File No. 333-1783
Rule 424(b)(3)
GROUP AND INDIVIDUAL SINGLE PREMIUM
ANNUITY CONTRACTS
Keyport Life Insurance Company
Executive & Administrative Offices
125 High Street, Boston, Massachusetts 02110
(617) 526-1400
SUMMARY
This prospectus describes participating interests in group and individual
deferred annuity contracts ("Contract(s)") which are designed and offered
by Keyport Life Insurance Company ("Keyport") to provide retirement
benefits for eligible individuals. Eligible individuals include persons who
participate in certain trusts or in certain plans established for eligible
individuals and members of eligible groups. Eligible individuals may also
include persons who collectively form a group of employees of an employer.
As required by certain states, the Contracts may be offered as Individual
Contracts.
(This "SUMMARY" section continues on page 2.)
The Contract may be sold by or through banks or other depository
institutions. The Contract and Certificates: are not insured by the FDIC;
are not a deposit or other obligation of, or guaranteed by, the depository
institution; and are subject to investment risks, including the possible
loss of principal amount invested, as described below.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS SETS FORTH INFORMATION A PROSPECTIVE CERTIFICATE OWNER
SHOULD KNOW BEFORE PURCHASING A CERTIFICATE OR ENROLLING. THIS PROSPECTUS
SHOULD BE RETAINED FOR FURTHER REFERENCE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE OR
JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO PERSON IS
AUTHORIZED BY KEYPORT TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN
CONNECTION WITH THIS OFFERING AND, IF GIVEN OR MADE, SUCH UNAUTHORIZED
INFORMATION OR REPRESENTATIONS SHOULD NOT BE RELIED UPON.
THESE SECURITIES MAY BE SUBJECT TO A SUBSTANTIAL SURRENDER CHARGE AND/OR
MARKET VALUE ADJUSTMENT IF NOT HELD TO THE END OF A TERM, AS DESCRIBED
BELOW. SURRENDER OF THESE SECURITIES AT OTHER TIMES COULD RESULT IN THE
RECEIPT OF LESS THAN THE CERTIFICATE OWNER'S ORIGINAL SINGLE PREMIUM.
The date of this Prospectus is May 1, 1998
MVA
Allocated and Non-Allocated Certificates are issued under Group Contracts.
With Allocated Certificates, each individual's interest is separately
accounted for and is held in a specific account established for that
individual. Each participant in a Non-Qualified plan and in certain
Qualified Plans will be issued an Allocated Certificate evidencing
participation in a Group Contract and will have a 100% vested interest in
all values credited to the participant's account. Under certain
Certificates issued with respect to Qualified Plans ("Non-Allocated
Certificates"), however, a participant's interest may be vested in the Plan
in which they are participating rather than in a Certificate. In such
cases, the Certificate will usually be owned by the Trustee(s) of the Plan,
and a single account will be established and held on behalf of all
participants in the Plan on a non-allocated basis.
Unless otherwise noted or the context so requires, all references to
"Certificates" include Group Contracts, Allocated and Non-Allocated
Certificates issued thereunder, and Individual Contracts.
A Single Premium of at least $5,000 per Certificate Owner's Account must
accompany the Certificate application or the Enrollment Form for a
participant under an Allocated Certificate. A Single Premium of $500,000 or
more requires Keyport's approval. No premium needs to accompany the Group
Contract application. The Single Premium is the only premium payment
permitted or required with respect to a particular Certificate. Eligible
individuals, however, may purchase more than one Certificate. (See
"Enrollment Form and Premium Payments", page 8.)
The premium payment credited to a Certificate Owner's Account becomes part
of the assets of Keyport. Keyport owns its General Account and Separate
Account assets, and generally intends to invest these payment amounts in
U.S. Government securities and certain commercial debt securities having
maturities generally matching the applicable Terms. Keyport may also invest
its assets in various instruments, including equity options, futures,
forwards, and other instruments based on the Index to hedge its obligations
with respect to Indexed Accounts. Keyport may also buy and sell interest
rate swaps and caps, Treasury bond futures, and similar instruments to
hedge its exposure to changes in interest rates. (See "Investments by
Keyport", page 16.)
The Certificate provides that the Single Premium may be allocated to one of
two types of accounts, Interest Accounts and Indexed Accounts, of varying
durations ("Terms"). As required by certain states, the Indexed Account is
not available under Certificates issued for those states.
Interest is credited to Interest Accounts at a fixed rate set and
guaranteed at the beginning of the Term for the duration of the Term.
Interest is credited to Interest Accounts on an annual compound guaranteed
interest basis for the entire duration of the selected Term. This means
that Keyport adds interest to the amount invested, so that credited
interest may earn interest. (See "Interest Accounts", page 8.)
Interest credited to Indexed Accounts ("Index Increases") is calculated by
reference to fixed interest rate factors, set and guaranteed at the
beginning of the Term for the duration of the Term, which are applied to
changes in the Standard & Poor's 500 Composite Stock Price Index (the
"Index") using a formula set forth in the Certificate. If the publication
of the Index is discontinued or the calculation of the Index is changed
substantially, Keyport will substitute a suitable index. Index Increases
are based on a percentage of the percentage increase in the Index since the
beginning of the Term. Index Increases are calculated and credited
proportionately over the selected Term at each Account Anniversary. The
total Index Increases that may be credited to an Indexed Account during a
Term are subject to a maximum and minimum limit, both of which are set and
guaranteed at the beginning of the Term. The minimum may never be less than
zero. Thus, the Indexed Account Value will never decrease to reflect
declines in the value of the Index since the beginning of the Term or from
Account Anniversary to Account Anniversary. (See "Indexed Accounts", page
9.) The amount of Index Increases credited to an Indexed Account may be
more or less than the amount of interest credited to an Interest Account
established at the same time for the same Term. Moreover, it is possible
that no Index Increases will be credited at Account Anniversaries, if the
Index on any of the Account Anniversaries in the Term does not exceed its
value at the beginning of the Term. (See "Establishment of Guaranteed
Interest Rates and Guaranteed Interest Rate Factors", page 10.)
The Certificate also provides for a minimum value to be used in certain
circumstances instead of the Indexed Account Value to calculate benefits
under a Certificate. This value, called the Certificate Value, is equal to:
90% of the Single Premium; plus any Excess Interest Credits (as described
below); less any amounts withdrawn by the Certificate Owner in a partial
surrender, such amounts being reduced by any applicable Surrender Charge;
plus, if the Account Value has ever been transferred, a positive or
negative amount reflecting the effect of any applicable Market Value
Adjustment on the Account Value at the time of the transfer; plus interest
credited on the foregoing at an annual guaranteed rate of 3% per year. In
addition, on each Account Anniversary and at the time of a transfer,
additional interest, i.e., an "Excess Interest Credit", may be credited to
the Certificate Value, such that the total interest credited to the
Certificate Value will equal the total interest and/or Index Increases ever
credited to the Certificate Owner's Account. The amount used to calculate
death benefits, withdrawal amounts, and annuity values will never be less
than the Certificate Value (subject to an adjustment to reflect the effect
of any applicable Market Value Adjustment on the corresponding Account
Value). If at the end of a Term the Indexed Account Value is less than the
Certificate Value, Keyport will credit interest to the Indexed Account so
that its value will equal the Certificate Value. (See "Certificate Value",
page 10; "Indexed Accounts," page 9.)
Initial Terms of one, three, five, six, seven, and ten (Interest Account
only) years are currently available. Keyport may discontinue offering terms
of certain durations or offer Terms of other durations from time to time.
The interest rates and interest rate factors declared by Keyport may vary
depending on the duration of the Term. Keyport should be contacted to
determine the Terms currently being offered. Subject to contractual
provisions and any applicable Surrender Charge and Market Value Adjustment,
a Certificate Owner may transfer from one type of Account to the other
and/or to Terms of greater or lesser duration.
Factors in Determining Guaranteed Interest Rates and Guaranteed Interest
Rate Factors
The level of Guaranteed Interest Rates and Guaranteed Interest Rate Factors
set by Keyport for Terms of a particular duration will depend on a variety
of factors, including the interest rates generally available on the types
of instruments in which Keyport will invest Certificate Owners' premium
payments, the duration of the Term, regulatory and tax requirements, sales
commissions and expenses borne by Keyport, general economic trends, and
competitive factors.
Risk
The interest and Index Increases credited to a Certificate Owner's Account
are based on guarantees made by Keyport. The initial and subsequent
Guaranteed Interest Rates and Guaranteed Interest Rate Factors apply to the
original principal sum and reinvested earnings.
AN INHERENT RISK IS THAT IN THE EVENT OF A SURRENDER PRIOR TO THE END OF
THE APPLICABLE TERM, THE MARKET VALUE ADJUSTMENT MIGHT EFFECT A REDUCTION
IN THE VALUE OF A CERTIFICATE OWNER'S ACCOUNT. ON THE OTHER HAND, THE
OPPOSITE MAY PROVE TO BE TRUE. (See "Market Value Adjustment", page 13.)
KEYPORT'S MANAGEMENT WILL MAKE THE FINAL DETERMINATION AS TO GUARANTEED
INTEREST RATES AND GUARANTEED INTEREST RATE FACTORS TO BE DECLARED. KEYPORT
CANNOT PREDICT OR GUARANTEE FUTURE GUARANTEED RATES AND FACTORS. (See
"Establishment of Guaranteed Interest Rates and Guaranteed Interest Rate
Factors", page 10.)
Renewal of Terms
At the end of each Term, a subsequent Term of the same type of Account
(Interest or Indexed) of one-year's duration will begin, unless, within the
thirty (30) day period before the end of the Term, the Certificate Owner
instructs Keyport otherwise. The Certificate Owner will have the
opportunity to apply the Account Value to an Interest or Indexed Account
that has a Term of any duration then offered. (See "Renewal Terms", page
10.)
Surrenders: Partial or Total
Subject to certain restrictions, partial and total surrenders of a
Certificate Owner's Account Value are permitted. Such surrenders may be
subject to a Surrender Charge and/or a Market Value Adjustment. Except as
described below, the Surrender Charge will be deducted from any partial or
total surrender made before the end of a Term. The Surrender Charge will be
calculated as a percentage of the gross amount being surrendered in excess
of the Free Withdrawal Amount (as explained below), before the addition or
deduction of any applicable Market Value Adjustment. The applicable
percentage will decline depending on the number of years (rounded up)
remaining until the end of the Term. The current maximum is 7% for
surrenders with seven (7) or more years remaining in the Term.
No Surrender Charge will apply to a partial or total surrender within the
first thirty (30) calendar days after the end of any full Term, if a
Certificate Owner notifies Keyport by prior Written Request.
The first partial surrender in a particular Certificate Year may be made
without paying a Surrender Charge on the Free Withdrawal Amount, which is
that portion of the surrender amount that does not exceed the sum of any
interest or Index Increases earned by and credited to the Certificate
Owner's Account Value in the prior year (measured from the date of the
surrender to that same date in the prior calendar year), up to the sum of
any such amounts earned and credited since the most recent partial
surrender, if any, during that prior year. Any partial surrender amount
above the Free Withdrawal Amount or any subsequent partial surrender during
the same Certificate Year will be subject to a Surrender Charge. (See
"Surrender Charge", page 12.)
PARTIAL SURRENDERS ARE NOT ALLOWED FROM THE INDEXED ACCOUNT OF ANY
CERTIFICATE ISSUED UNDER A CORPORATE OR KEOGH QUALIFIED PLAN THAT IS
ESTABLISHED PURSUANT TO THE PROVISIONS OF SECTION 401 OF THE INTERNAL
REVENUE CODE.
As to total surrenders, if no partial surrender was made in the same
Certificate Year, only the portion of the surrendered amount above the
foregoing limit is subject to a Surrender Charge. Otherwise, the total
amount surrendered is subject to a Surrender Charge.
The withdrawal of interest earnings from an Interest Account pursuant to
Keyport's systematic withdrawal program will not incur a Surrender Charge
or a Market Value Adjustment. Systematic withdrawals may not be made from
an Indexed Account. (See "Systematic Withdrawal Program", page 11.)
The minimum partial surrender is $250, unless made pursuant to the
systematic withdrawal program, in which case the minimum is $100. After a
partial surrender, the minimum Account Value must be at least $2500.
Transfers
Subject to certain conditions, the Interest Account Value may be
transferred to another Account at any time before the Income Date. The
Indexed Account Value may only be transferred at the end of a Term. Any
amount transferred before the end of a Term may be subject to a Market
Value Adjustment, as described below. Currently, there is no charge for
transfers. Keyport in its discretion may institute a transfer charge on
transfers in excess of a certain number of transfers annually. (See
"Transfer of Values", page 11; "Market Value Adjustment", page 13.)
Market Value Adjustment
The amount payable upon a partial or total surrender from, or upon the
application to an Annuity Option of Account Value of, an Account with a
Term of three (3) years or more may be adjusted up or down by the
application of the Market Value Adjustment. However, no Market Value
Adjustment will apply to a partial or total surrender within the first
thirty (30) calendar days after the end of any full Term, if a Certificate
Owner notifies Keyport by prior Written Request.
Where a Market Value Adjustment is applicable to a surrender or
annuitization, if there has not previously been a partial surrender in the
same Certificate Year as the surrender or annuitization, the Market Value
Adjustment will be calculated based on the gross amount payable in excess
of the Free Withdrawal Amount, before the deduction of any applicable
Surrender Charge. Otherwise, the Market Value Adjustment is calculated
based on the gross amount payable, before the deduction of any applicable
Surrender Charge. (See "Market Value Adjustment", page 13).
A Market Value Adjustment also applies to any transfer from an Account with
a Term of three (3) years or more, unless the effective date of the
transfer is: (a) within the last year of the Term and the transfer is to an
Account with a Term of three (3) years or more; or (b) within the first ten
(10) calendar days after the end of each full Term. The Market Value
Adjustment upon transfer is calculated based on the Account Value or, if
there has not previously been a partial surrender in the same Certificate
Year as the transfer, on the Account Value in excess of the Free Withdrawal
Amount. (See "Market Value Adjustment", page 13).
The Market Value Adjustment for Indexed Accounts includes a Scaling Factor.
The Scaling Factor may reduce the positive or negative amount of any Market
Value Adjustment on an Indexed Account. The Market Value Adjustment for
Interest Accounts will not include a Scaling Factor. (See "Market Value
Adjustment", page 13).
The Market Value Adjustment reflects the relative difference between: (a)
the current Treasury Rate for a period of time equivalent to the remaining
duration of the current Term; and (b) the Treasury Rate at the beginning of
the Term for a period of time equal to the full duration of the Term. It is
possible, therefore, that should such Treasury Rates increase significantly
from the beginning of a Term, the amount a Certificate Owner would receive
upon a total surrender would be less than the original amount credited to
the Certificate Owner's Account. (See "Market Value Adjustment", page 13.)
Deferral of Payment
Keyport may defer payment of any partial or total surrender for a period
not exceeding six (6) months from the date of receipt of a request for
surrender or for the period permitted by state insurance law, if less. A
deferral of payment for a period greater than thirty (30) days would occur
only under highly unusual circumstances. (See "Payment upon Partial or
Total Surrender", page 12.)
Annuity Period
On the Income Date, Keyport will start to pay the designated Annuitant a
series of annuity payments under an Annuity Option. The Annuity Option
selected determines the timing and basis of the annuity payments. (See
"Annuity Period Provisions", page 15.)
Death Benefit
The Certificate provides for a special death benefit if the Certificate
Owner dies before the Income Date or if the Annuitant dies before the
Income Date and the Certificate Owner is not a natural person. After one of
these deaths, the Designated Beneficiary may, by the later of the 90th day
after the death and the 60th day after Keyport is notified of the death,
surrender the Certificate to Keyport for the greatest of: (a) the
Certificate Owner's Account Value; (b) the Certificate Value; or (c) the
Certificate Withdrawal Value, which is defined as the greater of (i) the
Account Value, subject to any applicable Market Value Adjustment, less any
applicable Surrender Charge, and (ii) the Certificate Value adjusted
proportionally to reflect the effect of any applicable Market Value
Adjustment on the Account Value. If the Term that includes the date of
death relates to the Indexed Account and the Term's Floor is equal to 0%,
the "(a)" value will be recalculated by Keyport and the new value will be
the same or higher. If the surrender request is made after the applicable
90 or 60 day period or upon the death of a Joint Certificate Owner, the
Designated Beneficiary will receive the Certificate Withdrawal Value. If
the Certificate is not surrendered, it may stay in force for up to five
years after the date of death, at the end of which time Keyport will pay
the Designated Beneficiary the Certificate Withdrawal Value, without the
deduction of any applicable Surrender Charge. (See "Death Provisions", page
14; "Surrender Charge", page 12.)
Premium Taxes
Keyport will deduct the amount of any premium taxes levied by any State or
governmental entity when the premium tax is actually paid, unless Keyport
elects to defer such deduction until the time of surrender or the Income
Date. It is not possible to describe precisely the amount of premium tax
payable on any transaction. Such premium taxes depend, among other things,
on the type of Certificate (Qualified or Non-Qualified), on the state of
residence of the Certificate Owner or participant, the state of residence
of the Annuitant, the status of Keyport within such states, and the
insurance tax laws of such states. Currently such premium taxes range from
0%-5.0%. For a schedule of such taxes, see Appendix C, at page 50 of this
Prospectus.
Annual Reports to Certificate Owners
At least once each Certificate Year, Keyport will send each Certificate
Owner a report which will show the Account Value, the Certificate
Withdrawal Value, the Market Value Adjustment used to calculate the
Certificate Withdrawal Value, and any Surrender Charge.
TABLE OF CONTENTS
Page
SUMMARY 1
GLOSSARY OF SPECIAL TERMS 6
DESCRIPTION OF CONTRACTS AND CERTIFICATES 8
A. Ownership 8
B. Enrollment Form and Premium Payments 8
C. Accumulation Period 8
1. Initial Term 8
2. Interest Accounts 8
3. Indexed Accounts 9
4. Renewal Terms 10
5. Information on Renewal Rates 10
6. Establishment of Guaranteed Interest Rates and
Guaranteed Interest Rate Factors 10
7. Certificate Value 10
8. Transfer of Values 11
9. Surrenders 11
(a) General 11
(b) Systematic Withdrawal Program 11
(c) Surrender Procedures and Determination of Surrender Value 11
1. Partial Surrenders 11
2. Total Surrenders 11
(d) Risk 12
(e) Payment upon Partial or Total Surrender 12
10. Deductions 12
(a) Surrender Charge 12
(b) Market Value Adjustment 13
11. Premium Taxes 13
12. Death Provisions 13
(a) Non-Qualified Certificates 13
(b) Qualified Certificates 14
D. Annuity Period Provisions 14
1. Annuity Benefits 14
2. The Income Date and Form of Annuity 15
3. Change of Annuity Option 15
4. Annuity Options 15
5. Frequency and Amount of Payments 16
6. Proof of Age, Sex, and Survival of Annuitant 16
INVESTMENTS BY KEYPORT 16
AMENDMENT OF CERTIFICATES 16
ASSIGNMENT OF CERTIFICATES 17
DISTRIBUTION OF CONTRACTS AND CERTIFICATES 17
TAX CONSIDERATIONS 17
A. General 17
B. Taxation of Keyport 17
C. Taxation of Annuities in General 17
1. General 17
2. Surrenders, Assignments, and Gifts 17
3. Annuity Payments 18
4. Penalty Tax 18
5. Income Tax Withholding 18
6. Section 1035 Exchanges 18
D. Qualified Plans 18
1. Tax-Sheltered Annuities 19
2. Individual Retirement Annuities 19
3. Corporate Pension and Profit-Sharing Plans 19
THE COMPANY 19
A. Business 19
General 19
B. Selected Financial Data 20
C. Management's Discussion and Analysis of Results of Operations and
Financial Condition 20
Results of Operations 20
Financial Condition 21
Management of the Company's Investments 22
Liquidity 23
Year 2000 23
Effects of Inflation 24
D. General Account Investments 24
E. Competition 24
F. Employees 24
G. Regulation 24
COMPANY MANAGEMENT 26
EXECUTIVE COMPENSATION TABLES AND INFORMATION 27
LEGAL PROCEEDINGS 29
EXPERTS 29
CHANGE IN ACCOUNTANTS 29
LEGAL MATTERS 30
FINANCIAL STATEMENTS 31
APPENDIX A (TERM INTEREST AND INDEX INCREASE ILLUSTRATIONS) 46
APPENDIX B (MARKET VALUE ADJUSTMENT FORMULA AND ILLUSTRATIONS,
INCLUDING SURRENDER CHARGE CALCULATIONS) 48
APPENDIX C (SCHEDULE OF STATE PREMIUM TAXES) 50
GLOSSARY OF SPECIAL TERMS
The following terms in this Prospectus have the indicated meanings:
Account Year, Account Anniversary A continuous twelve-month period
commencing on the date that an Interest or Indexed Account is opened by
allocation or transfer, and each anniversary thereof including the end of
the Term.
Allocated Certificate A Certificate under which amounts are allocated or
credited to the account of one individual participant.
Annuitant The natural person upon whose life annuity payments are based,
and to whom any annuity payments will be made starting on the Income Date.
Annuity Options Options available for annuity payments.
Cap The maximum percentage by which the value of an Indexed Account may
increase during a single Term.
Certificate The document issued to each Certificate Owner evidencing his or
her interest in the Group Annuity Contract. The term Certificate also
includes any Group Contract and any Individual Contract, unless the context
requires otherwise.
Certificate Anniversary, Certificate Year A continuous twelve-month period
commencing on the Certificate Date and each anniversary thereof.
Certificate Date The date a Certificate is issued and the Certificate
Owner's rights and benefits begin.
Certificate Owner The person, persons or entity entitled to the ownership
rights stated in the Certificate and in whose name(s) the Certificate is
issued.
Certificate Owner's Account The Account established by Keyport for a
Certificate Owner into which the Single Premium paid by or on behalf of a
Certificate Owner is credited.
Certificate Owner's Account Value The value of all amounts under a
Certificate in an Indexed or Interest Account prior to the Income Date.
Certificate Value The guaranteed minimum value of the Certificate at any
time prior to any then-applicable Market Value Adjustment, calculated as
described below.
Certificate Withdrawal Value The greater of: (a) the Account Value, plus or
minus any applicable Market Value Adjustment, less any applicable Surrender
Charge, and (b) the Certificate Value, multiplied by the ratio of the
Account Value, adjusted by the applicable Market Value Adjustment, to the
unadjusted Account Value.
Contract Owner The person, persons, or entity entitled to the ownership
rights stated in a Group or Individual Contract and in whose name(s) the
Contract is issued.
Designated Beneficiary The person who may be entitled to receive benefits
following the death of the Annuitant, the Certificate Owner, or the Joint
Certificate Owner. The Designated Beneficiary will be the first person
among the following who is alive on the date of death: Certificate Owner;
Joint Certificate Owner; Primary Beneficiary, Contingent Beneficiary; and
otherwise the Certificate Owner's estate. If the Certificate Owner and
Joint Certificate Owner are both alive, they will be the Designated
Beneficiary together.
Enrollment Form A document signed by a participant that serves as his or
her application for participation under an Allocated Certificate.
Floor The minimum percentage by which the value of an Indexed Account may
increase during a single Term. The Floor will never be less than zero.
Free Withdrawal Amount The amount that may be surrendered, transferred, or
applied to an Annuity Option without any otherwise applicable Surrender
Charge or Market Value Adjustment. If no partial surrender has been made in
the Certificate Year of the transaction, the Free Withdrawal Amount is
equal to the sum of any interest or Index Increases earned by and credited
to the Certificate Owner's Account Value in the prior year (measured from
the date of the surrender to that same date in the prior calendar year), up
to the sum of any such amounts earned and credited since the most recent
partial surrender, if any, during that prior year.
General Account Keyport's general investment account which contains all of
Keyport's assets except those in Separate Account C and other separate
accounts.
Guaranteed Interest Rate The fixed rate of interest set and guaranteed by
Keyport at the beginning of a Term of an Interest Account to be used to
calculate the interest to be credited to the Interest Account during the
Term.
Guaranteed Interest Rate Factors The Participation Rate, Cap, and Floor,
which are set and guaranteed by Keyport at the beginning of each Term of an
Indexed Account and used to calculate Index Increases under a formula set
forth in the Certificate.
Income Date The date on which annuity payments to an Annuitant are to
begin.
Index The Index (set forth in the Certificate) that is used to calculate
Index Increases.
Indexed Account An account to which Keyport credits Index Increases.
Indexed Account Value The value of an Indexed Account, equal to all
allocations or transfers to the Indexed Account, plus all Index Increases
credited to the Indexed Account, less all amounts transferred or
surrendered from the Indexed Account.
Index Increase Interest credited to an Indexed Account, which is calculated
using the Guaranteed Interest Rate Factors as applied to changes in the
Index.
Individual Contract A Contract issued to a Contract Owner in states in
which Keyport does not issue a Certificate.
In Force The status of a Certificate before the Income Date, so long as it
is not totally surrendered and there has not been a death of the Annuitant
or any Certificate Owner that would cause the Certificate to end within at
most five years from the date of death.
Interest Account An account to which Keyport credits interest based on a
specific and guaranteed rate of interest.
Interest Account Value The value of an Interest Account, equal to all
allocations or transfers to the Interest Account, plus all interest
credited to the Interest Account, less all amounts transferred or
surrendered from the Interest Account.
Joint Certificate Owner Any person designated by the Certificate Owner
jointly to possess rights in the Certificate Owner's Account. Keyport
requires that the Certificate Owner and any Joint Certificate Owner act
together.
Non-Allocated Certificate A Certificate under which a single account is
established and held on behalf of all participants in a particular plan of
an employer or other eligible entity on a non-allocated basis.
Non-Qualified Certificate Any Certificate that is not issued under a
Qualified Plan.
Office Keyport's executive office, which is at 125 High Street, Boston,
Massachusetts 02110.
Participation Rate The percentage of the increase in the Index used to
calculate Index Increases.
Qualified Certificate Any Certificate issued under a Qualified Plan.
Qualified Plan A retirement plan established pursuant to the provisions of
Sections 401, 403 and 408 of the Internal Revenue Code and HR-10 Plans for
self-employed persons.
Reset Date The date on which an amount is allocated to an Interest or
Indexed Account. The first day of each subsequent Term is the next Reset
Date for that Account.
Separate Account A nonunitized separate investment account of Keyport in
which assets underlying the Certificates and other annuity contracts issued
by Keyport may be held. Assets held in Separate Account C will be subject
to the claims of Keyport's general creditors.
Single Premium The payment made by or an behalf of a participant with
respect to a Certificate.
Term The period for which either a Guaranteed Interest Rate is credited to
an Interest Account or Guaranteed Interest Rate Factors are used to
calculate Index Increases for an Indexed Account. Terms may be selected by
a Certificate Owner from among those offered by Keyport.
Treasury Rate The Treasury Rate is the interest rate in the Treasury
Constant Maturity Series, as published by the Federal Reserve Board, for a
maturity equal to the appropriate number of years. The Treasury Rate is
used in calculating Market Value Adjustments.
Written Request A written request in a form satisfactory to Keyport, signed
by the Certificate Owner, and received at Keyport's Office.
DESCRIPTION OF CONTRACTS AND CERTIFICATES
A. OWNERSHIP
The Certificate Owner is the individual or legal entity that has the power
to exercise the rights of an owner under the Certificate. The Certificate
Owner is the person or entity designated in the application for a
Certificate or the individual so designated in the Enrollment Form for an
Allocated Certificate.
The Certificate Owner may exercise all rights summarized in the
Certificate. Joint Certificate Owners are permitted but not contingent
Certificate Owners.
Prior to the Income Date, the Certificate Owner together with any Joint
Certificate Owner may, by Written Request, change the Certificate Owner,
Joint Certificate Owner, Beneficiary, Contingent Beneficiary, Contingent
Annuitant, or in certain instances, the Annuitant. An irrevocably-named
person may be changed only with the written consent of such person.
Because a change of Certificate Owner by means of a gift (i.e., a transfer
without full and adequate consideration) may be a taxable event, a
Certificate Owner should consult a competent tax adviser as to the tax
consequences resulting from such a transfer.
Any Qualified Certificate may have limitations on transfer of ownership. A
Certificate Owner should consult a competent tax adviser as to the tax
consequences resulting from such a transfer.
B. ENROLLMENT FORM AND PREMIUM PAYMENTS
The Single Premium is due on the Certificate Date. The Single Premium may
not be less than $5,000. There is a maximum of $500,000 for the Single
Premium. Payments of $500,000 or more require Keyport's approval.
Certificate Owners may purchase multiple Certificates, although Keyport
reserves the right to limit the total premiums paid on multiple
Certificates with respect to any one Certificate Owner. Keyport may reject
any premium payment.
The Single Premium is credited to a Certificate Owner's Account, which is
established on the date of receipt of a properly completed application or
Enrollment Form along with the required premium payment. Keyport will issue
a Certificate and confirm the receipt of the Single Premium in writing. If
the Contract is issued on a Non-Allocated basis, a single Certificate
Owner's Account is opened for the Certificate Owner. A Certificate Owner's
Account starts earning interest on the day following the date the
Certificate Owner's Account is established on his or her behalf. A
Certificate Owner may choose to allocate the Single Premium to an Interest
Account or an Indexed Account, as described below. As required by certain
states, the Indexed Account is not available under Certificates issued for
those states.
In the event Keyport determines that an application or Enrollment Form is
not properly completed, Keyport will attempt to contact the Certificate
Owner by letter or telephone to secure the information necessary to
complete the form.
Keyport will return an improperly completed application or Enrollment Form,
along with the corresponding premium payment, which cannot be properly
completed within three weeks of its receipt.
Keyport will permit others to act on behalf of an applicant in certain
instances, including the following two examples. First, Keyport will accept
an application for a Certificate that contains a signature signed under a
power of attorney, if a copy of that power of attorney is submitted with
the application. Second, Keyport will issue a Certificate that is replacing
an existing life insurance or annuity policy that was issued by either
Keyport or an affiliated company without having previously received a
signed application from the applicant. Certain dealers or other authorized
persons such as employers and Qualified Plan fiduciaries will inform
Keyport of an applicant's answers to the questions in the application by
telephone or by order ticket and cause the Single Premium to be paid to
Keyport. If the information is in good order, Keyport will issue the
Certificate with a copy of an application completed with that information.
The Certificate will be delivered to the Certificate Owner with a letter
from Keyport that will give the Certificate Owner an opportunity to respond
to Keyport if any of the application information is incorrect.
Alternatively, Keyport's letter may request the Certificate Owner to
confirm the correctness of the information by signing either a copy of the
application or a Certificate delivery receipt that ratifies the application
in all respects. (In either case, a copy of the signed document would be
returned to Keyport for its permanent records.) All purchases are
confirmed, in writing, to the applicant by Keyport. Keyport's liability
extends only to purchases so confirmed.
C. ACCUMULATION PERIOD
1. Initial Term
A Certificate Owner will select the type of Account, either an Interest
Account or an Indexed Account, to which the Single Premium will be
allocated, and the duration of the initial Term from among those offered by
Keyport. Initial Terms of one, three, five, six, seven, and ten (Interest
Account only) years are currently available. Keyport may offer other
durations from time to time. As required by certain states, the Indexed
Account is not available under Certificates issued for those states.
A Term begins on the date as of which the Single Premium is allocated or an
amount is transferred to an Account and ends when the number of years in
the Term elected has elapsed. The last day of the Term is the expiration
date for the Term. The subsequent Term begins on the first day following
the expiration date of the previous Term.
The Single Premium (less surrenders made and premium taxes, if any) will
earn and be credited interest and/or Index Increases in accordance with the
formula applicable to the selected type of Account, as described below.
Interest is credited to Interest Accounts at the Guaranteed Interest Rate
specified and guaranteed at the beginning of the Term for the duration of
the Term. Index Increases are credited to Indexed Accounts by reference to
Guaranteed Interest Rate Factors, guaranteed at the beginning of the Term
for the duration of the Term, as applied to changes in the Index.
2. Interest Accounts
Through the Interest Accounts, Keyport offers specified effective and
guaranteed annual rates of interest, the Guaranteed Interest Rates, for a
specified period of time, the Term, selected by the Certificate Owner.
Although Guaranteed Interest Rates may differ among Terms of different
durations or established at different times, a Guaranteed Interest Rate
will never be less than 3% per year and, once declared, will never be
changed during a Term.
An amount allocated or transferred to an Interest Account will earn
interest at the Guaranteed Interest Rate for a Term of the selected
duration. Interest will be credited daily at a rate which, compounded,
equals an effective annual rate equal to the Guaranteed Interest Rate. If
an amount remains in an Interest Account until the end of the applicable
Term, its value will be equal to the amount originally allocated or
transferred to the Interest Account, less all amounts withdrawn, plus all
interest credited to the Account.
An illustrative example of how interest is credited to the Interest Account
is set forth in Appendix A.
3. Indexed Accounts
Through the Indexed Accounts, Keyport offers Index Increases that depend on
increases in a specified Index. The Index Increases are determined based on
a formula utilizing specified Guaranteed Interest Rate Factors (the
Participation Rate, Cap, and Floor) that are available for specified
periods of time (Terms) selected by the Certificate Owner. Although
Guaranteed Interest Rate Factors may differ among Terms of different
durations or established at different times, once declared, they will never
be changed during a Term.
An amount allocated or transferred to an Indexed Account will earn Index
Increases based on the Guaranteed Interest Rate Factors for a Term of the
selected duration. Index Increases may be added to the Account on each
Account Anniversary. If an amount remains in an Indexed Account until the
end of the applicable Term, its value will be equal to the amount
originally allocated or transferred to the Indexed Account, less all
amounts withdrawn, plus all Index Increases credited to the Account.
Keyport will calculate and credit Index Increases at each Account
Anniversary after the start of a Term. The Certificates contain a formula
for using the Index and the Guaranteed Interest Rate Factors established at
the beginning of the Term to calculate the Index Increases on each Account
Anniversary in the Term. All Index Increases are credited to the Indexed
Account proportionately over the entire Term. Therefore, there are two
components of the Index Increases. The first part is the proportionate
credit for an increase (if any) in the Index from its prior highest Account
Anniversary value to its new highest value on the current Account
Anniversary. The second part is the proportionate credit for an increase(s)
(if any) in the Index occurring on a prior Account Anniversary(ies). The
second part of the Index Increase will always be zero on the first Account
Anniversary in any Term.
Part one is calculated as follows: Multiply the Participation Rate by
the increase in the Index from its prior highest Account Anniversary value
to its current Account Anniversary value divided by its beginning of Term
value. The result is then multiplied by the ratio of the number of
completed Account Years in the Term to the total number of Account Years in
the Term. This percentage is then multiplied by the smaller of the Account
Value at the beginning of the Term and the Account Value (prior to the
crediting of any Index Increases) on any Account Anniversary in the Term.
Part two is calculated as follows: Multiply the Participation Rate by
the percentage increase in the Index since the beginning of the Term,
calculated using the highest value attained by the Index at any Account
Anniversary during the Term excluding the current Account Anniversary.
Divide the resulting percentage by the number of Account Years in the Term.
This percentage is then multiplied by the smaller of the Account Value at
the beginning of the Term and the Account Value (prior to the crediting of
any Index Increases) on any Account Anniversary in the Term.
The part one and two amounts as calculated above may be reduced if the Cap
is applicable and increased if a Floor in excess of zero is applicable. The
sum of the two parts equals the total Index Increase that is added to the
Account Value. If the Index on each Account Anniversary in a Term is less
than the Index at the beginning of the Term, there will not be any Index
Increases credited during the Term. Because of the Floor of zero, Index
Increases can never be negative.
The effect of this formula is to provide that, in the absence of any
partial or total surrender during a Term, the total Index Increases
credited to an Indexed Account during a Term will equal the Account Value
at the beginning of the Term multiplied by a percentage (Participation
Rate) of the percentage increase in the Index since the beginning of the
Term (subject to the Floor and Cap), using the highest value attained by
the Index on any Account Anniversary in the Term. Partial surrenders in
excess of Index Increases will reduce the amount of the Index Increases
credited after such surrender, but do not affect Index Increases previously
credited.
Total Index Increases credited to an Index Account may be more or less than
the amount of interest credited to an Interest Account established at the
same time for the same Term, depending on the change in the Index over the
course of the Term.
If no or small Index Increases are earned by and credited to an Indexed
Account, in time the value of an Indexed Account may be less than the
Certificate Value. In those circumstances, the Certificate Value is used to
calculate any benefit payable under the Certificate. In addition, if at the
end of a Term the value of an Indexed Account is less than the Certificate
Value, Keyport will credit the Indexed Account with an End of the Term
Increase equal to the excess of the Certificate Value over the Indexed
Account Value. (See "Certificate Value" on page 10.)
Currently the Index is the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"). The S&P 500 is a widely accepted and broad measure of
the performance of the major United States stock markets. The S&P 500 is a
market value weighted measure of changes in the prices of the underlying
securities and does not reflect any stock dividend income on the underlying
securities. "S&P", "S&P 500", and "Standard & Poor's 500" are trademarks of
The McGraw Hill Companies, Inc., and have been licensed for use by Keyport.
The Contract is not sponsored, endorsed, sold, or promoted by Standard &
Poor's and Standard & Poor's makes no representation regarding the
advisability of purchasing the Contract.
If the publication of the Index is discontinued, or the calculation of the
Index is changed substantially, Keyport will substitute a suitable index
and notify the Certificate Owner.
The formula used to calculate Index Increases and illustrative examples are
set forth in Appendix A.
4. Renewal Terms
A new Term will automatically begin at the end of a Term, unless a
Certificate Owner elects to make a total surrender. (See "Surrenders".)
Each subsequent Term will be for one-year's duration, unless, within the
thirty (30) day period immediately prior to the end of the previous Term,
the Certificate Owner by Written Request chooses a Term of a different
duration or elects to transfer the Account Value to a different type of
Account. A Certificate Owner may choose from among the Terms offered by
Keyport at that time. Keyport may discontinue offering Terms of certain
durations currently available or offer Terms of different durations from
time to time. The then available Guaranteed Interest Rates and Guaranteed
Interest Rate Factors may vary based on the duration of the Term selected,
and may differ from the rates currently available for new Certificate. The
Certificate Owner may not select a Term for a period longer than the number
of years remaining until the Income Date. If the selected Term exceeds this
limit, Keyport automatically will allocate the Account Value to a Term of
one-year's duration. In addition, if less than one year remains until the
Income Date, Keyport automatically will allocate the Account Value to an
Interest Account with a Term of one year's duration.
The Account Value at the beginning of any subsequent Term will be equal to
the Account Value at the end of the previous Term. In the absence of any
partial or total surrender or transfer (the effects of which are described
below), the Account Value will earn and be credited with interest or Index
Increases for each year in the subsequent Term using the Guaranteed
Interest Rates or Guaranteed Interest Rate Factors established at the
beginning of the subsequent Term for the type of Account and Term selected
by the Certificate Owner or established by default (as described above) in
the absence of other instructions.
5. Information on Renewal Rates
A Certificate Owner is provided with a toll-free number to call to inquire
about rates for Terms then being offered. In addition, prior to the
beginning of each subsequent Term, Keyport will notify the Certificate
Owner in writing of the Terms then available. At the end of any Term, a
Certificate Owner has the opportunity to select any other duration of Term
then being offered.
6. Establishment of Guaranteed Interest Rates and Guaranteed Interest Rate
Factors
A Certificate Owner will know the Guaranteed Interest Rate or Guaranteed
Interest Rate Factors for the Term chosen at the time of the initial
purchase. Different Guaranteed Interest Rates and Guaranteed Interest Rate
Factors may be established for Terms of different durations. Guaranteed
Interest Rates and Guaranteed Interest Rate Factors for initial and renewal
Terms will be established periodically. Keyport may offer differing
Guaranteed Interest Rates and Guaranteed Interest Rate Factors for initial
allocations, transfers during Terms, and renewal Terms.
Keyport has no specific formula for determining the Guaranteed Interest
Rates and Guaranteed Interest Rate Factors that it will declare in the
future. The determination of those guaranteed rates and factors will be
reflective of interest rates generally available on the types of
investments in which Keyport intends to invest the proceeds attributable to
the Certificate Owner's Account. (See "Investments by Keyport".) In
addition, Keyport's management may consider various other factors in
determining guaranteed rates and factors for a given period, including, the
duration of a Term, regulatory and tax requirements, sales commissions and
administrative expenses borne by Keyport, general economic trends, and
competitive factors. The Guaranteed Interest Rates declared by Keyport,
however, (including the rate of interest credited to the Certificate Value
used in the determination of the value of an Indexed Account), will never
be less than 3% annually. KEYPORT'S MANAGEMENT WILL MAKE THE FINAL
DETERMINATION AS TO GUARANTEED INTEREST RATES AND GUARANTEED INTEREST RATE
FACTORS TO BE DECLARED. KEYPORT CANNOT PREDICT OR GUARANTEE FUTURE
GUARANTEED INTEREST RATES AND GUARANTEED INTEREST RATE FACTORS.
7. Certificate Value
The Certificate also provides a minimum value, called the Certificate
Value, that will be used to calculate benefits under a Certificate in
circumstances in which the Certificate Value is higher than the value of an
Indexed Account calculated as described above.
The Certificate Value is equal to: (a) 90% of the Single Premium; plus (b)
any Excess Interest Credits, as defined below; less (c) all amounts
withdrawn by the Certificate Owner in a partial surrender, such amounts
being reduced by any applicable Surrender Charges; plus (d) if there has
been a transfer to which a Market Value Adjustment applied, the positive or
negative amount equal to the Adjusted Certificate Value (i.e., the
Certificate Value proportionately adjusted to reflect the effect of any
applicable Market Value Adjustment on the Account Value) less the
Certificate Value, at the time of the transfer; plus (e) interest credited
at an annual guaranteed rate of 3% per year. In addition, at each Account
Anniversary and at the time of a transfer, additional interest, called an
"Excess Interest Credit", will be credited to the Certificate Value, to the
extent needed to ensure that the total interest (including previous Excess
Interest Credits) credited to the Certificate Value equals the total
interest or Index Increases ever credited to the Certificate Owner's
Account Value. Interest amounts credited to the Certificate Value will earn
interest in subsequent Certificate Years.
The Certificate Value would be used to calculate benefits if, for example,
the Index were to remain level or decline for several years and
accordingly, Index Increases were not credited to an Indexed Account. In
such a circumstance, while the value of the Indexed Account would not
decline, the Certificate Value might rise above the value of the Indexed
Account, as a result of the 3% annual interest credited to Certificate
Value.
8. Transfer of Values
The Certificate Owner may transfer the entire Account Value from an
Interest or Indexed Account to another Interest or Indexed Account, subject
to the following:
(a) the transfer must be by Written Request or telephone before the Income
Date;
(b) the number of transfers may not exceed any limit Keyport may set for a
specified time period; currently, Keyport does not limit the number of
permissible transfers in a single Certificate Year;
(c) the Indexed Account Value may only be transferred during the first ten
(10) calendar days after the end of each full Term;
(d) the Interest Account Value may be transferred at any time before the
Income Date;
(e) the amount transferred shall equal the total Account Value, with a
Market Value Adjustment (if any); partial transfers are not permitted;
(f) no Market Value Adjustment shall apply to a transfer (i) from an
Account with a Term of less than three (3) years, (ii) in the final year of
a Term of three (3) or more years to an Account with a Term of three (3) or
more years, or (iii) within the first ten (10) calendar days after the end
of each full Term; and
(g) for transfers not made within the first ten calendar days of a Term,
the Term of the new Account cannot be less than the remaining number of
Account Years (rounded up) in the Term of the Account from which the
transfer is being made; and
(h) the Term of the new Account cannot be longer than the number of years
remaining until the Income Date.
While no charge currently applies to transfers, Keyport reserves the right
to charge $25 per transfer if a Certificate Owner makes more than 4
transfers in a single Certificate Year. Keyport reserves the right, at any
time and without prior notice, to terminate, modify, or suspend the
transfer privileges described above.
9. Surrenders
(a) General
A Certificate Owner may make a full or partial surrender of a Certificate
Owner's Account at any time prior to the Income Date while it is In Force,
subject to specified charges and conditions described below. Partial
surrenders may only be made if:
(i) the surrender request is at least $250, unless the partial surrender
is made pursuant to Keyport's systematic withdrawal plan, in which case the
minimum withdrawal is $100; and
(ii) the remaining Account Value after the partial surrender has been made
is at least $2500.
Keyport reserves the right to change the minimums described above.
NOTWITHSTANDING THE FOREGOING, PARTIAL SURRENDERS ARE NOT ALLOWED FROM THE
INDEXED ACCOUNT OF ANY CERTIFICATE ISSUED UNDER A CORPORATE OR KEOGH
QUALIFIED PLAN THAT IS ESTABLISHED PURSUANT TO THE PROVISIONS OF SECTION
401 OF THE INTERNAL REVENUE CODE.
The net amount paid upon partial or total surrender will reflect the
deduction of any applicable Surrender Charge and any Market Value
Adjustment, calculated as described below. Therefore, the amount actually
received by a Certificate Owner may be greater than or less than the amount
subtracted from Account Value as a result of the surrender. As described
below, certain partial surrenders are not subject to a Surrender Charge
and/or Market Value Adjustment.
If after complying with a request for a partial surrender there would be
insufficient Account Value to keep the Certificate In Force, Keyport will
treat the request as a request to surrender only the excess amount over
$2500.
(b) Systematic Withdrawal Program
To the extent permitted by law, Keyport will make monthly, quarterly, semi-
annual, or annual distributions of interest credited to an Interest Account
to a Certificate Owner that has enrolled in the Systematic Withdrawal
Program (the "Program"). Under the Program, all distributions will be made
directly to the Certificate Owner and will be treated for federal tax
purposes as any other withdrawal or distribution of Account Value. (See
"Tax Considerations".) The selected frequency of payment may not result in
a payment of less than $100 per payment. Systematic withdrawals may not be
made from an Indexed Account. Distributions under the Systematic Withdrawal
Program are not subject to Surrender Charges or Market Value Adjustments.
(c) Surrender Procedures and Determination of Surrender Value
1. Partial Surrenders
At any time prior to the Income Date, a Certificate Owner may request by
Written Request a partial surrender. The surrender amount paid to the
Certificate Owner will be the gross surrender amount increased or decreased
by any applicable Market Value Adjustment and decreased by any applicable
Surrender Charge. Both the Surrender Charge and the Market Value Adjustment
are calculated based on the gross surrender amount. Thus, for example, if
the gross surrender amount were $10,000, the Surrender Charge and the
Market Value Adjustment were each 5%, and the Free Withdrawal Amount did
not apply, the Surrender Charge and the Market Value Adjustment would each
be 5% of $10,000, for a net surrender payment to the Certificate Owner of
$9,000 ($10,000 B $500 B $500). Keyport will attempt to honor requests for
a net partial surrender of a specific amount. If a Market Value Adjustment
applies, however, the amount actually paid by Keyport may be more or less
than the amount requested, because of computational rounding. The total
amount deducted from the Account Value upon a partial surrender will be the
gross surrender amount (prior to the application of any Market Value
Adjustment) and any applicable Surrender Charge.
2. Total Surrenders
The Certificate Owner may make a total surrender by Written Request.
Surrendering the Certificate will end it.
The surrender value will be determined as of the date that Keyport receives
the Written Request for surrender. Keyport will pay the Certificate Owner
the Certificate Withdrawal Value, which is the greater of: (a) the Account
Value (with any applicable Market Value Adjustment applied), less any
applicable Surrender Charge; or (b) the Certificate Value, adjusted by the
ratio of the Account Value (with any applicable Market Value Adjustment
applied) to the unadjusted Account Value. In addition, Keyport will deduct
any premium taxes not previously paid.
For any total surrender made after the first Certificate Year, the
Certificate Owner may receive the surrender benefit under an Annuity Option
rather than in a lump sum.
Keyport will, upon request, inform a Certificate Owner of the amount
payable upon a full or partial surrender. Any full or partial surrender
may, in addition to certain Certificate charges and adjustments, be subject
to tax. (See "Tax Considerations".)
(d) Risk
The interest and Index Increases credited to a Certificate Owner's Account
are based on guarantees made by Keyport. The initial and subsequent
Guaranteed Interest Rates and Guaranteed Interest Rate Factors apply to the
original principal sum and reinvested earnings.
AN INHERENT RISK IS THAT IN THE EVENT OF A SURRENDER PRIOR TO THE END OF
THE APPLICABLE TERM, THE MARKET VALUE ADJUSTMENT MIGHT CAUSE A REDUCTION IN
THE CERTIFICATE OWNER'S ACCOUNT VALUE. (See "Market Value Adjustment".)
(e) Payment Upon Partial or Total Surrender
Keyport may defer payment of any partial or total surrender for a period
not exceeding six (6) months from the date of receipt of a notice of
surrender by a Certificate Owner, or the period permitted by state
insurance law, if less. Only under highly unusual circumstances will a
surrender payment be deferred more than thirty (30) days. While all
circumstances under which deferral of payment might be involved upon
surrender may not be foreseeable at this time, such circumstances could
include, for example, a time of an unusually high number of surrenders by
Certificate Owners, accompanied by a radical shift in interest rates. If
Keyport decides to withhold payment for more than thirty (30) days, a
Certificate Owner will be notified in writing of such decision.
10. Deductions
(a) Surrender Charge
No sales charge is deducted from the Single Premium when received. Except
as provided below, however, a Surrender Charge will be deducted for any
partial or total surrender, other than partial or total surrenders
effective within the first thirty (30) calendar days after the end of any
full Term or during the Certificate Year preceding the Income Date.
The amount of any Surrender Charge is computed as a percentage of the gross
surrender amount in excess of the Free Withdrawal Amount, adjusted as
described below. A portion of the first partial surrender in a particular
Certificate Year, not exceeding the Free Withdrawal Amount, may be made
free of any Surrender Charge. The Free Withdrawal Amount is equal to the
sum of any interest or Index Increases earned by and credited to the
Certificate Owner's Account Value in the prior year (measured from the date
of the surrender to that same date in the prior calendar year) up to the
sum of any such amounts earned and credited since the most recent partial
surrender, if any, during that prior year. The portion of the first partial
surrender in excess of the Free Withdrawal Amount (if any), and any
subsequent partial surrender in the same Certificate Year, will be subject
to a Surrender Charge.
As to total surrenders, if no partial surrender was made in the same
Certificate Year, only the portion of the gross surrender amount in excess
of the Free Withdrawal Amount is subject to a Surrender Charge. Otherwise,
the total amount surrendered is subject to a Surrender Charge.
The amount of the Surrender Charge depends on the number of Account Years
(rounded up) remaining until the end of the Term of the Account from which
the partial surrender is withdrawn. The amount of the Surrender Charge will
be equal to (a) multiplied by (b), where:
(a) is the amount of the partial surrender request, less the Free
Withdrawal Amount (if applicable); and
(b) is the applicable percentage from the Certificate Schedule, depending
on the number of Account Years (rounded up) remaining until the end of the
Term.
After each surrender, Keyport also will adjust its records to reflect
appropriate deductions from the Account Value and the Certificate Value.
The chart below indicates the Surrender Charge percentage that will be
applied while the specified number of years are remaining:
Term (Length in Years)
Account
Years
Remaining 10 9 8 7 6 5 4 3 2 1
1 0% 0% 0% 1% 1% 1% 1% 1% 1% 1%
2 0 0 1 2 2 2 2 2 2
3 0 1 2 3 3 3 3 3
4 1 2 3 4 4 4 4
5 2 3 4 5 5 5
6 3 4 5 6 6
7 4 5 6 7
8 5 6 7
9 6 7
10 7
Keyport reserves the right to increase or decrease the amount of this
charge, and the period of time for which it will apply, on new Certificates
up to a maximum of 7% and ten years. Currently, the charge is 7%. If such
amounts are ever increased, the increase will only apply to new
Certificates issued after full disclosure to prospective new Certificate
Owners or to existing Certificate Owners purchasing additional
Certificates.
The Surrender Charge will apply to a full or partial surrender, in each
Term of a Certificate. In other words, a Surrender Charge may be payable in
Terms after the first, irrespective of how many Account Years have elapsed.
Also, any surrender may, in addition to certain Certificate charges and
adjustments, be subject to tax. (See "Tax Considerations".)
Illustrative examples of how the Surrender Charge is determined are set
forth in Appendix B.
(b) Market Value Adjustment
The amount payable upon a surrender prior to the Income Date, upon a
transfer, or upon application of Account Value to an Annuity Option may be
adjusted up or down by the application of a Market Value Adjustment. The
Market Value Adjustment reflects the relative difference between (a) the
current Treasury Rate for a period of time equivalent to the remaining
duration of the current Term; and (b) the Treasury Rate at the beginning of
the Term for a period of time equal to the full duration of the Term.
More specifically, the amount payable upon a partial or total surrender of,
or upon application of Account Value to an Annuity Option from, an Account
with a Term of three (3) years or more may be adjusted up or down by the
application of the Market Value Adjustment. No Market Value Adjustment will
apply to a partial or total surrender or the application of Account Value
to an Annuity Option within the first thirty (30) calendar days after the
end of any full Term. Where applicable, the Market Value Adjustment upon a
surrender is calculated based on the gross surrender amount before the
deduction of any applicable Surrender Charge.
A Market Value Adjustment also applies to any transfer from an Account with
a Term of three (3) years or more, unless the effective date of the
transfer is: (a) within the final Account Year of the Term and the transfer
is to an Account with a Term of three (3) years or more; or (b) within the
first ten (10) calendar days after the end of any full Term. Where
applicable, the Market Value Adjustment upon transfer is calculated based
on the Account Value. In addition, as described above, a Market Value
Adjustment in connection with a transfer also will result in an adjustment
to Certificate Value. (See "Certificate Value".)
The formula for calculating the Market Value Adjustment is set forth in
Appendix B to this prospectus. If there has not previously been a partial
surrender in the Certificate Year or a transaction subject to a Market
Value Adjustment, an amount not exceeding the Free Withdrawal Amount will
be subtracted from the amount used to calculate the Market Value
Adjustment. Otherwise, the gross amount surrendered, transferred, or
applied to an Annuity Option is used as the basis to calculate the
applicable Market Value Adjustment.
The Market Value Adjustment for Indexed Accounts includes a Scaling Factor.
A Certificate Owner will know the Scaling Factor for all Indexed Account
Terms at the time of the initial purchase. Different Scaling Factors may be
established for Terms of different durations. Keyport may change the
Scaling Factors from time to time for new Certificates issued after the
time of the change. The Scaling Factors will never be greater than one.
Where a Scaling Factor is less than one, the Scaling Factor will reduce the
positive or negative amount of any Market Value Adjustment. The Scaling
Factors are shown on the Certificate Schedule and are guaranteed for the
life of the Certificate. The Market Value Adjustment for Interest Accounts
will not include a Scaling Factor.
Because the Market Value Adjustment is based on changes in the yields on
U.S. Treasury securities, the effect of the Market Value Adjustment will be
closely related to the levels of such yields. It is possible, therefore,
that, should such yields increase significantly from the time of purchase
of a Certificate, coupled with any applicable Surrender Charge, the amount
a Certificate Owner would receive upon a total surrender could be less than
the Single Premium.
Illustrative examples of how the Market Value Adjustment is determined are
set forth in Appendix B.
UPON REQUEST, KEYPORT WILL FURNISH A CERTIFICATE OWNER WITH ILLUSTRATIONS
OF THE EFFECT OF THE MARKET VALUE ADJUSTMENT ON A CERTIFICATE OWNER'S
ACCOUNT VALUE IF ALL OR ANY PART OF THE CERTIFICATE OWNER'S ACCOUNT VALUE
IS SURRENDERED PRIOR TO THE END OF A TERM.
11. Premium Taxes
Keyport will deduct the amount of any premium taxes levied by any state or
governmental entity when the premium tax is incurred, unless Keyport elects
to defer such deduction until the time of surrender or the Income Date. It
is not possible to describe precisely the amount of premium tax payable on
any transaction involving a Certificate. Such premium taxes depend, among
other things, on the type of Certificate (Qualified or Non-Qualified), on
the state of residence of the Certificate Owner, the state of residence of
the Annuitant, the status of Keyport within such states, and the insurance
tax laws of such states. Currently such premium taxes range from 0% to
5.0%. For a schedule of such taxes, see Appendix C of this Prospectus.
12. Death Provisions
These provisions do not apply to Non-Allocated Certificates. In Non-
Allocated Certificates, Annuitants or payees are unknown until the
Certificate Owner requests that an annuity be effected.
(a) Non-Qualified Certificates
Death of Certificate Owner, Joint Certificate Owner or Certain Non-
Certificate Owner Annuitants--These provisions apply if, before the Income
Date while the Certificate is In Force, the Certificate Owner or any Joint
Certificate Owner dies (whether or not the decedent is also the Annuitant)
or the Annuitant dies under a Certificate with a non-natural Certificate
Owner such as a trust. The Designated Beneficiary will control the
Certificate Owner's Account after such a death.
If the decedent was the Certificate Owner or the Annuitant (if the
Certificate Owner is not a natural person), the Designated Beneficiary may,
by the later of the 90th day after the death and the 60th day after Keyport
is notified of the death, surrender the Certificate Owner's Account for the
death benefit on the date of surrender. The death benefit is the greatest
of the following three values: (a) the Certificate Value; (b) the
Certificate Withdrawal Value; or (c) the Certificate Owner's Account Value,
except that if the Term that includes the date of death relates to the
Indexed Account and the Term's Floor is equal to 0%, (c) is instead (i)
minus (ii), where:
(i) is the Indexed Account Value at the start of the Account Year in which
death occurs, with the Index Increase recalculated in the manner described
in section B of Appendix A; except that if death occurs in the last Account
Year of the Term and the Designated Beneficiary's surrender occurs after
the end of that Term, (i) is instead the Indexed Account Value at the end
of that Term; and
(ii) is the sum of any partial surrenders since the start of the Account
Year of death.
For a surrender after the applicable 90 or 60 day period and for a
surrender following the death of a Joint Certificate Owner, the Certificate
Withdrawal Value is payable instead. If the Certificate Owner's Account is
not surrendered, it will continue for the time period specified below.
If the decedent's surviving spouse (if any) is the sole Designated
Beneficiary, the surviving spouse will automatically become the new sole
Certificate Owner as of the Certificate Owner's or the Joint Certificate
Owner's date of death. And, if the decedent is the Annuitant, the new
Annuitant will be any living Contingent Annuitant named in the Enrollment
Form, otherwise the surviving spouse. The Certificate Owner's Account can
continue until another death occurs (i.e., until the death of the
Certificate Owner or Joint Certificate Owner). Except for this paragraph,
all of "Death Provisions" will apply to that subsequent death.
In all other cases, the Certificate Owner's Account can continue for up to
five years from the date of death. During this period, the Designated
Beneficiary may exercise all ownership rights, including the right to make
transfers or partial surrenders or the right to totally surrender the
Certificate pursuant to the surrender provisions of the Certificate. If the
Certificate Owner's Account continues to the end of the five-year period,
Keyport will automatically end it then by paying to the Designated
Beneficiary the Certificate Withdrawal Value, without the deduction of any
applicable Surrender Charge. If the Designated Beneficiary is not alive
then, Keyport will pay any Person(s) previously named by the Designated
Beneficiary in a Written Request, otherwise the Designated Beneficiary's
estate.
Payment of Benefits--Instead of receiving a lump sum, the Certificate Owner
or any Designated Beneficiary may direct by Written Request that Keyport
pay any benefit of $5,000 or more under an Annuity Option that meets the
following requirements: (a) the first payment to the Designated Beneficiary
must be made no later than one year after the date of death; (b) payments
must be made over the life of the Designated Beneficiary or over a period
not extending beyond that person's life expectancy; and (c) any Annuity
Option that provides for payments to continue after the death of the
Designated Beneficiary will not permit the successor payee to extend the
period of time over which the remaining payments are to be made. The
Certificate Owner may also direct that any benefit payable to a Designated
Beneficiary be paid under an Annuity Option meeting these same
requirements.
Death of Certain Non-Certificate Owner Annuitants--These provisions apply
if, before the Income Date while the Certificate is In Force, (a) the
Annuitant dies, (b) the Annuitant is not a Certificate Owner, and (c) the
Certificate Owner is a natural person. The Certificate will continue after
the Annuitant's death. The new Annuitant will be any living Contingent
Annuitant, otherwise the Certificate Owner.
(b) Qualified Certificates
Death of Annuitant--If the Annuitant dies while the Certificate is In
Force, the Designated Beneficiary will control the Certificate after such a
death. The Designated Beneficiary may, by the later of the 90th day after
the death and the 60th day after Keyport is notified of the death,
surrender the Certificate Owner's Account for the death benefit on the date
of surrender, calculated as described above. For a surrender after the
applicable 90 or 60 day period, the Certificate Withdrawal Value is payable
instead.
If the Certificate Owner's Account is not surrendered, it can continue for
the time period permitted by the Internal Revenue Code provisions
applicable to the particular Qualified Plan. During this period, the
Designated Beneficiary may exercise all ownership rights, including the
right to make partial surrenders or the right to totally surrender the
Certificate pursuant to the surrender provisions of the Certificate. If the
Certificate Owner's Account continues to the end of the period, Keyport
will automatically end it then by paying to the Designated Beneficiary the
Certificate Withdrawal Value. If the Designated Beneficiary is not alive
then, Keyport will pay any Person(s) named by the Designated Beneficiary in
a Written Request; otherwise the Designated Beneficiary's estate.
Payment of Benefits--Instead of receiving a lump sum, the Certificate Owner
or any Designated Beneficiary may, by Written Request, direct that Keyport
pay any benefit or $5,000 or more under an Annuity Option that meets the
following: (a) the first payment to the Designated Beneficiary must be made
no later than one year after the date of death; (b) payments must be made
over the life of the Designated Beneficiary or over a period not extending
beyond that person's life expectancy; and (c) any payment option that
provides for payments to continue after the death of the Designated
Beneficiary will not permit the successor payee to extend the period of
time over which the remaining payments are to be made. The Certificate
Owner may also direct that any benefit payable to a Designated Beneficiary
be paid under an Annuity Option meeting these same requirements.
D. ANNUITY PERIOD PROVISIONS
1. Annuity Benefits
If the Annuitant is alive on the Income Date and the Certificate is In
Force, payments will begin under the payment option or options the
Certificate Owner has chosen. The amount of the payments will be determined
by applying the Annuity Value (less any premium taxes not previously
deducted) on the Income Date in accordance with the option selected. The
Annuity Value is the greater of (a) the Account Value after application of
any applicable Market Value Adjustment, or (b) the Certificate Value,
adjusted to reflect the ratio of the Account Value (after application of
the Market Value Adjustment) to the unadjusted Account Value.
2. The Income Date and Form of Annuity
The Income Date is shown on the Certificate Schedule. The Income Date is
the later of the end of the Certificate Year in which the Annuitant's 85th
birthday occurs or the end of the 10th Certificate Year.
Under Allocated Certificates, a Certificate Owner may elect, at least
thirty (30) days prior to the Income Date, to have the Annuity Value
applied on the Income Date under any of the Annuity Options described
below. In the absence of such election, the Annuity Value will be applied
on the Income Date under Option 2 to provide a monthly life annuity with
ten (10) years of payments guaranteed.
If a Certificate is issued on a Non-Allocated basis, a Certificate Owner
may request that a portion of the Account Value, as modified by any
applicable Surrender Charge and Market Value Adjustment, be applied under
an Annuity Option for a participant in that Certificate Owner's plan.
Keyport will then issue a Certificate for such participant (who is also the
Annuitant) and begin annuity payments as directed by the Certificate Owner.
No surrenders may occur after the Income Date. Other special rules may
apply to qualified retirement plans. (See "Qualified Plans".)
3. Change of Annuity Option
A Certificate Owner may change the Annuity Option from time to time, but
such change must be made by Written Request and received by Keyport at
least thirty (30) days prior to the scheduled Income Date.
4. Annuity Options
Option 1 - Income for a Fixed Number of Years
Keyport will pay an annuity for a chosen number of years, not less than
five (5) nor over thirty (30). If, at the death of the payee, Option 1
payments have been made for less than the chosen number of years:
(a) payments will be continued during the remainder of the period to the
successor payee; or
(b) that successor payee may elect to receive in a lump sum the present
value of the remaining payments, commuted at the interest rate used to
create the annuity factor for this option.
Option 2 - Life Income with 10 Years Guaranteed
Keyport will pay an annuity during the lifetime of the payee. If, at the
death of the payee, payments have been made for less than ten (10) years:
(a) payments will be continued during the remainder of the 10 year period
to the successor payee; or
(b) the successor payee may elect to receive in a lump sum the present
value of the remaining certain payments, commuted at the interest rate used
to create the annuity factor for this option.
The amount of the annuity payments will depend on the age of the payee at
the time annuity payments are to begin and it may also depend on the
payee's sex.
Option 3 - Joint and Last Survivorship Income
Keyport will pay an annuity for as long as either the payee or a designated
second natural person is alive. The amount of the annuity payments will
depend on the age of both persons at the time annuity payments are to begin
and it may also depend on each person's sex. IT IS POSSIBLE UNDER THIS
OPTION TO RECEIVE ONLY ONE ANNUITY PAYMENT IF BOTH PAYEES DIE AFTER THE
RECEIPT OF THE FIRST PAYMENT OR TO RECEIVE ONLY TWO ANNUITY PAYMENTS IF
BOTH PAYEES DIE AFTER RECEIPT OF THE SECOND PAYMENT AND SO ON.
Other Annuity Options
Other options may be arranged with the mutual consent of a Certificate
Owner and Keyport.
5. Frequency and Amount of Payments
Payments will normally be paid as monthly installments. However, if the net
amount available to apply under any Annuity Option is less than $5,000,
Keyport has the right to pay such amount in one lump sum in lieu of the
payment otherwise provided for. In addition, if the payments provided for
would be or become less than $100, Keyport shall have the right to change
the frequency of payments to such intervals as will result in payments of
at least $100.
6. Proof of Age, Sex, and Survival of Annuitant
Keyport may require proof of age, sex, or survival of any payee upon whose
age, sex or survival payments depend. If the age or sex has been misstated,
Keyport will compute the amount payable based on the correct age and sex.
If income payments have begun, any underpayment Keyport may have made will
be paid in full with the next annuity payment. Any overpayment, unless
repaid in one sum, will be deducted from future annuity payments until
Keyport is repaid in full.
INVESTMENTS BY KEYPORT
Assets of Keyport must be invested in accordance with the requirements
established by applicable state laws regarding the nature and quality of
investments that may be made by the general accounts and separate accounts
of life insurance companies and the percentage of their assets that may be
committed to any particular type of investment. In general, these laws
permit investments, within specified limits and subject to certain
qualifications, in federal, state, and municipal obligations, corporate
bonds, preferred and common stocks, real estate mortgages, real estate and
certain other investments. (See page 23 for further information on the
investments of Keyport.)
All of Keyport's General Account assets, the assets of Separate Account C,
and the assets of certain other separate accounts will be available to fund
a Certificate Owner's claims under a Certificate.
In establishing the Guaranteed Interest Rates and Guaranteed Interest Rate
Factors under the Certificates, Keyport intends to take into account, among
other factors, the yields available on the instruments in which it intends
to invest the proceeds from the Certificates. (See "Establishment of
Guaranteed Interest Rates and Guaranteed Interest Rate Factors", page 10.)
Keyport's obligations and the values and benefits under the Certificates,
however, do not vary as a function of the returns on the instruments in
which Keyport will have invested the proceeds from the Certificates. Also,
Certificate Owners, Designated Beneficiaries and payees with rights under a
Certificate do not participate in the investment gains or losses of the
investment instruments held by Keyport in the Separate Account.
Keyport's investment strategy with respect to the proceeds attributable to
Certificates will generally be to invest in debt securities which it will
use to match its liabilities with respect to the Terms to which the
proceeds are allocated. This will be done, in Keyport's sole discretion, by
investing in any type of investment which it is authorized under state law
to invest in. Keyport expects to invest a substantial portion of the
premiums received in securities issued by the United States Government or
its agencies or instrumentalities, which issues may or may not be
guaranteed by the United States Government. This could include T-Bills,
Notes, Bonds, Zero Coupon Securities and Mortgage Pass-Through Certificates
including Government National Mortgage Association backed securities (GNMA
Certificates), Federal National Mortgage Association Guaranteed Pass-
Through Certificates (FNMA Certificates) and Federal Home Loan Mortgage
Corporation Mortgage Participation Certificates (FHLMC Certificates), and
others.
In addition, Keyport may invest its assets in various instruments,
including equity options, futures, forwards, and other instruments based on
the Index, in order to hedge Keyport's obligations with respect to Indexed
Accounts. Keyport may also buy and sell interest rate swaps and caps,
Treasury bond futures, and other instruments to hedge its exposure to
changes in interest rates. These derivative instruments will be purchased
from counterparties which conform to Keyport's Policies and Guidelines
regarding derivative instruments. Investments in these instruments
generally involve the following types of risks: in the case of over-the-
counter options and forward contracts, there is no guarantee these markets
will exist for these investments when Keyport wants to close out a
position; futures exchange may impose trading limits which may inhibit
Keyport's ability to close out positions in exchange-listed instruments;
and if Keyport has an open position with a dealer that becomes insolvent,
Keyport may experience a loss.
While the foregoing generally describes Keyport's investment strategy with
respect to the proceeds attributable to the Certificates, Keyport is not
obligated to invest assets, including the proceeds attributable to the
Certificates, according to any particular strategy except as may be
required by Rhode Island and other state insurance laws.
AMENDMENT OF CERTIFICATES
Keyport reserves the right to amend the Group Contracts and Certificate to
meet the requirements of any applicable federal or state laws or
regulations. Keyport will notify the Certificate Owners in writing of any
such amendments.
ASSIGNMENT OF CERTIFICATES
A Certificate Owner may assign a Certificate at any time, as permitted by
applicable law. A copy of any assignment must be filed with Keyport. An
assignment will not be binding upon Keyport until it receives a written
copy. The Certificate Owner's rights and those of any revocably-named
person will be subject to the assignment. Any Qualified Certificate may
have limitations on assignability. Keyport assumes no responsibility for
the validity or effect of any assignment.
Because an assignment may be a taxable event, a Certificate Owner should
consult a competent tax adviser as to the tax consequences resulting from
any assignment.
DISTRIBUTION OF CONTRACTS AND CERTIFICATES
Keyport Financial Services Corp. ("KFSC") serves as the Principal
Underwriter for the Contracts and the Certificates described in this
prospectus. The Certificate will be sold by salespersons who represent
Keyport Life Insurance Company (KFSC's corporate parent) as insurance
agents and who are registered representatives of broker-dealers who have
entered into distribution agreements with KFSC. KFSC is a wholly-owned
subsidiary of Keyport and is registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934 ("Exchange Act") as a
broker-dealer. KFSC is a member of the National Association of Securities
Dealers, Inc. ("NASD"). It is located at 125 High Street, Boston,
Massachusetts 02110.
Keyport will pay a maximum commission to broker-dealers of 5.25% of the
Single Premium, and may pay a reduced commission percentage applied to the
Certificate Owner's Account Value at the start of each Term after the first
or at some other date(s).
Certificates may be sold with a lower commission structure (1) to a person
who is an officer, director or employee of Keyport or of certain affiliates
of Keyport or (2) to any Qualified Plan established for such a person. Such
Certificates will have higher Participation Rates under the Indexed
Account, reflecting anticipated cost savings to Keyport from the lower
commission structure.
TAX CONSIDERATIONS
A. General
SINCE THE LAW IS COMPLICATED AND SINCE TAX CONSEQUENCES WILL VARY ACCORDING
TO THE ACTUAL STATUS OF THE CONTRACT OWNER OR CERTIFICATE OWNER INVOLVED,
LEGAL AND TAX ADVICE MAY BE NEEDED BY A PERSON, EMPLOYER, OR OTHER ENTITY
CONTEMPLATING THE PURCHASE OF A CONTRACT OR CERTIFICATE DESCRIBED IN THIS
PROSPECTUS.
It should be understood that any detailed description of the tax
consequences regarding the purchase of a Contract or Certificate cannot be
made in this prospectus and that special tax rules may be applicable with
respect to certain purchase situations not discussed herein. In addition,
no attempt is made to consider any applicable state or other tax laws. For
detailed information, a competent tax adviser should always be consulted.
This discussion is based upon Keyport's understanding of Federal income tax
laws as they are currently interpreted. The United States Congress has in
the past and may in the future consider legislation that, if enacted, could
adversely affect the tax treatment of annuity contracts, including
distributions and undistributed appreciation. There is no way of predicting
whether, when or in what form Congress will enact legislation affecting
annuity contracts. Any such legislation could have retroactive effect
regardless of the date of enactment. No representation is made regarding
the likelihood of continuation of those current federal income tax laws or
of the current interpretations by the Internal Revenue Service.
B. Taxation of Keyport
Keyport is taxed as a life insurance company under Part I of Subchapter L
of the Internal Revenue Code ("Code"). The assets underlying the
Certificates will be owned by Keyport. Any income earned on those assets
will be Keyport's income.
C. Taxation of Annuities in General
1. General
Section 72 of the Internal Revenue Code governs the taxation of annuities
in general. A Certificate Owner (including a trust or other entity holding
a Non-Qualified Certificate as an agent for an individual) is not taxed on
increases in Account Value until a distribution occurs, either in the form
of a lump sum payment (full or partial surrender of the Account), an
assignment or gift of the Certificate, or as annuity payments. The
provisions of Section 72 of the Code concerning distributions are briefly
summarized below. A trust or other entity owning a Non-Qualified
Certificate other than as an agent for an individual is taxed differently;
increases in Account Value are taxed yearly whether or not a distribution
occurs.
2. Surrenders, Assignments, and Gifts
A Certificate Owner who fully surrenders his or her Certificate is taxed on
the portion of the payment that exceeds his or her cost basis in the
Certificate. For Non-Qualified Certificates, the cost basis is generally
the amount of the Single Premium and the taxable portion of the surrender
payment is taxed as ordinary income. For Qualified Certificates, the cost
basis is generally zero and the taxable portion of the surrender payment is
generally taxed as ordinary income, subject to special 5-year income
averaging for lump-sum distributions received before January 1, 2000. A
Designated Beneficiary receiving a lump sum surrender benefit after the
death of the Annuitant or Certificate Owner is taxed on the portion of the
amount that exceeds the Certificate Owner's cost basis in the Certificate.
If the Designated Beneficiary elects to receive annuity payments within
sixty (60) days of the decedent's death, different tax rules apply. See
"Annuity Payments" below.
Partial surrenders received under Non-Qualified Certificates prior to the
Income Date are first included in gross income to the extent the Account
Value (plus or minus any Market Value Adjustment that would apply to the
Account Value assuming it were totally surrendered) exceeds the Single
Premium. Then, to the extent the Account Value (plus or minus any Market
Value Adjustment that would apply to the Account Value assuming it were
totally surrendered) does not exceed the Single Premium, such surrenders
are treated as a non-taxable return of principal to the Certificate Owner.
For partial surrenders under a Qualified Certificate, payments are treated
first as a non-taxable return of principal up to the cost basis and then a
taxable return of income. Since the cost basis of Qualified Certificates is
generally zero, partial surrender amounts will generally be fully taxed as
ordinary income.
A Certificate Owner who assigns or pledges a Non-Qualified Certificate is
treated as if he or she had received the amount assigned or pledged and
thus is subject to taxation under the rules applicable to surrenders. A
Certificate Owner who gives away the Certificate (i.e., transfers it
without full and adequate consideration) to anyone other than his or her
spouse is treated for income tax purposes as if he or she had fully
surrendered the Certificate.
A special computational rule applies if Keyport issues to the Certificate
Owner, during any calendar year, (a) two or more Certificates or (b) one or
more Certificates and one or more of Keyport's other annuity contracts.
Under this rule, the amount of any distribution includable in the
Certificate Owner's gross income is to be determined under Section 72(e) of
the Code by treating all the Keyport contracts as one contract. Keyport
believes that this means the amount of any distribution under one
Certificate will be includable in gross income to the extent that at the
time of distribution the sum of the values for all the Certificates or
contracts exceeds the sum of the cost bases for all the contracts. The
discussion in this paragraph applies to "laddered" Certificates, which are
multiple Certificates with different Term lengths that are purchased during
one calendar year.
3. Annuity Payments
The non-taxable portion of each annuity payment is determined by an
"exclusion ratio" formula which establishes the ratio that the cost basis
of the Certificate bears to the total expected value of annuity payments
for the term of the annuity. The remaining portion of each payment is
taxable. Such taxable portion is taxed at ordinary income rates. For
Qualified Certificates, the cost basis is generally zero. With annuity
payments based on life contingencies, the payments will become fully
taxable once the payee lives longer than the life expectancy used to
calculate the non-taxable portion of the prior payments.
4. Penalty Tax
Payments received by Certificate Owners, Annuitants, and Designated
Beneficiaries under Certificates may be subject to both ordinary income
taxes and a penalty tax equal to 10% of the amount received that is
includable in income. The penalty tax is not imposed on amounts received:
(a) after the taxpayer attains age 59-1/2; (b) in a series of substantially
equal payments made for life or life expectancy; (c) after the death of the
Certificate Owner (or, where the Certificate Owner is not a human being,
after the death of the Annuitant); (d) if the taxpayer becomes totally and
permanently disabled; or (e) under a Non-Qualified Certificate's annuity
payment option that provides for a series of substantially equal payments,
provided the Certificate is not issued as a result of a Section 1035
exchange and the first annuity payment begins in the first Certificate
Year.
5. Income Tax Withholding
Keyport is required to withhold federal income taxes on taxable amounts
paid under Certificates unless the recipient elects not to have withholding
apply. Keyport will notify recipients of their right to elect not to have
withholding apply. See "Tax-Sheltered Annuities" ("TSAs"), for an
alternative type of withholding that may apply to distributions from TSAs
that are eligible for rollover to another TSA or an individual retirement
annuity or account ("IRA").
6. Section 1035 Exchanges
A Non-Qualified Certificate may be purchased with proceeds from the
surrender of an existing annuity contract. Such a transaction may qualify
as a tax-free exchange pursuant to Section 1035 of the Code. It is
Keyport's understanding that in such an event: (a) the new Certificate will
be subject to the distribution-at-death rules described in "Death
Provisions for Non-Qualified Certificates"; (b) purchase payments made
between 8/14/82 and 1/18/85 and the income allocable to them will,
following an exchange, no longer be covered by a "grandfathered" exception
to the penalty tax for a distribution of income that is allocable to an
investment made over ten years prior to the distribution; and (c) purchase
payments made before 8/14/82 and the income allocable to them will,
following an exchange, continue to receive the following "grandfathered"
tax treatment under prior law: (i) the penalty tax does not apply to any
distribution; (ii) partial surrenders are treated first as a non-taxable
return of principal and then a taxable return of income; and (iii)
assignments are not treated as surrenders subject to taxation. Keyport's
understanding of the above is principally based on legislative reports
prepared by the Staff of the Congressional Joint Committee on Taxation.
D. QUALIFIED PLANS
The Certificate is designed for use with several types of Qualified Plans.
The tax rules applicable to participants in such Qualified Plans vary
according to the type of plan and the terms and conditions of the plan
itself. Therefore, no attempt is made herein to provide more than general
information about the use of the Certificate with the various types of
Qualified Plans. Participants under such Qualified Plans as well as
Certificate Owners, Annuitants, and Designated Beneficiaries are cautioned
that the rights of any person to any benefits under such Qualified Plans
may be subject to the terms and conditions of the plans themselves
regardless of the terms and conditions of the Certificate issued in
connection therewith. Following are brief descriptions of the various types
of Qualified Plans and of the use of the Certificate in connection
therewith. Purchasers of the Certificate should seek competent advice
concerning the terms and conditions of the particular Qualified Plan and
use of the Certificate with that Plan.
1. Tax-Sheltered Annuities
Section 403(b) of the Code permits public school employees and employees of
certain types of charitable, educational and scientific organizations
specified in Section 501(c)(3) of the Code to purchase annuity contracts
and, subject to certain contribution limitations, exclude the amount of
premium payments from gross income for tax purposes. However, such premium
payments may be subject to Social Security ("FICA") taxes. This type of
annuity contract is commonly referred to as a "Tax-Sheltered Annuity".
Section 403(b)(11) of the Code contains distribution restrictions.
Specifically, benefits may be paid, through surrender of the Certificate or
otherwise, only (a) when the employee attains age 59-1/2, separates from
service, dies or becomes totally and permanently disabled (within the
meaning of Section 72(m)(7) of the Code) or (b) in the case of hardship. A
hardship distribution must be of employee contributions only and not of any
income attributable to such contributions. Section 403(b)(11) does not
apply to distributions attributable to assets held as of December 31, 1988.
Thus, it appears that the law's restrictions would apply only to
distributions attributable to contributions made after 1988, to earnings on
those contributions, and to earnings on amounts held as of 12/31/88. The
Internal Revenue Service has indicated that the distribution restrictions
of Section 403(b)(11) are not applicable when TSA funds are being
transferred tax-free directly to another TSA issuer, provided the
transferred funds continue to be subject to the Section 403(b)(11)
distribution restrictions.
Keyport will notify a Certificate Owner who has requested a distribution
from a Certificate if all or part of such distribution is eligible for
rollover to another TSA or to an IRA. Any amount eligible for rollover
treatment will be subject to mandatory federal income tax withholding at a
20% rate if the Certificate Owner receives the amount rather than directing
Keyport by Written Request to transfer the amount as a direct rollover to
another TSA or IRA.
2. Individual Retirement Annuities
Section 408 of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity."
These Individual Retirement Annuities are subject to limitations on the
amount which may be contributed, the persons who may be eligible, and on
the time when distributions may commence. In addition, distributions from
certain types of Qualified Plans may be placed on a tax-deferred basis into
an Individual Retirement Annuity.
3. Corporate Pension and Profit-Sharing Plans
Sections 401(a) and 403(a) of the Code permit corporate employers to
establish various types of retirement plans for employees. Such retirement
plans may permit the purchase of the Certificate to provide benefits under
the plans.
THE COMPANY
A. Business
General
Keyport Life Insurance Company ("Keyport") is a specialty insurance company
providing a diversified line of fixed, indexed and variable annuity
products designed to serve the growing retirement savings market. These
annuity products are sold through a wide ranging network of banks, agents
and securities dealers. Keyport seeks to (i) maintain its presence in the
fixed annuity market while expanding its sales of variable and equity-
indexed annuities, (ii) achieve a broader market presence through the use
of diversified distribution channels and (iii) maintain a conservative
approach to investment and liability management.
Keyport is licensed to do business in all states except New York and is
also licensed in the District of Columbia and the Virgin Islands. Keyport
has been rated A+ (Superior) by A.M. Best and Company ("A.M. Best"),
independent analysts of the insurance industry. Keyport has been rated A+
each year since 1976, the first year Keyport was subject to A.M. Best's
alphabetic rating system. Standard & Poor's ("S&P") has rated Keyport AA
for excellent financial security, Moody's Investor Services ("Moody's") has
rated Keyport A1 for good financial strength and Duff & Phelps has rated
Keyport AA- for very high claims paying ability. The A.M. Best's A+ rating
is in the highest rating category, which also includes A++. S&P and Duff &
Phelps have one rating category above AA and Moody's has two rating
categories above A. Within the S&P AA category, only AA+ is higher. The
Moody's "1" modifier signifies that Keyport is at the higher end of the A
category while the Duff & Phelps "-" modifier signifies that Keyport is at
the lower end of the AA category. These ratings merely reflect the opinion
of the rating company as to the relative financial strength of Keyport and
Keyport's ability to meet its contractual obligations to its policyholders.
Keyport's wholly owned insurance subsidiaries are Independence Life and
Annuity Company ("Independence Life") and American Benefit Life Insurance
Company, to be renamed Keyport Benefit Life Insurance Company ("Keyport
Benefit"), on or about April 1, 1998. Other wholly owned subsidiaries are
Liberty Advisory Services Corp., an investment advisory company, and
Keyport Financial Services Corp., a broker-dealer.
Keyport is an indirect wholly owned subsidiary of Liberty Financial
Companies, Inc. ("Liberty Financial") which is a publicly traded holding
company. Liberty Financial is an indirect majority owned subsidiary of
Liberty Mutual Insurance Company ("Liberty"), a multi-line insurance
company.
Liberty Financial is an asset accumulation and management company providing
investment management and retirement-oriented insurance products through
multiple distribution channels. Keyport issues and underwrites
substantially all of Liberty Financial's retirement-oriented insurance
products. Liberty Financial's investment advisor, asset management and
bank distribution operating units are The Colonial Group, Inc.
("Colonial"), Stein Roe & Farnham Incorporated ("Stein Roe"), Newport
Pacific Management, Inc. ("Newport") and Independent Holdings, Inc.
("Independent"). Colonial, Stein Roe and Newport manage certain underlying
mutual funds and other invested assets of Keyport's separate accounts.
Stein Roe also provides asset management services for a substantial portion
of Keyport's general account. Independent, through its subsidiary, markets
Keyport's products through the bank distribution channel.
Keyport's executive and administrative offices are located at 125 High
Street, Boston Massachusetts 02110, and its home office is at 695 George
Washington Highway, Lincoln, Rhode Island 02865.
B. Selected Financial Data
The following selected consolidated financial data for Keyport should be
read in conjunction with the consolidated financial statements and notes
thereto included elsewhere in this prospectus.
Selected Financial Data (in thousands)
As of and for
the year ended
December 31 1997 1996 1995 1994 1993
Income statement
data:
Investment
income $ 847,048 $ 790,365 $ 755,930 $ 689,575 $ 669,667
Interest
credited (594,084) (572,719) (555,725) (481,926) (504,205)
Investment
spread 252,964 217,646 200,205 207,649 165,462
Fee income 36,353 33,534 29,767 25,273 18,158
Operating
expenses (49,941) (43,815) (44,475) (54,295) (40,697)
Income before
income taxes 172,651 137,846 107,941 95,276 86,705
Net income 113,561 90,624 69,610 63,225 57,995
Balance sheet
data:
Total cash and
investments $13,505,858 $12,305,312 $10,922,125 $ 9,274,793 $8,912,526
Total assets 15,342,189 13,924,557 12,280,194 10,873,604 10,227,327
Stockholder's
equity 1,103,021 980,782 902,331 682,485 684,270
C. Management's Discussion and Analysis of Results of Operations
and Financial Condition
1. Results of Operations
Net income was $113.6 million in 1997 compared to $90.6 million in 1996 and
$69.6 million in 1995. The improvement of $23.0 million in 1997 compared to
1996 resulted from higher investment spread, higher fee income and higher
net realized investment gains. Partially offsetting these items were
increased amortization of deferred policy acquisition costs and value of
insurance in force, higher operating expenses and higher 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 $253.0 million in 1997 compared to $217.6 million in
1996 and $200.2 million in 1995. 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 1.91% in 1997, and 1.84% in 1996 and 1995.
Investment income was $847.0 million in 1997 compared to $790.4 million in
1996 and $755.9 million in 1995. The increase of $56.6 million in 1997
compared to 1996 primarily relates to an $85.6 million increase as a result
of a higher level of average invested assets, partially offset by a
$29.0 million decrease resulting from a lower average investment yield. The
1997 investment income was net of $47.6 million of S&P 500 Index call
option amortization expense related to the Company's equity-indexed
annuities compared to $14.0 million in 1996. The average investment yield
was 6.90% in 1997 compared to 7.16% in 1996. Investment income increased
in 1996 compared to 1995 primarily as a result of a higher level of average
invested assets, partially offset by a decrease in the average investment
yield. The average investment yield was 7.16% in 1996 compared to 7.51% in
1995.
Interest credited to policyholders totaled $594.1 million in 1997 compared
to $572.7 million in 1996 and $555.7 million in 1995. The increase of
$21.4 million in 1997 compared to 1996 primarily relates to a $56.4 million
increase as a result of a higher level of average policyholder balances,
partially offset by a $35.0 million decrease resulting from a lower average
interest credited rate. Policyholder balances averaged $11.9 billion
(including $10.8 billion of fixed products and $1.1 billion of equity-
indexed annuities) in 1997 compared to $10.8 billion (including $10.4
billion of fixed products and $0.4 billion of equity-indexed annuities) in
1996. The average interest credited rate was 4.99% (5.45% on fixed
products and 0.85% on equity-indexed annuities) in 1997 compared to 5.32%
(5.50% on fixed products and 0.85% on equity-indexed annuities) in 1996.
The Company's equity-indexed annuities credit interest to the policyholder
at a "participation rate" equal to a portion (ranging for existing policies
from 60% to 95%) of the change in value of the S&P 500 Index. The
Company's equity-indexed annuities also provide a full guarantee of
principal if held to term, plus interest at 0.85% annually. For each of
the periods presented, the interest credited to equity-indexed
policyholders related to the participation rate was offset by investment
income recognized on the S&P 500 Index call options, resulting in an 0.85%
net credited rate. Interest credited to policyholders increased in 1996
compared to 1995 primarily as a result of a higher level of average
policyholder balances, partially offset by a decrease in the average
interest credited rate. Policyholder balances averaged $10.8 billion in
1996 compared to $9.8 billion in 1995. The average interest credited rate
was 5.67% in 1995.
Average investments (computed without giving effect to Statement of
Financial Accounting Standards No. 115), including a portion of the
Company's cash and cash equivalents, were $12.3 billion in 1997 compared to
$11.0 billion in 1996 and $10.1 billion in 1995. The increase of $1.3
billion in 1997 compared to 1996 was primarily due to a 100% coinsurance
agreement with respect to a $954.0 million block of SPDAs entered into with
Fidelity & Guaranty Life Insurance Company ("F&G Life") during the third
quarter of 1996 and investment portfolio earnings. The increase of $0.9
billion in 1996 compared to 1995 was primarily due to the reinvestment of
portfolio earnings and the F&G Life transaction.
Net realized investment gains were $24.7 million in 1997 compared to $5.5
million in 1996 and net realized investment losses of $4.0 million in 1995.
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 $16.8 million and gains on
redemption of seed money investments in separate account mutual funds
sponsored by the Company of $7.9 million. The net realized investment
gains in 1996 were primarily attributable to sales of fixed maturity
investments and sales of investments received in the F&G Life transaction.
Surrender charges on fixed 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
$16.0 million in 1997 compared to $14.9 million in 1996 and $14.8 million
in 1995.
Total annuity withdrawals represented 11.6% of the total average annuity
policyholder and separate account balances in 1997 and 1996 and 9.9% in
1995. Excluding surrenders from the older block of annuities acquired in
the F&G Life transaction, the withdrawal percentages were 10.6% and 10.0%
in 1997 and 1996, respectively.
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 in separate accounts
supporting the contracts, were $17.1 million in 1997 compared to $16.0
million in 1996 and $13.2 million in 1995. Such fees represented 1.54%,
1.68% and 1.61% of average variable annuity and variable life separate
account balances in 1997, 1996 and 1995, respectively.
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 $3.3
million in 1997 compared to $2.6 million in 1996 and $1.8 million in 1995.
The increase of $0.7 million in 1997 compared to 1996 primarily reflects a
higher level of average assets under management.
Operating expenses primarily represent compensation, selling and other
general and administrative expenses. These expenses were $49.9 million in
1997 compared to $43.8 million in 1996 and $44.5 million in 1995. The
increase in 1997 compared to 1996 was primarily due to higher employee
related expenses and selling expenses. The decrease in 1996 compared to
1995 was primarily due to IRS interest penalties of $1.9 million recorded
in 1995 related to a federal income tax assessment.
Amortization of deferred policy acquisition costs was $75.9 million in 1997
compared to $60.2 million in 1996 and $58.5 million in 1995. These
increases in amortization in 1997 and 1996 were primarily related to the
increase in investment spread from the growth of business in force
associated with fixed and equity-indexed products and the increased sales
of variable annuity products. Amortization expense represented 29.2%,
27.7% and 29.2%, of investment spread for 1997, 1996 and 1995,
respectively.
Amortization of value of insurance in force totaled $10.5 million in 1997
compared to $10.2 million in 1996 and $9.5 million in 1995. The increase in
amortization in 1997 compared to 1996 was primarily due to increased
amortization of $4.0 million related to the F&G Life transaction, partially
offset by decreased amortization related to a change in mortality
assumptions. The increase in amortization in 1996 compared to 1995 was
primarily due to $2.7 million of amortization recorded in 1996 relating to
the F&G Life transaction, partially offset by lower amortization in 1996
due to an increase in estimated amortization periods in the last quarter of
1995 of the Company's closed block of single premium whole life insurance.
Federal income tax expense was $59.1 million or 34.2% of pretax income in
1997 compared to $47.2 million, or 34.3% pretax income in 1996, and $38.3
million, or 35.5% of pretax income in 1995.
Effective July 18, 1997, due to a decrease in the ownership percentage of
the Company's indirect parent, the Company is no longer included in the
consolidated federal income tax return of Liberty. The Company does not
expect this change to have a material effect on its financial condition or
its results from operations. The Company will be required to file a
separate federal income tax return until the Company is eligible to file a
consolidated federal income tax return with Liberty Financial in 2002.
2. Financial Condition
Stockholder's Equity as of December 31, 1997 was $1.1 billion compared to
$980.8 million as of December 31, 1996. The increase in stockholder's
equity was due to net income of $113.6 million, as well as an increase in
after-tax unrealized gains and losses (net of adjustments to deferred
policy acquisition costs and value of insurance in force) during the period
of $8.7 million.
Investments not including cash and cash equivalents totaled $12.3 billion
at December 31, 1997 compared to $11.5 billion at December 31, 1996. The
increase of $0.8 billion is primarily attributable to the reinvestment of
portfolio earnings in 1997.
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
appropriate tax planning, the Company classifies its entire fixed maturity
portfolio as "available for sale" and accordingly carries such investments
at fair value. The Company's total investments at December 31, 1997 and
1996 reflected net unrealized gains of $280.3 million and $229.8 million,
respectively, relating to its fixed maturity and equity portfolios.
Approximately $11.0 billion, or 81.7%, of the Company's general account
investments at December 31, 1997, was rated by Standard & Poor's
Corporation, Moody's Investors Service or under comparable statutory rating
guidelines established by the NAIC. At December 31, 1997, the carrying
value of investments in below investment grade securities totaled $1.1
billion, or 7.9% of general account investments of $13.5 billion. 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 may be more limited than for investment grade
securities.
3. Management of the Company's Investments
Asset-liability duration 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 83.0%
of the Company's fixed annuity policyholder balances were subject to
surrender charges at December 31, 1997.
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 toward 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 December 31, 1997 the effective duration of the Company's
fixed maturities investments (including certain cash and cash equivalents)
was approximately 2.9. Effective duration is a common measure for the
price sensitivity of a fixed-income portfolio to changes in interest rates.
It measures the approximate percentage change in the market value of a
portfolio when interest rates change by 100 basis points. This measure
includes the impact of estimated changes in portfolio cash flows from
features, such as prepayments and bond calls.
As a component of its investment strategy and to reduce its exposure to
interest rate risk, the Company utilizes interest rate swap agreements 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 earned on longer-term fixed-rate assets with interest credited to
policyholders. The Company had 45 outstanding swap agreements with an
aggregate notional principal amount of $2.6 billion and had 39 outstanding
swap agreements with an aggregate notional principal amount of $2.3 billion
as of December 31, 1997 and 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 $250.0 million and $450.0 million as
of December 31, 1997 and 1996, respectively.
With respect to the Company's equity-indexed annuities, the Company buys
call options on the 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 $323.3 million and $109.7 million as of December 31, 1997 and
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. In addition, swap agreements have interest
rate risk and call options have stock market risk. However, the swap
agreements hedge fixed-rate assets; the Company expects that any interest
rate movements that adversely affect the market value of swap agreements
would be offset by changes in the market values of such fixed rate assets.
Similarly, the call options hedge the Company's obligations to provide
returns on equity-indexed annuities based upon the S&P 500 Index, and the
Company believes that any stock market movements that adversely affect the
market value of S&P 500 call options would be substantially offset by a
reduction in policyholder liabilities. However, there can be no assurance
that these hedges will be effective in offsetting the potentially adverse
effects of changes in S&P 500 Index levels. The Company's profitability
could be adversely affected if the value of its S&P 500 call options
increase less than (or decrease more than) the value of the guarantees made
to equity-indexed policyholders.
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. There were no non-income producing investments in the
Company's fixed maturity portfolio at December 31, 1997. 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.
4. 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 December
31, 1997, $10.3 billion, or 76.2%, 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.
Although no assurance can be given, the Company believes that liquidity to
fund withdrawals would be available through incoming cash flow, the sale of
short-term or floating-rate instruments, 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 December 31,
1997, the amount of dividends that the Company could pay without such
approval was $70.3 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.
5. Year 2000
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous
results by or at the Year 2000. This potential problem has become known as
the "Year 2000 issue". The Year 2000 issue affects virtually all companies
and organizations.
Computer applications which are affected by the Year 2000 issue could
impact Keyport's business functions in various ways, ranging from a
complete inability to perform critical business functions to a loss of
productivity in varying degrees. Likewise, the failure of some computer
applications could have no impact on critical business functions.
Keyport is assessing and addressing the Year 2000 issue by implementing a
four-step plan. The first two steps involve inventorying all the computer
applications which support Keyport's business functions and prioritizing
computer applications which are affected by the Year 2000 issue based upon
the degree of impact each has on the functioning of Keyport's business
units. The first two steps of the plan are substantially complete.
The final two steps of the four-step plan involve remediation of affected
computer applications (i.e., repairing or replacing programs, including
those which interface with third-party computer applications that have
unremediated Year 2000 issues, and appropriate testing) and reinstallation
of computer applications. For computer applications which are "mission
critical" (i.e., their failure would result in the complete inability to
perform critical business functions), Keyport expects to complete the final
two steps of the plan by December 31, 1998. Remediation and reinstallation
of non-critical computer applications is scheduled to be completed by
December 31, 1999.
Keyport believes that the Year 2000 issue could have a material impact on
Keyport's operations if the four-step plan is not timely implemented.
However, based upon the progress that is being made, Keyport believes that
the timetable for implementing the plan will be met and that the Year 2000
issue will not pose significant operational problems for its computer
systems.
6. 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.
D. General Account Investments
Premium deposits on fixed and equity-indexed annuities are credited to the
Company's general account investments (which at December 31, 1997 totaled
$13.5 billion). To maintain its investment spreads at acceptable levels,
the Company must earn returns on its general account sufficiently in excess
of the fixed or indexed returns credited to policyholders. The key element
of this investment process is asset/liability management. Successful
asset/liability management requires both a quantitative assessment of
overall policy liabilities (including maturities, surrenders and crediting
of interest) and prudent investment of general account assets. The two
most important tools in managing policy liabilities are setting crediting
rates and establishing surrender periods. The investment process requires
portfolio techniques that earn acceptable yields while effectively managing
both interest rate risk and credit risk. The Company emphasizes a
conservative approach to asset/liability management, which is oriented
toward reducing downside risk in adverse markets, as opposed to maximizing
spread in favorable markets. The approach is also designed to reduce
earnings volatility. Various factors can impact the Company's investment
spread, including changes in interest rates and other factors affecting the
Company's general account investments.
The bulk of the Company's general account investments are invested in fixed
maturity securities (83.3% at December 31, 1997). The Company's principal
strategy for managing interest rate risk is to closely match the duration
of its general account investment portfolio to its policyholder balances.
At December 31, 1997, the effective duration of its fixed income portfolio
was approximately 2.9. The Company also employs hedging strategies to
manage this risk, including interest rate swaps and caps. In the case of
equity-indexed products, the Company purchases S&P 500 Index call options
to hedge its obligations to provide participation rate returns. Credit
risk is managed by careful credit analysis and monitoring. At December 31,
1997, the Company's fixed maturity portfolio had an overall average S&P
rating of A+. A portion of the general account investments (7.9% at
December 31, 1997) are invested in below investment grade fixed maturity
securities to enhance overall portfolio yield. Below investment grade
securities pose greater risks than investment grade securities. The
Company actively manages its below investment grade portfolio to optimize
its risk/return profile. There were no non-income producing investments in
the Company's fixed maturity portfolio at December 31, 1997.
As of December 31, 1997, the Company owned approximately $3.5 billion of
mortgage-backed securities (26.2% of its general account investments),
97.4% of which were investment grade. Mortgage-backed securities are
subject to significant prepayment and extension risks, since the underlying
mortgages may be repaid more or less rapidly than scheduled.
As of December 31, 1997, approximately $3.2 billion (23.8% of the Company's
general account investments) were invested in securities which were sold
without registration under the Securities Act and were not freely tradable
under the Securities Act or which were otherwise illiquid. These
securities may be resold pursuant to an exemption from registration under
the Securities Act. If the Company sought to sell such securities, it
might be unable to do so at the then current carrying values and might have
to dispose of such securities over extended periods of time at uncertain
levels.
E. Competition
The Company's business activities are conducted in extremely competitive
markets. Keyport competes with a large number of life insurance companies,
some of which are larger and more highly capitalized and have higher
ratings than Keyport. No one company dominates the industry. In addition,
Keyport's products compete with alternative investment vehicles available
through financial institutions, brokerage firms and investment managers.
Management believes that Keyport competes principally with respect to
product features, pricing, ratings and service; management also believes
that Keyport can continue to compete successfully in this market by
offering innovative products and superior services. In addition, financial
institutions and broker-dealers focus on the insurer's ratings for
financial strength or claims-paying ability in determining whether to
market the insurer's annuities.
F. Employees
As of December 31, 1997, the Company had 412 full-time employees. The
Company provides its employees with a broad range of employee benefit
programs. The Company believes that its relations with its employees are
excellent.
G. Regulation
The Company's business activities are extensively regulated. The following
briefly summarizes the principal regulatory requirements and certain
related matters.
Keyport's retirement-oriented insurance products generally are issued as
individual policies. The policy is a contract between the issuing
insurance company and the policyholder. Policy forms, including all
principal contract terms, are regulated by state law. In most cases, the
policy form must be approved by the insurance department or similar agency
of a state in order for the policy to be sold in that state.
Keyport and Independence are each chartered in Rhode Island and the State
of Rhode Island Insurance Department is their primary oversight regulator.
Keyport and Independence Life also must be licensed by the state insurance
regulators in each other jurisdiction in which they conduct business. They
currently are licensed to conduct business in 49 states (the exception
being New York), and in the District of Columbia. State insurance laws
generally provide regulators with broad powers related to issuing licenses
to transact business, regulating marketing and other trade practices,
operating guaranty associations, regulating certain premium rates,
regulating insurance holding company systems, establishing reserve
requirements, prescribing the form and content of required financial
statements and reports, performing financial and other examinations,
determining the reasonableness and adequacy of statutory capital and
surplus, regulating the type and amount of investments permitted, limiting
the amount of dividends that can be paid and the size of transactions that
can be consummated without first obtaining regulatory approval, and other
related matters. The regulators also make periodic examinations of
individual companies and review annual and other reports on the financial
conditions of all companies operating within their respective
jurisdictions.
Keyport prepares its statutory-basis financial statements in accordance
with accounting practices prescribed or permitted by the Insurance
Department of the State of Rhode Island. Certain statutory accounting
practices are prescribed by state laws. Permitted statutory accounting
practices encompass all accounting practices that are not proscribed; such
practices may differ between the states and companies within a state. The
National Association of Insurance Commissioners (the "NAIC") currently is
in the process of codifying statutory accounting practices, the result of
which is expected to constitute the only source of prescribed statutory
accounting practices. That project, which is expected to be completed in
1998 may result in changes to the accounting practices that the Company
uses to prepare its statutory-basis financial statements. The impact of
any such changes on the Company's statutory-surplus cannot be determined at
this time. No assurance can be given that such changes would not have a
material adverse effect on the Company.
Risk Bond Capital Requirements. In recent years, various states have
adopted new quantitative standards promulgated by the NAIC. These
standards are designed to reduce the risk of insurance company
insolvencies, in part by providing an early warning of financial or other
difficulties. These standards include the NAIC's risk-based capital
("RBC") requirements. RBC requirements attempt to measure statutory
capital and surplus needs based on the risks in a company's mix of products
and investment portfolio. The requirements provide for four different
levels of regulatory attention which implement increasing levels of
regulatory control (ranging from development of an action plan to mandatory
receivership). As of December 31, 1997, Keyport's capital and surplus
exceeded the level at which the lowest of these regulatory attention levels
would be triggered.
Guaranty Fund Assessments. Under the insurance guaranty fund laws existing
in each state, insurers can be assessed for certain obligations of
insolvent insurance companies to policyholders and claimants. Because
assessments typically are not made for several years after an insurer
fails, Keyport cannot accurately determine the precise amount or timing of
its exposure to known insurance company insolvencies at this time. For
certain information regarding the Company's historical and estimated future
assessments, see Note 11 to the Company's Consolidated Financial
Statements. The insolvency of large life insurance companies in future
years could result in material assessments to Keyport by state guaranty
funds.
Insurance Holding Company Regulation. Current Rhode Island insurance law
imposes prior approval requirements for certain transactions with
affiliates and generally regulates dividend payments by a Rhode Island-
chartered insurance subsidiary to its parent company. Keyport may not make
dividend payments in excess of the lesser of (i) 10% of its statutory
surplus as of the preceding December 31 or (ii) its statutory net gain from
operations for the preceding fiscal year without prior approval by the
State of Rhode Island Insurance Department. As of December 31, 1997, such
restriction would limit dividends without such approval to approximately
$70.3 million. Keyport has not paid any dividends since its acquisition in
December, 1988.
KFSC, a subsidiary of Keyport, is regulated as a broker-dealer under the
Exchange Act and is a member of the NASD. (See "Distribution of Contracts
and Certificates".)
COMPANY MANAGEMENT
The following are the principal officers and directors of the Company:
Position with Other Business, Vocation
Keyport or Employment for Past
Name, Age Year of Election Five Years
Kenneth R. Leibler, 48 Chairman of the Board, Chief Executive Officer
12/31/94 of Liberty Financial
Companies, Inc. ("LFC"),
1/1/95; President of
LFC, formerly Chief
Operating Officer of LFC
Frederick Lippitt, 81 Director, 1/31/62, Chairman of The
and Assistant Providence Plan,
Secretary, 4/9/69 Providence, RI
Robert C. Nyman, 61 Director, 4/11/96 Formerly President and
Chairman of Nyman
Manufacturing Co., East
Providence, RI
John W. Rosensteel, 57 President and Chief Chairman of the Board,
Executive Officer, Director and President
12/30/92 of KFSC, 11/12/92;
and Director, 11/5/92 Chairman of the Board,
Director, President and
Chief Executive Officer of
LASC, 1/8/93; President,
Chief Executive Officer,
Chairman of the Board and
Director of Independence
Life and Annuity Company,
10/1/93
Paul H. LeFevre, Jr., 55 Executive Formerly Senior Vice
Vice President, President and Chief
4/10/97 Financial Officer of the
Company, 9/1/95; Director,
1/8/93, and Executive Vice
President, 7/22/97 of
LASC; formerly Senior
Vice President and Chief
Financial Officer of LASC,
1/8/93; Director, 10/1/93,
and Executive Vice
President, 7/28/97, of
Independence Life and
Annuity Company; formerly
Senior Vice President and
Chief Financial Officer of
Independence Life and
Annuity Company, 10/1/93
Bernard R.
Beckerlegge, 51 Senior Vice President Senior Vice President
and General Counsel, and General Counsel of
9/1/95 LASC, 7/22/97; Senior Vice
President and General
Counsel of Independence
Life and Annuity Company,
10/9/95; formerly General
Counsel for B.T. Variable
Insurance Co., 8/1/88
Stephen B. Bonner, 51 Senior Vice President, Senior Vice President
11/7/96 of Independence Life and
Annuity Company, 7/28/97;
formerly President of
Construction Information
Group at McGraw Hill,
2/1/92
Bernhard M. Koch, 43 Senior Vice President Senior Vice President and
and Chief Officer, Chief Financial Officer of
8/7/97 LASC, 7/22/97; Senior Vice
President and Chief
Financial Officer of
Independence Life and
Annuity Company, 7/28/97;
formerly Executive Vice
President and Chief
Financial Officer of Life
Partners Group, 12/1/95;
formerly Senior Vice
President and Chief
Financial Officer of
Laurentian Capital Corp.,
5/1/88
Stewart R.
Morrison, 41 Senior Vice President, Formerly Vice President,
4/10/97, and Chief Investments of the
Investment Officer, Company; Senior Vice
5/16/94 President and Chief
Investment Officer of
LASC, 7/22/97; formerly
Vice President,
Investments of LASC,
1/8/93; Senior Vice
President and Chief
Investment Officer of
Independence Life and
Annuity Company, 7/28/97;
formerly Vice President,
Investments of
Independence Life and
Annuity Company, 10/1/93
Francis E. Reinhart, 57 Senior Vice President, Formerly Chief
4/5/90, and Chief Administrative Officer of
Information Officer, the Company, 4/5/90;
4/10/97 Director, 3/15/95 and
Vice President, 10/24/85,
of KFSC; Senior Vice
President of LASC, 1/8/93;
formerly Chief
Administrative Officer
1/8/93; Senior Vice
President, 10/1/93 and
Chief Information Officer,
7/28/97, of Independence
Life and Annuity Company,
formerly Chief
Administrative Officer
of Independence Life and
Annuity Company, 10/1/93
James P. Greaton, 40 Vice President and Vice President and
Corporate Actuary, Corporate Actuary of
6/12/96 Independence Life and
Annuity Company, 12/31/96;
formerly Valuation
Actuary, Providian Capital
Management, 5/94
Jeffery J. Lobo, 36 Vice President-Risk Formerly Assistant Vice
Management, 6/12/96 President - Director of
Quantitative Research for
the Company, 2/8/95;
formerly Vice President of
Credit Suisse Financial
Products, 11/94; trader
for SBCI Securities (Asia)
Inc., 7/93
Jeffery J.
Whitehead, 41 Vice President, Formerly Controller of the
11/5/92, and Company; Vice President
Treasurer, 5/4/95 and Treasurer of LASC,
5/19/95; Vice President
and Treasurer of
Independence Life and
Annuity Company, 5/19/95
EXECUTIVE COMPENSATION TABLES AND INFORMATION
The tables that appear below, along with the accompanying text and
footnotes, provide information on compensation and benefits for the named
executive officers, in accordance with applicable SEC requirements. All
the data regarding values for stock options pertain to options to purchase
shares of Keyport's parent corporation, Liberty Financial Companies, Inc.
("Liberty Financial"). Such data are hypothetical in terms of the amounts
that an individual may or may not receive, because such amounts are
contingent on continued employment with Keyport and the price of Liberty
Financial's Common Stock ("Common Stock"). All year-end values shown in
these tables for outstanding stock options reflect a price of $37.75 per
share, which was the closing price of the Common Stock on the New York
Stock Exchange on December 31, 1997 (the last trading day of 1997). None
of the named executive officers received any perquisites during 1997
exceeding the lesser of $50,000 or 10% of such officer's total salary and
bonus for such year.
Summary Compensation Table. The following table sets forth compensation
information for the past two fiscal years for each of Keyport's chief
executive officer and the other four most highly compensated executive
officers:
Summary Compensation Table
Annual Long-Term
Compensation Compensation
Name and Restricted Securities
Principal Base Stock Underlying All Other
Position Salary Bonus Awards2 Options
Compensation
During 1997 Year ($) ($)1 ( $) (#) ($)3
John W.
Rosensteel, 1997 420,000 330,000 149,625 18,750 26,937
President 1996 396,500 275,000 -- 22,500 27,994
and Chief
Executive
Officer
Paul H.
LeFevre, Jr., 1997 315,000 205,000 85,500 9,000 24,971
Executive 1996 275,000 155,000 -- 13,500 15,638
Vice
President
Stephen B.
Bonner,4 1997 275,000 150,000 64,125 7,500 175,707
Senior Vice 1996 80,754 -- -- 17,414
President
and Chief Sales
Officer
Francis E.
Reinhart, 1997 245,000 115,000 -- 11,250 18,790
Senior Vice 1996 233,000 105,000 -- 11,250 13,136
President
and Chief
Information
Officer
Stewart R.
Morrison, 1997 230,000 130,000 42,750 8,250 13,205
Senior Vice 1996 182,700 54,000 -- 6,000 11,170
President &
Chief
Investment
Officer
1 The amounts presented are bonuses earned in 1997 and paid in 1998, or
earned in 1996 and paid in 1997, respectively.
2 The number of shares and value of restricted stock held by the named
executive officers as of December 31, 1997 is as follows: Mr. Rosensteel:
5,250 shares, $198,188; Mr. LeFevre: 3,000 shares, $113,250; Mr. Bonner:
2,250 shares, $84,938; Mr. Morrison: 1,500 shares, $56,625. All such
shares will vest any time after May 13, 1999 if for a 10 consecutive
trading-day period, the closing price of Liberty Financial's Common Stock
exceeds $41.73. Liberty Financial pays dividends on all such shares, and
the recipients are entitled to retain all such dividends regardless of any
future forfeitures.
3 Consists of (a) in the case of Mr. Rosensteel, $5,000 of insurance
premiums paid by Keyport with respect to term life insurance purchased for
his benefit in each year; (b) contributions under defined contribution
plans for the benefit of the named executive officers, individually as
follows: Mr. Rosensteel, $21,937 in 1997 and $22,994 in 1996; Mr. LeFevre,
$24,971 in 1997 and $15,638 in 1996; Mr. Bonner, $4,125 in 1997 and $0 in
1996; Mr. Reinhart, $18,790 in 1997 and $13,136 in 1996; and Mr. Morrison,
$13,205 in 1997 and $11,170 in 1996; (c) in the case of Mr. Bonner, $75,000
for a signing bonus paid in 1997; and (d) in the case of Mr. Bonner,
$96,582 in 1997 and $17,414 in 1996 of moving expenses reimbursement.
4 Mr. Bonner became an executive officer of Keyport effective November 7,
1996.
Option Grant Table. The following table sets forth certain information
regarding options to purchase Common Stock granted during 1997 by Liberty
Financial to the executive officers named in the above summary compensation
table.
Option Grants in Last Fiscal Year
Potential
Realizable
Value at
Assumed
Annual
Rates
Percent of Stock
Number of of Total Price
Securities Options Appreciation
Underlying Granted to Exercise of Option
Options Employees Price Per Expiration Terms ($)2
Name Granted (#) in 1997 Share($) on Date1 5% 10%
John W.
Rosensteel 18,750 2.4% 28.50 5/13/07 336,006 851,656
Paul H.
LeFevre, Jr. 9,000 1.2% 28.50 5/13/07 161,311 408,795
Stephen B.
Bonner 7,500 1.0% 28.50 5/13/07 134,426 340,662
Francis E.
Reinhart 11,250 1.4% 28.50 5/13/07 201,639 510,994
Stewart R.
Morrison 6,000 0.8% 28.50 5/13/07 107,541 272,530
1 Each option becomes exercisable in four equal annual installments
commencing on May 14, 1998, and vests in full upon the death, disability or
retirement (after age 60) of the optionee.
2 Amounts represent hypothetical gains that could be achieved for the
respective options if such options are not exercised until the end of the
option term. These gains are based on assumed rates of stock price
appreciation of 5% and 10% in accordance with applicable SEC regulations,
compounded annually from the dates the options were granted until their
expiration dates and, therefore, are not intended to forecast possible
future appreciation in the Common Stock. This table does not take into
account appreciation in the price of the Common Stock after the date of
grant.
Option Exercises and Year-End Values Table. The following table sets forth
certain information regarding (i) the 1997 exercises of stock options and
(ii) the stock options held as of December 31, 1997 by the executive
officers named in the above summary compensation table.
Aggregate Option Exercises in Last Fiscal Year and Aggregate Option Values
at Fiscal Year-End
Number of Value of
Shares Securities Unexercised
Acquired Underlying In-the-Money
Upon Value Unexercised Options at
Exercise Realized Options at Year-End
Name (#) ($) Year-End (#) ($)
Exerci- Unexerci- Exerci- Unexerci-
sable sable sable sable
John W.
Rosensteel 9,450 234,078 86,536 59,359 2,154,228 950,858
Paul H.
LeFevre, Jr. 23,500 677,490 54,373 24,753 1,568,396 358,533
Stephen B.
Bonner ---- ---- ---- 7,500 ---- 69,375
Francis E.
Reinhart 20,200 512,000 16,313 24,191 498,505 329,605
Stewart R.
Morrison 5,062 78,692 ---- 15,190 ---- 253,733
Certain Additional Information Regarding Executive Officer Compensation
Defined Benefit Retirement Programs. Each of the executive officers in the
above summary compensation table participates in Liberty Financial's
Pension Plan and Keyport's Supplemental Pension Plan (collectively, the
"Pension Plans"). The following table shows the estimated annual pension
benefits payable upon retirement for the specified compensation and years
of service classification under the Pension Plans.
Estimated Annual Retirement Benefits at Age 65
under the Pension Plans
Years of Credited Service
Compensation 15 20 25 30 35
$ 200,000 $ 52,178 $ 69,570 $ 86,963 $ 93,629 $100,296
400,000 106,178 141,570 176,963 190,296 203,629
600,000 160,178 213,570 266,963 286,963 306,963
800,000 214,178 285,570 356,963 383,629 410,296
1,000,000 268,178 357,570 446,963 480,296 513,629
1,200,000 322,178 429,570 536,963 576,963 616,963
Benefits under the Pension Plans are based on an employee's average pay for
the five highest consecutive years during the last ten years of employment,
the employee's estimated social security retirement benefit and years of
credited service with Keyport. The current compensation covered by the
Pension Plans for each participating executive officer in the above summary
compensation table is as follows: Mr. Rosensteel, $695,000; Mr. LeFevre,
$470,000; Mr. Bonner, $325,000; Mr. Reinhart, $350,000 and Mr. Morrison,
$305,000. For purposes of determining benefits payable upon retirement
under the Pension Plans, compensation includes base salary and annual
bonus. Benefits are payable in the form of a single-life annuity providing
for monthly payments. Actuarially equivalent methods of payment may be
elected by the recipient. As of December 31, 1997, the executive officers
named in the above summary compensation table had the following full
credited years of service under the Pension Plans: Mr. Rosensteel, 5 years;
Mr. LeFevre, 18 years; Mr. Bonner, 1 year; Mr. Reinhart, 13 years; and Mr.
Morrison, 7 years.
Change of Control Provisions of 1990 Stock Option Plan. Liberty
Financial's 1990 Stock Option Plan, as amended (the "1990 Plan"), provided
for the grant of options to officers and other key employees of Liberty
Financial for the purchase of shares of common stock. As of March 20,
1998, options issued and outstanding under the 1990 Plan included 82,141
shares held by Mr. Rosensteel (69,659 of which were vested), 45,372 shares
held by Mr. LeFevre (all of which were vested); and 16,000 shares held by
Mr. Reinhart (all of which were vested). No additional options will be
granted under the 1990 Plan. Upon a change of control of Liberty Financial
(defined as the transfer of 50% or more of the equity ownership of Liberty
Financial other than solely pursuant to a public offering in which
securities are issued for cash), all non-vested options will automatically
vest and Liberty Financial's Compensation and Stock Option Plan committee
may, in its discretion, elect to cancel all outstanding options by paying
the holders thereof an amount equal to the difference between the formula
value of the Common Stock (as defined in the 1990 Plan) and the exercise
price of the options.
Compensation of Directors. Directors of Keyport who are also employees
receive no compensation in addition to their compensation as employees of
Keyport. The two outside directors (Lippitt and Nyman) receive $2,000 per
quarter, plus $500 for each meeting of the Board of Directors and $200 for
each Audit Committee meeting that they attend. Three meetings of the Board
of Directors and two meetings of the Audit Committee are scheduled
annually.
LEGAL PROCEEDINGS
The Company is from time to time involved in litigation incidental to its
business. In the opinion of Keyport's management, the resolution of such
litigation is not expected to have a material adverse effect on the
Company's financial condition or results of operations.
EXPERTS
The consolidated financial statements including schedules of Keyport Life
Insurance Company at December 31, 1997 and 1996, and for each of the two
years in the period ended December 31, 1997, appearing in this Prospectus
and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Keyport Life Insurance Company for
the year ended December 31, 1995 have been included herein in reliance on
the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said
firm as experts accounting and auditing.
CHANGE IN ACCOUNTANTS
The consolidated financial statements of Keyport and also Liberty Financial
and its subsidiaries, including Keyport, for the year ended December 31,
1997 and 1996 have been audited and reported upon by Ernst & Young LLP
("E&Y").
For fiscal years prior to 1996, the consolidated financial statements of
Keyport and Liberty Financial and its subsidiaries, were audited and
reported on by KPMG Peat Marwick LLP ("KPMG"). On March 13, 1996,
following a competitive proposal process, Liberty Financial's Audit
Committee terminated KPMG's appointment as independent accountants for
Liberty Financial and its audited subsidiaries, including Keyport,
effective March 14, 1996, and voted to recommend to the Liberty Financial
Board of Directors that E&Y be appointed as Liberty Financial's
independent accountants for fiscal year 1996. The Liberty Financial Board
of Directors approved this recommendation on April 10, 1996. On April 11,
1996 Keyport's Board of Directors approved such engagement of E&Y.
In connection with the audit of Keyport's financial statements for the year
ended December 31, 1995, and the subsequent interim period through March
14, 1996, there were no disagreements between Keyport and KPMG on any
matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which disagreements if not
resolved to KPMG's satisfaction would have caused KPMG to make reference to
the subject matter of the disagreement in connection with KPMG's audit
report on the financial statements of Keyport. In addition, the audit
report of KPMG on the financial statements of Keyport for the year ended
December 31, 1995 did not contain any adverse opinion or disclaimer of
opinion, nor were such reports qualified or modified as to uncertainty or
audit scope.
LEGAL MATTERS
Legal matters with respect to the organization of Keyport, its authority to
issue annuity contracts and the validity of the Certificates, as well as
matters relating to the Federal securities laws, have been passed upon by
Bernard R. Beckerlegge, General Counsel. In addition, certain matters
relating to the Federal securities laws have been passed upon by Jorden
Burt Boros Cicchetti Berenson & Johnson LLP as Special Counsel for Keyport.
Report of Independent Auditors
The Board of Directors
Keyport Life Insurance Company
We have audited the consolidated balance sheet of Keyport Life Insurance
Company as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholder's equity, and cash flows for the years
then ended. Our audits also included the financial statement schedules
listed in the Index at Item 16. These financial statements and schedules
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes assessing the accounting principles
used and the significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Keyport Life Insurance Company at December 31, 1997 and 1996,
and the consolidated results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the information
set forth therein.
ERNST & YOUNG LLP
Boston, Massachusetts
February 3, 1998
Independent Auditors' Report
The Board of Directors Keyport Life Insurance Company
We have audited the consolidated financial statements of Keyport Life
Insurance Company and subsidiaries for the year ended December 31, 1995,
included herein. In connection with our audit of the consolidated financial
statements, we also have audited the financial statement Schedule III ("the
financial statement schedule") as of December 31, 1995 and for the year
then ended, also included herein. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects the results of operations and cash
flows for Keyport Life Insurance Company and subsidiaries for the year
ended December 31, 1995, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects, the information
set forth therein.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 16, 1996
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(in thousands)
December 31
ASSETS 1997 1996
Cash and investments:
Fixed maturities available for sale
(amortized cost: 1997 - $10,981,618;
1996 - $10,500,431) $11,246,539 $10,718,644
Equity securities (cost: 1997 - $21,950;
1996 - $19,412) 40,856 35,863
Mortgage loans 60,662 67,005
Policy loans 554,681 532,793
Other invested assets 440,773 183,622
Cash and cash equivalents 1,162,347 767,385
Total cash and investments 13,505,858 12,305,312
Accrued investment income 165,035 146,778
Deferred policy acquisition costs 232,039 250,355
Value of insurance in force 53,298 70,819
Income taxes recoverable 22,537 323
Intangible assets 18,058 19,186
Other assets 16,175 40,316
Separate account assets 1,329,189 1,091,468
Total assets $15,342,189 $13,924,557
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy liabilities $12,086,076 $11,637,528
Current income taxes - 13,123
Deferred income taxes 133,003 25,747
Payable for investments purchased and loaned 722,116 211,234
Other liabilities 34,015 38,476
Separate account liabilities 1,263,958 1,017,667
Total liabilities 14,239,168 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 82,277 73,599
Retained earnings 511,796 398,235
Total stockholder's equity 1,103,021 980,782
Total liabilities and
stockholder's equity $15,342,189 $13,924,557
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENT
(in thousands)
Year ended December 31
1997 1996 1995
Revenues:
Investment income $ 847,048 $ 790,365 $ 755,930
Interest credited to policyholders (594,084) (572,719) (555,725)
Investment spread 252,964 217,646 200,205
Net realized investment gains
(losses) 24,723 5,509 (3,958)
Fee income:
Surrender charges 15,968 14,934 14,772
Separate account fees 17,124 15,987 13,154
Management fees 3,261 2,613 1,841
Total fee income 36,353 33,534 29,767
Expenses:
Policy benefits (3,924) (3,477) (4,448)
Operating expenses (49,941) (43,815) (44,475)
Amortization of deferred policy
acquisition costs (75,906) (60,225) (58,541)
Amortization of value of insurance
in force (10,490) (10,196) (9,479)
Amortization of intangible assets (1,128) (1,130) (1,130)
Total expenses (141,389) (118,843) (118,073)
Income before income tax expense 172,651 137,846 107,941
Income tax expense (59,090) (47,222) (38,331)
Net income $ 113,561 $ 90,624 $ 69,610
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(in thousands)
Net
Unrealized
Additional Investment
Common Paid-in Gains Retained
Stock Capital (Losses) Earnings Total
Balance,
January 1, 1995 $3,015 $505,933 $ (64,464) $238,001 $ 682,485
Net income 69,610 69,610
Change in net
unrealized
investment
gains (losses) 150,236 150,236
Balance,
December 31, 1995 3,015 505,933 85,772 307,611 902,331
Net income 90,624 90,624
Change in net
unrealized
investment
gains (losses) (12,173) (12,173)
Balance,
December 31, 1996 3,015 505,933 73,599 398,235 980,782
Net income 113,561 113,561
Change in net
unrealized
investment
gains (losses) 8,678 8,678
Balance,
December 31, 1997 $ 3,015 $505,933 $ 82,277 $511,796 $1,103,021
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year ended December 31
1997 1996 1995
Cash flows from operating
activities:
Net income $ 113,561 $ 90,624 $ 69,610
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Interest credited to
policyholders 594,084 572,719 555,725
Net realized investment
(gains) losses (24,723) (5,509) 3,958
Amortization of value of
insurance in force and
intangible assets 11,618 11,326 10,609
Net amortization on
investments 29,862 (29,088) 9,688
Change in deferred policy
acquisition costs (10,252) (24,403) (24,630)
Change in current and
deferred income taxes 66,919 4,938 1,953
Net change in other assets
and liabilities 1,746 (42,634) (62,375)
Net cash provided by
operating activities 782,815 577,973 564,538
Cash flow from investing activities:
Investments purchased -
available for sale (4,543,374) (4,363,074) (2,851,013)
Investments sold -
held to maturity - - 14,930
Investments sold -
available for sale 2,563,465 1,714,023 605,197
Investments matured -
held to maturity - - 317,773
Investments matured -
available for sale 1,531,693 1,387,664 906,522
Increase in policy loans (21,888) (34,467) (21,033)
Decrease in mortgage loans 6,343 7,500 54,947
Other assets purchased, net (48,921) (130,087) -
Value of business acquired,
net of cash - (30,865) -
Net cash used in
investing activities (512,682) (1,449,306) (972,677)
Cash flows from financing
activities:
Withdrawals from policyholder
accounts (1,320,837) (1,154,087) (933,785)
Deposits to policyholder
accounts 950,472 2,134,504 1,116,975
Securities lending 495,194 (119,083) 317,715
Net cash provided by
financing activities 124,829 861,334 500,905
Change in cash and
cash equivalents 394,962 (9,999) 92,766
Cash and cash equivalents
at beginning of year 767,385 777,384 684,618
Cash and cash equivalents at
end of year $ 1,162,347 $ 767,385 $ 777,384
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
December 31, 1997
1. Accounting Policies
Organization
Keyport Life Insurance Company offers a diversified line of fixed, indexed,
and variable annuity products designed to serve the growing retirement
saving market. These annuity products are sold through a wide ranging
network of banks, agents, and securities dealers.
The Company is a wholly owned subsidiary of Stein Roe Services Incorporated
("Stein Roe"). Stein Roe is a wholly owned subsidiary of Liberty Financial
Companies, Incorporated ("Liberty Financial") which is a majority owned,
indirect subsidiary of Liberty Mutual Insurance Company ("Liberty Mutual").
Principles of Consolidation
The consolidated financial statements include Keyport Life Insurance
Company and its wholly owned subsidiaries, Independence Life and Annuity
Company ("Independence Life"), Liberty Advisory Services Corporation, and
Keyport Financial Services Corp., (collectively the "Company").
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles which vary in
certain respects from reporting practices prescribed or permitted by state
insurance regulatory authorities. All significant intercompany transactions
and balances have been eliminated. Certain prior year amounts have been
reclassified to conform to the current year's presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Investments
Investments in debt and equity securities classified as available for sale
are carried at fair value, and after-tax unrealized gains and losses (net
of adjustments to deferred policy acquisition costs and value of insurance
in force) are reported as a separate component of stockholder's equity. The
cost basis of securities is adjusted for declines in value that are
determined to be other than temporary. Realized investment gains and
losses are calculated on a first-in, first-out basis.
On December 31, 1995, pursuant to the "Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities,"
the Company made a one-time reclassification of certain fixed maturity
securities from held to maturity to available for sale. The amortized cost
of those securities at the time of transfer was $1.4 billion, and the
unrealized gain of $13.9 million was recorded net of taxes in stockholder's
equity.
For the mortgage backed bond portion of the fixed maturity investment
portfolio, the Company recognizes income using a constant effective yield
based on anticipated prepayments over the estimated economic life of the
security. When actual prepayments differ significantly from anticipated
prepayments, the effective yield is recalculated to reflect actual payments
to date and anticipated future payments and any resulting adjustment is
included in investment income.
Mortgage loans are carried at amortized cost. Policy loans are carried at
the unpaid principal balances plus accrued interest. Partnerships are
accounted for by using the equity method of accounting. Partnership
investments totaled $117.3 million and $72.6 million at December 31, 1997
and 1996, respectively.
Derivatives
The Company uses interest rate swap and cap agreements to manage its
interest rate risk and 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 utilizes interest rate swap agreements ("swap agreements") and
interest rate cap agreements ("cap agreements") to match assets more
closely to liabilities. Swap agreements are agreements to exchange with a
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.
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 balance) to hedge
against rising interest rates.
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 call options are terminated. If the terminated position was
accounted for as a hedge, realized gains or losses are deferred and
amortized over the remaining lives of the hedged assets or liabilities.
Conversely, if the terminated position was not accounted for as a hedge, or
if 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 swap agreements and cap
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 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.
Fee Income
Fees from investment advisory services are recognized as revenues when
services are provided. Revenues from fixed and variable annuities and
single premium whole life policies include mortality charges, surrender
charges, policy fees, and contract fees and are recognized when earned.
Deferred Policy Acquisition Costs
Policy acquisition costs are the costs of acquiring new business which vary
with, and are primarily related to, the production of new business. Such
costs include commissions, costs of policy issuance, underwriting, and
selling expenses. These costs are deferred and amortized in relation to
the present value of estimated gross profits from mortality, investment
spread, and expense margins. Deferred policy acquisition costs are
adjusted for amounts relating to unrealized gains and losses on fixed
maturity securities the Company has designated as available for sale. This
adjustment, net of tax, is included with the change in net unrealized
investment gains or losses that is credited or charged directly to
stockholder's equity. Deferred policy acquisition costs have been
decreased by $126.9 million at December 31, 1997 and decreased by $103.7
million at December 31, 1996, relating to this adjustment.
Value of Insurance in Force
Value of insurance in force represents the actuarially-determined present
value of projected future gross profits from policies in force at the date
of their acquisition. This amount is amortized in proportion to the
projected emergence of profits over periods not exceeding 15 years for
annuities and 25 years for life insurance. Interest is accrued on the
unamortized balance at the contract rate of 5.34%, 5.30% and 5.58% for the
years ended December 31, 1997, 1996 and 1995, respectively.
The value of insurance in force is adjusted for amounts relating to the
recognition of unrealized investment gains and losses. This adjustment,
net of tax, is included with the change in net unrealized investment gains
or losses that is credited or charged directly to stockholder's equity.
Value of insurance in force has decreased by $31.8 million at December 31,
1997 and decreased by $26.0 million at December 31, 1996, relating to this
adjustment.
Estimated net amortization expense of the value of insurance in force as of
December 31, 1997 is as follows (in thousands): 1998 - $8,701; 1999 -
$10,890; 2000 - $9,926; 2001 - $8,711; 2002 - $7,694; and thereafter -
$39,220.
Intangible Assets
Intangible assets consist of goodwill arising from business combinations
accounted for as a purchase. Amortization is provided on a straight-line
basis over twenty-five years.
Separate Account Assets and Liabilities
The assets and liabilities resulting from variable annuity and variable
life policies are segregated in separate accounts. Separate account assets,
which are carried at fair value, consist principally of investments in
mutual funds. Investment income and changes in asset values are allocated
to the policyholders, and therefore, do not affect the operating results of
the Company. The Company provides administrative services and bears the
mortality risk related to these contracts. As of December 31, 1997 and
1996, Keyport also classified as separate account assets $65.2 million and
$73.8 million, respectively, investments in certain mutual funds sponsored
by affiliates of the Company and other investments.
Policy Liabilities
Policy liabilities consist of deposits received plus credited interest,
less accumulated policyholder charges, assessments, and withdrawals related
to deferred annuities and single premium whole life policies. Policy
benefits that are charged to expense include benefit claims incurred in the
period in excess of related policy account balances.
Income Taxes
Income taxes have been provided using the liability method in accordance
with SFAS No. 109, "Accounting for Income Taxes," and are calculated as if
the companies filed their own income tax returns.
Effective July 18, 1997, due to changes in ownership of Liberty Financial,
the Company is no longer included in the consolidated federal income tax
return of Liberty Mutual. The Company will be eligible to file a
consolidated federal income tax return with Liberty Financial in 2002.
Independence Life, which until July 18, 1997, was required under federal
tax law to file its own federal income tax return, may join with Keyport in
a consolidated income tax return filing. Liberty Advisory Services
Corporation and Keyport Financial Services Corp. must file separate federal
tax returns.
Cash Equivalents
Short-term investments having an original maturity of three months or less
are classified as cash equivalents.
Recent Accounting Pronouncements
In January 1998, the FASB voted to proceed with the drafting of an
accounting standard titled "Accounting for Derivative Instruments and for
Hedging Activities." This accounting standard requires companies to report
derivatives on the balance sheet at fair value with changes in fair value
recorded in income or equity. The accounting standard also changes the
accounting for derivatives used in hedging strategies from traditional
deferral accounting to a current recognition approach which could impact a
company's income statement and balance sheet and expand the definition of a
derivative instrument. The Company is evaluating the impact of this
accounting standard. This accounting standard will become effective in
2000.
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS 125"). The relevant provisions of
SFAS 125 relating to securities lending, dollar rolls, and other similar
secured transactions become effective in 1998. It is not expected that the
adoption of SFAS 125 will have a material effect on the Company's
consolidated financial position or results of operations.
2. Acquisitions
On August 9, 1996, Keyport entered into a 100 percent coinsurance agreement
for a $954.0 million block of single premium deferred annuities issued by
Fidelity & Guaranty Life Insurance Company ("F&G Life"). Under this
transaction, the investment risk of the annuity policies was transferred to
Keyport. However, F&G Life will continue to administer the policies and
will remain contractually liable for the performance of all policy
obligations. This transaction increased investments by $923.1 million and
value of insurance in force by $30.9 million.
3. Investments
Fixed Maturities
As of December 31, 1997 and 1996, the Company did not hold any investments
in fixed maturities that were classified as held to maturity or trading
securities. The amortized cost, gross unrealized gains and losses, and
fair value of fixed maturity securities are as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized
December 31, 1997 Cost Gains Losses Fair Value
U.S. Treasury securities $ 128,580 $ 1,107 $ (40) $ 129,647
Mortgage backed securities
of U.S. government
corporations and agencies 1,089,809 49,536 (1,602) 1,137,743
Debt securities issued by
foreign governments 272,559 12,694 (4,966) 280,287
Corporate securities 4,744,208 189,387 (83,562) 4,850,033
Other mortgage backed
securities 2,325,889 81,886 (2,579) 2,405,196
Asset backed securities 2,200,689 26,178 (3,118) 2,223,749
Senior secured loans 219,884 - - 219,884
Total fixed maturities $ 10,981,618 $360,788 $ (95,867) $11,246,539
Gross Gross
Amortized Unrealized Unrealized
December 31, 1996 Cost Gains Losses Fair Value
U.S. Treasury securities $ 35,308 $ 130 $ (87) $ 35,351
Mortgage backed securities
of U.S. government
corporations and agencies 1,689,989 41,783 (8,618) 1,723,154
Debt securities issued by
foreign governments 246,339 11,718 (554) 257,503
Corporate securities 4,093,473 153,422 (12,298) 4,234,597
Other mortgage backed
securities 2,413,020 47,596 (23,970) 2,436,646
Asset backed securities 1,736,012 15,531 (6,440) 1,745,103
Senior secured loans 286,290 - - 286,290
Total fixed maturities $10,500,431 $270,180 $ (51,967) $10,718,644
At December 31, 1997, gross unrealized gains on equity securities, interest
rate cap agreements and investments in separate accounts aggregated $27.4
million, and gross unrealized losses aggregated $6.9 million, respectively.
At December 31, 1996, gross unrealized gains on equity securities, interest
rate cap agreements and investments in separate accounts aggregated $29.9
million, and gross unrealized losses aggregated $5.3 million, respectively.
Contractual Maturities
The amortized cost and fair value of fixed maturities by contractual
maturity as of December 31, 1997 are as follows (in thousands):
December 31, 1997 Amortized Cost Fair Value
Due in one year or less $ 147,177 $ 147,503
Due after one year through five years 1,925,739 1,926,372
Due after five years through ten years 2,350,299 2,419,857
Due after ten years 942,016 986,119
5,365,231 5,479,851
Mortgage and asset backed securities 5,616,387 5,766,688
$10,981,618 $11,246,539
Actual maturities will differ in some cases from those shown above because
borrowers may have the right to call or prepay obligations.
Net Investment Income
Net investment income is summarized as follows (in thousands):
Year Ended December 31 1997 1996 1995
Fixed maturities $ 811,688 $ 737,372 $ 681,998
Mortgage loans and other
invested assets 27,833 11,422 12,881
Policy loans 32,224 30,188 28,485
Equity securities 5,443 4,494 4,807
Cash and cash equivalents 34,449 36,138 41,643
Gross investment income 911,637 819,614 769,814
Investment expenses (15,311) (12,708) (10,837)
Amortization of options and
interest rate caps (49,278) (16,541) (3,047)
Net investment income $ 847,048 $ 790,365 $ 755,930
There were no non-income producing fixed maturity investments as of
December 31, 1997 or 1996.
Net Realized Investment Gains (Losses)
Net realized investment gains (losses) are summarized as follows (in
thousands):
Year Ended December 31 1997 1996 1995
Fixed maturities held to maturity:
Gross gains $ - $ - $ 1,306
Gross losses - - (64)
Fixed maturities available for sale:
Gross gains 42,464 24,304 8,156
Gross losses (19,146) (17,814) (15,982)
Equity securities (51) 1,492 (405)
Investments in separate accounts 7,912 (576) 1,684
Interest rate swaps - - (860)
Other - (208) (13)
Gross realized investment gains
(losses) 31,179 7,198 (6,178)
Amortization adjustments of deferred
policy acquisition costs
and value of insurance inforce (6,456) (1,689) 2,220
Net realized investment gains (losses) $ 24,723 $ 5,509 $ (3,958)
Proceeds from sales of fixed maturities available for sale were $2.6
billion, $1.7 billion and $565.4 million, for the years ended December 31,
1997, 1996 and 1995, respectively. The sale of fixed maturities held to
maturity during 1995 relate to certain securities, with amortized cost of
$15.0 million, which were sold specifically due to a decline in the
issuers' credit quality.
Deferred tax liabilities for the Company's unrealized investment gains and
losses, net of adjustments to deferred policy acquisition costs and value
of insurance inforce were $44.3 million and $39.5 million at December 31,
1997 and 1996, respectively.
No investment in any person or its affiliates (other than bonds issued by
agencies of the United States government) exceeded ten percent of
stockholder's equity at December 31, 1997.
At December 31, 1997, the Company did not have a material concentration of
financial instruments in a single investee, industry or geographic
location.
At December 31, 1997, $1.1 billion of fixed maturities were below
investment grade.
4. Derivatives
Outstanding derivatives, shown in notional amounts along with their
carrying value and fair value, are as follows (in thousands):
Assets (Liabilities)
Carrying Fair Carrying Fair
Notional Amounts Value Value Value Value
December 31 1997 1996 1997 1997 1996 1996
Interest rate cap
agreements $ 250,000 $ 450,000 $ 102 $ 102 $ 1,363 $ 1,363
Indexed call
options - - 323,343 345,294 109,701 122,395
Interest rate
swaps 2,575,000 2,275,000 (42,123) (42,123) (8,753) (8,753)
The interest rate swap agreements expire in 1998 to 2001. The interest
rate cap agreements expire in 1999 through 2000. The call options'
maturities range from 1998 to 2002.
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. Cap agreements are used to hedge
against rising interest rates. Call options are used for purposes of
hedging the Company's equity-indexed products. The call options hedge the
interest credited on these 1, 5 and 7 year term products, which is based on
the changes in the S&P 500 Index. At December 31, 1997 and 1996, the
Company had approximately $155.0 million and $73.1 million, respectively,
of unamortized premium in call option contracts.
Fair values for swap and cap agreements are based on current settlement
values. The current settlement values are based on quoted market prices
and brokerage quotes, which utilize pricing models or formulas using
current assumptions. Fair values for call options are based on quoted
market prices.
Deferred losses of $5.1 million and $7.9 million as of December 31, 1997
and 1996, respectively, resulting from terminated interest rate swap
agreements are included with the related fixed maturity securities to which
the hedge applied and are being amortized over the life of such securities.
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,
cap and call option agreements are financially responsible and that the
counterparty risk associated with these transactions is minimal.
5. Income Taxes
Income tax expense (benefit) is summarized as follows (in thousands):
Year Ended December 31 1997 1996 1995
Current $ (48,477) $ 52,369 $ 37,746
Deferred 107,567 (5,147) 585
$ 59,090 $ 47,222 $ 38,331
A reconciliation of income tax expense with expected federal income tax
expense computed at the applicable federal income tax rate of 35% is as
follows (in thousands):
Year Ended December 31 1997 1996 1995
Expected income tax expense $ 60,427 $ 48,246 $ 37,779
Increase (decrease) in income
taxes resulting from:
Nontaxable investment income (1,416) (1,216) (1,737)
Amortization of goodwill 396 396 396
Other, net (317) (204) 1,893
Income tax expense $ 59,090 $ 47,222 $ 38,331
The components of deferred federal income taxes are as follows (in
thousands):
December 31 1997 1996
Deferred tax assets:
Policy liabilities $ 124,250 $ 171,327
Guaranty fund expense 2,795 6,260
Net operating loss carryforwards 2,111 2,667
Other 1,205 3,915
Total deferred tax assets 130,361 184,169
Deferred tax liabilities:
Deferred policy acquisition costs (56,331) (63,076)
Value of insurance in force and
intangible assets (18,022) (20,539)
Excess of book over tax basis of
investments (178,697) (118,403)
Separate account asset (645) (4,557)
Deferred loss on interest rate swaps (1,792) (2,765)
Other (7,877) (576)
Total deferred tax liabilities (263,364) (209,916)
Net deferred tax liability $ (133,003) $ (25,747)
As of December 31, 1997, the Company had approximately $6.0 million of
purchased net operating loss carryforwards (relating to the acquisition of
Independence Life). Utilization of these net operating loss carryforwards,
which expire through 2006, is limited to use against future profits of
Independence Life. The Company believes that it is more likely than not
that it will realize the benefit of its deferred tax assets.
Income taxes refunded were $8.0 million in 1997 and income taxes paid were
$46.9 million and $44.7 million in 1996 and 1995, respectively.
6. Retirement Plans
Keyport employees and certain employees of Liberty Financial are eligible
to participate in the Liberty Financial Companies, Inc. Pension Plan (the
"Plan"). It is the Company's practice to fund amounts for the Plan
sufficient to meet the minimum requirements of the Employee Retirement
Income Security Act of 1974. Additional amounts are contributed from time
to time when deemed appropriate by the Company. Under the Plan, all
employees are vested after five years of service. Benefits are based on
years of service, the employee's average pay for the highest five
consecutive years during the last ten years of employment, and the
employee's estimated social security retirement benefit. Plan assets
consist principally of investments in certain mutual funds sponsored by an
affiliated company.
The Company also has an unfunded non-qualified Supplemental Pension Plan
("Supplemental Plan") collectively with the Plan, (the "Plans"), to replace
benefits lost due to limits imposed on Plan benefits under the Internal
Revenue Code.
The following table sets forth the Plans' funded status.
December 31 1997 1996
(Dollars in thousands)
Actuarial present value of benefit obligations:
Vested benefit obligations $ 8,374 $ 7,172
Accumulated benefit obligation $ 9,500 $ 7,963
Projected benefit obligation $ 12,594 $ 10,559
Plan assets at fair value (7,801) (6,399)
Projected benefit obligation in excess of the
Plans' assets 4,793 4,160
Unrecognized net actuarial loss (1,727) (1,496)
Prior service cost not yet recognized in net
periodic pension cost (160) (183)
Accrued pension cost $ 2,906 $ 2,481
The assumptions used to develop the actuarial present value of the
projected benefit obligation and the expected long-term rate of return on
plan assets are as follows:
Year Ended December 31 1997 1996 1995
Pension cost includes the following components:
Service cost benefits earned during the period $ 804 $ 717 $ 541
Interest cost on projected benefit obligation 829 725 603
Actual return on Plan assets (898) (732) (999)
Net amortization and deferred amounts 396 357 600
Total net periodic pension cost $1,131 $1,067 $ 745
Discount rate 7.25% 7.50% 7.25%
Rate of increase in compensation level 5.00% 5.25% 5.25%
Expected long-term rate of return on assets 8.50% 8.50% 8.50%
The Company provides various other funded and unfunded defined contribution
plans, which include savings and investment plans and supplemental savings
plans. For each of the years ended December 31, 1997, 1996 and 1995,
expenses related to these defined contribution plans totaled (in thousands)
$702, $590 and $595, respectively.
7. Fair Value of Financial Instruments
The following discussion outlines the methodologies and assumptions used to
determine the fair value of the Company's financial instruments. The
aggregate fair value amounts presented herein do not necessarily represent
the underlying value of the Company, and accordingly, care should be
exercised in deriving conclusions about the Company's business or financial
condition based on the fair value information presented herein.
The following methods and assumptions were used by the Company in
determining fair values of financial instruments:
Fixed maturities and equity securities: Fair values for fixed
maturity securities are based on quoted market prices, where
available. For fixed maturities not actively traded, the fair values
are determined using values from independent pricing services, or, in
the case of private placements, are determined by discounting expected
future cash flows using a current market rate applicable to the yield,
credit quality, and maturity of the securities. The fair values for
equity securities are based on quoted market prices.
Mortgage loans: The fair value of mortgage loans are determined by
discounting future cash flows to the present at current market rates,
using expected prepayment rates.
Policy loans: The carrying value of policy loans approximates fair
value.
Other invested assets: With the exception of call options, the
carrying value for assets classified as other invested assets in the
accompanying balance sheets approximates their fair value. Fair
values for call options are based on market prices quoted by the
counterparty to the respective call option contract.
Cash and cash equivalents: The carrying value of cash and cash
equivalents approximates fair value.
Policy liabilities: Deferred annuity contracts are assigned fair
value equal to current net surrender value. Annuitized contracts are
valued based on the present value of the future cash flows at current
pricing rates.
The fair values and carrying values of the Company's financial instruments
are as follows (in thousands):
December 31 1997 1996
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Fixed maturity securities $11,246,539 $11,246,539 $10,718,644 $10,718,644
Equity securities 40,856 40,856 35,863 35,863
Mortgage loans 60,662 63,007 67,005 73,424
Policy loans 554,681 554,681 532,793 532,793
Other invested assets 440,773 462,724 183,622 196,316
Cash and cash equivalents 1,162,347 1,162,347 767,385 767,385
Liabilities:
Policy liabilities 12,086,076 11,366,534 11,637,528 11,127,352
8. Quarterly Financial Data, in thousands (unaudited)
Quarter Ended 1997 March 31 June 30 September 30 December 31
Investment income $ 206,515 $ 210,655 $ 210,365 $ 219,513
Interest credited to
policyholders (147,313) (147,224) (150,875) (148,672)
Investment spread 59,202 63,431 59,490 70,841
Net realized
investment gains 12,796 2,669 4,951 4,307
Fee income 8,252 8,578 9,841 9,682
Pretax income 47,423 39,914 39,876 45,438
Net income 31,538 26,095 26,377 29,551
Quarter Ended 1996 March 31 June 30 September 30 December 31
Investment income $ 187,728 $ 188,334 $ 200,253 $ 214,050
Interest credited to
policyholders (138,109) (136,161) (146,071) (152,378)
Investment spread 49,619 52,173 54,182 61,672
Net realized
investment gains
(losses) 2,052 (2,487) 755 5,189
Fee income 7,769 8,006 9,015 8,744
Pretax income 30,340 29,650 34,575 43,281
Net income 19,688 19,943 22,289 28,704
9. Statutory Information
The Company is domiciled in Rhode Island and prepares its statutory
financial statements in accordance with accounting principles and practices
prescribed or permitted by the State of Rhode Island Insurance Department.
Statutory surplus and statutory net income differ from stockholder's equity
and net income reported in accordance with GAAP primarily because policy
acquisition costs are expensed when incurred, policy liabilities are based
on different assumptions, and income tax expense reflects only taxes paid
or currently payable. The Company's statutory surplus and net income are as
follows (in thousands):
Year Ended December 31 1997 1996 1995
Statutory surplus $ 702,610 $ 567,735 $ 535,179
Statutory net income 107,130 40,237 38,264
10. Transactions with Affiliated Companies
The Company reimbursed Liberty Financial and certain affiliates for
expenses incurred on its behalf for the years ended December 31, 1997, 1996
and 1995. These reimbursements included corporate, general, and
administrative expenses, corporate overhead, such as executive and legal
support, and investment management services. The total amounts reimbursed
were $7.8 million for the years ended December 31, 1997 and 1996 and $7.6
million for the year ended December 31, 1995. In addition, certain
affiliated companies distribute the Company's products and were paid $7.2
million, $6.4 million and $7.6 million by the Company for the years ended
December 31, 1997, 1996, and 1995, respectively.
Keyport has mortgage notes in the original principal amount of $100.0
million on properties owned by certain indirect subsidiaries of Liberty
Mutual. The notes were purchased for their face value. Liberty Mutual has
agreed to provide credit support to the obligors under these notes with
respect to certain payments of principal and interest thereon. As of
December 31, 1997 and 1996, the amounts outstanding were $39.5 million.
Dividend payments to Liberty Financial from the Company are governed by
insurance laws which restrict the maximum amount of dividends that may be
paid without prior approval of the State of Rhode Island Insurance
Department. As of December 31, 1997, the maximum amount of dividends
(based on statutory surplus and statutory net gains from operations) which
may be paid by Keyport was approximately $70.3 million without such
approval.
11. Commitments and Contingencies
Leases: The Company leases data processing equipment, furniture and certain
office facilities from others under operating leases expiring in various
years through 2008. Rental expense (in thousands) amounted to $3,408,
$3,213 and $3,221 for the years ended December 31, 1997, 1996 and 1995,
respectively. For each of the next five years, and in the aggregate, as of
December 31, 1997, the following are the minimum future rental payments
under noncancelable operating leases having remaining terms in excess of
one year (in thousands):
Year Payments
1998 $ 3,536
1999 3,505
2000 3,273
2001 3,178
2002 288
Thereafter 1,248
$ 15,028
Legal Matters: The Company is involved at various times in litigation
common to its business. In the opinion of management, provisions made for
potential losses are adequate and the resolution of any such litigation is
not expected to have a material adverse effect on the Company's financial
condition or its results of operations.
Regulatory Matters: Under existing guaranty fund laws in all states,
insurers licensed to do business in those states can be assessed for
certain obligations of insolvent insurance companies to policyholders and
claimants. The actual amount of such assessments will depend upon the final
outcome of rehabilitation proceedings and will be paid over several years.
In 1997, 1996 and 1995, the Company was assessed $5.9 million, $10.0
million, and $8.1 million, respectively. During 1997, 1996 and 1995, the
Company recorded $1.0 million, $1.0 million, and $2.0 million,
respectively, of provisions for state guaranty fund association expense. At
December 31, 1997 and 1996, the reserve for such assessments was $8.0
million and $12.9 million, respectively.
APPENDIX A
TERM INTEREST ILLUSTRATIONS
Set forth below is an illustration of how interest will be credited to an
Interest Account during a ten-year Term and an Indexed Account during a
five-year Term. The illustration also applies to a shorter Term if values
for inapplicable years are ignored. For the purpose of this illustration
certain assumptions are made as indicated.
NOTE: THE FOLLOWING EXAMPLES ASSUME NO SURRENDERS OF ANY AMOUNT DURING THE
ENTIRE TERM. A MARKET VALUE ADJUSTMENT OR SURRENDER CHARGE MAY APPLY TO ANY
SUCH INTERIM SURRENDER. (SEE "SURRENDERS".) THE HYPOTHETICAL GUARANTEED
INTEREST RATE, GUARANTEED INTEREST RATE FACTORS, AND INCREASES IN THE INDEX
ARE ILLUSTRATIVE ONLY AND ARE NOT INTENDED TO PREDICT FUTURE GUARANTEED
INTEREST RATES OR RATE FACTORS TO BE DECLARED UNDER A CERTIFICATE OR FUTURE
CHANGES IN THE INDEX. AS TO INTEREST ACCOUNTS, ACTUAL GUARANTEED INTEREST
RATES DECLARED FOR ANY GIVEN TERM MAY BE MORE OR LESS THAN THE 6% SHOWN.
LIKEWISE, ACTUAL GUARANTEED INTEREST RATE FACTORS DECLARED FOR INDEXED
ACCOUNTS AT ANY GIVEN TIME MAY BE HIGHER OR LOWER THAN THE FACTORS SHOWN IN
THE ILLUSTRATION (PROVIDED THAT THE FLOOR MAY NEVER BE LESS THAN 0).
MOREOVER, THERE ARE NO GUARANTEES THAT THE INDEX WILL INCREASE DURING THE
COURSE OF A TERM OR THAT IT WILL BE HIGHER THAN THE INDEX AT THE BEGINNING
OF THE TERM OR AT ANY TIME DURING THE TERM WHEN INDEX INCREASES ARE
CREDITED.
A. Illustration of Interest Account
Beginning Account Value: $100,000
Guaranteed Interest Rate: 6% per year compounded annually
Account Value at End of Certificate Year:
Year 1 Year 2 Year 3 Year 4 Year 5
$106,000.00 $112,360.00 $119,101.60 $126,247.70 $133,822.56
Year 6 Year 7 Year 8 Year 9 Year 10
$141,851.91 $150,363.03 $159,384.81 $168,947.90 $179,084.77
B. Illustration of Index Account
The Certificate provides that the Index Increase to be credited on each
Account Anniversary is the sum of two parts:
Part 1 represents the proportionate credit for an increase (if any) in the
Index from its prior highest Account Anniversary value to its value on the
current Account Anniversary. The formula for Part 1 is:
A x ((C-B)/D) x (E/F) x G
Part 2 represents the proportionate credit for an increase(s) (if any) in
the Index occurring on a prior Account Anniversary(ies). The formula for
Part 2 is:
A x ((B-D)/D) x (1/F) x G
where:
A is the Participation Rate for the Term
B is the highest Index value on all Account Anniversaries, including the
Index value at the beginning of the Term, but excluding the value of the
Index on the current Account Anniversary. The value of B can never be less
than the Minimum S&P Index Value nor greater than the Maximum S&P Index
Value. The Minimum S&P Index Value and the Maximum S&P Index Value are
defined below.
C is the value of the Index on the current Account Anniversary, not less
than B or greater than the Maximum S&P Index Value for the Term.
D is the Index value at the beginning of the Term
E is the number of completed Account Years in the Term
F is the total number of Account Years in the Term
G is the smaller of the Account Value at the beginning of the term and the
Account Value (prior to the crediting of any Index Increases) on any
Account Anniversary in the Term, including the current Account Anniversary
The Minimum S&P Index Value and the Maximum S&P Index Value are defined as
follows:
Minimum S&P Index Value = [(Floor / Participation Rate for Term) + 1] x
[Beginning of Term Index value]
Maximum S&P Index Value = [(Cap / Participation Rate for Term) + 1] x
[Beginning of Term Index value]
The Index Increase to be credited on the Account Anniversary is equal to
Part 1 + Part 2.
On the first Account Anniversary of any term, substitute D for B in the
above formulas.
If "Death Provisions" provides that the Index Increase is to be
recalculated, then: "E" in the formula for Part 1 is equal to "F" and
"(1/F)" in the formula for Part 2 is multiplied by the sum of 1.0 plus the
number of Account Years from the start of the Account Year of death to the
end of the Term.
Using the assumptions below, Keyport has prepared the following three
illustrations using different assumptions as to changes in the Index value
during the course of the Term. THESE ASSUMPTIONS AND ILLUSTRATIONS ARE NOT
AND ARE NOT INTENDED AS PREDICTIONS OF CHANGES IN THE INDEX DURING THE
COURSE OF ANY TERM. THE INDEX MAY RISE OR FALL DURING THE COURSE OF A TERM,
AND AT THE END OF A TERM THE INDEX VALUE MAY BE HIGHER OR LOWER THAN AT THE
BEGINNING OF THE TERM. KEYPORT MAKES NO PREDICTIONS, REPRESENTATIONS, OR
GUARANTEES AS TO FUTURE CHANGES IN THE INDEX. THESE VALUES ARE BASED ON THE
ASSUMPTION THAT NO PARTIAL SURRENDERS ARE MADE.
Beginning Account Value = $100,000.00
Beginning Index Value = 500
Participation Rate = 80%
Cap = 80%
Maximum S&P Index Value = [(80% / 80%) + 1] x 500 = 1000
Floor = 0%
Minimum S&P Index Value = [(0% / 80%) + 1] x 500 = 500
Illustration No. 1
Year Year-End Cumulative Indexed
Index Value Change Account
in Index Value of B Value of C Part 1 Part 2 Value
0 500 $100,000
1 600 20% 500 600 $ 3,200 $ --- $103,200
2 690 38% 600 690 $ 5,760 $ 3,200 $112,160
3 775 55% 690 775 $ 8,160 $ 6,080 $126,400
4 900 80% 775 900 $16,000 $ 8,800 $151,200
5 1035 107% 900 1000 $16,000 $12,880 $180,000
Illustration No. 2
Year Year-End Cumulative Indexed
Index Value Change Account
in Index Value of B Value of C Part 1 Part 2 Value
0 500 $100,000
1 550 10% 500 550 $ 1,600 $ --- $101,600
2 500 0% 550 550 $ --- $ 1,600 $103,200
3 560 12% 550 560 $ 960 $ 1,600 $105,760
4 620 24% 560 620 $ 7,680 $ 1,920 $115,360
5 660 32% 620 660 $ 6,400 $ 3,840 $125,600
Illustration No. 3
Year Year-End Cumulative Indexed
Index Value Change Account
in Index Value of B Value of C Part 1 Part 2 Value
0 500 $100,000
1 450 -10% 500 500 $ --- $ --- $100,000
2 425 -15% 500 500 $ --- $ --- $100,000
3 450 -10% 500 500 $ --- $ --- $100,000
4 515 3% 500 515 $1,920 $ --- $101,920
5 530 6% 515 530 $2,400 $ 480 $104,800
APPENDIX B
MARKET VALUE ADJUSTMENT FORMULA AND ILLUSTRATIONS, INCLUDING SURRENDER
CHARGE CALCULATIONS
MARKET VALUE ADJUSTMENT
The applicable surrender or transfer value is multiplied by the Market
Value Adjustment Factor to arrive at the Market Value Adjustment. The
formula that will be used to determine the Market Value Adjustment Factor
is:
[(1+a)/(1+b)](n/12) - 1, where
a = the Treasury Rate for the Term of the Account from which the surrender
or transfer amount is being taken.
b = the Treasury Rate for a period equal to the time remaining (rounded up
to the next whole number of Account Years) to the expiration of the Term
for the Account from which the surrender or transfer amount is being taken;
and
n = the number of complete Account Months remaining before the expiration
of the Term for the Account from which the surrender or transfer amount is
being taken, times the applicable Scaling Factor from the Certificate
Schedule for the Term of the Account from which the amount is being taken,
if the Account is an Indexed Account. The first Account Month begins on the
day that the Term begins and each subsequent Account Month begins on the
same day one month later.
The Treasury Rate for an Account is the interest rate in the Treasury
Constant Maturity Series as published by the Federal Reserve Board, for a
maturity equal to the number of years specified in "a" and "b" above.
Weekly Series are published at the beginning of the following week. To
determine "a", Keyport uses the weekly Series first published on or after
the most recent Determination Date which occurs on or before the first day
of the Account's current Term, except that if the first day is the same as
the Determination Date or the date of publication, or any date in between,
Keyport instead uses the weekly Series first published after the prior
Determination Date. To determine "b", Keyport uses the weekly Series first
published on or after the most recent Determination Date which occurs on or
before the date on which the Market Value Adjustment Factor is calculated,
except that if the calculation date is the same as the Determination Date
or the date of publication, or any date in between, Keyport instead uses
the weekly Series first published after the prior Determination Date. The
Determination Dates are the last business days prior to the first and
fifteenth days of each month.
If the number of years specified in "a" or "b" does not equal a maturity in
the Treasury Constant Maturity Series, the Treasury Rate will be determined
by straight line interpolation between the interest rate for the next
highest and next lowest maturities.
EXAMPLES OF MARKET VALUE ADJUSTMENTS
Example 1
Assume that the Certificate Owner purchased a Certificate for $10,000 and
allocated his interest to an Interest Account with a five-year Term and a
Guaranteed Interest Rate of 6%. Exactly two years later, the Certificate
Owner's Account was surrendered when the Surrender Charge was 3%. There had
been no prior surrenders and the interest earned in the previous twelve
months is equal to $636 ($11,236 - $10,600). Therefore, the Surrender
Charge and the Market Value Adjustment do not apply to $636 of the Interest
Account Value. At the beginning of the Term, the Treasury Rate for 5-year
Treasury Notes was 7% and, at the time of the surrender, the Treasury Rate
for 3-year Treasury Notes was 4.5%.
According to the Certificate, the Market Value Adjustment is
(A - Free Withdrawal Amount) x B = C
where:
A = the amount surrendered
= $10,000 x 1.06 x 1.06
= $11,236.00
B = the Market Value Adjustment Factor
= [(1+a)/(1+b)](n/12) - 1, where
a = the Treasury Rate for the Term of the Account from which the surrender
amount is being taken. Here, a = 7%.
b = the Treasury Rate for a period equal to the time remaining (rounded up
to the next whole number of Account Years) to the expiration of the Term
for the Account from which the surrender amount is being taken. Here, b =
4.5%
n = the number of complete Account Months remaining before the expiration
of the Term for the Account from which the surrender amount is being taken,
times the applicable Scaling Factor from the Certificate Schedule for the
Term of the Account from which the amount is being taken, if the Account is
an Indexed Account. Here, n = 36
B = [(1+.07)/(1+.045)](36/12) - 1
= [(1+.07)/(1+.045)]3 - 1
= .0735
Therefore,
C = (A - 1,236) x B
= ($11,236 - 636) x .0735
= $779.10 is the Market Value Adjustment, which would be added to the
Account Value in determining the Certificate Withdrawal Value.
The Surrender Charge is equal to I x (A - Free Withdrawal Amount), where
A = the surrendered amount = $11,236, and
I = the Surrender Charge Percentage. Here, I = 3%
Therefore,
The Surrender Charge = .03 x ($11,236 - 636)
= .03 x $10,600 = $318.00
The Certificate Value = [((.9 x $10,000 x 1.03) + 330) x 1.03]
+ 348
= $10,236.00
The Adjusted Certificate Value = $10,236.00 x [($11,236.00
+ $779.10) / $11,236.00]
= $10,945.76
Under the Certificate, the Certificate Withdrawal Value is equal to the
greater of (1) the amount surrendered, less any Surrender Charge plus any
Market Value Adjustment or (2) the Adjusted Certificate Value. Here,
therefore, the Certificate Withdrawal Value would be the greater of
($11,236.00 - $318.00 + $779.10 = $11,697.10) or $10,945.76. Therefore, the
Certificate Withdrawal Value is equal to $11,697.10.
Example 2
Given the same circumstances as in Example 1, but using a Treasury Rate of
7.5% instead of 4.5% at the time of surrender, the Market Value Adjustment
is computed as follows:
B = [(1+.07)/(1+.075)](36/12) - 1
= [(1+.07)/(1+.075)]3 - 1
= -.0139
Therefore,
C = (A - 636) x B
= ($11,236 - 636) x -.0139
= Negative $147.34 is the Market Value Adjustment, which would be
subtracted from the Account Value in determining the Certificate Withdrawal
Value.
As described in the previous example, the Surrender Charge would equal
$318.00.
The Adjusted Certificate Value = $10,236.00 x [($11,236.00 -
$147.34) / $11,236.00]
= $10,101.77
Accordingly, the Certificate Withdrawal Value would be the greater of
($11,236.00 - $318.00 - $147.34 = $10,770.66) or $10,101.77. Therefore, the
Certificate Withdrawal Value is equal to $10,770.66.
Example 3
Given the same circumstances as in Example 2, but assuming (1) an Indexed
Account instead of an Interest Account with an Account Value of $11,236,
(2) Index Increases credited in the prior year equal to $1,236.00, and (3)
a scaling factor ("k") of .9, the Market Value Adjustment is computed as
follows:
B = [(1+.07)/(1+.075)]((36 x k)/12) - 1
= [(1+.07)/(1+.075)]((36 x 9)/12) - 1
= [(1+.07)/(1+.075)](2.7) - 1
= -.0125
Therefore,
C = (A - 1,236) x B
= ($11,236 - 1,236) x -.0125
= Negative $125.00 is the Market Value Adjustment, which would be
subtracted from the Account Value in determining the Certificate Withdrawal
Value.
As described in the previous example, the Surrender Charge would equal
$300.00.
The Certificate Value = [((.9 x $10,000 x 1.03) + 0) x 1.03]
+ 687.90
= $10,236.00
The Adjusted Certificate Value = $10,236.00 x [($11,236.00 -
$125.00) / $11,236.00]
= $10,122.12
Accordingly, the Certificate Withdrawal Value would be the greater of
($11,236.00 - $300.00 - $125.00 = $10,811.00) or $10,122.12. Therefore, the
Certificate Withdrawal Value is equal to $10,811.00.
APPENDIX C
SCHEDULE OF STATE PREMIUM TAXES
State Non-Tax Qualified Tax-Qualified
Contracts/Certificates Contracts/Certificates
Rate of Tax Rate of Tax
California 2.35 0.50
District of Columbia 2.25 2.25
Kansas 2.00 0.00
Kentucky 2.00 2.00
Maine 2.00 0.00
Nevada 3.50 0.00
South Dakota 1.25 0.00
Virgin Islands 5.00 5.00
West Virginia 1.00 1.00
Wyoming 1.00 0.00
Distributed by:
Keyport Financial Services Corp.
125 High Street, Boston, MA 02110-2712
Keyport Logo
Issued by:
Keyport Life Insurance Company
125 High Street, Boston, MA 02110-2712
MVA 528.5/98