File Nos. 333-01783
333-13609
SECURITIES AND EXCHANGE COMMISSION 33-3630
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission file numbers 33-3630 and 333-1783
KEYPORT LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Rhode Island 05-0302931
(State of other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
125 High Street, Boston, Massachusetts 02110-2712
(Address of principal executive offices) (Zip Code)
(617) 526-1400
(Registrant's telephone number, including area code)
_________________________________________________________________________
Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [ ] No
There were 2,412,000 shares of the registrant's Common Stock, $1.25 par
value, outstanding as of March 31, 1998.
Exhibit Index - Page 15 Page 1 of 16
KEYPORT LIFE INSURANCE COMPANY
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1998
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997 3
Consolidated Income Statements for the Three Month
Periods Ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the
Three Month Periods Ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 8-13
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibit Index 15
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
ASSETS 1998 1997
Unaudited
Cash and investments:
Fixed maturities available for sale
(amortized cost: 1998 - $10,915,733;
1997 - $10,981,618) $11,187,372 $11,246,539
Equity securities (cost: 1998 - $22,207;
1997 - $21,950) 41,456 40,856
Mortgage loans 59,249 60,662
Policy loans 563,722 554,681
Other invested assets 543,923 440,773
Cash and cash equivalents 1,296,254 1,162,347
Total cash and investments 13,691,976 13,505,858
Accrued investment income 166,898 165,035
Deferred policy acquisition costs 236,548 232,039
Value of insurance in force 52,714 53,298
Intangible assets 19,024 18,058
Income taxes recoverable 44,178 22,537
Other assets 187,962 16,175
Separate account assets 1,469,452 1,329,189
Total assets $15,868,752 $15,342,189
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy liabilities $12,161,580 $12,086,076
Deferred income taxes 166,815 133,003
Payable for investments purchased and
loaned 971,095 722,116
Other liabilities 34,645 34,015
Separate account liabilities 1,401,439 1,263,958
Total liabilities 14,735,574 14,239,168
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
Accumulated other comprehensive income 86,385 82,277
Retained earnings 537,845 511,796
Total stockholder's equity 1,133,178 1,103,021
Total liabilities and stockholder's
equity $15,868,752 $15,342,189
See accompanying notes
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENTS
(in thousands)
Unaudited
Three Months Ended
March 31,
1998 1997
Investment income $ 206,075 $ 206,515
Interest credited to policyholders 142,136 147,313
Investment spread 63,939 59,202
Net realized investment gains 818 12,796
Fee income:
Surrender charges 4,211 3,536
Separate account fees 4,708 3,939
Management fees 958 777
Total fee income 9,877 8,252
Expenses:
Policy benefits (460) (1,021)
Operating expenses (15,539) (12,030)
Amortization of deferred policy
acquisition costs (18,975) (16,257)
Amortization of value of insurance in force (1,476) (3,237)
Amortization of intangible assets (314) (282)
Total expenses (36,764) (32,827)
Income before income tax expense 37,870 47,423
Income tax expense (11,821) (15,885)
Net income $ 26,049 $ 31,538
See accompanying notes
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
Three Months Ended
March 31,
1998 1997
Cash flows from operating activities:
Net income $ 26,049 $ 31,538
Adjustments to reconcile net income
to net cash provided by operating
activities:
Interest credited to policyholders 142,136 147,313
Net realized investment gains (818) (12,796)
Amortization of value of insurance
in force and intangible assets 1,790 3,519
Net amortization on investments 39,349 (8,125)
Change in deferred policy acquisition
costs (202) (575)
Change in current and deferred income
taxes 31,516 15,877
Net change in other assets and
liabilities (21,652) 300
Net cash provided by operating
activities 218,168 177,051
Cash flows from investing activities:
Investments purchased - available
for sale (1,155,234) (702,830)
Investments sold - available for sale 1,034,044 243,596
Investments matured - available for sale 287,541 450,492
Increase in policy loans (9,041) (6,027)
Decrease in mortgage loans 1,413 1,697
Other invested assets sold (purchased), net 9,937 (21,516)
Value of business acquired, net of cash (3,999) -
Net cash provided by (used in)
investing activities 164,661 (34,588)
Cash flows from financing activities:
Withdrawals from policyholder accounts (393,125) (299,445)
Deposits to policyholder accounts 167,411 202,354
Securities lending (23,208) 223,707
Net cash (used in) provided by
financing activities (248,922) 126,616
Change in cash and cash equivalents 133,907 269,079
Cash and cash equivalents at beginning
of year 1,162,347 767,385
Cash and cash equivalents at end of year $1,296,254 $1,036,464
See accompanying notes
KEYPORT LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
1. General
The accompanying unaudited consolidated financial statements of Keyport
Life Insurance Company (the Company) includes all adjustments, consisting
of normal recurring accruals, that management considers necessary for a
fair presentation of the Company's financial position and results of
operations as of and for the interim periods presented. Certain footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Therefore, these consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements contained in the Company's 1997 Form 10-
K. The results of operations for the three month period ended March 31,
1998 are not necessarily indicative of the results to be expected for the
full year. Certain previously reported amounts have been reclassified to
conform with the current period presentation.
2. Investments
The Company's general investment policy is to hold fixed maturity assets
for long-term investment and, accordingly, the Company does not have a
trading portfolio. To provide for maximum portfolio flexibility and enable
appropriate tax planning, the Company classifies fixed maturity investments
as "available for sale", which are carried at fair value.
3. Acquisitions
On January 2, 1998, the Company acquired the common stock of American
Benefit Life Insurance Company, renamed Keyport Benefit Life Insurance
Company on March 31, 1998, a New York insurance company, for $7.4 million.
The acquisition was accounted for as a purchase and, accordingly, operating
results are included in the consolidated financial statements from the date
of acquisition. In connection with the acquisition, the Company acquired
assets with a fair value of $9.4 million and assumed liabilities of $3.2
million.
4. Recent Accounting Change
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" (FAS 130).
FAS 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
statement did not have any impact on the Company's net income or
stockholder's equity. FAS 130 requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were
reported separately in stockholder's equity, to be included in accumulated
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of FAS 130.
Total comprehensive income (loss), net of tax, for the three month periods
ended March 31, 1998 and 1997, amounted to $30.2 million and $(11.7)
million, respectively.
KEYPORT LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Unaudited
5. Recent Accounting Proposal
In April 1998, the Financial Accounting Standards Board voted to proceed
with the drafting of an accounting statement "Accounting for Derivative
Instruments and for Hedging Activities", which is expected to be issued by
mid-June. This statement will standardize the accounting for derivative
instruments and the derivative portion of certain other contracts that have
similar characteristics by requiring that an entity recognize those
instruments at fair value. This statement also requires a new method of
accounting for hedging transactions, prescribes the type of items and
transactions that may be hedged, and specifies detailed criteria to be met
to qualify for hedge accounting. This statement will be effective for
fiscal years beginning after June 15, 1999. Earlier adoption is permitted
as of July 1, 1998. The Company is evaluating the impact of this
statement.
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
Net income was $26.0 million in the first quarter of 1998 compared to
$31.5 million in the first quarter of 1997. The decrease of $5.5 million in
the first quarter of 1998 compared to the first quarter of 1997 resulted
primarily from lower net realized investment gains and higher operating
expenses, partially offset by higher investment spread, lower income tax
expense and higher fee income.
Investment spread is the amount by which investment income earned on
the Company's investments exceeds interest credited to policyholder
balances. Investment spread was $63.9 million in the first quarter of 1998
compared to $59.2 million in the first quarter of 1997. The amount by
which the average yield on investments exceeds the average interest
credited rate on policyholder balances is the investment spread percentage,
which amounted to 1.85% in the first quarter of 1998 and 1997.
Investment income was $206.1 million in the first quarter of 1998
compared to $206.5 million in the first quarter of 1997. The decrease of
$0.4 million in 1998 compared to 1997 primarily relates to a $10.5 million
decrease resulting from a lower average investment yield, substantially
offset by a $10.1 million increase as a result of a higher level of average
invested assets. The first quarter 1998 investment income was net of $17.3
million of S&P 500 Index call option amortization expense related to the
Company's equity-indexed annuities compared to $7.8 million in the first
quarter of 1997. The average investment yield was 6.54% in the first
quarter of 1998 compared to 6.89% in the first quarter of 1997.
Interest credited to policyholders totaled $142.1 million in the first
quarter of 1998 compared to $147.3 million in the first quarter of 1997.
The decrease of $5.2 million in 1998 compared to 1997 primarily relates to
a $10.2 million decrease resulting from a lower average interest credited
rate, partially offset by a $5.0 million increase as a result of a higher
level of average policyholder balances. Policyholder balances averaged
$12.1 billion (including $10.5 billion of fixed products and $1.6 billion
of equity-indexed annuities) in the first quarter of 1998 compared to $11.7
billion (including $10.8 billion of fixed products and $0.9 billion of
equity-indexed annuities) for the first quarter of 1997. The average
interest credited rate was 4.69% (5.31% on fixed products and 0.85% on
equity-indexed annuities) for the first quarter of 1998 compared to 5.04%
(5.37% on fixed products and 0.85% on equity-indexed annuities) in the
first quarter of 1997. The Company's equity-indexed annuities credit
interest to the policyholder at a "participation rate" equal to a portion
(ranging for existing policies from 55% 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.
Average investments (computed without giving effect to SFAS 115),
including a portion of the Company's cash and cash equivalents, were $12.6
billion in the first quarter of 1998 compared to $12.0 billion in the first
quarter of 1997. The increase of $0.6 billion in the first quarter of 1998
compared to 1997 primarily relates to reinvestment of portfolio earnings.
Net realized investment gains were $0.8 million in the first quarter
of 1998 compared to $12.8 million in the first quarter of 1997. The net
realized investment gains in 1997 included gains on the sales of fixed
maturity investments of $7.2 million and gains on sales of other invested
assets in separate account mutual funds sponsored by the Company of $5.6
million. Sales of fixed maturity investments generally are made to
maximize total return.
Surrender charges are revenues earned on the early withdrawal of
fixed, indexed and variable annuity policyholder balances. Surrender
charges on fixed, equity-indexed and variable annuity withdrawals generally
are assessed at declining rates applied to policyholder withdrawals during
the first five to seven years of the contract. Total surrender charges
were $4.2 million in the first quarter of 1998 compared to $3.5 million in
the first quarter of 1997.
On an annualized basis, total fixed, equity-indexed and variable
annuity withdrawals represented 14.1% and 11.2% of the total average
annuity policyholder and separate account balances for the first quarter of
1998 and 1997, respectively. The increase in annualized withdrawals in
1998 was primarily attributable to surrenders of a certain block of single
premium deferred annuities which came out of their surrender charge period
during the first quarter of 1998; excluding these surrenders, the
withdrawal percentage in 1998 was 11.6%.
Separate account fees are primarily mortality and expense charges
earned on variable annuity and variable life policyholder balances. These
fees, which are based on the market values of the assets supporting the
contracts in separate accounts, were $4.7 million in the first quarter of
1998 compared to $3.9 million in the first quarter of 1997. Such fees
represented 1.43% and 1.55% of average variable annuity and variable life
separate account balances for the three month periods ended March 31, 1998
and 1997, 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 $1.0
million in the first quarter of 1998 compared to $0.8 million in the first
quarter of 1997. The increase of $0.2 million in 1998 compared to 1997
primarily reflects a higher level of average assets under management.
Operating expenses primarily represent compensation and other general
and administrative expenses. These expenses were $15.5 million in the
first quarter of 1998 compared to $12.0 million in the first quarter of
1997. The increase in 1998 compared to 1997 was primarily due to higher
compensation expense and an increase in certain marketing activities.
Amortization of deferred policy acquisition costs relates to the costs
of acquiring new business that varies with, and are primarily related to,
the production of new annuity business. Such costs include commissions,
cost of policy issuance, underwriting and selling expenses. Amortization
was $19.0 million in the first quarter of 1998 compared to $16.3 million in
the first quarter of 1997. The increase in amortization in 1998 compared
to 1997 was due to the increase in investment spread income from the growth
of business in force associated with fixed and indexed products and the
increased sales of variable annuity policies. Amortization expense
represented 29.7% and 27.5%, on an annualized basis, of investment spread
for 1998 and 1997, respectively.
Amortization of value of insurance in force totaled $1.5 million in
the first quarter of 1998 compared to $3.2 million in the first quarter of
1997. The decrease in amortization in 1998 compared to 1997 was due to
reduced amortization related to a change in mortality assumptions.
Income tax expense was $11.8 million or 31.2% of pretax income in the
first quarter of 1998 compared to $15.9 million, or 33.5% of pretax income
for the first quarter of 1997.
Financial Condition
Stockholder's Equity as of March 31, 1998 was $1.13 billion compared
to $1.10 billion as of December 31, 1997. The increase in stockholder's
equity was due to $26.1 million of net income for the period and
appreciation of available for sale securities.
Investments not including cash and cash equivalents totaled $12.4
billion at March 31, 1998 compared to $12.3 billion at December 31, 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 fixed maturity
portfolio as "available for sale" and carries such investments at fair
value. The Company's total investments at March 31, 1998 and December 31,
1997 reflected net unrealized gains of $276.1 million and $280.3 million,
respectively, relating to its fixed maturity and equity portfolios.
Approximately $11.0 billion, or 80.5%, of the Company's general
account investments at March 31, 1998, was rated by Standard & Poor's
Corporation, Moody's Investors Service or under comparable statutory rating
guidelines established by the NAIC. At March 31, 1998, the carrying value
of investments in below investment grade securities totaled $1.1 billion,
or 8.0% of general account investments of $13.7 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.
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
82.2% of the Company's fixed annuity policyholder balances were subject to
surrender charges at March 31, 1998.
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 March 31, 1998 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 46 and 45 outstanding swap agreements at
March 31, 1998 and December 31, 1997, respectively, with an aggregate
notional principal amount of $2.6 billion.
Cap agreements are agreements with a counterparty that 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 as of March
31, 1998 and December 31, 1997, 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 $478.6 million and $323.3 million as of March 31, 1998 and
December 31, 1997, 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, cap 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.
These swap and cap agreements hedge fixed-rate assets and the Company
expects that any interest rate movements that adversely affect the market
value of swap and cap agreements would be offset by changes in the market
values of such fixed rate assets. However, there can be no assurance that
these hedges will be effective in offsetting the potential adverse effects
of changes in interest rates. 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 Index 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 swap and cap agreements increase less than (or decrease
more than) the change in the market value of its fixed rate assets and/or
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. 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. There were no fixed
maturity investments classified as nonaccrual at March 31, 1998.
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, 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
March 31, 1998, $10.6 billion, or 77.6%, 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 March 31,
1998, 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.
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 that 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 that support Keyport's business functions and prioritizing
computer applications that 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 that 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 are 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.
Effects of Inflation
Inflation has not had a material effect on the Company's consolidated
results of operations to date. The Company manages its investment
portfolio in part to reduce its exposure to interest rate fluctuations. In
general, the fair value of the Company's fixed maturity portfolio increases
or decreases in inverse relationship with fluctuations in interest rates,
and the Company's net investment income increases or decreases in direct
relationship with interest rate changes. For example, if interest rates
decline the Company's fixed maturity investments generally will increase in
fair value, while net investment income will decrease as fixed maturity
investments mature or are sold and the proceeds are reinvested at reduced
rates. However, inflation may result in increased operating expenses that
may not be readily recoverable in the prices of the services charged by the
Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
#27 Financial Data Schedule - page 16
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended March
31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEYPORT LIFE INSURANCE COMPANY
/s/ Bernhard M. Koch
Bernhard M. Koch
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ Jeff Whitehead
Jeff Whitehead
Vice President and Treasurer
(Chief Accounting Officer)
Date: May 14, 1998
Exhibit Index
Exhibit No. Description Page
27 Financial Data Schedule 16
[TYPE] EX-27
[DESCRIPTION] ART. 7 FDS FOR 1ST QUARTER 10-Q
[ARTICLE] 7
[MULTIPLIER] 1,000
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-END] MAR-31-1998
<DEBT-HELD-FOR SALE> 11,187,372
[DEBT-CARRYING-VALUE] 0
[DEBT-MARKET-VALUE] 0
[EQUITIES] 41,456
[MORTGAGE] 59,249
[REAL-ESTATE] 0
[TOTAL-INVEST] 13,691,976
[CASH] 1,296,254
[RECOVER-REINSURE] 0
[DEFERRED-ACQUISITION] 236,548
[TOTAL-ASSETS] 15,868,752
<POLICY LOSSES> 0
[UNEARNED-PREMIUMS] 0
[POLICY-OTHER] 12,161,580
[POLICY-HOLDER-FUNDS] 0
[NOTES-PAYABLE] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 3,015
[OTHER-SE] 1,130,163
<TOTAL-LIABILITY-AND EQUITY> 15,868,752
[PREMIUMS] 0
[INVESTMENT-INCOME] 206,075
[INVESTMENT-GAINS] 818
[OTHER-INCOME] 9,877
[BENEFITS] 460
[UNDERWRITING-AMORTIZATION] 18,975
[UNDERWRITING-OTHER] 15,539
[INCOME-PRETAX] 37,870
[INCOME-TAX] 11,821
[INCOME-CONTINUING] 0
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 26,049
[EPS-PRIMARY] 0
[EPS-DILUTED] 0
[RESERVE-OPEN] 0
[PROVISION-CURRENT] 0
[PROVISION-PRIOR] 0
[PAYMENTS-CURRENT] 0
[PAYMENTS-PRIOR] 0
[RESERVE-CLOSE] 0
[CUMULATIVE-DEFICIENCY] 0