As filed with the Securities and Exchange Commission on April 14, 1999
Registration No. 333-1783
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Post-Effective Amendment No. 3
to the
FORM S-1 REGISTRATION STATEMENT
Under
The Securities Act of 1933
KEYPORT LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Rhode Island 05-0302931
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
6355
(Primary Standard Industrial Classification Code Number)
125 High Street
Boston, Massachusetts 02110
(Address of Principal Executive Office)
Bernard R. Beckerlegge, Esquire
Senior Vice President and General Counsel
(617) 526-1610
(Name, address, and telephone number of agent for service)
Approximate date of commencement of proposed sale to the public. As soon as
practicable following effectiveness of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 check the following box. [X]
=======================================================================
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum
Title of Each Class Offering Aggregate Amount of
of Securities to be Amount to Price Per Offering Registration
Registered Be Registered(1) Unit(1) Price(2) Fee
Deferred Group
Annuity contracts $100(3)
and Participating
Interests therein
(1) The amount being registered and the proposed maximum offering price per
unit is not applicable in that these contracts are not issued in
predetermined amounts or units.
(2) The maximum aggregate offering price is estimated solely for the
purpose of determining the registration fee.
(3) $100 paid with initial registration. Pursuant to Rule 429 under the
Securities Act of 1933, as amended, the prospectus contained herein
includes $300,000,000 aggregate amount of Deferred Annuity Contracts and
Participating Interests therein covered by Registration Statements on Form
S-1, File Nos. 333-3630 and 33-28313, for which a total filing fee of
$40,000 was paid.
KEYPORT LIFE INSURANCE COMPANY
Cross Reference Sheet Pursuant to
Regulation S-K, Item 501(b)
Form S-1 Item Number and Caption Heading in Prospectus
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus Inside Front Cover
3. Summary Information, Risk
Factors and Ratio of Earnings
to Fixed Charges Summary; Accumulation Period
4. Use of Proceeds Investments by Keyport
5. Determination of Offering Price Description of Contracts
and Certificates
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Distribution of Certificate
9. Description of Securities to
be Registered Description of Contracts
and Certificates
10. Interests of Named Experts
and Counsel Experts; Legal Matters
11. Information with Respect to
the Registrant The Company; Company
Management; Executive
Compensation;
Financial Statements;
Legal Proceedings
12. Disclosure of Commission
Position on Indemnification
for Securities Act Liabilities See Part II, Item 17
GROUP AND INDIVIDUAL SINGLE PREMIUM
ANNUITY CONTRACTS
Issued By
Keyport Life Insurance Company
Executive & Administrative Offices
125 High Street, Boston, Massachusetts 02110
(617) 526-1400
The Certificates:
o represent participating interests in group or individual annuity
contracts providing retirement benefits;
o are offered to persons who participate in certain trusts or plans and
may include employees of an employer;
o may be issued on an allocated basis, whereby your interest is separately
accounted for in an account established for you;
o may be issued on a non-allocated basis, whereby the interests of all
participants in a trust or plan are accounted for in a single account
established for all participants:
Certificate Owners:
o may pay a single premium of $5,000 up to $500,000 per Certificate;
o may allocate the single premium payment to an interest account or an
index accounts of varying terms;
o may receive interest on their interest account at a fixed rate that we
set and guarantee at the beginning of a term;
o may receive interest on index accounts that is calculated by reference
to fixed interest rate factors, set and guaranteed at the beginning of a
term, which are applied to changes in the Standard and Poor's 500
Composite Stock Price Index;
o may be charged a substantial surrender charge and/or Market Value
Adjustment if a Certificate is not held to the end of a Term; surrender
of the Certificates at other times could result in the receipt of less
than the Certificate Owner's original single premium.
The Certificates may be sold by or through depository institutions.
However, the Certificates are not deposits and are not insured by the
Federal Deposit Insurance Corporation or any other governmental agency. You
should consider carefully the risk factors associated with the Certificates
beginning on page ___ of this prospectus.
This prospectus sets forth information about the Certificates that you
ought to know before purchasing or enrolling. You should read the
prospectus before investing and retain it for future 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. You should not rely on any unauthorized
information or representation.
Neither the Securities and Exchange Commission nor any state securities
commission has approved the certificates or determined that this prospectus
is accurate or adequate. Any representation to the contrary is a criminal
offense.
We file annual and quarterly reports and other information with the SEC.
You may read and copy any reports, statements or other information we file
at the SEC's public reference room in Washington, D.C. You can obtain
copies of these documents by writing to the SEC and paying a duplicating
fee. Please call the SEC at 1-800-SEC-0330 for further information as to
the operation of the public reference room. Our SEC filings are also
available to the public on the SEC Internet site (http://www.sec.gov).
The date of this Prospectus is ________, 1999.
TABLE OF CONTENTS
Page
Definitions
Summary of Certificate Features
Risk Factors
Certificate Ownership
Enrollment Form and Premium Payments
Accumulation Period
Initial Term
Interest Accounts
Indexed Accounts
Renewal Terms
Information on Renewal Rates
Establishment of Guaranteed Interest Rates and
Guaranteed Interest Rate Factors
Certificate Value
Transfer of Values
Surrenders
(a) Systematic Withdrawal Program
(b) Partial Surrender Procedures and Determination of Surrender Value
(c) Total Surrenders Procedures and Determination of Surrender Value
(d) Risk
(e) Payment upon Partial or Total Surrender
Deductions
(a) Surrender Charge
(b) Market Value Adjustment
(c) Premium Taxes
Death Provisions
(a) Non-Qualified Certificates
(b) Qualified Certificates
Annuity Period Provisions
Annuity Benefits
The Income Date and Form of Annuity
Change of Annuity Option
Annuity Options
Other Annuity Options
Frequency and Amount of Payments
Proof of Age, Sex, and Survival of Annuitant
Investments by Keyport
Amendment of Certificates
Assignment of Certificates
Distribution of Contracts and Certificates
General Tax Considerations
Taxation of Keyport
Taxation of Annuities
(a) Surrenders, Assignments, and Gifts
(b) Annuity Payments
(c) Penalty Tax
(d) Income Tax Withholding
(e) Section 1035 Exchanges
Qualified Plans
Tax-Sheltered Annuities
Individual Retirement Annuities
Corporate Pension and Profit-Sharing Plans
The Company
(a) Business
General
(b) Selected Financial Data
(c) Management's Discussion and Analysis of Results
of Operations and Financial Condition
1. Results of Operations
2. Financial Condition
3. Market Risk
4. Derivatives
5. Liquidity and Capital Resources
6. Year 2000
7. Effects of Inflation
8. Forward-Looking Statements
(d) General Account Investments
(e) Competition
(f) Employees
(g) Regulation
Company Management
Executive Compensation Tables and Information
Properties
Legal Proceedings
Experts
Legal Matters
Financial Statements
Appendix A (Term Interest Illustrations)
Appendix B (Market Value Adjustment Formula and Illustrations;
Surrender Charge Calculations)
Appendix C (Schedule of State Premium Taxes)
DEFINITIONS
Certain terms used in this prospectus are defined as follows:
Account: The Account we establish for a Certificate Owner to which the
Single Premium, paid by or on behalf of a Certificate Owner, is credited.
Account Anniversary: Each anniversary of the date an Interest or Indexed
Account is opened or transferred, including the end of the Term.
Account Value: The total of the Indexed Account Value and the Interest
Account Value under a Certificate prior to the Income Date.
Account Year: A continuous 12-month period commencing on the date that an
Interest or Indexed Account is opened or transferred and each subsequent
Account Anniversary.
Allocated Certificate: A Certificate under which amounts are allocated or
credited to the account of one individual participant.
Annuitant: The natural person on whose life annuity payments are based and
who will receive annuity payments starting on the Income Date.
Annuity: Options available for annuity payments.
Cap: The maximum percentage that 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. As used in this prospectus,
the term Certificate also includes any group contract and any individual
contract, unless the context requires otherwise.
Certificate Anniversary: Each anniversary of the Certificate Date.
Certificate Year: A continuous 12-month period commencing on the
Certificate Date and each Certificate Anniversary thereafter.
Certificate Date: The date a Certificate is issued and the Certificate
Owner's rights and benefits begin.
Certificate Owner ("You"): The person(s) or entity entitled to the
ownership rights stated in the Certificate and in whose name(s) the
Certificate is issued.
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.
Company ("We", "Us", "Our", "Keyport"): Keyport Life Insurance Company.
Contract Owner: The person(s) 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 (if the Certificate Owner is not a
natural person), you or the Joint Certificate Owner.
Enrollment Form: A document signed by a participant that serves as his or
her application for participation under an Allocated Certificate.
Excess Interest Credit: Additional interest that may be credited to the
Certificate Value on the Account Anniversary or upon a transfer 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 your Account Value.
Floor: The minimum percentage that an Indexed Account may increase during a
single Term. The Floor will not be less than zero.
Free Withdrawal Amount: The portion of your Account Value that may be
surrendered, transferred, or applied to an Annuity Option without payment
of any surrender charge or Market Value Adjustment. If a partial surrender
has not been made in the Certificate Year of the transaction, the Free
Withdrawal Amount is equal to the sum of any interest or Index Increases
credited to your Account Value in the prior 12 months or since the most
recent partial surrender, if sooner.
General Account: Our general investment account which contains all of our
assets, except assets in any Separate Account.
Guaranteed Interest Rate: The fixed rate of interest we set and guarantee
at the beginning of a Term of an Interest Account.
Guaranteed Interest Rate Factors: The Participation Rate, Cap, and Floor,
we set and guarantee at the beginning of a Term of an Indexed Account.
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 we credit 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, based on the Guaranteed Interest Rate Factors,
that we credit to an Indexed Account.
Individual Contract: A contract issued to a Contract Owner in states in
which we may not issue a Certificate.
In Force: The status of a Certificate before the Income Date, so long as it
is not totally surrendered and the Annuitant, or any Certificate Owner has
not died, that will cause the Certificate to end within at most five years
from the date of death.
Interest Account: An account to which we credit interest based on the
Guaranteed Interest Rate.
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 you to jointly possess
rights in your Account. We require that you 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.
Participation Rate: The percentage of the increase in the Index.
Qualified Certificate: Any Certificate issued under a Qualified Plan.
Qualified Plan: A retirement plan which receives special tax treatment
under Sections 401, 403 and 408 of the Internal Revenue Code and HR-10
Plans for self-employed persons.
Reset Date: The date on which Account Value 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: Our nonunitized separate investment account in which
assets underlying the Certificates and other annuity contracts we issue may
be held. Assets held in the Separate Account will be subject to the claims
of our general creditors.
Single Premium: The money paid by, or on behalf of, a participant with
respect to a Certificate.
Term: The period for which interest is credited at a Guaranteed Interest
Rate to an Interest Account or Guaranteed Interest Rate Factors are used to
calculate Index Increases for an Indexed Account.
Treasury Rate: The interest rate in the Treasury Constant Maturity Series,
published by the Federal Reserve Board, that is used in calculating Market
Value Adjustments.
Written Request: A request that is written in a form satisfactory to us,
signed by you, and received at our office.
SUMMARY OF CERTIFICATE FEATURES
This summary and the detailed information in this prospectus describe
participating interests in group and individual deferred annuity contracts
and the Certificates issued thereunder. We offer the Certificates to
assist you in your retirement planning.
The Certificate
The Certificate is designed to provide retirement benefits for eligible
individuals. Eligible individuals include persons participating in certain
trusts or plans and may include employees of an employer. Certain states,
however, do not permit us to issue Certificates and require us to issue
Individual Contracts instead.
We issue Allocated and Non-Allocated Certificates 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. We will issue an Allocated Certificate to each participant in a
Non-Qualified plan and in certain Qualified Plans which will verify
participation in a group contract. In such cases, the participant will
have a 100% vested interest in all values credited to the individual
participant's account.
With Non-Allocated Certificates, however, a participant's interest may be
vested in the plan in which they are participating rather than in a
Certificate. We will only issue Non-Allocated Certificates in connection
with certain Qualified Plans. 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.
Single Premium
We require a Single Premium of at least $5,000 per Account to accompany the
application or the Enrollment Form for an Allocated Certificate. A Single
Premium of $500,000 or more requires our approval. The Single Premium does
not need to accompany the Enrollment form under a group contract. The
Single Premium is the only premium payment that we permit or require, but
you may purchase more than one Certificate. (See "Enrollment Form and
Premium Payments," page __).
You may allocate the Single Premium to one of two types of accounts, the
Interest Account or the Indexed Account, of varying durations or Terms.
Certain states, however, do not permit Indexed Accounts to be available for
Certificates issued in those states.
Investments by Keyport
The Single Premium that is credited to your Account becomes part of our
assets. We own our General Account and Separate Account assets and
generally invest these amounts in U.S. government securities and certain
commercial debt securities having maturities that usually match the Terms.
We may also invest our assets in various instruments, including equity
options, futures, forwards, and other instruments based on the Index to
hedge our obligations with respect to Indexed Accounts. We may also buy
and sell interest rate swaps and caps, Treasury bond futures, and similar
instruments to hedge our exposure to changes in interest rates. (See
"Investments by Keyport," page__).
Interest Earned on Accounts
Interest Accounts earn interest at a fixed rate that we set and guarantee
at the beginning of the Term for the duration of the Term. We credit such
Guaranteed Interest Rates to Interest Accounts on an annual, compounded
basis for the entire duration of the selected Term. This means that we add
interest to the amount invested, so that credited interest may earn
interest. (See "Interest Accounts," page __.)
Interest credited to Indexed Accounts, or Index Increase, is calculated by
reference to fixed interest rate factors, which are applied to changes in
the Standard & Poor's 500 Composite Stock Price Index using a formula set
forth in the Certificate. We set and guarantee Guaranteed Interest Rate
Factors at the beginning of a Term for the duration of the Term. If the
publication of the Index is discontinued or there is a substantial change
in the calculation of the Index, we 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 using the
Guaranteed Interest Rate Factors set at the beginning of the Term and
credited proportionately over the selected Term on each Account
Anniversary.
Index Increases are subject to a maximum and minimum limit, both of which
we set and guarantee at the beginning of the Term. The minimum may not be
less than zero. Thus, the Indexed Account Value will not decrease to
reflect declines in the Index value since the beginning of the Term or from
Account Anniversary to Account Anniversary. (See "Indexed Accounts," page
__). The amount of Index Increases earned on an Indexed Account may be
more or less than the amount of interest earned on an Interest Account of
the same Term and established at the same time. It is possible that an
Indexed Account will not earn Index Increases on Account Anniversaries if
the Index value 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 __).
In certain circumstances, the Certificate permits a minimum value to be
used, instead of the Indexed Account Value, to calculate benefits under a
Certificate. This value, or the Certificate Value, is equal to:
o 90% of the Single Premium;
o Plus any Excess Interest Credits;
o Less any amounts you have withdrawn in a partial surrender, such
amounts being reduced by any surrender charge;
o Plus, if the Account Value has ever been transferred, a positive or
negative amount reflecting the effect of any Market Value
Adjustment on the Account Value at the time of the transfer;
o Plus interest credited on the foregoing at an annual guaranteed
rate of 3% per year.
The amount used to calculate death benefits, withdrawal amounts, and
annuity values will not be less than the Certificate Value, subject to any
Market Value Adjustment on the corresponding Account Value. If the Indexed
Account Value is less than the Certificate Value at the end of a Term, we
will credit interest to the Indexed Account so that its value will equal
the Certificate Value. (See "Certificate Value," page __; "Indexed
Accounts," page __).
Terms and Renewal of Terms
We currently offer initial Terms of one, three, five, six, seven, and ten
(Interest Account only) years. From time to time we may discontinue
offering terms of certain durations or offer Terms of other durations. The
interest rates and interest rate factors we declare may vary depending on
the duration of the Term. You should contact us to determine the Terms we
currently offer. You may transfer from one type of account to the other
and/or to Terms of different durations, subject to contractual provisions
and any surrender charge and Market Value Adjustment.
At the end of each Term, a new Term of one year will begin, unless you
instruct us otherwise within 30 days before the end of the Term. At that
time, you may choose another Term from among the Terms we then offer or
transfer the Account Value to the other type of account. (See "Renewal
Terms," page __).
Determinations of Guaranteed Interest Rates and Guaranteed Interest Rate
Factors
We consider a variety of factors in setting Guaranteed Interest Rates and
Guaranteed Interest Rate Factors for any Term. These factors include the
interest rates generally available on the types of instruments in which we
invest your Single Premium, the duration of the Term, regulatory and tax
requirements, sales commissions and expenses we bear, general economic
trends, and competitive factors.
Partial and Total Surrenders
You may obtain a portion or all of your Account Value, by making a partial
or total surrender, subject to certain restrictions. Such surrenders may
be subject to a surrender charge and/or a Market Value Adjustment.
Generally, we deduct a surrender charge from any partial or total surrender
made before the end of a Term. However, we will not deduct a surrender
charge from the following:
o A partial or total surrender within the first 30 calendar
days after the end of any Term, if you notify us in writing before
the surrender;
o The Free Withdrawal Amount of the first partial surrender in a
particular Certificate Year; however, 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;
o The Free Withdrawal Amount of a total surrender, if no partial
surrender was made in the same Certificate Year; otherwise, the
total amount surrendered is subject to a surrender charge. (See
"Surrender Charge," page __).
o The withdrawal of interest earnings from an Interest Account
pursuant to our systematic withdrawal program. Systematic
withdrawals may not be made from an Indexed Account. (See
"Systematic Withdrawal Program," page __).
The minimum partial surrender generally is $250. The minimum for partial
surrenders under our systematic withdrawal program is $100. After a
partial surrender, the minimum Account Value must be at least $2,500. We
do not permit partial surrenders from the Indexed Account of any
Certificate issued under a corporate or KEOGH Qualified Plan that is
established pursuant to Section 401 of the Internal Revenue Code of 1986,
as amended.
The surrender charge equals a percentage of the gross amount surrendered in
excess of the Free Withdrawal Amount, before the addition or deduction of
any Market Value Adjustment. The surrender charge percentage declines
depending on the number of years (rounded up) remaining until the end of
the Term. The maximum surrender charge currently is 7% for surrenders when
seven or more years remain in the Term.
We may defer payment of any partial or total surrender for up to six months
from the date we receive your surrender request. Some states permit only a
shorter deferral period. A payment deferral for more than 30 days is
unlikely to occur except under highly unusual circumstances. (See "Payment
upon Partial or Total Surrender," page __).
Transfers
You may transfer the Interest Account Value to another account at any time
before the Income Date, subject to certain conditions. You may transfer
the Indexed Account Value only at the end of a Term. Any amount you
transfer before the end of a Term may be subject to a Market Value
Adjustment. Presently, we do not charge for transfers, but we may
institute a transfer charge on transfers in excess of a certain number of
transfers annually. (See "Transfer of Values," page __; "Market Value
Adjustment," page __).
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 years or more may be adjusted up or down by a Market Value
Adjustment. The Market Value Adjustment is an amount that in certain
circumstances we add or subtract from your Account Value to reflect the
relative difference between:
o the current Treasury Rate for a period of time equivalent to the
remaining duration of the current Term; and
o 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 a significant increase in Treasury Rates
from the beginning of a Term would cause your total surrender amount to be
less than the original amount credited to your Account. (See "Market Value
Adjustment," page __).
A Market Value Adjustment will not apply to a partial or total surrender
within the first 30 calendar days after the end of any Term. With respect
to another surrender or annuitization, if a partial surrender has not
occurred in the same Certificate Year, we base the Market Value Adjustment
on the gross amount payable that is in excess of the Free Withdrawal
Amount, before deducting any surrender charge. Otherwise, we base the
Market Value Adjustment on the gross amount payable, before deducting any
surrender charge. (See "Market Value Adjustment," page __).
A Market Value Adjustment also applies to any transfer from an Interest or
Indexed Account with a Term of three years or more, unless the effective
date of the transfer is:
o within the last year of the Term, and the transfer is to an
account with a Term of three years or more; or
o within the first 10 calendar days after the end of a Term.
The Market Value Adjustment upon transfer is based on the Account Value or,
if a partial surrender has not occurred in the same Certificate Year, on
the Account Value in excess of the Free Withdrawal Amount. (See "Market
Value Adjustment," page __).
The Market Value Adjustment for Indexed Accounts includes a scaling factor,
which may reduce the positive or negative amount of any such Market Value
Adjustment. The Market Value Adjustment for Interest Accounts does not
include a scaling factor. (See "Market Value Adjustment," page __).
Annuity Period
On the Income Date, we will start to pay the designated Annuitant a series
of annuity payments under an Annuity Option. The Annuity Option you select
determines the timing and basis of the annuity payments. (See "Annuity
Period Provisions," page __).
Death Benefit
The Certificate provides for a special death benefit if you die before the
Income Date, if the Certificate Owner is not a natural person, or the
Annuitant dies before the Income Date. The Designated Beneficiary may
claim the special death benefit by surrendering the Certificate to us for
the special death benefit. The special death benefit is the greater of:
o The Certificate Value;
o The Certificate Withdrawal Value; or
o The Account Value; but if the Term that includes the date of death
relates to an Indexed Account and the Term's Floor is equal to 0%,
we may recalculate the Account Value 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 Designated
Beneficiary chooses not to surrender the Certificate, it may stay In Force
for up to five years after the date of death. At the end of the five
years, we will pay the Designated Beneficiary the Certificate Withdrawal
Value, without deducting any surrender charge. (See "Death Provisions,"
page __; "Surrender Charge," page __).
Premium Taxes
We will deduct the amount of any premium taxes levied by any state or
governmental entity when the premium tax is actually paid, unless we defer
the deduction until the time of surrender or the Income Date. We cannot
describe precisely the amount of premium tax you may have to pay on any
transaction. The amount of any premium tax charged to your Certificate
depends, among other things, on the type of Certificate, your state of
residence, the Annuitant's state of residence, our status within those
states, and the insurance tax laws of those states. Currently premium tax
rates range from 0%-5.0%. Appendix C, on page __ of this prospectus,
contains a schedule of premium tax rates.
Annual Reports to Certificate Owners
At least once each Certificate Year, we will send you 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.
RISK FACTORS
An inherent risk of the Certificate is that, if you make a partial or total
surrender before the end of the applicable Term, application of any
surrender charge and/or Market Value Adjustment might reduce the value of
your Account. As a result you could receive less than your original Single
Premium. (See "Surrender Charge", page __; "Market Value Adjustment", page
__).
We base the interest and Index Increases earned by an Account on the
Guaranteed Interest Rate and Guaranteed Interest Rate Factors that we
declare at the beginning of each Term. The initial and subsequent
Guaranteed Interest Rates and Guaranteed Interest Rate Factors apply to the
original principal sum and reinvested earnings. Our management will decide
what Guaranteed Interest Rates and Guaranteed Interest Rate Factors to
declare. We cannot predict or guarantee future Guaranteed Interest Rates
and Guaranteed Interest Rate Factors. (See "Establishment of Guaranteed
Interest Rates and Guaranteed Interest Rate Factors", page __).
CERTIFICATE OWNERSHIP
The Certificate Owner is the person or entity designated in the application
or Enrollment Form for the Certificate. You may exercise all rights under
the Certificate. Joint Certificate Owners are permitted, but not contingent
Certificate Owners.
Prior to the Income Date, you and any Joint Certificate Owner may direct us
in writing to change the Certificate Owner, Joint Certificate Owner,
Beneficiary, Contingent Beneficiary, Contingent Annuitant, or in certain
instances, the Annuitant. You may change an irrevocably-named person only
with the written consent of that person.
Because a change of Certificate Owner by means of a gift may be a taxable
event, you should consult a competent tax adviser about the tax
consequences resulting from such a transfer.
Qualified Certificates may have limitations on the transfer of ownership.
You should consult a competent tax adviser about the tax consequences
resulting from such a transfer.
ENROLLMENT FORM AND SINGLE PREMIUM PAYMENTS
You must submit a Single Premium of at least $5,000 per Certificate with
the Enrollment Form for an Allocated Certificate. We must approve a Single
Premium payment of $500,000 or more. You may purchase multiple
Certificates, but we reserve the right to limit the total premiums you may
pay on your Certificates. We also may reject any premium payment.
We credit the Single Premium to your Account, which is established on the
date we receive of a properly completed Enrollment Form, along with the
required premium payment. We will issue a Certificate and confirm the
receipt of the Single Premium in writing. If we issue a contract on a non-
allocated basis, a single Account is opened for the Contract Owner.
Your Account starts earning interest the day after it is established. You
may choose to allocate the Single Premium to an Interest Account or an
Indexed Account. The Indexed Account is not available for Certificates
issued in certain states.
If we determine that an Enrollment Form is incomplete, we will notify you
in writing or by telephone to obtain the necessary information. We will
return an incomplete Enrollment Form, along with the Single Premium, if you
do not complete it within three weeks of its receipt.
We will permit others to act on your behalf in certain instances, including
the following two examples. First, we will accept an application for a
Certificate that contains a signature signed under a power of attorney, if
a copy of the power of attorney is also submitted. Second, we will also
issue a Certificate to replace an existing life insurance or annuity policy
that was issued by us or an affiliated company without requiring a new
application from the applicant.
Certain dealers and other authorized persons, such as employers and
Qualified Plan fiduciaries, will inform us of an applicant's answers to the
questions in the application by telephone or order ticket and remit the
Single Premium to us. If the information is complete, we will issue the
Certificate, along with a copy of the completed Enrollment Form, to you so
that you may verify the accuracy of the information. We may also ask you
to confirm the accuracy of the information by signing and returning a copy
of the Enrollment Form or a Certificate delivery receipt to us. We confirm
all purchases with you in writing and our liability extends only to
confirmed purchases.
ACCUMULATION PERIOD
Initial Term
You chose whether to allocate the Single Premium to an Interest Account or
an Indexed Account and the duration of the initial Term. We offer Terms of
one, three, five, six, seven, and ten years. However, the ten-year Term is
only available on an Interest Account. We may offer other Terms from time
to time. The Indexed Account is not available for Certificates issued in
certain states.
A Term begins on the date 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 after the expiration
date of the previous Term.
The Single Premium, less any surrenders and premium taxes, earns and is
credited interest and/or Index Increases in accordance with the applicable
formula for an account. We credit interest to an Interest Account at the
Guaranteed Interest Rates that are specified at the beginning of the Term
for the duration of the Term. We credit Index Increases to Indexed Accounts
by reference to Guaranteed Interest Rate Factors that are specified at the
beginning of the Term for the duration of the Term.
Interest Accounts
Through the Interest Accounts, we offer specified effective and guaranteed
annual rates of interest, for a specified period of time, the Term that you
select. Guaranteed Interest Rates may differ among different Terms or
Terms established at different times. A Guaranteed Interest Rate will not
be less than 3% per year. Once we declare a Guaranteed Interest Rate at
the beginning of a Term, we will not change it during the Term.
We will credit interest daily at a compounded rate which will be 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.
Appendix A provides an example of how interest is credited to the Interest
Account.
Indexed Accounts
Through the Indexed Accounts, we offer Index Increases that depend on
increases in a specified Index. Index Increases are determined based on a
formula using specified Guaranteed Interest Rate Factors (the Participation
Rate, Cap, and Floor) that are available for the Terms you select.
Guaranteed Interest Rate Factors may differ among different Terms or Terms
established at different times. Once these Guaranteed Interest Rate
Factors are declared at the beginning of a term, they will never be changed
during the Term.
Index Increases may be added to an Indexed 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.
We will calculate and credit Index Increases on each Account Anniversary
after the start of a Term. The Certificate contains the formula for
calculating the Index Increases. We will credit Index Increases to the
Indexed Account proportionately over the entire Term.
Therefore, there are two components of the Index Increases calculated on
each Account Anniversary. The first part is the proportionate credit for
any increase 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 any increase 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 percentage 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 crediting 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
crediting any Index Increases) on any Account Anniversary in the Term.
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. 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.
Index Increases can never be negative because of the Floor of zero.
The effect of this formula is that, in the absence of any partial or total
surrender during a Term, the total Index Increases credited during a Term
will equal:
o the Account Value at the beginning of the Term,
o multiplied by the Participation Rate times 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
subsequent Index Increases, but do not affect Index Increases previously
credited.
Total Index Increases 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 an Indexed Account, in time,
the value of an Indexed Account may be less than the Certificate Value. In
such a circumstance, the Certificate Value is used to calculate any benefit
payable under the Certificate. If at the end of a Term the value of an
Indexed Account is less than the Certificate Value, we will credit the
Indexed Account with an End of the Term Increase that is equal to the
excess of the Certificate Value over the Indexed Account Value. (See
"Certificate Value," page __).
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. that we have licensed for use. 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 Certificate.
If publication of the Index discontinues, or calculation of the Index
changes substantially, we will substitute a suitable index and notify you
of the substitution.
Appendix A provides the formula we use to calculate Index Increases and
illustrative examples of calculations.
Renewal Terms
A new Term will automatically begin at the end of each Term, unless you
elect to make a total surrender. (See "Surrenders", page __). Each new Term
will be for one year unless, you notify us in writing within 30 days before
the end of a Term, of your selection of a different Term or transfer the
Account Value to a different type of account. You may choose from among the
Terms we offer at that time. We may discontinue offering Terms of certain
durations currently available or offer Terms of different durations from
time to time. The 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 Certificates.
You may not select a Term that is longer than the number of years remaining
until the Income Date. If you do, we will allocate the Account Value to a
Term of one year. If less than one year remains until the Income Date, we
automatically will allocate the Account Value to an Interest Account with a
Term of one year.
The Account Value at the beginning of any subsequent Term will be equal to
the Account Value at the end of the previous Term. Absent 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 you or
established by default (as described above) in the absence of other
instructions.
Information on Renewal Rates
We will provide you with a toll-free number to call to inquire about rates
for Terms offered at the time. We will notify you in writing of the
available Terms before the beginning of each subsequent Term.
Establishment of Guaranteed Interest Rates and Guaranteed Interest Rate
Factors
You will know the Guaranteed Interest Rate or Guaranteed Interest Rate
Factors for the chosen Term at the time of the initial purchase. Guaranteed
Interest Rates and Guaranteed Interest Rate Factors may differ among the
Terms. We may offer differing Guaranteed Interest Rates and Guaranteed
Interest Rate Factors for initial allocations, transfers during Terms, and
renewal Terms.
We do not have a specific formula for determining future Guaranteed
Interest Rates and Guaranteed Interest Rate Factors. The guaranteed rates
and factors will reflect interest rates available on the types of
investments in which we invest the proceeds of the Account. (See
"Investments by Keyport," page __). Our management may also consider
various other factors to determine guaranteed rates and factors for a Term,
such as the duration of a Term, regulatory and tax requirements, sales
commissions and administrative expenses we bear, general economic trends,
and competitive factors. The Guaranteed Interest Rates we declare, and the
rate of interest we credit to the Certificate Value used in the
determination of an Indexed Account Value, however, will never be less than
3% annually.
Our management will make the final determination as to Guaranteed Interest
Rates and Guaranteed Interest Rate Factors to be declared. We cannot
predict or guarantee future Guaranteed Interest Rates and Guaranteed
Interest Rate Factors.
Certificate Value
The Certificate provides a minimum value, called the Certificate Value,
that we use to calculate benefits under a Certificate when the Certificate
Value is higher than the value of an Indexed Account calculated as
described above.
The Certificate Value is equal to:
o 90% of the Single Premium;
o Plus any Excess Interest Credits;
o Less all amounts you have withdrawn in a partial surrender,
including any applicable surrender charges;
o Plus, if a Market Value Adjustment was applied to a transfer, the
positive or negative amount equal to the adjusted Certificate Value
(which is the Certificate Value adjusted in proportion to the
effect of the Market Value Adjustment on the Account Value) less
the Certificate Value at the time of the transfer;
o Plus interest credited at an annual guaranteed rate of 3% per year.
In addition, at each Account Anniversary and at the time of a transfer, we
will credit additional interest, called an "Excess Interest Credit", 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 your
Account Value. Interest amounts credited to the Certificate Value will earn
interest in subsequent Certificate Years.
The Certificate Value is 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.
Transfer of Values
You may transfer the entire Account Value from an Interest or Indexed
Account to another Interest or Indexed Account, subject to the following
limitations:
o The transfer must be by Written Request or telephone before the
Income Date;
o You may not exceed any limit we may set; currently, we do not limit
the number of transfers in a Certificate Year;
o You may transfer the Indexed Account Value only during the first
10 calendar days after the end of each full Term;
o You may transfer the Interest Account Value at any time before the
Income Date;
o The amount transferred shall equal the total Account Value, with
any Market Value Adjustment; partial transfers are not permitted;
o No Market Value Adjustment shall apply to a transfer:
(i) from an account with a Term of less than three years,
(ii) in the final year of a Term of three or more years to an
account with a Term of three or more years, or
(iii) within the first 10 calendar days after the end of each
full Term; and
o For transfers not made within the first 10 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 existing Term; and
o The Term of the new account cannot be longer than the number of
years remaining until the Income Date.
While currently transfers are free of charge, we reserve the right to
charge $25 per transfer if you make more than four transfers in a
Certificate Year. We reserve the right, at any time and without prior
notice, to terminate, modify, or suspend the transfer privileges described
above.
Surrenders
You may make a full or partial surrender of a your Account at any time
prior to the Income Date while the Certificate is In Force. Partial
surrenders are subject to the following charges and conditions:
o the surrender is at least $250, unless it is made pursuant to our
systematic withdrawal plan, in which case the minimum withdrawal is
$100; and
o the remaining Account Value after the partial surrender is at least
$2,500.
We reserve the right to change the minimum amount of any partial
withdrawal.
We do not allow partial surrenders from the Indexed Account of any
Certificate issued under a corporate or KEOGH Qualified Plan under Section
401 of the Internal Revenue Code.
The net amount of a partial or total surrender will include deductions for
any surrender charge and Market Value Adjustment. The amount you receive
may be greater or less than the amount subtracted from the 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 a request for a partial surrender would create insufficient account
value to keep the Certificate In Force, we will treat the request as a
request to surrender only the excess amount over $2,500.
We will, upon request, inform you of the amount payable upon a full or
partial surrender. Any total or partial surrender may be subject to tax in
addition to certain Certificate charges and adjustments. (See "Tax
Considerations," page __).
(a) Systematic Withdrawal Program
To the extent permitted by law, we will make monthly, quarterly, semi-
annual, or annual distributions of interest credited to an Interest Account
if you have enrolled in the systematic withdrawal program. All interest
distributions are made directly to you and are taxed like any other
withdrawal or distribution of Account Value. (See "Tax Considerations,"
page __.) The minimum withdrawal may not be less than $100. You may not
take systematic withdrawals from an Indexed Account. Distributions under
the systematic withdrawal program are not subject to surrender charges or
Market Value Adjustments.
(b) Partial Surrender Procedures and Determination of Surrender Value
At any time before the Income Date, you may, in writing, request a partial
surrender. The surrender amount paid to you will be the requested surrender
amount increased or decreased by any Market Value Adjustment and decreased
by any surrender charge. The surrender charge and the Market Value
Adjustment are calculated based on the requested surrender amount. The
requested surrender amount will be deducted from your Account Value. For
example, if you request a surrender amount of $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 you of $9,000
($10,000-$500-$500).
We may in our discretion allow you to request the net partial surrender
amount that you wish to be paid, instead of the surrender amount described
in the prior paragraph. If a Market Value Adjustment applies, however, the
amount we actually pay 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 surrender amount (prior
to the application of any Market Value Adjustment and any applicable
surrender charge) that we calculate based on your requested net amount. For
example, if you request a net partial surrender amount of $9,000 under the
assumptions in the example above the total amount calculated by us and
deducted from your account would be approximately $10,000.
(c) Total Surrenders Procedures and Determination of Surrender Value
You may make a total surrender by Written Request. Surrendering the
Certificate will end it.
The surrender value will be determined as of the date we receive the
Written Request for surrender. We will pay you the Certificate Withdrawal
Value, which is the greater of:
(i) the Account Value, with any Market Value Adjustment, and less any
surrender charge; and
(ii) the Certificate Value, adjusted by the ratio of the Account Value
(with any Market Value Adjustment) to the unadjusted Account
Value. We will deduct any premium taxes not previously paid.
For any total surrender made after the first Certificate Year, you may
receive the surrender benefit under an Annuity Option rather than in a lump
sum.
(d) Risk
The interest and Index Increases credited to your Account are based on
guarantees we make. The initial and subsequent Guaranteed Interest Rates
and Guaranteed Interest Rate Factors apply to the original principal sum
and reinvested earnings.
An inherent risk in a surrender prior to the end of the applicable Term is
that the Market Value Adjustment may reduce your Account Value. (See
"Market Value Adjustment," page __).
(e) Payment Upon Partial or Total Surrender
We may defer payment of any partial or total surrender for six months or
less from the date of receipt of your request for surrender. It is unlikely
that we would defer a surrender payment more than 30 days. Deferred payment
may be caused by an unusually high number of surrender requests,
accompanied by a substantial shift in interest rates. If we decide to
defer payment for more than 30 days, we will notify you in writing.
DEDUCTIONS
(a) Surrender Charge
We do not deduct a sales charge from the Single Premium when we receive it.
A surrender charge is deducted upon any partial or total surrender, except:
o A partial or total surrender within the first 30 calendar
days after the end of any full Term or during the Certificate Year
preceding the Income Date.
o The portion of the first partial surrender in each Certificate Year
that does not exceed the Free Withdrawal Amount.
o As to total surrenders, the portion of the gross surrender amount
that does not exceed the Free Withdrawal Amount, if no partial
surrender was made in the same Certificate Year.
The amount of any surrender charge is computed as a percentage of the gross
surrender amount in excess of the Free Withdrawal Amount. The percentage
used depends on the number of Account Years (rounded up) remaining until
the end of the account Term. The surrender charge is equal to:
(i) The amount of the partial surrender request, less any Free
Withdrawal Amount;
(ii) Multiplied by the applicable percentage from the Certificate
Schedule depending on the number of Account Years (rounded up)
remaining until the end of the Term.
The following chart 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
We reserve 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
increase, the increase will only apply to new Certificates issued after
full disclosure to new Certificate Owners or to existing Certificate Owners
purchasing additional Certificates.
After each surrender, we will adjust our records to reflect appropriate
deductions from the Account Value and the Certificate Value.
The surrender charge will apply to a full or partial surrender in each Term
of a Certificate. Any surrender may, in addition to certain Certificate
charges and adjustments, be subject to tax. (See "Tax Considerations," page
__).
Appendix B provides examples of how the surrender charge is determined.
(b) Market Value Adjustment
The amount payable upon a partial or total surrender before the Income
Date, a transfer, or application of Account Value to an Annuity Option, may
be increased or decreased by the application of a Market Value Adjustment.
The Market Value Adjustment reflects the difference between:
(i) the current Treasury Rate for a period of time equivalent to the
remaining duration of the current Term; and
(ii) the Treasury Rate at the beginning of the Term for a period equal
to the full duration of the Term.
A Market Value Adjustment will not apply to a partial or total surrender,
or the transfer of Account Value to an Annuity Option, within the first 30
calendar days after the end of a Term.
A Market Value Adjustment applies to any other partial or total surrender
of, or upon the transfer of Account Value to an Annuity Option from, an
account with a Term of three years or more. The Market Value Adjustment
calculation upon such a surrender may be based on the gross surrender
amount before the deduction of any surrender charge.
A Market Value Adjustment applies to any transfer from an Account with a
Term of three years or more to another Account, unless the effective date
of the transfer is:
(i) within the final Account Year of the Term and the transfer is to
an account with a Term of three years or more; or
(ii) within the first 10 calendar days after the end of any
Term.
The Market Value Adjustment calculation upon transfer may be based on the
Account Value. A Market Value Adjustment in connection with a transfer also
will result in an adjustment to Certificate Value. (See "Certificate
Value," page __.)
If you have not previously taken a partial surrender or effected any other
transaction potentially subject to a Market Value Adjustment in the same
Certificate Year, we subtract an amount not exceeding the Free Withdrawal
Amount from the amount used to calculate the Market Value Adjustment.
Otherwise, we use the amount you requested to be surrendered, transferred,
or applied to an Annuity Option as the basis to calculate the Market Value
Adjustment.
The Market Value Adjustment for Indexed Accounts includes a Scaling Factor.
You will know the Scaling Factor for all Indexed Account Terms at the time
of the initial purchase. Scaling Factors may differ for Terms of different
durations. We 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, it
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 does 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. As a result, should such
yields increase significantly from the time of purchase of a Certificate,
coupled with any surrender charge, the amount you would receive upon a
total surrender could be less than the Single Premium.
Appendix B provides the formula for calculating the Market Value
Adjustment, as well as illustrative examples.
At your request, we will furnish you with illustrations of the Market Value
Adjustment on your Account Value, if you make a total or partial surrender
before the end of a Term.
(c) Premium Taxes
We will deduct the amount of any premium taxes levied by a state or
governmental entity when the premium tax is incurred, unless we defer the
deduction until the time of surrender or the Income Date. The amount of
premium tax payable on any transaction involving a Certificate will vary
depending on whether the Certificate is Qualified or Non-Qualified, your
state of residence, the state of residence of the Annuitant, our status
within such states, and the insurance tax laws of such states. Currently
premium tax rates range from 0% to 5.0%. Appendix C contains a schedule of
premium tax rates.
DEATH PROVISIONS
Death provisions do not apply to Non-Allocated Certificates. With Non-
Allocated Certificates, Annuitants or payees are unknown until you request
that an annuity be effected.
(a) Non-Qualified Certificates
Death of Certificate Owner, Joint Certificate Owner or Certain Non-
Certificate Owner Annuitants: If, while the Certificate is In Force, you or
any Joint Certificate Owner dies, or if the Annuitant dies when an entity
(such as a trust) owns the Certificate, we will treat the Designated
Beneficiary as the Certificate Owner after such a death. The Designated
Beneficiary will be the first person among the following who is alive on
the date of death; you; Joint Certificate Owner; Primary Beneficiary;
Contingent Beneficiary; and otherwise the Certificate Owner's estate. If
you and Joint Certificate Owner are both alive, you will be the Designated
Beneficiary together.
The Designated Beneficiary may receive a death benefit by surrendering the
Account. If the decedent was the Certificate Owner or the Annuitant (if the
Certificate Owner is not a natural person) and the surrender occurs by the
later of the 90th day after the death or the 60th day after we are notified
of the death, the death benefit is the greatest of the following three
values:
If the decedent was the Certificate Owner or the Annuitant (if the
Certificate Owner is an entity), the Designated Beneficiary may, by the
later of the 90th day after the death and the 60th day after we are
notified of the death, surrender the Account for the death benefit on the
date of surrender.
The death benefit is the greatest of the following three values:
(i) The Certificate Value;
(ii) The Certificate Withdrawal Value; or
(iii) The Account Value; but if the Term in which death occurs relates
to an Indexed Account and the Term's Floor is 0%, the Account
Value is:
(a) The Indexed Account Value at the start of the Account Year
in which death occurs; 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,
the Indexed Account Value at the end of a Term is used
instead;
(b) Minus the sum of any partial surrenders since the start of
the Account Year in which death occurs.
Otherwise, the death benefit is the Certificate Withdrawal Value.
If the Designated Beneficiary does not surrender the Certificate, the
Certificate will continue as follows:
o If you or any Joint Certificate Owner dies and the decedent's
surviving spouse is the sole Designated Beneficiary, he or she will
automatically become the new Certificate Owner as of
the date of death. If the Annuitant dies, the new Annuitant will
be any living contingent Annuitant named in the Enrollment Form,
otherwise the surviving spouse. The Certificate may remain In Force
until another death occurs. Except for this paragraph, all of the
"Death Provisions" will apply to that subsequent death.
o In all other cases, the Certificate may remain In Force 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 or total surrenders. If the
Certificate is In Force at the end of the five-year period, we will
automatically end it by paying to the Designated Beneficiary the
Certificate Withdrawal Value, without deducting any surrender
charge. If the Designated Beneficiary is not alive, we will pay any
person(s) named in writing by the Designated Beneficiary; otherwise
we will pay the Designated Beneficiary's estate.
Payment of Benefits: Instead of receiving a lump sum, you or any Designated
Beneficiary may direct us in writing to pay any benefit of $5,000 or more
under an Annuity Option that meets the following:
o The first payment to the Designated Beneficiary must be made no
later than one year after the date of death;
o Payments must be made over the life of the Designated
Beneficiary or over a period not extending beyond that person's
life expectancy; and
o 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 during which the
remaining payments are to be made.
You may also direct us to pay benefits to the Designated Beneficiary under
an Annuity Option meeting these same requirements.
Death of Certain Non-Certificate Owner Annuitants: These provisions apply
if and while the Certificate is In Force,
o The Annuitant dies,
o The Annuitant is not a Certificate Owner, and
o 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. The
Designated Beneficiary has until the later of the 90th day after the death
and the 60th day after we are notified of the death to surrender the
Certificate for the death benefit. The death benefit is:
o The Certificate Value;
o The Certificate Withdrawal Value; or
o The Certificate Owner's Account Value; but if the Term in which
death occurs relates to an Indexed Account and the Term's Floor
is 0%, the Account Value is:
(a) The Indexed Account Value at the start of the Account Year
in which death occurs; 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,
the Indexed Account Value at the end of a Term is used
instead;
(b) Minus the sum of any partial surrenders since the start of
the Account Year in which death occurs.
If a surrender is after the applicable 90 or 60 day period, the death
benefit is the Certificate Withdrawal Value.
If the Designated Beneficiary does not surrender the Certificate, the
Certificate may continue for the period permitted by the Internal Revenue
Code. During this period, the Designated Beneficiary may exercise all
ownership rights, including the right to make partial or total surrenders.
If the Certificate is in effect at the end of the period, we will
automatically end it then by paying to the Designated Beneficiary the
Certificate Withdrawal Value. If the Designated Beneficiary is not alive,
we will pay any person(s) named by the Designated Beneficiary in writing;
otherwise we will pay the Designated Beneficiary's estate.
Payment of Benefits: Instead of receiving a lump sum, you or any Designated
Beneficiary may direct us in writing to pay any benefit or $5,000 or more
under an Annuity Option that meets the following:
o The first payment to the Designated Beneficiary must be made no
later than one year after the date of death;
o Payments must be made over the life of the Designated
Beneficiary or over a period not extending beyond that person's
life expectancy; and
o 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.
You may also direct us to pay benefits to the Designated Beneficiary under
an Annuity Option meeting these same requirements.
ANNUITY PERIOD PROVISIONS
Annuity Benefits
If the Annuitant is alive on the Income Date and the Certificate is In
Force, we will begin payments under the payment option(s) you have chosen.
We determine the payment by applying the Annuity Value on the Income Date
(less any premium taxes not previously deducted) in accordance with the
option selected. The Annuity Value is the greater of:
o The Account Value after application of any Market Value Adjustment;
or
o The Certificate Value, adjusted to reflect the ratio of the Account
Value (after application of the Market Value Adjustment) to the
unadjusted Account Value.
The Income Date and Form of Annuity
The Income Date, shown on the Certificate Schedule, 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.
For Allocated Certificates, you may elect, at least 30 days before the
Income Date, to have the Annuity value applied on the Income Date pursuant
to the Annuity Options described below. If you do not make an election, the
Annuity value will be applied on the Income Date pursuant to Option 2 to
provide a monthly life annuity with 10 years of payments guaranteed.
For Non-Allocated Certificates, you may request that we apply a portion of
the Account Value, including any surrender charge and Market Value
Adjustment, under an Annuity Option for a participant in your plan. We will
issue a Certificate for such participant, who is also the Annuitant, and
begin annuity payments as you direct.
You may not make a surrender after the Income Date. Other rules may apply
to qualified retirement plans. (See "Qualified Plans," page __.)
Change of Annuity Option
You may change the Annuity Option from time to time, by Written Request,
but we must receive the request at least 30 days before the Income Date.
Annuity Options
Option 1 - Income for a Fixed Number of Year: We will pay an annuity for a
chosen number of years, not less than 5 or more than 30 years. If on the
payee's death, payments under the fixed number of years have not run out,
then:
(a) We will make payments to the successor payee for the rest of the
period; or
(b) The successor payee may elect to receive the present value of the
remaining payments in a lump sum, commuted at the interest rate used
to create the annuity factor for this option.
Option 2 - Life Income with 10 Years Guaranteed: We will pay an annuity
income during the lifetime of the payee. If on the payee's death payments
have been made for less than 10 years then:
(a) We will make payments to the successor payee for the rest of the 10
year period; or
(b) The successor payee may elect to receive the present value of the
remaining certain payments in a lump sum, 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 payments begin and may depend on the payee's sex.
Option 3 - Joint and Last Survivorship Income: We will pay an annuity as
long as 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 begin and may depend on each person's sex. You
may receive only one annuity payment under this option if both payees die
after the receipt of the first payment, or 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 you and us.
Frequency and Amount of Payments
Annuity payments are paid as monthly installments. However, if the net
amount available under any Annuity Option is less than $5,000, we have the
right to pay such amount in a lump sum. If the payments are less than $100
per payment, we may change the frequency of the payments to result in
payments of at least $100.
Proof of Age, Sex, and Survival of Annuitant
We 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, we
will compute the amount payable based on the correct age and sex. If income
payments have begun, we will pay any underpayment on the next annuity
payment and deduct any overpayment, unless repaid in one sum, from future
annuity payments until we are repaid in full.
INVESTMENTS BY KEYPORT
We invest our assets according to the requirements of applicable state laws
regarding investments that may be made by the general accounts and separate
accounts of life insurance companies. In general, these laws permit
investments, subject to specified limits and 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 ___ for further information on our investments).
All of our General Account assets, the assets of Separate Account C and of
certain other Separate Accounts are available to fund claims under a
Certificate.
In establishing the Guaranteed Interest Rates and Guaranteed Interest Rate
Factors under the Certificates, we will take into account factors such as
the yields available on the instruments in which the proceeds from the
Certificates are invested. (See "Establishment of Guaranteed Interest Rates
and Guaranteed Interest Rate Factors," page __). Our obligations and the
values and benefits under the Certificates, however, will not vary as a
result of the returns on the instruments. Also, you, Designated
Beneficiaries and payees with rights under a Certificate will not
participate in the gains or losses of the investment instruments we hold in
the Separate Account.
Our investment strategy will be to invest in debt securities, which we will
use to match our liabilities with respect to the Terms to which the
proceeds are allocated. It is in our sole discretion to invest in any type
of investment that is authorized under state law. We expect to invest a
substantial portion of the premiums in securities issued by the United
States Government, or its agencies or instrumentalities, that may or may
not be guaranteed by the United States Government. The government
securities may include T-Bills, Notes, Bonds, Zero Coupon Securities and
Mortgage Pass-Through Certificates such as 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).
We may invest our assets in various instruments, including equity options,
futures, forwards, and others based on the Index in order to hedge our
obligations with respect to Indexed Accounts. We may also buy and sell
interest rate swaps and caps, Treasury bond futures, and other instruments
to hedge our exposure to changes in interest rates. These derivative
instruments will be purchased from counterparties that conform to our
policies and guidelines regarding derivative instruments. Investments in
these instruments generally involve the following types of risks:
(a) in the case of over-the-counter options and forward contracts, there
is no guarantee these markets will exist for these investments when
we want to close out a position;
(b) futures exchange may impose trading limits which may inhibit our
ability to close out positions in exchange-listed instruments; and
(c) if we have an open position with a dealer that becomes insolvent, we
may experience a loss.
While the foregoing generally describes our investment strategy with
respect to the proceeds attributable to the Certificates, we are 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
We reserve the right to amend the group contracts and Certificate to meet
the requirements of any applicable federal or state laws or regulations. We
will notify you in writing of any such amendments.
ASSIGNMENT OF CERTIFICATES
You may assign a Certificate at any time, as permitted by applicable law.
You must file a copy of any assignment with us. An assignment will not be
binding on us until we receive a copy of it. Your rights and those of any
revocably-named person will be subject to the assignment. Any Qualified
Certificate may have limitations on your ability to assign the Certificate.
We will not assume responsibility for the validity or effect of any
assignment.
Because an assignment may be a taxable event, you 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. KFSC is our wholly-owned subsidiary 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") and is located at 125 High
Street, Boston, Massachusetts 02110.
The Certificate will be sold by insurance agents who are registered
representatives of broker-dealers that have entered into distribution
agreements with KFSC. We will pay a maximum commission to broker-dealers
of 5.25% of the Single Premium. We may pay a reduced commission percentage
applied to the Certificate Owner's Account Value at the start of each Term
after the first term or at some other date(s).
Certificates may be sold with a lower commission structure to (a) our
officers, directors or employees or those of our affiliates, or (b) any
Qualified Plan established for such a person. Such Certificates will have
higher Participation Rates under the Indexed Account, reflecting
anticipated cost savings to us from the lower commission structure.
GENERAL TAX CONSIDERATIONS
Because tax laws are complicated and tax consequences 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.
You should understand that any detailed description of the tax consequences
regarding the purchase of a contract or Certificate cannot be made in this
prospectus. Special tax rules may apply with respect to certain purchase
situations not discussed herein. We do not consider any applicable state or
other tax laws. For detailed information, you should always consult a
competent tax adviser.
This discussion is based upon our 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 to predict
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. We are not making any representation
regarding the likelihood of continuation of those current federal income
tax laws, or of the current interpretations by the Internal Revenue
Service.
Taxation of Keyport
We are taxed as a life insurance company under Part I of Subchapter L of
the Internal Revenue Code of 1986, as amended ("Code"). We own assets
underlying the Certificates, and any income earned on those assets will be
deemed our income.
Taxation of Annuities
Section 72 of the Code governs the taxation of annuities. You, a trust or
other entity holding a Non-Qualified Certificate as an agent for an
individual, are not taxed on increases in Account Value until a
distribution occurs of a total or partial surrender, an assignment or gift
of the Certificate, or 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.
(a) Surrenders, Assignments, and Gifts
If you fully surrender your Certificate, the portion of the payment that
exceeds your cost basis in the Certificate is subject to tax. For Non-
Qualified Certificates, the cost basis is generally the amount of the
Single Premium, and the taxable portion of the surrender payment is subject
to tax 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 your
death or the death of the Annuitant is taxed on the portion of the amount
that exceeds your 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) exceeds the Single
Premium. To the extent the Account Value (plus or minus any Market Value
Adjustment) does not exceed the Single Premium, such surrenders are treated
as a non-taxable return of principal to you. 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.
If you assign or pledge a Non-Qualified Certificate, you will be treated as
if you have received the amount assigned or pledged. You will be subject
to taxation under the rules applicable to surrenders. If you give away the
Certificate to anyone other than your spouse, you will be treated for
income tax purposes as if you have fully surrendered the Certificate.
A special computational rule applies if, during any calendar year, we issue
to you more than one Certificate or one or more Certificates and one or
more of our other annuity contracts. Under this rule, the amount of any
distribution includable in your gross income is determined under Section
72(e) of the Code. All such contracts will be treated as one contract.
We believe that this means the amount of any distribution under any
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. This
special computational rule applies to "laddered" Certificates, which are
multiple Certificates of different Terms that are purchased during one
calendar year.
(b) Annuity Payments
We determine the non-taxable portion of each annuity payment with 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 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.
(c) Penalty Tax
Payments received by you, Annuitants, and Designated Beneficiaries under
the 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 under the following
circumstances.
o After the taxpayer attains age 59-1/2;
o In a series of substantially equal payments made for life or life
expectancy;
o After your death (or, where an entity owns the Certificate, after
the death of the Annuitant);
o If the taxpayer becomes totally and permanently disabled; or
o 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.
(d) Income Tax Withholding
We are required to withhold federal income taxes on taxable amounts paid
under the Certificates, unless the recipient elects not to have withholding
apply. We will notify recipients of their right to elect not to have
withholding apply. (See "Tax-Sheltered Annuities" ("TSAs"), page __) 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")).
(e) Section 1035 Exchanges
You may purchase a Non-Qualified Certificate 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 our
understanding that in such an event:
o The new Certificate is subject to the distribution-at-death
rules described in "Death Provisions for Non-Qualified
Certificates";
o 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
o 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:
(a) The penalty tax does not apply to any distribution;
(b) Partial surrenders are treated first as a non-taxable return
of principal and then a taxable return of income; and
(c) Assignments are not treated as surrenders subject to
taxation. Our understanding of the above is principally
based on legislative reports prepared by the Staff of the
Congressional Joint Committee on Taxation.
QUALIFIED PLANS
The Certificate may be used 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. Therefore, we
do not attempt 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 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.
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. 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 in the following circumstances:
o 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
o 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 legal restrictions
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.
If you request a distribution from a Certificate, we will notify you 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, unless you direct
us in writing to transfer the amount as a direct rollover to another TSA or
IRA.
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 to
contribute, 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.
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
We are 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. We seek to
maintain our presence in the fixed annuity market while expanding our sales
of variable and equity-indexed annuities. We seek to achieve a broader
market presence through the use of diversified distribution channels and
maintain a conservative approach to investment and liability management.
We are licensed to do business in all states except New York and are also
licensed in the District of Columbia and the Virgin Islands. We are rated
A (Excellent) by A.M. Best and Company ("A.M. Best"), independent analysts
of the insurance industry. Standard & Poor's ("S&P") rates us AA for very
strong financial security, Moody's Investor Services ("Moody's") rates us
A2 for good financial strength and Duff & Phelps rates us AA- for very high
claims paying ability. The A.M. Best's A rating is in the second highest
rating category, which also includes a lower rating of 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 "2" modifier means that we are in the middle of the A category. The
Duff & Phelps "-" modifier signifies that we are at the lower end of the AA
category. These ratings reflect the opinion of the rating company as to our
relative financial strength and ability to meet contractual obligations to
our policyholders.
Our wholly owned insurance subsidiaries are Independence Life and Annuity
Company ("Independence Life") and Keyport Benefit Life Insurance Company
("Keyport Benefit"). Other wholly owned subsidiaries are Liberty Advisory
Services Corp., an investment advisory company, and Keyport Financial
Services Corp., a broker-dealer.
We are 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. We issue and underwrite 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 ("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
our separate accounts. Stein Roe also provides asset management services
for a substantial portion of our general account. Independent, through its
subsidiary, markets our products through the bank distribution channel.
Our executive and administrative offices are located at 125 High Street,
Boston Massachusetts 02110. Our home office is at 695 George Washington
Highway, Lincoln, Rhode Island 02865.
(b) Selected Financial Data
The following selected consolidated financial data 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, 1998 1997 1996 1995 1994
Income statement
data:
Investment
income $ 815,266 $ 847,048 $ 790,365 $ 755,930 $ 689,575
Interest
credited (562,238) (594,084) (572,719) (555,725) (481,926)
Investment
spread 252,988 252,964 217,646 200,205 207,649
Fee income 42,836 36,353 33,534 29,767 25,273
Operating
expenses (53,544) (49,941) (43,815) (44,475) (54,295)
Income before
income taxes 161,519 172,651 137,846 107,941 95,276
Net income 108,600 113,561 90,624 69,610 63,225
Balance sheet
data:
Total cash and
investments $13,317,878 $13,505,858 $12,305,312 $10,922,125 $ 9,274,793
Total assets 15,775,231 15,342,189 13,924,557 12,280,194 10,873,604
Stockholder's
equity 1,135,597 1,103,021 980,782 902,331 682,485
(c) Management's Discussion and Analysis of Results of Operations and
Financial Condition
1. Results of Operations
Net income was $108.6 million in 1998, compared to $113.6 million in 1997
and $90.6 million in 1996. Favorable variances in 1998 as compared to 1997
were the result of higher fee income, reduced amortization of deferred
policy acquisition costs and value of insurance in force, lower policy
benefits and income tax expense. Offsetting these items were reductions in
net realized investment gains and higher operating expenses.
Investment spread is the amount by which investment income earned on our
investments exceeds interest credited to policyholder balances. Investment
spread was $253.0 million in 1998 and 1997 as compared to $217.6 million in
1996. The amount by which the average yield on investments exceeds the
average interest credited rate on policyholder balances is the investment
spread percentage. Such investment spread percentage was 1.78% in 1998,
1.91% in 1997, and 1.84% in 1996.
Investment income was $815.2 million in 1998, compared to $847.0 million in
1997 and $790.4 million in 1996. The decrease of $31.8 million in 1998
compared to 1997 primarily relates to a $66.4 million decrease resulting
from a lower average investment yield, partially offset by a $34.6 million
increase as a result of a higher level of average invested assets. The
1998 investment income was net of $70.8 million of S&P 500 Index call
option amortization expense related to our equity-indexed annuities
compared to $47.6 million in 1997. The average investment yield was 6.36%
in 1998 compared to 6.90% in 1997. Investment income increased in 1997
compared to 1996 primarily as a result of a higher level of average
invested assets, partially offset by a decrease resulting from a lower
average investment yield. The average investment yield was 6.90% in 1997
compared to 7.16% in 1996.
Interest credited to policyholders totaled $562.2 million in 1998, compared
to $594.1 million in 1997 and $572.7 million in 1996. The decrease of $31.9
million in 1998 compared to 1997 primarily relates to a $49.4 million
decrease resulting from a lower average interest credited rate, partially
offset by a $17.5 million increase as a result of a higher level of average
policyholder balances. Policyholder balances averaged $12.3 billion
(including $10.5 billion of fixed products and $1.8 billion of equity-
indexed annuities) in 1998 compared to $11.9 billion (including $10.8
billion of fixed products and $1.1 billion of equity-indexed annuities) in
1997. The average interest credited rate was 4.58% (5.23% on fixed
products and 0.85% on equity-indexed annuities) in 1998 compared to 4.99%
(5.45% on fixed products and 0.85% on equity-indexed annuities) in 1997.
Our equity-indexed annuities credit interest to the policyholder at a
"participation rate" equal to a portion (ranging for existing policies from
25% to 95%) of the change in value of the S&P 500 Index. Our 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 and futures, resulting in an 0.85% net credited
rate. Interest credited to policyholders increased in 1997 compared to
1996 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 $11.9 billion in 1997 compared to
$10.8 billion in 1996. The average interest credited rate was 5.32% in
1996.
Average investments (computed without giving effect to Statement of
Financial Accounting Standards No. 115), including a portion of our cash
and cash equivalents, were $12.8 billion in 1998 compared to $12.3 billion
in 1997 and $11.0 billion in 1996. The increase of $0.5 billion in 1998
compared to 1997 was primarily due to the reinvestment of portfolio
earnings. 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 the reinvestment
of portfolio earnings.
Net realized investment gains were $.8 million in 1998, compared to $24.7
million in 1997 and $5.5 million in 1996. The net realized investment
gains in 1998 were net of losses of $28.3 million for certain fixed
maturity investments where the decline in value was determined to be other
than temporary. There were no impairment writedowns in 1997 and 1996. The
net realized investment gains in 1998 included net gains on sales of fixed
maturity investments of $12.4 million, gains on sales of equity securities
of $14.7 million and gains of $.1 million on redemption of seed money
investments in separate account mutual funds we sponsored. The net realized
investment gains in 1997 included gains on sales of fixed maturity
investments of $16.8 million and gains of $7.9 million on redemption of
seed money investments in separate account mutual funds we sponsored. Sales
of fixed maturity and equity investments generally are made to maximize
total return.
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
$17.5 million in 1998, compared to $16.0 million in 1997 and $14.9 million
in 1996.
Total annuity withdrawals represented 13.2% of the total average annuity
policyholder and separate account balances in 1998 and 11.6% in 1997 and
1996. Excluding surrenders from the older block of annuities acquired in
the F&G Life transaction, the withdrawal percentages were 13.2% in 1998,
10.6% in 1997 and 10.0% in 1996.
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 $20.6 million in 1998 compared to $17.1
million in 1997 and $16.0 million in 1996. Such fees represented 1.44%,
1.54% and 1.68% of average variable annuity and variable life separate
account balances in 1998, 1997 and 1996, 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 $4.8
million in 1998, compared to $3.3 million in 1997 and $2.6 million in 1996.
The increase of $1.5 million in 1998 compared to 1997 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 $53.5 million in
1998, compared to $49.9 million in 1997 and $43.8 million in 1996. The
increase in 1998 compared to 1997 was primarily due to higher employee
related expenses and selling expenses.
Amortization of deferred policy acquisition costs were $69.2 million in
1998, compared to $75.9 million in 1997 and $60.2 million in 1996. The
decrease in amortization of $6.7 million in 1998 compared to 1997 was
primarily related to revisions in investment spread assumptions, partially
offset by increased amortization from the growth of business in force. The
increase in amortization in 1997 compared to 1996 was primarily related to
the increase in investment spread from the growth of business in force
associated with fixed and equity-indexed products and the increased sales
of variable annuity products during 1997. Amortization expense represented
24.8%, 27.5% and 25.1% of investment spread and separate account fees in
1998, 1997 and 1996, respectively.
Amortization of value of insurance in force totaled $8.2 million in 1998,
compared to $10.5 million in 1997 and $10.2 million in 1996. The decrease
in amortization of $2.3 million in 1998 compared to 1997 was primarily
related to lower amortization associated with F&G Life. 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.
Income tax expense was $52.9 million or 32.76% of pretax income in 1998,
compared to $59.1 million or 34.2% of pretax income in 1997 and $47.2
million or 34.3% pretax income in 1996.
Effective July 18, 1997, due to changes in ownership of Liberty Financial,
we are no longer included in the consolidated federal income tax return of
Liberty Mutual. We do not expect this change to have a material effect on
our financial condition or results from operations. We will be eligible to
file a consolidated federal income tax return with Liberty Financial in
2002.
2. Financial Condition
Stockholder's Equity as of December 31, 1998 was $1.136 billion compared to
$1.103 billion as of December 31, 1997. The increase in stockholder's
equity was due to an in increase in comprehensive income of $52.6 million,
offset by cash dividends of $20.0 million paid to Liberty Financial.
Investments not including cash and cash equivalents totaled $12.6 billion
at December 31, 1998 compared to $12.3 billion at December 31, 1997. The
increase of $0.3 billion is primarily attributable to the reinvestment of
portfolio earnings.
Our general investment policy is to hold fixed maturity assets for long-
term investment and, accordingly, we do not have a trading portfolio. To
provide for maximum portfolio flexibility and appropriate tax planning, we
classify our entire fixed maturity portfolio as "available for sale" and
carry such investments at fair value. Our total investments at December 31,
1998 and 1997 reflected net unrealized gains of $105.3 million and $283.8
million, respectively, relating to our fixed maturity and equity
portfolios.
Approximately $11.3 billion, or 84.9%, of our general account investments
at December 31, 1998, were rated by Standard & Poor's Corporation, Moody's
Investors Service or under comparable statutory rating guidelines
established by the NAIC. At December 31, 1998, the carrying value of
investments in below investment grade securities totaled $1.1 billion, or
8.1% of general account investments of $13.3 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.
We routinely review our portfolio of investment securities. We identify
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, we principally consider 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, we also consider market value
quotations, if available.
As of December 31, 1998, the carrying value of fixed maturity investments
that were non-income producing was $30.0 million, which constituted 0.2% of
investments. There were no non-income producing fixed maturity investments
as of December 31, 1997.
3. Market Risk
Market-Sensitive Instruments and Risk Management
Market risk is the risk that we will incur losses due to adverse changes in
market rates and prices. Our primary market risk exposures are to changes
in interest rates and to changes in equity prices.
The active management of market risk is integral to our operations. We may
use the following approaches to manage our exposure to market risk within
defined tolerance ranges: 1) rebalance our existing asset or liability
portfolios, 2) change the character of future investment purchases, or 3)
use derivative instruments to modify the market risk characteristics of
existing assets and liabilities or assets expected to be purchased.
Corporate Oversight
We generate substantial investable funds from our annuity operations. We
believe that our fixed and indexed policyholder balances should be backed
by investments, principally comprised of fixed maturities, which generate
predictable rates of return. We do not have a specific target rate of
return. Instead, our 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. Our portfolio
strategy is designed to achieve acceptable risk-adjusted returns by
effectively managing portfolio liquidity and credit quality.
We administer and oversee the investment risk management processes
primarily through our Investment Committee, our Board of Directors, and the
Board of Directors of Liberty Financial. The Investment Committee and
Board of Directors provide executive oversight of investment activities.
The Investment Committee is a senior management committee consisting of the
Chief Investment Officer, Chief Financial Officer, President, and members
of senior management of Liberty Financial. The Investment Committee meets
monthly to provide detailed oversight of investment risk, including market
risk.
We have investment guidelines that define the overall framework for
managing market and other investment risks, including the accountabilities
and controls over these activities. In addition, we have specific
investment policies that delineate the investment limits and strategies
that are appropriate given our liquidity, surplus, product and regulatory
requirements.
We monitor and manage our exposure to market risk through asset allocation
limits, duration limits, and stress tests. Asset allocation limits place
restrictions on the aggregate fair value which may be invested within an
asset class. Duration limits on the aggregate investment portfolio, and, as
appropriate, on individual components of the portfolio, place restrictions
on the amount of interest rate risk that may be taken. Stress tests
measure downside risk to fair value and earnings over longer time intervals
and for adverse market scenarios.
The day-to-day management of market risk within defined tolerance ranges
occurs as portfolio managers buy and sell within their respective markets
based upon the acceptable boundaries established by asset allocation,
duration and other limits, including but not limited to credit and
liquidity.
Interest Rate Risk
Interest rate risk is the risk that we will incur economic losses due to
adverse changes in interest rates. This risk arises from our primary
activities, as we invest substantial funds in interest-sensitive assets and
also have interest-sensitive liabilities. Our asset/liability management
emphasizes a conservative approach, which is oriented toward reducing
downside risk in adverse markets, as opposed to maximizing spread in
favorable markets.
We manage the interest rate risk inherent in our assets relative to the
interest rate risk inherent in our liabilities. One of the measures we use
to quantify this exposure is effective duration. Effective duration is a
common measure for the price sensitivity of assets and liabilities to
changes in interest rates. It measures approximate the percentage change
in the fair value of assets and liabilities 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. The
effective duration of assets and related liabilities are produced using
standard financial valuation techniques. At December 31, 1998, the
estimated difference between our asset and liability duration was
approximately 1.2. This positive duration gap indicates that the fair
value of our assets is somewhat more sensitive to interest rate movements
than the fair value of our liabilities.
We seek to invest premiums and deposits to create future cash flows that
will fund future benefits, claims, and expenses, and earn stable margins
across a wide variety of interest rate and economic scenarios. In order to
achieve this objective and limit our exposure to interest rate risk, we
adhere to a philosophy of managing the effective duration of assets and
related liabilities. We use interest rate swaps, futures and caps to
reduce the interest rate risk resulting from effective duration mismatches
between assets and liabilities. To the extent that actual results differ
from the assumptions utilized, our effective duration could be
significantly impacted. Important assumptions include the timing of cash
flows on mortgage-related assets and liabilities subject to policyholder
surrenders. Additionally, our calculation assumes that the current
relationship between short-term and long-term interest rates (the term
structure of interest rates) will remain constant over time. As a result,
these calculations may not fully capture the impact of non-parallel changes
in the term structure of interest rates and/or large changes in interest
rates.
Our potential exposure due to a 10% increase in prevailing interest rates
from their December 31, 1998 levels is a loss of $87.0 million in fair
value of our fixed-rate assets that is not offset by a decrease in the fair
value of our fixed-rate liabilities. Because we actively manage our assets
and liabilities and have strategies in place to minimize our exposure to
loss as interest rate changes occur, we expect that actual losses would be
less than the estimated potential loss
Equity Price Risk
Equity price risk is the risk that we will incur economic losses due to
adverse changes in a particular stock or stock index. At December 31, 1998,
we had approximately $24.6 million in common stocks and $535.1 million in
other equity investments (primarily call options and futures contracts).
At December 31, 1998, we had $2.1 billion in equity-indexed annuity
liabilities which provide customers with contractually guaranteed
participation in price appreciation of the Standard & Poor's 500 Composite
Price Index ("S&P 500 Index"). We purchase equity-indexed options and
futures to hedge the risk associated with the price appreciation component
of equity-indexed annuity liabilities.
We manage the equity risk inherent in our assets relative to the equity
risk inherent in our liabilities by conducting detailed computer
simulations that model our S&P 500 Index derivatives and our equity-indexed
annuity liabilities under stress-test scenarios in which both the index
level and the index option implied volatility are varied through a wide
range. Implied volatility is a value derived from standard option
valuation models representing an implicit forecast of the standard
deviation of the returns on the underlying asset over the life of the
option or future. The fair values of S&P 500 Index linked securities,
derivatives, and annuities are produced using standard derivative valuation
techniques. The derivatives and future portfolios are constructed to
maintain acceptable interest margins under a variety of possible future S&P
500 Index levels and option or future cost environments. In order to
achieve this objective and limit our exposure to equity price risk, we
measure and manage these exposures using methods based on the fair value of
assets and the price appreciation component of related liabilities. We use
derivatives, including futures and options, to modify our net exposure to
fluctuations in the S&P 500 Index.
Based upon the information and assumptions we use in our stress-test
scenarios at December 31, 1998, we estimate that if the S&P 500 Index
increases by 10%, the net fair value of our assets and liabilities
described above would decrease by approximately $2.0 million. If the S&P
500 Index decreases by 10%, we estimate that the net fair value of our
assets and liabilities will increase by approximately $2.0 million. If
option implied volatilities increase by 100 basis points, we estimate that
the net fair value of our assets and liabilities will decrease by
approximately $6.0 million.
The simulations do not consider the effects of other changes in market
conditions that could accompany changes in the equity option and futures
markets including the effects of changes in implied dividend yields,
interest rates, and equity-indexed annuity policy surrenders.
4. Derivatives
As a component of our investment strategy and to reduce exposure to
interest rate risk, we utilize 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 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. We currently utilize swap agreements to reduce asset
duration and to better match interest earned on longer-term fixed-rate
assets with interest credited to policyholders. We had 42 and 45
outstanding swap agreements with an aggregate notional principal amount of
$2.4 billion and $2.6 billion as of December 31, 1998 and 1997,
respectively.
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. We had interest rate cap agreements with an
aggregate notional amount of $250.0 million as of December 31, 1998 and
1997.
With respect to our equity-indexed annuities, we buy call options and
futures on the S&P 500 Index to hedge our obligations to provide returns
based upon this index. We had call options with a carrying value of $535.6
million and $323.3 million as of December 31, 1998 and 1997, respectively.
We had futures with a carrying value of $(.6) million and $.8 million as of
December 31, 1998 and 1997, respectively.
There are risks associated with some of the techniques we use to match our
assets and liabilities. The primary risk associated with swap, cap and call
option agreements is counterparty nonperformance. We believe that the
counterparties to our swap, cap and call option agreements are financially
responsible and that the counterparty risk associated with these
transactions is minimal. Future contracts trade on organized exchanges
and, therefore, have minimal credit risk. In addition, swap and cap
agreements have interest rate risk and call options and future contracts
have stock market risk. These swap and cap agreements hedge fixed-rate
assets and we expect 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. 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
and futures hedge our obligations to provide returns on equity-indexed
annuities based upon the S&P 500 Index, and we believe that any stock
market movements that adversely affect the market value of S&P 500 Index
call options and futures 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. Our profitability could be adversely
affected if the value of our swap and cap agreements increase less than (or
decrease more than) the change in the market value of our fixed rate assets
and/or if the value of our S&P Index 500 call options and futures increase
less than (or decrease more than) the value of the guarantees made to
equity-indexed policyholders.
In June 1998, Statement of Financial Accounting Standard No. 133
"Accounting for Derivative Instruments and Hedging Activities" was issued.
This statement standardizes 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 is effective for fiscal years beginning
after June 15, 1999. Earlier adoption is permitted. Upon adoption, we
will be required to record a cumulative effect adjustment to reflect this
accounting change. At this time, we have not completed our analysis and
evaluation of the requirements and the impact of this statement.
5. Liquidity and Capital Resources
Our liquidity needs and financial resources pertain to the management of
the general account assets and policyholder balances. We use cash for the
payment of annuity and life insurance benefits, operating expenses and
policy acquisition costs, and the purchase of investments. We generate 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 our cash requirements. We monitor cash and cash equivalents in an
effort to maintain sufficient liquidity and have strategies in place to
maintain sufficient liquidity in changing interest rate environments.
Consistent with the nature of our obligations, we have invested a
substantial amount of our general account assets in readily marketable
securities. At December 31, 1998, $9.7 billion, or 73.3%, of our general
account investments are considered readily marketable.
To the extent that unanticipated surrenders cause us to sell for liquidity
purposes a material amount of securities prior to their maturity, such
surrenders could have a material adverse effect on us. Although no
assurance can be given, we believe 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. In addition, our fixed-rate products
incorporate surrender charges to encourage persistency and make the cost of
our policyholder balances more predictable. Approximately 81% of our fixed
annuity policyholder balances were subject to surrender charges or
restrictions as of December 31, 1998.
Current Rhode Island insurance law permits us to pay dividends or
distributions 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. We had not previously paid any dividends since
our acquisition in 1988. In 1998, we paid $20.0 million in dividends to
Liberty Financial. As of December 31, 1998, the amount of additional
dividends that we could pay without such approval was $59.1 million.
Based upon our historical cash flow, our current financial condition and
expectation that there will not be a material adverse change in our results
of operations and our subsidiaries during the next twelve months, we
believe that cash flow provided by operating activities over this period
will provide sufficient liquidity for us to meet our liquidity needs.
6. Year 2000
Many companies and organizations have computer programs that 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. We rely significantly on computer systems and applications in our
operations. Some of these systems are not presently Year 2000 compliant.
If not corrected, this could cause system failures. Such failures could
have an adverse effect on us causing disruption of operations, including,
among other things, an inability to process transactions.
In addressing the Year 2000 issue, we have completed an inventory of our
computer programs and assessed its Year 2000 readiness. Our computer
programs include internally developed programs, third-party purchased
programs and third-party custom developed programs. For programs which
were identified as not being Year 2000 ready, we have implemented a
remediation plan which includes repairing or replacing the programs and
appropriate testing for Year 2000. The remediation plan is substantially
complete and is currently in the final testing phase. We also identified
our non-information technology systems with respect to Year 2000 issues. We
initiated remediation efforts in this area and expect to complete this
phase during 1999.
We have initiated communication with significant financial institutions,
distributors, suppliers and others with which we do business to determine
the extent to which our systems are vulnerable by the failure of others to
remediate their own Year 2000 issues. We have received feedback from such
parties and are in the process of independently confirming information
received from other parties with respect to their year 2000 issues.
We are developing, and will continue to develop, contingency plans for
dealing with any adverse effects that become likely in the event our
remediation plans are not successful or third parties fail to remediate
their own Year 2000 issues. If necessary modifications and conversions are
not made, or are not timely completed, or if the systems of the companies
on which our interface system relies are not timely converted, the Year
2000 issues could have a material impact on our financial condition and
results of operations. However, we believe that with modifications to
existing software and conversions to new software, the Year 2000 issue will
not pose significant operational problems for our computer systems.
Through December 31, 1998, the external cost of the Year 2000 project was
approximately $.8 million, which was primarily related to consultants and
replacement hardware and software. During 1999, we estimate that an
additional $1.1 million in costs will be incurred related to testing and
contingency plan development. All of the costs of the Year 2000 project are
funded through operating cash flows. In our opinion, the cost of
addressing the Year 2000 issue is not expected to have a material adverse
effect on our financial condition or results of operations.
7. Effects of Inflation
Inflation has not had a material effect on our consolidated results of
operations to date. We manage our investment portfolio in part to reduce
our exposure to interest rate fluctuations. In general, the fair value of
our fixed maturity portfolio increases or decreases in inverse relationship
with fluctuations in interest rates, and our net investment income
increases or decreases in direct relationship with interest rate changes.
For example, if interest rates decline our 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 us.
8. Forward-Looking Statements
We desire to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). Investors are
cautioned that all statements, trend analyses and other information
contained in this report or in any of our filings under Section 13 or 15
(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), relative
to the markets for our products and trends in our operations or financial
results, as well as other statements including words such as "anticipate",
"believe", "plan", "estimate", "expect", "intend" and other similar
expressions, constitute forward-looking statements under the Reform Act.
These forward-looking statements are subject to known and unknown risks,
uncertainties and other factors, many of which are beyond our control, that
may cause actual results to be materially different from those contemplated
by the forward-looking statements. Such factors include, among other
things: (1) general economic conditions and market factors, such as
prevailing interest rate levels, stock market performance and fluctuations
in the market for retirement-oriented savings products, which may adversely
affect our ability to sell our products and services and the market value
of our investments and assets under management and, therefore, the portion
of our revenues that are based on a percentage of assets under management;
(2) our ability to manage effectively our investment spread (i.e. the
amount by which investment income exceeds interest credited to annuity and
life insurance policyholders) as a result of changes in interest rates and
crediting rates to policyholders, market conditions and other factors (our
results of operations and financial condition are significantly dependent
on our ability to manage effectively our investment spread); (3) levels of
surrenders and withdrawals of our retirement-oriented insurance products;
(4) our ability to manage effectively certain risks with respect to our
investment portfolio, including risks relating to holding below investment
grade securities and the ability to dispose of illiquid and/or restricted
securities at desired times and prices, and the ability to manage and hedge
against interest rate changes through asset/liability management
techniques; (5) competition in the sale of our products and services,
including our ability to establish and maintain relationships with
distributors of our products; (6) changes in our financial ratings or those
of our competitors; (7) our ability to attract and retain key employees,
including senior officers, investment managers and sales executives; (8)
the impact of and our compliance with existing and future regulation,
including restrictions on the ability to pay dividends and any of our
obligations under any guaranty fund assessment laws; (9) changes in
applicable tax laws which may affect the relative tax advantages and
attractiveness of some of our products; (10) the result of any litigation
or legal proceedings involving us; (11) changes in generally accepted
accounting principles and the impact of accounting principles and
pronouncements on our financial condition and results of operation; (12)
the impact of Year 2000 issues on our operations and our subsidiaries; and
(13) the other risk factors or uncertainties contained from time to time in
any document incorporated by reference in this report or otherwise filed by
us under the Exchange Act. Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements and no assurances can be given that the estimates and
expectations reflected in such statements will be achieved
(d) General Account Investments
We credit premium deposits on fixed and equity-indexed annuities to our
general account investments (which at December 31, 1998 totaled $13.3
billion). General account investments include cash and cash equivalents. To
maintain our investment spreads at acceptable levels, we must earn returns
on general accounts 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.
We emphasize 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 our investment
spread, including changes in interest rates and other factors affecting our
general account investments.
Most of our general account investments are invested in fixed maturity
securities (84.7% at December 31, 1998). Our principal strategy for
managing interest rate risk is to closely match the duration of our general
account investment portfolio to our policyholder balances. We also employ
hedging strategies to manage this risk, including interest rate swaps and
caps. In the case of equity-indexed products, we purchase S&P 500 Index
call options to hedge our obligations to provide participation rate
returns. Credit risk is managed by careful credit analysis and monitoring.
A portion of the general account investments (8.1% at December 31, 1998) is
invested in below investment grade fixed maturity securities to enhance
overall portfolio yield. Below investment grade securities pose greater
risks than investment grade securities. We actively manage our below
investment grade portfolio to optimize our risk/return profile. At
December 31, 1998, the carrying value of fixed maturity investments that
were non-income producing was $30.0 million, which constituted 0.2% of
investments.
As of December 31, 1998, we owned approximately $3.3 billion of mortgage-
backed securities (24.8% of our general account investments), 97.3% 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, 1998, approximately $3.6 billion (26.7% of our 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 we sought to sell such securities, we 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
Our business activities are conducted in extremely competitive markets. We
compete with a large number of life insurance companies, some of which are
larger, more highly capitalized and have higher ratings than we do.
However, no one company dominates the industry. In addition, our products
compete with alternative investment vehicles available through financial
institutions, brokerage firms and investment managers. We believe that we
compete principally with respect to product features, pricing, ratings and
service. We also believe that we 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, 1998 we have 408 full-time employees. We provide our
employees with a broad range of employee benefit programs. We believe that
our relations with our employees are excellent.
(g) Regulation
Our business activities are extensively regulated. The following is a brief
summary of principal regulatory requirements and certain related matters.
Our retirement-oriented insurance products generally are issued as
individual policies. A policy is a contract between the issuing insurance
company and the policyholder. Policy forms, including all principal
contract terms, are regulated by state law. Generally, the policy form
must be approved by the insurance department or similar agency of a state
prior to any sales in that state.
We are chartered in Rhode Island and the State of Rhode Island Insurance
Department is our primary oversight regulator. We also must be licensed by
the state insurance regulators in each jurisdiction in which we conduct
business. Currently, we 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.
We prepare our 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 ("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 1999 may
result in changes to the accounting practices that we use to prepare our
statutory-basis financial statements. The impact of any such changes on
our statutory-surplus cannot be determined at this time. We cannot assure
that such changes would not have a material adverse effect on us.
Risk-Based 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, 1998, our 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 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, we cannot
accurately determine the precise amount or timing of our exposure to known
insurance company insolvencies at this time. For certain information
regarding our historical and estimated future assessments, see note 11 to
our consolidated financial statements. The insolvency of large life
insurance companies in future years could result in material assessments to
us by state guaranty funds. No assurance can be given that such assessments
would not have a material adverse effect on us
Insurance Holding Company Regulation. Current Rhode Island insurance law
permits us to pay dividends or distributions 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. We had not
paid any dividends since our acquisition in 1988. In 1998, we paid $20.0
million in dividends to Liberty Financial. As of December 31, 1998, the
amount of additional dividends that we could pay without such approval was
$59.1 million.
KFSC, our subsidiary, 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, 50 Chairman of the Board, Chief Executive Officer of
12/31/94 Liberty Financial
Companies, Inc. ("LFC"),
1/1/95; President of LFC,
formerly Chief Operating
Officer of LFC
Frederick Lippitt, 82 Director, 1/31/62, Chairman of The Providence
and Assistant Secretary, Plan Providence, RI
4/9/69
Robert C. Nyman, 63 Director, 4/11/96 Formerly President and
Chairman of Nyman
Manufacturing Co., East
Providence, RI
Paul H. LeFevre, Jr., Acting President, Formerly Senior Vice
56 10/22/98, Executive President and Chief
Vice President, 4/10/97 Financial Officer of
the Company, 9/1/95;
Acting President,
10/22/98, Director,
1/30/98 and Executive Vice
President of Keyport
Benefit Life Insurance
Company; 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;
formerly Senior Vice
President and Chief
Financial Officer of
Independence Life, 10/1/93
Bernard R. Senior Vice President Director, 1/30/98, and
Beckerlegge, 52 and General Counsel, Senior Vice President and
9/1/95 General Counsel of Keyport
Benefit Life Insurance
Company, 2/6/98; Senior
Vice President and General
Counsel of LASC, 7/22/97;
Senior Vice President and
General Counsel of
Independence Life,
10/9/95; formerly General
Counsel for B.T. Variable
Insurance Co., 8/1/88
Bernhard M. Koch, 44 Senior Vice President Director, 1/30/98 and
and Chief Financial Senior Vice President
Officer, 8/7/97 and Chief Financial
Officer of Keyport Benefit
Life Insurance Company,
2/6/98; Senior Vice
President and Chief
Financial Officer of LASC,
7/22/97; Senior Vice
President and Chief
Financial Officer of
Independence Life,
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, Senior Vice President, Formerly Vice President,
42 4/10/97, and Chief Investments of the
Investment Officer, Company; Senior Vice
5/16/94 President and Chief
Investment Officer of
Keyport Benefit Life
Insurance Company, 2/6/98;
Senior Vice 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,
7/28/97; formerly Vice
President, Independence
Life, 10/1/93
Francis E. Reinhart, Senior Vice President, Formerly Chief
58 4/5/90, and Chief Administrative Officer of
Information Officer, the Company; formerly
4/10/97 Director and Vice
President of KFSC; Senior
Vice President and Chief
Information Officer of
Keyport Benefit Life
Insurance Company, 2/6/98;
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;
formerly Chief
Administrative Officer of
Independence Life, 10/1/93
Mark R. Tully, 42 Senior Vice President Formerly Vice President,
and Chief Sales Officer, 8/7/97, and Vice
1/20/98 President - National
Director of Traditional
Sales of the Company,
8/10/95; Senior Vice
President and Chief Sales
Officer of Keyport Benefit
Life Insurance Company,
2/6/98; Director and
Senior Vice President of
LASC, 1/13/98; Director
and Senior Vice President
of Independence Life,
12/41/97; formerly Vice
President of Paine Webber,
Inc., 11/1/88.
James P. Greaton, 41 Vice President and Vice President and
Corporate Actuary, Corporate Actuary of
6/12/96 Keyport Benefit Life
Insurance Company, 2/6/98;
Vice President and
Corporate Actuary of
Independence Life,
12/31/96; formerly
Valuation Actuary,
Providian Capital
Management, 5/94
Jeffery J. Lobo, 37 Vice President--Risk Formerly Assistant Vice
Management, 6/12/96 President - Director of
Quantitative Research for
the Company; Vice
President - Risk
Management of Keyport
Benefit Life Insurance
Company, 2/6/98; formerly
Vice President of Credit
Suisse Financial Products,
11/94
Jeffery J. Vice President, Formerly Controller of
Whitehead, 42 11/5/92 and Treasurer, the Company; Vice
5/4/95 President and Treasurer of
Keyport Benefit Life
Insurance Company, 2/6/98;
Vice President and
Treasurer of LASC,
5/19/95; Vice President
and Treasurer of
Independence Life, 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 our 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 us 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 $27.00 per
share, which was the closing price of the Common Stock on the New York
Stock Exchange on December 31, 1998 (the last trading day of 1998). None
of the named executive officers received any perquisites during 1998
exceeding the lesser of $50,000 or 10% of such officer's total salary and
bonus for such year.
Summary Compensation Table. The following table sets forth compensation
information for the past three fiscal years for our chief executive officer
and the other four most highly compensated executive officers:
Summary Compensation Table
Annual Long-Term
Compensation Compensation
Name and Restricted Securities
Principal Base Stock Underlying All Other
Position Salary Bonus Awards2 Options
Compensation
During 1997 Year ($) ($)1 ( $) (#) ($)3
John W. 1998 454,000 320,000 167,344 16,000 816,912
Rosensteel, 1997 420,000 330,000 149,625 18,750 62,121
President 1996 396,500 275,000 -- 22,500 46,037
and Chief
Executive
Officer (4)
Paul H. 1998 328,000 338,300 210,813 9,000 41,422
LeFevre, Jr., 1997 315,000 205,000 85,500 9,000 35,833
Acting 1996 275,000 155,000 -- 13,500 22,424
President (4)
Francis E. 1998 258,000 112,000 -- 6,500 25,490
Reinhart, 1997 245,000 115,000 -- 11,250 25,325
Senior Vice 1996 233,000 105,000 -- 11,250 16,343
President
and Chief
Information
Officer
Stewart R. 1998 240,000 145,000 63,219 5,000 25,808
Morrison, 1997 230,000 130,000 42,750 6,000 20,076
Senior Vice 1996 182,700 54,000 -- 8,250 10,437
President &
Chief
Investment
Officer
Bernhard 1998 258,000 123,000 55,781 5,000 64,027
M. Koch (5) 1997 104,166 75,000 -- 9,750 87,881
Senior Vice 1996 -- -- -- -- --
President &
Chief
Financial
Officer
Bernard R. 1998 207,000 92,500 -- 7,000 17,750
Beckerlegge 1997 195,000 85,000 -- 10,500 35,600
Senior Vice 1996 185,000 85,000 -- 10,500 31,481
President &
General
Counsel
1 The amounts presented are bonuses earned in 1998 and paid in 1999,
earned in 1997 and paid in 1998, or earned in 1996 and paid in 1997,
respectively.
2 Calculated by multiplying the closing price of Liberty Financial's
Common Stock on the New York Stock Exchange on the date of grant ($24.3125
on October 23, 1998; $37.1875 on May 11, 1998; $28.50 on May 13, 1997) by
the number of shares awarded. The number of shares and value of restricted
stock held by the named executive officers as of December 31, 1998 (based
on the New York Stock Exchange closing price of $27.00 for the Liberty
Financial's Common Stock at fiscal year end) is as follows: Mr. LeFevre:
10,400 shares, $280,800; Mr. Morrison: 3,200 shares, $86,400; and Mr. Koch:
1,500 shares, $40,500. The restricted stock granted in 1997 (Mr. LeFevre
3,000 shares and Mr. Morrison 1,500 shares) will vest on May 14, 2003 or
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. The
restricted stock granted in May 1998 (Mr. LeFevre 2,400 shares; Mr.
Morrison 1,700 shares and Mr. Koch 1,500 shares) will vest on May 12, 2004
or any time after May 11, 2000 if for a 10 consecutive trading day period
the closing price of Liberty Financial common stock exceeds $54.45. The
restricted stock granted in October 1998 (Mr. LeFevre 5,000 shares) will
vest on October 23, 2004 or any time after October 22, 2000 if for a 10
consecutive trading day period the closing price of Liberty Financial
common stock exceeds $35.60. All of Mr. Rosensteel's restricted stock
vested upon his retirement on December 31, 1998. Holders of restricted
stock are entitled to vote their restricted shares and retain all dividends
which may be paid with respect to such shares. In general, in the event of
termination of employment, restricted shares are forfeited by the holders
and revert to Liberty Financial. The closing price of the Liberty
Financial's Common Stock on the New York Stock Exchange on March 19, 1999
was $22.312.
3 Consists of (a) in the case of Mr. Rosensteel, $5,000 of insurance
premiums we paid 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, $56,912 in 1998, $57,121 in 1997 and $41,037 in 1996; Mr.
LeFevre, $41,422 in 1998, $35,833 in 1997 and $22,424 in 1996; Mr.
Reinhart, $25,490 in 1998, $25,325 in 1997 and $16,343 in 1996; Mr.
Morrison, $25,808 in 1998, $20,076 in 1997 and $10,437 in 1996; Mr. Koch,
$7,650 in 1998; and Mr. Beckerlegge, $17,750 in 1998, $7,125 in 1997 and
$1,734 in 1996; (c) in the case of Mr. Koch, $56,377 in 1998 and $87,881 in
1997 of moving expenses reimbursement; (d) in the case of Mr. Beckerlegge,
$28,475 in 1997 and $29,747 in 1996 of moving expenses reimbursement; and
(e) in the case of Mr. Rosensteel, $755,000 will be paid in 1999 and 2000
with respect to his retirement.
4 On October 22, 1998 Mr. LeFevre became Acting President and on December
31, 1998, Mr. Rosensteel retired.
5 Mr. Koch became Chief Financial Officer on July 14,1997.
Option Grant Table. The following table sets forth certain information
regarding options to purchase Common Stock granted during 1998 by Liberty
Financial to the executive officers named in the above summary compensation
table.
Option Grants in Last Fiscal Year
Potential
Realizable
Value at
Assumed
Annual
Rates
Percent of Stock
Number of of Total Price
Securities Options Appreciation
Underlying Granted to Exercise of Option
Options Employees Price Per Expiration Terms ($)2
Name Granted (#) in 1997 Share($) on Date 1 5% 10%
John W.
Rosensteel 16,000 2.56% 37.19 5/11/08 374,217 948,341
Paul H.
LeFevre, Jr. 9,000 1.44% 37.19 5/11/08 210,497 533,442
Francis E.
Reinhart 6,500 1.04% 37.19 5/11/08 152,026 385,263
Stewart R.
Morrison 5,000 0.80% 37.19 5/11/08 116,943 296,357
Bernhard
M. Koch 5,000 0.80% 37.19 5/11/08 116,943 296,357
Bernard R.
Beckerlegge 7,000 1.12% 37.19 5/11/08 163,720 414,899
1 Each option becomes exercisable in four equal annual installments
commencing on May 12, 1999, and vests in full upon the death, disability or
retirement (after age 60) of the optionee. All of Mr. Rosensteel's stock
options vested upon his retirement on December 31, 1998.
2 Amounts represent hypothetical gains that could be achieved for the
respective options if such options are not exercised until the end of the
option term. These gains are based on assumed rates of stock price
appreciation of 5% and 10% in accordance with applicable SEC regulations,
compounded annually from the dates the options were granted until their
expiration dates and, therefore, are not intended to forecast possible
future appreciation in the Common Stock. This table does not take into
account changes in the price of the Common Stock after the date of grant.
Option Exercises and Year-End Values Table. The following table sets forth
certain information regarding (i) the 1998 exercises of stock options and
(ii) the stock options held as of December 31, 1998 by the executive
officers named in the above summary compensation table.
Aggregate Option Exercises in Last Fiscal Year and Aggregate Option Values
at Fiscal Year-End
Number of Value of
Shares Securities Unexercised
Acquired Underlying In-the-Money
Upon Value Unexercised Options at
Exercise Realized Options at Year-End
Name (#) ($) Year-End (#) ($)
Exerci- Unexerci- Exerci- Unexerci-
sable sable sable sable
John W.
Rosensteel 50,451 971,740 111,439 ---- 704,108 ----
Paul H.
LeFevre, Jr. 21,500 502,618 41,312 25,310 596,489 61,407
Francis E.
Reinhart 1,250 25,417 22,939 22,812 334,219 50,248
Stewart R.
Morrison ---- ---- 5,064 15,124 25,060 35,370
Bernhard
M. Koch ---- ---- 2,437 12,313 ---- ----
Bernard R.
Beckerlegge ---- ---- 7,875 20,125 26,250 26,250
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 our 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 $ 51,773 $ 69,030 $ 86,288 $ 92,954 $ 99,621
400,000 105,773 141,030 176,288 189,621 202,954
600,000 159,773 213,030 266,288 286,288 306,288
800,000 213,773 285,030 356,288 382,954 409,621
1,000,000 267,773 357,030 446,288 479,621 512,954
1,200,000 321,773 429,030 536,288 576,288 616,288
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 us. The current average compensation covered by the
Pension Plans for each participating executive officer in the above summary
compensation table is as follows: Mr. Rosensteel, $671,218; Mr. LeFevre,
$475,859; Mr. Reinhart, $340,000; Mr. Morrison, $291,490; Mr. Koch
$381,897; and Mr. Beckerlegge, $307,025. 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, 1998, the executive officers named in the above summary
compensation table had the following full credited years of service under
the Pension Plans: Mr. Rosensteel, 8 years; Mr. LeFevre, 19 years; Mr.
Reinhart, 14 years; Mr. Morrison, 8 years; Mr. Koch, 1 years and Mr.
Beckerlegge, 3 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 19, 1999, options
issued and outstanding under the 1990 Plan included 31,688 shares held by
Mr. Rosensteel (all of which were vested), 23,872 shares held by Mr.
LeFevre (all of which were vested); and 14,750 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), 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 fair
market value of the Common Stock and the exercise price of the options.
Compensation of Directors. Our directors who are also employees receive no
compensation in addition to their compensation as employees. 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.
PROPERTIES
As of December 31, 1998, we maintained our executive, administrative and
sales offices in leased facilities. We lease approximately 96,500 square
feet in two facilities in downtown Boston pursuant to leases which expire
in 2008. We also lease approximately 19,800 square feet in a single
facility in Lincoln, Rhode Island and 13,300 square feet in a single
facility in Lake Mary, Florida pursuant to leases that expire in 2007 and
2004, respectively.
LEGAL PROCEEDINGS
We are, from time to time, involved in litigation incidental to our
business. In our opinion, the resolution of such litigation is not expected
to have a material adverse effect on our financial condition or results of
operations.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedules at December 13, 1998 and 1997, and for
each of the three years in the period ended December 31, 1998, as set forth
in their report. We've included our financial statements and schedules in
the prospectus and elsewhere in the registration statement in reliance on
Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
LEGAL MATTERS
Legal matters with respect to our organization, our 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 our Special Counsel.
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, 1998 and 1997, and the related consolidated
statements of income, stockholder's equity, and cash flows for each of the
three years in the period ended December 31, 1998. Our audits also included
the financial statement schedules listed in the Index at Item 14(a). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits 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, 1998 and 1997,
and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998, 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.
/s/Ernst & Young LLP
January 28, 1999
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(in thousands)
December 31,
ASSETS 1998 1997
Cash and investments:
Fixed maturities available for sale
sale (amortized cost: 1998 -
$11,174,697; 1997 - $10,981,618) $11,277,204 $11,246,539
Equity securities (cost: 1998 -
$21,836; 1997 - $21,950) 24,649 40,856
Mortgage loans 55,117 60,662
Policy loans 578,770 554,681
Other invested assets 662,513 440,773
Cash and cash equivalents 719,625 1,162,347
Total cash and investments 13,317,878 13,505,858
Accrued investment income 160,950 165,035
Deferred policy acquisition costs 340,957 232,039
Value of insurance in force 66,636 53,298
Income taxes recoverable 31,909 22,537
Intangible assets 18,082 18,058
Receivable for investments sold 37,936 1,398
Other assets 35,345 14,777
Separate account assets 1,765,538 1,329,189
Total assets $15,775,231 $15,342,189
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy liabilities $12,504,081 $12,086,076
Deferred income taxes 143,596 133,003
Payable for investments purchased
and loaned 240,440 722,116
Other liabilities 28,312 34,015
Separate account liabilities 1,723,205 1,263,958
Total liabilities 14,639,634 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
Retained earnings 600,396 511,796
Accumulated other comprehensive income 26,253 82,277
Total stockholder's equity 1,135,597 1,103,021
Total liabilities and
stockholder's equity $15,775,231 $15,342,189
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENT
(in thousands)
Year ended December 31,
1998 1997 1996
Revenues:
Net investment income $ 815,226 $ 847,048 $ 790,365
Interest credited to
policyholders (562,238) (594,084) (572,719)
Investment spread 252,988 252,964 217,646
Net realized investment
gains 785 24,723 5,509
Fee income:
Surrender charges 17,487 15,968 14,934
Separate account fees 20,589 17,124 15,987
Management fees 4,760 3,261 2,613
Total fee income 42,836 36,353 33,534
Expenses:
Policy benefits (2,880) (3,924) (3,477)
Operating expenses (53,544) (49,941) (43,815)
Amortization of deferred
policy acquisition costs (69,172) (75,906) (60,225)
Amortization of value of
insurance in force (8,238) (10,490) (10,196)
Amortization of intangible
Assets (1,256) (1,128) (1,130)
Total expenses (135,090) (141,389) (118,843)
Income before income taxes 161,519 172,651 137,846
Income taxes (52,919) (59,090) (47,222)
Net income $ 108,600 $ 113,561 $ 90,624
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(in thousands)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income Total
Balance,
January 1, 1996 $3,015 $505,933 $307,611 $ 85,772 $ 902,331
Comprehensive income
Net income 90,624 - 90,624
Other comprehensive
income, net of tax
Net unrealized
investment losses - (12,173) (12,173)
Comprehensive income 78,451
Balance,
December 31, 1996 3,015 505,933 398,235 73,599 980,782
Comprehensive income
Net income 113,561 - 113,561
Other comprehensive
income, net of tax
Net unrealized
investment gains 8,678 8,678
Comprehensive income 122,239
Balance,
December 31, 1997 3,015 505,933 511,796 82,277 1,103,021
Comprehensive income
Net income 108,600 - 108,600
Other comprehensive
income, net of tax
Net unrealized
investment losses - (56,024) (56,024)
Comprehensive income 52,576
Dividends paid (20,000) - (20,000)
Balance,
December 31, 1998 $3,015 $505,933 $600,396 $ 26,253 $1,135,597
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year ended December 31
1998 1997 1996
Cash flows from operating
activities:
Net income $ 108,600 $ 113,561 $ 90,624
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Interest credited to
policyholders 562,238 594,084 572,719
Net realized investment
gains (785) (24,723) (5,509)
Amortization of value of
insurance in force and
intangible assets 9,494 11,618 11,326
Net amortization on
investments 75,418 29,862 (29,088)
Change in deferred policy
acquisition costs (33,687) (10,252) (24,403)
Change in current and
deferred income taxes 1,112 71,919 7,263
Net change in other assets
and liabilities (53,786) 7,959 (41,012)
Net cash provided by
operating activities 668,604 794,028 581,920
Cash flows from investing
activities:
Investments purchased -
available for sale (6,789,048) (4,548,374) (4,365,399)
Investments sold -
available for sale 5,405,955 2,563,465 1,714,023
Investments matured -
available for sale 1,273,478 1,531,693 1,387,664
Increase in policy loans (24,089) (21,888) (34,467)
Decrease in mortgage loans 5,545 6,343 7,500
Other invested assets sold
(purchased), net 21,395 (48,921) (130,087)
Purchases of property and
Equipment, net (4,953) (6,213) (1,622)
Value of business acquired,
net of cash (3,999) - (30,865)
Net cash used in
investing activities (115,716) (523,895) (1,453,253)
Cash flows from financing
activities:
Withdrawals from policyholder
accounts (1,690,035) (1,320,837) (1,154,087)
Deposits to policyholder
accounts 1,224,991 950,472 2,134,504
Dividends paid (20,000) - -
Securities lending (510,566) 495,194 (119,083)
Net cash (used in) provided
by financing activities (995,610) 124,829 861,334
Change in cash and
cash equivalents (442,722) 394,962 (9,999)
Cash and cash equivalents
at beginning of year 1,162,347 767,385 777,384
Cash and cash equivalents at
end of year $ 719,625 $ 1,162,347 $ 767,385
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
December 31, 1998
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 savings market. These annuity products are sold through a wide
ranging network of banks, agents, and security dealers throughout the
United States.
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"), Keyport Benefit Life Insurance Company
("Keyport Benefit"), Liberty Advisory Services Corp., 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 accumulated other
comprehensive income. 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,
net of adjustments for amortization of deferred policy acquisition costs
and value of insurance in force.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
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 $126.8 million and $117.3 million at December 31, 1998
and 1997, respectively.
Derivatives
The Company uses interest rate swap and cap agreements to manage its
interest rate risk and call options and futures 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.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
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, net
of tax, included in accumulated other comprehensive income.
Premiums paid on call options are amortized into 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. Futures contracts are carried at fair value and
require daily cash settlement. Changes in the fair value of futures that
qualify as hedges are deferred and recognized as an adjustment to the
hedged asset or liability. Futures that do not qualify as hedges are
carried at fair value; changes in value are immediately recognized in
income.
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
accumulated other comprehensive income. Deferred policy acquisition costs
were decreased by $56.0 million and $126.9 million at December 31, 1998 and
1997, respectively, 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 10 years for
annuities and 25 years for life insurance. Interest is accrued on the
unamortized balance at the contract rate of 5.25%, 5.34% and 5.30% for the
years ended December 31, 1998, 1997 and 1996, 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 accumulated other
comprehensive income. Value of insurance in force was decreased by $10.3
million and $31.8 million at December 31, 1998 and 1997, respectively,
relating to this adjustment.
Estimated net amortization expense of the value of insurance in force as of
December 31, 1998 is as follows (in thousands): 1999 - $11,013; 2000 -
$10,043; 2001 - $8,823; 2002 - $7,803; 2003 - $6,975 and thereafter -
$32,252.
Intangible Assets
Intangible assets consist of goodwill arising from business combinations
accounted for as a purchase. Amortization is provided on a straight-line
basis ranging from ten to 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, 1998 and 1997, the Company also classified $42.3 million
and $65.2 million, respectively, of fixed maturities and investments in
certain mutual funds sponsored by affiliates of the Company as separate
account assets.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
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 Statement of Financial Accounting Standards ("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. Keyport Benefit may also join
with Keyport in a consolidated income tax 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 Changes
As of January 1, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components; however,
the adoption of SFAS 130 had no impact on the Company's net income or
stockholder's equity. SFAS 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 SFAS 130.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131").
SFAS 131 establishes standards for the reporting of financial information
from operating segments in annual and interim financial statements. SFAS
131 requires that financial information be reported on the basis that it is
reported internally for evaluating segment performance and deciding how to
allocate resources to segments. The adoption of SFAS 131 did not have any
effect on the Company's financial statements as management of the Company
considers its operations to be one segment.
Recent Accounting Pronouncement
In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") was issued. SFAS 133 standardizes 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
is effective for fiscal years beginning after June 15, 1999. Earlier
adoption is permitted. Upon adoption, the Company will be required to
record a cumulative effect adjustment to reflect this accounting change.
The Company has not completed its analysis and evaluation of the
requirements and the impact of this statement.
2. 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. Subsequent to the acquisition, the Company made a capital
contribution to Keyport Benefit in the amount of $7.5 million.
In August 1996, the Company 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.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
3. Investments
Fixed Maturities
As of December 31, 1998 and 1997, 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, 1998 Cost Gains Losses Fair Value
U.S. Treasury
securities $ 90,818 $ 3,039 $ (192) $ 93,665
Mortgage backed
securities of U.S.
government
corporations and
agencies 940,075 28,404 (2,894) 965,585
Debt securities
issued by foreign
governments 251,088 9,422 (16,224) 244,286
Corporate securities 5,396,278 185,132 (156,327) 5,425,083
Other mortgage
backed securities 2,286,585 65,158 (19,546) 2,332,197
Asset backed securities 1,941,966 25,955 (16,521) 1,951,400
Senior secured loans 267,887 1,079 (3,978) 264,988
Total fixed
maturities $11,174,697 $ 318,189 $ (215,682) $11,277,204
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
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
At December 31, 1998 and 1997, gross unrealized gains on equity securities,
interest rate cap agreements and investments in separate accounts
aggregated $7.8 million and $27.4 million, and gross unrealized losses
aggregated $3.6 million and $6.9 million, respectively.
Net unrealized investment gains (losses) on securities included in other
comprehensive income in 1998, 1997 and 1996 include: gross unrealized
gains (losses) on securities of $(182.2) million, $73.7 million and $(64.4)
million, respectively; reclassification adjustments for realized investment
(gains) losses in net income of $3.5 million, $(31.2) million and $(7.2)
million, respectively; and adjustments to deferred policy acquisition costs
and value of insurance in force of $92.5 million, $(29.1) million and $54.2
million, respectively. The above amounts are shown before income tax
expense (benefit) of $(30.2) million, $4.7 million and $(5.2) million,
respectively.
Deferred tax liabilities for the Company's net unrealized investment gains
and losses, net of adjustment to deferred policy acquisition costs and
value of insurance in force, were $14.1 million and $44.3 million at
December 31, 1998 and 1997, 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, 1998.
At December 31, 1998, the Company did not have a material concentration of
financial instruments in a single investee, industry or geographic
location.
At December 31, 1998, $1.1 billion of fixed maturities were below
investment grade.
Contractual Maturities
The amortized cost and fair value of fixed maturities by contractual
maturity as of December 31, 1998 are as follows (in thousands):
Amortized Fair
December 31, 1998 Cost Value
Due in one year or less $ 334,901 $ 335,179
Due after one year through five years 2,998,421 3,005,087
Due after five years through ten years 1,638,535 1,656,238
Due after ten years 1,034,214 1,031,518
6,006,071 6,028,022
Mortgage and asset backed securities 5,168,626 5,249,182
$11,174,697 $11,277,204
Actual maturities may differ because borrowers may have the right to call
or prepay obligations.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Net Investment Income
Net investment income is summarized as follows (in thousands):
Year Ended December 31, 1998 1997 1996
Fixed maturities $ 810,521 $ 811,688 $ 737,372
Mortgage loans and other
invested assets 18,238 27,833 11,422
Policy loans 33,251 32,224 30,188
Equity securities 4,369 5,443 4,494
Cash and cash equivalents 38,269 34,449 36,138
Gross investment income 904,648 911,637 819,614
Investment expenses (17,342) (15,311) (12,708)
Amortization of options and
interest rate caps (72,080) (49,278) (16,541)
Net investment income $ 815,226 $ 847,048 $ 790,365
As of December 31, 1998, the carrying value of fixed maturity investments
that was non-income producing was $30.0 million. (There were no non-income
producing fixed maturity investments as of December 31, 1997.)
Net Realized Investment Gains (Losses)
Net realized investment gains (losses) are summarized as follows (in
thousands):
Year Ended December 31, 1998 1997 1996
Fixed maturities available for sale:
Gross gains $ 72,119 $ 42,464 $ 24,304
Gross losses (59,730) (19,146) (17,814)
Other than temporary declines in value (28,322) - -
Equity securities 14,754 (51) 1,492
Investments in separate accounts 93 7,912 (576)
Interest rate caps (2,397) - -
Other - - (208)
Gross realized investment (losses) gains (3,483) 31,179 7,198
Amortization adjustments of deferred
policy acquisition costs and value
of insurance inforce 4,268 (6,456) (1,689)
Net realized investment gains $ 785 $ 24,723 $ 5,509
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Proceeds from sales of fixed maturities available for sale were $5.4
billion, $2.6 billion and $1.7 billion, for the years ended December 31,
1998, 1997 and 1996, respectively.
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 1998 1997 1998 1998 1997 1997
Interest
rate swaps $2,369,000 $2,575,000 $(71,163) $(71,163) $(42,123) $(42,123)
Interest
rate cap
agreements 250,000 250,000 - - 102 102
S&P 500
Index call
Options - - 535,628 607,022 323,343 345,294
S&P 500 Index
Futures - - (604) (604) 752 752
The interest rate swap agreements expire in 1999 through 2005. The interest
rate cap agreements expire in 1999 through 2000. The call options' and
futures' maturities range from 1999 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 and futures contracts are used
for purposes of hedging the Company's equity-indexed products. At December
31, 1998 and 1997, the Company had approximately $156.4 million and $155.0
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 and futures contracts
are based on quoted market prices.
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. Futures
contracts trade on organized exchanges and, therefore, have minimal credit
risk.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
5. Income Taxes
Income tax expense (benefit) is summarized as follows (in thousands):
Year Ended December 31,
1998 1997 1996
Current $ 12,150 $ (48,477) $ 52,369
Deferred 40,769 107,567 (5,147)
$ 52,919 $ 59,090 $ 47,222
A reconciliation of income tax expense with the expected federal income tax
expense computed at the applicable federal income tax rate of 35% is as
follows (in thousands):
Year Ended December 31,
1998 1997 1996
Expected income tax expense $ 56,532 $ 60,427 $ 48,246
Increase (decrease) in income
taxes resulting from:
Nontaxable investment income (2,152) (1,416) (1,216)
Amortization of goodwill 440 396 396
Other, net (1,901) (317) (204)
Income tax expense $ 52,919 $ 59,090 $ 47,222
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
5. Income Taxes (continued)
The components of deferred federal income taxes are as follows (in
thousands):
December 31,
1998 1997
Deferred tax assets:
Policy liabilities $ 107,433 $ 124,250
Guaranty fund expense 2,115 2,795
Net operating loss carryforwards 1,780 2,111
Deferred fees 4,379 -
Other 1,318 1,205
Total deferred tax assets 117,025 130,361
Deferred tax liabilities:
Deferred policy acquisition costs (92,533) (56,331)
Value of insurance in force and
intangible assets (23,322) (18,022)
Excess of book over tax basis of
Investments (135,364) (178,697)
Separate account asset (478) (645)
Deferred loss on interest rate swaps (805) (1,792)
Other (8,119) (7,877)
Total deferred tax liabilities (260,621) (263,364)
Net deferred tax liability $ (143,596) $ (133,003)
As of December 31, 1998, the Company had approximately $5.1 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 paid were $21.5 million in 1998 and $46.9 million in 1996,
while income taxes refunded were $8.0 million in 1997.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
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. 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.
Plan assets consist principally of investments in certain mutual funds
sponsored by an affiliated company.
The following table sets forth the Plans' funded status (in thousands).
December 31,
1998 1997
Change in benefit obligation
Benefit obligation at beginning of year $ 12,594 $ 10,559
Service cost 921 804
Interest cost 960 829
Actuarial loss 1,101 606
Benefits paid (294) (204)
Benefit obligation at end of year 15,282 12,594
Change in plan assets
Fair value of plan assets at beginning of year 7,801 6,399
Actual return on plan assets 593 901
Employer contribution 290 705
Benefits paid (294) (204)
Fair value of plan assets as end of year 8,390 7,801
Projected benefit obligation in excess of the
Plans' assets 6,892 4,793
Unrecognized net actuarial loss (2,814) (1,727)
Prior service cost not yet recognized in net
periodic pension cost (138) (160)
Accrued pension cost $ 3,940 $ 2,906
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
6. Retirement Plans (continued)
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,
1998 1997 1996
Pension cost includes the
following components:
Service cost benefits earned
during the period $ 921 $ 804 $ 717
Interest cost on projected
benefit obligation 960 829 725
Expected return on Plan assets (610) (525) (468)
Net amortization and deferred
amounts 53 23 93
Total net periodic pension cost $ 1,324 $ 1,131 $ 1,067
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:
Discount rate 6.75% 7.25% 7.50%
Rate of increase in compensation level 4.75% 5.00% 5.25%
Expected long-term rate of return on assets 9.00% 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, 1998, 1997 and 1996,
expenses related to these defined contribution plans totaled (in thousands)
$853, $702 and $590, respectively.
7. Fair Value of Financial Instruments
The following discussion outlines the methodologies and assumptions used to
determine the estimated 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 estimated fair value of financial instruments:
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
7. Fair Value of Financial Instruments (continued)
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, December 31,
1998 1997
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Fixed maturity
securities $11,277,204 $11,277,204 $11,246,539 $11,246,539
Equity securities 24,649 24,649 40,856 40,856
Mortgage loans 55,117 56,640 60,662 63,007
Policy loans 578,770 578,770 554,681 554,681
Other invested
Assets 662,513 730,394 440,773 462,724
Cash and cash
Equivalents 719,625 719,625 1,162,347 1,162,347
Liabilities:
Policy liabilities 12,504,081 11,647,558 12,086,076 11,366,534
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
8. Quarterly Financial Data (unaudited)
The following is a tabulation of the unaudited quarterly results of
operations (in thousands):
1998 Quarters
March 31 June 30 September 30 December 31
Investment income $ 206,075 $ 200,955 $ 201,158 $ 207,038
Interest credited to
policyholders (142,136) (140,198) (143,271) (136,633)
Investment spread 63,939 60,757 57,887 70,405
Net realized investment
gains (losses) 818 (2,483) 4,112 (1,662)
Fee income 9,877 12,400 10,505 10,054
Pretax income 37,870 36,627 44,344 42,678
Net income 26,049 24,092 29,779 28,680
1997 Quarters
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
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,
1998 1997 1996
Statutory surplus $ 790,935 $ 702,610 $ 567,735
Statutory net income 95,422 107,130 40,237
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
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, 1998, 1997
and 1996. 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 $7.1 million for the year ended December 31, 1998 and $7.8 million for
the years ended December 31, 1997 and 1996. In addition, certain
affiliated companies distribute the Company's products and were paid $8.6
million, $7.2 million and $6.4 million by the Company for the years ended
December 31, 1998, 1997, and 1996, respectively.
Keyport had 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 had
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, 1998 and 1997, the amounts outstanding were $39.5 million. In
January 1999, Liberty Mutual retired the mortgage notes with a payment of
$39.7 million for all outstanding principal and interest.
Dividend payments to Liberty Financial from the Company are governed by
insurance laws that 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, 1998, the maximum amount of dividends
(based on statutory surplus and statutory net gains from operations) which
may be paid by Keyport was approximately $59.1 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 $4,721,
$3,408 and $3,213 for the years ended December 31, 1998, 1997 and 1996,
respectively. For each of the next five years, and in the aggregate, as of
December 31, 1998, the following are the minimum future rental payments
under noncancelable operating leases having remaining terms in excess of
one year (in thousands):
Year Payments
1999 $ 5,354
2000 5,311
2001 4,487
2002 4,342
2003 4,351
Thereafter 16,752
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
11. Commitments and Contingencies (continued)
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 1998, 1997 and 1996, the Company was assessed $3.2 million, $5.9
million, and $10.0 million, respectively. During 1998, 1997 and 1996, the
Company recorded $1.2 million, $1.0 million, and $1.0 million,
respectively, of provisions for state guaranty fund association expense. At
December 31, 1998 and 1997, the reserve for such assessments was $6.0
million and $8.0 million, respectively.
12. Year 2000 (Unaudited)
The Company relies significantly on computer systems and applications in
its operations. Many of these systems are not presently Year 2000
compliant. These systems use programs that were designed and developed
without considering the impact of the upcoming change in the century. Any
of the Company's computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. The
Company's business, financial condition and results of operations could be
materially and adversely affected by the failure of the Company's systems
and applications (and those operated by third parties interfacing with the
Company's systems and applications) to properly operate or manage these
dates.
In addressing the Year 2000 issue, the Company has completed an inventory
of its computer programs and assessed its Year 2000 readiness. The
Company's computer programs include internally developed programs, third-
party purchased programs and third-party custom developed programs. For
programs which were identified as not being Year 2000 ready, the Company
has implemented a remedial plan which includes repairing or replacing the
programs and appropriate testing for Year 2000. The remediation plan is
substantially complete and is currently in the final testing phase. The
Company also identified its non-information technology systems with respect
to Year 2000 issues. The Company initiated remediation efforts in this area
and expects to complete this phase during 1999.
In addition, the Company has initiated communication with significant
financial institutions, distributors, suppliers and others with which it
does business to determine the extent to which the Company's systems are
vulnerable by the failure of others to remediate their own Year 2000
issues. The Company has received feedback from such parties and is in the
process of independently confirming information received from other parties
with respect to their year 2000 issues.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
12. Year 2000 (Unaudited) (continued)
The Company is developing, and will continue to develop, contingency plans
for dealing with any adverse effects that become likely in the event the
Company's remediation plans are not successful or third parties fail to
remediate their own Year 2000 issues. The Company expects contingency
planning to be substantially complete by June 1999. If necessary
modifications and conversions are not made, or are not timely completed, or
if the systems of the companies on which the Company's interface system
relies are not timely converted, the Year 2000 issues could have a material
impact on the financial condition and results of operations of the Company.
However, the Company believes that with modifications to existing software
and conversions to new software, the Year 2000 issue will not pose
significant operational problems for its computer systems.
APPENDIX A
TERM INTEREST ILLUSTRATIONS
Below are illustrations of how interest is credited to an Interest Account
during a ten-year Term and an Indexed Account during a five-year Term. The
illustrations also apply to a shorter Term if values for inapplicable years
are ignored. We have made certain assumptions with respect to the
illustrations, as indicated.
Note: the illustrations do not assume any surrender 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 Index Increases are
illustrative only and are not intended to predict future guaranteed
interest rates, rate factors, 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, we do not guarantee 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: $106,000.00
Year 2: $112,360.00
Year 3: $119,101.60
Year 4: $126,247.70
Year 5: $133,822.56
Year 6: $141,851.91
Year 7: $150,363.03
Year 8: $159,384.81
Year 9: $168,947.90
Year 10: $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 the following two parts:
(1) Part 1 = the proportionate credit for any increase 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
(2) Part 2 = the proportionate credit for any increase(s) 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 the values in the formulas are as follows:
A = the Participation Rate for the Term
B = 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 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]
C = 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 = the Index value at the beginning of the Term
E = the number of completed Account Years in the Term
F = the total number of Account Years in the Term
G = 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
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: (i) "E" in the formula for Part 1 is equal to "F", and
(ii) "(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, we prepared the following three illustrations
using different assumptions as to changes in the index value during the
course of the term. Note: 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. We are not making any 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;
SURRENDER CHARGE CALCULATIONS
Market Value Adjustment Formula
The applicable surrender or transfer value is multiplied by the Market
Value Adjustment Factor to arrive at the Market Value Adjustment. The
formula that is used to determine the Market Value Adjustment factor is:
[(1+a)/(1+b)](n/12) - 1
where the values in the formula is as follows:
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, multiplied by 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", we use 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,
we instead use the weekly Series first published after the prior
Determination Date. To determine "b", we use 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, we
instead use 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.
Illustrations and Surrender Charge Calculations
Illustration 1:
Assume that you purchased a Certificate for $10,000 and allocated your
interest to an Interest Account with a five-year Term and a Guaranteed
Interest Rate of 6%. Exactly two years later, your 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, multiplied by 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, 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.
Illustration 2:
Given the same circumstances as in Illustration 1, but using a 3-year
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.
Illustration 3:
Given the same circumstances as in Illustration 2, but assuming (i) an
Indexed Account instead of an Interest Account with an Account Value of
$11,236, (ii) Index Increases credited in the prior year equal to
$1,236.00, and (iii) 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
Tax Rate for Tax Rate For
State Non-Tax Qualified Tax-Qualified
Contracts/Certificates Contracts/Certificates
California 2.35% 0.50%
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 528.5/99
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Not Applicable
Item 14. Indemnification of Directors and Officers
The following provisions regarding the Indemnification of
Directors and Officers of the Registrant ("Keyport") are
applicable:
By-Laws, Article IX
Section 6 - Indemnification of Directors and Officers
Any person who at any time serves or shall serve as a Director or
Officer of the Corporation whether or not in office at the time
shall be indemnified or reimbursed against and for any and all
claims and liabilities to which he may be or become subject by
reason of such service and against and for any and all expenses
necessarily incurred or amounts paid in connection with the
defense or reasonable settlement or any legal or administrative
proceedings to which he is made a party by reason of such
service, except in relation to matters to which he shall be
finally adjudged to be liable of negligence or misconduct in the
performance of his official duties. Such a right of
indemnification and reimbursement shall also extend to the
personal representatives of any such person. Such rights shall
not be deemed exclusive of any other rights to which any such
Director, officer or his personal representatives may be
entitled, under any other by-law or any agreement or vote of the
stockholders or Directors or otherwise.
Consistent with such By-Laws, Keyport has obtained insurance from
Liberty Mutual Insurance Company for its directors and officers
that supplements the indemnification provisions of the By-Laws.
Item 15. Recent Sales of Unregistered Securities
Not applicable
Item 16. Exhibits and Financial Statement Schedules
Exhibits
* 1 Principal Underwriters Agreement
*** 3(a) Articles of Incorporation
*** 3(b) By-Laws
* 4(a) Group Annuity Contract
* 4(b) Group Annuity Certificate
* 4(c) Group Annuity Application
* 4(d) Group Annuity Certificate Application
* 4(e) Endorsements
(i) Tax-Sheltered Annuity (TSA)
(ii) Corporate/Keogh 401(a) Plan
(iii) Individual Retirement Annuity (IRA)
(iv) Qualified Plan Endorsement
** 5 Opinion regarding Legality
21 Subsidiaries of the Registrant
23(a) Consent of Counsel
23(b) Consents of Independent Auditors
**** 24 Powers of Attorney
27 Financial Data Schedule
Financial Statements
28(a) Schedule I
28(b) Schedule III
* Incorporated by reference to Registration Statement (File No. 333-1783)
filed on or about March 18, 1996.
** Incorporated by reference to Pre-Effective Amendment No 1 to
Registration Statement on Form S-1, filed on August 2, 1996 (File No. 333-
1783).
*** Incorporated by Reference to Registration Statement on Form N-4, filed
on or about February 16, 1996 (File No. 333-01043; 811-07543).
**** Incorporated by reference to Post-Effective Amendment No. 10 to the
Registration Statement on Form N-4 (File No. 333-1043) filed on or about
April 24, 1998.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a)
or Section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Boston, State of Massachusetts on April 14, 1999.
KEYPORT LIFE INSURANCE COMPANY
BY: /s/ Paul H. LeFevre, Jr.
Paul H. LeFevre, Jr.
Acting President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and the dates indicated.
Signature Title Date
(i) Principal Executive Officer
/s/ Paul H. LeFevre, Jr. Principal Executive Officer 04/14/99
Paul H. LeFevre, Jr.
(ii) Principal Financial Officer
/s/ Bernhard M. Koch* Senior Vice President and
Bernhard M. Koch Chief Financial Officer
(iii) Majority of Board of Directors
/s/ Kenneth R. Leibler* *By: /s/James J. Klopper
Kenneth R. Leibler James J. Klopper
Attorney-in-fact
/s/ Frederick Lippitt * April 14, 1999
Frederick Lippitt
/s/ Robert C. Nyman*
Robert C. Nyman
* James J. Klopper has signed this document on the indicated date on
behalf of each of the above Directors and Officers of the Registrant
pursuant to powers of attorney duly executed by such persons and
incorporated by reference to Post-Effective Amendment No. 10 to the
Registration Statement on Form N-4 (File No. 333-1043) filed on or
about
April 24, 1998.