File No. 333-13609
Rule No. 424(b)(3)
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Prospectus for
Keyport Life Insurance Company
125 High Street, Boston, Massachusetts 02110
Group and Individual Flexible Premium
Annuity Contracts
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This Prospectus describes interests in group and individual deferred
annuity contracts.
The Contracts
Keyport Life Insurance Company designed these contracts to provide
retirement benefits for eligible individuals such as participants in
certain trusts, plans or collective groups of employees. As required in
certain states, the contract may be offered as an individual contract.
The contracts may be sold through banks or other depository institutions;
however, they are not insured by the FDIC and are subject to certain
investment risks including loss of principal amount invested. See page 16.
The General Account
The contracts are sold through our General Account. The contracts feature
two types of owner sub-accounts: an interest sub-account and index sub-
account. Each type may have varying durations. You may direct initial
premium and subsequent premium payments to your sub-accounts. Index sub-
accounts are increased or decreased by reference to Guaranteed Interest
Rate Factors, which are applied to changes in the S&P 500 Index using a
formula set forth in the contract. Interest is declared for interest sub-
accounts at rates declared the first day of calendar month and guaranteed
for that month.
Contract Facts and Features
o The initial minimum premium payment is $5,000.
o You may, subject to certain restrictions, make partial and total
surrenders.
o You may transfer values between Interest Sub-accounts and Index Sub-
accounts at certain specified times.
o The contract provides for a death benefit if the owner dies before the
income date or if the annuitant dies before the income date and the
owner is not a natural person.
o You will receive an annual report showing values for each Sub-account.
These securities have not been approved or disapproved by the Securities
and Exchange Commission nor has the Commission passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a
criminal offense. This prospectus sets forth information a prospective
contract owner should know before purchasing a contract. This prospectus
should be retained 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 Life
Insurance Company to provide information or make representations other than
those contained in this Prospectus. Such unauthorized information should
not be relied upon. Surrender of these securities at times other than the
end of a term could result in the receipt of less than the contract owners
premium payment(s).
We will 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 April 30, 1999.
TABLE OF CONTENTS
Page
Summary of Contract Features.....................................3
Definitions......................................................7
Description of Contracts and Certificates........................9
A. Ownership....................................................9
B. Enrollment Form and Premium Payments.........................9
C. Accumulation Period.........................................10
1. General..................................................10
2. Interest Sub-account.....................................10
3. Index Sub-accounts.......................................11
4. Risk Considerations......................................16
5. Surrenders...............................................16
6. Dollar Cost Averaging Programs...........................17
7. Transfer of Values.......................................18
8. Premium Taxes............................................19
9. Death Provisions.........................................19
D. Annuity Payment Provisions..................................21
1. Annuity Benefits.........................................21
2. The Income Date and Form of Annuity......................21
3. Change of Annuity Option.................................21
4. Annuity Options..........................................22
5. Frequency and Amount of Payments.........................22
6. Proof of Age, Sex, and Survival of Annuitant.............22
Investments by Keyport..........................................23
Amendment of Certificate........................................23
Assignment of Certificate.......................................24
Distribution of Certificate ....................................24
Tax Considerations..............................................24
A. General.....................................................24
B. Taxation of Keyport.........................................25
C. Taxation of Annuities in General............................25
1. General..................................................25
2. Surrender, Assignments, and Gifts........................25
3. Annuity Payments.........................................25
4. Penalty Tax..............................................26
5. Income Tax Withholding...................................26
6. Section 1035 Exchanges...................................26
D. Qualified Plans.............................................26
1. Tax-Sheltered Annuities..................................27
2. Individual Retirement Annuities..........................27
3. Corporate Pension and Profit-Sharing Plans...............27
The Company.....................................................28
A. Business....................................................28
General..................................................28
B. Selected Financial Data.....................................28
C. Management's Discussion and Analysis of Results
of Operations and Financial Condition....................29
1. Results of Operations...................................29
2. Financial Condition.....................................31
3. Market Risk.............................................32
4. Derivatives.............................................34
5. Liquidity.and Capital Resources.........................35
6. Year 2000...............................................36
7. Effects of Inflation....................................37
8. Forward-Looking Statements...............................37
D. General Account Investments................................38
TABLE OF CONTENTS (continued)
Page
E. Competition................................................38
F. Employees..................................................39
G. Regulation.................................................39
Company Management..............................................41
Executive Compensation Tables and Information...................44
Properties......................................................48
Legal Proceedings...............................................48
Experts.........................................................48
Legal Matters...................................................48
Financial Statements............................................49
Appendix A (Formula for Index Increases and/or Decreases,
and Illustration of Index Increases and Index Decreases)......69
Appendix B (Calculation of the Death Benefit)...................73
Appendix C (Schedule of State Premium Taxes)....................74
Appendix D (Telephone Instructions).............................75
Summary of Contract Features
Because this is a summary, it does not contain all of the information that
may be important to you. You should read the entire prospectus before
deciding to invest.
Types of Certificates - Allocated and Non-Allocated
Allocated and Non-Allocated Certificates are issued under Group Contracts.
With an Allocated Certificate, each individual's interest is separately
accounted for in a specific account established for that individual.
Participants in Non-Qualified plans and certain Qualified Plans will be
issued an Allocated Certificate evidencing interest in an Allocated
Contract and will have a 100% vested interest in all values credited to the
participant's Account.
Under certain Certificates issued with respect to Qualified Plans ("Non-
Allocated Certificates"), however, a participant's interest may be vested
in the Plan in which they are participating rather than in a Certificate.
In such cases, the Certificate will usually be owned by the Trustee(s) of
the Plan, and a single Account will be established and held on behalf of
all participants in the Plan on a non-allocated basis. Each Account is
further accounted for by establishing Sub-accounts.
Unless otherwise noted or the context so requires, all references to
"Certificates" include Group Contracts, Allocated and Non-Allocated
Certificates, Certificates issued thereunder, and Individual Contracts.
Purchase of the Certificate
The minimum Initial Premium is $5,000 for a participant under an Allocated
Certificate. We must approve an Initial Premium of $500,000 or more. The
Initial Premium must accompany the Certificate application for a
participant under an Allocated Certificate but it need not accompany a
Group Contract Application. The Initial Premium is the only premium
payment required with respect to a particular Certificate. You may
establish an Index Sub-account with a minimum premium payment, transfer, or
Indexed Value upon renewal of $1,000. Eligible individuals may make
Subsequent Premium payments of at least $1,000, however, we will not accept
any payment within 10 years of the Income Date. (See "Enrollment Form and
Premium Payments", page 9.)
Premium payments credited to a Certificate Owner's Account become part of
our General Account assets. We own the General Account assets and intend
to invest these payment amounts in U.S. Government securities and certain
commercial debt securities having maturities generally matching the
applicable Terms. We may also invest a portion of our assets in various
instruments, including equity options, futures, forwards, and other
instruments based on the S&P 500 Index to hedge our obligations with
respect to Index Sub-accounts. We may 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 23.)
You may allocate Initial Premium and Subsequent Premium payments to two
types of Sub-accounts; Interest Sub-accounts, and Index Sub-account(s) of
varying lengths. The Sub-accounts are the method used to keep track of
your values accrued through the crediting of a declared interest rate on an
Interest Sub-account, or accrued through the application of Index Increases
or Index Decreases, and End-of-Term Adjustments on an Index Sub-account.
You may establish only one Interest Sub-account to which all premium
payments and transfers may be allocated. You may establish multiple Index
Sub-accounts because each premium payment and transfer that is allocated to
an Index Sub-account establishes a new Index Sub-account.
The Interest Sub-account
We credit interest to an Interest Sub-account at an interest rate we
declare on the first day of each calendar month and guaranteed for that
month (the "Declared Rate"). The Declared Rate will not be less than an
effective annual rate of 3%. An Interest Sub-account has an Accumulated
Value and a Surrender Value which we use to determine death benefits,
transfer and surrender amounts, and annuity values. (See "Interest Sub-
account", page 10.)
The Index Sub-accounts
Index Sub-accounts have both an Indexed Value and a Surrender Value.
Interest credited to the Indexed Value ("Index Increases") or decreases in
Indexed Value ("Index Decreases") may be subject to a minimum ("Floor") and
a maximum ("Cap"). As long as there is a Floor and it is zero or greater,
there will never be any Index Decreases. We calculate Index Increases or
Index Decreases by reference to Guaranteed Interest Rate Factors, set and
guaranteed at the beginning of the Term for the duration of the Term, which
we apply to changes in the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500 Index") using a formula set forth in the Certificate. If
the publication of the S&P 500 Index is discontinued or the calculation of
the S&P 500 Index is changed substantially, we will substitute a suitable
index.
Any Index Increases are based on a percentage (Participation Rate) of the
percentage increase in the S&P 500 Index since the beginning of the Term.
We calculate and credit Index Increases proportionately over the selected
Term on each Index Sub-account Anniversary. The total Index Increases that
we may apply to an Index Sub-account during a Term are subject to a Cap and
Floor, both of which we set and guarantee at the beginning of the Term.
(See "Index Sub-accounts", page 11.)
If there is no Floor or the Floor is less than zero, and the S&P 500 Index
at the first Sub-account Anniversary is less than it was at the beginning
of the Term, we apply an Index Decrease to the Index Value of the Sub-
account. If there is no Floor or the Floor is less than zero, and the S&P
500 Index at the first Sub-account Anniversary is equal to or higher than
it was at the beginning of the Term, we will never apply an Index Decrease
to the Indexed Value during that Term. We calculate Index Decreases using
the same formula as we do to calculate Index Increases except that the
Floor may limit the amount of any decrease. The Participation Rate
determines the percentage of the decrease which we apply to the Indexed
Value. We apply that decrease applied proportionately over the Selected
Term. If there are subsequent Index Increases, we first offset those
increases by the amount of the Index Decrease applied on each Sub-account
Anniversary. If on a subsequent Sub-account Anniversary the S&P 500 Index
value exceeds the S&P 500 Index value at the beginning of the Term, we no
longer apply Index Decreases proportionately to the Indexed Value over the
remaining Term and we credit only Index Increases going forward.
The amount of Index Increases we credit to an Index Sub-account may be more
or less than the amount of interest we credit to an Interest Sub-account.
Index Sub-accounts also provide for a minimum value called the Surrender
Value to be used in certain circumstances, instead of the Indexed Value, to
calculate benefits. The Surrender Value of each Index Sub-account in its
Initial Term is equal to:
o 90% of the premium payment allocated to that Index Sub-account or
o 100% of the amount transferred (See "Transfer of Values", page
18); plus
o any Sub-account Anniversary Adjustment in Surrender Value (as
described below); less
o any partial surrender.
We credit interest to the net amount at an annual effective guaranteed rate
of 3% per year. On each Sub-account Anniversary, we credit additional
interest (i.e., a "Sub-account Anniversary Adjustment in Surrender Value")
to an Index Sub-account's Surrender Value, so that the total interest
credited to the Surrender Value during a Term will at least be equal to the
Index Increases credited to that Index Sub-account.
The amount we use to calculate death benefits, surrender amounts, and
annuity value of an Index Sub-account will never be less than the Surrender
Value. If at the end of a Sub-account Term the Indexed Value is less than
the Surrender Value of that Sub-account, we will credit interest to the Sub-
account's Indexed Value so that it equals the Surrender Value. (See
"Surrender Value", page 9, "Index Sub-accounts," page 11).
We may offer initial and subsequent Terms of one to ten years. We may
discontinue offering Terms of certain lengths or offer Terms of other
lengths from time to time. The Terms we offer for Initial Terms may differ
from the Terms available upon renewal. We declare the Guaranteed Interest
Rate Factors. They may vary depending on the duration of the Term. You
should contact us to learn the Terms currently being offered.
Factors in Determining the Declared Rate and Guaranteed Interest Rate
Factors
We will set the level of the Declared Rate for an Interest Sub-account and
the Guaranteed Interest Rate Factors for Index Sub-accounts based upon a
variety of factors, including the interest rates generally available on the
types of instruments in which we will invest your premium payments, the
length of the Term, regulatory and tax requirements, sales commissions and
expenses we bear, general economic trends, and competitive factors.
Risk
If there is no Floor or the Floor is less than zero and the S&P 500 Index
at the first Sub-account Anniversary is less than it was at the beginning
of the Term, the Indexed Value of an Index Sub-account at the end of the
first year could be less than the Initial Premium. Thereafter, increases
in the S&P 500 Index will produce Index Increases that we first use to
offset any prior Index Decreases at any one or all Sub-account
Anniversaries. (See "Appendix A", Illustration No. 3)
Any payment or benefit, interest at the Declared Rate, and Index Increases
we credit to Certificate Owner's Sub-accounts are based on guarantees we
make. The initial and subsequent Declared Rate and Guaranteed Interest
Rate Factors apply to the original principal sum and reinvested earnings.
If you make a partial surrender during a Term it will result in the loss of
that portion of previously calculated, but not credited, Index Increases
attributable to the amount surrendered, because Index Increases are
credited and vested over the Term.
We make the final determination as to Declared Rate and Guaranteed Interest
Rate Factors to be declared. We are unable to predict or guarantee future
rates and factors.
Renewal of Terms
At the end of each Index Sub-account Term, a subsequent Term of the same
duration will begin subject to the new Term's Guaranteed Interest Rate
Factors. However, if you do not want a new Term to begin, you may instruct
us otherwise within the 30-day period before the end of the Term. You will
have the opportunity to transfer the Indexed Value to your Interest Sub-
account or choose an Index Sub-account that has a Term of any duration then
offered (See "Renewal Terms", page 15). However, no renewal will be allowed
into a Term that extends beyond the Income Date or the maximum date allowed
following your death or the death of a joint Certificate Owner, or
Annuitant where the Certificate Owner is not a natural person. (See "Death
Provisions", page 19.)
Surrenders: Partial or Total
You may make partial or total surrenders, subject to certain restrictions.
We do not allow partial surrenders if you have chosen an Index Sub-account
and we issued the Certificate under a corporate or Keogh qualified plan
established pursuant to the provisions of Section 401 of the Internal
Revenue Code.
The minimum partial surrender amount is $250. After a partial surrender,
there must be at least $4,000 combined Surrender Value remaining in the
Certificate. Each Index Sub-account must maintain a minimum balance of
$1,000 Surrender Value. There is no minimum balance for an Interest Sub-
account.
Transfers
You may transfer any portion of the values of an Interest Sub-account to
establish a new Index Sub-account at any time before the Income Date. The
minimum amount you may transfer from an Interest Sub-account to an Index
Sub-account is $1,000.
You may transfer the values of an Index Sub-account to an Interest Sub-
account only at the end of the Index Sub-account's Term. (See "Transfer of
Values", page 18).
Deferral of Payment
We may defer payment of any partial or total surrender for a period not
exceeding six months from the date of receipt of a request for surrender or
for the period permitted by state insurance law, if less. We would defer
payment for a period greater than 30 days would only under highly unusual
circumstances. (See "Surrender Procedures", page 17.)
Annuity Period
On the Income Date, we will pay the designated Annuitant a series of
annuity payments under an Annuity Option. The Annuity Option selected
determines the timing and basis of the annuity payments. (See "Annuity
Payment Provisions", page 21.)
Death Benefit
The Certificate provides for a death benefit if you die before the Income
Date or if the Annuitant dies before the Income Date and the Certificate
Owner is not a natural person. Within 90 days of the date of such death,
the Designated Beneficiary may surrender the Certificate to us for:
o the sum of the Accumulated Value of an Interest Sub-account, if
any, plus
o the greater of
(i) the Indexed Value as adjusted for any proportionate credit
for prior Index Increases and any partial surrenders (see
"Death Provisions", page 19) or
(ii) the Surrender Value, for all Index Sub-accounts, if any. If
the Floor is greater than zero, (a) is the Indexed Value as
of date of death less any subsequent partial surrenders.
For surrenders more than 90 days after the date of death for surrenders
following the death of a Joint Certificate Owner, the Surrender Value of
the Interest and Index Sub-account(s), will be payable instead.
Premium Taxes
We deduct the amount of any premium taxes levied by any state or
governmental entity when the premium tax is actually paid, unless we elect
to defer such deduction until the time of surrender or the Income Date. We
cannot describe precisely the amount of premium tax payable on any
transaction. Such premium taxes depend, among other things, on the type of
Certificate (Qualified or Non-Qualified), on 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, such premium taxes range
from 0% - 5%. For a schedule of such taxes, see Appendix C, at page 74 of
this prospectus.
Annual Reports to Certificate Owners
At least once each Certificate Year, we send you a report showing, for each
Sub-account that had values at any time during the year, the following
values:
o for an Interest Sub-account, the Surrender Value and Accumulated
Value at the beginning and end of the Certificate Year; the amount
of any surrenders, transfers, and interest credits during the
Certificate Year; and any premium payments allocated to an
Interest Sub-account during the Certificate Year.
o for each Index Sub-account, the Surrender Value and Indexed Value
at the beginning and end of the Certificate Year; the amount of
any surrenders during the year; the S&P 500 Index value as of the
most recent Sub-account Anniversary and the Index Increase or
Index Decrease, if any, during the Certificate Year.
DEFINITIONS
Accumulated Value: The value of an Interest Sub-account, equal to all
allocations or transfers to an Interest Sub-account, less all amounts
transferred or surrendered from an Interest Sub-account, plus all interest
credited to an Interest Sub-account. (See "Interest Sub-account").
Allocated Certificate: A Certificate that provides for allocations or
credits to the account of an 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: Options available for annuity payments.
Cap: The maximum percentage by which the Indexed Value of an Index Sub-
account may increase during a single Term.
Certificate: The document issued to each Certificate Owner evidencing his
or her interest in the Group or Individual Annuity Contract. The term
Certificate also includes any Group Contract and any Individual Contract,
unless the context requires otherwise.
Certificate Anniversary, Certificate Year: Each 12-month period beginning
on the Certificate Date and each anniversary thereafter.
Certificate Date: The date a Certificate is issued and your rights and
benefits begin.
Certificate Owner ("you"): The person(s) or entity who is named in the
Certificate and has the privileges of ownership defined in the Certificate.
The person(s) or entity designated in the Certificate application or the
individual designated in the Enrollment Form for an Allocated Certificate.
Certificate Owner Account: The Account established under a Certificate for
all of the values attributable to you and accounted for separately by
Certificate Owner Sub-accounts.
Certificate Owner Sub-account: We establish Interest and/or Index Sub-
account(s) that you may direct the Initial Premium and any Subsequent
Premium or transfers to. The Sub-accounts are used to value and maintain
records of your values under a Certificate.
Company ("we", "us", "our", "Keyport"): Keyport Life Insurance Company.
Contract Owner: The person(s) or entity that is named in the Contract and
has the privileges of ownership defined in the Contract.
Declared Rate: The rate of interest declared and guaranteed by us at the
beginning of each calendar month which is used to calculate the interest to
be credited to an Interest Sub-account.
Designated Beneficiary: The person designated to receive death benefits
under the Certificate. The Designated Beneficiary will be the first person
among the following who is alive on the date of death: Certificate Owner,
joint Certificate Owner, Primary Beneficiary, Contingent Beneficiary, and,
otherwise, the Certificate Owner's estate. If the Certificate Owner and
Joint Certificate Owner are both alive, they will be the Designated
Beneficiary together.
Enrollment Form: An application for an Allocated Certificate.
Floor: If the Floor is a positive number or zero, it represents the minimum
percentage by which the Indexed Value of an Index Sub-account may increase
during a single Term. If the Floor is a negative number or there is no
Floor, it represents the maximum percentage by which the Indexed Value of
an Index Sub-account may decrease during a single Term.
General Account: Our general investment account which contains all of our
assets, except those in separate accounts.
Guaranteed Interest Rate: The interest rate which, when compounded, will
equal an annual rate of 3%.
Guaranteed Interest Rate Factors: The Participation Rate, Cap, and Floor,
which we set and guarantee at the beginning of each Term of an Index Sub-
account and used to calculate Index Increases and Index Decreases under a
formula set forth in the Certificate and described in Appendix A.
Income Date: The date on which annuity payments are to begin. The Income
Date is the Annuitant's 90th birthday unless state law requires an earlier
date.
Income Value: The sum under a Certificate of the Accumulated Value for an
Interest Sub-account and the Indexed Value in each Index Sub-account on the
Income Date.
Index Decrease: A negative adjustment of Indexed Value which is calculated
using the Guaranteed Interest Rate Factors as applied to percentage changes
in the S&P 500 Index. This can only occur if there is no Floor or the
Floor is less than zero and the S&P 500 Index value on the first Sub-
account Anniversary of a Term is lower than it was at the beginning of the
Term.
Index Increase: Interest credited to an Index Sub-account, which is
calculated using the Guaranteed Interest Rate Factors as applied to
percentage changes in the S&P 500 Index.
Index Sub-account: The Sub-account to which we apply Index Increases and
Index Decreases.
Indexed Value: The value of an Index Sub-account, equal to all allocations,
transfers from the Interest Sub-account to establish the Index Sub-account,
or renewals of that Index Sub-account, plus all Index Increases credited to
the Index Sub-account, or less Index Decreases if the Floor is less than
zero or there is no Floor, plus any End-Of-Term Adjustments, less all
amounts surrendered from the Index Sub-account.
Individual Certificate: A Certificate issued to a natural person or a
trustee.
In Force: The status of a Certificate before the Income Date, so long as it
is not totally surrendered and there has not been a death of the Annuitant
or any Certificate Owner that would cause the Certificate to end within, at
most, five years from the date of death.
Initial Premium: The premium payment submitted with the Certificate
application.
Interest Sub-account: The Sub-account to which we credit interest based on
a monthly declared and guaranteed rate of interest. You will have one
Interest Sub-account.
Joint Certificate Owner: Any person you designate to possess rights in the
Certificate Owner Account. We require that you and any Joint Certificate
Owner act together.
Non-Allocated Certificate: A Certificate under which a single account is
established on behalf of all participants in a particular employer plan or
other eligible entity on a non-allocated basis.
Non-Qualified Certificate: Any Certificate that is not issued under a
Qualified Plan.
Office: Our executive office at 125 High Street, Boston, Massachusetts
02110.
Participation Rate: The percentage of the percentage increase or decrease
in the S&P 500 Index used in the formula to calculate Index Increases or
Index Decreases.
Qualified Certificate: Any Certificate issued under a Qualified Plan.
Qualified Plan A retirement plan established pursuant to the provisions of
Sections 401, 403 and 408 of the Internal Revenue Code of 1986, as amended,
and HR-10 Plans for self-employed persons.
S&P 500 Index: Standard & Poor's 500 Composite Stock Price Index which is
used to calculate Index Increases and Index Decreases.
Sub-account Year, Sub-account Anniversary: Each continuous 12-month period
beginning on the date an Index Sub-account is opened by allocation,
transfer, or renewal and each anniversary thereafter, including the end of
any applicable Term of an Index Sub-account.
Subsequent Premium: Any premium payment made after the Initial Premium.
Surrender Value: The guaranteed minimum value of each Sub-account,
calculated as described in this prospectus. The Surrender Values of an
Interest Sub-account and Index Sub-accounts are calculated separately by
differing formulas. The sum of the Surrender Values in an Interest Sub-
account and the Index Sub-account(s) is referred to as the Combined
Surrender Value.
Term: The period for which Guaranteed Interest Rate Factors are used to
calculate Index Increases or Index Decreases for an Index Sub-account. You
may select terms from among those we offer.
DESCRIPTION OF CONTRACTS AND CERTIFICATES
A. OWNERSHIP
You may exercise all rights summarized in the Certificate. Joint
Certificate Owners are permitted. Contingent Certificate Owners are not
permitted. Prior to the Income Date, you and any Joint Certificate Owner
may, by Written Request, change the Certificate Owner, Joint Certificate
Owner, Beneficiary, Contingent Beneficiary, Contingent Annuitant, or in
certain instances, the Annuitant. An irrevocably-named person may be
changed only with the written consent of that person.
Because a change of Certificate Owner by means of a gift may be a taxable
event, you should consult a competent tax advisor as to the tax
consequences resulting from such a transfer.
Qualified Certificates may have limitations on transfer of ownership. You
should consult a competent tax advisor as to the tax consequences resulting
from such a transfer.
B. ENROLLMENT FORM AND PREMIUM PAYMENTS
The Initial Premium must be at least $5,000 and is due on the Certificate
Date. The maximum Initial Premium is $500,000. Payments of $500,000 or
more require our approval. You may purchase multiple Certificates,
although we reserve the right to limit the total premiums you may pay on
multiple Certificates. We may reject any premium payment.
We credit the Initial Premium to a Certificate Owner Account, which we will
establish on the day we receive a properly completed application or
Enrollment Form and the required premium payment. We will issue a
Certificate and confirm the receipt of the Initial Premium in writing. If
the Certificate is issued on a Non-Allocated basis, a single Certificate
Owner's Account is opened for you. A Certificate Owner Account starts
earning interest on the day after it is established. You may choose to
allocate the Initial Premium to an Interest Sub-account and/or one or more
Index Sub-accounts, as described below.
If we determine that an application or Enrollment Form is incomplete, we
will attempt to notify you by letter or telephone to obtain the necessary
information.
We will return the Initial Premium and any incomplete application or
Enrollment Form, along with the corresponding premium payment, that is not
completed within three weeks of receipt.
We will permit others to act on your behalf in certain instances,
including:
o We will accept an application for a Certificate signed by an
attorney-in-fact if we receive a copy of the power of attorney with
the application.
o We will issue a Certificate to replace an existing life insurance or
annuity policy that we or an affiliated company issued even though
we did not previously receive a signed application from you.
Certain dealers or other authorized persons such as employers and Qualified
Plan fiduciaries may inform us of your responses to application questions
by telephone or by order ticket and cause the Initial Premium to be paid to
us. If the information is complete, we will issue the Certificate with a
copy of an application containing that information. We will send you the
Certificate and a letter so you may review the information and notify us of
any errors. We may request you to confirm that the information is correct
by signing a copy of the application or a Certificate delivery receipt. We
confirm, in writing, all purchases. Our liability extends only to
confirmed purchases.
Eligible individuals may make Subsequent Premium payments not less than
$1,000 or more than $100,000. Subsequent Premium payments may not be made
after the first Certificate Year if the Annuitant's age is within 10 years
of the Income Date. You instruct how Subsequent Premium payments will be
allocated to the Sub-accounts. If you do not specify how the Subsequent
Premium payment is to be allocated, we will add it to an Interest Sub-
account.
C. ACCUMULATION PERIOD
1. General
The Certificate consists of a series of Sub-accounts, including a single
Interest Sub-account and multiple Index Sub-accounts. We create a new
Index Sub-account each time you allocate a premium payment or make a
transfer to establish a new Index Sub-account. We calculate all benefits
under the Certificate by first calculating the appropriate value of each
Sub-account and then aggregating all Sub-account values to determine your
values.
Amounts you allocate to an Interest Sub-account will earn interest and
amounts allocated to an Index Sub-account may earn Index Increases.
2. Interest Sub-account
Any amount allocated to an Interest Sub-account will earn interest at a
rate calculated and credited daily based on the Declared Rate. The
Declared Rate is an annual effective interest rate that will be credited
when daily interest credits have compounded for a full year. We set the
Declared Rate on the first business day of each calendar month and we
guarantee the rate for that month. The Declared Rate will not be less than
a rate which when compounded will equal a 3% annual rate. Thus, the
Declared Rate has a guaranteed component and may include interest in excess
of the guaranteed component.
The determination of the Declared Rate will be reflective of interest rates
generally available on the types of investments in which we intend to
invest the proceeds attributable to your Interest Sub-accounts. (See
"Investments by Keyport".) In addition, we may consider various factors in
determining Declared Rates for a given period, including regulatory and tax
requirements, sales commissions and administrative expenses we bear,
general economic trends, and competitive factors. We will make the final
determination as to the declared rate.
An Interest Sub-account will have an Accumulated Value and a Surrender
Value.
The Accumulated Value is the Initial and Subsequent Premiums allocated to
an Interest Sub-account plus any transfers to an Interest Sub-account, less
amounts transferred or surrendered from an Interest Sub-account. We credit
interest at the Declared Rat to this net amount.
The Accumulated Value is available only during three time periods:
o as a surrender payable if all or part of an Interest Sub-account is
surrendered within the first five days of any calendar month.
o as a Death Benefit that is payable if the Certificate is surrendered
within 90 days after the date of certain deaths.
o as a value applied on the Income Date to determine the amount of
income payments.
At all other times, the Surrender Value is available while the Certificate
is In Force.
The Surrender Value at any time is equal to:
o 90% of the Initial and Subsequent Premiums allocated to an Interest
Sub-account, plus
o any Surrender Values transferred to this Sub-account from any Index
Sub-account, less
o Surrender Values transferred or surrendered from this Sub-account.
Interest, both guaranteed and excess, is credited to this net amount.
We credit guaranteed interest daily at a rate which when compounded will
equal a 3% annual rate.
Excess interest is the excess, if any, of interest credited to the
Accumulated Value over interest credited to the Surrender Value from the
last date we credited excess interest to the current date. We add excess
interest on the first of each calendar month and on any date of a transfer
or surrender from this Sub-account.
On each Certificate Anniversary within 10 years of the Income Date, if the
Accumulated Value exceeds the Surrender Value, we will increase the
Surrender Value by 1% of the Accumulated Value, but not to an amount
greater than the Accumulated Value.
3. Index Sub-accounts
Multiple Index Sub-accounts may be open at any time. Each Index Sub-
account that is open will have its own Term, Participation Rate, Cap, Floor
and values. The descriptions below relate to a single Index Sub-account.
This section describes activities that relate to activities within a
specific Index Sub-account, such as a partial surrender from a particular
Index Sub-account.
An Index Sub-account will have an Indexed Value and a Surrender Value. The
Indexed Value is available only during three time periods:
o as a surrender payable if the Index Sub-account is surrendered
within 45 days after the end of its Term;
o as a Death Benefit that is payable if the Certificate is surrendered
by the later of 90 days after the date of certain deaths and 60 days
after we receive notice of such death; and
o as an amount applied on the Income Date to determine the amount of
income payments.
At all other times, the Surrender Value is available while the Certificate
is In Force.
The Indexed Value is the premium payment allocated to or the Accumulated
Value transferred to the Index Sub-account, plus or minus any Index
Increase or Index Decrease, plus end-of-term adjustments less any partial
surrenders.
We determine Index Increases on each Sub-account Anniversary using the S&P
500 Index and the Participation Rate, Floor and Cap. This calculation may
result in an Index Decrease only if there is a reduction in the S&P 500
Index on the first Sub-account Anniversary of a Term and there is no Floor
or the Floor is less than zero. We will apply any Index Increase or Index
Decrease proportionately over the remainder of the Term (See "Appendix A").
We will calculate and apply Index Increases and Index Decreases to a Sub-
account at each Sub-account Anniversary after the start of a Term. The
Certificate contains a formula for using the S&P 500 Index and the
Guaranteed Interest Rate Factors established at the beginning of the Term
to calculate the Index Increases and Index Decreases on each Sub-account
Anniversary in the Term. We apply all Index Increases and Index Decreases
to the Sub-account proportionately over the entire Term. For example, we
will apply an Index Increase or Index Decrease attributable to the first
year in a five year Term over the first to fifth years in equal amounts.
(See "Appendix A", Illustrations 1-6), except that following an Index
Decrease, if the S&P 500 Index on any subsequent Sub-account Anniversary in
a Term exceeds the S&P 500 Index at the beginning of the Term, we will no
longer apply Index Decreases.
There are two parts to the formula. The first calculates the proportionate
credit for any increase in the S&P 500 Index from its prior highest Sub-
account Anniversary value to its new highest value on the current Sub-
account Anniversary. The second determines the proportionate credit for
any change in the S&P 500 Index occurring on a prior Sub-account
Anniversary(ies). This part is always zero on the first Sub-account
Anniversary in a Term.
WHEN THE FLOOR IS ZERO OR GREATER
At the first Sub-account Anniversary of a Term, we calculate the Index
Increase, if any, is by:
o multiplying
(i) the Participation Rate by
(ii) the change in the S&P 500 Index from the beginning of the Term
to the first Sub-account Anniversary divided by its beginning
of Term value;
o dividing the result by the number of years in the Term; and
o multiplying this percentage by the smaller of the Indexed Value at
the beginning of the Term and the Indexed Value (prior to the
crediting of any Index Increases) on the first Sub-account
Anniversary.
After the first Sub-account Anniversary in any Term;
We calculate Part one by:
o multiplying
(i) the Participation Rate by
(ii) any increase in the S&P 500 Index from its prior highest Sub-
account Anniversary value to its current highest Sub-account
Anniversary value divided by its beginning of Term value;
o multiplying this result by the ratio of the number of completed Sub-
account Years in the Term to the total number of Sub-account Years
in the Term; and
o multiplying this percentage by the smaller of the Indexed Value at
the beginning of the Term and the Indexed Value (prior to the
crediting of any Index Increases) on any Sub-account Anniversary in
the Term.
We calculate Part two by:
o multiplying the Participation Rate by the percentage change in the
S&P 500 Index since the beginning of the Term, calculated using the
highest value attained by the S&P 500 Index at any Sub-account
Anniversary during the Term excluding the value of the S&P 500 Index
at the beginning of the Term and on the current Sub-account
Anniversary;
o dividing the resulting percentage by the number of Sub-account Years
in the Term; and
o multiplying this percentage by the smaller of the Indexed Value at
the beginning of the Term and the Indexed Value (prior to the
crediting of any Index Increases) on any Sub-account Anniversary in
the Term.
WHEN THERE IS NO FLOOR OR THE FLOOR IS LESS THAN ZERO
At the first Sub-account Anniversary of a Term, we calculate the Index
Increase or the Index Decrease by:
o multiplying
(i) the Participation Rate by
(ii) the change in the S&P 500 Index from the beginning of the Term
to the first Sub-account Anniversary, divided by its beginning
of Term value;
o dividing this result by the number of years in the Term; and
o multiplying this percentage by the smaller of the Indexed Value at
the beginning of the Term and the Indexed Value (prior to the
crediting of any Index Increase or Index Decrease) on the first Sub-
account Anniversary.
If there is no decrease in the S&P 500 Index on the first Sub-account
Anniversary of a Term, there will be no Index Decreases during the Term.
After the first Sub-account Anniversary, we use the following two-part
calculation to determine any Index Increases and proportionately distribute
the first year decrease, if any, and any subsequent increases over the
remainder of the Term.
We calculate Part one by:
o multiplying
(i) the Participation Rate by
(ii) any increase in the S&P 500 Index from its prior highest Sub-
account Anniversary value to its current highest Sub-account
Anniversary value divided by its beginning of Term value;
o multiplying this result by the ratio of the number of completed Sub-
account Years in the Term to the total number of Sub-account Years
in the Term; and
o multiplying this percentage by the smaller of the Indexed Value at
the beginning of the Term and the Indexed Value (prior to the
crediting of any Index Increases) on any Sub-account Anniversary in
the Term.
We calculate Part two is by:
o multiplying the Participation Rate by the percentage change in the
S&P 500 Index since the beginning of the Term, calculated using the
highest value attained by the S&P 500 Index at any Sub-account
Anniversary during the Term excluding the value of the S&P 500 Index
at the beginning of the Term and on the current Sub-account
Anniversary;
o dividing the resulting percentage by the number of Sub-account Years
in the Term; and
o multiplying this percentage by the smaller of the Indexed Value at
the beginning of the Term and the Indexed Value (prior to the
crediting of any Index Increases or Index Decreases) on any Sub-
account Anniversary in the Term.
THIS SECTION APPLIES IN ALL INSTANCES
Any Index Increases calculated above may be reduced if the Cap is
applicable and increased if a Floor in excess of zero is applicable. Index
Decreases may be reduced if a Floor is applicable. The sum of the two
parts of the formula equals the total amount that we add to the Sub-account
Indexed Value. If the S&P 500 Index on each Sub-account Anniversary in a
Term is less than the S&P 500 Index at the beginning of the Term, we will
not credit any Index Increases during the Term, and we will apply an Index
Decrease if there is no Floor or the Floor is less than zero.
In the event the S&P 500 Index has increased on a Sub-account Anniversary
during a Term, the effect of this formula is to provide that, in the
absence of any Index Decreases or any partial or total surrender during a
Term, the total Index Increases, if any, we credit to an Index Sub-account
during a Term will equal the Sub-account Indexed Value at the beginning of
the Term multiplied by a percentage (Participation Rate) of the percentage
increase in the S&P 500 Index since the beginning of the Term (subject to
the Cap and the Floor), using the highest value attained by the S&P 500
Index on any Sub-account Anniversary in the Term, excluding the value of
the S&P 500 Index at the beginning of the Term and on the current Sub-
account Anniversary.
In the event the S&P 500 Index value has decreased on the first Sub-account
Anniversary of a Term, the effect of this formula is to provide that, in
the absence of any subsequent Index Increases or any partial or total
surrender during a Term, the total Index Decreases, if any, applied to an
Index Sub-account during a Term will equal the Indexed Value at the
beginning of the Term multiplied by a percentage (Participation Rate) of
the percentage decrease in the S&P 500 Index since the beginning of the
Term (subject to the Floor), using the value attained by the S&P 500 Index
on the first Sub-account Anniversary of a Term.
Partial surrenders in excess of Index Increases or Index Decreases will
reduce the amount of the Index Increases or Index Decreases credited after
such surrender, but do not affect the portion of Index Increases or Index
Decreases previously applied.
The total Index Increases we credit to an Index Sub-account may be more or
less than the amount of interest we credit to an Interest Sub-account
established at the same time, depending on the change in the S&P 500 Index
and the Guaranteed Interest Rate Factors over the course of the Term.
The formula may produce Index Increases or Index Decreases to the Indexed
Value, or the Indexed Value may remain unchanged. Over time, the Indexed
Value of an Index Sub-account may be less than the Surrender Value of that
same Index Sub-account. In those circumstances, the Surrender Value is
used to calculate any benefit payable under the Certificate. In addition,
if at the end of a Term, the Indexed Value of an Index Sub-account is less
than the Surrender Value of that Sub-account, we will credit the Indexed
Value with an End of Term Adjustment equal to the excess of the Surrender
Value over the Indexed Value.
The Surrender Value of an Index Sub-account at any time is equal to the
initial Surrender Value plus any Sub-account Anniversary Adjustments
(defined below), less any partial surrenders. Interest is credited to the
net amount at an annual effective rate of 3%.
A Sub-account Anniversary Adjustment may occur when we compare the Indexed
Value and the Surrender Value on each Sub-account Anniversary. If
o the Indexed Value exceeds the Surrender Value, and
o the total to date of all Index Increases or Index Decreases applied
during the Term exceeds "all increases in the Surrender Value during
the Term",
then the Surrender Value will be increased by the difference between the
two amounts above. "All increases in the Surrender Value during the Term"
equal the total to date during the Term of all prior Sub-account
Anniversary Adjustments to the Surrender Value and all interest credited to
the Surrender Value. (The interest for each Sub-account equals the
Surrender Value at the end of the Sub-account year plus the amount of any
partial surrender(s) during the Sub-account year, less the Surrender Value
at the start of the Sub-account year).
After the above adjustment, on each Sub-account Anniversary within 10 years
of the Income Date, if the Indexed Value exceeds the Surrender Value, then
the Surrender Value will be increased by the lesser of (a) and (b), where:
(a) is 1% of the Indexed Value multiplied by the number of elapsed Sub-
account Anniversaries within this 10-year period, less any prior
increases that were made pursuant to this provision; and
(b) is the difference between the Indexed Value and the Surrender
Value.
The initial Surrender Value of an Index Sub-account is equal to 90% of the
premium allocated to the Index Sub-account if opened by a premium payment,
and 100% of the Surrender Value transferred to the Index Sub-account if
opened by a transfer.
Currently the index is the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500 Index"). The S&P 500 Index is a widely accepted and broad
measure of the performance of the major United States stock markets. The
S&P 500 Index is a market value weighted measure of changes in the prices
of the underlying securities and does not reflect any stock dividend income
on the underlying securities. "S&P", "S&P 500", and "Standard & Poor's
500" are trademarks of The McGraw Hill Companies, Inc., and have been
licensed for use by us. The Certificate 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 the publication of the S&P 500 Index is discontinued, or the calculation
of the S&P 500 Index is changed substantially, we will substitute a
suitable index and notify you.
The formula we use to calculate Index Increases and Index Decreases and
illustrative examples are set forth in Appendix A.
Renewal Terms. For Index Sub-accounts, a new Term will begin automatically
at the end of a Term, unless you elect a total surrender. (See
"Surrenders".) Prior to the end of each Term of each Index Sub-account, we
will notify you of the lengths available for the next Terms. You may
choose from the Terms we offer at that time. We may discontinue offering
Terms of certain lengths currently available or offer Terms of different
lengths from time to time. The then available 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 for a period longer than the number of years remaining until
the Income Date or beyond the maximum date allowed following the death of a
Certificate Owner, Joint Certificate Owner, or Annuitant, if the Owner is a
non-natural person. If the selected Term exceeds these limits, we will
automatically transfer the value of the Index Sub-account to the Interest
Sub-account.
The Indexed Value at the beginning of any subsequent Term will be equal to
the value at the end of the previous Term. In the absence of any partial
or total surrender or transfer (described below), the Indexed Value will
earn and we will credit it with any Index Increases for each year in the
subsequent Term, using the Guaranteed Interest Rate Factors established at
the beginning of the subsequent Term you select or established by default
(as described above) in the absence of other instructions. The Surrender
Value at the beginning of any subsequent Term will be equal in value to the
Surrender Value at the end of the prior Term. The Indexed Value at the
beginning of a new Term can be greater than or equal to Surrender Value,
depending on Index Increases, Index Decreases, and surrenders during the
prior Term. As a result, the initial Surrender Value for a new Term will
be equal to or less than the initial Indexed Value for the new Term bearing
the same relationship between Indexed Value and Surrender as determined at
the end of the prior Term. For example, if the Surrender Value was 95% of
the Indexed Value at the end of the prior Term, it will be 95% of the
initial Indexed Value for the new Term. Absent any partial surrenders in
the prior Term, the initial Surrender Value will never be less than 90% of
the initial Indexed Value in the new Term.
Establishment of Guaranteed Interest Rate Factors. We periodically
establish Guaranteed Interest Rate Factors for initial and renewal Terms.
We will declare Guaranteed Interest Rate Factors for the Term chosen at the
time of the initial purchase or renewal. We may establish differing
Guaranteed Interest Rate Factors for Terms of different lengths. We may
offer differing Guaranteed Interest Rate Factors for initial allocations,
transfers, and renewal Terms.
We have no specific formula for determining the Guaranteed Interest Rate
Factors. We will make the final determination of Guaranteed Interest Rate
Factors and we cannot predict or guarantee what these factors will be.
Information on Renewal Rate Factors. You may call a toll-free number to
inquire about Guaranteed Interest Rate Factors for Terms then being
offered. In addition, prior to the beginning of each subsequent Term, we
will notify you in writing of the Terms available. Guaranteed Interest
Rate Factors will be declared prior to renewal. At the end of any Term,
you will have the opportunity to select any other duration of Term then
being offered.
4. Risk Considerations
The interest rates and Index Increases we credit to your Account are based
on guarantees we made. The initial and subsequent Guaranteed Interest
Rates and Guaranteed Interest Rate Factors apply to the original principal
sum and reinvested earnings. The amount of any Index Increases we credit
to an Index Sub-account may be more or less than the amount of interest we
credit to an Interest Sub-account. Moreover, it is possible that we will
apply an Index Decrease at each subsequent Index Sub-account Anniversary
after the first if the S&P 500 Index does not exceed its beginning value on
any subsequent Index Sub-account Anniversary in a Term. If the Floor
established for a Term is less than zero, and the S&P 500 Index is lower on
the first Sub-account Anniversary than it was at the beginning of the Term,
the Indexed Value could be less than principal (i.e., premium payments).
5. Surrenders
General.
You may make a partial or total surrender of your Account at any time prior
to the Income Date while the Certificate is In Force, subject to the
conditions described below. You may request partial surrenders from any
specified Sub-account. Partial and total surrenders are not subject to a
surrender charge. However, the values available for surrender may differ
depending on the timing of the surrender. For example, in the Interest Sub-
account, the Accumulated Value is available during the first five days of
every month. At all other times, the Surrender Value is available. The
available value in an Index Sub-account during the first 45 days of a new
Term is the greater of the Indexed Value and Surrender Value. After 45
days, only the Surrender Value is available.
Partial Surrenders.
At any time prior to the Income Date, you may make a partial surrender by
notifying us in writing if:
o the surrender request is at least $250;
o the Surrender Value remaining in each Index Sub-account after the
partial surrender has been made is at least $1,000; and
o the Combined Surrender Value remaining in the Certificate after the
partial surrender has been made is at least $4,000.
If after complying with a request for a partial surrender there would be
insufficient value in the Certificate Owner Account to keep the Certificate
In Force, we will treat the request as a request to surrender only the
excess over $4,000.
Notwithstanding the above, we do not allow Partial Surrenders from the
Index Sub-account(s) if we issued the Certificate under a Corporate or
Keogh Qualified Plan established pursuant to the provisions of Section 301
of the Internal Revenue Code.
Surrender Procedures.
If you do not specify from which Sub-account(s) the partial surrender is to
be taken, we will withdrawn it from Sub-accounts in the following order:
o from the Interest Sub-account;
o from any Index Sub-account where the Indexed Value is available,
starting with the most recently established Index Sub-account; and
o from any Index Sub-account where the Indexed Value currently is not
available, starting with the most recently established Index Sub-
account.
We have established these default procedures with the goal of minimizing
any adverse impact on you; however we do not represent that the order of
surrenders will necessarily be the most favorable sequence for any
individual Certificate Owner. You should evaluate factors such as the
length of the Terms, timing of the partial surrender, the Guaranteed
Interest Rate Factors, and the Indexed Value of each Sub-account to
determine the appropriate Sub-account from which to take a partial
surrender.
Total Surrenders.
You may request a total surrender in writing. Surrendering the Certificate
will end it. We will determine the Surrender Value as of the date we
receive your request for surrender in writing. We will pay you, as
applicable, the Accumulated Value or Surrender Value of the Interest Sub-
account and the Indexed Value or Surrender Value of the Index Sub-
account(s), less a deduction for any premium taxes not previously paid.
For any total surrender made after the first Certificate Year, you may
receive the values under an Annuity Option, rather than in a lump sum.
We will, upon request, inform you of the amount payable upon a partial or
total surrender. Any partial or total surrender may be subject to tax and
tax penalties. (See "Tax Considerations".)
We may defer payment of any partial or total surrender for a period not
exceeding six months from the date the Written Request for surrender is
received, or any shorter period permitted by state insurance law. Only
under highly unusual circumstances will we defer a surrender payment more
than 30 days. While all circumstances under which deferral of surrender
payment might be involved are not be foreseeable at this time, such
circumstances could include, for example, a period of unusually high
surrender requests, accompanied by a radical shift in interest rates. If
we decide to defer payment for more than 30 days, we will notify you in
writing of that decision.
6. Dollar Cost Averaging Programs
We offer dollar cost averaging programs in which you may participate by
making a written request. Under the programs we periodically and
automatically transfer values from the Interest Sub-account to the new
Index Sub-accounts of specific Terms that you select. The programs allow
you to allocate premium payments to Index Sub-accounts over time rather
than investing in an Index Sub-account all at once. The programs are
available for initial and subsequent Premium payments and for values
transferred into the Interest Sub-account. You may not choose an Index Sub-
account with a Term that would extend beyond the Income Date or the maximum
date allowed following the death of a Certificate Owner, any Joint
Certificate Owner, or Annuitant, if the Certificate Owner is a non-natural
person. We reserve the right to limit the number of Index Sub-account Terms
you may choose; however, there are currently no limits.
Each transfer from the Interest Sub-account will be to a new Index Sub-
account of a Term you select which will have declared Guaranteed Interest
Rate Factors unique to that Sub-account. As described in "Establishment of
Guaranteed Interest Rate Factors", we establish these factors periodically
and we will establish them prior to each transfer.
Because you elect the dollar cost averaging programs prior to our
declaration of the Guaranteed Interest Rate Factors for Index Sub-accounts
established under the programs, you should contact us prior to any transfer
date to determine the Guaranteed Interest Rate Factors applicable to the
planned transfer. You may elect to terminate the programs at any time.
We offer two dollar cost averaging programs:
Under the first program, you must specify in writing the amount (minimum
$1,000) of each periodic transfer and the Index Sub-account Term(s) to
which you want the transfers made. We will transfer values until all
values are transferred from the Interest Sub-account. When the value
remaining in the Interest Sub-account after the current transfer would be
less than the periodic transfer amount, we will add that remaining value to
the current transfer and allocate it proportionally to the designated Index
Sub-account(s). The program will then end. For example, assume you have
designated $1,000 to a 3 year Term Index Sub-account and $1,000 to a 5 year
Term Index Sub-account and have $2,500 remaining in the Interest Sub-
account. The final transfer will be for $1,250 to a 3-Year Term Index Sub-
account and $1,250 to a 5-year Term Index Sub-account.
Under the second program, you must specify in writing the amount (minimum
$1,000) of each periodic transfer, the duration for which you want the
periodic transfers made (e.g., 15 months) and the Index Sub-account Term(s)
to which you want the transfers made.
The first transfer will occur on a particular date that we designate in
advance (the "designated date") as long we receive your written request no
later than five business days prior to the designated date. Each subsequent
transfer will occur following the designated date. For example, if the
frequency is monthly and the designated date is the 10th of a month and we
receive your notice on April 2, the first transfer will occur on April 10
and on the 10th of each successive month.
Before any final transfer, you may extend our first program by allocating
Subsequent Premium to the Interest Sub-account or by transferring the
Indexed Value of any Index Sub-account at the end of its Term to the
Interest Sub-account.
We allow partial surrenders from the Interest Sub-account while a dollar
cost averaging program is in effect. The duration of either program may be
shortened by Partial Surrenders.
You may request in writing or by telephone that we change the periodic
amount to be transferred, change the Index Sub-account(s) Terms to which
you want the transfers made, or end the program. The program will
automatically end if the Income Date occurs. We reserve the right to end
the program at any time by sending you a notice one-month in advance.
We must receive written or telephone instructions by 4:00 PM Eastern Time
of the business day preceding the next scheduled transfer in order to be in
effect for that transfer. Telephone instructions are subject to the
conditions and procedures we establish from time to time. The current
conditions and procedures appear in Appendix D. If you participate in a
dollar cost averaging program we will notify you in advance of any changes.
7. Transfer of Values
You may transfer account values between the Interest Sub-account and Index
Sub-accounts, subject to the following:
o you must make all requests for transfers before the Income Date in
writing or by telephone;
o the number of transfers may not exceed any limit we set for a
specified time period. Currently, we do not limit the number of
permissible transfers in a single Certificate Year;
o you may transfer all or part of an Interest Sub-account (but not
less than $1,000) to establish a new Index Sub-account at any time
before the Income Date;
o a transfer from an Index Sub-account to an Interest Sub-account must
include the entire Indexed Value of the Sub-account and may only be
made at the end of a Term;
o the Term of a new Index Sub-account cannot be longer than the number
of years remaining until the Income Date or the date allowed
following the death of a Certificate Owner, Joint Certificate Owner
or Annuitant, if the Owner is a non-natural person.
Currently, we do not charge for transfers. However, we reserve the right
to charge $25 per transfer if you make more than four transfers in a single
Certificate Year. This restriction will not apply to dollar cost averaging
programs. We reserve the right, at any time and without prior notice, to
terminate, modify, or suspend the transfer privileges described above.
8. Premium Taxes
We deduct the amount of premium taxes levied by any state or governmental
entity when the premium tax is incurred, unless we elect to defer such
deduction until the time of surrender or the Income Date. It is not
possible to describe precisely the amount of premium tax payable on any
Certificate transaction. Such premium taxes depend, among other things, on
the type of Certificate (Qualified or Non-Qualified), on the state of
residence of the Certificate Owner, the state of residence of the
Annuitant, our status within such states, and the insurance tax laws of
such states. Currently, premium taxes range from 0% to 5.0%. Appendix C
contains a schedule of state premium taxes.
9. Death Provisions
The following 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 Certificate
Death of a 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 (whether or not the decedent is also the
Annuitant) or if the Annuitant dies when a non-natural person such as a
trust owns the Certificate, the Designated Beneficiary will control the
Certificate Owner Account.
If the decedent was the Certificate Owner or the Annuitant (if the
Certificate Owner is not a natural person), the Designated Beneficiary may,
by the later of the 90th day after the death and the 60th day after we
receive notice of the death, surrender the Certificate Owner Account for
the death benefit on the date of surrender. The total death benefit is the
sum of the death benefit(s) of an Interest Sub-account and each Index Sub-
account(s). The death benefit of an Interest Sub-account is equal to the
Accumulated Value of an Interest Sub-account, i.e.,
(a) the portion of the Initial Premium allocated to an Interest Sub-
account; plus
(b) the portion of any Subsequent Premium(s) allocated to the Interest
Sub-account; plus
(c) any amounts transferred to an Interest Sub-account; less
(d) any partial surrender amounts from an Interest Sub-account; less
(e) any amounts transferred from an Interest Sub-account; plus
(f) interest on the net amount at the Declared Rate set on the first day
of each calendar month and guaranteed for that month.
In all instances except when the Floor is greater than zero, the death
benefit of each Index Sub-account is the greater of the Death Benefit and
the Surrender Value. The Death Benefit is equal to (a)-(b), where:
(a) is the Indexed Value at the start of the Sub-account Year in which
death occurs, with the applicable Index Increase recalculated as
described in Appendix B, and
(b) is the sum of any partial surrenders since the start of the Sub-
account Year.
If the Floor is greater than zero, (a) is "the Indexed Value as of the date
of death, less any subsequent Partial Surrender".
For a surrender after the applicable 90 or 60 day period and for a
surrender following the death of a Joint Certificate Owner, we will pay the
Surrender Value instead.
If the decedent's surviving spouse is the sole Designated Beneficiary, he
or she will automatically become the new sole Certificate Owner as of the
decedent's date of death. If the decedent was the Annuitant, the new
Annuitant will be any living contingent Annuitant, otherwise the surviving
spouse. The Certificate Owner Account can stay in force until another
death occurs. Except for this paragraph, all of "Death Provisions" will
apply to that subsequent death.
In all other cases, the Certificate may remain In Force for a period not to
exceed five years from the date of death. During this period, the
Designated Beneficiary may exercise all ownership rights, including the
right to make transfers or partial surrenders or the right to totally
surrender the Certificate pursuant to the surrender provisions. If the
Certificate is still In Force at the end of the five-year period, we will
automatically end it by paying the Surrender Value to the Designated
Beneficiary. If the Designated Beneficiary is not alive then, we will pay
any Person(s) previously 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 in writing direct us 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 over which the remaining payments
are to be made.
You may also direct that any benefit payable to a Designated Beneficiary be
paid under an Annuity Option meeting these same requirements.
Death of Certain Non-Certificate Owner Annuitants. The following
provisions apply if, 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 In Force after the Annuitant's death. The
new Annuitant will be any living contingent Annuitant, otherwise the new
Annuitant will be you.
(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 receive notice of the death to surrender the
Certificate Owner Account for the death benefit on the date of surrender,
calculated as described above. For a surrender after the applicable 90 or
60 day period, we will pay the Surrender Value instead.
If the Designated Beneficiary does not surrender the Certificate, the
Certificate can stay In Force for the time period permitted by the Internal
Revenue Code provisions applicable to the particular Qualified Plan.
During this period, the Designated Beneficiary may exercise all ownership
rights, including the right to make partial surrenders or the right to
totally surrender the Certificate pursuant to the surrender provisions. If
the Certificate is still In Force at the end of the period, we will
automatically end it then by paying to the Designated Beneficiary the
Surrender Value. If the Designated Beneficiary is not alive then, 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 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 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 direct us to pay benefits to a Designated Beneficiary under an
Annuity Option meeting these same requirements.
D. ANNUITY PAYMENT PROVISIONS
1. 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 you have chosen. We
determine the payments by applying the Income Value (less any premium taxes
or other taxes not previously deducted) on the Income Date in accordance
with the option selected. The total Income Value is the sum of the
Accumulated Value for an Interest Sub-account and the Indexed Value of the
Index Account(s).
2. The Income Date and Form of Annuity
The Income Date is shown on the Certificate Specifications page. If the
Annuitant dies before the Income Date and there is a successor Annuitant,
we will base the Income Date on the successor Annuitant's birthday if the
successor Annuitant is younger than the deceased Annuitant.
With Allocated Certificates at least 30 days prior to the Income Date, you
may ask us to apply the Income Value on the Income Date under any of the
Annuity Options described below. In the absence of such request, we will
apply the Income Value on the Income Date under Option 3 to provide a
monthly life annuity with 10 years of payments guaranteed.
With a Non-Allocated Certificate, you may ask us to apply a portion of the
Account Value, as modified by any applicable Surrender Charge and Market
Value Adjustment, under an Annuity Option for a participant in that
Certificate Owner's plan. We will then issue a Certificate for such
participant (who is also the Annuitant) and begin annuity payments as you
direct.
No surrenders may occur after the Income Date. Other special rules may
apply to qualified retirement plans. (See "Qualified Plans".)
3. Change of Annuity Option
You may change the Annuity Option from time to time. We must receive your
written request for changes at least 30 days prior to the scheduled Income
Date.
4. Annuity Options
In addition to the following options, you may arrange other options if we
agree.
Option 1 - Income for a Fixed Number of Years. We will pay an annuity for
a chosen number of years, not less than 5 nor more than 30. If, at the
death of the payee, we have made Option 1 payments for fewer than the
chosen number of years:
o we will continue payments during the remainder of the period to the
successor payee; or
o the successor payee may elect to receive in a lump sum the present
value of the remaining payments, commuted at the rate of 3% per year
or at any greater interest rate used to create the annuity factor
for this Option 1.
See "Annuity Payments" for the manner in which Option 1 may be taxed.
Option 2 - Life Income. We will pay an annuity for as long as the payee is
alive. The amount of the annuity payments will depend on the age of the
payee at the time annuity payments are to begin and may also depend on the
payee's sex. It is possible under this option that the payee will receive
only one annuity payment if the payee dies after the receipt of the first
payment or will receive only two annuity payments if the payee dies after
receipt of the second payment, and so on.
Option 3 - Life Income with 5 or 10 Years Guaranteed. We will pay an
annuity during the lifetime of the payee. If, at the death of the payee,
we have made payments for fewer than the selected number of years:
o we will continue payments during the remainder of the period to the
successor payee; or
o the successor payee may elect to receive in a lump sum the present
value of the remaining certain payments, commuted at the rate of 3%
per year or at any greater interest rate used to create the annuity
factor for this Option 3.
The amount of the annuity payments will depend on the age of the payee at
the time annuity payments begin and may also depend on the payee's sex.
Option 4 - Joint and Last Survivor Income. We will pay an annuity for as
long as either the payee or a designated second natural person is alive.
The amount of the annuity payments will depend on the age of both persons
at the time annuity payments begin and may also depend on each person's
sex. It is possible under this option the payees will receive only one
annuity payment if both payees die after the receipt of the first payment
or will receive only two annuity payments if both payees die after receipt
of the second payment, and so on.
5. Frequency and Amount of Payments
We will make payments in monthly installments. However, if the net amount
available to apply under any Annuity Option is less than $5,000, We will
pay the amount in one lump sum, in lieu of the payment otherwise provided.
In addition, if payments become less than $100, we will change the
frequency of payments to such intervals as will result in payments of at
least $100 each.
6. 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 in full any underpayment with 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 in accordance with the requirements of applicable
state laws regarding investments that the general accounts and separate
accounts of life insurance companies may make. Generally, 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 "General Account Investments".)
All of our General Account assets will be available to fund a Certificate
Owner's claims under a Certificate.
In establishing the Guaranteed Interest Rates and Guaranteed Interest Rates
Factors under the Certificates, we will take into account, among other
factors, the yields available on the instruments in which we will invest
the proceeds from the Certificates. (See "Interest Sub-account", and
"Establishment of Guaranteed Interest Rate Factors".) Our obligations and
the values and benefits under the Certificates, however, do not vary as a
direct function of the returns on the instruments in which we will have
invested the proceeds from the Certificates.
Our investment strategy with respect to the proceeds attributable to
Certificates is to invest in debt securities which we use to match
liabilities with respect to the Terms of Index Sub-accounts to which the
proceeds are allocated. This will be done in our sole discretion by making
investments authorized by applicable state law. We expect to invest a
substantial portion of the premiums received in securities issued by the
United States Government, its agencies, and instrumentalities, which may or
may not be guaranteed by the United States Government. These securities
could include T-Bills, Notes, Bonds, Zero Coupon Securities, and Mortgage
Pass-Through Certificates, including Government National Mortgage
Association backed securities (GNMA Certificates), Federal National
Mortgage Association Guaranteed Pass-Through Certificates (FNMA
Certificates), Federal Home Loan Mortgage Corporation Mortgage
Participation Certificates (FHLMC Certificates), and others.
We may invest our assets in various instruments, including equity options,
futures, forwards, and other instruments based on the S&P 500 Index, in
order to hedge our obligations with respect to Index Sub-accounts. We may
buy and sell interest rate swaps and caps, Treasury bond futures, and other
instruments to hedge our exposure to interest rate changes. We will
purchase those derivatives from counterparties which conform to our
Policies and Guidelines regarding derivative instruments. Investments in
derivatives involve certain risks. In the case of over-the-counter
options and forward contracts, the risks include the possibility that
markets will not exist for these investments when we want to close out a
position, the risk that trading limits imposed by futures exchanges will
inhibit our ability to close out positions in exchange-listed instruments,
and the risk that a dealer with which we have an open position will become
insolvent.
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 CERTIFICATE
We reserve the right to amend the 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 CERTIFICATE
You may assign a Certificate at any time, as permitted by applicable law.
An assignment will not be binding on us until we receive a copy of the
assignment. Your rights and those of any revocably-named person will be
subject to the assignment.
A Qualified Certificate may have limitations on your ability to assign the
Certificate. We assume no 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 such
assignment.
DISTRIBUTION OF CERTIFICATE
Keyport Financial Services Corp. ("KFSC") serves as the Principal
Underwriter for the Certificate. Salespersons who represent us as insurance
agents will sell the Certificates. Such sales persons are also registered
representatives of broker-dealers who have entered into distribution
agreements with KFSC. KFSC is our wholly owned subsidiary, and is
registered with the Securities and Exchange Commission ("SEC") 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.
We will pay a commission to broker-dealers of no more than 5.25% of any
premium paid under a Certificate and we may pay a reduced commission.
Certificates may be sold with a lower commission structure to our officers,
directors or employees or those of our affiliates or to any Qualified Plan
established for such a person. Such Certificates will have higher
Participation Rates under the Index Sub-account(s), reflecting anticipated
cost savings to us from the lower commission structure.
TAX CONSIDERATIONS
A. GENERAL
You should consider getting tax and legal advice before you decide to
purchase a Certificate. Furthermore, you should understand that we can not
provide you with a detailed description of tax consequences regarding the
purchase of a Certificate and that there may be instances where special tax
rules apply. We do not address any applicable state or other tax laws in
the discussion below. You should consult a competent tax adviser.
This discussion is general in nature and is not intended as tax advice.
Each person concerned should consult a competent tax adviser. We make no
attempt to consider any applicable state or other tax laws. Moreover, this
discussion is based upon our understanding of current federal income tax
laws as they are currently interpreted. We make no representations
regarding the likelihood of continuation of those current federal income
tax laws or of the current interpretations by the Interval Revenue Service.
Congress has in the past and may in the future consider legislation that,
if enacted, could adversely affect the tax treatment of annuity
Certificates, including distributions and undistributed appreciation. We
cannot predict whether, when, or in what form Congress may enact
legislation affecting annuity contracts. Any such legislation could have
retroactive effect regardless of the date of enactment. New make no
representation regarding the likelihood of continuation of those current
Federal income tax laws or of the current interpretations by the Internal
Revenue Service.
B. TAXATION OF KEYPORT
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 the assets
underlying the Certificates. Any income we earn on those assets is our
income.
C. TAXATION OF ANNUITIES IN GENERAL
1. General
Section 72 of the Code governs taxation of annuities in general. There are
no income taxes on increases in the value of a Certificate until a
distribution occurs, either in the form of a lump sum payment (e.g., a full
or partial surrender of the Certificate Owner Account Value), an
assignment, a gift of the Certificate, or as annuity payments. The
provisions of Section 72 of the Code concerning distributions are briefly
summarized below. A trust or other entity owning a Non-Qualified
Certificate other than as an agent for an individual is taxed differently;
increases in Sub-account Value are taxed yearly whether or not a
distribution occurs.
2. Surrender, Assignments, and Gifts
If you fully surrender the Certificate you are taxed on the portion of the
payment that exceeds your cost basis in the Certificate. For Non-Qualified
Certificates, the cost basis is generally the amount of the Initial Premium
and any Subsequent Premium(s), and the taxable portion of the surrender
payment is taxed as ordinary income. For Qualified Certificates, the cost
basis is generally zero, and the taxable portion of the surrender payment
is generally taxed as ordinary income subject to special 5-year income
averaging for lump-sum distributions received before January 1, 2000. A
Designated Beneficiary receiving a lump sum surrender benefit after 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 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 that
Certificate Owner Account Value exceeds the Initial Premium and any
Subsequent Premium. Then, to the extent Certificate Owner Account Value
does not exceed the Initial Premium and any Subsequent 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 we issue to you, during any
calendar year, two or more Certificates 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 to be determined under
Section 72(e) of the Code by treating our contracts and Certificates as
one. We believe that this means the amount of any distribution under one
Certificate will be includable in gross income to the extent that, at the
time of distribution, the sum of the values for all the Certificates or
Certificates exceeds the sum of the cost bases for all the Certificates.
3. Annuity Payments
We determine the non-taxable portion of each annuity payment by an
"exclusion ratio" formula which establishes the ratio that the cost basis
of the Certificate bears to the total expected value of annuity payments
for the term of the annuity. The remaining portion of each payment is
taxable at ordinary income rates.
For Qualified Certificates, the cost basis is generally zero. With annuity
payments based on life contingencies, the payments will become fully
taxable once the payee lives longer than the life expectancy used to
calculate the non-taxable portion of the prior payments.
4. Penalty Tax
Payments you, Annuitants, and Designated Beneficiaries receive under
Certificates may be subject to both ordinary income taxes and a penalty tax
equal to 10% of the amount received that is includable in income. The
penalty tax is not imposed on amounts received 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 the Certificate Owner is not a human
being, 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.
5. Income Tax Withholding
We are required to withhold Federal income taxes on taxable amounts paid
under 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") for an
alternative type of withholding that may apply to distributions from TSAs
that are eligible for rollover to another TSA or to an individual
retirement annuity or account ("IRA").
6. Section 1035 Exchanges
You may purchase a Non-Qualified Certificate with proceeds from the
surrender of an existing annuity Certificate. 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 will be subject to the distribution-at-death
rules described in "Death Provisions for Non-Qualified
Certificates";
o premium payments made between August 14, 1982 and January 18, 1985,
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 10 years prior to the distribution; and
o premium payments made before August 14, 1982, and the income
allocable to them will, following an exchange, continue to receive
the following "grandfathered" tax treatment under prior law:
(i) the penalty tax does not apply to any distribution;
(ii) partial surrenders are treated first as a non-taxable return
of principal and then a taxable return of income; and
(iii) assignments are not treated as surrenders subject to
taxation.
We base our understanding of the above principally on legislative reports
prepared by the Staff of the Congressional Joint Committee on Taxation.
D. QUALIFIED PLANS
The Certificate is for use with several types of Qualified Plans. The tax
rules applicable to participants in such Qualified Plans vary according to
the type of Plan and the terms and conditions of the Plan. We make no
attempt to provide more than general information about the use of the
Certificate with the various types of Qualified Plans.
You, as well as participants under such Qualified Plans, 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
summaries of the various types of Qualified Plans and of the use of the
Certificate in connection with these Plans. Purchasers of the Certificate
should seek competent advice concerning the terms and conditions of the
particular Qualified Plan and use of the Certificate with that Plan.
1. Tax-Sheltered Annuities
Section 403(b) of the Code permits public school employees and employees of
certain types of charitable, educational, and scientific organizations
specified in Section 501c(3) of the Code to purchase annuity Certificates
and, subject to certain contribution limitations, exclude the amount of
premium payments from gross income for tax purposes. However, such premium
payments may be subject to Social Security ("FICA") taxes. This type of
annuity Certificate 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
those contributions.
Section 403(b)(11) does not apply to distributions attributable to assets
held as of December 31, 1988. Thus, it appears that the restrictions of
Section 403(b)(11) apply only to distributions attributable to
contributions made after 1988, to earnings on those contributions, and to
earnings on amounts held as of December 31, 1988.
The Internal Revenue Service has indicated that the distribution
restrictions of Section 403(b)(11) are not applicable when TSA funds are
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 have requested a distribution from a Certificate, we will notify you
if all or part of the 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 twenty percent (20%) rate
if you receive the amount rather than directing us by Written Request, to
transfer the amount as a direct rollover to another TSA or IRA.
2. Individual Retirement Annuities
Section 408 of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity."
These Individual Retirement Annuities are subject to limitations on the
amount contributed, the persons eligible, and the time distributions may
begin. Distributions from certain types of Qualified Plans may be placed
into an Individual Retirement Annuity on a tax-deferred basis.
3. Corporate Pension and Profit-Sharing Plans
Sections 401(a) and 403(a) of the Code permit corporate employers to
establish various types of retirement plans for employees. Such retirement
plans may permit the purchase of the Certificate to provide benefits under
the plans.
THE COMPANY
A. Business
General
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 year 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.
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
FORMULA FOR INDEX INCREASES AND/OR DECREASES, AND ILLUSTRATION OF INDEX
INCREASES AND INDEX DECREASES
The Certificate provides that we will calculate the Index Increase or Index
Decrease on each Sub-account Anniversary. On the first Sub-account
Anniversary in a Term, the formula for the Index Increase or Decrease, if
any, is:
A x ((C-D)/D x (E/F) x G
This calculation provides the proportionate credit for any change in the
S&P 500 Index from its value at the beginning of the Term to its value on
the first Sub-account Anniversary.
For every Sub-account Anniversary after the first in a Term, the
calculation of the Index Increases or Index Decreases, if any, is the sum
of two parts:
Part 1 represents the proportionate credit for an increase (if any) in the
S&P 500 Index from its prior highest Sub-account Anniversary value to its
value on the current Sub-account Anniversary. The formula for Part 1 is:
A x ((C-B)/D) x (E/F) x G
Part 2 represents the proportionate credit for an increase(s) or
decrease(s) (if any) in the S&P 500 Index occurring on a prior Sub-account
Anniversary(ies). The formula for Part 2 is:
A x ((B-D)/D) x (1/F) x G
where:
A is the Participation Rate for the Term
B is the highest S&P 500 Index Value on all Sub-account Anniversaries,
excluding the S&P 500 Index value at the beginning of the Term and on
the current Sub-account Anniversary. The value of B can never be less
than the Minimum S&P 500 Index Value nor greater than the Maximum S&P
500 Index value. The Minimum S&P 500 Index Value and the Maximum S&P
500 Index Value are defined below.
C is the value of the S&P 500 Index on the current Sub-account
Anniversary, not less than B or greater than the Maximum S&P 500 Index
Value for the Term.
D is the S&P 500 Index value at the beginning of the Term
E is the number of completed Sub-account Years in the Term
F is the total number of Sub-account Years in the Term
G is the smaller of the Indexed Value at the beginning of the term and
the Indexed Value (prior to the crediting of any Index Increases
and/or Decreases) on any Sub-account Anniversary in the Term,
including the current Sub-account Anniversary
The Minimum S&P 500 Index Value and the Maximum S&P 500 Index Value are
defined as follows:
Minimum S&P 500 Index Value = [(Floor / Participation Rate for Term) + 1] x
[Beginning of Term S&P 500 Index Value]
Maximum S&P 500 Index value = [(Cap / Participation Rate for Term) + 1] x
[Beginning of Term S&P 500 Index Value]
Using the assumptions below, we have prepared the following six
illustrations using different assumptions as to changes in the S&P 500
Index value during the course of the Term. These assumptions and
illustrations are not and are not intended as predictions of changes in the
S&P index during the course of any term. The S&P 500 Index may rise or
fall during the course of a term, and at the end of a term the S&P 500
Index value may be higher of lower than at the beginning of the term. We
make no predictions, representations, or guarantees as to future changes in
the S&P 500 Index. These values are based on the assumption that no
partial surrenders are made.
Illustration No. 1
Assumptions:
Term Length (Years) = 5
Beginning Indexed Value = $100,000
Beginning S&P 500 Index Value = 500
Participation Rate = 80%
Cap = 80%
Maximum S&P 500 Index Value = [(80%/80%) + 1] x 500 = 1,000
Floor = 0%
Minimum S&P 500 Index Value = [(0%/80%) + 1] x 500 = 500
End Value Change Value Value Value Value
of of in of of of of Indexed
Year INDEX INDEX B* C Part 1 Part 2 Value
0 500 $100,000.00
1 600 20% 500 600 $ 3,200 N/A $103,200.00
2 690 38% 600 690 $ 5,760 $ 3,200 $112,160.00
3 775 55% 690 775 $ 8,160 $ 6,080 $126,400.00
4 900 80% 775 900 $16,000 $ 8,800 $151,200.00
5 1035 107% 900 1,000 $16,000 $12,880 $180,000.00
* Although B has a value on the first anniversary, it is part of the
formula for the calculation of Index Increases on the first
Anniversary, but is used as a comparison value in the calculation of
C.
Illustration No. 2
Assumptions:
Term Length (Years) = 5
Beginning Indexed Value = $100,000
Beginning S&P 500 Index Value = 500
Participation Rate = 80%
Cap = 80%
Maximum S&P 500 Index Value = 1,000
Floor = -5%
Minimum S&P 500 Index Value = 468.75
End Value Change Value Value Value Value
of of in of of of of Indexed
Year INDEX INDEX B* C Part 1 Part 2 Value
0 500 $100,000.00
1 450 -10% 468.75 468.75 -1,000.00 N/A $ 99,000.00
2 425 -15% 468.75 468.75 0.00 -990.00 $ 98,010.00
3 450 -10% 468.75 468.75 0.00 -980.10 $ 97,029.90
4 430 -14% 468.75 475.00 0.00 -970.30 $ 96,059.60
5 400 -20% 468.75 475.00 0.00 -960.60 $ 95,099.00
* Although B has a value on the first anniversary, it is part of the
formula for the calculation of Index Increases on the first
Anniversary, but is used as a comparison value in the calculation of
C.
Illustration No. 3
Assumptions:
Term Length (Years) = 5
Beginning Indexed Value = $100,000
Beginning S&P 500 Index Value = 500
Participation Rate = 80%
Cap = 80%
Maximum S&P 500 Index Value = 1,000
Floor = -10%
Minimum S&P 500 Index Value = 437.50
End Value Change Value Value Value Value
of of in of of of of Indexed
Year INDEX INDEX B* C Part 1 Part 2 Value
0 500 $100,000.00
1 450 -10% 437.50 450.00 -1,600.00 N/A $ 98,400.00
2 485 -3% 450.00 485.00 2,204.16 -1,574.40 $ 99,029.76
3 500 0% 485.00 500.00 1,416.96 -472.32 $ 99,974.40
4 520 4% 500.00 520.00 2,519.04 0.00 $102,493.44
5 550 10% 520.00 550.00 4,723.20 629.76 $107,846.40
* Although B has a value on the first anniversary, it is part of the
formula for the calculation of Index Increases on the first
Anniversary, but is used as a comparison value in the calculation of
C.
Illustration No. 4
Assumptions:
Term Length (Years) = 5
Beginning Indexed Value = $100,000
Beginning S&P 500 Index Value = 500
Participation Rate = 80%
Cap = 80%
Maximum S&P 500 Index Value = 1,000
Floor = none
Minimum S&P 500 Index Value = unlimited
End Value Change Value Value Value Value
of of in of of of of Indexed
Year INDEX INDEX B* C Part 1 Part 2 Value
0 500 $100,000.00
1 450 -10% <1,000 450 -1,600.00 N/A $ 98,400.00
2 425 -15% 450 450 0.00 -1,574.40 $ 96,825.60
3 450 -10% 450 450 0.00 -1,549.21 $ 95,276.39
4 475 -5% 450 475 3,048.84 -1,524.42 $ 96,800.81
5 400 -20% 475 475 0.00 -762.21 $ 96,038.60
* Although B has a value on the first anniversary, it is part of the
formula for the calculation of Index Increases on the first
Anniversary, but is used as a comparison value in the calculation of
C.
Illustration No. 5
Assumptions:
Term Length (Years) = 5
Beginning Indexed Value = $100,000
Beginning S&P 500 Index Value = 500
Participation Rate = 80%
Cap = 80%
Maximum S&P 500 Index Value = 1,000
Floor = -5%
Minimum S&P 500 Index Value = 468.75
End Value Change Value Value Value Value
of of in of of of of Indexed
Year INDEX INDEX B* C Part 1 Part 2 Value
0 500 $100,000.00
1 450 -10% 468.75 468.75 -1,600.00 N/A $ 99,000.00
2 425 -15% 468.75 468.75 0.00 -990.00 $ 98,010.00
3 450 -10% 468.75 468.75 0.00 -980.10 $ 97,029.90
4 475 -5% 475.00 475.00 776.24 -970.30 $ 96,835.84
5 400 -20% 475.00 475.00 0.00 -774.69 $ 96,061.15
* Although B has a value on the first anniversary, it is part of the
formula for the calculation of Index Increases on the first
Anniversary, but is used as a comparison value in the calculation of
C.
Illustration No. 6
Assumptions:
Term Length (Years) = 5
Beginning Indexed Value = $100,000
Beginning S&P 500 Index Value = 500
Participation Rate = 80%
Cap = 80%
Maximum S&P 500 Index Value = 1,000
Floor = none
Minimum S&P 500 Index Value = unlimited
End Value Change Value Value Value Value
of of in of of of of Indexed
Year INDEX INDEX B* C Part 1 Part 2 Value
0 500 $100,000.00
1 650 30% <1,000 650 4,800 N/A $104,800.00
2 485 -3% 650 650 0 4,800 $109,600.00
3 475 -5% 650 650 0 4,800 $114,400.00
4 450 -10% 650 650 0 4,800 $119,200.00
5 430 -14% 650 650 0 4,800 $124,000.00
* Although B has a value on the first anniversary, it is part of the
formula for the calculation of Index Increases on the first Anniversary,
but is used as a comparison value in the calculation of C.
APPENDIX B
CALCULATION OF THE DEATH BENEFIT
In calculating the Death Benefit of an Index Sub-account, the Certificate
provides for the recalculation of the applicable Index Increase or
Decrease. Set forth below is the formula for calculating the Death Benefit
of an Index Sub-account and the factors specified in the Certificate for
recalculating the applicable Index Increase or Index Decrease.
If the Floor is greater than 0%, the Death Benefit is the greater of the
Indexed Value as of the date of death less any subsequent partial
surrenders, and the Surrender Value.
In all other situations, the Death Benefit is the greater of (a) minus (b),
and the Surrender Value where:
(a) is the Indexed Value at the start of the Sub-account year in which
death occurs, with the applicable Index Increase or Index Decrease
(see "Appendix A") recalculated as follows: "E" is equal to "F"
and "(B-D)" is multiplied by the sum of 1.0 plus the number of
Sub-account years from the start of such year to the end of the
Term; and
(b) is the sum of any partial surrenders since the start of such year.
In either case, if death occurs in the last year of a Term and the
surrender occurs after the end of the Term, the death benefit is equal to
the greater of the Indexed Value at the end of such Term, less any
subsequent partial surrenders, and the Surrender Value.
APPENDIX C
SCHEDULE OF STATE PREMIUM TAXES
Non-Qualified Qualified
Contracts/Certificates Contracts/Certificates
State Rate of Tax Rate of Tax
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
APPENDIX D
TELEPHONE INSTRUCTIONS
Telephone Transfers of Values of Certificate Owner Account
1. If there are joint Certificate Owners, both must authorize us to accept
telephone instructions, but either Certificate Owner may give us telephone
instructions.
2. All callers must identify themselves. We reserve the right to refuse to
act upon any telephone instructions in cases where the caller has not
sufficiently identified himself/herself to our satisfaction.
3. Neither we nor any person acting on our behalf shall be subject to any
claim, loss, liability, cost or expense if we or such person acted in good
faith upon a telephone instruction, including one that is unauthorized or
fraudulent. However, we will employ reasonable procedures to confirm that
a telephone instruction is genuine and, if we do not, we may be liable for
losses due to an unauthorized or fraudulent instruction. You thus bear the
risk that an unauthorized or fraudulent instruction we execute may cause
the values of a Certificate Owner Account to be lower than it would be had
we not executed the instruction.
4. We record all conversations with disclosure at the time of the call.
5. The application for the Certificate may allow you to create a power of
attorney by authorizing another person to give telephone instructions.
Unless prohibited by state law, we will treat such power as durable in
nature and it shall not be affected by your subsequent incapacity,
disability, or incompetency. Either we or the authorized person may cease
to honor the power by sending written notice to you at your last known
address. Neither we nor any person acting on our behalf shall be subject to
liability for any act executed in good faith reliance upon a power of
attorney.
6. Telephone authorization shall continue in force until:
o we receive your written revocation, or
o we discontinue the privilege, or
o we receive written evidence that you have entered into a market
timing or asset allocation agreement with an investment adviser
or with a broker/dealer.
7. If we receive telephone transfer instructions at 800-367-3653 before the
4:00 PM Eastern Time or other close of trading on the New York Stock
Exchange ("NYSE") they will be initiated that day based on the unit value
prices calculated at the close of that day. We will initiate instructions
we receive after the close of trading on the NYSE on the following business
day.
8. Once we accept instructions, they may not be canceled.
9. You must make all transfers in accordance with the terms of the
Certificate and current prospectus. If your transfer instructions are not
in good order, we will not execute the transfer and will notify the caller
within 48 hours.
Distributed by:
Keyport Financial Services Corp.
125 High Street, Boston, MA 02110-2712
Issued by:
Keyport Life Insurance Company
125 High Street, Boston, MA 02110-2712
DIA 1712.5/99