SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ___________________
Commission file numbers 33-3630 and 333-1783
KEYPORT LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Rhode Island 05-0302931
(State of other jurisdiction of incorporation or organization) (I.R.S.
Employer Identification No.)
125 High Street, Boston, Massachusetts 02110-2712
(Address of principal executive offices) (Zip Code)
(617) 526-1400
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [ ]
No
There were 2,412,000 shares of the registrant's Common Stock, $1.25 par
value, outstanding as of June 30, 1999.
Exhibit Index - Page 16 Page 1 of 16
KEYPORT LIFE INSURANCE COMPANY
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1999
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheet as of June 30, 1999
and December 31, 1998 3
Consolidated Income Statement for the Three and
Six-month Periods Ended June 30, 1999 and 1998 4
Consolidated Statement of Cash Flows for the
Six-month Periods Ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 8-13
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibit Index 15
2
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(in thousands)
June 30, December 31,
ASSETS 1999 1998
Unaudited
Cash and investments:
Bonds - available for sale
(amortized cost: 1999 - $11,393,615;
1998 - $11,174,697) $ 11,268,878 $ 11,277,204
Equity securities (cost: 1999 -
$17,808; 1998 - $21,836) 23,041 24,649
Mortgage loans 13,392 55,117
Policy loans 587,088 578,770
Other invested assets 820,673 662,513
Cash and cash equivalents 831,350 719,625
Total cash and investments 13,544,422 13,317,878
Accrued investment income 177,651 160,950
Deferred policy acquisition costs 478,970 340,957
Value of insurance in force 84,478 66,636
Intangible assets 17,454 18,082
Income taxes recoverable 27,238 31,909
Receivable for investments sold 34,652 37,936
Other assets 41,553 35,345
Separate account assets 2,662,733 1,765,538
Total assets $ 17,069,151 $ 15,775,231
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy liabilities $ 12,354,556 $ 12,504,081
Deferred income taxes 141,634 143,596
Payable for investments purchased and loaned 807,896 240,440
Other liabilities 35,384 28,312
Separate account liabilities 2,604,280 1,723,205
Total liabilities 15,943,750 14,639,634
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 637,187 600,396
Accumulated other comprehensive (loss) income (20,734) 26,253
Total stockholder's equity 1,125,401 1,135,597
Total liabilities and stockholder's equity $ 17,069,151 $ 15,775,231
See accompanying notes
3
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENT
(in thousands)
Unaudited
Three-months Ended Six-months Ended
June 30, June 30,
1999 1998 1999 1998
Investment income $ 195,730 $ 200,955 $ 400,655 $ 407,030
Interest credited to
policyholders 129,409 140,198 264,187 282,334
Investment spread 66,321 60,757 136,468 124,696
Net realized investment
losses (11,357) (2,483) (14,451) (1,665)
Fee income:
Surrender charges 4,442 5,409 8,327 9,620
Separate account fees 7,708 5,394 14,286 10,102
Management fees 2,523 1,597 4,144 2,555
Total fee income 14,673 12,400 26,757 22,277
Expenses:
Policy benefits 762 560 1,944 1,020
Operating expenses 14,244 13,611 27,723 29,150
Amortization of deferred
policy acquisition costs 20,046 18,346 42,060 37,321
Amortization of value of
insurance in force 2,384 1,216 4,633 2,692
Amortization of
intangible assets 314 314 628 628
Total expenses 37,750 34,047 76,988 70,811
Income before income taxes 31,887 36,627 71,786 74,497
Income tax expense 11,101 12,535 24,995 24,356
Net income $ 20,786 $ 24,092 $ 46,791 $ 50,141
See accompanying notes
4
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Unaudited
Six-months Ended
June 30,
1999 1998
Cash flows from operating activities:
Net income $ 46,791 $ 50,141
Adjustments to reconcile net income to
net cash provided by operating activities:
Interest credited to policyholders 264,187 282,334
Net realized investment losses 14,451 1,665
Amortization of value of insurance in
force and intangible assets 5,261 3,320
Net amortization on investments 39,342 28,245
Change in deferred policy acquisition
costs (10,943) (20,933)
Change in current and deferred
income taxes 33,907 30,246
Net change in other assets and
liabilities (11,800) (13,508)
Net cash provided by operating
activities 381,196 361,510
Cash flows from investing activities:
Investments purchased - available for
sale (2,928,649) (3,498,283)
Investments sold - available for sale 2,529,251 2,690,757
Investments matured - available for sale 159,209 561,207
Increase in policy loans (8,318) (19,344)
Decrease in mortgage loans 41,725 2,939
Other invested assets purchased, net (18,666) 32,134
Value of business acquired, net of cash (3,999)
Net cash used in investing activities (225,448) (234,589)
Cash flows from financing activities:
Withdrawals from policyholder accounts (962,351) (850,835)
Deposits to policyholder accounts 358,018 775,231
Dividends (10,000)
Securities lending 570,310 16,953
Net cash used in financing activities (44,023) (58,651)
Change in cash and cash equivalents 111,725 68,270
Cash and cash equivalents at beginning
of period 719,625 1,162,347
Cash and cash equivalents at end of
period $ 831,350 $ 1,230,617
See accompanying notes
5
KEYPORT LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
1. General
The accompanying unaudited consolidated financial statements of Keyport
Life Insurance Company (the Company) includes all adjustments, consisting
of normal recurring accruals that management considers necessary for a fair
presentation of the Company's financial position as of June 30, 1999 and
December 31, 1998 and the related consolidated statements of income and
cash flows for the three and six-month periods ended June 30, 1999 and
1998. Certain footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. Therefore, these
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements contained in the Company's 1998
Form 10-K. The results of operations for the six-month period ended June
30, 1999 are not necessarily indicative of the results to be expected for
the full year.
2. Bonds
The Company's general investment policy is to hold bonds for long-term
investment. To provide for maximum portfolio flexibility and enable
appropriate tax planning, the Company classifies bonds as "available for
sale", which are carried at fair value.
The carrying value of non-income producing bonds at June 30, 1999 and
December 31, 1998 was approximately $18.2 million and $30.0 million,
respectively.
3. Acquisitions
On January 2, 1998, the Company acquired the common stock of American
Benefit Life Insurance Company, renamed Keyport Benefit Life Insurance
Company on March 31, 1998, a New York insurance company, for $7.4 million.
The acquisition was accounted for as a purchase and, accordingly, operating
results are included in the consolidated financial statements from the date
of acquisition. In connection with the acquisition, the Company acquired
assets with a fair value of $9.4 million and assumed liabilities of $3.2
million. Subsequent to the acquisition, the Company made a capital
contribution to Keyport Benefit in the amount of $7.5 million.
4. Comprehensive Income
Total comprehensive income (loss), net of tax, for the six-month periods
ended June 30, 1999 and 1998, was $(0.2) million and $52.7 million,
respectively.
6
KEYPORT LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Unaudited
5. Recent Accounting Prouncement
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133
"Accounting for Derivative Instruments and Hedging Activities" 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. In June 1999, SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" was issued. SFAS 137 defers for one year the effective
date of SFAS 133. The rule now will apply to all fiscal quarters of all
fiscal years beginning after June 15, 2000. 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.
7
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
Net income was $20.8 million and $24.1 million for the three-month periods
ended June 30, 1999 and 1998, respectively. Net income was $46.8 million
and $50.1 million for the six-month periods ended June 30, 1999 and 1998,
respectively. The primary reason for the decrease in 1999 compared to the
prior year is attributable to the increase in net realized investment
losses. Income before income taxes and net realized investment losses was
$86.2 million and $76.1 million for the six-month periods ended June 30,
1999 and 1998, respectively.
Investment spread is the amount by which investment income earned on the
Company's investments exceeds interest credited on policyholder balances.
Investment spread was $66.3 million and $60.8 million for the three-month
periods ended June 30, 1999 and 1998, respectively. The amount by which
the average yield on investments exceeds the average interest credited rate
on policyholder balances is the investment spread percentage, which
amounted to 1.86% and 1.71% for the three-month periods ended June 30, 1999
and 1998, respectively. Investment spread was $136.5 million and $124.7
million for the six-month periods ended June 30, 1999 and 1998,
respectively. The investment spread percentage was 1.90% and 1.78% for the
six-month periods ended June 30, 1999 and 1998, respectively.
Investment income was $195.7 million and $201.0 million for the three-month
periods ended June 30, 1999 and 1998, respectively. The decrease of $5.3
million in 1999 compared to 1998 is attributable to a $8.1 million decrease
resulting from a lower average investment yield offset by a $2.8 million
increase as a result of a higher level of average invested assets.
Investment income for the three-month periods ended June 30, 1999 and 1998,
includes $19.4 million and $17.9 million, respectively, of S&P 500 Index
call option amortization expense related to the Company's equity-indexed
annuities. The average investment yield was 6.04% and 6.30% for the three-
month periods ended June 30, 1999 and 1998, respectively. Investment income
was $400.7 million and $407.0 million for the six-month periods ended June
30, 1999 and 1998, respectively. The decrease of $6.3 million in 1999
compared to 1998 is attributable to a $16.8 million decrease resulting from
a lower average investment yield offset by a $10.5 million increase as a
result of a higher level of average invested assets. Investment income for
the six-month periods ended June 30, 1999 and 1998, includes $38.8 million
and $35.2 million, respectively, of S&P 500 Index call option amortization
expense related to the Company's equity-indexed annuities. The average
investment yield was 6.15% and 6.44 % for the six-month periods ended June
30, 1999 and 1998, respectively.
Interest credited to policyholders was $129.4 million and $140.2 million
for the three-month periods ended June 30, 1999 and 1998, respectively. The
decrease of $10.8 million in 1999 compared to 1998 is attributable to a
$12.7 million decrease resulting from a lower average interest credited
rate offset by a $1.9 million increase as a result of a higher level of
average policyholder balances. Policyholder balances averaged $12.4 billion
($10.2 billion of fixed products, consisting of fixed annuities and the
closed block of single premium whole life insurance, and $2.2 billion of
equity-indexed annuities) and $12.2 billion ($10.4 billion of fixed
products and $1.8 billion of equity-indexed annuities) for the three-month
periods ended June 30, 1999 and 1998, respectively. The average interest
credited rate was 4.18% (4.98% on fixed products and 0.85% on equity-
indexed annuities) and 4.59% (5.28% on fixed products and 0.85% on equity-
indexed annuities) for the three-month periods ended June 30, 1999 and
1998, respectively. Interest credited to policyholders was $264.2 million
and $282.3 million for the six-month periods ended June 30, 1999 and 1998,
respectively. The decrease of $18.1 million in 1999 compared to 1998 is
attributable to a $23.8 million decrease resulting from a lower average
interest credited rate offset by a $5.7 million increase as a result of a
higher level of average policyholder balances. Policyholder balances
averaged $12.4 billion ($10.3 billion of fixed products, consisting of
fixed annuities and the closed block of single premium whole life
insurance, and $2.1 billion of equity-indexed annuities) and $12.1 billion
($10.4 billion of fixed products and $1.7 billion of equity-indexed
annuities) for the six-month periods ended June 30, 1999 and 1998,
respectively. The average interest credited rate was 4.25% (5.00% on fixed
products and 0.85% on equity-indexed annuities) and 4.64% (5.29% on fixed
products and 0.85% on equity-indexed annuities) for the six-month periods
ended June 30, 1999 and 1998, respectively. The Company's equity-indexed
annuities credit interest to the policyholder at a "participation rate"
equal to a portion (ranging for existing policies from 30% to 95%) of the
change in value of the S&P 500 Index. The Company's equity-indexed
annuities also provide 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 is reflected net of income recognized on the S&P 500
Index call options and futures resulting in a 0.85% net credited rate.
Average investments in the Company's general account (computed without
giving effect to SFAS 115), including a portion of the Company's cash and
cash equivalents, were $13.0 billion and $12.7 billion for the three-month
periods ended June 30, 1999 and 1998, respectively. Average investments
were $13.0 billion and $12.7 billion for the six-month periods ended June
30, 1999 and 1998, respectively. The increases in 1999 compared to 1998
primarily relate to reinvestment of portfolio earnings.
Net realized investment gains (losses) were $(11.4) million and $(2.5)
million for the three-month periods ended June 30, 1999 and 1998,
respectively. Net realized investment gains (losses) were $(14.5) million
and $(1.7) million for the six-month periods ended June 30, 1999 and 1998,
respectively. Sales of investments generally are made to maximize total
return and to take advantage of prevailing market conditions. An other than
temporary decline of $3 million was recorded in the second quarter of 1999.
There were not any other than temporary declines recorded in the three-
month period ended March 31, 1999 or the three and six-month periods ended
June 30, 1998.
Surrender charges are revenues earned on the early withdrawal of fixed,
equity-indexed and variable annuity policyholder balances. Surrender
charges on fixed, equity-indexed and variable annuity withdrawals generally
are assessed at declining rates applied to policyholder withdrawals during
the first five to seven years of the contract. Total surrender charges were
$4.4 million and $5.4 million for the three-month periods ended June 30,
1999 and 1998, respectively. Total surrender charges were $8.3 million and
$9.6 million for the six-month periods ended June 30, 1999 and 1998,
respectively.
On an annualized basis, total fixed, equity-indexed and variable annuity
withdrawals represented 15.1% and 14.6% of the total average annuity
policyholder and separate account balances for the three-month periods
ended June 30, 1999 and 1998, respectively, and 14.0% and 14.4% of the
total average annuity policyholder and separate account balances for the
six-month periods ended June 30, 1999 and 1998, respectively.
Separate account fees are primarily mortality and expense charges earned on
variable annuity and variable life policyholder balances. These fees, which
are primarily based on the market values of the assets supporting the
contracts in separate accounts, were $7.7 million and $5.4 million for the
three-month periods ended June 30, 1999 and 1998, respectively. Such fees
represented 1.26% and 1.51% of the average variable annuity and variable
life separate account balances for the three-month periods ended June 30,
1999 and 1998, respectively. Separate account fees were $14.3 million and
$10.1 million for the six-month periods ended June 30, 1999 and 1998,
respectively. These fees represented 1.27% and 1.47% of the average
variable annuity and variable life separate account balances for the six-
month periods ended June 30, 1999 and 1998, respectively.
Management fees are primarily investment advisory fees related to the
separate account assets. The fees are based on the level of assets under
management, which are affected by product sales, redemptions, and changes
in the market values of the investments managed. Management fees were $2.5
million and $1.6 million for the three-month periods ended June 30, 1999
and 1998, respectively. Management fees were $4.1 million and $2.6 million
for the six-month periods ended June 30, 1999 and 1998, respectively. The
increase in 1999 compared to 1998 primarily reflects an increase in the
average level of assets under management.
Operating expenses represent compensation and other general and
administrative expenses. These expenses were $14.2 million and $13.6
million for the three-month periods ended June 30, 1999 and 1998,
respectively. Operating expenses were $27.7 million and $29.2 million for
the six-month periods ended June 30, 1999 and 1998, respectively. The
decrease in the six-month period ended June 30, 1999 compared to the same
period in the prior year was primarily due to lower compensation and
selling expenses.
Amortization of deferred policy acquisition costs relates to the costs of
acquiring new business, which vary with, and are primarily related to, the
production of new annuity business. Such costs include commissions, costs
of policy issuance and underwriting and selling expenses. Amortization was
$20.0 million and $18.3 million for the three-month periods ended June 30,
1999 and 1998, respectively. Amortization of deferred policy acquisition
costs was $42.1 million and $37.3 million for the six-month periods ended
June 30, 1999 and 1998, respectively. The amortization increases in 1999
compared to 1998 are primarily related to the growth of business in force.
Deferred policy acquisition cost amortization expense for the six-month
periods ended June 30, 1999 and 1998 represented 27.9% and 27.7%, on an
annualized basis, of investment spread and separate account fees for 1999
and 1998, respectively.
Amortization of value of insurance in force relates to the actuarially
determined present value of projected future gross profits from policies in
force at the date of acquisition. Amortization was $2.4 million and $1.2
million for the three-month periods ended June 30, 1999 and 1998,
respectively. Amortization was $4.6 million and $2.7 million for the six-
month periods ended June 30, 1999 and 1998, respectively. Value of
insurance in force amortization expense for the six-month periods ended
June 30, 1999 and 1998 represented 3.1% and 2.0%, on an annualized basis,
of investment spread and separate account fees for 1999 and 1998,
respectively.
Federal income tax expense was $11.1 million or 34.8% and $12.5 million or
34.2% of pretax income for the three-month periods ended June 30, 1999 and
1998, respectively. The federal income tax expense was $25.0 million or
34.8% and $24.4 million or 32.7% for the six-month periods ended June 30,
1999 and 1998, respectively. The increase in the effective tax rate is due
to the decrease of certain permanent differences coupled with an adjustment
to the 1998 deferred tax liability.
Financial Condition
Stockholder's equity as of June 30, 1999 was $1.125 billion compared to
$1.136 billion as of December 31, 1998. The $10.2 million decrease in
stockholder's equity was due to $46.8 million of net income for the period,
offset by a decline in accumulated other comprehensive income of $47.0
million and a $10.0 million dividend paid to the parent company.
Investments, excluding cash and cash equivalents, totaled $12.7 billion at
June 30, 1999 compared to $12.6 billion at December 31, 1998.
The Company's general investment policy is to hold bonds for long-term
investment and, accordingly, the Company does not have a trading portfolio.
To provide for maximum portfolio flexibility and appropriate tax planning,
the Company classifies its bond portfolio as "available for sale" and
carries such investments at fair value. The Company's total investments at
June 30, 1999 and December 31, 1998 reflected gross unrealized gains
(losses) of $(117.6) million and $105.3 million, respectively, relating to
its bond and equity portfolios.
Approximately $11.5 billion, or 82.6%, of the Company's general account and
certain separate account investments at June 30, 1999, was rated by
Standard & Poor's Corporation, Moody's Investors Service or under
comparable statutory rating guidelines established by the National
Association of Insurance Commissioners (NAIC). At June 30, 1999, the
carrying value of investments in below investment grade securities totaled
$1.2 billion, or 8.9% of general account and certain separate account
investments of $14.0 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.
The carrying value of non-income producing securities at June 30, 1999 and
December 31, 1998 was approximately $18.2 milllion and $30.0 million,
respectively.
Derivatives
As a component of its investment strategy and to reduce its exposure to
interest rate risk, 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 earned on
longer-term fixed-rate assets with interest credited to policyholders. The
Company had 59 and 42 outstanding swap agreements with an aggregate
notional principal amount of $2.7 billion and $2.4 billion as of June 30,
1999 and December 31, 1998, 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. The Company had interest rate cap agreements
with an aggregate notional amount of $250.0 million as of June 30, 1999 and
December 31, 1998.
With respect to the Company's equity-indexed annuities, the Company buys
call options and futures on the S&P 500 Index to hedge its obligations to
provide returns based upon this index. The Company had call options with a
carrying value of $673.4 million and $535.6 million as of June 30, 1999 and
December 31, 1998, respectively. The Company had futures with a carrying
value of $(4.9) million and $(.6) million as of June 30, 1999 and December
31, 1998, respectively.
There are risks associated with some of the techniques the Company uses to
match its assets and liabilities. The primary risk associated with swap,
cap and call option agreements is counterparty nonperformance. The Company
believes that the counterparties to its swap, cap and call option
agreements are financially responsible and that the counterparty risk
associated with these transactions is minimal. 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 the Company expects that any interest rate movements
that adversely affect the market value of swap agreements would be offset
by changes in the market values of such fixed-rate assets. 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 the Company's obligations to provide returns
on equity-indexed annuities based upon the S&P 500 Index, and the Company
believes that any stock market movements that adversely affect the market
value of S&P 500 Index call options 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. The
Company's profitability could be adversely affected if the value of its
swap and cap agreements increase less than (or decrease more than) the
change in the market value of its fixed rate assets and/or if the value of
its S&P 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. In June 1999, SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" was issued. SFAS 137 defers for one year the effective
date of SFAS 133. The rule now will apply to all fiscal quarters of all
fiscal years beginning after June 15, 2000. Earlier adoption is permitted.
Upon adoption, the Company will be required to record a cumulative effect
adjustment to reflect this accounting change. At this time, the Company
has not completed its analysis and evaluation of the requirements and the
impact of this statement.
Liquidity
The Company's liquidity needs and financial resources pertain to the
management of the general account assets and policyholder balances. The
Company uses cash for the payment of annuity and life insurance benefits,
operating expenses, policy acquisition costs, and the purchase of
investments. The Company generates cash from annuity premiums and
deposits, net investment income, and from maturities and sales of its
investments. Annuity premiums, maturing investments and net investment
income have historically been sufficient to meet the Company's cash
requirements. The Company monitors cash and cash equivalents in an effort
to maintain sufficient liquidity and has strategies in place to maintain
sufficient liquidity in changing interest rate environments. Consistent
with the nature of its obligations, the Company has invested a substantial
amount of its general account assets in readily marketable securities. At
June 30, 1999, $10.3 billion, or 73.8%, of the Company's general account
investments are considered readily marketable.
To the extent that unanticipated surrenders cause the Company to sell for
liquidity purposes a material amount of securities prior to their maturity,
such surrenders could have a material adverse effect on the Company.
Although no assurance can be given, the Company believes that liquidity to
fund withdrawals would be available through incoming cash flow, the sale of
short-term or floating-rate instruments, thereby precluding the sale of
fixed maturity investments in a potentially unfavorable market.
Current Rhode Island insurance law permits the payment of dividends or
distributions from the Company to Liberty Financial, which, together with
dividends and distributions paid during the preceding 12 months, do not
exceed the lesser of (i) 10% of statutory surplus as of the preceding
December 31 or (ii) the net gain from operations for the preceding fiscal
year. Any proposed dividend in excess of this amount is called an
"extraordinary dividend" and may not be paid until it is approved by the
Commissioner of Insurance of the State of Rhode Island. As of June 30,
1999, the amount of additional dividends that the Company could pay without
such approval was $49.1 million.
Based upon the historical cash flow of the Company, the Company's current
financial condition and the Company's expectation that there will not be a
material adverse change in the results of operations of the Company and its
subsidiaries during the next twelve months, the Company believes that cash
flow provided by operating activities over this period will provide
sufficient liquidity for the Company to meet its liquidity needs.
Year 2000
Many 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. The Company relies significantly on computer systems and
applications in its 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 the Company causing
disruption of operations, including, among other things, an inability to
process transactions.
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 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. 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.
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.
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. 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.
Effects of Inflation
Inflation has not had a material effect on the Company's consolidated
results of operations to date. The Company manages its investment portfolio
in part to reduce its exposure to interest rate fluctuations. In general,
the fair value of the Company's fixed maturity portfolio increases or
decreases in inverse relationship with fluctuations in interest rates, and
the Company's net investment income increases or decreases in direct
relationship with interest rate changes. For example, if interest rates
decline the Company's fixed maturity investments generally will increase in
fair value, while net investment income will decrease as fixed maturity
investments mature or are sold and the proceeds are reinvested at reduced
rates. However, inflation may result in increased operating expenses that
may not be readily recoverable in the prices of the services charged by the
Company.
Item 3. Quantitative and Qualitative Disclosure of Market Risk
There have not been any material changes during the six-month period ended
June 30, 1999 in the market risks the Company is exposed to and the
management of such risks, which are summarized in our 1998 Form 10-K.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
#27 Financial Data Schedule - page 16
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended
June 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEYPORT LIFE INSURANCE COMPANY
_/s/ Bernhard M. Koch__________
Bernhard M. Koch
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
_/s/ Jeff Whitehead__________
Jeff Whitehead
Vice President and Treasurer
(Chief Accounting Officer)
Date: August 13, 1999
Exhibit Index
Exhibit No. Description Page
27 Financial Data Schedule 16