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 September 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 September 30, 1999.
Exhibit Index - Page 17 Page 1 of 18
KEYPORT LIFE INSURANCE COMPANY
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 1999
and December 31, 1998 3
Consolidated Income Statement for the Three and
Nine-month Periods Ended September 30, 1999 and 1998 4
Consolidated Statement of Cash Flows for the Nine-month
Periods Ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 7-14
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit Index 17
2
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(in thousands)
September 30, December 31,
ASSETS 1999 1998
Unaudited
Cash and investments:
Bonds - available for sale (amortized
cost: 1999 - $10,993,746; 1998 -
$11,174,697) $ 10,755,549 $ 11,277,204
Equity securities (cost: 1999 - $18,430;
1998 - $21,836) 25,777 24,649
Mortgage loans 13,049 55,117
Policy loans 589,626 578,770
Other invested assets 684,573 662,513
Cash and cash equivalents 1,115,645 719,625
Total cash and investments 13,184,219 13,317,878
Accrued investment income 176,165 160,950
Deferred policy acquisition costs 647,344 407,593
Intangible assets 17,140 18,082
Income taxes recoverable 13,542 31,909
Receivable for investments sold 39,960 37,936
Other assets 63,868 35,345
Separate account assets 2,849,628 1,765,538
Total assets $ 16,991,866 $ 15,775,231
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy liabilities $ 12,075,641 $ 12,504,081
Deferred income taxes 125,943 143,596
Payable for investments purchased and
loaned 835,526 240,440
Other liabilities 49,359 28,312
Separate account liabilities 2,790,388 1,723,205
Total liabilities 15,876,857 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 654,316 600,396
Accumulated other comprehensive (loss)
income (48,255) 26,253
Total stockholder's equity 1,115,009 1,135,597
Total liabilities and stockholder's
equity $ 16,991,866 $ 15,775,231
See accompanying notes
3
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENT
(in thousands)
Unaudited
Three-months Ended Nine-months Ended
September 30, September 30,
1999 1998 1999 1998
Investment income $ 196,724 $ 201,158 $ 597,379 $ 608,188
Interest credited to
policyholders 131,301 143,271 395,488 425,605
Investment spread 65,423 57,887 201,891 182,583
Net realized investment
(losses) gains (12,331) 4,112 (26,782) 2,447
Fee income:
Surrender charges 4,887 4,384 13,214 14,004
Separate account fees 8,747 5,352 23,033 15,454
Management fees 2,328 769 6,472 3,324
Total fee income 15,962 10,505 42,719 32,782
Expenses:
Policy benefits 986 386 2,930 1,406
Operating expenses 13,468 10,817 41,191 39,967
Amortization of deferred
policy acquisition costs 22,837 16,643 69,530 56,656
Amortization of
intangible assets 314 314 942 942
Total expenses 37,605 28,160 114,593 98,971
Income before income taxes 31,449 44,344 103,235 118,841
Income tax expense 9,320 14,565 34,315 38,921
Net income $ 22,129 $ 29,779 $ 68,920 $ 79,920
See accompanying notes
4
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Unaudited
Nine-months Ended
September 30,
1999 1998
Cash flows from operating activities:
Net income $ 68,920 $ 79,920
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to policyholders 395,488 425,606
Net realized investment losses (gains) 26,782 (2,447)
Net amortization on investments 61,552 101,918
Change in deferred policy acquisition costs (13,369) (20,919)
Change in current and deferred income taxes 46,096 12,158
Net change in other assets and liabilities (23,962) 14,896
Net cash provided by operating activities 561,507 611,102
Cash flows from investing activities:
Investments purchased - available for sale (3,878,354) (5,207,431)
Investments sold - available for sale 3,903,720 4,060,558
Investments matured - available for sale 110,760 938,164
Increase in policy loans (10,856) (24,817)
Decrease in mortgage loans 42,068 4,290
Change in other invested assets 9,537 33,394
Value of business acquired, net of cash (3,999)
Net cash provided by (used in) investing
activities 176,875 (199,841)
Cash flows from financing activities:
Withdrawals from policyholder accounts (1,570,819) (1,371,637)
Deposits to policyholder accounts 640,364 1,089,325
Dividends (15,000) (5,000)
Securities lending 603,093 (24,997)
Net cash used in financing activities (342,362) (312,309)
Change in cash and cash equivalents 396,020 98,952
Cash and cash equivalents at beginning of
period 719,625 1,162,347
Cash and cash equivalents at end of period $ 1,115,645 $ 1,261,299
See accompanying notes
5
KEYPORT LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 September 30, 1999
and December 31, 1998 and the related consolidated statement of income for
the three and nine-month periods ended September 30, 1999 and 1998 and
consolidated statement of cash flows for the nine-month periods ended
September 30, 1999 and 1998, respectively. 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 nine-month period ended September 30, 1999 are not necessarily
indicative of the results to be expected for the full year.
2. Comprehensive Income
Total comprehensive (loss) income, net of tax, for the nine-month periods
ended September 30, 1999 and 1998, was $(5.6) million and $53.6 million,
respectively.
3. 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 effective date of SFAS 133 is for 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.
6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
Net income was $22.1 million and $29.8 million for the three-month periods
ended September 30, 1999 and 1998, respectively. Net income was $68.9
million and $79.9 million for the nine-month periods ended September 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 (gains) was $43.8 million and $40.2 million and $130.0 million and
$116.4 million for the three and nine-month periods ended September 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 $65.4 million and $57.9 million for the three-month
periods ended September 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 1.58% for the three-month periods ended
September 30, 1999 and 1998, respectively. Investment spread was $201.9
million and $182.6 million for the nine-month periods ended September 30,
1999 and 1998, respectively. The investment spread percentage was 1.89%
and 1.71% for the nine-month periods ended September 30, 1999 and 1998,
respectively.
Investment income was $196.7 million and $201.2 million for the three-month
periods ended September 30, 1999 and 1998, respectively. The decrease of
$4.5 million in 1999 compared to 1998 is attributable to a $1.5 million
decrease resulting from a lower average investment yield and a $3.0 million
decrease as a result of a lower level of average invested assets.
Investment income for the three-month periods ended September 30, 1999 and
1998, includes $19.8 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 6.16% and 6.20% for the
three-month periods ended September 30, 1999 and 1998, respectively.
Investment income was $597.4 million and $608.2 million for the nine-month
periods ended September 30, 1999 and 1998, respectively. The decrease of
$10.8 million in 1999 compared to 1998 is attributable to a $18.7 million
decrease resulting from a lower average investment yield offset by a $7.9
million increase as a result of a higher level of average invested assets.
Investment income for the nine-month periods ended September 30, 1999 and
1998, includes $58.6 million and $53.1 million, respectively, of S&P 500
Index call option amortization expense related to the Company's equity-
indexed annuities. The average investment yield was 6.16% and 6.35% for the
nine-month periods ended September 30, 1999 and 1998, respectively.
Interest credited to policyholders was $131.3 million and $143.3 million
for the three-month periods ended September 30, 1999 and 1998. The decrease
of $12.0 million in 1999 compared to 1998 is attributable to a $10.0
million decrease resulting from a lower average interest credited rate and
a $2.0 million decrease as a result of a lower level of average
policyholder balances. Policyholder balances averaged $12.2 billion ($10.0
7
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 $12.4 billion ($10.6 billion of fixed products and
$1.8 billion of equity-indexed annuities) for the three-month periods ended
September 30, 1999 and 1998, respectively. The average interest credited
rate was 4.30% (5.00% on fixed products and 0.85% on equity-indexed
annuities) and 4.62% (5.25% on fixed products and 0.85% on equity-indexed
annuities) for the three-month periods ended September 30, 1999 and 1998,
respectively. Interest credited to policyholders was $395.5 million and
$425.6 million for the nine-month periods ended September 30, 1999 and
1998, respectively. The decrease of $30.1 million in 1999 compared to 1998
is attributable to a $34.1 million decrease resulting from a lower average
interest credited rate offset by a $4.0 million increase as a result of a
higher level of average policyholder balances. Policyholder balances
averaged $12.3 billion ($10.2 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 $12.2 billion
($10.5 billion of fixed products and $1.7 billion of equity-indexed
annuities) for the nine-month periods ended September 30, 1999 and 1998,
respectively. The average interest credited rate was 4.27% (5.00% on fixed
products and 0.85% on equity-indexed annuities) and 4.64% (5.28% on fixed
products and 0.85% on equity-indexed annuities) for the nine-month periods
ended September 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 40% 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 $12.8 billion and $13.0 billion for the three-month
periods ended September 30, 1999 and 1998, respectively. Average
investments were $12.9 billion and $12.8 billion for the nine-month periods
ended September 30, 1999 and 1998, respectively.
Net realized investment (losses) gains were $(12.3) million and $4.1
million and $(26.8) million and $2.4 for the three and nine-month periods
ended September 30, 1999 and 1998, respectively. Sales of investments
generally are made to maximize total return and to take advantage of
prevailing market conditions. Other than temporary declines of $5.7
million and $8.7 million were recorded in the three and nine-month periods
ended September 30, 1999. There were no other than temporary declines
recorded in the three and nine-month periods ended September 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
$4.9 million and $4.4 million for the three-month periods ended September
30, 1999 and 1998, respectively. Total surrender charges were $13.2 million
8
and $14.0 million for the nine-month periods ended September 30, 1999 and
1998, respectively.
On an annualized basis, total fixed, equity-indexed and variable annuity
withdrawals represented 15.2% and 12.4% of the total average annuity
policyholder and separate account balances for the three-month periods
ended September 30, 1999 and 1998, respectively, and 14.4% and 13.7% of the
total average annuity policyholder and separate account balances for the
nine-month periods ended September 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 $8.7 million and $5.4 million for the
three-month periods ended September 30, 1999 and 1998, respectively. Such
fees represented 1.32% and 1.53% of the average variable annuity and
variable life separate account balances for the three-month periods ended
September 30, 1999 and 1998, respectively. Separate account fees were
$23.0 million and $15.5 million for the nine-month periods ended September
30, 1999 and 1998, respectively. These fees represented 1.29% and 1.50% of
the average variable annuity and variable life separate account balances
for the nine-month periods ended September 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 $2.3
million and $0.8 million for the three-month periods ended September 30,
1999 and 1998, respectively. Management fees were $6.5 and $3.3 million for
the nine-month periods ended September 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 $13.5 million and $10.8
million and $41.2 million and $40.0 million for the three and nine-month
periods ended September 30, 1999 and 1998, respectively. The increases in
the three and nine-month periods ended September 30, 1999 compared to the
same periods in the prior year were primarily due to higher 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 and to the actuarially determined
present value of projected future gross profits from policies in force at
the date of acquisition. Such acquisition costs include commissions, costs
of policy issuance and underwriting and selling expenses.
Amortization was $22.8 million and $16.6 million for the three-month
periods ended September 30, 1999 and 1998, respectively. Amortization was
$69.5 million and $56.7 million for the nine-month periods ended September
30, 1999 and 1998, respectively. The amortization increases in 1999
compared to 1998 are primarily related to the growth of business in force.
9
Amortization for the three-month periods ended September 30, 1999 and 1998
represented 30.8% and 26.3%, on an annualized basis, of investment spread
and separate account fees for 1999 and 1998, respectively. Amortization for
the nine-month periods ended September 30, 1999 and 1998 represented 30.9%
and 28.6%, on an annualized basis, of investment spread and separate
account fees for 1999 and 1998, respectively.
Federal income tax expense was $9.3 million or 29.6% and $14.6 million or
32.8% of pretax income for the three-month periods ended September 30, 1999
and 1998, respectively. The decrease in the effective tax rate for the
three-month periods is due to the change in certain permanent differences.
The federal income tax expense was $34.3 million or 33.2% and $38.9 million
or 32.8% for the nine-month periods ended September 30, 1999 and 1998,
respectively. The increase in the effective tax rate for the nine-month
periods 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 September 30, 1999 was $1.115 billion compared
to $1.136 billion as of December 31, 1998. The $20.6 million decrease in
stockholder's equity was due to $74.5 million of net unrealized investment
losses, $15.0 million in dividends paid to the parent company, offset by
$68.9 million of net income for the period.
Investments, excluding cash and cash equivalents, totaled $12.1 billion at
September 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
September 30, 1999 and December 31, 1998 reflected gross unrealized
(losses) gains of $(230.7) million and $105.3 million, respectively,
relating to its bond and equity portfolios.
Approximately $11.3 billion, or 82.3%, of the Company's general account and
certain separate account investments at September 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 September 30, 1999, the
carrying value of investments in below investment grade securities totaled
$1.2 billion, or 8.8% of combined general account and certain separate
account investments of $13.7 billion. Below investment grade securities
generally provide higher yields and involve greater risks than investment
grade securities because their issuers typically are more highly leveraged
and more vulnerable to adverse economic conditions than investment grade
issuers. In addition, the trading market for these securities may be more
limited than for investment grade securities.
The carrying value of non-income producing securities at September 30, 1999
and December 31, 1998 was approximately $14.6 milllion and $30.0 million,
respectively.
10
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
61 and 42 outstanding swap agreements with an aggregate notional principal
amount of $2.8 billion and $2.4 billion as of September 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 September 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 $515.4 million and $535.6 million as of September 30,
1999 and December 31, 1998, respectively. The Company had futures with a
carrying value of $11.3 million and $(0.6) million as of September 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
11
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 effective date of SFAS 133 is for 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 September
30, 1999, $9.8 billion, or 74.5%, 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, or the sale
of short-term or floating-rate instruments, thereby precluding the sale of
fixed maturity investments in a potentially unfavorable market.
Current Rhode Island insurance law permits the payment of dividends or
distributions from the Company to Liberty Financial, which, together with
dividends and distributions paid during the preceding 12 months, do not
exceed the lesser of (i) 10% of statutory surplus as of the preceding
December 31 or (ii) the net gain from operations for the preceding fiscal
year. Any proposed dividend in excess of this amount is called an
"extraordinary dividend" and may not be paid until it is approved by the
Commissioner of Insurance of the State of Rhode Island. As of December 31,
12
1998, the amount of additional dividends that the Company could pay without
such approval during 1999 was $59.1 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 and may not be able to
correctly process dates after December 31,1999. The Company relies
significantly on computer systems and applications in its operations. To
the extent that these systems are not Year 2000 compliant (i.e. cannot
correctly process dates after December 31, 1999) and such non-compliance is
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 information technology systems and assessed its Year 2000 readiness.
The Company's systems include internally developed programs, third-party
purchased programs and third-party custom developed programs. For programs
which were identified as not being Year 2000 compliant, the Company has
implemented a remediation plan that includes repairing or replacing the
programs and testing for Year 2000 compliance. The remediation is complete
for all critical applications and the Company believes that with
modifications made to existing software and conversions to new software,
the Year 2000 issue will not pose significant operational problems for its
computer systems. In addition, all non-compliant hardware components of
the Company's information technology systems have been upgraded or
replaced. The Company also identified its non-information technology
systems affected by Year 2000 issues. The Company initiated remediation
efforts in this area and expects to complete this phase during the fourth
quarter of 1999.
The Company's Year 2000 efforts have included assessing the potential
impact on the Company of third parties' failure to remediate their own Year
2000 issues. These efforts have included: (1) identifying third parties
which have significant business relationships with the Company and
inquiring of such third parties regarding their Year 2000 readiness; (2)
evaluating such third parties' responses to the Company's inquiries; and
(3) conducting additional inquiries and evaluations with respect to third
parties as determined to be necessary in each case, based on the nature of
third party responses or their failure to respond and the significance of
the business relationship. The Company received information from such
parties and is in the process of requesting confirmation from these parties
with respect to remediation of their Year 2000 issues. In addition, for
certain critical applications, the Company participated in both industry-
wide testing of interfaces with third parties and point-to-point testing of
interfaces with major business partners. The Company has substantially
completed initiatives (1) and (2). It is continuing to conduct the
activities described in (3) and anticipates that these activities will
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continue through the end of 1999. However, because the Company does not
have control over these third parties, the Company cannot currently
determine to what extent future operating results may be adversely affected
by the failure of these third parties to adequately address their Year 2000
issues.
The Company has developed contingency plans to minimize the impact of
potential Year 2000 problems on critical systems. The contingency planning
process involved identifying reasonably likely business disruption
scenarios that, if they were to occur, could create significant problems in
critical functions of the Company. Alternative providers were then
identified, year-end staffing plans were finalized, manual work-arounds
were developed, and prioritization processes for problem resolution were
developed. Testing of the contingency plans will continue through the end
of 1999.
The complexity of the Year 2000 issue gives rise to numerous uncertainties
and extensive preparation efforts cannot guarantee a total absence of Year
2000 problems. 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 systems rely are not timely converted, or if contingency plans do
not adequately correct disruptions that could occur, the Year 2000 issues
could have a material impact on the operations of the Company.
Prior to 1999, the external cost of the Year 2000 project was approximately
$0.7 million, which was primarily related to consultants and replacement
hardware and software. Such external costs for the first nine months of
1999 were approximately $0.7 million. The additional external costs to
complete the project are currently expected to be approximately $1.0
million that are primarily related to testing of certain non-critical
applications. The Company does not segregate payroll or other internal
costs specifically devoted to its efforts to address Year 2000 issues, but
does not believe these costs to be significant. All of the costs of the
Year 2000 project have been and will be funded through operating cash flows
and have been and will be expensed as incurred. In the opinion of
management, the cost of addressing the Year 2000 issue is not expected to
have a material adverse effect on the Company's financial condition or its
results of operations.
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.
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Item 3. Quantitative and Qualitative Disclosure of Market Risk
There have not been any material changes during the nine-month period ended
September 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 18
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended
September 30, 1999.
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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: November 15, 1999
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Exhibit Index
Exhibit No. Description Page
27 Financial Data Schedule 18
17