<Page>
Exhibit (c)(4)
ACTUARIAL APPRAISAL OF
KEYPORT LIFE INSURANCE COMPANY
AND SUBSIDIARIES
AS OF SEPTEMBER 30, 2000
PREPARED FOR:
Liberty Financial Companies, Inc.
PREPARED BY:
Kenneth P. Mungan, F.S.A., M.A.A.A.
John R. Roeger, A.S.A., M.A.A.A.
Bruce W. Winterhof, F.S.A., M.A.A.A.
Laird D. Zacheis, F.S.A., M.A.A.A.
December 16, 2000
Milliman USA
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[MILLIMAN USA LETTERHEAD]
December 16, 2000
Mr. Andrew Hilbert
Chief Financial Officer
Liberty Financial Companies
600 Atlantic Avenue
Boston, Massachusetts 02210
Dear Andy:
This report provides actuarial appraisal values and projections as of September
30, 2000 for Keyport Life Insurance Company and its insurance subsidiaries.
Section I outlines the scope and qualifications associated with the analysis.
Actuarial appraisal values, yearly statutory profits and sensitivity of results
to changes in certain actuarial assumptions are summarized in Section II.
Section III provides the development of adjusted statutory book value. Sections
IV and the Appendices summarize the methodology, models and actuarial
assumptions underlying the developed values. Actuarial values, pro-forma as of
June 30, 2001, are illustrated in Section V.
This report and all supporting and sensitivity analysis provided to potential
purchasers is part of the Evaluation Materials described in the Confidentiality
Agreement executed by potential purchasers, and is subject to all terms and
provisions of the Confidentiality Agreement.
The professionals responsible for developing the actuarial values in this report
are available to answer any questions regarding the assumptions and procedures
underlying the values. Please contact either of us if any questions are raised.
Sincerely,
Bruce W. Winterhof, F.S.A. Laird D. Zacheis, F.S.A.
Consulting Actuary Consulting Actuary
Milliman USA
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TABLE OF CONTENTS
<Table>
<Caption>
SECTION PAGE
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I. Introduction and Qualifications 1
II. Summary of Results 6
III. Development of Adjusted Statutory Book Value 18
IV. Methodology, Models and Actuarial Assumptions 19
V. Summary of Pro-Forma Results as of June 30, 2001 23
APPENDIX
--------
A Summary of Asset and Investment Assumptions A-1
B Summary of Liability Models and Assumptions B-1
C Detailed Statutory Projection Output C-1
</Table>
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SECTION I
INTRODUCTION AND QUALIFICATIONS
Milliman & Robertson, Inc. (M&R) was retained by Liberty Financial Companies,
Inc. (LFC) to perform certain actuarial analyses with respect to Keyport Life
Insurance Company (Keyport Life) and its subsidiaries Keyport Benefit Life
Insurance Company (KBIC) and Independence Life and Annuity Insurance Company
(Independence). Specifically, our assignment has been to develop projected
statutory earnings arising from the existing and potential future life and
annuity business of Keyport Life, KBIC, and Independence (collectively Keyport
or the Companies) and to calculate present values of these future earnings.
Keyport is a wholly owned subsidiary of LFC, which is publicly traded but
majority owned by Liberty Mutual Insurance Company. In addition to Keyport, LFC
owns a number of mutual fund asset managers. Keyport offers fixed, equity
indexed, and variable annuities through banks, brokers/dealers, and general
agent distribution channels. Keyport was one of the first companies to introduce
equity-indexed annuities (EIA), and was a leading writer of EIA for several
years. More recently, most of Keyport's sales have been fixed annuity or
variable annuity. Keyport's variable annuity products offer both unaffiliated
third party funds and funds that are affiliated through LFC.
M&R is frequently engaged to prepare such analyses of life insurance companies.
The approach followed in this situation is consistent with methodology we have
generally employed in previous engagements.
We have prepared this report with the understanding that it will be used
internally by Keyport and LFC for purposes of analyzing strategic alternatives.
The report is intended to provide certain actuarial information and analyses as
of September 30, 2000 that would assist a qualified actuary, technically
competent in the area of actuarial appraisals, to develop an estimate of (1) the
adjusted statutory book value of the Companies as of
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September 30, 2000; (2) the projected amounts and present values of future
statutory profits from insurance in force as of September 30, 2000; and (3) the
projected statutory earnings and present values from insurance written after
September 30, 2000.
This report may not be distributed, disclosed, copied or otherwise furnished to
any party other than Keyport and LFC without our prior consent. Any distribution
of this report must be in its entirety.
Nothing included in this report is to be used in any filings with any public
body, such as but not limited to the Securities and Exchange Commission or State
Insurance Departments, without prior written consent from M&R.
We have projected future statutory profits computed according to regulatory
reporting criteria. The validity of these projections depends on how well future
experience conforms to our assumptions. Our assumptions for future mortality,
persistency, expenses, investment return and other actuarial factors are based
on our evaluation of recent experience of the Companies and anticipated future
trends. The approach employed to develop the projection assumptions is described
below.
1. Persistency and mortality assumptions are based on the
Companies' experience, industry experience, and pricing
assumptions.
2. Production assumptions were provided by the Companies.
3. Expenses were projected as a combination of: a) general
industry allowables; and b) transitional expenses which equal
the excess of total budgeted expenses over projected
allowables.
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4. Future investment income reflects the run-off of the September
30, 2000 asset portfolio and new investments based on
assumptions for asset yield, quality, and maturity provided by
Keyport. The projections are based on the November 27, 2000
interest rate environment.
5. Initial credited rates equal actual credited rates. Future
credited rates are based on the Companies' target spreads and
credited rate strategy.
Actual experience may differ from that assumed in the projections. Sensitivity
of results to changes in certain assumptions is provided as part of Section II,
Summary of Results.
RATIONALE FOR STATUTORY APPROACH
Our development of the projected amounts and actuarial values in this report
reflect statutory accounting practices. Two reasons why we believe it is
appropriate to analyze a life company using the statutory approach are:
1. Statutory accounting determines the availability of earnings
for dividends to life company shareholders.
2. Statutory surplus constitutes the funds available for
investments in new business or other ventures requiring
capital.
RELATIONSHIP TO MARKET VALUE
An actuarial appraisal value does not necessarily represent the value of a
company's stock in the open market. Rather, it is derived from a carefully
constructed projection of future earnings and therefore reflects the value of a
company's earnings potential under a specific set of assumptions. Assignment of
a value to any business
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enterprise is also a matter of informed judgment. Purchase or sales price is
determined by the parties involved, based on their respective evaluations of all
relevant factors, including:
o the perspective of the buyer and the seller and the level of
confidence regarding the assumptions underlying projected
earnings,
o the desired rate of return and the associated cost of capital,
o the degree of urgency associated with the sale or acquisition,
o economies of scale and scope associated with the potential
transaction, and
o significant tax or other consequences/benefits, unique to a
proposed transaction, which can have an effect on fair market
value.
DATA RELIANCE
We have relied on information supplied by the Companies as well as on published
financial information. We performed no audits or independent verification of the
information furnished to us. To the extent that there are any material errors in
the information provided, the results of our analysis will be affected as well.
The principal materials relied upon include:
1. Information contained in the public and internal statutory
financial statements of the Companies.
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2. Inventory of insurance and annuity policies in force as of
December 31, 1999 and September 30, 2000.
3. Information on policies in force, including schedules or
computer tapes of charges, cash values, statutory reserve
factors, policy benefits, commission rates, and other policy
information furnished to us by the Companies.
4. Information and analysis supplied by the Companies on recent
persistency and mortality experience, and assumptions as to
future expected experience as embodied in internal pricing.
5. Information provided by the Companies on invested assets as of
September 30, 2000, expected default rates, and the investment
of any positive net cash flows. Information provided by the
Companies on equity option hedging strategies employed for its
Equity Indexed Annuity business. Total return expectations on
the Alternative Asset Portfolio, provided by the Company.
6. Information provided by the Companies on future expenses.
7. Information provided by the Companies on statutory/tax reserve
differences and DAC tax outstanding as of September 30, 2000,
and other information with respect to federal income taxes.
8. Information with respect to new business production levels, as
supplied by the Companies.
9. Information provided by the Companies on current statutory
reserving practices.
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SECTION II
SUMMARY OF RESULTS
SUMMARY OF ACTUARIAL APPRAISAL VALUES
Table I summarizes the results of our analysis of the components of value as of
September 30, 2000. The items included are: 1) Adjusted Statutory Book Value; 2)
the present value of future statutory profits from business in force on
September 30, 2000; and 3) the present value of future statutory profits from
business written after September 30, 2000.
Future business production was valued in Table I assuming ten years of new
business writings. Details regarding production are provided later in this
section.
Tables II and III provide a summary of ten years of projected after-tax
statutory profits. The ten-year projections reflect an assumption that earnings
in excess of required capital funding are distributed from the Companies. Ten
years of new production are reflected in Tables II and III.
Summaries of the models, products, methodology and assumptions for each line of
business are provided in Section IV and in the Appendices. Detailed projections
of annual statutory profits and present values of profit by line of business are
provided in Appendix C.
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TABLE I
KEYPORT LIFE COMPANIES
SUMMARY OF ACTUARIAL VALUES
AS OF SEPTEMBER 30, 2000
(IN MILLIONS)
<Table>
<Caption>
Discount Rate
------------------------------------------
Component of Value 9% 11% 13%
------------------------------------------
1) ADJUSTED STATUTORY BOOK VALUE $987.8 $987.8 $987.8
------------------------------------------
2) VALUE OF BUSINESS INFORCE AS OF SEPTEMBER 30, 2000
Deferred Annuity - Fixed - SPDA/FPDA $617.0 $572.0 $533.2
Deferred Annuity - Equity Indexed 151.4 141.3 132.3
Deferred Annuity - Variable 192.3 168.4 149.1
SPWL 241.4 214.2 192.1
Independence Variable Life 12.2 10.5 9.2
Payout Annuity 56.0 51.1 46.9
Institutional 7.4 7.1 6.8
------------------------------------------
Subtotal Pre-Tax Existing Business $1,277.7 $1,164.5 $1,069.6
Federal Income Taxes (448.2) (408.8) (375.9)
------------------------------------------
Subtotal After-Tax Existing Business $829.5 $755.7 $693.8
------------------------------------------
3) Subtotal (1) plus (2)
Pre-Tax $2,265.5 $2,152.3 $2,057.4
After-Tax 1,817.3 1,743.5 1,681.6
------------------------------------------
4) TEN YEARS OF NEW BUSINESS FROM SEPTEMBER 30, 2000
Deferred Annuity - Fixed $678.4 $527.5 $411.4
Deferred Annuity - Equity Indexed 91.8 66.6 47.3
Deferred Annuity - Variable 629.5 467.6 352.6
Immediate Annuity - Variable 187.8 110.5 58.4
Institutional 270.2 222.9 186.4
Unallocated Expense (201.8) (192.2) (183.4)
------------------------------------------
Subtotal Pre-Tax Future Business $1,655.9 $1,203.0 $872.7
Federal Income Taxes (648.7) (493.0) (378.3)
------------------------------------------
Subtotal After-Tax Future Business $1,007.2 $710.1 $494.4
------------------------------------------
5) TOTAL ACTUARIAL VALUES (3) PLUS (4)
Pre-Tax $3,921.4 $3,355.3 $2,930.1
After-Tax 2,824.6 2,453.6 2,176.0
------------------------------------------
</Table>
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Keyport Life Companies
Line of Business Statutory Projection
(post-tax; in millions of dollars)
<Table>
<Caption>
Baseline
Year Ending September 30 2000 2001 2002 2003 2004 2005
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Existing Business at 9/30/2000
Deferred Annuity - Fixed - SPDA/FPDA 137.7 142.0 121.6 99.8 81.9
Deferred Annuity - Equity Indexed 40.3 32.0 26.8 23.4 22.8
Deferred Annuity - Variable 20.7 22.2 21.9 21.7 21.9
SPWL 33.5 33.7 32.4 31.2 29.7
ILI Variable Life 1.4 1.3 1.3 1.3 1.3
Payout Annuity 11.3 10.2 8.9 7.8 7.0
Institutional 2.6 2.5 2.2 1.5 0.3
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Total Existing Business 247.4 244.0 215.2 186.8 164.8
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Ten Years of New Business from 9/30/2000
Deferred Annuity - Fixed (70.0) (37.1) (9.7) 12.3 33.8
Deferred Annuity - Equity Indexed (15.8) (14.9) (11.2) (5.9) 0.5
Deferred Annuity - Variable (10.8) (7.9) (2.2) 4.0 11.0
Immediate Annuity - Variable (17.3) (20.5) (23.4) (24.6) (25.2)
Institutional 2.2 6.9 12.1 17.5 23.0
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Total New Business (111.7) (73.3) (34.3) 3.3 43.0
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Unallocated Expense (48.4) (46.5) (43.1) (38.7) (32.8)
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Interest on Capital, Surplus & AVR 77.0 69.4 74.1 79.4 88.1
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Total Pre-Tax Earnings 164.4 193.6 211.9 230.7 263.1
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Federal Income (100.5) (90.3) (76.1) (85.9) (106.1)
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After-Tax Earnings 63.9 103.3 135.8 144.9 157.0
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Distributed Earnings (Capital Contributions) 161.9 42.6 69.0 32.7 42.8
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General Account Liabilities 12,003.8 12,186.4 12,645.6 13,182.4 14,382.5 15,517.0
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Separate Account Liabilities 3,696.4 5,787.4 8,481.2 11,488.8 14,608.6 18,358.4
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Capital, Surplus & AVR 987.8 889.8 950.6 1,017.3 1,129.5 1,243.7
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NAIC RBC (Company Action Level) 424.4 444.9 475.3 508.7 564.7 621.8
-----------------------------------------------------------------------------------------------------------------------------------
RBC Ratio (Company Action Level) 232.7% 200.0% 200.0% 200.0% 200.0% 200.0%
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</Table>
<Table>
<Caption>
Baseline
Year Ending September 30 2006 2007 2008 2009 2010
--------------------------------------------------------------------------------------------------------------------
Existing Business at 9/30/2000
Deferred Annuity - Fixed - SPDA/FPDA 60.2 48.9 41.9 35.3 28.6
Deferred Annuity - Equity Indexed 16.8 11.6 10.1 9.5 8.5
Deferred Annuity - Variable 23.3 25.1 25.2 23.0 21.3
SPWL 28.0 26.4 24.9 23.8 22.3
ILI Variable Life 1.3 1.3 1.3 1.2 1.2
Payout Annuity 6.3 5.6 5.0 4.6 4.1
Institutional 0.0 0.0 0.0 0.0 0.0
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Total Existing Business 135.9 118.9 108.4 97.5 86.0
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Ten Years of New Business from 9/30/2000
Deferred Annuity - Fixed 52.2 68.8 85.6 102.8 120.3
Deferred Annuity - Equity Indexed 3.6 6.2 9.0 12.1 15.4
Deferred Annuity - Variable 18.8 27.7 37.4 48.8 64.9
Immediate Annuity - Variable (26.0) (26.9) (28.0) (29.5) (31.3)
Institutional 28.7 34.6 40.8 47.4 54.4
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Total New Business 77.2 110.5 144.9 181.6 223.7
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Unallocated Expense (25.6) (17.0) (6.5) 0.0 0.0
--------------------------------------------------------------------------------------------------------------------
Interest on Capital, Surplus & AVR 97.0 105.4 115.3 127.3 141.1
--------------------------------------------------------------------------------------------------------------------
Total Pre-Tax Earnings 284.6 317.8 362.1 406.4 450.9
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Federal Income (120.9) (135.0) (153.1) (170.5) (183.2)
--------------------------------------------------------------------------------------------------------------------
After-Tax Earnings 163.7 182.8 209.0 235.8 267.7
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Distributed Earnings (Capital Contributions) 55.8 56.1 55.8 57.8 66.5
--------------------------------------------------------------------------------------------------------------------
General Account Liabilities 16,475.9 17,643.4 19,131.4 20,901.9 22,915.0
--------------------------------------------------------------------------------------------------------------------
Separate Account Liabilities 22,592.5 27,312.0 32,568.4 38,427.9 44,992.0
--------------------------------------------------------------------------------------------------------------------
Capital, Surplus & AVR 1,351.6 1,478.2 1,631.4 1,809.4 2,010.6
--------------------------------------------------------------------------------------------------------------------
NAIC RBC (Company Action Level) 675.8 739.1 815.7 904.7 1,005.3
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RBC Ratio (Company Action Level) 200.0% 200.0% 200.0% 200.0% 200.0%
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</Table>
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Keyport Life Companies
Projected Statutory Operating Results
(in millions of dollars)
<Table>
<Caption>
Baseline
Year Ending September 30 2000 2001 2002 2003 2004
------------------------------------------------------------------------------------------------------------------------
Existing and Ten Years of New Business
Premium Income $4,104.5 $4,964.0 $5,736.5 $6,483.4
Investment Income 1,032.2 1,017.0 1,043.2 1,101.5
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Total Income 5,136.7 5,981.0 6,779.7 7,584.9
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Death Benefits 330.6 365.7 412.0 469.2
Surrender and Other Benefits 2,552.3 2,642.0 3,218.7 3,428.9
Reserve Increase 182.7 459.2 536.8 1,200.1
Separate Account Transfers 1,640.0 2,016.2 2,056.9 1,872.5
Expense 88.8 95.9 102.5 108.0
Commission 177.9 208.4 240.9 275.5
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Total Benefits and Expenses 4,972.2 5,787.4 6,567.8 7,354.2
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Total Pre-Tax Earnings 164.4 193.6 211.9 230.7
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Federal Income Tax (100.5) (90.3) (76.1) (85.9)
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After-Tax Earnings 63.9 103.3 135.8 144.9
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Distributed Earnings (Capital Contributions) 161.9 42.6 69.0 32.7
------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
Baseline
Year Ending September 30 2005 2006 2007 2008 2009 2010
---------------------------------------------------------------------------------------------------------------------------------
Existing and Ten Years of New Business
Premium Income $7,282.1 $8,188.0 $9,216.3 $10,384.2 $11,711.9 $13,222.3
Investment Income 1,194.2 1,271.6 1,352.5 1,460.5 1,593.9 1,745.6
Total Income 8,476.4 9,459.6 10,568.8 11,844.7 13,305.8 14,967.9
Death Benefits 531.5 591.7 656.6 732.2 820.7 922.0
Surrender and Other Benefits 3,937.4 4,853.5 55,39.4 6,249.0 7,140.7 8,200.6
Reserve Increase 1,134.5 958.9 1,167.6 1,488.0 1,770.5 2,013.0
Separate Account Transfers 2,183.0 2,290.3 2,351.5 2,414.9 2,490.2 2,605.3
Expense 113.4 119.1 125.0 131.3 144.0 166.0
Commission 313.4 361.6 411.0 467.3 533.3 610.2
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Total Benefits and Expenses 8,213.2 9,175.0 10,251.0 11,482.7 12,899.4 14,517.0
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Total Pre-Tax Earnings 263.1 284.6 317.8 362.1 406.4 450.9
---------------------------------------------------------------------------------------------------------------------------------
Federal Income Tax (106.1) (120.9) (135.0) (153.1) (170.5) (183.2)
---------------------------------------------------------------------------------------------------------------------------------
After-Tax Earnings 157.0 163.7 182.8 209.0 235.8 267.7
---------------------------------------------------------------------------------------------------------------------------------
Distributed Earnings (Capital Contributions) 42.8 55.8 56.1 55.8 57.8 66.5
---------------------------------------------------------------------------------------------------------------------------------
</Table>
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DISCOUNT RATES
The actuarial appraisal values were developed using discount rates of 9%, 11%,
and 13%. Table I illustrates the importance of the discount rate in the
determination of the value of profits from existing and future business.
We did not use discount rates of 9%, 11% and 13% in developing the Adjusted
Statutory Book Value amount shown in Table I. The amount of Adjusted Statutory
Book Value is equal to the market value of assets supporting statutory capital
and surplus and related items.
STATUTORY SURPLUS LEVELS, COST OF REQUIRED CAPITAL, AND RISK BASED CAPITAL
The approach used to project yearly profits underlying the present values
reflects an assumption that all future earnings from in force business and from
business to be produced over the next ten years are paid out as reported. No
recognition has been given to the minimum level of statutory net worth required
in order to continue favorable regulatory and rating agency treatment. The
values for new business developed in our analysis reflect an assumption that
adequate capital will be available to fund the projected new business volumes.
Table II provides a projection of capital, surplus, and AVR levels assuming all
statutory earnings are paid out in excess of the funds required to maintain a
200% NAIC RBC (Risk Based Capital - Company Action Level) ratio in the
Companies. Projected RBC ratios are illustrated based on the current asset
portfolio distribution.
The actuarial values presented in Table I do not include any specific provision
for the cost of retaining capital in the Companies in order to support the
ongoing insurance operations. The cost of retaining capital will depend on a)
the level of capital believed necessary for the risks inherent in the insurance
operations of the Companies and to achieve desired ratings from various rating
agencies; and b) the differential between the rate of return realized on
retained capital and a buyer's desired rate of return for an acquisition.
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Illustrated below are sample costs of capital under alternative capital
requirements, based on the difference between an investor's required rate of
return of 9%, 11%, or 13% and the after-tax investment earnings rate on capital
of 5.07%.
Illustrated Cost of Capital
(in millions)
<Table>
<Caption>
175% RBC Ratio 200% RBC Ratio
-------------------------------------------------------------------------------------------------------------
9% 11% 13% 9% 11% 13%
-------------------------------------------------------------------------------------------------------------
Required Capital at September 30, 2000 $742.7 $742.7 $742.7 $848.8 $848.8 $848.8
-------------------------------------------------------------------------------------------------------------
Cost of Capital
o Business In force at September 30, 2000 $119.5 $165.9 $205.5 $136.6 $189.6 $234.9
o Future Business - 10 Years of Production 254.4 321.2 363.1 290.7 367.1 415.0
-------------------------------------------------------------------------------------------------------------
o In force and 10 Years of Production $373.9 $487.1 $568.6 $427.3 $556.7 $649.8
-------------------------------------------------------------------------------------------------------------
</Table>
The factors used to develop projected RBC are summarized in Appendix A.
INVESTMENTS
Keyport provided detailed information on the investment portfolios as of
September 30, 2000. Substantially all of the invested assets were allocated to
the annuity and insurance lines of business. Policy loans were allocated to the
associated policy liabilities. Preferred stock, common stock, mortgage loans,
and a portion of Schedule D bonds and cash and short term, were allocated to
adjusted statutory book value. Market values for the assets allocated to
adjusted statutory book value were provided by Keyport as of September 30, 2000.
The actuarial values in Table I and projected statutory income amounts in Tables
II and III are based on a level interest scenario and the November 27, 2000
yield curve. Details regarding investment allocation, reinvestment strategy, and
other asset assumptions are provided in Appendix A. Interest sensitivity testing
related to defined shifts in the yield curve is summarized later in this
Section.
Keyport targets 3% of assets to be invested in an Alternative Asset Portfolio,
consisting primarily of private equity and low volatility hedge funds. The
Company's target return on the overall alternative portfolio is
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17% to 25%. This analysis reflects 3% of the portfolio invested in Alternative
Assets, with a total return net of expense of 18%, as provided by the Company.
The overall increase in yield due to the Alternative Asset Portfolio is 32 basis
points. The cost of capital calculations reflect the additional capital required
by these investments.
FEDERAL INCOME TAXES
The actuarial appraisal values summarized in Table I have been adjusted for the
effect of federal income taxes, assuming a 35% tax rate. In evaluating the
potential effect of taxes on value, one should consider:
a) Differences between tax and statutory reserves;
b) Impact of the DAC proxy tax;
c) Other differences between tax and statutory amounts; and
d) Tax benefits related to the transaction.
We have projected taxes as 35% of statutory income, adjusted as described below.
o The impact of the Deferred Acquisition Cost (DAC) proxy tax is
based on the establishment of an asset for purposes of
calculating taxable income equal to 7.70% of life insurance
premium income and 1.75% of non-qualified annuity premium. The
resulting tax asset is assumed to be amortized over ten years.
A corresponding reduction in taxes due to the amortization of
the existing DAC tax balance of $84.5 million in the Companies
as of September 30, 2000 is reflected as well.
o Interest related capital gains and losses are capitalized into
the Interest Maintenance Reserve (IMR) on an after-tax basis.
The tax on capital gains and losses is reflected in full in
the year it is incurred.
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o The statutory reserve exceeds the tax reserve as of September
30, 2000 on modeled liabilities by approximately $195 million.
The difference represents reserves which will eventually flow
into statutory income but not taxable income. The projections
reflect the impact of statutory - tax reserve differences for
both inforce and new business.
o The statutory basis of assets exceeds the tax basis by $257.6
million as of September 30, 2000, primarily on index options
and private equity investments. The difference will create an
increase to taxable income as the assets mature.
FUTURE BUSINESS VALUES AND PRODUCTION LEVELS
The values for business written after September 30, 2000 reflect ten years of
new production. The following table summarizes premium production levels as
provided by the Companies.
KEYPORT LIFE COMPANIES
PRODUCTION ASSUMPTIONS
(SINGLE PREMIUM, IN MILLIONS)
<Table>
<Caption>
2000 Annual Growth
Product Line Estimate 2001 2002 2003 2004 & Later
-------------------------------------------------------------------------------------------------------
Fixed Annuity $1,122 $1,269 $1,375 $1,490 12%
Equity Indexed Annuity 121 320 354 424 12
Variable Deferred Annuity 678 1,000 1,250 1,575 15
Variable Immediate Annuity 100 250 300 400 20
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Subtotal Individual Retail $2,021 $2,839 $3,279 $3,889 -
-------------------------------------------------------------------------------------------------------
Institutional & PPVLI $800 $1,400 $1,600 $1,800 10%
-------------------------------------------------------------------------------------------------------
Conservation Production $190 $230 $250 $250 0%
-------------------------------------------------------------------------------------------------------
Total Production $3,011 $4,469 $5,129 $5,939 -
-------------------------------------------------------------------------------------------------------
</Table>
For purposes of the projections, production is assumed to be written uniformly
throughout the year, and calendar year production is interpolated for projection
years.
Additional details on production by product are provided in Appendix B.
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GENERAL EXPENSES AND PREMIUM TAXES, LICENSES AND FEES
The budgeted expenses for the Company are summarized in the following table.
KEYPORT LIFE COMPANIES
BUDGETED EXPENSE
(IN MILLIONS)
<Table>
<Caption>
2000
Category Estimated 2001 2002 2003
----------------------------------------------------------------------------------------------------------
General Expense $56.6 $61.4 $67.2 $70.6
LFDI 27.4 29.9 32.1 35.0
Guaranty Fund Assessments 1.0 0.0 0.0 0.0
KBIC & Independence 3.0 2.4 2.5 2.7
Miscellaneous Exhibit 6 Taxes 2.0 2.1 2.3 2.4
Internal Investment Expense Allocation (7.0) (7.5) (8.1) (8.4)
Corporate Overhead 1.8 1.8 1.8 1.8
----------------------------------------------------------------------------------------------------------
Total Statutory Expense $84.8 $90.1 $97.8 $104.1
----------------------------------------------------------------------------------------------------------
</Table>
The 2003 budget is assumed to grow at 5% beyond 2003. For purposes of the
projections, expenses are assumed to be uniform throughout the year, and
calendar year expenses are interpolated for projection years.
LFDI represents the budget for Liberty Funds Distributors, Incorporated, the
joint marketing group for Keyport and the LFC mutual funds.
The unit expense assumptions are based on general industry allowables. In the
near term, the unit expenses do not cover the budgeted expense in full. The
excess of budgeted expense over total unit expense allowable, is illustrated
separately as unallocated expense as a reduction to the future business
actuarial appraisal values.
EQUITY-INDEXED ANNUITY
Keyport began selling equity-indexed annuities (EIA) in 1995, and was a leader
in that market for several years. Keyport's EIA products are predominantly
multi-year highwater mark design, i.e., pay a return based on the highest index
point at any anniversary. The majority of contracts are for five-year renewable
terms.
-14-
<Page>
Keyport's practice has been to manage the equity index risk internally, through
purchases of S&P call options and futures. The options are valued on the
statutory balance sheet at intrinsic value plus unamortized cost. The statutory
reserves reflect accrual of premium to the ultimate guarantee of 90% principal
and 3% growth, plus intrinsic value of the fully vested liability equity index
guarantee.
Keyport manages a very close match between the asset and liability equity risks
for the EIA line. The projections reflect an assumption that Keyport maintains a
perfect hedge going forward.
The first large block of EIA contracts began coming up for renewal in 2000. The
surrender experience is still emerging on this business, but initial results
indicate surrenders higher than the Company's plan. Keyport has put in place
conservation programs to retain this business, and expects surrender rates to
return to levels used in their internal planning. The surrender rates in this
analysis are based primarily on the most recent experience, but a sensitivity is
included to illustrate the impact of reduced surrender levels.
FINANCIAL REINSURANCE
Keyport is considering entering into a financial reinsurance agreement prior to
yearend 2000, for purposes of improving the yearend RBC ratio to maintain the
Company's internal target capital level. As of the date of this report, the
details to this arrangement have not yet been determined. This analysis does not
reflect any cost associated with financial reinsurance.
SENSITIVITY TESTING
The actuarial appraisal values illustrated in Table I reflect a constant
interest environment. We have analyzed the impact of changes in the interest
environment on inforce general account business. Assumptions underlying the
interest environment sensitivities are consistent with the baseline projections.
-15-
<Page>
INTEREST RATE SENSITIVITY TESTING OF INFORCE GENERAL ACCOUNT BUSINESS
CHANGE IN PRESENT VALUE OF STATUTORY PROFITS
(AFTER-TAX, IN MILLIONS)
<Table>
<Caption>
Discount Rate
----------------------------------------------------------------------------------------------------------------------------------
Interest Sensitivity 9% 11% 13%
----------------------------------------------------------------------------------------------------------------------------------
1) Rates increase 1.5% immediately $(118.3) $(97.1) $(80.5)
----------------------------------------------------------------------------------------------------------------------------------
2) Rates increase .25% per year for 10 years, then level (53.8) (43.8) (36.0)
----------------------------------------------------------------------------------------------------------------------------------
3) Rates increase .5% per year for 5 years, then decrease .5% (130.2) (105.7) (87.0)
per year for 5 years, then level
----------------------------------------------------------------------------------------------------------------------------------
4) Rates fall 1.5% immediately 73.8 65.2 58.0
----------------------------------------------------------------------------------------------------------------------------------
5) Rates fall .25% per year for 10 years, then level 38.0 35.2 32.5
----------------------------------------------------------------------------------------------------------------------------------
6) Rates fall .5% per year for 5 years, then rise .5% per year 71.9 63.9 57.3
for 5 years, then level
----------------------------------------------------------------------------------------------------------------------------------
</Table>
We have also analyzed the sensitivity of existing business values to changes in
the assumptions as follows:
1) The impact of a 20% decrease in base lapse rates (e.g., a 10%
lapse rate is adjusted to 8%).
2) The impact of a 20% increase in base lapse rates (e.g., a 10%
lapse rate is adjusted to 12%).
3) The impact of a 25 basis point decrease in the credited rate
(increase in spread), subject to guarantees. As a result of
the decrease in the credited rate, additional interest
sensitive lapses were assumed to occur as outlined in Appendix
B.
4) The impact of a 25 basis point increase in investment earnings
rate.
5) The impact of a 25% decrease in unit maintenance expenses,
with no change to unabsorbed expense.
6) The impact of an 8 basis point reduction in investment
expenses, from 13 basis points to 5 basis points.
-16-
<Page>
7) The impact of a reduction in lapse rate to 30% on EIA
renewals.
The table below illustrates the impact on the after-tax values reflected in
Table I under the above changes to assumptions.
SENSITIVITY ANALYSIS - INFORCE BUSINESS
CHANGE IN PRESENT VALUE OF STATUTORY PROFITS
(AFTER-TAX, IN MILLIONS)
<Table>
<Caption>
Discount Rate
--------------------------------------------------------------------------------------
Sensitivity Test 9% 11% 13%
--------------------------------------------------------------------------------------
20% decrease in lapse $125.7 $105.9 $90.3
20% increase in lapse (100.7) (86.1) (74.4)
25 bp decrease in credited rate 18.2 17.1 16.1
25 bp increase in earnings rate 74.3 69.2 64.8
25% decrease in unit maintenance expense 7.7 7.2 6.7
8 bp decrease in investment expense 23.8 22.1 20.7
30% EIA lapse on renewal 73.9 62.8 53.9
--------------------------------------------------------------------------------------
</Table>
-17-
<Page>
SECTION III
DEVELOPMENT OF ADJUSTED STATUTORY BOOK VALUE
The following table summarizes the development of the Adjusted Statutory Book
Value as of September 30, 2000 for the Companies.
KEYPORT LIFE COMPANIES
DEVELOPMENT OF ADJUSTED STATUTORY BOOK VALUE
AS OF SEPTEMBER 30, 2000
(IN MILLIONS)
<Table>
<Caption>
--------------------------------------------------------------------------------------------------------
Component Keyport Life KBIC Independence Consolidated
--------------------------------------------------------------------------------------------------------
Capital and Surplus $727.5 $28.0 $33.3 $727.5
Asset Valuation Reserve 254.0 0.9 0.1 255.0
Agents' Balances 8.4 0.7 0.0 9.1
Statutory Goodwill (3.5) - - (3.5)
Mark-to-Market on Surplus Assets - - - (0.3)
--------------------------------------------------------------------------------------------------------
Total $987.8
========================================================================================================
</Table>
The adjusted book value includes an addition for the difference between the book
and market value of certain assets allocated to statutory book value, adjusted
for taxes at 35%. Market values were provided by the Companies. Common stock,
low-rated bonds, and certain higher risk CMO investments were allocated to
statutory book value along with cash, short-term investments and a portion of
Schedule D bonds. Details on assets allocated to statutory book value are
included in Appendix A.
-18-
<Page>
SECTION IV
METHODOLOGY, MODELS AND ACTUARIAL ASSUMPTIONS
This section summarizes the models and assumptions underlying the projections of
the life insurance and annuities inforce and anticipated to be sold by Keyport.
MODELS
The models were developed by selecting the major plans inforce, and modeling
other minor plans into the major plans based on representative characteristics.
The significant new business plans, both those currently sold and anticipated
new products to be introduced in 2001, were modeled as well. The models reflect
all issue years of inforce and a wide range of issue ages.
A description of the principal products follows below. Detailed product
descriptions are included in Appendix B.
FIXED ANNUITIES
The Company began selling fixed deferred annuities in 1983. They are a
mix of single and flexible premium policies sold in both tax-qualified
and non-qualified markets. Back-end surrender charges vary by product
and range from five to ten year runoff patterns. Recently sold products
contain multi-year guaranteed credited rates, mostly for five years.
All of the products allow free partial withdrawals, and several have
provisions that don't allow free withdrawals in excess of cumulative
interest.
-19-
<Page>
EQUITY INDEXED ANNUITIES
Equity-indexed deferred annuities have been issued since 1995. Vested
index credits are awarded annually based on participation in the
Standard and Poor's 500 Index and the applicable vesting schedule. The
vast majority of inforce policies have a five-year term period with a
discrete look-back (high watermark) design. Multipoint, a recently sold
product, has an Asian look-back (high watermark of monthly average)
design. The minimum guaranteed cash surrender value is 90% of premium
growing at 3.0% reduced for partial surrenders. Full surrenders prior
to the end of the term period are subject to a 10% of premium penalty.
However, there is a free partial withdrawal provision up to the vested
interest credits as of the last anniversary.
VARIABLE ANNUITIES
Variable annuity policies have been issued since 1980. The inforce
plans were sold as single and flexible premium and have surrender
charges up to seven years. The vast majority of daily mortality and
expense charges is 140 basis points. Most products offer a standard
guaranteed minimum death benefit equal to the highest anniversary
account value, however no less than premium. There is also an enhanced
minimum death benefit offered, but seldom elected. A DCA account with a
high guaranteed interest rate is offered to the current products with
maturity of six to twelve months.
Keyport is planning to introduce a Bonus VA product, Latitude, in 2001,
which will feature up-front bonuses of three to five percent, but will
not offer a DCA account. The Company expects to redesign this product,
probably in 2002, if accounting guidelines change to prohibit the
deferral of up-front bonuses for GAAP reporting purposes. The
redesigned product would feature an up-front bonus that is vested over
time, in order to mirror the current GAAP treatment of amortizing the
cost of the bonus. Any product design change is anticipated to have
economics substantially similar to the current Latitude product. This
analysis does not reflect any future potential changes to Latitude.
-20-
<Page>
Also, Keyport is redesigning its immediate VA product in 2001. The
current product, PIP, is sold with a choice of certain payout periods
with commission rates not varying by contract term. The redesigned
product offers a life annuity option as well as commission rates
varying by contract term.
SINGLE PREMIUM LIFE (SPWL)
SPWL is a single premium product similar to an SPDA but with a
significant death benefit. The products were mostly sold from 1982 to
1988. The product currently has no loads or cost of insurance charges,
but features an excess interest surrender charge throughout the life of
the policy. Preferred loans are available at a zero net cost to the
policyholder for amounts up to accumulated interest. Amounts in excess
of accumulated interest are charged a 2.5% spread.
INSTITUTIONAL
Keyport manages institutional business through separate accounts. The
inforce is primarily business with an enhanced S&P return guarantee,
which is exactly matched with futures contracts. The Company
anticipates increasing this business going forward. Keyport also has a
small block of GIC contracts inforce.
ASSUMPTIONS
The assumptions underlying the projections are outlined below. Detailed
assumptions are outlined in the Appendices.
o The lapse assumptions were based on an analysis of nine months
2000 termination experience, a review of pricing assumptions,
and our knowledge of the experience of similar blocks of
business in other companies. Projected lapses include
provision for additional interest sensitive lapses due to the
difference between market rates and projected credited rates.
-21-
<Page>
o Mortality and partial surrender assumptions were based on
industry experience, and validated against recent Company
financial statements.
o Credited rates for inforce business reflected in this analysis
are based on maintaining Keyport's current credited rates,
adjusted for Keyport's current renewal crediting rate
strategy. For future issues, credited rates are based on the
target pricing spread in all years.
o Commissions were projected based on commission rates provided
by Keyport.
o Expenses were projected based on Keyport pricing allowables
for acquisition costs, and target industry allowables for
maintenance costs.
o Statutory and tax reserves were projected based on the current
reserving practices of the Companies.
o Investment income reflects the September 30, 2000 asset
portfolios of the Companies, the November 27, 2000 yield
curve, and future investment strategies provided by Keyport.
Separate accounts are assumed to grow at 10% net of investment
management fees.
-22-
<Page>
SECTION V
SUMMARY OF PRO-FORMA RESULTS AS OF JUNE 30, 2001
SUMMARY OF PRO-FORMA ACTUARIAL APPRAISAL VALUES
Table IV summarizes the results of our analysis of the components of value
pro-forma as of June 30, 2001. The items are in a format consistent with the
Table I values as of September 30, 2000. The values in Table IV do not include
any provision for the cost of retaining capital in the Company to support the
ongoing operations, which is discussed later in this Section.
-23-
<Page>
TABLE IV
KEYPORT LIFE COMPANIES
SUMMARY OF ACTUARIAL VALUES
PRO-FORMA AS OF JUNE 30, 2001
(IN MILLIONS)
<Table>
<Caption>
Discount Rate
---------------------------------------------------
Component of Value 9% 11% 13%
-------------------------------------------------------------------------------------------------------------
1) ADJUSTED STATUTORY BOOK VALUE $1,035.7 $1,035.7 $1,035.7
-------------------------------------------------------------------------------------------------------------
2) VALUE OF BUSINESS INFORCE AS OF JUNE 30, 2001
Deferred Annuity - Fixed - SPDA/FPDA $660.3 $613.2 572.5
Deferred Annuity - Equity Indexed 148.8 139.0 130.3
Deferred Annuity - Variable 230.4 201.8 178.8
SPWL 232.6 206.7 185.7
Independence Variable Life 11.9 10.3 9.1
Payout Annuity 69.4 62.8 57.2
Institutional 22.8 21.0 19.5
-------------------------------------------------------------------------------------------------------------
Subtotal Pre-Tax Existing Business $1,376.4 $1,254.8 $1,153.0
Federal Income Taxes (455.3) (413.8) (379.1)
-------------------------------------------------------------------------------------------------------------
Subtotal After-Tax Existing Business $921.0 $841.0 $773.9
-------------------------------------------------------------------------------------------------------------
3) SUBTOTAL (1) PLUS (2)
Pre-Tax $2,412.1 $2,290.5 $2,188.8
After-Tax 1,956.8 1,876.8 1,809.6
-------------------------------------------------------------------------------------------------------------
4) TEN YEARS OF NEW BUSINESS FROM JUNE 30, 2001
Deferred Annuity - Fixed $730.5 $568.1 $443.3
Deferred Annuity - Equity Indexed 101.4 73.6 52.4
Deferred Annuity - Variable 709.5 527.7 398.4
Immediate Annuity - Variable 221.6 131.3 70.1
Institutional 293.5 242.4 202.8
Unallocated Expense (177.6) (169.9) (162.8)
-------------------------------------------------------------------------------------------------------------
Subtotal Pre-Tax Future Business $1,879.0 $1,373.3 $1,004.3
Federal Income Taxes (733.6) (559.7) (431.6)
-------------------------------------------------------------------------------------------------------------
Subtotal After-Tax Future Business $1,145.3 $813.6 $572.7
-------------------------------------------------------------------------------------------------------------
5) TOTAL ACTUARIAL VALUES (3) PLUS (4)
Pre-Tax $4,291.1 $3,663.8 $3,193.0
After-Tax 3,102.1 2,690.4 2,382.3
-------------------------------------------------------------------------------------------------------------
</Table>
SUMMARY OF ASSUMPTIONS
The assumptions underlying the pro-forma values as of June 30, 2001 are
identical to those used elsewhere in the Appraisal. Specifically, production
amounts, expense budgets, and all other actuarial assumptions for September 30,
2000 through June 30, 2001 are assumed to be as described in this report. The
following additional assumptions were utilized:
-24-
<Page>
1) Production in 2011 is assumed to continue to grow at the same
rate as prior years.
2) Zero dividends are assumed to be paid out of the Company in
the period between September 30, and June 30, and zero capital
is assumed to be injected into the Company during that period.
No financial reinsurance is reflected.
COST OF REQUIRED CAPITAL
The cost of required capital as of June 30, 2001 consistent with the values in
Table IV, is illustrated below.
ILLUSTRATED COST OF CAPITAL AS OF JUNE 30, 2001
(IN MILLIONS)
<Table>
<Caption>
175% RBC Ratio 200% RBC Ratio
-----------------------------------------------------------------------------------------------------------------------------
9% 11% 13% 9% 11% 13%
-----------------------------------------------------------------------------------------------------------------------------
Required Capital at June 30, 2001 $769.6 $769.6 $769.6 $879.6 $879.6 $879.6
-----------------------------------------------------------------------------------------------------------------------------
Cost of Capital
o Business In force at June 30, 2001 $124.0 $172.3 $213.5 $141.8 $196.9 $244.0
o Future Business - 10 Years of Production 276.8 349.6 395.1 316.4 399.5 451.6
-----------------------------------------------------------------------------------------------------------------------------
o In force and 10 Years of Production $400.9 $521.8 $608.6 $458.1 $596.4 $695.5
-----------------------------------------------------------------------------------------------------------------------------
</Table>
-25-
<Page>
APPENDIX A
KEYPORT LIFE COMPANIES
SUMMARY OF ASSET AND INVESTMENT ASSUMPTIONS
ASSET PORTFOLIO AS OF SEPTEMBER 30, 2000
Modeled invested assets were projected on a seriatim basis, recognizing call
features, refinancing provisions, and anticipated levels of prepayments. Many of
the assets were projected using the CMS BondEdge software. A summary of the
modeled assets is shown below:
KEYPORT LIFE COMPANIES
MODELED ASSETS
AS OF SEPTEMBER 30, 2000
(VALUES IN MILLIONS, GROSS ANNUAL EFFECTIVE YIELDS)
<Table>
<Caption>
-----------------------------------------------------------------------------------------------------------------
Security Type Book Value Par Value Market Value Book Yield Coupon Rate Market Yield
-----------------------------------------------------------------------------------------------------------------
ABS $1,439.0 $1,443.4 $1,410.7 7.46% 7.46% 8.12%
CMO 1,242.4 1,322.6 1,243.7 8.59 7.24 8.29
CMBS 1,066.0 1,078.1 1,045.1 7.54 7.40 7.87
Pass-Through 823.7 842.6 819.5 7.23 7.00 7.38
Govt. Bond 78.1 77.4 78.1 6.15 6.44 6.43
Corp. Bond 4,392.9 4,403.2 4,279.3 7.67 7.67 8.26
Private Placement 1,364.1 1,368.9 1,306.4 7.92 7.88 8.37
FHA 106.6 105.3 101.6 7.95 7.99 9.46
Leveraged Loan 316.0 316.0 316.0 11.00 11.00 11.00
Short Term 445.4 445.9 445.4 6.61 6.61 6.61
Floating Rate Bond 212.1 222.4 209.0 8.67 7.56 9.04
-----------------------------------------------------------------------------------------------------------------
Total Invested Asset $11,486.2 $11,625.7 $11,254.7 7.79% 7.59% 8.18%
=================================================================================================================
</Table>
The equity-linked option portfolio, with book value of $443.6 million as of
September 30, 2000, was modeled in aggregate, as described later in this
Appendix.
Assets allocated to surplus and AVR include preferred and common stock and bonds
rated CCC or lower. Also allocated to surplus were certain higher risk
categories of CMOs and CMOs for which public information was not readily
available. Remaining surplus amounts were backed by cash, short term and a
pro-rata share of invested assets.
Amounts backing capital, surplus, and AVR are summarized below. The
mark-to-market is as of September 30, 2000. Equities, mortgage loans, and
amounts receivable for securities are reflected at book value.
A-1
<Page>
ASSETS BACKING CAPITAL, SURPLUS AND AVR
AS OF SEPTEMBER 30, 2000
(IN MILLIONS)
<Table>
<Caption>
------------------------------------------------------------------
Security Type Book Value Market Value
------------------------------------------------------------------
Mortgage Loans $8.7 $8.7
Common Stock 56.5 56.5
Receivable for Securities 38.8 38.8
Real Estate 0.0 0.00
Non-modeled CMOs 124.5 130.6
CCC & Lower Bonds 21.2 18.5
Cash and Short Term 516.8 516.8
Alternative Asset Portfolio 36.7 36.7
Other Schedule D 188.4 184.6
------------------------------------------------------------------
Total $991.6 $$991.2
==================================================================
</Table>
The Adjusted Book Value reflects an after-tax mark-to-market of $(0.3) million
for assets allocated to capital, surplus, and AVR.
Keyport targets approximately 3% of total assets in an Alternative Asset
Portfolio, which consists of a mixture of private equity investments, low
volatility hedge funds, and structured finance securities. In aggregate, the
Alternative Asset Portfolio is assumed to return 18%, and remain at 3% of
liabilities and capital, as specified by the Company. The impact of the
Alternative Asset Portfolio is reflected as an overall increment to investment
income of 32 basis points, i.e. an incremental 10.5% yield on 3% of the
portfolio.
REINVESTMENT ASSUMPTIONS
The following table is representative of the future investment strategy for
positive cash flow, as specified by Keyport.
The spreads are consistent with corporate bond equivalent (semi-annual) yield.
KEYPORT LIFE INSURANCE COMPANY
REINVESTMENT STRATEGY - MARKET CONDITIONS ON NOVEMBER 27, 2000
<Table>
<Caption>
---------------------------------------------------------------------------------------------------------------------
Net Net
Approx Treasury Gross Net Yield Yield
Asset Class Rating Maturity Allocation Duration Rate Spread Spread (BEY) (AEY)
---------------------------------------------------------------------------------------------------------------------
Public Corporate A 5 16% 4.0 5.63% 1.45% 1.31% 6.94% 7.06%
Public Corporate BBB 10 11 6.8 5.64 2.30 2.04 7.68 7.83
Private Corporate A 5 12 4.0 5.63 1.85 1.71 7.34 7.47
Private Corporate BBB 10 8 6.8 5.64 2.70 2.44 8.08 8.24
Public Corporate BB 5 5 3.9 5.63 3.70 2.64 8.27 8.44
Public Corporate B 5 3 3.8 5.63 6.23 3.97 9.60 9.83
Agency Passthrough MBS AAA 15 10 3.7 5.64 1.45 1.33 6.97 7.09
CMO - Subordinated AAA 10 6 5.0 5.64 1.75 1.63 7.27 7.40
CMO AAA 5 6 2.4 5.63 1.40 1.28 6.91 7.03
CMBS A 5 5 4.0 5.63 1.83 1.69 7.32 7.45
CMBS BBB 10 5 6.8 5.64 2.33 2.07 7.71 7.86
ABS AA 2 11 1.8 5.86 0.89 0.76 6.62 6.73
Short Term AAA 0 2 0.0 6.33 0.27 0.15 6.48 6.59
---------------------------------------------------------------------------------------------------------------------
Total 100% 4.3 5.67% 1.94% 1.67% 7.34% 7.48%
=====================================================================================================================
</Table>
A-2
<Page>
Keyport manages a securities lending program involving approximately 10% of the
asset base. Cash collateral is received for securities that are lent. The target
net investment return from the management of the cash collateral is 20 basis
points per year. This return acts to increase the yield on the underlying
securities that are lent. The net impact is a 2 basis point increase in the
aggregate portfolio yield.
Assets are assumed to be purchased at zero discount, i.e., coupon rates are
equal to statutory yield.
A cash balance of 2% is maintained before net positive cash flow is reinvested.
Based on the November 27, 2000 yield curve, this investment strategy results in
a gross effective yield for future investments of 7.76%. After expenses,
allowances for default, the 2 bp impact of Keyport's securities lending program,
and the 32 bp impact of the Alternative Asset Portfolio, the net effective new
money rate is 7.80%.
Future issues are projected based on the net new money rate of 7.80%.
DISINVESTMENT ASSUMPTIONS
Assets are liquidated on a pro-rata basis as sales are needed in order to fund
net cash outflow. Capital gains and losses were amortized into income through
the Interest Maintenance Reserve (IMR). The projections allow IMR to fall below
zero by a small amount (less than ten million). It is assumed that a buyer would
have available positive IMR to offset negatives on this block, or that asset
sales would be selected in order to avoid a disallowed negative IMR. The
existing IMR balance of $7 million was allocated to the fixed annuity line of
business.
PREPAYMENT PROVISIONS
CORPORATE BONDS: Initial call dates and premiums on existing bonds were
extracted from Bloomberg Analytics. Call schedules for bonds not found
on Bloomberg were provided by the company. The call premium is assumed
to linearly grade to zero at maturity. Investment grade bonds are
assumed to be called when the market price of the bond exceeds the call
price of the bond by 3% or more. Non-investment grade bonds are assumed
to be called when the market price of the bond exceeds the call price
by 5% or more.
BONDS MODELED ON CMS:
CMOS AND PASS-THROUGHS: BondEdge's mortgage prepayment
forecasts are stated in terms of percentage of PSA (the Public
Security Association Standard Prepayment Model) and/or CPR
(Conditional Prepayment Rate) in accordance with market
convention.
Prepayment forecasts for mortgage pools are generated by a
proprietary prepayment model developed at CMS, and take into
account the collateral type (e.g., 30-year or 15- year
maturity), the age and weighted average coupon on the
collateral, and the current interest rate environment.
Prepayment forecasts for CMOs are based on CMS model
prepayment forecasts for the underlying mortgage collateral.
CMO cashflow forecasts are then calculated on the assumption
that no credit losses occur.
A-3
<Page>
ASSET-BACKED SECURITIES: BondEdge has a proprietary prepayment
model for home equity loans and manufactured housing
collateral. The model generates prepayment forecasts using one
of a number of parameter sets, which determine the extent to
which the collateral will exhibit interest rate-sensitive
prepayments and prepayments due to relocations, defaults and
curtailments. Each asset-backed security deal backed by these
types of collateral is assigned to a particular parameter set,
based upon the collateral details of the deal.
CMBS: BondEdge's CMBS model assumes no prepayments can occur
during a lockout period. If there is a make-whole penalty
clause in the deal, cash flows will reflect the required
prepayment penalty and/or yield maintenance on any principal
prepayments, according to the prepayment speed (CPR%)
specified by the user. BondEdge does not make default
projections for CMBS deals (defaults are assumed to be zero).
OTHER MORTGAGE BACKED SECURITIES: Prepayment rates on mortgage
pass-throughs are based on the following formula, subject to a maximum
of 600% of PSA (for spreads in excess of 2.25%) and a minimum of 100%
PSA (for spreads below .45%).
PREPAYMENT RATE = [-2.06 + 6.98 X ARCTAN (SP)] X PSA
where,
SP = spread between coupon on
collateral and the current
market coupon for a
comparable mortgage.
PSA = Public Securities
Association (PSA) standard
prepayment model. The model
grades linearly from 0% to
6% over the first two and a
half years of the mortgage
lifetime, and remains at 6%
thereafter.
DEFAULT COST
Annual default costs are based on the Edward Altman studies of historical
defaults during the period 1971-1999. Default costs are summarized below.
<Table>
<Caption>
S&P Rating Annual Default Cost
----------------------------- -------------------
Treasuries, GNMA, FNMA, FHLMC 0.0 basis points
Cash 0.0
AAA 0.1
AA 2.0
A 3.0
BBB 15.0
BB 95.0
B 215.0
CCC 455.0
Mortgage Loans 20.0
Not Rated 15.0
</Table>
A-4
<Page>
INVESTMENT EXPENSES
Investment expenses are assumed to be 13 basis points, based on Keyport's
current internally allocated expenses and Keyport's external costs for the fund
managers.
The cost to trade a bond due to the bid/ask spread is assumed to be 5 basis
points.
SEPARATE ACCOUNT ASSUMPTIONS
Separate accounts are assumed to return an aggregate yield of 10% per annum net
of investment management fees.
TAX BASIS OF ASSETS
The tax basis of certain asset categories is significantly less than the
statutory basis as of September 30, 2000. The differences are assumed to
increase taxable income according to the following schedule, as provided by the
Company:
<Table>
<Caption>
AMORTIZATION OF STATUTORY-TAX BASIS
DIFFERENCES ON ASSETS
(IN MILLIONS)
Year Ending
September 30, Options Private Equity
------------- ------- --------------
2001 $118.4 $0.0
2002 59.2 0.0
2003 0.0 0.0
2004 0.0 0.0
2005 0.0 16.0
2006 0.0 16.0
2007 0.0 16.0
2008 0.0 16.0
2009 0.0 16.0
2010 & Later 0.0 0.0
Total $177.6 $80.0
</Table>
EQUITY INDEX OPTIONS
Keyport manages a dynamic hedging program to fund the equity index options
embedded in the majority of the block of equity index annuities. The dynamic
hedging program covers only the five and seven year lookback options embedded in
the EIA's. The following table shows that the dynamic hedging program covers
approximately 91% of the EIA block.
A-5
<Page>
<Table>
<Caption>
SUMMARY OF EMBEDDED LIABILITY OPTIONS
(MILLIONS)
9/30/00 Percent of
Option Type Statutory Reserve Reserve
----------- ----------------- ----------
5 Year Lookback $1,979.9 83.8%
7 Year Lookback 159.0 6.7%
Other Lookback 107.0 4.5%
Asian Lookback 117.0 5.0%
Total $2,362.9 100.0%
</Table>
For the portion of the EIA block not covered by the dynamic hedging program,
Keyport directly purchases the option embedded in the liability to cover its
exposure.
To dynamically hedge a five-year lookback option, Keyport executes the following
strategy upon sale of the corresponding equity index annuity. The company
purchases one, two, three, four, and five year European call options with strike
rates set to mirror the option embedded in the liability. In addition, the
company purchases an out-of-the-money five-year European call option. This set
of six options is selected to match asset and liability sensitivities to changes
in implied volatility levels. Finally, Keyport enters into S&P 500 futures
contracts to match asset and liability sensitivities to changes in the
underlying S&P 500 level.
As time passes, Keyport adjusts the level of S&P 500 futures contracts to
maintain the match between asset and liability sensitivities to changes in the
underlying S&P 500 level. Also, as the one, two, three, and four-year European
call options mature, the option payoffs are invested in fixed income assets in
the general account. Keyport designed the program to ensure that option payoffs,
the subsequent interest earnings on these payoffs, and cash flows from futures
contracts will fund the required payout above minimum non-forfeiture values on
the EIA.
Dynamic hedging for the seven-year lookback option is analogous to the five-year
lookback option.
A summary of the changes in asset and liability market values due to
instantaneous shifts in underlying risk factors is shown in the following table.
<Table>
<Caption>
EQUITY INDEX OPTIONS
SUMMARY OF MARKET VALUE CHANGES
(MILLIONS, PRE-TAX)
Embedded Option
Liability Option Portfolio
---------------- ---------
9/30/00 Market Value $1,009.9 $526.3
-------------------- ---------------- ---------
CHANGE IN MARKET VALUE
S&P 500 +10% $154.6 $149.3
S&P 500 -10% (120.8) (131.1)
Implied Volatility +2% 17.4 11.7
Implied Volatility -2% (17.3) (11.4)
Risk Free Rate +1% 3.3 13.2
Risk Free Rate -1% (2.5) (12.9)
</Table>
A-6
<Page>
The September 30, 2000 asset market value is less than the liability market
value. This is due to payoffs of European call options with maturity periods
that were less than the corresponding maturity periods on the embedded liability
options. As noted above, these payoffs were invested in fixed income assets.
As the S&P 500 level, implied volatilities, and risk free rates fluctuate, the
company maintains an approximate match between changes in asset and liability
market values. The market value changes due to fluctuations in risk free rates
must also account for the associated fixed income assets. This would tend to
improve the asset and liability match for this factor.
The projections reflect the amortization of the remaining cost basis of the
options on the statutory balance sheet, along with the amortization of the
deferred hedging losses. Future changes in the equity-linked returns of the
inforce liabilities are assumed to be matched exactly by the current portfolio
of options.
Under current market conditions, Keyport estimates the following option costs
for new business, as a percentage of premium, for the options embedded in the
major EIA products.
<Table>
<Caption>
OPTION COST SUMMARY
Option Type Participation Strike Option
--------------------- ------------- ------ ------
Rate Rate Cost
5 Year Lookback 40% 110.8% 13.2%
7 Year Lookback 45 123.8 16.6
5 Year Asian Lookback 95 104.6 15.3
7 Year Asian Lookback 110 109.7 19.6
</Table>
For the five and seven year lookback options, these prices represent the cost
that is expected to be realized over time as a result of the dynamic hedging
program. For the five and seven year Asian lookback options, the cost is
realized immediately upon purchase of the option.
INTEREST RATE SWAPS
Keyport manages a portfolio of interest rate swaps to match the durations
between fixed income assets and liabilities. Specifically, Keyport selects swaps
to match sensitivities to the first and second principal components of yield
curve shifts. A summary of the inforce U.S. dollar interest rate swaps is shown
in the following table.
<Table>
<Caption>
INTEREST RATE SWAPS SUMMARY
AS OF 9/30/2000, IN MILLIONS
Payment Characteristics Notional Amount
---------------------------- ---------------
Pay Fixed / Receive Floating $2,787
Pay Floating / Receive Fixed $ 350
</Table>
The floating payments received by Keyport are based on a range of indices that
includes constant maturity treasury rates, constant maturity swap rates, and the
three-month LIBOR rate. Indices are selected based on the characteristics of the
assets and liabilities being hedged.
Cash flows from the swap portfolio inforce on September 30, 2000 were included
in the appraisal projection based on the November 27, 2000 yield curve. The swap
cash flow projection was done on a seriatim basis accounting for notional
amounts, index values, fixed interest rates, payment start, reset, and maturity
dates.
A-7
<Page>
TREASURY YIELD CURVE (CORPORATE BOND EQUIVALENT)
The projections are based on the Constant Maturity Treasury yield curve as of
November 27, 2000. Yields on intermediate Treasuries were interpolated.
<Table>
<Caption>
TREASURY YIELD CURVE
November 27, 2000 September 29, 2000
------------------------------- ------------------
Constant Maturity "A" Rated Constant Maturity
Maturity Treasury Corporate Treasury
--------------- ----------------- --------- ------------------
90-day 6.33% 7.05% 6.23%
1 year 6.11 6.93 6.07
2 year 5.86 6.87 5.98
3 year 5.74 6.91 5.91
5 year 5.63 7.08 5.85
7 year 5.71 7.23 5.93
10 year 5.64 7.40 5.80
20 year 5.89 7.75 6.13
30 year 5.71 7.79 5.88
</Table>
NAIC RISK BASED CAPITAL
The factors employed to illustrate future risk based capital amounts were
developed from Keyport's consolidated RBC at September 30, 2000, as follows:
<Table>
<Caption>
RISK BASED CAPITAL FACTORS - GENERAL ACCOUNT LIABILITIES
(100% OF NAIC COMPANY ACTION LEVEL)
Risk
Component Base Factor
--------------- ---------------------------------- ------
C-1 General Account Liabilities 2.40%
Separate Account Liabilities 0.35%
C-2 Individual Life Net Amount at Risk 0.15%
C-3 Liabilities
- Deferred Annuity 1.40%
- SPIA & Life Insurance 0.50
C-4 General Account Premium 2.0%
Separate Account Liabilities .05%
</Table>
The C-3 factors for deferred annuities were further multiplied by 60% to reflect
management's estimation of the impact of recent NAIC adjustments to the RBC
formula to reflect the results of stochastic testing of interest rate risks.
The cost of capital calculation is based on the cost or retaining capital to
support the liabilities of Keyport, assuming earnings on capital at the
after-tax annual effective rate of 5.07%
A-8
<Page>
APPENDIX B
KEYPORT LIFE COMPANIES
SUMMARY OF LIABILITY MODELS AND ASSUMPTIONS
I. MODEL SUMMARY
The following tables summarize the modeled inforce amounts of the
Companies as of September 30, 2000, based on seriatim data provided by
Keyport. Surrender charge tables A through S are described later in
this Appendix. The average credited rates include the bonus interest
currently being applied to the account value and is described later in
this Appendix.
The model reflects decennial ages of 35 through 85.
B-1
<Page>
KEYPORT LIFE COMPANIES
LIABILITY INFORCE AS OF SEPTEMBER 30, 2000
(IN MILLIONS)
<Table>
<Caption>
----------------------- ---------------- -------- ---------- ----------- ----------- ----------- --------- -------- ------------
Average (1)
SC Policy Account Statutory Death Policy Credited
Line of Business Product Table Count Value Cash Value Reserve Benefit Loan Rate
----------------------- ---------------- -------- ---------- ----------- ----------- ----------- --------- -------- ------------
Fixed Deferred Key Annuity A 11,329 $405.4 $397.2 $400.4 $ - $ - 5.05%
Annuities
C 8,074 438.9 426.0 441.3 - - 5.65
F 14,494 460.8 447.1 454.2 - - 5.07
H 1,089 71.9 67.7 70.6 - - 5.64
I 3,026 100.4 94.8 96.0 - - 4.73
J 1,477 66.5 66.5 66.5 - - 5.19
K 1,426 71.8 71.8 71.8 - - 5.24
L 1,428 59.2 59.2 59.2 - - 5.25
N 1,389 73.6 68.6 72.8 - - 6.06
P 8,483 240.6 238.5 240.0 - - 4.92
Q 1,544 55.8 55.8 55.8 - - 4.92
R 11,389 407.1 398.6 405.1 - - 5.40
Galaxy B 26,552 819.9 765.5 845.6 - - 6.67
F 1,397 52.1 48.7 50.0 - - 6.31
Accumulator O 1,321 122.4 114.1 125.8 - - 7.34
Key Bonus 100 F 8,858 445.0 428.6 436.2 - - 5.16
Focus C 5,744 226.2 210.6 236.7 - - 7.62
Special Consrv. C 7,935 361.1 361.1 361.1 - - 5.22
Ultra-max F 27,418 945.0 912.0 928.9 - - 5.20
Valued Customer C 16,888 977.3 924.6 982.2 - - 5.81
F&G Annuity S 10,021 412.0 405.0 409.3 - - 4.73
---------------------------------------- -------- ---------- ----------- ----------- ----------- --------- -------- ------------
TOTAL FIXED DEFERRED ANNUITIES 171,282 6,812.8 6,561.9 6,809.3 - - 5.59
---------------------------------------- -------- ---------- ----------- ----------- ----------- --------- -------- ------------
Variable Deferred Keyport Advisor - 19,864 1,160.6 1,114.3 1,111.5 - - 5.67
Annuities
Keyport Charter - 7,178 435.2 409.3 411.4 - - 8.25
Flex 4 VA - 7,481 389.1 388.7 388.6 - - 5.22
Preferred - 7,979 451.9 444.2 447.4 - - 5.95
Advisor
Keyport Vista - 2,163 187.8 188.2 187.9 - - 5.24
GMDB - - - - 24.2 - - -
---------------------------------------- -------- ---------- ----------- ----------- ----------- --------- -------- ------------
TOTAL VARIABLE DEFERRED ANNUITIES 44,665 2,624.7 2,544.6 2,571.0 - - 5.46
---------------------------------------- -------- ---------- ----------- ----------- ----------- --------- -------- ------------
Equity Index Annuities Key Index - 45,100 2,003.4 1,864.2 2,245.9 - - -
Multi Point - 3,230 115.6 104.5 117.1 - - -
Deferred Index Gain (47.6) -
---------------------------------------- -------- ---------- ----------- ----------- ----------- --------- -------- ------------
TOTAL INDEX ANNUITIES 48,330 2,118.9 1,968.6 2,315.4 - - -
---------------------------------------- -------- ---------- ----------- ----------- ----------- --------- -------- ------------
Fixed Payout - - - - 470.6 - - -
Variable Payout PIP - - 411.2 411.2 411.2 - - -
SPWL Key Plan - 18,352 1,818.1 1,809.3 1,821.5 2,220.9 584.6 4.87
GICs (Bear Stearns) - - - - 400.9 - - 5.70
Other Institutional - - - - 740.5 - - -
Independence VLI - 1,709 187.4 187.4 187.4 384.6 - -
---------------------------------------- -------- ---------- ----------- ----------- ----------- --------- -------- ------------
TOTAL COMPANY 284,338 13,973.1 13,483.0 15,727.9 2,605.5 584.6 -
---------------------------------------- -------- ---------- ----------- ----------- ----------- --------- -------- ------------
</Table>
_________________________________
(1) The variable average credited rates are from the fixed account only.
B-2
<Page>
FUTURE ISSUES
Production amounts by product for 2000 through 2003 are summarized
below.
<Table>
<Caption>
----------------------------------------------------------------------------------------------------------------------
PRODUCTION AMOUNTS
(SINGLE PREMIUM, IN MILLIONS)
----------------------------------------------------------------------------------------------------------------------
Product 2000 Estimate 2001 2002 2003
------------------------------- ---------------- ----------------------- ---------------------- ----------------------
Fixed
o Focus 5 $339 $269 $140 $140
o Focus 5 MVA 0 250 435 500
o Galaxy 5 639 450 400 350
o Key Accumulator 144 300 400 500
o Subtotal Fixed $1,122 $1,269 $1,375 $1,490
------------------------------- ---------------- ----------------------- ---------------------- ----------------------
Equity Indexed
o 5 Year Multipoint $121 $320 $354 $424
------------------------------- ---------------- ----------------------- ---------------------- ----------------------
Variable
o Charter $678 $700 $875 $1,100
o Latitude 0 300 375 475
o Immediate VA 100 250 300 400
o Subtotal Variable $778 $1,250 $1,550 $1,975
------------------------------- ---------------- ----------------------- ---------------------- ----------------------
Total Individual $2,021 $2,839 $3,279 $3,889
------------------------------- ---------------- ----------------------- ---------------------- ----------------------
Institutional & PPVLI $800 $1,400 $1,600 $1,800
------------------------------- ---------------- ----------------------- ---------------------- ----------------------
Conservation Production $190 $230 $250 $250
------------------------------- ---------------- ----------------------- ---------------------- ----------------------
Total Production $3,011 $4,469 $5,129 $5,939
------------------------------- ---------------- ----------------------- ---------------------- ----------------------
</Table>
NON-MODELED
The following table summarizes the total reserve inforce as of
September 30, 2000 that was not modeled in our analysis.
<Table>
<Caption>
----------------------------------------------------
NON-MODELED RESERVE
AS OF SEPTEMBER 30, 2000
----------------------------------------------------
Description ($millions)
------------------------ ---------------------------
Employee 401K $29.1
Key Select MVA 63.8
Keyport VLI 18.6
Others 0.7
------------------------ ---------------------------
Total $112.2
------------------------ ---------------------------
</Table>
II. ASSUMPTIONS
MORTALITY
Mortality on deferred annuities is assumed to equal 75% of the 1983
Basic table.
Mortality on Single Premium Life is assumed to equal 65% of the 1975-80
S&U table.
Keyport does not currently reinsure the Guaranteed Minimum Death
Benefit features of its variable annuity products. The GMDB cost
assumed is based on the pricing assumptions as follows:
B-3
<Page>
<Table>
<Caption>
----------------------------------------------------------------------------------------------------------------------
VA GUARANTEED MINIMUM BENEFITS
----------------------------------------------------------------------------------------------------------------------
Benefit Type Description Additional Fee Assumed Cost
------------------------------- ---------------------------- ---------------------------- ----------------------------
Standard GMDB (1) Highest anniversary value; -- 15 bp
no less than principal
------------------------------- ---------------------------- ---------------------------- ----------------------------
Latitude GMDB Return of Premium -- 5 bp
------------------------------- ---------------------------- ---------------------------- ----------------------------
Enhanced Death Benefit -- 10bp Additional 10 bp
------------------------------- ---------------------------- ---------------------------- ----------------------------
Income Protection -- 35 bp Additional 35 bp
------------------------------- ---------------------------- ---------------------------- ----------------------------
Package: Enhanced DB plus Both of above 40 bp Additional 40 bp
Income Protection
------------------------------- ---------------------------- ---------------------------- ----------------------------
</Table>
There has been relatively little selection of the optional guaranteed
benefits by policyholders. For purposes of this analysis, all policies
are assumed to have the standard GMDB.
The highest anniversary ratchet applies only through attained age 80.
LAPSE RATES
The following tables provide a summary of the lapse rates assumed,
based on lapse studies performed using inforce as of yearend 1999 and
the valuation date, our knowledge of lapse experience on similar
products in the industry, and on experience studies and guidance
provided by the Company.
<Table>
<Caption>
----------------------------------------------------------------------------------------------------------------------
LAPSE RATES
----------------------------------------------------------------------------------------------------------------------
Galaxy 5 Key Annuity
---------------------- ---------------------------------------------------------------------------------
SC
Duration SC B SC F SC A SC C SC F SC H SC I SC J-K-L N-P-Q-R
------------- ----------- ---------- ----------- ----------- ----------- ---------- ---------- ------------ ----------
1 4% 4% 10% 2% 8% 10% 10% - 5%
2 5 5 10 6 8 10 10 - 5
3 5 5 10 6 8 10 10 - 6
4 6 6 10 6 8 10 10 - 7
5 8 8 10 8 8 10 15 - 8
6 50 8 15 50 11 10 15 - 9
7 20 8 20 20 13 10 15 - 10
8 15 50 35 15 35 15 15 15% 35
9 15 20 15 15 15 20 15 15 20
10 15 15 15 15 15 30 15 15 15
11 15 15 15 15 15 15 30 15 15
12+ 15 15 15 15 15 15 15 15 15
------------- ----------- ---------- ----------- ----------- ----------- ---------- ---------- ------------ ----------
</Table>
__________________________
(1) The Standard is not applied to Latitude.
B-4
<Page>
<Table>
<Caption>
-----------------------------------------------------------------------------------------------------------------------
LAPSE RATES
-----------------------------------------------------------------------------------------------------------------------
Equity Indexed*
-----------------------------------
Valued Single
Key Customer, Premium 5- 7- 10-
Duration Bonus Accumulator Focus Special Ultramax Life 1-Year Years Years Years
------------- -------- -------------- ------------ --------- ---------- ----------- --------- -------- ------- --------
1 8% 4% 4% 4% 8% - 15% 7% 7% 7%
2 10 5 5 5 8 - 15 5 5 5
3 10 5 5 5 8 - 15 3 3 3
4 10 6 6 6 8 - 15 2 2 2
5 10 8 8 8 9 - 15 2 2 2
6 10 50 50 50 10 - 15 65 2 2
7 15 20 20 30 10 5% 15 5 2 2
8 40 15 15 20 30 5 15 3 65 2
9 25 15 15 15 20 5 15 2 5 2
10 15 15 15 15 15 5 15 2 3 2
11 15 15 15 15 15 5 15 65 2 65
12 15 15 15 15 15 5 15 5 2 4
13 15 15 15 15 15 5 15 3 2 3
14+ 15 15 15 15 15 5 15 2 65 2
------------- -------- -------------- ------------ --------- ---------- ----------- --------- -------- ------- --------
</Table>
* Equity indexed products are assumed to have a 65% lapse at end of each
multi-year period.
<Table>
<Caption>
---------------------------------------------------------------------
LAPSE RATES
---------------------------------------------------------------------
Variable Annuity
-----------------------------------------
Duration F&G Annuity Latitude Others Keyport Vista
------------ -------------- ------------ ----------- ----------------
1 5% 5% 5% 5%
2 5 5 5 8
3 5 6 6 10
4 5 7 7 10
5 5 8 8 10
6 5 8 8 10
7 50 8 8 10
8 15 8 30 10
9 15 30 15 10
10 15 15 10 10
11 15 10 10 10
------------ -------------- ------------ ----------- ----------------
12+ 15 10 10 10
------------ -------------- ------------ ----------- ----------------
</Table>
B-5
<Page>
Interest sensitive lapse adjustments, expressed as a percentage, were added to
the lapse rates in the prior tables based on the following formula:
Z X (MR - CR - SC/4)(2) if MR < CR + SC/4
0 if CR > MR > CR + SC/4
-Z X (MR - CR)(2) if MR > CR
where,
SC is the surrender charges as a percent of account value, including the
impact of any market value adjustment.
CR is the credited rate of interest, as a percent.
MR is the market rate of interest, as a percent.
Z = 2 for deferred annuities
= 0 for SPWL
= 0 for EIA and VA
The market rate is assumed to equal the 7-year nominal Treasury rate for
annuities and the 7-year Treasury less 50 bp for SPWL.
PARTIAL WITHDRAWAL UTILIZATION
Free partial withdrawals of 2% per annum are assumed in years 2+.
EXPENSES
Unit expense factors for acquisition costs are based on Keyport pricing
allowables. Unit maintenance expense factors are based on industry allowables.
<Table>
<Caption>
----------------------------------------------------------------------------------
UNIT EXPENSE FACTORS
----------------------------------------------------------------------------------
Fixed Product Variable Product
------------------- ---------------------------------------- ---------------------
Maintenance $30 Per Policy $45 Per Policy
0.15% of Immediate Annuity Reserves
------------------- ---------------------------------------- ---------------------
Acquisition 0.5% Premium 1.25% Premium
$60 Per Policy $60 Per Policy
------------------- ---------------------------------------- ---------------------
</Table>
Inflation of 3% per year is reflected in the per policy expense allowables.
B-6
<Page>
CREDITED RATES
Initial credited rates were provided by the Company, and vary by plan, market
and deposit date. These rates are held constant until policy anniversary, and
are then changed subject to the following crediting rate strategy:
o Determine a preliminary rate equal to the current credited rate after
removing any first year interest bonuses.
o For annuities, hold the preliminary credited rate constant throughout the
projection, without allowing it to exceed the market rate less 85 bp during
the surrender charge period or 60 bp after the surrender charge period.
o For SPWL, hold the credited rate constant throughout the projection.
The resulting credited rates are subject to current multi-year guarantees and
long-term minimum guarantees.
Future business is projected based on the pricing spreads after bonus as
described below.
<Table>
<Caption>
---------------- ---------------------------------------------
Policy Year
---------------------------------------------
1 2-5 6+
---------------- ------------- --------------- ---------------
Focus 5 125 bp 225 bp 265 bp
Galaxy 5 100 200 265
Accumulator 95 195 265
---------------- ------------- --------------- ---------------
</Table>
MULTI-YEAR GUARANTEED PERIOD
The multi-year period is predominately five years as follows:
<Table>
<Caption>
-----------------------------------------------------
FIXED DEFERRED ANNUITIES
SUMMARY OF MULTI-YEAR GUARANTEED PERIOD
AS OF SEPTEMBER 30, 2000
-----------------------------------------------------
Period Statutory Reserve
-------------------------- --------------------------
3 $ 34.1 million
5 2,204.3
7 61.9
Not Multi-Year 4,509.1
-------------------------- --------------------------
Total 6,809.3 million
-------------------------- --------------------------
</Table>
B-7
<Page>
BONUS CREDITED RATES
Focus 5, Galaxy 5, Accumulator, Ultramax and Key Bonus offer a first year
interest bonus of 1.0%. Sixteen percent of the inforce fixed annuity block is
currently receiving the first year bonus. We have reduced credited rates on
these policies by 1.0% after the first policy year.
An additional bonus based on account value for Galaxy 5 and Accumulator is
summarized below.
<Table>
<Caption>
--------------------------------- -------------------------------
Galaxy 5 Accumulator
--------------------------------- -------------------------------
Account Bonus Account Bonus
Value (bp) Value (bp)
-------------------- ------------ -------------------- ----------
$0 - 4,999 0 $0 - 24,999 0
5,000 - 9,999 10 25,000 - 49,999 20
10,000 - 24,999 25 50,000 - 74,999 30
25,000 - 49,999 35 75,000 - 99,999 35
50,000 - 99,999 40 100,000+ 40
100,000+ 45
-------------------- ------------ -------------------- ----------
</Table>
The Latitude VA also has a first year bonus which is 4.0% paid at issue.
VARIABLE PRODUCT FEES
The separate accounts are projected based on an annual growth rate of 10%, net
of investment management fees.
<Table>
<Caption>
----------------------------- ------------------------ --------------------------- -----------------
Retained Investment
Plan M&E Fee Advisory Fees Total
----------------------------- ------------------------ --------------------------- -----------------
Charter 140 bp 40 bp 180 bp
PIP 140 40 180
Other Keyport 140 25 165
----------------------------- ------------------------ --------------------------- -----------------
Independence VLI 60 0 60
----------------------------- ------------------------ --------------------------- -----------------
</Table>
POLICY LOANS
75% of the SPWL policy loans are assumed to be preferred based on discussions
with the company. The preferred loans have a zero net cost to the policyholder
while the other 25% are charged a 2.50% spread. A similar net spread is assumed
for the Independence VLI block.
B-8
<Page>
RESERVES
We have calculated the reserves consistent with the Company's practice as
follows:
<Table>
<Caption>
------------------------------ ------------------------------------------------
Block Method
------------------------------ ------------------------------------------------
Fixed Annuities Continuous CARVM with Actuarial Guideline 33
------------------------------ ------------------------------------------------
Variable Annuities
o KLI - Existing Cash surrender value plus GMDB reserve
o KLI Future, Continuous CARVM with valuation rate less M&E
KBIC charges as the guaranteed rate
------------------------------ ------------------------------------------------
Equity Index EDIM with undiscounted recognition of
intrinsic value
------------------------------ ------------------------------------------------
</Table>
The fixed payout annuity reserves and cash flows were provided from the Company
and have an average valuation rate of 6.50%.
TAXES
Federal income tax rate: 35%
DAC Tax: Existing Business: $84.5 million of DAC tax asset is amortized
as provided by the Company.
New Business: 1.75% of non-qualified premium amortized over
ten years. 80% of all premium is assumed
non-qualified.
Tax Reserves: Existing business tax reserves are equal to statutory reserves
less approximately $195 million. This difference will
eventually flow into statutory income but not taxable income.
INSTITUTIONAL BUSINESS
The inforce institutional business consists of contracts from four different
counterparties. The following table summarizes the inforce as of September 30,
2000.
<Table>
<Caption>
------------------------------------------- ---------------------- --------------- ----------------
Counterparty Statutory Reserve Maturity Account
(millions)
------------------------------------------- ---------------------- --------------- ----------------
Commonwealth Edison $557.5 2004(1) Separate
Trustees of Halmark 84.6 4/2005 Separate
Trustees of Florida Power & Light 98.5 6/2003 Separate
Bear Stearns 400.9 6/2003 General
------------------------------------------- ---------------------- --------------- ----------------
Total $1,141.4
------------------------------------------- ---------------------- --------------- ----------------
</Table>
The Commonwealth Edison agreement consists of multiple contracts mostly maturing
in early 2004. We have assumed a 12% lapse rate on Commonwealth Edison to
account for early maturities.
------------------------------
(1) Consists of various contracts maturing at different dates. Most in early
2004.
B-9
<Page>
The following outlines the assumptions underlying the separate account
institutional projections:
<Table>
<Caption>
------------------------------------------------------------------- --------------
Separate Account Growth 10.00%
Gross Spread 0.45
Expenses 0.10
Net Spread 0.35
Lapse Rate - -- Future Business, Commonwealth Edison 12.00
-- Existing -Other 0.00
Partial Withdrawal 3.00
------------------------------------------------------------------- --------------
</Table>
The Bear Stearns' cash flows and reserves were provided by Company.
III. PRODUCT SPECIFICATIONS
SURRENDER CHARGES
<Table>
<Caption>
-----------------------------------------------------------------------------------------
FIXED ANNUITIES
-----------------------------------------------------------------------------------------
Policy Year
SC -------------------------------------------------------------------
Table Basis 1 2 3 4 5 6 7 8 9 10 11
---------- ---------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ------ ------
A % Premium 7% 6% 5% 4% 3% 2% 1% 0% 0% 0% 0%
B 7 7 6 5 4 0 0 0 0 0 0
C 7 7 7 6 5 0 0 0 0 0 0
D 8 7 6 5 4 3 2 0 0 0 0
E 7 7 7 6 5 4 2 0 0 0 0
F 7 7 7 6 5 4 3 0 0 0 0
G 7 7 7 6 5 4 3 2 1 0 0
H 8 8 7 6 5 4 3 2 1 0 0
I 7 7 7 7 7 7 6 5 4 3 0
---------- ---------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ------ ------
J % AV 6% 6% 5% 4% 3% 2% 1% 0% 0% 0% 0%
K 5 5 5 5 5 0 0 0 0 0 0
L 6 6 6 5 4 3 1 0 0 0 0
M 5 5 5 5 5 4 3 0 0 0 0
N 7 7 6 5 4 3 2 0 0 0 0
O 7 7 7 6 5 0 0 0 0 0 0
P 6 6 6 6 5 4 3 0 0 0 0
Q 6 6 6 6 6 5 3 0 0 0 0
R 7 7 7 6 5 4 3 0 0 0 0
S 6 5 4 3 2 1 0 0 0 0 0
---------- ---------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ------ ------
</Table>
B-10
<Page>
<Table>
<Caption>
----------------------------------------------------------------------------------
VARIABLE ANNUITIES
----------------------------------------------------------------------------------
Duration Latitude Vista Others
--------------------- --------------------- -------------------- -----------------
1 8% 0% 7%
2 8 0 6
3 8 0 5
4 7 0 4
5 6 0 3
6 5 0 2
7 4 0 1
8 3 0 0
9+ 0 0 0
--------------------- --------------------- -------------------- -----------------
</Table>
Equity Index Annuities:
10% of premium, waived at the end of the term period.
EQUITY INDEX S&P 500 CREDITS
The end of term S&P 500 credits are based on :
Key Index: The highest anniversary value of the S&P 500 Index
during the term.
MultiPoint: The highest monthly average from issue of
the S&P 500 Index at each anniversary.
The credits are vested at the end of each policy year linearly from issue to the
end of the term period. For example, the five-year plan's vesting schedule
increases 20% each year.
FREE PARTIAL WITHDRAWALS
Most annuity products have a 10% free partial withdrawal provision up to
accumulated interest.
GUARANTEED CREDITED RATES
The guaranteed interest rates after the initial guaranteed period are:
<Table>
------------------------------------------------------------- -----------------
General Account Annuities - Existing Business 3.50%
Future Business 3.00
------------------------------------------------------------- -----------------
SPWL 3.80% (2)
------------------------------------------------------------- -----------------
</Table>
------------------------------
(2) 3.80% is the average guaranteed rate assumed for SPWL.
B-11
<Page>
COMMISSIONS
<Table>
<Caption>
----------------------------------- --------------------
PRODUCT COMMISSIONS
----------------------------------- --------------------
Accumulator 5.00%
Focus 5, Focus 5 MVA 5.50
Galaxy 5 5.00
5 Year Multipoint 6.00
Charter 7.00
Immediate VA 7.50
Latitude 5.50
Focus 5 MVA Conservation 2.75
----------------------------------- --------------------
</Table>
The company is in the process of redesigning the immediate VA in 2001. The
commission rate on the current product is 7.0% which we have reflected in 2000
and a portion of the 2001 production. The 7.5% rate is based on preliminary
pricing of the product, and is reflected starting in 2001.
In addition, we have assumed a trail commission rate of 20 basis points for EIA
and 8 basis points for SPWL based on discussions with the Company.
B-12
<Page>
APPENDIX C
DETAILED STATUTORY PROJECTION OUTPUT
<Table>
<Caption>
LINE OF BUSINESS PAGE
--------------------------------------------------- ------
BUSINESS INFORCE AS OF SEPTEMBER 30, 2000
o Deferred Annuity - Fixed - SPDA/FPDA C-2
o Deferred Annuity - Equity Indexed C-4
o Deferred Annuity - Variable C-6
o SPWL C-8
o Independence Variable Life C-10
o Payout Annuity C-12
o Institutional C-14
o Total Existing Business C-15
TEN YEARS OF NEW ISSUES
o Deferred Annuity - Fixed C-17
o Deferred Annuity - Equity Indexed C-20
o Deferred Annuity - Variable C-23
o Immediate Annuity - Variable C-26
o Institutional C-29
o Total New Business C-32
</Table>
C-1