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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _________________________
Commission file numbers 33-3630 and 333-1783
KEYPORT LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Rhode Island 05-0302931
(State of other jurisdiction of incorporation or organization) (I.R.S.
Employer Identification No.)
125 High Street, Boston, Massachusetts 02110-2712
(Address of principal executive offices) (Zip Code)
(617) 526-1400
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. [X] Yes [ ]
No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. / /
There were 2,412,000 shares of the registrant's Common Stock, $1.25
par value, outstanding as of February 26, 1999.
Exhibit Index - Page 29 Page 1 of 33
KEYPORT LIFE INSURANCE COMPANY
ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
Part I Page
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 12
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 14
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition 15
Item 8. Consolidated Financial Statements and Supplementary
Data 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 23
Part III
Item 10. Directors and Executive Officers of the Registrant 24
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain Beneficial Owners
and Management 28
Item 13. Certain Relationships and Related Transactions 28
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 29
PART I
Item 1. Business
General
Keyport Life Insurance Company ("Keyport") is a specialty insurance company
providing a diversified line of fixed, indexed and variable annuity
products designed to serve the growing retirement savings market. The
Company sells its products through multiple distribution channels,
including banks, agents and brokerage firms. Keyport seeks to (i) maintain
its presence in the fixed annuity market while expanding its sales of
variable and equity-indexed annuities, (ii) achieve a broader market
presence through the use of diversified distribution channels and (iii)
maintain a conservative approach to investment and liability management.
Keyport's wholly owned insurance subsidiaries are Independence Life and
Annuity Company ("Independence Life") and Keyport Benefit Life Insurance
Company ("Keyport Benefit"). Other wholly owned subsidiaries are Liberty
Advisory Services Corp., an investment advisory company, and Keyport
Financial Services Corp., a broker-dealer (collectively the "Company").
The Company is licensed to sell insurance in all states, in the District of
Columbia and the Virgin Islands.
The Company is an indirect wholly owned subsidiary of Liberty Financial
Companies, Inc. ("Liberty Financial"), which is a publicly traded holding
company. Liberty Financial is an indirect majority owned subsidiary of
Liberty Mutual Insurance Company ("Liberty Mutual"), a multi-line insurance
company.
Liberty Financial is an asset accumulation and management company providing
investment management and retirement-oriented insurance products through
multiple distribution channels. Keyport issues and underwrites
substantially all of Liberty Financial's retirement-oriented insurance
products. Liberty Financial's primary investment advisor, asset management
and bank distribution operating units are The Colonial Group, ("Colonial"),
Stein Roe & Farnham Incorporated ("Stein Roe"), Newport Pacific Management,
Inc. ("Newport") and Independent Holdings, Inc. ("Independent"). Colonial,
Stein Roe and Newport manage certain underlying mutual funds and other
invested assets of Keyport's separate accounts. Stein Roe also provides
asset management services for a substantial portion of Keyport's general
account. Independent, through its subsidiary, markets Keyport's products
through the bank distribution channel.
Keyport's executive and administrative offices are located at 125 High
Street, Boston Massachusetts 02110, and its home office is at 695 George
Washington Highway, Lincoln, Rhode Island 02865.
Products
The Company (primarily Keyport and Keyport Benefit) sells a full range of
retirement-oriented insurance products, grouped by whether they provide
fixed, indexed or variable returns to policyholders. Annuities are
insurance products designed to offer individuals protection against the
risk of outliving their financial assets during retirement. Annuities offer
a tax-deferred means of accumulating savings for retirement needs and
provide a tax-efficient source of income in the payout period. The Company
earns spread income from fixed and indexed annuities; variable annuities
primarily produce fee income. The Company's primary financial objectives
are to increase policyholder balances through new sales and asset retention
and to earn acceptable investment spreads on its fixed and indexed return
products.
The Company's principal retirement-oriented insurance products are
categorized as follows:
Fixed Annuities. Fixed annuity products are principally single premium
deferred annuities ("SPDAs"). A SPDA policyholder typically makes a single
premium payment at the time of issuance. The Company obligates itself to
credit interest to the policyholder's account at a rate that is guaranteed
for an initial term (typically one year) and is reset annually thereafter,
subject to a guaranteed minimum rate. Interest crediting continues until
the policy is surrendered, upon policyholder death, or when the
policyholder turns age 90.
Equity-Indexed Annuities. Equity-indexed annuities are an innovative
product first introduced to the marketplace in 1995 by the Company when it
began selling its KeyIndex product. The Company's equity-indexed annuities
credit interest to the policyholder at a "participation rate" equal to a
portion (ranging for existing policies from 25% to 95%) of the change in
value of a specified equity index. KeyIndex is currently offered for one,
five and seven-year terms with interest earnings based on a percentage of
the increase in the Standard & Poor's 500 Composite Stock Price Index ("S&P
500 Index") ("S&P", "S&P 500", and "Standard & Poor's" are trademarks of
The McGraw Hill Companies, Inc. and have been licensed for use by the
Company). With the five and seven-year terms, the interest earnings are
based on the highest policy anniversary date value of the S&P 500 Index
during the term. KeyIndex also provides a guarantee of principal at the
end of the term. Thus, unlike a direct equity investment, even if the S&P
500 Index declines, there is no market risk to the policyholder's
principal. In late 1996, the Company introduced a market value adjusted
("MVA") annuity product, KeySelect, which offers a choice between a fixed
and equity-indexed account similar to KeyIndex and a fixed annuity type
interest account. KeySelect offers terms for each equity-indexed account of
one, three, five, six and seven years, as well as a ten-year term for the
fixed interest account. KeySelect shifts some investment risk to the
policyholder, since surrender of the policy before the end of the product
term will result in increased or decreased account values based on the
change in rates of designated U.S. Treasury securities since the beginning
of the term. The Company is continuing to develop new versions of the
equity-indexed annuities, including versions registered under the
Securities Act of 1933 ("Securities Act"), which are designed to be sold
through major national brokerage firms.
Variable Annuities. Variable annuities offer a selection of underlying
investment alternatives that may satisfy a variety of policyholder
risk/return objectives. Under a variable annuity, the policyholder has the
opportunity to select separate account investment options (consisting of
underlying mutual funds) which pass the investment risk directly to the
policyholder in return for the potential of higher returns. Variable
annuities also include guaranteed fixed interest options. The Company has
several different variable annuity products that currently offer 18 to 21
separate account investment choices, depending on the product, and four
guaranteed fixed interest options.
While the Company currently does not offer traditional life insurance
products, it manages a closed block of single premium whole life insurance
policies ("SPWLs"), a retirement-oriented tax-advantaged life insurance
product. The Company discontinued sales of SPWLs in response to certain tax
law changes in the 1980s. The Company had SPWL policyholder balances of
$2.0 billion as of December 31, 1998.
Under the Internal Revenue Code, returns credited on annuities and life
insurance policies during the accumulation period (the period during which
interest or other returns are credited) are not subject to federal or state
income tax. Proceeds payable on death from a life insurance policy are
also free from such taxes. At the maturity or payment date of an annuity
policy, the policyholder is entitled to receive the original deposit plus
accumulated returns. The policyholder may elect to take this amount in
either a lump sum or an annuitized series of payments over time. The
return component of such payments is taxed at the time of receipt as
ordinary income at the recipient's then applicable tax rate. The demand
for the Company's retirement-oriented insurance products could be adversely
affected by changes in this tax law.
The following table sets forth certain information regarding the Company's
retirement-oriented insurance business for the periods indicated.
As of or for the Year Ended
December 31,
1998 1997 1996
(in thousands, except policy data)
Policy and Separate
Account Liabilities:
Fixed annuities $ 8,246,275 $ 8,416,544 $ 8,641,423
Equity indexed annuities 2,125,254 1,527,489 787,848
Variable annuities 1,743,885 1,276,606 1,083,494
Life insurance 2,111,863 2,129,395 2,142,430
Total $ 14,227,277 $ 13,350,034 $ 12,655,195
Number of In Force Policies:
Fixed annuities 205,510 222,903 236,574
Equity indexed annuities 46,484 39,224 24,174
Variable annuities 37,049 27,429 25,177
Life insurance 23,097 24,921 26,850
Total 312,140 314,477 312,775
Average In Force Policy Amount:
Fixed annuities $ 40,126 $ 37,710 $ 36,479
Indexed annuities $ 45,720 $ 38,943 $ 32,591
Variable annuities $ 47,070 $ 46,542 $ 43,035
Life insurance $ 91,435 $ 83,709 $ 79,207
Premiums (statutory basis):
Fixed annuities $ 705,290 $ 426,052 $ 492,603
Equity indexed annuities 278,195 523,685 655,214
Variable annuities 507,897 172,688 97,357
Life insurance (1,039) (1,255) (447)
Total $ 1,490,343 $ 1,121,170 $ 1,244,727
New Contracts and Policies:
Fixed annuities 10,450 13,744 11,358
Equity indexed annuities 9,249 16,076 21,396
Variable annuities 12,238 4,333 1,814
Total 31,937 34,153 34,568
Aggregate Amount Subject to
Surrender Charges:
Fixed annuities $ 6,642,810 $ 6,982,210 $ 7,371,492
Equity indexed annuities $ 2,125,254 $ 1,527,489 $ 787,848
Withdrawals and Terminations (statutory basis):
Fixed annuities:
Death $ 28,921 $ 60,268 $ 24,650
Maturity $ 117,786 $ 109,614 $ 87,433
Surrender $ 1,225,877 $ 999,913 $ 966,023
Indexed annuities:
Death $ 11,279 $ 3,744 $ 147
Maturity $ 384 $ 10 --
Surrender $ 38,936 $ 19,453 $ 3,025
Variable annuities:
Death $ 7,051 $ 3,831 $ 1,762
Maturity $ 87,258 $ 27,507 $ 21,287
Surrender $ 140,544 $ 104,569 $ 76,725
Life Insurance:
Death $ 62,584 $ 65,593 $ 53,292
Surrender $ 77,485 $ 96,230 $ 98,189
Surrender Rates:
Fixed annuities 14.73% 11.74% 11.79%
Equity indexed annuities 2.13% 1.68% 0.69%
Variable annuities 9.31% 8.86% 7.55%
Life insurance 3.73% 4.57% 4.58%
Sales and Asset Retention
Product sales are influenced primarily by overall market conditions
impacting the attractiveness of the Company's retirement-oriented insurance
products, and by product features, including interest crediting and
participation rates, and innovations and services that distinguish the
Company's products from those of its competitors.
The Company's mix of annuity products is designed to include products in
demand under a variety of economic and market conditions. Sales of SPDAs
tend to be sensitive to prevailing interest rates. Sales can be expected
to increase and surrenders to decrease in interest rate environments when
SPDA rates are higher than rates offered by competing conservative fixed
return investments, such as bank certificates of deposit. SPDA sales can be
expected to decline and surrenders to increase in interest rate
environments when this differential in rates is not present (as has been
the case during 1998 and at the date of filing of this report). SPDA sales
also can be adversely affected by low interest rates (as has been the case
during 1998 and at the date of filing of this report). The Company believes
that the lack of significant growth in the sale of the Company's SPDAs has
resulted primarily from this type of low interest rate environment.
Conversely, sales of variable annuities can be expected to increase and
surrenders of such products to decrease in a rising equity market, low
interest rate environment. Similarly sales of equity-indexed annuities can
be expected to increase and surrenders to decrease in a rising equity
market, low interest rate environment. While economic conditions may be
generally favorable, high market volatility (as has been the case during
1998 and at the date of filing of this report) will result in a higher cost
of options associated with equity-indexed annuities. The result of the
higher option costs is a reduction in participation rates, which occurred
throughout the year.
The Company's insurance products include important features designed to
promote both sales and asset retention, including crediting rates and
surrender charges. Initial interest crediting and participation rates on
fixed and equity-indexed products significantly influence the sale of new
policies. Resetting of rates on SPDAs impacts retention of SPDA assets,
particularly on policies where surrender penalties have expired. At
December 31, 1998, crediting rates on 97% of the Company's in force SPDA
policy liabilities were subject to reset during the succeeding 12 months.
In setting crediting and participation rates, the Company takes into
account yield characteristics on its investment portfolio, surrender rate
assumptions and competitive industry pricing. Interest crediting rates on
the Company's in force SPDAs ranged from 3.50% to 7.75% at December 31,
1998. Such policies had guaranteed minimum rates ranging from 3.0% to
6.35% as of such date. Initial interest crediting rates on new policies
issued in 1998 ranged from 4.30% to 7.20%. Guaranteed minimum rates on new
policies issued during 1998 ranged from 3.0% to 4.5%.
Substantially all of the Company's annuities permit the policyholder at
anytime to withdraw all or part of the accumulated policy value. Premature
termination of an annuity policy results in the loss by the Company of
anticipated future earnings related to the premium deposit and the
accelerated recognition of the expenses related to policy acquisition
(principally commissions), which otherwise are deferred and amortized over
the expected life of the policy. Surrender charges provide a measure of
protection against premature withdrawal of policy values. Substantially all
of the Company's insurance products currently are issued with surrender
charges or similar penalties. Such surrender charges for all policies,
except KeyIndex, typically start at 7% of the policy premium and then
decline to zero over a five to seven year period. KeyIndex imposes a
penalty on surrender of up to 10% of the premium deposit for the life of
the policy. At December 31, 1998, 81% of the Company's fixed annuity
policyholder balances were subject to surrender charges or restrictions.
Surrender charges generally do not apply to withdrawals by policyowners of,
depending on the policy, either up to 10% per year of the then accumulated
value or the accumulated returns. In addition, certain policies may provide
for charge-free withdrawals in certain circumstances and at certain times.
All policies, except for certain variable annuities, are also subject to
"free look" risk (the legal right of a policyholder to cancel the policy
and receive back the premium deposit, without interest, for a period
ranging from ten days to one year, depending upon the policy). To the
extent a policyholder exercises the "free look" option, the Company may
realize a loss as a result of any investment losses on the underlying
assets during the free look period, as well as the commissions paid on the
sale of the policy. While SPWLs also permit withdrawal, it generally would
produce significant adverse tax consequences to the policyholder.
Keyport's strong financial ratings are important to its ability to
accumulate and retain assets. Keyport is rated "A" (Excellent) by A.M.
Best, "AA" (very strong financial security) by Standard & Poor's ("S&P"),
"A2" (good) by Moody's and "AA-" (very high claims-paying ability) by Duff
& Phelps. Rating agencies periodically review the ratings they issue. S&P
raised Keyport's rating from "AA-" to "AA" in March 1998 and reaffirmed
that rating in January 1999. In September 1998, Moody's reduced Keyport's
rating from "A1" to "A2". In January 1999, A.M. Best reduced Keyport's
rating from "A+" to "A". These ratings reflect the opinion of the rating
agency as to the relative financial strength of Keyport and Keyport's
ability to meet its contractual obligations to its policyholders. Such
ratings are not "market" ratings or recommendations to use or invest in
Keyport and should not be relied upon when making a decision to invest in
the Company. Many financial institutions and broker-dealers focus on the
claims-paying ability of an insurer in determining whether to market the
insurer's annuities. If any of Keyport's ratings were downgraded from
their current levels or if the ratings of Keyport's competitors improved
and Keyport's did not, sales of Keyport's products, the level of surrenders
on existing policies and the Company's relationships with distributors
could be materially adversely affected. No assurances can be given that
Keyport will be able to maintain its financial ratings. The Company's S&P
rating was placed under credit watch with negative implications as a
consequence of an acquisition announced by Liberty Mutual in January 1999.
Customer service is essential to asset accumulation and retention. The
Company believes it has a reputation for excellent service to its
distributors and its policyholders. The Company has developed advanced
technology systems for immediate response to customer inquiries, and rapid
processing of policy issuance and commission payments (often at the point
of sale). These systems also play an important role in controlling costs.
The Company's operating expense ratio for 1998 and 1997 was 0.42% and 0.40%
of assets, respectively, which reflects the Company's low cost operations.
General Account Investments
Premium deposits on fixed and equity-indexed annuities are credited to the
Company's general account investments (which at December 31, 1998 totaled
$13.3 billion). General account investments include cash and cash
equivalents. To maintain its investment spread at acceptable levels, the
Company must earn returns on its general account sufficiently in excess of
the fixed or indexed returns credited to policyholders. The key element of
this investment process is asset/liability management. Successful
asset/liability management requires both a quantitative assessment of
overall policy liabilities (including maturities, surrenders and crediting
of interest) and prudent investment of general account assets. The two
most important tools in managing policy liabilities are setting crediting
rates and establishing surrender periods. The investment process requires
portfolio techniques that earn acceptable yields while effectively managing
both interest rate risk and credit risk. The Company emphasizes a
conservative approach to asset/liability management, which is oriented
toward reducing downside risk in adverse markets, as opposed to maximizing
spread in favorable markets. The approach is also designed to reduce
earnings volatility. Various factors can impact the Company's investment
spread, including changes in interest rates and other factors affecting the
Company's general account investments.
The bulk of the Company's general account investments are invested in fixed
maturity securities (84.7% at December 31, 1998). The Company's principal
strategy for managing interest rate risk is to closely match the duration
of its general account investment portfolio to its policyholder balances.
The Company also employs hedging strategies to manage this risk, including
interest rate swaps and caps. In the case of equity-indexed products, the
Company purchases S&P 500 Index call options and futures to hedge its
obligations to provide participation rate returns. Credit risk is managed
by careful credit analysis and monitoring. A portion of the general account
investments (8.1% at December 31, 1998) is invested in below investment
grade fixed maturity securities to enhance overall portfolio yield. Below
investment grade securities pose greater risks than investment grade
securities. The Company actively manages its below investment grade
portfolio to optimize its risk/return profile. At December 31, 1998, the
carrying value of fixed maturity investments that were non-income producing
was $30.0 million, which constituted 0.2% of investments.
As of December 31, 1998, the Company owned approximately $3.3 billion of
mortgage-backed securities (24.8% of its general account investments),
97.3% of which were investment grade. Mortgage-backed securities are
subject to significant prepayment and extension risks, since the underlying
mortgages may be repaid more or less rapidly than scheduled.
As of December 31, 1998, approximately $3.6 billion (26.7% of the Company's
general account investments) were invested in securities that were sold
without registration under the Securities Act and were not freely tradable
under the Securities Act or which were otherwise illiquid. These
securities may be resold pursuant to an exemption from registration under
the Securities Act. If the Company sought to sell such securities, it
might be unable to do so at the then current carrying values and might have
to dispose of such securities over extended periods of time at uncertain
levels.
Marketing and Distribution
Keyport's sales strategy is to use multiple distribution channels to
achieve broader market presence. During 1998, the bank channel represented
approximately 42.6% of Keyport's annuity sales, and the brokerage channel
represented approximately 13.1%. The sale of insurance and investment
products through the bank distribution channel is highly regulated. Sales
through other distributors of insurance products, such as financial
planners, insurance agents and an institutional channel represented
approximately 44.3% of total annuity sales.
The following table presents sales information in Keyport's distribution
channels for the periods indicated (in millions).
Sales of Fixed and Sales of Variable
Indexed Annuities Annuities
Year Ended December 31, Year Ended December 31,
1998 1997 1996 1998 1997 1996
Bank channel
Independent $ 71.3 $ 168.4 $ 139.4 $ 223.7 $ 121.0 $ 28.5
Third party
bank marketers 294.9 286.5 311.2 45.8 3.2 13.7
Other channels:
Broker-dealers 69.8 179.5 211.7 126.0 24.9 36.6
Other distributors 547.5 314.1 485.6 111.8 23.6 18.5
Regulation
The Company's business activities are extensively regulated. The following
briefly summarizes the principal regulatory requirements and certain
related matters.
Keyport's retirement-oriented insurance products generally are issued as
individual policies. The policy is a contract between the issuing
insurance company and the policyholder. State law regulates policy forms,
including all principal contract terms. In most cases, the policy form
must be approved by the insurance department or similar agency of a state
in order for the policy to be sold in that state.
Keyport and Independence Life are chartered in Rhode Island and the State
of Rhode Island Insurance Department is their primary oversight regulator.
Keyport Benefit is chartered in the state of New York and the New York
Department of Insurance is its primary oversight regulator. Keyport
Benefit operates exclusively in New York and Rhode Island. Keyport and
Independence Life also must be licensed by the state insurance regulators
in each other jurisdiction in which they conduct business. They currently
are licensed to conduct business in 49 states (the exception being New
York), and in the District of Columbia and the Virgin Islands. State
insurance laws generally provide regulators with broad powers related to
issuing licenses to transact business, regulating marketing and other trade
practices, operating guaranty associations, regulating certain premium
rates, regulating insurance holding company systems, establishing reserve
requirements, prescribing the form and content of required financial
statements and reports, performing financial and other examinations,
determining the reasonableness and adequacy of statutory capital and
surplus, regulating the type and amount of investments permitted, limiting
the amount of dividends that can be paid and the size of transactions that
can be consummated without first obtaining regulatory approval, and other
related matters. The regulators also make periodic examinations of
individual companies and review annual and other reports on the financial
conditions of all companies operating within their respective
jurisdictions.
Keyport and Independence Life prepare their statutory-basis financial
statements in accordance with accounting practices prescribed or permitted
by the Insurance Department of the State of Rhode Island. Keyport Benefit
prepares its statutory-basis financial statements in accordance with
accounting practices prescribed or permitted by the New York Department of
Insurance. State laws prescribe certain statutory accounting practices.
Permitted statutory accounting practices encompass all accounting practices
that are not proscribed; such practices may differ between the states and
companies within a state. The National Association of Insurance
Commissioners (the "NAIC") currently is in the process of codifying
statutory accounting practices, the result of which is expected to
constitute the only source of prescribed statutory accounting practices.
That project, which is expected to be completed in 1999, may result in
changes to the accounting practices that the Company uses to prepare its
statutory-basis financial statements. The impact of any such changes on
the Company's statutory-surplus cannot be determined at this time. No
assurance can be given that such changes would not have a material adverse
effect on the Company.
Risk-Based Capital Requirements. In recent years, various states have
adopted new quantitative standards promulgated by the NAIC. These
standards are designed to reduce the risk of insurance company
insolvencies, in part by providing an early warning of financial or other
difficulties. These standards include the NAIC's risk-based capital
("RBC") requirements. RBC requirements attempt to measure statutory
capital and surplus needs based on the risks in a company's mix of products
and investment portfolio. The requirements provide for four different
levels of regulatory attention which implement increasing levels of
regulatory control (ranging from development of an action plan to mandatory
receivership). As of December 31, 1998, Keyport's capital and surplus
exceeded the level at which the least severe of these regulatory attention
levels would be triggered.
Guaranty Fund Assessments. Under the insurance guaranty fund laws existing
in each state, insurers can be assessed for certain obligations of
insolvent insurance companies to policyholders and claimants. Because
assessments typically are not made for several years after an insurer
fails, Keyport cannot accurately determine the precise amount or timing of
its exposure to known insurance company insolvencies at this time. For
certain information regarding the Company's historical and estimated future
assessments, see Note 11 to the Company's Consolidated Financial
Statements. The insolvency of large life insurance companies in future
years could result in material assessments to Keyport by state guaranty
funds. No assurance can be given that such assessments would not have a
material adverse effect on the Company.
Insurance Holding Company Regulation. Current Rhode Island insurance law
permits the payment of dividends or distributions from the Company to
Liberty Financial, which, together with dividends and distributions paid
during the preceding 12 months, do not exceed the lesser of (i) 10% of
statutory surplus as of the preceding December 31 or (ii) the net gain from
operations for the preceding fiscal year. Any proposed dividend in excess
of this amount is called an "extraordinary dividend" and may not be paid
until it is approved by the Commissioner of Insurance of the State of Rhode
Island. The Company had not paid any dividends since its acquisition in
1988. In 1998, the Company paid $20.0 million in dividends to Liberty
Financial. As of December 31, 1998, the amount of additional dividends that
the Company could pay without such approval was $59.1 million.
General Regulation at Federal Level and Certain Related Matters.
Although the federal government generally does not directly regulate the
insurance business, federal initiatives often have an impact on the
business in a variety of ways. Current and proposed federal measures that
may significantly affect the insurance business include limitations on
antitrust immunity, minimum solvency requirements and the removal of
barriers restricting banks from engaging in the insurance business. In
particular, several proposals to repeal or modify the Bank Holding Company
Act of 1956 (which prohibits banks from being affiliated with insurance
companies) have been made by members of Congress and the Clinton
Administration. Moreover, the United States Supreme Court held in 1995 in
NationsBank of North Carolina v. Variable Annuity Life Insurance Company
that annuities are not insurance for purposes of the National Bank Act. In
addition, the Supreme Court also held in 1995 in Barnett Bank of Marion
City v. Nelson that state laws prohibiting national banks from selling
insurance in small town locations are preempted by federal law. The Office
of the Comptroller of the Currency adopted a ruling in November 1996 that
permits national banks, under certain circumstances, to expand into other
financial services, thereby increasing competition for the Company. At
present, the extent to which banks can sell insurance and annuities without
regulation by state insurance departments is being litigated in various
courts in the United States. Although the effect of these recent
developments on the Company and its competitors is uncertain, there can be
no assurance that such developments would not have a material adverse
effect on the Company.
Competition
The Company's business activities are conducted in extremely competitive
markets. Keyport competes with a large number of life insurance companies,
some of which are larger and more highly capitalized and have higher
ratings than Keyport. No one company dominates the industry. In addition,
Keyport's products compete with alternative investment vehicles available
through financial institutions, brokerage firms and investment managers.
Management believes that Keyport competes principally with respect to
product features, pricing, ratings and service; management also believes
that Keyport can continue to compete successfully in this market by
offering innovative products and superior services. In addition, financial
institutions and broker-dealers focus on the insurer's ratings for
financial strength or claims-paying ability in determining whether to
market the insurer's annuities.
Employees
As of December 31, 1998, the Company had 408 full-time employees. The
Company provides its employees with a broad range of employee benefit
programs. The Company believes that its relations with its employees are
excellent.
Item 2. Properties
As of December 31, 1998, the Company maintained its executive,
administrative and sales offices in leased facilities. The Company leases
approximately 96,500 square feet in two facilities in downtown Boston
pursuant to leases which expire in 2008. The Company also leases
approximately 19,800 square feet in a single facility in Lincoln, Rhode
Island and 13,300 square feet in a single facility in Lake Mary, Florida
pursuant to leases that expire in 2007 and 2004, respectively.
Item 3. Legal Proceedings
The Company is from time to time involved in litigation incidental to its
business. In the opinion of Keyport's management, the resolution of such
litigation is not expected to have a material adverse effect on the
Company's financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Directors and Principal Officers of the Registrant
The following are the principal officers and directors of the Company:
Position with Other Business, Vocation
Keyport or Employment for Past
Name, Age Year of Election Five Years
Kenneth R. Leibler, 50 Chairman of the Board, Chief Executive Officer of
12/31/94 Liberty Financial
Companies, Inc. ("LFC"),
1/1/95; President of LFC,
formerly Chief Operating
Officer of LFC
Frederick Lippitt, 82 Director, 1/31/62, Chairman of The Providence
and Assistant Secretary, Plan Providence, RI
4/9/69
Robert C. Nyman, 63 Director, 4/11/96 Formerly President and
Chairman of Nyman
Manufacturing Co., East
Providence, RI
Paul H. LeFevre, Jr., Acting President, Formerly Senior Vice
56 10/22/98, Executive President and Chief
Vice President, 4/10/97 Financial Officer of
the Company, 9/1/95;
Acting President,
10/22/98, Director,
1/30/98 and Executive Vice
President of Keyport
Benefit Life Insurance
Company; Director, 1/8/93,
and Executive Vice
President, 7/22/97 of
LASC; formerly Senior Vice
President and Chief
Financial Officer of LASC,
1/8/93; Director, 10/1/93,
and Executive Vice
President, 7/28/97, of
Independence Life;
formerly Senior Vice
President and Chief
Financial Officer of
Independence Life, 10/1/93
Bernard R. Senior Vice President Director, 1/30/98, and
Beckerlegge, 52 and General Counsel, Senior Vice President and
9/1/95 General Counsel of Keyport
Benefit Life Insurance
Company, 2/6/98; Senior
Vice President and General
Counsel of LASC, 7/22/97;
Senior Vice President and
General Counsel of
Independence Life,
10/9/95; formerly General
Counsel for B.T. Variable
Insurance Co., 8/1/88
Bernhard M. Koch, 44 Senior Vice President Director, 1/30/98 and
and Chief Financial Senior Vice President
Officer, 8/7/97 and Chief Financial
Officer of Keyport Benefit
Life Insurance Company,
2/6/98; Senior Vice
President and Chief
Financial Officer of LASC,
7/22/97; Senior Vice
President and Chief
Financial Officer of
Independence Life,
7/28/97; formerly
Executive Vice President
and Chief Financial
Officer of Life Partners
Group, 12/1/95; formerly
Senior Vice President and
Chief Financial Officer of
Laurentian Capital Corp.,
5/1/88
Stewart R. Morrison, Senior Vice President, Formerly Vice President,
42 4/10/97, and Chief Investments of the
Investment Officer, Company; Senior Vice
5/16/94 President and Chief
Investment Officer of
Keyport Benefit Life
Insurance Company, 2/6/98;
Senior Vice President and
Chief Investment Officer
of LASC, 7/22/97; formerly
Vice President,
Investments of LASC,
1/8/93; Senior Vice
President and Chief
Investment Officer
of Independence Life,
7/28/97; formerly Vice
President, Independence
Life, 10/1/93
Francis E. Reinhart, Senior Vice President, Formerly Chief
58 4/5/90, and Chief Administrative Officer of
Information Officer, the Company; formerly
4/10/97 Director and Vice
President of KFSC; Senior
Vice President and Chief
Information Officer of
Keyport Benefit Life
Insurance Company, 2/6/98;
Senior Vice President of
LASC, 1/8/93; formerly
Chief Administrative
Officer 1/8/93; Senior
Vice President, 10/1/93
and Chief Information
Officer, 7/28/97 of
Independence Life;
formerly Chief
Administrative Officer of
Independence Life, 10/1/93
Mark R. Tully, 42 Senior Vice President Formerly Vice President,
and Chief Sales Officer, 8/7/97, and Vice
1/20/98 President - National
Director of Traditional
Sales of the Company,
8/10/95; Senior Vice
President and Chief Sales
Officer of Keyport Benefit
Life Insurance Company,
2/6/98; Director and
Senior Vice President of
LASC, 1/13/98; Director
and Senior Vice President
of Independence Life,
12/14/97; formerly Vice
President of Paine Webber,
Inc., 11/1/88.
James P. Greaton, 41 Vice President and Vice President and
Corporate Actuary, Corporate Actuary of
6/12/96 Keyport Benefit Life
Insurance Company, 2/6/98;
Vice President and
Corporate Actuary of
Independence Life,
12/31/96; formerly
Valuation Actuary,
Providian Capital
Management, 5/94
Jeffery J. Lobo, 37 Vice President--Risk Formerly Assistant Vice
Management, 6/12/96 President - Director of
Quantitative Research for
the Company; Vice
President - Risk
Management of Keyport
Benefit Life Insurance
Company, 2/6/98; formerly
Vice President of Credit
Suisse Financial Products,
11/94
Jeffery J. Vice President, Formerly Controller of
Whitehead, 42 11/5/92 and Treasurer, the Company; Vice
5/4/95 President and Treasurer of
Keyport Benefit Life
Insurance Company, 2/6/98;
Vice President and
Treasurer of LASC,
5/19/95; Vice President
and Treasurer of
Independence Life, 5/19/95
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Not applicable.
Item 6. Selected Financial Data (in thousands)
As of and for
the year ended
December 31, 1998 1997 1996 1995 1994
Income statement
data:
Investment
income $ 815,266 $ 847,048 $ 790,365 $ 755,930 $ 689,575
Interest
credited (562,238) (594,084) (572,719) (555,725) (481,926)
Investment
spread 252,988 252,964 217,646 200,205 207,649
Fee income 42,836 36,353 33,534 29,767 25,273
Operating
expenses (53,544) (49,941) (43,815) (44,475) (54,295)
Income before
income taxes 161,519 172,651 137,846 107,941 95,276
Net income 108,600 113,561 90,624 69,610 63,225
Balance sheet
data:
Total cash and
investments $13,317,878 $13,505,858 $12,305,312 $10,922,125 $ 9,274,793
Total assets 15,775,231 15,342,189 13,924,557 12,280,194 10,873,604
Stockholder's
equity 1,135,597 1,103,021 980,782 902,331 682,485
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Net income was $108.6 million in 1998, compared to $113.6 million in 1997
and $90.6 million in 1996. Favorable variances in 1998 as compared to 1997
were the result of higher fee income, reduced amortization of deferred
policy acquisition costs and value of insurance in force, lower policy
benefits and income tax expense. Offsetting these items were reductions in
net realized investment gains and higher operating expenses.
Investment spread is the amount by which investment income earned on the
Company's investments exceeds interest credited to policyholder balances.
Investment spread was $253.0 million in 1998 and 1997 as compared to $217.6
million in 1996. The amount by which the average yield on investments
exceeds the average interest credited rate on policyholder balances is the
investment spread percentage. Such investment spread percentage was 1.78%
in 1998, 1.91% in 1997, and 1.84% in 1996.
Investment income was $815.2 million in 1998, compared to $847.0 million in
1997 and $790.4 million in 1996. The decrease of $31.8 million in 1998
compared to 1997 primarily relates to a $66.4 million decrease resulting
from a lower average investment yield, partially offset by a $34.6 million
increase as a result of a higher level of average invested assets. The
1998 investment income was net of $70.8 million of S&P 500 Index call
option amortization expense related to the Company's equity-indexed
annuities compared to $47.6 million in 1997. The average investment yield
was 6.36% in 1998 compared to 6.90% in 1997. Investment income increased
in 1997 compared to 1996 primarily as a result of a higher level of average
invested assets, partially offset by a decrease resulting from a lower
average investment yield. The average investment yield was 6.90% in 1997
compared to 7.16% in 1996.
Interest credited to policyholders totaled $562.2 million in 1998, compared
to $594.1 million in 1997 and $572.7 million in 1996. The decrease of $31.9
million in 1998 compared to 1997 primarily relates to a $49.4 million
decrease resulting from a lower average interest credited rate, partially
offset by a $17.5 million increase as a result of a higher level of average
policyholder balances. Policyholder balances averaged $12.3 billion
(including $10.5 billion of fixed products and $1.8 billion of equity-
indexed annuities) in 1998 compared to $11.9 billion (including $10.8
billion of fixed products and $1.1 billion of equity-indexed annuities) in
1997. The average interest credited rate was 4.58% (5.23% on fixed
products and 0.85% on equity-indexed annuities) in 1998 compared to 4.99%
(5.45% on fixed products and 0.85% on equity-indexed annuities) in 1997.
The Company's equity-indexed annuities credit interest to the policyholder
at a "participation rate" equal to a portion (ranging for existing policies
from 25% to 95%) of the change in value of the S&P 500 Index. The
Company's equity-indexed annuities also provide a full guarantee of
principal if held to term, plus interest at 0.85% annually. For each of
the periods presented, the interest credited to equity-indexed
policyholders related to the participation rate was offset by investment
income recognized on the S&P 500 Index call options and futures, resulting
in an 0.85% net credited rate. Interest credited to policyholders
increased in 1997 compared to 1996 primarily as a result of a higher level
of average policyholder balances, partially offset by a decrease in the
average interest credited rate. Policyholder balances averaged $11.9
billion in 1997 compared to $10.8 billion in 1996. The average interest
credited rate was 5.32% in 1996.
Average investments (computed without giving effect to Statement of
Financial Accounting Standards No. 115), including a portion of the
Company's cash and cash equivalents, were $12.8 billion in 1998 compared to
$12.3 billion in 1997 and $11.0 billion in 1996. The increase of $0.5
billion in 1998 compared to 1997 was primarily due to the reinvestment of
portfolio earnings. The increase of $1.3 billion in 1997 compared to 1996
was primarily due to a 100% coinsurance agreement with respect to a $954.0
million block of SPDAs entered into with Fidelity & Guaranty Life Insurance
Company ("F&G Life") during the third quarter of 1996 and the reinvestment
of portfolio earnings.
Net realized investment gains were $.8 million in 1998, compared to $24.7
million in 1997 and $5.5 million in 1996. The net realized investment
gains in 1998 were net of losses of $28.3 million for certain fixed
maturity investments where the decline in value was determined to be other
than temporary. There were no impairment writedowns in 1997 and 1996. The
net realized investment gains in 1998 included net gains on sales of fixed
maturity investments of $12.4 million, gains on sales of equity securities
of $14.7 million and gains of $.1 million on redemption of seed money
investments in separate account mutual funds sponsored by the Company. The
net realized investment gains in 1997 included gains on sales of fixed
maturity investments of $16.8 million and gains of $7.9 million on
redemption of seed money investments in separate account mutual funds
sponsored by the Company. Sales of fixed maturity and equity investments
generally are made to maximize total return.
Surrender charges on fixed and variable annuity withdrawals generally are
assessed at declining rates applied to policyholder withdrawals during the
first five to seven years of the contract. Total surrender charges were
$17.5 million in 1998, compared to $16.0 million in 1997 and $14.9 million
in 1996.
Total annuity withdrawals represented 13.2% of the total average annuity
policyholder and separate account balances in 1998 and 11.6% in 1997 and
1996. Excluding surrenders from the older block of annuities acquired in
the F&G Life transaction, the withdrawal percentages were 13.2% in 1998,
10.6% in 1997 and 10.0% in 1996.
Separate account fees are primarily mortality and expense charges earned on
variable annuity and variable life policyholder balances. These fees, which
are based on the market values of the assets in separate accounts
supporting the contracts, were $20.6 million in 1998 compared to $17.1
million in 1997 and $16.0 million in 1996. Such fees represented 1.44%,
1.54% and 1.68% of average variable annuity and variable life separate
account balances in 1998, 1997 and 1996, respectively.
Management fees are primarily investment advisory fees related to the
separate account assets. The fees are based on the levels of assets under
management, which are affected by product sales and redemptions and changes
in the market values of the investments managed. Management fees were $4.8
million in 1998, compared to $3.3 million in 1997 and $2.6 million in 1996.
The increase of $1.5 million in 1998 compared to 1997 primarily reflects a
higher level of average assets under management.
Operating expenses primarily represent compensation, selling and other
general and administrative expenses. These expenses were $53.5 million in
1998, compared to $49.9 million in 1997 and $43.8 million in 1996. The
increase in 1998 compared to 1997 was primarily due to higher employee
related expenses and selling expenses.
Amortization of deferred policy acquisition costs were $69.2 million in
1998, compared to $75.9 million in 1997 and $60.2 million in 1996. The
decrease in amortization of $6.7 million in 1998 compared to 1997 was
primarily related to revisions in investment spread assumptions, partially
offset by increased amortization from the growth of business in force. The
increase in amortization in 1997 compared to 1996 was primarily related to
the increase in investment spread from the growth of business in force
associated with fixed and equity-indexed products and the increased sales
of variable annuity products during 1997. Amortization expense represented
24.8%, 27.5% and 25.1% of investment spread and separate account fees in
1998, 1997 and 1996, respectively.
Amortization of value of insurance in force totaled $8.2 million in 1998,
compared to $10.5 million in 1997 and $10.2 million in 1996. The decrease
in amortization of $2.3 million in 1998 compared to 1997 was primarily
related to lower amortization associated with F&G Life. The increase in
amortization in 1997 compared to 1996 was primarily due to increased
amortization of $4.0 million related to the F&G Life transaction, partially
offset by decreased amortization related to a change in mortality
assumptions.
Income tax expense was $52.9 million or 32.76% of pretax income in 1998,
compared to $59.1 million or 34.2% of pretax income in 1997 and $47.2
million or 34.3% pretax income in 1996.
Effective July 18, 1997, due to changes in ownership of Liberty Financial,
the Company is no longer included in the consolidated federal income tax
return of Liberty Mutual. The Company does not expect this change to have
a material effect on its financial condition or its results from
operations. The Company will be eligible to file a consolidated federal
income tax return with Liberty Financial in 2002.
Financial Condition
Stockholder's Equity as of December 31, 1998 was $1.136 billion compared to
$1.103 billion as of December 31, 1997. The increase in stockholder's
equity was due to an in increase in comprehensive income of $52.6 million,
offset by cash dividends of $20.0 million paid to Liberty Financial.
Investments not including cash and cash equivalents totaled $12.6 billion
at December 31, 1998 compared to $12.3 billion at December 31, 1997. The
increase of $0.3 billion is primarily attributable to the reinvestment of
portfolio earnings.
The Company's general investment policy is to hold fixed maturity assets
for long-term investment and, accordingly, the Company does not have a
trading portfolio. To provide for maximum portfolio flexibility and
appropriate tax planning, the Company classifies its entire fixed maturity
portfolio as "available for sale" and carries such investments at fair
value. The Company's total investments at December 31, 1998 and 1997
reflected net unrealized gains of $105.3 million and $283.8 million,
respectively, relating to its fixed maturity and equity portfolios.
Approximately $11.3 billion, or 84.9%, of the Company's general account
investments at December 31, 1998, were rated by Standard & Poor's
Corporation, Moody's Investors Service or under comparable statutory rating
guidelines established by the NAIC. At December 31, 1998, the carrying
value of investments in below investment grade securities totaled $1.1
billion, or 8.1% of general account investments of $13.3 billion. Below
investment grade securities generally provide higher yields and involve
greater risks than investment grade securities because their issuers
typically are more highly leveraged and more vulnerable to adverse economic
conditions than investment grade issuers. In addition, the trading market
for these securities may be more limited than for investment grade
securities.
The Company routinely reviews its portfolio of investment securities. The
Company identifies monthly any investments that require additional
monitoring, and carefully reviews the carrying value of such investments at
least quarterly to determine whether specific investments should be placed
on a nonaccrual basis and to determine declines in value that may be other
than temporary. In making these reviews, the Company principally considers
the adequacy of collateral (if any), compliance with contractual covenants,
the borrower's recent financial performance, news reports and other
externally generated information concerning the creditor's affairs. In the
case of publicly traded fixed maturity investments, management also
considers market value quotations, if available.
As of December 31, 1998, the carrying value of fixed maturity investments
that were non-income producing was $30.0 million, which constituted 0.2% of
investments. There were no non-income producing fixed maturity investments
as of December 31, 1997.
Market Risk
Market-Sensitive Instruments and Risk Management
Market risk is the risk that the Company will incur losses due to adverse
changes in market rates and prices. The Company's primary market risk
exposures are to changes in interest rates and to changes in equity prices.
The active management of market risk is integral to the Company's
operations. The Company may use the following approaches to manage its
exposure to market risk within defined tolerance ranges: 1) rebalance its
existing asset or liability portfolios, 2) change the character of future
investment purchases, or 3) use derivative instruments to modify the market
risk characteristics of existing assets and liabilities or assets expected
to be purchased.
Corporate Oversight
The Company generates substantial investable funds from its annuity
operations. The Company believes that its fixed and indexed policyholder
balances should be backed by investments, principally comprised of fixed
maturities, which generate predictable rates of return. The Company does
not have a specific target rate of return. Instead, its rates of return
vary over time depending on the current interest rates, the slope of the
yield curve and the excess at which fixed maturities are priced over the
yield curve. The Company's portfolio strategy is designed to achieve
acceptable risk-adjusted returns by effectively managing portfolio
liquidity and credit quality.
The Company administers and oversees the investment risk management
processes primarily through its Investment Committee, its Board of
Directors, and the Board of Directors of Liberty Financial. The Investment
Committee and Board of Directors provide executive oversight of investment
activities. The Investment Committee is a senior management committee
consisting of the Chief Investment Officer, Chief Financial Officer,
President, and members of senior management of Liberty Financial. The
Investment Committee meets monthly to provide detailed oversight of
investment risk, including market risk.
The Company has investment guidelines that define the overall framework for
managing market and other investment risks, including the accountabilities
and controls over these activities. In addition, the Company has specific
investment policies that delineate the investment limits and strategies
that are appropriate given the Company's liquidity, surplus, product and
regulatory requirements.
The Company monitors and manages its exposure to market risk through asset
allocation limits, duration limits, and stress tests. Asset allocation
limits place restrictions on the aggregate fair value which may be invested
within an asset class. Duration limits on the aggregate investment
portfolio, and, as appropriate, on individual components of the portfolio,
place restrictions on the amount of interest rate risk that may be taken.
Stress tests measure downside risk to fair value and earnings over longer
time intervals and for adverse market scenarios.
The day-to-day management of market risk within defined tolerance ranges
occurs as portfolio managers buy and sell within their respective markets
based upon the acceptable boundaries established by asset allocation,
duration and other limits, including but not limited to credit and
liquidity.
Interest Rate Risk
Interest rate risk is the risk that the Company will incur economic losses
due to adverse changes in interest rates. This risk arises from the
Company's primary activities, as the Company invests substantial funds in
interest-sensitive assets and also has interest-sensitive liabilities. The
Company's asset/liability management emphasizes a conservative approach,
which is oriented toward reducing downside risk in adverse markets, as
opposed to maximizing spread in favorable markets.
The Company manages the interest rate risk inherent in its assets relative
to the interest rate risk inherent in its liabilities. One of the measures
the Company uses to quantify this exposure is effective duration. Effective
duration is a common measure for the price sensitivity of assets and
liabilities to changes in interest rates. It measures the approximate
percentage change in the fair value of assets and liabilities when interest
rates change by 100 basis points. This measure includes the impact of
estimated changes in portfolio cash flows from features such as prepayments
and bond calls. The effective duration of assets and related liabilities
are produced using standard financial valuation techniques. At December
31, 1998, the estimated difference between the Company's asset and
liability duration was approximately 1.2. This positive duration gap
indicates that the fair value of the Company's assets is somewhat more
sensitive to interest rate movements than the fair value of its
liabilities.
The Company seeks to invest premiums and deposits to create future cash
flows that will fund future benefits, claims, and expenses, and earn stable
margins across a wide variety of interest rate and economic scenarios. In
order to achieve this objective and limit its exposure to interest rate
risk, the Company adheres to a philosophy of managing the effective
duration of assets and related liabilities. The Company uses interest rate
swaps, futures and caps to reduce the interest rate risk resulting from
effective duration mismatches between assets and liabilities. To the extent
that actual results differ from the assumptions utilized, the Company's
effective duration could be significantly impacted. Important assumptions
include the timing of cash flows on mortgage-related assets and liabilities
subject to policyholder surrenders. Additionally, the Company's
calculation assumes that the current relationship between short-term and
long-term interest rates (the term structure of interest rates) will remain
constant over time. As a result, these calculations may not fully capture
the impact of non-parallel changes in the term structure of interest rates
and/or large changes in interest rates.
The Company's potential exposure due to a 10% increase in prevailing
interest rates from their December 31, 1998 levels is a loss of $87.0
million in fair value of its fixed-rate assets that is not offset by a
decrease in the fair value of its fixed-rate liabilities. Because the
Company actively manages its assets and liabilities and has strategies in
place to minimize its exposure to loss as interest rate changes occur, it
expects that actual losses would be less than the estimated potential loss
Equity Price Risk
Equity price risk is the risk that the Company will incur economic losses
due to adverse changes in a particular stock or stock index. At December
31, 1998, the Company had approximately $24.6 million in common stocks and
$535.1 million in other equity investments (primarily call options and
futures contracts).
At December 31, 1998, the Company had $2.1 billion in equity-indexed
annuity liabilities which provide customers with contractually guaranteed
participation in price appreciation of the Standard & Poor's 500 Composite
Price Index ("S&P 500 Index"). The Company purchases equity-indexed options
and futures to hedge the risk associated with the price appreciation
component of equity-indexed annuity liabilities.
The Company manages the equity risk inherent in its assets relative to the
equity risk inherent in its liabilities by conducting detailed computer
simulations that model its S&P 500 Index derivatives and its equity-indexed
annuity liabilities under stress-test scenarios in which both the index
level and the index option implied volatility are varied through a wide
range. Implied volatility is a value derived from standard option
valuation models representing an implicit forecast of the standard
deviation of the returns on the underlying asset over the life of the
option or future. The fair values of S&P 500 Index linked securities,
derivatives, and annuities are produced using standard derivative valuation
techniques. The derivatives and future portfolios are constructed to
maintain acceptable interest margins under a variety of possible future S&P
500 Index levels and option or future cost environments. In order to
achieve this objective and limit its exposure to equity price risk, the
Company measures and manages these exposures using methods based on the
fair value of assets and the price appreciation component of related
liabilities. The Company uses derivatives, including futures and options,
to modify its net exposure to fluctuations in the S&P 500 Index.
Based upon the information and assumptions the Company uses in its stress-
test scenarios at December 31, 1998, management estimates that if the S&P
500 Index increases by 10%, the net fair value of its assets and
liabilities described above would decrease by approximately $2.0 million.
If the S&P 500 Index decreases by 10%, management estimates that the net
fair value of its assets and liabilities will increase by approximately
$2.0 million. If option implied volatilities increase by 100 basis points,
management estimates that the net fair value of its assets and liabilities
will decrease by approximately $6.0 million.
The simulations do not consider the effects of other changes in market
conditions that could accompany changes in the equity option and futures
markets including the effects of changes in implied dividend yields,
interest rates, and equity-indexed annuity policy surrenders.
Derivatives
As a component of its investment strategy and to reduce its exposure to
interest rate risk, the Company utilizes interest rate swap agreements
("swap agreements") and interest rate cap agreements ("cap agreements") to
match assets more closely to liabilities. Swap agreements are agreements to
exchange with counterparty interest rate payments of differing character
(e.g., fixed-rate payments exchanged for variable-rate payments) based on
an underlying principal balance (notional principal) to hedge against
interest rate changes. The Company currently utilizes swap agreements to
reduce asset duration and to better match interest earned on longer-term
fixed-rate assets with interest credited to policyholders. The Company had
42 and 45 outstanding swap agreements with an aggregate notional principal
amount of $2.4 billion and $2.6 billion as of December 31, 1998 and 1997,
respectively.
Cap agreements are agreements with a counterparty that require the payment
of a premium for the right to receive payments for the difference between
the cap interest rate and a market interest rate on specified future dates
based on an underlying principal balance (notional principal) to hedge
against rising interest rates. The Company had interest rate cap agreements
with an aggregate notional amount of $250.0 million as of December 31, 1998
and 1997.
With respect to the Company's equity-indexed annuities, the Company buys
call options and futures on the S&P 500 Index to hedge its obligations to
provide returns based upon this index. The Company had call options with a
carrying value of $535.6 million and $323.3 million as of December 31, 1998
and 1997, respectively. The Company had futures with a carrying value of
$(.6) million and $.8 million as of December 31, 1998 and 1997,
respectively.
There are risks associated with some of the techniques the Company uses to
match its assets and liabilities. The primary risk associated with swap,
cap and call option agreements is counterparty nonperformance. The Company
believes that the counterparties to its swap, cap and call option
agreements are financially responsible and that the counterparty risk
associated with these transactions is minimal. Future contracts trade on
organized exchanges and, therefore, have minimal credit risk. In addition,
swap and cap agreements have interest rate risk and call options and future
contracts have stock market risk. These swap and cap agreements hedge
fixed-rate assets and the Company expects that any interest rate movements
that adversely affect the market value of swap agreements would be offset
by changes in the market values of such fixed-rate assets. However, there
can be no assurance that these hedges will be effective in offsetting the
potential adverse effects of changes in interest rates. Similarly, the
call options and futures hedge the Company's obligations to provide returns
on equity-indexed annuities based upon the S&P 500 Index, and the Company
believes that any stock market movements that adversely affect the market
value of S&P 500 Index call options and futures would be substantially
offset by a reduction in policyholder liabilities. However, there can be
no assurance that these hedges will be effective in offsetting the
potentially adverse effects of changes in S&P 500 Index levels. The
Company's profitability could be adversely affected if the value of its
swap and cap agreements increase less than (or decrease more than) the
change in the market value of its fixed rate assets and/or if the value of
its S&P Index 500 call options and futures increase less than (or decrease
more than) the value of the guarantees made to equity-indexed
policyholders.
In June 1998, Statement of Financial Accounting Standard No. 133
"Accounting for Derivative Instruments and Hedging Activities" was issued.
This statement standardizes the accounting for derivative instruments and
the derivative portion of certain other contracts that have similar
characteristics by requiring that an entity recognize those instruments at
fair value. This statement also requires a new method of accounting for
hedging transactions, prescribes the type of items and transactions that
may be hedged, and specifies detailed criteria to be met to qualify for
hedge accounting. This statement is effective for fiscal years beginning
after June 15, 1999. Earlier adoption is permitted. Upon adoption, the
Company will be required to record a cumulative effect adjustment to
reflect this accounting change. At this time, the Company has not
completed its analysis and evaluation of the requirements and the impact of
this statement.
Liquidity and Capital Resources
The Company's liquidity needs and financial resources pertain to the
management of the general account assets and policyholder balances. The
Company uses cash for the payment of annuity and life insurance benefits,
operating expenses and policy acquisition costs, and the purchase of
investments. The Company generates cash from annuity premiums and deposits,
net investment income, and from maturities and sales of its investments.
Annuity premiums, maturing investments and net investment income have
historically been sufficient to meet the Company's cash requirements. The
Company monitors cash and cash equivalents in an effort to maintain
sufficient liquidity and has strategies in place to maintain sufficient
liquidity in changing interest rate environments. Consistent with the
nature of its obligations, the Company has invested a substantial amount of
its general account assets in readily marketable securities. At December
31, 1998, $9.7 billion, or 73.3%, of the Company's general account
investments are considered readily marketable.
To the extent that unanticipated surrenders cause the Company to sell for
liquidity purposes a material amount of securities prior to their maturity,
such surrenders could have a material adverse effect on the Company.
Although no assurance can be given, the Company believes that liquidity to
fund withdrawals would be available through incoming cash flow, the sale of
short-term or floating-rate instruments, thereby precluding the sale of
fixed maturity investments in a potentially unfavorable market. In
addition, the Company's fixed-rate products incorporate surrender charges
to encourage persistency and make the cost of its policyholder balances
more predictable. Approximately 81% of the Company's fixed annuity
policyholder balances were subject to surrender charges or restrictions as
of December 31, 1998.
Current Rhode Island insurance law permits the payment of dividends or
distributions from the Company to Liberty Financial, which, together with
dividends and distributions paid during the preceding 12 months, do not
exceed the lesser of (i) 10% of statutory surplus as of the preceding
December 31 or (ii) the net gain from operations for the preceding fiscal
year. Any proposed dividend in excess of this amount is called an
"extraordinary dividend" and may not be paid until it is approved by the
Commissioner of Insurance of the State of Rhode Island. The Company had
not previously paid any dividends since its acquisition in 1988. In 1998,
the Company paid $20.0 million in dividends to Liberty Financial. As of
December 31, 1998, the amount of additional dividends that the Company
could pay without such approval was $59.1 million.
Based upon the historical cash flow of the Company, the Company's current
financial condition and the Company's expectation that there will not be a
material adverse change in the results of operations of the Company and its
subsidiaries during the next twelve months, the Company believes that cash
flow provided by operating activities over this period will provide
sufficient liquidity for the Company to meet its liquidity needs.
Year 2000
Many companies and organizations have computer programs that use only two
digits to identify a year in the date field. These programs were designed
and developed without considering the impact of the upcoming change in the
century. The Company relies significantly on computer systems and
applications in its operations. Some of these systems are not presently
Year 2000 compliant. If not corrected, this could cause system failures.
Such failures could have an adverse effect on the Company causing
disruption of operations, including, among other things, an inability to
process transactions.
In addressing the Year 2000 issue, the Company has completed an inventory
of its computer programs and assessed its Year 2000 readiness. The
Company's computer programs include internally developed programs, third-
party purchased programs and third-party custom developed programs. For
programs which were identified as not being Year 2000 ready, the Company
has implemented a remediation plan which includes repairing or replacing
the programs and appropriate testing for Year 2000. The remediation plan
is substantially complete and is currently in the final testing phase. The
Company also identified its non-information technology systems with respect
to Year 2000 issues. The Company initiated remediation efforts in this
area and expects to complete this phase during 1999.
The Company has initiated communication with significant financial
institutions, distributors, suppliers and others with which it does
business to determine the extent to which the Company's systems are
vulnerable by the failure of others to remediate their own Year 2000
issues. The Company has received feedback from such parties and is in the
process of independently confirming information received from other parties
with respect to their year 2000 issues.
The Company is developing, and will continue to develop, contingency plans
for dealing with any adverse effects that become likely in the event the
Company's remediation plans are not successful or third parties fail to
remediate their own Year 2000 issues. If necessary modifications and
conversions are not made, or are not timely completed, or if the systems of
the companies on which the Company's interface system relies are not timely
converted, the Year 2000 issues could have a material impact on the
financial condition and results of operations of the Company. However, the
Company believes that with modifications to existing software and
conversions to new software, the Year 2000 issue will not pose significant
operational problems for its computer systems.
Through December 31, 1998, the external cost of the Year 2000 project was
approximately $.8 million, which was primarily related to consultants and
replacement hardware and software. During 1999, the Company estimates that
an additional $1.1 million in costs will be incurred related to testing and
contingency plan development. All of the costs of the Year 2000 project
are funded through operating cash flows. In the opinion of management, the
cost of addressing the Year 2000 issue is not expected to have a material
adverse effect of the Company's financial condition or its results of
operations.
Effects of Inflation
Inflation has not had a material effect on the Company's consolidated
results of operations to date. The Company manages its investment portfolio
in part to reduce its exposure to interest rate fluctuations. In general,
the fair value of the Company's fixed maturity portfolio increases or
decreases in inverse relationship with fluctuations in interest rates, and
the Company's net investment income increases or decreases in direct
relationship with interest rate changes. For example, if interest rates
decline the Company's fixed maturity investments generally will increase in
fair value, while net investment income will decrease as fixed maturity
investments mature or are sold and the proceeds are reinvested at reduced
rates. However, inflation may result in increased operating expenses that
may not be readily recoverable in the prices of the services charged by the
Company.
Forward-Looking Statements
The Company desires to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act").
Investors are cautioned that all statements, trend analyses and other
information contained in this report or in any of the Company's filings
under Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the
"Exchange Act"), relative to the markets for the Company's products and
trends in the Company's operations or financial results, as well as other
statements including words such as "anticipate", "believe", "plan",
"estimate", "expect", "intend" and other similar expressions, constitute
forward-looking statements under the Reform Act. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors, many of which are beyond the Company's control, that may cause
actual results to be materially different from those contemplated by the
forward-looking statements. Such factors include, among other things: (1)
general economic conditions and market factors, such as prevailing interest
rate levels, stock market performance and fluctuations in the market for
retirement-oriented savings products, which may adversely affect the
ability of the Company to sell its products and services and the market
value of the Company's investments and assets under management and,
therefore, the portion of its revenues that are based on a percentage of
assets under management; (2) the Company's ability to manage effectively
its investment spread (i.e. the amount by which investment income exceeds
interest credited to annuity and life insurance policyholders) as a result
of changes in interest rates and crediting rates to policyholders, market
conditions and other factors (the Company's results of operations and
financial condition are significantly dependent on the Company's ability to
manage effectively its investment spread); (3) levels of surrenders and
withdrawals of the Company's retirement-oriented insurance products; (4)
the ability of the Company to manage effectively certain risks with respect
to its investment portfolio, including risks relating to holding below
investment grade securities and the ability to dispose of illiquid and/or
restricted securities at desired times and prices, and the ability to
manage and hedge against interest rate changes through asset/liability
management techniques; (5) competition in the sale of the Company's
products and services, including the Company's ability to establish and
maintain relationships with distributors of its products; (6) changes in
financial ratings of the Company or those of its competitors; (7) the
Company's ability to attract and retain key employees, including senior
officers, investment managers and sales executives; (8) the impact of and
compliance by the Company with existing and future regulation, including
restrictions on the ability to pay dividends and any obligations of the
Company under any guaranty fund assessment laws; (9) changes in applicable
tax laws which may affect the relative tax advantages and attractiveness of
some of the Company's products; (10) the result of any litigation or legal
proceedings involving the Company; (11) changes in generally accepted
accounting principles and the impact of accounting principles and
pronouncements on the Company's financial condition and results of
operation; (12) the impact of Year 2000 issues on the operations of the
Company and its subsidiaries; and (13) the other risk factors or
uncertainties contained from time to time in any document incorporated by
reference in this report or otherwise filed by the Company under the
Exchange Act. Given these uncertainties, prospective investors are
cautioned not to place undue reliance on such forward-looking statements
and no assurances can be given that the estimates and expectations
reflected in such statements will be achieved
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The quantitative and qualitative disclosures about market risk are
contained in the Market Risk section of the Management's Discussion and
Analysis of Results of Operations and Financial Condition on pages 17
through 19 herein.
Item 8. Consolidated Financial Statements and Supplementary Data
The Company's consolidated financial statements begin on page F-2.
Reference is made to the Index to Financial Statements on page 29 herein.
Additional financial statement schedules are included on pages S-2 through
S-4 herein. Reference is made to the Index to Financial Statement
Schedules on page 29 herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
Information relating to the executive officers of the registrant appears
under the caption "Executive Officers of the Registrant" included in Part I
of this Form 10-K following Item 4.
Item 11. Executive Compensation
The tables that appear below, along with the accompanying text and
footnotes, provide information on compensation and benefits for the named
executive officers, in accordance with applicable SEC requirements. All
the data regarding values for stock options pertain to options to purchase
shares of Keyport's parent corporation, Liberty Financial Companies, Inc.
("Liberty Financial"). Such data are hypothetical in terms of the amounts
that an individual may or may not receive, because such amounts are
contingent on continued employment with Keyport and the price of Liberty
Financial's Common Stock ("Common Stock"). All year-end values shown in
these tables for outstanding stock options reflect a price of $27.00 per
share, which was the closing price of the Common Stock on the New York
Stock Exchange on December 31, 1998 (the last trading day of 1998). None
of the named executive officers received any perquisites during 1998
exceeding the lesser of $50,000 or 10% of such officer's total salary and
bonus for such year.
Summary Compensation Table. The following table sets forth compensation
information for the past three fiscal years for each of Keyport's chief
executive officer and the other four most highly compensated executive
officers:
Summary Compensation Table
Annual Long-Term
Compensation Compensation
Name and Restricted Securities
Principal Base Stock Underlying All Other
Position Salary Bonus Awards2 Options
Compensation
During 1997 Year ($) ($)1 ( $) (#) ($)3
John W. 1998 454,000 320,000 167,344 16,000 816,912
Rosensteel, 1997 420,000 330,000 149,625 18,750 62,121
President 1996 396,500 275,000 -- 22,500 46,037
and Chief
Executive
Officer (4)
Paul H. 1998 328,000 338,300 210,813 9,000 41,422
LeFevre, Jr., 1997 315,000 205,000 85,500 9,000 35,833
Acting 1996 275,000 155,000 -- 13,500 22,424
President (4)
Francis E. 1998 258,000 112,000 -- 6,500 25,490
Reinhart, 1997 245,000 115,000 -- 11,250 25,325
Senior Vice 1996 233,000 105,000 -- 11,250 16,343
President
and Chief
Information
Officer
Stewart R. 1998 240,000 145,000 63,219 5,000 25,808
Morrison, 1997 230,000 130,000 42,750 6,000 20,076
Senior Vice 1996 182,700 54,000 -- 8,250 10,437
President &
Chief
Investment
Officer
Bernhard 1998 258,000 123,000 55,781 5,000 64,027
M. Koch (5) 1997 104,166 75,000 -- 9,750 87,881
Senior Vice 1996 -- -- -- -- --
President &
Chief
Financial
Officer
Bernard R. 1998 207,000 92,500 -- 7,000 17,750
Beckerlegge 1997 195,000 85,000 -- 10,500 35,600
Senior Vice 1996 185,000 85,000 -- 10,500 31,481
President &
General
Counsel
____________________________________________
1 The amounts presented are bonuses earned in 1998 and paid in 1999,
earned in 1997 and paid in 1998, or earned in 1996 and paid in 1997,
respectively.
2 Calculated by multiplying the closing price of Liberty Financial's
Common Stock on the New York Stock Exchange on the date of grant ($24.3125
on October 23, 1998; $37.1875 on May 11, 1998; $28.50 on May 13, 1997) by
the number of shares awarded. The number of shares and value of restricted
stock held by the named executive officers as of December 31, 1998 (based
on the New York Stock Exchange closing price of $27.00 for the Liberty
Financial's Common Stock at fiscal year end) is as follows: Mr. LeFevre:
10,400 shares, $280,800; Mr. Morrison: 3,200 shares, $86,400; and Mr. Koch:
1,500 shares, $40,500. The restricted stock granted in 1997 (Mr. LeFevre
3,000 shares and Mr. Morrison 1,500 shares) will vest on May 14, 2003 or
any time after May 13, 1999 if for a 10 consecutive trading day period the
closing price of Liberty Financial's Common Stock exceeds $41.73. The
restricted stock granted in May 1998 (Mr. LeFevre 2,400 shares; Mr.
Morrison 1,700 shares and Mr. Koch 1,500 shares) will vest on May 12, 2004
or any time after May 11, 2000 if for a 10 consecutive trading day period
the closing price of Liberty Financial common stock exceeds $54.45. The
restricted stock granted in October 1998 (Mr. LeFevre 5,000 shares) will
vest on October 23, 2004 or any time after October 22, 2000 if for a 10
consecutive trading day period the closing price of Liberty Financial
common stock exceeds $35.60. All of Mr. Rosensteel's restricted stock
vested upon his retirement on December 31, 1998. Holders of restricted
stock are entitled to vote their restricted shares and retain all dividends
which may be paid with respect to such shares. In general, in the event of
termination of employment, restricted shares are forfeited by the holders
and revert to Liberty Financial. The closing price of the Liberty
Financial's Common Stock on the New York Stock Exchange on March 19, 1999
was $22.312.
3 Consists of (a) in the case of Mr. Rosensteel, $5,000 of insurance
premiums paid by Keyport with respect to term life insurance purchased for
his benefit in each year; (b) contributions under defined contribution
plans for the benefit of the named executive officers, individually as
follows: Mr. Rosensteel, $56,912 in 1998, $57,121 in 1997 and $41,037 in
1996; Mr. LeFevre, $41,422 in 1998, $35,833 in 1997 and $22,424 in 1996;
Mr. Reinhart, $25,490 in 1998, $25,325 in 1997 and $16,343 in 1996; Mr.
Morrison, $25,808 in 1998, $20,076 in 1997 and $10,437 in 1996; Mr. Koch,
$7,650 in 1998; and Mr. Beckerlegge, $17,750 in 1998, $7,125 in 1997 and
$1,734 in 1996; (c) in the case of Mr. Koch, $56,377 in 1998 and $87,881 in
1997 of moving expenses reimbursement; (d) in the case of Mr. Beckerlegge,
$28,475 in 1997 and $29,747 in 1996 of moving expenses reimbursement; and
(e) in the case of Mr. Rosensteel, $755,000 will be paid in 1999 and 2000
with respect to his retirement.
4 On October 22, 1998 Mr. LeFevre became Acting President and on December
31, 1998, Mr. Rosensteel retired.
5 Mr. Koch became Chief Financial Officer on July 14,1997.
Option Grant Table. The following table sets forth certain information
regarding options to purchase Common Stock granted during 1998 by Liberty
Financial to the executive officers named in the above summary compensation
table.
Option Grants in Last Fiscal Year
Potential
Realizable
Value at
Assumed
Annual
Rates
Percent of Stock
Number of of Total Price
Securities Options Appreciation
Underlying Granted to Exercise of Option
Options Employees Price Per Expiration Terms ($)2
Name Granted (#) in 1997 Share($) on Date 1 5% 10%
John W.
Rosensteel 16,000 2.56% 37.19 5/11/08 374,217 948,341
Paul H.
LeFevre, Jr. 9,000 1.44% 37.19 5/11/08 210,497 533,442
Francis E.
Reinhart 6,500 1.04% 37.19 5/11/08 152,026 385,263
Stewart R.
Morrison 5,000 0.80% 37.19 5/11/08 116,943 296,357
Bernhard
M. Koch 5,000 0.80% 37.19 5/11/08 116,943 296,357
Bernard R.
Beckerlegge 7,000 1.12% 37.19 5/11/08 163,720 414,899
_____________________
1 Each option becomes exercisable in four equal annual installments
commencing on May 12, 1999, and vests in full upon the death, disability or
retirement (after age 60) of the optionee. All of Mr. Rosensteel's stock
options vested upon his retirement on December 31, 1998.
2 Amounts represent hypothetical gains that could be achieved for the
respective options if such options are not exercised until the end of the
option term. These gains are based on assumed rates of stock price
appreciation of 5% and 10% in accordance with applicable SEC regulations,
compounded annually from the dates the options were granted until their
expiration dates and, therefore, are not intended to forecast possible
future appreciation in the Common Stock. This table does not take into
account changes in the price of the Common Stock after the date of grant.
Option Exercises and Year-End Values Table. The following table sets forth
certain information regarding (i) the 1998 exercises of stock options and
(ii) the stock options held as of December 31, 1998 by the executive
officers named in the above summary compensation table.
Aggregate Option Exercises in Last Fiscal Year and Aggregate Option Values
at Fiscal Year-End
Number of Value of
Shares Securities Unexercised
Acquired Underlying In-the-Money
Upon Value Unexercised Options at
Exercise Realized Options at Year-End
Name (#) ($) Year-End (#) ($)
Exerci- Unexerci- Exerci- Unexerci-
sable sable sable sable
John W.
Rosensteel 50,451 971,740 111,439 ---- 704,108 ----
Paul H.
LeFevre, Jr. 21,500 502,618 41,312 25,310 596,489 61,407
Francis E.
Reinhart 1,250 25,417 22,939 22,812 334,219 50,248
Stewart R.
Morrison ---- ---- 5,064 15,124 25,060 35,370
Bernhard
M. Koch ---- ---- 2,437 12,313 ---- ----
Bernard R.
Beckerlegge ---- ---- 7,875 20,125 26,250 26,250
Certain Additional Information Regarding Executive Officer Compensation
Defined Benefit Retirement Programs. Each of the executive officers in the
above summary compensation table participates in Liberty Financial's
Pension Plan and Keyport's Supplemental Pension Plan (collectively, the
"Pension Plans"). The following table shows the estimated annual pension
benefits payable upon retirement for the specified compensation and years
of service classification under the Pension Plans.
Estimated Annual Retirement Benefits at Age 65
under the Pension Plans
Years of Credited Service
Compensation 15 20 25 30 35
$ 200,000 $ 51,773 $ 69,030 $ 86,288 $ 92,954 $ 99,621
400,000 105,773 141,030 176,288 189,621 202,954
600,000 159,773 213,030 266,288 286,288 306,288
800,000 213,773 285,030 356,288 382,954 409,621
1,000,000 267,773 357,030 446,288 479,621 512,954
1,200,000 321,773 429,030 536,288 576,288 616,288
Benefits under the Pension Plans are based on an employee's average pay for
the five highest consecutive years during the last ten years of employment,
the employee's estimated social security retirement benefit and years of
credited service with Keyport. The current average compensation covered by
the Pension Plans for each participating executive officer in the above
summary compensation table is as follows: Mr. Rosensteel, $671,218; Mr.
LeFevre, $475,859; Mr. Reinhart, $340,000; Mr. Morrison, $291,490; Mr.
Koch, $381,897; and Mr. Beckerlegge, $307,025. For purposes of determining
benefits payable upon retirement under the Pension Plans, compensation
includes base salary and annual bonus. Benefits are payable in the form of
a single-life annuity providing for monthly payments. Actuarially
equivalent methods of payment may be elected by the recipient. As of
December 31, 1998, the executive officers named in the above summary
compensation table had the following full credited years of service under
the Pension Plans: Mr. Rosensteel, 8 years; Mr. LeFevre, 19 years; Mr.
Reinhart, 14 years; Mr. Morrison, 8 years; Mr. Koch, 1 years; and Mr.
Beckerlegge, 3 years.
Change of Control Provisions of 1990 Stock Option Plan. Liberty
Financial's 1990 Stock Option Plan, as amended (the "1990 Plan"), provided
for the grant of options to officers and other key employees of Liberty
Financial for the purchase of shares of common stock. As of March 19,
1999, options issued and outstanding under the 1990 Plan included 31,688
shares held by Mr. Rosensteel (all of which were vested), 23,872 shares
held by Mr. LeFevre (all of which were vested); and 14,750 shares held by
Mr. Reinhart (all of which were vested). No additional options will be
granted under the 1990 Plan. Upon a change of control of Liberty Financial
(defined as the transfer of 50% or more of the equity ownership of Liberty
Financial other than solely pursuant to a public offering in which
securities are issued for cash), Liberty Financial's Compensation and Stock
Option Plan committee may, in its discretion, elect to cancel all
outstanding options by paying the holders thereof an amount equal to the
difference between the fair market value of the Common Stock and the
exercise price of such options.
Compensation of Directors. Directors of Keyport who are also employees
receive no compensation in addition to their compensation as employees of
Keyport. The two outside directors (Lippitt and Nyman) receive $2,000 per
quarter, plus $500 for each meeting of the Board of Directors and $200 for
each Audit Committee meeting that they attend. Three meetings of the Board
of Directors and two meetings of the Audit Committee are scheduled
annually.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Keyport is a wholly owned, indirect subsidiary of Liberty Financial which
is a registrant under the Securities Exchange Act of 1934. Liberty
Financial is a majority owned, indirect subsidiary of Liberty Mutual
Insurance Company.
Item 13. Certain Relationships and Related Transactions
As noted in Item 12, Keyport is a wholly owned, indirect subsidiary of
Liberty Financial.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements Page
Report of Independent Auditors F-1
Consolidated Balance Sheet, December 31, 1998 and 1997 F-2
Consolidated Income Statement for the Years Ended
December 31, 1998, 1997 and 1996 F-3
Consolidated Statement of Stockholder's Equity for the
Years Ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-6 through F-
24
2. Financial Statement Schedules
I--Summary of Investments S-2
III-- Supplementary Insurance Information S-3
All other schedules are omitted because they are not applicable or are not
required, or because the required information is included in the
Consolidated Financial Statements or notes thereto.
(b) Exhibits
The exhibits filed as part of this Report are listed on the Exhibit Index
immediately preceding the Exhibits.
(c) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the fourth
quarter of 1998.
Report of Independent Auditors
The Board of Directors
Keyport Life Insurance Company
We have audited the consolidated balance sheet of Keyport Life Insurance
Company as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholder's equity, and cash flows for each of the
years in the period ended December 31, 1998. Our audits also included the
financial statement schedules listed in the Index at Item 14 (a). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and the significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Keyport Life Insurance Company at December 31, 1998 and 1997,
and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
/s/Ernst & Young LLP
January 28, 1999
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(in thousands)
December 31,
ASSETS 1998 1997
Cash and investments:
Fixed maturities available for sale
sale (amortized cost: 1998 -
$11,174,697; 1997 - $10,981,618) $11,277,204 $11,246,539
Equity securities (cost: 1998 -
$21,836; 1997 - $21,950) 24,649 40,856
Mortgage loans 55,117 60,662
Policy loans 578,770 554,681
Other invested assets 662,513 440,773
Cash and cash equivalents 719,625 1,162,347
Total cash and investments 13,317,878 13,505,858
Accrued investment income 160,950 165,035
Deferred policy acquisition costs 340,957 232,039
Value of insurance in force 66,636 53,298
Income taxes recoverable 31,909 22,537
Intangible assets 18,082 18,058
Receivable for investments sold 37,936 1,398
Other assets 35,345 14,777
Separate account assets 1,765,538 1,329,189
Total assets $15,775,231 $15,342,189
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy liabilities $12,504,081 $12,086,076
Deferred income taxes 143,596 133,003
Payable for investments purchased
and loaned 240,440 722,116
Other liabilities 28,312 34,015
Separate account liabilities 1,723,205 1,263,958
Total liabilities 14,639,634 14,239,168
Stockholder's equity:
Common stock, $1.25 par value;
authorized 8,000 shares; issued
and outstanding 2,412 shares 3,015 3,015
Additional paid-in capital 505,933 505,933
Retained earnings 600,396 511,796
Accumulated other comprehensive income 26,253 82,277
Total stockholder's equity 1,135,597 1,103,021
Total liabilities and
stockholder's equity $15,775,231 $15,342,189
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENT
(in thousands)
Year ended December 31,
1998 1997 1996
Revenues:
Net investment income $ 815,226 $ 847,048 $ 790,365
Interest credited to
policyholders (562,238) (594,084) (572,719)
Investment spread 252,988 252,964 217,646
Net realized investment
gains 785 24,723 5,509
Fee income:
Surrender charges 17,487 15,968 14,934
Separate account fees 20,589 17,124 15,987
Management fees 4,760 3,261 2,613
Total fee income 42,836 36,353 33,534
Expenses:
Policy benefits (2,880) (3,924) (3,477)
Operating expenses (53,544) (49,941) (43,815)
Amortization of deferred
policy acquisition costs (69,172) (75,906) (60,225)
Amortization of value of
insurance in force (8,238) (10,490) (10,196)
Amortization of intangible
Assets (1,256) (1,128) (1,130)
Total expenses (135,090) (141,389) (118,843)
Income before income taxes 161,519 172,651 137,846
Income taxes (52,919) (59,090) (47,222)
Net income $ 108,600 $ 113,561 $ 90,624
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(in thousands)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income Total
Balance,
January 1, 1996 $3,015 $505,933 $307,611 $ 85,722 $ 902,331
Comprehensive income
Net income 90,624 - 90,624
Other comprehensive
income, net of tax
Net unrealized
investment losses - (12,173) (12,173)
Comprehensive income 78,451
Balance,
December 31, 1996 3,015 505,933 398,235 73,599 980,782
Comprehensive income
Net income 113,561 - 113,561
Other comprehensive
income, net of tax
Net unrealized
investment gains 8,678 8,678
Comprehensive income 122,239
Balance,
December 31, 1997 3,015 505,933 511,796 82,277 1,103,021
Comprehensive income
Net income 108,600 - 108,600
Other comprehensive
income, net of tax
Net unrealized
investment losses - (56,024) (56,024)
Comprehensive income 52,576
Dividends paid (20,000) - (20,000)
Balance,
December 31, 1998 $3,015 $505,933 $600,396 $ 26,253 $1,135,597
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year ended December 31
1998 1997 1996
Cash flows from operating
activities:
Net income $ 108,600 $ 113,561 $ 90,624
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Interest credited to
policyholders 562,238 594,084 572,719
Net realized investment
gains (785) (24,723) (5,509)
Amortization of value of
insurance in force and
intangible assets 9,494 11,618 11,326
Net amortization on
investments 75,418 29,862 (29,088)
Change in deferred policy
acquisition costs (33,687) (10,252) (24,403)
Change in current and
deferred income taxes 1,112 71,919 7,263
Net change in other assets
and liabilities (53,786) 7,959 (41,012)
Net cash provided by
operating activities 668,604 794,028 581,920
Cash flows from investing
activities:
Investments purchased -
available for sale (6,789,048) (4,548,374) (4,365,399)
Investments sold -
available for sale 5,405,955 2,563,465 1,714,023
Investments matured -
available for sale 1,273,478 1,531,693 1,387,664
Increase in policy loans (24,089) (21,888) (34,467)
Decrease in mortgage loans 5,545 6,343 7,500
Other invested assets sold
(purchased), net 21,395 (48,921) (130,087)
Purchases of property and
Equipment, net (4,953) (6,213) (1,622)
Value of business acquired,
net of cash (3,999) - (30,865)
Net cash used in
investing activities (115,716) (523,895) (1,453,253)
Cash flows from financing
activities:
Withdrawals from policyholder
accounts (1,690,035) (1,320,837) (1,154,087)
Deposits to policyholder
accounts 1,224,991 950,472 2,134,504
Dividends paid (20,000) - -
Securities lending (510,566) 495,194 (119,083)
Net cash (used in) provided
by financing activities (995,610) 124,829 861,334
Change in cash and
cash equivalents (442,722) 394,962 (9,999)
Cash and cash equivalents
at beginning of year 1,162,347 767,385 777,384
Cash and cash equivalents at
end of year $ 719,625 $ 1,162,347 $ 767,385
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
December 31, 1998
1. Accounting Policies
Organization
Keyport Life Insurance Company offers a diversified line of fixed,
indexed, and variable annuity products designed to serve the growing
retirement savings market. These annuity products are sold through a wide
ranging network of banks, agents, and security dealers throughout the
United States.
The Company is a wholly owned subsidiary of Stein Roe Services
Incorporated ("Stein Roe"). Stein Roe is a wholly owned subsidiary of
Liberty Financial Companies, Incorporated ("Liberty Financial") which is a
majority owned, indirect subsidiary of Liberty Mutual Insurance Company
("Liberty Mutual").
Principles of Consolidation
The consolidated financial statements include Keyport Life Insurance
Company and its wholly owned subsidiaries, Independence Life and Annuity
Company ("Independence Life"), Keyport Benefit Life Insurance Company
("Keyport Benefit"), Liberty Advisory Services Corp., and Keyport Financial
Services Corp., (collectively the "Company").
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles which vary in
certain respects from reporting practices prescribed or permitted by state
insurance regulatory authorities. All significant intercompany transactions
and balances have been eliminated. Certain prior year amounts have been
reclassified to conform to the current year's presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Investments
Investments in debt and equity securities classified as available for sale
are carried at fair value, and after-tax unrealized gains and losses (net
of adjustments to deferred policy acquisition costs and value of insurance
in force) are reported as a separate component of accumulated other
comprehensive income. The cost basis of securities is adjusted for declines
in value that are determined to be other than temporary. Realized
investment gains and losses are calculated on a first-in, first-out basis,
net of adjustments for amortization of deferred policy acquisition costs
and value of insurance in force.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
For the mortgage backed bond portion of the fixed maturity investment
portfolio, the Company recognizes income using a constant effective yield
based on anticipated prepayments over the estimated economic life of the
security. When actual prepayments differ significantly from anticipated
prepayments, the effective yield is recalculated to reflect actual payments
to date and anticipated future payments and any resulting adjustment is
included in investment income.
Mortgage loans are carried at amortized cost. Policy loans are carried at
the unpaid principal balances plus accrued interest. Partnerships are
accounted for by using the equity method of accounting. Partnership
investments totaled $126.8 million and $117.3 million at December 31, 1998
and 1997, respectively.
Derivatives
The Company uses interest rate swap and cap agreements to manage its
interest rate risk and call options and futures on the Standard & Poor's
500 Composite Stock Price Index ("S&P 500 Index") to hedge its obligations
to provide returns based upon this index.
The Company utilizes interest rate swap agreements ("swap agreements") and
interest rate cap agreements ("cap agreements") to match assets more
closely to liabilities. Swap agreements are agreements to exchange with a
counterparty interest rate payments of differing character (e.g., fixed-
rate payments exchanged for variable-rate payments) based on an underlying
principal balance (notional principal) to hedge against interest rate
changes. The Company currently utilizes swap agreements to reduce asset
duration and to better match interest rates earned on longer-term fixed
rate assets with interest rates credited to policyholders.
Cap agreements are agreements with a counterparty which require the payment
of a premium for the right to receive payments for the difference between
the cap interest rate and a market interest rate on specified future dates
based on an underlying principal balance (notional balance) to hedge
against rising interest rates.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
Hedge accounting is applied after the Company determines that the items to
be hedged expose it to interest rate or price risk, designates the
instruments as hedges, and assesses whether the instruments reduce the
indicated risks through the measurement of changes in the value of the
instruments and the items being hedged at both inception and throughout the
hedge period. From time to time, interest rate swap agreements, cap
agreements and call options are terminated. If the terminated position was
accounted for as a hedge, realized gains or losses are deferred and
amortized over the remaining lives of the hedged assets or liabilities.
Conversely, if the terminated position was not accounted for as a hedge, or
if the assets and liabilities that were hedged no longer exist, the
position is "marked to market" and realized gains or losses are immediately
recognized in income.
The net differential to be paid or received on interest rate swap
agreements is recognized as a component of net investment income. Premiums
paid for interest rate cap agreements are deferred and amortized to net
investment income on a straight-line basis over the terms of the
agreements. The unamortized premium is included in other invested assets.
Amounts earned on interest rate cap agreements are recorded as an
adjustment to net investment income. Interest rate swap agreements and cap
agreements hedging investments designated as available for sale are
adjusted to fair value with the resulting unrealized gains and losses, net
of tax, included in accumulated other comprehensive income.
Premiums paid on call options are amortized into net investment income over
the terms of the contracts. The call options are included in other
invested assets and are carried at amortized cost plus intrinsic value, if
any, of the call options as of the valuation date. Changes in intrinsic
value of the call options are recorded as an adjustment to interest
credited to policyholders. Futures contracts are carried at fair value and
require daily cash settlement. Changes in the fair value of futures that
qualify as hedges are deferred and recognized as an adjustment to the
hedged asset or liability. Futures that do not qualify as hedges are
carried at fair value; changes in value are immediately recognized in
income.
Fee Income
Fees from investment advisory services are recognized as revenues when
services are provided. Revenues from fixed and variable annuities and
single premium whole life policies include mortality charges, surrender
charges, policy fees, and contract fees and are recognized when earned.
Deferred Policy Acquisition Costs
Policy acquisition costs are the costs of acquiring new business which vary
with, and are primarily related to, the production of new business. Such
costs include commissions, costs of policy issuance, underwriting, and
selling expenses. These costs are deferred and amortized in relation to
the present value of estimated gross profits from mortality, investment
spread, and expense margins. Deferred policy acquisition costs are
adjusted for amounts relating to unrealized gains and losses on fixed
maturity securities the Company has designated as available for sale. This
adjustment, net of tax, is included with the change in net unrealized
investment gains or losses that is credited or charged directly to
accumulated other comprehensive income. Deferred policy acquisition costs
were decreased by $56.0 million and $126.9 million at December 31, 1998 and
1997, respectively, relating to this adjustment.
Value of Insurance in Force
Value of insurance in force represents the actuarially-determined present
value of projected future gross profits from policies in force at the date
of their acquisition. This amount is amortized in proportion to the
projected emergence of profits over periods not exceeding 10 years for
annuities and 25 years for life insurance. Interest is accrued on the
unamortized balance at the contract rate of 5.25%, 5.34% and 5.30% for the
years ended December 31, 1998, 1997 and 1996, respectively.
The value of insurance in force is adjusted for amounts relating to the
recognition of unrealized investment gains and losses. This adjustment,
net of tax, is included with the change in net unrealized investment gains
or losses that is credited or charged directly to accumulated other
comprehensive income. Value of insurance in force was decreased by $10.3
million and $31.8 million at December 31, 1998 and 1997, respectively,
relating to this adjustment.
Estimated net amortization expense of the value of insurance in force as of
December 31, 1998 is as follows (in thousands): 1999 - $11,013; 2000 -
$10,043; 2001 - $8,823; 2002 - $7,803; 2003 - $6,975 and thereafter -
$32,252.
Intangible Assets
Intangible assets consist of goodwill arising from business combinations
accounted for as a purchase. Amortization is provided on a straight-line
basis ranging from ten to twenty-five years.
Separate Account Assets and Liabilities
The assets and liabilities resulting from variable annuity and variable
life policies are segregated in separate accounts. Separate account assets,
which are carried at fair value, consist principally of investments in
mutual funds. Investment income and changes in asset values are allocated
to the policyholders, and therefore, do not affect the operating results of
the Company. The Company provides administrative services and bears the
mortality risk related to these contracts.
As of December 31, 1998 and 1997, the Company also classified $42.3 million
and $65.2 million, respectively, of fixed maturities and investments in
certain mutual funds sponsored by affiliates of the Company as separate
account assets.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
Policy Liabilities
Policy liabilities consist of deposits received plus credited interest,
less accumulated policyholder charges, assessments, and withdrawals related
to deferred annuities and single premium whole life policies. Policy
benefits that are charged to expense include benefit claims incurred in the
period in excess of related policy account balances.
Income Taxes
Income taxes have been provided using the liability method in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," and are calculated as if the companies filed
their own income tax returns.
Effective July 18, 1997, due to changes in ownership of Liberty Financial,
the Company is no longer included in the consolidated federal income tax
return of Liberty Mutual. The Company will be eligible to file a
consolidated federal income tax return with Liberty Financial in 2002.
Independence Life, which until July 18, 1997, was required under federal
tax law to file its own federal income tax return, may join with Keyport in
a consolidated income tax return filing. Keyport Benefit may also join
with Keyport in a consolidated income tax filing. Liberty Advisory
Services Corporation and Keyport Financial Services Corp. must file
separate federal tax returns.
Cash Equivalents
Short-term investments having an original maturity of three months or less
are classified as cash equivalents.
Recent Accounting Changes
As of January 1, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components; however,
the adoption of SFAS 130 had no impact on the Company's net income or
stockholder's equity. SFAS 130 requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were
reported separately in stockholder's equity, to be included in accumulated
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131").
SFAS 131 establishes standards for the reporting of financial information
from operating segments in annual and interim financial statements. SFAS
131 requires that financial information be reported on the basis that it is
reported internally for evaluating segment performance and deciding how to
allocate resources to segments. The adoption of SFAS 131 did not have any
effect on the Company's financial statements as management of the Company
considers its operations to be one segment.
Recent Accounting Pronouncement
In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") was issued. SFAS 133 standardizes the
accounting for derivative instruments and the derivative portion of certain
other contracts that have similar characteristics by requiring that an
entity recognize those instruments at fair value. This statement also
requires a new method of accounting for hedging transactions, prescribes
the type of items and transactions that may be hedged, and specifies
detailed criteria to be met to qualify for hedge accounting. This statement
is effective for fiscal years beginning after June 15, 1999. Earlier
adoption is permitted. Upon adoption, the Company will be required to
record a cumulative effect adjustment to reflect this accounting change.
The Company has not completed its analysis and evaluation of the
requirements and the impact of this statement.
2. Acquisitions
On January 2, 1998, the Company acquired the common stock of American
Benefit Life Insurance Company, renamed Keyport Benefit Life Insurance
Company on March 31, 1998, a New York insurance company, for $7.4 million.
The acquisition was accounted for as a purchase and, accordingly, operating
results are included in the consolidated financial statements from the date
of acquisition. In connection with the acquisition, the Company acquired
assets with a fair value of $9.4 million and assumed liabilities of $3.2
million. Subsequent to the acquisition, the Company made a capital
contribution to Keyport Benefit in the amount of $7.5 million.
In August 1996, the Company entered into a 100 percent coinsurance
agreement for a $954.0 million block of single premium deferred annuities
issued by Fidelity & Guaranty Life Insurance Company ("F&G Life"). Under
this transaction, the investment risk of the annuity policies was
transferred to Keyport. However, F&G Life will continue to administer the
policies and will remain contractually liable for the performance of all
policy obligations. This transaction increased investments by $923.1
million and value of insurance in force by $30.9 million.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
3. Investments
Fixed Maturities
As of December 31, 1998 and 1997, the Company did not hold any investments
in fixed maturities that were classified as held to maturity or trading
securities. The amortized cost, gross unrealized gains and losses, and
fair value of fixed maturity securities are as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized
December 31, 1998 Cost Gains Losses Fair Value
U.S. Treasury
securities $ 90,818 $ 3,039 $ (192) $ 93,665
Mortgage backed
securities of U.S.
government
corporations and
agencies 940,075 28,404 (2,894) 965,585
Debt securities
issued by foreign
governments 251,088 9,422 (16,224) 244,286
Corporate securities 5,396,278 185,132 (156,327) 5,425,083
Other mortgage
backed securities 2,286,585 65,158 (19,546) 2,332,197
Asset backed securities 1,941,966 25,955 (16,521) 1,951,400
Senior secured loans 267,887 1,079 (3,978) 264,988
Total fixed
maturities $11,174,697 $ 318,189 $ (215,682) $11,277,204
Gross Gross
Amortized Unrealized Unrealized
December 31, 1997 Cost Gains Losses Fair Value
U.S. Treasury
Securities $ 128,580 $ 1,107 $ (40) $ 129,647
Mortgage backed
securities of
U.S. government
corporations and
agencies 1,089,809 49,536 (1,602) 1,137,743
Debt securities
issued by foreign
governments 272,559 12,694 (4,966) 280,287
Corporate securities 4,744,208 189,387 (83,562) 4,850,033
Other mortgage
backed securities 2,325,889 81,886 (2,579) 2,405,196
Asset backed securities 2,200,689 26,178 (3,118) 2,223,749
Senior secured loans 219,884 - - 219,884
Total fixed
maturities $10,981,618 $ 360,788 $ (95,867) $11,246,539
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
At December 31, 1998 and 1997, gross unrealized gains on equity securities,
interest rate cap agreements and investments in separate accounts
aggregated $7.8 million and $27.4 million, and gross unrealized losses
aggregated $3.6 million and $6.9 million, respectively.
Net unrealized investment gains (losses) on securities included in other
comprehensive income in 1998, 1997 and 1996 include: gross unrealized
gains (losses) on securities of $(182.2) million, $73.7 million and $(64.4)
million, respectively; reclassification adjustments for realized investment
(gains) losses in net income of $3.5 million, $(31.2) million and $(7.2)
million, respectively; and adjustments to deferred policy acquisition costs
and value of insurance in force of $92.5 million, $(29.1) million and $54.2
million, respectively. The above amounts are shown before income tax
expense (benefit) of $(30.2) million, $4.7 million and $(5.2) million,
respectively.
Deferred tax liabilities for the Company's net unrealized investment gains
and losses, net of adjustment to deferred policy acquisition costs and
value of insurance in force, were $14.1 million and $44.3 million at
December 31, 1998 and 1997, respectively.
No investment in any person or its affiliates (other than bonds issued by
agencies of the United States government) exceeded ten percent of
stockholder's equity at December 31, 1998.
At December 31, 1998, the Company did not have a material concentration of
financial instruments in a single investee, industry or geographic
location.
At December 31, 1998, $1.1 billion of fixed maturities were below
investment grade.
Contractual Maturities
The amortized cost and fair value of fixed maturities by contractual
maturity as of December 31, 1998 are as follows (in thousands):
Amortized Fair
December 31, 1998 Cost Value
Due in one year or less $ 334,901 $ 335,179
Due after one year through five years 2,998,421 3,005,087
Due after five years through ten years 1,638,535 1,656,238
Due after ten years 1,034,214 1,031,518
6,006,071 6,028,022
Mortgage and asset backed securities 5,168,626 5,249,182
$11,174,697 $11,277,204
Actual maturities may differ because borrowers may have the right to call
or prepay obligations.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Net Investment Income
Net investment income is summarized as follows (in thousands):
Year Ended December 31, 1998 1997 1996
Fixed maturities $ 810,521 $ 811,688 $ 737,372
Mortgage loans and other
invested assets 18,238 27,833 11,422
Policy loans 33,251 32,224 30,188
Equity securities 4,369 5,443 4,494
Cash and cash equivalents 38,269 34,449 36,138
Gross investment income 904,648 911,637 819,614
Investment expenses (17,342) (15,311) (12,708)
Amortization of options and
interest rate caps (72,080) (49,278) (16,541)
Net investment income $ 815,226 $ 847,048 $ 790,365
As of December 31, 1998, the carrying value of fixed maturity investments
that was non-income producing was $30.0 million. There were no non-income
producing fixed maturity investments as of December 31, 1997.
Net Realized Investment Gains (Losses)
Net realized investment gains (losses) are summarized as follows (in
thousands):
Year Ended December 31, 1998 1997 1996
Fixed maturities available for sale:
Gross gains $ 72,119 $ 42,464 $ 24,304
Gross losses (59,730) (19,146) (17,814)
Other than temporary declines in value (28,322) - -
Equity securities 14,754 (51) 1,492
Investments in separate accounts 93 7,912 (576)
Interest rate caps (2,397) - -
Other - - (208)
Gross realized investment (losses) gains (3,483) 31,179 7,198
Amortization adjustments of deferred
policy acquisition costs and value
of insurance inforce 4,268 (6,456) (1,689)
Net realized investment gains $ 785 $ 24,723 $ 5,509
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Proceeds from sales of fixed maturities available for sale were $5.4
billion, $2.6 billion and $1.7 billion, for the years ended December 31,
1998, 1997 and 1996, respectively.
4. Derivatives
Outstanding derivatives, shown in notional amounts along with their
carrying value and fair value, are as follows (in thousands):
Assets (Liabilities)
Carrying Fair Carrying Fair
Notional Amounts Value Value Value Value
December 31 1998 1997 1998 1998 1997 1997
Interest
rate swaps $2,369,000 $2,575,000 $(71,163) $(71,163) $(42,123) $(42,123)
Interest
rate cap
agreements 250,000 250,000 - - 102 102
S&P 500
Index call
Options - - 535,628 607,022 323,343 345,294
S&P 500 Index
Futures - - (604) (604) 752 752
The interest rate swap agreements expire in 1999 through 2005. The interest
rate cap agreements expire in 1999 through 2000. The call options' and
futures' maturities range from 1999 to 2002.
The Company currently utilizes swap agreements to reduce asset duration and
to better match interest rates earned on longer-term fixed rate assets with
interest credited to policyholders. Cap agreements are used to hedge
against rising interest rates. Call options and futures contracts are used
for purposes of hedging the Company's equity-indexed products. At December
31, 1998 and 1997, the Company had approximately $156.4 million and $155.0
million, respectively, of unamortized premium in call option contracts.
Fair values for swap and cap agreements are based on current settlement
values. The current settlement values are based on quoted market prices
and brokerage quotes, which utilize pricing models or formulas using
current assumptions. Fair values for call options and futures contracts
are based on quoted market prices.
There are risks associated with some of the techniques the Company uses to
match its assets and liabilities. The primary risk associated with swap,
cap and call option agreements is the risk associated with counterparty
nonperformance. The Company believes that the counterparties to its swap,
cap and call option agreements are financially responsible and that the
counterparty risk associated with these transactions is minimal. Futures
contracts trade on organized exchanges and, therefore, have minimal credit
risk.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
5. Income Taxes
Income tax expense (benefit) is summarized as follows (in thousands):
Year Ended December 31,
1998 1997 1996
Current $ 12,150 $ (48,477) $ 52,369
Deferred 40,769 107,567 (5,147)
$ 52,919 $ 59,090 $ 47,222
A reconciliation of income tax expense with the expected federal income tax
expense computed at the applicable federal income tax rate of 35% is as
follows (in thousands):
Year Ended December 31,
1998 1997 1996
Expected income tax expense $ 56,532 $ 60,427 $ 48,246
Increase (decrease) in income
taxes resulting from:
Nontaxable investment income (2,152) (1,416) (1,216)
Amortization of goodwill 440 396 396
Other, net (1,901) (317) (204)
Income tax expense $ 52,919 $ 59,090 $ 47,222
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
5. Income Taxes (continued)
The components of deferred federal income taxes are as follows (in
thousands):
December 31,
1998 1997
Deferred tax assets:
Policy liabilities $ 107,433 $ 124,250
Guaranty fund expense 2,115 2,795
Net operating loss carryforwards 1,780 2,111
Deferred fees 4,379 -
Other 1,318 1,205
Total deferred tax assets 117,025 130,361
Deferred tax liabilities:
Deferred policy acquisition costs (92,533) (56,331)
Value of insurance in force and
intangible assets (23,322) (18,022)
Excess of book over tax basis of
Investments (135,364) (178,697)
Separate account asset (478) (645)
Deferred loss on interest rate swaps (805) (1,792)
Other (8,119) (7,877)
Total deferred tax liabilities (260,621) (263,364)
Net deferred tax liability $ (143,596) $ (133,003)
As of December 31, 1998, the Company had approximately $5.1 million of
purchased net operating loss carryforwards (relating to the acquisition of
Independence Life). Utilization of these net operating loss carryforwards,
which expire through 2006, is limited to use against future profits of
Independence Life. The Company believes that it is more likely than not
that it will realize the benefit of its deferred tax assets.
Income taxes paid were $21.5 million in 1998 and $46.9 million in 1996,
while income taxes refunded were $8.0 million in 1997.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
6. Retirement Plans
Keyport employees and certain employees of Liberty Financial are eligible
to participate in the Liberty Financial Companies, Inc. Pension Plan (the
"Plan"). It is the Company's practice to fund amounts for the Plan
sufficient to meet the minimum requirements of the Employee Retirement
Income Security Act of 1974. Additional amounts are contributed from time
to time when deemed appropriate by the Company. Under the Plan, all
employees are vested after five years of service. Benefits are based on
years of service, the employee's average pay for the highest five
consecutive years during the last ten years of employment, and the
employee's estimated social security retirement benefit. The Company also
has an unfunded non-qualified Supplemental Pension Plan ("Supplemental
Plan") collectively with the Plan, (the "Plans"), to replace benefits lost
due to limits imposed on Plan benefits under the Internal Revenue Code.
Plan assets consist principally of investments in certain mutual funds
sponsored by an affiliated company.
The following table sets forth the Plans' funded status (in thousands).
December 31,
1998 1997
Change in benefit obligation
Benefit obligation at beginning of year $ 12,594 $ 10,559
Service cost 921 804
Interest cost 960 829
Actuarial loss 1,101 606
Benefits paid (294) (204)
Benefit obligation at end of year 15,282 12,594
Change in plan assets
Fair value of plan assets at beginning of year 7,801 6,399
Actual return on plan assets 593 901
Employer contribution 290 705
Benefits paid (294) (204)
Fair value of plan assets as end of year 8,390 7,801
Projected benefit obligation in excess of the
Plans' assets 6,892 4,793
Unrecognized net actuarial loss (2,814) (1,727)
Prior service cost not yet recognized in net
periodic pension cost (138) (160)
Accrued pension cost $ 3,940 $ 2,906
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
6. Retirement Plans (continued)
The assumptions used to develop the actuarial present value of the
projected benefit obligation and the expected long-term rate of return on
plan assets are as follows:
Year Ended December 31,
1998 1997 1996
Pension cost includes the
following components:
Service cost benefits earned
during the period $ 921 $ 804 $ 717
Interest cost on projected
benefit obligation 960 829 725
Expected return on Plan assets (610) (525) (468)
Net amortization and deferred
amounts 53 23 93
Total net periodic pension cost $ 1,324 $ 1,131 $ 1,067
The assumptions used to develop the actuarial present value of the
projected benefit obligation and the expected long-term rate of return on
plan assets are as follows:
Discount rate 6.75% 7.25% 7.50%
Rate of increase in compensation level 4.75% 5.00% 5.25%
Expected long-term rate of return on assets 9.00% 8.50% 8.50%
The Company provides various other funded and unfunded defined contribution
plans, which include savings and investment plans and supplemental savings
plans. For each of the years ended December 31, 1998, 1997 and 1996,
expenses related to these defined contribution plans totaled (in thousands)
$853, $702 and $590, respectively.
7. Fair Value of Financial Instruments
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair value of the Company's financial instruments.
The aggregate fair value amounts presented herein do not necessarily
represent the underlying value of the Company, and accordingly, care should
be exercised in deriving conclusions about the Company's business or
financial condition based on the fair value information presented herein.
The following methods and assumptions were used by the Company in
determining estimated fair value of financial instruments:
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
7. Fair Value of Financial Instruments (continued)
Fixed maturities and equity securities: Fair values for fixed maturity
securities are based on quoted market prices, where available. For fixed
maturities not actively traded, the fair values are determined using values
from independent pricing services, or, in the case of private placements,
are determined by discounting expected future cash flows using a current
market rate applicable to the yield, credit quality, and maturity of the
securities. The fair values for equity securities are based on quoted
market prices.
Mortgage loans: The fair value of mortgage loans are determined by
discounting future cash flows to the present at current market rates, using
expected prepayment rates.
Policy loans: The carrying value of policy loans approximates fair value.
Other invested assets: With the exception of call options, the carrying
value for assets classified as other invested assets in the accompanying
balance sheets approximates their fair value. Fair values for call options
are based on market prices quoted by the counterparty to the respective
call option contract.
Cash and cash equivalents: The carrying value of cash and cash equivalents
approximates fair value.
Policy liabilities: Deferred annuity contracts are assigned fair value
equal to current net surrender value. Annuitized contracts are valued
based on the present value of the future cash flows at current pricing
rates.
The fair values and carrying values of the Company's financial instruments
are as follows (in thousands):
December 31, December 31,
1998 1997
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Fixed maturity
securities $11,277,204 $11,277,204 $11,246,539 $11,246,539
Equity securities 24,649 24,649 40,856 40,856
Mortgage loans 55,117 56,640 60,662 63,007
Policy loans 578,770 578,770 554,681 554,681
Other invested
Assets 662,513 730,394 440,773 462,724
Cash and cash
Equivalents 719,625 719,625 1,162,347 1,162,347
Liabilities:
Policy liabilities 12,504,081 11,647,558 12,086,076 11,366,534
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
8. Quarterly Financial Data (unaudited)
The following is a tabulation of the unaudited quarterly results of
operations (in thousands):
1998 Quarters
March 31 June 30 September 30 December 31
Investment income $ 206,075 $ 200,955 $ 201,158 $ 207,038
Interest credited to
policyholders (142,136) (140,198) (143,271) (136,633)
Investment spread 63,939 60,757 57,887 70,405
Net realized investment
gains (losses) 818 (2,483) 4,112 (1,662)
Fee income 9,877 12,400 10,505 10,054
Pretax income 37,870 36,627 44,344 42,678
Net income 26,049 24,092 29,779 28,680
1997 Quarters
March 31 June 30 September 30 December 31
Investment income $ 206,515 $ 210,655 $ 210,365 $ 219,513
Interest credited to
Policyholders (147,313) (147,224) (150,875) (148,672)
Investment spread 59,202 63,431 59,490 70,841
Net realized investment
gains 12,796 2,669 4,951 4,307
Fee income 8,252 8,578 9,841 9,682
Pretax income 47,423 39,914 39,876 45,438
Net income 31,538 26,095 26,377 29,551
9. Statutory Information
The Company is domiciled in Rhode Island and prepares its statutory
financial statements in accordance with accounting principles and practices
prescribed or permitted by the State of Rhode Island Insurance Department.
Statutory surplus and statutory net income differ from stockholder's equity
and net income reported in accordance with GAAP primarily because policy
acquisition costs are expensed when incurred, policy liabilities are based
on different assumptions, and income tax expense reflects only taxes paid
or currently payable. The Company's statutory surplus and net income are as
follows (in thousands):
Year Ended December 31,
1998 1997 1996
Statutory surplus $ 790,935 $ 702,610 $ 567,735
Statutory net income 95,422 107,130 40,237
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
10. Transactions with Affiliated Companies
The Company reimbursed Liberty Financial and certain affiliates for
expenses incurred on its behalf for the years ended December 31, 1998, 1997
and 1996. These reimbursements included corporate, general, and
administrative expenses, corporate overhead, such as executive and legal
support, and investment management services. The total amounts reimbursed
were $7.1 million for the year ended December 31, 1998 and $7.8 million for
the years ended December 31, 1997 and 1996. In addition, certain
affiliated companies distribute the Company's products and were paid $8.6
million, $7.2 million and $6.4 million by the Company for the years ended
December 31, 1998, 1997, and 1996, respectively.
Keyport had mortgage notes in the original principal amount of $100.0
million on properties owned by certain indirect subsidiaries of Liberty
Mutual. The notes were purchased for their face value. Liberty Mutual had
agreed to provide credit support to the obligors under these notes with
respect to certain payments of principal and interest thereon. As of
December 31, 1998 and 1997, the amounts outstanding were $39.5 million. In
January 1999, Liberty Mutual retired the mortgage notes with a payment of
$39.7 million for all outstanding principal and interest.
Dividend payments to Liberty Financial from the Company are governed by
insurance laws that restrict the maximum amount of dividends that may be
paid without prior approval of the State of Rhode Island Insurance
Department. As of December 31, 1998, the maximum amount of dividends
(based on statutory surplus and statutory net gains from operations) which
may be paid by Keyport was approximately $59.1 million without such
approval.
11. Commitments and Contingencies
Leases: The Company leases data processing equipment, furniture and certain
office facilities from others under operating leases expiring in various
years through 2008. Rental expense (in thousands) amounted to $4,721,
$3,408 and $3,213 for the years ended December 31, 1998, 1997 and 1996,
respectively. For each of the next five years, and in the aggregate, as of
December 31, 1998, the following are the minimum future rental payments
under noncancelable operating leases having remaining terms in excess of
one year (in thousands):
Year Payments
1999 $ 5,354
2000 5,311
2001 4,487
2002 4,342
2003 4,351
Thereafter 16,752
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
11. Commitments and Contingencies (continued)
Legal Matters: The Company is involved at various times in litigation
common to its business. In the opinion of management, provisions made for
potential losses are adequate and the resolution of any such litigation is
not expected to have a material adverse effect on the Company's financial
condition or its results of operations.
Regulatory Matters: Under existing guaranty fund laws in all states,
insurers licensed to do business in those states can be assessed for
certain obligations of insolvent insurance companies to policyholders and
claimants. The actual amount of such assessments will depend upon the final
outcome of rehabilitation proceedings and will be paid over several years.
In 1998, 1997 and 1996, the Company was assessed $3.2 million, $5.9
million, and $10.0 million, respectively. During 1998, 1997 and 1996, the
Company recorded $1.2 million, $1.0 million, and $1.0 million,
respectively, of provisions for state guaranty fund association expense. At
December 31, 1998 and 1997, the reserve for such assessments was $6.0
million and $8.0 million, respectively.
12. Year 2000 (Unaudited)
The Company relies significantly on computer systems and applications in
its operations. Many of these systems are not presently Year 2000
compliant. These systems use programs that were designed and developed
without considering the impact of the upcoming change in the century. Any
of the Company's computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. The
Company's business, financial condition and results of operations could be
materially and adversely affected by the failure of the Company's systems
and applications (and those operated by third parties interfacing with the
Company's systems and applications) to properly operate or manage these
dates.
In addressing the Year 2000 issue, the Company has completed an inventory
of its computer programs and assessed its Year 2000 readiness. The
Company's computer programs include internally developed programs, third-
party purchased programs and third-party custom developed programs. For
programs which were identified as not being Year 2000 ready, the Company
has implemented a remedial plan which includes repairing or replacing the
programs and appropriate testing for Year 2000. The remediation plan is
substantially complete and is currently in the final testing phase. The
Company also identified its non-information technology systems with respect
to Year 2000 issues. The Company initiated remediation efforts in this area
and expects to complete this phase during 1999.
In addition, the Company has initiated communication with significant
financial institutions, distributors, suppliers and others with which it
does business to determine the extent to which the Company's systems are
vulnerable by the failure of others to remediate their own Year 2000
issues. The Company has received feedback from such parties and is in the
process of independently confirming information received from other parties
with respect to their year 2000 issues.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
12. Year 2000 (Unaudited) (continued)
The Company is developing, and will continue to develop, contingency plans
for dealing with any adverse effects that become likely in the event the
Company's remediation plans are not successful or third parties fail to
remediate their own Year 2000 issues. The Company expects contingency
planning to be substantially complete by June 1999. If necessary
modifications and conversions are not made, or are not timely completed, or
if the systems of the companies on which the Company's interface system
relies are not timely converted, the Year 2000 issues could have a material
impact on the financial condition and results of operations of the Company.
However, the Company believes that with modifications to existing software
and conversions to new software, the Year 2000 issue will not pose
significant operational problems for its computer systems.
Schedule I
KEYPORT LIFE INSURANCE COMPANY
SUMMARY OF INVESTMENTS
(in thousands)
December 31, 1998
Balance
Amortized Sheet
Type of investment Cost Fair Value Amount
Fixed maturities:
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 1,030,893 $ 1,059,250 $ 1,059,250
Foreign governments 251,088 244,286 244,286
Corporate and other securities 7,606,131 7,641,471 7,641,471
Mortgage backed securities 2,286,585 2,332,197 2,332,197
Total fixed maturities 11,174,697 11,277,204 11,277,204
Equity securities:
Common stocks:
Industrial, miscellaneous
and all other 21,836 24,649 24,649
Mortgage loans on real estate1 55,117 56,640 55,117
Policy loans 578,770 578,770 578,770
Other long term investments 662,513 730,394 662,513
Total investments $12,492,933 $12,667,657 $12,598,253
1 Includes mortgage notes relating to certain investment property owned
by Liberty Mutual in the amount of $39,500 at December 31, 1998
Schedule III
KEYPORT LIFE INSURANCE COMPANY
SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
Three Years Ended December 31, 1997
Column A Column B Column C Column D Column E Column F
Deferred Policyholder Unearned Policy Insurance
policy account premiums contract revenues
acquisition balances claims
costs and future and other
policy policy-
benefits holders'
funds
December 31, 1998
Interest sensitive
products $340,957 $12,445,950 NA $58,131 $38,076
December 31, 1997
Interest sensitive
products $232,039 $12,031,829 NA $54,247 $33,092
December 31, 1996
Interest sensitive
products $250,355 $11,610,418 NA $27,110 $30,921
Column A Column G Column H Column I Column J Column K
Net Interest Amortization Other Premiums
investment credited of deferred operating written
income to policy- policy expenses
holders acqui-
and policy sition
benefits costs
and claims
December 31, 1998
Interest sensitive
products $815,226 $565,118 $69,172 $63,038 NA
December 31, 1997
Interest sensitive
products $847,048 $598,008 $75,906 $61,559 NA
December 31, 1996
Interest sensitive
products $790,365 $576,196 $60,225 $55,141 NA
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston and the
Commonwealth of Massachusetts on March 29, 1999.
Keyport Life Insurance Company
By: /s/ Paul H. LeFevre, Jr.
-------------------------------
Paul H. LeFevre, Jr.
Acting President
Signature Title Date
/s/ Kenneth R. Leibler * Chairman of the Board March 29, 1999
Kenneth R. Leibler
/s/ Bernhard M. Koch Senior Vice President March 29, 1999
Bernhard M. Koch and Chief Financial
Officer
(Principal Financial Officer)
/s/ Jeffery J. Whitehead Vice President and Treasurer March 29, 1999
Jeffery J. Whitehead (Principal Accounting Officer)
/s/ Frederick Lippitt * Director and Assistant March 29, 1999
Frederick Lippitt Secretary
/s/ Robert C. Nyman * Director March 29, 1999
Robert C. Nyman
By: /s/ James J. Klopper 3/29/99
James J. Klopper Date
Attorney-in-Fact
* James J. Klopper has signed this document on the indicated date on behalf
of each of the above mentioned Directors and Officers of the Registrant
pursuant to powers of attorney duly executed by such persons and included
as part of Exhibit 16 in Post-Effective Amendment No.
10 to Registration Statement on Form N-4 (File No. 333-1043; 811-7543).
Exhibit Index
Exhibit
Number Description Page
2 Subsidiaries of the Company 32
3(i) Articles of Incorporation -- Incorporated by
Reference to Registration Statement on Form N-4,
filed on February 16, 1996 (File No. 333-01043;
811-07543)
3(ii) By-laws -- Incorporated by Reference to Registration
Statement on Form N-4, filed on February 16, 1996
(File No. 333-01043; 811-07543)
10.1 Coinsurance Agreement by and between Fidelity and
Guaranty Life Insurance Company and Keyport Life
Insurance Company incorporated by reference to
Form 10-K filed on or about March 31, 1997
23(a) Consent of Independent Auditors 33
24 Powers of Attorney are incorporated by reference to
Post-Effective Amendment No. 10 to the Registration
Statement on Form N-4 (File No. 333-1043) filed on
or about April 24, 1998.
27 Financial Data Schedule