KEYPORT LIFE INSURANCE CO - 10-K Annual Report

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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, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

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 incorporation) (I.R.S. Employer Identification No.)

125 High Street
Boston, Massachusetts 02110-2712
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (617) 526-1400

Securities registered pursuant to Section 12(b) of the Act:

Title of each Class Name of each exchange on which registered
Common Stock, Par Value None
$1.25 per share

Securities registered pursuant to Section 12(g) of the Act:
None

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, and (2) has been subject to such
filing requirements for the past 90 days. Yes /x/ 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 27, 1998.

KEYPORT LIFE INSURANCE COMPANY
ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1997

TABLE OF CONTENTS

Part I Page
Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8

Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition 10
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 16
Item 8. Consolidated Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 17

Part III
Item 10. Directors and Executive Officers of the Registrant 17
Item 11. Executive Compensation 17
Item 12. Security Ownership of Certain Beneficial Owners
and Management 21
Item 13. Certain Relationships and Related Transactions 21

Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 22

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. These
annuity products are sold through a wide ranging network of banks, agents
and securities dealers. 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 is licensed to do business in all states except New York and is
also licensed in the District of Columbia and the Virgin Islands. Keyport
has been rated A+ (Superior) by A.M. Best and Company ("A.M. Best"),
independent analysts of the insurance industry. Keyport has been rated A+
each year since 1976, the first year Keyport was subject to A.M. Best's
alphabetic rating system. The A.M. Best's A+ rating is in the highest
rating category, which also includes A++.

Keyport's wholly owned insurance subsidiaries are Independence Life and
Annuity Company ("Independence Life") and American Benefit Life Insurance
Company, to be renamed Keyport Benefit Life Insurance Company ("Keyport
Benefit"), on or about April 1, 1998. Other wholly owned subsidiaries are
Liberty Advisory Services Corporation, an investment advisory company, and
Keyport Financial Services Corp., a broker-dealer (collectively the
"Company").

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"), 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 investment advisor, asset management and
bank distribution operating units are The Colonial Group, Inc.
("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) sells a full range of retirement-oriented
insurance products, grouped by whether they provide fixed, indexed or
variable returns to policyholders. Annuities offer a tax-favored 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 for the Company. The Company's primary financial objectives are to
increase policyholder balances through new sales and asset retention and to
earn required investment spreads on its fixed and indexed-return products.

Fixed Annuities. The Company's principal fixed annuity products are 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 or the policyholder retires or
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 60% 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 trademarkes 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 an 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 which are designed to be sold through major national
brokerage firms.

Variable Annuities. Variable annuities offer a selection of underlying
investment alternatives which may satisfy a variety of policyholder
risk/return objectives. Under variable annuities, 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's
Keyport Advisor variable annuity currently offers 18 separate account
investment choices 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, 1997.

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 treatment.

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 is the case
at the date of the filing of this Report). SPDA sales also can be
adversely affected by low interest rates (as is the case at the date of
this Report).

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,
1997 1996 1995
(dollars in thousands, except policy data)

Policy and Separate
Account Liabilities:
Fixed annuities...................$ 8,416,544 $ 8,641,423 $ 7,771,661
Indexed annuities................. 1,527,489 787,848 83,916
Variable annuities................ 1,276,606 1,083,494 949,938
Life insurance.................... 2,129,395 2,142,430 2,167,968
Total.............................$ 13,350,034 $ 12,655,195 $ 10,973,483

Number of In Force Policies:
Fixed annuities....................... 222,903 236,574 224,238
Indexed annuities...................... 39,224 24,174 2,778
Variable annuities..................... 27,429 25,177 25,037
Life insurance.................... 24,921 26,850 28,489
Total............................. 314,477 312,775 280,542

Average In Force
Policy Amount:
Fixed annuities ..................$ 37,710 $ 36,479 $ 34,611
Indexed annuities................ $ 38,943 $ 32,591 $ 30,207
Variable annuities............... $ 46,542 $ 43,035 $ 37,941
Life insurance................... $ 83,709 $ 79,207 $ 75,728

Premiums (statutory basis):
Fixed annuities.................. $ 426,052 $ 492,603 $ 977,182
Indexed annuities ............... 523,685 655,214 83,971
Variable annuities............... 172,688 97,357 80,382
Life insurance.................... (1,255) (447) (554)
Total............................ $ 1,121,170 $ 1,244,727 $ 1,140,981

New Contracts and Policies:
Fixed annuities.................... 13,744 11,358 30,043
Indexed annuities.................. 16,076 21,396 2,778
Variable annuities................. 4,333 1,814 1,789
Total.............................. 34,153 34,568 34,610

Aggregate Amount Subject to
Surrender Charges:
Fixed annuities.................. $ 6,982,210 $ 7,371,492 $ 6,903,524
Indexed annuities................ $ 1,527,489 $ 787,848 $ 83,916

Withdrawals and Terminations
(statutory basis):
Fixed annuities:
Death............................ $ 60,268 $ 24,650 $ 14,966
Maturity......................... $ 109,614 $ 87,433 $ 75,858
Surrender........................ $ 999,913 $ 966,023 $ 692,560

Indexed annuities:
Death............................ $ 3,744 $ 147 --
Maturity......................... $ 10 -- --
Surrender........................ $ 19,453 $ 3,025 $ 50

Variable annuities:
Death............................ $ 3,831 $ 1,762 $ 426
Maturity......................... $ 27,507 $ 21,287 $ 14,008
Surrender........................ $ 104,569 $ 76,725 $ 92,187

Life Insurance:
Death............................ $ 65,593 $ 53,292 $ 53,788
Surrender........................ $ 96,230 $ 98,189 $ 95,332

Surrender Rates :
Fixed annuities.................. 11.74% 11.79% 9.34%
Indexed annuities................ 1.68% 0.69% 0.12%
Variable annuities............... 8.86% 7.55% 10.46%
Life insurance................... 4.57% 4.58% 4.36%

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 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 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, 1997, crediting rates on 95.0% 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 4.30% to 7.94% at December 31,
1997. Such policies had guaranteed minimum rates ranging from 3.0% to 5.5%
as of such date. Initial interest crediting rates on new policies issued
in 1997 ranged from 4.60% to 7.94%. Guaranteed minimum rates on new
policies issued during 1997 ranged from 3.0% to 5.5%.

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 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,
1997, 83.0% of the Company's SPDAs remained in the surrender charge period.
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+" (Superior) by A.M.
Best, "AA" (excellent financial security) by Standard & Poor's ("S&P"),
"A1" (good financial strength) by Moody's and "AA-" (very high claims
paying ability) by Duff & Phelps. "A+" is A.M. Best's second highest
rating. S&P raised Keyport's rating from "AA-" to "AA" in February, 1998.
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.

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.
Keyport's operating expense ratio for 1997 was 0.40% of assets, which
reflects Keyport'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, 1997 totaled
$13.5 billion). To maintain its investment spreads 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 (83.3% at December 31, 1997). 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.
At December 31, 1997, the effective duration of its fixed income portfolio
was approximately 2.9. 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
to hedge its obligations to provide participation rate returns. Credit
risk is managed by careful credit analysis and monitoring. At December 31,
1997, the Company's fixed maturity portfolio had an overall average S&P
rating of A+. A portion of the general account investments (7.9% at
December 31, 1997) are 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. There were no non-income producing investments in
the Company's fixed maturity portfolio at December 31, 1997.

As of December 31, 1997, the Company owned approximately $3.5 billion of
mortgage-backed securities (26.2% of its general account investments),
97.4% 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, 1997, approximately $3.2 billion (23.8% of the Company's
general account investments) were invested in securities which were sold
without registration under the Securities Act and were not freely tradable
under the Securities Act or which were otherwise illiquid. These
securities may be resold pursuant to an exemption from registration under
the Securities Act. If 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 1997, the bank channel represented
approximately 51.7% of Keyport's annuity sales, and the brokerage channel
represented approximately 18.2%. 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 and insurance agents, represented approximately 30.1% of total
annuity sales.

The following table presents sales information in Keyport's distribution
channels for the periods indicated (in millions).

Sales of Sales of
Fixed and Indexed Annuities Variable Annuities
Year Ended Year Ended
December 31, December 31,
1997 1996 1995 1997 1996 1995
Bank channel:
Independent $168.4 $139.4 $ 91.7 $121.0 $28.5 $27.0
Third party
bank marketers 286.5 311.2 427.1 3.2 13.7 7.1

Other channels:
Broker-dealers 179.5 211.7 392.5 24.9 36.6 45.3
Other distributors 314.1 485.6 149.9 23.6 18.5 1.0

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. Policy forms, including all
principal contract terms, are regulated by state law. 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 are each chartered in Rhode Island and the State
of Rhode Island Insurance Department is their primary oversight regulator.
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. 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 prepares its statutory-basis financial statements in accordance
with accounting practices prescribed or permitted by the Insurance
Department of the State of Rhode Island. Certain statutory accounting
practices are prescribed by state laws. Permitted statutory accounting
practices encompass all accounting practices that are not proscribed; such
practices may differ between the states and companies within a state. The
National Association of Insurance Commissioners (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
1998 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.

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, 1997, Keyport's capital and
surplus exceeded the level at which the lowest of these regulatory
attention levels would be triggered.

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.

Current Rhode Island insurance law imposes prior approval requirements for
certain transactions with affiliates and generally regulates dividend
payments by a Rhode Island-chartered insurance subsidiary to its parent
company. Keyport may not make dividend payments in excess of the lesser of
(i) 10% of its statutory surplus as of the preceding December 31 or (ii)
its statutory net gain from operations for the preceding fiscal year
without prior approval by the State of Rhode Island Insurance Department.
As of December 31, 1997, such restriction would limit dividends without
such approval to approximately $70.3 million. Keyport has not paid any
dividends since its acquisition in December, 1988.

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, 1997, the Company had 412 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, 1997, the Company maintained its executive,
administrative and sales offices in leased facilities. The Company leases
approximately 76,000 square feet in a single facility in downtown Boston
pursuant to a lease which expires in 2008. The Company also leases
approximately 19,800 square feet in a single facility in Lincoln, Rhode
Island and 7,700 square feet in a single facility in Maitland, Florida
pursuant to leases which expire in 2007 and 1999, 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, 48 Chairman of the Board, Chief Executive Officer
12/31/94 of Liberty Financial
Companies, Inc. ("LFC"),
1/1/95; President of
LFC, formerly Chief
Operating Officer of LFC

F. Remington Ballou, 68 Director, 3/7/62 President of B. A.
Ballou & Co., Inc.,
East Providence, RI

Frederick Lippit, 81 Director, 1/31/62, Chairman of The
and Assistant Providence Plan,
Secretary, 4/9/69 Providence, RI

Robert C. Nyman, 61 Director, 4/11/96 Formerly President and
Chairman of Nyman
Manufacturing Co., East
Providence, RI

John W. Rosensteel, 57 President and Chief Chairman of the Board,
Executive Officer, Director and President
12/30/92 of KFSC, 11/12/92;
and Director, 11/5/92 Chairman of the Board,
Director, President and
Chief Executive Officer of
LASC, 1/8/93; President,
Chief Executive Officer,
Chairman of the Board and
Director of Independence
Life and Annuity Company,
10/1/93

Paul H. LeFevre, Jr., 55 Executive Formerly Senior Vice
Vice President, President and Chief
4/10/97 Financial Officer of the
Company, 9/1/95; 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 and
Annuity Company; formerly
Senior Vice President and
Chief Financial Officer of
Independence Life and
Annuity Company, 10/1/93

Bernard R.
Beckerlegge, 51 Senior Vice President Senior Vice President
and General Counsel, and General Counsel of
9/1/95 LASC, 7/22/97; Senior Vice
President and General
Counsel of Independence
Life and Annuity Company,
10/9/95; formerly General
Counsel for B.T. Variable
Insurance Co., 8/1/88

Stephen B. Bonner, 51 Senior Vice President, Senior Vice President
11/7/96 of Independence Life and
Annuity Company, 7/28/97;
formerly President of
Construction Information
Group at McGraw Hill,
2/1/92

Bernhard M. Koch, 43 Senior Vice President Senior Vice President and
and Chief Officer, Chief Financial Officer of
8/7/97 LASC, 7/22/97; Senior Vice
President and Chief
Financial Officer of
Independence Life and
Annuity Company, 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, 41 Senior Vice President, Formerly Vice President,
4/10/97, and Chief Investments of the
Investment Officer, Company; Senior Vice
5/16/94 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 and
Annuity Company, 7/28/97;
formerly Vice President,
Investments of
Independence Life and
Annuity Company, 10/1/93

Francis E. Reinhart, 57 Senior Vice President, Formerly Chief
4/5/90, and Chief Administrative Officer of
Information Officer, the Company, 4/5/90;
4/10/97 Director, 3/15/95 and
Vice President, 10/24/85,
of KFSC; 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 and Annuity Company,
formerly Chief
Administrative Officer
of Independence Life and
Annuity Company, 10/1/93

James P. Greaton, 40 Vice President and Vice President and
Corporate Actuary, Corporate Actuary of
6/12/96 Independence Life and
Annuity Company, 12/31/96;
formerly Valuation
Actuary, Providian Capital
Management, 5/94

Jeffery J. Lobo, 36 Vice President-Risk Formerly Assistant Vice
Management, 6/12/96 President - Director of
Quantitative Research for
the Company, 2/8/95;
formerly Vice President of
Credit Suisse Financial
Products, 11/94; trader
for SBCI Securities (Asia)
Inc., 7/93

Jeffery J.
Whitehead, 41 Vice President, Formerly Controller of the
11/5/92, and Company; Vice President
Treasurer, 5/4/95 and Treasurer of LASC,
5/19/95; Vice President
and Treasurer of
Independence Life and
Annuity Company, 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 1997 1996 1995 1994 1993

Income statement
data:
Investment
income $ 847,048 $ 790,365 $ 755,930 $ 689,575 $ 669,667
Interest
credited (594,084) (572,719) (555,725) (481,926) (504,205)
Investment
spread 252,964 217,646 200,205 207,649 165,462
Fee income 36,353 33,534 29,767 25,273 18,158
Operating
expenses (49,941) (43,815) (44,475) (54,295) (40,697)
Income before
income taxes 172,651 137,846 107,941 95,276 86,705
Net income 113,561 90,624 69,610 63,225 57,995

Balance sheet
data:
Total cash and
investments $13,505,858 $12,305,312 $10,922,125 $ 9,274,793 $8,912,526
Total assets 15,342,189 13,924,557 12,280,194 10,873,604 10,227,327
Stockholder's
equity 1,103,021 980,782 902,331 682,485 684,270

Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition

Results of Operations

Net income was $113.6 million in 1997 compared to $90.6 million in 1996 and
$69.6 million in 1995. The improvement of $23.0 million in 1997 compared to
1996 resulted from higher investment spread, higher fee income and higher
net realized investment gains. Partially offsetting these items were
increased amortization of deferred policy acquisition costs and value of
insurance in force, higher operating expenses and higher income tax
expense.

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 1997 compared to $217.6 million in
1996 and $200.2 million in 1995. 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 1.91% in 1997, and 1.84% in 1996 and 1995.

Investment income was $847.0 million in 1997 compared to $790.4 million in
1996 and $755.9 million in 1995. The increase of $56.6 million in 1997
compared to 1996 primarily relates to an $85.6 million increase as a result
of a higher level of average invested assets, partially offset by a
$29.0 million decrease resulting from a lower average investment yield. The
1997 investment income was net of $47.6 million of S&P 500 Index call
option amortization expense related to the Company's equity-indexed
annuities compared to $14.0 million in 1996. The average investment yield
was 6.90% in 1997 compared to 7.16% in 1996. Investment income increased
in 1996 compared to 1995 primarily as a result of a higher level of average
invested assets, partially offset by a decrease in the average investment
yield. The average investment yield was 7.16% in 1996 compared to 7.51% in
1995.

Interest credited to policyholders totaled $594.1 million in 1997 compared
to $572.7 million in 1996 and $555.7 million in 1995. The increase of
$21.4 million in 1997 compared to 1996 primarily relates to a $56.4 million
increase as a result of a higher level of average policyholder balances,
partially offset by a $35.0 million decrease resulting from a lower average
interest credited rate. Policyholder balances averaged $11.9 billion
(including $10.8 billion of fixed products and $1.1 billion of equity-
indexed annuities) in 1997 compared to $10.8 billion (including $10.4
billion of fixed products and $0.4 billion of equity-indexed annuities) in
1996. The average interest credited rate was 4.99% (5.45% on fixed
products and 0.85% on equity-indexed annuities) in 1997 compared to 5.32%
(5.50% on fixed products and 0.85% on equity-indexed annuities) in 1996.
The Company's equity-indexed annuities credit interest to the policyholder
at a "participation rate" equal to a portion (ranging for existing policies
from 60% 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, resulting in an 0.85%
net credited rate. Interest credited to policyholders increased in 1996
compared to 1995 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 $10.8 billion in
1996 compared to $9.8 billion in 1995. The average interest credited rate
was 5.67% in 1995.

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 $12.3 billion in 1997 compared to
$11.0 billion in 1996 and $10.1 billion in 1995. 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 investment portfolio earnings. The increase of $0.9
billion in 1996 compared to 1995 was primarily due to the reinvestment of
portfolio earnings and the F&G Life transaction.

Net realized investment gains were $24.7 million in 1997 compared to $5.5
million in 1996 and net realized investment losses of $4.0 million in 1995.
Sales of fixed maturity investments generally are made to maximize total
return. The net realized investment gains in 1997 included gains on the
sales of fixed maturity investments of $16.8 million and gains on
redemption of seed money investments in separate account mutual funds
sponsored by the Company of $7.9 million. The net realized investment
gains in 1996 were primarily attributable to sales of fixed maturity
investments and sales of investments received in the F&G Life transaction.

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
$16.0 million in 1997 compared to $14.9 million in 1996 and $14.8 million
in 1995.

Total annuity withdrawals represented 11.6% of the total average annuity
policyholder and separate account balances in 1997 and 1996 and 9.9% in
1995. Excluding surrenders from the older block of annuities acquired in
the F&G Life transaction, the withdrawal percentages were 10.6% and 10.0%
in 1997 and 1996, respectively.

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 $17.1 million in 1997 compared to $16.0
million in 1996 and $13.2 million in 1995. Such fees represented 1.54%,
1.68% and 1.61% of average variable annuity and variable life separate
account balances in 1997, 1996 and 1995, 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 $3.3
million in 1997 compared to $2.6 million in 1996 and $1.8 million in 1995.
The increase of $0.7 million in 1997 compared to 1996 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 $49.9 million in
1997 compared to $43.8 million in 1996 and $44.5 million in 1995. The
increase in 1997 compared to 1996 was primarily due to higher employee
related expenses and selling expenses. The decrease in 1996 compared to
1995 was primarily due to IRS interest penalties of $1.9 million recorded
in 1995 related to a federal income tax assessment.

Amortization of deferred policy acquisition costs was $75.9 million in 1997
compared to $60.2 million in 1996 and $58.5 million in 1995. These
increases in amortization in 1997 and 1996 were 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. Amortization expense represented 29.2%,
27.7% and 29.2%, of investment spread for 1997, 1996 and 1995,
respectively.

Amortization of value of insurance in force totaled $10.5 million in 1997
compared to $10.2 million in 1996 and $9.5 million in 1995. 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. The increase in amortization in 1996 compared to 1995 was
primarily due to $2.7 million of amortization recorded in 1996 relating to
the F&G Life transaction, partially offset by lower amortization in 1996
due to an increase in estimated amortization periods in the last quarter of
1995 of the Company's closed block of single premium whole life insurance.

Federal income tax expense was $59.1 million or 34.2% of pretax income in
1997 compared to $47.2 million, or 34.3% pretax income in 1996, and $38.3
million, or 35.5% of pretax income in 1995.

Effective July 18, 1997, due to a decrease in the ownership percentage of
the Company's indirect parent, the Company is no longer included in the
consolidated federal income tax return of Liberty. 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 required to file a
separate federal income tax return until the Company is eligible to file a
consolidated federal income tax return with Liberty Financial in 2002.

Financial Condition

Stockholder's Equity as of December 31, 1997 was $1.1 billion compared to
$980.8 million as of December 31, 1996. The increase in stockholder's
equity was due to net income of $113.6 million, as well as an increase in
after-tax unrealized gains and losses (net of adjustments to deferred
policy acquisition costs and value of insurance in force) during the period
of $8.7 million.

Investments not including cash and cash equivalents totaled $12.3 billion
at December 31, 1997 compared to $11.5 billion at December 31, 1996. The
increase of $0.8 billion is primarily attributable to the reinvestment of
portfolio earnings in 1997.

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 accordingly carries such investments
at fair value. The Company's total investments at December 31, 1997 and
1996 reflected net unrealized gains of $280.3 million and $229.8 million,
respectively, relating to its fixed maturity and equity portfolios.

Approximately $11.0 billion, or 81.7%, of the Company's general account
investments at December 31, 1997, was rated by Standard & Poor's
Corporation, Moody's Investors Service or under comparable statutory rating
guidelines established by the NAIC. At December 31, 1997, the carrying
value of investments in below investment grade securities totaled $1.1
billion, or 7.9% of general account investments of $13.5 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.

Management of the Company's Investments

Asset-liability duration management is utilized by the Company to minimize
the risks of interest rate fluctuations and policyholder withdrawals. The
Company believes that its fixed and equity-indexed policyholder balances
should be backed by investments, principally comprised of fixed maturities,
that 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. Its
portfolio strategy is designed to achieve acceptable risk-adjusted returns
by effectively managing portfolio liquidity and credit quality.

The Company conducts its investment operations to closely match the
duration of the assets in its investment portfolio to its policyholder
balances. The Company seeks to achieve an acceptable spread between what it
earns on its assets and interest credited on its policyholder balances by
investing principally in fixed maturities. The Company's fixed-rate
products incorporate surrender charges to encourage persistency and make
the cost of its policyholder balances more predictable. Approximately 83.0%
of the Company's fixed annuity policyholder balances were subject to
surrender charges at December 31, 1997.

As part of its asset-liability management discipline, the Company conducts
detailed computer simulations that model its fixed-maturity assets and
liabilities under commonly used stress-test interest rate scenarios. Based
on the results of these computer simulations, the investment portfolio has
been constructed with a view toward maintaining a desired investment spread
between the yield on portfolio assets and the interest credited on its
policyholder balances under a variety of possible future interest rate
scenarios. At December 31, 1997 the effective duration of the Company's
fixed maturities investments (including certain cash and cash equivalents)
was approximately 2.9. Effective duration is a common measure for the
price sensitivity of a fixed-income portfolio to changes in interest rates.
It measures the approximate percentage change in the market value of a
portfolio 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.

As a component of its investment strategy and to reduce its exposure to
interest rate risk, the Company utilizes interest rate swap agreements and
interest rate 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 45 outstanding swap agreements with an
aggregate notional principal amount of $2.6 billion and had 39 outstanding
swap agreements with an aggregate notional principal amount of $2.3 billion
as of December 31, 1997 and 1996, respectively.

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 principal) to hedge
against rising interest rates. The Company had interest rate cap agreements
with an aggregate notional amount of $250.0 million and $450.0 million as
of December 31, 1997 and 1996, respectively.

With respect to the Company's equity-indexed annuities, the Company buys
call options on the S&P 500 Index to hedge its obligations to provide
returns based upon this index. The Company had call options with a book
value of $323.3 million and $109.7 million as of December 31, 1997 and
1996, 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 and call option agreements are
financially responsible and that the counterparty risk associated with
these transactions is minimal. In addition, swap agreements have interest
rate risk and call options have stock market risk. However, the swap
agreements hedge fixed-rate assets; 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.
Similarly, the call options 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 call options 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 S&P 500 call options
increase less than (or decrease more than) the value of the guarantees made
to equity-indexed policyholders.

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. There were no non-income producing investments in the
Company's fixed maturity portfolio at December 31, 1997. 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.

Liquidity

The Company's liquidity needs and financial resources pertain to the
management of the general account assets and policyholder balances. The
Company uses cash for the payment of annuity and life insurance benefits,
operating expenses 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, 1997, $10.3 billion, or 76.2%, of the Company's general account
investments are considered readily marketable.

To the extent that unanticipated surrenders cause the Company to sell for
liquidity purposes a material amount of securities prior to their maturity,
such surrenders could have a material adverse effect on the Company.
Although no assurance can be given, the Company believes that liquidity to
fund withdrawals would be available through incoming cash flow, the sale of
short-term or floating-rate instruments, thereby precluding the sale of
fixed maturity investments in a potentially unfavorable market.

Current Rhode Island insurance law permits the payment of dividends or
distributions from the Company to Liberty Financial, which, together with
dividends and distributions paid during the preceding 12 months, do not
exceed the lesser of (i) 10% of statutory surplus as of the preceding
December 31 or (ii) the net gain from operations for the preceding fiscal
year. Any proposed dividend in excess of this amount is called an
"extraordinary dividend" and may not be paid until it is approved by the
Commissioner of Insurance of the State of Rhode Island. As of December 31,
1997, the amount of dividends that the Company could pay without such
approval was $70.3 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 existing computer programs 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. If not
corrected, many computer applications could fail or create erroneous
results by or at the Year 2000. This potential problem has become known as
the "Year 2000 issue". The Year 2000 issue affects virtually all companies
and organizations.

Computer applications which are affected by the Year 2000 issue could
impact Keyport's business functions in various ways, ranging from a
complete inability to perform critical business functions to a loss of
productivity in varying degrees. Likewise, the failure of some computer
applications could have no impact on critical business functions.

Keyport is assessing and addressing the Year 2000 issue by implementing a
four-step plan. The first two steps involve inventorying all the computer
applications which support Keyport's business functions and prioritizing
computer applications which are affected by the Year 2000 issue based upon
the degree of impact each has on the functioning of Keyport's business
units. The first two steps of the plan are substantially complete.

The final two steps of the four-step plan involve remediation of affected
computer applications (i.e., repairing or replacing programs, including
those which interface with third-party computer applications that have
unremediated Year 2000 issues, and appropriate testing) and reinstallation
of computer applications. For computer applications which are "mission
critical" (i.e., their failure would result in the complete inability to
perform critical business functions), Keyport expects to complete the final
two steps of the plan by December 31, 1998. Remediation and reinstallation
of non-critical computer applications is scheduled to be completed by
December 31, 1999.

Keyport believes that the Year 2000 issue could have a material impact on
Keyport's operations if the four-step plan is not timely implemented.
However, based upon the progress that is being made, Keyport believes that
the timetable for implementing the plan will be met and that the Year 2000
issue will not pose significant operational problems for its computer
systems.

Effects of Inflation

Inflation has not had a material effect on the Company's consolidated
results of operations to date. The Company manages its investment portfolio
in part to reduce its exposure to interest rate fluctuations. In general,
the fair value of the Company's fixed maturity portfolio increases or
decreases in inverse relationship with fluctuations in interest rates, and
the Company's net investment income increases or decreases in direct
relationship with interest rate changes. For example, if interest rates
decline the Company's fixed maturity investments generally will increase in
fair value, while net investment income will decrease as fixed maturity
investments mature or are sold and the proceeds are reinvested at reduced
rates. However, inflation may result in increased operating expenses that
may not be readily recoverable in the prices of the services charged by the
Company.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

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 21 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 21 herein.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

The consolidated financial statements of Keyport and also Liberty Financial
and its subsidiaries, including Keyport, for the years ended December 31,
1997 and 1996 have been audited and reported upon by Ernst & Young ("E&Y").
Similarly, E&Y will serve as independent auditors of Keyport and Liberty
Financial for 1998.

For fiscal years prior to 1996, the consolidated financial statements of
Keyport and Liberty Financial and its subsidiaries, were audited and
reported on by KPMG Peat Marwick LLP ("KPMG"). On March 13, 1996,
following a competitive proposal process, the Liberty Financial's Audit
Committee terminated KPMG's appointment as independent accountants for
Liberty Financial and its audited subsidiaries, including Keyport,
effective March 14, 1996, and voted to recommend to the Liberty Financial
Board of Directors that E&Y be appointed as Liberty Financial's
independent accountants for fiscal year 1996. The Liberty Financial Board
of Directors approved this recommendation on April 10, 1996. On April 11,
Keyport's Board of Directors approved such engagement of E&Y.

In connection with the audits of Keyport's financial statements for the
fiscal year in the period ended December 31, 1995, and the subsequent
interim period through March 14, 1996, there were no disagreements between
Keyport and KPMG on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to KPMG's satisfaction would have caused KPMG
to make reference to the subject matter of the disagreement in connection
with KPMG's audit reports on the financial statements of Keyport. In
addition, the audit reports of KPMG on the consolidated financial
statements of Keyport as of and for the fiscal year ended December 31, 1995
did not contain any adverse opinion or disclaimer of opinion, nor were such
reports qualified or modified as to uncertainty, audit scope, or accounting
principles.

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 $37.75 per
share, which was the closing price of the Common Stock on the New York
Stock Exchange on December 31, 1997 (the last trading day of 1997). None
of the named executive officers received any perquisites during 1997
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 two 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.
Rosensteel, 1997 420,000 330,000 149,625 18,750 26,937
President 1996 396,500 275,000 -- 22,500 27,994
and Chief
Executive
Officer

Paul H.
LeFevre, Jr., 1997 315,000 205,000 85,500 9,000 24,971
Executive 1996 275,000 155,000 -- 13,500 15,638
Vice
President

Stephen B.
Bonner, (4) 1997 275,000 150,000 64,125 7,500 175,707
Senior Vice 1996 80,754 -- -- 17,414
President
and Chief Sales
Officer

Francis E.
Reinhart, 1997 245,000 115,000 -- 11,250 18,790
Senior Vice 1996 233,000 105,000 -- 11,250 13,136
President
and Chief
Information
Officer

Stewart R.
Morrison, 1997 230,000 130,000 42,750 8,250 13,205
Senior Vice 1996 182,700 54,000 -- 6,000 11,170
President &
Chief
Investment
Officer

1 The amounts presented are bonuses earned in 1997 and paid in 1998, or
earned in 1996 and paid in 1997, respectively.

2 The number of shares and value of restricted stock held by the named
executive officers as of December 31, 1997 is as follows: Mr. Rosensteel:
5,250 shares, $198,188; Mr. LeFevre: 3,000 shares, $113,250; Mr. Bonner:
2,250 shares, $84,938; Mr. Morrison: 1,500 shares, $56,625. All such
shares will vest 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. Liberty Financial pays dividends on all such shares, and
the recipients are entitled to retain all such dividends regardless of any
future forfeitures.

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, $21,937 in 1997 and $22,994 in 1996; Mr. LeFevre,
$24,971 in 1997 and $15,638 in 1996; Mr. Bonner, $4,125 in 1997 and $0 in
1996; Mr. Reinhart, $18,790 in 1997 and $13,136 in 1996; and Mr. Morrison,
$13,205 in 1997 and $11,170 in 1996; (c) in the case of Mr. Bonner, $75,000
for a signing bonus paid in 1997; and (d) in the case of Mr. Bonner,
$96,582 in 1997 and $17,414 in 1996 of moving expenses reimbursement.

4 Mr. Bonner became an executive officer of Keyport effective November 7,
1996.

Option Grant Table. The following table sets forth certain information
regarding options to purchase Common Stock granted during 1997 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 18,750 2.4% 28.50 5/13/07 336,006 851,656

Paul H.
LeFevre, Jr. 9,000 1.2% 28.50 5/13/07 161,311 408,795

Stephen B.
Bonner 7,500 1.0% 28.50 5/13/07 134,426 340,662

Francis E.
Reinhart 11,250 1.4% 28.50 5/13/07 201,639 510,994

Stewart R.
Morrison 6,000 0.8% 28.50 5/13/07 107,541 272,530

1 Each option becomes exercisable in four equal annual installments
commencing on May 14, 1998, and vests in full upon the death, disability or
retirement (after age 60) of the optionee.

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 appreciation 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 1997 exercises of stock options and
(ii) the stock options held as of December 31, 1997 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 9,450 234,078 86,536 59,359 2,154,228 950,858

Paul H.
LeFevre, Jr. 23,500 677,490 54,373 24,753 1,568,396 358,533

Stephen B.
Bonner ---- ---- ---- 7,500 ---- 69,375

Francis E.
Reinhart 20,200 512,000 16,313 24,191 498,505 329,605

Stewart R.
Morrison 5,062 78,692 ---- 15,190 ---- 253,733

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 $ 52,178 $ 69,570 $ 86,963 $ 93,629 $100,296
400,000 106,178 141,570 176,963 190,296 203,629
600,000 160,178 213,570 266,963 286,963 306,963
800,000 214,178 285,570 356,963 383,629 410,296
1,000,000 268,178 357,570 446,963 480,296 513,629
1,200,000 322,178 429,570 536,963 576,963 616,963

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 compensation covered by the
Pension Plans for each participating executive officer in the above summary
compensation table is as follows: Mr. Rosensteel, $695,000; Mr. LeFevre,
$470,000; Mr. Bonner, $325,000; Mr. Reinhart, $350,000 and Mr. Morrison,
$305,000. 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, 1997, the executive officers
named in the above summary compensation table had the following full
credited years of service under the Pension Plans: Mr. Rosensteel, 5 years;
Mr. LeFevre, 18 years; Mr. Bonner, 1 years; Mr. Reinhart, 13 years; and Mr.
Morrison, 7 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 20,
1998, options issued and outstanding under the 1990 Plan included 82,141
shares held by Mr. Rosensteel (69,659 of which were vested), 45,372 shares
held by Mr. LeFevre (all of which were vested); and 16,000 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), all non-vested options will automatically
vest and 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 formula
value of the Common Stock (as defined in the 1990 Plan) and the exercise
price of the options.

Compensation of Directors. Directors of Keyport who are also employees
receive no compensation in addition to their compensation as employees of
Keyport. The three outside directors (Lippitt, Ballou, 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
Independent Auditors' Report F-1a
Consolidated Balance Sheet, December 31, 1997 and 1996 F-2
Consolidated Income Statement for the Years Ended
December 31, 1997, 1996 and 1995 F-3
Consolidated Statement of Stockholder's Equity for
the Years Ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statement of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6 through F-20

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 1997.

Keyport Life Insurance Company

Audited Consolidated Financial Statements

Years ended December 31, 1997 and 1996

Contents

Report of Independent Auditors..................................F-1
Independent Auditors' Report....................................F-1a

Audited Consolidated Financial Statements

Consolidated Balance Sheet......................................F-2
Consolidated Income Statement...................................F-3
Consolidated Statement of Stockholder's Equity..................F-4
Consolidated Statement of Cash Flows............................F-5
Notes to Consolidated Financial Statements......................F-6

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, 1997 and 1996, and the related consolidated
statements of income, stockholder's equity, and cash flows for the years
then ended. 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 and schedules 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, 1997 and 1996,
and the consolidated results of its operations and its cash flows for the
years then ended 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
Boston, Massachusetts
February 3, 1998

Independent Auditors' Report

The Board of Directors Keyport Life Insurance Company

We have audited the consolidated financial statements of Keyport Life
Insurance Company and subsidiaries for the year ended December 31, 1995 as
listed in the accompanying index. In connection with our audit of the
consolidated financial statements, we also have audited the financial
statement Schedule III ("the financial statement schedule") as of December
31, 1995 and for the year then ended as listed in the accompanying index.
These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements and
financial statement schedule based on our audit.

We conducted our audit 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 significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects the results of operations and cash
flows for Keyport Life Insurance Company and subsidiaries for the year
ended December 31, 1995, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects, the information
set forth therein.

/s/KPMG Peat Marwick LLP
Boston, Massachusetts
February 16, 1996

KEYPORT LIFE INSURANCE COMPANY

CONSOLIDATED BALANCE SHEET
(in thousands)

December 31
ASSETS 1997 1996

Cash and investments:
Fixed maturities available for sale
(amortized cost: 1997 - $10,981,618;
1996 - $10,500,431) $11,246,539 $10,718,644
Equity securities (cost: 1997 - $21,950;
1996 - $19,412) 40,856 35,863
Mortgage loans 60,662 67,005
Policy loans 554,681 532,793
Other invested assets 440,773 183,622
Cash and cash equivalents 1,162,347 767,385
Total cash and investments 13,505,858 12,305,312

Accrued investment income 165,035 146,778
Deferred policy acquisition costs 232,039 250,355
Value of insurance in force 53,298 70,819
Income taxes recoverable 22,537 323
Intangible assets 18,058 19,186
Other assets 16,175 40,316
Separate account assets 1,329,189 1,091,468

Total assets $15,342,189 $13,924,557

LIABILITIES AND STOCKHOLDER'S EQUITY

Liabilities:

Policy liabilities $12,086,076 $11,637,528
Current income taxes - 13,123
Deferred income taxes 133,003 25,747
Payable for investments purchased and loaned 722,116 211,234
Other liabilities 34,015 38,476
Separate account liabilities 1,263,958 1,017,667
Total liabilities 14,239,168 12,943,775

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
Net unrealized investment gains 82,277 73,599
Retained earnings 511,796 398,235
Total stockholder's equity 1,103,021 980,782

Total liabilities and
stockholder's equity $15,342,189 $13,924,557

KEYPORT LIFE INSURANCE COMPANY

CONSOLIDATED INCOME STATEMENT(in thousands)

Year ended December 31

1997 1996 1995

Revenues:
Investment income $ 847,048 $ 790,365 $ 755,930
Interest credited to policyholders (594,084) (572,719) (555,725)
Investment spread 252,964 217,646 200,205
Net realized investment gains
(losses) 24,723 5,509 (3,958)
Fee income:
Surrender charges 15,968 14,934 14,772
Separate account fees 17,124 15,987 13,154
Management fees 3,261 2,613 1,841
Total fee income 36,353 33,534 29,767

Expenses:
Policy benefits (3,924) (3,477) (4,448)
Operating expenses (49,941) (43,815) (44,475)
Amortization of deferred policy
acquisition costs (75,906) (60,225) (58,541)
Amortization of value of insurance
in force (10,490) (10,196) (9,479)
Amortization of intangible assets (1,128) (1,130) (1,130)
Total expenses (141,389) (118,843) (118,073)

Income before income tax expense 172,651 137,846 107,941
Income tax expense (59,090) (47,222) (38,331)

Net income $ 113,561 $ 90,624 $ 69,610

KEYPORT LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(in thousands)

Net
Unrealized
Additional Investment
Common Paid-in Gains Retained
Stock Capita l (Losses) Earnings Total

Balance,
January 1, 1995 $3,015 $505,933 $ (64,464) $238,001 $ 682,485

Net income 69,610 69,610
Change in net
unrealized
investment
gains (losses) 150,236 150,236

Balance,
December 31, 1995 3,015 505,933 85,772 307,611 902,331

Net income 90,624 90,624
Change in net
unrealized
investment
gains (losses) (12,173) (12,173)

Balance,
December 31, 1996 3,015 505,933 73,599 398,235 980,782

Net income 113,561 113,561
Change in net
unrealized
investment
gains (losses) 8,678 8,678

Balance,
December 31, 1997 $3,015 $505,933 $ 82,277 $511,796 $1,103,021

KEYPORT LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)

Year ended December 31
1997 1996 1995

Cash flows from operating
activities:
Net income $ 113,561 $ 90,624 $ 69,610
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Interest credited to
policyholders 594,084 572,719 555,725
Net realized investment
(gains) losses (24,723) (5,509) 3,958
Amortization of value of
insurance in force and
intangible assets 11,618 11,326 10,609
Net amortization on
investments 29,862 (29,088) 9,688
Change in deferred policy
acquisition costs (10,252) (24,403) (24,630)
Change in current and
deferred income taxes 66,919 4,938 1,953
Net change in other assets
and liabilities 1,746 (42,634) (62,375)
Net cash provided by
operating activities 782,815 577,973 564,538

Cash flow from investing activities:
Investments purchased -
available for sale (4,543,374) (4,363,074) (2,851,013)
Investments sold -
held to maturity - - 14,930
Investments sold -
available for sale 2,563,465 1,714,023 605,197
Investments matured -
held to maturity - - 317,773
Investments matured -
available for sale 1,531,693 1,387,664 906,522
Increase in policy loans (21,888) (34,467) (21,033)
Decrease in mortgage loans 6,343 7,500 54,947
Other assets purchased, net (48,921) (130,087) -
Value of business acquired,
net of cash - (30,865) -
Net cash used in
investing activities (512,682) (1,449,306) (972,677)

Cash flows from financing
activities:
Withdrawals from policyholder
accounts (1,320,837) (1,154,087) (933,785)
Deposits to policyholder
accounts 950,472 2,134,504 1,116,975
Securities lending 495,194 (119,083) 317,715
Net cash provided by
financing activities 124,829 861,334 500,905

Change in cash and
cash equivalents 394,962 (9,999) 92,766
Cash and cash equivalents
at beginning of year 767,385 777,384 684,618

Cash and cash equivalents at
end of year $ 1,162,347 $ 767,385 $ 777,384

KEYPORT LIFE INSURANCE COMPANY

Notes to Consolidated Financial Statements

December 31, 1997

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
saving market. These annuity products are sold through a wide ranging
network of banks, agents, and securities dealers.

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"), Liberty Advisory Services Corporation, 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 stockholder's equity. 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.

KEYPORT LIFE INSURANCE COMPANY

Notes to Consolidated Financial Statements (continued)

1. Accounting Policies (continued)

On December 31, 1995, pursuant to the "Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities,"
the Company made a one-time reclassification of certain fixed maturity
securities from held to maturity to available for sale. The amortized cost
of those securities at the time of transfer was $1.4 billion, and the
unrealized gain of $13.9 million was recorded net of taxes in stockholder's
equity.

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 $117.3 million and $72.6 million at December 31, 1997
and 1996, respectively.

Derivatives

The Company uses interest rate swap and cap agreements to manage its
interest rate risk and call options 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
included in stockholder's equity.

Premiums paid on call options are amortized to 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.

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
stockholder's equity. Deferred policy acquisition costs have been
decreased by $126.9 million at December 31, 1997 and decreased by $103.7
million at December 31, 1996, relating to this adjustment.

KEYPORT LIFE INSURANCE COMPANY

Notes to Consolidated Financial Statements (continued)

1. Accounting Policies (continued)

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 15 years for
annuities and 25 years for life insurance. Interest is accrued on the
unamortized balance at the contract rate of 5.34%, 5.30% and 5.58% for the
years ended December 31, 1997, 1996 and 1995, 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 stockholder's equity.
Value of insurance in force has decreased by $31.8 million at December 31,
1997 and decreased by $26.0 million at December 31, 1996, relating to this
adjustment.

Estimated net amortization expense of the value of insurance in force as of
December 31, 1997 is as follows (in thousands): 1998 - $8,701; 1999 -
$10,890; 2000 - $9,926; 2001 - $8,711; 2002 - $7,694; and thereafter -
$39,220.

Intangible Assets

Intangible assets consist of goodwill arising from business combinations
accounted for as a purchase. Amortization is provided on a straight-line
basis over 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, 1997 and
1996, Keyport also classified as separate account assets $65.2 million and
$73.8 million, respectively, investments in certain mutual funds sponsored
by affiliates of the Company and other investments.
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 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. 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.

KEYPORT LIFE INSURANCE COMPANY

Notes to Consolidated Financial Statements (continued)

1. Accounting Policies (continued)

Recent Accounting Pronouncements

In January 1998, the FASB voted to proceed with the drafting of an
accounting standard titled "Accounting for Derivative Instruments and for
Hedging Activities." This accounting standard requires companies to report
derivatives on the balance sheet at fair value with changes in fair value
recorded in income or equity. The accounting standard also changes the
accounting for derivatives used in hedging strategies from traditional
deferral accounting to a current recognition approach which could impact a
company's income statement and balance sheet and expand the definition of a
derivative instrument. The Company is evaluating the impact of this
accounting standard. This accounting standard will become effective in
2000.

In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS 125"). The relevant provisions of
SFAS 125 relating to securities lending, dollar rolls, and other similar
secured transactions become effective in 1998. It is not expected that the
adoption of SFAS 125 will have a material effect on the Company's
consolidated financial position or results of operations.

2. Acquisitions

On August 9, 1996, Keyport 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, 1997 and 1996, 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, 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

Gross Gross
Amortized Unrealized Unrealized
December 31, 1996 Cost Gains Losses Fair Value

U.S. Treasury securities $ 35,308 $ 130 $ (87) $ 35,351
Mortgage backed securities
of U.S. government
corporations and agencies 1,689,989 41,783 (8,618) 1,723,154
Debt securities issued by
foreign governments 246,339 11,718 (554) 257,503
Corporate securities 4,093,473 153,422 (12,298) 4,234,597
Other mortgage backed
securities 2,413,020 47,596 (23,970) 2,436,646
Asset backed securities 1,736,012 15,531 (6,440) 1,745,103
Senior secured loans 286,290 - - 286,290

Total fixed maturities $10,500,431 $270,180 $ (51,967) $10,718,644

KEYPORT LIFE INSURANCE COMPANY

Notes to Consolidated Financial Statements (continued)

3. Investments (continued)

At December 31, 1997, gross unrealized gains on equity securities, interest
rate cap agreements and investments in separate accounts aggregated $27.4
million, and gross unrealized losses aggregated $6.9 million, respectively.
At December 31, 1996, gross unrealized gains on equity securities, interest
rate cap agreements and investments in separate accounts aggregated $29.9
million, and gross unrealized losses aggregated $5.3 million, respectively.

Contractual Maturities

The amortized cost and fair value of fixed maturities by contractual
maturity as of December 31, 1997 are as follows (in thousands):

December 31, 1997 Amortized Cost Fair Value

Due in one year or less $ 147,177 $ 147,503
Due after one year through five years 1,925,739 1,926,372
Due after five years through ten years 2,350,299 2,419,857
Due after ten years 942,016 986,119
5,365,231 5,479,851
Mortgage and asset backed securities 5,616,387 5,766,688
$10,981,618 $11,246,539

Actual maturities will differ in some cases from those shown above because
borrowers may have the right to call or prepay obligations.

Net Investment Income

Net investment income is summarized as follows (in thousands):

Year Ended December 31 1997 1996 1995

Fixed maturities $ 811,688 $ 737,372 $ 681,998
Mortgage loans and other
invested assets 27,833 11,422 12,881
Policy loans 32,224 30,188 28,485
Equity securities 5,443 4,494 4,807
Cash and cash equivalents 34,449 36,138 41,643
Gross investment income 911,637 819,614 769,814
Investment expenses (15,311) (12,708) (10,837)
Amortization of options and
interest rate caps (49,278) (16,541) (3,047)
Net investment income $ 847,048 $ 790,365 $ 755,930
KEYPORT LIFE INSURANCE COMPANY

Notes to Consolidated Financial Statements (continued)

3. Investments (continued)

There were no non-income producing fixed maturity investments as of
December 31, 1997 or 1996.

Net Realized Investment Gains (Losses)

Net realized investment gains (losses) are summarized as follows (in
thousands):

Year Ended December 31 1997 1996 1995

Fixed maturities held to maturity:
Gross gains $ - $ - $ 1,306
Gross losses - - (64)

Fixed maturities available for sale:
Gross gains 42,464 24,304 8,156
Gross losses (19,146) (17,814) (15,982)

Equity securities (51) 1,492 (405)
Investments in separate accounts 7,912 (576) 1,684
Interest rate swaps - - (860)
Other - (208) (13)
Gross realized investment gains
(losses) 31,179 7,198 (6,178)

Amortization adjustments of deferred
policy acquisition costs
and value of insurance inforce (6,456) (1,689) 2,220

Net realized investment gains (losses) $ 24,723 $ 5,509 $ (3,958)

Proceeds from sales of fixed maturities available for sale were $2.6
billion, $1.7 billion and $565.4 million, for the years ended December 31,
1997, 1996 and 1995, respectively. The sale of fixed maturities held to
maturity during 1995 relate to certain securities, with amortized cost of
$15.0 million, which were sold specifically due to a decline in the
issuers' credit quality.
KEYPORT LIFE INSURANCE COMPANY

Notes to Consolidated Financial Statements (continued)

3. Investments (continued)

Deferred tax liabilities for the Company's unrealized investment gains and
losses, net of adjustments to deferred policy acquisition costs and value
of insurance inforce were $44.3 million and $39.5 million at December 31,
1997 and 1996, 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, 1997.

At December 31, 1997, the Company did not have a material concentration of
financial instruments in a single investee, industry or geographic
location.

At December 31, 1997, $1.1 billion of fixed maturities were below
investment grade.

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 1997 1996 1997 1997 1996 1996

Interest rate cap
agreements $ 250,000 $ 450,000 $ 102 $ 102 $ 1,363 $ 1,363
Indexed call
options - - 323,343 345,294 109,701 122,395
Interest rate
swaps 2,575,000 2,275,000 (42,123) (42,123) (8,753) (8,753)

The interest rate swap agreements expire in 1998 to 2001. The interest
rate cap agreements expire in 1999 through 2000. The call options'
maturities range from 1998 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 are used for purposes of
hedging the Company's equity-indexed products. The call options hedge the
interest credited on these 1, 5 and 7 year term products, which is based on
the changes in the S&P 500 Index. At December 31, 1997 and 1996, the
Company had approximately $155.0 million and $73.1 million, respectively,
of unamortized premium in call option contracts.

KEYPORT LIFE INSURANCE COMPANY

Notes to Consolidated Financial Statements (continued)

4. Derivatives (continued)

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 are based quoted market
prices.

Deferred losses of $5.1 million and $7.9 million as of December 31, 1997
and 1996, respectively, resulting from terminated interest rate swap
agreements are included with the related fixed maturity securities to which
the hedge applied and are being amortized over the life of such securities.

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.

5. Income Taxes

Income tax expense (benefit) is summarized as follows (in thousands):

Year Ended December 31 1997 1996 1995

Current $ (48,477) $ 52,369 $ 37,746
Deferred 107,567 (5,147) 585
$ 59,090 $ 47,222 $ 38,331

A reconciliation of income tax expense with expected federal income tax
expense computed at the applicable federal income tax rate of 35% is as
follows (in thousands):

Year Ended December 31 1997 1996 1995

Expected income tax expense $ 60,427 $ 48,246 $ 37,779
Increase (decrease) in income
taxes resulting from:
Nontaxable investment income (1,416) (1,216) (1,737)
Amortization of goodwill 396 396 396
Other, net (317) (204) 1,893
Income tax expense $ 59,090 $ 47,222 $ 38,331

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 1997 1996

Deferred tax assets:
Policy liabilities $ 124,250 $ 171,327
Guaranty fund expense 2,795 6,260
Net operating loss carryforwards 2,111 2,667
Other 1,205 3,915
Total deferred tax assets 130,361 184,169

Deferred tax liabilities:
Deferred policy acquisition costs (56,331) (63,076)
Value of insurance in force and
intangible assets (18,022) (20,539)
Excess of book over tax basis of
investments (178,697) (118,403)
Separate account asset (645) (4,557)
Deferred loss on interest rate swaps (1,792) (2,765)
Other (7,877) (576)
Total deferred tax liabilities (263,364) (209,916)
Net deferred tax liability $ (133,003) $ (25,747)

As of December 31, 1997, the Company had approximately $6.0 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 refunded were $8.0 million in 1997 and income taxes paid were
$46.9 million and $44.7 million in 1996 and 1995, respectively.

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. Plan assets
consist principally of investments in certain mutual funds sponsored by an
affiliated company.

KEYPORT LIFE INSURANCE COMPANY

Notes to Consolidated Financial Statements (continued)

6. Retirement Plans (continued)

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.

The following table sets forth the Plans' funded status.

December 31 1997 1996
(Dollars in thousands)

Actuarial present value of benefit obligations:
Vested benefit obligations $ 8,374 $ 7,172
Accumulated benefit obligation $ 9,500 $ 7,963

Projected benefit obligation $ 12,594 $ 10,559
Plan assets at fair value (7,801) (6,399)
Projected benefit obligation in excess of the
Plans' assets 4,793 4,160
Unrecognized net actuarial loss (1,727) (1,496)
Prior service cost not yet recognized in net
periodic pension cost (160) (183)
Accrued pension cost $ 2,906 $ 2,481

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 1997 1996 1995

Pension cost includes the following components:
Service cost benefits earned during the period $ 804 $ 717 $ 541
Interest cost on projected benefit obligation 829 725 603
Actual return on Plan assets (898) (732) (999)
Net amortization and deferred amounts 396 357 600
Total net periodic pension cost $1,131 $1,067 $ 745

Discount rate 7.25% 7.50% 7.25%
Rate of increase in compensation level 5.00% 5.25% 5.25%
Expected long-term rate of return on assets 8.50% 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, 1997, 1996 and 1995,
expenses related to these defined contribution plans totaled (in thousands)
$702, $590 and $595, respectively.

KEYPORT LIFE INSURANCE COMPANY

Notes to Consolidated Financial Statements (continued)

7. Fair Value of Financial Instruments

The following discussion outlines the methodologies and assumptions used to
determine the 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 fair values of financial instruments:

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.

KEYPORT LIFE INSURANCE COMPANY

Notes to Consolidated Financial Statements (continued)

7. Fair Value of Financial Instruments (continued)

The fair values and carrying values of the Company's financial instruments
are as follows (in thousands):

December 31 1997 1996
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Fixed maturity securities $11,246,539 $11,246,539 $10,718,644 $10,718,644
Equity securities 40,856 40,856 35,863 35,863
Mortgage loans 60,662 63,007 67,005 73,424
Policy loans 554,681 554,681 532,793 532,793
Other invested assets 440,773 462,724 183,622 196,316
Cash and cash equivalents 1,162,347 1,162,347 767,385 767,385

Liabilities:
Policy liabilities 12,086,076 11,366,534 11,637,528 11,127,352

8. Quarterly Financial Data, in thousands (unaudited)

Quarter Ended 1997 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

Quarter Ended 1996 March 31 June 30 September 30 December 31

Investment income $ 187,728 $ 188,334 $ 200,253 $ 214,050
Interest credited to
policyholders (138,109) (136,161) (146,071) (152,378)
Investment spread 49,619 52,173 54,182 61,672
Net realized
investment gains
(losses) 2,052 (2,487) 755 5,189
Fee income 7,769 8,006 9,015 8,744
Pretax income 30,340 29,650 34,575 43,281
Net income 19,688 19,943 22,289 28,704

KEYPORT LIFE INSURANCE COMPANY

Notes to Consolidated Financial Statements (continued)

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 1997 1996 1995

Statutory surplus $ 702,610 $ 567,735 $ 535,179
Statutory net income 107,130 40,237 38,264

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, 1997, 1996
and 1995. 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 $7.8 million for the years ended December 31, 1997 and 1996 and $7.6
million for the year ended December 31, 1995. In addition, certain
affiliated companies distribute the Company's products and were paid $7.2
million, $6.4 million and $7.6 million by the Company for the years ended
December 31, 1997, 1996, and 1995, respectively.

Keyport has 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 has
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, 1997 and 1996, the amounts outstanding were $39.5 million.

Dividend payments to Liberty Financial from the Company are governed by
insurance laws which 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, 1997, the maximum amount of dividends
(based on statutory surplus and statutory net gains from operations) which
may be paid by Keyport was approximately $70.3 million without such
approval.

KEYPORT LIFE INSURANCE COMPANY

Notes to Consolidated Financial Statements (continued)

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 $3,408,
$3,213 and $3,221 for the years ended December 31, 1997, 1996 and 1995,
respectively. For each of the next five years, and in the aggregate, as of
December 31, 1997, the following are the minimum future rental payments
under noncancelable operating leases having remaining terms in excess of
one year (in thousands):

Year Payments

1998 $ 3,536
1999 3,505
1990 3,273
2001 3,178
2002 288
Thereafter 1,248
$ 15,028

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 1997, 1996 and 1995, the Company was assessed $5.9 million, $10.0
million, and $8.1 million, respectively. During 1997, 1996 and 1995, the
Company recorded $1.0 million, $1.0 million, and $2.0 million,
respectively, of provisions for state guaranty fund association expense. At
December 31, 1997 and 1996, the reserve for such assessments was $8.0
million and $12.9 million, respectively.

Schedule I

KEYPORT LIFE INSURANCE COMPANY
SUMMARY OF INVESTMENTS
(in thousands)

December 31, 1997
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 $1,218,389 $1,267,390 $1,267,390
Foreign governments 272,559 280,287 280,287
Corporate and other securities 7,164,782 7,293,666 7,293,666
Mortgage backed securities 2,325,889 2,405,196 2,405,196
Total fixed maturities 10,981,619 11,246,539 11,246,539
Equity securities:
Common stocks:
Industrial, miscellaneous
and all other 21,950 40,856 40,856
Mortgage loans on real estate1 60,662 63,007 60,662
Policy loans 554,681 554,681 554,681
Other long term investments 440,773 462,724 440,773

Total investments $12,059,685 $12,367,807 $12,343,511

1 Includes mortgage notes relating to certain investment property owned
by Liberty Mutual in the amount of $39,500 at December 31, 1997.
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, 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

December 31, 1995
Interest sensitive
products $179,672 $10,063,312 NA $21,080 $27,926

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, 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

December 31, 1995
Interest sensitive
products $755,930 $560,173 $58,541 $55,084 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 27, 1998.

Keyport Life Insurance Company

By: /s/ John W. Rosensteel
------------------------
John W. Rosensteel
President and
Chief Executive Officer

Signature Title Date

/s/ Kenneth R. Leibler * Chairman of the Board March 27, 1998
Kenneth R. Leibler

/s/ John W. Rosensteel President and Chief Executive March 27, 1998
John W. Rosensteel Officer

/s/ Bernhard M. Koch Senior Vice President and March 27, 1998
Bernard M. Koch Chief Financial Officer
(Principal Financial Officer)

/s/ Jeffery J. Whitehead Vice President and Treasurer March 27, 1998
Jeffery J. Whitehead (Principal Accounting Officer)

/s/ F. Remington Ballou * Director March 27, 1998
F. Remington Ballou

/s/ Frederick Lippit * Director and Assistant March 27, 1998
Frederick Lippit Secretary

/s/ Robert C. Nyman * Director March 27, 1998
Robert C. Nyman

* John W. Rosensteel 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. 6 to
Registration Statement on Form N-4 filed on or about November 14, 1997
(File No. 333-1043; 811-7543).

Exhibit Index

Exhibit
Nmber Description Page

2 Subsidiaries of the Company 25

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 Consent of Independent Auditors

24 Powers of Attorney are incorporated by reference to Post-
Effective Amendment No. 6 to Registration Statement on
Form N-4 (File No. 333-1043) filed on or about November
14, 1997

27 Financial Data Schedule

Exhibit 2

KEYPORT LIFE INSURANCE COMPANY
SUBSIDIARIES OF THE COMPANY

Independence Life & Annuity Company

Liberty Advisory Services Corp.

Keyport Financial Services Corp.

American Benefit Life Insurance Company
(to be renamed Keyport Benefit Life Insurance Company on or
about April 1, 1998)

Exhibit 23

Consent of Independent Auditors

We consent to the inclusion of our report dated February 3, 1998, with
respect to the consolidated financial statements and schedules of Keyport
Life Insurance Company included in the Annual Report (Form 10-K Nos. 33-
3630 and 333-1783) for the year ended December 31, 1997.

/s/ERNST & YOUNG LLP

Boston, Massachusetts
March 25, 1998