SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  to

Commission file numbers 33-3630, 333-1783 and 333-13609

KEYPORT LIFE INSURANCE COMPANY

(Exact name of registrant as specified in its charter)

Rhode Island                                                          05-0302931

(State of other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)



125 High Street, Boston, Massachusetts                                    02110-2712

(Address of principal executive offices)                                           (Zip Code)



(617) 526-1400

(Registrant's telephone number, including area code)





(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.         [X] Yes      [   ] No

There were 2,412,000 shares of the registrant's Common Stock, $1.25 par value, outstanding as of September 30, 2001.



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KEYPORT LIFE INSURANCE COMPANY

QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTMEBER 30, 2001



TABLE OF CONTENTS



|Part I.    | FINANCIAL INFORMATION                                                      | Page 
|---------- | -------------------------------------------------------------------------- | -----
|           |                                                                            |      
|Item 1.    | Financial Statements                                                       |      
|           |                                                                            |      
|           | Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 | 3    
|           |                                                                            |      
|           | Consolidated Statements of Operations for the Three and Nine Months        |      
|           | Ended September 30, 2001 and 2000                                          | 4    
|           |                                                                            |      
|           | Consolidated Statements of Cash Flows for the Nine Months Ended            |      
|           | September 30, 2001 and 2000                                                | 5    
|           |                                                                            |      
|           | Notes to Consolidated Financial Statements                                 | 6-9  
|           |                                                                            |      
|Item 2.    | Management's Discussion and Analysis of Results of Operations and          |      
|           | Financial Condition                                                        | 10-18
|           |                                                                            |      
|Item 3.    | Quantitative and Qualitative Disclosures About Market Risk                 | 18   
|           |                                                                            |      
|Part II.   | OTHER INFORMATION                                                          |      
|           |                                                                            |      
|Item 6.    | Exhibits and Reports on Form 8-K                                           | 19   
|           |                                                                            |      
|Signatures |                                                                            | 20   
|           |                                                                            |      

2



KEYPORT LIFE INSURANCE COMPANY

CONSOLIDATED BALANCE SHEETS

(in thousands)

|                                                                         | September 30, | December 31,
|------------------------------------------------------------------------ | ------------- | ------------
|ASSETS                                                                   | 2001          |             
|                                                                         | (Unaudited)   |             
|Cash and investments:                                                    |               |             
|Fixed maturities available for sale (amortized cost:  2001 - $10,554,094 |               |             
|2000 - $10,728,519)                                                      | $  10,829,092 |             
|Equity securities (cost:  2001 - $69,383; 2000 - $71,489)                | 57,739        |             
|Mortgage loans                                                           | 7,488         |             
|Policy loans                                                             | 633,192       |             
|Other invested assets                                                    | 471,072       |             
|Cash and cash equivalents                                                | 1,815,502     |             
|Total cash and investments                                               | 13,814,085    |             
|                                                                         |               |             
|Accrued investment income                                                | 142,782       |             
|Deferred policy acquisition costs                                        | 531,016       |             
|Intangible assets                                                        | 14,628        |             
|Income taxes recoverable                                                 | 40,437        |             
|Receivable for investments sold                                          | 32,586        |             
|Other assets                                                             | 201,640       |             
|Separate account assets                                                  | 3,853,278     |             
|                                                                         |               |             
|Total assets                                                             | $  18,630,452 |             
|                                                                         |               |             
|LIABILITIES AND STOCKHOLDER'S EQUITY                                     |               |             
|                                                                         |               |             
|Liabilities:                                                             |               |             
|Policy liabilities                                                       | $  12,033,291 |             
|Income taxes payable                                                     | -             |             
|Deferred income taxes                                                    | 166,413       |             
|Payable for investments purchased and loaned                             | 1,220,918     |             
|Other liabilities                                                        | 41,533        |             
|Separate account liabilities                                             | 3,823,420     |             
|Total liabilities                                                        | 17,285,575    |             
|                                                                         |               |             
|Stockholder's equity:                                                    |               |             
|Common stock, $1.25 par value; authorized 8,000 shares;                  |               |             
|issued and outstanding 2,412 shares                                      | 3,015         |             
|Additional paid-in capital                                               | 505,933       |             
|Retained earnings                                                        | 796,439       |             
|Accumulated other comprehensive income (loss)                            | 39,490        |             
|Total stockholder's equity                                               | 1,344,877     |             
|                                                                         |               |             
|Total liabilities and stockholder's equity                               | $  18,630,452 |             

3



KEYPORT LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

Unaudited



|                                                    | Three Months Ended |  | Nine Months Ended
|--------------------------------------------------- | ------------------ |  | -----------------
|                                                    | September 30,      |  | September 30,    
|                                                    | 2001               |  | 2000             
|                                                    |                    |  |                  
|Revenues:                                           |                    |  |                  
|Net investment income, including distributions      |                    |  |                  
|from private equity limited partnerships            | $  195,391         |  | $  212,896       
|Interest credited to policyholders                  | 148,099            |  | 135,758          
|Investment spread                                   | 47,292             |  | 77,138           
|Net realized investment losses                      | (14,021)           |  | (12,358)         
|Net derivative losses                               | (6,537)            |  | -                
|Net change in unrealized and undistributed          |                    |  |                  
|(losses)/gains in private equity limited            |                    |  |                  
|partnerships                                        | (2,483)            |  | 5,895            
|Fee income:                                         |                    |  |                  
|Surrender charges                                   | 3,681              |  | 6,031            
|Separate account income                             | 12,366             |  | 11,766           
|Management fees                                     | 1,748              |  | 1,522            
|Total fee income                                    | 17,795             |  | 19,319           
|                                                    |                    |  |                  
|Expenses:                                           |                    |  |                  
|Policy benefits                                     | 1,558              |  | 941              
|Operating expenses                                  | 16,975             |  | 15,438           
|Amortization of deferred policy acquisition costs   | 24,175             |  | 26,931           
|Amortization of intangible assets                   | 315                |  | 315              
|Total expenses                                      | 43,023             |  | 43,625           
|                                                    |                    |  |                  
|(Loss) income before income taxes and cumulative    |                    |  |                  
|effect of accounting changes                        | (977)              |  | 46,369           
|Income tax (benefit) expense                        | (2,446)            |  | 9,735            
|                                                    |                    |  |                  
|Income before cumulative effect of                  |                    |  |                  
|accounting changes                                  | 1,469              |  | 36,634           
|Cumulative effect of accounting changes, net of tax | -                  |  | -                
|                                                    |                    |  |                  
|Net income (loss)                                   | $ 1,469            |  | $   36,634       

4

KEYPORT LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Unaudited



|                                                                     | Nine Months Ended
|-------------------------------------------------------------------- | -----------------
|                                                                     | September 30,    
|                                                                     | 2001             
|                                                                     |                  
|                                                                     |                  
|Cash flows from operating activities:                                |                  
|Net (loss) income                                                    | $     (1,167)    
|Cumulative effect of accounting changes                              | 60,847           
|Non-cash derivative activity                                         | 95,171           
|Adjustments to reconcile net income to net cash                      |                  
|provided by operating activities:                                    |                  
|Interest credited to policyholders                                   | 449,954          
|Net realized investment losses                                       | 31,814           
|Net change in unrealized and undistributed (losses) gains in private |                  
|equity limited partnerships                                          | 17,088           
|Net (accretion) amortization on investments                          | (11,913)         
|Change in deferred policy acquisition costs                          | (55,267)         
|Change in current and deferred                                       |                  
|income taxes                                                         | (48,309)         
|Net change in other assets and liabilities                           | (91,015)         
|Net cash provided by operating activities                            | 447,203          
|                                                                     |                  
|Cash flows from investing activities:                                |                  
|Investments purchased - available for sale                           | (1,960,990)      
|Investments sold - available for sale                                | 1,975,313        
|Investments matured - available for sale                             | 86,626           
|Increase in policy loans                                             | (12,368)         
|Decrease in mortgage loans                                           | 1,945            
|Other invested assets sold, net                                      | 45,503           
|Net cash provided by investing activities                            | 136,029          
|                                                                     |                  
|Cash flows from financing activities:                                |                  
|Withdrawals from policyholder accounts                               | (1,957,586)      
|Deposits to policyholder accounts                                    | 1,568,286        
|Dividends to parent                                                  | -                
|(Decrease) increase in securities lending                            | (106,709)        
|Net cash (used in) provided by financing activities                  | (496,009)        
|                                                                     |                  
|Change in cash and cash equivalents                                  | 87,223           
|Cash and cash equivalents at beginning of period                     | 1,728,279        
|Cash and cash equivalents at end of period                           | $  1,815,502     

5



KEYPORT LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

1. General

The accompanying unaudited consolidated financial statements of Keyport Life Insurance Company (the Company) includes all adjustments, consisting of normal recurring accruals that management considers necessary for a fair presentation of the Company's financial position as of September 30, 2001 and December 31, 2000 and the related consolidated statements of operations and cash flows for the three and nine months ended September 30, 2001 and 2000, respectively. Certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company's 2000 Form 10-K. The results of operations for the nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for the full year.

2. Accounting Changes

The cumulative effect of accounting changes, net of tax, for the nine months ended September 30, 2001 of $60.8 million includes a loss of $54.3 million relating to the adoption of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of SFAS No. 133" (collectively hereafter referred to as the "Statement") in the quarter ended March 31, 2001 and a loss of $6.5 million relating to the adoption of Emerging Issues Task Force ("EITF") Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets" in the quarter ended June 30, 2001.

The Company adopted the Statement on January 1, 2001. The Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset by the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in operations.

The cumulative effect, reported after tax and net of related effects on deferred policy acquisition costs, upon adoption of the Statement at January 1, 2001 decreased net income and stockholder's equity by $54.3 million. The adoption of the Statement may increase volatility in future reported income due, among other reasons, to the requirements of defining an effective hedging relationship under the Statement as opposed to certain hedges the Company believes are effective economic hedges. The Company anticipates that it will continue to utilize its current risk management philosophy, which includes the use of derivative instruments.

The Company adopted EITF Issue No. 99-20 on April 1, 2001. EITF Issue 99-20 governs the method of recognizing interest income and impairment on asset-backed investment securities. EITF Issue No. 99-20 requires the Company to update the estimate of cash flows over the life of certain retained beneficial interests in securitization transactions and purchased benefecial interests in securitized financial assets. Pursuant to EITF Issue No. 99-20, based on current information and events, if the Company estimates that the fair value of its beneficial interests is not greater than or equal to its carrying value and if there has been a decrease in the estimated cash flows since the last revised estimate, considering both timing and amount, then an other-than-temporary impairment should be recognized. The cumulative effect, reported after tax and net of related effects on deferred policy acquisition costs, upon adoption of EITF Issue No. 99-20 on April 1, 2001 decreased net income by $6.5 million with a related increase to accumulated other comprehensive income of $1.8 million.

6

KEYPORT LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

3. Accounting for Derivatives and Hedging Activities

All derivatives are recognized on the balance sheet at fair value. On the date the derivative contract is entered into, the Company designates the derivative as either (1) a hedge of the fair value of a recognized asset ("fair value hedge") or (2) utilizes the derivative as an economic hedge ("non-designated derivative"). Changes in the fair value of a derivative that is highly effective and is designated and qualifies as a fair value hedge, along with the loss or gain on the hedged asset attributable to the hedged risk, are recorded in current period operations as a component of net derivative gains. Changes in the fair value of non-designated derivatives are reported in current period operations as a component of net derivative gains.

The Company issues equity-indexed annuity contracts that contain a derivative instrument that is "embedded" in the contract. Upon issuing the contract, the embedded derivative is separated from the host contract (annuity contract), is carried at fair value, and is considered a non-designated derivative.

The Company purchases call options and futures on the S&P 500 Index to economically hedge its obligation under the annuity contract to provide returns based upon this index. The call options and futures are non-designated derivatives. In addition, the Company utilizes non-designated total return swap agreements to hedge its obligations related to certain separate account liabilities.

As a component of its investment strategy and to reduce its exposure to interest rate risk, the Company utilizes interest rate swap agreements. Interest rate 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 interest rate swap agreements are designated and qualify as fair value hedges. The ineffective portion of the fair value hedges, net of related effects on deferred policy acquisition costs, resulted in a loss of ($4.5) and ($2.6) million for the three and nine months ended September 30, 2001.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedging transactions. This process includes linking all fair value hedges to specific assets on the balance sheet. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively.

When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair value hedge, the derivative will continue to be carried on the balance sheet at its fair value and changes in fair value will be reported in operations. The subsequent fair value changes in the hedged asset will no longer be reported in current period operations.



7



KEYPORT LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

4. Net Change in Unrealized and Undistributed (Losses)/Gains in Private Equity Limited Partnerships

The net change in unrealized and undistributed (losses)/gains in private equity limited partnerships is accounted for on the equity method and represents primarily increases/(decreases) in the fair value of the underlying investments of the private equity limited partnerships for which the Company has ownership interests in excess of 3%. The net change of ($2.5) million and $5.9 million in unrealized and undistributed (losses)/gains is recorded net of the related amortization of deferred policy acquisition costs of ($4.6) million and $11.0 million, and net of the amounts realized, which are recognized in investment income of $1.6 million and $6.2 million, for the three months ended September 30, 2001 and 2000, respectively. The net change of ($17.1) million and $28.3 million in unrealized and undistributed (losses)/gains is recorded net of the related amortization of deferred policy acquisition costs of ($31.7) million and $52.6 million, and net of the amounts realized, which are recognized in investment income of $31.4 million and $8.7 million, for the nine months ended September 30, 2001 and 2000, respectively. The financial information for these investments is obtained directly from the private equity limited partnerships on a periodic basis. There can be no assurance that any unrealized and undistributed gains will ultimately be realized or that the Company will not incur losses in the future on such investments. Partnership investments totaled $429.1 million and $439.0 million ($387.6 million and $348.7 million excluding the unrealized and undistributed (losses)/gains in private equity limited partnerships) at September 30, 2001 and December 31, 2000.

5. Comprehensive Income

Total comprehensive income, net of tax, for the nine months ended September 30, 2001 and 2000, was $64.6 million and $155.7 million, respectively.

6. Pending Change of Control

On May 3, 2001, Liberty Financial Corporation (LFC), the Company's parent, announced that it had reached a definitive agreement to sell its annuity and bank marketing businesses to Sun Life Financial. Through this transaction, Sun Life Financial will acquire Keyport Life Insurance Company and Independent Financial Marketing Group. Sun Life Financial will pay approximately $1.7 billion in cash for the two businesses.

The transaction is subject to customary conditions to closing, including receipt of approvals by various state insurance regulators in the U.S., certain other regulatory authorities in the U.S. and Canada and Liberty Financial's shareholders. In connection with the execution of the definitive purchase agreement, Liberty Mutual Insurance Company, LFC's controlling stockholder, entered into an agreement to vote in favor of the Sun Life Financial transaction. The acquisition is expected to close on October 31, 2001.



8





KEYPORT LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

7. September 11, 2001

The Company has approximately $440.6 million of fixed maturities invested in entities associated with the airline, hotel, and hospitality businesses. The national tragedy of September 11, 2001 has had an adverse impact on these industries. The Company has not recorded any other than temporary declines due to the decrease in market value of these investments subsequent to the September 11 terrorist attacks. The Company will continue to monitor the recoverability of these investments.

The Company also has a swap agreement in which the Company participates in a reinsurance pool of catastrophic insurance. The Company's maximum exposure under this agreement is $13.6 million per calendar year. The Company's estimated pro-rata share of losses associated with the September 11 terrorist attacks is $11.8 million, which has been recorded as a component of net investment income.

8. Reclassifications

Certain amounts in the prior year financials have been reclassified in order to conform to the current year presentation.

9



Item 2. Management's Discussion and Analysis of Results of Operations

and Financial Condition

On November 1, 2000, Liberty Financial Corporation (LFC), the Company's parent, announced that it had retained the investment banking firm of Credit Suisse First Boston Corporation to review its strategic alternatives, including a possible sale of the Company. On May 3, 2001, LFC announced that it had reached a definitive agreement to sell its annuity and bank marketing businesses to Sun Life Financial. Through this transaction, Sun Life Financial will acquire Keyport Life Insurance Company and Independent Financial Marketing Group. Sun Life Financial will pay approximately $1.7 billion in cash for the two businesses.

The transaction is subject to customary conditions to closing, including receipt of approvals by various state insurance regulators in the U.S., certain other regulatory authorities in the U.S. and Canada and Liberty Financial's shareholders. In connection with the execution of the definitive purchase agreement, Liberty Mutual Insurance Company, LFC's controlling stockholder, entered into an agreement to vote in favor of the Sun Life Financial transaction. The acquisition is expected to close October 31, 2001.

Accounting Changes

The cumulative effect of accounting changes, net of tax, for the nine months ended September 30, 2001 of $60.8 million includes a loss of $54.3 million relating to the adoption of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of SFAS No. 133" (collectively hereafter referred to as the "Statement") in the quarter ended March 31, 2001 and a loss of $6.5 million relating to the adoption of Emerging Issues Task Force ("EITF") Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets" in the quarter ended June 30, 2001.

The Company adopted the Statement on January 1, 2001. The Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset by the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in operations.

The cumulative effect, reported after tax and net of related effects on deferred policy acquisition costs, upon adoption of the Statement at January 1, 2001 decreased net income and stockholder's equity by $54.3 million. The adoption of the Statement may increase volatility in future reported income due, among other reasons, to the requirements of defining an effective hedging relationship under the Statement as opposed to certain hedges the Company believes are effective economic hedges. The Company anticipates that it will continue to utilize its current risk management philosophy, which includes the use of derivative instruments.

The Company adopted EITF Issue No. 99-20 on April 1, 2001. EITF Issue 99-20 governs the method of recognizing interest income and impairment on asset-backed investment securities. EITF Issue No. 99-20 requires the Company to update the estimate of cash flows over the life of certain retained beneficial interests in securitization transactions and purchased benefecial interests in securitized financial assets. Pursuant to EITF Issue No. 99-20, based on current information and events, if the Company estimates that the fair value of its benefitical interests is not greater than or equal to its carrying value and if there has been a decrease in the estimated cash flows since the last revised estimate, considering both timing and amount, then an other-than-temporary impairment should be recognized. The cumulative effect, reported after tax and net of related effects on deferred policy acquisition costs, upon adoption of EITF Issue No. 99-20 on April 1, 2001 decreased net income by $6.5 million with a related increase to accumulated other comprehensive income of $1.8 million.



10





September 11, 2001

The Company has approximately $440.6 million of fixed maturities invested in entities associated with the airline, hotel, and hospitality businesses. The national tragedy of September 11, 2001 has had an adverse impact on these industries. The Company has not recorded any other than temporary declines due to the decrease in market value of these investments subsequent to the September 11 terrorist attacks. The Company will continue to monitor the recoverability of these investments.

The Company also has a swap agreement in which the Company participates in a reinsurance pool of catastrophic insurance. The Company's maximum exposure under this agreement is $13.6 million per calendar year. The Company's estimated pro-rata share of losses associated with the September 11 terrorist attacks is $11.8 million, which has been recorded as a component of net investment income.

11

Results of Operations

Net income (loss) was $1.5 million and $36.6 million for the three months ended September 30, 2001 and 2000, respectively, and $(1.2) million and $107.3 million for the nine months ended September 30, 2001 and 2000, respectively. Income from operations (income before cumulative effect of accounting changes, income taxes, net change in unrealized and undistributed (losses)/gains in private equity limited partnerships, and net realized investment losses) was $15.5 million and $52.8 million for the three months ended September 30, 2001 and 2000, respectively, and $128.1 million and $155.2 million for the nine months ended September 30, 2001 and 2000, respectively. The decrease in income from operations is primarily attributable to a decrease in net investment spread of $29.8 million and $20.4 million and net derivative losses of $6.5 million and $1.8 million for the three and nine months ended September 30, 2001, respectively.

Net derivative losses of $6.5 million and $1.8 million for the three and nine months ended September 30, 2001, respectively, represents fair value changes of non-designated derivatives and the ineffective portion of fair value hedges, net of related effects on deferred policy acquisition costs.

All derivatives are recognized on the balance sheet at fair value. On the date the derivative contract is entered into, the Company designates the derivative as either (1) a hedge of the fair value of a recognized asset ("fair value hedge") or (2) utilizes the derivative as an economic hedge ("non-designated derivative"). Changes in the fair value of a derivative that is highly effective and is designated and qualifies as a fair value hedge, along with the loss or gain on the hedged asset attributable to the hedged risk, are recorded in current period operations as a component of net derivative gains. Changes in the fair value of non-designated derivatives are reported in current period operations as a component of net derivative gains.

The Company issues equity-indexed annuity contracts that contain a derivative instrument that is "embedded" in the contract. Upon issuing the contract, the embedded derivative is separated from the host contract (annuity contract), is carried at fair value, and is considered a non-designated derivative. The Company purchases call options and futures on the S&P 500 Index to economically hedge its obligation under the annuity contract to provide returns based upon this index. The call options and futures are non-designated derivatives. In addition, the Company utilizes non-designated total return swap agreements to hedge its obligations related to certain separate account liabilities. The net derivative gain (loss) related to changes in the fair value of the "embedded" derivatives, net of related effects on deferred policy acquisition costs was a gain of $15.5 million and $46.4 million for the three and nine months ended September 30, 2001, respectively. The net derivative gain (loss) related to changes in the fair value of call options and futures, net of related effects on deferred policy acquisition costs was a loss of ($17.5) million and a loss of ($45.6) million for the three and nine months ended September 30, 2001, respectively.

As a component of its investment strategy and to reduce its exposure to interest rate risk, the Company utilizes interest rate swap agreements. Interest rate 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 interest rate swap agreements are designated and qualify as fair value hedges. The ineffective portion of the fair value hedges, net of related effects on deferred policy acquisition costs, resulted in a loss of ($4.5) million and ($2.6) million for the three and nine months ended September 30, 2001, respectively.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedging transactions. This process includes linking all fair value hedges to specific assets on the balance sheet. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively.

When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair value hedge, the derivative will continue to be carried on the balance sheet at its fair value and changes in value will be reported in operations. The subsequent fair value changes in the hedged asset will no longer be reported in current period operations.                                                                           12



Investment spread is the amount by which investment income earned on the Company's investments exceeds interest credited to policyholder balances. Investment spread was $47.3 million and $77.1 million for the three months ended September 30, 2001 and 2000, respectively. The amount by which the average yield on investments exceeds the average interest credited rate on policyholder balances is the investment spread percentage. The investment spread percentage was 1.37% and 2.19% for the three months ended September 30, 2001 and 2000, respectively. Investment spread was $216.1 million and $236.6 million for the nine months ended September 30, 2001 and 2000, respectively. The investment spread percentage was 2.10% and 2.26% for the nine months ended September 30, 2001 and 2000, respectively.

Investment income was $195.4 million and $212.9 million for the three months ended September 30, 2001 and 2000, respectively. The decrease of $17.5 million in 2001 compared to 2000 is the result of a lower average investment yield ($11.5 million) and a decrease in average invested assets ($6.0 million). The average investment yield was 6.32% and 6.68% for the three months ended September 30, 2001 and 2000, respectively. Investment income was $666.1 million and $632.8 million for the nine months ended September 30, 2001 and 2000, respectively. The increase of $33.3 million in 2001 compared to 2000 is the result of a higher average investment yield ($43.5 million) offset by a decrease in average invested assets ($10.2 million). The average investment yield was 7.10% and 6.65% for the nine months ended September 30, 2001 and 2000, respectively. The adoption of FAS133 requires that call options be carried at fair value and the Company's call options are considered non-designated derivatives. The changes of the fair value of the call options are reported as a component of net derivative loss in 2001. In the prior year, the premium paid for a call option was amortized over its contract term and the call option amortization was included as a component of investment income. Investment income for the three and nine months ended September 30, 2000, includes $19.7 million and $64.3 million, respectively, of S&P 500 Index call option amortization expense related to the Company's equity-indexed annuities. If FAS 133 was not adopted, call option amortization expense and the average investment yield would have been $19.4 million and 5.69% and $67.4 million and 6.40% for the three and nine months ended September 30, 2001, respectively.

Interest credited to policyholders was $148.1 million and $135.8 million for the three months ended September 30, 2001 and 2000, respectively. The increase of $12.3 million in 2001 compared to 2000 is the result of a higher average interest credited rate ($13.8 million) offset by a slightly lower level of average policyholder balances ($1.5 million). Policyholder balances averaged $12.0 billion ($10.3 billion of fixed products, consisting of fixed annuities and the closed block of single premium whole life insurance, and $1.7 billion of equity-indexed annuities) and $12.1 billion ($9.8 billion of fixed products and $2.3 billion of equity-indexed annuities) for the three months ended September 30, 2001 and 2000, respectively. The average interest credited rate was 4.95% (5.07% on fixed products and 4.31% on equity-indexed annuities) and 4.49% (5.30% on fixed products and 0.85% on equity-indexed annuities) for the three months ended September 30, 2001 and 2000, respectively. Interest credited to policyholders was $450.0 million and $396.3 million for the nine months ended September 30, 2001 and 2000, respectively. The increase of $53.7 million in 2001 compared to 2000 is the result of a higher average interest credited rate ($56.0 million) offset by a slightly lower level of average policyholder balances ($2.3 million). Policyholder balances averaged $12.0 billion ($10.1 billion of fixed products, consisting of fixed annuities and the closed block of single premium whole life insurance, and $1.9 billion of equity-indexed annuities) and $12.1 billion ($9.7 billion of fixed products, consisting of fixed annuities and the closed block of single premium whole life insurance, and $2.4 billion of equity-indexed annuities) for the nine months ended September 30, 2001 and 2000, respectively. The average interest credited rate was 5.00% (5.20% on fixed products and 3.93% on equity-indexed annuities) and 4.38% (5.18% on fixed products and 0.85% on equity-indexed annuities) for the nine months ended September 30, 2001 and 2000, respectively. The Company's equity-indexed annuities credit interest to the policyholder at a "participation rate" equal to a portion (ranging for existing policies from 25% to 120%) of the change in value of the S&P 500 Index. The Company's equity-indexed annuities also provide full guarantee of principal if held to term, plus interest at 0.85% annually.

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Under FAS 133, the index annuities are deemed to contain an embedded derivative (the change in value attributable to the change in the S&P 500 index) and a host contract. The host contracts' interest rate is derived at the inception of the contract and an effective interest rate is utilized that will result in a liability equal to the guaranteed minimum account value at the end of the term. The embedded derivative is a non-designated derivative and the changes in fair value are reported as a component of derivative loss. In 2000, the interest credited to equity-indexed policyholders related to the participation rate is reflected net of income recognized on the S&P 500 Index call options and futures resulting in a 0.85% net credited rate. If FAS 133 was not adopted, interest credited and the average interest credited rate would have been $143.7 million and 4.79% and $428.8 million and 4.76% for the three and nine months ended September 30, 2001, respectively.

Average investments in the Company's general account (computed without giving effect to SFAS 115), including a portion of the Company's cash and cash equivalents, were $12.4 billion and $12.8 billion for the three months ended September 30, 2001 and 2000, respectively. Average investments were $12.5 billion and $12.7 billion for the nine months endedSeptember 30, 2001 and 2000, respectively.

Net realized investment losses were $14.0 million and $12.4 million for the three months ended September 30, 2001 and 2000, respectively, and $31.8 million and $29.6 million for the nine months ended September 30, 2001 and 2000, respectively. Sales of investments generally are made to maximize total return and to take advantage of prevailing market conditions. Net realized investment losses included $19.3 million and $5.7 million for the three months ended September 30, 2001 and 2000, respectively, and $42.8 million and $8.7 million for the nine months ended September 30, 2001 and 2000, respectively, for certain fixed maturity investments where the decline in value was determined to be other than temporary.

Net change in unrealized and undistributed (losses)/gains in private equity limited partnerships is accounted for on the equity method and represents primarily increases/(decreases) in the fair value of the underlying investments of the private equity limited partnerships for which the Company has ownership interests in excess of 3%. The net change of ($2.5) million and $5.9 million in unrealized and undistributed (losses)/gains is recorded net of the related amortization of deferred policy acquisition costs of ($4.6) million and $11.0 million, and net of the amounts realized, which are recognized in investment income of $1.6 million and $6.2 million, for the three months ended September 30, 2001 and 2000, respectively. The net change of ($17.1) million and $28.3 million in unrealized and undistributed (losses)/gains is recorded net of the related amortization of deferred policy acquisition costs of ($31.7) million and $52.6 million, and net of the amounts realized, which are recognized in investment income of $31.4 million and $8.7 million, for the nine months ended September 30, 2001 and 2000, respectively. The financial information for these investments is obtained directly from the private equity limited partnerships on a periodic basis. There can be no assurance that any unrealized and undistributed gains will ultimately be realized or that the Company will not incur losses in the future on such investments. Partnership investments totaled $429.1 million and $439.0 million ($387.6 million and $348.7 million excluding the unrealized and undistributed (losses)/gains in private equity limited partnerships) at September 30, 2001 and December 31, 2000.

Surrender charges are revenues earned on the early withdrawal of fixed, equity-indexed and variable annuity policyholder balances. Surrender charges on fixed, equity-indexed and variable annuity withdrawals generally are assessed at declining rates applied to policyholder withdrawals during the first five to seven years of the contract. Total surrender charges were $3.7 million and $6.0 million for the three months ended September 30, 2001 and 2000, respectively, and $11.2 million and $16.1 million for the nine months ended September 30, 2001 and 2000, respectively.

On an annualized basis, total annuity withdrawals represented 19.0% and 15.0% of the total average annuity policyholder and separate account balances for the three months ended September 30, 2001 and 2000, respectively, and 19.2% and 15.6% of the total average annuity policyholder and separate account balances for the nine months ended September 30, 2001 and 2000, respectively. The higher level of surrenders is the result of increased competition from other investment products and policy-holders surrendering out of fixed and indexed annuities.

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Separate account income is primarily mortality and expense charges earned on variable annuity and variable life policyholder balances. These charges, which are based on the market values of the assets in the separate accounts supporting the contracts, were $12.4 million and $11.8 million for the three months ended September 30, 2001 and 2000, respectively, and $39.6 million and $33.6 million for the nine months ended September 30, 2001 and 2000, respectively. Variable product fees represented 1.24% and 1.22% of the average variable annuity and variable life separate account balances for the three months ended September 30, 2001 and 2000, respectively, and 1.30% and 1.25% of the average variable annuity and variable life separate account balances for the nine months ended September 30, 2001 and 2000, respectively. In addition, for certain separate account institutional accounts, the investment spread is included in separate account income.

Management fees are primarily investment advisory fees related to the separate account assets. The fees are based on the level of assets under management, which are affected by product sales, redemptions and changes in the fair values of the investments managed. Management fees were $1.7 million and $1.5 million for the three months ended September 30, 2001 and 2000, respectively, and $5.3 million and $4.4 million for the nine months ended September 30, 2001 and 2000, respectively. Average separate account assets were $4.0 billion and $3.8 billion for the three months ended September 30, 2001 and 2000, respectively, and $4.1 billion and $3.6 billion for the nine months ended September 30, 2001 and 2000, respectively.

Operating expenses primarily represent compensation and general and administrative expenses. These expenses were $16.9 million and $15.4 million for the three months ended September 30, 2001 and 2000, respectively, and $49.4 million and $47.2 million for the nine months ended September 30, 2001 and 2000, respectively. The increase in the three and nine months ended September 30, 2001 compared to the same periods in the prior year was primarily due to higher compensation cost.

Amortization of deferred policy acquisition costs relates to the costs of acquiring new business, which vary with, and are primarily related to, the production of new annuity business. Such acquisition costs included commissions, costs of policy issuance, underwriting and selling expenses.

Amortization was $24.2 million and $26.9 million for the three months ended September 30, 2001 and 2000, respectively, and $87.8 million and $83.8 million for the nine months ended September 30, 2001 and 2000, respectively. Deferred policy acquisition cost amortization expense for the three months ended September 30, 2001 and 2000 represented 40.5% and 30.3% on an annualized basis, of investment spread and separate account fees for 2001 and 2000, respectively. Deferred policy acquisition cost amortization expense for the nine-month periods ended September 30, 2001 and 2000 represented 34.3% and 31.0%, on an annualized basis, of investment spread and separate account fees for 2001 and 2000, respectively. In September 2001, an additional $5.4 million of deferred policy acquisition cost was amortized based upon revised estimates of future gross profits. Excluding the prospective unlocking adjustment of $5.4 million, amortization of deferred policy acquisition cost as a percent of investment spread and separate account fees would have been 31.5% and 32.2% for the three and nine month periods ended September 30, 2001, respectively.

Federal income tax (benefit) expense was $(2.5) million or 250.4% and $9.7 million or 21.0% of pretax income for the three months ended September 30, 2001 and 2000, respectively, and $19.5 million or 24.6% and $46.6 million or 30.3% for the nine months ended September 30, 2001 and 2000, respectively. The decrease in the effective tax rate in 2001 as compared to 2000 is attributable to a $2.1 million and $8.0 million reduction in tax expense for the three and nine month periods ended September 30, 2001, respectively.The reduction is primarily attributable to a valuation allowance established for unrealized capital losses in the "available for sale" investment portfolio that was reduced in the current year.

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Financial Condition

Stockholder's equity was $1.345 billion as of September 30, 2001 compared to $1.280 billion as of December 31, 2000. The $64.6 million increase in stockholder's equity consists of a $65.8 million increase in net unrealized investment (losses)/gains on available for sale securities and the $1.2 million net loss for the nine months ended September 30, 2001.

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 $12.4 billion and $12.6 billion as of September 30, 2001 and December 31, 2000, respectively.

The Company's general investment policy is to hold fixed maturity investments for long-term investment and, accordingly, the Company does not have a trading portfolio. To provide for maximum portfolio flexibility and appropriate tax planning, the Company classifies its bond portfolio as "available for sale" and carries such investments at fair value. Gross unrealized gains (losses) at September 30, 2001 and December 31, 2000 were $263.4 million and ($60.2) million, respectively.

Approximately $12.0 billion, or 78.2%, of the Company's general account and certain separate account investments at September 30, 2001, were rated by Standard & Poor's Corporation, Moody's Investors Service or under comparable statutory rating guidelines established by the National Association of Insurance Commissioners (NAIC). At September 30, 2001, the carrying value of investments in below investment grade securities totaled $1.2 billion, or 7.6% of general account and certain separate account investments of $15.4 billion. Below investment grade securities generally provide higher yields and involve greater risks than investment grade securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities may be more limited than for investment grade securities.

The Company routinely reviews its portfolio of investment securities. The Company identifies monthly any investments that require additional monitoring, and reviews the carrying value of such investments at least quarterly to determine whether specific investments should be placed on a nonaccrual basis and to determine declines in value that may be other than temporary. In making these reviews, the Company principally considers the adequacy of collateral (if any), compliance with contractual covenants, the borrower's recent financial performance, news reports, and other externally generated information concerning the borrower's affairs. In the case of publicly traded fixed maturity securities, management also considers market value quotations if available. As of September 30, 2001 and December 31, 2000, the carrying value of fixed maturity securities that were non-income producing was $97.4 million and $24.4 million, respectively.

Derivatives

As a component of its investment strategy and to reduce its exposure to interest rate risk, the Company utilizes interest rate and total return swap agreements and interest rate cap agreements to match assets more closely to liabilities. Interest rate 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 interest rate swap agreements to reduce asset duration and to better match interest earned on longer-term fixed-rate assets with interest credited to policyholders. A total return swap agreement is an agreement to exchange payments based upon an underlying notional balance and changes in variable rate and total return indices. The Company utilizes total return swap agreements to hedge its obligations related to certain separate account liabilities. The Company had 99 and 69 outstanding swap agreements as of September 30, 2001 and December 31, 2000, respectively, with an aggregate notional principal amount of $4.1 billion and $3.8 billion, respectively.

Cap agreements are agreements with a counterparty that require the payment of a premium for the right to receive payments for the difference between the cap interest rate and a market interest rate on specified future dates based on an underlying notional principal to hedge against rising interest rates. There were no outstanding interest rate cap agreements as of September 30, 2001 and December 31, 2000.

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With respect to the Company's equity-indexed annuities, the Company buys call options and futures on the S&P 500 Index to hedge its obligations to provide returns based upon this index. The Company had call options with a carrying value of $36.3 million and $337.7million as of September 30, 2001 and December 31, 2000, respectively. The Company had open futures with a fair value of ($0.8) million and $10.5 million as of September 30, 2001 and December 31, 2000, respectively. The Company had total return swap agreements with a carrying value of $21.1 million and $23.9 million as of September 30, 2001 and December 31, 2000, respectively.

There are risks associated with some of the techniques the Company uses to match its assets and liabilities. The primary risk associated with swap, cap and call option agreements is counterparty nonperformance. The Company believes that the counterparties to its swap, cap and call option agreements are financially responsible and that the counterparty risk associated with these transactions is minimal. Future contracts trade on organized exchanges and, therefore, have minimal credit risk. In addition, swap and cap agreements have interest rate risk and call options, futures and certain total return swap agreements have stock market risk. These swap and cap agreements hedge fixed-rate assets and the Company expects that any interest rate movements that adversely affect the market value of swap agreements would be offset by changes in the market values of such fixed-rate assets. However, there can be no assurance that these hedges will be effective in offsetting the potential adverse effects of changes in interest rates. Similarly, the call options, futures and certain total return swap agreements hedge the Company's obligations to provide returns on equity-indexed annuities based upon the S&P 500 Index, and the Company believes that any stock market movements that adversely affect the market value of S&P 500 Index call options, futures and certain total return swap agreements would be substantially offset by a reduction in policyholder liabilities. However, there can be no assurance that these hedges will be effective in offsetting the potentially adverse effects of changes in S&P 500 Index levels. The Company's profitability could be adversely affected if the value of its swap and cap agreements increase less than (or decrease more than) the change in the market value of its fixed rate assets and/or if the value of its S&P 500 Index call options, futures and certain total return swap agreements increase less than (or decrease more than) the value of the guarantees made to equity-indexed policyholders.

Liquidity

The Company's liquidity needs and financial resources pertain to the management of the general account assets and policyholder balances. The Company uses cash for the payment of annuity and life insurance benefits, operating expenses, policy acquisition costs, and the purchase of investments. The Company generates cash from annuity premiums and deposits, net investment income, and from maturities and sales of its investments. Annuity premiums, maturing investments and net investment income have historically been sufficient to meet the Company's cash requirements. The Company monitors cash and cash equivalents in an effort to maintain sufficient liquidity and has strategies in place to maintain sufficient liquidity in changing interest rate environments. Consistent with the nature of its obligations, the Company has invested a substantial amount of its general account assets in readily marketable securities. At September 30, 2001, $12.3 billion, or 79.9%, of the Company's general account and certain separate 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 September 30, 2001, the amount of dividends that the Company could pay without such approval was $38.4 million.

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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.

Effects of Inflation

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

Item 3. Quantitative and Qualitative Disclosure of Market Risk

There have not been any material changes during the nine months ended September 30, 2001 in the market risks the Company is exposed to and management of such risks, which are summarized in our 2000 Form 10-K.



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Item 6. Exhibits and Reports on Form 8-K

(a) Exhibit

There are no exhibits for the quarter ended September 30, 2001.

(b) Reports on Form 8-K

On May 4, 2001, the Company filed a Current Report on form 8-K pursuant to which the Company stated that Liberty Financial Companies, Inc., a Massachusetts corporation ("LFC"), the Company's corporate parent, and Liberty Financial Services, Inc., a Massachusetts corporation and a wholly owned subsidiary of LFC ("LFS"), entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") with Sun Life Assurance Company of Canada, a Canadian insurance corporation ("Sun Life"). Pursuant to the Stock Purchase Agreement, LFC and LFS agreed to sell, and Sun Life agreed to purchase (the "Sale"), all of the issued and outstanding shares of capital stock of certain direct and indirect subsidiaries of LFC and LFS constituting LFC's annuity and bank marketing businesses, which include the Company for an aggregate purchase price of approximately $1.7 billion. The Sale is subject to customary conditions to closing, including without limitation receipt of approvals by various state insurance regulators in the U.S., certain regulatory authorities in the U.S. and Canada and LFC's shareholders. In connection with the execution of the Stock Purchase Agreement, Liberty Mutual Insurance Company, LFC's controlling stockholder, entered into an agreement to vote in favor of the Sale.

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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





| | KEYPORT LIFE INSURANCE COMPANY         
| | ---------------------------------------
| |                                        
| | _________/s/ Bernhard M. Koch__________
| |                                        
| | Bernhard M. Koch                       
| | Senior Vice President and              
| | Chief Financial Officer                
| | (Principal Financial Officer)          













Date: October 31, 2001









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