File Nos. 333-00373
811-07501
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. _1_ [X]
Post-Effective Amendment No. ___ [ ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. _1_ [X]
(Check appropriate box or boxes.)
Great American Reserve Variable Annuity Account G
_________________________________________________
(Exact Name of Registrant)
Great American Reserve Insurance Company
_________________________________________
(Name of Depositor)
11825 N. Pennsylvania Street, Carmel, Indiana 46032-4572
______________________________________________ __________
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code (317) 817-3700
Name and Address of Agent for Service
Lawrence W. Inlow
Secretary and General Counsel
Great American Reserve Insurance Company
11825 N. Pennsylvania Street
Carmel, Indiana 46032-4572
Copies to:
Judith A. Hasenauer
Blazzard, Grodd & Hasenauer, P.C.
P.O. Box 5108
Westport, CT 06881
(203) 226-7866
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Filing.
Calculation of Registration Fee under the Securities Act of 1933:
$500 - Registrant is registering an indefinite number of securities under
the Securities Act of 1933 pursuant to Investment Company Act Rule 24f-2.
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
CROSS REFERENCE SHEET
(Required by Rule 495)
<TABLE>
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Item No. Location
- -------- ----------------------
PART A
Item 1. Cover Page . . . . . . . . . . . . . . . . . Cover Page
Item 2. Definitions. . . . . . . . . . . . . . . . . Definitions
Item 3. Synopsis . . . . . . . . . . . . . . . . . . Highlights
Item 4. Condensed Financial Information. . . . . . . Not Applicable
Information
Item 5. General Description of Registrant, Depositor,
and Portfolio Companies. . . . . . . . . . . . The Company;
Additional Infor-
mation About the
Company; The
Separate Account;
Eligible Funds
Item 6. Deductions and Expenses . . . . . . . . . . . Charges and
Deductions
Item 7. General Description of Variable Annuity
Contracts. . . . . . . . . . . . . . . . . . . The Contracts
and Certificates
Item 8. Annuity Period. . . . . . . . . . . . . . . . Annuity Provisions
Item 9. Death Benefit. . . . . . . . . . . . . . . . . Proceeds Payable on
Death
Item 10. Purchases and Contract Value.. . . . . . . . . Purchase Payments,
Contract Value and
Certificate Value
Item 11. Redemptions. . . . . . . . . . . . . . . . . . Withdrawals
Item 12. Taxes. . . . . . . . . . . . . . . . . . . . . Tax Status
Item 13. Legal Proceedings. . . . . . . . . . . . . . . Legal Proceedings
Item 14. Table of Contents of the Statement of
Additional Information. . . . . . . . . . . . Table of Contents of
the Statement of
Additional Information
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CROSS REFERENCE SHEET (CONT'D)
(REQUIRED BY RULE 495)
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Item No. Location
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PART B
Item 15. Cover Page. . . . . . . . . . . . . . . . . . Cover Page
Item 16. Table of Contents. . . . . . . . . . . . . . . Table of Contents
Item 17. General Information and History. . . . . . . . The Company
Item 18. Services. . . . . . . . . . . . . .. . . . . . Not Applicable
Item 19. Purchase of Securities Being Offered. . . . . Not Applicable
Item 20. Underwriters. . . . . . . . . . . . . . . . . Distributor
Item 21. Calculation of Performance Data. . . .. . . . Performance
Information
Item 22. Annuity Payments. . . . . . . . . . . . . . . Annuity Provisions
Item 23. Financial Statements. . . . . . . . . . . . . Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item so numbered, in Part C to this Registration Statement.
GREAT AMERICAN RESERVE INSURANCE COMPANY
Administrative Office:
Great American Reserve Insurance Company
11815 N. Pennsylvania Street
Carmel, Indiana 46032
(317) 817-3700
INDIVIDUAL AND GROUP FIXED AND VARIABLE
DEFERRED ANNUITY CONTRACTS AND CERTIFICATES
issued by
GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT G
and
GREAT AMERICAN RESERVE INSURANCE COMPANY
The individual and group fixed and variable deferred annuity contracts and
certificates (the "Contracts and Certificates") described in this Prospectus
provide for accumulation of values on a fixed and variable basis and monthly
payment of Annuity Payments on a fixed and variable basis. The Contracts and
Certificates are designed for use by individuals in retirement plans on a
Qualified or Non-Qualified basis. (See "Definitions.")
Purchase Payments for the Contracts/Certificates will be allocated to a
segregated investment account of Great American Reserve Insurance Company (the
"Company") which account has been designated Great American Reserve Variable
Annuity Account G (the "Variable Account") or to the Company's Market Value
Adjustment Account ("MVA Account"). The Variable Account invests in shares of
the following: Conseco Series Trust (Asset Allocation Portfolio, Common Stock
Portfolio, Corporate Bond Portfolio, Government Securities Portfolio and Money
Market Portfolio); Evergreen Variable Trust (Evergreen VA Fund, Evergreen VA
Foundation Fund and Evergreen VA Growth and Income Fund); Federated Insurance
Series (International Stock Fund); The Alger American Fund (Alger American
Growth Portfolio, Alger American Leveraged AllCap Portfolio, Alger American
MidCap Growth Portfolio and Alger American Small Capitalization Portfolio);
INVESCO Variable Investment Funds, Inc. (INVESCO VIF-High Yield Portfolio and
INVESCO VIF-Industrial Income Portfolio); Lord Abbett Series Fund, Inc. (Growth
& Income Portfolio); The OFFITBANK Variable Insurance Fund, Inc. (OFFITBANK
VIF-Emerging Markets Fund and OFFITBANK VIF-Total Return Fund); Van Eck
Worldwide Insurance Trust (Worldwide Emerging Markets Fund, Gold and Natural
Resources Fund and Worldwide Hard Assets Fund); and Tomorrow Funds Retirement
Trust (Institutional Class Shares) (Core Large-Cap Stock Fund and Core Small-Cap
Stock Fund).
See "Highlights" and "Tax Status - Diversification" for a discussion of owner
control of the underlying investments in a variable annuity contract.
THE CONTRACTS AND CERTIFICATES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION, AND ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER AGENCY. INVESTMENT IN THE CONTRACTS AND CERTIFICATES IS
SUBJECT TO RISK THAT MAY CAUSE THE VALUE OF THE OWNER'S OR CERTIFICATE OWNER'S
INVESTMENT TO FLUCTUATE, AND WHEN THE CONTRACTS AND CERTIFICATES ARE
SURRENDERED, THE VALUE MAY BE HIGHER OR LOWER THAN THE PURCHASE PAYMENTS.
This Prospectus concisely sets forth the information a prospective investor
should know before investing. Additional information about the Contracts and
Certificates is contained in the statement of additional information ("SAI")
which is available at no charge. The SAI has been filed with the Securities
and Exchange Commission and is incorporated herein by reference. The Table
of Contents of the SAI can be found on the last page of this Prospectus. For
the SAI, call (800) 342-6307 or write to the Company's Administrative Office
at the address listed above.
INQUIRIES:
Any inquiries can be made by telephone or in writing to the Administrative
Office listed above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This Prospectus and the Statement of Additional Information are dated
_______________, 1997.
Investors should read and retain this Prospectus for future reference.
TABLE OF CONTENTS
PAGE
DEFINITIONS
HIGHLIGHTS
General
Variable Account
MVA Account
Right to Examine Period
Charges
Mortality and Expense Risk Charge
Administrative Charge
Contract and Certificate Maintenance Charges
Transfer Fee
Premium Taxes
Taxes
MVA Account
FEE TABLE
THE COMPANY
THE SEPARATE ACCOUNTS
ELIGIBLE FUNDS
Conseco Series Trust
Evergreen Variable Trust
Federated Insurance Series
The Alger American Fund
INVESCO Variable Investment Funds, Inc.
Lord Abbett Series Fund, Inc.
The OFFITBANK Variable Insurance Fund, Inc.
Van Eck Worldwide Insurance Trust
Tomorrow Funds Retirement Trust
Voting Rights
Substitution of Securities
THE MVA ACCOUNT
CHARGES AND DEDUCTIONS
Deduction for Mortality and Expense Risk Charge
Deduction for Administrative Charge
Deduction for Contract and Certificate Maintenance Charges
Deduction for Transfer Fee
Deduction for Premium and Other Taxes
Deduction for Expenses of the Eligible Funds
THE CONTRACTS AND CERTIFICATES
Owner/Certificate Owner
Joint Owners/Joint Certificate Owners
Group Contract Owner
Annuitant
Assignment
PURCHASE PAYMENTS, CONTRACT VALUE AND CERTIFICATE VALUE
Purchase Payment
Allocation of Purchase Payments
Dollar Cost Averaging
Rebalancing
Contract Value
Certificate Value
Accumulation Units
Accumulation Unit Value
TRANSFERS
Transfers During the Accumulation Period
Transfers During the Annuity Period
WITHDRAWALS
Systematic Withdrawal Program
Suspension or Deferral of Payments
PROCEEDS PAYABLE ON DEATH
Death of Owner or Certificate Owner During the Accumulation Period
Death Benefit Amount During the Accumulation Period
Death Benefit Options During the Accumulation Period
Death of Owner/Certificate Owner During the Annuity Period
Death of Annuitant
Payment of Death Benefit
Beneficiary
Change of Beneficiary
ANNUITY PROVISIONS
General
Annuity Date
Selection or Change of an Annuity Option
Frequency and Amount of Annuity Payments
Annuity Options
OPTION 1. LIFETIME ONLY ANNUITY
OPTION 2. LIFETIME ANNUITY WITH GUARANTEED PERIODS
OPTION 3. INSTALLMENT REFUND LIFE ANNUITY
OPTION 4. PAYMENT FOR A FIXED PERIOD
OPTION 5. JOINT AND SURVIVOR ANNUITY
Annuity
Fixed Annuity
Variable Annuity
DISTRIBUTOR
PERFORMANCE INFORMATION
Money Market Sub-Account
Other Sub-Accounts
Hypothetical Performance Information
TAX STATUS
General
Diversification
Multiple Contracts and Certificates
Contracts and Certificates Owned by Non-Natural Persons
Tax Treatment of Assignments
Income Tax Withholding
Tax Treatment of Withdrawals -- Non-Qualified Contracts and Certificates
Qualified Plans
Tax Treatment of Withdrawals -- Qualified Contracts and Certificates
Tax-Sheltered Annuities -- Withdrawal Limitations
ADDITIONAL INFORMATION ABOUT THE COMPANY
Selected Historical Financial Information of the Company
Business of Great American Reserve
Management's Discussion and Analysis of Financial Condition
and Results of Operations of Great American Reserve
The Company's Directors and Executive Officers
Executive Compensation
LEGAL PROCEEDINGS
ADDITIONAL INFORMATION ABOUT THE VARIABLE ACCOUNT
REGISTRATION STATEMENT
LEGAL OPINIONS
EXPERTS
FINANCIAL STATEMENTS
APPENDIX A
APPENDIX B
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
DEFINITIONS
ACCOUNT(S): The MVA Account, the General Account and/or one or more of the
Sub-Accounts of the Variable Account.
ACCUMULATION PERIOD: The period prior to the Annuity Date during which
Purchase Payments may be made by an Owner or a Certificate Owner.
ACCUMULATION UNIT: A unit of measure used to determine the value of the
Owner's or Certificate Owner's interest in a Sub-Account of the Variable
Account during the Accumulation Period.
ADJUSTED CERTIFICATE VALUE: The Certificate Value less any applicable
Premium Tax, and Certificate Maintenance Charge (see "Charges and
Deductions") and plus the applicable Market Value Adjustment which may
be positive or negative. This amount is applied to the applicable annuity
tables to determine Annuity Payments.
ADJUSTED CONTRACT VALUE: The Contract Value less any applicable Premium Tax
and Contract Maintenance Charge (see "Charges and Deductions") and plus the
applicable Market Value Adjustment which may be positive or negative. This
amount is applied to the applicable annuity tables to determine Annuity
Payments under an individual Contract.
ADMINISTRATIVE OFFICE: The office indicated on the cover page of this
Prospectus to which notices, requests and Purchase Payments must be sent. All
sums payable to the Company under a Contract or Certificate are payable at the
Administrative Office or an address designated by the Company.
AGE: The age of any Owner, Certificate Owner or Annuitant on his/her last
birthday. For joint Owners and joint Certificate Owners, all provisions which
are based on age are based on the age of the older of the joint Owners or
joint Certificate Owners.
ANNUITANT: The natural person on whose life Annuity Payments are based. On or
after the Annuity Date, the Annuitant shall also include any joint Annuitant.
ANNUITY DATE: The date on which Annuity Payments begin.
ANNUITY OPTIONS: Options available for Annuity Payments.
ANNUITY PAYMENTS: The series of payments made to the Owner or Certificate
Owner or any named payee after the Annuity Date under the Annuity Option
selected.
ANNUITY PERIOD: The period of time beginning with the Annuity Date during
which Annuity Payments are made.
ANNUITY UNIT: An accounting unit of measure used to calculate the amount of
Annuity Payments.
BENEFICIARY: The person(s) or entity(ies) who will receive the death benefit
payable under a Contract or Certificate.
CERTIFICATE: The document issued to a Certificate Owner to evidence a
Certificate Owner's Account established under a group Contract.
CERTIFICATE ANNIVERSARY: An anniversary of the Certificate Issue Date.
CERTIFICATE ISSUE DATE: The date a Certificate is issued to a Certificate
Owner.
CERTIFICATE OWNER: A person who has established a Certificate Owner's
Account under a group Contract.
CERTIFICATE OWNER'S ACCOUNT: A record established for each Certificate
Owner to maintain values under a group Contract.
CERTIFICATE VALUE: The dollar value as of any Valuation Period of all amounts
in a Certificate Owner's Account.
CERTIFICATE WITHDRAWAL VALUE: The Certificate Value less any applicable
Premium Tax, less any applicable Certificate Maintenance Charge (see
"Charges and Deductions") and plus any Market Value Adjustment which may be
positive or negative.
CERTIFICATE YEAR: The first Certificate Year is the annual period which begins
on the Certificate Issue Date. Subsequent Certificate Years begin on each
anniversary of the Certificate Issue Date.
CODE: The Internal Revenue Code of 1986, as amended.
COMPANY: Great American Reserve Insurance Company.
CONTRACT ANNIVERSARY: An anniversary of the Contract Issue Date.
CONTRACT ISSUE DATE: The later of the date on the cover of the
Contract or the date Purchase Payments are received.
CONTRACT VALUE: The dollar value as of any Valuation Period of all amounts in
an individual Contract.
CONTRACT WITHDRAWAL VALUE: The Contract Value of an individual Contract less
any applicable Premium Tax, less any applicable Contract Maintenance Charge
(see "Charges and Deductions") and plus any Market Value Adjustment which may
be positive or negative.
CONTRACT YEAR: The first Contract Year is the annual period which begins on
the Contract Issue Date. Subsequent Contract Years begin on each anniversary
of the Contract Issue Date.
CREDITED INTEREST RATE: The interest rate credited to a Certificate Owner's
Account or Contract Value by the Company for any given Guarantee Period in
the MVA Account.
EFFECTIVE DATE: The effective date of a Guarantee Period with a Credited
Interest Rate.
ELIGIBLE FUND: An investment entity into which assets of the Variable Account
will be invested.
FIXED ANNUITY: A series of payments made during the Annuity Period which are
guaranteed as to dollar amount by the Company.
GENERAL ACCOUNT: The Company's general investment account which contains all
the assets of the Company with the exception of the Variable Account and other
segregated asset accounts.
GROUP CONTRACT OWNER: The person or entity to which a group Contract is
issued.
GUARANTEE PERIOD: The period for which the Credited Interest Rate is credited
in the MVA Account. Each deposit or transfer to the MVA Account creates one
or more new Guarantee Period(s).
MARKET VALUE ADJUSTMENT: An adjustment to the amount withdrawn from or
transferred from the MVA Account prior to the end of the applicable Guarantee
Period. The adjustment reflects the change in the value of the funds
withdrawn or transferred due to the change in the interest rates since the
beginning of the Guarantee Period.
MVA ACCOUNT: A separate account which provides investment options where the
Company guarantees the rate of interest for a Guarantee Period and where
withdrawals or transfers may be subject to a Market Value Adjustment.
NET PURCHASE PAYMENT: A Purchase Payment less any applicable Premium Tax.
NON-QUALIFIED CONTRACTS AND CERTIFICATES: Contracts and Certificates issued
under non-qualified plans which are not Qualified Contracts and Certificates.
OWNER: The person or entity entitled to the ownership rights stated in an
individual Contract.
PORTFOLIO: A segment of an Eligible Fund which constitutes a separate and
distinct class of shares, which may also sometimes be referred to herein as a
Fund.
PREMIUM TAX: Any premium taxes incurred to any governmental entity assessed
against Purchase Payments, Contract Values or Certificate Values.
PURCHASE PAYMENT: A payment made by or for an Owner or Certificate Owner.
QUALIFIED CONTRACTS AND CERTIFICATES: Contracts and Certificates issued under
a retirement plan which receive favorable tax treatment under Sections 403(b)
or 408 of the Code.
SUB-ACCOUNT: Variable Account assets are divided into sub-accounts. Assets of
each Sub-Account will be invested in shares of an Eligible Fund or a Portfolio
of an Eligible Fund.
VALUATION DATE: Each day on which the New York Stock Exchange ("NYSE") is
open for business.
VALUATION PERIOD: The period of time beginning at the close of business of
the NYSE on each Valuation Date and ending at the close of business for the
next succeeding Valuation Date.
VARIABLE ACCOUNT: The Company's variable account designated as Great
American Reserve Variable Annuity Account G which provides investment
options where the benefits are variable and are not guaranteed as to
dollar amount.
WRITTEN REQUEST: A request in writing, in a form satisfactory to the Company,
which is received by the Administrative Office.
HIGHLIGHTS
GENERAL
The Contracts and Certificates offered by this Prospectus are combined fixed
and variable deferred annuity contracts and certificates issued by Great
American Reserve Insurance Company (the "Company"). Pursuant to selections
made by the Owner or Certificate Owner, Net Purchase Payments are allocated to
a segregated investment account of the Company which has been designated Great
American Reserve Variable Annuity Account G (the "Variable Account"), and/or
the MVA Account, which is a separate account where the Company guarantees the
rate of interest for a specified period and where withdrawals or transfers may
be subject to a Market Value Adjustment. Owners and Certificate
Owners may invest in up to fifteen (15) Sub-Accounts.
VARIABLE ACCOUNT
The Variable Account is divided into Sub-Accounts. The Sub-Accounts invest in
the following:
Conseco Series Trust
Asset Allocation Portfolio
Common Stock Portfolio
Corporate Bond Portfolio
Government Securities Portfolio
Money Market Portfolio
Evergreen Variable Trust
Evergreen VA Fund
Evergreen VA Foundation Fund
Evergreen VA Growth and Income Fund
Federated Insurance Series
International Stock Fund
The Alger American Fund
Alger American Growth Portfolio
Alger American Leveraged AllCap Portfolio
Alger American MidCap Growth Portfolio
Alger American Small Capitalization Portfolio
INVESCO Variable Investment Funds, Inc.
INVESCO VIF - High Yield Portfolio
INVESCO VIF - Industrial Income Portfolio
Lord Abbett Series Fund, Inc.
Growth & Income Portfolio
The OFFITBANK Variable Insurance Fund, Inc.
OFFITBANK VIF - Emerging Markets Fund
OFFITBANK VIF - Total Return Fund
Van Eck Worldwide Insurance Trust
Worldwide Emerging Markets Fund
Gold and Natural Resources Fund
Worldwide Hard Assets Fund
Tomorrow Funds Retirement Trust (Institutional Class Shares)
Core Large-Cap Stock Fund
Core Small-Cap Stock Fund
Owners and Certificate Owners bear the investment risk for all amounts
allocated to the Variable Account.
MVA ACCOUNT
The MVA Account offers investment options which pay fixed rates of interest
declared by the Company for specified periods (currently, 1 year, 3 years, 5
years, 7 years and 10 years) from the date amounts are allocated to the MVA
Account. Please contact the Company or the representative from whom this
Prospectus was obtained for information as to currently available options.
Such declared rates will vary from time to time but will not be less than 3%
per annum, and, once established for a particular allocation, will not change
during the Guarantee Period. However, withdrawals, transfers or annuitization
prior to the end of the Guarantee Period may be subject to a Market Value
Adjustment. Owners and Certificate Owners bear the risk that amounts
reallocated within, or prematurely withdrawn, transferred or annuitized from
the MVA Account prior to the end of the respective Guarantee Period
could result in the Owner or Certificate Owner receiving less than the Purchase
Payments or amounts so allocated.
RIGHT TO EXAMINE PERIOD
The individual Contract or Certificate may be returned to the Company for any
reason within ten (10) calendar days, or longer in states where required
thirty (30) calendar days if purchased by individuals who are 60 years of age
or older in California or twenty (20) calendar days from the date of receipt
with respect to the circumstances described in (c) below), after its receipt
by the Owner or Certificate Owner ("Right to Examine Period"). It may be
returned to the Company at its Administrative Office. When the Contract or
Certificate is received by the Company at its Administrative Office, it will
be voided as if it had never been in force. Upon its return, the Company will
refund the Contract Value or Certificate Value next computed after receipt of
the Contract or Certificate by the Company at its Administrative Office
except in the following circumstances: (a) where the Contract or Certificate is
purchased pursuant to an individual retirement annuity; (b) in those states
which require the Company to refund Purchase Payments, less withdrawals; or
(c) in the case of Contracts or Certificates which are deemed by certain
states to be replacing an existing annuity or insurance contract and which
require the Company to refund Purchase Payments, less withdrawals. With
respect to the circumstances described in (a), (b) and (c) above, the Company
will refund Purchase Payments, less any withdrawals. The Company has reserved
the right, under certain circumstances, to allocate initial Purchase Payments
to the Money Market Sub-Account (except those allocated to the MVA Account)
until the expiration of the Right to Examine Period. In the event that the
Company does so allocate initial Purchase Payments to the Money Market
Sub-Account, at the end of the Right to Examine Period, the Contract
Value/Certificate Value allocated to the Money Market Sub-Account will be
allocated to the Sub-Account(s) selected by the Owner/Certificate Owner.
Currently, however, the Company will allocate the initial Purchase Payment
directly to the Sub-Account(s) of the Variable Account and/or the MVA Account,
as selected by the Owner/Certificate Owner.
CHARGES
MORTALITY AND EXPENSE RISK CHARGE . Each Valuation Period, the Company
deducts a Mortality and Expense Risk Charge from the Variable Account which is
equal, on an annual basis, to 1.15% of the average daily net asset value of
each Sub-Account of the Variable Account. However, the Company may increase
this charge, but it will not exceed 1.25% of the average daily net asset value
of the Variable Account. This charge compensates the Company for assuming the
mortality and expense risks under the Contracts and Certificates. (See
"Charges and Deductions -Deduction for Mortality and Expense Risk Charge.")
ADMINISTRATIVE CHARGE . Each Valuation Period, the Company deducts an
Administrative Charge from the Variable Account which is equal, on an annual
basis, to .15% of the average daily net asset value of each Sub-Account of
the Variable Account. However, the Company may increase this charge, but it
will not exceed .25% of the average daily net asset value of the Variable
Account. This charge compensates the Company for costs associated with the
administration of the Contracts, Certificates and the Variable Account. (See
"Charges and Deductions -Deduction for Administrative Charge.")
CONTRACT AND CERTIFICATE MAINTENANCE CHARGES . The Company makes a
deduction of $30.00 each Contract or Certificate Year. However, during the
Accumulation Period if the Contract Value or the Certificate Value on the
Contract or Certificate Anniversary is at least $25,000, then no Contract or
Certificate Maintenance Charge is deducted. If a total withdrawal is made on
other than a Contract or Certificate Anniversary and the Contract Value or
the Certificate Value for the Valuation Period during which the total
withdrawal is made is less than $25,000, the full Contract or Certificate
Maintenance Charge will be deducted at the time of the total withdrawal.
During the Annuity Period, no Contract or Certificate Maintenance Charge is
deducted. (See "Charges and Deductions - Deduction for Contract and
Certificate Maintenance Charges.")
TRANSFER FEE . Under certain circumstances, a Transfer Fee may be
assessed when an Owner or Certificate Owner transfers Contract Values or
Certificate Values between Sub-Accounts of the Variable Account or to or from
the MVA Account. The Transfer Fee is the lesser of $25 or 2% of the amount
transferred. (See "Charges and Deductions - Deduction for Transfer Fee.")
PREMIUM AND OTHER TAXES. Certain states and other governmental entities
impose premium and other taxes based on Purchase Payments received by the
Company. It is the Company's current practice to deduct a charge for Premium
Taxes from an Owner's Contract Value or a Certificate Owner's Certificate
Value, if applicable at the time Annuity Payments begin or from amounts that
are withdrawn (although the deduction could be taken from Purchase Payments in
the future). (See "Charges and Deductions - Deduction for Premium and Other
Taxes.")
TAXES
There is a ten percent (10%) federal income tax penalty that may be applied to
the taxable income portion of any distribution from the Contracts and
Certificates. However, the penalty is not imposed under certain circumstances.
See "Tax Status - Tax Treatment of Withdrawals - Non-Qualified Contracts and
Certificates" and "Tax Treatment of Withdrawals - Qualified Contracts and
Certificates."
Withdrawals of amounts attributable to contributions made pursuant to a salary
reduction agreement (as defined in Section 403(b)(11) of the Code) are limited
to circumstances only when an Owner/Certificate Owner (1) attains age 59 1/2;
(2) separates from service; (3) dies; (4) becomes disabled (within the meaning
of Section 72(m)(7) of the Code); or (5) in the case of hardship. However,
withdrawals for hardship are restricted to the portion of the Owner's Contract
Value or Certificate Owner's Certificate Value which represents contributions
made by the Owner/Certificate Owner and does not include any investment
results. The limitations on withdrawals became effective on January 1, 1989
and only apply to (i) salary reduction contributions made after December 31,
1988; (ii) to income attributable to such contributions; and (iii) to income
attributable to amounts held as of December 31, 1988. The limitations on
withdrawals do not affect rollovers or transfers between certain Qualified
Plans. Owners and Certificate Owners should consult their own tax counsel or
other tax adviser regarding distributions. (See "Tax Status - Tax Sheltered
Annuities - Withdrawal Limitations.")
The Treasury Department has indicated that guidelines may be forthcoming
under which a variable annuity contract will not be treated as an annuity
contract for tax purposes if the owner of the contract has excessive control
over the investment underlying the contract. The issuance of such guidelines
may require the Company to impose limitations on an Owner's or Certificate
Owner's right to control the investment. It is not known whether any such
guidelines would have a retroactive effect (see "Tax Status -
Diversification").
For a further discussion of the taxation of the Contracts and Certificates,
see "Tax Status."
MVA ACCOUNT
Because of certain exemptive and exclusionary provisions, the MVA Account is
not registered as an investment company under the Investment Company Act of
1940, as amended.
GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT G
FEE TABLE
OWNER AND CERTIFICATE OWNER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
<S> <C>
Sales Charge None
Transfer Fee (see Note 2 below) No charge for first transfer in a 30 day
period during the Accumulation Period and
no charge for four transfers per
Contract/Certificate Year during the
Annuity Period; thereafter the fee is the
lesser of $25 or 2% of the amount
transferred.
Contract and Certificate $30 per Contract/Certificate Year.
Maintenance Charges
(see Note 3 below)
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
VARIABLE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
Mortality and Expense Risk Charge 1.15%
Administrative Charge .15%
------
Total Variable Account Annual Expenses 1.30%
</TABLE>
CONSECO SERIES TRUST'S ANNUAL EXPENSES
(as a percentage of the average daily net assets of a Portfolio)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Management Other Total Expenses (after
Fees Expenses expense reimbursement)*
----------- --------- ------------------------
Asset Allocation Portfolio** .55% .20% .75%
Common Stock Portfolio** .60% .20% .80%
Corporate Bond Portfolio .50% .20% .70%
Government Securities Portfolio .50% .20% .70%
Money Market Portfolio** .25% .20% .45%
<FN>
* Conseco Capital Management, Inc., the investment adviser of Conseco Series
Trust, has voluntarily agreed to reimburse all expenses, including management
fees, in excess of the following percentage of the average annual net assets of
each listed Portfolio, so long as such reimbursement would not result in a
Portfolio's inability to qualify as a regulated investment company under the
Code: 0.75% for the Asset Allocation Portfolio; 0.80% for the Common Stock
Portfolio; 0.70% for the Corporate Bond Portfolio and Government Securities
Portfolio; and 0.45% for the Money Market Portfolio. The total percentages in the
above table is after reimbursement. In the absence of expense reimbursement, the
total fees and expenses in 1995 would have totaled: 0.87% for the Asset
Allocation Portfolio; 0.80% for the Common Stock Portfolio; 0.74% for the
Corporate Bond Portfolio; 0.77% for the Government Securities Portfolio; and
0.52% for the Money Market Portfolio.
**Conseco Capital Management, Inc., since January 1, 1993, has voluntarily waived
its Management Fees in excess of the annual rates set forth above. Absent such
fee waivers, the Management Fees would be: .65% for the Asset Allocation
Portfolio; .65% for the Common Stock Portfolio; and .50% for the Money Market
Portfolio.
</TABLE>
EVERGREEN VARIABLE TRUST'S ANNUAL EXPENSES
(as a percentage of the average daily net assets of a Portfolio)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Other
Expenses
Management (after expense
Fees reimbursement)* Total Expenses
----------- --------------- -----------------
Evergreen VA Fund .95% .05% 1.00%
Evergreen VA Foundation Fund .825% .175% 1.00%
Evergreen VA Growth and Income
Fund .95% .05% 1.00%
<FN>
* Evergreen Asset Management Corp., the investment adviser to Evergreen
Variable Trust, has agreed to limit aggregate operating expenses (including
the adviser's fee, but excluding interest, taxes, brokerage commissions and
extraordinary expenses) of the Funds to 1.00% of average net assets. Absent
such reimbursement arrangements, the Total Annual Expenses would be: 3.06% for
the Evergreen VA Fund; 2.75% for the Evergreen VA Growth and Income Fund; and
2.08% for the Evergreen VA Foundation Fund.
</TABLE>
FEDERATED INSURANCE SERIES' ANNUAL EXPENSES
(as a percentage of the average daily net assets of a Portfolio)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Management Other Total
Fees Expenses Expenses
----------- --------- ----------
International Stock Fund* .00% 1.25% 1.25%
<FN>
*Federated Advisers, the investment adviser of Federated Insurance Series,
has voluntarily agreed to reimburse all or a portion of its advisory fee.
In the absence of such expense reimbursement, the maximum Management Fees
would be 1.00% of the Fund's average daily net assets. The total operating
expenses in the table above are based on expected expenses during the fiscal
year ending December 31, 1996. The total operating expenses for the fiscal
year ended December 31, 1995 were 1.22% and would have been 12.64% absent the
voluntary waiver of the Management Fee and the voluntary reimbursement of
certain other operating expenses.
</TABLE>
THE ALGER AMERICAN FUND'S ANNUAL EXPENSES
(as a percentage of the average daily net assets of a Portfolio)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Other Expenses
Management (after expense Total
Fees reimbursement)* Expenses
----------- --------------- ----------
Alger American Growth Portfolio .75% .10% .85%
Alger American Leveraged
AllCap Portfolio .85% .71% 1.56%
Alger American MidCap Growth
Portfolio .80% .10% .90%
Alger American Small Capitali-
zation Portfolio .85% .07% .92%
<FN>
* For the Alger American Leveraged AllCap Portfolio, absent expense
reimbursements, the Other Expenses and Total Expenses would have been 3.07%
and 3.92%, respectively. Included in Other Expenses of the Alger American
Leveraged AllCap Portfolio is .06% of interest expense on borrowings made
for leveraging purposes. (See The Alger American Fund prospectus for more
information).
</TABLE>
INVESCO VARIABLE INVESTMENT FUNDS, INC.'S ANNUAL EXPENSES
(as a percentage of the average daily net assets of a Portfolio)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Other Expenses
Management (after expense Total Operating
Fees reimbursement) Expenses*
----------- --------------- -------------------
INVESCO VIF - High Yield
Portfolio .60% .37% .97%
INVESCO VIF - Industrial Income
Portfolio .75% .28% 1.03%
<FN>
* Certain expenses are being absorbed voluntarily by the investment adviser
and sub-adviser. Total expenses (after expenses were absorbed but before any
expense offset arrangement) of the INVESCO VIF - High Yield Portfolio
and INVESCO VIF - Industrial Income Portfolio for the year ended December
31, 1995 amounted to .97% and 1.03%, respectively, of each Portfolio's average
net assets. In the absence of such voluntary expense limitation, the total
operating expenses of the INVESCO VIF - High Yield Portfolio and INVESCO VIF -
Industrial Income Portfolio for the fiscal period ended December 31, 1995
would have been 2.71% and 2.31%, respectively, of each Portfolio's average net
assets.
</TABLE>
LORD ABBETT SERIES FUND, INC.'S ANNUAL EXPENSES
(as a percentage of the average daily net assets of a Portfolio)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Other Total
Management Operating Fund Annual
Fees 12b-1 Fees** Expenses Expenses
----------- ------------- ------------ -------------
Growth and Income
Portfolio .50% .07% .02% .59%
<FN>
** The expenses for the Growth and Income Portfolio of Lord Abbett Series
Fund, Inc. have been restated to reflect a 12b-1 plan which provides for
payments to Lord, Abbett & Co. for remittance to a life insurance company
for certain distribution expenses (see the Lord Abbett Series Fund, Inc.
prospectus). The 12b-1 plan provides that such remittances,in the aggregate,
will not exceed .15%, on an annual basis, of the daily net asset value of
shares of the Growth and Income Portfolio. The 12b-1 plan was implemented
on or about June 28, 1996. The 12b-1 fees shown above have been estimated
for the year ending December 31, 1996. The examples below for this Portfolio
reflect the imposition of the estimated 12b-1 fees.
</TABLE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.'S ANNUAL EXPENSES
(as a percentage of average daily net assets of a Portfolio)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Other Expenses
(after expense
Management Fees reimbursement)* Total Expenses
--------------- --------------- ---------------
OFFITBANK VIF -
Emerging Markets
Fund .90% .60% 1.50%
OFFITBANK VIF -
Total Return Fund .80% .20% 1.00%
<FN>
* The adviser has agreed to reimburse Other Expenses of the OFFITBANK VIF-
Emerging Markets Fund ("Emerging Markets Fund") and the OFFITBANK VIF - Total
Return Fund ("Total Return Fund") such that the Total Expenses do not exceed
1.50% and 1.00% respectively of each Fund's average daily net assets. Absent
such reimbursement, the Other Expenses and the Total Expenses for the year
ending December 31, 1997 are estimated to be .53% and 1.33% for the Total
Return Fund. Given the projected asset size of the Emerging Markets Fund, it
is not anticipated that an expense reimbursement will be necessary with
respect to that Fund. Bisys Fund Services, Inc. serves as the administrator to
the OFFITBANK Variable Insurance Fund, Inc. and receives an administration fee
equal to .15% of aggregate average daily net assets of the Funds which is
currently being waived in 1997.
+ The amounts shown above for the Total Return Fund represent the fees and
expenses only with respect to that portion of the Fund's assets which is not
invested in the underlying funds. To the extent that the Total Return Fund
invests in the underlying funds (see "Eligible Funds - The OFFITBANK Variable
Insurance Fund, Inc. - OFFITBANK VIF - Total Return Fund"), the Total Return
Fund will indirectly bear a pro rata share of fees and expenses incurred by
the underlying funds (see the prospectus for the Total Return Fund for the
fees of the underlying funds).
</TABLE>
VAN ECK WORLDWIDE INSURANCE TRUST'S ANNUAL EXPENSES
(As a percentage of average daily net assets of a Portfolio)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Other Expenses
Management (after expense
Fees reimbursement) Total Expenses
----------- -------------- -----------------
Worldwide Emerging Markets Fund* .00% .00% .00%
Gold and Natural Resources
Fund 1.00% .08% 1.08%
Worldwide Hard Assets Fund* .00% .00% .00%
<FN>
* Expenses for Worldwide Emerging Markets Fund and Worldwide Hard Assets Fund
are being voluntarily absorbed until net assets reach $10 million or until
September 30, 1996. In the absence of the investment adviser's absorption of
these expenses, Management Fees for both of these Funds would be 1.00% of each
Fund's average daily net assets and Other Expenses and Total Expenses would
be 1.06% and 2.06%, respectively, for the Worldwide Emerging Markets Fund and
1.51% and 2.51%, respectively, for the Worldwide Hard Assets Fund.
</TABLE>
TOMORROW FUNDS RETIREMENT TRUST'S (INSTITUTIONAL CLASS SHARES) ANNUAL EXPENSES
(as a percentage of average daily net assets of a Portfolio)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Management Fees Other Expenses
(after Voluntary (after expense Total Fund Operating Expenses
waiver)* limitation)* (after expense limitation)*
----------------- --------------- ------------------------------
Core Large-Cap Stock Fund 0% 1.50% 1.50%
Core Small-Cap Stock Fund 0% 1.50% 1.50%
<FN>
* The Adviser to Tomorrow Funds Retirement Trust has voluntarily agreed to limit temporarily
each Fund's operating expenses (excluding service fees applicable to Institutional Class
shares, any other class-specific expenses, litigation, indemnification and other
extraordinary expenses) to 1.25% of its average daily net assets. Each Fund will reimburse
the Adviser for fees foregone or other expenses paid by the Adviser pursuant to this expense
limitation in later years in which operating expenses for that Fund are less than the expense
limitations set forth above for any such year. (See the Trust Prospectus.) In the absence
of this agreement, Management Fees would be 0.75% of each Fund's average daily net assets and
Other Expenses and Total Fund Operating Expenses are estimated to be approximately 3.90% and
4.65%, respectively, of the average daily net assets attributable to the Institutional Class
shares of the Core Large-Cap Fund and 4.49% and 5.24%, respectively, of the average daily net
assets attributable to the Institutional Class shares of the Core Small-Cap Fund.
</TABLE>
EXAMPLES (See Note 4 below)
Owner/Certificate Owner would pay the following expenses on a $1,000
investment, assuming a 5% annual return on assets regardless of whether the
Contract/Certificate is surrendered at the end of each time period or if the
Contract/Certificate is annuitized.
<TABLE>
<CAPTION>
<S> <C> <C>
1 Year 3 Years
--------- ----------
Conseco Series Trust
Asset Allocation Portfolio $ 21 $ 66
Common Stock Portfolio $ 22 $ 67
Corporate Bond Portfolio $ 21 $ 64
Government Securities Portfolio $ 21 $ 64
Money Market Portfolio $ 18 $ 57
Evergreen Variable Trust
Evergreen VA Fund $ 24 $ 73
Evergreen VA Foundation Fund $ 24 $ 73
Evergreen VA Growth and Income Fund $ 24 $ 73
Federated Insurance Series
International Stock Fund $ 26 $ 81
The Alger American Fund
Alger American Growth Portfolio $ 22 $ 69
Alger American Leveraged AllCap
Portfolio $ 29 $ 90
Alger American MidCap Growth
Portfolio $ 23 $ 70
Alger American Small Capitalization
Portfolio $ 23 $ 71
INVESCO Variable Investment Funds, Inc.
INVESCO VIF - High Yield Portfolio $ 23 $ 72
INVESCO VIF - Industrial Income Portfolio $ 24 $ 74
Lord Abbett Series Fund, Inc.
Growth & Income Portfolio $ 20 $ 61
The OFFITBANK Variable Insurance
Fund, Inc.
OFFITBANK VIF - Emerging Markets Fund $ 29 $ 88
OFFITBANK VIF - Total Return Fund $ 24 $ 73
Van Eck Worldwide Insurance Trust
Worldwide Emerging Markets Fund $ 14 $ 43
Gold and Natural Resources Fund $ 25 $ 76
Worldwide Hard Assets Fund $ 14 $ 43
Tomorrow Funds Retirement Trust
Core Large-Cap Stock Fund $ 29 $ 88
Core Small-Cap Stock Fund $ 29 $ 88
<FN>
THE ANNUAL EXPENSES OF THE ELIGIBLE FUNDS AND THE EXAMPLES ARE BASED ON DATA
PROVIDED BY THE RESPECTIVE ELIGIBLE FUNDS. THE COMPANY HAS NOT INDEPENDENTLY
VERIFIED SUCH DATA.
</TABLE>
NOTES TO FEE TABLE AND EXAMPLES
1. The Fee Table is provided to assist Owners and Certificate Owners in
understanding the various costs and expenses that they will bear directly or
indirectly. The Fee Table reflects expenses of both the Variable Account and
the Eligible Funds. For more complete descriptions of the various costs and
expenses involved, see "Charges and Deductions" in this Prospectus and the
prospectuses for the Eligible Funds. Premium Taxes may also be applicable,
although they do not appear in this table.
2. Any transfers made pursuant to an approved Dollar Cost Averaging
Program and/or Rebalancing Program will not be counted in determining the
application of the Transfer Fee. All reallocations on the same day count as
one transfer.
3. During the Accumulation Period, if the Owner's Contract Value or the
Certificate Owner's Certificate Value on the Contract or Certificate
Anniversary is at least $25,000, then no Contract or Certificate Maintenance
Charge is deducted. If a total withdrawal is made on other than a Contract or
Certificate Anniversary and the Contract Value/Certificate Value for the
Valuation Period during which the total withdrawal is made is less than
$25,000, the full Contract or Certificate Maintenance Charge will be deducted
at the time of the total withdrawal. During the Annuity Period, no Contract or
Certificate Maintenance Charges are deducted. (See "Charges and Deductions.")
4. The Examples assume an estimated $40,000 Contract Value or
Certificate Value so that the Contract and Certificate Maintenance
Charges per $1,000 of net asset value in the Variable Account is $.75. Such
charge would be higher for smaller values and lower for higher values.
THE COMPANY
Great American Reserve Insurance Company (the "Company" or "Great American
Reserve"), originally organized in 1937, is principally engaged in the life
insurance business in 47 states and the District of Columbia. The Company is
a stock company organized under the laws of the state of Texas and an indirect
wholly owned subsidiary of Conseco, Inc. ("Conseco"). The operations of the
Company are handled by Conseco. Conseco is a publicly owned financial
services holding company, the principal operations of which are the
development, marketing and administration of specialized annuity and life
insurance products. Conseco is located at 11825 N. Pennsylvania Street,
Carmel, Indiana 46032.
All inquiries regarding Accounts, the Contracts/Certificates, or any related
matter should be directed to the Company's Variable Annuity Department at the
address and telephone number shown on the cover page of this Prospectus. The
financial statements of the Company included in this Prospectus should be
considered only as bearing upon the ability of the Company to meet the
obligations under the Contracts and Certificates. Neither the assets of
Conseco nor those of any company in the Conseco group of companies other than
the Company support these obligations. As of September 30, 1996, the Company
had total assets of $2.7 billion and total shareholder's equity of $381.9
million. The Company does not guarantee the investment performance of the
Variable Account investment options.
For further information about the Company, see "Additional Information About
the Company."
THE SEPARATE ACCOUNTS
The Board of Directors of the Company adopted resolutions to establish
segregated asset accounts pursuant to Texas insurance law on January 18,
1996. One segregated asset account has been designated Great American Reserve
Variable Annuity Account G (the "Variable Account"). The other separate
account has been designated Great American Reserve Market Value Adjustment
Account (the "MVA Account") (collectively, the "Separate Accounts"). The
Company has caused the Variable Account to be registered with the Securities
and Exchange Commission as a unit investment trust pursuant to the provisions
of the Investment Company Act of 1940, as amended.
The assets of the Separate Accounts are the property of the Company. However,
the assets of the Separate Accounts, equal to the reserves and other contract
liabilities with respect to the Separate Accounts, are not chargeable with
liabilities arising out of any other business the Company may conduct.
Income, gains and losses, whether or not realized, are, in accordance with the
Contracts and Certificates, credited to or charged against the Separate
Accounts without regard to other income, gains or losses of the Company. The
Company's obligations arising under the Contracts and Certificates are general
obligations.
The Separate Accounts meet the definition of a "separate account" under
federal securities laws.
The Variable Account is divided into Sub-Accounts. Each Sub-Account invests in
one Portfolio of an Eligible Fund.
ELIGIBLE FUNDS
The Variable Account invests in the shares of the Eligible Funds as described
below. The descriptions below contain a short discussion of the investment
objective(s). See Appendix A in this Prospectus and the prospectuses for the
Eligible Funds for further information.
There is no assurance that the investment objective of any of the Portfolios
will be met. Owners and Certificate Owners bear the complete investment risk
for Purchase Payments allocated to a Portfolio. Contract Values and
Certificate Values will fluctuate in accordance with the investment
performance of the Portfolios to which Purchase Payments are allocated, and in
accordance with the imposition of the fees and charges assessed under the
Contracts and Certificates.
DETAILED INFORMATION ABOUT THE ELIGIBLE FUNDS IS CONTAINED IN THE ACCOMPANYING
CURRENT PROSPECTUSES OF THE ELIGIBLE FUNDS. AN INVESTOR SHOULD CAREFULLY READ
THIS PROSPECTUS AND THE PROSPECTUSES OF THE ELIGIBLE FUNDS BEFORE ALLOCATING
AMOUNTS TO BE INVESTED IN THE VARIABLE ACCOUNT.
CONSECO SERIES TRUST
ASSET ALLOCATION PORTFOLIO: The Asset Allocation Portfolio seeks a high
total investment return, consistent with the preservation of capital and
prudent investment risk. The Portfolio seeks to achieve this objective by
pursuing an active asset allocation strategy whereby investments are
allocated, based upon thorough investment research, valuation and analysis of
market trends and the anticipated relative total return available, among
various asset classes including debt securities, equity securities, and money
market instruments.
COMMON STOCK PORTFOLIO: The Common Stock Portfolio seeks to provide a
high total return consistent with preservation of capital and a prudent level
of risk primarily by investing in selected equity securities having the
investment characteristics of common stocks.
CORPORATE BOND PORTFOLIO: The Corporate Bond Portfolio seeks to provide
as high a level of income as is consistent with preservation of capital by
investing primarily in debt securities.
GOVERNMENT SECURITIES PORTFOLIO: The Government Securities Portfolio
seeks safety of capital, liquidity and current income by investing primarily
in securities issued by the U.S. Government, including mortgage-related
securities.
MONEY MARKET PORTFOLIO: The Money Market Portfolio seeks current income
consistent with stability of capital and liquidity. An investment in this
Portfolio is neither insured nor guaranteed by the U.S. Government and there
can be no assurance that the Portfolio will be able to maintain a stable net
asset value of $1.00 per share.
EVERGREEN VARIABLE TRUST
EVERGREEN VA FUND: The Evergreen VA Fund seeks to achieve its investment
objective of capital appreciation principally through investments in common
stock and securities convertible into or exchangeable for common stock of
companies which are little-known, relatively small or represent special
situations which, in the Adviser's opinion, offer potential for capital
appreciation. Income will not be a factor in the selection of portfolio
investments.
EVERGREEN VA FOUNDATION FUND: The Evergreen VA Foundation Fund seeks, in
order of priority, reasonable income, conservation of capital and capital
appreciation. The Fund seeks to achieve these objectives by investing in a
combination of common stocks, preferred stocks, securities convertible into or
exchangeable for common stocks and fixed income securities.
EVERGREEN VA GROWTH AND INCOME FUND: The Evergreen VA Growth and Income
Fund seeks to achieve a return composed of capital appreciation in the value
of its shares and current income. The Fund seeks to achieve its investment
objective by investing in the securities of companies which are undervalued
in the marketplace relative to those companies' assets, breakup value,
earnings, or potential earnings growth.
FEDERATED INSURANCE SERIES
INTERNATIONAL STOCK FUND: The International Stock Fund seeks to obtain a
total return on its assets. This fund seeks to achieve its objective by
investing at least 65% of its assets (and under normal market conditions
substantially all of its assets) in equity securities of issuers in at least
three different countries outside of the United States. Investing in foreign
securities generally involves risks not ordinarily associated with investing
in securities of domestic issuers. Purchasers are cautioned to read "Risks
Associated with Non-U.S. Securities" in the Insurance Management Series
Prospectus.
THE ALGER AMERICAN FUND
ALGER AMERICAN GROWTH PORTFOLIO: The investment objective of the Alger
American Growth Portfolio is long-term capital appreciation. Except during
temporary defensive periods, the Portfolio invests at least 65% of its total
assets in equity securities of companies that, at the time of purchase of the
securities, have total market capitalization of $1 billion or greater. The
Portfolio may invest up to 35% of its total assets in equity securities
of companies that, at the time of purchase, have total market capitalization
of less than $1 billion and in excess of that amount (up to 100% of its
assets) during temporary defensive periods.
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO: The Alger American Leveraged
AllCap Portfolio seeks long-term capital appreciation by investing in a
diversified, actively managed portfolio of equity securities. The Portfolio
may engage in leveraging (up to 33 1/3% of its assets) and options and futures
transactions, which are deemed to be speculative and which may cause the
Portfolio's net asset value to be more volatile than the net asset value of a
fund that does not engage in these activities.
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO: The investment objective of the
Alger American MidCap Growth Portfolio is long-term capital appreciation.
Except during temporary defensive periods, the Portfolio invests at least 65%
of its total assets in equity securities of companies that, at the time of
purchase of the securities, have total market capitalization within the range
of companies included in the S&P MidCap 400 Index, updated quarterly.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO: The investment objective
of the Alger American Small Capitalization Portfolio is long-term capital
appreciation. Except during temporary defensive periods, the Portfolio
invests at least 65% of its total assets in equity securities of companies
that, at the time of purchase, have total market capitalization within the
range of companies included in the Russell 2000 Growth Index, updated
quarterly. The Portfolio may invest up to 35% of its total assets in equity
securities of companies that, at the time of purchase, have total market
capitalization of $1 billion or greater and in excess of that amount (up to
100% of its assets) during temporary defensive periods.
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO VIF - HIGH YIELD PORTFOLIO: The INVESCO VIF - High Yield
Portfolio seeks a high level of current income by investing substantially all
of its assets in lower rated bonds and other debt securities and in preferred
stock. The Portfolio pursues its investment objective through investment in a
variety of long-term, intermediate term, and short-term bonds. Potential
capital appreciation is a factor in the selection of investments, but is
secondary to the Portfolio's primary objective. The Portfolio invests
primarily in lower rated bonds, commonly known as "junk bonds." Investments
of this type are subject to greater risks, including default risks, than those
found in higher rated securities. See the Portfolio Prospectus for more
information on the risks associated with these types of investments.
INVESCO VIF - INDUSTRIAL INCOME PORTFOLIO: The INVESCO VIF - Industrial
Income Portfolio seeks the best possible current income while following sound
investment practices. Capital growth potential is an additional, but
secondary, consideration in the selection of Portfolio securities. The
Portfolio seeks to achieve its investment objective by investing in securities
which will provide a relatively high yield and stable return and which, over a
period of years, also may provide capital appreciation.
LORD ABBETT SERIES FUND, INC.
GROWTH & INCOME PORTFOLIO: The Growth and Income Portfolio seeks
long-term growth of capital and income without excessive fluctuation in market
value. The Portfolio will invest in securities which are selling at
reasonable prices in relation to value. The Portfolio will normally invest in
common stocks (including securities convertible into common stocks) of large,
seasoned companies in sound financial condition, which common stocks are
expected to show above-average price appreciation.
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
OFFITBANK VIF - EMERGING MARKETS FUND: The investment objective of the
OFFITBANK VIF - Emerging Markets Fund is to provide a competitive total
investment return by focusing on current yield and opportunities for capital
appreciation. The Fund will seek to achieve its objective by investing
primarily in corporate and sovereign debt instruments of emerging market
countries. Under normal circumstances, the Fund will invest at least 80% of
its total assets in debt instruments, but may invest up to 20% of its total
assets in equity securities.
OFFITBANK VIF- TOTAL RETURN FUND: The OFFITBANK VIF - Total Return Fund's
investment objective is to maximize total return from a combination of capital
appreciation and current income. The Fund will seek to achieve its objective
by investing primarily in a diversified portfolio of fixed income securities
of varying maturities and by giving the adviser broad discretion to deploy
the Fund's assets among certain segments of the fixed income market that the
adviser believes will best contribute to the achievement of the Fund's
objective. The Fund may invest directly in the markets and securities
described in the Fund prospectus, or indirectly through investing in the
other investment portfolios of The OFFITBANK Variable Insurance Fund, Inc.,
including the OFFITBANK VIF-U.S. Government Securities Fund, the OFFITBANK
VIF-High Yield Fund and the OFFITBANK VIF-Emerging Markets Fund (the
"underlying funds").
VAN ECK WORLDWIDE INSURANCE TRUST
WORLDWIDE EMERGING MARKETS FUND: The Worldwide Emerging Markets Fund
seeks long-term capital appreciation by investing primarily in equity
securities in emerging markets around the world. The Fund emphasizes countries
that, compared to the world's major economies, exhibit relatively low gross
national product per capita as well as the potential for rapid economic
growth. Emerging countries can be found in regions such as Asia, Latin
America, Eastern Europe and Africa. Peregrine Asset Management Limited (Hong
Kong) serves as sub-investment adviser to the Fund. Investing in foreign
securities generally involves risks not ordinarily associated with investing
in securities of domestic issuers. Purchasers are cautioned to read "Risk
Factors" in the Van Eck Worldwide Insurance Trust Prospectus.
GOLD AND NATURAL RESOURCES FUND: The Gold and Natural Resources Fund
seeks long-term capital appreciation by investing in equity and debt
securities of companies engaged in the exploration, development, production
and distribution of gold and other natural resources, such as strategic and
other metals, minerals, forest products, oil, natural gas and coal. Current
income is not an investment objective.
WORLDWIDE HARD ASSETS FUND: The Worldwide Hard Assets Fund seeks
long-term capital appreciation by investing globally, primarily in "Hard Asset
Securities." Hard Asset Securities include equity securities of "Hard Asset
Companies" and securities, including structured notes, whose value is linked
to the price of a Hard Asset commodity or a commodity index. The term "Hard
Asset Companies" includes companies that are directly or indirectly (whether
through supplier relationships, servicing agreements or otherwise) engaged to
a significant extent in the exploration, development, production or
distribution of one or more of the following (together "Hard Assets"): (i)
precious metals, (ii) ferrous and non-ferrous metals, (iii) gas, petroleum,
petrochemicals or other hydrocarbons, (iv) forest products, (v) real estate
and (vi) other basic non-agricultural commodities which, historically, have
been produced and marketed profitably during periods of significant inflation.
Under normal market conditions, the Fund will invest at least 5% of its
assets in each of the first five sectors listed above. Income is a secondary
consideration.
TOMORROW FUNDS RETIREMENT TRUST
CORE LARGE-CAP STOCK FUND: The Core Large-Cap Stock Fund seeks to exceed
the performance of publicly traded large capitalization stocks in the
aggregate, as represented by the Standard & Poor's Index of 500 Common Stocks.
CORE SMALL-CAP STOCK FUND: The Core Small-Cap Stock Fund seeks to exceed
the performance of publicly traded small capitalization stocks in the
aggregate, as represented by the Russell 2000 Index.
VOTING RIGHTS
In accordance with its view of present applicable law, the Company will vote
the shares of the Eligible Funds held in the Variable Account at special
meetings of the shareholders in accordance with instructions received from
persons having the voting interest in the Variable Account attributable to
that option. The Company will vote shares for which it has not received
instructions, as well as shares attributable to it, in the same proportion as
it votes shares for which it has received instructions. None of the Eligible
Funds hold regular meetings of shareholders.
The number of shares which a person has a right to vote will be determined as
of a date to be chosen by the Company. Voting instructions will be solicited
by written communication prior to the meeting.
SUBSTITUTION OF SECURITIES
If the shares of an Eligible Fund (or any Portfolio within an Eligible Fund or
any other Eligible Fund or Portfolio), are no longer available for investment
by the Variable Account or, if in the judgment of the Company's Board of
Directors, further investment in the shares should become inappropriate in
view of the purpose of the Contracts or Certificates, the Company may limit
further purchase of such shares or may substitute shares of another Eligible
Fund or Portfolio for shares already purchased under the Contracts and
Certificates. No substitution of securities may take place without prior
approval of the Securities and Exchange Commission and under the requirements
it may impose.
Shares of the Eligible Funds are issued and redeemed in connection with
investments in and payments under certain variable annuity contracts and
variable life insurance policies of various life insurance companies which may
or may not be affiliated. In addition, certain Eligible Funds offer their
shares to qualified pension and retirements plans ("Qualified Plans"). The
Eligible Funds do not foresee any disadvantage to Owners or Certificate
Owners arising out of the fact that the Eligible Funds offer their shares for
products offered by life insurance companies which are not affiliated (or
with respect to certain Eligible Funds that may offer their shares to
Qualified Plans). Nevertheless, the Boards of Trustees or Boards of
Directors, as applicable, of the Eligible Funds intend to monitor events in
order to identify any material irreconcilable conflicts which may possibly
arise and to determine what action, if any, should be taken in response
thereto. If such a conflict were to occur, one or more insurance company
separate accounts (or Qualified Plans) might withdraw its investments in an
Eligible Fund. An irreconcilable conflict might result in the withdrawal of
a substantial amount of a Portfolio's assets which could adversely affect
such Portfolio's net asset value per share.
THE MVA ACCOUNT
In addition to the Sub-Accounts of the Variable Account, Owners and
Certificate Owners may also allocate Net Purchase Payments or transfer values
to the MVA Account, which is a separate account where the Company guarantees
the rate of interest for a specified period.
Net Purchase Payments may be allocated to one or more of the MVA Account
Guarantee Period options. Currently, the Company offers five MVA Account
Guarantee Periods - 1 Year, 3 years, 5 years, 7 years and 10 Years. In
addition, during the Accumulation Period, Contract Values and Certificate
Values can be transferred from the Variable Account to one or more of the MVA
Account Guarantee Period options. There will be an initial Credited Interest
Rate for the initial Guarantee Period of the MVA Account. After the initial
Guarantee Period, the Credited Interest Rate for any subsequent Guarantee
Period of the MVA Account may change. All interest payable under a Contract
or Certificate is compounded daily at the stated effective annual interest
rate. In no event will the Credited Interest Rate be less than the minimum
guaranteed interest rate, prior to the application of the Market Value
Adjustment.
During the thirty (30) days prior to the end of a current Guarantee Period,
the Owner or Certificate Owner may, by Written Request or pursuant to a
telephone transfer authorization, elect to renew for the same or any other
Guarantee Period then available at the then Credited Interest Rate or may
elect to transfer all or a portion of the amount to the Variable Account. Any
transfer elected during the thirty (30) days prior to the end of a current
Guarantee Period will be made as of the date the request is received by the
Company and will not be subject to the Market Value Adjustment.
If the Owner or Certificate Owner does not specify a Guarantee Period at the
time of renewal, the Company will select and transfer to the same Guarantee
Period as has just expired, so long as such Guarantee Period does not extend
beyond the latest Annuity Date that can be selected by an Owner or Certificate
Owner. If such Guarantee Period does extend beyond the latest Annuity Date,
the Company will choose the one year period. If there is no Guarantee Period
for the same period available, the one year period will be selected. If the
one year period is no longer available, the next longest period available will
be selected.
The Owner or Certificate Owner may elect one or more Guarantee Periods subject
to the Company's underwriting rules. Multiple Guarantee Periods are treated
separately for purposes of applying the Market Value Adjustment. The Company
reserves the right to credit different Credited Interest Rates to the
Contract Value/Certificate Value attributable to:
1. different Guarantee Periods; and
2. Guarantee Periods of the same duration with different Effective
Dates.
The Owner or Certificate Owner may upon Written Request or pursuant to a
telephone transfer authorization change to any Guarantee Period then being
offered by the Company with respect to contracts and certificates of this type
and class. The Market Value Adjustment will apply to a change made at any
time other than at the end of a Guarantee Period. The Market Value Adjustment
will not apply to a change made at the end of a Guarantee Period if a Written
Request or a telephone transfer authorization is received by the Company
within thirty (30) days prior to the end of the Guarantee Period. The Market
Value Adjustment will be an addition to or deduction from the remaining amount
of Contract Value or Certificate Value except in the case of a full
surrender in which case the Market Value Adjustment will be an addition to or
deduction from the amount surrendered.
Any amount withdrawn, transferred or annuitized prior to the end of that
Guarantee Period may be subject to a Market Value Adjustment. Owners and
Certificate Owners bear the risk that amounts reallocated within, or
prematurely withdrawn, transferred or annuitized from the MVA Account prior to
the end of their respective Guarantee Period could result in the Owner or
Certificate Owner receiving less than the Purchase Payments or amounts so
allocated. The Market Value Adjustment will be calculated by multiplying the
amount withdrawn, transferred or annuitized by the formula set forth below.
There will be no Market Value Adjustment on withdrawals from the MVA Account
in the following situations: (1) payment of a death benefit under the Contract
or Certificate; (2) amounts withdrawn to pay fees or charges; (3) amounts
withdrawn or transferred from the MVA Account within 30 days prior to the end
of the Guarantee Period; (4) if an Owner/Certificate Owner annuitizes his/her
Contract/Certificate under an Annuity Option providing for at least 60 monthly
Annuity Payments; and (5) withdrawals once each Contract or Certificate Year,
after the first year in such Guarantee Period, of up to a total of 10% of each
Guarantee Period. See Appendix B for examples of the application of the
Market Value Adjustment.
The Market Value Adjustment factor is equal to:
( 1 + A ) N/365
(___________) - 1
( 1 + B )
<TABLE>
<CAPTION>
<S> <C> <C>
where: A = the U.S. Treasury rate in effect at the beginning of
the Guarantee Period for the length of the Guarantee
Period selected.
B = the current U.S. Treasury rate as of the transaction
date plus .005. Treasury rate period is determined by
N/365 rounded to the next highest year.
N = Number of days remaining in the MVA Guarantee Period.
</TABLE>
If the Treasury rate is not available for the period, the rate will be arrived
at by interpolation.
WITHDRAWALS, TRANSFERS OR ANNUITIZATION OF AMOUNTS FROM A GUARANTEE PERIOD
PRIOR TO THE END OF THAT GUARANTEE PERIOD MAY BE SUBJECT TO A MARKET VALUE
ADJUSTMENT. THE MARKET VALUE ADJUSTMENT MAY BE POSITIVE OR NEGATIVE AND MAY
RESULT IN THE OWNER OR CERTIFICATE OWNER RECEIVING LESS THAN HIS OR HER
PURCHASE PAYMENT OR CONTRACT VALUE OR CERTIFICATE VALUE ALLOCATED
TO THE MVA ACCOUNT.
CHARGES AND DEDUCTIONS
Various charges and deductions are made from Owner's Contract Value and
Certificate Owners' Certificate Value, the Variable Account and the MVA
Account. These charges and deductions are:
DEDUCTION FOR MORTALITY AND EXPENSE RISK CHARGE
Each Valuation Period, the Company deducts a mortality and expense risk charge
from the Variable Account which is equal, on an annual basis, to 1.15% of the
average daily net asset value of each Sub-Account of the Variable Account
("Mortality and Expense Risk Charge"). The Company may increase this charge,
but it will not exceed 1.25% of the average daily net asset value of the
Variable Account. In the event of an increase, the Company will give Owners
and Certificate Owners 90 days prior notice of the increase. The mortality
risks assumed by the Company arise from its contractual obligation to make
Annuity Payments after the Annuity Date (determined in accordance with the
Annuity Option chosen by the Owner/Certificate Owner) regardless of how long
all Annuitants live. This assures that neither an Annuitant's own longevity,
nor an improvement in life expectancy greater than that anticipated in the
mortality tables, will have any adverse effect on the Annuity Payments the
Annuitant will receive under the Contract/Certificate. Further, the Company
bears a mortality risk in that it guarantees the annuity purchase rates
for the Annuity Options under the Contracts and Certificates. Also, the
Company bears a mortality risk with respect to the death benefit. The expense
risk assumed by the Company is that all actual expenses involved in
administering the Contracts and Certificates, including Contract and
Certificate maintenance costs, administrative costs, mailing costs, data
processing costs, legal fees, accounting fees, filing fees and the costs of
other services may exceed the amount recovered from the Contract and
Certificate Maintenance Charges and the Administrative Charge (see below).
If the Mortality and Expense Risk Charge is insufficient to cover the actual
costs, the loss will be borne by the Company. Conversely, if the amount
deducted proves more than sufficient, the excess will be a profit to the
Company. The Company expects a profit from this charge.
DEDUCTION FOR ADMINISTRATIVE CHARGE
Each Valuation Period, the Company deducts an administrative charge from the
Variable Account which is equal, on an annual basis, to .15% of the average
daily net asset value of each Sub-Account of the Variable Account
("Administrative Charge"). However, the Company may increase this charge, but
it will not exceed .25% of the average daily net asset value of the Variable
Account. The Company will give Owners/Certificate Owners 90 days notice
before any increase is implemented. This charge, together with the Contract
and Certificate Maintenance Charges (see below), is to reimburse the
Company for the expenses it incurs in the establishment and maintenance of
the Contracts, Certificates and the Variable Account. These expenses include
but are not limited to: preparation of the Contracts and Certificates,
confirmations, annual reports and statements, maintenance of Owner and
Certificate Owner records, maintenance of Variable Account records,
administrative personnel costs, mailing costs, data processing costs, legal
fees, accounting fees, filing fees, the costs of other services necessary for
Owner and Certificate Owner servicing and all accounting, valuation,
regulatory and reporting requirements. Since this charge is an
asset-based charge, the amount of the charge attributable to a particular
Contract or Certificate may have no relationship to the administrative costs
actually incurred by that Contract or Certificate. The Company does not
intend to profit from this charge. This charge will be reduced to the extent
that the amount of this charge is in excess of that necessary to reimburse
the Company for its administrative expenses.
DEDUCTION FOR CONTRACT AND CERTIFICATE MAINTENANCE CHARGES
During the Accumulation Period, on each Contract or Certificate Anniversary,
the Company deducts a contract or certificate maintenance charge ("Contract
Maintenance Charge" or "Certificate Maintenance Charge") from the
Contract Value/Certificate Value by reducing the Contract Value/Certificate
Value in the MVA Account and by canceling Accumulation Units from each
applicable Sub-Account of the Variable Account to reimburse it for expenses
relating to the maintenance of the Contracts and Certificates. The Company
makes a deduction of $30.00 each Contract or Certificate Year. However,
during the Accumulation Period if the Contract Value/Certificate Value on
the Contract or Certificate Anniversary is at least $25,000, then no Contract
or Certificate Maintenance Charges are deducted. If a total withdrawal is
made on other than a Contract or Certificate Anniversary and the
Contract Value/Certificate Value for the Valuation Period during which the
total withdrawal is made is less than $25,000, the full Contract or
Certificate Maintenance Charge will be deducted at the time of the total
withdrawal. During the Annuity Period, no Contract or Certificate Maintenance
Charge is deducted. The Contract and Certificate Maintenance Charges will be
deducted from the Sub-Account or MVA Account with the largest balance. The
Company has set this charge at a level so that, when considered in
conjunction with the Administrative Charge (see above), it will not make a
profit from the charges assessed for administration.
DEDUCTION FOR TRANSFER FEE
An Owner/Certificate Owner may transfer all or part of the Owner's/Certificate
Owner's interest in a Sub-Account or the MVA Account (subject to the MVA
Account provisions) after the expiration of any Right to Examine Period,
without the imposition of any fee or charge if there have been no more than
the number of free transfers made. An Owner/Certificate Owner may make one
transfer every 30 days without the imposition of the transfer fee during the
Accumulation Period and may make four transfers per Contract/Certificate Year
during the Annuity Period without the imposition of the transfer fee. The
transfer fee is the lesser of $25 or 2% of the amount transferred ("Transfer
Fee"). The Transfer Fee is deducted from the Account which is the source of
the transfer. However, if the Owner's or Certificate Owner's entire interest
in an Account is being transferred, the Transfer Fee will be deducted from
the amount which is transferred. If there are multiple source Accounts, the
Transfer Fee will be allocated to the Sub-Account or MVA Account with the
largest balance involved in the transfer transaction. A transfer made at the
end of the Right to Examine Period from the Money Market Sub-Account will not
count in determining the application of the Transfer Fee. If the Owner or
Certificate Owner is participating in an approved Dollar Cost Averaging
Program or Rebalancing Program, such transfers are not counted toward the
number of transfers for the year and are not taken into account in
determining any Transfer Fee. All reallocations made on the same day count as
one transfer for purposes of determining the Transfer Fee.
DEDUCTION FOR PREMIUM AND OTHER TAXES
Any taxes, including any Premium Taxes, paid to any governmental entity
relating to the Contracts and Certificates may be deducted from Purchase
Payments or Contract Values or Certificate Owner's Certificate Value when
incurred. The Company will, in its sole discretion, determine when taxes have
resulted from: the investment experience of the Variable Account; receipt by
the Company of the Purchase Payments; or commencement of Annuity Payments.
The Company may, at its sole discretion, pay taxes when due and deduct that
amount from the Contract Value or Certificate Owner's Certificate Value at a
later date. Payment at an earlier date does not waive any right the Company
may have to deduct amounts at a later date. The Company's current practice is
to deduct such taxes from an Owner's Contract Value/Certificate Owner's
Certificate Value at the time Annuity Payments begin or from amounts that are
withdrawn. Premium Taxes currently range from 0% to 3.5%.
While the Company is not currently maintaining a provision for federal income
taxes with respect to the Variable Account, the Company has reserved the right
to establish a provision for the deductions of income taxes from the Variable
Account if it determines, in its sole discretion, that it will incur a tax as
a result of the operation of the Variable Account.
The Company will deduct any withholding taxes required by applicable law.
(See "Tax Status - Income Tax Withholding.")
DEDUCTION FOR EXPENSES OF THE ELIGIBLE FUNDS
There are other deductions from and expenses (including management fees paid
to the advisers) paid out of the assets of the Eligible Funds which are
described in the prospectuses for the Eligible Funds.
THE CONTRACTS AND CERTIFICATES
OWNER/CERTIFICATE OWNER
The Owner or Certificate Owner has all interest and rights to amounts held in
his or her Contract/Certificate. The Owner or Certificate Owner is the person
designated as such on the Contract Issue Date/Certificate Issue Date, unless
changed.
The Owner/Certificate Owner may change owners of the Contract/Certificate at
any time by Written Request. A change of Owner or Certificate Owner will
automatically revoke any prior designation of Owner/Certificate Owner. The
change will become effective as of the date the Written Request is signed. The
Company will not be liable for any payment made or action taken before it
records the change.
JOINT OWNERS/JOINT CERTIFICATE OWNERS
The Contract can be owned by joint Owners. A Certificate may be owned by joint
Certificate Owners. If joint Owners or joint Certificate Owners are named, any
joint Owner or joint Certificate Owner must be the spouse of the other Owner
or joint Certificate Owner. Upon the death of either Owner/ Certificate Owner,
the surviving joint Owner/surviving joint Certificate Owner will be the
primary Beneficiary. Any other Beneficiary designation will be treated as a
contingent Beneficiary unless otherwise indicated in a Written Request.
GROUP CONTRACT OWNER
The Group Contract Owner has title to the group Contract. The group Contract
and any amounts accumulated thereunder are not subject to the claims of the
Group Contract Owner nor any of its creditors. The Group Contract Owner may
transfer ownership of the group Contract. Any transfer of ownership terminates
the interest of any existing Group Contract Owner. It does not change the
rights of any Certificate Owner.
ANNUITANT
The Annuitant is the person on whose life Annuity Payments are based. The
Annuitant is the person designated by the Owner/Certificate Owner at the
Contract Issue Date/Certificate Issue Date, unless changed prior to the
Annuity Date. The Owner/Certificate Owner may not change the Annuitant except
in the event that the Annuitant dies prior to the Annuity Date. If no new
Annuitant is designated by the Owner/Certificate Owner within 30 days, the
Owner/Certificate Owner becomes the Annuitant. The Annuitant may not be
changed in a Contract/Certificate which is owned by a non-natural person. Any
change of Annuitant is subject to the Company's underwriting rules then in
effect. A Written Request specifying the change of Annuitant must be provided
to the Administrative Office.
ASSIGNMENT
A Written Request specifying the terms of an assignment of the Contract or
Certificate must be provided to the Administrative Office. The Company will
not be liable for any payment made or action taken before it records the
assignment.
The Company will not be responsible for the validity or tax consequences of
any assignment. Any assignment made after the death benefit has become payable
will be valid only with the Company's consent.
If the Contract or Certificate is assigned, the Owner's or Certificate Owner's
rights may only be exercised with the consent of the assignee of record.
If the Contract or Certificate is issued pursuant to a retirement plan which
receives favorable tax treatment under the provisions of Sections 403(b) or
408 of the Code, it may not be assigned, pledged or otherwise transferred
except as may be allowed under applicable law.
PURCHASE PAYMENTS, CONTRACT VALUE AND CERTIFICATE VALUE
PURCHASE PAYMENT
The initial Purchase Payment is due on the Contract Issue Date/Certificate
Issue Date. The minimum initial Purchase Payment is $50,000 (except for
Qualified Contracts and Certificates, the minimum initial Purchase Payment is
$10,000). The minimum subsequent Purchase Payment is $1,000, or if the
automatic premium check option is elected $250 monthly. The maximum total
Purchase Payments the Company will accept without Company approval is
$1,000,000. The Company reserves the right to change these Purchase Payment
requirements. The Company reserves the right to reject any application or
Purchase Payment.
ALLOCATION OF PURCHASE PAYMENTS
Net Purchase Payments are allocated to MVA Account Guarantee Period option(s)
and/or to one or more Sub-Account(s) of the Variable Account in accordance
with the selections made by the Owner/Certificate Owner. The Company has
reserved the right, under certain circumstances, to allocate initial Purchase
Payments to the Money Market Sub-Account (except those allocated to the MVA
Account) until the expiration of the Right to Examine Period. In the event
that the Company does so allocate initial Purchase Payments to the Money
Market Sub-Account, at the end of the Right to Examine Period, the Contract
Value/Certificate Value allocated to the Money Market Sub-Account will be
allocated to the Sub-Account(s) selected by the Owner/Certificate Owner.
Currently, however, the Company will allocate the initial Purchase Payment
directly to the Sub-Account(s) and/or the MVA Account, as selected by the
Owner/Certificate Owner. The allocation of the initial Net Purchase Payment
is made in accordance with the selection made by the Owner or Certificate
Owner at the Contract Issue Date or Certificate Issue Date. Unless otherwise
changed by the Owner or Certificate Owner, subsequent Net Purchase Payments
are allocated in the same manner selected by the Owner/Certificate Owner for
the initial Net Purchase Payment. Allocation of the Net Purchase Payment is
subject to the terms and conditions imposed by the Company. Currently, the
Owner or Certificate Owner can select 15 Sub-Accounts of the Variable Account
and the MVA Account. The Company reserves the right to change this in the
future. Allocations must be in whole percentages with a minimum allocation of
1%. The minimum amount which can be allocated to a Guarantee Period option is
$2,000. The Company has reserved the right to change this minimum.
For initial Net Purchase Payments, if the forms required to issue a
Contract/Certificate are in good order, the Company will apply the Net
Purchase Payment to the Variable Account and credit the Contract/Certificate
with Accumulation Units and/or to the MVA Account and credit the
Contract/Certificate with dollars within two business days of receipt.
In addition to the underwriting requirements of the Company, good order means
that the Company has received federal funds (monies credited to a bank's
account with its regional Federal Reserve Bank). If the forms required to
issue a Contract or Certificate are not in good order, the Company will
attempt to get them in good order or the Company will return the forms and the
Purchase Payment within five business days. The Company will not retain the
Purchase Payment for more than five business days while processing incomplete
forms unless it has been so authorized by the purchaser. For subsequent Net
Purchase Payments, the Company will apply Net Purchase Payments to the
Variable Account and credit the Contract or Certificate with Accumulation
Units and/or to the MVA Account and credit the Contract or Certificate with
dollars as of the end of the Valuation Period during which the Purchase
Payment was received.
DOLLAR COST AVERAGING
Dollar Cost Averaging is a program which, if elected in writing, permits an
Owner or Certificate Owner to systematically transfer amounts monthly,
quarterly, semi-annually or annually during the Accumulation Period from the
Money Market Sub-Account to one or more of the other Sub-Accounts. By
allocating amounts on a regularly scheduled basis as opposed to allocating the
total amount at one particular time, an Owner or Certificate Owner may be less
susceptible to the impact of market fluctuations. A minimum of $2,000 must be
in the Money Market Sub-Account when Dollar Cost Averaging begins (the Company
reserves the right to change this amount). If the amount to be transferred
pursuant to Dollar cost Averaging exceeds the Contract Value/Certificate
Value, the total balance in the Money Market Sub-Account will be transferred.
Currently, an Owner or Certificate Owner may select up to 15 Sub-Accounts for
Dollar Cost Averaging.
There is no current charge for participating in the Dollar Cost Averaging
Program. However, the Company reserves the right to charge for Dollar Cost
Averaging in the future. Transfers made pursuant to the Dollar Cost Averaging
Program will occur on the first business day of the month. Dollar Cost
Averaging will discontinue when the Contract Value/Certificate Value in the
Money Market Sub-Account is zero. The Company will notify Owners/Certificate
Owners when the Dollar Cost Averaging Program is discontinued. The minimum
duration of participation in the Dollar Cost Averaging Program is currently 6
to 60 months. Transfers made pursuant to the Dollar Cost Averaging program are
not taken into account in determining any Transfer Fee. An Owner or
Certificate Owner participating in the Dollar Cost Averaging Program may not
also participate in the Systematic Withdrawal Program. The Company reserves
the right, at any time and without prior notice to any party, to terminate,
suspend or modify its Dollar Cost Averaging program.
REBALANCING
Rebalancing is a program, which if elected, provides for periodic
pre-authorized automatic transfers during the Accumulation Period among the
Sub-Accounts pursuant to written instructions from the Owner or Certificate
Owner. Such transfers are made to maintain a particular percentage allocation
among the Portfolios as selected by the Owner or Certificate Owner. Any
amounts in the MVA Account will not be transferred pursuant to the Rebalancing
Program. The Contract Value/Certificate Value must be at least $5,000 to have
transfers made pursuant to the program. Any transfer made pursuant to the
Rebalancing Program must be in whole percentages in one (1%) percent
allocation increments. The maximum number of Sub-Accounts which can be used
for rebalancing is fifteen (15). An Owner or Certificate Owner may select
that rebalancing occur on a quarterly, semi-annual or annual basis.
Rebalancing will occur on the date requested by the Owner or Certificate
Owner. Transfers made pursuant to the Rebalancing Program are not taken into
account in determining any Transfer Fee. There is no fee for participating in
the Rebalancing Program. The Company reserves the right to terminate, modify
or suspend its Rebalancing Program at any time.
CONTRACT VALUE
The Contract Value for any Valuation Period is the sum of the Contract Value
in each of the Sub-Accounts of the Variable Account and the Contract Value in
the MVA Account.
The Contract Value in a Sub-Account of the Variable Account is determined by
multiplying the number of Accumulation Units allocated to the Contract Value
for the Sub-Account by the Accumulation Unit value.
Withdrawals will result in the cancellation of Accumulation Units in a
Sub-Account or a reduction in the MVA Account, as applicable.
CERTIFICATE VALUE
The Certificate Value for any Valuation Period is the sum of the Certificate
Value in each of the Sub-Accounts of the Variable Account and the Certificate
Value in the MVA Account.
The Certificate Value in a Sub-Account of the Variable Account is determined
by multiplying the number of Accumulation Units allocated to the Certificate
Value for the Sub-Account by the Accumulation Unit Value.
Withdrawals will result in the cancellation of Accumulation Units in a
Sub-Account or a reduction in the MVA Account, as applicable.
ACCUMULATION UNITS
Accumulation Units will be used to account for all amounts allocated to or
withdrawn from the Sub-Accounts of the Variable Account as a result of Net
Purchase Payments, withdrawals, transfers, or fees and charges. The Company
will determine the number of Accumulation Units of a Sub-Account purchased or
canceled. This will be done by dividing the amount allocated to (or the amount
withdrawn from) the Sub-Account by the dollar value of one Accumulation Unit
of the Sub-Account as of the end of the Valuation Period during which the
request for the transaction is received at the Administrative Office.
ACCUMULATION UNIT VALUE
The Accumulation Unit value for each Sub-Account was arbitrarily set initially
at $10. Subsequent Accumulation Unit values for each Sub-Account are
determined by multiplying the Accumulation Unit Value for the immediately
preceding Valuation Period by the Net Investment Factor for the Sub-Account
for the current period.
The Net Investment Factor for each Sub-Account is determined by dividing A by
B and subtracting C where:
<TABLE>
<CAPTION>
<S> <C>
A is (i) the net asset value per share of the Eligible Fund or Portfolio
of an Eligible Fund held by the Sub-Account for the current
Valuation Period; plus
(ii) any dividend or capital gains per share declared on behalf of
such Eligible Fund or Portfolio that has an ex-dividend date
within the current Valuation Period; plus
(iii) a charge factor, if any, for taxes or any tax reserve
established by the Company as a result of the operation or
maintenance of the Sub-Account.
B is the net asset value per share of the Eligible Fund or Portfolio held
by the Sub-Account for the immediately preceding Valuation
Period.
C is the Valuation Period equivalent of the per month Mortality and
Expense Risk Charge and for the Administrative Charge.
</TABLE>
The Accumulation Unit Value may increase or decrease from Valuation Period to
Valuation Period.
TRANSFERS
TRANSFERS DURING THE ACCUMULATION PERIOD
Subject to any limitation imposed by the Company on the number of transfers
that can be made during the Accumulation Period, the Owner or Certificate
Owner may transfer all or part of the Contract Value or Certificate Value in a
Sub-Account or the MVA Account by Written Request. Currently, Owners and
Certificate Owners may make an unlimited number of transfers during the
Accumulation Period. All transfers are subject to the following:
1. If more than the number of free transfers have been made in a
Contract or Certificate Year, the Company will deduct a Transfer Fee for each
subsequent transfer permitted. (See "Charges and Deductions - Deduction for
Transfer Fee").
2. The minimum amount which can be transferred is $500 (from any
Sub-Account or any Guarantee Period in the MVA Account) or the Owner's or
Certificate Owner's entire interest in the Sub-Account or the Guarantee
Period, if less. The Company reserves the right to change this amount. This
requirement is waived if the transfer is made pursuant to the Dollar Cost
Averaging or Rebalancing Programs. The minimum amount which must remain in
each Account after a transfer is $500 per Sub-Account or a Guarantee Period in
the MVA Account, or $0 if the entire amount in any Sub-Account or a Guarantee
Period in the MVA Account is transferred. The Company reserves the right to
change this amount.
3. The Company reserves the right, at any time and without prior notice
to any party, to terminate, suspend or modify the transfer privilege described
above.
Transfers must be made by written authorization from the Owner/Certificate
Owner or from the person acting for the Owner or Certificate Owner as an
attorney-in-fact under a power-of-attorney if permitted by state law. By
authorizing the Company to accept telephone transfer instructions, the
Owner/Certificate Owner agrees to accept and be bound by the conditions and
procedures established by the Company from time to time. The Company has
instituted reasonable procedures to confirm that any instructions communicated
by telephone are genuine. All telephone calls will be recorded, and the caller
will be asked to produce the Owner/Certificate Owner's personalized data prior
to the Company initiating any transfer requests by telephone. Additionally, as
with other transactions, the Owner/Certificate Owner will receive a written
confirmation of the transfer. If reasonable procedures are employed, neither
the Company nor GARCO Equity Sales, Inc. will be liable for following
telephone instructions which it reasonably believes to be genuine. Written
transfer requests may be made by a person acting for the Owner or Certificate
Owner as an attorney-in-fact under a power-of-attorney.
Neither the Variable Account nor the Eligible Funds are designed for
professional market timing organizations or other entities using programmed
and frequent transfers. A pattern of exchanges that coincides with a "market
timing" strategy may be disruptive to a Portfolio. The Company reserves the
right to restrict the transfer privilege or reject any specific Purchase
Payment allocation request for any person whose transactions seem to follow a
timing pattern.
TRANSFERS DURING THE ANNUITY PERIOD
Subject to any limitations imposed by the Company on the number of transfers
that can be made during the Annuity Period, the Owner or Certificate Owner may
transfer Contract Values or Certificate Values by Written Request. Currently,
Owners and Certificate Owners may make four transfers per Contract/Certificate
Year during the Annuity Period. All transfers during the Annuity Period are
subject to the following:
1. Transfers may be made upon written notice to the Company at least 30
days before the due date of the first Annuity Payment for which the change
will apply. Transfers will be made by converting the number of Annuity Units
being transferred to the number of Annuity Units of the Sub-Account to which
the transfer is made, so that the next Annuity Payment, if it were made at
that time would be the same amount that it would have been without the
transfer. Thereafter Annuity Payments will reflect changes in the value of
the new Annuity Units.
2. If more than the number of free transfers have been made in a
Contract/Certificate Year, the Company will deduct a Transfer Fee for each
subsequent transfer permitted. Currently, the four transfers per
Contract/Certificate Year permitted during the Annuity Period are free.
(See "Charges and Deductions - Deduction for Transfer Fee").
3. The minimum amount which can be transferred is $500 (from any
Sub-Account) or the Owner's/Certificate Owner's entire interest in the
Sub-Account, if less. The minimum amount which must remain in each Account
after a transfer is $500 per Sub-Account, or $0 if the entire amount in any
Sub-Account is transferred.
4. No transfers can be made between the General Account and the Variable
Account. Transfers may only be made among the Sub-Accounts.
5. The Company reserves the right, at any time and without prior notice
to any party, to terminate, suspend or modify the transfer privilege described
above.
WITHDRAWALS
During the Accumulation Period, the Owner or Certificate Owner may, upon a
Written Request, make total or partial withdrawals of the Contract Withdrawal
Value or Certificate Withdrawal Value.
The Owner/Certificate Owner must specify by Written Request which
Sub-Account(s) of the Variable Account or Guarantee Period of the MVA Account,
as applicable, is the source of the partial withdrawal. A withdrawal from the
MVA Account may be subject to a Market Value Adjustment.
The Company will pay the amount of any withdrawal from the Variable Account
within seven (7) days of receipt of a request in good order unless the
Suspension or Deferral of Payments provision is in effect.
Each partial withdrawal must be for at least $500 from each Sub-Account and
each Guarantee Period of the MVA Account (unless the withdrawal is made
pursuant to the Systematic Withdrawal Option (see below). The minimum
Contract Value or Certificate Value which must remain in the Contract or
Certificate after a partial withdrawal is $500. The minimum Contract Value
or Certificate Value which must remain in any Sub-Account after a partial
withdrawal is $500.
Certain tax withdrawal penalties and restrictions may apply to withdrawals
from the Contracts and Certificates. (See "Tax Status"). For Contracts/
Certificates purchased in connection with 403(b) plans, the Code limits the
withdrawal of amounts attributable to contributions made pursuant to a salary
reduction agreement (as defined in Section 403(b)(11) of the Code) to
circumstances only when the Owner/Certificate Owner: (1) attains age 59 1/2;
(2) separates from service; (3) dies; (4) becomes disabled (within the meaning
of Section 72(m)(7) of the Code); or (5) in the case of hardship. However,
withdrawals for hardship are restricted to the portion of the Owner's
Contract Value or Certificate Owner's Certificate Value which represents
contributions made pursuant to a salary reduction agreement by the
Owner/Certificate Owner and does not include any investment results. The
limitations on withdrawals became effective on January 1, 1989 and apply only
to salary reduction contributions made after December 31, 1988, to income
attributable to such contributions and to income attributable to amounts held
as of December 31, 1988. The limitations on withdrawals do not affect
rollovers or transfers between certain Qualified Plans. Owners and
Certificate Owners should consult their own tax counsel or other tax adviser
regarding any distributions.
SYSTEMATIC WITHDRAWAL PROGRAM
The Company offers a Systematic Withdrawal Program which enables an Owner or
Certificate Owner to pre-authorize by Written Request a periodic exercise of
the contractual withdrawal rights described above. The Systematic Withdrawal
Program is available if the Contract Value or Certificate Value is at least
$5,000 as of the Valuation Date this option is requested (the Company reserves
the right to change this requirement). Each withdrawal pursuant to the
Systematic Withdrawal Program must be for at least $100. Systematic
withdrawals may be made from any Sub-Account of the Variable Account.
Systematic withdrawals cannot be made from the MVA Account.
Owners/Certificate Owners must specify from which Sub-Accounts the withdrawals
are to be made. The amount of the withdrawal must be specified as a percentage
of Contract Value or Certificate Value or in round dollars. Withdrawals may
be scheduled monthly, quarterly, semi-annually or annually. The standard date
of the month for withdrawals is the last day of the month. The Owner, the
Certificate Owner or the Company may terminate systematic withdrawals at any
time and may reinstate the program at any time by completing the appropriate
forms. Systematic withdrawals will terminate if the Owner/Certificate Owner
makes a partial withdrawal outside the program and the remaining
Contract/Certificate Value is less than $5,000. Participation in the
Systematic Withdrawal Program can be exercised at any time, including during
the first Contract/Certificate Year. There is currently no charge for
systematic withdrawals. An Owner or Certificate Owner participating in the
Systematic Withdrawal Program may not also participate in the Dollar Cost
Averaging Program.
Systematic withdrawals are available for Qualified and Non-Qualified Contracts
and Certificates. Certain tax penalties and restrictions may apply to
systematic withdrawals from the Contracts and Certificates. (See "Tax Status -
Tax Treatment of Withdrawals - Non-Qualified Contracts and Certificates" and
"Tax Treatment of Withdrawals - Qualified Contracts and Certificates".)
SUSPENSION OR DEFERRAL OF PAYMENTS
The Company reserves the right to suspend or postpone payments from the
Variable Account for a withdrawal or transfer for any period when:
1. The NYSE is closed (other than customary weekend and holiday
closings);
2. Trading on the NYSE is restricted;
3. An emergency exists as a result of which disposal of securities held
in the Variable Account is not reasonably practicable or it is not reasonably
practicable to determine the value of the Variable Account's net assets; or
4. During any other period when the Securities and Exchange Commission,
by order, so permits for the protection of Owners or Certificate Owners;
provided that applicable rules and regulations of the Securities and Exchange
Commission will govern as to whether the conditions described in (2) and (3)
exist.
The Company further reserves the right to postpone payments from the MVA
Account for a period of up to six months.
PROCEEDS PAYABLE ON DEATH
DEATH OF OWNER OR CERTIFICATE OWNER DURING THE ACCUMULATION PERIOD
Upon the death of the Owner or Certificate Owner, or any joint Owner or joint
Certificate Owner during the Accumulation Period, the death benefit will be
paid to the Beneficiary(ies) designated by the Owner or Certificate Owner.
Upon the death of any joint Owner or joint Certificate Owner, the surviving
joint Owner or joint Certificate Owner, if any, will be treated as the primary
Beneficiary. Any other Beneficiary designation on record at the time of death
will be treated as a contingent Beneficiary.
A Beneficiary may request that the death benefit be paid under one of the
death benefit options below. If the Beneficiary is the spouse of the
Owner/Certificate Owner, he or she may elect to continue the
Contract/Certificate at the then current Contract Value/Certificate Value in
his or her own name and exercise all the Owner's/Certificate Owner's rights
under the Contract/Certificate.
DEATH BENEFIT AMOUNT DURING THE ACCUMULATION PERIOD
Prior to the Owner/Certificate Owner attaining Age 80, the death benefit will
be the greater of: (i) the Purchase Payments, less any withdrawals; or (ii)
the Contract Value/Certificate Value determined as of the end of the Valuation
Period during which the Company receives both due proof of death and an
election for the payment method. If the death occurs after Age 80, the death
benefit will be the Contract Value/Certificate Value determined as of the end
of the Valuation Period during which the Company receives both due proof of
death and an election for the payment method.
DEATH BENEFIT OPTIONS DURING THE ACCUMULATION PERIOD
A non-spousal Beneficiary must elect the death benefit to be paid under one of
the following options in the event of the death of the Owner or Certificate
Owner during the Accumulation Period:
OPTION 1 - lump sum payment of the death benefit; or
OPTION 2 - payment of the entire death benefit within 5 years of the
date of the death of the Owner/Certificate Owner or any joint Owner/joint
Certificate Owner; or
OPTION 3 - payment of the death benefit under an Annuity Option over
the lifetime of the Beneficiary or over a period not extending beyond the life
expectancy of the Beneficiary with distribution beginning within one year of
the date of death of the Owner/Certificate Owner or any joint Owner/joint
Certificate Owner.
Any portion of the death benefit not applied under Option 3 within one year of
the date of the Owner's/Certificate Owner's death, must be distributed
within five years of the date of death.
A spousal Beneficiary may elect to continue the Contract/Certificate in his
or her own name at the then current Contract Value/Certificate Value, elect
a lump sum payment of the death benefit or apply the death benefit to an
Annuity Option.
If a lump sum payment is requested, the amount will be paid within seven (7)
days of receipt of proof of death and the election, unless the Suspension or
Deferral of Payments provision is in effect.
Payment to the Beneficiary, other than in a lump sum, may only be elected
during the sixty-day period beginning with the date of receipt of proof of
death.
DEATH OF OWNER/CERTIFICATE OWNER DURING THE ANNUITY PERIOD
If the Owner/Certificate Owner or any joint Owner/joint Certificate Owner, who
is not the Annuitant, dies during the Annuity Period, any remaining payments
under the Annuity Option elected will continue at least as rapidly as under
the method of distribution in effect at such Owner's/Certificate Owner's or
joint Owner's/joint Certificate Owner's death. Upon the death of any
Owner/Certificate Owner during the Annuity Period, the Beneficiary becomes the
Owner/Certificate Owner. Upon the death of any joint Owner/joint Certificate
Owner during the Annuity Period, the surviving joint Owner/joint Certificate
Owner, if any, will be treated as the primary Beneficiary. Any other
Beneficiary designation on record at the time of death will be treated as a
contingent Beneficiary.
DEATH OF ANNUITANT
Upon the death during the Accumulation Period of the Annuitant who is not the
Owner/Certificate Owner, the Owner/Certificate Owner may designate a new
Annuitant, subject to the Company's underwriting rules then in effect. If no
designation is made within 30 days of the death of the Annuitant, the
Owner/Certificate Owner will become the Annuitant. If the Owner/Certificate
Owner is a non-natural person, the death of the Annuitant will be treated as
the death of the Owner/Certificate Owner and a new Annuitant may not be
designated.
Upon the death of the Annuitant during the Annuity Period, the death benefit,
if any, will be as specified in the Annuity Option elected. Death benefits
will be paid at least as rapidly as under the method of distribution in effect
at the Annuitant's death.
PAYMENT OF DEATH BENEFIT
The Company will require due proof of death before any death benefit is paid.
Due proof of death will be:
1. a certified death certificate; or
2. a certified decree of a court of competent jurisdiction as to the
finding of death; or
3. any other proof satisfactory to the Company.
All death benefits will be paid in accordance with applicable law or
regulations governing death benefit payments.
BENEFICIARY
The Beneficiary designation in effect on the Contract Issue Date/Certificate
Issue Date will remain in effect until changed. The Beneficiary is entitled
to receive the benefits to be paid at the death of the Owner/Certificate Owner.
Unless the Owner/Certificate Owner provides otherwise, the death benefit will
be paid in equal shares to the survivor(s) as follows:
1. to the primary Beneficiary(ies) who survive the Owner's/Certificate
Owner's and/or the Annuitant's death, as applicable; or if there are none
2. to the contingent Beneficiary(ies) who survive the
Owner's/Certificate Owner's and/or the Annuitant's death, as applicable; or if
there are none
3. to the estate of the Owner/Certificate Owner.
CHANGE OF BENEFICIARY
Subject to the rights of any irrevocable Beneficiary(ies), the
Owner/Certificate Owner may change the primary Beneficiary(ies) or contingent
Beneficiary(ies). Any change may be made by Written Request. The change will
take effect as of the date the Written Request is signed. The Company will not
be liable for any payment made or action taken before it records the change.
ANNUITY PROVISIONS
GENERAL
On the Annuity Date, the Adjusted Contract Value/Adjusted Certificate
Value, as applicable, will be applied under the Annuity Option selected by the
Owner/Certificate Owner. The Owner/Certificate Owner may elect to have the
Contract Value/Certificate Value applied to provide a Fixed Annuity, a
Variable Annuity or a combination Fixed and Variable Annuity. If a
combination is elected, the Owner/Certificate Owner must specify what part of
the Contract Value/Certificate Value is to be applied to the fixed and
variable options.
ANNUITY DATE
The Annuity Date is selected by the Owner/Certificate Owner at the Contract
Issue Date/Certificate Issue Date. The Annuity Date must be the first day of a
calendar month and must be at least 90 days after the Contract Issue
Date/Certificate Issue Date. The Annuity Date may not be later than the
earlier of when the Annuitant reaches attained Age 90 or the maximum date
permitted under state law.
Prior to the Annuity Date, the Owner/Certificate Owner, subject to the above,
may change the Annuity Date by Written Request. Any change must be requested
at least thirty (30) days prior to the new Annuity Date.
SELECTION OR CHANGE OF AN ANNUITY OPTION
An Annuity Option may be selected by Written Request by the Owner/Certificate
Owner. If no Annuity Option is selected, Option 2 with 120 monthly payments
guaranteed will automatically be applied. Unless specified otherwise, that
portion of the Adjusted Contract Value/Adjusted Certificate Value allocated
to the Variable Account shall be used to provide a variable annuity and that
portion of the Adjusted Contract Value or Adjusted Certificate Value allocated
to the MVA Account will be used to provide a Fixed Annuity. Prior to the
Annuity Date, the Owner/Certificate Owner can change the Annuity Option
selected by Written Request. Any change must be requested at least thirty
(30) days prior to the Annuity Date.
FREQUENCY AND AMOUNT OF ANNUITY PAYMENTS
Annuity Payments are paid in monthly installments. The Adjusted Contract
Value/Adjusted Certificate Value is applied to the annuity table for the
Annuity Option selected. If the Adjusted Contract Value/Adjusted Certificate
Value to be applied under an Annuity Option is less than $5,000, the Company
reserves the right to make a lump sum payment in lieu of Annuity Payments. If
the Annuity Payment would be or become less than $50, the Company reserves the
right to reduce the frequency of payments to an interval which will result in
each payment being at least $50.
The Mortality and Expense Risk Charge is assessed during both the Accumulation
Period and Annuity Period. The Company will continue to assess the Mortality
and Expense Risk Charge during payment of an Annuity Option that does not
involve a life contingency even though the Company no longer bears any
mortality risk on such payment obligation.
ANNUITY OPTIONS
The following Annuity Options or any other Annuity Option acceptable to the
Company may be selected:
OPTION 1. LIFETIME ONLY ANNUITY : The Company will make monthly payments
during the life of the Annuitant. If this option is elected, payments will
stop immediately upon the death of the Annuitant and the annuity will
terminate without further value.
OPTION 2. LIFETIME ANNUITY WITH GUARANTEED PERIODS : The Company will
make monthly payments for the guaranteed period selected and thereafter for
the life of the Annuitant. If this option is elected, upon the death of
the Annuitant, any amounts remaining under the guaranteed period selected
will be distributed to the Beneficiary at least as rapidly as under the
method of distribution being used as of the date of the Annuitant's death.
The guaranteed period may be five (5) years, ten (10) years or twenty (20)
years.
OPTION 3. INSTALLMENT REFUND LIFE ANNUITY : The Company will make monthly
payments for the installment refund period (the time required for the sum of
the payments to equal the amount applied), and thereafter for the life of the
Annuitant. If this option is elected, upon the death of the Annuitant, any
amounts remaining under the installment refund period will be distributed to
the Beneficiary at least as rapidly as under the method of distribution being
used at the time of the Annuitant's death.
OPTION 4. PAYMENT FOR A FIXED PERIOD : The Company will make monthly
payments for a fixed period of 3 to 20 years.
OPTION 5. JOINT AND SURVIVOR ANNUITY : The Company will make monthly
payments during the joint life time of the Annuitant and a joint Annuitant.
Payments will continue during the lifetime of the surviving Annuitant and will
be computed on the basis of 100%, 50% or 66% of the Annuity Payment (or
limits) in effect during the joint life time.
ANNUITY
If the Owner/Certificate Owner selects a Fixed Annuity, the Adjusted
Contract Value or Adjusted Certificate Value is allocated to the General
Account and the annuity is paid as a Fixed Annuity. If the Owner/Certificate
Owner selects a Variable Annuity, the Adjusted Contract Value or
Adjusted Certificate Value will be allocated to the Sub-Accounts of the
Variable Account in accordance with the selection made by the Owner or
Certificate Owner, and the annuity will be paid as a variable annuity. If no
selection is made, the Adjusted Contract Value/Adjusted Certificate Value
will be applied in the same proportions to the same Sub-Accounts as the
allocations are at the time of election. Unless the Owner/Certificate Owner
specifies otherwise, the payee of the Annuity Payments shall be the
Owner/Certificate Owner. The Adjusted Contract Value/Adjusted Certificate
Value will be applied to the applicable annuity table contained in the
Contract/Certificate based upon the Annuity Option selected by the
Owner/Certificate Owner.
FIXED ANNUITY
The Owner or Certificate Owner may elect to have the Adjusted Contract
Value/Adjusted Certificate Value applied to provide a Fixed Annuity.
The dollar amount of each Fixed Annuity Payment shall be determined in
accordance with annuity tables contained in the Contract/Certificate which
are based on the minimum guaranteed interest rate of 3% per year.
VARIABLE ANNUITY
The Owner or Certificate Owner may elect to have the Adjusted Contract
Value/Adjusted Certificate Value applied to provide a variable annuity.
Variable Annuity Payments reflect the investment performance of the Variable
Account in accordance with the allocation of the Adjusted Contract
Value/Adjusted Certificate Value to the Sub-Accounts during the Annuity
Period. Variable Annuity Payments are not guaranteed as to dollar amount.
DISTRIBUTOR
Conseco Equity Sales, Inc., formerly GARCO Equity Sales, Inc., ("CES"), 11815
N. Pennsylvania Street, Carmel, Indiana 46032, an affiliate of the Company,
is the principal underwriter of the Contracts and Certificates. CES is
registered as a broker-dealer with the Securities and Exchange Commission and
is a member of the National Association of Securities Dealers, Inc. ("NASD").
Commissions will be paid on the sale of the Contracts and Certificates.
Commissions will be paid which are equal to .75% of Purchase Payments plus an
annual trail commission in the amount of .75% of accumulation value at the end
of each Contract/Certificate Year, for promotional or distribution expenses
associated with the marketing of the Contracts and Certificates. In addition,
under certain circumstances, payments may be made to certain sellers for other
services not directly related to the sale of the Contracts and Certificates.
The Company may use any of its corporate assets to cover the costs of
distribution, including any potential profit which may arise from the
Mortality and Expense Risk Charge.
PERFORMANCE INFORMATION
MONEY MARKET SUB-ACCOUNT
From time to time, the Money Market Sub-Account of the Variable Account may
advertise its "current yield" and "effective yield." Both yield figures are
based on historical earnings and are not intended to indicate future
performance. The "current yield" of the Money Market Sub-Account refers to the
income generated by Contract Values/Certificate Values in the Money Market
Sub-Account over a seven-day period ending on the date of calculation (which
period will be stated in the advertisement). This income is "annualized."
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the Contract Value or Certificate Value in the Money Market
Sub-Account. The "effective yield" is calculated similarly. However, when
annualized, the income earned by the Contract Value or the Certificate Value
is assumed to be reinvested. This results in the "effective yield" being
slightly higher than the "current yield" because of the compounding effect of
the assumed reinvestment. The yield figure will reflect the deduction of any
asset-based charges and any applicable Contract and Certificate Maintenance
Charge.
OTHER SUB-ACCOUNTS
From time to time, the Company may advertise performance data for the various
other Sub-Accounts. Such data will show the percentage change in the value of
an Accumulation Unit based on the performance of an investment medium over a
period of time, usually a calendar year, determined by dividing the increase
(decrease) in value for that Unit by the Accumulation Unit value at the
beginning of the period. This percentage figure will reflect the deduction of
any asset-based charges and any applicable Contract and Certificate
Maintenance Charges under the Contracts. Any advertisement will also include
total return figures calculated as described in the SAI.
The Company may make available yield information with respect to some of the
Sub-Accounts. Such yield information will be calculated as described in the
SAI. The yield information will reflect the deduction of any applicable
Contract and Certificate Maintenance Charge as well as any asset-based charges.
The Company may also show historical Accumulation Unit values in certain
advertisements containing illustrations. These illustrations will be based on
actual Accumulation Unit values.
In addition, the Company may distribute sales literature which compares the
percentage change in Accumulation Unit values for any of the Sub-Accounts
against established market indices such as the Standard & Poor's 500 Composite
Stock Price Index, the Dow Jones Industrial Average or other management
investment companies which have investment objectives similar to the
underlying Portfolio being compared. The Standard & Poor's 500 Composite
Stock Price Index is an unmanaged, unweighted average of 500 stocks, the
majority of which are listed on the New York Stock Exchange. The Dow Jones
Industrial Average is an unmanaged, weighted average of thirty blue chip
industrial corporations listed on the New York Stock Exchange. Both the
Standard & Poor's 500 Composite Stock Price Index and the Dow Jones Industrial
Average assume quarterly reinvestment of dividends.
In addition, the Company may, as appropriate, compare each Sub-Account's or
Portfolio's performance to that of other types of investments such as
certificates of deposit, savings accounts and U.S. Treasuries, or to certain
interest rate and inflation indices, such as the Consumer Price Index, which
is published by the U.S. Department of Labor and measures the average change
in prices over time of a fixed "market basket" of certain specified goods and
services. Similar comparisons of Sub-Account and/or Portfolio performance may
also be made with appropriate indices measuring the performance of a defined
group of securities widely recognized by investors as representing a
particular segment of the securities markets. For example, Sub-Account and/or
Portfolio performance may be compared with Donoghue Money Market Institutional
Averages (money market rates), Lehman Brothers Corporate Bond Index (corporate
bond interest rates) or Lehman Brothers Government Bond Index (long-term U.S.
Government obligation interest rates).
The Company may also distribute sales literature which compares the
performance of the Accumulation Unit values of the Contracts issued through
the Variable Account with the unit values of variable annuities issued through
the separate accounts derived from the Lipper Variable Insurance Products
Performance Analysis Service, the VARDS Report or from Morningstar.
The Lipper Variable Insurance Products Performance Analysis Service is
published by Lipper Analytical Services, Inc., a publisher of statistical data
which currently tracks the performance of almost 4,000 investment companies.
The rankings compiled by Lipper may or may not reflect the deduction of
asset-based insurance charges. The Company's sales literature utilizing these
rankings will indicate whether or not such charges have been deducted. Where
the charges have not been deducted, the sales literature will indicate that if
the charges had been deducted, the ranking might have been lower.
The VARDS Report is a monthly variable annuity industry analysis compiled by
Variable Annuity Research & Data Service of Roswell, Georgia and published by
Financial Planning Resources, Inc. The VARDS rankings may or may not reflect
the deduction of asset-based insurance charges. Where the charges have not
been deducted, the sales literature will indicate that if the charges had been
deducted, the rankings might have been lower.
Morningstar rates a variable annuity Sub-Account against its peers with
similar investment objectives. Morningstar does not rate any Sub-Account that
has less than three years of performance data. The Morningstar rankings may or
may not reflect the deduction of charges. Where charges have not been
deducted, the sales literature will indicate that if the charges had been
deducted, the rankings might have been lower.
HYPOTHETICAL PERFORMANCE INFORMATION
Although all of the Sub-Accounts of the Variable Account are new and therefore
have no investment performance history, certain of the corresponding
Portfolios of the Eligible Funds have been in existence for some time and
consequently have an investment performance history. In order to demonstrate
how the actual investment experience of the various Portfolios affects
Accumulation Unit values, the Company may develop hypothetical performance.
The information will be based upon the historical experience of the Portfolios
for the periods shown.
The performance of the various Sub-Accounts will vary and the hypothetical
results which will be shown will not necessarily be representative of future
results. Performance for periods ending after those which will be shown may
vary substantially from the examples which are shown. The performance of the
various Sub-Accounts will be calculated for a specified period of time by
assuming an initial Purchase Payment of $1,000 allocated to each of the
Sub-Accounts and a deduction of all charges and deductions. (See "Charges and
Deductions" for more information.) No withdrawals will be assumed. The
percentage increases are determined by subtracting the initial Purchase
Payment from the ending value and dividing the remainder by the beginning
value.
TAX STATUS
GENERAL
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING OF
CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE
COMPANY CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE
MADE. PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE
POSSIBILITY OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF
THE CONTRACTS AND CERTIFICATES. PURCHASERS BEAR THE COMPLETE RISK THAT THE
CONTRACTS AND CERTIFICATES MAY NOT BE TREATED AS "ANNUITY CONTRACTS" UNDER
FEDERAL INCOME TAX LAWS. IT SHOULD BE FURTHER UNDERSTOOD THAT THE FOLLOWING
DISCUSSION IS NOT EXHAUSTIVE AND THAT SPECIAL RULES NOT DESCRIBED IN THIS
PROSPECTUS MAY BE APPLICABLE IN CERTAIN SITUATIONS. MOREOVER, NO ATTEMPT HAS
BEEN MADE TO CONSIDER ANY APPLICABLE STATE OR OTHER TAX LAWS.
Section 72 of the Code governs taxation of annuities in general. An owner is
not taxed on increases in the value of a contract until distribution occurs,
either in the form of a lump sum payment or as annuity payments under the
Annuity Option selected. For a lump sum payment received as a total
withdrawal (total surrender), the recipient is taxed on the portion of the
payment that exceeds the cost basis of the Contract/Certificate. For
Non-Qualified Contracts and Certificates, this cost basis is generally the
Purchase Payments, while for Qualified Contracts and Certificates there may be
no cost basis. The taxable portion of the lump sum payment is taxed at
ordinary income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion
amount is includible in taxable income. The exclusion amount for payments
based on a fixed annuity option is determined by multiplying the payment by
the ratio that the cost basis of the Contract/Certificate (adjusted for any
period certain or refund feature) bears to the expected return under the
Contract/Certificate. Payments received after the investment in the Contract
has been recovered (i.e. when the total of the excludible amounts equal the
investment in the Contract) are fully taxable. The exclusion amount for
payments based on a variable annuity option is determined by dividing the cost
basis of the Contract/Certificate (adjusted for any period certain or refund
guarantee) by the number of years over which the annuity is expected to be
paid. Payments received after the investment in the Contract/Certificate has
been recovered (i.e. when the total of the excludable amounts equal the
investment in the Contract/Certificate) are fully taxable. The taxable portion
is taxed at ordinary income tax rates. For certain types of Qualified Plans
there may be no cost basis in the Contract within the meaning of Section 72 of
the Code. Owners, Certificate Owners, Annuitants and Beneficiaries under the
Contracts/Certificates should seek competent financial advice about the tax
consequences of any distributions.
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Variable Account is not a separate entity from the
Company and its operations form a part of the Company.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the United States Treasury
Department ("Treasury Department"), adequately diversified. Disqualification
of the Contract as an annuity contract would result in imposition of federal
income tax to the Owner with respect to earnings allocable to the Contract
prior to the receipt of payments under the Contract. The Code contains a safe
harbor provision which provides that annuity contracts such as the Contracts
meet the diversification requirements if, as of the end of each quarter, the
underlying assets meet the diversification standards for a regulated
investment company and no more than fifty-five percent (55%) of the total
assets consist of cash, cash items, U.S. Government securities and securities
of other regulated investment companies.
On March 2, 1989, the Treasury Department issued Regulations (Treas. Reg.
1.817-5), which established diversification requirements for the investment
portfolios underlying variable contracts such as the Contracts/Certificates.
The Regulations amplify the diversification requirements for variable
contracts set forth in the Code and provide an alternative to the safe harbor
provision described above. Under the Regulations, an investment portfolio
will be adequately diversified if: (1) no more than 55% of the value of the
total assets of the portfolio is represented by any one investment; (2) no
more than 70% of the value of the total assets of the portfolio is represented
by any two investments; (3) no more than 80% of the value of the total assets
of the portfolio is represented by any three investments; and (4) no more than
90% of the value of the total assets of the portfolio is represented by any
four investments.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable
contracts by Section 817(h) of the Code have been met, "each United States
government agency or instrumentality shall be treated as a separate issuer".
The Company intends that all Portfolios of the Eligible Funds underlying the
Contracts and Certificates will be managed by the investment advisers for the
Eligible Funds in such a manner as to comply with these diversification
requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which Owner/Certificate
Owner control of the investments of the Variable Account will cause the
Owner/Certificate Owner to be treated as the owner of the assets of the
Variable Account, thereby resulting in the loss of favorable tax treatment for
the Contract/Certificate. At this time it cannot be determined whether
additional guidance will be provided and what standards may be contained in
such guidance.
The amount of Owner/Certificate Owner control which may be exercised under the
Contract/Certificate is different in some respects from the situations
addressed in published rulings issued by the Internal Revenue Service in which
it was held that the policy owner was not the owner of the assets of the
separate account. It is unknown whether these differences, such as the
Owner's/Certificate Owner's ability to transfer among investment choices or
the number and type of investment choices available, would cause the
Owner/Certificate Owners to be considered as the owner of the assets of the
Variable Account resulting in the imposition of federal income tax to the
Owner/Certificate Owner with respect to earnings allocable to the
Contract/Certificate prior to receipt of payments under the
Contract/Certificate.
In the event any forthcoming guidance or ruling is considered to set forth a
new position, such guidance or ruling will generally be applied only
prospectively. However, if such ruling or guidance was not considered to set
forth a new position, it may be applied retroactively resulting in the
Owner/Certificate Owner being retroactively determined to be the owner of the
assets of the Variable Account.
Due to the uncertainty in this area, the Company reserves the right to modify
the Contracts or Certificates in an attempt to maintain favorable tax
treatment.
MULTIPLE CONTRACTS AND CERTIFICATES
The Code provides that multiple non-qualified annuity contracts and/or
certificates which are issued within a calendar year to the same contract
owner by one company or its affiliates are treated as one annuity contract
and/or certificate for purposes of determining the tax consequences of any
distribution. Such treatment may result in adverse tax consequences including
more rapid taxation of the distributed amounts from such combination of
contracts and/or certificates. Owners and Certificate Owners should consult a
tax adviser prior to purchasing more than one non-qualified annuity contract
in any calendar year.
CONTRACTS AND CERTIFICATES OWNED BY NON-NATURAL PERSONS
Under Section 72(u) of the Code, the investment earnings on premiums for the
Contracts and Certificates will be taxed currently to the Owner/Certificate
Owner if the Owner/Certificate Owner is a non-natural person, e.g., a
corporation or certain other entities. Such Contracts/Certificates generally
will not be treated as annuities for federal income tax purposes. However,
this treatment is not applied to Contracts or Certificates held by: (a) a
trust or other entity as agent for a natural person; (b) Qualified Plans; or
(c) the estate of a decedent by reason of the death of the decedent.
Additionally, this treatment is not applied to a Contract or Certificate which
is a qualified funding asset for a structured settlement under Section 130(d)
of the Code. Purchasers should consult their own tax counsel or other adviser
before purchasing a Contract or Certificate to be owned by a non-natural
person.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of all or any portion of a Contract or Certificate may
be treated as a taxable event. Any gain in the Contract or Certificate
subsequent to the assignment may also be treated as taxable income in the year
in which it is earned. Owners and Certificate Owners should therefore consult
competent tax advisers should they wish to assign or pledge their Contracts or
Certificates.
INCOME TAX WITHHOLDING
All distributions or the portion thereof which is includible in the gross
income of the Owner or Certificate Owner are subject to Federal income tax
withholding. Generally, amounts are withheld from periodic payments at the
same rate as wages and at the rate of 10% from non-periodic payments.
However, the Owner or Certificate Owner, in most cases, may elect not to have
taxes withheld or to have withholding done at a different rate.
Effective January 1, 1993, certain distributions from retirement plans
qualified under Section 401 or Section 403(b) of the Code, which are not
directly rolled over to another eligible retirement plan or individual
retirement account or individual retirement annuity, are subject to a
mandatory 20% withholding for Federal income tax. The 20% withholding
requirement generally does not apply to: a) a series of substantially equal
payments made at least annually for the life or life expectancy of the
participant or joint and last survivor expectancy of the participant and a
designated beneficiary or for a specified period of 10 years or more; or b)
distributions which are required minimum distributions; or c) the portion of
the distributions not includible in gross income (i.e. return of after-tax
contributions). Participants should consult their own tax counsel or other tax
advisor regarding withholding requirements.
TAX TREATMENT OF WITHDRAWALS -- NON-QUALIFIED CONTRACTS AND CERTIFICATES
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the Contract Value/Certificate Value
exceeds the aggregate purchase payments made, any amount withdrawn will be
treated as coming first from the earnings and then, only after the income
portion is exhausted, as coming from the principal. Withdrawn earnings are
includible in gross income. It further provides that a ten percent (10%)
penalty will apply to the income portion of any distribution. However, the
penalty is not imposed on amounts received: (a) on or after the taxpayer
reaches age 59 1/2; (b) after the death of the Owner/Certificate Owner; (c) if
the taxpayer is totally disabled (for this purpose disability is as defined in
Section 72(m)(7) of the Code); (d) in a series of substantially equal periodic
payments made not less frequently than annually for the life (or life
expectancy) of the taxpayer or for the joint lives (or joint life
expectancies) of the taxpayer and his or her Beneficiary; (e) under an
immediate annuity; or (f) which are allocable to purchase payments made prior
to August 14, 1982.
QUALIFIED PLANS
The Contracts and Certificates offered by this Prospectus are designed to be
suitable for use under various types of qualified plans. Generally,
participants in a qualified plan are not taxed on increases to the value of
the contributions to the plan until distribution occurs, regardless of whether
the plan assets are held under an annuity contract. Taxation of participants
in each qualified plan varies with the type of plan and terms and conditions
of each specific plan. Owners, Certificate Owners, Annuitants and
Beneficiaries are cautioned that benefits under a qualified plan may be
subject to the terms and conditions of the plan regardless of the terms and
conditions of the Contract/Certificate issued pursuant to the plan. Some
retirement plans are subject to distribution and other requirements that are
not incorporated into the Company's administrative procedures. Owners,
Certificate Owners, participants and Beneficiaries are responsible for
determining that contributions, distributions and other transactions with
respect to the Contracts/Certificates comply with applicable law. Following
are general descriptions of the types of qualified plans with which the
Contracts/Certificates may be used. Such descriptions are not exhaustive and
are for general informational purposes only. The tax rules regarding
qualified plans are very complex and will have differing applications
depending on individual facts and circumstances. Each purchaser should obtain
competent tax advice prior to purchasing a Contract or Certificate issued
under a qualified plan.
Contracts and Certificates issued pursuant to qualified plans include special
provisions restricting Contract/Certificate provisions that may otherwise be
available as described in this Prospectus. Generally, Contracts/Certificates
issued pursuant to qualified plans are not transferable except upon surrender
or annuitization. Various penalty and excise taxes may apply to contributions
or distributions made in violation of applicable limitations. Furthermore,
certain withdrawal penalties and restrictions may apply to surrenders from
Qualified Contracts and Certificates. (See "Tax Treatment of Withdrawals --
Qualified Contracts and Certificates", below.)
A. TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of "tax-sheltered
annuities" by public schools and certain charitable, educational and
scientific organizations described in Section 501(c)(3) of the Code. These
qualifying employers may make contributions to the Contracts/Certificates for
the benefit of their employees. Such contributions are not includible in the
gross income of the employees until the employees receive distributions from
the Contracts/Certificates. The amount of contributions to the tax-sheltered
annuity is limited to certain maximums imposed by the Code. Furthermore, the
Code sets forth additional restrictions governing such items as
transferability, distributions, nondiscrimination and withdrawals. (See "Tax
Treatment of Withdrawals -- Qualified Contracts and Certificates" and "Tax
Sheltered Annuities - Withdrawal Limitations" below.) Any employee should
obtain competent tax advice as to the tax treatment and suitability of such an
investment.
B. INDIVIDUAL RETIREMENT ANNUITIES
Section 408(b) of the Code permits eligible individuals to contribute to
an individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed to
an IRA which will be deductible from the individual's gross income. These
IRAs are subject to limitations on eligibility, contributions, transferability
and distributions. (See "Tax Treatment of Withdrawals -- Qualified Contracts
and Certificates" below.) Under certain conditions, distributions from other
IRAs and other Qualified Plans may be rolled over or transferred on a
tax-deferred basis into an IRA. Sales of Contracts and Certificates for use
with IRAs are subject to special requirements imposed by the Code, including
the requirement that certain informational disclosure be given to persons
desiring to establish an IRA. Purchasers of Contracts and Certificates to be
qualified as Individual Retirement Annuities should obtain competent tax
advice as to the tax treatment and suitability of such an investment.
TAX TREATMENT OF WITHDRAWALS -- QUALIFIED CONTRACTS AND CERTIFICATES
In the case of a withdrawal under a Qualified Contract/Certificate, a ratable
portion of the amount received is taxable, generally based on the ratio of the
individual's cost basis to the individual's total accrued benefit under the
retirement plan. Special tax rules may be available for certain distributions
from a Qualified Contract. Section 72(t) of the Code imposes a 10% penalty tax
on the taxable portion of any distribution from qualified retirement plans,
including Contracts and Certificates issued and qualified under Code Sections
403(b) (Tax-Sheltered Annuities) and 408(b) (Individual Retirement Annuities).
To the extent amounts are not includible in gross income because they have
been rolled over to an IRA or to another eligible qualified plan, no tax
penalty will be imposed. The tax penalty will not apply to the following
distributions: (a) if distribution is made on or after the date on which the
Owner/Certificate Owner or Annuitant (as applicable) reaches age 59 1/2; (b)
distributions following the death or disability of the Owner/Certificate Owner
or Annuitant (as applicable) (for this purpose disability is as defined in
Section 72(m)(7) of the Code); (c) after separation from service,
distributions that are part of substantially equal periodic payments made not
less frequently than annually for the life (or life expectancy) of the
Owner/Certificate Owner or Annuitant (as applicable) or the joint lives (or
joint life expectancies) of such Owner/Certificate Owner or Annuitant (as
applicable) and his or her designated Beneficiary; (d) distributions to an
Owner/Certificate Owner or Annuitant (as applicable) who has separated from
service after he or she has attained age 55; (e) distributions made to the
Owner/Certificate Owner or Annuitant (as applicable) to the extent such
distributions do not exceed the amount allowable as a deduction under Code
Section 213 to the Owner/Certificate Owner or Annuitant (as applicable) for
amounts paid during the taxable year for medical care; (f) distributions
made to an alternate payee pursuant to a qualified domestic relations order;
or (g) distributions from an Individual Retirement Annuity for the purchase
of medical insurance (as described in Section 213(d)(1)(D) of the Code) for
the Owner/Certificate Owner and his or her spouse and dependents if the
Owner/Certificate Owner has received unemployment compensation for at least 12
weeks. This exception will no longer apply after the Owner/Certificate Owner
has been re-employed for at least 60 days. The exceptions stated in (d) and (f)
above do not apply in the case of an Individual Retirement Annuity. The
exception stated in (c) above applies to an Individual Retirement Annuity
without the requirement that there be a separation from service.
Generally, distributions from a qualified plan must commence no later than
April 1 of the calendar year, following the year in which the employee attains
age 70 1/2 and in some cases, the later of age 70 1/2 or the date of
retirement. Required distributions must be over a period not exceeding the
life expectancy of the individual or the joint lives or life expectancies of
the individual and his or her designated beneficiary. If the required minimum
distributions are not made, a 50% penalty tax is imposed as to the amount not
distributed.
TAX-SHELTERED ANNUITIES -- WITHDRAWAL LIMITATIONS
The Code limits the withdrawal of amounts attributable to contributions made
pursuant to a salary reduction agreement (as defined in Section 403(b)(11) of
the Code) to circumstances only on or after when the Owner/Certificate Owner:
(1) attains age 59 1/2; (2) separates from service; (3) dies; (4) becomes
disabled (within the meaning of Section 72(m)(7) of the Code); or (5) in the
case of hardship. However, withdrawals for hardship are restricted to the
portion of the Owner's Contract Value or Certificate Owner's Certificate Value
which represents contributions made by the Owner/Certificate Owner and does
not include any investment results. The limitations on withdrawals became
effective on January 1, 1989 and apply only to salary reduction contributions
made after December 31, 1988, to income attributable to such contributions and
to income attributable to amounts held as of December 31, 1988. The
limitations on withdrawals do not affect transfers between certain Qualified
Plans. Owners and Certificate Owners should consult their own tax counsel or
other tax adviser regarding any distributions.
ADDITIONAL INFORMATION ABOUT THE COMPANY
SELECTED HISTORICAL FINANCIAL INFORMATION OF THE COMPANY
The selected historical financial information set forth below was derived
from the audited financial statements of Great American Reserve. Great American
Reserve's consolidated balance sheets at December 31, 1995 and 1994, and the
consolidated statements of operations, shareholder's equity and cash flows
for the four months ended December 31, 1995, the eight months ended August 31,
1995 and the years ended December 31, 1994 and 1993 and notes thereto were
audited by Coopers & Lybrand L.L.P., independent accountants, and are included
elsewhere herein. The selected historical financial information set forth
below should be read in conjunction with the financial statements and notes
of Great American Reserve and "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Great American Reserve"
appearing elsewhere herein. The financial information set forth for the one
month ended September 30, 1995 and the nine months ended September 30, 1996
is unaudited; however, in the opinion of Great American Reserve's management,
the accompanying financial information contains all adjustments, consisting
only of normal recurring items, necessary to present fairly the financial
information for such periods. The results of operations for the nine months
ended September 30, 1996, may not be indicative of the results of operations
to be expected for a full year. The financial data for all periods reflects
the effect of the December 31, 1994, merger of Jefferson National Life
Insurance Company ("Jefferson National") into the Company. This merger has been
accounted for as a pooling of interests; therefore, the assets and liabilities
of Jefferson National have been combined with Great American Reserve at their
book values and the financial data is presented as if the merger had occurred
prior to the periods presented.
<TABLE>
<CAPTION>
Prior basis (a)
-----------------------------------------
Nine One Four Eight
months month months months Year ended
ended ended ended ended December 31,
September 30, September 30, December 31, August 31, -------------------------
1996 1995 1995 1995 1994 1993 1992(b)
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Insurance policy income....................... $61.4 $11.2 $31.8 $ 60.5 $ 98.6 $108.2 $117.6
Investment activity:
Net investment income..................... 156.5 19.4 74.2 136.4 187.9 214.5 189.0
Net trading income (losses) .............. (1.4) (.2) .1 .8 (.5) 12.4 8.5
Net realized gains (losses) .............. 1.6 1.0 12.4 6.5 .7 20.0 24.5
Total revenues................................ 218.1 31.4 118.5 204.2 286.7 355.1 339.6
Interest expense on notes payable............. - - - - - - 13.9
Total benefits and expenses................... 186.2 25.0 92.7 159.5 225.2 260.4 272.3
Income before income taxes, and
extraordinary charge...................... 31.9 6.4 25.8 44.7 61.5 94.7 67.3
Extraordinary charge on extinguishment
of debt, net of tax....................... - - - - - - 6.9
Net income ................................. 19.9 4.2 16.1 28.2 38.8 54.5 36.4
Preferred dividends........................... - - - - - - .4
Net income applicable to common
stock ................................. 19.9 4.2 16.1 28.2 38.8 54.5 36.0
BALANCE SHEET DATA - PERIOD END
Investments................................... $2,414.0 $2,456.2 $2,484.8 $2,217.9 $2,473.8 $2,134.8
Total assets.................................. 2,731.5 2,770.1 2,756.8 2,625.0 2,751.1 2,443.3
Notes payable................................. - - - - - -
Insurance liabilities......................... 1,979.6 2,124.8 2,039.1 2,150.4 2,122.0 1,956.6
Total liabilities............................. 2,349.6 2,348.9 2,314.2 2,260.1 2,302.6 2,074.4
Shareholder's equity ......................... 381.9 421.2 442.6 364.9 448.5 368.9
<S> <C>
Year Ended
December 31,
------------
1991(b)
-------
STATEMENT OF OPERATIONS DATA
Insurance policy income....................... $143.1
Investment activity:
Net investment income..................... 182.0
Net trading income (losses) .............. 10.9
Net realized gains (losses) .............. 25.5
Total revenues................................ 361.5
Interest expense on notes payable............. 29.9
Total benefits and expenses................... 305.1
Income before income taxes, and
extraordinary charge...................... 56.4
Extraordinary charge on extinguishment
of debt, net of tax....................... -
Net income ................................. 36.4
Preferred dividends........................... .7
Net income applicable to common
stock ................................. 35.7
BALANCE SHEET DATA - PERIOD END
Investments................................... $1,856.8
Total assets.................................. 2,195.0
Notes payable................................. 119.9
Insurance liabilities......................... 1,731.9
Total liabilities............................. 2,144.5
Shareholder's equity ......................... 50.5
<FN>
- -----------------------------------------------
(a) Financial data for the period subsequent to August 31, 1995, reflect the
adoption of a new basis of accounting under the "push down" method as a
result of the indirect purchase of a controlling interest in Great
American Reserve by Conseco effective August 31, 1995. Accordingly, data
prior to August 31, 1995, may not be comparable with subsequent data.
Significant accounting adjustments recorded as a result of the adoption
of the new basis include: (i) an increase of $61.4 million to cost of
policies purchased; (ii) a reduction of $26.3 million to cost of
policies produced; (iii) a reduction of $15.1 million to goodwill;
(iv) an increase of $1.2 million to insurance liabilities; and (v) the
establishment of a deferred income tax liability to reflect the income
tax effects of all of the accounting adjustments. These adjustments most
materially impact the comparability of operating data by replacing a
portion of amortization expense for the cost of policies produced with
amortization expense for the cost of policies purchased and goodwill,
which have different amortization assumptions and bases.
(b) Financial data for periods prior to the July 21, 1992 initial public
offering ("IPO") of CCP Insurance, Inc. ("CCP" and Great American
Reserve's former indirect parent), include the accounts of CCP
subsidiaries, consisting principally of debt and preferred stock which
were used to acquire Great American Reserve and which were expected to
be repaid from future income of the Great American Reserve. Subsequent
to the IPO and related refinancing transactions, the long-term
debt of CCP and its subsidiaries was no longer expected to be repaid
solely from the net income of Great American Reserve. Accordingly, it
was no longer appropriate to push down the accounts of CCP and
subsidiaries into Great American Reserve's consolidated financial
statements. The impact of the July 21, 1992, capital restructuring is
reflected in Great American Reserve's 1992 consolidated statements of
operations and shareholder's equity. As a result of no longer pushing
down accounts of CCP subsidiaries into Great American Reserve's
consolidated financial statements, the 1992 consolidated statement of
shareholder's equity reflects: (i) the impact of removing the
accumulated earnings of the CCP subsidiaries, excluding such earnings
from their investment in Great American Reserve, as a dividend
distribution; and (ii) the impact of removing the capital accounts of
the subsidiaries as a reduction of contributed capital, and (iii) the
impact of removing the assets and liabilities of the subsidiaries as a
contribution of capital to Great American Reserve, which became Great
American Reserve's common stock and additional paid-in capital.
</TABLE>
BUSINESS OF GREAT AMERICAN RESERVE
Background
Great American Reserve, with total assets of $2.7 billion at September 30,
1996, markets, issues and administers tax-qualified annuities, life and certain
employee-benefit-related products primarily to school teachers and
administrators through approximately 3,000 educator market specialists. In
addition, Great American Reserve administers a block of life and annuity
business sold through professional independent producers, although new product
sales through this distribution channel are currently not being emphasized.
Conseco Capital Partners, L.P. (the "Partnership"), a limited partnership
organized by Conseco acquired Great American Reserve on June 27, 1990. The
Partnership acquired Jefferson National on October 31, 1990 (which was
merged with Great American Reserve in 1994), and Beneficial Standard Life
Insurance Company on March 31, 1991, through similar transactions.
On July 21, 1992, CCP Insurance, Inc. ("CCP"), a holding company
organized for the companies previously acquired by the Partnership, completed
an initial public offering of its common stock ("IPO"). After the IPO,
Conseco held a 36 percent interest in CCP. Conseco's ownership interest in
CCP increased to 49 percent in early 1995 as a result of: (i) a public
offering of 3.0 million shares of common stock by CCP in September 1993; (ii)
the purchase of .3 million CCP common shares in open market transactions
during 1993; and (iii) repurchases of CCP common stock during 1994 and early
1995 under its stock repurchase program.
In August 1995, Conseco completed the purchase of the remaining shares of
CCP stock it did not previously own in a transaction pursuant to which CCP was
merged with Conseco, with Conseco being the surviving corporation. As a
result, Great American Reserve became a wholly owned subsidiary of Conseco.
On December 31, 1994, Jefferson National was merged into Great American
Reserve in a transaction accounted for as a pooling of interests.
Great American Reserve was organized as a Texas corporation and commenced
operations in 1937. Its main administrative offices are located at 11815 N.
Pennsylvania Street, Carmel, Indiana 46032, and its telephone number is (317)
817-3700.
MARKETING
Great American Reserve primarily utilizes independent educator market
specialists to distribute its products. Great American Reserve does not have
the fixed costs associated with recruiting, training and maintaining employee
agents. Rather, a relatively small number of in-house marketing personnel
develop, direct and support the external distribution channels through which
Great American Reserve's products are marketed. Great American Reserve's
marketing management was restructured in 1993 by organizing Conseco personnel
who spent much of their time on Great American Reserve matters into a home
office and regional marketing management group dedicated exclusively to the
Great American Reserve's educator marketing activities.
PRODUCTS. Great American Reserve's collected premiums (net of reinsurance
ceded) by product categories and the nine months ended September 30, 1996 and
the year ended December 31, 1995, are set forth below (dollars in millions).
<TABLE>
<CAPTION>
Nine months ended September 30, 1996
------------------------------------
First Year Renewal Total
Premiums Premiums Premiums
---------- -------- --------
Products Amount % Amount % Amount %
- -------- ------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Single premium immediate annuities............. $14.9 25% $ - -% $14.9 9%
Flexible premium deferred annuities............ 10.8 18 21.0 21 31.8 20
Variable annuities............................. 25.2 42 31.6 31 56.8 35
---- -- ---- -- ----- --
Total annuities......................... 50.9 85 52.6 52 103.5 64
Individual life................................ 1.5 3 34.5 34 36.0 22
Accident and health and other.................. 7.3 12 14.5 14 21.8 14
Guaranteed investment contracts................ .1 - - - .1 -
---- -- ------ ---- ------ ----
Total collected premiums............. $ 59.8 100% $101.6 100% $161.4 100%
====== ==== ====== ==== ====== ====
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1995
----------------------------
First Year Renewal Total
Premiums Premiums Premiums
---------- -------- --------
Products Amount % Amount % Amount %
- -------- ------ ----- ------ --- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Single premium immediate annuities............. $29.9 38% $ - -% $29.9 14%
Flexible premium deferred annuities............ 16.3 20 23.6 17 39.9 18
Variable annuities............................. 17.2 22 40.1 30 57.3 27
----- ---- ----- ---- ----- ----
Total annuities......................... 63.4 80 63.7 47 127.1 59
Individual life................................ 1.8 2 49.3 36 51.1 24
Accident and health and other.................. 11.8 15 22.6 17 34.4 16
Guaranteed investment contracts ............... 2.4 3 - - 2.4 1
------ ---- ---- ---- ----- ----
Total collected premiums................... $ 79.4 100% $135.6 100% $215.0 100%
======= ==== ====== ==== ====== ====
</TABLE>
Annuities
Premiums collected by Great American Reserve in the first nine months of
1996 totaled $161.4 million, of which approximately 64 percent (85 percent of
first-year premiums) were from the sale of annuity products. Premiums
collected in 1995 totaled $215.0 million, of which approximately 59 percent
(80 percent of first-year premiums) were from the sale of annuities. Great
American Reserve markets several basic types of annuities: single premium
immediate annuities ("SPIAs"), flexible premium deferred annuities ("FPDAs")
and variable annuities.
Single Premium Immediate Annuities. SPIAs accounted for $14.9 million,
or 9 percent, of Great American Reserve's total premiums collected in the
first nine months of 1996 and $29.9 million, or 14 percent of premiums
collected in 1995. Great American Reserve's SPIAs are designed to provide a
series of periodic payments for a fixed period of time or for life, according
to the policyholder's choice at the time of issue. Once the payments have
begun, the amount, frequency and length of time for which they are payable are
fixed. SPIAs often are purchased by persons at or near retirement age who
desire a steady stream of payments over a future period of years. The single
premium is often the payout from a terminated annuity contract. The implicit
interest rate on SPIAs is based on market conditions when the policy is
issued.
Flexible Premium Deferred Annuities. FPDAs accounted for $31.8 million,
or 20 percent, of Great American Reserve's premiums collected in the first
nine months of 1996 and $39.9 million, or 19 percent, of premiums collected in
1995. Great American Reserve's FPDAs allow more than one premium payment,
usually on a salary reduction basis. FPDAs are marketed through networks of
educator market specialists primarily to teachers and employees of
not-for-profit institutions as tax-qualified salary-reduction retirement
programs as permitted under Section 403(b) of the Internal Revenue Code. A
tax-qualified annuity purchased under Section 403(b) is similar to
contributions made to a 401(k) plan, but with different (and somewhat more
generous) rules on the maximum amount of current income which may be
contributed by the participant on a pre-tax basis. Generally, a participant
may elect to defer (through the purchase of a tax-qualified annuity under a
403(b) plan) a percentage of includible compensation limited by statute and
subject to a maximum of $9,500 per year.
Great American Reserve's FPDAs typically have a guaranteed crediting rate
for the first policy year that exceeds the minimum annual guaranteed rate of
at least 3 percent. After the first year, the crediting rate may be changed
at least annually. The policyholder is permitted to withdraw all or part of
the accumulation value, less a surrender charge for withdrawals during an
initial penalty period of up to 15 years. The initial surrender charges range
from 5 percent to 19 percent of the first year premium and decline over the
penalty period.
Variable Annuities. Variable annuities accounted for $56.8 million, or
35 percent, of Great American Reserve's total premiums collected in the first
nine months of 1996 and $57.3 million, or 27 percent, of premiums collected in
1995. Great American Reserve markets variable annuities primarily to the
educator market. Variable annuities, sold on a single or flexible premium
basis, differ from fixed annuities in that the original principal value may
fluctuate depending on the performance of assets allocated pursuant to various
investment options chosen by the contract owner. Variable annuities offer
contract owners a fixed interest option or a variable rate of return based
upon the specific investment portfolios into which premiums may be directed.
INDIVIDUAL LIFE
Individual life products, consisting of interest sensitive life and
traditional life products, accounted for $36.0 million, or 22 percent, of
Great American Reserve's premiums collected in the first nine months of 1996
and $51.1 million, or 24 percent, of premiums collected in 1995. Although
Great American Reserve no longer actively markets these products, it continues
to have a substantial block of in-force policies on which renewal premiums are
collected. These products were sold through professional independent
producers.
Interest-sensitive life insurance products (including universal life
products) provide whole life insurance with adjustable rates of return related
to current interest rates. The principal differences between Great American
Reserve's universal life products and other interest-sensitive life insurance
products are policy provisions affecting the amount and timing of premium
payments. Universal life policyholders may vary the frequency and size of
their premium payments, although policy benefits may also fluctuate according
to such payments. Premium payments under the other interest-sensitive
policies may not be varied by the policyholders and, as a result, are designed
to reduce the administrative costs typically associated with monitoring
universal life premium payments and policy benefits.
Individual life products also include whole life and term life products.
Under whole life policies, which were the standard industry product prior to
the advent of universal life insurance, the policyholder generally pays a
level premium over the policyholder's expected lifetime, which exceeds the
premium on comparable term insurance when the policyholder is younger but is
less as the policyholder grows older. These policies combine insurance
protection with a savings component that increases in amount gradually over
the life of the policy. The policyholder may borrow against the savings
generally at a rate of interest lower than that available from other lending
sources. The policyholder may also choose to surrender the policy and receive
the accumulated cash value rather than continuing the insurance protection.
Term life products offer pure insurance protection for a specified period of
time-typically one, five, 10 or 20 years.
ACCIDENT AND HEALTH AND OTHER PRODUCTS
Accident and health and other products accounted for $21.8 million, or 14
percent, of Great American Reserve's total premiums collected in the first
nine months of 1996 and $34.4 million, or 16 percent, of premiums collected in
1995. Great American Reserve offers group dental, group disability, blanket
student accident and a limited amount of other health insurance products,
primarily through educator market specialists. Great American Reserve markets
accident and health policies primarily because it believes that offering a
broad range of products is important to successfully market life insurance and
annuity products to educators, although such accident and health policies are
also designed to be profitable. Group dental coverage provides a range of
benefits for dental care and related procedures. Disability products provide
defined monthly benefits up to specified levels in the case of disability.
Student accident products provide limited supplemental reimbursement coverage
to students for accidents and sickness. Great American Reserve's health
business is subject to the risk that its claims experience deviates from the
assumptions used in setting premium rates. However, Great American Reserve
has the right to change rates to correct for adverse experience every six
months on many group policies and annually on all others. Experience may be
adversely affected by inflationary trends in the costs of medical treatment,
competition-driven business cycles and the extent to which insureds utilize
covered services.
Great American Reserve collected premiums of $.1 million in the first
nine months of 1996 and $2.4 million in 1995, from guaranteed investment
contracts issued as investment options for qualified retirement plans
maintained by Conseco.
INVESTMENTS
Conseco Capital Management, Inc. ("CCM"), a registered investment adviser
wholly owned by Conseco, manages the investment portfolio of Great American
Reserve. CCM's investment philosophy is to maintain a largely
investment-grade fixed-income portfolio, provide adequate liquidity for
expected liability durations and other requirements and maximize total return
through active investment management. Investment activities are an integral
part of Great American Reserve's business, since investment income is a
significant component of Great American Reserve's total revenues.
Profitability is significantly affected by spreads between interest yields on
investments and rates credited on insurance liabilities. Although
substantially all credited rates on flexible premium deferred annuities may be
changed annually, changes in crediting rates may not be sufficient to maintain
targeted investment spreads in all economic and market environments. In
addition, competition and other factors, including the impact of the level of
surrenders and withdrawals, may limit Great American Reserve's ability to
adjust or to maintain crediting rates at levels necessary to avoid narrowing
of spreads under certain market conditions.
For information regarding the composition and diversification of the
investment portfolio of Great American Reserve, see "Management's Discussion
and Analysis of Consolidated Financial Condition and Results of Operations of
Great American Reserve - Investments" and note 3 to Great American Reserve's
financial statements for the year ended December 31, 1995.
COMPETITION
Great American Reserve operates in a highly competitive environment. The
life insurance industry consists of a large number of insurance companies,
many of which are substantially larger and have greater financial resources,
broader and more diversified product lines and larger staffs than those of
Great American Reserve. An expanding number of banks, securities brokerage
firms and other financial intermediaries also market insurance products or
offer competing products, such as mutual fund products, traditional bank
investments and other investment and retirement funding alternatives. In most
areas, competition is based on a number of factors, including pricing, service
provided to distributors and policyholders, and ratings. Great American
Reserve must also compete with other insurers to attract and retain the
allegiance of agents.
Financial institutions, school districts, marketing companies, agents who
market insurance products and policyholders use the financial strength ratings
assigned to an insurer by independent rating agencies as one factor in
determining which insurer's annuity to market or purchase. Great American
Reserve is rated "A (Excellent)" by A.M. Best. A.M. Best ratings for the
industry currently range from "A++ (Superior)" to "F ( In Liquidation)".
Publications of A.M. Best indicate that the "A" rating is assigned to those
companies that, in A.M. Best's opinion, have achieved excellent overall
performance when compared to the standards established by A.M. Best and have
demonstrated a strong ability to meet their obligations to policyholders over
a long period of time. A.M. Best's rating procedure includes quantitative
and qualitative evaluations of a company's financial condition and operating
performance. Its quantitative evaluation is based on an analysis of a
company's financial performance in the areas of profitability,
leverage/capitalization and liquidity. A.M. Best's review also includes a
qualitative evaluation of a company's spread of risk, quality and
appropriateness of the reinsurance program, quality and diversification of
assets, adequacy of policy or loss reserves, adequacy of surplus, capital
structure, management experience and objectives, market presence and
policyholders' confidence. In addition, Great American Reserve has been
assigned claims paying ability rating of "A+" from Duff & Phelps Credit
Rating Company ("Duff & Phelps"). Duff & Phelps' claims-paying ability
ratings range from "AAA (Highest claims-paying ability)" to "DD (Company is
under an order of liquidation)." The "A+" rating represents "High
claims-paying ability." Generally, rating agencies base their ratings upon
information furnished to them by the issuer and upon their own investigations,
studies and assumptions. Given the competitive nature of Great American
Reserve's business and the increasing focus placed on the aforementioned
ratings, Great American Reserve manages its business with the objective of
preserving existing ratings and, where possible, achieving more favorable
ratings. There can be no assurance that any particular rating will continue
for any given period of time or that it will not be changed or withdrawn
entirely if in the judgement of the rating agency circumstances so warrant.
If Great American Reserve's ratings were downgraded from their current levels,
sales of its products and the persistency of its in-force policies could be
adversely affected in a material way.
Great American Reserve believes that it is able to compete effectively
because: (i) it emphasizes a specialized distribution channel where the
ability to respond rapidly to changing customer needs yields a competitive
edge; (ii) it is experienced in establishing and cultivating relationships
with educator market specialists operating in Great American Reserve's
specialized market; (iii) it can offer competitive rates as a result of their
lower-than-average operating costs and increased investment yields achieved by
applying active investment portfolio management techniques; and (iv) it has
reliable policyholder administrative services, supported by customized data
processing systems.
UNDERWRITING
Underwriting with respect to the majority of products sold by Great
American Reserve (FPDAs and variable annuities) is minimal. Substantially all
life insurance policies issued by Great American Reserve were underwritten
individually, although standardized underwriting procedures have been adopted
for certain low face-amount life insurance coverages. Great American
Reserve's group accident and health policies are underwritten based on the
characteristics of a group and its past claim experience.
REINSURANCE
Consistent with the general practice of the life insurance industry,
Great American Reserve reinsures portions of the risk assumed under its
insurance policies with other insurance companies under agreements of
indemnity reinsurance. Great American Reserve also reinsures risks from other
insurers, which are accounted for in the same manner as direct business.
The policy risk retention limit on the life of one individual is $.5
million. At December 31, 1995, reinsurance ceded by Great American Reserve
represented 9.4 percent of gross combined life insurance in force and
reinsurance assumed represented 5.9 percent of net combined life insurance in
force. At December 31, 1995, Great American Reserve's largest reinsurer
accounted for less than .3 percent of total insurance liabilities and less
than 22 percent of total reinsurance receivables.
EMPLOYEES
Great American Reserve has no full-time employees. Great American
Reserve's day-to-day operations are administered by Conseco pursuant to
agreements between Great American Reserve and Conseco.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF GREAT AMERICAN RESERVE
The following discussion highlights the material factors affecting the
results of operations and financial condition and resources of Great American
Reserve. This discussion should be read in conjunction with the financial
statements and notes of Great American Reserve included elsewhere herein.
On August 31, 1995, Conseco, a publicly held specialized financial services
holding company, purchased all of the shares of common stock that it did not
previously own (50.5 percent) of CCP, Great American Reserve's indirect parent,
and effected a merger, with Conseco as the surviving company (the "Conseco
Acquisition"). As a result of Conseco's indirect purchase of a controlling
interest in Great American Reserve, a new basis of accounting under the "push
down" method was adopted effective September 1, 1995. Under this method, the
assets and liabilities of Great American Reserve were revalued to reflect
Conseco's cost basis, which is based on the fair values of such assets and
liabilities on the dates Conseco's ownership interests were acquired.
Financial data for the period subsequent to August 31, 1995, reflect the
adoption of a new basis of accounting under the "push down" method and,
accordingly, data prior to August 31, 1995, may not be comparable with
subsequent data. Significant accounting adjustments recorded as a result of the
adoption of the new basis include: (i) an increase of $61.4 million to cost of
policies purchased; (ii) a reduction of $26.3 million to cost of policies
produced; (iii) a reduction of $15.1 million to goodwill; (iv) an increase of
$1.2 million to insurance liabilities; and (v) the establishment of a deferred
income tax liability to reflect the income tax effects of all of the accounting
adjustments. These adjustments most materially impact the comparability of
operating data by replacing a portion of amortization expense for the cost of
policies produced with amortization expense for the cost of policies purchased
and goodwill, which have different amortization assumptions and bases.
The financial data also reflects the effect of the December 31, 1994,
merger of Jefferson National into the Company. This merger has been accounted
for as a pooling of interests; therefore, the assets and liabilities of
Jefferson National have been combined with Great American Reserve at their book
values and the financial data are presented as if the merger had occurred prior
to the periods presented.
RESULTS OF OPERATIONS
The adjustments resulting from the adoption of a new basis of accounting
under the "push down" method discussed above, may impact the comparability of
financial data for the periods before and after August 31, 1995.
NINE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO 1995 PERIODS COMBINED
(EIGHT MONTHS ENDED AUGUST 31, 1995 AND ONE MONTH ENDED SEPTEMBER 30, 1995)
Insurance policy income consists of premiums received on traditional life
products and policy fund and surrender charges assessed against investment type
products. This account decreased in the first nine months of 1996 compared to
the 1995 periods as a result of a decrease in sales of policies with mortality
or morbidity risks; and a decrease in surrender charges. Surrender charges
assessed against annuity withdrawals were $1.3 million in the first nine months
of 1996 and $1.8 million in the 1995 periods and annuity withdrawals were $123.7
million in the 1996 period and $113.7 million in the 1995 periods. Surrender
charges decreased in the 1996 periods despite the increase in annuity
withdrawals because of increased surrenders of annuities which were not subject
to surrender charges. Increases in withdrawals were primarily due to the
increased size of Great American Reserve's annuity portfolio and increased
competition from higher yielding alternative investment products.
Net investment income includes both income earned on the general invested
assets of Great American Reserve and separate account assets related to variable
annuities. Investment income earned on separate account assets is offset by a
corresponding charge to interest expense on annuities and financial products.
Excluding investment income on separate accounts, net investment income in the
nine months of 1996 decreased 5.3 percent from 1995, to $137.3 million. Average
invested assets (amortized cost basis and excluding separate account assets)
decreased to $2.3 billion in the first nine months of 1996 from $2.4 billion in
1995, while the yield earned on average invested assets decreased to 8.0 percent
from 8.2 percent. Cash flows received during 1995 and the first nine months of
1996 (including cash flows from the sales of investments) were invested in
lower-yielding securities due to a general decline in interest rates.
Net investment income on separate account assets in the first nine months
of 1996 increased to $19.2 million from $10.8 million in the 1995 periods.
Net realized gains and net trading gains (losses) often fluctuate from
period to period. Great American Reserve sold $668.3 million of investment
securities during the first nine months of 1996 compared to $478.4 million in
1995 which sales resulted in net realized gains of $1.6 million and trading
losses of $1.4 million in the 1996 period compared to net realized gains of $7.5
million and trading income of $.6 million in 1995.
Selling securities at a gain and reinvesting the proceeds at a lower yield
may, absent other management action, tend to decrease future investment yields.
Great American Reserve believes, however, that certain factors would mitigate
the adverse effect on net income of such yield decreases as follows: (i)
additional amortization of the cost of policies purchased and the cost of
policies produced is recognized in the same period as the gain in order to
reflect reduced future yields (thereby reducing such amortization in future
periods); (ii) interest rates credited to some products can be reduced thereby
diminishing the effect of the yield decrease on the investment spread; and (iii)
the investment portfolio grows as a result of reinvesting the realized gains.
See amortization related to realized gains below.
Insurance policy benefits and change in future policy benefits relate
solely to policies with mortality or morbidity features. The decrease in the
1996 period corresponds with the decrease in the in-force block of such
policies.
Interest expense on annuities and financial products increased 4.2 percent
in the first nine months of 1996 compared to the 1995 periods. Such increase
reflects fluctuations in charges to the account related to separate account
assets described above under net investment income; and changes in crediting
rates. The weighted average crediting rate for annuity liabilities (other than
separate accounts where the credited amount is based on investment income from
segregated investments and excluding interest bonuses guaranteed for the first
year of the contract) was 5.5 percent and 5.7 percent at September 30, 1996 and
1995, respectively.
Interest expense on investment borrowings in the 1996 and 1995 periods
reflect changes in investment borrowing activities and lower rates paid on such
borrowings in 1996.
Amortization related to operations is affected by the Conseco Acquisition
and the adoption of a new basis of accounting under the "push down" method.
Amortization related to operations in periods prior to the Conseco Acquisition
is comprised of cost of policies purchased, cost of policies produced and
goodwill based on the previous balances and bases. Amortization related to
operations after the Conseco Acquisition is comprised of amortization of the
aforementioned account balances, reflecting a combination of Conseco's ownership
interests in previous balances and its newly purchased interests using the
step-basis of accounting.
Cost of policies produced represents the cost of producing new business
(primarily commissions and certain costs of policy issuance and underwriting)
which varies with and is primarily related to the production of new business.
Costs deferred may represent amounts paid in the period new business is written
(such as underwriting costs and first year commissions) or in periods after the
business is written (such as commissions paid in subsequent years in excess of
ultimate commissions paid).
Cost of policies purchased represents the cost to acquire Great American
Reserve that is attributable to the right to receive cash flows from insurance
contracts in force at the acquisition dates. Some costs incurred subsequent to
the adoption of the new accounting basis on policies issued prior to such date,
which otherwise would have been deferred had it not been for the change in
accounting basis (because they vary with and are primarily related to the
production of the acquired interests in policies) are expensed. Such costs are
primarily comprised of certain commissions paid in excess of ultimate
commissions which have been expensed as operating expense in the nine months
ended September 30, 1996. However, such amounts were considered in determining
the cost of policies purchased and its amortization.
Amortization related to net realized gains decreased in the 1996 period as
a result of the decrease in realized gains discussed above.
Other operating costs and expenses increased 56 percent to $41.9 million in
the first nine months of 1996 compared to $26.9 million in the 1995 periods as a
result of costs which were previously capitalized as part of cost of policies
produced which were expensed in 1996 (see discussion of amortization related to
operations); and additional costs incurred under new service agreements with
Conseco as described in the notes to the financial statements for the nine
months ended September 30, 1996, included herein.
Income tax expense fluctuated primarily in relationship to income before
taxes.
1995 PERIODS COMBINED (FOUR MONTHS ENDED DECEMBER 31, 1995, AND EIGHT
MONTHS ENDED AUGUST 31, 1995) COMPARED TO YEAR ENDED DECEMBER 31, 1994
Insurance policy income consists of premiums received on traditional life
products and policy fund and surrender charges assessed against investment type
products. This account decreased in the 1995 periods from 1994 as a result of a
decrease in sales of policies with mortality or morbidity risks, partially
offset by an increase in surrender charges resulting from higher annuity policy
withdrawals. Surrender charges assessed against annuity withdrawals were $1.7
million in the 1995 periods and $1.5 million in 1994 and annuity withdrawals
were $179.8 million in the 1995 periods and $129.8 million in 1994. Increases in
withdrawals were primarily due to the increased size of Great American Reserve's
annuity portfolio and increased competition from higher yielding alternative
investment products.
Net investment income includes both income earned on the general invested
assets of Great American Reserve and separate account assets related to variable
annuities. Investment income earned on separate account assets is offset by a
corresponding charge to interest expense on annuities and financial products.
Excluding investment income on separate accounts, net investment income in the
1995 periods increased 3.1 percent from 1994, to $191.4 million. Average
invested assets (amortized cost basis and excluding separate account assets)
were $2.3 billion in 1995 and 1994, while the yield earned on average invested
assets increased to 8.2 percent from 8.0 percent.
Net investment income on separate account assets in the 1995 periods
increased to $19.2 million from $2.3 million in 1994.
Net realized gains and net trading gains (losses) often fluctuate from
period to period. Great American Reserve sold $919.7 million of investment
securities during the 1995 periods and $586.0 million in 1994 which sales
resulted in net realized gains of $20.5 million and trading income of $.9
million in the 1995 periods compared to net realized gains of $1.7 million and
trading losses of $.5 million in 1994. In addition, Great American Reserve
recorded net realized losses of $1.6 million in the 1995 periods and $1.0
million in 1994 on writedowns taken as a result of conditions which caused Great
American Reserve to conclude that declines in the fair value of certain
securities were other than temporary.
The effect of net realized gains on the amortization of cost of policies
purchased and cost of policies produced is discussed above under the comparison
of the first nine months of 1996 and 1995. Also see amortization related to
realized gains below.
Insurance policy benefits and change in future policy benefits relate
solely to policies with mortality or morbidity features. The decrease in the
1995 periods corresponds with the decrease in the in-force block of such
policies.
Interest expense on annuities and financial products increased 17 percent
in the 1995 periods over 1994. Such increase reflects: (i) fluctuations in
charges to the account related to investment income from separate account assets
as described above under net investment income; and (ii) changes in crediting
rates. The weighted average crediting rate for annuity liabilities (other than
separate accounts where the credited amount is based on investment income from
the segregated investments and excluding interest bonuses guaranteed for the
first year of the annuity contract) was 5.6 percent and 5.8 percent at December
31, 1995 and 1994, respectively.
Interest expense on investment borrowings in the 1995 periods and in 1994
reflects changes in investment borrowing activities and the higher rates paid on
such borrowings in the 1995 periods.
Amortization related to operations increased 6.3 percent to $17.0 million
in the 1995 periods from $16.0 million in 1994. Such increase is affected by:
(i) the adoption of a new basis of accounting as discussed above; and (ii) the
increased amount of business in force on which acquisition costs are
capitalized. See the discussion of cost of policies produced and cost of
policies purchased above under the comparison of the first nine months of 1996
and 1995.
Amortization related to net realized gains increased in the 1995 periods
as a result of the increase in realized gains discussed above.
Income tax expense fluctuated primarily in relationship to income before
taxes.
1994 COMPARED TO 1993
Insurance policy income decreased in 1994 from 1993 consistent with the
explanation above for the 1995 periods and 1994. Surrender charges assessed
against annuity withdrawals were $1.5 million in 1994 and $1.3 million in 1993
and annuity withdrawals were $129.8 million in 1994 compared to $102.3 million
in 1993.
Net investment income decreased 12 percent to $187.9 million in 1994 from
$214.5 million in 1993. The average invested assets in the general account did
not change materially in 1994 and 1993. However, the average yield earned on
invested assets in the general account decreased to approximately 7.8 percent in
1994 from 8.5 percent in 1993. Net investment income on separate account assets
related to variable annuities included in net investment income was $2.3 million
in 1994 and $11.8 million in 1993. Net investment income from separate account
assets is offset by a corresponding charge to interest expense on annuities and
financial products.
Net realized gains and net trading gains (losses) often fluctuate from
period to period. Great American Reserve sold $586.0 million of investment
securities in 1994 and $999.2 million in 1993, which sales resulted in net
realized gains of $1.7 million and net trading losses of $.5 million in 1994 and
net realized gains of $36.1 million and net trading income of $12.4 million in
1993. In addition, Great American Reserve recorded a net realized loss of $1.0
million in 1994 on writedowns taken as a result of conditions which caused Great
American Reserve to conclude that declines in the fair value of certain
securities were other than temporary. In 1993, Great American Reserve wrote down
exchange-rate-linked securities by $16.1 million as a result of foreign currency
fluctuations.
The effect of these sales of the amortization of cost of policies purchased
and cost of policies produced is discussed above under the comparison of the
first six months of 1996 and 1995.
Insurance policy benefits and change in future policy benefits relate
solely to policies with mortality or morbidity features. The decrease in 1994
corresponds with the decrease in the in-force block of such policies.
Interest expense on annuities and financial products decreased 11 percent
in 1994 from 1993. Such decrease reflects: (i) fluctuations in charges to the
account related to investment income from separate account assets as described
above under net investment income; and (ii) changes in crediting rates. The
weighted average crediting rate for annuity liabilities (other than separate
accounts where the credited amount is based on investment income from the
segregated investments and excluding interest rate bonuses guaranteed for the
first year of the annuity contract) was 5.7 percent in 1994 and 6.0 percent in
1993.
Amortization related to operations in 1994 was affected by the $15.7
million reduction in cost of policies purchased as a result of net realized
gains in 1993. Such reduction in the cost of policies purchased balance resulted
in future decreased amortization expense.
Interest expense on investment borrowings in 1994 and 1993 reflects changes
in the investment borrowing activities of Great American Reserve.
Amortization related to realized gains decreased in 1994 as a result of
the decrease in realized gains in 1994 compared to 1993.
Income tax expense decreased in 1994 primarily due to the decrease in
pretax income. The effective tax rate of 42 percent for 1993 exceeded the 1994
effective tax rate of 37 percent due to: (i) a $4.4 million charge in 1993
related to the 1985-1986 tax years; and (ii) additional tax expense of $1.1
million due to the increase in the statutory tax rate in 1993. Such items are
further discussed in the notes to the financial statements included herein.
INVESTMENTS
Great American Reserve's investment strategy is to: (i) maintain a
predominately investment grade fixed income portfolio; (ii) provide adequate
liquidity to meet the cash flow requirements of policyholders and other
obligations; and (iii) maximize current income and total investment return
through active investment management. Consistent with this strategy, investments
in fixed maturity securities, mortgage loans, credit-tenant loans, policy loans
and short-term investments comprised 89 percent of the Company's investment
portfolio at September 30, 1996. The remainder of the invested assets were in
equity securities and other investments. At September 30, 1996, the Company had
invested assets of approximately $2.4 billion.
Great American Reserve is regulated by insurance statutes and regulations
as to the type of investments that it is permitted to make and the amount of
funds that may be used for any one type of investment. In light of these
statutes and regulations and Great American Reserve's business and investment
strategy, Great American Reserve generally seeks to invest in United States
government and government agency securities and corporate securities rated
investment grade by established nationally recognized rating organizations or,
if not rated, in securities of comparable investment quality.
The following table summarizes investment yields earned over the periods
indicated:
<TABLE>
<CAPTION>
Prior basis
---------------------------------
Nine months One month Four months Eight months
ended ended ended ended
September 30, September 30, December 31, August 31,
1996 1995 1995 1995 1994 1993
---- ---- ---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Weighted average invested assets:
As reported ..................... $2,426.7 $2,484.8 $2,498.1 $2,416.5 $4,552.3 $4,828.0
Excluding unrealized appreciation
(depreciation) (a)............. 2,449.0 2,474.4 2,467.4 2,470.7 4,662.6 4,618.2
Net investment income................... 156.5 19.5 74.2 136.4 367.8 412.9
Yields earned:
As reported...................... 8.6% 9.4% 8.9% 8.4% 8.1% 8.6%
Excluding unrealized appreciation
(depreciation) (a) ............ 8.5% 9.5% 9.0% 8.2% 7.9% 8.9%
<FN>
- ----------------
(a) Excludes the effect of reporting fixed maturities at fair value.
</TABLE>
Although investment income is a significant component of total revenues,
the profitability of Great American Reserve's annuity business is determined
primarily by spreads between interest rates earned and rates credited on annuity
contracts. At September 30, 1996, the average yield, computed on the cost basis
of Great American Reserve's investment portfolio, was 8.0 percent and the
average interest rate credited on Great American Reserve's total liability
portfolio was 5.8 percent.
Actively Managed Fixed Maturities
Great American Reserve's actively managed fixed maturity portfolio at
September 30, 1996, was comprised primarily of debt securities of the United
States government, public utilities and other corporations and mortgage-backed
securities. Mortgage-backed securities included collateralized mortgage
obligations ("CMOs") and mortgage-backed pass-through securities.
At September 30, 1996, the amortized cost and estimated fair value of
actively managed fixed maturity securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
United States Treasury securities and obligations
of United States government corporations and
agencies............................................... $ 47.6 $ .2 $ 1.4 $ 46.4
Obligations of state and political subdivisions and
foreign government obligations......................... 21.7 .2 .8 21.1
Public utility securities................................. 267.3 1.0 12.1 256.2
Other corporate securities................................ 980.2 6.1 30.9 955.4
Mortgage-backed securities ............................... 606.8 1.6 13.5 594.9
---------- ------- ------ ----------
Total.................................................. $1,923.6 $9.1 $58.7 $1,874.0
======== ==== ===== ========
</TABLE>
As discussed in the notes to the financial statements, when Great American
Reserve adjusts carrying values of actively managed fixed maturity securities
for changes in fair value, the Company also adjusts the cost of policies
purchased, cost of policies produced and insurance liabilities. These
adjustments are made in order to reflect the change in amortization that would
be needed if those fixed maturity investments had actually been sold at their
fair values and the proceeds reinvested at current interest rates.
The following table sets forth actively managed fixed maturity securities
at September 30, 1996, classified by rating categories. The category assigned is
the highest rating by a nationally recognized statistical rating organization
or, as to $24.3 million estimated fair value of fixed maturity securities not
rated by such firms, the rating assigned by the National Association of
Insurance Commissioners ("NAIC"). For the purposes of this table, NAIC Class 1
is included in the "A" rating; Class 2, "BBB-"; Class 3, "BB-"; and Classes 4-6,
"B+ and below":
<TABLE>
<CAPTION>
Percent of Percent of
Investment fixed total
Rating maturities investments
------ ---------- -----------
<S> <C> <C>
AAA................................................................................... 38% 30%
AA.................................................................................... 6 5
A..................................................................................... 21 16
BBB+.................................................................................. 8 6
BBB................................................................................... 12 9
BBB-.................................................................................. 9 7
---- ----
Investment-grade................................................................. 94 73
--- ---
BB+................................................................................... 1 1
BB.................................................................................... 1 1
BB-................................................................................... 2 2
B+ and below ......................................................................... 2 1
---- ----
Below investment-grade........................................................... 6 5
---- ----
Total actively managed fixed maturities...................................... 100% 78%
=== ==
</TABLE>
Great American Reserve plans to maintain approximately the present level of
below investment grade fixed maturities. These securities generally have greater
risks than other corporate debt investments, including risk of loss upon default
by the borrower, and are often unsecured and subordinated to other creditors.
Below investment grade issuers usually have high levels of indebtedness and are
more sensitive to adverse economic conditions, such as recession or increasing
interest rates, than are investment grade issuers. The Company is aware of these
risks and monitors its below investment grade securities closely. At September
30, 1996, Great American Reserve's below investment grade fixed maturity
investments had an amortized cost of $115.0 million and an estimated fair value
of $112.8 million.
Great American Reserve's investment portfolio is managed by CCM, a
registered investment advisor and wholly owned subsidiary of Conseco. Great
American Reserve and CCM periodically evaluate the creditworthiness of each
issuer whose securities are held in the portfolio. Special attention is paid
to those securities whose market values have declined materially for reasons
other than changes in interest rates or other general market conditions. Great
American Reserve considers available information to evaluate the realizable
value of the investment, the specific condition of the issuer, and the issuer's
ability to comply with the material terms of the security. Information
reviewed may include the recent operational results and financial position of
the issuer, information about its industry, recent press releases and other
information. CCM employs a staff of experienced securities analysts in a
variety of specialty areas. Among other responsibilities, this staff compiles
and reviews such evidence. If evidence does not exist to support a realizable
value equal to or greater than the carrying value of the investment and such
decline in market value is determined to be other than temporary, Great
American Reserve reduces the carrying amount to its net realizable value, which
becomes the new cost basis; the amount of the reduction is reported as a
realized loss. Great American Reserve recognizes any recovery of such
reductions in the cost basis of an investment only upon the sale, repayment or
other disposition of the investment. Great American Reserve recorded writedowns
of investments of $1.6 million in 1995 as a result of changes in the financial
condition of an issuer and changes in the value of the underlying collateral
which caused the Company to conclude that the decline in fair value of such
investments was other than temporary. There were no such writedowns in the nine
months ended September 30, 1996. Great American Reserve's investment portfolio
is subject to the risks of further declines in realizable value. Great American
Reserve and CCM, however, attempt to mitigate this risk through the
diversification and active management of its portfolio.
Great American Reserve had no fixed maturity investment in technical
default (i.e., in default, but not as to the payment of interest or principal)
or substantive default (i.e., in default due to nonpayment of interest or
principal) at September 30, 1996. There were no fixed maturity investments about
which management had serious doubts as to the ability of the issuer to comply on
a timely basis with the material terms of the instruments.
At September 30, 1996, fixed maturity investments included $594.9 million
of mortgage-backed securities (32 percent of the fixed maturity security
portfolio). CMOs are securities backed by pools of pass-through securities
and/or mortgages that are segregated into sections or "tranches" which provide
for sequential retirement of principal rather than the pro rata share of
principal return which occurs through regular monthly principal payments on
pass-through securities.
The yield characteristics of mortgage-backed securities differ from those
of traditional fixed income securities. Interest and principal payments occur
more frequently, often monthly, and mortgage-backed securities are subject to
risks associated with variable prepayments. Prepayment rates are influenced by a
number of factors which cannot be predicted with certainty, including the
relative sensitivity of the underlying mortgages backing the assets to changes
in interest rates; a variety of economic, geographic and other factors; and the
repayment priority of the securities in the overall securitization structures.
In general, prepayments on the underlying mortgage loans, and the
securities backed by these loans, increase when the level of prevailing interest
rates declines significantly below the interest rates on such loans.
Mortgage-backed securities purchased at a discount to par will experience an
increase in yield when the underlying mortgages prepay faster than expected.
Those securities purchased at a premium that prepay faster than expected will
incur a reduction in yield. When declines in interest rates occur, the proceeds
from the prepayment of mortgage-backed securities are likely to be reinvested at
lower rates than the Company was earning on the prepaid securities. As the level
of prevailing interest rates increases, prepayments on mortgage-backed
securities decrease as fewer underlying mortgages are refinanced. When this
occurs, the average maturity and duration of the mortgage-backed securities
increase, which decreases the yield on mortgage-backed securities purchased at a
discount because the discount is realized as income at a slower rate and
increases the yield on those purchased at a premium as a result of a decrease in
annual amortization of the premium.
The following table sets forth the par value, amortized cost and estimated
fair value of mortgage-backed securities including CMOs summarized by interest
rates on the underlying collateral at September 30, 1996:
<TABLE>
<CAPTION>
Par Amortized Estimated
value cost fair value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Below 7 percent............................................................ $215.8 $211.1 $204.1
7 percent - 8 percent...................................................... 257.3 257.5 253.0
8 percent - 9 percent...................................................... 75.0 73.8 72.6
9 percent and above........................................................ 62.4 64.4 65.2
------ ------ ------
Total mortgage-backed securities...................................... $610.5 $606.8 $594.9
====== ====== ======
</TABLE>
The amortized cost and estimated fair value of mortgage-backed securities
including CMOs at September 30, 1996, summarized by type of security were as
follows:
<TABLE>
<CAPTION>
Estimated fair value
--------------------
% of
Amortized fixed
Type cost Amount maturities
- ---- --------- ------ ----------
(Dollars in millions)
<S> <C> <C> <C>
Pass-throughs and sequential and targeted amortization classes............ $481.7 $472.0 25%
Support classes............................................................ 4.8 4.5 -
Accrual (Z tranche) bonds.................................................. 9.4 9.4 1
Planned amortization classes and accretion directed bonds.................. 77.2 75.4 4
Subordinated classes....................................................... 33.7 33.6 2
------ ------ ---
$606.8 $594.9 32%
====== ====== ===
</TABLE>
Pass-throughs and sequential and targeted amortization classes have similar
prepayment variability. Pass-throughs have historically provided the best
liquidity in the mortgage-backed securities market and provide the best
price/performance ratio in a highly volatile interest rate environment. This
type of security is also frequently used as collateral in the dollar-roll
market. Sequential classes pay in a strict sequence; all principal payments
received by the CMO are paid to the sequential tranches in order of priority.
Targeted amortization classes provide a modest amount of prepayment protection
when prepayments on the underlying collateral increase from those assumed at
pricing. Thus, they offer slightly better call protection than sequential
classes and pass-throughs.
Support classes absorb the prepayment risk from which planned amortization
and targeted amortization classes are protected. As such, they are usually
extremely sensitive to prepayments. Most of Great American Reserve's support
classes are higher average life instruments that generally will not lengthen if
interest rates rise further and will have a tendency to shorten if interest
rates decline. However, since these bonds have costs below par values, higher
prepayments will have the effect of increasing yields.
Accrual bonds are CMOs structured such that the payment of coupon interest
is deferred until principal payments begin. On each accrual date, the principal
balance is increased by the amount of the interest (based upon the stated coupon
rate) that otherwise would have been payable. As such, these securities act much
the same as zero coupon bonds until cash payments begin. Cash payments typically
do not commence until earlier classes in the CMO structure have been retired,
which can be significantly influenced by the prepayment experience of the
underlying mortgage loan collateral in the CMO structure. Because of the zero
coupon element of these securities and the potential uncertainty as to the
timing of cash payments, their market values and yields are more sensitive to
changing interest rates than other CMOs, pass-through securities and coupon
bonds.
Planned amortization classes and accretion directed bonds are some of the
most stable and liquid instruments in the mortgage-backed securities market.
Planned amortization class bonds adhere to a fixed schedule of principal
payments as long as the underlying mortgage collateral experiences prepayments
within a certain range. Changes in prepayment rates are first absorbed by
support classes. This insulates the planned amortization classes from the
consequences of both faster prepayments (average life shortening) and slower
prepayments (average life extension).
Subordinated CMO classes have both prepayment and credit risk. The
subordinated classes are used to lend credit enhancement to the senior
securities and as such, rating agencies require that this support not
deteriorate due to the prepayment of the subordinated securities. The credit
risk of subordinated classes is derived from the negative leverage of owning a
small percentage of the underlying mortgage loan collateral while bearing a
majority of the risk of loss due to homeowner defaults.
All mortgage-backed securities are subject to risks associated with
variable prepayments. As a result, these securities may have a different actual
maturity than planned at the time of purchase. When securities having a cost
greater than par are backed by mortgages that prepay faster than expected, Great
American Reserve records a charge to investment income. When securities having a
cost less than par prepay faster than expected, Great American Reserve records
investment income.
The degree to which a mortgage-backed security is susceptible to income
fluctuations is influenced by: (i) the difference between its cost and par; (ii)
the relative sensitivity of the underlying mortgages backing the security to
prepayment in a changing interest rate environment; and (iii) the repayment
priority of the security in the overall securitization structure. The Company
limits the extent of these risks by : (i) purchasing securities which are backed
by collateral with lower prepayment sensitivity (such as mortgages priced at a
discount to par value and mortgages that are extremely seasoned); (ii) avoiding
securities whose values are heavily influenced by changes in prepayments (such
as interest-only and principal-only securities); and (iii) investing in
securities structured to reduce prepayment risk (such as planned amortization
class ("PAC") and targeted amortization class ("TAC") collateralized mortgage
obligations). PAC and TAC instruments represented approximately 20 percent of
Great American Reserve's mortgage-backed securities at September 30, 1996.
If the Company determines that it will dispose of an investment held in the
actively managed fixed maturity category, Great American Reserve will either
sell the security or transfer it to the trading account at its fair value; the
gain or loss is recognized immediately. There were no such transfers in 1995 and
the first nine months of 1996. During 1995 and the first nine months of 1996,
the Company sold actively managed fixed maturity securities with a book value of
$912.0 million and $668.3 million, respectively. Such sales resulted in
investment gains (before related expenses, amortization and taxes) of $18.9
million and $1.6 million, respectively, in 1995 and the nine months ended
September 30, 1996. Such securities were sold in response to changes in the
investment environment which created opportunities to enhance the total return
of the investment portfolio without adversely affecting the quality of the
portfolio or the matching of expected maturities of assets and liabilities. The
realization of gains and losses affects the timing of the amortization of the
cost of policies produced and the cost of policies purchased, as explained in
note 1 to the financial statements.
During 1995 and the nine months ended September 30, 1996, fixed maturity
investments with par values totaling $34.1 million and $20.5 million,
respectively, were redeemed prior to the scheduled maturity date. As a result of
such redemptions, Great American Reserve recognized additional income of
approximately $1.4 million, and $.3 million, respectively, which was credited to
investment income.
Other Investments
Credit-tenant loans are loans on commercial properties where the lease of
the principal tenant is assigned to the lender and the principal tenant, or any
guarantor of such tenant's obligations, has a credit rating at the time of
origination of the loan of at least BBB- or its equivalent. The underwriting
guidelines consider such factors as: (i) the lease term of the property; (ii)
the mortgagee's management ability, including business experience, property
management capabilities and financial soundness; and (iii) such economic,
demographic or other factors that may affect the income generated by the
property, or its value. The underwriting guidelines also generally require a
loan-to-value ratio of 75 percent or less. Credit-tenant loans are carried at
amortized cost and were $87.9 million at September 30, 1996, or 3.6 percent of
total invested assets. The total estimated fair value of credit-tenant loans was
$85.0 million at September 30, 1996.
At September 30, 1996, the Company held mortgage loan investments with a
carrying value of $81.8 million (or 3.4 percent of total invested assets) and a
fair value of $81.4 million. Substantially all of the mortgage loan investments
were commercial loans.
Non-current mortgage loans were not significant at September 30, 1996. The
Company had no realized losses on mortgage loans for the nine months ended
September 30, 1996. At September 30, 1996, the Company had a loan loss reserve
of $1.4 million. Approximately 28 percent, 21 percent and 15 percent of the
mortgage loans were on properties located in California, Indiana and Texas,
respectively. No other state comprised greater than 6 percent of the mortgage
loan balance.
At September 30, 1996, the Company held no trading account securities.
Trading account securities are investments that are purchased with the intent to
be traded prior to their maturity, or are believed likely to be disposed of in
the foreseeable future as a result of market or issuer developments. Effective
December 31, 1993, with Great American Reserve's adoption of Statement of
Financial Accounting Standards No. 115 ("SFAS 115"), trading account securities
are carried at estimated fair value, with the changes in fair value reflected in
the statement of operations. The net unrealized gain (loss) on trading account
securities recorded in trading income as a result of adopting SFAS 115, was
immaterial.
Short-term investments totaled $19.0 million, or .8 percent of invested
assets at September 30, 1996, and consisted primarily of commercial paper and
repurchase agreements relating to government securities.
LIQUIDITY
Great American Reserve generally produces adequate cash flow from premium
collections and investment income to meet its obligations. The liabilities
related to insurance policies are primarily long term and generally are paid
from future cash flows. Most of the assets, other than policy loans, are
invested in bonds and other securities, substantially all of which are readily
marketable. Although there is not present need or intent to dispose of such
investments, Great American Reserve could liquidate portions of its investments
if the need arose.
To increase its return on investments and increase liquidity, Great
American Reserve from time to time will enter into reverse repurchase agreements
and dollar roll transactions. These transactions are accounted for as short-term
collateralized borrowings. Such borrowings, which are collateralized by pledged
securities with fair values approximately equal to the borrowings, averaged
$118.0 million in the nine months ended September 30, 1996 and $84.4 million in
1995. The weighted average interest rate on short-term collateralized borrowings
was 5.5 percent in the nine months ended September 30, 1996 and 5.4 percent in
1995.
Of Great American Reserve's total insurance liabilities at September 30,
1996, less than 6 percent could not be surrendered, 57 percent could be
surrendered only by incurring a surrender charge and 37 percent could be
surrendered without penalty.
Great American Reserve believes that it has adequate short-term investments
and readily marketable investment-grade securities to cover the payments under
contracts containing fixed payment dates plus any likely cash needs for all
other contracts and obligations. Great American Reserve's investment portfolio
at September 30, 1996, included $19.0 million of short-term investments, $.6
billion of U.S. government/agency and mortgage-backed securities and $1.7
billion of publicly traded investment-grade bonds. Great American Reserve
believes that such investments could be readily sold at or near carrying value
or used to facilitate borrowings under reverse repurchase agreements.
GOVERNMENTAL REGULATION
Great American Reserve is subject to regulation and supervision by the
states in which it transacts business. The laws of the various states
generally establish supervisory agencies with broad administrative and
supervisory powers to: (i) grant and revoke licenses to transact business;
(ii) regulate and supervise trade practices and market conduct; (iii)
establish guaranty associations; (iv) license agents; (v) approve policy
forms; (vi) regulate premium rates for some lines of business; (vii) establish
reserve requirements; (viii) prescribe the form and content of required
financial statements and reports; (ix) determine the reasonableness and
adequacy of statutory capital and surplus, and (x) regulate the type and
amount of permitted investments. State insurance laws also restrict the
ability of insurance companies to pay dividends or make other distributions.
See note 11 to Great American Reserve's financial statements for the year
ended December 31, 1995.
The federal government currently does not directly regulate the insurance
business. However, federal legislation and administrative policies in several
areas, including pension regulation, age and sex discrimination, financial
services regulation and federal taxation, do affect the insurance business.
Recently, a number of state legislatures have considered or enacted
legislative proposals that alter, and in many cases, increase authority to
regulate insurance companies and holding company systems. In addition,
legislation has been introduced in Congress which could result in the federal
government assuming some role in the regulation of the insurance industry.
State insurance regulators and the NAIC periodically re-examine existing
laws and regulations and their application to insurance companies. In recent
years, the NAIC has approved, and recommended to the states for adoption and
implementation, several regulatory initiatives designed to decrease the risk
of insolvency of insurance companies. These initiatives include risk based
capital ("RBC") requirements for determining the levels of capital and surplus
an insurer must maintain in relation to its insurance and investment risks.
Other NAIC regulatory initiatives impose restrictions on an insurance
company's ability to pay dividends to its stockholders. These initiatives may
be adopted by the various states in which Great American Reserve is licensed;
the ultimate content and timing of any statutes and regulations adopted by the
states cannot be determined at this time. It is not possible to predict the
future impact of changing state and federal regulation on Great American
Reserve's operations, and there can be no assurance that existing insurance
related laws and regulations will not become more restrictive in the future or
that laws and regulations enacted in the future will not be more restrictive.
The NAIC's RBC requirements, which became effective December 31, 1993,
are intended to be used as an early warning tool to help insurance regulators
identify deteriorating or weakly capitalized companies in order to initiate
regulatory action. Such requirements are not intended as a mechanism for
ranking adequately capitalized companies. The formula defines a new minimum
capital standard which supplements the low, fixed minimum capital and surplus
requirements previously implemented on a state-by-state basis.
The NAIC's RBC requirements provide for four levels of regulatory
attention, varying with the ratio of the company's total adjusted capital
(defined as the total of its statutory capital, surplus, asset valuation
reserve and certain other adjustments) to its RBC. If a company's total
adjusted capital is less than 100 percent but greater than or equal to 75
percent of its RBC, or if a negative trend (as defined by the regulators) has
occurred and total adjusted capital is less than 125 percent of RBC (the
"Company Action Level"), the company must submit a comprehensive plan to the
regulatory authority proposing corrective actions aimed at improving its
capital position. If a company's total adjusted capital is less than 75
percent but greater than or equal to 50 percent of its RBC (the "Regulatory
Action Level") , the regulatory authority will perform a special examination
of the company and issue an order specifying corrective actions that must be
followed. If a company's total adjusted capital is less than 50 percent but
greater than or equal to 35 percent of its RBC (the "Authorized Control
Level"), the regulatory authority may take any action it deems necessary,
including placing the company under regulatory control. If a company's total
adjusted capital is less than 35 percent of its RBC (the "Mandatory Control
Level") the regulatory authority must place the company under its control. At
September 30, 1996, the total adjusted capital for Great American Reserve was
greater than twice the respective Company Action Levels.
The Texas Insurance Department adopted its own RBC requirements, the
stated purpose of which is to require a minimum level of capital and surplus
to absorb the financial, underwriting, and investment risks assumed by an
insurer. Texas' RBC requirements differ from those adopted by the NAIC in
two principal respects: (i) they use different elements to determine minimum
RBC levels in their calculation formulas; and (ii) the Texas Regulations do
not stipulate "Action Levels" (like those adopted by the NAIC) where
corrective actions are required. However, the Commissioner of the Texas
Insurance Department does have the power to take similar corrective actions if
a company does not maintain the required minimum level of capital and surplus.
Under the Texas Regulations, an insurer has met RBC requirements if its
admitted assets exceed its liabilities by at least 3 percent. At September
30, 1996, Great American Reserve's admitted assets exceeded liabilities by
more than twice the required 3 percent level.
Insurance companies are required to establish an asset valuation reserve
("AVR") for statutory reporting, consisting of two components: a "default
component" which provides for future credit-related losses on fixed maturity
investments and an "equity component" which provides for losses on all types
of equity investments, including real estate. Insurers are also required to
establish an interest maintenance reserve ("IMR") for fixed maturity realized
capital gains and losses, net of tax, related to changes in interest rates.
The IMR must be amortized into earnings on a basis reflecting the remaining
period to maturity of the fixed maturity securities sold. State regulatory
authorities require that these reserves be established as a liability on a
life insurer's statutory financial statements. These reserves do not affect
financial statements of Great American Reserve prepared in accordance with
generally accepted accounting principles.
Under the solvency or guaranty laws of most states in which it does
business, Great American Reserve is required to pay guaranty fund assessments
(up to certain prescribed limits). Guaranty funds are established by various
states to fund policyholder losses or the liabilities of insolvent or
rehabilitated insurance companies. These assessments may be deferred or
forgiven under most guaranty laws if they would threaten an insurer's
financial strength. In certain instances, the assessments may be offset
against future premium taxes. Prior to 1991 these assessments were not
material. The amount of such assessments has increased in recent years,
however, and may increase in future years. Great American Reserve's statutory
financial statements for the year ended December 31, 1995, include $1.3
million of expenses as a result of such assessments. The likelihood and
amount of any other future assessments in addition to estimated amounts
accrued cannot be estimated. Such assessments are beyond the control of Great
American Reserve.
Approximately once every three years, as part of their routine regulatory
oversight process, insurance departments conduct detailed examinations of the
books, records and accounts of insurance companies domiciled in their states.
Such examinations are generally conducted in cooperation with the departments
of two or three other states, under guidelines promulgated by the NAIC. The
latest examination of Great American Reserve was completed in 1994. The
conclusions reached did not have a material adverse effect on Great American
Reserve or its businesses and operations.
FEDERAL INCOME TAXATION
The annuity and life insurance products marketed and issued by Great
American Reserve generally provide the policyholder with an income tax
advantage, as compared to other saving investments such as certificates of
deposit and bonds, in that income taxation on the increase in value of the
product is deferred until receipt by the policyholder. With other savings
investments, the increase in value is taxed as earned. Annuity benefits, and
life insurance benefits which accrue prior to the death of the policyholder,
are generally not taxable until paid. Life insurance death benefits are
generally exempt from income tax. Also, benefits received on immediate
annuities (other than structured settlements) are recognized as taxable income
ratably as opposed to the economic accrual methods, which tend to accelerate
taxable income into earlier years than which are required for other
investments. The tax advantage for annuities and life insurance is provided
in the Internal Revenue Code, and is generally followed in all states and
other United States taxing jurisdictions. Accordingly, the tax advantage is
subject to change by Congress and by the legislatures of the respective taxing
jurisdictions.
THE COMPANY'S DIRECTORS AND EXECUTIVE OFFICERS
The directors and principal executive officers of the Company as of December
31, 1996 are listed below, together with information as to their ages, dates
of election and principal business occupation during the last five years.
<TABLE>
<CAPTION>
<S> <C>
PRINCIPAL BUSINESS OCCUPATION
NAME DURING LAST FIVE YEARS
- -------------------- --------------------------------------------
Ngaire E. Cuneo Since 1993, Director of Conseco's principal
(Age 45) insurance subsidiaries. Since 1992,
Executive Vice President, Corporate
Development of Conseco, Inc. and various
positions with certain of its affiliates.
Prior thereto, Ms. Cuneo was Senior Vice
President/Managing Director of GE Capital
from 1986 - 1992.
Stephen C. Hilbert Since 1979, Chairman of the Board, Chief
(Age 49) Executive Officer and Director of Conseco,
Inc. Since 1988, President and various
positions with the Company and certain of
its affiliates.
Rollin M. Dick Since 1986, Executive Vice President, Chief
(Age 64) Financial Officer and Director of Conseco,
Inc. and various positions with the Company
and certain of its affiliates.
Lawrence W. Inlow Since 1987, Executive Vice President,
(Age 45) Secretary and General Counsel of Conseco,
Inc. and various positions (including
Directorships) with the Company and certain
of its affiliates.
Donald F. Gongaware Since 1985, Executive Vice President, Chief
(Age 60) Operations Officer and Director of Conseco,
Inc. and various positions with certain of
its affiliates.
</TABLE>
EXECUTIVE COMPENSATION
The Company has no full-time employees and does not pay compensation to any
employee, officer or director of the Company.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account is a party or to
which the assets of the Variable Account are subject. Neither the Company nor
the Distributor is involved in any litigation that is of material importance
in relation to their total assets or that relates to the Variable Account.
ADDITIONAL INFORMATION ABOUT THE VARIABLE ACCOUNT
Additional information concerning the Variable Account is contained in a SAI
which is available without charge, by contacting the Company at 11815 N.
Pennsylvania Street, Carmel, Indiana 46032, (800)342-6307.
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
Contracts and Certificates offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement and amendments
thereto and exhibits filed as a part thereof, to all of which reference is
hereby made for further information concerning the Company and the Contracts
and Certificates offered hereby. Statements contained in this Prospectus as to
the content of Contracts and Certificates and other legal instruments are
summaries. For a complete statement of the terms thereof, reference is made to
such instruments as filed.
LEGAL OPINIONS
Legal matters in connection with the Contracts and Certificates described
herein are being passed upon by the law firm of Blazzard, Grodd & Hasenauer,
P.C., Westport, Connecticut.
EXPERTS
The financial statements of Great American Reserve as of December 31, 1995 and
1994, and for the four months ended December 31, 1995, the eight months ended
August 31, 1995, and the years ended December 31, 1994 and 1993, included in
this prospectus, have been audited by Coopers & Lybrand L.L.P., independent
accountants, as set forth in their report appearing herein, and have been so
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
FINANCIAL STATEMENTS
Financial statements of the Company are included in this Prospectus. No
financial statements for the Variable Account have been included because, as
of the date of this Prospectus, the Variable Account had no assets. The
financial statements of the Company included herein should be considered only
as bearing upon the ability of the Company to meet its obligations under the
Contracts and Certificates.
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
BALANCE SHEET
September 30, 1996
(Dollars in millions)
(Unaudited)
ASSETS
<S> <C>
Investments:
Actively managed fixed maturities at fair value (amortized cost: $1,923.6)............................. $1,874.0
Mortgage loans......................................................................................... 81.8
Credit-tenant loans.................................................................................... 87.9
Policy loans........................................................................................... 81.6
Other invested assets ................................................................................. 68.4
Short-term investments................................................................................. 19.0
Assets held in separate accounts....................................................................... 201.3
----------
Total investments.................................................................................. 2,414.0
Accrued investment income................................................................................. 34.0
Cost of policies purchased................................................................................ 164.8
Cost of policies produced................................................................................. 36.5
Reinsurance receivables................................................................................... 26.2
Goodwill (net of accumulated amortization: $11.3)......................................................... 50.1
Other assets.............................................................................................. 5.9
------------
Total assets...................................................................................... $2,731.5
========
</TABLE>
(continued on next page)
The accompanying notes are an
integral part of the financial
statements.
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
BALANCE SHEET (Continued)
September 30, 1996
(Dollars in millions, except per share amount)
(Unaudited)
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C>
Liabilities:
Insurance liabilities.................................................................................. $1,979.6
Income tax liabilities................................................................................. 24.1
Investment borrowings.................................................................................. 119.9
Other liabilities...................................................................................... 24.7
Liabilities related to separate accounts .............................................................. 201.3
---------
Total liabilities................................................................................ 2,349.6
---------
Shareholder's equity:
Common stock and additional paid-in capital (par value $4.80 per share, 1,065,000
shares authorized, 1,043,565 shares issued and outstanding).......................................... 380.8
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities (net of applicable deferred income taxes: $7.8)............................ (13.4)
Other investments (net of applicable deferred income taxes: $.2)..................................... (.4)
Retained earnings...................................................................................... 14.9
---------
Total shareholder's equity....................................................................... 381.9
---------
Total liabilities and shareholder's equity....................................................... $2,731.5
========
</TABLE>
The accompanying notes are an
integral part of the financial
statements.
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF OPERATIONS
(Dollars in millions)
(Unaudited)
Nine months One month Eight months
ended ended ended
September 30, September 30, August 31,
1996 1995 1995
------------- ------------ -------------
(prior basis)
<S> <C> <C> <C>
Revenues:
Insurance policy income............................................. $ 61.4 $ 11.2 $ 60.5
Investment activity:
Net investment income............................................. 156.5 19.4 136.4
Net trading income (losses)....................................... (1.4) (.2) .8
Net realized gains................................................ 1.6 1.0 6.5
-------- ------- -------
Total revenues.................................................. 218.1 31.4 204.2
------- ------- -------
Benefits and expenses:
Insurance policy benefits........................................... 41.4 4.5 45.9
Change in future policy benefits.................................... (5.5) 3.3 (4.3)
Interest expense on annuities and financial products................ 89.6 11.4 74.6
Interest expense on investment borrowings........................... 4.7 .3 3.6
Amortization related to operations.................................. 13.2 1.6 11.7
Amortization related to realized gains.............................. .9 .7 4.3
Other operating costs and expenses.................................. 41.9 3.2 23.7
------- ------- -------
Total benefits and expenses..................................... 186.2 25.0 159.5
------- ------- -------
Income before income taxes...................................... 31.9 6.4 44.7
Income tax expense..................................................... 12.0 2.2 16.5
------- ------- -------
Net income...................................................... $ 19.9 $ 4.2 $ 28.2
======= ======= =======
</TABLE>
The accompanying notes are an
integral part of the financial
statements.
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF SHAREHOLDER'S EQUITY
(Dollars in millions)
(Unaudited)
Nine months One month Eight months
ended ended ended
September 30, September 30, August 31,
1996 1995 1995
------------- ------------ ------------
(prior basis)
<S> <C> <C> <C>
Common stock and additional paid-in capital:
Balance, beginning of period............................................ $380.8 $380.8 $339.7
Adjustment of balance due to new accounting basis..................... - - 41.1
------- ------ -------
Balance, end of period.................................................. $380.8 $380.8 $380.8
======= ====== =======
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities:
Balance, beginning of period.......................................... $ 11.8 $ 1.3 $(53.0)
Adjustment of balance due to new accounting basis................... - - (1.4)
Change in unrealized appreciation (depreciation).................... (25.2) 1.0 55.7
-------- ------ -------
Balance, end of period................................................ $ (13.4) $ 2.3 $ 1.3
======== ====== =======
Other investments:
Balance, beginning of period.......................................... $ .6 $ .6 $ (2.1)
Adjustment of balance due to new accounting basis................... - - (.6)
Change in unrealized appreciation (depreciation).................... (1.0) - 3.3
-------- ------ -------
Balance, end of period................................................ $ (.4) $ .6 $ .6
======== ====== =======
Retained earnings:
Balance, beginning of period............................................ $ 49.4 $ 33.3 $ 80.3
Adjustment of balance due to new accounting basis................... - - (34.0)
Net income ......................................................... 19.9 4.2 28.2
Dividends on common stock........................................... (54.4) - (41.2)
-------- ------ -------
Balance, end of period.................................................. $ 14.9 $ 37.5 $ 33.3
======== ====== =======
Total shareholder's equity.......................................... $381.9 $421.2 $ 416.0
======= ====== ========
</TABLE>
The accompanying notes are an
integral part of the financial
statements.
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Nine months One month Eight months
ended ended ended
September 30, September 30, August 31,
1996 1995 1995
------------- ------------- ------------
(prior basis)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................................. $ 19.9 $ 4.2 $ 28.2
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization...................................................... 14.2 2.4 16.0
Income taxes...................................................... (3.2) .6 2.9
Insurance liabilities............................................. (28.4) (6.4) (14.0)
Interest credited to insurance liabilities........................ 89.6 11.4 74.6
Fees charged to insurance liabilities............................. (24.7) (3.1) (22.2)
Accrual and amortization of investment income..................... .1 (1.7) (1.8)
Deferral of cost of policies produced............................. (8.0) (1.2) (6.6)
Realized (gains) and trading (income) losses...................... (.2) (.8) (7.3)
Other............................................................. (1.7) (13.1) (3.2)
------- ------- --------
Net cash provided (used) by operating activities.................. 57.6 (7.7) 66.6
------- ------- --------
Cash flows from investing activities:
Sales of investments.................................................... 668.3 71.9 406.5
Maturities and redemptions.............................................. 97.1 19.0 57.5
Purchases of investments................................................ (718.8) (94.1) (476.2)
------- ------- --------
Net cash provided (used) by investing activities.................. 46.6 (3.2) (12.2)
------- ------- -------
Cash flows from financing activities:
Deposits to insurance liabilities....................................... 124.7 11.1 104.4
Investment borrowings................................................... 35.7 (68.8) 121.0
Withdrawals from insurance liabilities.................................. (220.1) 11.9 (166.3)
Dividends paid on common stock.......................................... (44.5) - (41.2)
------- ------- -------
Net cash provided (used) by financing activities.................. (104.2) (45.8) 17.9
------- ------- -------
Net increase (decrease) in short-term investments................ - (56.7) 72.3
Short-term investments, beginning of period................................ 19.0 86.0 13.7
------- ------- -------
Short-term investments, end of period...................................... $ 19.0 $ 29.3 $ 86.0
======== ======= =======
</TABLE>
The accompanying notes are an
integral part of the financial
statements.
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
(Unaudited)
------------------------------
The following notes should be read in conjunction with the notes to audited
financial statements included elsewhere in this Prospectus.
SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Great American Reserve Insurance Company (the "Company") markets
tax-qualified annuities and certain employee benefit- related insurance products
primarily to school teachers and administrators through approximately 3,000
educator market specialists. Conseco Capital Partners, L.P. (the "Partnership"),
a limited partnership organized by Conseco, Inc. ("Conseco") acquired the
Company on June 27, 1990 (the "Partnership Acquisition"). Conseco was
approximately a 50 percent owner and sole general partner of the Partnership at
that time. The Partnership acquired Jefferson National Life Insurance Company
("Jefferson National") on October 31, 1990 (which was merged with the Company in
1994), and Beneficial Standard Life Insurance Company ("Beneficial Standard") on
March 31, 1991, through similar transactions.
On July 21, 1992, CCP Insurance, Inc. ("CCP"), a holding company organized
for the companies previously acquired by the Partnership, completed an initial
public offering of its common stock (the "IPO"). After the IPO, Conseco held a
36 percent interest in CCP. Conseco's ownership interest in CCP increased to 49
percent in early 1995 as a result of: (i) a public offering of 3.0 million
shares of common stock by CCP in September 1993; (ii) the purchase of .3 million
CCP common shares in open market transactions during 1993; and (iii) repurchases
of CCP common stock during 1994 and early 1995 under its stock repurchase
program.
In August 1995, Conseco completed the purchase of the remaining shares of
CCP common stock it did not previously own in a transaction pursuant to which
CCP was merged with Conseco, with Conseco being the surviving corporation (the
"Conseco Acquisition"). As a result, the Company and the other former
subsidiaries of CCP became wholly owned subsidiaries of Conseco.
The accompanying financial statements give effect to "push down" purchase
accounting to reflect the Partnership Acquisition and the Conseco Acquisition.
As a result of applying "push down" purchase accounting: (i) the Company's
financial position and results of operations for periods subsequent to the
Partnership Acquisition and before the Conseco Acquisition (the "prior basis")
reflect the Partnership's cost to acquire the Company's asset and liability
accounts based upon their estimated fair values at the purchase date; and (ii)
the Company's financial position and results of operations for periods
subsequent to the Conseco Acquisition reflect Conseco's cost to acquire the
Company's asset and liability accounts based upon their estimated fair values at
the purchase dates.
The unaudited consolidated financial statements as of September 30, 1996
and 1995, reflect all adjustments, consisting only of normal recurring items,
which are necessary to present fairly the Company's financial position and
results of operations on a basis consistent with that of prior audited financial
statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the preparation period.
Actual results could differ from those estimates. Significant estimates and
assumptions are utilized in the calculation of cost of policies produced, cost
of policies purchased, insurance liabilities, guaranty fund assessment accruals
and deferred income taxes. It is reasonably possible that actual experience
could differ from the estimates and assumptions utilized which could have a
material impact on the financial statements.
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
(Unaudited)
------------------------------
ADJUSTMENT TO ACTIVELY MANAGED FIXED MATURITY SECURITIES
The Company classifies fixed maturity securities into three categories:
"actively managed", and "trading account" (which are carried at estimated fair
value) and "held to maturity" (which are carried at amortized cost). The Company
did not carry any fixed maturity securities in the held to maturity category at
September 30, 1996. Adjustments to carry actively managed fixed maturity
securities at fair value have no effect on earnings, but are recorded, net of
tax, as a component of shareholder's equity. The following table summarizes the
effect of these adjustments as of September 30, 1996:
<TABLE>
<CAPTION>
Effect of fair
Balance value adjustment on
before actively managed Reported
adjustment fixed maturities amount
---------- ---------------- ------
(Dollars in millions)
<S> <C> <C> <C>
Actively managed fixed maturity securities.................... $1,923.6 $(49.6) $1,874.0
Cost of policies purchased.................................... 139.8 25.0 164.8
Cost of policies produced..................................... 33.1 3.4 36.5
Income tax liabilities........................................ 31.9 (7.8) 24.1
Net unrealized appreciation (depreciation) of fixed
maturity securities....................................... - (13.4) (13.4)
</TABLE>
SHAREHOLDER'S EQUITY
The Company paid shareholder dividends of $44.5 million and $41.2 million
during the nine months ended September 30, 1996 and 1995, respectively. In
addition, during the first nine months of 1996, the Company forgave receivables
from Conseco totaling $9.9 million. This transaction is reflected as a dividend
to Conseco in the accompanying statement of shareholder's equity.
RELATED PARTY TRANSACTIONS
The Company operates without direct employees through management and
service agreements with subsidiaries of Conseco. Fees for such services
(including data processing, executive management and investment management
services) were based on negotiated rates for periods prior to January 1, 1996.
Pursuant to new service agreements effective January 1, 1996, such fees are
based on Conseco's direct and directly allocable costs plus a 10 percent margin.
Total fees paid to Conseco were $32.6 million and $20.6 million during the nine
months ended September 30, 1996 and 1995, respectively.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Great American Reserve Insurance Company
We have audited the accompanying balance sheet of Great American Reserve
Insurance Company ("the Company") as of December 31, 1995, and the related
statements of operations, shareholder's equity and cash flows for the four
months ended December 31, 1995. We have also audited the accompanying balance
sheet of the Company as of December 31, 1994, and the related statements of
operations, shareholder's equity and cash flows for the eight months ended
August 31, 1995, and the years ended December 31, 1994 and 1993, based on the
basis of accounting applicable to periods prior to the adoption of push down
accounting upon Conseco, Inc.'s purchase of all common shares of the Company it
did not previously own (see note 1 of the notes to financial statements
regarding the adoption of push down accounting). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and 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 financial statements referred to above present fairly,
in all material respects, the financial position of Great American Reserve
Insurance Company as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for the four months ended December 31, 1995, the
eight months ended August 31, 1995 and the years ended December 31, 1994, and
1993, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
March 20, 1996
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
BALANCE SHEET
December 31, 1995 and 1994
(Dollars in millions)
ASSETS
Prior Basis
-----------
1995 1994
---- ----
<S> <C> <C>
Investments:
Actively managed fixed maturities at fair value (amortized cost:
1995 - $1,980.1; 1994 - $1,985.0)............................................... $2,030.9 $1,828.4
Mortgage loans..................................................................... 95.5 109.2
Credit-tenant loans................................................................ 79.4 60.4
Policy loans....................................................................... 84.7 81.5
Other invested assets ............................................................. 37.8 33.3
Short-term investments............................................................. 19.0 13.7
Assets held in separate accounts................................................... 137.5 91.4
-------- ---------
Total investments........................................................... 2,484.8 2,217.9
Accrued investment income.............................................................. 34.0 35.0
Cost of policies purchased............................................................. 120.0 173.9
Cost of policies produced.............................................................. 24.0 63.2
Reinsurance receivables................................................................ 27.0 31.7
Income taxes .......................................................................... - 18.2
Goodwill (net of accumulated amortization: 1995 - $10.2; 1994 - $8.4)................. 53.0 69.9
Other assets........................................................................... 14.0 15.2
-------- --------
Total assets................................................................ $2,756.8 $2,625.0
======== ========
</TABLE>
(continued on next page)
The accompanying notes are an
integral part of the financial
statements.
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
BALANCE SHEET (Continued)
December 31, 1995 and 1994
(Dollars in millions, except per share amount)
LIABILITIES AND SHAREHOLDER'S EQUITY
Prior Basis
-----------
1995 1994
---- ----
<S> <C> <C>
Liabilities:
Insurance liabilities.............................................................. $2,039.1 2,150.4
Income tax liabilities............................................................. 39.0 -
Investment borrowings.............................................................. 84.2 -
Other liabilities.................................................................. 14.4 18.3
Liabilities related to separate accounts .......................................... 137.5 91.4
-------- --------
Total liabilities.......................................................... 2,314.2 2,260.1
-------- --------
Shareholder's equity:
Common stock and additional paid-in capital (par value $4.80 per share, 1,065,000
shares authorized, 1,043,565 shares issued and outstanding).................... 380.8 339.7
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities (net of applicable deferred income taxes:
1995 - $6.8; 1994 - $(30.7))................................................. 11.8 (53.0)
Other investments (net of applicable deferred income taxes:
1995 - $.4; 1994 - $(1.2))................................................... .6 (2.1)
Retained earnings.................................................................. 49.4 80.3
-------- --------
Total shareholder's equity................................................. 442.6 364.9
-------- --------
Total liabilities and shareholder's equity................................. $2,756.8 $2,625.0
======== ========
</TABLE>
The accompanying notes are an
integral part of the financial
statements.
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF OPERATIONS
(Dollars in millions)
Prior basis
--------------------------------------------
Four months Eight months
ended ended Year ended
December 31, August 31, December 31,
------------ ----------- ------------------------
1995 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income............................... $ 31.8 $ 60.5 $ 98.6 $108.2
Investment activity:
Net investment income.............................. 74.2 136.4 187.9 214.5
Net trading income (losses)........................ .1 .8 (.5) 12.4
Net realized gains................................. 12.4 6.5 .7 20.0
------ ------- ------ ------
Total revenues................................ 118.5 204.2 286.7 355.1
------ ------- ------ ------
Benefits and expenses:
Insurance policy benefits............................. 18.9 45.9 66.2 69.5
Change in future policy benefits...................... .2 (4.3) (1.3) (2.7)
Interest expense on annuities and financial products.. 44.2 74.6 101.4 113.8
Interest expense on investment borrowings............. 1.0 3.6 2.9 2.1
Amortization related to operations.................... 5.3 11.7 16.0 21.6
Amortization related to realized gains................ 10.0 4.3 2.7 15.7
Other operating costs and expenses.................... 13.1 23.7 37.3 40.4
------ ------- ------ ------
Total benefits and expenses................... 92.7 159.5 225.2 260.4
------ ------- ------ ------
Income before income taxes.................... 25.8 44.7 61.5 94.7
Income tax expense........................................ 9.7 16.5 22.7 40.2
------ ------- ------ ------
Net income.................................... $ 16.1 $ 28.2 $ 38.8 $ 54.5
====== ======= ====== ======
</TABLE>
The accompanying notes are an
integral part of the financial
statements.
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF SHAREHOLDER'S EQUITY
(Dollars in millions)
Prior basis
--------------------------------------------
Four months Eight months
ended ended Year ended
December 31, August 31, December 31,
------------ ----------- ---------------------
1995 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common stock and additional paid-in capital:
Balance, beginning of period........................... $380.8 $339.7 $339.7 $309.7
Contribution to capital............................. - - - 30.0
Adjustment of balance due to new accounting basis... - 41.1 - -
------ ------ ------ ------
Balance, end of period................................. $380.8 $380.8 $339.7 $339.7
====== ====== ====== ======
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities:
Balance, beginning of period........................ $ 1.3 $(53.0) $ 33.3 $ 17.4
Change in unrealized appreciation (depreciation).. 10.5 55.7 (86.3) 15.9
Adjustment of balance due to new
accounting basis................................ - (1.4) - -
------ ------ ------ ------
Balance, end of period.............................. $ 11.8 $ 1.3 $(53.0) $ 33.3
====== ====== ====== ======
Other investments:
Balance, beginning of period........................ $ .6 $ (2.1) $ (.1) $ -
Change in unrealized appreciation (depreciation).. - 3.3 (2.0) (.1)
Adjustment of balance due to new
accounting basis................................ - (.6) - -
------ ------ ------- -------
Balance, end of period.............................. $ .6 $ .6 $ (2.1) $ (.1)
====== ====== ======= =======
Retained earnings:
Balance, beginning of year............................. $ 33.3 $ 80.3 $ 75.6 $ 41.8
Net income ......................................... 16.1 28.2 38.8 54.5
Dividends on common stock........................... - (41.2) (34.1) (20.7)
Adjustment of balance due to new
accounting basis.................................. - (34.0) - -
------ ------ ------ --------
Balance, end of year................................... $ 49.4 $ 33.3 $ 80.3 $ 75.6
====== ====== ====== ========
Total shareholder's equity........................ $442.6 $416.0 $364.9 $ 448.5
====== ====== ====== ========
</TABLE>
The accompanying notes are an
integral part of the financial
statements.
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(Dollars in millions)
Prior basis
------------------------------------------
Four months Eight months
ended ended Year ended
December 31, August 31, December 31,
------------ ------------ ----------------------
1995 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 16.1 $ 28.2 $ 38.8 $ 54.5
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization.................................. 15.3 16.0 18.7 37.3
Income taxes.................................. 2.3 2.9 1.3 (8.6)
Insurance liabilities......................... (25.8) (14.0) (10.5) (29.6)
Interest credited to insurance liabilities.... 44.2 74.6 101.4 113.8
Fees charged to insurance liabilities ........ (10.3) (22.2) (36.5) (37.0)
Accrual and amortization of investment income 3.2 (1.8) (1.2) (10.6)
Deferral of cost of policies produced ....... (3.0) (6.6) (9.4) (18.4)
Trading account securities ................... - - 11.2 45.3
Realized (gains) and trading (income) losses.. (12.5) (7.3) (.2) (32.4)
Other......................................... (8.9) (3.2) 5.0 3.1
-------- -------- -------- ---------
Net cash provided by operating activities..... 20.6 66.6 118.6 117.4
-------- -------- -------- ---------
Cash flows from investing activities:
Sales of investments.................................. 513.2 406.5 586.0 999.2
Maturities and redemptions............................ 60.4 57.5 118.4 315.3
Purchases of investments.............................. (532.2) (476.2) (798.1) (1,547.2)
-------- -------- -------- ---------
Net cash provided (used) by investing
activities................................ 41.4 (12.2) (93.7) (232.7)
-------- -------- -------- ---------
Cash flows from financing activities:
Deposits to insurance liabilities..................... 50.8 104.4 146.0 231.3
Cash paid in reinsurance recapture ................... (71.1) - - -
Investment borrowings................................. (36.8) 121.0 (58.3) 58.3
Withdrawals from insurance liabilities................ (71.9) (166.3) (171.4) (138.5)
Dividends paid on common stock........................ - (41.2) (34.1) (20.7)
Contribution of capital............................... - - - 30.0
-------- -------- -------- ---------
Net cash provided (used) by
financing activities...................... (129.0) 17.9 (117.8) 160.4
-------- -------- -------- ---------
Net increase (decrease) in short-term
investments............................... (67.0) 72.3 (92.9) 45.1
Short-term investments, beginning of period............... 86.0 13.7 106.6 61.5
-------- -------- -------- ---------
Short-term investments, end of period..................... $ 19.0 $ 86.0 $ 13.7 $ 106.6
======== ======== ======== =========
</TABLE>
The accompanying notes are an
integral part of the financial
statements.
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Great American Reserve Insurance Company (the "Company") markets
tax-qualified annuities and certain employee benefit- related insurance products
primarily to school teachers and administrators through approximately 3,000
educator market specialists. Conseco Capital Partners, L.P. (the "Partnership"),
a limited partnership organized by Conseco, Inc. ("Conseco") acquired the
Company on June 27, 1990 (the "Partnership Acquisition). Conseco was
approximately a 50 percent owner and sole general partner of the Partnership at
that time. The Partnership acquired Jefferson National Life Insurance Company
("Jefferson National") on October 31, 1990 (which was merged with the Company in
1994), and Beneficial Standard Life Insurance Company ("Beneficial Standard") on
March 31, 1991, through similar transactions.
On July 21, 1992, CCP Insurance, Inc. ("CCP"), a holding company organized
for the companies previously acquired by the Partnership, completed an initial
public offering of its common stock ("IPO"). After the IPO, Conseco held a 36
percent interest in CCP. Conseco's ownership interest in CCP increased to 49
percent in early 1995 as a result of: (i) a public offering of 3.0 million
shares of common stock by CCP in September 1993; (ii) the purchase of .3 million
CCP common shares in open market transactions during 1993; and (iii) repurchases
of CCP common stock during 1994 and early 1995 under its stock repurchase
program.
In August 1995, Conseco completed the purchase of the remaining shares of
CCP common stock it did not previously own in a transaction pursuant to which
CCP was merged with Conseco, with Conseco being the surviving corporation (the
"Conseco Acquisition"). As a result, the Company and the other former
subsidiaries of CCP became wholly owned subsidiaries of Conseco.
The accompanying financial statements give effect to "push down" purchase
accounting to reflect the Partnership Acquisition and the Conseco Acquisition.
As a result of applying "push down" purchase accounting: (i) the Company's
financial position and results of operations for periods subsequent to the
Partnership Acquisition and before the Conseco Acquisition (the "prior basis")
reflect the Partnership's cost to acquire the Company's asset and liability
accounts based upon their estimated fair values at the purchase date; and (ii)
the Company's financial position and results of operations for periods
subsequent to the Conseco Acquisition reflect Conseco's cost to acquire the
Company's asset and liability accounts based upon their estimated fair values at
the purchase dates.
The effect of the adoption of the new basis of accounting on the Company's
balance sheet accounts is as follows (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Debit
(Credit)
-----------
Cost of policies purchased......................................... $ 61.4
Cost of policies produced ......................................... (26.3)
Goodwill........................................................... (15.1)
Insurance liabilities.............................................. (1.2)
Income tax liabilities............................................. (11.9)
Other.............................................................. (1.8)
Common stock and additional paid-in capital........................ (41.1)
Net unrealized appreciation of fixed maturity securities........... 1.4
Net unrealized appreciation of other investments................... .6
Retained earnings.................................................. 34.0
</TABLE>
The accompanying financial statements also include the effect of the
December 31, 1994, merger of Jefferson National into the Company. This merger
has been accounted for as a pooling of interests; therefore, the assets and
liabilities of each company have been combined at their book values and the
statements of operations, shareholder's equity and cash flows have been reported
as if the merger had occurred on January 1, 1993. Certain amounts from prior
periods have been reclassified to conform to the 1995 presentation.
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP"), which differ in some respects
from statutory accounting practices followed in the preparation of financial
statements submitted to state insurance departments. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
preparation period. Actual results could differ from those estimates.
Significant estimates and assumptions are utilized in the calculation of cost of
policies produced, cost of policies purchased, insurance liabilities, guaranty
fund assessment accruals and deferred income taxes. It is reasonably possible
that actual experience could differ from the estimates and assumptions utilized
which could have a material impact on the financial statements.
INVESTMENTS
Fixed maturity investments are securities that mature more than one year
after they are issued and include bonds, notes receivable and preferred stocks
with mandatory redemption features. Equity securities include investments in
common stocks and non-redeemable preferred stock. Effective December 31, 1993,
the Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"),
and, accordingly, classifies its fixed maturity and equity securities into the
following three categories:
o Actively managed fixed maturities are securities that may be sold prior
to maturity due to changes that might occur in market interest rate
risks, changes in the security's prepayment risk, the management of
income tax position, general liquidity requirements, an increase in
loan demand, the need to increase regulatory capital, changes in
foreign currency risk or similar factors. Actively managed securities
are carried at fair value and the unrealized gain or loss is recorded
as a component of shareholder's equity, net of income tax and related
adjustments described in the second following paragraph.
o Trading account securities are fixed maturity and equity securities
that are bought and held principally for the purpose of selling them in
the near term. Trading account securities are carried at estimated fair
value and the unrealized gain or loss is included as a component of net
trading income. No trading account securities were held at December 31,
1995 and 1994.
o Held to maturity securities are carried at amortized cost and represent
those securities which a company has the ability and positive intent to
hold to maturity. Such securities may be disposed of under certain
unforeseen circumstances, such as issuer credit deterioration or
regulatory requirements. No securities have been so classified since
implementing SFAS 115.
There was no effect on net income as a result of adopting SFAS 115.
Anticipated returns, including realized gains and losses, from the
investment of policyholder balances are considered in determining the
amortization of the cost of policies purchased and the cost of policies
produced. When actively managed fixed maturities are stated at fair value, an
adjustment to the cost of policies purchased and the cost of policies produced
may be necessary if a change in amortization would have been recorded if such
securities had been sold at their fair value and the proceeds reinvested at
current yields. Furthermore, if future yields expected to be earned on such
securities decline, it may be necessary to increase certain insurance
liabilities. Adjustments to such liabilities are required when their balances,
in addition to future net cash flows including investment income, are
insufficient to cover future benefits and expenses.
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Unrealized gains and losses and the related adjustments described in the
preceding paragraph have no effect on earnings, but are recorded, net of tax, as
a component of shareholder's equity. The following tables summarize the effect
of these adjustments as of December 31, 1995:
<TABLE>
<CAPTION>
Effect of fair
Balance value adjustment on
before actively managed Reported
adjustment fixed maturities amount
---------- ---------------- ------
(Dollars in millions)
<S> <C> <C> <C>
Actively managed fixed maturity securities.................... $1,980.1 $50.8 $2,030.9
Cost of policies purchased.................................... 148.8 (28.8) 120.0
Cost of policies produced..................................... 27.4 (3.4) 24.0
Income tax liabilities........................................ 32.2 6.8 39.0
Net unrealized appreciation of fixed maturities............... - 11.8 11.8
</TABLE>
Effective December 31, 1993, when changes in conditions cause a fixed
maturity investment to be transferred to a different category (e.g. actively
managed, held to maturity or trading), the security is transferred to the new
category at its fair value at the date of the transfer. There were no such
transfers in 1995 or 1994. At the transfer date, the security's unrealized gain
or loss is recorded as follows:
o For transfers to the trading category, the unrealized gain or loss
is recognized in earnings;
o For transfers from the trading category, the unrealized gain or loss
already recognized in earnings is not reversed;
o For transfers to actively managed from held to maturity, the
unrealized gain or loss is recognized in shareholder's equity; and
o For transfers to held to maturity from actively managed, the
unrealized gain or loss at the date of transfer continues to be
recognized in shareholder's equity, but is amortized as a yield
adjustment until ultimately sold.
Credit-tenant loans are loans for commercial properties which require: (i)
the lease of the principal tenant to be assigned to the Company; (ii) the lease
to produce adequate cash flow to fund substantially all the cash requirements of
the loan; and (iii) the principal tenant, or the guarantor of such tenant's
obligations, to have an investment-grade credit rating when the loan is made.
These loans also must be secured by the value of the related property.
Underwriting guidelines take into account such factors as: (i) the lease term of
the property; (ii) the borrower's management ability, including business
experience, property management capabilities and financial soundness; and (iii)
such economic, demographic or other factors that may affect the income generated
by the property or its value. The underwriting guidelines generally require a
loan-to-value ratio of 75 percent or less. Credit-tenant loans and traditional
mortgage loans are carried at amortized cost.
Policy loans are stated at their current unpaid principal balance.
Short-term investments include commercial paper, invested cash and other
investments purchased with maturities less than three months and are carried at
amortized cost, which approximates fair value. The Company considers all
short-term investments to be cash equivalents.
Fees received and costs incurred in connection with origination of
investments, principally mortgage loans, are deferred. Fees, costs, discounts
and premiums are amortized as yield adjustments over the contractual life of the
investments. Anticipated prepayments on mortgage-backed securities are taken
into consideration in determining estimated future yields on such securities.
The specific identification method is used to account for the disposition
of investments. The differences between sale proceeds and carrying values are
reported as gains and losses on investments, or as adjustments to investment
income if the proceeds are prepayments by issuers prior to maturity.
The Company manages its investments to limit credit risk by diversifying
its portfolio among various security types and industry sectors. The Company
regularly evaluates investment securities, credit-tenant loans and mortgage
loans based on current economic conditions, past credit loss experience and
other circumstances of the investee. A decline in a security's net realizable
value that is
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
other than temporary is treated as a realized loss and the cost basis of the
security is reduced to its estimated fair value. Impaired loans are revalued at
the present value of expected cash flows discounted at the loan's effective
interest rate when it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the agreement. The Company
accrues interest on the net carrying amount of impaired loans.
SEPARATE ACCOUNTS
Separate accounts are funds on which investment income and gains or losses
accrue directly to certain policyholders. The assets of these accounts are
legally segregated. They are not subject to the claims which may arise out of
any other business of the Company. The Company reports separate account assets
at market value; the underlying investment risks are assumed by the contract
holders. The Company records the related liabilities at amounts equal to the
underlying assets; the fair value of these liabilities is equal to their
carrying amount.
COST OF POLICIES PURCHASED
The cost of policies purchased represents the portion of the acquisition
cost that was allocated to the value of the right to receive future cash flows
from insurance contracts existing at the date such insurance contracts were
acquired. The value of cost of policies purchased is the actuarially determined
present value of the projected future cash flows from the insurance contracts
existing at the acquisition date.
The method used to value the cost of policies purchased is consistent with
the valuation methods used most commonly to value blocks of insurance business,
which is also consistent with the basic methodology generally used to value
assets. The method used is summarized as follows:
o Identify the expected future cash flows from the blocks of business.
o Identify the risks inherent in realizing those cash flows (i.e., what
is the probability that the cash flows will be realized).
o Identify the rate of return necessary considering the risks inherent
in realizing the cash flows.
o Determine the value of the policies by discounting the expected
future cash flows by the discount rate required.
Furthermore, if future yields expected to be earned on such securities
decline, it may be necessary to increase certain insurance liabilities.
Adjustments to such liabilities are required when their balances, in addition to
future net cash flows including investment income, are insufficient to cover
future benefits and expenses.
Expected future cash flows used in determining such values are based on
actuarially determined projections of future premium collections, mortality,
morbidity, surrenders, operating expenses, changes in insurance liabilities,
investment yields on the assets held to back the policy liabilities and other
factors. These projections take into account all factors known or expected at
the purchase date based on the collective judgment of management. Actual
experience on purchased business may vary from projections due to differences in
renewal premiums collected, investment spread, investment gains or losses,
mortality and morbidity costs and other factors. These variances from original
projections, whether positive or negative, are included in net income as they
occur. To the extent that these variances or other factors indicate that future
cash flows will differ from those reflected in the scheduled amortization of the
cost of policies purchased, current and future amortization may be adjusted. The
discount rate used to determine such value is the rate of return required to
justify the investment.
The cost of policies purchased is amortized based on the incidence of the
expected cash flows. For the portion of the cost of policies purchased asset
acquired by Conseco on the date of the Partnership Acquisition, the asset is
amortized with interest at the same rate used to determine the discounted value
of the asset. For the portion of the cost of policies purchased asset acquired
by Conseco on the date of the Conseco Acquisition, the asset is amortized at the
same interest rate credited to the underlying policy (currently, 5 percent to 8
percent). Recoverability of the cost of policies purchased is evaluated
regularly by comparing the current estimate of expected future cash flows
(discounted at the rate of interest earned on invested assets) to the
unamortized asset balance by line of insurance business. If such current
estimate indicates that the existing insurance liabilities, together with the
present value of future cash flows from the blocks of business purchased, will
not be sufficient to recover the cost of policies purchased, the difference is
charged to expense. Amortization is also adjusted for the current and future
years to reflect: (i) the revised estimate of
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
future profits; and (ii) the revised interest rate (but not greater than the
rate initially used and not lower than the rate of interest earned on invested
assets) at which the present value of such expected future profits equals the
unamortized asset balance.
COST OF POLICIES PRODUCED
Costs which vary with and are primarily related to the acquisition of new
business are deferred to the extent that such costs are deemed recoverable.
These costs include commissions, certain costs of policy issuance and
underwriting and certain agency expenses. For traditional life and health
contracts, deferred costs are amortized with interest in relation to future
anticipated premium revenue using the same assumptions that are used in
calculating the insurance liabilities. For universal life-type,
interest-sensitive and investment-type contracts, deferred costs are amortized
in relation to the present value of expected gross profits from these contracts,
discounted using the interest rate credited to the policy.
Recoverability of the unamortized balance of cost of policies produced is
evaluated regularly and considers anticipated investment income. For universal
life-type contracts and investment-type contracts, the accumulated amortization
is adjusted (whether an increase or a decrease) whenever there is a change in
the estimated gross profits expected over the life of a block of business in
order to maintain a constant relationship between amortization and the present
value (discounted at the rate of interest that accrues to the policies) of
expected gross profits. For traditional and most other contracts, the
unamortized asset balance is reduced by a charge to income only when the sum of
the present value of discounted future cash flows and the policy liabilities is
not sufficient to cover such asset balance.
GOODWILL
Th excess of the cost of acquiring the Company's net assets over its
estimated fair values is recorded as goodwill and is being amortized on the
straight-line basis over a 40-year period. The Company periodically assesses the
recoverability of goodwill through projections of future earnings of the related
subsidiaries. Such assessment is made based on whether goodwill is fully
recoverable from projected undiscounted net cash flows from earnings of the
subsidiaries over the remaining amortization period. If future evaluations of
goodwill indicate a material change in the factors supporting recoverability
over the remaining amortization period, all or a portion of goodwill may need to
be written off or the amortization period shortened.
INSURANCE LIABILITIES, RECOGNITION OF INSURANCE POLICY INCOME AND RELATED
BENEFITS AND EXPENSES
Reserves for traditional and limited-payment life insurance contracts are
generally calculated using the net level premium method and assumptions as to
investment yields, mortality, morbidity, withdrawals and dividends. The
assumptions are based on projections using past and expected experience and
include provisions for possible adverse deviation. These assumptions are made at
the time the contract is issued or, in the case of contracts acquired by
purchase, at the purchase date.
Reserves for universal life-type and investment-type contracts are based on
the contract account balance, if future benefit payments in excess of the
account balance are not guaranteed, or on the present value of future benefit
payments when such payments are guaranteed. Additional increases to insurance
liabilities are made if future cash flows including investment income are
insufficient to cover future benefits and expenses.
For investment-type contracts without mortality risk (such as deferred
annuities and immediate annuities with benefits paid for a period certain) and
for contracts that permit the Company or the insured to make changes in the
contract terms (such as single- premium whole life and universal life), premium
deposits and benefit payments are recorded as increases or decreases in a
liability account rather than as revenue and expense. Amounts charged against
the liability account for the cost of insurance, policy administration and
surrender penalties are recorded as revenues. Interest credited to the liability
account and benefit payments made in excess of the contract liability account
balance are charged to expense.
For traditional life insurance contracts, premiums are recognized as income
when due. Benefits and expenses are associated with earned premiums resulting in
their level recognition over the premium paying period of the contracts. Such
recognition is accomplished through the provision for future policy benefits and
the amortization of deferred policy acquisition costs.
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
For contracts with mortality risk, but with premiums paid for only a
limited period (such as single-premium immediate annuities with benefits paid
for the life of the annuitant), the accounting treatment is similar to
traditional contracts. However, the excess of the gross premium over the net
premium is deferred and recognized in relation to the present value of expected
future benefit payments.
Liabilities for incurred claims are determined using historical experience
and represent an estimate of the present value of the ultimate net cost of all
reported and unreported claims. Management believes these estimates are
adequate. Such estimates are periodically reviewed and any adjustments are
reflected in current operations.
For participating policies, the amount of dividends to be paid (which are
not significant) is determined annually by the Company. The portion of the
earnings allocated to participating policyholders is recorded as an insurance
liability.
REINSURANCE
In the normal course of business, the Company seeks to limit its exposure
to loss on any single insured and to recover a portion of benefits paid over
such limit by ceding reinsurance to other insurance enterprises or reinsurers
under excess coverage and coinsurance contracts. The Company has set its
retention limit for acceptance of risk on life insurance policies at various
levels up to $.5 million.
Assets and liabilities related to insurance contracts are reported before
the effects of reinsurance. Reinsurance receivables and prepaid reinsurance
premiums (including amounts related to insurance liabilities) are reported as
assets. Estimated reinsurance receivables are recognized in a manner consistent
with the liabilities relating to the underlying reinsured insurance contracts.
INCOME TAXES
Income tax expense includes deferred taxes arising from temporary
differences between the tax and financial reporting basis of assets and
liabilities. The effects of a tax rate change on current and accumulated
deferred income taxes are reflected in the period in which the change was
enacted.
In assessing the realization of deferred tax assets, the Company considers
whether it is more likely than not that the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences become deductible. If future income does not occur as expected,
deferred income taxes may need to be written off.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
determining estimated fair values of financial instruments:
Investment securities: The estimated fair values of fixed maturity
securities (including redeemable preferred stocks) are based on quotes from
independent pricing services, where available. For investment securities
for which such quotes are not available, the estimated fair values are
determined using values obtained from broker-dealer market makers or by
discounting expected future cash flows using current market interest rates
applicable to the yield, credit quality of the investments and maturity of
the investments.
Mortgage loans, credit-tenant loans and policy loans: The estimated fair
values of mortgage loans, credit-tenant loans and policy loans are
determined by discounting future expected cash flows using interest rates
currently being offered for similar loans to borrowers with similar credit
ratings. Loans with similar characteristics are aggregated for purposes of
the calculations.
Short-term investments: The estimated fair values of short-term investments
are based on quoted market prices, where available. The carrying amount
reported in the balance sheet for these assets approximates their estimated
fair value.
Other invested assets: The estimated fair values of these assets have been
assumed to be equal to their carrying value. Such value is believed to be a
reasonable approximation of the fair value of these investments.
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Insurance liabilities for investment contracts: The estimated fair values
of liabilities under investment-type insurance contracts are determined
using discounted cash flow calculations based on interest rates currently
being offered for similar contracts with maturities consistent with those
remaining for the contracts being valued.
Investment borrowings: Due to the short-term nature of these borrowings
(terms generally less than 30 days), estimated fair values are assumed to
approximate the carrying amount reported in the balance sheet.
The estimated fair values of financial instruments are as follows:
<TABLE>
<CAPTION>
1995 1994
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Financial assets issued for purposes other than trading:
Actively managed fixed maturity securities........... $2,030.9 $2,030.9 $1,828.4 $1,828.4
Mortgage loans....................................... 95.5 108.9 109.2 112.2
Credit-tenant loans.................................. 79.4 79.7 60.4 51.4
Policy loans......................................... 84.7 84.7 81.5 81.5
Other invested assets................................ 37.8 37.8 33.3 33.3
Short-term investments............................... 19.0 19.0 13.7 13.7
Financial liabilities issued for purposes other than trading:
Insurance liabilities for investment contracts (1)... $1,346.5 $1,346.5 $1,444.2 $1,444.2
Investment borrowings................................ 84.2 84.2 - -
<FN>
(1) The estimated fair value of the liabilities for investment contracts
was approximately equal to its carrying value at December 31, 1995
and 1994, because interest rates credited on the vast majority of
account balances approximate current rates paid on similar
investments and because these rates are not generally guaranteed
beyond one year. The Company is not required to disclose fair values
for insurance liabilities, other than those for investment contracts.
However, the Company takes into consideration the estimated fair
values of all insurance liabilities in its overall management of
interest rate risk. The Company attempts to minimize exposure to
changing interest rates by matching investment maturities with
amounts due under insurance contracts.
</TABLE>
2. JEFFERSON NATIONAL MERGER
On December 31, 1994, Jefferson National was merged with the Company, with
the Company being the surviving corporation. At the time of the merger, all
3,637,363 shares of Jefferson National's $1.00 par value common stock were
canceled. Each share of common stock of the Company issued and outstanding at
December 31, 1994, remained outstanding as the common stock of the merged
company. The merger has been accounted for as a pooling of interest and,
accordingly, the financial statements for all periods presented have been
restated to include the accounts of Jefferson National. Certain balances for the
separate companies for the periods preceding the merger were:
<TABLE>
<CAPTION>
Amount prior to Jefferson
effect of merger National Combined
---------------- --------- --------
(Dollars in millions)
<S> <C> <C> <C>
1994:
Revenues.................................................................. $ 154.1 $ 132.6 $ 286.7
Net income................................................................ 16.7 22.1 38.8
Total investments......................................................... 1,262.9 955.0 2,217.9
Total assets.............................................................. 1,434.4 1,190.6 2,625.0
Insurance liabilities..................................................... 1,163.5 986.9 2,150.4
Total liabilities......................................................... 1,268.1 992.0 2,260.1
Total shareholder's equity................................................ 166.3 198.6 364.9
Change in unrealized appreciation (depreciation) of securities............ (55.9) (32.4) (88.3)
Dividends on common stock................................................. 10.5 23.6 34.1
</TABLE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
<TABLE>
<CAPTION>
Amount prior to Jefferson
effect of merger National Combined
---------------- -------- ---------
(Dollars in millions)
<S> <C> <C> <C>
1993:
Revenues.................................................................. $ 188.2 $ 166.9 $ 355.1
Net income................................................................ 22.9 31.6 54.5
Total shareholder's equity................................................ 216.1 232.4 448.5
Contribution to capital................................................... 25.0 5.0 30.0
Change in unrealized appreciation of securities........................... 8.9 6.9 15.8
Dividends on common stock................................................. 12.9 7.8 20.7
</TABLE>
3. INVESTMENTS
At December 31,1995, the amortized cost and estimated fair value of
actively managed fixed maturity securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- -----
(Dollars in millions)
<S> <C> <C> <C> <C>
United States Treasury securities and obligations
of United States government corporations and
agencies............................................ $ 59.2 $ 2.1 $ - $ 61.3
Obligations of state and political subdivisions........ 9.3 .2 .1 9.4
Debt securities issued by foreign governments.......... 8.3 .3 - 8.6
Public utility securities.............................. 351.6 11.4 2.0 361.0
Other corporate securities............................. 888.0 34.0 6.4 915.6
Mortgage-backed securities............................. 663.7 12.2 .9 675.0
-------- ------ ------ --------
Total............................................... $1,980.1 $ 60.2 $ 9.4 $2,030.9
======== ====== ====== ========
</TABLE>
At December 31, 1994, the amortized cost and estimated fair value of
actively managed fixed maturity securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
United States Treasury securities and obligations
of United States government corporations and
agencies............................................ $ 37.8 $ .2 $ 2.7 $ 35.3
Obligations of state and political subdivisions........ 20.7 - 1.2 19.5
Public utility securities.............................. 414.1 5.9 39.7 380.3
Other corporate securities............................. 799.3 5.0 69.5 734.8
Mortgage-backed securities ............................ 713.1 5.1 59.7 658.5
-------- ----- ------ --------
Total............................................... $1,985.0 $16.2 $172.8 $1,828.4
======== ===== ====== ========
</TABLE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Actively managed fixed maturity securities, summarized by the source of
their estimated fair value, were as follows at December 31, 1995:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Nationally recognized pricing services.......................................... $1,776.9 $1,826.2
Broker-dealer market makers..................................................... 187.8 191.3
Internally developed methods (calculated based
on a weighted-average current market yield of 10.9 percent).................. 15.4 13.4
-------- --------
Total ................................................................. $1,980.1 $2,030.9
======== ========
</TABLE>
The following table sets forth actively managed fixed maturity securities
at December 31, 1995, classified by rating categories. The category assigned is
the highest rating by a nationally recognized statistical rating organization
or, as to $26.5 million estimated fair value of fixed maturity securities not
rated by such firms, the rating assigned by the National Association of
Insurance Commissioners ("NAIC"). For the purposes of this table, NAIC Class 1
is included in the "A" rating; Class 2, "BBB-"; Class 3, "BB-"; and Classes 4-6,
"B+ and below":
<TABLE>
<CAPTION>
Percent of Percent of
Investment fixed total
Rating maturities investments
------- ---------- -----------
<S> <C> <C>
AAA................................................................................... 39% 32%
AA ................................................................................. 8 7
A ................................................................................. 20 16
BBB+.................................................................................. 8 6
BBB................................................................................... 12 10
BBB-.................................................................................. 7 6
---- ----
Investment-grade................................................................. 94 77
---- ----
BB+................................................................................... 2 1
BB ................................................................................. 1 1
BB-................................................................................... 2 2
B+ and below ......................................................................... 1 1
---- ----
Below investment-grade........................................................... 6 5
---- ----
Total actively managed fixed maturities...................................... 100% 82%
==== ====
</TABLE>
Below investment-grade actively managed fixed maturity securities,
summarized by the amount their amortized cost exceeds fair value, were as
follows at December 31, 1995:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Amortized cost exceeds fair value by more than 15%.................................. $ 13.9 $ 11.5
Amortized cost exceeds fair value by more than 5% but not more than 15%............. 10.8 10.1
All others.......................................................................... 89.6 91.8
------ ------
Total...................................................................... $114.3 $113.4
====== ======
</TABLE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The Company had no fixed maturity investments in technical or substantive
default as of December 31, 1995. During 1995 and 1994, the Company recorded
writedowns of fixed maturity investments totaling $1.6 million and $1.0 million,
respectively, as a result of changes in conditions which caused it to conclude
the issuer may be unable to comply with the terms of the investment.
Additionally, the Company wrote down exchange-rate-linked securities by $16.1
million in 1993, due to foreign currency fluctuations which caused it to
conclude that the full amount of the investment would not be realized. All of
these exchange-rate-linked-securities subsequently matured in 1994. As of
December 31, 1995, there were no fixed maturity investments about which the
Company had serious doubts as to the ability of the issuer to comply with the
contractual terms of their obligations on a timely basis.
Actively managed fixed maturity securities at December 31, 1995, summarized
by contractual maturity date, are shown below. Actual maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties and because most
mortgage-backed securities provide for periodic payments throughout their lives.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Due in one year or less.................................................. $ 3.1 $ 3.1
Due after one year through five years.................................... 110.9 113.7
Due after five years through ten years................................... 408.8 418.9
Due after ten years...................................................... 793.6 820.2
-------- --------
Subtotal............................................................. 1,316.4 1,355.9
Mortgage-backed securities............................................... 663.7 675.0
-------- --------
Total ............................................................... $1,980.1 $2,030.9
======== ========
</TABLE>
Net investment income consisted of the following:
<TABLE>
<CAPTION>
Four months Eight months
ended ended Year ended
December 31, August 31, December 31,
------------ ------------ -----------------
1995 1995 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Actively managed fixed maturity securities................. $53.9 $110.2 $157.9 $173.6
Mortgage loans............................................. 4.8 8.0 13.0 16.2
Credit-tenant loans ....................................... 1.7 4.1 3.8 1.9
Policy loans............................................... 1.9 3.5 5.2 5.2
Short-term investments..................................... .8 1.9 3.8 3.1
Other invested assets...................................... .3 1.6 3.2 4.1
Separate accounts.......................................... 11.3 7.9 2.3 11.8
----- ------ ------ ------
Gross investment income................................ 74.7 137.2 189.2 215.9
Investment expenses........................................ .5 .8 1.3 1.4
----- ------ ------ ------
Net investment income.................................. $74.2 $136.4 $187.9 $214.5
===== ====== ====== ======
</TABLE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Net trading income (loss) consisted of the following:
<TABLE>
<CAPTION>
Four months Eight months
ended ended Year ended
December 31, August 31, December 31,
------------ ------------ ----------------
1995 1995 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Gross gains................................................ $.9 $2.0 $ 1.6 $17.2
Gross losses............................................... (.1) - (1.3) (2.7)
---- ---- ----- -----
Net trading income before expenses..................... .8 2.0 .3 14.5
Trading expenses........................................... .7 1.2 .8 2.1
---- ---- ----- -----
Net trading income (loss).............................. $.1 $ .8 $ (.5) $12.4
==== ==== ====== =====
</TABLE>
The proceeds from sales of actively managed fixed maturity securities were
$918.5 million in 1995, $578.3 million in 1994 and $975.8 million in 1993. Net
realized gains (losses) consisted of the following:
<TABLE>
<CAPTION>
Four months Eight months
ended ended Year ended
December 31, August 31, December 31,
------------ ------------ ----------------
1995 1995 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Fixed maturities:
Gross gains........................................... $15.6 $12.4 $ 16.0 $ 40.6
Gross losses.......................................... (2.1) (2.3) (8.0) (2.7)
Decline in net realizable value of fixed maturities... (.4) (1.2) (1.0) (16.1)
----- ----- ------ ------
Net realized gains from fixed maturities
before expenses................................... 13.1 8.9 7.0 21.8
Mortgage loans.......................................... - (.2) - .3
Other invested assets................................... - (1.0) (2.4) -
Other ............................................... - - (.7) -
----- ----- ------ ------
Net realized gains before expenses.................. 13.1 7.7 3.9 22.1
Realized gains expenses................................. .7 1.2 3.2 2.1
----- ----- ------ ------
Net realized gains.................................. $12.4 $ 6.5 $ .7 $ 20.0
===== ===== ====== =======
</TABLE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The change in net unrealized appreciation (depreciation) of securities
consisted of the following:
<TABLE>
<CAPTION>
Four months Eight months
ended ended Year ended
December 31, August 31, December 31,
------------ ------------ ----------------
1995 1995 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Actively managed fixed maturities............................. $45.5 $164.1 $(255.7) $ 50.1
Trading account securities.................................... - - .8 (1.8)
Other invested assets......................................... .1 5.1 (3.2) .5
----- ------ ------- ------
Subtotal............................................. 45.6 169.2 (258.1) 48.8
Less effect on other balance sheet accounts:
Cost of policies purchased.................................... (26.3) (64.1) 93.1 (13.7)
Cost of policies produced..................................... (2.7) (12.0) 27.6 (11.1)
Income taxes.................................................. (6.1) (34.1) 49.1 (8.2)
----- ------ ------- ------
Change in net unrealized appreciation
(depreciation) of securities.............................. $10.5 $ 59.0 $ (88.3) $ 15.8
===== ====== ======= ======
</TABLE>
Investments on deposit for regulatory authorities as required by law were
$17.1 million at December 31, 1995.
Investments in mortgage-backed securities at December 31, 1995, included
collateralized mortgage obligations ("CMOs") of $238.1 million and
mortgage-backed pass-through securities of $436.9 million. CMOs are securities
backed by pools of pass-through securities and/or mortgages that are segregated
into sections or "tranches." These securities provide for sequential retirement
of principal, rather than the pro rata share of principal return which occurs
through regular monthly principal payments on pass-through securities.
The following table sets forth the par value, amortized cost and estimated
fair value of investments in mortgage-backed securities including CMOs at
December 31, 1995, summarized by interest rates on the underlying collateral:
<TABLE>
<CAPTION>
Par Amortized Estimated
value cost fair value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Below 7 percent ..................................................... $224.5 $220.4 $221.5
7 percent - 8 percent................................................ 295.5 289.5 295.5
8 percent - 9 percent................................................ 84.5 83.9 86.3
9 percent and above.................................................. 67.6 69.9 71.7
------ ------ ------
Total mortgage-backed securities................................ $672.1 $663.7 $675.0
====== ====== ======
</TABLE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The amortized cost and estimated fair value of mortgage-backed securities
including CMOs at December 31, 1995, summarized by type of security were as
follows (dollars in millions):
<TABLE>
<CAPTION>
Estimated fair value
---------------------
Percent
Amortized of fixed
Type cost Amount maturities
---- ---- ------ -----------
<S> <C> <C> <C>
Pass-throughs and sequential and targeted amortization classes.... $453.6 $459.6 23%
Support classes................................................... 4.8 5.0 -
Accrual (Z tranche) bonds......................................... 9.0 9.1 -
Planned amortization classes and accretion directed bonds......... 169.2 173.7 9
Subordinated classes ............................................. 27.1 27.6 1
------ ------ ---
Total mortgage-backed securities.............................. $663.7 $675.0 33%
====== ====== ===
</TABLE>
The following table sets forth the amortized cost and estimated fair value
of mortgage-backed securities as of December 31, 1995, based upon the pricing
source used to determine estimated fair value:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Nationally recognized pricing services ...................................... $627.3 $637.8
Broker-dealer market makers.................................................. 35.8 36.5
Internally developed methods (calculated based on a
weighted-average current market yield of 10.0 percent)..................... .6 .7
------ ------
Total mortgage-backed securities........................................ $663.7 $675.0
====== ======
</TABLE>
At December 31, 1995, no mortgage loans or credit-tenant loans had
defaulted as to principal or interest for more than 60 days, was in foreclosure,
had been converted to foreclosed real estate or had been restructured while the
Company owned them. At December 31, 1995, the Company had a loan loss reserve of
$1.4 million. Approximately 30 percent, 22 percent, 14 percent and 6 percent of
the mortgage loan balance were on properties located in California, Indiana,
Texas and Georgia, respectively. No other state comprised greater than 5 percent
of the mortgage loan balance.
Reverse repurchase agreements and dollar-roll transactions are entered
into to increase return on investments and improve liquidity. These transactions
generally terminate after 30 days and are accounted for as short-term borrowings
collateralized by pledged securities with book values approximately equal to the
loan value. Such borrowings averaged approximately $84.4 million during 1995
compared to $81.7 million during 1994. The weighted average interest rate on
short-term collateralized borrowings was 5.4 percent and 3.5 percent during 1995
and 1994, respectively.
No investments of a single issuer were in excess of 10 percent of
shareholder's equity at December 31, 1995, other than investments issued or
guaranteed by the United States government.
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
4. INSURANCE LIABILITIES
Insurance liabilities consisted of the following:
<TABLE>
<CAPTION>
Interest
Withdrawal Mortality rate December 31, December 31,
assumption assumption assumption 1995 1994
---------- ---------- ---------- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Future policy benefits:
Investment contracts................ N/A N/A N/A $1,346.5 $1,444.2
Limited-payment contracts........... None (a) 8% 96.7 97.4
Traditional life insurance Company
contracts........................ experience (a) 8% 153.5 162.9
Universal life-type contracts....... N/A N/A N/A 367.6 376.1
Claims payable and other
policyholders' funds............... N/A N/A N/A 74.8 69.8
-------- --------
Total.......................... $2,039.1 $2,150.4
======== ========
<FN>
- --------------------
(a) Principally modifications of the 1975-80 Basic Table, Select and Ultimate Table.
(b) At December 31, 1995 and 1994, approximately 98 percent of this liability
represented account balances where future benefits were not guaranteed. The
weighted average interest rate on the remainder of the liabilities,
representing the present value of guaranteed future benefits, was
approximately 7 percent at December 31, 1995.
</TABLE>
Participating policies represented approximately 3.7 percent, 3.6 percent
and 3.8 percent of total life insurance in force at December 31, 1995, 1994 and
1993, respectively, and approximately 2.4 percent, 7.5 percent and 6.5 percent
of premium income for 1995, 1994 and 1993, respectively. Dividends on
participating policies amounted to $1.8 million, $1.7 million and $1.8 million
in 1995, 1994 and 1993, respectively.
5. REINSURANCE
Cost of reinsurance ceded where the reinsured policy contains mortality
risks totaled $29.1 million, $35.4 million and $41.4 million in 1995, 1994 and
1993, respectively. This cost was deducted from insurance premium revenue. The
Company is contingently liable for claims reinsured if the assuming company
is unable to pay. Reinsurance recoveries netted against insurance policy
benefits totaled $19.5 million, $27.5 million and $31.8 million in 1995, 1994
and 1993, respectively.
Effective October 1, 1995, Western National Life Insurance Company, a
former subsidiary of Conseco, recaptured certain annuity businesses ceded to the
Company through a reinsurance agreement. Reserves related to these policies
totaled $72.8 million. Recapture fees of $.7 million were recognized as income
during the four months ended December 31, 1995.
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
6. INCOME TAXES
Income tax assets and liabilities consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1994
---- ----
(Dollars in millions)
<S> <C> <C>
Deferred income tax liabilities (assets):
Cost of policies purchased and produced................................... $44.7 $63.9
Investments............................................................... 8.6 (13.3)
Insurance liabilities..................................................... (21.7) (25.1)
Unrealized appreciation (depreciation).................................... 7.2 (31.9)
Other..................................................................... (7.7) (8.5)
------ ------
Deferred income tax liabilities (assets).............................. 31.1 (14.9)
Current income tax liabilities (assets)...................................... 7.9 (3.3)
------- ------
Income tax liabilities (assets)......................................... $39.0 $(18.2)
===== ======
</TABLE>
Income tax expense was as follows:
<TABLE>
<CAPTION>
Four months Eight months
ended ended Year ended
December 31, August 31, December 31,
------------ ------------ -----------------
1995 1995 1994 1993
---- ---- ----- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Current tax provision......................................... $11.9 $19.9 $20.0 $43.4
Deferred tax provision (benefit).............................. (2.2) (3.4) 2.7 (3.2)
------ ------ ----- ------
Income tax expense..................................... $ 9.7 $16.5 $22.7 $40.2
====== ===== ===== ======
</TABLE>
Income tax expense differed from that computed at the applicable statutory
rate (35 percent in 1995, 1994, and 1993) for the following reasons:
<TABLE>
<CAPTION>
Four months Eight months
ended ended Year ended
December 31, August 31, December 31,
------------ ------------ ---------------
1995 1995 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Federal tax on income before income taxes at statutory rate... $9.0 $15.6 $21.5 $33.1
Additional tax on items not recognized in net income.......... - - - 4.4
Effect of the increase in tax rate related to prior period
income and unrealized appreciation of securities........... - - - 1.1
State taxes and other......................................... .5 .4 .5 .8
Nondeductible items........................................... .2 .5 .7 .8
---- ----- ----- -----
Income tax expense....................................... $9.7 $16.5 $22.7 $40.2
==== ===== ===== =====
</TABLE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The Omnibus Budget Reconciliation Act of 1993 (the "Act") was enacted on
August 10, 1993. The most significant provision of the Act is the increase in
the corporate tax rate to 35 percent from 34 percent effective for taxable
income reported for the year 1993. In addition to increasing taxes on current
year income, the impact of the Act on the Company in 1993 was additional tax
expense of $1.1 million consisting of: (i) $.6 million for a one-time adjustment
to accumulated deferred taxes related to prior years' income; and (ii) $.5
million for a one-time adjustment to unrealized appreciation of securities. The
impact of the other provisions of the Act was not material to the Company.
The 1993 federal income tax provision included a $4.4 million charge
related to the 1985-1986 tax years. Under the stock purchase agreement executed
in connection with the acquisition of the Company in 1990, the seller agreed to
indemnify the Company for any and all losses from federal income tax assessments
relating to periods prior to the sale. The recovery of this expense was reported
by a non-life insurance subsidiary of CCP.
The Company is currently being examined by the Internal Revenue Service for
the tax years 1992 and 1993. The Company believes that the outcome of these
examinations will not have a material impact on its financial position or
results of operations.
7. SHAREHOLDER'S EQUITY
In 1993, Jefferson National Life Insurance Company of Texas, the then sole
shareholder of the Company, contributed capital of $30 million to the Company.
The Company paid shareholder dividends of $41.2 million, $34.1 million and $20.7
million in 1995, 1994 and 1993, respectively.
8. RELATED PARTY TRANSACTIONS
The Company operates without direct employees through management and
service agreements with subsidiaries of Conseco. Total fees incurred by the
Company under such agreements were $26.6 million, $25.1 million and $25.8
million in 1995, 1994 and 1993, respectively.
9. OTHER OPERATING INFORMATION
Insurance policy income consisted of the following:
<TABLE>
<CAPTION>
Four months Eight months
ended ended Year ended
December 31, August 31, December 31,
------------ ------------ -----------------
1995 1995 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Direct premiums collected..................................... $ 82.8 $158.6 $ 240.3 $ 338.2
Reinsurance assumed........................................... .7 2.0 3.1 5.7
Reinsurance ceded............................................. (11.2) (17.9) (35.3) (41.4)
------- ------- -------- --------
Premiums collected, net of reinsurance........................ 72.3 142.7 208.1 302.5
Premiums on universal life and products without
mortality risk which are recorded as additions to
insurance liabilities......................................... (50.8) (104.4) (146.0) (231.3)
------- ------- -------- --------
Premiums on products with mortality and morbidity
risk, recorded as insurance policy income..................... 21.5 38.3 62.1 71.2
Fees and surrender charges.................................... 10.3 22.2 36.5 37.0
------- ------- -------- --------
Insurance policy income................................ $ 31.8 $ 60.5 $ 98.6 $ 108.2
======= ======= ======== ========
</TABLE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The three states with the largest shares of the Company's premiums
collected in 1995 were Texas (32 percent), Florida (18 percent), Michigan (8
percent) and California (6 percent). No other state's share of premiums
collected exceeded 5 percent.
Other operating costs and expenses were as follows:
<TABLE>
<CAPTION>
Four months Eight months
ended ended Year ended
December 31, August 31, December 31,
------------ ------------ -----------------
1995 1995 1994 1993
---- ----- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Policy maintenance expense................................. $ 6.5 $14.0 $19.0 $18.6
State premium taxes and guaranty assessments............... 1.6 1.1 3.0 3.3
Commission expense......................................... 5.0 8.6 15.3 18.5
----- ----- ----- -----
Other operating costs and expenses..................... $13.1 $23.7 $37.3 $40.4
===== ===== ===== =====
</TABLE>
Anticipated returns from the investment of policyholder balances are
considered in determining the amortization of the cost of policies purchased and
cost of policies produced. The sales of fixed maturity investments during 1995,
1994 and 1993 changed the incidence of profits on such policies because
investment gains and losses were recognized currently and the expected future
yields on the investment of policyholder balances were affected. Accordingly,
amortization of the cost of policies purchased and cost of policies produced for
the four months ended December 31, 1995, was increased by $8.3 million and $1.7
million, respectively. The amortization of cost of policies purchased and cost
of policies produced for the eight months ended August 31, 1995, was increased
by $3.4 million and $.9 million, respectively. The 1994 amortization of the cost
of policies purchased and cost of policies produced was increased by $2.6
million and $.1 million, respectively. The 1993 amortization of the cost of
policies purchased and cost of policies produced was increased by $12.2 million
and $3.5 million, respectively.
The changes in the cost of policies purchased were as follows:
<TABLE>
<CAPTION>
Four months Eight months
ended ended Year ended
December 31, August 31, December 31,
------------ ------------ ----------------
1995 1995 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Balance, beginning of period.................................. $159.0 $173.9 $ 93.0 $135.2
Amortization related to operations:
Cash flow realized....................................... (9.4) (19.1) (30.4) (41.6)
Interest added........................................... 5.0 12.7 20.8 25.3
Amortization related to sales of fixed maturity investments (8.3) (3.4) (2.6) (12.2)
Amounts related to fair value adjustment of actively
managed fixed maturity securities........................ (26.3) (66.5) 93.1 (13.7)
Adjustment of balance due to new accounting basis.......... - 61.4 - -
------ ------ ------- ------
Balance, end of period........................................ $120.0 $159.0 $173.9 $ 93.0
====== ====== ====== ======
</TABLE>
Based on current conditions and assumptions as to future events on all
policies in force, approximately 7.5 percent, 9.0 percent, 8.4 percent, 7.7
percent and 7.1 percent of the cost of policies purchased as of December 31,
1995, are expected to be amortized in each of the next five years, respectively.
The discount rates used to determine the amortization of the portion of cost of
policies purchased acquired by Conseco on the date of the Partnership
Acquisition ranged from 15 percent to 20 percent during the three-year period
ended December 31, 1995. The discount rates used to determine the amortization
of the portion of cost of policies purchased acquired by Conseco on the date of
the Conseco Acquisition ranged from 5 percent to 8 percent during the four
months ended December 31, 1995.
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The changes in the cost of policies produced were as follows:
<TABLE>
<CAPTION>
Four months Eight months
ended ended Year ended
December 31, August 31, December 31,
------------ ------------- -----------------
1995 1995 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Balance, beginning of period.................................. $25.9 $63.2 $30.8 $30.5
Additions.................................................. 3.0 6.6 9.4 18.4
Amortization related to operations......................... (.5) (4.0) (4.5) (3.4)
Amortization related to sales of fixed maturity investments (1.7) (.9) (.1) (3.5)
Amounts related to fair value adjustment of actively
managed fixed maturity securities........................ (2.7) (12.7) 27.6 (11.2)
Adjustment of balance due to new accounting basis.......... - (26.3) - -
----- ----- ----- -----
Balance, end of period........................................ $24.0 $25.9 $63.2 $30.8
===== ===== ===== =====
</TABLE>
10. STATEMENT OF CASH FLOWS
Income taxes paid during 1995, 1994, and 1993, were $19.3 million, $20.3
million and $40.9 million, respectively.
Short-term investments having original maturities of three months or less
are considered to be cash equivalents. All cash is invested in short-term
investments.
11. STATUTORY INFORMATION
Statutory accounting practices prescribed or permitted for insurance
companies by regulatory authorities differ from generally accepted accounting
principles. The Company reported the following amounts to regulatory agencies:
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1994
---- ----
(Dollars in millions)
<S> <C> <C>
Statutory capital and surplus.................................................. $156.2 $156.7
Asset valuation reserve ("AVR")................................................ 26.2 23.2
Interest maintenance reserve ("IMR")........................................... 64.7 49.7
------ ------
Total...................................................................... $247.1 $229.6
====== ======
</TABLE>
Statutory accounting practices classify certain segregated portions of
surplus, called AVR and IMR, as liabilities. The purpose of these accounts is to
stabilize statutory net income and surplus against fluctuations in the market
value and creditworthiness of investments. The IMR captures all realized
investment gains and losses resulting from changes in interest rates and
provides for subsequent amortization of such amounts into statutory net income
on a basis reflecting the remaining life of the assets sold. The AVR captures
investment gains and losses related to changes in creditworthiness and is also
adjusted each year based on a formula related to the quality and loss experience
of the investment portfolio.
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The following table compares the pre-tax income determined on a statutory
accounting basis with such income reported herein in accordance with GAAP:
<TABLE>
<CAPTION>
Four months Eight months
ended ended Year ended
December 31, August 31, December 31,
------------ ------------ ----------------
1995 1995 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Pre-tax income as reported on a statutory accounting basis
before transfers to and from and amortization of the IMR. $33.6 $ 50.2 $ 58.6 $105.3
GAAP adjustments:
Investments valuation.................................... (3.3) .8 7.5 9.7
Amortization related to operations....................... (5.3) (11.7) (16.0) (21.6)
Amortization related to realized gains................... (10.0) (4.3) (2.7) (15.7)
Deferral of cost of policies produced.................... 3.0 6.6 9.4 18.4
Insurance liabilities.................................... 5.1 2.5 2.5 (3.0)
Other liabilities........................................ 2.7 .7 2.3 1.6
Other.................................................... - (.1) (.1) -
----- ------ ------ ------
Net effect of GAAP adjustments....................... (7.8) (5.5) 2.9 (10.6)
----- ------ ------- ------
GAAP pre-tax income.................................. $25.8 $ 44.7 $ 61.5 $ 94.7
===== ====== ====== ======
</TABLE>
State insurance laws generally restrict the ability of insurance companies
to pay dividends or make other distributions. Approximately $39.5 million of the
Company's net assets at December 31, 1995, are available for distribution in
1996 without permission of state regulatory authorities.
<PAGE>
APPENDIX A
CONSECO SERIES TRUST
Conseco Series Trust is an open-end management investment company organized as
a business trust under the laws of the Commonwealth of Massachusetts on
November 15, 1982. Trust shares are offered only to separate accounts of
various insurance companies to fund benefits of variable life and variable
annuity contracts. Conseco Capital Management serves as the investment
adviser.
EVERGREEN VARIABLE TRUST
Evergreen Variable Trust is an open-end management investment
company. The Funds were organized to serve as investment vehicles for (a)
separate accounts funding variable annuity and variable life insurance
contracts issued by certain life insurance companies and (b) qualified pension
and retirement plans. Evergreen Asset Management Corp. serves as the
investment adviser to the Funds.
FEDERATED INSURANCE SERIES
Federated Insurance Series is an open-end management investment company
organized as a business trust under the laws of the Commonwealth of
Massachusetts on September 15, 1993. Trust shares are offered only to
separate accounts of various insurance companies to serve as the investment
medium of variable life insurance policies and variable annuity contracts
issued by the insurance companies. Federated Advisers serves as the
investment adviser.
THE ALGER AMERICAN FUND
The Alger American Fund is an open-end management investment company organized
as a business trust under the laws of the Commonwealth of Massachusetts on
April 6, 1988. Trust shares are offered to separate accounts of various life
insurance companies as investment options of variable life and variable
annuity contracts and as a funding vehicle for qualified pension and
retirement plans. Fred Alger Management, Inc. serves as the investment
adviser.
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO Variable Investment Funds, Inc. is a registered, open-end management
investment company that was organized as a Maryland corporation on August 19,
1993. Fund shares are intended to be funding vehicles for variable annuity
contracts and variable life insurance contracts to be offered by separate
accounts of certain life insurance companies. Fund shares are not available
for purchase other than through the purchase of such contracts. INVESCO Funds
Group, Inc. is the investment adviser. The investment adviser has retained
sub-advisers.
LORD ABBETT SERIES FUND, INC.
Lord Abbett Series Fund, Inc. is a diversified open-end management investment
company incorporated under the laws of Maryland on August 28, 1989.
Shares of the Fund are currently only offered to separate accounts of life
insurance companies to fund benefits of variable annuity contracts. Lord,
Abbett & Co. serves as the Funds investment manager.
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
The OFFITBANK Variable Insurance Fund, Inc. is an open-end management
investment company that was organized as a Maryland corporation on October 7,
1994. Shares of the Fund are sold only to certain life insurance companies
and their separate accounts to fund benefits under variable annuity contracts
and variable life insurance policies to be offered by the life insurance
companies. OFFITBANK, a trust company specializing in global fixed income
management, serves as the Funds investment adviser.
VAN ECK WORLDWIDE INSURANCE TRUST
Van Eck Worldwide Insurance Trust is an open-end management investment company
organized as a business trust under the laws of the Commonwealth of
Massachusetts on January 7, 1987. Trust shares are offered only to separate
accounts of various insurance companies to fund the benefits of variable life
and variable annuity contracts. The investment adviser and manager is Van Eck
Associates Corporation. Peregrine Asset Management Limited (Hong Kong) serves
as sub-investment adviser to the Worldwide Emerging Markets Fund.
TOMORROW FUNDS RETIREMENT TRUST
Tomorrow Funds Retirement Trust is an open-end management investment company
organized as a Delaware business trust. The Prospectuses of the Core
Large-Cap and Core Small-Cap Funds, which accompany this Prospectus describe
Institutional Class shares of the Funds. The Institutional Class shares of the
Funds are designed to provide investment vehicles for variable annuity and
variable life insurance contracts of various insurance companies.
Institutional Class shares may also be purchased by qualified pension or
retirement plans, including trustees of such plans for certain individuals
funding their individual retirement accounts or other qualified plans. Weiss,
Peck & Greer, L.L.C. serves as the investment adviser to the Funds.
A full description of each of the Eligible Funds, including the investment
objectives, policies and restrictions of each of the Portfolios, is contained
in the Prospectuses of the Eligible Funds which accompany this Prospectus and
should be read carefully by a prospective purchaser before investing.
APPENDIX B
Examples of Application of the Market Value Adjustment
CALCULATION OF MARKET VALUE ADJUSTMENT FACTOR:
( 1 + A ) N/365
(__________) - 1 = MVA factor
( 1 + B )
<TABLE>
<CAPTION>
<S> <C> <C>
Where:
A = the U.S. Treasury rate in effect at the beginning of the
Guarantee Period for the length of the Guarantee Period
selected.
B = the U.S. Treasury rate as of the transaction date plus
0.005%. The Treasury rate used is determined by taking
N/365 and rounding it to the next highest year.
N = Number of days remaining in the MVA Guarantee Period.
</TABLE>
If the Treasury rate is not available for the period, the rate will be arrived
at by interpolation.
EXAMPLE 1 FIVE-YEAR GUARANTEE PERIOD; INCREASE IN TREASURY RATE
Assume the Owner or Certificate Owner makes a $50,000 initial deposit on a
5-year Guarantee Period on January 1, 1996. The current 5-year Treasury rate
is 6.00%, and the current interest rate is 7.00%. On June 13, 1997 the Owner
or Certificate Owner surrenders the Contract/Certificate with 3 years and 202
days, or 1,297 days (12/31/2000 - 6/13/1997) remaining in the Guarantee
Period. The current Treasury rate at this point is found by rounding 3 years,
202 days to the next greatest year and taking the rate for that Guarantee
Period. In this case we would look at a 4 year rate. Assume that the 4-year
Treasury rate on June 13, 1997 is 6.50%. The Market Value Adjustment on the
Contract/Certificate would be calculated as follows:
Accumulation Value at 6/13/1997 (529 days from issue):
(529/365)
$50,000 x (1.07) = $55,151.38
( 1 + .06 ) (1,297/365)
$55,151.38 x[ ( ___________________) - 1 ] = $1,809.81
( 1 + .065 + .005)
resulting in an Adjusted Certificate Value of,
$55,151.38 - $1,809.81 = $53,341.57
EXAMPLE 2: FIVE-YEAR GUARANTEE PERIOD; DECREASE IN TREASURY RATE
Assuming a scenario identical to Example 1, but with a 4-year Treasury rate as
of the date of surrender of 5.00%, the following Market Value Adjustment would
result:
(1 + .06) (1,297/365)
$55,151.38 x[ ( __________________) - 1 ] = $934.43
( 1 + .050 + .005)
resulting in an Adjusted Contract Value/Adjusted Certificate Value of,
$55,151.38 + 943.43 = $56,085.81
EXAMPLE 3: TEN-YEAR GUARANTEE PERIOD; INCREASE IN TREASURY RATE
Assume the Owner or Certificate Owner makes a $50,000 initial deposit on a
10-year Guarantee Period on January 1, 1996. The current 10-year Treasury rate
is 7.00%, and the current interest rate is 7.50%. On October 31, 2002 the
Owner or Certificate Owner surrenders the Contract/Certificate with 3 years
and 61 days, or 1,157 days (12/31/2005 - 10/31/2002) remaining in the
Guarantee Period. The current Treasury rate at this point is found by rounding
3 years, 61 days to the next greatest year and taking the rate for that
Guarantee Period. In this case we would look at a 4 year rate. Assume that the
4-year Treasury rate on October 31, 2002 is 7.50%. The Market Value Adjustment
on the Contract/Certificate would be calculated as follows:
Accumulation Value at 10/31/2002 (2,495 days from issue):
(2,495/365)
$50,000 x (1.075) = $81,972.13
( 1 + .07) (1,157/365)
$81,972.13 x [ (_________________) - 1 ] = $2,381.85
( 1 + .075 + .005)
resulting in an Adjusted Contract Value/Adjusted Certificate Value of,
$81,972.13 + 2,381.85 = $79,590.28
EXAMPLE 4: DECREASE IN TREASURY RATE
Assuming a scenario identical to Example 3, but with a 4-year Treasury rate as
of the date of surrender of 6.00%, the following Market Value Adjustment would
result:
( 1 + .07) (1,157/365)
$81,972.13 x [ (__________________) - 1 ] = $1,226.13
( 1 + .060 + .005)
resulting in an Adjusted Certificate Value of,
$81,972.13 + 1,226.13 = $83,198.26
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
ITEM PAGE
Company..............................................................
Experts..............................................................
Legal Opinions.......................................................
Distributor..........................................................
Yield Calculation for Money Market Sub-Account.......................
Performance Information..............................................
Annuity Provisions...................................................
Financial Statements.................................................
If you would like a free copy of the Statement of Additional Information dated
_______________________ for this Prospectus, please complete this form,
detach, and mail to:
Great American Reserve Insurance Company
Administrative Office
11815 N. Pennsylvania Street
Carmel, Indiana 46032
Gentlemen:
Please send me a free copy of the Statement of Additional Information for
Great American Reserve Variable Annuity Account G at the following address:
Name:________________________________________________________________
Mailing Address:_____________________________________________________
_____________________________________________________
_____________________________________________________
Sincerely,
_____________________________________
(Signature)
PART B
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL AND GROUP FIXED AND VARIABLE DEFERRED
ANNUITY CONTRACTS AND CERTIFICATES
issued by
GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT G
AND
GREAT AMERICAN RESERVE INSURANCE COMPANY
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS DATED ______________, FOR THE
INDIVIDUAL AND GROUP FIXED AND VARIABLE DEFERRED ANNUITY CONTRACTS AND
CERTIFICATES WHICH ARE REFERRED TO HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR
OUGHT TO KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS CALL OR WRITE
THE COMPANY AT ITS ADMINISTRATIVE OFFICE: 11815 N. PENNSYLVANIA STREET,
CARMEL, INDIANA 46032 (317) 817-3700.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED ________________, 199__.
TABLE OF CONTENTS
PAGE
Company.................................................................. 3
Experts.................................................................. 3
Legal Opinions........................................................... 3
Distributor.............................................................. 3
Yield Calculation For Money Market Subaccounts........................... 3
Performance Information.................................................. 4
Annuity Provisions....................................................... 5
Financial Statements..................................................... 5
COMPANY
Information regarding Great American Reserve Insurance Company ("Great
American Reserve" or the "Company") and its ownership is contained in the
Prospectus.
EXPERTS
The financial statements of Great American Reserve as of December 31, 1995
and 1994, and for the four months ended December 31, 1995, the eight months
ended August 31, 1995, and the years ended December 31, 1994 and 1993, included
in the prospectus, have been audited by Coopers & Lybrand L.L.P., independent
accountants, as set forth in their report appearing herein, and have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
LEGAL OPINIONS
Legal matters in connection with the Contracts and Certificates described
herein are being passed upon by the law firm of Blazzard, Grodd & Hasenauer,
P.C., Westport, Connecticut.
DISTRIBUTOR
Conseco Equity Sales, Inc., an affiliate of the Company, acts as the
distributor. The offering is on a continuous basis.
YIELD CALCULATION FOR MONEY MARKET SUB-ACCOUNT
The Money Market Sub-Account of the Variable Account will calculate its
current yield based upon the seven days ended on the date of calculation. The
Money Market Sub-Account has yet to commence business.
The current yield of the Money Market Sub-Account is computed by determining
the net change (exclusive of capital changes) in the value of a hypothetical
pre-existing Owner or Certificate Owner account having a balance of one
Accumulation Unit of the Sub-Account at the beginning of the period,
subtracting the Mortality and Expense Risk Charge, the Administrative Charge
and the Contract and Certificate Maintenance Charges, dividing the difference
by the value of the account at the beginning of the same period to obtain the
base period return and multiplying the result by (365/7).
The Money Market Sub-Account computes its effective compound yield according
to the method prescribed by the Securities and Exchange Commission. The
effective yield reflects the reinvestment of net income earned daily on Money
Market Sub-Account assets.
Net investment income for yield quotation purposes will not include either
realized capital gains and losses or unrealized appreciation and depreciation,
whether reinvested or not.
The yields quoted should not be considered a representation of the yield of
the Money Market Sub-Account in the future since the yield is not fixed.
Actual yields will depend not only on the type, quality and maturities of the
investments held by the Money Market Sub-Account and changes in the interest
rates on such investments, but also on changes in the Money Market
Sub-Account's expenses during the period.
Yield information may be useful in reviewing the performance of the Money
Market Sub-Account and for providing a basis for comparison with other
investment alternatives. However, the Money Market Sub-Account's yield
fluctuates, unlike bank deposits or other investments which typically pay a
fixed yield for a stated period of time.
PERFORMANCE INFORMATION
From time to time, the Company may advertise performance data as described in
the Prospectus. Any such advertisement will include total return figures for
the time periods indicated in the advertisement. Such total return figures
will reflect the deduction of a 1.15% Mortality and Expense Risk Charge, a
.15% Administrative Charge, the investment advisory fee for the underlying
Portfolio being advertised and any applicable Contract and Certificate
Maintenance Charge.
The hypothetical value of a Contract or Certificate purchased for the time
periods described in the advertisement will be determined by using the actual
Accumulation Unit values for an initial $1,000 purchase payment, and deducting
any applicable Contract and Certificate Maintenance Charge to arrive at the
ending hypothetical value. The average annual total return is then determined
by computing the fixed interest rate that a $1,000 purchase payment would have
to earn annually, compounded annually, to grow to the hypothetical value at
the end of the time periods described. The formula used in these calculations
is:
n
P ( 1 + T ) = ERV
<TABLE>
<CAPTION>
<S> <C> <C>
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the time periods used
(or fractional portion thereof) of a hypothetical $1,000
payment made at the beginning of the time periods used.
</TABLE>
In addition to total return data, the Company may include yield information in
its advertisements. For each Sub-Account (other than the Money Market
Sub-Account) for which the Company will advertise yield, it will show a yield
quotation based on a 30 day (or one month) period ended on the date of the
most recent balance sheet of the Variable Account included in the
registration statement, computed by dividing the net investment income per
Accumulation Unit earned during the period by the maximum offering price per
Unit on the last day of the period, according to the following formula:
6
Yield = 2 [ (a-b) + 1) - 1 ]
___
cd
Where:
<TABLE>
<CAPTION>
<S> <C>
a = Net investment income earned during the period by the Eligible
Fund attributable to shares owned by the Subaccount.
b = Expenses accrued for the period (net of reimbursements).
c = The average daily number of Accumulation Units outstanding
during the period.
d = The maximum offering price per Accumulation Unit on the last
day of the period.
</TABLE>
Owners and Certificate Owners should note that the investment results of each
Sub-Account will fluctuate over time, and any presentation of the
Sub-Account's total return or yield for any period should not be considered as
a representation of what an investment may earn or what a Owner's or
Certificate Owner's total return or yield may be in any future period.
ANNUITY PROVISIONS
The Company makes available payment plans on a fixed and variable basis.
VARIABLE ANNUITY PAYOUT
A Variable Annuity is an annuity with payments which: (1) are not
predetermined as to dollar amount; and (2) will vary in amount with the net
investment results of the applicable Sub-Accounts of the Variable Account.
Annuity Payments also depend upon the Age of the Annuitant and any Joint
Annuitant and the assumed interest factor utilized. The Annuity Table used
will depend upon the Annuity Option chosen. The dollar amount of Annuity
Payments after the first is determined as follows:
1. The dollar amount of the first Variable Annuity Payment is divided by
the value of an Annuity Unit for each applicable Sub-Account as of the Annuity
Date. This sets the number of Annuity Units for each monthly payment for the
applicable Sub-Account.
2. The fixed number of Annuity Units per payment in each Sub-Account is
multiplied by the Annuity Unit Value for that Sub-Account for the last
Valuation Period of the month preceding the month for which the payment is
due. This result is the dollar amount of the payment for each applicable
Sub-Account.
The total dollar amount of each Variable Annuity Payment is the sum of all
Sub-Account Variable Annuity Payments reduced by the applicable portion of the
Contract or Certificate Maintenance Charge.
FIXED ANNUITY PAYOUT
A fixed annuity is an annuity with payments which are guaranteed as to dollar
amount by the Company and do not vary with the investment experience of the
Variable Account. The dollar amount of each Fixed Annuity Payment is
determined in accordance with Annuity Tables contained in the
Contract/Certificate.
ANNUITY UNIT
The value of any Annuity Unit for each Sub-Account of the Variable Account was
arbitrarily set initially at $10.
The Sub-Account Annuity Unit Value at the end of any subsequent Valuation
Period is determined as follows:
1. The Net Investment Factor for the current Valuation Period is
multiplied by the value of the Annuity Unit for the Sub-Account for the
immediately preceding Valuation Period.
2. The result in (1) is then divided by the Assumed Investment Rate
Factor which equals 1.00 plus the Assumed Investment Rate for the number of
days since the preceding Valuation Date. The Owner/Certificate Owner can
choose either a 5% or a 3% Assumed Investment Rate.
(See "Annuity Provisions" in the Prospectus.)
FINANCIAL STATEMENTS
The financial statements of the Company included in the Prospectus should be
considered only as bearing upon the ability of the Company to meet its
obligations under the Contracts and Certificates.
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
A. FINANCIAL STATEMENTS
The following financial statements of the Company are included in
the Prospectus:
1. Balance Sheet as of September 30, 1996 (unaudited)
2. Statement of Operations for the nine months ended September 30,
1996, the one month ended September 30, 1995 and the eight months
ended August 31, 1995 (unaudited)
3. Statement of Shareholder's Equity for the nine months ended
September 30, 1996, the one month ended September 30, 1995 and
the eight months ended August 31, 1995 (unaudited)
4. Statement of Cash Flows for the nine months ended September 30,
1996, the one month ended September 30, 1995 and the eight months
ended August 31, 1995 (unaudited)
5. Notes to Financial Statements (unaudited)
6. Report of Independent Accountants
7. Balance Sheet as of December 31, 1995 and 1994
8. Statement of Operations for the four months ended December 31,
1995, the eight months ended August 31, 1995 and the years ended
December 31, 1994 and 1993
9. Statement of Shareholder's Equity for the four months ended
December 31, 1995, the eight months ended August 31, 1995 and the
years ended December 31, 1994 and 1993
10. Statement of Cash Flows for the four months ended December 31,
1995, the eight months ended August 31, 1995 and the years ended
December 31, 1994 and 1993
11. Notes to Financial Statements
No financial statements for the Variable Account have been in-
cluded herein because, as of the date of this Prospectus, the
Variable Account had no assets.
B. EXHIBITS
<TABLE>
<CAPTION>
<C> <S>
1. Resolution of Board of Directors of the Company
authorizing the establishment of the Variable Account.*
2. Not Applicable.
3. Form of Principal Underwriters Agreement.*
4. (i) Individual Fixed and Variable Deferred Annuity
Contract.*
(ii) Allocated Fixed and Variable Group Annuity
Contract.*
(iii) Allocated Fixed and Variable Group Annuity
Certificate.*
5. Application Form.*
6. (i) Copy of Articles of Incorporation of the Company.*
(ii) Copy of the Bylaws of the Company.*
7. Not Applicable.
8. (i) Form of Fund Participation Agreement between INVESCO
Variable Investment Funds, Inc., INVESCO Funds Group,
Inc. and the Company.*
(ii) Form of Fund Participation Agreement between The Alger
American Fund, Fred Alger and Company, Incorporated
and the Company.*
(iii) Form of Fund Participation Agreement between Van
Eck Worldwide Insurance Trust, Van Eck Associates
Corporation and the Company.*
(iv) Form of Fund Participation Agreement between Insurance
Management Series, Federated Securities Corp. and the
Company.*
(v) Form of Fund Participation Agreement between Tomorrow
Funds Retirement Trust, Weiss, Peck & Greer, L.L.C.
and the Company.*
(vi) Form of Fund Participation Agreement between Lord
Abbett Series Fund, Inc. and the Company
(vii) Form of Fund Participation Agreement between OFFITBANK
Variable Insurance Fund, Inc. and the Company
(viii)Form of Fund Participation Agreement between Evergreen
Variable Trust and the Company
9. Opinion and Consent of Counsel.
10. Consent of Independent Accountants.
11. Not Applicable.
12. Not Applicable.
13. Not Applicable.
14. Not Applicable.
15. Company Organizational Chart.*
27. Financial Data Schedule - Not Applicable.
<FN>
* Incorporated by reference to Registrant's Form N-4 as
electronically filed on January 23, 1996.
</TABLE>
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The following are the Executive Officers and Directors of the Company:
<TABLE>
<CAPTION>
<S> <C>
Name and Principal Position and Offices
Business Address* with Depositor
- ------------------- ---------------------------------------
Ngaire E. Cuneo Director
Stephen C. Hilbert Director and Chairman of the Board
Rollin M. Dick Director, Executive Vice President and
Chief Financial Officer
Lawrence W. Inlow Director, Executive Vice President,
General Counsel
Donald F. Gongaware Director, President and Chief Executive
Officer
</TABLE>
*The Principal business address for all officers and directors listed above is
11825 N. Pennsylvania Street, Carmel, Indiana 46032.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR
OR REGISTRANT
The Company organizational chart was filed as Exhibit 15 in
Registrant's Form N-4 and is incorporated herein by reference.
ITEM 27. NUMBER OF CONTRACT OWNERS
Not Applicable
ITEM 28. INDEMNIFICATION
The Bylaws (Article VI) of the Company provide, in part, that:
The Corporation shall indemnify any person who was or is a party, or is
threatened to be made a party, to any threatened, pending, or completed
action, suit or proceeding, whether civil, criminal, administrative, or
investigative, by reason of the fact that he is or was a director or officer
of the Corporation, or is or was serving at the request of the Corporation as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise (collectively, "Agent") against
expenses (including attorneys' fees), judgments, fines, penalties, court costs
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order, settlement
(whether with or without court approval), conviction or upon a plea of NOLO
CONTENDERE or its equivalent, shall not, of itself, create a presumption that
the Agent did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Corporation,
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe that his conduct was unlawful. If several claims, issues or
matters are involved, an Agent may be entitled to indemnification as to some
matters even though he is not entitled as to other matters. Any director or
officer of the Corporation serving in any capacity of another corporation, of
which a majority of the shares entitled to vote in the election of its
directors is held, directly or indirectly, by the Corporation, shall be deemed
to be doing so at the request of the Corporation.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted directors and officers or controlling persons of the
Company pursuant to the foregoing, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Not Applicable.
(b) Conseco Equity Sales, Inc. ("CES") is the principal underwriter for the
Contracts and Certificates. The following persons are the officers and
directors of CES. The principal business address for each officer and
director of CES is 11815 N. Pennsylvania Street, Carmel, Indiana 46032.
<TABLE>
<CAPTION>
<C> <S> <C>
Name and Principal Positions and Offices
Business Address with Underwriter
------------------------ ---------------------------------------
L. Gregory Gloeckner President and Director
William P. Latimer Vice President, Senior Counsel,
Secretary and Director
James S. Adams Senior Vice President, Treasurer
and Director
William T. Devanney, Jr. Senior Vice President, Corporate
Taxes
Christene H. Darnell Assistant Vice President, Management
Reporting
Lisa M. Zimmerman Assistant Vice President, Corporate Tax
</TABLE>
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Lowell Short, whose address is 11825 N. Pennsylvania Street, Carmel, IN
46032, maintains physical possession of the accounts, books or documents of
the Separate Account required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and the rules promulgated thereunder.
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS
a. Registrant hereby undertakes to file a post-effective amendment to
this registration statement as frequently as is necessary to ensure that the
audited financial statements in the registration statement are never more than
sixteen (16) months old for so long as payment under the variable annuity
contracts may be accepted.
b. Registrant hereby undertakes to include either (1) as part of any
application to purchase a contract offered by the Prospectus, a space that an
applicant can check to request a Statement of Additional Information, or (2) a
postcard or similar written communication affixed to or included in the
Prospectus that the applicant can remove to send for a Statement of Additional
Information.
c. Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statement required to be made available under
this Form promptly upon written or oral request.
d. Great American Reserve Insurance Company (the "Company") hereby
represents that the fees and charges deducted under the Contracts and
Certificates described in the Prospectus, in the aggregate, are reasonable
in relation to the services rendered, the expenses to be incurred and the
risks assumed by the Company.
REPRESENTATIONS
The Company hereby represents that it is relying upon a No-Action Letter
issued to the American Council of Life Insurance dated November 28, 1988
(Commission ref. IP-6-88) and that the following provisions have been complied
with:
1. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in each registration statement, including the
prospectus, used in connection with the offer of the contract;
2. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in any sales literature used in connection with
the offer of the contract;
3. Instruct sales representatives who solicit participants to purchase
the contract specifically to bring the redemption restrictions imposed by
Section 403(b)(11) to the attention of the potential participants;
4. Obtain from each plan participant who purchases a Section 403(b)
annuity contract, prior to or at the time of such purchase, a signed statement
acknowledging the participant's understanding of (1) the restrictions on
redemption imposed by Section 403(b)(11), and (2) other investment
alternatives available under the employer's Section 403(b) arrangement to
which the participant may elect to transfer his contract value.
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant has caused this Registration Statement to be signed on
its behalf, in the City of Carmel, and State of Indiana on this 27th day of
January, 1997.
<TABLE>
<CAPTION>
<S> <C> <C>
GREAT AMERICAN RESERVE VARIABLE ANNUITY
ACCOUNT G
Registrant
By: GREAT AMERICAN RESERVE INSURANCE COMPANY
By: /S/ DONALD F. GONGAWARE
--------------------------------------------
Donald F. Gongaware
Chief Executive Officer
By: GREAT AMERICAN RESERVE INSURANCE COMPANY
Depositor
By: /S/ DONALD F. GONGAWARE
--------------------------------------------
Donald F. Gongaware
Chief Executive Officer
Attest:
/S/ LAWRENCE W. INLOW
________________________
Lawrence W. Inlow
Secretary
</TABLE>
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE TITLE DATE
- ------------------------ -------------------------- ---------------
/S/ NGAIRE E. CUNEO Director January 27, 1997
- ------------------------ -----------------
Ngaire E. Cuneo
/S/ STEPHEN C. HILBERT Director and Chairman of January 27, 1997
- ------------------------ -----------------
Stephen C. Hilbert the Board
Director, Executive Vice
/S/ ROLLIN M. DICK President and Chief January 27, 1997
- ------------------------ Financial Officer -----------------
Rollin M. Dick (Principal Financial and
Accounting Officer of the
Registrant)
/S/ LAWRENCE W. INLOW Director, Executive Vice January 27, 1997
- ------------------------ -----------------
Lawrence W. Inlow President, General Counsel
Director, President and
/S/ DONALD F. GONGAWARE Chief Executive Officer January 27, 1997
- ------------------------ (Principal Executive -----------------
Donald F. Gongaware Officer of the Registrant)
</TABLE>
EXHIBITS
TO
PRE-EFFECTIVE AMENDMENT NO.1
TO
FORM N-4
FOR
GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT G
GREAT AMERICAN RESERVE INSURANCE COMPANY
INDEX TO EXHIBITS
EXHIBIT PAGE
99.B8(vi) Form of Fund Participation Agreement between Lord
Abbett Series Fund, Inc. and the Company
99.B8(vii) Form of Fund Participation Agreement between OFFITBANK
Variable Insurance Fund, Inc. and the Company
99.B8(viii) Form of Fund Participation Agreement between Evergreen
Variable Trust and the Company
99.B9 Opinion and Consent of Counsel
99.B10 Consent of Independent Accountants
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT made as of the ___ day of ________,, by and between Lord
Abbett Series Fund, Inc. ("FUND"), a Maryland Corporation, Lord, Abbett & Co.
("ADVISER"), a _____________________, and GREAT AMERICAN RESERVE INSURANCE
COMPANY (the "COMPANY"), a life insurance company organized under the laws of
the State of Indiana.
WHEREAS, FUND is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, as amended (the ' 40 Act"),
as an open-end, diversified management investment company; and
WHEREAS, FUND is organized as a series fund comprised of several
Portfolios ("Portfolios"), those currently available are listed on Appendix A
hereto; and
WHEREAS, FUND was organized to act as the funding vehicle for certain
variable life insurance and/or variable annuity contracts ("Variable
Contracts") offered by life insurance companies through separate accounts
("Separate Accounts") of such life insurance companies ("Participating
Insurance Companies") and also offers its shares to certain qualified pension
and retirement plans ("Qualified Plans"); and
WHEREAS, FUND intends to apply for an order from the SEC, granting
Participating Insurance Companies and their separate accounts exemptions from
the provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the 40 Act, and
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to
permit shares of the Portfolios of the Fund to be sold to and held by variable
annuity and variable life insurance separate accounts of both affiliated and
unaffiliated Participating Insurance Companies and Qualified Plans ("Exemptive
Order"); and
WHEREAS, the COMPANY has established or will establish one or more
separate accounts ("Separate Accounts") to offer Variable Contracts and is
desirous of having FUND as one of the underlying funding vehicles for such
Variable Contracts; and
WHEREAS, ADVISER is registered with the SEC as an investment adviser
under the Investment Advisers Act of 1940 and as a broker-dealer under the
Securities Exchange Act of 1934, as amended and acts as the FUND's investment
adviser and its subsidiary Lord Abbett Distributors LLC, a New York limited
liability Company (the "Distributor") acts as principal underwriter; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the COMPANY intends to purchase shares of FUND to fund the
aforementioned Variable Contracts and FUND is authorized to sell such shares
to the COMPANY at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the COMPANY,
FUND, and ADVISER agree as follows:
Article I. SALE OF FUND SHARES
1.1 FUND agrees to make available to the Separate Accounts of the
COMPANY shares of the selected Portfolios as listed on Appendix B for
investment of purchase payments of Variable Contracts allocated to the
designated Separate Accounts as provided in FUND's Registration Statement.
1.2 FUND agrees to sell to the COMPANY those shares of the selected
Portfolios of Fund which the COMPANY orders, executing such orders on a daily
basis at the net asset value next computed after receipt by FUND or its
designee of the order for the shares of FUND. For purposes of this Section
1.2, the COMPANY shall be the designee of FUND for receipt of such orders from
the designated Separate Account and receipt by such designee shall constitute
receipt by FUND; provided that the COMPANY receives the order by 4:00 p.m. New
York time and FUND receives notice from the COMPANY by telephone or facsimile
(or by such other means as FUND and the COMPANY may agree in writing) of such
order by 9:00 a.m. New York time on the next following Business Day.
"Business Day" shall mean any day on which the New York Stock Exchange is open
for trading and on which FUND calculates its net asset value pursuant to the
rules of the SEC.
1.3 FUND agrees to redeem on the COMPANY's request, any full or
fractional shares of FUND held by the COMPANY, executing such requests on a
daily basis at the net asset value next computed after receipt by FUND or its
designee of the request for redemption, in accordance with the provisions of
this agreement and FUND's Registration Statement. For purposes of this
Section 1.3, the COMPANY shall be the designee of FUND for receipt of requests
for redemption from the designated Separate Account and receipt by such
designee shall constitute receipt by FUND; provided that the COMPANY receives
the request for redemption by 4:00 p.m. New York time and FUND receives notice
from the COMPANY by telephone or facsimile (or by such other means as FUND and
the COMPANY may agree in writing) of such request for redemption by 9:00 a.m.
New York time on the next following Business Day.
1.4 FUND shall furnish, on or before the ex-dividend date, notice to the
COMPANY of any income dividends or capital gain distributions payable on the
shares of any Portfolios of FUND. The COMPANY hereby elects to receive all
such income dividends and capital gain distributions as are payable on a
Portfolio's shares in additional shares of the Portfolio. FUND shall notify
the COMPANY or its designee of the number of shares so issued as payment of
such dividends and distributions.
1.5 FUND shall make the net asset value per share for the selected
Portfolio(s) available to the COMPANY on a daily basis as soon as reasonably
practicable after the net asset value per share is calculated but shall use
its best efforts to make such net asset value available by 6:30 p.m. New York
time. In the event that FUND is unable to meet the 6:30 p.m. time stated
herein, it shall provide additional time for the COMPANY to place orders for
the purchase and redemption of shares. Such additional time shall be equal to
the additional time which FUND takes to make the net asset value available to
the COMPANY. If FUND provides the COMPANY with materially incorrect share net
asset value information through no fault of the COMPANY, the COMPANY on behalf
of the Separate Accounts, shall be entitled to an adjustment to the number of
shares purchased or redeemed to reflect the correct share net asset value.
Any material error in the calculation of net asset value per share, dividend
or capital gain information shall be reported promptly upon discovery to the
COMPANY. If a Separate Account due to such error has received amounts in
excess of the amounts to which it is entitled, the COMPANY, when requested by
FUND, shall make adjustments to the Separate Account to reflect the change in
the values of the shares as reflected in the unit values of the affected
Variable Contract owners who still have values in the Portfolio. When making
adjustments for an error, the FUND shall not net same day transactions in a
Separate Account. No adjustment for an error shall be taken in any Separate
Account until such time as the parties hereto have agreed to a resolution of
the error, but the parties shall use all reasonable efforts to reach such
agreement within two business days after the discovery of the error.
1.6 At the end of each Business Day, the COMPANY shall use the
information described in Section 1.5 to calculate Separate Account unit values
for the day. Using these unit values, the COMPANY shall process each such
Business Day's Separate Account transactions based on requests and premiums
received by it by the close of trading on the floor of the New York Stock
Exchange (currently 4:00 p.m. New York time) to determine the net dollar
amount of FUND shares which shall be purchased or redeemed at that day's
closing net asset value per share. The net purchase or redemption orders so
determined shall be transmitted to FUND by the COMPANY by 9:00 a.m. New York
Time on the Business Day next following the COMPANY's receipt of such requests
and premiums in accordance with the terms of Sections 1.2 and 1.3 hereof.
1.7 If the COMPANY's order requests the purchase of FUND shares, the
COMPANY shall pay for such purchase by wiring federal funds to FUND or its
designated custodial account on the day the order is transmitted by the
COMPANY. If the COMPANY's order requests a net redemption resulting in a
payment of redemption proceeds to the COMPANY, FUND shall use its best efforts
to wire the redemption proceeds to the COMPANY by the next Business Day,
unless doing so would require FUND to dispose of Portfolio securities or
otherwise incur additional costs. In any event, proceeds shall be wired to
the COMPANY within three Business Days or such longer period permitted by the
'40 Act or the rules, orders or regulations thereunder and FUND shall notify
the person designated in writing by the COMPANY as the recipient for such
notice of such delay by 3:00 p.m. New York Time the same Business Day that the
COMPANY transmits the redemption order to FUND. If the COMPANY's order
requests the application of redemption proceeds from the redemption of shares
to the purchase of shares of another Portfolio advised by ADVISER, FUND shall
so apply such proceeds the same Business Day that the COMPANY transmits such
order to FUND.
1.8 FUND agrees that all shares of the Portfolios of FUND will be sold
only to Participating Insurance Companies which have agreed to participate in
FUND to fund their Separate Accounts and/or to Qualified Plans, all in
accordance with the requirements of Section 817(h) of the Internal Revenue
Code of 1986, as amended ("Code") and Treasury Regulation 1.817-5. Shares of
the Portfolios of FUND will not be sold directly to the general public.
1.9 FUND may refuse to sell shares of any Portfolios to any person, or
suspend or terminate the offering of the shares of any Portfolios if such
action is required by law or by regulatory authorities having jurisdiction or
is, in the sole discretion of the Board of Directors of the FUND (the
"Board"), acting in good faith and in light of its duties under federal and
any applicable state laws, deemed necessary, desirable or appropriate and in
the best interests of the shareholders of such Portfolios.
1.10 Issuance and transfer of Portfolio shares will be by book entry
only. Stock certificates will not be issued to the COMPANY or the Separate
Accounts. Shares ordered from Portfolios will be recorded in appropriate book
entry titles for the Separate Accounts.
Article II. REPRESENTATIONS AND WARRANTIES
2.1 The COMPANY represents and warrants that it is an insurance company
duly organized and in good standing under the laws of Indiana and that it has
legally and validly established each Separate Account as a segregated asset
account under such laws.
2.2 The COMPANY represents and warrants that it has registered or, prior
to any issuance or sale of the Variable Contracts, will register each Separate
Account as a unit investment trust ("UIT") in accordance with the provisions
of the 40 Act and cause each Separate Account to remain so registered to
serve as a segregated asset account for the Variable Contracts, unless an
exemption from registration is available.
2.3 The COMPANY represents and warrants that the Variable Contracts will
be registered under the Securities Act of 1933 (the " 33 Act") unless an
exemption from registration is available prior to any issuance or sale of the
Variable Contracts and that the Variable Contracts will be issued and sold in
compliance in all material respects with all applicable federal and state laws
and further that the sale of the Variable Contracts shall comply in all
material respects with state insurance law suitability requirements.
2.4 The COMPANY represents and warrants that the Variable Contracts are
currently and at the time of issuance will be treated as life insurance,
endowment or annuity contracts under applicable provisions of the Code, that
it will maintain such treatment and that it will notify FUND immediately upon
having a reasonable basis for believing that the Variable Contracts have
ceased to be so treated or that they might not be so treated in the future.
2.5 FUND represents and warrants that the Portfolio shares offered and
sold pursuant to this Agreement will be registered under the '33 Act and sold
in accordance with all applicable federal and state laws, and FUND shall be
registered under the 40 Act prior to and at the time of any issuance or sale
of such shares. FUND, subject to Section 1.9 above, shall amend its
registration statement under the 33 Act and the 40 Act from time to time as
required in order to effect the continuous offering of its shares. FUND shall
register and qualify its shares for sale in accordance with the laws of the
various states only if and to the extent deemed advisable by FUND.
2.6 FUND represents and warrants that each Portfolio will comply with
the diversification requirements set forth in Section 817(h) of the Code, and
the rules and regulations thereunder, including without limitation Treasury
Regulation 1.817-5, and will notify the COMPANY immediately upon having a
reasonable basis for believing any Portfolio has ceased to comply or might not
so comply and will immediately take all reasonable steps to adequately
diversify the Portfolio to achieve compliance.
2.7 FUND represents and warrants that each Portfolio invested in by the
Separate Account intends to elect to be treated as a "regulated investment
company" under Subchapter M of the Code, and to qualify for such treatment for
each taxable year and will notify the COMPANY immediately upon having a
reasonable basis for believing it has ceased to so qualify or might not so
qualify in the future.
2.8 ADVISER represents and warrants that Distributor is and will be a
member in good standing of the National Association of Securities Dealers,
Inc. ("NASD") and is and will be registered as a broker-dealer with the SEC.
ADVISER further represents that Distributor will sell and distribute Portfolio
shares in accordance with all applicable state and federal laws and
regulations, including without limitation the '33 Act, the '34 Act and the '40
Act.
2.9 ADVISER represents and warrants that it and Distributor are still and
will remain duly registered and licensed in all material respects under all
applicable federal and state securities laws and shall perform its obligations
hereunder in compliance in all material respects with any applicable state and
federal laws.
Article III. PROSPECTUS AND PROXY STATEMENTS
3.1 FUND shall prepare and be responsible for filing with the SEC and any
state regulators requiring such filing all shareholder reports, notices, proxy
materials (or similar materials such as voting instruction solicitation
materials), prospectuses and statements of additional information of FUND.
Except for the costs and fees the Distributor is obligated to pay pursuant to
its distribution agreement with the FUND, the FUND shall bear the costs of
registration and qualification of shares of the Portfolios, preparation and
filing of the documents listed in this Section 3.1 and all taxes and filing
fees to which an issuer is subject on the issuance and transfer of its shares.
3.2 At least annually, FUND or its designee shall provide the COMPANY,
free of charge, with as many copies of the current prospectus for the shares
of the Portfolios as the COMPANY may reasonably request for distribution to
existing Variable Contract owners whose Variable Contracts are funded by such
shares. FUND or its designee shall provide the COMPANY, at the COMPANY's
expense, with as many more copies of the current prospectus for the shares as
the COMPANY may reasonably request for distribution to prospective purchasers
of Variable Contracts. If requested by the COMPANY in lieu thereof, FUND or
its designee shall provide such documentation (including a "camera ready" copy
of the new prospectus as set in type or, at the request of the COMPANY, as a
diskette in the form sent to the financial printer) and other assistance as is
reasonably necessary in order for the parties hereto once a year (or more
frequently if the prospectus for the shares is supplemented or amended) to
have the prospectus for the Variable Contracts and the prospectus for the FUND
shares and any other fund shares offered as investments for the Variable
Contracts printed together in one document. The expenses of such printing will
be apportioned between (a) the COMPANY and (b) FUND in proportion to the
number of pages of the Variable Contract, other fund shares prospectuses and
the Fund shares prospectus, taking account of other relevant factors affecting
the expense of printing, such as covers, columns, graphs and charts; FUND to
bear the cost of printing the shares' prospectus portion of such document for
distribution only to owners of existing Variable Contracts funded by the FUND
shares and the COMPANY to bear the expense of printing the portion of such
documents relating to the Separate Account; provided, however, the COMPANY
shall bear all printing expenses of such combined documents where used for
distribution to prospective purchasers or to owners of existing Variable
Contracts not funded by the shares. In the event that the COMPANY requests
that FUND or its designee provide FUND's prospectus in a "camera ready" or
diskette format, FUND shall be responsible for providing the prospectus in the
format in which it is accustomed to formatting prospectuses and shall bear the
expense of providing the prospectus in such format (e.g. typesetting
expenses), and the Company shall bear the expense of adjusting or changing
the format to conform with any of its prospectuses. Furthermore, the COMPANY
shall be reimbursed for distribution expenses as provided for in the
Distribution Plan attached hereto as Appendix C under the terms and conditions
set forth in such Distribution Plan.
3.3 FUND will provide the COMPANY with at least one complete copy of all
prospectuses, statements of additional information, annual and semi-annual
reports, proxy statements, exemptive applications and all amendments or
supplements to any of the above that relate to the Portfolios promptly after
the filing of each such document with the SEC or other regulatory authority.
The COMPANY will provide FUND with at least one complete copy of all
prospectuses, statements of additional information, annual and semi-annual
reports, proxy statements, exemptive applications and all amendments or
supplements to any of the above that relate to a Separate Account promptly
after the filing of each such document with the SEC or other regulatory
authority.
Article IV. SALES MATERIALS
4.1 The COMPANY will furnish, or will cause to be furnished, to FUND
and ADVISER, each piece of sales literature or other promotional material in
which FUND or ADVISER or DISTRIBUTOR is named, at least fifteen (15) Business
Days prior to its intended use. No such material will be used if FUND,
ADVISER or DISTRIBUTOR objects to its use in writing within ten (10) Business
Days after receipt of such material.
4.2 FUND and DISTRIBUTOR will furnish, or will cause to be furnished, to
the COMPANY, each piece of sales literature or other promotional material in
which the COMPANY or its Separate Accounts are named, at least fifteen (15)
Business Days prior to its intended use. No such material will be used if the
COMPANY objects to its use in writing within ten (10) Business Days after
receipt of such material.
4.3 FUND and its affiliates and agents shall not give any information or
make any representations on behalf of the COMPANY or concerning the COMPANY,
the Separate Accounts, or the Variable Contracts issued by the COMPANY, other
than the information or representations contained in a registration statement
or prospectus for such Variable Contracts, as such registration statement and
prospectus may be amended or supplemented from time to time, or in reports of
the Separate Accounts or reports prepared for distribution to owners of such
Variable Contracts, or in sales literature or other promotional material
approved by the COMPANY or its designee, except with the written permission of
the COMPANY.
4.4 The COMPANY and its affiliates and agents shall not give any
information or make any representations on behalf of FUND , ADVISER or
DISTRIBUTOR or concerning FUND, ADVISER or DISTRIBUTOR other than the
information or representations contained in a registration statement or
prospectus for FUND, as such registration statement and prospectus may be
amended or supplemented from time to time, or in sales literature or other
promotional material approved by FUND, ADVISER or DISTRIBUTOR or its
designee, except with the written permission of FUND, ADVISER or DISTRIBUTOR,
as the case may be.
4.5 For purposes of this Agreement, the phrase "sales literature or
other promotional material" or words of similar import include, without
limitation, advertisements (such as material published, or designed for use,
in a newspaper, magazine or other periodical, radio, television, telephone or
tape recording, videotape display, signs or billboards, motion pictures or
other public media), sales literature (such as any written communication
distributed or made generally available to customers or the public, including
brochures, circulars, research reports, market letters, form letters, seminar
texts, or reprints or excerpts of any other advertisement, sales literature,
or published article), educational or training materials or other
communications distributed or made generally available to some or all agents
or employees, registration statements, prospectuses, statements of additional
information, shareholder reports and proxy materials, and any other material
constituting sales literature or advertising under National Association of
Securities Dealers, Inc. rules, the 40 Act or the '33 Act.
Article V. POTENTIAL CONFLICTS
5.1 The parties acknowledge that FUND intends to file an application with
the SEC to request an order granting relief from various provisions of the '40
Act and the rules thereunder to the extent necessary to permit FUND shares to
be sold to and held by variable annuity and variable life insurance separate
accounts of both affiliated and unaffiliated Participating Insurance Companies
and Qualified Plans. It is anticipated that the Exemptive Order, when and if
issued, shall require FUND and each Participating Insurance Company to comply
with conditions and undertakings substantially as provided in this Section 5.
If the Exemptive Order imposes conditions materially different from those
provided for in this Section 5, the conditions and undertakings imposed by the
Exemptive Order shall govern this Agreement and the parties hereto agree to
amend this Agreement consistent with the Exemptive Order. The Fund will not
enter into a participation agreement with any other Participating Insurance
Company unless it imposes the same conditions and undertakings as are imposed
on the COMPANY hereby.
5.2 The Board will monitor FUND for the existence of any material
irreconcilable conflict between the interests of Variable Contract owners of
all separate accounts investing in FUND. An irreconcilable material conflict
may arise for a variety of reasons, which may include: (a) an action by any
state insurance regulatory authority; (b) a change in applicable federal or
state insurance, tax, or securities laws or regulations, or a public ruling,
private letter ruling or any similar action by insurance, tax or securities
regulatory authorities; (c) an administrative or judicial decision in any
relevant proceeding; (d) the manner in which the investments of FUND are being
managed; (e) a difference in voting instructions given by variable annuity and
variable life insurance Contract owners; (f) a decision by a Participating
Insurance Company to disregard the voting instructions of Variable Contract
owners and (g) if applicable, a decision by a Qualified Plan to disregard the
voting instructions of plan participants.
5.3 The COMPANY will report any potential or existing conflicts to the
Board. The COMPANY will be responsible for assisting the Board in carrying
out its duties in this regard by providing the Board with all information
reasonably necessary for the Board to consider any issues raised. The
responsibility includes, but is not limited to, an obligation by the COMPANY
to inform the Board whenever it has determined to disregard Variable Contract
owner voting instructions. These responsibilities of the COMPANY will be
carried out with a view only to the interests of the Variable Contract owners.
5.4 If a majority of the Board or majority of its disinterested
TRUSTEES, determines that a material irreconcilable conflict exists, affecting
the COMPANY, the COMPANY, at its expense and to the extent reasonably
practicable (as determined by a majority of the Board's disinterested
TRUSTEES), will take any steps necessary to remedy or eliminate the
irreconcilable material conflict, including; (a) withdrawing the assets
allocable to some or all of the Separate Accounts from FUND or any Portfolio
thereof and reinvesting those assets in a different investment medium, which
may include another Portfolio of FUND, or another investment company; (b)
submitting the question as to whether such segregation should be implemented
to a vote of all affected Variable Contract owners and as appropriate,
segregating the assets of any appropriate group (i.e variable annuity or
variable life insurance Contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the
affected Variable Contract owners the option of making such a change; and (c)
establishing a new registered management investment company (or series
thereof) or managed separate account. If a material irreconcilable conflict
arises because of the COMPANY's decision to disregard Variable Contract owner
voting instructions, and that decision represents a minority position or would
preclude a majority vote, the COMPANY may be required, at the election of FUND
to withdraw the Separate Account's investment in FUND, and no charge or
penalty will be imposed as a result of such withdrawal. The responsibility to
take such remedial action shall be carried out with a view only to the
interests of the Variable Contract owners.
For the purposes of this Section 5.4, a majority of the disinterested
members of the Board shall determine whether or not any proposed action
adequately remedies any irreconcilable material conflict but in no event will
FUND or ADVISER (or any other investment adviser of FUND) be required to
establish a new funding medium for any Variable Contract. Further, the
COMPANY shall not be required by this Section 5.4 to establish a new funding
medium for any Variable Contracts if any offer to do so has been declined by a
vote of a majority of Variable Contract owners materially and adversely
affected by the irreconcilable material conflict.
5.5 The Board's determination of the existence of an irreconcilable
material conflict and its implications shall be made known promptly and in
writing to the COMPANY.
5.6 No less than annually, the COMPANY shall submit to the Board such
reports, materials or data as the Board may reasonably request so that the
Board may fully carry out its obligations. Such reports, materials, and data
shall be submitted more frequently if deemed appropriate by the Board.
Article VI. VOTING
6.1 The COMPANY will provide pass-through voting privileges to all
Variable Contract owners so long as the SEC continues to interpret the 40 Act
as requiring pass-through voting privileges for Variable Contract owners.
Accordingly, the COMPANY, where applicable, will vote shares of the Portfolio
held in its Separate Accounts in a manner consistent with voting instructions
timely received from its Variable Contract owners. The COMPANY will be
responsible for assuring that each of its Separate Accounts that participates
in FUND calculates voting privileges in a manner consistent with other
Participating Insurance Companies. The COMPANY will vote shares for which it
has not received timely voting instructions, as well as shares it owns, in the
same proportion as its votes those shares for which it has received voting
instructions.
6.2 If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or if
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
40 Act or the rules thereunder with respect to mixed and shared funding on
terms and conditions materially different from any exemptions granted in the
Exemptive Order, then FUND, and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rule
6e-2 and Rule 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent
such Rules are applicable.
Article VII. INDEMNIFICATION
7.1 Indemnification by the COMPANY. The COMPANY agrees to indemnify and
hold harmless FUND, ADVISER and DISTRIBUTOR and each of their trustees,
directors, principals, officers, partners, employees and agents and each
person, if any, who controls FUND, ADVISER or DISTRIBUTOR within the meaning
of Section 15 of the 33 Act (collectively, the "Indemnified Parties" for
purposes of this Article VII) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the COMPANY, which consent shall not be unreasonably withheld) or litigation
(including legal and other expenses), to which the Indemnified Parties may
become subject under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions
in respect thereof) or settlements are related to the sale or acquisition of
FUND's shares or the Variable Contracts and:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the Registration Statement
or prospectus for the Variable Contracts or contained in the Variable
Contracts (or any amendment or supplement to any of the foregoing), -or arise
out of or are based upon the omission or the alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this agreement to indemnify
shall not apply as to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon and in conformity
with information furnished to the COMPANY by or on behalf of an Indemnified
Party for use in the registration statement or prospectus for the Variable
Contracts or in the Variable Contracts or sales literature (or any amendment
or supplement) or otherwise for use in connection with the sale of the
Variable Contracts or FUND shares; or
(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the registration
statement, prospectus or sales literature of FUND not supplied by the
COMPANY, or persons under its control) or wrongful conduct of the COMPANY or
persons under its control, with respect to the sale or distribution of the
Variable Contracts or FUND shares; or
(c) arise out of any untrue statement or alleged untrue statement of
a material fact contained in a registration statement, prospectus, or sales
literature of FUND or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading if
such statement or omission or such alleged statement or omission was made in
reliance upon and in conformity with information furnished to FUND by or on
behalf of the COMPANY; or
(d) arise as a result of any failure by the COMPANY to provide
substantially the services and furnish the materials under the terms of this
Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the COMPANY in this Agreement or arise
out of or result from any other material breach of this Agreement by the
COMPANY.
7.2 The COMPANY shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations or duties under this
Agreement.
7.3 The COMPANY shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the COMPANY in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the COMPANY of
any such claim shall not relieve the COMPANY from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any such action is
brought against an Indemnified Party, the COMPANY shall be entitled to
participate at its own expense in the defense of such action. The COMPANY also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the COMPANY to such party of
the COMPANY's election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
the COMPANY will not be liable to such party under this Agreement for any
legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
7.4 Indemnification by FUND. FUND agrees to indemnify and hold harmless
the COMPANY and each of its directors, officers, employees, and agents and
each person, if any, who controls the COMPANY within the meaning of Section 15
of the 33 Act (collectively, the "Indemnified Parties" for the purposes of
this Article VII) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of ADVISER
which consent shall not be unreasonably withheld) or litigation (including
legal and other expenses) to which the Indemnified Parties may become subject
under any statute, or regulation, at common law or otherwise, insofar as such
losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements are related to the sale or acquisition of FUND's
shares or the Variable Contracts and:
(a) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the registration statement
or prospectus of FUND (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, pro-vided that this
agreement to indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was made in
reliance upon and in conformity with information furnished to- FUND by or on
behalf of the COMPANY for use in the registration statement or prospectus for
FUND (or any amendment or supplement) or otherwise for use in connection with
the sale of the Variable Contracts or FUND shares; or
(b) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration statement,
prospectus or sales literature for the Variable Contracts not supplied by FUND
or persons under its control) or wrongful conduct of FUND or persons under
their control, with respect to the sale or distribution of the Variable
Contracts or FUND shares; or
(c) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a registration statement or prospectus covering the
Variable Contracts, or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, if
such statement or omission or such alleged statement or omission was made in
reliance upon and in conformity with information furnished to the COMPANY for
inclusion therein by or on behalf of FUND; or
(d) arise as a result of (i) a failure by FUND to provide substantially
the services and furnish the materials under the terms of this Agreement; or
(ii) a failure by a Portfolio(s) invested in by the Separate Account to
comply with the diversification requirements of Section 817(h) of the Code; or
(iii) a failure by a Portfolio(s) invested in by the Separate Account to
qualify as a "regulated investment company" under Subchapter M of the Code; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by FUND in this Agreement or arise out of
or result from any other material breach of this Agreement by FUND.
7.5 Indemnification by ADVISER. ADVISER agrees to indemnify and hold
harmless the Company and each of its directors, officers, employees, and
agents and each person, if any, who controls the COMPANY within the meaning of
Section 15 of the '33 Act (collectively, the "Indemnified Parties" for the
purposes of this Article VII) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
ADVISER which consent shall not be unreasonably withheld) or litigation
(including legal and other expenses) to which the Indemnified Parties may
become subject under any statute, or regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions
in respect thereof) or settlements are related to the sale or acquisitions of
FUND's shares or the Variable Contracts and:
(a) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the registration statement
or prospectus or sales literature of FUND (or any amendment or supplement to
any of the foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, provided
that this agreement to indemnify shall not apply as to any Indemnified Party
if such statement or omission or such alleged statement or omission was made
in reliance upon and in conformity with information furnished to ADVISER or
FUND by or on behalf of the COMPANY for use in the registration statement or
prospectus for FUND or in sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Variable Contracts or
FUND shares; or
(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the registration
statement, prospectus or sales literature for the Variable Contracts not
supplied by ADVISER or persons under its control) or wrongful conduct of FUND
of ADVISER or persons under their control, with respect to the sale or
distribution of the Variable Contracts or FUND shares; or
(c) arise out of and untrue statement or alleged untrue statement of
a material fact contained in a registration statement, prospectus, or sales
literature covering the Variable Contracts, or any amendment thereof or
supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, if such statement or omission or such
alleged statement or omission was made in reliance upon and in conformity with
information furnished to the COMPANY for inclusion therein by or on behalf of
FUND; or
(d) arise as a result of (i) a failure by FUND to provide
substantially the services and furnish the materials under the terms of this
Agreement; or (ii) a failure by a Portfolio(s) invested in by the Separate
Account to comply with the diversification requirements of Section 817(h) of
the Code; or (iii) a failure by a Portfolio(s) invested in by the Separate
Account to qualify as a "regulated investment company" under Subchapter M of
the Code; or
(e) arise out of or result from any material breach of any
representation an/or warranty made by FUND or ADVISER in this Agreement or
arise out of or result from any other material breach of this Agreement by
FUND or ADVISER.
7.6 FUND or ADVISER shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation to which an Indemnified Party would otherwise be subject by reason
of such Indemnified Party's willful misfeasance, bad faith, or gross
negligence in the performance of such Indemnified Party's duties or by reason
of such Indemnified Party's reckless disregard of obligations and duties under
this Agreement.
7.7 FUND or ADVISER, as the case may be, shall not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have notified FUND or
ADVISER, as the case may be, in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
claim shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any designated
agent), but failure to notify FUND or ADVISER of any such claim shall not
relieve FUND or ADVISER from any liability which it may have to the
Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, FUND or ADVISER shall be entitled to
participate at its own expense in the defense thereof. FUND or ADVISER also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from FUND or ADVISER to such
party of FUND's or ADVISER's election to assume the defense thereof, the
Indemnified Party shall bear the fees and expenses of any additional counsel
retained by it, and FUND or ADVISER will not be liable to such party under
this Agreement for any legal or other expenses subsequently incurred by such
party independently in connection with the defense thereof other than
reasonable costs of investigation.
Article VIII. TERM; TERMINATION
8.1 This Agreement shall be effective as of the date hereof and shall
continue in force until terminated in accordance with the provisions herein.
8.2 This Agreement shall terminate in accordance with the following
provisions:
(a) At the option of the COMPANY or FUND at any time from the date
hereof upon 180 days' notice, unless a shorter time is agreed to by the
parties;
(b) At the option of the COMPANY, if FUND shares are not reasonably
available to meet the requirements of the Variable Contracts as determined by
the COMPANY. Prompt notice of election to terminate shall be furnished by the
COMPANY, said termination to be effective ten days after receipt of notice
unless FUND makes available a sufficient number of shares to reasonably meet
the requirements of the Variable Contracts within said ten-day period;
(c) At the option of the COMPANY, upon the institution of formal
proceedings against FUND by the SEC, the National Association of Securities
Dealers, Inc., or any other regulatory body, the expected or anticipated
ruling, judgment or outcome of which would, in the COMPANY's reasonable
judgment, materially impair FUND's ability to meet and perform FUND's
obligations and duties hereunder. Prompt notice of election to terminate
shall be furnished by the COMPANY with said termination to be effective upon
receipt of notice;
(d) At the option of FUND, upon the institution of formal proceedings
against the COMPANY by the SEC, the National Association of Securities
Dealers, Inc., or any other regulatory body, the expected or anticipated
ruling, judgment or outcome of which would, in FUND's reasonable judgment,
materially impair the COMPANY's ability to meet and perform its obligations
and duties hereunder. Prompt notice of election to terminate shall be
furnished by FUND with said termination to be effective upon receipt of
notice;
(e) In the event FUND's shares are not registered, issued or sold in
accordance with applicable state or federal law, or such law precludes the
use of such shares as the underlying investment medium of Variable Contracts
issued or to be issued by the COMPANY. Termination shall be effective upon
such occurrence without notice;
(f) At the option of FUND if the Variable Contracts cease to qualify as
annuity contracts or life insurance contracts, as applicable, under the Code,
or if FUND reasonably believes that the Variable Contracts may fail to so
qualify. Termination shall be effective upon receipt of notice by the
COMPANY;
(g) At the option of the COMPANY, upon FUND's breach of any material
provision of this Agreement, which breach has not been cured to the
satisfaction of the COMPANY within ten days after written notice of such
breach is delivered to FUND;
(h) At the option of FUND, upon the COMPANY's breach of any material
provision of this Agreement, which breach has not been cured to the
satisfaction of FUND within ten days after written notice of such breach is
delivered to the COMPANY;
(i) At the option of FUND, if the Variable Contracts are not
registered, issued or sold in accordance with applicable federal and/or state
law. Termination shall be effective immediately upon such occurrence without
notice;
(j) In the event this Agreement is assigned without the prior written
consent of the COMPANY, FUND, and ADVISER, termination shall be effective
immediately upon such occurrence without notice.
8.3 Notwithstanding any termination of this Agreement pursuant to
Section 8.2 hereof, FUND at the option of the COMPANY will continue to make
available additional FUND shares, as provided below, pursuant to the terms and
conditions of this Agreement, for all Variable Contracts in effect on the
effective date of termination of this Agreement (hereinafter referred to as
"Existing Contracts"). Specifically, without limitation, the owners of the
Existing Contracts or the COMPANY, whichever shall have legal authority to do
so, shall be permitted to reallocate investments in FUND, redeem investments
in FUND and/or invest in FUND upon the payment of additional premiums under
the Existing Contracts.
Article IX. NOTICES
Any notice hereunder shall be given by registered or certified mail
return receipt requested to the other party at the address of such party set
forth below or at such other address as such party may from time to time
specify in writing to the other party.
If to FUND, or ADVISER.
Lord, Abbett & Co.
The GM Building - 767 Fifth Avenue
New York, New York 10153-0203
Attn: Thomas F. Konop
If to the COMPANY:
Great American Reserve Insurance Company
11815 N. Pennsylvania Street
Carmel, Indiana 46032-4572
Attention: Gregory Gloeckner
Notice shall be deemed given on the date of receipt by the addressee as
evidenced by the return receipt.
Article X. MISCELLANEOUS
10.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof
or otherwise affect their construction or effect.
10.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
10.3 If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
10.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Indiana. It
shall also be subject to the provisions of the federal securities laws and the
rules and regulations thereunder and to any orders of the SEC granting
exemptive relief therefrom and the conditions of such orders.
10.5 It is understood and expressly stipulated that neither the
shareholders of shares of any Portfolio nor the Directors or officers of FUND
or any Portfolio shall be personally liable hereunder. No Portfolio shall be
liable for the liabilities of any other Portfolio. All persons dealing with
FUND or a Portfolio must look solely to the property of FUND or that
Portfolio, respectively, for enforcement of any claims against FUND or that
Portfolio. It is also understood that each of the Portfolios shall be deemed
to be entering into a separate Agreement with the COMPANY so that it is as if
each of the Portfolios had signed a separate Agreement with the COMPANY and
that a single document is being signed simply to facilitate the execution and
administration of the Agreement.
10.6 Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the SEC, the National
Association of Securities Dealers, Inc. and state insurance regulators) and
shall permit such authorities reasonable access to its books and records in
connection with any investigation or inquiry relating to this Agreement or the
transactions contemplated hereby.
10.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to
under state and federal laws.
10.8 No provision of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by FUND,
ADVISER and the COMPANY.
IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Fund Participation Agreement as of the date and year
first above written.
FUND
By:_____________________________
Name:
Title:
ADVISER
By:_____________________________
Name:
Title:
GREAT AMERICAN RESERVE INSURANCE COMPANY
By:______________________________
Name:
Title:
APPENDIX A
FUND and its Portfolios
Lord Abbett Series Fund, Inc. Growth and Income Portfolio
APPENDIX B
Separate Accounts Selected Portfolios
Variable Annuity Account G Growth and Income Portfolio
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT made as of the ___ day of ________,, by and between
OFFITBANK VARIABLE INSURANCE FUND, INC. ("FUND"), a Maryland corporation,
OFFIT FUNDS DISTRIBUTOR, INC. ("DISTRIBUTOR"), a Massachusetts corporation,
OFFITBANK ("ADVISER"), a New York trust company, and GREAT AMERICAN RESERVE
INSURANCE COMPANY ("COMPANY"), a life insurance company organized under the
laws of the State of Texas and GARCO EQUITY SALES, INC. ("UNDERWRITER"), a
Texas corporation.
WHEREAS, FUND is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, as amended (the " 40 Act"),
as an open-end, diversified management investment company; and
WHEREAS, FUND is organized as a series fund comprised of several
Portfolios ("Portfolios"), those currently available are listed on Appendix A
hereto; and
WHEREAS, FUND was organized to act as the funding vehicle for certain
variable life insurance and/or variable annuity contracts ("Variable
Contracts") offered by life insurance companies through separate accounts of
such life insurance companies ("Participating Insurance Companies"); and
WHEREAS, FUND has received an order from the SEC, granting Participating
Insurance Companies and their separate accounts exemptions from the provisions
of Sections 9(a), 13(a), 15(a) and 15(b) of the 40 Act, and Rules 6e-2(b)(15)
and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the
Portfolios of the FUND to be sold to and held by variable annuity and variable
life insurance separate accounts of both affiliated and unaffiliated
Participating Insurance Companies ("Exemptive Order"); and
WHEREAS, the COMPANY has established or will establish one or more
separate accounts ("Separate Accounts") to offer Variable Contracts and is
desirous of having FUND as one of the underlying funding vehicles for such
Variable Contracts; and
WHEREAS, the UNDERWRITER is registered with the SEC as a broker-dealer
under the Securities Exchange Act of 1934, as amended and acts as the FUND's
principal underwriter;
WHEREAS, DISTRIBUTOR is registered with the SEC as a broker-dealer under
the Securities Exchange Act of 1934, as amended and acts as the FUND's
principal underwriter; and
WHEREAS, ADVISER acts as the Fund's investment adviser; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the COMPANY intends to purchase shares of FUND to fund the
aforementioned Variable Contracts and FUND is authorized to sell such shares
to the COMPANY at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the COMPANY,
UNDERWRITER, FUND, DISTRIBUTOR and ADVISER agree as follows:
Article I. SALE OF FUND SHARES
1.1 FUND agrees to make available to the Separate Accounts of the
COMPANY shares of the selected Portfolios as listed on Appendix B for
investment of purchase payments of Variable Contracts allocated to the
designated Separate Accounts as provided in FUND's Registration Statement.
1.2 FUND agrees to sell to the COMPANY those shares of the selected
Portfolios of FUND which the COMPANY orders, executing such orders on a daily
basis at the net asset value next computed after receipt by FUND or its
designee of the order for the shares of FUND. For purposes of this Section
1.2, the COMPANY shall be the designee of FUND for receipt of such orders from
the designated Separate Account and receipt by such designee shall constitute
receipt by FUND; provided that the COMPANY receives the order by 4:00 p.m. New
York time and FUND receives notice from the COMPANY by telephone or facsimile
(or by such other means as FUND and the COMPANY may agree in writing) of such
order by 9:00 a.m. New York time on the next following Business Day.
"Business Day" shall mean any day on which the New York Stock Exchange is open
for trading and on which FUND calculates its net asset value pursuant to the
rules of the SEC.
1.3 FUND agrees to redeem on the COMPANY's request, any full or
fractional shares of FUND held by the COMPANY, executing such requests on a
daily basis at the net asset value next computed after receipt by FUND or its
designee of the request for redemption, in accordance with the provisions of
this agreement and FUND's Registration Statement. For purposes of this
Section 1.3, the COMPANY shall be the designee of FUND for receipt of requests
for redemption from the designated Separate Account and receipt by such
designee shall constitute receipt by FUND; provided that the COMPANY receives
the request for redemption by 4:00 p.m. New York time and FUND receives notice
from the COMPANY by telephone or facsimile (or by such other means as FUND and
the COMPANY may agree in writing) of such request for redemption by 9:00 a.m.
New York time on the next following Business Day.
1.4 FUND shall furnish, on or before the ex-dividend date, notice to the
COMPANY of any income dividends or capital gain distributions payable on the
shares of any Portfolio of FUND. The COMPANY hereby elects to receive all such
income dividends and capital gain distributions as are payable on a
Portfolio's shares in additional shares of the Portfolio. FUND shall notify
the COMPANY or its designee of the number of shares so issued as payment of
such dividends and distributions.
1.5 FUND shall make the net asset value per share for the selected
Portfolio(s) available to the COMPANY on a daily basis as soon as reasonably
practicable after the net asset value per share is calculated but shall use
its best efforts to make such net asset value available by 6:30 p.m. New York
time. In the event that FUND is unable to meet the 6:30 p.m. time stated
herein, it shall provide additional time for the COMPANY to place orders for
the purchase and redemption of shares. Such additional time shall be equal to
the additional time which FUND takes to make the net asset value available to
the COMPANY. If FUND provides the COMPANY with materially incorrect share net
asset value information through no fault of the COMPANY, the COMPANY on behalf
of the Separate Accounts, shall be entitled to an adjustment to the number of
shares purchased or redeemed to reflect the correct share net asset value.
Any material error in the calculation of net asset value per share, dividend
or capital gain information shall be reported promptly upon discovery to the
COMPANY.
1.6 At the end of each Business Day, the COMPANY shall use the
information described in Section 1.5 to calculate Separate Account unit values
for the day. Using these unit values, the COMPANY shall process each such
Business Day's Separate Account transactions based on requests and premiums
received by it by the close of trading on the floor of the New York Stock
Exchange (currently 4:00 p.m. New York time) to determine the net dollar
amount of FUND shares which shall be purchased or redeemed at that day's
closing net asset value per share. The net purchase or redemption orders so
determined shall be transmitted to FUND by the COMPANY by 9:00 a.m. New York
Time on the Business Day next following the COMPANY's receipt of such requests
and premiums in accordance with the terms of Sections 1.2 and 1.3 hereof.
1.7 If the COMPANY's order requests the purchase of FUND shares, the
COMPANY shall pay for such purchase by wiring federal funds to FUND or its
designated custodial account on the day the order is transmitted by the
COMPANY. If the COMPANY's order requests a net redemption resulting in a
payment of redemption proceeds to the COMPANY, FUND shall use its best efforts
to wire the redemption proceeds to the COMPANY by the next Business Day,
unless doing so would require FUND to dispose of Portfolio securities or
otherwise incur additional costs. In any event, proceeds shall be wired to
the COMPANY within three Business Days or such longer period permitted by the
'40 Act or the rules, orders or regulations thereunder and FUND shall notify
the person designated in writing by the COMPANY as the recipient for such
notice of such delay by 3:00 p.m. New York Time the same Business Day that the
COMPANY transmits the redemption order to FUND. If the COMPANY's order
requests the application of redemption proceeds from the redemption of shares
to the purchase of shares of another Portfolio as shown on Appendix B, FUND
shall so apply such proceeds the same Business Day that the COMPANY transmits
such order to FUND.
1.8 FUND agrees that all shares of the Portfolios of FUND will be sold
only to Participating Insurance Companies which have agreed to participate in
FUND to fund their Separate Accounts and/or to Qualified Plans, all in
accordance with the requirements of Section 817(h) of the Internal Revenue
Code of 1986, as amended ("Code") and Treasury Regulation 1.817-5. Shares of
the Portfolios of FUND will not be sold directly to the general public.
1.9 FUND may refuse to sell shares of any Portfolio to any person, or
suspend or terminate the offering of the shares of any Portfolio if such
action is required by law or by regulatory authorities having jurisdiction or
is, in the sole discretion of the Board of Directors of the FUND (the
"Board"), acting in good faith and in light of its duties under federal and
any applicable state laws, deemed necessary, desirable or appropriate and in
the best interests of the shareholders of such Portfolios.
1.10 Issuance and transfer of Portfolio shares will be by book entry
only. Stock certificates will not be issued to the COMPANY or the Separate
Accounts. Shares ordered from Portfolio will be recorded in appropriate book
entry titles for the Separate Accounts.
Article II. REPRESENTATIONS AND WARRANTIES
2.1 The COMPANY represents and warrants that it is an insurance company
duly organized and in good standing under the laws of Texas and that it has
legally and validly established each Separate Account as a segregated asset
account under such laws.
2.2 The COMPANY represents and warrants that it has registered or, prior
to any issuance or sale of the Variable Contracts, will register each Separate
Account as a unit investment trust ("UIT") in accordance with the provisions
of the 40 Act and cause each Separate Account to remain so registered to
serve as a segregated asset account for the Variable Contracts, unless an
exemption from registration is available.
2.3 The COMPANY represents and warrants that the Variable Contracts will
be registered under the Securities Act of 1933 (the " 33 Act") unless an
exemption from registration is available prior to any issuance or sale of the
Variable Contracts and that the Variable Contracts will be issued and sold in
compliance in all material respects with all applicable federal and state laws
and further that the sale of the Variable Contracts shall comply in all
material respects with state insurance law suitability requirements.
2.4 The COMPANY represents and warrants that the Variable Contracts are
currently and at the time of issuance will be treated as life insurance,
endowment or annuity contracts under applicable provisions of the Code, that
it will maintain such treatment and that it will notify FUND immediately upon
having a reasonable basis for believing that the Variable Contracts have
ceased to be so treated or that they might not be so treated in the future.
2.5 FUND represents and warrants that the Portfolio shares offered and
sold pursuant to this Agreement will be registered under the '33 Act to the
extent required by that Act and sold in accordance with all applicable federal
and state laws, and FUND shall be registered under the 40 Act to the extent
required by that Act, prior to and at the time of any issuance or sale of such
shares. FUND, subject to Section 1.9 above, shall amend its registration
statement under the 33 Act and the 40 Act from time to time as required in
order to effect the continuous offering of its shares. FUND shall register
and qualify its shares for sale in accordance with the laws of the various
states only if and to the extent deemed advisable by FUND.
2.6 FUND represents and warrants that each Portfolio will comply with
the diversification requirements set forth in Section 817(h) of the Code, and
the rules and regulations thereunder, including without limitation Treasury
Regulation 1.817-5, and will notify the COMPANY immediately upon having a
reasonable basis for believing any Portfolio has ceased to comply or might not
so comply and will immediately take all reasonable steps to adequately
diversify the Portfolio to achieve compliance.
2.7 FUND represents and warrants that each Portfolio invested in by the
Separate Account intends to elect to be treated as a "regulated investment
company" under Subchapter M of the Code, and to qualify for such treatment for
each taxable year and will notify the COMPANY immediately upon having a
reasonable basis for believing it has ceased to so qualify or might not so
qualify in the future.
2.8 DISTRIBUTOR represents and warrants that it is and will be a member
in good standing of the National Association of Securities Dealers, Inc.
("NASD") and is and will be registered as a broker-dealer with the SEC.
DISTRIBUTOR further represents that it will sell and distribute Portfolio
shares in accordance with all applicable state and federal laws and
regulations, including without limitation the '33 Act, the '34 Act and the '40
Act. DISTRIBUTOR represents that its operations are and shall at all times
remain in material compliance with the laws of the State of Delaware to the
extent required to perform this Agreement.
2.9 DISTRIBUTOR represents and warrants that it is and will remain duly
registered and licensed in all material respects under all applicable federal
and state securities laws and shall perform its obligations hereunder in
compliance in all material respects with any applicable state and federal
laws.
2.10 ADVISER represents and warrants that it is and will remain duly
registered and licensed in all material respects under all applicable federal
and state laws and shall perform its obligations hereunder in compliance in
all material respects with any applicable state and federal laws.
2.11 UNDERWRITER represents and warrants that it is and will be a member
in good standing of the NASD and is and will be registered as a broker-dealer
with the SEC. UNDERWRITER further represents that it will sell and distribute
the Variable Contracts in accordance with all applicable state and federal
laws and regulations, including without limitation the '33 Act, the '34 Act
and the '40 Act. UNDERWRITER represents that its operations are and shall at
all times remain in material compliance with the laws of the State of Texas to
the extent required to perform this Agreement.
2.12 UNDERWRITER represents and warrants that it is and will remain dully
registered and licensed in all material respects under all applicable federal
and state securities laws and shall perform its obligations hereunder in
compliance in all material respects with any applicable state and federal
laws.
Article III. PROSPECTUS AND PROXY STATEMENTS
3.1 FUND shall prepare and be responsible for filing with the SEC and any
state regulators requiring such filing all shareholder reports, notices, proxy
materials (or similar materials such as voting instruction solicitation
materials), prospectuses and statements of additional information of FUND.
FUND shall bear the costs of registration and qualification of shares of the
Portfolios, preparation and filing of the documents listed in this Section 3.1
and all taxes and filing fees to which an issuer is subject on the issuance
and transfer of its shares.
3.2 At least annually, FUND or its designee shall provide the COMPANY,
free of charge, with as many copies of the current prospectus for the shares
of the Portfolios as the COMPANY may reasonably request for distribution to
existing Variable Contract owners whose Variable Contracts are funded by such
shares. FUND or its designee shall provide the COMPANY, at the COMPANY's
expense, with as many copies of the current prospectus for the shares as the
COMPANY may reasonably request for distribution to prospective purchasers of
Variable Contracts. If requested by the COMPANY in lieu thereof, FUND or its
designee shall provide such documentation (including a "camera ready" copy of
the new prospectus as set in type or, at the request of the COMPANY, as a
diskette in the form sent to the financial printer) and other assistance as is
reasonably necessary in order for the parties hereto once a year (or more
frequently if the prospectus for the shares is supplemented or amended) to
have the prospectus for the Variable Contracts and the prospectus for the FUND
shares printed together in one document. The expenses of such printing will be
apportioned between (a) the COMPANY and (b) FUND in proportion to the number
of pages of the Variable Contract and shares' prospectus, taking account of
other relevant factors affecting the expense of printing, such as covers,
columns, graphs and charts; FUND to bear the cost of printing the shares'
prospectus portion of such document for distribution only to owners of
existing Variable Contracts funded by the FUND shares and the COMPANY to bear
the expense of printing the portion of such documents relating to the Separate
Account; provided, however, the COMPANY shall bear all printing expenses of
such combined documents where used for distribution to prospective purchasers
or to owners of existing Variable Contracts not funded by the shares. In the
event that the COMPANY requests that FUND or its designee provide FUND's
prospectus in a "camera ready" or diskette format, FUND shall be responsible
for providing the prospectus in the format in which it is accustomed to
formatting prospectuses and shall bear the expense of providing the prospectus
in such format (e.g. typesetting expenses), and the COMPANY shall bear the
expense of adjusting or changing the format to conform with any of its
prospectuses.
3.3 FUND will provide the COMPANY with at least one complete copy of all
prospectuses, statements of additional information, annual and semi-annual
reports, proxy statements, exemptive applications and all amendments or
supplements to any of the above that relate to the Portfolios promptly after
the filing of each such document with the SEC or other regulatory authority.
The COMPANY will provide FUND with at least one complete copy of all
prospectuses, statements of additional information, annual and semi-annual
reports, proxy statements, exemptive applications and all amendments or
supplements to any of the above that relate to a Separate Account promptly
after the filing of each such document with the SEC or other regulatory
authority.
Article IV. SALES MATERIALS
4.1 The COMPANY will furnish, or will cause to be furnished, to FUND and
DISTRIBUTOR, each piece of sales literature or other promotional material in
which FUND or DISTRIBUTOR is named, at least fifteen (15) Business Days prior
to its intended use. No such material will be used if FUND or DISTRIBUTOR
objects to its use in writing within ten (10) Business Days after receipt of
such material.
4.2 FUND and DISTRIBUTOR will furnish, or will cause to be furnished, to
the COMPANY, each piece of sales literature or other promotional material in
which the COMPANY or its Separate Accounts are named, at least fifteen (15)
Business Days prior to its intended use. No such material will be used if the
COMPANY objects to its use in writing within ten (10) Business Days after
receipt of such material.
4.3 FUND and its affiliates and agents shall not give any information or
make any representations on behalf of the COMPANY or concerning the COMPANY,
the Separate Accounts, or the Variable Contracts issued by the COMPANY, other
than the information or representations contained in a registration statement
or prospectus for such Variable Contracts, as such registration statement and
prospectus may be amended or supplemented from time to time, or in reports of
the Separate Accounts or reports prepared for distribution to owners of such
Variable Contracts, or in sales literature or other promotional material
approved by the COMPANY or its designee, except with the written permission of
the COMPANY.
4.4 The COMPANY and its affiliates and agents shall not give any
information or make any representations on behalf of FUND or concerning FUND
other than the information or representations contained in a registration
statement or prospectus for FUND, as such registration statement and
prospectus may be amended or supplemented from time to time, or in sales
literature or other promotional material approved by FUND or its designee,
except with the written permission of FUND.
4.5 For purposes of this Agreement, the phrase "sales literature or
other promotional material" or words of similar import include, without
limitation, advertisements (such as material published, or designed for use,
in a newspaper, magazine or other periodical, radio, television, telephone or
tape recording, videotape display, signs or billboards, motion pictures or
other public media), sales literature (such as any written communication
distributed or made generally available to customers or the public, including
brochures, circulars, research reports, market letters, form letters, seminar
texts, or reprints or excerpts of any other advertisement, sales literature,
or published article), educational or training materials or other
communications distributed or made generally available to some or all agents
or employees (including so-called "broker only" materials), registration
statements, prospectuses, statements of additional information, shareholder
reports and proxy materials, and any other material constituting sales
literature or advertising under National Association of Securities Dealers,
Inc. rules, the 40 Act or the '33 Act.
Article V. POTENTIAL CONFLICTS
5.1 The FUND will not enter into a participation agreement with any other
Participating Insurance Company unless it imposes the same conditions and
undertakings as are imposed on the COMPANY under Articles V and VI hereof.
5.2 The Board will monitor FUND for the existence of any material
irreconcilable conflict between the interests of Variable Contract owners of
all separate accounts investing in FUND. An irreconcilable material conflict
may arise for a variety of reasons, which may include: (a) an action by any
state insurance regulatory authority; (b) a change in applicable federal or
state insurance, tax, or securities laws or regulations, or a public ruling,
private letter ruling or any similar action by insurance, tax or securities
regulatory authorities; (c) an administrative or judicial decision in any
relevant proceeding; (d) the manner in which the investments of FUND are being
managed; (e) a difference in voting instructions given by variable annuity and
variable life insurance Contract owners; and (f) a decision by a Participating
Insurance Company to disregard the voting instructions of Variable Contract
owners.
5.3 The COMPANY will report any potential or existing conflicts to the
Board. The COMPANY will be responsible for assisting the Board in carrying
out its duties in this regard by providing the Board with all information
reasonably necessary for the Board to consider any issues raised. The
responsibility includes, but is not limited to, an obligation by the COMPANY
to inform the Board whenever it has determined to disregard Variable Contract
owner voting instructions. These responsibilities of the COMPANY will be
carried out with a view only to the interests of the Variable Contract owners.
5.4 If a majority of the Board or majority of its disinterested
Directors, determines that a material irreconcilable conflict exists,
affecting the COMPANY, the COMPANY, at its expense and to the extent
reasonably practicable (as determined by a majority of the Board's
disinterested Directors), will take any steps necessary to remedy or eliminate
the irreconcilable material conflict, including; (a) withdrawing the assets
allocable to some or all of the Separate Accounts from FUND or any Portfolio
thereof and reinvesting those assets in a different investment medium, which
may include another Portfolio of FUND, or another investment company; (b)
submitting the question as to whether such segregation should be implemented
to a vote of all affected Variable Contract owners and as appropriate,
segregating the assets of any appropriate group (i.e variable annuity or
variable life insurance Contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the
affected Variable Contract owners the option of making such a change; and (c)
establishing a new registered management investment company (or series
thereof) or managed separate account. If a material irreconcilable conflict
arises because of the COMPANY's decision to disregard Variable Contract owner
voting instructions, and that decision represents a minority position or would
preclude a majority vote, or because a particular state insurance regulator's
decision applicable to the Company conflicts with that of the majority of
other state regulators, the COMPANY may be required, at the election of FUND
to withdraw the Separate Account's investment in FUND, and no charge or
penalty will be imposed as a result of such withdrawal. The responsibility to
take such remedial action shall be carried out with a view only to the
interests of the Variable Contract owners.
For the purposes of this Section 5.4, a majority of the disinterested
members of the Board shall determine whether or not any proposed action
adequately remedies any irreconcilable material conflict but in no event will
FUND or its affiliates (including any investment adviser of FUND) be required
to establish a new funding medium for any Variable Contract. Further, the
COMPANY shall not be required by this Section 5.4 to establish a new funding
medium for any Variable Contracts if any offer to do so has been declined by a
vote of a majority of Variable Contract owners materially and adversely
affected by the irreconcilable material conflict. In the event that the Board
determines that any proposed action does not adequately remedy any
irreconcilable material conflict, then the Company shall withdraw the Separate
Account's investment in the FUND and terminate this Agreement with respect to
such Account within six (6) months after the Board informs the Company in
writing of the foregoing determination; provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
5.5 The Board's determination of the existence of an irreconcilable
material conflict and its implications shall be made known promptly and in
writing to the COMPANY.
5.6 No less than annually, the COMPANY shall submit to the Board such
reports, materials or data as the Board may reasonably request so that the
Board may fully carry out its obligations. Such reports, materials, and data
shall be submitted more frequently if deemed appropriate by the Board.
Article VI. VOTING
6.1 The COMPANY will provide pass-through voting privileges to all
Variable Contract owners so long as the SEC continues to interpret the 40 Act
as requiring pass-through voting privileges for Variable Contract owners.
Accordingly, the COMPANY, where applicable, will vote shares of the Portfolio
held in its Separate Accounts in a manner consistent with voting instructions
timely received from its Variable Contract owners. The COMPANY will be
responsible for assuring that each of its Separate Accounts that participates
in FUND calculates voting privileges in a manner consistent with other
Participating Insurance Companies. The COMPANY will vote shares for which it
has not received timely voting instructions, as well as shares it owns, in the
same proportion as its votes those shares for which it has received voting
instructions.
6.2 The FUND will comply with all provisions of the '40 Act requiring
voting by shareholders, and in particular the FUND will either provide for
annual meetings or comply with Section 16(c) of the '40 Act (although the FUND
is not one of the trusts described in Section 16(c) of that Act) as well as
with Sections 16(a) and, if and when applicable, Section 16(b). Further, the
FUND will act in accordance with the SEC's interpretation of the requirements
of Section 16(a) with respect to periodic elections of Directors and with
whatever rules the Commission may promulgate with respect thereto.
6.3 If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or if
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
40 Act or the rules thereunder with respect to mixed and shared funding on
terms and conditions materially different from any exemptions granted in the
Exemptive Order, then FUND, and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rule
6e-2 and Rule 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent
such Rules are applicable and Articles V and VI hereof shall continue in
effect only to the extent that terms and conditions substantially similar
thereto are contained in such Rule(s) as so amended or adopted
Article VII. INDEMNIFICATION
7.1 Indemnification by the COMPANY. The COMPANY agrees to indemnify and
hold harmless FUND, DISTRIBUTOR and ADVISER and each of their respective
directors, principals, officers, employees and agents and each person, if any,
who controls FUND, DISTRIBUTOR or ADVISER within the meaning of Section 15 of
the 33 Act (collectively, the "Indemnified Parties" for purposes of this
Article VII) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the COMPANY,
which consent shall not be unreasonably withheld) or litigation (including
reasonable legal and other expenses), to which the Indemnified Parties may
become subject under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions
in respect thereof) or settlements are related to the sale or acquisition of
FUND's shares or the Variable Contracts and:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the Registration Statement
or prospectus for the Variable Contracts or contained in the Variable
Contracts (or any amendment or supplement to any of the foregoing), or arise
out of or are based upon the omission or the alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this agreement to indemnify
shall not apply as to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon and in conformity
with information furnished to the COMPANY by or on behalf of FUND for use in
the registration statement or prospectus for the Variable Contracts or in the
Variable Contracts or sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Variable Contracts or
FUND shares; or
(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the registration
statement, prospectus or sales literature of FUND not supplied by the COMPANY,
or persons under its control) or wrongful conduct of the COMPANY or the
UNDERWRITER or persons under their respective control, with respect to the
sale or distribution of the Variable Contracts or FUND shares; or
(c) arise out of any untrue statement or alleged untrue statement of
a material fact contained in a registration statement, prospectus, or sales
literature of FUND or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading if
such statement or omission or such alleged statement or omission was made in
reliance upon and in conformity with information furnished to FUND by or on
behalf of the COMPANY; or
(d) arise as a result of any failure by the COMPANY or the
UNDERWRITER to provide substantially the services and furnish the materials
under the terms of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the COMPANY or the UNDERWRITER in this
Agreement or arise out of or result from any other material breach of this
Agreement by the COMPANY.
7.2 The COMPANY shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations or duties under this
Agreement.
7.3 The COMPANY shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the COMPANY in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the COMPANY of
any such claim shall not relieve the COMPANY from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any such action is
brought against an Indemnified Party, the COMPANY shall be entitled to
participate at its own expense in the defense of such action. The COMPANY also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the COMPANY to such party of
the COMPANY's election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
the COMPANY will not be liable to such party under this Agreement for any
legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
7.4 Indemnification by DISTRIBUTOR. DISTRIBUTOR agrees to indemnify and
hold harmless the COMPANY and the UNDERWRITER and each of their respective
directors, officers, employees, and agents and each person, if any, who
controls the COMPANY or the UNDERWRITER within the meaning of Section 15 of
the 33 Act (collectively, the "Indemnified Parties" for the purposes of this
Article VII) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of DISTRIBUTOR
which consent shall not be unreasonably withheld) or litigation (including
reasonable legal and other expenses) to which the Indemnified Parties may
become subject under any statute, or regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions
in respect thereof) or settlements are related to the sale or acquisition of
FUND's shares or the Variable Contracts and:
(a) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the registration statement
or prospectus or sales literature of FUND (or any amendment or supplement to
any of the foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, provided
that this agreement to indemnify shall not apply as to any Indemnified Party
if such statement or omission or such alleged statement or omission was made
in reliance upon and in conformity with information furnished to DISTRIBUTOR
or FUND by or on behalf of the COMPANY for use in the registration statement
or prospectus for FUND or in sales literature (or any amendment or supplement)
or otherwise for use in connection with the sale of the Variable contracts or
FUND shares; or
(b) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration statement,
prospectus or sales literature for the Variable Contracts not supplied by
DISTRIBUTOR or persons under its control) or wrongful conduct of FUND or
DISTRIBUTOR or persons under their control, with respect to the sale or
distribution of the Variable Contracts or FUND shares; or
(c) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a registration statement, prospectus, or sales
literature covering the Variable Contracts, or any amendment thereof or
supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, if such statement or omission or such
alleged statement or omission was made in reliance upon and in conformity with
information furnished to the COMPANY for inclusion therein by or on behalf of
FUND; or
(d) except as set forth in section 7.7 below, arise out of or result
from any material breach of any representation and/or warranty made by FUND or
DISTRIBUTOR in this Agreement or arise out of or result from any other
material breach of this Agreement by FUND or DISTRIBUTOR.
7.5 DISTRIBUTOR shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation to
which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations and duties under this
Agreement.
7.6 DISTRIBUTOR shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified DISTRIBUTOR in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify DISTRIBUTOR of
any such claim shall not relieve DISTRIBUTOR from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, DISTRIBUTOR shall be entitled to
participate at its own expense in the defense thereof. DISTRIBUTOR also shall
be entitled to assume the defense thereof, with counsel satisfactory to the
party named in the action. After notice from DISTRIBUTOR to such party of
DISTRIBUTOR's election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
DISTRIBUTOR will not be liable to such party under this Agreement for any
legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
7.7 In no event shall the DISTRIBUTOR be liable under the indemnification
provisions contained in this agreement to any individual or entity, including
without limitation, the COMPANY, the UNDERWRITER, or any Contract owner, with
respect to any losses, claims, damages, liabilities or expenses that arise out
of or result from (i) the failure by the FUND or any Portfolio to qualify or
maintain its qualification as a regulated investment company under Subchapter
M of the Code, or (ii) the failure by the FUND or any Portfolio to comply with
the diversification requirements of Section 817(h) of the Code.
7.8 Indemnification by ADVISER. ADVISER agrees to indemnify and hold
harmless the COMPANY and the UNDERWRITER and each of their directors,
officers, employees, and agents and each person, if any, who controls the
COMPANY or the UNDERWRITER within the meaning of Section 15 of the 33 Act
(collectively, the "Indemnified Parties" for the purposes of this Article VII)
against any and all losses, claims, damages, liabilities (including amounts
paid in settlement) or litigation (including reasonable legal and other
expenses) to which the Indemnified Parties may become subject under any
statute, or regulation, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of FUND's shares or the
Variable Contracts and arise as a result of (a) a failure by a Portfolio(s)
invested in by the Separate Account to comply with the diversification
requirements of Section 817(h) of the Code; or (b) a failure by a Portfolio(s)
invested in by the Separate Account to qualify as a "regulated investment
company" under Subchapter M of the Code.
7.9 ADVISER shall not be liable under this indemnification provision with
respect to any losses, claims, damages, liabilities or litigation to which an
Indemnified Party would otherwise be subject by reason of such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement.
7.10 ADVISER shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party under Section
7.8(b), unless such Indemnified Party shall have notified ADVISER in writing
within a reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify ADVISER of any
such claim shall not relieve ADVISER from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, ADVISER shall be entitled to participate at
its own expense in the defense thereof. ADVISER also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in
the action. After notice from ADVISER to such party of ADVISER's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and ADVISER will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the
defense thereof other than reasonable costs of investigation.
7.11 The COMPANY agrees that if the Internal Revenue Service ("IRS")
asserts in writing in connection with any governmental audit or review of the
COMPANY or, to the COMPANY's knowledge, of any Contract owner, annuitant,
beneficiary or participant under a group Contract (collectively,
"Participants"), that any Portfolio has failed to comply with the
diversification requirements of section 817(h) of the Code or the COMPANY
otherwise becomes aware of any facts that could give rise to any claim against
the FUND or its affiliates as a result of such a failure or alleged failure:
(a) the COMPANY shall promptly notify the ADVISER and FUND of such
assertion or potential claim;
(b) the COMPANY shall consult with the ADVISER and FUND as to how to
minimize any liability that may arise as a result of such failure or alleged
failure;
(c) the COMPANY shall use its best efforts to minimize any liability of
the FUND or its affiliates resulting from such failure, including, without
limitation, demonstrating, pursuant to Treasury Regulations Section
1.817-5(a)(2), that such failure was inadvertent;
(d) the COMPANY shall permit the FUND, ADVISER, their respective
affiliates and legal and accounting advisors to participate in any
conferences, settlement discussions or other administrative or judicial
proceedings or contests (including judicial appeals thereof) with the IRS, any
Participant or any other claimant regarding any claims that could give rise to
liability to the FUND or its affiliates as a result of such a failure or
alleged failure;
(e) any written materials to be submitted by the COMPANY to the IRS, any
Participant or any other claimant in connection with any of the foregoing
proceedings or contests (including, without limitation, any such materials to
be submitted to the IRS pursuant to Treasury Regulations Section
1.817-5(a)(2)), (a) shall be provided by the COMPANY to the ADVISER (together
with any supporting information or analysis) at least ten (10) business days
prior to the day on which such proposed materials are to be submitted and (b)
such materials (other than books and records of the COMPANY) shall not be
submitted by the COMPANY to any such person without the express written
consent of the ADVISER which shall not be unreasonably withheld;
(f) the COMPANY shall provide the FUND, ADVISER, or their respective
affiliates and legal and accounting advisors with such cooperation as the
ADVISER shall reasonably request (including, without limitation, by permitting
the FUND, ADVISER and their respective legal and accounting advisors to review
the relevant books and records of the COMPANY) in order to facilitate review
by the FUND, ADVISER or their respective advisors of any written submissions
provided to it pursuant to the preceding clause or its assessments of the
validity or amount of any claim against the FUND or its affiliates arising
from such a failure or alleged failure;
(g) the COMPANY shall not with respect to any claim of the IRS or any
Participant that would give rise to a claim against the FUND or its affiliates
(a) compromise or settle any claim, (b) accept any adjustment on audit, or (c)
forego any allowable administrative or judicial appeals, without the express
written consent of the FUND, ADVISER or their respective affiliates, which
shall not be unreasonably withheld, provided that the COMPANY shall not be
required to appeal any adverse judicial decision unless the FUND, ADVISER or
their respective affiliates shall have provided an opinion of independent
counsel to the effect that a reasonable basis exists for taking such appeal;
and
(h) the FUND, ADVISER and their respective affiliates shall have no
liability as a result of such failure or alleged failure if the COMPANY fails
to comply with any of the foregoing clauses (a) through (g), and such failure
could be shown to have materially contributed to the liability.
Should the FUND, ADVISER or any of their respective affiliates refuse to
give its written consent to any compromise or settlement of any claim or
liability hereunder, the COMPANY may, in its discretion, authorize the FUND,
ADVISER or their respective affiliates to act in the name of the COMPANY in,
and to control the conduct of, such conferences, discussions, proceedings,
contests or appeals and all administrative or judicial appeals thereof, and in
that event the FUND, ADVISER or their respective affiliates shall bear the
fees and expenses associated with the conduct of the proceedings that it is so
authorized to control. As used in this Agreement, the term "affiliates" shall
have the same meaning as "affiliated person" as defined in Section 2(a)(3) of
the 1940 Act.
7.12 In no event shall the DISTRIBUTOR or the ADVISER be liable under
the indemnification provisions contained in this agreement to any individual
or entity, including without limitation, the COMPANY, the UNDERWRITER, or any
Contract owner, with respect to any losses, claims, damages, liabilities or
expenses that arise out of or result from (i) a breach of any representation,
warranty, and/or covenant made by any Participating Insurance Company under an
agreement containing substantially similar representations, warranties and
covenants; (ii) the failure by the COMPANY or any Participating Insurance
Company to maintain its segregated asset account (which invests in any
Portfolio) as a legally and validly established segregated asset account under
applicable state law and as a duly registered unit investment trust under the
provisions of the 1940 Act (unless exempt therefrom); or (iii) the failure by
the COMPANY or any Participating Insurance Company to maintain its variable
annuity and/or variable life insurance contracts (with respect to which any
Portfolio serves as an underlying funding vehicle) as life insurance,
endowment or annuity contracts under applicable provisions of the Code.
7.13 The indemnification undertakings set forth in this Article VII are
in addition to (but not duplicative of) any other liability the parties may
have under this Agreement.
Article VIII. TERM; TERMINATION
8.1 This Agreement shall be effective as of the date hereof and shall
continue in force until terminated in accordance with the provisions herein.
8.2 This Agreement shall terminate in accordance with the following
provisions:
(a) At the option of the COMPANY, FUND, DISTRIBUTOR, ADVISER or
UNDERWRITER, at any time from the date hereof upon 180 days' notice, unless a
shorter time is agreed to by the parties;
(b) At the option of the COMPANY, if FUND shares are not reasonably
available to meet the requirements of the Variable Contracts as determined by
the COMPANY. Prompt notice of election to terminate shall be furnished by the
COMPANY, said termination to be effective ten days after receipt of notice
unless FUND makes available a sufficient number of shares to reasonably meet
the requirements of the Variable Contracts within said ten-day period;
(c) At the option of the COMPANY, upon the institution of formal
proceedings against FUND by the SEC, the NASD, or any other regulatory body,
the expected or anticipated ruling, judgment or outcome of which would, in the
COMPANY's reasonable judgment, materially impair FUND's ability to meet and
perform FUND's obligations and duties hereunder. Prompt notice of election to
terminate shall be furnished by the COMPANY with said termination to be
effective upon receipt of notice;
(d) At the option of FUND or the DISTRIBUTOR, upon the institution of
formal proceedings against the COMPANY by the SEC, the National Association of
Securities Dealers, Inc., or any other regulatory body, the expected or
anticipated ruling, judgment or outcome of which would, in FUND's reasonable
judgment, materially impair the COMPANY's ability to meet and perform its
obligations and duties hereunder. Prompt notice of election to terminate
shall be furnished by FUND with said termination to be effective upon receipt
of notice;
(e) In the event FUND's shares are not registered, issued or sold in
accordance with applicable state or federal law, or such law precludes the use
of such shares as the underlying investment medium of Variable Contracts
issued or to be issued by the COMPANY. Termination shall be effective upon
such occurrence without notice;
(f) At the option of FUND if the Variable Contracts cease to qualify as
annuity contracts or life insurance contracts, as applicable, under the Code,
or if FUND reasonably believes that the Variable Contracts may fail to so
qualify. Termination shall be effective upon receipt of notice by the
COMPANY;
(g) At the option of the COMPANY, upon FUND's breach of any material
provision of this Agreement, which breach has not been cured to the
satisfaction of the COMPANY within ten days after written notice of such
breach is delivered to FUND;
(h) At the option of FUND, upon the COMPANY's breach of any material
provision of this Agreement, which breach has not been cured to the
satisfaction of FUND within ten days after written notice of such breach is
delivered to the COMPANY;
(i) At the option of FUND, if the Variable Contracts are not registered,
issued or sold in accordance with applicable federal and/or state law.
Termination shall be effective immediately upon such occurrence without
notice;
(j) In the event this Agreement is assigned without the prior written
consent of the COMPANY, FUND, DISTRIBUTOR, ADVISER and UNDERWRITER,
termination shall be effective immediately upon such occurrence without
notice.
8.3 Notwithstanding any termination of this Agreement pursuant to
Section 8.2 hereof, FUND at the option of the COMPANY will continue to make
available additional FUND shares, as provided below, pursuant to the terms and
conditions of this Agreement, for all Variable Contracts in effect on the
effective date of termination of this Agreement (hereinafter referred to as
"Existing Contracts"). Specifically, without limitation, the owners of the
Existing Contracts or the COMPANY, whichever shall have legal authority to do
so, shall be permitted to reallocate investments in FUND, redeem investments
in FUND and/or invest in FUND upon the payment of additional premiums under
the Existing Contracts. This section 8.3 shall not apply to any termination
under Article V and the effect of such termination shall be governed by
Article V of this Agreement.
Article IX. NOTICES
Any notice hereunder shall be given by registered or certified mail
return receipt requested to the other party at the address of such party set
forth below or at such other address as such party may from time to time
specify in writing to the other party.
If to FUND, ADVISER or DISTRIBUTOR.
OFFITBANK Variable Insurance Fund, Inc.
237 Park Avenue, Suite 910
New York, New York 10017
Att: Stephen Brent Wells
If to the COMPANY or UNDERWRITER:
Great American Reserve Insurance Company
11815 N. Pennsylvania Street
Carmel, Indiana 46032-4572
Attention: Gregory Gloeckner
Notice shall be deemed given on the date of receipt by the addressee as
evidenced by the return receipt.
Article X. MISCELLANEOUS
10.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof
or otherwise affect their construction or effect.
10.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
10.3 If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
10.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Maryland.
It shall also be subject to the provisions of the federal securities laws and
the rules and regulations thereunder and to any orders of the SEC granting
exemptive relief therefrom and the conditions of such orders.
10.5 (a) The FUND and DISTRIBUTOR shall pay no fee or other compensation
to the COMPANY under this Agreement, except that if the FUND or any Portfolio
adopts and implements a plan pursuant to Rule 12b-1 to finance distribution
expenses, then the DISTRIBUTOR may make payments to the COMPANY or to the
underwriter for the Variable Contracts if and in amounts agreed to by the
DISTRIBUTOR in writing and such payments will be made out of existing fees
otherwise payable to the DISTRIBUTOR, past profits of the DISTRIBUTOR or other
resources available to the DISTRIBUTOR. The FUND currently does not intend to
make any payments to finance distribution expenses pursuant to Rule 12b-1
under the 1940 Act or otherwise, although it may make such payments in the
future. To the extent that it decides to finance distribution expenses
pursuant to Rule 12b-1, the FUND undertakes to have a Board of Directors, a
majority of whom are not interested persons of the FUND, formulate and approve
any plan under Rule 12b-1 to finance distribution expenses.
(b) Except as otherwise provided herein, or in any agreement
supplementary hereto, each party hereto shall bear all expenses incident to
its performance under this Agreement.
10.6 It is understood and expressly stipulated that neither the
shareholders of shares of any Portfolio nor the Directors or officers of FUND
or any Portfolio shall be personally liable hereunder. No Portfolio shall be
liable for the liabilities of any other Portfolio. All persons dealing with
FUND or a Portfolio must look solely to the property of FUND or that
Portfolio, respectively, for enforcement of any claims against FUND or that
Portfolio. It is also understood that each of the Portfolios shall be deemed
to be entering into a separate Agreement with the COMPANY so that it is as if
each of the Portfolios had signed a separate Agreement with the COMPANY and
that a single document is being signed simply to facilitate the execution and
administration of the Agreement.
10.7 Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the SEC, the National
Association of Securities Dealers, Inc. and state insurance regulators) and
shall permit such authorities reasonable access to its books and records in
connection with any investigation or inquiry relating to this Agreement or the
transactions contemplated hereby.
10.8 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to
under state and federal laws.
10.9 No provision of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by
COMPANY, FUND, DISTRIBUTOR, ADVISER and UNDERWRITER.
IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Fund Participation Agreement as of the date and year
first above written.
<TABLE>
<CAPTION>
<S> <C>
OFFITBANK Variable Insurance Fund, Inc.
By:_____________________________
Name:
Title:
Great American Reserve Insurance
Company OFFIT Fund Distributors, Inc.
By:_____________________________ By:_____________________________
Name: Name:
Title: Title:
GARCO Equity Sales, Inc. OFFITBANK
By:_____________________________ By:______________________________
Name: Name:
Title: Title:
</TABLE>
APPENDIX A
Fund and its Portfolios
OFFITBANK VIF - High Yield Fund
OFFITBANK VIF - Investment Grade Global Debt Fund
OFFITBANK VIF - Emerging Markets Fund
OFFITBANK VIF - Total Return Fund
OFFITBANK VIF - Global Convertible Fund
APPENDIX B
Separate Accounts Selected Portfolios
Great American Reserve OFFITBANK VIF - Investment Grade
Variable Account G Global Debt Fund
OFFITBANK VIF - Total Return
Fund
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT made as of the __ day of __, 96, by and between EVERGREEN
VARIABLE TRUST ("TRUST"), a Massachusetts business trust, and GREAT AMERICAN
RESERVE INSURANCE COMPANY (the "COMPANY"), a life insurance company organized
under the laws of the State of Indiana.
WHEREAS, TRUST is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, as amended (the '40 Act"),
as an open-end, diversified management investment company; and
WHEREAS, TRUST is organized as a series fund comprised of several Funds
("Funds"), those currently available are listed on Appendix A hereto as such
Appendix may be amended from time to time; and
WHEREAS, TRUST was organized to act as the funding vehicle for certain
variable life insurance and/or variable annuity contracts ("Variable
Contracts") offered by life insurance companies through separate accounts
("Separate Accounts") of such life insurance companies ("Participating
Insurance Companies") and also offers its shares to certain qualified pension
and retirement plans ("Qualified Plans"); and
WHEREAS, TRUST has applied for an order from the SEC, granting
Participating Insurance Companies and their separate accounts exemptions from
the provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the '40 Act and
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to
permit shares of the Funds of the TRUST to be sold to and held by variable
annuity and variable life insurance separate accounts of both affiliated and
unaffiliated Participating Insurance Companies and Qualified Plans ("Exemptive
Order"); and
WHEREAS, the COMPANY has established or will establish one or more
separate accounts ("Separate Accounts") to offer Variable Contracts and is
desirous of having TRUST as one of the underlying funding vehicles for such
Variable Contracts; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the COMPANY intends to purchase shares of TRUST to fund the
aforementioned Variable Contracts and TRUST is authorized to sell such shares
to the COMPANY at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the COMPANY
and TRUST agree as follows:
Article I. SALE OF TRUST SHARES
1.1 TRUST agrees to make available to the Separate Accounts of the
COMPANY shares of the selected Funds as listed on Appendix B (as such Appendix
may be amended from time to time) for investment of purchase payments of
Variable Contracts allocated to the designated Separate Accounts as provided
in TRUST'S Registration Statement.
1.2 TRUST agrees to sell to the COMPANY those shares of the selected
Funds of TRUST which the COMPANY orders, executing such orders on a daily
basis at the net asset value next computed after receipt by TRUST or its
designee of the order for the shares of TRUST. For purposes of this Section
1.2, the COMPANY shall be the designee of TRUST for receipt of such orders
from the designated Separate Account and receipt by such designee shall
constitute receipt by TRUST; provided that the COMPANY receives the order
by 4:00 p.m. New York time and TRUST receives notice from the COMPANY by
telephone or facsimile (or by such other means as TRUST and the COMPANY may
agree in writing) of such order by 9:00 a.m. New York time on the next
following Business Day. "Business Day" shall mean any day on which the New
York Stock Exchange is open for trading and on which TRUST calculates its net
asset value pursuant to the rules of the SEC.
1.3 TRUST agrees to redeem on the COMPANY'S request, any full or
fractional shares of TRUST held by the COMPANY, executing such requests on a
daily basis at the net asset value next computed after receipt by TRUST or its
designee of the request for redemption, in accordance with the provisions of
this Agreement and TRUST'S Registration Statement. For purposes of this
Section 1.3, the COMPANY shall be the designee of TRUST for receipt of
requests for redemption from the designated Separate Account and receipt by
such designee shall constitute receipt by TRUST; provided that the COMPANY
receives the request for redemption by 4:00 p.m. New York time and TRUST
receives notice from the COMPANY by telephone or facsimile (or by such other
means as TRUST and the COMPANY may agree in writing) of such request for
redemption by 9:00 a.m. New York time on the next following Business Day.
1.4 TRUST shall furnish, on or before the ex-dividend date, notice to the
COMPANY of any income dividends or capital gain distributions payable on the
shares of any Fund of TRUST. The COMPANY hereby elects to receive all such
income dividends and capital gain distributions as are payable on a Fund's
shares in additional shares of the Fund. TRUST shall notify the COMPANY or
its designee of the number of shares so issued as payment of such dividends
and distributions.
1.5 TRUST shall make the net asset value per share for the selected
Fund(s) available to the COMPANY on a daily basis as soon as reasonably
practicable after the net asset value per share it calculated but shall use
its best efforts to make such net asset value available by 6:30 p.m. New York
time. In the event that TRUST is unable to meet the 6:30 p.m. time stated
herein, it shall provide additional time for the COMPANY to place orders for
the purchase and redemption of shares. Such additional time shall be equal to
the additional time which TRUST takes to make the net asset value available to
the COMPANY. If TRUST provides the COMPANY with materially incorrect share
net asset value information through no fault of the COMPANY, the COMPANY on
behalf of the Separate Accounts, shall be entitled to an adjustment to the
number of shares purchased or redeemed to reflect the correct share net
asset value. Any material error in the calculation of net asset value per
share, dividend or capital gain information shall be reported promptly upon
discovery to the COMPANY. Neither the Trust, the Funds, the Funds' investment
adviser, nor any of their affiliates shall be liable for any information
provided to COMPANY pursuant to this Agreement which information is based on
incorrect information furnished by COMPANY or any other Participating
Insurance Company to TRUST or the Funds' investment adviser.
1.6 At the end of each Business Day, the COMPANY shall use the
information described in Section 1.5 to calculate Separate Account unit values
for the day. Using these unit values, the COMPANY shall process each such
Business Day's Separate Account transactions based on requests and premiums
received by it by the close of trading on the floor of the New York Stock
Exchange (currently 4:00 p.m. New York time) to determine the net dollar
amount of TRUST shares which shall be purchased or redeemed at that day's
closing net asset value per share. The net purchase or redemption orders so
determined shall be transmitted to TRUST by the COMPANY by 9:00 a.m. New York
time on the Business Day next following the COMPANY'S receipt of such requests
and premiums in accordance with the terms of Sections 1.2 and 1.3 hereof.
1.7 If the COMPANY'S order requests the purchase of TRUST shares, the
COMPANY shall pay for such purchase by wiring federal funds to TRUST or its
designated custodial account on the day the order is transmitted by the
COMPANY. If the COMPANY'S order requests a net redemption resulting in a
payment of redemption proceeds to the COMPANY, TRUST shall use its best
efforts to wire the redemption proceeds to the COMPANY by the next Business
Day, unless doing so would require TRUST to dispose of Fund securities or
otherwise incur additional costs. In any event, proceeds shall be wired to
the COMPANY within three Business Days or such longer period permitted by the
'40 Act or the rules, orders or regulations thereunder and TRUST shall notify
the person designated in writing by the COMPANY as the recipient for such
notice of such delay by 3:00 p.m. New York time the same Business Day that the
COMPANY transmits the redemption order to TRUST. If the COMPANY'S order
requests the application of redemption proceeds from the redemption of shares
to the purchase of shares of another Fund set forth on Appendix B hereto,
TRUST shall so apply such proceeds the same Business Day that the COMPANY
transmits such orders to TRUST.
1.8 TRUST agrees that all shares of the Funds of TRUST will be sold only
to Participating Insurance Companies which have agreed to participate in TRUST
to fund their Separate Accounts and/or to Qualified Plans, all in accordance
with the requirements of Section 817(h) of the Internal Revenue Code of 1986,
as amended ("Code") and Treasury Regulation 1.817-5. Shares of the Funds of
TRUST will not be sold directly to the general public.
1.9 TRUST may refuse to sell shares of any Fund to any person, or suspend
or terminate the offering of the shares of any Fund if such action is required
by law or by regulatory authorities having jurisdiction or is, in the sole
discretion of the Board of Trustees of the TRUST (the "Board"), acting in good
faith and in light of its duties under federal and any applicable state laws,
deemed necessary, desirable or appropriate and in the best interests of the
shareholders of such Funds.
1.10 Issuance and transfer of Fund shares will be by book entry only.
Stock certificates will not be issued to the COMPANY or the Separate Accounts.
Shares ordered from Fund will be recorded in appropriate book entry titles
for the Separate Accounts.
1.11 The COMPANY agrees and acknowledges that the TRUST'S adviser,
Evergreen Asset Management Corp. ("Evergreen Asset"), is the sole owner of the
name and mark "Evergreen" and that all use of any designation comprised in
whole or part of Evergreen (an "Evergreen Mark") under this Agreement shall
inure to the benefit of Evergreen Asset. Except as provided in Sections 3.4
and 4.1, the COMPANY shall not use any Evergreen Mark on its own behalf or
on behalf of the Separate Accounts or Variable Contracts in any registration
statement, advertisement, sales literature or other materials relating to the
Separate Accounts or Variable Contracts without the prior written consent of
Evergreen Asset. Upon termination of this Agreement for any reason, the
Company shall cease all use of any Evergreen Mark as soon as reasonably
practicable.
Article II. REPRESENTATIONS AND WARRANTIES
2.1 The COMPANY represents and warrants that it is an insurance company
duly organized and in good standing under the laws of Indiana and that it has
legally and validly established each Separate Account as a segregated asset
account under such laws.
2.2 The COMPANY represents and warrants that it has registered or, prior
to any issuance or sale of Variable Contracts, will register each Separate
Account as a unit investment trust ("UIT") in accordance with the provisions
of the '40 Act and cause each Separate Account to remain so registered to
serve as a segregated asset account for the Variable Contracts, unless an
exemption from registration is available.
2.3 The COMPANY represents and warrants that the Variable Contracts will
be registered under the Securities Act of 1933 (the "'33 Act") unless an
exemption from registration is available prior to any issuance or sale of the
Variable Contracts and that the Variable Contracts will be issued and sold in
compliance in all material respects with all applicable federal and state laws
and further that the sale of the Variable Contracts shall comply in all
material respects with state insurance law suitability requirements.
2.4 The COMPANY represents and warrants that the Variable Contracts are
currently and at the time of issuance will be treated as life insurance,
endowment or annuity contracts under applicable provisions of the Code, that
it will maintain such treatment and that it will notify TRUST immediately upon
having a reasonable basis for believing that the Variable Contracts have
ceased to be so treated or that they might not be so treated in the future.
2.5 TRUST represents and warrants that the Fund shares offered and sold
pursuant to this Agreement will be registered under the '33 Act and sold in
accordance will all applicable federal and state laws, and TRUST shall be
registered under the '40 Act prior to and at the time of any issuance or sale
of such shares. TRUST, subject to Section 1.9 above, shall amend its
registration statement under the '33 Act and the '40 Act from time to time as
required in order to effect the continuous offering of its shares. TRUST
shall register and qualify its shares for sale in accordance with the laws of
the various states only if and to the extent deemed advisable by TRUST.
2.6 TRUST represents and warrants that each Fund will comply with the
diversification requirements set forth in Section 817(h) of the Code, and the
rules and regulations thereunder, including without limitation Treasury
Regulation 1.817-5, and will notify the COMPANY immediately upon having a
reasonable basis for believing any Fund has ceased to comply or might not so
comply and will immediately take all reasonable steps to adequately diversify
the Fund to achieve compliance.
2.7 TRUST represents and warrants that each Fund invested in the Separate
Account intends to elect to be treated as a "regulated investment company"
under Subchapter M of the Code, and to qualify for such treatment for each
taxable year and will notify the COMPANY immediately upon having a reasonable
basis for believing it has ceased to so qualify or might not so qualify in the
future.
Article III. PROSPECTUS AND PROXY STATEMENTS
3.1 TRUST shall prepare and be responsible for filing with the SEC and
any state regulators requiring such filing all shareholder reports, notices,
proxy materials (or similar materials such as voting instruction solicitation
materials), prospectuses and statements of additional information of TRUST.
TRUST shall bear the costs of registration and qualification of shares of the
Funds, preparation and filing of the documents listed in this Section 3.1 and
all taxes and filing fees to which an issuer is subject on the issuance and
transfer of its shares.
3.2 At least annually, TRUST or its designee shall provide the COMPANY,
free of charge, with as many copies of the current prospectus for the shares
of the Funds as the COMPANY may reasonably request for distribution to
existing Variable Contract owners whose Variable Contracts are funded by such
shares. TRUST or its designee shall provide the COMPANY, at the COMPANY'S
expense, with as many copies of the current prospectus for the shares as the
COMPANY may reasonably request for distribution to prospective purchasers of
Variable Contracts. If requested by the COMPANY in lieu thereof, TRUST or its
designee shall provide such documentation (including a "camera ready" copy
of the new prospectus as set in type or, at the request of the COMPANY, as a
diskette in the form sent to the financial printer) and other assistance as
is reasonably necessary in order for the parties hereto once a year (or
more frequently if the prospectus for the shares is supplemented or amended)
to have the prospectus for the Variable Contracts and the prospectus for
the TRUST shares printed together in one document. The expenses of such
printing will be apportioned between (a) the COMPANY and (b) TRUST in
proportion to the number of pages of the Variable Contract and shares'
prospectus, taking account of other relevant factors affecting the
expense of printing, such as covers, columns, graphs and charts; TRUST
to bear the cost of printing the shares' prospectus portion of such document
for distribution only to owners of existing Variable Contracts funded by
the TRUST shares and the COMPANY to bear the expense of printing the portion
of such documents relating to the Separate Account; provided, however, the
COMPANY shall bear all printing expenses of such combined documents where
used for distribution to prospective purchasers or to owners of existing
Variable Contracts not funded by the shares. In the event that the COMPANY
requests that TRUST or its designee provide TRUST'S prospectus in a "camera
ready" or diskette format, TRUST shall be responsible for providing the
prospectus in the format in which it is accustomed to formatting
prospectuses and shall bear the expense of providing the prospectus in such
format (e.g. typesetting expenses), and COMPANY shall bear the expense
of adjusting or changing the format to conform with any of its prospectuses.
3.3 The obligations of TRUST and COMPANY with respect to the TRUST'S and
Variable Contracts' prospectuses set forth in Section 3.2 shall apply in the
same manner to the TRUST'S and Variable Contracts' statements of additional
information; provided, that such statements of additional information need
only be duplicated unless TRUST and COMPANY agree that such documents should
be printed.
3.4 TRUST will provide COMPANY with at least one complete copy of all
prospectuses, statements of additional information, annual and semi-annual
reports, proxy statements, exemptive applications and all amendments or
supplements to any of the above that relate the Funds promptly after the
filing of each such document with the SEC or other regulatory authority. The
COMPANY will provide TRUST with at least one complete copy of all
prospectuses, statements of additional information, annual and semi-annual
reports, proxy statements, exemptive applications and all amendments or
supplements to any of the above that relate to a Separate Account promptly
after the filing of each such document with the SEC or other regulatory
authority.
Article IV. SALES MATERIALS
4.1 The COMPANY will furnish, or will cause to be furnished, to TRUST,
each piece of sales literature or other promotional material in which TRUST or
its investment adviser is named, at least fifteen (15) Business Days prior to
its intended use. No such material will be used if TRUST objects to its use
in writing within ten (10) Business Days after receipt of such material.
4.2 TRUST will furnish, or will cause to be furnished, to the
COMPANY, each piece of sales literature or other promotional material in which
the COMPANY or its Separate Accounts are named, at least fifteen (15) Business
Days prior to its intended use. No such material will be used if the COMPANY
objects to its use in writing within ten (10) Business Days after receipt of
such material.
4.3 TRUST and its affiliates and agents shall not give any information
or make any representations on behalf of the COMPANY or concerning the
COMPANY, the Separate Accounts, or the Variable Contracts issued by the
COMPANY, other than the information or representations contained in a
registration statement or prospectus for such Variable Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in reports of the Separate Accounts or report prepared for
distribution to owners of such Variable Contracts, or in sales literature or
other promotional material approved by the COMPANY or its designee, except
within the written permission of the COMPANY.
4.4 The COMPANY and its affiliates and agents shall not give any
information or make any representations on behalf of TRUST or concerning
TRUST, other than the information or representations contained in a
registration statement or prospectus for TRUST, as such registration statement
and prospectus may be amended or supplemented from time to time, or in sales
literature or other promotional material approved by TRUST or its designee,
except with the written permission of TRUST.
4.5 For purposes of this Agreement, the phrase "sales literature or
other promotional material" or words of similar import include, without
limitation, advertisements (such as material published, or designed for use,
in a newspaper, magazine or other periodical, radio, television, telephone or
tape recording, videotape display, signs or billboards, motion pictures or
other public media), sales literature (such as any written communication
distributed or made generally available to customers or the public, including
brochures, circulars, research reports, market letters, form letters, seminar
texts, or reprints or excerpts of any other advertisement, sales literature,
or published article), educational or training materials or other
communications distributed or made generally available to some or all agents
or employees, registration statements, prospectuses, statements of additional
information, shareholder reports and proxy materials, and any other material
constituting sales literature or advertising under National Association of
Securities Dealers, Inc. rules, the '40 Act or the '33 Act.
Article V. POTENTIAL CONFLICTS
5.1 The parties acknowledge that TRUST has filed an application with the
SEC to request an order granting relief from various provisions of the '40 Act
and the rules thereunder to the extent necessary to permit TRUST shares to be
sold to and held by variable annuity and variable life insurance separate
accounts of both affiliated and unaffiliated Participating Insurance Companies
and Qualified Plans. It is anticipated that the Exemptive Order, when and if
issued, shall require TRUST and each Participating Insurance Company to comply
with conditions and undertakings substantially as provided in this Section 5.
If the Exemptive Order imposes conditions materially different from those
provided in this Section 5, the conditions and undertakings imposed by the
Exemptive Order shall govern this Agreement and the parties hereto agree to
amend this Agreement consistent with the Exemptive Order. The Fund will not
enter into a participation agreement with any other Participating Insurance
Company unless it imposes the same conditions and undertakings as are imposed
on the COMPANY hereby.
5.2 The Board will monitor TRUST for the existence of any
irreconcilable material conflict between and among the interests of Variable
Contract owners of all separate accounts and of plan participants of
Qualified Plans investing in TRUST, and determine what action, if any, should
be taken in response to such conflicts. An irreconcilable material conflict
may arise for a variety of reasons, which may include: (a) an action by any
state insurance regulatory authority; (b) a change in applicable federal or
state insurance, tax or securities laws or regulations, or a public ruling,
private letter ruling or any similar action by insurance, tax or securities
regulatory authorities; (c) an administrative or judicial decision in any
relevant proceeding; (d) the manner in which the investments of TRUST are
being managed; (e) a difference in voting instructions given by variable
annuity and variable life insurance Contract owners; (f) a decision by a
Participating Insurance Company to disregard the voting instructions of
Variable Contract owners and; (g) if applicable, a decision by a Qualified
Plan to disregard the voting instructions of plan participants.
5.3 The COMPANY will report any potential or existing conflicts to the
Board. The COMPANY will be responsible for assisting the Board in carrying
out its duties in this regard by providing the Board with all information
reasonably necessary for the Board to consider any issues raised. The
responsibility includes, but it is not limited to, an obligation by the
COMPANY to inform the Board whenever it has determined to disregard Variable
Contract owner voting instructions. These responsibilities of the COMPANY
will be carried out with a view only to the interests of the Variable Contract
owners.
5.4 If a majority of the Board of its disinterested trustees,
determines that a material irreconcilable conflict exists, affecting the
COMPANY, the COMPANY, at its expense and to the extent reasonably practicable
(as determined by a majority of the Board's disinterested TRUSTEES), will take
any steps necessary to remedy or eliminate the irreconcilable material
conflict, including: (a) withdrawing the assets allocable to some or all of
the Separate Accounts from TRUST or any Fund thereof and reinvesting those
assets in a different investment medium, which may include another Fund of
TRUST, or another investment company; (b) submitting the question as to
whether such segregation should be implemented to a vote of all affected
Variable Contract owners and, as appropriate, segregating the assets of any
appropriate group (i.e., variable annuity or variable life insurance Contract
owners of one or more Participating Insurance Companies) that votes in favor
of such segregation, or offering to the affected Variable Contract owners the
option of making such a change; and (c) establishing a new registered
management investment company or managed separate account. If an
irreconcilable material conflict arises because of the COMPANY'S decision to
disregard Variable Contract owner voting instructions, and that decision
represents a minority position or would preclude a majority vote, the COMPANY
may be required, at the election of TRUST to withdraw the Separate Account's
investment in TRUST, and no charge or penalty will be imposed as a result of
such withdrawal. The responsibility to take such remedial action shall be
carried out with a view only to the interests of the Variable Contract owners.
For purposes of this Section 5.4, a majority of the disinterested members
of the Board shall determine whether or not any proposed action adequately
remedies any irreconcilable material conflict but in no event will TRUST or
its investment adviser (or any other investment adviser of TRUST) be required
to establish a new funding medium for any Variable Contract. Further the
COMPANY shall not be required by this Section 5.4 to establish a new funding
medium for any Variable Contracts if any offer to do so has been declined by a
vote of a majority of Variable Contract owners materially and adversely
affected by the irreconcilable conflict.
5.5 The Board's determination of the existence of an irreconcilable
material conflict and its implications shall be made known promptly and in
writing to the COMPANY.
5.6 No less than annually, the COMPANY shall submit to the Board such
reports, materials or data as the Board may reasonably request so that the
Board may fully carry out its obligations. Such reports, materials and data
shall be submitted more frequently if deemed appropriate by the Board.
Article VI. VOTING
6.1 The COMPANY will provide pass-through voting privileges to all
Variable Contract owners so long as the SEC continues to interpret the '40 Act
as requiring pass-through voting privileges for Variable Contract owners.
Accordingly, the COMPANY, where applicable, will vote shares of the Fund held
in its Separate Accounts in a manner consistent with voting instructions
timely received form its Variable Contract owners. The COMPANY will be
responsible for assuring that each of its Separate Accounts that participates
in TRUST calculates voting privileges in a manner consistent with other
Participating Insurance Companies. The COMPANY will vote shares for which it
has not received timely voting instructions, as well as shares it owns, in the
same proportion as its votes those shares for which it has received voting
instructions.
6.2 If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or if
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
'40 Act or the rules thereunder with respect to mixed and shared funding on
terms and conditions materially different from any exemptions granted in the
Exemptive Order, then TRUST, and/or Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rule
6e-2 and Rule 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent
such Rules are applicable.
Article VII. INDEMNIFICATION
7.1 Indemnification by the COMPANY. The COMPANY agrees to indemnify
and hold harmless TRUST, and each of its Trustees, principals, officers,
employees and agents and each person, if any, who controls TRUST within the
meaning of Section 15 of the '33 Act (collectively, the "Indemnified Parties"
for purposes of this Article VII) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the COMPANY, which consent shall not be unreasonably withheld) or litigation
(including legal and other expenses), to which the Indemnified Parties may
become subject under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions
in respect thereof) or settlements are related to the sale or acquisition of
TRUST's shares or the Variable Contracts and:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in a registration statement
or prospectus for the Variable Contracts or contained in the Variable
Contracts or in sales literature generated or approved by COMPANY on behalf of
the Variable Contracts or Separate Accounts (or any amendment or supplement to
any of the foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, provided
that this agreement to indemnify shall not apply as to an Indemnified Party if
such statement or omission or such alleged statement or omission was made in
reliance upon and in conformity with information furnished to the COMPANY by
or on behalf of TRUST for use in the registration statement or prospectus for
the Variable Contracts or in the Variable Contracts or sales literature
(or any amendment or supplement) or otherwise for use in connection with
the sale of the Variable Contracts or TRUST shares; or
(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the registration
statement, prospectus or sales literature of TRUST not supplied by the
COMPANY, or persons under its control) or wrongful conduct of the COMPANY or
persons under its control, with respect to the sale or distribution of the
Variable Contracts or TRUST shares; or
(c) arise out of any untrue statement or alleged untrue statement of
a material fact contained in a registration statement, prospectus, or sales
literature of TRUST or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading if
such statement or omission or such alleged statement or omission was made in
reliance upon and in conformity with information furnished to TRUST by or on
behalf of the COMPANY; or
(d) arise a result of any failure by the COMPANY to provide
substantially the services and furnish the materials under the terms of this
Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the COMPANY in this Agreement or arise
out of or result from any other material breach of this Agreement by the
COMPANY.
7.2 The COMPANY shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations or duties under this
Agreement.
7.3 The COMPANY shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the COMPANY in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the COMPANY of
any such claim shall not relieve the COMPANY from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any such action is
brought against an Indemnified Party, the COMPANY shall be entitled to
participate at its own expense in the defense of such action. The COMPANY
also shall be entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action. After notice from the COMPANY
to such party of the COMPANY'S election to assume defense thereof, the
Indemnified Party shall bear the fees and expenses of any additional counsel
retained by it, and the COMPANY will not be liable to such party under this
Agreement for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable costs
of investigation.
7.4 Indemnification by TRUST. TRUST agrees to indemnify and hold
harmless the COMPANY and each of its directors, officers, employees, and
agents and each person, if any, who controls the COMPANY within the meaning of
Section 15 of the '33 Act (collectively, the "Indemnified Parties" for the
purpose of this Article VII) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
TRUST which consent shall not be unreasonably withheld) or litigation
(including legal and other expenses) to which the Indemnified Parties may
become subject under any statute, or regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements are related to the sale or acquisition of
TRUST'S shares or the Variable Contracts and:
(a) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the registration statement
or prospectus or sales literature of TRUST (or any amendment or supplement to
any of the foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, provided
that this Agreement to indemnify shall not apply as to an Indemnified Party if
such statement or omission or such alleged statement or omission was made in
reliance upon and in conformity with information furnished to TRUST by or
on behalf of the COMPANY for use in the registration statement or prospectus
for TRUST or in sales literature (or any amendment or supplement) or otherwise
for use in connection with the sale of the Variable Contracts or TRUST shares;
or
(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the registration
statement, prospectus or sales literature for the Variable Contracts not
supplied by TRUST or persons under its control) or wrongful conduct of TRUST
or persons under its control, with respect to the sale or distribution of the
Variable Contracts or TRUST shares; or
(c) arise out of any untrue statement or alleged untrue statement of
a material fact contained in a registration statement, prospectus, or sales
literature covering the Variable Contracts, or any amendment thereof or
supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, if such statement or omission or such
alleged statement or omission was made in reliance upon and in conformity with
information furnished to the COMPANY for inclusion therein by or on behalf
of TRUST; or
(d) arise a result of (i)a failure by TRUST to provide substantially
the services and furnish the materials under the terms of this Agreement; or
(ii) a failure by a Fund(s) invested in by the Separate Account to comply with
the diversification requirements of Section 817(h) of the Code: or (iii) a
failure by a Fund(s) invested in by the Separate Account to qualify as a
"regulated investment company" under Subchapter M of the Code; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by TRUST in this Agreement or arise out of
or result from any other material breach of this Agreement by TRUST.
7.5 TRUST shall not be liable under this indemnification provision with
respect to any losses, claims, damages, liabilities or litigation to which an
Indemnified Party would otherwise be subject by reason of such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement.
7.6 TRUST shall not be liable under this indemnification provision with
respect to any claim against an Indemnified Party unless such Indemnified
Party shall have notified TRUST in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
claim shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any designated
agent), but failure to notify TRUST of any such claim shall not relieve TRUST
from any liability which it may have to the Indemnified Party against whom
such action is brought otherwise than on account of this indemnification
provision. In case any such action is brought against the Indemnified Parties,
TRUST shall be entitled to participate at its own expense in the defense
thereof. TRUST also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice from
TRUST to such party of TRUST election to assume the defense thereof, the
Indemnified Party shall bear the fees and expenses of any additional counsel
retained by it, and TRUST will not be liable to such party under this
Agreement for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable
costs of investigation.
Article VIII. TERM: TERMINATION
8.1 This Agreement shall be effective as of the date hereof and shall
continue in force until terminated in accordance with the provisions herein.
8.2 This Agreement shall terminate in accordance with the following
provisions:
(a) At the option of the COMPANY or TRUST at any time from the date
hereof upon 180 days' notice, unless a shorter time is agreed to by the
parties;
(b) At the option of the COMPANY, if TRUST shares are not reasonably
available to meet the requirements of the Variable Contracts as determined by
the COMPANY. Prompt notice of election to terminate shall be furnished by the
COMPANY, said termination to be effective ten days after receipt of notice
unless TRUST makes available a sufficient number of shares to reasonably meet
the requirements of the Variable Contracts within said ten-day period;
(c) At the option of the COMPANY, upon the institution of formal
proceedings against TRUST by the SEC, the National Association of Securities
Dealers, Inc., or any other regulatory body, the expected or anticipated
ruling, judgment or outcome of which would, in the COMPANY'S reasonable
judgment, materially impair TRUST'S ability to meet and perform TRUST'S
obligations and duties hereunder. Prompt notice of election to terminate
shall be furnished by the COMPANY with said termination to be effective upon
receipt of notice;
(d) At the option of TRUST, upon the institution of formal
proceedings against the COMPANY by the SEC, the National Association of
Securities Dealers, Inc., or any other regulatory body, the expected or
anticipated ruling, judgment or outcome of which would, in TRUST'S reasonable
judgment, materially impair the COMPANY'S ability to meet and perform its
obligations and duties hereunder. Prompt notice of election to terminate
shall be furnished by TRUST with said termination to be effective upon receipt
of notice;
(e) In the event TRUST'S shares are not registered, issued or sold in
accordance with applicable state or federal law, or such law precludes the use
of such shares as the underlying investment medium of Variable Contracts
issued or to be issued by the COMPANY. Termination shall be effective upon
such occurrence without notice;
(f) At the option of TRUST, if the Variable Contracts cease to
qualify as annuity contracts or life insurance contracts, as applicable, under
the Code, or if TRUST reasonably believes that the Variable Contracts may fail
to so qualify. Termination shall be effective upon receipt of notice by the
COMPANY;
(g) At the option of the COMPANY, upon TRUST'S breach of any material
provision of this Agreement, which breach has not been cured to the
satisfaction of the COMPANY within ten days after written notice of such
breach is delivered to TRUST;
(h) At the option of TRUST, upon the COMPANY's breach of any material
provision of this Agreement, which breach has not been cured to the
satisfaction of TRUST within ten days after written notice of such breach is
delivered to the COMPANY;
(i) At the option of TRUST, if the Variable Contracts are not
registered, issued or sold in accordance with applicable federal and/or state
law. Termination shall be effective immediately upon such occurrence without
notice;
(j) In the event this Agreement is assigned without the prior written
consent of the COMPANY and TRUST, termination shall be effective immediately
upon such occurrence without notice.
8.3 Notwithstanding any termination of this Agreement pursuant to
Section 8.2 hereof, TRUST at the option of the COMPANY will continue to make
available additional TRUST shares, as provided below, pursuant to the terms
and conditions of this Agreement, for all Variable Contracts in effect on the
effective date of termination of this Agreement (hereinafter referred to as
"Existing Contracts"). Specifically, without limitation, the owners of the
Existing Contracts of the COMPANY, whichever shall have legal authority to do
so, shall be permitted to reallocate investments in TRUST, redeem investments
in TRUST and/or invest in TRUST upon the payment of additional premiums under
the Existing Contracts.
Article IX. NOTICES
Any notice hereunder shall be given by registered or certified mail
return receipt requested to the other party at the address of such party set
forth below or at such other address as such party may from time to time
specify in writing to the other party.
If to TRUST:
Evergreen Variable Trust
2500 Westchester Avenue
Purchase, New York 10577
Attn: Joseph J. McBrien, Esq.
If to the COMPANY:
Great American Reserve Insurance Company
11815 N. Pennsylvania Street
Carmel, Indiana 46032-4572
Attention:
Notice shall be deemed given on the date of receipt by the addresses as
evidenced by the return receipt.
Article X. MISCELLANEOUS
10.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof
or otherwise affect their construction or effect.
10.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
10.3 If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
10.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Indiana. It
shall also be subject to the provisions of the federal securities laws and the
rules and regulations thereunder and to any orders of the SEC granting
exemptive relief therefrom and the conditions of such orders.
10.5 It is understood and expressly stipulated that neither the
shareholders of shares of any Fund nor the Trustees or officers of TRUST or
any Fund shall be personally liable hereunder. No Fund shall be liable for
the liabilities of any other Fund. All persons dealing with TRUST or a Fund
must look solely to the property of TRUST or that Fund, respectively, for
enforcement of any claims against TRUST or that Fund. It is also understood
that each of the Funds shall be deemed to be entering into a separate
Agreement with the COMPANY so that it is as if each of the Funds has signed a
separate Agreement with the COMPANY and that a single document is being signed
simply to facilitate the execution and administration of the Agreement.
10.6 Each party shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC,
the National Association of Securities Dealers, Inc. and state insurance
regulators) and shall permit such authorities reasonable access to its books
and records in connection with any investigation or inquiry relating to this
Agreement or the transactions contemplated hereby.
10.7 The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to
under state and federal laws.
10.8 No provision of this Agreement may be amended or modified in any
manner except by written agreement properly authorized and executed by TRUST
and the COMPANY.
IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Fund Participation Agreement as of the date and year
first written above.
EVERGREEN VARIABLE TRUST
By:
_______________________
Name:
Title:
GREAT AMERICAN RESERVE INSURANCE
COMPANY
By:
_______________________
Name:
Title:
APPENDIX A
Trust and its Funds
Evergreen Variable Trust
Evergreen VA Fund
Evergreen VA Growth and Income Fund
Evergreen VA Foundation Fund
APPENDIX B
Separate Accounts Selected Funds
Blazzard, Grodd & Hasenauer, P.C.
943 Post Road East
Westport, CT 06880
(203) 226-7866
January 29, 1997
Board of Directors
Great American Reserve Insurance Company
11825 N. Pennsylvania Street
Carmel, IN 46032-4572
Re: Opinion of Counsel - Great American Reserve
Variable Annuity Account G
Gentlemen:
You have requested our Opinion of Counsel in connection with the filing with
the Securities and Exchange Commission of a Registration Statement on Form N-4
for the Individual and Group Fixed and Variable Deferred Annuity Contracts and
Certificates (the "Contracts") to be issued by Great American Reserve
Insurance Company and its separate account, Great American Reserve Variable
Annuity Account G.
We have made such examination of the law and have examined such records and
documents as in our judgment are necessary or appropriate to enable us to
render the opinions expressed below.
We are of the following opinions:
1. Great American Reserve Insurance Company is a valid and existing
stock life insurance company of the state of Texas.
2. Great American Reserve Variable Annuity Account G is a separate
investment account of Great American Reserve Insurance Company created and
validly existing pursuant to the Texas Insurance Laws and the Regulations
thereunder.
3. Upon the acceptance of purchase payments made by an Owner or
Certificate Owner pursuant to a Contract issued in accordance with the
Prospectus contained in the Registration Statement and upon compliance with
applicable law, such an Owner or Certificate Owner will have a legally-issued,
fully-paid, non-assessable contractual interest under such Contract.
You may use this opinion letter, or a copy thereof, as an exhibit to the
Registration Statement.
We consent to the reference to our Firm under the caption "Legal
Opinions" contained in the Prospectus and the Statement of Additional
Information which forms a part of the Registration Statement.
Sincerely,
BLAZZARD, GRODD & HASENAUER, P.C.
By: /S/ LYNN KORMAN STONE
__________________________
Lynn Korman Stone
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Great American Reserve Variable Annuity Account G on Form N-4 (File Nos.
333-00373 and 811-07501), of our report dated March 20, 1996 on our audits of
the financial statements of Great American Reserve Insurance Company as of
December 31, 1995 and 1994, and for the four months ended December 31, 1995,
the eight months ended August 31, 1995 and the years ended December 31, 1994
and 1993. We also consent to the reference to our firm under the caption
"Experts".
/S/ COOPERS & LYBRAND L.L.P.
----------------------------
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
January 27, 1997
