STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
CONSECO VARIABLE INSURANCE COMPANY
(FORMERLY GREAT AMERICAN RESERVE INSURANCE COMPANY)
ADMINISTRATIVE OFFICE: 11825 NORTH PENNSYLVANIA STREET, CARMEL, INDIANA 46032
PHONE: (800) 437-3506
INDIVIDUAL DEFERRED VARIABLE ANNUITY CONTRACT
FLEXIBLE PURCHASE PAYMENTS
THIS STATEMENT OF ADDITIONAL INFORMATION (WHICH IS NOT A PROSPECTUS) SHOULD
BE READ IN CONJUNCTION WITH THE CURRENT PROSPECTUS FOR RYDEX ADVISOR VARIABLE
ANNUITY ACCOUNT (THE "SEPARATE ACCOUNT"), DATED MAY 1, 1999. YOU MAY OBTAIN A
COPY OF THE CURRENT PROSPECTUS BY WRITING TO OR CALLING CONSECO EQUITY SALES,
INC., 11825 NORTH PENNSYLVANIA STREET, CARMEL, INDIANA 46032, TELEPHONE: (800)
437-3506
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TABLE OF CONTENTS
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Page
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PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 3
Total Return Information. . . . . . . . . . . . . . . . . . . . . . 3
Comparisons of Total Return . . . . . . . . . . . . . . . . . . . . 4
DISTRIBUTION OF CONTRACTS. . . . . . . . . . . . . . . . . . . . . . . . 6
FEDERAL INCOME TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Diversification . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Multiple Contracts. . . . . . . . . . . . . . . . . . . . . . . . . 9
Contracts Owned by Other than Natural Persons . . . . . . . . . . . 9
Tax Treatment of Assignments. . . . . . . . . . . . . . . . . . . . 9
Income Tax Withholding. . . . . . . . . . . . . . . . . . . . . . . 9
Tax Treatment of Withdrawals - Non-Qualified Contracts. . . . . . . 10
Qualified Plans . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Tax Treatment of Withdrawals - Qualified Contracts. . . . . . . . . 13
Mandatory Distributions - Qualified Contracts . . . . . . . . . . . 14
Tax-Sheltered Annuities - Withdrawal Limitations. . . . . . . . . . 14
INDEPENDENT ACCOUNTANTS. . . . . . . . . . . . . . . . . . . . . . . . . 15
LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 15
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PERFORMANCE INFORMATION
TOTAL RETURN INFORMATION
The following tables show investment returns of the subaccounts of the
Separate Account (other than the U.S. Government Money Market Fund), assuming
different amounts invested, different periods of time amounts are invested, and
withdrawal and non-withdrawal of amounts at the end of the periods. Past
performance of a subaccount does not necessarily indicate how a subaccount will
perform in the future.
The average annual rates of total return are computed by finding the
average annual compounded rates of return over the periods shown that would
equate the initial amount invested to the withdrawal value, in accordance n with
the following formula: P(1 + T) = ERV. In the formula, P is a hypothetical
purchase payment of $1,000; T is the average annual total return; n is the
number of years; and ERV is the withdrawal value at the end of the period shown.
Table 1: Amount Invested in Subaccount: $1,000 - Withdrawn at End of Period
Average Annual Total Return for the Periods Ending December 31, 1998
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DATE OF
COMMENCEMENT OF
CONTINUOUS
OPERATIONS
---------------
SINCE COMMENCEMENT OF
ONE YEAR CONTINUOUS OPERATIONS
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<S> <C> <C> <C>
Nova Subaccount 5/7/97 21.59% 27.03%
Ursa Subaccount 6/10/97 -27.00% -25.53%
OTC Subaccount 5/7/97 71.70% 44.13%
Precious Metals Subaccount 5/29/97 -22.63% -31.88%
U.S. Government Bond Subaccount 8/18/97 5.53% 11.39%
Juno Subaccount 3/4/98 N/A -17.37%
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Table 2: Amount Invested in Subaccount: $1,000--Not Withdrawn at the End of Period
Average Annual Total Return for the Periods Ending December 31, 1998
DATE OF
COMMENCEMENT OF
CONTINUOUS
OPERATIONS
---------------
SINCE COMMENCEMENT OF
ONE YEAR CONTINUOUS OPERATIONS
-------- ---------------------
<S> <C> <C> <C>
Nova Subaccount 5/7/97 29.77% 32.13%
Ursa Subaccount* 6/10/97 -22.09% -22.35%
OTC Subaccount 5/7/97 83.25% 49.92%
Precious Metals Subaccount 5/29/97 -17.43% -29.04%
U.S. Government Bond Subaccount* 8/18/97 12.63% 16.81%
Juno Subaccount* 3/4/98 N/A -10.64%
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* Due to the nature of the investment activity of the Funds underlying the
Subaccounts, there were discrete periods when certain Subaccounts had zero
net assets. The discrete periods for the Ursa Subaccount, and the
investment return for those periods, were as follows: 5/7/97 to 5/21/97
(-3.70%) and 5/24/97 to 6/3/97 (0.10%). The discrete periods for the U.S.
Government Bond Subaccount, and the investment return for those periods,
were as follows: 5/29/97 to 6/5/97 (1.50%), 6/24/97 to 7/14/97 (2.20%) and
7/29/97 to 8/12/97 (-3.30%). The discrete periods for the Juno Subaccount,
and the investment return for those periods, were as follows: 5/7/97 to
6/3/97 (-1.40%), 6/16/97 to 7/2/97 (-.31%), 7/7/97 (-0.52%), 7/24/97 to
8/11/97 (2.87%), 8/26/97 to 10/19/97 (-2.06%), 10/22/97 to 12/11/97
(-5.16%), 1/19/98 to 1/25/98 (2.93%), 2/1/98 to 2/2/98 (0.45%), 2/22/98 to
2/24/98 (1.22%) and 3/1/98 to 3/2/98 (0.88%).
The Performance Information Set Fort Above is For Past Performance and is
Not an Indication or Representation of Future Performance.
COMPARISONS OF TOTAL RETURN
Performance information for each of the Separate Account subaccounts
contained in reports to Contract Owners or prospective Contract Owners,
advertisements, and other promotional literature may be compared to the record
of various unmanaged indexes for the same period. In conjunction with
performance reports, promotional literature, and/or analyses of Contract Owner
service for a subaccount, comparisons of the performance information of the
subaccount for a given period to the performance of recognized, unmanaged
indexes for the same period may be made. Such indexes include, but are not
limited to, ones provided by Dow Jones & Company, Standard & Poor's Corporation,
Lipper Analytical Services, Inc., Shearson Lehman Brothers, National Association
of Securities Dealers, Inc., The Frank Russell Company, Value Line Investment
Survey, the American Stock Exchange, the Philadelphia Stock Exchange, Morgan
Stanley Capital International, Wilshire Associates, the Financial Times-Stock
Exchange, and the Nikkei Stock Average and Deutcher Aktienindex, all of which
are unmanaged market indicators. Such comparisons can be a useful measure of the
quality of a subaccount's investment performance.
In particular, performance information for the Nova subaccount, the Ursa
subaccount, and the Precious Metals subaccount may be compared to various
unmanaged indexes, including, but not limited to, the Standard & Poor's 500
Composite Stock Price Index-TM- (the "S&P 500 Index") or the Dow Jones
Industrial Average. Performance information for the Precious Metals subaccount
also may be compared to the current benchmark for the Precious Metals
subaccount, Philadelphia Stock Exchange Gold/Silver Index-TM- (the "XAU Index").
Performance information for the OTC subaccount may be compared to various
unmanaged indexes, including, but not limited to the current benchmark for the
OTC Fund, NASDAQ 100 Index-TM-, and the NASDAQ Composite Index-TM-. The NASDAQ
Composite Index-TM- comparison may be provided to show how the OTC subaccount's
total return compares to the record of a broad average of over-the-counter stock
prices over the same period. The OTC Fund has the ability to invest in
securities not included in the NASDAQ 100 Index-TM- or the NASDAQ Composite
Index-TM-, and the OTC Fund's investment portfolio may or may not be similar in
composition to NASDAQ 100 Index-TM- or the NASDAQ Composite Index-TM-. The
NASDAQ Composite Index-TM- is based on the prices of an unmanaged group of
stocks and, unlike the OTC Fund's returns, the returns of the NASDAQ Composite
Index-TM-, and such other unmanaged indexes, may assume the reinvestment of
dividends, but generally do not reflect payments of brokerage commissions or
deductions for operating costs and other expenses of investing. Performance
information for the U.S. Government Bond subaccount and the Juno subaccount may
be compared to the price movement of the current long treasury bond (the "Long
Bond") and to various unmanaged indexes, including, but not limited to, the
Shearson Lehman Government (LT) Index-TM-. Such unmanaged indexes may assume the
reinvestment of dividends, but generally do not reflect deductions for operating
costs and expenses.
In addition, rankings, ratings, and comparisons of investment performance
and/or assessments of the quality of Contract Owner service appearing in
publications such as Money, Forbes, Kiplinger's Magazine, Personal Investor,
Morningstar, Inc., the Morningstar Variable Annuity/Life Reporter, VARDS and
similar sources which utilize information compiled internally or by Lipper
Analytical Services, Inc., may be provided.
From time to time, each subaccount, other than the U.S. Government Money
Market subaccount, also may include in such advertising a total return figure
that is not calculated according to the formula set forth above in order to
compare more accurately the performance of the subaccount with other measures of
investment return. For example, in comparing the total return of a subaccount
with data published by Lipper Analytical Services, Inc., or with the performance
of the S&P 500 Index or the Dow Jones Industrial Average for each of the Nova
subaccount and the Ursa subaccount, the NASDAQ 100 Index-TM- for the OTC
subaccount, the XAU Index for the Precious Metals subaccount, and the Lehman
Government (LT) Index for the U.S. Government Bond subaccount and the Juno
subaccount, Conseco Variable Insurance Company ("Conseco Variable") (formerly
Great American Reserve Insurance Company) may calculate for each subaccount the
aggregate total return for the specified periods of time by assuming the
allocation of $10,000 to the subaccount and assuming the reinvestment of each
dividend or other distribution at Accumulation Unit value on the reinvestment
date. Percentage increases are determined by subtracting the initial value of
the investment from the ending value and by dividing the remainder by the
beginning value. Each subaccount may show non-standardized total returns and
average annual total returns that do not include the withdrawal charge (ranging
from 7% to 0%) which, if included, would reduce total return. Such alternative
total return information will be given no greater prominence in such advertising
than the information prescribed under SEC Rules.
DISTRIBUTION OF CONTRACTS
Conseco Equity Sales, Inc. ("CES"), 11825 North Pennsylvania Street,
Carmel, Indiana 46032, is the principal underwriter of the Contracts. Prior to
November 2, 1998, PADCO Financial Services, Inc., was the principal underwriter
of the Contracts. The offering of the Contracts is continuous, although Conseco
Variable reserves the right to suspend the offer and sale of the Contracts
whenever, in its opinion, market or other conditions make a suspension
appropriate. CES is a broker-dealer registered under the Securities Exchange Act
of 1934, as amended, and is a member of the National Association of Securities
Dealers, Inc. The Contracts are sold by authorized broker-dealers, and their
registered representatives, including registered representatives of CES. The
broker-dealers and their registered representatives are also licensed insurance
agents of Conseco Variable. Conseco Variable and its principal underwriter pay
commissions to authorized broker-dealers not exceeding 7.0% of purchase
payments.
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON CONSECO VARIABLE'S UNDERSTANDING
OF CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. CONSECO
VARIABLE 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. CONSECO VARIABLE DOES NOT GUARANTEE THE TAX STATUS
OF THE CONTRACTS. PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS 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 HEREIN 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 Internal Revenue Code of 1986, as amended (the "Code")
governs taxation of annuities in general. A Contract 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. For non-qualified Contracts, this cost basis is
generally the purchase payments, while for qualified Contracts 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 (adjusted for any period or refund feature)
bears to the expected return under the Contract. Payments received after the
investment in the Contract has been recovered (i.e. when the total of the
excludable amount equals the investment in the Contract) 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. Contract Owners, annuitants and beneficiaries under the
Contracts should seek competent financial advice about the tax consequences of
any distributions.
Conseco Variable is taxed as a life insurance company under the Code. For
federal income tax purposes, the Separate Account is not a separate entity from
Conseco Variable, and its operations form a part of Conseco Variable.
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 the imposition of federal income
tax to the Contract 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 Contract 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.
Regulations issued by the Treasury Department (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 deemed 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."
Conseco Variable intends that all Funds underlying the Contracts will be
managed 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 Contract Owner
control of the investments of the Separate Account will cause the Contract Owner
to be treated as the owner of the assets of the Separate Account, thereby
resulting in the loss of favorable tax treatment for the Contract. 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 Contract Owner control which may be exercised under the
Contract 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 Contract Owner's ability to
transfer among investment choices or the number and type of investment choices
available, would cause the Contract Owner to be considered as the owner of the
assets of the Separate Account resulting in the imposition of federal income tax
to the Contract Owner with respect to earnings allocable to the Contract prior
to receipt of payments under the Contract.
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 Contract
Owners being retroactively determined to be the owners of the assets of the
Separate Account.
Due to the uncertainty in this area, Conseco Variable reserves the right to
modify the Contract in an attempt to maintain favorable tax treatment.
MULTIPLE CONTRACTS
The Code provides that multiple non-qualified annuity contracts which are
issued within a calendar year to the same contract owner by one company or its
affiliates are treated as one annuity contract 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. For purposes of this rule, contracts received in a
Section 1035 exchange will be considered issued in the year of the exchange.
Contract Owners should consult a tax adviser prior to purchasing more than one
non-qualified annuity contract in any calendar year.
CONTRACTS OWNED BY OTHER THAN NATURAL PERSONS
Under Section 72(u) of the Code, the investment earnings on premiums for
the Contracts will be taxed currently to the Contract Owner if the Contract
Owner is a non-natural person, e.g., a corporation or certain other entities.
Such Contracts generally will not be treated as annuities for federal income tax
purposes. However, this treatment is not applied to a Contract held by a trust
or other entity as an agent for a natural person nor to Contracts held by
qualified plans. Purchasers should consult their own tax counsel or other tax
adviser before purchasing a Contract to be owned by a non-natural person.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract may be a taxable event. Contract
Owners should therefore consult competent tax advisers should they wish to
assign or pledge their Contracts.
If the Contract is issued pursuant to a qualified plan it may not be
assigned, pledged or otherwise transferred except as allowed under applicable
law.
INCOME TAX WITHHOLDING
All distributions or the portion thereof which is includible in the gross
income of the Contract 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 Contract Owner,
in most cases, may elect not to have taxes withheld or to have withholding done
at a different rate.
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. returns of
after-tax contributions); or d) hardship withdrawals. Participants should
consult their own tax counsel or other tax adviser regarding withholding
requirements.
TAX TREATMENT OF WITHDRAWALS - NON-QUALIFIED CONTRACTS
Section 72 governs treatment of distributions from annuity contracts.
Section 72 generally provides that if the contract 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.
Section 72 further provides that a ten percent (10%) penalty will apply to the
income portion of any premature distribution. However, the penalty is not
imposed on amounts received: (a) after you reach age 59 1/2; (b) after your
death; (c) if you become 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 your life (or life
expectancy) or for the joint lives (or joint life expectancies) of you and your
beneficiary; (e) under an immediate annuity; or (f) which are allocable to
purchase payments made prior to August 14, 1982.
With respect to (d) above, if the series of substantially equal periodic
payments is modified before the later of your attaining age 59 1/2 or 5 years
from the date of the first periodic payment, then the tax for the year of the
modification is increased by an amount equal to the tax which would have been
imposed (the 10% penalty tax) but for the exception, plus interest for the tax
years in which the exception was used.
The above information does not apply to qualified Contracts. However,
separate tax withdrawal penalties and restrictions may apply to such qualified
Contracts. (See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
QUALIFIED PLANS
The Contracts offered herein are designed to be suitable for use under
various types of qualified plans. Taxation of participants in each qualified
plan varies with the type of plan and terms and conditions of each specific
plan. Contract 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 Contracts issued pursuant to the
plan. Some retirement plans are subject to distribution and other requirements
that are not incorporated into Conseco Variable's administrative procedures.
Contract Owners, participants and beneficiaries are responsible for determining
that contributions, distributions and other transactions with respect to the
Contracts comply with applicable law. Following are general descriptions of the
types of qualified plans with which the Contracts 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 issued under a
qualified plan.
Contracts issued pursuant to qualified plans include special provisions
restricting Contract provisions that may otherwise be available as described
herein. Generally, Contracts 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. (See "Tax
Treatment of Withdrawals - Qualified Contracts" below.)
On July 6, 1983, the Supreme Court decided in ARIZONA GOVERNING COMMITTEE
V. NORRIS that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women. The Contracts sold by CVIC in connection with
certain qualified plans will utilize annuity tables which do not differentiate
on the basis of sex. Such annuity tables will also be available for use in
connection with certain non-qualified deferred compensation plans.
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 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. 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 "Tax-Sheltered
Annuities - Withdrawal Limitations" below.) Employee loans are not
permitted under these Contracts. 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 up to
$2,000 per year 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
taxable income. These IRAs are subject to limitations on eligibility,
contributions, transferability and distributions. (See "Tax Treatment of
Withdrawals - Qualified Contracts" 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 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 to be
qualified as Individual Retirement Annuities should obtain competent tax
advice as to the tax treatment and suitability of such an investment.
Roth IRAs
Section 408A of the Code provides that beginning in 1998, individuals may
purchase a new type of non-deductible IRA, known as a Roth IRA. Purchase
payments for a Roth IRA are limited to a maximum of $2,000 per year and are
not deductible from taxable income. Lower maximum limitations apply to
individuals with adjusted gross incomes between $95,000 and $110,000 in the
case of single taxpayers, between $150,000 and $160,000 in the case of
married taxpayers filing joint returns, and between $0 and $10,000 in the
case of married taxpayers filing separately. An overall $2,000 annual
limitation continues to apply to all of a taxpayer's IRA contributions,
including Roth IRA and non-Roth IRAs.
Qualified distributions from Roth IRAs are free from federal income tax. A
qualified distribution requires that an individual has held a Roth IRA for
at least five taxable years and, in addition, that the distribution is
made: (i) after the individual reaches age 59 1/2, (ii) on the individual's
death or disability, or (iii) as a qualified first-time home purchase
(subject to a $10,000 lifetime maximum), for the individual, a spouse,
child, grandchild, or ancestor. Any distribution which is not a qualified
distribution is taxable to the extent of earnings in the distribution.
Distributions are treated as made from contributions first and therefore no
distributions are taxable until distributions exceed the amount of
contributions and conversions to the Roth IRA. The 10% penalty tax and the
regular IRA exceptions to the 10% penalty tax apply to taxable
distributions from a Roth IRA.
Amounts may be rolled over from one Roth IRA to another Roth IRA.
Furthermore, an individual may make a rollover contribution from a non-Roth
IRA to a Roth IRA ("conversion deposits"), unless the individual has
adjusted gross income over $100,000 or the individual is a married taxpayer
filing a separate return. The individual must pay tax on any portion of the
IRA being rolled over that represents income or a previously deductible IRA
contribution. However, for rollovers in 1998, the individual may pay that
tax ratably over the four taxable year period beginning with tax year 1998.
In addition, distribution of amounts attributable to conversion deposits
held for less than 5 taxable years will also be subject to the penalty tax.
Purchasers of Contracts intended to be qualified as a Roth IRA should
obtain competent tax advice as to the tax treatment and suitability of such
an investment.
TAX TREATMENT OF WITHDRAWALS - QUALIFIED CONTRACTS
In the case of a withdrawal under a qualified Contract, 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 issued and qualified under Code Sections 403(b)
(Tax-Sheltered Annuities) and 408 and 408A (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 Contract Owner reaches
age 59 1/2; (b) distributions following the death or disability of the Contract
Owner (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 Contract Owner or the joint lives (or joint
life expectancies) of such Contract Owner and his or her designated Beneficiary;
(d) distributions to a Contract Owner who has separated from service after he
has attained age 55; (e) distributions made to the Contract Owner to the extent
such distributions do not exceed the amount allowable as a deduction under Code
Section 213 to the Contract 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; (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 Contract Owner and his or
her spouse and dependents if the Contract Owner has received unemployment
compensation for at least 12 weeks (this exception will no longer apply after
the Contract Owner has been re- employed for at least 60 days); (h)
distributions from an Individual Retirement Annuity made to the Contract Owner
to the extent such distributions do not exceed the qualified higher education
expenses (as defined in Section 72(t)(7) of the Code) of the Contract Owner for
the taxable year; and (i) distributions from an Individual Retirement Annuity
made to the Contract Owner which are qualified first-time home buyer
distributions (as defined in Section 72(t)(8)of the Code.) 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.
With respect to (c) above, if the series of substantially equal periodic
payments is modified before the later of your attaining age 59 1/2 or 5 years
from the date of the first periodic payment, then the tax for the year of the
modification is increased by an amount equal to the tax which would have been
imposed (the 10% penalty tax) but for the exception, plus interest for the tax
years in which the exception was used.
MANDATORY DISTRIBUTIONS - QUALIFIED CONTRACTS
Generally, distributions from a qualified plan must begin no later than
April 1st of the calendar year following the later of (a) the year in which the
employee attains age 70 1/2 or (b) the calendar year in which the employee
retires. The date set forth in (b) does not apply to an Individual Retirement
Annuity. 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: (1) when the Contract Owner attains age 59
1/2; (2) when the Contract Owner separates from service; (3) when the Contract
Owner dies; (4) when the Contract Owner becomes disabled (within the meaning of
Section 72(m)(7) of the Code); (5) in the case of hardship; or (6) pursuant to
the terms of a qualified domestic relations order, if otherwise permissible.
However, withdrawals for hardship are restricted to the portion of the
Contract Owner's Contract Value which represents contributions made by the
Contract 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
Tax-Sheltered Annuity Plans. Contract Owners should consult their own tax
counsel or other tax adviser regarding any distributions.
INDEPENDENT ACCOUNTANTS
The financial statements of Conseco Variable as of December 31, 1998 and
1997, and for the years ended December 31, 1998, 1997 and 1996, included in this
Statement of Additional Information, have been audited by PricewaterhouseCoopers
LLP, 2900 One American Square, Box 82002, Indianapolis, Indiana, 46282-0002, as
stated in their report herein.
LEGAL OPINIONS
Blazzard, Grodd & Hasenauer, P.C. of Westport, Connecticut has provided
advice on certain matters relating to the federal securities and income tax laws
in connection with the Contracts described in the prospectus.
FINANCIAL STATEMENTS
The financial statements of Conseco Variable are included on the following
pages. They should only be considered as bearing on the ability of the Company
to meet its obligations under the Contracts.
The financial statements of Rydex Advisor Variable Annuity Account are also
included herein.
Table of Contents
December 31, 1998
================================================================================
Rydex Advisor Variable Annuity Account Page
Statement of Assets and Liabilities as of December 31, 1998 ............... 2
Statement of Operations for the Year Ended December 31, 1998 .............. 3
Statements of Changes in Net Assets
for the Years Ended December 31, 1998 and 1997 .......................... 5
Notes to Financial Statements ............................................. 9
Report of Independent Accountants ......................................... 11
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
Statement of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
====================================================================================================================================
SHARES COST VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in Rydex Variable Trust portfolio shares,
at net asset value (Note 2):
Juno Fund .................................................... 8,187.8 $ 68,747 $ 68,802
Money Market I Fund .......................................... 40,968,656.6 40,968,657 40,968,655
Nova Fund .................................................... 1,842,133.2 28,068,573 29,256,759
OTC Fund ..................................................... 1,126,249.1 20,669,670 22,037,316
Precious Metals Fund ......................................... 464,174.2 2,683,754 2,694,995
Ursa Fund .................................................... 874,306.5 5,498,574 5,509,005
U.S. Government Bond Fund .................................... 374,466.8 5,016,942 4,972,544
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets ......................................................................................... 105,508,076
Liabilities:
Amounts due to Conseco Variable Insurance Company .......................................................... 106,182
------------
Net assets (Note 6) .................................................................................. $105,401,894
====================================================================================================================================
<CAPTION>
UNITS UNIT VALUE REPORTED VALUE
------------------------------------------------------
<S> <C> <C> <C>
Net assets attributable to:
Contract owners' deferred annuity reserves:
Juno Fund .................................................... 8,180.7 $ 8.383692 $ 68,584
Money Market I Fund .......................................... 3,871,940.2 10.567066 40,915,048
Nova Fund .................................................... 1,845,343.0 15.845676 29,240,708
OTC Fund ..................................................... 1,127,437.9 19.522364 22,010,254
Precious Metals Fund ......................................... 464,950.2 5.792543 2,693,244
Ursa Fund .................................................... 875,815.4 6.286469 5,505,786
U.S. Government Bond Fund .................................... 373,333.0 13.307877 4,968,270
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets attributable to contract owners' deferred annuity reserves .................................. $105,401,894
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
Statement of Operations
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
====================================================================================================================================
RYDEX MONEY
VARIABLE TRUST JUNO MARKET I NOVA
1998(1) 1998(2) 1998(2) 1998(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:
Interest received from investments in securities ..................... $ -- $ 8,048 $ 1,176,135 $ 422,178
Dividends from investments in securities ............................. -- -- -- 9,338
Dividends from investments in portfolio shares ....................... 232,050 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment income ............................................ 232,050 8,048 1,176,135 431,516
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk fees ...................................... 183,695 1,918 271,471 151,616
Administrative fees .................................................. 22,044 230 32,576 18,194
Other ................................................................ -- 3,505 347,483 263,278
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses ..................................................... 205,739 5,653 651,530 433,088
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income ............................................ 26,311 2,395 524,605 (1,572)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized gains (losses) and unrealized appreciation
(depreciation) on investments:
Net realized gains (losses) on sales of investments in securities .... -- (21,692) -- (1,384,843)
Net change in unrealized appreciation
(depreciation) of investments in securities ........................ -- 1,819 -- 944,617
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss on investments in securities .............................. -- (19,873) -- (440,226)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized gains on sales of investments in portfolio shares ....... 9,159,007 -- -- --
Net change in unrealized depreciation of investments
in portfolio shares ................................................ (1,573,770) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net gain on investments in portfolio shares ........................ 7,585,237 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from operations ............ $ 7,611,548 $ (17,478) $ 524,605 $ (441,798)
====================================================================================================================================
</TABLE>
(1) Period November 2, 1998, through December 31, 1998.
(2) Period January 1, 1998, through November 1, 1998.
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
Statement of Operations - Continued
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
====================================================================================================================================
U.S.
PRECIOUS GOVERNMENT
OTC METALS URSA BOND
1998(2) 1998(2) 1998(2) 1998(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:
Interest received from investments in securities ..................... $ 22,106 $ 220 $ 219,060 $ 12,680
Dividends from investments in securities ............................. 5,412 6,396 -- 48,402
Dividends from investments in portfolio shares ....................... -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment income ............................................ 27,518 6,616 219,060 61,082
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk fees ...................................... 119,669 9,169 64,878 16,279
Administrative fees .................................................. 14,360 1,100 7,785 1,953
Other ................................................................ 199,277 16,991 107,515 23,416
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses ..................................................... 333,306 27,260 180,178 41,648
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income ............................................ (305,788) (20,644) 38,882 19,434
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized gains (losses) and unrealized appreciation
(depreciation) on investments:
Net realized gains (losses) on sales of investments in securities .... 465,853 53,198 (1,045,533) 118,373
Net change in unrealized appreciation (depreciation)
of investments in securities ....................................... 3,223,602 19,034 (108,381) (46,092)
- ------------------------------------------------------------------------------------------------------------------------------------
Net gain (loss) on investments in securities ....................... 3,689,455 72,232 (1,153,914) 72,281
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized gains (losses) on sales of investments in
portfolio shares ................................................... -- -- -- --
Net change in unrealized appreciation (depreciation)
of investments in portfolio shares ................................. -- -- -- --
Net gain (loss) on investments in portfolio shares ................. -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations ....................... $ 3,383,667 $ 51,588 $(1,115,032) $ 91,715
====================================================================================================================================
</TABLE>
(2) Period January 1, 1998, through November 1, 1998
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
Statements of Changes in Net Assets
For the Year Ended December 31, 1998, and the Period Ended December 31, 1997
<TABLE>
<CAPTION>
====================================================================================================================================
RYDEX VARIABLE TRUST JUNO
--------------------------------------------------
1998 (1) 1998 (2) 1997 (3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Changes from operations:
Net investment income ........................................................ $ 26,310 $ 2,395 $ 6,316
Net realized gains (losses) on sales of investments .......................... 9,159,007 (21,692) (26,480)
Net change in unrealized appreciation (depreciation) of investments .......... (1,573,770) 1,819 --
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from operations ...................... 7,611,547 (17,478) (20,164)
- ------------------------------------------------------------------------------------------------------------------------------------
Changes from contract owners' transactions:
Net contract purchase payments ............................................... 15,167,095 2,976 6,578,572
Contract redemptions ......................................................... (2,204,222) (1,268) (6,558,408)
Net transfers (to) from fixed account ........................................ 11,808 111,042 --
Net assets transferred to Rydex Variable Trust ............................... 84,815,666 (95,272) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from contract owners' transactions .............. 97,790,347 17,478 20,164
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets ............................................... 105,401,894 -- --
Net assets, beginning of period ................................................. -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ................................................ $ 105,401,894 $ -- $ --
====================================================================================================================================
</TABLE>
(1) Period November 2, 1998, through December 31, 1998.
(2) Period January 1, 1998, through November 1, 1998.
(3) Period May 7, 1997, through December 31, 1997.
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
Statements of Changes in Net Assets - Continued
For the Year Ended December 31, 1998, and the Period Ended December 31, 1997
<TABLE>
<CAPTION>
====================================================================================================================================
MONEY MARKET I NOVA
---------------------------------------------------------------
1998 (2) 1997 (3) 1998 (2) 1997 (3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Changes from operations:
Net investment income (loss) ................................... $ 524,605 $ 221,638 $ (1,572) $ 25,410
Net realized gains (losses) on sales of investments ............ -- -- (1,384,843) 112,377
Net change in unrealized appreciation of investments ........... -- -- 944,617 198,918
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from operations ........ 524,605 221,638 (441,798) 336,705
- ------------------------------------------------------------------------------------------------------------------------------------
Changes from contract owners' transactions:
Net contract purchase payments ................................. 53,901,012 122,126,822 79,915 76,198,580
Contract redemptions ........................................... (4,910,715) (104,445,088) (810,397) (66,087,249)
Net transfers (to) from fixed account .......................... (35,290,688) -- 15,083,137 --
Net assets transferred to Rydex Variable Trust ................. (32,127,586) -- (24,358,893) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from contract
owners' transactions ....................................... (18,427,977) 17,681,734 (10,006,238) 10,111,331
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets ...................... (17,903,372) 17,903,372 (10,448,036) 10,448,036
Net assets, beginning of period ................................... 17,903,372 -- 10,448,036 --
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period .................................. $ -- $ 17,903,372 $ -- $ 10,448,036
====================================================================================================================================
</TABLE>
(2) Period January 1, 1998, through November 1, 1998.
(3) Period May 7, 1997, through December 31, 1997.
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
Statements of Changes in Net Assets - Continued
For the Year Ended December 31, 1998, and the Period Ended December 31, 1997
<TABLE>
<CAPTION>
====================================================================================================================================
OTC PRECIOUS METALS
-----------------------------------------------------------------
1998 (2) 1997 (3) 1998 (2) 1997 (4)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Changes from operations:
Net investment loss .......................................... $ (305,788) $ (15,375) $ (20,644) $ (5,585)
Net realized gains (losses) on sales of investments .......... 465,853 (81,503) 53,198 (365,727)
Net change in unrealized appreciation
(depreciation) of investments .............................. 3,223,602 (105,801) 19,034 39,904
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from operations ...... 3,383,667 (202,679) 51,588 (331,408)
- ------------------------------------------------------------------------------------------------------------------------------------
Changes from contract owners' transactions:
Net contract purchase payments ............................... 30,385 18,825,274 (657) 4,476,176
Contract redemptions ......................................... (346,725) (16,255,190) (10,139) (3,626,858)
Net transfers (to) from fixed account ........................ 10,730,100 -- 608,988 --
Net assets transferred to Rydex Variable Trust ............... (16,164,832) -- (1,167,690) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from contract
owners' transactions ..................................... (5,751,072) 2,570,084 (569,498) 849,318
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets .................... (2,367,405) 2,367,405 (517,910) 517,910
Net assets, beginning of period ................................. 2,367,405 -- 517,910 --
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ................................ $ -- $ 2,367,405 $ -- $ 517,910
====================================================================================================================================
</TABLE>
(2) Period January 1, 1998, through November 2, 1998.
(3) Period May 7, 1997, through December 31, 1997.
(4) Period May 29, 1997, through December 31, 1997.
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
Statements of Changes in Net Assets - Continued
For the Year Ended December 31, 1998, and the Period Ended December 31, 1997
<TABLE>
<CAPTION>
====================================================================================================================================
URSA U.S. GOVERNMENT BOND
-----------------------------------------------------------------
1998 (2) 1997 (3) 1998 (2) 1997 (4)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Changes from operations:
Net investment income (loss) ................................ $ 38,882 $ (3,330) $ 19,434 $ 5,858
Net realized gains (losses) on sales of investments ......... (1,045,533) (254,521) 118,373 14,916
Net change in unrealized appreciation
(depreciation) of investments ............................. (108,381) (77,323) (46,092) 16,633
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from operations ..... (1,115,032) (335,174) 91,715 37,407
- ------------------------------------------------------------------------------------------------------------------------------------
Changes from contract owners' transactions:
Net contract purchase payments .............................. 22,859 45,239,040 69 3,840,174
Contract redemptions ........................................ (400,593) (42,025,022) (23,708) (2,985,562)
Net transfers (to) from fixed account ....................... 4,285,421 -- 4,269,799 --
Net assets transferred to Rydex Variable Trust .............. (5,671,499) -- (5,229,894) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from contract
owners' transactions .................................... (1,763,812) 3,214,018 (983,734) 854,612
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets ................... (2,878,844) 2,878,844 (892,019) 892,019
Net assets, beginning of period ................................ 2,878,844 -- 892,019 --
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ............................... $ -- $ 2,878,844 $ -- $ 892,019
====================================================================================================================================
</TABLE>
(2) Period January 1, 1998, through November 2, 1998.
(3) Period May 7, 1997, through December 31, 1997.
(4) Period May 29, 1997, through December 31, 1997.
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
Notes to Financial Statements
December 31, 1998
================================================================================
(1) General
Rydex Advisor Variable Annuity Account (the "Account") is registered under
the Investment Company Act of 1940, as amended, as a unit investment trust. The
Account was established on April 15, 1996, as a segregated investment account
for individual variable annuity contracts issued by Conseco Variable Insurance
Company (the "Company") (formerly Great American Reserve Insurance Company prior
to its name change in October 1998) and commenced operations on May 7, 1997. The
Account was originally registered as a diversified, open-ended investment
company. On November 2, 1998, the Account was reorganized as a unit investment
trust pursuant to an Agreement and Plan of Reorganization approved by the
contract owners of the Account on October 26, 1998 (the "Reorganization"). On
November 2, 1998, the Account transferred its assets into the corresponding
portfolios of the Rydex Variable Trust in exchange for shares of the portfolios.
The respective interests of the contract owners in the Account immediately after
the Reorganization were equal to their interests in the Juno, Money Market I,
Nova, OTC, Precious Metals, Ursa and the U.S. Government Bond subaccounts
immediately before the Reorganization.
The operations of the Account are included in the operations of the Company
pursuant to the provisions of the Texas Insurance Code. The Company is an
indirect wholly owned subsidiary of Conseco, Inc., a publicly-held specialized
financial services holding company listed on the New York Stock Exchange.
Since November 2, 1998, the Account invests solely in the Rydex Variable
Trust (the "Trust"). The Trust consists of seven funds: Juno, Money Market,
Nova, OTC, Precious Metals, Ursa and U.S. Government Bond. The Trust is managed
by PADCO Advisors II, Inc. ("PADCO").
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net assets
during the reporting period. Actual results could differ from those estimates.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT VALUATION, TRANSACTIONS, AND INCOME
Investments in portfolio shares are valued using the net asset value of the
respective funds of the Trust at the end of each New York Stock Exchange
business day. Investment share transactions are accounted for on a trade date
basis (the date the order to purchase or redeem shares is executed) and dividend
income is recorded on the ex-dividend date. Prior to November 2, 1998, interest
income was accrued on a daily basis. The cost of investments in portfolio shares
sold is determined on a first-in first-out basis. The Account does not hold any
investments which are restricted as to resale.
Net investment income and net realized gains (losses) and unrealized
appreciation (depreciation) on investments are allocated to the contracts on
each valuation date based on each contract's pro rata share of the assets of the
Account as of the beginning of the valuation date.
FEDERAL INCOME TAXES
No provision for federal income taxes has been made in the accompanying
financial statements because the operations of the Account are included in the
total operations of the Company, which is treated as a life insurance company
for federal income tax purposes under the Internal Revenue Code. Net investment
income and realized gains (losses) are retained in the Account and are not
taxable until received by the contract owner or beneficiary in the form of
annuity payments or other distributions.
ANNUITY RESERVES
Deferred annuity contract reserves are comprised of net contract purchase
payments less redemptions and benefits. These reserves are adjusted daily for
the net investment income and net realized gains (losses) and unrealized
appreciation (depreciation) on investments.
(3) Purchases and Sales of Investments in Securities and Investments in
Portfolio Shares
The aggregate cost of purchases of investments in securities were
$116,032,035 for the period January 1, 1998, through November 2, 1998. The
aggregate proceeds from sales of investments in securities were $120,715,273 for
the period January 1, 1998, through November 2, 1998.
The aggregate cost of purchases of investments in portfolio shares were
$297,900,921 for the period November 2, 1998, to December 31, 1998 (including
transfers related to the Reorganization of $80,508,735). The aggregate proceeds
from sales of investments in portfolio shares were $204,085,011 for the period
November 2, 1998, through December 31, 1998.
9
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
Notes to Financial Statements - Continued
December 31, 1998
================================================================================
(4) Deductions and Expenses
The mortality risk assumed by the Company results from the life annuity
payment option in the contracts in which the Company agrees to make annuity
payments regardless of how long a particular annuitant or other payee lives. The
annuity payments are determined in accordance with annuity purchase rate
provisions established at the time the contracts are issued. Based on the
actuarial determination of expected mortality, the Company is required to fund
any deficiency in the annuity payment reserves from its general account assets.
The expense risk assumed by the Company is the risk that the deductions for
contract administrative charges and transfer processing fees may prove
insufficient to cover the actual administrative and transfer processing
expenses. The Company deducts daily from the Account a fee, which is equivalent
on an annual basis to 1.25 percent of the daily value of the total investments
of the Account, for assuming the mortality and expense risks. These total fees
for the Account were $818,697 and $154,279 for the periods ended December 31,
1998 and 1997, respectively.
The Company provides sales and administrative services to the Account. The
Company may deduct a percentage of amounts surrendered to cover sales expenses.
The percentage varies up to 7.00 percent based upon the number of years the
contract has been held. These total fees for the Account were $344,498 and
$8,611 for the periods ended December 31, 1998 and 1997, respectively. The
Company also deducts daily from the Account a fee, which is equivalent on an
annual basis to 0.15 percent of the daily value of the total investments of the
Account for administrative expenses. These total fees for the Account were
$98,244 and $18,514 for the periods ended December 31, 1998 and 1997,
respectively.
Under the terms of an investment advisory contract, the Account paid PADCO
investments advisory fees calculated at an annual percentage rate of 0.50
percent of the average net assets of the Money Market and the U.S. Government
Bond subaccounts, 0.75 percent of the average net assets of the Nova, Precious
Metals and OTC subaccounts, and 0.90 percent of the average net assets of the
Ursa and the Juno subaccounts.
PADCO Services, Inc. (the "Servicer") provided tactical allocation
administrative services to the Account during the periods of May 7, 1997,
through December 31, 1997, and January 1, 1998, through November 2, 1998,
calculated at an annual percentage rate of 0.20 percent of the average net
assets of the Money Market, U.S. Government Bond, Precious Metals and the OTC
subaccounts; and at an annual rate of 0.25 percent of the average net assets of
the Nova, Ursa and the Juno subaccounts. The Servicer also provided other
necessary services to the Account, such as accounting and auditing services,
custody, printing and mailing, etc. during these periods.
PADCO and the Servicer voluntarily agreed to waive their investment
advisory and tactical allocation administrative service fees and, if necessary,
to reimburse any subaccount expenses which would cause the ratios of expenses to
average net assets to exceed 2.80 percent in the Nova, OTC and Precious Metals
subaccounts, 2.90 percent in the Juno and Ursa subaccounts, 2.20 percent in the
Money Market subaccount and 2.40 percent in the U.S. Government Bond subaccount
for the period May 7, 1997, through December 31, 1997. Effective January 1,
1998, these voluntary limitations increased to 3.60 percent in the Nova, OTC and
Precious Metals subaccounts, 3.70 percent in the Juno and Ursa subaccounts, 3.00
percent in the Money Market subaccount, and 3.20 percent in the U.S. Government
Bond subaccount.
The investment advisory fees were payable during the periods of May 7,
1997, through December 31, 1997, and January 1, 1998, through November 2, 1998.
The applicable fees paid by the Account were $331,465 and $77,484 for the 1998
and 1997 periods, respectively. However, the Account was reimbursed $85,124 and
$77,484 from PADCO for the 1998 and 1997 periods, respectively. Expenses paid by
the Account to the Servicer during the 1998 and 1997 periods were $200,318 and
$26,693 for the 1998 and 1997 periods, respectively. However, the Account was
reimbursed $20,511 and $26,693 for the 1998 and 1997 periods, respectively. Both
expenses are reported as other expenses in the Statement of Operations.
(5) Other Transactions With Affiliates
Conseco Equity Sales, Inc., a wholly owned subsidiary of Conseco, Inc.,
acts as principal underwriter for the Account.
(6) Net Assets
Net assets consisted of the following at December 31, 1998:
================================================================================
Proceeds from the sales of units since organization,
less cost of units redeemed ............................... $ 95,606,795
Undistributed net investment income .......................... 515,442
Undistributed net realized gains on sales
of investments ............................................. 6,746,497
Net unrealized appreciation of investments ................... 2,533,160
- --------------------------------------------------------------------------------
Net assets .............................................. $105,401,894
================================================================================
10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
================================================================================
To The Board of Directors of Conseco Variable
Insurance Company and Contract Owners of
Rydex Advisor Variable Annuity Account
In our opinion, the accompanying statement of assets and liabilities and
the related statements of operations and of changes in net assets present
fairly, in all material respects, the financial position of the Rydex Advisor
Variable Annuity Account (the "Account") at December 31, 1998 and the results of
its operations for the year ended December 31, 1998 and the changes in its net
assets from inception (May 7, 1997) through December 31, 1997 and for the year
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Account's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of portfolio shares owned at December 31, 1998 by correspondence
with the custodian, provide a reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
Indianapolis, Indiana
February 24, 1999
11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Conseco Variable Insurance Company
In our opinion, the accompanying balance sheet and the related statements
of operations, shareholder's equity and cash flows present fairly, in all
material respects, the financial position of Conseco Variable Insurance Company
(the "Company") at December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Indianapolis, Indiana
March 30, 1999
F-1
<TABLE>
<CAPTION>
CONSECO VARIABLE INSURANCE COMPANY
BALANCE SHEET
December 31, 1998 and 1997
(Dollars in millions)
ASSETS
1998 1997
---- ----
Investments:
Actively managed fixed maturities at fair value (amortized cost:
<S> <C> <C> <C> <C> <C> <C>
1998 - $1,520.5; 1997 - $1,705.2)............................................... $1,524.1 $1,734.0
Equity securities at fair value (cost: 1998 - $46.0 million; 1997 - $25.1 million). 45.7 25.4
Mortgage loans..................................................................... 110.2 146.1
Policy loans....................................................................... 79.6 80.6
Other invested assets ............................................................. 103.1 62.8
Short-term investments............................................................. 48.4 49.5
Assets held in separate accounts................................................... 696.4 402.1
---------- ----------
Total investments............................................................ 2,607.5 2,500.5
Accrued investment income.............................................................. 30.5 30.5
Cost of policies purchased............................................................. 98.0 106.4
Cost of policies produced.............................................................. 82.5 55.9
Reinsurance receivables................................................................ 22.2 21.9
Goodwill (net of accumulated amortization: 1998 - $14.7; 1997 - $13.2)................. 46.7 48.2
Other assets........................................................................... 24.3 8.3
----------- ------------
Total assets................................................................. $2,911.7 $2,771.7
======== ========
</TABLE>
(continued on next page)
The accompanying notes are an integral part
of the financial statements.
F-2
CONSECO VARIABLE INSURANCE COMPANY
BALANCE SHEET (Continued)
December 31, 1998 and 1997
(Dollars in millions, except per share amount)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
1998 1997
---- ----
<S> <C> <C>
Liabilities:
Insurance liabilities:
Interest sensitive products..................................................... $1,365.2 $1,522.1
Traditional products............................................................ 246.2 248.3
Claims payable and other policyholder funds..................................... 62.6 62.5
Liabilities related to separate accounts........................................ 696.4 402.1
Income tax liabilities............................................................. 37.5 44.2
Investment borrowings.............................................................. 65.7 61.0
Other liabilities.................................................................. 33.0 14.6
----------- -----------
Total liabilities.......................................................... 2,506.6 2,354.8
--------- ---------
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).................... 380.8 380.8
Accumulated other comprehensive income:
Unrealized gains of fixed maturity securities (net of applicable deferred
income taxes: 1998 - $.5; 1997 - $4.4)...................................... 1.0 8.2
Unrealized gains (losses) of other investments (net of applicable deferred
income taxes: 1998 - $(.9); 1997 - $.3)..................................... (1.8) .5
Retained earnings.................................................................. 25.1 27.4
----------- -----------
Total shareholder's equity................................................. 405.1 416.9
---------- ----------
Total liabilities and shareholder's equity................................. $2,911.7 $2,771.7
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
CONSECO VARIABLE INSURANCE COMPANY
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
for the years ended December 31, 1998, 1997 and 1996
(Dollars in millions)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Insurance policy income.......................................... $ 73.6 $ 75.7 $ 81.4
Net investment income............................................ 198.0 222.6 218.4
Net investment gains............................................. 18.5 13.3 2.7
-------- -------- ---------
Total revenues............................................. 290.1 311.6 302.5
------- ------- -------
Benefits and expenses:
Insurance policy benefits........................................ 170.6 191.0 180.6
Amortization..................................................... 33.6 27.1 20.3
Other operating costs and expenses............................... 38.7 32.2 60.5
-------- -------- --------
Total benefits and expenses................................ 242.9 250.3 261.4
------- ------- -------
Income before income taxes................................. 47.2 61.3 41.1
Income tax expense................................................... 16.6 22.1 15.4
-------- -------- --------
Net income................................................. $ 30.6 $ 39.2 $ 25.7
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
CONSECO VARIABLE INSURANCE COMPANY
<TABLE>
<CAPTION>
STATEMENT OF SHAREHOLDER'S EQUITY
for the years ended December 31, 1998, 1997 and 1996
(Dollars in millions)
Common stock Accumulated other
and additional comprehensive Retained
Total paid-in capital income (loss) earnings
----- --------------- ------------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1995................................. $442.6 $380.8 $ 12.4 $ 49.4
Comprehensive income, net of tax:
Net income............................................ 25.7 - - 25.7
Change in unrealized appreciation (depreciation) of
securities (net of applicable income taxes of ($9.7)) (17.0) - (17.0) -
-------
Total comprehensive income........................ 8.7
Dividends on common stock............................... (54.4) - - (54.4)
------- ---------- ----------- ---------
Balance, December 31, 1996................................. 396.9 380.8 (4.6) 20.7
Comprehensive income, net of tax:
Net income............................................ 39.2 - - 39.2
Change in unrealized appreciation (depreciation) of
securities (net of applicable income taxes of $7.2). 13.3 - 13.3 -
--------
Total comprehensive income........................ 52.5
Dividends on common stock............................... (32.5) - - (32.5)
------- ---------- ----------- ------
Balance, December 31, 1997................................. 416.9 380.8 8.7 27.4
Comprehensive income, net of tax:
Net income............................................ 30.6 - - 30.6
Change in unrealized appreciation (depreciation) of
securities (net of applicable income taxes of $(5.1)) (9.5) - (9.5) -
--------
Total comprehensive income........................ 21.1
Dividends on common stock............................... (32.9) - - (32.9)
------- ---------- ----------- ------
Balance, December 31, 1998................................. $405.1 $380.8 $ (.8) $ 25.1
====== ====== ======== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<TABLE>
<CAPTION>
CONSECO VARIABLE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
for the years ended December 31, 1998, 1997 and 1996
(Dollars in millions)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................$ 30.6 $ 39.2 $ 25.7
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization................................................ 43.0 27.1 20.3
Income taxes................................................ (1.2) 6.7 (3.9)
Insurance liabilities....................................... 120.0 95.2 112.5
Accrual and amortization of investment income................. 1.6 .3 3.1
Deferral of cost of policies produced ....................... (35.3) (31.8) (13.2)
Investment gains.............................................. (18.5) (13.3) (2.7)
Other......................................................... (38.3) (4.6) (8.8)
--------- ---------- ------------
Net cash provided by operating activities................... 101.9 118.8 133.0
----------- -------- -----------
Cash flows from investing activities:
Sales of investments.............................................. 1,185.0 755.2 988.9
Maturities and redemptions........................................ 145.5 150.4 101.7
Purchases of investments.......................................... (1,420.7) (923.5) (1,049.6)
---------- -------- ---------
Net cash provided (used) by investing activities............ (90.2) (17.9) 41.0
----------- --------- ------------
Cash flows from financing activities:
Deposits to insurance liabilities................................. 400.4 255.9 169.8
Investment borrowings............................................. 4.7 12.6 (35.8)
Withdrawals from insurance liabilities............................ (385.0) (302.2) (267.7)
Dividends paid on common stock.................................... (32.9) (32.5) (44.5)
------------ -------- -----------
Net cash used by financing activities....................... (12.8) (66.2) (178.2)
------------ --------- ----------
Net increase (decrease) in short-term
investments............................................... (1.1) 34.7 (4.2)
Short-term investments, beginning of year............................ 49.5 14.8 19.0
------------- --------- ------------
Short-term investments, end of year..................................$ 48.4 $ 49.5 $ 14.8
============= ======== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
CONSECO VARIABLE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Conseco Variable Insurance Company ("we" or the "Company") markets
tax-qualified annuities and certain employee benefit-related insurance products
through professional independent agents. Prior to its name change in October
1998, the Company was named Great American Reserve Insurance Company. Since
August 1995, the Company has been a wholly owned subsidiary of Conseco, Inc.
("Conseco"), a financial services holding company operating throughout the
United States. Conseco's life insurance subsidiaries develop, market and
administer supplemental health insurance, annuity, individual life insurance,
individual and group major medical insurance and other insurance products.
Conseco's finance subsidiaries originate, purchase, sell and service consumer
and commercial finance loans.
The following summary explains the accounting policies we use to arrive at
the more significant numbers in our financial statements. We prepare our
financial statements in accordance with generally accepted accounting principles
("GAAP"). We follow the accounting standards established by the Financial
Accounting Standards Board, the American Institute of Certified Public
Accountants and the Securities and Exchange Commission. We reclassified certain
amounts in our 1997 and 1996 financial statements and notes to conform with the
1998 presentation.
Investments
Fixed maturities are securities that mature more than one year after
issuance and include bonds, notes receivable and redeemable preferred stock.
Fixed maturities that we may sell prior to maturity are classified as actively
managed and are carried at estimated fair value, with any unrealized gain or
loss, net of tax and related adjustments, recorded as a component of
shareholder's equity. Fixed maturity securities that we intend to sell in the
near term are classified as trading and included in other invested assets. We
include any unrealized gain or loss on trading securities in net investment
gains.
Equity securities include investments in common stocks and non-redeemable
preferred stock. We carry these investments at estimated fair value. We record
any unrealized gain or loss, net of tax and related adjustments, as a component
of shareholder's equity.
Mortgage loans held in our investment portfolio are carried at amortized
unpaid balances, net of provisions for estimated losses.
Policy loans are stated at their current unpaid principal balances.
Other invested assets include trading securities and certain
non-traditional investments. Non-traditional investments include investments in
venture capital funds, limited partnerships, mineral rights and promissory
notes; we account for them using either the cost method, or for investments in
partnerships over whose operations the Company exercises significant influence,
the equity method.
Short-term investments include commercial paper, invested cash and other
investments purchased with maturities of less than three months. We carry them
at amortized cost, which approximates their estimated fair value. We consider
all short-term investments to be cash equivalents.
We defer any fees received or costs incurred when we originate investments
(primarily mortgage loans). We amortize fees, costs, discounts and premiums as
yield adjustments over the contractual lives of the investments. We consider
anticipated prepayments on mortgage-backed securities in determining estimated
future yields on such securities.
F-7
CONSECO VARIABLE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
When we sell a security (other than a trading security), we report the
difference between our sale proceeds and its amortized cost (determined based on
specific identification) as an investment gain or loss.
We regularly evaluate all of our investments based on current economic
conditions, credit loss experience and other investee-specific developments. If
there is a decline in a security's net realizable value that is other than
temporary, we treat it as a realized loss and reduce our cost basis of the
security to its estimated fair value.
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 that may arise out of any
other business of the Company. We report separate account assets at market
value; the underlying investment risks are assumed by the contract holders. We
record the related liabilities at amounts equal to the market value of the
underlying assets.
Cost of Policies Produced
The costs that vary with, and are primarily related to, producing new
insurance business are referred to as cost of policies produced. We amortize
these costs using the interest rate credited to the underlying policy; (I) in
relation to the estimated gross profits for universal life-type and
investment-type products; or (ii) in relation to future anticipated premium
revenue for other products.
When we sell investments backing our universal life or investment-type
product business at a gain or loss, we adjust the amortization to reflect the
change in future investment yields resulting from the sale (thereby changing the
future amortization to offset the change in yield). We also adjust the cost of
policies produced for the change in amortization that would have been recorded
if actively managed fixed maturity securities had been sold at their stated
aggregate fair value and the proceeds reinvested at current yields. We include
the impact of this adjustment in net unrealized appreciation (depreciation)
within shareholder's equity.
Each year, we evaluate the recoverability of the unamortized balance of the
cost of policies produced. We consider estimated future gross profits or future
premiums, expected mortality or morbidity, interest earned and credited rates,
persistency and expenses in determining whether the balance is recoverable.
Cost of Policies Purchased
The cost assigned to the right to receive future cash flows from contracts
existing at the date of an acquisition is referred to as cost of policies
purchased. This balance is amortized, evaluated for recoverability, and adjusted
for the impact of realized and unrealized gains (losses) in the same manner as
the cost of policies produced described above.
Goodwill
Goodwill is the excess of the amount paid to acquire the Company over the
fair value of its net assets. We amortize goodwill on the straight-line basis
over a 40-year period. We continually monitor the value of our goodwill based on
our estimates of future earnings. We determine whether goodwill is fully
recoverable from projected undiscounted net cash flows over the remaining
amortization period. If we were to determine that changes in such projected cash
flows no longer support the recoverability of goodwill over the remaining
amortization period, we would reduce its carrying value with a corresponding
charge to expense or shorten the amortization period (no such changes have
occurred).
Recognition of Insurance Policy Income and Related Benefits and Expenses on
Insurance Contracts
Generally, we recognize insurance premiums for traditional life and
accident and health contracts as earned over the
F-8
CONSECO VARIABLE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
premium-paying periods. We establish reserves for future benefits on a net-level
premium method based upon assumptions as to investment yields, mortality,
morbidity, withdrawals and dividends. We record premiums for universal life-type
and investment-type contracts that do not involve significant mortality or
morbidity risk as deposits to insurance liabilities. Revenues for these
contracts consist of mortality, morbidity, expense and surrender charges. We
establish reserves for the estimated present value of the remaining net costs of
all reported and unreported claims.
Reinsurance
In the normal course of business, we seek to limit our exposure to loss on
any single insured or to certain groups of policies by ceding reinsurance to
other insurance enterprises. We currently retain no more than $.5 million of
mortality risk on any one policy. We diversify the risk of reinsurance loss by
using a number of reinsurers that have strong claims-paying ratings. If any
reinsurer could not meet its obligations, the Company would assume the
liability. The likelihood of a material loss being incurred as the result of the
failure of one of our reinsurers is considered remote. The cost of reinsurance
ceded totaled $21.0 million, $24.2 million and $24.6 million in 1998, 1997 and
1996, respectively. Reinsurance recoveries netted against insurance policy
benefits totaled $21.8 million, $14.9 million and $19.4 million in 1998, 1997
and 1996, respectively.
Income Taxes
Our income tax expense includes deferred income taxes arising from
temporary differences between the tax and financial reporting bases of assets
and liabilities. In assessing the realization of deferred income tax assets, we
consider whether it is more likely than not that the deferred income tax assets
will be realized. The ultimate realization of deferred income tax assets depends
upon generating future taxable income during the periods in which temporary
differences become deductible. If future income is not generated as expected,
deferred income tax assets may need to be written off (no such write-offs have
occurred).
Investment Borrowings
As part of our investment strategy, we may enter into reverse repurchase
agreements and dollar-roll transactions to increase our investment return or to
improve our liquidity. We account for these transactions as collateral
borrowings, where the amount borrowed is equal to the sales price of the
underlying securities. Reverse repurchase agreements involve a sale of
securities and an agreement to repurchase the same securities at a later date at
an agreed-upon price. Dollar rolls are similar to reverse repurchase agreements
except that, with dollar rolls, the repurchase involves securities that are only
substantially the same as the securities sold. We account for these transactions
as short-term collateralized borrowings. Such borrowings averaged approximately
$66.0 million during 1998 (compared with an average of $90.4 million during
1997) and were collateralized by investment securities with fair values
approximately equal to the loan value. The weighted average interest rate on
short-term collateralized borrowings was 4.4 percent in both 1998 and 1997. The
primary risk associated with short-term collateralized borrowings is that a
counterparty will be unable to perform under the terms of the contract. Our
exposure is limited to the excess of the net replacement cost of the securities
over the value of the short-term investments (such excess was not material at
December 31, 1998). We believe the counterparties to our reverse repurchase and
dollar-roll agreements are financially responsible and that the counterparty
risk is minimal.
Use of Estimates
When we prepare financial statements in conformity with GAAP, we are
required to make estimates and assumptions that significantly affect various
reported amounts of assets and liabilities, and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reporting periods. For example, we use significant estimates
and assumptions in calculating values for the cost of policies produced, the
cost of policies purchased, goodwill, liabilities for insurance and deposit
products, liabilities related to litigation, guaranty fund assessment accruals,
gain on sale of finance receivables and deferred income taxes. If our future
experience differs materially from these estimates and assumptions, our
financial statements could be affected.
F-9
CONSECO VARIABLE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Fair Values of Financial Instruments
We use the following methods and assumptions to determine the estimated
fair values of financial instruments:
Investment securities. For fixed maturity securities (including redeemable
preferred stocks) and for equity and trading securities, we use quotes from
independent pricing services, where available. For investment securities
for which such quotes are not available, we use values obtained from
broker-dealer market makers or by discounting expected future cash flows
using a current market rate appropriate for the yield, credit quality, and
(for fixed maturity securities) the maturity of the investment being
priced.
Short-term investments. We use quoted market prices. The carrying amount
for these instruments approximates their estimated fair value.
Mortgage loans and policy loans. We discount future expected cash flows for
loans included in our investment portfolio based on interest rates
currently being offered for similar loans to borrowers with similar credit
ratings. We aggregate loans with similar characteristics in our
calculations.
Other invested assets. We use quoted market prices, where available.
When quotes are not available, we assume a market value equal to carrying
value.
Insurance liabilities for investment contracts. We discount future expected
cash flows based on interest rates currently being offered for similar
contracts with similar maturities.
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.
Here are the estimated fair values of our financial instruments:
<TABLE>
<CAPTION>
1998 1997
----------------------- ------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
(Dollars in millions)
<S> <C> <C> <C> <C>
Financial assets:
Actively managed fixed maturities............................ $1,524.1 $1,524.1 $1,734.0 $1,734.0
Equity securities ........................................... 45.7 45.7 25.4 25.4
Mortgage loans............................................... 110.2 119.0 146.1 154.6
Policy loans................................................. 79.6 79.6 80.6 80.6
Other invested assets........................................ 103.1 103.1 62.8 62.8
Short-term investments....................................... 48.4 48.4 49.5 49.5
Financial liabilities:
Insurance liabilities for investment contracts (1)........... 1,036.0 1,036.0 1,177.5 1,177.5
Investment borrowings........................................ 65.7 65.7 61.0 61.0
<FN>
(1) The estimated fair value of the liabilities for investment contracts was
approximately equal to its carrying value at December 31, 1998 and 1997.
This was because interest rates credited on the vast majority of account
balances approximate current rates paid on similar investment contracts
and because these rates are not generally guaranteed beyond one year. We
are not required to disclose fair values for insurance liabilities, other
than those for investment contracts. However, we take into consideration
the estimated fair values of all insurance liabilities in our overall
management of interest rate risk. We attempt to minimize exposure to
changing interest rates by matching investment maturities with amounts due
under insurance contracts.
</FN>
</TABLE>
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") was issued in
June 1998. SFAS 133 requires all derivative instruments to be recorded on
the balance sheet at estimated fair value. Changes in the fair value of
derivative instruments are to be recorded each period either in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, on the type of hedge
transaction. SFAS 133 is effective for year 2000. We are currently evaluating
the impact of SFAS 133; at present, we do not believe it will have a material
effect on our financial position or results of operations.
F-10
CONSECO VARIABLE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
2. INVESTMENTS:
At December 31, 1998, the amortized cost and estimated fair value of
actively managed fixed maturities and equity 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>
Investment grade:
Corporate securities................................................ $ 860.4 $20.7 $15.0 $ 866.1
United States Treasury securities and obligations of
United States government corporations and agencies................ 26.9 .8 .2 27.5
States and political subdivisions................................... 17.3 .3 - 17.6
Debt securities issued by foreign governments....................... 11.7 - .8 10.9
Mortgage-backed securities ......................................... 487.4 8.0 1.2 494.2
Below-investment grade (primarily corporate securities)................ 116.8 1.2 10.2 107.8
---------- ------- ------ ----------
Total actively managed fixed maturities........................... $1,520.5 $31.0 $27.4 $1,524.1
======== ===== ===== ========
Equity securities......................................................$ 46.0 $ .8 $ 1.1 $ 45.7
========== ======= ====== ==========
</TABLE>
At December 31, 1997, the amortized cost and estimated fair value of
actively managed fixed maturities and equity 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>
Investment grade:
Corporate securities................................................ $ 955.8 $28.3 $ 5.3 $ 978.8
United States Treasury securities and obligations of
United States government corporations and agencies................ 28.0 .7 - 28.7
States and political subdivisions................................... 20.4 1.1 .1 21.4
Debt securities issued by foreign governments....................... 13.5 .1 .7 12.9
Mortgage-backed securities ......................................... 551.6 8.6 .4 559.8
Below-investment grade (primarily corporate securities)................ 135.9 1.8 5.3 132.4
---------- ------- ------- ----------
Total actively managed fixed maturities........................... $1,705.2 $40.6 $11.8 $1,734.0
======== ===== ===== ========
Equity securities......................................................$ 25.1 $ .5 $ .2 $ 25.4
========== ======= ======= ==========
</TABLE>
Net unrealized gains (losses) on actively managed fixed maturity
investments included in shareholders' equity as of December 31, 1998 and 1997,
were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(Dollars in millions)
<S> <C> <C>
Net unrealized gains on actively managed fixed maturity investments.................................. $ 3.6 $ 28.8
Adjustments to cost of policies purchased and cost of policies produced.............................. (2.1) (16.2)
Deferred income tax benefit.......................................................................... (.5) (4.4)
------- --------
Net unrealized gain on actively managed fixed maturity investments........................... $ 1.0 $ 8.2
====== ========
</TABLE>
F-11
CONSECO VARIABLE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The following table sets forth the amortized cost and estimated fair value
of actively managed fixed maturities at December 31, 1998, by contractual
maturity. 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. Most of the mortgage-backed securities shown below
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........................................................................ $ 14.5 $ 14.5
Due after one year through five years.......................................................... 132.1 133.4
Due after five years through ten years......................................................... 249.3 245.6
Due after ten years............................................................................ 637.2 636.4
---------- ----------
Subtotal.................................................................................. 1,033.1 1,029.9
Mortgage-backed securities..................................................................... 487.4 494.2
---------- ----------
Total actively managed fixed maturities ............................................... $1,520.5 $1,524.1
======== ========
</TABLE>
Net investment income consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Actively managed fixed maturity securities........................................... $118.4 $133.6 $146.4
Equity securities.................................................................... 3.2 1.7 1.6
Mortgage loans....................................................................... 12.1 16.4 19.0
Policy loans......................................................................... 5.1 5.4 5.0
Other invested assets................................................................ 13.3 7.7 9.8
Short-term investments............................................................... 2.9 3.4 2.3
Separate accounts.................................................................... 44.1 55.7 35.6
-------- -------- --------
Gross investment income.......................................................... 199.1 223.9 219.7
Investment expenses.................................................................. 1.1 1.3 1.3
--------- --------- ---------
Net investment income......................................................... $198.0 $222.6 $218.4
====== ====== ======
</TABLE>
The Company had no significant fixed maturity investments and mortgage
loans that were not accruing investment income in 1998, 1997 and 1996.
F-12
CONSECO VARIABLE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Investment gains (losses), net of investment expenses, were included in
revenue as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Fixed maturities:
Gross gains........................................................................ $ 34.0 $20.6 $16.6
Gross losses....................................................................... (12.4) (5.1) (9.2)
Other than temporary decline in fair value......................................... - (.3) (.2)
----------- -------- -------
Net investment gains from fixed maturities before expenses.................... 21.6 15.2 7.2
Other.................................................................................. .1 2.2 (.6)
---------- ------- -------
Net investment gains before expenses.......................................... 21.7 17.4 6.6
Investment expenses.................................................................... 3.2 4.1 3.9
--------- ------- -------
Net investment gains.......................................................... $ 18.5 $13.3 $ 2.7
======= ===== ======
</TABLE>
At December 31, 1998, the mortgage loan balance was primarily comprised of
commercial loans. Approximately 15 percent, 12 percent, 12 percent, 11 percent
and 8 percent of the mortgage loan balance were on properties located in
California, Michigan, Florida, Texas and Georgia, respectively. No other state
comprised greater than 8 percent of the mortgage loan balance. Noncurrent
mortgage loans were insignificant at December 31, 1998. At December 31, 1998,
our allowance for loss on mortgage loans was $.8 million.
Life insurance companies are required to maintain certain investments on
deposit with state regulatory authorities. Such assets had an aggregate carrying
value of $16.1 million at December 31, 1998.
The Company had no investments in any single entity in excess of 10 percent
of shareholder's equity at December 31, 1998, other than investments issued or
guaranteed by the United States government or a United States government agency.
3. INSURANCE LIABILITIES:
These liabilities consisted of the following:
<TABLE>
<CAPTION>
Interest
Withdrawal Mortality rate
assumption assumption assumption 1998 1997
---------- ---------- ---------- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Future policy benefits:
Interest-sensitive products:
Investment contracts............................ N/A N/A (C) $1,036.0 $1,177.5
Universal life-type contracts................... N/A N/A 4.8% 329.2 344.6
---------- ----------
Total interest-sensitive products............. 1,365.2 1,522.1
--------- ---------
Traditional products:
Traditional life insurance contracts............ Company (a) 7.6% 139.9 142.8
experience
Limited-payment contracts....................... None (b) 7.6% 106.3 105.5
---------- ----------
Total traditional products.................... 246.2 248.3
---------- ----------
Claims payable and other policyholder funds ........ N/A N/A N/A 62.6 62.5
Liabilities related to separate accounts............ N/A N/A N/A 696.4 402.1
---------- ----------
Total........................................... $2,370.4 $2,235.0
======== ========
F-13
CONSECO VARIABLE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
<FN>
- -------------
(a) Principally modifications of the 1975 - 80 Basic, Select and Ultimate
Tables.
(b) Principally the 1984 United States Population Table and the NAIC 1983
Individual Annuitant Mortality Table.
(c) At December 31, 1998 and 1997, approximately 95 percent and 97 percent,
respectively, of this liability represented account balances where future
benefits are not guaranteed. The weighted average interest rate on the
remainder of the liabilities representing the present value of guaranteed
future benefits was approximately 6 percent at December 31, 1998.
</FN>
</TABLE>
4. INCOME TAXES:
Income tax liabilities were comprised of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
(Dollars in millions)
Deferred income tax liabilities (assets):
<S> <C> <C>
Investments (primarily actively managed fixed maturities).................................. $ 5.4 $ 9.8
Cost of policies purchased and cost of policies produced................................... 56.7 52.2
Insurance liabilities...................................................................... (28.2) (19.5)
Unrealized appreciation (depreciation)..................................................... (.4) 4.7
Other...................................................................................... (2.2) (4.0)
-------- ------
Deferred income tax liabilities....................................................... 31.3 43.2
Current income tax liabilities (assets)........................................................ 6.2 1.0
--------- -------
Income tax liabilities................................................................ $ 37.5 $ 44.2
======= ======
</TABLE>
Income tax expense was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Current tax provision..................................................................... $20.8 $16.3 $10.5
Deferred tax provision (benefit).......................................................... (4.2) 5.8 4.9
------ ------- -------
Income tax expense............................................................... $16.6 $22.1 $15.4
===== ===== =====
</TABLE>
A reconciliation of the income tax provisions based on the U.S. statutory
corporate tax rate to the provisions reflected in the statement of operations is
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Tax on income before income taxes at statutory rate....................................... 35.0% 35.0% 35.0%
State taxes............................................................................... 1.0 .7 1.5
Other..................................................................................... (.8) .3 1.0
----- ------ -------
Income tax expense............................................................... 35.2% 36.0% 37.5%
==== ==== ====
</TABLE>
5. OTHER DISCLOSURES:
Litigation
The Company is involved on an ongoing basis in lawsuits related to its
operations. Although the ultimate outcome of certain of such matters cannot be
predicted, none of such lawsuits currently pending against the Company is
expected, individually or in the aggregate, to have a material adverse effect
on the Company's financial condition, cash flows or results of operations.
F-14
CONSECO VARIABLE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Guaranty Fund Assessments
The balance sheet at December 31, 1998, includes: (i) accruals of $2.4
million, representing our estimate of all known assessments that will be levied
against the Company by various state guaranty associations based on premiums
written through December 31, 1998; and (ii) receivables of $1.9 million that we
estimate will be recovered through a reduction in future premium taxes as a
result of such assessments. These estimates are subject to change when the
associations determine more precisely the losses that have occurred and how such
losses will be allocated among the insurance companies. We recognized expense
for such assessments of $1.1 million in 1998, $1.2 million in 1997 and $1.4
million in 1996.
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) are based on Conseco's direct and directly allocable costs plus a 10
percent margin. Total fees incurred by the Company under such agreements were
$37.8 million in 1998, $36.7 million in 1997 and $44.1 million in 1996.
During 1998 and 1997, the Company purchased $13.0 million and $11.2 million
par value, respectively, of senior subordinated notes issued by subsidiaries of
Conseco. Such notes had a carrying value of $45.5 million and $29.8 million at
December 31, 1998 and 1997, respectively, and are classified as "other invested
assets" in the accompanying balance sheet. In addition, during 1997, a
subsidiary of Conseco redeemed $16.5 million par value of such notes which were
purchased in 1996.
6. OTHER OPERATING STATEMENT DATA:
Insurance policy income consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Traditional products:
Direct premiums collected......................................................... $445.8 $309.6 $241.3
Reinsurance assumed............................................................... 15.6 14.9 1.7
Reinsurance ceded................................................................. (21.0) (24.2) (24.6)
------- ------- -------
Premiums collected, net of reinsurance...................................... 440.4 300.3 218.4
Less premiums on universal life and products
without mortality and morbidity risk which are
recorded as additions to insurance liabilities ................................ 400.4 255.9 169.8
------- ------- -------
Premiums on traditional products with mortality or morbidity risk,
recorded as insurance policy income...................................... 40.0 44.4 48.6
Fees and surrender charges on interest sensitive products............................. 33.6 31.3 32.8
-------- -------- --------
Insurance policy income..................................................... $ 73.6 $ 75.7 $ 81.4
======= ======= =======
</TABLE>
The five states with the largest shares of 1998 collected premiums were
Texas (17 percent), Florida (16 percent), California (13 percent), Michigan (7.1
percent) and Indiana (6.2 percent). No other state accounted for more than 5.0
percent of total collected premiums.
F-15
CONSECO VARIABLE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Changes in the cost of policies purchased were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Balance, beginning of year............................................................ $106.4 $143.0 $120.0
Amortization...................................................................... (21.1) (15.4) (15.3)
Amounts related to fair value adjustment of actively managed fixed maturities..... 11.8 (21.2) 36.6
Other ............................................................................ .9 - 1.7
---------- ----------- ---------
Balance, end of year.................................................................. $ 98.0 $106.4 $143.0
======= ====== ======
</TABLE>
Based on current conditions and assumptions as to future events on all
policies in force, the Company expects to amortize approximately 10 percent of
the December 31, 1998, balance of cost of policies purchased in 1999, 9 percent
in 2000, 9 percent in 2001, 8 percent in 2002 and 8 percent in 2003. The
discount rates used to determine the amortization of the cost of policies
purchased ranged from 3.6 percent to 8.0 percent and averaged 5.8 percent.
Changes in the cost of policies produced were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Balance, beginning of year............................................................ $ 55.9 $38.2 $24.0
Additions......................................................................... 35.3 31.8 13.2
Amortization...................................................................... (11.0) (10.2) (3.5)
Amounts related to fair value adjustment of actively managed fixed maturities..... 2.3 (3.9) 4.5
--------- ------- -------
Balance, end of year.................................................................. $ 82.5 $55.9 $38.2
======= ===== =====
</TABLE>
7. STATEMENT OF CASH FLOWS:
Income taxes paid during 1998, 1997, and 1996, were $17.1 million, $14.8
million and $18.1 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.
8. 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>
1998 1997
---- ----
(Dollars in millions)
<S> <C> <C>
Statutory capital and surplus.................................................. $134.0 $140.7
Asset valuation reserve........................................................ 30.9 29.2
Interest maintenance reserve................................................... 73.1 68.8
-------- --------
Total...................................................................... $238.0 $238.7
====== ======
</TABLE>
F-16
CONSECO VARIABLE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The Company's statutory net income was $32.7 million, $32.7 million and
$32.6 million in 1998, 1997 and 1996, respectively.
State insurance laws generally restrict the ability of insurance companies
to pay dividends or make other distributions. Approximately $32.9 million of the
Company's net assets at December 31, 1998, are available for distribution in
1999 without permission of state regulatory authorities.
F-17
