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Rule 497(e)
File No. 333-03963
STATEMENT OF ADDITIONAL INFORMATION
FOR THE
ALLOCATOR 2000 FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY POLICY
Offered by
Acacia National Life Insurance Company
This Statement of Additional Information expands upon subjects discussed in the
Prospectus for the Allocator 2000 Flexible Premium Deferred Variable Annuity
Policy ("Policy") offered by Acacia National Life Insurance Company ("ANLIC")
and funded by Acacia National Variable Annuity Separate Account II ("Variable
Account"). You may obtain a copy of the Prospectus dated May 1, 1998, by writing
to ANLIC's Service Office, P.O. Box 79574, Baltimore, Maryland 21279-0574 or by
telephoning 1-800-369-9407. The Prospectus is available in both printed and
digital formats. Terms used in the Prospectus are incorporated into this
Statement of Additional Information.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE READ
ONLY IN CONJUNCTION WITH THE PROSPECTUS FOR THE POLICY.
Dated: May 1, 1998, as supplemented November 6, 1998
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TABLE OF CONTENTS
Page
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GENERAL PROVISIONS..................................................... 3
The Policy.................................................... 3
Misstatement of Age or Sex.................................... 3
Nonparticipating.............................................. 3
Periodic Reports.............................................. 3
Policy Dates.................................................. 3
Termination................................................... 4
Owner and Joint Owner......................................... 4
Beneficiary Change............................................ 4
Assignment.................................................... 4
Delay or Suspension of Payments............................... 4
ACCUMULATION UNITS..................................................... 5
Accumulation Units............................................ 5
Net Investment Factor......................................... 5
FIXED ACCOUNT.......................................................... 6
General Description........................................... 6
Transfer Limitation........................................... 7
Fixed Account Value........................................... 7
SURRENDER CHARGE CALCULATIONS.......................................... 7
PERFORMANCE DATA CALCULATIONS.......................................... 9
Social Money Market Sub-account's Yield Calculation........... 9
Other Sub-accounts' Yield Calculations........................ 10
Standardized Average Annual Total Return Calculations......... 10
Non-Standardized Return Calculations.......................... 11
Cumulative Total Return Calculations.......................... 11
PERFORMANCE FIGURES.................................................... 11
FEDERAL TAX MATTERS.................................................... 14
Taxation of ANLIC............................................. 14
Tax Status of the Policies.................................... 14
Withholding................................................... 14
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS...................... 15
DISTRIBUTION OF THE POLICIES........................................... 15
STATE REGULATION....................................................... 16
RECORDS AND REPORTS.................................................... 16
LEGAL MATTERS.......................................................... 16
EXPERTS................................................................ 16
OTHER INFORMATION...................................................... 16
FINANCIAL STATEMENTS................................................... 16
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Throughout this Statement of Additional Information, the words "us", "we",
"our", and "ANLIC" refer to Acacia National Life Insurance Company, and the
words "you", "your", and "Owner" refer to the policy owner.
GENERAL PROVISIONS
THE POLICY
The Policy is a flexible premium deferred variable annuity policy.
(a) The Policy may be purchased on a non-tax qualified basis
("Nonqualified Policy"). The Policy may also be purchased and used in
connection with retirement plans or individual retirement accounts
that qualify for favorable federal income tax treatment ("Qualified
Policy").
(b) Before we will issue a Policy, we must receive a completed
application. A minimum Premium Payment of $300 during the first Policy
year is required.
(c) The Policy, the application and any applicable riders are the entire
contract. Only our Elected Officers can agree to change or waive any
provisions of the Policy. Any change or waiver must be in writing and
signed by such Elected Officers.
MISSTATEMENT OF AGE OR SEX
If the age or sex of the Annuitant has been misstated, the benefits payable
under the Policy will be equal to the benefits which the Premium Payments would
have provided for the correct age or sex (if such distinction based upon sex is
allowed by law).
We may require proof of the age of the Annuitant before making any Annuity
Payments under the Policy.
If a misstatement of age or sex results in monthly income payments that are
too large, the overpayments will be deducted from future payments. If we have
made payments that are too small, the underpayment will be added to the next
payment. Adjustments for overpayments or underpayment will include the compound
interest rate used to determine the Annuity Payments.
NONPARTICIPATING
No dividends will be paid. Neither you nor the Beneficiary will have the
right to share in our surplus earnings or profits.
PERIODIC REPORTS
At least once each Policy year, we will send you a statement showing your
Policy Account Value as of a date not more than two months prior to the date of
mailing. We will also send such statements as may be required by applicable
state and federal laws, rules, and regulations.
POLICY DATES
Policy months, years and Policy Anniversaries are measured from the Policy
Date shown on the Policy.
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TERMINATION
The Policy will remain in force until surrendered for its Surrender Value,
Annuity Payments begin, or the Death Benefit has been paid.
After the first five Policy years, we may cancel the Policy if for two
subsequent years you have not made any Premium Payments and the Policy Account
Value is less than $2,000 or would provide for less than $20 monthly payments
under any Annuity Payment Option. We will then pay you the Surrender Value in
one lump sum.
OWNER AND JOINT OWNER
The Owner is the individual named as such in the application or in any
later change shown in ANLIC's records. There may be Joint Owners. Prior to the
Maturity Date and during any Annuitant's lifetime, only the Owner has the right
to receive all benefits and may exercise the rights under this Policy. If there
are Joint Owners, the signatures of both Owners are needed to exercise rights
under the Policy. Joint Owners are not permitted for Policies issued in
connection with Qualified Plans.
If the Annuitant is not an Owner and the Annuitant dies before the Maturity
Date, the Owner may name a new Annuitant. If the Owner doesn't name a new
Annuitant, the Owner will become the Annuitant. If one of the Joint Annuitants
dies prior to the Maturity Date, the survivor shall become the sole Annuitant.
BENEFICIARY CHANGE
Unless the Beneficiary is irrevocable, you may change the named Beneficiary
by sending a written request in a form acceptable to us to our Service Office.
If the named Beneficiary is irrevocable, you may change the named Beneficiary
only by joint written request from you and such named Beneficiary.
You need not send us the Policy unless we request it. When recorded and
acknowledged by us, the change will be effective as of the date you signed the
request. The change will not apply to any payments made or other action taken by
us before we recorded and acknowledged the request.
ASSIGNMENT
You may assign the Policy as collateral, unless prohibited elsewhere in the
Prospectus or in the Policy itself. We will not be bound by the Assignment until
a copy is filed with us. We assume no responsibility for determining whether an
Assignment is valid or the extent of the assignee's interest.
No Beneficiary may assign any benefits under the Policy until they are due
and, to the extent permitted by law, payments are not subject to the debts of
any Beneficiary nor to any judicial process for payment of the Beneficiary's
debts.
DELAY OR SUSPENSION OF PAYMENTS
We will normally pay a surrender or withdrawal within seven days after we
receive your Written Request in our Service Office. However, transfers and
payment of any amount from the Sub-accounts may be delayed or suspended
whenever:
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(a) the New York Stock Exchange is closed other than customary weekend and
holiday closing, or trading on the New York Stock Exchange is
restricted as determined by the Securities and Exchange Commission
("SEC");
(b) the SEC by order permits postponement for the protection of Owners; or
(c) an emergency exists, as determined by the SEC, as a result of which
disposal of the securities held in the Sub-accounts is not reasonably
practicable or it is not reasonably practicable to determine the value
of the Variable Account's net assets.
Payment of any amounts from the Fixed Account may be deferred for up to six
months from the date of the request to surrender. If payment is deferred for
more than 30 days, we will pay interest on the amount deferred at a rate not
less the Guaranteed Minimum Interest Rate.
Payments under the Policy of any amounts derived from Premium Payments paid
by check may be delayed until such time as the check has cleared your bank.
ACCUMULATION UNITS
ACCUMULATION UNITS
An Accumulation Unit is an accounting unit of measure used to calculate the
value of your interest in the Sub- accounts. The net portion of a Premium
Payment that you allocate to a Sub-account is credited as Accumulation Units in
that Sub-account. Similarly, the value that you transfer to a Sub-account is
credited as Accumulation Units in that Sub- account. The number of Accumulation
Units to be credited to the Policy for each Sub-account is determined by
dividing (1) the net Premium Payments allocated to each Sub-account by (2) the
Accumulation Unit Value for that Sub-account for the Valuation Period during
which we received the Premium Payment or transfer request at our Service Office,
or in the case of the initial Premium Payment, for the Valuation Period during
which the Application is accepted.
The initial value of an Accumulation Unit for each Sub-account was
arbitrarily set at ten dollars ($10) when the first investments were bought,
except for the Social Money Market Sub-account which was set at one dollar ($1).
The value for any later Valuation Period is determined by multiplying the
Accumulation Unit Value for a Sub-account for the last prior Valuation Period by
such Sub-account's "net investment factor" for the following Valuation Period.
Like the Policy Account Value, the value of an Accumulation Unit may increase or
decrease from one Valuation Period to the next.
NET INVESTMENT FACTOR
The "net investment factor" is an index that measures the investment
performance of a Sub-account from one Valuation Period to the next. The net
investment factor may be greater or less than one, so the value of a Sub-account
may increase or decrease.
The net investment factor for each Sub-account for any Valuation Period is
determined by dividing (a) by (b), where:
(a) is the net result of:
(1) the net asset value per share of the Portfolio shares held in the
Sub-account determined as of the end of the current Valuation
Period; plus
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(2) the per share amount of any dividend or capital gain
distributions made by the Portfolio on shares held in the
Sub-account, if the "ex-dividend" date occurs during the current
Valuation Period; plus or minus
(3) a per unit charge or credit for any taxes incurred by or reserved
for in the Sub-account, which is determined by ANLIC to have
resulted from the maintenance of the Sub-account; and
(b) is the net result of:
(1) the net asset value per share of the Portfolio shares held in the
Sub-account, determined as of the end of the immediately
preceding Valuation Period; plus or minus
(2) the per unit charge or credit for any taxes reserved for the
immediately preceding Valuation Period.
FIXED ACCOUNT
The Prospectus and this Statement of Additional Information are generally
intended to serve as a disclosure document only for the Policy and the Variable
Account. For complete details regarding the Fixed Account, see the Policy
itself.
Premium Payments allocated and amounts transferred to the Fixed Account
become part of the General Account assets of ANLIC. Interests in the General
Account have not been registered under the Securities Act of 1933, as amended
(the "1933 Act"), nor is the General Account registered as an investment company
under the Investment Company Act of 1940 Act, as amended (the "1940 Act").
Accordingly, neither the General Account nor any interests therein are generally
subject to the provisions of the 1933 or 1940 Acts, and ANLIC has been advised
that the staff of the SEC has not reviewed the disclosures in this Prospectus
which relate to the Fixed Account.
GENERAL DESCRIPTION
The General Account consists of all assets owned by ANLIC other than those
in the Variable Account and other separate accounts. Subject to applicable law,
ANLIC has sole discretion over the investment of the assets in the General
Account.
The General Account is supported by ANLIC's assets that are held in the
General Account. Premium Payments applied and any amounts transferred to the
General Account are credited with a fixed rate of interest for a specified
period. This is the account known as the "Fixed Account".
The allocation of Premium Payments and/or transfer of Policy Account Value
to the Fixed Account does not entitle an Owner to share in the investment
experience of the General Account. Instead, the guaranteed interest rate used in
the calculation of the Fixed Account Value is the amount stated in the Policy,
compounded annually, or any higher amount of interest in excess of the
guaranteed rate may be used in the calculation of the Fixed Account Value at
such times and in such a manner as we may determine. Interest rates will be
determined on no less than an annual basis.
Prior to the Maturity Date, you may elect to allocate net Premium Payments
to the Fixed Account or to transfer Policy Account Value to or from the Fixed
Account (subject to certain restrictions upon transfers from the Fixed Account,
as discussed, below).
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TRANSFER LIMITATION
The maximum amount allowed to be transferred out of the Fixed Account
during one Policy Year is 100% of Fixed Account interest accrued since the last
Policy Anniversary, plus 10% of:
(1) Account Value of the Fixed Account as of the last Policy Anniversary;
plus
(2) Deposits and transfers made into the Fixed Account since the last
Policy Anniversary; minus
(3) All partial withdrawals from the Fixed Account since the last Policy
Anniversary.
You may also elect to systematically reallocate all interest generated from
the Fixed Account into the Sub-accounts of the Variable Account on an interest
only basis according to your allocation election. (See "Interest Sweep Program"
in the Prospectus.)
FIXED ACCOUNT VALUE
We will credit all net Premium Payments allocated to the Fixed Account to
your Fixed Account Value. The Fixed Account Value at any time equals:
(1) The net Premium Payments allocated to the Fixed Account; plus
(2) The total of all amounts transferred to the Fixed Account from the
Variable Account; minus
(3) The total of all amounts transferred from the Fixed Account to the
Variable Account, minus
(4) The total of all Policy fees attributable to the Fixed Account; minus
(5) The total of all partial withdrawals from the Fixed Account (including
any Surrender Charges); plus
(6) Interest.
ANLIC'S MANAGEMENT HAS COMPLETE AND SOLE DISCRETION TO DETERMINE THE
CURRENT INTEREST RATES. ANLIC CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE
CURRENT INTEREST RATES, EXCEPT THAT ANLIC GUARANTEES THAT FUTURE CURRENT
INTEREST RATES WILL NOT BE BELOW AN EFFECTIVE RATE OF 4% PER YEAR COMPOUNDED
ANNUALLY. THE OWNER BEARS THE RISK THAT CURRENT INTEREST RATES WILL NOT EXCEED
AN EFFECTIVE RATE OF 4% PER YEAR.
SURRENDER CHARGE CALCULATIONS
Owners may, prior to the earlier of the Maturity Date or death, withdraw
100% of earnings since the last Policy Anniversary in all Sub-accounts and the
Fixed Account free of Surrender Charges. Additionally, Owners may also withdraw
free of Surrender Charges up to 10% of the Policy Account Value as of the last
Policy Anniversary, plus 10% of (1) deposits since the last Policy Anniversary
minus (2) withdrawals since the last Policy Anniversary.
Upon a partial withdrawal, surrender, or annuitization, we will apply the
Surrender Charge percentage shown below to those Premium Payments received
within five years of the partial withdrawal, surrender or annuitization date.
After the free amounts are determined, the calculation will be based on a
first-in, first-out basis.
Surrender Charges are assessed on Premium Payments made within five years
of a surrender or partial withdrawal. To determine the Surrender Charge for a
particular Premium Payment, the Surrender Charge percentage is multiplied by the
Premium Payment less any withdrawals previously allocated to the Premium
Payment. The total Surrender Charge is then determined by summing the previous
result over all Premium Payments used in the calculation. The Surrender Charge
will be based on the excess of the surrender amount over the Free Withdrawal
Amounts. This excess is distributed over the Premium Payments on a first-in,
first-out basis until the excess is exhausted. Partial withdrawals will be
charged based on the above method. There are no Surrender Charges assessed on
distributions made upon the death of the Owner. The Surrender Charge percentages
are as follows:
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Years 1-3........................... 8%
Year 4.............................. 6%
Year 5.............................. 4%
Year 6.............................. 0%
Example:
Premium Payments:
02/10/90 $4,000
12/10/90 $1,000
06/02/91 $1,500
08/21/92 $3,000
10/02/95 $2,000
01/12/95 $1,000
WITHDRAWAL ONE - 05/12/92
<TABLE>
<CAPTION>
<S> <C> <C>
Requested Withdrawal Amount (not including $3,000.00
the Surrender Charge)
Policy Account Value (before withdrawal) 7,114.45
Policy Year Gain (free of charge) 109.22
Gross Premium Payments 6,500.00
10% Free Withdrawal Amount 6,500 X 0.10 = 650.00
Total Free Amount 109.22 + 650 = 759.22
Non-Free Amount 3,000 - 759.22 = 2,240.78
</TABLE>
<TABLE>
<CAPTION>
Surrender Surrender
Premium Payment Charge % Charge
- --------------- --------- ---------
<S> <C> <C> <C>
$4,000 x .08 = 320.00
$1,000 x .08 = 80.00
$1,500 x .08 = 120.00
Total Surrender Charge 520.00
Partial Surrender Charge (2,240.78/.92) x .08 = 194.85
Total Withdrawal 3,194.85
Policy Account Value (after withdrawal) 3,919.60
</TABLE>
Only those Premium Payments made before May 12, 1992 will be used to
determine the Surrender Charge. The $3,000 withdrawal is less than the first
Premium Payment, therefore, we will use the Surrender Charge percentage on that
Premium Payment. However, it seems that we are applying one surrender Charge
percentage for all premiums. The reason is that the Surrender Charge for the
first three years is 8%.
Assume that your Policy Account Value is split among four Sub-accounts in
the following proportions:
<TABLE>
<CAPTION>
<S> <C> <C>
Sub-account 1 $ 784.02 .1102%
Sub-account 2 3,111.15 .4373%
Sub-account 3 1,730.23 .2432%
Sub-account 4 1,489.05 .2093%
-------- ------
$ 7,114.45 1.000%
</TABLE>
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The process for allocating the Surrender Charge among the Sub-accounts is
as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
.1102 Sub-account 1 $ 784.01 - 12.04 = $ 771.97
.4373 Sub-account 2 3,111.15 - 47.76 = 3,063.39
.2432 Sub-account 3 1,730.23 - 26.56 = 1,703.67
.2093 Sub-account 4 1,489.05 - 22.86 = 1,466.19
.1102 Sub-account 1 771,97 - 71.63 = 700.34
.4373 Sub-account 2 3,063.39 - 284.25 = 2,779.14
.2432 Sub-account 3 1,703,67 - 158.08 = 1,545.59
.2093 Sub-account 4 1,466.19 - 136.04 = 1,330.15
.1102 Sub-account 1 700.34 - 268.41 = 431.93
.4373 Sub-account 2 2,779.14 - 1,065.10 = 1,714.04
.2432 Sub-account 3 1,545.59 - 592.35 = 953.25
.2093 Sub-account 4 1,330.15 - 509.78 = 820.38
$ 3,919.60
</TABLE>
PERFORMANCE DATA CALCULATIONS
We may advertise the yield and effective yield of the Social Money Market
Sub-account. In addition, we may advertise yield and total returns for other
Sub-accounts. All performance data calculations for the Sub-accounts will be in
accordance with SEC rules and regulations.
SOCIAL MONEY MARKET SUB-ACCOUNT'S YIELD CALCULATION
In accordance with regulations adopted by the SEC, if we disclose the
annualized yield of the Social Money Market Sub-account for a seven-day period,
it is required to be in a manner which does not take into consideration any
realized or unrealized gains or losses of the CS Money Market Portfolio or on
its portfolio securities. The annualized yield is computed by determining the
net change (exclusive of realized gains and losses on the sale of securities and
unrealized appreciation and depreciation) in the value of a hypothetical account
having a balance of one Accumulation Unit of the Social Money Market Sub-account
at the beginning of the seven-day period, dividing the net change in the value
of the Sub-account by the value of the account at the beginning of the period to
determine the base period return, and annualizing this quotient on a 365-day
basis. The net change in Sub-account Value reflects the deduction for the
Mortality and Expense Risk Charge and the Administrative Expense Charge as well
as income and expenses accrued during the period. Because of these deductions,
the yield for the Social Money Market Sub-account will be lower than the yield
for the CS Money Market Portfolio.
The SEC also permits us to disclose the effective yield of the Social Money
Market Sub-account for the same seven-day period, determined on a
weekly-compounded basis. The effective yield is calculated by compounding the
base period return by adding one to the base period return, raising the sum to a
power equal to 365 divided by 7, and subtracting one from the result according
to the following formula:
Effective Yield = [(Base period return + 1) 365/7 ] - 1
The actual yield of the Social Money Market Sub-account is affected by: (l)
changes in interest rates on money market securities; (2) the average portfolio
maturity of the CS Money Market Portfolio; (3) the types and quality of
securities held by the CS Money Market Portfolio; and (4) its operating
expenses. The yield on amounts held in the Social Money Market Sub-account
normally will fluctuate on a daily basis. Therefore, the disclosed yields for
any given past period is not an indication or representation of future yields or
rates of return.
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OTHER SUB-ACCOUNTS' YIELD CALCULATIONS
We may from time to time advertise or disclose the annualized yield for
each Sub-account other than the Social Money Market Sub-account for 30-day (or
one-month) periods. Calculation of the yield of a Sub-account begins with the
income generated by an investment in the Sub-account over a specific 30-day (or
one-month) period. This income is then annualized. That is, the amount of income
generated by the investment during that 30-day (or one-month) period is assumed
to be generated during, and reinvested at the end of, each such period over a
360-day (or twelve-month) year. The 30-day (or one-month) yield is calculated
according to the following formula:
Yield = 2[(a-b/cd + 1)6 - 1]
where
a = net investment income earned during the period by the Portfolio attributable
to shares owned by the Sub-account;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of Accumulation Units outstanding during the
period; and
d = the maximum offering price per Accumulation Unit (i.e., net asset value per
Accumulation Unit) on the last day in the period.
Because of the charges and deductions imposed by the Variable Account, the
yield for a Sub-account will be lower than the yield for its corresponding
Portfolio. The yield calculations do not reflect the effect of any premium taxes
or Surrender Charge that may be applicable to a particular Policy. Surrender
Charges range from 8% to 0% of the Premium Payments included in the withdrawal,
depending on the number of years since each Premium Payment was received. The
yield on amounts held in the Sub-accounts normally will fluctuate over time.
Therefore, the disclosed yield for any given past period is not an indication or
representation of future yields or rates of return. A Sub-account's actual yield
is affected by the types and quality of the Portfolio's investments and the
Portfolio's operating expenses.
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN CALCULATIONS
For each Sub-account, we may advertise standardized average annual total
return calculated as prescribed by the rules of the SEC. The calculation assumes
a single $1,000 Premium Payment made at the beginning of the stated period and a
surrender at the end of the period. The ending redeemable value (i.e., the
Surrender Value) reflects all recurring fees that are charged to Owner accounts,
including the Annual Policy Fee, Administrative Expense Charge and Mortality and
Expense Risk Charge, and any applicable Surrender Charge.
Quotations of average annual total return are computed by finding the
average annual compounded rates of return over a period of one, three, five, and
ten years (or, if less, up to the life of the Portfolio), and up to the life of
the Sub- Account that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1 + T)n = ERV
where
P = a hypothetical initial Premium Payment of $1,000;
T = average annual total return;
n = number of years in the period; and
ERV = ending redeemable value of a hypothetical $1,000 Premium Payment made at
the beginning of the period (or fractional portion thereof).
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NON-STANDARDIZED RETURN CALCULATIONS
In addition to the standardized calculation described above, we may
disclose non-standardized total returns and non-standardized average annual
total returns for each Sub-account. Like the standardized calculation,
non-standardized calculations assume a single $1,000 Premium Payment made at the
beginning of the stated period. However, non- standardized calculations do not
assume a surrender at the end of the period or reflect recurring separate
account charges. Non-standardized total returns represent the percentage change
in Accumulation Unit Value with respect to periods of one year or less.
Non-standardized average annual total returns represent the average annual
change in Accumulation Unit Value over the stated period. For periods of one
year or less, the two non-standardized rates of return are equal. For periods
greater than one year, the non-standardized average annual total return is the
effective annual compounded rate of return.
CUMULATIVE TOTAL RETURN CALCULATIONS
We may from time to time also disclose cumulative total return for each
Sub-account. Cumulative total return is non-standardized and unaveraged. It
reflects the simple percentage change in value of a hypothetical investment in a
Sub-account over the stated period. Cumulative total return is calculated using
the following formula:
CTR = (ERV / P) - 1
where
CTR = the cumulative total return net of Sub-account recurring charges for the
period;
ERV = ending redeemable value of a hypothetical $1,000 Premium Payment made at
the beginning of the period (or fractional portion thereof); and
P = a hypothetical initial Premium Payment of $1,000.
PERFORMANCE FIGURES
The performance information provided in the tables below is as of December
31, 1997, and reflects only the performance of a Policy's allocation to the
Sub-accounts during the time period on which the calculations are based. For
periods prior to the inception date of a Sub-account, performance information
represents hypothetical returns based on the performance of the corresponding
Portfolio and the assumption that the Sub-account had been in existence for the
period indicated. All returns for periods greater than one year are annualized.
Performance information provided for any given past period is not an indication
or representation of future rates of return.
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Standardized Average Annual Total Return - reflects historical investment
results based on a $1,000 hypothetical investment over the period indicated,
less separate account and underlying charges. The separate account charges
include an annual policy fee, an administrative expense charge, a mortality and
expense risk charge, and any surrender charge applicable if an owner surrendered
the policy at the end of the period indicated. The underlying portfolio charges
include management fees and other operating expenses.
<TABLE>
<CAPTION>
SUBACCOUNT PORTFOLIO 10 YEAR OR SINCE
INCEPTION INCEPTION 1 YEAR 3 YEAR 5 YEAR SINCE PORTFOLIO SUB-ACCOUNT
DATE DATE INCEPTION INCEPTION
--------- --------- ----- ----- ----- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
THE ALGER AMERICAN FUND
Growth Portfolio 8/26/96 1/9/89 15.95% 21.23% 17.15% 17.72% 19.76%
MidCap Growth Portfolio 8/26/96 5/3/93 5.37% 19.36% N/A 19.91% 10.23%
Small Cap Growth Portfolio 8/26/96 9/21/88 1.80% 15.07% 10.51% 17.47% 3.54%
CALVERT VARIABLE SERIES INC.
Calvert Social Money Market Portfolio 8/26/96 6/30/92 -4.30% 1.12% 2.30% 2.77% -2.47%
Calvert Social Small Cap Growth Portfolio 8/26/96 3/15/95 -19.15% N/A N/A 6.53% -9.48%
Calvert Social Mid Cap Growth Portfolio 5/1/97 7/16/91 13.76% 19.23% 10.27% 11.31% 15.25%
Calvert Social International Equity Portfolio 5/1/97 6/30/92 3.61% 9.58% 10.77% 9.47% 1.12%
Calvert Social Balanced Portfolio 8/26/96 9/2/86 10.36% 16.98% 10.76% 10.81% 14.85%
DREYFUS STOCK INDEX FUND 8/26/96 9/29/89 23.06% 27.12% 17.57% 14.21% 28.20%
NEUBERGER & BERMAN ADVISERS
MANAGEMENT TRUST
Limited Maturity Bond Portfolio 8/26/96 9/10/84 -2.79% 3.35% 3.44% 5.55% 0.05%
Growth Portfolio 8/26/96 9/10/84 19.17% 19.26% 11.34% 13.25% 22.74%
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Aggressive Growth Fund 5/1/97 8/15/86 2.08% 17.56% 13.80% 14.58% 16.14%
Growth Fund 5/1/97 4/3/85 16.88% 25.91% 16.47% 15.00% 11.84%
Growth & Income Fund 5/1/97 7/5/95 22.59% N/A N/A 33.21% 19.15%
Strategic Bond Fund 5/1/97 5/3/93 -0.84% 8.17% N/A 5.40% -1.35%
High Income Fund 5/1/97 4/30/86 2.62% 12.17% 11.62% 12.70% 2.09%
STRONG VARIABLE INSURANCE FUNDS, INC.
Strong International Stock Fund II 8/26/96 10/20/95 -22.76% N/A N/A -6.19% -16.31%
STRONG DISCOVERY FUND II 8/26/96 5/8/92 1.80% 11.19% 9.75% 10.48% 7.32%
VAN ECK WORLDWIDE HARD ASSETS FUND
Worldwide Hard Assets Fund 8/26/96 9/1/89 -11.08% 4.89% 12.99% 5.47% -5.03%
</TABLE>
12
<PAGE>
Non-Standardized Average Annual Total Return - reflects historical investment
results based on a $1000 hypothetical investment over the period indicated, less
the underlying portfolio charges consisting of management fees and other
operating expenses. The returns do not reflect recurring separate account
charges or the maximum Surrender Charge that would apply for the period
indicated. If reflected, those deductions would reduce the performance quoted.
<TABLE>
<CAPTION>
SUBACCOUNT PORTFOLIO 10 YEAR OR SINCE
INCEPTION INCEPTION 1 YEAR 3 YEAR 5 YEAR SINCE PORTFOLIO SUB-ACCOUNT
DATE DATE INCEPTION INCEPTION
--------- -------- ----- ------ ------ --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
THE ALGER AMERICAN FUND
Growth Portfolio 8/26/96 1/9/89 25.75% 24.80% 19.28% 19.43% 27.33%
MidCap Growth Portfolio 8/26/96 5/3/93 15.01% 22.96% N/A 22.09% 17.81%
Small Cap Growth Portfolio 8/26/96 9/21/88 11.39% 18.75% 12.65% 19.17% 11.13%
CALVERT VARIABLE SERIES INC.
Calvert Social Money Market Portfolio 8/26/96 6/30/92 5.20% 5.17% 4.51% 4.26% 5.14%
Calvert Social Small Cap Growth Portfolio 8/26/96 3/15/95 -9.86% N/A N/A 10.61% -1.83%
Calvert Social Mid Cap Growth Portfolio 5/1/97 7/16/91 23.53% 22.83% 12.41% 12.92% 24.44%
Calvert Social International Equity Portfolio 5/1/97 6/30/92 13.23% 13.38% 12.91% 11.06% 10.17%
Calvert Social Balanced Portfolio 8/26/96 9/2/86 20.08% 20.62% 12.90% 12.42% 22.42%
DREYFUS STOCK INDEX FUND 8/26/96 9/29/89 32.96% 30.62% 19.70% 15.87% 35.77%
NEUBERGER & BERMAN ADVISERS
MANAGEMENT TRUST
Limited Maturity Bond Portfolio 8/26/96 9/10/84 6.74% 7.32% 5.64% 7.08% 7.65%
Growth Portfolio 8/26/96 9/10/84 29.01% 22.86% 13.48% 14.89% 30.31%
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Aggressive Growth Fund 5/1/97 8/15/86 11.68% 21.19% 15.93% 16.24% 25.34%
Growth Fund 5/1/97 4/3/85 26.69% 29.42% 18.60% 16.67% 21.00%
Growth & Income Fund 5/1/97 7/5/95 32.48% N/A N/A 37.24% 28.38%
Strategic Bond Fund 5/1/97 5/3/93 8.71% 12.00% N/A 7.64% 7.68%
High Income Fund 5/1/97 4/30/86 12.22% 15.91% 13.76% 14.33% 11.15%
STRONG VARIABLE INSURANCE FUNDS, INC.
Strong International Stock Fund II 8/26/96 10/20/95 -13.52% N/A N/A -0.94% -8.61%
STRONG DISCOVERY FUND II 8/26/96 5/8/92 11.39% 14.95% 11.89% 12.08% 14.90%
VAN ECK WORLDWIDE HARD ASSETS FUND
Worldwide Hard Assets Fund 8/26/96 9/1/89 -1.67% 8.81% 15.12% 7.00% 2.59%
</TABLE>
13
<PAGE>
FEDERAL TAX MATTERS
TAXATION OF ANLIC
ANLIC is taxed as a life insurance company under Part 1 of Subchapter L of
the Internal Revenue Code of 1986, as amended (the "Code"). Since the Variable
Account is not an entity separate from ANLIC and its operations form a part of
ANLIC, it will not be taxed separately as a "regulated investment company" under
Subchapter M of the Code. Investment income and realized net capital gains on
the assets of the Variable Account are reinvested and taken into account in
determining the Policy Account Value. As a result, such investment income and
realized net capital gains are automatically retained as part of the reserves
under the Policy. Under existing federal income tax law, we believe that
Variable Account investment income and realized net capital gains should not be
taxed to the extent that such income and gains are retained as part of the
reserves under the Policy.
TAX STATUS OF THE POLICIES
Section 817(h) of the Code provides that the investments of the Variable
Account must be "adequately diversified" in accordance with Treasury regulations
in order for the Policies to qualify as annuity contracts under Section 72 of
the Code. The Variable Account, through each Portfolio, intends to comply with
the diversification requirements prescribed by the Treasury Department in Treas.
Reg. Section 1.817-5, which affect how the Portfolios' assets may be invested.
We do not control any of the Funds or their Portfolios' investments. However, we
have entered into an agreement regarding participation in each Fund, which
requires each participating Portfolio to be operated in compliance with the
diversification requirements prescribed by the Treasury.
In certain circumstances, owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate account used to support their contracts. In those circumstances, income
and gains from the separate account assets would be includible in the variable
contract owner's gross income. The IRS has stated in published rulings that a
variable contract owner will be considered the owner of separate account assets
if the contract owner possesses incidents of ownership in those assets, such as
the ability to exercise investment control over the assets. The Treasury
Department also announced, in connection with the issuance of regulations
concerning diversification, that those regulations "do not provide guidance
concerning the circumstances in which investor control of the investments of a
segregated asset account may cause the investor (i.e., the policyholder), rather
than the insurance company, to be treated as the owner of the assets in the
account." This announcement also stated that guidance would be issued by way of
regulations or rulings on the "extent to which policyholders may direct their
investments to particular subaccounts without being treated as owners of the
underlying assets."
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, the Owner has additional flexibility in allocating premium payments and
Policy Account Values. These differences could result in an Owner being treated
as the owner of a pro rata portion of the assets of the Variable Account. In
addition, we do not know what standards will be set forth, if any, in the
regulations or rulings which the Treasury Department has stated it expects to
issue. We therefore reserve the right to modify the Policy as necessary to
attempt to prevent an Owner from being considered the owner of a pro rata share
of the assets of the Variable Account.
WITHHOLDING
Pension and annuity distributions generally are subject to withholding for
the recipient's federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Generally, the recipient is
given the opportunity to elect not to have tax withheld from distributions.
However, certain distributions from Section 401(a) and 403(b) plans are subject
to mandatory withholding.
14
<PAGE>
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
We cannot guarantee that shares of the Portfolios currently being offered
will be available in the future for investment of Premium Payments or for
transfers. We reserve the right, subject to compliance with applicable law, to
make additions to, deletions from, or substitutions for, the shares of the Funds
that are held by the Variable Account (or any Sub-account) or that the Variable
Account (or any Sub-account) may purchase. We reserve the right to eliminate the
shares of any of the Portfolios and to substitute shares of another Portfolio or
any other investment vehicle or of another open-end, registered investment
company if laws or regulations are changed, if the shares of any of the Funds or
a Portfolio are no longer available for investment, or if in our judgment
further investment in any Portfolio should become inappropriate in view of the
objectives and policies of the Sub-account. We will not substitute any shares
attributable to an Owner's interest in a Sub-account without notice and prior
approval of the SEC and the insurance regulator of the state where the Policy
was delivered, where required. Nothing contained herein shall prevent the
Variable Account from purchasing other securities for other series or classes of
policies, or from permitting a conversion between series or classes of policies
on the basis of requests made by Owners.
We also reserve the right to establish additional Sub-accounts of the
Variable Account, each of which would invest in a new Portfolio of one of the
Funds, or in shares of another investment company or suitable investment, with a
specified investment objective. New Sub-accounts may be established when, in our
sole discretion, marketing needs or investment conditions warrant, and any new
Sub-accounts will be made available to existing Owners on a basis to be
determined by us. We may also eliminate one or more Sub-accounts if, in its sole
discretion, marketing, tax, or investment conditions warrant.
In the event of any such substitution or change, we may, by appropriate
endorsement, make such changes in the Policies as may be necessary or
appropriate to reflect such substitution or change. If deemed by us to be in the
best interests of persons having voting rights under the Policies, the Variable
Account may be operated as a management company under the 1940 Act, it may be
deregistered under that Act in the event such registration is no longer
required, or it may be combined with other ANLIC separate accounts.
DISTRIBUTION OF THE POLICIES
Applications for the Policies are solicited by agents who are licensed by
state insurance authorities to sell our variable annuity insurance policies, and
who are also registered representatives of The Advisors Group, Inc. ("TAG") or
registered representatives of broker/dealers who have selling agreements with
TAG or registered representatives of broker/dealers who have selling agreements
with such broker/dealers. TAG, whose address is 7315 Wisconsin Avenue, Bethesda,
Maryland 20814, is a registered broker/dealer under the Securities Exchange Act
of 1934 ("1934 Act") and a member of the National Association of Securities
Dealers, Inc. ("NASD"). TAG is a second tier wholly-owned subsidiary of Acacia
Life Insurance Company of Washington, D.C. TAG acts as the principal
underwriter, as defined in the 1940 Act, of the Policies (as well as of other
variable life policies) pursuant to an underwriting agreement with ANLIC. The
Policies are offered and sold only in those states where their sale is lawful.
We will refund any Premium Payments paid if a Policy ultimately is not
issued or will refund the applicable amount if the Policy is canceled during the
Free Look Period.
Agents are compensated for sales of the Policies on a commission and
service fee basis and with other forms of compensation. Agent commissions will
vary, but in any event will not exceed 5% of Premium Payments made.
15
<PAGE>
STATE REGULATION
We are subject to the insurance laws and regulations of states within which
we are licensed or may become licensed to operate. Generally, the insurance
department of a state applies the laws of the state of the insurance company's
domicile in determining permissible investments by that insurance company. A
Policy is governed by the law of the state in which it is delivered. The values
and benefits of each Policy are at least equal to those required by the state in
which it is delivered.
RECORDS AND REPORTS
All records and accounts relating to the Variable Account will be
maintained by ANLIC. As presently required by the 1940 Act and regulations
promulgated thereunder, reports containing such information as may be required
under that Act or by any other applicable law or regulation will be sent to
Owners at their last known address of record.
LEGAL MATTERS
Legal advice regarding certain matters relating to federal securities laws
applicable to the issuance of the Policy described in the Prospectus have been
provided by Jorden Burt Boros Cicchetti Berenson & Johnson LLP of Washington,
D.C.
EXPERTS
The financial statements (statutory basis) of ANLIC as of December 31, 1996
and 1997, and the financial statements of the Variable Account as of December
31, 1997 and for each of the periods indicated therein, have been included in
this Statement of Additional Information in reliance upon the report of Coopers
& Lybrand L.L.P., independent certified public accountants, which is also
included herein, and upon the authority of said firm as experts in accounting
and auditing.
OTHER INFORMATION
A Registration Statement has been filed with the SEC under the 1933 Act
with respect to the Policies discussed in this Statement of Additional
Information. Not all of the information set forth in the Registration Statement,
amendments and exhibits thereto has been included in this Statement of
Additional Information. Statements contained in this Statement of Additional
Information concerning the content of the Policy and other legal instruments are
intended to be summaries. For a complete statement of the terms of these
documents, reference should be made to the instruments filed with the SEC.
FINANCIAL STATEMENTS
We have included financial statements of ANLIC and of the Variable Account
in this Statement of Additional Information. The financial statements of ANLIC
should be considered only as bearing on ANLIC's ability to meet its obligations
under the Policy. They should not be considered as bearing on the investment
performance of the assets held in the Variable Account.
16
<PAGE>
FINANCIAL STATEMENTS
<PAGE>
Audited Financial Statements
ACACIA NATIONAL VARIABLE ANNUITY SEPARATE ACCOUNT II
December 31, 1997 and 1996
Report of Independent Accountants...........................................1
Statement of Assets and Liabilities.........................................2
Statements of Operations and Changes in Net Assets........................3-4
Notes to the Financial Statements.........................................5-8
<PAGE>
[Coopers & Lybrand letterhead]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Acacia National Life
Insurance Company and Contract Owners of Acacia
National Variable Annuity Separate Account II
We have audited the accompanying statement of assets and liabilities for
each of the following sub-accounts comprising the Acacia National Variable
Annuity Separate Account II (the Account): the Social Money Market; Social
Balanced; Social Strategic Growth; Large Cap Growth; Mid Cap Growth; Small Cap
Growth; S&P 500 Index; Income; Growth; International Growth; Aggressive Growth;
and Hard Assets/Metals sub-accounts as of December 31, 1997, and the related
statements of operations and changes in the net assets for the year ended
December 31, 1997 and for the period September 9, 1996 (date of inception) to
December 31, 1996; the statement of assets and liabilities for the Social
Managed Growth; Social Global; High Income; Aggressive Growth; Large Cap Growth;
Balanced; and Managed Income sub-accounts as of December 31, 1997 and related
statements of operations and changes in the net assets for the period May 1,
1997 (date of inception) to December 31, 1997; and the statements of operations
and changes in net assets of the Income; and Balance sub-accounts for the period
January 1, 1997 to November 6, 1997 (date of closure) and for the period
September 9, 1996 (date of inception) to December 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1997, by correspondence with
the registered investment companies. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all respect, the financial position of each of the respective sub-accounts
comprising the Acacia National Variable Annuity Separate Account II as of
December 31, 1997 and the results of their operations and changes in net assets
for the respective periods indicated herein, in conformity with generally
accepted accounting principles.
Coopers & Lybrand LLP
Washington, D. C.
April 22, 1998
1
<PAGE>
ACACIA NATIONAL VARIABLE ANNUITY SEPARATE ACCOUNT II
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
Calvert
----------------------------------------------------------------------------------------
Social Social Social
Money Social Strategic Managed Social
Market Balanced Growth Growth Global
----------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments, identified costs $1,219,988 $533,832 $314,512 $101,334 $92,759
================= ================ ================ ================ ================
Investments, at market $1,219,988 $518,034 $303,034 $90,848 $84,509
================= ================ ================ ================ ================
Number of shares 1,219,988 261,633 25,232 3,409 4,441
================= ================ ================ ================ ================
Net Assets $1,219,988 $518,034 $303,034 $90,848 $84,509
================= ================ ================ ================ ================
ACCUMULATION UNITS
Number of units 1,140,175 39,756 31,049 7,302 7,669
================= ================ ================ ================ ================
NET ASSET VALUE PER
ACCUMULATION UNIT
December 31, 1997 $1.07 $13.03 $9.76 $12.44 $11.02
================= ================ ================ ================ ================
December 31, 1996 $1.02 $10.85 $10.84 --- ---
================= ================ ================ ================ ================
</TABLE>
See notes to financial statements.
2
<PAGE>
ACACIA NATIONAL VARIABLE ANNUITY SEPARATE ACCOUNT II
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
Alger Dreyfus
------------------------------------------------- ----------------
S & P
Large Cap Mid Cap Small Cap 500
Global Growth Growth Index
---------------- ----------------- -------------- ----------------
<S> <C> <C> <C> <C>
ASSETS
Investments, identified costs $1,645,300 $720,612 $1,393,909 $4,840,150
================= ================= ============== ===============
Investments, at market $1,813,578 $803,834 $1,521,686 $5,462,674
================= ================ =============== ==============
Number of shares 42,413 33,244 34,781 212,143
================= ================ =============== ==============
Net Assets $1,813,578 $803,834 $1,521,686 $5,462,674
================= ================= =============== ==============
ACCUMULATION UNITS
Number of units 132,282 64,878 132,551 366,377
================== ================= =============== ==============
NET ASSET VALUE PER
ACCUMULATION UNIT
December 31, 1997 $13.71 $12.39 $11.48 $14.91
================== ================= ================= =============
December 31, 1996 $10.91 $10.77 $10.30 $11.22
================== ================= ================ ============
</TABLE>
See notes to financial statements.
<PAGE>
ACACIA NATIONAL VARIABLE ANNUITY SEPARATE ACCOUNT II
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
Neuberger & Berman Strong Van Eck
-------------------------------- ---------------------------------- -----------------
International Aggressive Hard
Income Growth Growth Growth Assets / Metals
-------------- ---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments, identified costs $2,595,021 $1,259,288 $2,908,933 $113,588 $571,653
============== ================ ================ ================= =================
Investments, at market $2,649,323 $1,413,815 $2,451,925 $128,147 $552,416
============== ================ ================ ================= =================
Number of shares 187,629 46,294 263,082 10,652 35,141
============== ================ ================ ================= =================
Net Assets $2,649,323 $1,413,815 $2,451,925 $128,147 $552,416
============== ================ ================ ================= =================
ACCUMULATION UNITS
Numbr of units 240,629 100,057 284,776 10,687 53,425
============== ================ ================ ================= =================
NET ASSET VALUE PER
ACCUMULATION UNIT
December 31, 1997 $11.01 $14.13 $8.61 $11.99 $10.34
============== ================ ================ ================== =================
December 31, 1996 $10.32 $10.96 $10.28 $10.63 $10.52
============== ================ ================ ================== =================
</TABLE>
See notes to financial statements.
<PAGE>
ACACIA NATIONAL VARIABLE ANNUITY SEPARATE ACCOUNT II
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
Oppenheimer
------------------------------------------------------------------------------
High Aggressive Large Cap Managed
Income Growth Growth Balanced Income
---------------- --------------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments, identified costs $515,157 $765,379 $1,444,800 $475,478 $71,746
================ =============== ============ ========== ===========
Investments, at market $516,541 $756,016 $1,457,619 $492,500 $71,526
================ =============== ============ ========== ===========
Number of shares 44,839 18,457 44,933 23,931 13,970
================ =============== ============ ========== ===========
Net Assets $516,541 $756,016 $1,457,619 $492,500 $71,526
================ =============== ============ ========== ===========
ACCUMULATION UNITS
Number of units 46,452 60,337 120,465 38,357 6,641
================ ================ ============ =========== ===========
NET ASSET VALUE PER
ACCUMULATION UNIT
December 31, 1997 $11.12 $12.53 $12.10 $12.84 $10.77
================ ================ ============ ========== ============
December 31, 1996 --- --- --- --- ---
================ ================ ============ ========== ============
</TABLE>
See notes to financial statements.
<PAGE>
ACACIA NATIONAL VARIABLE ANNUITY SEPARATE ACCOUNT II
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Calvert Alger Dreyfus
----------------------------------------------------------------------------
Social Social Social
Money Social Strategic Managed Social
Market Balanced Growth Growth * Global *
-------------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Investment Income
Dividends $64,961 $36,031 $27,229 $9,408 $8,438
Mortality and expense charge (19,061) (2,310) (2,999) (344) (625)
-------------- -------------- -------------- -------------- --------------
Net Investment Income (Loss) 45,900 33,721 24,230 9,064 7,813
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of
fund shares --- 737 (9,679) 44 508
Unrealized appreciation (depreciation)
of investments --- (15,137) (12,986) (10,486) (8,251)
-------------- -------------- -------------- -------------- --------------
Net Gain(Loss) on Investments --- (14,400) (22,665) (10,442) (7,743)
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS 45,900 19,321 1,565 (1,378) 70
CAPITAL TRANSACTIONS:
Transfer of premium 2,998,427 182,688 241,253 70,218 45,127
Contract terminations (2,529) --- (35) --- ---
Policy account value charges (38) (26) (111) --- ---
Sub-account transfers (1,961,363) 309,038 4,470 22,008 39,312
-------------- -------------- -------------- -------------- --------------
NET INCREASE IN NET
ASSETS RESULTING FROM
CAPITAL TRANSACTIONS 1,034,497 491,700 245,577 92,226 84,439
-------------- -------------- -------------- -------------- --------------
TOTAL INCREASE IN NET ASSETS 1,080,397 511,021 247,142 90,848 84,509
NET ASSETS, at the beginning of the year 139,591 7,013 55,892 --- ---
-------------- -------------- -------------- -------------- --------------
NET ASSETS, at end of the year $1,219,988 $518,034 $303,034 $90,848 $84,509
============== ============== ============== ============== ==============
UNITS ISSUED AND REDEEMED
Beginning balance 137,527 646 5,157 --- ---
Units issued 4,128,605 40,008 39,680 7,302 8,607
Units redeemed 3,125,957 898 13,788 --- 938
-------------- -------------- -------------- -------------- --------------
Ending balance 1,140,175 39,756 31,049 7,302 7,669
============== ============== ============== ============== ==============
</TABLE>
* From Sub-account inception, May, 1997.
** Sub-account closed November, 1997.
See notes to financial statements.
3
<PAGE>
ACACIA NATIONAL VARIABLE ANNUITY SEPARATE ACCOUNT II
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Alger Dreyfus
------------------------------------------- -------------
S & P
Large Cap Mid Cap Small Cap 500
Growth Growth Growth Index
-------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Investment Income
Dividends $10,030 $9,045 $41,086 $120,071
Mortality and expense charge (14,930) (8,022) (13,620) (46,643)
-------------- -------------- -------------- --------------
Net Investment Income (Loss) (4,900) 1,023 27,466 73,428
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of
fund shares 38,682 5,524 7,228 52,894
Unrealized appreciation (depreciation)
of investments 171,097 84,526 127,659 652,827
-------------- -------------- -------------- --------------
Net Gain(Loss) on Investments 209,779 90,050 134,887 705,721
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS 204,879 91,073 162,353 779,149
CAPITAL TRANSACTIONS:
Transfer of premium 1,297,026 455,018 1,178,023 2,964,441
Contract terminations (5,902) (524) (1,596) (33,324)
Policy account value charges (154) (142) (134) (317)
Sub-account transfers 24,017 118,923 (95,479) 230,856
-------------- -------------- -------------- --------------
NET INCREASE IN NET
ASSETS RESULTING FROM
CAPITAL TRANSACTIONS 1,314,987 573,275 1,080,814 3,161,656
-------------- -------------- -------------- --------------
TOTAL INCREASE IN NET ASSETS 1,519,866 664,348 1,243,167 3,940,805
NET ASSETS, at the beginning of the year 293,712 139,486 278,519 1,521,869
-------------- -------------- -------------- --------------
NET ASSETS, at end of the year $1,813,578 $803,834 $1,521,686 $5,462,674
============== ============== ============== ==============
UNITS ISSUED AND REDEEMED
Beginning balance 26,933 12,949 27,028 135,684
Units issued 139,737 68,691 151,147 280,880
Units redeemed 34,388 16,762 45,624 50,187
-------------- -------------- -------------- --------------
Ending balance 132,282 64,878 132,551 366,377
============== ============== ============== ==============
</TABLE>
* From Sub-account inception, May, 1997.
** Sub-account closed November, 1997.
See notes to financial statements.
<PAGE>
ACACIA NATIONAL VARIABLE ANNUITY SEPARATE ACCOUNT II
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Neuberger & Berman
------------------------------
Income Growth
-------------- ---------------
<S> <C> <C>
OPERATIONS:
Investment Income
Dividends $56,915 $33,636
Mortality and expense charge (19,186) (12,001)
-------------- ---------------
Net Investment Income (Loss) 37,729 21,635
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of
fund shares (27,270) 25,296
Unrealized appreciation (depreciation)
of investments 53,453 151,202
-------------- ---------------
Net Gain(Loss) on Investments 26,183 176,498
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS 63,912 198,133
CAPITAL TRANSACTIONS:
Transfer of premium 2,210,048 905,220
Contract terminations (10,806) (4,586)
Policy account value charges (193) (112)
Sub-account transfers 39,484 46,272
-------------- ---------------
NET INCREASE IN NET
ASSETS RESULTING FROM
CAPITAL TRANSACTIONS 2,238,533 946,794
-------------- ---------------
TOTAL INCREASE IN NET ASSETS 2,302,445 1,144,927
NET ASSETS, at the beginning of the year 346,878 268,888
-------------- ---------------
NET ASSETS, at end of the year $2,649,323 $1,413,815
============== ===============
UNITS ISSUED AND REDEEMED
Beginning balance 33,612 24,534
Units issued 316,194 97,573
Units redeemed 109,177 22,050
-------------- ---------------
Ending balance 240,629 100,057
============== ===============
</TABLE>
* From Sub-account inception, May, 1997.
** Sub-account closed November, 1997.
See notes to financial statements.
<PAGE>
ACACIA NATIONAL VARIABLE ANNUITY SEPARATE ACCOUNT II
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Strong Van Eck
------------------------------------------------------------ --------------
International Aggressive Hard
Income ** Balance ** Growth Growth Assets / Metals
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Investment Income
Dividends $0 $7,583 $16,762 $0 $5,569
Mortality and expense charge (259) (3,182) (23,821) (1,174) (4,487)
-------------- -------------- -------------- -------------- --------------
Net Investment Income (Loss) (259) 4,401 (7,059) (1,174) 1,082
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of
fund shares (173) 41,997 (6,729) 1,415 823
Unrealized appreciation (depreciation)
of investments 93 4,747 (458,423) 14,637 (21,641)
-------------- -------------- -------------- -------------- --------------
Net Gain(Loss) on Investments (80) 46,744 (465,152) 16,052 (20,818)
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS (339) 51,145 (472,211) 14,878 (19,736)
CAPITAL TRANSACTIONS:
Transfer of premium 18,515 173,019 1,905,310 31,900 401,897
Contract terminations --- (309) (7,409) --- (1,833)
Policy account value charges (19) (23) (261) --- (51)
Sub-account transfers (31,381) (305,537) 505,179 72,911 59,159
-------------- -------------- -------------- -------------- --------------
NET INCREASE IN NET
ASSETS RESULTING FROM
CAPITAL TRANSACTIONS (12,885) (132,850) 2,402,819 104,811 459,172
-------------- -------------- -------------- -------------- --------------
TOTAL INCREASE IN NET ASSETS (13,224) (81,705) 1,930,608 119,689 439,436
NET ASSETS, at the beginning of the year 13,224 81,705 521,317 8,458 112,980
-------------- -------------- -------------- -------------- --------------
NET ASSETS, at end of the year $0 $0 $2,451,925 $128,147 $552,416
============== ============== ============== ============== ==============
UNITS ISSUED AND REDEEMED
Beginning balance 1,320 7,530 50,712 796 10,740
Units issued 1,849 37,662 283,605 12,531 47,780
Units redeemed 3,169 45,192 49,541 2,640 5,095
-------------- -------------- -------------- -------------- --------------
Ending balance 0 0 284,776 10,687 53,425
============== ============== ============== ============== ==============
</TABLE>
* From Sub-account inception, May, 1997.
** Sub-account closed November, 1997.
See notes to financial statements.
<PAGE>
ACACIA NATIONAL VARIABLE ANNUITY SEPARATE ACCOUNT II
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Oppenheimer
-------------------------------------------------------------------------
High Aggressive Large Cap Managed
Income * Growth * Growth * Balanced * Income *
--------------- ----------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Investment Income
Dividends $13,028 $0 $0 $1,487 $3,556
Mortality and expense charge (2,086) (3,007) (6,077) (1,927) (420)
-------------- ---------- ----------- ---------- -----------
Net Investment Income (Loss) 10,942 (3,007) (6,077) (440) 3,136
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of
fund shares 128 5,186 6,345 4,296 (15)
Unrealized appreciation (depreciation)
of investments 1,385 (9,363) 12,820 17,322 (220)
-------------- ---------- ----------- ---------- -----------
Net Gain(Loss) on Investments 1,513 (4,177) 19,165 21,618 (235)
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS 12,455 (7,184) 13,088 21,178 2,901
CAPITAL TRANSACTIONS:
Transfer of premium 341,056 524,024 964,009 403,720 55,814
Contract terminations (1,492) (1,585) (3,132) --- ---
Policy account value charges (11) (47) (87) --- ---
Sub-account transfers 164,533 240,808 483,741 67,602 12,811
-------------- ---------- ----------- ---------- -----------
NET INCREASE IN NET
ASSETS RESULTING FROM
CAPITAL TRANSACTIONS 504,086 763,200 1,444,531 471,322 68,625
-------------- ---------- ----------- ---------- -----------
TOTAL INCREASE IN NET ASSETS 516,541 756,016 1,457,619 492,500 71,526
NET ASSETS, at the beginning of the year --- --- --- --- ---
-------------- ---------- ----------- ---------- -----------
NET ASSETS, at end of the year $516,541 $756,016 $1,457,619 $492,500 $71,526
============== ========== =========== ========== ===========
UNITS ISSUED AND REDEEMED
Beginning balance --- --- --- --- ---
Units issued 51,260 67,873 128,512 43,527 9,415
Units redeemed 4,808 7,536 8,047 5,170 2,774
-------------- ---------- ----------- ---------- -----------
Ending balance 46,452 60,337 120,465 38,357 6,641
============== ========== =========== ========== ===========
</TABLE>
* From Sub-account inception, May, 1997.
** Sub-account closed November, 1997.
See notes to financial statements.
<PAGE>
ACACIA NATIONAL VARIABLE ANNUITY SEPARATE ACCOUNT II
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
For the Period September 9, 1996 (inception) to December 31, 1996
<TABLE>
<CAPTION>
Calvert Alger
------------------------------------ ------------------------------------
Social Social
Money Social Strategic Large Cap Mid Cap Small Cap
Market Balanced Growth Growth Growth Growth
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Investment Income
Dividends $1,813 $526 $176 --- --- ---
Mortality and expense charge (599) (13) (132) ($750) ($340) ($660)
------- ------- ------- ------- ------- -------
Net Investment Income (Loss) 1,214 513 44 (750) (340) (660)
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of
fund shares --- 155 (734) 3,994 1,789 (2,904)
Unrealized appreciation (depreciation)
of investments --- (661) 1,508 (2,818) (1,305) 119
------- ------- ------ ------- ------- -------
Net Gain(Loss) on Investments --- (506) 774 1,176 484 (2,785)
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS 1,214 7 818 426 144 (3,445)
CAPITAL TRANSACTIONS:
Transfer of premium 196,883 5,427 55,074 285,998 137,081 275,740
Sub-account transfers (58,506) 1,579 --- 7,288 2,261 6,224
--------- ------- ------ ------- ------- -------
NET INCREASE IN NET
ASSETS RESULTING FROM
CAPITAL TRANSACTIONS 138,377 7,006 55,074 293,286 139,342 281,964
-------- ------- ------- -------- ------- --------
TOTAL INCREASE IN NET ASSETS 139,591 7,013 55,892 293,712 139,486 278,519
NET ASSETS, at inception --- --- --- --- --- ---
-------- ------- ------- -------- ------- --------
NET ASSETS, at end of the year $139,591 $7,013 $55,892 $293,712 $139,486 $278,519
======== ======== ======= ======== ======== ========
UNITS ISSUED AND REDEEMED
Beginning balance --- --- --- --- --- ---
Units issued 317,908 2,096 7,446 33,793 17,969 35,703
Units redeemed 180,381 1,450 2,289 6,860 5,020 8,675
------- ------ ------- -------- ------- -------
Ending balance 17,527 646 5,157 26,933 12,949 27,028
======= ====== ======= ========= ======== ========
</TABLE>
See notes to financial statements.
4
<PAGE>
ACACIA NATIONAL VARIABLE ANNUITY SEPARATE ACCOUNT II
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
For the Period September 9, 1996 (inception) to December 31, 1996
<TABLE>
<CAPTION>
Dreyfus
--------
S & P Neuberger & Berman
500 -----------------------
Index Income Growth
------- ------------------------
<S> <C> <C> <C>
OPERATIONS:
Investment Income
Dividends $20,596 --- ---
Mortality and expense charge (3,491) ($779) ($646)
------- ----- -----
Net Investment Income (Loss) 17,105 (779) (646)
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of
fund shares 13,609 1,963 3,359
Unrealized appreciation (depreciation)
of investments (30,303) 851 3,325
------- ------ ------
Net Gain(Loss) on Investments (16,694) 2,814 6,684
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS 411 2,035 6,038
CAPITAL TRANSACTIONS:
Transfer of premium 1,495,454 343,641 257,825
Sub-account transfers 26,004 1,202 5,025
--------- ------- ------
NET INCREASE IN NET
ASSETS RESULTING FROM
CAPITAL TRANSACTIONS 1,521,458 344,843 262,850
--------- ------- --------
TOTAL INCREASE IN NET ASSETS 1,521,869 346,878 268,888
NET ASSETS, at inception --- --- ---
---------- -------- --------
NET ASSETS, at end of the year $1,521,869 $346,878 $268,888
========== ======== ========
UNITS ISSUED AND REDEEMED
Beginning balance --- --- ---
Units issued 151,870 44,214 31,468
Units redeemed 16,186 10,602 6,934
-------- ------- -------
Ending balance 135,684 33,612 24,534
======== ======= =======
</TABLE>
See notes to financial statements.
<PAGE>
ACACIA NATIONAL VARIABLE ANNUITY SEPARATE ACCOUNT II
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
For the Period September 9, 1996 (inception) to December 31, 1996
<TABLE>
<CAPTION>
Strong Van Eck
-------------------------------------------------- ---------------
International Aggressive Hard
Income Balance Growth Growth Assets / Metals
--------------------------------------------------- ----------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Investment Income
Dividends $99 $4,927 $91 --- ---
Mortality and expense charge (34) (187) (1,292) ($15) ($278)
------- ------- ------- ----- ------
Net Investment Income (Loss) 65 4,740 (1,201) (15) (278)
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of
fund shares 6 1,027 3,174 80 1,068
Unrealized appreciation (depreciation)
of investments (58) (4,604) 1,415 (78) 2,405
------ ------- ------- ------ -------
Net Gain(Loss) on Investments (52) (3,577) 4,589 2 3,473
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS 13 1,163 3,388 (13) 3,195
CAPITAL TRANSACTIONS:
Transfer of premium 13,211 80,542 515,225 2,236 109,785
Sub-account transfers --- --- 2,704 6,235 ---
------- ------- ------- ------- -------
NET INCREASE IN NET
ASSETS RESULTING FROM
CAPITAL TRANSACTIONS 13,211 80,542 517,929 8,471 109,785
-------- ------- --------- ------ --------
TOTAL INCREASE IN NET ASSETS 13,224 81,705 521,317 8,458 112,980
NET ASSETS, at inception --- --- --- --- ---
-------- ------- --------- ------ --------
NET ASSETS, at end of the year $13,224 $81,705 $521,317 $8,458 $112,980
======== ======= ========= ====== ========
UNITS ISSUED AND REDEEMED
Beginning balance --- --- --- --- ---
Units issued 2,137 11,847 65,607 1,379 12,631
Units redeemed 817 4,317 14,895 583 1,891
------- ------- -------- ------
Ending balance 1,320 7,530 50,712 796 10,740
======= ======= ======== ====== ========
</TABLE>
See notes to financial statements.
<PAGE>
ACACIA NATIONAL VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1 - ORGANIZATION AND DESCRIPTION OF OPERATIONS
The Acacia National Variable Annuity Separate Account II (the Account) began
operations on September 9, 1996 as a separate investment account within Acacia
National Life Insurance Company (the Company) to receive and invest net premiums
paid under a flexible premium deferred variable annuity policy (the Policy). The
purpose of the Policy is to provide long-term financial planning and to provide
for the accumulation of capital on a tax-deferred basis for retirement or other
long-term purposes. The Policy may be purchased with a minimum premium payment
of $300 the first year and a minimum of $30 for premium payments thereafter. The
Policy may be purchased on a non-qualified tax basis or used in connection with
plans qualifying for favorable Federal income tax treatment.
The Company is a member of the Acacia Group which includes Acacia Life Insurance
Company (known prior to June 30, 1997 as Acacia Mutual Life Insurance Company)
and its other wholly-owned subsidiaries: Acacia Financial Corporation (AFCO) and
its subsidiaries: Acacia Federal Savings Bank F.S.B., Calvert Group, Ltd. and
The Advisors Group, Inc.
Assets of the Account are the property of the Company. However, those assets
attributable to the policies are not chargeable with liabilities arising out of
any other business which the Company may conduct. The Account operates and is
registered as a unit investment trust under the Investment Company Act of 1940.
The net assets maintained in the Account attributable to the policies provide
the base for the periodic determination of the increased or decreased benefits
under the policies.
NOTE 2 - SEPARATE ACCOUNT ASSETS
As of December 31, 1997, the Account has nineteen separate sub-accounts which
are invested as directed by the contract owner. The Account purchases shares of
each of the sub-accounts subject to the terms of the Participation Agreements
between the Company and the sub-accounts. Shares of each sub-account are offered
at a price equal to their respective net asset values per share, without sales
charge, which represents their fair value. Calvert Asset Management Company,
Inc., an indirectly wholly-owned subsidiary of AFCO, serves as an investment
advisor to the Calvert Variable Series Inc. Calvert Social Money Market, Calvert
Social Small Cap, Calvert Social Mid Cap and Calvert Social International Equity
Portfolios. The Advisors Group, Inc. acts as a principal underwriter of the
policies pursuant to an underwriting agreement with the Company.
In addition to the nineteen separate sub-accounts, a contract owner may also
allocate net premiums to the General Account, which is part of the Company.
Because of exclusionary provisions, interests in the General Account have not
been registered as securities under the Securities Actof 1933 and the General
Account has not been registered as an investment company under the Investment
Company Act of 1940.
5
<PAGE>
ACACIA NATIONAL VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS
The sub-accounts and the respective portfolios in effect during 1997 were as
follows:
<TABLE>
<CAPTION>
Sub-Account Portfolio Invested
----------- ------------------
<S> <C>
Calvert Variable Series, Inc.:
Social Money Market - Calvert Social Money Market
Social Balanced - Calvert Social Balanced
Social Strategic Growth - Calvert Small Cap Growth
Social Managed Growth - Calvert Mid Cap Growth
Social Global - Calvert Social International Equity
Alger American:
Large Cap Growth - Growth
Mid Cap Growth - Mid Cap Growth
Small Cap Growth - Small Capitalization
S & P 500 Index Dreyfus Stock Index
The Neuberger & Berman Advisers
Management Trust:
Income - Limited Maturity Bond
Growth - Growth
Strong:
Income (closed November, 1997) - Advantage Fund II
Balance (closed November 1997) - Asset Allocation Fund II
International Growth - International Stock Fund II
Aggressive Growth - Discovery Fund II
Hard Assets / Metals Van Eck Worldwide Hard Assets Fund
Oppenheimer Variable Account Funds:
High Income - High Income Fund
Aggressive Growth - Aggressive Growth Fund
Large Cap Growth - Growth Fund
Balanced - Growth & Income Fund
Managed Income - Strategic Bond Fund
</TABLE>
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Account in the preparation of the financial statements in
conformity with generally accepted accounting principles.
6
<PAGE>
ACACIA NATIONAL VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS
Use of Estimates
The preparation of the 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investments Valuation
Investments are stated at market value based on the net asset value of the
underlying investment in each of the respective funds. Net asset values are
based upon market quotations of the securities held in each of the corresponding
portfolios of the sub-accounts.
Accounting for Investments
Investment transactions are accounted for on the trade date. Dividend income is
recorded on the ex-dividend date. Identified cost is the basis followed in
determining the cost of investments sold for financial statement purposes.
Federal Income Taxes
The operations of the Account are taxed as part of the total operations of the
Company. The Company is taxed as a life insurance company under the Internal
Revenue Code. Under existing law, no taxes are payable on investment income or
realized capital gains of the Account.
NOTE 4 - RELATED PARTY TRANSACTIONS
The following charges are deducted by the Company from the Account's net assets
attributed to each policy:
Annual Policy Fee: An annual charge of $42 will be made on each policy
anniversay to compensate the Company for the cost of administering the
Policy for all policies with an account value less than $50,000.
Administrative Expense Charge: A monthly charge at an effective annual
rate of 0.10% of the average daily net asset value of the variable
account will be made to compensate the Company for the costs of
administering the Policy. Net investment income is reduced by charges
for investment management fees and other expenses incurred by the
Portfolios.
Mortality and Expense Risk Charge: A monthly charge at an effective
annual rate of 1.25% of the average daily net asset value of the
sub-accounts will be made to compensate the Company for assuming
certain mortality and expense risks. The charge will decrease by 0.05%
on each Policy anniversary beginning in year 16 until it reaches an
effective rate of 0.50% at the end of year 30.
7
<PAGE>
ACACIA NATIONAL VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS
Surrender Charge: A surrender charge is deducted on a percentage basis
from premium payments made within five years of surrender. The amount
of the charge is equal to 8% of premium payments made within three
years of surrender, 6% of premium payments made during the fourth year
prior to surrender, and 4% of premium payments made during the fifth
year prior to surrender.
Premium Taxes: Certain states impose premium taxes. The Company will
deduct amounts equal to these taxes as applicable. Premium tax rates
vary from 0 to 3.5%.
NOTE 5 - PURCHASES AND SALES
The cost of purchases and proceeds from sales for the two years ended December
31,1997 and 1996 for the sub-accounts are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Cost of Proceeds Cost of Proceeds
Portfolio Purchases from Sales Purchases from Sales
---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Social Money Market $4,322,028 $3,241,631 $ 321,690 $ 182,098
Social Balanced 536,568 10,410 23,033 15,515
Social Strategic Growth 402,402 142,274 79,633 23,713
Social Managed Growth 101,645 311 --- ---
Social Global 102,506 9,747 --- ---
Large Cap Growth 1,750,761 401,991 368,032 76,298
Mid Cap Growth 764,846 185,025 194,085 54,616
Small Cap Growth 1,605,526 490,017 370,039 88,504
S & P 500 Index 3,845,059 557,081 1,739,044 183,232
Income 3,419,436 1,170,442 453,444 109,143
Growth 1,261,094 267,369 337,515 75,726
Income (closed November, 1997) 18,465 31,857 21,502 8,206
Balance (closed November, 1997) 428,465 514,774 131,433 46,001
International Growth 2,890,242 501,211 676,888 154,673
Aggressive Growth 132,810 27,758 14,687 6,231
Hard Assets / Metals 515,399 54,321 129,521 20,013
High Income 565,864 50,707 --- ---
Aggressive Growth 856,525 91,146 --- ---
Large Cap Growth 1,534,627 89,827 --- ---
Balanced 532,547 57,368 --- ---
Managed Income 101,553 29,807 --- ---
</TABLE>
8
<PAGE>
Audited Financial Statements (Statutory Basis)
ACACIA NATIONAL LIFE INSURANCE COMPANY
December 31, 1997 and 1996
Report of Independent Accountants......................................1-2
Statements of Financial Condition........................................3
Statements of Operations and Changes
in Capital and Surplus................................................4
Statements of Cash Flow..................................................5
Notes to Financial Statements.......................................6 - 17
Supplemental Schedule of Selected Financial Data...................18 - 20
<PAGE>
[Coopers & Lybrand letterhead]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Acacia National Life Insurance Company
We have audited the accompanying statutory statements of financial condition of
Acacia National Life Insurance Company as of December 31, 1997 and 1996, and the
related statutory statements of operations and changes in capital and surplus,
and cash flow for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Note 2 to the financial statements, these financial
statements were prepared in conformity with accounting practices prescribed or
permitted by the Bureau of Insurance, State Corporation Commission of the
Commonwealth of Virginia, which practices differ from generally accepted
accounting principles. The effects on the financial statements of the variances
between the statutory basis of accounting and generally accepted accounting
principles are material.
In our opinion, because of the effects of the matter discussed in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Acacia National Life Insurance Company as of December 31, 1997 and 1996 or
the results of its operations or its cash flow for the years then ended.
In our opinion, however, the financial statements referred to above present
fairly, in all material respects, the admitted assets, liabilities, and surplus
of Acacia National Life Insurance Company as of December 31, 1997 and 1996, and
the results of its operations and its cash flow for the years then ended, on the
basis of accounting described in Note 2.
1
<PAGE>
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Supplemental Schedule of Selected
Financial Data is presented for purposes of additional analysis and is not a
required part of the basic financial statements, but is supplementary
information required by the National Association of Insurance Commissioners.
Such information has been subjected to the auditing procedures applied in the
audit of the basic financial statements and in our opinion is fairly stated, in
all material respects, in relation to the basic financial statements taken as a
whole.
Coopers & Lybrand LLP
Washington, D.C.
February 24, 1998
2
<PAGE>
ACACIA NATIONAL LIFE INSURANCE COMPANY
Statements of Financial Condition (Statutory Basis)
<TABLE>
<CAPTION>
December 31,
1997 1996
---------------- ---------------
(In thousands)
<S> <C> <C>
ASSETS
Debt securities $ 570,348 $ 596,394
Equity securities 2,373 2,405
Mortgage loans 5,031 47
Policy loans 8,100 8,091
Cash and cash equivalents 13,090 16,246
Accrued investment income 9,992 10,520
Separate account assets 31,095 6,433
Other assets 2,820 2,671
--------------- ----------------
Total Assets $ 642,849 $ 642,807
=============== ===============
LIABILITIES
Insurance and annuity reserves $ 508,884 $ 539,065
Deposit administration contracts and other
deposit reserves 26,459 25,659
Other policyowner funds 28,666 19,633
Policy claims 3,143 2,821
Interest maintenance reserve 2,587 2,230
Asset valuation reserve 5,188 5,712
Separate account liabilities 31,095 6,433
Other liabilities 4,321 11,613
--------------- ---------------
Total Liabilities 610,343 613,166
CAPITAL AND SURPLUS
Preferred stock, 8% non-voting, non-cumulative, $1,000 par value,
10,000 shares authorized; 6,000 shares issued and outstanding 6,000 6,000
Common stock, $170 par value; 15,000 shares authorized
issued and oustanding 2,550 2,550
Gross paid-in surplus 13,450 13,450
Surplus 10,506 7,641
--------------- ----------------
Total Capital and Surplus 32,506 29,641
--------------- ----------------
Total Liabilities and Capital and Surplus $ 642,849 $ 642,807
=============== ================
</TABLE>
See notes to financial statements.
3
<PAGE>
ACACIA NATIONAL LIFE INSURANCE COMPANY
Statements of Operations and Changes in Capital and Surplus (Statutory Basis)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1997 1996
------------- ------------
(In thousands)
<S> <C> <C>
INCOME
Premiums and annuity considerations $ 59,646 $ 42,444
Net investment income 47,774 45,701
Supplementary contracts 16,809 12,589
Other income 1,042 3,845
------------ -----------
125,271 104,579
BENEFITS AND EXPENSES
Benefits for policyholders and beneficiaries:
Benefit payments, surrenders, and withdrawals 108,148 114,085
Decrease in insurance and annuity reserves (21,269) (24,741)
Increase in deposit administration funds 800 977
------------ -----------
87,679 90,321
Commissions to managing directors
and account managers 5,202 3,146
Net transfers to separate accounts 20,387 ---
Operating expenses allocated from Acacia Life 12,724 13,539
Other operating expenses and taxes 1,247 162
------------ ----------
127,239 107,168
------------ ----------
Net (Loss) Gain from Operations Before Federal
Income Taxes and Realized Capital Losses (1,968) (2,589)
Federal income tax benefit (expense) 2,511 (642)
------------ ----------
Net Gain (Loss) from Operations Before
Realized Capital Gains (Losses) 543 (3,231)
REALIZED CAPITAL Gains (LOSSES)
Net realized capital gains 1,183 339
Capital gains taxes (521) (335)
Transferred to interest maintenance reserve (516) (224)
------------ ----------
Net Realized Capital Gains (Losses) 146 (220)
------------ -----------
Net Income (Loss) 689 (3,451)
Capital and surplus, beginning of year 29,641 26,775
Issuance of preferred stock --- 6,000
Contribution of gross paid-in surplus --- 6,000
Change in valuation basis of reserves (119) ---
Change in asset valuation reserve 524 (1,068)
Change in net unrealized capital gains 495 323
Change in non-admitted assets 1,276 (4,938)
----------- -----------
Capital and Surplus, End of Year $ 32,506 $ 29,641
=========== ===========
</TABLE>
See notes to financial statements.
4
<PAGE>
ACACIA NATIONAL LIFE INSURANCE COMPANY
Statements of Cash Flow (Statutory Basis)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1997 1996
---------- ----------
OPERATING ACTIVITIES (In thousands)
<S> <C> <C>
Premiums and annuity considerations $ 59,646 $ 42,453
Other premiums, considerations and deposits 16,809 12,589
Net investment income received 47,368 43,220
Cash and short-term investments received from
execution of assumption reinsurance agreement --- 52,671
Annuity and other fund deposits 2,167 4,069
Benefits paid to policyholders (10,980) (10,092)
Commissions and other expenses paid (20,698) (16,601)
Surrender benefits and other fund withdrawals paid (96,822) (103,994)
Net transfers to separate accounts (22,815) ---
Federal and state income tax paid (1,093) (41)
------------- ------------
Net Cash (Used In) Provided By Operating Activities (26,418) 24,274
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid:
Bonds 68,392 52,368
Equities 756 191
Mortgage loans 16 ---
Partnership and other interests 240 ---
Cost of investments acquired:
Bonds (40,619) (92,269)
Mortgage loans (5,000) ---
Partnership and other interests (1,158) (435)
Net change in policy loans and premium notes (9) 210
-------------- -----------
Net Cash Provided By (Used In) Investing Activities 22,618 (39,935)
FINANCING ACTIVITIES
Cash provided:
Issuance of preferred stock --- 6,000
Capital contribution --- 6,000
Other provisions (applications) 644 (80)
------------ ------------
Net Cash Provided By Financing Activities 644 11,920
Decrease in Cash and Cash Equivalents (3,156) (3,741)
Cash and Cash Equivalents, Beginning of Year 16,246 19,987
----------- -----------
Cash and Cash Equivalents, End of Year $ 13,090 $ 16,246
=========== ===========
NON-CASH TRANSACTIONS:
Non-cash items received from execution of assumption
reinsurance agreement:
Investment in bonds --- $68,429
Policy loans --- $1,600
Annuity reserve liabilities --- $127,851
</TABLE>
See notes to financial statements
5
<PAGE>
ACACIA NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1 - ORGANIZATION AND DESCRIPTION OF OPERATIONS
Acacia National Life Insurance Company (the Company) is a wholly-owned
subsidiary of Acacia Life Insurance Company (Acacia Life), known prior to June
30, 1997 as Acacia Mutual Life Insurance Company. Acacia Life is a wholly-owned
subsidiary of Acacia Financial Group, Ltd (AFG) which is wholly owned by Acacia
Mutual Holding Corporation (AMHC). AMHC and AFG were formed in 1997 pursuant to
a plan of reorganization whereby Acacia Life became a stock life insurance
company. AMHC and its wholly-owned subsidiaries are collectively known as The
Acacia Group (the Group). Other members of the Group include Acacia Financial
Corporation and its subsidiaries, Acacia Federal Savings Bank, Calvert Group,
Ltd. and The Advisors Group, Inc.
The Company underwrites and markets deferred and immediate annuities and life
insurance products within the United States and is licensed to operate in 46
states and the District of Columbia. On December 1, 1995 and September 9, 1996,
respectively, operations began for the Acacia National Variable Life Insurance
Separate Account I and Acacia National Variable Annuity Separate Account II
which are separate investment accounts within the Company.
NOTE 2 - SIGNIFICANT ACCOUNTING PRACTICES
The Company, domiciled in Virginia, prepares its statutory financial statements
in accordance with statutory accounting practices (SAP) prescribed or permitted
by the Bureau of Insurance, State Corporation Commission of the Commonwealth of
Virginia. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners (NAIC), as
well as state laws, regulations, and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed. Such practices vary, in some respects, from generally accepted
accounting principles (GAAP). The significant statutory basis accounting
practices followed by the Company are described below.
The preparation of the financial statements in conformity with statutory
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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
6
<PAGE>
In general, the SAP basis of accounting varies in certain respects from GAAP in
that:
o Acquisition costs incurred at policy issuance, such as commissions and
other costs in connection with acquiring new business, are charged to
expense in the year in which they are incurred, rather than being
deferred and amortized over the periods benefited.
o Certain assets designated as "non-admitted' are excluded from the
balance sheets by a direct charge to unassigned surplus.
o The asset valuation reserve and interest maintenance reserve are not
recorded for GAAP purposes.
o Federal income taxes are computed in accordance with those sections of
the Internal Revenue Code applicable to life insurance companies and
are based solely on currently taxable income. Under GAAP, the
recognition of deferred tax liabilities and assets is required for the
expected future tax consequences of temporary differences between the
carrying amounts for financial statements purposes and the tax basis of
other assets and liabilities.
o The liability for policy reserves is based on statutory assumptions for
interest and mortality without considerations of withdrawals, rather
than assumptions for interest, mortality and withdrawals based on
actual experience.
o Premiums for universal life, single premium non-life contingent
immediate annuity and single premium deferred annuity contracts are
reported as premium income or fund deposits rather than additions to
liabilities.
o Reinsurance ceded to other companies is reported on a net basis for
premium revenue, benefits and underwriting, acquisition and insurance
expenses, and policy reserves and accruals. Under GAAP, policy reserves
and claim liabilities ceded are reported separately in the balance
sheet as a reinsurance recoverable asset.
o Debt securities are generally carried at amortized costs, whereas,
under GAAP, investments in debt securities are stated at amortized cost
or current market values depending on the classification pursuant to
FASB Statement No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Any difference between cost and current market
values of debt securities classified as available-for-sale, net of
deferred income taxes or benefit and related deferred acquisition cost
effects, is reported as a separate component in GAAP shareholder's
equity and does not affect net income.
7
<PAGE>
The impact of the differences between SAP and GAAP basis reporting on Net Income
and Capital and Surplus is as follows:
<TABLE>
<CAPTION>
($ in thousands)
1997 1996
---- ----
Net Capital Net Capital
Income And Surplus Income And Surplus
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
As reported under SAP: $ 689 $32,506 $(3,451) $29,641
Adjustments:
Deferred policy acquisition costs (66) 53,937 (663) 62,324
AVR and IMR 357 7,775 17 7,942
Deferred Federal income taxes (2,372) (19,561) (307) (15,244)
Net policyholder liabilities 731 (9,813) 5,287 (10,664)
Investments --- 22,521 --- 9,135
Other 1,289 (456) 444 (467)
----- ---------- -------- ---------
Amounts under GAAP $ 628 $86,909 $ 1,327 $82,667
======= ======= ======= =======
</TABLE>
Valuation of Assets
Debt and equity securities are valued in accordance with rules prescribed by the
NAIC. Debt securities are generally stated at amortized cost, preferred stocks
at cost and common stocks at market value. Collateralized mortgage obligations
are valued using the prospective method and currently anticipated prepayment
assumptions, based on data from current actual experience. Mortgage loans and
policy loans are recorded at their unpaid balance. Discount or premium on debt
securities is amortized using the interest method. Unrealized capital gains and
losses are reflected directly in surplus and are not included in net income.
Realized gains and losses are determined on a first-in, first-out basis and are
presented in the statements of operations, net of taxes and excluding amounts
transferred to the Interest Maintenance Reserve.
As prescribed by the NAIC, the Company maintains an Asset Valuation Reserve
(AVR). The AVR is computed in accordance with a prescribed formula. The purpose
of the AVR is to stabilize surplus against fluctuations in the value of stocks
and credit-related declines in the value of bonds, mortgage loans and other
invested assets. Changes to the AVR are charged or credited directly to surplus.
As also prescribed by the NAIC, the Company maintains an Interest Maintenance
Reserve, which represents the net accumulated unamortized realized capital gains
and losses attributable to changes in the general level of interest rates on
sales of fixed income investments, principally bonds and mortgage loans. Such
gains or losses are amortized into income using schedules prescribed by the NAIC
over the remaining period to expected maturity of the individual securities
sold.
8
<PAGE>
Cash Equivalents
The Company considers overnight repurchase agreements, money market funds and
short-term investments with original maturities of less than three months at the
time of acquisition to be cash equivalents. Cash equivalents are carried at
cost.
Separate Accounts
Separate Accounts are assets and liabilities associated with certain life
insurance and annuity contracts, for which the investment risk lies solely with
the holder of the contract rather than the Company. Consequently, the insurer's
liability for these Separate Accounts equals the value of the Separate Account
assets. Investment income and realized gains (losses) related to Separate
Accounts are excluded from the statements of operations and cash flows. Assets
held in Separate Accounts are primarily shares in mutual funds, which are
carried at fair value, based on the quoted net asset value per share.
Non-Admitted Assets
Certain assets, primarily goodwill, are designated as "non-admitted" under SAP.
The cost of these assets is charged directly to surplus. Non-admitted balances
totaled $3,662,000 and $4,938,000 at December 31, 1997 and 1996, respectively.
Policy Reserves
Life policy reserves are computed by using the Commissioners Reserve Valuation
Method and the Commissioners Standard Ordinary Mortality table. Annuity reserves
are calculated using the Commissioners Annuity Reserve Valuation Method and the
maximum valuation interest rate; for annuities with life contingencies, the
prescribed valuation mortality table is used. Policy claims in process of
settlement include provision for reported claims and claims incurred but not
reported. The valuation rates for fixed immediate and deferred annuities range
between 6.0% and 11.25% as of December 31, 1997.
Federal Income Taxes
The Company files a consolidated tax return with the Group. Under statutory
accounting practices, no provision is made for deferred federal income taxes
related to temporary differences between statutory and taxable income. Such
temporary differences arise primarily from Internal Revenue Code requirements
regarding the capitalization and amortization of deferred policy acquisition
costs, calculation of life insurance reserves and recognition of realized gains
or losses on sales of debt securities.
9
<PAGE>
Premiums and Related Expense
Premiums are recognized as income over the premium paying period of the
policies. Annuity considerations and fund deposits are included in revenue as
received. Commissions and other policy acquisition costs are expensed as
incurred.
Reinsurance
The Company cedes reinsurance to provide for greater diversification of
business, additional capacity for growth as well as a way for management to
control exposure to potential losses arising from large risks. A significant
portion of reinsurance is ceded to Acacia Life.
The excess of the amount of liabilities assumed over the amount of assets
received upon execution of an assumption reinsurance agreement is recorded as
goodwill, a non-admitted asset, and charged directly to surplus. Goodwill is
being amortized over a period of ten years using the interest method.
Reclassifications
Certain reclassifications of 1996 amounts were made to conform with the 1997
financial statement presentation.
NOTE 3 - INVESTMENTS AND OTHER FINANCIAL INSTRUMENTS
Fair Values of Financial Instruments
<TABLE>
<CAPTION>
($ in thousands)
December 31, 1997 December 31, 1996
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- ------- -------- -------
<S> <C> <C> <C> <C>
Financial Assets:
Debt securities $570,348 $610,928 $596,394 $620,368
Equity securities 2,373 2,713 2,405 2,773
Mortgage loans 5,031 5,084 47 50
Cash and cash equivalents 13,090 13,090 16,246 16,246
Financial Liabilities:
Investment-type insurance
contracts $407,643 $475,678 $440,645 $512,452
</TABLE>
10
<PAGE>
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Investment securities: Fair values for fixed maturity securities (including
redeemable preferred stocks and mortgage backed securities) are based on quoted
market prices, where available. For fixed maturity securities not actively
traded and for private placements, fair values are estimated using values
obtained from independent pricing services. The fair values for equity
securities are based on quoted market prices.
Mortgage loans: The fair values for mortgage loans are estimated using
discounted cash flow analysis, based on interest rates currently being offered
for similar loans to borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Cash and cash equivalents: The carrying amount approximates fair values because
of the short maturity of these instruments.
Policy loans: Policy loans are an integral component of insurance contracts and
have no maturity dates. Future cash flows are uncertain and difficult to
predict. Therefore, management has concluded that it is not practical to
estimate their fair value.
Investment contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash flow
calculations, based on interest rates currently being offered for similar
contracts with maturities consistent with those remaining for the contracts
being valued. The carrying values for the deposit administration contracts and
supplementary contracts without life contingencies approximate their fair
values.
Investments
Major categories of investment income for the years ended December 31 are
summarized as follows:
<TABLE>
<CAPTION>
($ in thousands)
1997 1996
--------- --------
<S> <C> <C>
Fixed maturity securities $ 47,086 $ 44,932
Common stock --- 54
Preferred stock 60 81
Mortgage loans 110 4
Policy loans 502 436
Other 1,001 1,544
--------- --------
Gross investment income 48,759 47,051
Investment expenses (1,143) (1,558)
Interest maintenance reserve amortization 158 208
--------- ----------
Net investment income $ 47,774 $ 45,701
========= ==========
</TABLE>
11
<PAGE>
Realized gains (losses) on investments for the years ended December 31 are
summarized as follows:
<TABLE>
<CAPTION>
($ in thousands)
1997 1996
-------- ------
<S> <C> <C>
Available for sale fixed maturity securities
Gross realized gains 963 355
Gross realized losses (11) (16)
Equity securities
Gross realized gains 230 --
Gross realized losses -- --
Other invested assets 1 --
------- -------
$ 1,183 $ 339
======= =======
</TABLE>
The statement values and estimated fair values of the Company's investments in
debt securities are as follows:
<TABLE>
<CAPTION>
($ in thousands) Gross Gross
Statement Unrealized Unrealized Fair
Value Gains Losses Value
--------- ----------- ----------- ---------
At December 31, 1997
<S> <C> <C> <C> <C>
U.S. government and agencies $ 87,514 $ 8,228 $ -- $ 95,742
Other government 30,943 856 (73) 31,726
Mortgaged backed securities 150,831 5,592 (402) 156,021
Corporate 301,060 26,994 (615) 327,439
-------- ------- ------ --------
$570,348 $41,670 $(1,090) $610,928
======== ======= ======== ========
At December 31, 1996
U.S. government and agencies $117,448 $ 7,161 $ (28) $124,581
Other government 3,300 23 --- 3,323
Mortgaged backed securities 153,001 2,641 (1,627) 154,015
Corporate 322,645 17,503 (1,699) 338,449
-------- ------- -------- --------
$596,394 $27,328 $(3,354) $620,368
======== ======= ======== ========
</TABLE>
12
<PAGE>
The amortized cost and estimated fair value of debt securities, by contractual
maturity at December 31, 1997 are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
($ in thousands)
Statement Fair
Value Value
--------- ---------
<S> <C> <C>
Maturities in 1998 $ 16,980 $ 17,243
In 1999 to 2002 121,926 130,953
In 2003 to 2007 153,737 163,299
After 2007 126,874 143,412
Mortgaged-backed securities 150,831 156,021
-------- --------
$570,348 $610,928
======== ========
</TABLE>
Investment Portfolio Credit Risk
The Company's bond investment portfolio is predominately comprised of investment
grade securities. At December 31, 1997 and 1996, approximately $3.9 million and
$2.7 million, respectively, in debt security investments (0.7% and 0.5%,
respectively, of the total debt security portfolio) are considered "below
investment grade." Securities are classified as "below investment grade" by
utilizing rating criteria established by the NAIC.
NOTE 4 - REINSURANCE
The Company reinsures all life insurance risks over its retention limit of $10
thousand per policy under yearly renewable term insurance agreements with Acacia
Life and several other non-affiliated companies. The Company remains obligated
for amounts ceded in the event that reinsurers do not meet their obligations.
Since the reinsurance treaties are of such a nature as to pass economic risk to
the reinsurer, appropriate reductions are made from income, claims, expense and
liability items in accounting for the reinsurance ceded.
13
<PAGE>
Premiums and benefits have been reduced by amounts reinsured as follows (in
thousands):
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996
------ -----
<S> <C> <C>
Premiums ceded:
Acacia Life $3,384 $3,559
Others 533 540
------- ------
Total premium ceded $3,917 $4,099
====== ======
Death benefits reimbursed:
Acacia Life $2,989 $3,380
Other 277 1,841
------- ------
Total benefits reimbursed $3,236 $5,221
====== ======
Amounts recoverable on paid and unpaid losses:
Acacia Life $643 $424
Other --- 24
------- ---
Total amounts recoverable on paid
and unpaid losses $643 $448
==== ====
Policy reserves ceded:
Acacia Life $1,897 $3,238
Others 350 379
------- ------
Total policy reserves ceded $2,247 $3,617
====== ======
Life insurance in force ceded:
Acacia Life $1,206,052 $ 926,529
Others 90,471 74,550
----------- ----------
Total life insurance in force ceded $1,296,523 $1,001,079
========== ==========
</TABLE>
During 1997, the Company terminated a reinsurance agreement whereby disability
benefits were ceded to Acacia Life. Termination of the agreement resulted in net
expense to the Company of $372,000.
Assumption Reinsurance Agreement
Effective May 31, 1996 under an assumption reinsurance agreement, the Company
assumed certain assets and liabilities relating to annuities previously
underwritten by the National American Life Insurance Company (NALICO), which had
been in rehabilitation. Under the agreement, the Company assumed fixed annuity
policies with statutory liabilities of $127.9 million. The Company received from
NALICO assets with a fair value of approximately $122.7, consisting principally
of investment grade bonds and short-term investments. The difference between
assets
14
<PAGE>
acquired and liabilities assumed of $5.2 million was capitalized as goodwill and
treated as a non-admitted asset. Based on adjustments in 1997, additional assets
of $0.4 million were received and reduced the goodwill. Approximately $1.1
million was amortized through operations during 1997 as an offset to
miscellaneous income. At December 31, 1997, the balance of goodwill was $3.7
million.
NOTE 5 - ANNUITY RESERVES AND DEPOSIT LIABILITIES
Annuity reserves and deposit liabilities have the following withdrawal
characteristics:
<TABLE>
<CAPTION>
($ in thousands)
December 31,
1997 1996
---------- --------------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal with adjust-
ment, at book value less surrender charge 228,262 46% $362,603 72%
Subject to discretionary withdrawal without adjust-
ment, at book value (minimal or no charge) 226,606 45 107,453 21
Not subject to discretionary withdrawal provision 46,550 9 32,205 7
-------- ---- ------ --
Total annuity actuarial reserves and deposit
fund liabilities $501,418 100% $502,261 100%
======== === ======== ====
</TABLE>
NOTE 6 - FEDERAL INCOME TAXES
Under a tax sharing agreement between the Company and other members of the
Group, Acacia Life reimburses or receives from the Company an amount
representing the taxes that would have been paid or refunded had the Company
filed a separate income tax return.
Under the statutes in effect before the Deficit Reduction Act of 1984, a portion
of "net income" was not subject to current income taxation for stock life
insurance companies, but was accumulated for tax purposes in a memorandum tax
account. The 1984 Act prohibited any additions to the memorandum tax account
after 1983. The balance in this account for the Company was $6.6 million at
December 31, 1997 and 1996. In the event that either cash distributions from the
Company to Acacia Life or the balance in the memorandum tax account exceeds
certain stated minimums, such amounts distributed would become subject to
federal income taxes at rates then in effect.
15
<PAGE>
NOTE 7 - OTHER RELATED PARTY TRANSACTIONS
The Company has entered into an agreement whereby Acacia Life provides such
services and facilities as are necessary for the operation of the Company. Net
amounts payable to Acacia Life at December 31, 1997 and 1996 are $1.5 million
and $5.5 million, respectively, and are included in other liabilities.
During 1997, the Company purchased participations of $5 million in two
commercial mortgage loans from Acacia Life. The participations were purchased at
the unpaid principal balance.
NOTE 8 - CONTINGENT LIABILITIES
The Company is involved in various lawsuits that have arisen in the ordinary
course of business. Management believes that its defenses are meritorious and
the eventual outcome of these lawsuits will not have a material effect on the
Company's financial position.
The Company is also subject to insurance guaranty laws in the states in which it
does business. Periodically, the Company is assessed by various state guaranty
funds as part of those funds' activities to collect funds from solvent insurance
companies to cover certain losses to policyholders that resulted from the
insolvency or rehabilitation of other insurance companies. The Company has
established an estimated liability for guaranty fund assessments for those
insolvencies or rehabilitations that have actually occurred prior to the balance
sheet date. For those payments made which are expected to offset future premium
taxes, an asset has been recorded. Because of the many uncertainties regarding
the amounts that will be assessed against the Company, the ultimate assessments
may vary from the estimated liability included in the accompanying financial
statements. Expected premium tax offsets, net of the estimated liability for
future assessments, at December 31, 1997 and 1996 were $359,000 and $736,000,
respectively.
NOTE 9 - CAPITAL AND DIVIDEND RESTRICTIONS
The maximum amount of annual dividends and other distributions which may be
remitted by the Company to its shareholder without prior approval of the
appropriate state insurance commissioner is subject to restrictions relating to
statutory capital and surplus and statutory gains from operations. The maximum
dividend payout which may be made in 1998 without prior approval is $ 688,503.
Regulatory risk-based capital rules require a specified level of capital
depending on the types and quality of investments held, the types of business
written and the types of liabilities maintained. Depending on the ratio of an
insurer's adjusted surplus to its risk-based capital, the insurer could be
subject to various regulatory actions ranging from increased scrutiny to
conservatorship. The Company's risk-based capital ratios for 1997 and 1996 are
significantly above the regulatory action levels.
16
<PAGE>
NOTE 10 - CAPITAL AND SURPLUS
During 1996, the Company received a $6 million capital contribution from Acacia
Life and also issued to Acacia Life $6 million of 8% non-voting, non-cumulative
preferred stock at par.
During 1997, the Company changed the valuation interest rates for certain
supplementary contracts, resulting in an increase in the liability of
approximately $700,000. Based on an agreement with the Bureau of Insurance, the
increase is being recognized evenly over three years, with $119,000 charged
directly against surplus and the remainder charged through operations.
17
<PAGE>
ACACIA NATIONAL LIFE INSURANCE COMPANY
Annual Statement for the Year Ended December 31, 1997
Supplemental Schedule of Selected Financial Data (In Thousands)
<TABLE>
<CAPTION>
Investment Income Earned
<S> <C>
Government bonds $6,863
Other bonds (unaffiliated) 40,223
Bonds of Affiliates ---
Preferred stocks (unaffiliated) 60
Preferred stocks of affiliates ---
Common stocks (unaffiliated) ---
Common stocks of affiliates ---
Mortgage loans 110
Real estate ---
Premium notes, policy loans and liens 502
Collateral loans ---
Cash on hand and on deposit ---
Short-term investments 896
Other invested assets 105
Derivative instruments ---
Aggregate write-ins for investment income ---
----------
Gross investment income $48,759
==========
Real Estate Owned - Book Value less Encumbrances ---
==========
Mortgage Loans - Book Value:
Farm mortgages ---
Residential mortgages $46
Commercial mortgages 4,985
----------
Total mortgage loans $5,031
==========
Mortgage Loans By Standing - Book Value:
Good standing $5,031
==========
Good standing with restructured terms ---
==========
Interest overdue more than three months, not in foreclosure ---
==========
Foreclosure in process ---
==========
Other Long Term Assets - Statement Value $699
==========
Collateral Loans ---
==========
Bonds and Stocks of Parents, Subsidiaries and Affiliates - Book Value:
Bonds ---
==========
Preferred stocks ---
==========
Common stocks ---
==========
</TABLE>
18
<PAGE>
ACACIA NATIONAL LIFE INSURANCE COMPANY
Annual Statement for the Year Ended December 31, 1997
Supplemental Schedule of Selected Financial Data (In Thousands)
<TABLE>
<CAPTION>
Bonds and Short-term Investments by Class and Maturity:
Bonds and Short-term Investments by Maturity - Statement Value
<S> <C>
Due within one year $42,315
Over 1 year through 5 years 162,771
Over 5 years through 10 years 206,802
Over 10 years through 20 years 99,753
Over 20 years 69,582
----------
Total by Maturity $581,223
==========
Bonds and Short-term Investments by Class - Statement Value
Class 1 $341,820
Class 2 212,120
Class 3 23,348
Class 4 1,980
Class 5 1,955
Class 6 ---
----------
Total by Class $581,223
==========
Total Bonds and Short-term Investments Publicly Traded $551,865
==========
Total Bonds and Short-term Investments Privately Placed $29,358
==========
Preferred Stocks - Statement Value $546
==========
Common Stocks - Market Value $1,827
==========
Short-term Investments - Book Value $10,875
==========
Financial Options Owned - Statement Value ---
==========
Financial Options Written and In-force - Statement Value ---
==========
Financial Futures Contracts Open - Current Price ---
==========
Cash on Deposit $2,215
==========
Life Insurance In Force:
Industrial ---
==========
Ordinary $1,463,791
==========
Credit Life ---
==========
Group Life ---
==========
Amount of Accidental Death Insurance in Force Under Ordinary Policies $103,610
==========
Life Insurance Policies with Disability Provisions in Force
Industrial ---
==========
Ordinary $587
==========
Credit Life ---
==========
Group Life ---
==========
</TABLE>
19
<PAGE>
ACACIA NATIONAL LIFE INSURANCE COMPANY
Annual Statement for the Year Ended December 31, 1997
Supplemental Schedule of Selected Financial Data (In Thousands)
<TABLE>
<CAPTION>
Supplementary Contracts In Force:
<S> <C>
Ordinary - Not Involving Life Contingencies
Amount on Deposit $3,412
==========
Income Payable $25,492
==========
Ordinary - Involving Life Contingencies
Income Payable $9,975
==========
Group - Not Involving Life Contingencies
Amount on Deposit ---
Income Payable ---
===========
Group - Involving Life Contingencies
Income Payable ---
===========
Annuities Ordinary
Immediate - Amount of Income Payable $3,119
==========
Deferred - Fully Paid - Account Balance $388,585
==========
Deferred - Not Fully Paid - Account Balance $49,131
==========
Annuities Group
Amount of Income Payable $18
==========
Fully Paid - Account Balance ---
==========
Not Fully Paid - Account Balance $300
==========
Accident and Health Insurance - Premium In Force:
Ordinary ---
==========
Group ---
==========
Credit ---
==========
Deposit Funds and Dividend Accumulations:
Deposits Funds - Account Balance $26,459
==========
Dividend Accumulations - Account Balance ---
==========
Claim Payments - Year Ended December 31, 1997:
Group Accident and Health
1997 ---
==========
1996 ---
==========
1995 ---
==========
Other Accident and Health
1997 ---
==========
1996 ---
==========
1995 ---
==========
Other Coverage that use developmental methods to calculate claims reserves
1997 ---
==========
1996 ---
==========
1995 ---
==========
</TABLE>
20
<PAGE>
