<PAGE>
File No. 2-28844, 2-28842, 2-28843, 811-1636
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment to
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ____ [ ]
Post-Effective Amendment No. 46 (2-28844) [X]
47 (2-28842) [X]
48 (2-28843) [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 26 [X]
(Check appropriate box or boxes)
Variable Annuity Fund I of Southwestern Life
(Exact Name of Registrant)
Southwestern Life Insurance Company
(Name of Insurance Company)
500 North Akard, Dallas, Texas 75201
(Address of Insurance company's Principal Executive Offices) (Zip Code)
Insurance Company's Telephone Number, including Area Code (214) 954-7111
Daniel B. Gail, 500 North Akard, Dallas, Texas 75201
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
[X] immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] on (date) pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
<PAGE>
VARIABLE ANNUITY FUND I OF SOUTHWESTERN LIFE
Cross Reference Sheet
Item Number Form N-4 Caption
PART A - Prospectus
1. Cover Page Cover Page
2. Definitions Definitions
3. Synopsis Synopsis
4. Condensed Financial Information Condensed Financial Information
5. General Description of Registrant,
Depositor and Portfolio Companies Southwestern, The Separate Account,
Conversion of the Separate Account,
Growth Portfolio, Voting Rights
6. Deductions and Expenses Deductions for Sales and Other
Expenses
7. General Description of Variable
Annuity Contracts Annuity Contracts, Accumulation
Period, Assignment, Modification,
Contract Owner Inquiries, Rights,
Suspension
8. Annuity Period Annuity Period
9. Death Benefit Death Benefits
10. Purchases and Contract Value Accumulation Period, Principal
Underwriter
11. Redemptions Termination
12. Taxes Federal Tax Consequences
13. Legal Proceedings Legal Proceedings
14. Table of Contents of the Statement
of Additional Information Table of Contents of the Statement
of Additional Information
<PAGE>
PART B - Statement of Additional Information
15. Cover Page Cover Page
16. Table of Contents Table of Contents
17. General Information and History General Information
18. Services Conversion Transaction, Accountants,
General Information
19. Purchase of Securities
Being Offered Purchase of Contracts
20. Underwriters Underwriter, Purchase of Contracts
21. Calculation of Performance Data N/A
22. Annuity Payments Annuity Payments
23. Financial Statements Financial Statements
PART C - Other Information
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
PROSPECTUS
Variable
Annuity Fund I
of Southwestern Life
SOUTHWESTERN LIFE INSURANCE COMPANY
This prospectus describes group flexible payment contracts ("Contracts") issued
by Southwestern Life Insurance Company ("Southwestern") for use as tax sheltered
annuities in retirement programs that satisfy the requirements of section 403(b)
of the Internal Revenue Code of 1986, as amended ("Code"). Although new
Contracts are no longer being issued, Southwestern continues to accept purchase
payments on existing Contracts and new Participants under existing Contracts.
Variable Annuity Fund I of Southwestern Life ("Separate Account") is a unit
investment trust that invests exclusively in shares of beneficial interest in
the Capital Growth Portfolio ("Growth Portfolio") of Scudder Variable Life
Investment Fund ("Scudder Fund").
This prospectus sets forth information about the Separate Account that a
prospective investor ought to know before investing and should be kept for
future reference. Additional information about the Separate Account has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information, dated July 30, 1996, which information is incorporated herein by
reference and is available without charge by writing to Southwestern Life
Insurance Company, P.O. Box 2699, Dallas, Texas 75221-9917, or by calling
1-800-792-4368.
The Table of Contents of the Statement of Additional Information appears on page
15 of this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus Dated July 30, 1996
<PAGE>
TABLE OF CONTENTS
Page
Definitions 3
Synopsis 3
The Contracts 3
The Separate Account 4
Condensed Financial Information 4
Southwestern 5
The Separate Account 6
Conversion of Separate Account 7
Portfolio Voting Rights 7
Deductions and Expenses 7
Deductions for Sales and Other Expenses 7
Charges for Mortality and Expense Undertakings 7
Other Expenses 8
Annuity Contracts 8
Accumulation Period 8
Application for Contracts 8
Crediting Accumulation Units 8
Value of an Accumulation Unit 8
Net Investment Factor 8
Valuation of the Separate Account 9
Termination 9
Annuity Period 10
Annuity Forms 10
Death Benefits 11
Death Before the Annuity Date 11
Death After the Annuity Date 11
Federal Tax Consequences 11
Assignment 13
Modification 13
Suspension 14
Principal Underwriter 14
Legal Proceedings 14
Contract Owner Inquiries 14
Earlier Contracts 14
Table of Contents of the Statement of Additional
Information 15
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY JURISDICTION TO ANY PERSON TO
WHOM SUCH OFFER WOULD BE UNLAWFUL THEREIN.
<PAGE>
DEFINITIONS
Accumulation Unit: a measuring unit used to calculate the value of a Contract
before annuity payments begin.
Annuitant: a person on whose life annuity payments are based.
Annuity Unit: a measuring unit used to calculate the amount of annuity payments.
Contract Owner: the person who has title to the Contract.
Fixed-Dollar Annuity: an annuity providing for payments that remain fixed in
amount throughout the payment period.
General Account: all assets of Southwestern that are not allocated to and made a
part of the Separate Account or any other segregated account of Southwestern.
Participant: a person who makes Purchase Payments, or for whom Purchase Payments
are made, under a group Contract.
Purchase Payment: amount paid to Southwestern pursuant to the Contract.
Valuation Date: Each Monday through Friday with certain limited exceptions such
as days when changes in the value of the investment company's portfolio
securities do not materially affect the current net asset value of the
investment company's redeemable securities, and on the day following
Thanksgiving.
Variable Annuity: an annuity providing for payments that vary in amount with the
investment experience of the Separate Account.
SYNOPSIS
The Contracts
The Contracts offered by this prospectus are group flexible premium variable
annuity Contracts under which annuity payments will commence on a selected
future date (see "Annuity Period," page 10). The Contracts primarily are
intended for use as tax-sheltered annuity contracts issued to employees of
public school systems, certain tax-exempt organizations and state-supported
educational systems pursuant to section 403(b) of the Code (see "Federal Tax
Consequences," page 12). A Contract that covers all Participants is issued to
the Contract Owner. Each Participant receives a certificate that summarizes the
provisions of the Contract and evidences participation in the annuity purchase
plan.
The minimum initial and subsequent premium under the Contract is $10 (see
"Application for Contracts," page 8). Premiums, less deductions for sales and
administrative expenses and applicable premium taxes, are held in the Separate
Account. The deduction for sales and administrative expenses is 6 1/4%,
consisting of 3 1/4% for sales expense and 3% for administrative expense (see
"Deductions for Sales and Other Expenses," page 7). Where applicable, a
deduction is made from each payment for premium taxes (currently ranging from
.5% to 3.0%). The Contract provides for charges equal to 1% on an annual basis
of the average daily net asset value of the Separate Account, for mortality and
expense risk undertakings by Southwestern. Southwestern estimates .70% is
allocated to its mortality undertakings and .30% to its expense undertaking (see
"Charges for Mortality and Expense Undertakings," page 7).
The Contract includes Southwestern's undertaking to provide annuity payments
determined in accordance with the applicable annuity tables and other provisions
in the Contract for the lifetime of the Annuitant regardless of the actual
mortality experience among Annuitants. Southwestern also provides an undertaking
that the deductions for sales and administrative services will be the only cost
to Participants for these services regardless of the actual cost to
Southwestern.
During the accumulation period, a Participant's account or a portion thereof may
be redeemed for a cash payment equal to the value of the Accumulation Units
redeemed, valued at the next determined unit value after Southwestern receives
notice of the redemption request (see "Termination," page 9). No redemption
charge is imposed.
<PAGE>
==============================================================================
Contract Owner Transaction Expenses (1), as a percentage
of the purchase payments Sales Load Imposed on Purchases 3.25 %
Administrative Expenses 3.00 %
Separate Account Annual Expenses, as a percentage of average net assets (for the
year ended December 31, 1995, as adjusted) (2)
Mortality Risk Fees 0.70 %
Expense Risk Fees 0.30 %
Other expenses 0.20 %(3)
------
Total Separate Account Annual Expenses 1.20 %
Growth Portfolio Annual Expenses, as a percentage of average net assets (for the
year ended December 31, 1995, as adjusted)
Total Growth Portfolio Operating Expenses 0.57 %
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXAMPLE (4) 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
If you surrender (or annuitize) your
Contract at the end of the applicable time period:
You would pay the following expenses on
a $1,000 investment, assuming 5% annual
return on assets: $80 $116 $156 $276
If you do not surrender your Contract:
You would pay the following expenses on
a $1,000 investment, assuming 5% annual
return on assets: $80 $116 $156 $276
</TABLE>
(1) State Premium Taxes (ranging from .5% to 3.0%) are not included.
(2) Actual expenses adjusted to reflect the conversion of the Separate
Account from a management investment company to a unit investment trust,
effective July 30, 1996.
(3) Audit expense of the Separate Account (limited to .20% of net asset value).
In connection with the conversion of the Separate Account into a unit
investment trust, Southwestern agreed to assume the audit expense of the
Separate Account to the extent it would otherwise exceed 0.20% of the
Separate Account's average net assets in any year.
(4) Assumes the conversion of the separate account to a unit investment trust
was effective throughout the periods presented.
The EXAMPLE, a projection, should not be considered a representation of past or
future expenses. Actual expenses may be greater or lesser than those shown.
THE PURPOSE OF THE ABOVE TABLE IS TO ASSIST CONTRACT OWNERS IN UNDERSTANDING THE
EXPENSES THAT THEY BEAR DIRECTLY AND INDIRECTLY. THE TABLE ABOVE REFLECTS THE
EXPENSES OF THE SEPARATE ACCOUNT AS WELL AS THE CAPITAL GROWTH PORTFOLIO. SEE
"DEDUCTIONS AND EXPENSES," PAGE 7, AND THE ACCOMPANYING PROSPECTUS OF THE
SCUDDER FUND.
==============================================================================
As described in Note 2 of the above table, the expense information in the table
has been adjusted to reflect the conversion of the Separate Account from a
management investment company to a unit investment trust.
The Separate Account
The Separate Account operates as an investment company registered with the
Securities and Exchange Commission ("Commission") under the Investment Company
Act of 1940 ("1940 Act"). Effective July 30, 1996, the Separate Account
converted from an open-end diversified management company to a unit investment
trust. The Separate Account invests exclusively in shares of the Capital Growth
Portfolio of Scudder Variable Life Investment Fund. The investment objectives of
the Growth Portfolio are discussed in the accompanying prospectus of the Scudder
Fund.
CONDENSED FINANCIAL INFORMATION
The following information is based upon the performance of the Separate Account
when it was organized as an open-end diversified management company. The per
unit income and capital changes data for the ten years ended December 31,1995,
have been examined by Coopers & Lybrand L.L.P., independent certified public
accountants. The data reflects operations conducted before May 1, 1987, the date
SLC Financial Services, Inc. became the investment adviser of the Separate
Account. Upon conversion of the Separate Account to a unit investment trust, SLC
Financial Services, Inc. ceased to serve as investment adviser of the Separate
Account.
<PAGE>
(For an accumulation unit outstanding throughout the year)
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
Qualified unit:
Investment income $ .213 $ .187 $ .176 $ .163 $ .188 $ .222 $ .172 $ .111 $ .084 $ .081
Expenses .131 .106 .105 .097 .084 .074 .065 .053 .049 .045
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income .082 .081 .071 .066 .104 .148 .107 .058 .035 .036
Net realized and unrealized gain
(loss) on securities 1.547 .231 .101 .200 .918 (.116) .811 .188 (.167) (.054)
Net increase (decrease) in unit ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
value 1.629 .312 .172 .266 1.022 .032 .918 .246 (.132) (.018)
Unit value:
Beginning of year 5.710 5.398 5.226 4.960 3.938 3.906 2.988 2.742 2.874 2.892
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
End of year $7.339 $5.710 $5.398 $5.226 $4.960 $3.938 $3.906 $2.988 $2.742 $2.874
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Number of units outstanding at
end of year (in thousands) 548 685 701 764 930 1,156 1,399 1,819 2,193 2,641
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Nonqualified unit:
Investment income $ .195 $ .170 $ .160 $ .149 $ .171 $ .202 $ .157 $ .101 $ .076 $ .074
Expenses .120 .096 .096 .088 .076 .067 .059 .048 .044 .041
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income .075 .074 .064 .061 .095 .135 .098 .053 .032 .033
Net realized and unrealized
gain (loss) on securities 1.408 .210 0.92 .183 .834 (.106) .737 .171 (.152) (.049)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net increase (decrease) in unit
value 1.483 .284 .156 .244 .929 .029 .835 .224 (.120) (.016)
Unit value:
Beginning of year 5.197 4.913 4.757 4.513 3.584 3.555 2.720 2.496 2.616 2.632
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
End of year $6.680 $5.197 $4.913 $4.757 $4.513 $3.584 $3.555 $2.720 $2.496 $2.616
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Number of units outstanding at
end of year (in thousands) 115 112 112 116 116 124 135 139 156 161
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
----------------------------------------------------------------------------------------
Ratios:
Expenses to average
net assets % 1.94 1.91 1.98 1.95 1.92 1.91 1.83 1.81 1.47 1.43
Net investment income to
average net assets % 1.21 1.47 1.33 1.35 2.39 3.85 3.01 1.98 1.06 1.16
Portfolio turnover % 0 6 9 5 25 8 44 18 6 78
</TABLE>
Note: Prior to 1984, federal income taxes or benefits were charged or credited
to accumulation unit values on nonqualified units on each valuation date and
affected net realized and unrealized gain (loss).
The Separate account has had no senior securities (or outstanding bank loans)
during the last ten fiscal years.
Financial Statements of the Separate Account and Southwestern may be found in
the Statement of Additional Information. A copy of the Statement of Additional
Information may be obtained without charge by written request to Southwestern
Life Insurance Company, P.O. Box 2699, Dallas, Texas 75221-9917, or by calling
1-800-792-4368.
SOUTHWESTERN
Southwestern is a stock life insurance company originally chartered in 1903
under the laws of the State of Texas. Its home office is located at 500 North
Akard Street, Dallas, Texas 75201. Southwestern primarily writes life insurance.
It is licensed to write life insurance business in 39 states and in the District
of Columbia. Southwestern is an indirect wholly-owned subsidiary of Southwestern
Financial Corporation ("SFC"), an insurance holding company. SFC is owned by two
entities: PennCorp Financial Group, Inc., which indirectly holds 15.1% of the
voting stock of SFC, and Knightsbridge Capital Fund I, L.P., which directly
holds 84.9% of the voting stock of SFC.
<PAGE>
THE SEPARATE ACCOUNT
On December 19, 1967, the Board of Directors of Southwestern established the
Separate Account in accordance with certain provisions of the Texas Insurance
Code. The Separate Account is registered with the Commission as a unit
investment trust under the 1940 Act. Such registration does not involve
supervision by the Commission of the management or investment practices or
policies of the Separate Account.
The Separate Account is administered and accounted for as part of the general
business of Southwestern, but the income, gains and losses whether or not
realized, from assets allocated to the Separate Account are, in accordance with
the Contracts, credited or charged against the Separate Account without regard
to other income, gains or losses of Southwestern. Assets of the Separate Account
are not chargeable with liabilities arising out of any other business of
Southwestern.
All obligations arising under the Contract, including the obligation to make
annuity payments, are general corporate obligations of Southwestern and all of
Southwestern's assets are available to meet its expenses and obligations under
the Contracts. However, while Southwestern is obligated to make the variable
annuity payments under a Contract, the amount of these payments is not
guaranteed.
On April 23, 1996, the University of Texas at Austin, P.O. Box 8047, Austin,
Texas 78712, owned a group variable annuity contract which represented 11.28% of
the assets of the Separate Account. In addition, Southwestern owned a 13.04%
interest in the assets of the Separate Account, as of April 23, 1996, by virtue
of its initial contribution to the Separate Account when the Separate Account
was organized.
CONVERSION OF SEPARATE ACCOUNT
Effective July 30, 1996, the Separate Account converted from a management
investment company into a unit investment trust (the "Conversion"). The Separate
Account no longer invests directly in a diversified portfolio of securities, but
instead invests exclusively in the shares of the Growth Portfolio.
GROWTH PORTFOLIO
The Capital Growth Portfolio is a series of Scudder Variable Life Investment
Fund, a Massachusetts business trust established by Declaration of Trust dated
March 15, 1985. The Scudder Fund is registered with the Commission under the
1940 Act as an open-end, diversified management investment company. Such
registration does not involve supervision of the Commission of the management or
investment practices or policies of the Scudder Fund. The Scudder Fund is
designed to provide an investment vehicle for variable annuity contracts and
variable life insurance policies offered by separate accounts of life insurance
companies.
The Growth Portfolio seeks to maximize long-term capital growth through a broad
and flexible investment program. The Growth Portfolio invests primarily in
marketable securities, principally common stocks and consistent with its
objective of long-term capital growth, preferred stocks. The Growth Portfolio is
free to invest in a wide range of marketable securities offering the potential
for growth, in various sectors of the stock market, including companies that own
or develop natural resources, companies that may benefit from changing consumer
demands and lifestyles and foreign companies. In order to reduce risk, as market
or economic conditions may warrant, the Growth Portfolio may also invest up to
25% of its assets in short-term debt instruments.
In addition, Growth Portfolio may invest up to 20% of its net assets in
intermediate to longer-term debt securities when Growth Portfolio's investment
adviser, Scudder, Stevens & Clark, Inc. ("Scudder"), anticipates that the total
return on debt securities is likely to equal or exceed the total return on
common stocks over a selected period of time. The Growth Portfolio may purchase
investment-grade debt securities, which are those rated Aaa, Aa, A or Baa by
Moody's Investors Service, Inc., or AAA, AA, A or BBB by Standard & Poor's or if
unrated, of equivalent quality as determined by the adviser. The Growth
Portfolio's intermediate to longer-term debt securities may also include those
which are rated below investment grade, as long as no more than 5% of its net
assets are invested in such securities.
The accompanying prospectus of the Scudder Fund should be read carefully before
investing. It contains more detailed information about the Growth Portfolio,
including the risks of investing in the Growth Portfolio.
<PAGE>
VOTING RIGHTS
Contract Owners have the opportunity to instruct Southwestern as to the voting
of Growth Portfolio shares at meetings of shareholders of the Scudder Fund, in
proportion to their respective interest under the Contracts. Contract Owners
entitled to vote will receive proxy material and a form on which voting
instructions may be given. Southwestern will vote the shares of the Growth
Portfolio held by the Separate Account attributable to the Contracts, in
accordance with instructions received from Contract Owners. Such shares for
which timely instructions have not been received from Contract Owners will be
voted by Southwestern for or against any proposition, or Southwestern will
abstain in the same proportion as shares in the Separate Account for which
instructions are receive. Southwestern will vote, or abstain from voting, any
Growth Portfolio shares that are not attributable to Contract Owners in the same
proportion as all Contract Owners in the Separate Account vote or abstain.
However, if Southwestern determines that it is permitted to vote such shares of
the Growth Portfolio in its own right, it may elect to do so, subject to the
then-current interpretations of the 1940 Act and the rules thereunder.
Unless the Contract has been issued in connection with a deferred compensation
plan, individuals participating under a Contract Owners's retirement plan have
the right to instruct the owner with respect to shares attributable to their
contributions and to such additional extent as the owner's retirement plan may
permit. For purposes of determining voting rights, the number of shares of the
Growth Portfolio held in the Separate Account deemed attributed to a
Participant's interest under a Contract prior to the annuity date will be
determined on the basis of the value of the accumulation units credited to the
Participant's account as of the record date. On or after the annuity
commencement date, the number of attributable shares will be based on the value
of the assets held in the Separate Account to meet annuity obligations to the
payee under the Contracts as of the record date. In either case, the number of
Growth Portfolio shares eligible to be voted is computed by dividing the "value"
so determined by the net asset value of the Growth Portfolio share on the record
date. During the annuity period, the number of votes attributable to a Contract
will generally decrease since funds held in the Separate Account for an
annuitant will decrease over time.
Because the Scudder Fund is organized as a Massachusetts business trust, it is
not required to elect Trustees of the Scudder Fund annually and does not expect
to hold annual meetings for any other purpose. Nevertheless, if Trustees of the
Scudder Fund are required to be elected or any other action is required to be
taken at any special or annual meeting of Scudder Fund, instructions for voting
shares underlying the interests of Contract Owners will, as indicated above, be
solicited by means of proxy materials.
DEDUCTIONS AND EXPENSES
Charges under the Contracts are assessed in two ways: as deductions from
Purchase Payments and as charges to the Separate Account. The level of these
fees may be revised periodically (see "Modification," page 13).
Deductions for Sales and Other Expenses
Deductions are made from each Purchase Payment as received to cover: (i) sales
expenses; (ii) administrative expenses, including but not limited to items such
as salaries and travel expenses of home office officials and employees, rent,
postage, telephone, legal fees, office equipment, stationery and other office
expenses; and (iii) premium taxes, when applicable. The deductions for
administrative expenses are designed only to reimburse Southwestern for its
actual expenses, and Southwestern does not expect to recover from these
deductions any amounts above its accumulated expenses in administering the
Contracts. These deductions do not cover: (i) taxes arising from income and
capital gains on the Separate Account or otherwise from the existence of the
Separate Account; (ii) fees and expenses of audit of the Separate Account. These
other expenses are borne by the Separate Account other than taxes on income and
capital gains (if any) as may be attributable to Southwestern's initial capital
contribution to the Separate Account, which taxes will be borne by Southwestern.
The cost of preparing and printing annual or other amendments to the Separate
Account's registration statement, including prospectuses, is borne by
Southwestern.
<PAGE>
Under the Contracts, the deduction is 6 1/4% (plus applicable premium taxes),
consisting of 3 1/4% for sales expense and 3% for administrative expense. This
represents 6.67% (excluding any premium tax) of the amount invested. At the time
annuity benefits are purchased, any additional premium taxes are deducted.
Premium taxes may range from .5% to 3.5%. No deduction for sales or
administrative expense is made from a Purchase Payment composed entirely of an
amount payable by Southwestern under a fixed-dollar group annuity contract
issued by Southwestern.
Charges for Mortality and Expense Undertakings
Southwestern provides a mortality undertaking by assuming the risk that its
actuarial estimate of mortality rates among Annuitants may prove erroneous and
that reserves set up on the basis of this estimate will not be sufficient to
meet its annuity payment obligations. Southwestern provides an expense
undertaking by assuming the risk that charges made under the Contracts may not
prove sufficient to cover the actual cost of providing sales, administrative and
other services. If the reserves or charges prove more than sufficient, the
excess will be a profit to Southwestern. If the reserves or charges are not
sufficient, the loss will fall on Southwestern. If the cost of selling the
Contracts is greater than the charges collected, the deficiency will be made up
out of Southwestern's General Account assets which may include profits derived
from the mortality undertaking fee.
Other Expenses
Accounting fees (not to exceed 0.20% of the Separate Account's average net
assets in any year) are charged against the assets of the Separate Account at
cost, pursuant to Rule 26a-1 under the 1940 Act. In addition, there are
deductions from and expenses paid out of the Growth Portfolio that are described
in the accompanying prospectus of the Scudder Fund.
THE ANNUITY CONTRACTS
The basic objective of the Contracts is to provide benefits over the lifetime of
an Annuitant that will tend to vary with changes in the cost of living. There is
no assurance that the value of a Participant's account will equal or exceed the
Purchase Payments made.
The dollar amount of variable annuity payments varies with the investment
experience of the Separate Account and reflects the Separate Account's
investment experience throughout the Contract's existence. The value of the
Separate Account's investments in the Growth Portfolio fluctuates daily and is
subject to all the risks of changing economic conditions, as well as the risk
inherent in the Scudder Fund's ability to anticipate changes in investments
necessary to meet changes in economic conditions.
Because it is impossible to predict how long an Annuitant will live and because
annuity payments vary, there is no way of knowing whether the aggregate amount
of the variable annuity payments received in the years following the
commencement of annuity payments will equal or exceed the amount applied to
provide these payments.
ACCUMULATION PERIOD
Application for Contracts
New Contracts are no longer being marketed or issued. However, Southwestern
continues to accept Purchase Payments on existing Contracts and to accept new
Participants under existing group Contracts.
When new Contracts were being marketed and issued, completed applications for
the Contracts were forwarded to the home office of Southwestern for acceptance.
A Purchase Payment may accompany an application for a Contract. The minimum
initial and subsequent Purchase Payment for a Contract is $10.
Each application was subject to acceptance by Southwestern. As a general rule,
Contracts were issued if any of the following situations existed: (i) there were
fifty or more eligible employees; (ii) there were ten or more Participants; or
(iii) there were at least three Participants and it was anticipated that
contributions under the Contract would aggregate at least $3,000 per year for
the next ten years. Upon acceptance, a Contract was issued to the Contract Owner
and, if a Purchase Payment accompanied the application, the Purchase Payment
(net of deductions for sales and administrative expenses and applicable premium
<PAGE>
taxes) was held in the Separate Account and credited to the Participant's
account. If an application was complete upon receipt, the Purchase Payment was
credited to the Participant's account within two business days. If it was not
complete, Southwestern requested additional information to complete the
processing of the application. If this was not accomplished within five business
days, Southwestern would return the Purchase Payment to the applicant unless
otherwise instructed. Subsequent Purchase Payments are credited to the
Participant's account at the price next computed after the Purchase Payment is
received by Southwestern at its home office.
Crediting Accumulation Units
Purchase payments (net of deductions for sales and administrative expenses and
applicable premium taxes) are credited to the Contract in the form of
Accumulation Units. The number of units credited is determined by dividing the
amount credited by the value of an Accumulation Unit next determined after the
Purchase Payment is received by Southwestern at its home office.
The number of Accumulation Units credited is not affected by any subsequent
change in the value of an Accumulation Unit, but the dollar value of an
Accumulation Unit may vary from date to date depending upon the investment
experience of the Separate Account.
Value of an Accumulation Unit
The value of an Accumulation Unit is determined on each Valuation Date by
multiplying the Accumulation Unit value for the immediately preceding date by
the net investment factor for the current date. The value of a Participant's
account at any time prior to the commencement of annuity payments can be
determined by multiplying the total number of Accumulation Units credited to his
or her account by the current Accumulation Unit value. The Participant will be
advised at least twice each year of the number of Accumulation Units credited to
his or her account and the current dollar value of an Accumulation Unit.
Net Investment Factor
The net investment factor is an index of the percentage change (adjusted for the
deduction of the fees for audit and mortality and expense undertakings) in the
net asset value of the Separate Account since the preceding Valuation Date. This
factor may either be positive or negative depending upon the Growth Portfolio's
investment performance.
Valuation of the Separate Account
The value of the Separate Account is the sum of its assets minus its
liabilities. Because the Separate Account invests exclusively in the Growth
Portfolio, the fair market value of its assets will be based on the net asset
value of the Growth Portfolio. For the calculation of the net asset value of the
Growth Portfolio, see the current prospectus for the Growth Portfolio, a current
copy of which accompanies this prospectus. Portfolio securities generally are
valued at market value. However, securities for which market quotations are not
readily available are valued at fair value as determined in good faith by the
Trustees of the Scudder Fund. Short-term obligations are valued at amortized
cost.
Termination
During the accumulation period a Participant's account, or a portion thereof,
may be redeemed for a cash payment equal to the value of the Accumulation Units
redeemed as next determined after receipt of proper notice by Southwestern at
its home office on a form obtained from Southwestern. Upon redemption of a
portion of a Participant's account, the account is reduced by the number of
Accumulation Units redeemed. No redemption charge is imposed by Southwestern.
A redemption of all or a portion of a Participant's account resulting in a cash
payment to a resident of any one of certain states may result in a reduction of
Southwestern's premium tax liability in that state. In this event, Southwestern
will pay in addition to the value of the Accumulation Units redeemed, an amount
equal to the lesser of:
(i) the amount by which the premium tax liability of Southwestern is
reduced as a result of this redemption, or
<PAGE>
(ii) the amount previously deducted for premium taxes from Purchase
Payments allocable to the Accumulation Units redeemed.
No representation is hereby made that upon the redemption of all or a portion of
an account that any additional payment will be made, since the state of
residence of the Participant and the premium tax laws of that state at the time
of redemption will determine the additional amount payable, if any.
Any cash payment resulting from the partial or complete redemption of a
Participant's account is payable within seven days following receipt by
Southwestern of the request for redemption in proper form provided, however, the
right is reserved to suspend or postpone redemptions during any period when:
(i) trading on the New York Stock Exchange is restricted by the Commission
or the Exchange is closed for other than weekends and holidays,
(ii) the Commission has by order permitted suspension, or
(iii)an emergency as determined by the Commission exists making disposal
of portfolio securities or valuation of assets of the Separate Account
not reasonably practicable.
In addition to an election to receive a cash payment for the value of a
Participant's account, the following options are available. An election may be
made to use the redemption value of an account to purchase an individual
deferred fixed dollar annuity or variable annuity. Any such conversion will be
made and the provisions and annuity purchase tables of the contract will be in
accordance with the rules of Southwestern in effect with respect to the annuity
contracts at the time application is made to Southwestern. A Participant under a
Contract who becomes an employee of another employer which has a contract of the
same type then in force with Southwestern may elect, subject to approval of
Southwestern and the new employer, to transfer the value of his or her
individual account to that contract.
If a Contract is issued in connection with the Texas Optional Retirement Program
for employees of certain state-supported educational institutions, a redemption
will require the joinder of the Contract Owner and, in accordance with an
opinion of the Attorney General of Texas, may not be effected prior to
termination of employment, retirement or death of the Participant. Certain
restrictions on distributions from annuity contracts sold to plans qualified
under section 403(b) of the Code also apply. (See "Federal Tax Consequences,"
page 11.)
A Participant may, one time only and within thirty days after a redemption,
reinvest the proceeds with no deduction for sales or other expenses.
ANNUITY PERIOD
The annuity period is that period during which annuity payments are made. The
Participant may select any date for annuity payments to commence with the
exception that annuity payments must begin within five years after the standard
annuity commencement date selected by the Contract Owner. During the annuity
period, an Annuitant receives a monthly variable annuity payment determined on
the basis of the number of variable Annuity Units purchased and the investment
experience of the Separate Account. In addition, the level of annuity payments
is affected by the age of the Annuitant and the annuity form selected. Each
annuity payment is payable on the first business day following the due date of
the payment.
The amount of a variable annuity payment is not affected by adverse mortality
experience or by any excess in Southwestern's expenses over expense deductions
provided for in the Contract. Accordingly, Southwestern provides an undertaking
that its actual expense and actual mortality results will not adversely affect
the dollar amounts of variable annuity payments.
Each month, the Annuitant receives the value of a fixed number of Annuity Units.
The value of an Annuity Unit, and the amount of the monthly payments, reflects
the Separate Account's investment gains and losses and investment income.
Accordingly, payments vary with the investment experience of the assets of the
Separate Account, namely, shares of the Growth Portfolio.
<PAGE>
The Annuity Unit is a measure of the value of the Annuitant's income from a
variable annuity Contract during the annuity period. The value of an Annuity
Unit is determined by multiplying the value of an Annuity Unit for the
immediately preceding date by the product of (i) the net investment factor for
the date the value is calculated and (ii) a factor to neutralize the net
investment rate built into the annuity tables contained in the Contract.
The objective of the Contract is to provide annuity payments that tend to vary
with changes in the cost of living over the life of an Annuitant. The
achievement of this objective depends in part upon the validity of the
assumption that the annual net investment rate built into the annuity tables
will be realized. Payments will be smaller than, equal to or greater than the
first payment, depending upon whether the actual net investment rate is smaller
than, equal to or greater than the assumed annual net investment rate. A higher
assumption would mean a higher initial payment but a more slowly rising series
of subsequent payments if actual investment performance exceeds the assumed
rate, or a more rapidly falling series of subsequent payments if actual
performance is less than the assumed rate. A lower assumption would have the
opposite effect. If the actual net investment rate is at the assumed rate, the
annuity payments are level.
Annuity Forms
The Annuitant is generally given the choice of receiving annuity payments in
accordance with the annuity forms set forth in the Contract. The right to elect
annuity forms may be restricted to comply with the Code. In the absence of an
effective election, a variable annuity on Annuity Form 2 will be deemed to have
been elected, with annuity payments guaranteed for ten years.
In general, the longer annuity payments are guaranteed, the lower the amount of
each payment. No minimum value for a Participant's account is required to elect
any of the annuity forms specified below.
Annuity Form 1 - Life Annuity
An annuity payable monthly during the lifetime of the Annuitant and terminating
with the last monthly payment preceding the death of the Annuitant. This annuity
form offers the maximum level of monthly payments since there is no undertaking
by Southwestern to provide a minimum number of payments or a death benefit for
beneficiaries. It would be possible for the Annuitant to receive only one
payment, if he or she died prior to the due date of the second annuity payment.
Annuity Form 2 - Life Annuity with 5, 10, 15 or 20 Years Certain
An annuity payable monthly during the lifetime of an Annuitant with payments
assured for an elected certain period of 5, 10, 15 or 20 years. If the Annuitant
dies during the period, however, the beneficiary may elect to receive in one sum
the present value of the remaining number of payments, based on interest at the
assumed annual net investment rate in the annuity table included in the
Contract, compounded annually.
Annuity Form 3 - Unit Refund Life Annuity
An annuity payable monthly during the lifetime of the Annuitant, terminating
with the last payment due prior to death of the Annuitant, provided that the
beneficiary will then receive a payment of the dollar value, as of the date of
the Annuitant's death, of a number of Annuity Units equal to the excess, if any,
of (a) over (b) where (a) is the total amount applied under this annuity form
divided by the Annuity Unit value for the date on which annuity payments
commence and (b) is the number of Annuity Units represented by each monthly
payment multiplied by the number of monthly payments made.
Annuity Form 4 - Joint Life and Survivor Annuity - 10 Years Certain
An annuity payable monthly for 10 years and so long thereafter as either the
Annuitant or the joint Annuitant shall live. If both Annuitants die during the
certain period, the present value of the remaining payments, based on interest
at the assumed annual net investment rate in the annuity table included in the
Contract, compounded annually, will be paid.
<PAGE>
A participant may, if a greater initial payment would result, prior to the due
date of the first annuity payment, elect an annuity with a first monthly payment
in the amount which can be provided by a single premium life annuity contract,
if any are then being issued by Southwestern, at the current published rates
with a single premium equal to 103% of the amount that would otherwise be
applied to determine the first monthly payment.
DEATH BENEFITS
Death Before the Annuity Date
Under the Contract, the amount payable upon death of a Participant before the
due date of the first annuity payment is equal to the dollar value of the
Participant's individual account as of the date on which proof satisfactory to
Southwestern of the Participant's death is received by Southwestern.
If the total death benefit is $2,000 or more, payment may be made to the
beneficiary in installment payments instead of one cash payment or payment may
be deferred for a specified period of time, during which interest is added by
Southwestern to the sum deferred.
All certificates issued after January 18, 1985, are required by the Code to
provide that, if the Participant dies before the annuity starting date, his or
her entire interest must be distributed within 5 years. An exception to this
requirement exists for any portion of the participant's interest payable to (or
for the benefit of) a designated beneficiary, and (i) such portion will be
distributed over the life, or a period not exceeding the life expectancy of the
designated beneficiary and (ii) such distributions will begin not later than one
year after the Participant's death or such later date as may be prescribed by
regulations issued by the Secretary of the Treasury. If the designated
beneficiary is the surviving spouse of the Participant, he or she will be
treated as the Participant.
Death After the Annuity Date
If the Annuitant under the Contract dies after the annuity date, the death
proceeds, if any, depend upon the form of annuity payment in effect at the time
of death (see "Annuity Forms," page 11).
A certificate issued after January 18, 1985, is also required to provide that,
if the Annuitant dies on or after the annuity date, the remaining portion of his
or her interest will be distributed at least as rapidly as under the method of
distribution used at the date of the Annuitant's death.
FEDERAL TAX CONSEQUENCES
The operations of the Separate Account form part of the operations of
Southwestern, but the Code currently provides that if certain conditions are
satisfied no federal income tax is payable by Southwestern on the investment
income and capital gains of the Separate Account other than the amount of such
income and capital gain (if any) as may be attributable to Southwestern's
initial capital contribution in the Separate Account. No federal income tax is
payable by a Participant under a certificate until annuity payments commence or
a full or partial withdrawal is made if the investments of the Separate Account
(directly or indirectly, through the Growth Portfolio) meet certain
diversification requirements.
The amount of premiums paid by the employer are excluded from the employee's
income for the taxable year to the extent that the payments do not exceed the
employee's exclusion allowance for the taxable year. In addition, tax-sheltered
annuities may permit nondeductible employee contributions.
Payments to purchase a tax-sheltered annuity contract for an employee are
subject to the overall limits on contributions and benefits applicable to
tax-sheltered plans under section 403(b) or, if applicable, section 415 of the
Code.
All distributions, with the exception of a return of nondeductible employee
contributions, are included in gross income in the year they are paid. If an
amount is received before the annuity starting date, the Participant may be
allowed to recover pre-1987 nondeductible employee contributions tax-free before
receiving the taxable income. Otherwise, both before and after the annuity
starting date, each payment under a certificate is treated in part as a return
of nondeductible employee contributions and the remainder as taxable income.
<PAGE>
The Tax Reform Act of 1986 imposes restrictions on distributions (i.e.,
redemptions in whole or part) from annuity contracts sold to plans qualified
under section 403(b) of the Code. These restrictions are effective in tax years
beginning after December 31, 1988. Section 403(b)(11) of the Code requires that
for such annuity contracts to receive tax-deferred treatment, they must provide
that:
Distributions attributable to contributions made pursuant to a salary reduction
agreement be paid only:
(1) when the employee attains age 59 1/2 separates from service, dies, or
becomes disabled (within the meaning of section 72(m) (7)); or
(2) in the case of hardship. In hardship cases, only the distribution of
contributed amounts is permitted; distribution of any income
attributable to these contributions is prohibited.
The contracts described in this prospectus were modified to comply with these
changes in the Code. Disclosure relating to "Termination" of the contracts and
redemption of all or a portion of a Participant's account should be read with
the above restrictions in mind.
Distributions from contracts that are attributable to assets held as of December
31, 1988, are not subject to these Code restrictions.
In the case of benefits accruing under a tax-sheltered annuity after 1986, the
Contract value must be distributed or annuity payments must be commenced by
April 1 of the calendar year following the year in which the Participant retires
or attains age 70 1/2. Such payments are based upon the life expectancy or a
period not exceeding the life expectancy of the Participant or the Participant
and a designated beneficiary. At least 50% of the present value of the amount
available for distribution under a tax-sheltered annuity must be paid within the
life expectancy of the Participant. This rule does not apply where the
Participant's spouse is the designated beneficiary, but each payment to the
spouse must be no greater than each payment to the Participant and spouse. If
certain requirements of the Code are met, distributions from a tax-sheltered
annuity may be rolled over tax-free to another qualified plan or to an IRA.
However, distributions required to be made under the Code cannot be rolled over.
Southwestern is required to withhold federal income tax on annuity payments and
on distributions required by the Code. However, recipients of Contract
distributions are allowed to make an election not to have federal income tax
withheld. After such an election is made with respect to annuity payments, an
Annuitant may revoke the election at any time, and commence withholding. In this
case, Southwestern will notify the payee at least annually of his or her right
to change the election.
However, for any lump-sum, partial or other distributions made on or after
January 1, 1993, that are eligible in whole or in part to be rolled over
tax-free into another eligible plan, contract or IRA, Southwestern is required
to withhold 20% of the taxable portion of the distribution, unless the eligible
portion of the distribution is transferred directly to such other plan, contract
or IRA in a direct "trustee-to-trustee" transfer. Recipients of such
distributions are not permitted to waive the 20% withholding requirement.
Payees are required by law to provide Southwestern (as payor) with their correct
taxpayer identification number. If the payee is an individual, this number is
his or her social security number.
The description in this prospectus of the federal tax status of amounts
accumulated or received under the Contract is not exhaustive and is for general
information purposes only. For this reason, a qualified tax adviser should be
consulted for complete tax information regarding any specific situation.
ASSIGNMENT
Assignment by a Participant of his or her interest in any payment or benefits
under a Contract is prohibited, unless such prohibition is contrary to
applicable law.
MODIFICATION
The Contracts may be modified by Southwestern from time to time to the extent
necessary to make the Contracts conform to any law or regulation issued by a
governmental agency. No other modification can be made before the Contract's
fifth anniversary without the Contract Owner's agreement. No mutually agreed
upon modification, however, will adversely affect Accumulation or Annuity Units
credited before its effective date without the agreement of Participants and
Annuitants covered by the Contract.
<PAGE>
Group variable Annuity contracts are normally in force over many years, and the
character of the group covered by the Contract continually changes, thus
affecting Southwestern's ability to predict the future costs of administering
the Contract. Accordingly, on the fifth or any later Contract anniversary,
Southwestern reserves the right to modify the Contract, including the deductions
from Purchase Payments for sales and administrative expense, the periodic charge
for mortality and expense undertakings, and the annuity purchase rates. No
modification will adversely affect Accumulation or Annuity Units credited before
its effective date. At least 90 days' notice of any such modification will be
given to the Contract Owner, and notice will also be given to each Participant
and Annnuitant covered by the Contract.
The Separate Account presently invests exclusively in shares of the Growth
Portfolio. Should shares of the Growth Portfolio become available for investment
by the Separate Account, or if Southwestern determines that investment in the
Growth Portfolio would be inappropriate in view of the purposes of the Contract,
Southwestern may, in its discretion, substitute shares of a different open-end
management investment company registered as such under the 1940 Act, or one or
more separate investment series thereof, for shares of the Growth Portfolio held
or to be acquired by the Separate Account. No such substitution may take place
unless it is permitted by the Commission and under such conditions as the
Commission may impose.
SUSPENSION
Southwestern may suspend a Contract on any Contract anniversary if during the
year preceding the anniversary (i) the Contract Owner has failed to remit the
required Purchase Payments or (ii) the number of Participants under the Contract
has become less than ten. A Contract may be suspended upon written notice to
Southwestern by the Contract Owner. Upon suspension, Southwestern will not
accept any further Purchase Payments under the Contract, but suspension in no
way affects the Accumulation Units or Annuity Units previously credited to any
Participant. Suspension of a Contract will not result in any immediate tax
consequences to the Contract Owner or any Participant.
PRINCIPAL UNDERWRITER
The Contracts have been sold primarily by life insurance agents of Southwestern
who have been properly licensed by the appropriate state insurance departments.
In addition, these agents have been licensed with the National Association of
Securities Dealers, Inc. ("NASD") as registered representatives of the principal
underwriter, PLAPCO. PLAPCO's principal offices are located at 400 Market
Street, 11th Floor, Philadelphia, Pennsylvania 19106. Although new Contracts are
no longer being issued, Southwestern continues to accept purchase payments on
existing Contracts and to accept new Participants under the existing group
Contracts. PLAPCO is a wholly owned subsidiary of Philadelphia Life Insurance
Company which, in turn, is an indirect wholly-owned subsidiary of Life Partners
Group, Inc.
LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the Separate Account is
a party.
CONTRACT OWNER INQUIRIES
Southwestern provides a toll free number for inquiries by Contract Owners and
Participants. The number is 1-800-793-4368. Written questions should be sent to
Southwestern Life Insurance Company P.O. Box 2699, Dallas, Texas 75221-9917.
EARLIER CONTRACTS
Southwestern has outstanding a number of Variable Annuity contracts funded in
the Separate Account that are no longer offered or sold. These earlier contracts
differ in several respects from those described in this prospectus. Any copy of
this prospectus, required to be delivered to an Owner or Participant under such
earlier contract, contains a supplement setting forth material differences.
<PAGE>
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
Page
General Information 3
Conversion Transaction 3
Purchase of Contracts 4
Underwriter 4
Annuity Payments 5
Illustration of Calculation of Annuity Payments 5
Experience Rating Credits 6
State Regulation 6
Legal Opinions 7
Accountants 7
Financial Statements 7
The Separate Account's Statement of Additional Information and this prospectus
omit certain information contained in the Registration Statement which the
Separate Account has filed with the Securities and Exchange Commission under the
Securities Act of 1933, and reference is hereby made to the Registration
Statement and its amendments, for further information with respect to the
Separate Account and the securities offered herby. The Registration Statement
and its amendments, are available for inspection by the public at the Securities
and Exchange Commission in Washington, D.C.
<PAGE>
Variable Annuity Fund I
of Southwestern Life
For Contracts Issued on Form APDVA
Supplement to Prospectus Dated July 30, 1996
The individual annual premium deferred variable annuity contract issued by
Southwestern on Form APDVA ("Contract") is no longer offered or sold by
Southwestern but remains in effect. The Contract differs from the contract
described in the prospectus in certain material respects. For a complete
description of the provisions of the Contract, in addition to those described
below, see the Contract itself.
(1) Premiums. Premiums may be paid annually, semiannually, quarterly or
monthly, but each purchase payment must be at least $10.
(2) Sales and Administrative Expenses.* A deduction is made from each purchase
payment of 4 1/4% for sales expense plus 3 3/4% for administrative expense
for a total deduction of 8 1/4% (8.99% of the amount invested, excluding
premium tax, if any).
(3) Grace Period. Thirty-one days of grace are granted for the payment of each
premium except the first. During that grace period the Contract will remain
in force.
(4) Premium Default. Any premium for the Contract unpaid at the end of the
grace period will be in default. Upon default, the Contract will be
continued in force as a paid-up variable annuity contract based on the
number of Accumulation Units in the Individual Account as of the due date
of the premium in default and, subject to provision (5) herein,
Southwestern will not accept the payment of any premium thereafter.
(5) Resumption of Premium Payments. Upon the payment of all past due premiums
at any time within three years after the due date of the first premium then
in default and while the Contract is in force as a paid-up variable annuity
contract, premium payments may be resumed in accordance with the provisions
of the Contract.
(6) Annuity Forms. The life annuity with 5 years certain under Annuity Form 2
is not available under the Contract.
(7) Assignment. When the Contract is not used to fund a plan qualified for
favorable tax treatment under the Internal Revenue Code, it may be
assigned.
<TABLE>
<CAPTION>
==============================================================================
* The expense table on page 4 of the prospectus should be replaced with the
following:
<S> <C>
Contract Owner Expenses (1), as a percentage of the purchase payment
Sales Load Imposed on Purchases 4.50 %
Administrative Expenses 3.75 %
Separate Account Annual Expenses, as a percentage of average net assets
(for the year ended December 31, 1995, as adjusted) (2)
Mortality Undertaking 0.70 %
Expense Undertaking 0.30 %
Other expenses 0.20 %(3)
------
Total Separate Account Annual Expenses 1.20 %
Growth Portfolio Annual Expenses, as a percentage of average net assets
(for the year ended December 31, 1995, as adjusted) (2)
Total Growth Portfolio Annual Expenses 0.57 %
- - ------------------------------------------------------------------------------
<CAPTION>
EXAMPLE (4) 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
If you surrender (or annuitize) your
Contract at the end of the applicable time period:
You would pay the following expenses
on a $1,000 investment, assuming 5%
annual return on assets: $99 $135 $174 $292
If you do not surrender your Contract:
You would pay the following expenses
on a $1,000 investment, assuming 5%
annual return on assets: $99 $135 $174 $292
(1) State Premium Taxes (ranging from .5% to 3.0%) are not included.
(2) Actual expenses adjusted to reflect the conversion of the Separate Account
from a management investment company to a unit investment trust, effective
July 30, 1996.
(3) Audit expense of the Separate Account (limited to .20% of net asset value).
In connection with the conversion of the Separate Account into a unit
investment trust, Southwestern agreed to assume the audit expense of the
Separate Account to the extent it would otherwise exceed 0.20% of the
Separate Account's average net assets in any year.
(4) Assumes the conversion of the separate account to a unit investment trust
was effective throughout the periods presented.
The EXAMPLE, a projection, should not be considered a representation of future
expenses. Actual expenses may be greater or lesser than those shown.
THE PURPOSE OF THE ABOVE TABLE IS TO ASSIST CONTRACT OWNERS IN UNDERSTANDING THE
EXPENSES THAT THEY BEAR DIRECTLY AND INDIRECTLY. THE ABOVE TABLE REFLECTS THE
EXPENSES OF THE SEPARATE ACCOUNT AS WELL AS THE CAPITAL GROWTH PORTFOLIO.
==============================================================================
</TABLE>
The Date of this Supplement is July 30, 1996
<PAGE>
Variable Annuity Fund I
of Southwestern Life
For Contracts Issued on Form FPDVA
Supplement to Prospectus Dated July 30, 1996
The individual flexible premium deferred annuity contract issued by Southwestern
on Form FPDVA ("Contract") is no longer offered or sold by Southwestern but
remains in effect. The Contract differs from the contract described in the
prospectus in certain material respects. For a complete description of the
provisions of the Contract, in addition to those described below, see the
Contract itself.
(1) Premiums. Premiums may be paid as often as once a month subject to a $10
minimum. The total amount of premiums payable during any one Contract year
may, at the option of Southwestern, be limited to two times the premium
paid during the first Contract year.
(2) Deductions.* Under the Contract, a deduction is made from each purchase
payment of 4 1/2% for sales expense plus 3 3/4% for administrative expense
or total deduction of 8 1/4% (8.99% of the amount invested, excluding
premium tax, if any).
(3) Right to Cancel. If the Contract is to be used as an IRA, Southwestern will
mail notice of the applicant's right to cancel the application, within 7
days of the notice, for a full refund of any purchase payment.
(4) Annuity Forms. The life annuity with 5 years certain under Annuity Form 2
is not available under the Contract.
<TABLE>
<CAPTION>
==============================================================================
* The expense table on page 4 of the prospectus should be replaced with the
following:
<S> <C>
Contract Owner Expenses (1), as a percentage of the purchase payment
Sales Load Imposed on Purchases 4.50 %
Administrative Expenses 3.75 %
Separate Account Annual Expenses, as a percentage of average net assets
(for the year ended December 31, 1995, as adjusted) (2)
Mortality Undertaking 0.70 %
Expense Undertaking 0.30 %
Other expenses 0.20 %(3)
------
Total Separate Account Annual Expenses 1.20 %
Growth Portfolio Annual Expenses, as a percentage of average net assets
(for the year ended December 31, 1995, as adjusted) (2)
Total Growth Portfolio Annual Expenses 0.57 %
- - ------------------------------------------------------------------------------
<CAPTION>
EXAMPLE (4) 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
If you surrender (or annuitize) your
Contract at the end of the applicable time period:
You would pay the following expenses
on a $1,000 investment, assuming 5%
annual return on assets: $ 99 $135 $174 $292
If you do not surrender your Contract:
You would pay the following expenses
on a $1,000 investment, assuming 5%
annual return on assets: $ 99 $135 $174 $292
(1) State Premium Taxes (ranging from .5% to 3.0%) are not included.
(2) Actual expenses adjusted to reflect conversion of the Separate Account from
a management investment company to a unit investment trust, effect July
30, 1996.
(3) Audit expense of the Separate Account (limited to .20% of net asset value).
In connection with the conversion of the Separate Account into a unit
investment trust, Southwestern agreed to assume the audit expense of the
Separate Account to the extent it would otherwise exceed 0.20% of the
Separate Account's average net assets in any year.
(4) Assumes the conversion of the separate account to a unit investment trust
was effective throughout the periods presented.
The EXAMPLE, a projection, should not be considered a representation of future
expenses. Actual expenses may be greater or lesser than those shown.
THE PURPOSE OF THE ABOVE TABLE IS TO ASSIST CONTRACT OWNERS IN UNDERSTANDING THE
EXPENSES THAT THEY BEAR DIRECTLY AND INDIRECTLY. THE ABOVE TABLE REFLECTS THE
EXPENSES OF THE SEPARATE ACCOUNT AS WELL AS THE CAPITAL GROWTH PORTFOLIO.
</TABLE>
The Date of this Supplement is July 30, 1996
<PAGE>
Variable Annuity Fund I
of Southwestern Life
For Contracts Issued on Form GRVA
Supplement to Prospectus Dated July 30, 1996
The group variable annuity contract issued by Southwestern on Form GRVA
("Contract") is no longer offered or sold by Southwestern but remains in effect.
The Contract differs from the contract described in the prospectus in certain
material respects. For a complete description of the provisions of the Contract,
in addition to these described below, see the Contract itself.
(1) Annuity Election. The Participant's right to elect an annuity form is
subject to certain restrictions specified in the Contract.
(2) Withdrawal Options. The Contract Owner will notify Southwestern of the
number of Accumulation Units to be released to a Participant which are not
to be used to provide an annuity. The Participant may, within 31 days after
the date of notice, elect (a) to receive the value of those Accumulation
Units in a cash payment to be made within 7 days, or (b) to convert the
value of the Accumulation Units to an individual deferred annuity contract.
In the absence of an election, Southwestern will pay the value of those
units as provided in (a). Any Accumulation Units in a Participant's
Individual Account not used to provide an annuity for a Participant and not
released to the Participant shall be automatically paid to the Contract
Owner.
(3) Discontinuance. The Contract Owner may give written notice to Southwestern
that contributions for the Contract are to be discontinued. Southwestern
may discontinue the Contract where the Contract Owner fails to submit an
application or make a contribution for any Participant in accordance with
the Plan or where it is not practicable, in the opinion of Southwestern, to
provide for the continued purchase of annuities under the Contract because
of a change in the Plan or in the amount of benefits to be provided. If the
Contract Owner fails to make any contribution required by the Plan within
31 days from the date a contribution is due, the Contract will
automatically be discontinued. On discontinuance other than by the Contract
Owner, Southwestern will pay to the Contract Owner an amount equal to the
value of the remaining Accumulation Units.
(4) Benefit Limitations. Employer contributions for any of the 25 highest paid
employees whose anticipated benefit from such contributions will exceed
$1,500 may be restricted in certain circumstances specified in the
Contract.
The Date of this Supplement is July 30, 1996
<PAGE>
VARIABLE
ANNUITY FUND I
OF SOUTHWESTERN LIFE
Southwestern Life Insurance Company
P.O. Box 2699
Dallas, Texas 75221-9917
STATEMENT OF ADDITIONAL INFORMATION
July 30, 1996
Philadelphia Life Asset Planning Company
400 Market Street, 11th Floor
Philadelphia, Pennsylvania 19106
(Principal Underwriter)
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the prospectus for Variable Annuity Fund I of Southwestern
Life also dated July 30, 1996. A copy of the prospectus may be obtained by
writing to Southwestern Life Insurance Company at the above address or by
calling:
1-800-792-4368.
<PAGE>
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
Page
General Information 3
Conversion Transaction 3
Purchase of Contracts 4
Underwriter 4
Annuity Payments 5
Illustration of Calculation of Annuity Payments 5
Experience Rating Credits 6
State Regulation 6
Legal Opinions 7
Accountants 7
Financial Statements 7
<PAGE>
GENERAL INFORMATION
Variable Annuity Fund I of Southwestern Life ("Separate Account") is
registered with the Securities and Exchange Commission ("SEC") as a unit
investment trust under the Investment Company Act of 1940 ("1940 Act").
Registration with the SEC does not involve supervision of the management or
investment practices or policies of the Separate Account by the SEC.
Southwestern Life Insurance Company ("Southwestern") is a wholly-owned
subsidiary of Constitution Life Insurance Company, which is a wholly-owned
subsidiary of Southwestern Life Acquisition Corp., an insurance holding company,
which is a wholly-owned subsidiary of Southwestern Financial Corporation
("SFC"), which is also an insurance holding company. SFC is owned by two
parties, Knightsbridge Capital Fund I, L.P., which owns 84.9% of the voting
stock of SFC, and PennCorp Southwest, Inc., which owns 15.1% of the voting stock
of SFC. Knightsbridge Capital Fund I, L.P. is an investment partnership whose
general partner is Knightsbridge Capital, L.L.C. PennCorp Southwest, Inc., is an
insurance holding company, which is a wholly-owned subsidiary of PennCorp
Financial Group, Inc., an insurance holding company.
Southwestern participates in the Separate Account as a result of the
initial capital it contributed to the Separate Account at the time the Separate
Account was organized. The percentage of the total assets of the Separate
Account attributable to Southwestern's initial capital contribution was 12.47%
as of April 1, 1996. In addition, on April 23, 1996, the University of Texas at
Austin, P.O. Box 8047, Austin, Texas 78712, owned a group variable annuity
contract which represented 11.28% of the assets of the Separate Account. For a
further description of Southwestern and the Separate Account, see the
prospectus.
Philadelphia Life Asset Planning Company ("PLAPCO") is registered as a
broker-dealer under the Securities Exchange Act of 1934 and acts as the
principal underwriter of the contracts offered by the prospectus (see
"Underwriter," page 5).
The assets of the Separate Account are not chargeable with liabilities
arising out of any other business that Southwestern may conduct. Accordingly,
the assets of the Separate Account are held for the exclusive benefit of
participants in, and persons entitled to payment under, the Contract and other
contracts under which net purchase payments are placed in the Separate Account
to provide benefits varying in accordance with the investment experience of the
Separate Account.
CONVERSION TRANSACTION
Effective July 30, 1996, the Separate Account converted from a diversified
open-end management investment company to a unit investment trust (the
"Conversion") and now invests exclusively in shares of the Capital Growth
Portfolio of Scudder Variable Life Investment Fund. Pro forma financial
information, unaudited, showing the financial effects of the Conversion, had it
occurred in 1995, is set forth on pages 32 and 33 of this Statement of
Additional Information.
Prior to the Conversion, SLC Financial Services, Inc. served as the
investment adviser for the Separate Account pursuant to an Investment Advisory
Agreement that was terminated effective upon the Conversion. SLC Financial
Services, Inc. was formerly, but is not currently, an affiliate of Southwestern.
Under the Investment Advisory Agreement, and its predecessor advisory agreement,
<PAGE>
the Separate Account paid SLC Financial Services, Inc. advisory fees of $17,027
during 1995, $12,372 during 1994 and $16,000 for 1993.
Administrative services for the Separate Account and the Contracts are
provided by Southwestern. Such administrative services include, among other
things, salaries and travel expenses of home office officials and employees,
rent, postage, telephone, legal fees, office equipment, stationery and other
office expenses. As compensation for the performance of administrative services,
the Contracts provide for the deduction of 3.0% from purchase payments to
reimburse Southwestern for administrative expenses. The deductions for
administrative expenses are designed only to reimburse Southwestern for its
actual expenses, and Southwestern does not expect to recover from these
deductions any amounts above its accumulated expenses in administering the
Contracts. These deductions do not cover (i) any taxes that might arise from
income and capital gains on the Separate Account or otherwise from the existence
of the Separate Account; and (ii) fees and expenses of any audit of the Separate
Account. These other expenses are borne by the Separate Account, except that
taxes on income and capital gains (if any) as may be attributed to
Southwestern's initial capital contribution to the Separate Account will be
borne by Southwestern. The cost of preparing and printing annual or other
amendments to the Separate Account's registration statement, including
prospectuses, is borne by Southwestern.
PURCHASE OF CONTRACTS
The Separate Account no longer offers Contracts for sale, though it
continues to accept purchase payments on existing Contracts and to accept new
participants under existing group Contracts. For a description of the manner in
which the Contracts were offered in the past, including the method used to
determine the sales load, see the prospectus for the Separate Account.
UNDERWRITER
PLAPCO is the principal underwriter for the Contracts. Although no new
Contracts are being offered to the public or issued, the Contracts have been
sold primarily by life insurance agents of Southwestern who have been properly
licensed by the appropriate state insurance departments and with the National
Association of Securities Dealers, Inc. ("NASD"). The commissions paid to such
persons will bear a reasonable relationship to, and in the aggregate will be
equivalent to or less than, the deductions for sales expenses. Although
commissions on purchase payments made for the first contract year may exceed the
sales expense deductions from such purchase payments, any such excess commission
will be paid from Southwestern's general account. To the extent that overall
sales expenses exceed amounts deducted for sales loads, they will be borne by
Southwestern. PLAPCO receives no underwriting commissions from the Separate
Account in connection with the sale of the Contracts.
PLAPCO was formerly, but is not currently, an affiliate of Southwestern.
<PAGE>
ANNUITY PAYMENTS
At commencement of the annuity period, a number of annuity units is
determined from the applicable annuity tables that reflect the age or year of
birth of the annuitant (and the joint annuitant, if applicable), the dollar
amount available to effect the annuity and the next determined applicable
annuity unit value. The number of annuity units so determined is credited to the
Participant's account and thereafter, the number of annuity units will not
change except in accordance with the provisions of the annuity form selected at
the commencement of the annuity period.
The amount of each subsequent annuity payment will be determined by
multiplying the number of annuity units credited to the Participant's account on
the due date of such payment by the applicable annuity unit value for that date.
The annuity tables for the Contracts are based on the Group Annuity Table
for 1951 and an assumed net investment rate of 3-1/2% per year. Because the
Contracts provide for age adjustment based on the year of birth of the Annuitant
(and, if applicable, the joint Annuitant), a person's actual age when payments
commence may not be the same as the age used in determining the amount of the
first annuity payment.
The dollar amount available to be credited as annuity units for a
Participant's account under a Contract is determined on the basis set forth in
the plan and the Contract. If the plan permits such election, the Annuitant may
elect to receive all or a portion of his or her annuity payments on a
fixed-dollar basis rather than a variable basis. The accumulation units
applicable to the amount available will be withdrawn from the accumulation
account.
The first annuity payment under a Contract shall be due on the day the
Participant's account enters the annuity period. Subsequent payments shall be
due each month thereafter on the day corresponding to the day of the month of
the first payment.
ILLUSTRATION OF CALCULATION OF ANNUITY PAYMENTS
Assume that a Participant at the due date of his or her first annuity
payment is entitled to 30,000 accumulation units, and that the value of an
accumulation unit on the day on which payments commence is $1.150000, producing
a total accumulated value of $34,500. Assume also that the Participant elects an
annuity form for which the table in the variable annuity Contract indicates the
first monthly payment is $6.97 per $1,000 of value applied. The annuitant's
first monthly payment would be 34.500 multiplied by $6.97, which produces
$240.47.
Assume that the annuity unit value for the due date of the first payment is
$1.100000. When this is divided into the first monthly payment, the number of
annuity units represented by that payment is determined to be 218.609. The value
of this same number of annuity units will be paid each subsequent month.
<PAGE>
Each subsequent monthly annuity payment is determined by multiplying the
fixed number of annuity units (218.609) by the annuity unit value for the day on
which the annuity payment is due.
EXPERIENCE RATING CREDITS
The Contracts provide that Southwestern, in its sole discretion, may allow
experience rating credits to provide additional accumulation or annuity units,
as the case may be. Pursuant to its experience rating plan, Southwestern will
determine the administrative expenses applicable to each Contract. If actual
costs exceed the amount deducted for such expenses, no additional deduction will
be made. If, however, the amount deducted for such expenses exceeds actual
costs, Southwestern in its discretion may allocate all, a portion, or none of
such excess as an experience rating credit under the Contract. Such experience
rating credit (less applicable premium taxes) will be applied to increase the
number of accumulation units or annuity units, as applicable, without deduction
of any amounts for sales and administrative expenses. Southwestern reserves
discretion to determine when to initiate its experience rating plan, but after
experience rating commences, a determination of the credit, if any, to be
allocated under the Contracts will be made annually. Southwestern does not
intend to begin experience rating in the immediate future.
STATE REGULATION
As a life insurance company organized and operated under Texas law,
Southwestern is subject to provisions governing such companies and to regulation
by the Texas Commissioner of Insurance. An annual statement is filed with the
Commissioner on or before March 1st of each year covering the operations of
Southwestern for the preceding year and its financial condition on December 31st
of such year. Southwestern's books and accounts are subject to review and
examination by the Texas Department of Insurance at all times, and a full
examination of its operations is conducted by the National Association of
Insurance Commissioners ("NAIC") at least once every three years. The NAIC has
divided the country into four geographic zones. A representative of each zone in
which Southwestern is licensed to operate is invited to participate in the
triennial examination.
In addition, Southwestern is subject to the insurance laws and regulations
of other jurisdictions in which it conducts insurance operations. Generally, the
insurance departments of such jurisdictions apply the laws of Texas in
determining permissible investments for Southwestern.
<PAGE>
LEGAL OPINIONS
Certain legal matters concerning the Contracts, including the legality of
the Contracts and their issuance by Southwestern, and the binding obligations of
Southwestern represented by the Contracts, have been passed upon by Daniel B.
Gail, General Counsel of Southwestern.
ACCOUNTANTS
Coopers & Lybrand L.L.P., located at 1999 Bryan Street, Suite 3000, Dallas,
Texas 75201, provides auditing services for the Separate Account and
Southwestern.
PRO FORMA FINANCIAL INFORMATION
Pro forma financial information, unaudited, showing the financial effects
of the conversion of the Separate Account from a diversifed open-end investment
company to a unit investment trust, had it occurred in 1995, is set forth on
pages 32 and 33 of this statement of additional information.
FINANCIAL STATEMENTS
The financial statements of the Separate Account and Southwestern are set
forth on pages 34 to 72 of this statement of additional information. The
financial statements of Southwestern should be considered by the purchaser of
variable annuity Contracts only as bearing upon the ability of Southwestern to
meet its obligations under the variable annuity Contracts and not in any sense
as a measure of the possible future investment performance of the Separate
Account.
<PAGE>
VARIABLE ANNUITY FUND I OF SOUTHWESTERN LIFE
PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
(Unaudited)
The unaudited pro forma statement of operations for the year ended December 31,
1995, has been prepared utilizing the historical results of the Variable Annuity
Fund I of Southwestern Life (the "Fund"), adjusted to reflect the effects of the
assumed liquidation of the net assets of the Fund effective December 31, 1994,
and the investment of the proceeds in shares of the Scudder Variable Life
Investment Fund (the "Scudder Fund"), effective January 1, 1995.
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Income:
Investment income $ 165,609 $(165,609)(a) $ 0
Distributions received on shares of the Scudder Fund 220,646 (c) 220,646
---------- --------- ----------
Total income 165,609 55,037 220,646
---------- --------- ----------
Expenses:
Accountant's fees 25,000 (14,500)(b) 10,500
Board of Managers' fees 7,500 (7,500)(b) 0
Investment management fee 17,052 (17,052)(b) 0
Expense and mortality guaranty fees 52,497 52,497
---------- --------- ----------
Total expenses 102,049 (39,052) 62,997
---------- --------- ----------
Net income before realized and unrealized gain on
investments 63,560 94,089 157,649
---------- --------- ----------
Net realized and unrealized gain on investments:
Net realized gain on investments 575,148 (575,148)(a) 0
Net unrealized appreciation on investments 662,929 (662,929)(a) 0
Net unrealized appreciation on investments in shares of the
Scudder Fund 1,162,688 (d) 1,162,688
---------- --------- ----------
Net realized and unrealized gain on investments 1,238,077 (75,389) 1,162,688
---------- --------- ----------
Increase in net assets resulting from operations $1,301,637 $ 18,700 $1,320,337
========== ========= ==========
</TABLE>
Notes to Pro Forma Statement of Operations:
(a) To reflect the elimination of investment income and net realized and
unrealized gain on investments of the Fund.
(b) To reflect the reduction in expenses of the Fund as a result of the
conversion to a unit investment trust. As a result of the conversion,
accountant's fees are to be limited to 0.2% of the average net assets of
the Fund and Board of Managers' fees and investment management fees are to
be eliminated. There are no changes in charges for expense and mortality
guarantee fees as a result of the conversion.
(c) To reflect pro forma distributions received by the Fund based on the actual
distributions of the Scudder Fund during 1995 totaling $0.54 per share.
(d) To reflect unrealized appreciation on shares of the Scudder Fund based on
the $2.85 change in value of such shares in 1995, net of distributions
made. From time to time, the Fund may realize gains or losses on the sale
or other disposition of shares of the Scudder Fund; however, for purposes
of the pro forma statement of operations, it has been assumed there were no
sales of shares in the Scudder Fund during 1995.
<PAGE>
VARIABLE ANNUITY FUND I OF SOUTHWESTERN LIFE
PRO FORMA STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
(Unaudited)
The unaudited pro forma statement of assets and liabilities has been prepared
utilizing the historical balances of the Variable Annuity Fund I of Southwestern
Life (the "Fund"), adjusted to reflect the assumed liquidation of the Fund's
investments and related investment receivables and the investment of the
proceeds in shares of the Scudder Variable Life Investment Fund (the "Scudder
Fund") as of December 31, 1995.
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Assets:
Investment in securities at market $4,815,922 $(4,815,922)(a) $ 0
Short-term investments at cost 314,136 (314,136)(a) 0
Investment in 354,116 shares of the Scudder Fund at cost
and fair value 5,340,073 (b) 5,340,073
---------- ----------- ----------
Total investments 5,130,058 210,015 5,340,073
Cash 15,619 5,340,073 (a) 15,619
(5,340,073)(b)
Receivable for securites sold 181,474 (181,474)(a) 0
Accrued dividends and interest receivable 28,541 (28,541)(a) 0
---------- ----------- ----------
Total assets 5,355,692 0 5,355,692
Liabilities:
Payable to affiliates 22,466 22,466
---------- ----------- ----------
Net assets $5,333,226 $ 0 $5,333,226
========== =========== ==========
Ownership in Net Assets:
548,359 qualified accumulation units at $7.339334 per unit $4,024,590 $4,024,590
114,809 nonqualified accumulation units at $6.679868 per unit 766,909 766,909
74,584 annuity fund accumulation units at $7.263314 per unit 541,727 541,727
---------- ----------
$5,333,226 $5,333,226
========== ==========
</TABLE>
Notes to Pro Forma Statement of Assets and Liabilities:
(a) To reflect the liquidation of the investments and related investment
receivables of the Fund as of December 31, 1995, for total proceeds of
$5,340,073.
(b) To reflect utilization of the $5,340,073 of proceeds received in (a) above
to purchase 354,116 shares of the Scudder Fund at the December 31, 1995 per
share price of $15.08.
<PAGE>
Report of Independent Accountants
To the Board of Managers and Contract Owners of the Variable Annuity Fund I of
Southwestern Life:
We have audited the accompanying statement of assets and liabilities of the
Variable Annuity Fund I of Southwestern Life (the "Fund"), including the
schedule of portfolio investments, as of December 31, 1995, and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the selected
accumulation unit data and ratios for each of the five years in the period then
ended. These financial statements and selected accumulation unit data and ratios
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and selected accumulation unit
data and ratios 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 and selected
accumulation unit data and ratios 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, 1995 by correspondence with the custodian.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and selected accumulation unit data and
ratios referred to above present fairly, in all material respects, the financial
position of the Fund as of December 31, 1995, the results of its operations for
the year then ended, the changes in net assets for each of the two years in the
period then ended, and the selected accumulation unit data and ratios for each
of the five years in the period then ended, in conformity with general accepted
accounting principles.
Coopers & Lybrand L.L.P.
Dallas, Texas
January 15, 1996
<PAGE>
VARIABLE ANNUITY FUND I OF SOUTHWESTERN LIFE
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investment in securities at market (identified cost $2,294,866) $4,815,922
Short-term investments at cost, which approximates market 314,136
---------------
Total investments 5,130,058
Cash 15,619
Receivable for securities sold 181,474
Accrued dividends and interest receivable 28,541
---------------
Total assets 5,355,692
---------------
LIABILITIES:
Payable to affiliates:
Investment management fee payable 1,390
Expense and mortality guarantee fee payable 4,280
Accountant's and Board of Managers' fees payable 2,938
Premiums and surrenders, net 13,858
---------------
Total liabilities 22,466
---------------
NET ASSETS $5,333,226
===============
NET ASSETS:
548,359 qualified accumulation units at $7.339334 per unit $4,024,590
114,809 nonqualified accumulation units at $6.679868 per unit 766,909
Annuity fund for currently payable contracts 541,727
---------------
$5,333,226
===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
VARIABLE ANNUITY FUND I OF SOUTHWESTERN LIFE
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
INVESTMENT INCOME:
Income:
<S> <C>
Dividends $75,180
Interest 90,429
------------
Total income 165,609
------------
Expenses:
Accountant's fees 25,000
Board of managers' fees 7,500
Investment management fee 17,052
Expense and mortality guarantee fee 52,497
------------
Total expenses 102,049
------------
Net investment income 63,560
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from security transactions:
Proceeds from sales 947,860
Cost of securities sold 372,712
------------
Net realized gain on investments 575,148
------------
Net unrealized appreciation on investments:
Beginning of the year 1,858,127
End of the year 2,521,056
------------
Change in unrealized appreciation of investments for the year 662,929
------------
Net realized and unrealized gain on investments 1,238,077
------------
Increase in net assets resulting from operations $1,301,637
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
VARIABLE ANNUITY FUND I OF SOUTHWESTERN LIFE
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1995 1994
--------------- ---------------
<S> <C> <C>
Increase in net assets from operations:
Net investment income $63,560 $71,826
Net realized gain on investments 575,148 81,268
Increase in unrealized appreciation 662,929 104,155
--------------- ---------------
Net increase in net assets resulting from operations 1,301,637 257,249
--------------- ---------------
Contract owners' account transactions:
Additions:
Net contract purchases 36,864 42,573
--------------- ---------------
36,864 42,573
--------------- ---------------
Deductions:
Contract surrenders 956,312 109,757
Adjustments for mortality deviation (30,555) (23,480)
Annuity payments 70,126 62,063
--------------- ---------------
995,883 148,340
--------------- ---------------
Decrease in net assets resulting from
contract owners' account transactions (959,019) (105,767)
--------------- ---------------
Net increase in net assets 342,618 151,482
Net assets:
Beginning of year 4,990,608 4,839,126
--------------- ---------------
End of year $5,333,226 $4,990,608
=============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
VARIABLE ANNUITY FUND I OF SOUTHWESTERN LIFE
PORTFOLIO OF INVESTMENTS IN SECURITIES
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET PERCENT OF
OR SHARES COST VALUE NET ASSETS
--------- ---- ------ ----------
COMMON STOCKS:
<S> <C> <C> <C> <C> <C>
CONSUMER DURABLE GOODS 3,000 Anheuser-Busch Cos., Inc. $128,175 $200,625 3.76%
32.26% 4,000 Colgate-Palmolive Co. 80,930 281,000 5.27
12,000 General Motors Corp. Class E 92,385 624,000 11.70
2,000 Philip Morris Companies, Inc. 102,950 180,500 3.38
2,000 WMX Technologies, Inc. 66,700 59,500 1.12
1,000 CPC International, Inc. 41,850 68,625 1.29
2,000 Motorola, Inc. 71,850 114,000 2.14
1,000 V F Corporation 44,225 52,625 0.99
1,000 Coca-Cola 52,225 74,375 1.39
------------ ------------ --------
681,290 1,655,250 31.04
------------ ------------ --------
CONSUMER SERVICES 6,000 Walt Disney Co. 26,244 353,250 6.62
6.89% ------------ ------------ --------
26,244 353,250 6.62
------------ ------------ --------
FINANCIAL SERVICES
0.84% 1,000 Regions Financial Corp. 37,475 43,000 0.81
------------ ------------ --------
37,475 43,000 0.81
------------ ------------ --------
HEALTH CARE 6,000 Abbott Laboratories 97,650 249,750 4.68
14.47% 9,000 Schering-Plough Corporation 52,155 492,750 9.24
------------ ------------ --------
149,805 742,500 13.92
------------ ------------ --------
PRODUCER DURABLE GOODS 9,000 Intel Corporation 22,688 510,750 9.58
9.96% ------------ ------------ --------
22,688 510,750 9.58
------------ ------------ --------
INTERMEDIATE GOODS & SERVICES 4,000 Amoco Corp. 219,400 287,500 5.39
10.20% 3,000 Texaco Inc. 203,925 235,875 4.42
------------ ------------ --------
423,325 523,375 9.81
------------ ------------ --------
TOTAL COMMON STOCKS $1,340,827 $3,828,125 71.78%
------------ ------------ --------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
VARIABLE ANNUITY FUND I OF SOUTHWESTERN LIFE
PORTFOLIO OF INVESTMENTS IN SECURITIES - (Continued)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET PERCENT OF
OR SHARES COST VALUE NET ASSETS
--------- ---- ------ ----------
LONG TERM BONDS:
<S> <C> <C> <C> <C> <C>
GOVERNMENT 150,000 U. S. Treasury Note 7.375%
19.26% Due 11/15/97 $148,430 $155,766 2.92%
300,000 U. S. Treasury Note 8.00%
Due 10/15/96 301,313 306,328 5.74
500,000 U. S. Treasury Note 7.875%
Due 1/15/98 504,297 525,703 9.86
------------ ------------ --------
954,039 987,797 18.52
------------ ------------ --------
TOTAL LONG TERM BONDS $954,039 $987,797 18.52%
------------ ------------ --------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
VARIABLE ANNUITY FUND I OF SOUTHWESTERN LIFE
PORTFOLIO OF INVESTMENTS IN SECURITIES - (Continued)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET PERCENT OF
OR SHARES COST VALUE NET ASSETS
--------- ---- ------ ----------
<S> <C> <C> <C> <C> <C>
SHORT TERM INVESTMENTS:
6.12% 315,000 U. S. Treasury Bill
Due 1/11/96 $314,136 $314,136 5.89%
------------ ------------ --------
TOTAL COMMERCIAL PAPER 314,136 314,136 5.89%
------------ ------------ --------
TOTAL SHORT TERM INVESTMENTS 314,136 314,136 5.89%
------------ ------------ --------
TOTAL INVESTMENTS $2,609,002 (A) 5,130,058 96.19
============ ============ ========
OTHER ASSETS LESS LIABILITIES 203,168 3.81
------------ --------
$5,333,226 100.00%
============ ========
</TABLE>
(A) Aggregate cost for Federal Income Tax purposes is the same. At December
31, 1995, unrealized appreciation/(depreciation) of securities for
Federal Income Tax purposes is as follows:
Unrealized appreciation $2,528,256
Unrealized depreciation (7,200)
------------
$2,521,056
============
The accompanying notes are an integral part of the financial statements.
<PAGE>
VARIABLE ANNUITY FUND I OF SOUTHWESTERN LIFE
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Variable Annuity Fund I of Southwestern Life (the Fund) is registered under the
Investment Company Act of 1940, as amended, (the Act) as a diversified, open-end
management investment company. The Fund is no longer actively seeking investors
and unit sales are only open to renewals. The following is a summary of
significant accounting policies consistently followed by the Fund. The
operations of the Fund are part of Southwestern Life Insurance Company
(Southwestern).
Security Valuation
- - ------------------
The Fund's investments in securities are carried at market value. Securities are
valued at the last sales price for securities listed on an exchange or quoted on
a national market system, or at the mean between the current bid or asked price
for unlisted securities and listed securities in which there were no
transactions during the day. Debt securities, including listed issues, are
valued on the basis of valuations furnished by a pricing service, which reflect
valuations of normal institutional size trading units of debt securities,
without exclusive reliance upon exchange or over the counter prices.
Security Transactions and Related Investment Income
- - ---------------------------------------------------
Security transactions are accounted for on the trade date, the date securities
are purchased or sold. Dividend income is recorded on the ex-dividend date.
Gains and losses from sales of investments are computed on the basis of
identified cost.
Annuity Fund for Currently Payable Contracts
- - --------------------------------------------
The basis of valuation of individual annuity contracts is the progressive
annuity table, with age adjustments, assuming interest rates of 3% and 3 1/2%.
The basis of valuation for group contract annuity reserves is the group annuity
table for 1951 male lives, projected to 1962 by projection scale C, with age
adjustments and assuming a 3 1/2% interest rate. To the extent the mortality
experience among annuitants varies from the prescribed tables, Southwestern
absorbs the gain or loss.
Federal Income Taxes
- - --------------------
The Fund is not taxed separately because the operations of the Fund are part of
the total operations of Southwestern. Southwestern is taxed as a life insurance
company under the Internal Revenue Code. The Fund will not be taxed as a
regulated investment company under subchapter M of the Internal Revenue Code.
Under existing federal income tax law, no taxes are payable by the Fund on the
investment income or on the capital gains. Capital gains and ordinary income are
taxable to the participants only upon distribution.
Qualified accumulation units are those credited to the accounts of variable
annuity contracts or certificates purchased under benefit plans qualified for
special tax treatment under Internal Revenue Code Sections 401, 403 and 408.
Nonqualified accumulation units are those credited to the accounts of variable
annuity contracts or certificates not purchased under such benefit plans. Prior
to 1984, provisions (benefits) for federal income taxes were charged (credited)
to accumulation unit values on nonqualified accumulation units at each valuation
date. Since 1984, qualified and nonqualified accumulation units have been
credited (charged) the same percentage increase (decrease).
<PAGE>
VARIABLE ANNUITY FUND I OF SOUTHWESTERN LIFE
NOTES TO FINANCIAL STATEMENTS
2. SALES AND REDEMPTIONS OF UNITS:
------------------------------
Following is a reconciliation of unit (qualified and nonqualified) activity in
the Fund for the years ended December 31, 1995 and 1994:
1995 1994
----------- -----------
Units outstanding at January 1 797,611 812,929
----------- -----------
Purchases 5,468 7,760
Surrenders (146,719) (19,688)
Adjustments to annuity fund 6,808 (3,390)
----------- -----------
Net decrease in units (134,443) (15,318)
----------- -----------
Units outstanding at December 31 663,168 797,611
=========== ===========
3. RELATED PARTY TRANSACTIONS:
--------------------------
As required by the Act, the Fund's investments are managed by a registered
investment adviser, SLC Financial Services, Inc. ("SLC Financial"), an affiliate
(formerly I.C.H. Financial Services, Inc.). In accordance with a management
agreement, management fees are computed based on a daily charge of .00089% of
the net assets (.325% on an annual basis.) For the year ended December 31, 1995,
the Fund paid SLC Financial management fees of $17,027.
Southwestern provides administrative services and guarantees the mortality
expense of the Fund. A daily charge of .00274% of the net assets (1.00% on an
annual basis) or $52,419 was paid to Southwestern for the year ended December
31, 1995.
Southwestern pays annuity payments, surrenders, death benefits and certain
expenses on behalf of the Fund. The Fund reimburses Southwestern
periodically.
4. FUND CONVERSION
---------------
On July 28, 1995, Contract Owners of the Fund approved a proposal to convert
from a management investment company to a unit investment trust and to exchange
substantially all assets less cash, in an amount estimated to pay current
liabilities, for an equivalent amount of shares of the Capital Growth Portfolio
of Scudder Variable Life Investment Fund. The market value of the assets of the
Fund to be exchanged shall be determined as of the close of trading on the
business day preceding the closing date, after the declaration and payment of
any dividend on that date. The conversion is expected to be completed by April
30, 1996.
<PAGE>
VARIABLE ANNUITY FUND I OF SOUTHWESTERN LIFE
SUPPLEMENTARY INFORMATION - SELECTED ACCUMULATION UNIT DATA AND RATIOS
<TABLE>
<CAPTION>
FOR YEAR ENDED DECEMBER 31
---------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
QUALIFIED UNIT:
<S> <C> <C> <C> <C> <C>
Investment income $ .213 $ .187 $ .176 $ .163 $ .188
Expenses .131 .106 .105 .097 .084
----------- ----------- ----------- ----------- -----------
Net investment income .082 .081 .071 .066 .104
Net realized and unrealized gain on securities 1.547 .231 .101 .200 .918
----------- ----------- ----------- ----------- -----------
Net increase in unit value 1.629 .312 .172 .266 1.022
Unit value:
Beginning of the year 5.710 5.398 5.226 4.960 3.938
----------- ----------- ----------- ----------- -----------
End of the year $7.339 $5.710 $5.398 $5.226 $4.960
=========== =========== =========== =========== ===========
Number of units outstanding at end of the period (in thousands) 548 685 701 764 930
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
FOR YEAR ENDED DECEMBER 31
---------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
NONQUALIFIED UNIT:
<S> <C> <C> <C> <C> <C>
Investment income $ .195 $ .170 $ .160 $ .149 $ .171
Expenses .120 .096 .096 .088 .076
----------- ----------- ----------- ----------- -----------
Net investment income .075 .074 .064 .061 .095
Net realized and unrealized gain on securities 1.408 .210 .092 .183 .834
----------- ----------- ----------- ----------- -----------
Net increase in unit value 1.483 .284 .156 .244 .929
Unit value:
Beginning of the year 5.197 4.913 4.757 4.513 3.584
----------- ----------- ----------- ----------- -----------
End of the year $6.680 $5.197 $4.913 $4.757 $4.513
=========== =========== =========== =========== ===========
Number of units outstanding at end of the period (in thousands) 115 112 112 116 116
=========== =========== =========== =========== ===========
RATIOS:
Expenses to average net assets (%) 1.94 1.91 1.98 1.95 1.92
Net investment income to average net assets (%) 1.21 1.47 1.33 1.35 2.39
Portfolio turnover (%) 0 6 9 5 25
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Southwestern Life Insurance Company
We have audited the accompanying statutory statements of admitted assets,
liabilities and capital and surplus of Southwestern Life Insurance Company as of
December 31, 1995 and 1994, and the related statements of operations, capital
and surplus and cash flows 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1, the accompanying financial statements have been prepared
in conformity with the accounting practices prescribed or permitted by the
National Association of Insurance Commissioners or the Texas Department of
Insurance, which is a comprehensive basis of accounting other than generally
accepted accounting principles. The effects on such financial statements of the
variances between such practices and generally accepted accounting principles
are described in Note 15.
In our opinion, because of the effects of the matters 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 Southwestern Life Insurance Company as of December 31, 1995 and 1994, and the
results of its operations and its cash flows for the years then ended.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the admitted assets, liabilities and capital
and surplus of Southwestern Life Insurance Company as of December 31, 1995 and
1994, and the results of its operations and its cash flows for the years then
ended, on the basis of accounting described in Note 1.
Our audit was conducted for the purpose of expressing an opinion on the
statutory financial statements taken as a whole. The Schedule of Selected
Financial Data is presented to comply with the NAIC's Annual Statement
Instructions and is not a required part of the basic statutory financial
statements. Such information has been subjected to the auditing procedures
applied in the audit of the basic statutory financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
statutory financial statements taken as a whole.
Coopers & Lybrand L.L.P.
Dallas, Texas
March 20, 1996
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Statements of Admitted Assets, Liabilities and
Capital and Surplus (Statutory Basis)
December 31, 1995 and 1994
(In Thousands)
<TABLE>
<CAPTION>
Admitted Assets 1995 1994
<S> <C> <C>
Cash and investments:
Bonds $ 890,245 $ 912,829
Common stocks:
Affiliated 5,852 83,702
Unaffiliated 495 1,561
Mortgage loans 97,650 122,318
Real estate 20,292 20,965
Policy loans 123,831 127,144
Collateral loans 41,308 49,465
Cash 16,455 17,498
Short-term investments 113,186 32,697
Other invested assets 34,965 31,657
Total cash and investments 1,344,279 1,399,836
Accrued investment income 15,238 15,667
Deferred and uncollected premiums 2,935 2,064
Electronic data processing equipment
at cost, less accumulated depreciation
of $5,234 in 1995 and $5,124 in 1994 133 243
Receivable from affiliates 17 156
Guaranty funds assessment 3,521 2,948
Due from reinsurer and other
non-affiliated parties 9,054 7,532
Other assets 6,898 7,539
$1,382,075 $1,435,985
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Statements of Admitted Assets, Liabilities and
Capital and Surplus (Statutory Basis)
(Continued)
December 31, 1995 and 1994
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Liabilities, Capital and Surplus 1995 1994
<S> <C> <C>
Liabilities:
Future policy benefits:
Aggregate reserve for life policies
and contracts $1,209,916 $1,220,054
Supplementary contracts without life
contingencies 22,167 23,366
Life policy and contract claims 8,475 7,302
Policyholders' dividend and coupon
accumulations 181 182
Policyholders' dividends and coupons
due and unpaid 190 179
Premiums received in advance and
premium deposit funds 7,209 10,232
Other policy and contract liabilities 9,561 11,951
Interest maintenance reserve 3,350 1,329
Commissions payable 656 688
Federal income taxes due or accrued 2,562
Accrued expenses and other liabilities 15,273 14,404
Asset valuation reserves 20,666 25,740
Unearned investment income 3,630 3,557
Funds held under reinsurance treaties 830 45
1,304,666 1,319,029
Capital and surplus:
Common stock, $1.00 par value, 5,000,000 shares authorized, 3,000,000 shares
and 5,000,000 shares issued and outstanding
in 1995 and 1994, respectively 3,000 5,000
Additional paid-in surplus 73,024 211,637
Unassigned surplus 1,385 60,932
Treasury stock, at cost, 2,000,000
shares in 1994 (160,613)
77,409 116,956
$1,382,075 $1,435,985
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Statements of Operations (Statutory Basis)
For the Years Ended December 31, 1995 and 1994
(In Thousands)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Premiums and other considerations:
Life and annuity $ 108,852 $ 135,898
Supplementary contracts and dividends
and coupon accumulations 2,594 2,120
Net investment income 99,622 94,580
Amortization of interest maintenance
reserve (1,195) (1,743)
Commissions on reinsurance ceded 4,663 4,992
Reserve adjustments on reinsurance
ceded and other income (15,405) (15,230)
Amounts transferred on reinsurance 108,227
Total premiums and other
considerations 199,131 328,844
Benefits paid or provided:
Death and annuity benefits 59,799 61,953
Disability benefits and benefits under
accident and health policies 503 516
Surrender benefits 76,644 35,302
Other benefits 12,979 11,922
Increase (decrease) in reserves for
life policies and contracts (10,138) 161,260
Increase (decrease) in reserves for
other contract deposit funds (2,852) 6,706
Increase (decrease) in reserve for
supplementary contract without life
contingencies and for dividend and
coupon accumulations (1,200) 13,386
Total benefits paid or provided 135,735 291,045
Insurance expenses:
Commissions 15,894 18,268
General expenses 21,800 20,987
Insurance taxes, licenses and fees 5,270 4,791
Amounts transferred on reinsurance 42,082
Other (1,440) 604
Total insurance expenses 83,606 44,650
Total benefits and expenses 219,341 335,695
Loss from operations before dividends
to policyholders and federal income
tax provision (20,210) (6,851)
Dividends to policyholders 206 120
Loss from operations before federal
income tax provision and realized
capital losses (20,416) (6,971)
Federal income tax provision 540 1,788
Net loss from operations before
realized capital losses (20,956) (8,759)
Realized capital losses, net (19,391) (6,109)
Net loss $ (40,347)$ (14,868)
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Statements of Capital and Surplus (Statutory Basis)
For the Years Ended December 31, 1995 and 1994
(In Thousands)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Common stock:
Balance at beginning of year $ 5,000 $ 5,000
Retirement of treasury stock (2,000)
Balance at end of year 3,000 5,000
Additional paid-in surplus:
Balance at beginning of year 211,637 211,637
Cash contribution from parent 20,000
Adjustment for retirement of
treasury stock (158,613)
Balance at end of year 73,024 211,637
Unassigned surplus:
Balance at beginning of year 60,932 87,062
Net loss (40,347) (14,868)
Change in net unrealized capital
gains/losses 16,734 54
Dividends to stockholder (41,497) (14,000)
Change in asset valuation reserves 5,073 196
Prior year taxes (285)
Change in non-admitted assets 490 2,773
Balance at end of year 1,385 60,932
Less treasury stock:
Balance at beginning of year 160,613 160,613
Retirement of treasury stock (160,613)
Balance at end of year 160,613
Total capital and surplus $ 77,409 $ 116,956
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Statements of Cash Flows (Statutory Basis)
For the Years Ended December 31, 1995 and 1994
(In Thousands)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Cash provided (used) by operations:
Premiums and annuity considerations $ 108,250 $ 133,714
Other premiums and deposits 2,594 2,120
Allowances received on reinsurance
assumed (17,055) (18,963)
Investment income 102,159 109,757
Other income (35,781) 116,505
Life and accident and health claims (49,458) (55,618)
Surrender benefits (76,644) (35,442)
Other benefits (24,824) (19,522)
Commissions, expenses and taxes (41,444) (43,227)
Dividends paid to policyholders (195) (179)
Federal income taxes 1,214 (5,690)
Decrease in policy loans 3,313 5,245
Other operating income 959 365
Net cash provided (used) by
operations (26,912) 189,065
Other cash provided:
Proceeds from investments sold
or matured 505,317 468,777
Proceeds from contributions to
paid-in surplus 20,000
Other cash provided 9,512 9,957
Total cash provided 507,917 667,799
Cash applied:
Cost of long-term investments 381,427 617,289
Dividends paid to stockholder 41,497 14,000
Other cash applied 5,547 27,846
Total cash applied 428,471 659,135
Net increase in cash and short-term
investments 79,446 8,664
Cash and short-term investments:
Beginning of year 50,195 41,531
End of year $ 129,641 $ 50,195
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
1. Basis of Presentation and Significant Accounting Policies
a. Organization
At December 31, 1995, Southwestern Life Insurance Company (the
"Company") was an indirect wholly-owned subsidiary of Southwestern
Financial Corporation ("SW Financial"). Pursuant to a Stock Acquisition
Agreement, effective December 14, 1995, the Company along with its
affiliates, Constitution Life Insurance Company ("Constitution"), Union
Bankers Insurance Company ("Union Bankers") and Marquette National Life
Insurance Company ("Marquette"), was acquired by SW Financial, a
newly-formed corporation organized by PennCorp Financial Group, Inc.
and Knightsbridge Capital Fund I, L.P. Prior to December 14, 1995, the
Company was a wholly-owned subsidiary of SWL Holding Corporation, whose
parent was I.C.H. Corporation ("ICH"). Effective January 1, 1996, the
Company was contributed to and became a wholly-owned subsidiary of
Constitution.
b. Basis of Presentation
The accompanying financial statements have been prepared in conformity
with the accounting practices prescribed or permitted by the National
Association of Insurance Commissioners ("NAIC") or the Texas Department
of Insurance ("Texas Department"). The prescribed or permitted
accounting practices vary in some respects from generally accepted
accounting principles ("GAAP"). The more significant of these
differences are: (a) methods of recording reinsurance contracts; (b)
under statutory accounting principles investments are carried at values
prescribed by the NAIC with provisions for an asset valuation reserve
("AVR") and an interest maintenance reserve ("IMR"); under GAAP,
trading securities and securities available for sale would be carried
at fair value, and held to maturity securities would be carried at
amortized cost; (c) acquisition costs, such as commissions and other
costs related to acquiring new business, are charged to current
operations as incurred rather than matched against premiums which are
taken into income over the premium paying period or on a pro rata basis
over the respective term of the policies; (d) benefit reserves are
based on statutory mortality and interest requirements and may differ
from GAAP reserves; (e) deferred federal income taxes are not provided
for bases differences between tax and financial reporting; (f) certain
assets are not recognized under statutory accounting principles, some
of which are reflected as a reduction to surplus as non- admitted
assets; whereas under GAAP, such assets would be separately evaluated
regarding realization to determine the appropriate valuation; and (g)
statutory statement of cash flows follows a prescribed method included
in the NAIC Instructions to present changes in amounts in balance sheet
accounts which may not reflect actual cash flows from transactions or
operations.
Prescribed statutory accounting practices include state laws,
regulations, and general administrative rules, as well as a variety of
publications of the NAIC. Permitted statutory accounting practices
encompass all accounting practices that are not prescribed; such
practices differ from state to state, may differ from company to
company within a state, and may change in the future. Furthermore, the
NAIC has a project to codify statutory accounting practices, the result
of which is expected to constitute the only source of "prescribed"
statutory accounting practices. Accordingly, that project will likely
change to some extent prescribed statutory accounting practices, and
may result in changes to the accounting practices that insurance
enterprises use to prepare their statutory financial statements.
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements, continued
c. Investments
Bonds not backed by other loans are stated at amortized cost using the
interest method. Loan-backed bonds and structured securities are stated
at amortized cost using the interest method including anticipated
prepayments at the date of purchase. Significant changes in estimated
cash flows are accounted for using the prospective method. Investments
in the Class B Pass-Through Certificates of Fund America Investors
Corporation II, Series 1993-C, are valued in the same manner as other
loan-backed bonds or, if lower, the value of the individual underlying
securities as determined utilizing the prospective method. Obligations
which do not qualify for amortization are stated at NAIC value or a
supportable value. Bonds in or near default are carried at fair value.
Common stocks of unaffiliated issuers are carried at fair value. The
Company's investments in 100% of the common stocks of its insurance
subsidiaries are carried at the net capital and surplus of the
respective companies, as determined on the basis of accounting
practices prescribed by regulatory authorities. The Company's
investments of 100% in its non-insurance subsidiary REO Holding
Corporation ("REO"), and 83% in its non-insurance subsidiary, I.C.H.
Funding Corporation ("ICH Funding"), are determined on the equity basis
as described in Section 5(B)(a) of the NAIC Valuation of Securities
Manual. At December 31, 1994, the Company's subsidiaries were Bankers
Life Insurance Company of New York ("Bankers New York"), Constitution,
ICH Funding and REO. At December 31, 1995, the Company's remaining
subsidiary was ICH Funding.
Mortgage loans on real estate are carried at their aggregate unpaid
principal balances, net of amounts non- admitted.
Real estate, substantially all of which is acquired through
foreclosure, is carried at the lower of cost or market at the date of
acquisition, net of amounts non- admitted, adjusted for accumulated
depreciation and related encumbrances, if any. Depreciation is computed
principally on the straight-line method.
Policy loans are carried at their aggregate unpaid principal balances.
Short-term investments include those investments whose maturities at
the time of acquisition were one year or less. These investments are
carried at amortized cost which approximates fair value.
Other invested assets include residual interests in mortgage-backed
securities stated at amortized cost, utilizing the interest method and
anticipated prepayments at the date of purchase, and other
miscellaneous investments carried at amortized cost.
Realized gains and losses on investments are determined on a specific
identification basis and are included as a component of net gain from
operations, net of federal income taxes and amounts transferred to the
IMR. Realized gains and losses on investments are recorded when
investments are sold or when management determines a permanent
impairment of investment value has occurred. Unrealized gains or losses
on investments are credited or charged to unassigned surplus.
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements, continued
d. Premiums Deferred and Uncollected
Deferred and uncollected life insurance premiums represent annual or
fractional premiums, either due and uncollected or not yet due where
policy reserves have been provided on the assumption that the full
premium for the current policy year has been collected. Deferred and
uncollected premiums are reported net of loading and reinsurance ceded.
e. Non-Admitted Assets
Assets exceeding applicable statutory limitations, or those of
questionable quality, are generally non- admitted. Any changes in such
assets are credited or charged directly to unassigned surplus.
f. Aggregate Reserves
The reserves for future policy benefits are actuarially computed in
accordance with provisions of the Texas Administration Code.
The reserves are reported net of a deduction for reinsurance ceded to
other companies. The ceded reserves are calculated primarily on a
yearly renewable term or coinsurance basis.
The aggregate reserve for annuities is based primarily on the
Commissioners Annuity Reserve Valuation Method ("CARVM"). Assumed
interest rates on annuities range
from 4% to 9.25%.
The aggregate reserve for life policies has been calculated principally
using the Net Level Premium Reserve Method ("NLP Method") and the
Commissioners Reserve Valuation Method ("CRVM") utilizing the American
Experience Table, 1941, 1958 and 1980 Commissioners Standard Ordinary
Mortality Tables and assumed interest rates of 2.5% to 6.0%. Universal
life reserves are computed in accordance with the NAIC Universal Life
Model Regulation.
Additional reserves are provided if projected cash flows from assets
supporting reserve liabilities and anticipated future revenues from the
underlying insurance policies are determined to be insufficient to
cover future policy obligations under moderately adverse conditions. At
December 31, 1995, no such additional reserves were needed.
g. Separate Accounts
Separate accounts represent segregated assets whose values directly
determine the amounts of the liabilities for variable annuities. The
Company does not have an investment risk with these assets and
liabilities. The risk lies solely with the holder of the contract.
Separate accounts are included in other assets and other liabilities in
these financial statements.
h. Policy and Contract Claims
Policy and contract claims include provisions for reported claims in
process of settlement, valued in accordance with the terms of the
related policies and contracts, as well as provisions for claims
incurred but not reported, based on prior experience of the Company.
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements, continued
i. Premium Income Recognition
Life insurance premiums on traditional life policies are reported as
earned on the anniversary dates of the policies. Life insurance
premiums on universal life policies and annuities are reported as
earned when collected. Acquisition costs, such as commissions and other
costs in connection with acquiring new business, are charged to
operations as incurred.
j. Federal Income Taxes
Until December 14, 1995, the Company was a member of a consolidated tax
group which filed a Federal income tax return with ICH and
substantially all of ICH's insurance and non-insurance subsidiaries.
For the period from December 15, 1995 through December 31, 1995, the
Company will file a separate Federal income tax return.
Effective January 1, 1996, the Company intends to file a consolidated
Federal income tax return with Constitution, Union Bankers and
Marquette. The Consolidated Return Group for this period, is subject to
a Tax Allocation Agreement under which each member's tax liability
equals or approximates that respective member's tax liability had a
separate tax return been filed. The agreement allows for reimbursement
for utilization of each separate entity's net operating losses to the
extent that such losses could have been utilized, on a separate return
basis.
In 1994, adjustments in prior years' taxes are charged or credited
directly to surplus. In 1995, prior years' tax adjustments were charged
or credited directly to net income.
k. Interest Maintenance Reserve
An IMR is provided in compliance with NAIC prescribed accounting
practices in order to provide a reserve for fixed income realized gains
and losses related to changes in interest rates. The IMR is amortized
against gain from operations on a basis reflecting the remaining period
to maturity of the fixed income securities sold.
l. Asset Valuation Reserve
An AVR is provided in compliance with NAIC prescribed accounting
practices in order to provide a reserve for credit-related losses in
the investment portfolio.
m. Postretirement Benefits Obligation Effective January 1, 1993, the
Company and its subsidiaries were required under statutory accounting
practices to adopt the accrual method of accounting for certain
postretirement benefits. The Company and its subsidiaries are
amortizing the transition obligation over a 20-year period.
n. Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and short-term investments: The carrying amounts reported in the
statement of admitted assets, liabilities and capital and surplus for
these instruments approximate their fair values.
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements, continued
n. Fair Values of Financial Instruments, continued
Investment securities: Fair values for bonds are based on quoted market
prices, where available. For bonds not actively traded, fair values are
estimated using values obtained from independent pricing services. The
fair values for unaffiliated common equity securities are based on
quoted market prices and are recognized in the statement of admitted
assets, liabilities and capital and surplus (see Note 4).
Mortgage loans and other invested assets: Fair values for mortgage
loans are estimated using discounted cash flow analyses, using interest
rates currently being offered for similar loans to borrowers with
similar credit ratings. Loans with similar characteristics are
aggregated for purposes of the calculations. The fair value of the
Company's investment in residual interests in mortgage-backed
securities was obtained from an independent broker-dealer. The fair
values of other miscellaneous invested assets have not been estimated
due to their relative immateriality (see Note 4).
Investments in limited partnerships: Fair values of the Company's
investments in limited partnerships are based on the estimated fair
values of the partnership assets and liabilities, assuming a
liquidation of the partnership and distribution of proceeds to the
partners (see Note 4).
Policy loans: The Company does not believe an estimate of the fair
value of policy loans can be made without incurring excessive cost.
Further, because of the numerous assumptions which must be made to
estimate the fair value of policy loans, the Company does not believe
that such information would necessarily be meaningful.
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.
o. Use of Estimates
The preparations of financial statements 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
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
p. Reclassifications
Previously reported 1994 amounts have in some instances been
reclassified to conform to the 1995 presentation. Certain accounts as
reflected in the Company's Annual Statement filed with regulatory
authorities have been reclassified to more accurately reflect the
nature of such accounts.
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements, continued
2. Nature of Operations
The Company is a life insurance concern originally organized in Texas in
1903. The Company is authorized to sell life, annuity, and accident and
health insurance in 40 states, the District of Columbia and Guam. The
Company currently derives most of its premium income from the sales of
ordinary life, universal life, and annuities to individuals. Maximum
retention on any one life is $500,000. Business is produced through
independent general agents and their subagents and producers. The Company
does not have any branch or service offices.
3. Change in Subsidiary Holdings
a. Acquisition of Subsidiaries
In conjunction with the termination of a reinsurance agreement with
Consolidated Fidelity Life Insurance Company ("CFLIC"), a former
affiliate, the Company acquired 83% of the common stock of ICH Funding
valued at $9.6 million (as of April 1, 1994, see Note 12).
b. Disposition of Subsidiaries
On July 26, 1995, the Company sold to an unaffiliated party its
wholly-owned subsidiary, Bankers New York, for approximately $35
million cash. The sale resulted in a realized capital gain of
approximately $11.3 million.
Immediately prior to its sale to SW Financial, the Company distributed
its wholly-owned subsidiary, Constitution, in the form of a dividend
resulting in a net decrease in surplus of approximately $41.5 million.
The Company reflected a realized loss of approximately $17.0 million on
the distribution, representing the excess of the Company's cost basis
in Constitution over its carrying value; however, such loss was offset
in surplus by a corresponding reduction in unrealized capital losses.
On December 13, 1995, the Company also sold its wholly-owned subsidiary
REO to Bankers Multiple Line Insurance Company, a former affiliate, for
$4.3 million. This sale resulted in a realized capital loss of
approximately $2.9 million and a corresponding decrease in surplus.
4. Investments
Bonds with a statement value of $105,113,000 and $129,791,000 at December
31, 1995 and 1994, respectively, were on deposit with various regulatory
authorities as required by law.
The statement value of investments in bonds, the cost of unaffiliated
common stocks and the estimated fair values of such investments at
December 31, 1995 and 1994, by category of securities are as follows (in
thousands):
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements, continued
4. Investments, continued
<TABLE>
<CAPTION>
December 31, 1995: Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Classification Cost Gains Losses Value
<S> <C> <C> <C> <C>
United States Government,
government agencies and
authorities $ 18,378 $ 914 $ 14 $ 19,278
States, municipalities and
political subdivisions 13,919 1,473 15,392
Foreign government 14,660 1,738 16,398
Public utilities 62,819 1,993 780 64,032
Mortgage-backed securities 395,644 15,055 29,182 381,517
All other corporate 384,825 23,713 2,908 405,630
Subtotal, bonds 890,245 44,886 32,884 902,247
Common stocks, unaffiliated 1,769 37 1,311 495
Total bonds and equity
securities $ 892,014 $ 44,923 $ 34,195 $ 902,742
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994: Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Classification Cost Gains Losses Value
<S> <C> <C> <C> <C>
United States Government, government
agencies and authorities $ 12,566 $ 14 $ 419 $ 12,161
States, municipalities and political
subdivisions 12,908 81 266 12,723
Foreign governments 14,747 27 1,204 13,570
Public utilities 91,223 12,576 78,647
Mortgage-backed securities 410,811 912 50,079 361,644
All other corporate 370,574 535 25,887 345,222
Subtotal, bonds 912,829 1,569 90,431 823,967
Common stocks, unaffiliated 2,655 329 1,423 1,561
Total bonds and equity securities $ 915,484 $ 1,898 $ 91,854 $ 825,528
</TABLE>
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements, continued
4. Investments, continued
At December 31, 1995, the Company non-admitted $506,035 of the carrying
value of bonds representing the difference between book value and fair
value of two issuers. These securities are being carried at the lower of
book value or fair value.
Unaffiliated common stocks are carried at fair value with the difference
between book value and fair value reported net as either non-ledger or
non-admitted assets. At December 31, 1995 and 1994, the Company had net
non- admitted unrealized losses of approximately $1.3 million and $1.1
million, respectively.
The amortized cost and estimated fair value of bonds at December 31,
1995, by contractual maturity, are shown below (in thousands). Actual
maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $ 25,321 $ 24,222
Due after one year through five years 64,570 67,103
Due after five years through ten years 198,368 210,352
Due after ten years 206,342 219,053
494,601 520,730
Mortgage-backed securities 395,644 381,517
$890,245 $902,247
</TABLE>
At December 31, 1995 the Company held unrated or noninvestment-grade
corporate debt securities (NAIC Classes 3 through 6) of approximately
$48.5 million with an aggregate estimated fair value of approximately
$47.4 million. These holdings amounted to 5.5% of the Company's bonds
and 3.6% of total cash and invested assets. The holdings of
noninvestment-grade securities are widely diversified and include
securities of 40 issuers.
Included in Mortgage-Backed Securities is an investment in the Class B
Pass-Through Certificates of Fund America Investors Corporation II,
Series 1993-C. The carrying value of this investment was $30.7 million
and $29.6 million at December 31, 1995 and 1994, respectively.
The Company maintains its cash and short-term investments with high
credit quality institutions. At times, such investments may be in excess
of the FDIC insurance limit.
Excluding scheduled maturities, proceeds from sale of bonds during 1995
and 1994 and the related gross gains and gross losses realized on such
sales were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Proceeds from sales $341,257 $346,861
Gross gains 5,527 6,034
Gross losses 3,524 2,161
</TABLE>
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements, continued
4. Investments, continued
The following is an analysis of changes in the difference between estimated
fair values and amortized cost of investments owned by the Company during
the years ended December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Bonds $ 100,359 $(111,423)
Unaffiliated common stocks (180) (182)
Total increase (decrease) $ 100,179 $(111,605)
</TABLE>
The carrying amounts and the estimated fair values of the Company's
investments in mortgage loans and residual interests in mortgage-backed
securities were as follows at December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Mortgage loans $97,650 $110,395 $122,318 $115,878
Residual interests $ 4,646 $ 2,651 $ 6,282 $ 2,026
</TABLE>
The Company's mortgage loans consist primarily of loans on commercial real
estate. At December 31, 1995, approximately 64% of such mortgages involved
property located in Texas, consisting primarily of first mortgage liens on
income-producing properties.
Included in mortgage loans is a loan to Bent Tree Towers. The carrying
value of this loan was $8.1 million and $7.9 million at December 31, 1995
and 1994, respectively.
At December 31, 1995 and 1994, the Company non-admitted $2.0 million and
$1.0 million, respectively, of mortgage loan book value. This non-admitted
amount represents management's estimate of potential losses on the
Company's mortgage loan portfolio. Additionally, the Company wrote off a
non-performing mortgage loan in 1995, resulting in a realized capital loss
of approximately $2.2 million.
The Company has an agreement to sell a block of seventy-two (72)
residential mortgage loans to an unaffiliated third party for approximately
$3.6 million. These mortgages were originally acquired in 1994 as a part of
the CFLIC reinsurance settlement (see Note 12). Included in this block of
mortgage loans is all of the approximately $1.0 million of mortgage loans
that are in the process of foreclosure. The carrying value of the loans
have been reduced to the sales price, which resulted in a realized loss of
$222,014 at December 31, 1995.
In conjunction with the termination of a reinsurance agreement with Modern
American Life Insurance Company ("Modern American"), a former affiliate,
the Company transferred mortgage loans with a fair value of approximately
$4.6 million, resulting in a realized loss of
$915,720.
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements, continued
4. Investments, continued
Following is a summary of the Company's carrying value of investments in
the common stocks of subsidiaries at December 31, 1995 and 1994 (In
thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
I.C.H. Funding Corporation $ 5,852 $ 6,530
Bankers Life Insurance Company
of New York 23,898
Constitution Life Insurance Company 45,822
REO Holding Corporation 7,452
$ 5,852 $ 83,702
</TABLE>
Other than ICH Funding, all of the Company's subsidiaries were wholly owned
at December 31, 1994. The Company owned 83% of the common stock of ICH
Funding at December 31, 1995 and 1994.
Summarized financial information as determined on the basis of statutory
accounting practices for investments in subsidiaries at December 31, 1995
and 1994, is as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Insurance assets $ 685,761
Insurance liabilities 616,041
Capital and surplus 69,720
Noninsurance affiliates' equity $ 5,852 13,982
$ 5,852 $ 83,702
</TABLE>
The carrying values of investments in subsidiaries are determined on the
equity basis as described in Section 5(B)a of the NAIC Valuation of
Securities Manual. For insurance subsidiaries, such carrying value
represents the subsidiaries' net statutory capital and surplus. For non-
insurance subsidiaries, the carrying value represents the net value of
assets and liabilities after applying statutory accounting valuation
procedures. The difference between book value and carrying value of these
investments is reported net as either non-ledger or non-admitted assets. At
December 31, 1995, the Company reported as a non-ledger asset an unrealized
gain on investments in affiliates of approximately $4.1 million. At
December 31, 1994, the Company reflected as a non-admitted asset an
unrealized loss on investments in affiliates of approximately $13.4
million.
Prior to December 31, 1992, Bankers Life and Casualty Company ("Bankers"),
a former affiliate, held a note receivable from James M. Fail ("Fail") with
an aggregate carrying value, including accrued interest, of $33.6 million.
The note receivable was issued in conjunction with a December 1990
refinancing of certain obligations due by Mr. Fail to Bankers and Marquette
and was collateralized by Mr. Fail's ownership in Consolidated Federal
Savings Bank ("CFSB") and CFSB's ownership in its wholly-owned subsidiary,
Bluebonnet Savings Bank. This note receivable was purchased by the Company
on December 31, 1992, for $31.6 million. The value of the collateral at the
time of purchase was estimated to total $60.7 million. In January 1993 the
Fail loan was restructured into a note receivable from Fail for $12.4
million and a note receivable from CFSB for $17.8 million. The terms of the
notes provide for quarterly installments of principal and interest at 12%,
which will amortize the loans over a seven-year period.
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements, continued
4. Investments, continued
In conjunction with the termination of the CFLIC reinsurance agreement, the
Company acquired additional collateral loans due from Fail and CFSB
totalling $29.1 million and $21.5 million, respectively (as of April 1,
1994, see Note 12). Subsequently, in 1994, 50% of the Fail loans were
transferred to an unaffiliated insurance company in exchange for other
securities. Effective January 1, 1996, an additional amount of the Fail and
CFSB loans, of approximately $20.0 million, were transferred to the
unaffiliated insurance company in exchange for other securities.
The Fail loan held by the Company at December 31, 1995, including the 50%
loan participation transferred to a non-affiliate, is collateralized by
2,400 shares of CFSB common stock. Management has estimated the value of
the collateral supporting the Company's loan to Fail, net of the
participation transferred, at $90.5 million based on the GAAP equity of
CFSB as of September 30, 1995. The carrying value of the Fail loan at
December 31, 1995 and 1994, was $19.6 million and $20.2 million,
respectively.
The CFSB loan held by the Company at December 31, 1995, is collateralized
by an equity interest equal to 100% of the nonvoting capital stock of
Bluebonnet Savings Bank, a wholly-owned subsidiary of CFSB, and all rights
there to per the security agreement dated January 25, 1993. Management has
estimated the value of the collateral supporting the Company's loan to CFSB
at $100.2 million, based on the GAAP equity of CFSB as of September 30,
1995. The carrying value of the CFSB loans at December 31, 1995 and 1994,
was $21.7 million and $29.3 million, respectively.
Following is an analysis of realized capital gains (losses) on investments
(in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994
<S> <C> <C>
Bonds $ 2,003 $ 3,873
Common stocks - affiliated (8,625)
Common stocks - unaffiliated 548 (691)
Equity in realized losses of
subsidiaries (3,284) (6,405)
Mortgage loans (3,585) (105)
Real estate (238) (1,433)
Other (1,179) (509)
(14,360) (5,270)
Amount transferred to the IMR (826) (1,414)
Income tax (expense) benefit (4,205) 575
Net realized capital losses $ (19,391) $ (6,109)
</TABLE>
The Company reduced its investment in residual interest mortgage-backed
securities from $6.3 million at December 31, 1994, to $4.6 million at
December 31, 1995. The effective yield on such residual interests averaged
approximately 8% at December 31, 1995.
Included in other invested assets is an ownership interest in a limited
partnership, GSSW, L.P. ("GSSW"), which acquired, through auction, certain
mortgage loans and real estate formerly held by failed savings and loan
associations for resale. During 1994, GSSW distributed $7,891,000 of
mortgages to the Company. After this distribution the remaining assets of
GSSW consisted primarily of income producing real estate. In 1995, one of
these mortgage loans became non-performing and
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements, continued
4. Investments, continued
was transferred back to the partnership resulting in the Company reporting
a realized capital loss of $271,000. The carrying value of GSSW was $27.0
million and $21.1 million at December 31, 1995 and 1994, respectively. The
fair value of the Company's investment in GSSW approximated $40.4 million
and $32.0 million at December 31, 1995 and 1994, respectively.
5. Net Investment Income
Net investment income consists of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994
<S> <C> <C>
Investment income:
Interest on bonds and
short-term investments $ 74,191 $ 69,820
Dividends 2 6
Equity in losses of subsidiaries (A) (2,962) (2,152)
Interest on mortgage loans 10,975 11,702
Income from real estate investments 3,758 3,900
Interest on policy loans 7,727 7,832
Interest on collateral loans 5,457 5,373
Income from other invested assets 7,629 4,880
Other 591 2,055
Gross investment income 107,368 103,416
Investment expenses 7,746 8,836
Net investment income $ 99,622 $ 94,580
</TABLE>
(A) Cash dividends received from subsidiaries totalled $5.6 million in
1994.
The carrying value of nonaffiliated invested assets for which no investment
income was recorded during the twelve months ended December 31, 1995 and
1994, was as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Bonds $ 629 $ 1,048
Common stocks 481 377
Real estate 10,785 12,462
Cash and short-term investments 1,143
Other invested assets 4,205 5,961
Total $ 16,100 $ 20,991
</TABLE>
In addition, the Company has non-admitted mortgage loan interest on loans
in foreclosure or delinquent more than one year or where collection of
interest is uncertain. At December 31, 1995 and 1994, the interest
non-admitted totalled $257,318 and $257,768, respectively.
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements, continued
6. Real Estate
Real estate consists of the following at December 31, 1995 and 1994 (in
thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Cost of real estate $ 30,167 $ 30,934
Accumulated depreciation (1,919) (1,563)
Real estate non-admitted (7,956) (8,406)
$ 20,292 $ 20,965
</TABLE>
The non-admitted amounts represent management's estimate of potential
losses on the Company's real estate portfolio. These estimates take into
consideration the net operating income of the property, any recent offers
for purchase, and internal appraisals of values.
7. Transactions With Affiliates
Through December 31, 1995, the Company was a party to a management and
services agreement with Facilities Management Installation, Inc. ("FMI"), a
subsidiary of ICH. FMI provided substantially all administrative,
management, investment, personnel, data processing, facilities and certain
other services for ICH, its subsidiaries and affiliates and certain other
unrelated parties. Under the management and service agreement with FMI, the
Company paid fees for personnel, data processing, and other services equal
to the cost of such services, and a percentage markup, to FMI. The Company
incurred $20,935,475 and $21,822,864 in fees in accordance with the
agreement in 1995 and 1994, respectively.
On November 9, 1992 the Company sold its wholly-owned subsidiary, Bankers
Life and Casualty Company ("Bankers"). The sale of Bankers was subject to
Bankers having a specified level of adjusted capital and surplus as of
October 31, 1992. A final determination as to the level of such adjusted
capital and surplus was mutually agreed upon by the buyer and the Company
on June 30, 1994. The Company was required to return a portion of the
proceeds it had received from the sale totalling $2.5 million.
The Company also paid $275,000 to its former affiliate, Philadelphia
American Life Insurance Company, on November 23, 1994, in settlement of
certain uncollectible receivables
related to the sale of Bankers.
As part of a reorganization effected in September 1993, the Company entered
into a reinsurance agreement with Modern American. Effective October 1,
1995, the Company terminated this reinsurance agreement (see Note 12).
8. Federal Income Taxes
Life insurance companies are taxed at corporate rates on life insurance
company taxable income, any distributions from a policyholders' surplus
account (the Company's balance in this account is zero) and net realized
capital gains. Taxable income is life insurance gross income reduced by
life insurance deductions which include generally available business
deductions and certain other adjustments prescribed by the Internal Revenue
Code.
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements, continued
8. Federal Income Taxes, continued
Pursuant to the Tax Reform Act of 1986, all corporations including
insurance companies are subject to the alternative minimum tax ("AMT").
This law requires corporations to pay the higher of regular tax or AMT. A
corporation's alternative minimum taxable income is equal to its regular
taxable income increased by tax preferences and other adjustments. In
general, the AMT rate is 20%.
Reconciliations of the amounts computed by applying the statutory U.S.
federal income tax rate of 35% to income before tax and the provisions as
reflected in the statement of operations for the years ended December 31,
1995 and 1994, are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Loss from operations before realized
capital gains (losses):
Computed expected tax provision
(benefit) $ (7,146) $ (2,440)
Increase (decrease) in taxes
resulting from:
Equity in losses of subsidiaries 1,037 753
Book/tax difference in mortgage
loan accretion 111 1,756
Reserve revaluations 526 1,567
Reinsurance recapture with no
current tax effect 8,680
Capitalization of policy
acquisition costs 1,602 1,530
Limited partnership income (losses) (770) 496
Utilization of AMT credit
carryforwards (2,171)
Tax settlements, 1986-1989 (2,373)
Other (1,127) 297
Federal income tax expense $ 540 $ 1,788
Realized capital gains (losses):
Computed "expected" tax provision
(benefit) $ (5,026) $ (1,844)
Increase (decrease) in taxes
resulting from:
Equity in gains (losses) of
subsidiaries 1,149 1,271
Loss on sale or dividend of
subsidiaries with no tax effect 3,197
Collateralized mortgage obligation
taxable writedowns 1,227 177
Corporate taxable mortgage loan
accretion 412
Limited partnership bases differences 1,773
Mortgage loan writedowns 1,160
Other 313 (179)
Federal income tax provision
(benefit) $ 4,205 $ (575)
</TABLE>
The federal income tax returns for 1990 through 1994 are currently under
examination. There are no significant adjustments which, after prescribed
indemnifications, are expected to result from these examinations that would
materially affect the financial position of the Company (see Note 13).
9. Postretirement Health Care and Life Insurance Benefits
The Company provides certain health care and life insurance benefits for
retired employees. Employees meeting certain age and length of service
requirements become eligible for these benefits. The expected cost of
providing these benefits is recognized as expense as claims are incurred
for retired employees and as service requirements are met for active
employees. These costs for the
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements, continued
9. Postretirement Health Care and Life Insurance Benefits, continued
Company approximated $945,000 and $900,000 for the years ended December 31,
1995 and 1994, respectively. The cost of providing these benefits for
retirees is not separable from the cost of providing benefits for active
employees. The Company's unrecognized transition obligation as of December
31, 1995 was $3.4 million. The amortization of the transition obligation in
1995 totaled $420,000.
10. Capital and Surplus and Shareholder Dividend Restrictions
Companies incorporated under the laws of the State of Texas have minimum
capital and surplus requirements in order to transact business. Minimum
capital and surplus requirements are $700,000 and $700,000, respectively.
In 1995, the Company retired two million shares of treasury stock by
reducing its capital stock by $2.0 million and its gross paid-in and
contributed surplus by approximately $158.6 million. The retirement of the
treasury stock had no effect on total capital and surplus.
On December 15, 1995, the Company received a $20.0 million cash
contribution to gross paid-in and contributed surplus from its parent.
Generally, the net assets of the Company available for transfer to the
Company's parent as dividends are limited to the greater of the Company's
net gain from operations during the preceding year or 10% of the Company's
net surplus as of the end of the preceding year as determined on the basis
of accounting practices prescribed or permitted by insurance regulatory
authorities. Payments of dividends in excess of such amounts generally
require approval by the Texas Department. In 1995, the Company distributed
its wholly-owned subsidiary, Constitution, in the form of a dividend which
was approved by the Texas Department (see Note 3).
11. Insurance Liabilities
At December 31, 1995, the withdrawal characteristics for reserve
liabilities related to investment-type contracts, including annuities and
deposit liabilities, were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
Subject to discretionary withdrawal Amount Percentage
<S> <C> <C>
- With market value adjustment $ 47,101 10.7%
- At book value less surrender charge 133,052 30.2
- At market value 4,794 1.1
- At book value (minimal or no charge
or adjustment) 146,548 33.3
Not subject to discretionary
withdrawal provision 108,467 24.7
Total annuity actuarial reserves
and deposit liabilities (gross) 439,962 100.0%
Less: Reinsurance 141,516
Total annuity actuarial reserves
and deposit liabilities (net) $ 298,446
</TABLE>
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements, continued
11. Insurance Liabilities, continued
The estimated fair value of the liabilities for investment-type contracts
is approximately equal to the carrying value as reflected in the preceding
table at December 31, 1995, because interest rates credited to account
balances approximate current rates paid on similar investments and are
generally not guaranteed beyond one year. Fair values for the Company's
insurance contracts other than investment-type contracts are not required
to be disclosed. However, the fair values of liabilities under all
contracts are taken into consideration in the Company's overall management
of interest rate risk, which minimizes exposure to changing interest rates
through the matching of investment maturities with amounts due under
insurance contracts.
12. Reinsurance
The Company has set its retention limit for acceptance of risk on
individual life insurance policies at various levels up to $500,000. There
are reinsurance agreements with various unaffiliated companies whereby
insurance in excess of the Company's retention limit is reinsured. To the
extent that reinsuring companies become unable to meet their obligations
under these agreements, the Company remains contingently liable. Insurance
in force ceded at December 31, 1995 and 1994 totalled $2,802,057,000 and
$3,170,725,000, respectively. The related reserve credits taken on life
policies and contracts totalled $1,929,000 and $42,032,000 at December 31,
1995 and 1994, respectively. Estimated amounts recoverable from reinsurers
are approximately $26,000 and $244,000 at December 31, 1995 and 1994,
respectively. Life reinsurance premiums ceded during 1995 and 1994 totaled
$21,254,000 and $23,586,000, respectively.
Effective December 31, 1991, the Company entered into a quota share
coinsurance and modified coinsurance reinsurance agreement with an
unaffiliated reinsurer. Under the terms of the treaty, the Company ceded
85% of its traditional (non-interest sensitive) ordinary premium paying and
paid-up whole life, endowment, term insurance and extended term insurance
plans issued prior to January 1, 1991, and in force as of December 31,
1991. The traditional life block of business represented approximately $412
million in statutory reserves, $24 million in annualized premium in force
and $2.5 billion of face amount in force. The Company received an initial
ceding commission of $75 million and became obligated for a quarterly risk
charge. The Company had the right to recapture the ceded business with
advance written notice at any time after December 31, 1994. On December 29,
1995, the Company gave notice of its intent to terminate effective March
31, 1996, this agreement.
For financial reporting purposes, the Company treated the recapture as
being effective December 31, 1995 and, as a consequence, did not take a
reserve credit at year-end 1995 for the coinsurance reserves, which
resulted in an increase in reserve liabilities of approximately $25.9
million. The face amount of insurance in force ceded under such reinsurance
agreement totaling $1,299,051,000 at December 31, 1995 is included in the
total insurance in force ceded as reflected above. Because the recapture
could not be reflected in 1995 for federal income tax purposes, the tax
benefit associated with the recapture was not reflected in the 1995
Statement of Operations. Such tax benefit, totalling approximately $8.7
million, is expected to be realized in 1996.
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements, continued
12. Reinsurance, continued
The following reflects the effects of this reinsurance agreement for the
years ended December 31, 1995 and 1994, respectively (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Life and annuity premiums ceded $11,707 $13,034
Reserve adjustments on reinsurance
ceded and other income 1,525 5,525
Surrender benefits ceded 28,520 32,338
Decrease in reserves for supplementary
contracts without life contingencies
and for dividend and coupon
accumulations 39,731 11,491
Expense commissions ceded 3,362 3,910
Premium taxes ceded 234 261
Risk charge paid 780 1,059
Statutory surplus provided 39,731
Interest charges paid 19,814 19,010
</TABLE>
Effective September 30, 1990, the Company entered into a reinsurance
agreement with an unaffiliated insurance company whereby it ceded
retroactive to March 31, 1990, 100% of certain annuity business to the
reinsurer, which in turn retroceded the business on essentially identical
terms to Marquette. Marquette subsequently retroceded the business on
essentially identical terms to its parent, CFLIC. The business involved had
a present value of $25 million, based on specific assumptions about the
future investment performance of the related assets. The reinsurance
arrangements provided for an experience refund to the Company equal to 95%
of the amount by which actual future profits on the ceded business and
related assets exceeded the amounts projected in determining the $25
million present value of the business. As of March 31, 1990, the related
assets that the Company transferred had a book value of approximately
$447.8 million and a market value of approximately $413.8 million.
Marquette paid $25 million for the ceded business by assuming approximately
$438.8 million of reserve liabilities (as March 31) on that business, which
amount exceeded by $25 million the approximately $413.8 million market
value of the assets transferred to Marquette through the unaffiliated
reinsurer. The reserve liabilities ceded were subsequently reduced by $22.1
million and Marquette returned cash to the Company in the same amount. An
additional adjustment to the amounts payable was periodically made between
the companies to reflect the effect of the adjustment in the reserves
ceded.
On June 30, 1994, the CFLIC reinsurance agreements were terminated and the
business reinsured thereunder was recaptured by the reinsurer effective as
of April 1, 1994. Annuity reserve liabilities totalling $323,305,000 were
assumed by the reinsurer and invested assets with a fair value of
$289,414,000 were transferred by CFLIC to the reinsurer. The difference
between the reserve liabilities assumed by the reinsurer and the assets
transferred from CFLIC, totalling $33,891,000, represented the aggregate
ceding fee paid to CFLIC to effect the termination. Immediately thereafter
the Company recaptured $106,448,000 of the reserve liabilities from the
reinsurer and received invested assets from the reinsurer totalling
$93,227,000. The assets consisted of cash, short-term investments and
marketable fixed maturity investments totalling $24,740,000, CFLIC's
investment in ICH Funding and certain pass-through certificates issued by a
special purpose trust with an estimated fair value totalling $12,528,000,
collateral loans due from James M. Fail and CFSB Corporation totalling
$50,640,000 and other assets, principally mortgage loans, totalling
$5,319,000. The difference between the reserve liabilities recaptured by
the Company and the assets transferred from the reinsurer totalling
$13,221,000 represented a ceding fee paid by the Company and reduced the
reinsurer's net ceding fees incurred to effect the CFLIC reinsurance
termination to $20,670,000. The reinsurance agreement between the Company
and the reinsurer was amended to provide that the
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements, continued
12. Reinsurance, continued
reinsurer will be permitted to recover the net ceding fees incurred out of
the future profits on the portion of the Company's annuity business it
retained, together with interest at 2% per annum on the unamortized balance
of such ceding fees.
Effective December 31, 1994, the Company recaptured 8% of the remaining
annuity business ceded to the reinsurer. Annuity reserve liabilities
totalling $16.6 million were recaptured by the Company and cash totalling
$15 million was transferred by the reinsurer to the Company. The difference
between the reserve liabilities recaptured and the cash transferred from
the reinsurer, totalling $1.6 million, represented the aggregate ceding fee
paid to the reinsurer to effect the recapture. The unamortized balance of
annuity reinsurance ceding fees totaled $13,075,000 and $18,047,000 at
December 31, 1995 and 1994, respectively.
The reserve credits for liabilities ceded under the above annuity
reinsurance agreement are recorded as future policy benefits and other
policy and contract liabilities. The aggregate reserve credit taken on
contracts ceded under this reinsurance agreement totaled approximately
$139.0 million and $188.8 million at December 31, 1995 and 1994,
respectively. Reinsurance premiums ceded during 1995 and 1994 totaled
approximately $6,026,000 and $9,251,000, respectively.
Effective August 1, 1990, the Company ceded 100% of its guaranteed interest
contracts ("GIC") to Constitution. The liability for GIC's are recorded net
of reinsurance ceded as other policy and contract liabilities. The reserve
liabilities ceded at December 31, 1995 and 1994, were approximately $2.5
million and $20.2 million, respectively. Premiums ceded totaled $170,000
during 1995 and none during 1994.
The Company entered into a reinsurance agreement with Modern American as of
September 30, 1993, whereby the Company assumed by coinsurance 100% of
Modern American's interest-sensitive life insurance policies. The Company
paid an initial ceding commission of $4.3 million by receiving assets
having an admitted asset value equal to $36.7 million and reserves and
other policy liabilities on the business coinsured of $41.0 million. The
Company terminated this reinsurance agreement effective October 1, 1995.
The termination resulted in assets being transferred to Modern American
equaling reserves of approximately $42.1 million. The assets transferred,
consisting of bonds and mortgage loans, were transferred at their fair
value. Since assets equaled reserve liability transferred, there was no
effect on operating earnings of the Company resulting from this
transaction; however, the valuation of the assets at their fair value
resulted in the Company realizing net capital loss of $330,925.
The following reflects the effects of this reinsurance agreement for the
years ended December 31, 1995 and 1994, respectively (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Life and annuity premiums assumed $1,739 $2,535
Net investment income 209 245
Death and annuity benefits assumed 855 1,313
Surrender benefits assumed 2,237 2,244
Other benefits assumed 6 9
Increase (decrease) in reserves for
life policies assumed (42,393) 886
Commissions assumed 52 91
General expenses assumed 353 503
Insurance taxes, licenses and fees
assumed 35 51
</TABLE>
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements, continued
13. Commitments, Litigation and Contingent Liabilities
At December 31, 1995, the Company had a lease covering certain of its
administrative office facilities which is scheduled to expire November 30,
1997. Minimum rental commitments under the lease total approximately $3.1
million ($1.6 million in 1996 and $1.5 million in 1997).
In July 1994, the Internal Revenue Service ("IRS") completed its
examination of the Modern American consolidated group for the tax years
1986 through 1989 and issued Notices of Proposed Deficiencies totalling
approximately $127.7 million, before interest. In August 1995, the
Company's former parent, Modern American, settled the IRS examination of
these tax years by agreeing to pay $33.6 million of additional taxes and
$36.3 million of interest, for a total settlement of $69.9 million. The
Company's allocable share of the settlement, including amounts owed as the
result of prior indemnification agreements, was a net benefit of
approximately $370,000. In accordance with the intercompany tax allocation
agreement, the Company received payment of this benefit from Modern
American on December 29, 1995. On the same date ICH made a capital
contribution to Modern American and Modern American paid $69.9 million to
the IRS in full satisfaction of the settlement.
The IRS is currently conducting an examination of the Company's tax return
for 1990 through 1994. The Company is not aware of any issues that would
materially affect its financial position. In addition, the Company has been
indemnified by ICH against all tax liabilities that might arise prior to
the date of sale (see Note 3) and ICH has deposited funds in an escrow
account to fulfill its obligations, if any, under the indemnification.
From time to time, assessments are levied on the Company and its
subsidiaries by life and health guaranty associations of states in which
they are licensed to do business. Such assessments are made primarily to
cover the losses of policyholders of insolvent or rehabilitated insurers.
In some states, these assessments can be partially recovered through a
reduction in future premium taxes. The Company paid or accrued assessments
in 1995 and 1994 totalling approximately $2.4 million and $1.6 million,
respectively. Based on information currently available, management believes
that any future assessments are not reasonably likely to have a material
adverse effect on the Company or its subsidiaries.
Various lawsuits and claims are pending against the Company. Based in part
upon the opinion of counsel as to the ultimate disposition of these
matters, management believes that the liability, if any, will not be
material.
14. Regulatory Matters
On September 24, 1993, the Company, ICH and Union Bankers entered into a
letter agreement with the Texas Department. This letter agreement
superseded a letter agreement dated March 31, 1993, among the parties. Both
the Company and Union Bankers agreed that they would not enter into any
financial reinsurance agreements without prior notice to the Texas
Department. In addition, the Company agreed, among other things, that it
would 1) give the Texas Department at least 30 days' prior notice of any
stockholder dividend, 2) limit the amount it invests in private placement
securities without the prior approval of the Texas Department, and 3) not
invest in any interest-only securities ("IO's") and would exercise
commercially reasonable efforts to liquidate the IO's held by it and its
subsidiaries. Management subsequently gave assurances to the Texas
Department that the Company would not declare and pay any dividends in 1995
without the approval of the Texas Insurance Commissioner. Upon the sale of
the Company in December 1995, the letter agreements with the Texas
Department were withdrawn.
The Texas Department has examined the Company through December 31, 1994. No
adjustments were made as a result of the examination.
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements, continued
15. Reconciliation to Generally Accepted Accounting Principles
A reconciliation to stockholder's equity and net income (loss) as of and
for the years ended December 31, 1995 and 1994, from the basis of
accounting as prescribed or permitted by regulatory authorities (statutory
basis) to the basis of GAAP is as set forth below (in thousands). The
December 31, 1995, balances are unaudited and presented on a basis of
accounting no longer utilized by the Company subsequent to its acquisition
by SW Financial (see Note 1). However, such basis of accounting is
consistent with the basis of accounting previously utilized as of and for
the year ended December 31, 1994.
<TABLE>
<CAPTION>
December 31,
1995 1994
(unaudited)
Stockholder's equity:
<S> <C> <C>
Per statutory basis $ 77,409 $ 116,956
Adjustments for:
Deferred policy acquisition costs and
present value of future profits of
acquired business 120,885 148,220
Excess cost 75,224 77,650
Statutory asset valuation reserves 20,666 25,740
Financial reinsurance (13,075) (57,778)
Deferred income tax (liability) asset (5,324) 58,096
Difference in carrying value of
subsidiaries 193 (10,153)
Due from reinsurers 152,604 198,762
Difference in carrying values of
invested assets 11,933 (196,024)
Net ceding fees incurred by the
reinsurer to be recovered from future
profits on retained annuity business 6,245
Difference in reserve and other
liabilities (158,647) (133,003)
Other, net 10,023 10,982
Stockholder's equity in accordance
with GAAP $ 291,891 $ 245,693
</TABLE>
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements, continued
15. Reconciliation to Generally Accepted Accounting Principles, continued
<TABLE>
<CAPTION>
December 31,
1995 1994
(unaudited)
Net income (loss):
<S> <C> <C>
Per statutory basis $ (40,347) $(14,868)
Adjustments for:
Amortization of deferred policy
acquisition costs and present value
of future profits of acquired
business (15,274) (23,916)
Amortization of excess cost change in
accounting method in 1994 (2,427) (219,693)
Due and deferred premiums and loading (1,289) (1,201)
Financial reinsurance 41,699 10,482
Equity in earnings of subsidiaries (1,916) (22,245)
Deferred income tax (expense) benefit (36,591) 4,841
Realized capital gains 16,982 9,342
Federal income tax adjustments (2,005) 2,123
Writedown of collateralized mortgage
obligations (25,819)
Increase in reserves net of reinsurance 2,950 20,577
Increase in reserves from reinsurance (1,053) 123,030
Assets received from reinsurance (108,227)
Change in carrying value of residual
interests 1,178 1,570
Accrual of expense for lease obligation
and retired employee benefits 8,041 (1,806)
Equity in earnings of limited partnership 6,383 5,856
Amortization of unearned revenue reserve 5,260 4,010
Other, net 5,248 8,062
Net income (loss) in accordance
with GAAP $ (13,161) $(227,882)
</TABLE>
16. Adjustment of Amounts Reflected in Annual Statement
The income tax provisions as reflected in the Company's Annual Statement
for the year ended December 31, 1995, were incorrectly allocated between
income from operations and realized capital gains (losses). In the
accompanying financial statements, such income tax provisions have been
adjusted, as follows (in thousands):
<TABLE>
<CAPTION>
Realized Total
Operating Capital Income
Income Gains Tax
(Loss) (Losses) Provision
<S> <C> <C> <C>
As reflected in Annual
Statement $ 6,052 $ (1,307) $4,745
Reclassification of tax
provision (5,512) 5,512
As reflected in accompanying
financial statements $ 540 $ 4,205 $4,745
</TABLE>
The reallocation of such income tax provisions had no effect on the
Company's reported net loss.
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Schedule of Selected Financial Data
December 31, 1995
(In Thousands)
The following is a summary of certain financial data included in other
exhibits and schedules subjected to audit procedures by independent
accountants and utilized by actuaries in the determination of reserves (in
thousands).
<TABLE>
<CAPTION>
Year Ended
December 31, 1995
Investment Income Earned
<S> <C>
Government bonds $ 21,130
Other bonds (unaffiliated) 49,254
Common stocks (unaffiliated) 2
Common stocks of affiliates (2,962)
Mortgage loans 10,975
Real estate 3,758
Premium notes, policy loans and liens 7,727
Collateral loans 5,457
Short-term investments 3,806
Other invested assets 7,629
Other miscellaneous 592
Gross investment income $ 107,368
Real estate owned - book value less encumbrances $ 28,248
Mortgage loans - book value:
Residential mortgages $ 4,989
Commercial mortgages 94,661
Total mortgage loans $ 99,650
Mortgage loans by standing - book value:
Good standing $ 70,970
Good standing with structured terms $ 20,995
Interest overdue more than three months,
not in foreclosure $ 6,705
Foreclosure in process $ 980
Collateral loans $ 41,308
Bonds and stocks of parents, subsidiaries and
affiliates - book value Common stocks $ 1,749
Bonds and short-term investments by class and maturity:
Bonds and short-term by maturity - statement value: Due within one year or
less $ 166,578 Over 1 year through 5 years 172,215 Over 5 years through 10
years 300,371 Over 10 years through 20 years 202,608 Over 20 years 161,659
Total by maturity $1,003,431
</TABLE>
<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
Schedule of Selected Financial Data
(continued)
December 31, 1995
(In Thousands)
<TABLE>
<CAPTION>
Year Ended
December 31, 1995
<S> <C>
Bonds and short-term by class - statement value:
Class 1 $ 759,572
Class 2 195,335
Class 3 34,761
Class 4 8,514
Class 5 4,649
Class 6 580
Total by class $1,003,431
Total bonds and short-term publicly traded $ 928,629
Total bonds and short-term privately placed $ 74,802
Common stocks - market value $ 6,347
Short-term investments - book value $ 113,186
Cash on deposit $ 16,455
Life insurance in force:
Ordinary $8,565,233
Amount of accidental death insurance in force
under ordinary policies $ 511,820
Life insurance policies with disability provisions in force:
Ordinary $1,233,237
Supplementary contracts in force:
Ordinary - not involving life contingencies 1
Amount on deposit $ 7,951
Income payable $ 1,272
Ordinary - involving life contingencies 5
Income payable $ 8,417
Annuities:
Ordinary
Immediate - amount of income payable $ 3,020 Deferred - fully paid -
account balance $ 132,144 Deferred - not fully paid - account balance $
45,580
Group:
Amount of income payable $ 1,270
Fully paid - account balance $ 5,275
Not fully paid - account balance $ 16,635
Deposit funds and dividend accumulations:
Deposit funds - account balance $ 7,186
Dividend accumulations -account balance $ 181
</TABLE>
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Part A Condensed Financial Information
Part B Financial Statements for Variable Annuity Fund I of
Southwestern Life
Part B Financial Statements for Southwestern Life Insurance Company
(b) Exhibits
(1) Copy of resolution establishing Variable Annuity Fund I of
Southwestern Life (incorporated by reference to registration
statements for Variable Annuity Fund I of Southwestern Life Forms
N-8B-1 and S-5 (File Nos. 811-1636, 2-28842, 2-28843 and 2-28844),
filed on April 23, 1968, and pre-effective amendments thereto).
(1a) Amended and Restated Rules and Regulations of Variable Annuity Fund I
of Southwestern Life (filed herewith).
(2) Safekeeping Agreement between Southwestern Life Insurance Company and
NationsBank of Texas, N.A. (incorporated by reference to Exhibit 3 to
Post-Effective Amendment Nos. 46 (File No. 2-28842), 47 (File No.
2-28843), 45 (File No. 2-28844) and 24 (File No. 811- 1636) to the
registration statement on Form N-3 of Variable Annuity Fund I of
Southwestern Life).
(3) Distribution and Administrative Services Agreement (Variable Annu- ity
Fund I of Southwestern Life) (incorporated by reference to Amendment
No. 12 to the Registration Statement on Form N-3 for Variable Annuity
Fund I of Southwestern Life, filed on July 2, 1986).
(4a) Specimen variable annuity contracts issued by Southwestern Life
Insurance Company and endorsements (incorporated by reference to
registration statements for Variable Annuity Fund I of Southwestern
Life Forms N-8B-1 and S-5 (File Nos. 811-1636, 2- 28842, 2-28843 and
2-28844), filed on April 23, 1968, and pre- effective amendments
thereto; and by reference to Exhibit 6a to Post-Effective Amendment
Nos. 44 (File No. 2-28842), 46 (File No. 2-28843), 45 (File No.
2-28844) and 24 (File No. 811-1636) to the registration statement on
Form N-3 of Variable Annuity Fund I of Southwestern Life; and to
Exhibit 5(a)(2) to the Registration statement for Variable Annuity
Fund I of Southwestern Life on Form N-14 (File No. 033-59447) filed on
May 19, 1995).
(5) Forms of application used with variable annuity contracts
(incorporated by reference to registration statements for Variable
Annuity Fund I of Southwestern Life Forms N-8B-1 and S-5 (File Nos.
811-1636, 2-28842, 2-28843, 2-28844), filed on April 23, 1968 and
pre-effective amendments thereto).
<PAGE>
(6) Certificate of Incorporation and By-Laws of Southwestern Life (filed
herewith).
(7) Reinsurance contracts . . . . . . . . . . . . . . . Not Applicable
(8a) Asset Transfer Agreement (incorporated by reference to Exhibit A to
the prospectus forming a part of the Registration Statement for
Variable Annuity Fund I of Southwestern Life on Form N-14 (File No.
033-59447) filed May 19, 1995).
(8b) Form of Participating Contract and Policy Agreement to be entered into
between Scudder Investor Services, Inc. and Southwestern Life
Insurance Company (filed herewith).
(8c) Form of letter agreement to be executed by Southwestern Life Insurance
Company and Scudder Variable Life Insurance Fund (filed herewith).
(9) Opinion and Consent of Counsel as to legality of interests to be
issued by Variable Annuity Fund I of Southwestern Life (filed
herewith).
(10) Consent of Independent Auditors for Variable Annuity Fund I of
Southwestern Life (filed herewith).
(11) Financial Statements omitted pursuant to Item 14(a)(1) Not Applicable
(12) Agreements or understandings in consideration of initial capital Not
Applicable
(13) Schedule for computation of performance quotations Not Applicable
(14) Financial data schedule (filed herewith).
(15) Organizational Chart showing the ultimate controlling persons and
affiliates of Southwestern Life Insurance Company (filed herewith).
<PAGE>
Item 25. Directors and Officers of the Depositor
The officers and directors of Southwestern Life Insurance Company are
listed below. Their principal business address is 500 North Akard, Dallas, Texas
75201.
Directors and Senior
Officers of Southwestern Position and Offices with Southwestern
Robert J. Bruce Director and Senior Vice President
Administration
Glenn H. Gettier, Jr. Chairman of the Board, Director, President
and Chief Executive Officer
Robert C. Greving Director, Executive Vice President & Chief
Actuary
John T. Hull Director, Executive Vice President, Chief
Financial Officer and Treasurer
H. Don Rutherford Director and Executive Vice President
Marketing
Daniel B. Gail Executive Vice President, General Counsel &
Secretary
David A. Leonard Vice President, Associate General Counsel &
Assistant Secretary
Charles R. Nunemaker Vice President Life Administration
Richard P. Pimsner Vice President & Controller
Mary M. Wilson Vice President & Product Actuary
Joe W. Grady Vice President & Appointed Actuary
Item 26. Persons Controlled by or Under Common Control with the Insurance
Company or Registrant
Variable Annuity Fund I of Southwestern Life is a registered separate
account of Southwestern Life Insurance Company. Exhibit 15, attached hereto,
provides information about each person by or under common control with
Southwestern Life Insurance Company.
<PAGE>
Item 27. Number of Contract Owners
As of March 31, 1996, the number of qualified and non-qualified Contract
Owners of Variable Annuity Fund I of Southwestern Life was 292 and 27,
respectively.
Item 28. Indemnification
Reference is made to Exhibit 14 of Form N-8B-1 (File No. 811-1636).
Insofar as indemnification by the Separate Account for liability arising
under the Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Separate Account pursuant to the foregoing
provisions, or otherwise, the Separate Account has been advised that in
the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Separate Account of expenses
incurred or paid by a director, officer or controlling person of the
Separate Account in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Separate Account
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of
such issue.
Item 29. Principal Underwriters
(a) Philadelphia Life Asset Planning Company, the principal underwriter
for the Registrant, does not serve as principal underwriter for any
other registered investment companies.
<PAGE>
(b) Directors and Officers of the Principal Underwriter
Name Principal Positions Business Address
and Offices
Kenneth R. Carpel Director, President 400 Market Street
and 11th Floor
Treasurer Philadelphia, PA
19106
Paul Carmody Director and Vice 7887 E. Belleview
President Ave.
Englewood, CO 80111
Kenneth G. Director, Vice 7887 E. Belleview
Luzietti President and Ave.
Assistant Treasurer Englewood, CO 80111
Maxine L. Newstein Secretary 400 Market Street
11th Floor
Philadelphia, PA
19106
(c) Philadelphia Life Asset Planning Company received no compensation
from Variable Annuity Fund I of Southwestern Life during the last
fiscal year.
Item 30. Location of Accounts and Records
All accounts, books or other documents required to be maintained by
Section 31(a) of the 1940 Act and the rules promulgated thereunder are
maintained in physical possession of either Philadelphia Life Asset
Planning Company, 400 Market Street, 11th Floor, Philadelphia,
Pennsylvania 19106 or Southwestern Life Insurance Company, 500 North
Akard, Dallas, Texas 75201.
Item 36. Management Services
None.
Item 37. Undertakings
Registrant undertakes to file a post-effective amendment to this
Registration Statement as frequently as is needed to ensure that the
audited financial statements in the Registration Statement are never more
than 16 months old for so long as payments under the variable annuity
Contracts may be accepted.
<PAGE>
Registrant undertakes to include a written communication in the Prospectus
that the applicant can remove to send for a Statement of Additional
Information. Registrant also undertakes to deliver any Statement of
Additional Information and any financial statements required to be made
available under this Form promptly upon written or oral request.
Southwestern Life Insurance Company and Variable Annuity Fund I of
Southwestern Life are relying on a no-action letter from the Securities
and Exchange Commission that was issued to the American Council of Life
Insurance and made publicly available on November 28, 1988. That letter
outlines conditions that must be met if a company offering registered
annuity contracts imposes the limitations on surrenders and withdrawals on
section 403(b) contracts as required by the Internal Revenue Code.
Southwestern Life Insurance Company and Variable Annuity Fund I of
Southwestern Life are in compliance with the conditions of that no-action
letter.
<PAGE>
SIGNATURES
As required by (the Securities Act of 1933) and the Investment Company Act
of 1940 the Registrant has caused this Registration Statement to be signed on
its behalf in the City of Dallas, and State of Texas on the 3rd day of May,
1996.
Registrant: Southwestern Life Insurance Company
By:/s/Glenn H. Gettier, Jr.
------------------------
Glenn H. Gettier, Jr.
President, Chief Executive
Officer and Chairman of the Board
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
/s/Robert J. Bruce Director May 23, 1996
- - -------------------------
Robert J. Bruce
/s/Glenn H. Gettier, Jr. President and Chief Executive May 23, 1996
- - ------------------------ Officer (Principal Executive
Glenn H. Gettier, Jr. Officer) and Chairman of the
Board
/s/Robert C. Greving Executive Vice President, May 23, 1996
- - ------------------------ Chief Actuary and Director
Robert C. Greving
/s/John T. Hull Executive Vice President, May 23, 1996
- - ------------------------ Chief Financial Officer,
John T. Hull Treasurer (Principal
Accounting and Financial
Officer) and Director
/s/H. Don Rutherford Director May 23, 1996
- - ------------------------
H. Don Rutherford
<PAGE>
Exhibit Index
Number Description
(1a) Amended and Restated Rules and Regulations of Variable Annuity Fund I of
Southwestern Life (filed herewith).
(6) Certificate of Incorporation and By-Laws of Southwestern Life (filed
herewith).
(8b) Form of Participating Contract and Policy Agreement to be entered into
between Scudder Investor Services, Inc. and Southwestern Life Insurance
Company (filed herewith).
(8c) Form of Indemnification Agreement to be entered into between Scudder,
Stevens & Clark, Inc. and Southwestern Life Insurance Company (filed
herewith).
(8d) Form of letter agreement to be executed by Southwestern Life Insurance
Company and Scudder Variable Life Insurance Fund (filed herewith).
(9) Opinion and Consent of Counsel as to legality of interests to be issued by
Variable Annuity Fund I of Southwestern Life (filed herewith).
(10) Consent of Independent Auditors for Variable Annuity Fund I of Southwestern
Life (filed herewith).
(14) Financial data schedule (filed herewith).
(15) Organizational Chart showing the ultimate controlling persons and
affiliates of Southwestern Life Insurance Company (filed herewith).
<PAGE>
VARIABLE ANNUITY FUND I OF SOUTHWESTERN LIFE
DALLAS, TEXAS
RULES AND REGULATIONS
(as amended and restated ____________, 1996)
ARTICLE I
GENERAL
Section 1. Name. The name of this separate account shall be Variable
Annuity Fund I of Southwestern Life ("Fund"). The Fund was established in 1967
in accordance with the provisions of Chapter 3, Article 3.72 of the Texas
Insurance Code (the "Code") as then in effect, and continues in existence
pursuant to Article 3.75 of the Code.
Section 2. Offices. The principal office of the Fund shall be at the
offices of Southwestern Life Insurance Company ("Southwestern"), 500 North
Akard Street, Dallas, Texas 75201.
Section 3. Purposes. The purposes of the Fund are to provide, pursuant to
the applicable provisions of the Code, for a separate account of Southwestern
for the assets held and applied exclusively for the benefit of owners or
beneficiaries of the variable annuity contracts designated by Southwestern as
contracts ("Contracts") for which reserves shall be maintained in the Fund, and
to pay contractual obligations relating to the assets and investment performance
of the Fund under the Contracts to their owners or beneficiaries.
Section 4. Fund Investments. The Fund's assets shall consist exclusively
of investments in one or more open-end management investment companies
registered as such under the Investment Company Act of 1940 ("1940 Act"), or one
or more separate investment series thereof ("Underlying Fund(s)") as determined
by Southwestern. No such investment shall be made except in Underlying Funds
that satisfy the requirements of the Internal Revenue Code of 1986, as amended
(the "Internal Revenue Code") pertaining to investments underlying variable
annuity contracts. Currently, the Underlying Fund in which the Fund shall invest
exclusively in shares of the Capital Growth Portfolio ("Growth Portfolio") of
Scudder Variable Life Investment Fund ("Scudder Fund"). Should shares of the
Growth Portfolio become unavailable for investment by the Fund, or if
Southwestern determines that investment in the Growth Portfolio would be
inappropriate in view of the purposes of the Contracts, Southwestern may, in its
discretion, substitute shares of a different Underlying Fund for shares of the
Growth Portfolio held or to be acquired by the Fund. No such substitution may
take place unless it is permitted by the Securities and Exchange Commission
("Commission") and under such conditions as the Commission may impose.
<PAGE>
ARTICLE II
VARIABLE ANNUITY CONTRACT OWNERS
Section l. Contract Owner Meetings. Contract Owner meetings generally
shall not be held except as may be required by law, particularly, as required
under the 1940 Act.
Section 2. Voting Rights of Shareholders of the Underlying Fund.
Southwestern is the owner of record of all shares of the Growth Portfolio (and
will be the record owner of all of the Fund's shares in any other Underlying
Fund allocated to the Fund), and as such is entitled to exercise voting rights
pertaining to such shares on any matter that is submitted to shareholder vote by
the Scudder Fund. However, for so long as the staff of the Commission interprets
the federal securities laws as requiring it to do so, Southwestern will provide
Contract Owners (and participants under a group Contract, to the extent
permitted under the terms of any employee benefit plan that is the owner of such
Contract), with the opportunity to instruct Southwestern as to the voting of
such shares attributable to the Contract of such participants' interest therein.
Section 3. Determination for Voting Instructions. To be entitled to
provide voting instructions to Southwestern, a person must be a Contract Owner
on the record date. During the accumulation period, each Contract Owner may give
instructions for voting the number of shares of the Underlying Fund equal to (i)
the Contract value divided by (ii) the net asset value of one share of the
Underlying Fund, both determined as of the record date, including fractions
thereof, equal to the number of variable annuity accumulation units attributable
to the contract. During the annuity period, each Contract Owner may give
instructions for voting the number of shares of the Underlying Fund, including
fractions thereof, equal to (i) the amount of the assets maintained in the Fund
as reserves to meet the annuity obligations under the contract divided by (ii)
the net asset value of one share of the Growth Portfolio, both determined as of
the record date.
Southwestern will vote the shares of the Underlying Fund for which it has
not received any voting instructions on a proposal for and against such proposal
in the same proportion as in the case of shares for which it has received
instructions.
Each Participant under a group contract will have the right to instruct
the Contract Owner with respect to amounts allocated to such Participant under
the terms of the group contract. Contract Owners shall forward instructions that
have been received from Participants. Instructions for shares with regard to
which Participants where entitled to instruct the Contract Owner, but for which
the Contract Owner has received no instructions, shall be provided by the
Contract Owner for or against each proposal to be voted upon in the same
proportion as votes for which instructions have been received.
Annuitants under individual contracts issued in connection with plans
established under the Self-Employed Individuals Tax Retirement Act of 1962, as
amended, will have the right to instruct the owners of
<PAGE>
such contracts with respect to all votes attributable to such contracts, if the
owners of such contracts are persons other than the annuitants. Annuitants
covered by individual contracts issued in connection with qualified employee
retirement or profit-sharing plans described in Section 401 of the Internal
Revenue Code shall be given the right to instruct the owners with respect to
shares attributable to their contributions to the plans, if any, and to the
extent authorized by the terms of the plans with respect to any additional
shares under such contracts. The owners of such contracts shall provide
instructions with respect to which instructions from annuitants have been
received in accordance with such instructions; votes applicable to individual
contracts with regard to which annuitants were entitled to instruct the Contract
Owner, but for which the Contract Owner has received no instructions, shall be
provided by the Contract Owner for or against each proposal to be voted upon in
the same proportion as votes for which instructions have been received.
Neither the Fund nor Southwestern is under a duty to inquire as to the
instructions received or the authority of variable annuity Contract Owners to
cast votes. Except as the Fund or Southwestern has actual knowledge to the
contrary, the votes cast by Contract Owners will be considered valid and
effective as they affect the Fund, Southwestern, and any others having voting
rights with respect to the Fund.
Section 4. Determination of Voting Rights. In the event that a meeting of
Contract Owners shall be held as required by law, a record date shall be set and
a notice stating the time, date, place of meeting and the purpose or purposes
for which the meeting is called, shall be given to Contract Owners as required
by law. Unless otherwise required by law, to be entitled to vote, a person must
be a Contract Owner on the record date. During the accumulation period, each
Contract Owner may cast the number of votes, including fractions thereof, equal
to the number of variable annuity accumulation units attributable to the
contract. During the annuity period, each Contract Owner may cast the number of
votes, including fractions thereof, equal to (i) the amount of the assets
maintained in the Fund to meet the annuity obligations under the contract
divided by (ii) the value of such an accumulation unit.
Each Participant under a group contract will have the right to instruct
the Contract Owner with respect to amounts allocated to such participant under
the terms of the group contract. Contract Owners shall cast the votes for which
instructions have been received from Participants in accordance with such
instructions. Votes with regard to which participants were entitled to instruct
the Contract Owner, but for which the Contract Owner has received no
instructions, shall be cast by the Contract Owner for or against each proposal
to be voted upon in the same proportion as votes for which instructions have
been received.
Annuitants under individual contracts issued in connection with plans
established under the Self-Employed Individuals Tax Retirement Act of 1962, as
amended, will have the right to instruct the owners of such contracts with
respect to all votes attributable to such contracts, if the owners of such
contracts are persons other than the annuitants. Annuitants covered by
individual contracts issued in connection with qualified employee retirement or
profit-sharing plans described in Section 401 of the Internal Revenue Code shall
be given the right to instruct the owners with respect to votes attributable to
their contributions to the plans, if any, and to the extent authorized by the
terms of the
<PAGE>
plans with respect to any additional votes under such contracts. The owners of
such contracts shall cast the votes with respect to which instructions from
annuitants have been received in accordance with such instructions; votes
applicable to individual contracts with regard to which annuitants were entitled
to instruct the Contract Owner, but for which the Contract Owner has received no
instructions, shall be cast by the Contract Owner for or against each proposal
to be voted upon in the same proportion as votes for which instructions have
been received.
The number of Contract Owners constituting a quorum, the number of votes
required at such meeting and any other matters relating to meetings of Contract
Owners shall be as prescribed by law.
Except as may otherwise be required by law, neither the Fund nor
Southwestern is under a duty to inquire as to the instructions received or the
authority of variable annuity Contract Owners to cast votes. Further, except as
may otherwise be required by law, or except as the Fund or Southwestern has
actual knowledge to the contrary, the votes cast by Contract Owners will be
considered valid and effective as they affect the fund, Southwestern, and any
others having voting rights with respect to the Fund.
ARTICLE III
ADMINISTRATION
Section 1. Administration of the Fund. The Fund shall not have a Board of
Managers. Southwestern shall be responsible for, and shall bear the costs of,
administering the Fund and the Contracts except as provided below.
Section 2. Charges Against the Fund. The assets of the Fund shall be
chargeable by Southwestern for its mortality and expense undertakings at the
rates prescribed in the Contracts. In addition, the Fund shall be charged for
the actual costs of providing auditing services to it, except that Southwestern
shall not charge the Fund for any portion of such fees as may exceed 0.20% of
the average daily net assets of the Fund.
ARTICLE IV
AMENDMENTS
These Rules and Regulations, subject to applicable law, may be altered,
amended or repealed by Southwestern.
<PAGE>
EXHIBIT 6
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
SOUTHWESTERN LIFE INSURANCE COMPANY
Pursuant to the provisions of Article 3.05 of the Texas Insurance Code and
Article 4.07 of the Texas Business Corporation Act, the undersigned Corporation
adopts the following Amended and Restated Articles of Incorporation, which
accurately copy the articles of incorporation and all amendments thereto that
are in effect to date, with these amendments:
(a) the omission of the names and addresses of the original
incorporators, which omission causes re-numbering of all articles beginning
with the second;
(b) the deletion of the physical street address of the Corporation,
which deletion was made on the recommendation of the Texas Department of
Insurance.
These Amended and Restated Articles of Incorporation were adopted effective
September 14, 1995, by the written consent of the sole shareholder holding the
three million (3,000,000) shares of the Corporation's common stock. par value
$1.00 per share, that are issued and outstanding.
ARTICLE ONE
The name of the Corporation is Southwestern Life Insurance Company.
ARTICLE TWO
The location of its home office is Dallas, Dallas County, Texas.
ARTICLE THREE
The kinds of business the Corporation proposes to transact shall be any and
all kinds, classes, types and forms of life, health and accident insurance
including, but not limited to, annuity contracts and combinations of any two (2)
or more of such kinds classes, types or forms of such insurance and annuity
contracts, as such insurance business is now or hereafter permitted and
authorized under the laws of the State of Texas or any other state, the District
of Columbia, nation, country, territory, possession, or principality in which
the Corporation is authorized to do business; and to reinsure any such insurance
risk or any part thereof ceded to it by other insurance companies.
AMENDED AND RESTATED ARTICLES OF INCORPORATION Page 1 of 3
<PAGE>
ARTICLE FOUR
The amount of the authorized capital stock is five million dollars
($5,000,000.00) The number of authorized shares of capital stock is five million
(5,000,000) with a par value of one dollar ($1.00) each. Three million
(3,000,000) shares, representing the issued and outstanding capital stock, have
been in good faith subscribed and fully paid for. All authorized shares shall be
common shares of the same class, shall have one (1) vote per share at all
shareholder meetings, and shall be equal in all respects. Shares may be redeemed
by the Corporation and cancelled only as authorized by the laws of the State of
Texas.
ARTICLE FIVE
Cumulative voting for Directors shall not be permitted.
ARTICLE SIX
The period of its duration shall be five hundred (500) years.
ARTICLE SEVEN
No holder of shares of capital stock of the Corporation shall have any
preemptive or preferential right of subscription or right to subscribe for,
purchase or receive any part of any of the authorized but unissued shares or any
new or additional issue of shares of any class, whether now or hereafter
authorized, and all such additional shares may be issued and disposed of by the
Board of Directors to such person or persons on such terms and for such
consideration, as far as may be permitted by law, as the Board of Directors in
its absolute discretion may deem advisable. Every shareholder shall have the
right to vote in person or by proxy the number of shares of common stock held by
such shareholder upon any and all matters coming before any and all shareholders
meetings, general and special.
ARTICLE EIGHT
The number of Directors shall be not fewer than five (5), but the exact
number to serve the Corporation shall be designated by the shareholders from
year to year. On the date of the adoption by the sole shareholder of these
Amended and Restated Articles of Incorporation, the number of Directors was six
(6), and the name of each is as follows:
AMENDED AND RESTATED ARTICLES OF INCORPORATION Page 2 of 3
<PAGE>
Robert J. Bruce John T. Hull
Glenn H. Gettier, Jr. James R. Kerber
Robert C. Greving Richard P. Pimsner
The business address of each Director is 500 North Akard, Dallas, Texas
75201.
/s/Daniel B. Gail
-------------------------------------------------
Daniel B. Gail, Executive Vice President, General
Counsel and Secretary of the Corporation
AMENDED AND RESTATED ARTICLES OF INCORPORATION Page 3 of 3
<PAGE>
BYLAWS
OF
SOUTHWESTERN LIFE INSURANCE COMPANY
As Amended to March 12, 1996
ARTICLE I
STOCKHOLDERS
PLACE OF MEETINGS
Section 1. All meetings of the stockholders of Southwestern Life Insurance
Company (the "Company") shall be held at such place or places, within or without
the State of Texas, as may from time to time be fixed by the Board of Directors
(the "Board"), or as shall be specified or fixed in the respective notices or
waivers of notice thereof; provided that any or all stockholders may participate
in any such meeting by means of conference telephone or similar communications
equipment pursuant to Article VI, Section 1 hereof.
ANNUAL MEETING
Section 2. The annual meeting of the stockholders shall be held at the home
office of the Company on or before the thirtieth day of April of each year for
the purpose of electing directors and for the transaction of such other business
as may be brought before the meeting.
SPECIAL MEETINGS
Section 3. Special meetings of the stockholders may be called at any time
by the Chairman of the Board (the "Chairman"), or his designee. The business
transacted at a special meeting shall be confined to the purposes specified in
the notice thereof. Special meetings shall be held at such date and at such time
as the Chairman may designate.
NOTICE OF MEETING
Section 4. Written notice of each meeting of stockholders, stating the
place, date and hour of the meeting, and the purpose or purposes thereof, shall
be mailed to each stockholder entitled to vote at such meeting not less than ten
or more than fifty days before the date of the meeting. Stockholders by written
notice may waive notice of any meeting, and the presence of a stockholder at any
meeting, in person or by proxy, shall constitute a waiver of notice of such
meeting.
1
<PAGE>
QUORUM/VOTING
Section 5. The presence at a meeting in person or by proxy of stockholders
of the Company representing a majority of issued and outstanding shares of the
Company shall be necessary to constitute a quorum for the purpose of transacting
business, except as otherwise provided by law, but a smaller number may adjourn
the meeting from time to time until a quorum shall be obtained. Each stockholder
shall be entitled to cast one vote in person or by proxy for each share of stock
of the Company held and of record in his or her name on the books of the
Company.
PROXIES
Section 6. A stockholder may vote at any meeting of the stockholders,
either in person or by proxy executed in writing by the stockholder or by his
duly authorized attorney-in-fact. All proxies shall be filed with the Secretary
of the Company before voting and entered on the record in the minutes of the
meeting. No special form of proxy shall be necessary.
CONSENTS TO CORPORATE ACTIONS
Section 7. Unless otherwise prohibited by the applicable laws of the State
of Texas or the Company's Articles of Incorporation, any action required to be
taken or which may be taken at any annual or special meeting of stockholders of
the Company may be taken without a meeting and without a vote if a consent in
writing, setting forth the action so taken, shall be signed by all of the
stockholders entitled to vote with respect to the subject matter thereof. The
consents of stockholders shall be evidenced by one or more written approvals,
each of which sets forth the action taken, and bears the signature of one or
more stockholders. All of the approvals evidencing the consents shall be
delivered to the Secretary of the Company to be filed in the Company's records.
The action shall be effective when the stockholders have approved the consents
unless the consent specifies a different effective date.
ARTICLE II
BOARD OF DIRECTORS
NUMBER: METHOD OF ELECTION: TERMS
OF OFFICE AND QUALIFICATION
Section 1. The property, business and affairs of the Company shall be under
the management, control and direction of the Board, the number of members of
which shall be set from time to time, all in accordance with the laws of the
State of Texas, by action of the stockholders or the current members of the
Board, but which number shall be not less than five or more than nine.
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BYLAWS OF SOUTHWESTERN LIFE INSURANCE COMPANY
<PAGE>
The term "whole Board" as used in these bylaws shall mean the number of
directors elected and holding office at any time.
The directors shall be elected at the annual meeting of stockholders, each
to hold office for a term of one year and until a successor is elected and
qualified or until an earlier resignation, death or removal. Any director may
resign from office at any time by delivering a resignation in writing to the
Company, and the acceptance of such resignation unless required by the terms
thereof shall not be necessary to make such resignation effective. Any and all
vacancies in the Board caused by death, resignation, removal, increase in the
number of directors, or otherwise, may be filled by the Board, at any regular or
called meeting, by the vote of a majority of the remaining directors though less
than a quorum, or by the sole remaining director.
Unless otherwise provided in the Articles of Incorporation, directors need
not be stockholders of the Corporation or residents of the State of Texas.
MEETINGS
Section 2. The Board may hold its meetings and have an office in such place
or places within or without the State of Texas as the Board by resolution from
time to time may determine. Annual and special meetings of the Board shall be
held whenever called by direction of the Chairman or his designee, or by
unanimous consent of the Board. The Secretary or an Assistant Secretary of the
Company shall give notice to each director of any special meeting by mailing the
same at least three days, or by telegraphing or by telephoning or by sending by
facsimile the same at least one day, before the meeting; but such notice may be
waived by any director, in writing, either prior to or after such meeting; and
the presence of a director at any meeting shall constitute a waiver of notice of
such meeting, except where a director attends a meeting for the express purpose
of objecting to the transaction of any business on the ground that the meeting
is not lawfully called or convened. Unless otherwise indicated in the notice
thereof, any and all business may be transacted at a special meeting.
At any meeting at which every director shall be present, even though
without notice, any business may be transacted. No notice of any adjourned
meeting need be given.
The Board shall meet immediately after its election, following the annual
meeting of stockholders, for the purpose of organizing, for the election of
corporate officers as hereinafter specified, and for the transaction of any
other business which may come before it. No notice of such meeting shall be
necessary. At such meeting, the Board shall elect a Chairman of the Board from
among its membership. The Chairman shall preside at all meetings of the
stockholders and the Board. The Chairman shall not be or be deemed to be an
officer of the Company by reason of such title.
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BYLAWS OF SOUTHWESTERN LIFE INSURANCE COMPANY
<PAGE>
QUORUM
Section 3. Except as otherwise expressly required by these bylaws or by
statute, a majority of the directors of the whole Board shall be present at any
meeting of the Board in order to constitute a quorum for the transaction of
business at such meeting, and the vote of a majority of the directors present at
any such meeting at which a quorum is present shall be necessary for the passage
of any resolution or for an act to be the act of the Board. In the absence of a
quorum, a majority of the directors present may adjourn such meeting form time
to time until a quorum shall be present. Notice of any adjourned meeting need
not be given.
COMPENSATION OF BOARD OF DIRECTORS
Section 4. Each director (other than a director who is a salaried officer
of the Company or of any subsidiary or affiliate of the Company), in
consideration of serving as such, shall be entitled to receive from the Company
such amount per annum and such fees for attendance at meetings of the Board or
of any Committee thereof, or both, as the Board shall from time to time
determine. The Board may likewise provide that the Company shall reimburse each
director or member of a Committee for any expenses incurred on account of such
attendance at any such meeting. Nothing contained in this Section shall be
construed to preclude any director from serving the Company in any other
capacity and receiving compensation therefor.
REMOVAL
Section 5. At any meeting of stockholders at which a quorum of stockholders
is present called expressly for that purpose, or pursuant to a written consent
adopted pursuant to Article VI, Section 1 hereof, any director may be removed,
with or without cause, by vote of the holders of issued and outstanding shares
representing a majority of the votes entitled to be cast for the election of
such director.
PRESUMPTION OF ASSENT
Section 6. A director who is present at a meeting of the Board at which
action on any corporate matter is taken shall be presumed to have assented to
the action unless his dissent shall be entered in the minutes of the meeting or
unless he shall file his written dissent to such action with the person acting
as secretary of the meeting before the adjournment thereof or shall forward such
dissent by registered mail to the Secretary immediately after the adjournment of
the meeting. Such right to dissent shall not apply to a director who voted in
favor of such action.
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BYLAWS OF SOUTHWESTERN LIFE INSURANCE COMPANY
<PAGE>
APPROVAL OR RATIFICATION OF ACTS OR CONTRACTS BY STOCKHOLDERS
Section 7. The Board in its discretion may submit any act or contract for
approval or ratification at any annual meeting of the stockholders, or at any
special meeting of the stockholders called for the purpose of considering any
such act or contract, and any act or contract that shall be approved or be
ratified by the vote of the stockholders holding a majority of the issued and
outstanding shares of stock of the Company entitled to vote and present in
person or by proxy at such meeting (provided that a quorum is present), shall be
as valid and as binding upon the Company and upon all the stockholders as if it
shall have been approved or ratified by every stockholder of the Company.
ARTICLE III
COMMITTEES OF THE BOARD
COMMITTEES
Section 1. The Board shall elect from the directors by the affirmative vote
of a majority of the whole Board such committees which the Board may by
resolution prescribe. Any such committee shall be comprised of such persons and
shall possess such authority as shall be set forth in such resolution; except
that no such committee shall have the authority of the Board in reference to
amending the Articles of Incorporation, approving a plan of merger or
consolidation, recommending to the stockholders the sale, lease, or exchange of
all or substantially all of the property and assets of the Company otherwise
than in the usual and regular course of its business, recommending to the
stockholders a voluntary dissolution of the Company or a revocation thereof,
amending, altering, or repealing these bylaws or adopting new bylaws for the
Company, filling vacancies in the Board or any such committee, filling any
directorship to be filled by reason of an increase in the number of directors,
electing or removing officers of the Company or members of any such committee,
fixing the compensation of any member of such committee, or altering or
repealing any resolution of the Board that by its terms provides that it shall
not be so amendable or repealable in such manner; and, unless such resolution or
the Articles of Incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend or to authorize the issuance of
shares of the Company.
PROCEDURE
Section 2. Except as provided otherwise in these bylaws, each committee may
elect its own chairman and secretary, who shall keep minutes of its proceedings;
shall fix its own rules of procedure and shall meet where and as provided by
such rules. Unless otherwise stated in these bylaws, a majority of the members
of a committee shall constitute a quorum for the transaction of its business.
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BYLAWS OF SOUTHWESTERN LIFE INSURANCE COMPANY
<PAGE>
In the absence or disqualification of a member of any committee, the
members of such committee present at any meeting, whether or not they constitute
a quorum, may unanimously appoint another member of the Board to act at the
meeting in the place of any such absent or disqualified member.
REPORTS TO THE BOARD
Section 3. All completed actions by any committee established by the Board
shall be reported to the Board at the next succeeding Board meeting and shall be
subject to revision or alteration by the Board; provided, that no acts or rights
of third parties shall be affected by any such revision or alteration.
ARTICLE IV
OFFICERS
GENERAL PROVISIONS
Section 1. The corporate officers of the Company shall consist of the
following: a President, who shall be chosen from the Board; one or more Vice
Presidents, a Treasurer, a Secretary and such other officers as the Board may
from time to time determine. The Board may authorize the classification of
certain Vice Presidents as Executive, Senior, Second or Assistant and may
authorize Assistant Treasurers, Assistant Secretaries and such other titles and
designations as in its discretion seems proper. Insofar as permitted by statute,
the same person may hold two or more offices.
The President, each Executive Vice President and Senior Vice President, the
Secretary and the Treasurer shall be elected, and their respective salaries
fixed by the Board. Each such officer shall hold office until a successor is
elected or appointed and qualified or until his or her earlier death,
resignation, removal or suspension. Any such officer may be removed, with or
without cause, at any time by the Board.
Subject to such direction, consent and approval as the Board may require,
all other officers of the Company shall be appointed, may be removed with or
without cause, and their salaries and duties fixed by the President.
Any officer or agent or member of a committee elected or appointed by the
Board may be removed, either with or without cause, by the Board whenever in its
judgment the best interests of the Company will be served thereby, but such
removal shall be without prejudice to the contract rights, if any, of the person
so removed. Election or appointment of an officer or agent or member of a
committee shall not of itself create contract rights.
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BYLAWS OF SOUTHWESTERN LIFE INSURANCE COMPANY
<PAGE>
Any vacancy occurring in any office of the Company may be filled by the
Board.
POWERS AND DUTIES OF THE PRESIDENT
Section 2. The President shall have general charge and management of the
affairs, property and business of the Company, subject to the Board, the
Investment Committee and the provisions of these bylaws. The President shall be
the chief executive officer, and, in the absence of the Chairman, shall preside
at meetings of the stockholders and the Board. In the absence of the President,
the Board shall appoint another of their number to preside.
The President shall perform all duties assigned that office by these bylaws
and such other duties as may from time to time be assigned by the Board.
POWERS AND DUTIES OF OTHER OFFICERS
EXECUTIVE VICE PRESIDENT
Section 3. Each Executive Vice President shall perform such duties as may
from time to time be assigned by the Board or the President.
SENIOR VICE PRESIDENT
Section 4. Each Senior Vice President shall perform such duties as may from
time to time be assigned by the Board, the President or an Executive Vice
President.
VICE PRESIDENTS
Section 5. Each Vice President shall perform such duties as may from time
to time be assigned by the Board, the President, Executive Vice President or a
Senior Vice President.
TREASURER
Section 6. The Treasurer and the Assistant Treasurers shall have care and
custody of all funds of the Company and disburse and administer the same under
the direction of the Board or the President and shall perform such other duties
as the Board or the President shall assign.
SECRETARY
Section 7. The Secretary or the Assistant Secretary shall record the
proceedings of all the meetings of the stockholders, the Board and the
Investment Committee in books kept for that purpose. The Secretary shall be the
custodian of the corporate seal, the Secretary or an Assistant
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BYLAWS OF SOUTHWESTERN LIFE INSURANCE COMPANY
<PAGE>
Secretary shall affix the same to and countersign papers requiring such
acts; and the Secretary and Assistant Secretaries shall perform other duties as
may be required by the Board or the President
ARTICLE V
CAPITAL STOCK
CERTIFICATES OF STOCK
Section 1. Certificates of stock certifying the number of shares owned
shall be issued to each stockholder in such form not inconsistent with the
Articles of Incorporation as shall be approved by the Board. Such certificates
of stock shall be numbered and registered in the order in which they are issued
and shall be signed by the President or any Executive vice President, Senior
Vice President or Vice President, and by the Secretary or an Assistant
Secretary. Any and all the signatures on the certificates may be a facsimile.
TRANSFER OF STOCK
Section 2. Transfers of stock of the Company shall be made only on the
books of the Company by the registered holder thereof or by an attorney of such
registered holder thereunto authorized by power of attorney duly executed, and
on surrender of the certificate or certificates for such stock properly endorsed
or accompanied by a proper instrument of transfer. The Board may make such
additional rules and regulations as it may deem expedient concerning the issue,
registration and transfer of certificates for stock of the Company and may
appoint one or more corporate transfer agents and registrars of the stock of the
Company, which may be a subsidiary or affiliate of the company, and require all
certificates to bear the signatures thereof. The Company shall be entitled to
treat the holder of record of any stock as the owner thereof in fact.
LOST, STOLEN OR DESTROYED CERTIFICATES
Section 3. No certificate for shares of the capital stock of the Company
shall be issued, in place of any certificate alleged to have been lost, stolen
or destroyed, except by order of the Board and on delivery to the Company of a
bond of indemnity in an amount satisfactory to the Board executed by the person
to whom the stock should be issued and also by an approved surety company,
against any claim upon or in respect to such lost, stolen or destroyed
certificate. Proper and legal evidence of such loss, theft or destruction shall
be produced to the Board, if required. The Board, in its discretion, may refuse
to issue such new certificate, save upon the order of some court having
jurisdiction in such matters.
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BYLAWS OF SOUTHWESTERN LIFE INSURANCE COMPANY
<PAGE>
FIXING OF RECORD DATE
Section 4. In order that the company may determine the stockholders
entitled to notice of or to vote at an meeting of stockholders or any
adjournment thereof, or for the purpose of any other lawful action, the Board
may fix, in advance, a record date, which shall not be more than 50 nor less
than 10 days before the date of such meeting, or more than 50 days prior to any
other action. A determination of stockholders entitled to notice of or to vote
at a meeting of the stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board may fix a new record date for the adjourned
meeting.
ARTICLE VI
MISCELLANEOUS
WAIVER OF NOTICE
Section 1. Notice of any meeting required by law or by these bylaws may be
waived in writing, signed by the person or persons entitled to such notice,
either before or after the time of such meeting.
AMENDMENTS
Section 2. The Board from time to time shall have the power to make, alter,
amend or repeal any and all of these bylaws, but any bylaws so made, altered,
amended or repealed by the Board may be amended, altered or repealed by the
stockholders.
DIVIDENDS
Section 3. The Board may, from time to time and in accordance with the law,
declare and cause to be paid dividends of cash, property or shares of stock or
securities of, or owned by the Company as the Board may deem proper.
FISCAL YEAR
Section 4. The fiscal year of the Company shall begin with January first
and end with December thirty-first.
9
BYLAWS OF SOUTHWESTERN LIFE INSURANCE COMPANY
<PAGE>
SEAL
Section 5. The seal of the Company shall bear the corporate name of the
Company and the place of its home office.
ACTION WITHOUT A MEETING OR
BY TELEPHONE CONFERENCE MEETING
Section 6. Any action permitted or required by the law, the Articles of
Incorporation or these bylaws, to be taken at a meeting of the stockholders, the
Board or any committee designated by the Board may be taken without a meeting if
a consent in writing, setting forth the action to be taken is signed by all the
stockholders or members of the board or committee, as the case may be. Such
consent shall have the same force and effect as a unanimous vote at a meeting
and may be stated as such in any document or instrument filed with the Secretary
of State, and the execution of such consent shall constitute attendance or
presence in person at a meeting of stockholders, the Board or any such
committee, as the case may be. Subject to the requirements by law, the Articles
of Incorporation or these bylaws for notice of meetings, unless otherwise
restricted by the Articles of Incorporation, stockholders, members of the Board,
or members of any committee designated by the Board may participate in and hold
a meeting of such stockholders, Board or any committee of directors, as the case
may be, by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in such meeting shall constitute attendance and presence in
person at such meeting, except where a person participates in the meeting for
the express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened.
ARTICLE VII
INDEMNIFICATION
Section 1. (a) To the extent not prohibited by applicable law, the Company
shall indemnify and hold harmless any person who was or is a party, or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Company) by reason of the fact
that he is or was a director, officer, employee or agent of the Company, or who
is or was serving at the request of the Company as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise or entity, from and against any and all liability and expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding, if he acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the Company and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or
10
BYLAWS OF SOUTHWESTERN LIFE INSURANCE COMPANY
<PAGE>
proceeding by judgment, order settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not of itself create a presumption that the
person did not act in good faith and in a manner which he reasonably believed to
be in or not opposed to the best interests of the Company, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that his
conduct was unlawful.
(b) To the extent not prohibited by applicable law, the Company shall
indemnify and hold harmless any person who was or is a party, or is threatened
to be made a party to any threatened, pending or completed action or suit by or
in the right of the Company to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee or agent of the Company, or
is or was serving at the request of the Company as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise or entity, from and against any expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit, if he acted in good faith an in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Company, and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
Company, unless, and only to the extent that the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability, but in view of all the circumstances of the case, such person is
fairly and reasonable entitled to indemnity for such expenses as the court shall
deem proper.
(c) To the extent that a director, officer, employee or agent of the
Company or a person who is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise or entity, has been successful, on the merits
or otherwise, in the defense of any action, suit or proceeding referred to in
paragraphs (a) or (b), or in defense of any claim, issue or matter therein,
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
DETERMINATION OF RIGHT TO INDEMNIFICATION
Section 2. Any indemnification under paragraphs (a) or (b) of Section 1
(unless ordered by a court) shall be made by the Company only as authorized in
the specific case, upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in paragraphs (a) or (b). Such
determination shall be made (1) by the Board of directors by a majority vote of
a quorum consisting of directors who were not parties to such action, suit or
proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or (3) by the stockholders.
11
BYLAWS OF SOUTHWESTERN LIFE INSURANCE COMPANY
<PAGE>
ADVANCES
Section 3. To the extent not prohibited by applicable law, expenses
incurred in defending a civil or criminal action, suit or proceeding may be paid
by the Company in advance of the final disposition of such action, suit or
proceeding, as authorized by the Board of directors in the specific case, upon
receipt of an undertaking by or on behalf of the director, officer, employee or
agent or person who is or was serving at the request of the Company as director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise or entity, to repay such amount, unless it shall
ultimately be determined that he is entitled to be indemnified by the Company as
authorized in this Article of these bylaws.
EXCLUSIVITY
Section 4. The indemnification provided by this Article shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any agreement, resolution, vote of stockholders or disinterested
directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee or agent, or person
who was serving at the request of the Company as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise or entity, and shall inure to the benefit of the heirs, executors and
administrators of such a person.
INSURANCE
Section 5. The Company may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Company, or
who is or was serving at the request of the Company as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise or entity, against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the Company would have the power to indemnify him against such
liability under the provisions of this Article of these by-Laws or otherwise.
THESE BYLAWS WERE DULY ADOPTED BY THE BOARD OF DIRECTORS OF THE COMPANY ON
MARCH 12, 1996.
/s/Daniel B. Gail
-----------------------------------
Daniel B. Gail, Corporate Secretary
12
BYLAWS OF SOUTHWESTERN LIFE INSURANCE COMPANY
<PAGE>
EXHIBIT "8b"
FORM OF
PARTICIPATION AGREEMENT
PARTICIPATION AGREEMENT (the "Agreement") made by and between SCUDDER VARIABLE
LIFE INVESTMENT FUND (the "Fund"), a Massachusetts business trust created under
a Declaration of Trust dated March 15, 1985, as amended, with a principal place
of business in Boston, Massachusetts and SOUTHWESTERN LIFE INSURANCE COMPANY, a
Texas corporation (the "Company"), with a principal place of business in Dallas,
Texas on behalf of [SEPARATE ACCOUNT NAME], a separate account of the Company,
and any other separate account of the Company as designated by the Company from
time to time, upon written notice to the Fund in accordance with Section 9
herein (each, an "Account").
WHEREAS, the Fund acts as the investment vehicle for the separate accounts
established for variable life insurance policies and variable annuity contracts
(collectively referred to herein as "Variable Insurance Products") to be offered
by insurance companies which have entered into participation agreements
substantially identical to this Agreement ("Participating Insurance Companies")
and their affiliated insurance companies; and
WHEREAS, the beneficial interest in the Fund is divided into several series of
shares of beneficial interest without par value ("Shares"), and additional
series of Shares may be established, each designated a "Portfolio" and
representing the interest in a particular managed portfolio of securities; and
WHEREAS, each Portfolio of the Fund, except the Money Market Portfolio, is
divided into two classes of Shares, and additional classes of Shares may be
established; and
WHEREAS, the Parties desire to evidence their agreement as to certain other
matters,
NOW THEREFORE, in consideration of the foregoing and the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Duty of Fund to Sell.
The Fund shall make its Shares available for purchase at the applicable net
asset value per Share by Participating Insurance Companies and their affiliates
and separate accounts on those days on which the Fund calculates its net asset
value pursuant to rules of the Securities and Exchange
<PAGE>
Commission; provided, however, that the Trustees of the Fund may refuse to sell
Shares of any Portfolio to any person, or suspend or terminate the offering of
Shares of any Portfolio, if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Trustees,
necessary in the best interest of the shareholders of any Portfolio.
2. Fund Materials.
The Fund, at its expense, shall provide the Company or its designee with
camera-ready copy or computer diskette versions of all prospectuses, statements
of additional information, annual and semi-annual reports and proxy materials
(collectively, "Fund Materials") to be printed and distributed by the Company or
its broker/dealer to the Company's existing or prospective contract owners, as
appropriate. The Company agrees to bear the cost of printing and distributing
such Fund Materials.
3. Requirement to Execute Participation Agreement; Requests.
Each Participating Insurance Company shall, prior to purchasing Shares in the
Fund, execute and deliver a participation agreement in a form substantially
identical to this Agreement.
The Fund shall make available, upon written request from the Participating
Insurance Company given in accordance with Paragraph 9, to each Participating
Insurance Company which has executed an Agreement and which Agreement has not
been terminated pursuant to Paragraph 7 (i) a list of all other Participating
Insurance Companies, and (ii) a copy of the Agreement as executed by any other
Participating Insurance Company.
The Fund shall also make available upon request to each Participating Insurance
Company which has executed an Agreement and which Agreement has not been
terminated pursuant to Paragraph 7, the net asset value of any Portfolio of the
Fund as of any date upon which the Fund calculates the net asset value of its
Portfolios for the purpose of purchase and redemption of Shares.
4. Indemnification.
(a) The Company agrees to indemnify and hold harmless the Fund and each of its
Trustees and officers and each person, if any, who controls the Fund within the
meaning of Section 15 of the Securities Act of 1933 (the "Act") against any and
all losses, claims, damages, liabilities or litigation (including legal and
other expenses), arising out of the acquisition of any Shares by any person, to
which the Fund or such Trustees, officers or controlling person may become
subject under the Act,
<PAGE>
under any other statute, at common law or otherwise, which (i) may be based upon
any wrongful act by the Company, any of its employees or representatives, any
affiliate of or any person acting on behalf of the Company or a principal
underwriter of its insurance products, or (ii) may be based upon any untrue
statement or alleged untrue statement of a material fact contained in a
registration statement or prospectus covering Shares or any amendment thereof or
supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading if such a statement or omission was made in reliance upon
information furnished to the Fund by the Company, or (iii) may be based on any
untrue statement or alleged untrue statement of a material fact contained in a
registration statement or prospectus covering insurance products sold by the
Company or any insurance company which is an affiliate thereof, or any
amendments or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statement or statements therein not misleading, unless such statement or
omission was made in reliance upon information furnished to the Company or such
affiliate by or on behalf of the Fund; provided, however, that in no case (i) is
the Company's indemnity in favor of a Trustee or officer or any other person
deemed to protect such Trustee or officer or other person against any liability
to which any such person would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of his duties or
by reason of his reckless disregard of obligations and duties under this
Agreement or (ii) is the Company to be liable under its indemnity agreement
contained in this Paragraph 4 with respect to any claim made against the Fund or
any person indemnified unless the Fund or such person, as the case may be, shall
have notified the Company in writing pursuant to Paragraph 9 within a reasonable
time after the summons or other first legal process giving information of the
nature of the claims shall have been served upon the Fund or upon such person
(or after the Fund or such person shall have received notice of such service on
any designated agent), but failure to notify the Company of any such claim shall
not relieve the Company from any liability which it has to the Fund or any
person against whom such action is brought otherwise than on account of its
indemnity agreement contained in this Paragraph 4. The Company shall be entitled
to participate, at its own expense, in the defense, or, if it so elects, to
assume the
<PAGE>
defense of any suit brought to enforce any such liability, but, if it elects to
assume the defense, such defense shall be conducted by counsel chosen by it and
satisfactory to the Fund, to its officers and Trustees, or to any controlling
person or persons, defendant or defendants in the suit. In the event that the
Company elects to assume the defense of any such suit and retain such counsel,
the Fund, such officers and Trustees or controlling person or persons, defendant
or defendants in the suit, shall bear the fees and expenses of any additional
counsel retained by them, but, in case the Company does not elect to assume the
defense of any such suit, the Company will reimburse the Fund, such officers and
Trustees or controlling person or persons, defendant or defendants in such suit,
for the reasonable fees and expenses of any counsel retained by them. The
Company agrees promptly to notify the Fund pursuant to Paragraph 9 of the
commencement of any litigation or proceedings against it in connection with the
issue and sale of any Shares.
(b) The Fund agrees to indemnify and hold harmless the Company and each of its
directors and officers and each person, if any, who controls the Company within
the meaning of Section 15 of the Act against any and all losses, claims,
damages, liabilities or litigation (including legal and other expenses) to which
it or such directors, officers or controlling person may become subject under
the Act, under any other statute, at common law or otherwise, arising out of the
acquisition of any Shares by any person which (i) may be based upon any wrongful
act by the Fund, any of its employees or representatives or a principal
underwriter of the Fund, or (ii) may be based upon any untrue statement or
alleged untrue statement of a material fact contained in a registration
statement or prospectus covering Shares or any amendment thereof or supplement
thereto or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading unless such statement or omission was made in reliance upon
information furnished to the Fund by the Company or (iii) may be based on any
untrue statement or alleged untrue statement of a material fact contained in a
registration statement or prospectus covering insurance products sold by the
Company, or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement or statements therein not misleading, if such
statement or omission was made in reliance upon information furnished to the
Company by or on behalf of the Fund; provided, however, that in
<PAGE>
no case (i) is the Fund's indemnity in favor of a director or officer or any
other person deemed to protect such director or officer or other person against
any liability to which any such person would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence in the performance of his
duties or by reason of his reckless disregard of obligations and duties under
this Agreement or (ii) is the Fund to be liable under its indemnity agreement
contained in this Paragraph 4 with respect to any claims made against the
Company or any such director, officer or controlling person unless it or such
director, officer or controlling person, as the case may be, shall have notified
the Fund in writing pursuant to Paragraph 9 within a reasonable time after the
summons or other first legal process giving information of the nature of the
claim shall have been served upon it or upon such director, officer or
controlling person (or after the Company or such director, officer or
controlling person shall have received notice of such service on any designated
agent), but failure to notify the Fund of any claim shall not relieve it from
any liability which it may have to the person against whom such action is
brought otherwise than on account of its indemnity agreement contained in this
Paragraph. The Fund will be entitled to participate at its own expense in the
defense, or, if it so elects, to assume the defense of any suit brought to
enforce any such liability, but if the Fund elects to assume the defense, such
defense shall be conducted by counsel chosen by it and satisfactory to the
Company, its directors, officers or controlling person or persons, defendant or
defendants, in the suit. In the event the Fund elects to assume the defense of
any such suit and retain such counsel, the Company, its directors, officers or
controlling person or persons, defendant or defendants in the suit, shall bear
the fees and expenses of any additional counsel retained by them, but, in case
the Fund does not elect to assume the defense of any such suit, it will
reimburse the Company or such directors, officers or controlling person or
persons, defendant or defendants in the suit, for the reasonable fees and
expenses of any counsel retained by them. The Fund agrees promptly to notify the
Company pursuant to Paragraph 9 of the commencement of any litigation or
proceedings against it or any of its officers or Trustees in connection with the
issuance or sale of any Shares.
The provisions of this Section 4 shall survive the termination of the Agreement.
5. Procedure for Resolving Irreconcilable Conflicts.
<PAGE>
(a) The Trustees of the Fund will monitor the operations of the Fund for the
existence of any material irreconcilable conflict among the interests of all the
contract holders and policy owners of Variable Insurance Products (the
"Participants") of all separate accounts investing in the Fund. An
irreconcilable material conflict may arise, among other things, from: (a) an
action by any state insurance regulatory authority; (b) a change in applicable
insurance laws or regulations; (c) a tax ruling or provision of the Internal
Revenue Code or the regulations thereunder; (d) any other development relating
to the tax treatment of insurers, contract holders or policy owners or
beneficiaries of Variable Insurance Products; (e) the manner in which the
investments of any Portfolio are being managed; (f) a difference in voting
instructions given by variable annuity contract holders, on the one hand, and
variable life insurance policy owners, on the other hand, or by the contract
holders or policy owners of different participating insurance companies; or (g)
a decision by an insurer to override the voting instructions of Participants.
(b) The Company will be responsible for reporting any potential or existing
conflicts to the Trustees of the Fund. The Company will be responsible for
assisting the Trustees in carrying out their responsibilities under this
Paragraph 5(b) and Paragraph 5(a), by providing the Trustees with all
information reasonably necessary for the Trustees to consider the issues raised.
The Fund will also request its investment adviser to report to the Trustees any
such conflict which comes to the attention of the adviser.
(c) If it is determined by a majority of the Trustees of the Fund, or a majority
of its disinterested Trustees, that a material irreconcilable conflict exists
involving the Company, the Company shall, at its expense, and to the extent
reasonably practicable (as determined by a majority of the disinterested
Trustees), take whatever steps are necessary to eliminate the irreconcilable
material conflict, including withdrawing the assets allocable to some or all of
the separate accounts from the Fund or any Portfolio or class thereof and
reinvesting such assets in a different investment medium, including another
Portfolio of the Fund or class thereof, offering to the affected Participants
the option of making such a change or establishing a new funding medium
including a registered investment company.
<PAGE>
For purposes of this Paragraph 5(c), the Trustees, or the disinterested
Trustees, shall determine whether or not any proposed action adequately remedies
any irreconcilable material conflict. In the event of a determination of the
existence of an irreconcilable material conflict, the Trustees shall cause the
Fund to take such action, such as the establishment of one or more additional
Portfolios or classes, as they in their sole discretion determine to be in the
interest of all shareholders and Participants in view of all applicable factors,
such as cost, feasibility, tax, regulatory and other considerations. In no event
will the Fund be required by this Paragraph 5(c) to establish a new funding
medium for any variable contract or policy.
The Company shall not be required by this Paragraph 5(c) to establish a new
funding medium for any variable contract or policy if an offer to do so has been
declined by a vote of a majority of the Participants materially adversely
affected by the material irreconcilable conflict. The Company will recommend to
its Participants that they decline an offer to establish a new funding medium
only if the Company believes it is in the best interest of the Participants.
(d) The Trustees' determination of the existence of an irreconcilable material
conflict and its implications promptly shall be communicated to all
Participating Insurance Companies by written notice thereof delivered or mailed,
first class postage prepaid.
6. Voting Privileges.
The Company shall be responsible for assuring that its separate account or
accounts participating in the Fund shall use a calculation method of voting
procedures substantially the same as the following: those Participants permitted
to give instructions and the number of Shares for which instructions may be
given will be determined as of the record date for the Fund shareholders'
meeting, which shall not be more than 60 days before the date of the meeting.
Whether or not voting instructions are actually given by a particular
Participant, all Fund shares held in any separate account or sub-account thereof
and attributable to policies will be voted for, against, or withheld from voting
on any proposition in the same proportion as (i) the aggregate record date cash
value held in such sub-account for policies giving instructions, respectively,
to vote for, against, or withhold votes on such proposition, bears to (ii) the
aggregate record date cash value held in the sub-account for all policies for
which voting instructions are received. Participants continued in effect under
lapse
<PAGE>
options will not be permitted to give voting instructions. Shares held in any
other insurance company general or separate account or sub-account thereof will
be voted in the proportion specified in the second preceding sentence for shares
attributable to policies.
7. Duration and Termination.
This Agreement shall continue in effect for five (5) years from the date of its
execution. This Agreement may be terminated at any time, at the option of either
of the Company or the Fund, when neither the Company, any insurance company nor
the separate account or accounts of such insurance company which is an affiliate
thereof which is not a Participating Insurance Company own any Shares of the
Fund or may be terminated by either party to the Agreement upon a determination
by a majority of the Trustees of the Fund, or a majority of its disinterested
Trustees, following certification thereof by a Participating Insurance Company
given in accordance with Paragraph 9 that an irreconcilable conflict exists
among the interests of (i) all contract holders and policy holders of Variable
Insurance Products of all separate accounts or (ii) the interests of the
Participating Insurance Companies investing in the Fund. If this Agreement is so
terminated, the Fund may, at any time thereafter, automatically redeem the
Shares of any Portfolio held by a Participating Shareholder.
8. Compliance.
The Fund will comply with the provisions of Section 4240(a) of the New York
Insurance Law.
Each Portfolio of the Fund will use its best efforts to comply with the
provisions of Section 817(h) of the Internal Revenue Code of 1986, as amended
(the "Code"), relating to diversification requirements for variable annuity,
endowment and life insurance contracts. Specifically, each Portfolio will comply
with either (i) the requirement of Section 817(h)(1) of the Code that its assets
be adequately diversified, or (ii) the "Safe Harbor for Diversification"
specified in Section 817(h)(2) of the Code, or (iii) in the case of variable
life insurance contracts only, the diversification requirement of Section
817(h)(1) of the Code by having all or part of its assets invested in U.S.
Treasury securities which qualify for the "Special Rule for Investments in
United States Obligations" specified in Section 817(h)(3) of the Code. The Fund
will notify the Company immediately upon
<PAGE>
having a reasonable basis for believing that a Portfolio has ceased to comply
with the requirements of Section 817(h) of the Code or that the Portfolio might
not so comply in the future.
The provisions of Paragraphs 5 and 6 of this Agreement shall be interpreted in a
manner consistent with any Rule or order of the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended, applicable to
the parties hereto.
No Shares of any Portfolio of the Fund may be sold to the general public.
9. Notices.
Any notice shall be sufficiently given when sent by registered or certified mail
to the other party at the address of such party set forth below or at such other
address as such party may from time to time specify in writing to the other
party.
If to the Fund:
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
(617) 295-2275
Attn: David B. Watts
If to the Company:
Southwestern Life Insurance Company
500 North Akard
Dallas, Texas 75221
(214) 954-7220
Attn: Al Kennon
10. Massachusetts Law to Apply.
This Agreement shall be construed and the provisions hereof interpreted under
and in accordance with the laws of The Commonwealth of Massachusetts.
11. Miscellaneous.
The name "Scudder Variable Life Investment Fund" is the designation of the
Trustees for the time being under a Declaration of Trust dated March 15, 1985,
as amended, and all persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund as
neither the Trustees, officers, agents or shareholders assume any personal
liability for
<PAGE>
obligations entered into on behalf of the Fund. No Portfolio shall be liable for
any obligations properly attributable to any other Portfolio.
The captions in this Agreement are included for convenience of reference only
and in no way define or delineate any of the provisions hereof or otherwise
affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which taken together shall
constitute one and the same instrument.
12. Entire Agreement.
This Agreement incorporates the entire understanding and agreement among the
parties hereto, and supersedes any and all prior understandings and agreements
between the parties hereto with respect to the subject matter hereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed hereto as of the ___ day of ________, 1996.
SEAL SCUDDER VARIABLE LIFE
INVESTMENT FUND
By: ____________________
David B. Watts
President
SEAL SOUTHWESTERN LIFE INSURANCE
COMPANY
By: ____________________
Its:____________________
<PAGE>
EXHIBIT "8c"
FORM OF
INDEMNIFICATION AGREEMENT
INDEMNIFICATION AGREEMENT (the "Agreement") made by and between SCUDDER STEVENS
& CLARK, INC., a Delaware corporation ("SS&C"), with a principal place of
business in Boston, Massachusetts and SOUTHWESTERN LIFE INSURANCE COMPANY, a
Texas corporation (the "Company"), with a principal place of business in Dallas,
Texas on behalf of the [SEPARATE ACCOUNT NAME] , a separate account of the
Company, and any other separate account of the Company as designated by the
Company from time to time, upon written notice to the Fund in accordance with
Section 8 herein (the "Account").
WHEREAS, SS&C has caused to be organized Scudder Variable Life Investment Fund
(the "Fund"), a Massachusetts business trust created under a Declaration of
Trust dated March 15, 1985, as amended, the beneficial interest in which is
divided into several series, each designated a "Portfolio" and representing the
interest in a particular managed portfolio of securities, each of which series
(except Money Market Portfolio) is divided into two classes of shares of
beneficial interest; and
WHEREAS, the purpose of the Fund is to act as the investment vehicle for the
separate accounts established for variable life insurance policies and variable
annuity contracts to be offered by insurance companies which have entered into
indemnification agreements substantially identical to this Agreement; and
WHEREAS, the parties desire to express their agreement as to certain other
matters;
NOW THEREFORE, in consideration of the foregoing and the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Additional Definitions.
For purposes of this Agreement, the following definitions shall apply:
(a) "Shares" means shares of beneficial interest, without par value, of any
class of any Portfolio, now or hereafter created, of the Fund.
<PAGE>
2. Access to Other Products.
SS&C shall permit a Participating Shareholder to participate in any registered
investment company other than the Fund which is intended as the funding vehicle
for insurance products and for which SS&C or an affiliate of SS&C acts as
investment adviser, on the same basis as other insurance companies are permitted
to participate in such a registered investment company. This provision shall not
require SS&C to make available to the Company shares of any investment company
which is organized solely as the funding vehicle for insurance products offered
by a single insurance company or a group of affiliated insurance companies.
3. Right to Review and Approve Sales Materials.
The Company shall furnish, or shall cause to be furnished, to SS&C or its
designee, at least twenty days prior to its intended use, each piece of
promotional material in which SS&C or the Fund is named. No such material shall
be used unless SS&C or its designee shall have approved such use in writing, or
twenty days shall have elapsed without approval, rejection or objection since
receipt by SS&C or its designee of such material.
SS&C shall furnish, or shall cause to be furnished, to the Company or its
designee, at least twenty days prior to its intended use, each piece of
promotional material in which the Company or its separate account(s) is named.
No such material shall be used unless the Company or its designee shall have
approved such use in writing, or twenty days shall have elapsed without
approval, rejection or objection since receipt by the Company or its designee of
such material.
4. Sales Organization Meetings.
Representatives of SS&C or its designee shall meet with the sales organizations
of the Company at such reasonable times and places as may be agreed upon by the
Company and SS&C or its designee for the purpose of educating sales personnel
about the Fund.
5. Duration.
This Agreement shall continue in effect for five (5) years from the date of its
execution, except that the obligation of each party hereto to indemnify the
other party hereto shall continue with respect to all losses, claims, damages,
liabilities or litigation based upon the acquisition of Shares purchased
<PAGE>
as the funding vehicle for any variable life insurance policy or variable
annuity contract issued by the Company or any affiliated insurance company.
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless SS&C and each of its
directors and officers and each person, if any, who controls SS&C within the
meaning of Section 15 of the Securities Act of 1933 (the "Act") or any person,
controlled by or under common control with SS&C ("affiliate") against any and
all losses, claims, damages, liabilities or litigation (including legal and
other expenses) to which SS&C or such directors, officers or controlling person
may become subject under the Act, under any other statute, at common law or
otherwise, arising out of the acquisition of any Shares by any person which (i)
may be based upon any wrongful act by the Company, any of its employees or
representatives, any affiliate of or any person acting on behalf of the Company
or a principal underwriter of its insurance products, or (ii) may be based upon
any untrue statement or alleged untrue statement of a material fact contained in
a registration statement .or prospectus covering Shares or any amendment thereof
or supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading if such a statement or omission was made in reliance upon
information furnished to SS&C or the Fund by the Company, provided, however,
that in no case (i) is the Company's indemnity in favor of a director or officer
or any other person deemed to protect such director or officer or other person
against any liability to which any such person would otherwise be subject by
reason of willful misfeasance, bad faith, or gross negligence in the performance
of his duties or by reason of his reckless disregard of obligations and duties
under this Agreement or (ii) is the Company to be liable under its indemnity
agreement contained in this Paragraph 6 with respect to any claim made against
SS&C or any person indemnified unless SS&C or such person, as the case may be,
shall have notified the Company in writing pursuant to Paragraph 8 within a
reasonable time after the summons or other first legal process giving
information of the nature of the claims shall have been served upon SS&C or upon
such person (or after SS&C or such person shall have received notice of such
service on any designated agent), but failure to notify the Company of any such
claim shall not relieve the Company from any liability which it has to SS&C or
any person against whom
<PAGE>
such action is brought otherwise than on account of the indemnity agreement
contained in this Paragraph 6. The Company shall be entitled to participate, at
its own expense, in the defense, or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but, if it elects to assume the
defense, such defense shall be conducted by counsel chosen by it and
satisfactory to SS&C, to its officers and directors, or to any controlling
person or persons, defendant or defendants in the suit. In the event that the
Company elects to assume the defense of any such suit and retain such counsel,
SS&C, such officers and directors or controlling person or persons, defendant or
defendants in the suit, shall bear the fees and expenses of any additional
counsel retained by them, but, in case the Company does not elect to assume the
defense of any such suit, the Company will reimburse SS&C, such officers and
directors or controlling person or persons, defendant or defendants in such
suit, for the reasonable fees and expenses of any counsel retained by them. The
Company agrees promptly to notify SS&C pursuant to Paragraph 8 of the
commencement of any litigation or proceedings against it in connection with the
issue and sale of any Shares.
(b) SS&C agrees to indemnify and hold harmless the Company and each of its
directors and officers and each person, if any, who controls the Company within
the meaning of Section 15 of the Act against any and all losses, claims,
damages, liabilities or litigation (including legal and other expenses) to which
it or such directors, officers or controlling persons may become subject under
the Act, under any other statute, at common law or otherwise, arising out of the
acquisition of any Shares by any person which (i) may be based upon any wrongful
act by SS&C, any of its employees or representatives or a principal underwriter
of the Fund, or (ii) may be based upon any untrue statement or alleged untrue
statement of a material fact contained in a registration statement or prospectus
covering Shares or any amendment thereof or supplement thereto or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading if such
statement or omission was made in reliance upon information furnished to the
Fund or the Company by SS&C; provided, however, that in no case (i) is SS&C's
indemnity in favor of a director or officer or any other person deemed to
protect such director or officer or other person against any liability to which
any such person would otherwise be subject by reason of willful misfeasance, bad
faith, or gross negligence in the performance of his duties or by reason of his
<PAGE>
reckless disregard of obligations and duties under this Agreement or (ii) is
SS&C to be liable under its indemnity agreement contained in this Paragraph 6
with respect to any claims made against the Company or any such director,
officer or controlling person unless the Company or such director, officer or
controlling person, as the case may be, shall have notified SS&C in writing
pursuant to Paragraph 8 within a reasonable time after the summons or other
first legal process giving information of the nature of the claim shall have
been served upon it or upon such director, officer or controlling person (or
after the Company or such director, officer or controlling person shall have
received notice of such service on any designated agent), but failure to notify
SS&C of any claim shall not relieve it from any liability which it may have to
the person against whom such action is brought otherwise than on account of its
indemnity agreement contained in this Paragraph 6. SS&C will be entitled to
participate at its own expense in the defense, or, if it so elects, to assume
the defense of any suit brought to enforce any such liability, but if SS&C
elects to assume the defense, such defense shall be conducted by counsel chosen
by it and satisfactory to the Company, its directors, officers or controlling
person or persons, defendant or defendants, in the suit. In the event SS&C
elects to assume the defense of any such suit and retain such counsel, the
Company, its directors, officers or controlling person or persons, defendant or
defendants in the suit, shall bear the fees and expenses of any additional
counsel retained by them, but, in case SS&C does not elect to assume the defense
of any such suit, it will reimburse the Company or such directors, officers or
controlling person or persons, defendant or defendants in the suit, for the
reasonable fees and expenses of any counsel retained by them. SS&C agrees
promptly to notify the Company pursuant to Paragraph 8 of the commencement of
any litigation or proceedings against it or any of its officers or directors in
connection with the issuance or sale of any Shares.
(c) SS&C agrees to indemnify and hold harmless the Company and each of its
directors and officers against any and all losses, claims, damages, liabilities
or litigation arising from the imposition of additional federal income taxes on
the Company or any policyholder solely as a result of a Final Determination that
any Portfolio has failed (x) to comply with the diversification requirements of
section 81 7(h) of the Internal Revenue Code of 1986, as amended (the "Code"),
relating to the diversification requirements for variable annuity, endowment and
life insurance contracts, or (y) to
<PAGE>
qualify as a regulated investment company within the meaning of section 851 of
the Code; provided, however, that (i) SS&C shall have no liability under this
Paragraph 6(c) if such failure is caused by a third party who is not an employee
or agent of SS&C (e.g., the Fund's custodian or another service provider), and
(ii) in no case is SS&C's indemnity under this Paragraph 6(c) deemed to protect
any person against any liability to which that person would otherwise be subject
by reason of willful misfeasance, bad faith or gross negligence in the
performance of that person's duties or by reason of reckless disregard by that
person of obligations under this Agreement.
The Company agrees that if the Internal Revenue Service asserts in writing in
connection with any governmental audit or review of the Company or, to the
Company's knowledge, of any policyholder, that any Portfolio has failed to
comply with the diversification requirements of section 81 7(h) of the Code or
the Company otherwise becomes aware of any facts that could give rise to any
claim against SS&C as a result of such a failure or alleged failure, (i) the
Company shall promptly notify SS&C of such assertion or potential claim; (ii)
the Company shall consult with SS&C as to how to minimize any liability that may
arise as a result of such failure or alleged failure; (iii) the Company shall
use its best efforts to minimize any liability of SS&C for indemnification
resulting from such failure, including, without limitation, demonstrating,
pursuant to Treasury Regulations Section 1.817-5(a) (2), to the Commissioner of
the Internal Revenue Service that such failure was inadvertent; (iv) the Company
shall permit SS&C and its legal and accounting advisors to participate in any
conferences, settlement discussions or other administrative or judicial
proceedings or contests (including judicial appeals thereof) with the Internal
Revenue Service, any policyholder or any other claimant regarding any claims
that could give rise to indemnification by SS&C as a result of such a failure or
alleged failure; (v) any written materials to be submitted by the Company to the
Internal Revenue Service, any policyholder or any other claimant in connection
with any of the foregoing proceedings or contests (including, without
limitation, any such materials to be submitted to the Internal Revenue Service
pursuant to Treasury Regulations Section 1.817-5(a) (2)), (a) shall be provided
by the Company to SS&C (together with any supporting information or analysis) at
least 10 business days prior to the day on which such proposed materials are to
be submitted and (b) shall not be submitted by the Company to any such person
without the express written consent of SS&C,
<PAGE>
which shall not be unreasonably withheld; (vi) the Company shall provide SS&C
and its advisors with such cooperation as SS&C shall reasonably request
(including, without limitation, by permitting SS&C and its accounting and legal
advisors to review the relevant books and records of the Company) in order to
facilitate SS&C's review of any written submissions provided to it pursuant to
the preceding clause or its assessment of the validity or amount of any claim
against it arising from such a failure or alleged failure; (vii) the Company
shall not with respect to any claim of the IRS or any policyholder that would
give rise to a claim for indemnification against SS&C (a) compromise or settle
any claim, (b) accept any adjustment on audit, or (c) forego any allowable
judicial appeals, without the express written consent of SS&C, which shall not
be unreasonably withheld, provided that the Company shall not be required to
appeal any adverse judicial decision unless SS&C shall have provided an opinion
of independent counsel to the effect that a reasonable basis (consistent with
Formal Opinion 85-352 of the American Bar Association) exists for taking such
appeal; and (viii) SS&C shall have no liability as a result of such failure or
alleged failure if the Company fails to comply with any of the foregoing clauses
(i) through (vii). Should SS&C refuse to give its written consent to any
compromise or settlement of any claim or liability hereunder, the Company may,
in its discretion, authorize SS&C to act in the name of the Company in, and to
control the conduct of, such conferences, discussions, proceedings, contests or
appeals and all administrative or judicial appeals thereof, and in that event
SS&C shall bear the fees and expenses associated with the conduct of the
proceedings that it is so authorized to control.
For purposes of this Paragraph 6(c), "Final Determination" shall mean, with
respect to any claim, a settlement of such claim (including the acceptance of an
adjustment proposed by the Internal Revenue Service) or a decision of a court of
competent jurisdiction with respect to such claim that has become final after
either the (i) exhaustion of allowable appeals or (2) expiration of the time to
take any such appeal with respect to the claim.
7. Massachusetts Law to Apply.
This Agreement shall be construed and the provisions hereof interpreted under
and in accordance with the laws of The Commonwealth of Massachusetts.
<PAGE>
8. Notices.
Any notice shall be sufficiently given when sent by registered or certified mail
to the other party at the address of such party set forth below or at such other
address as such party may from time to time specify in writing to the other
party.
If to SS&C:
Scudder, Stevens & Clark, Inc.
Two International Place
Boston, Massachusetts 02110
(617) 295-2275
Attn: David B. Watts
If to the Company:
Southwestern Life Insurance Company
500 North Akard
Dallas, Texas 75221
(214) 954-7220
Attn: Al Kennon
9. Miscellaneous.
The captions in the Agreement are included for convenience of reference only and
in no way define or delineate any of the provisions hereof or otherwise affect
their construction or effect. This Agreement may be executed simultaneously in
two or more counterparts, each of which taken together shall constitute one and
the same instrument.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed hereto as of the ___ day of _________, 1996.
SEAL SCUDDER, STEVENS & CLARK, INC.
By: __________________________
David S. Lee
Authorized Officer
SEAL SOUTHWESTERN LIFE INSURANCE
COMPANY
By: __________________________
Name:_________________________
Title:________________________
<PAGE>
EXHIBIT "8d"
FORM OF LETTER AGREEMENT
________, 1996
Southwestern Life Insurance Company
500 North Akard
Dallas, Texas 75221
Reference is made to the Asset Transfer Agreement (the "Agreement") among
Variable Annuity Fund I of Southwestern Life, Scudder Variable Life Investment
Fund, on its own behalf and on behalf of its Capital Growth Portfolio (the
"Fund"), and you dated _________, 199__.
In connection with the terms and conditions of the Agreement, and as an
additional inducement for us to enter into the Agreement, we understand that:
(i) you have no present intent to market, offer or solicit the sale
of any shares of beneficial interest of the Fund, other than those shares
representing the shares of beneficial interest of the Fund issued pursuant
to the terms of the Agreement (the "Shares");
(ii) you will be responsible for insuring compliance with any Blue
Sky laws of any state or jurisdiction as may be necessary to offer the
Shares issued pursuant to the Agreement; and we will cooperate with you in
taking such actions as may be necessary to continue to qualify the Shares
for offering and sale in any state or jurisdiction so long as such
registration is required by applicable law in connection with the Shares
issued pursuant to the Agreement; and
(iii) you will not directly or indirectly engage in any activity
with respect to the Shares, and any shares of the Fund issued following
the completion of the transaction contemplated by the Agreement, which
would require you to be a registered broker or dealer within the meaning
of the Securities Exchange Act of 1934, as amended; and no person on your
behalf or on behalf of your affiliates, and no person acting as your
agent, will engage in any activity with respect to the Shares, and any
shares of the fund issued following the completion of the transaction
contemplated by the Agreement, which would require them to register as a
broker or dealer.
If the foregoing represents your understanding, please sign this letter
and return it to David B. Watts, Scudder Variable Life Investment Fund, Two
International Place, Boston, MA 02110.
SCUDDER INVESTOR SERVICES, INC.
By: ___________________________
Authorized Officer
<PAGE>
The foregoing represents our understanding.
SOUTHWESTERN LIFE INSURANCE
COMPANY
By: _______________________
Authorized Officer
<PAGE>
EXHIBIT "9"
July 30, 1996
Board of Directors
Southwestern Life Insurance Company
500 North Akard Street
Dallas, Texas 75201
Gentlemen:
You have requested my opinion, as General Counsel of Southwestern Life
Insurance Company ("Southwestern"), concerning the legality of the securities
of Variable Annuity Fund I of Southwestern Life (the "Separate Account")
registered by the Separate Account under the Securities Act of 1933 (the "1933
Act") and the Investment Company Act of 1940 (the "1940 Act ) on the
Registration Statement on Form N-4 and the post-effective amendments filed
thereto as follows: Amendment No. 26 on Form N-4 to the Registration Statement
under the 1940 Act, Amendment No. 46 to Registration Statement No. 2-28844
under the 1933 Act, Amendment No. 47 to Registration Statement No. 2-28842
under the 1933 Act and Amendment No. 48 to Registration Statement No. 2-28843
under the 1933 Act.
It is my opinion that the securities of the Separate Account registered
under the Amendment on Form N-4 Registration Statement are and will be legally
issued and do and will represent legal and binding obligations of Southwestern.
Southwestern is an indirect, wholly owned subsidiary of Southwestern
Financial Corporation ("SFC"). I am a Senior Vice President of SFC and the
Executive Vice President, General Counsel and Secretary of Southwestern. I am
employed by, and receive compensation from, Southwestern Financial Services
Corporation, a wholly owned subsidiary of SFC and an affiliate of Southwestern.
I hereby consent to the attachment of this opinion (or a copy of this
opinion) as an exhibit to the Amendment on Form N-4 Registration Statement and
to the reference to or summarization or quotation of this opinion in that
Registration Statement or in a prospectus which may form a part of that
Registration Statement.
Sincerely,
/s/Daniel B. Gail
Daniel B. Gail
Executive Vice President
General Counsel and Secretary
DBG/dt
<PAGE>
<TABLE>
<CAPTION>
Organizational For Southwestern Life Insurance Company and Affiliates
<S> <C> <C> <C>
Southwestern Financial
Knightsbridge Knightsbridge --------Services Corporation
Capital L.L.C.>---------Capital Fund I, L.P.>--- / Domicile: DE
Domicile: NY Domicile: DE | Southwestern / Ownership Q
Ownership: O | Financial Corporation<
|>------Domicile: DE \ Southwestern Life
PennCorp | Ownership: P \--------Acquisition Corporation
--Southwest, Inc.>-------- Domicile: DE
| Domicile: DE Ownership: Q
| Ownership: A |
| |
| Constitution Life
| Insurance Company
| Domicile: TX
| PennCorp Financial Ownership: T
|--Services, Inc. ______________/ \_______
| Domicile: DE | |
| Ownership: A Union Bankers Southwestern Life
| Insurance Company Insurance Company
| Domicile: TX Domicile: TX
| Ownership: R Ownership: R
| |
| PennCorp Financial, Inc. Marquette National
|--Domicile: DE Life Insurance Company
| Ownership: A Domicile: KY
| Ownership: S
|
PennCorp Financial |
Group, Inc. >--|
Domicile: DE |
| American Amicable Pioneer Security American-Amicable Life Pioneer American
|--Holdings Corporation----Life Insurance Company--Insurance Company of Texas---Insurance Company
| Domicile: DE Domicile: TX Domicile: TX Domicile: TX
| Ownership: A Ownership: E Ownership: F Ownership G
|
|
| Professional Peninsular Life PennCorp Occidental
| Pacific Life ---Insurance Corporation /--Insurance Company----Corporation
| and Accident ------| Domicile: FL | Domicile: NC Domicile: DE
|--Insurance Company | Ownership: B -----/ Ownership: D Ownership: H
| Domicile: TX | | |
| Ownership: A | Pennsylvania Life | Executive Fund Life Penn LaFranco
| ---Insurance Company--|-------Insurance Company Corporation
| Domicile: PA | Domicile: PA Domicile: British V.I.
| Ownership: C | Ownership: D Ownership: I
| | |
| | Penncorp Life LaFranco Penn Life
| -------Insurance Company Compania de Seguros
| Domicile: Canada de Vida, S.A.
| Ownership: D Domicile: Argentina
| Ownership: J
| ILC Capital
| Acquisition Salem Holdings Salem Life Occidental Life
---Corporation-------Corporation ----------Insurance Company-------Insurance Company
Domicile: DE Domicile: DE Domicile: NC of North Carolina
Ownership: A Ownership: K Ownership: L Domicile: NC
| Ownership: M
|
|
Integon Life Georgia International Life
Insurance Company-------Insurance Company
Domicile: NC Domicile: NC
Ownership: M Ownership: N
</TABLE>
<TABLE>
<CAPTION>
Ownership Codes:
<C> <S> <C> <S>
A. Wholly owned by PennCorp Financial K. Wholly owned by ILCCAC.
Group, Inc. L. ILCCAC owns 893,832 shares which constitutes
B. PLAIC 49,996.65 shares which constitutes 40% of the issued and outstanding stock of
99.99% of the issued and outstanding IFLIC. The remaining 60% is held by SHC.
Capital Stock of PIC. The remaining 3.5 M. Wholly owned by SLIC.
shares are held by non-related third parties. N. Wholly owned by ILIC.
C. Wholly owned by PLAIC. O. Limited Partnership whose General Partner
D. Wholly owned by PLIC. is Knightsbridge Capital, L.L.C.
E. Wholly owned by AAHC. P. Voting stock held by Knightsbridge
F. Wholly owned by PSLIC. (3,000,000 shares) and PennCorp Financial
G. Wholly owned by AALIC. group, Inc. (500,000 shares).
H. Wholly owned by PLICO. Q. Wholly owned by SWFC.
I. Wholly owned by PENNOCCI. R. Wholly owned by CLIC.
J. PLFC owns 2, 723 shares which constitutes S. Wholly owned by UBIC.
99% of the issued and outstanding Capital T. Wholly owned by SLAC.
Stock of LFPL.
</TABLE>
<PAGE>
VARIABLE ANNUITY FUND I OF SOUTHWESTERN LIFE
500 North Akard Street
Dallas, Texas 75201
July 30, 1996
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549
Re: Post-Effective Amendments Nos. 46, 47 and 48 Variable Annuity
Fund I of Southwestern Life File Nos. 2-28844, 2-28842 and
2-28843 (811-1636)
Ladies and Gentlemen:
On behalf of Variable Annuity Fund I of Southwestern Life, enclosed for
filing under the Securities Act of 1933 and the Investment Company Act of 1940
are the above referenced Post-Effective Amendments.
The Post-Effective Amendments make certain changes in response to comments
from staff of the Division of Investment Management, including the addition of
pro forma financial information. The changes have been discussed with the staff.
The Post-Effective Amendments are filed pursuant to paragraph (b) of Rule
485 under the Securities Act of 1933. We have discussed the filing of the
Post-Effective Amendments pursuant to paragraph (b) with the staff and based
upon those discussions I represent that they are eligible to become effective
pursuant thereto.
Sincerely,
/s/A. Craig Mason Jr.
----------------------
A. Craig Mason Jr.
cc: Mr. Ed McDonald, Mail Stop 10-6
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of this Registration Statement and has caused this
Registration Statement to be signed on its behalf in the City of Dallas, and the
State of Texas on this 30th day of July, 1996.
Variable Annuity Fund I of Southwestern Life
(Registrant)
By: Southwestern Life Insurance Company
(Depositor)
By: /s/Glenn H. Gettier, Jr.
------------------------
Glenn H. Gettier, Jr.
President and Chief Executive Officer
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
/s/Robert J. Bruce Director July 30, 1996
- - ------------------------
Robert J. Bruce
/s/Glenn H. Gettier, Jr. President and Chief Executive July 30, 1996
- - ------------------------ Officer (Principal Executive
Glenn H. Gettier, Jr. Officer), and Chairman of the Board
/s/Robert C. Greving Executive Vice President, July 30, 1996
- - ------------------------ Chief Actuary and Director
Robert C. Greving
/s/John T. Hull Executive Vice President, Chief July 30, 1996
- - ------------------------ Financial Officer and Treasurer
John T. Hull (Principal Accounting and Financial
Officer) and Director
/s/H. Don Rutherford Director July 30, 1996
- - ------------------------
H. Don Rutherford
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
To The Board of Managers
Variable Annuity Fund I of Southwestern Life:
We consent to the inclusion in Post-Effective Amendment No.'s 46, 47, 48
and to the registration statement of Variable Annuity Fund I of Southwestern
Life ("Fund") on Amendment to Form N-3 on Form N-4 (File Nos. 2-28844, 2-28842,
2-28843, 811-1636) of our report dated January 15, 1996, on our audits of the
financial statements and selected accumulated data and ratios of the Fund, and
our report dated March 20, 1996, on audits of the financial statements of
Southwestern Life Insurance Company (statutory basis). Our report on the
financial statements of Southwestern Life Insurance Company (statutory basis)
expressed an unqualified opinion on those statements prepared in conformity with
the accounting practices prescribed or permitted by the National Association of
Insurance Commissioners or the Texas Department of Insurance, but indicated the
financial statements did not present fairly the financial position, results of
operations, and cash flows in conformity with generally accepted accounting
principles. We also consent to the reference to our Firm under the Captions
"Condensed Financial Information" and "Accountants."
Coopers & Lybrand L.L.P.
Dallas, Texas
July 30, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 314,136
<INVESTMENTS-AT-VALUE> 4,815,922
<RECEIVABLES> 181,474
<ASSETS-OTHER> 44,160
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,355,692
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 22,466
<TOTAL-LIABILITIES> 22,466
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 5,333,226
<DIVIDEND-INCOME> 75,180
<INTEREST-INCOME> 90,429
<OTHER-INCOME> 0
<EXPENSES-NET> 102,049
<NET-INVESTMENT-INCOME> 63,560
<REALIZED-GAINS-CURRENT> 575,148
<APPREC-INCREASE-CURRENT> 662,929
<NET-CHANGE-FROM-OPS> 1,301,637
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 17,052
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 102,049
<AVERAGE-NET-ASSETS> 5,247,456
<PER-SHARE-NAV-BEGIN> 5.638
<PER-SHARE-NII> .086
<PER-SHARE-GAIN-APPREC> .899
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.229<F1>
<EXPENSE-RATIO> 1.94
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>The net asset value per share at end of period is $7.339334 on the qualified
accumulation fund, $6.679868 on the nonqualified accumulation period and
$7.2633314 on the annuity fund.
</FN>
</TABLE>
