Great American Reserve Insurance Company
Semiannual Report to Contract Owners
June 30, 1998
Great American Reserve Variable Annuity Account F
Conseco Series Trust
SEMIANNUAL REPORT TO CONTRACT OWNERS
TABLE OF CONTENTS
JUNE 30, 1998
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SEMIANNUAL REPORT TO CONTRACT OWNERS
TABLE OF CONTENTS
JUNE 30, 1998
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GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT F PAGE
Statement of Assets and Liabilities as of June 30, 1998.......................................................................... 1
Statement of Operations for the Period February 12, 1998 to June 30, 1998........................................................ 3
Statement of Changes in Net Assets for the Period February 12, 1998 to June 30, 1998............................................. 3
Notes to Financial Statements.................................................................................................... 4
CONSECO CAPITAL MANAGEMENT, INC.
Report from the President........................................................................................................ 6
Report from the Asset Allocation Portfolio Adviser............................................................................... 6
Report from the Common Stock Portfolio Adviser................................................................................... 7
Report from the Corporate Bond Portfolio Adviser................................................................................. 7
Report from the Government Securities Portfolio Adviser.......................................................................... 8
Report from the Money Market Portfolio Adviser................................................................................... 8
CONSECO SERIES TRUST
Statement of Assets and Liabilities as of June 30, 1998.......................................................................... 9
Statement of Operations for the Six Months Ended June 30, 1998................................................................... 9
Statements of Changes in Net Assets for the Six Months Ended June 30, 1998 and the Year Ended December 31, 1997..................10
Statements of Investments in Securities as of June 30, 1998:
Asset Allocation Portfolio....................................................................................................12
Common Stock Portfolio........................................................................................................15
Corporate Bond Portfolio......................................................................................................16
Government Securities Portfolio...............................................................................................18
Money Market Portfolio........................................................................................................19
Notes to Financial Statements....................................................................................................20
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GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT F
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998
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SHARES COST REPORTED VALUE
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Assets:
Investments in portfolio shares, at net asset value (Note 2):
The Alger American Fund:
Growth Portfolio................................................................ 12,377.7 $ 573,979 $ 565,164
Leveraged AllCap Portfolio...................................................... 6,502.9 173,645 180,651
MidCap Portfolio................................................................ 12,477.9 332,822 333,160
Small Capitalization Portfolio.................................................. 5,020.8 217,846 216,549
American Century Variable Portfolios, Inc.:
VP International Fund........................................................... 28,601.1 225,133 229,953
VP Value Fund................................................................... 58,951.2 410,354 400,868
VP Income and Growth............................................................ 109,769.1 673,924 692,643
Berger Institutional Products Trust:
100 Fund........................................................................ 6,962.0 89,228 85,714
Growth and Income Fund.......................................................... 19,203.3 282,470 288,625
Small Company Growth Fund....................................................... 34,113.9 449,138 464,290
BIAM International Fund......................................................... 5,889.4 66,308 66,963
Conseco Series Trust:
Asset Allocation Portfolio...................................................... 113,819.0 1,611,466 1,600,935
Common Stock Portfolio.......................................................... 88,931.0 1,922,115 1,902,600
Corporate Bond Portfolio........................................................ 42,468.6 430,775 429,452
Government Securities Portfolio................................................. 11,724.5 141,014 141,411
Money Market Portfolio.......................................................... 1,360,340.8 1,360,341 1,360,341
Dreyfus Stock Index Fund.......................................................... 95,921.0 2,819,688 2,879,548
Dreyfus Socially Responsible Growth Fund, Inc..................................... 10,101.9 290,704 298,612
Dreyfus Variable Investment Fund:
Disciplined Stock Portfolio..................................................... 1,819.9 38,105 39,001
International Value Portfolio................................................... 323.1 4,920 4,898
Federated Insurance Series:
High Income Bond Fund II........................................................ 82,851.8 915,593 916,341
International Equity Fund II.................................................... 9,809.3 154,794 156,360
Utility Fund II................................................................. 29,566.0 413,000 415,698
Invesco Variable Investment Funds, Inc.:
High Yield Portfolio............................................................ 6,729.2 88,671 88,758
Industrial Income Portfolio..................................................... 851.7 15,705 15,995
Janus Aspen Series:
Aggressive Growth Portfolio..................................................... 18,997.2 434,492 457,832
Growth Portfolio................................................................ 28,621.2 605,282 592,459
Worldwide Growth Portfolio...................................................... 59,847.5 1,720,856 1,717,623
Lazard Retirement Series, Inc.:
Equity Portfolio................................................................ 9,689.0 100,566 100,863
Small Cap Portfolio............................................................. 13,237.5 141,410 134,626
Lord Abbett Series Fund, Inc.:
Growth & Income Portfolio....................................................... 17,900.9 383,194 383,903
Neuberger & Berman Advisers Management Trust:
Limited Bond Portfolio.......................................................... 151,463.5 2,046,809 2,055,360
Partners Portfolio.............................................................. 58,632.1 1,147,841 1,128,668
Mitchell Hutchins Series Trust:
Growth & Income Portfolio....................................................... 2,541.7 39,425 39,727
Strong Variable Insurance Funds, Inc.:
Growth Fund II Fund............................................................. 10,037.6 140,899 145,645
Strong Opportunity Fund II........................................................ 15,009.2 335,512 326,300
Van Eck Worldwide Insurance Trust:
Worldwide Bond Fund............................................................. 5,706.1 63,925 64,251
Worldwide Emerging Markets Fund................................................. 8,899.7 91,534 74,312
Worldwide Hard Assets Fund...................................................... 2,677.3 31,427 30,923
WORLDWIDE REAL ESTATE FUND...................................................... 3,863.4 42,077 40,913
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Total assets............................................................................................... 21,067,935
Liabilities:
Amounts due to Great American Reserve Insurance Company.......................................................... 19,389
Net assets (Note 6)........................................................................................ $21,048,546
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The accompanying notes are an integral part of these financial statements.
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GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT F
STATEMENT OF ASSETS AND LIABILITIES - CONTINUED
JUNE 30, 1998
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UNITS UNIT VALUE REPORTED VALUE
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NET ASSETS ATTRIBUTABLE TO:
Contract owners' deferred annuity reserves:
The Alger American Fund:
Growth Portfolio................................................................ 46,971.8 $ 12.021010 $ 564,649
Leveraged AllCap Portfolio...................................................... 15,143.4 11.917892 180,477
MidCap Portfolio................................................................ 28,839.8 11.540334 332,821
Small Capitalization Portfolio.................................................. 19,568.3 11.060018 216,426
American Century Variable Portfolios, Inc.:
International Fund.............................................................. 19,460.2 11.805708 229,742
Value Fund...................................................................... 38,517.9 10.396833 400,464
Growth and Income Fund.......................................................... 61,565.6 11.244275 692,260
Berger Institutional Products Trust:
100 Fund........................................................................ 8,346.8 10.261623 85,651
Growth and Income Fund.......................................................... 26,065.4 11.063823 288,383
Small Company Growth Fund....................................................... 42,438.9 10.932944 463,982
BIAM International Fund......................................................... 6,145.5 10.883008 66,882
Conseco Series Trust:
Asset Allocation Portfolio...................................................... 149,362.6 10.708526 1,599,453
Common Stock Portfolio.......................................................... 175,671.4 10.819807 1,900,731
Corporate Bond Portfolio........................................................ 42,004.6 10.213761 429,024
Government Securities Portfolio................................................. 13,856.3 10.195941 141,278
Money Market Portfolio.......................................................... 133,952.9 10.147958 1,359,348
Dreyfus Stock Index Fund.......................................................... 257,162.3 11.186291 2,876,692
The Dreyfus Socially Responsible Growth Fund, Inc................................. 26,406.5 11.297926 298,339
Dreyfus Variable Investment Fund:
Disciplined Stock Portfolio..................................................... 3,883.3 10.034818 38,968
International Value Portfolio................................................... 497.1 9.848696 4,896
Federated Insurance Series:
High Income Bond Fund II........................................................ 90,598.1 10.104333 915,434
International Equity Fund II.................................................... 13,073.4 11.950873 156,239
Utility Fund II................................................................. 39,338.0 10.559817 415,402
Invesco Variable Investment Funds:
High Yield...................................................................... 8,873.4 9.993808 88,679
Industrial Income............................................................... 1,613.4 9.910033 15,988
Janus Aspen Series:
Aggressive Growth Portfolio..................................................... 40,426.5 11.315975 457,466
Growth Portfolio................................................................ 52,816.9 11.209340 592,043
Worldwide Growth Portfolio...................................................... 145,494.6 11.794819 1,716,082
Lazard Retirement Series, Inc.:
Equity Portfolio................................................................ 9,732.3 10.352633 100,755
Small Cap Portfolio............................................................. 13,430.2 10.013801 134,487
Lord Abbett Series Fund, Inc.:
Growth and Income Portfolio..................................................... 36,166.9 10.603479 383,495
Neuberger & Berman Advisers Management Trust:
Limited Bond Portfolio.......................................................... 202,960.3 10.114974 2,052,938
Partners Portfolio.............................................................. 109,490.4 10.298679 1,127,607
Mitchell Hutchins Series Trust:
Growth and Income Portfolio..................................................... 3,639.8 10.907987 39,703
Strong Variable Insurance Funds, Inc.:
Growth Fund II Fund............................................................. 12,759.6 11.407283 145,553
Strong Opportunity Fund II........................................................ 29,770.2 10.951092 326,016
Van Eck Worldwide Insurance Trust:
Worldwide Bond Fund............................................................. 6,310.6 10.170741 64,184
Worldwide Emerging Markets Fund................................................. 9,334.0 7.953852 74,241
Worldwide Hard Assets Fund...................................................... 3,462.5 8.924831 30,903
WORLDWIDE REAL ESTATE FUND...................................................... 4,229.4 9.662030 40,865
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Net assets................................................................................................. $ 21,048,546
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The accompanying notes are an integral part of these financial statements.
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GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT F
STATEMENT OF OPERATIONS
FOR THE PERIOD FEBRUARY 12, 1998 TO JUNE 30,1998
(UNAUDITED)
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FEBRUARY 12, 1998
TO JUNE 30, 1998
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INVESTMENT INCOME:
Dividends from investments in portfolio shares................................................................... $ 244,278
Expenses:
Mortality and expense risk fees.................................................................................. 28,744
Administrative fees.............................................................................................. 3,449
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Total expenses................................................................................................. 32,193
Net investment income........................................................................................ 212,085
Net realized gains (losses) and unrealized appreciation (depreciation) on
investments:
Net realized losses on sales of investments in portfolio shares.................................................. (5,876)
Net change in unrealized appreciation of investments in portfolio shares......................................... 40,942
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Net gain on investments in portfolio shares.................................................................... 35,066
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Net increase in net assets from operations................................................................... $ 247,151
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Statement of Changes in Net Assets
FOR THE PERIOD FEBRUARY 12, 1998 TO JUNE 30,1998
(UNAUDITED)
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FEBRUARY 12, 1998
TO JUNE 30, 1998
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Changes from operations:
Net investment income............................................................................................ $ 212,085
Net realized losses on sales of investments...................................................................... (5,876)
Net change in unrealized appreciation of investments............................................................. 40,942
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Net increase in net assets from operations..................................................................... 247,151
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Changes from principal transactions:
Net contract purchase payments................................................................................... 20,800,753
Contract redemptions............................................................................................. (400)
Net transfers from fixed account................................................................................. 1,042
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NET INCREASE IN NET ASSETS FROM PRINCIPAL TRANSACTIONS......................................................... 20,801,395
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Net increase in net assets................................................................................... 21,048,546
Net assets, beginning of period..................................................................................... 0
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Net assets, end of period.................................................................................... $ 21,048,546
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The accompanying notes are an integral part of these financial statements.
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GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT F
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
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(1) GENERAL
Great American Reserve Insurance Company (the "Company") has established two
separate accounts for this contract (the "Contract"). One account, Great
American Reserve Variable Annuity Account F ("Account F"), which serves the
variable annuity portion of the contract, is registered under the Investment
Company Act of 1940, as amended, as a unit investment trust. The other account,
Great American Reserve Market Value Adjustment Account ("MVA"), which serves the
portion of the contract that may be subject to a market value adjustment, is not
registered with the Securities and Exchange Commission. Both accounts were
established on September 26, 1997 and commenced operations on February 12, 1998
as a segregated investment account for individual and group variable annuity
contracts which are registered under the Securities Act of 1933. The operations
of the Contract are included in the operations of the Company pursuant to the
provisions of the Texas Insurance Code. The Company is an indirect wholly owned
subsidiary of Conseco, Inc., a publicly-held specialized financial services
holding company listed on the New York Stock Exchange.
Besides the three guarantee periods of the MVA option (1, 3 and 5 years), the
following investment options are currently available:
THE ALGER AMERICAN FUND
Growth Portfolio
Leveraged AllCap Portfolio
MidCap Portfolio
Small Capitalization Portfolio
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
Income and Growth Fund
International Fund
Value Fund
BERGER INSTITUTIONAL PRODUCTS TRUST
100 Fund
Growth and Income Fund
Small Company Growth Fund
BIAM International Fund
CONSECO SERIES TRUST
Asset Allocation Portfolio
Common Stock Portfolio
Corporate Bond Portfolio
Government Securities Portfolio
Money Market Portfolio
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
DREYFUS STOCK INDEX FUND
DREYFUS VARIABLE INVESTMENT FUND
International Value Portfolio
Disciplined Stock Portfolio
FEDERATED INSURANCE SERIES
High Income Bond Fund II
International Equity Fund II
Utility Fund II
INVESCO VARIABLE INVESTMENT FUNDS, INC.
High Yield Portfolio
Industrial Income Portfolio
JANUS ASPEN SERIES
Aggressive Growth Portfolio
Growth Portfolio
Worldwide Growth Portfolio
LAZARD RETIREMENT SERIES, INC.
Equity Portfolio
Small Cap Portfolio
LORD ABBETT SERIES FUND, INC.
Growth and Income Portfolio
MITCHELL HUTCHINS SERIES TRUST
Growth and Income Portfolio
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
Limited Maturity Bond Portfolio
Partners Portfolio
STRONG CAPITAL VARIABLE INSURANCE FUNDS, INC.
GROWTH FUND II
STRONG OPPORTUNITY FUND II
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Bond Fund
Worldwide Emerging Markets Fund
Worldwide Hard Assets Fund
Worldwide Real Estate Fund
The financial statements have been prepared in accordance with generally
accepted accounting principles and, as such, include amounts based on informed
estimates and judgments of management with consideration given to materiality.
Actual results could differ from those estimates.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT VALUATION, TRANSACTIONS AND INCOME
Investments in portfolio shares are valued using the net asset value of the
respective portfolios at the end of each New York Stock Exchange business day.
Investment share transactions are accounted for on a trade date basis (the date
the order to purchase or redeem shares is executed) and dividend income is
recorded on the ex-dividend date. The cost of investments in portfolio shares
sold is determined on a first-in first-out basis. Account F does not hold any
investments which are restricted as to resale.
Net investment income and net realized gains (losses) and unrealized
appreciation (depreciation) on investments are allocated to the contracts on
each valuation date based on each contract's pro rata share of the assets of
Account F as of the beginning of the valuation date.
FEDERAL INCOME TAXES
No provision for federal income taxes has been made in the accompanying
financial statements because the operations of the Contract are included in the
total operations of the Company, which is treated as a life insurance company
for federal income tax purposes under the Internal Revenue Code. Net investment
income and realized gains (losses) are retained in the Contract and are not
taxable until received by the contract owner or beneficiary in the form of
annuity payments or other distributions.
ANNUITY RESERVES
Deferred annuity contract reserves are comprised of net contract purchase
payments less redemptions and benefits. These reserves are adjusted daily for
the net investment income and net realized gains (losses) and unrealized
appreciation (depreciation) on investments.
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GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT F
NOTES TO FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998
(UNAUDITED)
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(3) PURCHASES AND SALES OF INVESTMENTS IN PORTFOLIO SHARES
The aggregate cost of purchases of investments in portfolio shares were
$21,760,883 for the period February 12, 1998 to June 30, 1998. The aggregate
proceeds from sales of investments in portfolio shares were $728,014 for the
period February 12, 1998 to June 30, 1998.
(4) DEDUCTIONS AND EXPENSES
Although periodic retirement payments to contract owners vary according to
the investment performance of the portfolios, such payments are not affected by
mortality or expense experience because the Company assumes the mortality and
expense risks under the contracts.
The mortality risk assumed by the Company results from the life annuity
payment option in the contracts in which the Company agrees to make annuity
payments regardless of how long a particular annuitant or other payee lives. The
annuity payments are determined in accordance with annuity purchase rate
provisions established at the time the contracts are issued. Based on the
actuarial determination of expected mortality, the Company is required to fund
any deficiency in the annuity payment reserves from its general account assets.
The expense risk assumed by the Company is the risk that the deductions for
sales and administrative expenses may prove insufficient to cover the actual
sales and administrative expenses. The Company deducts daily from Account F a
fee, which is equal on an annual basis to 1.25 percent of the daily value of the
total investments of Account F, for assuming the mortality and expense risks.
These fees were $28,744 for the period February 12, 1998 to June 30, 1998.
Pursuant to an agreement between Account F and the Company (which may be
terminated by the Company), the Company provides sales and administrative
services to Account F, as well as a minimum death benefit prior to retirement
for the contracts. The Company may deduct a percentage of amounts surrendered to
cover sales expenses. The percentage varies up to 9.00 percent based upon the
number of years the contract has been held. In addition, the Company deducts
units from individual contracts annually and upon full surrender to cover an
administrative fee of $30, unless the value of the contract is $50,000 or
greater. There were no sales and administrative charges for the period February
12, 1998 to June 30, 1998. The Company also deducts daily from Account F a fee,
which is equal on an annual basis to 0.15 percent of the daily value of the
total investments of Account F, for administrative expenses. These expenses were
$3,449 for the period February 12, 1998 to June 30, 1998.
(5) OTHER TRANSACTIONS WITH AFFILIATES
Conseco Equity Sales, Inc., an affiliate of the Company, is the principal
underwriter and performs all variable annuity sales functions on behalf of the
Company through various retail broker/dealers including Conseco Financial
Services, Inc., an affiliate of the Company.
(6) NET ASSETS
Net assets consisted of the following at June 30, 1998:
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Proceeds from the sales of units since organization,
less cost of units redeemed.................................... $20,801,395
Undistributed net investment income............................... 212,085
Undistributed net realized loss on
sales of investments ........................................... (5,876)
Net unrealized appreciation of investments........................ 40,942
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Total net assets............................................. $21,048,546
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5
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CONSECO CAPITAL MANAGEMENT, INC.
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REPORT FROM THE PRESIDENT
Dear Contract Owner:
We are pleased to report the performance of the Conseco Series Trust for
Great American Reserve Variable Annuity Account F for the period February 12,
1998 through June 30, 1998:
PERIOD MORNINGSTAR
FEBRUARY 12, 1998 SIX MONTHS
THROUGH ENDED
PORTFOLIO JUNE 30, 1998 JUNE 30, 1998 (1)
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Asset Allocation 7.09% 9.51%
Common Stock 8.20% 11.36%
Corporate Bond 2.14% 3.41%
Government Securities 1.96% 3.78%
Money Market 1.48% 1.92%
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Note: Past performance is not indicative of future results.
(1) Average Accumulation Unit Value Total Return for each respective peer group
from Morningstar Variable Annuity/Life Performance Report through 06/30/98.
In recent testimony before Congress, Federal Reserve Chairman Alan Greenspan
stated that the U.S. economy was performing better than at any time in the last
50 years. Strong stuff indeed, and largely the result of the prudent and
intelligent implementation of both monetary policy and-surprise-fiscal policy.
We can think of no time in the 20th century where monetary and fiscal policies
have been so "in sync". That the performance of U.S. financial assets has been
so incredible in the 1990s, surely reflects the power of enlightened policy.
Much ink has been spilled of late claiming that recent market turmoil harkens
the beginning of bad times for the U.S. economy and the market. We don't buy it.
Bull markets end with significant increases in inflation, rising interest rates,
tax hikes, or rampant protectionism. We just don't see any of these on the
horizon. As long as monetary and fiscal policies stay their current courses, we
should see nothing more than what used to be recognized as relatively normal
cyclical activity. As you can see, markets don't always move in one direction.
While markets have certainly been buffeted lately by a series of events that
have raised doubts about the ability of the economy and the market to sustain
their secular path, we are relatively nonplused by what we view as simply normal
cyclical volatility. In fact, as you read through the reports of the various
portfolio managers, it should be clear that we view the current period as a time
when our research intensive, bottom-up security selection process will shine, as
volatility unearths value. One theme rings constant throughout these reports, as
it does throughout all of Conseco Capital Management; we will continue to
populate your portfolio with rigorously researched, undervalued securities-one
security at a time. We are convinced that this philosophy offers the best upside
potential with the greatest downside protection.
So enjoy reading these reports, thank you for your trust, and good investing!
Sincerely,
/s/ Maxwell E. Bublitz, CFA
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Maxwell E. Bublitz, CFA
President & CEO
Conseco Capital Management
REPORT FROM THE ASSET ALLOCATION
PORTFOLIO ADVISER
The economic environment in the first half of 1998 has proven positive for
both the economy and the financial markets. During this time period we
experienced above-trend growth in the economy, slowing inflation, and lower
levels of interest rates. While the U.S. economy posted strong growth numbers
through the first half of 1998, we believe there is considerable evidence,
particularly from recent jobs growth, industrial production, and the trade data,
for a significant slowdown during the second half of the year. With the
unemployment rate bouncing off a 28 year low, there is little slack in our labor
markets. Historically, this would result in a pickup in the rate of inflation.
The improvement in productivity throughout the economy, however, has allowed for
a higher rate of economic growth without higher inflation.
At Conseco Capital Management, our investment philosophy is deeply rooted in
the belief that through investing in securities that we consider to be
undervalued, we will provide better portfolio returns without assuming
significant levels of risk. We implement our investment strategies utilizing
proprietary research gleaned from our team of securities analysts and strive to
achieve every advantage to earn incremental return for your portfolio. In
executing our investment strategies, we actively manage the portfolio across all
the major asset sectors including equities and corporate bonds.
Our strategy for the fixed income portion of the portfolio (which represents
roughly 38% of the portfolio's value) during the first half of 1998 was to
continue to emphasize the investment grade corporate sector while utilizing high
yield bonds to enhance the overall yield and return potential of the portfolio.
One of the cheapest sectors of the investment grade corporate bond market has
been Real Estate Investment Trusts. The income potential from bonds in this
sector remains very attractive. In this sector, we invested in EOP Operating and
Simon DeBartolo Group, Inc.
We believe the media and telecommunications sectors currently represents good
value within the high yield market. In the communications sector, we invested in
Pinnacle Holdings, a wireless telecommunications tower owner and operator. In
the media sector, we invested in Lenfest Communications, an owner and developer
of cable television systems.
The remaining 62% of the portfolio is comprised of equities and cash. In the
equity markets, the first half of 1998 ended with yet another healthy dose of
the volatility that has become commonplace in the latter stages of this bull
market. April began with a continuation of the upward bias we saw through much
of the first quarter, with most indices reaching new highs and sentiment
readings indicating that 65% of all investors were bullish. In fact, the outlook
was so positive that Federal Reserve Board Chairman Alan Greenspan felt
compelled once again to suggest that interest rates may need an upward
adjustment by mid-year to cool things down a bit. As the concern about such a
move began to work its way into stocks, selling pressure increased even further
as second quarter earnings suggested that growth was slowing in many industries
and that the problems in Asia were becoming a much bigger issue than many had
anticipated.
Looking forward, we expect to experience stability in interest rates as a
shrinking industrial sector, combined with trade imbalances, helps to slow U.S.
economic growth. We believe the Federal Reserve will remain on the sidelines and
not alter monetary policy until the financial crisis in Southeast Asia is
perceived to be under control. Until the Fed is clear on the direction of
monetary policy, the shape of the yield curve will remain flat and investors may
find better opportunities investing in securities with shorter maturities. While
we have experienced some easing in our labor markets recently, the low level of
unemployment during the first half of 1998 may cause some pres-
6
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sure on wages. Still, we believe this is an excellent environment for bond
investors. In the meantime, thank you for another quarter of your much-valued
trust. Please know that our investment strategy will continue to rely upon a
bottom up approach to stock selection that emphasizes extensive research of the
companies in which we invest. Our goal, as always, is to discover good growth
stories in stocks that still trade at reasonable valuations. We are committed to
a long term reliance on this strategy, and believe that it will continue to
serve our shareholders well through the balance of this year and beyond.
/s/ Thomas J. Pence
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Thomas J. Pence
Vice President
Portfolio Manager
REPORT FROM THE COMMON STOCK
PORTFOLIO ADVISER
As we began 1998, much of the prevailing market sentiment was driven by
concerns that weakness in foreign markets (Asia) would worsen global
deflationary pressures, depress the global economy and drag down the U.S. market
in the process. What transpired was something quite different. By cutting
incremental demand for oil and other resource inputs, weakness in Asian markets
actually stimulated the U.S. financial markets. Falling interest rates resulted
in increased refinancing activity, allowing U.S. consumers to bolster their
already high confidence levels by strengthening their balance sheets and
increasing their monthly disposable income. We saw the direct effect of this in
stronger than expected housing starts (the highest jump since 1987) and retail
sales through much of the first quarter.
Larger cap stocks continued to outpace small and mid-cap stocks in the first
quarter, much as they did in the latter half of 1997. In fact, the mania for
large caps is beginning to create market anomalies that resemble conditions of
some of the great market bubbles in history. Our concern here is that the
appetite for large cap stocks at virtually any price may simply reflect the
current demographic profile of U.S. investors. In an effort to save for their
retirement via 401K contributions into mutual funds, investors have poured huge
amounts of money into the market that must be put to work quickly, regardless of
the valuations being assigned to the businesses behind the stocks being
purchased. The parallels here to the conditions that existed in Japan in the
late `80's are somewhat disconcerting.
Our strong performance during the quarter was well ahead of most major
indices, including the seemingly unstoppable S&P 500. Encouragingly, many of the
stocks responsible for this solid quarter were in sectors that underperformed in
the overall market. In the healthcare sector, we enjoyed strong performance from
Quorum Health Group.
Amid all of the negative sentiment in the technology sector, we were able to
establish a position in Comverse Technology at a three year low point in its
price and price to earnings ratio multiple. Comverse, who recently merged with
one of its main competitors, Boston Technology, is involved in enhanced voice
messaging for wired and wireless networks.
Other strong names in the portfolio during the quarter were Affiliated
Computer Services, Transocean Offshore in the oil drilling sector and Department
56, who finally regained investor confidence after a two-year struggle with
excess inventories in its retail channel. Lastly, we realized some excellent
returns through our holding of several asset managers such as Franklin
Resources, Legg Mason and Kansas City Southern.
As we move toward the second half of 1998, all eyes will be on the lookout
for the much-feared slowdown in corporate profits, particularly once second
quarter earnings can be fully tallied. The fact that fourth quarter profits fell
2.3% in 1997 (the first drop since mid 1996) did not receive much attention when
it was reported on March 26th. Nor did the fact that this profit shortfall came
not only from slower revenue growth but also from a decrease in profit margins,
which have been the key driver of this profit cycle. A continuation of this
trend would suggest that in order for stocks to advance from here, they simply
have to get more expensive (i.e., multiples have to keep increasing).
Our investment strategy continues to rely on a bottom up approach to stock
selection. Through extensive research of the companies in which we invest, our
goal is to discover good growth stories in stocks that still trade at reasonable
valuations. We are committed to a long term reliance on this strategy, and we
remain hopeful that it will continue to serve our shareholders well through the
balance of the year and beyond.
/s/ Thomas J. Pence
-------------------
Thomas J. Pence
Vice President
Portfolio Manager
REPORT FROM THE CORPORATE BOND
PORTFOLIO ADVISER
The first half of 1998 continues an environment that has been positive for
the economy as well as financial assets. We have experienced above-trend growth
in the economy, slowing inflation, and lower levels of interest rates. The U.S.
economy has shown strong growth through the first half of 1998 although there is
considerable evidence, particularly from recent jobs growth, industrial
production, and the trade data, for a significant slowing in the second half of
the year. With the unemployment rate bouncing off a 28 year low, there is little
slack in our labor markets. Historically, this has resulted in a pickup in the
rate of inflation; however, the improvement in productivity throughout the
economy has allowed for a higher rate of economic growth without the consequence
of higher inflation.
At Conseco Capital Management, our investment philosophy is deeply rooted in
the belief that through investing in securities that we consider to be
undervalued, we will provide better portfolio returns without assuming
significant levels of risk. We implement our investment strategies utilizing
proprietary research gleaned from our team of security analysts and strive to
achieve every advantage to earn incremental return for your portfolio.
Our strategy during the first half of 1998 was to emphasize the corporate
sector and utilize other asset sectors to enhance the overall yield and return
potential of the portfolio. To this end, we found value in two primary areas of
the corporate bond market: the industrial sector and the bank/finance sector.
Within the industrial sector, several securities offered excellent return
potential. We invested in Waste Management which we consider to be fundamentally
undervalued in the environmental sector. One of the cheapest sectors of the
corporate bond market has been Real Estate Investment Trusts (REITs). Because of
the large amount of issuance of REIT debt during the period, the opportunity to
earn incremental return was limited. However, the income potential remains
attractive and we have invested in several shorter maturity issues including
Chelsea GCA Realty and Simon DeBartolo.
Our economy is in the eighth year of an expansion and, combined with
deflationary price pressures from the Southeast Asian economies, we have
experienced a decline in several commodity prices. This lack of price pressure
has kept us out of several of the
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cyclical sectors including paper and forest products, and chemicals. We
considers several securities to be undervalued in the cable and media sector,
which has been one of the best performing. We have maintained a position in
based on improving balance sheet fundamentals and profitability. The recently
announced merger with AT&T has helped to further tighten Telecommunications
Inc.'s yield spread over U. S. Treasury securities.
The strength and health of our financial markets can be attributed, in part,
to a very healthy bank system in the United States. Because of the strength in
the U.S. economy, one of our investment themes has been to invest in several of
the regional banks and underweight the money center banks. With the trend toward
consolidation, we also look for value in certain banks that we consider to be
underrated and have the potential for an upgrade either through a merger or
improved fundamentals. Consistent with this theme, we invested in the debt of
St. Paul Bancorp and U.S. Bancorp during the first half of the year.
We have utilized taxable municipal bonds, asset-backed securities and
commercial mortgage-backed securities (CMBS) within the portfolio in order to
capture value in the short and intermediate maturity portions of the portfolio.
Taxable municipal bonds have similar characteristics to their tax-exempt
counterparts; however, the interest earned is subject to Federal taxes. The CMBS
in which we invested offer excellent relative value with more predictable
cashflows than other types of mortgage-backed securities.
Looking forward, we expect to experience stability in interest rates as a
shrinking industrial sector combine with trade imbalances to help slow U.S.
economic growth. We believe the Federal Reserve will remain on the sidelines and
not alter monetary policy until the financial crisis in Southeast Asia is under
control. Until it is clear on the direction of monetary policy, the shape of the
yield curve will remain flat and investors may find better opportunities in
securities with shorter maturities. While we have experienced some easing in our
labor markets recently, the low levels of unemployment we have seen in the first
half of 1998 may cause some pressure on wages. Still, we believe this is an
excellent environment in which to invest.
/s/ Gregory J. Hahn, CFA
------------------------
Gregory J. Hahn, CFA
Senior Vice President
Portfolio Manager
REPORT FROM THE GOVERNMENT SECURITIES
PORTFOLIO ADVISER
The key points in the behavior of the U.S. Government bond market in the 2nd
quarter were low domestic inflation, continuing Asian turmoil and a balanced
Federal budget. Without exception, these key factors led the market to new price
highs and historic lows in yields. The Portfolio capitalized on this encouraging
market environment by being fully invested in fixed income instruments in a wide
range of maturities. The sector allocation of the Portfolio at quarter end was
52% in U.S. Government and agency debt, 23% in corporate debt, 15% in asset
backed securities, and 10% in taxable municipal debt. The investment in taxable
municipal securities permits the fund to access a relatively new asset class
that offers value due to pricing disparity versus comparably rated credits.
It has been our strategy in the last few quarters to make a partial
allocation in highly rated corporate bonds in an effort to increase the income
component of the fund. This strategy has contributed to the Portfolio's total
return, not only through increased income but also by price performance. These
securities, which include Tommy Hilfiger and Tyson Foods, generally have short
maturities and are of high credit quality.
The outlook for the U.S. bond market is, in the near term, positive. The
Federal Reserve has maintained a stance of non-intervention due in large part to
the unwinding of the Asian economic miracle. The U.S. economy, however,
continues to show outstanding performance. If the growth continues at its
current pace, we would expect a preemptory move by the Federal Reserve, once
Asia stabilizes and the wealth effect becomes apparent in the economic data.
/s/ G. Nolan Smith
-------------------
G. Nolan Smith
Vice President
Portfolio Manager
REPORT FROM THE MONEY MARKET
PORTFOLIO ADVISER
During the first half of 1998, the Federal Open Market Committee (FOMC) met
three times to discuss the economic outlook and the implementation of monetary
policy. The Federal Reserve Board (the "Fed") held the Federal Funds Target Rate
at a 5.50% yield throughout the first and second quarters. With Asia still
struggling to revive its economies and many American multinational companies
issuing earnings warnings, the Fed has hesitated to increase the Federal Funds
Target Rate. The Fed noted in the May meeting that weakening net exports were
exerting an unfavorable impact on U.S. economic growth. The Fed also expected
that this trend would expand into the last two quarters of 1998.
Low price inflation in combination with low unemployment was a major focus
for all the FOMC meetings. Consumer price inflation in the second quarter was
modest as weak energy prices offset most of the increases in other sectors. The
Consumer Price Index was anticipated to reach an increase of .2% but achieved a
level of .3%. Also, the unemployment level reached 4.3% which is placing
additional pressure on the Fed to tighten its credit policy in order to prevent
future inflation.
Quarter end pressures from brokers who needed to liquidate their inventory
lead to increased yields in short term securities. Top-tier Commercial Paper
traded over the quarter end at a 5.98% discount as compared to a Federal Fund
Target of 5.50%. This pressure is caused by brokers needing to liquidate
inventory from their balance sheets for the quarter end.
The portfolio achieved a 2.80% gross return versus the benchmark return of
2.72%. The benchmark used for the portfolio is weighted by a combination of 75%
of the commercial paper index and 25% of Payden & Rygel 1-Year Treasury Bill
Index.
Throughout the first half, Top-Tier 30 day commercial paper range went from
trading around a 5.36% discount on January 8, 1998 to a 5.98% discount on June
30,1998. The yield on the 3-month T-Bill varied between 4.97% and 5.345% and
ended on June 30, 1998 at a 5.078% yield. The 1-year T-Bill range went from
yielding 5.076% on January 09, 1998 to a high of 5.484% on April, 29, 1998.
The objectives of the Money Market Portfolio have not changed. We attempt to
balance safety, liquidity, and total return in managing a fully diversified
portfolio of money market securities. These objectives are met by investing in
United States Government and agency obligations, top-tier commercial paper, and
highly rated short corporate debt.
/s/ Darren B. Meyer
--------------------
Darren B. Meyer
Portfolio Manager
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GREAT AMERICAN RESERVE
VARIABLE ANNUITY ACCOUNT E
SPONSOR
Great American Reserve Insurance Company - Carmel, Indiana.
DISTRIBUTOR
Conseco Equity Sales, Inc. - Carmel, Indiana.
INDEPENDENT PUBLIC ACCOUNTANTS
PricewaterhouseCoopers LLP - Indianapolis, Indiana.
CONSECO SERIES TRUST
BOARD OF TRUSTEES
William P. Daves, Jr., Chairman
Consultant to the insurance and health care industries.
Director, President and Chief Executive Officer,
FFG Insurance Co.,
Dallas, Texas.
Harold W. Hartley, Trustee
Retired. Chartered Financial Analyst.
Formerly Executive Vice President,
Tenneco Financial Services Inc.,
Fort Myers Beach, Florida.
Maxwell E. Bublitz, Trustee and President
President, Conseco Capital Management, Inc.,
Carmel, Indiana.
Dr. R. Jan LeCroy, Trustee
President, Dallas Citizens Council,
Dallas, Texas.
Dr. Jesse H. Parrish, Trustee
Higher education consultant.
Formerly President, Midland College,
Midland, Texas.
INVESTMENT ADVISER
Conseco Capital Management, Inc. - Carmel, Indiana.
INDEPENDENT PUBLIC ACCOUNTANTS
PricewaterhouseCoopers LLP - Indianapolis, Indiana.
CUSTODIAN
Bankers Trust Company - New York, New York.
29
<PAGE>
Great American Reserve Insurance Company
11815 North Pennsylvania Street
Carmel, Indiana 46032
-----------------
FIRST CLASS MAIL
[LOGO] U.S. POSTAGE PAID
HACKENSACK, NJ
PERMIT NO. 9
-----------------
CONSECO
GREAT AMERICAN RESERVE INSURANCE COMPANY
SEMIANNUAL REPORT TO CONTRACT OWNERS
JUNE 30, 1998
This report is for the information of contract owners and participants of the
Great American Reserve Variable Annuity Account F and Conseco Series Trust. It
is authorized for distribution to other persons only when preceded or
accompanied by a current prospectus which contains more complete information,
including charges and expenses.
GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT F
CONSECO SERIES TRUST
05-8433 (8/98)
