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CONSECO(R)
Issued by
CONSECO VARIABLE INSURANCE COMPANY
Conseco Advantage
Fixed and Variable Annuity
May 1, 1999
Prospectus
Conseco Variable Insurance Company
Conseco Variable Annuity Account F
This cover is not part of the prospectus.
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[LOGO]
CONSECO(R)
Issued by
CONSECO VARIABLE INSURANCE COMPANY
Conseco Advantage
CONSECO VARIABLE INSURANCE COMPANY
11815 N. Pennsylvania Street
Carmel, IN 46032
(C)1999, Conseco Variable Insurance Company
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[LOGO]
CONSECO(R)
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The Fixed And Variable Annuity
issued by
Conseco Variable Annuity Account F
(formerly Great American Reserve Variable Annuity Account F)
and
Conseco Variable Insurance Company
(formerly Great American Reserve Insurance Company)
This prospectus describes the Group and Individual Fixed and Variable
Annuity Contract offered by Conseco Variable Insurance Company (Conseco
Variable). Prior to October 7, 1998, Conseco Variable Insurance Company's name
was Great American Reserve Insurance Company.
The annuity Contract has 44 investment choices--a Fixed Account which
offers an interest rate which is guaranteed not to be less than 3% by Conseco
Variable, three Guarantee Periods of the market value adjustment account option
(MVA Option) and 40 Investment Portfolios listed below. You can put your money
in the Fixed Account, any of the three Guarantee Periods of the MVA Option
and/or the Investment Portfolios. Currently, you can invest in up to 15
Investment Portfolios at one time.
Conseco Series Trust
Managed by Conseco Capital Management, Inc.
o Balanced Portfolio (formerly, Asset Allocation Portfolio)
o Equity Portfolio (formerly, Common Stock Portfolio)
o Fixed Income Portfolio (formerly, Corporate Bond Portfolio)
o Government Securities Portfolio
o Money Market Portfolio
The Alger American Fund
Managed by Fred Alger Management, Inc.
o Alger American Growth Portfolio
o Alger American Leveraged AllCap Portfolio
o Alger American MidCap Growth Portfolio
o Alger American Small Capitalization Portfolio
American Century Variable Portfolios, Inc.
Managed by American Century Investment Management, Inc.
o VP Income & Growth
o VP International
o VP Value
Berger Institutional Products Trust
Managed by Berger Associates, Inc.
o Berger IPT--100 Fund
o Berger IPT--Growth and Income Fund
o Berger IPT--Small Company Growth Fund
Managed by BBOI Worldwide, LLC
o Berger/BIAM IPT--International Fund
The Dreyfus Socially Responsible Growth Fund, Inc.
Managed by The Dreyfus Corporation
Dreyfus Stock Index Fund
Managed by The Dreyfus Corporation
Dreyfus Variable Investment Fund
Managed by The Dreyfus Corporation
o Disciplined Stock Portfolio
o International Value Portfolio
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The Securities and Exchange Commission has not approved or disapproved
these securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
May 1, 1999
1
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Federated Insurance Series
Managed by Federated Investment Management Company (formerly, Federated
Advisers)
o Federated High Income Bond Fund II
o Federated Utility Fund II
Managed by Federated Global Investment Management Corp.
o Federated International Equity Fund II
INVESCO Variable Investment Funds, Inc.
Managed by INVESCO Funds Group, Inc.
o INVESCO VIF - High Yield Fund
o INVESCO VIF - Equity Income Fund (formerly, INVESCO VIF - Industrial
Income Portfolio)
Janus Aspen Series
Managed by Janus Capital Corporation
o Aggressive Growth Portfolio
o Growth Portfolio
o Worldwide Growth Portfolio
Lazard Retirement Series, Inc.
Managed by Lazard Asset Management
o Lazard Retirement Equity Portfolio
o Lazard Retirement Small Cap Portfolio
Lord Abbett Series Fund, Inc.
Managed by Lord, Abbett & Co.
o Growth and Income Portfolio
Mitchell Hutchins Series Trust
Managed by Mitchell Hutchins Asset Management Inc.
o Growth and Income Portfolio
Neuberger Berman Advisers Management Trust
Managed by Neuberger Berman Management Inc.
o Limited Maturity Bond Portfolio
o Partners Portfolio
Strong Opportunity Fund II, Inc.
Managed by Strong Capital Management, Inc.
o Opportunity Fund II
Strong Variable Insurance Funds, Inc.
Managed by Strong Capital Management, Inc.
o Strong Mid Cap Growth Fund II (formerly, Growth Fund II)
Van Eck Worldwide Insurance Trust
Managed by Van Eck Associates Corporation
o Worldwide Bond Fund
o Worldwide Emerging Markets Fund
o Worldwide Hard Assets Fund
o Worldwide Real Estate Fund
Please read this prospectus before investing and keep it on file for future
reference. It contains important information about the Conseco Advantage Fixed
and Variable Annuity Contract.
To learn more about the Conseco Advantage Fixed and Variable Annuity
Contract, you can obtain a copy of the Statement of Additional Information (SAI)
dated May 1, 1999. The SAI has been filed with the Securities and Exchange
Commission (SEC) and is legally a part of this prospectus. The SEC has a Web
site (http://www.sec.gov) that contains the SAI, material incorporated by
reference, and other information regarding companies that file electronically
with the SEC. The Table of Contents of the SAI is on Page 59 of this prospectus.
For a free copy of the SAI, call us at (800) 824-2726 or write us at our
administrative office: 11815 N. Pennsylvania Street, Carmel, Indiana 46032.
The Contracts:
o are not bank deposits
o are not federally insured
o are not endorsed by any bank or government agency
o are not guaranteed and may be subject to loss of principal
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CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
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Table of Contents
Page
Index of Special Terms...................................................... 5
Fee Table................................................................... 6
1. The Conseco Advantage Annuity Contract .................................. 13
2. Annuity Payments (The Income Phase)...................................... 13
3. Purchase................................................................. 14
Purchase Payments........................................................ 14
Allocation of Purchase Payments.......................................... 14
Free Look................................................................ 15
Accumulation Units....................................................... 15
4. Investment Options....................................................... 15
Investment Portfolios.................................................... 15
Voting Rights............................................................ 17
Substitution............................................................. 17
The Fixed Account........................................................ 17
The MVA Option........................................................... 17
Transfers................................................................ 18
Dollar Cost Averaging Program............................................ 19
Rebalancing Program...................................................... 19
Asset Allocation Program................................................. 20
Sweep Program............................................................ 20
5. Expenses................................................................. 20
Insurance Charges........................................................ 20
Contract Maintenance Charge.............................................. 20
Contingent Deferred Sales Charge......................................... 21
Reduction or Elimination of the Contingent Deferred Sales Charge......... 21
Transfer Fee............................................................. 21
Premium Taxes............................................................ 22
Income Taxes............................................................. 22
Investment Portfolio Expenses............................................ 22
6. Taxes.................................................................... 22
Annuity Contracts in General............................................. 22
Qualified and Non-Qualified Contracts.................................... 22
Withdrawals--Non-Qualified Contracts..................................... 22
Withdrawals--Qualified Contracts......................................... 23
Withdrawals--Tax-Sheltered Annuities..................................... 23
Diversification.......................................................... 23
Investor Control......................................................... 23
7. Access To Your Money..................................................... 24
Systematic Withdrawal Program............................................ 24
Suspension of Payments or Transfers...................................... 24
3
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Table of Contents cont'd
Page
8. Performance............................................................. 25
9. Death Benefit........................................................... 25
Upon Your Death......................................................... 25
Death of Annuitant...................................................... 26
10. Other Information....................................................... 26
Conseco Variable........................................................ 26
The Separate Accounts .................................................. 26
Distributor............................................................. 26
Ownership............................................................... 27
Beneficiary............................................................. 27
Assignment.............................................................. 27
Additional Information ................................................. 27
Selected Financial Information of Conseco Variable...................... 28
Business of Conseco Variable............................................ 29
Management's Discussion and Analysis of Financial Condition
and Results of Operations of Conseco Variable.......................... 34
Directors and Executive Officers........................................ 43
Executive Compensation.................................................. 44
Independent Accountants................................................. 44
Legal Opinions.......................................................... 44
Financial Statements.................................................... 44
Table of Contents of the Statement of Additional Information................ 60
Appendix A--Condensed Financial Information................................. 60
Appendix B--Market Value Adjustment......................................... 64
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CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
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Index of Special Terms
We have written this prospectus in plain English. By the very nature of the
Contract, however, certain technical words or terms are unavoidable. We have
identified the following as some of these words or terms. They are capitalized
in the text and the page that is indicated here is where we believe you will
find the best explanation for the word or term.
Page
Accumulation Phase......................................................... 13
Accumulation Unit.......................................................... 15
Annuitant.................................................................. 13
Annuity Date............................................................... 13
Annuity Options............................................................ 13
Annuity Payments........................................................... 14
Annuity Unit............................................................... 15
Beneficiary................................................................ 27
Contract................................................................... 13
Fixed Account.............................................................. 17
Guarantee Period........................................................... 17
Income Phase............................................................... 13
Investment Portfolios...................................................... 15
Joint Owner................................................................ 27
MVA Option................................................................. 17
Non-Qualified.............................................................. 22
Owner...................................................................... 27
Purchase Payment........................................................... 14
Qualified.................................................................. 22
Tax-Deferral............................................................... 22
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Fee Table
Owner Transaction Expenses
Contingent Deferred Sales Charge (as a percentage of Purchase Payments) (See
Note 2 under "Explanation of Fee Table and Examples")
No. of Years from Receipt of Payment Charge
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First Year.................................................... 7%
Second Year................................................... 7%
Third Year.................................................... 6%
Fourth Year................................................... 5%
Fifth Year.................................................... 4%
Sixth Year.................................................... 3%
Seventh Year.................................................. 2%
Eighth Year and more.......................................... 0%
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TRANSFER FEE (see Note 3 under "Explanation of Fee Table and Examples")
No charge for one transfer in each 30 day period during the Accumulation Phase.
Thereafter, we will charge a fee of $25 per transfer. We will not charge for the
two transfers allowed each year during the Income Phase.
Contract Maintenance Charge
(see Note 4 under "Explanation of Fee Table and Examples")
$30 per Contract per year
Separate Account Annual Expenses
(as a percentage of average account value)
Mortality and Expense Risk Charge 1.25%
Administrative Charge .15%
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TOTAL SEPARATE ACCOUNT ANNUAL EXPENSES 1.40%
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CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
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INVESTMENT PORTFOLIO EXPENSES
(as a percentage of the average daily net assets of an Investment Portfolio)
<TABLE>
<CAPTION>
TOTAL ANNUAL
OTHER EXPENSES PORTFOLIO
(AFTER EXPENSE EXPENSES
REIMBURSEMENT (AFTER EXPENSE
MANAGEMENT 12b-1 FOR CERTAIN REIMBURSEMENT FOR
FEES FEES PORTFOLIOS) CERTAIN PORTFOLIOS)
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<S> <C> <C> <C> <C>
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CONSECO SERIES TRUST(1)
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Balanced Portfolio(2) ............................................ 0.75% -- 0.00% 0.75%
Equity Portfolio(2) .............................................. 0.80% -- 0.00% 0.80%
Fixed Income Portfolio ........................................... 0.70% -- 0.00% 0.70%
Government Securities Portfolio .................................. 0.70% -- 0.00% 0.70%
Money Market Portfolio(2) ........................................ 0.45% -- 0.00% 0.45%
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THE ALGER AMERICAN FUND
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Alger American Growth Portfolio .................................. 0.75% -- 0.04% 0.79%
Alger American Leveraged AllCap Portfolio(3) ..................... 0.85% -- 0.11% 0.96%
Alger American MidCap Growth Portfolio ........................... 0.80% -- 0.04% 0.84%
Alger American Small Capitalization Portfolio .................... 0.85% -- 0.04% 0.89%
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AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
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VP Income & Growth ............................................... 0.70% -- 0.00% 0.70%
VP International ................................................. 1.50% -- 0.00% 1.50%
VP Value ......................................................... 1.00% -- 0.00% 1.00%
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BERGER INSTITUTIONAL PRODUCTS TRUST
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Berger IPT--100 Fund(4) .......................................... 0.00% -- 1.00% 1.00%
Berger IPT--Growth and Income Fund(4) ............................ 0.00% -- 1.00% 1.00%
Berger IPT--Small Company Growth Fund(4) ......................... 0.00% -- 1.15% 1.15%
Berger/BIAM IPT--International Fund(4) ........................... 0.00% -- 1.20% 1.20%
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THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC. ............... 0.75% -- 0.05% 0.80%
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DREYFUS STOCK INDEX FUND ......................................... 0.25% -- 0.01% 0.26%
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DREYFUS VARIABLE INVESTMENT FUND
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Disciplined Stock Portfolio ...................................... 0.75% -- 0.13% 0.88%
International Value Portfolio .................................... 1.00% -- 0.29% 1.29%
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FEDERATED INSURANCE SERIES
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Federated High Income Bond Fund II ............................... 0.60% -- 0.18% 0.78%
Federated International Equity Fund II(5) ........................ 0.53% -- 0.72% 1.25%
Federated Utility Fund II(5) ..................................... 0.68% -- 0.25% 0.93%
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INVESCO VARIABLE INVESTMENT FUNDS, INC.
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INVESCO VIF-- High Yield Fund(6) ................................. 0.60% -- 0.47% 1.07%
INVESCO VIF-- Equity Income Fund(6)(7) ........................... 0.75% -- 0.18% 0.93%
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JANUS ASPEN SERIES
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Aggressive Growth Portfolio ...................................... 0.72% -- 0.03% 0.75%
Growth Portfolio(8) .............................................. 0.65% -- 0.03% 0.68%
Worldwide Growth Portfolio(8) .................................... 0.65% -- 0.07% 0.72%
</TABLE>
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<TABLE>
<CAPTION>
TOTAL ANNUAL
OTHER EXPENSES PORTFOLIO
(AFTER EXPENSE EXPENSES
REIMBURSEMENT (AFTER EXPENSE
MANAGEMENT 12b-1 FOR CERTAIN REIMBURSEMENT FOR
FEES FEES PORTFOLIOS) CERTAIN PORTFOLIOS)
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<S> <C> <C> <C> <C>
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LAZARD RETIREMENT SERIES, INC.
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Lazard Retirement Equity Portfolio(9) ............................ 0.75% 0.25% 0.25% 1.25%
Lazard Retirement Small Cap Portfolio(9) ......................... 0.75% 0.25% 0.25% 1.25%
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LORD ABBETT SERIES FUND, INC.
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Growth and Income Portfolio ...................................... 0.50% -- 0.26% 0.76%
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MITCHELL HUTCHINS SERIES TRUST
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Growth and Income Portfolio ...................................... 0.70% -- 0.34% 1.04%
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NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST(10)
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Limited Maturity Bond Portfolio .................................. 0.65% -- 0.11% 0.76%
Partners Portfolio ............................................... 0.78% -- 0.06% 0.84%
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STRONG OPPORTUNITY FUND II, INC.
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Opportunity Fund II .............................................. 1.00% -- 0.16% 1.16%
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STRONG VARIABLE INSURANCE FUNDS, INC.
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Strong Mid Cap Growth Fund II(11) ................................ 1.00% -- 0.20% 1.20%
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VAN ECK WORLDWIDE INSURANCE TRUST(12)
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Worldwide Bond Fund .............................................. 1.00% -- 0.15% 1.15%
Worldwide Emerging Markets Fund .................................. 1.00% -- 0.50% 1.50%
Worldwide Hard Assets Fund ....................................... 1.00% -- 0.16% 1.16%
Worldwide Real Estate Fund ....................................... 0.89% -- 0.00% 0.89%
</TABLE>
(1) The expense information in the table has been restated to reflect
current fees. Pursuant to a contractual arrangement with the Trust, Conseco
Capital Management, Inc., the adviser, has agreed to waive fees and/or reimburse
portfolio expenses through 4/30/00, so that the annual operating expenses of
each portfolio are limited to the Total Annual Expenses for each respective
portfolio, as set forth above. This arrangement does not cover interest, taxes,
brokerage commissions, and extraordinary expenses. The total percentages in the
above table are after reimbursement. In the absence of expense reimbursement,
the total estimated fees and expenses for 1999 would total: 0.83% for the Money
Market Portfolio; 0.97% for the Government Securities Portfolio; 0.89% for the
Fixed Income Portfolio; 1.01% for the Balanced Portfolio and 0.95% for the
Equity Portfolio.
(2) Conseco Capital Management, Inc., since January 1, 1993, has waived its
management fees in excess of the annual rates set forth above. Absent such fee
waivers, the management fees would be: .85% for the Balanced Portfolio; .85% for
the Equity Portfolio; and .70% for the Money Market Portfolio.
(3) The Alger American Leveraged AllCap Portfolio's "Other Expenses"
includes .03% of interest expense.
(4) The Funds' investment advisers have agreed to waive their advisory fee
and reimburse the Funds for additional expenses to the extent that normal
operating expenses in any fiscal year, including the investment advisory fee but
excluding brokerage commissions, interest, taxes and extraordinary expenses, of
each of the Berger IPT--100 Fund and the Berger IPT--Growth and Income Fund
exceed 1.00%, the normal operating expenses in any fiscal year of the Berger
IPT--Small Company Growth Fund exceed 1.15%, and the normal operating expenses
of the Berger/BIAM IPT--International Fund exceed 1.20% of the respective Fund's
average daily net assets. Absent the waiver and reimbursement, the Management
Fee for the Berger IPT--100 Fund, Berger IPT--Growth and Income Fund, the Berger
IPT--Small Company Growth Fund and the Berger/BIAM IPT--International Fund would
have
8
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CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
================================================================================
been .75%, .75%, .90%, and .90% respectively, and their Total Annual Portfolio
Expenses would have been 2.88%, 1.99%, 2.19% and 2.85%, respectively.
(5) In the absence of a voluntary waiver by Federated Investment Management
Company, the Funds' investment adviser, the Management Fee and Total Annual
Portfolio Expenses would have been 0.75% and 1.00%, respectively, for Utility
Fund II. Absent a voluntary waiver of the management fee and the voluntary
reimbursement of certain other operating expenses by Federated Investment
Management Company, the Management Fee and Total Annual Portfolio Expenses for
International Equity Fund II would have been 1.00% and 1.72%, respectively.
(6) The Fund's actual Total Annual Fund Operating Expenses were lower than
the figures shown because its transfer agent and/or custodian fees were reduced
under expense offset arrangements. Because of an SEC requirement, the figures
shown do not reflect these reductions.
(7) Certain expenses of the Fund are being absorbed voluntarily by INVESCO
Funds Group, Inc. pursuant to a commitment to the Fund. In the absence of such
absorption, Other Expenses and Total Annual Fund Operating Expenses for the year
ended December 31, 1998 were 0.42% and 1.17%, respectively. This commitment may
be changed at any time following consultation with the board of directors.
(8) The expense figures shown are net of certain fee waivers or reductions
from Janus Capital Corporation, the investment adviser of the Janus Aspen
Series. Without such waivers or reductions, the total fees and expenses in 1998
would have totaled: 0.75% for Growth and 0.74% for Worldwide Growth.
(9) Lazard Asset Management, the Fund's investment adviser, has voluntarily
agreed to reimburse all expenses through December 31, 1999 to the extent total
annual portfolio expenses exceed in any fiscal year 1.25% of the Portfolio's
average daily net assets. Absent such an agreement with the adviser, the total
annual portfolio expenses for the year ended December 31, 1998 would have been
21.32% for the Lazard Retirement Equity Portfolio and 16.20% for the Lazard
Retirement Small Cap Portfolio.
(10) Neuberger Berman Advisers Management Trust is divided into portfolios
("Portfolios"), each of which invests all of its net investable assets in a
corresponding series ("Series") of Advisers Managers Trust. The figures reported
under "Management Fees" include the aggregate of the administration fees paid by
the Portfolio and the management fees paid by its corresponding Series.
Similarly, "Other Expenses" includes all other expenses of the Portfolio and its
corresponding Series.
(11) Strong Capital Management, Inc., the investment adviser of the Strong
Mid Cap Growth Fund II, has voluntarily agreed to cap the Fund's total operating
expenses at 1.20%. In the absence of the expense cap, total annual portfolio
expenses for the year ended December 31, 1998 were 1.55%. The Adviser has no
current intention to, but may in the future, discontinue or modify any waiver of
fees or absorption of expenses at its discretion with appropriate notification
to its shareholders.
(12) Van Eck Associates Corporation (the "Adviser") agreed to assume
expenses exceeding 1.50% of the Worldwide Emerging Markets Fund's average daily
net assets. Absent this expense reimbursement, Other Expenses would have been
0.61% and Total Portfolio Expenses would have been 1.61%. The Worldwide Hard
Assets Fund's Other Expenses was reduced by a fee arrangement based on cash
balances left on deposit with the custodian and a directed brokerage arrangement
where the Fund directs certain portfolio trades to a broker that, in turn, pays
a portion of the Fund's expenses. Absent these arrangements, the Other Expenses
would have been 0.20% and Total Portfolio Expenses would have been 1.20%. For
the Worldwide Real Estate Fund the Adviser agreed to waive its management fees
and assume certain expenses for the period January 1, 1998 to February 28, 1998.
The Adviser also agreed to assume expenses exceeding 1.00% of the Worldwide Real
Estate Fund's average daily net assets for the period March 1, 1998 to December
31, 1998. The Worldwide Real Estate Fund expenses were also reduced by a fee
arrangement based on cash balances left on deposit with the custodian and a
directed brokerage arrangement where the Fund directs certain portfolio trades
to a broker that, in turn, pays a portion of the Fund's expenses. Absent these
arrangements, the management fee would have been 1.00%, the Other Expenses would
have been 4.32% and Total Portfolio Expenses would have been 5.32% for the
Worldwide Real Estate Fund.
9
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Examples:
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets:
(a) if you surrender your Contract at the end of each time period; (b) if
you do not surrender your Contract; (c) if you annuitize your Contract (except
under certain circumstances).
<TABLE>
<CAPTION>
TIME PERIODS
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
CONSECO SERIES TRUST
Balanced ................................................................. (a)$ 85 (a)$123 (a)$154 (a)$255
(b)$ 23 (b)$ 69 (b)$119 (b)$255
(c)$ 85 (c)$123 (c)$119 (c)$255
Equity ................................................................... (a)$ 86 (a)$124 (a)$157 (a)$260
(b)$ 23 (b)$ 71 (b)$121 (b)$260
(c)$ 86 (c)$124 (c)$121 (c)$260
Fixed Income ............................................................. (a)$ 85 (a)$121 (a)$152 (a)$250
(b)$ 22 (b)$ 68 (b)$116 (b)$250
(c)$ 85 (c)$121 (c)$116 (c)$250
Government Securities .................................................... (a)$ 85 (a)$121 (a)$152 (a)$250
(b)$ 22 (b)$ 68 (b)$116 (b)$250
(c)$ 85 (c)$121 (c)$116 (c)$250
Money Market ............................................................. (a)$ 82 (a)$114 (a)$139 (a)$224
(b)$ 20 (b)$ 60 (b)$104 (b)$224
(c)$ 82 (c)$114 (c)$104 (c)$224
THE ALGER AMERICAN FUND
Alger American Growth .................................................... (a)$ 86 (a)$124 (a)$156 (a)$259
(b)$ 23 (b)$ 71 (b)$121 (b)$259
(c)$ 86 (c)$124 (c)$121 (c)$259
Alger American Leveraged AllCap........................................... (a)$ 87 (a)$129 (a)$165 (a)$276
(b)$ 25 (b)$ 76 (b)$129 (b)$276
(c)$ 87 (c)$129 (c)$129 (c)$276
Alger American MidCap Growth.............................................. (a)$ 86 (a)$126 (a)$159 (a)$264
(b)$ 23 (b)$ 72 (b)$123 (b)$264
(c)$ 86 (c)$126 (c)$123 (c)$264
Alger American Small Capitalization....................................... (a)$ 87 (a)$127 (a)$161 (a)$269
(b)$ 24 (b)$ 74 (b)$126 (b)$269
(c)$ 87 (c)$127 (c)$126 (c)$269
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC
VP Income & Growth ....................................................... (a)$ 85 (a)$121 (a)$152 (a)$250
(b)$ 22 (b)$ 68 (b)$116 (b)$250
(c)$ 85 (c)$121 (c)$116 (c)$250
VP International ......................................................... (a)$ 93 (a)$145 (a)$192 (a)$328
(b)$ 30 (b)$ 92 (b)$156 (b)$328
(c)$ 93 (c)$145 (c)$156 (c)$328
VP Value ................................................................. (a)$ 88 (a)$130 (a)$167 (a)$280
(b)$ 25 (b)$ 77 (b)$131 (b)$280
(c)$ 88 (c)$130 (c)$131 (c)$280
BERGER INSTITUTIONAL PRODUCTS TRUST
Berger IPT--100 .......................................................... (a)$ 88 (a)$130 (a)$167 (a)$280
(b)$ 25 (b)$ 77 (b)$131 (b)$280
(c)$ 88 (c)$130 (c)$131 (c)$280
Berger IPT--Growth and Income ............................................ (a)$ 88 (a)$130 (a)$167 (a)$280
(b)$ 25 (b)$ 77 (b)$131 (b)$280
(c)$ 88 (c)$130 (c)$131 (c)$280
Berger IPT--Small Company Growth ......................................... (a)$ 89 (a)$135 (a)$174 (a)$295
(b)$ 27 (b)$ 81 (b)$139 (b)$295
(c)$ 89 (c)$135 (c)$139 (c)$295
Berger/BIAM IPT--International ........................................... (a)$ 90 (a)$136 (a)$177 (a)$300
(b)$ 27 (b)$ 83 (b)$141 (b)$300
(c)$ 90 (c)$136 (c)$141 (c)$300
</TABLE>
10
<PAGE>
CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
================================================================================
<TABLE>
<CAPTION>
TIME PERIODS
1 YEAR 3 YEARS 5 YEARS 10 YEARS
================================================================================================================================
<S> <C> <C> <C> <C>
The Dreyfus Socially Responsible Growth Fund, Inc......................... (a) $86 (a)$124 (a)$157 (a)$260
(b) $23 (b)$ 71 (b)$121 (b)$260
(c) $86 (c)$124 (c)$121 (c)$260
Dreyfus Stock Index Fund.................................................. (a) $80 (a)$108 (a)$129 (a)$204
(b) $18 (b)$ 55 (b)$ 94 (b)$204
(c) $80 (c)$108 (c)$ 94 (c)$204
DREYFUS VARIABLE INVESTMENT FUND
Disciplined Stock ........................................................ (a) $87 (a)$127 (a)$161 (a)$268
(b) $24 (b)$ 73 (b)$125 (b)$268
(c) $87 (c)$127 (c)$125 (c)$268
International Value ...................................................... (a) $91 (a)$139 (a)$181 (a)$308
(b) $28 (b)$ 86 (b)$146 (b)$308
(c) $91 (c)$139 (c)$146 (c)$308
Federated Insurance Series
Federated High Income Bond II ............................................ (a) $86 (a)$124 (a)$156 (a)$258
(b) $23 (b)$ 70 (b)$120 (b)$258
(c) $86 (c)$124 (c)$120 (c)$258
Federated International Equity II......................................... (a) $90 (a)$138 (a)$179 (a)$305
(b) $28 (b)$ 84 (b)$144 (b)$305
(c) $90 (c)$138 (c)$144 (c)$305
Federated Utility II...................................................... (a) $87 (a)$128 (a)$163 (a)$273
(b) $24 (b)$ 75 (b)$128 (b)$273
(c) $87 (c)$128 (c)$128 (c)$273
INVESCO Variable Investment Funds, Inc.
INVESCO VIF-- High Yield.................................................. (a) $89 (a)$133 (a)$170 (a)$287
(b) $26 (b)$ 79 (b)$135 (b)$287
(c) $89 (c)$133 (c)$135 (c)$287
INVESCO VIF-- Equity Income............................................... (a) $87 (a)$128 (a)$163 (a)$273
(b) $24 (b)$ 75 (b)$128 (b)$273
(c) $87 (c)$128 (c)$128 (c)$273
JANUS ASPEN SERIES
Aggressive Growth......................................................... (a) $85 (a)$123 (a)$154 (a)$255
(b) $23 (b)$ 69 (b)$119 (b)$255
(c) $85 (c)$123 (c)$119 (c)$255
Growth.................................................................... (a) $85 (a)$121 (a)$151 (a)$248
(b) $22 (b)$ 67 (b)$115 (b)$248
(c) $85 (c)$121 (c)$115 (c)$248
Worldwide Growth.......................................................... (a) $85 (a)$122 (a)$153 (a)$252
(b) $22 (b)$ 68 (b)$117 (b)$252
(c) $85 (c)$122 (c)$117 (c)$252
LAZARD RETIREMENT SERIES, INC.
Lazard Retirement Equity.................................................. (a) $90 (a)$138 (a)$179 (a)$305
(b) $28 (b)$ 84 (b)$144 (b)$305
(c) $90 (c)$138 (c)$144 (c)$305
Lazard Retirement Small Cap............................................... (a) $90 (a)$138 (a)$179 (a)$305
(b) $28 (b)$ 84 (b)$144 (b)$305
(c) $90 (c)$138 (c)$144 (c)$305
LORD ABBETT SERIES FUND, INC.
Growth and Income......................................................... (a) $85 (a)$123 (a)$155 (a)$256
(b) $23 (b)$ 70 (b)$119 (b)$256
(c) $85 (c)$123 (c)$119 (c)$256
MITCHELL HUTCHINS SERIES TRUST
Growth and Income......................................................... (a) $88 (a)$132 (a)$169 (a)$284
(b) $25 (b)$ 78 (b)$133 (b)$284
(c) $88 (c)$132 (c)$133 (c)$284
</TABLE>
11
<PAGE>
================================================================================
<TABLE>
<CAPTION>
TIME PERIODS
1 YEAR 3 YEARS 5 YEARS 10 YEARS
================================================================================================================================
<S> <C> <C> <C> <C>
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
Limited Maturity Bond..................................................... (a) $85 (a)$123 (a)$155 (a)$256
(b) $23 (b)$ 70 (b)$119 (b)$256
(c) $85 (c)$123 (c)$119 (c)$256
Partners.................................................................. (a) $86 (a)$126 (a)$159 (a)$264
(b) $23 (b)$ 72 (b)$123 (b)$264
(c) $86 (c)$126 (c)$123 (c)$264
STRONG OPPORTUNITY FUND II, INC.
Opportunity Fund II....................................................... (a) $89 (a)$135 (a)$175 (a)$296
(b) $27 (b)$ 82 (b)$139 (b)$296
(c) $89 (c)$135 (c)$139 (c)$296
STRONG VARIABLE INSURANCE FUNDS, INC.
Strong Mid Cap Growth II.................................................. (a) $90 (a)$136 (a)$177 (a)$300
(b) $27 (b)$ 83 (b)$141 (b)$300
(c) $90 (c)$136 (c)$141 (c)$300
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Bond............................................................ (a) $89 (a)$135 (a)$174 (a)$295
(b) $27 (b)$ 81 (b)$139 (b)$295
(c) $89 (c)$135 (c)$139 (c)$295
Worldwide Emerging Markets................................................ (a) $93 (a)$145 (a)$192 (a)$328
(b) $30 (b)$ 92 (b)$156 (b)$328
(c) $93 (c)$145 (c)$156 (c)$328
Worldwide Hard Assets..................................................... (a) $89 (a)$135 (a)$175 (a)$296
(b) $27 (b)$ 82 (b)$139 (b)$296
(c) $89 (c)$135 (c)$139 (c)$296
Worldwide Real Estate..................................................... (a) $87 (a)$127 (a)$161 (a)$269
(b) $24 (b)$ 74 (b)$126 (b)$269
(c) $87 (c)$127 (c)$126 (c)$269
</TABLE>
Explanation of Fee Table and Examples
1. The purpose of the Fee Table is to show you the various expenses you
will incur directly or indirectly with the Contract. The Fee Table reflects
expenses of the Separate Account as well as the Investment Portfolios.
2. Every year you can take money out of your Contract, without the
contingent deferred sales charge, of an amount equal to the greater of: (i) 10%
of the value of your Contract or (ii) the IRS minimum distribution requirement
for your Contract if issued as an Individual Retirement Annuity, or (iii) the
total of your Purchase Payments that have been in the Contract more than 7
complete years.
3. Conseco Variable will not charge you the transfer fee even if there is
more than one transfer in a 30-day period during the Accumulation Phase if the
transfer is for the Dollar Cost Averaging, Sweep or Rebalancing Programs. We
will also not charge you a transfer fee on transfers made at the end of the free
look period. All reallocations made on the same day count as one transfer.
4. Conseco Variable will not charge the contract maintenance charge if the
value of your Contract is $50,000 or more. However, if you make a complete
withdrawal, we will charge the contract maintenance charge.
5. Premium taxes are not reflected. Premium taxes may apply depending on
the state where you live.
6. The assumed average Contract size is $30,000.
7. The examples should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
There is Condensed Financial Information in Appendix A to this prospectus.
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CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
================================================================================
1. The Conseco Advantage Annuity Contract
This Prospectus describes the Conseco Advantage Fixed and Variable Annuity
Contract offered by Conseco Variable.
An annuity is a contract between you, the Owner, and an insurance company
(in this case Conseco Variable), where the insurance company promises to pay you
an income, in the form of Annuity Payments. Until you decide to begin receiving
Annuity Payments, your annuity is in the Accumulation Phase. Once you begin
receiving Annuity Payments, your Contract switches to the Income Phase.
The Contract benefits from Tax-Deferral. Tax-Deferral means that you are
not taxed on earnings or appreciation on the assets in your Contract until you
take money out of your Contract.
The Contract is a variable annuity. You can choose among 40 Investment
Portfolios and, depending upon market conditions, you can make or lose money in
any of these portfolios. If you select the variable annuity portion of the
Contract, the amount of money you are able to accumulate in your Contract during
the Accumulation Phase depends upon the investment performance of the Investment
Portfolio(s) you select. The amount of the Annuity Payments you receive during
the Income Phase from the variable annuity portion of the Contract also depends
upon the investment performance of the Investment Portfolios you select for the
Income Phase.
The Contract contains a Fixed Account. The Fixed Account offers an interest
rate that is guaranteed to be no less than 3% by Conseco Variable. If you select
the Fixed Account, the amount of money you are able to accumulate in your
Contract during the Accumulation Phase depends upon the total interest credited
to your Contract. The amount of the Annuity Payments you receive during the
Income Phase from the Fixed Account portion of the Contract will remain level
for the entire Income Phase.
The Contract also contains 3 Guarantee Periods within the MVA Option. Your
money will earn interest at the rate set by Conseco Variable. The interest rate
is guaranteed by Conseco Variable for the time you agree to leave your money in
the Guarantee Period. We currently offer Guarantee Periods for 1, 3 and 5 years.
If you allocate money to a Guarantee Period, the amount of money you are able to
accumulate in your Contract during the Accumulation Phase depends upon the total
interest credited to your Contract. An adjustment to your Contract will apply to
withdrawals, transfers or annuitizations from the 1, 3 and 5 year Guarantee
Periods prior to the end of the selected period.
As Owner of the Contract , you exercise all rights under the Contract. You
can change the Owner at any time by notifying Conseco Variable in writing. You
and another person can be named Joint Owners. We have described more information
on this in Section 10--Other Information.
2. Annuity Payments (The Income Phase)
Under the Contract you can receive regular income payments. You can choose
the month and year in which those payments begin. We call that date the Annuity
Date. Your Annuity Date can be any date selected by you. Your Annuity Date
cannot be any earlier than 90 days after we issue the Contract. Annuity Payments
must begin by the earlier of the Annuitant's 90th birthday or the maximum date
allowed by law. You can also choose among income plans. We call those Annuity
Options.
We ask you to choose your Annuity Date when you purchase the Contract. With
30 days notice to us, you can change the Annuity Date or Annuity Option at any
time before the Annuity Date. The Annuitant is the person whose life we look to
when we determine Annuity Payments.
You can select an Annuity Option any time 30 days before the Annuity Date.
If you do not choose an Annuity Option, we will assume that you selected Option
2 which provides a life annuity with 10 years of guaranteed payments.
On the Annuity Date the value of your Contract, less any premium tax, plus
any market value adjustment (which may be positive or negative), less any
contingent deferred sales charge, and less any contract maintenance charge will
be applied under the Annuity Option you selected. If you select an Annuity Date
that is at least 4 years after your Contract was issued and you choose an
Annuity Option that has a life contingency or is for a minimum of 5 years, the
value of your Contract,
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less any premium tax and less any contract maintenance charge will be applied
under the Annuity Option you selected. A contingent deferred sales charge will
not be deducted under these circumstances.
During the Income Phase, you can choose to have payments come from the
Investment Portfolios, the Fixed Account or both. Payments cannot come from the
MVA Option during the Income Phase. If you don't tell us otherwise, your Annuity
Payments will be based on the investment allocations in the Investment
Portfolios and Fixed Account that were in place on the Annuity Date.
If you choose to have any portion of your Annuity Payments come from the
Investment Portfolio(s), the dollar amount of your payment will depend upon 3
things:
1) the value of your Contract in the Investment Portfolio on the Annuity
Date;
2) the 3% or 5% (as you selected) assumed investment rate used in the
annuity table for the Contract; and
3) the performance of the Investment Portfolio(s) you selected.
You can choose either a 5% or a 3% assumed investment rate. If the actual
performance exceeds the 3% or 5% (as you selected) assumed investment rate, your
Annuity Payments will increase. Similarly, if the actual investment rate is less
than 3% or 5% (as you selected), your Annuity Payments will decrease.
Unless you notify us otherwise, we will pay the Annuity Payments to you.
You can change the payee at any time prior to the Annuity Date. Income from any
distribution will be reported to you for tax purposes.
You can choose one of the following Annuity Options or any other Annuity
Option which is acceptable to Conseco Variable. After Annuity Payments begin,
you cannot change the Annuity Option.
Option 1. Income For A Specified Period. We will pay an income for a
specific number of years in equal installments.
Option 2. Life Annuity With 5, 10 or 20 Years Guaranteed. We will make
monthly Annuity Payments so long as the Annuitant is alive. However, when the
Annuitant dies, if we have made Annuity Payments for less than the selected
guaranteed period, we will then continue to make Annuity Payments for the rest
of the guaranteed period to the beneficiary.
Option 3. Income Of Specified Amount. We will pay income of a specified
amount until the principal and interest are exhausted.
Option 4. Joint And Survivor Annuity. We will make monthly Annuity Payments
so long as the Annuitant and a joint Annuitant are both alive. When either of
these people die, the amount of the Annuity Payments we will make to the
survivor can be equal to 100%, 66 2/3% or 50% of the amount that we would have
paid if both were alive.
Annuity Payments are made monthly unless you have less than $5,000 to apply
toward a payment. In that case, Conseco Variable may make a single lump sum
payment to you. Likewise, if your Annuity Payments would be less than $50 a
month, Conseco Variable has the right to change the frequency of payments so
that your Annuity Payments are at least $50.
3. Purchase
Purchase Payments
A Purchase Payment is the money you give us to buy the Contract. The
minimum we will accept is $5,000 when the Contract is bought as a Non-Qualified
Contract. If you are buying the Contract as part of an Individual Retirement
Annuity (IRA), the minimum we will accept is $2,000. For each Guarantee Period
of the MVA Option, a minimum of $2,000 is required. The maximum we accept is
$2,000,000 without our prior approval.
You can make additional Purchase Payments of $500 or more to a
Non-Qualified Contract and $50 to an IRA Contract. However, if you select the
automatic premium check option, you can make additional payments of $200 each
month for Non-Qualified Contracts and $50 each month for IRA Contracts.
Allocation of Purchase Payments
When you purchase a Contract , we will allocate your Purchase Payment to
the Fixed Account, the Guarantee Periods of the MVA Option and/or one or more of
the Investment Portfolios you have selected. Currently, you can allocate money
in up to 15 Investment Portfolios at any one time. If you make additional
Purchase Payments, we will allocate them in the same way as your first Purchase
Payment unless you tell us otherwise. Currently, the
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CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
================================================================================
minimum amount which can be allocated to any of the Guarantee Periods of the MVA
Option is $2,000. We reserve the right to change this amount in the future.
Once we receive your Purchase Payment and the necessary information, we
will issue your Contract and allocate your first Purchase Payment within 2
business days. If you do not provide us all of the information needed, we will
contact you. If for some reason we are unable to complete this process within 5
business days, we will either send back your money or get your permission to
keep it until we get all of the necessary information. If you add more money to
your Contract by making additional Purchase Payments, we will credit these
amounts to your Contract within one business day. Our business day closes when
the New York Stock Exchange closes, usually 4:00 P.M. Eastern time.
Free Look
If you change your mind about owning the Contract, you can cancel it within
10 days after receiving it (or whatever period is required in your state). When
you cancel the Contract within this time period, Conseco Variable will not
assess a contingent deferred sales charge. On the day we receive your request we
will return the value of your Contract. In some states, we may be required to
refund your Purchase Payment. If you have purchased the Contract as an IRA, we
are required to give you back your Purchase Payment if you decide to cancel your
Contract within 10 days after receiving it (or whatever period is required in
your state).
Accumulation Units
The Accumulation Unit value for each account was arbitrarily set initially
at $10.00. The value of the variable annuity portion of your Contract will
increase or decrease depending upon the investment performance of the Investment
Portfolio(s) you choose. In order to keep track of the value of your Contract ,
we use a unit of measure we call an Accumulation Unit. (An Accumulation Unit
works like a share of a mutual fund.) During the Income Phase of the Contract we
call the unit an Annuity Unit.
Every business day we determine the value of an Accumulation Unit for each
of the Investment Portfolios by multiplying the Accumulation Unit value for the
previous period by a factor for the current period. The factor is determined by:
1. dividing the value of an Investment Portfolio share at the end of the
current period (and any charges for taxes) by the value of an Investment
Portfolio share for the previous period; and
2. subtracting the daily amount of the insurance charges. The value of an
Accumulation Unit may go up or down from day to day.
When you make a Purchase Payment, we credit your Contract with Accumulation
Units. The number of Accumulation Units credited is determined by dividing the
amount of the Purchase Payment allocated to an Investment Portfolio by the value
of the Accumulation Unit for that Investment Portfolio.
We calculate the value of an Accumulation Unit for each Investment
Portfolio after the New York Stock Exchange closes each day and then credit your
Contract .
Example: On Wednesday we receive an additional Purchase Payment of $4,000
from you. You have told us you want this to go to the Equity Portfolio. When the
New York Stock Exchange closes on that Wednesday, we determine that the value of
an Accumulation Unit for the Equity Portfolio is $12.25. We then divide $4,000
by $12.25 and credit your Contract on Wednesday night with 326.53 Accumulation
Units for the Equity Portfolio.
4. Investment Options
Investment Portfolios
The Contract offers 40 Investment Portfolios which are listed below. You
can invest in up to 15 Investment Portfolios at any one time. Additional
Investment Portfolios may be available in the future.
Shares of the funds are offered in connection with certain variable annuity
contracts and variable life insurance policies of various life insurance
companies which may or may not be affiliated with Conseco Variable. Certain
Investment Portfolios are also sold directly to Qualified plans. The funds do
not believe that offering their shares in this manner will be disadvantageous to
you.
Conseco Variable may enter into certain arrangements under which it is
reimbursed by the Investment Portfolios' advisers, distributors and/or
affiliates for the administrative services which it provides to the portfolios.
15
<PAGE>
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You should read the prospectuses for these funds carefully before
investing. Copies of these prospectuses are attached to this prospectus.
Conseco Series Trust
Conseco Series Trust is a mutual fund with multiple portfolios. Conseco
Series Trust is managed by Conseco Capital Management, Inc. The following
portfolios are available under the Contract:
Balanced Portfolio (formerly, Asset Allocation Portfolio)
Equity Portfolio (formerly, Common Stock Portfolio)
Fixed Income Portfolio (formerly, Corporate Bond Portfolio)
Government Securities Portfolio
Money Market Portfolio
The Alger American Fund
The Alger American Fund is a mutual fund with multiple portfolios. Fred
Alger Management, Inc. serves as the Fund's investment adviser. The following
portfolios are available under the Contract:
Alger American Growth Portfolio
Alger American Leveraged AllCap Portfolio
Alger American MidCap Growth Portfolio
Alger American Small Capitalization Portfolio
American Century Variable Portfolios, Inc.
American Century Variable Portfolios, Inc. is a series of funds managed by
American Century Investment Management, Inc. The following portfolios are
available under the Contract:
VP Income & Growth
VP International
VP Value (long-term capital growth with income as a secondary objective)
Berger Institutional Products Trust
Berger Institutional Products Trust is a mutual fund with multiple
portfolios. Berger Associates, Inc. is the investment adviser to all portfolios
except the Berger/BIAM IPT--International Fund. BBOI Worldwide, LLC is the
adviser to the Berger/BIAM IPT--International Fund. The following portfolios are
available under the Contract:
Berger IPT--100 Fund (long-term capital appreciation)
Berger IPT--Growth and Income Fund
Berger IPT--Small Company Growth Fund
Berger/BIAM IPT--International Fund
The Dreyfus Socially Responsible Growth Fund, Inc.
The Dreyfus Socially Responsible Growth Fund, Inc. is managed by The
Dreyfus Corporation. Dreyfus has hired NCM Capital Management Group, Inc. to
serve as sub-investment adviser and provide day-to-day management of the Fund's
investments.
Dreyfus Stock Index Fund
The Dreyfus Corporation serves as the Fund's manager. Dreyfus has hired its
affiliate, Mellon Equity Associates, to serve as the Fund's index fund manager
and provide day-to-day management of the Fund's investments.
Dreyfus Variable Investment Fund
The Dreyfus Variable Investment Fund is a mutual fund with multiple
portfolios. The Dreyfus Corporation serves as the investment adviser. The
following portfolios are available under the Contract:
Disciplined Stock Portfolio (seeks to outperform the total return
performance of the Standard & Poor's 500 Composite Stock Price Index)
International Value Portfolio
Federated Insurance Series
Federated Insurance Series is a mutual fund with multiple portfolios.
Federated Investment Management Company is the investment adviser. The adviser
changed its name from Federated Advisers to Federated Investment Management
Company on March 31, 1999. Federated Global Investment Management Corp. is the
sub-adviser of the Federated International Equity Fund II. The following
portfolios are available under the Contract:
Federated High Income Bond Fund II
Federated International Equity Fund II
Federated Utility Fund II
INVESCO Variable Investment Funds, Inc.
INVESCO Variable Investment Funds, Inc. is a mutual fund with multiple
portfolios. INVESCO Funds Group, Inc. is the investment adviser. The following
portfolios are available under the Contract:
INVESCO VIF - High Yield Fund (seeks high level of current income)
INVESCO VIF - Equity Income Fund (formerly, INVESCO VIF - Industrial Income
Portfolio) (seeks high current income with growth of capital as a secondary
goal)
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CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
================================================================================
Janus Aspen Series
The Janus Aspen Series is a mutual fund with multiple portfolios which are
advised by Janus Capital Corporation. The following portfolios are available
under the Contract:
Aggressive Growth Portfolio
Growth Portfolio
Worldwide Growth Portfolio
Lazard Retirement Series, Inc.
Lazard Retirement Series, Inc. is a mutual fund with multiple portfolios.
Lazard Asset Management, a division of Lazard Freres & Co. LLC, is the
investment manager for each portfolio. The following portfolios are available
under the Contract:
Lazard Retirement Equity Portfolio
Lazard Retirement Small Cap Portfolio
Lord Abbett Series Fund, Inc.
Lord Abbett Series Fund, Inc. is a mutual fund managed by Lord, Abbett &
Co. The following portfolio is available under the Contract:
Growth and Income Portfolio
Mitchell Hutchins Series Trust
Mitchell Hutchins Series Trust is a mutual fund with multiple portfolios.
Mitchell Hutchins Asset Management Inc. provides advisory and administrative
services to the Fund. The following portfolio is available under the Contract:
Growth and Income Portfolio
Neuberger Berman Advisers Management Trust
Each portfolio of Neuberger Berman Advisers Management Trust invests in a
corresponding series of Advisers Managers Trust. All series of Advisers Managers
Trust are managed by Neuberger Berman Management Inc. The following are
available under the Contract:
Limited Maturity Bond Portfolio
Partners Portfolio (capital growth)
Strong Opportunity Fund II, Inc.
Strong Opportunity Fund II is a mutual fund managed by Strong Capital
Management, Inc. The following portfolio is available under the Contract:
Opportunity Fund II (capital growth)
Strong Variable Insurance Funds, Inc.
Strong Variable Insurance Funds, Inc. is a mutual fund with multiple
series. Strong Capital Management, Inc. serves as the investment adviser. The
following series is available under the Contract:
Strong Mid Cap Growth Fund II (formerly, Growth Fund II)
Van Eck Worldwide Insurance Trust
Van Eck Worldwide Insurance Trust is a mutual fund with multiple portfolios
which are managed by Van Eck Associates Corporation. The following portfolios
are available under the Contract:
Worldwide Bond Fund
Worldwide Emerging Markets Fund
Worldwide Hard Assets Fund
Worldwide Real Estate Fund
Voting Rights
Conseco Variable is the legal owner of the Investment Portfolio shares.
However, Conseco Variable believes that when an Investment Portfolio solicits
proxies in conjunction with a vote of shareholders, it is required to obtain
from you and other Owners instructions as to how to vote those shares. When we
receive those instructions, we will vote all of the shares we own in proportion
to those instructions. Should Conseco Variable determine that it is no longer
required to comply with the above, we will vote the shares in our own right.
Substitution
Conseco Variable may, in the interest of shareholders, deem it necessary to
discontinue one or more of the Investment Portfolios or substitute one of the
Investment Portfolios you have selected with another Investment Portfolio. We
will notify you of our intent to do this. We will obtain prior approval by the
Securities and Exchange Commission before any such change is made.
The Fixed Account
You can invest in the one year Fixed Account of Conseco Variable. The Fixed
Account offers an interest rate that is guaranteed to be no less than 3%
annually by Conseco Variable. If you select the Fixed Account, your money will
be placed with the other general assets of Conseco Variable.
The MVA Option
The Contract also offers three Guarantee Periods of the market value
adjustment option (MVA Option). A Guarantee Period is the period of time for
which interest is credited in the market value adjustment option. Each
allocation or transfer to the MVA Option creates one or more new Guarantee
Periods. We currently offer Guarantee Periods of 1, 3 and 5 years. You can
allocate your Purchase
17
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Payment or transfer money to any of the currently available periods.
The Guarantee Periods of the MVA Option offer interest rates that are
guaranteed by Conseco Variable. Interest rates may differ from time to time
because of changes in market conditions. The interest rates set for a Guarantee
Period for new Purchase Payments may be different from the interest rates
offered for money already in the Guarantee Periods. We set interest rates at our
discretion. Once we set an interest rate for a Guarantee Period, it will not
change during that period.
If you do not specify a Guarantee Period at the time of renewal, we will
select the same Guarantee Period that just finished as long as it does not
extend beyond the latest Annuity Date. If it does, we will choose the one year
period. If there is no Guarantee Period for the same period available, the one
year period will be selected. If it is not available, the next longest period
will be selected.
If you take money out (whether by withdrawal, transfer or annuitization) of
the Guarantee Period before the end of the period in excess of the free amount
(see below), an adjustment will be made to the amount withdrawn. This adjustment
is referred to as a market value adjustment. The market value adjustment can
increase or decrease the amount you take out of your Contract. However, after
the first year in a period, you can make one withdrawal each year of up to a
total of 10% of the value of your MVA Option in that period and no market value
adjustment will be made to that withdrawal (free amount).
We will not apply a market value adjustment for any withdrawals in the
following situations:
o to pay a death benefit;
o to pay fees or charges under the Contract;
o amounts which you withdraw or transfer during the 30-day period before
the end of the Guarantee Period;
o when your Contract switches to the Income Phase if your Annuity
Payments begin after the 4th year from the date your Contract was
issued and you have chosen an Annuity Option that provides for a life
contingency or is for a period of at least 5 years; or
o withdrawals of the free amount.
The market value adjustment is determined by comparing the U.S. Treasury
rate which was in effect at the beginning of the Guarantee Period for the length
of the Guarantee Period selected versus the current U.S. Treasury Rate as of the
date of the withdrawal or transfer for the number of years remaining (rounded
up) plus .005. The U.S. Treasury Rate is the Bloomberg published Treasury rate
found in the Wall Street Journal or on the Bloomberg System, representing the
last trade made in the Treasury market for the applicable maturities related to
the product. In general, if interest rates have dropped between the time you
allocated your money to the Guarantee Period and the time you took it out, there
will be a positive adjustment to the value of your Contract. But, if interest
rates have increased between the time you allocated your money to the Guarantee
Period and the time you took it out, there will be a negative adjustment.
Appendix B contains more information regarding how Conseco Variable
calculates the market value adjustment, including examples.
Transfers
You can transfer money among the Fixed Account, the MVA Option and the
Investment Portfolios. However, you cannot be invested in more than 15
Investment Portfolios, the 3 Guarantee Periods of the MVA Option and/or the
Fixed Account at any time.
TRANSFERS DURING THE ACCUMULATION PHASE. You can make one transfer in a
30-day period during the Accumulation Phase without charge. You can make a
transfer to or from the Fixed Account, the MVA Option and to or from any
Investment Portfolio. Transfers from a Guarantee Period of the MVA Option before
the end of the period may be subject to an adjustment. If you make more than one
transfer in a 30-day period, a transfer fee of $25 may be deducted. The
following apply to any transfer during the Accumulation Phase:
1. The minimum amount which you can transfer is $500 or your entire value
in the Investment Portfolio, or $2,000 into any Guarantee Period of the MVA
Option or the Fixed Account. This requirement is waived if the transfer is
pursuant to the dollar cost averaging or rebalancing programs.
2. You must leave at least $500 in each Investment Portfolio, Guarantee
Period of the MVA Option or the Fixed Account after you make a transfer unless
the entire amount is being transferred. Transfers out of the Fixed Account are
lim-
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Individual and Group Annuity
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ited to 20% of the value of your Contract every 6 months.
3. Your request for a transfer must clearly state which Investment
Portfolio(s), the Guarantee Period of the MVA Option or the Fixed Account are
involved in the transfer.
4. Your request for transfer must clearly state how much the transfer is
for.
TRANSFERS DURING THE INCOME PHASE. You can only make two transfers every
year during the Income Phase. The two transfers are free. We measure a year from
the anniversary of the day we issued your Contract. The following apply to any
transfer during the Income Phase:
1. You can make transfers at least 30 days before the due date of the first
Annuity Payment for which the transfer will apply.
2. The minimum amount which you can transfer is $500 or your entire value
in the Investment Portfolio.
3. You must leave at least $500 in each Investment Portfolio (or $0 if you
are transferring the entire amount) after a transfer.
4. No transfers can be made between the Fixed Account and the Investment
Portfolios. You may only make transfers between the Investment Portfolios.
This product is not designed for professional market timing organizations.
Conseco Variable reserves the right to modify the transfer privileges described
above.
TELEPHONE TRANSFERS. You can elect to make transfers by telephone. You can
also authorize someone else to make transfers for you. If you own the Contract
with a Joint Owner, unless Conseco Variable is instructed otherwise, Conseco
Variable will accept instructions from either you or the other Owner. Conseco
Variable will use reasonable procedures to confirm that instructions given to us
by telephone are genuine. All telephone calls will be recorded and the caller
will be asked to produce personalized data about the Owner before we will make
the telephone transfer. We will send you a written confirmation of the transfer.
If Conseco Variable fails to use such procedures, we may be liable for any
losses due to unauthorized or fraudulent instructions.
Dollar Cost Averaging Program
The Dollar Cost Averaging Program allows you to systematically transfer a
set amount either monthly, quarterly, semi-annually or annually from the Money
Market Portfolio or the Fixed Account to any of the other Investment
Portfolio(s). You cannot transfer to the MVA Option under this program. By
allocating amounts on a regular schedule as opposed to allocating the total
amount at one particular time, you may be less susceptible to the impact of
market fluctuations.
You must have at least $2,000 in the Money Market Portfolio or the Fixed
Account in order to participate in the Dollar Cost Averaging Program.
All Dollar Cost Averaging transfers will be made on the first business day
of the month. Dollar Cost Averaging must be for 36-60 months. Dollar Cost
Averaging will end when the value in the Money Market Portfolio or the Fixed
Account is zero. We will notify you when that happens.
If you participate in the Dollar Cost Averaging Program, the transfers made
under the program are not taken into account in determining any transfer fee.
Rebalancing Program
Once your money has been allocated among the Investment Portfolios, the
performance of each portfolio may cause your allocation to shift. If the value
of your Contract is at least $5,000, you can direct us to automatically
rebalance your Contract to return to your original percentage allocations by
selecting our Rebalancing Program. You can tell us whether to rebalance
quarterly, semi-annually or annually. We will measure these periods from the
date you selected. You must use whole percentages in 1% increments for
rebalancing. There will be no rebalancing within the Fixed Account or the MVA
Option. You can discontinue rebalancing at any time. You can change your
rebalancing requests at any time in writing which we must receive before the
next rebalancing date. If you participate in the Rebalancing Program, the
transfers made under the program are not taken into account in determining any
transfer fee.
Example:
Assume that you want your initial Purchase Payment split between 2
Investment Portfolios. You want 40% to be in the Fixed Income Portfolio and
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60% to be in Growth Portfolio. Over the next 2 1/2 months the bond market does
very well while the stock market performs poorly. At the end of the first
quarter, the Fixed Income Portfolio now represents 50% of your holdings because
of its increase in value. If you had chosen to have your holdings rebalanced
quarterly, on the first day of the next quarter, Conseco Variable would sell
some of your units in the Fixed Income Portfolio to bring its value back to 40%
and use the money to buy more units in the Growth Portfolio to increase those
holdings to 60%.
Asset Allocation Program
We understand the importance to you of having advice from a financial
adviser regarding your investments in the Contract (asset allocation program).
Certain investment advisers have made arrangements with us to make their
services available to you. Conseco Variable has not made any independent
investigation of these advisers and is not endorsing such programs. You may be
required to enter into an advisory agreement with your investment adviser to
have the fees paid out of your Contract during the Accumulation Phase.
Conseco Variable will, pursuant to an agreement with you, make a partial
withdrawal from the value of your Contract to pay for the services of the
investment adviser. If the Contract is Non- Qualified, the withdrawal will be
treated like any other distribution and may be included in gross income for
federal tax purposes. Further, if you are under age 59 1/2, it may be subject to
a tax penalty. If the Contract is Qualified, the withdrawal for the payment of
fees may not be treated as a taxable distribution if certain conditions are met.
Additionally, any withdrawals for this purpose may be subject to a contingent
deferred sales charge. You should consult a tax adviser regarding the tax
treatment of the payment of investment adviser fees from your Contract.
Sweep Program
You can elect to transfer (sweep) your earnings from the Fixed Account to
the Investment Portfolios on a periodic and systematic basis.
5. Expenses
There are charges and other expenses associated with the Contract that
reduce the return on your investment in the Contract. These charges and expenses
are:
Insurance Charges
Each day, Conseco Variable makes a deduction for its insurance charges.
Conseco Variable does this as part of its calculation of the value of the
Accumulation Units and the Annuity Units.
The insurance charge has two parts: 1) the mortality and expense risk
charge, and 2) the administrative charge.
o Mortality And Expense Risk Charge. This charge is equal, on an annual
basis, to 1.25% of the average daily value of the Contract invested in
an Investment Portfolio, after expenses have been deducted. This
charge is for the insurance benefits provided under the Contract and
certain administrative and distribution expenses associated with the
Contract.
o ADMINISTRATIVE CHARGE. This charge is equal, on an annual basis, to
.15% of the average daily value of the Contract invested in an
Investment Portfolio, after expenses have been deducted. This charge
may be increased but will not exceed .25% of the average daily value
of the Contract invested in an Investment Portfolio, after expenses
have been deducted. We will give you 60 days' notice if this charge is
increased. This charge is for certain administrative expenses.
Contract Maintenance Charge
During the Accumulation Phase, every year on the anniversary of the date
when your Contract was issued, Conseco Variable deducts $30 from your Contract
as a contract maintenance charge. We reserve the right to change this charge but
it will not be more than $60 each year. No contract maintenance charge is
deducted during the Income Phase. This charge is for certain administrative
expenses associated with the Contract.
Under current practices, Conseco Variable does not deduct this charge if
the value of your Contract is $50,000 or more. Conseco Variable may some time in
the future discontinue this practice and deduct the charge.
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Individual and Group Annuity
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If you make a complete withdrawal from your Contract, the contract
maintenance charge will also be deducted. The charge will be deducted if the
Annuity Date is other than an anniversary.
Contingent Deferred Sales Charge
During the Accumulation Phase, you can make withdrawals from your Contract.
Conseco Variable keeps track of each Purchase Payment.
Every year you can take money out of your Contract, without charge, of an
amount equal to the greater of:
o 10% of the value of your Contract (if you do not use the 10% in any
year, it may not be carried over to the next year), or
o the IRS minimum distribution requirement for this Contract if it was
issued under an Individual Retirement Annuity, or
o the total of your Purchase Payments that have been in the Contract
more than 7 complete years.
Withdrawals in excess of these amounts will be charged a contingent
deferred sales charge which equals:
No. Of Years Contingent
From Receipt Deferred Sales
Of Purchase Payment Charge
- --------------------------------------------------------------------------------
First Year .................................................... 7%
Second Year ................................................... 7%
Third Year .................................................... 6%
Fourth Year ................................................... 5%
Fifth Year .................................................... 4%
Sixth Year .................................................... 3%
Seventh Year .................................................. 2%
Eighth Year and more .......................................... 0%
In addition, the following circumstances further limit or reduce withdrawal
charges:
o for issue ages up to 52, there is no contingent deferred sales charge
made after the 15th Contract year and later;
o for issue ages 53 to 56, there is no contingent deferred sales charge
made after you attain age 67 or later;
o for issue ages 57 and later, any otherwise applicable contingent
deferred sales charge will be multiplied by a factor ranging from .9
to 0 for Contract years one through ten and later, respectively.
The contingent deferred sales charge is assessed against each Purchase
Payment withdrawn and will reduce the remaining value of your Contract. For
purposes of the contingent deferred sales charge, Conseco Variable treats
withdrawals as coming from the oldest purchase payment first. The contingent
deferred sales charge compensates us for expenses associated with selling the
Contract.
Withdrawals from a Guarantee Period of the MVA Option may also be subject
to a market value adjustment. (See Appendix B for information on the market
value adjustment.)
Note: For tax purposes, withdrawals are generally considered to have come
from earnings first.
Conseco Variable does not assess the contingent deferred sales charge on
death benefits or on any payments paid out as Annuity Payments if your Annuity
Date is at least four years after we issue your Contract and your Annuity Option
has a life contingency or is for a minimum of 5 years.
Reduction or Elimination of the Contingent Deferred Sales Charge
Conseco Variable will reduce or eliminate the amount of the contingent
deferred sales charge when the Contract is sold under circumstances which reduce
its sales expenses. Some examples are: if there is a large group of individuals
that will be purchasing the Contract or a prospective purchaser already had a
relationship with Conseco Variable. Conseco Variable will not deduct a
contingent deferred sales charge when a Contract is issued to an officer,
director or employee or Conseco Variable or any of its affiliates. Any
circumstances resulting in the reduction or elimination of the contingent
deferred sales charge requires our prior approval. In no event will reduction or
elimination of the contingent deferred sales charge be permitted where it would
be unfairly discriminatory to any person.
Transfer Fee
You can make one free transfer every 30 days during the Accumulation Phase.
If you make more than one transfer in a 30-day period, you could be charged a
transfer fee of $25 per transfer. We reserve the right to change the transfer
fee. The transfer fee is deducted from the account from which the transfer was
made. If the entire amount in the account is transferred, the fee will be
deducted from the amount transferred. If you transfer money from more than one
account, the charge is deducted from the account with the largest balance. The
two transfers permitted each year during the Income Phase are free.
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All reallocations made in the same day count as one transfer. Transfers
made at the end of the free look period by us are not counted in determining the
transfer fee. If the transfer is part of the Dollar Cost Averaging Program, the
Rebalancing Program or the Sweep Program it will not count in determining the
transfer fee.
Transfers from a Guarantee Period of the MVA Option may also be subject to
a market value adjustment. (See Appendix B for information on the market value
adjustment.)
Premium Taxes
Some states and other governmental entities (e.g., municipalities) charge
premium taxes or similar taxes. Conseco Variable is responsible for the payment
of these taxes and will make a deduction from the value of the Contract for
them. These taxes are due either when the Contract is issued or when Annuity
Payments begin. It is Conseco Variable's current practice to deduct these taxes
when either Annuity Payments begin or upon partial or full surrender of the
Contract. Conseco Variable may in the future discontinue this practice and
assess the charge when the tax is due. Premium taxes currently range from 0% to
3.5%, depending on the jurisdiction.
Income Taxes
Conseco Variable will deduct from the Contract for any income taxes which
it incurs because of the Contract. At the present time, we are not making any
such deductions.
Investment Portfolio Expenses
There are deductions from and expenses paid out of the assets of the
various Investment Portfolios, which are described in the attached fund
prospectuses.
6. Taxes
Note: Conseco Variable has prepared the following information on taxes as a
general discussion of the subject. It is not intended as tax advice to any
individual. You should consult your own tax adviser about your own
circumstances. Conseco Variable has included in the statement of additional
information an additional discussion regarding taxes.
Annuity Contracts in General
Annuity contracts are a means of setting aside money for future needs,
usually retirement. Congress recognized how important saving for retirement was
and provided special rules in the Internal Revenue Code (Code) for annuities.
Simply stated, these rules provide that you will not be taxed on the
earnings on the money held in your annuity contract until you take the money
out. This is referred to as Tax-Deferral. There are different rules as to how
you will be taxed depending on how you take the money out and the type of
Contract--Qualified or Non-Qualified (see following sections).
You, as the Owner, will not be taxed on increases in the value of your
Contract until a distribution occurs--either as a withdrawal or as Annuity
Payments. When you make a withdrawal you are taxed on the amount of the
withdrawal that is earnings. For Annuity Payments, different rules apply. A
portion of each Annuity Payment is treated as a partial return of your Purchase
Payments and will not be taxed. The remaining portion of the Annuity Payment
will be treated as ordinary income. How the Annuity Payment is divided between
taxable and non-taxable portions depends upon the period over which the Annuity
Payments are expected to be made. Annuity Payments received after you have
received all of your Purchase Payments are fully includible in income.
When a Non-Qualified Contract is owned by a non-natural person (e.g.,
corporation or certain other entities other than a trust holding the Contract as
an agent for a natural person), the Contract will generally not be treated as an
annuity for tax purposes.
Qualified And Non-Qualified Contracts
If you purchase the Contract as an individual and not under any pension
plan, specially sponsored program or an Individual Retirement Annuity (IRA),
your Contract is referred to as a Non-Qualified Contract.
If you purchase the Contract under a pension plan, specially sponsored
program or an IRA, your Contract is referred to as a Qualified Contract.
Withdrawals--Non-Qualified Contracts
If you make a withdrawal from your Contract, the Code generally treats such
a withdrawal as first coming from earnings and then from your Purchase
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Payments. Such withdrawn earnings are includible in income.
The Code also provides that any amount received under an annuity contract
which is included in income may be subject to a penalty. The amount of the
penalty is equal to 10% of the amount that is includible in income. Some
withdrawals will be exempt from the penalty. They include any amounts:
(1) paid on or after you reach age 59 1/2;
(2) paid after you die;
(3) paid if you become totally disabled (as that term is defined in the
Code);
(4) paid in a series of substantially equal payments made annually (or
more frequently) for life or a period not exceeding life expectancy;
(5) paid under an immediate annuity; or
(6) which come from Purchase Payments made prior to August 14, 1982.
Withdrawals--Qualified Contracts
If you make a withdrawal from your Qualified Contract, a portion of the
withdrawal is treated as taxable income. This portion depends on the ratio of
the pre-tax Purchase Payments to the after-tax Purchase Payments in your
Contract. If all of your Purchase Payments were made with pre-tax money then the
full amount of any withdrawal is includible in taxable income. Special rules may
apply to withdrawals from certain types of Qualified Contracts.
The Code also provides that any amount received under a Qualified Contract
which is included in income may be subject to a penalty. The amount of the
penalty is equal to 10% of the amount that is includible in income. This penalty
will be increased to 25% for withdrawals from SIMPLE IRA's within the first two
years of your Contract. Some withdrawals will be exempt from the penalty. They
include any amounts:
(1) paid on or after you reach age 59 1/2;
(2) paid after you die;
(3) paid if you become totally disabled (as that term is defined in Code);
(4) paid to you after leaving your employment in a series of substantially
equal payments made annually (or more frequently) under a lifetime
annuity;
(5) paid to you after you have attained age 55 and left your employment;
(6) paid for certain allowable medical expenses (as defined in the Code);
(7) paid pursuant to a qualified domestic relations order;
(8) paid from an IRA for medical insurance (as defined in the Code);
(9) paid from an IRA for qualified higher education expenses; or
(10) up to $10,000 for qualified first time homebuyer expenses (as defined
in the Code).
The exceptions in (5) and (7) above do not apply to IRAs. The exception in
(4) above applies to IRAs but without the requirement of leaving employment.
We have provided a more complete discussion in the Statement of Additional
Information.
Withdrawals - Tax-Sheltered Annuities
The Code limits the withdrawal of amounts attributable to purchase payments
made by owners under a salary reduction agreement. Withdrawals can only be made
when a Contract Owner:
(1) reaches age 59 1/2;
(2) leaves his or her job;
(3) dies;
(4) becomes disabled (as that term is defined in the Code);
(5) in the case of hardship; or
(6) pursuant to a qualified domestic relations order, if otherwise
permitted.
However, in the case of hardship, the owner can only withdraw the purchase
payments and not any earnings.
Diversification
The Code provides that the underlying investments for a variable annuity
must satisfy certain diversification requirements in order to be treated as an
annuity contract. Conseco Variable believes that the Investment Portfolios are
being managed so as to comply with the requirements.
Investor Control
Neither the Code nor the Internal Revenue Service Regulations issued to
date provide guidance as to the circumstances under which you, because of the
degree of control you exercise over the underlying investments, and not Conseco
Variable would be considered the owner of
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the shares of the Investment Portfolios. If you are considered the owner of the
shares, it will result in the loss of the favorable tax treatment for the
Contract. It is unknown to what extent under federal tax law Owners are
permitted to select Investment Portfolios, to make transfers among the
Investment Portfolios or the number and type of Investment Portfolios Owners may
select from without being considered the owner of the shares. If any guidance is
provided which is considered a new position, then the guidance would generally
be applied prospectively. However, if such guidance is considered not to be a
new position, it may be applied retroactively. This would mean that you, as the
Owner of the Contract, could be treated as the Owner of the Investment
Portfolios.
Due to the uncertainty in this area, Conseco Variable reserves the right to
modify the Contract as reasonably deemed necessary to maintain favorable tax
treatment.
7. Access To Your Money
You can have access to the money in your Contract :
o by making a withdrawal (either a partial or a complete withdrawal);
o by electing to receive Annuity Payments; or
o when a death benefit is paid to your Beneficiary.
Withdrawals can only be made during the Accumulation Phase.
When you make a complete withdrawal, you will receive the value of the
Contract on the day you made the withdrawal, less any applicable contingent
deferred sales charge, less any premium tax less, any contract maintenance
charge and plus or minus any market value adjustment (which may be positive or
negative). (See Section 5--Expenses for a discussion of the charges and Section
4--Investment Options--The MVA Option and Appendix B for a discussion of
withdrawals from the MVA Option.)
You must tell us which account (Investment Portfolio(s), Guarantee Periods
of the MVA Option and/or the Fixed Account) you want the withdrawal to come
from. Under most circumstances, the amount of any partial withdrawal from any
Investment Portfolio, Guarantee Period of the MVA Option or the Fixed Account
must be for at least $500. Conseco Variable requires that after a partial
withdrawal is made there must be at least $500 left in your Contract.
Conseco Variable will pay the amount of any withdrawal from the Investment
Portfolios within 7 days of your request in good order unless the suspension of
payments or transfers provision (see below) is in effect.
Income taxes, tax penalties and certain restrictions may apply to any
withdrawal you make.
There are limits to the amount you can withdraw from a Qualified plan
referred to as a 403(b) (tax-sheltered annuity) plan. For a more complete
explanation, see Section 6.--Taxes and the discussion in the Statement of
Additional Information.
Systematic Withdrawal Program
The Systematic Withdrawal Program allows you to choose to receive your
automatic payments either monthly, quarterly, semi-annually or annually. You
must have at least $5,000 in your Contract to start the program. You cannot take
systematic withdrawals from any Guarantee Period of the MVA Option. You can
instruct us to withdraw a specific amount which can be a percentage of the value
of your Contract or a dollar amount. All systematic withdrawals will be
withdrawn from the Fixed Account and the Investment Portfolio(s) on a pro-rata
basis. The systematic withdrawal program will end any time you designate. If you
make a partial withdrawal outside the program and the value of your Contract is
less than $5,000 the program will automatically terminate. Conseco Variable does
not have any charge for this program, however, the withdrawal may be subject to
a contingent deferred sales charge. For a discussion of the contingent deferred
sales charge, see Section 5--Expenses.
All systematic withdrawals will be paid on the last business day of the
month (beginning with the first full month after you bought your Contract).
You may not participate in the Systematic Withdrawal Program and the Dollar
Cost Averaging Program at the same time.
Income taxes, tax penalties and certain restrictions may apply to
Systematic Withdrawals.
Suspension of Payments or Transfers
Conseco Variable may be required to suspend or postpone payments for
withdrawals or transfers for any period when:
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Individual and Group Annuity
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1. the New York Stock Exchange is closed (other than customary weekend and
holiday closings);
2. trading on the New York Stock Exchange is restricted;
3. an emergency exists as a result of which disposal of shares of the
Investment Portfolios is not reasonably practicable or Conseco Variable cannot
reasonably value the shares of the Investment Portfolios;
4. during any other period when the Securities and Exchange Commission, by
order, so permits for the protection of Owners.
Conseco Variable has reserved the right to defer payment for a withdrawal
or transfer from the Fixed Account and/or the MVA Option for the period
permitted by law but not for more than six months.
8. Performance
Conseco Variable may periodically advertise performance of the annuity
investment in the various Investment Portfolios. Conseco Variable will calculate
performance by determining the percentage change in the value of an Accumulation
Unit by dividing the increase (decrease) for that unit by the value of the
Accumulation Unit at the beginning of the period. This performance number
reflects the deduction of the insurance charges and the fees and expenses of the
Investment Portfolio. It does not reflect the deduction of any applicable
contract maintenance charge and contingent deferred sales charge. The deduction
of any applicable contract maintenance charge and contingent deferred sales
charge would reduce the percentage increase or make greater any percentage
decrease. Any advertisement will also include standardized average annual total
return figures which reflect the deduction of the insurance charges, contract
maintenance charge, contingent deferred sales charge and the fees and expenses
of the Investment Portfolio.
For periods starting prior to the date the Contracts were first offered,
the performance will be based on the historical performance of the corresponding
portfolios, modified to reflect the charges and expenses of the Contract as if
the Contract had been in existence during the period stated in the
advertisement. These figures should not be interpreted to reflect actual
historic performance.
Conseco Variable may, from time to time, include in its advertising and
sales materials, tax deferred compounding charts and other hypothetical
illustrations, which may include comparisons of currently taxable and tax
deferred investment programs, based on selected tax brackets.
9. Death Benefit
Upon Your Death
If you die before Annuity Payments begin, Conseco Variable will pay a death
benefit to your Beneficiary (see below). If you have a Joint Owner, the death
benefit will be paid when the first Owner dies. The surviving Joint Owner will
be treated as the Beneficiary.
If death occurs prior to age 90, the amount of the death benefit will be
the greater of:
(1) the value of your Contract at the time Conseco Variable receives proof
of death and a payment election; or
(2) the total Purchase Payments you have made, less any adjusted partial
withdrawals, increased by 5% each year up to the date of death.
Adjusted partial withdrawal means the amount of the partial withdrawal
multiplied by the amount of the death benefit just before the partial withdrawal
divided by the value of your Contract just before the partial withdrawal. A
partial withdrawal is the amount paid to you plus any taxes withheld less any
contingent deferred sales charge.
If death occurs at age 90 or later, the death benefit will be the Contract
value at the time Conseco Variable receives proof of death and a payment
election.
The entire death benefit must be paid within 5 years of the date of death
unless the Beneficiary elects to have the death benefit payable under an Annuity
Option. The death benefit payable under an Annuity Option must be paid over the
Beneficiary's lifetime or for a period not extending beyond the Beneficiary's
life expectancy. Payment must begin within one year of the date of death. If the
Beneficiary is the spouse of the Owner, he/she can continue the Contract in
his/her own name at the then current value. If a lump sum payment is elected and
all the necessary requirements are met, the payment will be made within 7 days.
Different
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rules may apply in the case of an Individual Retirement Annuity.
If you or any Joint Owner (who is not the Annuitant) dies during the Income
Phase, any remaining payments under the Annuity Option elected will continue at
least as rapidly as under the method of distribution prior to the death of the
Owner or Joint Owner. If you die during the Income Phase, the Beneficiary
becomes the Owner. If any Joint Owner dies during the Income Phase, the
surviving Joint Owner, if any, will be treated as the primary Beneficiary. Any
other Beneficiary on record at the time of death will be treated as a contingent
Beneficiary. Different rules may apply in the case of an Individual Retirement
Annuity.
Death Of Annuitant
If the Annuitant, who is not an Owner or Joint Owner, dies during the
Accumulation Phase, you can name a new Annuitant. Unless another Annuitant is
named within 30 days of the death of the Annuitant, you will become the
Annuitant. However, if the Owner is a non-natural person (for example, a
corporation), then the death of the Annuitant will be treated as the death of
the Owner, and a new Annuitant may not be named.
Upon the death of the Annuitant during the Income Phase, the death benefit,
if any, will be as provided for in the Annuity Option selected. The death
benefit will be paid at least as rapidly as under the method of distribution in
effect at the Annuitant's death.
10. Other Information
Conseco Variable
Conseco Variable Insurance Company was originally organized in 1937. Prior
to October 7, 1998, Conseco Variable Insurance Company was known as Great
American Reserve Insurance Company. In certain states, we may still use the name
Great American Reserve Insurance Company until our name change is approved in
the state. It is principally engaged in the life insurance business in 49 states
and the District of Columbia. Conseco Variable is a stock company organized
under the laws of the state of Texas and is an indirect wholly- owned subsidiary
of Conseco, Inc. Headquartered in Carmel, Indiana, Conseco, Inc. is one of
middle America's leading sources for investment, insurance and lending products.
Through its subsidiaries and a nationwide network of insurance agents and
finance dealers, Conseco, Inc. provides solutions for both wealth protection and
wealth creation to more than 12 million customers.
There is more information about Conseco Variable below.
The Separate Accounts
Conseco Variable has established two separate accounts to hold the assets
that underlie the Contracts. One account, Conseco Variable Annuity Account F,
serves the variable annuity portion of the Contract. Prior to May 1, 1999,
Conseco Variable Annuity Account F was known as Great American Reserve Variable
Annuity Account F. The other separate account, Conseco Market Value Adjustment
Account, serves the portion of the Contract that may be subject to a market
value adjustment. Prior to May 1, 1999, Conseco Market Value Adjustment Account
was known as Great American Reserve Market Value Adjustment Account. The Board
of Directors of Conseco Variable adopted a resolution to establish the Separate
Accounts under Texas Insurance law on September 26, 1997. Conseco Variable
Annuity Account F is registered with the Securities and Exchange Commission as a
unit investment trust under the Investment Company Act of 1940. Conseco Variable
Annuity Account F is divided into sub-accounts. Conseco Market Value Adjustment
Account is not registered with the Securities and Exchange Commission.
The assets of the Separate Accounts are held in Conseco Variable's name on
behalf of the Separate Accounts and legally belong to Conseco Variable. However,
those assets that underlie the Contracts, are not chargeable with liabilities
arising out of any other business Conseco Variable may conduct. All the income,
gains and losses (realized or unrealized) resulting from these assets are
credited to or charged against the Contracts and not against any other Contracts
Conseco Variable may issue.
Distributor
Conseco Equity Sales, Inc. (CES), 11815 N. Pennsylvania Street, Carmel,
Indiana 46032, acts as the distributor of the Contracts. CES, an affiliate of
Conseco Variable, is registered as a broker-dealer under the Securities Exchange
Act of 1934. CES is
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a member of the National Association of Securities Dealers, Inc.
Commissions will be paid to broker-dealers who sell the Contracts.
Broker-dealers commissions may cost up to 8.25% of Purchase Payments and may
include reimbursement of promotional or distribution expenses associated with
the marketing of the Contracts. Conseco Variable may, by agreement with the
broker-dealer, pay commissions as a combination of a certain percentage amount
at the time of sale and a trail commission. This combination may result in the
broker-dealer receiving more commission over time than would be the case if it
had elected to receive only a commission at the time of sale. The commission
rate paid to the broker-dealer will depend upon the nature and level of services
provided by the broker-dealer.
Ownership
The Contract is a group allocated fixed and variable deferred annuity
Contract. This group Contract is issued to a Contract holder, for the benefit of
the participants in the group. You are a participant in the group and will
receive a certificate evidencing your ownership. You, as the owner of a
certificate, are entitled to all the rights and privileges of ownership. As used
in this prospectus, the term Contract refers to your certificate. In some
states, an individual fixed and variable deferred annuity Contract may be
available instead, which is identical to the group Contract described in this
prospectus except that it is issued directly to the Owner.
Spousal Joint Owners are allowed with this Contract (except if it is issued
pursuant to a Qualified plan). Upon the death of either Joint Owner, the
surviving owner will be the designated Beneficiary. Any other Beneficiary
designation at the time the Contract was issued or as may have been later
changed will be treated as a contingent Beneficiary unless otherwise indicated.
Beneficiary
The Beneficiary is the person(s) or entity you name to receive any death
benefit. The Beneficiary is named at the time the Contract is issued. Unless an
irrevocable Beneficiary has been named, you can change the Beneficiary at any
time before you die.
Assignment
You can assign the Contract at any time during your lifetime. Conseco
Variable will not be bound by the assignment until it receives the written
notice of the assignment. Conseco Variable will not be liable for any payment or
other action we take in accordance with the Contract before we receive notice of
the assignment. An assignment may be a taxable event.
If the Contract is issued pursuant to a Qualified plan, there are
limitations on your ability to assign the Contract.
Additional Information
Conseco Variable is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended. In accordance with such
requirements, we file reports and other information with the SEC. Such reports
and other information we file can be inspected and copied. Copies can be
obtained at the public reference facilities of the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, or at the regional offices in Chicago and
New York. The addresses of these regional offices are as follows: 500 West
Madison Street, Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor,
New York, New York 10048. Copies of such material also can be obtained by mail
from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the fees prescribed by the rules and
regulations of the SEC at prescribed rates.
Registration statements have been filed with the SEC, Washington, D.C.,
under the Securities Act of 1933 as amended, relating to the Contracts offered
by this prospectus. This prospectus does not contain all the information set
forth in the registration statements and the exhibits filed as part of the
registration statements. Reference should be made to such registration
statements and exhibits for further information concerning the Separate
Accounts, Conseco Variable and its general account, the Investment Portfolios
and the Contract.
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Selected Financial Information of Conseco Variable
The selected financial information set forth below was derived from the
audited financial statements of Conseco Variable Insurance Company ("we" or
"Conseco Variable"). Our balance sheets at December 31, 1998 and 1997, and our
statements of operations, shareholder's equity and cash flows for the years
ended December 31, 1998, 1997 and 1996, and the notes thereto were audited by
PricewaterhouseCoopers LLP, independent accountants, and are included elsewhere
herein. The selected financial information set forth below should be read in
conjunction with the financial statements and notes of Conseco Variable and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere herein. The financial information for all
periods reflects the effect of the December 31, 1994, merger of Jefferson
National Life Insurance Company ("Jefferson National") into Conseco Variable.
This merger has been accounted for as a pooling of interests; therefore, the
assets and liabilities of Jefferson National have been combined with Conseco
Variable at their book values and the financial data is presented as if the
merger had occurred prior to the periods presented.
<TABLE>
<CAPTION>
PRIOR BASIS (a)
------------------------
FOUR EIGHT
YEAR YEAR YEAR MONTHS MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1998 1997 1996 1995 1995 1994
===================================================================================================================================
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Insurance policy income ....................... $ 73.6 $ 75.7 $ 81.4 $ 31.8 $ 60.5 $ 98.6
Net investment income ......................... 198.0 222.6 218.4 74.2 136.4 187.9
Net investment gains .......................... 18.5 13.3 2.7 12.5 7.3 .2
Total revenues. ............................... 290.1 311.6 302.5 118.5 204.2 286.7
Total benefits and expenses ................... 242.9 250.3 261.4 92.7 159.5 225.2
Income before income taxes .................... 47.2 61.3 41.1 25.8 44.7 61.5
Net income .................................... 30.6 39.2 25.7 16.1 28.2 38.8
BALANCE SHEET DATA - PERIOD END
Investments ................................... $2,607.5 $2,500.5 $2,382.8 $2,484.8 $2,217.9
Total assets .................................. 2,911.7 2,771.7 2,680.5 2,756.8 2,625.0
Insurance liabilities ......................... 2,370.4 2,235.0 2,189.9 2,176.6 2,241.8
Total liabilities ............................. 2,506.6 2,354.8 2,283.6 2,314.2 2,260.1
Shareholder's equity .......................... 405.1 416.9 396.9 442.6 364.9
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Financial data for the periods subsequent to August 31, 1995, reflect the
adoption of a new basis of accounting under the "push down" method as a
result of the acquisition of all of the common stock of Conseco Variable's
parent not previously owned by Conseco, Inc. Accordingly, data prior to
August 31, 1995, may not be comparable with subsequent data. Significant
accounting adjustments recorded as a result of the adoption of the new
basis include: (i) an increase of $59.0 million to cost of policies
purchased; (ii) a reduction of $27.0 million to cost of policies produced;
(iii) a reduction of $15.1 million to goodwill; (iv) an increase of $1.2
million to insurance liabilities; and (v) the establishment of a deferred
income tax liability to reflect the income tax effects of all of the
accounting adjustments.
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CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
================================================================================
Business of Conseco Variable
Background
Conseco Variable, with total assets of $2.9 billion at December 31, 1998,
markets tax-qualified annuities and certain employee benefit-related insurance
products through professional independent agents. Since August 1995, Conseco
Variable has been a wholly owned subsidiary of Conseco, Inc. ("Conseco"), a
financial services holding company engaged in business in the insurance and
consumer and commercial finance industries.
Our company was organized as a Texas corporation and commenced operations
in 1937. Prior to its name change in October 1998, Conseco Variable was named
Great American Reserve Insurance Company. Our main administrative offices are
located at 11825 N. Pennsylvania Street, Carmel, Indiana 46032, and our
telephone number is (317) 817-3700.
Marketing
We primarily utilize independent market specialists to distribute our
products. We do not have fixed costs associated with recruiting, training and
maintaining employee agents. Rather, in-house marketing personnel develop,
direct and support the external distribution channels through which our products
are marketed.
Collected Insurance Premiums
In accordance with generally accepted accounting principles, ("GAAP"),
insurance policy income as shown in our statement of operations consists of
premiums we receive for policies having life contingencies or morbidity
features. For annuity and universal life contracts without such features,
premiums collected are not reported as revenues, but as deposits to insurance
liabilities. We recognize revenues for these products over time in the form of
investment income and surrender or other charges.
Total premiums collected were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Premiums collected:
Annuities:
Variable (first-year)................................................ $267.2 $126.9 $ 37.9
Variable (renewal)................................................... 43.8 46.1 43.6
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal - variable annuities...................................... 311.0 173.0 81.5
- ------------------------------------------------------------------------------------------------------------------------------------
Flexible-premium deferred annuities (first-year)..................... 6.7 17.0 15.4
Flexible-premium deferred annuities (renewal)........................ 26.8 28.4 27.9
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal - flexible premium deferred annuities..................... 33.5 45.4 43.3
- ------------------------------------------------------------------------------------------------------------------------------------
Single-premium immediate annuities................................... 31.1 10.6 17.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total annuities.................................................. 375.6 229.0 142.0
- ------------------------------------------------------------------------------------------------------------------------------------
Life insurance:
First-year........................................................... 1.5 1.5 2.1
Renewal.............................................................. 37.3 40.9 45.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total life insurance............................................. 38.8 42.4 47.1
- ------------------------------------------------------------------------------------------------------------------------------------
Accident and health and other:
First-year........................................................... 10.4 12.3 11.1
Renewal.............................................................. 15.6 16.6 18.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total - accident and health and other............................ 26.0 28.9 29.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total first-year premiums.............................................. 316.9 168.3 83.7
Total renewal premiums................................................. 123.5 132.0 134.7
- ------------------------------------------------------------------------------------------------------------------------------------
Total premiums collected......................................... $440.4 $300.3 $218.4
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
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Annuities
We market several basic types of annuities: variable annuities,
flexible-premium deferred annuities ("FPDAs") and single-premium immediate
annuities ("SPIAs").
Variable Annuities. Variable annuities accounted for $311.0 million, or
70.6 percent, of our total premiums collected in 1998. Variable annuities, sold
on a single-premium or flexible-premium basis, differ from fixed annuities in
that the original principal value may fluctuate, depending on the performance of
assets allocated pursuant to various investment options chosen by the contract
owner. Variable annuities offer contract owners a fixed interest option or a
variable rate of return based upon the specific investment portfolios into which
premiums may be directed.
Flexible-Premium Deferred Annuities. FPDAs accounted for $33.5 million, or
7.6 percent, of our total premiums collected in 1998. FPDAs allow more than one
premium payment, usually on a salary reduction basis. FPDAs are marketed through
networks of educator market specialists primarily to teachers and employees of
not-for- profit institutions as tax-qualified salary-reduction retirement
programs as permitted under Section 403(b) of the Code. A tax-qualified annuity
purchased under Section 403(b) is similar to contributions made to a 401(k)
plan, but with different (and somewhat more generous) rules on the maximum
amount of current income which may be contributed by the participant on a
pre-tax basis. Generally, a participant may elect to defer (through the purchase
of a tax-qualified annuity under a 403(b) plan) a percentage of includible
compensation limited by statute and subject to a maximum of $10,000 per year in
1998.
Our FPDAs typically have a guaranteed crediting rate for the first policy
year that exceeds the minimum annual guaranteed rate of at least 3 percent.
After the first year, the crediting rate may be changed at least annually. The
policyholder is permitted to withdraw all or part of the accumulation value,
less a surrender charge for withdrawals during an initial penalty period of up
to 12 years. The initial surrender charges range from 6 percent to 12 percent of
the accumulation value and decline over the penalty period.
Single-Premium Immediate Annuities. SPIAs accounted for $31.1 million, or
7.1 percent, of our total premiums collected in 1998. SPIAs are designed to
provide a series of periodic payments for a fixed period of time or for life,
according to the policyholder's choice at the time of issue. Once the payments
begin, the amount, frequency and length of time for which they are payable are
fixed. SPIAs often are purchased by persons at or near retirement age who desire
a steady stream of payments over a future period of years. The single premium is
often the payout from a terminated annuity contract. The implicit interest rate
on SPIAs is based on market conditions when the policy is issued and averaged 7
percent at December 31, 1998.
Life Insurance
Life insurance products, consisting of interest- sensitive life and
traditional life products, accounted for $38.8 million, or 8.8 percent, of our
total premiums collected in 1998. Although we no longer actively market these
products, we continue to have a substantial block of in-force policies on which
renewal premiums are collected.
Interest-sensitive life insurance products (including universal life
products) provide whole life insurance with adjustable rates of return related
to current interest rates. The principal differences between our universal life
products and other life insurance products are policy provisions affecting the
amount and timing of premium payments. Universal life policyholders may vary the
frequency and size of their premium payments, and policy benefits may also
fluctuate according to such payments. Premium payments under the other policies
may not be varied by the policyholders.
Life insurance products also include whole life and term life products.
Under whole life policies, the policyholder generally pays a level premium over
the policyholder's expected lifetime. The annual premium for a whole life policy
is generally higher than the premium for comparable term insurance coverage in
the early years of the policy's life, but is generally lower than the premium
for comparable term insurance coverage in the later years of the policy's life.
These policies combine insurance protection with a savings component that
increases in amount gradually over the life of the policy. The policyholder may
borrow against the savings generally at a rate of interest lower than that
available from other lending sources. The policyholder may also choose to
surrender the policy and receive the accumulated cash value rather than
30
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CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
================================================================================
continuing the insurance protection. Term life products offer pure insurance
protection for a specified period of time - typically 5, 10 or 20 years.
Accident and Health and Other Products
Accident and health and other products accounted for $26.0 million, or 5.9
percent, of our total premiums collected in 1998. We offer group dental, group
disability, blanket student accident and a limited amount of other health
insurance products. Group dental coverage provides a range of benefits for
dental care and related procedures. Disability products provide defined monthly
benefits up to specified levels in the case of disability. Student accident
products provide limited supplemental reimbursement coverage to students for
accidents and sickness. Our health business is subject to the risk that our
claim experience will deviate from the assumptions used in setting premium
rates. However, we have the right to change rates to correct for adverse
experience every six months on many group policies and annually on all others.
Experience may be adversely affected by increases in the cost of medical
treatment and the extent to which insureds utilize covered services.
Investments
Conseco Capital Management, Inc. ("CCM"), a registered investment adviser
wholly owned by Conseco, manages our investment portfolio. CCM's investment
philosophy is to maintain a largely investment-grade fixed-income portfolio,
provide adequate liquidity for expected liability durations and other
requirements and maximize total return through active investment management.
Investment activities are an integral part of our business; investment
income is a significant component of our total revenues. Profitability of many
of our insurance products is significantly affected by spreads between interest
yields on investments and rates credited on insurance liabilities. Although
substantially all credited rates on FPDAs may be changed annually, changes in
crediting rates may not be sufficient to maintain targeted investment spreads in
all economic and market environments. In addition, competition and other
factors, including the impact of the level of surrenders and withdrawals, may
limit our ability to adjust or to maintain crediting rates at levels necessary
to avoid narrowing of spreads under certain market conditions. As of December
31, 1998, the average yield, computed on the cost basis of our investment
portfolio, was 7.2 percent, and the average interest rate credited or accruing
to total insurance liabilities, excluding interest bonuses guaranteed for the
first year of the annuity contract only, was 5.1 percent.
For additional information regarding our investment portfolio, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Investments" and the notes to our financial statements.
Competition
Our business operates in a highly competitive environment. The life
insurance industry consists of a large number of insurance companies, many of
which are substantially larger and have greater financial resources, broader and
more diversified product lines and larger staffs than those of Conseco Variable.
An expanding number of banks, securities brokerage firms and other financial
intermediaries also market insurance products or offer competing products, such
as mutual fund products, traditional bank investments and other investment and
retirement funding alternatives. In most areas, competition is based on a number
of factors, including pricing, service provided to distributors and
policyholders, and ratings. We must also compete with other insurers to attract
and retain the allegiance of agents.
Marketing companies, agents who market insurance products, school
districts, financial institutions and policyholders use the financial strength
ratings assigned to an insurer by independent rating agencies as one factor in
determining which insurer's products to market or purchase. Conseco Variable has
received: (i) an "A (Excellent)" insurance company rating by A.M. Best Company
("A.M. Best"); (ii) an "AA-" claims-paying ability rating from Duff & Phelps'
Credit Rating Company ("Duff & Phelps"); and (iii) an "A+" claims-paying ability
rating from Standard & Poor's Corporation ("S&P"). A.M. Best insurance company
ratings for the industry currently range from "A++ (Superior)" to "F (In
Liquidation)". Publications of A.M. Best indicate that the "A" and "A-" ratings
are assigned to those companies that, in A.M. Best's opinion, have demonstrated
excellent overall performance when compared to the standards established by A.M.
Best and have demonstrated a strong ability to meet their obligations to
policyholders over a long period of time. Duff & Phelps' claims-paying ability
ratings range from "AAA (Highest
31
<PAGE>
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claims-paying ability)" to "DD (Company is under an order of liquidation)." An
"AA-" rating represents "Very high claims-paying ability." S&P claims-paying
ability ratings range from "AAA (Superior)" to "R (Regulatory Action)". An "A"
is assigned by S&P to those companies which, in its opinion, have a secure
claims-paying ability and whose financial capacity to meet policyholder
obligations is viewed on balance as sound, but their capacity to meet such
policyholder obligations is somewhat more susceptible to adverse changes in
economic or underwriting conditions than more highly rated insurers. A plus or
minus sign attached to a S&P or Duff & Phelps claims-paying rating shows
relative standing within a ratings category. These A.M. Best, Duff & Phelps and
S&P ratings consider the claims paying ability of the rated company and are not
a rating of the investment worthiness of the rated company.
We believe that we are able to compete effectively because: (i) we have
experience in establishing and cultivating relationships with independent market
specialists; (ii) we can offer competitive rates as a result of our
lower-than-average operating costs and higher-than-average investment yields
achieved by applying active investment portfolio management techniques; and
(iii) we have reliable policyholder administrative services, supported by
customized information technology systems.
Underwriting
Underwriting with respect to the annuity products we sell is minimal.
Substantially all life insurance policies we issue are underwritten
individually, although standardized underwriting procedures have been adopted
for certain low face-amount life insurance coverages. Our group accident and
health policies are underwritten based on the characteristics of a group and its
past claim experience.
Reinsurance
Consistent with the general practice of the life insurance industry, we
enter into reinsurance agreements in order to transfer a portion of the risk
assumed under our insurance contracts to other insurance companies. Indemnity
reinsurance agreements are intended to limit a life insurer's maximum loss on a
large or unusually hazardous risk or to diversify its risk. Indemnity insurance
does not discharge the original insurer's primary liability to the insured. Our
reinsured business is ceded to numerous companies. We believe the assuming
companies are able to honor all contractual commitments, based on periodic
review of their financial statements, insurance industry reports and reports
filed with state insurance departments.
At December 31, 1998, the policy risk retention limit on the life of one
individual is $.5 million. Reinsurance ceded represented 7.6 percent of gross
life insurance in force and reinsurance assumed represented 4.4 percent of net
life insurance in force. At December 31, 1998, our largest reinsurer accounted
for less than .5 percent of total insurance liabilities and 35 percent of total
reinsurance receivables.
Employees
Conseco Variable has no full-time employees. Our day-to-day operations are
administered by Conseco pursuant to agreements between Conseco Variable and
Conseco.
Governmental Regulation
Our business is subject to regulation and supervision by the insurance
regulatory agencies of the states in which we transact business. State laws
generally establish supervisory agencies with broad regulatory authority,
including the power to: (i) grant and revoke business licenses; (ii) regulate
and supervise trade practices and market conduct; (iii) establish guaranty
associations; (iv) license agents; (v) approve policy forms; (vi) approve
premium rates for some lines of business; (vii) establish reserve requirements;
(viii) prescribe the form and content of required financial statements and
reports; (ix) determine the reasonableness and adequacy of statutory capital and
surplus; (x) perform financial, market conduct and other examinations; (xi)
define acceptable accounting principles; (xii) regulate the type and amount of
permitted investments; and (xiii) limit the amount of dividends and surplus
debenture payments that can be paid without obtaining regulatory approval.
Conseco Variable is subject to periodic examinations by state regulatory
authorities.
Most states have either enacted legislation or adopted administrative
regulations which affect the acquisition of control of insurance companies as
well as transactions between insurance companies and persons controlling them.
The nature and extent of such legislation and regulations vary from state to
state. Most states, however, require administrative approval of: (i) the
acquisition of 10 percent or more of the outstanding shares of an insur-
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CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
================================================================================
ance company domiciled in the state; or (ii) the acquisition of 10 percent or
more of the outstanding stock of an insurance holding company whose insurance
subsidiary is domiciled in the state. The acquisition of 10 percent of such
shares is generally deemed to be the acquisition of control for the purpose of
the holding company statutes. These regulations require the acquirer to file
detailed information concerning the acquiring parties and the plan of
acquisition, and to obtain administrative approval prior to the acquisition. In
many states, however, an insurance authority may determine that control does not
exist, even in circumstances in which a person owns or controls 10 percent or a
greater amount of securities.
The federal government does not directly regulate the insurance business.
However, federal legislation and administrative policies in several areas,
including pension regulation, age and sex discrimination, financial services
regulation, securities regulation and federal taxation, do affect the insurance
business. Legislation has been introduced from time to time in Congress that
could result in the federal government assuming some role in regulating the
companies or allowing combinations between insurance companies, banks and other
entities.
On the basis of statutory statements filed with state regulators annually,
the National Association of Insurance Commissioners ("NAIC") (an association of
state regulators and their staffs) calculates certain financial ratios to assist
state regulators in monitoring the financial condition of insurance companies. A
"usual range" of results for each ratio is used as a benchmark. In the past,
variances in certain ratios of Conseco Variable have resulted in inquiries from
insurance departments to which we have responded. Such inquiries did not lead to
any restrictions affecting our operations.
In recent years, the NAIC has developed several model laws and regulations
including: (i) investment reserve requirements; (ii) risk-based capital ("RBC")
standards; (iii) codification of insurance accounting principles; (iii)
additional investment restrictions; and (iv) restrictions on an insurance
company's ability to pay dividends. The NAIC is currently developing new model
laws or regulations, including: (i) product design standards; (ii) reserve
requirements; and (iii) product illustrations.
The RBC standards establish capital requirements for insurance companies
based on the ratio of the company's total adjusted capital (defined as the total
of its statutory capital, surplus, asset valuation reserve and certain other
adjustments) to its RBC. The standards are designed to help identify companies
which are under capitalized and require specific regulatory actions in the event
an insurer's RBC falls below specified levels. Conseco Variable has more than
enough statutory capital to meet the standards at December 31, 1998. The Texas
Insurance Department adopted different RBC requirements. Conseco Variable is in
compliance with Texas RBC requirements at December 31, 1998.
In addition, we are required under guaranty fund laws of most states in
which we transact business, to pay assessments up to prescribed limits to fund
policyholder losses or liabilities of insolvent insurance companies.
We cannot predict with certainty the effect that any proposals, if adopted,
or legislative developments could have on our business and operations.
Federal Income Taxation
The annuity and life insurance products we market generally provide the
policyholder with an income tax advantage, as compared to other savings
investments such as certificates of deposit and bonds, in that income taxation
on the increase in value of the product is deferred until it is received by the
policyholder. With other savings investments, the increase in value is taxed as
earned. Annuity benefits and life insurance benefits, which accrue prior to the
death of the policyholder, are generally not taxable until paid. Life insurance
death benefits are generally exempt from income tax. Also, benefits received on
immediate annuities (other than structured settlements) are recognized as
taxable income ratably, as opposed to the methods used for some other
investments which tend to accelerate taxable income into earlier years. The tax
advantage for annuities and life insurance is provided in the Code, and is
generally followed in all states and other United States taxing jurisdictions.
From time to time, various tax law changes have been proposed that could
have an adverse effect on our business, including elimination of all or a
portion of the income tax advantage of certain insurance products. The Clinton
administration, in its Revenue Proposal as released in February 1999, has
proposed changes in how life insurance companies are taxed; such changes could
increase our current tax liability.
33
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Conseco Variable is taxed under the life insurance company provisions of
the Code. Provisions in the Code require a portion of the expenses incurred in
selling insurance products to be deducted over a period of years, as opposed to
immediate deduction in the year incurred. As of December 31, 1998, the
cumulative taxes paid as a result of this provision were approximately $7
million.
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Conseco Variable
In this section, we review the financial condition of Conseco Variable at
December 31, 1998 and 1997, the results of operations for the three years ended
December 31, 1998, and where appropriate, factors that may affect future
financial performance. Please read this discussion in conjunction with our
financial statements, notes and selected financial information.
All statements, trend analyses and other information contained in this
report and elsewhere (such as in filings by Conseco Variable or Conseco with the
Securities and Exchange Commission, press releases, presentations by Conseco
Variable, Conseco or its management or oral statements) relative to markets for
the Conseco Variable's products and trends in the Conseco Variable's operations
or financial results, as well as other statements including words such as
"anticipate," "believe," "plan," "estimate," "expect," "intend," and other
similar expressions, constitute forward-looking statements under the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
subject to known and unknown risks, uncertainties and other factors which may
cause actual results to be materially different from those contemplated by the
forward-looking statements. Such factors include, among other things: (i)
general economic conditions and other factors, including prevailing interest
rate levels, stock and credit market performance and health care inflation,
which may affect (among other things) Conseco Variable's ability to sell our
products, our ability to access capital resources and the costs associated
therewith, the market value of Conseco Variable's investments and the lapse rate
and profitability of policies; (ii) Conseco Variable's ability to achieve
anticipated synergies and levels of operational efficiencies; (iii) customer
response to new products, distribution channels and marketing initiatives; (iv)
mortality, morbidity, usage of health care services and other factors which may
affect the profitability of Conseco Variable's insurance products; (v) changes
in the federal income tax laws and regulations which may affect the relative tax
advantages of some of Conseco Variable's products; (vi) increasing competition
in the sale of insurance and annuities; (vii) regulatory changes or actions,
including those relating to regulation of financial services affecting (among
other things) bank sales and underwriting of insurance products, regulation of
the sale, underwriting and pricing of products, health care regulation affecting
health insurance products; (viii) the ability to achieve Year 2000 readiness for
significant systems and operations on a timely basis; (ix) the availability and
terms of future acquisitions; and (x) the risk factors or uncertainties listed
from time to time in Conseco Variable's or Conseco's filings with the Securities
and Exchange Commission.
Results Of Operations Year Ended December 31, 1998, Compared with Year Ended
December 31, 1997
Insurance policy income consists of premiums received on traditional life
products and policy fund and surrender charges assessed against investment type
products. This account decreased slightly in 1998 compared with 1997 as a result
of decreases in surrender charges and sales of policies with mortality or
morbidity risks. Withdrawals from insurance liabilities were slightly lower in
1998 than 1997, resulting in lower surrender charges.
Net investment income includes both income earned on our general invested
assets and separate account assets related to variable annuities. Investment
income earned on separate account assets is offset by a corresponding charge to
insurance policy benefits. Excluding investment income on separate accounts, net
investment income in 1998 decreased 7.8 percent from 1997, to $153.9 million.
Average general invested assets decreased to $2.0 billion in 1998 from $2.1
billion in 1997, and the yield earned on such average invested assets decreased
to 7.8 percent from 7.9 percent. Cash flows received during 1998 and 1997
(including cash flows from the sales of investments) were
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CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
================================================================================
invested in lower yielding securities due to a general decline in interest
rates.
Net investment income on separate account assets in 1998 decreased to $44.1
million from $55.7 million in 1997. Such income fluctuates in relation to total
separate account assets and the return earned on such assets.
Net investment gains often fluctuate from period to period. We sold
$1,185.0 million of investments during 1998 compared with $755.2 million in
1997, which sales resulted in net investment gains of $18.5 million in 1998
compared with net investment gains of $13.3 million in 1997.
Selling securities at a gain and reinvesting the proceeds at a lower yield
may, absent other management action, tend to decrease future investment yields.
We believe, however, that certain factors will mitigate the adverse effect on
net income of such yield decreases as follows: (i) additional amortization of
the cost of policies purchased and the cost of policies produced is recognized
in the same period as the gain in order to reflect reduced future yields
(thereby reducing such amortization in future periods); (ii) interest rates
credited to some products can be reduced thereby diminishing the effect of the
yield decrease on the investment spread; and (iii) the investment portfolio
grows as a result of reinvesting the investment gains.
Insurance policy benefits include amounts related to policies with
mortality and morbidity features and amounts added to annuity and financial
product policyholder account balances. These amounts decreased to $170.6 million
in 1998 from $191.0 million in 1997. The decrease is primarily attributable to
decreases in: (i) amounts added to variable annuity product policyholder account
balances; and (ii) the policyholder account balances related to products other
than variable annuities due to withdrawals. Insurance policy benefits in 1998
included $44.1 million of amounts added to variable annuity product policyholder
account balances compared to $55.7 million in 1997.
Amortization consists of the amortization of cost of policies purchased,
cost of policies produced and goodwill and increased to $33.6 million in 1998
compared with $27.1 million in 1997. Cost of policies produced represents the
cost of producing new business (primarily commissions and certain costs of
policy issuance and underwriting) which varies with and is primarily related to
the production of new business. Costs deferred may represent amounts paid in the
period new business is written (such as underwriting costs and first year
commissions) or in periods after the business is written (such as commissions
paid in subsequent years in excess of ultimate commissions paid). Cost of
policies purchased represents the cost to acquire Conseco Variable that is
attributable to the right to receive cash flows from insurance contracts in
force at the acquisition dates. Net investment gains (losses) affect the timing
of the amortization of the cost of policies purchased and the cost of policies
produced. The gains realized in 1998 were the primary reason for the increased
amortization.
Other operating costs and expenses increased 20 percent to $38.7 million in
1998 compared with $32.2 million in 1997. The increase primarily reflects the
additional marketing costs incurred under service agreements with Conseco which
are non-deferrable.
Income tax expense fluctuated primarily in relationship to income before
taxes.
Year Ended December 31, 1997, Compared with Year Ended December 31, 1996
Insurance policy income consists of premiums received on traditional life
products and policy fund and surrender charges assessed against investment type
products. This account decreased in 1997 compared with 1996 as a result of a
decrease in sales of policies with mortality or morbidity risks. In addition,
withdrawals from insurance liabilities were higher in 1997 than 1996, however
fewer withdrawals were subject to surrender charges. Increases in withdrawals
were primarily due to increased competition from higher yielding alternative
investment products.
Net investment income includes both income earned on our general invested
assets and the separate account assets related to variable annuities. Investment
income earned on separate account assets is offset by a corresponding charge to
insurance policy benefits. Excluding investment income on separate accounts, net
investment income in 1997 decreased 8.7 percent from 1996, to $166.9 million.
Average general invested assets decreased to $2.1 billion in 1997 from $2.3
billion in 1996, and the yield earned on average invested assets decreased to
7.9 percent from 8.1 percent. Cash flows received during 1997 and 1996
(including cash flows from the sales of investments) were
35
<PAGE>
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invested in lower-yielding securities due to a general decline in interest
rates.
Net investment income on separate account assets in 1997 increased to $55.7
million from $35.6 million in 1996. Such income fluctuates in relation to total
separate account assets and the return earned on such assets.
Net investment gains often fluctuate from period to period. We sold $755.2
million of investment securities during 1997 compared with $988.9 million in
1996, which sales resulted in net investment gains of $13.3 million in 1997
compared with net investment gains of $2.7 million in 1996.
Selling securities at a gain and reinvesting the proceeds at a lower yield
may, absent other management action, tend to decrease future investment yields.
We believe, however, that certain factors will mitigate the adverse effect on
net income of such yield decreases as follows: (i) additional amortization of
the cost of policies purchased and the cost of policies produced is recognized
in the same period as the gain in order to reflect reduced future yields
(thereby reducing such amortization in future periods); (ii) interest rates
credited to some products can be reduced thereby diminishing the effect of the
yield decrease on the investment spread; and (iii) the investment portfolio
grows as a result of reinvesting the realized gains.
Insurance policy benefits include amounts related to policies with
mortality and morbidity features and amounts added to annuity and financial
product policyholder account balances. These amounts increased to $191.0 million
in 1997 from $180.6 million in 1996. Insurance policy benefits in 1997 included
$55.7 million of amounts added to variable annuity product policyholder account
balances compared to $35.6 million in 1996. The increase in these benefits
(offset by a decrease in crediting rates on policyholder account balances other
than variable annuities) is the primary reason for the increased benefits in
1998.
Amortization consists of the amortization of cost of policies purchased,
cost of policies produced and goodwill and increased to $27.1 million in 1997
compared with $20.3 million in 1996. Cost of policies produced represents the
cost of producing new business (primarily commissions and certain costs of
policy issuance and underwriting) which varies with and is primarily related to
the production of new business. Costs deferred may represent amounts paid in the
period new business is written (such as underwriting costs and first year
commissions) or in periods after the business is written (such as commissions
paid in subsequent years in excess of ultimate commissions paid). Cost of
policies purchased represents the cost to acquire Conseco Variable that is
attributable to the right to receive cash flows from insurance contracts in
force at the acquisition dates. Net investment gains (losses) affect the timing
of the amortization of the cost of policies purchased and the cost of policies
produced. The gains realized in 1997 were the primary reason for the increased
amortization.
Other operating costs and expenses decreased 47 percent to $32.2 million in
1997 compared with $60.5 million in 1996, primarily as a result of a reduction
in operating costs incurred under service agreements with Conseco.
Income tax expense fluctuated primarily in relationship to income before
taxes.
Investments
Our investment strategy is to: (i) maintain a predominately
investment-grade fixed income portfolio; (ii) provide adequate liquidity to meet
our cash obligations to policyholders and others; and (iii) maximize current
income and total investment return through active investment management.
Consistent with this strategy, investments in fixed maturity securities,
mortgage loans, policy loans, separate accounts and short-term investments made
up 94 percent of our $2.6 billion investment portfolio at December 31, 1998. The
remainder of the invested assets were equity securities and other invested
assets.
Insurance statutes regulate the type of investments that our insurance
subsidiaries are permitted to make and limit the amount of funds that may be
used for any one type of investment. In light of these statutes and regulations
and our business and investment strategy, Conseco Variable generally seeks to
invest in United States government and government-agency securities and
corporate securities rated investment grade by established nationally recognized
rating organizations or in securities of comparable investment quality, if not
rated.
36
<PAGE>
CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
================================================================================
The following table summarizes investment yields earned over the past three
years:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Weighted average invested assets (excluding separate account assets):....
As reported.......................................................... $2,004.9 $2,113.7 $2,237.9
Excluding unrealized appreciation (depreciation) (a)................. 1,981.1 2,121.2 2,258.9
Net investment income, excluding investment income
on separate accounts................................................... 153.9 166.9 182.8
Yields earned:
As reported.......................................................... 7.7% 7.9% 8.2%
Excluding unrealized appreciation (depreciation) (a) ................ 7.8% 7.9% 8.1%
</TABLE>
(a) Excludes the effect of reporting fixed maturities at fair value as
described in note 1 to the financial statements.
Although investment income is a significant component of total revenues,
the profitability of certain of our insurance products is determined primarily
by the spreads between the interest rates we earn and the rates we credit or
accrue to our insurance liabilities. At December 31, 1998, the average yield,
computed on the cost basis of our investment portfolio, was 7.2 percent, and the
average interest rate credited or accruing to our total insurance liabilities
was 5.1 percent, excluding interest bonuses guaranteed only for the first year
of the contract.
Actively managed fixed maturities
Our actively managed fixed maturity portfolio at December 31, 1998,
included primarily debt securities of the United States government, public
utilities and other corporations, and mortgage-backed securities.
Mortgage-backed securities included collateralized mortgage obligations ("CMOs")
and mortgage-backed pass-through securities.
At December 31, 1998, our fixed maturity portfolio had $31.0 million of
unrealized gains and $27.4 million of unrealized losses, for a net unrealized
gain of $3.6 million. Estimated fair values for fixed maturity investments were
determined based on: (i) estimates from nationally recognized pricing services
(81 percent of the portfolio); (ii) broker-dealer market makers (11 percent of
the portfolio); and (iii) internally developed methods (8 percent of the
portfolio).
At December 31, 1998, approximately 4.1 percent of our invested assets (7.1
percent of fixed maturity investments) were rated below-investment grade by
nationally recognized statistical rating organizations (or, if not rated by such
firms, with ratings below Class 2 assigned by the NAIC). We plan to maintain
approximately the present level of below-investment-grade fixed maturities.
These securities generally have greater risks than other corporate debt
investments, including risk of loss upon default by the borrower, and are often
unsecured and subordinated to other creditors. Below-investment-grade issuers
usually have higher levels of indebtedness and are more sensitive to adverse
economic conditions, such as recession or increasing interest rates, than are
investment-grade issuers. We are aware of these risks and monitor our
below-investment-grade securities closely. At December 31, 1998, our
below-investment-grade fixed maturity investments had an amortized cost of
$116.8 million and an estimated fair value of $107.8 million.
We periodically evaluate the creditworthiness of each issuer whose
securities we hold. We pay special attention to those securities whose market
values have declined materially for reasons other than changes in interest rates
or other general market conditions. We evaluate the realizable value of the
investment, the specific condition of the issuer and the issuer's ability to
comply with the material terms of the security. Information reviewed may include
the recent operational results and financial position of the issuer, information
about its industry, recent press releases and other information. CCM employs a
staff of experienced securities analysts in a variety of specialty areas. Among
its other responsibilities, this staff is charged with compiling and reviewing
such information. If evidence does not exist to support a realizable value equal
to or greater than the carrying value of the investment, and such decline in
market value is determined to be other than temporary, we reduce the carrying
amount to its net realizable value, which becomes the new cost basis; we report
the amount of the
37
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================================================================================
reduction as a realized loss. We recognize any recovery of such reductions in
the cost basis of an investment only upon the sale, repayment or other
disposition of the investment. In 1998, there were no writedowns of fixed
maturity investments, equity securities or other invested assets. Our investment
portfolio is subject to the risks of further declines in realizable value.
However, we attempt to mitigate this risk through the diversification and active
management of our portfolio.
As of December 31, 1998, our fixed maturity investments in substantive
default (i.e., in default due to nonpayment of interest or principal) had an
amortized cost and carrying value of $.8 million and $.6 million, respectively.
Conseco Variable had no fixed maturity investments in technical (but not
substantive) default (i.e., in default, but not as to the payment of interest or
principal). There were no other fixed maturity investments about which we had
serious doubts as to the ability of the issuer to comply on a timely basis with
the material terms of the instrument.
When a security defaults, our policy is to discontinue the accrual of
interest and eliminate all previous interest accruals, if we determine that such
amounts will not be ultimately realized in full. Investment income forgone due
to defaulted securities was not significant in any of the three years ended
December 31, 1998.
At December 31, 1998, fixed maturity investments included $494.2 million of
mortgage-backed securities (or 32 percent of all fixed maturity securities).
CMOs are backed by pools of mortgages that are segregated into sections or
"tranches" that provide for sequential retirement of principal. Pass-through
securities receive principal and interest payments through their regular pro
rata share of the payments on the underlying mortgages backing the securities.
The yield characteristics of mortgage-backed securities differ from those of
traditional fixed-income securities. Interest and principal payments occur more
frequently, often monthly. Mortgage-backed securities are subject to risks
associated with variable prepayments. Prepayment rates are influenced by a
number of factors that cannot be predicted with certainty, including: the
relative sensitivity of the underlying mortgages backing the assets to changes
in interest rates; a variety of economic, geographic and other factors; and the
repayment priority of the securities in the overall securitization structures.
In general, prepayments on the underlying mortgage loans and the securities
backed by these loans increase when the level of prevailing interest rates
declines significantly relative to the interest rates on such loans.
Mortgage-backed securities purchased at a discount to par will experience an
increase in yield when the underlying mortgages prepay faster than expected.
These securities purchased at a premium that prepay faster than expected will
incur a reduction in yield. When interest rates decline, the proceeds from the
prepayment of mortgage-backed securities are likely to be reinvested at lower
rates than we were earning on the prepaid securities. When interest rates
increase, prepayments on mortgage-backed securities decrease, because fewer
underlying mortgages are refinanced. When this occurs, the average duration of
the mortgage- backed securities increases, which decreases the yield on
mortgage-backed securities purchased at a discount, because the discount is
realized as income at a slower rate and increases the yield on those purchased
at a premium as a result of a decrease in annual amortization of the premium.
The degree to which a mortgage-backed security is susceptible to income
fluctuations is influenced by: (i) the difference between its cost and par; (ii)
the relative sensitivity of the underlying mortgages backing the security to
prepayment in a changing interest rate environment; and (iii) the repayment
priority of the security in the overall securitization structure. Conseco
Variable seeks to limit the extent of these risks associated with mortgage-
backed securities in our fixed maturity portfolio by: (i) purchasing securities
that are backed by collateral with lower prepayment sensitivity (such as
mortgages priced at a discount to par value and mortgages that are extremely
seasoned); (ii) avoiding the purchase of securities for our fixed maturity
portfolio whose values are heavily influenced by changes in prepayments (such as
interest-only and principal-only securities); (iii) investing in securities
structured to reduce prepayment risk (such as planned amortization class ("PAC")
and targeted amortization class ("TAC") CMOs); and (iv) actively managing the
entire portfolio of mortgage-backed securities to dispose of those which are
deemed more likely to be prepaid. PAC and TAC instruments represented
approximately
38
<PAGE>
CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
================================================================================
13 percent of our mortgage-backed securities at December 31, 1998. The
call-adjusted modified duration of our mortgage-backed securities at December
31, 1998, was 3.6 years.
Mortgage-backed securities held in our fixed maturity portfolio at December
31, 1998, summarized by interest rates on the underlying collateral were as
follows:
<TABLE>
<CAPTION>
PAR AMORTIZED ESTIMATED
VALUE COST FAIR VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Below 7 percent.......................................................... $281.6 $280.5 $283.7
7 percent - 8 percent.................................................... 120.9 124.6 125.8
8 percent - 9 percent.................................................... 59.2 58.2 60.2
9 percent and above...................................................... 23.3 24.1 24.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities..................................... $485.0 $487.4 $494.2
====================================================================================================================================
</TABLE>
Mortgage-backed securities held in our fixed maturity portfolio at December
31, 1998, summarized by security type, were as follows: Estimated fair value
<TABLE>
<CAPTION>
ESTIMATED FAIR VALUE
------------------------------------
% OF
AMORTIZED FIXED
TYPE COST AMOUNT MATURITIES
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Pass-throughs and sequential and targeted amortization classes........... $376.1 $382.3 25%
Planned amortization classes and accretion-directed bonds................ 52.2 53.0 3
Subordinated classes..................................................... 59.1 58.9 4
- ------------------------------------------------------------------------------------------------------------------------------------
$487.4 $494.2 32%
====================================================================================================================================
</TABLE>
Pass-throughs and sequential and targeted amortization classes have similar
prepayment variability. Pass-throughs have historically provided the best
liquidity among mortgage-backed securities and also provide the best
price/performance ratio in highly volatile interest rate environments. This type
of security is also frequently used as collateral in the dollar-roll market.
Sequential classes pay in a strict sequence; all principal payments received by
the CMO are paid to the sequential tranches in order of priority. Targeted
amortization classes provide a modest amount of prepayment protection when
prepayments on the underlying collateral increase from those assumed at pricing.
Thus, they offer slightly better call protection than sequential classes and
pass-throughs.
Planned amortization classes and cretion-directed bonds are some of the
most stable and liquid instruments in the mortgage-backed securities market.
Planned amortization class bonds adhere to a fixed schedule of principal
payments as long as the underlying mortgage collateral experiences prepayments
within a certain range. Changes in prepayment rates are first absorbed by
support classes. This insulates the planned amortization classes from the
consequences of both faster prepayments (average life shortening) and slower
prepayments (average life extension).
Subordinated CMO classes have both prepayment and credit risk. The
subordinated classes are used to enhance the credit quality of the senior
securities, and as such, rating agencies require that this support not
deteriorate due to the prepayment of the subordinated securities. The credit
risk of subordinated classes is derived from the negative leverage of owning a
small percentage of the underlying mortgage loan collateral while bearing a
majority of the risk of loss due to homeowner defaults.
If we decide to sell an investment held in the actively managed fixed
maturity category, we either sell the security or transfer it to the trading
account at its fair value and recognize the gain or loss immediately. We
transferred securities with a fair value of approximately $48.1 million into our
trading account during 1998: there was no material gain or loss on the transfer.
39
<PAGE>
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During 1998, we sold $1.2 billion of investments (primarily fixed
maturities), resulting in $34.0 million of investment gains and $12.4 million of
investment losses (both before related expenses, amortization and taxes). Such
securities were sold in response to changes in the investment environment, which
created opportunities to enhance the total return of the investment portfolio
without adversely affecting the quality of the portfolio or the matching of
expected maturities of assets and liabilities. As discussed in the notes to the
financial statements, the realization of gains and losses affects the timing of
the amortization of the cost of policies produced and the cost of policies
purchased related to universal life and investment products.
Other Investments
At December 31, 1998, we held mortgage loan investments purchased for our
investment portfolio with a carrying value of $110.2 million (or 4.2 percent of
total invested assets) and a fair value of $119.0 million. Mortgage loans were
substantially comprised of commercial loans. Noncurrent mortgage loans were
insignificant at December 31, 1998. Realized losses on mortgage loans were not
significant in any of the past three years. At December 31, 1998, we had a
mortgage loan loss reserve of $.8 million. Approximately 15 percent of the
mortgage loans were on properties located in California, 12 percent in Michigan,
12 percent in Florida, 11 percent in Texas and 8 percent in Georgia. No other
state accounted for more than 8 percent of the mortgage loan balance.
At December 31, 1998, we held $47.9 million of trading securities; they are
included in other invested assets. Trading securities are investments we intend
to sell in the near term. We carry trading securities at estimated fair value;
changes in fair value are reflected in the statement of operations.
Other invested assets include: (i) trading securities; and (ii) certain
nontraditional investments, including investments in venture capital funds,
limited partnerships, mineral rights and promissory notes.
Short-term investments totaled $48.4 million, or 1.9 percent of invested
assets at December 31, 1998, and consisted primarily of commercial paper and
repurchase agreements relating to government securities.
As part of our investment strategy, we enter into reverse repurchase
agreements and dollar-roll transactions to increase our return on investments
and improve our liquidity. Reverse repurchase agreements involve a sale of
securities and an agreement to repurchase the same securities at a later date at
an agreed-upon price. Dollar rolls are similar to reverse repurchase agreements
except that the repurchase involves securities that are only substantially the
same as the securities sold. We enhance our investment yield by investing the
proceeds from the sales in short-term securities pending the contractual
repurchase of the securities at discounted prices in the forward market. We are
able to engage in such transactions due to the market demand for mortgage-backed
securities to form CMOs. Such investment borrowings averaged $66.0 million
during 1998 and were collateralized by investment securities with fair values
approximately equal to the loan value. The weighted average interest rate on
short-term collateralized borrowings was 4.4 percent in 1998. The primary risk
associated with short-term collateralized borrowings is that the counterparty
will be unable to perform under the terms of the contract. Our exposure is
limited to the excess of the net replacement cost of the securities over the
value of the short-term investments (which was not material at December 31,
1998). We believe that the counterparties to our reverse repurchase and
dollar-roll agreements are financially responsible and that counterparty risk is
minimal.
Liquidity
Conseco Variable generally produces adequate cash flow from premium
collections and investment income to meet its obligations. The liabilities
related to insurance policies are primarily long term and generally are paid
from future cash flows. Most of the assets, other than policy loans, are
invested in bonds and other securities, substantially all of which are readily
marketable. Although there is no present need or intent to dispose of such
investments, we could liquidate portions of our investments if the need arose.
We believe Conseco Variable has adequate short-term investments and readily
marketable investment-grade securities to cover the payments under contracts
containing fixed payment dates plus any likely cash needs for all other
contracts
40
<PAGE>
CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
================================================================================
and obligations. Our investment portfolio at December 31, 1998 included $48.4
million of short-term investments and $1.4 billion of publicly traded
investment-grade bonds. We believe that such investments could be readily sold
at or near carrying value or used to facilitate borrowings under reverse
repurchase agreements.
Year 2000 Matters
Many computer programs were originally designed to identify each year using
two digits. If not corrected, these computer programs could cause system
failures or miscalculations in the year 2000, with possible adverse effects on
our operations. In 1996, Conseco (our parent company and the provider of all of
our day-to-day operations through various service agreements) initiated a
comprehensive corporate-wide program designed to ensure that our computer
programs function properly in the year 2000. A number of Conseco's employees
(including several officers), as well as external consultants and contract
programmers, are working on various year-2000 projects. Under the program,
Conseco is analyzing our application systems, operating systems, hardware,
networks, electronic data interfaces and infrastructure devices (such as
facsimile machines and telephone systems). Conseco has also been working with
vendors and other external business relations to help avoid year-2000 problems
related to the software or services they provide to us.
Our year-2000 projects are currently on schedule. Conseco is conducting our
year-2000 projects in three phases: (i) an audit and assessment phase, designed
to identify year-2000 issues; (ii) a modification phase, designed to correct
year-2000 issues; and (iii) a testing phase, designed to test the modifications
after they have been installed. Conseco has completed the audit and assessment
phase for all critical systems. The modification phase of our program is
substantially complete. The testing phase of our program is expected to be
completed by the end of the third quarter of 1999. We have provided for
significant time in order to complete any additional modifications, if
necessary, before December 31, 1999.
For some of our year-2000 issues, Conseco is working to complete the
previously planned conversions of older systems to the more modern,
year-2000-ready systems already used by other Conseco subsidiaries. In other
cases, we are purchasing new, more modern systems; these costs are being
capitalized as assets and amortized over their expected useful lives. In the
remaining cases, Conseco is modifying existing systems; these costs are being
charged to operating expense.
We currently estimate that the total expense of our year-2000 projects will
be approximately $16 million. This expense is not material to our financial
position and we are funding it through operating cash flows. Approximately 80
percent of this expense was incurred in 1996, 1997 and 1998, related primarily
to modifying existing software systems.
The impact of year-2000 issues will depend not only on the corrective
actions taken, but also on the way in which year-2000 issues are addressed by
governmental agencies, businesses and other third parties: (i) that provide
services, utilities or data to Conseco Variable; (ii) that receive services or
data from Conseco Variable; or (iii) whose financial condition or operating
capability is important to Conseco Variable. Conseco is in the process of
identifying risks and updating assessments of potential year-2000 risks
associated with our external business relationships, such as utilities and
financial institutions. These procedures are necessarily limited to matters over
which Conseco is able to reasonably exercise control. Conseco has been informed
by our key financial institutions and utilities that they will be year-2000
ready at year-end 1999.
Conseco is also assessing what contingency plans will be needed if any of
our critical systems or those of external business relationships are not
year-2000 ready at year-end 1999. We do not currently anticipate such a
situation, but Conseco's consideration of contingency plans will continue to
evolve as new information becomes available.
Our year-2000 projects are the highest priority for Conseco's information
technology and many other employees. Other systems projects continue while our
year-2000 projects are being completed, however, in many cases, Conseco has
accelerated system upgrades when the new systems address year-2000 issues.
The failure to correct a material year-2000 problem could result in an
interruption in, or failure of, a number of normal business activities or
operations. Such failures could materially and adversely affect Conseco
Variable's results of operations, liq-
41
<PAGE>
================================================================================
uidity and financial condition. Due to the general uncertainty inherent in the
year-2000 problem, including the uncertainty of the preparedness of our external
business relationships, we are not able to currently determine whether the
consequences of year-2000 failures will have a material impact on Conseco
Variable's results of operations, liquidity and financial condition. However, we
believe our year-2000 readiness efforts will minimize the likelihood of a
material adverse impact.
Market-Sensitive Instruments And Risk Management
We seek to invest our available funds in a manner that will maximize
shareholder value and fund future obligations to policyholders, subject to
appropriate risk considerations. We seek to meet this objective through
investments that: (i) have similar characteristics to the liabilities they
support; (ii) are diversified among industries, issuers and geographic
locations; and (iii) make up a predominantly investment-grade fixed maturity
securities portfolio. Many of our products incorporate surrender charges, market
interest rate adjustments or other features to encourage persistency.
We seek to maximize the total return on our investments through active
investment management. Accordingly, we have determined that our entire portfolio
of fixed maturity securities is available to be sold in response to: (i) changes
in market interest rates; (ii) changes in relative values of individual
securities and asset sectors; (iii) changes in prepayment risks; (iv) changes in
credit quality outlook for certain securities; (v) liquidity needs; and (vi)
other factors. From time to time, we invest in securities for trading purposes,
although such investments account for a relatively small portion of our total
portfolio.
The profitability of many of our products depends on the spreads between
the interest yield we earn on investments and the rates we credit on our
insurance liabilities. Although substantially all credited rates on our annuity
products may be changed annually (subject to minimum guaranteed rates), changes
in competition and other factors, including the impact of the level of
surrenders and withdrawals, may limit our ability to adjust or to maintain
crediting rates at levels necessary to avoid narrowing of spreads under certain
market conditions. Approximately 80 percent of our insurance liabilities were
subject to interest rates that may be reset annually: the remainder have no
explicit interest rates. As of December 31, 1998, the average yield, computed on
the cost basis of our investment portfolio, was 7.2 percent, and the average
interest rate credited or accruing to our total insurance liabilities was 5.1
percent, excluding interest bonuses guaranteed for the first year of the annuity
contract only.
We use computer models to simulate the cash flows expected from our
existing business under various interest rate scenarios. These simulations
enable us to measure the potential gain or loss in fair value of our interest
rate-sensitive financial instruments. With such estimates, we seek to closely
match the duration of our assets to the duration of our liabilities. When the
estimated durations of assets and liabilities are similar, exposure to interest
rate risk is minimized because a change in the value of assets should be largely
offset by a change in the value of liabilities. At December 31, 1998, the
adjusted modified duration of our fixed maturity securities and short-term
investments was approximately 6.0 years and the duration of our insurance
liabilities was approximately 7.5 years. If interest rates were to increase by
10 percent from their December 31, 1998 levels, we estimate that our fixed
maturity securities and short-term investments (net of corresponding changes in
the value of cost of policies purchased, cost of policies produced and insurance
liabilities) would decline in fair value by approximately $30 million. This
compares to a decline in fair value of $35 million based on a comparable
calculation at December 31, 1997. The calculations involved in our computer
simulations incorporate numerous assumptions, require significant estimates and
assume an immediate change in interest rates without any management of the
investment portfolio in reaction to such change. Consequently, potential changes
in value of our financial instruments indicated by the simulations will likely
be different from the actual changes experienced under given interest rate
scenarios, and the differences may be material. Because we actively manage our
investments and liabilities, our net exposure to interest rates can vary over
time.
42
<PAGE>
CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
================================================================================
Directors And Executive Officers
Conseco Variable's directors and executive officers as of May 1, 1999 are listed
below:
PRINCIPAL BUSINESS OCCUPATION
NAME DURING LAST FIVE YEARS
- --------------------------------------------------------------------------------
Stephen C. Hilbert Since 1979, Chairman of the Board, Chief Executive
(Age 53) Officer and Director and since 1988 President of
Conseco, Inc. Director and Chairman of the Board
of Conseco Variable.
Ngaire E. Cuneo Since 1992, Executive Vice President, Corporate
(Age 48) Development of Conseco, Inc. and various positions
with certain of its affiliates. Director of
Conseco Variable.
Rollin M. Dick Since 1986, Executive Vice President, Chief
(Age 67) Financial Officer and Director of Conseco, Inc.
Director and Executive Vice President and Chief
Financial Officer of Conseco Variable.
Thomas J. Kilian Since 1998, Executive Vice President, Chief
(Age 48) Operations Officer of Conseco, Inc. and from 1989
until 1998 Senior Vice President of various
subsidiaries of Conseco, Inc. Director and
President of Conseco Variable.
John J. Sabl Since 1997, Executive Vice President, General
(Age 47) Counsel and Secretary of Conseco, Inc. Prior
thereto, Mr. Sabl was a partner in the law firm of
Sidley & Austin in Chicago, Illinois. Director and
Executive Vice President, General Counsel and
Secretary of Conseco Variable.
James S. Adams Since 1997, Senior Vice President, Chief
(Age 39) Accounting Officer and Treasurer of Conseco, Inc.
Since 1989, Senior Vice President of various
subsidiaries of Conseco, Inc. Senior Vice
President and Treasurer of Conseco Variable.
43
<PAGE>
================================================================================
Executive Compensation
Conseco Variable has no full-time employees and does not compensate any
employee, officer or director of Conseco Variable.
Independent Accountants
The financial statements of Conseco Variable as of December 31, 1998 and
1997 and for the years ended December 31, 1998, 1997 and 1996, included in this
prospectus, have been audited by PricewaterhouseCoopers LLP, independent
accountants, as set forth in their report appearing herein.
Legal Opinions
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut has provided
advice on certain matters relating to the federal securities and income tax laws
in connection with the Contracts described in this prospectus.
Financial Statements
The financial statements of Conseco Variable which are included in this
prospectus should be considered only as bearing on the ability of Conseco
Variable to meet its obligations under the Contracts. They should not be
considered as bearing on the investment performance of the Investment
Portfolios. The value of the Investment Portfolios is affected primarily by the
performance of the underlying investments.
The financial statements of Conseco Variable Annuity Account F are included
in the Statement of Additional Information.
44
<PAGE>
CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
================================================================================
Report Of Independent Accountants
To the Shareholders and Board of Directors
Conseco Variable Insurance Company
In our opinion, the accompanying balance sheet and the related statements
of operations, shareholder's equity and cash flows present fairly, in all
material respects, the financial position of Conseco Variable Insurance Company
(the "Company") at December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Indianapolis, Indiana
March 30, 1999
45
<PAGE>
================================================================================
Conseco Variable Insurance Company
Balance Sheet
December 31, 1998 and 1997
(Dollars in millions)
<TABLE>
<CAPTION>
Assets
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments:
Actively managed fixed maturities at fair value (amortized cost:
1998--$1,520.5; 1997--$1,705.2)..................................................... $1,524.1 $1,734.0
Equity securities at fair value (cost: 1998 - $46.0 million;
1997--$25.1 million)................................................................ 45.7 25.4
Mortgage loans........................................................................ 110.2 146.1
Policy loans.......................................................................... 79.6 80.6
Other invested assets................................................................. 103.1 62.8
Short-term investments................................................................ 48.4 49.5
Assets held in separate accounts...................................................... 696.4 402.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total investments................................................................. 2,607.5 2,500.5
Accrued investment income............................................................... 30.5 30.5
Cost of policies purchased.............................................................. 98.0 106.4
Cost of policies produced............................................................... 82.5 55.9
Reinsurance receivables................................................................. 22.2 21.9
Goodwill (net of accumulated amortization: 1998 - $14.7;
1997--$13.2).......................................................................... 46.7 48.2
Other assets............................................................................ 24.3 8.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets...................................................................... $2,911.7 $2,771.7
====================================================================================================================================
</TABLE>
(continued on next page)
The accompanying notes are an integral part of the financial statements.
46
<PAGE>
CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
================================================================================
Conseco Variable Insurance Company
Balance Sheet (Continued)
December 31, 1998 and 1997
(Dollars in millions, except per share amount)
<TABLE>
<CAPTION>
Liabilities And Shareholder's Equity
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities:
Insurance liabilities:
Interest sensitive products..................................................... $1,365.2 $1,522.1
Traditional products............................................................ 246.2 248.3
Claims payable and other policyholder funds..................................... 62.6 62.5
Liabilities related to separate accounts........................................ 696.4 402.1
Income tax liabilities.............................................................. 37.5 44.2
Investment borrowings............................................................... 65.7 61.0
Other liabilities................................................................... 33.0 14.6
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities........................................................... 2,506.6 2,354.8
- ------------------------------------------------------------------------------------------------------------------------------------
Shareholder's equity:
Common stock and additional paid-in capital (par value $4.80 per share,
1,065,000 shares authorized, 1,043,565 shares
issued and outstanding)......................................................... 380.8 380.8
Accumulated other comprehensive income:
Unrealized gains of fixed maturity securities (net of
applicable deferred income taxes: 1998 - $.5; 1997 - $4.4).................. 1.0 8.2
Unrealized gains (losses) of other investments (net of
applicable deferred income taxes: 1998 - $(.9); 1997 - $.3)................. (1.8) .5
Retained earnings................................................................... 25.1 27.4
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholder's equity.................................................. 405.1 416.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity ................................. $2,911.7 $2,771.7
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
47
<PAGE>
================================================================================
Conseco Variable Insurance Company
Statement Of Operations
for the years ended December 31, 1998, 1997 and 1996
(Dollars in millions)
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Insurance policy income.............................................. $ 73.6 $ 75.7 $ 81.4
Net investment income................................................ 198.0 222.6 218.4
Net investment gains................................................. 18.5 13.3 2.7
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues................................................... 290.1 311.6 302.5
- ------------------------------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Insurance policy benefits............................................ 170.6 191.0 180.6
Amortization......................................................... 33.6 27.1 20.3
Other operating costs and expenses................................... 38.7 32.2 60.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses...................................... 242.9 250.3 261.4
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes....................................... 47.2 61.3 41.1
Income tax expense....................................................... 16.6 22.1 15.4
- ------------------------------------------------------------------------------------------------------------------------------------
Net income....................................................... $ 30.6 $ 39.2 $ 25.7
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
48
<PAGE>
CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
================================================================================
Conseco Variable Insurance Company
Statement Of Shareholder's Equity
for the years ended December 31, 1998, 1997 and 1996
(Dollars in millions)
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED OTHER
AND ADDITIONAL COMPREHENSIVE RETAINED
TOTAL PAID-IN CAPITAL INCOME (LOSS) EARNINGS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995....................................... $442.6 $380.8 $ 12.4 $ 49.4
Comprehensive income, net of tax:
Net income................................................. 25.7 -- -- 25.7
Change in unrealized appreciation (depreciation) of
securities (net of applicable income taxes of ($9.7)) ... (17.0) -- (17.0) --
- ------------------------------------------------------------------------------
Total comprehensive income........................... 8.7
Dividends on common stock.................................... (54.4) -- -- (54.4)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996....................................... 396.9 380.8 (4.6) 20.7
Comprehensive income, net of tax:
Net income................................................. 39.2 -- -- 39.2
Change in unrealized appreciation (depreciation) of
securities (net of applicable income taxes of $7.2)...... 13.3 -- 13.3 --
- ------------------------------------------------------------------------------
Total comprehensive income........................... 52.5
Dividends on common stock.................................... (32.5) -- -- (32.5)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997....................................... 416.9 380.8 8.7 27.4
Comprehensive income, net of tax:
Net income................................................. 30.6 -- -- 30.6
Change in unrealized appreciation (depreciation) of
securities (net of applicable income taxes of ($5.1)) ... (9.5) -- (9.5) --
- ------------------------------------------------------------------------------
Total comprehensive income........................... 21.1
Dividends on common stock.................................... (32.9) -- -- (32.9)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998....................................... $405.1 $380.8 $ (.8) $ 25.1
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
49
<PAGE>
================================================================================
Conseco Variable Insurance Company
Statement Of Cash Flows
for the years ended December 31, 1998, 1997 and 1996
(Dollars in millions)
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................... $30.6 $39.2 $25.7
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization................................................... 43.0 27.1 20.3
Income taxes................................................... (1.2) 6.7 (3.9)
Insurance liabilities.......................................... 120.0 95.2 112.5
Accrual and amortization of investment income.................... 1.6 .3 3.1
Deferral of cost of policies produced............................ (35.3) (31.8) (13.2)
Investment gains................................................. (18.5) (13.3) (2.7)
Other............................................................ (38.3) (4.6) (8.8)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities.................... 101.9 118.8 133.0
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Sales of investments................................................. 1,185.0 755.2 988.9
Maturities and redemptions........................................... 145.5 150.4 101.7
Purchases of investments............................................. (1,420.7) (923.5) (1,049.6)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities............. (90.2) (17.9) 41.0
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Deposits to insurance liabilities.................................... 400.4 255.9 169.8
Investment borrowings................................................ 4.7 12.6 (35.8)
Withdrawals from insurance liabilities............................... (385.0) (302.2) (267.7)
Dividends paid on common stock....................................... (32.9) (32.5) (44.5)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities........................ (12.8) (66.2) (178.2)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in short-term investments............ (1.1) 34.7 (4.2)
Short-term investments, beginning of year................................ 49.5 14.8 19.0
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term investments, end of year...................................... $48.4 $49.5 $14.8
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
50
<PAGE>
CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Notes to Financial Statements
================================================================================
1. Significant Accounting Policies
Basis of Presentation
Conseco Variable Insurance Company ("we" or the "Company") markets
tax-qualified annuities and certain employee benefit-related insurance products
through professional independent agents. Prior to its name change in October
1998, the Company was named Great American Reserve Insurance Company. Since
August 1995, the Company has been a wholly owned subsidiary of Conseco, Inc.
("Conseco"), a financial services holding company operating throughout the
United States. Conseco's life insurance subsidiaries develop, market and
administer supplemental health insurance, annuity, individual life insurance,
individual and group major medical insurance and other insurance products.
Conseco's finance subsidiaries originate, purchase, sell and service consumer
and commercial finance loans.
The following summary explains the accounting policies we use to arrive at
the more significant numbers in our financial statements. We prepare our
financial statements in accordance with generally accepted accounting principles
("GAAP"). We follow the accounting standards established by the Financial
Accounting Standards Board, the American Institute of Certified Public
Accountants and the Securities and Exchange Commission. We reclassified certain
amounts in our 1997 and 1996 financial statements and notes to conform with the
1998 presentation.
Investments
Fixed maturities are securities that mature more than one year after
issuance and include bonds, notes receivable and redeemable preferred stock.
Fixed maturities that we may sell prior to maturity are classified as actively
managed and are carried at estimated fair value, with any unrealized gain or
loss, net of tax and related adjustments, recorded as a component of
shareholder's equity. Fixed maturity securities that we intend to sell in the
near term are classified as trading and included in other invested assets. We
include any unrealized gain or loss on trading securities in net investment
gains.
Equity securities include investments in common stocks and non-redeemable
preferred stock. We carry these investments at estimated fair value. We record
any unrealized gain or loss, net of tax and related adjustments, as a component
of shareholder's equity.
Mortgage loans held in our investment portfolio are carried at amortized
unpaid balances, net of provisions for estimated losses.
Policy loans are stated at their current unpaid principal balances.
Other invested assets include trading securities and certain
non-traditional investments. Non-traditional investments include investments in
venture capital funds, limited partnerships, mineral rights and promissory
notes; we account for them using either the cost method, or for investments in
partnerships over whose operations the Company exercises significant influence,
the equity method.
Short-term investments include commercial paper, invested cash and other
investments purchased with maturities of less than three months. We carry them
at amortized cost, which approximates their estimated fair value. We consider
all short-term investments to be cash equivalents.
We defer any fees received or costs incurred when we originate investments
(primarily mortgage loans). We amortize fees, costs, discounts and premiums as
yield adjustments over the Contractual lives of the investments. We consider
anticipated prepayments on mortgage-backed securities in determining estimated
future yields on such securities.
When we sell a security (other than a trading security), we report the
difference between our sale proceeds and its amortized cost (determined based on
specific identification) as an investment gain or loss.
We regularly evaluate all of our investments based on current economic
conditions, credit loss experience and other investee-specific developments. If
there is a decline in a security's net realizable value that is other than
temporary, we treat it as a realized loss and reduce our cost basis of the
security to its estimated fair value.
Separate Accounts
Separate accounts are funds on which investment income and gains or losses
accrue directly to certain policyholders. The assets of these accounts are
legally segregated. They are not subject to the claims that may arise out of any
other business of the Company. We report separate account assets at market
value; the underlying investment risks are assumed by the Contract holders. We
record the
51
<PAGE>
================================================================================
related liabilities at amounts equal to the market value of the underlying
assets.
Cost of Policies Produced
The costs that vary with, and are primarily related to, producing new
insurance business are referred to as cost of policies produced. We amortize
these costs using the interest rate credited to the underlying policy; (I) in
relation to the estimated gross profits for universal life-type and
investment-type products; or (ii) in relation to future anticipated premium
revenue for other products.
When we sell investments backing our universal life or investment-type
product business at a gain or loss, we adjust the amortization to reflect the
change in future investment yields resulting from the sale (thereby changing the
future amortization to offset the change in yield). We also adjust the cost of
policies produced for the change in amortization that would have been recorded
if actively managed fixed maturity securities had been sold at their stated
aggregate fair value and the proceeds reinvested at current yields. We include
the impact of this adjustment in net unrealized appreciation (depreciation)
within shareholder's equity.
Each year, we evaluate the recoverability of the unamortized balance of the
cost of policies produced. We consider estimated future gross profits or future
premiums, expected mortality or morbidity, interest earned and credited rates,
persistency and expenses in determining whether the balance is recoverable.
Cost of Policies Purchased
The cost assigned to the right to receive future cash flows from Contracts
existing at the date of an acquisition is referred to as cost of policies
purchased. This balance is amortized, evaluated for recoverability, and adjusted
for the impact of realized and unrealized gains (losses) in the same manner as
the cost of policies produced described above.
Goodwill
Goodwill is the excess of the amount paid to acquire the Company over the
fair value of its net assets. We amortize goodwill on the straight-line basis
over a 40-year period. We continually monitor the value of our goodwill based on
our estimates of future earnings. We determine whether goodwill is fully
recoverable from projected undiscounted net cash flows over the remaining
amortization period. If we were to determine that changes in such projected cash
flows no longer support the recoverability of goodwill over the remaining
amortization period, we would reduce its carrying value with a corresponding
charge to expense or shorten the amortization period (no such changes have
occurred).
Recognition of Insurance Policy Income and Related Benefits and Expenses on
Insurance Contracts
Generally, we recognize insurance premiums for traditional life and
accident and health Contracts as earned over the premium-paying periods. We
establish reserves for future benefits on a net-level premium method based upon
assumptions as to investment yields, mortality, morbidity, withdrawals and
dividends. We record premiums for universal life-type and investment-type
Contracts that do not involve significant mortality or morbidity risk as
deposits to insurance liabilities. Revenues for these Contracts consist of
mortality, morbidity, expense and surrender charges. We establish reserves for
the estimated present value of the remaining net costs of all reported and
unreported claims.
Reinsurance
In the normal course of business, we seek to limit our exposure to loss on
any single insured or to certain groups of policies by ceding reinsurance to
other insurance enterprises. We currently retain no more than $.5 million of
mortality risk on any one policy. We diversify the risk of reinsurance loss by
using a number of reinsurers that have strong claims-paying ratings. If any
reinsurer could not meet its obligations, the Company would assume the
liability. The likelihood of a material loss being incurred as the result of the
failure of one of our reinsurers is considered remote. The cost of reinsurance
ceded totaled $21.0 million, $24.2 million and $24.6 million in 1998, 1997 and
1996, respectively. Reinsurance recoveries netted against insurance policy
benefits totaled $21.8 million, $14.9 million and $19.4 million in 1998, 1997
and 1996, respectively.
Income Taxes
Our income tax expense includes deferred income taxes arising from
temporary differences between the tax and financial reporting bases of
52
<PAGE>
CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Notes to Financial Statements
================================================================================
assets and liabilities. In assessing the realization of deferred income tax
assets, we consider whether it is more likely than not that the deferred income
tax assets will be realized. The ultimate realization of deferred income tax
assets depends upon generating future taxable income during the periods in which
temporary differences become deductible. If future income is not generated as
expected, deferred income tax assets may need to be written off (no such
write-offs have occurred).
Investment Borrowings
As part of our investment strategy, we may enter into reverse repurchase
agreements and dollar-roll transactions to increase our investment return or to
improve our liquidity. We account for these transactions as collateral
borrowings, where the amount borrowed is equal to the sales price of the
underlying securities. Reverse repurchase agreements involve a sale of
securities and an agreement to repurchase the same securities at a later date at
an agreed-upon price. Dollar rolls are similar to reverse repurchase agreements
except that, with dollar rolls, the repurchase involves securities that are only
substantially the same as the securities sold. We account for these transactions
as short-term collateralized borrowings. Such borrowings averaged approximately
$66.0 million during 1998 (compared with an average of $90.4 million during
1997) and were collateralized by investment securities with fair values
approximately equal to the loan value. The weighted average interest rate on
short-term collateralized borrowings was 4.4 percent in both 1998 and 1997. The
primary risk associated with short-term collateralized borrowings is that a
counterparty will be unable to perform under the terms of the Contract. Our
exposure is limited to the excess of the net replacement cost of the securities
over the value of the short-term investments (such excess was not material at
December 31, 1998). We believe the counterparties to our reverse repurchase and
dollar-roll agreements are financially responsible and that the counterparty
risk is minimal.
Use of Estimates
When we prepare financial statements in conformity with GAAP, we are
required to make estimates and assumptions that significantly affect various
reported amounts of assets and liabilities, and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reporting periods. For example, we use significant estimates
and assumptions in calculating values for the cost of policies produced, the
cost of policies purchased, goodwill, liabilities for insurance and deposit
products, liabilities related to litigation, guaranty fund assessment accruals,
gain on sale of finance receivables and deferred income taxes. If our future
experience differs materially from these estimates and assumptions, our
financial statements could be affected.
Fair Values of Financial Instruments
We use the following methods and assumptions to determine the estimated
fair values of financial instruments:
Investment securities. For fixed maturity securities (including redeemable
preferred stocks) and for equity and trading securities, we use quotes from
independent pricing services, where available. For investment securities for
which such quotes are not available, we use values obtained from broker-dealer
market makers or by discounting expected future cash flows using a current
market rate appropriate for the yield, credit quality, and (for fixed maturity
securities) the maturity of the investment being priced.
Short-term investments. We use quoted market prices. The carrying amount
for these instruments approximates their estimated fair value.
Mortgage loans and policy loans. We discount future expected cash flows for
loans included in our investment portfolio based on interest rates currently
being offered for similar loans to borrowers with similar credit ratings. We
aggregate loans with similar characteristics in our calculations.
Other invested assets. We use quoted market prices, where available. When
quotes are not available, we assume a market value equal to carrying value.
Insurance liabilities for investment Contracts. We discount future expected
cash flows based on interest rates currently being offered for similar contracts
with similar maturities.
Investment borrowings. Due to the short-term nature of these borrowings
(terms generally less than 30 days), estimated fair values are assumed to
approximate the carrying amount reported in the balance sheet.
53
<PAGE>
================================================================================
Here are the estimated fair values of our financial instruments:
<TABLE>
<CAPTION>
1998 1997
---------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
====================================================================================================================================
(DOLLARS IN MILLIONS)
====================================================================================================================================
<S> <C> <C> <C> <C>
Financial assets:
Actively managed fixed maturities........................................... $1,524.1 $1,524.1 $1,734.0 $1,734.0
Equity securities ........................................................... 45.7 45.7 25.4 25.4
Mortgage loans............................................................... 110.2 119.0 146.1 154.6
Policy loans................................................................. 79.6 79.6 80.6 80.6
Other invested assets........................................................ 103.1 103.1 62.8 62.8
Short-term investments....................................................... 48.4 48.4 49.5 49.5
Financial liabilities:
Insurance liabilities for investment contracts (1)........................... 1,036.0 1,036.0 1,177.5 1,177.5
Investment borrowings. ...................................................... 65.7 65.7 61.0 61.0
====================================================================================================================================
</TABLE>
(1) The estimated fair value of the liabilities for investment contracts
was approximately equal to its carrying value at December 31, 1998 and 1997.
This was because interest rates credited on the vast majority of account
balances approximate current rates paid on similar investment contracts and
because these rates are not generally guaranteed beyond one year. We are not
required to disclose fair values for insurance liabilities, other than those for
investment contracts. However, we take into consideration the estimated fair
values of all insurance liabilities in our overall management of interest rate
risk. We attempt to minimize exposure to changing interest rates by matching
investment maturities with amounts due under insurance contracts.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") was issued in June
1998. SFAS 133 requires all derivative instruments to be recorded on the balance
sheet at estimated fair value. Changes in the fair value of derivative
instruments are to be recorded each period either in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, on the type of hedge transaction. SFAS 133 is
effective for year 2000. We are currently evaluating the impact of SFAS 133; at
present, we do not believe it will have a material effect on our financial
position or results of operations.
2. Investments:
At December 31, 1998, the amortized cost and estimated fair value of
actively managed fixed maturities and equity securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
====================================================================================================================================
(DOLLARS IN MILLIONS)
====================================================================================================================================
<S> <C> <C> <C> <C>
Investment grade:
Corporate securities......................................................... $860.4 $20.7 $15.0 $866.1
United States Treasury securities and obligations of
United States government corporations and agencies........................... 26.9 .8 .2 27.5
States and political subdivisions............................................ 17.3 .3 -- 17.6
Debt securities issued by foreign governments................................ 11.7 -- .8 10.9
Mortgage-backed securities .................................................. 487.4 8.0 1.2 494.2
Below-investment grade (primarily corporate securities)........................ 116.8 1.2 10.2 107.8
====================================================================================================================================
Total actively managed fixed maturities................................... $1,520.5 $31.0 $27.4 $1,524.1
====================================================================================================================================
Equity securities.............................................................. $ 46.0 $ .8 $ 1.1 $ 45.7
====================================================================================================================================
</TABLE>
At December 31, 1997, the amortized cost and estimated fair value of
actively managed fixed maturities and equity securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
====================================================================================================================================
(DOLLARS IN MILLIONS)
====================================================================================================================================
<S> <C> <C> <C> <C>
Investment grade:
Corporate securities ........................................... $ 955.8 $28.3 $ 5.3 $ 978.8
United States Treasury securities and obligations of
United States government corporations and agencies ............. 28.0 .7 -- 28.7
States and political subdivisions .............................. 20.4 1.1 .1 21.4
Debt securities issued by foreign governments .................. 13.5 .1 .7 12.9
Mortgage-backed securities ..................................... 551.6 8.6 .4 559.8
Below-investment grade (primarily corporate securities) .......... 135.9 1.8 5.3 132.4
====================================================================================================================================
Total actively managed fixed maturities .................... $1,705.2 $40.6 $11.8 $1,734.0
====================================================================================================================================
Equity securities ................................................ $ 25.1 $ .5 $ .2 $ 25.4
====================================================================================================================================
</TABLE>
54
<PAGE>
CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
================================================================================
Net unrealized gains (losses) on actively managed fixed maturity
investments included in shareholders' equity as of December 31, 1998 and 1997,
were as follows:
<TABLE>
<CAPTION>
1998 1997
(DOLLARS IN MILLIONS)
====================================================================================================================================
<S> <C> <C>
Net unrealized gains on actively managed fixed maturity investments........................ $ 3.6 $ 28.8
Adjustments to cost of policies purchased and cost of policies produced.................... (2.1) (16.2)
Deferred income tax benefit................................................................ (.5) (4.4)
- ------------------------------------------------------------------------------------------------------------------------------------
Net unrealized gain on actively managed fixed maturity investments................... $ 1.0 $8.2
====================================================================================================================================
</TABLE>
The following table sets forth the amortized cost and estimated fair value
of actively managed fixed maturities at December 31, 1998, by Contractual
maturity. Actual maturities will differ from Contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Most of the mortgage-backed securities shown below
provide for periodic payments throughout their lives.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
(DOLLARS IN MILLIONS)
====================================================================================================================================
<S> <C> <C>
Due in one year or less.................................................................... $14.5 $14.5
Due after one year through five years...................................................... 132.1 133.4
Due after five years through ten years..................................................... 249.3 245.6
Due after ten years........................................................................ 637.2 636.4
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal............................................................................... 1,033.1 1,029.9
Mortgage-backed securities................................................................. 487.4 494.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total actively managed fixed maturities ............................................. $1,520.5 $1,524.1
====================================================================================================================================
</TABLE>
Net investment income consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
(DOLLARS IN MILLIONS)
====================================================================================================================================
<S> <C> <C> <C>
Actively managed fixed maturity securities............................................ $118.4 $133.6 $146.4
Equity securities..................................................................... 3.2 1.7 1.6
Mortgage loans........................................................................ 12.1 16.4 19.0
Policy loans.......................................................................... 5.1 5.4 5.0
Other invested assets................................................................. 13.3 7.7 9.8
Short-term investments................................................................ 2.9 3.4 2.3
Separate accounts..................................................................... 44.1 55.7 35.6
- ------------------------------------------------------------------------------------------------------------------------------------
Gross investment income........................................................... 199.1 223.9 219.7
Investment expenses................................................................... 1.1 1.3 1.3
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income........................................................... $198.0 $222.6 $218.4
====================================================================================================================================
</TABLE>
The Company had no significant fixed maturity investments and mortgage
loans that were not accruing investment income in 1998, 1997 and 1996.
Investment gains (losses), net of investment expenses, were included in
revenue as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(DOLLARS IN MILLIONS)
====================================================================================================================================
<S> <C> <C> <C>
Fixed maturities:
Gross gains......................................................................... $ 34.0 $20.6 $16.6
Gross losses........................................................................ (12.4) (5.1) (9.2)
Other than temporary decline in fair value.......................................... -- (.3) (.2)
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment gains from fixed maturities before expenses........................ 21.6 15.2 7.2
Other................................................................................. .1 2.2 (.6)
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment gains before expenses.............................................. 21.7 17.4 6.6
Investment expenses................................................................... 3.2 4.1 3.9
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment gains.............................................................. $ 18.5 $13.3 $ 2.7
====================================================================================================================================
</TABLE>
55
<PAGE>
================================================================================
At December 31, 1998, the mortgage loan balance was primarily comprised of
commercial loans. Approximately 15 percent, 12 percent, 12 percent, 11 percent
and 8 percent of the mortgage loan balance were on properties located in
California, Michigan, Florida, Texas and Georgia, respectively. No other state
comprised greater than 8 percent of the mortgage loan balance. Noncurrent
mortgage loans were insignificant at December 31, 1998. At December 31, 1998,
our allowance for loss on mortgage loans was $.8 million.
Life insurance companies are required to maintain certain investments on
deposit with state regulatory authorities. Such assets had an aggregate carrying
value of $16.1 million at December 31, 1998.
The Company had no investments in any single entity in excess of 10 percent
of shareholder's equity at December 31, 1998, other than investments issued or
guaranteed by the United States government or a United States government agency.
3. Insurance Liabilities:
These liabilities consisted of the following:
<TABLE>
<CAPTION>
INTEREST
WITHDRAWAL MORTALITY RATE
ASSUMPTION ASSUMPTION ASSUMPTION 1998 1997
(DOLLARS IN MILLIONS)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Future policy benefits:
Interest-sensitive products:
Investment Contracts........................... N/A N/A (c) $1,036.0 $1,177.5
Universal life-type Contracts.................. N/A N/A 4.8% 329.2 344.6
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-sensitive products.......... 1,365.2 1,522.1
- ------------------------------------------------------------------------------------------------------------------------------------
Traditional products:
Traditional life insurance Contracts........... Company (a) 7.6% 139.9 142.8
experience
Limited-payment Contracts...................... None (b) 7.6% 106.3 105.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total traditional products................. 246.2 248.3
- ------------------------------------------------------------------------------------------------------------------------------------
Claims payable and other policyholder funds........ N/A N/A N/A 62.6 62.5
Liabilities related to separate accounts........... N/A N/A N/A 696.4 402.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total...................................... $2,370.4 $2,235.0
====================================================================================================================================
</TABLE>
(a) Principally modifications of the 1975 - 80 Basic, Select and Ultimate
Tables.
(b) Principally the 1984 United States Population Table and the NAIC 1983
Individual Annuitant Mortality Table.
(c) At December 31, 1998 and 1997, approximately 95 percent and 97
percent, respectively, of this liability represented account balances
where future benefits are not guaranteed. The weighted average
interest rate on the remainder of the liabilities representing the
present value of guaranteed future benefits was approximately 6
percent at December 31, 1998.
4. Income Taxes:
Income tax liabilities were comprised of the following:
<TABLE>
<CAPTION>
1998 1997
(DOLLARS IN MILLIONS)
====================================================================================================================================
<S> <C> <C>
Deferred income tax liabilities (assets):
Investments (primarily actively managed fixed maturities)....................... $5.4 $ 9.8
Cost of policies purchased and cost of policies produced........................ 56.7 52.2
Insurance liabilities........................................................... (28.2) (19.5)
Unrealized appreciation (depreciation).......................................... (.4) 4.7
Other........................................................................... (2.2) (4.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities............................................... 31.3 43.2
Current income tax liabilities (assets)........................................... 6.2 1.0
- ------------------------------------------------------------------------------------------------------------------------------------
Income tax liabilities........................................................ $ 37.5 $ 44.2
====================================================================================================================================
</TABLE>
56
<PAGE>
CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
================================================================================
Income tax expense was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(DOLLARS IN MILLIONS)
====================================================================================================================================
<S> <C> <C> <C>
Current tax provision................................................................. $20.8 $16.3 $10.5
Deferred tax provision (benefit)...................................................... (4.2) 5.8 4.9
- ------------------------------------------------------------------------------------------------------------------------------------
Income tax expense................................................................ $16.6 $22.1 $15.4
====================================================================================================================================
A reconciliation of the income tax provisions based on the U.S. statutory
corporate tax rate to the provisions reflected in the statement of operations is
as follows:
<CAPTION>
1998 1997 1996
====================================================================================================================================
Tax on income before income taxes at statutory rate................................... 35.0% 35.0% 35.0%
State taxes........................................................................... 1.0 .7 1.5
Other................................................................................. (.8) .3 1.0
- ------------------------------------------------------------------------------------------------------------------------------------
Income tax expense................................................................ 35.2% 36.0% 37.5%
====================================================================================================================================
</TABLE>
5. Other Disclosures:
Litigation
The Company is involved on an ongoing basis in lawsuits related to its
operations. Although the ultimate outcome of certain of such matters cannot be
predicted, none of such lawsuits currently pending against the Company is
expected, individually or in the aggregate, to have a material adverse effect on
the Company's financial condition, cash flows or results of operations.
Guaranty Fund Assessments
The balance sheet at December 31, 1998, includes: (i) accruals of $2.4
million, representing our estimate of all known assessments that will be levied
against the Company by various state guaranty associations based on premiums
written through December 31, 1998; and (ii) receivables of $1.9 million that we
estimate will be recovered through a reduction in future premium taxes as a
result of such assessments. These estimates are subject to change when the
associations determine more precisely the losses that have occurred and how such
losses will be allocated among the insurance companies. We recognized expense
for such assessments of $1.1 million in 1998, $1.2 million in 1997 and $1.4
million in 1996.
Related Party Transactions
The Company operates without direct employees through management and
service agreements with subsidiaries of Conseco. Fees for such services
(including data processing, executive management and investment management
services) are based on Conseco's direct and directly allocable costs plus a 10
percent margin. Total fees incurred by the Company under such agreements were
$37.8 million in 1998, $36.7 million in 1997 and $44.1 million in 1996.
During 1998 and 1997, the Company purchased $13.0 million and $11.2 million
par value, respectively, of senior subordinated notes issued by subsidiaries of
Conseco. Such notes had a carrying value of $45.5 million and $29.8 million at
December 31, 1998 and 1997, respectively, and are classified as "other invested
assets" in the accompanying balance sheet. In addition, during 1997, a
subsidiary of Conseco redeemed $16.5 million par value of such notes which were
purchased in 1996.
57
<PAGE>
================================================================================
6. Other Operating Statement Data:
Insurance policy income consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
(DOLLARS IN MILLIONS)
====================================================================================================================================
<S> <C> <C> <C>
Traditional products:
Direct premiums collected........................................................... $445.8 $309.6 $241.3
Reinsurance assumed................................................................. 15.6 14.9 1.7
Reinsurance ceded................................................................... (21.0) (24.2) (24.6)
- ------------------------------------------------------------------------------------------------------------------------------------
Premiums collected, net of reinsurance............................................ 440.4 300.3 218.4
Less premiums on universal life and products
without mortality and morbidity risk which are
recorded as additions to insurance liabilities ................................... 400.4 255.9 169.8
- ------------------------------------------------------------------------------------------------------------------------------------
Premiums on traditional products with mortality or morbidity risk,
recorded as insurance policy income............................................. 40.0 44.4 48.6
Fees and surrender charges on interest sensitive products............................. 33.6 31.3 32.8
- ------------------------------------------------------------------------------------------------------------------------------------
Insurance policy income........................................................... $ 73.6 $ 75.7 $ 81.4
====================================================================================================================================
</TABLE>
The five states with the largest shares of 1998 collected premiums were
Texas (17 percent), Florida (16 percent), California (13 percent), Michigan (7.1
percent) and Indiana (6.2 percent). No other state accounted for more than 5.0
percent of total collected premiums.
Changes in the cost of policies purchased were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(DOLLARS IN MILLIONS)
====================================================================================================================================
<S> <C> <C> <C>
Balance, beginning of year............................................................ $106.4 $143.0 $120.0
Amortization........................................................................ (21.1) (15.4) (15.3)
Amounts related to fair value adjustment of actively managed fixed maturities....... 11.8 (21.2) 36.6
Other .............................................................................. .9 -- 1.7
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of year.................................................................. $ 98.0 $106.4 $143.0
====================================================================================================================================
</TABLE>
Based on current conditions and assumptions as to future events on all
policies in force, the Company expects to amortize approximately 10 percent of
the December 31, 1998, balance of cost of policies purchased in 1999, 9 percent
in 2000, 9 percent in 2001, 8 percent in 2002 and 8 percent in 2003. The
discount rates used to determine the amortization of the cost of policies
purchased ranged from 3.6 percent to 8.0 percent and averaged 5.8 percent.
Changes in the cost of policies produced were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(DOLLARS IN MILLIONS)
====================================================================================================================================
<S> <C> <C> <C>
Balance, beginning of year............................................................ $ 55.9 $38.2 $24.0
Additions........................................................................... 35.3 31.8 13.2
Amortization........................................................................ (11.0) (10.2) (3.5)
Amounts related to fair value adjustment of actively managed fixed maturities....... 2.3 (3.9) 4.5
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of year.................................................................. $ 82.5 $55.9 $38.2
====================================================================================================================================
</TABLE>
58
<PAGE>
CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
================================================================================
7. Statement Of Cash Flows:
Income taxes paid during 1998, 1997, and 1996, were $17.1 million, $14.8
million and $18.1 million, respectively.
Short-term investments having original maturities of three months or less
are considered to be cash equivalents. All cash is invested in short-term
investments.
8. Statutory Information:
Statutory accounting practices prescribed or permitted for insurance
companies by regulatory authorities differ from generally accepted accounting
principles. The Company reported the following amounts to regulatory agencies:
<TABLE>
<CAPTION>
1998 1997
(DOLLARS IN MILLIONS)
====================================================================================================================================
<S> <C> <C>
Statutory capital and surplus............................................................... $134.0 $140.7
Asset valuation reserve..................................................................... 30.9 29.2
Interest maintenance reserve................................................................ 73.1 68.8
- ------------------------------------------------------------------------------------------------------------------------------------
Total................................................................................. $238.0 $238.7
====================================================================================================================================
</TABLE>
The Company's statutory net income was $32.7 million, $32.7 million and
$32.6 million in 1998, 1997 and 1996, respectively.
State insurance laws generally restrict the ability of insurance companies
to pay dividends or make other distributions. Approximately $32.9 million of the
Company's net assets at December 31, 1998, are available for distribution in
1999 without permission of state regulatory authorities.
59
<PAGE>
================================================================================
Table of Contents of the Statement of Additional Information
Company
Independent Accountants
Legal Opinions
Distribution
Calculation of Performance Information
Federal Tax Status
Annuity Provisions
Financial Statements
Appendix A-Condensed Financial Information
Accumulation Unit Value History
The following schedule includes Accumulation Unit values for the period
indicated. This data has been taken from the Conseco Variable Annuity Account
F's financial statements. This information should be read in conjunction with
Conseco Variable Annuity Account F's financial statements and related notes
which are included in the Statement of Additional Information.
Period ended
SUB-ACCOUNT 12/31/98
- --------------------------------------------------------------------------------
Balanced
Beginning of Period......................................... $10.000
End of Period............................................... $10.510
No. of Accum. Units Outstanding............................. 399,217
Equity
Beginning of Period......................................... $10.000
End of Period............................................... $10.878
No. of Accum. Units Outstanding............................. 446,344
Fixed Income
Beginning of Period......................................... $10.000
End of Period............................................... $10.392
No. of Accum. Units Outstanding............................. 308,576
Government Securities
Beginning of Period......................................... $10.000
End of Period............................................... $10.480
No. of Accum. Units Outstanding............................. 153,270
Money Market
Beginning of Period......................................... $10.000
End of Period............................................... $10.335
No. of Accum. Units Outstanding............................. 779,777
Alger American Growth
Beginning of Period......................................... $10.000
End of Period............................................... $13.913
No. of Accum. Units Outstanding............................. 436,443
Alger American Leveraged AllCap
Beginning of Period......................................... $10.000
End of Period............................................... $14.867
No. of Accum. Units Outstanding............................. 109,259
Alger American MidCap Growth
Beginning of Period......................................... $10.000
End of Period............................................... $12.391
No. of Accum. Units Outstanding............................. 155,496
Alger American Small Capitalization
Beginning of Period......................................... $10.000
End of Period............................................... $11.196
No. of Accum. Units Outstanding............................. 153,227
60
<PAGE>
CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
================================================================================
Period ended
SUB-ACCOUNT 12/31/98
- --------------------------------------------------------------------------------
VP Income & Growth
Beginning of Period......................................... $10.000
End of Period............................................... $12.058
No. of Accum. Units Outstanding............................. 351,625
VP International
Beginning of Period......................................... $10.000
End of Period............................................... $11.110
No. of Accum. Units Outstanding............................. 115,687
VP Value
Beginning of Period......................................... $10.000
End of Period............................................... $10.217
No. of Accum. Units Outstanding............................. 171,138
Berger IPT--100
Beginning of Period......................................... $10.000
End of Period............................................... $10.694
No. of Accum. Units Outstanding............................. 74,889
Berger IPT--Growth and Income
Beginning of Period......................................... $10.000
End of Period............................................... $12.237
No. of Accum. Units Outstanding............................. 153,114
Berger IPT--Small Company Growth
Beginning of Period......................................... $10.000
End of Period............................................... $9.799
No. of Accum. Units Outstanding............................. 112,140
Berger/BIAM IPT--International
Beginning of Period......................................... $10.000
End of Period............................................... $10.806
No. of Accum. Units Outstanding............................. 20,704
The Dreyfus Socially Responsible Growth
Beginning of Period......................................... $10.000
End of Period............................................... $12.261
No. of Accum. Units Outstanding............................. 212,780
Dreyfus Stock Index
Beginning of Period......................................... $10.000
End of Period............................................... $12.120
No. of Accum. Units Outstanding............................. 1,229,906
Disciplined Stock
Beginning of Period......................................... $10.000
End of Period............................................... $10.726
No. of Accum. Units Outstanding............................. 64,622
International Value
Beginning of Period......................................... $10.000
End of Period............................................... $9.423
No. of Accum. Units Outstanding............................. 14,881
Federated High Income Bond II
Beginning of Period......................................... $10.000
End of Period............................................... $9.906
No. of Accum. Units Outstanding............................. 449,248
Federated International Equity II
Beginning of Period......................................... $10.000
End of Period............................................... $11.457
No. of Accum. Units Outstanding............................. 49,555
Federated Utility II
Beginning of Period......................................... $10.000
End of Period............................................... $11.388
No. of Accum. Units Outstanding............................. 227,545
61
<PAGE>
================================================================================
Period ended
SUB-ACCOUNT 12/31/98
- --------------------------------------------------------------------------------
INVESCO VIF - High Yield
Beginning of Period......................................... $10.000
End of Period............................................... $9.512
No. of Accum. Units Outstanding............................. 119,637
INVESCO VIF - Equity Income
Beginning of Period......................................... $10.000
End of Period............................................... $10.300
No. of Accum. Units Outstanding............................. 80,397
Aggressive Growth
Beginning of Period......................................... $10.000
End of Period............................................... $12.864
No. of Accum. Units Outstanding............................. 189,516
Growth
Beginning of Period......................................... $10.000
End of Period............................................... $12.663
No. of Accum. Units Outstanding............................. 424,913
Worldwide Growth
Beginning of Period......................................... $10.000
End of Period............................................... $11.887
No. of Accum. Units Outstanding............................. 698,806
Lazard Retirement Equity
Beginning of Period......................................... $10.000
End of Period............................................... $10.950
No. of Accum. Units Outstanding............................. 93,997
Lazard Retirement Small Cap
Beginning of Period........................................ $10.000
End of Period............................................... $9.311
No. of Accum. Units Outstanding............................. 45,538
Growth and Income (Lord Abbett)
Beginning of Period......................................... $10.000
End of Period............................................... $10.812
No. of Accum. Units Outstanding............................. 240,000
Growth and Income (Mitchell Hutchins)
Beginning of Period......................................... $10.000
End of Period............................................... $11.030
No. of Accum. Units Outstanding............................. 23,636
Limited Maturity Bond
Beginning of Period......................................... $10.000
End of Period............................................... $10.229
No. of Accum. Units Outstanding............................. 308,953
Partners
Beginning of Period......................................... $10.000
End of Period............................................... $10.056
No. of Accum. Units Outstanding............................. 308,591
Strong Opportunity II
Beginning of Period......................................... $10.000
End of Period............................................... $10.886
No. of Accum. Units Outstanding............................. 181,752
Strong Mid Cap Growth II
Beginning of Period......................................... $10.000
End of Period............................................... $12.506
No. of Accum. Units Outstanding............................. 53,572
Worldwide Bond
Beginning of Period......................................... $10.000
End of Period............................................... $11.014
No. of Accum. Units Outstanding............................. 31,389
62
<PAGE>
CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
================================================================================
Period ended
SUB-ACCOUNT 12/31/98
- --------------------------------------------------------------------------------
Worldwide Emerging Markets
Beginning of Period......................................... $10.000
End of Period............................................... $6.734
No. of Accum. Units Outstanding............................. 36,153
Worldwide Hard Assets
Beginning of Period......................................... $10.000
End of Period............................................... $7.059
No. of Accum. Units Outstanding............................. 12,476
Worldwide Real Estate
Beginning of Period......................................... $10.000
End of Period............................................... $8.643
No. of Accum. Units Outstanding............................. 25,254
================================================================================
63
<PAGE>
================================================================================
Appendix B-Market Value Adjustment
The market value adjustment reflects the impact that changing interest
rates have on the value of your money in a Guarantee Period of the MVA Option.
The longer the period of time remaining in the term you selected, the greater
the impact of changing interest rates. The market value adjustment can be
positive or negative. We will apply the following factor to amounts withdrawn,
transferred or annuitized from a Guarantee Period in excess of the MVA waiver
amount (see below):
((1 + A)/(1 + B))(N/365)-1
where:
A is the U.S. Treasury rate that is in effect at the beginning of the
Guarantee Period for the length of the Guarantee Period you selected.
B is the current U.S. Treasury rate as of the date of the withdrawal or
transfer plus .005. The Treasury rate period is determined by N/365 rounded
to the next highest year.
N is the number of days remaining in the Guarantee Period.
If the Treasury rate is not available for the period, the rate will be
determined by interpolation. If no Treasury rates are available, an index will
be selected by Conseco Variable which will be approved by the state insurance
commissioners.
MVA Waiver Amount: After the first year in a Guarantee Period, you can make
one withdrawal or transfer from a Guarantee Period each year of up to 10% of the
value in that Guarantee Period without the market value adjustment.
Examples of the Market Value Adjustment
EXAMPLE 1: FIVE-YEAR GUARANTEE PERIOD; INCREASE IN TREASURY RATE
Assume you make a $50,000 payment allocated to a 5-year Guarantee Period on
January 1, 1998. The current 5-year Treasury rate is 6.00%, and the current
interest rate is 7.00%. On June 13, 1999 you surrender the Contract with 3 years
and 202 days, or 1,297 days (12/31/2002-6/13/1999) remaining in the Guarantee
Period. The current Treasury rate at this point is found by rounding 3 years,
202 days to the next greatest year and taking the rate for that Guarantee
Period. In this case, we would look at the 4-year rate. Assume that the 4-year
Treasury rate on June 13, 1999 is 6.50%. The market value adjustment would be
calculated as follows:
Contract Value at 6/13/1999 (529 days from the day your Contract was
issued):
$50,000 x [1.07(529/365)] = $55,151.38
MVA Waiver Amount: $ 5,515.14 (10% after year 1)
Amount remaining: $49,636.24
$49,636.24 x [((1+.06)/(1+.065+.005)(1,297/365)-1] = -$1,628.83
resulting in an adjustment to the amount you withdraw as follows:
$49,636.24 - $1,628.83 + $5,515.14 = $53,522.55
EXAMPLE 2: FIVE-YEAR GUARANTEE PERIOD; DECREASE IN TREASURY RATE
Assuming the same facts as Example 1, but with a 4-year Treasury rate as of
the date of surrender of 5.00%, the following market value adjustment would
result:
Contract Value at 6/13/1999 (529 days from the day your Contract was
issued):
$50,000 x [1.07(529/365)] = $55,151.38
MVA Waiver Amount: $5,515.14 (10% after 1 year)
Amount remaining: $49,636.24
$49,636.24 x [((1+.06)/(1+.050+.005))(1,297/365)-1] = $840.99
resulting in an adjustment to the amount you withdraw as follows:
$49,636.24 + $840.99 + $5,515.14 = $55,992.37
(contingent deferred sales charges may also apply)
64
<PAGE>
CONSECO VARIABLE INSURANCE COMPANY
1999 Account F
Individual and Group Annuity
================================================================================
- --------------------------------------------------------------------------------
If you would like a free copy of the Statement of Additional Information
dated May 1, 1999 for this Prospectus, please complete this form, detach, and
mail to:
Conseco Variable Insurance Company
Administrative Office
11815 N. Pennsylvania Street
Carmel, Indiana 46032
Gentlemen:
Please send me a free copy of the Statement of Additional Information for the
Conseco Variable Annuity Account F fixed and variable annuity at the following
address:
Name: _________________________________________________________________
Mailing Address: ______________________________________________________
_______________________________________________________________________
Sincerely,
______________________________________________________
(Signature)
- --------------------------------------------------------------------------------
Conseco Variable Insurance Company
11815 N. Pennsylvania Street
Carmel, Indiana 46032
(C)1999, Conseco Variable Insurance Company
65
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