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PROSPECTUS
JANUARY 12, 2000
Please read this prospectus carefully before investing, and keep it for future
reference. It contains important information about the Farmers Variable Annuity.
To learn more about the Contract, you may want to read the Statement of
Additional Information dated January 12, 2000 (known as the "SAI"). For a free
copy of the SAI, contact us at:
Farmers New World Life Insurance Company
SERVICE CENTER
P.O. Box 724208
Atlanta, Georgia 31139
1-877-376-8008 (toll free)
We have filed the SAI with the U.S. Securities and Exchange Commission ("SEC")
and have incorporated it by reference into this prospectus. The SAI's table of
contents appears at the end of this prospectus.
The SEC maintains an Internet website (http://www.sec.gov) that contains the SAI
and other information about us. You may also read and copy these materials at
the SEC's public reference room in Washington, D.C. Call 1-800-SEC-0330 for
information about the SEC's public reference room.
VARIABLE ANNUITY CONTRACTS INVOLVE CERTAIN RISKS, AND YOU MAY LOSE SOME OR ALL
OF YOUR INVESTMENT.
- - The investment performance of the portfolios in which the subaccounts
invest will vary.
- - We do not guarantee how any of the portfolios will perform.
- - The Contract is not a deposit or obligation of any bank, and no bank
endorses or guarantees the Contract.
- - Neither the U.S. Government nor any federal agency insures your investment
in the Contract.
FARMERS VARIABLE ANNUITY
INDIVIDUAL FLEXIBLE PREMIUM VARIABLE ANNUITY
issued by
FARMERS NEW WORLD LIFE INSURANCE COMPANY
through the
FARMERS ANNUITY SEPARATE ACCOUNT A
HOME OFFICE
3003 - 77th Avenue, S.E.
Mercer Island, Washington 98040
Telephone: (206) 232-8400
The Farmers Variable Annuity Contract (the "Contract") has 13 funding choices --
one fixed account (paying a guaranteed minimum fixed rate of interest) and 12
subaccounts. The subaccounts invest in the following 12 portfolios:
JANUS ASPEN SERIES
- - Capital Appreciation Portfolio
KEMPER VARIABLE SERIES
- - Kemper Government Securities Portfolio
- - Kemper High Yield Portfolio
- - Kemper Small Cap Growth Portfolio
- - Kemper-Dreman High Return Equity Portfolio
PIMCO VARIABLE INSURANCE TRUST
- - PIMCO Low Duration Bond Portfolio
- - PIMCO Foreign Bond Portfolio
SCUDDER VARIABLE LIFE INVESTMENT FUND
- - Money Market Portfolio
- - Growth and Income Portfolio (Class A Shares)
- - International Portfolio (Class A Shares)
- - Bond Portfolio (Class A Shares)
TEMPLETON VARIABLE PRODUCTS SERIES FUND
- - Templeton Developing Markets Fund (Class 2 Shares)
THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR EACH
OF THE PORTFOLIOS LISTED ABOVE.
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS. ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A
FEDERAL CRIME.
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TABLE OF CONTENTS
GLOSSARY......................................................................1
HIGHLIGHTS....................................................................3
The Contract...............................................................3
How to Invest..............................................................3
Cancellation -- The Right To Examine Period................................4
Investment Options.........................................................4
Transfers..................................................................5
Access to Your Money.......................................................5
Standard Death Benefit.....................................................6
Guaranteed Minimum Death Benefit...........................................6
Fees and Charges...........................................................7
Annuity Provisions.........................................................8
Guaranteed Retirement Income Benefit.......................................8
Federal Tax Status.........................................................9
Inquiries..................................................................9
FEE TABLE....................................................................10
Examples..................................................................12
Condensed Financial Information...........................................13
ABOUT FARMERS NEW WORLD LIFE INSURANCE COMPANY AND THE VARIABLE ACCOUNT......14
Farmers New World Life Insurance Company..................................14
Farmers Annuity Separate Account A........................................14
THE PORTFOLIOS...............................................................15
Investment Objectives of the Portfolios...................................15
Availability of the Portfolios............................................16
THE PAY-IN PERIOD............................................................17
Purchasing a Contract.....................................................17
Cancellation -- The 10 Day Right to Examine Period........................17
Designating Your Investment Options.......................................17
Additional Premium Payments...............................................18
YOUR CONTRACT VALUE..........................................................19
Variable Account Value....................................................19
TRANSFERS BETWEEN INVESTMENT OPTIONS.........................................20
Automatic Asset Rebalancing Program.......................................20
Asset Allocation Services.................................................21
Excessive Trading Limits..................................................21
Dollar Cost Averaging Program.............................................21
Telephone Transfers and Withdrawals.......................................22
Transfer Fee..............................................................22
ACCESS TO YOUR MONEY.........................................................22
Surrenders................................................................22
Partial Withdrawals.......................................................23
Systematic Withdrawal Plan................................................24
DEATH BENEFITS...............................................................24
Death Benefits Before the Annuity Start Date..............................24
Guaranteed Minimum Death Benefit..........................................25
Distribution Upon Death...................................................26
Death Benefits After the Annuity Start Date...............................26
FEES AND CHARGES.............................................................27
Mortality and Expense Risk Charge.........................................27
Asset-Based Administration Charge.........................................27
Transfer Fee..............................................................27
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Surrender Charge..........................................................27
Records Maintenance Charge................................................29
Portfolio Fees and Charges................................................29
Premium Taxes.............................................................30
Other Taxes...............................................................30
THE PAYOUT PERIOD............................................................30
The Annuity Start Date....................................................30
Annuity Options...........................................................30
Determining the Amount of Your Annuity Payment............................31
Fixed Annuity Payments....................................................31
Guaranteed Annuity Tables.................................................31
Description of Annuity Options............................................32
GUARANTEED RETIREMENT INCOME BENEFIT.........................................33
THE FIXED ACCOUNT............................................................34
Fixed Account Value.......................................................35
Fixed Account Transfers...................................................35
INVESTMENT PERFORMANCE OF THE SUBACCOUNTS....................................36
VOTING RIGHTS................................................................37
FEDERAL TAX MATTERS..........................................................37
Taxation of Non-Qualified Contracts.......................................38
Taxation of Qualified Contracts...........................................40
Other Tax Issues..........................................................40
Our Income Taxes..........................................................41
Possible Tax Law Changes..................................................41
OTHER INFORMATION............................................................41
Payments..................................................................41
Modification..............................................................42
Distribution of the Contracts.............................................42
Legal Proceedings.........................................................42
Reports to Owners.........................................................42
Inquiries.................................................................42
Year 2000 Matters.........................................................43
Financial Statements......................................................44
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS........................45
ii
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GLOSSARY
For your convenience, we are providing a glossary of the special terms we
use in this prospectus.
ACCUMULATION UNIT
An accounting unit we use to calculate subaccount values during the pay-in
period. It measures the net investment results of each of the subaccounts.
ANNUITANT
You are the annuitant, unless you state otherwise in your application. Before
any annuity payments begin, the annuitant is the person (or persons) on whose
life (or lives) the Contract is issued. When annuity payments begin, the
annuitant is a person during whose lifetime we may make payments under one of
the annuity options. You may select joint annuitants.
ANNUITY START DATE
The date when we will begin to pay annuity payments to you or a person you
designate under the annuity option you selected.
BENEFICIARY
The person you select to receive the death benefit if you or the last surviving
annuitant die before the annuity start date.
CASH VALUE
The Contract Value minus any applicable surrender charge, records maintenance
charge, and premium tax.
COMPANY (WE, US, OUR, FARMERS)
Farmers New World Life Insurance Company.
CONTRACT MONTH, YEAR OR ANNIVERSARY
A month, year or anniversary as measured from the issue date.
CONTRACT VALUE
The sum of the amounts you have accumulated under the Contract. It is equal to
the money you have under the Contract in the variable account and the fixed
account.
FINAL ANNUITY DATE
The Contract anniversary when the oldest annuitant is age 95.
FIXED ACCOUNT
An option to which you can direct your money under the Contract. It provides a
guarantee of principal and interest. The assets supporting the fixed account are
held in our general account and are not part of, or dependent on, the investment
performance of the variable account.
FIXED ACCOUNT VALUE
Your Contract Value in the fixed account.
FREE WITHDRAWAL AMOUNT
An amount you can withdraw each Contract year as a partial withdrawal without
incurring a surrender charge.
FUNDS
Investment companies that are registered with the SEC. This Contract allows you
to invest in the portfolios of the funds that are listed on the front page of
this prospectus.
GENERAL ACCOUNT
The account containing all of Farmers' assets, other than those held in its
separate accounts.
HOME OFFICE
The address of our Home Office is 3003 - 77th Avenue, S.E., Mercer Island,
Washington 98040.
ISSUE DATE
The date on which we credit the initial premium payment to your Contract. It is
also the date when, depending on your state of residence, we allocate your
premium(s) either entirely to the fixed account, or to the fixed account and the
subaccounts you selected on your application.
NET INVESTMENT FACTOR
The factor we use to determine the value of an accumulation unit at the end of
each valuation
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period. We determine the net investment factor separately for
each subaccount.
PAY-IN PERIOD
The period that begins when we issue your Contract and ends on the annuity start
date. During the pay-in period, earnings accumulate on a tax-deferred basis
until you take money out.
PAYOUT PERIOD
The period beginning on the annuity start date during which you or the person
you designate will receive annuity payments.
PORTFOLIO
A separate investment portfolio of a fund. Each subaccount invests exclusively
in one portfolio of a fund.
PREMIUM PAYMENT
Amount you pay to us for the Contract. When we use the term "premium payment" in
this prospectus, it has the same meaning as "net premium payment" in the
Contract, and means a premium payment less any applicable premium taxes.
QUALIFIED CONTRACT
A Contract issued in connection with a retirement plan that qualifies for
special federal income tax treatment under the Tax Code.
SERVICE CENTER
The address of the Service Center is P.O. Box 724208, Atlanta, Georgia 31139.
McCamish Systems, L.L.C. is the administrator of the Contract. You can call the
Service Center office toll-free at 1-877-376-8008.
SUBACCOUNT
A subdivision of the variable account that invests exclusively in shares of one
portfolio of a fund. The investment performance of each subaccount is linked
directly to the investment performance of the portfolio in which it invests.
SURRENDER
The termination of a Contract at the option of the owner.
TAX CODE
The Internal Revenue Code of 1986, as amended.
VALUATION DAY
Each day that the New York Stock Exchange ("NYSE") is open for trading. Farmers
New World Life Insurance Company is open to administer the Contract on each day
the NYSE is open.
VALUATION PERIOD
The period of time over which we determine the change in the value of the
subaccounts in order to price accumulation units. Each valuation period begins
at the close of normal trading on the NYSE (currently 4:00 p.m. Eastern time,
1:00 p.m. Pacific Time) on each Valuation Day and ends at the close of normal
trading on the NYSE on the next Valuation Day.
VARIABLE ACCOUNT
Farmers Annuity Separate Account A. It is a separate investment account divided
into subaccounts, each of which invests in a corresponding portfolio of a
designated fund.
VARIABLE ACCOUNT VALUE
The portion of the total value of your Contract that is allocated to the
subaccounts of the variable account.
WRITTEN NOTICE
The written notice you must sign and send to us to request or exercise your
rights as owner under the Contract. To be complete, it must: (1) be in a form we
accept; (2) contain the information and documentation that we determine is
necessary, and (3) be received at our Service Center.
YOU (YOUR, OWNER)
The person(s) entitled to exercise all rights as owner under the Contract.
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HIGHLIGHTS
These highlights provide only a brief overview of the more important
features of the Contract. More detailed information about the Contract appears
later in this prospectus. Please read the remainder of this prospectus
carefully.
THE CONTRACT
An annuity is a contract between you (the Contract owner) and an
insurance company (Farmers) in which you agree to make one or more payments to
us and, in return, we agree to pay a series of payments to you at a later date.
The Farmers Variable Annuity Contract is a special kind of annuity that is:
- FLEXIBLE PREMIUM - you may add premium payments at any time.
- TAX-DEFERRED - you do not have to pay taxes on earnings
until you take money out by surrender, partial cash
withdrawals, or we make annuity payments to you, or we pay
the death benefit.
- VARIABLE - you can direct your premium into any of 12
subaccounts. Each subaccount invests exclusively in a single
portfolio of a fund. The money you invest in the subaccounts
will fluctuate daily based on the performance of the
portfolios. You bear the investment risk on the amounts you
invest in the subaccounts.
You can also direct money to the fixed account. Amounts in the fixed
account earn interest annually at a fixed rate that is guaranteed by us never to
be less than 3%, and may be more. We guarantee the interest, as well as
principal, on money placed in the fixed account.
The Contract allows you to select on your application, for an
additional fee:
- the optional Guaranteed Minimum Death Benefit, and/or
- the optional Guaranteed Retirement Income Benefit.
Like all deferred annuities, the Contract has two phases: the
"pay-in" period and the "payout" period. During the pay-in period, you can
allocate money to any combination of investment alternatives. Any earnings on
your investments accumulate tax-deferred. The payout period begins once you
start receiving regular annuity payments from the Contract. The Contract allows
you to receive annuity payments under one of three fixed annuity payment
options. Unless you opt for the Guaranteed Retirement Income Benefit, the money
you can accumulate during the pay-in period will directly determine the dollar
amount of any annuity payments you receive.
HOW TO INVEST
You may obtain a Contract application from your Farmers agent who is
also a licensed registered representative. You may purchase the Contract with a
single payment of $500 or more. We will not issue a Contract if you are older
than age 90 on the issue date.
You can pay additional premiums of $500 or more ($50 or more if you
authorize us to draw on an account by check or electronic debit) at any time
before the annuity start date. You must send all premium payments to the Service
Office in Atlanta, Georgia at the address listed on the front cover of this
prospectus.
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We may limit the total premium(s) paid to us during any Contract
year.
CANCELLATION -- THE RIGHT TO EXAMINE PERIOD
You may return your Contract to us for a refund within 10 days after
you receive it. In most states, the amount of the refund will be the total
premiums we have received, plus (or minus) any gains (or losses) in the amounts
you invested in the subaccounts. If state law requires a return of premium, we
will refund the greater of your original premium or the Contract Value on the
date we receive the returned Contract at our Home Office at the address shown on
the front page of this prospectus. In those states, we will place your
premium(s) in the fixed account for the number of days in your state's right to
examine period, plus 10 days. We will pay the refund within 7 days after we
receive the Contract. The Contract will then be deemed void. In some states you
may have more than 10 days to return the Contract.
INVESTMENT OPTIONS
You may invest your money in any of 12 portfolios by directing it
into the corresponding subaccount. The portfolios now available to you under the
Contract are:
<TABLE>
<S> <C>
JANUS ASPEN SERIES SCUDDER VARIABLE LIFE INVESTMENT FUND
- Capital Appreciation Portfolio - Money Market Portfolio
- Growth and Income Portfolio (Class A
KEMPER VARIABLE SERIES Shares)
- Kemper Government Securities Portfolio - International Portfolio (Class A Shares)
- Kemper High Yield Portfolio - Bond Portfolio (Class A Shares)
- Kemper Small Cap Growth Portfolio
- Kemper-Dreman High Return Equity Portfolio TEMPLETON VARIABLE PRODUCTS SERIES FUND
- Templeton Developing Markets Fund
PIMCO VARIABLE INSURANCE TRUST (Class 2 Shares)
- PIMCO Low Duration Bond Portfolio
- PIMCO Foreign Bond Portfolio
</TABLE>
EACH ALLOCATION TO A SUBACCOUNT OR THE FIXED ACCOUNT MUST BE AT LEAST
$500.
Each subaccount invests exclusively in shares of one portfolio of a
fund. Each portfolio's assets are held separately from the other portfolios and
each portfolio has separate investment objectives and policies. The portfolios
are described in their own prospectuses that accompany this prospectus. The
value of your investment in the subaccounts will fluctuate daily based on the
investment results of the portfolios in which you invest, and on the fees and
charges we deduct.
DEPENDING ON MARKET CONDITIONS, YOU CAN GAIN OR LOSE MONEY IN ANY OF
THE SUBACCOUNTS. WE RESERVE THE RIGHT TO OFFER OTHER INVESTMENT CHOICES IN THE
FUTURE.
You may also direct your money to the fixed account and receive a
guaranteed rate of return. Money you place in the fixed account will earn
interest for one-year periods at a fixed rate that we guarantee to be not less
than 3.0%.
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TRANSFERS
You have the flexibility to transfer assets within your Contract. At
any time during the pay-in period and after the Right to Examine Period, you may
transfer amounts among the subaccounts and between the fixed account and the
subaccounts. Certain restrictions apply:
- transfers must be at least $100, or the total value in
a subaccount or fixed account, if less;
- Contract Value remaining in a subaccount or the fixed
account must be at least $500, or we will transfer the
total value;
- only one transfer may be made from the fixed account
each Contract year. The transfer must be made during
the 30 days following a Contract anniversary; and
- transfers cannot be made from any subaccount to the
fixed account during the 6 month period following any
transfer from the fixed account into one or more
subaccounts.
You may make 12 free transfers each Contract year. We impose a $25
charge per transfer on each transfer after the twelfth during a Contract year.
Transfers made under the asset allocation or dollar cost averaging programs do
not count toward the 12 free transfers.
AUTOMATIC ASSET REBALANCING PROGRAM
Under the automatic asset rebalancing program, we will automatically
transfer amounts among the subaccounts on a quarterly basis so that the
allocation of your Contract Value matches the percentages you specify.
DOLLAR COST AVERAGING PROGRAM
The dollar cost averaging program permits you to systematically
transfer (on each monthly anniversary of the issue date) a set dollar amount
from the fixed account to up to 8 subaccounts. Dollar cost averaging is
available only during the pay-in period. The minimum transfer amount is $100.
ACCESS TO YOUR MONEY
During the pay-in period, you may receive a cash withdrawal of part
of your cash value once each calendar quarter. You may also fully withdraw all
your value from the Contract and receive its cash value. This is called a
surrender.
Partial withdrawals are subject to the following conditions:
- the minimum amount you can withdraw is $100; and
- you may not make a partial withdrawal if the withdrawal
plus the surrender charge would cause the Contract
Value to fall below $500.
Surrenders and partial withdrawals may be subject to a surrender
charge. In any Contract year, you may withdraw a portion of your Contract Value,
called the free withdrawal amount, without incurring a surrender charge.
We offer a systematic withdrawal plan whereby, after the first
Contract year, you may receive periodic payments of at least $100 on a monthly
basis during the pay-in period.
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You may have to pay federal income taxes and a penalty tax on any
money you withdraw from the Contract.
STANDARD DEATH BENEFIT
We will pay a death benefit to the beneficiary on the death of either
any owner or the last surviving annuitant before the annuity start date.
If you do not select the Guaranteed Minimum Death Benefit on your
application and if an annuitant (including an owner who is an annuitant) dies
before his or her 80th birthday, the death benefit equals the standard death
benefit, which is the greater of:
- the Contract Value on the later of the date that we
receive due proof of death and the date when we receive
the beneficiary's instructions on payment method; or
- the minimum death benefit. The minimum death benefit
equals the sum of all premiums paid, minus proportional
reductions for withdrawals.
In all other cases, the death benefit equals the Contract Value
determined on the later of the date that we receive due proof of death and the
date when we receive the beneficiary's instructions on payment method.
GUARANTEED MINIMUM DEATH BENEFIT
The Guaranteed Minimum Death Benefit provides an enhanced death
benefit in the event of the death of the last surviving annuitant before the
annuity start date. You may select the Guaranteed Minimum Death Benefit only on
your Contract application. We will deduct an additional daily charge from the
subaccounts at an annual rate of 0.25% for this benefit.
On the death of the last surviving annuitant, the Guaranteed Minimum
Death Benefit will equal the greatest of the following:
- the standard death benefit described above;
- premiums you paid accumulated daily with interest
compounded at 4% per year until the earlier of: (i) the
date of death, or (ii) the Contract anniversary on or
next following the last surviving annuitant's 80th
birthday; minus proportional reductions for
withdrawals; or
- the Greatest Anniversary Value on any Contract
anniversary through the earlier of the date of death or
the Contract anniversary on or next following the last
surviving annuitant's 80th birthday, minus proportional
reductions for withdrawals.
A different death benefit calculation applies if the last surviving
annuitant dies after the Contract anniversary on or next following the
annuitant's 80th birthday. See "Death Benefits."
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FEES AND CHARGES
MORTALITY AND EXPENSE RISK CHARGE. We will deduct a daily mortality
and expense risk charge from your value in the subaccounts at an annual rate of
0.95% (1.20% if you select either the Guaranteed Minimum Death Benefit or the
Guaranteed Retirement Income Benefit; 1.45% if you choose both benefits.)
ASSET-BASED ADMINISTRATIVE CHARGE. We will deduct a daily
administrative charge from your value in each subaccount at an annual rate of
0.20%.
RECORDS MAINTENANCE CHARGE. We deduct a Records Maintenance Charge of
$30 from your Contract Value on the last valuation day of each Contract year
during the pay-in period, on the date when the Contract is surrendered, and on
the annuity start date. We will waive this charge if your Contract Value is
$50,000 or more on the date the charge would be assessed.
TRANSFER FEE. You may make 12 free transfers each Contract year. We
impose a $25 charge per transfer on each transfer after the twelfth during a
Contract year before the annuity start date.
SURRENDER CHARGE. During the pay-in period, you may withdraw all or
part of your cash value before your death. Certain withdrawals may be taken
without payment of any surrender charge. Other withdrawals are subject to
surrender charges.
We calculate the surrender charge from the date you made the premium
payment(s) being withdrawn. The surrender charge applies during the entire seven
year period following each premium payment, and will vary depending on the
number of years since you made the premium payment(s) being withdrawn.
<TABLE>
<CAPTION>
NUMBER OF COMPLETE YEARS
FROM DATE OF PREMIUM
PAYMENT: 0 1 2 3 4 5 6 7+
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SURRENDER CHARGE: 7% 6% 5% 5% 4% 3% 2% 0
</TABLE>
In determining surrender charges, we will treat your premium payments
as being withdrawn in the order in which we received them -- that is on a
first-in, first-out basis.
We do not assess a surrender charge on:
- the death benefit;
- on the withdrawal of premium payments you paid us more
than seven years ago;
- on withdrawals that qualify under the waiver of
surrender charge riders as extended hospitalization or
confinement to a skilled nursing facility or terminal
illness (see, "Surrender Charge"); or
- on the free withdrawal amount.
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Each Contract year, you may withdraw the free withdrawal amount which
is an amount up to the greater of:
- Contract Value minus total premiums and minus prior
withdrawals that were previously assessed a surrender
charge; or
- 10% of the Contract Value determined at the time the
withdrawal is requested.
PREMIUM TAXES. We will deduct state premium taxes, which currently
range from 0% up to 3.5%, if your state requires us to pay the tax. If
applicable, we will make the deduction either: (a) from premium payments as we
receive them, (b) from your Contract Value upon surrender or partial withdrawal,
(c) on the annuity start date, or (d) upon payment of a death benefit.
PORTFOLIO FEES AND CHARGES. Each portfolio deducts portfolio
management fees and charges from the amounts you have invested in the
portfolios. For 1998, these charges ranged from 0.44% to 1.91% annually. See the
Fee Table in this Prospectus and the prospectuses for the portfolios.
ANNUITY PROVISIONS
ANNUITY OPTIONS. The Contract allows you to receive income payments
under one of three fixed annuity options beginning on the annuity start date you
select. The latest annuity start date you may select is the Contract anniversary
when the oldest annuitant is age 95. You may receive income payments for a
specific period of time, or for life with or without a guaranteed number of
payments.
We will use your cash value (less any applicable premium taxes) on
the annuity start date to calculate the amount of your income payments under the
annuity option you choose.
GUARANTEED RETIREMENT INCOME BENEFIT
The Guaranteed Retirement Income Benefit provides a minimum
guaranteed lifetime fixed income benefit in the form of fixed monthly annuity
payments, once the Contract has been in force for at least 10 Contract years.
You may select the Guaranteed Retirement Income Benefit only on your Contract
application. We will deduct an additional daily charge from the subaccounts at
an annual rate of 0.25% for this benefit.
The amount of income payments we will pay under the Guaranteed
Retirement Income Benefit is determined by applying the income base (less
applicable taxes) to the guaranteed annuity table rates in your Contract for the
annuity option you select. On the annuity start date, the amount of income
payments we will pay under the Contract will be the greater of:
- the dollar amount determined under the Guaranteed Retirement
Income Benefit; and
- the dollar amount determined by applying the Contract's cash
value to the income benefits, annuity options and annuity tables
described in your Contract.
The income base under the Guaranteed Retirement Income Benefit equals the
greater of:
(i) premiums you paid accumulated daily with interest compounded at
5.00% per year through the earlier of the annuity start date and
the Contract anniversary on or next
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following the oldest joint annuitant's 80th birthday, with a
proportional reduction for withdrawals; and
(ii) the Greatest Anniversary Value for the Contract anniversaries
through the earlier of the annuity start date and the Contract
anniversary on or next following the oldest joint annuitant's
80th birthday, with a proportional reduction for withdrawals
FEDERAL TAX STATUS
Generally, a Contract's earnings are not taxed until you take them
out. For federal tax purposes, if you take money out during the pay-in period,
including a surrender, partial withdrawal or death benefit payment, earnings
come out first and are taxed as ordinary income. If you are younger than 59 1/2
when you take money out, you also may be charged a 10% federal penalty tax on
earnings. The annuity payments you receive during the payout phase are
considered partly a return of your original investment so that part of each
payment is not taxable as income until the "investment in the contract" has been
fully recovered. Different tax consequences may apply for a qualified Contract.
For a further discussion of the federal tax status of variable annuity
contracts, see "Federal Tax Status."
INQUIRIES
If you need additional information, please contact us at:
the Service Center:
P.O. Box 724208
Atlanta, Georgia 31139
1-877-376-8008 (toll-free)
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FEE TABLE
The purpose of the Fee Table is to help you understand the various
costs and expenses that you will pay directly and indirectly by investing in the
subaccounts. The Fee Table shows the current expenses for the variable account
as well as the portfolios.
YOUR TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Charge Imposed on Premium Payments.....................................................................None
Maximum Surrender Charge
(as a percentage of your premium payment) (1)..............................................................7.0%
Transfer Fee....................................................................No fee for the first 12 transfers
in a Contract year; then $25
per additional transfer
RECORDS MAINTENANCE CHARGE (2)...........................................................................................$30
VARIABLE ACCOUNT ANNUAL EXPENSES
(as a percentage of average daily net assets in the subaccounts)
With Both the Guaranteed Minimum Death Benefit AND the Guaranteed Retirement Income Benefit
-------------------------------------------------------------------------------------------
Mortality and Expense Risk Charge............................................................................1.45%
Administrative Expenses......................................................................................0.20%
----
Total Variable Account Annual Expenses.......................................................................1.65%
With Either the Guaranteed Minimum Death Benefit OR the Guaranteed Retirement Income Benefit
--------------------------------------------------------------------------------------------
Mortality and Express Risk Charge............................................................................1.20%
Administrative Expenses......................................................................................0.20%
----
Total Variable Account Annual Expenses.......................................................................1.40%
With Standard Death Benefit Only
--------------------------------
Mortality and Expense Risk Charge............................................................................0.95%
Administrative Expenses......................................................................................0.20%
----
Total Variable Account Annual Expenses.......................................................................1.15%
</TABLE>
ANNUAL PORTFOLIO EXPENSES
(as a percentage of average daily net assets in the subaccounts after fee
waivers and expense reimbursements)
<TABLE>
<CAPTION>
TOTAL ANNUAL
EXPENSES (AFTER
MANAGEMENT OTHER EXPENSES WAIVERS
FEES 12b-1 (AFTER AND
NAME OF PORTFOLIO (AFTER WAIVERS) FEES REIMBURSEMENT) REIMBURSEMENT)
- ----------------- -------------- ---- -------------- --------------
<S> <C> <C> <C> <C>
Janus Aspen Series
- ------------------
Capital Appreciation Portfolio(3) .70% -- % .22% .92%
Kemper Variable Series
- ----------------------
Kemper Government Securities Portfolio .55% -- % .11% .66%
Kemper High Yield Portfolio .60% -- % .05% .65%
</TABLE>
10
<PAGE> 14
<TABLE>
<S> <C> <C> <C> <C>
Kemper Small Cap Growth Portfolio .65% -- % .05% .70%
Kemper-Dreman High Return Equity
Portfolio(4)(5) .42% -- % .45% .87%
PIMCO Variable Insurance Trust(6)
- ---------------------------------
Low Duration Bond Portfolio .63% -- % .02% .65%
Foreign Bond Portfolio .88% -- % .02% .90%
Scudder Variable Life Investment Fund
- -------------------------------------
Money Market Portfolio .37% -- % .07% .44%
Growth and Income Portfolio (Class A Shares) .47% -- % .09% .56%
International Portfolio (Class A Shares) .87% -- % .18% 1.05%
Bond Portfolio (Class A Shares) .47% -- % .09% .56%
Templeton Variable Products Series Fund
- ---------------------------------------
Templeton Developing Markets Fund 1.25% .25% .41% 1.91%
(Class 2 Shares)(7)
</TABLE>
(1) We do not assess a surrender charge on death benefit payments. We do assess
a surrender charge if you annuitize under the Contract.
(2) We will also deduct this fee on the annuity start date or the date you
surrender your Contract. We waive this fee for Contracts with a Contract Value
of $50,000 or more on the date the fee is assessed.
(3) The expense figures shown for the Janus Aspen Capital Appreciation
Portfolio are net of certain fee waivers or reductions from Janus Capital
Corporation. Without such waivers, the Management Fees, Other Expenses and Total
Annual Expenses for the Janus Aspen Capital Appreciation Portfolio for the
fiscal year ended December 31, 1998 would have been: 0.75%, 0.22% and 0.97%,
respectively. See the prospectus and Statement of Additional Information of
Janus Aspen Series for a description of these waivers.
(4) The Kemper-Dreman High Return Equity Portfolio commenced operations on May
4, 1998. As a result, "Other Expenses" for fiscal year 1998 have been
annualized.
(5) Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year period
ending May 1, 2000, to limit their respective fees and to reimburse other
operating expenses to the extent necessary to limit total operating expenses of
the Kemper-Dreman High Return Equity Portfolio to the levels set forth in the
table above. Without taking into effect these expense caps, for the High Return
Equity Portfolio, the Management Fees are estimated to be 0.75%; Other Expenses
are estimated to be 0.45%; and Total Annual Expenses are estimated to be 1.20%.
(6) For the PIMCO Variable Insurance Trust portfolios, Management Fees include
fixed advisory and administrative fees. The administrative fee covers most of
the expenses of these portfolios. However, the portfolios are responsible for
bearing certain expenses associated with their operations that are not covered
by the administrative fee. While it is expected that these expenses generally
will not have a material effect on the portfolio expense ratios, they may have a
material effect in certain circumstances, such as when the average net assets of
a portfolio are lower than anticipated. Pacific Investment Management Company
has agreed to reduce its administrative fee, subject to potential future
reimbursement, to the extent that Total Annual Expenses would exceed, due to
organizational expenses and the payment by the portfolio of its pro rata portion
of the Trust's Trustees' fees, 0.65% of average daily net assets of the PIMCO
Low Duration Bond portfolio and 0.90% of average daily net assets of the PIMCO
Foreign Bond portfolio. "Other Expenses" are based on estimates for the current
fiscal year. Without such reductions, Management Fees, Other Expenses and Total
Annual Expenses for the fiscal year ended December 31, 1998 would have been: for
the PIMCO Low Duration Bond Portfolio, 0.65%, 0.02% and 0.67%, respectively; and
for the PIMCO Foreign Bond Portfolio, 0.90%, 0.02% and 0.92%, respectively.
11
<PAGE> 15
(7) Class 2 of the Templeton Developing Market Portfolio has a distribution
plan or "Rule 12b-1 Plan" which is described in the portfolio's prospectus.
EXAMPLES
EXAMPLE 1
Example 1 below shows the dollar amount of expenses that you would bear directly
or indirectly if you:
- invested $1,000 in a subaccount;
- earned a 5% annual return on your investment;
- fully surrendered your Contract, or began receiving annuity
payments, with applicable surrender charges deducted; and
- selected both the optional Guaranteed Minimum Death Benefit
(with an annual charge of 0.25%) and the optional Guaranteed
Retirement Income Benefit (with an annual charge of 0.25%),
resulting in total variable account expenses of 1.65%.
EXAMPLE 2
Example 2 has the same assumptions as Example 1, except that you selected
neither the Guaranteed Minimum Death Benefit nor Guaranteed Retirement Income
Benefit, resulting in total variable account expenses of 1.15%.
<TABLE>
<CAPTION>
ASSUMES YOU SURRENDER OR ANNUITIZE THE CONTRACT EXAMPLE 1 EXAMPLE 2
----------------------------------------------------------------------------------------------------------------------------
SUBACCOUNT 1 YEAR 3 YEARS 1 YEAR 3 YEARS
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JANUS ASPEN SERIES
----------------------------------------------------------------------------------------------------------------------------
Capital Appreciation $92 $133 $87 $118
----------------------------------------------------------------------------------------------------------------------------
KEMPER VARIABLE SERIES
----------------------------------------------------------------------------------------------------------------------------
Kemper Government Securities $90 $125 $85 $111
----------------------------------------------------------------------------------------------------------------------------
Kemper High Yield $89 $125 $85 $110
----------------------------------------------------------------------------------------------------------------------------
Kemper Small Cap Growth $90 $126 $85 $112
----------------------------------------------------------------------------------------------------------------------------
Kemper-Dreman High Return Equity $91 $131 $87 $117
----------------------------------------------------------------------------------------------------------------------------
PIMCO VARIABLE INSURANCE TRUST
----------------------------------------------------------------------------------------------------------------------------
PIMCO Low Duration Bond $89 $125 $85 $110
----------------------------------------------------------------------------------------------------------------------------
PIMCO Foreign Bond $92 $132 $87 $118
----------------------------------------------------------------------------------------------------------------------------
SCUDDER VARIABLE LIFE INVESTMENT FUND
----------------------------------------------------------------------------------------------------------------------------
Money Market $87 $119 $83 $104
----------------------------------------------------------------------------------------------------------------------------
Growth and Income $89 $122 $84 $108
----------------------------------------------------------------------------------------------------------------------------
International $93 $136 $88 $122
----------------------------------------------------------------------------------------------------------------------------
Bond $89 $122 $84 $108
----------------------------------------------------------------------------------------------------------------------------
TEMPLETON VARIABLE PRODUCT SERIES
----------------------------------------------------------------------------------------------------------------------------
Templeton Developing Markets Fund $101 $160 $97 $146
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 16
EXAMPLE 3
Example 3 has the same assumptions as Example 1, except that you decided not to
surrender your Contract or begin receiving annuity payments. Surrender charges
are not deducted. Like Example 1, we assume that you selected both the optional
Guaranteed Minimum Death Benefit (with an annual charge of 0.25%) and the
Guaranteed Retirement Income Benefit (with an annual charge of 0.25%), resulting
in total variable account expenses of 1.65%.
EXAMPLE 4
Example 4 has the same assumptions as Example 3, except that you selected
neither the optional Guaranteed Minimum Death Benefit nor the optional
Guaranteed Retirement Income Benefit, resulting in total variable annuity
expenses of 1.15%.
<TABLE>
<CAPTION>
ASSUMES YOU DO NOT SURRENDER OR ANNUITIZE THE CONTRACT EXAMPLE 3 EXAMPLE 4
----------------------------------------------------------------------------------------------------------------------------
SUBACCOUNT 1 YEAR 3 YEARS 1 YEAR 3 YEARS
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JANUS ASPEN SERIES
----------------------------------------------------------------------------------------------------------------------------
Capital Appreciation $28 $84 $23 $69
----------------------------------------------------------------------------------------------------------------------------
KEMPER VARIABLE SERIES
----------------------------------------------------------------------------------------------------------------------------
Kemper Government Securities $25 $77 $20 $62
----------------------------------------------------------------------------------------------------------------------------
Kemper High Yield $25 $76 $20 $61
----------------------------------------------------------------------------------------------------------------------------
Kemper Small Cap Growth $25 $78 $20 $63
----------------------------------------------------------------------------------------------------------------------------
Kemper-Dreman High Return Equity $27 $83 $22 $68
----------------------------------------------------------------------------------------------------------------------------
PIMCO VARIABLE INSURANCE TRUST
----------------------------------------------------------------------------------------------------------------------------
PIMCO Low Duration Bond $25 $76 $20 $61
----------------------------------------------------------------------------------------------------------------------------
PIMCO Foreign Bond $27 $84 $22 $69
----------------------------------------------------------------------------------------------------------------------------
SCUDDER VARIABLE LIFE INVESTMENT FUND
----------------------------------------------------------------------------------------------------------------------------
Money Market $23 $70 $18 $55
----------------------------------------------------------------------------------------------------------------------------
Growth and Income $24 $74 $19 $58
----------------------------------------------------------------------------------------------------------------------------
International $29 $88 $24 $73
----------------------------------------------------------------------------------------------------------------------------
Bond $24 $74 $19 $58
----------------------------------------------------------------------------------------------------------------------------
TEMPLETON VARIABLE PRODUCT SERIES
----------------------------------------------------------------------------------------------------------------------------
Templeton Developing Markets Fund $37 $113 $32 $99
</TABLE>
The examples assume that you made no transfers. The examples also do
not take into account any premium taxes. The examples reflect the Records
Maintenance Charge of $30 as an annual charge of 0.15% which we calculated by
dividing the total Records Maintenance Charges expected to be collected during a
year by an assumed average investment of $20,000 in the Contract.
PLEASE REMEMBER THAT THE EXAMPLES ARE SIMPLY ILLUSTRATIONS AND DO NOT REPRESENT
PAST OR FUTURE EXPENSES. Your actual expenses may be higher or lower than those
shown in the examples. Similarly your rate of return may be more or less than
the 5% assumed in the examples.
CONDENSED FINANCIAL INFORMATION
Because the variable account had not commenced operations as of the
date of this prospectus, no condensed financial information is included in this
prospectus.
13
<PAGE> 17
ABOUT FARMERS NEW WORLD LIFE INSURANCE COMPANY
AND THE VARIABLE ACCOUNT
================================================================================
FARMERS NEW WORLD LIFE INSURANCE COMPANY
Farmers New World Life Insurance Company ("Farmers") is the stock
life insurance company issuing the Contract. Farmers is located at 3003 - 77th
Avenue, S.E., Mercer Island, Washington 98040, and was incorporated under
Washington law on February 21, 1910. Farmers established the variable account to
support the investment options under this Contract and under other variable
annuity contracts Farmers may issue. Farmers' general account supports the fixed
account under the Contract.
Farmers is a direct wholly-owned subsidiary of Farmers Group, Inc.
("FGI"). FGI is a stock holding and management company. The ultimate controlling
parents of FGI are Allied Zurich p.l.c., a United Kingdom company, and Zurich
Allied AG, a Swiss company. Allied Zurich p.l.c. and Zurich Allied AG are traded
in certain European markets, but are not publicly traded in the U.S.
Farmers markets a broad line of individual life insurance products,
including universal life, term life and whole life insurance and annuity
products (predominately flexible premium deferred annuities). Farmers currently
is licensed to sell insurance in 38 states and the District of Columbia. The
states where Farmers is not licensed are Alaska, Connecticut, Florida, Hawaii,
Louisiana, Maine, Massachusetts, New Hampshire, New Jersey, New York, North
Carolina, and Vermont.
FARMERS ANNUITY SEPARATE ACCOUNT A
We established the Farmers Annuity Separate Account A (the "variable
account") as a variable account under Washington insurance law on April 6, 1999.
The variable account will receive and invest premium payments paid under the
Contracts and under other variable annuity contracts we may issue in the future.
Although the assets in the variable account are our property, the
portion of the assets in the variable account that are attributable to variable
annuity contracts are not chargeable with the liabilities arising out of any
other business that we may conduct. All obligations arising under the Contracts
are our general corporate obligations. Income, gains and losses, whether or not
realized, from assets allocated to the variable account are credited to or
charged against the variable account without regard to our other income, gains
or losses.
The variable account is divided into 12 subaccounts. Additional
subaccounts may be available in the future. Each subaccount invests exclusively
in shares of a single portfolio of a fund. The income, gains and losses, whether
or not realized, from the assets allocated to each subaccount are credited to or
charged against that subaccount without regard to income, gains or losses from
any other subaccount.
The variable account has been registered with the SEC as a unit
investment trust under the Investment Company Act of 1940 (the "1940 Act") and
meets the definition of a separate account under the federal securities laws.
Registration with the SEC does not involve supervision of the management or
investment practices or policies of the variable account, the funds or of us by
the SEC. The variable account is also subject to the laws of the State of
Washington which regulate the operations of insurance companies domiciled in
Washington.
14
<PAGE> 18
THE PORTFOLIOS
================================================================================
Each subaccount of the variable account invests exclusively in shares
of a designated portfolio of a fund. Shares of each portfolio are purchased and
redeemed at net asset value, without a sales charge. Each fund available under
the Contract is registered with the SEC under the 1940 Act as an open-end,
management investment company.
The assets of each portfolio are separate from the assets of any
other portfolio, and each portfolio has separate investment objectives and
policies. As a result, each portfolio operates as a separate investment
portfolio and the income or losses of one portfolio has no effect on the
investment performance of any other portfolio.
Each of the portfolios is managed by an investment adviser registered
with the SEC under the Investment Advisers Act of 1940, as amended. Each
investment adviser is responsible for the selection of the investments of the
portfolio. These investments must be consistent with the investment objective,
policies and restrictions of that portfolio.
Some of the portfolios have been established by investment advisers
that manage publicly traded mutual funds having similar names and investment
objectives to the portfolios available under the Contract. While some of the
portfolios may be similar to, and may in fact be modeled after, publicly traded
mutual funds, you should understand that the portfolios are not otherwise
directly related to any publicly traded mutual fund. Consequently, the
investment performance of publicly traded mutual funds and any similarly named
portfolio may differ substantially from the portfolios available through this
Contract.
An investment in a subaccount, or in any portfolio, including the
Money Market Portfolio, is not insured or guaranteed by the U.S. Government and
there can be no assurance that the Money Market Portfolio will be able to
maintain a stable net asset value per share.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS
The investment objective of each portfolio is summarized below. NO
ONE CAN PROMISE THAT ANY PORTFOLIO WILL MEET ITS INVESTMENT OBJECTIVES. Amounts
you have allocated to the subaccounts may grow in value, decline in value, or
grow less than you expect, depending on the investment performance of the
portfolios in which those subaccounts invest. You bear the investment risk that
those portfolios possibly will not meet their investment objectives.
You can find more detailed information, including a description of
risks, fees and expenses of each portfolio, in the prospectuses for the
portfolios which accompany this prospectus.
CERTAIN PORTFOLIOS HAVE SIMILAR INVESTMENT OBJECTIVES. YOU SHOULD CAREFULLY READ
THE PROSPECTUSES FOR THE PORTFOLIOS BEFORE YOU INVEST.
15
<PAGE> 19
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO INVESTMENT OBJECTIVE AND INVESTMENT ADVISER
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
JANUS ASPEN CAPITAL APPRECIATION seeks long-term growth of capital. It is a non-diversified fund. Investment adviser
PORTFOLIO is Janus Capital Corporation.
- ------------------------------------------------------------------------------------------------------------------------------
KEMPER GOVERNMENT SECURITIES seeks high current return consistent with preservation of capital. Investment adviser
PORTFOLIO is Scudder Kemper Investments, Inc.
- ------------------------------------------------------------------------------------------------------------------------------
KEMPER HIGH YIELD PORTFOLIO seeks to provide a high level of current income. Investment adviser is Scudder Kemper
Investments, Inc.
- ------------------------------------------------------------------------------------------------------------------------------
KEMPER SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors' capital. Investment adviser is Scudder Kemper
Investments, Inc.
- ------------------------------------------------------------------------------------------------------------------------------
KEMPER-DREMAN HIGH RETURN EQUITY seeks to achieve a high rate of total return. Investment adviser is Scudder Kemper
PORTFOLIO Investments, Inc.; investment sub-adviser is Dreman Value Management L.L.C.
- ------------------------------------------------------------------------------------------------------------------------------
PIMCO LOW DURATION BOND PORTFOLIO seeks to maximize total return, consistent with preservation of capital and prudent
investment management. Investment adviser is Pacific Investment Management Company.
- ------------------------------------------------------------------------------------------------------------------------------
PIMCO FOREIGN BOND PORTFOLIO seeks to maximize total return, consistent with preservation of capital and prudent
investment management. Investment adviser is Pacific Investment Management Company.
- ------------------------------------------------------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO seeks stability of capital and consistent therewith, to maintain the liquidity of
capital and to provide current income. Investment adviser is Scudder Kemper
Investments, Inc.
- ------------------------------------------------------------------------------------------------------------------------------
GROWTH AND INCOME PORTFOLIO (CLASS seeks long-term growth of capital, current income and growth of income.
A SHARES) Investment adviser is Scudder Kemper Investments, Inc.
- ------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL PORTFOLIO (CLASS A seeks long-term growth of capital primarily through a diversified holdings of
SHARES) marketable foreign equity investments. Investment adviser is Scudder Kemper
Investments, Inc.
- ------------------------------------------------------------------------------------------------------------------------------
BOND PORTFOLIO (CLASS A SHARES) seeks a high level of income consistent with a high quality portfolio of debt securities.
Investment adviser is Scudder Kemper Investments, Inc.
- ------------------------------------------------------------------------------------------------------------------------------
TEMPLETON DEVELOPING MARKETS FUND seeks long-term capital appreciation. Investment adviser is Templeton Asset Management
(CLASS 2 SHARES) Ltd.
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
AVAILABILITY OF THE PORTFOLIOS
We cannot guarantee that each portfolio will always be available for
investment through the Contracts.
We reserve the right, subject to applicable law, to make additions
to, deletions from, or substitutions for the shares of a portfolio that are held
in the variable account. If the shares of a portfolio are no longer available
for investment or if, in our judgment, further investment in any portfolio
should become inappropriate, we may redeem the shares of that portfolio and
substitute shares of another portfolio. We will not substitute any shares
without notice and prior approval of the SEC and state insurance authorities, to
the extent required by the 1940 Act or other applicable law.
We also reserve the right in our sole discretion to establish
additional subaccounts, or eliminate or combine one or more subaccounts. Subject
to obtaining any approvals or consents required by law, the assets of one or
more subaccounts may also be transferred to any other subaccount if, in our sole
16
<PAGE> 20
discretion, conditions warrant. Additional information regarding the
substitutions of investments and resolving conflicts among funds may be found in
the SAI.
THE PAY-IN PERIOD
================================================================================
The pay-in period begins when we issue your Contract and continues
until the annuity start date. The pay-in period will also end if you surrender
your Contract, or a death benefit is payable, before the payout period.
PURCHASING A CONTRACT
You may purchase a Contract with a premium payment of $500 or more.
The first premium payment is the only one we require you to make.
To purchase a Contract, you must complete an application and send it
with your premium to us through one of our authorized agents who is also a
registered representative. Contracts may be sold to or in connection with
retirement plans that qualify for special tax treatment.
If you are purchasing the Contract through a tax favored arrangement,
including IRAs, Roth IRAs, and SIMPLE IRAs, you should carefully consider the
costs and benefits of the Contract (including annuity income benefits) before
purchasing the Contract, since the tax favored arrangement itself provides for
tax sheltered growth.
We will not issue you a Contract if you are older than age 90 on the
issue date.
CANCELLATION -- THE 10 DAY RIGHT TO EXAMINE PERIOD
You have the right to cancel the Contract for any reason within 10
days after you receive it. In some jurisdictions, this period may be longer than
10 days. To cancel the Contract, you must send it to our Home Office at Mercer
Island, Washington, before the end of the right to cancel period.
In most states, the amount of the refund will be the total premiums
we have received, plus (or minus) any gains (or losses) in the amounts you
invested in the subaccounts. If state law requires a return of premium, we will
refund the greater of your original premium(s) or the Contract Value on the date
we receive the Contract at our Home Office at the address shown on the front
page of this prospectus. In those states, we will place your premium(s) in the
fixed account for the number of days in your state's right to examine period,
plus 10 days. We will credit your premium(s) placed in the fixed account with
interest at the current fixed account interest rates. We will pay the refund
within 7 days after we receive the Contract. The Contract will then be deemed
void.
DESIGNATING YOUR INVESTMENT OPTIONS
When you complete your application, you will give us instructions on
how to allocate your first premium payment among the 12 subaccounts and the
fixed account. The amount you direct to a particular subaccount and/or to the
fixed account must be in whole percentages from 1% to 100% of the premium
payment, and must equal at least $500.
17
<PAGE> 21
If your application is complete and your premium payment has been
received at the Service Center, we will issue your Contract within two business
days of its receipt, and credit your initial premium payment to your Contract.
If your application is incomplete, we will contact you and seek to complete it
within five business days. If we cannot complete your application within five
business days after we receive it, we will return your premium payment, unless
you expressly permit us to keep it. We will credit the payment as soon as we
receive all necessary application information.
The date we credit your initial premium payment to your Contract is
the issue date. In most states, on the issue date we will allocate your initial
premium to the subaccounts and the fixed account as you specified on your
application.
If your state requires us to return your initial premium(s) in the
event you exercise your right to cancel the Contract, we will allocate the
initial premium(s) to the fixed account on the issue date. While held in the
fixed account, your premium(s) will be credited with interest at current fixed
account rates. The premium(s) will remain in the fixed account for the number of
days in your state's right to examine period, plus 10 days. On the first
valuation day on or after that period, we will reallocate all Contract Value
from the fixed account to the subaccounts and fixed account as you selected on
the application.
We may reject any application or premium payment for any reason
permitted by law.
ADDITIONAL PREMIUM PAYMENTS
There are no requirements on how many premium payments to make. You
determine the amount and timing of each additional premium payment, except that
premium payments must be at least $500 ($50 if you authorize us to draw on an
account by check or electronic debit). You may make premium payments at any time
until the earliest of: (a) the annuity start date; (b) the date you fully
withdraw all Contract Value; or (c) the date you reach age 70 1/2 for qualified
Contracts (other than Roth IRAs and rollovers and transfers).
We will not accept total premium payments in excess of the cumulative
premium limit that is specified on your Contract specification page. The Tax
Code may also limit the amount of premiums you may make.
We will credit any additional premium payments you make to your
Contract at the accumulation unit value next computed at the end of the
valuation day on which we receive them at the Service Center. Our valuation day
closes at 4:00 p.m. Eastern Time (1:00 p.m. Pacific Time). If we receive your
premium payments after the close of a valuation day, we will calculate and
credit them as of the end of the next valuation day.
We will direct your premium payment to the subaccounts and/or the
fixed account according to your written instructions in effect at the time we
receive it at the Service Center. However, you may direct individual premium
payments to a specific subaccount and/or to the fixed account without changing
your instructions. You may change your instructions at any time by sending us a
written request or by telephone authorization. Changing your allocation
instructions will not change the way existing Contract Value is apportioned
among the subaccounts or the fixed account.
THE VALUE OF YOUR CONTRACT INVESTED IN A SUBACCOUNT WILL VARY WITH
THE INVESTMENT PERFORMANCE OF THAT SUBACCOUNT. YOU BEAR THE ENTIRE INVESTMENT
RISK FOR AMOUNTS YOU ALLOCATE TO THE SUBACCOUNTS. YOU SHOULD PERIODICALLY REVIEW
YOUR PREMIUM PAYMENT ALLOCATION INSTRUCTIONS IN LIGHT OF MARKET CONDITIONS AND
YOUR OVERALL FINANCIAL OBJECTIVES.
18
<PAGE> 22
YOUR CONTRACT VALUE
================================================================================
VARIABLE ACCOUNT VALUE
Your variable account value will reflect the investment experience of
the selected subaccounts, any premium payments paid, any surrenders or partial
withdrawals, any transfers, and any charges assessed in connection with the
Contract. There is no guaranteed minimum variable account value.
CALCULATING VARIABLE ACCOUNT VALUE
Your variable account value is determined at the end of each
valuation day. The value will be the total of your Contract's value in each of
the subaccounts. We determine your Contract's value in each subaccount by
multiplying that subaccount's unit value for the relevant valuation period by
the number of accumulation units of that subaccount allocated to the Contract.
NUMBER OF ACCUMULATION UNITS
Any amounts you allocate or transfer to the subaccounts will be
converted into subaccount accumulation units. We determine the number of
accumulation units to be credited to your Contract by dividing the dollar amount
being allocated or transferred to a subaccount by the accumulation unit value
for that subaccount at the end of the valuation day during which the amount was
allocated or transferred. The number of accumulation units in any subaccount
will be increased at the end of the valuation day by:
- any premium payments allocated to the subaccount during the
current valuation day; and
- by any amounts transferred to the subaccount from another
subaccount or from the fixed account during the current
valuation day.
Any amounts transferred, surrendered or deducted from a subaccount
will be processed by canceling or liquidating accumulation units. The number of
accumulation units to be canceled is determined by dividing the dollar amount
being removed from a subaccount by the accumulation unit value for that
subaccount at the end of the valuation day during which the amount was removed.
The number of accumulation units in any subaccount will be decreased at the end
of the valuation day by:
- any amounts transferred (including any applicable transfer
fee) from that subaccount to another subaccount or to the
fixed account on that valuation day;
- any amounts withdrawn or surrendered (including any
applicable surrender charges and premium taxes) on that
valuation day; and
- the Records Maintenance Charge, if assessed on that
valuation day.
ACCUMULATION UNIT VALUE
The accumulation unit value for each subaccount's first valuation day
was set at $10. The accumulation unit value for each subaccount is recalculated
at the end of each valuation day by multiplying the accumulation unit value at
the end of the immediately preceding valuation day by the Net Investment Factor
for the valuation day for which the value is being determined. The new
accumulation unit value reflects the investment performance of the underlying
portfolio, and the daily deduction of: (i)
19
<PAGE> 23
the mortality and expense risk charge, (ii) any charge for enhanced benefit
riders, and (iii) the daily administrative charge during each valuation period.
We determine a separate accumulation unit value for each subaccount.
We will also determine separate sets of accumulation unit value reflecting the
costs of the Guaranteed Minimum Death Benefit and the Guaranteed Retirement
Income Benefit.
The formula for computing the Net Investment Factor is in the SAI.
TRANSFERS BETWEEN INVESTMENT OPTIONS
================================================================================
After the right to examine period has expired and before the annuity
start date, you may transfer all or part of the amount in a subaccount or the
fixed account to another subaccount or the fixed account, subject to the
restrictions described below.
The minimum amount that you may transfer is $100 or your total value
in that subaccount, if less. If you request a transfer that would reduce the
amount in a subaccount or fixed account below $500, we will transfer the entire
amount in the subaccount.
You may make one transfer from the fixed account to the subaccounts
each Contract year during the 30 days following a Contract anniversary. We
measure a Contract year from the anniversary of the issue date. You may not make
a transfer into the fixed account during the six months following any transfer
you make out of the fixed account to any subaccount(s).
Transfers will be processed based on the accumulation unit values
determined at the end of the valuation day on which we receive your written
request or telephone authorization to transfer, provided we receive the request
before the close of our valuation day, usually 4:00 p.m. Eastern Time (1:00 p.m.
Pacific Time). If we receive your request after the close of our valuation day,
we will process the transfer request using the accumulation unit value for the
next valuation day. There currently is no limit on the number of transfers that
you can make among subaccounts or to the fixed account
We may suspend or modify this transfer privilege at any time.
AUTOMATIC ASSET REBALANCING PROGRAM
The automatic asset rebalancing program permits you to maintain the
percentage of the Contract Value allocated to each subaccount at a pre-set
level. Under the program, automatic transfers are made among the subaccounts on
a quarterly basis so that your Contract Value is reallocated to match the
percentages you specify. Asset rebalancing is consistent with maintaining your
allocation of investments among market segments, although it is accomplished by
reducing your Contract Value allocated to the better performing segments.
Transfers under this program are not subject to the $100 minimum
transfer limitation. We will not charge a transfer fee for asset rebalancing.
You may not include the fixed account in the asset rebalancing program. We may
change, terminate, limit or suspend automatic asset rebalancing at any time.
20
<PAGE> 24
You may elect automatic asset rebalancing on your application or you
may enroll in automatic asset rebalancing at any time by completing a form and
return it to the Service Center. You may cancel your participation in the
program at any time.
ASSET ALLOCATION SERVICES
If you authorize a third party to transact transfers on your behalf,
we will reallocate your Contract Value pursuant to the authorized asset
allocation program. However, we do not offer or participate in any asset
allocation program and we take no responsibility for any third party asset
allocation program. We may suspend or cancel acceptance of a third party's
instructions at any time and may restrict the investment options available for
transfer under third party authorizations.
EXCESSIVE TRADING LIMITS
We reserve the right to limit transfers in any Contract year, or to
refuse any transfer request for a Contract owner if:
- we believe, in our sole discretion, that excessive trading
by the Contract owner, or a specific transfer request, or a
group of transfer requests, may have a detrimental effect on
the accumulation unit values of any subaccount or the share
prices of any portfolio or would be detrimental to other
Contract owners; or
- we are informed by one or more portfolios that they intend
to restrict the purchase of portfolio shares because of
excessive trading or because they believe that a specific
transfer or group of transfers would have a detrimental
effect on the price of portfolio shares.
We may apply the restrictions in any manner reasonably designed to prevent
transfers that we consider disadvantageous to other Contract owners.
DOLLAR COST AVERAGING PROGRAM
Under the dollar cost averaging program, you may authorize us to
transfer a fixed dollar amount at monthly intervals from the fixed account to
one or more subaccounts. You may designate up to eight subaccounts to receive
the transfers. The fixed dollar amount will purchase more accumulation units of
a subaccount when their value is lower and fewer units when their value is
higher. Over time, the cost per unit averages out to be less than if all
purchases of units had been made at the highest value and greater than if all
purchases had been made at the lowest value. The dollar cost averaging method of
investment reduces the risk of making purchases only when the price of
accumulation units is high. It does not assure a profit or protect against a
loss in declining markets.
Dollar cost averaging is only available during the pay-in period. You
may cancel your participation in the program at any time.
You may enroll in the dollar cost averaging program at any time by
completing our dollar cost averaging form and sending it to the Service Center.
We make transfers on the same day of every month as your issue date. We must
receive the form at least 5 valuation days before the transfer date, for your
transfers to begin on that date. When you enroll in the dollar cost averaging
program, your total Contract Value in an account must be at least equal to the
amount you designate to be transferred on each transfer date. Transfers from the
fixed account must be at least $100.
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<PAGE> 25
TELEPHONE TRANSFERS AND WITHDRAWALS
Unless you notify us on your application or in writing that you do
not want the ability to make transfers and partial withdrawals by telephone, you
will have the ability to make a transfer or a partial withdrawal by giving us
instructions over the telephone. You may use your telephone to authorize a
transfer from one subaccount or the fixed account to another subaccount or the
fixed account, to change the allocation instructions for future investments, to
change asset rebalancing and dollar cost averaging programs, and/or to request a
partial withdrawal.
We will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. If we follow such procedures we will not
be liable for any losses due to unauthorized or fraudulent instructions. We may
be liable for such losses if we do not follow those reasonable procedures.
The procedures that we may follow for telephone transfers include:
- providing you with a written confirmation of all transfers
made according to telephone instructions,
- requiring a form of personal identification prior to acting
on instructions received by telephone, and
- tape recording instructions received by telephone.
We reserve the right to modify, restrict, suspend or eliminate the
transfer privileges (including the telephone transfer facility) at any time, for
any class of Contracts, for any reason.
TRANSFER FEE
We will impose a transfer fee of $25 for the thirteenth and each
subsequent transfer request you make per Contract year. Transfers you make
pursuant to the asset rebalancing and dollar cost averaging programs do not
count toward your 12 free transfers. See "Fees and Charges."
ACCESS TO YOUR MONEY
================================================================================
SURRENDERS
At any time before the annuity start date, you may surrender your
Contract for its cash value.
The cash value is equal to :
- the Contract Value; minus
- any applicable surrender charges; minus
- any premium taxes not previously deducted; minus
- the Records Maintenance Charge unless waived.
The cash value will be determined at the accumulation unit value next
determined as of the close of business on the day we receive your written
request for surrender at the Service Center, unless you specify a later date in
your request. The cash value will be paid in a lump sum unless you request
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<PAGE> 26
payment under an annuity option. A surrender may have adverse federal income tax
consequences, including a penalty tax. See "Federal Tax Consequences."
PARTIAL WITHDRAWALS
Once each calendar quarter before the annuity start date, you may
request a withdrawal of part of your cash value. Partial withdrawals are subject
to the following conditions:
- the minimum amount you can withdraw is $100; and
- you may not make a partial withdrawal if the withdrawal plus
the surrender charge would cause the Contract Value to fall
below $500.
We will withdraw the amount you request from the Contract Value as of
the valuation day on which we receive your written request for the partial
withdrawal. We will then reduce the amount remaining in the Contract by any
applicable surrender charge plus the dollar amount we sent to you.
You may specify how much you wish to withdraw from each subaccount
and/or the fixed account. If you do not specify, or if you do not have
sufficient assets in the subaccounts or fixed account you specified to comply
with your request, we will make the partial withdrawal on a pro rata basis from
the fixed account and those subaccounts in which you are invested. We will base
the pro rata reduction on the ratio that the value in each subaccount and the
fixed account has to the entire Contract Value before the partial withdrawal.
Remember, any partial withdrawal you take will reduce your Contract
Value, and will proportionally reduce the minimum death benefit by the amount of
the withdrawals plus any charges. See "Death Benefits."
If you elected the Guaranteed Minimum Death Benefit, a partial
withdrawal will proportionally reduce the Greatest Anniversary Value and the
amount of premiums (plus interest) being accumulated at 4% annually. Likewise,
if you elected the Guaranteed Retirement Income Benefit, a partial withdrawal
will proportionally reduce the Income Base. The impact of a proportional
reduction on these benefits depends, in part, upon the relative amount of your
Contract Value at the time of the withdrawal. Under proportional reductions, if
the amount of the death benefit or Income Base is greater than the Contract
Value at the time of the partial withdrawal, then the reduction in the death
benefit or Income Base will be greater than the dollar amount of the withdrawal
(including any charges). For this reason, if a death benefit is paid, or the
Income Base is calculated, after you have taken a partial withdrawal, the
possibility exists that the total amount of the death benefit or Income Base
will be less than the total premium payments you have paid. See "Death Benefits"
and "Guaranteed Retirement Income Benefit."
INCOME TAXES, TAX PENALTIES AND CERTAIN RESTRICTIONS MAY APPLY TO ANY
WITHDRAWAL YOU MAKE.
Your right to make surrenders and partial withdrawals is also subject
to any restrictions imposed by applicable law or employee benefit plan.
See "Surrender Charges" for an explanation of the surrender charges
that may apply.
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<PAGE> 27
SYSTEMATIC WITHDRAWAL PLAN
After your first Contract year, you can elect to receive regular
payments from your Contract Value during the pay-in period. You instruct us to
withdraw selected amounts from the fixed account or any of the subaccounts. We
will make these withdrawals on a monthly basis. You must complete an enrollment
form and send it to the Service Center. You may terminate the systematic
withdrawal plan at any time.
There are some limitations to the systematic withdrawal plan:
- Withdrawals must be at least $100.
- You must have a minimum balance at least equal to the amount
you want to withdraw.
- We will deduct a surrender charge from any amount you
withdraw in excess of your free withdrawal amount.
Income taxes and tax penalties may apply to the amount withdrawn. We
may suspend or modify the systematic withdrawal plan at any time.
DEATH BENEFITS
================================================================================
Only one death benefit will be payable under this Contract. Upon
payment of the death benefit proceeds, the Contract will terminate.
DEATH BENEFITS BEFORE THE ANNUITY START DATE
We will pay a death benefit to the beneficiary if any of the
following occurs during the pay-in period:
- the owner or any joint owner dies, or
- the last surviving annuitant dies.
If any owner is a non-natural person, then the death of any annuitant
will be treated as the death of an owner.
STANDARD DEATH BENEFIT
If you have not selected the Guaranteed Minimum Death Benefit on your
application, and if an annuitant (including an owner who is an annuitant) dies
before his or her 80th birthday, the death benefit equals the greater of:
- the Contract Value on the later of the date that we receive
due proof of death and the date when we receive the
beneficiary's instructions on payment method at the Service
Center; or
- the minimum death benefit. The minimum death benefit equals
the sum of all premiums, minus proportional reductions for
withdrawals.
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<PAGE> 28
In all other cases, the death benefit equals the Contract Value
determined on the later of the date that we receive due proof of death and the
date when we receive the beneficiary's instructions on payment method. Such
other cases include the death of an annuitant who has attained his or her 80th
birthday, or death of an owner who is not an annuitant.
The proportional reduction in the minimum death benefit equals:
- the minimum death benefit immediately prior to the
withdrawal; multiplied by
- the ratio of the amount you withdraw (including any charges)
to the Contract Value immediately before the withdrawal.
GUARANTEED MINIMUM DEATH BENEFIT
On your Contract application, you may select the Guaranteed Minimum
Death Benefit. Under this benefit, the death benefit payable in the event of the
last surviving annuitant's death is enhanced as described below. This death
benefit is only payable during the pay-in period and is not available after the
annuity start date. No Guaranteed Minimum Death Benefit is ever payable if a
non-annuitant owner dies. If you select this option, we will deduct an
additional charge equal, on an annual basis, to 0.25% of the average net assets
you have invested in the subaccounts.
Under the Guaranteed Minimum Death Benefit, the death benefit we will
pay upon the death of the last surviving annuitant is the greatest of the
following:
1. the standard death benefit as described above;
2. premiums you paid accumulated daily with interest
compounded at a rate of 4% per year through the earlier of
(i) the date of death, or (ii) the Contract anniversary on
or next following the last surviving annuitant's 80th
birthday, minus proportional reductions for withdrawals; or
3. the Greatest Anniversary Value for the anniversaries
through the earlier of the date of death or the Contract
anniversary on or next following the last surviving
annuitant's 80th birthday, minus proportional reductions
for withdrawals.
The Greatest Anniversary Value is calculated as follows: an
anniversary value is defined for each eligible Contract
anniversary as the Contract Value on that anniversary,
increased by premiums accepted since that anniversary and
proportionately reduced for withdrawals since that
anniversary. The largest such anniversary value is the
Greatest Anniversary Value.
If the last surviving annuitant dies after the Contract anniversary
coincident with or next following that annuitant's 80th birthday and before the
annuity start date, the amounts calculated under 2. and 3. will be increased by
premiums received and proportionately reduced for withdrawals since that
anniversary.
If the last surviving annuitant was older than 80 on the issue date,
then no death benefit will be payable under 2. or 3. above.
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<PAGE> 29
The proportional reductions for withdrawals are determined
independently for 2. and 3. above. The proportional reduction for each
withdrawal is equal to the product of:
- the death benefit available under the item being considered
(either 2. or 3.) immediately prior to the withdrawal, and
- the ratio of the amount withdrawn (including any charges) to
the Contract Value immediately before the withdrawal.
The Guaranteed Minimum Death Benefit will end when the Contract ends
or you send a signed request to terminate it to the Service Center. If you
terminate the rider, we will no longer deduct the 0.25% additional rider charge
from the subaccounts.
In determining the death benefit, we will also subtract any
applicable premium and withholding taxes not previously deducted.
DISTRIBUTION UPON DEATH
If a death benefit is payable before the Annuity Start Date, we will
pay the death benefit in a lump sum, unless we consent to another arrangement
within 90 days of receiving due proof of death.
In all events, death benefit distributions will be made from the
Contract in accordance with Section 72(s) of the Tax Code.
If any owner dies before the annuity start date, the death benefit
must be distributed to the beneficiaries within five years after the date of
death or distributed over the life (or period not exceeding the life expectancy)
of the beneficiary, provided that such distributions begin within one year of
the owner's death.
If the sole beneficiary is the surviving spouse of the deceased
owner, the Contract may be continued (in lieu of paying the death benefit) with
the surviving spouse as the sole owner.
If the owner is a non-natural person, then each annuitant will be
treated as an owner for purposes of distributing the death benefit, and any
death of an annuitant will be treated as the death of the owner for purposes of
these requirements. Moreover, if the annuitant is also an owner, then the death
of such annuitant will also be treated as the death of an owner.
DEATH BENEFITS AFTER THE ANNUITY START DATE
If an annuitant dies on or after the annuity start date, we will pay
any remaining guaranteed payments to the beneficiary as provided in the annuity
option selected. If you are not the annuitant and you die while an annuitant is
still living, we will continue to pay the income payments for the annuitant's
lifetime in the same manner as before your death.
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FEES AND CHARGES
================================================================================
MORTALITY AND EXPENSE RISK CHARGE
As compensation for assuming mortality and expense risks, we deduct a
daily mortality and expense risk charge from your net assets in the subaccounts.
The charge is equal, on an annual basis, to 0.95%. of average daily net assets
you have invested in the subaccounts.
The mortality risk we assume is that annuitants may live for a longer
period of time than estimated when we established the guarantees in the
Contract. Because of these guarantees, each annuitant is assured that longevity
will not have an adverse effect on the annuity payments received. The mortality
risk that we assume also includes a guarantee to pay a death benefit if the
annuitant dies before the annuity start date. The expense risk that we assume is
the risk that the administrative fees and transfer fees (if imposed) may be
insufficient to cover actual future expenses. We may use any profits from this
charge to pay the costs of distributing the Contracts.
If you choose either the Guaranteed Minimum Death Benefit or the
Guaranteed Retirement Income, we will deduct an additional daily fee from your
value in the subaccounts at an annual rate of 0.25%. of average daily net assets
you have invested in the subaccounts. If you choose both benefits, the
additional daily fee will increase to an annual rate of 0.50%. See "Fee Table."
ASSET-BASED ADMINISTRATION CHARGE
We deduct a daily asset-based administration charge from each
subaccount to help reimburse us for our administrative costs, such as owner
inquiries, changes in allocations, owner reports, Contract maintenance costs and
data processing costs. This charge is equal, on an annual basis, to 0.20% of
your average daily net assets in the subaccounts. This charge is designed to
help compensate us for the cost of administering the Contracts and the variable
account.
TRANSFER FEE
A transfer fee of $25 will be imposed for the thirteenth and each
subsequent transfer during a Contract year. Any unused free transfers do not
carry over to the next Contract year. Each written or telephone request would be
considered to be one transfer, regardless of the number of subaccounts affected
by the transfer. Transfers you make through our asset rebalancing and dollar
cost averaging programs do not count toward your twelve free transfers. We
deduct the transfer fee from the amount transferred.
SURRENDER CHARGE
We do not deduct a charge for sales expenses from premium payments at
the time premium payments are paid to us. However, we will deduct a surrender
charge, if applicable, if you surrender your Contract or partially withdraw cash
value before the annuity start date, or if you annuitize your Contract. We do
not assess a surrender charge on withdrawals made if the Contract terminates due
to your death or the death of the last surviving annuitant.
As a general rule, the surrender charge equals a percentage of the
premium payments withdrawn that: (a) we have held for less than seven years; and
(b) are not eligible for a free withdrawal. The
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<PAGE> 31
surrender charge applies during the entire seven year period following each
premium payment. The applicable percentage depends on the number of years since
you made the premium payment being withdrawn, as shown on this chart:
<TABLE>
<CAPTION>
NUMBER OF COMPLETED
YEARS FROM THE DATE OF SURRENDER CHARGE
PREMIUM PAYMENTS PERCENTAGE
----------------------------------------- ---------------------------------
<S> <C>
0................................... 7%
1................................... 6%
2................................... 5%
3................................... 5%
4................................... 4%
5................................... 3%
6................................... 2%
7 and later......................... 0%
</TABLE>
In determining surrender charges, we will deem premiums to be
surrendered in the order in which they were received -- that is, on a first-in,
first-out basis.
Because surrender charges are based on the date each premium payment
is made, you may be subject to a surrender charge, even though the Contract may
have been issued many years earlier.
When you request a withdrawal, you will be sent a check in the amount
you requested, less applicable tax withholding. If a surrender charge applies,
your Contract Value will be reduced by the dollar amount we send you, plus the
surrender charge. The surrender charge is deducted pro-rata from all subaccounts
and the fixed account in which the Contract is invested based on the remaining
Contract Value in each subaccount and the fixed account, unless you request
otherwise.
FREE WITHDRAWAL AMOUNT
In any Contract year before the annuity start date, you may withdraw
a portion of your Contract Value once each calendar quarter without incurring a
surrender charge. This amount is called the free withdrawal amount. Each
Contract year, the free withdrawal amount is an amount up to the greater of:
- Contract Value minus total premiums and minus prior
withdrawals that were previously assessed a surrender
charge; or
- 10% of the Contract Value determined at the time the
withdrawal is requested.
In addition, you may withdraw, free of surrender charge, any premium that has
been held by us for more than seven years.
EXAMPLE OF SURRENDER CHARGE CALCULATION
This example is for a Contract issued on July 1, 2000 with a $10,000
premium paid on the issue date. No subsequent premiums are paid.
The owner wishes to withdraw $4,000 on September 15, 2003. Suppose
the Contract Value is $12,700 on that date, before the withdrawal.
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<PAGE> 32
The free withdrawal amount is the larger of (a) and (b):
(a) $12,700 - 10,000 = $2,700
(b) (10%)(12,700) = $1,270
The free withdrawal amount is $2,700. The remaining portion of the withdrawal is
subject to a surrender charge. Since this amount represents the withdrawal of
premium paid between 3 and 4 years ago, the surrender charge percentage is 5%.
The surrender charge is calculated as follows:
($4,000 - $2,700)(5%) = $65
Free withdrawals may be subject to the 10% federal penalty tax if made before
you reach age 59 1/2. They also may be subject to federal income tax.
WAIVER OF SURRENDER CHARGE RIDERS
If state law permits and subject to certain restrictions, we will
automatically issue two riders with your Contract. As described in these
riders, we will waive the surrender charge:
- after an annuitant (who is under age 75) has been confined
in a hospital or skilled heath care facility continuously
for at least 90 days; or
- if an annuitant is diagnosed with a terminal illness after
we issue the Contract and is expected to live for 12 months
or less, up to an aggregate maximum withdrawal of $250,000.
RECORDS MAINTENANCE CHARGE
At the end of each Contract year before the annuity start date, we
will deduct a records maintenance charge of $30 from your Contract Value as
partial reimbursement for our administrative expenses relating to the Contract.
We will deduct the fee from each subaccount and the fixed account based on the
proportion that the value in each subaccount and the fixed account bears to the
total Contract Value. We will also deduct this charge on the annuity start date,
or the date you surrender the Contract.
We will not deduct this fee after annuity payments have begun. We
also currently waive deduction of the charge for Contracts whose Contract Value
is $50,000 or more on the date of assessment.
PORTFOLIO FEES AND CHARGES
Each portfolio deducts portfolio management fees and charges from the
amounts you have invested in the portfolios. In addition, one portfolio deducts
12b-1 fees. For 1998, total portfolio fees and charges ranged from 0.44% to
1.91%. See the Fee Table in this Prospectus and the prospectuses for the
portfolios.
We may receive compensation from the investment advisers, administrators,
distributors (and/or an affiliate thereof) of the portfolios in connection with
administrative, distribution, or other services and cost savings experienced by
the investment advisers, administrators or distributors. It is anticipated that
such compensation will be based on assets of the particular portfolios
attributable to the Contract. Some advisers, administrators or distributors may
pay us more than others.
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<PAGE> 33
PREMIUM TAXES
Various states and other governmental entities charge a premium tax
on annuity contracts issued by insurance companies. Premium tax rates currently
range up to 3.5%, depending on the state. We are responsible for paying these
taxes. If applicable, we will deduct the cost of such taxes from the value of
your Contract either:
- from premium payments as we receive them,
- from Contract Value upon surrender or partial withdrawal,
- on the annuity start date, or
- upon payment of a death benefit.
OTHER TAXES
Currently, no charge is made against the variable account for any
federal, state or local taxes (other than premium taxes) that we incur or that
may be attributable to the variable account or the Contracts. We may, however,
deduct such a charge in the future, if necessary.
THE PAYOUT PERIOD
================================================================================
THE ANNUITY START DATE
The annuity start date is the day that the payout period begins under
the annuity option you have selected. If you own a Contract that is not a
qualified Contract, you must select the annuity start date on which you will
begin to receive annuity payments. The annuity start date can be no later than
the Final Annuity Date (the Contract anniversary when the oldest annuitant is
age 95).
In the case of an IRA that satisfies Tax Code section 408, the
annuity start date must be no later than April 1 of the calendar year following
the year in which you reach age 70 1/2 and the payment must be made in a
specified form or manner. Roth IRAs under section 408A of the Tax Code do not
require distributions at any time prior to your death; the annuity start date
for Roth IRAs can be no later than the final annuity date.
ANNUITY OPTIONS
You must chose an annuity option on or before the annuity start date.
The annuity option you select will affect the dollar amount of each annuity
payment you receive. You may select or change your annuity option on or before
the annuity start date while the annuitant is living by sending a written
request signed by you and/or your beneficiary, as appropriate, to our Home
Office. You may choose one of the annuity options described below or any other
annuity option being offered by us as of the annuity start date. The annuity
options we currently offer provide for fixed annuity payments.
You may elect to receive annuity payments on a monthly, quarterly,
semi-annual or annual basis. If you do not specify the frequency of payment, we
will pay you monthly. The first payment under any option will be made on the day
of the month you request (subject to our agreement) and will begin in the month
immediately following the annuity start date. We will make subsequent payments
on the same day of each subsequent period in accordance with the payment
interval and annuity option you select.
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<PAGE> 34
If you do not select an annuity option by the Final Annuity Date, we
will apply the Contract Value under the Second Option, Life Income with a 10
year guarantee period, as described below.
A beneficiary may have the death benefit paid as an annuity under one
of the annuity options.
DETERMINING THE AMOUNT OF YOUR ANNUITY PAYMENT
On the annuity start date, we will use the cash value to calculate
your annuity payments under the annuity option you select. Cash value is your
Contract Value minus any applicable surrender charges, records maintenance fee,
and premium tax.
For qualified Contracts, distributions must satisfy certain
requirements specified in the Tax Code.
FIXED ANNUITY PAYMENTS
Fixed annuity payments are periodic payments that we make to the
annuitant. The amount of the fixed annuity payment is fixed and guaranteed by
us.
The amount of each payment depends on:
- the form and duration of the annuity option you choose;
- the age of the annuitant;
- the sex of the annuitant (if applicable);
- the amount of your Contract Value on the annuity start date;
and
- the applicable guaranteed annuity tables in the Contract.
The guaranteed annuity tables in the Contract are based on a minimum
guaranteed interest rate of 3.0%. We may, in our sole discretion, make annuity
payments in an amount based on a higher interest rate.
GUARANTEED ANNUITY TABLES
The guaranteed annuity tables in your Contract show the minimum
dollar amount of the first monthly payment for each $1,000 applied under the
first, second and third annuity options. Under the first or second options, the
amount of each payment will depend upon the adjusted age and sex of the
annuitant at the time we are due to pay the first payment. Under the third
option, the amount of each payment will depend upon the sex of both annuitants
and their adjusted ages at the time we are due to pay the first payment.
The adjusted age of the annuitant is determined by calculating the
age at the nearest birthday of the annuitant on the annuity start date and
subtracting a number that depends on the year in which the annuity start date
belongs:
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<PAGE> 35
<TABLE>
<CAPTION>
annuity start date Adjusted Age is Age Minus
------------------ -------------------------
<S> <C> <C>
Before 2001 0 Years
2001 to 2010 1 Year
2011 to 2020 2 Years
2021 to 2030 3 Years
2031 to 2040 4 Years
After 2040 5 Years
</TABLE>
Once you have selected an annuity option, you may not change that
election with respect to any annuitant if annuity payments have begun.
After the annuity start date, the Contract no longer participates in
the variable account.
DESCRIPTION OF ANNUITY OPTIONS
FIRST OPTION -- LIFE INCOME.* We will make payments for the
annuitant's lifetime. We will stop making monthly payments with the last payment
due prior to the annuitant's death.
SECOND OPTION -- LIFE INCOME WITH A GUARANTEE PERIOD. We will make
payments for the annuitant's lifetime, with the guarantee that we will make
payments for at least 10 or 20 years. You select either the 10 or 20 year
guarantee period.
THIRD OPTION -- JOINT AND SURVIVOR LIFE ANNUITY.* Under this option,
we will make annuity payments so long as two annuitants are alive. After the
death of one of the annuitants, we will continue to make payments for the
lifetime of the surviving annuitant, although the amount of the payment may
change. We will stop making monthly payments with the last payment due before
the last surviving annuitant's death.
- ---------------
* IT IS POSSIBLE UNDER THIS OPTION TO RECEIVE ONLY ONE ANNUITY PAYMENT IF THE
ANNUITANT DIES (OR ANNUITANTS DIE) BEFORE THE DUE DATE OF THE SECOND PAYMENT OR
TO RECEIVE ONLY TWO ANNUITY PAYMENTS IF THE ANNUITANT DIES (OR ANNUITANTS DIE)
BEFORE THE DUE DATE OF THE THIRD PAYMENT, AND SO ON.
The amount of each payment will be determined from the tables in the
Contract that apply to the particular option using the annuitant's age (and if
applicable, sex or adjusted age).
Other options may be available.
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<PAGE> 36
GUARANTEED RETIREMENT INCOME BENEFIT
================================================================================
We offer an optional Guaranteed Retirement Income Benefit under this
Contract. Here are some terms you will need to know before reading this section:
- THE GUARANTEED ANNUITY RATES are the rates contained in your
Contract. See "Guaranteed Annuity Tables."
- INCOME BASE equals the greater of :
(i) premiums you paid accumulated daily with interest
compounded at 5.00% per year through the earlier of the
annuity start date and the Contract anniversary on or next
following the oldest joint annuitant's 80th birthday, with
a proportional reduction for withdrawals; and
(ii) the Greatest Anniversary Value for the Contract
anniversaries through the earlier of the annuity start date
and the Contract anniversary on or next following the
oldest joint annuitant's 80th birthday, with a proportional
reduction for withdrawals.
In determining the income base when the oldest joint annuitant is
over 80 on the annuity start date, the income base on the Contract anniversary
coincident with or next following the annuitant's 80th birthday is increased by
any premiums received and proportionately reduced by any withdrawals since that
anniversary.
- PROPORTIONAL REDUCTION (for purposes of the Guaranteed Retirement
Income Benefit) equals:
- the income base under either (i) or (ii) above immediately
prior to the withdrawal; MULTIPLIED BY
- the ratio of the amount withdrawn (including charges) to the
Contract Value immediately prior to the withdrawal.
* * *
The Guaranteed Retirement Income Benefit provides a minimum fixed
annuity guaranteed lifetime income to the annuitant once the Contract has been
in force for ten Contract years. You must select the Guaranteed Retirement
Income Benefit on your initial Contract application. You may discontinue the
Guaranteed Retirement Income Benefit at any time by sending notice to the
Service Center. Once you discontinue the Guaranteed Retirement Income Benefit,
you may not select it again.
If you select the Guaranteed Retirement Income Benefit, we will
deduct an additional daily charge on each valuation day from the subaccounts at
an annual rate of 0.25% of the average daily net assets you have invested in the
subaccounts. See "Fees and Charges."
You may choose to receive the Guaranteed Retirement Income Benefit on
the annuity start date, if all of the following conditions are met:
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<PAGE> 37
- You choose an annuity option that provides payments for the
lifetime of one or more annuitants with payments guaranteed for
a period not to exceed 10 years;
- You select an annuity start date that is on or after the 10th
Contract anniversary;
- You select an annuity start date that occurs within 30 days
following a Contract anniversary;
- The annuity start date is before the annuitant's 91st birthday
and after the annuitant's 60th birthday. If the annuitant is
younger than 44 on the issue date, the annuity start date must
be after the 15th Contract anniversary.
The amount of minimum income payments we will pay under the
Guaranteed Retirement Income Benefit is determined by applying the income base
(less applicable taxes) to the guaranteed annuity table rates in your Contract
for the annuity option you select. On the annuity start date, the income
payments we will pay under the Contract will equal the greater of:
- the dollar amount determined by applying the income base (under
the Guaranteed Retirement Income Benefit) to the guaranteed
annuity tables in the Contract; and
- the dollar amount determined by applying the Contract's cash
value to the income benefits, annuity options and current
annuity tables as described in your Contract.
We will pay the Guaranteed Retirement Income Benefit for the life of
a single annuitant, or the lifetimes of two annuitants. If we pay the Guaranteed
Retirement Income Benefit for the life of two annuitants, then we will use the
age of the oldest joint annuitant to determine the income base.
THE GUARANTEED RETIREMENT INCOME BENEFIT GUARANTEES A MINIMUM INCOME
THAT IS BASED ON CONSERVATIVE ACTUARIAL FACTORS. Therefore the income guaranteed
under the Guaranteed Retirement Income Benefit by applying the income base to
the Contract's guaranteed annuity tables may, under some circumstances, be less
than the income that would be provided by applying the Contract's cash value to
current annuity factors (i.e., the income you would receive if you did not
purchase the Guaranteed Retirement Income Benefit).
THE FIXED ACCOUNT
================================================================================
You may allocate some or all of your premium payments and transfer
some or all of your Contract Value to the fixed account. The fixed account
offers a guarantee of principal, after deductions for fees and expenses. We also
guarantee that you will earn interest at a rate of a least 3% per year on
amounts in the fixed account. The fixed account is part of our general account.
Our general account supports our insurance and annuity obligations. Because the
fixed account is part of the general account, we assume the risk of investment
gain or loss on this amount. All assets in the general account are subject to
our general liabilities from business operations. The fixed account may not be
available in all states.
The fixed account is not registered with the SEC under the Securities
Act of 1933 (the "1933 Act"). Neither the fixed account nor our general account
have been registered as an investment company under the 1940 Act. Therefore,
neither our general account, the fixed account, nor any interests therein are
generally subject to regulation under the 1933 Act or the 1940 Act. The
disclosures relating to the fixed account which are included in this prospectus
are for your information and have not been reviewed by the SEC. However, such
disclosures may be subject to certain generally applicable provisions of federal
securities laws relating to the accuracy and completeness of statements made in
prospectuses.
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<PAGE> 38
FIXED ACCOUNT VALUE
On each valuation period (before the annuity start date), the fixed
account value is equal to:
- the total of premiums allocated to the fixed account; MINUS
- any applicable premium taxes; PLUS
- amounts transferred from the subaccounts; INCREASED BY
- any credited interest; and DECREASED BY
- any transfers and withdrawals from the fixed account, and by any
charges deducted from the fixed account.
We intend to credit the fixed account with interest at current rates
in excess of the minimum guaranteed rate of 3%, but we are not obligated to do
so. We have no specific formula for determining current interest rates.
The fixed account value will not share in the investment performance
of our general account. Because we, in our sole discretion, anticipate changing
the current interest rate from time to time, different allocations you make to
the fixed account will be credited with different current interest rates. You
assume the risk that interest credited to amounts in the fixed account may not
exceed the minimum 3% guaranteed rate.
We reserve the right to change and/or add other fixed account options
from time to time. Such options will provide a guaranteed rate of interest of at
least 3% per year and will apply that interest rate for at least one calendar
year (except for the year in which such amount is received or transferred).
FIXED ACCOUNT TRANSFERS
GENERAL
A transfer charge of $25 will be imposed for the thirteenth and each
subsequent request you make to transfer Contract Value from one or more
subaccounts to the fixed account (or to one or more subaccounts) during a single
Contract year before the annuity start date.
Before the annuity start date, you may make one transfer each
Contract year during the 30 days following a Contract anniversary from the fixed
account to one or more of the subaccounts.
You may not make transfers from any subaccount to the fixed account
during the six months following any transfer you make from the fixed account to
any subaccount, or after you begin to receive annuity payments.
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<PAGE> 39
PAYMENT DEFERRAL
We have the right to defer payment of any surrender, partial
withdrawal, or transfer from the fixed account for up to six months from the
date we receive your written request at the Service Center. During such
deferral, we will continue to credit interest at the current guaranteed interest
rate for the fixed account.
INVESTMENT PERFORMANCE OF THE SUBACCOUNTS
================================================================================
The Company periodically advertises performance of the subaccounts
and portfolios. We may disclose at least four different kinds of performance.
First, we may disclose standard total return figures for the
subaccounts that reflect the deduction of all charges under the Contract,
including the mortality and expense charge, any charge for optional benefits,
the annual records maintenance charge and the surrender charge. These figures
are based on the actual historical performance of the subaccounts since their
inception.
Second, we may disclose total return figures on a non-standard basis.
This means that the data may be presented for different time periods and
different dollar amounts. The data will not be reduced by the surrender charge
or by charges for optional benefits currently assessed under the Contract. We
will only disclose non-standard performance data if it is accompanied by
standard total return data.
Third, we may present historic performance data for the portfolios
since their inception reduced by all fees and charges under the Contract,
although we may not deduct the surrender charge or the charges for optional
benefits in some cases. Such adjusted historic performance includes data that
precedes the inception dates of the subaccounts, but is designed to show the
performance that would have resulted if the Contract had been available during
that time.
Fourth, we may include in our 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.
In advertising and sales literature (including illustrations), the
performance of each subaccount may be compared with the performance of other
variable annuity issuers in general or to the performance of particular types of
variable annuities investing in mutual funds, or portfolios of mutual funds with
investment objectives similar to the subaccount. Lipper Analytical Services,
Inc. ("Lipper"), CDA Investment Technologies ("CDA"), Variable Annuity Research
Data Service ("VARDS") and Morningstar, Inc. ("Morningstar") are independent
services which monitor and rank the performance of variable annuity issuers in
each of the major categories of investment objectives on an industry-wide basis.
Lipper's and Morningstar's rankings include variable life insurance
issuers as well as variable annuity issuers. VARDS rankings compare only
variable annuity issuers. The performance analyses prepared by Lipper, CDA,
VARDS and Morningstar rank or illustrate such issuers on the basis of total
return, assuming reinvestment of distributions, but do not take sales charges,
redemption fees, or certain expense deductions at the variable account level
into consideration. In addition, VARDS prepares risk rankings, which consider
the effects of market risk on total return performance. This type of ranking
provides data as to which funds provide the highest total return within various
categories of funds defined by the degree of risk inherent in their investment
objectives.
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<PAGE> 40
Advertising and sales literature may also compare the performance of
each subaccount to the Standard & Poor's Index of 500 Common Stocks, a widely
used measure of stock performance. This unmanaged index assumes the reinvestment
of dividends but does not reflect any "deduction" for the expense of operating
or managing an investment portfolio. Other independent ranking services and
indices may also be used as a source of performance comparison.
We may also report other information including the effect of
systematic withdrawals, systematic investments and tax-deferred compounding on a
subaccount's investment returns, or returns in general. We may illustrate this
information by using tables, graphs, or charts. All income and capital gains
derived from subaccount investments are reinvested and can lead to substantial
long-term accumulation of assets, provided that the subaccount investment
experience is positive.
VOTING RIGHTS
================================================================================
We are the legal owner of the portfolio shares held in the
subaccounts. However, when a portfolio is required to solicit the votes of its
shareholders through the use of proxies, we believe that current law requires us
to solicit you and other contract owners as to how we should vote the portfolio
shares held in the subaccounts. If we determine that we no longer are required
to solicit your votes, we may vote the shares in our own right.
When we solicit your vote, the number of votes you have will be
calculated separately for each subaccount in which you have an investment. The
number of your votes is based on the net asset value per share of the portfolio
in which the subaccount invests. It may include fractional shares. Before the
annuity start date, you hold a voting interest in each subaccount to which the
Contract Value is allocated. If you have a voting interest in a subaccount, you
will receive proxy materials and reports relating to any meeting of shareholders
of the portfolio in which that subaccount invests.
If we do not receive timely voting instructions for portfolio shares,
we will vote those shares in proportion to the voting instructions we receive.
Instructions we receive to abstain on any item will reduce the total number of
votes being cast on a matter. For further details as to how we determine the
number of your votes, see the SAI.
FEDERAL TAX MATTERS
================================================================================
The following discussion is general in nature and is not intended as
tax advice. Each person concerned should consult a competent tax advisor. No
attempt is made to consider any applicable state tax or other tax laws.
We believe that our Contracts will qualify as annuity contracts for
federal income tax purposes and the following discussion assumes that they will
so qualify. Further information on the tax status of the Contract can be found
in the SAI under the heading "Tax Status of the Contracts."
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<PAGE> 41
When you invest in an annuity contract, you usually do not pay taxes
on your investment gains until you withdraw the money -- generally for
retirement purposes. In this way, annuity contracts have been recognized by the
tax authorities as a legitimate means of deferring tax on investment income.
If you invest in a variable annuity as part of an IRA, Roth IRA or
SIMPLE IRA program, your Contract is called a Qualified Contract. If your
annuity is independent of any formal retirement or pension plan, it is called a
Non-Qualified Contract.
We believe that if you are a natural person you will not be taxed on
increases in the Contract Value of your Contract until a distribution occurs or
until annuity payments begin. (The agreement to assign or pledge any portion of
a Contract's accumulation value and, in the case of a qualified Contract
described below, any portion of an interest in the qualified plan, generally
will be treated as a distribution.) When annuity payments begin, you will be
taxed only on the investment gains you have earned and not on the payments you
made to purchase the Contract. Generally, withdrawals from your annuity should
only be made once the annuitant reaches age 59 1/2, dies or is disabled,
otherwise a tax penalty of ten percent of the amount treated as income could be
applied against any amounts included in income, in addition to the tax otherwise
imposed on such amount.
TAXATION OF NON-QUALIFIED CONTRACTS
NON-NATURAL PERSON
If a non-natural person owns a non-qualified annuity contract, the
owner generally must include in income any increase in the excess of the
accumulation value over the investment in the contract (generally, the premiums
or other consideration paid for the contract) during the taxable year. There are
some exceptions to this rule and a prospective owner that is not a natural
person should discuss these with a tax adviser.
The following discussion generally applies to Contracts owned by
natural persons.
WITHDRAWALS
When a withdrawal from a Non-Qualified Contract occurs, the amount
received will be treated as ordinary income subject to tax up to an amount equal
to the excess (if any) of the accumulation value immediately before the
distribution over the Owner's investment in the contract (generally, the
premiums or other consideration paid for the Contract, reduced by any amount
previously distributed from the Contract that was not subject to tax) at that
time. In the case of a surrender under a Non-Qualified Contract, the amount
received generally will be taxable only to the extent it exceeds the Owner's
investment in the contract.
PENALTY TAX ON CERTAIN WITHDRAWALS
In the case of a distribution from a Contract, there may be imposed a
federal tax penalty equal to ten percent of the amount treated as income. In
general, however, there is no penalty on distributions:
- made on or after the taxpayer reaches age 59 1/2;
- made on or after the death of an Owner;
- attributable to the taxpayer's becoming disabled; or
- made as part of a series of substantially equal periodic
payments for the life (or life expectancy) of the taxpayer.
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<PAGE> 42
Other exceptions may apply under certain circumstances and special
rules may apply in connection with the exceptions enumerated above. Additional
exceptions apply to distributions from a Qualified Contract. You should consult
a tax adviser with regard to exceptions from the penalty tax.
ANNUITY PAYMENTS
Although tax consequences may vary depending on the annuity option
elected under an annuity contract, a portion of each annuity payment is
generally not taxed and the remainder is taxed as ordinary income. The
non-taxable portion of an annuity payment is generally determined in a manner
that is designed to allow you to recover your investment in the contract ratably
on a tax-free basis over the expected stream of annuity payments, as determined
when annuity payments start. Once your investment in the contract has been fully
recovered, however, the full amount of each annuity payment is subject to tax as
ordinary income.
TAXATION OF DEATH BENEFIT PROCEEDS
Amounts may be distributed from a Contract because of your death or
the death of the annuitant. Generally, such amounts are includible in the income
of the recipient as follows: (i) if distributed in a lump sum, they are taxed in
the same manner as a surrender of the Contract, or (ii) if distributed under an
annuity option, they are taxed in the same way as annuity payments.
TRANSFERS, ASSIGNMENTS OR EXCHANGES OF A CONTRACT
A transfer or assignment of ownership of a Contract, the designation
of an annuitant, the selection of certain annuity start dates, or the exchange
of a Contract may result in certain tax consequences to you that are not
discussed herein. An Owner contemplating any such transfer, assignment or
exchange, should consult a tax advisor as to the tax consequences.
WITHHOLDING
Annuity distributions are generally subject to withholding for the
recipient's federal income tax liability. Recipients can generally elect,
however, not to have tax withheld from distributions.
MULTIPLE CONTRACTS
All annuity contracts that are issued by us (or our affiliates) to
the same Owner during any calendar year are treated as one annuity contract for
purposes of determining the amount includible in such Owner's income when a
taxable distribution occurs.
FURTHER INFORMATION
We believe that the contracts will qualify as annuity contracts for
Federal income tax purposes and the above discussion is based on that
assumption. Further details can be found in the Statement of Additional
Information under the heading "Tax Status of the Contracts."
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<PAGE> 43
TAXATION OF QUALIFIED CONTRACTS
The tax rules that apply to Qualified Contracts vary according to the
type of retirement plan and the terms and conditions of the plan. Your rights
under a Qualified Contract may be subject to the terms of the retirement plan
itself, regardless of the terms of the Qualified Contract. Adverse tax
consequences may result if you do not ensure that contributions, distributions
and other transactions with respect to the Contract comply with the law.
INDIVIDUAL RETIREMENT ANNUITIES (IRAs), as defined in Section 408 of
the Tax Code, permit individuals to make annual contributions of up to the
lesser of $2,000 or 100% of the compensation included in your income for the
year. The contributions may be deductible in whole or in part, depending on the
individual's income. Distributions from certain pension plans may be "rolled
over" into an IRA on a tax-deferred basis without regard to these limits.
Amounts in the IRA (other than nondeductible contributions) are taxed when
distributed from the IRA. A 10% penalty tax generally applies to distributions
made before age 59 1/2, unless certain exceptions apply. The Internal Revenue
Service has not reviewed the Contract for qualification as an IRA, and has not
addressed in a ruling of general applicability whether a death benefit provision
such as the optional Guaranteed Minimum Death Benefit provision in the Contract
comports with IRA qualification requirements.
SIMPLE IRAS, permit certain small employers to establish SIMPLE plans
as provided by Section 408(p) of the Code, under which employees may elect to
defer to a SIMPLE IRA a percentage of compensation up to $6,000 (as increased
for cost of living adjustments). The sponsoring employer is required to make
matching or non-elective contributions on behalf of the employees. Distributions
from SIMPLE IRAs are subject to the same restrictions that apply to IRA
distributions and are taxed as ordinary income. Subject to certain exceptions,
premature distributions prior to age 59 1/2 are subject to a 10% penalty tax,
which is increased to 25% if the distribution occurs within the first two years
after the commencement of the employee's participation in the plan.
ROTH IRAS, as described in Tax Code section 408A, permit certain
eligible individuals to make non-deductible contributions to a Roth IRA in cash
or as a rollover or transfer from another Roth IRA or other IRA. A rollover from
or conversion of an IRA to a Roth IRA is generally subject to tax and other
special rules apply. The Owner may wish to consult a tax adviser before
combining any converted amounts with any other Roth IRA contributions, including
any other conversion amounts from other tax years. Distributions from a Roth IRA
generally are not taxed, except that, once aggregate distributions exceed
contributions to the Roth IRA, income tax and a 10% penalty tax may apply to
distributions made (1) before age 59 1/2 (subject to certain exceptions) or (2)
during the five taxable years starting with the year in which the first
contribution is made to any Roth IRA. A 10% penalty tax may apply to amounts
attributable to a conversion from an IRA if they are distributed during the five
taxable years beginning with the year in which the conversion was made.
OTHER TAX ISSUES
Qualified Contracts have minimum distribution rules that govern the
timing and amount of distributions. You should consult a tax advisor for more
information about these distribution rules.
Distributions from Qualified Contracts generally are subject to
withholding for the Owner's federal income tax liability. The withholding rate
varies according to the type of distribution and the Owner's tax status. The
Owner will be provided the opportunity to elect to not have tax withheld from
distributions.
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<PAGE> 44
OUR INCOME TAXES
At the present time, we make no charge for any federal, state or
local taxes (other than the charge for state and local premium taxes) that we
incur that may be attributable to the investment divisions (that is, the
subaccounts) of the variable account or to the Contracts. We do have the right
in the future to make additional charges for any such tax or other economic
burden resulting from the application of the tax laws that we determine is
attributable to the investment divisions of the variable account or the
Contracts.
Under current laws in several states, we may incur state and local
taxes (in addition to premium taxes). These taxes are not now significant and we
are not currently charging for them. If they increase, we may deduct charges for
such taxes.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is
always the possibility that the tax treatment of the Contracts could change by
legislation or otherwise. Consult a tax adviser with respect to legislative
developments and their effect on the Contract.
We have the right to modify the Contract in response to legislative
changes that could otherwise diminish the favorable tax treatment that annuity
contract owners currently receive. We make no guarantee regarding the tax status
of any contract and do not intend the above discussion as tax advice.
OTHER INFORMATION
================================================================================
PAYMENTS
During the pay-in period, we will usually pay you any surrender,
partial withdrawal, or death benefit payment within seven days after we receive
all the required information. The required information includes your written
request, any information or documentation we reasonably need to process your
request, and, in the case of a death benefit, receipt and filing of due proof of
death.
However, we may suspend or postpone payments during any period when:
- the New York Stock Exchange is closed, other than customary
weekend and holiday closings;
- trading on the New York Stock Exchange is restricted as
determined by the SEC;
- the SEC determines that an emergency exists that would make the
disposal of securities held in the variable account or the
determination of the value of the variable account's net assets
not reasonably practicable; or
- the SEC permits, by order, the suspension or postponement of
payments for your protection.
If a recent check or draft has been submitted, we have the right to
delay payment until we have assured ourselves that the check or draft has been
honored.
We have the right to defer payment for a surrender, partial
withdrawal, death benefit or transfer from the fixed account for up to six
months from the date we receive your written request.
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<PAGE> 45
MODIFICATION
Upon notice to you, we may modify the Contract to:
- permit the Contract or the variable account to comply with any
applicable law or regulation issued by a government agency;
- assure continued qualification of the Contract under the Tax
Code or other federal or state laws relating to retirement
annuities or variable annuity contracts;
- reflect a change in the operation of the variable account; or
- provide additional investment options.
In the event of most such modifications, we will make appropriate
endorsement to the Contract.
DISTRIBUTION OF THE CONTRACTS
The Contracts are sold by licensed insurance agents in those states
where the Contract may be lawfully sold. The agents are also registered
representatives of registered broker-dealers that are members of the National
Association of Securities Dealers, Inc. ("NASD"). Sales commissions will be paid
to broker-dealers who sell the Contracts. Sales commissions may vary, but are
expected not to exceed 7.0% of premium payments. The broker-dealers are expected
to compensate sales representatives in varying amounts from these commissions.
In addition, we may pay additional promotional incentives, in the form of cash
or other compensation, such as production incentive bonuses, agent's insurance
and pension benefits, and agency expense allowances. These distribution expenses
do not result in any additional charges against the Contracts other than those
described under "Fees and Charges."
Investors Brokerage Services, Inc. ("IBS"), 1 Kemper Drive, Long
Grove, Illinois 60049-0001, acts as the principal underwriter for the Contracts.
IBS is affiliated with Farmers. IBS is registered with the SEC under the
Securities Exchange Act of 1934 as a broker-dealer, and is a member of the NASD.
LEGAL PROCEEDINGS
Like other life insurance companies, we are involved in lawsuits. These
actions are in various stages of discovery and development, and some seek
punitive as well as compensatory damages. While it is not possible to predict
the outcome of such matters with absolute certainty, we believe that the
ultimate disposition of these proceedings should not have a material adverse
effect on the financial position of Farmers New World Life Insurance Company. In
addition, we are, from time to time, involved as a party to various governmental
and administrative proceedings. There are no pending or threatened lawsuits that
will materially impact the variable account.
REPORTS TO OWNERS
Before the annuity start date, we will mail a report to you at least
annually at your last known address of record. The report will state the
Contract Value (including the Contract Value in each subaccount and the fixed
account) of the Contract, and any further information required by any applicable
law or regulation.
INQUIRIES
Inquiries regarding your Contract may be made by calling or writing
to us at the Service Center.
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<PAGE> 46
YEAR 2000 MATTERS
In 1995, Farmers Group, Inc. ("FGI"), our parent company, initiated
the "Year 2000 Project" in order to prepare for the information processing
problems presented by the approach of the new millennium. Significant efforts
have been expended to gain a complete understanding of Year 2000 implications
and to develop a strategy to make FGI's and our systems Year 2000 compliant. As
of September 30, 1999, FGI has completed its remediation plans related to the
Year 2000 Project. Although these plans have been completed, FGI continues to
monitor its preparedness for unforeseen Year 2000 issues that may impact FGI.
The costs associated with the Year 2000 Project were expensed as incurred, and,
through September 30, 1999, the cumulative costs totaled $23.0 million, of which
$2.0 million was allocated to Farmers. Total costs of the project are expected
to be approximately $23.3 million, of which approximately $2.2 million is
expected to be allocated to Farmers.
To remedy the Year 2000 issue, FGI devised a three-phase plan:
Phase I - "Awareness and Initial Impact Assessment". This phase was
completed in May 1996. During this phase, Year 2000 "Impact Assessment" was
performed using a mainframe analysis tool to determine which areas were at risk.
Phase II - "Year 2000 Workpackage and Development Blueprint Project".
This phase was completed in November 1996 and consisted of creating a
comprehensive master plan which included establishing and prioritizing clusters
(groups of similar computer programs) and agreeing upon a definition of what
would be acceptable Year 2000 compliance. In addition, a timeframe was
established for the conversion, compliance testing and the implementation of
Year 2000 compliant programs into production.
Phase III - "Year 2000 Conversion and Implementation". This phase was
completed in July 1999. During this phase the process of converting,
implementing and testing these Year 2000 conversion programs were performed.
In addition, FGI evaluated its relationships with third parties with
which FGI has a direct and material relationship to determine whether they are
Year 2000 compliant. FGI sent out questionnaires and warranty requests to all
third party vendors and performed compliance testing with all vendors to
validate the vendors' claims regarding Year 2000 compliance. All compliance
testing related to third party relationships has been completed. However, it is
not possible to state with certainty that the operations of third parties will
not be materially impacted in turn by other parties with whom they themselves
have a relationship.
The Year 2000 issue may not only affect FGI's information technology
("IT") systems but also its non-IT systems. FGI has assessed the readiness of
its non-IT systems and, in the event of an interruption of these systems,
contingency plans have been established such that no major disruptions will
occur.
FGI's Year 2000 contingency plans were completed in June 1999. These
plans include contingency measures which will be followed in the event that
certain key vendors experience difficulties related to the Year 2000 issue. As
new information becomes available, the contingency plans will be reviewed to
determine whether they are adequate or if they need to be further enhanced. The
operations of FGI are such that in the event all electronic communications are
down, FGI could continue to operate until an alternative communication source is
acquired.
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<PAGE> 47
FINANCIAL STATEMENTS
Our audited balance sheets as of December 31, 1998 and 1997, and the
related statements of income, shareholder's equity, and cash flows for each of
the three years in the period ended December 31, 1998, as well as the Report of
the Independent Auditors, are contained in the SAI. Our financial statements
should be considered only as bearing on our ability to meet our obligations
under the Contracts. They should not be considered as bearing on the investment
performance of the assets held in the variable account.
There are no financial statements for the variable account, because
it has not commenced operations as of the date of this prospectus.
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<PAGE> 48
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS
Page
ADDITIONAL CONTRACT PROVISIONS............................................... 1
The Contract...................................................... 1
Incontestability.................................................. 1
Incorrect Age or Sex.............................................. 1
Nonparticipation.................................................. 1
Waiver of Surrender Charge Riders................................. 1
Tax Status of the Contracts....................................... 2
CALCULATION OF SUBACCOUNT AND ADJUSTED HISTORIC PORTFOLIO PERFORMANCE DATA... 3
Money Market Subaccount Yields.................................... 3
Other Subaccount Yields........................................... 4
Average Annual Total Returns for the Subaccounts.................. 5
Non-Standard Subaccount Total Returns............................. 6
Adjusted Historic Portfolio Performance Data...................... 6
Effect of the Records Maintenance Charge on Performance Data...... 7
NET INVESTMENT FACTOR........................................................ 7
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS............................ 8
Resolving Material Conflicts...................................... 8
VOTING RIGHTS................................................................ 8
SAFEKEEPING OF VARIABLE ACCOUNT ASSETS....................................... 9
DISTRIBUTION OF THE CONTRACTS................................................ 9
LEGAL MATTERS................................................................ 9
EXPERTS...................................................................... 9
OTHER INFORMATION............................................................ 10
FINANCIAL STATEMENTS......................................................... 10
45
<PAGE> 49
STATEMENT OF ADDITIONAL INFORMATION
for the
FARMERS VARIABLE ANNUITY
Individual Flexible Premium Variable Annuity Contract
-----------------------------------------------------
Issued Through
FARMERS ANNUITY SEPARATE ACCOUNT A
Offered by
FARMERS NEW WORLD LIFE INSURANCE COMPANY
3003 - 77th Avenue, S.E.
Mercer Island, Washington 98040
(206) 232-8400
SERVICE CENTER:
P.O. Box 724208
Atlanta, Georgia 31139
1-877-376-8008 (toll free)
This Statement of Additional Information expands upon subjects discussed in
the current Prospectus for the Farmers Variable Annuity individual flexible
premium variable annuity contract offered by Farmers New World Life Insurance
Company. You may obtain a copy of the Prospectus for the Contract dated January
12, 2000 by calling 1-877-376-8008 or by writing to our SERVICE CENTER at P.O.
Box 724208, Atlanta, Georgia 31139.
This Statement incorporates terms used in the current Prospectus for each
Contract.
================================================================================
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE READ
ONLY IN CONJUNCTION WITH THE PROSPECTUSES FOR YOUR CONTRACT AND THE PORTFOLIOS.
The date of this Statement of Additional Information is January 12, 2000.
<PAGE> 50
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ADDITIONAL CONTRACT PROVISIONS........................................................................1
The Contract..............................................................................1
Incontestability..........................................................................1
Incorrect Age or Sex......................................................................1
Nonparticipation..........................................................................1
Waiver of Surrender Charge Riders.........................................................1
Tax Status of the Contracts...............................................................2
CALCULATION OF SUBACCOUNT AND ADJUSTED HISTORIC PORTFOLIO PERFORMANCE DATA............................3
Money Market Subaccount Yields............................................................3
Other Subaccount Yields...................................................................4
Average Annual Total Returns for the Subaccounts..........................................5
Non-Standard Subaccount Total Returns.....................................................6
Adjusted Historic Portfolio Performance Data..............................................6
Effect of the Records Maintenance Charge on Performance Data..............................7
NET INVESTMENT FACTOR.................................................................................7
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS.....................................................8
Resolving Material Conflicts..............................................................8
VOTING RIGHTS.........................................................................................8
SAFEKEEPING OF VARIABLE ACCOUNT ASSETS................................................................9
DISTRIBUTION OF THE CONTRACTS.........................................................................9
LEGAL MATTERS.........................................................................................9
EXPERTS...............................................................................................9
OTHER INFORMATION....................................................................................10
FINANCIAL STATEMENTS.................................................................................10
</TABLE>
i
<PAGE> 51
ADDITIONAL CONTRACT PROVISIONS
THE CONTRACT
The entire contract consists of the Contract, the signed application
attached at issue, any attached amendments and supplements to the application,
and any attached riders and endorsements. In the absence of fraud, we consider
all statements in the application to be representations and not warranties. We
will not use any statement to contest a claim unless that statement is in an
attached application or in an amendment or supplement to the application
attached to the Contract.
Any change in the Contract or waiver of its provisions must be in writing
and signed by one of our officers. No other person -- no agent or registered
representative -- has authority to change or waive any provision of the
Contract.
Upon notice to you, we may modify the Contract if necessary to:
- permit the Contract or the variable account to comply with any
applicable law or regulation that a governmental agency issues; or
- assure continued qualification of the Contract under the Tax Code or
other federal or state laws relating to retirement annuities
or variable annuity contracts; or
- effect a change in the operation of the variable account or to provide
additional investment options.
In the event of such modifications, we will make the appropriate
endorsement to the Contract.
INCONTESTABILITY
We will not contest the Contract after the issue date.
INCORRECT AGE OR SEX
We may require proof of age, sex, and right to payments before making any
life annuity payments. If the age or sex (if applicable) of the annuitant has
been stated incorrectly, then we will determine the annuity start date and the
amount of the annuity payments by using the correct age and sex. After the
annuity start date, any adjustment for underpayment will be paid immediately.
Any adjustment for overpayment will be deducted from future payments. We will
make adjustments for overpayments or underpayments with interest at the rate
then in use to determine the rate of payments.
NONPARTICIPATION
The Contract does not participate in our surplus earnings or profits. We
will not pay dividends on the Contract.
WAIVER OF SURRENDER CHARGE RIDERS
On issuance we will automatically issue riders that waive surrender charges
if:
- the annuitant is confined in a hospital or skilled health care
facility continuously for at least 90 days and remains confined at the
time of the surrender request; or
1
<PAGE> 52
- the annuitant is diagnosed with a terminal illness after the Contract
is issued and is expected to live for 12 months or less, and the
aggregate maximum withdrawal is $250,000, or less.
There is no additional charge for the issuance of the waiver of surrender
charge riders. These riders may not be available in all states.
TAX STATUS OF THE CONTRACTS
Tax law imposes several requirements that variable annuities must satisfy
in order to receive the tax treatment normally accorded to annuity contracts.
Diversification Requirements. The Tax Code requires that the investments of
each investment division of the variable account underlying the Contracts be
"adequately diversified" in order for the Contracts to be treated as annuity
contracts for Federal income tax purposes. It is intended that each investment
division, through the fund in which it invests, will satisfy these
diversification requirements.
Owner Control. In certain circumstances, owners of variable annuity
contracts have been considered for Federal income tax purposes to be the owners
of the assets of the variable account supporting their contracts due to their
ability to exercise investment control over those assets. When this is the case,
the contract owners have been currently taxed on income and gains attributable
to the variable account assets. There is little guidance in this area, and some
features of our Contracts, such as the flexibility of an owner to allocate
premiums and transfer amounts among the investment divisions of the variable
account, have not been explicitly addressed in published rulings. While we
believe that the Contracts do not give Owners investment control over variable
account assets, we reserve the right to modify the Contracts as necessary to
prevent an Owner from being treated as the Owner of the variable account assets
supporting the Contract.
Required Distributions. In order to be treated as an annuity contract for
Federal income tax purposes, section 72(s) of the Tax Code requires any
Non-Qualified Contract to contain certain provisions specifying how your
interest in the Contract will be distributed in the event of the death of a
holder of the Contract. Specifically, section 72(s) requires that (a) if any
Owner dies on or after the annuity starting date, but prior to the time the
entire interest in the Contract has been distributed, the entire interest in the
Contract will be distributed at least as rapidly as under the method of
distribution being used as of the date of such Owner's death; and (b) if any
owner dies prior to the annuity start date, the entire interest in the Contract
will be distributed within five years after the date of such Owner's death.
These requirements will be considered satisfied as to any portion of a Owner's
interest which is payable to or for the benefit of a designated beneficiary and
which is distributed over the life of such designated beneficiary or over a
period not extending beyond the life expectancy of that beneficiary, provided
that such distributions begin within one year of the Owner's death. The
designated beneficiary refers to a natural person designated by the owner as a
beneficiary and to whom ownership of the Contract passes by reason of death.
However, if the designated beneficiary is the surviving spouse of the deceased
Owner, the Contract may be continued with the surviving spouse as the new owner.
The Non-Qualified Contracts contain provisions that are intended to comply
with these Tax Code requirements, although no regulations interpreting these
requirements have yet been issued. We intend to review such provisions and
modify them if necessary to assure that they comply with the applicable
requirements when such requirements are clarified by regulation or otherwise.
2
<PAGE> 53
Other rules may apply to Qualified Contracts.
CALCULATION OF SUBACCOUNT AND ADJUSTED HISTORIC PORTFOLIO PERFORMANCE DATA
We may advertise and disclose historic performance data for the
subaccounts, including yields, standard annual total returns, and nonstandard
measures of performance of the subaccounts. Such performance data will be
computed, or accompanied by performance data computed, in accordance with the
SEC defined standards.
MONEY MARKET SUBACCOUNT YIELDS
Advertisements and sales literature may quote the current annualized yield
of the Money Market subaccount for a seven-day period in a manner that does not
take into consideration any realized or unrealized gains or losses, or income
other than investment income, on shares of the Money Market Portfolio.
We compute this current annualized yield by determining the net change (not
including any realized gains and losses on the sale of securities, unrealized
appreciation and depreciation, and income other than investment income) at the
end of the seven-day period in the value of a hypothetical subaccount under a
Contract having a balance of one unit of the Money Market subaccount at the
beginning of the period. We divide that net change in subaccount value by the
value of the hypothetical subaccount at the beginning of the period to determine
the base period return. Then we annualize this quotient on a 365-day basis. The
net change in account value reflects (i) net income from the Money Market
portfolio in which the hypothetical subaccount invests; and (ii) charges and
deductions imposed under the Contract that are attributable to the hypothetical
subaccount.
These charges and deductions include the per unit charges for the records
maintenance charge, the mortality and expense risk charge for the standard death
benefit (and the mortality and expense risk charge for the Guaranteed Minimum
Death Benefit and the Guaranteed Retirement Income Benefit) and the asset-based
administration charge. For purposes of calculating current yields for a
Contract, we use an average per unit records maintenance charge based on the $30
records maintenance charge.
We calculate the current yield by the following formula:
Current Yield = ((NCS - ES)/UV) X (365/7)
Where:
NCS = the net change in the value of the Money Market Portfolio (not
including any realized gains or losses on the sale of securities,
unrealized appreciation and depreciation, and income other than
investment income) for the seven-day period attributable to a
hypothetical subaccount having a balance of one subaccount unit.
ES = per unit charges deducted from the hypothetical subaccount for
the seven-day period.
3
<PAGE> 54
UV = the unit value for the first day of the seven-day period.
We may also disclose the effective yield of the Money Market subaccount for
the same seven-day period, determined on a compounded basis. We calculate the
effective yield by compounding the unannualized base period return by adding one
to the base return, raising the sum to a power equal to 365 divided by 7, and
subtracting one from the result.
(365/7)
Effective Yield = (1 + ((NCS-ES)/UV)) - 1
Where:
NCS = the net change in the value of the Money Market portfolio (not
including any realized gains or losses on the sale of securities,
unrealized appreciation and depreciation, and income other than
investment income) for the seven-day period attributable to a
hypothetical subaccount having a balance of one subaccount unit.
ES = per unit charges deducted from the hypothetical subaccount for
the seven-day period.
UV = the unit value for the first day of the seven-day period.
The Money Market subaccount yield is lower than the Money Market
portfolio's yield because of the charges and deductions that the Contract
imposes.
The current and effective yields on amounts held in the Money Market
subaccount normally fluctuate on a daily basis. THEREFORE, THE DISCLOSED YIELD
FOR ANY GIVEN PAST PERIOD IS NOT AN INDICATION OR REPRESENTATION OF FUTURE
YIELDS OR RATES OF RETURN. The Money Market subaccount's actual yield is
affected by changes in interest rates on money market securities, average
portfolio maturity of the Money Market Portfolio, the types and quality of
securities held by the Money Market Portfolio and that Portfolio's operating
expenses. We may also present yields on amounts held in the Money Market
subaccount for periods other than a seven-day period.
Yield calculations do not take into account the Surrender Charge that we
assess on certain withdrawals of Contract Value.
OTHER SUBACCOUNT YIELDS
Sales literature or advertisements may quote the current annualized yield
of one or more of the subaccounts (except the Money Market subaccount) under the
Contract for 30-day or one-month periods. The annualized yield of a subaccount
refers to income that the subaccount generates during a 30-day or one-month
period and is assumed to be generated during each period over a 12-month period.
We compute the annualized 30-day yield by:
1. dividing the net investment income of the portfolio attributable
to the subaccount units, less subaccount expenses attributable to
the Contract for the period, by the maximum offering price per
unit on the last day of the period;
2. multiplying the result by the daily average number of units
outstanding for the period;
3. compounding that yield for a 6-month period; and
4. multiplying the result by 2.
4
<PAGE> 55
Expenses of the subaccount include the records maintenance charge, the
asset-based administration charge and the mortality and expense risk charge for
the standard death benefit (and the mortality and expense risk charge for the
Guaranteed Minimum Death Benefit and the Guaranteed Retirement Income Benefit).
The yield calculation assumes that we deduct the records maintenance charge at
the end of each Contract Year. For purposes of calculating the 30-day or
one-month yield, we divide an average records maintenance charge collected by
the average Contract Value in the subaccount to determine the amount of the
charge attributable to the subaccount for the 30-day or one-month period. We
calculate the 30-day or one-month yield by the following formula:
(6)
Yield = 2 X (((NI - ES)/(U X UV)) + 1) - 1)
Where:
NI = net income of the portfolio for the 30-day or one-month period
attributable to the subaccount's units.
ES = charges deducted from the subaccount for the 30-day or one-month
period.
U = the average number of units outstanding.
UV = the unit value at the close of the last day in the 30-day or
one-month period.
The yield for the subaccount is lower than the yield for the corresponding
portfolio because of the charges and deductions that the Contract imposes.
The yield on the amounts held in the subaccounts normally fluctuates over
time. THEREFORE, THE DISCLOSED YIELD FOR ANY GIVEN PAST PERIOD IS NOT AN
INDICATION OR REPRESENTATION OF FUTURE YIELDS OR RATES OF RETURN. The types and
quality of securities that a portfolio holds and its operating expenses affect
the corresponding subaccount's actual yield.
Yield calculations do not take into account the Surrender Charge that we
assess on certain withdrawals of Contract Value.
AVERAGE ANNUAL TOTAL RETURNS FOR THE SUBACCOUNTS
Sales literature or advertisements may quote average annual total returns
for one or more of the subaccounts for various periods of time. If we advertise
total return for the Money Market Subaccount, then those advertisements and
sales literature will include a statement that yield more closely reflects
current earnings than total return.
When a subaccount has been in operation for 1, 5, and 10 years,
respectively, we will provide the average annual total return for these periods.
We may also disclose average annual total returns for other periods of time.
Standard average annual total returns represent the average annual
compounded rates of return that would equate an initial investment of $1,000
under a Contract to the redemption value of that investment as of the last day
of each of the periods. Each period's ending date for which we provide total
return quotations will be for the most recent calendar quarter-end practicable,
considering the type of the communication and the media through which it is
communicated.
We calculate the standard average annual total returns using subaccount
unit values that we calculate on each valuation day based on the performance of
the subaccount's underlying portfolio, the
5
<PAGE> 56
deductions for the mortality and expense risk charge for the standard death
benefit (and in some cases, the mortality and expense risk charge for the
Guaranteed Minimum Death Benefit and the Guaranteed Retirement Income Benefit),
the asset-based administration charge and the records maintenance charge. The
calculation assumes that we deduct a records maintenance charge of $30.00 at the
end of each Contract year. For purposes of calculating average annual total
return, we use an average per-dollar per-day records maintenance charge
attributable to the hypothetical subaccount for the period. The calculation also
assumes total surrender of the Contract at the end of the period for the return
quotation and will take into account the Surrender Charge applicable to the
Contract that we assess on surrenders of Contract Value.
We calculate the standard total return by the following formula:
(1/N)
TR = ((ERV/P) ) - 1
Where:
TR = the average annual total return net of subaccount recurring
charges.
ERV = the ending redeemable value (minus any applicable Surrender
Charge) of the hypothetical subaccount at the end of the period.
P = a hypothetical initial payment of $1,000.
N = the number of years in the period.
NON-STANDARD SUBACCOUNT TOTAL RETURNS
Sales literature or advertisements may quote average annual total returns
for the subaccounts that do not reflect any Surrender Charges. We calculate such
nonstandard total returns in exactly the same way as the average annual total
returns described above, except that we replace the ending redeemable value of
the hypothetical subaccount for the period with an ending value for the period
that does not take into account any Surrender Charges.
We may disclose cumulative total returns in conjunction with the standard
formats described above. We calculate the cumulative total returns using the
following formula:
CTR = (ERV/P) - 1
Where:
CTR = the cumulative total return net of subaccount recurring charges
for the period.
ERV = the ending redeemable value of the hypothetical investment at the
end of the period.
P = a hypothetical single payment of $1,000.
ADJUSTED HISTORIC PORTFOLIO PERFORMANCE DATA
Sales literature or advertisements may quote adjusted yields and total
returns for the portfolios since their inception reduced by some or all of the
fees and charges under the Contract. Such adjusted historic portfolio
performance may include data that precedes the inception dates of the
subaccounts. This data is designed to show the performance that would have
resulted if the Contract had been in existence during that time.
6
<PAGE> 57
We will disclose nonstandard performance data only if we disclose the
standard performance data for the required periods.
EFFECT OF THE RECORDS MAINTENANCE CHARGE ON PERFORMANCE DATA
The Contract provides for the deduction of a $30.00 records maintenance
charge at the end of each Contract year from the fixed account and the
subaccounts. We will waive this charge if your Contract Value is $50,000 or more
on the date the charge is assessed. We deduct the charge from each account based
on the proportion that the value of each such account bears to the total
Contract Value. For purposes of reflecting the records maintenance charge in
yield and total return quotations, we convert the records maintenance charge
into a per-dollar per-day charge based on the average Contract Value in the
subaccount for all Contracts on the last day of the period for which quotations
are provided. Then, we adjust the per-dollar per-day average charge to reflect
the basis upon which we calculate the particular quotation.
NET INVESTMENT FACTOR
The net investment factor is an index that measures the investment
performance of a subaccount from one valuation day to the next. Each subaccount
has its own net investment factor, which may be greater or less than one. The
net investment factor for each subaccount equals the fraction obtained by
dividing (X) by (Y) minus (Z) where:
(X) is the net result of:
1. the net asset value per portfolio share held in the subaccount at
the end of the current valuation day; plus
2. the per share amount of any dividend or capital gain distribution
on portfolio shares held in the subaccount during the current
valuation day; less
3. the per share amount of any capital loss, realized or unrealized,
on portfolio shares held in the subaccount during the current
valuation day.
(Y) equals the net asset value per portfolio share held in the subaccount
as of the end of the immediately preceding valuation day.
(Z) equals charges and fees deducted from the subaccount. These consist of:
1. the amount charged for mortality and expense risk on that
valuation day;
2. the amount charged for administrative costs on that valuation
day; and
3. the amount charged for any other charges, fees and expenses for
riders, endorsements, or supplemental benefits attached to your
Contract, including the Guaranteed Minimum Death Benefit Rider
and the Guaranteed Retirement Income Benefit Rider.
7
<PAGE> 58
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
In the event of any substitution or change of the underlying portfolios, we
may (by appropriate endorsement, if necessary) change the Contract to reflect
the substitution or change. If we consider it to be in the best interest of
Owners and Annuitants, and subject to any approvals that may be required under
applicable law, the variable account may be operated as a management investment
company under the 1940 Act, it may be deregistered under that Act if
registration is no longer required, it may be combined with other of our
variable accounts, or the assets may be transferred to another variable account.
In addition, we may, when permitted by law, restrict or eliminate any voting
rights you have under the Contracts.
RESOLVING MATERIAL CONFLICTS
The funds currently sell shares to registered separate accounts of
insurance companies other than us to support other variable annuity contracts
and variable life insurance contracts. In addition, our other separate accounts
and separate accounts of other affiliated life insurance companies may purchase
some of the funds to support other variable annuity or variable life insurance
contracts. Moreover, qualified retirement plans may purchase shares of some of
the funds. As a result, there is a possibility that an irreconcilable material
conflict may arise between your interests as a Contract owner and the interests
of persons owning other contracts investing in the same funds. There is also the
possibility that a material conflict may arise between the interests of owners
generally, or certain classes of owners, and participating qualified retirement
plans or participants in such retirement plans.
We currently do not foresee any disadvantages to you that would arise from
the sale of fund shares to support variable life insurance contracts or variable
annuity contracts of other companies or to qualified retirement plans. However,
the management of each fund will monitor events related to its fund in order to
identify any material irreconcilable conflicts that might possibly arise as a
result of such fund offering its shares to support both variable life insurance
contracts and variable annuity contracts, or support the variable life insurance
contracts and/or variable annuity contracts issued by various affiliated and
unaffiliated insurance companies. In addition, the management of the funds will
monitor the funds in order to identify any material irreconcilable conflicts
that might possibly arise as a result of the sale of its shares to qualified
retirement plans, if applicable.
In the event of such a conflict, the management of the appropriate fund
would determine what action, if any, should be taken in response to the
conflict. In addition, if we believe that the response of the funds to any such
conflict does not sufficiently protect you, then we will take our own
appropriate action, including withdrawing the variable account's investment in
such funds, as appropriate.
VOTING RIGHTS
We determine the number of votes you may cast by dividing your Contract
Value in a subaccount by the net asset value per share of the portfolio in which
that subaccount invests. We determine the number of votes available to you as of
the same date that the fund establishes for determining shareholders eligible to
vote at the relevant meeting of the portfolio's shareholders. We will solicit
voting instructions by sending you written materials before the fund's meeting
in accordance with the fund's procedures.
8
<PAGE> 59
SAFEKEEPING OF VARIABLE ACCOUNT ASSETS
We hold the title to the assets of the variable account. The assets are
kept physically segregated and held separate and apart from our general account
assets and from the assets in any other separate account. We maintain records of
all purchases and redemptions of portfolio shares held by each of the
subaccounts. Additional protection for the assets of the variable account is
provided by a blanket fidelity bond issued by Federal Insurance Company to
Farmers Group, Inc., providing aggregate coverage of $30,000,000 (subject to a
$500,000 deductible) for all officers and employees of Farmers Group, Inc.
DISTRIBUTION OF THE CONTRACTS
Investors Brokerage Services, Inc. ("IBS"), 1 Kemper Drive, Long Grove,
Illinois 60049-0001, acts as principal underwriter for the Contracts. IBS is
registered with the SEC under the Securities Exchange Act of 1934 as a
broker-dealer and is a member of the National Association of Securities Dealers,
Inc.
We offer the Contracts to the public on a continuous basis. We anticipate
continuing to offer the Contracts, but we reserve the right to discontinue the
offering. Agents who sell the Contracts are licensed by applicable state
insurance authorities to sell the Contracts and are registered representatives
of IBS or broker-dealers having selling agreements with IBS or broker-dealers
having selling agreements with such broker-dealers.
We may pay sales commissions to broker-dealers up to an amount equal to 7%
of the Premiums paid under a Contract. We expect the broker-dealers to
compensate sales representatives in varying amounts from these commissions. We
may pay other distribution expenses such as production incentive bonuses, an
agent's insurance and pension benefits, and agency expense allowances. These
distribution expenses do not result in any additional charges against the
Contracts other than those described in the prospectus under "Fees and Charges."
LEGAL MATTERS
M. Douglas Close, Vice President and General Counsel, Farmers New World
Life Insurance Company, has passed upon all matters relating to Washington law
pertaining to the Contracts, including the validity of the Contracts and the
Company's authority to issue the Contracts. Sutherland Asbill & Brennan LLP of
Washington, D.C. has provided advice on certain matters relating to the federal
securities laws.
EXPERTS
Deloitte & Touche LLP, 1700 Fifth Avenue, Suite 4500, Seattle, Washington
98104-5044, independent auditors, have audited the balance sheets of Farmers New
World Life Insurance Company as of December 31, 1998 and 1997 and the related
statements of income, comprehensive income, stockholder's equity and cash flows
for each of the three years in the period ended December 31, 1998, appearing in
this Statement of Additional Information and Registration Statement. These are
set forth in their reports thereon appearing elsewhere herein, and are included
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing. There are no financial statements available for the
Variable Account, because the Variable Account has not commenced operations as
of the date of this statement of additional information.
9
<PAGE> 60
OTHER INFORMATION
We have filed a registration statement with the SEC under the Securities
Act of 1933, as amended, with respect to the Contracts discussed in this
Statement of Additional Information. The Statement of Additional Information
does not include all of the information set forth in the registration statement,
amendments and exhibits. Statements contained in this Statement of Additional
Information concerning the content of the Contracts and other legal instruments
are intended to be summaries. For a complete statement of the terms of these
documents, you should refer to the instruments filed with the SEC.
FINANCIAL STATEMENTS
10
<PAGE> 61
FARMERS NEW WORLD LIFE
INSURANCE COMPANY
(a wholly owned subsidiary of Farmers Group, Inc.)
================================================================================
FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1998, 1997, 1996 AND
INDEPENDENT AUDITORS' REPORT
<PAGE> 62
INDEPENDENT AUDITORS' REPORT
Board of Directors
Farmers New World Life Insurance Company
Mercer Island, Washington
We have audited the accompanying balance sheets of Farmers New World Life
Insurance Company (a wholly owned subsidiary of Farmers Group, Inc.) (the
Company) as of December 31, 1998 and 1997, and the related statements of income,
comprehensive income, stockholder's equity, and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of Farmers New World Life Insurance 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.
February 3, 1999
Seattle, Washington
Deloitte & Touche LLP
<PAGE> 63
FARMERS NEW WORLD LIFE INSURANCE COMPANY
- -----------------------------------------
(a wholly owned subsidiary of Farmers Group, Inc.)
BALANCE SHEETS (in thousands)
DECEMBER 31, 1998 AND 1997
================================================================================
<TABLE>
<CAPTION>
ASSETS 1998 1997
- ------ ---- ----
<S> <C> <C>
INVESTMENTS (Notes 2 and 3):
Fixed maturities available-for-sale:
Bonds, at fair value (cost: $3,510,846 and $3,298,645) $3,674,223 $3,444,333
Redeemable preferred stocks, at fair value
(cost: $82,090 and $109,781) 86,662 110,815
Equity securities available-for-sale:
Non-redeemable preferred stocks, at fair value
(cost: $1,153 and $1,153) 1,270 1,227
Common stocks, at fair value (cost: $41 and $-0-) 3 120
Mortgage loans on real estate, net of allowance for losses 52,879 89,903
Investment real estate, net of accumulated depreciation
and allowance for losses (Note 1) 59,047 67,214
Surplus note of the Exchanges (Note 4) 119,000 0
Policy loans 185,211 165,894
Joint ventures 8,456 11,566
S&P 500 call options, at fair value (cost: $11,305 and $3,450) 14,817 3,299
----------- ----------
Total investments 4,201,568 3,894,371
CASH AND CASH EQUIVALENTS 63,784 9,980
ACCRUED INVESTMENT INCOME 53,263 51,971
OTHER RECEIVABLES 17,558 18,937
INCOME TAXES RECOVERABLE 0 23,366
DEFERRED POLICY ACQUISITION COSTS (Note 1) 467,248 439,579
VALUE OF BUSINESS ACQUIRED (Notes 1 & 5) 334,442 359,146
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $7,411 and $6,824 14,379 14,401
OTHER ASSETS:
Securities lending collateral (Note 6) 461,801 544,580
Other assets 2,298 2,380
----------- ----------
464,099 546,960
----------- ----------
TOTAL $5,616,341 $5,358,711
=========== ==========
</TABLE>
<PAGE> 64
================================================================================
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY 1998 1997
- ------------------------------------ ---- ----
<S> <C> <C>
POLICY LIABILITIES AND ACCRUALS:
Future policy benefits $ 3,184,248 $ 3,010,162
Policy claims (Note 7) 26,177 22,156
----------- -----------
3,210,425 3,032,318
OTHER POLICYHOLDER FUNDS & DIVIDENDS 57,358 60,072
ACCRUED EXPENSES AND OTHER LIABILITIES:
Securities lending liability (Note 6) 461,801 544,580
Death benefit liability 37,024 29,087
Other liabilities 63,736 60,047
----------- -----------
562,561 633,714
INCOME TAXES (Note 8):
Current 4,180 0
Deferred 161,184 153,006
----------- -----------
165,364 153,006
----------- -----------
Total liabilities 3,995,708 3,879,110
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDER'S EQUITY:
Common stock, $1 par value - Authorized, 25,000,000 shares;
issued and outstanding, 6,600,000 shares 6,600 6,600
Additional paid-in capital 994,246 994,246
Accumulated other comprehensive income, net of deferred
taxes of $41,518 and $35,902 77,105 66,675
Retained earnings (Note 10) 542,682 412,080
----------- -----------
Total stockholder's equity 1,620,633 1,479,601
----------- -----------
TOTAL $ 5,616,341 $ 5,358,711
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
----
See notes to financial statements. 2
<PAGE> 65
FARMERS NEW WORLD LIFE INSURANCE COMPANY
- -----------------------------------------
(a wholly owned subsidiary of Farmers Group, Inc.)
STATEMENTS OF INCOME (in thousands)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
================================================================================
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Net premiums earned (Note 11) $ 173,229 $ 151,134 $ 136,142
Universal life and annuity policy charges 206,393 200,857 188,355
Net investment income (Note 2) 293,770 275,760 257,852
Net realized investment gains (losses) (Note 2) (13,473) 10,063 30,182
Other income 707 784 764
--------- --------- ---------
Total revenues 660,626 638,598 613,295
BENEFITS AND EXPENSES:
Death and other benefits (Note 7) 133,984 112,370 110,853
Future policy benefits 23,711 15,713 11,383
Interest credited to policyholders 150,618 146,376 138,033
Underwriting, acquisition and insurance expenses:
Amortization of deferred policy acquisition costs 68,997 70,855 62,178
Amortization of value of business acquired 23,897 21,305 20,411
Commissions 18,972 17,344 18,317
General insurance expenses and taxes 38,659 42,986 38,699
--------- --------- ---------
Total benefits and expenses 458,838 426,949 399,874
--------- --------- ---------
Income before provision for income taxes 201,788 211,649 213,421
--------- --------- ---------
PROVISION (BENEFIT) FOR INCOME TAXES (Note 8):
Current 70,690 80,889 82,556
Deferred 496 (7,027) (11,417)
--------- --------- ---------
Total provision for income taxes 71,186 73,862 71,139
--------- --------- ---------
NET INCOME $ 130,602 $ 137,787 $ 142,282
========= ========= =========
</TABLE>
----
See notes to financial statements. 3
<PAGE> 66
FARMERS NEW WORLD LIFE INSURANCE COMPANY
- -----------------------------------------
(a wholly owned subsidiary of Farmers Group, Inc.)
STATEMENTS OF COMPREHENSIVE INCOME (in thousands)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
================================================================================
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET INCOME $ 130,602 $ 137,787 $ 142,282
--------- --------- ---------
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized holding gains (losses) on securities:
Unrealized holding gains (losses) on securities,
net of tax of $(7,921) 14,711
Less: reclassification adjustment for gains
included in net income, net of tax of $(357) (662)
--------- --------- ---------
Net unrealized holding gains on securities, net of tax of
$7,565, $28,968, and $13,218 14,049 53,797 24,547
Change in effect of unrealized gains (losses) on other
insurance accounts, net of tax of $(1,949), $(7,387), and $3,664 (3,619) (13,718) 6,805
--------- --------- ---------
COMPREHENSIVE INCOME $ 141,032 $ 177,866 $ 173,634
========= ========= =========
</TABLE>
----
See notes to financial statements. 4
<PAGE> 67
FARMERS NEW WORLD LIFE INSURANCE COMPANY
- -----------------------------------------
(a wholly owned subsidiary of Farmers Group, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY (in thousands)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
================================================================================
<TABLE>
<CAPTION>
Accumulated
Additional other Total stock-
Common paid-in comprehensive Retained holder's
stock capital income earnings equity
------- ------- ------ -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 $ 6,600 $ 994,246 $ (4,756) $ 506,927 $ 1,503,017
Dividend in-kind to stockholder $(374,916) (374,916)
Net income 142,282 142,282
Change in other comprehensive
income, net of tax of $16,882 31,352 31,352
------- --------- -------- ---------- -----------
BALANCE, December 31, 1996 6,600 994,246 26,596 274,293 1,301,735
Net income 137,787 137,787
Change in other comprehensive
income, net of tax of $21,581 40,079 40,079
------- --------- -------- ---------- -----------
BALANCE, December 31, 1997 6,600 994,246 66,675 412,080 1,479,601
Net income 130,602 130,602
Unrealized gains on available for
sale investments arising during
the period, net of tax of $7,921 14,711 14,711
Reclassification adjustment for
gains included in net income,
net of tax of $(356) (662) (662)
Change in effect of unrealized
losses on other insurance
accounts, net of tax of $(1,949) (3,619) (3,619)
------- --------- -------- ---------- -----------
BALANCE, December 31, 1998 $ 6,600 $ 994,246 $ 77,105 $ 542,682 $ 1,620,633
======= ========= ======== ========== ===========
</TABLE>
----
See notes to financial statements. 5
<PAGE> 68
FARMERS NEW WORLD LIFE INSURANCE COMPANY
- ----------------------------------------
(a wholly owned subsidiary of Farmers Group, Inc.)
STATEMENTS OF CASH FLOWS (in thousands)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
================================================================================
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 130,602 $ 137,787 $ 142,282
Adjustments to reconcile net income to net cash provided by
operating activities:
Universal life type contracts:
Deposits received 299,007 295,747 288,745
Withdrawals (241,765) (232,728) (210,182)
Interest credited 67,585 62,247 56,216
Realized investment losses (gains) 13,473 (10,063) (30,182)
Amortization of deferred policy acquisition costs and VOBA 92,894 92,160 82,589
Deferred income tax expense (benefit) 496 (7,027) (11,417)
Depreciation 2,544 2,462 1,970
Cash provided (used) by changes in operating assets and liabilities:
Federal income taxes payable 4,180 (22,822) 21,016
Deferred policy acquisition costs (93,047) (70,913) (112,362)
Life insurance policy liabilities 27,802 14,588 13,521
Other policyholder funds (2,714) (2,894) (3,097)
Other 31,758 (37,212) (262)
-------- -------- --------
Net cash provided by operating activities 332,815 221,332 238,837
INVESTING ACTIVITIES:
Purchase of bonds and stocks available-for-sale (660,918) (735,325) (948,418)
Proceeds from sales or maturities of bonds and stocks available-for-sale 458,364 450,760 549,600
Purchase of mortgage loans 0 (32,623) 0
Mortgage loan collections 36,839 30,448 18,287
Purchase of investment real estate (908) (23,568) (168)
Proceeds from sale of investments in real estate 8,557 2,327 5,349
Increase in policy loans (19,317) (17,836) (18,592)
Purchase of property and equipment (572) (1,685) (72)
Purchase of surplus note of the Exchanges (119,000) 0 0
Other (7,535) (10,782) 139
-------- -------- --------
Net cash used by investing activities (304,490) (338,284) (393,875)
FINANCING ACTIVITIES:
Annuity contracts:
Deposits received 144,793 131,651 141,046
Withdrawals (202,244) (161,150) (121,836)
Interest credited 82,930 80,280 78,177
-------- -------- --------
Net cash provided by financing activities 25,479 50,781 97,387
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS,
carried forward 53,804 (66,171) (57,651)
</TABLE>
----
See notes to financial statements. 6
<PAGE> 69
FARMERS NEW WORLD LIFE INSURANCE COMPANY
- -----------------------------------------
(a wholly owned subsidiary of Farmers Group, Inc.)
STATEMENTS OF CASH FLOWS (in thousands) (continued)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
================================================================================
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS,
brought forward $ 53,804 $ (66,171) $ (57,651)
CASH AND CASH EQUIVALENTS:
Beginning of year 9,980 76,151 133,802
-------- --------- ---------
End of year $ 63,784 $ 9,980 $ 76,151
======== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during year for:
Income taxes $ 41,250 $ 122,787 $ 83,538
Interest paid 945 0 1,777
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Dividend in-kind to stockholder 0 0 374,916
</TABLE>
----
See notes to financial statements. 7
<PAGE> 70
FARMERS NEW WORLD LIFE INSURANCE COMPANY
- ----------------------------------------
(a wholly owned subsidiary of Farmers Group, Inc.)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997, and 1996
===============================================================================
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY: The accompanying financial statements include the accounts
of Farmers New World Life Insurance Company ("the Company"), a wholly
owned subsidiary of Farmers Group, Inc. ("FGI") whose ultimate parent is
Zurich Financial Services Group. FGI, a management services insurance
holding company, is attorney in fact for three inter-insurance exchanges
and their subsidiaries ("the Exchanges") and owns a reinsurance company
Farmers Re.
In December 1988, BATUS Inc. ("BATUS"), a subsidiary of B.A.T Industries
p.l.c. ("B.A.T"), acquired 100% ownership of FGI and its subsidiaries for
$5,212,619,000 in cash, including related expenses, through its wholly
owned subsidiary BATUS Financial Services. Immediately thereafter, BATUS
Financial Services was merged into FGI. The acquisition was accounted for
as a purchase and, accordingly, the acquired assets and liabilities were
recorded in the Company's balance sheet based on their estimated fair
values at December 31, 1988.
At the time of purchase, a portion of the purchase price, $530,076,000,
was assigned to the Company's "Value of Business Acquired" ("VOBA"),
which represented an actuarial determination of the expected profits from
the business in force at the date of B.A.T's acquisition of FGI. The
amount so assigned is being amortized over its actuarially determined
useful life with the unamortized amount included in "Value of Business
Acquired" in the accompanying balance sheets.
On December 22, 1997, a definitive agreement was reached to merge B.A.T's
Financial Services Businesses, which included FGI and its subsidiaries,
with Zurich Insurance Company ("Zurich"). In June 1998, the merger was
approved by the shareholders of B.A.T and Zurich. In September 1998, this
merger was completed and the businesses of Zurich and B.A.T's Financial
Services Businesses were transferred to Zurich Financial Services
("ZFS"), a new Swiss company with headquarters in Zurich. This merger was
accounted for by ZFS as a pooling of interests and, therefore, no
purchase accounting adjustments were made to FGI's assets and
liabilities.
NATURE OF OPERATIONS: The Company concentrates its activities in the
individual life insurance and annuity markets. Principal lines of
business include traditional and universal whole life products as well as
term life insurance. Additionally, the Company issues flexible and single
premium deferred annuities, single premium immediate annuities and equity
indexed annuities.
FGI, its subsidiaries including the Company and the Exchanges operate
using common trade names and logos, including Farmers Insurance Group of
Companies(R), Farmers Insurance Group(R) and Farmers(R), and distribute
their respective insurance products through a common network of direct
writing agents and district managers. As of December 31, 1998, this
network consisted of 14,743 direct writing agents and 499 district
managers, each of whom is an independent contractor. The size, efficiency
and scope of this agency force have made it a major factor in FGI, the
Exchanges and the Company's growth. Each agent is required to first
submit business to the insurers in the Farmers Insurance Group of
Companies within the classes and lines of business written by such
insurers. To the extent that such insurers decline such business or do
not underwrite it, the agents may offer business to other insurers.
----
8
<PAGE> 71
The Company is currently licensed in 37 states, primarily in the western,
midwestern, and southwestern regions of the United States.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
REVENUE RECOGNITION: Premiums for traditional life and accident and health
insurance products are recognized as revenues when due from policyholders.
Policy withdrawal, maintenance, and other charges are recognized as income when
earned.
Revenues associated with universal life products consist of policy charges for
the cost of insurance, policy administration fees, surrender charges, and
investment income on assets allocated to support policyholder account balances
on deposit. Revenues for deferred annuity products consist of surrender
charges, investment income on assets allocated to support policyholder account
balances on deposit and administrative charges for equity-indexed annuities.
Consideration received for interest-sensitive insurance and annuity products is
recorded as a liability when received.
INVESTMENTS: The Company has classified all investments in fixed maturities and
equity securities as available-for-sale and reports them on the balance sheet
at fair value with unrealized gains and losses, net of tax, excluded from
earnings and reported as a component of stockholder's equity in accordance with
the application of Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities". As of
December 31, 1998 and 1997, there were no securities designated as
held-to-maturity or trading.
Realized gains (losses) on sales, redemptions and write-downs of investments
are determined based on the net book value of individual investments.
Investment real estate consists of properties purchased for investment and
properties acquired through foreclosure, and is carried at the lower of cost
less accumulated depreciation of $12,995,000 in 1998 and $12,862,000 in 1997,
or market. Depreciation is provided on a straight-line basis over 45 years, the
estimated life of the properties.
The Company follows the provisions of SFAS No. 118 (amending SFAS No. 114),
"Accounting by Creditors for Impairment of a Loan", which requires that
impaired loans be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral, if the loan is collateral dependent. No material amounts were
recognized in the periods presented.
DEFERRED POLICY ACQUISITION COSTS: The costs of acquiring new traditional life
business, principally first year commissions and other expenses for policy
underwriting and issuance (which are primarily related to and vary with the
production of new business), are deferred and amortized proportionately over the
estimated period during which the related premiums will be recognized as income,
based on the same assumptions that are used for computing the liabilities for
future policy benefits.
----
9
<PAGE> 72
Policy acquisition costs for universal life and deferred annuity products are
deferred and amortized in relation to the present value of expected gross
profits on the policies. Deferred Policy Acquisition Costs ("DAC") include
amounts associated with the unrealized gains and losses recorded as a component
of stockholder's equity. Accordingly, DAC is increased or decreased for the
impact of estimated future gross profits as if net unrealized gains or losses
on securities had been realized at the balance sheet date. Net unrealized gains
or losses on securities within stockholder's equity also reflect this impact.
VALUE OF BUSINESS ACQUIRED: The present value of the business acquired in
the 1998 merger with B.A.T is being amortized as the life insurance business
in-force at the time of the merger declines.
PROPERTY AND EQUIPMENT: Depreciation of property and equipment has been
provided using the straight-line method with estimated useful lives of ten to
45 years for buildings and improvements and five years for furniture and
equipment.
LONG-LIVED ASSETS: In accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
long-lived assets and certain identifiable intangibles to be held and used are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. No such
impairments have occurred.
POLICY LIABILITIES AND ACCRUALS: Liabilities for future policy benefits for
traditional life policies are computed principally on a net level premium
method reflecting estimated future investment yields, mortality, morbidity, and
withdrawals. Interest rate assumptions range from 2.25% to 9.00% depending upon
the year of issue. Mortality is calculated principally on select and ultimate
tables in common usage in the industry, modified for Company experience, and
withdrawals are estimated based primarily on experience.
Liabilities for future policy benefits on universal life and deferred annuity
products are determined under the retrospective deposit method and consist
principally of policy values before any surrender charges.
Unpaid policy claims include claims in course of settlement and a provision for
claims incurred but not reported, based on past experience.
LIFE SALES MANAGEMENT SERVICES: Fees charged to the Company by FGI for sales
and marketing services were $21,187,000 in 1998, $20,862,000 in 1997, and
$20,885,000 in 1996, and are accounted for as deferred policy acquisition costs
except for advertising expenses, which are expensed as incurred, of $1,336,000,
$1,590,000, and $1,512,000, in 1998, 1997, and 1996, respectively.
STATEMENT OF CASH FLOWS: For purposes of reporting cash flows, the Company
considers short-term investments purchased with an initial maturity of three
months or less to be cash equivalents.
ACCOUNTING PRONOUNCEMENTS: In March 1998, The American Institute of Certified
Public Accountants ("AICPA") issued Statement of Position ("SOP") No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". This SOP, effective for financial statements issued for periods
beginning after December 15, 1998, applies to all nongovernmental entities and
establishes the rules for capitalizing or expensing internally developed
software.
----
10
<PAGE> 73
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". This Statement, effective for fiscal periods beginning after
December 15, 1997 established standards for reporting and displaying
comprehensive income and its components. This Statement mandated that
all items that are required to be recognized under accounting standards,
as components of comprehensive income be reported in a financial
statement with the same prominence as other financial statements. As a
result of adopting this Statement, the components of comprehensive
income are now stated in the statements of comprehensive income.
In 1998, the FASB released SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement, effective for
financial statements of public and nonpublic entities issued for fiscal
year beginning after June 15, 1999 and deferred until June 15, 2000 by
SFAS No. 137, "Deferral of Effective Date of FASB Statement No. 133",
establishes accounting and reporting standards for derivative
instruments (including certain derivative instruments embedded in other
contracts) and for hedging activities. SFAS No. 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at market
value. The Company does not expect the adoption of this Statement to
have a material impact on its financial statements.
NOTE 2: INVESTMENTS
INVESTMENT INCOME: The sources of investment income for the years ended
December 31 are (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Bonds $257,422 $236,405 $212,944
Common and preferred stocks 8,123 11,747 20,874
Other 41,883 40,370 33,990
-------- -------- --------
Gross investment income 307,428 288,522 267,808
Less investment expenses 13,658 12,762 9,956
-------- -------- --------
Net investment income $293,770 $275,760 $257,852
======== ======== ========
</TABLE>
The Company's investment expenses included approximately $1,143,000,
$2,063,000 and $1,931,000 in 1998, 1997, and 1996, respectively, that were paid
to its parent company, FGI.
In June 1998, the Company's investment management was transferred to Scudder
Kemper Investments ("SKI"), an indirect subsidiary of Zurich Financial
Services. In 1998, approximately $704,000 of the Company's investment expenses
were paid to SKI.
----
11
<PAGE> 74
REALIZED GAINS (LOSSES): Realized investment gains (losses) for the years ended
December 31 are (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Bonds $(15,126) $ 8,613 $ (660)
Redeemable preferred stocks 25 1,304 1,674
Non-redeemable preferred stocks 0 71 (3,063)
Common stocks 117 61 32,373
Investment real estate 1,393 3 1,008
Other 118 11 (1,150)
-------- ------- -------
$(13,473) $10,063 $30,182
======== ======= =======
</TABLE>
Properties acquired through foreclosure were $25,677,000 and $28,050,000 at
December 31, 1998 and 1997. During 1998, the Company recorded $768,000 in
realized gains and $587,000 in realized losses on the sale of real estate
acquired through foreclosure. During 1997, the Company recorded no gain or loss
on the sale of real estate acquired through foreclosure. In 1996, the Company
recorded a loss of $179,000 and a gain of $1,000,000 on the sale of real estate
acquired through foreclosure. The Company maintained an allowance for losses of
$3,263,000 and $4,295,000 at December 31, 1998 and 1997, respectively.
UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIES: Gross unrealized gains
(losses), pertaining to non-redeemable preferred stocks and common stocks
stated at fair value as of December 31 are (in thousands):
<TABLE>
<CAPTION>
Gains Losses Net
<S> <C> <C> <C>
1998:
Non-redeemable preferred stocks $ 165 $ (48) $ 117
Common stocks 0 (38) (38)
----------- ----------- ----------
$ 165 $ (86) 79
=========== ===========
Less deferred federal income taxes (28)
----------
$ 51
==========
1997:
Non-redeemable preferred stocks $ 111 $ (37) $ 74
Common stocks 120 0 120
----------- ----------- ----------
$ 231 $ (37) 194
=========== ===========
Less deferred federal income taxes (68)
----------
$ 126
==========
</TABLE>
----
12
<PAGE> 75
UNREALIZED GAINS (LOSSES) ON FIXED MATURITIES: Amortized cost, gross unrealized
gains, gross unrealized losses, and estimated fair values of fixed maturities
as of December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
1998:
Fixed maturities available-for-sale:
U.S. Treasury securities and
obligations of U.S.
Government corporations
and agencies $ 408,742 $ 42,515 $ (124) $ 451,133
Obligations of states and
political subdivisions 334,242 25,784 (5) 360,021
Debt securities issued by foreign
governments 88,672 2,410 (15,032) 76,050
Corporate securities 914,465 58,161 (5,938) 966,688
Mortgage-backed securities 1,764,725 65,546 (9,940) 1,820,331
------------ ----------- ------------ ------------
3,510,846 194,416 (31,039) 3,674,223
Redeemable preferred stock 82,090 4,747 (175) 86,662
------------ ----------- ------------ ------------
$ 3,592,936 $ 199,163 $ (31,214) $ 3,760,885
============ =========== ============ ============
1997:
Fixed maturities available-for-sale:
U.S. Treasury securities and
obligations of U.S.
Government corporations
and agencies $ 393,538 $ 24,174 $ (104) $ 417,608
Obligations of states and
political subdivisions 270,502 13,346 (58) 283,790
Debt securities issued by foreign
governments 136,127 15,686 (5,113) 146,700
Corporate securities 842,838 48,429 (1,578) 889,689
Mortgage-backed securities 1,655,640 56,282 (5,376) 1,706,546
------------ ----------- ------------ ------------
3,298,645 157,917 (12,229) 3,444,333
Redeemable preferred stock 109,781 3,589 (2,555) 110,815
------------ ----------- ------------ ------------
$ 3,408,426 $ 161,506 $ (14,784) $ 3,555,148
============ =========== ============ ============
</TABLE>
----
13
<PAGE> 76
MATURITIES OF FIXED MATURITIES: The amortized cost and estimated fair value of
fixed maturities classified as available-for-sale by contractual maturity at
December 31 are shown below (in thousands). Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
<S> <C> <C>
1998:
Fixed maturities available-for-sale:
Due in one year or less $ 23,445 $ 23,813
Due after one year through five years 502,229 516,838
Due after five years through ten years 540,794 569,572
Due after ten years 679,653 743,669
---------- ----------
1,746,121 1,853,892
Mortgage-backed securities 1,764,725 1,820,331
Preferred stock with characteristics of debt securities 82,090 86,662
---------- ----------
$3,592,936 $3,760,885
========== ==========
</TABLE>
In determining estimated fair value, management obtains quotations from
independent sources who make markets in similar securities, generally
broker/dealers. Unless representative trades of securities actually occurred at
December 31, 1998, these quotes are generally estimates of market value based
on an evaluation of appropriate factors such as trading in similar securities,
yields, credit quality, coupon rate, maturity, type of issue, and other market
data.
SALE AND IMPAIRMENT OF DEBT SECURITIES: The gross gains (losses) and proceeds
from sales and writedowns of debt securities are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross Write-
gains losses Proceeds downs
----- ------ -------- -----
<S> <C> <C> <C> <C>
1998 $11,742 $ (468) $458,247 $ (26,356)
1997 12,111 (2,194) 446,202 0
1996 10,891 (7,377) 376,989 (2,500)
</TABLE>
----
14
<PAGE> 77
NOTE 3: FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments disclosed have been
determined using available market information and appropriate valuation
methodologies. However, considerable judgment is required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates
presented may not be indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies could have a significant effect on the estimated fair
value amounts. The carrying value and estimated fair value of assets and
liabilities as of December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
Estimated
Carrying fair
value value
----- -----
<S> <C> <C>
1998:
Assets:
Cash and cash equivalents $ 63,784 $ 63,784
Fixed maturities available-for-sale 3,760,885 3,760,885
Non-redeemable preferred stock available-for-sale 1,270 1,270
Common stock available-for-sale 3 3
Mortgage loans 52,879 67,615
Surplus note of the Exchanges 119,000 119,000
Policy loans 185,211 192,620
Joint ventures 8,456 6,668
S&P call options 14,817 14,817
Liabilities:
Future Policy Benefits-deferred annuities 1,492,032 1,433,494
1997:
Assets:
Cash and cash equivalents $ 9,980 $ 9,980
Fixed maturities available-for-sale 3,555,148 3,555,148
Non-redeemable preferred stock available-for-sale 1,227 1,227
Common stock available-for-sale 120 120
Mortgage loans 89,903 105,235
Policy loans 165,894 172,115
Joint ventures 11,566 10,037
S&P call options 3,299 3,299
Liabilities:
Future Policy Benefits-deferred annuities 1,473,578 1,403,455
</TABLE>
The following methods and assumptions were used to estimate the fair value of
financial instruments as of December 31, 1998 and 1997:
CASH AND CASH EQUIVALENTS: The carrying amounts of these items are a
reasonable estimate of their fair value.
FIXED MATURITIES, REDEEMABLE AND NON-REDEEMABLE PREFERRED STOCK, AND
COMMON STOCK: The estimated fair values of bonds, redeemable and
non-redeemable preferred stock and common stock are based upon quoted
market prices, dealer quotes, and prices obtained from independent
pricing services.
----
15
<PAGE> 78
MORTGAGE LOANS: The estimated fair value of the mortgage loan portfolio
is determined by discounting the estimated future cash flows, using a
year-end market rate which is applicable to the yield, credit quality
and average maturity of the composite portfolio.
POLICY LOANS: The estimated fair value of policy loans is determined by
discounting future cash flows using the current rates at which similar
loans would be made.
SURPLUS NOTE OF THE EXCHANGES: The carrying amount of this item is a
reasonable estimate of its fair market value.
JOINT VENTURES: The estimated fair value of the joint ventures is based
on quoted market prices, current appraisals, and independent pricing
services.
S&P 500 CALL OPTIONS: S&P 500 call options are purchased as hedges
against the interest liabilities generated on the equity-indexed annuity
products. These call options are carried at an estimated fair value
based on stock price, strike price, time to expiration, interest rates,
dividends, and volatility per the methodology of the Black-Scholes
Option Pricing Formula.
FUTURE POLICY BENEFITS-DEFERRED ANNUITIES: The estimated fair values are
based on the currently available cash surrender value, similar to the
demand deposit liabilities of depository institutions.
NOTE 4: SURPLUS NOTE
In September 1998, the Company purchased a $119,000,000 surplus note of the
Exchanges which bears interest at 6.10% annually and is payable in full no
later than October 2001. Conditions governing repayment of the amount are
outlined in the surplus note. Generally, repayment may be made only when the
surplus balance of the issuer reaches a specified level, and then, only after
approval is granted by the issuer's governing Board and the appropriate
Department of Insurance.
The Company recognized interest income of $2,279,000 on this note during 1998.
NOTE 5: VALUE OF BUSINESS ACQUIRED
The changes in VOBA were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 359,146 $ 383,951 $408,362
Amortization related to operations (53,598) (56,371) (57,156)
Interest accrued 29,701 35,066 36,745
Amortization related to net unrealized losses (807) (3,500) (4,000)
--------- --------- --------
Balance, end of year $ 334,442 $ 359,146 $383,951
========= ========= ========
</TABLE>
Based on current conditions and assumptions as to future events, the Company
expects to amortize the December 31, 1998 balance as follows: approximately
3.5% in 1999, 3.7% in 2000, 3.9% in 2001, 4.2% in 2002 and 4.3% in 2003. The
discount rate used to determine the amortization rate of the VOBA ranged from
12.5% to 7.5%.
----
16
<PAGE> 79
NOTE 6: SECURITY LENDING ARRANGEMENT
The Company has entered into a security lending agreement with a financial
institution. The agreement authorizes the institution to lend securities held in
the Company's portfolio to a list of authorized borrowers. Concurrent with
delivery of the securities, the borrower provides the Company with cash
collateral equal to at least 102% of the market value of domestic securities and
105% of the market value of international securities subject to the loan.
The securities are marked-to-market on a daily basis and the collateral is
adjusted on the next business day. The collateral is invested in highly liquid,
fixed income assets with a maturity of less than one year. Income earned from
the security lending arrangement is shared 40% and 60% between the institution
and the Company, respectively. Income earned by the Company was $899,000,
$816,000 and $383,000 in 1998, 1997, and 1996, respectively. As of December 31,
1998 and 1997, the Company recorded $461,801,000 and $544,580,000, respectively,
of collateral in other assets and in accrued expenses and other liabilities.
NOTE 7: LIABILITY FOR POLICY CLAIMS
Activity in the liability for policy claims is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance, January 1 $ 22,156 $ 24,487
Less reinsurance recoverables 270 141
-------- --------
Net balance, January 1 21,886 24,346
-------- --------
Incurred related to:
Current year 121,015 106,659
Prior years 12,968 5,698
-------- --------
Total incurred 133,983 112,357
Paid related to:
Current year 105,251 85,899
Prior years 24,457 28,919
-------- --------
Total paid 129,708 114,818
-------- --------
Net balance, December 31 26,161 21,885
Plus reinsurance recoverables 16 271
-------- --------
Balance, December 31 $ 26,177 $ 22,156
======== ========
</TABLE>
The liability for policy claims at December 31, 1998 and 1997, was increased by
$12,968,000 and $5,698,000, respectively, due to higher than anticipated
severity of previously reported claims. The liability for policy claims is
primarily comprised of pending claims known to the Company at the end of the
year as well as estimates for incurred claims not yet reported to the Company.
Because estimates are utilized in the statement process, incurred expenses
exist in the current year that relate to insured events from the prior year.
The Company monitors these levels to ensure that current liabilities adequately
reflect proper levels for both current and prior periods.
----
17
<PAGE> 80
NOTE 8: INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes
under FASB Statement No. 109, "Accounting for Income Taxes". Under this method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years the differences are expected
to be recovered or settled.
The components of the provision for income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $69,601 $79,185 $82,556
State 1,089 1,704 0
------- ------- -------
70,690 80,889 82,556
Deferred:
Federal 496 (7,027) (11,417)
------- ------- -------
Total $71,186 $73,862 $71,139
======= ======= =======
</TABLE>
The table below reconciles the provision for income taxes computed at the U.S.
statutory income tax rate of 35% to the Company's provision for income taxes
(in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected tax expense $70,626 $73,938 $74,697
Tax-exempt investment income (1,705) (2,233) (3,356)
State taxes 1,089 1,704 0
Other, net 1,176 453 (202)
------- ------- -------
Reported income tax expense $71,186 $73,862 $71,139
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax liabilities as of December 31, 1998 and 1997,
are presented in the following table (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred policy acquisition costs $ 251,626 $ 243,270
Future policy benefits (135,215) (145,733)
Investments (10,842) (5,323)
Valuation of investments in securities 41,518 43,320
Depreciable assets 5,520 6,425
Other 8,577 11,047
--------- ---------
Net deferred tax liabilities $ 161,184 $ 153,006
========= =========
</TABLE>
There was no valuation allowance recognized for deferred tax assets in 1998 or
1997.
----
18
<PAGE> 81
NOTE 9: COMMITMENTS AND CONTINGENCIES
The Company is a party to lawsuits arising from its normal business activities.
These actions are in various stages of discovery and development, and some seek
punitive as well as compensatory damages. In the opinion of management, the
Company has not engaged in any conduct which should warrant the award of any
material punitive or compensatory damages. Acting on the advice of counsel, the
Company intends to defend vigorously its position in each case, and management
believes that, while it is not possible to predict the outcome of such matters
with absolute certainty, ultimate disposition of these proceedings should not
have a material adverse effect on the Company's financial position or results
of operations.
NOTE 10: REGULATORY MATTERS
The Company, domiciled in Washington state, prepares its statutory financial
statements in accordance with accounting practices prescribed by the State of
Washington Department of Insurance. Prescribed statutory accounting practices
include a variety of publications of the National Association of Insurance
Commissioners (NAIC), as well as state laws, regulations, and general
administrative rules.
Statutory stockholders' equity was $888,644,000 and $787,637,000 as of December
31, 1998 and 1997, respectively. Statutory net income for the year ended
December 31, 1998, 1997, and 1996, was $98,796,000, $122,863,000, and
$160,957,000, respectively.
Statutory unassigned surplus of $878,845,000 and $777,838,000 included in
retained earnings at December 31, 1998 and 1997, respectively, is the amount
held for the benefit of the stockholder. The entire amount in 1998 and 1997 is
designated as stockholders' surplus for tax purposes and would not subject the
Company to taxation if paid as a cash dividend.
The maximum amount of dividends that can be paid to stockholders by state of
Washington insurance companies without prior approval of the Insurance
Commissioner is subject to restrictions relating to statutory surplus. The
maximum dividend payout which could be made without prior approval is
$98,796,000 in 1999 and $122,863,000 in 1998.
Dividends are determined by the Board of Directors. In 1996, upon approval of
the State of Washington Department of Insurance, the Company paid a
$374,916,000 in-kind dividend to its parent company, FGI.
As of December 31, 1998 and 1997, the Company's statutory surplus exceeded the
NAIC risk-based capital requirements.
NOTE 11: REINSURANCE
The Company has ceded business under both yearly renewable term contracts and
coinsurance contracts. The policy benefit liabilities and unpaid claim amounts
attributable to such business are stated as other receivables on the balance
sheets. The carrying value of reinsurance receivables included in other
receivables totalled approximately $8,500,000 and $8,600,000 at December 31,
1998 and 1997, respectively. None of the reinsurance receivables were with
reinsurers that resulted in any concentration of material credit risk.
----
19
<PAGE> 82
Effective September 5, 1997, the Company raised the retention limit for
automatic reinsurance ceded. The primary change was to increase the maximum
retention on new issues from $800,000 per life to $2,000,000 per life for the
Farmers Flexible Universal Life policy and from $800,000 per life to $1,500,000
per life for all Traditional policies except Farmers Yearly Renewable Term. The
maximum retention on new issues remains at $800,000 per life for Farmers Yearly
Renewable Term. The excess risk is reinsured with an outside reinsurer and is
not material. Increases in policy benefit liabilities and claims expense are
stated net of increases in future policy benefit liabilities and claims
expenses applicable to reinsurance ceded. Death and other benefits expense is
reduced by $4,074,000, $2,047,000 and $707,000 in 1998, 1997, and 1996,
respectively, of reinsurance recoveries. The Company is contingently liable
with respect to reinsurance ceded in the event that a reinsurer is unable to
meet its obligations under existing reinsurance agreements.
The effect of reinsurance on premiums and amounts earned for the years ended
December 31 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Direct premiums $168,017 $144,938 $128,303
Reinsurance assumed 8,798 10,297 11,834
Reinsurance ceded (3,586) (4,101) (3,995)
-------- -------- --------
Net premiums earned $173,229 $151,134 $136,142
======== ======== ========
</TABLE>
Premiums assumed from unaffiliated companies approximated $8,798,000,
$10,297,000, and $8,028,000 in 1998, 1997, and 1996, respectively, which
represents 5.1%, 6.8%, and 5.8% of the net premiums earned in 1998, 1997, and
1996, respectively. Claims paid to unaffiliated companies on assumed
reinsurance were approximately $7,998,000, $8,240,000, and $8,140,000 in 1998,
1997, and 1996, respectively.
NOTE 12: EMPLOYEES' RETIREMENT PLANS
The Company participates in FGI's two noncontributory defined benefit pension
plans (the Regular Plan and the Restoration Plan). The Regular Plan covers
substantially all employees of FGI, its subsidiaries and the Exchanges who have
reached age 21 and have rendered one year of service. Benefits are based on
years of service and the employee's compensation during the last five years of
employment. The Restoration Plan provides supplemental retirement benefits for
certain key employees of FGI, its subsidiaries, and the Exchanges.
FGI's policy is to fund the amount determined under the aggregate cost method,
provided it does not exceed funding limitations. There has been no change in
funding policy from prior years.
Assets of the Regular Plan are held by an independent trustee. Assets held are
primarily in fixed maturity and equity investments. The principal liability is
for annuity benefit payments of current and future retirees. Assets of the
Restoration Plan are considered corporate assets of FGI and are held in a
grantor trust.
----
20
<PAGE> 83
Information regarding the Regular Plan's and the Restoration Plan's funded
status is not developed separately for FGI, its subsidiaries including the
Company and the Exchanges. The funded status of both plans as of December 1,
1998 and 1997 (the latest date for which information is available) is as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Change in benefit obligation:
Net benefit obligation at beginning of the year $ 747,069 $ 695,346
Service cost 26,423 26,229
Interest cost 54,998 51,890
Plan amendments 0 7,722
Actuarial (gains)/losses 54,218 (5,213)
Benefits paid (29,534) (28,905)
--------- ---------
$ 853,174 $ 747,069
========= =========
Change in plan assets:
Fair value of plan assets at beginning of the year $ 817,552 $ 744,340
Actual return on plan assets 135,313 101,303
Benefits paid (28,564) (28,091)
--------- ---------
Fair value of plan assets at end of the year $ 924,301 $ 817,552
========= =========
Funded status at end of the year $ 71,127 $ 70,483
Unrecognized net actuarial gain (140,910) (136,691)
Unrecognized prior service cost 31,255 34,555
Unrecognized net transition asset (26,186) (30,862)
--------- ---------
Net amount recognized at end of the year $ (64,714) $ (62,515)
========= =========
</TABLE>
Upon B.A.T's purchase of FGI and its subsidiaries in 1998, FGI allocated part
of the purchase price to its portion of the Regular Plan assets in excess of
the projected benefit obligation at the date of acquisition. The asset is being
amortized for the difference between FGI's net pension cost and amounts
contributed to the Plan. The unamortized balance as of December 31, 1998 and
1997 was $20,622,000 and $24,304,000, respectively.
Components of net periodic pension expense for FGI and its subsidiaries are as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service costs $ 13,240 $ 14,238 $ 15,275
Interest costs 27,810 28,362 27,409
Return on plan assets (35,817) (35,116) (35,671)
Amortization of:
Transition obligation 1,365 1,229 1,264
Prior service cost 1,986 2,298 1,359
Actuarial gain (2,447) (1,248) (624)
-------- -------- --------
Net periodic pension expense $ 6,137 $ 9,763 $ 9,012
======== ======== ========
</TABLE>
The Company's share of pension expense was $452,000, $510,000, and $565,000 in
1998, 1997, and 1996, respectively.
----
21
<PAGE> 84
FGI uses the projected unit credit cost actuarial method for attribution of
expense for financial reporting purposes. The interest cost and the actuarial
present value of benefit obligations were computed using a weighted average
interest rate of 6.75% in 1998 and 7.25% in 1997 and 1996, while the expected
return on plan assets was computed using a weighted average interest rate of
9.25% in 1998 and 9.00% in 1997 and 1996. The weighted average rate of increase
in future compensation levels used in determining the actuarial present value
of the projected benefit obligation was 4.50% in 1998 and 5.00% in 1997 and
1996.
FGI and its subsidiaries' postretirement benefits plan is a contributory
defined benefit plan for employees who were retired or who were eligible for
early retirement on January 1, 1995, and is a contributory defined dollar plan
for all other employees retiring after January 1, 1995. Health benefits are
provided for all employees who participated in the Company's group medical
benefits plan for 15 years prior to retirement at age 55 or later. A life
insurance benefit of $5,000 is provided at no cost to retirees who maintained
group life insurance coverage for 15 years prior to retirement at age 55 or
later.
There are no assets separated and allocated to this plan.
The funded status of the entire plan, which includes FGI, its subsidiaries
and the Exchanges, at December 1, 1998 and 1997 (the latest date for which
information is available) was as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Change in benefit obligation:
Net benefit obligation at beginning of the year $ 70,758 $ 75,142
Service cost 1,280 1,395
Interest cost 5,080 5,402
Plan participations' contributions 1,297 1,216
Actuarial (gain)/loss 6,936 (8,205)
Benefits paid (4,984) (4,192)
---------- ----------
$ 80,367 $ 70,758
========== ==========
Fair value of plan assets at end of year $ 0 $ 0
========== ==========
Funded status at end of the year $ (80,367) $ (70,758)
Unrecognized net actuarial (gain) (8,193) (15,976)
Unrecognized net transition obligation 18,354 19,665
---------- ----------
Accrued postretirement benefit cost $ (70,206) $ (67,069)
========== ==========
</TABLE>
FGI and its subsidiaries' share of the accrued postretirement benefit cost was
approximately $53,206,000 in 1998 and $51,930,000 in 1997. The unrecognized net
transition obligation of $18,354,000 in 1998 and $19,665,000 in 1997 represents
the remaining transition obligation of the Exchanges.
Components of postretirement benefits expense for FGI and its subsidiaries are
as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service costs $ 636 $ 753 $ 1,016
Interest costs 2,527 2,918 3,018
Amortization of actuarial (gain)/loss (435) (13) 0
--------- ------- -------
Net periodic expense $ 2,728 $ 3,658 $ 4,034
========= ======= =======
</TABLE>
----
22
<PAGE> 85
The Company's share of this amount was approximately $205,000, $253,000, and
$264,000 in 1998, 1997, and 1996, respectively.
The weighted average interest rate used in the above benefit computations was
6.75% in 1998 and 7.25% in 1997 and 1996. Beginning in 1996, the initial medical
inflation rate was 7.5% to be graded over a three-year period to 6.0% and level
thereafter, and contribution levels from retirees were the same as applicable
medical cost increases where defined benefits exist. The weighted average rate
of increase in future compensation levels used in determining the actuarial
present value of the accumulated benefit obligation was 4.50% in 1998 and 5.00%
in 1997 and 1996.
A 1.0% increase or decrease in the medical inflation rate assumption would have
resulted in the following (in thousands):
<TABLE>
<CAPTION>
1% 1%
increase decrease
-------- --------
<S> <C> <C>
Effect on 1998 service and interest components of net periodic cost $ 64 $ (59)
Effect on accumulated postretirement benefit obligation
at December 31, 1998 772 (710)
</TABLE>
NOTE 13: EMPLOYEES' PROFIT SHARING PLANS
FGI and its subsidiaries have two profit sharing plans providing for cash
payments to all eligible employees. The two plans, Cash Profit Sharing Plan
(consisting of Cash and Quest for Gold in 1998 and Cash and Cash Plus in 1997
and 1996) and Deferred Profit Sharing Plan, provide for a maximum aggregate
expense of 16.25% of FGI and its subsidiaries' consolidated annual pretax
earnings, as adjusted. The Deferred Profit Sharing Plan, limited to 10% of
pretax earnings, as adjusted, or 15% of the salary or wage paid or accrued to
the eligible employee, provides for an annual contribution by FGI and its
subsidiaries to a trust for eventual payment to employees as provided in the
Plan. The Cash Profit Sharing Plan and Quest for Gold Program provide for
annual cash distributions to eligible employees. The Cash Profit Sharing Plan
is limited to 5% of pretax earnings, as adjusted, or 5% of eligible employee
salaries or wages paid or accrued. The Quest for Gold Program is limited to
1.25% of pretax earnings, as adjusted, or 6% of eligible employee salaries or
wages paid or accrued. The Cash Plus Plan was limited to 1.25% of pretax
earnings, as adjusted.
The Company's share of expense under these plans was $4,069,000, $3,850,000 and
$3,918,000 in 1998, 1997, and 1996, respectively.
NOTE 14: EQUITY-INDEXED ANNUITIES
During 1997, the Company began selling an equity-indexed annuity product. At
the end of its seven-year term, this product credits interest to the annuity
participant at a rate based on a specified portion of the change in the value
of the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index),
subject to a guaranteed annual minimum return. In order to hedge the interest
liability generated on the annuities as the index rises, the Company purchases
call options on the S&P 500 Index. The Company considers such call options to
be held as a hedge. As of December 31, 1998 and 1997, the Company had call
options with contract values of $40,229,000 and $13,180,000 respectively, and
carrying values of $14,817,000 and $3,299,000, respectively.
----
23
<PAGE> 86
Hedge accounting is used to account for the call options as the Company
believes that the options reduce the risk associated with increases in the
account value of the annuities that result from increases in the S&P 500 Index.
The call options effectively hedge the annuity contracts since they are both
purchased and sold with identical parameters. Periodically, the value of the
assets (S&P 500 call options) are matched to the potential liability (annuity
contracts) to ensure the hedge has remained effective. The annuities were
written based on a seven year investment term, absent early termination by
participants. Therefore, the anticipated hedge transaction (i.e., payment of
interest to the policyholder at the end of the investment term and maturity of
the call option) for each annuity is generally expected to occur in seven years
or less. For the years ended December 31, 1998 and 1997, the amount of
unrealized hedging gains (losses) deferred was $3,511,000 and $(151,000),
respectively.
The call options are carried at estimated fair value. Unrealized gains and
losses resulting from changes in the estimated fair value of the call options
are recorded as an adjustment to the interest liability credited to
policyholders. In addition, realized gains and losses from maturity or
termination of the call options are offset against the interest credited to
policyholders during the period incurred. Premiums paid on call options are
amortized to net investment income over the term of the contracts. There were
no early terminations by annuity participants that led to maturities or sales
of the S&P 500 call options during 1998 or 1997.
The cash requirement of the call options consists of the initial premium paid
to purchase the call options. Should a liability exist to the annuity
participant at maturity of the annuity policy, the termination or maturity of
the option contracts will generate positive cash flow to the Company. The
appropriate amount of cash will then be remitted to the annuity participant
based on the respective participation rate. The call options are generally
expected to be held for a seven-year term, but can be terminated at any time.
There are certain risks associated with the call options, primarily with
respect to significant movements in the United States stock market and
counterparty nonperformance. The Company believes that the counterparties to
its call option agreements are financially responsible and that the
counterparty risk associated with these transactions is minimal.
NOTE 15: PARTICIPATING POLICIES
Participating business, which consists of group business, comprised
approximately 8.6% of total insurance in-force as of December 31, 1998 and 8.8%
of its total insurance in-force as of December 31, 1997. In addition,
participating business represented 2.1% and 2.2% of premium income for the
years ended December 31, 1998 and December 31, 1997 and 2.2% of premium income
for the year ended December 31, 1996.
The amount of dividends paid on participating business is determined by the
Farmers Life Board of Directors and is paid annually on the policyholder's
anniversary date. Amounts allocable to participating policyholders are based on
published dividend projections or expected dividend scales.
NOTE 16: OPERATING SEGMENTS
The Company concentrates its activities in the individual life insurance and
annuity markets. These activities are managed separately as each offers a unique
set of product services. As a result, the Company is comprised of the following
two reportable operating segments as defined in SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information": the life insurance segment
and the annuity segment.
----
24
<PAGE> 87
The life insurance segment provides individual life insurance products,
including universal life, term life, and whole life. The annuity segment
provides flexible and single premium deferred annuities, single premium
immediate annuities, and equity-indexed annuity products.
The basis of accounting used by the Company's management in evaluating segment
performance and determining how resources should be allocated is referred to as
the Company's GAAP historical basis, which excludes the effects of the purchase
accounting ("PGAAP") adjustments related to the acquisition of FGI and the
Company by B.A.T in December 1988 (See Note 1).
The Company accounts for intersegment transactions as if they were to third
parties and, as such, records the transactions at current market prices. There
were no intersegment revenues among the Company's two reportable operating
segments for the years 1998, 1997, and 1996.
The Company operates in 37 states, primarily in the western, midwestern, and
southwestern regions of the United States and does not earn revenues or hold
assets in any foreign countries.
Information regarding the Company's reportable operating segments follows (in
thousands):
<TABLE>
<CAPTION>
Year ended December 31, 1998
-----------------------------------------------------------------------------------------
GAAP Historical Basis PGAAP Adjustments Total
----------------------------------------------------------------------------------------- PGAAP
Life Annuities Total Life Annuities Total Basis
---- --------- ----- ---- --------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 544,390 $ 116,029 $ 660,419 (a) $ 171 $ 36 $ 207 $ 660,626
Investment income 190,197 117,024 307,221 128 79 207 307,428
Investment expenses (8,457) (5,201) (13,658) 0 0 0 (13,658)
Net realized losses (13,473) 0 (13,473) 0 0 0 (13,473)
Income before
provision for taxes 173,576 26,033 199,609 1,895 284 2,179 201,788
Provision for income
taxes 61,803 9,269 71,072 99 15 114 71,186
Assets 3,593,311 1,844,266 5,437,577 118,310 60,454 178,764 (b) 5,616,341
Capital expenditures 572 0 572 0 0 0 572
Depreciation &
amortization 88,146 8,572 96,718 (c) (1,129) (151) (1,280) (d) 95,438
</TABLE>
(a) Revenues for the insurance operating segments include net investment
income and net realized gains(losses).
(b) Amount includes PGAAP adjustments related to the DAC ($168.3 million
decrease) and VOBA ($334.4 million increase) assets.
(c) Amount includes the historical basis amortization associated with the DAC
asset.
(d) Amount includes PGAAP adjustments related to the amortization of the DAC
($26.2 million decrease) and VOBA ($23.9 million increase) assets.
----
25
<PAGE> 88
<TABLE>
<CAPTION>
Year ended December 31, 1997
-----------------------------------------------------------------------------------------
GAAP Historical Basis PGAAP Adjustments Total
----------------------------------------------------------------------------------------- PGAAP
Life Annuities Total Life Annuities Total Basis
---- --------- ----- ---- --------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 522,983 $ 114,899 $ 637,882 (a) $ 588 $ 128 $ 716 $ 638,598
Investment income 171,979 115,827 287,806 428 288 716 288,522
Investment expenses (7,626) (5,136) (12,762) 0 0 0 (12,762)
Net realized gains 10,063 0 10,063 0 0 0 10,063
Income before
provision for taxes 190,418 24,677 215,095 (3,050) (396) (3,446) 211,649
Provision for income
taxes 67,022 8,685 75,707 (1,633) (212) (1,845) 73,862
Assets 3,311,007 1,870,445 5,181,452 116,805 60,454 177,259 (b) 5,358,711
Capital expenditures 1,696 0 1,696 0 0 0 1,696
Depreciation &
amortization 82,849 7,210 90,059 (c) 4,025 538 $ 4,563 (d) 94,622
</TABLE>
(a) Revenues for the insurance operating segments include net investment income
and net realized gains(losses).
(b) Amount includes PGAAP adjustments related to the DAC ($195.2 million
decrease) and VOBA ($359.1 million increase) assets.
(c) Amount includes the historical basis amortization associated with the DAC
asset.
(d) Amount includes PGAAP adjustments related to the amortization of the DAC
($18.5 million decrease) and VOBA ($21.3 million increase) assets.
<TABLE>
<CAPTION>
Year ended December 31, 1996
---------------------------------------------------------------------------------
GAAP Historical Basis PGAAP Adjustments Total
--------------------------------------------------------------------------------- PGAAP
Life Annuities Total Life Annuities Total Basis
---- --------- ----- ---- --------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 502,941 $ 110,344 $ 613,285 (a) $ 8 $ 2 $ 10 $ 613,295
Investment income 157,138 110,660 267,798 6 4 10 267,808
Investment expenses (5,842) (4,114) (9,956) 0 0 0 (9,956)
Net realized gains 30,182 0 30,182 0 0 0 30,182
Income before
provision for taxes 194,416 22,554 216,970 (3,266) (283) (3,549) 213,421
Provision for income
taxes 78,246 9,077 87,323 (14,893) (1,291) (16,184) 71,139
Assets 3,356,559 1,898,740 5,255,299 118,557 61,348 179,905 (b) 5,435,204
Capital expenditures 132 0 132 132
Depreciation &
amortization 75,166 5,624 80,790 (c) 3,490 279 $ 3,769 (d) 84,559
</TABLE>
(a) Revenues for the insurance operating segments include net investment income
and net realized gains(losses).
(b) Amount includes PGAAP adjustments related to the DAC ($217.3 million
decrease) and VOBA ($383.9 million increase) assets.
(c) Amount includes the historical basis amortization associated with the DAC
asset.
(d) Amount includes PGAAP adjustments related to the amortization of the DAC
($20.6 million decrease) and VOBA ($20.5 million increase) assets.
----
26
<PAGE> 89
FARMERS NEW WORLD LIFE INSURANCE COMPANY
- ------------------------------------------
(a wholly owned subsidiary of Farmers Group, Inc.)
BALANCE SHEETS (in thousands)
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
- ------ -------------- -------------
<S> <C> <C>
INVESTMENTS:
Fixed maturities available for sale:
Bonds, at fair value (cost: $3,746,937 and $3,510,846) $ 3,699,789 $ 3,674,223
Redeemable preferred stocks, at fair value
(cost: $67,206 and $82,090) 68,845 86,662
Equity securities available for sale:
Nonredeemable preferred stocks, at fair value
(cost: $1,153 and $1,153) 1,205 1,270
Common stocks, at fair value (cost: $58,987 and $41) 55,748 3
Mortgage loans on real estate, net of allowance for losses 37,009 52,879
Investment real estate, net of accumulated depreciation
and allowance for losses 51,297 59,047
Surplus note of the Exchanges 119,000 119,000
Policy loans 196,802 185,211
Joint ventures 7,899 8,456
S&P 500 call options, at fair value (cost: $17,376 and $11,305) 23,498 14,817
----------- -----------
Total investments 4,261,092 4,201,568
CASH AND CASH EQUIVALENTS 51,034 63,784
ACCRUED INVESTMENT INCOME 58,686 53,263
NOTE RECEIVABLE OF AFFILIATE 50,000 0
OTHER RECEIVABLE 27,471 17,558
DEFERRED POLICY ACQUISITION COSTS 530,629 467,248
VALUE OF BUSINESS ACQUIRED 329,379 334,442
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $7,802 and $7,411 14,314 14,379
OTHER ASSETS:
Securities lending collateral 262,126 461,801
Other assets 1,687 2,298
----------- -----------
263,813 464,099
----------- -----------
TOTAL $ 5,586,418 $ 5,616,341
=========== ===========
</TABLE>
<PAGE> 90
FARMERS NEW WORLD LIFE INSURANCE COMPANY
- ------------------------------------------
(a wholly owned subsidiary of Farmers Group, Inc.)
BALANCE SHEETS (in thousands)
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 1999 1998
- ------------------------------------ -------------- -------------
<S> <C> <C>
POLICY LIABILITIES AND ACCRUALS:
Future policy benefits $3,348,597 $3,184,248
Policy claims 31,013 26,177
---------- ----------
3,379,610 3,210,425
OTHER POLICYHOLDER FUNDS & DIVIDENDS 77,239 57,358
ACCRUED EXPENSES AND OTHER LIABILITIES:
Securities lending liability 262,126 461,801
Death benefit liability 44,483 37,024
Other liabilities 76,279 63,736
---------- ----------
382,888 562,561
INCOME TAXES:
Current 9,890 4,180
Deferred 102,699 161,184
---------- ----------
112,589 165,364
Total liabilities 3,952,326 3,995,708
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $1 par value - Authorized, 25,000,000 shares;
issued and outstanding, 6,600,000 shares 6,600 6,600
Additional paid-in capital 994,246 994,246
Accumulated other comprehensive income - net of deferred
taxes of $(11,979) and $41,518 (22,246) 77,105
Retained earnings 655,492 542,682
---------- ----------
Total stockholder's equity 1,634,092 1,620,633
TOTAL $5,586,418 $5,616,341
========== ==========
</TABLE>
----
2
<PAGE> 91
FARMERS NEW WORLD LIFE INSURANCE COMPANY
- ------------------------------------------
(a wholly owned subsidiary of Farmers Group, Inc.)
STATEMENTS OF INCOME (in thousands)
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
Nine month period
ended September 30,
-----------------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
REVENUES:
Net premiums earned $ 154,821 $ 128,696
Universal life and annuity policy charges 157,731 154,643
Net investment income 228,617 220,008
Net realized investment gains 12,160 9,869
Other income 621 529
--------- ---------
Total revenues 553,950 513,745
BENEFITS AND EXPENSES:
Death and other benefits 102,805 99,212
Future policy benefits 38,270 16,715
Interest credited to policyholders 117,540 112,371
Underwriting, acquisition and insurance expenses:
Amortization of deferred policy acquisition costs 62,297 48,307
Amortization of value of business acquired 15,903 19,452
Commissions 11,818 14,083
General insurance expenses and taxes 32,248 31,813
--------- ---------
Total benefits and expenses 380,881 341,953
--------- ---------
Income before provision for income taxes 173,069 171,792
--------- ---------
PROVISION (BENEFIT) FOR INCOME TAXES:
Current 66,081 23,496
Deferred (5,822) 37,679
--------- ---------
Total provision for income taxes 60,259 61,175
--------- ---------
NET INCOME $ 112,810 $ 110,617
========= =========
</TABLE>
----
3
<PAGE> 92
FARMERS NEW WORLD LIFE INSURANCE COMPANY
- -----------------------------------------
(a wholly owned subsidiary of Farmers Group, Inc.)
STATEMENTS OF COMPREHENSIVE INCOME (in thousands)
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
Nine month period
ended September 30,
--------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
NET INCOME $ 112,810 $ 110,617
----------------- ----------------
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized holding gains/losses on securities:
Unrealized holding gains/(losses) on securities net of tax (144,945) 18,357
of $(78,047) and $9,885
Less: reclassification adjustment for gains included in net income,
net of tax of $2,364 and $(268) 4,390 (497)
----------------- ----------------
Net unrealized holding gains on securities, net of tax of
$(75,683) and $9,617 (140,555) 17,860
Change in effect of unrealized gains (losses) on other
insurance accounts, net of tax of $22,187 and $(2,612) 41,204 (4,850)
----------------- ----------------
COMPREHENSIVE INCOME $ 13,459 $ 123,627
================= ================
</TABLE>
----
4
<PAGE> 93
FARMERS NEW WORLD LIFE INSURANCE COMPANY
- ----------------------------------------
(a wholly owned subsidiary of Farmers Group, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY (in thousands)
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
Accumulated
Additional other Total stock-
Common paid-in comprehensive Retained holder's
stock capital income earnings equity
----- ------- ------ -------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998 $ 6,600 $ 994,246 $ 77,105 $ 542,682 $ 1,620,633
Net income 112,810 112,810
Unrealized gains (losses) on
available for sale investments
arising during the period, net
of tax of $(78,047) (144,945) (144,945)
Reclassification adjustment for
gains included in net income,
net of tax of $2,364 4,390 4,390
Change in effect of unrealized
gains (losses) on other insurance
accounts, net of tax of $22,187 41,204 41,204
-------- --------- ---------- --------- -----------
BALANCE, September 30, 1999 $ 6,600 $ 994,246 $ (22,246) $ 655,492 $ 1,634,092
======== ========= ========== ========= ===========
</TABLE>
----
5
<PAGE> 94
FARMERS NEW WORLD LIFE INSURANCE COMPANY
- ----------------------------------------
(a wholly owned subsidiary of Farmers Group, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY (in thousands)
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
Accumulated
Additional other Total stock-
Common paid-in comprehensive Retained holder's
stock capital income earnings equity
------ ------- ------ -------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 $ 6,600 $ 994,246 $ 66,675 $ 412,080 $ 1,479,601
Net income 110,617 110,617
Unrealized gains (losses) on
available for sale investments
arising during the period, net
of tax of $9,885 18,357 18,357
Reclassification adjustment for
gains included in net income,
net of tax of $(268) (497) (497)
Change in effect of unrealized
gains (losses) on other insurance
accounts, net of tax of $(2,612) (4,850) (4,850)
-------- --------- ---------- --------- -----------
BALANCE, September 30, 1998 $ 6,600 $ 994,246 $ 79,685 $ 522,697 $ 1,603,228
======== ========= ========== ========= ===========
</TABLE>
----
6
<PAGE> 95
FARMERS NEW WORLD LIFE INSURANCE COMPANY
- ----------------------------------------
(a wholly owned subsidiary of Farmers Group, Inc.)
STATEMENTS OF CASH FLOWS (in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine month period
ended September 30,
------------------------------------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 112,810 $ 110,617
Adjustments to reconcile net income to net cash provided by
operating activities:
Universal life type contracts:
Deposits received 226,359 223,394
Withdrawals (189,591) (180,274)
Interest credited 53,167 50,285
Realized investment losses (gains) (12,160) (9,869)
Amortization of deferred policy acquisition costs and VOBA 78,200 67,759
Deferred income tax expense (benefit) (5,822) 37,679
Depreciation 1,948 1,921
Cash provided (used) by changes in operating assets and liabilities:
Federal income taxes payable 5,710 14,875
Deferred policy acquisition costs (136,515) (64,284)
Life insurance policy liabilities 43,572 23,779
Other policyholder funds 19,882 (2,466)
Other 72,707 (17,420)
--------- --------
Net cash provided by operating activities 270,267 255,996
INVESTING ACTIVITIES:
Purchase of bonds and stocks available-for-sale (890,540) (446,970)
Proceeds from sales or maturities of bonds and stocks available-for-sale 617,121 348,489
Purchase of mortgage loans 0 0
Mortgage loan collections 17,044 24,025
Purchase of investment real estate (617) (878)
Proceeds from sale of investments in real estate 6,368 4,302
Increase in policy loans (11,591) (14,847)
Purchase of property and equipment (409) (445)
Purchase of surplus note of the Exchanges 0 (119,000)
Purchase of note receivable from affiliate (50,000) 0
Other (6,071) (6,101)
--------- --------
Net cash used by investing activities (318,695) (211,425)
FINANCING ACTIVITIES:
Annuity contracts:
Deposits received 121,572 107,341
Withdrawals (149,600) (164,283)
Interest credited 63,706 58,577
--------- --------
Net cash provided by financing activities 35,678 1,635
--------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS,
carried forward (12,750) 46,206
</TABLE>
----
7
<PAGE> 96
FARMERS NEW WORLD LIFE INSURANCE COMPANY
- ----------------------------------------
(a wholly owned subsidiary of Farmers Group, Inc.)
STATEMENTS OF CASH FLOWS (in thousands) (continued)
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
Nine month period
ended September 30,
------------------------------------
1999 1998
---- ----
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS,
brought forward $ (12,750) $ 46,206
CASH AND CASH EQUIVALENTS:
Beginning of year 63,784 9,980
--------- --------
End of year $ 51,034 $ 56,186
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during year for:
Income taxes $ 59,878 $ 22,199
Interest paid (125) 945
</TABLE>
----
8
<PAGE> 97
FARMERS NEW WORLD LIFE INSURANCE COMPANY
- ----------------------------------------
(a wholly owned subsidiary of Farmers Group, Inc.)
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
================================================================================
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying balance sheet of Farmers New World Life Insurance Company
("the Company") as of September 30, 1999, the related statements of income,
comprehensive income, stockholders' equity and cash flows for the nine
month periods ended September 30, 1999 and September 30, 1998, have been
prepared in accordance with generally accepted accounting principles
("GAAP") for interim periods and are unaudited. However, in management's
opinion, the financial statements include all adjustments (consisting of
only recurring adjustments) necessary for a fair presentation of results
for such interim periods. These statements do not include all of the
information and footnotes required by GAAP for complete financial
statements and should be read in conjunction with the balance sheets of the
Company as of December 31, 1998 and 1997, and the related statements of
income, comprehensive income, stockholder's equity, and cash flows for each
of the three years in the period ended December 31, 1998.
2. MATERIAL CONTINGENCIES
The Company is a party to numerous lawsuits arising from its normal
business activities. These actions are in various stages of discovery and
development, and some seek punitive as well as compensatory damages. In the
opinion of management, the Company has not engaged in any conduct which
should warrant the award of any material punitive or compensatory damages.
The Company intends to vigorously defend its position in each case, and
management believes that, while it is not possible to predict the outcome
of such matters with absolute certainty, ultimate disposition of these
proceedings should not have a material adverse effect on the Company's
results of operations or financial position.
----
9
