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PROSPECTUS JANUARY 12, 2000
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FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ISSUED BY
FARMERS NEW WORLD LIFE INSURANCE COMPANY
THROUGH
FARMERS VARIABLE LIFE SEPARATE ACCOUNT A
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HOME OFFICE: SERVICE CENTER:
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3003 - 77TH AVENUE, S.E. P.O. BOX 724208
MERCER ISLAND, WASHINGTON 98040 ATLANTA, GEORGIA 31139
(206) 232-8400 1-877-376-8008 (TOLL FREE)
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This prospectus describes the Farmers flexible premium variable life insurance
policy (the "Policy") issued by Farmers New World Life Insurance Company. The
Policy provides life insurance and accumulates variable Contract Value. The
amount of life insurance may, and the Contract Value will, depend on the
investment experience of the subaccounts of the Farmers Variable Life Separate
Account A ("variable account") in which you invest.
You choose one of two death benefit options. The death benefit will be at least
the principal sum shown in the Policy's specifications page, adjusted for any
increases or decreases in principal sum, and reduced by any outstanding loan
amount.
This prospectus provides information that a prospective owner should know
before investing and you should keep this prospectus for future reference. You
should consider whether this Policy is suitable for you in light of your life
insurance needs.
You can allocate Contract Value to:
- the subaccounts of the variable account, which invest in the
portfolios listed on this page; or
- a fixed account, which credits a specified rate of interest.
AN INVESTMENT IN THIS POLICY IS NOT A BANK DEPOSIT, AND THE POLICY IS NOT
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
PLEASE READ THE "RISK SUMMARY" SECTION OF THIS PROSPECTUS. IT DESCRIBES CERTAIN
RISKS ASSOCIATED WITH INVESTING IN THE POLICY.
The following portfolios are currently available under the Policy:
[ ] 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 (Class A Shares)
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)
A prospectus for each of the portfolios available through the variable account
must accompany this prospectus. Please read these documents before investing
and save them for future reference.
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THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THIS
POLICY OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE.
ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A FEDERAL CRIME.
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TABLE OF CONTENTS
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GLOSSARY..........................................................................................................1
POLICY SUMMARY....................................................................................................3
Premiums.......................................................................................................4
Investment Options.............................................................................................4
Contract Value.................................................................................................5
Charges and Deductions.........................................................................................6
Portfolio Expense Table........................................................................................7
Surrenders and Withdrawals.....................................................................................8
Death Benefits.................................................................................................8
Transfers......................................................................................................9
Loans..........................................................................................................9
RISK SUMMARY.....................................................................................................10
Investment Risk...............................................................................................10
Risk of Lapse.................................................................................................10
Tax Risks.....................................................................................................11
Limits on Cash Withdrawals....................................................................................11
Loan Risks....................................................................................................11
Effects of Surrender Charges..................................................................................12
Comparison with Other Insurance Policies......................................................................12
Illustrations.................................................................................................12
FARMERS NEW WORLD LIFE INSURANCE COMPANY AND THE FIXED ACCOUNT...................................................12
Farmers New World Life Insurance Company......................................................................12
The Fixed Account.............................................................................................13
THE VARIABLE ACCOUNT AND THE PORTFOLIOS..........................................................................14
The Variable Account..........................................................................................14
The Portfolios................................................................................................14
INVESTMENT OBJECTIVES OF THE PORTFOLIOS....................................................................15
Your Right to Vote Portfolio Shares...........................................................................17
THE POLICY.......................................................................................................17
Purchasing a Policy...........................................................................................17
When Insurance Coverage Takes Effect..........................................................................18
Ownership Rights..............................................................................................18
CHANGING THE OWNER.........................................................................................18
SELECTING AND CHANGING THE BENEFICIARY.....................................................................19
ASSIGNING THE POLICY.......................................................................................19
Canceling a Policy............................................................................................19
PREMIUMS.........................................................................................................20
Premium Flexibility...........................................................................................20
Minimum Premiums..............................................................................................20
Planned Premiums..............................................................................................21
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Allocating Premiums...........................................................................................21
CONTRACT VALUES..................................................................................................22
Contract Value................................................................................................22
Surrender Value...............................................................................................22
Subaccount Value..............................................................................................22
Subaccount Unit Value.........................................................................................23
Fixed Account Value...........................................................................................24
CHARGES AND DEDUCTIONS...........................................................................................25
Premium Deductions............................................................................................25
Monthly Deduction.............................................................................................25
COST OF INSURANCE..........................................................................................26
CHARGES FOR RIDERS.........................................................................................27
MONTHLY ADMINISTRATION CHARGE..............................................................................27
MONTHLY SPECIAL PREMIUM CLASS CHARGE.......................................................................27
MONTHLY FLAT EXTRA CHARGE..................................................................................27
Mortality and Expense Risk Charge.............................................................................27
Surrender Charge..............................................................................................27
DECREASE IN PRINCIPAL SUM..................................................................................28
Transfer Charge...............................................................................................29
Portfolio Expenses............................................................................................29
Other Charges.................................................................................................30
DEATH BENEFIT....................................................................................................30
Death Benefit Proceeds........................................................................................30
Death Benefit Options.........................................................................................30
Changing Death Benefit Options................................................................................32
Effects of Withdrawals on the Death Benefit...................................................................33
Changing the Principal Sum....................................................................................33
Payment Options...............................................................................................35
SURRENDERS AND WITHDRAWALS.......................................................................................37
Surrenders....................................................................................................37
Partial Withdrawals...........................................................................................37
TRANSFERS........................................................................................................38
Automatic Asset Rebalancing Program...........................................................................39
Asset Allocation Services.....................................................................................39
Excessive Trading Limits......................................................................................39
Dollar Cost Averaging Program.................................................................................39
Telephone Transfers...........................................................................................40
LOANS............................................................................................................41
Loan Conditions...............................................................................................41
Effect of Policy Loans........................................................................................42
POLICY LAPSE.....................................................................................................42
Lapse.........................................................................................................42
Reinstatement.................................................................................................43
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FEDERAL TAX CONSIDERATIONS.......................................................................................43
Tax Status of the Policy......................................................................................44
Tax Treatment of Policy Benefits..............................................................................44
OTHER POLICY INFORMATION.........................................................................................46
Our Right to Contest the Policy...............................................................................46
Suicide Exclusion.............................................................................................47
Misstatement of Age or Sex....................................................................................47
Modifying the Policy..........................................................................................47
When We Will Make Payments....................................................................................47
Reports to Owners.............................................................................................48
Policy Termination............................................................................................48
Supplemental Benefits (Riders)................................................................................48
PERFORMANCE DATA.................................................................................................49
Hypothetical Illustrations Based on Adjusted Historic Portfolio Performance...................................49
ADDITIONAL INFORMATION...........................................................................................49
Sale of the Policies..........................................................................................49
Legal Matters.................................................................................................50
Legal Proceedings.............................................................................................50
Year 2000 Matters.............................................................................................50
Experts.......................................................................................................51
Financial Statements..........................................................................................51
Farmers' Executive Officers and Directors.....................................................................51
ILLUSTRATIONS....................................................................................................55
APPENDIX A - GUARANTEED MAXIMUM COST OF INSURANCE RATES.........................................................A-1
APPENDIX B - TABLE OF SURRENDER CHARGE FACTORS..................................................................B-1
APPENDIX C - FINANCIAL STATEMENTS...............................................................................C-1
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GLOSSARY
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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. It measures the net
investment results of each of the subaccounts.
ATTAINED AGE
The insured's age on the issue date plus the number of years completed since
the issue date.
BENEFICIARY
The person(s) you select to receive the death benefit from this Policy.
CASH VALUE
The Contract Value minus any applicable surrender charge.
COMPANY (WE, US, OUR, FARMERS, FNWL)
Farmers New World Life Insurance Company
CONTRACT VALUE
The sum of the values you have in the variable account and the fixed account.
If you have a loan outstanding, the Contract Value includes any amounts we hold
in the loan account to secure the loan.
CUMULATIVE MINIMUM PREMIUMS
The sum of all monthly-mode minimum premiums due since the issue date. The
initial minimum premium is specified on the Policy specifications page. The
minimum premium will change if you increase or decrease the principal sum or if
certain other changes in the Policy occur.
DEATH BENEFIT PROCEEDS
The amount we will pay to the beneficiary when we receive proof of the
insured's death. We will increase the proceeds by any additional insurance
benefits you add by rider, and we will reduce the proceeds by the amount of any
outstanding loans (including any interest you owe), and any due and unpaid
monthly deductions.
FIXED ACCOUNT
An option to which you can direct your Contract Value under the Policy. 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
The portion of your Contract Value allocated to the fixed account.
FUNDS
Investment companies that are registered with the SEC. This Policy 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.
INITIAL PREMIUM
The amount you must pay before insurance coverage begins under this Policy. The
initial premium is shown on your Policy's specification page.
INSURED
The person whose life is insured by this Policy.
ISSUE AGE
The insured's age as of the last birthday before the issue date.
ISSUE DATE
The date when life insurance coverage begins. We measure Policy months, Policy
years, and Policy
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anniversaries from the issue date. On the issue date, we place your initial
premium (times the percent of premium factor) in the fixed account. The first
monthly deduction occurs on the issue date. The entire Contract Value remains
allocated to the fixed account until the reallocation date.
LAPSE
When life insurance coverage ends because you do not have enough cash value to
pay the monthly deduction and any outstanding loan amount (including any
interest you owe on the loan(s)), and you have not made a sufficient payment by
the end of a 61-day grace period. If you have paid total premiums (minus
withdrawals) that exceed cumulative minimum premiums, then the Policy will
enter a 61-day grace period only if the Contract Value (minus any outstanding
loan amount, including any interest you owe) is too low to pay the entire
monthly deduction due.
LOAN AMOUNT
The total amount of all outstanding Policy loans, including both principal and
interest due. We deduct an amount equal to the loan amount from the subaccounts
and the fixed account and place it in the loan account as collateral for the
loans. The loan account is part of our general account.
MATURITY DATE
The Policy anniversary when the insured reaches age 110 and life insurance
coverage under this Policy ends. The maturity date is shown on the Policy
specifications page.
MONTHLY DEDUCTION
The amount we deduct from the Contract Value each month to pay for the
insurance coverage. The monthly deduction includes the cost of insurance
charge, the monthly administration charge, the cost of any riders, and any flat
extra charge for a special premium class.
MONTHLY DUE DATE
The day of each month when we determine Policy charges and deduct them from
Contract Value. It is the same date each month as the issue date. If there is
no Valuation Day that coincides with the issue date in the calendar month, the
monthly due date is the next Valuation Day.
PERCENT OF PREMIUM FACTOR
The factor (currently .965) by which we multiply each premium to determine the
amount of premium credited to the Contract Value. We retain the balance of each
premium to compensate us for certain expenses such as premium taxes and
distribution expenses. The percent of premium factor is shown on your Policy's
specifications page.
PORTFOLIO
A separate investment portfolio of a fund. Each subaccount invests exclusively
in one portfolio of a fund.
PREMIUM CLASS
A classification that affects the cost of insurance rate and the premium
required to insure an individual.
PREMIUMS
All payments you make under the Policy other than loan repayments. When we use
the term "premium" in this prospectus, it generally has the same meaning as
"net premium" in the Policy, and means a premium multiplied by the percent of
premium factor.
PRINCIPAL SUM
The dollar amount of insurance selected by the owner. The principal sum on the
issue date is set forth on the Policy's specifications page. You may increase
or decrease the principal sum under certain conditions. Certain actions you
take, such as changing the death benefit option or taking a partial withdrawal,
may affect the amount of the principal sum. The actual death benefit proceeds
we pay under the Policy may be more or less than the principal sum.
REALLOCATION DATE
The date we reallocate any premium (plus interest) held in the fixed account to
the subaccounts and fixed account as you directed in your application. The
reallocation date is the record date, plus the number of days in your state's
right to examine period, plus 10 days.
RECORD DATE
The date we record your Policy in our books as an in force policy.
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RIGHT TO EXAMINE PERIOD
The period when you may return the Policy and receive a refund. The length of
the right to examine period varies by state. It will be at least 10 days from
the date you receive the Policy. The first page of your Policy shows your right
to examine period.
SERVICE CENTER
The address of the Service Center is P.O. Box 724208, Atlanta, GA 31139.
McCamish Systems, L.L.C. is the administrator of the Policy. You can call the
Service Center office toll-free at 1-877-376-8008.
SUBACCOUNT
A division 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 the Policy at the option of the owner.
SURRENDER VALUE
The amount we will pay you if you surrender the Policy while it is in force.
The Surrender Value on the date you surrender is equal to: the Contract Value,
minus any surrender charge, and minus any outstanding loan amount (including
any interest you owe on the loan(s)).
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 Policy 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 Variable Life Separate Account A. It is a separate investment account
that is divided into subaccounts, each of which invests in a corresponding
portfolio of a designated fund.
VARIABLE ACCOUNT VALUE
The portion of your Contract Value that is allocated to the subaccounts of the
variable account.
WRITTEN NOTICE
The written notice you must sign and send us to request or exercise your rights
as owner under the Policy. 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 entitled to exercise all rights as owner under the Policy.
POLICY SUMMARY
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This summary provides only a brief overview of the more important
features of the Policy. More detailed information about the Policy appears
later in this prospectus. Please read the remainder of this prospectus
carefully.
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PREMIUMS
- - You can select a premium plan. Within certain limits specified in your
Policy, you can vary the frequency and amount of premiums. You may be
able to skip premium payments under certain circumstances. However, you
greatly increase your risk of lapse if you do not regularly pay premiums
at least as large as the current minimum premium.
- - We will not accept any premiums after the insured reaches attained age
100.
- - After you pay an initial premium, you can pay subsequent premiums
(minimum $25) at any time.
- - If you authorize electronic payments from your checking account, or ask
us to bill you, the premiums you pay each year must be $300 or more.
- - We multiply each premium by the percent of premium factor (currently
0.965) and credit the resulting amount to the Contract Value.
- - The initial minimum premium and payment mode (monthly or annual) are
shown on your Policy's specification page. The minimum premium will
change if you increase or decrease the principal sum, if you change death
benefit options, if you change or add a rider, if you take a partial
withdrawal and you have chosen a level death benefit (Option B), or if
the insured's premium class changes.
- - This Policy does not provide a no-lapse period. PAYING THE CURRENT
MINIMUM MONTHLY PREMIUM FOR THE POLICY WILL NOT NECESSARILY KEEP YOUR
POLICY IN FORCE. Additional premiums may be necessary to keep the Policy
in force.
- - If you have paid large enough premiums so that total premiums paid (less
withdrawals) exceed the cumulative minimum premiums, your Policy will
enter a 61-day pre-lapse grace period only if the Contract Value, less
the loan amount (including any interest you owe) is not enough to cover
the monthly deduction when due. We would not take the surrender charge
into account.
- - If you have not paid enough premium so that total premiums paid (less
withdrawals) are less than the cumulative minimum premiums, then your
Policy will enter the grace period if the Surrender Value is not
sufficient to cover the monthly deduction when due. This means that if
you do not pay large enough premiums, we will take surrender charges into
account in determining whether your Policy will enter a 61-day pre-lapse
grace period.
- - There will be a 61-day grace period before your Policy lapses. We will
mail you a notice at least 61 days before the end of the grace period. If
you fail to make a sufficient payment during the 61-day grace period,
your Policy will lapse and terminate without value. See "Risk of Lapse,"
and "Policy Lapse."
- - New premium(s) will be allocated to the subaccounts and the fixed account
in accordance with your instructions in the application, unless you
provide different instructions with your premiums. Any future premiums
will be allocated in accordance with the new instructions, unless we
receive contrary instructions.
INVESTMENT OPTIONS
VARIABLE ACCOUNT:
- - You may direct the money in your Policy to any of the 12 subaccounts of
the variable account. WE DO NOT GUARANTEE ANY MONEY YOU PLACE IN THE
SUBACCOUNTS. THE VALUE OF EACH
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SUBACCOUNT WILL INCREASE OR DECREASE, DEPENDING ON THE INVESTMENT
PERFORMANCE OF THE CORRESPONDING PORTFOLIO. YOU COULD LOSE SOME OR ALL OF
YOUR MONEY.
- - Each subaccount invests exclusively in one investment portfolio of a
fund. The following portfolios are currently available:
[ ] JANUS ASPEN SERIES
Capital Appreciation Portfolio
[ ] KEMPER VARIABLE SERIES FUND
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 (Class A Shares)
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)
FIXED ACCOUNT:
- - You may place money in the fixed account where it earns interest at an
annual rate of at least 3.0%. We may declare higher rates of interest, but
are not obligated to do so.
CONTRACT VALUE
- - Contract Value is the sum of your amounts in the subaccounts and the
fixed account. Contract Value also includes amounts we hold in the loan
account to secure any outstanding loans.
- - Contract Value varies from day to day, depending on the investment
experience of the subaccounts you choose, the interest we credit to the
fixed account, the charges we deduct, and any other transactions (such as
transfers, withdrawals, and loans).
- - Contract Value is the starting point for calculating important values
under the Policy, such as the cash value, Surrender Value and the death
benefit.
- - We do not guarantee a minimum Contract Value. Your Policy may lapse if
you do not pay sufficient premiums and do not have sufficient Surrender
Value to pay the monthly deduction when due. See "Minimum Premiums" and
"Policy Lapse."
- - Once you receive your Policy, the RIGHT TO EXAMINE PERIOD begins. You
may return the Policy during this period and receive a refund. See
"Canceling a Policy."
- - From the issue date until the reallocation date (the record date, plus
the number of days in your state's right to examine period, plus 10
days), we hold your premium(s) in the fixed account. On the reallocation
date, we transfer the Contract Value in the fixed account to other
subaccounts and the fixed account in accordance with the allocation
percentages you provided in the application.
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CHARGES AND DEDUCTIONS
$ Premium Charge: We currently deduct 3.5% from each premium and credit the
remaining 96.5% to your Contract Value. This occurs when we apply the
percent of premium factor to each premium received. We may change the
charge for new owners in the future. This charge compensates us for
distribution expenses and state premium taxes.
$ Monthly Deduction. Each month we deduct:
- a cost of insurance charge for the Policy (varies by issue age, sex,
premium class and Policy duration);
- charges for any riders;
- a flat extra charge, if any, for a special premium class;
- a special premium class rate, applied to both current and guaranteed
cost of insurance charges, for insured in a special premium class;
and
- a current monthly administration charge of $5, guaranteed never to be
higher than $8.
$ Surrender and Withdrawal Charges:
- surrender: We deduct a surrender charge when a full surrender occurs
during the first 14 Policy years. It consists of:
- a deferred sales charge component: calculated by multiplying the
sum of all premiums by a factor that declines over the first 15
Policy years and is less for issue ages 66 and older; and
- an administrative component: calculated by multiplying the
number of thousands of principal sum on the issue date (minus
any reductions in principal sum for which a surrender charge has
already been paid) by a factor that varies by insured's issue
age, sex and premium class, and the number of years you held the
Policy.
THE SURRENDER CHARGE MAY BE SIGNIFICANT. YOU MAY HAVE NO SURRENDER VALUE IF YOU
SURRENDER YOUR POLICY DURING THE FIRST 14 POLICY YEARS.
- The maximum surrender charge is the entire Contract Value. It is more
likely that you may have no Surrender Value if you pay premiums below
or not much higher than the current minimum premium, and/or your
investment performance is too low.
- withdrawal (partial surrender): We deduct a processing fee equal to
the lesser of $25 or 2% of the amount withdrawn, PLUS a surrender
charge if you elect a level death benefit (Option B).
- decrease in principal sum: If you decrease the principal sum, we will
deduct a portion of the surrender charge.
$ Mortality and Expense Risk Charge: Deducted daily at an annual rate equal
to 0.90% of your average daily net assets in the variable subaccounts.
$ Transfer Charge: $25 fee for the 13th and each additional transfer in a
Policy year.
$ Portfolio Expenses: You indirectly bear the annual operating expenses of
the portfolios in which the subaccounts invest. These may include
investment management fees, 12b-1 fees, and other expenses. These
charges vary by portfolio and, during 1998, ranged from .44% to 1.91% per
year. See "Portfolio Expense Table."
$ Other charges:
- A $5 fee for each additional annual report you request.
- A charge of $1.50 per $1,000 for each increase in principal sum
(maximum charge is $300).
- Any riders attached to the Policy will have their own charges.
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PORTFOLIO EXPENSE TABLE
The following table shows the fees and expenses charged by the
portfolios. The purpose of the table is to assist you in understanding the
various costs and expenses that you will bear directly and indirectly by
investing in the subaccounts. The table reflects the actual charges and
expenses for each portfolio for the fiscal year ended December 31, 1998, unless
the charges are annualized. Expenses of the portfolios may be higher or lower
in the future. For more information on the fees and expenses described in this
table, see the prospectuses for the portfolios which accompany this prospectus.
ANNUAL PORTFOLIO OPERATING EXPENSES (as a percentage of average portfolio assets
after fee waivers and expense reimbursements)
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TOTAL ANNUAL
EXPENSES (AFTER
MANAGEMENT OTHER EXPENSES WAIVERS
FEES 12b-1 (AFTER AND
NAME OF PORTFOLIO (AFTER WAIVERS) FEES REIMBURSEMENT) REIMBURSEMENT)
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Janus Aspen Series
- ------------------
Capital Appreciation Portfolio(1) .70% --- .22% .92%
Kemper Variable Series
- ----------------------
Kemper Government Securities Portfolio .55% --- .11% .66%
Kemper High Yield Portfolio .60% --- .05% .65%
Kemper Small Cap Growth Portfolio .65% --- .05% .70%
Kemper-Dreman High Return Equity Portfolio(2)(3) .42% --- .45% .87%
PIMCO Variable Insurance Trust
- ------------------------------
Low Duration Bond Portfolio(4) .63% --- .02% .65%
Foreign Bond Portfolio(4) .88% --- .02% .90%
Scudder VLIF
- ------------
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 (Class 2
Shares)(5) 1.25% .25% .41% 1.91%
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1/ 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: .75%, .22% and .97%,
respectively. See the prospectus and Statement of Additional Information of
Janus Aspen Series for a description of these waivers.
2/ 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.
3/ 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 .75%;
Other Expenses are estimated to be .45%; and Total Annual Expenses are
estimated to be 1.20%.
4/ 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
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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.
5/ Class 2 of the Templeton Developing Markets Portfolio has a distribution
plan or "Rule 12b-1 Plan" which is described in the portfolio's prospectus.
SURRENDERS AND WITHDRAWALS
- - FULL SURRENDER: At any time while the Policy is in force, you may submit a
written request to surrender your Policy and receive the Surrender Value
(that is, the Contract Value minus any surrender charge, and minus any
outstanding loan amount including any interest you owe). A surrender may
have tax consequences. See "Federal Tax Considerations."
- - PARTIAL WITHDRAWALS: After the first Policy year, you may submit a
written request to withdraw part of the Surrender Value, subject to the
following rules. Withdrawals may have tax consequences. See "Federal Tax
Considerations."
- You may make only 1 withdrawal each calendar quarter.
- You must request at least $500.
- You may not request more than 75% of the Surrender Value.
- Surrender charges apply to the withdrawal if you have selected a
level death benefit (Option B).
- For each withdrawal, we deduct a processing fee equal to the lesser
of $25 or 2% of the withdrawal.
- If you select a level death benefit (Option B), the principal sum
will be reduced by the amount of the partial withdrawal (but not by
any surrender charges or the processing fee).
DEATH BENEFITS
- - As long as it remains in force, the Policy provides for a death benefit
payment upon the death of the insured.
- - You must choose one of two death benefit options under the Policy.
- OPTION A is a variable death benefit through attained age 99 that
is the greater of:
- the principal sum plus the Contract Value on the date of
death; or
- the Contract Value multiplied by the applicable death
benefit percentage.
- OPTION B is a level death benefit through attained age 99 that is
the greater of:
- the principal sum on the date of death; or
- the Contract Value multiplied by the applicable death
benefit percentage.
Any death benefit proceeds paid will be increased by any additional insurance
benefits you add by rider and will be reduced by the amount of any outstanding
loan amount (including any interest you owe) and any due and unpaid monthly
deductions.
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<PAGE> 13
- - After the first Policy year, you may change the death benefit option or
increase or decrease the principal sum once each Policy year (but you may
not change both the death benefit and principal sum during the same Policy
year unless done simultaneously).
- - You may not decrease the principal sum below the minimum principal sum
amount shown on your Policy's specifications page.
TRANSFERS
- - Each Policy year, you may make:
- an unlimited number of transfers from and among the subaccounts; and
- one transfer from the fixed account.
- - Transfers from subaccounts must be a minimum of $250, or the total value
in the subaccount if less.
- - Transfers from the fixed account may not be for more than 25% of the
unloaned value in the fixed account. If the balance in the fixed account
after the transfer is less than $250, then the entire balance will be
transferred.
- - We charge $25 for the 13th and each additional transfer during a Policy
year.
- - 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. The minimum transfer amount is
$100.
LOANS
- - You may take a loan against the Policy for amounts up to the Surrender
Value, minus the loan interest you would have to pay by the next Policy
anniversary.
- - To secure the loan, we transfer an amount equal to the loan from the
subaccounts and fixed account to the loan account (part of our general
account). Unless you specify otherwise, the amount is withdrawn from the
subaccounts and the fixed account on a pro-rata basis.
- - Amounts in the loan account earn interest at the guaranteed minimum rate
of 3% per year.
- - During the first fourteen Policy years, we currently charge you interest
at 4.5% annually, with a maximum loan interest rate of 8% per year on
your loan. After the fourteenth Policy year, the maximum loan interest
rate is 3%, compounded annually. Interest is charged daily, and is due
and payable at the end of each Policy year, or on the date of any policy
loan increase or repayment, if earlier. Unpaid interest becomes part of
the outstanding loan and accrues interest.
- - You may repay all or part of your outstanding loans at any time. Loan
repayments must be at least $25, and must be clearly marked as "loan
repayments" or they will be credited as premiums.
- - We deduct any unpaid loans from the proceeds payable on the insured's
death.
- - A loan may have tax consequences. See "Federal Tax Consequences."
9
<PAGE> 14
RISK SUMMARY
===============================================================================
INVESTMENT RISK
If you invest your Contract Value in one or more subaccounts, you will
be subject to the risk that investment performance will be unfavorable and that
your Contract Value will decrease. You COULD lose everything you invest and
your Policy could lapse. If you allocate premiums and Contract Value to the
fixed account, we will credit your Contract Value in the fixed account with a
declared rate of interest, but you assume the risk that the rate may decrease,
although it will never be lower than a guaranteed minimum annual effective rate
of 3.0%.
RISK OF LAPSE
This Policy does not provide a no-lapse period. You greatly increase
your risk of lapse if you do not regularly pay premiums at least as large as
the current minimum premium. Your Policy may lapse if loans, withdrawals, the
monthly deduction of insurance charges, and insufficient investment returns
reduce the Surrender Value to zero.
Your Policy will enter a 61-day pre-lapse grace period if:
- you have not paid large enough premiums so that total premiums
paid (minus withdrawals, but not including surrender charges or
the processing fee) are less than the cumulative minimum
premiums, AND the Surrender Value is not large enough to cover
the monthly deduction when due; or
- you have paid enough premiums so that total premiums paid (minus
withdrawals, but not including surrender charges or the
processing fee) are greater than the cumulative minimum
premiums, BUT the Contract Value, minus any outstanding loan
amount (including any interest you owe) is not large enough to
cover the monthly deduction when due.
Whenever your Policy enters the 61-day grace period, you must make a
sufficient payment before the grace period ends. If you do not make a
sufficient payment during the grace period, your Policy will terminate without
value, insurance coverage will no longer be in effect, and you will receive no
benefits. The payment you make during the grace period must be large enough to
cause either one of the following conditions:
1. the Surrender Value must exceed zero, after deducting all due and
unpaid monthly deductions; OR
2. total premiums you paid (minus withdrawals, but not including
surrender charges or the processing fee) must exceed the
cumulative minimum premiums, AND the Contract Value, minus any
outstanding loan (including any interest you owe) must exceed
zero, after deducting all due and unpaid monthly deductions.
A Policy lapse will have adverse tax consequences. See "Federal Tax
Considerations," and "Policy Loans."
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<PAGE> 15
You may reinstate a lapsed Policy within three years after the Policy
enters the grace period, if the insured meets our insurability requirements and
you pay the amount we require. We will not reinstate a Policy that has been
surrendered for the Surrender Value.
TAX RISKS
Although there is limited guidance and some uncertainty, we believe
that the Policy should be deemed a life insurance contract under Federal tax
law, so that the death benefit paid to the beneficiary will not be subject to
Federal income tax.
Depending on the total amount of premiums you pay, the Policy may be
treated as a modified endowment contract ("MEC") under Federal tax laws. If a
Policy is treated as a MEC, then withdrawals, surrenders and loans under a
Policy will be taxable as ordinary income to the extent there are earnings in
the Policy. In addition, a 10% penalty tax may be imposed on withdrawals,
surrenders and loans taken before you reach age 59 1/2.
You should consult a qualified tax advisor for assistance in all tax
matters involving your Policy.
LIMITS ON CASH WITHDRAWALS
The Policy permits you to take only one partial withdrawal in any
calendar quarter, after the first Policy year has been completed. The amount
you may withdraw is limited to 75% of the Surrender Value.
A withdrawal reduces the Surrender Value and Contract Value and will
increase the risk that the Policy will lapse. A withdrawal also may have tax
consequences.
A withdrawal will reduce the death benefit. If you select a level
death benefit (Option B), a partial withdrawal will permanently reduce the
principal sum by the amount of the withdrawal (not including the surrender
charge or the processing fee). If a variable death benefit (Option A) is in
effect when you make a withdrawal, the death benefit also will be reduced by
the amount that the Contract Value is reduced.
LOAN RISKS
A Policy loan, whether or not repaid, will affect Contract Value over
time because we subtract the amount of the loan from the subaccounts and fixed
account as collateral. We then credit a fixed interest rate of 3.0% to the loan
collateral. As a result, the loan collateral does not participate in the
investment results of the subaccounts nor does it receive any higher current
interest rate credited to the fixed account. The longer the loan is
outstanding, the greater the effect is likely to be. Depending on the
investment results of the subaccounts and the interest rate credited to the
fixed account, the effect could be favorable or unfavorable.
A Policy loan affects the death benefit because a loan reduces the
death benefit proceeds by the amount of the outstanding loan, plus any interest
you owe on Policy loans.
A Policy loan will increase the risk that the Policy will lapse. There
is a risk that if the loan amount reduces your Surrender Value (or Contract
Value, if applicable) to an amount that is not large
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<PAGE> 16
enough to pay the monthly deduction when due, then the Policy will enter the
61-day grace period, and possibly lapse. Adverse tax consequences would result.
EFFECTS OF SURRENDER CHARGES
The surrender charges under this Policy are significant during the
first 14 Policy years. It is likely that you will receive no Surrender Value if
you surrender your Policy in the early Policy years. You should purchase this
Policy only if you have the financial ability to keep it in force at the
initial principal sum for a substantial period of time.
Even if you do not ask to surrender your Policy, surrender charges may
play a role in determining whether your Policy will lapse. If you have not paid
sufficient minimum premiums, the Surrender Value is the measure we use to
determine whether your Policy will enter a grace period, and possibly lapse.
COMPARISON WITH OTHER INSURANCE POLICIES
Like fixed benefit life insurance, the Policy offers a minimum death
benefit and provides a Contract Value, loan privileges and a Surrender Value.
However, the Policy differs from a fixed benefit policy because it allows you
to place your premiums in investment subaccounts. The amount and duration of
life insurance protection will vary with the investment performance of the
amounts you place in the subaccounts. In addition, the Contract Value and the
Surrender Value will always vary with the investment performance of your
selected subaccounts.
As you consider purchasing this Policy, keep in mind that it may not
be to your advantage to replace existing insurance with the Policy.
ILLUSTRATIONS
The Illustrations provided at the end of this prospectus illustrate
Contract Values, Surrender Values and Death Benefits. These illustrations are
based on hypothetical rates of return that are not guaranteed. The
Illustrations also assume costs of insurance for a hypothetical person. Your
rates of return and insurance charges may be higher or lower than these
illustrations.
FARMERS NEW WORLD LIFE INSURANCE COMPANY AND THE FIXED ACCOUNT
===============================================================================
FARMERS NEW WORLD LIFE INSURANCE COMPANY
Farmers New World Life Insurance Company ("Farmers"), is the stock
life insurance company issuing the Policy. 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 Policy and under other variable
life insurance policies Farmers may issue. Farmers' general account supports
the fixed account under the Policy.
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
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<PAGE> 17
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.
THE FIXED ACCOUNT
The fixed account is part of Farmers' general account. We use our
general assets to support our insurance and annuity obligations other than
those funded by our separate investment accounts. Subject to applicable law,
Farmers has sole discretion over investment of the fixed account's assets.
Farmers bears the full investment risk for all amounts contributed to the fixed
account. Farmers guarantees that the amounts allocated to the fixed account
will be credited interest daily at a net effective interest rate of at least
3%. We will determine any interest rate credited in excess of the guaranteed
rate at our sole discretion.
Money you place in the fixed account will earn interest that is
compounded daily at the current interest rate in effect at the time of your
allocation. 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 the method of crediting interest from
time to time, provided that such changes do not reduce the guaranteed rate of
interest below 3% per year or shorten the period for which the interest rate
applies to less than one calendar year (except for the year in which such
amount is received or transferred).
We allocate amounts from the fixed account for partial withdrawals,
transfers to the subaccounts, or charges for the monthly deduction on a last
in, first out basis ("LIFO") for the purpose of crediting interest.
THE FIXED ACCOUNT IS NOT REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION AND THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
REVIEWED THE DISCLOSURE IN THIS PROSPECTUS RELATING TO THE FIXED ACCOUNT.
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<PAGE> 18
THE VARIABLE ACCOUNT AND THE PORTFOLIOS
===============================================================================
THE VARIABLE ACCOUNT
Farmers established the variable account as a separate investment
account under Washington law on April 6, 1999. Farmers owns the assets in the
variable account and is obligated to pay all benefits under the Policies.
Farmers may use the variable account to support other variable life insurance
policies Farmers issues. The variable account is registered with the U.S.
Securities and Exchange Commission ("SEC") as a unit investment trust under the
Investment Company Act of 1940 and qualifies as a "separate account" within the
meaning of the Federal securities laws.
The variable account is divided into 12 subaccounts, each of which
invests in shares of one portfolio of a fund.
Under Washington law, the assets in the variable account are the
property of Farmers. However, assets in the variable account that are
attributable to the Policy are not chargeable with liabilities arising out of
any other business we may conduct. Income, gains, and losses (realized and
unrealized), resulting from assets in the variable account, are credited to or
charged against the variable account without regard to other income, gains or
losses of Farmers. Promises we make in the Policy are general corporate
obligations of Farmers and are not dependent on assets in the variable account.
The variable account may include other subaccounts that are not
available under the Policies and are not discussed in this prospectus. Where
permitted by applicable law, Farmers reserves the right to:
1. Create new variable accounts;
2. Combine separate accounts, including the variable account;
3. Remove, combine or add subaccounts and make the new subaccounts
available to you at our discretion;
4. Make new portfolios available under the variable account or
remove existing portfolios;
5. Substitute new portfolios for any existing portfolios if shares
of the portfolio are no longer available for investment or if
Farmers determines that investment in a portfolio is no longer
appropriate in light of the purposes of the variable account;
6. Deregister the variable account under the Investment Company Act
of 1940 if such registration is no longer required;
7. Operate the variable account as a management investment company
under the Investment Company Act of 1940 or as any other form
permitted by law; and
8. Make any changes required by the Investment Company Act of 1940
or any other law.
No such changes will be made without any necessary approval of the SEC and
applicable state insurance departments. We will notify you of any changes.
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. Any dividends and
distributions from a portfolio are reinvested at net asset value in shares of
that portfolio. Each fund available under the Contract is registered with the
SEC under the 1940 Act as an
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<PAGE> 19
open-end, management investment company. Such registration does not involve
supervision of the management or investment practices or policies of the funds
by the SEC.
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 following table summarizes each portfolio's investment
objective(s) and policies. THERE IS NO ASSURANCE THAT ANY OF THE PORTFOLIOS
WILL ACHIEVE ITS STATED OBJECTIVE(s). You can find more detailed information
about the portfolios, including a description of risks, in the prospectuses for
the funds. You should read the funds' prospectuses carefully.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE AND INVESTMENT ADVISER
<S> <C>
JANUS ASPEN SERIES-CAPITAL Seeks long-term growth of capital. It is
APPRECIATION PORTFOLIO non-diversified. Investment adviser is
Janus Capital Corporation.
KEMPER GOVERNMENT Seeks high current return consistent with
SECURITIES PORTFOLIO preservation of capital. Investment
adviser is Scudder Kemper Investments, Inc.
KEMPER HIGH YIELD Seeks to provide a high level of current
PORTFOLIO income. Investment adviser is Scudder
Kemper Investments, Inc.
KEMPER SMALL CAP Seeks maximum appreciation of investors'
GROWTH PORTFOLIO capital. Investment adviser is Scudder
Kemper Investments, Inc.
</TABLE>
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<PAGE> 20
<TABLE>
<S> <C>
KEMPER-DREMAN HIGH Seeks to achieve a high rate of total
RETURN EQUITY return. Investment adviser is Scudder
PORTFOLIO Kemper Investments, Inc.; investment
sub-adviser is Dreman Value Management
L.L.C.
PIMCO LOW DURATION Seeks to maximize total return, consistent
BOND PORTFOLIO with preservation of capital and prudent
investment management. Investment adviser
is Pacific Investment Management Company.
PIMCO FOREIGN BOND Seeks to maximize total return, consistent
PORTFOLIO with preservation of capital and prudent
investment management. Investment adviser
is Pacific Investment Management Company.
MONEY MARKET Seeks stability of capital and, consistent
PORTFOLIO (CLASS A therewith, to maximize the liquidity of
SHARES) capital and to provide current income.
Investment adviser is Scudder Kemper
Investments, Inc.
GROWTH AND INCOME Seeks long-term growth of capital, current
PORTFOLIO (CLASS A income and growth of income. Investment
SHARES) adviser is Scudder Kemper Investments, Inc.
INTERNATIONAL Seeks long-term growth of capital primarily
PORTFOLIO (CLASS A through diversified holdings of marketable
SHARES) foreign equity investments. Investment
adviser is Scudder Kemper Investments, Inc.
BOND PORTFOLIO Seeks a high level of income consistent
(CLASS A SHARES) with a high quality portfolio of debt
securities. Investment adviser is Scudder
Kemper Investments, Inc.
TEMPLETON DEVELOPING Seeks long-term capital appreciation.
MARKETS FUND (CLASS 2 Investment adviser is Templeton Asset
SHARES) Management Ltd.
</TABLE>
In addition to the variable account, the funds may sell shares to
other separate investment accounts established by other insurance companies to
support variable annuity contracts and variable life insurance policies as well
as to qualified plans. It is possible that, in the future, it may become
disadvantageous for variable life insurance separate accounts and variable
annuity separate accounts to invest in the funds simultaneously. Although
neither Farmers nor the mutual funds currently foresee any such disadvantages,
either to variable life insurance policy owners or to variable annuity contract
owners, each fund's Board of Directors (Trustees) will monitor events in order
to identify any material conflicts between the interests of such variable life
insurance policy owners and variable annuity contract owners, and will
determine what action, if any, it should take. Such action could include the
sale of fund shares by one or more of the separate accounts, which could have
adverse consequences. Material conflicts could result from, for example, (1)
changes in state insurance laws, (2) changes in Federal income tax laws, or (3)
differences in voting instructions between those given by variable life
insurance policy owners and those given by variable annuity contract owners.
If a fund's Board of Directors (or Trustees) were to conclude that
separate funds should be established for variable life insurance and variable
annuity separate accounts, Farmers will bear the attendant expenses, but
variable life insurance policy owners and variable annuity contract owners
would no longer have the economies of scale resulting from a larger combined
fund.
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<PAGE> 21
PLEASE READ THE ATTACHED PROSPECTUSES FOR THE PORTFOLIOS TO OBTAIN MORE
COMPLETE INFORMATION REGARDING THE PORTFOLIOS.
YOUR RIGHT TO VOTE PORTFOLIO SHARES
Even though we are the legal owner of the portfolio shares held in the
subaccounts, and have the right to vote on all matters submitted to
shareholders of the portfolios, we will vote our shares only as Policy owners
instruct, so long as such action is required by law.
Before a vote of a portfolio's shareholders occurs, you will receive
voting materials from us. We will ask you to instruct us on how to vote and to
return your proxy to us in a timely manner. You will have the right to instruct
us on the number of portfolio shares that corresponds to the amount of Contract
Value you have in that portfolio (as of a date set by the portfolio).
If we do not receive voting instructions on time from some owners, we
will vote those shares in the same proportion as the timely voting instructions
we receive. Should Federal securities laws, regulations and interpretations
change, we may elect to vote portfolio shares in our own right. If required by
state insurance officials, or if permitted under Federal regulation, we may
disregard certain owner voting instructions. If we ever disregard voting
instructions, we will send you a summary in the next annual report to Policy
owners advising you of the action and the reasons we took such action.
THE POLICY
===============================================================================
PURCHASING A POLICY
To purchase a Policy, you must send the application and initial
premium to us through any licensed Farmers insurance agent who is also a
registered representative of a broker-dealer having a selling agreement with
the principal underwriter for the Policy, Investors Brokerage Services, Inc.
Acceptance of an application is subject to our insurance underwriting, and we
reserve the right to decline an application for any reasons subject to the
requirements imposed by law in the jurisdiction where the requested insurance
Policy was to be issued and delivered. If the application is declined or
canceled, the full amount paid with the application will be refunded.
We determine the minimum principal sum (death benefit) for a Policy
based on the attained age of the insured when we issue the Policy. The minimum
principal sum for the preferred premium class is $150,000, and $50,000 for all
others. The maximum issue age for insureds in the preferred underwriting class
is age 75, and for all other premium classes is age 80. We base the minimum
initial premium for your Policy on a number of factors including the age, sex
and premium class of the insured and the amount of the principal sum. We
currently require a minimum initial premium as shown on the Policy's
specifications page.
We use different underwriting standards in relation to the Policy. We
can provide you with details as to these underwriting standards when you apply
for a Policy. We must receive evidence of insurability that satisfies our
underwriting standards before we will issue a Policy. We reserve the right to
reject an application for any reason permitted by law.
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<PAGE> 22
WHEN INSURANCE COVERAGE TAKES EFFECT
TEMPORARY INSURANCE COVERAGE. If the insured meets our eligibility
requirements for temporary insurance coverage, then we will provide the insured
with temporary insurance coverage in the amount applied for, or $50,000,
whichever is less. The conditions and eligibility requirements for temporary
insurance coverage are detailed in the Temporary Insurance Agreement included
with the Policy application.
Temporary insurance coverage terminates automatically, and without
notice, on the earliest of:
- The date full insurance coverage becomes effective; or
- The date the proposed insured receives notice that their
application has been declined, and in no event later than
12:01 a.m. Pacific Standard Time of the fifth day after
Farmers has mailed a letter giving such notice; or
- The date the proposed insured or the owner signs a request to
cancel the application or rejects the policy if issued other
than as applied for.
FULL INSURANCE COVERAGE. If we issue the Policy as applied for, full
insurance coverage under the Policy will take effect on the issue date. If we
issue a Policy other than as applied for, full insurance coverage will take
effect either upon the completion of all underwriting and Policyowner
acceptance of the Policy, or on the issue date, whichever is later.
Generally, we will issue the Policy if we determine that the insured
meets our underwriting requirements and we accept the original application. On
the issue date, we will begin to deduct monthly deductions from your net
premium and we will allocate your premium (multiplied by the percent of premium
factor, and minus the monthly deduction(s)) to the fixed account until the
reallocation date. See "Allocating Premiums."
OWNERSHIP RIGHTS
The Policy belongs to the owner named in the application. The owner
may exercise all of the rights and options described in the Policy. The owner
is the insured unless the application specifies a different person as the
insured. If the owner dies before the insured and no successor owner is named,
then ownership of the Policy will pass to the insured's estate. The owner may
exercise certain rights described below.
<TABLE>
<S> <C>
CHANGING - You may change the owner by providing a written request to
THE OWNER us at any time while the insured is alive.
- The change takes effect on the date that the written
request is signed.
- We are not liable for any actions we may have taken before
we received the written request.
- Changing the owner does not automatically change the
beneficiary.
- Changing the owner may have tax consequences. You should
consult a tax adviser before changing the owner.
</TABLE>
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<PAGE> 23
<TABLE>
<S> <C>
SELECTING - You designate the beneficiary (the person to receive the
AND death benefit when the insured dies) in the application.
CHANGING - If you designate more than one beneficiary, then each
THE beneficiary shares equally in any death benefit
BENEFICIARY proceeds unless the beneficiary designation states
otherwise.
- If the beneficiary dies before the insured, then any
contingent beneficiary becomes the beneficiary.
- If both the beneficiary and contingent beneficiary die
before the insured, then we will pay the death
benefit to the owner or the owner's estate once
the insured dies.
- You can request a delay clause which provides that if the
beneficiary dies within a specified number of days
(maximum 180 days) following the insured's death,
then the death benefit proceeds will be paid as if
the beneficiary had died first.
- You can change the beneficiary by providing us with a
written request while the insured is living.
- The change in beneficiary is effective as of the date you
sign the written request.
- We are not liable for any actions we may have taken before
we received the written request.
ASSIGNING - You may assign Policy rights while the insured is alive.
THE POLICY - The owner retains any ownership rights that are not
assigned.
- Assignee may not change the owner or the beneficiary,
and may not elect or change an optional method of
payment. We will pay any amount payable to the
assignee in a lump sum.
- Claims under any assignment are subject to proof of
interest and the extent of the assignment.
- We are not:
- bound by any assignment unless we receive a written notice
of the assignment.
- responsible for the validity of any assignment.
- liable for any payment we made before we received written
notice of the assignment.
- Assigning the Policy may have tax consequences. See
"Federal Tax Considerations."
</TABLE>
CANCELING A POLICY
You may cancel a Policy during the "right-to-examine period" by
returning it to our Home Office. In most states, the right-to-examine period
expires 10 days after you receive the Policy. This period will be longer if
required by state law. If you decide to cancel the Policy during the
right-to-examine period, we will treat the Policy as if we never issued it.
Within seven calendar days after we receive the returned Policy, we will refund
an amount equal to the greater of Contract Value at the end of the Valuation
Date on which we receive the returned Policy at our Home Office or the sum of
all premiums paid for the Policy.
19
<PAGE> 24
PREMIUMS
===============================================================================
PREMIUM FLEXIBILITY
You have flexibility to determine the frequency and the amount of the
premiums you pay. You do not have to pay premiums according to any schedule.
However, you greatly increase your risk of lapse if you do not regularly pay
premiums at least as large as the current minimum premium.
Before we issue a Policy, we will require you to pay the premium
indicated on your Policy's specification page. Thereafter, you may pay premiums
($25 minimum) at any time. You must send all premiums to our Service Center. We
reserve the right to limit the number and amount of any unscheduled premiums.
You may not pay any premiums after the insured reaches attained age 100.
We multiply each premium by the percent of premium factor (currently
0.965) and credit the resulting value to the Contract Value. We retain the
balance of each premium to compensate us for certain expenses such as premium
taxes and selling expenses.
WE WILL TREAT ANY PAYMENT YOU MAKE AS A PREMIUM UNLESS YOU CLEARLY
MARK IT AS A LOAN REPAYMENT. We have the right to limit or refund any premium,
if the premium would disqualify the Policy as a life insurance contract under
the Internal Revenue Code, or if the payment would increase the death benefit
by more than the amount of the premium. Your Policy's specifications page will
show the maximum premium amount. If we return a portion of your premium based
on the maximum premium amount, we will not allow you to make additional
premiums until they are allowed by the maximum premium limitations.
ELECTRONIC PAYMENTS OR BILLING. If you authorize electronic payment of
your premiums from your bank account, or if you ask to be billed for your
planned premiums, the total amount of premiums being debited, or billed, must
be at least $300 per year. You can be billed, or make electronic payments, on
an annual, semi-annual, quarterly or monthly basis for the applicable fraction
of $300, but the total for the year must add up to at least $300.
You can stop paying premiums at any time and your Policy will continue
in force until the earlier of the maturity date (when the insured reaches
attained age 110), or the date when either (1) the insured dies, or (2) the
grace period ends after the Surrender Value has been exhausted, or (3) we
receive your signed request to surrender the Policy.
MINIMUM PREMIUMS
The full initial premium is the only premium required to be paid under
the Policy. However, you greatly increase your risk of lapse if you do not
regularly pay premiums at least as large as the current minimum premium. PAYING
THE CURRENT MONTHLY MINIMUM PREMIUM WILL NOT NECESSARILY KEEP YOUR POLICY IN
FORCE. Additional premiums may be necessary to keep the Policy in force.
The initial minimum premium and payment mode (annual and monthly) are
shown on your Policy's specifications page, and depends on a number of factors
including the age, sex, and premium class of the proposed insured, and the
principal sum requested.
20
<PAGE> 25
The minimum premium will change if:
- you increase or decrease the principal sum;
- you change the death benefit option;
- you change or add a rider;
- you take a partial withdrawal when you have elected the level
death benefit option (Option B); or
- the insured's premium class changes (for example, from smoker to
non-smoker, or from standard to substandard).
If your Surrender Value (that is, the Contract Value, minus the
surrender charge, and minus any outstanding loan amount, including any interest
you owe) becomes zero or less, so that you cannot pay the monthly deduction
when due, AND if the total premiums you have paid, less withdrawals (not
including surrender charges and processing fees), are less than the cumulative
minimum premiums under your Policy, then your Policy will enter a 61-day grace
period. During the grace period, you must make a payment large enough to keep
the Policy in force. The cumulative minimum premiums is the sum of all past
monthly-mode minimum premiums due since the issue date.
But if the total premiums you have paid, less withdrawals (not
including surrender charges and processing fees), are greater than the
cumulative minimum premiums required under your Policy, then your Policy will
enter a grace period only if your Contract Value, minus any outstanding loan
amount (including any interest you owe), is not large enough to pay the entire
monthly deduction when due. See "Risk Summary," and "Policy Lapse."
PLANNED PREMIUMS
You may determine a planned premium schedule which allows you to pay
level premiums at fixed intervals over a specified period of time. You are not
required to pay premiums according to this schedule. You may change the amount,
frequency, and the time period over which you make your planned premiums by
sending us a written request. We have the right to limit the amount of any
increase in planned premiums. Even if you make your planned premiums on
schedule, your Policy may lapse if your Surrender Value (or Contract Value, if
applicable) is insufficient to pay the monthly deduction. See "Risk Summary,"
"Policy Lapse."
ALLOCATING PREMIUMS
When you apply for a Policy, you must instruct us to allocate your
initial premium(s) to one or more subaccounts of the variable account and to
the fixed account according to the following rules:
- you must put at least 1% of each premium in any subaccount or
the fixed account you select;
- allocation percentages must be in whole numbers and the sum of
the percentages must equal 100.
You can change the allocation instructions for additional premiums without
charge at any time by providing us with written notification (or any other
notification we deem satisfactory). Any allocation change will be effective on
the date we record the change. Any future premiums will be allocated in
accordance with the new allocation, unless we receive contrary written
instructions. We reserve the right to limit the number of premium allocation
changes. We also reserve the right to limit the number of subaccount
allocations in effect at any one time.
21
<PAGE> 26
Investment returns from amounts allocated to the subaccounts will vary
with the investment experience of these subaccounts and will be reduced by
Policy charges. YOU BEAR THE ENTIRE INVESTMENT RISK FOR AMOUNTS YOU ALLOCATE TO
THE SUBACCOUNTS.
On the issue date, we will allocate your premium(s), times the percent
of premium factor, minus the monthly deduction(s) to the fixed account. We also
allocate any premiums we receive from the issue date to the reallocation date
(the record date, plus the number of days in your state's right to examine
period, plus 10 days) to the fixed account. While held in the fixed account,
premium(s) will be credited with interest at the current fixed account rate. On
the reallocation date, we will reallocate the Contract Value in the fixed
account to the other subaccounts (at the unit value next determined) and the
fixed account in accordance with the allocation percentages provided in the
application.
Unless additional underwriting is required, we invest all premiums
paid after the reallocation date on the Valuation Day they are received in our
Service Center. We credit these premiums to the subaccounts at the unit value
next determined after we receive your payment.
CONTRACT VALUES
===============================================================================
CONTRACT VALUE
<TABLE>
<S> <C>
CONTRACT - serves as the starting point for calculating
VALUE values under a Policy
- equals the sum of all values in each subaccount
and the fixed account
- is determined on the issue date and on each
Valuation Day
- on the issue date, equals the initial premium
times the percent of premium factor,
less the monthly deduction
- has no guaranteed minimum amount and may be more
or less than premiums paid
</TABLE>
SURRENDER VALUE
The Surrender Value is the amount we pay when you surrender your
Policy. We determine the Surrender Value at the end of the Valuation Period
when we receive your written surrender request.
<TABLE>
<S> <C>
SURRENDER VALUE ON - the Contract Value as of such date; MINUS
ANY VALUATION DAY - any surrender charge as of such date; MINUS
EQUALS: - any outstanding Policy loans; MINUS
- any interest you owe on the Policy loans.
</TABLE>
SUBACCOUNT VALUE
Each subaccount's value is the Contract Value in that subaccount. At
the end of any Valuation Period, the subaccount's value is equal to the number
of units that the Policy has in the subaccount, multiplied by the unit value of
that subaccount.
22
<PAGE> 27
<TABLE>
<S> <C>
THE NUMBER OF UNITS IN - the initial units purchased at the unit value
ANY SUBACCOUNT ON ANY on the issue date; PLUS
VALUATION DAY EQUALS: - units purchased with additional premiums net
of the percent of premium factor; PLUS
- units purchased via transfers from another
subaccount or the fixed account; MINUS
- units redeemed to pay a pro-rata share of the
monthly deductions; MINUS
- units redeemed to pay for withdrawals, and
any applicable surrender charges; MINUS
- units redeemed as part of a transfer to
another subaccount or the fixed account.
</TABLE>
Every time you allocate or transfer money to or from a subaccount, we
convert that dollar amount into units. We determine the number of units we
credit to, or subtract from, your Policy by dividing the dollar amount of the
allocation, transfer, or withdrawal, by the unit value for that subaccount at
the end of the Valuation Period.
SUBACCOUNT UNIT VALUE
The value (or price) of each subaccount will reflect the investment
performance of the portfolio in which the subaccount invests. Unit values will
vary among subaccounts. The unit value of each subaccount was originally
established at $10 per unit. The unit value may increase or decrease from one
Valuation Period to the next.
The unit value of any subaccount at the end of a Valuation Period is
calculated as:
A x B, where:
"A" is the subaccount's unit value for the end of the immediately
preceding Valuation Day; and
"B" is the net investment factor for the most current Valuation Day.
The net investment factor is an index we use to measure the investment
performance of a subaccount from one Valuation Period to the next. Each
subaccount has a net investment factor for each Valuation Period that may be
greater or less than one. Therefore, the value of a unit (and the value of a
subaccount) may increase or decrease. We determine the net investment factor
for any subaccount for any Valuation Period by the following formula:
X Z
---- -
Y
"X" equals:
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 shares held in the subaccount during the current Valuation
Day; MINUS
23
<PAGE> 28
3. the per share amount of any capital loss distribution on shares
held in the subaccount during the current Valuation Day; MINUS
4. the per share amount of any taxes or any amount set aside during
the Valuation Day as a reserve for taxes.
"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 the mortality and expense risk charge.
FIXED ACCOUNT VALUE
On the issue date, the fixed account value is equal to the premiums
allocated to the fixed account, less the portion of the first monthly deduction
taken from the fixed account.
<TABLE>
<S> <C>
THE FIXED ACCOUNT VALUE AT - "A" is the fixed account value on the
THE END OF ANY VALUATION preceding Valuation Day plus interest from
PERIOD IS EQUAL TO the preceding Valuation Day to the date of
A+B+C-D-E-F: calculation; PLUS
- "B" is the portion of the premium(s),
multiplied by the percent of premium factor,
allocated to the fixed account since the
preceding Valuation Day, plus interest from
the date such premiums were received to the
date of calculation; PLUS
-
"C" any amounts transferred to the fixed
account since the preceding Valuation Day,
plus interest from the effective date of such
transfers to the date of calculation; MINUS
- "D" is the amount of any transfer from the
fixed account to the subaccounts since the
preceding Valuation Day, plus interest from
the effective date of such transfers to the
date of calculation; MINUS
- "E" is the amount of any withdrawals
(partial surrenders) and any applicable
surrender charges deducted from the fixed
account since the preceding Valuation Day,
plus interest on those surrendered amounts
from the effective date of each withdrawal
to the date of calculation; MINUS
- "F" is zero, except on the monthly due date,
when it is a pro-rata share of the monthly
deduction for the month beginning on that
monthly due date.
</TABLE>
Your Policy's guaranteed minimum fixed account value will not be less
than the minimum values required by the state where we deliver your Policy.
24
<PAGE> 29
CHARGES AND DEDUCTIONS
===============================================================================
This section describes the charges and deductions that we make under
the Policy to compensate for: (1) the services and benefits we provide; (2) the
costs and expenses we incur; and (3) the risks we assume.
<TABLE>
<S> <C>
SERVICES AND - the death benefit (principal sum),
BENEFITS WE PROVIDE: surrender and loan benefits under the
Policy
- investment options, including premium
allocations
- administration of elective options
- the distribution of reports to owners
COSTS AND EXPENSES WE - costs associated with processing and
INCUR: underwriting applications, issuing and
administering the Policy (including any
riders)
- overhead and other expenses for providing
services and benefits
- sales and marketing expenses
- other costs of doing business, such as
collecting premiums, maintaining records,
processing claims, effecting transactions,
and paying Federal, state and local
premium and other taxes and fees
RISKS WE ASSUME: - that the cost of insurance charges we may
deduct are insufficient to meet our actual
claims because insureds die sooner than we
estimate
- that the costs of providing the services
and benefits under the Policies exceed the
charges we deduct
</TABLE>
PREMIUM DEDUCTIONS
When you make a premium payment, we apply a percent of premium factor
currently equal to 0.965 to the premium to determine the amount that we will
allocate to the subaccounts and the fixed account according to your
instructions. The 3.5% of each premium we retain compensates us for
distribution expenses and state premium taxes. We may change the percent of
premium factor for new Policies in the future.
MONTHLY DEDUCTION
We take a monthly deduction from the Contract Value on the issue date
and on each monthly due date (the same day of each succeeding month as the
issue date, or, if there is no comparable Valuation Day, the next Valuation
Day). We will make deductions from each subaccount and the fixed account in
accordance with the current premium allocation instructions. If the value of
any subaccount or the fixed account is insufficient to pay that subaccount or
fixed account's portion of the monthly deduction, we will take the monthly
deduction on a pro-rata basis from all accounts (i.e., in the same proportion
that the value in each subaccount and the fixed account bears to the total
Contract Value on the monthly due date). Because portions of the monthly
deduction can vary from month-to-month, the monthly deduction will also vary.
25
<PAGE> 30
The monthly deduction is equal to:
- The cost of insurance charge for the Policy; PLUS
- The charges for any riders; PLUS
- The monthly administration charge; PLUS
- The special premium factor applied to the cost of insurance
for a special premium class, if any; PLUS
- The flat extra charge for a special premium class, if any.
COST OF INSURANCE. We assess a monthly cost of insurance charge to
compensate us for underwriting the death benefit (i.e., the anticipated cost of
paying a death benefit that exceeds your Contract Value). The charge depends on
a number of variables (Contract Value and the insured's issue age, sex, and
premium class, and the number of months since the issue date) that would cause
it to vary from Policy to Policy and from monthly due date to monthly due date.
The cost of insurance charge is equal to the cost of insurance rate at
the insured's attained age, times the number of thousands of Risk Insurance
Amount.
The Risk Insurance Amount is:
1. The current death benefit; MINUS
2. The Contract Value at the end of the Valuation Day preceding the
monthly due date; PLUS
3. The monthly administrative charge for the month that begins on the
monthly due date; PLUS
4. Any charges for riders for the month that begins on the monthly due
date.
The Risk Insurance Amount may increase, or decrease, depending on
investment experience, the payment of additional premiums, Policy riders, and
the application of the death benefit percentage formula. Therefore, the cost of
insurance charges can increase or decrease over time.
Cost of insurance rates are based on the sex, attained age, and
premium class of the insured. The cost of insurance rates are generally higher
for male insureds than for female insureds of the same age and premium class,
and ordinarily increase with age. Cost of insurance rates may never exceed the
guaranteed maximum cost of insurance rates shown in Appendix A.
The premium class of the insured will affect the cost of insurance
rates. We currently place insureds into standard premium classes and into
special premium classes involving higher mortality risks. The cost of insurance
rates for special premium classes involving higher mortality risks are
multiples of the standard rates. If the insured is in a special premium class,
the guaranteed maximum monthly cost of insurance rate will be the rate shown in
the table in Appendix A times the special premium class rating factor shown on
your Policy's specification page. The charge for any attached rider is a
separate calculation.
We calculate the cost of insurance separately for the initial
principal sum and for any increase in principal sum. If you request and we
approve an increase in your Policy's principal sum, then a different premium
class (and a different cost of insurance) may apply to the increase, based on
the insured's circumstances at the time of the increase.
The Policies are based on mortality tables that distinguish between
men and women. As a result, the Policy may pay different benefits to men and
women of the same age and premium class. We also offer Policies based on unisex
mortality tables if required by state law.
26
<PAGE> 31
CHARGES FOR RIDERS. The monthly deduction includes charges for any
optional insurance benefits you add to your Policy by rider.
MONTHLY ADMINISTRATION CHARGE. We deduct this charge to compensate us
for administrative expenses such as recordkeeping, processing death benefit
claims and Policy changes, and overhead costs. The monthly administration
charge currently equals $5, guaranteed never to be higher than $8.
MONTHLY SPECIAL PREMIUM CLASS CHARGE. If the insured is in a special
premium class, the guaranteed maximum monthly cost of insurance rate will be
the rate shown in the Policy times the special premium rate factor shown on the
Policy's specifications page. This factor is applied to both current and
guaranteed cost of insurance rate. This charge compensates us for additional
costs associated with claims from the insureds in the special premium class. If
applicable to you, your Policy's specifications page will show the amount of
this charge.
MONTHLY FLAT EXTRA CHARGE. We deduct a flat extra charge if the
insured is in a special premium class. This compensates us for the additional
costs associated with the special premium class. The charge, if any, will be
shown on your Policy's specifications page.
MORTALITY AND EXPENSE RISK CHARGE
We deduct a daily charge from your Contract Value in each subaccount
to compensate us for certain mortality and expense risks we assume. The
mortality risk is that an insured will live for a shorter time than we project.
The expense risk is that the expenses that we incur will exceed the
administrative charge limits we set in the Policy. This charge is equal to:
- your Contract Value in each subaccount MULTIPLIED BY
- the daily pro rata portion of the annual mortality and
expense risk charge rate of 0.90%.
If this charge does not cover our actual costs, we absorb the loss.
Conversely, if the charge more than covers actual costs, the excess is added to
our surplus. We expect to profit from this charge. We may use any profits for
any lawful purpose including covering distribution costs.
SURRENDER CHARGE
We deduct a surrender charge if, during the first 14 Policy years, you:
- fully surrender the Policy, or
- take a partial withdrawal from your Policy, if you have
elected a level death benefit (Option B) , or
- you decrease the principal sum that was in effect at
the time of issue.
In the case of a full surrender, we pay the remaining Contract Value
(less any surrender charge and any outstanding loan amount, including any
interest you owe) to you. The payment you receive is called the Surrender
Value.
If you take a partial withdrawal, we will reduce the Contract Value on
a pro-rata basis from the subaccounts and the fixed account (unless you
instruct us otherwise) by the amount of the partial withdrawal, the processing
fee, and any surrender charge.
27
<PAGE> 32
THE SURRENDER CHARGE MAY BE SIGNIFICANT. YOU SHOULD CAREFULLY
CALCULATE THIS CHARGE BEFORE YOU REQUEST A SURRENDER. Under some circumstances
the level of surrender charges might result in no Contract Value available if
you surrender your Policy during the period when surrender charges apply. This
will depend on a number of factors, but is more likely if:
1. you pay premiums equal to or not much higher than the minimum
premium shown in your Policy, or
2. investment performance is too low.
The surrender charge is equal to the sum of the Deferred Sales Charge
Component and the Administrative Component.
The Deferred Sales Charge Component is calculated by:
1. find the sum of all premiums that have been paid to the
Policy (do not deduct amounts withdrawn or the percent of
premium factor);
2. multiply this sum by 0.075 if the insured's issue age was 65
or younger, or by 0.050 if the insured's issue age was 66 or
older;
3. multiply the result by the appropriate number on this table:
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Policy Year: 1-3 4 5 6 7 8 9 10 11 12 13 14 15 or more
- ---------------------------------------------------------------------------------------------------------------------------
Issue ages 0-65 1.00 1.00 1.00 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00
- ---------------------------------------------------------------------------------------------------------------------------
Issue ages 66 and older 1.00 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.15 0.10 0.05 0.00
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Administrative Component is calculated by:
1. the appropriate surrender charge factor from the tables in
Appendix B for the insured's age on the issue date and the
number of full Policy years since the issue date (regardless
of whether the Policy has lapsed and been reinstated) (the
tables vary by sex and premium class); MULTIPLIED BY
2. the number of thousands of principal sum on the issue date,
MINUS any reductions in principal sum for which a surrender
charge has already been imposed.
DECREASE IN PRINCIPAL SUM. If you decrease the principal sum that was
in effect on the issue date, we will assess the administrative component of the
surrender charge. To determine the surrender charge for a decrease in principal
sum: multiply the appropriate surrender charge factor from the tables in
Appendix B by the number of thousands of principal sum at the time of issue
that are now being decreased. Only a reduction in the original principal sum
amount (as of the issue date) incurs a surrender charge.
AN EXAMPLE OF CALCULATING THE SURRENDER CHARGE FOLLOWS:
This example is for a Policy that is in its seventh Policy year. The
principal sum is $200,000 and the issue age is 35. A premium of $1,000 has been
paid at the beginning of each year and the total cumulative premium payments
are $7,000.
The total surrender charge is the sum of a Deferred Sales Charge
Component and an Administrative Component.
28
<PAGE> 33
The Deferred Sales Charge Component is calculated by multiplying the
cumulative premium by 0.075, then multiplying the result by the appropriate
number from the table. For this example the appropriate number is 0.80. The
result is ($7,000)(0.075)(0.80) = $420.
The Administrative Component is calculated by multiplying the number
of thousands of principal sum by the appropriate factor from the surrender
charge table. In this example the factor is 4.94. The result is ($200)(4.94) =
$988.
The total surrender charge is the sum of the Deferred Sales Charge
Component and the Administrative Component. The total surrender charge is
therefore $420 + $988 = $1,408.
PARTIAL WITHDRAWAL PROCESSING FEE. We deduct a processing fee equal
to the lesser of $25 or 2% of the amount withdrawn.
TRANSFER CHARGE
- We currently allow you to make 12 transfers each Policy year free
from charge. Any unused free transfers do not carry over to the
next Policy year.
- We charge $25 for each additional transfer. We will not increase
this charge.
- For purposes of assessing the transfer charge, each written or
telephone request is considered to be one transfer, regardless of
the number of subaccounts (or fixed account) affected by the
transfer.
- We deduct the transfer charge from the amount being transferred,
or from the remaining Contract Value, according to your
instructions.
- Transfers we effect on the reallocation date, and transfers due
to loans, automatic asset rebalancing, and dollar cost averaging,
do NOT count as transfers for the purpose of assessing this
charge.
PORTFOLIO EXPENSES
The value of the net assets of each subaccount reflects the investment
management fees, 12b-1 fees in some cases, and other expenses incurred by the
corresponding portfolio in which the subaccount invests. See the Portfolio
Expense Table in this prospectus, and the portfolios' prospectuses for further
information on these fees and expenses.
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 Policy. Some advisers, administrators
or distributors may pay us more than others.
29
<PAGE> 34
OTHER CHARGES
- We charge $5 for each additional annual report you request.
- We charge $1.50 per $1,000 for each increase in principal sum
(this charge cannot exceed $300).
- Any riders attached to the Policy will have their own charges.
DEATH BENEFIT
===============================================================================
DEATH BENEFIT PROCEEDS
As long as the Policy is in force, we will pay the death benefit
proceeds once we receive satisfactory proof of the insured's death at our Home
Office. We may require return of the Policy. We will pay the death benefit
proceeds to the primary beneficiary or a contingent beneficiary. If the
beneficiary dies before the insured and there is no contingent beneficiary, we
will pay the death benefit proceeds to the owner or the owner's estate. We will
pay the death benefit proceeds into an interest paying checking account or
under a payment option. See "Payment Options."
<TABLE>
<S> <C>
DEATH BENEFIT - the death benefit (described below); MINUS
PROCEEDS EQUAL: - any past due monthly deductions; MINUS
- any outstanding Policy loan on the date of death; MINUS
- any interest you owe on the Policy loan(s); PLUS
- any additional insurance provided by rider.
</TABLE>
If all or part of the death benefit proceeds are paid in one sum, we
will pay interest on this sum as required by applicable state law from the date
we receive due proof of the insured's death to the date we make payment.
We may further adjust the amount of the death benefit proceeds under
certain circumstances. See "Our Right to Contest the Policy," "Misstatement of
Age or Sex," and "Suicide Exclusion."
DEATH BENEFIT OPTIONS
In your application, you tell us how much life insurance coverage you
want on the life of the insured. We call this the "principal sum" of insurance.
You also chose whether the death benefit we will pay is Option A (variable
death benefit through attained age 99), or Option B (level death benefit
through attained age 99). For attained ages after age 99, the death benefit
equals the Contract Value. You may change the death benefit option after the
first Policy year.
<TABLE>
<S> <C>
THE VARIABLE DEATH - the principal sum PLUS the Contract Value (determined as
BENEFIT UNDER OPTION A IS of the end of the Valuation Period during which the
THE GREATER OF: insured dies); OR
- the death benefit required by the Tax Code (Contract
Value on the date of death multiplied by the
applicable death benefit percentage).
</TABLE>
Under Option A, the death benefit varies with the Contract Value.
30
<PAGE> 35
<TABLE>
<S> <C>
THE LEVEL DEATH BENEFIT - the principal sum on the date of death; OR
UNDER OPTION B IS THE - the death benefit required by the Tax Code (Contract
GREATER OF: Value on the date of death multiplied by the applicable
death benefit percentage).
</TABLE>
Under Option B, your death benefit generally equals the principal
amount and will remain level, unless the death benefit is determined as
required by the Tax Code (Contract Value times the applicable death benefit
percentage).
Under Option A, your death benefit will tend to be higher than under
Option B. However, the monthly insurance charges we deduct will also be higher
to compensate us for our additional risk. Because of this, your Contract Value
will tend to be higher under Option B than under Option A.
In order for the Policy to qualify as life insurance, Federal tax law
requires that your death benefit be at least as much as your Contract Value
multiplied by the applicable death benefit percentage. The death benefit
percentage is based on the insured person's attained age. For example, the
death benefit percentage is 250% for an insured at age 40 or under, and it
declines for older insureds. The following table indicates the applicable death
benefit percentages for different attained ages:
<TABLE>
<CAPTION>
ATTAINED AGE DEATH BENEFIT PERCENTAGE
<S> <C>
40 and under 250%
41 to 45 250% minus 7% for each age over age 40
46 to 50 209% minus 6% for each age over age 45
51 to 55 178% minus 7% for each age over age 50
56 to 60 146% minus 4% for each age over age 55
61 to 65 128% minus 2% for each age over age 60
66 to 70 119% minus 1% for each age over age 65
71 to 74 113% minus 2% for each age over age 70
75 to 90 105%
91 to 94 104% minus 1% for each age over age 90
95 and above 100%
</TABLE>
If the Tax Code requires us to increase the death benefit by reference
to the death benefit percentages, that increase in the death benefit will
increase our risk, and will result in a higher monthly cost of insurance.
31
<PAGE> 36
OPTION A EXAMPLE. Assume that the insured's attained age is under 40,
that there have been no decreases in the principal sum, and that there are no
outstanding loans. Under Option A, a Policy with a principal sum of $50,000
will pay a death benefit equal to the greater of $50,000 plus Contract Value or
250% of the Contract Value. Thus, a Policy with a Contract Value of $10,000
will have a death benefit of $60,000 (that is, the greater of $60,000 ($50,000
+ $10,000) or $25,000 (250% of $10,000)).
However, once the Contract Value exceeds $33,334, the death benefit
determined by reference to the death benefit percentage ($33,333 X 250% =
$83,335) will be greater than the principal sum plus Contract Value ($50,000 +
$33,334 = $83,334). Each additional dollar of Contract Value above $33,334 will
increase the death benefit by $2.50.
Similarly, under this scenario, any time Contract Value exceeds
$33,334, each dollar taken out of Contract Value will reduce the death benefit
by $2.50.
OPTION B EXAMPLE. Assume that the insured's attained age is under 40,
there have been no withdrawals or decreases in principal sum, and that there
are no outstanding loans. Under Option B, a Policy with a $50,000 principal sum
will generally pay $50,000 in death benefits. However, because the death
benefit must be equal to or be greater than 250% of Contract Value, any time
the Contract Value exceeds $20,000, the death benefit will be determined as
required by the Tax Code (Contract Value X 250%) and will exceed the principal
sum of $50,000. Each additional dollar added to the Contract Value above
$20,000 will increase the death benefit by $2.50.
Similarly, so long as the Contract Value exceeds $20,000, each dollar
taken out of the Contract Value will reduce the death benefit by $2.50.
CHANGING DEATH BENEFIT OPTIONS
- After the first Policy year, you may change death benefit options
or change the principal sum (but not both, unless done
simultaneously) once each Policy year.
- You must make your request in writing.
- We may require evidence of insurability.
- The effective date of the change will be the monthly due date on
or following the date when we approve your request for a change.
- We will send you a Policy endorsement with the change to attach
to your Policy.
- Changing the death benefit option may have tax consequences. You
should consult a tax adviser before changing the death benefit
option.
FROM OPTION A (VARIABLE DEATH BENEFIT) TO OPTION B (LEVEL DEATH BENEFIT)
- We do not require evidence of insurability.
- The principal sum will change. The new Option B principal
sum will equal the Option A principal sum plus the Contract
Value on the effective date of the change.
- The minimum premium will increase.
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<PAGE> 37
- The change in option affects the determination of the death
benefit since Contract Value is no longer added to the
principal sum. The death benefit will equal the new
principal sum (or, if higher, the Contract Value times the
applicable death benefit percentage).
FROM OPTION B (LEVEL DEATH BENEFIT) TO OPTION A (VARIABLE DEATH BENEFIT)
- You must provide satisfactory evidence of insurability.
- The principal sum will change. The new Option A principal
sum will equal the Option B principal sum less the Contract
Value immediately before the change, but the new principal
sum will not be less than the minimum principal sum shown on
your Policy's specifications page. WE WILL NOT IMPOSE ANY
SURRENDER CHARGE SOLELY AS A RESULT OF THIS CHANGE IN
PRINCIPAL SUM.
- The minimum premium will decrease.
- The change in death benefit option affects the determination
of the death benefit since Contract Value will be added to
the new principal sum, and the death benefit will then vary
with the Contract Value.
A change in death benefit option may affect the future monthly cost of
insurance charge, which varies with the Risk Insurance Amount. Generally, the
Risk Insurance Amount is the amount by which the death benefit exceeds the
Contract Value. (See " Charges and Deductions -- Monthly Deduction -- Cost of
Insurance.") If the death benefit does not equal Contract Value times the death
benefit percentage under either Options A or B, changing from Option A
(variable death benefit) to Option B (level death benefit) will generally
decrease the future Risk Insurance Amount. This would decrease the future cost
of insurance charges. Changing from Option B (level death benefit) to Option A
(variable death benefit) generally results in a Risk Insurance Amount that
remains level. Such a change, however, results in an increase in cost of
insurance charges over time, since the cost of insurance rates increase with
the insured's age.
After any change in death benefit option, the total surrender charge
for the Policy will continue to be based on the principal sum on the issue date
on which surrender charges have not already been imposed.
EFFECTS OF WITHDRAWALS ON THE DEATH BENEFIT
If you have selected the variable death benefit (Option A), a
withdrawal will not affect the principal sum. But if you have selected the
level death benefit (Option B), a withdrawal (partial surrender) will reduce
the principal sum by the amount of the withdrawal (not including surrender
charges or the processing fee). The reduction in principal sum will be subject
to the terms of the Changing the Principal Sum section below.
CHANGING THE PRINCIPAL SUM
When you apply for the Policy, you tell us how much life insurance
coverage you want on the life of the insured. We call this the principal sum.
After the first Policy year, you may change the principal sum subject to the
conditions described below. YOU MAY EITHER CHANGE THE PRINCIPAL SUM OR CHANGE
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<PAGE> 38
THE DEATH BENEFIT OPTION (BUT NOT BOTH, UNLESS DONE SIMULTANEOUSLY) NO MORE
THAN ONCE PER POLICY YEAR. We will send you a Policy endorsement with the
change to attach to your Policy.
Increasing the principal sum could increase the death benefit.
Decreasing the principal sum could decrease the death benefit. The amount of
change in the death benefit will depend, among other things, upon the selected
death benefit option and the degree to which the death benefit exceeds the
principal sum prior to the change. Changing the principal sum could affect the
subsequent level of death benefit and Policy values. An increase in the
principal sum may increase the Risk Insurance Amount, thereby increasing your
cost of insurance charge. Conversely, a decrease in the principal sum may
decrease the Risk Insurance Amount, thereby decreasing your cost of insurance
charge.
We will not permit any change that would result in your Policy being
disqualified as a life insurance contract under Section 7702 of the Internal
Revenue Code. However, changing the principal sum may have other tax
consequences. You should consult a tax adviser before changing the principal
sum.
INCREASES
- You may increase the principal sum by submitting a written
request and providing evidence of insurability satisfactory to
us. The increase will be effective on the monthly due date
following our approval of your request.
- You can only increase the principal sum before the insured's
attained age 80.
- The minimum increase is $10,000.
- We deduct a processing fee from the Contract Value equal to
$1.50 per $1,000 of increase. The fee cannot exceed $300. The
processing fee will be deducted from the subaccounts and the
fixed account on a pro-rata basis, unless you give us
different instructions.
- If the amount of the Contract Value is insufficient to cover
the processing fee, you must add sufficient additional
premiums before the increase in principal sum will become
effective.
- Increasing the principal sum will increase your Policy's
minimum premium.
DECREASES
- You may decrease the principal sum, but not below the minimum
principal sum amount shown on your Policy's specifications
page.
- You must submit a written request to decrease the principal
sum. Evidence of insurability is not required.
- Any decrease will be effective on the monthly due date
following our approval of your request.
- Any decrease will first be used to:
1. reduce the most recent increase; then
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<PAGE> 39
2. the next most recent increases in succession; and
then
3. the principal sum on the issue date (subject to a
surrender charge).
- If you decrease the principal sum that was in effect on the
issue date, we will assess the Administrative Component of
the surrender charge. To determine the surrender charge for a
decrease in principal sum, multiply the appropriate surrender
charge factor from the tables in Appendix B by the number of
thousands of principal sum at the time of issue that are now
being decreased. Only a reduction in the original principal
sum amount (as of the issue date) incurs a surrender charge.
Surrender charges will be deducted from the subaccounts and
the fixed account on a pro-rata basis, unless you give us
different instructions.
- A decrease in principal sum may require that a portion of a
Policy's Surrender Value be distributed as a partial
surrender in order to maintain federal tax compliance.
- Decreasing the principal sum will reduce your Policy's
minimum premium.
PAYMENT OPTIONS
There are several ways of receiving proceeds under the death benefit
and surrender provisions of the Policy, other than in a lump sum. Below is
information concerning settlement options described in your Policy. None of
these options vary with the investment performance of the variable account.
SETTLEMENT OPTIONS. If you surrender the Policy, or if the Policy matures, you
may elect to receive the net surrender value in either a lump sum or as a
series of regular income payments under one of five fixed settlement options
described below. In either event, life insurance coverage ends. Also, when the
insured dies, the beneficiary may apply the lump sum death benefit proceeds to
one of the same settlement options. The proceeds under any settlement option
must be at least $2,500, and each payment must be at least $25, or we will
instead pay the proceeds in one lump sum. We may make other settlement options
available in the future.
Once we begin making payments under a settlement option, you or the
beneficiary will no longer have any value in the subaccounts or the fixed
account. Instead, the only entitlement will be the amount of the regular
payment for the period selected under the terms of the settlement option
chosen. Depending upon the circumstances, the effective date of a settlement
option is the surrender date, the maturity date or the insured's date of death.
Under any settlement option, the dollar amount of each payment will
depend on three things:
- the amount of the surrender or death benefit proceeds on the
surrender date, maturity date or insured's date of death;
- the interest rate we credit on those amounts (we guarantee a
minimum interest rate); and
- the specific option(s) you choose. The amount you would
receive may depend on your adjusted age and sex.
<TABLE>
<S> <C>
OPTION 1 -- - Your proceeds will earn interest at a
INTEREST rate of 2.5% per year compounded annually.
ACCUMULATION: - We may not keep the funds under this
option for longer than five years,
unless the beneficiary is a minor, in
which case we may hold the funds until
the beneficiary attains the age of
majority.
</TABLE>
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<PAGE> 40
<TABLE>
<S> <C>
OPTION 2 -- - You will receive income of at least $25
INTEREST annually, $12.42 semi-annually, $6.19
INCOME: quarterly, or $2.05 monthly for each
$1,000 of proceeds.
- Unless you direct otherwise, the payee
may withdraw the proceeds at any time.
- After the first year, we may defer such
withdrawal for up to six months.
OPTION 3 -- - We will pay installments for a specified period.
INCOME - - The amount of each installment will not be less than the
PERIOD amounts shown in the table in your Policy.
CERTAIN: - If the payee dies before the end of the specified period,
we will pay the installments to the contingent payee for
the remainder of the specified period.
OPTION 4 -- - We will pay installments of a specified amount until the
INCOME - proceeds together with interest are paid in full.
AMOUNT - We will credit interest at a rate of 2.5% compounded
CERTAIN: annually.
OPTION 5 -- - We will pay installments for the payee's lifetime.
INCOME - - We will make payments for at least a specified guaranteed
LIFE: period.
- If the payee dies before the end of the guaranteed period,
we will continue to pay proceeds to a contingent payee for
the remainder of the guaranteed period.
- The amount of each installment will depend on the adjusted
age and sex of the payee at the time the first payment is due.
- We determine the adjusted age by calculating the age at the
payee's nearest birthday on the date of the first payment
and subtracting a number that depends on the year in which
the first payment begins:
</TABLE>
<TABLE>
<CAPTION>
First Payment Date Adjusted Age is Age Minus
------------------ -------------------------
<S> <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>
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<PAGE> 41
SURRENDERS AND WITHDRAWALS
===============================================================================
SURRENDERS
- You may make a written request to surrender your Policy for
its Surrender Value as calculated at the end of the
Valuation Day when we receive your request. You should send
your written request to the Service Center. A surrender may
have tax consequences.
- The insured must be alive and the Policy must be in force
when you make your written request. A surrender is effective
as of the date when we receive your written request.
- You will incur a surrender charge if you surrender the
Policy during the first 14 Policy years. See "Charges and
Deductions."
- Once you surrender your Policy, all coverage and other
benefits under it cease and cannot be reinstated.
- We will pay you the Surrender Value in a lump sum within
seven days unless you request other arrangements.
- Surrendering the Policy may have tax consequences. See
"Federal Tax Consequences."
PARTIAL WITHDRAWALS
After the first Policy Year, you may request a withdrawal of a portion
of your Contract Value subject to certain conditions. Partial withdrawals may
have tax consequences. See "Federal Tax Consequences."
<TABLE>
<S> <C>
WITHDRAWAL - You must make your partial withdrawal request to us in
CONDITIONS: writing.
- You should send your written request to the Service
Center.
- You may make only one partial withdrawal each calendar
quarter.
- You must request at least $500.
- You cannot withdraw more than 75% of the Surrender Value
without surrendering the Policy.
- You can specify the subaccount(s) and fixed account from
which to make the withdrawal, otherwise we will deduct
the amount from the subaccounts and the fixed account on
a pro-rata basis (that is, according to the percentage of
Contract Value contained in each subaccount and the fixed
account).
- We will process the withdrawal at the unit values next
determined after we receive your request.
- We generally will pay a withdrawal request within seven
days after the Valuation Day when we receive the request.
</TABLE>
Whenever you take a withdrawal, we deduct a processing fee (on a pro
rata basis) from the Contract Value equal to the lesser of $25 or 2% of the
amount withdrawn.
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<PAGE> 42
In addition, if you make a partial withdrawal during the first 14
years from the issue date and you have elected the level death benefit (Option
B), we will deduct a surrender charge from your Contract Value. The surrender
charge on a withdrawal is equal to the appropriate surrender charge factor from
the table in Appendix B, multiplied by the number of thousands in principal sum
on the issue date, minus any reductions in principal sum for which we have
already imposed a surrender charge. We will cancel units equal to the amount of
the withdrawal, processing fee, and any surrender charge from the subaccounts
and the fixed account according to your instructions, or on a pro-rata basis if
you provide no instructions.
If the level death benefit (Option B) is in effect at the time of a
withdrawal, we will reduce the principal sum by the amount of the withdrawal
(but not by any surrender charges or the processing fee). See "Changing the
Principal Sum - Decreases." We will not allow any withdrawal to reduce the
principal sum below the minimum principal sum set forth in the Policy.
TRANSFERS
===============================================================================
You may make transfers from the subaccounts or from the fixed account.
We determine the amount you have available for transfers at the end of the
Valuation Period when we receive your transfer request. WE MAY MODIFY OR REVOKE
THE TRANSFER PRIVILEGE AT ANY TIME. The following features apply to transfers
under the Policy:
- You may make an unlimited number of transfers in a Policy year from
the subaccounts.
- You may only make one transfer a Policy year from the fixed account
(unless you choose dollar cost averaging).
- You may request transfers in writing (in a form we accept), or by
telephone. You should send written requests to the Service Center.
- For SUBACCOUNT TRANSFERS, you must transfer the lesser of $250, or
the total value in the subaccount.
- For FIXED ACCOUNT TRANSFERS, you may not transfer more than 25% of
the unloaned value in the fixed account, unless the balance after the
transfer is less than $250, in which case the entire amount will be
transferred.
- We deduct a $25 charge from the amount transferred or from the
remaining Contract Value (your choice) for the 13th and each
additional transfer in a Policy year. Any unused free transfers do
not carry over to the next Policy year. Transfers we effect on the
reallocation date and transfers resulting from loans are NOT treated
as transfers for the purpose of the transfer charge.
- We consider each written or telephone request to be a single
transfer, regardless of the number of subaccounts (or fixed account)
involved.
- We process transfers based on unit values determined at the end of
the Valuation Day when we receive your transfer request.
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<PAGE> 43
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 $250 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.
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 Policy year, or to
refuse any transfer request for an owner if:
- we believe, in our sole discretion, that excessive trading by
the 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 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 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
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<PAGE> 44
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.
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.
TELEPHONE TRANSFERS
Your Policy, as applied for and issued, will automatically receive
telephone transfer privileges unless you provide other instructions. The
telephone transfer privileges allow you to give authority to the registered
representative or agent of record for your Policy to make telephone transfers
and to change the allocation of future payments among the subaccounts and the
fixed account on your behalf according to your instructions. To make a
telephone transfer, you may call the Service Center toll-free at
1-877-376-8008.
Please note the following regarding telephone transfers:
- We are not liable for any loss, damage, cost or expense from
complying with telephone instructions we reasonably believe
to be authentic. You bear the risk of any such loss.
- We will employ reasonable procedures to confirm that
telephone instructions are genuine.
- Such procedures may include requiring forms of personal
identification prior to acting upon telephone instructions,
providing written confirmation of transactions to you, and/or
tape recording telephone instructions received from you.
- If we do not employ reasonable confirmation procedures, we
may be liable for losses due to unauthorized or fraudulent
instructions.
The corresponding portfolio of any subaccount determines its net asset
value per each share once daily, as of the close of the regular business
session of the New York Stock Exchange ("NYSE") (usually 4:00 p.m. Eastern
time, 1:00 p.m. Pacific time), which coincides with the end of each Valuation
Period. Therefore, we will process any transfer request we receive after the
close of the regular business session of the NYSE, on any day the NYSE is open,
using the net asset value for each share of the applicable portfolio determined
as of the close of the next regular business session of the NYSE.
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<PAGE> 45
LOANS
===============================================================================
While the Policy is in force, you may borrow money from us using the
Policy as the only security for the loan. A loan that is taken from, or
secured by, a Policy may have tax consequences. See "Federal Tax
Consequences."
<TABLE>
<S> <C>
LOAN - You may take a loan against the Policy for
CONDITIONS: amounts up to the Surrender Value minus loan
interest you would have to pay by the next
Policy anniversary date.
- To secure the loan, we transfer an amount
equal to the loan from the variable account
and fixed account to the loan account, which
is a part of our general account. If your loan
application does not specify any allocation
instructions, we will transfer the loan from
the subaccounts and the fixed account on a
pro-rata basis (that is, according to the
percentage of Contract Value contained in each
subaccount and the fixed account).
- Amounts in the loan account earn interest at
the guaranteed minimum rate of 3% per year,
compounded annually. We may credit the loan
account with an interest rate different from
the fixed account.
- We normally pay the amount of the loan within
seven days after we receive a proper loan
request at the Service Center. We may
postpone payment of loans under certain
conditions. See "When We Make Payments."
- We charge you interest on your loan. During
the first fourteen policy years, the current
loan interest rate is 4.5%, with a maximum
loan interest rate of 8% per year, compounded
annually, on your loan. After the fourteenth
Policy year, the maximum loan interest rate is
3%, compounded annually. We may change the
interest rate, but we will notify you of any
increase in loan interest at least 30 days
before the new rate becomes effective.
Interest is due and payable at the end of each
Policy year, or, if earlier, on the date of
any loan increase or repayment. Unpaid
interest becomes part of the outstanding loan
and accrues interest accordingly.
- You may repay all or part of your outstanding
loans at any time by sending the repayment to
the Service Center. LOAN REPAYMENTS MUST BE AT
LEAST $25, AND MUST BE CLEARLY MARKED AS "LOAN
REPAYMENTS" OR THEY WILL BE CREDITED AS
PREMIUMS.
- Upon each loan repayment, we will transfer an
amount equal to the loan repayment from the
loan account to the fixed and/or variable
account according to your current premium
allocation instructions.
- We deduct any unpaid loan amount, including
any interest you owe, from the Surrender Value
and death benefit proceeds payable on the
insured's death.
</TABLE>
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<PAGE> 46
<TABLE>
<S> <C>
- If any unpaid loan amount, including any
interest you owe, equals or exceeds the
Contract Value, causing the Surrender Value
to become zero, then your Policy will enter a
61-day grace period. See "Policy Lapse."
</TABLE>
EFFECTS OF POLICY LOANS
A Policy loan affects the Policy, because we reduce the death benefit
proceeds and Surrender Value under the Policy by any outstanding loan amount,
including any interest you owe. Repaying the loan causes the death benefit
proceeds and Surrender Value to increase by the amount of the repayment. As
long as a loan is outstanding, we hold an amount equal to the loan amount in
the loan account. This amount is not affected by the variable account's
investment performance and may not be credited with the same interest rates
currently accruing on the fixed account. Amounts transferred from the variable
account to the loan account will affect the value in the variable account
because we credit such amounts with an interest rate we declare rather than a
rate of return reflecting the investment results of the variable account.
There are risks involved in taking a Policy loan, a few of which
include an increased potential for the Policy to lapse if projected earnings,
taking into account outstanding loans, are not achieved. A Policy loan may also
have possible adverse tax consequences that could occur if your Policy lapses
with loans outstanding. See "Federal Income Tax Considerations." In addition,
the tax consequences of a Policy loan after the fourteenth Policy year are
uncertain. You should consult a tax adviser before taking out a Policy loan.
We will notify you (and any assignee of record) if the sum of your
loans plus any interest you owe on the loans is more than the Surrender Value.
If you do not submit a sufficient payment within 61 days from the date of the
notice, your Policy may lapse.
POLICY LAPSE
===============================================================================
LAPSE
The following circumstances will cause your Policy to enter a 61-day
grace period during which you must make a large enough payment to keep your
Policy in force:
- If your Policy's Surrender Value becomes zero, and total premiums
you have paid, minus withdrawals (not including surrender charges
and processing fees), are less than the cumulative minimum
premiums required under the Policy; or
- If you have paid large enough premiums so that total premiums you
have paid, less withdrawals (not including surrender charges and
processing fees), are greater than the cumulative minimum
premiums, and the Contract Value (minus outstanding loan amount
and interest you owe) is too low to pay the entire monthly
deduction when due.
Whenever your Policy enters the grace period, you must make a
sufficient payment before the grace period ends. If you do not make a
sufficient payment by the end of the grace period, then your
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<PAGE> 47
Policy will terminate without value, insurance coverage will no longer be in
effect, and you will receive no benefits. The payment must be large enough to
cause either one of the following conditions:
1. the Surrender Value must exceed zero, after deducting all due
and unpaid monthly deductions; OR
2. total premiums paid less withdrawals (not including surrender
charges and processing fees) must exceed cumulative minimum
premiums, AND the Contract Value less any outstanding loan
amount (including any interest you owe) must exceed zero,
after deducting all due and unpaid monthly deductions.
If your Policy meets the circumstances where it would enter into a
grace period, we will mail a notice to your last known address and any assignee
of record. We will mail the notice at least 61 days before the end of the grace
period. The notice will specify the minimum payment required and the final date
by which we must receive the payment to keep the Policy from lapsing. If we do
not receive the specified minimum payment by the end of the grace period, all
coverage under the Policy will terminate.
REINSTATEMENT
We will reinstate a lapsed Policy within three years after the Policy
enters a grace period that ends with a lapse (and prior to the maturity date).
To reinstate the Policy you must:
- provide evidence of insurability satisfactory to us;
- make a payment of the unpaid monthly deductions due during the
last expired grace period;
- make a payment of a minimum premium
sufficient to keep the Policy in force for three months; and
- repay the entire Policy loan amount (including any interest you
owed) that existed at the date of termination of coverage.
We will not reinstate any indebtedness. Your Contract Value on the
reinstatement date will equal the premiums you pay at reinstatement, minus all
unpaid monthly deductions due during the last expired grace period, minus an
additional monthly deduction due at the time of reinstatement. The surrender
charges will still apply and will be calculated as of the original issue date
of the Policy. The reinstatement date for your Policy will be the monthly due
date on or following the date we approve your application for reinstatement. We
will apply the suicide and incontestability provisions from the reinstatement
date. We may decline a request for reinstatement. We will not reinstate a
Policy that has been surrendered for the Surrender Value.
FEDERAL TAX CONSIDERATIONS
===============================================================================
The following summary provides a general description of the Federal
income tax considerations associated with a Policy and does not purport to be
complete or to cover all situations. THIS DISCUSSION IS NOT INTENDED AS TAX
ADVICE. Please consult counsel or other qualified tax advisors for more
complete information. We base this discussion on our understanding of the
present Federal income tax laws as they are currently interpreted by the
Internal Revenue Service (the "IRS"). Federal income tax laws and the current
interpretations by the IRS may change.
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<PAGE> 48
TAX STATUS OF THE POLICY
A Policy must satisfy certain requirements set forth in the Internal
Revenue Code (Code) in order to qualify as a life insurance contract for
Federal income tax purposes and to receive the tax treatment normally accorded
life insurance contracts under Federal tax law. There is limited guidance as to
how these requirements are to be applied. Nevertheless, we believe that a
Policy should satisfy the applicable Code requirements. Because of the absence
of pertinent interpretations of the Code requirements, there is, however, some
uncertainty about the application of such requirements to the Policy,
particularly if the Policy is issued on a special premium class basis. If it is
subsequently determined that a Policy does not satisfy the applicable
requirements, we may take appropriate steps to bring the Policy into compliance
with such requirements and we reserve the right to restrict Policy transactions
in order to do so.
In certain circumstances, owners of variable life insurance 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. Where this is the case, the
contract owners have been currently taxed on income and gains attributable to
the separate account assets. There is little guidance in this area, and some
features of the Policies, such as the your flexibility to allocate premiums and
Contract Values, have not been explicitly addressed in published rulings. While
we believe that the Policy does not give you investment control over variable
account assets, we reserve the right to modify the Policy as necessary to
prevent you from being treated as the owner of the variable account assets
supporting the Policy.
In addition, the Code requires that the investments of the variable
account be "adequately diversified" in order to treat the Policy as a life
insurance contract for Federal income tax purposes. We intend that the variable
account, through the portfolios, will satisfy these diversification
requirements.
The following discussion assumes that the Policy will qualify as a
life insurance contract for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
IN GENERAL. We believe that the death benefit under a Policy should be
excludible from the beneficiary's gross income. Federal, state and local
transfer, and other tax consequences of ownership or receipt of Policy proceeds
depend on your circumstances and the beneficiary's circumstances. You should
consult a tax advisor on these consequences.
Generally, you will not be deemed to be in constructive receipt of the
Contract Value until there is a distribution. When distributions from a Policy
occur, or when loans are taken out from or secured by (e.g., by assignment), a
Policy, the tax consequences depend on whether the Policy is classified as a
"Modified Endowment Contract."
MODIFIED ENDOWMENT CONTRACTS. Under the Code, certain life insurance
policies are classified as "Modified Endowment Contracts" ("MECs") and receive
less favorable tax treatment than other life insurance contracts. Due to the
Policy's flexibility, each Policy's circumstances will determine whether the
Policy is classified as a MEC. The rules are too complex to be summarized here,
but generally depend on the amount of premiums paid during the first seven
Policy years. Certain changes in a Policy after it is issued (including a
reduction in benefits at any time after issuance) could also cause it to be
classified as a MEC. If you do not want your Policy to be classified as a MEC,
you should consult a tax
44
<PAGE> 49
advisor to determine the circumstances, if any, under which your Policy would
not be classified as a MEC.
Upon issue of your Policy, we will notify you if your Policy is
classified as a MEC based on the initial premium we receive. If any future
payment we receive would cause your Policy to become a MEC, you will be
notified. We will not invest that premium in the Policy until you notify us
that you want to continue your Policy as a MEC.
DISTRIBUTIONS FROM MODIFIED ENDOWMENT CONTRACTS. Policies classified
as MECs are subject to the following tax rules:
- All distributions other than death benefits from a MEC, including
distributions upon surrender and withdrawals, will be treated
first as distributions of gain taxable as ordinary income and as
tax-free recovery of the Policy owner's investment in the Policy
only after all gain has been distributed.
- Loans taken from or secured by (e.g., by assignment) such a
Policy are treated as distributions and taxed accordingly.
- A 10% additional income tax is imposed on the amount included in
income except where the distribution or loan is made when you have
attained age 59 1/2 or are disabled, or where the distribution is
part of a series of substantially equal periodic payments for your
life (or life expectancy) or the joint lives (or joint life
expectancies) of you, the beneficiary.
- If a Policy becomes a MEC, distributions that occur during the
Policy year will be taxed as distributions from a MEC. In
addition, distributions from a Policy within two years before it
becomes a MEC will be taxed in this manner. This means that a
distribution from a Policy that is not a MEC at the time when the
distribution is made could later become taxable as a distribution
from a MEC.
DISTRIBUTIONS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS.
Distributions from a Policy that is not a MEC are generally treated first as a
recovery of your investment in the Policy, and as taxable income after the
recovery of all investment in the Policy. However, certain distributions which
must be made in order to enable the Policy to continue to qualify as a life
insurance contract for Federal income tax purposes if Policy benefits are
reduced during the first 15 Policy years may be treated in whole or in part as
ordinary income subject to tax.
Loans from or secured by a Policy that is not a MEC are generally not
treated as distributions. However, the tax consequences associated with Policy
loans that are outstanding after the first Policy year is less clear; you
should consult a tax advisor about such loans.
Finally, neither distributions from nor loans from or secured by a
Policy that is not a MEC are subject to the 10% additional tax.
INVESTMENT IN THE POLICY. Your investment in the Policy is generally
your aggregate premiums. When a distribution is taken from the Policy, your
investment in the Policy is reduced by the amount of the distribution that is
tax-free.
POLICY LOANS. If a loan from a Policy that is not a MEC is outstanding
when the Policy is cancelled or lapses, the amount of the outstanding
indebtedness will be added to the amount distributed
45
<PAGE> 50
and will be taxed accordingly. In general, interest you pay on a loan from a
Policy will not be deductible. Before taking out a Policy loan, you should
consult a tax advisor as to the tax consequences.
MULTIPLE POLICIES. All MECs that we issue (or that our affiliates
issue) to the same owner during any calendar year are treated as one MEC for
purposes of determining the amount includible in the owner's income when a
taxable distribution occurs.
OTHER POLICY OWNER TAX MATTERS. The tax consequences of continuing the
Policy beyond the insured's 100th year are unclear. You should consult a tax
advisor if you intend to keep the Policy in-force beyond the insured's 100th
year.
BUSINESS USES OF THE POLICY. The Policy may be used in various
arrangements, including nonqualified deferred compensation or salary
continuance plans, split dollar insurance plans, executive bonus plans, retiree
medical benefit plans and others. The tax consequences of such plans and
business uses of the Policy may vary depending on the particular facts and
circumstances of each individual arrangement and business uses of the Policy.
Therefore, if you are contemplating using the Policy in any arrangement the
value of which depends in part on its tax consequences, you should be sure to
consult a tax advisor as to tax attributes of the arrangement.
POSSIBLE TAX LAW CHANGES. While the likelihood of legislative changes
is uncertain, there is always a possibility that the tax treatment of the
Policy could change by legislation or otherwise. It is even possible that any
legislative change could be retroactive (effective prior to the date of the
change). Consult a tax advisor with respect to legislative developments and
their effect on the Policy.
POSSIBLE CHARGES FOR OUR TAXES. At the present time, we make no charge
for any Federal, state or local taxes (other than the charge for state premium
taxes) that may be attributable to the subaccounts or to the Policy. We reserve
the right to impose charges for any future taxes or economic burden we may
incur.
OTHER POLICY INFORMATION
===============================================================================
OUR RIGHT TO CONTEST THE POLICY
In issuing this Policy, we rely on all statements made by or for the
insured in the application or in a supplemental application. Therefore, if you
make any material misrepresentation of a fact in the application (or any
supplemental application), then we may contest the Policy's validity or may
resist a claim under the Policy.
In the absence of fraud, we cannot bring any legal action to contest
the validity of the Policy after the Policy has been in force during the
insured's lifetime for two years from the issue date, or if reinstated, for two
years from the date of reinstatement. We will not contest any increase in
principal sum after the increase has been in force for two years during the
insured's lifetime. This provision also applies to any riders.
46
<PAGE> 51
SUICIDE EXCLUSION
If the insured commits suicide, while sane or insane, within two years
of the issue date, the Policy will terminate and our liability is limited to an
amount equal to the premiums paid, LESS any loans (including any interest you
owe), and LESS any withdrawals (not including surrender charges and processing
fees)previously paid. A new two-year period will apply from the effective date
of any reinstatement and to each increase in principal sum starting on the
effective date of each increase. During this two-year period, the death benefit
proceeds paid that are associated with an increase in principal sum will be
limited to the monthly cost of insurance charges for the increase.
MISSTATEMENT OF AGE OR SEX
If the insured's age or sex was stated incorrectly in the application
or any supplemental application, we will adjust the death benefit to the amount
that would have been payable at the correct age and sex based on the most
recent deduction for cost of insurance. If the insured's age has been
overstated or understated, we will calculate future monthly deductions using
the cost of insurance based on the insured's correct age and sex.
MODIFYING THE POLICY
Only one of our officers may modify the Policy or waive any of our
rights or requirements under the Policy. Any modification or waiver must be in
writing. No agent may bind us by making any promise not contained in this
Policy.
Upon notice to you, we may modify the Policy to:
- conform the Policy, our operations, or the variable
account's operations to the requirements of any law
(or regulation issued by a government agency) to
which the Policy, our company or the variable
account is subject;
- assure continued qualification of the Policy as a
life insurance contract under the Federal tax laws;
or
- reflect a change in the variable account's
operations.
If we modify the Policy, we will make appropriate endorsements to the
Policy. If any provision of the Policy conflicts with the laws of a
jurisdiction that govern the Policy, we will amend the provision to conform
with such laws.
WHEN WE WILL MAKE PAYMENTS
We usually pay the amounts of any surrender, withdrawal, death benefit
proceeds, loans, or settlement options within seven business days after we
receive all applicable written notices and/or due proofs of death. However, we
can postpone such payments if:
- the NYSE is closed, other than customary weekend and holiday
closing, or trading on the NYSE is restricted as determined
by the SEC; OR
- the SEC permits, by an order, the postponement for the
protection of owners; OR
47
<PAGE> 52
- the SEC determines that an emergency exists that would make
the disposal of securities held in the variable account or
the determination of their value not reasonably practicable.
If you have submitted a recent check or draft, we have the right to
defer payment of surrenders, withdrawals, death benefit proceeds, or payments
under a settlement option until such check or draft has been honored.
We have the right to defer payment of any surrender, withdrawal, death
benefit proceeds, loans or settlement options from the fixed account for up to
six months from the date we receive your written request.
REPORTS TO OWNERS
At least once each year, or more often as required by law, we will
mail to owners at their last known address a report showing at least the
following information as of the end of the report period:
<TABLE>
<S> <C>
the current principal sum any loans since the last report
the current death benefit premiums paid since the last report
the Contract Value all deductions since the last report
the Surrender Value the amount of any outstanding loans
</TABLE>
You may request additional copies of reports for a $5 fee. We will
maintain all records relating to the variable account and the fixed account.
POLICY TERMINATION
Your Policy will terminate on the earliest of:
<TABLE>
<S> <C>
- the maturity date (insured's - the end of the grace period without a
attained age 110) sufficient payment
- the date the insured dies - the date you surrender the Policy
</TABLE>
SUPPLEMENTAL BENEFITS (RIDERS)
The following supplemental benefits (riders) are available and may be
added to a Policy. The cost of these benefits is added to the monthly
deduction. The riders available with the Policies provide fixed benefits that
do not vary with the investment experience of the variable account.
- waiver of monthly deductions due to the insured's total
disability
- term insurance on the insured's dependent children
- payment of an accidental death benefit if the insured's death
was caused by accidental bodily injury
- term insurance on additional insureds
- automatic increases in principal sum
- accelerated payment of a portion of the death benefit in the
event the insured develops a terminal illness
48
<PAGE> 53
- payment of a monthly disability benefit to the fixed account if the
insured is totally disabled. This rider is designed to provide a
monthly benefit that defrays a portion of the monthly deduction during
periods when the policyowner is disabled and cannot pay any premiums.
Surrender charges would be assessed and normal withdrawal limits would
apply if you withdrew the monthly disability benefit. See "Surrender
Charge."
The benefits and restrictions are described in each rider. We will
provide samples of these provisions upon request.
PERFORMANCE DATA
===============================================================================
HYPOTHETICAL ILLUSTRATIONS BASED ON ADJUSTED HISTORIC PORTFOLIO PERFORMANCE
In order to demonstrate how the actual investment experience of the
portfolios could have affected the death benefit, Contract Value and Surrender
Value of the Policy, we may provide hypothetical illustrations using the actual
investment experience of each portfolio since its inception. THESE HYPOTHETICAL
ILLUSTRATIONS ARE DESIGNED TO SHOW THE PERFORMANCE THAT COULD HAVE RESULTED IF
THE POLICY HAD BEEN IN EXISTENCE DURING THE PERIOD ILLUSTRATED.
The values we may illustrate for death benefit, Contract Value and
Surrender Value would take into account all charges and deductions from the
Policy, the variable account and the portfolios. We would not deduct premium
taxes or charges for any riders.
ADDITIONAL INFORMATION
===============================================================================
SALE OF THE POLICIES
The Policy will be sold by individuals who are licensed as our life
insurance agents and who are also registered representatives of broker-dealers
having written sales agreements for the Policy with Investors Brokerage
Services, Inc. ("IBS"), the principal underwriter of the Policy. IBS is located
at 1 Kemper Drive, Long Grove, Illinois 60049-0001, 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. The maximum sales
commission payable to Farmers' agents who are registered representatives is 50%
of premiums paid up to a target premium set by Farmers and 2.6% of premium in
excess of the target premium in the first year. The commission is 4.0% of
premiums up to the target premium and 2.6% of excess premium in renewal years
two through ten. After year 10 the commission is 0.15% of the Policy's Contract
Value each year. In addition, certain production, persistency and managerial
bonuses may be paid.
49
<PAGE> 54
LEGAL MATTERS
Sutherland Asbill & Brennan LLP of Washington, D.C. has provided
advice on certain legal matters relating to the Policy under the Federal
securities laws. All matters of Washington law pertaining to the Policy have
been passed upon by M. Douglas Close, Vice President and General Counsel,
Farmers New World Life Insurance Company.
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. 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.
YEAR 2000 MATTERS
YEAR 2000 ISSUE
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.
50
<PAGE> 55
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.
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 prospectus. 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.
Actuarial matters included in this prospectus have been examined by
Joel D. Kuni as stated in the opinion filed as an exhibit to this registration
statement.
FINANCIAL STATEMENTS
Farmers' financial statements appear in Appendix C and should be
considered only as bearing upon our ability to meet our obligations under the
Policies.
There are no financial statements available for the variable account,
because the variable account has not commenced operations as of the date of
this prospectus.
FARMERS' EXECUTIVE OFFICERS AND DIRECTORS
Farmers is governed by a board of directors. The following table sets
forth the name, address and principal occupation during the past five years of
each of Farmers' executive officers and directors.
51
<PAGE> 56
BOARD OF DIRECTORS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
POSITION WITH
NAME AND ADDRESS FARMERS PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Richard E. Bangert Board Director Director since 1973.
2615 42nd West
Seattle, WA
- --------------------------------------------------------------------------------------------------------------------------
Donald J. Covey Board Director Director since 1976;
6300 Sand Point Way, N.E., #307 Chairman, UNICO Properties,
Seattle, WA Inc., 1990-1994; Retired,
1995.
- --------------------------------------------------------------------------------------------------------------------------
Martin D. Feinstein Board Director Chairman of the Board of
4680 Wilshire Blvd. Farmers Group, Inc. ("FGI")
Los Angeles, CA since 11/97, Chief
Executive Officer of FGI
since 1/97, President of
FGI since 1/95 and director
of FGI since 2/95; director
of Allied Zurich p.l.c.
since 3/98 and member of
Group Executive Board of
Zurich Financial Services;
director of B.A.T. from
1/97 to 9/98; Senior Vice
President-Property and
Casualty Staff of FGI from
10/93 to 1/95; Chief
Operating Officer of FGI
from 1/95 to 1/97.
- --------------------------------------------------------------------------------------------------------------------------
Paul Hopkins Board Director Senior Vice President &
4680 Wilshire Blvd. Chief Marketing Officer,
Los Angeles, CA FGI since 1998; Senior Vice
President Agencies, FGI
from 1997 to 1998; Vice
President Agencies, FGI
from 1994-1997;
Assistant Vice President
Regional Operations, FGI
from 1992-1994.
- --------------------------------------------------------------------------------------------------------------------------
Dennis I. Okamoto Board Director Regional Vice President of
1600 - 7th Ave.,Suite 1802 US West Communications from
Seattle, WA 1968 to 1998; Retired, 1998.
- --------------------------------------------------------------------------------------------------------------------------
C. Paul Patsis Board Director President, FNWL since 5/98;
3003 - 77th Ave., S.E. President, Marketing One
Mercer Island, WA from 1989 to 5/98.
- --------------------------------------------------------------------------------------------------------------------------
Keitha Schofield Board Director Executive Vice President
4680 Wilshire Blvd. -Support Services of FGI
Los Angeles, CA since 1/98 and director of
FGI since 5/97; Senior Vice
President and Chief
Information Officer of FGI
from 5/95 to 1/97;
Executive Vice President -
Support Services and Chief
Information Officer from
1/97 to 1/98; Vice
President-Technology Division of
Continental Airlines, Inc.
from 1988 to 5/95.
- --------------------------------------------------------------------------------------------------------------------------
Gary R. Severson Board Director Vice Chairman, Laird Norton
6131 - 128th Ave., N.E. Trust Company since 1997;
Kirkland, WA Chairman of the Board,
First Interstate Bank from
7/83 to 8/96.
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE> 57
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
POSITION WITH
NAME AND ADDRESS FARMERS PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
John F. Sullivan Jr. Board Director President, G.J. Sullivan
1201 - 3rd Ave., Company from 1985 to 1994;
Suite 3390 Retired since 1995.
Seattle, WA (Continues as non-executive
Vice President of G.J.
Sullivan Company).
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table gives the name, address and principal occupation
during the past five years of the senior officers of Farmers (other than
officers listed above as directors).
SENIOR OFFICERS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
POSITION WITH
NAME AND ADDRESS FARMERS PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Kathryn M. Callahan Vice Vice President & Actuary,
3003 - 77th Ave., S.E. President & FNWL since 1987.
Mercer Island, WA Actuary
- --------------------------------------------------------------------------------------------------------------------------
M. Douglas Close Vice Associate General Counsel,
4680 Wilshire Blvd. President & FGI since 1990.
Los Angeles, CA General
Counsel
- --------------------------------------------------------------------------------------------------------------------------
Sharon D. Courlas, Vice Medical Director, FNWL
M.D. President & since 1991; Medical
3003 - 77th Ave., S.E. Medical Director at Safeco from
Mercer Island, WA Director 1/99 to 5/99; Consulting
Contract Medical Director,
PEMCO since 1997.
- --------------------------------------------------------------------------------------------------------------------------
David A. Demmon Assistant Assistant Vice President &
3003 - 77th Ave., S.E. Vice Treasurer, FNWL since 1992.
Mercer Island, WA President &
Treasurer
- --------------------------------------------------------------------------------------------------------------------------
Gerald A. Dulek Assistant Vice President Real Estate
4680 Wilshire Blvd. Vice President & Support Services, FGI
Los Angeles, CA since 3/76.
- --------------------------------------------------------------------------------------------------------------------------
Howard Falk Vice Vice President & Treasurer,
4680 Wilshire Blvd. President & FGI since 1994.
Los Angeles, CA Treasurer
- --------------------------------------------------------------------------------------------------------------------------
Gerald E. Faulwell Vice President Senior Vice President &
4680 Wilshire Blvd. Chief Financial Officer,
Los Angeles, CA FGI since 1988.
- --------------------------------------------------------------------------------------------------------------------------
Doren Hohl Assistant Secretary & Senior
4680 Wilshire Blvd. Secretary Corporate Counsel, FGI
Los Angeles, CA since 3/92.
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE> 58
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
POSITION WITH
NAME AND ADDRESS FARMERS PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paul F. Hott Assistant Assistant Vice President
3003 - 77th Ave., S.E. Vice President MIS, FNWL since 3/95;
Mercer Island, WA Computer Operations Manager
from 4/93 to 3/95.
- --------------------------------------------------------------------------------------------------------------------------
Kathleen D. Katovich Assistant Senior Corporate Counsel,
4680 Wilshire Blvd. Secretary FGI since 2/96; Assistant
Los Angeles, CA General Counsel, California
Institute of Technology
from 1992 to 1996.
- --------------------------------------------------------------------------------------------------------------------------
Hubert L. Mountz Assistant Vice President, Taxes &
4680 Wilshire Blvd. Treasurer Assistant Treasurer, FGI
Los Angeles, CA since 3/90.
- --------------------------------------------------------------------------------------------------------------------------
Link R. Murphy, M.D. Assistant Assistant Medical Director,
2500 Farmers Way Medical FNWL since 1983; private
Columbus, OH Director practice from 1983 to 1999.
- --------------------------------------------------------------------------------------------------------------------------
C. Paul Patsis President President, FNWL since 5/98;
3003 - 77th Ave., S.E. President, Marketing One
Mercer Island, WA from 1989 to 5/98.
- --------------------------------------------------------------------------------------------------------------------------
John R. Patton Assistant Assistant Vice President &
3003 - 77th Ave., S.E. Vice Secretary, FNWL since
Mercer Island, WA President & 11/98; Life Claims Manager,
Secretary FNWL from 3/85 to 11/98.
- --------------------------------------------------------------------------------------------------------------------------
Christopher R. Pflug Assistant Corporate Counsel &
4680 Wilshire Blvd. Secretary Assistant Secretary, FGI
Los Angeles, CA since 12/95.
- --------------------------------------------------------------------------------------------------------------------------
James I. Randolph Vice Vice President Insurance
3003 - 77th Ave., S.E. President & Operations & Assistant
Mercer Island, WA Assistant Secretary, FNWL since 9/91.
Secretary
- --------------------------------------------------------------------------------------------------------------------------
Paul Secord Vice President Senior Vice President
4680 Wilshire Blvd. Investment Operations &
Los Angeles, CA Chief Investment Officer,
FGI since 9/98; Senior Vice
President, Asset
Management, FGI from 12/95
to 9/98; Senior Vice
President, Equity of Penn
Mutual from 1993 to 1995.
- --------------------------------------------------------------------------------------------------------------------------
Maryann M. Seltzer Assistant Senior Corporate Counsel,
4680 Wilshire Blvd. Secretary FGI since 1973.
Los Angeles, CA
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
We hold the assets of the variable account physically segregated and
apart from our general account and any other separate investment accounts. We
maintain records of all purchases and sales of portfolio shares 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.
54
<PAGE> 59
providing aggregate coverage of $30,000,000 (subject to a
$500,000 deductible) for all officers and employees of Farmers Group, Inc.
ILLUSTRATIONS
===============================================================================
The following illustrations have been prepared to help show how
certain values under a sample Policy would change with different hypothetical
rates of investment performance over an extended period of time. The
illustrations show Contract Value and Surrender Value as well as death
benefits. The tables illustrate how Contract Values and Surrender Values, which
reflect all applicable charges and deductions, and death benefits of the Policy
at the illustrated age, would vary over time if the return on the assets of the
portfolios was a uniform, gross, after-tax, annual rate of 0%, 6% or 12%. The
tables assume that an annual premium of $1,000 was paid on the first day of
each Policy year. The tables also show how the Policy would operate if premiums
accumulated at 5% interest.
The Contract Values, Surrender Values and Death Benefits shown in the
tables reflect the fact that the hypothetical net rate of return for each
subaccount is lower than the gross rate of return on the portfolios as a result
of expenses and fees incurred by the portfolios and the variable account. The
illustrations assume that the assets in the portfolios are subject to an annual
expense ratio of 0.8225% of the average daily net assets. This annual expense
ratio assumes an equal allocation of values between all subaccounts and is
based on the arithmetic average of the expense ratios of each of the portfolios
for the last fiscal year and takes into account current expense reimbursement
arrangements. The illustrations reflect the fee waivers and expense
reimbursements in effect during fiscal year 1998 for the Janus Aspen Capital
Appreciation Portfolio, the Kemper-Dreman High Return Equity Portfolio, the
PIMCO Low Duration Bond Portfolio, and the PIMCO Foreign Bond Portfolio.
Without these waivers and reimbursements, total annual expenses for these
portfolios would have been 0.97%, 1.20%, 0.67% and 0.92%, respectively, and the
illustrations would have assumed that the assets in the portfolios were subject
to an annual expense ratio of 0.8575%. For information on portfolio expenses,
see the portfolios' prospectuses.
The illustrations also take into account the daily charge for assuming
mortality and expense risks against each subaccounts. This charge is equivalent
to an annual charge of 0.90% of the average daily net assets in the
subaccounts. The illustrations also take into account the percent of premium
factor, the monthly cost of insurance charge, the monthly administration
charge, and the surrender charges where applicable.
Taking into consideration the assumed annual average portfolio
expenses of 0.8225% and the 0.90% annual charge for mortality and expense
risks, the gross annual rates of return of 0%, 6% and 12% correspond to
approximate net annual rates of return of -1.71%, 4.24% and 10.19%.
The tables illustrating Policy values are based on the assumptions
that the owner pays the premiums indicated, does not increase your principal
sum, and does not make any withdrawals or take any Policy loans. The values
under the Policy will be different from those shown even if the portfolio
returns average 0%, 6% or 12%, but fluctuate over and under those averages
throughout the years shown.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE PROVIDED ONLY TO
ILLUSTRATE THE MECHANICS OF A HYPOTHETICAL POLICY AND DO NOT REPRESENT PAST OR
FUTURE INVESTMENT RATES OF RETURN. Actual rates of return for a particular
Policy may be more or less than the hypothetical investment rates of return.
The actual return on your Contract Value will depend on factors such as the
amounts you allocate to particular
55
<PAGE> 60
portfolios, the amounts deducted for the Policy's monthly charges, the
portfolios' expense ratios, your Policy loan and withdrawal history.
Separate illustrations on each of the following pages reflect our
current cost of insurance and administration charges and the higher guaranteed
maximum cost of insurance and administration charges that we have the
contractual right to charge. The illustrations assume no charges for Federal or
state taxes or charges for supplemental benefits.
These illustrations assume the level death benefit option (Option B)
is chosen. The illustrated death benefits increase in certain years, reflecting
current Internal Revenue Code requirements.
Zero values in the illustration indicate the Policy lapses unless
premiums higher than those illustrated are paid.
These illustrations are based on Farmers' sex distinct rates for
non-tobacco users. Upon request, we will furnish a comparable illustration
based upon the proposed Insured's individual circumstances. Such illustrations
may assume different hypothetical rates of return than those illustrated in the
following illustrations.
56
<PAGE> 61
Flexible Premium Variable Life Insurance Policy
Male Standard Non-Nicotine, Annual Premium, Issue Age 35
$100,000 Initial Death Benefit
(Level Death Benefit (Option B) Selected)
Hypothetical Values Based on Current Cost of Insurance and
Current Administration Charge
<TABLE>
<CAPTION>
Premiums 0% Hypothetical Gross 6% Hypothetical Gross 12% Hypothetical Gross
Paid Plus Investment Return Investment Return Investment Return
Policy Interest Contract Surrender Death Contract Surrender Death Contract Surrender Death
Year at 5% Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,050 725 32 100,000 775 82 100,000 825 132 100,000
2 2,153 1,432 664 100,000 1,577 809 100,000 1,729 961 100,000
3 3,310 2,117 1,274 100,000 2,404 1,561 100,000 2,715 1,872 100,000
4 4,526 2,780 1,862 100,000 3,255 2,337 100,000 3,791 2,873 100,000
5 5,802 3,422 2,429 100,000 4,132 3,139 100,000 4,967 3,974 100,000
6 7,142 4,036 3,075 100,000 5,031 4,070 100,000 6,248 5,287 100,000
7 8,549 4,625 3,711 100,000 5,953 5,039 100,000 7,645 6,731 100,000
8 10,027 5,188 4,335 100,000 6,899 6,046 100,000 9,170 8,317 100,000
9 11,578 5,727 4,951 100,000 7,871 7,095 100,000 10,839 10,063 100,000
10 13,207 6,257 5,573 100,000 8,886 8,202 100,000 12,682 11,998 100,000
11 14,917 6,778 6,201 100,000 9,947 9,370 100,000 14,717 14,140 100,000
12 16,713 7,293 6,838 100,000 11,056 10,601 100,000 16,967 16,512 100,000
13 18,599 7,801 7,482 100,000 12,215 11,896 100,000 19,453 19,134 100,000
14 20,579 8,300 8,133 100,000 13,427 13,260 100,000 22,200 22,033 100,000
15 22,657 8,793 8,793 100,000 14,694 14,694 100,000 25,235 25,235 100,000
16 24,840 9,279 9,279 100,000 16,018 16,018 100,000 28,589 28,589 100,000
17 27,132 9,758 9,758 100,000 17,402 17,402 100,000 32,295 32,295 100,000
18 29,539 10,230 10,230 100,000 18,849 18,849 100,000 36,389 36,389 100,000
19 32,066 10,695 10,695 100,000 20,362 20,362 100,000 40,914 40,914 100,000
20 34,719 11,154 11,154 100,000 21,943 21,943 100,000 45,914 45,914 100,000
25 50,113 11,116 11,116 100,000 28,853 28,853 100,000 78,701 78,701 105,459
30 69,761 8,852 8,852 100,000 35,789 35,789 100,000 131,752 131,752 160,737
35 94,836 2,577 2,577 100,000 41,880 41,880 100,000 215,905 215,905 250,450
40 126,840 0 0 0 45,574 45,574 100,000 350,039 350,039 374,541
45 167,685 0 0 0 43,158 43,158 100,000 566,102 566,102 594,407
</TABLE>
57
<PAGE> 62
Flexible Premium Variable Life Insurance Policy
Male Standard Non-Nicotine, Annual Premium, Issue Age 35
$100,000 Initial Death Benefit
(Level Death Benefit (Option B) Selected)
Hypothetical Values Based on Maximum Cost of Insurance and
Maximum Administration Charge
<TABLE>
<CAPTION>
Premiums 0% Hypothetical Gross 6% Hypothetical Gross 12% Hypothetical Gross
Paid Plus Investment Return Investment Return Investment Return
Policy Interest Contract Surrender Death Contract Surrender Death Contract Surrender Death
Year at 5% Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,050 684 0 100,000 733 40 100,000 782 89 100,000
2 2,153 1,349 581 100,000 1,489 721 100,000 1,636 868 100,000
3 3,310 1,992 1,149 100,000 2,267 1,424 100,000 2,566 1,723 100,000
4 4,526 2,612 1,694 100,000 3,066 2,148 100,000 3,579 2,661 100,000
5 5,802 3,210 2,217 100,000 3,888 2,895 100,000 4,684 3,691 100,000
6 7,142 3,783 2,822 100,000 4,729 3,768 100,000 5,888 4,927 100,000
7 8,549 4,331 3,417 100,000 5,591 4,677 100,000 7,199 6,285 100,000
8 10,027 4,853 4,000 100,000 6,474 5,621 100,000 8,630 7,777 100,000
9 11,578 5,347 4,571 100,000 7,376 6,600 100,000 10,190 9,414 100,000
10 13,207 5,813 5,129 100,000 8,299 7,615 100,000 11,894 11,210 100,000
11 14,917 6,249 5,672 100,000 9,239 8,662 100,000 13,753 13,176 100,000
12 16,713 6,653 6,198 100,000 10,197 9,742 100,000 15,783 15,328 100,000
13 18,599 7,024 6,705 100,000 11,172 10,853 100,000 18,003 17,684 100,000
14 20,579 7,360 7,193 100,000 12,163 11,996 100,000 20,430 20,263 100,000
15 22,657 7,659 7,659 100,000 13,168 13,168 100,000 23,087 23,087 100,000
16 24,840 7,917 7,917 100,000 14,185 14,185 100,000 25,996 25,996 100,000
17 27,132 8,130 8,130 100,000 15,210 15,210 100,000 29,181 29,181 100,000
18 29,539 8,291 8,291 100,000 16,237 16,237 100,000 32,672 32,672 100,000
19 32,066 8,394 8,394 100,000 17,263 17,263 100,000 36,500 36,500 100,000
20 34,719 8,434 8,434 100,000 18,282 18,282 100,000 40,701 40,701 100,000
25 50,113 7,468 7,468 100,000 23,089 23,089 100,000 69,076 69,076 100,000
30 69,761 3,578 3,578 100,000 26,616 26,616 100,000 115,568 115,568 140,993
35 94,836 0 0 0 26,792 26,792 100,000 188,997 188,997 219,236
40 126,840 0 0 0 18,952 18,952 100,000 305,489 305,489 326,873
45 167,685 0 0 0 0 0 0 492,759 492,759 517,396
</TABLE>
58
<PAGE> 63
APPENDIX A - GUARANTEED MAXIMUM COST OF INSURANCE RATES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
GUARANTEED MAXIMUM MONTHLY
COST OF INSURANCE RATES FOR A MALE NON-SMOKER (ISSUE AGES 21-80)*
Per $1000 of Risk Insurance Amount
- ---------------------------------------------------------------------------------------------------------------------------------
Attained Cost of Attained Cost of Attained Cost of Attained Cost of Attained Cost of Attained Cost of
Age Insurance Age Insurance Age Insurance Age Insurance Age Insurance Age Insurance
Rate Rate Rate Rate Rate Rate
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
21 0.13788 35 0.14370 49 0.39205 62 1.35058 75 5.13652 88 16.39051
22 0.13539 36 0.15117 50 0.42611 63 1.50009 76 5.66811 89 17.59988
23 0.13207 37 0.16114 51 0.46514 64 1.66621 77 6.22379 90 18.85909
24 0.12875 38 0.17194 52 0.51000 65 1.84812 78 6.80688 91 20.19721
25 0.12459 39 0.18357 53 0.56150 66 2.04497 79 7.43566 92 21.66408
26 0.12210 40 0.19769 54 0.61881 67 2.25096 80 8.13005 93 23.40255
27 0.12044 41 0.21264 55 0.68276 68 2.48520 81 8.90834 94 25.73492
28 0.11961 42 0.22842 56 0.75254 69 2.73937 82 9.78630 95 29.22599
29 0.11961 43 0.24586 57 0.82646 70 3.02676 83 10.75978 96 34.96802
30 0.12044 44 0.26497 58 0.90869 71 3.35485 84 11.80967 97 44.93622
31 0.12293 45 0.28656 59 1.00089 72 3.73361 85 12.91190 98 61.89321
32 0.12625 46 0.30982 60 1.10389 73 4.16221 86 14.05233 99 83.06141
33 0.13124 47 0.33474 61 1.21851 74 4.63317 87 15.21353 100-109 0.00000
34 0.13705 48 0.36215
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Different rates apply for male smokers, all females, and all
juveniles (issue ages 0-20).
If the insured is in a special premium class, the guaranteed maximum
monthly cost of insurance rate will be the rate shown in the table times the
special premium class rating factor shown on the Policy Specifications page.
A-1
<PAGE> 64
APPENDIX B - TABLE OF SURRENDER CHARGE FACTORS
<TABLE>
<CAPTION>
MALE NONSMOKERS (PREFERRED & STANDARD)
Number of Full Policy Years Completed Since the Issue Date
Issue 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 or
Age more
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
21 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
22 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
23 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
24 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
25 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
26 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
27 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
28 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
29 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
30 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
31 5.91 5.91 5.91 5.91 5.91 5.32 4.73 4.14 3.55 2.96 2.36 1.77 1.18 0.59 0.00 0.00
32 5.98 5.98 5.98 5.98 5.98 5.38 4.78 4.19 3.59 2.99 2.39 1.79 1.20 0.60 0.00 0.00
33 6.01 6.01 6.01 6.01 6.01 5.41 4.81 4.21 3.61 3.01 2.41 1.80 1.20 0.60 0.00 0.00
34 6.11 6.11 6.11 6.11 6.11 5.50 4.89 4.28 3.67 3.06 2.45 1.83 1.22 0.61 0.00 0.00
35 6.18 6.18 6.18 6.18 6.18 5.56 4.94 4.33 3.71 3.09 2.47 1.85 1.24 0.62 0.00 0.00
36 6.28 6.28 6.28 6.28 6.28 5.66 5.03 4.40 3.77 3.14 2.51 1.89 1.26 0.63 0.00 0.00
37 6.32 6.32 6.32 6.32 6.32 5.68 5.05 4.42 3.79 3.16 2.53 1.89 1.26 0.63 0.00 0.00
38 6.42 6.42 6.42 6.42 6.42 5.78 5.13 4.49 3.85 3.21 2.57 1.93 1.28 0.64 0.00 0.00
39 6.52 6.52 6.52 6.52 6.52 5.87 5.22 4.56 3.91 3.26 2.61 1.96 1.30 0.65 0.00 0.00
40 6.62 6.62 6.62 6.62 6.62 5.96 5.30 4.63 3.97 3.31 2.65 1.99 1.32 0.66 0.00 0.00
41 6.76 6.76 6.76 6.76 6.76 6.08 5.40 4.73 4.05 3.38 2.70 2.03 1.35 0.68 0.00 0.00
42 6.82 6.82 6.82 6.82 6.82 6.14 5.46 4.78 4.09 3.41 2.73 2.05 1.36 0.68 0.00 0.00
43 6.99 6.99 6.99 6.99 6.99 6.29 5.59 4.89 4.19 3.50 2.80 2.10 1.40 0.70 0.00 0.00
44 7.13 7.13 7.13 7.13 7.13 6.41 5.70 4.99 4.28 3.56 2.85 2.14 1.43 0.71 0.00 0.00
45 7.30 7.30 7.30 7.30 7.30 6.57 5.84 5.11 4.38 3.65 2.92 2.19 1.46 0.73 0.00 0.00
46 7.46 7.46 7.46 7.46 7.46 6.72 5.97 5.23 4.48 3.73 2.99 2.24 1.49 0.75 0.00 0.00
47 7.67 7.67 7.67 7.67 7.67 6.90 6.13 5.37 4.60 3.83 3.07 2.30 1.53 0.77 0.00 0.00
48 7.87 7.87 7.87 7.87 7.87 7.08 6.30 5.51 4.72 3.93 3.15 2.36 1.57 0.79 0.00 0.00
49 8.14 8.14 8.14 8.14 8.14 7.33 6.51 5.70 4.88 4.07 3.26 2.44 1.63 0.81 0.00 0.00
50 8.38 8.38 8.38 8.38 8.38 7.54 6.70 5.86 5.03 4.19 3.35 2.51 1.68 0.84 0.00 0.00
51 8.65 8.65 8.65 8.65 8.65 7.78 6.92 6.05 5.19 4.32 3.46 2.59 1.73 0.86 0.00 0.00
52 8.95 8.95 8.95 8.95 8.95 8.05 7.16 6.26 5.37 4.47 3.58 2.68 1.79 0.89 0.00 0.00
53 9.29 9.29 9.29 9.29 9.29 8.36 7.43 6.50 5.57 4.64 3.71 2.79 1.86 0.93 0.00 0.00
54 9.62 9.62 9.62 9.62 9.62 8.66 7.70 6.74 5.77 4.81 3.85 2.89 1.92 0.96 0.00 0.00
55 10.06 10.06 10.06 10.06 10.06 9.06 8.05 7.04 6.04 5.03 4.03 3.02 2.01 1.01 0.00 0.00
56 10.47 10.47 10.47 10.47 10.47 9.42 8.37 7.33 6.28 5.23 4.19 3.14 2.09 1.05 0.00 0.00
57 10.91 10.91 10.91 10.91 10.91 9.82 8.72 7.63 6.54 5.45 4.36 3.27 2.18 1.09 0.00 0.00
58 11.41 11.41 11.41 11.41 11.41 10.27 9.13 7.99 6.85 5.71 4.57 3.42 2.28 1.14 0.00 0.00
59 11.99 11.99 11.99 11.99 11.99 10.79 9.59 8.39 7.19 5.99 4.79 3.60 2.40 1.20 0.00 0.00
60 12.56 12.56 12.56 12.56 12.56 11.30 10.05 8.79 7.54 6.28 5.02 3.77 2.51 1.26 0.00 0.00
61 13.17 13.17 13.17 13.17 13.17 11.85 10.53 9.22 7.90 6.58 5.27 3.95 2.63 1.32 0.00 0.00
62 13.88 13.88 13.88 13.88 13.88 12.49 11.10 9.71 8.33 6.94 5.55 4.16 2.78 1.39 0.00 0.00
63 14.62 14.62 14.62 14.62 14.62 13.16 11.70 10.23 8.77 7.31 5.85 4.39 2.92 1.46 0.00 0.00
64 15.43 15.43 15.43 15.43 15.43 13.89 12.34 10.80 9.26 7.71 6.17 4.63 3.09 1.54 0.00 0.00
65 16.25 16.25 16.25 16.25 16.25 14.63 13.00 11.38 9.75 8.13 6.50 4.88 3.25 1.63 0.00 0.00
66 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
67 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
68 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
69 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
70 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
71 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
</TABLE>
B-1
<PAGE> 65
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
72 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
73 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
74 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
75 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
76 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
77 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
78 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
79 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
80 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
</TABLE>
<TABLE>
<CAPTION>
FEMALE NONSMOKERS (PREFERRED & STANDARD)
Number of Full Policy Years Completed Since the Issue Date
Issue 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 or
Age more
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
21 5.74 5.74 5.74 5.74 5.74 5.17 4.59 4.02 3.45 2.87 2.30 1.72 1.15 0.57 0.00 0.00
22 5.74 5.74 5.74 5.74 5.74 5.17 4.59 4.02 3.45 2.87 2.30 1.72 1.15 0.57 0.00 0.00
23 5.74 5.74 5.74 5.74 5.74 5.17 4.59 4.02 3.45 2.87 2.30 1.72 1.15 0.57 0.00 0.00
24 5.74 5.74 5.74 5.74 5.74 5.17 4.59 4.02 3.45 2.87 2.30 1.72 1.15 0.57 0.00 0.00
25 5.74 5.74 5.74 5.74 5.74 5.17 4.59 4.02 3.45 2.87 2.30 1.72 1.15 0.57 0.00 0.00
26 5.74 5.74 5.74 5.74 5.74 5.17 4.59 4.02 3.45 2.87 2.30 1.72 1.15 0.57 0.00 0.00
27 5.74 5.74 5.74 5.74 5.74 5.17 4.59 4.02 3.45 2.87 2.30 1.72 1.15 0.57 0.00 0.00
28 5.74 5.74 5.74 5.74 5.74 5.17 4.59 4.02 3.45 2.87 2.30 1.72 1.15 0.57 0.00 0.00
29 5.74 5.74 5.74 5.74 5.74 5.17 4.59 4.02 3.45 2.87 2.30 1.72 1.15 0.57 0.00 0.00
30 5.74 5.74 5.74 5.74 5.74 5.17 4.59 4.02 3.45 2.87 2.30 1.72 1.15 0.57 0.00 0.00
31 5.78 5.78 5.78 5.78 5.78 5.20 4.62 4.04 3.47 2.89 2.31 1.73 1.16 0.58 0.00 0.00
32 5.81 5.81 5.81 5.81 5.81 5.23 4.65 4.07 3.49 2.91 2.32 1.74 1.16 0.58 0.00 0.00
33 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
34 5.91 5.91 5.91 5.91 5.91 5.32 4.73 4.14 3.55 2.96 2.36 1.77 1.18 0.59 0.00 0.00
35 5.95 5.95 5.95 5.95 5.95 5.35 4.76 4.16 3.57 2.97 2.38 1.78 1.19 0.59 0.00 0.00
36 5.98 5.98 5.98 5.98 5.98 5.38 4.78 4.19 3.59 2.99 2.39 1.79 1.20 0.60 0.00 0.00
37 6.08 6.08 6.08 6.08 6.08 5.47 4.86 4.26 3.65 3.04 2.43 1.82 1.22 0.61 0.00 0.00
38 6.11 6.11 6.11 6.11 6.11 5.50 4.89 4.28 3.67 3.06 2.45 1.83 1.22 0.61 0.00 0.00
39 6.18 6.18 6.18 6.18 6.18 5.56 4.94 4.33 3.71 3.09 2.47 1.85 1.24 0.62 0.00 0.00
40 6.28 6.28 6.28 6.28 6.28 5.66 5.03 4.40 3.77 3.14 2.51 1.89 1.26 0.63 0.00 0.00
41 6.35 6.35 6.35 6.35 6.35 5.72 5.08 4.45 3.81 3.18 2.54 1.91 1.27 0.64 0.00 0.00
42 6.42 6.42 6.42 6.42 6.42 5.78 5.13 4.49 3.85 3.21 2.57 1.93 1.28 0.64 0.00 0.00
43 6.49 6.49 6.49 6.49 6.49 5.84 5.19 4.54 3.89 3.24 2.59 1.95 1.30 0.65 0.00 0.00
44 6.62 6.62 6.62 6.62 6.62 5.96 5.30 4.63 3.97 3.31 2.65 1.99 1.32 0.66 0.00 0.00
45 6.69 6.69 6.69 6.69 6.69 6.02 5.35 4.68 4.01 3.34 2.68 2.01 1.34 0.67 0.00 0.00
46 6.82 6.82 6.82 6.82 6.82 6.14 5.46 4.78 4.09 3.41 2.73 2.05 1.36 0.68 0.00 0.00
47 6.92 6.92 6.92 6.92 6.92 6.23 5.54 4.85 4.15 3.46 2.77 2.08 1.38 0.69 0.00 0.00
48 7.09 7.09 7.09 7.09 7.09 6.38 5.67 4.97 4.26 3.55 2.84 2.13 1.42 0.71 0.00 0.00
49 7.19 7.19 7.19 7.19 7.19 6.47 5.76 5.04 4.32 3.60 2.88 2.16 1.44 0.72 0.00 0.00
50 7.36 7.36 7.36 7.36 7.36 6.63 5.89 5.15 4.42 3.68 2.95 2.21 1.47 0.74 0.00 0.00
51 7.53 7.53 7.53 7.53 7.53 6.78 6.02 5.27 4.52 3.77 3.01 2.26 1.51 0.75 0.00 0.00
52 7.70 7.70 7.70 7.70 7.70 6.93 6.16 5.39 4.62 3.85 3.08 2.31 1.54 0.77 0.00 0.00
53 7.90 7.90 7.90 7.90 7.90 7.11 6.32 5.53 4.74 3.95 3.16 2.37 1.58 0.79 0.00 0.00
54 8.14 8.14 8.14 8.14 8.14 7.33 6.51 5.70 4.88 4.07 3.26 2.44 1.63 0.81 0.00 0.00
55 8.38 8.38 8.38 8.38 8.38 7.54 6.70 5.86 5.03 4.19 3.35 2.51 1.68 0.84 0.00 0.00
56 8.58 8.58 8.58 8.58 8.58 7.72 6.86 6.01 5.15 4.29 3.43 2.57 1.72 0.86 0.00 0.00
57 8.88 8.88 8.88 8.88 8.88 7.99 7.10 6.22 5.33 4.44 3.55 2.66 1.78 0.89 0.00 0.00
58 9.12 9.12 9.12 9.12 9.12 8.21 7.29 6.38 5.47 4.56 3.65 2.74 1.82 0.91 0.00 0.00
59 9.46 9.46 9.46 9.46 9.46 8.51 7.56 6.62 5.67 4.73 3.78 2.84 1.89 0.95 0.00 0.00
60 9.79 9.79 9.79 9.79 9.79 8.81 7.83 6.86 5.88 4.90 3.92 2.94 1.96 0.98 0.00 0.00
61 10.10 10.10 10.10 10.10 10.10 9.09 8.08 7.07 6.06 5.05 4.04 3.03 2.02 1.01 0.00 0.00
62 10.40 10.40 10.40 10.40 10.40 9.36 8.32 7.28 6.24 5.20 4.16 3.12 2.08 1.04 0.00 0.00
63 10.77 10.77 10.77 10.77 10.77 9.69 8.62 7.54 6.46 5.39 4.31 3.23 2.15 1.08 0.00 0.00
64 11.14 11.14 11.14 11.14 11.14 10.03 8.91 7.80 6.69 5.57 4.46 3.34 2.23 1.11 0.00 0.00
65 11.58 11.58 11.58 11.58 11.58 10.42 9.26 8.11 6.95 5.79 4.63 3.47 2.32 1.16 0.00 0.00
66 12.91 12.91 12.91 11.62 10.33 9.04 7.75 6.46 5.16 3.87 2.58 1.94 1.29 0.65 0.00 0.00
</TABLE>
B-2
<PAGE> 66
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
67 13.66 13.66 13.66 12.30 10.93 9.56 8.20 6.83 5.46 4.10 2.73 2.05 1.37 0.68 0.00 0.00
68 14.41 14.41 14.41 12.97 11.53 10.09 8.65 7.21 5.76 4.32 2.88 2.16 1.44 0.72 0.00 0.00
69 15.28 15.28 15.28 13.75 12.22 10.69 9.17 7.64 6.11 4.58 3.06 2.29 1.53 0.76 0.00 0.00
70 16.21 16.21 16.21 14.59 12.97 11.35 9.73 8.11 6.48 4.86 3.24 2.43 1.62 0.81 0.00 0.00
71 17.41 17.41 17.41 15.67 13.93 12.19 10.45 8.71 6.96 5.22 3.48 2.61 1.74 0.87 0.00 0.00
72 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
73 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
74 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
75 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
76 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
77 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
78 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
79 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
80 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
</TABLE>
<TABLE>
<CAPTION>
MALE SMOKERS
Number of Full Policy Years Completed Since the Issue Date
Issue 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 or
Age more
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
1 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
2 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
3 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
4 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
5 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
6 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
7 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
8 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
9 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
10 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
11 5.38 5.38 5.38 5.38 5.38 4.85 4.31 3.77 3.23 2.69 2.15 1.62 1.08 0.54 0.00 0.00
12 5.43 5.43 5.43 5.43 5.43 4.89 4.34 3.80 3.26 2.71 2.17 1.63 1.09 0.54 0.00 0.00
13 5.50 5.50 5.50 5.50 5.50 4.95 4.40 3.85 3.30 2.75 2.20 1.65 1.10 0.55 0.00 0.00
14 5.56 5.56 5.56 5.56 5.56 5.01 4.45 3.89 3.34 2.78 2.23 1.67 1.11 0.56 0.00 0.00
15 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
16 5.88 5.88 5.88 5.88 5.88 5.29 4.70 4.12 3.53 2.94 2.35 1.76 1.18 0.59 0.00 0.00
17 5.90 5.90 5.90 5.90 5.90 5.31 4.72 4.13 3.54 2.95 2.36 1.77 1.18 0.59 0.00 0.00
18 5.93 5.93 5.93 5.93 5.93 5.34 4.75 4.15 3.56 2.97 2.37 1.78 1.19 0.59 0.00 0.00
19 5.96 5.96 5.96 5.96 5.96 5.36 4.76 4.17 3.57 2.98 2.38 1.79 1.19 0.60 0.00 0.00
20 5.99 5.99 5.99 5.99 5.99 5.39 4.79 4.19 3.59 3.00 2.40 1.80 1.20 0.60 0.00 0.00
21 6.01 6.01 6.01 6.01 6.01 5.41 4.81 4.21 3.61 3.01 2.41 1.80 1.20 0.60 0.00 0.00
22 6.05 6.05 6.05 6.05 6.05 5.44 4.84 4.23 3.63 3.02 2.42 1.81 1.21 0.60 0.00 0.00
23 6.07 6.07 6.07 6.07 6.07 5.46 4.86 4.25 3.64 3.03 2.43 1.82 1.21 0.61 0.00 0.00
24 6.10 6.10 6.10 6.10 6.10 5.49 4.88 4.27 3.66 3.05 2.44 1.83 1.22 0.61 0.00 0.00
25 6.13 6.13 6.13 6.13 6.13 5.51 4.90 4.29 3.68 3.06 2.45 1.84 1.23 0.61 0.00 0.00
26 6.15 6.15 6.15 6.15 6.15 5.53 4.92 4.30 3.69 3.07 2.46 1.84 1.23 0.61 0.00 0.00
27 6.18 6.18 6.18 6.18 6.18 5.56 4.94 4.33 3.71 3.09 2.47 1.85 1.24 0.62 0.00 0.00
28 6.20 6.20 6.20 6.20 6.20 5.58 4.96 4.34 3.72 3.10 2.48 1.86 1.24 0.62 0.00 0.00
29 6.24 6.24 6.24 6.24 6.24 5.61 4.99 4.37 3.74 3.12 2.50 1.87 1.25 0.62 0.00 0.00
30 6.26 6.26 6.26 6.26 6.26 5.63 5.01 4.38 3.76 3.13 2.50 1.88 1.25 0.63 0.00 0.00
31 6.40 6.40 6.40 6.40 6.40 5.76 5.12 4.48 3.84 3.20 2.56 1.92 1.28 0.64 0.00 0.00
32 6.53 6.53 6.53 6.53 6.53 5.88 5.22 4.57 3.92 3.27 2.61 1.96 1.31 0.65 0.00 0.00
33 6.62 6.62 6.62 6.62 6.62 5.96 5.30 4.63 3.97 3.31 2.65 1.99 1.32 0.66 0.00 0.00
34 6.82 6.82 6.82 6.82 6.82 6.14 5.46 4.78 4.09 3.41 2.73 2.05 1.36 0.68 0.00 0.00
35 6.97 6.97 6.97 6.97 6.97 6.27 5.58 4.88 4.18 3.48 2.79 2.09 1.39 0.70 0.00 0.00
36 7.18 7.18 7.18 7.18 7.18 6.47 5.75 5.03 4.31 3.59 2.87 2.16 1.44 0.72 0.00 0.00
37 7.28 7.28 7.28 7.28 7.28 6.56 5.83 5.10 4.37 3.64 2.91 2.19 1.46 0.73 0.00 0.00
38 7.51 7.51 7.51 7.51 7.51 6.76 6.01 5.26 4.51 3.75 3.00 2.25 1.50 0.75 0.00 0.00
39 7.73 7.73 7.73 7.73 7.73 6.96 6.19 5.41 4.64 3.87 3.09 2.32 1.55 0.77 0.00 0.00
40 7.97 7.97 7.97 7.97 7.97 7.17 6.38 5.58 4.78 3.99 3.19 2.39 1.59 0.80 0.00 0.00
</TABLE>
B-3
<PAGE> 67
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
41 8.27 8.27 8.27 8.27 8.27 7.45 6.62 5.79 4.96 4.14 3.31 2.48 1.65 0.83 0.00 0.00
42 8.47 8.47 8.47 8.47 8.47 7.62 6.77 5.93 5.08 4.23 3.39 2.54 1.69 0.85 0.00 0.00
43 8.85 8.85 8.85 8.85 8.85 7.96 7.08 6.19 5.31 4.42 3.54 2.65 1.77 0.88 0.00 0.00
44 9.19 9.19 9.19 9.19 9.19 8.27 7.35 6.43 5.51 4.59 3.67 2.76 1.84 0.92 0.00 0.00
45 9.59 9.59 9.59 9.59 9.59 8.63 7.67 6.71 5.75 4.80 3.84 2.88 1.92 0.96 0.00 0.00
46 9.85 9.85 9.85 9.85 9.85 8.86 7.88 6.89 5.91 4.92 3.94 2.95 1.97 0.98 0.00 0.00
47 10.15 10.15 10.15 10.15 10.15 9.14 8.12 7.11 6.09 5.08 4.06 3.05 2.03 1.02 0.00 0.00
48 10.46 10.46 10.46 10.46 10.46 9.41 8.36 7.32 6.27 5.23 4.18 3.14 2.09 1.05 0.00 0.00
49 10.86 10.86 10.86 10.86 10.86 9.77 8.69 7.60 6.52 5.43 4.34 3.26 2.17 1.09 0.00 0.00
50 11.19 11.19 11.19 11.19 11.19 10.07 8.95 7.83 6.71 5.59 4.48 3.36 2.24 1.12 0.00 0.00
51 11.56 11.56 11.56 11.56 11.56 10.40 9.25 8.09 6.94 5.78 4.62 3.47 2.31 1.16 0.00 0.00
52 11.98 11.98 11.98 11.98 11.98 10.78 9.58 8.38 7.19 5.99 4.79 3.59 2.40 1.20 0.00 0.00
53 12.43 12.43 12.43 12.43 12.43 11.18 9.94 8.70 7.46 6.21 4.97 3.73 2.49 1.24 0.00 0.00
54 12.86 12.86 12.86 12.86 12.86 11.58 10.29 9.01 7.72 6.43 5.15 3.86 2.57 1.29 0.00 0.00
55 13.44 13.44 13.44 13.44 13.44 12.09 10.75 9.41 8.06 6.72 5.38 4.03 2.69 1.34 0.00 0.00
56 13.93 13.93 13.93 13.93 13.93 12.54 11.15 9.75 8.36 6.97 5.57 4.18 2.79 1.39 0.00 0.00
57 14.45 14.45 14.45 14.45 14.45 13.01 11.56 10.12 8.67 7.23 5.78 4.34 2.89 1.45 0.00 0.00
58 15.04 15.04 15.04 15.04 15.04 13.54 12.03 10.53 9.03 7.52 6.02 4.51 3.01 1.50 0.00 0.00
59 15.71 15.71 15.71 15.71 15.71 14.14 12.57 11.00 9.43 7.86 6.28 4.71 3.14 1.57 0.00 0.00
60 16.25 16.25 16.25 16.25 16.25 14.63 13.00 11.38 9.75 8.13 6.50 4.88 3.25 1.63 0.00 0.00
61 16.25 16.25 16.25 16.25 16.25 14.63 13.00 11.38 9.75 8.13 6.50 4.88 3.25 1.63 0.00 0.00
62 16.25 16.25 16.25 16.25 16.25 14.63 13.00 11.38 9.75 8.13 6.50 4.88 3.25 1.63 0.00 0.00
63 16.25 16.25 16.25 16.25 16.25 14.63 13.00 11.38 9.75 8.13 6.50 4.88 3.25 1.63 0.00 0.00
64 16.25 16.25 16.25 16.25 16.25 14.63 13.00 11.38 9.75 8.13 6.50 4.88 3.25 1.63 0.00 0.00
65 16.25 16.25 16.25 16.25 16.25 14.63 13.00 11.38 9.75 8.13 6.50 4.88 3.25 1.63 0.00 0.00
66 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
67 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
68 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
69 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
70 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
71 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
72 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
73 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
74 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
75 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
76 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
77 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
78 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
79 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
80 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
</TABLE>
<TABLE>
<CAPTION>
FEMALE SMOKERS
Number of Full Policy Years Completed Since the Issue Date
Issue 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 or
Age more
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
1 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
2 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
3 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
4 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
5 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
6 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
7 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
8 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
9 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
10 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
11 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
12 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
13 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
14 5.38 5.38 5.38 5.38 5.38 4.85 4.31 3.77 3.23 2.69 2.15 1.62 1.08 0.54 0.00 0.00
15 5.61 5.61 5.61 5.61 5.61 5.05 4.49 3.93 3.37 2.80 2.24 1.68 1.12 0.56 0.00 0.00
</TABLE>
B-4
<PAGE> 68
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
16 5.63 5.63 5.63 5.63 5.63 5.07 4.50 3.94 3.38 2.82 2.25 1.69 1.13 0.56 0.00 0.00
17 5.69 5.69 5.69 5.69 5.69 5.12 4.55 3.98 3.41 2.84 2.27 1.71 1.14 0.57 0.00 0.00
18 5.71 5.71 5.71 5.71 5.71 5.14 4.57 4.00 3.43 2.85 2.28 1.71 1.14 0.57 0.00 0.00
19 5.77 5.77 5.77 5.77 5.77 5.19 4.61 4.04 3.46 2.88 2.31 1.73 1.15 0.58 0.00 0.00
20 5.79 5.79 5.79 5.79 5.79 5.21 4.63 4.05 3.47 2.89 2.32 1.74 1.16 0.58 0.00 0.00
21 5.89 5.89 5.89 5.89 5.89 5.30 4.71 4.12 3.53 2.94 2.36 1.77 1.18 0.59 0.00 0.00
22 5.91 5.91 5.91 5.91 5.91 5.32 4.73 4.14 3.55 2.96 2.36 1.77 1.18 0.59 0.00 0.00
23 5.95 5.95 5.95 5.95 5.95 5.35 4.76 4.16 3.57 2.97 2.38 1.78 1.19 0.59 0.00 0.00
24 5.97 5.97 5.97 5.97 5.97 5.37 4.77 4.18 3.58 2.98 2.39 1.79 1.19 0.60 0.00 0.00
25 5.99 5.99 5.99 5.99 5.99 5.39 4.79 4.19 3.59 3.00 2.40 1.80 1.20 0.60 0.00 0.00
26 6.01 6.01 6.01 6.01 6.01 5.41 4.81 4.21 3.61 3.01 2.41 1.80 1.20 0.60 0.00 0.00
27 6.04 6.04 6.04 6.04 6.04 5.43 4.83 4.22 3.62 3.02 2.41 1.81 1.21 0.60 0.00 0.00
28 6.07 6.07 6.07 6.07 6.07 5.46 4.86 4.25 3.64 3.03 2.43 1.82 1.21 0.61 0.00 0.00
29 6.09 6.09 6.09 6.09 6.09 5.48 4.87 4.26 3.65 3.05 2.44 1.83 1.22 0.61 0.00 0.00
30 6.11 6.11 6.11 6.11 6.11 5.50 4.89 4.28 3.67 3.06 2.45 1.83 1.22 0.61 0.00 0.00
31 6.19 6.19 6.19 6.19 6.19 5.57 4.95 4.34 3.72 3.10 2.48 1.86 1.24 0.62 0.00 0.00
32 6.27 6.27 6.27 6.27 6.27 5.64 5.02 4.39 3.76 3.14 2.51 1.88 1.25 0.63 0.00 0.00
33 6.35 6.35 6.35 6.35 6.35 5.72 5.08 4.45 3.81 3.18 2.54 1.91 1.27 0.64 0.00 0.00
34 6.49 6.49 6.49 6.49 6.49 5.84 5.19 4.54 3.89 3.24 2.59 1.95 1.30 0.65 0.00 0.00
35 6.58 6.58 6.58 6.58 6.58 5.92 5.26 4.60 3.95 3.29 2.63 1.97 1.32 0.66 0.00 0.00
36 6.67 6.67 6.67 6.67 6.67 6.00 5.33 4.67 4.00 3.33 2.67 2.00 1.33 0.67 0.00 0.00
37 6.87 6.87 6.87 6.87 6.87 6.18 5.49 4.81 4.12 3.43 2.75 2.06 1.37 0.69 0.00 0.00
38 6.97 6.97 6.97 6.97 6.97 6.27 5.58 4.88 4.18 3.48 2.79 2.09 1.39 0.70 0.00 0.00
39 7.13 7.13 7.13 7.13 7.13 6.41 5.70 4.99 4.28 3.56 2.85 2.14 1.43 0.71 0.00 0.00
40 7.35 7.35 7.35 7.35 7.35 6.62 5.88 5.15 4.41 3.68 2.94 2.21 1.47 0.74 0.00 0.00
41 7.52 7.52 7.52 7.52 7.52 6.77 6.02 5.26 4.51 3.76 3.01 2.26 1.50 0.75 0.00 0.00
42 7.69 7.69 7.69 7.69 7.69 6.92 6.15 5.38 4.61 3.84 3.08 2.31 1.54 0.77 0.00 0.00
43 7.87 7.87 7.87 7.87 7.87 7.08 6.30 5.51 4.72 3.93 3.15 2.36 1.57 0.79 0.00 0.00
44 8.18 8.18 8.18 8.18 8.18 7.37 6.55 5.73 4.91 4.09 3.27 2.46 1.64 0.82 0.00 0.00
45 8.38 8.38 8.38 8.38 8.38 7.54 6.70 5.86 5.03 4.19 3.35 2.51 1.68 0.84 0.00 0.00
46 8.59 8.59 8.59 8.59 8.59 7.73 6.87 6.01 5.15 4.29 3.44 2.58 1.72 0.86 0.00 0.00
47 8.72 8.72 8.72 8.72 8.72 7.85 6.98 6.11 5.23 4.36 3.49 2.62 1.74 0.87 0.00 0.00
48 8.97 8.97 8.97 8.97 8.97 8.07 7.18 6.28 5.38 4.49 3.59 2.69 1.79 0.90 0.00 0.00
49 9.10 9.10 9.10 9.10 9.10 8.19 7.28 6.37 5.46 4.55 3.64 2.73 1.82 0.91 0.00 0.00
50 9.33 9.33 9.33 9.33 9.33 8.40 7.46 6.53 5.60 4.67 3.73 2.80 1.87 0.93 0.00 0.00
51 9.56 9.56 9.56 9.56 9.56 8.60 7.64 6.69 5.73 4.78 3.82 2.87 1.91 0.96 0.00 0.00
52 9.77 9.77 9.77 9.77 9.77 8.79 7.82 6.84 5.86 4.89 3.91 2.93 1.95 0.98 0.00 0.00
53 10.03 10.03 10.03 10.03 10.03 9.03 8.02 7.02 6.02 5.01 4.01 3.01 2.01 1.00 0.00 0.00
54 10.33 10.33 10.33 10.33 10.33 9.30 8.27 7.23 6.20 5.17 4.13 3.10 2.07 1.03 0.00 0.00
55 10.63 10.63 10.63 10.63 10.63 9.56 8.50 7.44 6.38 5.31 4.25 3.19 2.13 1.06 0.00 0.00
56 10.84 10.84 10.84 10.84 10.84 9.76 8.67 7.59 6.50 5.42 4.34 3.25 2.17 1.08 0.00 0.00
57 11.21 11.21 11.21 11.21 11.21 10.09 8.97 7.85 6.73 5.61 4.48 3.36 2.24 1.12 0.00 0.00
58 11.45 11.45 11.45 11.45 11.45 10.30 9.16 8.01 6.87 5.72 4.58 3.43 2.29 1.14 0.00 0.00
59 11.83 11.83 11.83 11.83 11.83 10.65 9.46 8.28 7.10 5.91 4.73 3.55 2.37 1.18 0.00 0.00
60 12.19 12.19 12.19 12.19 12.19 10.97 9.75 8.53 7.31 6.09 4.87 3.66 2.44 1.22 0.00 0.00
61 12.47 12.47 12.47 12.47 12.47 11.22 9.98 8.73 7.48 6.24 4.99 3.74 2.49 1.25 0.00 0.00
62 12.74 12.74 12.74 12.74 12.74 11.47 10.19 8.92 7.64 6.37 5.10 3.82 2.55 1.27 0.00 0.00
63 13.08 13.08 13.08 13.08 13.08 11.77 10.46 9.16 7.85 6.54 5.23 3.92 2.62 1.31 0.00 0.00
64 13.39 13.39 13.39 13.39 13.39 12.05 10.71 9.38 8.04 6.70 5.36 4.02 2.68 1.34 0.00 0.00
65 13.78 13.78 13.78 13.78 13.78 12.40 11.02 9.64 8.27 6.89 5.51 4.13 2.76 1.38 0.00 0.00
66 15.29 15.29 15.29 13.76 12.23 10.70 9.17 7.64 6.12 4.59 3.06 2.29 1.53 0.76 0.00 0.00
67 15.98 15.98 15.98 14.38 12.78 11.18 9.59 7.99 6.39 4.79 3.20 2.40 1.60 0.80 0.00 0.00
68 16.61 16.61 16.61 14.95 13.29 11.63 9.97 8.31 6.64 4.98 3.32 2.49 1.66 0.83 0.00 0.00
69 17.33 17.33 17.33 15.59 13.86 12.13 10.40 8.66 6.93 5.20 3.47 2.60 1.73 0.87 0.00 0.00
70 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
71 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
72 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
73 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
74 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
75 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
76 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
77 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
</TABLE>
B-5
<PAGE> 69
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
78 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
79 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
80 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
</TABLE>
B-6
<PAGE> 70
APPENDIX C - FINANCIAL
STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FARMERS NEW WORLD LIFE INSURANCE COMPANY
C-1
<PAGE> 71
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> 72
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> 73
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> 74
================================================================================
<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> 75
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> 76
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> 77
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> 78
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> 79
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> 80
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> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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> 92
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> 93
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> 94
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> 95
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> 96
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> 97
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> 98
<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> 99
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> 100
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> 101
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> 102
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> 103
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> 104
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> 105
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> 106
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> 107
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.
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