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PROSPECTUS
MAY 1, 2000
Please read this prospectus carefully before investing, and keep it for future
reference. It contains important information about the Farmers Variable Annuity.
To learn more about the Contract, you may want to read the Statement of
Additional Information dated May 1, 2000 (known as the "SAI"). For a free copy
of the SAI, contact us at:
Farmers New World Life Insurance Company
SERVICE CENTER
P.O. Box 724208
Atlanta, Georgia 31139
1-877-376-8008 (toll free)
We have filed the SAI with the U.S. Securities and Exchange Commission ("SEC")
and have incorporated it by reference into this prospectus. (It is legally a
part of this prospectus.) The SAI's table of contents appears at the end of this
prospectus.
The SEC maintains an Internet website (http://www.sec.gov) that contains the SAI
and other information about us. You may also read and copy these materials at
the SEC's public reference room in Washington, D.C. Call 1-800-SEC-0330 for
information about the SEC's public reference room.
VARIABLE ANNUITY CONTRACTS INVOLVE CERTAIN RISKS, AND YOU MAY LOSE SOME OR ALL
OF YOUR INVESTMENT.
- - The investment performance of the portfolios in which the subaccounts
invest will vary.
- - We do not guarantee how any of the portfolios will perform.
- - The Contract is not a deposit or obligation of any bank, and no bank
endorses or guarantees the Contract.
- - Neither the U.S. Government nor any federal agency insures your
investment in the Contract.
FARMERS VARIABLE ANNUITY
INDIVIDUAL FLEXIBLE PREMIUM VARIABLE ANNUITY
issued by
FARMERS NEW WORLD LIFE INSURANCE COMPANY
through the
FARMERS ANNUITY SEPARATE ACCOUNT A
HOME OFFICE
3003 - 77th Avenue, S.E.
Mercer Island, Washington 98040
Telephone: (206) 232-8400
The Farmers Variable Annuity Contract (the "Contract") has 13 funding choices --
one fixed account (paying a guaranteed minimum fixed rate of interest) and 12
subaccounts. The subaccounts invest in the following 12 portfolios:
JANUS ASPEN SERIES
- - Capital Appreciation Portfolio (Institutional Shares)
KEMPER VARIABLE SERIES
- - Kemper Government Securities Portfolio
- - Kemper High Yield Portfolio
- - Kemper Small Cap Growth Portfolio
- - KVS Dreman High Return Equity Portfolio (Formerly Kemper-Dreman High
Return Equity Portfolio)
PIMCO VARIABLE INSURANCE TRUST
- - PIMCO Low Duration Bond Portfolio
- - PIMCO Foreign Bond Portfolio
SCUDDER VARIABLE LIFE INVESTMENT FUND
- - Money Market Portfolio
- - Growth and Income Portfolio (Class A Shares)
- - International Portfolio (Class A Shares)
- - Bond Portfolio (Class A Shares)
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
- - Templeton Developing Markets Securities Fund (Class 2 Shares) (Formerly
Templeton Developing Markets Fund)
THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR EACH
OF THE PORTFOLIOS LISTED ABOVE.
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS. ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A
FEDERAL CRIME.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Glossary..................................................................................................................1
Highlights................................................................................................................3
The Contract...........................................................................................................3
How to Invest..........................................................................................................4
Cancellation -- The Right To Examine Period............................................................................4
Investment Options.....................................................................................................4
Transfers..............................................................................................................5
Access to Your Money...................................................................................................6
Standard Death Benefit.................................................................................................6
Guaranteed Minimum Death Benefit.......................................................................................7
Fees and Charges.......................................................................................................7
Annuity Provisions.....................................................................................................8
Guaranteed Retirement Income Benefit...................................................................................9
Federal Tax Status.....................................................................................................9
Inquiries.............................................................................................................10
Fee Table................................................................................................................11
Condensed Financial Information.......................................................................................15
About Farmers New World Life Insurance Company and the Variable Account..................................................15
Farmers New World Life Insurance Company..............................................................................15
Farmers Annuity Separate Account A....................................................................................15
The Portfolios...........................................................................................................16
Investment Objectives of the Portfolios...............................................................................17
Availability of the Portfolios........................................................................................18
The Pay-In Period........................................................................................................18
Purchasing a Contract.................................................................................................18
Cancellation -- The 10 Day Right to Examine Period....................................................................19
Designating Your Investment Options...................................................................................19
Additional Premium Payments...........................................................................................20
Your Contract Value......................................................................................................20
Variable Account Value................................................................................................20
Transfers Between Investment Options.....................................................................................21
Automatic Asset Rebalancing Program...................................................................................22
Third Party Transfers.................................................................................................22
Excessive Trading Limits..............................................................................................23
Dollar Cost Averaging Program.........................................................................................23
Telephone Transfers...................................................................................................23
Transfer Fee..........................................................................................................24
Access to Your Money.....................................................................................................24
Surrenders............................................................................................................24
Partial Withdrawals...................................................................................................25
Systematic Withdrawal Plan............................................................................................26
Death Benefits...........................................................................................................26
Death Benefits Before the Annuity Start Date..........................................................................26
Guaranteed Minimum Death Benefit......................................................................................27
Distribution Upon Death...............................................................................................28
Death Benefits on or After the Annuity Start Date.....................................................................28
Fees and Charges.........................................................................................................29
Mortality and Expense Risk Charge.....................................................................................29
Asset-Based Administration Charge.....................................................................................29
Transfer Fee..........................................................................................................29
</TABLE>
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<TABLE>
<S> <C>
Surrender Charge......................................................................................................29
Records Maintenance Charge............................................................................................31
Portfolio Management Fees and Charges.................................................................................31
Premium Taxes.........................................................................................................32
Other Taxes...........................................................................................................32
The Payout Period........................................................................................................32
The Annuity Start Date................................................................................................32
Annuity Options.......................................................................................................32
Determining the Amount of Your Annuity Payment........................................................................33
Fixed Annuity Payments................................................................................................33
Guaranteed Annuity Tables.............................................................................................33
Description of Annuity Options........................................................................................34
Guaranteed Retirement Income Benefit.....................................................................................35
The Fixed Account........................................................................................................36
Fixed Account Value...................................................................................................37
Fixed Account Transfers...............................................................................................37
Investment Performance of the Subaccounts................................................................................38
Voting Rights............................................................................................................39
Federal Tax Matters......................................................................................................39
Taxation of Non-Qualified Contracts...................................................................................40
Taxation of Qualified Contracts.......................................................................................42
Other Tax Issues......................................................................................................42
Our Income Taxes......................................................................................................43
Possible Tax Law Changes..............................................................................................43
Other Information........................................................................................................43
Payments..............................................................................................................43
Modification..........................................................................................................44
Distribution of the Contracts.........................................................................................44
Legal Proceedings.....................................................................................................44
Reports to Owners.....................................................................................................45
Inquiries.............................................................................................................45
Year 2000 Matters.....................................................................................................45
Financial Statements..................................................................................................45
Statement of Additional Information Table of Contents....................................................................46
</TABLE>
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GLOSSARY
For your convenience, we are providing a glossary of the special terms
we use in this prospectus.
ACCUMULATION UNIT
An accounting unit we use to calculate subaccount values during the pay-in
period. It measures the net investment results of each of the subaccounts.
ANNUITANT
You are the annuitant, unless you state otherwise in your application. Before
any annuity payments begin, the annuitant is the person (or persons) on whose
life (or lives) the Contract is issued. When annuity payments begin, the
annuitant is a person during whose lifetime we may make payments under one of
the annuity options. You may select joint annuitants.
ANNUITY START DATE
The date when we will begin to pay annuity payments to you or a person you
designate under the annuity option you selected.
BENEFICIARY
The person you select to receive the death benefit if you or the last surviving
annuitant die before the annuity start date.
CASH VALUE
The Contract Value minus any applicable surrender charge, records maintenance
charge, and premium tax.
COMPANY (WE, US, OUR, FARMERS)
Farmers New World Life Insurance Company.
CONTRACT MONTH, YEAR OR ANNIVERSARY
A month, year or anniversary as measured from the issue date.
CONTRACT VALUE
The sum of the amounts you have accumulated under the Contract. It is equal to
the money you have under the Contract in the variable account and the fixed
account.
FINAL ANNUITY DATE
The Contract anniversary when the oldest annuitant is age 95.
FIXED ACCOUNT
An option to which you can direct your money under the Contract. It provides a
guarantee of principal and interest. The assets supporting the fixed account are
held in our general account and are not part of, or dependent on, the investment
performance of the variable account.
FIXED ACCOUNT VALUE
Your Contract Value in the fixed account.
FREE WITHDRAWAL AMOUNT
An amount you can withdraw each Contract year as a partial withdrawal without
incurring a surrender charge.
FUNDS
Investment companies that are registered with the SEC. This Contract allows you
to invest in the portfolios of the funds that are listed on the front page of
this prospectus.
GENERAL ACCOUNT
The account containing all of Farmers' assets, other than those held in its
separate accounts.
HOME OFFICE
The address of our Home Office is 3003 - 77th Avenue, S.E., Mercer Island,
Washington 98040.
ISSUE DATE
The date on which we credit the initial premium payment to your Contract. It is
also the date when, depending on your state of residence, we allocate your
premium(s) either entirely to the fixed account, or to the fixed account and the
subaccounts you selected on your application.
NET INVESTMENT FACTOR
The factor we use to determine the value of an accumulation unit at the end of
each valuation period. We determine the net investment factor separately for
each subaccount.
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PAY-IN PERIOD
The period that begins when we issue your Contract and ends on the annuity start
date. During the pay-in period, earnings accumulate on a tax-deferred basis
until you take money out.
PAYOUT PERIOD
The period beginning on the annuity start date during which you or the person
you designate will receive annuity payments.
PORTFOLIO
A separate investment portfolio of a fund. Each subaccount invests exclusively
in one portfolio of a fund.
PREMIUM PAYMENT
Amount you pay to us for the Contract. When we use the term "premium payment" in
this prospectus, it means a premium payment less any applicable premium taxes.
QUALIFIED CONTRACT
A Contract issued in connection with a retirement plan that qualifies for
special federal income tax treatment under the Tax Code.
SERVICE CENTER
The address of the Service Center is P.O. Box 724208, Atlanta, Georgia 31139.
McCamish Systems, L.L.C. is the administrator of the Contract. You can call the
Service Center office toll-free at 1-877-376-8008.
SUBACCOUNT
A subdivision of the variable account that invests exclusively in shares of one
portfolio of a fund. The investment performance of each subaccount is linked
directly to the investment performance of the portfolio in which it invests.
SURRENDER
The termination of a Contract at the option of the owner.
TAX CODE
The Internal Revenue Code of 1986, as amended.
VALUATION DAY/BUSINESS DAY
Each day that the New York Stock Exchange ("NYSE") is open for trading. Farmers
New World Life Insurance Company is open to administer the Contract on each day
the NYSE is open.
VALUATION PERIOD
The period of time over which we determine the change in the value of the
subaccounts in order to price accumulation units. Each valuation period begins
at the close of normal trading on the NYSE (currently 4:00 p.m. Eastern time,
1:00 p.m. Pacific Time) on each Valuation Day and ends at the close of normal
trading on the NYSE on the next Valuation Day.
VARIABLE ACCOUNT
Farmers Annuity Separate Account A. It is a separate investment account divided
into subaccounts, each of which invests in a corresponding portfolio of a
designated fund.
VARIABLE ACCOUNT VALUE
The portion of the total value of your Contract that is allocated to the
subaccounts of the variable account.
WRITTEN NOTICE
The written notice you must sign and send to us to request or exercise your
rights as owner under the Contract. To be complete, it must: (1) be in a form we
accept; (2) contain the information and documentation that we determine is
necessary, and (3) be received at our Service Center.
YOU (YOUR, OWNER)
The person(s) entitled to exercise all rights as owner under the Contract.
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HIGHLIGHTS
These highlights provide only a brief overview of the more important
features of the Contract. More detailed information about the Contract appears
later in this prospectus. PLEASE READ THE REMAINDER OF THIS PROSPECTUS
CAREFULLY.
THE CONTRACT
An annuity is a contract between you (the Contract owner) and an
insurance company (Farmers) in which you agree to make one or more payments to
us and, in return, we agree to pay a series of payments to you at a later date.
The Farmers Variable Annuity Contract is a special kind of annuity that is:
- FLEXIBLE PREMIUM - you may add premium payments at any time.
- TAX-DEFERRED - you do not have to pay taxes on earnings until you
take money out by surrender, partial cash withdrawals, or we make
annuity payments to you, or we pay the death benefit.
- VARIABLE - you can direct your premium into any of 12 subaccounts.
Each subaccount invests exclusively in a single portfolio of a
fund. The money you invest in the subaccounts will fluctuate daily
based on the performance of the portfolios. You bear the
investment risk on the amounts you invest in the subaccounts.
You can also direct money to the fixed account. Amounts in the fixed
account earn interest annually at a fixed rate that is guaranteed by us never to
be less than 3%, and may be more. We guarantee the interest, as well as
principal, on money placed in the fixed account.
The Contract allows you to select on your application, for an
additional fee:
- the optional Guaranteed Minimum Death Benefit, and/or
- the optional Guaranteed Retirement Income Benefit.
These riders may not be available in all states, and may vary by state.
Like all deferred annuities, the Contract has two phases: the "pay-in"
period and the "payout" period. During the pay-in period, you can allocate money
to any combination of investment alternatives. Any earnings on your investments
accumulate tax-deferred. The payout period begins once you start receiving
regular annuity payments from the Contract. The Contract allows you to receive
annuity payments under one of three fixed annuity payment options. Unless you
opt for the Guaranteed Retirement Income Benefit, the money you can accumulate
during the pay-in period will directly determine the dollar amount of any
annuity payments you receive.
This Contract cannot be offered in any state where it is not lawful to
make such offer.
HOW TO INVEST
You may obtain a Contract application from your Farmers agent who is
also a licensed registered representative. You may purchase the Contract with a
single payment of $500 or more. We will not issue a Contract if you are older
than age 90 on the issue date.
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You can pay additional premiums of $500 or more ($50 or more if you
authorize us to draw on an account by check or electronic debit) at any time
before the annuity start date. You must send all premium payments to the Service
Office in Atlanta, Georgia at the address listed on the front cover of this
prospectus.
We may limit the total premium(s) paid to us during any Contract year.
CANCELLATION -- THE RIGHT TO EXAMINE PERIOD
You may return your Contract to us for a refund within 10 days after
you receive it. In most states, the amount of the refund will be the total
premiums we have received, plus (or minus) any gains (or losses) in the amounts
you invested in the subaccounts. If state law requires a return of premium, we
will refund the greater of your original premium or the Contract Value on the
date we receive the returned Contract at our Home Office at the address shown on
the front page of this prospectus. If you purchase a qualified Contract, we will
return the premium(s) paid. If your state requires us to return your premium or
if you have purchased a qualified Contract, we will place your premium(s) in the
fixed account for the number of days in your state's right to examine period,
plus 10 days. We will pay the refund within 7 calendar days after we receive the
Contract. The Contract will then be deemed void. In some states you may have
more than 10 days to return the Contract.
INVESTMENT OPTIONS
You may invest your money in any of 12 portfolios by directing it into
the corresponding subaccount. The portfolios now available to you under the
Contract are:
<TABLE>
<S> <C>
JANUS ASPEN SERIES SCUDDER VARIABLE LIFE INVESTMENT FUND
- Capital Appreciation Portfolio - Money Market Portfolio
(Institutional Shares) - Growth and Income Portfolio (Class A
Shares)
KEMPER VARIABLE SERIES - International Portfolio (Class A Shares)
- Kemper Government Securities - Bond Portfolio (Class A Shares)
Portfolio
- Kemper High Yield Portfolio FRANKLIN TEMPLETON VARIABLE INSURANCE
- Kemper Small Cap Growth Portfolio PRODUCTS TRUST
- KVS Dreman High Return Equity - Templeton Developing Markets Securities Fund
Portfolio (Formerly Kemper-Dreman (Class 2 Shares) (Formerly Templeton Developing
High Return Equity Portfolio) Markets Fund)
PIMCO VARIABLE INSURANCE TRUST
- PIMCO Low Duration Bond Portfolio
- PIMCO Foreign Bond Portfolio
</TABLE>
EACH ALLOCATION TO A SUBACCOUNT OR THE FIXED ACCOUNT MUST BE AT LEAST
$500.
Each subaccount invests exclusively in shares of one portfolio of a
fund. Each portfolio's assets are held separately from the other portfolios and
each portfolio has separate investment objectives and policies. The portfolios
are described in their own prospectuses that accompany this prospectus. The
value of your investment in the subaccounts will fluctuate daily based on the
investment results of the portfolios in which you invest, and on the fees and
charges we deduct.
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DEPENDING ON MARKET CONDITIONS, YOU CAN GAIN OR LOSE MONEY IN ANY OF
THE SUBACCOUNTS. WE RESERVE THE RIGHT TO OFFER OTHER INVESTMENT CHOICES IN THE
FUTURE.
You may also direct your money to the fixed account and receive a
guaranteed rate of return. Money you place in the fixed account will earn
interest for one-year periods at a fixed rate that we guarantee to be not less
than 3.0%.
TRANSFERS
You have the flexibility to transfer assets within your Contract. At
any time during the pay-in period and after the Right to Examine Period, you may
transfer amounts among the subaccounts and between the fixed account and the
subaccounts. Certain restrictions apply:
- transfers must be at least $100, or the total value in a
subaccount or fixed account, if less;
- Contract Value remaining in a subaccount or the fixed account must
be at least $500, or we will transfer the total value;
- only one transfer may be made from the fixed account each Contract
year. The transfer must be made during the 30 days following a
Contract anniversary; and
- transfers cannot be made from any subaccount to the fixed account
during the 6 month period following any transfer from the fixed
account into one or more subaccounts.
You may make 12 free transfers each Contract year. We impose a $25
charge per transfer on each transfer after the twelfth during a Contract year.
Transfers made under the asset rebalancing or dollar cost averaging programs do
not count toward the 12 free transfers.
AUTOMATIC ASSET REBALANCING PROGRAM
Under the automatic asset rebalancing program, we will automatically
transfer amounts among the subaccounts on a quarterly basis so that the
allocation of your Contract Value matches the percentages you specify.
DOLLAR COST AVERAGING PROGRAM
The dollar cost averaging program permits you to systematically
transfer (on each monthly anniversary of the issue date) a set dollar amount
from the fixed account to up to 8 subaccounts. Dollar cost averaging is
available only during the pay-in period. The minimum transfer amount is $100.
ACCESS TO YOUR MONEY
During the pay-in period, you may receive a cash withdrawal of part of
your cash value once each calendar quarter. You may also fully withdraw all your
value from the Contract and receive its cash value. This is called a surrender.
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Partial withdrawals are subject to the following conditions:
- the minimum amount you can withdraw is $100; and
- you may not make a partial withdrawal if the withdrawal
plus the surrender charge would cause the Contract Value to
fall below $500.
Surrenders and partial withdrawals may be subject to a surrender
charge. In any Contract year, you may withdraw a portion of your Contract Value,
called the free withdrawal amount, without incurring a surrender charge.
We offer a systematic withdrawal plan whereby, after the first Contract
year, you may receive periodic payments of at least $100 on a monthly basis
during the pay-in period.
You may have to pay federal income taxes and a penalty tax on any money
you fully or partially withdraw from the Contract. Access to amounts held in
qualified Contracts may be restricted or prohibited.
STANDARD DEATH BENEFIT
We will pay a death benefit to the beneficiary on the death of either
any owner or the last surviving annuitant before the annuity start date.
If you do not select the Guaranteed Minimum Death Benefit on your
application and if an annuitant (including an owner who is an annuitant) dies
before his or her 80th birthday, the death benefit equals the standard death
benefit, which is the greater of:
- the Contract Value on the later of the date that we receive
due proof of death and the date when we receive the
beneficiary's instructions on payment method; or
- the minimum death benefit. The minimum death benefit equals
the sum of all premiums paid, minus proportional reductions
for withdrawals.
In all other cases, the death benefit equals the Contract Value
determined on the later of the date that we receive due proof of death and the
date when we receive the beneficiary's instructions on payment method.
GUARANTEED MINIMUM DEATH BENEFIT
The Guaranteed Minimum Death Benefit provides an enhanced death benefit
in the event of the death of the last surviving annuitant before the annuity
start date. You may select the Guaranteed Minimum Death Benefit only on your
Contract application. We will deduct an additional daily charge from the
subaccounts at an annual rate of 0.25% for this benefit.
On the death of the last surviving annuitant, the Guaranteed Minimum
Death Benefit will equal the greatest of the following:
- the standard death benefit described above;
- premiums you paid accumulated daily with interest
compounded at 4% per year until the earlier of: (i) the
date of death, or (ii) the Contract anniversary on or next
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following the last surviving annuitant's 80th birthday;
minus proportional reductions for withdrawals; or
- the Greatest Anniversary Value on any Contract anniversary
through the earlier of the date of death or the Contract
anniversary on or next following the last surviving
annuitant's 80th birthday, minus proportional reductions
for withdrawals.
A different death benefit calculation applies if the last surviving
annuitant dies after the Contract anniversary on or next following the
annuitant's 80th birthday. See "Death Benefits."
FEES AND CHARGES
MORTALITY AND EXPENSE RISK CHARGE. We will deduct a daily mortality and
expense risk charge from your value in the subaccounts at an annual rate of
0.95% (1.20% if you select either the Guaranteed Minimum Death Benefit or the
Guaranteed Retirement Income Benefit; 1.45% if you choose both benefits).
ASSET-BASED ADMINISTRATIVE CHARGE. We will deduct a daily
administrative charge from your value in each subaccount at an annual rate of
0.20%.
RECORDS MAINTENANCE CHARGE. We deduct a Records Maintenance Charge of
$30 from your Contract Value on the last valuation day of each Contract year
during the pay-in period, on the date when the Contract is surrendered, and on
the annuity start date. We will waive this charge if your Contract Value is
$50,000 or more on the date the charge would be assessed.
TRANSFER FEE. You may make 12 free transfers each Contract year. We
impose a $25 charge per transfer on each transfer after the twelfth during a
Contract year before the annuity start date.
SURRENDER CHARGE. During the pay-in period, you may withdraw all or
part of your cash value before your death. Certain withdrawals may be taken
without payment of any surrender charge. Other withdrawals are subject to
surrender charges.
We calculate the surrender charge from the date you made the premium
payment(s) being withdrawn. The surrender charge applies during the entire seven
year period following each premium payment, and will vary depending on the
number of years since you made the premium payment(s) being withdrawn.
<TABLE>
<CAPTION>
NUMBER OF COMPLETE YEARS
FROM DATE OF PREMIUM
PAYMENT:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0 1 2 3 4 5 6 7+
-------------------------------------------------------------------
SURRENDER CHARGE: 7% 6% 5% 5% 4% 3% 2% 0
</TABLE>
In determining surrender charges, we will treat your premium payments
as being withdrawn in the order in which we received them -- that is on a
first-in, first-out basis.
We do not assess a surrender charge on:
- the death benefit;
- on the withdrawal of premium payments you paid us more than
seven years ago;
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- on withdrawals that qualify under the waiver of surrender
charge riders as extended hospitalization or confinement to
a skilled nursing facility or terminal illness (see,
"Surrender Charge"); or
- on the free withdrawal amount.
Each Contract year, you may withdraw the free withdrawal amount which
is an amount up to the greater of:
- Contract Value minus total premiums and minus prior
withdrawals that were previously assessed a surrender
charge; or
- 10% of the Contract Value determined at the time the
withdrawal is requested.
PREMIUM TAXES. We will deduct state premium taxes, which currently
range from 0% up to 3.5%, if your state requires us to pay the tax. If
applicable, we will make the deduction either: (a) from premium payments as we
receive them, (b) from your Contract Value upon surrender or partial withdrawal,
(c) on the annuity start date, or (d) upon payment of a death benefit.
PORTFOLIO MANAGEMENT FEES AND CHARGES. Each portfolio deducts portfolio
management fees and charges from the amounts you have invested in the
portfolios. One portfolio deducts 12b-1 fees. For 1999, these charges ranged
from 0.43% to 1.81% annually. See the Fee Table in this Prospectus and the
prospectuses for the portfolios.
ANNUITY PROVISIONS
ANNUITY OPTIONS. The Contract allows you to receive income payments
under one of three fixed annuity options beginning on the annuity start date you
select. The latest annuity start date you may select is the Contract anniversary
when the oldest annuitant is age 95. You may receive income payments for a
specific period of time, or for life with or without a guaranteed number of
payments.
We will use your cash value (less any applicable premium taxes) on the
annuity start date to calculate the amount of your income payments under the
annuity option you choose.
GUARANTEED RETIREMENT INCOME BENEFIT
The Guaranteed Retirement Income Benefit provides a minimum guaranteed
lifetime fixed income benefit in the form of fixed monthly annuity payments,
once the Contract has been in force for at least 10 Contract years. You may
select the Guaranteed Retirement Income Benefit only on your Contract
application. We will deduct an additional daily charge from the subaccounts at
an annual rate of 0.25% for this benefit.
The amount of income payments we will pay under the Guaranteed
Retirement Income Benefit is determined by applying the income base (less
applicable taxes) to the guaranteed annuity table rates in your Contract for the
annuity option you select. On the annuity start date, the amount of income
payments we will pay under the Contract will be the greater of:
- the dollar amount determined under the Guaranteed
Retirement Income Benefit; and
- the dollar amount determined by applying the Contract's
cash value to the income benefits, annuity options and
annuity tables described in your Contract.
The income base under the Guaranteed Retirement Income Benefit equals the
greater of:
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(i) premiums you paid accumulated daily with interest compounded
at 5.00% per year through the earlier of the annuity start
date and the Contract anniversary on or next following the
oldest joint annuitant's 80th birthday, with a proportional
reduction for withdrawals; and
(ii) the Greatest Anniversary Value for the Contract anniversaries
through the earlier of the annuity start date and the Contract
anniversary on or next following the oldest joint annuitant's
80th birthday, with a proportional reduction for withdrawals
FEDERAL TAX STATUS
Generally, a Contract's earnings are not taxed until you take them out.
For federal tax purposes, if you take money out during the pay-in period,
including a surrender or partial withdrawal payment, earnings come out first and
are taxed as ordinary income. If you are younger than 59 1/2 when you take money
out, you also may be charged a 10% federal penalty tax on earnings. The annuity
payments you receive during the payout phase are considered partly a return of
your original investment so that part of each payment is not taxable as income
until the "investment in the contract" has been fully recovered.
Death benefits are taxable and generally are included in the income of
the recipient as follows: if received under an annuity option, death benefits
are taxed in the same manner as annuity payouts; if not received under an
annuity option (for instance, if paid out in a lump sum), death benefits are
taxed in the same manner as a surrender or full withdrawal. Different tax
consequences may apply for a qualified Contract. For a further discussion of
the federal tax status of variable annuity contracts, see "Federal Tax Status."
INQUIRIES
If you need additional information, please contact us at:
the Service Center
P.O. Box 724208
Atlanta, Georgia 31139
1-877-376-8008 (toll-free)
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FEE TABLE
The purpose of the Fee Table is to help you understand the various
costs and expenses that you will pay directly and indirectly by investing in the
subaccounts. The Fee Table shows the current expenses for the variable account
as well as the actual charges and expenses for each portfolio for the fiscal
year ended December 31, 1999, except as stated in the footnotes.
YOUR TRANSACTION EXPENSES
<TABLE>
<CAPTION>
<S> <C>
Sales Charge Imposed on Premium Payments...............................................None
Maximum Surrender Charge
(as a percentage of your premium payment) (1)........................................7.0%
Transfer Fee..............................................No fee for the first 12 transfers
in a Contract year; then $25
per additional transfer
RECORDS MAINTENANCE CHARGE (2)...................................................................$30
</TABLE>
VARIABLE ACCOUNT ANNUAL EXPENSES
(as a percentage of average daily net assets in the subaccounts)
<TABLE>
<CAPTION>
<S> <C>
With Both the Guaranteed Minimum Death Benefit AND the
Guaranteed Retirement Income Benefit
Mortality and Expense Risk Charge...............................................1.45%
Administrative Expenses.........................................................0.20%
-------
Total Variable Account Annual Expenses..........................................1.65%
With Either the Guaranteed Minimum Death Benefit OR the
Guaranteed Retirement Income Benefit
Mortality and Express Risk Charge...............................................1.20%
Administrative Expenses.........................................................0.20%
-------
Total Variable Account Annual Expenses..........................................1.40%
With Standard Death Benefit Only
Mortality and Expense Risk Charge...............................................0.95%
Administrative Expenses.........................................................0.20%
-------
Total Variable Account Annual Expenses..........................................1.15%
</TABLE>
ANNUAL PORTFOLIO EXPENSES
(as a percentage of average daily net assets in the subaccounts after fee
waivers and expense reimbursements)
<TABLE>
<CAPTION>
TOTAL ANNUAL
EXPENSES (AFTER
MANAGEMENT OTHER EXPENSES WAIVERS
FEES 12b-1 (AFTER AND
NAME OF PORTFOLIO (AFTER WAIVERS) FEES REIMBURSEMENT) REIMBURSEMENT)
- ----------------- --------------- ---- -------------- --------------
<S> <C> <C> <C> <C>
Janus Aspen Series
Capital Appreciation Portfolio .65% -- % .04% .69%
(Institutional Shares)(3)
Kemper Variable Series
Kemper Government Securities Portfolio .55% -- % .08% .63%
</TABLE>
10
<PAGE> 14
<TABLE>
<S> <C> <C> <C> <C>
Kemper High Yield Portfolio .60% -- % .07% .67%
Kemper Small Cap Growth Portfolio .65% -- % .06% .71%
KVS Dreman High Return Equity
Portfolio(4) .75% -- % .11% .86%
PIMCO Variable Insurance Trust(5)
Low Duration Bond Portfolio .25% -- % .40% .65%
Foreign Bond Portfolio .25% -- % .85% 1.10%
Scudder Variable Life Investment Fund
Money Market Portfolio .37% -- % .06% .43%
Growth and Income Portfolio (Class A Shares) .47% -- % .08% .55%
International Portfolio (Class A Shares) .85% -- % .18% 1.03%
Bond Portfolio (Class A Shares) .48% -- % .09% .57%
Franklin Templeton Variable Insurance Products Trust
Templeton Developing Markets Securities Fund 1.25% .25% .31% 1.81%
(Class 2 Shares)(6)(7)
</TABLE>
1/ We do not assess a surrender charge on death benefit payments. We do
assess a surrender charge if you surrender your Contract, partially withdraw its
cash value, or annuitize under the Contract.
2/ We will also deduct this fee on the annuity start date or the date you
surrender your Contract. We waive this fee for Contracts with a Contract Value
of $50,000 or more on the date the fee is assessed.
3/ The expense figures shown for the Janus Aspen Capital Appreciation
Portfolio are based upon expenses for the fiscal year ended December 31, 1999,
restated to reflect a reduction in the management fee.
4/ Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year period
commencing on May 1, 2000, to limit their respective fees and to reimburse other
operating expenses to the extent necessary to limit total annual expenses of the
KVS Dreman High Return Equity Portfolio to 0.87%.
5/ For the PIMCO Low Duration Bond Portfolio, "Other Expenses" reflects a
0.25% administrative fee and a 0.15% service fee. For the PIMCO Foreign Bond
Portfolio, "Other Expenses" reflects a 0.50% administrative fee, a 0.15% service
fee and 0.20% of interest expense. PIMCO has contractually agreed to reduce
total annual portfolio operating expenses to the extent they would exceed, due
to the payment of organizational expenses and Trustees' fees, 0.65% and 0.90% of
average daily net assets of the PIMCO Low Duration Bond Portfolio and the PIMCO
Foreign Bond Portfolio, respectively. The expense reimbursement does not include
the 0.20% interest expense for the PIMCO Foreign Bond Portfolio. Without such
reductions, total annual expenses for the fiscal year ended December 31, 1999
would have been 0.78% and 1.25% for the PIMCO Low Duration Bond Portfolio and
the PIMCO Foreign Bond Portfolio, respectively. Under the Expense Limitation
Agreement, PIMCO may recoup these waivers and reimbursements in future periods,
not exceeding three years, provided total annual expenses, including such
recoupment, do not exceed the annual expense limit. For the PIMCO Foreign Bond
Portfolio, the ratio of net expenses to average net assets excluding interest
expense is 0.90%. Fees expressed are restated as of April 1, 2000.
6/ On February 8, 2000, shareholders approved a merger and reorganization
that combined the portfolio with the Templeton Developing Markets Equity Fund,
effective May 1, 2000. The shareholders of that portfolio had approved new
management fees, which apply to the combined portfolio effective May 1, 2000.
The table shows restated total expenses based on the new fees and the assets of
the portfolio as of December 31, 1999, and not the assets of the combined
portfolio. However, if the table reflected both the new fees and the combined
assets,
11
<PAGE> 15
the portfolio's expenses after May 1, 2000 would be estimated as:
management fees, 1.25%; 12b-1 fees, 0.25%; other expenses, 0.29%; and total
annual expenses, 1.79%.
7/ Class 2 of the Templeton Developing Markets Securities Fund has a
distribution plan or "Rule 12b-1 Plan" which is described in the portfolio's
prospectus. While the maximum amount payable under the portfolio's class 2 rule
12b-1 plan is 0.35% per year of the portfolio's average daily net assets, the
Board of Trustees of Franklin Templeton Variable Insurance Products Trust has
set the current rate at 0.25% per year. Because these fees are paid out of Class
2's assets on an on-going basis, over time these fees will increase the cost of
an investment, and may cost more than paying other types of sales charges.
EXAMPLES
The purpose of the following Examples is to assist you in understanding
the expenses that you would pay over time. The Examples are based on the actual
charges and expenses for the variable account and for each portfolio for the
fiscal year ended December 31, 1999, as stated in the Fee Table.
EXAMPLE 1
Example 1 below shows the dollar amount of expenses that you would bear directly
or indirectly if you:
- invested $1,000 in a subaccount;
- earned a 5% annual return on your investment;
- fully surrendered your Contract, or began receiving annuity
payments, with applicable surrender charges deducted; and
- selected both the optional Guaranteed Minimum Death Benefit
(with an annual charge of 0.25%) and the optional
Guaranteed Retirement Income Benefit (with an annual charge
of 0.25%), resulting in total variable account expenses of
1.65%.
EXAMPLE 2
Example 2 has the same assumptions as Example 1, except that you selected
neither the Guaranteed Minimum Death Benefit nor Guaranteed Retirement Income
Benefit, resulting in total variable account expenses of 1.15%.
<TABLE>
<CAPTION>
ASSUMES YOU SURRENDER OR ANNUITIZE THE CONTRACT EXAMPLE 1 EXAMPLE 2
------------------------------------------------- ------------------------------ ------------------------------
SUBACCOUNT 1 YEAR 3 YEARS 1 YEAR 3 YEARS
------------------------------------------------- --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
JANUS ASPEN SERIES
------------------------------------------------- --------------- -------------- -------------- ---------------
Capital Appreciation $89.79 $126.03 $85.10 $111.63
------------------------------------------------- --------------- -------------- -------------- ---------------
KEMPER VARIABLE SERIES
------------------------------------------------- --------------- -------------- -------------- ---------------
Kemper Government Securities $89.23 $124.31 $84.53 $109.89
------------------------------------------------- --------------- -------------- -------------- ---------------
Kemper High Yield $89.61 $125.45 $84.91 $111.05
------------------------------------------------- --------------- -------------- -------------- ---------------
Kemper Small Cap Growth $89.98 $126.60 $85.28 $112.21
------------------------------------------------- --------------- -------------- -------------- ---------------
KVS Dreman High Return Equity $91.39 $130.87 $86.70 $116.55
------------------------------------------------- --------------- -------------- -------------- ---------------
PIMCO VARIABLE INSURANCE TRUST
------------------------------------------------- --------------- -------------- -------------- ---------------
PIMCO Low Duration Bond $89.42 $124.88 $84.72 $110.47
------------------------------------------------- --------------- -------------- -------------- ---------------
PIMCO Foreign Bond $93.63 $137.67 $88.95 $123.45
------------------------------------------------- --------------- -------------- -------------- ---------------
SCUDDER VARIABLE LIFE INVESTMENT FUND
------------------------------------------------- --------------- -------------- -------------- ---------------
Money Market $87.35 $118.57 $82.64 $104.05
------------------------------------------------- --------------- -------------- -------------- ---------------
Growth and Income $88.57 $122.30 $83.87 $107.85
------------------------------------------------- --------------- -------------- -------------- ---------------
International $92.97 $135.69 $88.29 $121.44
------------------------------------------------- --------------- -------------- -------------- ---------------
</TABLE>
12
<PAGE> 16
<TABLE>
<S> <C> <C> <C> <C>
------------------------------------------------- --------------- -------------- -------------- ---------------
Bond $88.67 $122.59 $83.96 $108.14
------------------------------------------------- --------------- -------------- -------------- ---------------
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS
TRUST
------------------------------------------------- --------------- -------------- -------------- ---------------
Templeton Developing Markets Securities
Fund $100.23 $157.48 $95.58 $143.57
------------------------------------------------- --------------- -------------- -------------- ---------------
</TABLE>
EXAMPLE 3
Example 3 has the same assumptions as Example 1, except that you decided not to
surrender your Contract or begin receiving annuity payments. Surrender charges
are not deducted. Like Example 1, we assume that you selected both the optional
Guaranteed Minimum Death Benefit (with an annual charge of 0.25%) and the
Guaranteed Retirement Income Benefit (with an annual charge of 0.25%), resulting
in total variable account expenses of 1.65%.
EXAMPLE 4
Example 4 has the same assumptions as Example 3, except that you selected
neither the optional Guaranteed Minimum Death Benefit nor the optional
Guaranteed Retirement Income Benefit, resulting in total variable annuity
expenses of 1.15%.
<TABLE>
<CAPTION>
ASSUMES YOU DO NOT SURRENDER OR ANNUITIZE THE
CONTRACT EXAMPLE 3 EXAMPLE 4
------------------------------------------------- ------------------------------ ------------------------------
SUBACCOUNT 1 YEAR 3 YEARS 1 YEAR 3 YEARS
------------------------------------------------- --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
JANUS ASPEN SERIES
------------------------------------------------- --------------- -------------- -------------- ---------------
Capital Appreciation $25.21 $77.55 $20.20 $62.44
------------------------------------------------- --------------- -------------- -------------- ---------------
KEMPER VARIABLE SERIES
------------------------------------------------- --------------- -------------- -------------- ---------------
Kemper Government Securities $24.61 $75.75 $19.60 $60.61
------------------------------------------------- --------------- -------------- -------------- ---------------
Kemper High Yield $25.01 $76.95 $20.00 $61.83
------------------------------------------------- --------------- -------------- -------------- ---------------
Kemper Small Cap Growth $25.41 $78.15 $20.40 $63.05
------------------------------------------------- --------------- -------------- -------------- ---------------
KVS Dreman High Return Equity $26.91 $82.64 $21.91 $67.60
------------------------------------------------- --------------- -------------- -------------- ---------------
PIMCO VARIABLE INSURANCE TRUST
------------------------------------------------- --------------- -------------- -------------- ---------------
PIMCO Low Duration Bond $24.81 $76.35 $19.80 $61.22
------------------------------------------------- --------------- -------------- -------------- ---------------
PIMCO Foreign Bond $29.30 $89.79 $24.31 $74.85
------------------------------------------------- --------------- -------------- -------------- ---------------
SCUDDER VARIABLE LIFE INVESTMENT FUND
------------------------------------------------- --------------- -------------- -------------- ---------------
Money Market $22.61 $69.72 $17.58 $54.49
------------------------------------------------- --------------- -------------- -------------- ---------------
Growth and Income $23.91 $73.65 $18.89 $58.47
------------------------------------------------- --------------- -------------- -------------- ---------------
International $28.61 $87.70 $23.61 $72.74
------------------------------------------------- --------------- -------------- -------------- ---------------
Bond $24.01 $73.95 $18.99 $58.78
------------------------------------------------- --------------- -------------- -------------- ---------------
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS
TRUST
------------------------------------------------- --------------- -------------- -------------- ---------------
Templeton Developing Markets Securities
Fund $36.35 $110.58 $31.39 $95.97
------------------------------------------------- --------------- -------------- -------------- ---------------
</TABLE>
The examples assume that you made no transfers. The examples also do
not take into account any premium taxes. The examples reflect the Records
Maintenance Charge of $30 as an annual charge of 0.15% which we calculated by
dividing the total Records Maintenance Charges expected to be collected during a
year by an assumed average investment of $20,000 in the Contract.
PLEASE REMEMBER THAT THE EXAMPLES ARE SIMPLY ILLUSTRATIONS AND DO NOT REPRESENT
PAST OR FUTURE EXPENSES. Your actual expenses may be higher or lower than those
shown in the examples. Similarly your rate of return may be more or less than
the 5% assumed in the examples.
13
<PAGE> 17
CONDENSED FINANCIAL INFORMATION
Because the variable account had not commenced operations as of
December 31, 1999, no condensed financial information is included in this
prospectus.
ABOUT FARMERS NEW WORLD LIFE INSURANCE COMPANY
AND THE VARIABLE ACCOUNT
================================================================================
FARMERS NEW WORLD LIFE INSURANCE COMPANY
Farmers New World Life Insurance Company ("Farmers") is the stock life
insurance company issuing the Contract. Farmers is located at 3003 - 77th
Avenue, S.E., Mercer Island, Washington 98040, and was incorporated under
Washington law on February 21, 1910. Farmers established the variable account to
support the investment options under this Contract and under other variable
annuity contracts Farmers may issue. Farmers' general account supports the fixed
account under the Contract.
Farmers is a direct wholly-owned subsidiary of Farmers Group, Inc.
("FGI"). FGI is a stock holding and management company. The ultimate controlling
parents of FGI are Allied Zurich p.l.c., a United Kingdom company, and Zurich
Allied AG, a Swiss company. Allied Zurich p.l.c. and Zurich Allied AG are traded
in certain European markets, but are not publicly traded in the U.S.
Farmers markets a broad line of individual life insurance products,
including universal life, term life and whole life insurance and annuity
products (predominately flexible premium deferred annuities). Farmers currently
is licensed to sell insurance in 41 states and the District of Columbia. The
states where Farmers is not licensed are Alaska, Florida, Hawaii, Louisiana,
Maine, New Hampshire, New York, North Carolina, and Vermont.
FARMERS ANNUITY SEPARATE ACCOUNT A
We established the Farmers Annuity Separate Account A (the "variable
account") as a variable account under Washington insurance law on April 6, 1999.
The variable account will receive and invest premium payments paid under the
Contracts and under other variable annuity contracts we may issue in the future.
Although the assets in the variable account are our property, the
portion of the assets in the variable account that are attributable to variable
annuity contracts are not chargeable with the liabilities arising out of any
other business that we may conduct. All obligations arising under the Contracts
are our general corporate obligations. Income, gains and losses, whether or not
realized, from assets allocated to the variable account are credited to or
charged against the variable account without regard to our other income, gains
or losses.
The variable account is divided into 12 subaccounts. Additional
subaccounts may be available in the future. Each subaccount invests exclusively
in shares of a single portfolio of a fund. The income, gains and losses, whether
or not realized, from the assets allocated to each subaccount are credited to or
charged against that subaccount without regard to income, gains or losses from
any other subaccount.
14
<PAGE> 18
The variable account has been registered with the SEC as a unit
investment trust under the Investment Company Act of 1940 (the "1940 Act") and
meets the definition of a separate account under the federal securities laws.
Registration with the SEC does not involve supervision of the management or
investment practices or policies of the variable account, the funds or of us by
the SEC. The variable account is also subject to the laws of the State of
Washington which regulate the operations of insurance companies domiciled in
Washington.
THE PORTFOLIOS
================================================================================
Each subaccount of the variable account invests exclusively in shares
of a designated portfolio of a fund. Shares of each portfolio are purchased and
redeemed at net asset value, without a sales charge. Each fund available under
the Contract is registered with the SEC under the 1940 Act as an open-end,
management investment company.
The assets of each portfolio are separate from the assets of any other
portfolio, and each portfolio has separate investment objectives and policies.
As a result, each portfolio operates as a separate investment portfolio and the
income or losses of one portfolio has no effect on the investment performance of
any other portfolio.
Each of the portfolios is managed by an investment adviser registered
with the SEC under the Investment Advisers Act of 1940, as amended. Each
investment adviser is responsible for the selection of the investments of the
portfolio. These investments must be consistent with the investment objective,
policies and restrictions of that portfolio.
Some of the portfolios have been established by investment advisers
that manage retail mutual funds sold directly to the public having similar names
and investment objectives to the portfolios available under the Contract. While
some of the portfolios may be similar to, and may in fact be modeled after,
publicly traded mutual funds, you should understand that the portfolios are not
otherwise directly related to any publicly traded mutual fund. Consequently, the
investment performance of publicly traded mutual funds and any similarly named
portfolio may differ substantially from the portfolios available through this
Contract.
An investment in a subaccount, or in any portfolio, including the Money
Market Portfolio, is not insured or guaranteed by the U.S. Government and there
can be no assurance that the Money Market Portfolio will be able to maintain a
stable net asset value per share.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS
The investment objective of each portfolio is summarized below. NO ONE
CAN PROMISE THAT ANY PORTFOLIO WILL MEET ITS INVESTMENT OBJECTIVES. Amounts you
have allocated to the subaccounts may grow in value, decline in value, or grow
less than you expect, depending on the investment performance of the portfolios
in which those subaccounts invest. You bear the investment risk that those
portfolios possibly will not meet their investment objectives.
You can find more detailed information, including a description of
risks, fees and expenses of each portfolio, in the prospectuses for the
portfolios which accompany this prospectus.
15
<PAGE> 19
CERTAIN PORTFOLIOS HAVE SIMILAR INVESTMENT OBJECTIVES. YOU SHOULD CAREFULLY READ
THE PROSPECTUSES FOR THE PORTFOLIOS BEFORE YOU INVEST.
<TABLE>
<CAPTION>
- ------------------------------- ----------------------------------------------------------------------------
PORTFOLIO INVESTMENT OBJECTIVE AND INVESTMENT ADVISER
- ------------------------------- ----------------------------------------------------------------------------
<S> <C>
JANUS ASPEN CAPITAL
APPRECIATION PORTFOLIO seeks long-term growth of capital. It is a non-diversified fund.
(INSTITUTIONAL SHARES) Investment adviser is Janus Capital Corporation.
- ------------------------------- ----------------------------------------------------------------------------
KEMPER GOVERNMENT SECURITIES seeks high current return consistent with preservation of capital.
PORTFOLIO Investment adviser is Scudder Kemper Investments, Inc.
- ------------------------------- ----------------------------------------------------------------------------
KEMPER HIGH YIELD PORTFOLIO seeks to provide a high level of current income. Investment adviser is
Scudder Kemper Investments, Inc.
- ------------------------------- ----------------------------------------------------------------------------
KEMPER SMALL CAP GROWTH seeks maximum appreciation of investors' capital. Investment adviser is
PORTFOLIO Scudder Kemper Investments, Inc.
- ------------------------------- ----------------------------------------------------------------------------
KVS DREMAN HIGH RETURN seeks to achieve a high rate of total return. Investment adviser is
EQUITY PORTFOLIO Scudder Kemper Investments, Inc.; investment sub-adviser is Dreman Value
Management L.L.C.
- ------------------------------- ----------------------------------------------------------------------------
PIMCO LOW DURATION BOND seeks to maximize total return, consistent with preservation of capital
PORTFOLIO and prudent investment management. Investment adviser is Pacific
Investment Management Company.
- ------------------------------- ----------------------------------------------------------------------------
PIMCO FOREIGN BOND PORTFOLIO seeks to maximize total return, consistent with preservation of capital
and prudent investment management. Investment adviser is Pacific
Investment Management Company.
- ------------------------------- ----------------------------------------------------------------------------
MONEY MARKET PORTFOLIO seeks to maintain stability of capital and consistent therewith, to maintain
the liquidity of capital and to provide current income. Investment adviser
is Scudder Kemper Investments, Inc.
- ------------------------------- ----------------------------------------------------------------------------
GROWTH AND INCOME PORTFOLIO seeks long-term growth of capital, current income and growth of income.
(CLASS A SHARES) Investment adviser is Scudder Kemper Investments, Inc.
- ------------------------------- ----------------------------------------------------------------------------
INTERNATIONAL PORTFOLIO seeks long-term growth of capital primarily through diversified holdings
(CLASS A SHARES) of marketable foreign equity investments. Investment adviser is Scudder
Kemper Investments, Inc.
- ------------------------------- ----------------------------------------------------------------------------
BOND PORTFOLIO (CLASS A seeks a high level of income consistent with a high quality portfolio of
SHARES) debt securities. Investment adviser is Scudder Kemper Investments, Inc.
- ------------------------------- ----------------------------------------------------------------------------
TEMPLETON DEVELOPING MARKETS seeks long-term capital appreciation. The Fund invests primarily in
SECURITIES FUND (CLASS 2 emerging market equity securities. Investment adviser is Templeton Asset
SHARES) Management Ltd.
- ------------------------------- ----------------------------------------------------------------------------
</TABLE>
AVAILABILITY OF THE PORTFOLIOS
We cannot guarantee that each portfolio will always be available for
investment through the Contracts.
We reserve the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares of a portfolio that are held in
the variable account. If the shares of a portfolio are no longer available for
investment or if, in our judgment, further investment in any portfolio should
become inappropriate, we may redeem the shares of that portfolio and substitute
shares of another portfolio. We will not substitute any shares without notice
and prior approval of the SEC and state insurance authorities, to the extent
required by the 1940 Act or other applicable law.
16
<PAGE> 20
We also reserve the right in our sole discretion to establish
additional subaccounts, or eliminate or combine one or more subaccounts. Subject
to obtaining any approvals or consents required by law, the assets of one or
more subaccounts may also be transferred to any other subaccount if, in our sole
discretion, conditions warrant. Additional information regarding the
substitutions of investments and resolving conflicts among funds may be found in
the SAI.
THE PAY-IN PERIOD
================================================================================
The pay-in period begins when we issue your Contract and continues
until the annuity start date. The pay-in period will also end if you surrender
your Contract, or a death benefit is payable, before the payout period.
PURCHASING A CONTRACT
You may purchase a Contract with a premium payment of $500 or more. The
first premium payment is the only one we require you to make.
To purchase a Contract, you must complete an application and send it
with your premium to us through one of our authorized agents who is also a
registered representative. Contracts may be sold to or in connection with
retirement plans that qualify for special tax treatment.
If you are purchasing the Contract through a tax favored arrangement,
including IRAs, Roth IRAs, and SIMPLE IRAs, you should carefully consider the
costs and benefits of the Contract (including annuity income benefits) before
purchasing the Contract, since the tax favored arrangement itself provides for
tax sheltered growth.
We will not issue you a Contract if you are older than age 90 on the
issue date.
CANCELLATION -- THE 10 DAY RIGHT TO EXAMINE PERIOD
You have the right to cancel the Contract for any reason within 10 days
after you receive it. In some jurisdictions, this period may be longer than 10
days. To cancel the Contract, you must send it to our Home Office at Mercer
Island, Washington, before the end of the right to cancel period.
In most states, the amount of the refund will be the total premiums we
have received, plus (or minus) any gains (or losses) in the amounts you invested
in the subaccounts. If state law requires a return of premium, we will refund
the greater of your original premium(s) or the Contract Value on the date we
receive the Contract at our Home Office at the address shown on the front page
of this prospectus. If you purchase a qualified Contract, we will return the
premium(s) paid. If your state requires us to return your premium or if you have
purchased a qualified Contract, we will place your premium(s) in the fixed
account for the number of days in your state's right to examine period, plus 10
days. We will credit your premium(s) placed in the fixed account with interest
at the current fixed account interest rates. We will pay the refund within 7
calendar days after we receive the Contract. The Contract will then be deemed
void.
17
<PAGE> 21
DESIGNATING YOUR INVESTMENT OPTIONS
When you complete your application, you will give us instructions on
how to allocate your first premium payment among the 12 subaccounts and the
fixed account. The amount you direct to a particular subaccount and/or to the
fixed account must be in whole percentages from 1% to 100% of the premium
payment, and must equal at least $500.
If your application is complete and your premium payment has been
received at the Service Center, we will issue your Contract within two business
days of its receipt, and credit your initial premium payment to your Contract.
If your application is incomplete, we will contact you and seek to complete it
within five business days. If we cannot complete your application within five
business days after we receive it, we will return your premium payment, unless
you expressly permit us to keep it. We will credit the payment as soon as we
receive all necessary application information.
The date we credit your initial premium payment to your Contract is the
issue date. In most states, on the issue date we will allocate your initial
premium to the subaccounts and the fixed account as you specified on your
application.
If your state requires us to return your initial premium(s) in the
event you exercise your right to cancel the Contract, or if you purchase a
qualified Contract, we will allocate the initial premium(s) to the fixed account
on the issue date. While held in the fixed account, your premium(s) will be
credited with interest at current fixed account rates. The premium(s) will
remain in the fixed account for the number of days in your state's right to
examine period, plus 10 days. On the first valuation day on or after that
period, we will reallocate all Contract Value from the fixed account to the
subaccounts and fixed account as you selected on the application.
We may reject any application or premium payment for any reason
permitted by law.
ADDITIONAL PREMIUM PAYMENTS
There are no requirements on how many premium payments to make. You
determine the amount and timing of each additional premium payment, except that
premium payments must be at least $500 ($50 if you authorize us to draw on an
account by check or electronic debit). You may make premium payments at any time
until the earliest of: (a) the annuity start date; (b) the date you fully
withdraw all Contract Value; or (c) the date you reach age 70 1/2 for qualified
Contracts (other than Roth IRAs and rollovers and transfers).
We will not accept total premium payments in excess of the cumulative
premium limit that is specified on your Contract specification page. The Tax
Code may also limit the amount of premiums you may make.
We will credit any additional premium payments you make to your
Contract at the accumulation unit value next computed at the end of the
valuation day on which we receive them at the Service Center. Our valuation day
closes at 4:00 p.m. Eastern Time (1:00 p.m. Pacific Time). If we receive your
premium payments after the close of a valuation day, we will calculate and
credit them as of the end of the next valuation day.
We will direct your premium payment to the subaccounts and/or the fixed
account according to your written instructions in effect at the time we receive
it at the Service Center. However, you may direct individual premium payments to
a specific subaccount and/or to the fixed account without changing your
instructions. You may change your instructions at any time by sending us a
written request or by
18
<PAGE> 22
telephone authorization. Changing your allocation instructions will not change
the way existing Contract Value is apportioned among the subaccounts or the
fixed account.
THE VALUE OF YOUR CONTRACT INVESTED IN A SUBACCOUNT WILL VARY WITH THE
INVESTMENT PERFORMANCE OF THAT SUBACCOUNT. YOU BEAR THE ENTIRE INVESTMENT RISK
FOR AMOUNTS YOU ALLOCATE TO THE SUBACCOUNTS. YOU SHOULD PERIODICALLY REVIEW YOUR
PREMIUM PAYMENT ALLOCATION INSTRUCTIONS IN LIGHT OF MARKET CONDITIONS AND YOUR
OVERALL FINANCIAL OBJECTIVES.
YOUR CONTRACT VALUE
================================================================================
VARIABLE ACCOUNT VALUE
Your variable account value will reflect the investment experience of
the selected subaccounts, any premium payments paid, any surrenders or partial
withdrawals, any transfers, and any charges assessed in connection with the
Contract. There is no guaranteed minimum variable account value.
CALCULATING VARIABLE ACCOUNT VALUE
Your variable account value is determined at the end of each valuation
day. The value will be the total of your Contract's value in each of the
subaccounts. We determine your Contract's value in each subaccount by
multiplying that subaccount's unit value for the relevant valuation period by
the number of accumulation units of that subaccount allocated to the Contract.
NUMBER OF ACCUMULATION UNITS
Any amounts you allocate or transfer to the subaccounts will be
converted into subaccount accumulation units. We determine the number of
accumulation units to be credited to your Contract by dividing the dollar amount
being allocated or transferred to a subaccount by the accumulation unit value
for that subaccount at the end of the valuation day during which the amount was
allocated or transferred. The number of accumulation units in any subaccount
will be increased at the end of the valuation day by:
- any premium payments allocated to the subaccount during the
current valuation day; and
- by any amounts transferred to the subaccount from another
subaccount or from the fixed account during the current
valuation day.
Any amounts transferred, surrendered or deducted from a subaccount will
be processed by canceling or liquidating accumulation units. The number of
accumulation units to be canceled is determined by dividing the dollar amount
being removed from a subaccount by the accumulation unit value for that
subaccount at the end of the valuation day during which the amount was removed.
The number of accumulation units in any subaccount will be decreased at the end
of the valuation day by:
- any amounts transferred (including any applicable transfer
fee) from that subaccount to another subaccount or to the
fixed account on that valuation day;
- any amounts withdrawn or surrendered (including any
applicable surrender charges and premium taxes) on that
valuation day; and
- the Records Maintenance Charge, if assessed on that
valuation day.
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<PAGE> 23
ACCUMULATION UNIT VALUE
The accumulation unit value for each subaccount's first valuation day
was set at $10. The accumulation unit value for each subaccount is recalculated
at the end of each valuation day by multiplying the accumulation unit value at
the end of the immediately preceding valuation day by the Net Investment Factor
for the valuation day for which the value is being determined. The new
accumulation unit value reflects the investment performance of the underlying
portfolio, and the daily deduction of: (i) the mortality and expense risk
charge, (ii) any charge for enhanced benefit riders, and (iii) the daily
administrative charge during each valuation period.
We determine a separate accumulation unit value for each subaccount. We
will also determine separate sets of accumulation unit value reflecting the
costs of the Guaranteed Minimum Death Benefit and the Guaranteed Retirement
Income Benefit.
The formula for computing the Net Investment Factor is in the SAI.
TRANSFERS BETWEEN INVESTMENT OPTIONS
================================================================================
After the right to examine period has expired and before the annuity
start date, you may transfer all or part of the amount in a subaccount or the
fixed account to another subaccount or the fixed account, subject to the
restrictions described below.
The minimum amount that you may transfer is $100 or your total value in
that subaccount, if less. If you request a transfer that would reduce the amount
in a subaccount or fixed account below $500, we will transfer the entire amount
in the subaccount.
You may make one transfer from the fixed account to the subaccounts
each Contract year during the 30 days following a Contract anniversary. We
measure a Contract year from the anniversary of the issue date. You may not make
a transfer into the fixed account during the six months following any transfer
you make out of the fixed account to any subaccount(s).
Transfers will be processed based on the accumulation unit values
determined at the end of the valuation day on which we receive your written
request or telephone authorization to transfer, provided we receive the request
at our Service Center before the close of our valuation day, usually 4:00 p.m.
Eastern Time (1:00 p.m. Pacific Time). If we receive your request after the
close of our valuation day, we will process the transfer request using the
accumulation unit value for the next valuation day. There currently is no limit
on the number of transfers that you can make among subaccounts or to the fixed
account.
We may suspend or modify this transfer privilege at any time.
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<PAGE> 24
AUTOMATIC ASSET REBALANCING PROGRAM
The automatic asset rebalancing program permits you to maintain the
percentage of the Contract Value allocated to each subaccount at a pre-set
level. Under the program, automatic transfers are made among the subaccounts on
a quarterly basis so that your Contract Value is reallocated to match the
percentages you specify. Asset rebalancing is consistent with maintaining your
allocation of investments among market segments, although it is accomplished by
reducing your Contract Value allocated to the better performing segments.
Transfers under this program are not subject to the $100 minimum
transfer limitation. We will not charge a transfer fee for asset rebalancing.
You may not include the fixed account in the asset rebalancing program. We may
change, terminate, limit or suspend automatic asset rebalancing at any time.
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.
We may suspend or modify this automatic asset rebalancing program at
any time.
THIRD PARTY TRANSFERS
If you authorize a third party to transact transfers on your behalf, we
will honor their transfer instructions, so long as they comply with our
administrative systems, rules and procedures, which we may modify or rescind at
any time. We take no responsibility for any third party asset allocation
program. PLEASE NOTE that any fees and charges assessed for third party asset
allocation services are separate and distinct from the Contract fees and charges
set forth in this prospectus. We neither recommend nor discourage the use of
asset allocation services.
EXCESSIVE TRADING LIMITS
We reserve the right to limit transfers in any Contract year, or to
refuse any transfer request for a Contract owner if:
- we believe, in our sole discretion, that excessive trading by the
Contract owner, or a specific transfer request, or a group of
transfer requests, may have a detrimental effect on the
accumulation unit values of any subaccount or the share prices of
any portfolio or would be detrimental to other Contract owners; or
- we are informed by one or more portfolios that they intend to
restrict the purchase of portfolio shares because of excessive
trading or because they believe that a specific transfer or group
of transfers would have a detrimental effect on the price of
portfolio shares.
We may apply the restrictions in any manner reasonably designed to prevent
transfers that we consider disadvantageous to other Contract owners.
DOLLAR COST AVERAGING PROGRAM
Under the dollar cost averaging program, you may authorize us to
transfer a fixed dollar amount at monthly intervals from the fixed account to
one or more subaccounts. You may designate up to eight
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<PAGE> 25
subaccounts to receive the transfers. The fixed dollar amount will purchase more
accumulation units of a subaccount when their value is lower and fewer units
when their value is higher. Over time, the cost per unit averages out to be less
than if all purchases of units had been made at the highest value and greater
than if all purchases had been made at the lowest value. The dollar cost
averaging method of investment reduces the risk of making purchases only when
the price of accumulation units is high. It does not assure a profit or protect
against a loss in declining markets.
Dollar cost averaging is only available during the pay-in period. You
may cancel your participation in the program at any time.
You may enroll in the dollar cost averaging program at any time by
completing our dollar cost averaging form and sending it to the Service Center.
We make transfers on the same day of every month as your issue date. We must
receive the form at least 5 valuation days before the transfer date, for your
transfers to begin on that date. When you enroll in the dollar cost averaging
program, your total Contract Value in an account must be at least equal to the
amount you designate to be transferred on each transfer date. Transfers from the
fixed account must be at least $100.
We may suspend or modify this dollar cost averaging program at any
time.
TELEPHONE TRANSFERS
Unless you notify us on your application or in writing that you do not
want the ability to make transfers by telephone, you will have the ability to
make a transfer by giving us instructions over the telephone. You may use your
telephone to authorize a transfer from one subaccount or the fixed account to
another subaccount or the fixed account, to change the allocation instructions
for future investments, and/or to change asset rebalancing and dollar cost
averaging programs.
We will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. If we follow such procedures we will not
be liable for any losses due to unauthorized or fraudulent instructions. We may
be liable for such losses if we do not follow those reasonable procedures.
The procedures that we may follow for telephone transfers include:
- providing you with a written confirmation of all transfers made
according to telephone instructions,
- requiring a form of personal identification prior to acting on
instructions received by telephone, and
- tape recording instructions received by telephone.
We reserve the right to modify, restrict, suspend or eliminate the
transfer privileges (including the telephone transfer facility) at any time, for
any class of Contracts, for any reason.
TRANSFER FEE
We will impose a transfer fee of $25 for the thirteenth and each
subsequent transfer request you make per Contract year. Transfers you make
pursuant to the asset rebalancing and dollar cost averaging programs do not
count toward your 12 free transfers. See "Fees and Charges."
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<PAGE> 26
ACCESS TO YOUR MONEY
================================================================================
SURRENDERS
At any time before the annuity start date, you may surrender your
Contract for its cash value.
The cash value is equal to :
- the Contract Value; minus
- any applicable surrender charges; minus
- any premium taxes not previously deducted; minus
- the Records Maintenance Charge unless waived.
The cash value will be determined at the accumulation unit value next
determined as of the close of business on the day we receive your written
request for surrender at the Service Center, unless you specify a later date in
your request. If we receive your written request after the close of our business
day, usually 4:00 p.m. Eastern Time, we will determine the surrender value as of
the next business day. The cash value will be paid in a lump sum unless you
request payment under an annuity option. A surrender may have adverse federal
income tax consequences, including a penalty tax. See "Federal Tax
Consequences."
PARTIAL WITHDRAWALS
Once each calendar quarter before the annuity start date, you may
request a withdrawal of part of your cash value. Partial withdrawals are subject
to the following conditions:
- the minimum amount you can withdraw is $100; and
- you may not make a partial withdrawal if the withdrawal
plus the surrender charge would cause the Contract Value to
fall below $500.
We will withdraw the amount you request from the Contract Value as of
the valuation day on which we receive your written request for the partial
withdrawal at our Service Center, provided we receive it before the close of our
business day, usually 4:00 p.m. Eastern Time. If we receive your request after
the close of our business day, we will make the withdrawal as of the next
business day. We will then reduce the amount remaining in the Contract by any
applicable surrender charge plus the dollar amount we sent to you.
You may specify how much you wish to withdraw from each subaccount
and/or the fixed account. If you do not specify, or if you do not have
sufficient assets in the subaccounts or fixed account you specified to comply
with your request, we will make the partial withdrawal on a pro rata basis from
the fixed account and those subaccounts in which you are invested. We will base
the pro rata reduction on the ratio that the value in each subaccount and the
fixed account has to the entire Contract Value before the partial withdrawal.
Remember, any partial withdrawal you take will reduce your Contract
Value, and will proportionally reduce the minimum death benefit by the amount of
the withdrawals plus any charges. See "Death Benefits."
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<PAGE> 27
If you elected the Guaranteed Minimum Death Benefit, a partial
withdrawal will proportionally reduce the Greatest Anniversary Value and the
amount of premiums (plus interest) being accumulated at 4% annually. Likewise,
if you elected the Guaranteed Retirement Income Benefit, a partial withdrawal
will proportionally reduce the Income Base. The impact of a proportional
reduction on these benefits depends, in part, upon the relative amount of your
Contract Value at the time of the withdrawal. Under proportional reductions, if
the amount of the death benefit or Income Base is greater than the Contract
Value at the time of the partial withdrawal, then the reduction in the death
benefit or Income Base will be greater than the dollar amount of the withdrawal
(including any charges). For this reason, if a death benefit is paid, or the
Income Base is calculated, after you have taken a partial withdrawal, the
possibility exists that the total amount of the death benefit or Income Base
will be less than the total premium payments you have paid. See "Death Benefits"
and "Guaranteed Retirement Income Benefit."
INCOME TAXES, TAX PENALTIES AND CERTAIN RESTRICTIONS MAY APPLY TO ANY
WITHDRAWAL YOU MAKE.
Your right to make surrenders and partial withdrawals is also subject
to any restrictions imposed by applicable law or employee benefit plan.
See "Surrender Charges" for an explanation of the surrender charges
that may apply.
SYSTEMATIC WITHDRAWAL PLAN
After your first Contract year, you can elect to receive regular
payments from your Contract Value during the pay-in period. You instruct us to
withdraw selected amounts from the fixed account or any of the subaccounts. We
will make these withdrawals on a monthly basis. You must complete an enrollment
form and send it to the Service Center. You may terminate the systematic
withdrawal plan at any time.
There are some limitations to the systematic withdrawal plan:
- withdrawals must be at least $100;
- you must have a minimum balance at least equal to the amount
you want to withdraw; and
- we will deduct a surrender charge from any amount you
withdraw in excess of your free withdrawal amount.
Income taxes and tax penalties may apply to the amount withdrawn. We
may suspend or modify the systematic withdrawal plan at any time.
DEATH BENEFITS
================================================================================
Only one death benefit will be payable under this Contract. Upon
payment of the death benefit proceeds, the Contract will terminate.
DEATH BENEFITS BEFORE THE ANNUITY START DATE
We will pay a death benefit to the beneficiary if any of the following
occurs during the pay-in period:
- the owner or any joint owner dies, or
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<PAGE> 28
- the last surviving annuitant dies.
If any owner is a non-natural person, then the death of any annuitant
will be treated as the death of an owner.
STANDARD DEATH BENEFIT
If you have not selected the Guaranteed Minimum Death Benefit on your
application, and if an annuitant (including an owner who is an annuitant) dies
before his or her 80th birthday, the death benefit equals the greater of:
- the Contract Value on the later of the date that we receive
due proof of death and the date when we receive the
beneficiary's instructions on payment method at the Service
Center; or
- the minimum death benefit. The minimum death benefit equals
the sum of all premiums, minus proportional reductions for
withdrawals.
In all other cases, the death benefit equals the Contract Value
determined on the later of the date that we receive due proof of death and the
date when we receive the beneficiary's instructions on payment method. Such
other cases include the death of an annuitant who has attained his or her 80th
birthday, or death of an owner who is not an annuitant.
The proportional reduction in the minimum death benefit equals:
- the minimum death benefit immediately prior to the
withdrawal; multiplied by
- the ratio of the amount you withdraw (including any
charges) to the Contract Value immediately before the
withdrawal.
GUARANTEED MINIMUM DEATH BENEFIT
On your Contract application, you may select the Guaranteed Minimum
Death Benefit. Under this benefit, the death benefit payable in the event of the
last surviving annuitant's death is enhanced as described below. This death
benefit is only payable during the pay-in period and is not available after the
annuity start date. No Guaranteed Minimum Death Benefit is ever payable if a
non-annuitant owner dies. If you select this option, we will deduct an
additional charge equal, on an annual basis, to 0.25% of the average net assets
you have invested in the subaccounts.
Under the Guaranteed Minimum Death Benefit, the death benefit we will
pay upon the death of the last surviving annuitant is the greatest of the
following:
1. the standard death benefit as described above;
2. premiums you paid accumulated daily with interest compounded
at a rate of 4% per year through the earlier of (i) the date
of death, or (ii) the Contract anniversary on or next
following the last surviving annuitant's 80th birthday, minus
proportional reductions for withdrawals; or
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<PAGE> 29
3. the Greatest Anniversary Value on any contract anniversary
through the earlier of the date of death or the Contract
anniversary on or next following the last surviving
annuitant's 80th birthday, minus proportional reductions for
withdrawals.
The Greatest Anniversary Value is calculated as follows: an
anniversary value is defined for each eligible Contract
anniversary as the Contract Value on that anniversary,
increased by premiums accepted since that anniversary and
proportionately reduced for withdrawals since that
anniversary. The largest such anniversary value is the
Greatest Anniversary Value.
If the last surviving annuitant dies after the Contract anniversary
coincident with or next following that annuitant's 80th birthday and before the
annuity start date, the amounts calculated under 2 and 3 will be increased by
premiums received and proportionately reduced for withdrawals since that
anniversary.
If the last surviving annuitant was older than 80 on the issue date,
then no death benefit will be payable under 2 or 3 above.
The proportional reductions for withdrawals are determined
independently for 2 and 3 above. The proportional reduction for each
withdrawal is equal to the product of:
- the death benefit available under the item being considered
(either 2 or 3) immediately prior to the withdrawal, and
- the ratio of the amount withdrawn (including any charges)
to the Contract Value immediately before the withdrawal.
The Guaranteed Minimum Death Benefit will end when the Contract ends or
you send a signed request to terminate it to the Service Center. If you
terminate the rider, we will no longer deduct the 0.25% additional rider charge
from the subaccounts.
In determining the death benefit, we will also subtract any applicable
premium and withholding taxes not previously deducted.
The Guaranteed Minimum Death Benefit may not be available in all
states, and it may vary by state.
DISTRIBUTION UPON DEATH
If a death benefit is payable before the Annuity Start Date, we will
pay the death benefit in a lump sum, unless we consent to another arrangement
within 90 days of receiving due proof of death.
In all events, death benefit distributions will be made from the
Contract in accordance with Section 72(s) of the Tax Code.
If any owner dies before the annuity start date, the death benefit must
be distributed to the beneficiaries within five years after the date of death or
distributed over the life (or period not exceeding the life expectancy) of the
beneficiary, provided that such distributions begin within one year of the
owner's death. A new settlement agreement will be drawn up and the original
Contract will terminate. The payments under this agreement will be fixed and
guaranteed. If you have named two or more beneficiaries, then the provisions of
this section shall apply independently to each beneficiary.
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<PAGE> 30
If the sole beneficiary is the surviving spouse of the deceased owner,
the Contract may be continued (in lieu of paying the death benefit) with the
surviving spouse as the sole owner.
If an owner is a non-natural person, then each annuitant will be
treated as an owner for purposes of distributing the death benefit, and any
death of an annuitant will be treated as the death of the owner for purposes of
these requirements. Moreover, if the annuitant is also an owner, then the death
of such annuitant will also be treated as the death of an owner.
DEATH BENEFITS ON OR AFTER THE ANNUITY START DATE
If an annuitant dies on or after the annuity start date, we will pay
any remaining guaranteed payments to the beneficiary as provided in the annuity
option selected. If you are not the annuitant and you die while an annuitant is
still living, we will continue to pay the income payments for the annuitant's
lifetime in the same manner as before your death.
FEES AND CHARGES
================================================================================
MORTALITY AND EXPENSE RISK CHARGE
As compensation for assuming mortality and expense risks, we deduct a
daily mortality and expense risk charge from your net assets in the subaccounts.
The charge is equal, on an annual basis, to 0.95% of average daily net assets
you have invested in the subaccounts.
The mortality risk we assume is that annuitants may live for a longer
period of time than estimated when we established the guarantees in the
Contract. Because of these guarantees, each annuitant is assured that longevity
will not have an adverse effect on the annuity payments received. The mortality
risk that we assume also includes a guarantee to pay a death benefit if the
annuitant dies before the annuity start date. The expense risk that we assume is
the risk that the administrative fees and transfer fees (if imposed) may be
insufficient to cover actual future expenses. We may use any profits from this
charge to pay the costs of distributing the Contracts.
If you choose either the Guaranteed Minimum Death Benefit or the
Guaranteed Retirement Income, we will deduct an additional daily fee from your
value in the subaccounts at an annual rate of 0.25% of average daily net assets
you have invested in the subaccounts. If you choose both benefits, the
additional daily fee will increase to an annual rate of 0.50%. See "Fee Table."
ASSET-BASED ADMINISTRATION CHARGE
We deduct a daily asset-based administration charge from each
subaccount to help reimburse us for our administrative costs, such as owner
inquiries, changes in allocations, owner reports, Contract maintenance costs and
data processing costs. This charge is equal, on an annual basis, to 0.20% of
your average daily net assets in the subaccounts. This charge is designed to
help compensate us for the cost of administering the Contracts and the variable
account.
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<PAGE> 31
TRANSFER FEE
A transfer fee of $25 will be imposed for the thirteenth and each
subsequent transfer during a Contract year. Any unused free transfers do not
carry over to the next Contract year. Each written or telephone request would be
considered to be one transfer, regardless of the number of subaccounts affected
by the transfer. Transfers you make through our asset rebalancing and dollar
cost averaging programs do not count toward your twelve free transfers. We
deduct the transfer fee from the amount transferred.
SURRENDER CHARGE
We do not deduct a charge for sales expenses from premium payments at
the time premium payments are paid to us. However, we will deduct a surrender
charge, if applicable, if you surrender your Contract or partially withdraw cash
value before the annuity start date, or if you annuitize your Contract. We do
not assess a surrender charge on withdrawals made if the Contract terminates due
to your death or the death of the last surviving annuitant.
As a general rule, the surrender charge equals a percentage of the
premium payments withdrawn that: (a) we have held for less than seven years; and
(b) are not eligible for a free withdrawal. The surrender charge applies during
the entire seven year period following each premium payment. The applicable
percentage depends on the number of years since you made the premium payment
being withdrawn, as shown on this chart:
<TABLE>
<CAPTION>
NUMBER OF COMPLETED
YEARS FROM THE DATE OF SURRENDER CHARGE
PREMIUM PAYMENTS PERCENTAGE
----------------------------------------- ---------------------------------
<S> <C>
0.............................. 7%
1.............................. 6%
2.............................. 5%
3.............................. 5%
4.............................. 4%
5.............................. 3%
6.............................. 2%
7 and later.................... 0%
</TABLE>
In determining surrender charges, we will deem premiums to be
surrendered in the order in which they were received -- that is, on a first-in,
first-out basis.
Because surrender charges are based on the date each premium payment is
made, you may be subject to a surrender charge, even though the Contract may
have been issued many years earlier.
When you request a withdrawal, you will be sent a check in the amount
you requested, less applicable tax withholding. If a surrender charge applies,
your Contract Value will be reduced by the dollar amount we send you, plus the
surrender charge. The surrender charge is deducted pro-rata from all subaccounts
and the fixed account in which the Contract is invested based on the remaining
Contract Value in each subaccount and the fixed account, unless you request
otherwise.
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<PAGE> 32
FREE WITHDRAWAL AMOUNT
In any Contract year before the annuity start date, you may withdraw a
portion of your Contract Value once each calendar quarter without incurring a
surrender charge. This amount is called the free withdrawal amount. Each
Contract year, the free withdrawal amount is an amount up to the greater of:
- Contract Value minus total premiums and minus prior
withdrawals that were previously assessed a surrender
charge; or
- 10% of the Contract Value determined at the time the
withdrawal is requested.
In addition, you may withdraw, free of surrender charge, any premium that has
been held by us for more than seven years.
EXAMPLE OF SURRENDER CHARGE CALCULATION
This example is for a Contract issued on July 1, 2000 with a $10,000
premium paid on the issue date. No subsequent premiums are paid.
The owner wishes to withdraw $4,000 on September 15, 2003. Suppose the
Contract Value is $12,700 on that date, before the withdrawal.
The free withdrawal amount is the larger of (a) and (b):
(a) $12,700 - 10,000 = $2,700
(b) (10%)(12,700) = $1,270
The free withdrawal amount is $2,700. The remaining portion of the withdrawal is
subject to a surrender charge. Since this amount represents the withdrawal of
premium paid between 3 and 4 years ago, the surrender charge percentage is 5%.
The surrender charge is calculated as follows:
($4,000 - $2,700)(5%) = $65
Free withdrawals may be subject to the 10% federal penalty tax if made before
you reach age 59 1/2. They also may be subject to federal income tax.
WAIVER OF SURRENDER CHARGE RIDERS
If state law permits and subject to certain restrictions, we will
automatically issue two riders with your Contract. As described in these
riders, we will waive the surrender charge:
- after an annuitant (who is under age 75) has been confined in a
hospital or skilled heath care facility continuously for at least
90 days; or
- (after one year from the effective date of the rider) if an
annuitant is diagnosed with a terminal illness after we issue the
Contract and is expected to live for 12 months or less, up to an
aggregate maximum withdrawal of $250,000.
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<PAGE> 33
RECORDS MAINTENANCE CHARGE
At the end of each Contract year before the annuity start date, we will
deduct a records maintenance charge of $30 from your Contract Value as partial
reimbursement for our administrative expenses relating to the Contract. We will
deduct the fee from each subaccount and the fixed account based on the
proportion that the value in each subaccount and the fixed account bears to the
total Contract Value. We will also deduct this charge on the annuity start date,
or the date you surrender the Contract.
We will not deduct this fee after annuity payments have begun. We also
currently waive deduction of the charge for Contracts whose Contract Value is
$50,000 or more on the date of assessment.
PORTFOLIO MANAGEMENT FEES AND CHARGES
Each portfolio deducts portfolio management fees and charges from the
amounts you have invested in the portfolios. In addition, one portfolio deducts
12b-1 fees. For 1999, total portfolio fees and charges ranged from 0.43% to
1.81%. See the Fee Table in this Prospectus and the prospectuses for the
portfolios.
We receive compensation from certain investment advisers and/or
administrators (and/or an affiliate thereof) of the portfolios in connection
with administrative or other services and cost savings experienced by the
investment advisers, administrators or affiliate. Such compensation may range
from 0.15% to 0.25% and is based on a percentage of assets of the particular
portfolios attributable to the Contract, and in some cases, other contracts
issued by Farmers (or its affiliates). We also receive a portion of the 12b-1
fees deducted from portfolio assets as reimbursement for providing certain
services permitted under the fund's 12b-1 plan. Some advisers, administrators,
or portfolios may pay us more than others.
PREMIUM TAXES
Various states and other governmental entities charge a premium tax on
annuity contracts issued by insurance companies. Premium tax rates currently
range up to 3.5%, depending on the state. We are responsible for paying these
taxes. If applicable, we will deduct the cost of such taxes from the value of
your Contract either:
- from premium payments as we receive them,
- from Contract Value upon surrender or partial withdrawal,
- on the annuity start date, or
- upon payment of a death benefit.
OTHER TAXES
Currently, no charge is made against the variable account for any
federal, state or local taxes (other than premium taxes) that we incur or that
may be attributable to the variable account or the Contracts. We may, however,
deduct such a charge in the future, if necessary.
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<PAGE> 34
THE PAYOUT PERIOD
================================================================================
THE ANNUITY START DATE
The annuity start date is the day that the payout period begins under
the annuity option you have selected. If you own a Contract that is not a
qualified Contract, you must select the annuity start date on which you will
begin to receive annuity payments. The annuity start date can be no later than
the Final Annuity Date (the Contract anniversary when the oldest annuitant is
age 95).
In the case of an IRA that satisfies Tax Code section 408, the annuity
start date must be no later than April 1 of the calendar year following the year
in which you reach age 70 1/2 and the payment must be made in a specified form
or manner. Roth IRAs under section 408A of the Tax Code do not require
distributions at any time prior to your death; the annuity start date for Roth
IRAs can be no later than the final annuity date.
ANNUITY OPTIONS
You must chose an annuity option on or before the annuity start date.
The annuity option you select will affect the dollar amount of each annuity
payment you receive. You may select or change your annuity option on or before
the annuity start date while the annuitant is living by sending a written
request signed by you and/or your beneficiary, as appropriate, to our Home
Office. You may choose one of the annuity options described below or any other
annuity option being offered by us as of the annuity start date. The annuity
options we currently offer provide for fixed annuity payments.
You may elect to receive annuity payments on a monthly, quarterly,
semi-annual or annual basis. If you do not specify the frequency of payment, we
will pay you monthly. The first payment under any option will be made on the day
of the month you request (subject to our agreement) and will begin in the month
immediately following the annuity start date. We will make subsequent payments
on the same day of each subsequent period in accordance with the payment
interval and annuity option you select.
If you do not select an annuity option by the Final Annuity Date, we
will apply the Contract Value under the Second Option, Life Income with a 10
year guarantee period, as described below.
A beneficiary may have the death benefit paid as an annuity under one
of the annuity options.
DETERMINING THE AMOUNT OF YOUR ANNUITY PAYMENT
On the annuity start date, we will use the cash value to calculate your
annuity payments under the annuity option you select. Cash value is your
Contract Value minus any applicable surrender charges, records maintenance fee,
and premium tax.
For qualified Contracts, distributions must satisfy certain
requirements specified in the Tax Code.
FIXED ANNUITY PAYMENTS
Fixed annuity payments are periodic payments that we make to the
annuitant. The amount of the fixed annuity payment is fixed and guaranteed by
us.
The amount of each payment depends on:
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<PAGE> 35
- the form and duration of the annuity option you choose;
- the age of the annuitant;
- the sex of the annuitant (if applicable);
- the amount of your Contract Value on the annuity start date; and
- the applicable guaranteed annuity tables in the Contract.
The guaranteed annuity tables in the Contract are based on a minimum
guaranteed interest rate of 2.5%. We may, in our sole discretion, make annuity
payments in an amount based on a higher interest rate.
GUARANTEED ANNUITY TABLES
The guaranteed annuity tables in your Contract show the minimum dollar
amount of the first monthly payment for each $1,000 applied under the first,
second and third annuity options. Under the first or second options, the amount
of each payment will depend upon the adjusted age and sex of the annuitant at
the time we are due to pay the first payment. Under the third option, the amount
of each payment will depend upon the sex of both annuitants and their adjusted
ages at the time we are due to pay the first payment.
The adjusted age of the annuitant is determined by calculating the age
at the nearest birthday of the annuitant on the annuity start date and
subtracting a number that depends on the year in which the annuity start date
belongs:
<TABLE>
<CAPTION>
annuity start 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>
Once you have selected an annuity option, you may not change that
election with respect to any annuitant if annuity payments have begun.
After the annuity start date, the Contract no longer participates in
the variable account.
DESCRIPTION OF ANNUITY OPTIONS
FIRST OPTION -- LIFE INCOME.* We will make payments for the annuitant's
lifetime. We will stop making monthly payments with the last payment due prior
to the annuitant's death.
SECOND OPTION -- LIFE INCOME WITH A GUARANTEE PERIOD. We will make
payments for the annuitant's lifetime, with the guarantee that we will make
payments for at least 10 or 20 years. You select either the 10 or 20 year
guarantee period.
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<PAGE> 36
THIRD OPTION -- JOINT AND SURVIVOR LIFE ANNUITY.* Under this option, we
will make annuity payments so long as two annuitants are alive. After the death
of one of the annuitants, we will continue to make payments for the lifetime of
the surviving annuitant, although the amount of the payment may change. We will
stop making monthly payments with the last payment due before the last surviving
annuitant's death.
The amount of each payment will be determined from the tables in the
Contract that apply to the particular option using the annuitant's age (and if
applicable, sex or adjusted age).
Other options may be available.
- ---------------
* IT IS POSSIBLE UNDER THIS OPTION TO RECEIVE ONLY ONE ANNUITY PAYMENT IF THE
ANNUITANT DIES (OR ANNUITANTS DIE) BEFORE THE DUE DATE OF THE SECOND PAYMENT OR
TO RECEIVE ONLY TWO ANNUITY PAYMENTS IF THE ANNUITANT DIES (OR ANNUITANTS DIE)
BEFORE THE DUE DATE OF THE THIRD PAYMENT, AND SO ON.
GUARANTEED RETIREMENT INCOME BENEFIT
================================================================================
We offer an optional Guaranteed Retirement Income Benefit under this
Contract. Here are some terms you will need to know before reading this section:
- THE GUARANTEED ANNUITY RATES are the rates contained in your Contract
under "Guaranteed Annuity Tables."
- INCOME BASE equals the greater of:
(i) premiums you paid accumulated daily with interest compounded
at 5.00% per year through the earlier of the annuity start
date and the Contract anniversary on or next following the
oldest joint annuitant's 80th birthday, with a proportional
reduction for withdrawals; and
through the earlier of the annuity start date and the Contract
anniversary on or next following the oldest joint annuitant's
80th birthday, with a proportional reduction for withdrawals.
In determining the income base when the oldest joint annuitant is over
80 on the annuity start date, the income base on the Contract anniversary
coincident with or next following the annuitant's 80th birthday is increased by
any premiums received and proportionately reduced by any withdrawals since that
anniversary.
- PROPORTIONAL REDUCTION (for purposes of the Guaranteed Retirement Income
Benefit) equals:
- the income base under either (i) or (ii) above immediately prior
to the withdrawal; MULTIPLIED BY
- the ratio of the amount withdrawn (including charges) to the
Contract Value immediately prior to the withdrawal.
* * *
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<PAGE> 37
The Guaranteed Retirement Income Benefit provides a minimum fixed
annuity guaranteed lifetime income to the annuitant once the Contract has been
in force for ten Contract years. You must select the Guaranteed Retirement
Income Benefit on your initial Contract application. You may discontinue the
Guaranteed Retirement Income Benefit at any time by sending notice to the
Service Center. Once you discontinue the Guaranteed Retirement Income Benefit,
you may not select it again.
If you select the Guaranteed Retirement Income Benefit, we will deduct
an additional daily charge on each valuation day from the subaccounts at an
annual rate of 0.25% of the average daily net assets you have invested in the
subaccounts. See "Fees and Charges."
You may choose to receive the Guaranteed Retirement Income Benefit on
the annuity start date, if all of the following conditions are met:
- You choose an annuity option that provides payments for the
lifetime of one or more annuitants with payments guaranteed for a
period not to exceed 10 years;
- You select an annuity start date that is on or after the 10th
Contract anniversary;
- You select an annuity start date that occurs within 30 days
following a Contract anniversary;
- The annuity start date is before the annuitant's 91st birthday and
after the annuitant's 60th birthday. If the annuitant is younger
than 44 on the issue date, the annuity start date must be after
the 15th Contract anniversary.
The amount of minimum income payments we will pay under the Guaranteed
Retirement Income Benefit is determined by applying the income base (less
applicable taxes) to the guaranteed annuity rates in your Contract for the
annuity option you select. On the annuity start date, the income payments we
will pay under the Contract will equal the greater of:
- the dollar amount determined by applying the income base (under
the Guaranteed Retirement Income Benefit) to the guaranteed
annuity rates in the Contract; and
- the dollar amount determined by applying the Contract's cash value
to the income benefits, annuity options and current annuity tables
as described in your Contract.
We will pay the Guaranteed Retirement Income Benefit for the life of a
single annuitant, or the lifetimes of two annuitants. If we pay the Guaranteed
Retirement Income Benefit for the life of two annuitants, then we will use the
age of the oldest joint annuitant to determine the income base.
THE GUARANTEED RETIREMENT INCOME BENEFIT GUARANTEES A MINIMUM INCOME
THAT IS BASED ON CONSERVATIVE ACTUARIAL FACTORS. Therefore the income guaranteed
under the Guaranteed Retirement Income Benefit by applying the income base to
the Contract's guaranteed annuity tables may, under some circumstances, be less
than the income that would be provided by applying the Contract's cash value to
current annuity factors (i.e., the income you would receive if you did not
purchase the Guaranteed Retirement Income Benefit).
The Guaranteed Retirement Income Benefit may not be available in all
states, and it may vary by state.
<PAGE> 38
THE FIXED ACCOUNT
================================================================================
You may allocate some or all of your premium payments and transfer some
or all of your Contract Value to the fixed account. The fixed account offers a
guarantee of principal, after deductions for fees and expenses. We also
guarantee that you will earn interest at a rate of a least 3% per year on
amounts in the fixed account. The fixed account is part of our general account.
Our general account supports our insurance and annuity obligations. Because the
fixed account is part of the general account, we assume the risk of investment
gain or loss on this amount. All assets in the general account are subject to
our general liabilities from business operations. The fixed account may not be
available in all states.
The fixed account is not registered with the SEC under the Securities
Act of 1933 (the "1933 Act"). Neither the fixed account nor our general account
have been registered as an investment company under the 1940 Act. Therefore,
neither our general account, the fixed account, nor any interests therein are
generally subject to regulation under the 1933 Act or the 1940 Act. The
disclosures relating to the fixed account which are included in this prospectus
are for your information and have not been reviewed by the SEC. However, such
disclosures may be subject to certain generally applicable provisions of federal
securities laws relating to the accuracy and completeness of statements made in
prospectuses.
FIXED ACCOUNT VALUE
On each valuation period (before the annuity start date), the fixed
account value is equal to:
- the total of premiums allocated to the fixed account; MINUS
- any applicable premium taxes; PLUS
- amounts transferred from the subaccounts; INCREASED BY
- any credited interest; and DECREASED BY
- any transfers and withdrawals from the fixed account, and by any
charges deducted from the fixed account.
We intend to credit the fixed account with interest at current rates in
excess of the minimum guaranteed rate of 3%, but we are not obligated to do so.
We have no specific formula for determining current interest rates.
The fixed account value will not share in the investment performance of
our general account. Because we, in our sole discretion, anticipate changing the
current interest rate from time to time, different allocations you make to the
fixed account will be credited with different current interest rates. You assume
the risk that interest credited to amounts in the fixed account may not exceed
the minimum 3% guaranteed rate.
We reserve the right to change 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 year (except for the year in which such amount is
received or transferred).
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<PAGE> 39
We allocate amounts from the fixed account for partial withdrawals,
transfers to the subaccounts, or charges on a last in, first out basis ("LIFO")
for the purpose of crediting interest.
FIXED ACCOUNT TRANSFERS
GENERAL
A transfer charge of $25 will be imposed for the thirteenth and each
subsequent request you make to transfer Contract Value from one or more
subaccounts to the fixed account (or to one or more subaccounts) during a single
Contract year before the annuity start date.
Before the annuity start date, you may make one transfer each Contract
year during the 30 days following a Contract anniversary from the fixed account
to one or more of the subaccounts.
You may not make transfers from any subaccount to the fixed account
during the six months following any transfer you make from the fixed account to
any subaccount, or after you begin to receive annuity payments.
PAYMENT DEFERRAL
We have the right to defer payment of any surrender, partial
withdrawal, or transfer from the fixed account for up to six months from the
date we receive your written request at the Service Center. During such
deferral, we will continue to credit interest at the current guaranteed interest
rate for the fixed account.
INVESTMENT PERFORMANCE OF THE SUBACCOUNTS
================================================================================
The Company periodically advertises performance of the subaccounts and
portfolios. We may disclose at least four different kinds of performance.
First, we may disclose standard total return figures for the
subaccounts that reflect the deduction of all charges under the Contract,
including the mortality and expense charge, any charge for optional benefits,
the annual records maintenance charge and the surrender charge. These figures
are based on the actual historical performance of the subaccounts since their
inception.
Second, we may disclose total return figures on a non-standard basis.
This means that the data may be presented for different time periods and
different dollar amounts. The data will not be reduced by the surrender charge
or by charges for optional benefits currently assessed under the Contract. We
will only disclose non-standard performance data if it is accompanied by
standard total return data.
Third, we may present historic performance data for the portfolios
since their inception reduced by all fees and charges under the Contract,
although we may not deduct the surrender charge or the charges for optional
benefits in some cases. Such adjusted historic performance includes data that
precedes the inception dates of the subaccounts, but is designed to show the
performance that would have resulted if the Contract had been available during
that time.
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<PAGE> 40
Fourth, we may include in our advertising and sales materials, tax
deferred compounding charts and other hypothetical illustrations, which may
include comparisons of currently taxable and tax deferred investment programs,
based on selected tax brackets.
In advertising and sales literature (including illustrations), the
performance of each subaccount may be compared with the performance of other
variable annuity issuers in general or to the performance of particular types of
variable annuities investing in mutual funds, or portfolios of mutual funds with
investment objectives similar to the subaccount. Lipper Analytical Services,
Inc. ("Lipper"), CDA Investment Technologies ("CDA"), Variable Annuity Research
Data Service ("VARDS") and Morningstar, Inc. ("Morningstar") are independent
services which monitor and rank the performance of variable annuity issuers in
each of the major categories of investment objectives on an industry-wide basis.
Lipper's and Morningstar's rankings include variable life insurance
issuers as well as variable annuity issuers. VARDS rankings compare only
variable annuity issuers. The performance analyses prepared by Lipper, CDA,
VARDS and Morningstar rank or illustrate such issuers on the basis of total
return, assuming reinvestment of distributions, but do not take sales charges,
redemption fees, or certain expense deductions at the variable account level
into consideration. In addition, VARDS prepares risk rankings, which consider
the effects of market risk on total return performance. This type of ranking
provides data as to which funds provide the highest total return within various
categories of funds defined by the degree of risk inherent in their investment
objectives.
Advertising and sales literature may also compare the performance of
each subaccount to the Standard & Poor's Index of 500 Common Stocks, a widely
used measure of stock performance. This unmanaged index assumes the reinvestment
of dividends but does not reflect any "deduction" for the expense of operating
or managing an investment portfolio. Other independent ranking services and
indices may also be used as a source of performance comparison.
We may also report other information including the effect of systematic
withdrawals, systematic investments and tax-deferred compounding on a
subaccount's investment returns, or returns in general. We may illustrate this
information by using tables, graphs, or charts. All income and capital gains
derived from subaccount investments are reinvested and can lead to substantial
long-term accumulation of assets, provided that the subaccount investment
experience is positive.
VOTING RIGHTS
================================================================================
We are the legal owner of the portfolio shares held in the subaccounts.
However, when a portfolio is required to solicit the votes of its shareholders
through the use of proxies, we believe that current law requires us to solicit
you and other contract owners as to how we should vote the portfolio shares held
in the subaccounts. If we determine that we no longer are required to solicit
your votes, we may vote the shares in our own right.
When we solicit your vote, the number of votes you have will be
calculated separately for each subaccount in which you have an investment. The
number of your votes is based on the net asset value per share of the portfolio
in which the subaccount invests. It may include fractional shares. Before the
annuity start date, you hold a voting interest in each subaccount to which the
Contract Value is allocated. If you have a voting interest in a subaccount, you
will receive proxy materials and reports relating to any meeting of shareholders
of the portfolio in which that subaccount invests.
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<PAGE> 41
If we do not receive timely voting instructions for portfolio shares,
we will vote those shares in proportion to the voting instructions we receive.
Instructions we receive to abstain on any item will reduce the total number of
votes being cast on a matter. For further details as to how we determine the
number of your votes, see the SAI.
FEDERAL TAX MATTERS
================================================================================
The following discussion is general in nature and is not intended as
tax advice. Each person concerned should consult a competent tax adviser. No
attempt is made to consider any applicable state tax or other tax laws.
We believe that our Contracts will qualify as annuity contracts for
federal income tax purposes and the following discussion assumes that they will
so qualify. Further information on the tax status of the Contract can be found
in the SAI under the heading "Tax Status of the Contracts."
When you invest in an annuity contract, you usually do not pay taxes on
your investment gains until you withdraw the money -- generally for retirement
purposes. In this way, annuity contracts have been recognized by the tax
authorities as a legitimate means of deferring tax on investment income.
If you invest in a variable annuity as part of an IRA, Roth IRA or
SIMPLE IRA program, your Contract is called a Qualified Contract. If your
annuity is independent of any formal retirement or pension plan, it is called a
Non-Qualified Contract.
We believe that if you are a natural person you will not be taxed on
increases in the Contract Value of your Contract until a distribution occurs or
until annuity payments begin. (The agreement to assign or pledge any portion of
a Contract's accumulation value generally will be treated as a distribution.)
When annuity payments begin, you will be taxed only on the investment gains you
have earned and not on the payments you made to purchase the Contract.
Generally, withdrawals from your annuity should only be made once the annuitant
reaches age 59 1/2, dies or is disabled, otherwise a tax penalty of ten percent
of the amount treated as income could be applied against any amounts included in
income, in addition to the tax otherwise imposed on such amount.
TAXATION OF NON-QUALIFIED CONTRACTS
NON-NATURAL PERSON
If a non-natural person (such as a corporation or a trust) owns a
non-qualified annuity contract, the owner generally must include in income any
increase in the excess of the accumulation value over the investment in the
contract (generally, the premiums or other consideration paid for the contract)
during the taxable year. There are some exceptions to this rule and a
prospective owner that is not a natural person should discuss these with a tax
adviser.
The following discussion generally applies to Contracts owned by
natural persons.
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<PAGE> 42
WITHDRAWALS
When a withdrawal from a Non-Qualified Contract occurs, the amount
received will be treated as ordinary income subject to tax up to an amount equal
to the excess (if any) of the accumulation value immediately before the
distribution over the Owner's investment in the contract (generally, the
premiums or other consideration paid for the Contract, reduced by any amount
previously distributed from the Contract that was not subject to tax) at that
time. In the case of a surrender under a Non-Qualified Contract, the amount
received generally will be taxable only to the extent it exceeds the Owner's
investment in the contract.
PENALTY TAX ON CERTAIN WITHDRAWALS
In the case of a distribution from a Contract, there may be imposed a
federal tax penalty equal to ten percent of the amount treated as income. In
general, however, there is no penalty on distributions:
- made on or after the taxpayer reaches age 59 1/2;
- made on or after the death of an Owner;
- attributable to the taxpayer's becoming disabled; or
- made as part of a series of substantially equal periodic payments
for the life (or life expectancy) of the taxpayer.
Other exceptions may apply under certain circumstances and special
rules may apply in connection with the exceptions enumerated above. Additional
exceptions apply to distributions from a Qualified Contract. You should consult
a tax adviser with regard to exceptions from the penalty tax.
ANNUITY PAYMENTS
Although tax consequences may vary depending on the annuity option
elected under an annuity contract, a portion of each annuity payment is
generally not taxed and the remainder is taxed as ordinary income. The
non-taxable portion of an annuity payment is generally determined in a manner
that is designed to allow you to recover your investment in the contract ratably
on a tax-free basis over the expected stream of annuity payments, as determined
when annuity payments start. Once your investment in the contract has been fully
recovered, however, the full amount of each annuity payment is subject to tax as
ordinary income.
TAXATION OF DEATH BENEFIT PROCEEDS
Amounts may be distributed from a Contract because of your death or the
death of the annuitant. Generally, such amounts are includible in the income of
the recipient as follows: (i) if distributed in a lump sum, they are taxed in
the same manner as a surrender of the Contract, or (ii) if distributed under an
annuity option, they are taxed in the same way as annuity payments.
TRANSFERS, ASSIGNMENTS OR EXCHANGES OF A CONTRACT
A transfer or assignment of ownership of a Contract, the designation of
an annuitant, the selection of certain annuity start dates, or the exchange of a
Contract may result in certain tax consequences to you that are not discussed
herein. An Owner contemplating any such transfer, assignment or exchange, should
consult a tax advisor as to the tax consequences.
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<PAGE> 43
WITHHOLDING
Annuity distributions are generally subject to withholding for the
recipient's federal income tax liability. Recipients can generally elect,
however, not to have tax withheld from distributions.
MULTIPLE CONTRACTS
All non-qualified defined annuity contracts that are issued by us (or
our affiliates) to the same Owner during any calendar year are treated as one
annuity contract for purposes of determining the amount includible in such
Owner's income when a taxable distribution occurs.
FURTHER INFORMATION
We believe that the contracts will qualify as annuity contracts for
Federal income tax purposes and the above discussion is based on that
assumption. Further details can be found in the Statement of Additional
Information under the heading "Tax Status of the Contracts."
TAXATION OF QUALIFIED CONTRACTS
The tax rules that apply to Qualified Contracts vary according to the
type of retirement plan and the terms and conditions of the plan. Your rights
under a Qualified Contract may be subject to the terms of the retirement plan
itself, regardless of the terms of the Qualified Contract. Adverse tax
consequences may result if you do not ensure that contributions, distributions
and other transactions with respect to the Contract comply with the law.
INDIVIDUAL RETIREMENT ANNUITIES (IRAs), as defined in Section 408 of
the Tax Code, permit individuals to make annual contributions of up to the
lesser of $2,000 or 100% of the compensation included in your income for the
year. The contributions may be deductible in whole or in part, depending on the
individual's income. Distributions from certain pension plans may be "rolled
over" into an IRA on a tax-deferred basis without regard to these limits.
Amounts in the IRA (other than nondeductible contributions) are taxed when
distributed from the IRA. A 10% penalty tax generally applies to distributions
made before age 59 1/2, unless certain exceptions apply. The Internal Revenue
Service has reviewed the Contract and its traditional IRA and SIMPLE IRA riders
and has issued an opinion letter approving the use of the Contract and the
riders as a traditional IRA and a SIMPLE IRA. The Internal Revenue Service has
not addressed in a ruling of general applicability whether a death benefit
provision such as the optional Guaranteed Minimum Death Benefit provision in the
Contract comports with IRA qualification requirements.
SIMPLE IRAS, permit certain small employers to establish SIMPLE plans
as provided by Section 408(p) of the Code, under which employees may elect to
defer to a SIMPLE IRA a percentage of compensation up to $6,000 (as increased
for cost of living adjustments). The sponsoring employer is required to make
matching or non-elective contributions on behalf of the employees. Distributions
from SIMPLE IRAs are subject to the same restrictions that apply to IRA
distributions and are taxed as ordinary income. Subject to certain exceptions,
premature distributions prior to age 59 1/2 are subject to a 10% penalty tax,
which is increased to 25% if the distribution occurs within the first two years
after the commencement of the employee's participation in the plan.
ROTH IRAS, as described in Tax Code section 408A, permit certain
eligible individuals to make non-deductible contributions to a Roth IRA in cash
or as a rollover or transfer from another Roth IRA or other IRA. A rollover from
or conversion of an IRA to a Roth IRA is generally subject to tax and other
special rules apply. The Owner may wish to consult a tax adviser before
combining any converted
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<PAGE> 44
amounts with any other Roth IRA contributions, including any other conversion
amounts from other tax years. Distributions from a Roth IRA generally are not
taxed, except that, once aggregate distributions exceed contributions to the
Roth IRA, income tax and a 10% penalty tax may apply to distributions made (1)
before age 59 1/2 (subject to certain exceptions) or (2) during the five taxable
years starting with the year in which the first contribution is made to any Roth
IRA. A 10% penalty tax may apply to amounts attributable to a conversion from an
IRA if they are distributed during the five taxable years beginning with the
year in which the conversion was made.
OTHER TAX ISSUES
Qualified Contracts have minimum distribution rules that govern the
timing and amount of distributions. You should consult a tax advisor for more
information about these distribution rules.
Distributions from Qualified Contracts generally are subject to
withholding for the Owner's federal income tax liability. The withholding rate
varies according to the type of distribution and the Owner's tax status. The
Owner will be provided the opportunity to elect to not have tax withheld from
distributions.
OUR INCOME TAXES
At the present time, we make no charge for any federal, state or local
taxes (other than the charge for state and local premium taxes) that we incur
that may be attributable to the investment divisions (that is, the subaccounts)
of the variable account or to the Contracts. We do have the right in the future
to make additional charges for any such tax or other economic burden resulting
from the application of the tax laws that we determine is attributable to the
investment divisions of the variable account or the Contracts.
Under current laws in several states, we may incur state and local
taxes (in addition to premium taxes). These taxes are not now significant and we
are not currently charging for them. If they increase, we may deduct charges for
such taxes.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is
always the possibility that the tax treatment of the Contracts could change by
legislation or otherwise. Consult a tax adviser with respect to legislative
developments and their effect on the Contract.
We have the right to modify the Contract in response to legislative
changes that could otherwise diminish the favorable tax treatment that annuity
contract owners currently receive. We make no guarantee regarding the tax status
of any contract and do not intend the above discussion as tax advice.
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<PAGE> 45
OTHER INFORMATION
PAYMENTS
During the pay-in period, we will usually pay you any surrender,
partial withdrawal, or death benefit payment within seven calendar days after we
receive all the required information. The required information includes your
written request, any information or documentation we reasonably need to process
your request, and, in the case of a death benefit, receipt and filing of due
proof of death.
However, we may suspend or postpone payments during any period when:
- the New York Stock Exchange is closed, other than customary
weekend and holiday closings;
- trading on the New York Stock Exchange is restricted as determined
by the SEC;
- the SEC determines that an emergency exists that would make the
disposal of securities held in the variable account or the
determination of the value of the variable account's net assets
not reasonably practicable; or
- the SEC permits, by order, the suspension or postponement of
payments for your protection.
If a recent check or draft has been submitted, we have the right to
delay payment until we have assured ourselves that the check or draft has been
honored.
We have the right to defer payment for a surrender, partial withdrawal,
death benefit or transfer from the fixed account for up to six months from the
date we receive your written request.
MODIFICATION
Upon notice to you, we may modify the Contract to:
- permit the Contract or the variable account to comply with any
applicable law or regulation issued by a government agency;
- assure continued qualification of the Contract under the Tax Code
or other federal or state laws relating to retirement annuities or
variable annuity contracts;
- reflect a change in the operation of the variable account; or
- provide additional investment options.
In the event of most such modifications, we will make appropriate
endorsement to the Contract.
DISTRIBUTION OF THE CONTRACTS
The Contracts are sold by licensed insurance agents in those states
where the Contract may be lawfully sold. The agents are also registered
representatives of registered broker-dealers that are members of the National
Association of Securities Dealers, Inc. ("NASD"). Sales commissions will be paid
to broker-dealers who sell the Contracts. Sales commissions may vary, but are
expected not to exceed 7.0% of premium payments. The broker-dealers are expected
to compensate sales representatives in varying amounts from these commissions.
In addition, we may pay additional promotional incentives, in the form of cash
or other compensation, such as production incentive bonuses, agent's insurance
and
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<PAGE> 46
pension benefits, and agency expense allowances. These distribution expenses do
not result in any additional charges against the Contracts other than those
described under "Fees and Charges."
Investors Brokerage Services, Inc. ("IBS"), 1 Kemper Drive, Long Grove,
Illinois 60049-0001, acts as the principal underwriter for the Contracts. IBS is
affiliated with Farmers. IBS is registered with the SEC under the Securities
Exchange Act of 1934 as a broker-dealer, and is a member of the NASD.
LEGAL PROCEEDINGS
Like other life insurance companies, we are involved in lawsuits. These
actions are in various stages of discovery and development, and some seek
punitive as well as compensatory damages. While it is not possible to predict
the outcome of such matters with absolute certainty, we believe that the
ultimate disposition of these proceedings should not have a material adverse
effect on the financial position of Farmers New World Life Insurance Company. In
addition, we are, from time to time, involved as a party to various governmental
and administrative proceedings. There are no pending or threatened lawsuits that
will materially impact the variable account.
REPORTS TO OWNERS
Before the annuity start date, we will mail a report to you at least
annually at your last known address of record. The report will state the
Contract Value (including the Contract Value in each subaccount and the fixed
account) of the Contract, and any further information required by any applicable
law or regulation.
INQUIRIES
Inquiries regarding your Contract may be made by calling or writing to
us at the Service Center.
YEAR 2000 MATTERS
In 1995, Farmers Group, Inc. ("FGI") initiated a Year 2000 project (the
"Year 2000 Project") in order to prepare for the information processing problems
presented by the approach of the new millennium. FGI expended significant
efforts to gain a complete understanding of Year 2000 implications and to
develop a strategy to make FGI's systems Year 2000 compliant. The costs
associated with the Year 2000 Project were expensed as incurred and, through
December 31, 1999, totaled $23.2 million. The costs related to the Year 2000
Project were consistent with management's expectations of the total costs that
would be incurred in connection with Year 2000 issue. No further costs related
to the Year 2000 Project are expected.
The Year 2000 issue has not presented any significant disruptions to
the operations of FGI. However, FGI will continue to monitor its systems
throughout the year to ensure that all systems are operating properly.
FINANCIAL STATEMENTS
Our audited balance sheets as of December 31, 1999 and 1998, 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, 1999,
as well as the Independent Auditors' Report, are contained in the SAI. Our
financial statements should be considered only as bearing on our ability to
meet our obligations under the
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<PAGE> 47
Contracts. They should not be considered as bearing on the investment
performance of the assets held in the variable account.
There are no financial statements for the variable account, because it
had not commenced operations as of December 31, 1999.
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<PAGE> 48
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS
The SAI contains additional information about the Contract and the variable
account. You can obtain the SAI (at no cost) by writing to us at the address
shown on the front cover or by calling 1 (877) 376-8008. The following is the
Table of Contents for the SAI.
<TABLE>
<CAPTION>
Page
----
<S> <C>
ADDITIONAL CONTRACT PROVISIONS.............................................................. 1
The Contract....................................................................... 1
Incontestability................................................................... 1
Incorrect Age or Sex............................................................... 1
Nonparticipation................................................................... 1
Waiver of Surrender Charge Riders.................................................. 2
Tax Status of the Contracts........................................................ 2
CALCULATION OF SUBACCOUNT AND ADJUSTED HISTORIC PORTFOLIO PERFORMANCE DATA.................. 3
Money Market Subaccount Yields..................................................... 3
Other Subaccount Yields............................................................ 5
Average Annual Total Returns for the Subaccounts................................... 6
Non-Standard Subaccount Total Returns.............................................. 7
Adjusted Historic Portfolio Performance Data....................................... 7
Effect of the Records Maintenance Charge on Performance Data....................... 8
HISTORIC PERFORMANCE DATA................................................................... 8
General Limitations................................................................ 8
Time Periods Before the Date the Variable Account Commenced Operations............. 8
Tables of Adjusted Historic Total Return Quotations................................ 8
NET INVESTMENT FACTOR.......................................................................12
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS...........................................12
Resolving Material Conflicts.......................................................13
VOTING RIGHTS...............................................................................13
SAFEKEEPING OF VARIABLE ACCOUNT ASSETS......................................................13
DISTRIBUTION OF THE CONTRACTS...............................................................14
LEGAL MATTERS...............................................................................14
EXPERTS.....................................................................................14
OTHER INFORMATION...........................................................................15
FINANCIAL STATEMENTS........................................................................15
</TABLE>
45
<PAGE> 49
STATEMENT OF ADDITIONAL INFORMATION
for the
FARMERS VARIABLE ANNUITY
Individual Flexible Premium Variable Annuity Contract
Issued Through
FARMERS ANNUITY SEPARATE ACCOUNT A
Offered by
FARMERS NEW WORLD LIFE INSURANCE COMPANY
3003 - 77th Avenue, S.E.
Mercer Island, Washington 98040
(206) 232-8400
SERVICE CENTER:
P.O. Box 724208
Atlanta, Georgia 31139
1-877-376-8008 (toll free)
This Statement of Additional Information expands upon subjects discussed in
the current Prospectus for the Farmers Variable Annuity individual flexible
premium variable annuity contract offered by Farmers New World Life Insurance
Company. You may obtain a copy of the Prospectus for the Contract dated May 1,
2000 by calling 1-877-376-8008 or by writing to our SERVICE CENTER at P.O. Box
724208, Atlanta, Georgia 31139.
This Statement incorporates terms used in the current Prospectus for each
Contract.
- --------------------------------------------------------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE READ
ONLY IN CONJUNCTION WITH THE PROSPECTUSES FOR YOUR CONTRACT AND THE PORTFOLIOS.
The date of this Statement of Additional Information is May 1, 2000.
<PAGE> 50
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ADDITIONAL CONTRACT PROVISIONS............................................................1
The Contract.......................................................................1
Incontestability...................................................................1
Incorrect Age or Sex...............................................................1
Nonparticipation...................................................................2
Waiver of Surrender Charge Riders..................................................2
Tax Status of the Contracts........................................................2
CALCULATION OF SUBACCOUNT AND ADJUSTED HISTORIC PORTFOLIO PERFORMANCE DATA................3
Money Market Subaccount Yields.....................................................3
Other Subaccount Yields............................................................5
Average Annual Total Returns for the Subaccounts...................................6
Non-Standard Subaccount Total Returns..............................................7
Adjusted Historic Portfolio Performance Data.......................................7
Effect of the Records Maintenance Charge on Performance Data.......................8
HISTORIC PERFORMANCE DATA.................................................................8
General Limitations................................................................8
Time Periods Before The Date The Variable Account Commenced Operations.............8
Tables Of Adjusted Historic Total Return Quotations................................8
NET INVESTMENT FACTOR....................................................................12
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS........................................12
Resolving Material Conflicts......................................................13
VOTING RIGHTS............................................................................13
SAFEKEEPING OF VARIABLE ACCOUNT ASSETS...................................................14
DISTRIBUTION OF THE CONTRACTS............................................................14
LEGAL MATTERS............................................................................14
EXPERTS..................................................................................15
OTHER INFORMATION........................................................................15
FINANCIAL STATEMENTS.....................................................................15
</TABLE>
i
<PAGE> 51
ADDITIONAL CONTRACT PROVISIONS
THE CONTRACT
The entire contract consists of the Contract, the signed application
attached at issue, any attached amendments and supplements to the application,
and any attached riders and endorsements. In the absence of fraud, we consider
allstatements in the application to be representations and not warranties. We
will not use any statement to contest a claim unless that statement is in an
attached application or in an amendment or supplement to the application
attached to the Contract.
Any change in the Contract or waiver of its provisions must be in writing
and signed by one of our officers. No other person -- no agent or registered
representative -- has authority to change or waive any provision of the
Contract.
Upon notice to you, we may modify the Contract if necessary to:
- permit the Contract or the variable account to comply with any
applicable law or regulation that a governmental agency issues; or
- assure continued qualification of the Contract under the Tax Code or
other federal or state laws relating to retirement annuities or
variable annuity contracts; or
- effect a change in the operation of the variable account or to provide
additional investment options.
In the event of such modifications, we will make the appropriate endorsement
to the Contract.
INCONTESTABILITY
We will not contest the Contract after the issue date.
INCORRECT AGE OR SEX
We may require proof of age, sex, and right to payments before making any
life annuity payments. If the age or sex (if applicable) of the annuitant has
been stated incorrectly, then we will determine the annuity start date and the
amount of the annuity payments by using the correct age and sex. After the
annuity start date, any adjustment for underpayment will be paid immediately.
Any adjustment for overpayment will be deducted from future payments. We will
make adjustments for overpayments or underpayments with interest at the rate
then in use to determine the rate of payments.
1
<PAGE> 52
NONPARTICIPATION
The Contract does not participate in our surplus earnings or profits. We
will not pay dividends on the Contract.
WAIVER OF SURRENDER CHARGE RIDERS
On issuance we will automatically issue riders that waive surrender charges
if:
- the owner is under age 75 at the time we issue the Contract
and the annuitant is confined in a hospital or skilled health
care facility continuously for at least 90 days and remains
confined at the time of the surrender request; or
- the annuitant is diagnosed with a terminal illness after the
Contract is issued and is expected to live for 12 months or
less, and the aggregate maximum withdrawal is $250,000, or less.
There is no additional charge for the issuance of the waiver of surrender
charge riders. These riders may not be available in all states.
TAX STATUS OF THE CONTRACTS
Tax law imposes several requirements that variable annuities must satisfy in
order to receive the tax treatment normally accorded to annuity contracts.
Diversification Requirements. The Tax Code requires that the investments of
each investment division of the variable account underlying the Contracts be
"adequately diversified" in order for the Contracts to be treated as annuity
contracts for Federal income tax purposes. It is intended that each investment
division, through the fund in which it invests, will satisfy these
diversification requirements.
Owner Control. In certain circumstances, owners of variable annuity
contracts have been considered for Federal income tax purposes to be the owners
of the assets of the variable account supporting their contracts due to their
ability to exercise investment control over those assets. When this is the case,
the contract owners have been currently taxed on income and gains attributable
to the variable account assets. There is little guidance in this area, and some
features of our Contracts, such as the flexibility of an owner to allocate
premiums and transfer amounts among the investment divisions of the variable
account, have not been explicitly addressed in published rulings. While we
believe that the Contracts do not give Owners investment control over variable
account assets, we reserve the right to modify the Contracts as necessary to
prevent an Owner from being treated as the Owner of the variable account assets
supporting the Contract.
Required Distributions. In order to be treated as an annuity contract for
Federal income tax purposes, section 72(s) of the Tax Code requires any
Non-Qualified Contract to contain
2
<PAGE> 53
certain provisions specifying how your interest in the Contract will be
distributed in the event of the death of a holder of the Contract. Specifically,
section 72(s) requires that (a) if any Owner dies on or after the annuity
starting date, but prior to the time the entire interest in the Contract has
been distributed, the entire interest in the Contract will be distributed at
least as rapidly as under the method of distribution being used as of the date
of such Owner's death; and (b) if any owner dies prior to the annuity start
date, the entire interest in the Contract will be distributed within five years
after the date of such Owner's death. These requirements will be considered
satisfied as to any portion of an Owner's interest which is payable to or for
the benefit of a designated beneficiary and which is distributed over the life
of such designated beneficiary or over a period not extending beyond the life
expectancy of that beneficiary, provided that such distributions begin within
one year of the Owner's death. The designated beneficiary refers to a natural
person designated by the owner as a beneficiary and to whom ownership of the
Contract passes by reason of death. However, if the designated beneficiary is
the surviving spouse of the deceased Owner, the Contract may be continued with
the surviving spouse as the new owner.
The Non-Qualified Contracts contain provisions that are intended to comply
with these Tax Code requirements, although no regulations interpreting these
requirements have yet been issued. We intend to review such provisions and
modify them if necessary to assure that they comply with the applicable
requirements when such requirements are clarified by regulation or otherwise.
Other rules may apply to Qualified Contracts.
CALCULATION OF SUBACCOUNT AND ADJUSTED HISTORIC PORTFOLIO PERFORMANCE DATA
We may advertise and disclose historic performance data for the subaccounts,
including yields, standard annual total returns, and nonstandard measures of
performance of the subaccounts. Such performance data will be computed, or
accompanied by performance data computed, in accordance with the SEC defined
standards.
MONEY MARKET SUBACCOUNT YIELDS
Advertisements and sales literature may quote the current annualized yield
of the Money Market subaccount for a seven-day period in a manner that does not
take into consideration any realized or unrealized gains or losses, or income
other than investment income, on shares of the Money Market Portfolio.
We compute this current annualized yield by determining the net change (not
including any realized gains and losses on the sale of securities, unrealized
appreciation and depreciation, and income other than investment income) at the
end of the seven-day period in the value of a hypothetical subaccount under a
Contract having a balance of one unit of the Money Market subaccount at the
beginning of the period. We divide that net change in subaccount value by the
value of the hypothetical subaccount at the beginning of the period to determine
the base period return. Then we annualize this quotient on a 365-day basis. The
net change in account value reflects (i) net income from the Money Market
portfolio in which the hypothetical subaccount
3
<PAGE> 54
invests; and (ii) charges and deductions imposed under the Contract that are
attributable to the hypothetical subaccount.
These charges and deductions include the per unit charges for the records
maintenance charge, the mortality and expense risk charge for the standard death
benefit (and the mortality and expense risk charge for the Guaranteed Minimum
Death Benefit and the Guaranteed Retirement Income Benefit) and the asset-based
administration charge. For purposes of calculating current yields for a
Contract, we use an average per unit records maintenance charge based on the $30
records maintenance charge.
We calculate the current yield by the following formula:
Current Yield = ((NCS - ES)/UV) X (365/7)
Where:
NCS = the net change in the value of the Money Market Portfolio (not
including any realized gains or losses on the sale of
securities, unrealized appreciation and depreciation, and
income other than investment income) for the seven-day period
attributable to a hypothetical subaccount having a balance of
one subaccount unit.
ES = per unit charges deducted from the hypothetical subaccount for
the seven-day period.
UV = the unit value for the first day of the seven-day period.
We may also disclose the effective yield of the Money Market subaccount for
the same seven-day period, determined on a compounded basis. We calculate the
effective yield by compounding the unannualized base period return by adding one
to the base return, raising the sum to a power equal to 365 divided by 7, and
subtracting one from the result.
365/7
Effective Yield = (1 + ((NCS-ES)/UV)) - 1
Where:
NCS = the net change in the value of the Money Market portfolio (not
including any realized gains or losses on the sale of
securities, unrealized appreciation and depreciation, and
income other than investment income) for the seven-day period
attributable to a hypothetical subaccount having a balance of
one subaccount unit.
ES = per unit charges deducted from the hypothetical subaccount for
the seven-day period.
UV = the unit value for the first day of the seven-day period.
The Money Market subaccount yield is lower than the Money Market portfolio's
yield because of the charges and deductions that the Contract imposes.
4
<PAGE> 55
The current and effective yields on amounts held in the Money Market
subaccount normally fluctuate on a daily basis. THEREFORE, THE DISCLOSED YIELD
FOR ANY GIVEN PAST PERIOD IS NOT AN INDICATION OR REPRESENTATION OF FUTURE
YIELDS OR RATES OF RETURN. The Money Market subaccount's actual yield is
affected by changes in interest rates on money market securities, average
portfolio maturity of the Money Market Portfolio, the types and quality of
securities held by the Money Market Portfolio and that Portfolio's operating
expenses. We may also present yields on amounts held in the Money Market
subaccount for periods other than a seven-day period.
Yield calculations do not take into account the Surrender Charge that we
assess on certain withdrawals of Contract Value.
OTHER SUBACCOUNT YIELDS
Sales literature or advertisements may quote the current annualized yield
of one or more of the subaccounts (except the Money Market subaccount) under
the Contract for 30-day or one-month periods. The annualized yield of a
subaccount refers to income that the subaccount generates during a 30-day or
one-month period and is assumed to be generated during each period over a
12-month period.
We compute the annualized 30-day yield by:
1. dividing the net investment income of the portfolio attributable
to the subaccount units, less subaccount expenses attributable
to the Contract for the period, by the maximum offering price
per unit on the last day of the period;
2. multiplying the result by the daily average number of units
outstanding for the period;
3. compounding that yield for a 6-month period; and
4. multiplying the result by 2.
Expenses of the subaccount include the records maintenance charge, the
asset-based administration charge and the mortality and expense risk charge for
the standard death benefit (and the mortality and expense risk charge for the
Guaranteed Minimum Death Benefit and the Guaranteed Retirement Income Benefit).
The yield calculation assumes that we deduct the records maintenance charge at
the end of each Contract Year. For purposes of calculating the 30-day or
one-month yield, we divide an average records maintenance charge collected by
the average Contract Value in the subaccount to determine the amount of the
charge attributable to the subaccount for the 30-day or one-month period. We
calculate the 30-day or one-month yield by the following formula:
6
Yield = 2 X (((NI - ES)/(U X UV)) + 1) - 1)
Where:
NI = net income of the portfolio for the 30-day or one-month period
attributable to the subaccount's units.
5
<PAGE> 56
ES = charges deducted from the subaccount for the 30-day or one-month
period.
U = the average number of units outstanding.
UV = the unit value at the close of the last day in the 30-day or
one-month period.
The yield for the subaccount is lower than the yield for the corresponding
portfolio because of the charges and deductions that the Contract imposes.
The yield on the amounts held in the subaccounts normally fluctuates over
time. THEREFORE, THE DISCLOSED YIELD FOR ANY GIVEN PAST PERIOD IS NOT AN
INDICATION OR REPRESENTATION OF FUTURE YIELDS OR RATES OF RETURN. The types and
quality of securities that a portfolio holds and its operating expenses affect
the corresponding subaccount's actual yield.
Yield calculations do not take into account the Surrender Charge that we
assess on certain withdrawals of Contract Value.
AVERAGE ANNUAL TOTAL RETURNS FOR THE SUBACCOUNTS
Sales literature or advertisements may quote average annual total returns
for one or more of the subaccounts for various periods of time. If we advertise
total return for the Money Market Subaccount, then those advertisements and
sales literature will include a statement that yield more closely reflects
current earnings than total return.
When a subaccount has been in operation for 1, 5, and 10 years,
respectively, we will provide the average annual total return for these periods.
We may also disclose average annual total returns for other periods of time.
Standard average annual total returns represent the average annual
compounded rates of return that would equate an initial investment of $1,000
under a Contract to the redemption value of that investment as of the last day
of each of the periods. Each period's ending date for which we provide total
return quotations will be for the most recent calendar quarter-end practicable,
considering the type of the communication and the media through which it is
communicated.
We calculate the standard average annual total returns using subaccount unit
values that we calculate on each valuation day based on the performance of the
subaccount's underlying portfolio, the deductions for the mortality and expense
risk charge for the standard death benefit (and in some cases, the mortality and
expense risk charge for the Guaranteed Minimum Death Benefit and the Guaranteed
Retirement Income Benefit), the asset-based administration charge and the
records maintenance charge. The calculation reflects the deduction of the
records maintenance charge by assuming a uniform reduction in the yield or total
return which is determined by calculating the average impact of the records
maintenance charge on in-force contracts.
6
<PAGE> 57
We calculate the standard total return by the following formula:
1/N
TR = ((ERV/P) ) - 1
Where:
TR = the average annual total return net of subaccount recurring
charges.
ERV = the ending redeemable value (minus any applicable Surrender
Charge) of the hypothetical subaccount at the end of the period.
P = a hypothetical initial payment of $1,000.
N = the number of years in the period.
NON-STANDARD SUBACCOUNT TOTAL RETURNS
Sales literature or advertisements may quote average annual total returns
for the subaccounts that do not reflect any Surrender Charges. We calculate such
nonstandard total returns in exactly the same way as the average annual total
returns described above, except that we replace the ending redeemable value of
the hypothetical subaccount for the period with an ending value for the period
that does not take into account any Surrender Charges.
We may disclose cumulative total returns in conjunction with the standard
formats described above. We calculate the cumulative total returns using the
following formula:
CTR = (ERV/P) - 1
Where:
CTR = the cumulative total return net of subaccount recurring charges for
the period.
ERV = the ending redeemable value of the hypothetical investment at the
end of the period.
P = a hypothetical single payment of $1,000.
ADJUSTED HISTORIC PORTFOLIO PERFORMANCE DATA
Sales literature or advertisements may quote adjusted yields and total
returns for the portfolios since their inception reduced by some or all of the
fees and charges under the Contract. Such adjusted historic portfolio
performance may include data that precedes the inception dates of the
subaccounts. This data is designed to show the performance that would have
resulted if the Contract had been in existence during that time. For some
portfolios and for some time periods prior to the start of the variable account,
deductions for asset-based insurance charges were determined using monthly
portfolio data.
We will disclose nonstandard performance data only if we disclose the
standard performance data for the required periods.
7
<PAGE> 58
EFFECT OF THE RECORDS MAINTENANCE CHARGE ON PERFORMANCE DATA
The Contract provides for the deduction of a $30.00 records maintenance
charge at the end of each Contract year from the fixed account and the
subaccounts. We will waive this charge if your Contract Value is $50,000 or more
on the date the charge is assessed. We deduct the charge from each account based
on the proportion that the value of each such account bears to the total
Contract Value. The calculation reflects the deduction of the records
maintenance charge by assuming a uniform reduction in the yield or total return
which is determined by calculating the average impact of the records maintenance
charge on in-force contracts.
HISTORIC PERFORMANCE DATA
GENERAL LIMITATIONS
The funds have provided the portfolios' performance data. We derive the
subaccount performance data from the data that the funds provide. In preparing
the tables below, we relied on the funds' data. While we have no reason to doubt
the accuracy of the figures provided by the funds, we have not verified those
figures.
TIME PERIODS BEFORE THE DATE THE VARIABLE ACCOUNT COMMENCED OPERATIONS
The variable account may also disclose non-standardized total return for time
periods before the variable account commenced operations. This performance data
is based on the actual performance of the portfolios since their inception,
adjusted to reflect the effect of the current level of charges that apply to the
subaccounts under the Contract.
TABLES OF ADJUSTED HISTORIC TOTAL RETURN QUOTATIONS
The tables below set out the adjusted historic total returns for the
portfolios for various periods as of December 31, 1999. This performance data is
based on the actual performance of the portfolios since their inception,
adjusted to reflect the effect of the current level of charges that apply to the
subaccounts under the Contract. For some portfolios and for some time periods
prior to the start of the variable account, deductions for asset-based insurance
charges were determined using monthly portfolio data.
8
<PAGE> 59
TABLE 1
ADJUSTED HISTORIC PORTFOLIO TOTAL RETURN AS OF DECEMBER 31, 1999(2)
ASSUMING CONTRACT IS SURRENDERED OR ANNUITIZED
AVERAGE ANNUAL TOTAL RETURN(3)
WITH STANDARD DEATH BENEFIT
(TOTAL VARIABLE ACCOUNT ANNUAL EXPENSES: 1.15%)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
PORTFOLIO Inception Date(2) 1 Year (%) 5 Year (%) 10 Year (%) Since Inception (%)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JANUS ASPEN SERIES
- -----------------------------------------------------------------------------------------------------------------------------
Capital Appreciation 5/1/97 57.95% N/A N/A 54.33%
- -----------------------------------------------------------------------------------------------------------------------------
KEMPER VARIABLE SERIES
- -----------------------------------------------------------------------------------------------------------------------------
Kemper High Yield 4/6/82 -5.51% 7.15% 9.22% 10.68%
- -----------------------------------------------------------------------------------------------------------------------------
Kemper Government Securities 9/3/87 -6.87% 5.45% 5.74% 5.87%
- -----------------------------------------------------------------------------------------------------------------------------
KVS Dreman High Return Equity 5/4/98 -17.84% N/A N/A -9.59%
- -----------------------------------------------------------------------------------------------------------------------------
Kemper Small Cap Growth 5/2/94 25.89% 26.99% N/A 24.19%
- -----------------------------------------------------------------------------------------------------------------------------
PIMCO VARIABLE INSURANCE TRUST
- -----------------------------------------------------------------------------------------------------------------------------
PIMCO Low Duration Bond 2/16/99 N/A N/A N/A -5.69%
- -----------------------------------------------------------------------------------------------------------------------------
PIMCO Foreign Bond 2/16/99 N/A N/A N/A -9.22%
- -----------------------------------------------------------------------------------------------------------------------------
SCUDDER VARIABLE LIFE INVESTMENT FUND
- -----------------------------------------------------------------------------------------------------------------------------
International 5/1/87 45.61% 18.63% 11.79% 12.08%
- -----------------------------------------------------------------------------------------------------------------------------
Growth and Income 5/2/94 -2.13% 17.02% N/A 15.78%
- -----------------------------------------------------------------------------------------------------------------------------
Bond 7/16/85 -8.38% 4.93% 6.00% 6.34%
- -----------------------------------------------------------------------------------------------------------------------------
Money Market(1) 7/16/85 -2.88% 3.21% 3.60% 4.21%
- -----------------------------------------------------------------------------------------------------------------------------
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
- -----------------------------------------------------------------------------------------------------------------------------
Templeton Developing Markets Securities Fund(5)
(Class 1 Performance until Class 2 Start
Date of 5/1/97) 3/4/96 44.38% N/A N/A -7.18%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
WITH EITHER GUARANTEED MINIMUM DEATH BENEFIT OR GUARANTEED RETIREMENT INCOME BENEFIT
(TOTAL VARIABLE ACCOUNT ANNUAL EXPENSES: 1.40%)
- -----------------------------------------------------------------------------------------------------------------------------
PORTFOLIO Inception Date(2) 1 Year (%) 5 Year (%) 10 Year (%) Since Inception (%)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JANUS ASPEN SERIES
- -----------------------------------------------------------------------------------------------------------------------------
Capital Appreciation 5/1/97 57.54% N/A N/A 53.94%
- -----------------------------------------------------------------------------------------------------------------------------
KEMPER VARIABLE SERIES
- -----------------------------------------------------------------------------------------------------------------------------
Kemper High Yield 4/6/82 -5.75% 6.88% 8.95% 10.40%
- -----------------------------------------------------------------------------------------------------------------------------
Kemper Government Securities 9/3/87 -7.10% 5.18% 5.48% 5.61%
- -----------------------------------------------------------------------------------------------------------------------------
KVS Dreman High Return Equity 5/4/98 -18.04% N/A N/A -9.81%
- -----------------------------------------------------------------------------------------------------------------------------
Kemper Small Cap Growth 5/2/94 25.56% 26.67% N/A 23.88%
- -----------------------------------------------------------------------------------------------------------------------------
PIMCO VARIABLE INSURANCE TRUST
- -----------------------------------------------------------------------------------------------------------------------------
PIMCO Low Duration Bond 2/16/99 N/A N/A N/A -5.93%
- -----------------------------------------------------------------------------------------------------------------------------
PIMCO Foreign Bond 2/16/99 N/A N/A N/A -9.44%
- -----------------------------------------------------------------------------------------------------------------------------
SCUDDER VARIABLE LIFE INVESTMENT FUND
- -----------------------------------------------------------------------------------------------------------------------------
International 5/1/87 45.23% 18.34% 11.51% 11.80%
- -----------------------------------------------------------------------------------------------------------------------------
Growth and Income 5/2/94 -2.38% 16.73% N/A 15.49%
- -----------------------------------------------------------------------------------------------------------------------------
Bond 7/16/85 -8.61% 4.66% 5.74% 6.08%
- -----------------------------------------------------------------------------------------------------------------------------
Money Market(1) 7/16/85 -3.12% 2.95% 3.34% 3.95%
- -----------------------------------------------------------------------------------------------------------------------------
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
- -----------------------------------------------------------------------------------------------------------------------------
Templeton Developing Markets Securities Fund(5)
(Class 1 Performance until Class 2 Start
Date of 5/1/97) 3/4/96 44.01% N/A N/A -8.03%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
WITH BOTH GUARANTEED MINIMUM DEATH BENEFIT AND GUARANTEED RETIREMENT INCOME BENEFIT
(TOTAL VARIABLE ACCOUNT ANNUAL EXPENSES: 1.65%)
- -----------------------------------------------------------------------------------------------------------------------------
PORTFOLIO Inception Date(2) 1 Year (%) 5 Year (%) 10 Year (%) Since Inception (%)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JANUS ASPEN SERIES
- -----------------------------------------------------------------------------------------------------------------------------
Capital Appreciation 5/1/97 57.14% N/A N/A 53.56%
- -----------------------------------------------------------------------------------------------------------------------------
KEMPER VARIABLE SERIES
- -----------------------------------------------------------------------------------------------------------------------------
Kemper High Yield 4/6/82 -5.98% 6.61% 8.68% 10.13%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 60
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kemper Government Securities 9/3/87 -7.33% 4.91% 5.22% 5.35%
- -----------------------------------------------------------------------------------------------------------------------------
KVS Dreman High Return Equity 5/4/98 -18.25% N/A N/A -10.03%
- -----------------------------------------------------------------------------------------------------------------------------
Kemper Small Cap Growth 5/2/94 25.23% 26.36% N/A 23.58%
- -----------------------------------------------------------------------------------------------------------------------------
PIMCO VARIABLE INSURANCE TRUST
- -----------------------------------------------------------------------------------------------------------------------------
PIMCO Low Duration Bond 2/16/99 N/A N/A N/A -6.16%
- -----------------------------------------------------------------------------------------------------------------------------
PIMCO Foreign Bond 2/16/99 N/A N/A N/A -9.67%
- -----------------------------------------------------------------------------------------------------------------------------
SCUDDER VARIABLE LIFE INVESTMENT FUND
- -----------------------------------------------------------------------------------------------------------------------------
International 5/1/87 44.86% 18.04% 11.23% 11.52%
- -----------------------------------------------------------------------------------------------------------------------------
Growth and Income 5/2/94 -2.62% 16.43% N/A 15.20%
- -----------------------------------------------------------------------------------------------------------------------------
Bond 7/16/85 -8.84% 4.40% 5.47% 5.81%
- -----------------------------------------------------------------------------------------------------------------------------
Money Market(1) 7/16/85 -3.36% 2.69% 3.09% 3.70%
- -----------------------------------------------------------------------------------------------------------------------------
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
- -----------------------------------------------------------------------------------------------------------------------------
Templeton Developing Markets Securities Fund(5)
(Class 1 Performance until Class 2 Start
Date of 5/1/97) 3/4/96 43.64% N/A N/A -8.26%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) An investment in the Money Market Portfolio is neither insured nor
guaranteed by the U.S. Government and there can be no assurance that the Money
Market Portfolio will maintain a stable $1.00 share price. Yield more closely
reflects current earnings of the Money Market Portfolio than its total return.
(2) The variable account has not yet commenced operations. Once available,
standardized performance data for the periods after the inception of Contract
sales will reflect the actual performance of the Contracts.
(3) Total return includes changes in share price, reinvestment of dividends, and
capital gains. The performance figures: (1) represent past performance and
neither guarantee nor predict future investment results; (2) assume an initial
hypothetical investment of $1,000 as required by the SEC for the standardized
returns; (3) reflect the deduction of either 1.15% (for the Standard Death
Benefit), 1.40% (for the election of either the Guaranteed Minimum Death Benefit
or the Guaranteed Retirement Income Benefit), or 1.65% (for the election of both
Guaranteed Minimum Death Benefit and the Guaranteed Retirement Income Benefit)
in annual variable account charges and a $30 records maintenance charge, and (4)
the applicable Surrender Charge. The impact of the records maintenance charge on
investment returns will vary depending on the size of the Contract and is
reflected as an annual charge of 0.15% of subaccount assets based on an assumed
average investment of $20,000 in the Contract. For some portfolios and for some
time periods prior to the start of the variable account, deductions for
asset-based insurance charges were determined using monthly portfolio data. The
investment return and value of a Contract will fluctuate so that a Contract,
when surrendered, may be worth more or less than the amount of the purchase
payments.
(4) Total returns reflect that certain investment advisers waived all or part of
the advisory fee or reimbursed the portfolio for a portion of its expenses.
Otherwise, total returns would have been lower.
(5) On February 8, 2000, shareholders approved a merger and reorganization that
combined the Templeton Developing Markets Fund with the Templeton Developing
Markets Equity Fund, effective May 1, 2000. Going forward the new combined fund
will adopt the prior performance of its predecessor fund, the Templeton
Developing Markets Fund. The data presented in Table One represents the
performance of Class 1 shares of the predecessor fund from March 4, 1996 until
the start date of Class 2 shares on May 1, 1997. Prior to May 1, 1997, fund
shares were offered without a Rule 12b-1 fee and with lower costs. Had Class 2
shares been offered prior to May 1, 1997, performance would have been lower.
TABLE 2
ADJUSTED HISTORIC PORTFOLIO TOTAL RETURN AS OF DECEMBER 31, 1999(2)
ASSUMING CONTRACT IS NOT SURRENDERED OR ANNUITIZED
AVERAGE ANNUAL TOTAL RETURN(3)
WITH STANDARD DEATH BENEFIT
(TOTAL VARIABLE ACCOUNT ANNUAL EXPENSES: 1.15%)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO Inception Date(2) 1 Year (%) 5 Year (%) 10 Year (%) Since Inception (%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JANUS ASPEN SERIES
- -----------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation 05/01/97 64.95% N/A N/A 55.23%
- -----------------------------------------------------------------------------------------------------------------------------------
KEMPER VARIABLE SERIES
- -----------------------------------------------------------------------------------------------------------------------------------
Kemper High Yield 04/06/82 0.84% 7.75% 9.22% 10.68%
- -----------------------------------------------------------------------------------------------------------------------------------
Kemper Government Securities 09/03/87 -0.61% 6.08% 5.74% 5.87%
- -----------------------------------------------------------------------------------------------------------------------------------
KVS Dreman High Return Equity 05/04/98 -12.32% N/A N/A -6.51%
- -----------------------------------------------------------------------------------------------------------------------------------
Kemper Small Cap Growth 05/02/94 32.89% 27.30% N/A 24.38%
- -----------------------------------------------------------------------------------------------------------------------------------
PIMCO VARIABLE INSURANCE TRUST
- -----------------------------------------------------------------------------------------------------------------------------------
PIMCO Low Duration Bond 02/16/99 N/A N/A N/A 1.62%
- -----------------------------------------------------------------------------------------------------------------------------------
PIMCO Foreign Bond 02/16/99 N/A N/A N/A -2.18%
- -----------------------------------------------------------------------------------------------------------------------------------
SCUDDER VARIABLE LIFE INVESTMENT FUND
- -----------------------------------------------------------------------------------------------------------------------------------
International 05/01/87 52.61% 19.03% 11.79% 12.08%
- -----------------------------------------------------------------------------------------------------------------------------------
Growth and Income 05/02/94 4.45% 17.44% N/A 16.04%
- -----------------------------------------------------------------------------------------------------------------------------------
Bond 07/16/85 -2.22% 5.58% 6.00% 6.34%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 61
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Money Market(1) 07/16/85 3.65% 3.91% 3.60% 4.21%
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
- ------------------------------------------------------------------------------------------------------------------------------------
Templeton Developing Markets Securities Fund(5)
(Class 1 Performance until Class 2 Start
Date of 5/1/97) 03/04/96 51.38% N/A N/A -6.69%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
WITH EITHER GUARANTEED MINIMUM DEATH BENEFIT OR GUARANTEED RETIREMENT INCOME BENEFIT
(TOTAL VARIABLE ACCOUNT ANNUAL EXPENSES: 1.40%)
- ------------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO Inception Date(2) 1 Year (%) 5 Year (%) 10 Year (%) Since Inception (%)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
JANUS ASPEN SERIES
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation 05/01/97 64.54% N/A N/A 54.85%
- ------------------------------------------------------------------------------------------------------------------------------------
KEMPER VARIABLE SERIES
- ------------------------------------------------------------------------------------------------------------------------------------
Kemper High Yield 04/06/82 0.59% 7.48% 8.95% 10.40%
- ------------------------------------------------------------------------------------------------------------------------------------
Kemper Government Securities 09/03/87 -0.86% 5.82% 5.48% 5.61%
- ------------------------------------------------------------------------------------------------------------------------------------
KVS Dreman High Return Equity 05/04/98 -12.53% N/A N/A -6.74%
- ------------------------------------------------------------------------------------------------------------------------------------
Kemper Small Cap Growth 05/02/94 32.56% 26.98% N/A 24.08%
- ------------------------------------------------------------------------------------------------------------------------------------
PIMCO VARIABLE INSURANCE TRUST
- ------------------------------------------------------------------------------------------------------------------------------------
PIMCO Low Duration Bond 02/16/99 N/A N/A N/A 1.37%
- ------------------------------------------------------------------------------------------------------------------------------------
PIMCO Foreign Bond 02/16/99 N/A N/A N/A -2.42%
- ------------------------------------------------------------------------------------------------------------------------------------
SCUDDER VARIABLE LIFE INVESTMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
International 05/01/87 52.23% 18.74% 11.51% 11.80%
- ------------------------------------------------------------------------------------------------------------------------------------
Growth and Income 05/02/94 4.19% 17.15% N/A 15.75%
- ------------------------------------------------------------------------------------------------------------------------------------
Bond 07/16/85 -2.47% 5.32% 5.74% 6.08%
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market(1) 07/16/85 3.39% 3.65% 3.34% 3.95%
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
- ------------------------------------------------------------------------------------------------------------------------------------
Templeton Developing Markets Securities Fund(5)
(Class 1 Performance until Class 2 Start
Date of 5/1/97) 03/04/96 51.01% N/A N/A -6.92%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
WITH BOTH GUARANTEED MINIMUM DEATH BENEFIT AND GUARANTEED RETIREMENT INCOME BENEFIT
(TOTAL VARIABLE ACCOUNT ANNUAL EXPENSES: 1.65%)
- ------------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO Inception Date(2) 1 Year (%) 5 Year (%) 10 Year (%) Since Inception (%)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
JANUS ASPEN SERIES
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation 05/01/97 64.14% N/A N/A 54.47%
- ------------------------------------------------------------------------------------------------------------------------------------
KEMPER VARIABLE SERIES
- ------------------------------------------------------------------------------------------------------------------------------------
Kemper High Yield 04/06/82 0.34% 7.22% 8.68% 10.13%
- ------------------------------------------------------------------------------------------------------------------------------------
Kemper Government Securities 09/03/87 -1.10% 5.56% 5.22% 5.35%
- ------------------------------------------------------------------------------------------------------------------------------------
KVS Dreman High Return Equity 05/04/98 -12.75% N/A N/A -6.97%
- ------------------------------------------------------------------------------------------------------------------------------------
Kemper Small Cap Growth 05/02/94 32.23% 26.67% N/A 23.77%
- ------------------------------------------------------------------------------------------------------------------------------------
PIMCO VARIABLE INSURANCE TRUST
- ------------------------------------------------------------------------------------------------------------------------------------
PIMCO Low Duration Bond 02/16/99 N/A N/A N/A 1.12%
- ------------------------------------------------------------------------------------------------------------------------------------
PIMCO Foreign Bond 02/16/99 N/A N/A N/A -2.66%
- ------------------------------------------------------------------------------------------------------------------------------------
SCUDDER VARIABLE LIFE INVESTMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
International 05/01/87 51.86% 18.45% 11.23% 11.52%
- ------------------------------------------------------------------------------------------------------------------------------------
Growth and Income 05/02/94 3.93% 16.87% N/A 15.47%
- ------------------------------------------------------------------------------------------------------------------------------------
Bond 07/16/85 -2.71% 5.06% 5.47% 5.81%
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market(1) 07/16/96 3.14% 3.40% 3.09% 3.70%
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
- ------------------------------------------------------------------------------------------------------------------------------------
Templeton Developing Markets Securities Fund(5)
(Class 1 Performance until Class 2 Start
Date of 5/1/97) 03/04/96 50.64% N/A N/A -7.15%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)An investment in the Money Market Portfolio is neither insured nor guaranteed
by the U.S. Government and there can be no assurance that the Money Market
Portfolio will maintain a stable $1.00 share price. Yield more closely reflects
current earnings of the Money Market Portfolio than its total return.
(2)The variable account has not yet commenced operations. Once available,
standardized performance data for the periods after the inception of Contract
sales will reflect the actual performance of the Contracts.
(3)Total return includes changes in share price, reinvestment of dividends, and
capital gains. The performance figures: (1) represent past performance and
neither guarantee nor predict future investment results; (2) assume an initial
hypothetical investment of $1,000 as required by the SEC for the standardized
returns; and (3) reflect the deduction of either 1.15% (for the
11
<PAGE> 62
Standard Death), 1.40% for the election of either the Guaranteed Minimum Death
Benefit or the Guaranteed Retirement Income Benefit, or 1.65% (for the election
of both the Guaranteed Minimum Death Benefit and the Guaranteed Retirement
Income Benefit) in annual variable account charges and a $30 records maintenance
charge. The applicable Surrender Charge is not deducted. The impact of the
records maintenance charge on investment returns will vary depending on the size
of the Contract and is reflected as an annual charge of 0.15% of subaccount
assets based on an assumed average investment of $20,000 in the Contract. For
some portfolios and for some time periods prior to the start of the variable
account, deductions for asset-based insurance charges were determined using
monthly portfolio data. The investment return and value of a Contract will
fluctuate so that a Contract, when surrendered, may be worth more or less than
the amount of the purchase payments.
(4)Total returns reflect that certain investment advisers waived all or part of
the advisory fee or reimbursed the portfolio for a portion of its expenses.
Otherwise, total returns would have been lower.
(5) On February 8, 2000, shareholders approved a merger and reorganization that
combined the Templeton Developing Markets Fund with the Templeton Developing
Markets Equity Fund, effective May 1, 2000. Going forward the new combined fund
will adopt the prior performance of its predecessor fund, the Templeton
Developing Markets Fund. The data presented in Table One represents the
performance of Class 1 shares of the predecessor fund from March 4, 1996 until
the start date of Class 2 shares on May 1, 1997. Prior to May 1, 1997, fund
shares were offered without a Rule 12b-1 fee and with lower costs. Had Class 2
shares been offered prior to May 1, 1997, performance would have been lower.
NET INVESTMENT FACTOR
The net investment factor is an index that measures the investment
performance of a subaccount from one valuation day to the next. Each subaccount
has its own net investment factor, which may be greater or less than one. The
net investment factor for each subaccount equals the fraction obtained by
dividing (X) by (Y) minus (Z) where:
(X) is the net result of:
1. the net asset value per portfolio share held
in the subaccount at the end of the current
valuation day; plus
2. the per share amount of any dividend or
capital gain distribution on portfolio
shares held in the subaccount during the
current valuation day; less
3. the per share amount of any capital loss,
realized or unrealized, on portfolio shares
held in the subaccount during the current
valuation day.
(Y) equals the net asset value per portfolio share held in the
subaccount as of the end of the immediately preceding valuation day.
(Z) equals charges and fees deducted from the subaccount. These
consist of:
1. the amount charged for mortality and expense
risk on that valuation day;
2. the amount charged for administrative costs
on that valuation day; and
3. the amount charged for any other charges,
fees and expenses for riders, endorsements,
or supplemental benefits attached to your
Contract, including the Guaranteed Minimum
Death Benefit Rider and the Guaranteed
Retirement Income Benefit Rider.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
In the event of any substitution or change of the underlying
portfolios, we may (by appropriate endorsement, if necessary) change the
Contract to reflect the substitution or change. If we consider it to be in the
best interest of Owners and Annuitants, and subject to any approvals that may be
required under applicable law, the variable account may be operated as a
management investment company under the 1940 Act, it may be deregistered under
that Act if registration is no longer required, it may be combined with other of
our variable accounts, or the
12
<PAGE> 63
assets may be transferred to another variable account. In addition, we may, when
permitted by law, restrict or eliminate any voting rights you have under the
Contracts.
RESOLVING MATERIAL CONFLICTS
The funds currently sell shares to registered separate accounts of
insurance companies other than us to support other variable annuity contracts
and variable life insurance contracts. In addition, our other separate accounts
and separate accounts of other affiliated life insurance companies may purchase
some of the funds to support other variable annuity or variable life insurance
contracts. Moreover, qualified retirement plans may purchase shares of some of
the funds. As a result, there is a possibility that an irreconcilable material
conflict may arise between your interests as a Contract owner and the interests
of persons owning other contracts investing in the same funds. There is also the
possibility that a material conflict may arise between the interests of owners
generally, or certain classes of owners, and participating qualified retirement
plans or participants in such retirement plans.
We currently do not foresee any disadvantages to you that would
arise from the sale of fund shares to support variable life insurance contracts
or variable annuity contracts of other companies or to qualified retirement
plans. However, the management of each fund will monitor events related to its
fund in order to identify any material irreconcilable conflicts that might
possibly arise as a result of such fund offering its shares to support both
variable life insurance contracts and variable annuity contracts, or support the
variable life insurance contracts and/or variable annuity contracts issued
by various affiliated and unaffiliated insurance companies. In addition, the
management of the funds will monitor the funds in order to identify any material
irreconcilable conflicts that might possibly arise as a result of the sale of
its shares to qualified retirement plans, if applicable.
In the event of such a conflict, the management of the appropriate
fund would determine what action, if any, should be taken in response to the
conflict. In addition, if we believe that the response of the funds to any such
conflict does not sufficiently protect you, then we will take our own
appropriate action, including withdrawing the variable account's investment in
such funds, as appropriate.
VOTING RIGHTS
We determine the number of votes you may cast by dividing your
Contract Value in a subaccount by the net asset value per share of the portfolio
in which that subaccount invests. We determine the number of votes available to
you as of the same date that the fund establishes for determining shareholders
eligible to vote at the relevant meeting of the portfolio's shareholders. We
will solicit voting instructions by sending you written materials before the
fund's meeting in accordance with the fund's procedures.
13
<PAGE> 64
SAFEKEEPING OF VARIABLE ACCOUNT ASSETS
We hold the title to the assets of the variable account. The assets
are kept physically segregated and held separate and apart from our general
account assets and from the assets in any other separate account. We maintain
records of all purchases and redemptions of portfolio shares held by each of the
subaccounts. Additional protection for the assets of the variable account is
provided by a blanket fidelity bond issued by Federal Insurance Company to
Farmers Group, Inc., providing aggregate coverage of $30,000,000 (subject to a
$500,000 deductible) for all officers and employees of Farmers Group, Inc.
DISTRIBUTION OF THE CONTRACTS
Investors Brokerage Services, Inc. ("IBS"), 1 Kemper Drive, Long
Grove, Illinois 60049-0001, acts as principal underwriter for the Contracts. IBS
is registered with the SEC under the Securities Exchange Act of 1934 as a
broker-dealer and is a member of the National Association of Securities Dealers,
Inc.
We offer the Contracts to the public on a continuous basis. We
anticipate continuing to offer the Contracts, but we reserve the right to
discontinue the offering. Agents who sell the Contracts are licensed by
applicable state insurance authorities to sell the Contracts and are registered
representatives of IBS or broker-dealers having selling agreements with IBS or
broker-dealers having selling agreements with such broker-dealers.
We may pay sales commissions to broker-dealers up to an amount equal
to 7% of the Premiums paid under a Contract. We expect the broker-dealers to
compensate sales representatives in varying amounts from these commissions. We
may pay other distribution expenses such as production incentive bonuses, an
agent's insurance and pension benefits, and agency expense allowances. These
distribution expenses do not result in any additional charges against the
Contracts other than those described in the prospectus under "Fees and Charges."
LEGAL MATTERS
M. Douglas Close, Vice President and General Counsel, Farmers New
World Life Insurance Company, has passed upon all matters relating to Washington
law pertaining to the Contracts, including the validity of the Contracts and the
Company's authority to issue the Contracts. Sutherland Asbill & Brennan LLP of
Washington, D.C. has provided advice on certain matters relating to the federal
securities laws.
14
<PAGE> 65
EXPERTS
The financial statements included in the Statement of Additional
Information have been audited by Deloitte & Touche LLP, independent auditors,
700 Fifth Avenue, Suite 4500, Seattle, Washington, 98104-5044, as stated in
their report appearing in the Statement of Additional Information in the
registration statement, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
OTHER INFORMATION
We have filed a registration statement with the SEC under the
Securities Act of 1933, as amended, with respect to the Contracts discussed in
this Statement of Additional Information. The Statement of Additional
Information does not include all of the information set forth in the
registration statement, amendments and exhibits. Statements contained in this
Statement of Additional Information concerning the content of the Contracts and
other legal instruments are intended to be summaries. For a complete statement
of the terms of these documents, you should refer to the instruments filed with
the SEC.
FINANCIAL STATEMENTS
15
<PAGE> 66
FARMERS NEW WORLD LIFE
INSURANCE COMPANY
(a wholly owned subsidiary of Farmers Group, Inc.)
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997, AND
INDEPENDENT AUDITORS' REPORT
DELOITTE & TOUCHE LLP
<PAGE> 67
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, 1999 and 1998, 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, 1999. 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 auditing standards generally accepted
in the United States of America. 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, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States of America.
February 4, 2000
<PAGE> 68
FARMERS NEW WORLD LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Farmers Group, Inc.)
BALANCE SHEETS (in thousands)
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
- ------ ---- ----
<S> <C> <C>
INVESTMENTS (Notes 2 and 3):
Fixed maturities available-for-sale:
Bonds, at fair value (cost: $3,791,785 and $3,510,846) $3,684,255 $3,674,223
Redeemable preferred stocks, at fair value
(cost: $64,176 and $82,090) 64,855 86,662
Equity securities available-for-sale:
Nonredeemable preferred stocks, at fair value
(cost: $1,153 and $1,153) 1,158 1,270
Common stocks, at fair value (cost: $123,567 and $41) 127,556 3
Mortgage loans on real estate, net of allowance for losses 35,834 52,879
Investment real estate, net of accumulated depreciation
and allowance for losses 66,672 59,047
Surplus note of the Exchanges (Note 4) 119,000 119,000
Policy loans 201,687 185,211
Joint ventures 6,662 8,456
S&P 500 call options, at fair value (cost: $19,521 and $11,305) 32,718 14,817
---------- ----------
Total investments 4,340,397 4,201,568
CASH AND CASH EQUIVALENTS 93,035 63,784
ACCRUED INVESTMENT INCOME 53,975 53,263
OTHER RECEIVABLES 18,608 17,558
DEFERRED POLICY ACQUISITION COSTS 550,908 467,248
VALUE OF BUSINESS ACQUIRED (Note 5) 328,718 334,442
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $8,842 and $7,411 14,351 14,379
OTHER ASSETS:
Securities lending collateral (Note 6) 262,425 461,801
Other assets 3,740 2,298
---------- ----------
Total other assets 266,165 464,099
---------- ----------
TOTAL $5,666,157 $5,616,341
========== ==========
</TABLE>
See notes to financial statements.
<PAGE> 69
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY 1999 1998
- ------------------------------------ ---- ----
<S> <C> <C>
POLICY LIABILITIES AND ACCRUALS:
Future policy benefits $ 3,412,452 $3,184,248
Policy claims (Note 7) 28,396 26,177
----------- ----------
Total policy liabilities and accruals 3,440,848 3,210,425
OTHER POLICYHOLDER FUNDS AND DIVIDENDS 83,479 57,358
ACCRUED EXPENSES AND OTHER LIABILITIES:
Securities lending liability (Note 6) 262,425 461,801
Death benefit liability 45,423 37,024
Other liabilities 74,636 63,736
----------- ----------
Total accrued expenses and other liabilities 382,484 562,561
INCOME TAXES (Note 8):
Current 10,006 4,180
Deferred 93,970 161,184
----------- ----------
Total income taxes 103,976 165,364
----------- ----------
Total liabilities 4,010,787 3,995,708
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 (loss), net of deferred
tax provision (benefit) of $(24,965) and $41,518 (46,363) 77,105
Retained earnings (Note 10) 700,887 542,682
----------- ----------
Total stockholder's equity 1,655,370 1,620,633
----------- ----------
TOTAL $ 5,666,157 $5,616,341
=========== ==========
</TABLE>
----
2
<PAGE> 70
FARMERS NEW WORLD LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Farmers Group, Inc.)
STATEMENTS OF INCOME (in thousands)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Net premiums earned (Note 11) $209,683 $ 173,229 $ 151,134
Universal life and annuity policy charges 210,639 206,393 200,857
Net investment income (Note 2) 307,674 293,770 275,760
Net realized investment gains (losses) (Note 2) 24,159 (13,473) 10,063
Other income 36 707 784
-------- --------- ---------
Total revenues 752,191 660,626 638,598
BENEFITS AND EXPENSES:
Death and other benefits (Note 7) 137,798 133,984 112,370
Future policy benefits 52,200 23,711 15,713
Interest credited to policyholders 157,831 150,618 146,376
Underwriting, acquisition, and insurance expenses:
Amortization of deferred policy acquisition costs 83,187 68,997 70,855
Amortization of value of business acquired 19,394 23,897 21,305
Commissions 13,520 18,972 17,344
General insurance expenses and taxes 44,077 38,659 42,986
-------- --------- ---------
Total benefits and expenses 508,007 458,838 426,949
-------- --------- ---------
Income before provision for income taxes 244,184 201,788 211,649
PROVISION (BENEFIT) FOR INCOME TAXES (Note 8):
Current 85,426 70,690 80,889
Deferred 553 496 (7,027)
-------- --------- ---------
Total provision for income taxes 85,979 71,186 73,862
-------- --------- ---------
NET INCOME $158,205 $ 130,602 $ 137,787
======== ========= =========
</TABLE>
----
See notes to financial statements. 3
<PAGE> 71
FARMERS NEW WORLD LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Farmers Group, Inc.)
STATEMENTS OF COMPREHENSIVE INCOME (in thousands)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
NET INCOME $ 158,205 $ 130,602 $ 137,787
OTHER COMPREHENSIVE INCOME, net of tax:
Unrealized holding gains (losses) on securities:
Unrealized holding gains (losses) on securities, net
of tax provision (benefit) of $96,564 and $(7,921) (179,334) 14,711
Less: reclassification adjustment for losses (gains)
included in net income, net of tax of
$1,749 and $(357) 3,249 (662)
--------- ---------
Net unrealized holding gains (losses) on
securities, net of tax provision (benefit) of
$(94,815), $7,565, and $28,968 (176,085) 14,049 53,797
Change in effect of unrealized gains (losses) on other
insurance accounts, net of tax provision (benefit) of
$28,332, $(1,949), and $(7,387) 52,617 (3,619) (13,718)
--------- --------- ---------
COMPREHENSIVE INCOME $ 34,737 $ 141,032 $ 177,866
========= ========= =========
</TABLE>
----
See notes to financial statements. 4
<PAGE> 72
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, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated Total
Additional other stock-
Common paid-in comprehensive Retained holder's
stock capital income earnings equity
----- ------- ------ -------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997 $ 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 $(357) (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
Net income 158,205 158,205
Unrealized losses on available-for-sale investments arising
during the period, net of tax of $(96,564) (179,334) (179,334)
Reclassification adjustment for losses included in
net income, net of tax of $1,749 3,249 3,249
Change in effect of unrealized gains on other insurance
accounts, net of tax of $28,332 52,617 52,617
--------- --------- -------- -------- ----------
BALANCE, December 31, 1999 $ 6,600 $ 994,246 $(46,363) $700,887 $1,655,370
========= ========= ======== ======== ==========
</TABLE>
----
See notes to financial statements. 5
<PAGE> 73
FARMERS NEW WORLD LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Farmers Group, Inc.)
STATEMENTS OF CASH FLOWS (in thousands)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 158,205 $ 130,602 $ 137,787
Adjustments to reconcile net income to
net cash provided by operating activities:
Universal life type contracts:
Deposits received 302,424 299,007 295,747
Withdrawals (253,228) (241,765) (232,728)
Interest credited 71,386 67,585 62,247
Realized investment losses (gains) (24,159) 13,473 (10,063)
Amortization of deferred policy acquisition costs and VOBA 102,581 92,894 92,160
Deferred income tax expense (benefit) 553 496 (7,027)
Depreciation 2,606 2,544 2,462
Cash provided (used) by changes in operating assets and liabilities:
Federal income taxes payable 5,826 4,180 (22,822)
Deferred policy acquisition costs (99,568) (93,047) (70,913)
Life insurance policy liabilities 55,478 27,802 14,588
Other policyholder funds 26,121 (2,714) (2,894)
Other 12,768 31,758 (37,212)
----------- --------- ---------
Net cash provided by operating activities 360,993 332,815 221,332
INVESTING ACTIVITIES:
Purchase of bonds and stocks available-for-sale (1,322,589) (660,918) (735,325)
Proceeds from sales or maturities of bonds and stocks
available-for-sale 953,106 458,364 450,760
Purchase of mortgage loans (32,623)
Mortgage loan collections 18,421 36,839 30,448
Purchase of investment real estate (20,640) (908) (23,568)
Proceeds from sale of investment real estate 10,565 8,557 2,327
Increase in policy loans (16,475) (19,317) (17,836)
Purchase of capital assets (2,508) (572) (1,685)
Purchase of surplus note of the Exchanges (119,000)
Purchase of options (8,216) (7,855) (3,450)
Other 1,891 320 (7,332)
----------- --------- ---------
Net cash used by investing activities (386,445) (304,490) (338,284)
FINANCING ACTIVITIES:
Annuity contracts:
Deposits received 157,468 144,793 131,651
Withdrawals (194,187) (202,244) (161,150)
Interest credited 91,422 82,930 80,280
----------- --------- ---------
Net cash provided by financing activities 54,703 25,479 50,781
----------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 29,251 53,804 (66,171)
CASH AND CASH EQUIVALENTS:
Beginning of year 63,784 9,980 76,151
----------- --------- ---------
End of year $ 93,035 $ 63,784 $ 9,980
=========== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during year for:
Income taxes $ 82,047 $ 41,250 $ 122,787
Interest 125 945
</TABLE>
----
See notes to financial statements. 6
<PAGE> 74
FARMERS NEW WORLD LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Farmers Group, Inc.)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
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 interinsurance 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.
In September 1998, B.A.T's Financial Services Businesses, including FGI and
subsidiaries, were merged with Zurich Insurance Company (Zurich). 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. Beginning in 2000, the Company has added variable universal life
and variable annuity products to its product line. Securities and Exchange
Commission registration and filings were completed in December 1999, in
anticipation of product marketing in 2000.
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). In addition, the Company and the Exchanges
distribute their respective insurance products through a common network of
direct writing agents and district managers. As of December 31, 1999, this
network consisted of 14,722 writing agents and 494 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 the Exchange's and the
Company's growth. Each agent is required to first submit business to the
insurers in the Farmers Insurance Group of
----
7
<PAGE> 75
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.
The Company is currently licensed in 39 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 accounting
principles generally accepted in the United States of America 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, structured settlement
contracts involving life contingencies (SSILC), 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 and structured
settlement contracts not involving life contingencies (SSNILC) 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, SSNILC, 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 accumulated other comprehensive income, a
component of stockholder's equity. As of December 31, 1999 and 1998, 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 $27,292,000 in 1999 and $28,366,000
in 1998, 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.
----
8
<PAGE> 76
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
other comprehensive income, 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 other comprehensive income also reflect this impact.
VALUE OF BUSINESS ACQUIRED: The present value of the business acquired in
the 1988 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 10
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.
Liabilities for future policy benefits on SSNILC are recorded when the
payments are received.
Unpaid policy claims include claims in the 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 $21,750,000, $21,187,000, and $20,862,000
in 1999, 1998, and 1997, respectively, and are accounted for as deferred
policy acquisition costs except for advertising expenses, which are
expensed as incurred, of $1,814,000, $1,336,000, and $1,590,000 in 1999,
1998, and 1997, respectively.
STATEMENTS 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 software
costs developed or obtained for internal use. During 1999, the Company
capitalized $6,724,000 in accordance with this SOP.
In 1998, the Financial Accounting Standards Board (FASB) released SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. This
statement, effective for financial statements of
----
9
<PAGE> 77
public and nonpublic entities issued for fiscal years 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 as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Bonds $270,191 $257,422 $236,405
Common and preferred stocks 5,737 8,123 11,747
Other 43,883 41,883 40,370
-------- -------- --------
Gross investment income 319,811 307,428 288,522
Less investment expenses 12,137 13,658 12,762
-------- -------- --------
Net investment income $307,674 $293,770 $275,760
======== ======== ========
</TABLE>
The Company's investment expenses included approximately $737,000,
$1,143,000, and $2,063,000 in 1999, 1998, and 1997, respectively, that were
paid to its parent company, FGI.
In June 1998, the Company's investment management was transferred to
Scudder Kemper Investments, Inc. (SKI), an indirect subsidiary of Zurich
Financial Services. In 1999 and 1998, approximately $1,469,000 and $704,000
of the Company's investment expenses were paid to SKI.
REALIZED GAINS (LOSSES): Realized investment gains (losses) for the years
ended December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Bonds $17,558 $(15,126) $8,613
Redeemable preferred stocks 450 25 1,304
Nonredeemable preferred stocks 71
Common stocks 4,589 117 61
Investment real estate 1,562 1,393 3
Other 118 11
------- --------- -------
$24,159 $(13,473) $10,063
======= ========= =======
</TABLE>
Properties acquired through foreclosure were $18,805,000 and $25,677,000 at
December 31, 1999 and 1998. During 1999 and 1998, the Company recorded
$386,000 and $768,000 in realized gains and $1,114,000 and $587,000 in
realized losses on the sale of real estate acquired through foreclosure,
respectively. The Company maintained an allowance for losses of $3,263,000
for the years ended December 31, 1999 and 1998.
----
10
<PAGE> 78
UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIES: Gross unrealized gains
(losses) pertaining to nonredeemable preferred stocks and common stocks
stated at fair value as of December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
Gains Losses Net
----- ------ ---
<S> <C> <C> <C>
1999:
Nonredeemable preferred stocks $ 97 $ (92) $ 5
Common stocks 11,350 (7,361) 3,989
-------- ------- -------
$ 11,447 $(7,453) 3,994
======== =======
Less deferred federal income taxes (1,398)
-------
$ 2,596
=======
1998:
Nonredeemable preferred stocks $ 165 $ (48) $ 117
Common stocks (38) (38)
------- ------- -------
$ 165 $ (86) 79
======== =======
Less deferred federal income taxes (28)
-------
$ 51
=======
</TABLE>
----
11
<PAGE> 79
UNREALIZED GAINS (LOSSES) ON FIXED MATURITIES: Amortized cost, gross
unrealized gains, gross unrealized losses, and estimated fair value 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>
1999:
Fixed maturities available-for-sale:
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 350,845 $ 553 $ (20,033) $ 331,365
Obligations of states and
political subdivisions 314,988 3,105 (5,420) 312,673
Debt securities issued by
foreign governments 62,214 5,336 (1,045) 66,505
Corporate securities 1,223,504 6,957 (47,222) 1,183,239
Mortgage-backed securities 1,840,234 8,758 (58,519) 1,790,473
---------- --------- ----------- ----------
3,791,785 24,709 (132,239) 3,684,255
Redeemable preferred stock 64,176 1,347 (668) 64,855
---------- --------- ----------- ----------
$3,855,961 $ 26,056 $ (132,907) $3,749,110
========== ========= =========== ==========
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
========== ========= =========== ==========
</TABLE>
----
12
<PAGE> 80
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, 1999, 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>
Fixed maturities available-for-sale:
Due in one year or less $ 29,287 $ 29,183
Due after one year through five years 600,267 593,984
Due after five years through 10 years 665,258 647,032
Due after 10 years 656,739 623,583
---------- ----------
1,951,551 1,893,782
Mortgage-backed securities 1,840,234 1,790,473
Preferred stock with characteristics of debt securities 64,176 64,855
---------- ----------
$3,855,961 $3,749,110
========== ==========
</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, 1999, 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, gross losses,
proceeds from sales, and write-downs of debt securities for the years ended
December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross Write-
gains losses Proceeds downs
----- ------ -------- -----
<S> <C> <C> <C> <C>
1999 $35,321 $(17,313) $910,601 $ -
1998 11,742 (468) 458,247 (26,356)
1997 12,111 (2,194) 446,202
</TABLE>
----
13
<PAGE> 81
NOTE 3: FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts 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>
1999:
Assets:
Cash and cash equivalents $ 93,035 $ 93,035
Fixed maturities available-for-sale 3,749,110 3,749,110
Nonredeemable preferred stock available-for-sale 1,158 1,158
Common stock available-for-sale 127,556 127,556
Mortgage loans 35,834 43,818
Surplus note of the Exchanges 119,000 119,000
Policy loans 201,687 199,166
Joint ventures 6,662 5,137
S&P call options 32,718 32,718
Liabilities:
Future policy benefits - Deferred annuities 1,531,412 1,481,098
1998:
Assets:
Cash and cash equivalents $ 63,784 $ 63,784
Fixed maturities available-for-sale 3,760,885 3,760,885
Nonredeemable 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
</TABLE>
The following methods and assumptions were used to estimate the fair value of
financial instruments as of December 31, 1999 and 1998:
CASH AND CASH EQUIVALENTS: The carrying amounts of these items are a
reasonable estimate of their fair value.
FIXED MATURITIES, REDEEMABLE AND NONREDEEMABLE PREFERRED STOCK, AND COMMON
STOCK: The estimated fair values of bonds, redeemable and nonredeemable
preferred stock, and common stock are based upon quoted market prices,
dealer quotes, and prices obtained from independent pricing services.
----
14
<PAGE> 82
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 using 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 $7,259,000 and $2,279,000 on this note
during 1999 and 1998, respectively.
NOTE 5: VALUE OF BUSINESS ACQUIRED
The changes in the VOBA were as follows (in thousands) as of December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 334,442 $ 359,146 $ 383,951
Amortization related to operations (50,392) (53,598) (56,371)
Interest accrued 30,998 29,701 35,066
Amortization related to net unrealized gains (losses) 13,670 (807) (3,500)
--------- --------- ---------
Balance, end of year $ 328,718 $ 334,442 $ 359,146
========= ========= =========
</TABLE>
Based on current conditions and assumptions as to future events, the Company
expects to amortize the December 31, 1999, balance as follows: approximately
7.0% in 2000, 2001, and 2002, and 8.0% in 2003 and 2004. The discount rate used
to determine the amortization rate of the VOBA ranged from 12.5% to 7.5%.
----
15
<PAGE> 83
NOTE 6: SECURITY LENDING ARRANGEMENT
The Company has entered into a security lending agreement with a lending agent,
an affiliate company. The agreement authorizes the agent 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 other 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 25% and 75% between the agent and the
Company, respectively. Income earned by the Company was $798,000, $899,000, and
$816,000 in 1999, 1998, and 1997, respectively. As of December 31, 1999 and
1998, the Company recorded $262,425,000 and $461,801,000, 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>
1999 1998
---- ----
<S> <C> <C>
Balance, January 1 $ 26,177 $ 22,156
Less reinsurance recoverables 16 270
-------- --------
Net balance, January 1 26,161 21,886
Incurred related to:
Current year 123,329 121,016
Prior years 14,469 12,968
-------- --------
Total incurred 137,798 133,984
Paid related to:
Current year 105,055 105,252
Prior years 31,963 24,457
-------- --------
Total paid 137,018 129,709
-------- --------
Net balance, December 31 26,941 26,161
Plus reinsurance recoverables 1,455 16
-------- --------
Balance, December 31 $ 28,396 $ 26,177
======== ========
</TABLE>
The liability for policy claims at December 31, 1999 and 1998, was increased for
claims reported in prior years by $14,469,000 and $12,968,000, respectively. 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, actual expenses incurred in the current year related to prior year
claims may differ from those estimates. The Company monitors these fluctuations
to ensure that current liabilities adequately reflect reasonable expense levels
for both current and prior periods.
----
16
<PAGE> 84
NOTE 8: INCOME TAXES
The Company files a consolidated federal income tax return with Farmers Group,
Inc. and its subsidiaries.
The Company uses the asset and liability method of accounting for income taxes
under SFAS 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 83,823 $69,601 $ 79,185
State 1,603 1,089 1,704
-------- ------- --------
Total current 85,426 70,690 80,889
Deferred:
Federal 1,127 496 (7,027)
State (574)
--------- ------- --------
Total deferred 553 496 (7,027)
-------- ------- --------
Total $ 85,979 $71,186 $ 73,862
======== ======= ========
</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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected tax expense $ 85,464 $ 70,626 $ 73,938
Tax-exempt investment income (1,410) (1,705) (2,233)
State taxes 1,029 1,089 1,704
Other, net 896 1,176 453
-------- -------- --------
Reported income tax expense $ 85,979 $ 71,186 $ 73,862
======== ======== ========
</TABLE>
----
17
<PAGE> 85
The tax effects of temporary differences that give rise to significant portions
of the net deferred tax liabilities as of December 31 are presented in the
following table (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred policy acquisition costs $ 245,850 $ 251,626
Future policy benefits (115,336) (135,215)
Investments (15,447) (10,842)
Valuation of investments in securities (24,965) 41,518
Depreciable assets 4,620 5,520
Other (752) 8,577
--------- ---------
Net deferred tax liabilities $ 93,970 $ 161,184
========= =========
</TABLE>
There was no valuation allowance recognized for deferred tax assets in 1999 or
1998.
NOTE 9: 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 stockholder's equity was $989,615,000 and $888,644,000 as of December
31, 1999 and 1998, respectively. Statutory net income for the years ended
December 31, 1999, 1998, and 1997, was $114,909,000, $98,796,000, and
$122,863,000, respectively.
Statutory unassigned surplus of $979,816,000 and $878,845,000 included in
retained earnings at December 31, 1999 and 1998, respectively, is the amount
held for the benefit of the stockholder. The entire amount in 1999 and 1998 is
designated as stockholder's 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
$112,941,000 in 2000.
Dividends are determined by the Board of Directors.
As of December 31, 1999 and 1998, the Company's statutory surplus exceeded the
NAIC risk-based capital requirements.
----
18
<PAGE> 86
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 $10,846,000 and $8,500,000 at December 31,
1999 and 1998, respectively. The Company utilizes several reinsurers to minimize
concentration of credit risk.
The Company has established retention limits for automatic reinsurance ceded.
The maximum retention on new issues is $2,000,000 per life for the Farmers
Flexible Universal Life policy and $1,500,000 per life for all traditional
policies except Farmers Yearly Renewable Term. The maximum retention on new
issues is $800,000 per life for Farmers Yearly Renewable Term. The excess risk
is reinsured with an outside reinsurer. 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 $3,052,000, $4,074,000, and $2,047,000 in 1999,
1998, and 1997, 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.
Effective July 1, 1999, the Company entered into a new co-insurance agreement
with a reinsurer. The Company agrees to cede a significant portion of the risk
of the Farmers Premier 10 and Farmers Premier 20 policies.
The effect of reinsurance on premiums and amounts earned for the years ended
December 31 is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Direct premiums $ 214,557 $ 168,159 $ 145,073
Reinsurance assumed 9,065 8,798 10,297
Reinsurance ceded (13,939) (3,728) (4,236)
--------- --------- ---------
Net premiums earned $ 209,683 $ 173,229 $ 151,134
========= ========= =========
</TABLE>
Premiums assumed from unaffiliated companies approximated $9,065,000,
$8,798,000, and $10,297,000 in 1999, 1998, and 1997, respectively, which
represent 4.3%, 5.1%, and 6.8% of the net premiums earned in 1999, 1998, and
1997, respectively. Claims paid to unaffiliated companies on assumed reinsurance
were approximately $8,134,000, $7,998,000, and $8,240,000 in 1999, 1998, and
1997, 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.
----
19
<PAGE> 87
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.
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,
1999 and 1998 (the latest date for which information is available) is as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Change in benefit obligation:
Net benefit obligation at beginning of the year $ 853,174 $ 747,069
Service cost 29,395 26,423
Interest cost 58,469 54,998
Plan amendments 7,903
Actuarial losses (gains) (111,100) 54,218
Benefits paid (33,948) (29,534)
----------- ----------
$ 803,893 $ 853,174
=========== =========
Change in plan assets:
Fair value of plan assets at beginning of the year $ 924,301 $ 817,552
Actual return on plan assets 124,380 135,313
Benefits paid (32,753) (28,564)
----------- ----------
Fair value of plan assets at end of the year $ 1,015,928 $ 924,301
=========== =========
Funded status at end of the year $ 212,034 $ 71,127
Unrecognized net actuarial gain (287,586) (140,910)
Unrecognized prior service cost 35,859 31,255
Unrecognized net transition asset (21,510) (26,186)
----------- ----------
Net amount recognized at end of the year $ (61,203) $ (64,714)
=========== =========
</TABLE>
Upon B.A.T's purchase of FGI and its subsidiaries in 1988, 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, 1999 and
1998, was $16,940,000 and $20,622,000, respectively.
----
20
<PAGE> 88
Components of net periodic pension expense for FGI and its subsidiaries are as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service costs $ 15,126 $ 13,240 $ 14,238
Interest costs 34,525 27,810 28,362
Return on plan assets (49,000) (35,817) (35,116)
Amortization of:
Transition obligation 955 1,365 1,229
Prior service cost 2,207 1,986 2,298
Actuarial gain (2,445) (2,447) (1,248)
-------- -------- --------
Net periodic pension expense $ 1,368 $ 6,137 $ 9,763
======== ======== ========
</TABLE>
The Company's share of pension expense was $192,000, $452,000, and $510,000 in
1999, 1998, and 1997, respectively.
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 8.00%, 6.75%, and 7.25% in 1999, 1998, and 1997, respectively,
while the expected return on plan assets was computed using a weighted average
interest rate of 9.25%, 9.25%, and 9.00% in 1999, 1998, and 1997, respectively.
The weighted average rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation was
5.00%, 4.50%, and 5.00% in 1999, 1998, and 1997, respectively.
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.
----
21
<PAGE> 89
The funded status of the entire plan, which includes FGI, its subsidiaries, and
the Exchanges, at December 1, 1999 and 1998 (the latest date for which
information is available) was as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Change in benefit obligation:
Net benefit obligation at beginning of the year $ 80,367 $ 70,758
Service cost 1,537 1,280
Interest cost 5,374 5,080
Plan participations' contributions 1,575 1,297
Actuarial loss (gain) (5,892) 6,936
Benefits paid (3,460) (4,984)
-------- --------
$ 79,501 $ 80,367
======== ========
Fair value of plan assets at end of the year $ - $ -
======== ========
Funded status at end of the year $(79,501) $(80,367)
Unrecognized net actuarial gain (14,070) (8,193)
Unrecognized net transition obligation 17,044 18,354
-------- --------
Accrued postretirement benefit cost $(76,527) $(70,206)
======== ========
</TABLE>
FGI and its subsidiaries' share of the accrued postretirement benefit cost was
approximately $55,578,000 and $53,206,000 in 1999 and 1998, respectively. The
unrecognized net transition obligation of $17,044,000 and $18,354,000 in 1999
and 1998, respectively, 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service costs $ 696 $ 636 $ 753
Interest costs 3,263 2,527 2,918
Amortization of actuarial gain (9) (435) (13)
------- --------- --------
Net periodic expense $ 3,950 $ 2,728 $ 3,658
======== ========= ========
</TABLE>
The Company's share of this amount was approximately $229,000, $205,000, and
$253,000 in 1999, 1998, and 1997, respectively.
The weighted average interest rate used in the above benefit computations was
8.00%, 6.75%, and 7.25% in 1999, 1998, and 1997, respectively. Beginning in
1997, the initial medical inflation rate was 7.00% to be graded over a
three-year period to 6.00% 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 5.00%, 4.50%, and 5.00% in 1999, 1998, and 1997,
respectively.
----
22
<PAGE> 90
A 1% 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 1999 service and interest components of net periodic cost $116 $(106)
Effect on accumulated postretirement benefit obligation
at December 31, 1999 2,028 (1,849)
</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 Program in 1999 and 1998) 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 employees' 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 employees' salaries or wages paid or accrued.
The Company's share of expense under these plans was $4,120,000, $4,069,000, and
$3,850,000 in 1999, 1998, and 1997, 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, 1999 and 1998, the Company had call options with
contract values of $65,229,000 and $40,229,000, respectively, and carrying
values of $32,718,000 and $14,817,000, respectively.
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, 1999 and 1998, the amount of unrealized hedging gains was
$13,197,000 and $3,511,000, 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
----
23
<PAGE> 91
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 1999 or 1998.
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 for both years ended December 31,
1999 and 1998. In addition, participating business represented 2.0%, 2.1%, and
2.2% of premium income for the years ended December 31, 1999, 1998, and 1997.
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.
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 (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 1999, 1998, and 1997.
The Company operates in 39 states and does not earn revenues or hold assets in
any foreign countries.
----
24
<PAGE> 92
Information regarding the Company's reportable operating segments follows (in
thousands):
<TABLE>
<CAPTION>
Year ended December 31, 1999
----------------------------
GAAP historical basis PGAAP adjustments Total
--------------------- ----------------- PGAAP
Life Annuities Total Life Annuities Total basis
---- --------- ----- ---- --------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 635,419 $ 118,044 $ 753,463 (a) $ (921) $ (351) $ (1,272) $ 752,191
Investment income 202,258 118,502 320,760 (598) (351) (949) 319,811
Investment expenses (7,653) (4,484) (12,137) (12,137)
Net realized gains 24,482 24,482 (323) (323) 24,159
Income before provision
for taxes 246,963 26,326 273,289 (26,301) (2,804) (29,105) 244,184
Provision for income taxes 87,421 9,319 96,740 (9,724) (1,037) (10,761) 85,979
Assets 3,646,654 1,870,221 5,516,875 98,675 50,607 149,282 (b) 5,666,157
Capital expenditures 2,508 2,508 2,508
Depreciation and
amortization 69,727 7,924 77,651 (c) 24,727 2,809 27,536 (d) 105,187
</TABLE>
(a) Revenues for the operating segments include net investment income and net
realized gains (losses).
(b) Amount includes PGAAP adjustments related to the DAC ($190,100,000 decrease)
and VOBA ($328,700,000 increase) assets.
(c) Amount includes the historical basis amortization associated with the DAC
asset.
(d) Amount includes PGAAP adjustments totalling $21,300,000 related to the
amortization of the DAC and VOBA assets.
<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) (13,658)
Net realized losses (13,473) (13,473) (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 572 572 572
Depreciation and
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 ($168,300,000 decrease)
and VOBA ($334,400,000 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
($26,200,000 decrease) and VOBA ($23,900,000 increase) assets.
<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) (12,762)
Net realized gains 10,063 10,063 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 1,696 1,696
Depreciation and
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 ($195,200,000 decrease)
and VOBA ($359,100,000 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
($18,500,000 decrease) and VOBA ($21,300,000 increase) assets.
----
25
