Prospectus: August 1, 2000
The Pilot Classic Variable Annuity
Issued by
JEFFERSON PILOT FINANCIAL INSURANCE COMPANY
In connection with
JPF VARIABLE ANNUITY SEPARATE ACCOUNT
One Granite Place, Concord, NH 03301
Telephone No.: 1-800-258-3648, Ext. 5394
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This Prospectus describes the Pilot Classic Variable Annuity (the "Policy"),
an individual flexible premium deferred variable annuity offered by Jefferson
Pilot Financial Insurance Company ("we", "our" or the "Company"). The Policy is
designed to help you plan for retirement or other long-term purposes. You may
purchase it on either a tax qualified or non-tax qualified basis.
Because this is a flexible premium annuity policy, you may pay multiple
premiums. We allocate your premiums among the 19 Variable Sub-accounts of the
JPF Variable Annuity Separate Account and the 3 Interest Rate Guarantee Periods
of the Guaranteed Interest Account in the proportions that you choose. Each
Variable Sub-account invests exclusively in shares of one of the following
Portfolios:
JPVF International Equity Portfolio
JPVF World Growth Stock Portfolio
JPVF Emerging Growth Portfolio
JPVF Capital Growth Portfolio
JPVF Small Company Portfolio
JPVF Growth Portfolio
JPVF S&P 500 Index Portfolio
JPVF Value Portfolio
JPVF Balanced Portfolio
JPVF High Yield Bond Portfolio
JPVF Money Market Portfolio
Fidelity VIP Growth Portfolio
Fidelity VIP Equity-Income Portfolio
Fidelity VIP II Contrafund[RegTM] Portfolio
MFS Research Series
MFS Utilities Series
Oppenheimer Capital Appreciation Fund/VA
Oppenheimer Bond Fund/VA
Oppenheimer Strategic Bond Fund/VA
We may make available other allocation options in the future. Not all Variable
Sub-accounts or Interest Rate Guarantee Periods may be available in all states.
You may not purchase a Non-Qualified Policy if you or the Annuitant are over 90
years old. You may not purchase certain types of Qualified Policies if you are
over 80 years old.
Your Accumulation Value will vary up or down depending on the investment
performance of the Variable Sub-accounts to which you have allocated your
premium payments. We do not guarantee any minimum Accumulation Value for amounts
allocated to the Variable Sub-accounts. Amounts which you allocate to the
Guaranteed Interest Account will earn a specified interest rate. A Market Value
Adjustment ("MVA") could increase or decrease the value of amounts withdrawn,
transferred, or annuitized from the Guaranteed Interest Account.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This Prospectus sets forth the information you should know about the Policy. You
should read it before investing and keep it for future reference. We have filed
a Statement of Additional Information with the Securities and Exchange
Commission ("SEC"). The current Statement of Additional Information is dated
August 1, 2000. The information in the Statement of Additional Information is
incorporated by reference in this Prospectus. You can obtain a free copy by
writing us or calling us at the address or telephone number given above or
checking the appropriate box on the application at time of purchase. The Table
of Contents of the Statement of Additional Information appears at page 42 of
this Prospectus.
This Prospectus is valid only if accompanied or preceded by current prospectuses
for the Portfolios listed above. Please read this Prospectus and the
prospectuses for the Portfolios carefully and retain them for your future
reference.
Policies and shares of the Portfolios are not deposits or obligations of or
guaranteed by any bank. They are not federally insured by the FDIC or any other
government agency. Investing in the Policies involves certain investment risks,
including possible loss of principal invested. This Prospectus and other
information about the JPF Variable Annuity Separate Account required to be filed
with the SEC can be found in the SEC's Web Site at http://www.sec.gov or may be
obtained from the SEC's Public Reference Room by calling 202-942-8090.
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table of contents
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Page
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DEFINITIONS............................................................ 4
SUMMARY INFORMATION ABOUT YOUR POLICY.................................. 6
FEE TABLES............................................................. 10
Owner Transaction Expenses........................................... 10
Separate Account Annual Expenses..................................... 10
Portfolio Company Annual Expenses.................................... 11
Examples............................................................. 12
ALLOCATION OPTIONS..................................................... 14
Separate Account Investments......................................... 14
Mixed and Shared Funding: Conflicts of interest...................... 16
The Guaranteed Interest Account...................................... 16
Market Value Adjustment.............................................. 17
THE PILOT CLASSIC VARIABLE ANNUITY POLICY.............................. 18
Application and Issuance of Policies................................. 18
Free Look Period..................................................... 18
Premium Payments..................................................... 18
Initial Premium Payment............................................ 19
Additional Premium Payments........................................ 19
Allocation of Premium Payments..................................... 19
Accumulation Value................................................... 19
Separate Account Accumulation Unit Value........................... 19
Minimum Accumulation Value......................................... 20
Transfers............................................................ 20
Telephone Transfers and Reallocations............................. 21
Dollar Cost Averaging................................................ 21
Automatic Rebalancing................................................ 21
DISTRIBUTIONS UNDER THE POLICY ........................................ 22
Withdrawals.......................................................... 22
Systematic Withdrawal Plan........................................... 23
Annuity Payments..................................................... 23
Maturity Date...................................................... 23
Election of Payment Option......................................... 24
Payment Options...................................................... 24
Death Benefit........................................................ 25
Death of Owner Prior to Maturity Date............................. 25
IRS Required Distribution......................................... 26
Spousal Continuation of Policy.................................... 26
Death of Annuitant Prior to Maturity Date......................... 26
Death of Annuitant on or After Maturity Date...................... 26
Death of Owner on or After Maturity Date.......................... 26
Payment of Death Benefit to Beneficiary........................... 26
Payment Not Honored by Bank ......................................... 27
Beneficiary.......................................................... 27
Restrictions Under Qualified Policies................................ 27
Restrictions Under Section 403(b) Plans.............................. 27
CHARGES AND DEDUCTIONS................................................. 27
Withdrawal Charge.................................................... 27
Mortality and Expense Risk Charge.................................... 28
Administrative Expense Charge........................................ 28
Annual Administrative Fee............................................ 28
Optional Enhanced Death Benefit Charges.............................. 29
Optional Extended Care Confinement & Terminal Illness
Rider Charge......................................................... 29
Transfer Charge...................................................... 29
Premium Taxes........................................................ 29
Federal, State and Local Taxes....................................... 29
Other Expenses Including Investment Advisory Fees.................... 29
Reduction in Charges for Certain Groups ............................. 29
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES......................................................... 30
Taxation of Annuities................................................ 31
In General......................................................... 31
Possible Changes in Taxation....................................... 31
Withdrawals from Qualified Policies................................ 31
Withdrawals from Non-Qualified Policies............................ 31
Annuity Payments................................................... 31
Penalty Tax........................................................ 32
Death Benefit Proceeds............................................. 32
Gifts and Other Transfers or
Exchanges of the Policy.......................................... 32
Multiple Policies.................................................. 32
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Withholding........................................................ 33
Other Tax Consequences............................................. 33
Qualified Plans.................................................... 33
Qualified Pension and Profit Sharing Plans......................... 33
Individual Retirement Annuities.................................... 33
Tax-Sheltered Annuities............................................ 34
Section 457 Deferred Compensation
("Section 457") Plans............................................. 34
JEFFERSON PILOT FINANCIAL INSURANCE COMPANY
INSURANCE COMPANY ................................................... 34
The Separate Account................................................. 35
DISTRIBUTOR OF THE POLICIES............................................ 35
VOTING RIGHTS.......................................................... 36
LOANS.................................................................. 36
ADDITIONAL INFORMATION ABOUT
THE SEPARATE ACCOUNT................................................. 37
Addition, Deletion, Or Substitution of Investments .................. 37
Performance Data..................................................... 38
Company Ratings...................................................... 39
GENERAL POLICY PROVISIONS............................................. 40
LEGAL PROCEEDINGS...................................................... 41
AVAILABLE INFORMATION.................................................. 41
STATEMENT OF ADDITIONAL
INFORMATION TABLE OF CONTENTS ....................................... 42
APPENDIX I - WITHDRAWAL CHARGE
CALCULATION.......................................................... I-1
APPENDIX II -- MARKET VALUE
ADJUSTMENT CALCULATION AND
EXAMPLES............................................................. II-1
FUND PROSPECTUSES
Jefferson Pilot Variable Fund, Inc................................... JPVF-l
Fidelity's Variable Insurance Products
Funds (VIP and VIP II)............................................. VIP-I
MFS Variable Insurance Trust......................................... MFSRS-1
Oppenheimer Variable Account Funds
(OVAF)......................................................... OVAF-1
This Prospectus does not constitute an offering in any jurisdiction in which
such offering may not lawfully be made. No dealer, salesperson or other person
is authorized to give any information or make any representations in connection
with this offering other than those contained in this Prospectus, and, if given
or made, such other information or representations must not be relied upon.
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definitions
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Accumulation Unit--A unit of measure which we use to calculate Separate Account
Value during the Pay-in Period.
Accumulation Value -- The value of all of the Accumulation Units held under your
Policy in the Separate Account plus the value of all amounts held under your
Policy in the Guaranteed Interest Account.
Annuitant--The natural person upon whose life the Annuity Payments are based.
You will be the Annuitant unless you name someone else to be the Annuitant in
the application. The Annuitant cannot be changed unless the Annuitant named in
the application dies.
Annuity Payments--The payments we make to the Payee beginning on the Maturity
Date. The amount of the Annuity Payments will be based on the Accumulation Value
and the age and sex of the Annuitant on the Maturity Date, and the payment
option and payment frequency that you select.
Annuity Unit--A unit of measure we use to calculate the amount of each variable
annuity payment.
Beneficiary--The persons or entities you designate to receive the Death Benefit
under your Policy.
Code--The Internal Revenue Code of 1986, as amended.
Company (our, we, us)--Jefferson Pilot Financial Insurance Company.
Death Benefit--The amount payable upon the death of the Owner during the Pay-in
Period.
Due Proof of Death--Information required by the Company to process a claim for a
Death Benefit, including a death certificate and a death claim form acceptable
to the Company.
Guaranteed Interest Account--An allocation option available under the Policy
that provides a Guaranteed Interest Rate for a specified Interest Rate Guarantee
Period. This rate will never be less than 3.00% per year. We guarantee the
Guaranteed Interest Account, and it is not part of the Separate Account.
Guaranteed Interest Account Value--The portion of your Accumulation Value held
in the Guaranteed Interest Account.
Guaranteed Interest Rate--The applicable effective annual interest rate we will
credit the Guaranteed Interest Account Value during each Interest Rate Guarantee
Period. The rate is guaranteed to be at least 3.00% per year.
Interest Rate Guarantee Period--A specified period which begins on the date that
a premium payment is allocated to (or a portion of Accumulation Value is
transferred to) the Guaranteed Interest Account to accumulate at a Guaranteed
Interest Rate. Currently we offer one-year, three-year, and five-year Interest
Rate Guarantee Periods.
Investment Option-- Each Variable Sub-account of the Separate Account.
Issue Age--The age of the Owner on the Policy Date.
Jefferson Pilot Variable Fund, Inc. ("JPVF")--An open-end management investment
company registered under the 1940 Act. JPVF was previously known as Chubb
America Fund, Inc. and changed its name as part of the acquisition of Chubb Life
and its affiliates by Jefferson-Pilot Corporation.
Jefferson Pilot Funds--The Portfolios of JPVF which are available under the
Policies-- International Equity Portfolio, World Growth Stock Portfolio,
Emerging Growth Portfolio, Capital Growth Portfolio, Small Company Portfolio,
Growth Portfolio, S&P 500 Index Portfolio, Value Portfolio, Balanced Portfolio,
High Yield Bond Portfolio and Money Market Portfolio.
Market Value Adjustment ("MVA")--A positive or negative adjustment applied to
the Guaranteed Interest Account Value in the event of a premature Full
Withdrawal, Partial Withdrawal, transfer or annuitization that is requested
prior to the end of a 3-year or 5-year Interest Rate Guarantee Period. The MVA
does not apply during the last 30 days of the Interest Rate Guarantee Period.
Maturity Date--The date on which we make the first Annuity Payment under your
Policy. The Maturity Date is the first day of the Pay-out Period.
MFS Funds--Mutual fund series of the MFS[RegTM] Variable Insurance Trust which
are available under the Policy--MFS Research Series and MFS Utilities Series.
MFS[Reg TM] Variable Insurance Trust--An open-end management investment company
registered under the 1940 Act.
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Oppenheimer Funds--The Portfolios of the Oppenheimer Variable Account Funds
which are available under the Policy--Oppenheimer Capital Appreciation Fund/VA,
Oppenheimer Strategic Bond Fund/VA and Oppenheimer Bond Fund/VA.
Oppenheimer Variable Account Funds ("OVAF")--An open-end management investment
company registered under the 1940 Act.
Owner (you, your)--The person or entity entitled to the ownership rights of the
Policy. The Owner is the person in whose name the Policy is issued. It is the
person or entity named in the application, unless otherwise changed. Joint
Owners are permitted only if they are spouses unless we consent otherwise. You
may change the Owner by sending us a signed request. Our consent is needed to
change the Owner.
Payee--The person or entity you designate to receive Annuity Payments under your
Policy.
Pay-in Period--The period during which you make payments to us. In the Policy
the Pay-in Period is referred to as the Accumulation Period. The Pay-in Period
is the period between the Policy Date and the Maturity Date.
Pay-out Period--The period during which we make payments to you. In the Policy
the Pay-out Period is referred to as the Annuity Period. The Pay-out Period
begins on the Maturity Date and ends with the last Annuity Payment.
Policy--The Pilot Classic Variable Annuity, an individual flexible premium
deferred variable annuity policy that is described in this Prospectus. In some
states it may be referred to as a certificate.
Policy Date--The effective date of your Policy and the date from which we
measure your Policy years, quarters, months and anniversaries.
Policy Year--The first Policy Year is the annual period which begins on the
Policy Date. Subsequent Policy Years begin on each anniversary of the Policy
Date.
Portfolios--The Jefferson Pilot Funds, VIP Portfolios, MFS Funds and Oppenheimer
Funds.
Request--A request in a form satisfactory to us, which is received by our
Variable Annuity Service Center.
Separate Account--The JPF Variable Annuity Separate Account, a separate account
of Jefferson Pilot Financial Insurance Company, which consists of assets set
aside by the Company, the investment performance of which is kept separate from
that of the general assets and all other separate account assets of the Company.
The Separate Account is registered as a unit investment trust under the 1940
Act.
Separate Account Value--The portion of Accumulation Value held in the Separate
Account. There is no guaranteed or minimum Separate Account Value.
Surrender Value--Proceeds payable upon a surrender of the Policy, equal to:
o the Accumulation Value
o plus or minus any applicable MVA
o minus any applicable Withdrawal Charge
o minus any applicable Annual Administrative Fee
o minus any premium tax payable by us and not previously deducted
Valuation Day--Any day on which the New York Stock Exchange is open for trading
except when the Securities and Exchange Commission has determined that a state
of emergency exists. In addition, the Company will be closed on the following
local or regional business holidays which shall not constitute a Valuation Day:
Good Friday, the Friday following Thanksgiving and the day before and/or
following Christmas Day.
Valuation Period--The period of time beginning at the close of business on the
New York Stock Exchange on any Valuation Day and ending at the close of business
on the next Valuation Day. A Valuation Period may be more than one day.
Variable Annuity Service Center-- One Granite Place, P.O. Box 515, Concord, NH
03302-0515. Notices, Requests and premium payments under the Policy must be sent
to our Variable Annuity Service Center.
Variable Sub-account--Separate Account assets are divided into Variable
Sub-accounts. Assets of each Variable Sub-account will be invested in shares of
a corresponding Portfolio.
VIP Funds--The Variable Insurance Products Fund ("VIP") and the Variable
Insurance Products Fund II ("VIP II"), which are open-end management investment
companies registered under the 1940 Act.
VIP Portfolios--The Portfolios of the VIP Funds which are available under the
Policy--VIP Equity-Income Portfolio, VIP Growth Portfolio and VIP II
Contrafund[Reg TM] Portfolio.
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Summary Information about your Policy
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The following summary describes some of the more important features of the
Policy. The Policy is more fully described in the rest of the Prospectus. Please
read the Prospectus carefully.
1. The Policy
The Policy is a flexible premium deferred variable annuity policy. It is
designed for tax-deferred retirement investing. It can be purchased on a
non-qualified basis ("Non-Qualified Policy") or in connection with certain plans
qualifying for favorable Federal income tax treatment ("Qualified Policy"). The
Policy, like all deferred annuity policies, has two phases: the Pay-in Period
and the Pay-out Period. During the Pay-in Period, earnings accumulate on a
tax-deferred basis and are taxed as income when you make a withdrawal. The
Pay-out Period begins when you (or your designated Payee) begin receiving
payments from us under one of the payment options. The amount of money
accumulated under your Policy during the Pay-in Period will be used to determine
the amount of our payments to you during the Pay-out Period.
You may allocate your premium payments to any combination of the allocation
options under the Policy. However, over the life of your Policy, you are
currently limited to allocating your premium payments to no more than 15 of the
current or future Variable Sub-accounts. We may change this limitation in the
future at our discretion. The allocation options currently available are the 19
Variable Sub-accounts of the Separate Account and the three Interest Rate
Guarantee Periods of the Guaranteed Interest Account.
These allocation options may not be available in all states.
Each Variable Sub-account will invest in a single investment portfolio (a
"Portfolio") of a mutual fund. Because the Separate Account Value will increase
or decrease depending on the investment experience of the Variable Sub-accounts
to which you allocate your premiums, you bear the entire investment risk with
respect to amounts allocated to the Variable Sub-accounts. The investment
policies and risks of each Portfolio are described in prospectuses for the
Portfolios which accompany this Prospectus.
The Policy may be issued as a group Policy in certain states. If you are covered
under a group Policy, you will be issued a certificate as evidence of your
participation under the group Policy. The description of the Policy in this
Prospectus applies equally to a certificate under a group Policy unless
otherwise described.
2. Purchasing the Policy
You can obtain an application from your registered representative. We must
receive a completed application and an initial premium payment of at least
$5,000 before we will issue a Non-Qualified Policy. A lower initial premium
payment of $2,000 is required for a Qualified Policy. Your subsequent premium
payments must be at least $50. We will not issue a Policy to you if either you
or the Annuitant are more than 90 years old. For certain types of Qualified
Policies you must be age 80 or younger before we will issue a Policy to you.
3. Investment Options
You can allocate and reallocate your investment among the Variable Sub-accounts.
Each Variable Sub-account invests in a single Portfolio. Under the Policy, the
Separate Account currently invests in the following Portfolios:
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Jefferson Pilot Variable Fund, Inc:
International Equity Portfolio
World Growth Stock Portfolio
Emerging Growth Portfolio
Capital Growth Portfolio
Small Company Portfolio
Growth Portfolio
S&P 500 Index Portfolio
Value Portfolio
Balanced Portfolio
High Yield Bond Portfolio
Money Market Portfolio
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Variable Insurance Products Fund:
VIP Growth Portfolio
VIP Equity-Income Portfolio
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Variable Insurance Products Fund II:
VIP II Contrafund[Reg TM] Portfolio
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MFS[Reg TM] Variable Insurance Trust:
Research Series
Utilities Series
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Oppenheimer Variable Account Funds:
Capital Appreciation Fund/VA
Bond Fund/VA
Strategic Bond Fund/VA
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Each Portfolio holds its assets separately from the assets of the other
Portfolios. Each Portfolio has distinct investment objectives and policies which
are described in the accompanying prospectuses for the Portfolios.
4. The Guaranteed Interest Account
We currently offer three different Interest Rate Guarantee Periods in the
Guaranteed Interest Account, lasting for one, three and five years. Not all
periods are available in all states. We will credit specified interest rates to
the amounts you
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allocate to the Guaranteed Interest Account. The amounts you allocate to the
Guaranteed Interest Account may be subject to an MVA, if you request a
withdrawal, transfer or annuitization 31 days or more prior to the end of a
3-year or 5-year Interest Rate Guarantee Period. Because of this adjustment and
for other reasons, the amount we pay you upon a withdrawal or apply to a
transfer or annuitization may be more or less than the Guaranteed Interest
Account Value at the time of the transaction. However, the MVA will never reduce
the earnings on amounts allocated to the Guaranteed Interest Account to less
than 3.0% per year before any applicable Withdrawal Charges.
5. Expenses
Mortality and Expense Risk Charge. We deduct a daily charge equal to a
percentage of the net assets in the Separate Account for the mortality and
expense risks that we assume. The effective annual rate of this charge is 1.10%
of the Separate Account Value. This charge does not apply to the Guaranteed
Interest Account.
Administrative Expense Charge. We deduct a daily charge equal to a percentage
of the net assets in each Variable Sub-account for administering the Separate
Account. The effective annual rate of this charge is 0.15% of the daily value of
net assets in each Variable Sub-account. We guarantee that we will not increase
this charge. This charge does not apply to the Guaranteed Interest Account.
Annual Administrative Fee. We impose a fee each year for Policy maintenance and
related administrative expenses. This fee is $35 per Policy Year. We guarantee
that we will not increase this fee. The fee will be deducted from the
Accumulation Value on the last day of each Policy Year and upon Full Withdrawal
of the Accumulative Value before a Policy anniversary. We will not deduct the
fee if 100% of the Accumulation Value is held in the Guaranteed Interest
Account. We will also not deduct the fee for a Policy Year if, on the last day
of that year, the Accumulation Value is $50,000 or greater.
Transfer Charge. Although we currently are not charging a transfer fee, the
Policy permits us to charge you a $10 fee for each transfer in excess of 12
during any Policy Year.
Optional Enhanced Death Benefit Charges. To provide additional protection,
you may choose one of two Optional Enhanced Death Benefits. If you
choose Option 1, you will pay an additional charge equal to an effective annual
rate of 0.10% of the daily net assets of the Separate Account. If you choose
Option 2, you will pay an additional charge equal to an effective annual rate of
0.15% of the daily net assets of the Separate Account.
Optional Extended Care Confinement & Terminal Illness Rider Charge. If you wish,
you may elect to purchase this rider for an additional charge equal to an
effective annual rate of 0.05% of the daily net assets of the Separate Account.
Withdrawal Charge. We may deduct a Withdrawal Charge from the amount of any
Partial or Full Withdrawal. If a premium payment remains in your Policy for at
least seven years, you will not incur a Withdrawal Charge on that amount.
However, a Withdrawal Charge may apply to withdrawals of amounts invested less
than seven years. A separate Withdrawal Charge Schedule applies to each premium
payment. The Withdrawal Charge is a percentage of each premium payment withdrawn
within the indicated time period. The Withdrawal Charge percentages are as
follows:
Completed Years
Elapsed Since Percentage
Premium Payment Charge
--------------- ------
Less than 1 8%
1 8%
2 7%
3 6%
4 5%
5 4%
6 3%
7 0%
The Withdrawal Charge will not apply to withdrawals attributable to investment
gains on your premiums allocated to Variable sub-accounts, interest credited to
amounts held in the Guaranteed interest Account and certain other distributions.
(See "Withdrawal Charge")
In addition to a free withdrawal of investment gain, each year you are entitled
to a free withdrawal amount equal to 10% of the aggregate premium payments at
the time of the withdrawal on which we will not deduct a Withdrawal Charge.
Premium Tax. Some states charge a premium tax. We will deduct premium taxes if
we must pay them. This may occur, for example, at the time when you pay the
premium, surrender the policy, make a Partial Withdrawal, when the Policy
reaches the Maturity Date, or when a Death Benefit is paid.
Fund Expenses. In addition to our charges under the Policy, each Portfolio
deducts amounts from its assets to pay its investment advisory fees and other
expenses.
6. Payment Options
The Policy offers four payment options. You may choose a fixed annuity, a
variable annuity, or a combination of both. The payment options include:
o Income for a fixed period (available as a fixed annuity only).
o Life Income (Life Only; Life with guaranteed periods; Life with installment
refund--available as a fixed annuity only).
o Interest Only (available as a fixed annuity only).
o Income of a Fixed Amount (available as a fixed annuity only).
We reserve the right to offer additional payment options.
You may change your payment option at any time before the Maturity Date. You may
select the Maturity Date of your Policy. The Maturity Date may not be earlier
than the second Policy anniversary date. The latest Maturity Date you may select
is the later of Annuitant's 90th birthday or ten years from the Policy Date. If
your Policy is issued in connection with a qualified plan and you select a
Maturity Date that is later than the date the Annuitant attains age 70 1/2, you
may be required to make Partial Withdrawals prior to the Maturity Date to
satisfy any minimum distribution requirements of the Code or the qualified plan.
If you do not select a Maturity Date, the Maturity Date will be the later of the
tenth Policy anniversary date or the Policy anniversary date on or immediately
following the Annuitant's 70th birthday.
If you select Annuity Payments on a variable basis, the amount of our payments
to you will be affected by the investment performance of the Variable
Sub-accounts you have selected. A fixed annuity payment option provides for
payments that will be set on the Maturity Date and will not change. If you
select a payment option that is a combination of variable and fixed payments,
you must specify the allocation of the Accumulation Value between the fixed
payment option and the variable payment option. You may not change the payment
option or the frequency of Annuity Payments after we begin making Annuity
Payments to you. After Annuity Payments begin, you cannot make a Full or Partial
Withdrawal.
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7. Taxes
You should consult a qualified tax advisor for personalized answers. If you are
a natural person, generally, earnings under your Policy are not taxed until
amounts are withdrawn or distributions are made (e.g., a Full or Partial
Withdrawal, or Annuity Payment). You may be deemed to have received a
distribution and taxes may be due if you pledge or assign your Policy.
Generally, a portion of any distribution or deemed distribution will be taxable
as ordinary income. The taxable portion of certain distributions may be subject
to withholding. In addition, a penalty tax may apply to certain distributions or
deemed distributions under the Policy.
Special rules apply if the Policy is owned by a company or other legal entity.
Generally, such an Owner must include in income any increase in the excess of
the Accumulation Value over the "investment in the contract" during the taxable
year.
8. Withdrawals
At any time during the Pay-in Period, you may elect to receive all or a portion
of your Policy's Surrender Value. The minimum Partial Withdrawal amount you may
receive is $250 from a Variable Sub-account and $1,000 from the Guaranteed
Interest Account. After a Partial Withdrawal, the remaining Accumulation Value
must be at least $2,000.
Although you have access to your money during the Pay-in Period, certain
charges, such as the Withdrawal Charge, Annual Administrative Fee and state
premium taxes, may be deducted on a withdrawal. You may also incur Federal
income tax liability or tax penalties. In addition, if you have allocated some
of the value of your Policy to the Guaranteed Interest Account, the amount of
your proceeds may be increased or decreased by an MVA.
9. Death Benefit
We will pay a Death Benefit while the Policy is in force and before the Maturity
Date, if the Owner dies, or if the Annuitant dies and the Owner is not a natural
person. To receive the Death Benefit payment, the Beneficiary must return the
Policy, provide us with Due Proof of Death, and elect a payment option. The
Death Benefit will be at least equal to the Accumulation Value on the date we
receive Due Proof of Death of the Owner (or Joint Owner). No Withdrawal Charge,
MVA or Annual Administrative Fee is imposed upon amounts paid as a Death
Benefit. You may also elect an optional Enhanced Death Benefit at the time you
purchase your Policy. If you elect one of the optional Enhanced Death Benefits,
you will pay an additional charge.
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10. Transfers
During the Pay-in Period, you may transfer Accumulation Value among the
allocation options subject to certain limitations. The minimum amount you may
transfer from any Variable Sub-account is $250. The minimum amount you may
transfer from the Guaranteed Interest Account is $1,000. Transfers from the
Guaranteed Interest Account may be subject to an MVA.
During the Pay-out Period, if you have chosen a variable annuity payment option,
you may transfer Separate Account Value between the various Variable
Sub-accounts. However, if you have chosen a fixed annuity payment option,
transfers are not permitted.
11. Cancellation
You have a limited time period in which to return your Policy for cancellation
and receive a refund as described in your Policy. This time period depends on
the state in which your Policy is issued. In most states, it is ten days after
you receive the Policy. If your Policy replaces another Policy, you have 20 days
in which to cancel your Policy. The amount of your refund will depend on the
state in which your Policy was issued. In most states, we will pay you an amount
equal to the Accumulation Value on the date we receive the Policy from you and
we will not deduct any Withdrawal Charges or administrative charges that would
otherwise apply. The Accumulation Value may be more or less than your premium
payments. In some states, we are required to refund your premium payments minus
any Partial Withdrawals you may have already made from your Policy. Since state
laws differ as to the time period you have to return your Policy and the amount
of the refund to which you would be entitled, you should refer to your Policy
for specific information about your circumstances.
12. Inquiries
If you have a request or a question about procedures or your Policy, you can
write to us at the Variable Annuity Service Center, One Granite Place, P.O. Box
515, Concord, New Hampshire 03302-0515. You may also send us a fax at
603-226-5123 or call us at 1-800-258-3648, EXT. 5394. When contacting us you
should include the Policy number, your name and the Annuitant's name. Please
make sure you also sign the inquiry or request.
The foregoing summary is qualified in its entirety by the information in the
remainder of this Prospectus, in the Statement of Additional Information, in the
prospectus for each of the underlying Portfolios and in the Policy. You should
refer to these documents for more detailed information. This Prospectus
generally describes only the Policy and the Separate Account. Separate
prospectuses attached hereto describe each Portfolio.
9
<PAGE>
fee tables
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Owner Transaction Expenses
Sales Charge on Premium Payments................................ none
Maximum Withdrawal Charge
(as a % of premium payments withdrawn) (1) ..................... 8%
Annual Administrative Fee (2)................................... $35
Transfer Fee.................................................... No fee for first 12 transfers each
year; $10 for each
additional transfer
(currently not assessed)
Separate Account Annual Expenses
(effective annual rate as a percentage
of average daily net assets)
Mortality and Expense Risk Charge .............................. 1.10%
Administrative Expense Charge................................... 0.15%
-----
Total Separate Account Annual Expenses.......................... 1.25%
Optional Benefits
Optional Enhanced Death Benefit Option 1 Charge ................ 0.10%
Optional Enhanced Death Benefit Option 2 Charge ................ 0.15%
Optional Extended Care Confinement & Terminal
Illness Rider Charge ......................................... 0.05%
Total Separate Account Annual Expenses With
Maximum Optional Benefits Selected ........................... 1.45%
</TABLE>
(1) The Withdrawal Charge is not applicable to premium payments withdrawn
at least seven years after they are made, to the withdrawal of
investment gains on premiums allocated to the Variable Sub-accounts, to
the withdrawal of interest credited on premiums allocated to the
Guaranteed Interest Account or to the first 10% of aggregate premium
payments withdrawn during each Policy Year. (See "Free Withdrawal
Amount.")
(2) This fee is waived if, on the last day of that Policy Year, your
Accumulation Value is at least $50,000 or if 100% of your
Accumulation Value is allocated to the Guaranteed Interest Account.
Portfolio Company Annual Expenses
(as a percentage of average net assets)
<TABLE>
<CAPTION>
Total Portfolio
Management Other Annual
Fees Expenses Expenses
(After Expense (After Expense (After Expense
Reimbursements) Reimbursements) Reimbursements)
--------------- --------------- ---------------
<S> <C> <C> <C>
JPVF International Equity Portfolio...................... 1.00% 0.25% 1.25%
JPVF World Growth Stock Portfolio........................ 0.75% 0.13% 0.88%
JPVF Emerging Growth Portfolio........................... 0.80% 0.14% 0.94%
JPVF Capital Growth Portfolio............................ 1.00% 0.07% 1.07%
JPVF Small Company Portfolio............................. 0.75% 0.11% 0.86%
JPVF Growth Portfolio.................................... 0.75% 0.21% 0.96%
JPVF S&P 500 Index Portfolio............................. 0.24% 0.04% 0.28%(1)
JPVF Value Portfolio..................................... 0.75% 0.10% 0.85%
JPVF Balanced Portfolio.................................. 0.75% 0.15% 0.90%
JPVF High Yield Bond Portfolio........................... 0.75% 0.40% 1.15%
JPVF Money Market Portfolio.............................. 0.50% 0.10% 0.60%
MFS Research Series...................................... 0.75% 0.11% 0.86%
MFS Utilities Series..................................... 0.75% 0.26% 1.01%
Oppenheimer Capital Appreciation Fund/VA................. 0.68% 0.02% 0.70%
Oppenheimer Bond Fund/VA................................. 0.72% 0.01% 0.73%
Oppenheimer Strategic Bond Fund/VA....................... 0.74% 0.04% 0.78%
VIP Equity-Income Portfolio.............................. 0.48% 0.09% 0.57%(2)
VIP Growth Portfolio..................................... 0.58% 0.08% 0.66%(2)
VIP II Contrafund[Reg TM] Portfolio...................... 0.58% 0.09% 0.67%(2)
</TABLE>
(1) JPVF S&P 500 Index Portfolio commenced operations on May 1, 2000.
Total Portfolio Annual Expenses for this Portfolio are based on
estimated "Other Expenses" for the fiscal year ending December 31,
2000. The Portfolio's investment adviser has agreed to reimburse the
Portfolio for total annual expenses above 0.28% of average net assets.
Without such reimbursement, estimated total annual expenses are
expected to be 0.35%. The expense reimbursement plan is pursuant to a
contract with the Portfolio's investment adviser which may be
terminated by that investment adviser at any time after April 30, 2001
and terminates automatically on December 31, 2005.
(2) FMR or the fund has entered into varying arrangements with third
parties who either paid or reduced a portion of the class' expenses.
With these arrangements, the total annual expenses presented in the
table were 0.56% for the VIP Equity-Income Portfolio, 0.65% for the
VIP Growth Portfolio, and 0.65% for the VIP II Contrafund[Reg TM]
Portfolio.
10
<PAGE>
Examples
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets, assuming the entire Accumulation Value is allocated
to the applicable Variable Sub-account and assuming you have selected the
optional benefits with the maximum charges:
1. If you surrender the Policy you would pay the following expenses:
<TABLE>
<CAPTION>
1 Year 3 Years
------ -------
<S> <C> <C>
Variable Sub-accounts:
JPVF International Equity Portfolio............................. $108 $161
JPVF World Growth Stock Portfolio............................... $104 $149
JPVF Emerging Growth Portfolio.................................. $105 $151
JPVF Capital Growth Portfolio................................... $106 $155
JPVF Small Company Portfolio.................................... $104 $149
JPVF Growth Portfolio........................................... $105 $152
JPVF S&P 500 Index Portfolio (1)................................ $ 99 $130
JPVF Value Portfolio............................................ $104 $148
JPVF Balanced Portfolio......................................... $105 $150
JPVF High Yield Bond Portfolio.................................. $107 $158
JPVF Money Market Portfolio..................................... $102 $140
MFS Research Series ............................................ $104 $149
MFS Utilities Series ........................................... $106 $153
Oppenheimer Capital Appreciation Fund/VA........................ $103 $143
Oppenheimer Bond Fund/VA........................................ $103 $144
Oppenheimer Strategic Bond Fund/VA.............................. $103 $146
VIP Equity-Income Portfolio..................................... $101 $139
VIP Growth Portfolio............................................ $102 $142
VIP II Contrafund[Reg TM] Portfolio............................. $102 $143
</TABLE>
2. If you annuitize or do not surrender the Policy, you would pay the following
expenses:
<TABLE>
<CAPTION>
1 Year 3 Years
------ -------
<S> <C> <C>
Variable Sub-accounts:
JPVF International Equity Portfolio............................. $28 $91
JPVF World Growth Stock Portfolio............................... $24 $79
JPVF Emerging Growth Portfolio.................................. $25 $81
JPVF Capital Growth Portfolio................................... $26 $85
JPVF Small Company Portfolio.................................... $24 $79
JPVF Growth Portfolio........................................... $25 $82
JPVF S&P 500 Index Portfolio (1)................................ $19 $60
JPVF Value Portfolio............................................ $24 $78
JPVF Balanced Portfolio......................................... $25 $80
JPVF High Yield Bond Portfolio.................................. $27 $88
JPVF Money Market Portfolio..................................... $22 $70
MFS Research Series ............................................ $24 $79
MFS Utilities Series ........................................... $26 $83
Oppenheimer Capital Appreciation Fund/VA........................ $23 $73
Oppenheimer Bond Fund/VA........................................ $23 $74
Oppenheimer Strategic Bond Fund/VA.............................. $23 $76
VIP Equity-Income Portfolio..................................... $21 $69
VIP Growth Portfolio............................................ $22 $72
VIP II Contrafund[Reg TM] Portfolio............................. $22 $73
</TABLE>
(1) The examples in these tables assume that the expense reimbursement plan
remains in effect for the time periods shown. The expense reimbursement plan
is pursuant to a contract with the Portfolio's investment adviser which may
be terminated by that investment adviser at any time after April 30, 2001
and terminates automatically on December 31, 2005.
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets, assuming the entire Accumulation Value is allocated
to the applicable Variable Sub-account and assuming you have not selected any
of the optional benefits:
1. If you surrender the Policy you would pay the following expenses:
<TABLE>
<CAPTION>
1 Year 3 Years
------ -------
<S> <C> <C>
Variable Sub-accounts:
JPVF International Equity Portfolio............................. $106 $154
JPVF World Growth Stock Portfolio............................... $103 $143
JPVF Emerging Growth Portfolio.................................. $103 $145
JPVF Capital Growth Portfolio................................... $104 $149
JPVF Small Company Portfolio.................................... $102 $142
JPVF Growth Portfolio........................................... $103 $145
JPVF S&P 500 Index Portfolio (1)................................ $ 97 $124
JPVF Value Portfolio............................................ $102 $142
JPVF Balanced Portfolio......................................... $103 $143
JPVF High Yield Bond Portfolio.................................. $105 $151
JPVF Money Market Portfolio..................................... $100 $134
MFS Research Series ............................................ $102 $142
MFS Utilities Series ........................................... $104 $147
Oppenheimer Capital Appreciation Fund/VA........................ $101 $137
Oppenheimer Bond Fund/VA........................................ $101 $138
Oppenheimer Strategic Bond Fund/VA.............................. $102 $140
VIP Equity-Income Portfolio..................................... $ 99 $133
VIP Growth Portfolio............................................ $100 $136
VIP II Contrafund[Reg TM] Portfolio............................. $100 $136
</TABLE>
2. If you annuitize or do not surrender the Policy, you would pay the following
expenses:
<TABLE>
<CAPTION>
1 Year 3 Years
------ -------
<S> <C> <C>
Variable Sub-accounts:
JPVF International Equity Portfolio............................. $26 $84
JPVF World Growth Stock Portfolio............................... $23 $73
JPVF Emerging Growth Portfolio.................................. $23 $75
JPVF Capital Growth Portfolio................................... $24 $79
JPVF Small Company Portfolio.................................... $22 $72
JPVF Growth Portfolio........................................... $23 $75
JPVF S&P 500 Index Portfolio (1)................................ $17 $54
JPVF Value Portfolio............................................ $22 $72
JPVF Balanced Portfolio......................................... $23 $73
JPVF High Yield Bond Portfolio.................................. $25 $81
JPVF Money Market Portfolio..................................... $20 $64
MFS Research Series ............................................ $22 $72
MFS Utilities Series ........................................... $24 $77
Oppenheimer Capital Appreciation Fund/VA........................ $21 $67
Oppenheimer Bond Fund/VA........................................ $21 $68
Oppenheimer Strategic Bond Fund/VA.............................. $22 $70
VIP Equity-Income Portfolio..................................... $19 $63
VIP Growth Portfolio............................................ $20 $66
VIP II Contrafund[Reg TM] Portfolio............................. $20 $66
</TABLE>
(1) The examples in these tables assume that the expense reimbursement plan
remains in effect for the time periods shown. The expense reimbursement plan
is pursuant to a contract with the Portfolio's investment adviser which may
be terminated by that investment adviser at any time after April 30, 2001
and terminates automatically on December 31, 2005.
We have included the above table and examples to assist you in understanding the
costs and expenses that you will bear directly or indirectly, by investing in
the Separate Account. The table reflects expenses of the Separate Account as
well as the Portfolios. However, the examples do not take into account any
premium taxes you may pay. For additional information you should read "Charges
and Deductions" in the Prospectus and the section on expenses in the Prospectus
for each underlying Portfolio.
11
<PAGE>
allocation options
--------------------------------------------------------------------------------
You may allocate your premium payments to the 19 Variable Sub-accounts of the
Separate Account, to the three Interest Rate Guarantee Periods of the Guaranteed
Interest Account, or to a combination of these allocation options. These
allocation options may not be available in all states. Over the life of your
Policy, you are currently limited to allocating your premium payments to no more
than 15 of the Variable Sub-accounts in existence now or in the future. We
reserve the right to modify this limitation in the future. There is no
guaranteed or minimum Surrender Value for any premium payments or amounts
allocated to any Variable Sub-account.
Separate Account Investments
The Separate Account currently is divided into 19 Variable Sub-accounts. We
reserve the right to add, consolidate or remove Variable Sub-accounts. Each
Variable Sub-account reflects the investment performance of a specific
underlying Portfolio. Currently, 11 Variable Sub-accounts invest in shares of
the Jefferson Pilot Funds, two Variable Sub-accounts invest in shares of the
Variable Insurance Products Fund (VIP), one Variable Sub-account invests in
shares of the Variable Insurance Products Fund II (VIP II), two Variable
Sub-accounts invest in shares of the MFS Funds and three Variable Sub-accounts
invest in shares of the Oppenheimer Funds. JPVF, the VIP Funds, MFS[Reg TM]
Variable Insurance Trust and Oppenheimer Variable Account Funds are open-end
management investment companies and, with the exception of the MFS Utilities
Fund and JPVF International Equity Portfolio, all of the Portfolios available
under the Policies are diversified. Each Portfolio is managed by a registered
investment advisor.
The investment advisor for JPVF is Jefferson Pilot Investment Advisory
Corporation (formerly known as "Chubb Investment Advisory Corporation").
Jefferson Pilot Investment Advisory Corporation has contracted with eight
unaffiliated companies to act as sub-investment managers to the Jefferson Pilot
Funds. These sub-investment managers are shown in the table below.
The investment advisor for VIP and VIP II is Fidelity Management & Research
Company ("FMR"). FMR has entered into sub-advisory agreements with Fidelity
Management & Research (U.K.) Inc., Fidelity Management & Research Far East
Inc., and Fidelity Investments Japan Limited to provide sub-advisory services
to the Contrafund Portfolio.
The investment advisor for the MFS[Reg TM] Variable Insurance Trust is
Massachusetts Financial Services Company ("MFS").
The investment advisor for the Oppenheimer Variable Account Funds is
OppenheimerFunds, Inc.
The investment objective and manager of each Portfolio is as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
EQUITY PORTFOLIO CHOICES
-----------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME OBJECTIVE MANAGER
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
JPVF International Equity Portfolio Long-term growth of capital through investments in securities Lombard Odier International
whose primary trading markets are outside the United States. Portfolio Management Limited
------------------------------------------------------------------------------------------------------------------------------------
JPVF World Growth Stock Portfolio Long-term capital growth through a policy of investing Templeton Investment
primarily in stocks of companies organized in the Counsel, Inc.
U.S. or in any foreign nation. A portion of the Portfolio
may also be invested in debt obligations of companies and
governments of any nation. Any income realized will be
incidental.
------------------------------------------------------------------------------------------------------------------------------------
JPVF Emerging Growth Portfolio Long-term growth of capital. MFS
Dividend and interest income from portfolio securities,
if any, is incidental to the Portfolio's investment
objective of long term growth.
------------------------------------------------------------------------------------------------------------------------------------
JPVF Capital Growth Portfolio Seeks capital growth. Realization of income is not a Janus Capital Corporation
significant investment consideration and any income realized
will be incidental.
------------------------------------------------------------------------------------------------------------------------------------
JPVF Small Company Portfolio Seeks growth of capital. The Portfolio pursues its objective Lord, Abbett & Company
by investing primarily in a diversified portfolio of equity
securities issued by small companies.
------------------------------------------------------------------------------------------------------------------------------------
JPVF Growth Portfolio Capital growth by investing primarily in Strong Capital Management,
equity securities that the Sub-Investment Manager Inc.
believes have above-average growth prospects.
------------------------------------------------------------------------------------------------------------------------------------
JPVF S&P 500 Index Portfolio(1) Seeks investment results that correspond to the total return Barclays Global Fund
of common stocks publicly traded in the United States, as Advisors
represented by the S&P 500[RegTM].
------------------------------------------------------------------------------------------------------------------------------------
JPVF Value Portfolio Long-term growth of capital by investing primarily Credit Suisse Management,
in a wide range of equity issues that may offer LLC
capital appreciation and, secondarily, to seek a
reasonable level of current income.
------------------------------------------------------------------------------------------------------------------------------------
MFS Research Seeks to provide long-term growth of capital and future income. MFS
------------------------------------------------------------------------------------------------------------------------------------
MFS Utilities Seeks capital growth and current income (income above that MFS
available from a portfolio invested entirely in equity
securities).
------------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Capital Appreciation Seeks to achieve capital appreciation by investing in securities OppenheimerFunds, Inc.
Fund/VA of well-known established companies.
------------------------------------------------------------------------------------------------------------------------------------
VIP Equity-Income Portfolio Seeks reasonable income by investing primarily in FMR
income-producing equity securities. In choosing these
securities the Portfolio will also consider the potential for
capital appreciation. The Portfolio's goal is to achieve a
yield which exceeds the composite yield on the securities
comprising the Standards & Poor's Composite Index of 500 Stocks
(S&P 500).
------------------------------------------------------------------------------------------------------------------------------------
VIP Growth Portfolio Seeks to achieve capital appreciation. FMR
------------------------------------------------------------------------------------------------------------------------------------
VIP II Contrafund[RegTM] Portfolio Seeks long-term capital appreciation. FMR
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) "Standard & Poor's[RegTM]", "S&P[RegTM]", "Standard & Poor's 500", and
"500" are tradmarks of the McGraw-Hill Companies, Inc. and have been
licensed for use by the Portfolio. The Portfolio is not sponsored,
endorsed, sold or promoted by Standard & Poor's and Standard & Poor's makes
no representation regarding the advisability of investing in the Portfolio.
12
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
EQUITY AND FIXED INCOME PORTFOLIO CHOICES
------------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME OBJECTIVE MANAGER
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
JPVF Balanced Portfolio Reasonable current income and long-term capital growth, Janus Capital Corporation
consistent with conservation of capital, by investing
primarily in common stocks and fixed income securities.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO CHOICES
------------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME OBJECTIVE Manager
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
JPVF High Yield Bond Portfolio High level of current income by investing primarily in MFS
corporate obligations with emphasis on higher yielding, higher
risk, lower-rated or unrated securities.
------------------------------------------------------------------------------------------------------------------------------------
JPVF Money Market Portfolio Seeks to achieve as high a level of current income as is MFS
consistent with preservation of capital and liquidity.
------------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Bond Fund/VA Seeks a high level of current income. As a secondary OppenheimerFunds Inc.
objective, seeks capital growth when
consistent with its primary objective.
------------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Strategic Bond Fund/VA Seeks a high level of current income principally derived from OppenheimerFunds Inc.
interest on debt securities and to
enhance such income by writing covered call options on
debt securities.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
An investment in the JPVF Money Market Portfolio is neither insured nor
guaranteed by the U.S. Government or the FDIC or any other agency.
* * *
We do not promise that the Portfolios will meet their investment objectives.
Amounts you have allocated to Variable Sub-accounts may grow in value, decline
in value, or grow less than you expect, depending on the investment performance
of the Portfolios in which those Variable Sub-accounts invest. You bear the
investment risk that those Portfolios will not meet their investment objectives.
You should carefully review their prospectuses before allocating amounts to the
Variable Sub-accounts of the Separate Account.
Mixed and Shared Funding: Conflicts of Interest
Shares of the Portfolios are available to insurance company separate accounts
which fund variable annuity and variable life insurance policies, including the
Policy described in the Prospectus. Shares of the Portfolios are offered to
separate accounts of both affiliated and unaffiliated insurance companies. It is
conceivable that, in the future, it may not be advantageous for variable life
insurance separate accounts and variable annuity separate accounts to invest in
these Portfolios simultaneously, since the interests of such owners may differ.
Although neither the Company nor the Portfolios currently foresee any such
disadvantages either to variable life insurance or variable annuity owners, each
Portfolio's Board of Trustees/Directors has agreed to monitor events in order to
identify any material irreconcilable conflicts which may possibly arise and to
determine what action, if any, should be taken in response thereto. If such a
conflict were to occur, one of the separate accounts might withdraw its
investment in a Portfolio. This might force that Portfolio to sell portfolio
securities at disadvantageous prices.
The Guaranteed Interest Account
Premium payments allocated to the Guaranteed Interest Account and transfers to
the Guaranteed Interest Account are not part of the Separate Account. Rather,
the Guaranteed Interest Account is guaranteed by our general account which
supports our insurance and annuity obligations. Interests in the Guaranteed
Interest Account have not been registered with the SEC in reliance upon
exemptions under the Securities Act of 1933 and the Guaranteed Interest Account
has not been registered as an investment company under the Investment Company
Act of 1940 ("1940 Act"). However, disclosures about the Guaranteed Interest
Account may be subject to certain generally applicable provisions of the Federal
securities laws relating to the accuracy and completeness of statements made in
prospectuses. Disclosure in this Prospectus relating to the Guaranteed Interest
Account has not been reviewed by the SEC.
Within the Guaranteed Interest Account, we currently offer three Interest Rate
Guarantee Periods, lasting for one, three, and five years. The Guaranteed
Interest Account, or certain of the Interest Rate Guarantee Periods, may not be
available in all states. Will will start a new Interest Rate Guarantee Period
for each premium payment you allocate and each amount you transfer to the
Guaranteed Interest Account. We will credit interest at a specified Guaranteed
Interest Rate on each Interest Rate Guarantee Period.
The actual credited rate will be the interest rate in effect on the day that
premium payments are allocated or amounts are transferred to the Guaranteed
Interest Account. All interest rates are stated as annual effective yields. The
interest rate for new money allocated to the Guaranteed Interest Account will
reset periodically. Interest rates are set at the Company's sole discretion, but
will never be less than an annual effective yield of 3.0%. There is no specific
formula for the determining the Guaranteed Interest Rate. Some of the factors
that we may consider in determining the Guaranteed Interest Rate are: general
economic trends, rates of return currently available and anticipated on our
investments; expected investment yields; regulatory and tax requirements; and
competitive factors.
13
<PAGE>
Amounts you allocate to the Guaranteed Interest Account may be subject to an MVA
upon a withdrawal, transfer or annuitization requested 31 days or more prior to
the end of the applicable Interest Rate Guarantee Period. The MVA will never
reduce the return on amounts allocated to an Interest Rate Guarantee Period to
less than 3.0% per year before any applicable Withdrawal Charge. Because of this
adjustment and for other reasons, the amount you receive upon withdrawal or the
amount applied to a transfer or annuitization may be more or less than the
Account Value of the relevant Interest Rate Guarantee Period at the time of the
transaction.
You may elect to have your premium payments allocated to the Interest Rate
Guarantee Periods at any time. In addition, you may transfer all or part of the
Separate Account Value to one or more of the Interest Rate Guarantee Periods
prior to the Maturity Date.
Market Value Adjustment
The proceeds of a withdrawal or transfer made from the three or five year
Interest Rate Guarantee Period of the Guaranteed Interest Account 31 days or
more prior to the end of the applicable Interest Rate Guarantee Period will be
increased or decreased by the application of the MVA. If the Maturity Date is 31
or more days before the end of a three or five year Interest Rate Guarantee
Period, the amount applied to Annuity Payments from the Guaranteed Interest
Account also may be increased or decreased by an MVA. Where applicable, the MVA
is applied to the Guaranteed Interest Account Value. Where applicable, the MVA
only applies to the portion of the partial withdrawal withdrawn from the
Guaranteed Interest Account. No MVA is applied to any withdrawal or transfer
made during the last 30 days of the Interest Rate Guarantee Period.
The MVA will reflect the relationship between (a) the interest rate for the
Guaranteed Interest Account then currently available for the period of time
which most closely approximates the duration remaining in the Interest Rate
Guarantee Period from which the withdrawal or transfer is made, and (b) the
Guaranteed Interest Rate applicable to the Interest Rate Guarantee Period from
which the withdrawal or transfer is made at the time of the transaction. For
purposes of calculating (a) above, fractional years will be rounded to the
nearest month and the interest rate will be calculated using linear
interpolation.
Generally, if your Guaranteed Interest Rate does not exceed the applicable
currently available interest rate by at least 0.4%, then the application of the
MVA will reduce the proceeds of a withdrawal or transfer. Conversely, if your
Guaranteed Interest Rate exceeds the applicable currently available interest
rate by more than 0.4%, the application of the MVA will increase the proceeds of
a withdrawal or transfer.
For example, assume that an Owner selects an initial Interest Rate Guarantee
Period of five years and the Guaranteed Interest Rate for that duration is 8%
per annum, and, at the end of four years, the Owner makes a Partial Withdrawal.
If the currently available interest rate for the one year Interest Rate
Guarantee Period is then 6%, the MVA will be positive and will increase the
proceeds. On the other hand, if the currently available interest rate for the
one year Interest Rate Guarantee Period is higher than the Guaranteed Interest
Rate, for example 10%, the application of the MVA will cause a decrease in the
amount payable.
The MVA will never reduce the return on amounts allocated to the Interest Rate
Guarantee Periods below 3.0% per year. Even on a partial withdrawal,a negative
MVA may be as much as the total interest credited to the relevant Interest Rate
Guarantee Period, as of the withdrawal date, in excess of an effective annual
rate of 3.0%
The formula for calculating the MVA is set forth in Appendix II to this
Prospectus, which contains examples of the application of the MVA.
The pilot classic variable annuity policy
-----------------------------------------------------------------------------
The Pilot Classic Variable Annuity Policy (the "Policy") is an individual
flexible premium deferred variable annuity Policy. You may purchase the Policy
on a non-qualified basis ("Non-Qualified Policy"). You may also purchase the
Policy in connection with retirement plans or individual retirement accounts
that qualify for favorable Federal income tax treatment ("Qualified Policy").
The Policy is designed to aid you in long-term financial planning.
Application and Issuance of Policies
Before we will issue a Policy, we must receive a completed application and an
initial premium payment of at least $5,000 for Non-Qualified Policies. A lower
minimum premium of $2,000 is required for Qualified Policies. You may pay the
initial premium payment in a single payment or in 12 equal systematic payments
over the first 12 Policy months. The systematic payments must be made via
automatic debits or automated clearing house transfers from your checking or
savings account. We reserve the right to reject any application or premium
payment. For a Non-Qualified Policy, you (or the Annuitant, if you are not the
Annuitant) must be age 90 or younger. You must be age 80 or younger for certain
types of Qualified Policies. The Policy is not available in all states.
If you properly complete the application and it can be accepted in the form
received, your initial premium payment, minus any applicable premium tax, will
be credited to the Accumulation Value within two business days after the later
of our receipt of the application or our receipt of the initial premium payment
at our Variable Annuity Service Center. If we cannot credit the initial premium
payment to the Separate Account because the application or other issuing
requirements are incomplete, we will contact you within five business days and
give an explanation for the delay. We will return the initial premium payment to
you at that time unless you permit us to keep the initial premium payment and
credit it as soon as the necessary requirements are fulfilled. In that event, we
will credit the initial premium payment, minus any applicable premium tax, to
the Accumulation Value within two business days of the application's completion.
Your Policy will become effective on the date we credit the initial premium
payment, minus any applicable premium tax, to the Accumulation Value.
14
<PAGE>
Free Look Period
You have a limited time period in which to return your Policy for cancellation
and receive a refund as described in your Policy. This time period depends on
the state in which your Policy is issued. In most states, it is ten days after
you receive it. In most states if your Policy replaces another Policy, you have
20 days in which to cancel your Policy.
In order to cancel the Policy you must deliver or mail a written notice to our
Variable Annuity Service Center, or to your registered representative from whom
you purchased the Policy, and return the Policy. Your cancellation will be
effective upon being postmarked, properly addressed and postage paid. The Policy
will then be void as if it had never been issued.
The amount of your refund will depend on the state in which your Policy was
issued. In most states we will pay you an amount equal to the Accumulation Value
on the date we receive the Policy from you. We will not deduct any Withdrawal
Charges or administrative charges that would otherwise apply. The Accumulation
Value at that time may be more or less than your premium payments. In some
states we are required to refund your premium payments minus any Partial
Withdrawals you may have already made from your Policy. If your Policy is issued
in one of the states where we are required to refund your premium payments, the
amount of your refund may be more or less than your Accumulation Value at that
time.
Premium Payments
You should make all premium payments, checks, or electronic fund transfers
payable to Jefferson Pilot Financial Insurance Company and they should be sent
to our Variable Annuity Service Center. We will provide you with a confirmation
of each transaction. Your premium payments may be made directly on a flexible
basis or through the systematic investment program on a monthly or quarterly
basis. For certain qualified plans, premium payments may be made through a group
billing or payroll deduction arrangement on a periodic basis.
Initial Premium Payment. The minimum initial premium payment is currently $5,000
for Non-Qualified Policies and $2,000 for Qualified Policies. However, the
minimum initial premium can be made in 12 equal monthly payments when you have
elected the systematic investment program for additional premiums to be
automatically withdrawn monthly from your bank account or when you are part of a
periodic group billing or payroll deduction arrangement. We reserve the right to
increase or decrease this amount for Policies issued after some future date. The
initial premium payment is the only premium payment required to be paid under a
Policy. The maximum initial premium payment that we currently accept without our
prior approval is $1,000,000 if you are age 65 or younger and $500,000 if you
are over age 65. If you purchased your Policy as part of a Tax Sheltered Annuity
Salary Reduction Agreement, a lower minimum initial premium may apply.
Additional Premium Payments. Prior to the Maturity Date and before a Death
Benefit has become payable, you may make additional premium payments at any
interval. The minimum additional premium payment under the Policy is $50. We
reserve the right to limit the sum of premium payments and transfers to the
Guaranteed Interest Account to $25,000 during any 12 month period. Total premium
payments under the Policy may not exceed $1,000,000 without our prior approval.
Additional premium payments will be credited to Accumulation Value as of the
Valuation Period during which they are received at our Variable Annuity Service
Center.
Allocation of Premium Payments. We will allocate your premium payments among the
Variable Sub-accounts as specified in your application. If you fail to specify
how premium payments are to be allocated, the application cannot be accepted.
You must allocate premium payments to one or more Variable Sub-accounts or
Interest Rate Guarantee Periods, or some combination thereof in whole
percentages (totaling 100%). Any allocation to a Variable Sub-account must be at
least $50 and at least 5% of a premium payment. Any allocation to an Interest
Rate Guarantee Period of the Guaranteed Interest Account must be at least
$1,000.
The allocation specified in the application will continue to be used for
additional premium payments unless you request a change of allocation. You may
change the allocation instructions for premium payments any time before the
Maturity Date by sending a Request to our Variable Annuity Service Center. You
must specify your new allocation choices. The allocation change will apply to
premium payments received with or after the Request.
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Accumulation Value
On the Policy Date, your Accumulation Value equals your initial premium payment
minus any applicable charge for premium taxes. Thereafter, on any day on or
before your Maturity Date, your Accumulation Value equals the sum of the
Separate Account Value and the Guaranteed Interest Account Value.
Your Accumulation Value will increase by:
o any additional premium payments we receive;
o any increases in the Accumulation Value due to investment results of the
Variable Sub-accounts you have selected;
o interest credited to the Guaranteed Interest Account.
Your Accumulation Value will decrease by:
o any Partial or Full Withdrawals, including applicable charges;
o any decreases in your Accumulation Value due to investment results of the
Variable Sub-accounts you have selected;
o the Mortality and Expense Risk Charge, the Administrative Expense Charge, any
applicable Transfer Charge, and, on the last day of any Policy Year, the
Annual Administrative Fee, if applicable;
o any charge for premium taxes, when applicable;
o any charges for an Optional Enhanced Death Benefit or Optional Extended Care
Confinement & Terminal Illness Rider, if elected.
We will inform you of your Accumulation Value upon request.
Your Accumulation Value is expected to change from Valuation Period to Valuation
Period. A Valuation Period is the period between successive Valuation Days. A
Valuation Day is any day that the New York Stock Exchange is open for trading.
Holidays are generally not Valuation Days.
Separate Account Accumulation Unit Value. When you allocate a premium payment or
transfer an amount to a Variable Sub-account, it is credited to the Separate
Account Value in the form of Accumulation Units. Each Variable Sub-account has a
distinct Accumulation Unit value. The number of units credited is determined by
dividing the portion of the premium payment (minus any applicable charge for
premium taxes we deduct at such time) or amount transferred by the dollar value
of one Accumulation Unit of the Variable Sub-account as of the end of the
Valuation Period during which the allocation or transfer is made. When amounts
are transferred out of, or withdrawn from, a Variable Sub-account, Accumulation
Units are canceled or redeemed in a similar manner.
We will determine the Separate Account Value on every Valuation Day. For each
Variable Sub-account, the Accumulation Unit value for a given Valuation Period
is based on the net asset value of a share of the corresponding Portfolio.
Therefore, the Accumulation Units will fluctuate in value from day to day based
on the investment experience of the corresponding Portfolio and the Separate
Account Value will increase or decrease to reflect the investment performance of
the corresponding Portfolio. The Separate Account Value also reflects expenses
borne by the Portfolios and the deduction of certain charges. The determination
of Variable Sub-account Accumulation Unit values is described in detail in the
Statement of Additional Information.
Minimum Accumulation Value. A minimum Accumulation Value of $2,000 must be
maintained during the Pay-in Period. If you fail to maintain the minimum
Accumulation Value and no premium payments have been made in the past two years,
then we may cancel the Policy and return the Accumulation Value minus any
applicable fees to you in one lump sum. We will send a 90 day notice to you at
the most current address you have given us before we cancel your Policy. If you
make sufficient premium payments to restore the Accumulation Value to at least
the minimum Accumulation Value within 90 days of the date of notice, the Policy
will not be canceled.
Transfers
You can transfer Accumulation Value to or from Interest Rate Guarantee Periods
of the Guaranteed Interest Account and/or any Variable Sub-account of the
Separate Account, within certain limits, as described below. We reserve the
right to restrict the transfer privilege in any way. We must receive your
transfer request at our Variable Annuity Service Center before we effect your
transfer.
We only make transfers on days when we and the New York Stock Exchange are open
for business. If we receive your request on one of those days, we will make the
transfer that day. Otherwise, we will make the transfer on the first subsequent
day on which we and the New York Stock Exchange are open.
Transfers during the Pay-in Period are subject to the following provisions:
o There is no limit to the number of transfers that can be made.
o No fee is imposed on the first 12 transfers in each Policy Year
during the Pay-in Period, but a fee equal to $10 may be imposed for
each transfer in excess of 12 during any Policy Year. Although we
reserve the right to impose the $10 fee, we currently have no plans
to do so. We will provide at least 30 days notice of our intention to
impose such a fee.
o If, after a transfer, the remaining Guaranteed Interest Account Value
of the Interest Rate Guarantee Period from which the transfer was
made is less than $1,000 we may include that remaining value as part
of the transfer.
o If, after a transfer, the remaining Separate Account Value in the
Variable Sub-account from which the transfer was made is less than
$250, we may include that remaining Separate Account Value as part of
the transfer.
o The minimum amount you may transfer among the Variable Sub-accounts
is $250 or the entire Separate Account Value remaining in the
Investment Option.
o The minimum amount that may be transferred to or from an Interest
Rate Guarantee Period of the Guaranteed Interest Account is $1,000.
o Transfers from an Interest Rate Guarantee Period that are made within
30 days of the end of the Interest Rate Guarantee Period are not
subject to an MVA. All other transfers from Interest Rate Guarantee
Periods are
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subject to an MVA, if applicable.
During the Pay-out Period, under any variable payment option, you (whether you
are the Annuitant or not) may transfer Separate Account Value among Variable
Sub-accounts, subject to the following provisions:
o There is no limit to the number of transfers that can be made.
o No fee is imposed on the first 12 transfers in each Policy Year
during the Pay-out Period, but there may be a charge of $10 for
each transfer in excess of 12 during any Policy Year. We reserve
the right to charge the fee, however, we currently have no plans
to do so. We will provide at least 30 days notice of our intention
to impose the fee.
o If, after a transfer, the remaining Separate Account Value in the
Variable Sub-account from which the transfer was made is less than
$250, we may include that remaining Separate Account Value as part of
the transfer.
o The minimum amount you may transfer from a Variable Sub-account is
$250 or the entire Separate Account Value remaining in the Variable
Sub-account.
Transfers between Variable Sub-accounts during the Pay-out Period will be
processed based on the formula outlined in the Statement of Additional
Information (see "Pay-out Period Transfer Formulas").
No transfers of amounts applied to a fixed payment option are permitted.
Telephone Transfers and Reallocations. You, your authorized representative or a
member of your representative's administrative staff may request transfers by
telephone of Accumulation Value or reallocation of premium payments (including
allocation changes pursuant to existing Dollar Cost Averaging and Automatic
Rebalancing programs), provided we have received the appropriate authorization
form. You will be asked to provide us with personal identification information
at the time of your request. Although our procedures are reasonably designed to
reduce the risk of unauthorized telephone transfers or allocation changes, there
still exists some risk. Neither the Company, Jefferson Pilot Variable
Corporation, nor any of their affiliates are liable for any loss resulting from
unauthorized telephone transfers or allocation changes if the procedures have
been followed, and you bear the risk of loss in such a situation.
Dollar Cost Averaging
Under our Dollar Cost Averaging ("DCA") program, you can instruct us to
automatically transfer a specified dollar amount from any Variable Sub-account
to one or more of the other Variable Sub-accounts. The program is not available
in connection with transfers from or to the Interest Rate Guarantee Periods of
the Guaranteed Interest Account. The automatic transfers can occur monthly or
quarterly, and the amount transferred each time must be at least $50. At the
time the program begins, your Policy must have a minimum value of $5,000.
DCA, an investment method which provides for regular, level investments over
time, results in the purchase of more Accumulation Units when the Accumulation
Unit Value is low, and fewer Accumulation Units when the Accumulation Unit Value
is high. DCA generally helps reduce the risk of purchasing when market prices
are high and selling when market prices are low. DCA transfers from a Variable
Sub-account investing in a Portfolio with a stabilized net asset value like the
JPVF Money Market Portfolio will generally reduce the average total cost of
indirectly purchasing Portfolio shares because a greater number of shares will
be purchased when the share prices are higher. However, there is no guarantee
that the DCA program will result in a higher Accumulation Value, protect against
loss, or otherwise be successful. In addition, DCA transfers from a Variable
Sub-account that invests in a Portfolio that does not maintain a stabilized net
asset value may have the effect of reducing the average price of the Portfolio
shares being redeemed.
If your Policy was issued in a state where we are required to return your
premium payments if you cancel your Policy during the Free Look Period, we
reserve the right to delay commencement of DCA transfers until the expiration of
the Free Look Period. If the premium payments that are to be used for your DCA
program will be sent to us at different times, we will hold the funds in the
JPVF Money Market Sub-account until we have received all of the payments.
You can elect the DCA program when purchasing the Policy or at a later date.
Your election can specify that only a certain number of transfers will be made,
in which case the program will terminate when that number of transfers has been
made. Otherwise, the program will terminate when the amount in the Variable
Sub-account equals $250 or less. At any one time, you are allowed to participate
in only one DCA program. There is currently no charge for this program.
Transfers made as part of the DCA program do not count toward the 12 free
transfers that you are permitted annually under the Policy.
Automatic Rebalancing
An automatic rebalancing program is also available to you. This program provides
a method for re-establishing fixed proportions between selected Variable
Sub-accounts on a systematic basis. Under this program, the allocation between
Variable Sub-accounts will be automatically readjusted to the desired
allocation, subject to a minimum of 5% per Variable Sub-account, on a quarterly
or annual basis. Transfers made as a result of this program do not count toward
the 12 free transfers that you are permitted annually under the Policy. There is
currently no fee charged for participation in this program. This program does
not guarantee profits nor protect against losses.
You may not elect to have DCA and Automatic Rebalancing at the same time. The
applicable authorization form must be on file with us before either program may
begin. We reserve the right to modify the terms and conditions of these
programs, including charging fees for them, upon 30 days advance notice to you.
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distributions under the policy
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Withdrawals
Prior to the Maturity Date, you may withdraw all (a "Full Withdrawal") or a
portion (a "Partial Withdrawal") of the Surrender Value in exchange for a cash
payment from us by sending a signed Request to our Variable Annuity Service
Center. The Surrender Value is the Accumulation Value plus or minus any MVA and
minus any applicable Withdrawal Charge, any applicable Annual Administrative
Fee, and any applicable charge for premium taxes payable by us and not
previously deducted.
The proceeds payable upon a Partial Withdrawal will be the Partial Withdrawal
amount requested, increased or decreased by any applicable MVA and then
decreased by any applicable Withdrawal Charge and any applicable premium taxes
payable by us and not previously deducted. For Partial Withdrawals, you must
specify the allocation option from which the withdrawal should be taken. If we
do not receive allocation instructions from you, we will allocate the Partial
Withdrawal proportionately among the Variable Sub-accounts and the Guaranteed
Interest Account in the same proportions as you have instructed us to allocate
your premium payments.
No MVA is imposed on Full or Partial Withdrawals made from an Interest Rate
Guarantee Period during the last 30 days of the Interest Rate Guarantee Period.
The minimum amount that you can withdraw is $250 ($1,000 if the withdrawal is
from any Interest Rate Guaranteed Period of the Guaranteed Interest Account)
unless we agree otherwise or unless a smaller amount is required to comply with
the Code. Qualified Policies may be subject to required minimum distribution
requirements. (See "Certain Federal Income Tax Consequences.") In addition,
following any Partial Withdrawal, your remaining Accumulation Value must be at
least $2,000. If the processing of your Partial Withdrawal request would result
in a remaining Accumulation Value of less than $2,000, we may treat your Partial
Withdrawal request as a request for a Full Withdrawal of your Policy, and you
will receive the Surrender Value. Following payment of the Surrender Value, your
Policy will be canceled. If the amount requested to be withdrawn from an
allocation option is greater than the portion of the Accumulation Value
attributable to that allocation option, we will pay you the entire portion of
the Accumulation Value attributable to that allocation option, plus or minus any
MVA, minus any Withdrawal Charge and minus any Annual Administrative Fee and any
charge for applicable premium taxes payable by us and not previously deducted.
The Separate Account Value remaining in any Variable Sub-account immediately
following a Partial Withdrawal must be at least $250. The Guaranteed Interest
Account Value remaining in an Interest Rate Guarantee Period immediately
following a Partial Withdrawal must be at least $1,000. If the processing of
your withdrawal request would result in Separate Account Value remaining in a
Variable Sub-account of less than $250 or Guaranteed Interest Account Value
remaining in an Interest Rate Guarantee Period of less than $1,000, we may treat
your withdrawal request as a request for withdrawal of the entire Separate
Account Value remaining in the relevant Variable Sub-account or the entire
Guaranteed Interest Account Value remaining in the relevant Interest Rate
Guarantee Period.
You may surrender your entire Policy at any time prior to the Maturity Date by
sending a Request for a Full Withdrawal to our Variable Annuity Service Center.
All of your rights and those of the Annuitant will terminate following a Full
Withdrawal or at any time Partial Withdrawals reduce your Accumulation Value to
zero. After the Maturity Date, no Full Withdrawal or Partial Withdrawal is
permitted. (See "Payment Options.")
Full and Partial Withdrawals will be processed using the Separate Account Value
for the Valuation Period during which your Request for Full or Partial
Withdrawal is received at our Variable Annuity Service Center. We will pay all
Full or Partial Withdrawal requests to you or to any other Payee that you
designate within five business days (unless you choose a later date) following
receipt of your request and all requirements necessary to process the Request at
our Variable Annuity Service Center, except as follows:
o Guaranteed Interest Account--We reserve the right, when permitted by
law, to defer payment of any Full or Partial Withdrawal from the
Interest Rate Guarantee Periods for up to six months. If payment is
deferred for 30 days or more we will credit the deferred amount with
interest required by law.
o Separate Account--We reserve the right to defer the payment of any
Full or Partial Withdrawal from the Separate Account as permitted by
the 1940 Act. Such a delay may occur because:
o the New York Stock Exchange is closed for trading (other
than usual weekend or holiday closing);
o the SEC determines that a state of emergency exists; or
o an order or pronouncement of the SEC permits a delay for
your protection.
In addition, a premium payment amount is not available to satisfy a Full or
Partial Withdrawal until the check or other instrument by which such premium
payment was made has been honored.
Full and Partial Withdrawals (including systematic withdrawals described below)
may be taxable and a penalty tax may apply prior to age 59 1/2. (See "Certain
Federal Income Tax Consequences.")
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Systematic Withdrawal Plan
Under the Systematic Withdrawal Plan, you can instruct us to make automatic
withdrawal payments to you monthly, quarterly, semi-annually or annually from a
specified Variable Sub-account. In order to receive monthly payments, your
Accumulation Value must be at least $20,000. In order to receive quarterly,
semi-annual or annual payments, your Accumulation Value must be at least
$10,000. The request for systematic withdrawal must specify a date for the first
payment, which must be at least 30 but not more than 90 days after the form is
submitted. Withdrawal Charges will not apply to the withdrawal of earnings on
your premium payments or to the first 10% of aggregate premium payments
(determined at the time of the withdrawal) that is withdrawn during a Policy
Year. Amounts withdrawn in excess of 10% will be subject to any applicable
Withdrawal Charge. No other charge will be made in connection with the
Systematic Withdrawal Plan. Systematic withdrawals may not be taken from the
Guaranteed Interest Account. Systematic withdrawals may result in certain tax
consequences. (See "Certain Federal Income Tax Consequences.")
Annuity Payments
We will make Annuity Payments beginning on the Maturity Date, provided that the
Policy is in force on that date. The payment option and frequency of Annuity
Payments may not be changed after Annuity Payments begin. Unless you specify
otherwise, the Payee of the Annuity Payments is the Annuitant. The dollar amount
of the payments will depend on numerous factors including the Accumulation Value
on the Maturity Date, the type of Annuity and payment option you elect, the
frequency of payments you elect, and possibly the age and sex of the Annuitant
on the Maturity Date.
Maturity Date. You may select the Maturity Date at the time the application is
completed. You may change the Maturity Date from time-to-time, by submitting a
Request to us, provided that notice of each change is received by our Variable
Annuity Service Center at least 30 days prior to the then-current Maturity Date
along with the written consent of any irrevocable Beneficiaries. The Maturity
Date may not be earlier than the second Policy anniversary date. The latest
Maturity Date which may be elected, unless we otherwise consent, is the
Annuitant's 90th birthday or the tenth Policy anniversary (whichever is later).
If you do not select a Maturity Date, the Maturity Date will be the later of the
tenth Policy anniversary date or the Policy anniversary date on or immediately
following the Annuitant's 70th birthday.
Election of Payment Option. During your lifetime and that of the Annuitant and
prior to the Maturity Date, you may choose a payment option. You may change the
option, but a Request specifying a change of option and the written consent of
any irrevocable Beneficiary must be received by our Variable Annuity Service
Center at least 30 days prior to the Maturity Date. If no election is made at
least 30 days prior to the Maturity Date, payments will be made as an annuity
for the Annuitant's life with Annuity Payments guaranteed for ten years. (See
"Payment Options") You may not change the payment option after the Maturity
Date.
Payment Options
The Policy provides the payment options which are described below. Payment
Options II(a) and II(b) are offered as either a fixed annuity or a variable
annuity. Payment Options I, II(c), III and IV are only available as a fixed
annuity. You may elect a fixed annuity, a variable annuity, or a combination of
both. If you elect a combination, you must specify what part of the Accumulation
Value is to be applied to the fixed and variable payment options. Unless you
specify otherwise, the Guaranteed Interest Account Value will be used to provide
a fixed annuity and the Separate Account Value will be used to provide a
variable annuity. Variable Annuity Payments will be based on the Variable
Sub-account(s) that you select, or on the allocation of the Separate Account
Value among the Variable Sub-accounts.
If the amount of the Annuity Payments will depend on the age and sex of the
Annuitant, the Payee must be the Annuitant and we reserve the right to ask for
satisfactory proof of the Annuitant's age and sex. If Annuity Payments are
contingent upon the survival of the Annuitant, we may require evidence
satisfactory to us that the Annuitant is living. We may delay making payments
until satisfactory proof is received.
On the Maturity Date, the sum of:
o the Guaranteed Interest Account Value plus or minus any applicable MVA, and
o the Separate Account Value;
o minus any premium taxes, payable by us and not previously deducted,
will be applied to provide for Annuity Payments under the selected payment
option
A fixed annuity provides for Annuity Payments which will remain constant
pursuant to the terms of the payment option elected. The effect of choosing a
fixed annuity is that the amount of each payment will be set on the Maturity
Date and will not change. The Annuity Payments will be fixed in amount by the
fixed annuity provisions selected and, for some options, the age and sex of the
Annuitant. The fixed annuity payment amounts are determined by applying the
annuity purchase rate specified in the Policy to the portion of the Accumulation
Value allocated to the fixed annuity payment option that you select. (The
"annuity purchase rate" is a factor used in computing the amount of the Annuity
Payment that we will pay the Annuitant monthly for each $1,000 of Accumulation
Value to be allocated to a payment option. Quarterly, semi-annual and annual
Annuity Payments are also available.) However, if the Company's annuity purchase
rates in effect on the Maturity Date would result in higher Annuity Payments,
then those more favorable rates will be used. If a fixed annuity is selected,
the Separate Account Value used to provide the fixed annuity will be transferred
to the general assets of the Company, and may become subject to the claims of
the Company's third party creditors.
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A variable annuity provides for payments that fluctuate or vary in dollar
amount, based on the investment performance of your selected allocations to one
or more Variable Sub-accounts. The payment option table in the Policy reflects
an assumed interest rate of 3.0%, so if the actual net investment performance of
the Variable Sub-account is less than this rate, then the dollar amount of the
actual variable Annuity Payments will decrease. If the actual net investment
performance of the Variable Sub-account is higher than this rate, then the
dollar amount of the actual variable Annuity Payments will increase. If the net
investment performance exactly equals the 3.0% rate, then the dollar amount of
the actual variable Annuity Payments will remain constant. You should consult
the Statement of Additional Information for more detailed information as to how
we determine variable Annuity Payments.
You may choose to receive Annuity Payments under any one of the payment options
described below. In addition, we reserve the right to offer or to consent to
other plans of payment before the Maturity Date.
Note Carefully: Under Payment Option II(a) (Life Only with no Guaranteed Period)
it would be possible for only one Annuity Payment to be made if the Annuitant
were to die before the due date of the second Annuity Payment; only two Annuity
Payments if the Annuitant were to die before the due date of the third Annuity
Payment; and so forth.
The following payment options are available:
Payment Option I--Income for Fixed Period (Available as a Fixed Annuity Only).
We make periodic payments for the period you have chosen. The fixed period must
be at least five years and cannot be more than 30 years.
Payment Option II--You may elect one of the following three options:
(a) Life Only. Annuity Payments are paid as long as the Annuitant lives.
The Payee must be the Annuitant.
(b) Life with Guaranteed Perod. Annuity Payments are paid during the
guaranteed period. After the guaranteed period ends, Annuity Payments
are paid as long as the Annuitant lives. The Payee must be the
Annuitant.
(c) Life with Installment Refund--(Available as a Fixed Annuity Only).
Annuity Payments are paid until the sum of the payments equals the
amount of the Accumulation Value on the Maturity Date. After that,
Annuity Payments are paid as long as the Annuitant lives. The Payee
must be the Annuitant.
Payment Option III-- Interest Only Payments (Available as a Fixed Annuity Only).
For an agreed period of at least five years, we will hold the proceeds and pay
interest at a rate we declare annually at our discretion subject to a guaranteed
minimum rate of 3.0% per year. You may elect to have the interest paid to the
Payee periodically or you can allow the interest to accumulate. At any time
during the period, the annuity proceeds plus any accumulated interest may be
applied under another payment option. You may also choose at the end of the
period to receive the annuity proceeds plus any accumulated interest in a lump
sum or apply it under another payment option.
Payment Option IV-- Income of a Fixed Amount (Available as a Fixed Annuity
Only). We will pay proceeds in fixed amounts until the proceeds reach zero. The
payment period must be at least five years.
During the Pay-out Period, you may (whether or not you are the Annuitant), upon
Request, transfer a portion of any Variable Sub-account to another Variable
Sub-account within the Separate Account (See "Transfers"). However, during the
Pay-out Period, no Full or Partial Withdrawals are permitted.
A portion of the entire amount of the Annuity Payments may be taxable as
ordinary income. If, at the time the Annuity Payments begin, we have not
received a proper written election not to have Federal income taxes withheld, we
must by law withhold those taxes from the taxable portion of your Annuity
Payments and pay that amount to the Federal government. (See "Certain Federal
Income Tax Consequences.")
Except as otherwise agreed to by you and the Company, Annuity Payments will be
payable monthly. If your Accumulation Value is less than $2,000 (or an amount
that would provide monthly Annuity Payments of less than $20 under any payment
option) on the Maturity Date, we will pay you a lump sum. We may require proof
from the Payee of the Annuitant's survival as a condition of future payments.
In some states, the Policies offered by this Prospectus contain payment option
tables that provide for different benefit payments to men and women of the same
age. We will use these sex-distinct tables, where permitted, for Non-Qualified
Policies and IRAs. We will use unisex tables for Qualified Policies (other than
IRAs).
Death Benefit
Death of Owner Prior to Maturity Date. If you die before the Maturity Date while
this Policy is in force, we will pay the Beneficiary a Death Benefit. If your
Policy has Joint Owners and one of the Joint Owners dies, the surviving Owner
(provided he or she survives the deceased Owner by more than 24 hours) will be
the Beneficiary rather than any other Beneficiary you may have designated.
The Death Benefit is equal to the greatest of:
o the Accumulation Value, minus any taxes payable by us and not
previously deducted;
o the guaranteed minimum death benefit; or
o if elected, the optional enhanced death benefit.
Guaranteed Minimum Death Benefit--The guaranteed minimum death benefit is the
sum of all premium payments minus any Partial Withdrawals.
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Optional Enhanced Death Benefit-- You may also elect one of two optional
enhanced death benefit features that provide additional death benefit
guarantees. You must elect an optional enhanced death benefit at the time you
purchase your Policy and you must be less than age 70. And once you elect an
enhanced death benefit you may not change or terminate it.
The optional enhanced death benefits that you may elect are:
Option 1--Under Option 1 the enhanced death benefit is the greater of:
o the sum of all premium payments minus any adjusted partial
withdrawals, accumulated with interest at 4.0% per year through
the end of the Policy Year you reach age 75; but in no case more
than 200% of all premium payments minus any Partial Withdrawals;
or
o the Accumulation Value on the most recent fifth Policy
anniversary occurring while you are alive and before you reach
age 75, plus any premium payments and minus any adjusted Partial
Withdrawals made since that Policy anniversary.
If you elect this option, we will deduct an additional charge equal to an
effective annual rate of 0.10% of the daily net assets of the Separate Account
for the enhanced death benefit.
Option 2--Under Option 2 the enhanced death benefit is the greatest Accumulation
Value on any Policy anniversary while you are alive and before you reach age 75.
If you elect this option, we will deduct an additional charge equal to an
effective annual rate of 0.15% of the daily net assets of the Separate Account
for the enhanced death benefit.
For purposes of the above, we will use the Accumulation Value as of the date we
received due proof of the Owner's or Joint Owner's death.
The adjusted Partial Withdrawal amount equals (A) multiplied by (B) where:
(A) is the ratio of the amount of the Partial Withdrawal to the
Accumulation Value on the date of the Partial Withdrawal; and
(B) is the Death Benefit on the date of the Partial Withdrawal.
IRS Required Distribution. Federal tax law requires that if you die before the
Maturity Date, then the entire value of the Policy must generally be distributed
within five years of the date of your death. Special rules may apply to your
spouse. Other rules apply to Qualified Policies. (See "Certain Federal Income
Tax Consequences").
Spousal Continuation of Policy. If you die before the Maturity Date and the
Beneficiary is your surviving spouse, your spouse may choose to not receive the
Death Benefit and may continue the Policy and become the Owner. The excess, if
any, of the Death Benefit over the Accumulation Value will be added to the
Accumulation Value. In this situation, if you were also the Annuitant, your
spouse will become the new Annuitant. If your spouse chooses to continue the
Policy, no Death Benefit will be paid because of your death.
Death of Annuitant Prior to Maturity Date. If you are not the Annuitant and the
Annuitant dies prior to the Maturity Date, you may name a new Annuitant. If no
new Annuitant is named, you become the new Annuitant.
If you are a non-natural person (i.e. a trust or corporation) for purposes of
Code Section 72, then the primary Annuitant's death will be treated as the death
of the owner and will result in payment of the Death Benefit.
Death of Annuitant on or After Maturity Date. If the Annuitant dies on or after
the Maturity Date while there are remaining guaranteed annuity payments to be
made, we will continue to make the remaining guaranteed annuity payments to only
one of the following, in this order:
o the named Payee, if any and if living
o the Beneficiary, if any and if living
o the Owner, if living, and
o the Owner's estate.
Death of Owner on or After Maturity Date. If you die on or after the Maturity
Date and before the Annuitant while there are remaining guaranteed annuity
payments to be made, we will continue to make the remaining guaranteed annuity
payments to only one of the following, in this order:
o any named Payee, if living
o any Joint Owner, if living
o any Beneficiary, if living, and
o the deceased Owner's estate
Payment of Death Benefit to Beneficiary. Instead of accepting the Death Benefit,
the Beneficiary (after your death) can choose by Request to receive Annuity
Payments based on his or her life expectancy. Payment under any payment option
must be for the life of the Beneficiary or for a number of years that is not
more than the life expectancy of the Beneficiary, at the time of your death (as
determined for Federal tax purposes), and must begin within one year of your
death.
Payment Not Honored by Bank
Any distribution under the Policy which is derived, all or in part, from any
amount paid to us by check or draft may be postponed until we determine that the
instrument has been honored.
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Beneficiary
You may name more than one Beneficiary in the application. You may change a
Beneficiary by sending a signed Request to our Variable Annuity Service Center.
When the Variable Annuity Service Center records the change, it will take effect
as of the date we receive your Request at our Variable Annuity Service Center.
You may designate the amount or percentage of the Death Benefit that each
Beneficiary receives, either in the application or by a signed Request. If you
do not make such a designation, the Death Benefit will be paid in equal shares
to each Beneficiary. We will comply with all state and Federal laws requiring
notification of the change in Beneficiary.
If you die and you have not named a Beneficiary, or your named Beneficiary
predeceased you and you did not name a new Beneficiary, your estate will be the
Beneficiary. If your Policy is owned by Joint Owners and one of the Joint Owners
dies, the surviving Joint Owner will be the deemed Beneficiary provided he or
she survives the deceased Joint Owner by more than 24 hours. Our consent is
needed if you wish to name a Joint Owner that is not your spouse.
Restrictions Under Qualified Policies
Other restrictions with respect to the election, commencement, or distribution
of benefits may apply under Qualified Policies or under the terms of the plan in
respect of which Qualified Policies are issued.
Restrictions Under Section 403(b) Plans
Section 403(b) of the Code provides for tax-deferred retirement savings plans
for employees of certain non-profit and educational organizations. In accordance
with the requirements of Section 403(b), any Policy used for a 403(b) plan will
prohibit distributions of elective contributions and earnings on elective
contributions except upon death of the employee, attainment of age 59 1/2,
separation from service, disability, or financial hardship. In addition, income
attributable to elective contributions may not be distributed in the case of
hardship.
charges and deductions
--------------------------------------------------------------------------------
We will make certain charges and deductions under the Policy in order to
compensate us for incurring expenses in distributing the Policy, bearing
mortality and expense risks under the Policy, and administering the Separate
Account and the Policies. We may also deduct charges for transfers, premium
taxes, optional benefits and riders you may elect, and other Federal, state or
local taxes. In addition, certain deductions are made from the assets of the
Portfolios for management fees and expenses.
Withdrawal Charge
Upon a Full or Partial Withdrawal, Withdrawal Charges may apply. Withdrawal
Charges are calculated assuming that policy earnings are withdrawn first. Policy
earnings include investment gains on premiums allocated to the Separate Account
and interest credited to premiums allocated to the Guaranteed Interest Account.
Withdrawal Charges will not be imposed on withdrawals of policy earnings. After
all policy earnings have been withdrawn, premium payments are deemed to be
surrendered in the order in which they were received. The length of time from
receipt of a premium payment to the time of withdrawal determines the percent of
the Withdrawal Charge. The Withdrawal Charge is assessed as a percentage of the
premium payment withdrawn as follows:
<TABLE>
<CAPTION>
Complete Years
Elapsed Since
Premium Payment Withdrawal Charge
--------------- -----------------
<S> <C>
Less than 1 8%
1 8%
2 7%
3 6%
4 5%
5 4%
6 3%
7 0%
</TABLE>
The Withdrawal Charge will not be applied under the following circumstances:
o If you cancel the Policy during the Free Look Period.
o Payment of the Death Benefit.
o On any free withdrawal amount. (See below.)
o To comply with any minimum distribution requirements of the Code for the
Policy.
o If you selected an optional Extended Care Confinement and Terminal Illness
Rider when you purchased your Policy, and after the first policy
Anniversary, you (1) become confined to a hospital or a state-licensed
inpatient extended care facility for at least 30 consecutive days or (2)
are first diagnosed as suffering from an illness that reduces your life
expectancy to 12 months or less from the date of diagnosis, and you meet
all of the conditions contained in the rider. You may only elect this rider
at the time you purchase your Policy. You will pay a daily charge for this
rider. This charge is equal to an effective annual rate of 0.05% of the
daily net assets of the Separate Account. We reserve the right to terminate
this rider if you or any Joint Owner is changed. Otherwise, once you elect
this rider it cannot be changed or dropped. This rider may not be available
in all states.
We will tell you the amount of Withdrawal Charge that would be assessed upon a
withdrawal upon request. More information about how the Withdrawal Charge is
calculated for Full or Partial Withdrawals is in Appendix I.
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Free Withdrawal Amount. In addition to a free withdrawal of policy earnings, you
are entitled to withdraw up to 10% of the aggregate premium payments each year
without a Withdrawal Charge. This free withdrawal amount is equal to 10% of the
aggregate premium payments as of the date of the withdrawal, minus the sum of
free withdrawal amounts previously taken during the Policy Year, and will not be
less than zero. Unused free withdrawal amounts cannot be accumulated and carried
from one Policy Year to the next.
Mortality and Expense Risk Charge
We impose a daily charge as compensation for bearing certain mortality and
expense risks in connection with the Policies. This charge is 1.10% annually of
the daily value of net assets in each Variable Sub-Account. The Mortality and
Expense Risk Charge is reflected in the Accumulation Unit value or Annuity Unit
value for each Variable Sub-account. The Mortality and Expense Risk Charge does
not apply to amounts held in the Guaranteed Interest Account.
Accumulation Values and Annuity Payments are not affected by changes in actual
mortality experience or by actual expenses incurred by the Company. The
mortality risks we assume arise from our Policy obligations to make Annuity
Payments. Thus, you are assured that neither the Annuitant's own longevity nor
an unanticipated improvement in general life expectancy will adversely affect
the Annuity Payments that you will receive under the Policy.
We also bear substantial risk in connection with the Death Benefit. During the
Pay-in Period, we will pay a Death Benefit that could be greater than the
Accumulation Value. Otherwise, the Death Benefit is based on the Accumulation
Value. The Death Benefit is paid without imposition of a Withdrawal Charge or
application of the MVA.
The expense risk we assume is the risk that our actual expenses in administering
the Policy and the Separate Account will exceed the amount we receive through
the Annual Administrative Fee and the Administrative Expense Charge.
Administrative Expense Charge
We deduct a daily charge equal to a percentage of the net assets in each
Variable Sub-account for administering the Separate Account. The effective
annual rate of this charge is 0.15% of the daily value of net assets in each
Variable Sub-account. We guarantee that the amount of this charge will not
increase. The Administrative Expense Charge does not apply to any amounts held
in the Guaranteed Interest Account.
Annual Administrative Fee
In order to cover the cost of administering your Policy, we deduct an Annual
Administrative Fee from the Accumulation Value of your Policy on the last day of
each Policy Year and upon Full Withdrawal of the Policy. This Annual
Administrative Fee is $35.00. We guarantee that this fee will not increase. The
Annual Administrative Fee will be deducted pro rata from your allocation options
in the same proportion that the amount of your Accumulation Value in each
allocation option bears to your total Accumulation Value. We will waive the
Annual Administrative Fee if, on the last day of that Policy Year, your
Accumulation Value is $50,000 or greater, or if 100% of your Accumulation Value
is allocated to the Guaranteed Interest Account. No Annual Administrative Fee is
deducted after the Maturity Date.
We may waive or reduce the Annual Administrative Fee for Policies sold to
certain groups. (See "Reduction in Charges for Certain Groups.")
Optional Enhanced Death Benefit Charges
You will pay an additional charge if you elect to purchase one of our two
optional enhanced death benefit options. If you choose Option 1, you will pay an
additional charge equal to an effective annual rate of 0.10% of the daily net
assets of the Separate Account. If you choose Option 2, you will pay an
additional charge equal to an effective annual rate of 0.15% of the daily net
assets of the Separate Account.
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<PAGE>
Optional Extended Care Confinement & Terminal Illness Rider Charge
You will pay an additional charge equal to an effective annual rate of 0.05% of
the daily net assets of the Separate Account if you elect this rider.
Transfer Charge
We may impose a fee equal to $10 for each transfer in excess of 12 during any
Policy Year. Although we reserve the right to impose a $10 fee, we currently
have no plans to do so.
Premium Taxes
We may be required to pay premium taxes in certain states. Depending upon
applicable state law, we will deduct the premium taxes if we are required to pay
them. This may occur, for example, at the time you pay a premium or make a Full
or Partial Withdrawal or when the Policy reaches the Maturity Date or a Death
Benefit is paid. We may elect to defer the deduction of Policy premium taxes
that would otherwise be deducted from premium payments until a later time.
Premium taxes currently range from 0.0% to 3.5% of premium payments or
Accumulation Value. However, a state may change its premium tax rate at some
future date.
Federal, State and Local Taxes
No charges are currently imposed for Federal, state, or local taxes other than
state premium taxes. However, we reserve the right to deduct charges in the
future for such taxes or other economic burden resulting from the application of
any tax laws that we determine to be attributable to the Policies.
Other Expenses Including Investment Advisory Fees
You indirectly bear the charges and expenses of the Portfolios whose shares are
held by the Variable Sub-accounts to which you allocate your Accumulation Value.
The net assets of each Portfolio will reflect deductions in connection with the
investment advisory fees and other expenses.
For more information concerning the investment advisory fees and other charges
against the Portfolios, see the prospectuses for the Portfolios, current copies
of which accompany this Prospectus.
Reduction in Charges for Certain Groups
The Company may reduce or eliminate the Annual Administrative Fee or Withdrawal
Charge on Policies that have been sold to:
o employees and sales representatives of the Company or its affiliates;
o customers of the Company or distributors of the Policies who are transferring
existing Accumulation Values to a Policy;
o individuals or groups of individuals when sales of the Policy result in
savings of sales or administrative expenses; or
o individuals or groups of individuals where premium payments are to be made
through an approved group payment method and where the size and type of the
group results in savings of administrative expenses.
In no event will reduction or elimination of the Annual Administrative Fee or
Withdrawal Charge be permitted where the reduction or elimination will be
unfairly discriminatory to any person.
certain federal income tax consequences
--------------------------------------------------------------------------------
The following is a general description of Federal tax considerations relating to
individual owners and individual beneficiaries of the Policy, and is based upon
our understanding of the present Federal income tax laws as they are currently
interpreted by the Internal Revenue Service. No representation is made as to the
likelihood of the continuation of the present Federal income tax laws or the
current interpretations by the Internal Revenue Service (the "IRS"). This
general discussion does not attempt to describe the tax treatment of the Policy
under state or local tax laws. This general discussion also does not attempt to
describe the tax treatment that will apply to:
o foreign owners or beneficiaries
o corporate owners or beneficiaries, or
o trusts that are owners or beneficiaries
This discussion is not intended to be tax advice. Any person concerned about the
tax implications of owning a Policy, or receiving distributions from the Policy,
should consult a competent tax advisor before initiating any transaction.
The Policy is issued by the Separate Account of the Company, which is taxed as a
life insurance company under the Code. Under existing Federal income tax laws,
all investment income and realized and unrealized capital gains (and losses)
automatically increase (or decrease) the Accumulation Unit Values of the Policy.
If changes in the Federal tax laws, or changes in the IRS's interpretation of
the tax laws, result in the Company being taxed on income or gains produced in
the Separate Account, then we reserve the right to start imposing charges
against any affected Policies in order to provide for payment of those taxes.
You may purchase a Non-Qualified Policy or a Qualified Policy. A Policy is a
Qualified Policy if purchased by individuals whose premium payments are
comprised solely of proceeds from and/or contributions under retirement plans
which are intended to qualify as plans entitled to special income tax treatment
under Sections 401, 403(b) (Tax-Sheltered Annuity), 408 (Traditional IRA), 408A
(Roth IRA), or 457 of the Internal Revenue Code. Information regarding the tax
treatment of a Traditional IRA or a Roth IRA is contained in a separate IRA
Disclosure Statement available from the Company. The ultimate effect of Federal
income taxes on amounts contributed to, held in, or received from a Qualified
Policy depends on the type of retirement plan, the tax and employment status of
the individual and/or his or her employer, the source of the contributions, and
the reason for the distribution. Purchasers of Qualified Policies should seek
competent legal and tax advice regarding the suitability of the Policy for their
situation, the applicable requirements, and
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<PAGE>
the tax treatment of the rights and benefits of the Policy. The following
discussion assumes that a Qualified Policy is purchased with proceeds from
and/or contributions under retirement plans that qualify for the intended
special Federal income tax treatment.
If you purchase this Policy as a Non-Qualified Policy, it is intended that the
Policy will be owned and administered to satisfy the requirements of Sections 72
and 817(h) of the Code. If you purchase this Policy as a Qualified Policy, it is
intended that the Policy will be owned and administered to satisfy the
requirements of the provisions of the Code that apply to that type of Qualified
Policy. The following discussion is based on the assumption that the Policy
satisfies whichever Federal income tax rules apply to the Policy.
At the time you pay the initial premium payment, you must specify whether a
Non-Qualified Policy or a Qualified Policy is being purchased. If your initial
premium payment is derived from an exchange or surrender of another annuity
policy, we may require that you provide us with information as to the Federal
income tax status of the previous policy. We will require you to purchase
separate Policies if you desire to invest monies qualifying for different
annuity tax treatment under the Code. We will require the minimum initial
premium payment on each Policy. Additional premium payments under your Policy
must qualify for the same Federal income tax treatment as your initial premium
payment under the Policy. We will not accept an additional premium payment under
your Policy if the Federal income tax treatment of such premium payment would be
different from that of your initial premium payment.
The investments held for Non-Qualified Policies must be "adequately
diversified" in accordance with the requirements of Section 817(h) and Treas.
Regs. [section] 1.817-5. The Company intends to, and will be responsible for,
complying with these diversification rules. The IRS has stated in several
published rulings (the "Investor Control Rulings") that if the owner of the
policy has such control or power over the investments held for the policy, the
owner of the policy, and not the separate account, will be treated as the owner
of the underlying assets. The Company believes that it is complying with the
Investor Control Rulings so that the Company, and not the Owner of the Policy,
will be treated as the Owner of the underlying assets. We reserve the right to
amend or modify the Policy if necessary to comply with any IRS rules or
regulations related to diversification or control over investments.
Taxation of Annuities
In General. Section 72 of the Code governs taxation of annuities in general. We
believe that if you are an individual (a "natural" person under the tax rules),
you will not be taxed on increases in the value of a Non-Qualified Policy until
a distribution occurs (e.g., Partial Withdrawals, Full Withdrawals, loan or
assignment, pledge, gift, or the receipt of Annuity Payments under a payment
option). Any change in ownership, assignment, pledge, or agreement to assign or
pledge any portion of a Qualified Policy's value generally will be treated as a
distribution. The taxable portion of a distribution (in the form of a single
lump sum payment or as an annuity) is taxable as ordinary income. Unlike direct
investments in mutual funds, no amounts invested in a variable annuity will
produce any capital gains or losses.
If the owner of any Non-Qualified Policy is not an individual or other "natural"
person (e.g., a corporation or a certain type of trust), the owner generally
must include in income any increase in the excess of the policy's value over the
"investment in the contract" (discussed below) during the taxable year. There
are exceptions to this rule if the non-natural person holds the Policy as agent
for a natural person. We reserve the right to not issue a Non-Qualified Policy
if it will not be owned by a natural person, or by a non-natural person as agent
for a natural person.
Possible Changes in Taxation. In past years, legislation has been proposed that
would have adversely modified the Federal taxation of certain annuities.
Although as of the date of this Prospectus Congress has not passed any
legislation regarding the taxation of annuities, there is always the possibility
that the tax treatment of annuities could change by legislation or other means
(such as IRS regulations, revenue rulings, judicial decisions, etc.). Moreover,
it is also possible that any change could apply to your Policy even though it
was purchased prior to the change in the tax laws or rules.
Withdrawals from Qualified Policies. In the case of a Full Withdrawal or Partial
Withdrawal under a Qualified Policy, under Section 72(e) of the Code a ratable
portion of the amount received is taxable, generally based on the ratio of the
"investment in the contract" to the individual's total account balance under the
retirement plan. The "investment in the contract" generally equals the amount of
any premium payments paid by or on behalf of any individual with after tax
contributions. For certain Qualified Policies the "investment in the contract"
may be zero. As explained in the separate Disclosure Statement for Roth IRAs,
special tax rules apply to distributions from Roth IRAs and Roth Conversion
IRAs.
Withdrawals from Non-Qualified Policies. Full Withdrawals from Non-Qualified
Policies are treated as taxable income to the extent that the amount received
exceeds the "investment in the contract." Partial Withdrawals from Non-Qualified
Policies (including systematic withdrawals) are generally treated as taxable
income to the extent that the Accumulation Value (before any Withdrawal Charges,
and including any positive Market Value Adjustment) immediately before the
Partial Withdrawal exceeds the "investment in the contract" at that time.
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<PAGE>
Annuity Payments. If you elect to receive payments over a period of years, over
your life expectancy, or over the life expectancies of yourself and another
individual, part of each payment you receive will be a return of your
"investment in the contract" and part of each payment will be taxable income. In
general, the amount of each payment that is a return of your "investment in the
contract" is calculated by dividing your total "investment in the contract" by
the total number of expected payments. For example, if your "investment in the
contract" is $6,000, and you elect to receive 60 monthly annuity payments, $100
of each payment will be a return of your "investment in the contract" and will
not be subject to Federal income taxes ($6,000 / 60 = $100). If payments are
being made over your life expectancy, or the joint life expectancy of you and
your spouse, there are IRS tables which are used to determine how many annuity
payments are expected to be made. After you have received the expected number of
payments, you will have received tax-free your entire "investment in the
contract." Any additional payments will be fully taxable. If you die before you
have received your entire "investment in the contract" and there are no
additional payments after you die, there is a special tax rule that allows a tax
deduction for the unrecovered "investment in the contract" on your last income
tax return. If some payments continue to your Beneficiary after your death, your
Beneficiary can recover any remaining "investment in the contract" over the
additional payments being made.
Penalty Tax. For Non-Qualified Policies and for most Qualified Policies (there
are special rules for Roth IRAs) there may be a 10% Federal penalty tax on any
premature distributions. The 10% penalty applies only to the portion of the
distribution that is treated as taxable income. In general, however, there is no
penalty tax on distributions from a Qualified or a Non-Qualified Policy:
o made on or after the date on which you attain age 59 1/2;
o made as a result of your death or disability;
o received in substantially equal periodic payments as a life annuity or a
joint and survivor annuity for the lives or life expectancies of you and a
"designated beneficiary";
o resulting from the direct rollover of the Policy into another qualified
contract or individual retirement annuity;
o allocable to investment in a Non-Qualified Policy before August 14, 1982;
o under a qualified funding asset (as defined in Code Section 130(d));
o under an immediate annuity (as defined in Code Section 72(u)(4)); or
o which are purchased by an employer on termination of certain types of
qualified plans and which are held by the employer until the employee
separates from service.
For distributions from Qualified Policies, in addition to all of the above
exceptions to the 10% penalty tax, additional exceptions to the penalty may
apply to distributions made to:
o an employee after separation from service after age 55 from a retirement plan
other than an IRA;
o pay certain uninsured medical expenses;
o certain unemployed individuals to pay health insurance premiums;
o pay for certain higher education expenses; or
o a first-time home buyer ($10,000 lifetime limit).
Death Benefit Proceeds. The Code requires that both Qualified and Non-Qualified
Policies make certain distributions if the Owner of the Policy dies. If you die
before periodic annuity payments have started, the entire value of the annuity
must either (i) be paid out, in full, within five years of your death, or (ii)
annuity payments must start within one year of your death. If your surviving
spouse is the Beneficiary of the Policy, your spouse has the option of
continuing the Policy as if he or she had been the original owner. If you die
after periodic annuity payments have started, payments must continue to be made
under a method that will distribute the balance in the Policy at least as
rapidly as the method being used prior to your death. A non-spousal beneficiary
may not elect, or continue to use, a settlement option unless that settlement
option will result in distributions that comply with the Code. Amounts
distributed because of the death of an Owner are generally included in income
under the same rules that apply to distributions to the Owner. Annuities, unlike
capital assets owned directly by an individual (e.g., real estate, stocks,
bonds), do not receive a step-up in tax basis at the death of the Owner.
Therefore, the investment in the Policy is not affected by the Owner's death.
Gifts and Other Transfers or Exchanges of the Policy. The gift or other transfer
of ownership of a Policy may result in certain tax consequences to you,
including the immediate taxation of the entire gain in the Policy. You should
contact a competent tax advisor to discuss the potential tax effects of any
gift, transfer or exchange of a Policy.
Multiple Policies. All non-qualified deferred annuity policies that we or our
affiliates issue to you during any calendar year are treated as one annuity
policy for purposes of determining the amount of income produced by a
distribution from one or more of the annuity policies. The Treasury Department
may issue regulations to prevent the avoidance of Section 72(e) through the
serial purchase of annuity policies or otherwise, or to treat the combination
purchase of separate immediate and deferred annuity policies as a single annuity
policy. You should consult with a competent tax advisor before purchasing more
than one annuity policy in a calendar year.
Withholding. Pension and annuity distributions generally are subject to
withholding for the recipient's Federal income tax liability at rates that vary
according to the type of distribution and the recipient's tax status. If you
have provided the Company with your taxpayer identification number (i.e., your
Social Security number), you may elect not to have tax withheld from most
distributions. Withholding is mandatory for certain distributions from certain
types of Qualified Policies.
Other Tax Consequences. As noted above, this discussion of the Federal income
tax consequences under the Policy is not intended to cover every possible
situation. The Federal income tax consequences discussed in this Prospectus
reflect our understanding of current law, and the law may change. Federal estate
and state and local estate, inheritance, and other tax consequences of ownership
or receipt of distributions under the Policy depend on your individual
circumstances or those of the recipient of the distribution. You should consult
a competent tax advisor for further information.
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<PAGE>
Qualified Plans. The Policy may be used with several types of qualified plans.
Under the Code, qualified plans generally enjoy tax-deferred accumulation of
amounts invested in the plan. Therefore, in considering whether or not to
purchase a Policy in a qualified plan, you should only consider the Policy's
other features, including the availability of lifetime annuity payments and
death benefit protection.
No attempt is made to provide detailed information about the use of the
Policy with the various types of qualified plans. Policy Owners, Annuitants
and Beneficiaries are cautioned that the rights of any person to any
benefits under Qualified Policies may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions
of the Policy. Some retirement plans are subject to distribution and other
requirements that are not incorporated into our Policy administration
procedures. Owners, Participants and Beneficiaries are responsible for
determining that contributions, distributions and other transactions with
respect to the Policies comply with applicable law. The following are brief
descriptions of the various types of qualified plans in connection with
which we will issue the Policy. Policies for all types of qualified plans
may not be available in all states. When issued in connection with a
qualified plan, the Policy will be amended as necessary to conform to the
requirements of the Code.
Qualified Pension and Profit Sharing Plans. Sections 401(a) of the Code permits
corporate employers to establish various types of retirement plans for
employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as
amended, commonly referred to as "H.R. 10," permits self-employed individuals to
establish qualified plans for themselves and their employees. These retirement
plans may permit the purchase of the Policies to accumulate retirement savings
under the plans. Adverse tax or other legal consequences to the plan, to the
participant or to both may result if the Policy is assigned or transferred to
any individual as a means to provide benefit payments, unless the plan complies
with all legal requirements applicable to such benefits prior to transfer of the
Policy. If you are considering the purchase of a Policy for use with such a
plan, you should seek competent advice regarding the suitability of the proposed
plan documents and the Policy to your specific needs.
Individual Retirement Annuities. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity (each hereinafter referred to as "Traditional
IRA"). Traditional IRAs are subject to limitations on the amount which may be
contributed and deducted and the time when distributions may commence. Also,
distributions from certain other types of qualified plans may be "rolled over"
on a tax-deferred basis into a Traditional IRA. The sale of a Policy for use
with a Traditional IRA is subject to special disclosure requirements of the IRS.
Purchasers of a Policy for use with Traditional IRAs will be provided with
supplemental information required by the Internal Revenue Service or other
appropriate agency. Such purchasers will have the right to revoke their purchase
within seven days of the earlier of the establishment of the Traditional IRA or
their purchase. You should seek competent advice as to the suitability of the
Policy for use with Traditional IRAs. The Internal Revenue Service has not
addressed in a ruling of general applicability whether a death benefit provision
such as the provision in the Policy comports with Traditional IRA qualification
requirements.
Section 408A of the Code permits eligible individuals to contribute to a Roth
IRA. Purchasers of a Policy for use with Roth IRAs will be provided with
supplemental information required by the IRS or other appropriate agency. Such
purchasers will have the right to revoke their purchase within seven days of the
earlier of the establishment of the Roth IRA or their purchase. You should seek
competent advice as to the suitability of the Policy for use with Roth IRAs. The
Internal Revenue Service has not addressed in a ruling of general applicability
whether a death benefit provision such as the provision in the Policy comports
with Roth IRA qualification requirements.
Tax-Sheltered Annuities. Section 403(b) of the Code permits public school
employees and employees of certain types of religious, charitable, educational,
and scientific organizations specified in Section 501(c)(3) of the Code to
purchase annuity policies and, subject to certain limitations, exclude the
amount of premiums from gross income for tax purposes. However, these payments
may be subject to FICA (Social Security) taxes. These annuity policies are
commonly referred to as "Tax-Sheltered Annuities."
Subject to certain exceptions, withdrawals under Tax-Sheltered Annuities which
are attributable to contributions made pursuant to salary reduction agreements
are prohibited unless made:
o after you attain age 59 1/2,
o after your separation from service,
o because of your death or disability, or
o for an amount not greater than the total of such contributions in the case of
hardship.
Section 457 Deferred Compensation ("Section 457") Plans. Under Section 457 of
the Code, employees of (and independent contractors who perform services for)
certain state and local governmental units or certain tax-exempt employers may
participate in a Section 457 plan of their employer allowing them to defer part
of their salary or other compensation. The amount deferred and any income on
such amount will not be taxable until paid or otherwise made available to the
employee. The maximum amount that can be deferred under a Section 457 plan in
any tax year is ordinarily one-third of the employee's includable compensation,
up to $7,500. Includable compensation means earnings for services rendered to
the employer which is includable in the employee's gross income, but excluding
any contributions under the Section 457 plan or a Tax-Sheltered Annuity. During
the last three years before an individual attains normal retirement age,
additional "catch-up" deferrals are permitted.
The deferred amounts will be used by the employer to purchase the Policy. The
Policy will be issued to a trust set up by a governmental employer, or by
another tax-exempt employer. All Accumulation Values will be subject to the
claims of the employer's creditors. The employee has no rights or vested
interest in the Policy and is only entitled to payment in accordance with the
Section 457 plan provisions. The plans may permit participants to specify the
form of investment for their deferred compensation account. Depending on the
terms of the particular plan, the employer may be entitled to draw on deferred
amounts for purposes unrelated to its Section 457 plan obligations. Present
Federal income tax law does not allow tax-free transfers or rollovers for
amounts accumulated in a Section 457 plan, except for transfers to other Section
457 plans in certain limited cases. If you are considering the purchase of a
Policy for use with such a plan, you should seek competent advice regarding the
suitability of the proposed plan documents and the Policy to your specific
needs.
27
<PAGE>
Jefferson Pilot Financial Insurance Company
--------------------------------------------------------------------------------
Jefferson Pilot Financial Insurance Company is a stock life insurance company
chartered in 1903 in Tennessee, redomesticated to New Hampshire in 1991, and
redomesticated to Nebraska effective June 12, 2000. Prior to May 1, 1998, we
were known as Chubb Life Insurance Company of America. Effective April 30, 1997,
Chubb Life, formerly a wholly-owned subsidiary of the Chubb Corporation, became
a wholly-owned subsidiary of Jefferson-Pilot Corporation, a North Carolina
corporation. The principal offices of Jefferson-Pilot Corporation are located at
100 North Greene Street, Greensboro, North Carolina 27401; its telephone number
is 336-691-3000. Our service center is located at One Granite Place, Concord,
New Hampshire 03301; our telephone number is 800-258-3648, ext. 5394.
We are licensed to do life insurance business in forty-nine states of the United
States, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam,
and the Commonwealth of the Northern Mariana Islands.
At December 31, 1999, we and our subsidiaries had total assets of approximately
$16.6 billion and had over $149 billion of insurance in force, while total
assets of Jefferson-Pilot Corporation and its subsidiaries (including the
Company) were approximately $26.4 billion.
The Company writes individual life insurance and annuities. We are subject to
Nebraska laws governing insurance.
Effective August 1, 2000, Alexander Hamilton Life Insurance Company of America
("Alexander Hamilton Life") and Guarantee Life Insurance Company ("GLIC") merged
with and into the Company, with the Company as the surviving entity. Both
Alexander Hamilton Life and GLIC were affiliates of the Company. Alexander
Hamilton Life was a stock life company initially organzied under the laws of the
State of North Carolina in 1981, and reincorporated in the State of Michigan in
September 1995. GLIC was a stock life insurance company incorporated under the
laws of the State of Nebraska. GLIC originally was organized in 1901 as a
mutual assessment association and, after a period as a mutual life insurance
company, became a stock life insurance company on December 26, 1995.
Upon the merger, the existence of Alexander Hamilton Life and GLIC ceased, and
the Company became the surviving company. At the time of the merger, the Company
assumed all of the variable annuity contracts issued by Alexander Hamilton Life
and the applicable separate account became a separate account of the Company.
GLIC did not have any separate accounts or insurance contracts registered with
the SEC.
In approving the merger on July 14, 2000, the boards of directors of the
Company, Alexander Hamilton Life and GLIC determined that the merger of three
financially strong stock life insurance companies would result in an overall
enhanced capital position and reduced expenses, which, together, would be in
the long-term interests of their respective contract owners. On July 14, 2000,
the respective 100% stockholders of the Company, Alexander Hamilton Life and
GLIC voted to approve the merger. In addition, the Nebraska Department of
Insurance has approved the merger.
The Separate Account
The JPF Variable Annuity Separate Account of Jefferson Pilot Financial Insurance
Company (the "Separate Account") was established as a separate investment
account under the laws of the State of New Hampshire on November 18, 1999 and is
now governed by the laws of the State of Nebraska as a result of the Company's
redomestication to Nebraska on June 12, 2000.
We own the assets of the Separate Account. The Separate Account will not be
charged with liabilities arising out of other separate accounts or out of any of
our other business unless the liabilities have a specific and determinable
relation to or dependence upon the Separate Account. We reserve the right to
transfer assets of the Separate Account in excess of the reserves and other
Policy liabilities with respect to the Separate Account to our general account.
The income, if any, and gains or losses realized or unrealized on each Variable
Sub-account are credited to or charged against that Variable Sub-account without
regard to our other income, gains or losses. Therefore, the investment
performance of any Variable Sub-account should be entirely independent of the
investment performance of our general account assets or any of our other
separate accounts.
distributor of the policies
--------------------------------------------------------------------------------
Jefferson Pilot Variable Corporation (formerly Jefferson-Pilot Investor
Services, Inc.) is the principal underwriter of the Policies. Jefferson Pilot
Variable Corporation will enter into one or more contracts with various
broker-dealers for the distribution of the Policies. Commissions paid on Policy
sales may vary, but we estimate that total commissions paid on all Policy sales
will not exceed 7% of all premium payments. In certain circumstances,
commissions may be paid in installments over time. Jefferson Pilot Variable
Corporation, a wholly owned subsidiary of Jefferson-Pilot Corporation, is a
member of the NASD. Its mailing address is One Granite Place, Concord, NH 03301.
There may be other underwriters in the future.
In addition to the payment of commissions, we may from time to time pay or allow
additional promotional incentives, in the form of cash or other compensation, to
broker-dealers that sell variable annuity contracts. In some instances, such
other incentives may be offered only to certain broker-dealers that sell or are
expected to sell during specified time periods certain minimum amounts of
variable annuity contracts. Our payment of promotional incentives is subject to
applicable state insurance law and regulation.
voting rights
--------------------------------------------------------------------------------
There are no voting rights associated with the Guaranteed Interest Account
Value.
With respect to the Separate Account Value, we are the "shareholder" of the
Portfolios and as such, we have certain voting rights. As a general matter, you
do not have a direct right to vote the shares of the Portfolios held by the
Variable Sub-accounts to which you have allocated your Accumulation Value. Under
current law, however, and prior to the Maturity Date, you are entitled to give
us instructions on how to vote those shares on certain matters. We will notify
you when your instructions are needed. We will also provide proxy materials or
other information to assist you in understanding the matters being voted on. We
will determine the number of shares for which you may give voting instructions
as of the record date set by the relevant Portfolio holding the shareholder
meeting. The number of votes that you have the right to instruct will be
calculated separately for each Variable Sub-account. The number of votes that
you have the right to instruct for a particular Variable Sub-account will be
determined by dividing your Accumulation Value in the Variable Sub-account by
the net asset value per share of the corresponding Portfolio in which the
Variable Sub-account invests. Fractional shares will be counted.
After the Maturity Date, the person receiving Annuity Payments has the voting
interest, and the number of votes decreases as Annuity Payments are made and as
the reserves for the Policy decrease. The person's number of votes will be
determined by dividing the reserve for the Policy allocated to the applicable
Variable Sub-account by the net asset value per share of the corresponding
Portfolio. Fractional shares will be counted.
If you send us written voting instructions, we will follow your instructions in
voting the Portfolio shares attributable to your Policy. If you do not send us
written instructions, we will vote the shares attributable to your Policy in the
same proportions as we vote the shares for which we have received instructions
from other Owners. We or our affiliates may vote shares in which you or other
persons entitled to vote have no beneficial interest in our sole discretion.
We reserve the right to restrict or eliminate any of your voting rights when we
are permitted by law to do so.
The above description reflects our view of currently applicable law. If the law
changes or our interpretation of the law
28
<PAGE>
changes, we may decide that we are permitted to vote Portfolio shares without
obtaining voting instructions from our Owners and we may elect to do so.
Loans
--------------------------------------------------------------------------------
Generally, a loan is available to you if your Policy is a Tax-Sheltered Annuity
Policy issued under Section 403(b) of the Code. Loans are subject to provisions
of the Code and to applicable plan rules. Loans may not be available in all
states. You should consult your tax advisor and plan fiduciary prior to
exercising your loan privileges.
You may borrow up to 50% of the Surrender Value from your Policy, but in no case
more than $50,000, without incurring current taxes or policy-imposed Withdrawal
Charges. Certain other Code and IRS limitations may apply. For example, if a
loan already exists, the $50,000 limit is reduced. Existing loans include loans
from all qualified plans. A minimum loan of $1,000 also applies. We will notify
you of the loan interest rate at the time you request a loan. However, your
Policy guarantees that the loan interest rate will never exceed 8%.
Loans must be repaid in substantially equal payments, at least quarterly, within
five years. However, loans used to purchase your principal residence must be
repaid within 15 years. The loan repayment period may not extend beyond age 70.
If you do not make a loan payment when due, interest will continue to accrue on
that amount. If you do not make a loan payment by the end of a 30 day grace
period, the entire loan will be treated as a deemed distribution, may be taxable
to you, and may be subject to a 10% penalty tax. If the required payment is not
received by the end of the grace period, the defaulted loan balance, plus
accrued interest and any Withdrawal Charge, will be withdrawn from your
Surrender Value, if amounts under your Policy are "eligible for distribution."
In order for an amount to be eligible for distribution under a 403(b) Plan, you
must meet one of the six triggering events:
o attainment of age 59 1/2;
o separation from service;
o death;
o disability;
o plan termination; or
o financial hardship.
If those amounts are not eligible for distribution, the defaulted loan balance
plus accrued interest and any Withdrawal Charge will be considered a "deemed
distribution" and will be withdrawn when those Surrender Values become eligible.
Either a distribution or a deemed distribution will be considered a currently
taxable event, and may be subject to Federal tax withholding, the Withdrawal
Charge and the Federal early withdrawal penalty tax.
Your Policy Surrender Value will provide the collateral for the loan. The amount
of Surrender Value serving as collateral will be placed in a loan collateral
account. The loan collateral account is part of the General Account. You may
specify the allocation option from which amounts will be transferred to the loan
collateral account. If you do not specify the allocation options, amounts will
be transferred from the Variable Sub-accounts and Guaranteed Interest Accounts
in the same proportion that your Accumulation Value in each allocation option
bears to your total Accumulation Value.
Until the loan has been repaid, amounts in the loan collateral account will be
credited interest at a rate 2.25% less than the loan interest rate fixed by the
Company for the term of the loan. Your Policy guarantees that the interest rate
credited to the loan collateral account will never be less than 3%. Loan
repayments will be deducted from the loan collateral account and allocated to
the allocation options based on your current allocation elections.
If you make a Full Withdrawal of your Policy while a loan is outstanding, the
Surrender Value you receive will be reduced by the amount of the loan
outstanding plus any accrued interest. If you die while a loan is outstanding,
the Death Benefit paid to the Beneficiary will be reduced by the amount of the
loan outstanding plus any accrued interest. If the Maturity Date occurs while a
loan is outstanding, the amount of the Accumulation Value applied under any
payment option will be reduced by the amount of the loan outstanding plus
accrued interest.
additional information about the separate account
--------------------------------------------------------------------------------
Addition, Deletion, or Substitution of Investments
We reserve the right to transfer assets of the Separate Account, which we
determine to be associated with the class of policies to which the Policy
belongs, to another separate account. If this type of transfer is made, the term
"Separate Account," as used herein shall then mean the separate account to which
the assets were transferred.
We further reserve the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the Separate
Account or that the Separate Account may purchase. 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 in view of the purposes of the
Separate Account, we may redeem the shares, if any, of that Portfolio and
substitute shares of another Portfolio or of another registered open-end
management investment company. If required by law, we will not substitute any
shares attributable to a Policy's interest in a Variable Sub-account of the
Separate Account without notice and prior approval of the SEC and state
insurance authorities.
We also reserve the right to establish additional Variable Sub-accounts of the
Separate Account, each of which would invest in shares corresponding to a new
investment portfolio of the existing Portfolio or in shares of another
investment company. Subject to applicable law and any required SEC approval, we
may, in our sole discretion, establish new Variable Sub-accounts, eliminate one
or more Variable Sub-accounts, or combine Variable Sub-accounts if marketing
needs, tax considerations or investment conditions warrant. Any new Variable
Sub-accounts may be made available to existing Owners on a basis to be
determined by the Company.
If any of these substitutions or changes are made, we may by appropriate
endorsement change the Policy to reflect the substitution or change. If we deem
it to be in the best interest of Owners and Annuitants, and subject to any
approvals that may be required under applicable law, the Separate Account may be
operated as a management investment company under the 1940 Act; it may be
deregistered under the Act if registration is no longer required; or it may be
combined with other separate accounts of the Company. Further we reserve the
right, when permitted by law, to manage the Separate Account under the direction
of a committee at any time. We will notify you of our intent to exercise any of
these reserved rights with respect to the Separate Account. If you choose not to
accept such change(s), you may request cancellation of your Policy and receive
the Surrender Value.
29
<PAGE>
Performance Data
From time-to-time we may use the yield of the JPVF Money Market Variable
Sub-account and total returns of other Variable Sub-accounts in advertisements
and sales literature. Performance data is not intended to and does not indicate
future performance.
JPVF Money Market Variable Sub-account Yield. The yield of the JPVF Money Market
Variable Sub-account refers to the annualized income generated by an investment
in that Variable Sub-account over a specified seven-day period. The yield is
"annualized" by assuming that the income generated for that seven-day period is
generated each seven-day period over a 52-week period and is shown as a
percentage of that investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in that Variable Sub-account
is assumed to be reinvested. The effective yield will be slightly higher than
the yield because of the compounding effect of this assumed reinvestment.
Other Variable Sub-account Yield. We may from time-to-time advertise or disclose
the current annualized yield of one or more of the Variable Sub- accounts of the
Separate Account (except the JPVF Money Market Variable Sub-account) for 30-day
periods. The annualized yield of a Variable Sub-account refers to income
generated by the Variable Sub-account over a specific 30-day period. Because the
yield is annualized, the yield generated by a Variable Sub-account during the
30-day period is assumed to be generated each 30-day period over a 12-month
period.
The yield is computed by:
o dividing the net investment income of the Variable Sub-account less Variable
Sub-account expenses for the period,
o by the maximum offering price per unit on the last day of the period times
the daily average number of units outstanding for the period,
o compounding that yield for a six month period, and
o multiplying that result by 2.
Expenses attributable to the Variable Sub-account include:
o the Mortality and Expense Risk Charge,
o the Administrative Expense Charge, and
o the Annual Administrative Fee, if applicable.
Because of the charges and deductions imposed by the Separate Account, the yield
for a Variable Sub-account of the Separate Account will be lower than the yield
for its corresponding Portfolio. The yield calculations do not reflect the
effect of any Withdrawal Charge or premium taxes that may be applicable to a
particular Policy. The yield on amounts held in the Variable Sub-accounts of the
Separate Account normally will fluctuate over time. Therefore, the disclosed
yield for any given past period is not an indication or representation of future
yields or rates of return.
Total Return. Total returns for the Sub-accounts may be calculated pursuant to a
standardized formula or in non-standardized manners. The standardized total
return of the Variable Sub-accounts refers to return quotations assuming an
investment has been held in the Variable Sub-account for various periods of time
including, but not limited to, one year, five years, and ten years (if the
Variable Sub-account has been in operation for those periods), and a period
measured from the date the Variable Sub-account commenced operations. The total
return quotations will represent the average annual compounded rates of return
that would equate an initial investment of $1,000 to the redemption value of
that investment as of the last day of each of the periods for which total return
quotations are provided. Accordingly, the total return quotations will reflect
not only income but also changes in principal value (that is, changes in the
Accumulation Unit values), whereas the yield figures will only reflect income.
In addition, the standardized total return quotations will reflect the
Withdrawal Charge imposed on Full or Partial Withdrawals.
In addition, we may from time-to-time also disclose total return in non-standard
formats and cumulative total return for the Variable Sub-accounts. The
non-standard average annual total return and cumulative total return would not
reflect any applicable Withdrawal Charge, which if reflected would lower the
performance figures.
We may from time-to-time also disclose standard total returns and non-standard
total returns for the Variable Sub-accounts based on or covering periods of time
other than those indicated above. All non-standard performance data will only be
disclosed if the standard total return is also disclosed. For additional
information regarding the calculation of performance data, please refer to the
Statement of Additional Information.
Performance Comparisons. From time-to-time, in advertisements, sales literature,
or in reports to you, we may compare the performance of the Variable
Sub-accounts to that of other variable accounts or investment vehicles with
similar investment objectives or to relevant indices published by recognized
mutual fund or variable annuity statistical rating services or publications of
general variable annuity statistical rating services or publications of general
interest such as Forbes or Money magazines. For example, a Variable
Sub-account's performance might be compared to that of other accounts or
investments with a similar investment objective as compiled by Lipper Analytical
Services, Inc., VARDs, Morningstar, Inc., or by others. In addition, a Variable
Sub-account's performance might be compared to that of recognized stock market
indicators including, but not limited to, the Standard & Poor's 500 Stock Index
(which is a group of unmanaged securities widely regarded by investors as
representative of the stock market in general) and the Dow Jones Industrial
Average (which is a price-weighted average of 30 large, well-known industrial
stocks that are generally the leaders in their industry). Performance
comparisons should not be considered representative of the future performance of
a Variable Sub-account.
General. Performance data may also be calculated for shorter or longer base
periods. The Separate Account may use various base periods as may be deemed
necessary or appropriate to provide investors with the most informative
performance data information, depending on the then-current market conditions.
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<PAGE>
Performance will vary from time-to-time, and historical results will not be
representative of future performance. Performance information may not provide a
basis for comparison with other investments or other investment companies using
a different method of calculating performance. A Portfolio's total returns
should not be expected to be the same as the returns of other funds, whether or
not both funds have the same portfolio managers and/or similar names. Current
yield is not fixed and varies with changes in investment income and Accumulation
Unit values. The JPVF Money Market Variable Sub-account yield will be affected
if it experiences a net inflow of new money which it invests at interest rates
different from those being earned on its then-current investments. An investor's
principal in a Variable Sub-account and a Variable Sub-account's return are not
guaranteed and will fluctuate according to market conditions. Also, as noted
above, advertised performance data figures will be historical figures for a
Policy during the Pay-in Period.
Company Ratings
We may from time-to-time publish (in advertisements, sales literature and
reports to you) the ratings and other information assigned to us by one or more
independent rating organizations such as A.M. Best Company, Standard & Poor's,
Duff & Phelps, and Fitch Investors Services. The purpose of the ratings is to
reflect our financial strength and/or claims-paying ability and should not be
considered as bearing on the investment performance of assets held in the
Separate Account. Each year the A.M. Best Company reviews the financial status
of thousands of insurers, culminating in the assignment of Best's Ratings. These
ratings reflect A.M. Best Company's current opinion of the relative financial
strength and operating performance of an insurance company in comparison to the
norms of the life/health insurance industry. In addition, our claims-paying
ability as measured by Standard and Poor's Insurance Ratings Services, Duff &
Phelps, or Fitch Investors Services may be referred to in such advertisements,
sales literature, or reports. These ratings are opinions regarding our financial
capacity to meet the obligations of our insurance and annuity policies in
accordance with their terms. Such ratings do not reflect the investment
performance of the Separate Account or the degree of risk associated with an
investment in the Separate Account.
general policy provisions
--------------------------------------------------------------------------------
Entire Policy
The entire Policy consists of the Policy, any attached riders and endorsements,
and the attached copy of the application. Only our Chief Executive Officer,
President, one of our Executive Vice Presidents or the Secretary may change the
Policy. The change must be in writing. No change will be made in the Policy
unless you agree to it in writing. No registered representative is authorized to
change the Policy or to change or waive any provisions of the Policy.
Reliance on Information Provided in Application
In issuing the Policy, we will rely on the statements made in the application.
We deem all such statements to be representations and not warranties. We assume
that these statements are true and complete to the best of the knowledge and
belief of those who made them. We will not use any statement made in connection
with the application to void the Policy unless that statement is a material
misrepresentation and is part of the application.
Variations in Policy Provisions
Certain provisions of your Policy may vary from the descriptions in this
Prospectus in order to comply with different state laws. Any such variations
will be included in your Policy or in riders or endorsements to your Policy.
Measurement of Dates
Policy Years, quarters, months, and anniversaries are measured from the Policy
Date, except where otherwise specified.
Calculation of Age
References in the Policy to a person's age on any date refer to his or her age
on that person's last birthday.
Misstatement of Age
If the age of the Annuitant has been misstated, any amount payable under the
Policy will be what would have been purchased at the correct age. If payments
were made based on incorrect age, we will increase or reduce a later payment or
payments to adjust for the error. Any adjustment will include interest, at 6.0%
per year, from the date of the wrong payment to the date the adjustment is made.
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<PAGE>
Assignment of the Policy
While the Annuitant is living, and except for Qualified Policies, you may assign
the Policy or any interest you have in it. Any irrevocable Beneficiary must
agree to the assignment. If there is a Joint Owner, the Joint Owner must agree
to any assignment. Your interest, and anyone else's, will then be subject to
that assignment. As Owner, you still have the rights of ownership that you have
not assigned.
An assignee cannot change the Owner, Annuitant or Beneficiary, and may not elect
an alternative payment option. Any amount payable to the assignee will be made
in one lump sum.
To assign the Policy, you must provide us a copy of the assignment. We are not
bound by an assignment unless we receive written notice at our Variable Annuity
Service Center. We are not responsible for the validity of any assignment. An
assignment will be subject to any payment previously made by us or any other
action we may take before recording the assignment.
State law such as those governing marital property may affect your ability to
encumber the Policy.
Nonparticipating
The Policy is nonparticipating and will not share in any surplus earnings of the
Company. No dividends are payable on the Policy.
Non-Business Days
If the due date for any activity required by the Policy falls on a non-business
day for the Company, performance will be rendered on the first business day
following the due date.
Regulatory Requirements
All interest guarantees, withdrawal benefits, and amounts payable at death will
not be less than the minimum benefits approved under the laws and regulations of
the state in which the Policy is delivered.
We will administer the Policy in accordance with the U.S. tax laws and
regulations in order to retain its status as an annuity policy.
The Policy is deemed to include all state and Federal laws that apply.
legal proceedings
--------------------------------------------------------------------------------
We are not involved in any litigation that is of material importance in relation
to our general account assets. In addition, there are no legal proceedings to
which the Separate Account is a party.
available information
--------------------------------------------------------------------------------
We have filed a registration statement (the "Registration Statement") with the
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933
relating to the Policies offered by this Prospectus. This Prospectus has been
filed as part of the Registration Statement and does not contain all of the
information set forth in the Registration Statement. Reference is hereby made to
such Registration Statement for further information relating to the Company and
the Policies. The Registration Statement may be inspected and copied at the
public reference facilities of the SEC at Room 1024, 450 Fifth Street, N.W,
Washington, D.C. 20549. Copies of such materials also can be obtained from the
Public Reference Section of the SEC at 450 Fifth Street, N.W, Washington, D.C.
20549, (telephone no. 202-942-8090), at prescribed rates or may be found at the
SEC's Web Site at http://www.sec.gov.
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<PAGE>
Statement of additional information
--------------------------------------------------------------------------------
A Statement of Additional Information is available (at no cost) which contains
more details concerning the subjects discussed in this Prospectus. The following
is the Table of Contents for that Statement:
TABLE OF CONTENTS
Page
----
More information About the Policy....................................... 3
Determination of Variable Sub-account Accumulation Unit Values.......... 3
Calculation of Annuity Unit Value....................................... 4
Pay-out Period Transfer Formulas........................................ 5
Administration.......................................................... 6
Records and Reports..................................................... 6
Custody of Assets....................................................... 6
Administrator .......................................................... 6
Principal Underwriter................................................... 6
Performance Data and Calculations....................................... 7
Money Market Variable Sub-account Yields............................. 7
Other Variable Sub-account Yield..................................... 7
Variable Sub-account Total Return Calculations: Standardized......... 10
Other Performance Data: Non-Standardized............................. 10
Other Information.................................................... 12
Other Information....................................................... 13
Experts ................................................................ 13
Financial Statements ................................................... 13
33
<PAGE>
appendix i
--------------------------------------------------------------------------------
[right arrow] WITHDRAWAL CHARGE CALCULATION
A Withdrawal Charge may be deducted from the Accumulation Value upon Partial
Withdrawal or Full Withdrawal of the Policy (See "Withdrawal Charge", p. 27.)
The Withdrawal Charge is calculated as follows:
The Withdrawal Charge for each premium is calculated as follows:
(S-Free) * X% = WC, but not less than zero.
Where:
S = the amount of premium withdrawn, premiums are withdrawn in the order in
which they were received
Free = the 10% free withdrawal amount, net of any other free withdrawals
during the current policy year
WC = the Withdrawal Charge amount
X = the following Withdrawal Charge percentage, a separate Withdrawal Charge
applies to each premium
Complete Years
Elapsed Since
Premium Payment Withdrawal Charge
--------------- -----------------
Less than 2 8%
2 7%
3 6%
4 5%
5 4%
6 3%
7 0%
Example:
Assume an initial premium payment of $10,000 in policy year 1, and an additional
premium payment of $5,000 in policy year 2. Also assume that after earnings, the
Accumulation Value in policy year 3 is $16,000.
1. If there is a Full Withdrawal during policy year 3:
Withdrawal Charge = ($10,000 - $1,500)*.07 + ($5,000*.08) = $995
Thus, the Surrender Value would be $16,000 - $995 = $15,005. Premium taxes
and the annual administrative fee may also be applicable.
2. If there is a Partial Withdrawal of $5,000 during policy year 3:
Earnings of $1,000 are withdrawn without Withdrawal Charges, therefore
premium of $4,000 must be withdrawn
Withdrawal Charge = ($4,000 - $1,500)*.07 =$175
Thus the Accumulation Value would be reduced by $5,000 and you would receive
$4,825. Premium taxes may also be applicable.
I-1
<PAGE>
appendix ii
--------------------------------------------------------------------------------
[right arrow] MARKET VALUE ADJUSTMENT
The formula which will be used to determine the Market Value Adjustment is:
N/12
[[(1 +I)/(1+J+ .004)] - 1]*A
NOTE: The Market Value Adjustment will be limited so that it does not
reduce the return on the Guaranteed Interest Account below 3.0% per year.
I = The Guaranteed Interest Rate in effect for the current Interest Rate
Guarantee Period (expressed as a decimal, (e.g., 1% = .01).)
J = The interest rate (expressed as a decimal e.g. 1% = .01) for the Guaranteed
Interest Account currently available for the period of time most closely
approximating the duration remaining in the current Interest Rate Guarantee
Period (Fractional years will be rounded to the nearest month and the interest
rate will be calculated using linear interpolation. If an interest rate for the
Guaranteed Interest Account is not available, and cannot be calculated by linear
interpolation, a substitute interest rate will be used. The substitute interest
rate will be no less favorable to you than the most recent U.S. Treasury Yield
for the maturity closest to the duration remaining plus 1.00%). If the period is
less than 1 year then the Company will use the currently available interest rate
for the 1-year option.
N = The number of complete months from the Full or Partial Withdrawal to the end
of the current Interest Rate Guarantee Period.
A = The amount surrendered, withdrawn or transferred.
The ".004" in the formula is a factor designed to cover anticipated costs of
liquidation investments. Thus, the Guaranteed Interest Rate ("I") must be at
least 0.4% higher than the currently available interest rate for new money in
the Guaranteed Interest Account for there to be a positive market value
adjustment. If it is lower than J or higher but less than 0.4% higher, the
Market Value Adjustment is negative.
Examples of Market Value Adjustment
Assume a Guaranteed Interest Account Value of $50,000, a five year guaranteed
period with an guaranteed interest rate of 6%, and a original payment of $42,000
at the beginning of the current guaranteed period.
1. If there is a Full Withdrawal at the beginning of the fourth year with two
years remaining in the interest rate guarantee period:
a. If the current interest rate available for a two-year Guaranteed
Interest Account is 5%:
24
MVA = $50,000*[( 1.06 )-- - 1] = $570.88
------ 12
1.054
Free Withdrawal Amount = ($42,000 * .10) = $4,200.00
Withdrawal Charge = ($42,000 - $4,200) * .06 = $2,268.00
Thus the surrender proceeds = $50,000.00 + $570.88 - $2,268.00
= $48,302.88 - any applicable premium taxes or annual
administrative fees
b. If the current interest rate available for a two-year Guaranteed
Interest Account is 7%:
24
MVA = $50,000*[( 1.06 )-- - 1] = -$1,295.04
------ 12
1.074
Minimum Market Value Adjustment with 3% guaranteed return =
3
$42,000 * (1.03) - $50,000 = -$4,105.47
Since -$1,295.04 is greater than -$4,105.47, the actual MVA is
-$1,295.04
Free Withdrawal Amount = ($42,000 * .10) = $4,200.00
Withdrawal Charge = ($42,000 - $4,200) * .06 = $2,268.00
Thus the surrender proceeds = $50,000.00 - $1,295.04 - $2,268.00
= $46,436.96 - any applicable premium tax or annual
administrative fees
35
<PAGE>
2. If there is a Full Withdrawal at the beginning of the tenth year (thus, no
Withdrawal Charge applies) with three years remaining in the interest rate
guarantee period:
a. If the current interest rate available for a three-year Guaranteed
Interest Account is 5%:
36
MVA = $50,000*[( 1.06 )-- - 1] = $858.76
------ 12
1.054
Free Withdrawal Amount = $50,858.76
Withdrawal Charge = 0
Thus the surrender proceeds = $50,000.00 + $858.76
= $50,858.76 - any applicable premium tax or annual
administrative fees
b. If the current interest rate available for a three-year Guaranteed
Interest Account is 7%:
36
MVA = $50,000*[( 1.06 )-- - 1] = -$1,929.93
------ 12
1.074
Minimum Market Value Adjustment with 3% guaranteed return =
2
$42,000 * (1.03) - $50,000 = -$5,442.20
Since -$1,929.93 is greater than -$5,442.20, the actual MVA is
-$1,929.93
Free Withdrawal Amount = $48,070.07
Withdrawal Charge = 0
Thus the surrender proceeds = $50,000.00 - $1,929.93
= $48,070.07 - any applicable premium tax or annual
administrative fees
3. If there is a partial withdrawal of $10,000 at the beginning of the
fourth year with two years remaining in the interest rate guarantee
period;
a. If the current interest rate available for a two-year Guaranteed
Interest Account is 5%:
24
MVA = $10,000*[( 1.06 )-- - 1] = $114.18
------ 12
1.054
Free Withdrawal Amount = ($42,000 * .10) = $4,200.00
Withdrawal Charge = ($10,000 - $4,200) * .06 = $348.00
Thus the surrender proceeds = $10,000.00 + $114.18 - $348.00
= $9,766.18 - any applicable premium tax or annual
administrative fees
b. If the current interest rate available for a two-year Guaranteed
Interest Account is 7%:
24
MVA = $10,000*[( 1.06 )-- - 1] = -$259.01
------ 12
1.074
Minimum Market Value Adjustment with 3% guaranteed return =
3
$42,000 * (1.03) - $50,000 = -$4,105.47
Since -$259.01 is greater than -$4,105.47, the actual MVA is -$259.01
Free Withdrawal Amount = ($42,000 * .10) = $4,200.00
Withdrawal Charge = ($10,000 - $4,200) * .06 = $348.00
Thus the surrender proceeds = $10,000.00 - $259.01 - $348.00
= $9,392.99 - any applicable premium tax or annual
administrative fees
4. If there is a partial withdrawal of $10,000 at the beginning of the tenth
year (thus, no Withdrawal Charge applies) with three years remaining in the
interest rate guarantee period:
36
<PAGE>
a. If the current interest rate available for a three-year Guaranteed
Interest Account is 5%:
36
MVA = $10,000*[( 1.06 )-- - 1] = $171.75
------ 12
1.054
Free Withdrawal Amount = $10,171.75
Withdrawal Charge = 0
Thus the surrender proceeds = $10,000 + $171.75
= $10,171.75 - any applicable premium tax or administrative fees
b. If the current interest rate available for a three-year Guaranteed
Interest Account is 7%:
36
MVA = $10,000*[( 1.06 )-- - 1] = -$385.99
------ 12
1.074
Minimum Market Value Adjustment with 3% guaranteed return =
2
$42,000 * ( 1.03 ) - $50,000 = -$5,442.20
Since -$385.99 is greater than -$5,442.20, the actual MVA is -$385.99
Free Withdrawal Amount = $9,614.01
Withdrawal Charge = 0
Thus the surrender proceeds = $10,000.00 - $385.99
= $9,614.01 - any applicable premium tax or annual
administrative fees
<PAGE>
JPF VARIABLE ANNUITY SEPARATE ACCOUNT
Offered by
JEFFERSON PILOT FINANCIAL INSURANCE COMPANY
One Granite Place
Concord, New Hampshire 03301
------------
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information expands upon certain subjects discussed
in the current Prospectus for the Jefferson Pilot Financial Insurance Company
Pilot Classic Variable Annuity Policy (the "Policy") offered by Jefferson Pilot
Financial Insurance Company (the "Company"). You may obtain a copy of the
Prospectus dated August 1, 2000 by calling 1-800-258-3648, ext. 5394, or by
writing Variable Annuity Service Center, One Granite Place, P.O. Box 515,
Concord, New Hampshire 03302-0515. Terms used in the current Prospectus for the
Policy are incorporated in this Statement.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE READ
ONLY IN CONJUNCTION WITH THE PROSPECTUSES FOR THE POLICY, THE JEFFERSON PILOT
VARIABLE FUND, INC.; THE VARIABLE INSURANCE PRODUCTS FUND; THE VARIABLE
INSURANCE PRODUCTS FUND II; THE MFS VARIABLE INSURANCE TRUST; AND THE
OPPENHEIMER VARIABLE ACCOUNT FUNDS.
Dated: August 1, 2000
<PAGE>
TABLE OF CONTENTS
Page
----
More Information About the Policy........................................... 3
Determination of Variable Sub-account Accumulation Unit Values.............. 3
Calculation of Annuity Unit Value .......................................... 4
Pay-Out Period Transfer Formulas............................................ 5
Administration.............................................................. 6
Records and Reports......................................................... 6
Custody of Assets........................................................... 6
Administrator .............................................................. 6
Principal Underwriter....................................................... 6
Performance Data and Calculations........................................... 7
Money Market Variable Sub-account Yield................................. 7
Other Variable Sub-account Yields....................................... 7
Variable Sub-account Total Return Calculations: Standardized........... 10
Other Performance Data: Non-Standardized.............................. 10
Other Information...................................................... 12
Other Information.......................................................... 13
Experts ................................................................... 13
Financial Statements ...................................................... 13
In order to supplement the description in the Prospectus, the following provides
additional information about the Company and the Policy which may be of interest
to you.
Page 2
<PAGE>
MORE INFORMATION ABOUT THE POLICY
DETERMINATION OF VARIABLE SUB-ACCOUNT ACCUMULATION UNIT VALUES
ACCUMULATION UNITS. Accumulation Units are used to account for all
amounts allocated to or withdrawn from the Separate Account. The Company will
determine the number of Accumulation Units of a Variable Sub-account by dividing
the net premium payment allocated to (or the amount withdrawn from) the Variable
Sub-account by the dollar value of one Accumulation Unit on the date of the
transaction. The Separate Account Value will consist of the sum of the value of
all Accumulation Units in all Variable Sub-accounts credited to the Policy on
the applicable Valuation Day.
ACCUMULATION UNIT VALUE. The value of an Accumulation Unit in a
Variable Sub-account on any Valuation Day is the product of (a) the value on the
preceding Valuation Day and (b) the Net Investment Factor for the Variable
Sub-account for the Valuation Period just ended. The value of an Accumulation
Unit in each of the Sub-accounts was arbitrarily established at the inception of
the Separate Account's operation. The value was established at $10.00 for each
of the Variable Sub-accounts.
A VALUATION DAY is any day on which the New York Stock Exchange is open
for trading except for normal federal holiday closing or when the SEC has
determined that a state of emergency exists. In addition, the Company will be
closed on the following local or regional business holidays which shall not
constitute a Valuation Day: Good Friday, the Friday following Thanksgiving and
the day before and/or following Christmas Day.
A VALUATION PERIOD is the period of time beginning at the close of
trading of the New York Stock Exchange on any Valuation Day and ending at the
close of business on the next Valuation Day. A Valuation Period may be one day
or more than one day.
NET INVESTMENT FACTOR. The Company calculates the Net Investment Factor
for a Valuation Period for each Variable Sub-account by dividing (a) by (b) and
subtracting (c) from the result, where:
(a) is the sum of:
(1) the net asset value of a Portfolio share held in the
Separate Account for that Variable Sub-account
determined at the end of the current Valuation Period,
plus
(2) the per share amount of any dividend or capital gain
distributions made for shares held in the Separate
Account for that Variable Sub-account if the ex-dividend
date occurs during the Valuation Period.
Page 3
<PAGE>
(b) is the net asset value of a Portfolio share held in the
Separate Account for that Variable Sub-account determined as
of the end of the preceding Valuation Period.
(c) is a factor representing the Mortality and Expense Risk Charge
and the Administrative Expense Charge. This factor is equal,
on an annual basis, to 1.25% (1.10% + 0.15%) of the daily net
asset value of Portfolio shares held in the Separate Account
for that Variable Sub-account.
The Net Investment Factor may be greater or less than one; therefore, the
Accumulation Unit value may increase or decrease.
CALCULATION OF ANNUITY UNIT VALUE
o Annuity Units and Payments. The dollar amount of each Variable Annuity
Payment depends on the number of Annuity Units credited to that Payment
Option and the value of those units. The number of Annuity Units is
determined as follows:
1. The dollar amount of the first payment with respect to each
Variable Sub-account is determined by multiplying the portion of
the Accumulation Value to be applied to the Variable Sub-account
by the variable annuity purchase rate specified in the Settlement
Option Table in the Policy.
2. The number of Annuity Units credited in each Variable Sub-account
is then determined by dividing the dollar amount of the first
payment by the value of one Annuity Unit in that Variable
Sub-account on the Maturity Date.
3. The amount of each subsequent Annuity Payment equals the product
of the Annuitant's number of Annuity Units and the Annuity Unit
values on the payment date. The amount of each payment may vary.
o Annuity Unit Value. The value of the Annuity Units will increase or
decrease on a daily basis to reflect the investment performance of the
applicable Portfolio. The value of an Annuity Unit in a Variable
Sub-account on any Valuation Day is determined as follows:
1. The value of the Annuity Unit for the Variable Sub-account on the
preceding Valuation Day is multiplied by the Net Investment
Factor for the Valuation Period.
2. The result in (1) is then multiplied by a factor (slightly less
than one) to compensate for the interest assumption built into
the variable annuity purchase rates.
The Net Investment Factor reflects the investment experience of the
applicable Portfolio and certain charges (See above for a detailed description
of the Net Investment Factor).
Page 4
<PAGE>
PAY-OUT PERIOD TRANSFER FORMULAS
During the Pay-out Period, you may transfer Separate Account Value
from one Variable Sub-account to another, subject to certain limitations.
Interest Rate Guarantee Periods are not available during the Pay-out Period,
thus none will be available for transfers. (See "Transfers", p.20 of the
Prospectus.)
Transfers during the Pay-out Period are implemented according to the
following formula:
1. Determine the number of units to be transferred from the Variable
Sub-account as follows:
= D/AUV1
2. Determine the number of Annuity Units remaining in that Variable
Sub-account (after the transfer):
= UNIT1 - D/AUV1
3. Determine the number of Annuity Units in the transferee Variable
Sub-account (after the transfer):
= UNIT2 + D/AUV2
4. Subsequent Annuity Payments will reflect the changes in Annuity Units
in each Variable Sub-account as of the next Annuity Payment's due
date.
Where:
(AUV1) is the Annuity Unit value of the Variable Sub-account
from which the transfer is being made.
(AUV2) is the Annuity Unit value of the Variable Sub-account to
which the transfer is being made.
(UNIT1) is the number of units in the Variable Sub-account from
which the transfer is being made, before the transfer.
(UNIT2) is the number of units in the Variable Sub-account to which
the transfer is being made, before the transfer.
(D) is the dollar amount being transferred.
ADMINISTRATION
The Company or its affiliates will be providing administrative
services. The services provided by the Company or its affiliates include
issuance and redemption of the Policy, maintenance of records concerning the
Policy and certain Owner services.
Page 5
<PAGE>
If the Company or its affiliates do not continue to provide these
services, the Company will attempt to secure similar services from such sources
as may then be available. Services will be purchased on a basis which, in the
Company's sole discretion, affords the best service at the lowest cost. The
Company, however, reserves the right to select a provider of services which the
Company, in its sole discretion, considers best able to perform such services in
a satisfactory manner even though the costs for the service may be higher than
would prevail elsewhere.
RECORDS AND REPORTS
All records and accounts relating to the Separate Account will be
maintained by the Company. As presently required by the Investment Company Act
of 1940 and regulations promulgated thereunder, the Company will mail to you at
your last known address of record, at least annually, reports containing such
information as may be required under that Act or by any other applicable law or
regulation. You will also receive confirmation of each financial transaction and
any other reports required by law or regulation.
CUSTODY OF ASSETS
The assets of each of the Variable Sub-accounts of the Separate Account
are held in the custody of Citibank, N.A. The assets of each of the Variable
Sub-accounts of the Separate Account are segregated and held separate and apart
from the assets of the other Variable Sub-accounts and from the Company's
General Account assets.
ADMINISTRATOR
Jefferson Pilot Investment Advisory Corporation, an affiliate of the
Company, maintains records of all purchases and redemptions of Portfolio shares
by each of the Variable Sub-accounts.
PRINCIPAL UNDERWRITER
The Company, on its own behalf and on behalf of the Separate Account,
entered into an Agreement with Jefferson Pilot Variable Corporation ("JPVC") to
serve as principal underwriter for the continuous offering of the Policies. JPVC
is a wholly-owned subsidiary of Jefferson-Pilot Corporation and is an affiliate
of the Company.
Page 6
<PAGE>
PERFORMANCE DATA AND CALCULATIONS
Money Market Variable Sub-account Yield
The Yield of the Money Market Variable Sub-account for a seven-day
period is calculated by a standardized method prescribed by rules of the
Securities and Exchange Commission. Under this method, the yield quotation is
computed by determining the net change, exclusive of capital changes, in the
value of a hypothetical pre-existing account having a balance of one
Accumulation Unit of the Money Market Variable Sub-account at the beginning of
such seven-day period, subtracting a hypothetical charge reflecting deductions
from Policy owner accounts, and dividing the difference by the value of the
account at the beginning of the base period to obtain the base period return,
and multiplying the base period return by (365/7) with the resulting yield
figure carried to at least the nearest 100th of 1%. The Separate Account may
also compute the Money Market Variable Sub-account's yield on an annualized
basis. This current annualized yield is computed by determining the net change
(exclusive of realized gains and losses on the sale of securities and unrealized
appreciation and depreciation) in the value of a hypothetical account having a
balance of one Accumulation Unit of the Money Market Variable Sub-account at the
beginning of such seven-day period, dividing such net change in account value by
the value of the account at the beginning of the seven-day base period to
determine the base period return, and annualizing this quotient on a 365-day
basis.
The SEC also permits the Separate Account to disclose the effective
yield of the Money Market Variable Sub-account for the same seven-day period,
determined on a compounded basis. The effective yield is calculated by
compounding the unannualized base period return by adding one to the base period
return, raising the sum to a power equal to 365 divided by 7, and subtracting
one from the result.
The yield on amounts held in the Money Market Variable Sub-account
normally will 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 Variable Sub-account's actual yield is
affected by changes in interest rates on money market securities, average
portfolio maturity of the JPVF Money Market Portfolio, the types and quality of
portfolio securities held by the JPVF Money Market Portfolio, and its operating
expenses. The yield figures do not reflect Withdrawal Charges or premium taxes.
Other Variable Sub-account Yields
The yield of Variable Sub-accounts other than the Money Market Variable
Sub-account based on a 30-day period is calculated by a standardized method
prescribed by rules of the SEC. The yield is computed by dividing the net
investment income per Accumulation Unit earned during the period by the maximum
offering price per unit on the last day of the period, according to the
following formula:
Page 7
<PAGE>
6
YIELD = 2[(a-b+1) -1]
---
cd
Where:
a = net investment income earned during the period by the portfolio company
attributable to shares owned by the Sub-account.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of Accumulation Units outstanding during the
period.
d = the maximum offering price per Accumulation Unit on the last day of the
period.
The Company may from time to time advertise or disclose the current
annualized yield of one or more of the Variable Sub-accounts of the Separate
Account (except the Money Market Variable Sub-account) for 30-day periods. The
annualized yield of a Variable Sub-account refers to income generated by the
Variable Sub-account over a specific 30-day period. Because the yield is
annualized, the yield generated by a Variable Sub-account during the 30-day
period is assumed to be generated each 30-day period over a 12-month period. The
30-day yield is calculated according to the following formula:
6
Yield = 2 (a-b)
-----
cd +1 -1
Where:
a = Net investment income of the Variable Sub-account for the 30-day period
attributable to the Variable Sub-account's unit.
b = Expenses of the Variable Sub-account for the 30-day period.
c = The average number of units outstanding.
d = The unit value at the close (highest) of the last day in the 30-day
period.
Because of the charges and deductions imposed by the Separate Account,
the yield for a Variable Sub-account of the Separate Account will be lower than
the yield for its corresponding Portfolio. The yield calculations do not reflect
the effect of any premium taxes or Withdrawal Charge that may be applicable to a
particular Policy. Withdrawal Charges range from 8% to 3% of the amount
withdrawn which is attributable to premium payments made less than seven years
prior to the Withdrawal. The yield on amounts held in the Variable Sub-accounts
of the Separate Account normally will fluctuate over time. Therefore, the
disclosed yield for any given past period is not an indication or representation
of future yields or rates of return. A Variable Sub-account's actual yield is
affected by the types and quality of the Portfolios' investments and its
operating expenses.
Page 8
<PAGE>
Variable Sub-account Total Return Calculations: Standardized
The Company may from time to time also disclose average annual total
returns for one or more of the Variable Sub-accounts for various periods of
time. Average annual total return quotations are computed by finding the average
annual compounded rates of return over one, five and ten year periods and for
the life of the Variable Sub-account that would equate the initial amount
invested to the ending redeemable value, according to the following formula:
n
P(1 + T) = ERV
Where:
P = hypothetical initial premium payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the one, five or
ten-year period (or fractional portion thereof) of a
hypothetical $1,000 payment made at the beginning of
the 1, 5, or 10-year period.
The Withdrawal Charge on Policies and all recurring fees that are
charged to all shareholder accounts (the Annual Administrative Fee) are
recognized in the ending redeemable value for standard total return figures.
These figures will not reflect any premium taxes.
Other Performance Data: Non-Standardized
The Company may from time to time also disclose average annual total
returns in non-standardized formats in conjunction with the standard format
described above. The non-standard format calculation varies from the standard
format calculation described above in that it will NOT take either Withdrawal
Charges or the Annual Administrative Fee into account and will be based on an
average Policy size of $30,000.
The standardized performance calculation described above is based on
the inception date of each Variable Sub-account. However, for the
non-standardized performance calculation, if a Portfolio was in existence prior
to the inception date of the corresponding Variable Sub-account, the performance
for the Variable Sub-account will be calculated on a hypothetical basis by
applying the Mortality and Expense Risk Charge and the Administrative Expense
Charge to the historical performance of the corresponding Portfolio as if the
Policy has been in existence back to the inception date of the Portfolio.
Page 9
<PAGE>
The Company may from time to time also disclose cumulative total
returns in conjunction with the standard format described above. Cumulative
total return figures represent the cumulative change in value of an investment
in a Sub-account over the indicated periods. The cumulative returns will be
calculated using the following formula, assuming no Withdrawal Charge or Annual
Administrative Fee.
CTR = ERV - P
-------
P
Where:
CTR = the cumulative total return net of a Variable Sub-account's
recurring charges for the period;
ERV = ending redeemable value at the end of the 1, 5 or 10-year (or
other) period (or fractional portion thereof) of a hypothetical
$30,000 premium payment made at the beginning of the one, five,
or ten-year (or other) period, and
P = a hypothetical initial premium payment of $30,000.
All non-standard performance data will only be advertised if the standard total
return performance data is also included in the advertisement.
Page 10
<PAGE>
Other Information
The following is a partial list of those publications which may be
cited in advertising or sales literature describing investment results or other
data relative to one or more of the Variable Sub-accounts. Other publications
may also be cited.
Broker World Financial World
Across the Board Advertising Age
American Banker Barron's
Best's Review Business Insurance
Business Month Business Week
Changing Times Consumer Reports
Economist Financial Planning
Forbes Fortune
Inc. Institutional Investor
Insurance Forum Insurance Sales
Insurance Week Journal of Accountancy
Journal of the American Society of CLU & ChFC Journal of Commerce
Life Insurance Selling Life Association News
MarketFacts Manager's Magazine
National Underwriter Money
Morningstar, Inc. Nation's Business
New Choices (formerly 50 Plus) New York Times
Pension World Pensions&Investments
Rough Notes Round the Table
U.S. Banker VARDs
Wall Street Journal Working Woman
Page 11
<PAGE>
OTHER INFORMATION
A Registration Statement has been filed with the Securities and
Exchange Commission, under the Securities Act of 1933, as amended, with respect
to the Polices discussed in this Statement of Additional Information. Not all of
the information set forth in the Registration Statement, amendments and exhibits
thereto has been included in the Prospectus for the Policies or this Statement
of Additional Information. Statements contained in the Prospectus and this
Statement of Additional Information concerning the content of the Policies and
other legal instruments are intended to be summaries. For a complete statement
of the terms of these documents, reference should be made to the instruments
filed with the Securities and Exchange Commission.
EXPERTS
The audited consolidated financial statements of Jefferson Pilot Financial
Insurance Company as of December 31, 1999 and for each of the two years ended
December 31, 1999, and the eight months ended December 31, 1997, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The audited financial statements of The Guarantee Life Companies Inc. (a
wholly-owned subsidiary of Jefferson Pilot Corporation and the former holding
company parent of GLIC) and subsidiaries as of December 31, 1999, and December
31, 1998, and for each of the years in the three-year period ended December 31,
1999, have been audited by KPMG LLP, independent auditors as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
FINANCIAL STATEMENTS
The supplemental financial statements of the Company included in this Statement
of Additional Information should be considered only as bearing on the ability of
the Company to meet its obligations under the Policies. They should not be
considered as bearing on the investment performance of the assets held in the
Separate Account, nor do they necessarily bear on the Guaranteed Interest Rates
declared from time to time for the Interest Rate Guarantee Periods of the
Guaranteed Interest Account.
Page 12
<PAGE>
Audited Consolidated Financial Statements
Jefferson Pilot Financial Insurance Company and Subsidiaries
As of December 31, 1999 and 1998 and for the two years ended December 31, 1999
and the eight months ended December 31, 1997
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Audited Consolidated Financial Statements
As of December 31, 1999 and 1998 and for the two years ended December
31, 1999 and the eight months ended December 31, 1997
Contents
Report of Independent Auditors.................................................1
Consolidated Balance Sheets....................................................2
Consolidated Statements of Income..............................................4
Consolidated Statements of Stockholder's Equity................................5
Consolidated Statements of Cash Flows..........................................6
Notes to Consolidated Financial Statements.....................................8
<PAGE>
Report of Independent Auditors
The Board of Directors
Jefferson Pilot Financial Insurance Company and Subsidiaries
We have audited the accompanying consolidated balance sheets of Jefferson Pilot
Financial Insurance Company (a wholly-owned subsidiary of Jefferson-Pilot
Corporation) and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholder's equity, and cash flows for each
of the two years in the period ended December 31, 1999 and for the eight month
period ended December 31, 1997. 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. 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Jefferson Pilot
Financial Insurance Company and subsidiaries at December 31, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the two years in the period ended December 31, 1999 and for the eight month
period ended December 31, 1997, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Greensboro, North Carolina
August 1, 2000
1
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Consolidated Balance Sheets
(In Thousands, except for Share Amounts)
<TABLE>
<CAPTION>
Assets December 31,
Invested assets: 1999 1998
-----------------------------------
<S> <C> <C>
Debt securities available-for-sale, at fair value (amortized cost $8,102,384
and $7,029,122) $ 7,827,493 $ 7,305,747
Debt securities held-to-maturity, at amortized cost (fair value $1,762,890 and
$1,862,069) 1,798,897 1,797,798
Equity securities available-for-sale, at fair value (cost $58,615 and $11,475) 55,023 23,631
Policy loans 654,431 1,194,703
Mortgage loans on real estate 1,120,310 772,304
Real estate 41,724 35,897
Other investments 18,749 8,004
-----------------------------------
Total investments 11,516,627 11,138,084
Cash and cash equivalents 156,672 14,663
Accrued investment income 169,244 143,231
Due from reinsurers 1,473,925 1,342,925
Deferred policy acquisition costs 329,513 223,337
Value of business acquired 949,095 568,208
Cost in excess of net assets acquired, net of accumulated amortization
(1999-$12,132; 1998-$9,406) 266,680 192,016
Property and equipment, net of accumulated depreciation (1999-
$53,368; 1998-$56,041) 34,951 16,066
Deferred federal income taxes 123,917 40,528
Assets held in separate accounts 1,483,931 919,493
Other assets 91,581 69,359
-----------------------------------
$16,596,136 $14,667,910
===================================
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Liabilities
Policy liabilities:
Policyholder contract deposits $10,781,694 $10,667,782
Future policy benefits 1,212,866 743,694
Policy and contract claims 173,612 80,832
Premiums paid in advance 2,148 2,851
Other policyholders' funds 243,502 109,102
-----------------------------------------
Total policy liabilities 12,413,822 11,604,261
Payable to affiliates 88,946 124,496
Liabilities related to separate accounts 1,483,931 919,493
Securities sold under repurchase agreements 302,358 150,372
Accrued expenses and other liabilities 255,990 138,194
-----------------------------------------
14,545,047 12,936,816
Commitments and contingencies
Redeemable preferred stock - 3,000
Stockholder's equity
Common stock, par value $5 per share, 600,000 shares authorized, issued
and outstanding 3,000 3,000
Paid in capital 1,714,338 1,288,454
Retained earnings 434,964 330,483
Accumulated other comprehensive income - net unrealized (losses) gains
on securities (101,213) 106,157
-----------------------------------------
2,051,089 1,728,094
-----------------------------------------
$16,596,136 $14,667,910
=========================================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Consolidated Statements of Income
(In Thousands)
<TABLE>
<CAPTION>
Eight months
Year ended ended
December 31, December 31,
1999 1998 1997
-------------------- ------------------- ---------------------
<S> <C> <C> <C>
Revenues
Premiums and policy charges $444,545 $447,388 $328,513
Net investment income 726,928 714,504 515,347
Realized investment (losses) gains (4,333) (355) 5,631
Other income 2,372 3,929 6,413
-------------------- ------------------- ---------------------
Total revenues 1,169,512 1,165,466 855,904
Benefits and expenses
Policy benefits and claims 649,388 675,770 514,470
Commissions and operating
expenses, net of deferrals 54,170 73,581 64,928
Amortization of intangibles 118,368 107,174 63,651
Taxes, licenses and fees 28,335 27,194 18,948
-------------------- ------------------- ---------------------
Total benefits and expenses 850,261 883,719 661,997
-------------------- ------------------- ---------------------
Income before federal income tax and
preferred stock dividends 319,251 281,747 193,907
Federal income tax expense:
Current 69,694 72,868 40,127
Deferred 45,076 28,048 28,623
-------------------- ------------------- ---------------------
114,770 100,916 68,750
-------------------- ------------------- ---------------------
Net income before preferred stock
dividends 204,481 180,831 125,157
Preferred stock dividends - 1,128 2,811
-------------------- ------------------- ---------------------
Net income $204,481 $179,703 $122,346
==================== =================== =====================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Consolidated Statements of Stockholder's Equity
(In Thousands)
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income - Total
Common Paid in Retained Net Unrealized (Losses) Stockholder's
Stock Capital Earnings Gains on Securities Equity
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, April 30, 1997 $ - $ - $ - $ - $ -
Purchase of JPFIC by JPCorp 3,000 782,500 - - 785,500
AHL balances at time of affiliation with
JPFIC - 532,388 98,434 (39,249) 591,573
Net income, eight months - - 122,346 - 122,346
Other comprehensive income - - - 128,801 128,801
----------------------------------------------------------
Comprehensive income 251,147
----------------------------------------------------------------------------------------
Balance, December 31, 1997 3,000 1,314,888 220,780 89,552 1,628,220
Net income - - 179,703 - 179,703
Other comprehensive income - - - 16,605 16,605
----------------------------------------------------------
Comprehensive income 196,308
Less dividends paid - - (70,000) - (70,000)
Purchase price adjustment - (26,434) - - (26,434)
----------------------------------------------------------------------------------------
Balance, December 31, 1998 3,000 1,288,454 330,483 106,157 1,728,094
Net income - - 204,481 - 204,481
Other comprehensive income - - - (207,370) (207,370)
----------------------------------------------------------
Comprehensive income (2,889)
Less dividends paid - - (100,000) - (100,000)
Acquisition of GLIC - 425,884 - - 425,884
----------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 3,000 $ 1,714,338 $ 434,964 $ (101,213) $2,051,089
========================================================================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Eight months
Year ended ended
December 31, December 31,
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $204,481 $179,703 $122,346
Adjustments to reconcile net income to
net cash provided by operating activities:
Change in future policy benefits, policy and
contract claims and premiums paid in advance, net 6,635 (103,826) 15,614
Credits to policyholder accounts, net 52,210 79,661 192,962
Policy acquisition costs deferred,
net of amortization (106,175) (91,387) (47,202)
Net amortization of value of
business acquired 59,607 47,704 (3,159)
Change in accrued investment income (6,250) (2,902) 704
Realized investment losses (gains) 4,333 355 (5,631)
Amortization of investment
premium 14,498 20,905 24,552
Provision for depreciation 6,417 10,737 1,210
Provision for deferred income tax 45,076 28,048 28,623
Change in receivables and asset accruals 5,800 (27,420) 75,840
Change in payables and expense accruals 59,476 73,872 (32,857)
Other operating activities, net (6,629) (16,878) 22,223
-----------------------------------------------------
Net cash provided by operating activities 339,479 198,572 395,225
-----------------------------------------------------
Investing activities
Proceeds from sales of debt securities 693,010 356,442 526,259
Proceeds from maturities of debt securities 978,645 994,576 551,720
Proceeds from sales of equity securities 2,616 11,294 10,386
Purchases of debt securities (1,567,094) (1,347,301) (1,042,253)
Purchases of equity securities (11,354) (13,805) (322)
Mortgage loans originated (279,375) (260,915) (323,058)
Repayments of mortgage loans 40,859 79,556 40,001
Policy loans issued, net of repayments (22,168) (12,004) 15,683
Other investing activities, net 5,896 6,996 1,405
-----------------------------------------------------
Net cash used in investing activities (158,965) (185,161) (220,179)
-----------------------------------------------------
</TABLE>
6
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(In Thousands)
<TABLE>
<CAPTION>
Eight months
Year ended ended
December 31, December 31,
1999 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C>
Financing activities
Deposits credited to policyholders' funds 834,017 902,909 763,509
Withdrawals from policyholders' funds (965,290) (966,006) (855,580)
Dividends paid (100,000) (70,000) -
Proceeds from securities sold under
repurchase agreements 151,986 150,593 (44,958)
Other financing activities (4,184) (53,068) (43,301)
-----------------------------------------------------------
Net cash used in financing activities (83,471) (35,572) (180,330)
-----------------------------------------------------------
Change in cash and cash equivalents 97,043 (22,161) (5,284)
Cash of GLIC at date of acquisition 44,966 - -
Cash and cash equivalents, beginning
of period 14,663 36,824 42,108
-----------------------------------------------------------
Cash and cash equivalents, end of period $ 156,672 $ 14,663 $ 36,824
===========================================================
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation
Principles of Consolidation
The consolidated financial statements presented herein represent the merger of
three insurance companies that previously were affiliated through a common
parent. The merger (reorganization of affiliates) under the common parent has
been accounted for on a basis similar to a pooling-of-interests utilizing the
parent's historical basis. The historical accounting basis includes the "pushed
down" effect of purchase accounting utilized by the common parent to the three
individual companies. The merger was effective August 1, 2000, and included no
additional consideration. The parties to the merger include Jefferson Pilot
Financial Insurance Company (the Company or JPFIC), the survivor in the
reorganization, acquired by the common parent Jefferson-Pilot Corporation
(JPCorp) effective April 30, 1997, Alexander Hamilton Life Insurance Company of
America (AHL), acquired by JPCorp in 1995 and Guarantee Life Insurance Company
(GLIC), a wholly-owned subsidiary of The Guarantee Life Companies, Inc., (TGLCI)
which was acquired by JPCorp effective December 30, 1999. The financial
statements presented include the periods for which each of three companies were
affiliated through common ownership by JPCorp. JPFIC is the survivor company,
and therefore, the related statements of income, stockholder's equity and cash
flows are presented only for the period in which JPCorp owned the Company.
Significant intercompany transactions have been eliminated in consolidation.
Nature of Business
After the merger, the Company is wholly-owned by JPCorp. The merged Company and
subsidiaries are principally engaged in the sale of individual life insurance
products, individual annuity products, individual investment products, and
worksite and group non-medical products (primarily term life and disability).
These products are marketed primarily through personal producing general agents
throughout the Unites States.
Acquisitions
JPCorp acquired the Company on May 13, 1997, with an effective date of April 30,
1997. The acquisition was accounted for as a purchase, utilizing "push down"
accounting, and the assets and liabilities were recorded at fair value as of
April 30, 1997. The original cost of the acquisition as of April 30, 1997 was
$785 million, including all acquisition costs. Subsequent adjustments to the
original purchase price in 1998 resulted in a downward adjustment of the
purchase price to $759 million. The amount allocated to value of business
acquired and cost in excess of net assets acquired was $460 million and $100
million, respectively.
8
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Basis of Presentation (continued)
Acquisitions (continued)
AHL was acquired by JPCorp on October 1, 1995, and included substantially all of
the life insurance and single premium deferred annuity contracts in force as of
the acquisition date. Certain blocks of business including structured
settlements, lottery business and Corporate Owned Life Insurance (COLI) written
prior to the acquisition as well as certain business written in conjunction with
the seller's lending business were 100% reinsured with affiliates of the seller
on a coinsurance basis. The aggregate purchase was $575 million including all
acquisition costs. The value of business acquired resulting from this
acquisition amounted to $325 million while cost in excess of net assets acquired
came to $50 million.
GLIC was acquired by JPCorp through the acquisition of its parent on December
30, 1999 for an aggregate purchase price of $426 million. The preliminary amount
allocated to value of business acquired and cost in excess of net assets
acquired was $206 million and $81 million, respectively.
The following proforma results of operations for the year ended December 31,
1999, assume that the GLIC acquisition occurred as of January 1, 1999. The
proforma results have been prepared for comparative purposes only and do not
purport to indicate the results of operations which would have actually been
reported had the acquisition occurred on January 1, 1999, or which may occur in
the future (in thousands):
Net revenues $1,665,614
Net income $ 207,136
9
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements requires management to make estimates
and assumptions affecting the reported amounts of assets and liabilities, the
disclosures of contingent assets and liabilities as of the date of the financial
statements, and the reported amounts of revenues and expenses for the reporting
period. Those estimates are inherently subject to change and actual results
could differ from those estimates. Included among the material (or potentially
material) reported amounts and disclosures that require extensive use of
estimates are asset valuation allowances, policy liabilities, deferred policy
acquisition costs, value of business acquired and the potential effects of
resolving litigated matters.
Cash and Cash Equivalents
The Company includes with cash and cash equivalents its holdings of short-term
investments which are highly liquid investments that mature within three months
of the date of acquisition.
Invested Assets
Debt securities are classified as either securities held-to-maturity, stated at
amortized cost, or as securities available-for-sale, stated at fair value with
net unrealized gains and losses included in accumulated other comprehensive
income, net of deferred income taxes and adjustments to deferred policy
acquisition costs and value of business acquired.
Equity securities are classified as securities available-for-sale, stated at
fair value with net unrealized gains and losses included in accumulated other
comprehensive income, net of deferred income taxes and adjustments to deferred
policy acquisition costs and value of business acquired.
Policy loans are carried at the unpaid balances.
10
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Invested Assets (continued)
Mortgage loans on real estate are stated at the unpaid balances, net of
allowances for unrecoverable amounts. The Company's mortgage loan portfolio is
comprised primarily of conventional real estate mortgages collateralized by
retail (28%) and (33%), apartment (20%) and (18%), industrial (24%) and (17%),
hotel (11%) and (14%), and office (17%) and (16%) properties at December 31,
1999 and 1998, respectively.
Mortgage loan underwriting standards emphasize the credit status of a
prospective borrower, quality of the underlying collateral and conservative
loan-to-value relationships. Of stated mortgage loan balances as of December 31,
1999 and 1998, 29% and 28% are due from borrowers in South Atlantic states, 24%
and 28% are due from borrowers in West South Central states, 10% and 10% are due
from borrowers in West North Central states, 11% and 7% are due from borrowers
in East North Central states, 10% and 7% are due from borrowers in Pacific
states, and 10% and 12% are due from borrowers in Mountain states. No other
geographic region represents as much as 10% of December 31, 1999 and 1998
mortgage loans.
Amortization of premiums and accrual of discounts on investments in debt
securities are reflected in earnings over the contractual terms of the
investments in a manner that produces a constant effective yield. Realized gains
and losses on dispositions of securities are determined by the specific
identification method.
Recognition of Revenues, Benefits, Claims and Expenses
Universal Life Products
Universal life products include universal life insurance, variable universal
life insurance and other interest-sensitive life insurance policies. Revenues
for universal life products consist of policy charges for the cost of insurance,
policy administration and surrenders that have been assessed against policy
account balances during the period.
Policy fund liabilities for universal life and other interest-sensitive life
insurance policies are computed in accordance with the retrospective deposit
method and represent policy account balances before surrender charges. Policy
fund assets and liabilities for variable universal life insurance are segregated
and recorded as separate account assets and liabilities. Separate account assets
are carried at market values as of the balance sheet date and are invested by
the Company
11
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Recognition of Revenues, Benefits, Claims and Expenses (continued)
at the direction of the policyholder. Investments are made in different
portfolios in a series fund. Each of the portfolios has specific investment
objectives and the investment income and investment gains and losses accrue
directly to, and investment risk is borne by, the policyholders. Accordingly,
operating results of the separate accounts are not included in the consolidated
statements of income.
Policy claims that are charged to expense include claims incurred in the period
in excess of related policy account balances. Other policy benefits include
interest credited to universal life and other interest-sensitive life insurance
policies.
Investment Products
Investment products include variable annuities, fixed premium annuities,
flexible premium annuities, structured settlement annuities and other
supplementary contracts without life contingencies. Revenues for investment
products consist of policy charges for the cost of insurance, policy
administration and surrenders that have been assessed against policy account
balances during the period. Deposits for these products are recorded as policy
fund liabilities, which are increased by interest credited to the liabilities
and decreased by withdrawals and policy charges assessed against the contract
holders.
Traditional Life Insurance Products
Traditional life insurance products include those products with fixed and
guaranteed premiums and benefits. Premium revenues for traditional life
insurance are recognized as revenues when due. The liabilities for future policy
benefits are computed by the net level premium method based on estimated future
investment yield, mortality and withdrawal experience. Mortality is calculated
principally on an experience multiple applied to select and ultimate tables in
common usage in the industry. Estimated withdrawals are determined principally
based on industry tables. Policy benefits and claims are charged to expense as
incurred.
Interest Rate Assumptions
The liability for future policy benefits associated with ordinary life insurance
policies has been determined using initial interest rate assumptions ranging
from 2% to 9.9% and, when applicable, uniform grading over 20 to 30 years to
ultimate rates ranging from 2% to 6%.
12
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Recognition of Revenues, Benefits, Claims and Expenses (continued)
Credited interest rates for universal life-type products ranged from 4.1% to
6.6% in 1999, 3.8% to 6.85% in 1998, and 4% to 7.5% in 1997. The average
credited interest rates for universal life-type products were 5.28%, 5.96% and
6.25% for 1999, 1998 and 1997. For annuity products, credited interest rates
generally ranged from 4% to 6% in 1999, 1998, and 1997.
Accident and health and disability insurance premiums are earned on a monthly
pro rata basis over the terms of the policies. Benefits include paid claims plus
an estimate for known claims and claims incurred but not reported as of the
balance sheet date.
Policy and Contract Claims
The liability for policy and contract claims consists of the estimated amount
payable for claims reported but not yet settled, and an estimate of claims
incurred but not reported, which is based on historical experience, adjusted for
trends and circumstances. Management believes that the recorded liability is
sufficient to provide for the associated claims adjustment expenses.
Reinsurance
Reinsurance receivables include amounts recoverable from reinsurers related to
paid benefits and estimated amounts related to unpaid policy and contract
claims, future policy benefits and policyholder contract deposits. The cost of
reinsurance is accounted for over the terms of the underlying reinsured policies
using assumptions consistent with those used to account for the policies.
Deferred Policy Acquisition Costs and Value of Business Acquired
Costs related to obtaining new business, including commissions, certain costs of
underwriting and issuing policies and certain agency office expenses, all of
which vary with and are primarily related to the production of new business,
have been deferred.
Deferred policy acquisition costs for traditional life insurance polices are
amortized over the premium paying periods of the related contracts using the
same assumptions for anticipated premium revenue that are used to compute
liabilities for future policy benefits. For universal life and investment
products, these costs are amortized at a constant rate based on the present
value of the estimated future gross profits to be realized over the terms of the
contracts, not to exceed 25 years.
13
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Deferred Policy Acquisition Costs and Value of Business Acquired (continued)
Value of business acquired represents the actuarially determined present value
of anticipated profits to be realized from life insurance and annuity business
purchased, using the same assumptions used to value the related liabilities.
Amortization of the value of business acquired occurs over the related contract
periods, using current crediting rates to accrete interest and a constant
amortization rate based on the present value of expected future profits.
The carrying amounts of deferred policy acquisition costs and value of business
acquired related to universal life and investment contracts is adjusted to
reflect the effects that the unrealized gains or losses on investments
classified as available-for-sale would have had on the present value of
estimated gross profits had such gains or losses actually been realized. This
adjustment is excluded from income and charged or credited directly to
accumulated other comprehensive income, net of applicable deferred income tax.
The carrying amounts of deferred policy acquisition costs and value of business
acquired are also adjusted for the effect of realized gains and losses.
The carrying amounts of deferred policy acquisition costs and value of business
acquired are reviewed periodically to determine that the unamortized portion
does not exceed expected recoverable amounts. No impairment adjustments have
been reflected in earnings for any period presented.
Cost in Excess of Net Assets Acquired
The excess of JPCorp's purchase price over the fair value of assets acquired,
which has been "pushed down" to the Company level for financial reporting
purposes, is being amortized on a straight-line basis over 25 to 35 years.
Carrying amounts are regularly reviewed for indications of value impairment,
with consideration given to financial performance and other relevant factors.
Property and Equipment
Property and equipment used in operations are carried at cost, less accumulated
depreciation. Depreciation is calculated using the straight-line method over the
estimated remaining useful lives of the assets.
14
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Federal Income Taxes
For each of the periods presented, each of the insurance companies, JPFIC, AHL
and TGLCI, have filed separate consolidated tax returns with their wholly-owned
subsidiaries.
Deferred income tax assets and liabilities are recorded on the differences
between the tax bases of assets and liabilities and the amounts at which they
are reported in the financial statements. Recorded amounts are adjusted to
reflect changes in income tax rates and other tax law provisions as they become
enacted.
New Accounting Pronouncement
Effective January 1, 2001, the Company will adopt SFAS 133, "Accounting for
Derivative Instruments and for Hedging Activities". SFAS 133 requires companies
to recognize all derivatives on the balance sheet at fair value and establishes
special accounting rules for hedging activities. The effect of the hedge
accounting rules is to permit a company to offset changes in fair value or cash
flows of both the hedged item and hedging instrument in earnings in the same
period. Changes in the fair value of derivatives that do not qualify for hedge
accounting are reported in earnings in the period of the change. Based on the
limited nature of the Company's use of derivatives and hedging activities,
adoption of this pronouncement is not expected to have a material impact on the
Company's financial position or results of operations.
15
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Invested Assets
Aggregate amortized cost, aggregate fair value and gross unrealized gains and
losses of debt securities were as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale carried
at fair value
U.S. Treasury obligations and direct
obligations of U.S. government
agencies $ 156,185 $ 439 $ (275) $ 156,349
Corporate bonds 5,116,508 8,135 (211,387) 4,913,256
Obligations of states and political
subdivisions 7,582 - (883) 6,699
Mortgage-backed securities 2,809,367 9,564 (80,794) 2,738,137
Redeemable preferred stocks 12,742 381 (71) 13,052
------------------------------------------------------------------------
Total debt securities $8,102,384 $18,519 $(293,410) $7,827,493
========================================================================
Held-to-maturity carried
at amortized cost
U.S. Treasury obligations and
direct obligations of U.S.
government agencies $ 6,616 $ - $ - $ 6,616
Corporate bonds 1,735,122 1,999 (37,650) 1,699,471
Obligations of states and
political subdivisions 11,091 - - 11,091
Mortgage-backed securities 2,985 - - 2,985
Affiliate bonds 43,083 3 (359) 42,727
------------------------------------------------------------------------
Total debt securities $1,798,897 $2,002 $(38,009) $1,762,890
========================================================================
</TABLE>
16
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Invested Assets (continued)
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Available for sale carries
at fair value
U.S. Treasury obligations
and direct obligations of
U.S. government agencies $ 127,215 $ 6,425 $ - $ 133,640
Corporate bonds 4,194,389 202,304 (31,262) 4,365,431
Obligations of states and
political subdivisions 12,225 97 (165) 12,157
Mortgage-backed securities 2,681,474 104,692 (6,599) 2,779,567
Redeemable preferred stocks 13,819 1,154 (21) 14,952
----------------- ---------------- ---------------- -----------------
Total debt securities $7,029,122 $ 314,672 $ (38,047) $7,305,747
================= ================ ================ =================
Held to maturity carried
at amortized cost
Corporate bonds $1,752,631 $63,498 $ (2,235) $1,813,894
Affiliate bonds 45,167 3,008 - 48,175
----------------- ---------------- ---------------- -----------------
Total debt securities $1,797,798 $ 66,506 $ (2,235) $1,862,069
================= ================ ================ =================
</TABLE>
Affiliate bonds consist of securities issued by Jefferson-Pilot Communications
Company, an affiliate. Interest earned on these bonds totaled $3.1 million, $3.3
million and $2.9 million in 1999, 1998 and 1997, respectively.
17
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Invested Assets (continued)
Aggregate amortized cost and aggregate fair value of debt securities at December
31, 1999 by contractual maturity were as follows (in thousands):
<TABLE>
Available-for-Sale Held-to-Maturity
----------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 178,084 $ 178,114 $ 222,498 $ 222,543
Due after one year through five years 1,197,090 1,181,542 726,094 716,731
Due after five years through ten years 1,761,089 1,681,859 189,634 183,210
Due after ten years 963,539 922,923 123,780 121,722
Amounts not due at a single maturity date 4,002,582 3,863,055 536,891 518,684
----------------------------------------------------------------
$8,102,384 $7,827,493 $1,798,897 $1,762,890
================================================================
</TABLE>
Actual future maturities will differ from the contractual maturities shown
because the issuers of certain debt securities have the right to call or prepay
the amounts due to the Company, with or without penalty.
The sources of net investment income were as follows (in thousands):
<TABLE>
<CAPTION>
Eight months
ended
Year ended December 31, December 31,
1999 1998 1997
----------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $648,201 $647,093 $470,786
Equity securities 2,817 2,710 3,477
Policy loans 27,098 24,598 16,086
Mortgage loans 71,170 53,549 28,851
Other 7,086 11,316 9,439
----------------------------------------------------------------
Gross investment income 756,372 739,266 528,639
Investment expenses 29,444 24,762 13,292
----------------------------------------------------------------
Net investment income $726,928 $714,504 $515,347
================================================================
</TABLE>
18
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Invested Assets (continued)
Realized investment gains and (losses) were as follows (in thousands):
<TABLE>
<CAPTION>
Eight months
ended
Year ended December 31, December 31,
1999 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C>
Debt securities $(4,932) $ 7,679 $ 4,826
Equity securities (95) 2,899 1,534
Real estate 157 1,640 532
Increase in mortgage loan valuation allowance (411) (9,800) -
Amortization of value of business acquired
and deferred policy acquisition costs 1,643 (2,365) (444)
Other (695) (408) (817)
------------------------------------------------------------
$(4,333) $ (355) $ 5,631
============================================================
</TABLE>
Information about gross realized gains and losses on available-for-sale
securities transactions is as follows (in thousands):
<TABLE>
<CAPTION>
Eight months
ended
Year ended December 31, December 31,
1999 1998 1997
----------------- ------------------- -------------------
<S> <C> <C> <C>
Gross realized:
Gains $ 6,786 $17,299 $15,388
Losses (12,354) (7,247) (8,699)
----------------- ------------------- -------------------
Net realized (losses) gains on available-for-
sale securities $ (5,568) $10,052 $ 6,689
================= =================== ===================
</TABLE>
19
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Invested Assets (continued)
The changes in unrealized gains and (losses) on securities classified as
available-for-sale for the Company were as follows (in thousands):
<TABLE>
<CAPTION>
Eight months
ended
Year ended December 31, December 31,
1999 1998 1997
--------------------------------------------------------------
<S> <C> <C> <C>
Change in equity securities $ (1,902) $ (1,697) $ 3,842
Change in debt securities (551,516) 44,398 315,835
Change in value of business acquired
adjustment 234,387 (17,156) (121,522)
--------------------------------------------------------------
(319,031) 25,545 198,155
Deferred income taxes 111,661 (8,940) (69,354)
--------------------------------------------------------------
Change in net unrealized gains $(207,370) $ 16,605 $ 128,801
==============================================================
</TABLE>
The Company participates in a securities lending program. The Company generally
receives cash collateral in an amount that is in excess of the market value of
the securities loaned. Market values of securities loaned and collateral are
monitored daily, and additional collateral is obtained as necessary. At December
31, 1999, the market value of securities loaned and collateral received amounted
to $59.7 million and $63.1 million, respectively. At December 31, 1998, the
market value of securities loaned and collateral received amounted to $99.7
million and $104.3 million, respectively.
The allowance for credit losses on mortgage loans increased from $0 at April 30,
1997 to $9.8 million at December 31, 1998 to $10.2 million at December 31, 1999.
20
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Derivatives
Use of Derivatives
The Company's investment policy permits the use of derivative financial
instruments such as interest rate swaps in certain circumstances. The following
summarizes open interest rate swaps at December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------ --- ------------------
<S> <C> <C>
Received-fixed swaps held as hedges of direct
investments
Notional amount $137,440 $137,440
Average rate received 7.28% 7.28%
Average rate paid 5.62% 5.55%
Received-fixed swaps held to modify annuity
crediting rates
Notional amount $17,500 $17,500
Average rate received 6.78% 6.78%
Average rate paid 5.33% 5.31%
</TABLE>
Hedging Direct Investments
Interest rate swaps are used to reduce the impact of interest rate fluctuations
on specific floating-rate direct investments. Interest is exchanged periodically
on the notional value, with the Company receiving a fixed rate and paying a
short-term LIBOR rate on a net exchange basis. The net amount received or paid
under swaps is reflected as an adjustment to investment income. All of the
hedges are of investments classified as available-for-sale, and net unrealized
gains and losses, net of the effects of income taxes and the impact on deferred
policy acquisition costs and the value of business acquired, are not significant
and are included in accumulated other comprehensive income in stockholder's
equity as of December 31, 1999 and 1998.
21
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Derivatives (continued)
Modifying Annuity Crediting Rates
Interest rate swaps are used to modify the interest characteristics of certain
blocks of annuity contract deposits. Interest is exchanged periodically on the
notional value, with the Company receiving a fixed rate and paying various
short-term LIBOR rates on a net exchange basis. The net amount received or paid
under these swaps is reflected as an adjustment to annuity benefits.
Hedging Equity Indexed Annuity Crediting Rates
GLIC marketed an equity indexed annuity product which has an equity market
component, where interest credited to the contracts is linked to the performance
of the S&P 500 index. GLIC historically managed this risk by purchasing call
options that mirrored the interest credited to the contracts. As of December 31,
1999, the fair value of these options totaled $5 million. The fair value equaled
the carrying value due to the mark-to-market adjustment made to GLIC's assets as
of the acquisition date.
Credit and Market Risk
The Company is exposed to credit risk in the event of non-performance by
counterparties to swap agreements. The Company limits this exposure by entering
into swap agreements with counterparties having high credit ratings and by
regularly monitoring the ratings.
The Company's credit exposure on swaps is limited to the fair value of swap
agreements that are favorable to the Company. The Company does not expect any
counterparty to fail to meet its obligation; however, non-performance would not
have a material adverse effect on the Company's financial position or results of
operations.
The Company's exposure to market risk is mitigated by the offsetting effects of
changes in the value of swap agreements and the related direct investments. The
Company routinely monitors correlation between hedged items and hedging
instruments. In the event a hedge relationship is terminated or loses
correlation, any related hedging instrument that remained would be
marked-to-market through income. If the hedging instrument is terminated, any
gain or loss is deferred and amortized over the remaining life of the hedged
asset.
22
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Deferred Policy Acquisition Costs and Value of Business Acquired
Policy acquisition costs deferred and the related amortization charged to income
were as follows (in thousands):
<TABLE>
<CAPTION>
Eight months
ended
Year ended December 31, December 31,
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $ 223,337 $ 132,215 $ -
AHL balance at time of affiliation with JPFIC - - 64,658
Deferral:
Commissions 104,033 78,759 49,865
Other 30,801 29,960 23,218
------------------------------------------------------
134,834 108,719 73,083
Amortization (29,273) (17,332) (5,526)
Adjustment related to realized losses (gains) on debt
securities 615 (265) -
------------------------------------------------------
Ending balance $ 329,513 $ 223,337 $132,215
======================================================
</TABLE>
Changes in the value of business acquired were as follows (in thousands):
<TABLE>
<CAPTION>
Eight months
ended
Year ended December 31, December 31,
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
Beginning balance $568,208 $622,438 $ -
Purchase of JPFIC by JPCorp. - - 481,600
AHL balance at time of affiliation with JPFIC - - 279,556
Deferral of commissions and accretion
of interest 22,142 37,281 36,809
Amortization (82,778) (83,518) (53,561)
Adjustment related to purchase accounting
adjustments 206,108 11,263 -
Adjustment related to realized losses (gains) on
debt securities 1,028 (2,100) (444)
Adjustment related to unrealized losses (gains) on
securities available-for-sale 234,387 (17,156) (121,522)
-----------------------------------------------------
Ending balance $949,095 $568,208 $ 622,438
=====================================================
</TABLE>
23
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Deferred Policy Acquisition Costs and Value of Business Acquired (continued)
Expected approximate amortization percentages of the value of business acquired
as of December 31, 1999 over the next five years were as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
2000 9.8%
2001 8.7%
2002 7.8%
2003 7.1%
2004 6.4%
</TABLE>
6. Federal Income Taxes
The tax effects of temporary differences that gave rise to deferred income tax
assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
-----------------------------------
<S> <C> <C>
Deferred income tax assets:
Difference in policy liabilities $ 253,904 $ 266,372
Net unrealized losses on securities 54,699 -
Obligation for postretirement benefits 650 -
Depreciation differences - 2,263
Deferred compensation 20,577 19,445
Differences in investment basis 7,754 -
Other deferred tax assets 80,677 38,186
-----------------------------------
Gross deferred tax assets 418,261 326,266
Deferred income tax liabilities:
Net unrealized gains on securities - (57,162)
Deferral of policy acquisition costs and value of business acquired (251,052) (184,861)
Deferred gain recognition for income tax purposes - (11,115)
Obligation for postretirement benefits - (40)
Depreciation differences (3,678) -
Other deferred tax liabilities (39,614) (32,560)
-----------------------------------
Gross deferred tax liabilities (294,344) (285,738)
-----------------------------------
Net deferred income tax assets $ 123,917 $ 40,528
===================================
</TABLE>
24
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Federal Income Taxes (continued)
Under prior federal income tax law, one-half of the excess of a life insurance
company's income from operations over its taxable investment income was not
taxed, but was set aside in a special tax account designated as "Policyholders'
Surplus". The Company has approximately $15.8 million of untaxed "Policyholders'
Surplus" on which no payment of federal income taxes will be required unless it
is distributed as a dividend, or under other specified conditions. The Clinton
administration is proposing to tax, as part of its 2001 budget initiative, the
"Policyholders' Surplus" over a five-year period. No related deferred tax
liability has been recognized for the potential tax which would approximate $5.5
million under current proposed rates.
Federal income taxes paid in 1999 and 1998 were $52 million and $70 million,
respectively. Federal income taxes paid in the eight month period ended December
31, 1997 were $47 million.
7. Retirement Benefit Plans
Pensions
The Company's employees participate in JPCorp's defined benefit pension plans
covering substantially all employees. The plans are noncontributory and are
funded through group annuity contracts issued by Jefferson-Pilot Life Insurance
Company, an affiliate. The assets of the plan are those of the related
contracts, and are primarily held in the separate accounts of Jefferson-Pilot
Life Insurance Company. The plans provide benefits based on annual compensation
and years of service. The funding policy is to contribute annually no more than
the maximum amount deductible for federal income tax purposes. The plans are
administered by JPCorp. Pension expense for all years presented was not
significant.
Other Postretirement Benefits
The Company provides certain other postretirement benefits, principally health
care and life insurance, to retired employees and their beneficiaries and
covered dependents. The Company contributes to a welfare benefit trust from
which future benefits will be paid. The Company accrues the cost of providing
postretirement benefits other than pensions during the employees' active service
period. Plan expense for all years presented was not significant.
Defined Contribution Plans
Defined contribution retirement plans cover most employees and full time agents.
The Company matches a portion of participant contributions and makes profit
sharing contributions to a fund that acquires and holds shares of JPCorp's
common stock. Most plan assets are invested under a group variable annuity
contract issued by Jefferson-Pilot Life Insurance Company. Plan expense for all
years presented was not significant.
25
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingent Liabilities
The Company leases electronic data processing equipment and field office space
under noncancelable operating lease agreements. The lease terms generally range
from three to five years. Neither annual rent nor future rental commitments are
significant.
The Company routinely enters into commitments to extend credit in the form of
mortgage loans and to purchase certain debt securities for its investment
portfolio in private placement transactions. The fair value of outstanding
commitments to fund mortgage loans and to acquire debt securities in private
placement transactions, which are not reflected in the consolidated balance
sheet, approximates $4.5 million as of December 31, 1999.
The Company is a defendant in a proposed class action suit. The suit alleges
deceptive practices, fraudulent and negligent misrepresentation and breach of
contract in the sale of certain life insurance policies using policy
illustrations which plaintiffs claim were misleading. Unspecified compensatory
and punitive damages, costs and equitable relief are sought in the case. While
management is unable to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome in the case, management
believes that it has made appropriate disclosures to policyholders as a matter
of practice, and intends to vigorously defend its position.
In the normal course of business, the Company and its subsidiaries are parties
to various lawsuits. Because of the considerable uncertainties that exist, the
Company cannot predict the outcome of pending or future litigation. However,
management believes that the resolution of pending legal proceedings will not
have a material adverse effect on the Company's financial position or liquidity,
although it could have a material adverse effect on the results of operations
for a specific period.
9. Reinsurance
The Company attempts to reduce its exposure to significant individual claims by
reinsuring portions of certain life insurance contracts written. The maximum
amount of individual life insurance retained on any one life, including
accidental death benefits, is $1.5 million.
26
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Reinsurance (continued)
The effect of reinsurance in the consolidated statements of income for the year
ended December 31, 1999 was as follows (in thousands):
<TABLE>
<CAPTION>
Eight months ended
Year ended December 31, December 31,
1999 1998 1997
-------------------------------------------------------
<S> <C> <C> <C>
Direct premiums and other considerations $561,978 $557,495 $370,897
Less premiums and other
considerations ceded 118,336 140,998 43,588
Plus premiums and other
considerations assumed 903 30,891 1,204
-------------------------------------------------------
Net premiums and other
considerations $444,545 $447,388 $328,513
=======================================================
Policy benefits and claims ceded $232,886 $263,789 $ 89,643
=======================================================
</TABLE>
Reinsurance contracts do not relieve the Company from its primary obligation to
policyholders. Therefore, the failure of a reinsurer to discharge its
reinsurance obligations could result in a loss to the Company. The Company
regularly evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk related to reinsurance activities. No significant
credit losses resulted from the Company's reinsurance activities during any
period presented.
The Company reinsured 100% of the Periodic Payment Annuities (PPA), COLI and
Affiliated credit insurance business written prior to the AHL acquisition by
JPCorp in 1995 with affiliates of Household International, Inc. on a coinsurance
basis. Balances are settled monthly, and the Company is compensated by the
reinsurers for administrative services related to the reinsured business. The
amounts due from reinsurers in the consolidated balance sheets include $1,080
million and $1,057 million due from the Household affiliates at December 31,
1999 and 1998.
27
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Reinsurance (continued)
Assets related to the reinsured PPA and COLI business have been placed in
irrevocable trusts formed to hold the assets for the benefit of the Company and
are subject to investment guidelines which identify (1) the types and standards
of securities in which new investments are permitted, (2) prohibited new
investments, (3) individual credit exposure limits and (4) portfolio
characteristics. Household has unconditionally and irrevocably guaranteed, as
primary obligor, full payment and performance by its affiliated reinsurers. The
Company has the right to terminate the PPA and COLI reinsurance agreements by
recapture of the related assets and liabilities if Household does not take a
required action under the guarantee agreements within 90 days of a triggering
event. The Company has the option to terminate the PPA and COLI reinsurance
agreements on the seventh anniversary of the acquisition, by recapturing the
related assets and liabilities at an agreed-upon price or their then current
fair values as independently determined.
As of December 31, 1999 and 1998, the Company had a reinsurance recoverable of
$87 million and $95 million, respectively, from a another reinsurer, pursuant to
a 50% coinsurance agreement. The Company and the reinsurer are joint and equal
owners in $191 million of securities and short-term investments as of December
31, 1999 and 1998, respectively, 50% of which is included in investments in the
accompanying consolidated balance sheets.
10. Statutory Financial Information
The Company prepares financial statements on the basis of statutory accounting
practices (SAP) prescribed or permitted by the Nebraska Department of Insurance.
Prescribed SAP include a variety of publications of the National Association of
Insurance Commissioners (NAIC) as well as state laws, regulations and
administrative rules. Permitted SAP encompass all accounting practices not so
prescribed. The impact of permitted accounting practices on statutory capital
and surplus is not significant for the Company.
28
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Statutory Financial Information (continued)
The principal differences between SAP and generally accepted accounting
principles (GAAP) as they relate to the financial statements of the Company are
(1) policy acquisition costs are expensed as incurred under SAP, whereas they
are deferred and amortized under GAAP, (2) amounts collected from holders of
universal life-type and investment products are recognized as premiums when
collected under SAP, but are initially recorded as contract deposits under GAAP,
with cost of insurance recognized as revenue when assessed and other contract
charges recognized over the periods for which services are provided, (3) the
classification and carrying amounts of investments in certain securities are
different under SAP than under GAAP, (4) the criteria for providing asset
valuation allowances, and the methodologies used to determine the amounts
thereof, are different under SAP than under GAAP, (5) the timing of establishing
certain reserves, and the methodologies used to determine the amounts thereof,
are different under SAP than under GAAP, (6) no provision is made for deferred
income taxes under SAP, and (7) certain assets are not admitted for purposes of
determining surplus under SAP.
Reported capital and surplus on a statutory basis (including GLIC at December
31, 1999 only) at December 31, 1999 and 1998 was $874 million and $651 million.
Reported statutory net income (excluding GLIC) for the years ended December 31,
1999 and 1998 was $198 million and $191 million, respectively, and for the eight
months ended December 31, 1997 was $95 million.
Prior to the acquisition of GLIC by JPCorp, GLIC converted from a mutual form to
a stock life company. In connection with that conversion, GLIC agreed to
segregate certain assets to provide for dividends on participating policies
using dividend scales in effect at the time of the conversion, providing that
the experience underlying such scales continued. The assets, including the
revenue therefrom, allocated to the participating policies will accrue solely to
the benefit of those policies. At December 31, 1999, the assets and liabilities
relating to these participating policies amounted to $332 million and $371
million. The excess of liabilities over the assets represents the total
estimated future earnings expected to emerge from these participating policies.
29
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Statutory Financial Information (continued)
The amount of GAAP equity in excess of statutory surplus is unavailable for
distribution. In addition, various state insurance laws restrict the Company and
its insurance subsidiaries as to the amount of dividends from statutory surplus
they may pay without the prior approval of regulatory authorities. The
restrictions generally are based on net gains from operations and on certain
levels of surplus as determined in accordance with statutory accounting
practices. Dividends in excess of such thresholds are considered "extraordinary"
and require prior regulatory approval.
Risk-Based Capital ("RBC") requirements promulgated by the NAIC require life
insurers to maintain minimum capitalization levels that are determined based on
formulas incorporating credit risk, insurance risk, interest rate risk and
general business risk. As of December 31, 1999, JPFIC, AHL, and GLIC each had
adjusted capital and surplus that exceeded authorized control level RBC.
The NAIC Codification of Statutory Accounting Principles (Codification) has been
completed. The purpose of Codification is to create uniformity in statutory
financial reporting across states. Codification must be adopted by individual
states before it will have any bearing on the statutory reporting requirements
of their domiciliary companies. The NAIC is encouraging the states to adopt
Codification as soon as possible, with an implementation date of January 1,
2001. The Company does not expect implementation to have a material impact on
its statutory surplus; however, implementation is expected to result in a net
reduction of statutory surplus and RBC throughout the insurance industry.
11. Transactions with Affiliated Companies
The Company has entered into service agreements with JPCorp and other
subsidiaries of JPCorp for personnel and facilities usage, general management
services and investment management services. The Company expensed $75.7 million,
$83.3 million, and $73.8 million in 1999, 1998, and the eight months ended
December 31, 1997 for general management and investment services provided by
Jefferson-Pilot Life Insurance Company, another wholly-owned subsidiary of
JPCorp of which $55.9 million and $60.7 million remained payable as of December
31, 1999 and 1998, respectively. The remainder of the payable to affiliates at
year end was due to other affiliates.
30
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Fair Values of Financial Instruments
Fair values of financial instruments are based on quoted market prices where
available. Fair values of financial instruments for which quoted market prices
are not available are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rates and the estimates of future cash flows. Certain
financial instruments, particularly insurance contracts, are excluded from fair
value disclosure requirements.
The methods and assumptions used to estimate the fair value of financial
instruments are as follows:
o Fair values of debt securities with active markets are based on quoted
market prices. For debt securities that trade in less active markets,
fair values are obtained from independent pricing services. Fair
values of debt securities are principally a function of current
interest rates.
o Fair values of equity securities are based on quoted market prices.
o The carrying value of cash and cash equivalents approximates fair
value due to the short maturities of these assets.
o Fair values of policy loans and mortgage loans are estimated using
discounted cash flow analyses.
o Fair values of separate account assets and liabilities are reflected
in the consolidated balance sheets.
o Annuity contracts do not generally have defined maturities. Therefore,
fair values of the liabilities under annuity contracts, the carrying
amounts of which are included with policyholder contract deposits in
the consolidated balance sheets, are estimated to equal the cash
surrender values of the contracts.
o Fair value of the Company's redeemable preferred stock approximates
its stated amount because its dividend rate is adjustable.
o Fair values of securities sold under repurchase agreements approximate
carrying values, which include accrued interest.
31
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Fair Values of Financial Instruments (continued)
The carrying value and fair value of financial instruments were as follows (in
thousands):
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998
-----------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Debt securities available-for-sale $7,827,862 $7,827,862 $7,295,526 $7,295,526
Interest rate swaps available-for-sale (369) (369) 10,221 10,221
Debt securities held-to-maturity 1,798,897 1,763,127 1,797,798 1,860,736
Interest rate swaps held-to-maturity - (237) - 1,333
Equity securities available-for-sale 55,023 55,023 23,631 23,631
Cash and cash equivalents 156,672 156,672 14,663 14,663
Policy loans 654,431 714,121 1,194,703 1,238,437
Mortgage loans on real estate 1,120,310 1,064,177 772,304 814,707
Financial Liabilities
Annuity contracts in accumulation phase 2,969,170 2,904,528 3,275,463 3,184,119
Redeemable preferred stock - - 3,000 3,000
Securities sold under repurchase agreements 302,358 302,358 150,372 150,372
</TABLE>
Securities sold under repurchase agreements with a single counterparty, Credit
Suisse First Boston Corporation, totaled $149 million at December 31, 1999, and
had maturity dates ranging from January to March, 2000.
32
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Other Comprehensive Income
Comprehensive income and its components are displayed in the accompanying
statements of stockholder's equity. Currently, the only element of other
comprehensive income applicable to the Company is changes in unrealized gains
and losses on securities classified as available-for-sale, which are displayed
in the following table, along with related tax effects. See Note 3 for further
detail of changes in unrealized gains on securities available-for-sale (in
thousands):
<TABLE>
<CAPTION>
Eight months
ended
December 31,
Year ended December 31, 1997
------------------------------------------------------
1999 1998
------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding (losses) gains arising during
period, before taxes $(322,415) $ 33,758 $204,071
Income taxes 112,845 (11,815) (71,425)
------------------------------------------------------
Unrealized holding (losses) gains arising during
period, net of taxes (209,570) 21,943 132,646
Less reclassification adjustment:
(Losses) gains realized in net income, before taxes (3,384) 8,213 5,916
Income taxes 1,184 (2,875) (2,071)
------------------------------------------------------
Reclassification adjustment for (losses) gains
realized in net income (2,200) 5,338 3,845
------------------------------------------------------
Other comprehensive income - net unrealized (losses) gains $(207,370) $ 16,605 $128,801
======================================================
</TABLE>
14. Impact of Year 2000 (Unaudited)
The Company's administrative and financial reporting systems are shared among
numerous insurance affiliates within the consolidated Jefferson-Pilot
Corporation group. In prior years, JPCorp discussed the nature and progress of
its plans to become Year 2000 ready. In late 1999, JPCorp completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, JPCorp experienced no significant disruptions in
critical information technology systems and believes those systems successfully
responded to the Year 2000 date change. JPCorp expensed approximately $20.6
million to date in connection with remediating its systems. JPCorp is not aware
of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third parties.
JPCorp will continue to monitor its critical computer applications and those of
its vendors throughout the Year 2000 to ensure that any latent Year 2000 matters
that arise are addressed promptly.
33
<PAGE>
Jefferson Pilot Financial Insurance Company
Unaudited Pro Forma Condensed Consolidated Statements of Income
Introduction
On December 30, 1999, Jefferson-Pilot Corporation, the parent company of
Jefferson Pilot Financial Insurance Company (JPFIC) acquired Guarantee Life
Insurance Company (GLIC) through the acquisition of GLIC's parent. The
acquisition was accounted for using the purchase method. Accordingly, no results
of operations for GLIC for 1999 or before are included in the audited JPFIC
financial statements included in this document. The following pro forma
condensed consolidated statements of income have been prepared assuming the
acquisition of GLIC had taken place on January 1, 1999.
The total purchase price paid for GLIC was $426 million, including debt assumed
of GLIC's parent. Preliminary estimates of the allocation of the purchase price
to GLIC's tangible and intangible assets and liabilities resulted in $81 million
of cost in excess of net assets acquired and $206 million of value of business
acquired.
The pro forma adjustments include adjustments for financing costs of GLIC,
investment differences and the changes resulting from the intangibles relating
from purchase accounting adjustments. The parent company does not allocate
interest costs to the operating subsidiaries, and therefore, no adjustments for
the interest cost associated with the acquisition are reflected in these
statements. There are also no adjustments relating to expected savings in
expenses from either personnel or efficiencies of operations shown in these pro
forma statements.
<PAGE>
Jefferson Pilot Financial Insurance Company
Unaudited Pro Forma Condensed Consolidated Statements of Income
Year Ended December 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
REVENUE: JPFIC GLIC Adjustments Pro Forma
------------- -------------- -------------------- ----------------
<S> <C> <C> <C> <C>
Premium and other considerations $ 444,545 $393,439 $ (12,092) (5) $ 825,892
Net investment income 726,928 85,258 776 (1) 812,962
Realized investment gains (losses) (4,333) (381) (4,714)
Other income 2,372 29,102 31,474
------------- -------------- -------------- ----------------
1,169,512 507,418 (11,316) 1,665,614
BENEFITS AND EXPENSES:
Policy benefits 649,388 316,713 (10,020) (5) 956,081
Commissions and operating expenses,
net of deferrals 82,505 108,649 (7,518) (1)
298 (4) 183,934
Amortization of intangibles 118,368 79,677 (79,677) (2)
68,381 (3)
11,954 (3)
2,314 (3) 201,017
------------- -------------- -------------- ----------------
850,261 505,039 (14,268) 1,341,032
Income before income taxes 319,251 2,379 2,952 324,582
Provision for income taxes 114,770 833 1,843 (6) 117,446
------------- -------------- -------------- ----------------
Net income $ 204,481 $ 1,546 $ 1,109 $ 207,136
============= ============== ============== ================
</TABLE>
See notes to Unaudited Pro Forma Condensed Consolidated Statements of Income
<PAGE>
Jefferson Pilot Financial Insurance Company
Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income
Year Ended December 31, 1999
(Dollars in thousands)
Background Information:
No pro forma balance sheet information is provided as the December 31, 1999
balance sheet is presented with the purchase accounting adjustments already
made.
<TABLE>
<S> <C>
Note 1 - Adjustment to increase investment income and reduce GLIC interest
expense
Increase in investment income from amortization of market value
adjustment of invested assets 776
Decrease in interest expense of GLIC due to pay off of debt
(reflected as operating expense) 7,518
-----------------
8,294
Note 2 - Adjustment to reduce historical amortization of intangible assets
Decrease in amortization of deferred acquisition costs 79,677
Note 3 - Adjustments to record amortization of purchase accounting adjustments
to intangible assets
Amortization of deferred acquisition costs associated with costs deferred
subsequent to January 1, 1999 (68,381)
Amortization of the value of business acquired over the related
contract periods (11,954)
Amortization of the cost in excess of net assets acquired
over a 35 year period (2,314)
-----------------
(82,649)
Note 4 - Adjustment to record additional depreciation expense on purchase
accounting adjustments
Depreciation expense on properties (298)
Note 5 - Adjustment to remove the impact of AGL Life Assurance Company (AGL)
from 1999 operating results, as GLIC sold AGL prior to Jefferson-Pilot
Corporation's acquisition of GLIC
Decrease in revenue ( reflected as premiums and other considerations) (12,092)
Decrease in expenses ( reflected as policy benefits) 10,020
-----------------
(2,072)
Note 6 - Pro forma income tax effect of the foregoing adjustments based on the
statutory tax rate of 35%, except that the amortization of cost in
excess of net assets acquired is not tax effected
Federal income tax expense 1,843
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of The Guarantee Life Companies Inc.:
We have audited the accompanying consolidated balance sheets of The
Guarantee Life Companies Inc. and subsidiaries (Guarantee Life) as of December
31, 1999 and 1998, and the related consolidated statements of income,
comprehensive income, shareholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1999. These consolidated financial
statements are the responsibility of Guarantee Life's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Guarantee Life Companies Inc. and subsidiaries as of December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1999 in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Omaha, Nebraska
June 16, 2000
1
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Assets
------
Invested assets:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $870,415 and $865,597) $ 830,823 $ 888,363
Held-to-maturity, at amortized cost (fair value: $123,219 and $158,341) 129,011 147,180
----------- -----------
959,834 1,035,543
Equity securities, at fair value (cost: $25,154 and $20,643) 24,885 23,835
Mortgage loans, net 113,010 103,736
Policy loans 32,527 31,767
Investment real estate, net 3,162 3,211
Other invested assets, net 14,236 54,970
Closed Block invested assets 289,795 314,108
----------- -----------
Total invested assets 1,437,449 1,567,170
Cash and cash equivalents 48,190 23,794
Accrued investment income 16,571 13,900
Ceded reinsurance recoverables 89,321 95,511
Accounts receivable, net 28,019 19,641
Deferred policy acquisition costs, net 155,610 144,844
Property, plant and equipment, net 18,723 19,929
Other assets 12,160 12,607
Closed Block other assets 8,395 16,224
Separate account assets -- 78,629
----------- -----------
Total assets $ 1,814,438 $ 1,992,249
=========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Future policy benefits:
Life $ 97,835 $ 97,433
Accident and health 96,154 80,700
Policyholder account balances:
Universal life contracts 461,984 445,986
Annuity contracts 324,255 349,834
Policy and contract claims 74,805 68,701
Other policyholder funds 51,475 43,751
Unearned premium revenue 12,847 13,149
Notes payable -- 112,500
Intercompany borrowing 91,250 --
Other liabilities 17,898 63,516
Closed Block liabilities 381,373 386,933
Discontinued operations 21,620 21,075
Separate account liabilities -- 78,629
----------- -----------
Total liabilities 1,631,496 1,762,207
Shareholders' equity:
Common stock $0.01 par value; 30,000,000 shares authorized, 10,315,785
shares issued at December 31, 1999 and 1998 103 103
Additional paid-in capital 200,440 201,255
Retained earnings 33,238 33,962
Treasury stock, at cost (978,274 and 1,087,124 shares at December 31, 1999
and 1998, respectively) (22,695) (25,054)
Accumulated other comprehensive income, net (28,144) 19,776
----------- -----------
Total shareholders' equity 182,942 230,042
Commitments and contingencies -- --
----------- -----------
Total liabilities and shareholders' equity $ 1,814,438 $ 1,992,249
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Insurance premiums and policyholder assessments:
Life $ 123,118 $ 116,811 $ 76,260
Accident and health 296,206 246,056 179,700
Policyholder assessments 46,329 37,020 30,476
Reinsurance premiums (72,214) (77,881) (55,508)
--------- --------- ---------
393,439 322,006 230,928
Investment income, net 85,258 74,651 58,449
Realized investment gains (381) 1,978 1,270
Ceding commissions and other income 25,970 22,124 15,558
Contribution from Closed Block 3,132 4,723 4,071
--------- --------- ---------
Total revenues 507,418 425,482 310,276
Policyholder benefits:
Benefits:
Life 56,925 96,046 62,749
Accident and health 278,397 184,691 113,335
Reinsurance recoveries (60,717) (67,082) (35,752)
--------- --------- ---------
274,605 213,655 140,332
Interest credited to policyholder account balances:
Annuity contracts 14,473 16,059 10,624
Universal contracts 27,635 20,353 15,028
--------- --------- ---------
Total policyholder benefits 316,713 250,067 165,984
Expenses:
Policy acquisition costs 79,677 77,964 57,364
Other insurance operating expenses 108,649 83,055 61,191
--------- --------- ---------
Total expenses 188,326 161,019 118,555
Income from continuing operations before income taxes 2,379 14,396 25,737
Income tax expense 833 5,039 9,098
--------- --------- ---------
Net income from continuing operations 1,546 9,357 16,639
Net income (loss) from discontinued operations 374 (328) (195)
--------- --------- ---------
Net income $ 1,920 $ 9,029 $ 16,444
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
--------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income $ 1,920 $ 9,029 $ 16,444
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation) of invested assets (48,640) 4,773 7,843
Less reclassification adjustment for gains included in net income 720 1,978 1,270
-------- -------- --------
(47,920) 6,751 9,113
-------- -------- --------
Comprehensive income (loss) $(46,000) $ 15,780 $ 25,557
======== ======== ========
</TABLE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands except share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Common stock, beginning of year $ 103 $ 99 $ 99
Issuance of common stock, 371,402 shares -- 4 --
--------- --------- ---------
Common stock, end of year 103 103 99
--------- --------- ---------
Additional paid in capital, beginning of year 201,255 191,123 191,226
Issuance of common stock (815) 9,996 --
Options exercised and stock awards granted -- 136 (103)
--------- --------- ---------
Additional paid in-capital, end of year 200,440 201,255 191,123
--------- --------- ---------
Retained earnings, beginning of year 33,962 27,463 13,435
Net income 1,920 9,029 16,444
Shareholder dividends declared ($0.28/share in 1999
and 1998, $0.26/share in 1997) (2,644) (2,530) (2,416)
--------- --------- ---------
Retained earnings, end of year 33,238 33,962 27,463
--------- --------- ---------
Treasury stock, beginning of year (25,054) (22,512) --
Purchases of treasury stock (None in 1999, 119,722 shares
in 1998, 1,069,011 shares in 1997) -- (3,150) (23,603)
Options exercised (106,862 shares in 1999; 42,730 shares in 1998,
1,496 shares in 1997) and stock awards granted, (2,017 shares in 1999,
7,392 shares in 1998, 49,991 shares in 1997) 2,359 608 1,091
--------- --------- ---------
Treasury stock, end of year (22,695) (25,054) (22,512)
--------- --------- ---------
Accumulated other comprehensive income:
Beginning of year 19,776 13,025 3,912
Unrealized appreciation (depreciation) of invested assets (47,920) 6,751 9,113
--------- --------- ---------
End of year (28,144) 19,776 13,025
--------- --------- ---------
Total shareholders' equity $ 182,942 $ 230,042 $ 209,198
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income from continuing operations $ 1,546 $ 9,357 $ 16,639
Adjustments to reconcile net income from continuing
operations to net cash provided by continuing operating
activities:
Policyholder assessments (46,329) (37,020) (30,476)
Interest credited to policyholder account balances 42,108 36,412 25,652
Realized investment (gains) losses 381 (1,978) (1,270)
Change in: (net of amounts acquired)
Ceded reinsurance recoverables 3,720 (12,358) (2,918)
Deferred policy acquisition costs (10,766) 1,907 4,799
Liabilities for future policy benefits 15,856 13,695 13,745
Policy and contract claims 6,104 13,863 (6,586)
Other liabilities (7,337) 4,908 6,492
Deferred income taxes (29,245) 3,077 (2,996)
Closed Block assets and liabilities, net 2,269 (2,475) (2,377)
Other, net (5,614) 10,902 10,200
--------- --------- ---------
Net cash provided by continuing operating activities (27,307) 40,290 30,904
Net cash provided (used) by discontinued operations 919 (251) (11,560)
--------- --------- ---------
Net cash provided (used) by operating activities (26,388) 40,039 19,344
--------- --------- ---------
Cash flows from investing activities:
Purchase of fixed maturities (224,406) (329,247) (226,294)
Proceeds from sale of fixed maturities:
Available-for-sale 204,272 358,102 144,607
Maturities, calls and principal reductions of fixed maturities 51,758 29,392 82,751
Purchases of equity securities and short-term investments (3,514) (32,924) (3,121)
Purchase of mortgage loans (18,415) (25,900) (27,670)
Proceeds from repayment of mortgage loans 9,138 7,806 11,431
Acquisitions, net of cash acquired -- (90,863) (30,913)
Dispositions, net of cash surrendered 3,900 -- --
Change in Closed Block invested assets, net 24,313 (4,331) (4,206)
Other, net 30,633 (3,848) 1,127
--------- --------- ---------
Net cash used by investing activities 77,679 (91,813) (52,288)
--------- --------- ---------
Cash flows from financing activities:
Deposits to policyholder account balances 77,967 76,715 77,153
Withdrawals from policyholder account balances (83,327) (77,183) (52,752)
Purchase of treasury stock -- (3,150) (23,603)
Options exercised 2,359 608 1,091
Proceeds from issuance of long term debt -- 90,000 40,000
Principal payments on debt obligations (21,250) (17,500) --
Shareholder dividends (2,644) (2,530) (2,416)
--------- --------- ---------
Net cash provided (used) by financing activities (26,895) 66,960 39,473
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 24,396 15,186 6,529
Cash and cash equivalents at beginning of year $ 23,794 $ 8,608 $ 2,079
--------- --------- ---------
Cash and cash equivalents at end of year $ 48,190 $ 23,794 $ 8,608
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
--------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
(a) Organization and Principles of Consolidation
At December 31, 1999 the consolidated financial statements include The
Guarantee Life Companies Inc. (Holding Company) and its direct and indirect
wholly owned subsidiaries, all of which are collectively referred to hereinafter
as "Guarantee Life". Guarantee Life Insurance Company (Guarantee Life Insurance)
is an insurance subsidiary domiciled in Nebraska.
On December 30, 1999, Jefferson Pilot Corporation (A North
Carolina-domiciled insurance holding company) acquired 100% of the outstanding
common stock of the Holding Company.
These financial statements have been prepared on an historical GAAP basis
of accounting which reflects the cost of the assets acquired and owned by
Guarantee Life. These financial statements do not reflect the adjustments
necessary to record the purchase of Guarantee Life by Jefferson Pilot
Corporation on the December 31, 1999 consolidated balance sheet.
Until October 31, 1999, PFG, Inc.'s wholly owned subsidiaries included AGL
Life Assurance Company (AGL) and "Philadelphia Financial Group" which consists
of Philadelphia Financial Group, Inc., PFG Distribution Company, Philadelphia
Financial Group Agency of Ohio, Inc., PFG Insurance Agency of Texas, Inc., and
Philadelphia Financial Insurance Agency of Massachusetts, Inc., which were owned
by Guarantee Life.
On October 31, 1999, the common stock of AGL and the other minor
subsidiaries of PFG, Inc. was sold to a group of unrelated investors. Concurrent
with the spin-off transaction, Guarantee Life Insurance assumed, through a
coinsurance agreement and an assumption reinsurance agreement, 100% of the
policies of AGL, excluding the variable life and annuities. As part of this
transaction the company sold the separate accounts business with assets and
liabilities for $109.4 million recording proceeds of $3.9 million. No gain or
loss resulted on the sale.
The unaudited pro forma consolidated results of operations, which assume
that AGL had been sold as of January 1, 1999 is as follows:
For the Year Ended
December 31, 1999
------------------
(in millions)
Total Revenue $ 495.7
Net Income from Continuing Operations $ 0.2
Net Income $ 0.5
Effective May 31, 1998, Guarantee Life acquired the Westfield Life
Insurance Company from Ohio Farmers Insurance Company for $100.0 million,
consisting of $90.0 million in cash and 371,402 restricted shares of Guarantee
Life common stock valued at $10.0 million. In addition, approximately $2.0
million of expenses were capitalized as part of this transaction. Guarantee Life
acquired $396.9 million in assets and assumed $294.5 million in liabilities in
this transaction. The acquisition has been accounted for as a purchase and,
accordingly, the acquired assets and liabilities have been recorded at their
estimated fair value at the date of acquisition. No goodwill was recorded in
this transaction. The results of operations, since the date of acquisition, have
been included in the accompanying consolidated financial statements.
6
<PAGE>
The unaudited pro forma consolidated results of operations, which assume
that PFG and Westfield had been acquired as of January 1, 1997 are as follows:
For the Years Ended
December 31,
-----------------------
(in millions)
1998 1997
------- -------
Total Revenue $ 450.0 $ 389.2
Net Income from Continuing Operations $ 12.1 $ 14.2
Net Income $ 11.7 $ 14.0
Pro forma presented herein related to acquisition and disposal data does
not purport to be indicative of the results that would have been obtained had
this acquisition occurred at the beginning of the periods presented and is not
intended to be indicative of future results.
All significant intercompany transactions have been eliminated in
consolidation.
(b) Investments in Fixed Maturities and Equity Securities
Categorization of fixed maturities and equity securities
Fixed maturity and equity securities are carried at fair value unless
Guarantee Life demonstrates that it has the positive intent and ability to hold
these investments to maturity. Fixed maturity and equity securities must be
classified into one of three categories: 1) held-to-maturity, 2)
available-for-sale, or 3) trading securities.
Management determines the appropriate classification of fixed maturities
and equity securities at the time of purchase and reevaluates such designation
at each balance sheet date. When changes in condition cause a fixed maturity
investment to be transferred to a different category, the security is
transferred to the new category at its fair value at the date of transfer. In
1999 and 1998 there were no such transfers. In 1997, Guarantee Life transferred
one security with an amortized cost of $0.5 million from the held-to-maturity
category due to deterioration in the issuers' credit quality. The credit was
sold during 1997 realizing a loss of $80,000.
Available-for-sale fixed maturities and equity securities
Available-for-sale fixed maturities and equity securities (common and
nonredeemable preferred stocks) are carried at fair value. After adjusting
related balance sheet accounts as if the unrealized gains had been realized, the
net adjustment is recorded within other accumulated comprehensive income on
securities within shareholders' equity. If the fair value of a security
classified as available-for-sale declines below its cost and this decline is
considered to be other than temporary, the security is reduced to its net
realizable value, and the reduction is recorded as a realized loss.
Held-to-maturity fixed maturities
Fixed maturities for which Guarantee Life has both the ability and the
intent to hold to maturity are stated at amortized cost adjusted for other than
temporary fair value decline. Amortized cost reflects actual cost adjusted for
amortization of premium and accretion of discount.
Mortgage Loans
Mortgage loans on real estate are stated at unpaid principal balance, net
of unamortized discounts and valuation allowances. The valuation allowances on
mortgage loans are based on losses expected by management to be realized on
transfers of mortgage loans to real estate, on the disposition or settlement of
mortgage loans and on mortgage loans which management believes may not be
collectible in full.
Policy loans, investment real estate and other invested assets
Policy loans are carried at unpaid balances. Investment real estate is
generally stated at depreciated cost, including development costs, less
allowances for other than temporary decline in value. Investment real estate
acquired in satisfaction of debt is valued at the lower of cost or estimated
fair value at date of acquisition and is periodically revalued. Other invested
assets are recorded at amortized cost less allowances.
7
<PAGE>
Investment income
Bond premium and discounts are amortized into income using the scientific
yield method over the term of the security. Premiums and discounts on
mortgage-backed securities are amortized using the interest method over the
expected life of each security. In addition, a pro rata portion of premiums and
discounts is recognized when unscheduled principal payments are received and is
included in net investment income. Realized gains and losses on sales of
investments are recognized in net income on the specific identification basis.
Changes in fair values of available-for-sale fixed maturities and equity
securities are reflected as a component of accumulated comprehensive income
directly in shareholders' equity and, accordingly, have no effect on net income.
Interest is recognized as earned on the accrual basis of accounting. Dividends
are recognized on the ex-dividend date.
Invested asset impairment and valuation allowances
Invested assets are considered impaired when Guarantee Life determines
that collection of all amounts due under the contractual terms is doubtful.
Guarantee Life adjusts invested assets to their estimated net realizable value
at the point at which it determines an impairment is other than temporary.
Guarantee Life has also established valuation allowances for mortgage loans and
other invested assets. Valuation allowances for other than temporary impairments
in value are netted against the asset categories to which they apply, and
additions to valuation allowances are included in total investment results.
(c) Deferred Policy Acquisition Costs
For limited payment and other traditional life insurance policies, certain
commissions, expenses of the policy issue and underwriting departments and other
variable expenses have been deferred. These deferred policy acquisition costs
are being amortized in proportion to the ratio of the expected annual premium
revenue to the expected total premium revenue. Expected premium revenue was
estimated with the same assumptions used for computing liabilities for future
policy benefits for these policies.
For universal life and annuity type contracts, the deferred policy
acquisitions costs are amortized over a period of not more than twenty years in
relation to the present value of estimated gross profits arising from estimates
of mortality, interest, expense and surrender experience. The estimates of
expected gross profits are evaluated regularly and are revised if actual
experience or other evidence indicates that revision is appropriate. Upon
revision, total amortization recorded to date is adjusted by a charge or credit
to current earnings. Deferred policy acquisition costs are adjusted for the
impact on estimated gross profits of net unrealized gains and losses on
securities.
For short duration contracts, certain acquisition costs have been deferred
and are amortized over the life of the related insurance policies. Deferred
policy acquisition costs are reviewed for recoverability from future income,
including investment income, and costs which are deemed unrecoverable are
expensed in the period in which the determination is made. No such costs have
been deemed unrecoverable during the three years in the period ending December
31, 1999.
(d) Recognition of Insurance Premium Revenue and Related Expenses
For limited payment contracts, net premiums are recorded as revenue, and
the difference between the gross premium and the net premium is deferred and
recognized in income in a constant relationship to insurance in force. For other
traditional life policies, premiums are recognized when due, less allowances for
estimated uncollectible balances.
For universal life and annuity policies, contract charges for mortality,
surrender and expense, other than front-end expense charges, are reported as
income when charged to policyholder accounts. Expenses consist primarily of
benefit payments in excess of policyholder account values and interest credited
to policyholder accounts. Profits are recognized over the life of universal life
type contracts through the amortization of deferred policy acquisition costs in
relation to estimated gross profits from mortality, interest, surrender and
expense.
8
<PAGE>
For accident and health policies, premium income is earned pro rata over
the term of the contracts. Premiums received but not earned are recorded as
liabilities.
(e) Future Policy Benefits and Policyholder Account Balances
For traditional life insurance policies, future policy benefits and
dividend liabilities are computed using a net level premium method on the basis
of actuarial assumptions as to mortality, persistency and interest established
at policy issue. Assumptions established at policy issue as to mortality and
persistency are based on industry standards and Guarantee Life's historical
experience, which, together with interest and expense assumptions, provide a
margin for adverse deviation. Interest rate assumptions principally range from
2.5% to 4.5%. When the liabilities for future policy benefits plus the present
value of expected future gross premiums are insufficient to provide for expected
future policy benefits and expenses, unrecoverable deferred policy acquisition
costs are written off and thereafter a premium deficiency reserve is established
through a charge to earnings.
Accident and health benefits for active lives are calculated using the net
level premium method and assumptions as to future morbidity, withdrawals and
interest which provide a margin for adverse deviation. Benefit liabilities for
disabled lives are calculated using the present value of benefits method and
experience assumptions as to claim termination, expense and interest which also
provide a margin for adverse deviation.
Policyholders' account balances for universal life and annuity policies
are equal to the policy account value before deduction of any surrender charges.
The policy account value represents an accumulation of gross premium payments
plus credited interest less expense and mortality charges and withdrawals. An
additional liability is established for deferred front-end expense charges on
universal life type policies. These expense charges are recognized in income as
policyholder assessments using the same assumptions as are used to amortize
deferred policy acquisition costs. Weighted average interest crediting rates for
universal life policies were 5.61%, 5.77% and 5.68%; and for annuity policies,
were 4.73%, 5.28% and 5.38% for 1999, 1998 and 1997, respectively.
(f) Policy and Contract Claims
Guarantee Life establishes a liability for unpaid claims based on
estimates of the ultimate cost of claims incurred, which is comprised of
aggregate case basis estimates and average claim costs for reported claims and
estimates of incurred but unreported losses based on past experience. Guarantee
Life's policy and contract claims liability includes a provision for both life
and accident and health claims.
The liability for unreported losses is established using various
statistical and actuarial techniques reflecting historical patterns of
development of paid and reported losses adjusted for current trends. The
liability is continually reviewed and updated as new information becomes
available. Resulting adjustments are reflected in income currently. Adjustments
related to claims incurred in prior periods have not been material for all
periods presented in the accompanying consolidated statements of income.
Management believes the liabilities for unpaid claims are adequate to
cover the ultimate liability; however, due to the underlying risks and the high
degree of uncertainty associated with the determination of the liability for
unpaid claims, the amounts which will ultimately be paid to settle these
liabilities cannot be determined precisely and may vary from the estimated
amount included in the consolidated balance sheets.
(g) Property, Plant, and Equipment
Property, plant, and equipment is presented at cost less accumulated
depreciation. Expenditures resulting in significant betterment or improvement of
the buildings are included in the cost of the building. Maintenance, repairs,
and renewals of a minor nature are charged to operations as incurred. Guarantee
Life uses the straight-line method of depreciation based upon the estimated
useful lives of the buildings and improvements.
9
<PAGE>
(h) Guaranty Fund Assessments
As a condition of doing business, states and jurisdictions in which
Guarantee Life does business have adopted laws requiring membership in life and
health insurance guaranty funds, which are organized to pay contractual
obligations under insurance policies issued by insolvent and failed life and
health insurers. Member companies are subject to assessments each year based on
life, health, or annuity premiums collected in the state. In some states these
assessments may be applied against premium taxes.
In accordance with estimates provided by the National Organization of Life
and Health Guaranty Associations, Guarantee Life has established a liability of
$1.3 million in the accompanying consolidated financial statements for amounts
due for actual and potential insurance company failures in the states where
Guarantee Life writes business. Guarantee Life capitalizes the assessments which
are deductible when they are paid and generally amortizes the payments over not
more than five years. Guaranty fund assessments capitalized are reviewed
quarterly to determine that the unamortized portion of such costs does not
exceed recoverable amounts. At December 31, 1999 and 1998, Guarantee Life had
$1.0 million and $1.5 million, respectively, of unamortized guaranty fund
assessments which are included in other assets.
(i) Pension and Other Post Retirement Benefits
Guarantee Life has a defined benefit pension plan which covers
substantially all of its employees. Current pension costs are funded at the
maximum deductible amount allowed by the Internal Revenue Service (IRS).
Periodic net pension expense is based on the cost of incremental benefits for
employee service during the period, interest on the projected benefit
obligation, actual return on plan assets and amortization of actuarial gains and
losses. In addition to providing pension benefits, Guarantee Life provides life
insurance benefits to retired employees. Substantially all of Guarantee Life's
employees may become eligible for the life benefits. Guarantee Life recognizes
the cost of these post retirement benefits as they are earned by the employees
and accrues for the expected cost of providing those benefits to employees and
their beneficiaries during the years the employees render service.
(j) Federal Income Taxes
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
to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
(k) Fair Value of Financial Instruments
Fair values for all fixed securities are determined by independent
valuation procedures. The fair values for mortgage loans and policy loans are
estimated using discounted cash flow analyses and using interest rates currently
being offered for similar loans to borrowers with similar credit ratings. Loans
with similar characteristics are aggregated for purposes of the calculations.
Prepayments are assumed to occur at the same rate as in previous periods when
interest rates were at levels similar to current levels. The fair value of
investment real estate is based on market values for comparable local real
estate. The fair values of Guarantee Life's other invested assets are based on
current market prices and discounted expected future cash flows for related
investments.
Fair values for Guarantee Life's liabilities under investment type
reinsurance contracts (those contracts without significant mortality risks) are
estimated using discounted cash flow calculations, based on interest rates
currently being offered for similar contracts with maturities consistent with
those remaining for the contracts being valued. The intangible value of
long-term relationships with policyholders is not taken into account in
estimating fair values disclosed. Fair values for Guarantee Life's insurance
contracts other than investment type contracts are not required to be disclosed.
However, the fair values of liabilities under all insurance contracts are taken
into consideration in Guarantee Life's overall management of interest rate risk,
which minimizes exposure to changing interest rates through the matching of
investment maturities with amounts due under insurance contracts.
10
<PAGE>
(l) Separate Accounts
Separate account assets, carried at market value, and liabilities
represent variable annuity and universal life contract funds invested primarily
in equity securities. The investment income, gains and losses of these accounts
accrue directly to the policyholders and are not included in the operations of
Guarantee Life.
(m) Cash Equivalents
For purposes of the consolidated statements of cash flows, Guarantee Life
considers cash equivalents to be all highly liquid debt instruments with
original maturities of three months or less when purchased. The carrying amounts
reported in the consolidated balance sheets for these instruments approximates
their fair value.
(n) Earnings Per Share
Earnings per share data has not been presented because Guarantee Life
ceased being a public company on December 30, 1999.
(o) Comprehensive Income
The Company classifies items of other comprehensive income by their nature
and displays the accumulated balance of other comprehensive income separately
from retained deficit and additional paid-in capital in the equity section of
the consolidated balance sheets.
(p) Discontinued Operations
In 1994, Guarantee Life decided to withdraw from the alternate workers'
compensation benefit program segment. The operations of this segment have been
reflected on a net basis and classified as discontinued operations in the
accompanying consolidated financial statements. See also note 15.
(q) Risks and Uncertainties
Certain risks and uncertainties are inherent to the Company's day-to-day
operations and to the process of preparing its consolidated financial
statements. The more significant of those risks and uncertainties, as well as
the Company's method for mitigating the risks, are presented below and
throughout the notes to the consolidated financial statements:
Consolidated Financial Statements - The preparation of consolidated
financial statements required management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the consolidated financial
statements, and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
Reinsurance - Reinsurance contracts do not relieve the Company from its
obligations to reinsureds. Failure of reinsurers to honor their obligations
could result in losses to the Company; consequently, allowances are established
for amounts deemed uncollectible. The Company evaluates the financial condition
of its reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. Management believes that any liability arising from this
contingency would not be material to the Company's financial position.
Investments - The Company is exposed to risks that issuers of securities
owned by the Company will default, or that interest rates will change and cause
a decrease in the value of its investments. Management mitigates these risks by
conservatively investing in high-grade securities and by matching maturities of
its invesment with the anticipated payouts of its liabilities.
11
<PAGE>
(r) Reclassifications
Certain reclassifications have been made to the prior consolidated
financial statements to conform with the most current presentation.
(2) Investments
Fixed maturities at December 31, 1999 (in thousands) are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 87,768 $ 125 $ (2,754) $ 85,139
Obligations of states and political subdivisions 14,385 7 (475) 13,917
Debt securities issued by foreign governments 8,400 -- (452) 7,948
Corporate securities 485,996 11,638 (37,390) 460,244
Mortgage-backed securities 273,866 3,873 (14,164) 263,575
--------- --------- --------- ---------
$ 870,415 $ 15,643 $ (55,235) $ 830,823
Equity Securities 25,154 3,646 (3,915) 24,885
--------- --------- --------- ---------
$ 895,569 $ 19,289 $ (59,150) $ 855,708
========= ========= ========= =========
Held-to-maturity:
Corporate securities $ 103,361 $ 3,855 $ (6,222) $ 100,994
Mortgage-backed securities 25,650 404 (3,829) 22,225
--------- --------- --------- ---------
$ 129,011 $ 4,259 $ (10,051) $ 123,219
========= ========= ========= =========
</TABLE>
Guarantee Life manages its credit risk associated with fixed maturities by
diversifying its portfolio. At December 31, 1999, Guarantee Life held no
corporate debt securities or foreign government debt securities of a single
issuer which had a carrying value in excess of 5% of shareholders' equity.
At December 31, 1999, Guarantee Life held $132.0 million of
mortgage-backed securities issued by U.S. Government agencies and $157.2 million
of mortgage-backed securities issued by Guarantee Life. At December 31, 1999,
Guarantee Life held no other mortgage-backed securities of a single issuer which
had a carrying value in excess of 5% of shareholders' equity. Guarantee Life's
non-income earning investments in fixed maturities are not material.
12
<PAGE>
Fixed maturities at December 31, 1998 (in thousands) are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 101,338 $ 2,603 $ 89 $ 103,852
Obligations of states and political subdivisions 13,081 1,524 -- 14,605
Debt securities issued by foreign governments 15,394 1,290 4 16,680
Corporate securities 506,911 21,571 5,527 522,955
Mortgage-backed securities 228,873 3,515 2,117 230,271
--------- --------- --------- ---------
$ 865,597 $ 30,503 $ 7,737 $ 888,363
Equity Securities 20,643 4,176 984 23,835
--------- --------- --------- ---------
$ 886,240 $ 34,679 $ 8,721 $ 912,198
========= ========= ========= =========
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 3,627 $ 55 $ -- $ 3,682
Obligations of states and political subdivisions 7,654 634 -- 8,288
Corporate securities 133,203 11,103 658 143,648
Mortgage-backed securities 2,696 27 -- 2,723
--------- --------- --------- ---------
$ 147,180 $ 11,819 $ 658 $ 158,341
========= ========= ========= =========
</TABLE>
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. The amortized cost and estimated fair value of fixed
maturities by contractual maturity (in thousands) are as follows:
December 31, 1999
------------------------
Amortized Estimated
Cost Fair Value
--------- ----------
Due in one year or less $ 34,944 $ 35,089
Due after one year through five years 169,858 167,503
Due after five years through ten years 279,549 265,606
Due after ten years 215,559 200,044
-------- --------
699,910 668,242
Mortgage-backed securities 299,516 285,800
-------- --------
$999,426 $954,042
======== ========
Guarantee Life had fixed maturities, mortgage loans, preferred stocks and
common stocks with carrying values aggregating $11 million as of December 31,
1999 on deposit with regulatory authorities.
A summary of realized investment gains (losses) (in thousands) is as
follows:
Years Ended December 31,
-----------------------------
1999 1998 1997
------- ------- -------
Fixed maturities:
Gross gains $ 1,677 $ 4,669 $ 1,883
Gross losses (2,208) (1,419) (1,851)
Equity securities:
Gross gains 654 1,944 --
Gross losses (467) -- --
Sale of Guarantee American -- -- 785
Other investments (37) (3,007) 1,401
Change in investment valuation allowances -- (209) (948)
------- ------- -------
Realized investment gains/(losses) $ (381) $ 1,978 $ 1,270
======= ======= =======
13
<PAGE>
A summary of consolidated net investment income (in thousands) is as
follows:
Years Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Fixed maturities $ 69,494 $ 65,313 $ 51,450
Equity securities 971 229 394
Mortgage loans 8,674 7,682 6,929
Policy loans 2,206 1,984 1,420
Investment real estate 1,032 990 1,415
Other 7,192 3,672 3,955
-------- -------- --------
89,569 9,870 65,563
Less investment expenses (2,313) (2,443) (5,510)
-------- -------- --------
Net investment income from invested assets 87,256 77,427 60,053
Less discontinued operations (note 15) (1,998) (2,776) (1,604)
-------- -------- --------
Net investment income $ 85,258 $ 74,651 $ 58,449
======== ======== ========
Investment expenses include depreciation and depletion of $0.7 million,
$0.7 million and $0.6 million in 1999, 1998 and 1997, respectively.
A summary of the components of the net unrealized appreciation on invested
assets, including Closed Block, carried at fair value (in thousands) is as
follows:
Years Ended December 31,
------------------------
1999 1998
-------- --------
Unrealized appreciation/(depreciation):
Fixed maturities available-for-sale $(49,820) $ 32,568
Equity securities (270) 3,485
Deferred policy acquisition costs 6,499 (5,629)
Deferred income taxes 15,447 (10,648)
-------- --------
Net unrealized appreciation/(depreciation) $(28,144) $ 19,776
======== ========
(3) Mortgage Loans
Investments in mortgage loans consist almost entirely of commercial
mortgage loans which are primarily fixed-rate first mortgages on completed
properties. The following table sets forth additions, reductions from payments
and other charges and foreclosures related to the mortgage loan portfolio (in
thousands):
Years Ended December 31,
--------------------------
1999 1998
--------- ---------
Commercial loans:
Beginning Balance $ 105,208 $ 86,166
Additions 18,415 25,900
Payments and other charges (9,138) (7,759)
--------- ---------
Ending Balance 114,485 104,307
Other mortgage loans -- 904
Valuation allowance (1,475) (1,475)
--------- ---------
$ 113,010 $ 103,736
========= =========
Guarantee Life manages its credit risk associated with these loans by
diversifying its mortgage portfolio by property type and geographic location. As
of December 31, 1999, Guarantee Life had no single mortgage loan out-
14
<PAGE>
standing which had a carrying value in excess of 5% of shareholders' equity. As
of December 31, 1999, all commercial mortgage loans bore a fixed interest rate
and Guarantee Life had no material loans over 60 days past due. Guarantee Life
had no outstanding commitments to fund mortgage loans as of December 31, 1999.
(4) Deferred Policy Acquisition Costs
A summary of the policy acquisition costs deferred and amortized (in
thousands) is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period $ 144,844 $ 102,696 $ 77,968
Policy acquisition costs deferred 102,571 80,048 55,848
Policy acquisition costs amortized (79,677) (77,964) (57,364)
Policy acquisition costs acquired in purchase -- 40,198 29,525
--------- --------- ---------
167,738 144,978 105,977
Change in deferred policy acquisition costs relating to unrealized
appreciation of invested assets carried at fair value (12,128) (134) (3,281)
--------- --------- ---------
Total reflected in consolidated balance sheet $ 155,610 $ 144,844 $ 102,696
========= ========= =========
</TABLE>
(5) Reinsurance
In the ordinary course of business, Guarantee Life assumes business from
and cedes business to other insurers under a variety of contracts. The existence
of ceded reinsurance constitutes a means by which Guarantee Life has
underwritten a portion of its business.
Amounts paid or deemed to have been paid for reinsurance contracts are
recorded as reinsurance receivables. The cost of reinsurance related to
long-duration contracts is accounted for over the life of the underlying
reinsured policies using assumptions consistent with those used to account for
the underlying policies.
Guarantee Life's retention limit on its life insurance business in 1999
was generally $150,000 on a life risk in the Employee Benefits and Group Special
Markets Divisions, $250,000 on a life risk for individual business originally
written through Guarantee Life. Certain reinsurers have agreed to reinsure
automatically all amounts on any one life in excess of the retention amount not
to exceed eight times Guarantee Life's retention in 1999. Amounts in excess of
the automatic acceptance limits of Guarantee Life's retention may be applied for
facultatively. As of December 31, 1999 and 1998, the amount of ceded life
insurance in force was approximately $5.5 billion and $5.3 billion,
respectively.
Guarantee Life cedes 70% of an equity indexed annuity block on a true
coinsured basis. The policyholder deposits ceded on this block amounted to $28.5
million as of December 31, 1999.
Guarantee Life cedes 100% of its individual accident and health business.
Guarantee Life's retention level on group accident and health business varies by
product. On its excess loss insurance program, Guarantee Life retains 30% on the
first $300,000 of eligible expenses per claim with 100% reinsurance coverage on
expenses in excess of that amount.
Effective January 1, 1995, AGL entered into a reinsurance agreement to
assume $50,000,000 in existing single premium deferred annuity business from
Phoenix Home Mutual Life Insurance Company ("Phoenix"). Pursuant to the terms of
the reinsurance agreement, assets equal to policyholder liabilities assumed are
maintained in a trust account. As of December 31, 1999, policyholder deposits
related to this business amounted to $24.2 million.
In a separate reinsurance agreement, AGL assumed 80% quota share in all
production of a single deferred annuity product which was jointly developed with
Phoenix. Pursuant to the terms of the reinsurance agreement, assets equal to
policyholder liabilities assumed are maintained in a trust account. This
reinsurance agreement can be terminated by either party with respect to new
business with 90 days notice. As of December 31, 1999, policyholder deposits
related to this business amounted to $4.4 million. These blocks of business were
included in the business Guarantee Life Insurance assumed from AGL on October
31, 1999.
15
<PAGE>
Guarantee Life generally strives to diversify its credit risks related to
reinsurance ceded; however, certain concentrations of credit risk related to
reinsurance recoverables (including unearned premiums) exist with the insurance
organizations listed in the table below (in thousands):
December 31,
1999
-----------
RGA Reinsurance Company $ 31,623
Cologne Life Reinsurance Company 11,772
Lonestar Life Insurance Company 10,347
Phoenix Home Life Mutual Insurance Company 6,204
Swiss RE Life & Health America, Inc. 5,150
ESG (European Specialty Limited) 4,849
UNUM Life Insurance Company of America 4,674
Lincoln National Life Insurance Company 4,600
Indianapolis Life Insurance Company 3,555
Security Life of Denver 2,195
London Life Reinsurance 2,147
Business Men's Assurance Company 2,108
Life Reassurance Corp. of America 2,012
John Hancock Mutual Life Insurance Company 1,678
Great Midwest 1,000
All Others 8,036
---------
Total before discontinued operations 101,950
Less discontinued operations (note 15) (12,629)
---------
Total reflected in accompanying consolidated balance sheet $ 89,321
=========
This underwriting activity subjects Guarantee Life to certain risks. To
the extent that reinsurers who are underwriting Guarantee Life's business become
unable to meet their contractual obligations, Guarantee Life retains the primary
obligation to its direct policyholders because the existence of this reinsurance
does not discharge Guarantee Life from its obligation to its policyholders.
Guarantee Life has policies and procedures to approve reinsurers prior to
entering into an agreement and also to monitor financial stability on a
continuous basis. As of December 31, 1999 and 1998 Guarantee Life had no
significant overdue reinsurance balances. As of December 31, 1999 Guarantee Life
held funds and other collateral of $8.9 million related to the above
recoverables.
The effect of reinsurance on premiums and amounts earned is as follows (in
thousands):
Direct premiums and policyholder assessments $ 459,600
Reinsurance assumed 6,053
Reinsurance ceded (72,214)
---------
Net premiums and amounts earned $ 393,439
=========
16
<PAGE>
(6) Property, Plant, and Equipment
A summary of property, plant, and equipment (in thousands) is as follows:
December 31,
-----------------------
1999 1998
-------- --------
Home office building $ 19,928 $ 19,928
Plant and equipment 14,007 12,767
Less accumulated depreciation (15,212) (12,766)
-------- --------
$ 18,723 $ 19,929
======== ========
(7) Closed Block
On December 15, 1994, Guarantee Life Insurance's Board of Directors
adopted a plan to convert Guarantee Life Insurance from its mutual form to a
stock life insurance company (demutualization). The Holding Company, a Delaware
corporation, was formed to act as the holding company for the demutualization of
Guarantee Life Insurance.
The plan of conversion contained an arrangement, known as a Closed Block,
to provide for dividends on policies that were in force on the effective date
and are within the classes of individual policies for which Guarantee Life
Insurance had a dividend scale in effect for 1994. Guarantee Life has maintained
a book of individual life policies which are participating policies and entitle
the policyholders to receive dividends based on actual interest, mortality,
morbidity, and expense experience for the related policies. These dividends are
distributed to the policyholders through an annual dividend using current
dividend scales which are approved by the Board of Directors. These policies are
now included in the Closed Block. The Company has no other participating
policies.
The Closed Block is designed to give reasonable assurance to holders of
affected policies that assets will be available to support such policies,
including maintaining dividend scales in effect for 1994 if the experience
underlying such scales continues. The assets, including revenue therefrom,
allocated to the Closed Block will accrue solely to the benefit of the holders
of policies included in the block until the block is no longer in effect.
Guarantee Life will not be required to support the payment of dividends on
Closed Block policies from its general funds.
The Closed Block includes only those revenues, benefits, expenses, and
dividends considered in funding it. The pre-tax income of the Closed Block is
reported as a single line item of total revenues from continuing operations in
Guarantee Life's consolidated statements of income. Income tax expense
applicable to the Closed Block, which was funded, is reflected as a component of
income tax expense.
The excess of Closed Block liabilities over Closed Block assets as of
December 31, 1999, 1998 and 1997 represents the total estimated future
contribution from the Closed Block expected to emerge from operations in the
Closed Block after income taxes. The contribution from the Closed Block will be
recognized in income over the period the policies and contracts in it remain in
force.
If, over the period the Closed Block remains in existence, the actual
cumulative contribution is greater than the expected cumulative contribution,
only such expected contribution would be recognized in income. The excess of the
actual cumulative contribution over such expected cumulative contribution would
be paid to Closed Block policyholders as additional policyholder dividends. If
over such period, the actual cumulative contribution is less than expected, only
such actual contribution would be recognized in income. However, dividends could
be changed in the future, which would increase future actual contributions until
the actual cumulative contributions equal the expected cumulative contributions.
Therefore, management believes that over time the actual cumulative
contributions from the Closed Block will approximately equal the expected
cumulative contributions due to the effect of dividend changes.
17
<PAGE>
Summarized financial information of the Closed Block (in thousands) is as
follows:
December 31,
--------------------
1999 1998
-------- --------
Assets
------
Invested assets:
Fixed maturities:
Available-for-sale, at fair value (amortized cost
$223,695 and $210,935) $213,810 $220,603
Held-to-maturity, at amortized cost (fair value:
$29,464 and $48,460) 31,495 44,595
-------- --------
245,305 265,198
Policy loans 44,490 46,217
Other invested assets, net -- 2,693
-------- --------
Total invested assets 289,795 314,108
Cash and cash equivalents (3,224) 2,000
Accrued investment income 1,984 2,367
Deferred policy acquisition costs 8,638 10,476
Other assets 997 1,381
-------- --------
Total Closed Block assets $298,190 $330,332
======== ========
Liabilities
-----------
Life future policy benefits $297,171 $300,254
Policyholder account balances for annuity contracts 939 885
Policy and contract claims 755 839
Other policyholder funds 72,009 71,966
Dividends payable to policyholders 7,131 7,052
Deferred income taxes 2,750 3,384
Other liabilities 618 2,553
-------- --------
Total Closed Block liabilities $381,373 $386,933
======== ========
Condensed statements of income for the Closed Block (in thousands) is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Insurance premiums and policyholder assessments, net of reinsurance $ 18,603 $ 20,142 $ 20,933
Investment income, net 21,300 21,918 21,894
Realized investment (losses) 942 1,465 (155)
Other income 18 46 86
-------- -------- --------
Total revenues $ 40,863 $ 43,571 $ 42,758
-------- -------- --------
Policyholder benefits and expenses:
Total policyholder benefits $ 21,243 $ 22,162 $ 22,244
Policy acquistion costs 2,096 2,071 1,983
Other insurance operating expenses 4,103 4,189 3,404
-------- -------- --------
Total benefits and expenses 27,442 28,422 27,631
Dividends to policyholders 10,289 10,426 11,056
-------- -------- --------
Contribution from Closed Block $ 3,132 $ 4,723 $ 4,071
======== ======== ========
</TABLE>
18
<PAGE>
(8) Liability for Unpaid Accident and Health Claims and Claim Adjustment
Expenses
The change in the liability for unpaid EBD and GSM accident and health
claims and claim adjustment expenses is summarized (in thousands) as follows:
Years Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
Balance at January 1 $ 123,186 $ 98,233 $ 93,881
Less reinsurance recoverables (39,201) (31,781) (38,468)
--------- --------- ---------
Net balance at January 1 83,985 66,452 55,413
Incurred related to:
Current year 184,731 125,296 79,739
Prior years 3,712 5,936 1,151
--------- --------- ---------
Total incurred 188,443 131,232 80,890
Paid related to:
Current year 129,160 74,045 48,590
Prior years 28,638 39,654 21,261
--------- --------- ---------
Total paid 157,798 113,699 69,851
--------- --------- ---------
Balance at December 31 114,630 83,985 66,452
Plus reinsurance recoverables 27,451 39,201 31,781
--------- --------- ---------
Balance at December 31 $ 142,081 $ 123,186 $ 98,233
========= ========= =========
The liability for unpaid accident and health claims and claim adjustment
expenses is included in policy and contract claims and future policy benefits:
accident and health, on the consolidated balance sheet. As a result of a change
in the estimate of insured events in prior years, the provision for claims and
claim adjustment expenses increased (net of reinsurance) by approximately
$3,700, $6,000 and $1,000 in 1999, 1998 and 1997, respectively.
(9) Federal Income Taxes
The actual federal income tax expense attributable to income from
continuing operations differs from the amounts computed by applying the U.S.
federal income tax rate of 35% to income from continuing operations before
income taxes as a result of the following (in thousands):
Years Ended December 31,
----------------------------
1999 1998 1997
------ ------ ------
Computed "expected" tax expense $ 833 $5,039 $9,008
Increase in income taxes resulting from:
Other, net -- -- 90
------ ------ ------
Total $ 833 $5,039 $9,098
====== ====== ======
Total income taxes, substantially all of which are federal, are recorded
in the consolidated statements of income and directly in certain shareholders'
equity accounts. Income tax expense (benefit) was allocated as follows: (in
thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Statements of Income:
Current $ 8,254 $ 11,356 $ 12,094
Deferred (7,421) (6,317) (2,996)
-------- -------- --------
Total income taxes from continuing operations 833 5,039 9,098
Income tax expense (benefit) in discontinued operations 202 (177) (107)
-------- -------- --------
Income taxes included in the statements of income $ 1,035 $ 4,862 $ 8,991
Shareholders' Equity:
Deferred income taxes related to unrealized appreciation (depreciation) of
invested securities within accumulated other comprehensive income
carried at fair value, net (26,095) 3,635 4,906
-------- -------- --------
Total income taxes $(25,060) $ 8,497 $ 13,897
======== ======== ========
</TABLE>
19
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities (included in
other liabilities) are presented below (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Deferred tax assets:
Policy liabilities $47,344 $29,828 $30,707
Unrealized loss on investments available for sale 15,447 -- --
Net operating loss carryovers 7,638 7,739 5,122
Other 15,115 10,162 10,110
------- ------- -------
Net deferred tax assets $85,544 $47,729 $45,939
Deferred tax liabilities:
Deferred policy acquisition costs 46,055 31,923 35,475
Unrealized gain on investments available for sale -- 10,648 7,013
Other 3,106 2,291 3,266
------- ------- -------
Total gross deferred tax liabilities 49,161 44,862 45,754
------- ------- -------
Net deferred tax assets $36,383 $ 2,867 $ 185
======= ======= =======
</TABLE>
As discussed in note 1, Guarantee Life carries its invested securities
classified as available-for-sale at fair value. For federal income tax purposes,
Guarantee Life believes it is not a dealer with respect to these investment
securities and, therefore, recognizes gains and losses on such investment
securities only when they are sold.
As of December 31, 1999, Guarantee Life does not believe any valuation
allowance with respect to the gross deferred tax assets is necessary as it is
more likely than not that these deferred tax assets will be realized due to the
expected reversal of existing temporary differences attributable to gross
deferred tax liabilities and the carryback potential of prior year income taxes
paid.
Prior to 1984, a portion of Guarantee Protective's current income was not
subject to current income tax but was accumulated for income tax purposes in a
memorandum account designated as "policyholders' surplus." The total of the life
companies' balances in their respective "policyholders' surplus" accounts at
December 31, 1983 was frozen by the Tax Reform Act of 1984 and, accordingly,
there have been no additions to the accounts after that date. Certain triggering
events will cause a recapture of all or part of the "policyholders' surplus"
account. Any amounts recaptured must be included in taxable income and may not
be offset by any existing NOL carryovers. As of December 31, 1999, the balance
of Guarantee Protective's "policyholders' surplus" account was approximately
$2.4 million. In addition, the accumulated amount of income subject to current
taxation, less certain adjustments, is set aside in another special memorandum
tax account called a "shareholders' surplus" account. Dividends paid by
Guarantee Protective in excess of the balance in the "shareholders' surplus"
account cannot be paid without a portion of the "policyholders' surplus"
becoming taxable. The balance of Guarantee Protective's "shareholders' surplus"
account was $1.2 million as of December 31, 1999.
During the years ended December 31, 1999, 1998, and 1997, Guarantee Life's
cash payments for federal income taxes were $11.6 million, $8.7 million, and
$10.1 million, respectively.
Guarantee Life has net operating loss carryovers (NOL) as of December 31,
1999 of approximately $21.8 million. These NOLs, if not utilized, will expire in
the years 2000 to 2018. A majority of these NOLs relate to non-life members.
(10) Employee Benefit Plans
Pension Plans
Guarantee Life Insurance has a noncontributory defined benefit cash
balance pension plan (qualified plan) covering substantially all home office
employees. Contributions credited to a participant based on a percentage
(determined by the participation age) times eligible compensation. Interest
credited rates are also applied annually.
20
<PAGE>
It is Guarantee Life Insurance's policy to fund pension costs in accordance with
the requirements of the Employee Retirement Income Security Act of 1974 and,
based on such standards, no funding was required for each of the years
presented. Substantially all of the plan assets are invested in the general and
separate investment accounts of two life insurance companies. The plan will be
merged into the Jefferson Pilot defined benefit pension plan at December 31,
2000.
Net periodic benefit cost related to the qualified plan included the
following components (in thousands):
Years Ended December 31,
-----------------------------
1999 1998 1997
------- ------- -------
Service cost-benefits earned during the year $ 2,188 $ 1,682 $ 1,752
Interest cost on projected benefit obligations 2,034 1,939 1,811
Actual return on plan assets (3,314) (2,951) (5,479)
Net amortization and deferral (617) (523) 2,450
------- ------- -------
Net periodic benefit cost $ 291 $ 147 $ 534
======= ======= =======
The changes in benefit obligation and plan assets for the qualified plan
included in the consolidated balance sheets are as follows (in thousands):
December 31,
---------------------
1999 1998
-------- --------
Change in projected benefit obligation:
Projected benefit obligation at beginning of year $ 32,620 $ 30,866
Service cost 2,188 1,682
Interest cost 2,034 1,939
Plan amendments -- (1,597)
Actuarial loss (4,880) 1,490
Benefits paid (3,822) (1,760)
-------- --------
Projected benefit obligation at end of year $ 28,140 $ 32,620
-------- --------
Change in fair value of plan assets:
Plan assets at beginning of year $ 42,066 $ 37,528
Actual return on plan assets 2,612 6,298
Benefits paid (3,822) (1,760)
-------- --------
Plan assets at end of year $ 40,856 $ 42,066
-------- --------
Funded status $ 12,716 $ 9,446
Unrecognized net actuarial gain (12,002) (8,141)
Unrecognized prior service cost (1,349) (1,473)
Unrecognized net asset at transition (527) (703)
-------- --------
Accrued pension benefit cost $ (1,162) $ (871)
======== ========
The assumptions used in determining pension information were as follows:
Years Ended December 31,
--------------------------
1999 1998 1997
---- ---- ----
Discount rate assumed 7.50% 6.50% 6.75%
Rate of compensation progression 5.50 5.50 5.50
Expected return on assets 8.00 8.00 8.00
Guarantee Life maintained two nonqualified pension plans to provide equal
retirement benefits for employees whose benefits would otherwise be restricted
due to Internal Revenue Code restrictions or the deferral of compensation. As of
December 31, 1999 and 1998, Guarantee Life's unfunded liability for these plans
was approximately $1.5 million and $2.1 million, respectively, which has been
accrued for in these statements. As a result of the change in control, these two
plans were terminated.
21
<PAGE>
Retiree Benefit Plans
In addition to providing pension benefits, Guarantee Life provides certain
life insurance benefits for retired employees. Substantially all employees may
become eligible for those benefits if they reach normal retirement age while
working for Guarantee Life. The benefits are determined at retirement and are
based upon retirement age, length of service and amount of group term life
insurance in force at retirement, subject to a maximum amount of $50,000.
Guarantee Life has established a liability in the amount of $250 thousand and
$1.1 million as of December 31, 1999 and 1998, respectively. The liability is
based upon the present value (including mortality and persistency) of the amount
required to fund the obligation. Guarantee Life recognizes the cost of providing
these benefits as earned. Guarantee Life does not have a separate plan for
retiree medical benefits. No significant medical benefits have been paid for
retirees for the years presented. No formal decision has been made regarding the
future of this plan.
Incentive Compensation, Deferred Compensation, Phantom Stock and 401(k)
Plans
Guarantee Life maintains the 1994 Long-Term Incentive Plan (Incentive
Plan), which includes incentive and nonqualified stock options, performance
shares and, under limited circumstances, restricted stock to officers and key
employees of Guarantee Life. The maximum number of shares of common stock that
could be issued under the Incentive Plan was increased by 600,000 in May 1997 to
1,345,828. The options vest in annual increments of 25% beginning on the second
anniversary of the grant date. Guarantee Life also maintains the Directors Stock
Incentive Plan (Directors Plan) which includes nonqualified stock options for
the members of the Board of Directors of the Holding Company. The maximum number
of shares of common stock that could be issued under the Directors Plan is
90,000. The options vest six months after grant date. Under both plans, the
exercise price of each option equaled the market price of the Holding Company's
stock on the date of grant, and an option's maximum term is ten years.
In February 1997, Guarantee Life's Board of Directors approved the 1997
Associate Stock Incentive Plan (Associate Plan). Under this plan, nonqualified
stock options could be granted to employees and agents. The maximum number of
shares of common stock that could be issued under the Associate Plan is 120,000.
These three plans (Incentive Plan, Directors Plan and Associate Plan) were
terminated December 31, 1999, due to the change in control.
Guarantee Life applies APB Opinion No. 25 and related interpretations in
accounting for the Incentive Plan, Associate Plan and the Directors Plan.
Accordingly, no compensation cost has been recognized for the three plans since
the exercise price of the options was equal to the fair value of the company's
common stock on the date of grant. Had compensation cost been determined using a
fair value based method, Guarantee Life's net income would have been reduced to
the pro forma amounts indicated below. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions used for the grants during the years ended December
31, 1999, 1998 and 1997, respectively: dividend yield of 1.3%, 1.4% and 1.4%;
expected volatility of 35%, 35% and 33%; risk-free interest rate of 5.50%, 5.50%
and 5.87%; for expected lives of six years for the Incentive Plan options and
two years for the Directors Plan option. The weighted average fair values of
stock options granted in 1999, 1998 and 1997 were $17.31, $24.75 and $20.71,
respectively.
22
<PAGE>
Year Ended December 31,
-------------------------------
1999 1998 1997
------- ------- -------
Net income (in thousands)
As reported $ 1,920 $ 9,029 $16,444
======= ======= =======
Pro forma -- 8,127 $15,924
======= ======= =======
A summary of the status of Guarantee Life's stock option plans as of
December 31, 1999, 1998, and 1997, and changes for the years ended is presented
below:
Years Ended December 31,
----------------------------------
1999 1998 1997
-------- -------- --------
Outstanding, beginning of year 976,433 898,102 512,878
Granted 88,517 248,514 415,057
Exercised (106,862) (42,730) (1,496)
Forfeited (35,890) (127,453) (28,337)
Cancelled due to change in control (922,198) -- --
-------- -------- --------
Outstanding, end of year -- 976,433 898,102
======== ======== ========
Options exercisable at year-end -- 209,607 143,917
======== ======== ========
Guarantee Life maintains the Guarantee Life Insurance Company Incentive
Compensation Plan (Incentive Compensation Plan) which provides short-term
incentives to eligible employees based upon financial and other performance
measures. As of December 31, 1999, 1998 and 1997, benefits in the amount of $5.1
million, $0.4 million and $1.7 million had been expensed and accrued for the
years then ended. Certain amounts awarded under the Incentive Compensation Plan
may be deferred under the Management Deferred Plan. Due to the change in
control, the Incentive Compensation Plan was cancelled at December 30, 1999.
Accrued amounts were paid subsequent to year-end.
Guarantee Life maintained the Guarantee Life Insurance Company Phantom
Stock Plan (Phantom Stock Plan) for certain management employees. The amounts
awarded under the Phantom Stock Plan are based on long-term improvements in
Guarantee Life's capital performance. At December 31, 1998, the accrued benefits
of the plan included in other liabilities was $754,000. As of December 31, 1999,
the Phantom Stock Plan has terminated due to a change in control. All vested
benefits were paid to participants in full.
Guarantee Life maintains the Guarantee Life Insurance Company Deferred
Compensation Plan (Management Deferred Plan) and Guarantee Life Insurance
Company Board of Directors Deferred Compensation Plan (Director Deferred Plan)
that allow management and directors to defer compensation into an
interest-bearing account, which earns interest at a rate equal to that received
by employees for a Guarantee Life Insurance Company IRA, or into a separate
phantom stock account. Under this phantom stock account option, contributions
are deemed to have been used to purchase shares in the Holding Company at
current quoted market rates. Concurrent with the declaration and payment of
shareholder dividends, similar per share amounts are contributed to accounts in
the Management Deferred Plan and Director Deferred Plan. At December 31, 1998,
compensation in the amount of $1.9 million was accrued in these plans which
fully funded the amounts due to participants. As of December 31, 1999, the
Deferred Compensation Plans were terminated due to change in control. All vested
benefits were paid to participants in full. Guarantee Life charged approximately
$1,300,000 and $314,000 to expense relating to this plan in 1999 and 1998,
respectively.
Guarantee Life maintains the Guarantee Life Insurance Company Thrift
Savings Plan (401(k) Plan) for eligible salaried employees. Effective January 1,
1999, the PFG qualified 401(k) plan was merged into the Guarantee Life Insurance
Company Thrift Savings Plan. All employee contributions are vested immediately
and all Company contributions are vested after three years. Guarantee Life
charged $719,000, $686,000 and $594,000 to expense relating to this plan in
1999, 1998 and 1997, respectively. This plan will be merged into Jefferson
Pilot's 401(k) Plan at December 31, 2000.
23
<PAGE>
PFG maintains a nonqualified, unfunded deferred compensation plan for
certain key management personnel and certain directors which provides for
payments upon retirement, death, or disability. Under the plan, management
personnel receive retirement payments equal to a portion of the average prior
five years' base compensation. Directors receive retirement payments based upon
the amount of years of service at PFG and their age at retirement. These
payments are to be made to the individuals or their designated beneficiary for a
maximum period of fifteen years for management personnel and five years for
directors. The plan also provides for reduced benefits upon early retirement,
disability, or termination of employment/service. The plan provided for full
vesting immediately upon a change in control of PFG, as occurred with the
acquisition by Guarantee Life. At December 31, 1999 and 1998, the accrued
benefits of the plan included in other liabilities were $2.5 million and $4.1
million, respectively. Due to the change in control, the plan will be terminated
in 2000, with all vested amounts to be paid to participants.
(11) Fair Value Information
The carrying value and estimated fair value of Guarantee Life's invested
assets and investment type insurance contracts (without material mortality risk)
were as follows (in thousands):
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------
1999 1998
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Assets:
Fixed maturities $ 959,834 $ 954,042 $1,035,543 $1,046,704
Equity securities 24,885 24,885 23,835 23,835
Mortgage loans 113,010 109,901 103,736 109,438
Policy loans 32,527 32,527 31,767 29,730
Investment real estate 3,162 7,904 3,211 7,800
Other invested assets 14,236 14,236 54,970 54,970
Liabilities:
Annuity contracts $ 324,255 $ 317,001 $ 349,834 $ 336,326
Other policyholder funds 51,475 51,475 43,751 43,751
========== ========== ========== ==========
</TABLE>
(12) Regulatory Matters
A reconciliation of statutory net income determined for Guarantee Life
under statutory accounting practices to that reflected herein (in thousands and
including Closed Block and discontinued operations) is as follows:
Years Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Net gain from operations as reported to
regulatory authorities $ 17,958 $ 26,035 $ 15,078
Pre-acquisition statutory earning -- (10,131) --
Change in deferred acquisition costs 10,776 (3,437) (3,210)
Deferred federal income taxes 7,421 6,317 2,996
Differences in statutory and GAAP reserves (26,540) (1,332) 1,074
Other, net (7,695) (8,423) 506
-------- -------- --------
Net income as reported herein $ 1,920 $ 9,029 $ 16,444
======== ======== ========
24
<PAGE>
A reconciliation of statutory surplus for Guarantee Life determined under
statutory accounting practices to shareholders' equity reflected herein (in
thousands and including Closed Block and discontinued operations):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Statutory surplus as reported to regulatory authorities $ 157,477 $ 165,650
Deferred policy acquisition costs 155,610 144,844
Deferred federal income taxes 36,383 6,251
Asset valuation and interest maintenance reserves 28,310 29,175
Fixed maturities available-for-sale unrealized appreciation (49,820) 32,568
Insurance reserves (71,733) (45,193)
Shareholders' equity in Holding Company (95,764) (110,016)
Other, net 22,479 6,763
--------- ---------
Shareholders' equity as reported herein $ 182,942 $ 230,042
========= =========
</TABLE>
Under the NAIC solvency monitoring program known as Risk-Based Capital
(RBC), Guarantee Life's insurance subsidiaries are required to measure its
solvency against certain parameters. As of December 31, 1999, Guarantee Life
Insurance exceeded the established minimums in the RBC program. In addition,
Guarantee Life Insurance exceeded the minimum statutory capital and surplus
requirements of its state of domicile, Nebraska.
The payment of dividends by Guarantee Life Insurance is subject to
restrictions set forth in the insurance laws and regulations of Nebraska. Under
state law, Guarantee Life Insurance may pay, within a twelve-month period,
dividends only from the earned surplus arising from its business and must
receive the prior approval of the state departments to pay a dividend, if such
dividend would exceed the greater of (i) 10% of statutory capital and surplus as
of the preceding year end or (ii) the net gain from operations for the previous
calendar year. State law gives the broad discretion to disapprove requests for
dividends in excess of these limits.
The Board of Directors of Guarantee Life Insurance declared a $15 million
extraordinary dividend to the Holding Company in November 1997, which was paid
in January 1998. In December 1998, the Board of Directors of Westfield declared
and paid a $20 million extraordinary distribution of excess capital to the
Holding Company. The State of Nebraska approved both of these transactions. In
September 1998, AGL's Board of Directors declared and paid a $2.4 million
dividend to PFG, Inc. No dividends were paid in 1999. In 2000, Guarantee Life
Insurance can declare a dividend of up to $18.0 million without permission from
the Nebraska Department of Insurance.
(13) Commitments and Contingencies
Guarantee Life is party to certain claims and legal actions arising during
the ordinary course of business. In the opinion of management, after consulting
with legal counsel, these matters will not have a material adverse effect on the
operations or financial condition of Guarantee Life. Guarantee Life has accrued
$5 million as its best estimate of the cost to settle its outstanding
litigation.
At December 31, 1998, Guarantee Life had debt obligations outstanding
totaling $112.5 million from available credit totaling $132.5 million. This debt
consisted of a six-year Senior Secured Term Loan Facility with a balance of
$82.5 million and a five-year Senior Secured Revolving Credit Facility with a
balance of $30 million. These Facilities are part of a credit agreement dated
May 28, 1998 with eleven banks including Chase Manhattan Bank who acts as lender
and administrative agent. The interest rate is computed as LIBOR plus a margin
based upon Guarantee Life's leverage ratio and AM Best Rating. This rate was
6.75% at December 31, 1998. As a result of the change in control, the debt
obligation was paid off.
Guarantee Life's credit agreement contains certain restrictions and
covenants related to, among other, minimum net worth, leverage ratio, interest
coverage ratio and Risk-Based Capital ratio. Prior to the debt pay-off,
Guarantee Life was in compliance with these covenants.
25
<PAGE>
Guarantee Life has commitments under noncancelable operating leases for
facilities principally used by regional and district offices. Rental expense and
associated future minimum lease payments required under these leases are
insignificant.
(14) Related Party Transaction
On December 30, 1999, Jefferson Pilot Corporation advanced Guarantee Life
$91.3 million for the purpose of retiring their external credit facility. At
December 31, 1999, this liability was outstanding.
(15) Discontinued Operations
In November 1994, Guarantee Life made a decision to withdraw from its
alternative workers' compensation benefit program segment. To facilitate its
exit, Guarantee Life entered into a reinsurance arrangement whereby it cedes 80%
of all claims incurred after October 31, 1994. In addition, Guarantee Life
entered into a reinsurance arrangement to limit its exposure to $10,000 per
claim relating to its 20% retention.
Concurrent with the implementation of the reinsurance coverage, Guarantee
Life amended its agreement with the managing general agent which marketed this
product for Guarantee Life, whereby Guarantee Life agreed to write new or
renewal business for this line only until the earlier replacement by another
insurance carrier or November 1, 1995. In September 1995, a replacement carrier
began issuing policies in Louisiana and Georgia. Effective November 1, 1995,
Guarantee Life ceased writing Special Risk policies.
Guarantee Life intends to allow the liabilities related to this business
to run off, unless an appropriate sale can be made. Guarantee Life does not
believe the disposal of this segment will result in a loss which would be
significant. Any gain resulting from a potential disposition would be recognized
when realized using the installment method of accounting.
The composition of the assets (liabilities) classified as discontinued are
as follows:
December 31,
--------------------
1999 1998
-------- --------
Ceded reinsurance recoverables $ 12,629 $ 29,758
Policy and contract claims (34,435) (51,042)
Other liabilities 186 209
-------- --------
Net liabilities relating to discontinued operations $(21,620) $(21,075)
======== ========
The results of operations for the discontinued segment are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net premiums $ (21) $ 28 $ (581)
Investment income, net and realized investment gains 1,969 2,937 1,634
Ceding commissions -- 14 241
------- ------- -------
Total revenues 1,948 2,979 1,294
Net policyholder benefits 552 3,015 (1,307)
Policy acquisition costs and other operating expense 820 469 2,903
------- ------- -------
Income (loss) before income taxes 576 (505) (302)
Income tax expense (benefit) (202) (177) (107)
------- ------- -------
Net income (loss) from discontinued operations $ 374 $ (328) $ (195)
======= ======= =======
</TABLE>
26
