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[LOGO]
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April 30, 1996 Prospectus
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INDIVIDUAL DEFERRED
VARIABLE ANNUITY
CONTRACT
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
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[LOGO] NORTHWESTERN NATIONAL LIFE
20 Washington Avenue South
Minneapolis, Minnesota 55401
----------------------------------
INDIVIDUAL DEFERRED VARIABLE ANNUITY CONTRACTS
ISSUED BY
MFS/NWNL VARIABLE ACCOUNT
The Individual Deferred Variable Annuity Contracts described in this
Prospectus are flexible purchase payment contracts. The Contracts are sold to or
in connection with retirement plans which qualify for special federal tax
treatment under the Internal Revenue Code. (See "Federal Tax Status" on page
20.) Annuity payments under the Contracts are deferred until a selected later
date.
Purchase payments are allocated to one or more Sub-Accounts, as selected by
the Contract Owner, of MFS/ NWNL Variable Account (the "Variable Account"), a
separate account of Northwestern National Life Insurance Company (the
"Company"). Each Sub-Account is invested in shares at net asset value of one of
a group of Mutual Funds (the "Funds") which utilize the investment advisory
services of Massachusetts Financial Services Company, Boston, Massachusetts.
Each Fund pays its investment adviser certain fees charged against the assets of
the Fund. The Contract Value and the amount of annuity payments will vary,
primarily based on the investment performance of the Funds whose shares are held
in the Sub-Accounts selected. The Funds are currently MFS-Registered Trademark-
Money Market Fund, MFS-Registered Trademark- Bond Fund, Massachusetts Investors
Trust, Massachusetts Investors Growth Stock Fund, MFS-Registered Trademark-
Research Fund, MFS-Registered Trademark- Total Return Fund,
MFS-Registered Trademark- Growth Opportunities Fund, MFS-Registered Trademark-
High Income Fund, MFS-Registered Trademark- World Governments Fund and
MFS-Registered Trademark- Emerging Growth Fund. (For more information about the
Funds, see "Investments of the Variable Account" on page 12.)
The Variable Account Contract Value is subject to daily charges which are a
mortality risk premium equal to 0.9% annually and an expense risk charge equal
to 0.4% annually. There is also an annual administrative charge of $30, and
there may be a surrender charge (contingent deferred sales charge) of 5% of the
amount surrendered which will, with certain exceptions, apply to whole or
partial surrenders made within five years of the last purchase payment. (For
more information about charges see "Charges Made By the Company" on page 14.)
Additional information about the Contracts, the Company and the Variable
Account, contained in a Statement of Additional Information dated April 30,
1996, has been filed with the Securities and Exchange Commission and is
available upon request without charge by writing to Washington Square
Securities, Inc., 20 Washington Avenue South, Minneapolis, Minnesota 55401. The
Statement of Additional Information relating to the Contracts having the same
date as this Prospectus is incorporated by reference in this Prospectus. The
Table of Contents for the Statement of Additional Information may be found on
page 23 of this Prospectus.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR ACCOMPANYING
FUND PROSPECTUSES AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER
OR SOLICITATION WOULD BE UNLAWFUL.
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION ABOUT THE CONTRACTS THAT A
PROSPECTIVE INVESTOR OUGHT TO KNOW BEFORE INVESTING AND SHOULD BE RETAINED FOR
FUTURE REFERENCE. IT IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES
OF THE FUNDS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SHARES OF THE FUNDS AND INTERESTS IN THE CONTRACTS ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, A BANK, AND THE SHARES AND
INTERESTS ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THE DATE OF THIS PROSPECTUS IS APRIL 30, 1996
N4000.15m
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Definitions.................................. 3
Summary of Contract Expenses................. 4
Summary...................................... 6
Condensed Financial Information.............. 7
Performance Information...................... 11
The Company.................................. 11
The Variable Account......................... 11
Investments of the Variable Account.......... 12
Charges Made by the Company.................. 14
Surrender Charge (Contingent
Deferred Sales Charge)................... 14
Administrative Charge...................... 14
Mortality Risk Premium..................... 14
Expense Risk Charge........................ 15
Sufficiency of Charges..................... 15
Premium Taxes.............................. 15
Expenses of the Funds...................... 15
Administration of the Contracts.............. 15
The Contracts................................ 15
Allocation of Purchase Payments............ 15
Sub-Account Accumulation Unit Value........ 16
Net Investment Factor...................... 16
Death Benefit Before the
Annuity Commencement Date................ 16
Death Benefit After the
Annuity Commencement Date................ 17
Surrender (Redemption)..................... 17
Transfers Between Sub-Accounts............. 17
Assignments................................ 18
Contract Owner and Beneficiaries........... 18
Contract Inquiries......................... 18
Annuity Provisions........................... 18
Annuity Commencement Date.................. 18
Annuity Form Selection - Change............ 19
Annuity Forms.............................. 19
Automatic Annuity Form..................... 19
Frequency and Amount
of Annuity Payments...................... 19
Variable Annuity Payments.................. 19
Sub-Account Annuity Unit Value............. 20
Assumed Investment Rate.................... 20
Federal Tax Status........................... 20
Introduction............................... 20
Qualified Plans............................ 20
Voting of Fund Shares........................ 21
Distribution of the Contracts................ 21
Return Privilege............................. 22
Reports to Owners............................ 22
Legal Proceedings............................ 22
Financial Statements and Experts............. 22
Further Information.......................... 22
Statement of Additional
Information Table of Contents.............. 23
</TABLE>
2
<PAGE>
DEFINITIONS
ACCUMULATION UNIT - A unit of measure, similar to a share of stock, used to
determine the Contract Value before annuity payments start.
ANNUITANT - The person who is named by the Owner to receive annuity payments.
ANNUITY COMMENCEMENT DATE (COMMENCEMENT DATE) - The date on which the annuity
payments are to start, which must be the first day of a month. The date will
be the first day of the month following the Annuitant's 75th birthday unless
an earlier or later date has been selected by the Owner and, if the date is
later, it has been agreed to by the Company. If the Annuity Commencement
Date selected by the Owner does not occur on a Valuation Date, at least 60
days after the date on which the Contract was issued, the Company reserves
the right to adjust the Commencement Date to the first Valuation Date after
the Commencement Date selected by the Owner and which is at least 60 days
after the Contract issue date.
BENEFICIARY - The person who is named by the Owner to receive the Contract Value
upon the death of the Annuitant prior to the Annuity Commencement Date or to
receive the balance of the annuity payments if the Annuitant does not live
to receive all payments due.
CONTRACT ANNIVERSARY - Occurs yearly on the same day and month the Contract was
issued.
CONTRACT OWNER (OWNER) - The person who controls all the rights under the
Contract until the earlier of Annuity Commencement Date or the date of death
of the annuitant.
CONTRACT VALUE - The value of the Sub-Account Accumulation Units under the
Contract.
CONTRACT YEAR - The twelve-month period starting on a Contract Anniversary.
QUALIFIED PLAN - A retirement plan under Sections 401, 403, 404, 408 or 457 or
similar provisions of the Federal Internal Revenue Code.
SUB-ACCOUNT - A sub-division of the Variable Account. Each Sub-Account invests
exclusively in the shares of a specified Fund.
SUCCESSOR BENEFICIARY - The person named to become the Beneficiary if the
Beneficiary is not alive.
SUCCESSOR OWNER - The person named to become the Owner if the Owner dies prior
to the Annuity Commencement Date.
VALUATION DATE - The close of the market each day the New York Stock Exchange is
open for trading and valuations have not been suspended by the Securities
and Exchange Commission.
VALUATION PERIOD - The time interval between a Valuation Date and the next
Valuation Date.
VARIABLE ACCOUNT - MFS/NWNL Variable Account, a separate investment account
established by us to receive and invest purchase payments under the
Contract. See "The Variable Account" on page 11.
VARIABLE ANNUITY - A series of periodic payments to the Annuitant which will
vary in amount, primarily based on the investment results of the Variable
Account Sub-Accounts under the Contract.
3
<PAGE>
SUMMARY OF CONTRACT EXPENSES
CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Charges Imposed on Purchases.............................................................. None
Contingent Deferred Sales Charge (a)............................................................ 5.00%
(as a percentage of purchase payments paid in last 5 years)
Surrender Fees.................................................................................. None
Exchange Fee.................................................................................... None
</TABLE>
<TABLE>
<S> <C>
ANNUAL ADMINISTRATIVE CHARGE.................................................................... $30
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
Mortality and Expense Risk Fees................................................................. 1.30%
Account Fees and Expenses....................................................................... None
Total Separate Account Annual Expenses.......................................................... 1.30%
</TABLE>
ANNUAL PORTFOLIO COMPANY EXPENSES
(as a percentage of portfolio company average net assets)
<TABLE>
<CAPTION>
TOTAL
PORTFOLIO
MANAGEMENT OTHER COMPANY ANNUAL
FEES 12B-1 FEE (B) EXPENSES EXPENSES
------------ ------------- --------------- --------------
<S> <C> <C> <C> <C>
MFS-Registered Trademark- Money Market Fund..................... 0.48% 0.00% 0.28% 0.76%
MFS-Registered Trademark- Bond Fund (Class A)................... 0.43% 0.30% 0.32% 1.05%
Massachusetts Investors Trust (Class A)......................... 0.26% 0.305% 0.22% 0.785%
Massachusetts Investors Growth Stock Fund (Class A)............. 0.31% 0.19% 0.23% 0.73%
MFS-Registered Trademark- Research Fund (Class A)............... 0.41% 0.35% 0.29% 1.05%
MFS-Registered Trademark- Total Return Fund (Class A)........... 0.39% 0.35% 0.23% 0.97%
MFS-Registered Trademark- Growth Opportunities Fund (Class A)... 0.43% 0.13% 0.29% 0.85%
MFS-Registered Trademark- High Income Fund (Class A)............ 0.45% 0.27% 0.32% 1.04%
MFS-Registered Trademark- World Governments Fund (Class A)...... 0.90% 0.25% 0.36% 1.51%
MFS-Registered Trademark- Emerging Growth Fund (Class A)........ 0.75% 0.25% 0.28% 1.28%
</TABLE>
4
<PAGE>
EXAMPLES
If you surrender your contract at the end of the applicable time period, you
would pay the following expenses on a $1,000 investment, assuming 5% annual
return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
MFS-Registered Trademark- Money Market Fund...................... $67 $113 $117 $252
MFS-Registered Trademark- Bond Fund (Class A).................... 70 122 132 281
Massachusetts Investors Trust (Class A).......................... 67 114 119 255
Massachusetts Investors Growth Stock Fund (Class A).............. 67 113 116 249
MFS-Registered Trademark- Research Fund (Class A)................ 70 122 132 281
MFS-Registered Trademark- Total Return Fund (Class A)............ 69 120 128 273
MFS-Registered Trademark- Growth Opportunities Fund (Class A).... 68 116 122 261
MFS-Registered Trademark- High Income Fund (Class A)............. 70 122 131 280
MFS-Registered Trademark- World Governments Fund (Class A)....... 75 136 155 326
MFS-Registered Trademark- Emerging Growth Fund (Class A)......... 72 129 143 304
</TABLE>
If you annuitize at the end of the applicable period or if you do not surrender
your contract, you would pay the following expenses on a $1,000 investment,
assuming 5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
MFS-Registered Trademark- Money Market Fund...................... $22 $68 $117 $252
MFS-Registered Trademark- Bond Fund (Class A).................... 25 77 132 281
Massachusetts Investors Trust (Class A).......................... 22 69 119 255
Massachusetts Investors Growth Stock Fund (Class A).............. 22 68 116 249
MFS-Registered Trademark- Research Fund (Class A)................ 25 77 132 281
MFS-Registered Trademark- Total Return Fund (Class A)............ 24 75 128 273
MFS-Registered Trademark- Growth Opportunities Fund (Class A).... 23 71 122 261
MFS-Registered Trademark- High Income Fund (Class A)............. 25 77 131 280
MFS-Registered Trademark- World Governments Fund (Class A)....... 30 91 155 326
MFS-Registered Trademark- Emerging Growth Fund (Class A)......... 27 84 143 304
</TABLE>
(a) The Contingent Deferred Sales Charge may be less than 5%, since under
certain situations amounts may be surrendered or withdrawn free of any
surrender charge. For more information on the Contingent Deferred Sales
Charge, see page 14, "Surrender Charge (Contingent Deferred Sales Charge)."
(b) Each fund (except for the MFS-Registered Trademark- Money Market Fund) has
adopted a Distribution Plan for its Class A shares in accordance with Rule
12b-1 under the Investment Company Act of 1940, as amended, which provides
that it will pay distribution/service fees aggregating up to (but not
necessarily all of) 0.35% per annum of the average daily net assets
attributable to Class A shares. Currently, 0.10% of the distribution fee is
being waived for Massachusetts Investors Growth Stock Fund,
MFS-Registered Trademark- Growth Opportunities Fund,
MFS-Registered Trademark- World Governments Fund and
MFS-Registered Trademark- Emerging Growth Fund; 0.05% of the distribution
fee is being waived for MFS-Registered Trademark- Bond Fund and
MFS-Registered Trademark- High Income Fund; and 0.025% of the distribution
fee is being waived for Massachusetts Investors Trust.
THE EXAMPLES SHOWN IN THE ABOVE TABLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE
SHOWN.
THE 5% ANNUAL RETURN ASSUMED IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE ANNUAL RETURNS, WHICH MAY BE GREATER OR LESS
THAN THE ASSUMED RATE.
The purpose of this table is to assist the Contract Owner in understanding the
various costs and expenses that a Contract Owner will bear either directly or
indirectly. The table reflects the expenses of the Separate Account as well as
those of the Portfolio Companies. The $30 Annual Administrative Charge is
reflected as an annual percentage charge in this table based on the average net
assets in the Variable Account during the preceding year, which translates to a
charge equal to an annual rate of 0.128% of the Variable Account Values.
In addition to the costs and expenses shown in this table, state premium taxes
may also be applicable. For more information on state premium taxes, see page
15, "Premium Taxes."
5
<PAGE>
SUMMARY
The Contracts are individual deferred variable annuity contracts issued by
the Variable Account. (See "The Variable Account" on page 11.) They are sold to
or in connection with retirement plans which qualify for special Federal tax
treatment under the Internal Revenue Code. (See "Federal Tax Status" on page
20.) Annuity payments under the Contracts are deferred until a later date.
Purchase payments may be allocated to one or more Sub-Accounts of the
Variable Account. Purchase payments allocated to one or more Sub-Accounts of the
Variable Account will be invested in shares at net asset value of one or more of
the Funds. The Variable Account Contract Value and the amount of variable
annuity payments will vary, primarily based on the investment performance of the
Funds whose shares are held in the Sub-Accounts selected. (See "Investments of
the Variable Account" on page 12.)
No deduction for a sales charge is made from the purchase payments for the
Contracts. However, if all or any part of the Contract Value is surrendered
within five years from the date of the last purchase payment, the Company will,
with certain exceptions, deduct a surrender charge (which may be deemed a
contingent deferred sales charge). (See "Surrender Charge (Contingent Deferred
Sales Charge)" on page 14.)
In addition, on each Contract Anniversary and on the surrender of the
Contract for full value if it is not surrendered on a Contract Anniversary, the
Company will deduct from the Contract Value an administrative charge of $30.
During the annuity period the annual administrative charge will be deducted
proportionately from each monthly annuity payment. The administrative charge is
to reimburse the Company for administrative expenses relating to the issue and
maintenance of the Contracts. (See "Administrative Charge" on page 14.)
The Company also deducts a Mortality Risk Premium and an Expense Risk
Charge, equal to an annual rate of 1.3% of the daily net asset value of the
Sub-Accounts of the Variable Account, for mortality and expense risks assumed by
the Company. (See "Mortality Risk Premium" and "Expense Risk Charge" on pages 14
and 15, respectively.)
The minimum amount of purchase payments the Company will accept during the
first Contract Year will be $600, with no individual payment to be less than
$50. The Company may choose not to accept any subsequent purchase payment if it
is less than $50 or if the purchase payment together with the Contract Value at
the next Valuation Date exceeds $250,000.
If the Contract Value at the Annuity Commencement Date is less than $2,500,
the Contract Value may be distributed in a single sum payment in lieu of annuity
payments. If any annuity payment would be less than $50, the Company shall have
the right to change the frequency of payments to such intervals as will result
in payments of at least $50 each. (See "Frequency and Amount of Annuity
Payments" on page 19.)
Premium taxes payable to any governmental entity will be charged against the
Contracts. (See "Premium Taxes" on page 15.)
The Contract Owner may request early withdrawal of all or part of the
Contract Value before the Annuity Commencement Date. (See "Surrender
(Redemption)" on page 17.)
The Contract Owner may return the Contract within ten days after it was
delivered to the Owner, and the full amount of the purchase payments received
will be refunded. (See "Return Privilege" on page 22.)
6
<PAGE>
QUALIFIED CONTRACTS CONDENSED FINANCIAL INFORMATION
The following table shows, for each Sub-Account of the Variable Account, the
value of the Sub-Account Accumulation Unit at the dates shown, and the total
number of Sub-Account Accumulation Units outstanding at the end of each period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------------------------
SUB-ACCOUNT INVESTING IN 1995 1994 1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
MFS-Registered Trademark- Money Market
Fund
Beginning of period.................. $23.1844 $22.6883 $22.4486 $22.0738 $21.1776 $19.9100 $18.5307
End of period........................ $24.0892 $23.1844 $22.6883 $22.4486 $22.0738 $21.1776 $19.9100
Units outstanding at end of period... 112,836.517 165,050.913 173,003.069 246,544.750 332,101.019 498,184.172 550,092.886
MFS-Registered Trademark- Bond Fund
(Class A)
Beginning of period.................. $37.8779 $40.1676 $35.7423 $34.0697 $29.2428 $27.4126 $24.6562
End of period........................ $45.3978 $37.8779 $40.1676 $35.7423 $34.0697 $29.2428 $27.4126
Units outstanding at end of period... 35,793.566 40,693.818 50,303.414 50,760.586 61,379.164 76,944.303 90,129.412
Massachusetts Investors Trust (Class A)
Beginning of period.................. $42.2011 $43.1946 $39.7739 $37.5272 $29.7806 $29.9787 $22.6133
End of period........................ $58.0438 $42.2011 $43.1946 $39.7339 $37.5272 $29.7806 $29.9787
Units outstanding at end of period... 23,606.537 24,462.862 26,533.906 28,801.024 25,691.195 26,253.540 27,220.098
Massachusetts Investors Growth Stock Fund
(Class A)
Beginning of period.................. $37.5531 $40.7906 $36.1050 $34.3668 $23.5708 $25.0703 $18.7279
End of period........................ $47.5723 $37.5531 $40.7906 $36.1050 $34.3668 $23.5708 $25.0703
Units outstanding at end of period... 28,425.391 33,994.422 37,131.591 45,779.800 44,197.888 43,415.688 44,626.073
MFS-Registered Trademark- Research Fund
(Class A)
Beginning of period.................. $40.6617 $41.1909 $34.2990 $31.2699 $23.8879 $25.5621 $20.6858
End of period........................ $55.6243 $40.6617 $41.1909 $34.2990 $31.2699 $23.8879 $25.5621
Units outstanding at end of period... 26,841.846 34,805.269 32,670.590 33,475.816 39,710.220 41,836.136 51,087.289
<CAPTION>
SUB-ACCOUNT INVESTING IN 1988 1987 1986
----------- ----------- -----------
<S> <C> <C> <C>
MFS-Registered Trademark- Money Market
Fund
Beginning of period.................. $17.5305 $16.7252 $15.9295
End of period........................ $18.5307 $17.5305 $16.7252
Units outstanding at end of period... 720,965.605 773,423.071 869,277.255
MFS-Registered Trademark- Bond Fund
(Class A)
Beginning of period.................. $23.1007 $23.5486 $20.4932
End of period........................ $24.6562 $23.1107 $23.5486
Units outstanding at end of period... 103,919.882 146,226.646 164,136.783
Massachusetts Investors Trust (Class A)
Beginning of period.................. $20.6330 $19.4532 $16.8154
End of period........................ $22.6133 $20.6330 $19.4532
Units outstanding at end of period... 32,187.062 45,607.981 28,220.297
Massachusetts Investors Growth Stock Fund
(Class A)
Beginning of period.................. $18.2258 $17.4467 $15.7136
End of period........................ $18.7279 $18.2258 $17.4467
Units outstanding at end of period... 50,004.130 52,074.825 52,562.339
MFS-Registered Trademark- Research Fund
(Class A)
Beginning of period.................. $19.0013 $18.2716 $16.2257
End of period........................ $20.6858 $19.0013 $18.2716
Units outstanding at end of period... 47,219.438 63,981.972 70,806.122
</TABLE>
7
<PAGE>
QUALIFIED CONTRACTS CONDENSED FINANCIAL INFORMATION, CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------
SUB-ACCOUNT INVESTING IN 1995 1994 1993 1992 1991 1990
------------ ----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
MFS-Registered Trademark- Total Return Fund
(Class A)
Beginning of period.................... $46,2480 $48.1422 $42.3443 $38.9773 $32.4698 $33.1965
End of period.......................... $57.9570 $46.2480 $48.1422 $42.3443 $38.9773 $32.4698
Units outstanding at end of period..... 62,015.823 81,547.990 89,906.122 101,079.955 100,558.308 101,405.128
MFS-Registered Trademark- Growth
Opportunities Fund (Class A)
Beginning of period.................... $37.5616 $39.7037 $34.6197 $32.5672 $26.9555 $28.5310
End of period.......................... $49.8621 $37.5616 $39.7037 $34.6197 $32.5672 $26.9555
Units outstanding at end of period..... 94,854.760 111,690.329 120,669.763 143,707.314 181,334.581 210,152.529
MFS-Registered Trademark- High Income Fund
(Class A)
Beginning of period.................... $41.3000 $42.9477 $36.4478 $31.5507 $21.4681 $28.8509
End of period.......................... $47.7827 $41.3000 $42.9477 $36.4478 $31.5507 $21.4681
Units outstanding at end of period..... 83,394.363 95,772.845 120,857.156 134,205.074 136,839.759 148,819.003
MFS-Registered Trademark- World Governments
Fund (Class A)
Beginning of period.................... $41.9946 $45.5372 $38.9695 $38.9589 $34.8019 $29.9073
End of period.......................... $47.8696 $41.9946 $45.5372 $38.9695 $38.9589 $34.8019
Units outstanding at end of period..... 13,675.919 15,677.993 20,279.064 17,835.352 17,705.770 17,146.001
MFS-Registered Trademark- Emerging Growth
Fund (Class A)
Beginning of period.................... $35.6893 $34.4899 $27.5093 $25.9117 $15.4281 $17.6564
End of period.......................... $49.7321 $35.6893 $34.4899 $27.5093 $25.9117 $15.4281
Units outstanding and end of period.... 39,184.416 39,191.298 34,652.403 38,879.705 32,126.322 37,795.519
<CAPTION>
SUB-ACCOUNT INVESTING IN 1989 1988 1987 1986
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
MFS-Registered Trademark- Total Return Fund
(Class A)
Beginning of period.................... $27.7245 $24.4227 $23.9005 $20.2050
End of period.......................... $33.1965 $27.7245 $24.4227 $23.9005
Units outstanding at end of period..... 103,008.700 72,821.194 86,749.679 41,391.966
MFS-Registered Trademark- Growth
Opportunities Fund (Class A)
Beginning of period.................... $22.5166 $20.9239 $20.3963 $19.5445
End of period.......................... $28.5310 $22.5166 $20.9239 $20.3963
Units outstanding at end of period..... 246,495.335 310,042.666 369,380.225 435,724.558
MFS-Registered Trademark- High Income Fund
(Class A)
Beginning of period.................... $27.0011 $24.3481 $24.5978 $22.4661
End of period.......................... $28.8509 $27.0011 $24.3481 $24.5978
Units outstanding at end of period..... 241,925.212 323,005.671 434,092.003 587,328.901
MFS-Registered Trademark- World Governments
Fund (Class A)
Beginning of period.................... $28.2198 $27.3900 $22.2821 $17.3424
End of period.......................... $29.9073 $28.2198 $27.3900 $22.2821
Units outstanding at end of period..... 15,573.269 23,380.332 21,335.577 27,497.493
MFS-Registered Trademark- Emerging Growth
Fund (Class A)
Beginning of period.................... $14.2228 $12.5553 $14.1713 $12.7364
End of period.......................... $17.6564 $14.2228 $12.5553 $14.1713
Units outstanding and end of period.... 44,821.897 48,903.090 51,913.604 41,826.052
</TABLE>
8
<PAGE>
NONQUALIFIED CONTRACTS CONDENSED FINANCIAL INFORMATION
The following table shows, for each Sub-Account of the Variable Account, the
value of the Sub-Account Accumulation Unit at the dates shown, and the total
number of Sub-Account Accumulation Units outstanding at the end of each period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------------
1995 1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
MFS-Registered Trademark- Money Market Fund
Beginning of period................................. $23.2253 $22.7283 $22.4883 $22.1128 $21.2150 $19.9452
End of period....................................... $24.1318 $23.2253 $22.7283 $22.4883 $22.1128 $21.2150
Units outstanding at end of period.................. 0.000 2,191.338 2,811.472 2,814.571 2,991.702 3,510.691
MFS-Registered Trademark- Bond Fund (Class A)
Beginning of period................................. $37.1401 $39.3852 $35.0461 $33.4060 $28.6731 $26.8786
End of period....................................... $44.5135 $37.1401 $39.3852 $35.0461 $33.4060 $28.6731
Units outstanding at end of period.................. 0.000 0.078 0.342 0.000 536.534 490.048
Massachusetts Investors Trust (Class A)
Beginning of period................................. $41.1381 $42.1066 $38.7721 $36.5820 $29.0305 $29.2236
End of period....................................... $56.5818 $41.1381 $42.1066 $38.7721 $36.5820 $29.0305
Units outstanding at end of period.................. 0.000 0.069 0.300 0.000 0.000 4.880
Massachusetts Investors Growth Stock Fund (Class A)
Beginning of Period................................. $36.7003 $39.8644 $35.2851 $33.5864 $23.0355 $24.5010
End of Period....................................... $46.4920 $36.7003 $39.8644 $35.2851 $33.5864 $23.0355
Units outstanding at end of period.................. 37.471 37.970 38.043 299.068 348.026 301.242
MFS-Registered Trademark- Research Fund (Class A)
Beginning of period................................. $42.7553 $43.3118 $36.0651 $32.8800 $25.1178 $26.8782
End of period....................................... $58.4883 $42.7553 $43.3118 $36.0651 $32.8800 $25.1178
Units outstanding at end of period.................. 263.912 264.515 265.364 489.836 491.318 492.819
<CAPTION>
1989 1988 1987 1986
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
MFS-Registered Trademark- Money Market Fund
Beginning of period................................. $18.5634 $17.5614 $16.7547 $15.9576
End of period....................................... $19.9452 $18.5634 $17.5614 $16.7547
Units outstanding at end of period.................. 5,944.240 5,110.834 5,484.860 7,207.659
MFS-Registered Trademark- Bond Fund (Class A)
Beginning of period................................. $24.1759 $22.6605 $23.0899 $20.0940
End of period....................................... $26.8786 $24.1759 $22.6605 $23.0899
Units outstanding at end of period.................. 1,012.197 1,984.447 2,049.323 2,437.008
Massachusetts Investors Trust (Class A)
Beginning of period................................. $22.0437 $20.1133 $18.9632 $16.3918
End of period....................................... $29.2236 $22.0437 $20.1133 $18.9632
Units outstanding at end of period.................. 9.359 501.036 501.873 749.774
Massachusetts Investors Growth Stock Fund (Class A)
Beginning of Period................................. $18.3026 $17.8119 $17.0505 $15.3568
End of Period....................................... $24.5010 $18.3026 $17.8119 $17.0505
Units outstanding at end of period.................. 40.803 41.608 41.608 7.331
MFS-Registered Trademark- Research Fund (Class A)
Beginning of period................................. $21.7509 $19.8976 $19.1335 $--
End of period....................................... $26.8782 $21.7509 $19.8976 $--
Units outstanding at end of period.................. 269.360 270.482 271.861 --
</TABLE>
9
<PAGE>
NONQUALIFIED CONTRACTS CONDENSED FINANCIAL INFORMATION, CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------
1995 1994 1993 1992 1991 1990
--------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
MFS-Registered Trademark- Total Return Fund (Class A)
Beginning of period................................ $46.3716 $48.2709 $42.4575 $39.0816 $-- $--
End of period...................................... $58.1120 $46.3716 $48.2709 $42.4575 $39.0816 $--
Units outstanding at end of period................. 0.000 -- -- 0.000 37.482 --
MFS-Registered Trademark- Growth Opportunities Fund
(Class A)
Beginning of period................................ $34.2102 $36.1611 $31.5308 $29.6614 $24.5502 $25.9853
End of period...................................... $45.4132 $34.2102 $36.1611 $31.5308 $29.6614 $24.5502
Units outstanding at end of period................. 35.025 35.633 36.176 37.089 38.133 45.163
MFS-Registered Trademark- High Income Fund (Class A)
Beginning of Period................................ $-- $-- $-- $-- $-- $--
End of Period...................................... $48.2415 $-- $-- $-- $-- $--
Units outstanding at end of period................. 0.000 -- -- -- -- --
MFS-Registered Trademark- World Governments Fund (Class
A)
Beginning of period................................ $-- $-- $-- $-- $34.8241 $29.9263
End of period...................................... $47.9001 $-- $-- $-- $-- $34.8241
Units outstanding at end of period................. 0.000 -- -- -- 0.0000 0.303
MFS-Registered Trademark- Emerging Growth Fund (Class
A)
Beginning of period................................ $-- $-- $-- $-- $-- $--
End of period...................................... $49.7321 $-- $-- $-- $-- $--
Units outstanding at end of period................. 0.000 -- -- -- -- --
<CAPTION>
1989 1988 1987 1986
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
MFS-Registered Trademark- Total Return Fund (Class A)
Beginning of period................................ $-- $-- $-- $--
End of period...................................... $-- $-- $-- $--
Units outstanding at end of period................. -- -- -- --
MFS-Registered Trademark- Growth Opportunities Fund
(Class A)
Beginning of period................................ $20.5076 $19.0570 $18.5765 $17.8007
End of period...................................... $25.9853 $20.5076 $19.0570 $18.5765
Units outstanding at end of period................. 1,362.300 2,400.206 3,623.602 4,722.596
MFS-Registered Trademark- High Income Fund (Class A)
Beginning of Period................................ $27.2603 $24.5818 $24.8339 $22.6817
End of Period...................................... $-- $27.2603 $24.5818 $24.8339
Units outstanding at end of period................. 0.000 76.541 1,078.930 8,675.686
MFS-Registered Trademark- World Governments Fund (Class
A)
Beginning of period................................ $28.2380 $27.4075 $22.2963 $17.3535
End of period...................................... $29.9263 $28.2380 $27.4075 $22.2963
Units outstanding at end of period................. 0.799 1.368 1.979 2.588
MFS-Registered Trademark- Emerging Growth Fund (Class
A)
Beginning of period................................ $14.2228 $12.5553 $14.1713 $12.7364
End of period...................................... $-- $14.2228 $12.5553 $14.1713
Units outstanding at end of period................. 0.000 1,561.312 1,563.342 1,565.034
</TABLE>
10
<PAGE>
PERFORMANCE INFORMATION
The Variable Account may, on occasion, advertise certain performance
information concerning its Sub-Accounts. The performance information is based on
historical results and is not intended to indicate past performance under an
actual contract or future performance. More detailed information discussing the
calculation of performance information appears in the Statement of Additional
Information.
The yield of the Sub-Account investing in the MFS-Registered Trademark-
Money Market Fund refers to the annualized income generated by an investment in
the Sub-Account over a specified seven-day period. The yield is calculated by
assuming that the income is generated for that seven-day period over a 52-week
period and is shown as a percentage of the investment. The effective yield is
calculated similarly but, when annualized, the income earned by an investment in
the 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.
The total return of a Sub-Account refers to return quotations assuming an
investment under a Contract has been held in the Sub-Account for various periods
of time including, but not limited to, a period measured from the date the
Sub-Account commenced operations. When a Sub-Account has been in operation for
one, five, and ten years, respectively, the total return for these periods will
be provided.
The average annual total return quotations represent the average annual
compounded rates of return that would equate an initial investment of $1,000
under a Contract to the redemption value of that investment as of the last day
of each of the periods for which total return quotations are provided. Average
annual total return information shows the average percentage change in the value
of an investment in the Sub-Account from the beginning date of the measuring
period to the end of that period. This version of average annual total return
reflects all historical investment results, less all charges and deductions
applied against the Sub-Account (including any surrender charge that would apply
if an Owner terminated the Contract at the end of each period indicated, but
excluding any deductions for premium taxes).
Average total return information may be presented, computed on the same
basis as described above, except deductions will not include the surrender
charge. In addition, the Company may from time to time disclose average annual
total return in non-standard formats and cumulative total return for Contracts
funded by the Sub-Accounts.
THE COMPANY
The Company, organized in 1885, is a stock life insurance company
incorporated under the laws of the State of Minnesota. Effective January 3,
1989, the Company converted from a stock and mutual life insurance company to a
stock life insurance company and, through a merger, became a direct,
wholly-owned subsidiary of ReliaStar Financial Corp., a holding company
incorporated under the laws of the State of Delaware. The Company offers
individual life insurance and annuities, employee benefits and retirement
contracts. The Company is admitted to do business in the District of Columbia
and all states except New York. Its home office is at 20 Washington Avenue
South, Minneapolis, Minnesota 55401 (telephone 612/372-5507).
The Contracts described in this Prospectus are nonparticipating. The capital
and surplus of the Company should be considered as bearing only upon the ability
of the Company to meet its obligations under the Contracts.
THE VARIABLE ACCOUNT
The Variable Account is a Separate Account of the Company established by the
Board of Directors of the Company on September 13, 1979, pursuant to the laws of
the State of Minnesota. The Company has caused the Variable Account to be
registered with the Securities and Exchange Commission as a unit investment
trust under the Investment Company Act of 1940. Such registration does not
involve supervision by such Commission of the management or investment policies
or practices of the Variable Account, the Company or the Funds.
The assets of the Variable Account are owned by the Company, and the Company
is not a trustee with respect to such assets. However, the Minnesota laws under
which the Variable Account was established provide that the Variable Account
shall not be chargeable with liabilities arising out of any other business the
Company may conduct. The Company does not guarantee the investment performance
of the Variable Account. The Contract Value and the amount of annuity payments
will vary, primarily based on the investment performance of the Funds, whose
shares are held in the Variable Account Sub-Accounts selected by the Owner.
Purchase payments under a Contract are allocated to one or more Sub-Accounts
of the Variable Account. Each Sub-Account is invested in shares of one of the
Mutual Funds on the list of Funds provided by the Company. The
11
<PAGE>
purchase payments under a Contract are allocated to the Sub-Account or
Sub-Accounts selected by the Owner, and the future Contract Value depends
primarily on the investment performance of the Funds whose shares are held in
the Sub-Accounts selected.
INVESTMENTS OF THE VARIABLE ACCOUNT
When a Contract is applied for, the Owner elects to have purchase payments
allocated to one or more Sub-Accounts, each of which invests in shares of one of
the Mutual Funds on the list provided by the Company. The Sub-Accounts invest in
shares of the Funds at their net asset value, subject to any minimum purchase
requirements that may be imposed by the Funds. The Owner may change a purchase
payment allocation for future purchase payments and may at any time transfer all
or part of any existing values in a Sub-Account to another Sub-Account that
invests in shares of another Fund on the list, subject to any terms and
conditions the Funds may impose on transfers from one Fund to another in
addition to transfer requirements under the Contract.
Massachusetts Financial Services Company, Boston, Massachusetts, is the
investment adviser for each of the Funds and is paid fees for its services by
the Funds. The Funds currently offered are described below. Each of the Funds,
with the exception of the MFS-Registered Trademark- Money Market Fund, offers
more than one class of shares. The Sub-Accounts offered through the Contract,
with the exception of the MFS-Registered Trademark- Money Market Fund, invest
only in Class A shares of the Funds. A brief summary of investment objectives is
contained in the description of each Fund. More detailed information may be
found in the current prospectus for each Fund offered. Such a prospectus for the
Fund being considered must accompany this Prospectus and should be read in
conjunction herewith.
MFS-REGISTERED TRADEMARK- MONEY MARKET FUND
MFS-Registered Trademark- Money Market Fund has as its investment objective
to seek as high a level of current income as is considered consistent with the
preservation of capital and liquidity. The Fund invests primarily in short-term
money market instruments, including obligations issued or guaranteed as to
interest and principal by the U.S. government or any agency or instrumentality
thereof (including repurchase agreements collateralized by such securities),
obligations of larger banks, and certain commercial paper and short-term
corporate obligations. All of the assets of the Fund will be invested in
obligations maturing in 13 months or less; however, securities collateralizing
repurchase agreements may have maturities in excess of 13 months.
MFS-REGISTERED TRADEMARK- BOND FUND (CLASS A)
The Fund invests at least 80% of its assets in "investment grade" or
equivalent debt securities. The MFS-Registered Trademark- Bond Fund's primary
investment objective is to provide as high a level of current income as is
believed to be consistent with prudent investment risk. A secondary objective is
to seek protection of shareholders' capital.
In the event of a sudden rise in interest rates, the net asset value per
share of the Fund may decrease. During the annuity payout period, this may cause
a temporary decrease in monthly annuity payments. Because the portfolio of the
Fund will be managed, this effect may be minimized but there can be no guarantee
that it will be eliminated.
MASSACHUSETTS INVESTORS TRUST (CLASS A)
The objectives of Massachusetts Investors Trust are to provide reasonable
current income and long-term growth of capital and income. The Fund is believed
to constitute a conservative medium for that portion of an investor's capital
which he wishes to have invested in securities considered to be of high or
improving investment quality. The Fund's assets are normally invested in
securities or securities convertible into common stocks. However, the Fund may
hold its assets in cash or invest in commercial paper, repurchase agreements or
other forms of debt securities either to provide reserves for future purchases
of common stock or as a defensive measure in certain economic environments.
MASSACHUSETTS INVESTORS GROWTH STOCK FUND (CLASS A)
Massachusetts Investors Growth Stock Fund has as its investment objective to
provide long-term growth of capital and future income rather than current
income. To achieve this objective it is the policy of the Fund to keep its
assets invested, except for working cash balances, in the common stocks, or
securities convertible into common stocks, of companies believed to possess
better-than-average prospects for long-term growth. Emphasis is placed on the
selection of progressive, well-managed companies.
MFS-REGISTERED TRADEMARK- RESEARCH FUND (CLASS A)
MFS-Registered Trademark- Research Fund has as its objective to provide
long-term growth of capital and future income.
12
<PAGE>
MFS-REGISTERED TRADEMARK- TOTAL RETURN FUND (CLASS A)
MFS-Registered Trademark- Total Return Fund has as its primary investment
objective to obtain above-average income (compared to a portfolio entirely
invested in equity securities) consistent with the prudent employment of
capital. While current income is the primary objective, the Fund believes that
there also should be a reasonable opportunity for growth of capital and income,
since many securities offering a better-than-average yield may possess growth
potential.
MFS-REGISTERED TRADEMARK- GROWTH OPPORTUNITIES FUND (CLASS A)
MFS-Registered Trademark- Growth Opportunities Fund has as its investment
objective to seek growth of capital. Dividend income, if any, is incidental to
the objective of growth of capital. To achieve this objective, the Fund
maintains a flexible approach towards types of companies as well as types of
securities, depending upon the economic environment and the relative
attractiveness of the various security markets. Generally, emphasis is placed
upon smaller companies believed to possess above-average growth opportunities.
MFS-REGISTERED TRADEMARK- HIGH INCOME FUND (CLASS A)
The investment objective of MFS-Registered Trademark- High Income Fund is to
seek high current income by investing primarily in a professionally managed
diversified portfolio of fixed income securities, some of which may involve
equity features. Securities offering the high current income sought by the Fund
are ordinarily in the lower rating categories of recognized rating agencies or
are unrated and generally involve greater volatility of price and risk of
principal and income than securities in the higher rating categories. Capital
growth, if any, is a consideration incidental to the investment objective of
high current income.
MFS-REGISTERED TRADEMARK- WORLD GOVERNMENTS FUND (CLASS A)
The objective of MFS-Registered Trademark- World Governments Fund is to seek
not only preservation but also growth of capital, together with moderate current
income through a professionally managed, internationally diversified portfolio
consisting primarily of debt securities and, to a lesser extent, equity
securities.
MFS-REGISTERED TRADEMARK- EMERGING GROWTH FUND (CLASS A)
MFS-Registered Trademark- Emerging Growth Fund has as its investment
objective to seek long-term growth of shareholders' capital, primarily through
investing in common stocks of small and medium-sized companies early in their
life cycle but which may have the potential to become major enterprises
(emerging growth companies). Dividend and interest income, if any, is incidental
to the Fund's investment objective. Investments may also be made in limited
amounts of foreign securities, warrants and restricted securities and may invest
in repurchase agreements. Accordingly, the Fund is intended for investors who
understand and are willing to accept the risks entailed in seeking long-term
growth of capital through these kinds of investments.
REINVESTMENT
The Funds described above have as a policy the reinvestment of income
dividends and capital gains unless another option is chosen by a shareholder.
However, under the Contracts described in this Prospectus there is an automatic
reinvestment of such distributions.
SUBSTITUTION OF FUND SHARES
If the shares of any of the above Funds should no longer be available for
investment by a Sub-Account or if in the judgment of the Company's management
investment in such Fund shares has become inappropriate in view of the purposes
of the Contract, the Company may substitute shares of another Fund for Fund
shares already purchased. No substitution of shares in any Sub-Account may take
place without a prior favorable vote of a majority of the votes entitled to be
cast by persons having a voting interest in the Fund shares allocated to such
Sub-Account and prior approval of the Securities and Exchange Commission.
If a purchase payment for a selected Sub-Account is unable to be invested
because shares of the applicable Fund are no longer available for investment or
if in the judgment of the Company's management further investment in such Fund
shares would be inappropriate in view of the purposes of the Contract, the Owner
will be so notified and may direct investment of the purchase payment in a
different Sub-Account, which investment will be made on the next Valuation Date
after such direction is received by the Company. Until receipt of such
direction, the purchase payment will be invested in shares of
MFS-Registered Trademark- Money Market Fund, if available, or, if not, in a
daily interest-bearing bank savings account.
13
<PAGE>
CHARGES MADE BY THE COMPANY
SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE)
No deduction for a sales charge is made from the purchase payments for the
Contracts. However, the surrender charge described below (which may be deemed a
contingent deferred sales charge), when it is applicable, is intended to
reimburse the Company for expenses relating to the sale of the Contracts,
including commissions to sales personnel, costs of sales material and other
promotional activities and sales administration costs. Commissions and other
distribution compensation to be paid on the sale of the Contracts will not be
more than 5.11% of the purchase payments.
If part or all of a Contract's value is surrendered, surrender charges may
be made by the Company. For purposes of the following surrender charge
description, "New Purchase Payments" are those Contract purchase payments
received by the Company during the Contract Year in which the surrender occurs
or in the four immediately preceding Contracts Years; "Old Purchase Payments"
are those Contract purchase payments not defined as New Purchase Payments; and
"Accumulated Value" at any Valuation Date is the Contract Value less the sum of
New Purchase Payments and Old Purchase Payments.
For purposes of determining surrender charges, surrenders shall first be
taken from Old Purchase Payments until they are exhausted, then from New
Purchase Payments until they are exhausted, and thereafter from Accumulated
Value.
The following amounts ("Free Surrenders") are not subject to a surrender
charge during any Contract Year: (a) any Old Purchase Payments not already
surrendered; (b) 10% of all New Purchase Payments that have been received by the
Company (however, this does not apply to surrenders made during the first
Contract Year); and (c) any Accumulated Value being surrendered.
Partial surrenders may be made in an amount not greater than the sum of the
following: (a) amounts eligible for a Free Surrender (including Accumulated
Value); and (b) 95% of New Purchase Payments not eligible for a Free Surrender.
In the event of a partial surrender, the amount of the partial surrender subject
to a surrender charge will be determined by dividing the amount being
surrendered which is not eligible for a Free Surrender by 0.95. The surrender
charge to be assessed by the Company in the event of a partial surrender will be
equal to 5% of the amount of the partial surrender subject to a surrender charge
determined as described in the preceding sentence.
In the event of a total surrender of a Contract for its full value, the
surrender charge to be assessed by the Company, will be equal to 5% of the
amount being surrendered which is not eligible for a Free Surrender.
If the surrender charge is less than the Contract Value that remains
immediately after surrender, it will be deducted proportionately from the
Sub-Accounts that make up such Contract Value. If the surrender charge is more
than such remaining Contract Value, the portion of the surrender charge that can
be deducted from such remaining Contract Value will be so deducted and the
balance will be deducted from the surrender payment. In computing surrenders,
any portion of a surrender charge that is deducted from the remaining Contract
Value will be deemed a part of the surrender.
ADMINISTRATIVE CHARGE
Each year on the Contract Anniversary, the Company deducts from the Contract
Value an annual administrative charge of $30 to reimburse it for administrative
expenses relating to the Contract, the Variable Account and the Sub-Accounts. In
any Contract Year when a Contract is surrendered for its full value on other
than the Contract Anniversary, the administrative charge will be deducted at the
time of such surrender. During the annuity period the annual administrative
charge will be divided by the number of payments to be made in a twelve-month
period and the resulting amount will be deducted from each payment. If more than
one Sub-Account is selected under a Contract, an equal portion of the
administrative charge will be deducted from each Sub-Account.
MORTALITY RISK PREMIUM
The variable annuity payments made to Annuitants will vary in accordance
with the investment performance of the Sub-Accounts selected by the Owner.
However, they will not be affected by the mortality experience (death rate) of
persons receiving annuity payments from the Variable Account. The Company
assumes this "mortality risk" and has guaranteed the annuity rates incorporated
in the Contract, which cannot be changed.
To compensate the Company for assuming this mortality risk and the mortality
risk that Beneficiaries of Annuitants dying before the Annuity Commencement Date
may receive amounts in excess of the then current Contract Value (see "Death
Benefit Before the Annuity Commencement Date" on page 16), the Company deducts a
14
<PAGE>
Mortality Risk Premium from the Contract Value. The deduction is made daily in
an amount that is equal to an annual rate of 0.9% of the daily Contract Values
under the Variable Account. The Company may not change the rate charged for the
Mortality Risk Premium under any Contract.
EXPENSE RISK CHARGE
The Company will not increase charges for administrative expenses regardless
of its actual expenses. To compensate the Company for assuming this expense
risk, the Company deducts an Expense Risk Charge from Contract Value. The
deduction is made daily in an amount that is equal to an annual rate of 0.4% of
the daily Contract Values under the Variable Account. The Company may not change
the rate of the Expense Charge under any Contract.
SUFFICIENCY OF CHARGES
If the amount of all charges assessed in connection with the Variable
Account, i.e., surrender charges, administrative charges, the Mortality Risk
Premium and the Expense Risk Charge, is not enough to cover all expenses
incurred in connection therewith, the loss will be borne by the Company.
Conversely, if the amount of such charges proves more than enough, the excess
will be retained by the Company. Any expenses borne by the Company will be paid
out of its general account which may include, among other things, proceeds
derived from the Mortality Risk Premiums and Expense Risk Charges deducted from
the Variable Account.
PREMIUM TAXES
Various states and other governmental entities levy a premium tax, currently
ranging up to 3.50%, on annuity contracts issued by insurance companies. If the
Owner of a Contract lives in a governmental jurisdiction that levies such a tax,
the Company will deduct from the Contract Value the amount of the tax. If
premium taxes are applicable to a Contract, they will be deducted either from
purchase payments as they are received or from the Contract Value applied to an
Annuity Form at the Annuity Commencement Date.
The current premium tax rates are a guide only and should not be relied on
to determine actual premium taxes
on any purchase payment or Contract because the taxes are subject to change from
time to time by legislative and other governmental action. In addition, other
governmental units within a state may levy such taxes.
The timing of tax levies also varies from one taxing authority to another.
Consequently, in many cases the purchaser of a Contract will not be able to
accurately determine the premium tax applicable to the Contract by reference to
the state tax rates described above.
EXPENSES OF THE FUNDS
There are deductions from and expenses paid out of the assets of the Funds
that are described in the accompanying prospectuses for the Funds.
ADMINISTRATION OF THE CONTRACTS
The Company has entered into a contract with Continuum Administrative
Services Corporation ("CASC") (formerly known as Vantage Computer Systems,
Inc.), Kansas City, Missouri, under which CASC has agreed to perform certain
administrative functions relating to the Contracts and the Variable Account.
These functions include, among other things, maintaining the books and records
of the Variable Account and the Sub-Accounts, and maintaining records of the
name, address, taxpayer identification number, Contract number, type of Contract
issued to each Owner, Contract Value and other pertinent information necessary
to the administration and operation of the Contracts.
THE CONTRACTS
The Contracts described in this Prospectus are designed for retirement plans
which are Qualified Plans. The minimum amount of purchase payments the Company
will accept during the first Contract Year will be $600, with no individual
payment to be less than $50. The Company may choose not to accept any subsequent
purchase payment if it is less than $50 or if the purchase payment together with
the Contract Value at the next Valuation Date exceeds $250,000 (any such
purchase payment not accepted by the Company will be refunded).
ALLOCATION OF PURCHASE PAYMENTS
The purchase payment is allocated to the Sub-Accounts selected by the Owner.
Purchase payments will be allocated to the appropriate Sub-Accounts not
later than two business days after receipt, if the application and all
information necessary for processing the Contract are complete. The Company
15
<PAGE>
may retain purchase payments for up to five business days while attempting to
complete an incomplete application. If the application cannot be made complete
within this period, the applicant will be informed of the reasons for the delay
and the purchase payment will be returned immediately unless the applicant
consents to retention of the payment by the Company until the application is
made complete. Thereafter the payment must be allocated within two business
days.
Upon allocation to the appropriate Sub-Accounts, the purchase payment is
converted into Accumulation Units of the Sub-Account. The amount of the purchase
payment allocated to a particular Sub-Account is divided by the value of an
Accumulation Unit for the Sub-Account to determine the number of Accumulation
Units of the Sub-Account to be held in the Variable Account with respect to the
Contract. The net investment results of each Sub-Account vary primarily with the
investment performance of the Fund whose shares are held in the Sub-Account.
In the event any Fund in the future imposes a minimum purchase requirement
that is in excess of the aggregate of all purchase payments received on any
given day that are to be applied to the purchase of shares of such Fund, such
purchase payments will be refunded.
SUB-ACCOUNT ACCUMULATION UNIT VALUE
Each Sub-Account Accumulation Unit was initially valued at $10 when the
first Fund shares were purchased. Thereafter the value of each Sub-Account
Accumulation Unit varies up or down according to a Net Investment Factor, which
is primarily based on the investment performance of the applicable Fund. Fund
shares in the Sub-Accounts will be valued at their net asset value.
Dividend and capital gain distributions from a Fund are automatically
reinvested in additional shares of such Fund and allocated to the appropriate
Sub-Account. The number of Sub-Account Accumulation Units does not increase
because of the additional shares, but the Accumulation Unit value may increase.
NET INVESTMENT FACTOR
The Net Investment Factor is an index number which is primarily based on the
investment performance during a Valuation Period of the Fund whose shares are
held in the particular Sub-Account. If the Net Investment Factor is greater than
one, the value of a Sub-Account Accumulation Unit has increased. If the Net
Investment Factor is less than one, the value of a Sub-Account Accumulation Unit
has decreased. The Net Investment Factor is determined by dividing (1) by (2)
and then subtracting (3) from the result, where:
(1) is the net result of:
(a) the net asset value per share of the Fund shares held in the
Sub-Account, determined at the end of the current Valuation Period,
plus
(b) the per share amount of any dividend or capital gain distributions
made on the Fund shares held in the Sub-Account during the current
Valuation Period, plus or minus
(c) a per share charge or credit for any taxes provided for which the
Company determines to have resulted from the investment operations
of the Sub-Account and to be applicable to the Contract;
(2) is the net result of:
(a) the net asset value per share of the Fund shares held in the
Sub-Account, determined at the end of the last prior Valuation
Period, plus or minus
(b) a per share charge or credit for any taxes reserved for during the
last prior Valuation Period which the Company determined to have
resulted from the investment operations of the Sub-Account and to be
applicable to the Contract; and
(3) is a factor representing the Mortality Risk Premium and the Expense Risk
Charge deducted from the Sub-Account, which factor is equal, on an
annual basis, to 1.3% of the daily net asset value of the Sub-Account.
DEATH BENEFIT BEFORE THE ANNUITY COMMENCEMENT DATE
If the Annuitant dies before the Annuity Commencement Date, the Beneficiary
will be entitled to receive the Contract Value as of the Valuation Date next
after the Company receives (a) proof of the Annuitant's death and (b) a written
request from the Beneficiary for either a single sum payment or an Annuity Form.
For this purpose the Contract Value will be:
(1) if the Annuitant dies on or before the first day of the month following
the Annuitant's 75th birthday, the greater of (i) the Contract Value at
such Valuation Date, or (ii) the sum of the purchase payments received
by the Company under the Contract to such Valuation Date, less any
surrender payments previously made by the Company; or
16
<PAGE>
(2) if the Annuitant dies after the first day of the month following the
Annuitant's 75th birthday, the Contract Value at such Valuation Date.
If a single sum is requested, it will be paid within seven days after such
Valuation Date. If an Annuity Form is requested, it may be any Annuity Form the
Owner could have selected before the Annuity Commencement Date. An Annuity Form
selection must be in writing and received by the Company within 90 days after
such Valuation Date, otherwise the Contract Value as of such Valuation Date will
be paid in a single sum to the Beneficiary and the Contract will be canceled.
DEATH BENEFIT AFTER THE ANNUITY COMMENCEMENT DATE
If the Annuitant dies after the Annuity Commencement Date, the death benefit
shall be as stated in the Annuity Form in effect.
SURRENDER (REDEMPTION)
If a written request therefor from the Owner is received by the Company
before the Annuity Commencement Date, all or part of the Contract Value will be
paid to the Owner after deducting any applicable surrender charge. (See
"Surrender Charge (Contingent Deferred Sales Charge)" on page 14). In addition,
if a total surrender occurs other than on a Contract Anniversary the annual
administrative charge will be deducted from the Contract Value before the
surrender payment is made and if in excess of $50,000 must be signature
guaranteed by a member firm of the New York, American, Boston, Midwest,
Philadelphia, or Pacific Stock Exchange, or by a commercial bank (not a savings
bank) which is a member of the Federal Deposit Insurance Corporation, or, in
certain cases, by a member firm of the National Association of Securities
Dealers, Inc. that has entered into an appropriate agreement with the Company.
The Company may require that the Contract be returned before a surrender
takes places. A surrender will take place on the next Valuation Date after the
requirements for surrender are completed and payment will be made within seven
days after such Valuation Date. If a surrender is partial and unless the Owner
requests the surrender to be made from particular Sub-Accounts, the surrender
payments will be taken proportionately from all Sub-Accounts on a basis that
reflects each Sub-Account's proportionate percentage of the Contract Value.
The Company may cancel the Contract on any Contract Anniversary, or if such
Contract Anniversary is not a Valuation Date on the next Valuation Date
thereafter, by paying to the Owner the Contract Value as of such Valuation Date
if such Contract Value after all charges is less than $1,000.
If this Contract is purchased as a "tax-sheltered annuity" under Section
403(b) of the Internal Revenue Code (the "Code"), it is subject to certain
restrictions on redemption imposed by Section 403(b)(11) of the Code (See
"Taxation of Annuities in General" on page 20). These restrictions on redemption
are imposed by the Variable Account and the Company in full compliance with and
in reliance upon the terms and conditions of a no-action letter issued by the
Office of Insurance Products and Legal Compliance of the Securities and Exchange
Commission to the American Council of Life Insurance (publicly available
November 28, 1988).
TRANSFERS BETWEEN SUB-ACCOUNTS
Prior to the Annuity Commencement Date the Owner may request a transfer in
writing, (or by telephone if a telephone authorization form has been completed
and is in effect), subject to any conditions the Funds whose shares are involved
may impose, of all or part of a Sub-Account's value to other Sub-Accounts. The
transfer will be made by the Company on the first Valuation Date after the
request for such a transfer is received by the Company (provided that under
certain circumstances large transfers may be delayed until proceeds from related
Fund share redemptions are received, which may be for up to seven days). There
is no charge for such a transfer, other than those that may be made by the
Funds. To accomplish the transfer, the Variable Account will surrender
Accumulation Units in the particular Sub-Accounts and reinvest that value in
Accumulation Units of other particular Sub-Accounts appropriate for the Contract
as directed in the request. After the Annuity Commencement Date, the Annuitant
may request transfer of Annuity Unit values in the same manner and subject to
the same requirements as for an Owner-transfer of Sub-Account Accumulation Unit
values.
If the Owner elects to complete the telephone transfer form, the Owner in so
doing agrees that the Company and its Contract Administrator will not be liable
for any loss, liability, cost or expense when the Company, and/or the Contract
Administrator act in accordance with the telephone transfer instructions which
are received and recorded on voice recording equipment. If a telephone transfer,
processed after the Owner has completed the telephone transfer form, is later
determined not to have been made by the Owner or was made without the Owner's
authorization, and a loss results from such unauthorized transfer, the Owner
bears the risk of this loss. The
17
<PAGE>
Company will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. In the event the Company does not employ
such procedures, the Company may be liable for any losses due to unauthorized or
fraudulent instructions. Such procedures may include, among others, requiring
forms of personal identification prior to acting upon telephone instructions,
providing written confirmation of such instructions and/or tape recording
telephone instructions.
ASSIGNMENTS
Contracts are issued pursuant to or in connection with Qualified Plans, and
may not be sold, transferred, pledged or assigned to any person or entity other
than the Company.
CONTRACT OWNER AND BENEFICIARIES
Unless someone else is named as the Owner in the application for the
Contract, the applicant is the Owner of the Contract and before the Annuity
Commencement Date may exercise all of the Owner's rights under the Contract. The
Owner may name a Successor Owner who becomes the Owner if the Owner does not
survive until the Annuity Commencement Date. If a Successor Owner is not named
or does not survive to become the Owner, then in the event of the Owner's death
the Annuitant becomes the Owner.
The Owner may name a Beneficiary and a Successor Beneficiary. In the event
the Annuitant dies before the Annuity Commencement Date, the Beneficiary shall
receive the Contract Value according to the death benefit provisions of the
Contract. In the event the Annuitant dies on or after the Annuity Commencement
Date, the Beneficiary shall receive payments according to the Annuity Form in
effect. The Successor Beneficiary shall become the Beneficiary if the
Beneficiary does not survive. If a Beneficiary is not named or does not survive
the Annuitant, the Owner becomes the Beneficiary. If none of the Owner, the
Annuitant and the Beneficiary is living, payments due under the Contract or any
Annuity Form shall be paid to the estate of the last of them to survive.
A person named as a Successor Owner, a Beneficiary or a Successor
Beneficiary shall not be entitled to exercise any rights relating to the
Contract or to receive any payments or settlements under the Contract or any
Annuity Form, unless such person is living on the earlier of (a) the day due
proof of death of the Owner, the Annuitant or the Beneficiary, whichever is
applicable, is received by the Company or (b) the tenth day after the death of
the Owner, the Annuitant or the Beneficiary, whichever is applicable.
Unless different arrangements have been made with the Company by the Owner,
if more than one Beneficiary is entitled to payments from the Company the
payments shall be in equal shares.
Before the Annuity Commencement Date and while the named Annuitant is
living, the Owner may change the Annuitant, the Successor Owner, the Beneficiary
or the Successor Beneficiary by giving the Company written notice of the change,
but the change shall not be effective until actually received by the Company.
Upon receipt by the Company of a notice of change, it will be effective as of
the date it was signed but shall not affect any payments made or actions taken
by the Company before the Company received the notice, and the Company shall not
be responsible for the validity of any change.
CONTRACT INQUIRIES
Inquiries regarding a Contract may be made by writing to the Annuity Service
Center at P.O. Box 13208, Kansas City, Missouri 64199-3208.
ANNUITY PROVISIONS
ANNUITY COMMENCEMENT DATE
The Owner selects the Annuity Commencement Date, which must be the first day
of a month, when making application for the Contract. The date will be the first
day of the month following the Annuitant's 75th birthday unless an earlier or
later date has been selected by the Owner and, if the date is later, it has been
agreed to by the Company. The Owner may change an Annuity Commencement Date
selection by written notice received by the Company at least 30 days before both
the Annuity Commencement Date currently in effect and the new Annuity
Commencement Date. The new date selected must satisfy the requirements for an
Annuity Commencement Date. If the Annuity Commencement Date selected by the
Owner does not occur on a Valuation Date, at least 60 days after the date on
which the Contract was issued, the Company reserves the right to adjust the
Annuity Commencement Date to the first Valuation Date after the Annuity
Commencement Date selected by the Owner and which is at least 60 days after the
Contract issue date.
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ANNUITY FORM SELECTION - CHANGE
The Owner may select an Annuity Form with payments starting at the Annuity
Commencement Date when making application for the Contract. The Owner may also
change a choice of Annuity Form by written notice received by the Company before
the Annuity Commencement Date.
ANNUITY FORMS
Any one of the following Annuity Forms may be selected (all provide for
variable payments):
LIFE ANNUITY - An annuity payable on the first day of each month during the
Annuitant's life, starting with the first payment due according to the Contract.
Payments cease with the payment made on the first day of the month in which the
Annuitant's death occurs. IT WOULD BE POSSIBLE UNDER THIS ANNUITY FORM FOR THE
ANNUITANT TO RECEIVE ONLY ONE PAYMENT IF HE OR SHE DIED BEFORE THE SECOND
ANNUITY PAYMENT, ONLY TWO PAYMENTS IF HE OR SHE DIED BEFORE THE THIRD ANNUITY
PAYMENT, ETC.
LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 YEARS (120 MONTHS) OR 20 YEARS
(240 MONTHS) - An annuity payable on the first day of each month during the
Annuitant's life, starting with the first payment due according to the Contract.
If the Annuitant receives all of the guaranteed payments, payments will continue
thereafter but cease with the payment made on the first day of the month in
which the Annuitant's death occurs. If all of the guaranteed payments have not
been made before the Annuitant's death, the unpaid installments of the
guaranteed payments will be continued to the Beneficiary.
JOINT AND FULL SURVIVOR ANNUITY - An annuity payable on the first day of
each month during the Annuitant's life and the life of a named person (the
"Joint Annuitant"), starting with the first payment due according to the
Contract. Payments will continue while either the Annuitant or the Joint
Annuitant is living and cease with the payment made on the first day of the
month in which the death of the Annuitant or the Joint Annuitant, whichever
lives longer, occurs. THERE IS NO MINIMUM NUMBER OF PAYMENTS GUARANTEED UNDER
THIS ANNUITY FORM. PAYMENTS CEASE UPON THE DEATH OF THE LAST SURVIVOR OF THE
ANNUITANT AND THE JOINT ANNUITANT REGARDLESS OF THE NUMBER OF PAYMENTS RECEIVED.
The Company also has other annuity forms available and information about
them can be obtained by writing to the Company.
AUTOMATIC ANNUITY FORM
If no valid selection of an Annuity Form has been made by the Annuity
Commencement Date, the Life Annuity with Payments Guaranteed for 10 Years (120
Months) shall be automatically effective.
FREQUENCY AND AMOUNT OF ANNUITY PAYMENTS
Annuity payments will be paid as monthly installments, unless the Annuitant
and the Company agree to a different payment schedule. However, if the Contract
Value at the Annuity Commencement Date is less than $2,500, the Company may pay
the Contract Value in a single sum and the Contract will be canceled. Also if a
monthly payment would be or become less than $50, the Company may change the
frequency of payments to intervals that will result in payments of at least $50
each.
VARIABLE ANNUITY PAYMENTS
The amount of the first annuity payment is determined by applying the
Contract Value at the Annuity Commencement Date to the annuity table in the
Contract for the Annuity Form selected. The table shows the amount of the
initial annuity payment for each $1,000 of Contract Value applied. The
appropriate portion of the annual administrative charge is deducted from such
amount and the remainder is the actual amount of the first annuity payment.
Subsequent variable annuity payments vary in amount in accordance with the
investment performance of the applicable Sub-Account. Assuming annuity payments
are based on the unit values of a single Sub-Account, the dollar amount of the
first annuity payment, determined as set forth above, is divided by the
Sub-Account Annuity Unit Value as of the Annuity Commencement Date to establish
the number of Annuity Units representing each annuity payment. This number of
Annuity Units remains fixed during the annuity payment period. The dollar amount
of the second and subsequent payments is not predetermined and may change from
month to month. The dollar amount of the second and each subsequent payment is
determined by multiplying the fixed number of Annuity Units by the Sub-Account
Annuity Unit Value for the Valuation Period with respect to which the payment is
due. If the monthly payment is based upon the Annuity Unit Values of more than
one Sub-Account, the foregoing procedure is repeated for each applicable
Sub-Account and the sum of the payments based on each Sub-Account is the amount
of the monthly annuity payment. The appropriate portion of the annual
administrative charge is then deducted from each monthly annuity payment.
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<PAGE>
The annuity tables in the Contracts are based on the 1971 Individual Annuity
Mortality Table (set back two years).
The Company guarantees that the dollar amount of each payment after the
first payment will not be affected by variations in expenses or in mortality
experience from the mortality assumptions used to determine the first payment.
SUB-ACCOUNT ANNUITY UNIT VALUE
A Sub-Account's Annuity Units will initially be valued at $10 each at the
time Accumulation Units with respect to the Sub-Account are first converted into
Annuity Units. The Sub-Account Annuity Unit Value for any subsequent Valuation
Period is determined by multiplying the Sub-Account Annuity Unit Value for the
immediately preceding Valuation Period by the Net Investment Factor for the
Sub-Account for the Valuation Period for which the Sub-Account Annuity Unit
Value is being calculated, and multiplying the result by an interest factor to
neutralize the assumed investment rate of 4% per annum built into the annuity
tables contained in the Contracts. (See "Net Investment Factor" on page 16.)
ASSUMED INVESTMENT RATE
A 4% assumed investment rate is built into the annuity tables contained in
the Contracts. A higher assumption would mean a higher initial payment but more
slowly rising and more rapidly falling subsequent payments. A lower assumption
would have the opposite effect. If the actual net investment rate were at the
annual rate of 4%, the annuity payments would be level.
FEDERAL TAX STATUS
INTRODUCTION
The Contracts are sold to or in connection with retirement plans which are
Qualified Plans under the provisions of the Internal Revenue Code (the "Code").
The ultimate effect of Federal income taxes depends upon the type of retirement
plan for which the Contract is purchased, and upon the tax and employment status
of the individual concerned. The discussion contained herein is general in
nature and is not intended as tax advice. EACH PERSON CONCERNED SHOULD CONSULT A
QUALIFIED TAX ADVISER. No attempt is made to consider any applicable state or
other tax laws. Moreover, the discussion contained herein is based upon the
Company's understanding of Federal income tax laws as currently interpreted. No
representation is made regarding the likelihood of continuation of these
interpretations by the Internal Revenue Service. THE COMPANY DOES NOT MAKE ANY
GUARANTEE REGARDING THE TAX STATUS OF ANY CONTRACT OR ANY TRANSACTION INVOLVING
THE CONTRACT.
QUALIFIED PLANS
The Contracts are designed for use with several types of Qualified Plans.
The tax rules applicable to participants in such Qualified Plans vary according
to the type of plan and its terms and conditions. Therefore, no attempt is made
herein to provide more than general information about the use of the Contracts
with the various types of Qualified Plans. Participants under such Qualified
Plans as well as Owners, Annuitants and Beneficiaries are cautioned that the
rights of any person to any benefits under such Qualified Plans may be subject
to the terms and conditions of the plans themselves regardless of the terms and
conditions of the Contracts issued in connection therewith.
TAXATION OF ANNUITIES IN GENERAL
Generally, no tax is imposed on the increase in the value of a Contract
until a distribution occurs. Monthly annuity payments made as retirement
distributions, and lump-sum payments or cash withdrawals (when permitted by the
applicable Plan) are generally taxable as ordinary income to the extent that
such payments are not deemed to come from the Owner's previously taxed
investment in the Contract. Distributions made prior to age 59-1/2 generally are
subject to a 10% penalty tax, although this tax will not apply in certain
circumstances.
The Unemployment Compensation Amendments of 1992 require us to withhold
Federal income tax at the rate of 20% on most distributions from qualified
plans, unless the distribution is an "eligible rollover distribution" as defined
by the Unemployment Compensation Act of 1992 and the Owner files a written
request with us for a direct rollover to an individual retirement account as
described in Sections 408(a) and 408(b) of the Code, or as applicable, to
another qualified plan or a Section 403(b) arrangement that accepts rollovers.
Following are brief descriptions of the various types of Qualified Plans and
of the use of the Contracts in connection therewith.
20
<PAGE>
INDIVIDUAL RETIREMENT ANNUITIES
Sections 219 and 408 of the Code permits eligible individuals to contribute
to an individual retirement program known as an "individual retirement annuity"
(IRA's), excluding IRA's established under Section 408(b). These individual
retirement annuities are subject to limitations on the amount that may be
contributed, the persons who may be eligible, and on the time when distributions
may commence. In addition, distributions from certain other types of Qualified
Plans may be placed on a tax-deferred basis into an individual retirement
annuity. Sales of the Contracts for use with individual retirement annuities may
be subject to special requirements imposed by the Internal Revenue Service.
Purchasers of the Contracts for such purposes will be provided with such
supplementary information as may be required by the Internal Revenue Service or
other appropriate agency. Purchasers of the Contracts for establishment of
individual retirement annuities will have the right to revoke the Contract
within seven days after the earlier of the establishment of the annuity or the
purchase of the Contract.
CORPORATE PENSION AND PROFIT-SHARING PLANS
Corporate employers and certain associations may establish various types of
retirement plans for employees, as permitted by Sections 401(a) and 401(k) of
the Code, including those purchasers who would have been covered under the rules
governing old H.R. 10 (Keogh) Plans. Such retirement plans may permit the
purchase of the Contracts to provide benefits under the plans. Corporate
employers intending to use the Contracts in connection with such plans should
seek qualified advice in connection therewith.
VOTING OF FUND SHARES
As long as the Variable Account is registered as a unit investment trust
under the Investment Company Act of 1940 and the assets of the Variable Account
are allocated to Sub-Accounts that are invested in Fund shares, the Fund shares
held in the Sub-Accounts will be voted by the Company in accordance with
instructions received from the persons having voting interests under the
Contracts as described below. If the Company determines pursuant to applicable
law or regulation that Fund shares held in the Sub-Accounts and attributable to
the Contracts need not be voted pursuant to instructions received from persons
otherwise having the voting interests, then the Company may vote such Fund
shares held in the Sub-Accounts in its own right.
Before the Annuity Commencement Date, the Owner shall have the voting
interest with respect to the Fund shares attributable to the Contract.
On and after the Annuity Commencement Date, the person then entitled to
receive annuity payments shall have the voting interest with respect to the Fund
shares. Such voting interest will generally decrease during the annuity payout
period.
Any Fund shares held in the Variable Account for which we do not receive
timely voting instructions, or which are not attributable to Contract Owners,
will be voted by us in proportion to the instructions received from all Contract
Owners having a voting interest in the Fund. Any Fund shares held by us or any
of our affiliates in general accounts will, for voting purposes, be allocated to
all separate accounts having voting interests in the Fund in proportion to each
account's voting interest in the respective Fund and will be voted in the same
manner as are the respective account's votes.
All Fund proxy material will be sent to persons having voting interests
together with appropriate forms which may be used to give voting instructions.
Persons entitled to voting interests and the number of votes which they may cast
shall be determined as of a record date, to be selected by the Company, not more
than 90 days before the meeting of the applicable Fund.
Persons having voting interests under the Contracts as described above will
not, as a result thereof, have voting interests with respect to meetings of the
stockholders and/or policyholders of the Company.
DISTRIBUTION OF THE CONTRACTS
The Contracts will be sold by licensed insurance agents in those states
where the Contracts may be lawfully sold. Such agents will be registered
representatives of broker-dealers registered under the Securities Exchange Act
of 1934 who are members of the National Association of Securities Dealers, Inc.
The Contracts will be distributed by the General Distributor, Clarendon
Insurance Agency, Inc., 500 Boylston Street, Boston, Massachusetts 02116, which
is controlled by Massachusetts Financial Services Company. Commissions and other
distribution compensation will be paid by the Company and will not be more than
5.11% of the purchase payments.
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<PAGE>
RETURN PRIVILEGE
As soon as the Owner of a Contract receives it, he or she should read it
carefully to see if it is what is wanted. If the Owner desires to return the
Contract, it must be returned within ten days after it was delivered to the
Owner. It may be returned to the Company or to the agent through whom it was
purchased. When the Company receives the returned Contract, it will be canceled
and the full amount of the purchase payments received by the Company will be
refunded.
Under the Employee Retirement Income Security Act of 1974, an Owner
establishing an individual retirement annuity must be furnished with a
disclosure statement containing certain information about the Contract and about
applicable legal requirements. Such a statement must be furnished on or before
the date the individual retirement annuity is established. If the disclosure
statement is furnished after the seventh day preceding establishment of the
individual retirement annuity, then the Owner may revoke the annuity any time
within seven days after the establishment date. Upon such revocation, the Owner
will receive the purchase payments made by the Owner. If the Owner is furnished
with such disclosure statement not later than the seventh day preceding the date
the individual retirement annuity is established, the Owner will not have such a
right of revocation. The foregoing right of revocation with respect to an
individual retirement annuity is in addition to the return privilege set forth
in the preceding paragraph.
The liability of the Variable Account under the foregoing is limited to the
Contract Value on the Valuation Date of cancellation. Any additional amount
necessary to make the refund to the Owner equal the purchase payments will be
paid by the Company.
REPORTS TO OWNERS
The Company will mail to the Contract Owner, at the last known address of
record at the home office of the Company, at least annually after the first
Contract Year, a report containing such information as may be required by any
applicable law or regulation and a statement showing the Contract Value.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account is a party. The
Company is a defendant in various lawsuits in connection with the normal conduct
of its operations. In the opinion of management, the ultimate resolution of such
litigation will not result in any significant liability to the Company.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of MFS/NWNL Variable Account as of December 31,
1995 and for each of the three years in the period then ended and the annual
financial statements of Northwestern National Life Insurance Company, which are
included in the Statement of Additional Information, have been audited by
Deloitte & Touche LLP, independent auditors, as stated in the reports which are
included herein, and have been so included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
FURTHER INFORMATION
A Registration Statement under the Securities Act of 1933 has been filed
with the Securities and Exchange Commission, with respect to the Contracts
described herein. This Prospectus does not contain all of the information set
forth in the Registration Statement and exhibits thereto, to which reference is
hereby made for further information concerning the Variable Account, the Company
and the Contracts. The information so omitted may be obtained from the
Commission's principal office in Washington, D.C., upon payment of the fee
prescribed by the Commission, or examined there without charge. Statements
contained in this Prospectus as to the provisions of the Contracts and other
legal documents are summaries, and reference is made to the documents as filed
with the Commission for a complete statement of the provisions thereof.
22
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STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<S> <C>
Introduction....................................................................................... 2
Administration of the Contracts.................................................................... 2
Custody of Assets.................................................................................. 2
Independent Auditors............................................................................... 3
Distribution of the Contracts...................................................................... 3
Calculation of Yield and Return.................................................................... 3
Calculation of Average Annual Total Return......................................................... 4
Financial Statements............................................................................... 7
</TABLE>
- --------------------------------------------------------------------------------
If you would like to receive a copy of the MFS/NWNL Variable Account Statement
of Additional Information, please return this request to:
WASHINGTON SQUARE SECURITIES, INC.
20 WASHINGTON AVENUE SOUTH
MINNEAPOLIS, MN 55401
Your name ______________________________________________________________________
Address ________________________________________________________________________
City ________________________ State __________________ Zip ____________
Please send me a copy of the MFS/NWNL Variable Account Statement of Additional
Information.
- --------------------------------------------------------------------------------
23
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Contract Administrator
Annuity Service Center
301 West 11th Street
Kansas City, Missouri 64105
General Distributor
Clarendon Insurance Agency, Inc.
600 Boylston Street
Boston, MA 02116
[LOGO] NORTWESTERN NATIONAL LIFE
A RELIASTAR COMPANY
Select*Annuity Prospectus
N4000.15m (April 30, 1996)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
---------------------
INDIVIDUAL DEFERRED VARIABLE ANNUITY CONTRACTS
ISSUED BY
MFS/NWNL VARIABLE ACCOUNT
AND
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
This Statement of Additional Information is not a Prospectus, but should be
read in conjunction with the Prospectus, dated April 30, 1996 (the
"Prospectus"), relating to the Individual Deferred Variable Annuity Contracts
issued by MFS/NWNL Variable Account (the "Variable Account") and Northwestern
National Life Insurance Company. Much of the information contained in this
Statement of Additional Information expands upon subjects discussed in the
Prospectus. A copy of the Prospectus may be obtained from Washington Square
Securities, Inc., 20 Washington Avenue South, Minneapolis, Minnesota 55401.
Capitalized terms used in this Statement of Additional Information that are
not otherwise defined herein shall have the meanings given to them in the
Prospectus.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Introduction..................................................... 2
Administration of the Contracts.................................. 2
Custody of Assets................................................ 2
Independent Auditors............................................. 3
Distribution of the Contracts.................................... 3
Calculation of Yield and Return.................................. 3
Calculation of Average Annual Total Return....................... 4
Financial Statements............................................. 7
</TABLE>
------------------------
The date of this Statement of Additional Information is April 30, 1996
<PAGE>
INTRODUCTION
The Individual Deferred Variable Annuity Contracts described in the
Prospectus are flexible purchase payment contracts. The Contracts are sold to or
in connection with retirement plans which qualify for special federal tax
treatment under the Internal Revenue Code. (See "Federal Tax Status" on page 20
of the Prospectus.) Annuity payments under the Contracts are deferred until a
selected later date.
The Contract Owner allocates purchase payments to one or more of the
Sub-Accounts of the Variable Account, a separate account of the Company. Each
Sub-Account is invested in shares at net asset value of one of a group of
Investment Funds (the "Investment Funds") which utilize the investment advisory
services of Massachusetts Financial Services Company, Boston, Massachusetts.
Each Investment Fund pays its investment adviser certain fees charged against
the assets of the Investment Fund. The Contract Value and the amount of annuity
payments will vary, primarily based on the investment performance of the
Investment Funds whose shares are held in the Sub-Accounts selected. The
Contract Owner may allocate purchase payments to the following Investment Funds:
MFS-Registered Trademark- Money Market Fund
MFS-Registered Trademark- Bond Fund (Class A)
Massachusetts Investors Trust (Class A)
Massachusetts Investors Growth Stock Fund (Class A)
MFS-Registered Trademark- Research Fund (Class A)
MFS-Registered Trademark- Total Return Fund (Class A)
MFS-Registered Trademark- Growth Opportunities Fund (Class A)
MFS-Registered Trademark- High Income Fund (Class A)
MFS-Registered Trademark- World Governments Fund (Class A)
MFS-Registered Trademark- Emerging Growth Fund (Class A)
(For more information about the Funds, see "Investments of the Variable
Account" on page 12 of the Prospectus.)
ADMINISTRATION OF THE CONTRACTS
Northwestern National Life Insurance Company ("Company") has entered into a
contract with Continuum Administrative Services Corporation ("CASC") (formerly
known as Vantage Computer Systems, Inc.), Kansas City, Missouri, as assignee of
the Company's contract with State Street Bank and Trust Company, Boston,
Massachusetts, under which CASC has agreed to perform certain administrative
functions relating to the Contracts and the Variable Account, effective May 6,
1991. These functions include, among other things, maintaining the books and
records of the Variable Account and the Sub-Accounts, and maintaining records of
the name, address, taxpayer identification number, Contract number, type of
Contract issued to each Owner, Contract Value and other pertinent information
necessary to the administration and operation of the Contracts. For the years
ended December 31, 1993, 1994, and 1995, the Company paid fees to CASC under the
Contract of $41,972, $50,162 and $36,836, respectively.
CUSTODY OF ASSETS
The Company, whose address appears on the cover of the Prospectus, maintains
custody of the assets of the Variable Account.
2
<PAGE>
INDEPENDENT AUDITORS
The financial statements of MFS/NWNL Variable Account and Northwestern
National Life Insurance Company, which are included in the Statement of
Additional Information, have been audited by Deloitte & Touche LLP, 400 One
Financial Plaza, 120 South Sixth Street, Minneapolis, Minnesota 55402,
independent auditors, as stated in their reports which are included herein,
and have been so included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
DISTRIBUTION OF THE CONTRACTS
The Contracts will be sold by licensed insurance agents in those states
where the Contracts may be lawfully sold. Such agents will be registered
representatives of broker-dealers registered under the Securities Exchange Act
of 1934 who are members of the National Association of Securities Dealers, Inc.
The Contracts will be distributed by the General Distributor, Clarendon
Insurance Agency, Inc., which is controlled by Massachusetts Financial Services
Company. For the years ended December 31, 1993, 1994 and 1995, the General
Distributor was paid fees by the Company with respect to distribution of the
Contracts aggregating $6,000, $8,000 and $4,000, respectively.
The offering of the Contracts is continuous.
There are no special purchase plans or exchange privileges not described in
the Prospectus. (See "The Contracts" at page 15 of the Prospectus.)
No deduction for a sales charge is made from the purchase payments for the
Contracts. However, if part or all of a Contract's value is surrendered,
surrender charges (which may be deemed to be contingent deferred sales charges)
may be made by the Company. The method used to determine the amount of such
charge is described in the Prospectus at page 14 under the heading "Charges Made
By The Company -- Surrender Charge (Contingent Deferred Sales Charge)". There is
no difference in the amount of this charge or any of the other charges described
in the Prospectus as between Contracts purchased by members of the public as
individuals or groups, on the one hand, and Contracts purchased by any class of
individuals, such as officers, directors or employees of the Company or of
Clarendon Insurance Agency, Inc., on the other hand.
CALCULATION OF YIELD AND RETURN
Current Yield and Effective Yield:
Current yield and effective yield will be calculated only for the
MFS-Registered Trademark- Money Market Fund Sub-Account.
The current yield is based on a seven-day period (the "base period") and is
calculated by determining the "net change in value" on a hypothetical account
having a balance of one Accumulation Unit at the beginning of the period,
dividing the net change in account value 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 the
nearest hundredth of one percent. The effective yield is computed in a similar
manner, except that the base period return is compounded by adding 1, raising
the sum to a power equal to 365 divided by 7, and subtracting 1 from the result,
according to the following formula:
3
<PAGE>
365/7
EFFECTIVE YIELD = [(Base Period Return + 1) ] - 1.
Net changes in value of a hypothetical account will include net investment
income of the account (accrued daily dividends as declared by the
MFS-Registered Trademark- Money Market Fund Sub-Account, less daily expense and
contract charges to the account) for the period, but will not include realized
gains or losses on its underlying fund shares.
The MFS-Registered Trademark- Money Market Fund Sub-Account's yield and
effective yield will vary in response to any fluctuations in interest rates and
expenses of the Sub-Account.
The yield and effective yield of the Sub-Account for the seven day period
ending December 29, 1995 were as follows:
<TABLE>
<S> <C>
Yield.......................................................... 5.09%
Effective Yield................................................ 5.22%
</TABLE>
CALCULATION OF AVERAGE ANNUAL TOTAL RETURN
Average annual total returns represent the average annual compounded rates
of return that would equate an initial investment of $1,000 under a Contract to
the redemption value of that investment as of the last day of each of the
periods. The ending date for each period for which total return quotations are
provided will be for the most recent month-end practicable, considering the type
and media of the communication and will be stated in the communication.
Average annual total returns will be calculated using Sub-Account unit
values which the Company calculates on each Valuation Date based on the
performance of the Sub-Account's underlying Portfolio, the deductions for the
Mortality Risk Premium and Expense Risk Charge, and the Annual Administrative
Charge. The calculation assumes that the Annual Administrative Charge is $30 per
year per Contract deducted at the end of each Contract Year. For purposes of
calculating average annual total return, an average per dollar Annual
Administrative Charge attributable to the hypothetical account for the period
is used. The calculation also assumes surrender of the Contract at the end
of the period for the return quotation. Total returns will therefore reflect
a deduction of the Surrender Charge for any period less than five years. The
total return will then be calculated according to the following formula:
<TABLE>
<S> <C> <C>
1/N
TR = (ERV/P) - 1
Where:
TR = The average annual total return net of Sub-Account
recurring charges.
ERV = the ending redeemable value (net of any applicable
surrender charge) of the hypothetical account at the
end of the period.
P = a hypothetical initial payment of $1,000.
N = the number of years in the period.
</TABLE>
4
<PAGE>
Following are the average annual returns for each of the Sub-Accounts, as of
December 31, 1995, for the relevant listed periods:
<TABLE>
<CAPTION>
SUB-ACCOUNT INCEPTION DATE 1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------- --------------- ----------- --------- -----------
<S> <C> <C> <C> <C>
MFS-Registered Trademark- Bond Fund (Class A)............................... 03/16/81 15.22% 9.09% 8.19%
Massachusetts Investors Trust (Class A)..................................... 03/05/81 32.91% 14.18% 13.11%
Massachusetts Investors Growth Stock Fund (Class A)......................... 05/13/81 22.05% 14.99% 11.63%
MFS-Registered Trademark- Research Fund (Class A)........................... 04/03/81 32.17% 18.33% 13.03%
MFS-Registered Trademark- Total Return Fund (Class A)....................... 03/24/81 20.69% 12.18% 11.03%
MFS-Registered Trademark- Growth Opportunities Fund (Class A)............... 02/04/81 28.12% 12.99% 9.72%
MFS-Registered Trademark- High Income Fund (Class A)........................ 02/09/81 11.07% 17.27% 7.74%
MFS-Registered Trademark- World Governments Fund (Class A).................. 06/19/81 9.36% 6.47% 10.61%
MFS-Registered Trademark- Emerging Growth Fund (Class A).................... 02/29/84 34.72% 26.30% 14.50%
</TABLE>
5
<PAGE>
OTHER TOTAL RETURNS. From time to time, sales literature or advertisements
may quote average annual total returns that do not reflect the Surrender Charge.
These are calculated in exactly the same way as average annual total returns
described above, except that the ending redeemable value of the hypothetical
account for the period is replaced with an ending value for the period that does
not take into account any charges on amounts surrendered or withdrawn. Such
information is as follows:
<TABLE>
<CAPTION>
SUB-ACCOUNT INCEPTION DATE 1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------- --------------- ----------- --------- -----------
<S> <C> <C> <C> <C>
MFS-Registered Trademark- Bond Fund (Class A)............................... 03/16/81 19.72% 9.09% 8.19%
Massachusetts Investors Trust (Class A)..................................... 03/05/81 37.41% 14.18% 13.11%
Massachusetts Investors Growth Stock Fund (Class A)......................... 05/13/81 26.55% 14.99% 11.63%
MFS-Registered Trademark- Research Fund (Class A)........................... 04/03/81 36.67% 18.33% 13.03%
MFS-Registered Trademark- Total Return Fund (Class A)....................... 03/24/81 25.19% 12.18% 11.03%
MFS-Registered Trademark- Growth Opportunities Fund (Class A)............... 02/04/81 32.62% 12.99% 9.72%
MFS-Registered Trademark- High Income Fund (Class A)........................ 02/09/81 15.57% 17.27% 7.74%
MFS-Registered Trademark- World Governments Fund (Class A).................. 06/19/81 13.86% 6.47% 10.61%
MFS-Registered Trademark- Emerging Growth Fund (Class A).................... 02/29/84 39.22% 26.30% 14.50%
</TABLE>
6
<PAGE>
The Company may disclose Cumulative Total Returns in conjunction with the
standard formats described above. The Cumulative Total Returns will be
calculated using the following formula:
<TABLE>
<S> <C> <C>
CTR = ERV/P - 1
Where:
CTR = the Cumulative Total Return net of Sub-Account
recurring charges for the period.
ERV = the ending redeemable value of the hypothetical
investment at the end of the period.
P = a hypothetical single payment of $1,000.
</TABLE>
EFFECT OF THE ANNUAL ADMINISTRATIVE CHARGE ON PERFORMANCE DATA. The
Contract provides for a $30 Annual Administrative Charge to be deducted annually
at the end of each Contract Year, from the Sub-Accounts and the
Fixed Account based on the proportion that the value of each such account bears
to the total Contract Value. For purposes of reflecting the Annual
Administrative Charge in yeild and total return quotations, the annual charge is
converted into a per-dollar of per-day charge based on the Annual Administrative
Charges collected from the average total assets of the Variable Account and
Fixed Account during the calendar year ending December 31, 1995.
FINANCIAL STATEMENTS
This Statement of Additional Information contains Financial Statements for
the Variable Account as of December 31, 1995 and for each of the three years in
the period then ended. Deloitte & Touche LLP serves as independent auditors for
the Variable Account. Although the financial statements are audited, the
period they cover is not necessarily indicative of the longer term performance
of the assets held in the Variable Account.
The Company's statements of financial condition as of December 31, 1995 and
1994, and the related statements of operations, shareholder's equity and cash
flows for the years ended December 31, 1995 and 1994 which are included in this
Statement of Additional Information, should be considered only as bearing on the
Company's ability to meet its obligations under the Contracts. They should not
be considered as bearing on the investment performance of the assets held in the
Variable Account.
7
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Northwestern National Life Insurance
Company and Contract Owners of
MFS/NWNL Variable Account:
We have audited the accompanying statement of assets and liabilities of
MFS/NWNL Variable Account as of December 31, 1995 and the related combined
statements of operations and changes in Contract Owners' equity for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the management of Northwestern National Life Insurance
Company. Our responsibility is to express an opinion on these financial
statements based on our audits.
We have 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
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures include
confirmation of the securities owned as of December 31, 1995, by correspondence
with the Account custodians. 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 financial position of MFS/NWNL Variable Account as
of December 31, 1995, and the results of its operations and changes in Contract
Owners' equity for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Minneapolis, Minnesota
February 2, 1996
i
<PAGE>
MFS/NWNL VARIABLE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE AND UNIT DATA)
<TABLE>
<CAPTION>
MFS
MFS MFS MASSACHUSETTS -REGISTERED
-REGISTERED -REGISTERED MASSACHUSETTS INVESTORS TRADEMARK-
TRADEMARK- MONEY TRADEMARK- BOND INVESTORS GROWTH STOCK RESEARCH
MARKET FUND TRUST FUND FUND
FUND (CLASS A) (CLASS A) (CLASS A) (CLASS A)
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in mutual funds at
market value:
MFS-Registered Trademark-
Money Market Fund
2,720,961 shares (cost
$2,721)................... $ 2,721
MFS-Registered Trademark-
Bond Fund -- Class A
120,449 shares (cost
$1,631)................... $ 1,648
Massachusetts Investors
Trust -- Class A 109,399
shares (cost $1,355)...... $ 1,390
Massachusetts Investors
Growth Stock Fund -- Class
A 127,504 shares (cost
$1,392)................... $ 1,355
MFS-Registered Trademark-
Research Fund -- Class A
96,542 shares (cost
$1,240)................... $ 1,510
MFS-Registered Trademark-
Total Return Fund -- Class
A 249,715 shares (cost
$3,199)...................
MFS-Registered Trademark-
Growth Opportunities Fund
-- Class A 403,389 shares
(cost $4,501).............
MFS-Registered Trademark-
High Income Fund -- Class
A 770,685 shares (cost
$3,805)...................
MFS-Registered Trademark-
World Governments Fund --
Class A 62,188 shares
(cost $734)...............
MFS-Registered Trademark-
Emerging Growth Fund --
Class A 73,023 shares
(cost $1,405).............
----------------- ----------------- ----------------- ----------------- -----------------
Total Assets.............. $ 2,721 $ 1,648 $ 1,390 $ 1,355 $ 1,510
----------------- ----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- ----------------- -----------------
LIABILITIES AND CONTRACT
OWNERS' EQUITY:
Due to Northwestern National
Life Insurance Company for
accrued contract charges and
reserve transfers............ $ 3 $ 3 $ 1 $ 1 $ 2
Contract Owners' Equity....... 2,718 1,645 1,389 1,354 1,508
----------------- ----------------- ----------------- ----------------- -----------------
Total Liabilities and
Contract Owners'
Equity.................. $ 2,721 $ 1,648 $ 1,390 $ 1,355 $ 1,510
----------------- ----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- ----------------- -----------------
Units Outstanding:...... 112,836.517 35,793.566 23,606.537 28,462.862 27,105.758
Net Asset Value per
Unit:
Tax Qualified......... $ 24.089226 $ 45.397825 $ 58.043826 $ 47.572288 $ 55.624290
Non-Tax Qualified..... $ 24.131759 $ 44.513521 $ 56.581787 $ 46.492000 $ 58.488303
</TABLE>
The accompanying notes are an integral part of the financial statements.
ii
<PAGE>
<TABLE>
<CAPTION>
MFS
MFS MFS MFS MFS -REGISTERED
-REGISTERED -REGISTERED -REGISTERED -REGISTERED TRADEMARK-
TRADEMARK- TOTAL TRADEMARK- GROWTH TRADEMARK- HIGH TRADEMARK- WORLD EMERGING
RETURN OPPORTUNITIES INCOME GOVERNMENTS GROWTH
FUND FUND FUND FUND FUND
(CLASS A) (CLASS A) (CLASS A) (CLASS A) (CLASS A)
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in mutual funds at
market value:
MFS-Registered Trademark-
Money Market Fund
2,720,961 shares (cost
$2,721)...................
MFS-Registered Trademark-
Bond Fund -- Class A
120,449 shares (cost
$1,631)...................
Massachusetts Investors
Trust -- Class A 109,399
shares (cost $1,355)......
Massachusetts Investors
Growth Stock Fund -- Class
A 127,504 shares (cost
$1,392)...................
MFS-Registered Trademark-
Research Fund -- Class A
96,542 shares (cost
$1,240)...................
MFS-Registered Trademark-
Total Return Fund -- Class
A 249,715 shares (cost
$3,199)................... $ 3,598
MFS-Registered Trademark-
Growth Opportunities Fund
-- Class A 403,389 shares
(cost $4,501)............. $ 4,817
MFS-Registered Trademark-
High Income Fund -- Class
A 770,685 shares (cost
$3,805)................... $ 3,992
MFS-Registered Trademark-
World Governments Fund --
Class A 62,188 shares
(cost $734)............... $ 685
MFS-Registered Trademark-
Emerging Growth Fund --
Class A 73,023 shares
(cost $1,405)............. $ 1,951
----------------- ----------------- ----------------- ----------------- -----------------
Total Assets.............. $ 3,598 $ 4,817 $ 3,992 $ 685 $ 1,951
----------------- ----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- ----------------- -----------------
LIABILITIES AND CONTRACT
OWNERS' EQUITY:
Due to Northwestern National
Life Insurance Company for
accrued contract charges and
reserve transfers............ $ 4 $ 5 $ 4 $ -- $ 2
Contract Owners' Equity....... 3,594 4,812 3,988 685 1,949
----------------- ----------------- ----------------- ----------------- -----------------
Total Liabilities and
Contract Owners'
Equity.................. $ 3,598 $ 4,817 $ 3,992 $ 685 $ 1,951
----------------- ----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- ----------------- -----------------
Units Outstanding:...... 62,014.906 94,889.785 83,394.363 13,675.919 39,184.416
Net Asset Value per
Unit:
Tax Qualified......... $ 57.956980 $ 49.862122 $ 47.782748 $ 47.869578 $ 49.732075
Non-Tax Qualified..... $ 58.111989 $ 45.413197 $ 48.241464 $ 47.900110 $ 49.732075
<CAPTION>
TOTAL
-----------------
<S> <C>
ASSETS:
Investments in mutual funds at
market value:
MFS-Registered Trademark-
Money Market Fund
2,720,961 shares (cost
$2,721)................... $ 2,721
MFS-Registered Trademark-
Bond Fund -- Class A
120,449 shares (cost
$1,631)................... 1,648
Massachusetts Investors
Trust -- Class A 109,399
shares (cost $1,355)...... 1,390
Massachusetts Investors
Growth Stock Fund -- Class
A 127,504 shares (cost
$1,392)................... 1,355
MFS-Registered Trademark-
Research Fund -- Class A
96,542 shares (cost
$1,240)................... 1,510
MFS-Registered Trademark-
Total Return Fund -- Class
A 249,715 shares (cost
$3,199)................... 3,598
MFS-Registered Trademark-
Growth Opportunities Fund
-- Class A 403,389 shares
(cost $4,501)............. 4,817
MFS-Registered Trademark-
High Income Fund -- Class
A 770,685 shares (cost
$3,805)................... 3,992
MFS-Registered Trademark-
World Governments Fund --
Class A 62,188 shares
(cost $734)............... 685
MFS-Registered Trademark-
Emerging Growth Fund --
Class A 73,023 shares
(cost $1,405)............. 1,951
-----------------
Total Assets.............. $ 23,667
-----------------
-----------------
LIABILITIES AND CONTRACT
OWNERS' EQUITY:
Due to Northwestern National
Life Insurance Company for
accrued contract charges and
reserve transfers............ $ 25
Contract Owners' Equity....... 23,642
-----------------
Total Liabilities and
Contract Owners'
Equity.................. $ 23,667
-----------------
-----------------
Units Outstanding:...... 520,964.629
Net Asset Value per
Unit:
Tax Qualified.........
Non-Tax Qualified.....
</TABLE>
The accompanying notes are an integral part of the financial statements.
iii
<PAGE>
MFS/NWNL VARIABLE ACCOUNT STATEMENT OF OPERATIONS
AND CHANGES IN CONTRACT OWNERS' EQUITY
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Net investment income:
Reinvested dividend income................................ $ 960 $ 844 $ 1,289
Reinvested capital gains.................................. 1,107 751 1,347
Administrative expenses................................... (350) (365) (407)
------------ ------------ ------------
Net investment income and capital gains................. 1,717 1,230 2,229
------------ ------------ ------------
Realized and unrealized gains (losses):
Net realized gains on redemption of fund shares........... 388 268 774
Increase (decrease) in unrealized appreciation of
investments............................................. 2,731 (2,242) 209
------------ ------------ ------------
Net realized and unrealized gains (losses).............. 3,119 (1,974) 983
------------ ------------ ------------
Net additions (reductions) from operations............ 4,836 (744) 3,212
------------ ------------ ------------
Contract Owners' transactions:
Net purchase payments..................................... 339 492 661
Surrenders................................................ (4,519) (3,049) (4,598)
Annuity payments.......................................... (283) (54) (24)
Transfers (from) to required reserves..................... -- (18) 2
------------ ------------ ------------
Net reductions for Contract Owners' transactions........ (4,463) (2,629) (3,959)
------------ ------------ ------------
Net additions (reductions) for the year............... 373 (3,373) (747)
Contract Owners' Equity, beginning of the year.............. 23,269 26,642 27,389
------------ ------------ ------------
Contract Owners' Equity, end of the year.................... $ 23,642 $ 23,269 $ 26,642
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
iv
<PAGE>
MFS/NWNL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND CONTRACTS:
MFS/NWNL Variable Account (the "Account") is a separate account of
Northwestern National Life Insurance Company ("NWNL"), a wholly owned
subsidiary of ReliaStar Financial Corp. (formerly The NWNL Companies, Inc.).
The Account is registered as a unit investment trust under the Investment
Company Act of 1940.
Purchase payments received under the contracts are allocated to Sub-Accounts
of the Account, each of which invested in one of the following Funds during
the year.
MFS-Registered Trademark- Money Market Fund (Class A)
MFS-Registered Trademark- Bond Fund (Class A)
Massachusetts Investors Trust (Class A)
Massachusetts Investors Growth Stock Fund (Class A)
MFS-Registered Trademark- Research Fund (Class A)
MFS-Registered Trademark- Total Return Fund (Class A)
MFS-Registered Trademark- Growth Opportunities Fund (Class A)
MFS-Registered Trademark- High Income Fund (Class A)
MFS-Registered Trademark- World Governments Fund (Class A)
MFS-Registered Trademark- Emerging Growth Fund (Class A)
SECURITIES VALUATION TRANSACTIONS:
The market value of investments in the Sub-Accounts is based on the closing
net asset values of the Fund shares held at the end of the year. Investment
transactions are accounted for on the trade date (date the order to purchase
or redeem is executed) and dividend income and capital gain distributions are
recorded on the ex-dividend date. Net realized gains and losses on redemptions
of shares of the Funds are determined on the basis of specific identification
of Fund share costs.
VARIABLE ANNUITY RESERVES:
The amount of the reserves for contracts in the distribution period is
determined by actuarial assumptions which meet statutory requirements. Gains
or losses resulting from actual mortality experience, the full responsibility
for which is assumed by NWNL, are offset by transfers to, or from, NWNL.
2. FEDERAL INCOME TAXES:
The MFS/NWNL Variable Account has not provided for income taxes because in
1981 the Internal Revenue Service issued Revenue Ruling 81-225, which holds,
in part, that for certain types of variable annuity contracts, the Contract
Owner is considered the owner of the underlying mutual fund shares for federal
income tax purposes and any earnings and/or gains from the shares are included
in the gross income of the Contract Owner. The Ruling requires that all
long-term realized gains or losses on nontax qualified accounts be reported to
the Contract Owners'.
3. CONTRACT CHARGES:
No deduction is made for a sales charge from the purchase payments made for
the contracts. However, on certain surrenders, NWNL will deduct from the
contract value a surrender charge as set forth in the contract.
Charges by NWNL on the contracts include: (a) an annual administrative charge
of $30 from each contract on the anniversary date or at the time of surrender
if other than the anniversary date and (b) a charge for mortality and expense
risk assumed by NWNL equal to an annual rate of 0.9% and 0.4%, respectively,
of each participant's account. NWNL bears the risk of adverse mortality
experience and any costs for sales and administrative services and expenses
which exceed the periodic charge.
Various states and other governmental units levy a premium tax on annuity
contracts issued by insurance companies. If the owner of a contract lives in a
state which levies such a tax, NWNL may deduct the amount of the tax from the
purchase payments received or the value of the contract at annuitization.
v
<PAGE>
MFS/NWNL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. INVESTMENTS:
The net realized gains (losses) on redemptions of fund shares during the years
ended December 31, 1995, 1994 and 1993 were as follows, (in thousands):
<TABLE>
<CAPTION>
MFS-REGISTERED TRADEMARK-MONEY MARKET
TOTAL FUND
------------------------------------- -------------------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1995 1994 1993 1995 1994 1993
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from redemptions.......... $6,671 $12,719 $9,252 $2,050 $4,904 $3,004
Cost............................... 6,283 12,451 8,478 2,050 4,904 3,004
----------- ----------- ----------- ----------- ----------- -----------
Net realized gains (losses) on
redemptions of fund shares....... $388 $268 $774 $-- $-- $--
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
MASSACHUSETTS INVESTORS MFS-REGISTERED
GROWTH STOCK FUND TRADEMARK-RESEARCH FUND
(CLASS A) (CLASS A)
---------------------------------------- ----------------------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1995 1994 1993 1995 1994 1993
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from redemptions.......... $290 $226 $442 $503 $273 $104
Cost............................... 244 201 301 395 214 76
------------ ------------ ------------ ------------ ------------ ------------
Net realized gains (losses) on
redemptions of fund shares....... $46 $25 $141 $108 $59 $28
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
MFS-REGISTERED MFS-REGISTERED
TRADEMARK-HIGH INCOME FUND TRADEMARK-WORLD GOVERNMENTS FUND
(CLASS A) (CLASS A)
-------------------------------------- ----------------------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1995 1994 1993 1995 1994 1993
------------ ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from redemptions.......... $913 $4,304 $1,803 $220 $354 $124
Cost............................... 959 4,196 1,536 227 379 111
------------ ----------- ----------- ------------ ------------ ------------
Net realized gains (losses) on
redemptions of fund shares....... $(46) $108 $267 $(7) $(25) $13
------------ ----------- ----------- ------------ ------------ ------------
------------ ----------- ----------- ------------ ------------ ------------
</TABLE>
vi
<PAGE>
MFS/NWNL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
MFS-REGISTERED TRADEMARK-BOND FUND MASSACHUSETTS INVESTORS TRUST (CLASS A)
(CLASS A)
---------------------------------------- ----------------------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1995 1994 1993 1995 1994 1993
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from redemptions.......... $276 $682 $382 $190 $157 $207
Cost............................... 292 705 335 220 182 220
------------ ------------ ------------ ------------ ------------ ------------
Net realized gains (losses) on
redemptions of fund shares....... ($16) ($23) $47 ($30) ($25) ($13)
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
MFS-REGISTERED
MFS-REGISTERED TRADEMARK-GROWTH
TRADEMARK-TOTAL RETURN FUND OPPORTUNITIES FUND
(CLASS A) (CLASS A)
------------------------------------- ---------------------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1995 1994 1993 1995 1994 1993
----------- ----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from redemptions.......... $1,025 $1,031 $1,300 $924 $586 $1,201
Cost............................... 844 901 1,081 790 557 1,111
----------- ----------- ----------- ------------ ------------ -----------
Net realized gains (losses) on
redemptions of fund shares....... $181 $130 $219 $134 $29 $90
----------- ----------- ----------- ------------ ------------ -----------
----------- ----------- ----------- ------------ ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
MFS-REGISTERED
TRADEMARK-EMERGING GROWTH FUND
(CLASS A)
----------------------------------------
Year ended Year ended Year ended
Dec. 31, Dec. 31, Dec. 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Proceeds from redemptions.......... $280 $202 $685
Cost............................... 262 212 703
------------ ------------ ------------
Net realized gains (losses) on
redemptions of fund shares....... $18 $(10) $(18)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
vii
<PAGE>
MFS/NWNL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. CONTRACT OWNERS' TRANSACTIONS:
Unit transactions in each Sub-Account during the years ended December 31, 1995,
1994 and 1993 were as follows:
<TABLE>
<CAPTION>
MFS-REGISTERED TRADEMARK-MONEY MFS-REGISTERED TRADEMARK-BOND FUND
MARKET FUND (CLASS A)
------------------------------------- -------------------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1995 1994 1993 1995 1994 1993
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding, beginning of
year............................. 167,242.251 175,814.541 249,359.321 40,693.896 50,303.756 50,761.189
Units purchased.................... 2,492.450 3,150.590 4,421.159 446.925 550.518 471.219
Units redeemed..................... (60,956.726) (41,227.550) (68,847.244) (5,794.078) (4,984.507) (3,803.303)
Units transferred between
Sub-Accounts..................... 4,058.542 29,504.670 (9,118.695) 446.823 (5,175.871) 2,874.651
----------- ----------- ----------- ----------- ----------- -----------
Units outstanding, end of year..... 112,836.517 167,242.251 175,814.541 35,793.566 40,693.896 50,303.756
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
MFS-REGISTERED TRADEMARK-GROWTH
MFS-REGISTERED TRADEMARK-TOTAL OPPORTUNITIES
RETURN FUND FUND
(CLASS A) (CLASS A)
------------------------------------- -------------------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1995 1994 1993 1995 1994 1993
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding, beginning of
year............................. 81,547.990 89,906.122 101,079.955 111,725.962 120,705.939 143,744.403
Units purchased.................... 1,366.667 2,564.594 4,026.884 1,166.607 1,677.949 1,916.269
Units redeemed..................... (15,678.477) (13,630.791) (21,200.524) (18,109.828) (9,521.122) (16,522.653)
Units transferred between
Sub-Accounts..................... (5,221.274) 2,708.065 5,999.807 107.044 (1,136.804) (8,432.080)
----------- ----------- ----------- ----------- ----------- -----------
Units outstanding, end of year..... 62,014.906 81,547.990 89,906.122 94,889.785 111,725.962 120,705.939
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
viii
<PAGE>
MFS/NWNL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
MASSACHUSETTS
MASSACHUSETTS INVESTORS GROWTH
INVESTORS TRUST STOCK FUND
(CLASS A) (CLASS A)
---------------------------------- ----------------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1995 1994 1993 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding, beginning of
year............................. 24,462.931 26,534.206 28,801.024 34,032.392 37,169.634 46,078.868
Units purchased.................... 697.792 764.201 2,229.713 695.880 837.386 1,317.191
Units redeemed..................... (2,385.827) (1,997.585) (2,354.560) (5,171.989) (4,276.482) (7,653.972)
Units transferred between
Sub-Accounts..................... 831.641 (837.891 ) (2,141.971) (1,093.421) 301.854 (2,572.453)
---------- ---------- ---------- ---------- ---------- ----------
Units outstanding, end of year..... 23,606.537 24,462.931 26,534.206 28,462.862 34,032.392 37,169.634
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
MFS-REGISTERED TRADEMARK-RESEARCH
FUND
(CLASS A)
----------------------------------
Year ended Year ended Year ended
Dec. 31, Dec. 31, Dec. 31,
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Units outstanding, beginning of
year............................. 35,069.784 32,935.954 33,965.652
Units purchased.................... 345.673 439.089 612.508
Units redeemed..................... (6,975.455) (3,194.020) (2,167.924)
Units transferred between
Sub-Accounts..................... (1,334.244) 4,888.761 525.718
---------- ---------- ----------
Units outstanding, end of year..... 27,105.758 35,069.784 32,935.954
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
MFS-REGISTERED TRADEMARK-WORLD
MFS-REGISTERED TRADEMARK-HIGH GOVERNMENTS
INCOME FUND FUND
(CLASS A) (CLASS A)
----------------------------------------------- ------------------------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1995 1994 1993 1995 1994 1993
--------------- --------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding, beginning of
year............................. 95,772.845 120,857.156 134,205.074 15,677.993 20,279.064 17,835.352
Units purchased.................... 343.909 1,627.949 1,824.158 128.349 254.406 302.815
Units redeemed..................... (16,544.601) (21,586.502) (17,638.627) (1,615.579) (2,420.053) (846.695)
Units transferred between
Sub-Accounts..................... 3,822.210 (5,125.758) 2,466.551 (514.844) (2,435.424) 2,987.592
--------------- --------------- ------------- ------------- ------------- ------------
Units outstanding, end of year..... 83,394.363 95,772.845 120,857.156 13,675.919 15,677.993 20,279.064
--------------- --------------- ------------- ------------- ------------- ------------
--------------- --------------- ------------- ------------- ------------- ------------
<CAPTION>
MFS-REGISTERED TRADEMARK-EMERGING
GROWTH
FUND
(CLASS A)
-----------------------------------------
Year ended Year ended Year ended
Dec. 31, Dec. 31, Dec. 31,
1995 1994 1993
------------- ------------ ------------
<S> <C> <C> <C>
Units outstanding, beginning of
year............................. 39,191.298 34,652.403 36,879.705
Units purchased.................... 1,016.229 1,145.168 1,297.358
Units redeemed..................... (1,275.193) (2,853.696) (8,941.467)
Units transferred between
Sub-Accounts..................... 252.082 6,247.423 5,416.807
------------- ------------ ------------
Units outstanding, end of year..... 39,184.416 39,191.298 34,652.403
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
ix
<PAGE>
MFS/NWNL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. STATEMENT OF OPERATIONS AND CHANGES IN CONTRACT OWNERS' EQUITY.
Operations and changes in Contract Owners' equity for the year ended December
31, 1995 were as follows, (in thousands):
<TABLE>
<CAPTION>
MFS MFS MASSACHUSETTS
-REGISTERED -REGISTERED MASSACHUSETTS INVESTORS
TRADEMARK- TRADEMARK- BOND INVESTORS GROWTH STOCK
MONEY MARKET FUND TRUST FUND
TOTAL FUND (CLASS A) (CLASS A) (CLASS A)
------------ ------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Net investment income:
Reinvested dividend
income.................... $ 960 $ 175 $ 118 $ 25 --
Reinvested capital gains.... 1,107 -- -- 104 179
Administrative expenses..... (350) (60) (24) (18) (19)
------------ ------------ ------ ------ ------
Net investment income and
capital gains............ 1,717 115 94 111 160
------------ ------------ ------ ------ ------
Realized and unrealized gains
(losses):
Net realized gains (losses)
on redemptions of fund
shares.................... 388 -- (16) (30) 46
Increase in unrealized
appreciation of
investments............... 2,731 -- 207 296 105
------------ ------------ ------ ------ ------
Net realized and
unrealized gains......... 3,119 -- 191 266 151
------------ ------------ ------ ------ ------
Net additions from
operations............. 4,836 115 285 377 311
------------ ------------ ------ ------ ------
Contract Owners' transactions:
Net purchase payments....... 339 59 18 36 26
Surrenders.................. (4,519) (1,336) (159) (117) (220)
Transfers between
Sub-Accounts.............. -- 92 20 47 (42)
Annuity payments............ (283) (90) (79) (2) --
Transfers from required
reserves.................. -- -- -- -- --
------------ ------------ ------ ------ ------
Net (reductions) additions
for Contract Owners'
transactions............. (4,463) (1,275) (200) (36) (236)
------------ ------------ ------ ------ ------
Net additions
(reductions) for the
year................... 373 (1,160) 85 341 75
Contract Owners' Equity,
beginning of the year........ 23,269 3,878 1,560 1,048 1,279
------------ ------------ ------ ------ ------
Contract Owners' Equity, end
of the year.................. $ 23,642 $ 2,718 $ 1,645 $ 1,389 $ 1,354
------------ ------------ ------ ------ ------
------------ ------------ ------ ------ ------
</TABLE>
x
<PAGE>
MFS/NWNL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
MFS
MFS MFS MFS MFS -REGISTERED
-REGISTERED -REGISTERED -REGISTERED -REGISTERED TRADEMARK-
TRADEMARK- TRADEMARK- TOTAL TRADEMARK- GROWTH TRADEMARK- HIGH WORLDWIDE
RESEARCH RETURN OPPORTUNITIES INCOME GOVERNMENTS
FUND FUND FUND FUND FUND
(CLASS A) (CLASS A) (CLASS A) (CLASS A) (CLASS A)
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Net investment income:
Reinvested dividend
income.................... $ 5 $ 201 $ -- $ 350 $ 86
Reinvested capital gains.... 88 131 605 -- --
Administrative expenses..... (21) (52) (67) (55) (10)
------ ------ ------ ------ -----
Net investment income and
capital gains............ 72 280 538 295 76
------ ------ ------ ------ -----
Realized and unrealized gains
(losses):
Net realized gains (losses)
on redemptions of fund
shares.................... 108 181 134 (46) (7)
Increase in unrealized
appreciation of
investments............... 264 353 622 338 23
------ ------ ------ ------ -----
Net realized and
unrealized gains......... 372 534 756 292 16
------ ------ ------ ------ -----
Net additions from
operations............. 444 814 1,294 587 92
------ ------ ------ ------ -----
Contract Owners' transactions:
Net purchase payments....... 16 70 48 17 7
Surrenders.................. (341) (696) (790) (736) (73)
Transfers between
Sub-Accounts.............. (37) (265) 5 163 (25)
Annuity payments............ -- (100) (9) -- (3)
Transfers from required
reserves.................. -- -- 1 (1) --
------ ------ ------ ------ -----
Net (reductions) additions
for Contract Owners'
transactions............. (362) (991) (745) (557) (94)
------ ------ ------ ------ -----
Net additions
(reductions) for the
year................... 82 (177) 549 30 (2)
Contract Owners' Equity,
beginning of the year........ 1,426 3,771 4,263 3,958 687
------ ------ ------ ------ -----
Contract Owners' Equity, end
of the year.................. $ 1,508 $ 3,594 $ 4,812 $ 3,988 $ 685
------ ------ ------ ------ -----
------ ------ ------ ------ -----
<CAPTION>
MFS
-REGISTERED
TRADEMARK-
EMERGING GROWTH
FUND
(CLASS A)
----------------
<S> <C>
Net investment income:
Reinvested dividend
income.................... $ --
Reinvested capital gains.... --
Administrative expenses..... (24)
------
Net investment income and
capital gains............ (24)
------
Realized and unrealized gains
(losses):
Net realized gains (losses)
on redemptions of fund
shares.................... 18
Increase in unrealized
appreciation of
investments............... 523
------
Net realized and
unrealized gains......... 541
------
Net additions from
operations............. 517
------
Contract Owners' transactions:
Net purchase payments....... 42
Surrenders.................. (51)
Transfers between
Sub-Accounts.............. 42
Annuity payments............ --
Transfers from required
reserves.................. --
------
Net (reductions) additions
for Contract Owners'
transactions............. 33
------
Net additions
(reductions) for the
year................... 550
Contract Owners' Equity,
beginning of the year........ 1,399
------
Contract Owners' Equity, end
of the year.................. $ 1,949
------
------
</TABLE>
xi
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholder
Northwestern National Life Insurance Company
(A Wholly Owned Subsidiary of ReliaStar Financial Corp.)
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Northwestern
National Life Insurance Company and Subsidiaries as of December 31, 1995 and
1994, and the related statements of income, shareholder's equity, and cash flows
for each of the two years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Northwestern
National Life Insurance Company and Subsidiaries as of December 31, 1995 and
1994 and the results of their operations and their cash flows for each of the
two years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
February 1, 1996
i
<PAGE>
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Investments
Fixed Maturity Securities
Available-for-Sale (Amortized Cost: 1995, $8,485.4; 1994, $3,638.6)................ $ 9,053.7 $ 3,470.6
Held-to-Maturity (Fair Value: $2,253.0)............................................ -- 2,310.4
Equity Securities (Cost: 1995, $34.8; 1994, $45.9)................................... 35.9 43.7
Mortgage Loans on Real Estate........................................................ 1,948.4 1,570.3
Real Estate and Leases............................................................... 97.9 111.0
Policy Loans......................................................................... 499.8 306.8
Other Invested Assets................................................................ 47.0 42.3
Short-Term Investments............................................................... 122.4 59.9
----------- -----------
Total Investments.................................................................. 11,805.1 7,915.0
Cash................................................................................... 43.0 19.8
Accounts and Notes Receivable.......................................................... 150.9 118.2
Reinsurance Receivable................................................................. 162.9 93.9
Deferred Policy Acquisition Costs...................................................... 860.7 885.2
Present Value of Future Profits........................................................ 192.0 --
Property and Equipment, Net............................................................ 122.6 121.1
Accrued Investment Income.............................................................. 164.7 112.2
Other Assets........................................................................... 275.0 128.4
Participation Fund Account Assets...................................................... 319.6 323.4
Assets Held in Separate Accounts....................................................... 1,369.0 623.6
----------- -----------
Total Assets....................................................................... $ 15,465.5 $ 10,340.8
----------- -----------
----------- -----------
LIABILITIES
Future Policy and Contract Benefits.................................................... $ 11,033.2 $ 7,823.6
Pending Policy Claims.................................................................. 257.7 193.5
Other Policyholder Funds............................................................... 174.4 157.2
Notes and Mortgages Payable - Unaffiliated............................................. 144.6 74.8
Note Payable - Parent.................................................................. 100.0 100.0
Income Taxes........................................................................... 169.2 --
Other Liabilities...................................................................... 328.9 235.0
Participation Fund Account Liabilities................................................. 319.6 323.4
Liabilities Related to Separate Accounts............................................... 1,362.9 623.6
----------- -----------
Total Liabilities.................................................................. 13,890.5 9,531.1
----------- -----------
SHAREHOLDER'S EQUITY
Common Stock (2.0 Million Shares Issued in 1995 and 1994).............................. 2.5 2.5
Additional Paid-In Capital............................................................. 538.9 216.4
Net Unrealized Investment Gains (Losses) .............................................. 246.8 (79.4)
Retained Earnings...................................................................... 786.8 670.2
----------- -----------
Total Shareholder's Equity......................................................... 1,575.0 809.7
----------- -----------
Total Liabilities and Shareholder's Equity....................................... $ 15,465.5 $ 10,340.8
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
ii
<PAGE>
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1995 1994
---------- ----------
<S> <C> <C>
REVENUES
Premiums............................................................................... $ 851.5 $ 726.9
Net Investment Income.................................................................. 890.3 618.1
Realized Investment Gains (Losses)..................................................... 7.4 (27.4)
Policy and Contract Charges............................................................ 218.5 136.2
Other Income........................................................................... 94.4 111.1
---------- ----------
Total................................................................................ 2,062.1 1,564.9
---------- ----------
BENEFITS AND EXPENSES
Benefits to Policyholders.............................................................. 1,321.9 1,025.8
Sales and Operating Expenses........................................................... 344.4 281.8
Amortization of Deferred Policy Acquisition Costs and Present Value of Future
Profits............................................................................... 90.5 56.7
Interest Expense....................................................................... 13.5 15.2
Dividends and Experience Refunds to Policyholders...................................... 23.4 19.0
---------- ----------
Total................................................................................ 1,793.7 1,398.5
---------- ----------
Income from Continuing Operations before Income Taxes.................................... 268.4 166.4
Income Tax Expense..................................................................... 94.4 57.9
---------- ----------
Income from Continuing Operations.................................................... 174.0 108.5
---------- ----------
Loss from Discontinued Operations...................................................... (5.4) (2.6)
---------- ----------
Net Income........................................................................... $ 168.6 $ 105.9
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
iii
<PAGE>
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
---------------------
1995 1994
---------- ---------
<S> <C> <C>
SHAREHOLDER'S EQUITY
Common Stock
Beginning and End of Year.............................................................. $ 2.5 $ 2.5
---------- ---------
Additional Paid-In Capital
Beginning of Year...................................................................... 216.4 216.4
Capital Contributions from Parent...................................................... 322.5 --
---------- ---------
End of Year.......................................................................... 538.9 216.4
---------- ---------
Net Unrealized Investment Gains (Losses)
Beginning of Year...................................................................... (79.4) 1.8
Cumulative Effect of Accounting Change -- Securities................................... -- 85.3
Change for the Year.................................................................... 326.2 (166.5)
---------- ---------
End of Year.......................................................................... 246.8 (79.4)
---------- ---------
Retained Earnings
Beginning of Year...................................................................... 670.2 588.3
Net Income............................................................................. 168.6 105.9
Dividends to Shareholder............................................................... (52.0) (24.0)
---------- ---------
End of Year.......................................................................... 786.8 670.2
---------- ---------
Total Shareholder's Equity............................................................... $ 1,575.0 $ 809.7
---------- ---------
---------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
iv
<PAGE>
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1995 1994
----------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income............................................................................... $ 168.6 $ 105.9
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities
Interest Credited to Insurance Contracts............................................... 500.1 364.7
Future Policy Benefits................................................................. (117.5) (60.1)
Capitalization of Policy Acquisition Costs............................................. (176.6) (119.0)
Amortization of Deferred Policy Acquisition Costs
and Present Value of Future Profits................................................... 90.5 56.7
Deferred Income Taxes.................................................................. 11.5 9.2
Net Change in Receivables and Payables................................................. 8.5 45.2
Other Assets........................................................................... (83.4) 4.0
Realized Investment (Gains) Losses, Net................................................ (7.4) 27.4
Other.................................................................................. (3.5) 15.7
----------- ---------
Net Cash Provided by Operating Activities............................................ 390.8 449.7
----------- ---------
INVESTING ACTIVITIES
Proceeds from Sales of Fixed Maturity Securities......................................... 190.5 158.5
Proceeds from Maturities or Repayment of Fixed Maturity Securities
Available-for-Sale..................................................................... 329.9 177.2
Held-to-Maturity....................................................................... 415.6 390.2
Cost of Fixed Maturity Securities Acquired
Available-for-Sale..................................................................... (971.4) (720.7)
Held-to-Maturity....................................................................... (519.8) (617.5)
Sales (Purchases) of Equity Securities, Net.............................................. 31.0 (9.0)
Proceeds of Mortgage Loans Sold, Matured or Repaid....................................... 314.2 358.2
Cost of Mortgage Loans Acquired.......................................................... (385.2) (149.4)
Sales of Real Estate and Leases, Net..................................................... 28.8 14.5
Policy Loans Issued, Net................................................................. (63.0) (49.4)
Sales of Other Invested Assets, Net...................................................... 39.0 19.6
Sales (Purchases) of Short-Term Investments, Net......................................... (56.4) 13.8
Cash Acquired with Acquisition of USLICO................................................. .4 --
----------- ---------
Net Cash Used by Investing Activities................................................ (646.4) (414.0)
----------- ---------
FINANCING ACTIVITIES
Deposits to Insurance Contracts.......................................................... 1,265.6 862.6
Maturities and Withdrawals from Insurance Contracts...................................... (1,015.3) (849.7)
Increase in Notes and Mortgages Payable.................................................. 72.1 --
Repayment of Notes and Mortgages Payable................................................. (2.3) (35.8)
Dividends to Shareholder................................................................. (41.3) (24.0)
----------- ---------
Net Cash Provided (Used) by Financing Activities..................................... 278.8 (46.9)
----------- ---------
Increase (Decrease) in Cash.............................................................. 23.2 (11.2)
Cash at Beginning of Year................................................................ 19.8 31.0
----------- ---------
Cash at End of Year...................................................................... $ 43.0 $ 19.8
----------- ---------
----------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
v
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 1. CHANGES IN ACCOUNTING PRINCIPLES
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
Effective January 1, 1995, Northwestern National Life Insurance Company
(Northwestern) and its subsidiaries (the Company) adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan" and SFAS No. 118 "Accounting by Creditors for Impairment of a Loan --
Income Recognition and Disclosure." SFAS No. 114 and SFAS No. 118 require a
company to measure impairment based upon the present value of expected future
cash flows discounted at the loan's effective interest rate, the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. If foreclosure is probable, the measurement of impairment
must be based upon the fair value of the collateral. The adoption of these
standards did not have a significant effect on the financial results of the
Company.
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." SFAS No. 115 requires a
company to classify its securities into categories based upon the company's
intent relative to the eventual disposition of the securities.
SFAS No. 115 establishes three categories of securities. The first category,
held-to-maturity securities, is composed of debt securities which a company has
the positive intent and ability to hold to maturity. These securities are
carried at amortized cost. The second category, available-for-sale securities,
may be sold to address the liquidity and other needs of a company. Debt and
equity securities classified as available-for-sale are carried at fair value on
the balance sheet with unrealized gains and losses excluded from income and
reported as a separate component of shareholder's equity. The third category,
trading securities, is for debt and equity securities acquired for the purpose
of selling them in the near term. The Company has not classified any of its
securities as trading securities.
The December 31, 1995 balance of shareholder's equity was increased by
$246.8 million (comprised of an increase in the carrying value of the securities
of $569.9 million, reduced by $189.4 million of related adjustments to deferred
policy acquisition costs and $133.7 million in deferred income taxes), while the
December 31, 1994 balance of shareholder's equity was reduced by $79.4 million
(comprised of a decrease in the carrying value of the securities of $170.2
million, reduced by $48.1 million of related adjustments to deferred policy
acquisition costs and $42.7 million in deferred income taxes) to reflect the net
unrealized gain/loss on fixed maturity securities classified as available-for-
sale.
NOTE 2. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company is principally engaged in the business of providing life
insurance and related financial service products. The Company operates primarily
in the United States and, through its subsidiaries is authorized to do business
in all 50 states.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Northwestern
and its subsidiaries. Northwestern is a wholly owned subsidiary of ReliaStar
Financial Corp. (ReliaStar). Northwestern's principal subsidiaries are Northern
Life Insurance Company (Northern), United Services Life Insurance Company (USL),
Bankers Security Life Insurance Society (BSL), ReliaStar Mortgage Corporation
and Washington Square Advisors, Inc. During 1995, The North Atlantic Life
Insurance Company of America was merged into BSL. These consolidated financial
statements exclude the effects of all material intercompany transactions.
vi
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 2. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVESTMENTS
Fixed maturity securities (bonds and redeemable preferred stocks) which may
be sold to meet liquidity and other needs of the Company are categorized as
available-for-sale and are valued at fair value. Fixed maturity securities which
the Company has the positive intent and ability to hold to maturity are
categorized as held-to-maturity and are valued at amortized cost less write-offs
for other than temporary declines in fair value.
Equity securities (common stocks and nonredeemable preferred stocks) are
valued at fair value.
Mortgage loans on real estate are carried at amortized cost less an
impairment allowance for estimated uncollectible amounts.
Investment real estate owned directly by the Company is carried at cost less
accumulated depreciation and allowances for estimated losses. Investments in
real estate joint ventures are accounted for using the equity method. Real
estate acquired through foreclosure is carried at the lower of fair value minus
estimated costs to sell or cost.
Short-term investments are carried at amortized cost.
Unrealized investment gains and losses of equity securities and fixed
maturity securities classified as available-for-sale, net of related deferred
acquisition costs and tax effects, are accounted for as a direct increase or
decrease in shareholder's equity.
Realized investment gains and losses enter into the determination of net
income. Realized investment gains and losses on sales of securities are
determined on the specific identification method. Write-offs of investments that
decline in value below cost on other than a temporary basis and the change in
the allowance for mortgage loans and wholly owned real estate are included with
realized investment gains and losses in the Consolidated Statements of Income.
The Company records write-offs or allowances for its investments based upon
an evaluation of specific problem investments. The Company reviews, on a
continual basis, all invested assets (including marketable bonds, private
placements, mortgage loans and real estate investments) to identify investments
where the Company has credit concerns. Investments with credit concerns include
those the Company has identified as problem investments, which are issues
delinquent in a required payment of principal or interest, issues in bankruptcy
or foreclosure and restructured or foreclosed assets. The Company also
identifies investments as potential problem investments, which are investments
where the Company has serious doubts as to the ability of the borrowers to
comply with the present loan repayment terms.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, net of accumulated depreciation
of $79.8 million and $67.5 million at December 31, 1995 and 1994, respectively.
The Company provides for depreciation of
vii
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 2. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
property and equipment using straight-line and accelerated methods over the
estimated useful lives of the assets. Buildings are generally depreciated over
35 to 50 years. Depreciation expense for 1995 and 1994 amounted to $9.1 million
and $8.4 million, respectively.
PARTICIPATION FUND ACCOUNT
On January 3, 1989, the Commissioner of Commerce of the State of Minnesota
approved a Plan of Conversion and Reorganization (the Plan) which provided,
among other things, for the conversion of Northwestern from a combined stock and
mutual insurance company to a stock life insurance company.
The Plan provided for the establishment of a Participation Fund Account
(PFA) for the benefit of certain participating individual life insurance
policies and annuities issued by Northwestern prior to the effective date of the
Plan. Under the terms of the PFA, the insurance liabilities and assets with
respect to such policies are segregated in the accounting records of
Northwestern to assure the continuation of current policyholder dividend
practices. Assets and liabilities of the PFA are presented in accordance with
statutory accounting practices. Earnings derived from the operation of the PFA
will inure solely to the benefit of the policies covered by the PFA, and no
benefit will inure to the Company. Accordingly, results of operations for the
PFA are excluded from the Company's Consolidated Statements of Income. In the
event that the assets of the PFA are insufficient to provide the contractual
benefits guaranteed by the affected policies, Northwestern must provide such
contractual benefits from its general assets.
SEPARATE ACCOUNTS
The Company operates separate accounts. The assets (principally investments)
and liabilities (principally to contractholders) of each account are clearly
identifiable and distinguishable from other assets and liabilities of the
Company. Assets are valued at fair value.
PREMIUM REVENUE AND BENEFITS TO POLICYHOLDERS
RECOGNITION OF TRADITIONAL LIFE, GROUP AND ANNUITY PREMIUM REVENUE AND
BENEFITS TO POLICYHOLDERS -- Traditional life insurance products include those
products with fixed and guaranteed premiums and benefits, and consist
principally of whole life insurance policies and certain annuities with life
contingencies (immediate annuities). Life insurance premiums and immediate
annuity premiums are recognized as premium revenue when due. Group insurance
premiums are recognized as premium revenue over the time period to which the
premiums relate. Benefits and expenses are associated with earned premiums so as
to result in recognition of profits over the life of the contracts. This
association is accomplished by means of the provision for liabilities for future
policy benefits and the amortization of deferred policy acquisition costs.
RECOGNITION OF UNIVERSAL LIFE-TYPE CONTRACTS REVENUE AND BENEFITS TO
POLICYHOLDERS -- Universal life-type policies are insurance contracts with terms
that are not fixed and guaranteed. The terms that may be changed could include
one or more of the amounts assessed the policyholder, premiums paid by the
policyholder or interest accrued to policyholder balances. Amounts received as
payments for such contracts are not reported as premium revenues.
Revenues for universal life-type policies consist of charges assessed
against policy account values for deferred policy loading and the cost of
insurance and policy administration. Policy benefits and claims that are charged
to expense include interest credited to contracts and benefit claims incurred in
the period in excess of related policy account balances.
viii
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 2. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECOGNITION OF INVESTMENT CONTRACT REVENUE AND BENEFITS TO POLICYHOLDERS --
Contracts that do not subject the Company to risks arising from policyholder
mortality or morbidity are referred to as investment contracts. Guaranteed
Investment Contracts (GICs) and certain deferred annuities are considered
investment contracts. Amounts received as payments for such contracts are not
reported as premium revenues.
Revenues for investment contracts consist of investment income and policy
administration charges. Contract benefits that are charged to expense include
benefit claims incurred in the period in excess of related contract balances,
and interest credited to contract balances.
POLICY ACQUISITION COSTS
Those costs of acquiring new business, which vary with and are primarily
related to the production of new business, have been deferred to the extent that
such costs are deemed recoverable. Such costs include commissions, certain costs
of policy issuance and underwriting and certain variable agency expenses.
Costs deferred related to traditional life insurance are amortized over the
premium paying period of the related policies, in proportion to the ratio of
annual premium revenues to total anticipated premium revenues. Such anticipated
premium revenues are estimated using the same assumptions used for computing
liabilities for future policy benefits.
Costs deferred related to universal life-type policies and investment
contracts are amortized over the lives of the policies, in relation to the
present value of estimated gross profits from mortality, investment and expense
margins.
PRESENT VALUE OF FUTURE PROFITS
The present value of future profits (PVFP) reflects the estimated fair value
of the acquired insurance business in force and represents the portion of the
cost to acquire USLICO Corporation (USLICO) that is allocated to the value of
future cash flows from insurance contracts existing at the date of acquisition.
Such value is the present value of the actuarially determined projected net cash
flows from the acquired insurance contracts. The weighted average discount rate
used to determine such value was approximately 15%.
An analysis of the present value of the future profits asset account is
presented below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
-------------
(IN MILLIONS)
<S> <C>
Balance at Acquisition.................................................................... $ 300.0
Imputed Interest.......................................................................... 17.6
Amortization.............................................................................. (32.6)
Adjustment for Unrealized Gains on Available-for-Sale Securities.......................... (93.0)
-------------
Balance, December 31, 1995................................................................ $ 192.0
-------------
-------------
</TABLE>
Based on current conditions and assumptions as to future events on acquired
policies in force, the Company expects that the net amortization of the
beginning balance of the PVFP will be between 5% and 6% in each of the years
1996 through 2000. The interest rates used to determine the amount of imputed
interest on the unamortized PVFP balance ranged from 5% to 8%.
ix
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 2. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill is the excess of the amount paid to acquire a Company over the fair
value of the net assets acquired. Goodwill is amortized on a straight-line basis
over 40 years. The carrying value of goodwill is monitored for impairment of
value based on the Company's estimate of future earnings. The carrying value of
goodwill is reduced and a charge to income is recorded when an impairment in
value is identified. No goodwill impairment charges have been recorded.
FUTURE POLICY AND CONTRACT BENEFITS
Liabilities for future policy benefits for traditional life contracts are
calculated using the net level premium method and assumptions as to investment
yields, mortality, withdrawals and dividends. The assumptions are based on
projections of past experience and include provisions for possible unfavorable
deviation. These assumptions are made at the time the contract is issued or, for
purchased contracts, at the date of acquisition.
Liabilities for future policy and contract benefits on universal life-type
and investment-type contracts are based on the policy account balance.
The liabilities for future policy and contract benefits for group disabled
life reserves and long-term disability reserves are based upon interest rate
assumptions and morbidity and termination rates from published tables, modified
for Company experience.
INCOME TAXES
The provision for income taxes includes amounts currently payable and
deferred income taxes resulting from the cumulative differences in the assets
and liabilities determined on a tax return and financial statement basis.
INTEREST RATE SWAP AGREEMENTS
Interest rate swap agreements are used as hedges for asset/liability
management of adjustable rate and short-term invested assets. The Company does
not enter into any interest rate swap agreements for trading purposes. The
interest rate swap transactions involve the exchange of fixed and floating rate
interest payments without the exchange of underlying principal amounts and do
not contain other optional provisions. The difference between amounts paid and
amounts received on interest rate swaps is reflected in net investment income.
INTEREST RATE FUTURES CONTRACTS
Futures contracts are used as hedges for asset/liability management of fixed
maturity securities and liabilities arising from GICs. Realized and unrealized
gains and losses on futures contracts are deferred and amortized over the life
of the hedged asset or liability.
NOTE 3. ACQUISITION
On January 17, 1995, ReliaStar acquired USLICO. USLICO was a holding company
with two primary subsidiaries: USL of Arlington, Virginia and BSL of Uniondale,
New York. Concurrent with the acquisition, ReliaStar contributed all of the
capital stock of USL and BSL to the Company. The acquisition was accounted for
using the purchase method of accounting and, therefore, the consolidated
financial statements include the accounts of USL and BSL since the date of
acquisition. Goodwill totaling $44.3 million representing the excess of the
purchase price allocated to USL and BSL over the fair value of the net assets
acquired has been recorded.
x
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 3. ACQUISITION (CONTINUED)
The following pro forma consolidated financial information has been prepared
assuming the acquisition had taken place at the beginning of 1994:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
(IN
MILLIONS)
<S> <C>
Revenues.................................................................................. $ 1,961.1
Net Income................................................................................ 139.0
</TABLE>
The pro forma financial information is not necessarily indicative of the
results of operations that would have occurred had the acquisition taken place
at the beginning of 1994 or of future operations of the combined companies.
NOTE 4. INVESTMENTS
Investment income summarized by type of investment was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
--------------------
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Fixed Maturity Securities.......................................................... $ 673.4 $ 449.6
Equity Securities.................................................................. 3.1 1.6
Mortgage Loans on Real Estate...................................................... 184.3 160.0
Real Estate and Leases............................................................. 16.8 15.7
Policy Loans....................................................................... 28.9 17.6
Other Invested Assets.............................................................. 7.8 3.6
Short-Term Investments............................................................. 7.6 4.2
--------- ---------
Gross Investment Income.......................................................... 921.9 652.3
Investment Expenses................................................................ 31.6 34.2
--------- ---------
Net Investment Income............................................................ $ 890.3 $ 618.1
--------- ---------
--------- ---------
</TABLE>
xi
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 4. INVESTMENTS (CONTINUED)
Net pretax realized investment gains (losses) were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
--------------------
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Net Gains (Losses) on Sales of Investments
Fixed Maturity Securities......................................................... $ 3.3 $ 2.1
Equity Securities................................................................. 15.1 .6
Mortgage Loans.................................................................... (.1) --
Foreclosed Real Estate............................................................ .6 .7
Real Estate....................................................................... 1.7 (.2)
Other............................................................................. 2.2 3.2
--------- ---------
22.8 6.4
--------- ---------
Provisions for Losses on Investments
Fixed Maturity Securities......................................................... (3.0) (13.9)
Equity Securities................................................................. (.1) (1.0)
Mortgage Loans.................................................................... (6.3) (4.9)
Foreclosed Real Estate............................................................ (5.2) (11.8)
Real Estate....................................................................... (.8) --
Other Assets...................................................................... -- (2.2)
--------- ---------
(15.4) (33.8)
--------- ---------
Net Pretax Realized Investment Gains (Losses)..................................... $ 7.4 $ (27.4)
--------- ---------
--------- ---------
</TABLE>
Gross realized investment gains of $8.3 million and $5.0 million and gross
realized investment losses of $5.0 million and $2.9 million were recognized on
sales of fixed maturity securities during the years ended December 31, 1995 and
1994, respectively. All 1995 and 1994 fixed maturity security sales were from
the available-for-sale portfolio.
xii
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 4. INVESTMENTS (CONTINUED)
The amortized cost and fair value of investments in fixed maturity
securities by type of investment were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------
GROSS UNREALIZED
AMORTIZED --------------------
COST GAINS (LOSSES) FAIR VALUE
---------- --------- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
United States Government and Government Agencies and
Authorities..................................................... $ 172.8 $ 13.2 -- $ 186.0
States, Municipalities and Political Subdivisions................ 64.4 4.2 $ (.1) 68.5
Foreign Governments.............................................. 82.1 6.8 (.2) 88.7
Public Utilities................................................. 775.3 74.5 (.9) 848.9
Corporate Securities............................................. 5,330.7 392.2 (21.6) 5,701.3
Mortgage-Backed/Structured Finance Securities.................... 2,058.0 102.7 (2.4) 2,158.3
Redeemable Preferred Stock....................................... 2.1 -- (.1) 2.0
---------- --------- --------- ----------
Total.......................................................... $ 8,485.4 $ 593.6 $ (25.3) $ 9,053.7
---------- --------- --------- ----------
---------- --------- --------- ----------
<CAPTION>
DECEMBER 31, 1994
--------------------------------------------
GROSS UNREALIZED
AMORTIZED --------------------
COST GAINS (LOSSES) FAIR VALUE
---------- --------- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
United States Government and Government Agencies and
Authorities..................................................... $ 5.8 -- $ (.3) $ 5.5
States, Municipalities and Political Subdivisions................ 5.7 -- -- 5.7
Foreign Governments.............................................. 56.4 -- (3.4) 53.0
Public Utilities................................................. 309.4 $ 1.3 (17.5) 293.2
Corporate Securities............................................. 2,649.8 13.3 (136.4) 2,526.7
Mortgage-Backed/Structured Finance Securities.................... 608.5 2.5 (27.1) 583.9
Redeemable Preferred Stock....................................... 3.0 -- (.4) 2.6
---------- --------- --------- ----------
Total Available-for-Sale....................................... 3,638.6 17.1 (185.1) 3,470.6
---------- --------- --------- ----------
HELD-TO-MATURITY
States, Municipalities and Political Subdivisions................ .7 -- (.1) .6
Public Utilities................................................. 42.5 .8 (1.8) 41.5
Corporate Securities............................................. 1,202.1 15.0 (37.7) 1,179.4
Mortgage-Backed/Structured Finance Securities.................... 1,065.1 .6 (34.2) 1,031.5
---------- --------- --------- ----------
Total Held-to-Maturity......................................... 2,310.4 16.4 (73.8) 2,253.0
---------- --------- --------- ----------
Total.......................................................... $ 5,949.0 $ 33.5 $ (258.9) $ 5,723.6
---------- --------- --------- ----------
---------- --------- --------- ----------
</TABLE>
xiii
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 4. INVESTMENTS (CONTINUED)
The amortized cost and fair value of fixed maturity securities by
contractual maturity are shown below. 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.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------
AVAILABLE-FOR-SALE
----------------------
AMORTIZED FAIR
COST VALUE
---------- ----------
<S> <C> <C>
Due in One Year or Less.................................................................. $ 123.1 $ 122.8
Due After One Year Through Five Years.................................................... 2,497.4 2,634.3
Due After Five Years Through Ten Years................................................... 2,750.4 2,965.4
Due After Ten Years...................................................................... 1,056.5 1,172.9
Mortgage-Backed/Structured Finance Securities............................................ 2,058.0 2,158.3
---------- ----------
Total.................................................................................. $ 8,485.4 $ 9,053.7
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------------------------------------
AVAILABLE-FOR-SALE HELD-TO-MATURITY TOTAL
---------------------- ---------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
---------- ---------- ---------- ---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Due in One Year or Less...................... $ 63.4 $ 63.0 $ 47.7 $ 47.8 $ 111.1 $ 110.8
Due After One Year Through Five Years........ 928.2 898.3 425.9 422.1 1,354.1 1,320.4
Due After Five Years Through Ten Years....... 1,697.3 1,600.7 445.0 437.2 2,142.3 2,037.9
Due After Ten Years.......................... 341.2 324.7 326.7 314.4 667.9 639.1
Mortgage-Backed/Structured Finance
Securities.................................. 608.5 583.9 1,065.1 1,031.5 1,673.6 1,615.4
---------- ---------- ---------- ---------- ---------- ----------
Total...................................... $ 3,638.6 $ 3,470.6 $ 2,310.4 $ 2,253.0 $ 5,949.0 $ 5,723.6
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
The fair values for the marketable bonds are determined based upon the
quoted market prices for bonds actively traded. The fair values for marketable
bonds without an active market are obtained through several commercial pricing
services which provide the estimated fair values. Fair values of privately
placed bonds which are not considered problems are determined utilizing a
commercially available pricing model. The model considers the current level of
risk-free interest rates, current corporate spreads, the credit quality of the
issuer and cash flow characteristics of the security. Utilizing these data, the
model generates estimated market values which the Company considers reflective
of the fair value of each privately placed bond. Fair values for privately
placed bonds which are considered problems are determined though consideration
of factors such as the net worth of borrower, the value of collateral, the
capital structure of the borrower, the presence of guarantees and the Company's
evaluation of the borrower's ability to compete in the relevant market.
At December 31, 1995, the largest industry concentration of the private
placement portfolio was consumer products/services, where 18.9% of the portfolio
was invested, and the largest industry concentration of the marketable bond
portfolio was structured finance/mortgage-backed securities, where 31.9% of the
portfolio was invested. At December 31, 1995, the largest geographic
concentration of commercial mortgage loans was in the midwest region of the
United States, where approximately 32.5% of the commercial mortgage loan
portfolio was invested.
xiv
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 4. INVESTMENTS (CONTINUED)
At December 31, 1995 and 1994, gross unrealized appreciation of equity
securities was $3.0 million and $7.5 million, respectively, and gross unrealized
depreciation was $1.9 million and $9.7 million, respectively.
Invested assets which were nonincome producing (no income received for the
12 months preceding the balance sheet date) were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Fixed Maturity Securities............................................................ $ .7 $ 7.8
Mortgage Loans on Real Estate........................................................ 2.8 2.5
Real Estate and Leases............................................................... 17.6 29.9
--------- ---------
Total.............................................................................. $ 21.1 $ 40.2
--------- ---------
--------- ---------
</TABLE>
Allowances for losses on investments are reflected on the Consolidated
Balance Sheets as a reduction of the related assets and were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Mortgage Loans....................................................................... $ 12.4 $ 4.1
Foreclosed Real Estate............................................................... 10.6 11.9
Investment Real Estate............................................................... 1.0 .2
Other Invested Assets................................................................ 2.3 2.5
</TABLE>
At December 31, 1995, the total investment in impaired mortgage loans
(before allowances for credit losses) and the related allowance for credit
losses on these impaired mortgage loans was $25.4 million and $12.4 million,
respectively. Increases to the allowance for credit losses account charged to
income and the amount of decreases to the allowance account were $6.3 million
and $9.5 million, respectively, during the year ended December 31, 1995. The
average investment in impaired mortgage loans (before allowances for credit
losses) and the amount of the related interest income recognized on impaired
mortgage loans during 1995, were approximately $2.0 million and $1.7 million,
respectively. The Company does not accrue interest income on impaired mortgage
loans when the likelihood of collection is doubtful. Cash receipts for interest
payments are recognized as income in the period received.
Noncash investing activities consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
--------------------
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Real Estate Assets Acquired Through Foreclosure...................................... $ 28.0 $ 24.9
Mortgage Loans Acquired in Sales of Real Estate Assets............................... 15.3 27.9
</TABLE>
During 1994, the Company transferred four fixed maturity securities with an
amortized cost of $31.0 million and a fair value of $27.1 million from the
held-to-maturity portfolio to the available-for-sale portfolio. Each of the
securities transferred were private placement securities which experienced a
significant deterioration in the issuers' creditworthiness during the period.
None of the securities transferred were sold during the year.
xv
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 4. INVESTMENTS (CONTINUED)
Effective December 31, 1995, the Company adopted the implementation guidance
contained in the Financial Accounting Series Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." Concurrent with the adoption of this implementation
guidance, the Company reclassified all of its held-to-maturity securities to
available-for-sale based upon a reassessment of the appropriateness of the
classifications of all securities held at that time. The amortized cost and net
unrealized appreciation of the securities reclassified were $2.42 billion and
$108.1 million, respectively, at December 31, 1995. In accordance with the
special report, financial statements prior to December 31, 1995 have not been
restated to reflect the effects of initially adopting the implementation
guidance.
NOTE 5. INCOME TAXES
The income tax liability (asset) as reflected on the Consolidated Balance
Sheets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Current Income Taxes............................................................... $ 6.4 $ 5.4
Deferred Income Taxes.............................................................. 162.8 (5.6)
--------- ---------
Total............................................................................ $ 169.2 $ (.2)
--------- ---------
--------- ---------
</TABLE>
The provision for income taxes reflected on the Consolidated Statements of
Income consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
--------------------
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Currently Payable.................................................................... $ 82.9 $ 47.3
Deferred............................................................................. 11.5 10.6
--------- ---------
Total.............................................................................. $ 94.4 $ 57.9
--------- ---------
--------- ---------
</TABLE>
The Internal Revenue Service has completed its review of the Company's tax
return for all years through 1991.
xvi
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 5. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the impact for financial statement reporting
purposes of "temporary differences" between the financial statement carrying
amounts and tax bases of assets and liabilities. The "temporary differences"
that give rise to a significant portion of the deferred tax liability (asset)
relate to the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Future Policy and Contract Benefits............................................. $ (269.7) $ (221.2)
Investment Write-Offs and Allowances............................................ (35.0) (17.7)
Pension and Postretirement Benefit Plans........................................ (8.3) (6.3)
Employee Benefits............................................................... (9.3) (5.2)
Deferred Futures Gains.......................................................... (1.8) (5.1)
Net Unrealized Investment Losses................................................ -- (42.7)
Other .......................................................................... (42.0) (35.8)
--------- ---------
Gross Deferred Tax Asset........................................................ (366.1) (334.0)
--------- ---------
Deferred Policy Acquisition Costs............................................... 267.9 260.4
Present Value of Future Profits................................................. 99.0 --
Net Unrealized Investment Gains................................................. 90.2 --
Property and Equipment.......................................................... 27.1 26.3
Real Estate Joint Ventures...................................................... 12.2 14.3
Accrual of Market Discount...................................................... 8.4 3.2
Policyholder Dividends.......................................................... 4.4 3.0
Other........................................................................... 19.7 21.2
--------- ---------
Gross Deferred Tax Liability.................................................... 528.9 328.4
--------- ---------
Net Deferred Tax Liability (Asset)............................................ $ 162.8 $ (5.6)
--------- ---------
--------- ---------
</TABLE>
Federal income tax regulations allowed certain special deductions for 1983
and prior years which are accumulated in a memorandum tax account designated as
"policyholders' surplus." Generally, this policyholders' surplus account will
become subject to tax at the then current rates only if the accumulated balance
exceeds certain maximum limitations or if certain cash distributions are deemed
to be paid out of the account. At December 31, 1995, Northwestern and its life
insurance subsidiaries have accumulated approximately $51.0 million in their
separate policyholders' surplus accounts. Deferred taxes have not been provided
on this temporary difference.
There have been no deferred taxes recorded for the unremitted equity in
subsidiaries as the earnings are considered to be permanently invested or will
be remitted only when tax effective to do so.
The difference between the U.S. federal income tax rate and the consolidated
tax provision rate is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Statutory Tax Rate................................................................. 35.0% 35.0%
Other.............................................................................. .2 (.2)
--- ---
Provision for Income Taxes....................................................... 35.2% 34.8%
--- ---
--- ---
</TABLE>
xvii
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 5. INCOME TAXES (CONTINUED)
Cash paid to ReliaStar for federal income taxes was $90.3 million and $29.8
million for the years ended December 31, 1995 and 1994, respectively.
NOTE 6. NOTES AND MORTGAGES PAYABLE
A summary of notes and mortgages payable is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Unaffiliated:
Commercial Paper................................................................ $ 135.6 $ 65.6
Other Indebtedness -- Current Portion........................................... .1 .1
--------- ---------
Short-Term Debt............................................................... 135.7 65.7
--------- ---------
Other Indebtedness -- Noncurrent Portion........................................ 8.9 9.1
--------- ---------
Total Unaffiliated............................................................ $ 144.6 $ 74.8
--------- ---------
--------- ---------
Note Payable to Parent........................................................ $ 100.0 $ 100.0
--------- ---------
--------- ---------
</TABLE>
At December 31, 1995 and 1994, other indebtedness is primarily mortgage
notes assumed in connection with certain real estate investments with interest
rates ranging from 6.2% to 11.5%.
The weighted average interest rate on the commercial paper outstanding at
December 31, 1995 and 1994 was 6.06% and 6.10%, respectively, with maturities
ranging from 5 to 44 days at December 31, 1995.
Principal payments required on notes and mortgages payable to unaffiliated
companies in each of the next five years and thereafter are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- -------------------------------------------------------
<S> <C>
1996 - $135.7 1999 - $ .2
1997 - $ .1 2000 - $ .2
1998 - $ .2 2001 and thereafter - $8.2
</TABLE>
ReliaStar has loaned $100.0 million to Northwestern under a surplus note.
The original note, dated April 1, 1989, was issued in connection with
Northwestern's demutualization and was used to offset the surplus reduction
related to the cash distribution to the mutual policyholders in the
demutualization. This original note was replaced by a successor surplus note
(the 1994 Note) dated November 1, 1994. The 1994 Note provides, subject to the
regulatory constraints discussed below, that (i) it is a surplus note which will
mature on September 15, 2003 with principal due at maturity, but payable without
penalty, in whole or in part before maturity; (ii) interest is at 6 5/8% payable
semi-annually; and (iii) in the event that Northwestern is in default in the
payment of any required interest or principal, Northwestern cannot pay cash
dividends on its capital stock (all of which is owned directly by ReliaStar).
The 1994 Note further provides that there may be no payment of interest or
principal without the express approval of the Minnesota Department of Commerce.
Interest paid on debt was $14.2 million and $16.0 million for 1995 and 1994,
respectively.
xviii
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 7. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has noncontributory defined benefit retirement plans covering
substantially all employees. The plans, which may be terminated as to accrual of
additional benefits at any time by the Board of Directors, provide benefits to
employees upon retirement.
The benefits under the plans are based on years of service and the
employee's compensation during the last five years of employment. The Company's
policy is to fund the minimum required contribution necessary to meet the
present and future obligations of the plans. Contributions are intended to
provide not only for benefits attributed to service to date but also for those
expected to be earned in the future. Contributions are made to a tax-exempt
trust. Plan assets consist principally of investments in stock and bond mutual
funds, common stock and corporate bonds. Included in plan assets are 616,491
shares of ReliaStar common stock with a fair value of $27.4 million.
The Company and ReliaStar also have unfunded noncontributory defined benefit
plans providing for benefits to employees in excess of limits for qualified
retirement plans and for benefits to nonemployee members of the ReliaStar Board
of Directors.
Net periodic pension expense for ReliaStar and its subsidiaries included the
following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
--------------------
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Service Cost -- Benefits Earned During the Year..................................... $ 3.4 $ 3.1
Interest Cost on Projected Benefit Obligation....................................... 11.9 5.2
Actual Return on Plan Assets........................................................ (33.7) 2.4
Net Amortization and Deferral....................................................... 19.1 (7.5)
--------- ---------
Net Periodic Pension Expense...................................................... $ .7 $ 3.2
--------- ---------
--------- ---------
</TABLE>
The following table sets forth for ReliaStar and its subsidiaries the funded
status of the plans as of December 31:
<TABLE>
<CAPTION>
FUNDED PLANS UNFUNDED PLANS
-------------------- --------------------
1995 1994 1995 1994
--------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Accumulated Benefit Obligation
Vested.................................................................. $ (157.1) $ (48.5) $ (10.7) $ (3.5)
Nonvested............................................................... (5.1) (3.2) (1.2) (.2)
Effect of Projected Future Compensation Increases......................... (10.6) (8.1) (2.1) (2.3)
--------- --------- --------- ---------
Projected Benefit Obligation.............................................. (172.8) (59.8) (14.0) (6.0)
Plan Assets at Fair Value................................................. 169.9 53.3 -- --
--------- --------- --------- ---------
Plan Assets Less Than Projected Benefit Obligation........................ (2.9) (6.5) (14.0) (6.0)
Unrecognized Net Loss..................................................... 24.2 8.4 6.2 1.8
Unrecognized Transition Obligation (Asset)................................ (.8) (1.1) .1 .1
Additional Minimum Liability.............................................. -- -- (4.2) (.1)
--------- --------- --------- ---------
Net Pension Asset (Liability)........................................... $ 20.5 $ .8 $ (11.9) $ (4.2)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
xix
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The above amounts are for ReliaStar and its subsidiaries as the Company's
portion is not determinable. The net periodic pension expense relating to and
billed to ReliaStar was insignificant.
The projected benefit obligation was determined using an assumed discount
rate of 7.25% and 8.5%, and a weighted-average assumed long-term rate of
compensation increase of 4.5% and 5.0% at January 1, 1996 and 1995,
respectively. The assumed long-term rate of return on plan assets was 9.5%.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain health care and life insurance benefits to
retired employees (and their eligible dependents). Substantially all of the
Company's employees will become eligible for those benefits if they meet
specified age and service requirements and reach retirement age while working
for the Company, unless the plans are terminated or amended. The postretirement
health care plan is contributory, with retiree contributions adjusted annually;
the life insurance plan is noncontributory and benefits are primarily based on
the employee's final compensation levels.
The Company's postretirement health care plans currently are not funded. The
accumulated postretirement benefit obligation (APBO) and the accrued
postretirement benefit liability were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Retirees.............................................................................. $ 10.3 $ 8.4
Fully Eligible Active Plan Participants............................................... 4.5 2.4
Other Active Plan Participants........................................................ 4.9 2.6
--------- ---------
Unfunded APBO....................................................................... 19.7 13.4
Unrecognized Prior Service Cost....................................................... .1 .3
Unrecognized Gain (Loss).............................................................. (.3) 1.6
--------- ---------
Accrued Postretirement Benefit Liability............................................ $ 19.5 $ 15.3
--------- ---------
--------- ---------
</TABLE>
Net periodic postretirement benefit costs consisted of the following
components:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
--------------------
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Service Cost -- Benefits Earned.......................................................... $ 1.2 $ 1.1
Interest Cost on APBO.................................................................... 1.3 1.0
Amortization of Prior Service Cost....................................................... (.1) (.1)
--- ---
Net Periodic Postretirement Benefit Costs.............................................. $ 2.4 $ 2.0
--- ---
--- ---
</TABLE>
The assumed health care cost trend rate used in measuring the APBO as of
January 1, 1996 was 10.0%, decreasing gradually to 5.0% in the year 2010 and
thereafter. The assumed health care cost trend rate used in measuring the APBO
as of January 1, 1995 was 10.0%, decreasing gradually to 6.0% in the year 2009
and thereafter. The assumed discount rate used in determining the APBO was 7.25%
and 8.5% at January 1, 1996 and 1995, respectively. The assumed health care cost
trend rate has a significant effect on the amounts reported. For example, a
one-percentage-point increase in the assumed health care cost trend rate for
each year would increase the APBO as of December 31, 1995 approximately $2.4
million and 1995 net postretirement health care cost by approximately $.4
million.
xx
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 7. EMPLOYEE BENEFIT PLANS (CONTINUED)
SUCCESS SHARING PLAN AND ESOP
The Success Sharing Plan and ESOP (Success Sharing Plan) was designed to
increase employee ownership and reward employees when certain Company
performance objectives are met. Essentially all employees are eligible to
participate in the Success Sharing Plan. The Success Sharing Plan has both
qualified and nonqualified components. The nonqualified component is equal to
25% of the annual award and is paid in cash to employees. The qualified
component is equal to 75% of the annual award, with 25% contributed to a
deferred investment account and the remaining 50% contributed to the ESOP
portion of the Success Sharing Plan. Costs charged to expense for the Success
Sharing Plan were $8.6 million and $8.4 million in 1995 and 1994, respectively.
NOTE 8. RELATED PARTY TRANSACTIONS
The Company and ReliaStar have entered into agreements whereby ReliaStar and
the Company provide certain management, administrative, legal, and other
services to each other. The net amounts billed resulted in the Company making
payments of $25.1 million and $13.6 million to ReliaStar in 1995 and 1994,
respectively. During 1995 the Company paid dividends of $52.0 million to
ReliaStar consisting of $41.3 million paid in cash and 10.7 million in noncash
dividends.
NOTE 9. SHAREHOLDER'S EQUITY
DIVIDEND RESTRICTIONS
The ability of Northwestern to pay cash dividends to ReliaStar is restricted
by law or subject to approval of the insurance regulatory authorities of
Minnesota. These authorities recognize only statutory accounting practices for
the ability of an insurer to pay dividends to its shareholders.
Under Minnesota insurance law regulating the payment of dividends by
Northwestern, any such payment must be an amount deemed prudent by
Northwestern's Board of Directors and, unless otherwise approved by the
Commissioner of the Minnesota Department of Commerce (the Commissioner), must be
paid solely from the adjusted earned surplus of Northwestern. Adjusted earned
surplus means the earned surplus as determined in accordance with statutory
accounting practices (unassigned funds), less 25% of the amount of such earned
surplus which is attributable to net unrealized capital gains. Further, without
approval of the Commissioner, Northwestern may not pay in any calendar year any
dividend which, when combined with other dividends paid within the preceding 12
months, exceeds the greater of (i) 10% of Northwestern's statutory surplus at
the prior year-end or (ii) 100% of Northwestern's statutory net gain from
operations (not including realized capital gains) for the prior calendar year.
For 1996, the amount of dividends which can be paid by Northwestern without
commissioner approval is $117.7 million.
STATUTORY SURPLUS AND NET INCOME
Net income of Northwestern and its subsidiaries, as determined in accordance
with statutory accounting practices was $97.8 million and $57.6 million for 1995
and 1994, respectively. Northwestern's statutory surplus was $728.3 million and
$565.2 million at December 31, 1995 and 1994, respectively.
NOTE 10. REINSURANCE
The Company is a member of reinsurance associations established for the
purpose of ceding the excess of life insurance over retention limits. In
addition, Northwestern's Life and Health Reinsurance Division assumes and cedes
reinsurance on certain life and health risks as its primary business.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to the Company; consequently, allowances are established for amounts
deemed uncollectible. The amount of the allowance for uncollectible
xxi
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 10. REINSURANCE (CONTINUED)
reinsurance receivables was immaterial at December 31, 1995. The Company
evaluates the financial condition of its reinsurers and monitors concentrations
of credit risk to minimize its exposure to significant losses from reinsurer
insolvencies. The Company's retention limit is $400,000 per life for individual
coverage and, to the extent that Northwestern reinsures life policies written by
Northern and North Atlantic, the limit is increased up to $600,000 per life. For
group coverage and reinsurance assumed, the retention is $500,000 per life with
per occurrence limitations, subject to certain maximums. As of December 31,
1995, $12.0 billion of life insurance in force was ceded to other companies. The
Company has assumed $36.7 billion of life insurance in force as of December 31,
1995 (including $32.0 billion of reinsurance assumed pertaining to Federal
Employees' Group Life Insurance and Servicemans' Group Life Insurance). Also
included in these amounts are $513.1 million of reinsurance ceded and $4.7
billion of reinsurance assumed by Northwestern's Life and Health Reinsurance
Division.
The effect of reinsurance on premiums and recoveries is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
--------------------
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Direct Premiums.................................................................... $ 643.8 $ 533.2
Reinsurance Assumed................................................................ 297.6 261.8
Reinsurance Ceded.................................................................. (89.9) (68.1)
--------- ---------
Net Premiums ...................................................................... $ 851.5 $ 726.9
--------- ---------
--------- ---------
Reinsurance Recoveries............................................................. $ 80.4 $ 59.0
--------- ---------
--------- ---------
</TABLE>
NOTE 11. LIABILITY FOR UNPAID ACCIDENT AND HEALTH CLAIMS AND CLAIM ADJUSTMENT
EXPENSE
The change in the liability for unpaid accident and health claims and claim
adjustment expenses is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Balance at January 1............................................................... $ 322.9 $ 244.6
Less Reinsurance Recoverables...................................................... 59.5 32.8
--------- ---------
Net Balance at January 1....................................................... 263.4 211.8
Incurred Related to:
Current Year..................................................................... 273.1 266.2
Prior Year....................................................................... (2.7) (16.6)
--------- ---------
Total Incurred................................................................. 270.4 249.6
Paid Related to:
Current Year..................................................................... 157.0 140.3
Prior Year....................................................................... 89.0 66.7
--------- ---------
Total Paid..................................................................... 246.0 207.0
Net Balance at December 31......................................................... 287.8 254.4
Plus Reinsurance Recoverables...................................................... 81.6 50.5
--------- ---------
Balance at December 31........................................................... $ 369.4 $ 304.9
--------- ---------
--------- ---------
</TABLE>
xxii
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 11. LIABILITY FOR UNPAID ACCIDENT AND HEALTH CLAIMS AND CLAIM ADJUSTMENT
EXPENSE (CONTINUED)
The liability for unpaid accident and health claims and claim adjustment
expenses is included in Future Policy and Contract Benefits on the Consolidated
Balance Sheets.
NOTE 12. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a defendant in a number of lawsuits arising out of the normal
course of the business of the Company. In the opinion of Management, the
ultimate resolution of such litigation will not result in any material adverse
impact to operations or financial condition of the Company.
JOINT GROUP LIFE AND ANNUITY CONTRACTS
Northwestern has issued certain participating group annuity and group life
insurance contracts jointly with another insurance company. Northwestern has
entered into an arrangement with this insurer whereby Northwestern will
gradually transfer these liabilities (approximately $328.4 million at December
31, 1995) to the other insurer over a ten year period which commenced in 1993.
The terms of the arrangement specify the interest rate on the liabilities and
provide for a transfer of assets and liabilities scheduled in a manner
consistent with the expected cash flows of the assets allocated to support the
liabilities. A contingent liability exists with respect to the joint obligor's
portion of the contractual liabilities attributable to contributions received
prior to July 1, 1993 in the event the joint obligor is unable to meet its
obligations.
RESERVE INDEMNIFICATION
In March 1992, the Company sold Chartwell Re Corporation (Chartwell), its
property and casualty reinsurance subsidiary. The Company and the acquiring
company entered into a separate agreement which provides for reciprocal
indemnity (but with different ultimate exposure amounts) between the parties to
the agreement with respect to the adequacy of the loss and loss adjustment
expense reserves of Chartwell for all accident years which ended on or before
December 31, 1991. The indemnity is measured for the period ending on December
31, 1996. Under the terms of the agreement, the maximum amount payable by the
Company would be $23.0 million and the maximum amount payable by the acquirer to
the Company would be $5.0 million.
Based upon analyses completed during the fourth quarter of 1995, the Company
has accrued a cumulative total of $8.0 million of the maximum potential payment
under the indemnification agreement. The ultimate amount to be paid will be
affected by subsequent favorable or adverse claims development.
The amounts accrued under the indemnification agreement are presented as
discontinued operations in the Consolidated Statements of Income.
FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to reduce its exposure to fluctuations in
interest rates. These financial instruments include commitments to extend
credit, financial guarantees, futures contracts and interest rate swaps. Those
instruments involve, to varying degrees, elements of credit, interest rate or
liquidity risk in excess of the amount recognized in the Consolidated Balance
Sheets.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
financial guarantees written is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. For
xxiii
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
futures contracts and interest rate swap transactions, the contract or notional
amounts do not represent exposure to credit loss. For swaps, the Company's
exposure to credit loss is limited to those swaps where the Company has an
unrealized gain. For futures contracts, the Company has no exposure to credit
risk, as the contracts are marked to market daily.
Unless otherwise noted, the Company does not require collateral or other
security to support financial instruments with credit risk.
<TABLE>
<CAPTION>
CONTRACT OR NOTIONAL
AMOUNT
DECEMBER 31
----------------------
1995 1994
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Financial Instruments Whose Contract Amounts Represent Credit Risk
Commitments to Extend Credit.......................................................... $ 82.6 $ 36.4
Financial Guarantees.................................................................. 41.8 47.5
Financial Instruments Whose Notional or Contract Amounts Exceed the Amount of Credit
Risk
Futures Contracts..................................................................... 80.4 84.4
Interest Rate Swap Agreements......................................................... 1,222.5 1,320.0
</TABLE>
COMMITMENTS TO EXTEND CREDIT -- Commitments to extend credit are legally
binding agreements to lend to a customer. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
They generally may be terminated by the Company in the event of deterioration in
the financial condition of the borrower. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future liquidity requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis.
FINANCIAL GUARANTEES -- Financial guarantees are conditional commitments
issued by the Company guaranteeing the performance of the borrower to a third
party. Those guarantees are primarily issued to support public and private
commercial mortgage borrowing arrangements. The credit risk involved is
essentially the same as that involved in issuing commercial mortgage loans.
Northwestern is a partner in eight real estate joint ventures where it has
guaranteed the repayment of loans of the partnership. As of December 31, 1995,
Northwestern had guaranteed repayment of $41.8 million ($47.5 million at
December 31, 1994) of such loans including the portion allocable to the PFA. If
any payments were made under these guarantees, Northwestern would be allowed to
make a claim for repayment from the joint venture, foreclose on the assets of
the joint venture including its real estate investment and, in certain
instances, make a claim against the joint venture's general partner.
For certain of these partnerships, Northwestern has made capital
contributions from time to time to provide the partnerships with sufficient cash
to meet its obligations, including operating expenses, tenant improvements and
debt service. Capital contributions during 1995 and 1994 were insignificant.
Further capital contributions are likely to be required in future periods for
certain of the joint ventures with the guarantees. The Company cannot predict
the amount of such future contributions.
FUTURES CONTRACTS -- Futures contracts are contracts for delayed delivery of
securities or money market instruments in which the seller agrees to make
delivery at a specified future date of a specified
xxiv
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
instrument, at a specified price or yield. These contracts are entered into to
manage interest rate risk as part of the Company's asset and liability
management. Risks arise from the movements in securities values and interest
rates.
INTEREST RATE SWAP AGREEMENTS -- The Company also enters into interest rate
swap agreements to manage interest rate exposure. The primary reason for the
interest rate swap agreements is to extend the duration of adjustable rate
investments. Interest rate swap transactions generally involve the exchange of
fixed and floating rate interest payment obligations without the exchange of the
underlying principal amounts. Changes in market interest rates impact income
from adjustable rate investments and have an opposite (and approximately
offsetting) effect on the reported income from the swap portfolio. The risks
under interest rate swap agreements are generally similar to those of futures
contracts. Notional principal amounts are often used to express the volume of
these transactions but do not represent the much smaller amounts potentially
subject to credit risk.
LEASES
The Company has operating leases for office space and certain computer
processing and other equipment. Rental expense for these items was $13.6 million
and $11.0 million for 1995 and 1994, respectively.
Future minimum aggregate rental commitments at December 31, 1995 for
operating leases were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- -------------------------------------------------------
<S> <C>
1996 - $7.6 1999 - $4.6
1997 - $6.8 2000 - $5.4
1998 - $5.7 2001 and thereafter - $4.4
</TABLE>
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures are made in accordance with the requirements of
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." SFAS No.
107 requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates, in many cases, could not be realized in immediate
settlement of the instrument.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The fair value estimates presented herein are based on pertinent information
available to Management as of December 31, 1995 and 1994. Although Management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since that date; therefore, current estimates of
fair value may differ significantly from the amounts presented herein.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
FIXED MATURITY SECURITIES -- The estimated fair value disclosures for debt
securities satisfy the fair value disclosure requirements of SFAS No. 107 (See
Note 4).
xxv
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
EQUITY SECURITIES -- Fair value equals carrying value as these securities
are carried at quoted market value.
MORTGAGE LOANS ON REAL ESTATE -- The fair values for mortgage loans on real
estate are estimated using discounted cash flow analyses, using interest rates
currently being offered in the marketplace for similar loans to borrowers with
similar credit ratings. Loans with similar characteristics are aggregated for
purposes of the calculations.
CASH, SHORT-TERM INVESTMENTS AND POLICY LOANS -- The carrying amounts for
these assets approximate the assets' fair values.
OTHER FINANCIAL INSTRUMENTS REPORTED AS ASSETS -- The carrying amounts for
these financial instruments (primarily premiums and other accounts receivable
and accrued investment income) approximate those assets' fair values.
INVESTMENT CONTRACT LIABILITIES -- The fair value for deferred annuities was
estimated to be the amount payable on demand at the reporting date as those
investment contracts have no defined maturity and are similar to a deposit
liability. The amount payable at the reporting date was calculated as the
account balance less applicable surrender charges.
The fair value for GICs was estimated using discounted cash flow analyses.
The discount rate used was based upon current industry offering rates on GICs of
similar durations.
The fair values for supplementary contracts without life contingencies and
immediate annuities were estimated using discounted cash flow analyses. The
discount rate was based upon treasury rates plus a pricing margin.
The carrying amounts reported for other investment contracts which includes
participating pension contracts and retirement plan deposits, approximate those
liabilities' fair value.
CLAIM AND OTHER DEPOSIT FUNDS -- The carrying amounts for claim and other
deposit funds approximate the liabilities' fair value.
NOTES AND MORTGAGES PAYABLE -- The fair value for the note payable to
ReliaStar was based upon the quoted market price of the related ReliaStar
publicly traded debt. For other debt obligations, discounted cash flow analyses
were used. The discount rate was based upon the Company's estimated current
incremental borrowing rates.
OTHER FINANCIAL INSTRUMENTS REPORTED AS LIABILITIES -- The carrying amounts
for other financial instruments (primarily normal payables of a short-term
nature) approximate those liabilities' fair values.
FINANCIAL GUARANTEES -- The fair values for financial guarantees were
estimated using discounted cash flow analyses based upon the expected future net
amounts to be expended. The estimated net amounts to be expended were determined
based on projected cash flows and a valuation of the underlying collateral.
INTEREST RATE SWAPS -- The fair value for interest rate swaps was estimated
using discounted cash flow analyses. The discount rate was based upon rates
currently being offered for similar interest rate swaps available from similar
counterparties.
xxvi
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and estimated fair values of the Company's financial
instruments were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------
1995 1994
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Financial Instruments Recorded as Assets
Fixed Maturity Securities
Available-for-Sale......................................... $ 9,053.7 $ 9,053.7 $ 3,470.6 $ 3,470.6
Held-to-Maturity........................................... -- -- 2,310.4 2,253.0
Equity Securities............................................ 35.9 35.9 43.7 43.7
Mortgage Loans on Real Estate
Commercial................................................. 1,465.0 1,525.8 1,120.1 1,068.8
Residential and Other...................................... 483.4 496.1 450.2 443.1
Policy Loans................................................. 499.8 499.8 306.8 306.8
Cash and Short-Term Investments.............................. 165.4 165.4 79.7 79.7
Other Financial Instruments Recorded as Assets............... 503.3 503.3 349.7 349.7
Financial Instruments Recorded as Liabilities
Investment Contracts
Deferred Annuities......................................... (6,704.9) (6,285.6) (4,690.0) (4,369.3)
GICs....................................................... (115.0) (148.6) (239.9) (261.5)
Supplementary Contracts and Immediate Annuities............ (99.8) (99.7) (99.1) (93.9)
Other Investment Contracts................................. (529.2) (529.2) (539.4) (539.4)
Claim and Other Deposit Funds................................ (114.9) (114.9) (101.2) (101.2)
Notes and Mortgages Payable.................................. (243.6) (244.4) (173.7) (159.4)
Other Financial Instruments Recorded as Liabilities.......... (224.8) (224.8) (167.8) (167.8)
Off-Balance Sheet Financial Instruments
Financial Guarantees......................................... -- (4.6) -- (5.2)
Interest Rate Swaps.......................................... -- 42.7 -- (46.5)
</TABLE>
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimates.
xxvii
