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VARIABLE ANNUITY III
1997 ANNUAL REPORT
[SBL LOGO]
Security Benefit Life Insurance Company
A Member of The Security Benefit
Group of Companies
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A LETTER FROM THE PRESIDENT
At Security Benefit we strive for the optimum in financial integrity,
operational excellence and core values. Our dedication to providing quality
products and services is a never-ending quest. It's through these commitments
that we maintain a strong financial position and consistent growth for the
protection and security of our policyholders and customers.
Capitalizing on opportunities and challenges, 1997 was a year of milestones for
Security Benefit.
* Sales were up 5%
* Profits were up 17%
* Company assets rose 11%
* Statutory equity rose 29%
We have long been positioned to meet the demand for flexible annuities. And we
took that one step further in 1997 by unveiling Variflex Signature. Our new
variable annuity offers opportunities for investors tired of low interest rates
and lack of control over their insurance investments.
Another milestone for 1997 was FORTUNE magazine citing Security Benefit as "One
of the Best 100 Companies To Work for in America." FORTUNE has discovered what
our associates already know--that Security Benefit is a quality, caring and
well-managed place to work and grow. We understand that satisfied people are
more productive people, and that translates to higher quality service to our
customers.
When it comes to quality service, 1997 was a banner season for Security Benefit.
DALBAR, an independent research firm that rates the service standards of
financial services organizations, awarded us the first Quality Tested Service
Seal. The award places Security Benefit at the pinnacle of superior customer
service in the variable annuity industry.
As we move forward, our sights are set high to continue as a leader in the
financial services industry. By anticipating evolving needs and developing
appropriate solutions, we anticipate a prosperous and successful 1998.
HOWARD R. FRICKE
Howard R. Fricke
Chairman of the Board
and Chief Executive Officer
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BOARD OF DIRECTORS
Howard R. Fricke
Chairman of the Board and CEO
Security Benefit Life Insurance Company
Topeka, Kansas
Thomas R. Clevenger
Wichita, Kansas
Sister Loretto Marie Colwell
President and CEO
St. Francis Hospital and Medical Center
Topeka, Kansas
John C. Dicus
Chairman of the Board
Capitol Federal Savings & Loan Association
Topeka, Kansas
Stephen J. Douglass
Chairman and CEO
Payless ShoeSource
Topeka, Kansas
William W. Hanna
President & Chief Operating Officer
Koch Industries
Wichita, Kansas
John E. Hayes, Jr.
Chairman of the Board and CEO
Western Resources, Inc.
Topeka, Kansas
Laird G. Noller
President
Noller Enterprises
Topeka, Kansas
Frank Sabatini
Chairman of the Board and CEO
Capital City Bank
Topeka, Kansas
Robert C. Wheeler
Chairman and CEO
Hill's Pet Nutrition, Inc.
Topeka, Kansas
NOTICE OF POLICYOWNERS' MEETING
We encourage you to attend the annual meeting of policyowners to be held on
Tuesday, June 2, 1998 at Security Benefit Life, 700 SW Harrison St., Topeka,
Kansas, at 2:00 p.m. Each policyowner is entitled to vote, either in person or
by proxy, on all matters coming before the meeting. Proxies are available from
the corporate secretary and must be returned at least 30 days prior to the
annual meeting.
This report is submitted only for the general information of Security Benefit
Life Variable Annuity contractowners and participants and is not authorized for
distribution to the public.
For More Information Call 1-800-888-2461
www.securitybenefit.com
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REPORT OF INDEPENDENT AUDITORS
The Contractowners of SBL Variable Annuity Account III and
The Board of Directors of Security Benefit Life Insurance Company
We have audited the accompanying balance sheet of SBL Variable Annuity Account
III (the Account) as of December 31, 1997, and the related statement of
operations and changes in net assets for the year then ended. These financial
statements are the responsibility of the Account's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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. Our procedures included
confirmation of investments owned as of December 31, 1997 by correspondence with
the custodian. 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 audit provides 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 SBL Variable Annuity Account
III at December 31, 1997, and the results of its operations and changes in its
net assets for the year then ended in conformity with generally accepted
accounting principles.
Ernst & Young LLP
February 6, 1998
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SBL VARIABLE ANNUITY ACCOUNT III
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BALANCE SHEET DECEMBER 31, 1997
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ASSETS (DOLLARS IN THOUSANDS - EXCEPT PER SHARE AND UNIT VALUES)
Investments:
SBL Fund:
Series A (Growth Series) - 311,928 shares at net asset value
of $29.39 per share (cost, $8,114).............................. $ 9,168
Series B (Growth-Income Series) - 79,717 shares at net asset
value of $41.60 per share (cost, $2,951)........................ 3,316
Series C (Money Market Series) - 139,944 shares at net asset
value of $12.53 per share (cost, $1,780)........................ 1,754
Series D (Worldwide Equity Series) - 65,964 shares at net asset
value of $6.14 per share (cost, $393)........................... 405
Series E (High Grade Income Series) - 52,453 shares at net
asset value of $12.25 per share (cost, $648).................... 643
Series J (Emerging Growth Series) - 30,591 shares at net asset
value of $21.33 per share (cost, $582).......................... 653
Series K (Global Aggressive Bond Series) - 623 shares at net
asset value of $10.07 per share (cost, $8)...................... 6
Series M (Specialized Asset Allocation Series) - 1,564 shares
at net asset value of $12.29 per share (cost, $18).............. 19
Series N (Managed Asset Allocation Series) - 952 shares at net
asset value of $13.88 per share (cost, $12)..................... 13
Series O (Equity Income Series) - 4,221 shares at net asset
value of $17.62 per share (cost, $71)........................... 74
Series S (Social Awareness Series) - 3,617 shares at net asset
value of $22.25 per share (cost, $61)........................... 80
------
Total assets.......................................................... $16,131
======
See accompanying notes.
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LIABILITIES AND NET ASSETS
Actuarial risk fees payable............... $ 140
Net assets are represented by (Note 3):
NUMBER UNIT
OF UNITS VALUE AMOUNT
-------- ----- ------
Growth Series:
Accumulation units..................... 93,572 $93.80 $8,777
Annuity reserves....................... 3,421 93.80 321 9,098
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Growth-Income Series:
Accumulation units..................... 37,087 87.67 3,251
Annuity reserves....................... 397 87.67 35 3,286
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Money Market Series:
Accumulation units..................... 61,020 28.09 1,714
Annuity reserves....................... 924 28.09 26 1,740
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Worldwide Equity Series:
Accumulation units..................... 21,381 17.91 383
Annuity reserves....................... 1,056 17.91 19 402
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High Grade Income Series:
Accumulation units..................... 23,394 27.26 638
Emerging Growth Series:
Accumulation units..................... 27,930 22.56 630
Annuity reserves....................... 759 22.56 17 647
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Global Aggressive Bond Series:
Accumulation units..................... 483 11.62 6
Specialized Asset Allocation Series:
Accumulation units..................... 1,480 11.32 17
Managed Asset Allocation Series:
Accumulation units..................... 876 13.03 11
Equity Income Series:
Accumulation units..................... 4,125 16.03 66
Social Awareness Series:
Accumulation units..................... 3,272 24.43 80
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Total liabilities and net assets.......... $16,131
======
See accompanying notes.
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SBL VARIABLE ANNUITY ACCOUNT III
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STATEMENT OF OPERATIONS AND
CHANGES IN NET ASSETS YEAR ENDED DECEMBER 31, 1997
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(IN THOUSANDS)
<TABLE>
<CAPTION>
GROWTH- MONEY WORLDWIDE HIGH GRADE EMERGING
GROWTH INCOME MARKET EQUITY INCOME GROWTH
SERIES SERIES SERIES SERIES SERIES SERIES
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dividend distributions......................................... $ 53 $ 64 $ 103 $ 9 $ 39 $ 1
Expenses (Note 2):
Mortality and expense risk fee............................... (75) (32) (18) (3) (6) (5)
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Net investment income (loss)................................... (22) 32 85 6 33 (4)
Capital gain distributions..................................... 495 160 --- 19 --- 11
Realized gain (loss) on investments............................ 1,411 295 67 32 (17) 65
Unrealized appreciation (depreciation) on investments.......... (344) 163 (27) (28) 31 53
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Net realized and unrealized gain on investments................ 1,562 618 40 23 14 129
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Net increase in net assets resulting from operations........... 1,540 650 125 29 47 125
Net assets at beginning of year................................ 8,409 2,716 2,294 399 552 294
Variable annuity deposits (Notes 2 and 3)...................... 3,460 1,090 5,077 91 136 789
Terminations and withdrawals (Notes 2 and 3)................... (4,286) (1,152) (5,690) (106) (95) (534)
Annuity payments (Notes 2 and 3)............................... (25) (18) (66) (11) (2) (27)
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Net assets at end of year...................................... $ 9,098 $ 3,286 $ 1,740 $ 402 $638 $ 647
==================================================================
</TABLE>
See accompanying notes.
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<TABLE>
<CAPTION>
SPECIALIZED
GLOBAL ASSET MANAGED ASSET EQUITY SOCIAL
AGGRESSIVE ALLOCATION ALLOCATION INCOME AWARENESS
BOND SERIES SERIES SERIES SERIES SERIES
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<S> <C> <C> <C> <C> <C>
Dividend distributions......................................... $ 1 $--- $ --- $ 1 $---
Expenses (Note 2):
Mortality and expense risk fee............................... (5) (2) (2) (8) (1)
--------------------------------------------------------------
Net investment income (loss)................................... (4) (2) (2) (7) (1)
Capital gain distributions..................................... 2 --- --- 1 4
Realized gain on investments................................... 59 1 262 4 3
Unrealized appreciation (depreciation) on investments.......... (36) --- (233) 1 8
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Net realized and unrealized gain on investments................ 25 1 29 6 15
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Net increase (decrease) in net assets resulting from operations 21 (1) 27 (1) 14
Net assets at beginning of year................................ 592 25 1,401 9 43
Variable annuity deposits (Notes 2 and 3)...................... 11 2 12 204 31
Terminations and withdrawals (Notes 2 and 3)................... (618) (9) (1,429) (146) (8)
Annuity payments (Notes 2 and 3)............................... --- --- --- --- ---
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Net assets at end of year...................................... $ 6 $ 17 $ 11 $ 66 $ 80
==============================================================
</TABLE>
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SBL VARIABLE ANNUITY ACCOUNT III
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - SBL Variable Annuity Account III (the Account) is a separate
account of Security Benefit Life Insurance Company (SBL). The Account is
registered as a unit investment trust under the Investment Company Act of 1940,
as amended. Deposits received by the Account are invested in the SBL Fund, a
mutual fund not otherwise available to the public. As directed by the owners,
amounts deposited may be invested in shares of Series A (Growth Series -
emphasis on capital appreciation), Series B (Growth-Income Series - emphasis on
capital appreciation with secondary emphasis on income), Series C (Money Market
Series - emphasis on capital preservation while generating interest income),
Series D (Worldwide Equity Series - emphasis on long-term capital growth through
investment in foreign and domestic common stocks and equivalents), Series E
(High Grade Income Series - emphasis on current income with security of
principal), Series J (Emerging Growth Series - emphasis on capital
appreciation), Series K (Global Aggressive Bond Series - emphasis on high
current income with secondary emphasis on capital appreciation), Series M
(Specialized Asset Allocation Series - emphasis on high total return consisting
of capital appreciation and current income), Series N (Managed Asset Allocation
Series - emphasis on high level of total return), Series O (Equity Income Series
- - emphasis on substantial dividend income and capital appreciation) and Series S
(Social Awareness Series - emphasis on capital appreciation).
Under the terms of the investment advisory contracts, portfolio investments of
the underlying mutual fund are made by Security Management Company, LLC (SMC), a
limited liability company controlled by its members, SBL and Security Benefit
Group, Inc. (SBG), a wholly-owned subsidiary of SBL. SMC has engaged Lexington
Management Corporation to provide sub-advisory services for the Worldwide Equity
Series and Global Aggressive Bond Series, T. Rowe Price Associates, Inc. to
provide sub-advisory services for the Managed Asset Allocation Series and the
Equity Income Series and Meridian Investment Management Corporation to provide
sub-advisory services for the Specialized Asset Allocation Series.
INVESTMENT VALUATION - Investments in mutual fund shares are carried in the
balance sheet at market value (net asset value of the underlying mutual fund).
The first-in, first-out cost method is used to determine gains and losses.
Security transactions are accounted for on the trade date.
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1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The cost of investments purchased and proceeds from investments sold were as
follows (In Thousands):
COST OF PROCEEDS
PURCHASES FROM SALES
--------- ----------
Growth Series........................... $4,278 $4,586
Growth-Income Series.................... 1,348 1,205
Money Market Series..................... 5,259 5,839
Worldwide Equity Series................. 124 122
High Grade Income Series................ 181 104
Emerging Growth Series.................. 814 573
Global Aggressive Bond Series........... 13 622
Specialized Asset Allocation Series..... 4 11
Managed Asset Allocation Series......... 12 1,429
Equity Income Series.................... 206 146
Social Awareness Series................. 34 8
ANNUITY RESERVES - Annuity reserves relate to contracts that have matured and
are in the payout stage. Such reserves are computed on the basis of published
mortality tables using assumed interest rates that will provide reserves as
prescribed by law. In cases where the payout option selected is life contingent,
SBL periodically recalculates the required annuity reserves, and any resulting
adjustment is either charged or credited to SBL and not to the Account.
REINVESTMENT OF DIVIDENDS - Dividends and capital gains distributions paid by
the mutual fund to the Account are reinvested in additional shares of each
respective Series. Dividend income and capital gains distributions are recorded
as income on the ex-dividend date.
FEDERAL INCOME TAXES - Under current law, no federal income taxes are payable
with respect to the Account.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
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SBL VARIABLE ANNUITY ACCOUNT III
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
2. VARIABLE ANNUITY CONTRACT CHARGES
SBL deducts an administrative fee of $30 per year for each contract, except for
certain contracts based on a minimum account value and the period of time the
contract has been in force. Mortality and expense risks assumed by SBL are
compensated for by a fee equivalent to an annual rate ranging from 0.85% to 1.2%
of the net asset value of each contract, of which 0.7% is for assuming mortality
risks and the remainder is for assuming expense risks.
When applicable, an amount for state premium taxes is deducted as provided by
pertinent state law either from purchase payments or from the amount applied to
effect an annuity at the time annuity payments commence.
A contingent deferred sales charge is assessed against certain withdrawals
during the first eight years of the contract, declining from 8% in the first
year to 1% in the eighth year. There were no such surrender charges.
3. SUMMARY OF UNIT TRANSACTIONS (IN THOUSANDS)
UNITS
-----
Growth Series:
Variable annuity deposits............................................. 39
Terminations, withdrawals, annuity payments and expense charges....... 57
Growth-Income Series:
Variable annuity deposits............................................. 14
Terminations, withdrawals, annuity payments and expense charges....... 15
Money Market Series:
Variable annuity deposits............................................. 185
Terminations, withdrawals, annuity payments and expense charges....... 209
Worldwide Equity Series:
Variable annuity deposits............................................. 5
Terminations, withdrawals, annuity payments and expense charges....... 6
High Grade Income Series:
Variable annuity deposits............................................. 5
Terminations, withdrawals, annuity payments and expense charges....... 4
Emerging Growth Series:
Variable annuity deposits............................................. 40
Terminations, withdrawals, annuity payments and expense charges....... 27
Global Aggressive Bond Series:
Variable annuity deposits............................................. 1
Terminations, withdrawals, annuity payments and expense charges....... 49
Specialized Asset Allocation Series:
Variable annuity deposits............................................. ---
Terminations, withdrawals, annuity payments and expense charges....... 1
Managed Asset Allocation Series:
Variable annuity deposits............................................. 1
Terminations, withdrawals, annuity payments and expense charges....... 116
Equity Income Series:
Variable annuity deposits............................................. 12
Terminations, withdrawals, annuity payments and expense charges....... 9
Social Awareness Series:
Variable annuity deposits............................................. 1
Terminations, withdrawals, annuity payments and expense charges....... ---
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[SBG LOGO] BULK RATE
The Security Benefit Group of Companies U.S. POSTAGE PAID
700 SW Harrison St., TOPEKA, KS
Topeka, Kansas 66636-0001 PERMIT NO. 428
