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VARIABLE
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ANNUITY III
1998 ANNUAL REPORT
[SBL LOGO]
SECURITY BENEFIT LIFE
INSURANCE COMPANY
A Member of The Security Benefit
Group of Companies
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A MESSAGE FROM THE CHAIRMAN OF THE BOARD
Security Benefit is poised on the brink of exciting change. Over the past year,
we have aggressively focused on relationship management and forging new
strategic partnerships. As good as the Security Benefit team is, as strong as
our management, research and fundamentals are, we still recognize opportunities
to bring more talent to the table. Making certain our cultures are compatible
and our goals are aligned, we've formed relationships that bring value to both
our customers and those who represent us.
Our successful team led the company to a record year of profits and sales.
* Sales totaled $1.1 billion, a 35% increase from 1997
* Profits were up 13.6%
* Assets under management rose 12% to $8.8 billion
* GAAP Equity rose 14.4%
In 1998, WORKING MOTHER magazine again selected Security Benefit as one of the
100 Best Companies for working mothers. We are very proud of the continued
recognition we receive for Security Benefit and believe that it directly affects
the quality of our service to our customers.
Security Benefit's financial strength and stability also continue to be
recognized. During 1998, Security Benefit was upgraded to an AA- (very strong)
rating from Standard & Poor's. We are also rated:
* AA- (very high) by Duff & Phelps
* A+ (superior) by A. M. Best
The strides we are making now shape our strategies and vision for the future. By
providing more products that offer choices to our customers, we position our
organization as one of the most responsive and flexible in the industry. This
combination of innovative products and service-oriented associates enables us to
continue meeting the needs of sophisticated customers well into the next
millennium.
HOWARD R. FRICKE
Howard R. Fricke
Chairman of the Board
and Chief Executive Officer
Rating information applies to Security Benefit Life Insurance Company. The
ratings should not be considered as bearing on the investment performance of
assets held in any separate account.
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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
Investments
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
STEVEN 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 (Ret.)
Western Resources, Inc.
Topeka, Kansas
LAIRD G. NOLLER
President
Noller Automotive Group
Lawrence, 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 MEETING OF MEMBERS
The annual meeting of members of Security Benefit Mutual Holding Company (the
"Mutual Holding Company") will be held on Tuesday, June 1, 1999, at 700 SW
Harrison St., Topeka, Kansas, at 1:00 p.m. Each owner of an insurance policy
issued by Security Benefit Life Insurance Company is a member of the Mutual
Holding Company and 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 no later than May 31, 1999.
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 CONTRACT OWNERS 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) (comprised of the individual series as indicated therein) as
of December 31, 1998, and the related statements 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, 1998, by correspondence
with the transfer agent. 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 the individual series of the
SBL Variable Annuity Account III at December 31, 1998, and the results of their
operations and changes in their net assets for the year then ended in conformity
with generally accepted accounting principles.
Ernst & Young LLP
February 5, 1999
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VARIABLE ANNUITY ACCOUNT III
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BALANCE SHEET DECEMBER 31, 1998
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ASSETS (DOLLARS IN THOUSANDS - EXCEPT PER SHARE AND UNIT VALUES)
Investments:
SBL Fund:
Series A (Growth Series) - 284,337 shares at net asset value of
$34.27 per share (cost, $8,353)................................. $ 9,744
Series B (Growth-Income Series) - 81,078 shares at net asset
value of $39.68 per share (cost, $3,264)........................ 3,217
Series C (Money Market Series) - 164,641 shares at net asset
value of $12.53 per share (cost, $2,032)........................ 2,063
Series D (Worldwide Equity Series) - 77,862 shares at net asset
value of $6.74 per share (cost, $493)........................... 525
Series E (High-Grade Income Series) - 47,503 shares at net asset
value of $12.42 per share (cost, $569).......................... 590
Series J (Emerging Growth Series) - 29,765 shares at net asset
value of $22.51 per share (cost, $593).......................... 670
Series K (Global Aggressive Bond Series) - 56 shares at net asset
value of $9.56 per share (cost, $1)............................. 1
Series M (Specialized Asset Allocation Series) - 685 shares at
net asset value of $12.87 per share (cost, $9).................. 9
Series N (Managed Asset Allocation Series) - 8,802 shares at net
asset value of $16.01 per share (cost, $127).................... 141
Series O (Equity Income Series) - 6,835 shares at net asset value
of $18.35 per share (cost, $119)................................ 125
Series S (Social Awareness Series) - 4,224 shares at net asset
value of $28.40 per share (cost, $83)........................... 120
------
Total assets.......................................................... $17,205
======
See accompanying notes.
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NET ASSETS
Net assets are represented by (NOTE 3):
NUMBER UNIT
OF UNITS VALUE AMOUNT
-------- ----- ------
Growth Series:
Accumulation units................ 80,468 $118.53 $9,538
Annuity reserves.................. 1,739 118.53 206 $ 9,744
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Growth-Income Series:
Accumulation units................ 33,454 95.14 3,183
Annuity reserves.................. 358 95.14 34 3,217
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Money Market Series:
Accumulation units 66,396 29.76 1,976
Annuity reserves.................. 2,931 29.76 87 2,063
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Worldwide Equity Series:
Accumulation units................ 23,168 21.67 502
Annuity reserves.................. 1,042 21.67 23 525
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High-Grade Income Series:
Accumulation units................ 19,888 29.67 590
Emerging Growth Series:
Accumulation units................ 24,459 26.83 656
Annuity reserves.................. 514 26.83 14 670
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Global Aggressive Bond Series:
Accumulation units................ 35 15.18 1
Specialized Asset Allocation Series:
Accumulation units................ 603 14.62 9
Managed Asset Allocation Series:
Accumulation units................ 8,256 17.07 141
Equity Income Series:
Accumulation units................ 6,380 19.66 125
Social Awareness Series:
Accumulation units................ 3,711 32.32 120
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Total net assets $17,205
======
See accompanying notes.
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VARIABLE ANNUITY ACCOUNT III
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STATEMENT OF OPERATIONS AND
CHANGES IN NET ASSETS YEAR ENDED DECEMBER 31, 1998
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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
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<S> <C> <C> <C> <C> <C> <C>
Dividend distributions................................ $ 50 $ 58 $ 91 $ 9 $ 38 $ 3
Expenses (NOTE 2):
Mortality and expense risk fee..................... (53) (48) (37) 2 (8) 5
Administrative fee................................. (1) --- --- --- --- ---
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Net investment income (loss).......................... (4) 10 54 11 30 8
Capital gain distributions............................ 644 369 --- 48 --- 55
Realized gain (loss) on investments................... 1,185 203 (5) 19 (19) 72
Unrealized appreciation (depreciation) on investments. 337 (412) 57 20 26 6
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Net realized and unrealized gain on investments....... 2,166 160 52 87 7 133
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Net increase in net assets resulting from operations.. 2,162 170 106 98 37 141
Net assets at beginning of year....................... 9,098 3,286 1,740 402 638 647
Variable annuity deposits (NOTES 2 AND 3)............. 2,630 1,958 5,646 389 116 274
Terminations and withdrawals (NOTES 2 AND 3).......... (3,979) (2,193) (5,406) (359) (186) (377)
Annuity payments (NOTES 2 AND 3)...................... (167) (4) (23) (5) (15) (15)
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Net assets at end of year............................. $ 9,744 $ 3,217 $ 2,063 $ 525 $ 590 $ 670
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</TABLE>
See accompanying notes.
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<TABLE>
<CAPTION>
GLOBAL SPECIALIZED MANAGED
AGGRESSIVE ASSET ASSET EQUITY SOCIAL
BOND ALLOCATION ALLOCATION INCOME AWARENESS
SERIES SERIES SERIES SERIES SERIES
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<S> <C> <C> <C> <C> <C>
Dividend distributions................................ $--- $--- $ 2 $ 1 $---
Expenses (NOTE 2):
Mortality and expense risk fee..................... (1) (1) 7 1
Administrative fee................................. --- --- --- --- ---
----------------------------------------------------------------------------
Net investment income (loss).......................... --- (1) 1 8 1
Capital gain distributions............................ --- 3 1 3 2
Realized gain (loss) on investments................... (1) 1 2 4 6
Unrealized appreciation (depreciation) on investments. 2 (1) 13 3 18
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Net realized and unrealized gain on investments....... 1 3 16 10 26
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Net increase in net assets resulting from operations.. 1 2 17 18 27
Net assets at beginning of year....................... 6 17 11 66 80
Variable annuity deposits (NOTES 2 AND 3)............. 15 15 118 86 28
Terminations and withdrawals (NOTES 2 AND 3).......... (21) (25) (5) (45) (15)
Annuity payments (NOTES 2 AND 3)...................... --- --- --- --- ---
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Net assets at end of year............................. $ 1 $ 9 $141 $125 $120
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</TABLE>
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VARIABLE ANNUITY ACCOUNT III
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NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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., a wholly-owned subsidiary of SBL.
SMC has engaged T. Rowe Price Associates, Inc. to provide subadvisory
services for the Managed Asset Allocation Series and the Equity Income
Series; Meridian Investment Management Corporation to provide subadvisory
services for the Specialized Asset Allocation Series and Strong Capital
Management, Inc. to provide subadvisory services to the Small Cap Series.
Lexington Management Corporation (LMC) served as subadvisor for the
Worldwide Equity Series until November 1, 1998, when LMC was replaced by
OppenheimerFunds, Inc. Effective December 31, 1998, LMC resigned as
subadvisor for Global Aggressive Bond Series, which will be advised by SMC.
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.
The cost of investments purchased and proceeds from investments sold for the
year ended December 31 was as follows:
COST OF PROCEEDS
PURCHASES FROM SALES
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(IN THOUSANDS)
Growth Series................................. $3,741 $4,687
Growth-Income Series.......................... 2,455 2,345
Money Market Series........................... 5,799 5,542
Worldwide Equity Series....................... 447 366
High-Grade Income Series...................... 166 226
Emerging Growth Series........................ 334 395
Global Aggressive Bond Series................. 15 21
Specialized Asset Allocation Series........... 18 28
Managed Asset Allocation Series............... 120 7
Equity Income Series.......................... 89 45
Social Awareness Series....................... 31 15
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 gain distributions paid
by the mutual fund to the Account are reinvested in additional shares of
each respective series. Dividend income and capital gain distributions are
recorded as income on the ex-dividend date.
FEDERAL INCOME TAXES -- The operations of the Account are included in the
operations of SBL. Under current law, no federal income taxes are allocated
by SBL to the operations of 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.
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 charges in 1998.
3. SUMMARY OF UNIT TRANSACTIONS (IN THOUSANDS)
UNITS
-----
Growth Series:
Variable annuity deposits......................................... 25
Terminations, withdrawals, annuity payments and expense charges... 40
Growth-Income Series:
Variable annuity deposits......................................... 21
Terminations, withdrawals, annuity payments and expense charges... 24
Money Market Series:
Variable annuity deposits......................................... 195
Terminations, withdrawals, annuity payments and expense charges... 187
Worldwide Equity Series:
Variable annuity deposits......................................... 20
Terminations, withdrawals, annuity payments and expense charges... 18
High-Grade Income Series:
Variable annuity deposits......................................... 4
Terminations, withdrawals, annuity payments and expense charges... 8
Emerging Growth Series:
Variable annuity deposits......................................... 12
Terminations, withdrawals, annuity payments and expense charges... 16
Global Aggressive Bond Series:
Variable annuity deposits......................................... 1
Terminations, withdrawals, annuity payments and expense charges... 2
Specialized Asset Allocation Series:
Variable annuity deposits......................................... 1
Terminations, withdrawals, annuity payments and expense charges... 2
Managed Asset Allocation Series:
Variable annuity deposits......................................... 8
Terminations, withdrawals, annuity payments and expense charges... ---
Equity Income Series:
Variable annuity deposits......................................... 5
Terminations, withdrawals, annuity payments and expense charges... 2
Social Awareness Series:
Variable annuity deposits......................................... 1
Terminations, withdrawals, annuity payments and expense charges... 1
