<PAGE> 1
AS FILED PURSUANT TO RULE 497(c)
REGISTRATION NO. 333-07987
SECURITY FIRST LIFE SEPARATE ACCOUNT A
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GROUP FLEXIBLE PAYMENT
VARIABLE ANNUITY CONTRACTS
Security First Life Insurance Company
11365 West Olympic Boulevard
Los Angeles, California 90064
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The group flexible payment fixed and variable contracts (the "Contracts")
described in this prospectus were initially issued by Fidelity Standard Life
Insurance Company ("Fidelity Standard Life", a wholly-owned subsidiary of
Security First Life Insurance Company ("Security First Life")). Upon
consummation of an assumption reinsurance agreement entered into between the
parties, the Contracts will be reinsured by Security First Life. See
"Reinsurance of Previously Issued Contracts", on Page 9. These Contracts are
designed to provide annuity benefits to employees of public school systems and
certain tax-exempt organizations as tax deferred annuity contracts under the
provisions of Section 403(b) of the Internal Revenue Code of 1986 (the "Code"),
to retirement plans that qualify under Section 401 of the Code, to employees
covered under employer deferred compensation plans which are qualified under
Section 457 of the Code, and to individuals as individual retirement annuities
under Section 408 of the Code.
Participants may allocate premiums and cash value to one or more series of the
Separate Account (the "Series"). The assets of the Series will be used to
purchase, at net asset value, shares of (i) the Money Market Portfolio and
Growth Portfolio of the Variable Insurance Products Fund; (ii) the Asset Manager
Portfolio, Contrafund Portfolio and Index 500 Portfolio of the Variable
Insurance Products Fund II; (iii) the T. Rowe Price Bond Series (formerly Bond
Series), the T. Rowe Price Growth and Income Series (formerly Growth and Income
Series) and the Virtus U.S. Government Income Series (formerly U.S. Government
Income Series) of the Security First Trust; (iv) the International Portfolio of
the Scudder Variable Life Investment Fund; and (v) the Small Capitalization
Portfolio of The Alger American Fund (referred to herein as the "Funds"). The
prospectus for each of these Funds describes their investment objectives.
This prospectus sets forth information a prospective investor should know before
investing. Additional information about the Contracts has been filed with the
Securities and Exchange Commission ("SEC") in a Statement of Additional
Information, dated November 6, 1996, which information is incorporated herein by
reference and is available without charge upon written request to Security First
Life Insurance Company, P.O. Box 92193, Los Angeles, California 90009 or by
telephoning 1(800)283-4536.
The table of contents of the Statement of Additional Information appears on Page
22 of the Prospectus.
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THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF SHARES OF ANY UNDERLYING FUND
FOR WHICH A CURRENT PROSPECTUS HAS NOT BEEN RECEIVED AND IN NO EVENT WILL
DESIGNATION OF AN UNDERLYING FUND FOR WHICH A CURRENT PROSPECTUS HAS NOT BEEN
RECEIVED BE PERMITTED. PLEASE READ AND RETAIN THIS PROSPECTUS FOR FUTURE
REFERENCE.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Prospectus dated November 6, 1996 SF 224 R1 (11/96)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Glossary....................................................................................... 3
Summary of the Contract........................................................................ 4
Fee Tables..................................................................................... 6
Condensed Financial Information................................................................ 8
Performance.................................................................................... 8
Financial Information.......................................................................... 8
Description of Security First Life Insurance Company,
The Separate Account and The Funds........................................................... 9
Reinsurance of Previously Issued Contracts................................................. 9
The Insurance Company...................................................................... 9
The General Account........................................................................ 9
The Separate Account....................................................................... 9
The Funds.................................................................................. 10
Principal Underwriter.......................................................................... 11
Servicing Agent................................................................................ 12
Custody of Securities.......................................................................... 12
Contract Charges............................................................................... 12
Premium Taxes.............................................................................. 12
Sales Charges.............................................................................. 12
Administration Fees........................................................................ 13
Transaction Charges........................................................................ 13
Mortality and Administrative Expense Risk Charges.......................................... 13
Distribution Risk Charge................................................................... 13
Free Look Period........................................................................... 13
Description of the Contracts................................................................... 14
General.................................................................................... 14
Purchase Payments.......................................................................... 14
Conversions................................................................................ 14
Loans...................................................................................... 15
Modification of the Contracts.............................................................. 15
Assignment................................................................................. 15
Accumulation Period............................................................................ 15
Crediting Accumulation Units in the Separate Account....................................... 15
Valuation of Accumulation Units............................................................ 15
Net Investment Factor...................................................................... 15
Surrenders................................................................................. 16
Statement of Account....................................................................... 16
Annuity Benefits............................................................................... 16
Variable Annuity Payments.................................................................. 16
Level Payments Varying Annually............................................................ 16
Assumed Investment Return.................................................................. 17
Election of Annuity Date and Form of Annuity............................................... 17
Frequency of Payment....................................................................... 18
Annuity Unit Values........................................................................ 18
Death Benefits................................................................................. 18
Death Benefit Before the Annuity Date...................................................... 18
Death Benefit After the Annuity Date....................................................... 19
Federal Income Tax Status...................................................................... 19
Withholding................................................................................ 20
Multiple Contracts......................................................................... 20
Obtaining Tax Advice....................................................................... 20
Voting Rights.................................................................................. 20
Legal Proceedings.............................................................................. 21
Additional Information......................................................................... 21
Table of Contents of Statement of Additional Information....................................... 22
</TABLE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus in connection with
the offer described herein 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 in any jurisdiction to any person to
whom such offer would be unlawful therein.
2
<PAGE> 3
GLOSSARY
As used in this Prospectus, these terms have the following meanings:
ACCUMULATION UNIT -- A measuring unit used to determine the value of a
Participant's interest in a General Account or Separate Account Series under a
Contract at any time before Annuity payments commence.
ANNUITANT -- The individual on whose life Annuity payments under a Contract are
based.
ANNUITY -- A series of periodic payments made to an Annuitant for a defined
period of time.
ANNUITY DATE -- The date on which Annuity payments begin.
ANNUITY UNIT -- A measuring unit used to determine the amount of Variable
Annuity payments based on a Separate Account Series after such payments have
commenced.
ASSUMED INVESTMENT RETURN -- The investment rate selected by the Annuitant for
use in determining the Variable Annuity payments.
BENEFICIARY -- The person who has the right to receive a Death Benefit on the
death of the Participant.
BUSINESS DAY -- Each Monday through Friday except for days the New York Stock
Exchange is not open for trading.
CERTIFICATE -- The form given to Participants describing their rights under a
Contract. No Certificates are issued to Participants under deferred compensation
or qualified retirement plans.
CERTIFICATE DATE -- The date a Participant's Certificate is issued, or the date
when a Participant's Account is established where no Certificate is issued.
CERTIFICATE YEAR -- A period of 12 consecutive months beginning on the
Certificate Date and each anniversary of this date.
CONTRACT -- The agreement between Security First Life and the group
contractholder covering the rights of the whole group.
FIXED ANNUITY -- An Annuity providing guaranteed level payments. Such payments
are not based upon the investment experience of the Separate Account.
FUND -- An open end management investment company, or series thereof, registered
under the Investment Company Act of 1940 ("1940 Act"), which serves as the
underlying investment medium for a Series of the Separate Account.
GENERAL ACCOUNT -- All assets of Security First Life other than those in the
Separate Account or any of its other segregated asset accounts.
NORMAL ANNUITY DATE -- The earlier of (i) the first day of the month coincident
with or immediately preceding the date on which a distribution must commence
under the terms of the Plan to which the Contract is issued, or (ii) the first
day of the month coincident with or next following the anniversary of the
Certificate Date nearest the Participant's 75th birthday.
OWNER -- The person who has title to the Contract.
PARTICIPANT -- The individual by or for whom Purchase Payments are made under a
Contract.
PARTICIPANT'S ACCOUNT -- The sum of the values of all Accumulated Units credited
for a Participant under a Contract.
PLAN -- The 403(b) plan, deferred compensation plan, qualified retirement plan
or individual retirement annuity with respect to which the Contract is issued.
PURCHASE PAYMENT -- The amounts paid to Security First Life in order to provide
Annuity benefits under the Contract.
SEPARATE ACCOUNT -- The segregated asset account entitled "Security First Life
Separate Account A" which has been established by Security First Life pursuant
to Delaware law to receive and invest amounts allocated to provide Variable
Annuity benefits under the Contracts. The Separate Account is registered as a
unit investment trust under the 1940 Act.
3
<PAGE> 4
SERIES -- A division of the Separate Account, the assets of which consist of
shares of a Fund, or an accounting series maintained for Security First Life's
General Account to determine values used to provide Fixed Annuity benefits under
the Contracts.
SURRENDER CHARGE -- A percentage charge which may be deducted upon full or
partial surrender.
VALUATION DATE -- Any Business Day used by the Separate Account to determine the
value of part or all of its assets for purposes of determining Accumulation and
Annuity Unit values for the Contracts. Security First Life will establish
Valuation Dates at its discretion, but until notice to the contrary is given
there will be one Valuation Date in each calendar week for Annuity Unit values,
such date being the last Business Day in a week. Accumulation unit values will
be determined each Business Day.
VALUATION PERIOD -- The period of time from one Valuation Date through the next
Valuation Date.
VARIABLE ANNUITY -- An Annuity providing payments which will vary annually in
accordance with the net investment experience of the applicable Separate Account
Series.
SUMMARY OF THE CONTRACT
THE CONTRACT
The Contract is a combined fixed and variable annuity contract which may be
issued to plans qualified for special tax treatment under Section 403(b) of the
Code (tax sheltered annuities), retirement plans which qualify under Section 401
of the Code, Section 457 deferred compensation plans and Section 408 individual
retirement annuities. This prospectus is intended to serve as a disclosure
document only for the variable portion of the Contract.
PURCHASE PAYMENTS
Purchase Payments under the Contract may be made to the General Account, the
Separate Account or allocated between them in accordance with the election of
the Participant. The minimum Purchase Payment is $20 with an annual minimum of
$240. There is no initial sales charge; however, certain charges and deductions
will be made to the Participant's Account. (See "Contract Charges," page 12.)
Amounts allocated to a Series of the Separate Account may be converted to one or
more of the other Separate Account Series at any time and may be transferred to
the General Account at any time before the Annuity Date. Amounts allocated to
the General Account may be transferred to the Separate Account subject to
certain limitations as to time and amount. (See "Conversions," page 14.) The
minimum conversion is the lesser of $500 or the balance of the Participant's
Account in the Series.
SEPARATE ACCOUNT
Pursuant to the Participant's designation, Purchase Payments allocated to
the Separate Account are invested at net asset value in Accumulation Units of
one or more of ten series, each of which consists of the shares of a different
Fund. The Funds presently consist of the Money Market Portfolio and Growth
Portfolio of the Variable Insurance Products Fund, the Asset Manager Portfolio,
Contrafund Portfolio and Index 500 Portfolio of the Variable Insurance Products
Fund II, the T. Rowe Price Bond Series (formerly Bond Series), the T. Rowe Price
Growth and Income Series (formerly Growth and Income Series) and the Virtus U.S.
Government Income Series (formerly U.S. Government Income Series) of the
Security First Trust, the International Portfolio of the Scudder Variable Life
Investment Fund, and the Small Capitalization Portfolio of The Alger American
Fund. The investment adviser of the Variable Insurance Products Fund and the
Variable Insurance Products Fund II is Fidelity Management & Research Company
("FMR"). The investment adviser and manager of Security First Trust is Security
First Investment Management Corporation ("Security Management"). T. Rowe Price
Associates, Inc. ("Price Associates") is subadvisor to Security Management with
respect to the T. Rowe Price Bond Series and T. Rowe Price Growth and Income
Series, and Virtus Capital Management, Inc. ("Virtus") is subadvisor to Security
Management with respect to the Virtus U.S. Government Income Series. The
investment adviser and manager of the Scudder Variable Life Investment Fund is
Scudder, Stevens & Clark Inc. ("Scudder"). The investment adviser and manager of
The Alger American Fund is Fred Alger Management, Inc. ("Alger Management").
(See "The Separate Account," page 9 and "The Funds," page 10.)
CHARGES AND DEDUCTIONS
The reinsured Contract will permit Security First Life to deduct a maximum
administrative fee of $27.50 plus $2.50 for each Series in which the Participant
invests. The fee is payable on each anniversary of the Certificate Date. Until
further notice to the Participant, Security First Life will waive these
administrative fees. (See "Administrative Fees," Page 13).
A transaction charge of $10 will be deducted from the Participant's Account
for each conversion from a Separate Account Series or between the Separate
Account and the General Account and upon annuitization of all or a portion of
4
<PAGE> 5
the Participant's Account. In addition, a transaction charge of the lesser of
$10 or 2% of the amount withdrawn will be deducted from the Participant's
Account upon each partial or full surrender. Transaction charges for conversions
from one series of the Separate Account to another series of the Separate
Account are currently waived. (See "Transaction Charges," page 13 and "Sales
Charges," page 12.)
Daily deductions will be made for mortality risks in the amount of .002192%
(.80% per annum), for expense risks in the amount of .001233% (.45% per annum)
and for distribution risks (sales load) in the amount of .00274% (.10% per
annum).
A surrender charge (contingent deferred sales charge) may be deducted in the
event the Participant requests a full or partial surrender. The charge is based
on a graduated table of charges starting at 7% for Purchase Payments credited
within the calendar year of the surrender and decreasing 1% for each preceding
calendar year or part thereof from the date of receipt and declining to 0% for
Purchase Payments received earlier than the fourth calendar year prior to the
surrender. No charge will be made for that part of the first surrender in a
Certificate Year that does not exceed 10% from the Participant's interest in the
Separate Account and 10% from his or her interest in the General Account. (See
"Sales Charges," page 12.)
Premium taxes payable to any state or other governmental agency may be
deducted from the Participant's Account when incurred. Premium taxes currently
range from 0% to 2.35% (3.5% in Nevada). Until further notice to the
Participant, Security First Life will waive deduction of premium taxes. (See
"Premium Taxes," page 12.)
FREE LOOK PERIOD
At any time within twenty days (or such longer period as required by state
law) after the receipt of the Contract it may be returned for cancellation and a
full refund of all Purchase Payments or, if required by state law, the greater
of the Purchase Payments or the account value. (See "Free Look Period," page
13).
VARIABLE ANNUITY PAYMENTS
Annuity payments will start on the Annuity Date. The Participant selects the
Annuity Date, an Annuity payment option, and an Assumed Investment Return. Any
of these selections may be changed prior to the Annuity Date. The Variable
Annuity payment will vary annually based on a comparison of the Assumed
Investment Returns with the investment experience of the Series in which the
Annuity Units are invested. (See "Variable Annuity Payments," page 16.) If
Annuity payments from any one Series would be less than $50, Security First Life
reserves the right to change the frequency of the payments from that Series to
such intervals as will result in payments of at least $50 from each Series. (See
"Frequency of Payment," page 18.)
SURRENDERS
If permitted by the Plan, a Participant may surrender all or part of his or
her account before the Annuity Date. Requests for partial or full surrenders
must be made in writing. However, no partial surrender from a Series is
permitted if it would reduce the Participant's interest in the Series to less
than $200, unless the entire amount allocated to that Series is being
surrendered. A surrender charge may be assessed and a transaction charge will be
assessed. (See "Sales Charges," page 12 and "Transaction Charges," page 13.) In
addition, the amounts surrendered, which represent income over any tax basis,
will be taxed as ordinary income and may be subject to a penalty tax under the
Code. Certain restrictions are applicable to withdrawals from Contracts funding
retirement plans qualified for special tax treatment under the Code. (See
"Federal Income Tax Status," page 19.)
LOANS (SECTION 403(B) PLANS ONLY)
Participants whose Contracts are issued under a Plan which qualifies under
Section 403(b) of the Code may be entitled to obtain a loan from that portion of
the Participant's Account allocated to the General Account. Security First Life
reserves the right to terminate loans and to change the terms under which loans
may be made. Any such action would not affect outstanding loans. (See "Loans,"
page 15.) Loan proceeds may be considered a distribution for tax purposes (See
"Federal Income Tax Status," page 19.)
DEATH BENEFIT
Unless otherwise restricted by the Plan, in the event of the Participant's
death prior to the Annuity Date, the Beneficiary may elect either to receive
death benefits in a lump sum or to apply the Annuity Value under any of the
available Annuity options contained in the Contract. If a Participant who has
not attained age 65 dies before the Annuity Date, the amount of any lump sum
settlement will be the greater of the value of the Participant's Account or the
total of the Participant's Purchase Payments, less any Purchase Payments
previously withdrawn as partial surrenders or applied to annuity options. (See
"Death Benefits," page 19.)
5
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FEE TABLES
PARTICIPANT TRANSACTION EXPENSES
<TABLE>
<CAPTION>
Calendar
Years
Between
Surrender
and
Purchase
Payment Percentage
------------ ----------
<C> <S> <C> <C>
(a) Contingent Deferred Sales 0 7%
Charge (as a percentage
of amount surrendered) 1 but not 2 6%
2 but not 3 5%
3 but not 4 4%
4 but not 5 3%
5 or more 0%
(b) Transaction Charge $10 for each surrender or
annuitization
(c) Administrative Charges Maximum $55 per year
(currently waived)
(d) Conversion Charge (applies $10 per conversion
to election to convert
Accumulation or Annuity
Units from any one Series
to another)
(currently waived)
</TABLE>
SEPARATE ACCOUNT EXPENSES
(AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE.
DEDUCTED DAILY FROM THE SEPARATE ACCOUNT.)
<TABLE>
<S> <C>
Mortality Risk Fees .80% per annum
Expense Risk Fees .45% per annum
Distribution Risk Charge (Sales Load) .10% per annum
Total Separate Account 1.35% per annum
</TABLE>
FUND ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
Virtus
Money Asset Index U.S. Govt.
Market Growth Manager Contrafund 500 Income
Portfolio Portfolio Portfolio Portfolio Portfolio* Series
--------- --------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(a) Management Fee.... 0.24% 0.61% 0.71% 0.61% 0.09% 0.22%
(b) Other Expenses.... 0.09% 0.09% 0.08% 0.11% 0.19% 0.48%
(c) Total Annual
Expenses.......... 0.33% 0.70% 0.79% 0.72% 0.28% 0.70%
</TABLE>
<TABLE>
<CAPTION>
T. Rowe
T. Rowe Price
Price Growth Small
Bond & Income International Capitalization
Series Series Portfolio Portfolio
-------- --------- -------------- ---------------
<S> <C> <C> <C> <C>
(a) Management Fee................. 0.50% 0.50% 0.88% 0.85%
(b) Other Expenses................. 0.79% 0.24% 0.20% 0.07%
(c) Total Annual Expenses.......... 1.29% 0.74% 1.08% 0.92%
</TABLE>
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* Effective August 27, 1992 (commencement of operations), the Portfolio's
investment advisor voluntarily agreed to limit expenses to .28% of average
net assets.
6
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EXAMPLES
<TABLE>
<CAPTION>
CONDITIONS
SEPARATE A PARTICIPANT WOULD PAY THE FOLLOWING EXPENSES ON TIME PERIODS
ACCOUNT A $1,000 INVESTMENT ASSUMING 5% ANNUAL RETURN ON ----------------------------------
SERIES ASSETS: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------- -------------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Money Market (a) upon surrender at the end of the stated time (a) $ 83 $ 103 $ 101 $209
Portfolio period
(b) if the Certificate WAS NOT surrendered (b) 17 53 91 199
(c) if you annuitize at the end of the applicable (c) 27 63 101 209
time period
- --------------- -------------------------------------------------- ------ ------- ------- --------
Growth SAME (a) 86 114 120 248
Portfolio (b) 21 64 110 238
(c) 31 74 120 248
- --------------- -------------------------------------------------- ------ ------- ------- --------
Asset SAME (a) 87 116 125 257
Manager (b) 22 67 115 247
Portfolio (c) 32 77 125 257
- --------------- -------------------------------------------------- ------ ------- ------- --------
Contrafund SAME (a) 87 114 121 250
Portfolio (b) 21 65 111 240
(c) 31 75 121 250
- --------------- -------------------------------------------------- ------ ------- ------- --------
Index SAME (a) 82 101 99 203
500 (b) 17 51 89 193
Portfolio (c) 27 61 99 203
- --------------- -------------------------------------------------- ------ ------- ------- --------
Virtus U.S. SAME (a) 86 114 120 248
Govt. (b) 21 64 110 238
Income (c) 31 74 120 248
Series
- --------------- -------------------------------------------------- ------ ------- ------- --------
T. Rowe SAME (a) 92 131 150 307
Price (b) 27 82 140 297
Bond (c) 37 92 150 307
Series
- --------------- -------------------------------------------------- ------ ------- ------- --------
T. Rowe SAME (a) 87 115 122 252
Price (b) 21 65 112 242
Growth & (c) 31 75 122 252
Income
Series
- --------------- -------------------------------------------------- ------ ------- ------- --------
International SAME (a) 90 125 140 287
Portfolio (b) 25 76 130 277
(c) 35 86 140 287
- --------------- -------------------------------------------------- ------ ------- ------- --------
Small SAME (a) 88 120 132 271
Capitalization (b) 23 71 122 261
Portfolio (c) 33 81 132 271
- --------------- -------------------------------------------------- ------ ------- ------- --------
</TABLE>
7
<PAGE> 8
EXPLANATION OF FEE TABLE AND EXAMPLES
1. The purpose of the foregoing tables and examples is to assist the Participant
in understanding the various costs and expenses that he or she will bear
directly or indirectly. The table reflects expenses of the Separate Account
as well as the underlying funds. For additional information see "Contract
Charges," beginning on page 12.
2. The investment adviser to the Index 500 Portfolio voluntarily reimbursed
certain expenses of the Portfolio. If there had been no reimbursement, total
expenses would have been 0.81% (see the Variable Insurance Products Fund II
prospectus for more information).
3. The examples assume that there were no transactions (other than in connection
with the assumed redemptions or annuitizations at the end of the stated
periods) that would result in the imposition of Transaction Charges or the
Conversion Charge. The surrender charge percentages shown are applied against
the gross amount required to be redeemed in order to produce the requested
surrender. The Transaction Charge imposed upon surrender is considered to
constitute part of the gross amount redeemed for purposes of computing the
amount of surrender charge to be assessed. (See "Sales Charges," page 12.)
Administrative Charges, which vary from $30.00 to $55.00 annually depending
on how many Series the Participant has invested in, are not reflected in the
examples because they are currently waived. Premium taxes are not reflected.
Presently, premium taxes ranging from 0% to 2.35% (3.5% in Nevada) may be
deducted from each Purchase Payment, or upon annuitization. Until further
notice, Security First Life currently absorbs these charges.
4. The examples reflect the fact that a purchase payment withdrawn at the end of
a 1 year period will necessarily be withdrawn in the calendar year following
the calendar year of the purchase payment and thus will incur a surrender
charge of 6% rather than the maximum of 7%. Similarly, the data for the
3-year periods reflect a surrender charge of 4%.
5. NEITHER THE TABLE NOR THE EXAMPLES ARE REPRESENTATIONS OF FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
CONDENSED FINANCIAL INFORMATION
Financial information for the Separate Account is not presented herein
because, as of the date of this prospectus, the assumptive reinsurance
transaction between Security First Life and Fidelity Standard Life had not been
consummated. Accordingly, the Separate Account, at that date, held no assets
attributable to the Contracts. The Separate Account, however, funds other
contracts issued by Security First Life that are not described in this
prospectus.
PERFORMANCE
Security First Life from time to time will advertise the yield and effective
yield on the Series invested in the Money Market Portfolio of the Separate
Account and the average annual total returns for the other Series in the
Separate Account. Yields and average annual total returns are determined in
accordance with the methods of computation set forth by the SEC in the Form N-4
Registration Statement and are more particularly described in the Statement of
Additional Information. Yields are expressed for a seven day period, and average
annual total returns are expressed for at least one, five and ten year periods
(or from inception if shorter).
The yields of the Series invested in Money Market Portfolio are determined
based upon the change in the value of an outstanding unit in the Separate
Account over a seven day period and annualizing the result. The computation
takes into account recurring deductions from account values, but no deduction is
made for transaction or surrender charges which may apply upon a full or partial
surrender. These charges are described in "Sales Charges," page 12 and
"Transaction Charges," page 13. In the event of a surrender of the Contract, the
imposition of surrender and transaction charges will have the effect of reducing
the yield earned over the period of ownership.
The computation of average annual total returns does take into consideration
recurring charges and any non-recurring charges applicable to a Contract which
is surrendered in full at the end of the stated holding period.
FINANCIAL INFORMATION
Financial statements of Security First Life are contained in the Statement
of Additional Information.
8
<PAGE> 9
DESCRIPTION OF SECURITY FIRST LIFE INSURANCE COMPANY,
THE SEPARATE ACCOUNT AND THE FUNDS
REINSURANCE OF PREVIOUSLY ISSUED CONTRACTS
On August 15, 1996, Security First Life and its subsidiary, Fidelity
Standard Life entered into an assumption reinsurance agreement (the
"Agreement"). Under the Agreement, Security First Life will acquire, on an
assumption reinsurance basis, effective as of October 31, 1996 variable annuity
contracts of Fidelity Standard Life ("reinsured contracts"), including contracts
which, except for the issuer, are identical in all material respects to the
Contracts otherwise offered by this prospectus. Thus, Security First Life will
assume all the liabilities and obligations under the reinsured contracts. Upon
consummation of the Agreement, all future payments made under the reinsured
contracts will be made directly to or by Security First Life.
Reinsured Contract Owners will have the same contract rights and the same
contract values as they did before the reinsurance transaction. However, they
will look to Security First Life instead of to Fidelity Standard Life to fulfill
the terms of their Contracts. Pursuant to the Agreement, the assets held by
Fidelity Standard Life as reserves for those Contracts will be transferred
intact to the Separate Account. As of the effective date of the assumption by
Security First Life, the assets of the Separate Account will only be available
to satisfy obligations under the variable annuity contracts funded by the
Separate Account. The Separate Account is not chargeable with liabilities
arising out of any other business that Fidelity Standard Life has conducted and
the assets of the Separate Account cannot be reached by Fidelity Standard Life's
creditors. Similarly, after assumption by Security First Life, the Separate
Account is not chargeable with liabilities arising out of other business of
Security First Life. (See "The Separate Account," page 9.)
Under the insurance laws of some states, Contract Owners or Participants
(collectively, "Named Insured(s)") are afforded the right to reject, and in at
least one state, must affirmatively consent to, having their Contracts reinsured
by Security First Life under the Agreement. Affected Contract Owners and
Participants will be notified of such right, and of the procedures they should
observe. In any case of such rejection (or, where applicable, failure to give
affirmative consent), the liability for the Named Insured's Contract will remain
with Fidelity Standard Life, and Security First Life will have no liability to
the Named Insured under the Contract. It is contemplated that if any Contracts
remain with Fidelity Standard Life, however, they will be indemnity reinsured by
Security First Life.
THE INSURANCE COMPANY
Security First Life is a stock life insurance company founded in 1960 and
organized under the laws of the state of Delaware. Its principal executive
offices are located at 11365 West Olympic Boulevard, Los Angeles, California
90064. Security First Life is a wholly owned subsidiary of Security First Group
("SFG") (formerly The Holden Group, Inc.). The outstanding voting common stock
of SFG is owned by London Insurance Group, Inc., a Canadian insurance service
corporation and a publicly traded subsidiary of the Trilon Financial Corporation
of Toronto, Canada. Security First Life is authorized to transact business of
life insurance, including annuities. Security First Life presently is licensed
to do business in 49 states and the District of Columbia.
THE GENERAL ACCOUNT
The General Account is made up of all of the assets of Security First Life,
other than those in the Separate Account and any other segregated asset account.
The Participant may allocate amounts to the General Account at the time of
purchase or by subsequent transfers from the Separate Account. Amounts allocated
to the General Account will be credited with interest on the basis of interest
rates guaranteed or declared by Security First Life under the terms of the
Contract. Instead of the Participant bearing the risk of fluctuations in the
value of the assets as is the case for amounts invested in the Separate Account,
Security First Life bears the full investment risk for amounts in the General
Account. Security First Life has sole discretion to invest the assets of the
General Account, subject to applicable law. The General Account provisions of
the Contract are not intended to be offered by this Prospectus. Participants are
referred to the terms of the contract itself for more information concerning the
General Account provisions.
THE SEPARATE ACCOUNT
The Separate Account was established by Security First Life pursuant to a
resolution of its Board of Directors on May 29, 1980, in accordance with the
provisions of the Delaware Insurance Code. It is registered with the SEC as a
unit investment trust under the 1940 Act. Registration with the SEC does not
involve supervision by the Commission of the management or investment practices
or policies of the Separate Account or Security First Life.
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The Separate Account and each Series therein are administered and accounted
for as part of the general business of Security First Life, but the income and
realized capital gains or losses of each Series are credited to or charged
against the assets held for that Series in accordance with the terms of the
Contracts. This is done without regard to the income, realized capital gains or
losses of any other Series or the experience of Security First Life in any other
business it may conduct. The assets of each of these Series are not chargeable
with the liabilities arising out of any other business Security First Life may
conduct.
All obligations under the Contracts, including the guarantee to make Annuity
payments, are general corporate obligations of Security First Life, and all of
Security First Life's assets are available to meet its expenses and obligations
under the Contracts. However, while Security First Life is obligated to make the
Variable Annuity payments under the Contract, the amount of such payments is
guaranteed only to the extent of the level amount calculated at the beginning of
each Annuity year. (See "Level Payments Varying Annually," page 16.)
The Funds consist of (i) the Money Market Portfolio and Growth Portfolio of
the Variable Insurance Products Fund; (ii) the Asset Manager Portfolio,
Contrafund Portfolio and Index 500 Portfolio of the Variable Insurance Products
Fund II; (iii) the T. Rowe Price Bond Series, T. Rowe Price Growth and Income
Series and Virtus U.S. Government Income Series of the Security First Trust;
(iv) the International Portfolio of the Scudder Variable Life Investment Fund;
and (v) the Small Capitalization Portfolio of The Alger American Fund. The
shares of each Fund are purchased, without sales charge, for the corresponding
Series at the net asset value per share next for each Fund following receipt of
the applicable payment. Any dividend or capital gain distributions received from
a Fund are reinvested in Fund shares which are retained as assets of the
applicable Series. Fund shares will be redeemed without fee to the Series to the
extent necessary for Security First Life to make Annuity or other payments under
the Contracts. The Funds listed above include, but are not limited to, the Funds
currently available for investment under the Fidelity Standard Life Contracts to
be reinsured by Security First Life.
If shares of any Fund should no longer be available for investment by a
Series or if in the judgment of Security First Life's management further
investment in shares of any Fund should become inappropriate in view of the
purposes of the Contracts, Security First Life may substitute for each Fund
share already purchased, and apply future Purchase Payments under the Contracts
to the purchase of shares of another Fund or other securities. No substitution
of securities of any Series may take place, however, without prior notice to
Participants and the prior approval of the SEC.
THE FUNDS
Each of the Funds is a portfolio or series of an open-end management
investment company registered with the SEC under the 1940 Act. Registration does
not involve supervision by the SEC of the investments or investment policies of
the Funds. There can be no assurance that the investment objectives of the Funds
will be achieved.
Variable Insurance Products Fund and Variable Insurance Products Fund II are
Massachusetts business trusts. Each is divided into separate portfolios. The
following portfolios are available under the Contracts:
Money Market Portfolio seeks to obtain as high a level of current income as
is consistent with preserving capital and providing liquidity. The portfolio
will invest only in high quality U.S. dollar denominated money market securities
of domestic and foreign issuers.
Growth Portfolio seeks to achieve capital appreciation normally through the
purchase of common stocks (although the portfolio's investments are not
restricted to any one type of security). Capital appreciation may also be found
in other types of securities, including bonds and preferred stocks.
Asset Manager Portfolio seeks high total return with reduced risk over the
long-term by allocating its assets among stocks, bonds and short-term, fixed
income instruments.
Contrafund Portfolio seeks capital appreciation by investing in companies
that the investment adviser believes to be undervalued due to an overly
pessimistic appraisal by the public.
Index 500 Portfolio seeks investment results that correspond to the total
return (i.e., the combination of capital changes and income) of common stocks
publicly traded in the United States, as represented by the Standard & Poor's
500 Composite Stock Price Index while keeping transaction costs and other
expenses low.
FMR is the investment adviser to each of the portfolios of the Variable
Insurance Products Fund and the Variable Insurance Products Fund II.
The Security First Trust is a Massachusetts business trust which presently
has a number of series, three of which are available under the Contracts:
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Virtus U.S. Government Income Series (formerly U.S. Government Income
Series) seeks to provide current income. The Series pursues this objective by
investing in a professionally managed, diversified portfolio limited primarily
to U.S. government securities.
T. Rowe Price Bond Series (formerly Bond Series) seeks to achieve the
highest investment income over the long-term consistent with the preservation of
principal through investment primarily in marketable debt instruments. Growth of
principal and income will also be objectives with respect to up to 10% of the T.
Rowe Price Bond Series' assets that may be invested in common and preferred
stocks.
T. Rowe Price Growth and Income Series (formerly Growth and Income Series)
seeks capital growth and a reasonable level of current income. While this series
will generally invest in common stocks and other equities, it may, depending on
economic conditions, reduce such investments and substitute fixed income
instruments.
Security Management, a subsidiary of SFG and an affiliate of Security First
Life and Security First Financial, Inc., provides investment advice and
management services to the three series of Security First Trust described above.
Under Subadvisory agreements with Security Management, Price Associates provides
investment management services to the T. Rowe Price Bond Series and T. Rowe
Price Growth and Income Series, and Virtus provides investment management
services to the Virtus U.S. Government Income Series.
Scudder Variable Life Investment Fund is a Massachusetts business trust
which is divided into separate Portfolios. The following Portfolio is available
under the Contracts.
International Portfolio seeks long-term growth of capital primarily through
diversified holdings of marketable foreign equity investments. The Portfolio
invests in companies, wherever organized, which do business primarily outside
the United States. The Portfolio intends to diversify investments among several
countries and to have represented in its holdings business activities in not
less than three different countries. The Portfolio does not intend to
concentrate investments in any particular industry.
The investment adviser of the Scudder Variable Life Investment Fund is
Scudder.
The Alger American Fund is a Massachusetts business trust which has a number
of portfolios, one of which is available under the Contracts.
Small Capitalization Portfolio seeks long-term capital appreciation by
investing in a diversified, actively managed portfolio of equity securities,
primarily of companies within the range of companies included in the Russell
2000 Growth Index. Income is a consideration in the selection of investments but
is not an investment objective of the Portfolio.
The investment adviser of The Alger American Fund is Alger Management.
Funds are available to registered separate accounts offering variable
annuity and variable life products of participating insurance companies and
entities permitted under Section 817(h) of the Code. Although it is not
anticipated that any disadvantage will result, there is a possibility that a
material conflict may arise between the interest of the Separate Account and one
or more of the other separate accounts participating in the Funds. A conflict
may occur due to a change in law affecting the operations of variable life and
variable annuity separate accounts, differences in the voting instructions of
our Owners and those of other companies, or some other reason. In the event of a
conflict, the Separate Account will take any steps necessary to protect Owners
and variable annuity payees, which may include withdrawal of amounts invested in
the Fund by the Separate Account.
The rights of Participants or Beneficiaries to instruct Security First Life
on voting shares of the Funds are described under "Voting Rights," page 20.
Detailed information about the Funds, their investment objectives,
investment portfolios and the charges may be found in the prospectuses of the
Funds. An investor should carefully read the Funds' prospectuses before
investing. Prospectuses for the Variable Insurance Products Fund, the Variable
Insurance Products Fund II, the Security First Trust, the Scudder Variable Life
Investment Fund and The Alger American Fund may be obtained without charge by
written request to Security First Life Insurance Company, P.O. Box 92193, Los
Angeles, California 90009.
PRINCIPAL UNDERWRITER
Security First Financial, Inc., 11365 West Olympic Boulevard, Los Angeles,
California 90064, a broker-dealer registered under the Securities Exchange Act
of 1934 and a member of the National Association of Securities Dealers, Inc., is
the principal underwriter for the Contract. Security First Financial, Inc., is a
Delaware corporation and a subsidiary of SFG.
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SERVICING AGENT
Security First Life receives certain administrative services such as office
space, supplies, utilities, office equipment, travel expenses and periodic
reports pursuant to an agreement with SFG.
CUSTODY OF SECURITIES
The custodian of assets of the Separate Account is Security First Life. The
assets of each Series will be kept physically segregated by Security First Life
and held separate from the assets of the other Series and of any other firm,
person, or corporation. Additional protection for the assets of the Separate
Account is afforded by fidelity bonds covering all of Security First Life's
officers and employees.
CONTRACT CHARGES
Charges under the Contract are assessed for the following: (i) premium
taxes; (ii) surrenders, part of which may be deemed to be a sales charge; (iii)
administrative charges; (iv) certain transactions; and (v) assumption of
mortality risks, administrative expense risks and distribution risks with
respect to the Separate Account. These charges may not be changed under the
Contract, and Security First Life may profit from certain of these charges.
A Participant should note that there are deductions from and expenses paid
out of the assets of the Funds that are described in the Funds' prospectuses.
Security First Life represents that the charges deducted under the Contract,
described below, are, in the aggregate, reasonable in relation to the services
rendered, the expenses expected to be incurred and the risks assumed by Security
First Life.
PREMIUM TAXES
Certain state and governmental entities impose a premium tax of up to 2.35%
(3.50% in Nevada) of Purchase Payments or amounts applied to an Annuity option.
The Contract permits Security First Life to deduct any applicable premium taxes
from the Participant's Account on or after the time they are incurred. Until
further notice, such premium taxes will be absorbed by Security First Life and
will not be charged against a Participant's Account.
SALES CHARGES
No sales charge is deducted from any Purchase Payment. However, a surrender
charge (contingent deferred sales charge) may be imposed upon a partial or full
surrender of the Participant's Account. The surrender charge covers expenses
relating to the sale of the Contract, including commissions paid to sales
personnel and other promotional costs.
Up to 10% of the Participant's Account in each of the Separate Account and
the General Account paid in the first surrender in a calendar year will not be
subject to the surrender charge ("Free Withdrawal Amount"). Amounts surrendered
in excess of the Free Withdrawal Amount may be subject to the surrender charge,
and each surrender will be subject to a transaction charge. (See "Transaction
Charges," page 13).
The amount credited to the Participant's Account with respect to each
Purchase Payment will be subject to a charge equal to the applicable percentage
of such amount at the time a full or partial surrender is made. The charges
amount to:
7% for Purchase Payments received in the calendar year of the surrender;
6% for Purchase Payments received in the calendar year before the surrender;
5% for Purchase Payments received in the 2nd calendar year before the
surrender;
4% for Purchase Payments received in the 3rd calendar year before the
surrender;
3% for Purchase Payments received in the 4th calendar year before the
surrender;
0% for Purchase Payments received prior to the 4th calendar year before the
surrender.
These charges are applied by reducing the Series from which the surrender
will be taken by an amount computed so as to provide the participant with
surrender proceeds in the amount requested net of transaction fees and surrender
charges. Such reduction is determined by dividing the amount elected to be
surrendered plus transactions fees by a factor derived from the above percentage
charges. This factor is equivalent to (a)-(b) where (a) is 1 and (b) is the
percentage charge expressed as a decimal. For example, if a participant requests
a $1,000 surrender, and the applicable sales charge percentage is 6%, the
relevant Series is reduced by ($1,000 + $10)/(1 - .06) = $1,010/0.94 =
$1,074.47. Accumulation Units are cancelled on a first-in, first-out basis. The
effect of this varying schedule of percentage charges is that amounts left in
the Separate Account for longer periods of time are subject to lower charges
than amounts immediately surrendered.
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In the event of a partial surrender, the Participant will receive a check in
the amount requested. Surrender charges, if any, will be deducted from the
Series from which the partial surrender was taken, or proportionally from the
remaining Series in the event that the Series is fully surrendered. Deductions
from the Participant's interest in the General Account, if any, will be from
Purchase Payments and accumulations thereon on a first-in, first-out basis.
ADMINISTRATIVE FEES
At the end of each Certificate year Security First Life may deduct an
administrative fee. This fee will not exceed $27.50 plus $2.50 for each Series
for which there are Accumulation Units included in the value of the
Participant's Account. Therefore, the maximum fee on an annual basis will not
exceed $55. The fee will be prorated between Series in the Participant's Account
on the basis of their respective values on the date of the deduction.
Administrative expenses include the cost of policy issuance, salaries, postage,
telephone, travel expenses, legal, administrative, actuarial, management and
accounting fees, periodic reports, office equipment, stationery, office space
and custodial expenses. Until further notice, Security First will waive the
deduction of administrative fees, and this waiver is permanent for contracts
issued prior to the termination or change of the waiver.
TRANSACTION CHARGES
A $10 transaction charge will be deducted from the Participant's Account for
each conversion from a Series (see "Conversions," page 14) and upon
annuitization of all or a portion of the Participant's Account (see "Annuity
Benefits," page 16). Similarly, in the event of a surrender, a transaction
charge will be deducted from the Participant's Account in an amount equal to the
lesser of $10 or 2% of the amount surrendered. The Transaction Charge imposed
upon surrender is considered to constitute part of the gross amount surrendered
for purposes of computing the amount of surrender charge to be assessed. (See
"Sales Charges," page 12.) These charges are at cost, and Security First Life
does not anticipate profiting from them. Transaction charges for conversions
from one series of the Separate Account to another series of the Separate
Account are currently waived. This waiver is permanent for contracts issued
prior to the termination or change of the waiver.
MORTALITY AND ADMINISTRATIVE EXPENSE RISK CHARGES
The minimum death benefit provided for by the Contract requires Security
First Life to assume a mortality risk that the Participant's Account will be
less than the Participant's Purchase Payments adjusted for prior surrenders
and/or amounts applied to Annuity options. (See "Death Benefit Before the
Annuity Date," page 18.) In addition, because the Contract provides life Annuity
options, Security First Life assumes a mortality risk that the death rate of
Participants as a group will be lower than the death rate upon which the
mortality tables specified in the Contract are based. A fee will be charged to
compensate Security First Life for assuming these mortality risks in an amount
equal to .002192% on a daily basis (.80% per year) from the Separate Account
assets funding the Contract.
Security First Life also assumes the risk that the amount, if any, deducted
for administrative fees will be insufficient to cover its actual costs for
administrative services. Contract administration expenses include the cost of
policy issuance, salaries, rent, postage, travel expenses, legal,
administrative, actuarial and accounting fees, periodic reports, office
equipment, stationery, office space and custodial expenses. There is no
assurance that the margins will be sufficient to absorb the expenses during the
term of the Contract. As compensation for assuming this risk, Security First
Life will make a deduction of .001233% on a daily basis (.45% per year) from the
value of the Separate Account assets funding the Contract.
DISTRIBUTION RISK CHARGE (SALES LOAD)
Security First Life also assumes the risk that surrender charges described
above will be insufficient to cover the actual cost of distribution. These costs
include commissions, fees, registration costs, direct and indirect selling
expenses including advertising, sales materials, illustrations, marketing
personnel, printing and related overhead expenses. As compensation for assuming
this risk, Security First Life will make a deduction of .000274% on a daily
basis (.10% per year) from the value of the Separate Account assets funding the
Contract. The distribution risk charge (sales load) together with any contingent
deferred sales charge imposed will never exceed 9% of purchase payments.
If Security First Life has gains from the mortality, administrative expense
and distribution risk charges over its costs of assuming these risks, it may
profit from these gains. Any gains derived from the mortality and administrative
expense risk charges may be used to cover shortfalls in amounts available to pay
distribution expenses.
Security First Life may, in its discretion, voluntarily waive a portion of
the mortality, administrative expense, and/or distribution fees which waiver may
be terminated at any time.
FREE LOOK PERIOD
The Contract provides for an initial "Free Look" period. The Owner has the
right to return the Contract within 20 days (or such longer period as required
by state law) after the Owner receives the Contract by delivering or mailing it
to
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Security First Life at its administrative office. If the Contract is mailed, it
will be deemed mailed on the date of the postmark or, if sent by certified or
registered mail, the date of certification or registration. The returned
Contract will be treated as if the Company never issued it, and the Company will
refund the Purchase Payments or, if required by state law, the greater of the
Purchase Payments or the account value.
DESCRIPTION OF THE CONTRACTS
GENERAL
The Contracts are group contracts designed to provide annuity benefits to
employees of public school systems, churches and certain tax-exempt
organizations as tax deferred annuity contracts under the provisions of Section
403(b) of the Code, to employees covered under various types of employer
deferred compensation plans which qualify under the provisions of Section 457 of
the Code, to trusts under retirement plans which qualify under Section 401 of
the Code and to individuals as individual retirement annuities under Section 408
of the Code. (See "Federal Income Tax Status," page 19.) Since the Contracts are
designed to fulfill long-term financial needs, purchasers should not consider
them as short-term or temporary investments.
A group Contract is issued to an employer, to a trustee of a qualified
retirement plan, or to another organization, which will be the Owner, covering
all present and future Participants. Except as described below, after completing
an enrollment form and arranging for Purchase Payments to begin, each enrolled
Participant receives a Certificate which summarizes the provisions of the group
contract and evidences his or her participation in the Plan. The group contracts
described below may be restricted by the governing instrument of the Plan as to
the exercise by the Participant of certain rights provided in such contracts.
Owners and Participants should refer to the Plan for information concerning such
restrictions, if any. No Certificates are issued to Participants under deferred
compensation or qualified retirement Plans.
PURCHASE PAYMENTS
Purchase Payments may be made on an annual, semi-annual, quarterly, or
monthly basis, or at such intervals as may be agreed to by Security First Life.
The frequency of Purchase Payments may be changed if permitted by the Plan. The
minimum Purchase Payment is $20, with an annual minimum of $240. Purchase
Payments may be allocated to the Separate Account, the General Account or
between them in accordance with the election of the Participant. Confirmation of
each Purchase Payment received will be periodically sent to the Participant as
appropriate.
CONVERSIONS
Accumulation Units may be converted among the Series of the Separate Account
or from the Separate Account to the General Account at any time. In addition,
Accumulation Units in the General Account may be converted to the Separate
Account subject to the following limitations: (i) conversions are limited to
once per Certificate year; (ii) unless otherwise permitted by Security First
Life, the total value converted from the General Account may not exceed 20% of
the accumulated payment value of the Participant's interest in the General
Account and (iii) the amount converted will be based upon accumulated payment
value less transaction fees, and a proportional reduction will be made in the
annuity value of the Participant's interest in the General Account.
Conversion instructions may be communicated in writing or, if permitted by
Security First Life, by telephone. If telephone conversions of Accumulation
Units are permitted, the Participant will be required to complete a prior
authorization on a form provided by Security First Life. Security First Life
will employ reasonable procedures to confirm that telephone instructions are
genuine (including requiring one or more forms of personal identification), and
Security First Life will not be liable for following instructions it reasonably
believes to be genuine.
Accumulation Units will be converted on the first Valuation Date after
receipt of written or telephone instructions. Because Accumulation Unit values
are determined at the close of regular trading on the New York Stock Exchange
(currently 4:00 P.M. Eastern Time) on a Valuation Date, conversion instructions
received after that time will be effected as of the next Valuation Date.
Annuity Units may be converted among the Series of the Separate Account at
any time (except within two calendar weeks before the Annuity Date and any
anniversary thereof). Annuity Units may not be converted to the General Account.
However, amounts in the General Account that have not been applied to a Fixed
Annuity income option may be converted to Annuity Units in one or more Series of
the Separate Account for a Variable Annuity payout. Conversions of Annuity Units
must be elected in writing and will be effective on the first Valuation Date
following receipt of the instructions.
A minimum of $500 (or, if lesser, the balance of the Participant's account
allocated to the Series to be converted) must be converted from any Series of
the Separate Account or from the General Account. The value of the
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<PAGE> 15
Accumulation and Annuity Units converted will be calculated as of the close of
business on the date the conversion occurs.
LOANS (SECTION 403 (B) PLANS ONLY)
Participants in Plans which qualify under Section 403(b) may obtain a loan
under the Contract from that portion of the Participant's Account which is
allocated to the General Account. Accumulation Units in the Separate Account
will be taken into account in determining the maximum amount of any loan, and
the Participant would be permitted to convert Accumulation Units from the
Separate Account to the General Account prior to any loan. The Participant's
Account will serve as sole security for a loan, and Security First Life may
terminate a loan, in its discretion, in the event of a request for a surrender.
Security First Life may modify or terminate the granting of loans at any time,
provided that any such modification or termination will not affect outstanding
loans. Fees may be charged for loan set-up and administration. Loans may, under
some circumstances, result in taxable distributions from the Contract. See
"Federal Income Tax Status," page 19.
MODIFICATION OF THE CONTRACTS
The Contract guarantees that Annuity payments involving life contingencies
will be based on the minimum guaranteed Annuity purchase rates incorporated in
the Contracts, regardless of actual mortality experience. The Contract also
includes provisions legally binding on Security First Life with respect to
surrenders, death benefits and maximum charges, fees and deductions from a
Participant's Account. Security First Life may only change these provisions: (i)
with respect to terms which apply to Participants after the effective date of
the change; (ii) with respect to terms which apply to the excess of any Purchase
Payments received in any Certificate Year over the Purchase Payments received in
the first Certificate Year; or (iii) to the extent necessary to conform the
Contract to any federal or state law, regulation or ruling.
A Contract may also be modified by written agreement between Security First
Life and the Owner.
ASSIGNMENT
If permitted by the Plan and applicable laws, the Contracts may be assigned
by the Participant, provided written notice of such assignment is received by
Security First Life. In the case of Contracts issued in connection with a
deferred compensation plan, all rights, discretion and powers under the Contract
are vested in the Owner and not the Participant.
Inquiries as to any Contract provisions should be made in writing to
Security First Life Insurance Company, P.O. Box 92193, Los Angeles, California
90009 or by telephoning 1(800)283-4536.
ACCUMULATION PERIOD
CREDITING ACCUMULATION UNITS IN THE SEPARATE ACCOUNT
Accumulation Units are credited to a Series upon receipt of each Purchase
Payment or conversion, as the case may be. The number of Accumulation Units to
be credited is determined by dividing the net amount allocated to a Series by
the value of an Accumulation Unit in the Series next computed following receipt
of the Purchase Payment or conversion.
In the event that an application for a Contract fails to recite all of the
necessary information, Security First Life will promptly request that the
Participant furnish further instructions and will hold any initial Purchase
Payment in a suspense account, without interest, for a period not exceeding five
Business Days pending receipt of such information. If the necessary information
is not received by Security First Life within five Business Days of receipt of
the application, Security First Life will return the Purchase Payment.
VALUATION OF ACCUMULATION UNITS
The current value of Accumulation Units of a Series of the Separate Account
varies with the investment experience of the Fund in which the assets of the
Series are invested. Such value is determined each business day at the close of
regular trading on the New York Stock Exchange (currently 4:00 P.M. Eastern
Time) by multiplying the value of an Accumulation Unit in the Series on the
immediately preceding Valuation Date by the net investment factor for the period
since that day. (See "Net Investment Factor," below.) The Participant bears the
investment risk that the current value of Accumulation Units invested in a
Series may at any time be less than the amounts originally allocated to the
Series.
NET INVESTMENT FACTOR
The net investment factor is an index of the percentage change (adjusted for
distributions by the Fund and the deduction of the mortality, administrative
expense and distribution risk fees) in the net asset value of the Fund in which
a Series is invested, since the preceding Valuation Date. The net investment
factor may be greater or less than one, depending upon the Fund's investment
performance.
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SURRENDERS
To the extent permitted by the Plan, a Participant may surrender all or a
portion of the Participant's Account at any time prior to the Annuity Date. The
value of any partial surrender must be at least $200. A surrender may result in
adverse federal income tax consequences to the Participant including current
taxation of the distribution and a penalty tax on a premature distribution. (See
"Federal Income Tax Status," page 19.) The Participant should consult his or her
tax adviser before requesting a surrender.
The cash value of a Participant's interest in the Separate Account prior to
the Annuity Date may be determined at any time by multiplying the number of
Accumulation Units for each Separate Account Series credited to the Contract by
the current value of an Accumulation Unit in the Series and subtracting the
surrender charges, if any, and the transaction charges. Upon receipt of a
written request for a full or partial surrender, Security First Life will
calculate the surrender using the value of Accumulation Units computed after
receipt of such request.
A request for a partial surrender from more than one Series must specify the
allocation of the partial surrender among the Series. No partial surrender may
be made that would cause a Participant's interest in any Series to have a value
after the surrender of less than $200, unless the entire amount allocated to
such Series is being surrendered.
Payment of any amount surrendered from the Series will be made within seven
days of the date the written request is received by Security First Life.
Surrenders may be suspended when: (i) trading on the New York Stock Exchange is
restricted by the SEC or such Exchange is closed for other than weekends or
holidays; (ii) the SEC has by order permitted such suspension; or (iii) an
emergency as determined by the SEC exists making disposal of portfolio
securities or valuation of assets of the Funds not reasonably practicable.
STATEMENT OF ACCOUNT
Prior to the Annuity Date, each Participant will be provided with a written
statement of account each calendar quarter in which a transaction occurs. In no
event will a statement of account be provided less often than once annually. The
statement of account will show all transactions for the period being reported.
It will also show the number of Accumulation Units of each Series in the
Participant's Account, the current Accumulation Unit value for each Series, and
the value of the Participant's Account as of the end of the reporting period.
ANNUITY BENEFITS
VARIABLE ANNUITY PAYMENTS
Unless otherwise elected by the Participant, the Participant's interest in
the Separate Account will be applied to provide a Variable Annuity. The dollar
amount of Variable Annuity payments will reflect the investment experience of
the Series but will not be affected by adverse mortality experience which may
exceed the mortality risk charge provided for under the Contract.
LEVEL PAYMENTS VARYING ANNUALLY
Under the Contract, Variable Annuity payments are determined annually rather
than monthly so that Annuity payments, uniform in amount, are made monthly
during each Annuity year. The level of payments for each year is based on the
investment performance of the Series up to the Valuation Date as of which the
payments are determined for the year. Thus, amounts of the Annuity payments vary
with the investment performance of the Series from year to year rather than from
month to month.
The monthly Variable Annuity payments for the first year will be determined
on the last Valuation Date of the second calendar week preceding the Annuity
Date by using a formula described in the Contract. On each anniversary of the
Annuity Date, Security First Life will determine the amount of monthly payments
for the year then beginning. This is determined by multiplying the number of
Annuity Units in each Series from which payments are to be made by the Annuity
Unit value of that Series for the Valuation Period in which the first payment
for that year is due.
The amount of the year's Variable Annuity payments is transferred to the
General Account at the beginning of the Annuity year. Although an amount in the
Separate Account is credited to an Annuitant and transferred to the General
Account to make Annuity payments, it should not be inferred that the Annuitant
has any property rights in this amount. The Annuitant has only a contractual
right to Annuity payments from the amount credited to him or her in the Separate
Account.
The monthly Annuity payments are made from the General Account with interest
credited using the Assumed Investment Return of 4.25% or the alternative Assumed
Investment Return selected by Participant. Security First Life will experience
profit or loss on the amounts placed in the General Account to provide level
monthly payments during the year to the extent that net investment income and
gains in the General Account exceed or are lower than the Assumed Investment
Return selected.
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Because Annuity payments for the year are set at the beginning of the year,
the Annuitant will not benefit from increases in Annuity Unit values during the
year. However, such increases and decreases will be reflected in the calculation
of Annuity payments for the subsequent year.
ASSUMED INVESTMENT RETURN
Variable Annuity payments will vary from payments based on the Assumed
Investment Return if the actual investment experience of the Series is better or
worse than the Assumed Investment Return. The choice of the Assumed Investment
Return can affect the level of Annuity payments from year to year. Over a period
of time, if the Separate Account achieves a net investment result equal to the
Assumed Investment Return applicable to a particular option, the amount of the
Annuity payments would be level. However, if the Separate Account achieves a net
investment result greater than the Assumed Investment Return, the amount of the
Annuity payments would increase in value each year. Similarly, if the Separate
Account achieves a net investment result smaller than the Assumed Investment
Return, the amount of the Annuity payments would decrease each year.
Although a higher initial payment would be received under a higher Assumed
Investment Return, there is a point in time after which payments under a lower
Assumed Investment Return would be greater, assuming payments continue through
that point in time. The effect of a higher or lower Assumed Investment Return
can be summarized as follows: a higher Assumed Investment Return will result in
a larger initial payment but more slowly rising or more rapidly falling
subsequent payments than a lower Assumed Investment Return.
Unless otherwise elected the Assumed Investment Return will be 4.25% per
annum. To the extent permitted by state law and regulations, Security First Life
will permit an election of an Assumed Investment Return of 3.50%, 5% or 6%. It
should not be inferred, however, that such returns will bear any relationship to
the actual net investment experience of the Series.
ELECTION OF ANNUITY DATE AND FORM OF ANNUITY
The Annuity Date and the form of Annuity payment are elected by the
Participant. Unless an earlier date is elected in accordance with the Plan,
Annuity payments must begin on the Normal Annuity Date.
To the extent not prohibited by the Plan, an optional Annuity Date may be
elected which date may be the first day of any month prior to the Normal Annuity
Date. The election must be made at least 31 days before the optional Annuity
Date.
The normal form of Annuity payment under the Contract is Option 2, a life
Annuity with 120 monthly payments certain. Unless indicated otherwise, Option 2
will be automatically applied. Changes in the optional form of Annuity payment
may be made at any time up to 31 days prior to the date on which Annuity
payments are to begin. Options 1 through 4 may be elected as either Variable
Annuities or Fixed Annuities, while Option 5 may be elected only as a Fixed
Annuity. The first year's Annuity payments described in Option 1 through 4 are
determined on the basis of: (i) the mortality table specified in the Contract,
(ii) the age and, where permitted, the sex of the Annuitant, (iii) the type of
Annuity payment option(s) selected, and (iv) the Assumed Investment Return
selected. Fixed Annuity payments described in Option 5 are determined on the
basis of: (i) the number of years in the payment period and (ii) the interest
rate guaranteed with respect to the option.
The United States Supreme Court in its decision entitled Arizona Governing
Committee for Tax Deferred Annuity and Deferred Compensation Plans v. Norris
determined that an employer subject to Title VII of the Civil Rights Act of 1964
may not offer to its employees the option of receiving retirement benefits
calculated on the basis of sex. The Company will issue contracts which comply
with the Norris decision and state law.
OPTION 1 -- LIFE ANNUITY
An Annuity payable monthly during the lifetime of an individual, ceasing
with the last payment due prior to the death of an individual. This option
offers the maximum level of monthly payments since there is no guarantee of a
minimum number of payments or of death benefits for Beneficiaries.
OPTION 2 -- LIFE ANNUITY WITH 120, 180 OR 240 MONTHLY PAYMENTS CERTAIN
An Annuity payable monthly during the lifetime of an individual with a
guaranteed minimum number of monthly payments not less than 120, 180 or 240
months, as elected. If at the death of the individual the specified number of
payments have not been made, Annuity payments will be continued during the
remainder of such period to the designated Beneficiary.
OPTION 3 -- INSTALLMENT REFUND LIFE ANNUITY
An Annuity payable monthly during the lifetime of an individual with a
guaranteed minimum number of monthly payments equal to the amount applied under
this option divided by the first monthly payment. Any payments made to
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<PAGE> 18
the designated Beneficiary after death of the Annuitant will stop when Security
First Life has paid out a total number of payments equal to the minimum number
of payments.
OPTION 4 -- JOINT AND LAST SURVIVOR ANNUITY
An Annuity payable monthly during the joint lifetime of two individuals and
thereafter during the lifetime of the survivor, ceasing with the last payment
due prior to the death of the survivor.
OPTION 5 -- DESIGNATED PERIOD ANNUITY -- FIXED DOLLAR ONLY
A fixed dollar Annuity payable monthly for a specified number of years from
5 to 30. The amount of each payment will be based on an interest rate determined
by Security First Life, that will not be less than 3.50% per annum. Fixed
Annuity payments under this option may not be commuted to a lump sum, except as
provided under "Death Benefits". Monthly payments for 3 years may be elected
under this option for a Participant who is age 60 or over on the Annuity Date,
or who has submitted evidence of election to begin payments under the employer's
retirement program.
FREQUENCY OF PAYMENT
At the election of the Payee, payments under any option may be made
annually, semi-annually, quarterly or monthly, except that payments under the
special 36 month designated period described in option 5 must be made on a
monthly basis. If at any time any payments to be made to any payee from any
Series are or become less than $50 each, Security First Life shall have the
right to decrease the frequency of payments to such interval as will result in a
payment of at least $50.
ANNUITY UNIT VALUES
The value of an Annuity Unit at a Valuation Date is determined by
multiplying the value of the Annuity Unit at the preceding Valuation Date by an
"Annuity Change Factor". The Annuity Change Factor is an adjusted measurement of
the investment performance of the Fund since the end of the preceding Valuation
Period. The Annuity Change Factor is determined by dividing the value of the
Accumulation Unit at the Valuation Date by the value of the Accumulation Unit at
the preceding Valuation Date and multiplying the result by a neutralization
factor.
The neutralization factor is determined by dividing 1 by the weekly
equivalent of the Assumed Investment Return previously selected by the
Annuitant. For example, the neutralization factor for the Assumed Investment
Return of 4.25% is 0.9991999.
The number of Annuity Units for a Series is determined by dividing the
monthly Annuity payment for the first year by that Series' Annuity Unit value on
the same date as the first year's Annuity payments are calculated. The number of
Annuity Units thus determined will not change throughout the annuity payment
period unless the Participant converts Annuity Units to or from other Series of
the Separate Account.
DEATH BENEFITS
DEATH BENEFIT BEFORE THE ANNUITY DATE
If the Participant dies before the Annuity Date, the Contract will pay a
death benefit to the Beneficiary in accordance with the terms set forth below.
The Beneficiary may elect to receive the Participant's Account values as
either: (i) Annuity income under Annuity Income Options One, Two, or Five
described in Article 7 of the Contract, provided that an election of an Annuity
Income Option is subject to the following conditions; (a) payments must begin
within one year of the Participant's death (provided that under a Qualified
Contract the spouse of the Participant may delay commencement of payments to the
date on which the Participant would have attained age 70 1/2); (b) the
guaranteed period under Option Two or the designated period under Option Five
may not be longer than the Beneficiary's life expectancy under applicable tables
specified by the internal Revenue Service; and (c) the Annuity Value as of the
date of the first Annuity income payment will be used to determine the amount of
the death benefit to be applied; or (ii) a lump sum payout of the Cash Value,
provided that this payout shall be made within five (5) years of the date of
death of the Participant.
If a Participant who has not attained age 65 dies before the Annuity Date
the amount of any lump sum settlement will be the greater of the Participant's
Account less transaction fees or the total of the Participant's Purchase
Payments reduced by any Purchase Payments previously surrendered or applied to
Annuity income. If a Participant who has attained age 65 dies before the Annuity
Date only the Cash Value will be paid as a death benefit.
If the sole Beneficiary is the spouse of the Participant, the spouse may
elect to succeed to all rights of the Participant under this Contract. Except as
otherwise required by law or as required by the Plan, if there is more than one
Beneficiary living at the time of the Participant's death, each will share in
the proceeds of the death benefit equally, unless the Participant has elected
otherwise. If the Participant outlives all Beneficiaries, the death benefit will
be paid to
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the Participant's estate in a lump sum. No Beneficiary shall have the right to
assign, anticipate or commute any future payments under any of the options,
except as provided in the election or by law.
Rights to the death benefit will pass as if the Participant outlived the
Beneficiary if: (i) the Beneficiary dies at the same time as the Participant; or
(ii) the Beneficiary dies within 15 days of the Participant's death and prior to
the date due proof of the Participant's death is received by Security First
Life. Due proof of death will be a certified death certificate, an attending
physician's statement, a decree of a court of competent jurisdiction as to the
finding of death, or such other documents as Security First Life may, at its
option, accept.
DEATH BENEFIT AFTER THE ANNUITY DATE
If the Annuitant under a Contract dies on or after the Annuity Date, the
remaining portion of his or her interest will be distributed to the Beneficiary
at least as rapidly as under the method of distribution being used at the date
of the Annuitant's death. If no designated Beneficiary survives the Annuitant,
the present value of any remaining payments certain on the date of the death of
the Annuitant, calculated on the basis of the Assumed Investment Return
previously elected, may be paid in one sum to the estate of the Annuitant unless
other provisions have been made and approved by Security First Life. This value
is calculated as of the date of payment following receipt of due proof of death.
Unless otherwise restricted, a Beneficiary receiving variable payments under
Options 2 or 3 after the death of an Annuitant may elect at any time to receive
the present value of the remaining number of Annuity payments certain in a
single payment, calculated on the basis of the Assumed Investment Return
previously selected. However, such election is not available to a Beneficiary
receiving Fixed Annuity payments.
FEDERAL INCOME TAX STATUS
The operations of the Separate Account form part of the operations of
Security First Life. Under the Code as it is now written no federal income tax
is payable by Security First Life on the investment income and capital gains of
the Separate Account. Moreover, as long as the Separate Account meets the
diversification requirements of Section 817(h) of the Code, no federal income
tax is payable by the Participant on the investment income and capital gains
under a Certificate until Annuity payments commence or a full or partial
withdrawal is made. It is intended that the Separate Account will continue to
meet the requirements of Section 817(h) of the Code.
Employers may deduct their contributions to self-employed and corporate
pension and profit-sharing plans described in Section 401 of the Code and tax
sheltered annuities described in Section 403(b) in the year when made up to the
limits specified in the Code. In addition, some employer plans may permit
nondeductible employee contributions.
All distributions, with the exception of tax free rollovers as described
below or a return of permitted nondeductible employee contributions, are
included in gross income. In the case of Sections 401 and 403(b) plans and IRAs,
a distribution is includible in the year in which it is paid. In the case of a
457 plan, a distribution is includible in the year it is paid or made available.
Under certain limited circumstances, a lump sum distribution from a Section 401
plan may qualify for special 5-year or 10-year forward income averaging or
long-term capital gains treatment.
In the case of Sections 401, 403(b) and 457 plans and IRAs, Annuity payments
for life or a period not exceeding the life expectancy of the Participant or the
Participant and a designated beneficiary must commence by April 1 of the
calendar year following the calendar year in which the employee attains age
70 1/2 (or retires in the case of government plans) (excluding account values in
a 403(b) plan at December 31, 1986). Distributions under Sections 401, 403(b)
and 457 plans must also meet the minimum incidental death benefit requirements
of the Code.
Except as described below, the Code imposes a 10% penalty tax on the taxable
portion of any distribution from qualified retirement plans, including both 401
and 403(b) plans. To the extent amounts are not includable in gross income
because they have been rolled over to an IRA or to another 401 plan or 403(b)
annuity, no tax penalty will be imposed. The tax penalty will not apply to the
following distributions: (a) if distribution is made on or after the date on
which the Participant reaches age 59 1/2; (b) distributions following the death
or disability of the Participant; (c) after separation from service,
distributions that are part of substantially equal periodic payments, not less
frequently than annually, made for the life (or life expectancy) of the
Participant or the joint lives (or joint life expectancies) of such Participant
and his designated Beneficiary; (d) distributions to a Participant who has
separated from service after attaining age 55; (e) distributions made to the
Participant to the extent such distributions do not exceed the amount allowable
as a deduction under Code Section 213 to the Participant for amounts paid during
the taxable year for medical care; and (f) distributions made to an alternate
payee pursuant to a qualified domestic relations order.
Similar rules apply to IRAs, but there are fewer exceptions to the 10%
penalty tax. The taxable portion of an IRA distribution will not be subject to
the tax penalty if: (a) it is made on or after the date on which the Participant
reaches age 59 1/2; (b) it is made following the death or disability of the
Participant; or (c) it is part of substantially equal periodic payments, not
less frequently than annually, made for the life (or life expectancy) of the
Participant or the joint
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lives (or joint life expectancies) of such Participant and his or her designated
beneficiary. The 10% penalty tax does not apply to Section 457 plans.
The Code prohibits the withdrawal of amounts contributed or earned under a
403(b) annuity on or after January 1, 1989, except in these circumstances: (a)
the Participant attains age 59 1/2, separates from service, dies, becomes
disabled, or (b) in the case of hardship as determined in accordance with
applicable regulations. Withdrawals for hardship are restricted to the portion
of the Participant's Account which represents contributions by the Participant
and does not include any investment results. These limitations on withdrawals
apply only to salary reduction contributions made after December 31, 1988 and to
income attributable to such contributions and to income attributable to amounts
held as of December 31, 1988. The limitations on withdrawals do not affect
rollovers or exchanges between Section 403(b) annuities.
Loans from 403(b) annuity contracts are subject to a number of limitations
described in the Code (and, for plans subject to the requirements of Title 1 of
the Employee Retirement Income Security Act of 1974 ("ERISA"), the fiduciary
responsibility provisions of ERISA as well). Failure of a loan to meet the
Code's requirements may result in the loan being deemed to constitute a taxable
distribution of income to the Participant.
Providing certain requirements of the Code are met, distributions from a
plan may be rolled over tax free to another plan. Distributions from a Section
401 plan may be rolled over to a Section 401 defined contribution plan, a
Section 403(a) annuity or an IRA. Distributions from a tax sheltered annuity may
be rolled over to another tax sheltered annuity or an IRA. Distributions from an
IRA may be rolled over to another IRA and, if the IRA contains only permissible
rollover amounts, to a Section 401 plan or a tax-sheltered annuity.
The discussion contained in the Prospectus regarding withdrawals and other
distributions from a Participant's Account should be considered in light of the
above.
WITHHOLDING
Security First Life is required to withhold federal income tax on
distributions such as Annuity payments and full or partial surrenders. However,
except as detailed in the next paragraph, recipients of distributions are
allowed to make an election not to have federal income tax withheld. After an
election is made with respect to Annuity payments, an Annuitant may revoke the
election at any time, and thereafter commence withholding. Security First Life
will notify the payee at least annually of his or her right to revoke the
election.
Security First Life is required to withhold 20% of certain taxable amounts
constituting "eligible rollover distributions" to participants (including lump
sum distributions) in retirement plans under Code Section 401 and tax deferred
annuities under Code Section 403(b). This withholding requirement does not apply
to distributions from such plans and annuities in the form of a life and life
expectancy annuity (individual or joint), an annuity with a designated period of
10 years or more, or any distribution required by the minimum distribution
requirements of Code Section 401(a)(9). Withholding on these latter types of
distribution will continue to be made under the rules described in the prior
paragraph. A participant cannot elect out of the 20% withholding requirement.
However, if an eligible rollover distribution is rolled over into an eligible
retirement plan or IRA in a direct trustee-to-trustee transfer, no withholding
will be required.
Payees are required by law to provide Security First Life (as payor) with
their correct taxpayer identification number ("TIN"). If the payee is an
individual, the TIN is the same as his or her social security number.
MULTIPLE CONTRACTS
Code Section 72(e)(11) provides that multiple deferred annuity contracts
which are issued within a calendar year to the same Contract Owner by one
company or its affiliates are treated as one annuity contract for purposes of
determining the tax consequences of any distribution. Such treatment may result
in adverse tax consequences.
OBTAINING TAX ADVICE
It should be recognized that the federal income tax information in this
prospectus is not exhaustive and is for information purposes only. The
discussion above does not purport to cover all situations involving the purchase
of an Annuity or the election of an option under the Contract. Tax results may
vary depending upon individual situations and special rules may apply in certain
cases. State and local tax results may also vary. For these reasons a qualified
tax adviser should be consulted.
VOTING RIGHTS
Unless otherwise restricted by the Plan, each Participant holding a
Certificate will have the right to instruct Security First Life with respect to
voting the Fund shares which are the assets underlying his or her interest in
the Separate Account, at all regular and special shareholders meetings of the
Funds. Security First Life will mail to each Participant, at his or her last
known address, all periodic reports and proxy material of the applicable Fund
and a form with which to
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give voting instructions. Fund shares as to which no timely instructions are
received will be voted by Security First Life in proportion according to the
instructions received from all the Participants giving timely instructions.
Security First Life is under no duty to inquire as to the instructions received
or the authority of persons to instruct the voting of Fund shares, and unless
Security First Life has actual knowledge to the contrary, the instructions given
it will be valid as they affect Security First Life or the Funds.
Even though Annuity payments have begun, the Annuitant will continue to have
any voting rights exercisable with respect to the Funds shares.
The number of votes to be cast by each person having the right to vote will
be determined as of a record date within 90 days prior to the meeting of the
Fund, and voting instructions will be solicited by written communication at
least 10 days prior to such meeting. To be entitled to vote, a Participant or
Annuitant must have been such on the record date. The number of shares as to
which voting instructions may be given to Security First Life is determined by
dividing the value on the record date on that portion of the Participant's
Account then allocated to a Series for a Fund by the net asset value of a Fund
share as of the same date.
LEGAL PROCEEDINGS
Security First Life, in the ordinary course of its business, is engaged in
litigation of various kinds which in its judgment is not of material importance
in relation to its total assets. There are no present or pending material legal
proceedings affecting the Separate Account.
ADDITIONAL INFORMATION
For further information contact Security First Life at the address and phone
number on the cover of this Prospectus. A copy of the Statement of Additional
Information, dated November 6, 1996, which provides more detailed information
about the Contracts, may also be obtained. Set forth below is the table of
contents for the Statement of Additional Information.
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<PAGE> 22
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
The Insurance Company........................................................ 3
The Separate Account......................................................... 3
Net Investment Factor........................................................ 3
Annuity Payments............................................................. 4
Additional Federal Income Tax Information.................................... 6
Underwriters, Distribution of the Contracts.................................. 7
Calculation of Performance Data.............................................. 8
Voting Rights................................................................ 8
Safekeeping of the Securities................................................ 9
Servicing Agent.............................................................. 9
Independent Auditors......................................................... 9
Legal Matters................................................................ 9
State Regulation of Security First Life...................................... 9
Financial Statements......................................................... 10
</TABLE>
A registration statement has been filed with the SEC under the Securities
Act of 1933 with respect to the Contracts offered hereby. This Prospectus does
not contain all the information set forth in the registration statement, to all
of which reference is made for further information concerning the Separate
Account, Security First Life and the Contracts offered hereby. Statements
contained in this Prospectus as to the contents of the Contracts and other legal
instruments are summaries. For a complete statement of the terms thereof
reference is made to such instruments as filed.
22
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'33 Act File No. 333-07987
STATEMENT OF
ADDITIONAL INFORMATION
SECURITY FIRST LIFE SEPARATE ACCOUNT A
-----------------------------------------------------------
GROUP FLEXIBLE PAYMENT FIXED AND
VARIABLE ANNUITY CONTRACTS
-----------------------------------------------------------
SECURITY FIRST LIFE INSURANCE COMPANY
November 6, 1996
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the prospectus. A copy of the prospectus, dated November 6,
1996, may be obtained without charge by writing to Security First Life
Insurance Company, P.O. Box 92193, Los Angeles, California 90009 or by
telephoning (800)283-4536.
SF 224R1
<PAGE> 24
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Insurance Company 3
The Separate Account 3
Net Investment Factor 3
Annuity Payments 4
Additional Federal Income Tax Information 6
Underwriters, Distribution of the Contracts 7
Calculation of Performance Data 8
Voting Rights 8
Safekeeping of Securities 9
Servicing Agent 9
Independent Auditors 9
Legal Matters 9
State Regulation of Security First Life 9
Financial Statements 10
</TABLE>
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<PAGE> 25
THE INSURANCE COMPANY
Security First Life Insurance Company ("Security First Life"), a Delaware
corporation, is a wholly-owned subsidiary of Security First Group, Inc. ("SFG").
The common shares of SFG are held by London Insurance Group, Inc., a Canadian
insurance service corporation and publicly traded subsidiary of the Trilon
Financial Corporation of Toronto, Canada.
THE SEPARATE ACCOUNT
The Security First Life Separate Account A ("Separate Account") presently funds
group variable annuity contracts issued by Security First Life on Forms SF
224FL, SF 226R1, SF 230, SF 234, SF 236 and individual annuity contracts on Form
SF 135. These individual and group variable annuity contracts are described in
other prospectuses. The combination fixed and variable contracts ("Contracts")
described in this Statement of Additional Information and related prospectus are
distinct contracts from the above described individual and group variable
annuity contacts.
The Contracts were originally issued by Fidelity Standard Life Insurance Company
("Fidelity Standard Life"), a wholly-owned subsidiary of Security First Life.
Pursuant to an assumption reinsurance agreement ("Agreement") entered into
between the parties, Security First Life has agreed to assume all of Fidelity
Standard Life's obligations under the Contracts. Upon consummation of the
transaction contemplated by the Agreement ("Reinsurance Transaction"), which is
described in greater detail in the prospectus, the assets currently supporting
the Contracts in a separate account of Fidelity Standard Life will be
transferred to the Separate Account. Thereafter, payments under the Contracts
will be made to or by Security First Life rather than Fidelity Standard Life.
Amounts transferred to the Separate Account under the Contracts will be invested
in the securities of ten Funds: (i) the Money Market Portfolio and Growth
Portfolio of the Variable Insurance Products Fund; (ii) the Asset Manager
Portfolio, Contrafund Portfolio and Index 500 Portfolio of the Variable
Insurance Products Fund II; (iii) the T. Rowe Price Bond Series, T. Rowe Price
Growth and Income Series and Virtus U.S. Government Income Series of the
Security First Trust; (iv) the International Portfolio of the Scudder Variable
Life Investment Fund; and (v) the Small Capitalization Portfolio of The Alger
American Fund. The Separate Account is divided into a number of Series of
Accumulation and Annuity Units, which correspond respectively to these ten
funds.
NET INVESTMENT FACTOR
The Separate Account net investment factor is an index of the percentage change
(adjusted for distributions by the Funds and the deduction of the mortality,
administrative expense and distribution risk fees) in the net asset value of
each Fund in which the series is invested, since the preceding Business Day. The
Separate Account net investment factor for each series of Accumulation Units is
determined for any Business Day by dividing (i) the net asset value of a share
of the Fund which is represented by such Fund at the close of the business on
such day, plus the per share amount of any distributions made by such Fund on
such day by (ii) the net asset value of share of such Fund determined as of the
close of business on the preceding Business Day and then subtracting from this
result the mortality, administrative expense and distribution risk fees factor
of .003699% for each calendar day between the preceding Business Day and the end
of the current Business Day.
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ANNUITY PAYMENTS
The primary theory of a variable annuity having underlying assets chiefly
invested in a portfolio of common stocks is to provide Annuitants with Annuity
payments which will tend to remain level during a period when the economy is
relatively stable and to provide increased Annuity payments during periods of
economic growth and inflation. It is believed that the value of such Separate
Account investment will, over the long term, tend to reflect changes in the
general economic price level. Historically, the value of a diversified portfolio
of common stocks held for an extended period of time has tended to rise during
the periods of economic growth and inflation. However, there is no exact
correlation between the two. In some periods, the value of a common stock
portfolio has declined while the cost of living has increased.
The primary theory of a variable annuity having underlying assets chiefly
invested in fixed-income securities (such as the T. Rowe Price Bond Series) is
to provide Annuitants with annuity payments which will be higher in amount than
those provided by conventional Fixed Annuities. It should be recognized,
however, that a portfolio consisting of non-convertible fixed-income securities
and which is designed to obtain a high level of current yield involves market
risks that are not found in a fixed annuity and that differ from those found in
a variable annuity invested primarily in common and preferred stocks. Certain
securities (high yield bonds) in the portfolio will be very sensitive to adverse
economic changes and corporate developments. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield bonds, especially in a thin market. In
addition, periods of economic uncertainty and change may result in increased
volatility of both the market prices of high yield bonds and the fund's net
asset value.
The market value of non-convertible fixed-income securities usually reflects
yields then generally available in securities of similar quality and type. Based
upon historical analysis, when interest rates decline, the market value of a
portfolio already invested at higher interest rates may be expected to rise if
such securities are not subject to call at the option of the issuer. Conversely,
when such interest rates increase, the market value of a portfolio already
invested at lower interest rates may be expected to decline. The Asset Manager
Portfolio, T. Rowe Price Bond Series and T. Rowe Price Growth and Income Series
may, pursuant to the investment policies, invest a significant portion of their
assets in long-term fixed-income securities. Because of this, Participants who
select one of these series as the basis for Annuity Payments should recognize
that Annuity Payments may decrease during periods when interest rates and
general prices are rising.
Participants should carefully consider which of the underlying Funds is best
suited to their long-term needs.
Basis of Variable Annuity Benefits
The Variable Annuity benefit rates used in determining Annuity Payments under
the Contract are based on actuarial assumptions, reflected in tables in the
Contract, as to the expected mortality and adjusted age and the form of Annuity
selected. The mortality basis for these tables is Security First Life's Modified
Select Annuity Mortality Table, projected to the year 2000 on Projection Scale
C, with interest at 4.25% for all functions involving life contingencies and the
portion of any period certain beyond 10 years, and 3.25% for the first 10 years
of any certain period.
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<PAGE> 27
Adjusted age in those tables means actual age to the nearest birthday at the
time the first payment is due, adjusted according to the following table:
<TABLE>
<CAPTION>
Calendar Year Adjusted
of Birth Age Is
-------- ------
<S> <C>
Before 1916 Actual Age
1916 - 1935 Actual Age Minus 1
1936 - 1955 Actual Age Minus 2
1956 - 1975 Actual Age Minus 3
1976 - 1995 Actual Age Minus 4
</TABLE>
Determination of Amount of Monthly Variable Annuity Payments for First Year
The Separate Account value used to establish the monthly Variable Annuity
Payment for the first year consists of the value of Accumulation Units of each
Series of the Separate Account credited to a Participant on the last day of the
second calendar week before the Annuity Date. The Contract contains tables
showing monthly payment factors and Annuity premium rates per $1,000 of Separate
Account value to be applied under Options 1 through 4.
At the beginning of the first payment year, an amount is transferred from the
Separate Account to Security First Life's General Account and level monthly
Annuity payments for the year are made out of the General Account. The amount to
be transferred is determined by multiplying the Annuity premium rate per $1,000
set forth in the Contract tables by the number of thousands of dollars of
Separate Account Value credited to a Participant. The level monthly payment for
the first payment year is then determined by multiplying the amount transferred
(the "Annuity Premium") by the monthly payment factor in the same table. In the
event the Contract involved has Separate Account Accumulation Units in more than
one Series, the total monthly Annuity payment for the first year is the sum of
the monthly Annuity payments, determined in the same manner as above, for each
Series.
At the time the first year's monthly payments are determined, a number of
Annuity Units for each Separate Account Series is also established for the
Annuitant by dividing the monthly payment derived from that Series for the first
year by the Separate Account Annuity Unit values for the Series on the last
Business Day of the second calendar week before the first Annuity payment is
due. The number of Annuity Units remains fixed during the Annuity period unless
Annuity Units are converted to another Series.
Determination of Amount of Monthly Variable Annuity Payments for Second and
Subsequent Years
As of each anniversary of the Annuity Date, Security First Life will determine
the amount of the monthly Variable Annuity Payments for the year then beginning.
Separate determinations will be made for each Separate Account Series in which
the Annuitant has Annuity Units, with the total Annuity Payment being the sum of
the payments derived from the Series. The amount of monthly payments for any
Separate Account series for any year after the first will be determined by
multiplying the number of Annuity Units for that Series by the Annuity Unit
value for that series for the Valuation Period in which the first payment for
the year is due. It will be Security First Life's practice to mail Variable
Annuity payments no later than seven days after
5
<PAGE> 28
the last day of the Valuation Period upon which they are based or the monthly
anniversary thereof.
The objective of a Variable Annuity contract is to provide level payments during
periods when the economy is relatively stable and to reflect as increased
payments only the excess of investment results flowing from inflation or an
increase in productivity. The achievement of this objective will depend, in
part, upon the validity of the assumption that the net investment return of the
Separate Account equals the Assumed Investment Return during periods of stable
prices. Subsequent years' payments will be smaller than, equal to or greater
than the first year's payments depending on whether the actual net investment
return for the Separate Account is smaller than, equal to or greater than the
Assumed Investment Return.
Annuity Unit Values
The Separate Account annuity unit values for each Series was originally
established at $5 per unit. The value of an annuity unit for each Series for any
subsequent valuation period is determined by multiplying the value of an annuity
unit at the end of the preceding valuation period by the "Annuity Change Factor"
for the current valuation period. The Annuity Change Factor is an adjusted
measurement of the investment performance of the Series since the end of the
preceding valuation period. The Annuity Change Factor for any valuation period
is determined by dividing the value of an accumulation unit at the end of the
valuation period by the value of an accumulation unit at the end of the
immediately preceding valuation period and multiplying the result by a
neutralization factor.
Variable annuity payments for each year after the first reflect variations in
the investment performance of the Separate Account above and below an assumed
investment return. This assumed investment rate is included for purposes of
actuarial computations and does not relate to the actual investment performance
of the underlying Series. Therefore, the Assumed Investment Return must be
"neutralized" in computing the Annuity Change Factor. The Interest
Neutralization Factor is determined by dividing 1 by the effective weekly
equivalent of the assumed investment return previously selected by the
annuitant. For example, the Interest Neutralization Factor for the assumed
investment return of 4.25% is calculated as follows:
Interest Neutralization Factor: 1/[(1 + 0.0425)(1/52)] = 0.9991999
ADDITIONAL FEDERAL INCOME TAX INFORMATION
Security First Life is required to withhold federal income tax on any Contract
distributions to Participants (such as Annuity payments, lump sum distributions
or partial surrenders). However, except as noted below, Participants are allowed
in some cases to make an election not to have federal income tax withheld. After
such election is made with respect to Annuity payments, an Annuitant may revoke
the election at any time, and thereafter commence withholding. In such a case,
Security First Life will notify the payee at least annually of his or her right
to change such election.
The withholding rate followed by Security First Life will be applied only
against the taxable portion of the Contract distributions. Federal tax will be
withheld from Annuity payments pursuant to the recipient's withholding
certificate. If no withholding certificate is filed with Security First Life,
federal tax will be withheld from Annuity payments on the basis that the payee
is married with three withholding exemptions. Federal tax on the taxable portion
of a partial or total surrender (i.e., non-periodic
6
<PAGE> 29
distribution) generally will be withheld at a flat rate 10% rate. In the case of
a plan qualified under Sections 401(a) or 403(b) of the Code, if the balance to
the credit of a participant in a plan is distributed within one taxable year to
the recipient ("total distribution"), the amount of withholding will approximate
the federal income tax on a lump sum distribution. If a total distribution is
made from such a plan or a tax-sheltered annuity on account of the Participant's
death, the amount of withholding will reflect the exclusion from federal income
tax for employer-provided death benefits.
Security First Life will be required to withhold 20% of certain taxable amounts
constituting "eligible rollover distributions" to participants (including lump
sum distributions) in retirement plans under Code Section 401 and tax deferred
annuities under Code Section 403(b). This new withholding requirement does not
apply to distributions from such plans and annuities in the form of a life and
life expectancy annuity (individual or joint), an annuity with a designated
period of 10 years or more, or any distributions required by the minimum
distributions requirements of Code Section 401(a)(9). Withholding on these
latter types of distribution will continue to be made under the rules described
in the prior paragraph. A participant cannot elect out of the new 20%
withholding requirement. However, if an eligible rollover distribution is rolled
over into an eligible retirement plan or IRA in a direct trustee-to-trustee
transfer, no withholding will be required.
Payees are required by law to provide Security First Life (as payor) with their
correct taxpayer identification number ("TIN"). If the payee is an individual,
the TIN is the same as his or her Social Security number. If the payee elects
not to have federal income tax withheld on an Annuity payment or a non-periodic
distribution and a correct TIN has not been provided, such election is
ineffective, and such payment will be subject to withholding as noted above.
Obtaining Tax Advice
It should be recognized that the federal income tax information in the
prospectus and this Statement of Additional Information is not exhaustive and is
for information purposes only. The discussions do not purport to cover all
situations involving the purchase of an annuity or the election of an option
under the Contract. Tax results may vary depending upon individual situations
and special rules may apply in certain cases. State and local tax results may
also vary. For these reasons a qualified tax adviser should be consulted.
UNDERWRITERS, DISTRIBUTION OF THE CONTRACTS
If new Contracts are issued by Security First Life, they will be sold as a
continuous offering by individuals who are appropriately licensed as insurance
agents of Security First Life for the sale of life insurance and variable
annuity contracts in the state where the sale is made. In addition, these
individuals will be registered representatives of the principal underwriter,
Security First Financial, Inc., or of other broker-dealers registered under the
Securities Exchange Act of 1934 whose registered representatives are authorized
by applicable law to sell variable annuity contracts issued by Security First
Life. Commissions on sales of contracts range from 0% to 7.5%. Agents are paid
from the General Account of Security First Life. Such commissions bear no direct
relationship to any of the charges under the Contracts. No direct underwriting
commissions are paid to Security First Financial, Inc.
7
<PAGE> 30
CALCULATION OF PERFORMANCE DATA
a. Money Market Portfolio. The yield of the Money Market Portfolio of the
Separate Account is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one accumulation unit of the Series at the beginning of a seven-day base period,
subtracting a hypothetical charge reflecting deductions from account values, and
dividing the difference by the value of the account at the beginning of the base
period to obtain the base period return, and multiplying the base period return
by (365/7) with the resulting yield figure carried to a least the nearest
hundredth of one percent.
The effective yield of the Money Market Portfolio over the same period is
computed by determining the net change, exclusive of capital changes, in the
value of a hypothetical pre-existing account having a balance of one
accumulation unit of the Series at the beginning of the period, subtracting a
hypothetical charge reflecting deductions from account values, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then compounding the base period return 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:
EFFECTIVE YIELD = (BASE PERIOD RETURN + 1)(365/7) - 1.
b. Other Series. The average annual returns of the other Series of the Separate
Account are computed by finding the average annual compounded rates of return
over the specified periods that would equate the initial amount invested to the
ending redeemable value, according to the following formula:
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years in the period
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period (or fractional portion thereof)
The computation of average annual total returns does take into consideration
recurring charges and any non-recurring charges applicable to a Contract which
is surrendered in full at the end of the stated holding period.
For periods occurring prior to commencement of operations of a Series of the
Separate Account, the performance computed will be derived from that of the
corresponding underlying Fund, adjusted for all Contract charges applicable to
the Separate Account. The inception date, if applicable, will be that of the
underlying Fund in such cases. Advertisements will always include total return
data for one, five and ten year periods (or since inception) but may include
other periods as well.
VOTING RIGHTS
Unless otherwise restricted by the Plan under which a Contract is issued, each
Participant will have the right to instruct Security First Life with respect to
voting the Fund shares which are the assets underlying the Participant's
interest in the Separate
8
<PAGE> 31
Account, at all regular and special shareholder meetings. An Annuitant's voting
power with respect to Fund shares held by the Separate Account declines during
the time the Annuitant is receiving a Variable Annuity based on the investment
performance of the Separate Account, because amounts attributable to the
Annuitant's interest are being transferred annually to the General Account to
provide the variable payments.
SAFEKEEPING OF SECURITIES
All assets of the Separate Account are held in the custody of Security First
Life. The assets of each Separate Account Series will be kept physically
segregated by Security First Life and held separate from the assets of any other
firm, person or corporation. Additional protection for the assets of the
Separate Account is afforded by fidelity bonds covering all of Security First
Life's officers and employees.
SERVICING AGENT
An Administrative Services Agreement has been entered into between Security
First Life and SFG under which the latter has agreed to perform certain of the
administrative services relating to the Contracts and for the Separate Account.
SFG performs substantially all of the recordkeeping and administrative services
for the Separate Account.
INDEPENDENT AUDITORS
The financial statements of Security First Life Insurance Company which are
included in this Statement of Additional Information and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, for the periods
indicated in their reports thereon which appear herein, all of which have been
included in reliance on their reports, given on their authority as experts in
accounting and auditing.
LEGAL MATTERS
Legal matters concerning federal securities laws applicable to the issue and
sale of the Variable Annuity contracts have been passed upon by Routier and
Johnson, P.C., 1700 K Street, N.W., Washington, D.C. 20006.
STATE REGULATION OF SECURITY FIRST LIFE
Security First Life is subject to the laws of the State of Delaware governing
insurance companies and to regulation by the Delaware Commissioner of Insurance.
An annual statement, in a prescribed form, is filed with the Commissioner on or
before March 1 each year covering the operations of Security First Life for the
preceding year and its financial condition on December 31 of such year. Security
First Life's books and assets are subject to review or examination by the
Commissioner or his agents at all times, and a full examination of its
operations is usually conducted by the National Association of Insurance
Commissioners at least once in every three years. Security First Life was last
examined as of December 31, 1993. While Delaware insurance law prescribes
permissible investments for Security First Life, it does not prescribe
permissible investments for the Separate Account, nor does it involve
supervision of the investment management or policy of Security First Life.
In addition, Security First Life is subject to the insurance laws and
regulations of other jurisdictions in which it is licensed to operate. State
insurance laws generally provide regulations for the licensing of insurers and
their agents, govern the financial affairs of
9
<PAGE> 32
insurers, require approval of policy forms, impose reserve requirements and
require filing of an annual statement. Generally, the insurance departments of
these other jurisdictions apply the laws of Delaware in determining permissible
investments for Security First Life.
FINANCIAL STATEMENTS
The financial statements of Security First Life contained herein should be
considered only for the purposes of informing investors as to its ability to
carry out the contractual obligations as depositor under the Contracts as
described elsewhere herein and in the prospectus. The financial statements of
the Separate Account are not included in this Statement of Additional
Information, because, as of the date thereof, the Reinsurance Transaction
referred to above under "The Separate Account" page 3, and described in greater
detail in the prospectus, had not been consummated, and as a result the Separate
Account had no assets and no liabilities attributable to the Contracts.
10
<PAGE> 33
[LETTERHEAD]
Report of Independent Auditors
Board of Directors
Security First Life Insurance Company
We have audited the accompanying consolidated balance sheets of Security First
Life Insurance Company and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of income, stockholder's equity, and cash
flows for each of the three 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Security First
Life Insurance Company and subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Notes 3 and 5 to the consolidated financial statements, Security
First Life Insurance Company and subsidiaries made certain accounting changes in
1994 and 1993.
/s/ Ernst & Young LLP
-----------------------
Ernst & Young LLP
February 9, 1996
<PAGE> 34
SECURITY FIRST LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1995 1994
---- ----
(In thousands)
<S> <C> <C>
ASSETS
INVESTMENTS
Fixed maturities:
Available-for-sale $2,176,985 $1,602,387
Held-for-investment 197,379
Equity securities 5,129 5,827
Investment real estate 2,311 2,298
Policy and mortgage loans 18,798 16,239
Short-term investments 7,024 26,215
---------- ----------
2,210,247 1,850,345
CASH AND CASH EQUIVALENTS 7,990 13,359
ACCRUED INVESTMENT INCOME 30,459 27,018
DEFERRED POLICY ACQUISITION COSTS 56,515 47,985
OTHER ASSETS
Property under capital lease 10,680 11,260
Assets held in separate accounts 340,287 184,196
Other 4,318 4,517
---------- ----------
$2,660,496 $2,138,680
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 35
<TABLE>
<CAPTION>
December 31
1995 1994
---- ----
(In thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Policyholder liabilities $2,047,818 $1,790,456
Obligation under capital lease 15,966 16,183
Notes payable to parent 35,000 35,000
Note payable 1,000 2,000
Federal income taxes 35,052 1,723
Liabilities related to separate accounts 340,287 184,196
Other 5,293 5,060
---------- ----------
2,480,416 2,034,618
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Preferred stock, $1 par value
Authorized, issued and outstanding -- 200,000 shares 200 200
Common stock, $200 par value
Authorized -- 15,000 shares
Issued and outstanding -- 11,000 shares 2,200 2,200
Additional paid-in capital 48,147 48,147
Net unrealized investment gains (losses) 38,972 (21,561)
Retained earnings 90,561 75,076
---------- ----------
180,080 104,062
---------- ----------
$2,660,496 $2,138,680
========== ==========
</TABLE>
3
<PAGE> 36
SECURITY FIRST LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
REVENUES
Net investment income $158,174 $146,101 $137,450
Annuity product income 14,815 6,121 2,499
Net realized investment gains (losses) 1,347 (1,735) 921
Other 701 709 721
-------- -------- --------
TOTAL REVENUES 175,037 151,196 141,591
BENEFITS AND EXPENSES
Interest credited to policyholders 103,959 102,776 102,513
Benefits in excess of policyholder liabilities 5,738 4,119 1,907
Amortization of deferred policy acquisition costs 15,505 5,612 1,981
Operating expenses 28,201 23,543 17,397
-------- -------- --------
TOTAL BENEFITS AND EXPENSES 153,403 136,050 123,798
-------- -------- --------
21,634 15,146 17,793
Income tax expense
Current 3,044 1,776 5,467
Deferred 3,105 3,388 597
-------- -------- --------
6,149 5,164 6,064
-------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 15,485 9,982 11,729
Cumulative effect of change in accounting for income taxes 1,510
-------- -------- --------
NET INCOME $ 15,485 $ 9,982 $ 13,239
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 37
SECURITY FIRST LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Net
Additional Unrealized Total
Preferred Common Paid-in Investment Retained Stockholder's
Stock Stock Capital Gains (Losses) Earnings Equity
----- ----- ------- -------------- -------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993 $200 $2,200 $48,147 $ 226 $51,855 $102,628
Net income 13,239 13,239
Net unrealized investment losses (269) (269)
---- ------ ------- -------- ------- --------
Balance at December 31, 1993 200 2,200 48,147 (43) 65,094 115,598
Net income 9,982 9,982
Cumulative effect of change in
accounting principle at January 1 28,618 28,618
Net unrealized investment losses (50,136) (50,136)
---- ------ ------- -------- ------- --------
Balance at December 31, 1994 200 2,200 48,147 (21,561) 75,076 104,062
Net income 15,485 15,485
Net unrealized investment gains 60,533 60,533
---- ------ ------- -------- ------- --------
Balance at December 31, 1995 $200 $2,200 $48,147 $ 38,972 $90,561 $180,080
==== ====== ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 38
SECURITY FIRST LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 15,485 $ 9,982 $ 13,239
Adjustments to reconcile net income to net cash
provided by operations:
Cumulative effect of accounting change (1,510)
Net realized investment losses (gains) (1,347) 3,014 (12,121)
Depreciation and amortization 1,391 2,281 1,703
Accretion of discount and amortization of
premium on investments 1,059 (2,423) (8,212)
Changes in operating assets and liabilities:
Accrued investment income (3,441) (648) (3,957)
Deferred policy acquisition costs (15,676) (4,915) (16,946)
Other assets 2,194 4,560 (4,504)
Other liabilities 673 (9,050) 2,207
--------- ----------- -----------
NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES 338 2,801 (30,101)
INVESTING ACTIVITIES
Fixed maturity securities -- available-for-sale
Purchases (636,371) (1,033,097)
Sales and maturities 439,897 860,239
Fixed maturity securities -- held-for-investment
Purchases (1,037,222)
Sales and maturities 783,570
Equity securities
Purchases (117)
Sales 931 1,085
Disposal (acquisition) of real estate, net (13) 2,192 (161)
Net sale (purchase) of short-term investments 19,191 (26,215)
Repayment (issuance) of loans, net (2,558) 5,792 (359)
Purchase of equipment (388) (896)
--------- ----------- -----------
NET CASH USED IN
INVESTING ACTIVITIES (179,428) (190,900) (254,172)
FINANCING ACTIVITIES
Receipts credited to policyholder accounts 565,698 468,898 509,223
Amounts returned to policyholders (390,760) (326,691) (208,422)
Issuance of note payable to parent 10,000 25,000
Repayment of notes payable (1,000) (1,000) (1,000)
Reduction of capital lease obligation (217) (192) (170)
--------- ----------- -----------
NET CASH PROVIDED
BY FINANCING ACTIVITIES 173,721 151,015 324,631
--------- ----------- -----------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (5,369) (37,084) 40,358
Cash and cash equivalents at beginning of year 13,359 50,443 10,085
--------- ----------- -----------
CASH AND CASH
EQUIVALENTS AT END OF YEAR $ 7,990 $ 13,359 $ 50,443
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 39
SECURITY FIRST LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- Security First Life Insurance Company (Security First
Life) and subsidiaries (collectively, the Company) is a wholly-owned subsidiary
of Security First Group, Inc. (SFG), formerly The Holden Group, Inc. SFG has
been a wholly-owned subsidiary of London Insurance Group, Inc. (LIG) since May
1994. The Company sells a broad range of fixed and variable annuity contracts.
The Company's consolidated financial statements are prepared in conformity with
generally accepted accounting principles (GAAP) which vary in some respects from
statutory accounting practices prescribed or permitted by regulatory authorities
(statutory basis) and include the accounts of its wholly-owned subsidiaries,
Fidelity Standard Life Insurance Company (Fidelity Standard Life) and Security
First Life Insurance Company of Arizona (SFL-Arizona). All significant
intercompany transactions and accounts are eliminated in consolidation.
INVESTMENTS -- Investments are reported on the following bases:
Fixed Maturities:
Available-for-sale -- at fair value, which differs from the amortized
cost of such investments. Unrealized gains and losses on these
investments (net of related adjustments for deferred policy acquisition
costs and applicable deferred income taxes) are credited or charged to
stockholder's equity and, accordingly, have no effect on net income.
Held-for-investment -- at cost, adjusted for amortization of premium or
accretion of discount and other-than-temporary declines in fair value.
The amortized cost of such investments differs from their fair values.
See Note 3 regarding the reclassification in 1995 of
held-for-investment securities to available-for-sale.
For those fixed maturities which are mortgage-backed, the Company
recognizes income using a constant effective yield based on anticipated
prepayments and the estimated economic life of the securities. When
actual prepayments differ significantly from anticipated prepayments,
the effective yield is recalculated to reflect actual payments to date
and anticipated future payments. The net investment in the security is
adjusted to the amount that would have existed had the new effective
yield been applied since the acquisition of the security. Such
adjustment is included in net investment income.
The Company does not maintain a trading portfolio, or at December 31,
1995, a held-for-investment portfolio.
7
<PAGE> 40
SECURITY FIRST LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Equity securities (common and non-redeemable preferred stocks) -- at fair
value if publicly traded. Changes in fair values of equity securities, net
of applicable deferred income taxes, are reported as unrealized gains or
losses directly in stockholder's equity and, accordingly, have no effect on
net income.
Investment real estate -- at lower of cost less accumulated depreciation or
fair value.
Mortgage loans and policy loans -- at unpaid balances.
Short-term investments -- at cost, which approximates fair value.
Realized gains and losses on disposal of investments are determined on a
specific identification basis.
CASH EQUIVALENTS -- Cash equivalents consist of investments in money market
funds. The carrying amount of cash equivalents approximates fair value.
DEFERRED POLICY ACQUISITION COSTS -- As of January 1, 1995, the Company adopted
the account value deposit method of reporting on two-tier annuities (those
annuities that have a different interest credited rate for annuitization as
compared to withdrawal). The Company had previously adopted this method for
single-tier annuities. Under this method, commissions and other costs of
acquiring annuities that vary with and are primarily related to the acquisition
of such business are included in deferred policy acquisition costs. Prior to
that date, certain commission costs for two-tier annuities were reported as a
component of policyholder liabilities. As a result of this change, deferred
policy acquisition costs and policyholder liabilities increased by $38,590,000
on January 1, 1995 with no effect on stockholder's equity. Additionally, the
presentation of certain revenue and expense items in the consolidated statement
of income for the year ended December 31, 1995 has been effected by this change
with no significant impact on net income.
Deferred policy acquisition costs are being amortized in proportion to the
present value of estimated future gross margins which includes the impact of
realized investment gains and losses.
8
<PAGE> 41
SECURITY FIRST LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
POLICYHOLDER LIABILITIES -- As indicated previously, the Company adopted the
account value deposit method for reporting on two-tier annuities as of January
1, 1995. Under this method, the policyholder liabilities for two-tier annuities
are the lower tier account values. Prior to that date, policyholder liabilities
for the Company's two-tier fixed annuity products were calculated using a
prospective approach. Under the prospective approach, the policyholder liability
was equal to the present value of future benefits using a "break-even" discount
rate which resulted in no gain or loss when a policy was issued. This method
allowed profits to emerge in relation to the difference between actual
investment earnings and the break-even discount rate used in the calculation of
the policyholder liabilities. Policyholder liabilities for the Company's
single-tier fixed annuity products are the account values.
The fair value of policyholder liabilities is estimated assuming all
policyholders surrender their policies. The carrying amounts and estimated fair
values are as follows (in thousands):
<TABLE>
<CAPTION>
Carrying Amount Estimated Fair Value
--------------- --------------------
<S> <C> <C>
December 31, 1995 $2,047,818 $1,976,079
December 31, 1994 1,790,456 1,760,999
</TABLE>
NOTES PAYABLE -- Notes payable are carried at their unpaid balances which
approximate fair value because the interest rates on these notes approximate
market rates.
INCOME TAXES -- The Company files consolidated federal income tax returns with
SFG. Income taxes are provided on the basis as if the companies filed
separately.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Such differences are related principally to the deferral of policy
acquisition costs, the valuation of fixed maturities and the provision for
policyholder liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
SEPARATE ACCOUNTS -- The assets held in separate accounts represent funds which
are separately administered by the Company pursuant to variable annuity
contracts. The liabilities related to separate accounts consist of policyholder
liabilities for variable annuities. The separate account assets and liabilities
are reported at fair value. The Company receives a fee for administrative
services provided to the separate accounts. Investment risks associated with
fair value changes are borne by the contract holders.
9
<PAGE> 42
SECURITY FIRST LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ANNUITY REVENUES AND BENEFITS -- Annuity product income represents fees earned
from policyholders of annuity contracts, including surrender charges,
annuitization charges and administration fees. Benefits in excess of
policyholder liabilities consists of the difference between the policyholder
account values surrendered or annuitized during the period and the related
policyholder liability balances.
ESTIMATES -- Certain amounts reported in the accompanying consolidated financial
statements are based on management's best estimates and judgments. Actual
results could differ from those estimates.
NEW ACCOUNTING STANDARD -- In March 1995, the Financial Accounting Standards
Board (FASB) issued a new standard on accounting for long-lived assets which are
impaired or to be disposed of. The Company must adopt the standard by 1996. The
standard requires that an impaired long-lived asset be measured based on the
fair value of the asset to be held and used or the fair value less cost to sell
the asset to be disposed of. When adopted, this standard is not expected to have
a material effect on the financial position or results of operations of the
Company.
RECLASSIFICATIONS -- Certain reclassifications of prior-year amounts have been
made to conform with current-year classifications.
10
<PAGE> 43
SECURITY FIRST LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 -- STATUTORY CAPITAL AND RESTRICTIONS
Security First Life and each of its subsidiaries are required to file annual
statements with various state insurance regulatory authorities on a statutory
basis.
The statutory-basis capital and surplus at December 31, 1995, 1994 and 1993, and
statutory-basis net income (loss) for those years are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Net
and Surplus Income (Loss)
----------- -------------
December 31, 1995
-----------------
<S> <C> <C>
Security First Life Insurance Company $100,027* $3,161*
Fidelity Standard Life Insurance Company 15,573* 831*
Security First Life Insurance Company of Arizona 12,715* 612*
December 31, 1994
-----------------
Security First Life Insurance Company $ 99,272 $1,758
Fidelity Standard Life Insurance Company 14,894 409
Security First Life Insurance Company of Arizona 12,118 1,246
December 31, 1993
-----------------
Security First Life Insurance Company $ 90,967 $5,057
Fidelity Standard Life Insurance Company 14,651 (160)
Security First Life Insurance Company of Arizona 10,890 1,358
</TABLE>
* These unaudited amounts are preliminary and subject to change upon
completion of the statutory annual statements.
The difference between statutory-basis net income (loss) and net income reported
based on GAAP relates primarily to different reserving methods used to calculate
policyholder liabilities, the recognition of deferred policy acquisition costs
and deferred income taxes.
Security First Life and Fidelity Standard Life are incorporated and domiciled in
Delaware. SFL-Arizona is incorporated and domiciled in Arizona. The payment of
dividends by Security First Life and each of its subsidiaries is subject to
statutory limitations which are based on each company's statutory-basis net
income and surplus levels. At December 31, 1995, the maximum amount of dividends
Security First Life could pay SFG without prior approval from state insurance
regulatory authorities is $9,762,000.
11
<PAGE> 44
SECURITY FIRST LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 -- INVESTMENTS
The Company adopted Statement of Financial Accounting Standards No. 115 (SFAS
No. 115), Accounting for Certain Investments in Debt and Equity Securities, as
of January 1, 1994. In accordance with SFAS No. 115, prior period financial
statements were not restated to reflect the change in accounting principle. The
cumulative effect as of January 1, 1994 of adopting SFAS No. 115 was an increase
in stockholder's equity of $28,618,000 -- net of related adjustments for
deferred policy acquisition costs of $62,166,000 which was recorded as an
adjustment to policyholder liabilities and deferred income taxes of $14,743,000
- -- to reflect the net unrealized gains on securities previously carried at
amortized cost. There was no effect on net income as a result of the adoption of
SFAS No. 115.
In November 1995, the FASB issued a Special Report, A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities. In accordance with provisions in that Special Report, the Company
chose to reclassify securities from held-for-investment to available-for-sale.
At the date of transfer, the amortized cost of those securities was $169,879,000
and the unrealized gain on those securities was $2,291,000, which is included in
stockholder's equity.
Unrealized investment gains and losses reported in the accompanying financial
statements are as follows (in thousands):
<TABLE>
<CAPTION>
December 31
1995 1994
---- ----
<S> <C> <C>
Unrealized investment gains (losses) $104,593 $(76,004)
Less: Adjustment for deferred policy acquisition costs 45,736 (43,719)
Deferred income taxes (benefit) 19,885 (10,724)
-------- --------
Net unrealized investment gains (losses) $ 38,972 $(21,561)
======== ========
</TABLE>
The adjustment for deferred policy acquisition costs of $43,719,000 in 1994 was
recorded as an adjustment to policyholder liabilities. Included in unrealized
investment gains (losses) are net losses related to equity securities of $58,000
and $230,000 at December 31, 1995 and 1994, respectively.
12
<PAGE> 45
SECURITY FIRST LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 -- INVESTMENTS (continued)
The amortized cost and fair value of fixed maturities as of December 31, 1995
and 1994 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
December 31, 1995
-----------------
Available-for-sale:
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 131,672 $ 12,467 $ (153) $ 143,986
Debt securities issued by foreign governments 16,779 1,687 18,466
Corporate securities 894,766 64,723 (5,194) 954,295
Mortgage-backed securities 1,029,090 33,049 (1,901) 1,060,238
---------- -------- -------- ----------
$2,072,307 $111,926 $ (7,248) $2,176,985
========== ======== ======== ==========
December 31, 1994
-----------------
Available-for-sale:
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 114,207 $ 2,100 $ (4,649) $ 111,658
Debt securities issued by foreign
governments 21,916 334 (481) 21,769
Corporate securities 760,618 9,679 (39,496) 730,801
Mortgage-backed securities 781,296 6,735 (49,872) 738,159
---------- -------- -------- ----------
$1,678,037 $ 18,848 $(94,498) $1,602,387
========== ======== ======== ==========
Held-for-investment:
Mortgage-backed securities $ 197,379 $ 1,471 $(13,215) $ 185,635
========== ======== ======== ==========
</TABLE>
13
<PAGE> 46
SECURITY FIRST LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 -- INVESTMENTS (continued)
The amortized cost and fair value of fixed maturities by contractual maturity at
December 31, 1995, are summarized below. Actual maturities will differ from
contractual maturities because certain borrowers have the right to call or
prepay obligations.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
(In thousands)
<S> <C> <C>
Available-for-sale:
Due in one year or less $ 18,459 $ 18,666
Due after one year through five years 162,465 172,269
Due after five years through ten years 580,386 611,671
Due after ten years 281,907 314,142
Mortgage-backed securities 1,029,090 1,060,237
---------- ----------
$2,072,307 $2,176,985
========== ==========
</TABLE>
Proceeds from sales of fixed maturities are $441,790,000 and $695,755,000 in
1995 and 1994, respectively.
The Company reports realized gains (losses) on investment transactions net of
any adjustment to the amortization of deferred policy acquisition costs when
such amortization is accelerated or decelerated as a result of the realization
of gains or losses other than as originally anticipated on the sale of
investments associated with annuity products. Net realized investment gains
(losses) reported in the accompanying financial statements are as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Fixed maturities -- available-for-sale
Gross gains $ 6,181 $ 7,174
Gross losses (4,621) (6,328)
------- -------
1,560 846
Fixed maturities -- held-for-investment
Gross gains $ 14,755
Gross losses (2,634)
--------
12,121
Loss on equity securities (213) (31)
Loss on real estate (2,250)
Accelerated amortization
of deferred policy acquisition costs (300) (11,200)
------- ------- ---------
Net realized investment gains (losses) $ 1,347 $(1,735) $ 921
======= ======= ========
</TABLE>
14
<PAGE> 47
SECURITY FIRST LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 -- INVESTMENTS (continued)
The Company has recorded a valuation reserve for possible other-than-temporary
impairment in the value of fixed maturities of $2,000,000 at December 31, 1995
and 1994.
Concentrations of credit risk with respect to fixed maturities are limited due
to the large number of issues owned and their dispersion across many different
industries and geographic areas. Accordingly, at December 31, 1995, the Company
had no significant concentration of credit risk.
The fair values for fixed maturities and equity securities are primarily based
on values obtained from independent pricing services.
The cost of equity securities was $5,214,000 and $6,177,000 on December 31, 1995
and 1994, respectively.
Investment real estate is net of accumulated depreciation of $1,596,000 and
$1,538,000 as of December 31, 1995 and 1994, respectively, and a $2,250,000
provision for decline in fair value at those dates.
The carrying amount of mortgage loans ($945,000 and $934,000 at December 31,
1995 and 1994, respectively) and policy loans ($17,853,000 and $15,305,000 at
December 31, 1995 and 1994, respectively) approximates fair value because the
interest rates on these loans approximate market rates.
The Company places its temporary cash investments with high-credit quality
financial institutions and, by corporate policy, limits the amount of credit
exposure to any one financial institution.
At December 31, 1995, investment securities having an amortized cost of
$10,561,000 were on deposit with various states in accordance with state
insurance department requirements.
15
<PAGE> 48
SECURITY FIRST LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 -- INVESTMENTS (continued)
Investment income by major category of investment is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Fixed maturities $159,266 $148,303 $139,404
Policy loans 884 749 620
Real estate 894 406 367
Mortgage loans 345 769 974
Short-term investments 1,943 114
Cash and cash equivalents 388 783 831
-------- -------- --------
163,720 151,124 142,196
Investment expenses (5,546) (5,023) (4,746)
--------- -------- --------
Net investment income $158,174 $146,101 $137,450
======== ======== ========
</TABLE>
The Company has no significant amounts of non-income producing investments.
NOTE 4 -- NOTES PAYABLE
Notes payable consist of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
5% Surplus note due to SFG, interest payable monthly,
principal payable upon regulatory approval $25,000 $25,000
8% Note due to The Capitol Life Insurance Company,
interest payable quarterly, principal payments of $1,000,000
each paid annually on December 31 1,000 2,000
8% Surplus note due to SFG, interest payable monthly,
principal payable upon regulatory approval 10,000 10,000
------- -------
$36,000 $37,000
======= =======
</TABLE>
Security First Life has a $15,000,000 bank revolving credit line which bears
interest at a floating rate based on London Interbank Offered Rates. There were
no borrowings outstanding under this revolving credit line at December 31, 1995
and 1994. The $25,000,000 and $10,000,000 surplus notes payable to SFG are
pledged, along with the common and preferred stock of Security First Life, as
collateral for SFG's bank revolving credit line.
Principal payments due on the notes payable during the next five years are
$1,000,000 in 1996.
16
<PAGE> 49
SECURITY FIRST LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4 -- NOTES PAYABLE (continued)
Interest paid by the Company totaled $2,225,000 in 1995, $1,799,000 in 1994 and
$343,000 in 1993.
NOTE 5 -- INCOME TAXES
The Company files a consolidated federal income tax return with SFG and its
subsidiaries. Taxes are provided for and paid to SFG as if the Company filed
separately.
The Company adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, effective January 1, 1993 and, as permitted under
the new rules, did not restate prior years' financial statements. The cumulative
effect of this change in accounting for income taxes as of January 1, 1993 of
$1,510,000 is reported separately in the consolidated statement of income for
the year ended December 31, 1993.
The liability for federal income taxes includes deferred taxes of $35,875,000
and $3,324,000 at December 31, 1995 and 1994, respectively. Significant
components of these deferred taxes are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs $32,937 $14,701
Fixed maturities 19,980
Other assets 301
Other, net 495 1,050
------- -------
Total deferred tax liabilities 53,412 16,052
Deferred tax assets:
Fixed maturities 8,654
Policyholder liabilities 13,384 1,674
Capital lease 765 628
Other liabilities 3,388 1,772
------- -------
Total deferred tax assets 17,537 12,728
------- -------
Net deferred tax liabilities $35,875 $ 3,324
======= =======
</TABLE>
Income taxes paid by the Company were $3,248,000 in 1995, $2,000,000 in 1994 and
$4,325,000 in 1993.
17
<PAGE> 50
SECURITY FIRST LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 -- INCOME TAXES (continued)
In 1995, the Company's income tax provision differs from the statutory rate of
34%. The following is a reconciliation of the federal income tax at statutory
rates with the income tax provision as shown in the consolidated statement of
income for the year ended December 31, 1995 (in thousands):
<TABLE>
<S> <C>
Federal income tax at 34% $7,356
Dividends received deduction (317)
True up of prior year taxes (875)
Other (15)
------
Provision for income tax expense $6,149
======
</TABLE>
NOTE 6 -- CAPITAL LEASE
Security First Life has a lease for office space that expires in 2014. This
lease is treated as a capital lease for financial reporting purposes.
The Company subleases space on an annual basis to SFG to use as its home office.
Related income offset against the lease costs was $1,663,000, $1,649,000 and
$1,578,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Future payments under the lease are as follows (in thousands):
<TABLE>
<S> <C>
1996 $ 2,166
1997 2,166
1998 2,166
1999 2,166
2000 2,166
Thereafter 29,051
--------
Total minimum rental payments 39,881
Amount representing interest (23,915)
Present value of minimum rental payments $ 15,966
========
</TABLE>
The property under capital lease is net of accumulated amortization of
$6,717,000 in 1995 and $6,137,000 in 1994.
18
<PAGE> 51
SECURITY FIRST LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 -- COMMITMENTS, CONTINGENCIES AND RISKS
The Company has forward contracts with commitments to purchase mortgage-backed
securities with total par values of $25,500,000 at December 31, 1995. The
Company uses these contracts to hedge the interest rate risk on future
investments that match policyholder liabilities, primarily related to
guaranteed-rate products. Gains or losses realized on such contracts are
included in the carrying value of the underlying anticipated investment. The
Company is subject to the risk that the counterparties to such contracts would
fail to deliver the securities to the Company on settlement date, if the Company
were to hold the contract on that date. The Company's current cash balances and
expected future cash flows are sufficient to settle the commitments under these
forward contracts.
Included in the accompanying balance sheet are assets of $6,000,000 at December
31, 1995 related to The Capitol Life Insurance Company (CLICO) and its parent.
CLICO is currently operating under supervision by the Colorado Division of
Insurance. The Company anticipates that CLICO will continue as an ongoing
enterprise. However, there can be no certainty that this will occur.
NOTE 8 -- RELATED PARTY TRANSACTIONS
The Company has marketing and administrative agreements with SFG and previously
with its subsidiary, Holden Financial Company, under which these companies
provide all of the Company's marketing and policyholder administration services.
Amounts incurred under these agreements were $38,954,000, $31,183,000 and
$26,026,000 for 1995, 1994 and 1993, respectively.
The Company has management agreements with SFG under which the latter provides
certain personnel, administrative services and office space. Amounts incurred
under these agreements were $4,308,000 in 1995 and 1994 and $4,248,000 in 1993.
The Company has investment advisory agreements with Security First Investment
Management Corporation, a subsidiary of SFG. Fees of $4,756,000, $4,508,000 and
$4,067,000 were paid in 1995, 1994 and 1993, respectively, pursuant to these
agreements.
19
