<PAGE>
As filed with the Securities and Exchange Commission on April 24, 1995
Registration No. 33-37498
811-2954
----------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------------------------
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
--- ---
Post-Effective Amendment No. 45 x
--- ---
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Amendment No. 23 x
-- ---
-----------------------------------------------------
THE FIDELITY VARIABLE ANNUITY ACCOUNT
(Exact Name of Registrant)
PFL LIFE INSURANCE COMPANY
(Name of Depositor)
4333 Edgewood Road N.E.
Cedar Rapids, Iowa 52499
Depositor's Telephone Number: (319) 398-8511
Craig D. Vermie
Associate General Counsel, Vice President and Assistant Secretary
PFL Life Insurance Company
4333 Edgewood Road N.E., Cedar Rapids, Iowa 52499
(Name and Address of Agent for Service)
Copy to:
Frederick R. Bellamy, Esquire
Sutherland, Asbill & Brennan
1275 Pennsylvania Avenue N.W.
Washington, D.C. 20004-2404
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of the Registration Statement.
<PAGE>
DECLARATION PURSUANT TO RULE 24F-2
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant declares that a notice pursuant to Rule 24f-2 for the year ended
December 31, 1994, was filed on February 27, 1995.
------------------------------
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b) of Rule 485.
- -----
X on May 1, 1995 pursuant to paragraph (b) of Rule 485.
- -----
60 days after filing pursuant to paragraph (a)(i) of Rule 485
- -----
on pursuant to paragraph (a)(i) of Rule 485
- ----- -------------------
75 days after filing pursuant to paragraph (a)(ii)
- -----
on pursuant to paragraph (a)(ii) of Rule 485
- ----- -----------
If appropriate, check the following box:
This post-effective amendment designates a new effective
---
date for a previously filed post-effective amendment.
<PAGE>
PROSPECTUS May 1, 1995
Fidelity Income Plus
The Fidelity Variable Annuity Account
Individual Variable Annuity Contracts
Issued by
PFL Life Insurance Company
Administrative and Service Office:
Financial Markets Division - Variable Annuity Dept.
4333 Edgewood Road, N.E.
Cedar Rapids, IA 52499
The individual variable annuity contracts (the "Contracts") described in
this Prospectus are offered under the name "Fidelity Income Plus" by PFL Life
Insurance Company (the "Company") to individuals who desire to accumulate
capital on a long-term tax-deferred basis for retirement or other long-term
purposes. The Contracts may only be purchased on a non-tax qualified basis.
The Contracts provide for monthly annuity payments on a variable or fixed
basis, commencing at a future date selected by the owner of the Contract.
The Contract may be purchased with a minimum initial Purchase Payment of
$5,000.
After the deduction of applicable charges, payments made to purchase the
Contracts ("Purchase Payments") become assets of the Fidelity Variable
Annuity Account (the "Variable Account"), a segregated investment account of
the Company. Net Purchase Payments may be allocated to one or more of seven
sub-accounts of the Variable Account (the "Sub-accounts"). The assets of the
Sub-accounts are currently invested in shares of the Variable Insurance
Products Fund and the Variable Insurance Products Fund II (the "Funds"). The
Funds currently offer seven Portfolios that are available under the Contracts:
Money Market, High Income, Equity-Income, Growth, Overseas, Investment Grade
Bond and Asset Manager. The value of each Contract prior to the date upon
which the first annuity payment is to be made (the "Annuity Commencement
Date") and the amount of Variable Annuity Payments thereafter will depend
upon the investment performance of the assets of the Variable Account.
Following the date selected by the Contract Owner, Annuity Payments may
commence under one of the Annuity Options provided in the Contracts. Prior
to the Annuity Commencement Date, the Contracts are redeemable, in whole or
in part, at their then current value.
This Prospectus sets forth the information about the Variable Account that
a prospective investor should know before investing. Additional information
about the Variable Account has been filed with the Securities and Exchange
Commission in a Statement of Additional Information dated May 1, 1995, which
information is incorporated by reference, and is available without charge by
calling Fidelity Investments at 1-800-544-2442. The table of contents of the
Statement of Additional Information appears on page 30 of this Prospectus.
N. INC-PRO-595
1
<PAGE>
For further information please call Fidelity Investments
For Sales Information
Nationwide (toll-free): 800-544-2442
For Service and Account Information
Nationwide (toll-free): 800-634-4672
This Prospectus Must Be Accompanied Or Preceded By A Current Prospectus
For the Variable Insurance Products Fund and the Variable Insurance
Products Fund II.
THE CERTIFICATE IS NOT A DEPOSIT OR OBLIGATION OF OR GUARANTEED OR ENDORSED
BY, ANY BANK OR DEPOSITORY INSTITUTION, AND THE CERTIFICATE IS NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THIS PROSPECTUS SHOULD BE RETAINED FOR FUTURE REFERENCE.
The date of this Prospectus is May 1, 1995
This Contract is not available in all States
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESMAN, OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON.
DEFINITIONS
Accumulation Unit - An accounting unit of measure used in calculating the
Contract Value.
Administrative and Service Office - Financial Markets Division - Variable
Annuity Dept., 4333 Edgewood Road N.E., Cedar Rapids, Iowa 52499.
Annuitant - The person entitled to receive Annuity Payments after the
Annuity Commencement Date and during whose life any Annuity Payments
involving life contingencies will continue.
Annuity Commencement Date - The date, which can only be the first day of a
calendar month, upon which Annuity Payments are to commence.
Annuity Option - A method of receiving a stream of Annuity Payments.
Annuity Purchase Value - An amount equal to the Contract Value for the
Valuation Period which ends immediately preceding the Annuity Commencement
Date, reduced by any applicable premium or similar taxes.
Annuity Unit - An accounting unit of measure used in the calculation of the
amount of the second and each subsequent Variable Annuity Payment.
Beneficiary - The person who has the right to the death benefit set forth
in the Contract.
Code - The Internal Revenue Code of 1986, as amended.
Company - PFL Life Insurance Company.
Contingent Contract Owner - A person appointed by the Contract Owner to
succeed to ownership of the Contract in the event of the death of the
Contract Owner before the Annuity Commencement Date.
Contract - One of the variable annuity contracts offered by this Prospectus.
Contract Owner - The person who may exercise all rights and privileges under
the Contract. The Contract Owner during the lifetime of the Annuitant and
prior to the Annuity Commencement Date is the person designated as the
Contract Owner in the application or a Contingent Contract Owner; the
Contract Owner on and after the Annuity Commencement Date is the Annuitant;
and the Contract Owner after the death of the Annuitant is the Beneficiary.
2
<PAGE>
Contract Value - The sum of the value of all Accumulation Units credited to
a Contract for any particular Valuation Period.
Date of Issue - The date the Contract is issued, as shown on the Contract
Schedule Page.
Due Proof of Death - A certified copy of a death certificate, a certified
copy of a decree of a court of competent jurisdiction as to the finding of
death, or a written statement by the attending physician or any other proof
satisfactory to the Company will constitute Due Proof of Death.
Eligible Funds - Mutual funds, shares of which currently may be purchased
for the Variable Account.
FMR - Fidelity Management & Research Company, the investment advisor to the
Funds.
Fidelity Insurance - Fidelity Insurance Agency, Inc., through which the
Contracts are distributed.
Fidelity Brokerage - Fidelity Brokerage Services, Inc., which is the
principal underwriter for the contracts, and through which the Contracts are
distributed.
Fixed Annuity Payments - Payments made pursuant to an Annuity Option which
do not fluctuate in amount.
Formerly Eligible Funds - Mutual funds, shares of which were purchased for
the Variable Account prior to September 25, 1981.
Net Investment Factor - An index applied to measure the investment
performance of a Sub-account from one Valuation Period to the next.
Net Purchase Payment - A Purchase Payment less any applicable charges, such
as the initial administrative charge and any premium taxes.
Purchase Payment - An amount paid to the Company by the Contract Owner or on
the Contract Owner's behalf as consideration for the benefits provided by
the Contract.
Sub-account - A segregated account within the Variable Account which invests
in a portfolio of an Eligible Fund.
Valuation Period - The period of time from one determination of Accumulation
Unit and Annuity Unit values to the next subsequent determination of values.
Such determination shall be made as of the close of trading on the New York
Stock Exchange on each day that the Exchange is open for trading.
Variable Account - A separate account established by the Company and
registered as a unit investment trust under the Investment Company Act of
1940 to which Net Purchase Payments under the Contracts are allocated.
Variable Annuity - An annuity with Variable Annuity Payments which vary as
to dollar amount in relation to the investment performance of specified
Sub-accounts within the Variable Account.
Variable Annuity Payments - Payments made pursuant to an Annuity Option which
fluctuate based on the investment performance of selected Sub-accounts.
QUESTIONS AND ANSWERS ABOUT THE CONTRACT
Note: The following section contains brief questions and answers about the
Contract. Reference should be made to the body of this Prospectus for more
detailed information. "You" or "your" refers to the Contract Owner, "we,"
"us" or "our" refers to the Company.
1. What is the purpose of the Contract?
The Contract seeks to allow you to accumulate funds on a tax-deferred basis
and to receive Annuity Payments based on the investment experience of the
assets underlying the Contract. The Contract may only be purchased on a
non-tax qualified basis for use with retirement plans and other long-term
investment objectives. The Contract Owner can allocate Net Purchase Payments
to one or more Sub-accounts of the Fidelity Variable Annuity Account (the
"Variable Account"), each of which will invest in a corresponding portfolio
of the Variable Insurance Products Fund and the Variable Insurance Products
Fund II ("VIP" and "VIP II" or the "Funds"). Because Variable Annuity
Payments and Contract Values depend on the investment experience of the
selected Sub-accounts, the Contract Owner bears the entire investment risk
under this contract.
3
<PAGE>
2. What is an annuity?
An annuity provides for a stream of Annuity Payments beginning on the
Annuity Commencement Date. The Contract Owner may select from a number of
Annuity Options, including Annuity Payments for the life of an Annuitant (or
an Annuitant and another person, the "Joint Annuitant") with or without a
guaranteed number of Annuity Payments. Annuity Payments which remain the
same throughout the payment period are referred to in this Prospectus as
"Fixed Annuity Payments." Annuity Payments which vary in accordance with the
investment experience of the Sub-account selected by the Contract Owner are
referred to in this Prospectus as "Variable Annuity Payments." (See Annuity
Options," p. 22.)
3. What investments support the Contracts?
Currently, Purchase Payments made under the Contracts will be invested
through the Variable Account exclusively in shares of the Funds, which are
mutual funds advised by Fidelity Management & Research Company ("FMR"). The
Funds currently have seven Portfolios that are available under the Contracts:
Money Market, High Income, Equity-Income, Growth, Overseas, Investment
Grade Bond, and Asset Manager. Each of the seven Sub-accounts of the Variable
Account invests in the corresponding Portfolio of the Funds. The assets of
each Portfolio are held separately from other Portfolios and each has
distinct investment objectives and policies (see "The Variable Insurance
Products Fund and Variable Insurance Products Fund II," p. 13) which are
described in the accompanying Prospectuses for the Funds.
4. How do I purchase a Contract?
You may purchase a Contract by mailing in a completed signed application,
along with a check for the initial Purchase Payment to the Administrative and
Service Office. The minimum initial Purchase Payment is $5,000. Subsequent
Purchase Payments must be for $500 or more, and may be made at any time
prior to the Annuity Commencement Date as long as the Annuitant is living.
(See "Purchase of the Contracts," p.16.)
5. How are Purchase Payments allocated?
Net Purchase Payments are allocated in accordance with the Contract
Owner's instructions. Any allocation of the initial Net Purchase Payment
must be of at least $1,000 to each Sub-account selected. Allocations of
subsequent Net Purchase Payments may be made in any manner, so long as any
contribution to a Sub-account is at least $500. Allocations of subsequent
Net Purchase Payments may be changed by sending written notice to the
Administrative and Service Office or if you have previously authorized it,
by telephone. (See "Allocation and Reallocation of Net Purchase Payments,"
p. 16.)
6. Can I transfer values among the Sub-accounts?
A Contract Owner may reallocate the Contract Value allocated to a
particular Sub-account to one or more other Sub-accounts at any time either
in writing or, if you have previously authorized it, by telephone. (See
"Allocation and Reallocation of Net Purchase Payments," p. 16.)
7. How can I get to my money if I need it?
All or part of the Contract Value under the Contract may be withdrawn
before the earlier of the Annuitant's death or the Annuity Commencement
Date. The amount of the cash withdrawal payment will be equal to the Contract
Value at the end of the Valuation Period during which the election becomes
effective, or the lesser amount requested. None of the amount surrendered
will be subject to a surrender charge.
4
<PAGE>
(See "Surrenders," p. 18.) Certain withdrawals may be taxable and subject to a
penalty tax. (See "Surrenders," p. 18 and "Federal Tax Matters," p. 24.)
8. What are the charges and deductions under the Contract?
There is no sales charge under the Contract. We deduct a daily charge
equal to a percentage of the value of the net assets in the Variable Account
for the mortality risks assumed by us. The effective annual rate of this
charge is 0.8%. (See "Charges for Mortality Risk," p. 19.) WE GUARANTEE
THAT THIS CHARGE WILL NOT BE INCREASED.
The Company also deducts an annual administrative charge from the Contract
Value of each Contract to cover the costs of administering the Contract. The
annual administrative charge currently is $35. (See "Administrative Charge,"
p. 19.) This charge could increase in the future.
Premium taxes are deducted from Purchase Payments or Contract Values
depending upon when they are incurred by the Company. (See "Deductions for
Taxes" p. 20.)
The Contract Values also reflect the charges, fees and expenses of the
Fund. (See "The Variable Insurance Products Fund and Variable Insurance
Products Fund II Expenses," p. 13.) See also the Expense Data Summary on
page 7.
9. What Annuity Income Options are available under the Contract?
The Contract Owner, or the person selected by the Contract Owner (the
Annuitant), may receive Annuity Payments on a variable basis or a fixed
basis. The Contract Owner has flexibility in choosing the Annuity
Commencement Date.
Four Annuity Income Options are included in the Contract: (1) life
annuity; (2) joint and survivor annuity; (3) life annuity with 120 or 240
monthly payments guaranteed; and (4) cash or unit refund life annuity. All
of these are offered as either "Fixed Annuity Options" or "Variable Annuity
Options."
Fixed Annuity Payments will always be for the same specified amount.
However, the amount of Variable Annuity Payments will increase or decrease
according to the investment experience of the particular Sub-account(s)
selected. (See "Annuity Options," p. 22.)
10. What happens if the Annuitant dies before the Annuity Commencement
Date?
In the event that the Annuitant dies prior to the Annuity Commencement
Date, the Death Benefit is calculated and is payable, upon receipt of notice
of death, Due Proof of Death, and an election as to how the proceeds should
be paid, to the Beneficiary selected by the Contract Owner. The named
Beneficiary may be changed at any time before the Annuitant's death; the
Annuitant named in the contract, however, may not be changed. The Death
Benefit is not reduced by the application of any surrender charge. The Death
Benefit may be paid as either a lump sum cash benefit or under an Annuity
Option (See "Death Benefit," p. 21.)
11. What happens if the Contract Owner dies before the Annuity
Commencement Date?
If the Contract Owner is a different person than the Annuitant, in the
event that the Contract Owner dies prior to the Annuity Commencement Date,
his entire interest in the Contract will be distributed to the Contingent
Contract Owner if one is appointed, or to the estate of the Contract Owner.
The Contract Owner may appoint or change the Contingent Contract Owner at
any time prior to the Annuity Commencement Date. Regardless of whether the
Contract Owner is a different person than the Annuitant, upon the death of
the Contract Owner, the value of the Contract must be distributed pursuant
to rules prescribed by the Internal Revenue Code of 1986, as amended.
Special rules apply where the beneficiary of the Contract Owner's estate
is the surviving spouse of the deceased Contract Owner. (See "IRS Required
Distributions," p. 21.)
5
<PAGE>
12. Can the Contract be returned after it is delivered?
The Contract contains a provision for a Right to Return the Contract,
which permits cancellation by returning the Contract to us, along with a
written notice of revocation, at our Administrative and Service Office
within 10 days of receipt of the Contract. In the event of cancellation,
we will return all Purchase Payments made under the Contract within ten
days after we receive notice of cancellation.
13. Who do I call if I have any questions about my Contract?
Any question about procedures of your Contract will be answered by our
Administrative and Service Office. For service and account information, call
toll free, 800-634-4672. For information and assistance regarding sales
information, please call, toll free, 800-544-2442.
<TABLE>
<CAPTION>
FIDELITY VARIABLE ANNUITY ACCOUNT
SUMMARY
EXPENSE DATA
Investment
Contract Owner Money High Equity- Grade Asset
Transaction Expenses Market Income Income Growth Overseas Bond Manager
<S> <C> <C> <C> <C> <C> <C> <C>
Sales Load on Purchase
Payments 0 0 0 0 0 0 0
Deferred Sales Load 0 0 0 0 0 0 0
Surrender Fees 0 0 0 0 0 0 0
Annual Contract Fee $35 Per Contract
Transfer Fee 0 0 0 0 0 0 0
Variable Account
(as a percentage of
contract value)
Mortality and Expense
Risk Fees 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%
Account Fees and
Expenses 0 0 0 0 0 0 0
Total Variable Account
Annual Expenses 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%
===========================================================================
VIP AND VIP II Funds
Annual Expenses
(as a percentage of average
net assets)
Management Fee 0.20% 0.61% 0.52% 0.62% 0.77% 0.46% 0.72%
Other Expenses 0.07% 0.10% 0.06% 0.07% 0.15% 0.21% 0.08%
Total Fund Annual
Expenses 0.27% 0.71% 0.58% 0.69% 0.92% 0.67% 0.80%
===========================================================================
</TABLE>
Examples
An Owner would pay the following expenses on a $1,000 investment, assuming
a 5% annual return on assets:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Money Market Sub-account Portfolio $11 $36 $62 $137
High Income Sub-account Portfolio $16 $49 $85 $186
Equity-Income Sub-account Portfolio $15 $45 $78 $172
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Growth Sub-account Portfolio $16 $49 $84 $184
Overseas Sub-account Portfolio $18 $56 $96 $209
Investment Grade Bond Sub-account
Portfolio $16 $48 $83 $182
Asset Manager Portfolio $17 $52 $90 $197
</TABLE>
The above tables are intended to assist the Owner in understanding the costs
and expenses that will be borne, directly or indirectly. These include the
expenses of the VIP and VIP II Funds. See "Charges and Deductions," p. 19
and the VIP and VIP II prospectuses. In addition to the expenses listed
above, premium taxes may be applicable.
The Examples should not be considered a representation of past or future
expenses, and actual expenses may be greater or lesser than those shown. The
figures and data for the VIP and VIP II Funds Annual Expenses have been
provided by FMR, and while the Company does not dispute these figures, the
Company does not guaranty their accuracy.
CONDENSED FINANCIAL INFORMATION
The Accumulation Unit Values and the number of Accumulation Units
outstanding for each Sub-account:
<TABLE>
<CAPTION>
Money Market Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $2.124046 $2.196945 65,884,206.476
1993 2.073920 2.124046 38,531,933.669
1992 2.011998 2.073920 46,920,555.357
1991 1.911406 2.011998 52,846,585.564
1990 1.783014 1.911406 61,584,581.853
1989 1.646165 1.783014 49,315,212.043
1988 1.545254 1.646165 46,119,586.661
1987 1.463177 1.545254 44,988,833.709
1986 1.382250 1.463177 44,432,625.449
1985 1.288784 1.382250 59,047,598.683
</TABLE>
<TABLE>
<CAPTION>
High Income Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $2.485444 $2.427652 17,337,052.330
1993 2.078934 2.485444 26,114,121.248
1992 1.703009 2.078934 20,668,821.606
1991 1.269032 1.703009 9,450,159.190
1990 1.310687 1.269032 6,894,970.437
1989 1.380187 1.310687 10,504,655.711
1988 1.244613 1.380187 12,374,735.048
1987 1.239420 1.244613 10,524,351.054
1986 1.061544 1.239420 10,543,270.635
1985* 1.000000 1.061544 1,859,260.823
</TABLE>
*Period from September 11, 1985 through December 31, 1985
7
<PAGE>
<TABLE>
<CAPTION>
Equity-Income Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $2.073414 $2.202346 74,571,142.757
1993 1.768091 2.073414 70,574,621.050
1992 1.523641 1.768091 49,654,509.443
1991 1.168338 1.523641 22,551,293.495
1990 1.390307 1.168338 15,320,204.431
1989 1.194265 1.390307 17,192,667.422
1988 0.978927 1.194265 12,203,910.523
1987 1.001137 0.978927 11,135,126.597
1986* 1.000000 1.001137 3,852,750.258
</TABLE>
*Period from October 8, 1986 through December 31, 1986
<TABLE>
<CAPTION>
Growth Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $2.500812 $2.480539 37,916,994.644
1993 2.111765 2.500812 37,369,691.127
1992 1.947218 2.111765 37,625,493.719
1991 1.348850 1.947218 24,177,587.154
1990 1.540465 1.348850 15,340,498.596
1989 1.181690 1.540465 9,534,230.020
1988 1.028662 1.181690 6,262,868.956
1987 1.001140 1.028662 6,695,752.199
1986* 1.000000 1.001140 1,960,340.560
</TABLE>
*Period from October 8, 1986 through December 31, 1986
<TABLE>
<CAPTION>
Overseas Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $1.591344 $1.605980 35,747,520.597
1993 1.168866 1.591344 36,890,355.495
1992 1.319600 1.168866 4,705,928.756
1991 1.229709 1.319600 4,170,995.265
1990 1.261608 1.229709 4,324,803.282
1989 1.007020 1.261608 2,450,169.365
1988 0.938767 1.007020 1,829,968.620
1987* 1.000000 0.938767 1,908,059.653
</TABLE>
*Operations commenced January 27, 1987
<TABLE>
<CAPTION>
Investment Grade Bond Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $1.501802 $1.433937 8,539,290.351
1993 1.364252 1.501802 11,685,281.879
1992 1.289396 1.364252 7,725,407.154
1991 1.115679 1.289396 8,683,076.207
1990 1.059709 1.115679 3,887,531.807
1989* 1.000000 1.059709 1,710,458.331
</TABLE>
*Operations commenced June 5, 1989
8
<PAGE>
<TABLE>
<CAPTION>
Asset Manager Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $1.687107 $1.571804 76,955,562.944
1993 1.404870 1.687107 90,364,012.115
1992 1.265768 1.404870 27,180,037.717
1991 1.041041 1.265768 12,676,645.581
1990* 1.000000 1.041041 989,833.209
</TABLE>
*Operations Commenced May 29, 1990.
FORMERLY ELIGIBLE SUB-ACCOUNTS - THESE SUB-ACCOUNTS ARE NO LONGER AVAILABLE
FOR INVESTMENT
<TABLE>
<CAPTION>
Fidelity Daily Income Trust Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $2.812357 $2.921185 190,668.116
1993 2.736044 2.812357 158,275.684
1992 2.641072 2.736044 243,997.001
1991 2.495176 2.641072 268,694.048
1990 2.313482 2.495176 339,345.456
1989 2.120570 2.313482 323,342.240
1988 1.977108 2.120570 351,832.648
1987 1.860549 1.977108 411,855.441
1986 1.746040 1.860549 491,664.785
1985 1.616847 1.746040 506,030.230
</TABLE>
<TABLE>
<CAPTION>
Fidelity Cash Reserves Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $2.822897 $2.934039 27,720.506
1993 2.742508 2.822897 29,444.337
1992 2.643311 2.742508 47,677.285
1991 2.493319 2.643311 60,818.839
1990 2.312283 2.493319 88,660.193
1989 2.122897 2.312283 102,882.970
1988 1.979215 2.122897 108,627.416
1987 1.859726 1.979215 171,381.094
1986 1.745740 1.859726 176,832.562
1985 1.618265 1.745740 219,836.298
</TABLE>
<TABLE>
<CAPTION>
Fidelity Government Securities Fund, Ltd. Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $4.009576 $3.911039 8,076.564
1993 3.676253 4.009576 8,085.472
1992 3.404732 3.676253 8,094.201
1991 2.934545 3.404732 8,103.722
1990 2.678442 2.934545 8,114.001
1989 2.376907 2.678442 8,125.927
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Fidelity Government Securities Fund, Ltd. Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1988 2.236112 2.376907 8,138.994
1987 2.213017 2.236112 24,310.778
1986 1.928700 2.213017 48,786.771
1985 1.639720 1.928700 55,930.289
</TABLE>
<TABLE>
<CAPTION>
Fidelity Capital and Income Fund Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $6.060768 $5.777672 35,622.255
1993 4.850494 6.060768 43,008.701
1992 3.785099 4.850494 70,510.002
1991 2.912437 3.785099 94,291.263
1990 3.029998 2.912437 112,223.477
1989 3.130904 3.029998 140,750.477
1988 2.782925 3.130904 175,640.223
1987 2.748078 2.782925 184,937.624
1986 2.329827 2.748078 224,558.207
1985 1.856497 2.329827 246,095.806
</TABLE>
<TABLE>
<CAPTION>
Fidelity Investment Grade Bond Fund, Inc. Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $4.231763 $N/A -0-
1993 3.639516 4.231763 10,102.321
1992 3.359592 3.639516 10,104.223
1991 2.823384 3.359592 10,106.454
1990 2.661615 2.823384 10,108.987
1989 2.353678 2.661615 10,112.210
1988 2.182444 2.353678 25,209.160
1987 2.179695 2.182444 119,303.264
1986 1.918119 2.179695 134,744.236
1985 1.584293 1.918119 134,782.336
</TABLE>
FINANCIAL STATEMENTS
The financial statements of the Variable Account and the Company and the
independent auditors' reports thereon are in the Statement of Additional
Information.
PFL LIFE INSURANCE COMPANY AND THE FIDELITY
VARIABLE ANNUITY ACCOUNT
The Company
PFL Life Insurance Company (the "Company") is a stock life insurance
company organized under the laws of the State of Iowa on April 19, 1961. The
Company offers a complete line of life insurance, annuities, and accident
and health insurance. It is currently authorized to sell variable annuities
in the District of Columbia and Guam and in all states other than New York.
The Company is an indirect wholly-owned subsidiary of AEGON USA, Inc., 4333
Edgewood Road N.E., Cedar Rapids, Iowa 52499, which is, in turn, an indirect
wholly-owned subsidiary of AEGON N.V., Mariahoeveplein 50, P.O. Box 202,
2501 CE The Hague, The Netherlands, a holding company organized under the
laws of The Netherlands.
10
<PAGE>
The Variable Account
The Fidelity Variable Annuity Account (the "Variable Account") was
established by an affiliate (Pacific Fidelity Life Insurance Company) under
California insurance law on August 24, 1979. On March 31, 1991, the Company
acquired the assets (and liabilities) of that affiliate, including the
Variable Account. As of December 31, 1994 the Company had assets of $6.1
billion.
The Variable Account is registered with the Securities and Exchange
Commission (the "Commission") as a unit investment trust pursuant to the
provisions of the Investment Company Act of 1940 and meets the definition
of a separate account under federal securities laws. Such registration does
not involve supervision of the management of the Variable Account or the
Company by the Commission.
Under Iowa insurance law, the income, gains or losses of the Variable
Account are credited to or charged against the assets of the Variable Account
without regard to the other income, gains or losses of the Company. Although
the assets maintained in the Variable Account will not be charged with any
liabilities arising out of any other business conducted by the Company, all
obligations arising under the Contracts, including the promise to make
annuity payments, are general corporate obligations of the Company.
Currently, the Company invests the assets of the Variable Account that
support the Contracts in shares of one or more mutual funds (the "Eligible
Funds") that have been approved by the Company's Board of Directors. Shares
of the Eligible Funds will be purchased at net asset value. Currently, the
only Eligible Funds are the Variable Insurance Products Fund and the Variable
Insurance Products Fund II (the "Funds"), but other mutual funds may be added
or withdrawn as permitted by law. The Variable Account currently offers seven
sub-accounts that invest exclusively in corresponding portfolios of the
Funds: Money Market, High Income, Equity-Income, Growth, Overseas, Investment
Grade Bond and Asset Manager sub-accounts (the "Sub-accounts"). Additional
sub-accounts may be established at the Company's discretion.
The Company does not guarantee the investment performance of the
Variable Account. The Contract Value and the amount of Variable Annuity
Payments depend on the investment performance of the assets of the Fund.
Because each Contract Owner bears the full investment risk associated with
the Variable Account, there can be no assurance concerning the amount of
Variable Annuity Payments under the Contract.
Prior to September 25, 1981, the assets of certain sub-accounts of the
Variable Account were invested in mutual funds (the "Formerly Eligible
Funds") other than the Funds. Contracts funded by these sub-accounts,
which invest in the Formerly Eligible Funds, are no longer offered, and no
additional assets of the Variable Account will be invested in shares of the
Formerly Eligible Funds. The following is a list of the Formerly Eligible
Funds, which correspond to these sub-accounts of the Variable Account:
Fidelity Daily Income Trust; Fidelity Cash Reserves; Fidelity Government
Securities Fund, Ltd.; Fidelity Intermediate Bond Fund; Fidelity Investment
Grade Bond Fund, Inc.; and Fidelity Capital and Income Fund. Further
information about the Formerly Eligible Funds can be found in the Formerly
Eligible Funds' individual fund prospectuses. The remaining assets of the
Variable Account are currently invested exclusively in shares of the Funds.
THE VARIABLE INSURANCE PRODUCTS FUND AND
VARIABLE INSURANCE PRODUCTS FUND II
The available Sub-accounts of the Variable Account invest exclusively in
shares of the Funds. The Funds are diversified, open-end management
investment companies organized as Massachusetts Business Trusts. The Variable
Insurance Product Fund was established on November 13, 1981, and was formerly
known as Fidelity Cash Reserves II. The Variable Insurance Products Fund II
was established on March 21, 1988.
Certain information concerning the Funds is set forth below. More detailed
information may be found in the Funds' current prospectuses which accompany
or precede this Prospectus and the Funds' current Statements of Additional
Information. The following description is qualified in its entirety by
reference to each Fund's prospectus and Statement of Additional Information
wherein more detailed information may be found.
Fidelity Management & Research Company ("FMR") provides investment advice
and administrative services to the Funds pursuant to an agreement under which
each Portfolio pays FMR a monthly fee. FMR also provides investment advice
and
11
<PAGE>
administrative services to the Formerly Eligible Funds for a fee similar
to the ones applicable to the Portfolios of the Funds. The Variable Insurance
Products Fund currently offers five Portfolios: Money Market Portfolio; High
Income Portfolio; Equity-Income Portfolio; Growth Portfolio; and Overseas
Portfolio. The Variable Insurance Products Fund II currently offers two
portfolios that are available under the Contracts: the Investment Grade Bond
Portfolio (formerly known as the Short-Term Portfolio) and Asset Manager
Portfolio. The seven Portfolios offered by the Funds provide a range of
investment alternatives that vary according to the different investment
objectives described in the Funds' prospectuses and summarized below. The
assets of each Portfolio are separate from the others, and each Portfolio
has separate investment objectives and policies. As a result, each Portfolio
operates as a separate investment fund, and the investment performance of
one Portfolio has no effect on the investment performance of any other
Portfolio. Each of the Portfolios may not be available for investment in
every state.
Money Market Portfolio seeks to obtain as high a level of current income
as is consistent with preserving capital and liquidity. The Portfolio will
invest only in high-quality U.S. dollar dominated money market instruments
of domestic and foreign insurers. The Portfolio seeks to maintain a constant
net asset value of $1.00 per share although no assurances can be given that
such constant net asset value will be maintained. The Portfolio's shares are
neither insured nor guaranteed by the U.S. Government.
High Income Portfolio seeks to obtain a high level of current income by
investing primarily in high-yielding, lower rated, fixed-income securities.
In choosing these securities, growth of capital also will be considered. The
Portfolio may invest without limitation in lower-quality debt securities,
sometimes called "junk bonds" which carry greater risk than other debt
securities. See the Funds' prospectus for a description of these risks.
Equity-Income Portfolio seeks reasonable income by investing primarily in
income-producing equity securities. In choosing these securities, the
Portfolio will also consider the potential for capital appreciation. The
Portfolio's goal is to achieve a yield which exceeds the composite yield on
the securities comprising the Standard & Poor's Composite Index of 500
Stocks.
Growth Portfolio seeks to achieve capital appreciation 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.
Overseas Portfolio seeks long-term growth of capital primarily through
investments in foreign securities. The Portfolio seeks to achieve its
investment objective by investing at least 65% of the Portfolio's assets in
securities of companies from at least three different countries outside of
North America. The Overseas Portfolio expects to invest most of its assets in
securities of companies located in developed countries in these general areas:
The Americas (other than the United States), the Far East and Pacific Basin,
Scandinavia and Western Europe. Generally, the investment in securities of
foreign companies will involve greater risks than are present in domestic
investments.
Investment Grade Bond Portfolio seeks as high a level of current income as
is consistent with the preservation of capital by investing in investment-
grade fixed income securities. Its dollar weighted average maturity will be
ten years or less. The Portfolio will not invest in securities rated below
Baa by Moody's Investor's Service, Inc. or rated below BBB by Standard &
Poor's Corporation and unrated securities judged by FMR to be of equivalent
quality.
Asset Manager Portfolio seeks high total return with reduced risk over the
long-term by allocating its assets among domestic and foreign stocks, bonds
and short-term fixed income instruments.
THERE IS NO ASSURANCE THAT ANY OF THE FUNDS' PORTFOLIOS WILL ACHIEVE ITS
INVESTMENT OBJECTIVE.
The Funds' prospectuses should be read carefully before any decision is
made concerning the allocation of Purchase Payments to a particular
Portfolio. The Funds are not limited to selling their shares to the Variable
Account and are permitted to accept investments from any separate account of
an insurance company. Since the Portfolios of the Funds are available to
registered separate accounts offering variable annuity products of the
Company, as well as variable annuity and variable
12
<PAGE>
life products of other insurance companies, there is a possibility that a
material conflict may arise between the interests of the Variable Account and
one or more of the separate accounts of another participating insurance company.
In the event of a material conflict, the affected insurance companies agree to
take any necessary steps, including removing their separate accounts from the
Funds, to resolve the matter. See the Funds' prospectuses for further details.
Additions, Deletions or Substitutions of Investments
If the shares of the Funds or the Formerly Eligible Funds should no longer
be available for investment or, if in the judgment of the Company's
management, further investment in the Eligible Funds' share should become
inappropriate in view of the purposes of the Contract, then the Company may
substitute shares of another fund for shares already purchased, or to be
purchased in the future, under the Contract. No substitution of securities
in any sub-account may take place except to the extent permitted by law.
To the extent required by the Investment Company Act of 1940, substitutions
of shares attributable to a Contract Owner's interest in a sub-account
will not be made until the Contract Owner has been notified of the change
and prior approval of the Securities and Exchange Commission is obtained.
New sub-accounts may be established when, in the sole discretion of the
Company, marketing, tax, investment or other conditions so warrant. Any
new sub-accounts will be made available to existing Contract Owners on a
basis to be determined by the Company. Each additional sub-account will
purchase shares in a Portfolio of the fund or in another mutual fund or
investment vehicle. The Company may also eliminate one or more sub-accounts
if, in its sole discretion, marketing, tax, investment or other conditions
so warrant.
In the event of any such substitution or change, the Company may, by
appropriate endorsement, make such changes in the Contracts as may be
necessary or appropriate to reflect such substitutions or change.
Furthermore, if deemed to be in the best interests of persons having voting
rights under the Contracts, the Variable Account may be operated as a
management company under the 1940 Act or any other form permitted by law,
or it may be deregistered under such Act in the event such registration
is no longer required.
THE CONTRACTS
Purchase of the Contracts
The Contracts may be purchased by mailing in a completed, signed
application to the Company, along with a check for the initial investment.
Purchase Payments are payable at the Administrative and Service Office of
the Company designated on the cover page. The initial Purchase Payment must
be at least $5,000. Subsequent Purchase Payments must be at least $500.
Except for these limitations, there are no restrictions on the amount or
frequency of Purchase Payments under a Contract.
If an application is complete upon receipt, the Contract Owner will
receive a Contract based on the price next determined after the application
and initial Purchase Payment are received. If an incomplete application is
received, the Company will notify the applicant by phone or mail to request
the information necessary to complete the application. Once the application
is completed, the Contract Owner will receive a Contract based on the price
next determined after the application was made complete. If, after five days,
the application remains incomplete, the Company will return the applicant's
initial Purchase Payment unless it obtains the applicant's permission to
retain the initial Purchase Payment pending completion of the application.
A Contract shall automatically be continued in full force during the
lifetime of the Annuitant until the Annuity Commencement Date or until the
Contract is surrendered. Unless the Contract Owner has surrendered the
Contract, Purchase Payments may be made at any time during the life of the
Annuitant and before the Annuity Commencement Date.
Allocation and Reallocation of Net Purchase Payments
Net Purchase Payments are allocated among the Sub-accounts of the Variable
Account that have been selected by the Contract Owner. The Purchase Payment,
less the administrative charge deducted upon payment, and less any deduction
for premium
13
<PAGE>
taxes, equals the Net Purchase Payment. Upon allocation to a Sub-account, Net
Purchase Payments are converted into Accumulation Units of the Sub-account. The
number of Accumulation Units to be credited is determined by dividing the dollar
amount allocated to each Sub-account by the value of a Accumulation Unit for
that Sub-account as next determined after the Purchase Payment is received at
the Administrative and Service Office, or in the case of the initial Purchase
Payment, when the Contract application is completed, whichever is later.
Contract Owners (or their designated account executive) can make transfers
and/or change the allocation of subsequent premium payments by telephone if
the "Telephone Transfer/Reallocation Authorization" box in the application
has been checked or telephone transfers have been subsequently authorized
in writing. PFL and/or the Administrative and Service Office will not be
liable for following instructions communicated by telephone that it
reasonably believes to be genuine. However, PFL and/or the Administrative
and Service Office will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. If PFL and/or the
Administrative and Service Office fails to do so, it may be liable for any
losses due to unauthorized or fraudulent instructions. All telephone
requests will be recorded on voice recorder equipment for the protection
of the Contract Owner. A Contract Owner, when making telephone requests
may be required to provide their social security number and/or other
information for identification purposes.
Telephone requests must be received at the Administrative and Service
Office no later than 3:30 p.m. Central time in order to assure same day
pricing of the transaction.
The telephone transaction privilege may be discontinued at any time as to
some or all Contracts and PFL may require written confirmation of a
transaction request.
When a reallocation is requested, the redemption of the requested amount
from out of the Sub-account and portfolio in which the amount had been
invested will always be effected as of the end of the Valuation Period in
which the request is received at our Administrative and Service Office. That
amount will generally be credited to the new Sub-account and portfolio at
the same time. However, when (1) you are making a transfer to any portfolio
that accrues dividends on a daily basis and (2) the equity portfolio from
which the transfer is being made is in an illiquid position due to
substantial redemptions or transfers that require it to sell portfolio
securities in order to make funds available, then the crediting of the
amount transferred to the new Sub-account may be delayed until the portfolio
from which the transfer is being made obtains liquidity through the earlier
of the portfolio's receipt of proceeds from sales of portfolio securities,
new contributions by contract owners, or otherwise, but no longer than seven
days. During this period, the amount transferred will be uninvested.
There are currently seven Sub-accounts, each corresponding to one of the
seven Portfolios of the Funds, each representing a different investment
alternative. (See "The Variable Insurance Products Fund and Variable
Insurance Products Fund II," p. 13.) In allocating the initial Purchase
Payment among the Sub-accounts, the Contract Owner must allocate a minimum
contribution of $1,000 to each Sub-account selected. Subsequent Net Purchase
Payments may be allocated among the Sub-accounts in any manner, so long as
any contribution to a selected Sub-account is at least $500. A Contract
Owner may subsequently reallocate the value of a designated number of
Accumulation Units of a Sub-account then credited to a Contract, into an
equal value of Accumulation Units of one or more other Sub-accounts. The
reallocation shall be based on the relative value of the Accumulation Units
of the Sub-accounts at the end of business on the day the request is
received by the Company.
On the Date of Issue of the Contract, the Contract Value equals the value
of the Net Purchase Payment. Thereafter, the Contract Value is determined
by multiplying the number of Accumulation Units of each Sub-account credited
to the Contract by the current value of an Accumulation Unit for that
Sub-account. The number of Accumulation Units is increased by any Net
Purchase Payments and decreased by the annual administrative charge, any
premium taxes deducted and any full or partial surrenders.
Value of Accumulation Units
The Accumulation Units of each Sub-account of the Variable Account are
valued separately. The value of Accumulation Units may change each Valuation
Period
14
<PAGE>
according to the investment performance of the shares purchased by each Sub-
account and the deduction of certain charges.
A Valuation Period is the period beginning at the close of trading on the
New York Stock Exchange on each Valuation Date and ends at the close of
trading on the next succeeding Valuation Date. A Valuation Date is each day
that the New York Stock Exchange is open for business.
The value of an Accumulation Unit in a Sub-account for any Valuation Period
equals the value of the Accumulation Unit as of the immediately preceding
Valuation Period, multiplied by the Net Investment Factor for that
Sub-account for the Valuation Period for which the Accumulation Unit value
is being calculated. The Net Investment Factor is a number representing the
change in the value of Sub-account assets on successive Valuation Dates due
to investment income, realized or unrealized capital gains or losses,
deductions for taxes, if any, and deductions for the Mortality Risk Charge.
Surrenders
At any time before the Annuity Commencement Date and during the lifetime
of the Annuitant, the Contract Owner may elect to surrender all or any
portion of the Contract Value in exchange for a cash withdrawal payment
from the Company. Any such election shall be in writing in such form as the
Company may require and shall specify the amount of the cash withdrawal
payment. At the Contract Owner's request, the Company will provide a form
to request a surrender and to notify the Company of the Contract Owner's
election whether to have federal income taxes withheld. Such an election
will be effective on the date that it is received by the Company at its
Administrative and Service Office.
The amount of the cash withdrawal payment will be equal to the Contract
Value at the end of the Valuation Period during which the election becomes
effective, or the lesser amount requested. The cash withdrawal payment will
result in the liquidation of Accumulation Units with an aggregated value
equal to the dollar amount of the cash withdrawal payment. Unless instructed
to the contrary, the Company will liquidate Accumulation Units of all
Sub-accounts within the Variable Account in the same proportion that the
cash withdrawal payment bears to the Contract Value.
Any cash withdrawal payment will be paid within seven (7) days from the
date the surrender request becomes effective, except as the Company may be
permitted to defer such payment in accordance with the Investment Company
Act of 1940. (See "Suspension of Payment," p.27.) Payments under the
Contract of any amounts derived from Purchase Payments made by check, may
be delayed until such time as the check has cleared your bank. If at the
time that the Contract Owner makes a partial or full surrender request, he
or she has not provided the Company with a written election not to have
federal income taxes withheld, the Company must by law withhold such taxes
from the taxable portion of any full or partial surrender and remit that
amount to the federal government. Moreover, the Internal Revenue Code
provides that a 10% penalty tax may be imposed on certain early surrenders.
(See "Federal Tax Matters," p. 24.)
Exchange Privilege
As long as the Annuitant is living, a Contract may, subject to the
Company's rules and regulations and the applicable laws or regulations of
any regulating authority, be exchanged for any other variable annuity
contract of the Company which is the same in all material respects to the
Contract except for the underlying investment. Upon such exchange, the
Contract Value shall be applied, without fee, penalty or other charge
payable to the Company, to the extent permitted by law, toward the
purchase of the new Contract.
Right to Return the Contract
The Contract Owner may cancel the Contract within ten (10) days after
it is delivered to the Contract Owner by delivering or mailing the Contract
and a written notice of revocation to the Company at its Administrative and
Service Office. In the event of cancellation, the Company will return all
Purchase Payments made under the Contract within ten (10) days after it
receives written notice of cancellation and the returned Contract.
15
<PAGE>
CONTRACT CHARGES
No deduction for sales charges is made from Purchase Payments or upon
surrender. As more fully described below, charges under the contracts are
assessed (1) against the initial Purchase Payments and annually thereafter
from the Contract Value for administrative expenses, and (2) against the
assets of the Variable Account for the assumption of mortality risk.
Premium taxes, if any, are deducted from the Purchase Payment or the
Contract Value at the time they are incurred by the Company and the
Company reserves the right to make deductions from the Variable Account
for income tax liabilities resulting from the operation of the Variable
Account.
Costs of distributing the Contracts will be paid from the Company's
general assets. These assets may include proceeds from the mortality charge
described below. The Company incurs certain costs, including the obligation
to pay certain insurance commissions in connection with the distribution of
the Contracts.
Administrative Charge
The Company performs the administrative services for the Contracts and the
Variable Account. These services include issuance of the Contracts,
maintenance of records concerning the Contracts, and valuation services. An
administrative charge to cover these expenses is deducted from the initial
Purchase Payment and annually thereafter from the Contract Value. The current
annual administrative charge is $35.00.
When the Contract Owner makes the initial investment in the Contract, a pro
rata portion of the annual charge for the current year will be deducted from
the Purchase Payments. Annually thereafter, on the last day of each year, the
annual charge for the next calendar year will be deducted. No part of the
annual charge will be refunded upon termination of a Contract. In the states
of Pennsylvania and South Carolina the annual charge will never exceed $35.00
for Contracts issued in connection with the delivery of this Prospectus.
The Company does not intend to profit from the administrative charge. PRIOR
TO THE ANNUITY COMMENCEMENT DATE, THE ADMINISTRATIVE CHARGE IS NOT GUARANTEED
AND, SUBJECT TO LIMITS IMPOSED BY STATE LAW, MAY CHANGE OVER THE YEARS THE
CONTRACT IS IN FORCE.
Charges for Mortality Risk
The mortality risk assumed by the Company arises from the contractual
obligation to continue to make annuity payments to each Annuitant regardless
of how long the Annuitant lives and regardless of how long all Annuitants as
a group live. Although Variable Annuity Payments made to Annuitants will vary
in accordance with the investment performance of the Funds (or the Formerly
Eligible Funds), they will not be affected by the mortality experience of
persons receiving such payments or of the general population. This assures
each Annuitant that neither the longevity of fellow Annuitants nor an
improvement in life expectancy generally will have an adverse effect on the
Variable Annuity Payments received under the Contracts. The Company assumes
this mortality risk by virtue of annuity payment rates incorporated in the
Contract. These rates cannot be changed. (See "Statement of Additional
Information - Annuity Payment Rates," p. 6.)
For assuming this mortality risk, the Company deducts from the daily net
asset value of the Variable Account an amount, computed on a daily basis,
which is equal to an effective annual rate of 0.8%. If this amount is
insufficient to cover the actual costs, the loss will be borne by the
Company; conversely, if the amount deducted proves more than sufficient,
the excess will be a profit to the Company. To the extent that this charge
results in a profit to the Company, such profit will be available for use
by the Company for, among other things, the payment of distribution, sales
and other expenses. The level of this charge is guaranteed and will not
change. A mortality and expense risk charge is assessed during the annuity
phase for all options including those that do not carry a life contingency.
Deductions for Taxes
16
<PAGE>
Any premium taxes or other similar taxes (herein collectively referred to
as "premium taxes") levied by any governmental entity as a result of the
existence of the Contracts will be deducted from Contract Values when
incurred. Premium taxes are generally levied at the Annuity Commencement
Date. As of the date of this prospectus, the current range of state premium
taxes is from 0.0% to 3.5%.
The Company does not expect to incur any federal income tax liability
attributable to investment income or capital gains retained as part of the
reserve under the Contracts. Based on these expectations, no charge is being
made currently to the Variable Account for corporate federal income taxes
which may be attributable to Variable Account. However, if the tax laws
change such that there is tax liability, the Company may review from time
to time the need to make a charge for any taxes attributable to the income
of the Variable Account.
Under present laws, the Company does not incur state or local taxes (other
than premium taxes), and therefore, does not charge for these taxes. If there
is a change in state or local tax laws, charges for such taxes, if any,
attributable to the Variable Account may be made.
The Variable Insurance Products Fund and Variable Insurance Products Fund II
Expenses
The value of the assets in the Variable Account will reflect the value of
the Funds' (or the Formerly Eligible Fund) shares and, therefore, the fees
and expenses paid by the Funds (or the Formerly Eligible Fund). A complete
description of the expenses and deductions from the portfolios are found in
the individual fund prospectuses.
BENEFITS UNDER THE CONTRACT
Death Benefit
In the event of the death of the Annuitant prior to the Annuity
Commencement Date, the Company, upon receipt of Due Proof of Death of the
Annuitant, will pay a death benefit to the Beneficiary designated by the
Contract Owner. If the death of the Annuitant occurs on or after the Annuity
Commencement Date, no death benefit will be payable under the contract
except as may be provided under the Annuity Option elected.
The death benefit payable in the event of the death of the Annuitant prior
to the Annuity Commencement Date is equal to the Contract Value. The
Accumulation Unit values used in determining the amount of death benefit
will be the values for the next subsequent Valuation Period following the
date all of the items listed below have been received by the Company:
written notice of death of the Annuitant; Due Proof of Death of the
Annuitant; and an election to pay the proceeds as a single cash payment or
under an Annuity Option.
If no election as to how the proceeds should be paid was made by the
Contract Owner prior to the Annuitant's death, the Beneficiary may elect one
of the Annuity Options or a lump sum cash payment within 90 days after the
Company receives notification of death. To comply with federal tax law,
however, the Beneficiary must choose an Annuity Option within 60 days after
the lump sum first became payable in order to receive favorable tax
treatment.
IRS Required Distributions
For Contracts issued on or after January 19, 1985, federal tax law requires
that if the Contract Owner or any Joint Contract Owner dies before the
Annuity Commencement Date, the entire value of the Contract must generally be
distributed within five (5) years of the date of death of the Contract Owner
or the Joint Contract Owner. Special rules may apply to spouses of the
deceased owner. See the Statement of Additional Information for a detailed
description of these rules.
ANNUITY PAYMENTS
Annuity Commencement Date
17
<PAGE>
Unless the Annuity Commencement Date is changed, Annuity Payments under a
contract will begin on the Annuity Commencement Date which is selected by
the Contract Owner at the time the Contract is applied for. The Annuity
Commencement Date may be changed from time to time by the Contract Owner by
written notice to the Company, provided that notice of each change is
received by the Company at its Administrative and Service Office at least
thirty (30) days prior to the then current Annuity Commencement Date. Except
as otherwise permitted by the Company, a new Annuity Commencement Date must
be a date which is: (1) at least thirty (30) days after the date notice of
the change is received by the Company; (2) the first day of a month; and
(3) not later than the first day of the first month following the Annuitant's
75th birthday. Currently, the Company permits the new Annuity Commencement
Date to begin as late as the first day of the first month following the
Annuitant's 85th birthday. The Annuity Commencement Date may also be
changed by the Beneficiary's election of the Annuity Option after the
Annuitant's death.
Election of Annuity Options
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Contract Owner may elect any one of the Annuity Options described
in this Prospectus. The Contract Owner may also change any election, but
written notice of any election or change of election must be received by the
Company at its Administrative and Service Office at least thirty (30) days
prior to the Annuity Commencement Date. If no election is in effect on the
thirtieth day prior to the Annuity Commencement Date, Annuity Option 3 for
a life annuity with 120 monthly payments guaranteed will be deemed to have
been elected on a variable basis. At such time as one of the Annuity Options
under the Contract may become operative, a supplementary agreement will be
issued by the Company setting forth the terms of the option elected.
During the lifetime of the Annuitant, the Contract Owner may elect that
all or any part of the Death Benefit be applied under any one of the Annuity
Options listed in the Contract or in any other manner agreeable to the
Company. If no election as to the Annuity Option has been selected by the
Contract Owner at the time of death of the Annuitant, such an election may
be made by the Beneficiary.
Annuity Options
Annuity payments may be made under any one of the Annuity Options described
below or in any other manner agreeable to the Company. Annuity payments will
be made on either a fixed basis or a variable basis as selected by the
Contract Owner (or the Beneficiary, after the Annuitant's death). The effect
of choosing a Fixed Annuity Option is that the amount of each payment will be
set on the Annuity Commencement Date and will not change. If a Fixed Annuity
Option is selected, the Contract Value will be transferred to the general
account of the Company, and the annuity payments will be fixed in amount and
duration by the fixed annuity provisions selected and the age and sex of the
Annuitant. For further information, contact the Company at its Administrative
and Service Office.
The Contract provides four Annuity Options which are described below;
however, the Contract Owner may not select more than one. All of these are
offered as either "Fixed Annuity Options" or "Variable Annuity Options."
Under Annuity Options 1 and 2, it would be possible for only one annuity
payment to be made if the Annuitant(s) were to die before the due date of the
second annuity payment, only two annuity payments if the Annuitant(s) were to
die before the due date of the third annuity payment, and so forth.
Therefore, under Annuity Options 1 and 2 the Contract Value may not be
returned.
Annuity Option 1 - Life Annuity: This option provides monthly payments
during the lifetime of the Annuitant ceasing with the last payment due prior
to the death of the Annuitant. This option offers the highest level of
monthly payments because no further payments are payable after the death of
the Annuitant and there is no provision for a death benefit payable to a
Beneficiary.
Annuity Option 2 - Joint and Survivor Annuity: This option provides monthly
payments during the joint lifetime of the Annuitant and designated second
person and during the lifetime of the survivor. As in the case of Annuity
Option 1, there is no guaranteed number of payments and there is no
provision for a death benefit payable to a Beneficiary under this option.
Annuity Option 3 - Life Annuity with 120 or 240 Monthly Payments Guaranteed:
This option provides monthly payments during the lifetime of the Annuitant
and in any
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event for one hundred twenty (120) or two hundred forty (240) months certain as
elected. In the event of the death of the Annuitant under this option, the
Contract provides that any guaranteed monthly payments will be paid to the
Beneficiary during the remaining months of the term selected, provided that the
Beneficiary may, at any time, elect to receive the discounted value of the
remaining payments, if any, in one sum. The discounted value for Fixed or
Variable Annuity Payments will be based on interest compounded annually at the
applicable assumed interest rate used in determining the first annuity payment.
(See "Determination of Annuity Payments," p. 23.) Upon the death of a
Beneficiary receiving annuity benefits under this option, the present value of
the guaranteed number of payments remaining after the Company receives notice of
the death of the Beneficiary, computed at the applicable assumed interest rate
shall be paid in a lump sum to the estate of the Beneficiary. Such present value
is computed as of the Valuation Period during which notice of the death of the
Beneficiary is received by the Company at its Administrative and Service Office.
Annuity Option 4 - Cash or Unit Refund Life Annuity: This option provides
monthly payments during the lifetime of the Annuitant terminating with the last
payment due prior to the death of the Annuitant. An additional payment will be
made to the Beneficiary which for a Variable Annuity will equal the Annuity Unit
value as of the date that notice of death of the Annuitant in writing is
received by the Company at its Administrative and Service Office, multiplied by
the excess, if any, of (a) over (b) where (a) is the Contract Value applied at
the Annuity Commencement Date under this option, divided by the Annuity Unit
Value as of the Annuity Commencement Date, and (b) is the product of the number
of Annuity Units represented by each Variable Annuity Payment paid to the
Annuitant and the number of Variable Annuity Payments made. For Fixed Annuity
Payments, the Annuity Unit Value shall be $1. Therefore, (a) is the Contract
Value as of the Annuity Commencement Date, while (b) is the sum of all Fixed
Annuity Payments made.
Determination of Annuity Payments
On the Annuity Commencement Date the Contract's Annuity Purchase Value will
be applied to provide for Annuity Payments under the selected annuity option
as specified. The Annuity Purchase Value will be equal to the Contract Value
for the Valuation Period which ends immediately preceding the Annuity
Commencement Date, reduced by an applicable premium or similar taxes.
Fixed Annuity Payments are determined by the Annuity Payment rates based on
the current assumed rate of interest as determined by the Company at the
Annuity Commencement Date. The assumed interest rate may be changed upon the
Company's discretion; however, the minimum guaranteed interest rate is 3.5%.
If, at the time the annuity payments begin, the Contract Owner has not
provided the Company with a written election not to have federal income taxes
withheld, the Company must by law withhold such taxes from the taxable
portion of such annuity payments and remit that amount to the federal
government.
The dollar amount of the first Variable Annuity Payment will be determined
in accordance with the annuity payment rates based on the assumed interest
rate selected by the Annuitant. Under the Contract, the Annuitant has some
flexibility in choosing the assumed rate of interest to be used in connection
with the Variable Annuity Payments. The Annuitant may choose among interest
rates offered by the Company at the Annuity Commencement Date. Currently, the
Company offers assumed interest rates of 3.5% to 7.5%.
If the Annuitant chooses a higher assumed interest rate, as compared to
choosing the lowest rate offered, variable annuity payments would start at a
higher level but would increase more slowly and decrease more rapidly.
Therefore, election of a higher assumed rate of interest would result in a
higher first monthly Variable Annuity Payment, but would increase the
possibility of reduced future payments during the periods when net investment
performance of the Sub-account did not exceed the higher assumed rate of
interest.
All Variable Annuity Payments other than the first are calculated using
Annuity Units which are credited to the Contract. The number of Annuity Units
to be credited in respect of a particular Sub-account is determined by
dividing that portion of the first Variable Annuity Payment attributable to
that Sub-account by the Annuity Unit value of that Sub-account for the
Valuation Period which ends immediately preceding the Annuity Commencement
Date. The number of Annuity Units of each particular Sub-account credited to
the Contract then remains fixed. The dollar amount of each
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Variable Annuity Payment after the first may increase, decrease or remain
constant, and is equal to the sum of the amounts determined by multiplying the
number of Annuity Units of each particular Sub-account credited to the Contract
by the Annuity Unit value for the particular Sub-account for the Valuation
Period which ends immediately preceding the due date of each subsequent payment.
Furthermore, after the Annuity Commencement Date, the Contract Owner may
reallocate all or part of the values held in one Sub-account to one or more
other Sub-accounts. (See Statement of Additional Information - "Reallocation of
Contract Values after the Annuity Commencement Date, p. 2.)
Adjustment of Annuity Payments
If the Contract Value on the Annuity Commencement Date is less than $5,000,
the Company may pay such value in one sum in lieu of the payments otherwise
provided for. If the Contract Value is not less than $5,000, but the payments
provided for would be or become less than $50, the Company may change, at its
discretion, the frequency of payments to such intervals as will result in
payments of at least $50.
FEDERAL TAX MATTERS
Introduction
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE.
The Contracts are designed for use by individuals in retirement plans which
will not be qualified plans under the provisions of the Internal Revenue Code
of 1986, as amended (the "Code"). The ultimate effect of federal income taxes
on the Contract Value, on Variable Annuity Payments and on the economic
benefit to the Contract Owner, Annuitant or Beneficiary depends on the tax
status of both the Company and the individual concerned. The discussion
contained herein is general in nature and is not intended as tax advice. Each
person concerned should consult a competent tax adviser. No attempt is made
to consider any applicable state or other tax laws. The discussion contained
herein reflects the Company's understanding of current federal income tax
laws applicable to the Company and to variable annuity contracts used in
connection with retirement plans which are not qualified plans under the
Code. Moreover, the discussion herein is limited to a consideration of the
taxation of variable annuity contracts funded by investments in shares of
the Fund. The discussion contained herein does not attempt to discuss the
tax treatment applicable to variable annuity contracts funded by investments
in shares of the Formerly Eligible Funds which is different from the
treatment discussed herein. No representation is made regarding the
likelihood of continuation of current federal income tax laws or the current
interpretations by the Internal Revenue Service. THE COMPANY DOES NOT MAKE
ANY GUARANTEE REGARDING ANY TAX STATUS, FEDERAL, STATE OR LOCAL, OF ANY
CONTRACT OR ANY TRANSACTION INVOLVING THE CONTRACTS.
Taxation of Annuities in General
THE FOLLOWING DISCUSSION ASSUMES THAT THE CONTRACTS WILL QUALIFY AS AN
ANNUITY CONTRACT FOR FEDERAL INCOME TAX PURPOSES. THE STATEMENT OF ADDITIONAL
INFORMATION DISCUSSES SUCH QUALIFICATIONS.
An annuity Contract Owner generally is not taxed on increases in the value
of a Contract until distribution occurs, either in the form of a cash payment
received by withdrawing all or part of the cash value or as annuity payments
under the annuity option elected. For this purpose, the assignment or pledge
of, or the agreement to assign or pledge, any portion of the value of a
Contract will be treated as a distribution. The taxed portion of a
distribution (in the form of a lump sum payment or an annuity) is taxed as
ordinary income. However, the purchase payments made after February 28, 1986,
an owner of a Contract who is not a natural person (subject to limited
exceptions) generally will be taxed on any increase in the Contract's cash
value over the "investment in the contract" during the taxable year, even if
no distribution occurs. There are, however, exceptions to this rule which you
may wish to discuss with your tax counsel. The following discussion applies
to Contracts owned by natural persons.
Except as provided below, in the case of a partial withdrawal under a
Contract, amounts received are first treated as taxable income to the extent
that the Contract Value of the Contract immediately before the withdrawal
exceeds the "investment in
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the contract" at that time. Any additional amount withdrawn is not taxable.
However, in the case of a withdrawal under a Contract issued before August 14,
1982, and allocable to an "investment in the contract" made before that date,
amounts received are treated as taxable income only to the extent that they
exceed the "investment in the contract." Upon a full surrender of the Contract,
amounts received in excess of the "investment in the contract" will be treated
as taxable income. The "investment in the contract" generally equals the
portion, if any, of any Purchase Payment paid by or on behalf of an individual
under a Contract which is not excluded from the individual's gross income.
Although the tax consequences may vary depending on the form of annuity
selected under the Contract, the recipient of an Annuity Payment under a
Contract generally is taxed on the portion of such payment that exceeds the
"investment in the contract." For Variable Annuity Payments, the taxable
portion is determined by a formula that establishes a specific dollar amount
of each payment that is not taxed. The dollar amount is determined by
dividing the "investment in the contract" by the total number of expected
periodic payments. For Fixed Annuity Payments, in general, there is no tax
on the amount of each payment which represents the same ratio that the
"investment in the contract" bears to the total expected value of the Annuity
Payment for the term of the payment; however, the remainder of each Annuity
Payment is taxable. For individuals whose Annuity Commencement Date is after
December 31, 1986, any distribution received subsequent to the investment in
the Contract being recovered will be fully taxable.
There may be imposed a penalty tax on distributions equal to ten percent
(10%) of the amount treated as taxable income. The penalty tax is not imposed
in certain circumstances, which generally include, for distributions made in
taxable years beginning on or after January 1, 1987: (1) distributions
received on or after owner's age 591/2, death of the owner, or disability of
the owner; (2) distributions received in substantially equal installments as
a life annuity (subject to special "recapture" rules if the series of
payments is subsequently modified), and (3) distributions allocable to the
"investment in the contract" and attributable earnings thereon before
August 14, 1982.
The Company will withhold and remit to the U.S. Government a part of the
taxable portion of each distribution made under a Contract unless the
Contract Owner or Annuitant notifies the Company at or before the time of
the distribution that he or she chooses not to have any amounts withheld.
All non-qualified, deferred annuity contracts issued by the same company
(or an affiliated company) to the same owner during any calendar year shall
be treated as one annuity contract, and "aggregated" for purposes of
determining the amount includable in gross income.
In addition, the IRS may (1) require aggregation of contracts owned by
family members; (2) apply a 50% test for determining whether insurance
companies are affiliated; and (3) require aggregation of contracts issued by
unaffiliated insurance companies if purchased pursuant to a common plan.
The foregoing comments about the federal income tax consequences under
Contracts issued by the Company are not exhaustive, and special rules apply
in other situations not discussed in this Prospectus. The discussion herein
also reflects the Company's understanding of current law. No assurance can
be given that the present deferred tax treatment of variable annuity
contracts will remain unaffected by future actions of Congress. Accordingly,
a prospective purchaser should consult a qualified tax adviser.
Proposed Tax Legislation
In past years, legislation has been proposed in the U.S. Congress that
would have adversely modified the federal taxation of certain annuities. For
example, one such proposal would have changed the tax treatment of
non-qualified annuities that did not have "substantial life contingencies"
by taxing income as it is credited to the annuity. Although as of the date
of this Prospectus Congress was not actively considering any legislation
regarding the taxation of annuities, there is always the possibility that
the tax treatment of annuities could change by legislation or other means
(such as IRS regulations, revenue rulings, judicial decisions, etc.).
Moreover, it is also possible that any change could be retroactive (that
is, effective prior to the date of the change).
GENERAL PROVISIONS
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Ownership of the Contract
The Contract shall belong to the Contract Owner upon issuance of the
Contract after completion of an application and delivery of the initial
Purchase Payment. Prior to the Annuity Commencement Date, the Contract
Owner shall be the person so designated in the application. A Contract
Owner may appoint another person (the "Contingent Contract Owner") to
succeed to ownership of the Contract in the event of the death of the
Contract Owner prior to the Annuity Commencement Date. The Contract Owner
may appoint or change the Contingent Contract Owner or Beneficiary at any
time prior to the Annuity Commencement Date. All Contract rights and
privileges may be exercised by the Contract Owner without the consent of
the Beneficiary or any other person. Such rights and privileges may be
exercised only during the lifetime of the Annuitant and prior to the
Annuity Commencement Date, except as otherwise provided in the Contract.
The Annuitant becomes the Contract Owner on and after the Annuity
Commencement Date. The Beneficiary becomes the Contract Owner on the death
of the Annuitant.
Assignment
During the lifetime of the Annuitant, the Contract Owner may assign any
rights or benefits provided by the Contract. An assignment will not be
binding on the Company until a copy has been filed at its Administrative
and Service Office. The rights and benefits of the Contract Owner and
Beneficiary are subject to the rights of the assignee. The Beneficiary may
not assign any payment under the Contract before the payment becomes due.
Beneficiary
The Beneficiary designation contained in the application will remain in
effect until changed. The interest of any Beneficiary is subject to the
particular Beneficiary surviving the Annuitant. The Contract Owner may change
or revoke the designation of a Beneficiary at any time while the Annuitant is
living by filing with the Company a written beneficiary designation or
revocation in such form as the Company may require. The change or revocation
will not be effective and binding upon the Company until it is received by
the company at its Administrative and Service Office. The Annuitant named in
the Contract, however, may not be changed.
Amendments
The Company reserves the right to amend the Contracts to meet the
requirements of the Investment Company Act of 1940 or other applicable
federal or state laws or regulations. No contract may be modified by the
Company without the consent of the Contract Owner except as may be required
by applicable law.
Suspension of Payment
The Company reserves the right to suspend or postpone the date of any
payment of death benefits or cash withdrawals (1) for any period during
which the New York Stock Exchange is closed (other than customary week-end
and holiday closings) or during which trading on the New York Stock Exchange
is restricted as determined by the Securities and Exchange Commission; (2)
for any period during which an emergency exists as a result of which disposal
of securities held in any separate account is not reasonably practicable, or
it is not reasonably practicable to fairly determine the value of such
assets; or (3) for such other periods as the Securities and Exchange
Commission may by order permit for the protection of security holders or as
may be permitted under the Investment Company Act of 1940.
Non-Participating
The Contracts are non-participating. No dividends are payable and the
Contracts will not share in the profits or surplus earnings of the Company.
Misstatement of Age or Sex
If the age or sex of the Annuitant or Designated Annuitant has been
misstated, the Company will change the annuity benefit payable to that which
the Purchase Payments would have purchased for the correct age or sex.
The dollar amount of any underpayment made by the Company shall be paid in
full with the next payment due
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such person or the Beneficiary. The dollar amount of any overpayment made by the
Company due to any misstatement shall be deducted from payments subsequently
accruing to such person or the Beneficiary. The age of the Annuitant or
Designated Annuitant may be established at any time by the submission of proof
satisfactory to the Company.
DISTRIBUTION OF CONTRACTS
The Contracts will be sold by licensed insurance agents in those states
where the Contracts may be lawfully sold. Such agents will be registered
representatives of broker-dealers registered under the Securities Exchange
Act of 1934 which are members of the National Association of Securities
Dealers, Inc. The Contracts will be distributed through Fidelity Brokerage
Services, Inc. ("Fidelity Brokerage") and Fidelity Insurance Agency, Inc.
("Fidelity Insurance"), which are affiliated with FMR. Fidelity Brokerage,
the principal underwriter of the Contracts, is a member of the National
Association of Securities Dealers, Inc. Fidelity Distributors Corporation
("Fidelity Distributors"), an affiliate of FMR, was incorporated under the
laws of Massachusetts on July 18, 1960, is also the distributor of funds in
the Fidelity family of Funds and other funds advised by FMR and funds
advised by other companies. The principal business address of Fidelity
Brokerage, Fidelity Insurance and Fidelity Distributors is 82 Devonshire
Street, Boston, Massachusetts 02109.
The Company has agreed to pay insurance commissions to Fidelity Insurance
for its services as an insurance general agent in distributing the Contracts
which will equal 0.55% on an annual basis of the daily net asset value of
the Variable Account. Fidelity Insurance may appoint subagents to whom it
will pay a portion of its commissions.
VOTING RIGHTS AND REPORTS
In accordance with its view of present applicable law, the Company will
vote the Funds' shares and the Formerly Eligible Fund shares held in the
Variable Account at regular and special meetings of shareholders of the
Funds and the Formerly Eligible Funds in accordance with instructions
received from persons having a voting interest in the Variable Account.
However, if the Investment Company Act of 1940 or any regulation thereunder
should be amended or if the present interpretation thereof should change,
and as a result the Company determines that it is permitted to vote such
shares in its own right, it may elect to do so.
Prior to the Annuity Commencement Date, the Contract Owner exercises the
voting rights under the Contract. After the Annuity Commencement Date, the
person having the voting interest shall be the person then entitled to
receive Variable Annuity Payments. Prior to the Annuity Commencement Date,
the number of votes which a person has the right to cast will be determined
by applying such person's percentage interest in a Sub-account to the total
number of votes attributable to the Sub-account. After the Annuity
Commencement Date, the number of votes attributable to a Contract is
determined by applying the percentage interest reflected by the reserve for
such Contract by the total number of votes attributable to the Sub-account.
After the Annuity Commencement Date the votes attributable to a Contract
decrease as such percentage interest decreases. Voting instructions will be
solicited by written communications prior to the date of the meeting at which
votes are to be cast.
Shares of the Funds and Formerly Eligible Funds held in a Sub-account as
to which no timely instructions are received or as to which Contract Owners
do not have an interest will be voted by the Company in proportion to the
voting instructions which are received with respect to all Contracts
participating in that Sub-account. Voting instructions to abstain on any item
to be voted upon will be applied on a pro rata basis to reduce the votes
eligible to be cast. Each person having a voting interest in a Sub-account
will receive proxy material, reports and other material relating to the Funds
and the Formerly Eligible Funds. In addition, every person having voting
rights will receive such reports or prospectuses concerning the Variable
Accounts as may be required by the Investment Company Act of 1940 and the
Securities Act of 1933. The Company will also send such statements reflecting
transactions involving the Contract as may be required by applicable laws,
rules and regulations.
LEGAL PROCEEDINGS
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No material legal proceedings are pending against the Variable Account,
the Company, its subsidiaries or Fidelity Brokerage.
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STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Page
PFL Life Insurance Company...................................... 2
The Contracts................................................... 2
Reallocation of Contract Values After the Annuity...............
Commencement Date............................................... 2
Accumulation Units.............................................. 2
Illustration of Accumulation Unit Value Calculations............ 3
Reinvestment of Fund Distributions.............................. 4
Contract Charges................................................ 4
Administrative Charge........................................... 4
Charges for Mortality Risk...................................... 4
Benefits Under the Contract..................................... 4
Death Benefit................................................... 4
IRS Required Distribution....................................... 5
Annuity Payments................................................ 6
Annuity Unit Value.............................................. 6
Annuity Payment Rates........................................... 6
Illustration of Calculations for Annuity Unit Value.............
and Variable Annuity Payments................................... 7
Federal Tax Matters............................................. 8
Tax Treatment of the Company.................................... 8
Diversification Requirements.................................... 8
Owner Control................................................... 8
Distribution of the Contracts................................... 8
Custody of Assets............................................... 9
State Regulation................................................ 9
Records and Reports............................................. 9
Independent Auditors............................................ 9
Other Information............................................... 9
Financial Statements............................................ 10
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FIDELITY INCOME PLUS
The Fidelity Variable Annuity Account
STATEMENT OF ADDITIONAL INFORMATION FOR THE
INDIVIDUAL VARIABLE ANNUITY CONTRACT
Offered by
PFL Life Insurance Company
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499
This Statement of Additional Information supplements the information found
in the current Prospectus for the Individual Variable Annuity Contracts
("Contract") offered by PFL Life Insurance Company. You may obtain a copy of
the Prospectus dated May 1, 1995, without charge by calling Fidelity
Investments; for Sales information call toll free 800-544-2442; for Service
and Account information call toll free 800-634-4672. Terms used in the
current Prospectus for the Contract are incorporated in this Statement.
Dated May 1, 1995
STATEMENT OF INDIVIDUAL INFORMATION
TABLE OF CONTENTS
Prospectus
Page Page
PFL Life Insurance Company 2 12
The Contracts 2 16
Reallocation of Contract Values After
the Annuity Commencement Date 2
Accumulation Units 2 17
Illustration of Accumulation Unit Value
Calculations 3
Reinvestment of Fund Distributions 4
Contract Charges 4 19
Administrative Charge 4 19
Charges for Mortality Risk 4 19
Benefits Under the Contract 4 21
Death Benefit 4 21
IRS Required Distribution 5 21
Annuity Payments 6 21
Annuity Unit Value 6
Annuity Payment Rates 7 21,22 or 23
Illustration of Calculations for Annuity Unit
Value and Variable Annuity Payments 7
Federal Tax Matters 8 24
Tax Treatment of the Company 8
Diversification Requirements 8
Owner Control 8
Distribution of the Contracts 8 28
Custody of Assets 9
State Regulation 9
Records and Reports 9 28
Independent Auditors 9
Other Information 9
Financial Statements 10
N.INC-PTB-595
PFL LIFE INSURANCE COMPANY
PFL Life Insurance Company ("Company") is a stock life insurance company
incorporated under the laws of the State of Iowa on April 19, 1961 under
the name "NN Investors Life Insurance Company, Inc." On January 1, 1991,
the name was changed from NN Investors Life Insurance Company, Inc. to PFL
Life Insurance Company. All of its products, including life insurance,
annuities, and accident and health insurance, have been approved by the
various states where offered.
<PAGE>
All of the stock of the Company is indirectly owned by AEGON USA, Inc.,
an insurance holding company, which is a wholly-owned indirect subsidiary
of AEGON, N.V., a holding company organized under the laws of The Netherlands
and engaged, through subsidiaries and associated companies, mainly in the
insurance and financial services industries.
THE CONTRACTS
Reallocation of Contract Values After the Annuity Commencement Date
After the Annuity Commencement Date, the Contract Owner may reallocate the
value of a designated number of Annuity Units of a Sub-account, then credited
to a Contract, into an equal value of Annuity Units of one or more other
Sub-accounts. The reallocation shall be based on the relative value of the
Annuity Units of the Sub-accounts at the end of the Valuation Date on the
next payment date. The request must be in writing to our Administrative and
Service Office. There is no charge assessed in connection with such
reallocation. The Company reserves the right to limit the number of times a
reallocation of Contract Value may be made in any given calendar year.
Accumulation Units
Upon allocation to the selected Sub-account, Net Purchase Payments are
converted into Accumulation Units of the Sub-account. The number of
Accumulation Units to be credited is determined by dividing the dollar amount
allocated to each Sub-account by the value of an Accumulation Unit for that
Sub-account as next determined after the Purchase Payment is received at the
Administrative and Service Office or, in the case of the initial Purchase
Payment, when the Contract application is completed, whichever is later. The
value of an Accumulation Unit was arbitrarily established at $1 at the
inception of each Sub-account. Thereafter, the value of Accumulation Unit is
determined as of the close of trading on each day the New York Stock Exchange
is open for business.
An index (the "Net Investment Factor") which measures the investment
performance of a Sub-account during a Valuation Period is used to determine
the value of an Accumulation Unit for the next subsequent Valuation Period.
The Net Investment Factor may be greater or less than or equal to one;
therefore, the value of an Accumulation Unit may increase, decrease or remain
the same from one Valuation Period to the next. The Contract Owner bears this
investment risk. The Net Investment Performance of a Sub-account and deduction
of certain charges affect the Accumulation Unit Value.
The Net Investment Factor for any Sub-account for any Valuation Period is
determined by dividing (a) by (b) and subtracting (c) from the result. For
purposes of this calculation:
(a) is the net result of:
(1) the net asset value per share of the shares held in the
Sub-account determined at the end of the current Valuation Period,
plus
(2) the per share amount of any dividend or capital gain distribution
made with respect to the shares held in the Sub-account if the
ex-dividend date occurs during the current Valuation Period, plus
or minus
(3) a per share charge or credit for any taxes determined by the
Company to have resulted from the investment operations of the
Sub-account and for which it has created a reserve;
(b) is the net result of:
(1) the net asset value per share of the shares held in the
Sub-account determined as of the end of the immediately preceding
Valuation Period, plus or minus
(2) the per share charge or credit for taxes pertaining to the
immediately preceding Valuation Period for which the Company has
created a reserve; and
(c) is the charge for mortality risk during the Valuation Period equal on
an annual basis to 0.8% of the daily net asset value of the
Sub-account.
Illustration of Accumulation Unit Value Calculations
Formula and Illustration for Determining the Net Investment Factor
Net Investment Factor = A + B - C - F
---------
D - E
2
<PAGE>
Where: A= The Net Asset Value of an Underlying Fund share as of the end
of the current Valuation Period.
Assume.................................. = $11.57
B= The per share amount of any dividend or.capital gains
distribution since the end of the immediately preceding
Valuation Period.
Assume.................................. = 0
C= The per share charge or credit for any taxes reserved for at
the end of the current Valuation Period.
Assume.................................. = 0
D= The Net Asset Value of an Underlying Fund share at the end of
the immediately preceding Valuation Period.
Assume.................................. = $11.40
E= The per share amount of any taxes reserved for at the end of
the immediately preceding Valuation Period.
Assume.................................. = 0
F= The daily deduction for mortality risk, which totals 0.8% on
an annual basis.
On a daily basis........................ = 0.00002183
Then, the Net Investment Factor = 11.57 + 0 - 0
-------------
11.40 - 0
- 0.00002183 = 1.01489045
Formula and Illustration for Determining Accumulation Unit Value
Accumulation Unit Value = A x B
Where: A= The Accumulation Unit Value for the immediately preceding
Valuation Period.
Assume.................................. = $1.347125
B= The Net Investment Factor for the current Valuation Period.
Assume.................................. = 1.01489045
Then, the Accumulation Unit Value = $1.347125 x 1.01489045
= $1.367184
Reinvestment of Fund Distributions
The Fund and the Formerly Eligible Funds have as a policy the current
distribution of income and capital gains. However, under the Contracts,
there is an automatic reinvestment of such distributions in the Fund to
comply with the requirements for special taxation of annuities under Section
72 of the Internal Revenue Code of 1986, as amended (the "Code"). That
section allows the deferral of taxes on increases in the value of the
Contract until distribution occurs, either as a lump sum or as annuity
payments under the elected settlement option.
CONTRACT CHARGES
Administrative Charge
The Company performs the administrative services for the Contracts. These
services include issuance of the Contracts, maintenance of records concerning
the Contracts, and certain valuation services.
3
<PAGE>
Charges for Mortality Risk
A mortality risk charge equal to an annual charge of 0.8% of the daily net
asset value of the Variable Account is deducted daily. The Company believes
there is a reasonable likelihood that the proposed distribution-financing
agreement (i.e., the use of the Company's general assets, including amounts
derived from the mortality risk charge, to pay for any distribution expenses)
will benefit the Variable Account and the Contract Owners.
BENEFITS UNDER THE CONTRACT
Death Benefit
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Contract Owner may elect to have the Contract Value applied under
any one of the Annuity Options. If no election of a method of settlement of
the death benefit by the Contract Owner is in effect on the date of death of
the Annuitant, the Beneficiary may elect (a) to receive the death benefit in
the form of a cash payment; or (b) to have the Contract Value applied under
one of the Annuity Options subject to the distribution after death rules
described below in the case of Contracts issued after January 18, 1985; or
(c) continue the Contract as the new Contract Owner/Annuitant if the contract
was issued after January 18, 1985, and the Beneficiary was the surviving
spouse of the Annuitant at the time of death. If settlement of the death
benefit under an Annuity Option is elected, the Annuity Commencement Date
shall be the date specified in the election but no later than ninety (90)
days after receipt by the Company of notification of the death of the
Annuitant. Either election described above may be made by filing with the
Company a written election in such form as the Company may require. Any
election of a method of settlement of the death benefit by the Contract Owner
will become effective on the date it is received by the Company at its
Administrative and Service Office. Any election of a method of settlement of
the death benefit by the Beneficiary will become effective on the later of:
(a) the date the election is received by the Company at its Administrative
and Service Office: and (b) the date notification of death and due proof of
the death of the Annuitant is received by the Company. If an election by the
Beneficiary is not received by the Company within ninety (90) days following
the date notification of the death of the Annuitant is received by the
Company at its Administrative and Service Office, the Beneficiary will be
deemed to have elected a cash payment as of the last day of the ninety (90)
day period.
If the death benefit is to be paid in cash to the Beneficiary, payment will
be made within seven (7) days of the date the election is deemed to become
effective. If the death benefit is to be paid to the Contract Owner or the
Contract Owner's estate, payment will be made within seven (7) days of the
date Due Proof of Death is received by the Company. Payment will be made in
accordance with any applicable laws and regulations governing payment of
death benefits. Notwithstanding the foregoing, the Company may be permitted
to defer such payment in accordance with the Investment Company Act of 1940.
The taxable portion of a lump sum payment of the death benefit is subject
to tax at ordinary income rates. If the Beneficiary elects to receive the
death benefit under an Annuity Option within sixty (60) days after the death
benefit becomes payable in a lump sum, the Beneficiary will recognize such
ordinary income as payments are received. However, if the election is not
made within sixty (60) days after the lump sum first became payable, the
entire death benefit will be subject to tax in the current tax year,
irrespective of whether the death benefit is actually received as a lump sum
or as a series of payments under an Annuity Option elected.
4
<PAGE>
IRS Required Distribution
If the Contract Owner or any Joint Contract Owner of the Contract dies
before the entire interest in the Contract is distributed, the value of the
Contract must be distributed to the designated beneficiary as described in
this section so that the Contracts qualify as annuities under the Internal
Revenue Code.
For Contracts issued after January 18, 1985, if the death occurs on or
after the Annuity Commencement Date, the remaining portion of such interest
will be distributed at least as rapidly as under the method of distribution
being used as of the date of death. If the death occurs before the Annuity
Commencement Date, the Contract Value generally must be paid out to the
beneficiary within five years after the death. However, if an Annuity Option
is elected by the beneficiary, the Contract Value may be distributed as an
annuity over the lifetime of the beneficiary, as long as the distribution
does not extend beyond the life expectancy of the beneficiary and the
distribution begins within one year after the Contract Owner's (or Joint
Contract Owner's) death. If any portion of the Contract Owner's interest is
payable to (or for the benefit of) the surviving spouse of the Contract
Owner's interest is payable to (or for the benefit of) the surviving spouse
of the Contract Owner, the Contract may be continued with the surviving
spouse as the new Contract Owner. For Contracts issued before January 19,
1985, the Contract Value will be paid out in accordance with the Annuity
Option elected by the beneficiary.
ANNUITY PAYMENTS
Annuity Unit Value
The amount of Variable Annuity Payments will vary with Annuity Unit Values.
Annuity Unit Values rise if the net investment performance of the Sub-account
exceeds the assumed interest rate, which is selected by the Annuitant upon
the Annuity Commencement Date. Conversely, Annuity Unit Values fall if the
net investment performance of the Sub-account is less than the assumed rate.
The Annuity Unit Value of each Sub-account is arbitrarily established at
$1.00 for the first Valuation Period of the particular Sub-account. The
Annuity Unit Value for the particular Sub-account for any Valuation Period
is determined by multiplying the Annuity Unit Value for the particular
Sub-account for the immediately preceding Valuation Period by the Net
Investment Factor for the particular Sub-account for the current Valuation
Period, and then multiplying that product by a factor to neutralize the
assumed interest rate used to establish the annuity payment rate found in
the Contract.
Annuity Payment Rates
The Contract contains Annuity Payment Rates for each Annuity Option
described in this Prospectus. The rates show, for each $1,000 applied, the
dollar amount of the first monthly Variable Annuity Payment when this payment
is based on the minimum guaranteed interest rate of 3.5% per year. The dollar
amount of subsequent Variable Annuity Payments will depend upon changes in
applicable Annuity Unit Values.
The annuity payment rates vary according to the Annuity Option elected and
the sex and adjusted age of the Annuitant at the Annuity Commencement Date.
The Contract also contains a table for determining the adjusted age of the
Annuitant.
Illustration of Calculations for Annuity Unit Value
and Variable Annuity Payments
Formula and Illustration for Determining Annuity Unit Value
Annuity Unit Value = A x B x C
Where: A = Annuity Unit Value for the immediately preceding Valuation
Period.
Assume............................. = $1.097696
B = Net Investment Factor for the Valuation Period for which the
Annuity Unit Value is being calculated.
Assume............................. = 1.005200
C = A factor to neutralize the assumed interest rate of 31/2%
built into the Annuity Tables used.
5
<PAGE>
Daily factor equals................ = 0.999906
Then, the Annuity Unit Value is:
$1.097696 x 1.005200 x 0.999906 = $1.103300
Formula and Illustration for Determining Amount of
First Monthly Variable Annuity Payment
First Monthly Variable Annuity Payment = A x B
------
$1,000
Where: A = The Annuity Purchase Value as of the Annuity
Commencement Date.
Assume............................. = $15,000.00
B = The Annuity purchase rate per $1,000 based upon the option
selected, the sex and adjusted age of the Annuitant according
to the tables contained in the Contract.
Assume............................. = $ 6.10
Then, the first Monthly Variable Annuity Payment = $15,000 x $6.10 = $91.50
-------
$1,000
Formula and Illustration for Determining the Number of Annuity
Units Represented by Each Monthly Variable Annuity Payment
Number of Annuity Units = A
---
B
Where: A = The dollar amount of the first monthly Variable Annuity
Payment.
Assume............................. $91.50
B = The Annuity Unit Value for the Valuation Date on which the
first monthly payment is due.
Assume............................. $1.103300
Then, the number of Annuity Units = $91.50 = 82.933019
------
$1.103300
FEDERAL TAX MATTERS
Tax Treatment of the Company
The Company is taxed as a life insurance company under Subchapter L of the
Code. Since the Variable Account is not an entity separate from the Company
and its operations form a part of the Company, it will not be taxed
separately as a "regulated investment company" under Subchapter M of the
Code. Investment income and realized net capital gains on the assets of the
Variable Account are reinvested and are taken into account in determining
Contract Values. As a result, such investment income and realized net capital
gains are automatically retained as part of the reserves under the Contract.
Under existing federal income tax law, the Company believes that Variable
Account investment income and realized net capital gains should not be taxed,
to the extent that such income and gains are retained as part of the reserves
under the Contracts.
Diversification Requirements
Section 817(h) of the Code provides in substance that Section 72 of the
Code will not apply and the Company will not be treated as the owner of the
assets of the Company's segregated account unless the investments made by the
segregated account are "adequately diversified" in accordance with
regulations prescribed by the Treasury. If the segregated account is not
"adequately diversified," any increase in the value of a variable annuity
contract will be taxed to the contract owner currently.
The Variable Account, through the Funds, intends to comply with the
diversification requirements under Section 817(h) as prescribed by the
Treasury. Although the Company does not control the Funds, it believes that
FMR, as the manager of the investments of each of the Funds' Portfolios,
will comply with the
6
<PAGE>
diversification rules set forth in the Regulations. Accordingly, the Company
believes that it will be treated as the owner of the segregated account assets
invested in shares of the Funds and the Contracts issued by the Company will be
taxed as annuities under Section 72 of the Code.
Owner Control
In connection with the issuance of temporary regulations on diversification
requirements, the Treasury also announced that such regulations do not
provide guidance concerning the extent to which Owners may direct their
investments to the Subaccounts of the Variable Account. It is not clear
whether additional guidance in this regard will be provided nor whether, if
provided, it will be prospective only. It is possible that any such guidance
could treat an Owner as the owner of the assets of the Variable Account if a
Subaccount is too narrow in its investment strategy (e.g., a fund that
invests only in gold or stock of gold mining companies) or if Owners have too
many subaccount options to select, even though it technically meets the
diversification requirements. It is possible that if any guidance is
provided then the Variable Account may not be in compliance. The Company
can provide no assurances that any such guidance will not adversely affect
the tax treatment of existing Contracts. For these reasons the Company
reserves the right to modify the Contract as necessary to prevent the Owner
from being considered the owner of the assets of the Variable Account or
otherwise to qualify the Contract for favorable tax treatment.
DISTRIBUTION OF THE CONTRACTS
The Contracts are offered to the public through brokers licensed under
the federal securities laws and state insurance laws. The offering of the
Contracts is continuous and the Company does not anticipate discontinuing
the offering of the Contracts. However, the Company reserves the right to
discontinue the offering of the Contracts.
The Contracts will be distributed through Fidelity Brokerage Services,
Inc., the principle underwriter of the Contracts, and Fidelity Insurance
Agency, Inc., which are affiliated with FMR. During 1994, the amount paid
to Fidelity Insurance Agency, Inc. for its services as a general insurance
agency was $3,511,300. Amounts paid for these services in 1993 and 1992 were
$2,693,726 and $1,617,019, respectively.
CUSTODY OF ASSETS
The assets of each of the Sub-accounts are held by the Company. The assets
of the Variable Account and each of the Sub-accounts thereunder are kept
physically segregated and held separate and apart from the general account
assets of the Company. The Company maintains records of all purchases and
redemptions of shares of the Fund held by each of the Sub-accounts.
Additional protection for the assets of the Variable Account is afforded by
the Company's fidelity bond presently in the amount of $5 million covering
the acts of officers and employees of the Company.
STATE REGULATION
The Company is subject to the laws of Iowa governing insurance companies
and to regulation by the Iowa Division of Insurance. An annual statement
in a prescribed form is filed with the Division of Insurance each year
covering the operation of the Company for the preceding year and its
financial condition as of the end of such year. Regulation by the Division
of Insurance includes periodic examination to determine the Company's
contract liabilities and reserves so that the Division of Insurance may
certify the items are correct. The Company's books and accounts are subject
to review by the Division of Insurance at all times and a full examination
of its operations is conducted periodically by the National Association of
Insurance Commissioners. In addition, the Company is subject to regulation
under the insurance laws of other jurisdictions in which it may operate.
7
<PAGE>
RECORDS AND REPORTS
All records and accounts relating to the Variable Account will be
maintained by the Company. As presently required by the Investment Company
Act of 1940 and regulations promulgated thereunder, the Company will mail
to all Contract Owners at their last known address of record, at least
semi-annually, reports containing such information as may be required under
that Act or by any other applicable law or regulation. The Company will also
mail to Contract Owners confirmation of each financial transaction and
semi-annual Account Statements reflecting the Contract Value of a particular
Contract.
INDEPENDENT AUDITORS
The financial statements of PFL Life Insurance Company at December 31, 1994
and 1993, and for each of three years in the period ended December 31, 1994,
and the financial statements of The Fidelity Variable Annuity Account at
December 31, 1994 and for each of the two years in the period then ended,
included in this Statement of Additional Information have been audited by
Ernst & Young LLP, independent auditors, Des Moines, Iowa.
OTHER INFORMATION
A Registration statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933, as amended, with respect to the
Contracts discussed in this Statement of Additional Information. Not all of
the information set forth in the Registration amendments and exhibits thereto
has been included in this Statement of Additional Information. Statements
contained in this Statement of Additional Information concerning the content
of the Contracts and other legal instruments are intended to be summaries.
For a complete statement of the terms of the documents, reference should be
made to the instruments filed with the Securities and Exchange Commission.
FINANCIAL STATEMENTS
The values of the interest of Contract Owners in the Variable Account will
be affected solely by the investment results of the selected Sub-account(s).
The financial statements of the Company as contained herein should be
considered only as bearing upon the Company's ability to meet its obligations
to Contract Owners under the Contracts, and they should not be considered as
bearing on the investment performance of the Sub-accounts.
8
<PAGE>
THE FIDELITY VARIABLE ANNUITY ACCOUNT
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS:
- -------------------------------
THE BOARD OF DIRECTORS AND CONTRACT OWNERS OF THE FIDELITY VARIABLE ANNUITY
ACCOUNT, PFL LIFE INSURANCE COMPANY:
We have audited the accompanying balance sheet of The Fidelity Variable
Annuity Account (comprising, respectively, the Money Market, High Income,
Equity Income, Growth, Overseas, Investment Grade Bond, Asset Manager,
Fidelity Daily Income Trust, Fidelity Cash Reserves, Fidelity Government
Securities Fund, Ltd., Fidelity Investment Grade Bond Fund and Fidelity
Capital and Income Fund Subaccounts)as of December 31, 1994, and the related
statement of operations for the year then ended and the statements of changes
in contract owners' equity for each of the two years in the period then
ended. These financial statements are the responsibility of the Variable
Account's management. Our responsibility is to express an opinion of 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 audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of mutual fund shares owned as of
December 31, 1994 by correspondence with the mutual funds' transfer agent. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
subaccounts constituting The Fidelity Variable Annuity Account at December
31, 1994, and the results of their operations for the year then ended and
changes in their contract owners' equity for each of the two years in the
period then ended in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Des Moines, Iowa
February 7, 1995
1
<PAGE>
THE FIDELITY VARIABLE ANNUITY ACCOUNT
- --------------------------------------------------------------------------------
BALANCE SHEET
December 31, 1994
<TABLE>
<CAPTION>
Money High Equity
Market Income Income
Total Subaccount Subaccount Subaccount
------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash..................................................................... $ 759,153 - 127,006 211,880
Investments in mutual funds, at current market value:
Variable Insurance Products Fund - Money Market Portfolio
145,199,658.180 shares (cost $145,199,658)......................... 145,199,658 145,199,658 - -
Variable Insurance Products Fund - High Income Portfolio
3,902,144.990 shares (cost $43,582,608)............................ 41,987,080 - 41,987,080 -
Variable Insurance Products Fund - Equity Income Portfolio
10,692,289.308 shares (cost $152,425,908).......................... 164,126,641 - - 164,126,641
Variable Insurance Products Fund - Growth Portfolio
4,323,501.839 shares (cost $94,106,907)............................ 93,776,755 - - -
Variable Insurance Products Fund - Overseas Portfolio
3,668,833.043 shares (cost $59,120,170)............................ 57,490,613 - - -
Variable Insurance Products Fund II - Investment Grade Bond Portfolio
1,104,994.026 shares (cost $12,691,756)............................ 12,177,034 - - -
Variable Insurance Products Fund II - Asset Manager Portfolio
8,776,895.992 shares (cost $125,226,616)........................... 121,033,395 - - -
Fidelity Daily Income Trust -
557,335.852 shares (cost $557,336)................................. 557,336 - - -
Fidelity Cash Reserves -
81,846.280 shares (cost $81,846)................................... 81,846 - - -
Fidelity Government Securities Fund, Ltd. -
3,318.854 shares (cost $31,795).................................... 30,434 - - -
Fidelity Capital and Income Fund -
23,789.791 shares (cost $206,681).................................. 205,306 - - -
------------ ----------- ---------- -----------
Total Assets........................................................... $637,425,251 145,199,658 42,114,086 164,338,521
============ =========== ========== ===========
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Contract Terminations Payable.......................................... $ 402,296 358,976 - -
Accrued Mortality Risk (Note 4)........................................ 415,224 96,704 25,756 107,064
------------ ----------- ---------- -----------
Total Liabilities...................................................... 817,520 455,680 25,756 107,064
Contract Owners' Equity:
Deferred annuity contracts terminable by owners (Notes 2 and 5).......... 636,607,731 144,743,978 42,088,330 164,231,457
------------ ----------- ---------- -----------
$637,425,251 145,199,658 42,114,086 164,338,521
============ =========== ========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
2
<PAGE>
<TABLE>
<CAPTION>
Fidelity Fidelity Fidelity
Daily Fidelity Government Capital and
Investment Asset Income Cash Securities Income
Growth Overseas Grade Bond Manager Trust Reserves Fund, Ltd. Fund
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
335,768 - 75,928 6,908 - - 1,154 509
- - - - - - - -
- - - - - - - -
- - - - - - - -
93,776,755 - - - - - - -
- 57,490,613 - - - - - -
- - 12,177,034 - - - - -
- - - 121,033,395 - - - -
- - - - 557,336 - - -
- - - - - 81,846 - -
- - - - - - 30,434 -
- - - - - - - 205,306
---------- ---------- ---------- ----------- ------- ------ ------ -------
94,112,523 57,490,613 12,252,962 121,040,303 557,336 81,846 31,588 205,815
========== ========== ========== =========== ======= ====== ====== =======
- 42,448 - - 359 513 - -
57,939 38,363 8,158 81,240 - - - -
---------- ---------- ---------- ----------- ------- ------ ------ -------
57,939 80,811 8,158 81,240 359 513 - -
94,054,584 57,409,802 12,244,804 120,959,063 556,977 81,333 31,588 205,815
---------- ---------- ---------- ----------- ------- ------ ------ -------
94,112,523 57,490,613 12,252,962 121,040,303 557,336 81,846 31,588 205,815
========== ========== ========== =========== ======= ====== ====== =======
</TABLE>
3
<PAGE>
THE FIDELITY VARIABLE ANNUITY ACCOUNT
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year Ended December 31, 1994
<TABLE>
<CAPTION>
Money High Equity
Market Income Income
Total Subaccount Subaccount Subaccount
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME (LOSS)
Income:
Dividends............................................................... $17,044,527 5,285,592 4,114,395 3,812,070
Expenses:
Administrative Fee (Note 4)............................................. 340,599 64,413 22,471 92,036
Mortality and expense risk charge (Note 4).............................. 5,107,341 987,046 397,926 1,242,424
----------- ----------- ---------- ----------
Net investment income (loss)............................................ 11,596,587 4,234,133 3,693,998 2,477,610
----------- ----------- ---------- ----------
NET REALIZED AND UNREALIZED CAPITAL GAIN (LOSS) FROM INVESTMENTS
Net realized capital gain (loss) from sales of investments:
Proceeds from sales..................................................... 404,071,314 121,670,069 59,788,039 34,789,414
Cost of investments sold................................................ 382,234,531 121,670,069 59,744,324 27,377,527
----------- ----------- ---------- ----------
21,836,783 - 43,715 7,411,887
Capital gain dividends.................................................. 19,428,519 - 2,085,378 7,327,321
----------- ----------- ---------- ----------
Net realized capital gain (loss)................................... 41,265,302 - 2,129,093 14,739,208
----------- ----------- ---------- ----------
Net change in unrealized appreciation (depreciation) of investments:
Beginning of the period................................................. 57,196,405 - 5,177,219 20,305,050
End of the period....................................................... 3,434,817 - (1,595,528) 11,700,733
----------- ----------- ---------- ----------
Net change in unrealized appreciation
(depreciation) of investments...................................... (53,761,588) - (6,772,747) (8,604,317)
----------- ----------- ---------- ----------
Net realized and unrealized capital gain (loss) from investments... (12,496,286) - (4,643,654) 6,134,891
----------- ----------- ---------- ----------
INCREASE (DECREASE) FROM OPERATIONS......................................... $ (899,699) 4,234,133 (949,656) 8,612,501
=========== =========== ========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
4
<PAGE>
<TABLE>
<CAPTION>
Fidelity
Fidelity Fidelity Investment Fidelity
Daily Fidelity Government Grade Capital and
Investment Asset Income Cash Securities Bond Income
Growth Overseas Grade Bond Manager Trust Reserves Fund, Ltd. Fund Fund
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
----------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
482,245 333,647 - 2,963,557 20,338 3,143 2,225 1,998 25,317
55,017 27,910 5,752 72,264 420 127 35 - 154
700,922 531,816 108,983 1,138,224 - - - - -
----------- ---------- ---------- ----------- ------- ------ ------- ------- --------
(273,694) (226,079) (114,735) 1,753,069 19,918 3,016 2,190 1,998 25,163
----------- ---------- ---------- ----------- ------- ------ ------- ------- --------
61,114,116 63,649,976 11,795,007 50,830,885 77,643 4,943 199,516 40,738 110,968
56,640,318 58,294,909 12,222,359 45,882,891 77,643 4,943 199,283 39,892 80,373
----------- ---------- ---------- ----------- ------- ------ ------- ------- --------
4,473,798 5,355,067 (427,352) 4,947,994 - - 233 846 30,595
5,103,755 - 42,627 4,868,701 - - 66 671 -
----------- ---------- ---------- ----------- ------- ------ ------- ------- --------
9,577,553 5,355,067 (384,725) 9,816,695 - - 299 1,517 30,595
----------- ---------- ---------- ----------- ------- ------ ------- ------- --------
10,180,317 3,448,859 (304,636) 18,311,341 - - 2,080 5,504 70,671
(330,152) (1,629,557) (514,722) (4,193,221) - - (1,361) - (1,375)
----------- ---------- ---------- ----------- ------- ------ ------- ------- --------
(10,510,469) (5,078,416) (210,086) (22,504,562) - - (3,441) (5,504) (72,046)
----------- ---------- ---------- ----------- ------- ------ ------- ------- --------
(932,916) 276,651 (594,811) (12,687,867) - - (3,142) (3,987) (41,451)
----------- ---------- ---------- ----------- ------- ------ ------- ------- --------
(1,206,610) 50,572 (709,546) (10,934,798) 19,918 3,016 (952) (1,989) (16,288)
=========== ========== ========== =========== ======= ====== ======= ======= ========
</TABLE>
5
<PAGE>
THE FIDELITY VARIABLE ANNUITY ACCOUNT
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
Years Ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
MONEY HIGH
MARKET INCOME
TOTAL SUBACCOUNT SUBACCOUNT
------------------------------- ---------------------------- ---------------------------
1994 1993 1994 1993 1994 1993
------------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations
Net investment
income (loss)........... $ 11,596,587 8,397,343 4,234,133 2,034,081 3,693,998 3,027,674
Net realized capital
gain (loss)............. 41,265,302 23,820,180 - - 2,129,093 4,114,734
Net change in
unrealized
appreciation
(depreciation).......... (53,761,588) 37,440,830 - - (6,772,747) 2,879,380
------------- ----------- ----------- ---------- ---------- ----------
Increase (decrease)
from operations......... (899,699) 69,658,353 4,234,133 2,034,081 (949,656) 10,021,788
------------- ----------- ----------- ---------- ---------- ----------
Contract Transactions
Net contract
purchase
payments (Note 5)..... 62,285,269 205,399,532 9,120,437 17,940,251 3,369,795 14,778,479
Transfers between
funds................. - - 67,470,241 (27,673,332) (22,995,715) (509,396)
Contract
terminations,
withdrawals, and
other deductions...... (41,145,719) (21,905,680) (18,186,396) (7,760,730) (2,241,305) (2,354,797)
------------- ----------- ----------- ---------- ---------- ----------
Increase (decrease)
from contract
transactions.......... 21,139,550 183,493,852 58,404,282 (17,493,811) (21,867,225) 11,914,286
------------- ----------- ----------- ---------- ---------- ----------
Net increase
(decrease) in
contract owners'
equity................ 20,239,851 253,152,205 62,638,415 (15,459,730) (22,816,881) 21,936,074
Contract Owners'
Equity
Beginning of
period.................. 616,367,880 363,215,675 82,105,563 97,565,293 64,905,211 42,969,137
------------- ----------- ----------- ---------- ---------- ----------
End of period............. $ 636,607,731 616,367,880 144,743,978 82,105,563 42,088,330 64,905,211
============= =========== =========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
EQUITY
INCOME GROWTH
SUBACCOUNT SUBACCOUNT
----------------------------- ---------------------------
1994 1993 1994 1993
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Operations
Net investment
income (loss)........... 2,477,610 2,326,644 (273,694) (285,302)
Net realized capital
gain (loss)............. 14,739,208 5,293,638 9,577,553 9,695,864
Net change in
unrealized
appreciation
(depreciation).......... (8,604,317) 10,915,679 (10,510,469) 3,876,333
----------- ----------- ---------- ----------
Increase (decrease)
from operations......... 8,612,501 8,535,961 (1,206,610) 13,286,895
----------- ----------- ---------- ----------
Contract Transactions
Net contract
purchase
payments (Note 5)..... 12,038,431 44,591,441 6,686,141 20,576,076
Transfers between
funds................. 3,244,268 (595,408) (1,233,845) (17,565,537)
Contract
terminations,
withdrawals, and
other deductions...... (5,994,171) (3,995,275) (3,645,699) (2,299,059)
----------- ----------- ---------- ----------
Increase (decrease)
from contract
transactions.......... 9,288,528 40,000,758 1,806,597 711,480
----------- ----------- ---------- ----------
Net increase
(decrease) in
contract owners'
equity................ 17,901,029 58,536,719 599,987 13,998,375
Contract Owners'
Equity
Beginning of
period.................. 146,330,428 87,793,709 93,454,597 79,456,222
----------- ----------- ---------- ----------
End of period............. 164,231,457 146,330,428 94,054,584 93,454,597
=========== =========== ========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
6
<PAGE>
<TABLE>
<CAPTION>
FIDELITY
DAILY
INVESTMENT ASSET INCOME
OVERSEAS GRADE BOND MANAGER TRUST
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------- ------------------------- --------------------------- ---------------------
1994 1993 1994 1993 1994 1993 1994 1993
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(226,079) (141,434) (114,735) 835,044 1,753,069 549,357 19,918 15,257
5,355,067 2,467,950 (384,725) 536,999 9,816,695 1,683,872 - -
(5,078,416) 4,119,853 (210,086) (10,839) (22,504,562) 15,636,686 - -
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
50,572 6,446,369 (709,546) 1,361,204 (10,934,798) 17,869,915 19,918 15,257
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
9,930,629 18,588,457 1,399,181 7,816,192 19,629,724 81,108,636 110,931 -
(9,356,057) 28,842,183 (4,916,111) (1,555,163) (32,141,231) 19,240,958 (10,000) (47,666)
(1,920,604) (672,359) (1,077,700) (612,655) (8,048,389) (3,950,172) (9,000) (190,050)
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
(1,346,032) 46,758,281 (4,594,630) 5,648,374 (20,559,896) 96,399,422 91,931 (237,716)
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
(1,295,460) 53,204,650 (5,304,176) 7,009,578 (31,494,694) 114,269,337 111,849 (222,459)
58,705,262 5,500,612 17,548,980 10,539,402 152,453,757 38,184,420 445,128 667,587
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
57,409,802 58,705,262 12,244,804 17,548,980 120,959,063 152,453,757 556,977 445,128
========== ========== ========== ========== =========== =========== ======= =======
</TABLE>
<TABLE>
<CAPTION>
FIDELITY
FIDELITY INVESTMENT FIDELITY
FIDELITY GOVERNMENT GRADE CAPITAL AND
CASH SECURITIES BOND INCOME
RESERVES FUND, LTD. FUND FUND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------- ------------------------- --------------------------- ---------------------
1994 1993 1994 1993 1994 1993 1994 1993
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
3,016 2,777 2,190 1,161 1,998 2,929 25,163 29,155
- - 299 897 1,517 1 30,595 26,225
- - (3,441) 605 (5,504) 3,047 (72,046) 20,086
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
3,016 2,777 (952) 2,663 (1,989) 5,977 (16,288) 75,466
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
- - - - - - - -
- - - - (40,730) - (20,820) (136,639)
(4,801) (50,414) 121 - (32) - (17,743) (20,169)
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
(4,801) (50,414) 121 - (40,762) - (38,563) (156,808)
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
(1,785) (47,637) (831) 2,663 (42,751) 5,977 (54,851) (81,342)
83,118 130,755 32,419 29,756 42,751 36,774 260,666 342,008
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
81,333 83,118 31,588 32,419 - 42,751 205,815 260,666
========== ========== ========== ========== =========== =========== ======= =======
</TABLE>
7
<PAGE>
THE FIDELITY VARIABLE ANNUITY ACCOUNT
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization-The Fidelity Variable Annuity Account ("Variable Account") is a
segregated investment account of PFL Life Insurance Company ("PFL Life"), an
indirect, wholly-owned subsidiary of AEGON USA, Inc. ("AUSA"), a holding
company. AUSA is an indirect, wholly-owned subsidiary of AEGONnv, a holding
company organized under the laws of The Netherlands.
The Variable Account is registered with the Securities and Exchange
Commission as a Unit Investment Trust pursuant to provisions of the
Investment Company Act of 1940.
The Fidelity Investment Grade Bond Fund Subaccount was previously referred to as
the Fidelity Flexible Bond Fund Subaccount in the 1993 financial statements. As
of December 31, 1994, this subaccount had no assets or liabilities.
Investments-Net purchase payments received by the Variable Account are
invested in the portfolios of the eligible mutual funds, Variable Insurance
Products Fund and Variable Insurance Products Fund II ("VIPF II"), as
selected by the contract owner. Variable Insurance Products Fund, formerly
known as Fidelity Cash Reserves II, was established on April 1, 1982 to
comply with the Internal Revenue Service guidelines for tax-deferred variable
annuity contracts. Transfers into the portfolios of the eligible Funds are
permitted from the formerly eligible funds. Transfers into the formerly eligible
funds are permitted only on deposits made prior to 1981. Investments are stated
at the closing net asset values per share as of December 31, 1994.
Realized capital gains and losses from sale of shares in the mutual funds are
determined on the first-in, first-out basis. Investment transactions are
accounted for on the trade date (date the order to buy or sell is executed) and
dividend income is recorded on the ex-dividend date. Unrealized gains or losses
from investments in the mutual funds are credited or charged to contract owners'
equity.
Dividend Income-Dividends received from the mutual fund investments are
reinvested to purchase additional mutual fund shares.
2. CONTRACT OWNERS' EQUITY
The January 1, 1993 contract owners' equity has been restated to include the
then current value of PFL Life's initial capital contribution. In total,
contract owners' equity was increased $255,886, substantially all of which is
related to the Money Market Subaccount. At December 31, 1994, contract owners'
equity includes an amount of $271,006, which represents the current value of PFL
Life's initial capital contribution.
A summary of deferred annuity contracts terminable by owners at December 31,
1994 follows:
<TABLE>
<CAPTION>
ACCUMULATION
ACCUMULATION UNIT TOTAL
SUBACCOUNT UNITS OWNED VALUE CONTRACT VALUE
- ---------- -------------- --------- --------------
<S> <C> <C> <C>
Variable Insurance Products Fund-Money Market .............. 65,884,206.476 $2.196945 $144,743,978
Variable Insurance Products Fund-High Income ............... 17,337,052.330 2.427652 42,088,330
Variable Insurance Products Fund-Equity Income ............. 74,571,142.757 2.202346 164,231,457
Variable Insurance Products Fund-Growth .................... 37,916,994.644 2.480539 94,054,584
Variable Insurance Products Fund-Overseas .................. 35,747,520.597 1.605980 57,409,802
Variable Insurance Products Fund II-Investment Grade Bond... 8,539,290.351 1.433937 12,244,804
Variable Insurance Products Fund II-Asset Manager .......... 76,955,562.944 1.571804 120,959,063
Fidelity Daily Income Trust................................. 190,668.116 2.921185 556,977
Fidelity Cash Reserves...................................... 27,720.506 2.934039 81,333
Fidelity Government Securities Fund, Ltd.................... 8,076.564 3.911039 31,588
Fidelity Capital and Income Fund............................ 35,622.255 5.777672 205,815
------------
$636,607,731
============
</TABLE>
8
<PAGE>
THE FIDELITY VARIABLE ANNUITY ACCOUNT
- --------------------------------------------------------------------------------
A summary of changes in contract owner's account units follows:
<TABLE>
<CAPTION>
Investment
Money High Equity Grade
Market Income Income Growth Overseas Bond
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding
at 1/1/93.................... 47,043,904 20,668,832 49,654,519 37,625,504 4,705,939 7,725,407
Units purchased.................. 8,542,964 6,497,089 23,079,714 8,937,971 12,656,941 5,413,093
Units redeemed and transferred... (16,931,602) (1,051,790) (2,159,602) (9,193,774) 19,527,486 (1,453,218)
---------- ---------- ---------- ---------- ---------- ----------
Units outstanding
at 12/31/93.................. 38,655,266 26,114,131 70,574,631 37,369,701 36,890,366 11,685,282
Units purchased.................. 4,152,571 1,393,573 5,628,529 2,701,508 6,073,666 940,153
Units redeemed and transferred... 23,076,369 (10,170,652) (1,632,017) (2,154,214) (7,216,511) (4,086,145)
---------- ---------- ---------- ---------- ---------- ----------
Units outstanding
at 12/31/94.................. 65,884,206 17,337,052 74,571,143 37,916,995 35,747,521 8,539,290
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Fidelity
Fidelity Fidelity Investment Fidelity
Daily Fidelity Government Grade Capital and
Asset Income Cash Securities Bond Income
Manager Trust Reserves Fund, Ltd. Fund Fund
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding
at 1/1/93.................... 27,180,038 243,997 47,677 8,094 10,104 70,510
Units purchased.................. 53,248,545 - - - - -
Units redeemed and transferred... 9,935,429 (85,721) (18,233) (9) (2) (27,501)
----------- -------- -------- -------- -------- --------
Units outstanding
at 12/31/93.................. 90,364,012 158,276 29,444 8,085 10,102 43,009
Units purchased.................. 11,630,547 39,217 - - - -
Units redeemed and transferred... (25,038,996) (6,825) (1,723) (8) (10,102) (7,387)
----------- -------- -------- -------- -------- --------
Units outstanding
at 12/31/94.................. 76,955,563 190,668 27,721 8,077 - 35,622
=========== ======== ======== ======== ======== ========
</TABLE>
3. TAXES
Operations of the Variable Account form a part of PFL Life, which is taxed as
a life insurance company under Subchapter L of the Internal Revenue Code of
1986, as amended (the "Code"). The operations of the Variable Account are
accounted for separately from other operations of PFL Life for purposes of
federal income taxation. The Variable Account is not separately taxable as a
regulated investment company under Subchapter M of the Code and is not
otherwise taxable as an entity separate from PFL Life. Under existing federal
income tax laws, the income of the Variable Account, to the extent applied to
increase reserves under the variable annuity contracts, is not taxable to PFL
Life.
4. ADMINISTRATIVE AND MORTALITY RISK CHARGE
Administrative charges include an annual charge of $35 per contract. Charges
for administrative fees to the variable annuity contracts are an expense of
the Variable Account.
PFL Life deducts a daily charge equal to an annual rate of 0.8% of the value
of the contract owners' individual account of the eligible funds as a charge
for assuming the mortality and expense risk.
9
<PAGE>
THE FIDELITY VARIABLE ANNUITY ACCOUNT
- --------------------------------------------------------------------------------
5. NET ASSETS
At December 31, 1994 contract owners' equity was comprised of:
<TABLE>
<CAPTION>
Investment
Money High Equity Grade
Market Income Income Growth Overseas Bond
Total Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
------------ ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Unit transactions,
accumulated
net investment
income and
realized capital
gains................. $633,172,914 144,743,978 43,683,858 152,530,724 94,384,736 59,039,359 12,759,526
Adjustment for
appreciation
(depreciation) to
market value.......... 3,434,817 - (1,595,528) 11,700,733 (330,152) (1,629,557) (514,722)
------------ ----------- ---------- ----------- ---------- ---------- ----------
Total Contract
Owners' Equity........ $636,607,731 144,743,978 42,088,330 164,231,457 94,054,584 57,409,802 12,244,804
============ =========== ========== =========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Fidelity Fidelity Fidelity
Daily Fidelity Government Capital and
Asset Income Cash Securities Income
Manager Trust Reserves Fund, Ltd. Fund
Subaccount Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Unit transactions,
accumulated
net investment
income and
realized capital
gains................. 125,152,284 556,977 81,333 32,949 207,190
Adjustment for
appreciation
(depreciation) to
market value.......... (4,193,221) - - (1,361) (1,375)
----------- ------- ------ ------ -------
Total Contract
Owners' Equity........ 120,959,063 556,977 81,333 31,588 205,815
=========== ======= ====== ====== =======
</TABLE>
6. PURCHASES AND SALES OF INVESTMENT SECURITIES
The aggregate cost of purchases and proceeds from sales of investments were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1994 1993
----------------------------- ---------------------------
PURCHASES SALES PURCHASES SALES
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Variable Insurance Products Fund-Money Market Portfolio............... $ 184,706,003 $ 121,670,069 $ 56,286,041 $ 71,754,448
Variable Insurance Products Fund-High Income Portfolio................ 43,563,970 59,788,039 63,817,549 48,615,179
Variable Insurance Products Fund-Equity Income Portfolio.............. 53,686,271 34,789,414 60,250,742 17,888,886
Variable Insurance Products Fund-Growth Portfolio..................... 67,390,261 61,114,116 60,196,095 58,413,778
Variable Insurance Products Fund-Overseas Portfolio................... 62,112,924 63,649,976 73,857,941 27,172,233
Variable Insurance Products Fund II-Investment Grade Bond Portfolio... 7,045,524 11,795,007 18,750,671 12,167,295
Variable Insurance Products Fund II-Asset Manager Portfolio........... 36,879,077 50,830,885 102,102,801 4,143,677
Fidelity Daily Income Trust........................................... 189,204 77,643 15,744 238,238
Fidelity Cash Reserves................................................ 3,143 4,943 2,977 50,593
Fidelity Government Securities Fund, Ltd. ............................ 202,290 199,516 2,777 35
Fidelity Investment Grade Bond Fund................................... 2,484 40,738 2,944 8
Fidelity Capital and Income Fund...................................... 96,801 110,968 29,087 157,031
------------ ------------ ------------ ------------
$455,877,952 $404,071,314 $435,315,369 $240,601,401
============ ============ ============ ============
</TABLE>
10
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
PFL Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of PFL Life
Insurance Company as of December 31, 1994 and 1993, and the related statutory-
basis statements of operations, capital and surplus and cash flows for each of
the three years in the period ended December 31, 1994. 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.
The Company presents its financial statements in conformity with the
accounting practices prescribed or permitted by the Insurance Division of the
Commerce Department of the State of Iowa. The variances between such practices
and generally accepted accounting principles are described in Note 1. The
effects of these variances have not been determined but we believe they are
material.
In our opinion, because of the materiality of the effects of the variances
between generally accepted accounting principles and the accounting practices
referred to in the preceding paragraph, the financial statements referred to
above are not intended to and do not present fairly, in conformity with
generally accepted accounting principles, the financial position of PFL Life
Insurance Company at December 31, 1994 and 1993, or the results of its
operations or its cash flows for each of the three years in the period ended
December 31, 1994.
1
<PAGE>
[LOGO OF ERNST & YOUNG LLP APPEARS HERE]
Also, in our opinion, the financial statements referred to above present
fairly, in all material respects, the admitted assets, liabilities and capital
and surplus of PFL Life Insurance Company at December 31, 1994 and 1993, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1994 in conformity with accounting practices
prescribed or permitted by the Insurance Division of the Commerce Department of
the State of Iowa.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 17, 1995
2
<PAGE>
PFL LIFE INSURANCE COMPANY
BALANCE SHEETS--STATUTORY BASIS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1994 1993
---------- ----------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments........................ $ 34,062 $ 18,135
Bonds (Note 2)......................................... 4,094,407 3,511,009
Stocks (Note 2):
Preferred............................................ 12,667 14,002
Common (cost: 1994--$15,812; 1993--$14,653).......... 16,754 18,651
Affiliated entities (cost: 1994--$13,155; 1993--
$14,705)............................................ 26,530 48,226
Mortgage loans on real estate (Note 2)................. 527,410 415,829
Real estate, at cost less accumulated depreciation and
encumbrances ($12,318 in 1994; $12,728 in 1993):
Home office properties............................... 21,226 12,791
Properties acquired in satisfaction of debt.......... 10,381 13,222
Investment properties................................ 45,859 45,682
Policy loans........................................... 51,798 48,596
Other invested assets.................................. 4,593 5,289
---------- ----------
Total cash and invested assets......................... 4,845,687 4,151,432
Premiums deferred and uncollected........................ 18,386 18,877
Accrued investment income................................ 61,969 56,852
Receivable from affiliates............................... 31,843 31,478
Federal income taxes recoverable (Note 4)................ 10,274 --
Other assets (Note 8).................................... 29,441 32,569
Separate account assets.................................. 1,120,391 907,255
---------- ----------
Total admitted assets.................................. $6,117,991 $5,198,463
========== ==========
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1994 1993
---------- ----------
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life................................................. $ 557,624 $ 475,503
Annuity.............................................. 3,763,714 3,183,571
Accident and health.................................. 99,240 81,635
Policy and contract claim reserves:
Life................................................. 7,493 8,540
Accident and health.................................. 66,407 61,643
Other policyholders' funds............................. 5,494 3,207
Remittances and items not allocated.................... 35,415 19,238
Federal income taxes payable (Note 4).................. -- 5,824
Asset valuation reserve (Note 1)....................... 37,975 44,015
Interest maintenance reserve (Note 1).................. 22,826 36,487
Other liabilities (Note 8)............................. 73,071 56,774
Separate account liabilities........................... 1,120,391 907,255
---------- ----------
Total liabilities...................................... 5,789,650 4,883,692
Commitments and contingencies (Notes 3 and 8)
Capital and surplus (Note 6):
Common stock, $10 par value, 500 shares authorized, 266
issued and outstanding................................ 2,660 2,660
Paid-in surplus........................................ 114,129 99,129
Unassigned surplus..................................... 211,552 212,982
---------- ----------
Total capital and surplus.............................. 328,341 314,771
---------- ----------
Total liabilities and capital and surplus.............. $6,117,991 $5,198,463
========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net of
reinsurance:
Life................................... $ 148,954 $ 98,670 $ 93,360
Annuity................................ 1,067,406 740,787 492,426
Accident and health.................... 230,889 266,789 263,540
Net investment income (Note 2)........... 343,880 322,393 315,416
Amortization of interest maintenance
reserve (Note 1)........................ 2,871 2,674 481
Commissions and expense allowances on
reinsurance ceded....................... 94,635 62,584 53,688
---------- ---------- ----------
1,888,635 1,493,897 1,218,911
Benefits and expenses:
Death, surrender and other life insurance
and annuity benefits.................... 499,120 298,457 212,371
Accident and health benefits............. 107,882 132,044 135,400
Increase in aggregate reserves for
policies and contracts:
Life................................... 82,062 26,703 29,441
Annuity................................ 580,564 254,593 375,219
Accident and health.................... 22,144 19,216 16,552
Commissions.............................. 215,635 198,251 181,644
General insurance expenses............... 52,166 53,367 51,480
Taxes, licenses and fees................. 15,368 10,781 10,606
Transfer to separate account............. 243,806 414,819 131,512
Other expenses........................... 1,014 814 2,875
---------- ---------- ----------
1,819,761 1,409,045 1,147,100
---------- ---------- ----------
Gain from operations before federal income
taxes and net realized capital losses on
investments............................... 68,874 84,852 71,811
Federal income tax expense (Note 4)........ 23,858 31,667 24,052
---------- ---------- ----------
Gain from operations before net realized
capital losses on investments............. 45,016 53,185 47,759
Net realized capital losses on investments
(net of related federal income taxes and
transfer to interest maintenance reserve)
(Note 2).................................. (3,624) (451) (1,407)
---------- ---------- ----------
Net income................................. $ 41,392 $ 52,734 $ 46,352
========== ========== ==========
</TABLE>
See accompanying notes.
5
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF CAPITAL AND SURPLUS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Common stock, at beginning and end of year....... $ 2,660 $ 2,660 $ 2,660
Paid-in surplus:
Beginning of year.............................. 99,129 99,129 99,129
Capital contribution (Note 7).................. 15,000 -- --
-------- -------- --------
End of year...................................... 114,129 99,129 99,129
Unassigned surplus:
Beginning of year.............................. 212,982 213,665 213,038
Net income..................................... 41,392 52,734 46,352
Net change in unrealized capital gains/losses.. (25,350) 1,719 254
Change in non-admitted assets.................. (248) (5) 44
Change in asset valuation reserve.............. 6,040 (10,773) (7,354)
Surplus effect of mergers (Note 1)............. -- -- 6,364
Surplus effect of sale of division (Note 1).... -- (862) --
Surplus effect of ceding commissions associated
with the sale of a division (Note 1).......... 184 -- --
Cancellation of coinsurance agreements (Note
1)............................................ -- (288) 877
Amendment of reinsurance agreement (Note 1).... 391 -- --
Dividends to stockholder (Note 6).............. (20,900) (46,000) (31,200)
Prior period adjustment (Notes 4 and 8)........ (3,444) 452 (13,791)
Change in liability for reinsurance in
unauthorized companies........................ 505 2,340 (919)
-------- -------- --------
End of year...................................... 211,552 212,982 213,665
-------- -------- --------
Total capital and surplus........................ $328,341 $314,771 $315,454
======== ======== ========
</TABLE>
See accompanying notes.
6
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1994 1993 1992
----------- ----------- ----------
<S> <C> <C> <C>
SOURCES OF CASH
Net cash provided by operations:
Premiums and other considerations, net
of reinsurance........................ $ 1,547,797 $ 1,169,096 $ 898,953
Net investment income.................. 339,856 326,480 318,076
----------- ----------- ----------
1,887,653 1,495,576 1,217,029
Life and accident and health claims.... (137,602) (159,968) (158,039)
Surrender benefits and other fund with-
drawals............................... (392,064) (217,998) (144,230)
Other benefits to policyholders........ (73,237) (50,180) (42,699)
Commissions, other expenses and other
taxes................................. (288,151) (264,124) (244,208)
Net transfers to separate accounts..... (243,806) (414,819) (131,512)
Dividends to policyholders............. (1,155) (1,200) (1,374)
Federal income taxes, excluding tax on
capital gains and IRS settlements..... (39,864) (32,548) (2,728)
Increase in policy loans............... (3,202) (677) (3,497)
----------- ----------- ----------
(1,179,081) (1,141,514) (728,287)
----------- ----------- ----------
Net cash provided by operations.......... 708,572 354,062 488,742
Proceeds from investments sold, matured
or repaid:
Bonds and preferred stocks............. 1,430,339 1,532,807 1,418,990
Common stocks.......................... 12,941 11,121 11,132
Mortgage loans on real estate.......... 43,495 47,460 25,480
Real estate............................ 9,536 8,286 1,112
Other proceeds......................... 189 1,407 2,691
----------- ----------- ----------
Total cash from investments.............. 1,496,500 1,601,081 1,459,405
Capital contribution (Note 7)............ 15,000 --
Cash received as the result of coinsur-
ance cancellations (Note 1)............. -- 114 23,471
Cash received in connection with mergers
(Note 1)................................ -- -- 675
Dividend from subsidiary (Note 7)........ 10,000 -- --
Cash received from ceding commissions as-
sociated with the sale of a division
(Note 1)................................ 284 -- --
Other cash provided...................... 45,799 12,457 30,849
----------- ----------- ----------
Total sources of cash.................... 2,276,155 1,967,714 2,003,142
</TABLE>
7
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1994 1993 1992
----------- ----------- ----------
<S> <C> <C> <C>
APPLICATIONS OF CASH
Cost of investments acquired:
Bonds and preferred stocks............. 2,043,615 1,846,839 1,697,452
Common stocks.......................... 11,228 18,832 10,471
Mortgage loans on real estate.......... 160,068 94,557 73,508
Real estate............................ 14,801 8,587 2,961
Other invested assets.................. 664 347 720
----------- ----------- ----------
Total investments acquired............... 2,230,376 1,969,162 1,785,112
Dividends to stockholder (Note 6)........ 20,900 46,000 31,200
Cash transferred as the result of sale of
division (Note 1)....................... -- 8,773 -
Other cash applied....................... 8,952 46,504 88,948
----------- ----------- ----------
Total applications of cash............... 2,260,228 2,070,439 1,905,260
----------- ----------- ----------
Net change in cash and short-term invest-
ments................................... 15,927 (102,725) 97,882
Cash and short-term investments at begin-
ning of year............................ 18,135 120,860 22,978
----------- ----------- ----------
Cash and short-term investments at end of
year.................................... $ 34,062 $ 18,135 $ 120,860
=========== =========== ==========
</TABLE>
See accompanying notes.
8
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
PFL Life Insurance Company (the Company) is a stock life insurance company
and is a wholly-owned subsidiary of First AUSA Life Insurance Company (AUSA),
which is an indirect wholly-owned subsidiary of AEGON nv, a holding company
organized under the laws of The Netherlands. The financial statements presented
herein are prepared on the statutory accounting principles basis for the
Company only; as such, the accounts of the Company's wholly-owned subsidiary,
Equity National Life Insurance Company (Equity National), are not consolidated
with those of the Company.
In connection with the sale of certain affiliated companies by AUSA, the
Company has assumed various blocks of business from these former affiliates
through mergers. In addition, the Company has cancelled or entered into several
coinsurance agreements with affiliates and non-affiliates. The following is a
description of those transactions:
. On January 1, 1994, the Company revised a reinsurance agreement with
a non-affiliate (primarily group health business). As a result, the
Company transferred $3,881 in assets and $4,080 in liabilities. The
difference between the assets and liabilities of $199, plus a tax
credit of $192, was credited directly to unassigned surplus.
. During 1993, the Company sold the Oakbrook Division (primarily group
health business). The initial transfer of risk occurred through an
indemnity reinsurance agreement. The policies will then be assumed by
the reinsurer by novation as state regulatory and policyholder
approvals are received. In addition, the Company will receive from
the third party administrator a ceding commission of one percent of
the premiums collected between January 1, 1994 and December 31, 1996.
As a result of the sale, in 1993, the Company transferred $12,094 in
assets including $8,773 in cash and short-term investments and
$10,570 in liabilities to the assuming company. The difference
between the assets and liabilities transferred, net of a tax effect
of $662, was charged directly to unassigned surplus. The income
statement for 1993 includes revenues of $53,558 and net income of
$2,839 earned by the division prior to its sale. During 1994, the
Company received $284 for ceding commissions; the commissions net of
the related tax effect of $100 was credited directly to unassigned
surplus.
9
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
. During 1993, the Company cancelled several coinsurance agreements
with affiliated and non-affiliated companies. As a result of the
cancellations with affiliates, the Company received $1,006 in assets,
and $1,051 in liabilities. As a result of the cancellations with non-
affiliates, the Company received $6,736 in assets, including $114 in
cash and short-term investments, and $7,131 in liabilities. The
difference between the assets and liabilities, net of a tax effect of
$152, was charged directly to surplus.
. During 1992, the Company cancelled several coinsurance agreements
with affiliates. As a result of the cancellations, the Company
transferred $8,199 in assets, including $358 in cash and short-term
investments, and $10,986 in liabilities to affiliates. Also in 1992,
the Company entered into a reinsurance agreement with an affiliate
and received $23,474 in assets including $23,471 in cash and short-
term investments, and $24,934 in liabilities. The net effect of these
transactions, net of the related tax effect, was credited directly to
unassigned surplus.
. In 1991, the majority of the assets, liabilities and capital and
surplus of Pacific Fidelity Life Insurance Company (PFL) and National
Old Line Insurance Company, Inc. (NOL) (affiliated companies) were
merged into the Company. In 1992, the remaining assets, liabilities
and capital and surplus of $36,984, $30,620 and $6,364, respectively,
were merged into the Company. Revenues and net income of this
remaining merged business are not significant to current or prior
years' operations.
Basis of Presentation
The accompanying statutory-basis financial statements have been prepared in
accordance with accounting practices prescribed or permitted by the Insurance
Division of the Commerce Department of the State of Iowa, which are designed
primarily to reflect the Company's ability to meet obligations to policyholders.
Statutory insurance accounting principles differ in many respects from generally
accepted accounting principles (GAAP) followed by other business enterprises in
determining financial position, and results of operations. The effects of such
variances from GAAP have not been determined. Accordingly, the accompanying
statutory-basis financial statements are not intended to present financial
position, results of operations and cash flows in conformity with GAAP. Pursuant
to statutory requirements: (a) bonds are generally carried at amortized cost
rather than segregating the portfolio into held-to-maturity (carried at
amortized cost), available-for-sale (carried at fair value), and trading
(carried at fair value) classifications; (b) premium income on life policies is
recognized over the premium paying period of the policies and premium income on
accident and health policies is recognized over the
10
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
coverage period of the policies, whereas the related acquisition costs such
as commissions and other costs related to acquiring new business are charged to
current operations as incurred; (c) aggregate policy reserves are based on
statutory mortality and interest requirements without consideration of
withdrawals, which may differ from reserves determined using estimates of
mortality, interest and withdrawals; (d) deferred federal income taxes are not
provided for timing differences between the financial statements and the tax
returns; (e) certain assets designated as "non-admitted assets" have been
excluded from the balance sheet by a charge to surplus; (f) the asset valuation
reserve (AVR), which is in the nature of a contingency reserve for possible
losses on investments, is recorded as a liability through a charge to surplus;
(g) net realized capital gains and losses attributable to changes in the level
of market interest rates are deferred and amortized over the remaining life of
the bonds and mortgage loans disposed of rather than being recognized in the
statement of operations in the year of disposition; (h) gross premiums for all
insurance products are considered revenues rather than reporting only various
policy charges and fees for certain long-duration contracts; (i) pension
expense is recorded as amounts are paid; and (j) reinsurance reserve credits
are recorded as a reduction to aggregate policy reserves rather than being
recorded as reinsurance recoverable assets. All pertinent financial statement
disclosures otherwise required under generally accepted accounting principles
are presented herein using the corresponding statutory-basis amounts.
The National Association of Insurance Commissioners (NAIC) currently is in
the process of recodifying statutory accounting practices, the result of which
is expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in
1996, will likely change, to some extent, prescribed statutory accounting
practices and may result in changes to the accounting practices that the
Company uses to prepare its statutory-basis financial statements.
Fair Values of Financial Instruments
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments", requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparisons to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
11
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents, short-term investments: The carrying amounts
reported in the balance sheet for these instruments approximate their fair
values.
Investment securities: Fair values for fixed maturity securities
(including redeemable preferred stocks) are based on quoted market prices,
where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from independent pricing
services or, in the case of private placements, are estimated by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality, and maturity of the investments.
The fair values for equity securities other than insurance subsidiaries are
based on quoted market prices and are recognized in the balance sheet. Fair
value for the Company's insurance subsidiary is the statutory net book
value of that subsidiary.
Mortgage loans and policy loans: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans are assumed to equal their carrying
value.
Investment contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash
flow calculations, based on interest rates currently being offered for
similar contracts with maturities consistent with those remaining for the
contracts being valued.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure
to changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The following sets forth a comparison of the fair values and carrying values
of the Company's financial instruments subject to the provisions of Statement
of Financial Accounting Standards No. 107:
12
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------
1994 1993
--------------------- ---------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds (Note 2).................. $4,094,407 $3,952,849 $3,511,009 $3,691,415
Preferred stocks (Note 2)....... 12,667 12,905 14,002 14,622
Common stocks................... 16,754 16,754 18,651 18,651
Affiliated common stock......... 26,530 26,530 48,226 48,226
Mortgage loans on real estate
(Note 2)....................... 527,410 499,350 415,829 432,363
Policy loans.................... 51,798 51,798 48,596 48,596
Cash and short-term investments. 34,062 34,062 18,135 18,135
Separate account assets......... 1,120,391 1,120,391 907,255 907,255
LIABILITIES
Investment contract liabilities
(including separate accounts).. 4,898,221 4,587,228 4,102,845 4,103,903
</TABLE>
Cash and Short-Term Investments
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with remaining maturity of one year or less when
purchased to be short-term investments. Short-term investments are recorded at
amortized cost, which approximates market.
Investments
Mortgage loans on real estate and policy loans are recorded at unpaid
balances. Bonds are valued primarily at amortized cost using the effective
interest method. Preferred stocks are valued primarily at cost. Common stocks,
which include shares of mutual funds (money market and other), are valued at
market with market value for the Company's investment in an insurance
subsidiary equal to the statutory net book value of the subsidiary. Realized
gains and losses on the sale of securities are recognized using the specific
identification method.
Depreciation on real estate is provided over the estimated useful lives of
the assets using the straight-line method.
13
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Aggregate Policy Reserves
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest rates and valuation methods that will provide,
in the aggregate, reserves that are greater than or equal to the minimum
required by law.
The aggregate policy reserves for life insurance policies are based
principally upon the 1941, 1958, and 1980 Commissioners' Standard Ordinary
Mortality and American Experience Mortality Tables. The reserves are calculated
using interest rates ranging from 2.00 to 6.00 percent and are computed
principally on the Net Level Valuation and the Commissioners' Reserve Valuation
Methods. Reserves for universal life policies are based on account balances
adjusted for the Commissioners' Reserve Valuation Method.
Deferred annuity reserves are calculated according to the Commissioners'
Annuity Reserve Valuation Method including excess interest reserves to cover
situations where the future interest guarantees plus the decrease in surrender
charges are in excess of the maximum valuation rates of interest. Reserves for
immediate annuities and supplementary contracts with and without life
contingencies are equal to the present value of future payments assuming
interest rates ranging from 2.50 to 11.25 percent and mortality rates, where
appropriate, from a variety of tables.
Accident and health policy reserves are equal to the greater of the gross
unearned premiums or any required midterminal additional reserves plus net
unearned premiums and the present value of amounts not yet due on both reported
and unreported claims.
Policy and Contract Claim Reserves
Claim reserves represent the estimated accrued liability for claims reported
to the Company and claims incurred but not yet reported through the statement
date. These reserves are estimated using either individual case-basis
valuations or statistical analysis techniques. These estimates are subject to
the effects of trends in claim severity and frequency. The estimates are
continually reviewed and adjusted as necessary as experience develops or new
information becomes available.
Separate Account
Assets held in trust for purchases of variable annuity contracts and the
Company's corresponding obligation to the contract owners are shown separately
in the balance sheets. The assets in the separate account are valued at market.
Income and gains and losses with respect to the assets in the separate account
accrue to the benefit of the policyholders.
14
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Asset Valuation Reserve and Interest Maintenance Reserve
As prescribed by the NAIC, the Company is required to record an Asset
Valuation Reserve (AVR). The AVR is computed in accordance with a prescribed
formula and represents a provision for possible fluctuations in the value of
bonds, equity securities, mortgage loans, real estate, and other invested
assets. Changes to the AVR are charged or credited directly to unassigned
surplus.
Also, as prescribed by the NAIC, the Company reports an Interest Maintenance
Reserve (IMR) that represents the net accumulated unamortized realized capital
gains and losses attributable to changes in the general level of interest rates
on sales of fixed income investments, principally bonds and mortgage loans.
During 1994, 1993 and 1992, net realized capital gains (losses) of $(10,790),
$21,403 and $18,166, respectively, were credited to the IMR rather than being
recognized in the statements of operations. Such gains or losses are amortized
into income on a straight-line basis over the remaining period to maturity
based on groupings of individual securities sold in five-year bands;
amortization of these net gains aggregated $2,871, $2,674 and $481 for the
years ended December 31, 1994, 1993 and 1992, respectively.
Reclassifications
Certain reclassifications have been made to the 1993 and 1992 financial
statements to conform to the 1994 presentation.
2. INVESTMENTS
The carrying value and estimated fair value of investments in debt securities
were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
Bonds:
United States Government and
agencies..................... $ 104,798 $ 395 $ (1,958) $ 103,235
State, municipal and other
government................... 51,650 390 (2,739) 49,301
Public utilities.............. 164,975 1,860 (5,710) 161,125
Industrial and miscellaneous.. 1,891,899 27,082 (69,137) 1,849,844
Mortgage-backed securities.... 1,881,085 9,074 (100,815) 1,789,344
---------- -------- --------- ----------
4,094,407 38,801 (180,359) 3,952,849
Preferred stocks.............. 12,667 778 (540) 12,905
---------- -------- --------- ----------
$4,107,074 $ 39,579 $(180,899) $3,965,754
========== ======== ========= ==========
</TABLE>
15
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
2. INVESTMENTS (continued)
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1993
Bonds:
United States Government and
agencies..................... $ 89,357 $ 5,207 $ (347) $ 94,217
State, municipal and other
government................... 65,767 3,125 (308) 68,584
Public utilities.............. 223,954 15,903 (923) 238,934
Industrial and miscellaneous.. 1,668,026 126,858 (10,693) 1,784,191
Mortgage-backed securities.... 1,463,905 49,624 (8,040) 1,505,489
---------- -------- --------- ----------
3,511,009 200,717 (20,311) 3,691,415
Preferred stocks.............. 14,002 620 -- 14,622
---------- -------- --------- ----------
$3,525,011 $201,337 $ (20,311) $3,706,037
========== ======== ========= ==========
</TABLE>
The carrying value of bonds at December 31, 1994 and 1993 included $9,655 and
$5,876, respectively, in writedowns on certain debt securities which are valued
at estimated fair value.
The carrying value and estimated fair value of bonds at December 31, 1994, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
---------- ----------
<S> <C> <C>
Due in one year or less............................... $ 48,345 $ 48,022
Due after one year through five years................. 949,309 922,700
Due after five years through ten years................ 973,031 944,929
Due after ten years................................... 242,637 247,854
---------- ----------
2,213,322 2,163,505
Mortgage-backed securities............................ 1,881,085 1,789,344
---------- ----------
$4,094,407 $3,952,849
========== ==========
</TABLE>
16
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
2. INVESTMENTS (continued)
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Interest on bonds and notes....................... $294,145 $286,013 $278,475
Dividends on equity investments................... 12,091 3,990 7,553
Interest on mortgage loans........................ 42,385 37,587 34,655
Rental income on real estate...................... 9,360 8,753 7,624
Interest on policy loans.......................... 3,182 2,943 2,813
Other investment income........................... 282 555 541
-------- -------- --------
Gross investment income........................... 361,445 339,841 331,661
Investment expenses............................... 17,565 17,448 16,245
-------- -------- --------
Net investment income............................. $343,880 $322,393 $315,416
======== ======== ========
</TABLE>
Proceeds from sales and maturities of debt securities and related gross
realized gains and losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Proceeds................................. $1,430,339 $1,532,807 $1,418,990
========== ========== ==========
Gross realized gains..................... $ 15,411 $ 42,020 $ 47,854
Gross realized losses.................... (33,044) (9,071) (17,537)
---------- ---------- ----------
Net realized gains (losses).............. $ (17,633) $ 32,949 $ 30,317
========== ========== ==========
</TABLE>
At December 31, 1994, investments with an aggregate carrying value of
$4,713,391 were on deposit with regulatory authorities or were restrictively
held in bank custodial accounts for the benefit of such regulatory authorities
as required by statute.
17
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
2. INVESTMENTS (continued)
Realized investment gains (losses) and changes in unrealized gains (losses)
for investments are summarized below:
<TABLE>
<CAPTION>
REALIZED
YEAR ENDED DECEMBER 31
----------------------------
1994 1993 1992
--------- ------- --------
<S> <C> <C> <C>
Debt securities............................... $ (17,633) $32,949 $ 30,317
Short-term investments........................ (309) 679 --
Equity securities............................. 1,322 (348) 979
Mortgage loans on real estate................. (2,186) 199 (1,705)
Real estate................................... (2,858) (41) (1,343)
Other invested assets......................... 14 33 40
--------- ------- --------
(21,650) 33,471 28,288
Tax effect.................................... 7,236 (12,519) (11,529)
Transfer to interest maintenance reserve...... 10,790 (21,403) (18,166)
--------- ------- --------
Net realized losses........................... $ (3,624) $ (451) $ (1,407)
========= ======= ========
<CAPTION>
CHANGE IN UNREALIZED
YEAR ENDED DECEMBER 31
----------------------------
1994 1993 1992
--------- ------- --------
<S> <C> <C> <C>
Debt securities............................... $(322,346) $28,210 $(48,889)
Equity securities............................. (23,202) 3,449 1,289
--------- ------- --------
Change in unrealized appreciation (deprecia-
tion)........................................ $(345,548) $31,659 $(47,600)
========= ======= ========
</TABLE>
Gross unrealized gains and gross unrealized losses on common stocks were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Unrealized gains.................................. $20,244 $42,045 $39,161
Unrealized losses................................. (5,927) (4,526) (5,091)
------- ------- -------
Net unrealized gains.............................. $14,317 $37,519 $34,070
======= ======= =======
</TABLE>
18
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
2. INVESTMENTS (continued)
The carrying values and fair values of the Company's investments in mortgage
loans are as follows at December 31:
<TABLE>
<CAPTION>
1994 1993
------------------- -------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Commercial mortgages................. $520,625 $492,292 $407,115 $422,446
Residential mortgages................ 6,785 7,058 8,714 9,917
-------- -------- -------- --------
$527,410 $499,350 $415,829 $432,363
======== ======== ======== ========
</TABLE>
During 1994, 1993 and 1992, mortgage loans of $799, $101 and $11,022,
respectively, were foreclosed and transferred to real estate. At December 31,
1994 and 1993, the Company held a mortgage loan loss reserve in the asset
valuation reserve of $5,204 and $5,375, respectively. At December 31, 1994, the
mortgage loan portfolio is diversified by geographic region and specific
collateral property type as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION
- ----------------------------
<S> <C>
South Atlantic.......... 26%
Mountain................ 16
W. South Central........ 15
Pacific................. 14
E. North Central........ 14
E. South Central........ 6
W. North Central........ 5
Middle Atlantic......... 2
New England............. 2
</TABLE>
<TABLE>
<CAPTION>
PROPERTY TYPE DISTRIBUTION
- --------------------------
<S> <C>
Retail.................. 33%
Apartment............... 23
Office.................. 20
Industrial.............. 18
Hotel/Motel............. 3
Other................... 3
</TABLE>
At December 31, 1994, the Company had the following investments (excluding U.
S. Government guaranteed or insured issues) which individually represented more
than ten percent of capital and surplus and the asset valuation reserve:
<TABLE>
<CAPTION>
CARRYING
DESCRIPTION OF SECURITY OR ISSUER VALUE
--------------------------------- --------
<S> <C>
Bonds:
Standard Credit Card Trust........................................ $60,426
G E Capital....................................................... 53,028
Residential Funding............................................... 41,609
</TABLE>
19
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
3. REINSURANCE
The Company reinsures portions of risk on certain insurance policies which
exceed its established limits, thereby providing a greater diversification of
risk and minimizing exposure on larger risks. The Company remains contingently
liable with respect to any insurance ceded, and this would become an actual
liability in the event that the assuming insurance company became unable to
meet its obligation under the reinsurance treaty.
Reinsurance assumption and cession treaties are transacted primarily with
affiliates. Premiums earned reflect the following reinsurance assumed and ceded
amounts:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Direct premiums.......................... $1,857,446 $1,472,409 $1,311,871
Reinsurance assumed...................... 1,832 3,040 23,052
Reinsurance ceded........................ (412,029) (369,203) (485,597)
---------- ---------- ----------
Net premiums earned...................... $1,447,249 $1,106,246 $ 849,326
========== ========== ==========
</TABLE>
The Company received reinsurance recoveries in the amount of $148,414,
$97,409 and $80,795 during 1994, 1993 and 1992, respectively. At December 31,
1994 and 1993, estimated amounts recoverable from reinsurers that have been
deducted from policy and contract claim reserves totaled $62,882 and $57,821,
respectively. The aggregate reserves for policies and contracts were reduced
for reserve credits for reinsurance ceded at December 31, 1994 and 1993 of
$2,977,954 and $2,857,448, respectively.
At December 31, 1994, amounts recoverable from unauthorized reinsurers of
$43,055 (1993--$55,112) and reserve credits for reinsurance ceded of $59,131
(1993--$54,481) were associated with a single reinsurer and its affiliates. The
Company holds collateral under these reinsurance agreements in the form of
trust agreements totaling $64,038 at December 31, 1994 that can be drawn on for
amounts that remain unpaid for more than 120 days.
4. INCOME TAXES
For federal income tax purposes, the Company joins in a consolidated tax
return filing with certain affiliated companies. Under the terms of a tax-
sharing agreement between the Company and its affiliates, the Company computes
federal income tax expense as if it were filing a separate income tax return,
except that tax credits and net operating loss carryforwards are determined on
the basis of the consolidated group. Additionally, the alternative minimum tax
is computed for the consolidated group and the resulting tax, if any, is
allocated back to the separate companies on the basis of the separate
companies' alternative minimum taxable income.
20
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
4. INCOME TAXES (continued)
The following is a reconciliation of the expected federal tax on income
before realized capital gains (losses), based on statutory rates, to the actual
tax expense:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax........................... $24,106 $29,698 $24,415
Tax reserve adjustment............................ 1,150 1,433 1,073
Excess tax depreciation........................... (406) (248) (273)
Deferred acquisition costs--tax basis............. 7,378 5,200 3,334
Amortization of in-force.......................... -- -- (414)
Prior year over accrual........................... (644) (330) (2,009)
Dividend received deduction....................... (3,513) (1,202) (2,304)
Charitable contribution........................... (3,935) -- --
Other items--net.................................. (278) (2,884) 230
------- ------- -------
Federal income tax expense........................ $23,858 $31,667 $24,052
======= ======= =======
</TABLE>
Prior to 1984, as provided for under the Life Insurance Company Tax Act of
1959, a portion of statutory income was not subject to current taxation but was
accumulated for income tax purposes in a memorandum account referred to as the
policyholders' surplus account. No federal income taxes have been provided for
in the financial statements on income deferred in the policyholders' surplus
account ($20,387 at December 31, 1994). To the extent dividends are paid from
the amount accumulated in the policyholders' surplus account, net earnings
would be reduced by the amount of tax required to be paid. Should the entire
amount in the policyholders' surplus account become taxable, the tax thereon
computed at current rates would amount to approximately $7,135.
The Company's federal income tax returns have been examined and closing
agreements have been executed with the Internal Revenue Service through 1986.
During 1993, there was a prior period adjustments of $452, which consisted of
an adjustment to the tax accrual. The 1992 amount consisted of an IRS
settlement of $10,882 less asset capitalization relating to the NOL merger of
$5,387. An examination is underway for years 1987 through 1992.
5. PARTICIPATING INSURANCE
Participating life insurance policies are issued by the Company which entitle
policyholders to a share in the earnings of the participating policies,
provided that a dividend distribution, which is determined annually based on
mortality and persistency experience of the participating policies, is
authorized by the Company. Participating insurance constituted approximately
1.2% and 1.3% of ordinary life insurance in force at December 31, 1994 and
1993, respectively.
21
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
6. DIVIDEND RESTRICTIONS
Generally, an insurance company's ability to pay dividends is limited to the
amount that their net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements. However,
payment of such amounts as dividends may be subject to approval by regulatory
authorities.
The Company paid dividends to its parent of $20,900, $46,000 and $31,200 in
1994, 1993 and 1992, respectively.
7. RELATED PARTY TRANSACTIONS
The Company is allocated administrative and benefit expenses from the parent
for employee related costs, as all employees are considered employees of the
parent, not employees of the Company.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1994,
1993 and 1992, the Company paid $11,820, $11,689 and $9,566, respectively, for
these services, which approximates their costs to the affiliates.
The Company's allocated share of pension expense for 1994, 1993 and 1992, was
$1,135, $782 and $547, respectively. Total net assets available for benefits of
the pension plan exceeded the actuarial present value of accumulated plan
benefits at December 31, 1994. Amounts for the Company relating to plan assets
and actuarial liabilities are not determinable.
Payable to affiliates and intercompany borrowings bear interest at the
thirty-day commercial paper rate of 5.90% at December 31, 1994. During 1994,
1993 and 1992, the Company paid net interest of $363, $283 and $255,
respectively, to affiliates.
During 1994, the Company received a capital contribution of $15,000 in cash
from its parent and received a dividend of $10,000 from its subsidiary, Equity
National, which was included in net investment income.
22
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
8. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business.
Although such litigation sometimes includes substantial demands for
compensatory and punitive damages, in addition to contract liability, it is
management's opinion, after consultation with counsel and a review of available
facts, that damages arising from such demands will not be material to the
Company's financial position.
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the event of insolvency of
other insurance companies. Assessments are charged to operations when received
by the Company except where right of offset against other taxes paid is allowed
by law; amounts available for future offsets are recorded as an asset on the
Company's balance sheet. Potential future obligations for unknown insolvencies
are not determinable by the Company. The future obligation has been based on
the most recent information available from the National Organization of Life
and Health Insurance Guaranty Associations (NOLHGA). The Company has
established a reserve of $18,344 and $15,874 and an offsetting premium tax
benefit of $10,556 and $11,477 at December 31, 1994 and 1993, respectively, for
its estimated share of future guaranty fund assessments related to several
major insurer insolvencies. During 1994, 1993 and 1992, $3,444, $0 and $8,296,
respectively, were charged to surplus as prior period adjustments to provide
for this net reserve plus certain assessments paid that related to several
major insurer insolvencies prior to 1992.
23
<PAGE>
PFL LIFE INSURANCE COMPANY
SUMMARY OF INVESTMENTS--OTHER THAN
INVESTMENTS IN RELATED PARTIES
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1994
SCHEDULE I
<TABLE>
<CAPTION>
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET
------------------ ---------- ---------- ---------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds:
United States Government and government
agencies and authorities.............. $1,509,285 $1,444,834 $1,506,080
States, municipalities and political
subdivisions.......................... 9,522 9,091 9,389
Foreign governments.................... 48,341 45,181 47,645
Public utilities....................... 166,777 161,124 164,974
All other corporate bonds.............. 2,384,012 2,292,619 2,366,319
Redeemable preferred stock............... 12,912 12,905 12,667
---------- ---------- ----------
Total fixed maturities................... 4,130,849 3,965,754 4,107,074(2)
EQUITY SECURITIES
Common stocks:
Banks, trust and insurance............. 4,252 4,027 4,027
Industrial, miscellaneous and all
other................................. 24,715 39,257 39,257
---------- ---------- ----------
Total equity securities.................. 28,967 43,284 43,284
Mortgage loans on real estate............ 527,410 527,410
Real estate.............................. 67,085 67,085
Real estate acquired in satisfaction of
debt.................................... 10,381 10,381
Policy loans............................. 51,798 51,798
Other long-term investments.............. 4,593 4,593
Cash and short-term investments.......... 34,062 34,062
---------- ----------
Total investments........................ $4,855,145 $4,845,687
========== ==========
</TABLE>
- --------
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accrual of discounts.
(2) Amount differs from cost as certain bonds have been adjusted to reflect
other than temporary decline in value charged to surplus, as prescribed by
the NAIC.
24
<PAGE>
PFL LIFE INSURANCE COMPANY
SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)
SCHEDULE V
<TABLE>
<CAPTION>
FUTURE POLICY POLICY AND
BENEFITS AND UNEARNED CONTRACT
EXPENSES PREMIUMS LIABILITIES
------------- -------- -----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Individual life.............................. $ 555,841 $ -- $ 7,298
Individual health............................ 16,649 6,487 8,643
Group life and health........................ 60,207 17,680 57,959
Annuity...................................... 3,763,714 -- --
---------- ------- -------
$4,396,411 $24,167 $73,900
========== ======= =======
YEAR ENDED DECEMBER 31, 1993
Individual life.............................. $ 414,663 $ -- $ 8,424
Individual health............................ 11,714 4,623 6,494
Group life and health........................ 108,355 17,783 55,265
Annuity...................................... 3,183,571 -- --
---------- ------- -------
$3,718,303 $22,406 $70,183
========== ======= =======
YEAR ENDED DECEMBER 31, 1992
Individual life.............................. $ 447,444 $ -- $ 6,166
Individual health............................ 9,081 3,088 4,740
Group life and health........................ 36,051 15,904 64,767
Annuity...................................... 2,920,639 -- --
---------- ------- -------
$3,413,215 $18,992 $75,673
========== ======= =======
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
NET BENEFITS, CLAIMS OTHER
PREMIUM INVESTMENT LOSSES AND OPERATING PREMIUMS
REVENUE INCOME SETTLEMENT EXPENSES EXPENSES WRITTEN
------- ---------- ------------------- --------- ----------
<S> <C> <C> <C> <C>
$ 146,328 $ 43,025 $ 124,736 $ 42,309 $ --
38,811 3,983 22,323 22,707 38,797
194,704 10,531 108,400 143,645 192,034
1,067,406 286,341 1,036,313 319,328 1,067,404
- ---------- -------- ---------- -------- ----------
$1,447,249 $343,880 $1,291,772 $527,989 $1,298,235
========== ======== ========== ======== ==========
$ 95,716 $ 36,471 $ 71,638 $ 56,462 $ --
28,388 1,024 16,663 15,987 28,434
241,356 13,465 135,764 148,254 239,575
740,786 271,433 506,949 457,328 740,900
- ---------- -------- ---------- -------- ----------
$1,106,246 $322,393 $ 731,014 $678,031 $1,008,909
========== ======== ========== ======== ==========
$ 90,437 $ 40,273 $ 66,422 $ 62,486 $ --
19,550 2,091 11,303 10,684 19,693
246,913 12,635 141,575 145,629 246,234
492,426 260,417 549,683 27,806 360,323
- ---------- -------- ---------- -------- ----------
$ 849,326 $315,416 $ 768,983 $246,605 $ 626,250
========== ======== ========== ======== ==========
</TABLE>
26
<PAGE>
PFL LIFE INSURANCE COMPANY
REINSURANCE
(DOLLARS IN THOUSANDS)
SCHEDULE VI
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1994
Life insurance in force.. $4,713,817 $468,811 $112,054 $4,357,060 2.6%
========== ======== ======== ========== ===
Premiums:
Individual life........ $ 148,702 $ 3,639 $ 1,265 $ 146,328 .9%
Individual health...... 50,303 11,492 -- 38,811 --
Group life and health.. 412,200 217,496 -- 194,704 --
Annuity................ 1,246,241 179,402 567 1,067,406 .05%
---------- -------- -------- ---------- ---
$1,857,446 $412,029 $ 1,832 $1,447,249 .1%
========== ======== ======== ========== ===
YEAR ENDED DECEMBER 31,
1993
Life insurance in force.. $4,773,533 $387,843 $192,203 $4,577,893 4.2%
========== ======== ======== ========== ===
Premiums:
Individual life........ $ 95,982 $ 2,640 $ 2,373 $ 95,715 2.5%
Individual health...... 37,709 9,321 -- 28,388 --
Group life and health.. 401,906 160,550 -- 241,356 --
Annuity................ 936,812 196,692 667 740,787 .1%
---------- -------- -------- ---------- ---
$1,472,409 $369,203 $ 3,040 $1,106,246 .3%
========== ======== ======== ========== ===
YEAR ENDED DECEMBER 31,
1992
Life insurance in force.. $4,714,489 $392,343 $405,036 $4,727,182 8.6%
========== ======== ======== ========== ===
Premiums:
Individual life........ $ 88,285 $ 2,220 $ 4,372 $ 90,437 4.8%
Individual health...... 25,110 5,560 -- 19,550 --
Group life and health.. 372,315 142,944 17,542 246,913 7.1%
Annuity................ 826,161 334,873 1,138 492,426 .3%
---------- -------- -------- ---------- ---
$1,311,871 $485,597 $ 23,052 $ 849,326 3.2%
========== ======== ======== ========== ===
</TABLE>
27
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
---------------------------------
a) All required financial statements are included in Part B of this
Registration Statement.
b) Exhibits:
(1) Resolution of the Board of Directors of PFL Life
Insurance Company establishing the Fidelity Variable
Annuity Account. Note 1.
(2) Not applicable.
(3) (i) Distribution Agreement between Fidelity Distributors
Corporation (Underwriter) and PFL Life Insurance
Company (Depositor). Note 2.
(ii) Specimen selling group agreement. Note 3.
(4) Form for the Fidelity Variable Annuity Account Contract.
Note 6.
(5) Application for the Fidelity Variable Annuity Account
Contract. Note 1.
(6) (i) Articles of Incorporation of PFL Life Insurance
Company. Note 6.
(7) Not applicable.
(8) (i) Administrative Service Agreement. Note 5.
(ii) Amendment and Assignment of Administrative Services
Agreement. Note 6.
(iii) Second Amendment to Administrative Service
Agreement. Note 7.
(9) (i) Opinion of counsel as to the legality of the
securities being registered. Note 1.
(ii) Consent of counsel to use its opinion. Note 1.
1
<PAGE>
(10) Written consent of Independent Auditors. Note 9.
(11) Not applicable.
(12) Not applicable.
(13) Not applicable.
(14) Powers of Attorney (P.S. Baird, L.G. Brown, W.L. Busler,
P.E. Falconio, D.C. Kolsrud, R.J. McGraw, R.J. Kontz)
(Note 8).
Note 1 Incorporated by reference to the Exhibits to the Post-Effective
Amendment No. 8 to Form N-4, File No. 2-65365 filed on March 2,
1987.
Note 2 Incorporated by reference to Exhibit 3(a) to Form N-8B-2, File No.
811-2954 filed April 27, 1984, on behalf of the Fidelity Variable
Annuity Account (formerly the PFL Variable Separate Account).
Note 3 Incorporated by reference to Exhibit 3(b) to Form N-8B-2, File No.
811-2954 filed April 27, 1984, on behalf of the Fidelity Variable
Annuity Account (formerly the PFL Variable Separate Account).
Note 4 Incorporated by reference to Post-Effective Amendment No. 9,
Registration No. 2-65365, Exhibit 4 to Form N-4, filed on April
27, 1987.
Note 5 Incorporated by reference to Exhibit 2(c) to Pre-Effective
Amendment No. 4 to Form S-6, File No. 2-65365 filed on August 14,
1980.
Note 6 Incorporated by reference to the Exhibits to Post-Effective
Amendment No. 1 to Form N-4, Registration No. 33-37498, filed
March 29, 1991.
Note 7 Incorporated by reference to the Exhibits to Post-Effective
Amendment No. 2 to Form N-4, Registration No. 33-37498, filed
April 29, 1992.
Note 8 Incorporated by reference to the Exhibits to Post-Effective
Amendment No. 4 to Form N-4, Registration No. 33-37498, filed
April 29, 1994.
Note 9. Filed herewith.
2
<PAGE>
Item 25. Directors and Officers of the Depositor
---------------------------------------
Principal Positions
Name and and Offices with
Business Address Depositor
- ---------------- ---------
Larry G. Brown Director, Senior Vice
1111 North Charles Street President, Secretary and
Baltimore, MD 21201 General Counsel
William L. Busler Director, Chairman of the
4333 Edgewood Road N.E. Board and President
Cedar Rapids, IA 52499
Patrick E. Falconio Director, Senior Vice
4333 Edgewood Road N.E. President and Chief
Cedar Rapids, IA 52499 Investment Officer
Robert J. Kontz Vice President and
4333 Edgewood Road N.E. Controller
Cedar Rapids, IA 52499
Robert J. McGraw Vice President and
1111 North Charles Street Treasurer
Baltimore, MD 21201
Patrick S. Baird Director, Vice President
4333 Edgewood Road N.E. and Chief Financial
Cedar Rapids, IA 52499 Officer
Douglas C. Kolsrud Director, Vice President
4333 Edgewood Road N.E. and Corporate Actuary
Cedar Rapids, IA 52499
Item 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
---------------------------------------------
WITH THE DEPOSITOR OR REGISTRANT
--------------------------------
1. Corporate Chart
---------------
Principal Business
------------------
AEGON USA, Inc. - Holding company
Life Investors Insurance Company of America - Insurance
International Life Investors Insurance Company - Insurance
Transunion Casualty Company - Insurance
Investors Warranty of America, Inc. - Provider of automobile extended
maintenance contracts
Supplemental Insurance Division, Inc. - Insurance
Creditor Resources, Inc. - Credit insurance
AEGON USA Investment Management, Inc. - Investment advisor
AEGON USA Realty Advisors, Inc. - Provides real estate administrative and
real estate investment services
3
<PAGE>
AEGON USA Realty Management, Inc. - Real estate management
AEGON USA Securities, Inc. - Broker-dealer
AEGON USA Managed Portfolios, Inc. - Mutual fund
USP Real Estate Investment Trust - Real estate investment trust
Cedar Income Fund, Ltd. - Real estate investment trust
Forty-Six Hundred Limited Partnership - Limited partnership
First AUSA Life Insurance Company - Insurance holding company
Bankers United Life Assurance Company - Insurance
PFL Life Insurance Company - Insurance
Universal Benefits Corporation - Third party administrator
Massachusetts Fidelity Trust Company - Trust company
Money Services, Inc. - Provides financial counseling for employees and
agents of affiliated companies
Zahorik Company, Inc. - Broker-dealer
Partel Holding, Inc. - Telemarketing
Partel Research Corp. - Telemarketing
Telequote Insurance Services, Inc. - Telemarketing
Tele-Quote Corporation - Telemarketing
Tele-Quote, Inc. - Telemarketing
Cadet Holding Corp. - Holding company
ISI Insurance Agency, Inc. - Broker-dealer
Southwest Equity Life Insurance Company - Insurance
Iowa Fidelity Life Insurance Company - Insurance
The Whitestone Corporation - Insurance agency
Monumental Life Insurance Company - Insurance
United Financial Services, Inc. - General agency
Equity National Life Insurance Company - Insurance
Monumental General Insurance Group, Inc. - Holding company
Monumental General Administrators, Inc. - Provides management services to
unaffiliated third party administrator
Executive Management and Consultant Services, Inc. - Provides actuarial
consulting services
Monumental General Mass Marketing, Inc. - Marketing arm for sale of mass
marketed insurance coverages
Cross-Country Life Insurance Company - Insurance
Bankers Financial Life Insurance Company - Insurance
Monumental General Casualty Company - Insurance
AUSA Holding Company - Holding company
JLW Financial Management Systems, Inc. - Provides management expertise and
administrative services for credit unions
ZCI, Inc. - Insurance agency
AUSA Financial Markets, Inc. - Marketing
CRC Creditor Resources Canadian Dealer Network Inc. - Insurance agency
American Forum For Fiscal Fitness, Inc. - Marketing
Western Reserve Life Assurance Co. of Ohio - Insurance
Landauer Realty Advisors, Inc. - Real estate counseling
Landauer Associates, Inc. - Real estate counseling
4
<PAGE>
IDEX Total Income Trust - Mutual fund
IDEX Fund - Mutual fund
IDEX II - Mutual fund
IDEX Fund 3 - Mutual fund
Intersecurities, Inc. - Broker-dealer
Idex Management, Inc. - Investment advisor
IDEX Investor Services, Inc. - Shareholder services
WRL Series Fund, Inc. - Mutual fund
AUSA Life Insurance Company, Inc. - Insurance
Diversified Investors Advisors, Inc. - Registered investment advisor
Diversified Investors Securities Corp. - Broker-dealer
Associated Mariner Financial Group, Inc. - Holding company management
services
Mariner Financial Services, Inc. - Broker/Dealer
Mariner Planning Corporation - Financial planning
Associated Mariner Agency, Inc. - insurance agency
Mariner Mortgage Corp. - Mortgage origination
AMCORP, Inc. - Insurance agency
Colorado Annuity Agency, Inc. - Insurance agency
Realty Information Systems, Inc. - Information Systems for real estate
investment management
Item 27. Number of Contractowners
------------------------
The number of Contractowners of Registrant as of December 31,
1994, was 9,514.
Item 28. Indemnification
---------------
The Iowa Code (Sections 490.850 et. seq.) provides for permissive
indemnification in certain situations, mandatory indemnification
in certain situations. The Code also specifies procedures for
determining when indemnification payments can be made.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Depositor pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director,
officer or controlling person in connection with the securities
being registered), the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
5
<PAGE>
Item 29. Principal Underwriters
----------------------
(a) Fidelity Brokerage Services, Inc. and its affiliate, Fidelity
Insurance Agency, Inc. act as distributor of the contracts.
Fidelity Brokerage Services, Inc. acts as distributor for other
variable annuity and variable life contracts registered by separate
accounts of Fidelity Investments Life Insurance Company and Empire
Fidelity Investments Life Insurance Company.
(b) Name and Principal Positions and Offices
Business Address* With Underwriter
------------------ ---------------------
Roger T. Servison President
Steven Akin Director and Executive
Vice President
Robert K. Mackenzie Executive Vice President
Gordon R. Watson Director and Chairman
David J. Plucinski Director
Ernest C. Cornelssen Vice President
Jeffrey Larsen Counsel and Clerk
Shaugn S. Stanley Treasurer and Chief
Financial Officer
Leonard M. Rush Compliance Officer
*82 Devonshire Street, Boston, MA 02109.
(c) Commission and other compensation received by principal
underwriter.
Fidelity Insurance Agency, Inc. receives insurance
commissions for its services as an insurance general agent
in distributing the Contracts. Fidelity Insurance Agency,
Inc. is an affiliate of the principal underwriter of the
Contracts, Fidelity Brokerage Services, Inc., a registered
broker-dealer. Fidelity Insurance Agency, Inc. received
$3,511,300 in commissions from the Registrant during the
last fiscal year. No other
6
<PAGE>
commission or compensation was received by the principal
underwriter, directly or indirectly, from the Registrant
during the fiscal year.
Item 30. Location of Accounts and Records
--------------------------------
The records required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 to 31a-3
promulgated thereunder, are maintained by PFL Life Insurance
Company at 4333 Edgewood Road N.E., Cedar Rapids, IA 52499.
Item 31. Management Services
-------------------
Not applicable.
Item 32. Undertakings
------------
(a) Registrant undertakes that it will file a post-effective
amendment to this registration statement as frequently as necessary to ensure
that the audited financial statements in the registration statement are never
more than 16 months old for so long as Premiums under the Policy may be
accepted.
(b) Registrant undertakes that it will include either (i) a postcard
or similar written communication affixed to or included in the Prospectus that
the applicant can remove to send for a Statement of Additional Information or
(ii) a space in the Policy application that an applicant can check to request a
Statement of Additional Information.
(c) Registrant undertakes to deliver any Statement of Additional
Information and any financial statements required to be made available under
this Form promptly upon written or oral request at the address or phone number
listed in the Prospectus.
7
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant hereby certifies that this Amendment to the Registration
Statement meets the requirements for effectiveness pursuant to paragraph (b)
of Rule 485 and has caused this Registration Statement to be signed on its
behalf, in the City of Cedar Rapids, and State of Iowa on this 24th day of
April, 1995.
FIDELITY VARIABLE
ANNUITY ACCOUNT
PFL LIFE INSURANCE COMPANY
Depositor
William L. Busler
-----------------
William L. Busler
President
As required by the Securities Act of 1933, this Amendment to the Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Title Date
----- ----
<S> <C> <C>
Patrick S. Baird Director April 24, 1995
- ---------------------------
Patrick S. Baird
Larry G. Brown Director April 24, 1995
- ---------------------------
Larry G. Brown
William L. Busler Director April 24, 1995
- ---------------------------
William L. Busler (Principal Executive Officer)
Patrick E. Falconio Director April 24, 1995
- ---------------------------
Patrick E. Falconio
Douglas C. Kolsrud Director April 24, 1995
- ---------------------------
Douglas C. Kolsrud
Robert J. Kontz Controller April 24, 1995
- ---------------------------
Robert J. Kontz
Robert J. McGraw Treasurer April 24, 1995
- ---------------------------
Robert J. McGraw
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
(10) Written Consent of Independent
Auditors..............................
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
Form N-4 for The Fidelity Variable Annuity Account and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 633,231,281
<INVESTMENTS-AT-VALUE> 636,666,098
<RECEIVABLES> 0
<ASSETS-OTHER> 759,153
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 637,425,251
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 817,520
<TOTAL-LIABILITIES> 817,520
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 317,213,858
<SHARES-COMMON-PRIOR> 311,778,933
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,434,817
<NET-ASSETS> 636,607,731
<DIVIDEND-INCOME> 17,044,527
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 5,447,940
<NET-INVESTMENT-INCOME> 11,596,587
<REALIZED-GAINS-CURRENT> 41,265,302
<APPREC-INCREASE-CURRENT> (53,761,588)
<NET-CHANGE-FROM-OPS> (899,699)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 32,559,764
<NUMBER-OF-SHARES-REDEEMED> 27,248,211
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT (10)
WRITTEN CONSENT OF INDEPENDENT AUDITORS
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
We consent to the reference to our firm under the captions "Independent
Auditors" and "Financial Statements", to the use of our report dated February 7,
1995 with respect to the financial statements of The Fidelity Variable Annuity
Account, and to the use of our report dated February 17, 1995 with respect to
the statutory-basis financial statements of PFL Life Insurance Company, included
in Amendment No. 5 to Registration Statement (Form N-4 No. 33-37498) and related
Prospectus of The Fidelity Variable Annuity Account for the registration of
individual variable annuity contracts.
Our audits also included the statutory-basis financial statement schedules of
PFL Life Insurance Company included in the Statement of Additional Information.
These schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
with respect to which the date is February 17, 1995, the statutory-basis
financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
/s/ Ernst & Young LLP
Des Moines, Iowa
April 19, 1995
