<PAGE>
As filed with the Securities and Exchange Commission on April 28, 1999.
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. 10 x
--- ---
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Amendment No. 8 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) 297-8121
Frank A. Camp, Esquire
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 L.L.P.
1275 Pennsylvania Avenue N.W.
Washington, D.C. 20004-2404
<PAGE>
Title of Securities Being Registered:
Fexible Premium Variable Annuity Policies
------------------------------
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b) of Rule 485.
- -----
X on May 1, 1999 pursuant to paragraph (b) of Rule 485.
- -----
60 days after filing pursuant to paragraph (a)(i) of Rule 485
- -----
on May 1, 1999 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>
CROSS REFERENCE SHEET
Pursuant to Rule 495
Showing Location in Part A (Prospectus) and
Part B (Statement of Additional Information)
of Registration Statement of Information Required by Form N-4
-------------------------------------------------------------
<TABLE>
<CAPTION>
PART A
------
Item of Form N-4 Prospectus Caption
- ---------------- ------------------
<S> <C>
1. Cover Page.................... Cover Page
2. Definitions................... Glossary of Terms
3. Synopsis...................... Questions and Answers About the Contract;
Fee Table
4. Condensed Financial Information Financial Information
5. General
(a) Depositor................. PFL Life Insurance Company
(b) Registrant................ The Fidelity Variable Annuity Account
(c) Portfolio Company......... Variable Insurance
Products Fund, Varible Insurance Products
Fund II and Variable Insurance
Products Fund II
(d) Fund Prospectus........... Variable Insurance
Products Fund, Variable Insurance
Products Fund II and Variable Insurance
Products Fund II
(e) Voting Rights............. Voting Rights
6. Deductions and Expenses
(a) General................... Contract Charges
(b) Sales Load %.............. N/A
(c) Special Purchase Plan..... N/A
(d) Commissions............... Distribution of Contracts
(e) Expenses - Registrant..... N/A
(f) Fund Expenses............. Variable Insurance Products
Fund Variable Insurance
Products Fund II, and Variable Insurance
Products Fund III
(g) Organizational Expenses... N/A
7. Policies
(a) Persons with Rights....... The Policy; Election of Annuity
Option; Determination of Annuity
Payments; Annuity Commencement
Date; Ownership of the Policy
Voting Rights
(b) (i) Allocation of Premium
Payments............ Allocation and Reallocation of Net
Purchase Payments
(ii) Transfers........... Allocation and Reallocation of Net
Purchase Payments
(iii) Exchanges........... Exchange Privilege
(c) Changes................... Addition, Deletion or
Substitution of Investments;
Election of Annuity Option;
Annuity Commencement Date;
Beneficiary; Ownership of the
Policy
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
(d) Inquiries................. Summary
8. Annuity Period................ Election of Annuity Options
9. Death Benefit................. Death Benefit
10. Purchase and Policy Values
(a) Purchases................. Purchase of the Contracts
(b) Valuation................. Value of Accumulation Units
(c) Daily Calculation......... Value of Accumulation Units
(d) Underwriter............... Distribution of Contracts
1 Redemptions
(a) By Owners................. Surrenders
By Annuitant.............. N/A
(b) Texas ORP................. N/A
(c) Check Delay............... Surrenders
(d) Lapse..................... N/A
(e) Free Look................. Right to Return Contract
12. Taxes.......................... Federal Tax Matters
13. Legal Proceedings.............. Legal Proceedings
14. Table of Contents for the
Statement of Table of Contents of the
Additional Information Statement of Additional
Information
<CAPTION>
PART B
------
Item of Form N-4 Statement of Additional
- ---------------- Information Caption
-------------------
<S> <C>
15. Cover Page..................... Cover Page
16 Table of Contents.............. Table of Contents
17. General Information
and History.................... (Prospectus) PFL Life Insurance
Company
18. Services.......................
(a) Fees and Expenses
of Registrant............. N/A
(b) Management Policies....... N/A
(c) Custodian................. Custody of Assets
Independent
Auditors.................. Independent Auditors
(d) Assets of Registrant...... Custody of Assets
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
(e) Affiliated Person......... N/A
(f) Principal Underwriter..... Distribution of Contracts
19. Purchase of Securities
Being Offered.................. Distribution of Contracts
Offering Sales Load............ N/A
20. Underwriters................... Distribution of the Contracts;
(Prospectus) Distributor of the
Contracts
21. Calculation of Performance
Data........................... Historical Performance Data
22. Annuity Payments............... (Prospectus) Election of Annuity Option;
(Prospectus) Determination of Annuity
Payments
23. Financial Statements........... Financial Statements
<CAPTION>
PART C -- OTHER INFORMATION
---------------------------
Item of Form N-4 Part C Caption
- ---------------- --------------
<S> <C>
24. Financial Statements
and Exhibits.................. Financial Statements and Exhibits
(a) Financial Statements..... Financial Statements
(b) Exhibits................. Exhibits
25. Directors and Officers of Directors and Officers of the
the Depositor Depositor
26. Persons Controlled By or Under Persons Controlled By or Under
Common Control with the Common Control with the
Depositor or Registrant....... Depositor or Registrant
27. Number of Policyowners........ Number of Policyowners
28. Indemnification............... Indemnification
29. Principal Underwriters........ Principal Underwriters
30. Location of Accounts..........
and Records................... Location of Accounts and Records
31. Management Services........... Management Services
32. Undertakings.................. Undertakings
Signature Page................ Signatures
</TABLE>
______________________________
5
<PAGE>
FIDELITY INCOME PLUS
Issued Through
THE FIDELITY VARIABLE
ANNUITY ACCOUNT
by
PFL LIFE INSURANCE COMPANY
Prospectus
May 1, 1999
This prospectus and the mutual fund prospectuses give you important information
about the contracts and the mutual funds. Please read them carefully before you
invest and keep them for future reference.
If you would like more information about the Fidelity Income Plus Variable
Annuity Contract, you can obtain a free copy of the Statement of Additional
Information (SAI) dated May 1, 1999. Please call us at (800) 525-6205 or write
us at: PFL Life Insurance Company, Financial Markets Division, Variable Annuity
Department, 4333 Edgewood Road N.E., Cedar Rapids, IA, 52499-0001. A
registration statement, including the SAI, has been filed with the Securities
and Exchange Commission (SEC) and is incorporated herein by reference.
Information about the separate account and the target account can be reviewed
and copied at the SEC's Public Reference Room in Washington, D.C. You may
obtain information about the operation of the public reference room by calling
the SEC at 1-800-SEC-0330. The SEC also maintains a web site
(http://www.sec.gov) that contains the prospectus, the SAI, material
incorporated by reference, and other information. The table of contents of the
SAI is included at the end of this prospectus.
The individual variable annuity contract has thirteen mutual fund portfolios
listed below. You can choose any combination of these investment choices.
Variable Insurance Products
Fund (VIP):
VIP Money Market
VIP High Income
VIP Equity-Income
VIP Growth
VIP Overseas
Variable Insurance Products
Fund II (VIP II):
VIP II Investment Grade Bond
VIP II Asset Manager
VIP II Asset Manager: Growth
VIP II Index 500
VIP II Contrafund
Variable Insurance Products Fund III (VIP III):
VIP III Balanced
VIP III Growth & Income
VIP III Growth Opportunities
Please note that the policies and the mutual funds:
. are not bank deposits
. are not federally insured
. are not endorsed by any bank or government agency
. are not guaranteed to achieve their goal
. are subject to risks, including loss of premium
The Securities and Exchange Commission has not approved or disapproved these
securities, or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
<PAGE>
<TABLE>
<S> <C>
TABLE OF CONTENTS Page
GLOSSARY OF TERMS......................................................... 3
QUESTIONS AND ANSWERS ABOUT THE CONTRACT.................................. 5
ANNUITY CONTRACT FEE TABLE................................................ 8
EXAMPLES.................................................................. 9
FINANCIAL STATEMENTS...................................................... 10
PFL LIFE INSURANCE COMPANY................................................ 10
THE FIDELITY VARIABLE ANNUITY ACCOUNT..................................... 10
THE VARIABLE INSURANCE PRODUCTS FUND, VARIABLE INSURANCE PRODUCTS FUND II
AND VARIABLE INSURANCE PRODUCTS FUND III................................. 11
Performance.............................................................. 12
Additions, Deletions, Substitutions of Investments....................... 12
THE CONTRACTS............................................................. 13
Purchase of the Contracts................................................ 13
Allocation and Reallocation of Net Purchase Payments..................... 13
Value of Accumulation Units.............................................. 15
Surrenders............................................................... 15
Right to Return the Contract............................................. 16
CONTRACT CHARGES.......................................................... 16
Administrative Charge.................................................... 16
Charges for Mortality Risk............................................... 16
Deductions for Taxes..................................................... 17
The Variable Insurance Products Fund, Variable Insurance Products Fund
II, and Variable Insurance Product Fund III Expenses.................... 17
</TABLE>
<TABLE>
<S> <C>
Page
BENEFITS UNDER THE CONTRACT................................................ 17
Death Benefit............................................................. 17
IRS Required Distributions................................................ 18
ANNUITY PAYMENTS........................................................... 18
Annuity Commencement Date................................................. 18
Election of Annuity Options............................................... 18
Annuity Options........................................................... 19
Determination of Annuity Payments......................................... 20
Adjustment of Annuity Payments............................................ 21
FEDERAL TAX MATTERS........................................................ 21
Introduction.............................................................. 21
Taxation of Annuities in General.......................................... 21
Possible Changes in Taxation.............................................. 23
GENERAL PROVISIONS......................................................... 23
Ownership of the Contract................................................. 23
Assignment................................................................ 24
Beneficiary............................................................... 24
Amendments................................................................ 24
Suspension of Payment..................................................... 24
Non-Participating......................................................... 24
Misstatement of Age or Sex................................................ 24
DISTRIBUTION OF CONTRACTS.................................................. 25
VOTING RIGHTS AND REPORTS.................................................. 25
YEAR 2000 MATTERS.......................................................... 26
IMSA....................................................................... 26
LEGAL PROCEEDINGS.......................................................... 26
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION............... 27
APPENDIX A................................................................. 28
Condensed Financial Information........................................... 28
</TABLE>
2
<PAGE>
GLOSSARY OF TERMS
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 52499-0001.
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 upon which annuity payments are to
commence. This date can only be the first day of a calendar month.
Annuity Option -- A method of receiving a stream of annuity payments.
Annuity Purchase Value -- An amount equal to the contract value 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 additional 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.
Contingent Contract Owner -- A person appointed by you to succeed to ownership
of the contract in the event of your death 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. Before annuitization, the contract owner is the person listed on
the application if the annuitant is still living. After annuitization, the
contract owner is the annuitant. The beneficiary is the contract owner if the
annuitant dies.
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 PFL 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.
3
<PAGE>
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 subaccount 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 you pay to PFL or on your behalf as consideration
for the benefits provided by the contract.
Subaccount -- A segregated account within the variable account which invests in
a portfolio of an eligible fund.
Variable Account -- Fidelity Variable Annuity Account, a separate account
established by PFL 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 that vary as to
dollar amount in relation to the investment performance of specified
subaccounts within the variable account.
Variable Annuity Payments -- Payments made pursuant to an annuity option which
fluctuate based on the investment performance of selected subaccounts.
4
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE CONTRACT
The following section contains brief questions and answers about the contract.
Please read the remainder of this prospectus for more detailed information.
"You" or "your" refers to the contract owner. "PFL," "we," "us" or "our" refers
to PFL Life Insurance Company. Words printed in italics in this prospectus are
defined in the Glossary.
1. What is the purpose of the Contract?
The contract lets you 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. You
can allocate net purchase payments to one or more subaccounts of the Fidelity
Variable Annuity Account (the "variable account"). Each subaccount invests in a
corresponding portfolio of the Variable Insurance Products Fund, the Variable
Insurance Products Fund II and the Variable Insurance Products Fund III (the
"funds"). You bear the entire investment risk under this contract because
variable annuity payments and contract values depend on the investment
experience of the subaccounts that you choose. You could lose the amount that
you invest.
2. What is an annuity?
An annuity provides for periodic annuity payments (from us to you) beginning on
the annuity commencement date. Fixed annuity payments remain the same
throughout the payment period. Variable annuity payments vary in accordance
with the investment experience of the subaccount that you select.
3. What investments support the Contracts?
Your purchase payments are invested through the variable account exclusively in
shares of the mutual fund portfolios advised by Fidelity Management & Research
Company ("FMR"). The following thirteen portfolios are currently available
under the contracts:
VARIABLE INSURANCE PRODUCTS FUND:
VIP Money Market
VIP High Income
VIP Equity-Income
VIP Growth
VIP Overseas
VARIABLE INSURANCE PRODUCTS FUND II:
VIP II Investment Grade Bond
VIP II Asset Manager
VIP II Asset Manager: Growth
VIP II Index 500
VIP II Contrafund
PRODUCTS FUND III:
VIP III Balanced
VIP III Growth & Income
VIP III Growth Opportunities
Each of the subaccounts invest in the corresponding portfolio of the funds. The
assets of each portfolio are held separately from other portfolios. Each
portfolio has distinct investment objectives and policies, which are described
in the funds' prospectuses that are attached to this prospectus.
4. How are Purchase Payments allocated?
You tell us how to allocate the net purchase payments. You must allocate
initial net purchase payments to the subaccounts in amounts of at least $1,000.
You may allocate additional net purchase payments in any
5
<PAGE>
manner, so long as any allocation to a subaccount is at least $500. You may
change allocations of additional net purchase payments by sending written
notice to the administrative and service office, or by telephone, if you have
previously authorized telephone transactions. A net purchase payment is the
amount you send us, less a premium tax charge in certain states.
5. Can I transfer values among the Subaccounts?
Yes, you may transfer your contract value allocated to a particular subaccount
to one or more other subaccounts at any time either in writing, or by
telephone, if you have previously authorized telephone transactions.
6. Can I get to my money if I need it?
Yes, you can withdraw all or part of your contract value anytime before the
earlier of the annuitant's death or the annuity commencement date. We do not
charge for withdrawals, and there is no surrender charge. Withdrawals may be
taxable and subject to a 10% penalty tax.
7. What are the charges and deductions under the Contract?
There is no sales charge under the contract. PFL deducts a daily charge equal
to a percentage of the value of the net assets in the variable account for the
mortality risks assumed by PFL. The effective annual rate of this charge is
0.8%. PFL GUARANTEES THAT THIS CHARGE WILL NOT BE INCREASED.
PFL 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. We can increase this charge in the
future.
Premium taxes are deducted from purchase payments or contract values depending
upon when we incur them.
The contract values also reflect the fund's charges, fees and expenses. See the
"Annuity Contract Fee Table" on page 6.
8. What Annuity Income Options are available under the Contract?
You can select annuity payments on a variable basis or a fixed basis. You have
flexibility in choosing the annuity commencement date. And you can choose among
these four annuity options:
. life annuity;
. joint and survivor annuity;
. life annuity with 120 or 240 monthly payments guaranteed; and
. 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 subaccount(s) you selected.
9. What happens if the Annuitant dies before the Annuity Commencement Date?
If the annuitant dies prior to the annuity commencement date, we will pay a
death benefit after we receive:
. notice of death;
. due proof of death; and
. an election as to how the proceeds should be paid to the beneficiary.
You select the beneficiary. You can change the named beneficiary at any time
before the
6
<PAGE>
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. Special distribution rules mandated by the Internal
Revenue Code apply if the annuitant is an owner.
10. What happens if you die before the Annuity Commencement Date?
If you (the contract owner) are not the annuitant, and you die prior to the
annuity commencement date, your entire interest in the contract will be
distributed to the contingent contract owner if one is appointed, or to your
estate. You may appoint or change the contingent contract owner at any time
prior to the annuity commencement date. Regardless of whether you are the
annuitant, upon your death, the value of the contract must be distributed
pursuant to rules prescribed by the Internal Revenue Code of 1986, as amended.
11. Can the Contract be returned after it is delivered?
You may cancel the contract by returning it to us, along with a written notice
of revocation, at our administrative and service office within 10 days after
you receive it. If you cancel, we will return all purchase payments made under
the contract within ten days after we receive notice of cancellation.
12. Who do I call if I have any questions about my Contract?
Our administrative and service office will answer any question about procedures
of your contract. 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.
7
<PAGE>
ANNUITY CONTRACT FEE TABLE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Contract Owner Transaction
Expenses
- ---------------------------------
<S> <C>
Sales Load on
Purchase Pay-
ments 0
Deferred Sales
Load 0
Surrender Fees 0
Annual Contract
Fee $35 Per Contract
Transfer Fee 0
</TABLE>
<TABLE>
<CAPTION>
Variable Account Expenses
(as a percentage of
average contract value)
<S> <C>
Mortality and Expense
Risk Fee 0.80%
Account Fees and Ex-
penses 0
-----
TOTAL VARIABLE ACCOUNT
ANNUAL EXPENSES 0.80%
</TABLE>
- --------------------------------------------------------------------------------
VIP, VIP II, and VIP III Funds Annual Expenses -- (as a percentage of average
net assets and after expense reimbursements)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total Fund
Management Other Annual
Fees Expenses Expenses
- -------------------------------------------------------------------
<S> <C> <C> <C>
VIP Money Market 0.20% 0.10% 0.30%
VIP High Income(/1/) 0.58% 0.12% 0.70%
VIP Equity-Income(/1/) 0.49% 0.08% 0.57%
VIP Growth(/1/) 0.59% 0.07% 0.66%
VIP Overseas(/1/) 0.74% 0.15% 0.89%
VIP II Investment Grade Bond 0.43% 0.14% 0.57%
VIP II Asset Manager(/1/) 0.54% 0.09% 0.63%
VIP II Asset Manager: Growth(/1/) 0.59% 0.13% 0.72%
VIP II Contrafund(/1/) 0.59% 0.07% 0.66%
VIP II Index 500(/1/) 0.24% 0.04% 0.28%
VIP III Balanced(/1/) 0.44% 0.14% 0.58%
VIP III Growth Opportunities(/1/) 0.59% 0.11% 0.70%
VIP III Growth & Income(/1/) 0.49% 0.11% 0.60%
</TABLE>
uninvested cash balances were used
(/1/) A portion of the brokerage to reduce custodian expenses. The
commissions that certain funds total operating expenses, after
pay was used to reduce fund reimbursement for Index 500 Port-
expenses. In addition, certain folio reflect these reductions in
funds, or FMR on behalf of the table above.
certain funds, have entered into
arrangements with their
custodian whereby credits
realized as a result of
8
<PAGE>
Examples
You would pay the following expenses on a
$1,000 investment, assuming a 5% annual re-
turn on assets:
<TABLE>
<CAPTION>
Subaccounts 1 Year 3 Years 5 Years 10 Years
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
VIP Money Market $12 $36 $62 $137
VIP High Income $16 $48 $83 $182
VIP Equity-Income $14 $44 $77 $168
VIP Growth $15 $47 $81 $178
VIP Overseas $17 $54 $93 $203
VIP II Investment Grade Bond $14 $44 $77 $168
VIP II Asset Manager $15 $46 $80 $175
VIP II Asset Manager: Growth $16 $49 $84 $185
VIP II Contrafund $15 $47 $81 $178
VIP II Index 500 $11 $35 $61 $135
VIP III Balanced $14 $45 $77 $169
VIP III Growth Opportunities $16 $48 $83 $182
VIP III Growth & Income $15 $45 $78 $171
</TABLE>
The above tables are intended to help and have been provided by FMR. PFL
you understand the costs and expenses does not dispute these figures,
that you will bear, directly or however PFL does not guarantee their
indirectly. These include the accuracy. Examples for formerly
expenses of the VIP, VIP II and VIP eligible subaccounts may be found in
III Funds. In addition to the Appendix A to this prospectus.
expenses listed above, premium taxes
may be applicable.
In these examples, the $35 annual
service charge is reflected as a
charge of .0292% based on an average
policy value of $119,988.12 and is
deducted on each policy anniversary.
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, VIP
II, and VIP III Funds Annual Expenses Financial Information. Condensed
are for 1998 financial information for the
subaccounts is in Appendix A to this
prospectus.
9
<PAGE>
FINANCIAL STATEMENTS
Condensed financial information for each subaccount is in Appendix A to this
prospectus. The financial statements of PFL and the variable account, and the
independent auditors' reports thereon, are in the Statement of Additional
Information.
PFL LIFE INSURANCE COMPANY
PFL is a stock life insurance company organized under the laws of the State of
Iowa on April 19, 1961. PFL's address is 4333 Edgewood Road N.E., Cedar Rapids,
Iowa, 52499. PFL offers a complete line of life insurance, annuities, and
accident and health insurance. We are currently authorized to sell variable
annuities in the District of Columbia and Guam, and in all states other than
New York. PFL is an indirect wholly owned subsidiary of AEGON USA, Inc. AEGON
USA, Inc. is an indirect wholly owned subsidiary of AEGON N.V., a holding
company organized under the laws of The Netherlands.
All obligations arising under the policies, including the promote to make
annuity payments, are general corporate obligations of PFL.
THE FIDELITY VARIABLE ANNUITY ACCOUNT
The Fidelity Variable Annuity Account was established by an affiliate (Pacific
Fidelity Life Insurance Company) under California insurance law on August 24,
1979. On March 31, 1991, PFL acquired the assets (and liabilities) of that
affiliate, including the variable account.
The variable account is registered with the Securities and Exchange Commission
as a unit investment trust pursuant to the provisions of the Investment Company
Act of 1940. Such registration does not involve supervision of the management
of the variable account or PFL by the Securities and Exchange Commission. The
separate account meets the definition of a separate account under federal
securities laws.
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 PFL. Although the assets
maintained in the variable account will not be charged with any liabilities
arising out of any other business conducted by PFL, all obligations arising
under the contracts, including the promise to make annuity payments, are
general corporate obligations of PFL.
Currently, PFL invests the assets of the variable account that support the
contracts in shares of one or more eligible funds that have been approved by
PFL'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, the Variable Insurance Products Fund II, and the Variable
Insurance Products Fund III. Other mutual funds may be added or withdrawn as
permitted by law. The variable account currently offers thirteen subaccounts
that invest exclusively in corresponding portfolios of the funds. Additional
subaccounts may be established at PFL's discretion.
PFL 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 funds. Because you bear the full
investment risk associated with the variable account, there can be no assurance
concerning the amount of variable annuity payments under the contract.
10
<PAGE>
Prior to September 25, 1981, the assets of certain subaccounts of the variable
account were invested in mutual funds (formerly eligible funds) other than the
funds. Contracts funded by these subaccounts, 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 subaccounts of the variable account: Fidelity Daily Income Trust;
Fidelity Cash Reserves; Fidelity Government Income Fund (formerly Fidelity
Government Securities Fund, Ltd.); 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, VARIABLE INSURANCE PRODUCTS FUND II, AND
VARIABLE INSURANCE PRODUCTS FUND III
The available subaccounts 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.
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 administrative services to the
formerly eligible funds for a fee similar to the ones applicable to the
portfolios of the funds. The subaccounts currently invest in the following
funds' portfolios:
VARIABLE INSURANCE PRODUCTS FUND (VIP):
VIP Money Market
VIP High Income
VIP Equity-Income
VIP Growth
VIP Overseas
VARIABLE INSURANCE PRODUCTS FUND II (VIP II):
VIP II Investment Grade Bond
VIP II Asset Manager
VIP II Asset Manager: Growth
VIP II Index 500
VIP II Contrafund
VARIABLE INSURANCE PRODUCTS FUND III (VIP III):
VIP III Balanced
VIP III Growth & Income
VIP III Growth Opportunities
More detailed information, including an explanation of the portfolio's
investment objectives, may be found in the funds' current prospectuses, which
are attached to this prospectus.
The thirteen portfolios offered by the funds provide a range of investment
alternatives that vary according to their different investment objectives. 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.
There is no assurance that any portfolio will achieve its investment
objective.
The funds' prospectuses should be read carefully before any decision is made
concerning the allocation of purchase
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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
PFL, as well as variable annuity and variable 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.
The general public may not purchase these underlying funds. The investment
objectives and policies may be similar to other portfolios and mutual funds
managed by the same investment adviser or manager that are sold directly to the
public. You should not expect that the investment results of the other
portfolios and mutual funds will be comparable to those of the underlying
funds.
PFL may receive revenue or fees from the funds or the advisor. The amount of
the fees, if any, may be based on the amount of assets that PFL or the variable
account invests in the portfolio.
Performance
Performance information for the variable subaccounts may appear in reports and
advertising to you and prospective contract owners. The performance information
is based on historical investment experience of the subaccounts and the
portfolios and does not indicate or represent future performance.
Total returns are based on the overall dollar or percentage change in value of
a hypothetical investment. Total return quotations reflect changes in portfolio
share price, the automatic reinvestment by the separate account of all
distributions and the deduction of applicable administrative and mortality
charges.
An average annual total return reflects the hypothetical annually compounded
return that would have produced the same cumulative total return if the
performance had been constant over the entire period. Because average annual
total returns tend to smooth out variations in a subaccount's returns, you
should recognize that they are not the same as actual year-by-year results.
The Money Market Subaccount may advertise its current and effective yield.
Current yield reflects the income generated by an investment in the subaccount
over a 7-day period. Effective yield is calculated in a similar manner except
that income earned is assumed to be reinvested. This income is annualized and
shown as a percentage. Yields do not take into account capital gains or losses.
The standard quotations of yield reflect the administrative and mortality
charges.
Additional information regarding yields and total returns calculated using the
standard formats briefly summarized above is contained in the Statement of
Additional Information.
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 PFL's management, further
investment in the eligible funds' shares should become inappropriate in view of
the purposes of the contract, then PFL may substitute shares of another fund
for
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shares already purchased, or to be purchased in the future, under the contract.
No substitution of securities in any subaccount 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 your interest in a subaccount
will not be made until you have been notified of the change and prior approval
of the Securities and Exchange Commission is obtained.
New subaccounts may be established when, in the sole discretion of PFL,
marketing, tax, investment or other conditions so warrant. Any new subaccounts
will be made available to you on a basis to be determined by PFL. Each
additional subaccount will purchase shares in a portfolio of the fund or in
another mutual fund or investment vehicle. PFL may also eliminate one or more
subaccounts if, in its sole discretion, marketing, tax, investment or other
conditions so warrant.
In the event of any such substitution or change, PFL 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
Investment Company Act of 1940 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
PFL, along with a check for the initial investment. Purchase payments are
payable at the administrative and service office of PFL designated on the cover
page. The initial purchase payment must be at least $5,000. Additional 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, you 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, PFL will notify you by
phone or mail to request the information necessary to complete the application.
Once the application is completed, you will receive a contract based on the
price next determined after the application was completed. If, after five days,
the application remains incomplete, PFL will return your initial purchase
payment unless it obtains your 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 you have 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 subaccounts that you have
selected. The purchase payment, less the administrative charge deducted upon
payment, and less any deduction for premium taxes, equals the net purchase
payment. Upon allocation to a subaccount, net purchase payments are converted
into accumulation units of the
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subaccount. The number of accumulation units to be credited is determined by
dividing the dollar amount allocated to each subaccount by the value of an
accumulation unit for that subaccount 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.
You (or your designated account executive) can make transfers and/or change the
allocation of additional 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 your protection. You may be required to provide your social
security number and/or other information for identification purposes when
making telephone requests.
Telephone requests must be received at the administrative and service office no
later than 3:00 p.m. Central time in order to assure same day pricing of the
transaction.
The telephone transaction privilege may be discontinued at any time for 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
the subaccount and portfolio in which the amount had been invested will always
be effective 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 subaccount and portfolio at the same time.
However, IF:
. you are making a transfer to any portfolio that accrues dividends on a daily
basis; and
. 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 subaccount may be delayed
(for up to seven days) 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.
During this period, the amount transferred will be uninvested.
In allocating the initial purchase payment among the subaccounts, you must
allocate a minimum contribution of $1,000 to each subaccount selected.
Additional net purchase payments may be allocated among the subaccounts in any
manner, so long as any contribution to a selected subaccount is at least $500.
You may subsequently reallocate the value of a designated number of
accumulation units of a subaccount then credited to a contract, into an equal
value of accumulation units of one or more other
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subaccounts. The reallocation shall be based on the relative value of the
accumulation units of the subaccounts at the end of business on the day the
request is received by PFL.
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 subaccount credited to the
contract by the current value of an accumulation unit for that subaccount. 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 subaccount are valued separately. The value of
accumulation units may change each valuation period according to the investment
performance of the shares purchased by each subaccount 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 subaccount 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 subaccount
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 subaccount 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, you may elect to surrender all or any portion of the contract value
in exchange for a cash withdrawal payment from PFL. Any such election shall be
in writing in such form as PFL may require and shall specify the amount of the
cash withdrawal payment. At your request, PFL will provide a form to request a
surrender and to notify PFL of your election whether to have federal income
taxes withheld. Such an election will be effective on the date that it is
received by PFL 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, PFL
will liquidate accumulation units of all subaccounts 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 days from the date the
surrender request becomes effective, except as PFL may be permitted to defer
such payment in accordance with the Investment Company Act of 1940. 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. PFL must by
law withhold federal income taxes from the
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taxable portion of any full or partial surrender and remit that amount to the
federal government if you have not provided PFL with a written election not to
have federal income taxes withheld. Moreover, the Internal Revenue Code
provides that a 10% penalty tax may be imposed on certain early surrenders.
Right to Return the Contract
You may cancel the contract within ten days after it is delivered to you by
delivering or mailing the contract and a written notice of revocation to PFL at
its administrative and service office. In the event of cancellation, PFL will
return all purchase payments made under the contract within seven days after it
receives written notice of cancellation and the returned contract.
CONTRACT CHARGES
No deduction for sales charges is made from purchase payments or upon
surrender. As described below, charges under the contracts are assessed:
. against the initial purchase payments and annually thereafter from the
contract value for administrative expenses; and
. 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 PFL. PFL 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 PFL's general assets.
These assets may include proceeds from the mortality charge described below.
PFL incurs certain costs, including the obligation to pay certain insurance
commissions in connection with the distribution of the contracts.
Administrative Charge
PFL 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 you make 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.
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.
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 PFL 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
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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. PFL assumes this
mortality risk by virtue of annuity payment rates incorporated in the contract.
These rates cannot be changed.
For assuming this mortality risk, PFL 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 0.80%. If this amount is insufficient to cover the
actual costs, the loss will be borne by PFL. If the amount deducted proves more
than sufficient, the excess will be a profit to PFL. To the extent that this
charge results in a profit to PFL, such profit will be available for use by PFL
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 risk
charge is assessed during the annuity phase for all options including those
that do not carry a life contingency.
Deductions for Taxes
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%.
PFL 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, PFL may review the need to make a charge for any taxes
attributable to the income of the variable account.
Under present laws, PFL 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, Variable Insurance Products Fund II and
Variable Insurance Products Fund III Expenses
The value of the assets in the variable account will reflect the value of the
funds' (or the formerly eligible funds) shares and, therefore, the fees and
expenses paid by the funds (or the formerly eligible funds). A complete
description of the expenses and deductions from the portfolios are found in the
funds' prospectuses.
BENEFITS UNDER THE CONTRACT
Death Benefit
In the event of the death of the annuitant prior to the annuity commencement
date, PFL, upon receipt of due proof of death of the annuitant, will pay a
death benefit to the beneficiary that you designated. 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
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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 PFL:
. 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 you did not make an election as to how the proceeds should be paid 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 PFL 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 becomes 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 you or any joint contract owner dies before the annuity commencement
date, the entire value of the contract must generally be distributed within
five years of the date of your death or the joint contract owner's death.
Special rules may apply to the spouse of the deceased owner. See the Statement
of Additional Information for a detailed description of these rules.
ANNUITY PAYMENTS
Annuity Commencement Date
Unless the annuity commencement date is changed, annuity payments under a
contract will begin on the annuity commencement date that you select at the
time the contract is applied for. You may change the annuity commencement date
from time to time by written notice to PFL, provided that notice of each change
is received by PFL at its administrative and service office at least thirty
days prior to the then current annuity commencement date.
Except as otherwise permitted by PFL, a new annuity commencement date must be a
date that is:
. at least thirty days after the date notice of the change is received by PFL;
. the first day of a month; and
. not later than the first day of the first month following the annuitant's
75th birthday.
Currently, PFL 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, you may elect any one of the annuity options described in this
prospectus. You may also change an election at any time. Written notice of any
election or change of election must be received by PFL at its administrative
and service office at least thirty days prior to the annuity commencement date.
If no election is in effect on the thirtieth day prior to the annuity
commencement date, we will make payment according to "Annuity Option 3--Life
Annuity with 120 or 240 Monthly Payments Guaranteed" 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 PFL setting forth the
terms of the option elected.
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During the lifetime of the annuitant, you 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 PFL. If you have not made an
annuity option election 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 PFL. You, or the beneficiary after
the annuitant's death, will select whether annuity payments will be made on a
fixed basis or a variable basis. 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 PFL; 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 PFL at its administrative and service office.
The contract provides four annuity options that are described below; however,
you 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 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. 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.
Upon the death of a beneficiary receiving annuity benefits under this option,
the present value of the guaranteed number of payments remaining after PFL
receives notice of the beneficiary's death, computed at the applicable assumed
interest rate shall be paid in a lump sum to the estate of the beneficiary.
Such
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present value is computed as of the valuation period during which notice of the
beneficiary's death is received by PFL 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. For a variable annuity, the payment will equal the
annuity unit value as of the date that notice of death of the annuitant in
writing is received by PFL 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 PFL at the annuity
commencement date. The assumed interest rate may be changed at PFL's
discretion; however, the minimum guaranteed interest rate is 3.5%. If, at the
time the annuity payments begin, you have not provided PFL with a written
election not to have federal income taxes withheld, PFL 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 PFL at the annuity commencement date. PFL currently offers
assumed interest rates of 3.5% and 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 subaccount did not exceed the higher assumed rate of
interest.
All variable annuity payments other than the first are calculated using annuity
units that are credited to the contract. The number of annuity units to be
credited in respect of a particular subaccount is determined by dividing the
portion of the first variable annuity payment attributable to that subaccount
by the annuity
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unit value of that subaccount for the valuation period which ends immediately
preceding the annuity commencement date. The number of annuity units of each
particular subaccount credited to the contract then remains fixed.
The dollar amount of each variable annuity payment after the first may
increase, decrease or remain constant. It is equal to the sum of the amounts
determined by multiplying the number of annuity units of each particular
subaccount credited to the contract by the annuity unit value for the
particular subaccount for the valuation period which ends immediately preceding
the due date of each additional payment. Furthermore, after the annuity
commencement date, you may reallocate all or part of the values held in one
subaccount to one or more other subaccounts.
Adjustment of Annuity Payments
If the contract value on the annuity commencement date is less than $5,000, PFL
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, PFL may change, at its discretion, the
frequency of payments so that payments will be 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 for retirement planning. They
are not designed for use with plans qualified for special tax treatment 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 PFL 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 PFL's understanding of current federal
income tax laws applicable to PFL 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 funds. 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.
PFL 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.
21
<PAGE>
You generally are 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, for
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 contract value during the taxable year, even if
no distribution occurs. There are, however, exceptions to this rule that you
may wish to discuss with your tax counsel. The following discussion applies to
contracts owned by natural persons.
In the case of a partial withdrawal under a contract, amounts received are
generally first treated as taxable income to the extent that the contract value
of the contract immediately before the withdrawal exceeds the "investment in
the contract" at that time. Any additional amount withdrawn is not taxable.
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. Any annuity
payments received after the investment in the contract has been recovered
generally will be fully taxable.
A penalty tax may be imposed 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:
. distributions received on or after owner's age 59 1/2, death of the owner,
or disability of the owner;
. distributions received in substantially equal installments as a life annuity
(subject to special "recapture" rules if the series of payments is
subsequently modified); and
. distributions allocable to the "investment in the contract" and attributable
earnings thereon before August 14, 1982.
Amounts may be distributed from a contract because of your death or the death
of an annuitant. Generally, such amounts are includable in the income of the
recipient as follows:
. if distributed in a lump sum, they are taxed in the same manner as a full
withdrawal, as described above; or
. if distributed under an annuity option, they are taxed in the same manner as
annuity payments, as described above.
22
<PAGE>
For these purposes, the investment in the contract is not affected by the
owner's or annuitant's death. That is, the investment in the contract remains
the amount of any purchase payments paid which were not excluded from gross
income.
PFL will withhold and remit to the U.S. Government a part of the taxable
portion of each distribution made under a contract unless you or the annuitant
notifies PFL 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 Treasury Department has
specific authority to issue regulations that prevent the avoidance of section
72(e) through the serial purchase of annuity contracts or otherwise. Congress
has also indicated that the Treasury Department may have authority to treat the
combination purchase of an immediate annuity contract and separate deferred
annuity contracts as a single annuity contract under its general authority to
prescribe rules as may be necessary to enforce the income tax laws.
A transfer of ownership of a contract, the designation of an annuitant, payee
or other beneficiary who is not also an owner, the selection of certain annuity
dates, or the exchange of a contract may result in certain tax consequences
that are not discussed herein. Anyone contemplating any such designation,
transfer, assignment, selection, or exchange should contact a competent tax
adviser with respect to the potential tax effects of such a transaction. The
foregoing comments about the federal income tax consequences under contracts
issued by PFL are not exhaustive, and special rules apply in other situations
not discussed in this prospectus. The discussion herein also reflects PFL'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.
Possible Changes in Taxation
Although the likelihood of legislative change in uncertain, there is always the
possibility that the tax treatment of the policies could change by legislation
or other means. It is also possible that any change could be retroactive (that
is, effective prior to the date of the change). A tax adviser should be
consulted with respect to legislative developments and their effect on the
policy.
GENERAL PROVISIONS
Ownership of the Contract
Once we issue the contract, it shall belong to you. We will issue the contract
after you complete an application and deliver the initial purchase payment to
us. Prior to the annuity commencement date, you shall be the person so
designated in the application. You may appoint a contingent contract owner to
succeed ownership of the contract in the event of your death prior to the
annuity commencement date. You 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 you 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
23
<PAGE>
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, you may assign any rights or benefits
provided by the contract. An assignment will not be binding on PFL until a copy
has been filed at its administrative and service office. Your rights and
benefits, and those of the 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. You may change or revoke the designation
of a beneficiary at any time while the annuitant is living by filing with PFL a
written beneficiary designation or revocation in such form as PFL may require.
The change or revocation will not be effective and binding upon PFL until it is
received by PFL at its administrative and service office. The annuitant named
in the contract, however, may not be changed.
Amendments
PFL 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 PFL without your consent except as
may be required by applicable law.
Suspension of Payment
PFL reserves the right to suspend or postpone the date of any payment of death
benefits or cash withdrawals:
. 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;
. 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
. 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 PFL.
Misstatement of Age or Sex
If the age or sex of the annuitant or designated annuitant has been misstated,
PFL 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 PFL shall be paid in full with the next payment due such
person or the beneficiary. The dollar amount of any overpayment made by PFL due
to any misstatement shall be deducted from payments subsequently accruing to
such person or the
24
<PAGE>
beneficiary. The age of the annuitant or designated annuitant may be
established at any time by the submission of proof satisfactory to PFL.
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, and 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.
PFL 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, PFL 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 PFL 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, you exercise 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 that a
person has the right to cast will be determined by applying such person's
percentage interest in a subaccount to the total number of votes attributable
to the subaccount. 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 subaccount. 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 subaccount as to
which no timely instructions are received or as to which you do not have an
interest will be voted by PFL in proportion to the voting instructions which
are
25
<PAGE>
received with respect to all contracts participating in that subaccount. 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 subaccount 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. PFL will also send such statements
reflecting transactions involving the contract as may be required by applicable
laws, rules and regulations.
YEAR 2000 MATTERS
In May 1996, PFL Life Insurance Company (PFL) adopted and presently has in
place a Year 2000 Project Plan (the "Plan") to review and analyze existing
hardware and software systems, as well as voice and data communications
systems, to determine if they are Year 2000 compliant. As of March 1, 1999,
substantially all of PFL's mission-critical systems are Year 2000 compliant.
The Year 2000 Project Plan remains on track as PFL continues with the
validation of its mission-critical and non-mission-critical systems, including
revalidation testing in 1999. In addition, PFL has undertaken aggressive
initiatives to test all systems that interface with any third parties and other
business partners. All of these steps are aimed at allowing current operations
to remain unaffected by the year 2000 date change.
As of the date of this prospectus, PFL has identified and made available what
it believes are the appropriate resources of hardware, people, and dollars,
including the engagement of outside third parties, to ensure that the Plan will
be completed.
The actions taken by management under The Year 2000 Project Plan are intended
to significantly reduce PFL's risk of a material business interruption based on
the Year 2000 issues. It should be noted that the Year 2000 computer problem,
and its resolution, is complex and multifaceted, and any company's success
cannot be conclusively known until the Year 2000 is reached. In spite of its
efforts or results, PFL's ability to function unaffected to and through the
Year 2000 may be adversely affected by actions, or failure to act, of third
parties beyond our knowledge or control. This statement is a Year 2000
Readiness Disclosure pursuant to Section 3(9) of the Year 2000 Information and
Readiness Disclosure Act, 15 U.S.C. Section 1 (1998).
IMSA
PFL is a member of the Insurance Marketplace Standards Association (IMSA). IMSA
members subscribe to a set of ethical standards involving the sales and service
of individually sold life insurance and annuities. As a member, we may use the
IMSA logo and language in advertisements.
LEGAL PROCEEDINGS
No material legal proceedings are pending against the variable account, PFL,
its subsidiaries or Fidelity Brokerage.
26
<PAGE>
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
PFL Life Insurance Company
The Contracts
Contract Charges
Benefits Under the Contract
Annuity Payments
Federal Tax Matters
Distribution of the Contracts
Custody of Assets
State Regulation
Records and Reports
Independent Auditors
Other Information
Financial Statements
</TABLE>
27
<PAGE>
APPENDIX A
CONDENSED FINANCIAL INFORMATION
The accumulation unit values and the number of accumulation units outstanding
for each subaccount from the date of inception are shown in the following ta-
bles.
<TABLE>
<CAPTION>
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
at Beginning at End of Units at End
of Year Year of Year
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
VIP Money Market Subaccount
1998............................... $2.525659 $2.642832 43,337,060.933
1997............................... 2.413358 2.525659 43,319,514.745
1996............................... 2.307819 2.413358 51,936,943.182
1995............................... 2.196945 2.307819 48,392,069.066
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
- --------------------------------------------------------------------------------
VIP High Income Subaccount
1998............................... $3.835575 $3.640420 12,247,818.239
1997............................... 3.285775 3.835575 17,495,330.353
1996............................... 2.904665 3.285775 18,704,131.149
1995............................... 2.427652 2.904665 19,488,862.806
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
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
at Beginning at End of Units at End
of Year Year of Year
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
VIP Equity-Income Subaccount
1998............................... $4.252876 $4.709707 43,094,581.632
1997............................... 3.346303 4.252876 57,352,295.075
1996............................... 2.951686 3.346303 68,119,423.617
1995............................... 2.202346 2.951686 81,601,359.509
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
- --------------------------------------------------------------------------------
VIP Growth Subaccount
1998............................... $4.643463 $6.425788 28,101,887.125
1997............................... 3.790532 4.643463 30,726,907.924
1996............................... 3.331228 3.790532 38,326,955.306
1995............................... 2.480539 3.331228 43,498,210.261
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
- --------------------------------------------------------------------------------
VIP Overseas Subaccount
1998............................... $2.172007 $2.429523 13,624,240.201
1997............................... 1.962599 2.172007 15,101,589.750
1996............................... 1.747454 1.962599 18,498,493.052
1995............................... 1.605980 1.747454 18,307,714.844
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
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
at Beginning at End of Units at End
of Year Year of Year
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
VIP II Investment Grade Bond
Subaccount
1998............................. $1.848460 $1.995998 11,759,114.123
1997............................. 1.708442 1.848460 10,859,598.713
1996............................. 1.669036 1.708442 9,681,784.561
1995............................. 1.571804 1.669036 10,019,780.574
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/)........................ 1.000000 1.059709 1,710,458.331
- ------------------------------------------------------------------------------
VIP II Asset Manager Subaccount
1998............................. $2.481731 $2.832585 26,983,405.294
1997............................. 2.073401 2.481731 33,046,715.565
1996............................. 1.823774 2.073401 37,212,616.412
1995............................. 1.571804 1.823774 45,933,251.411
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(/2/)........................ 1.000000 1.041041 989,833.209
- ------------------------------------------------------------------------------
VIP II Asset Manager: Growth
Subaccount
1998............................. $1.490886 $1.738937 5,249,723.064
1997............................. 1.201587 1.490886 1,443,467.081
1996............................. 1.009935 1.201587 7,788,605.432
1995(/3/)........................ 1.000000 1.009935 2,178,270.748
- ------------------------------------------------------------------------------
VIP II Contrafund
1998............................. $1.508640 $1.945361 26,840,603.665
1997............................. 1.224976 1.508640 33,372,392.534
1996............................. 1.017954 1.224976 42,901,139.435
1995(/4/)........................ 1.000000 1.017954 20,570,759.262
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
at Beginning at End of Units at End
of Year Year of Year
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
VIP II Index 500 Subaccount
1998............................. $1.758955 $2.239298 27,546,396.903
1997............................. 1.336134 1.758955 31,990,011.025
1996............................. 1.096624 1.336134 23,088,441.156
1995............................. 1.000000 1.096623 8,432,120.348
- ------------------------------------------------------------------------------
VIP III Balanced Subaccount
1998............................. $1.150095 $1.342236 1,525,895.592
1997(/5/)........................ 1.000000 1.150095 1,126,357.174
- ------------------------------------------------------------------------------
VIP III Growth Opportunities
Subaccount
1998............................. $1.232659 $1.523888 6,147,873.836
1997(/5/)........................ 1.000000 1.232659 4,621,108.553
- ------------------------------------------------------------------------------
VIP III Growth & Income Subaccount
1998............................. $1.241360 $1.595917 11,928,129.677
1997(/5/)........................ 1.000000 1.241360 6,281,887.718
</TABLE>
(/1/)Period from June 5, 1989 through December 31, 1989.
(/2/)Period from May 29, 1990 through December 31, 1990.
(/3/)Period from September 5, 1995 through December 31, 1995
(/4/)Period from September 1, 1995 through December 31, 1995
(/5/)Period from May 1, 1997 through December 31, 1997.
31
<PAGE>
FORMERLY ELIGIBLE SUB-ACCOUNTS
(These Subaccounts are no longer available for investment.)
<TABLE>
<CAPTION>
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
at Beginning at End of Units at End
of Year Year of Year
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Fidelity Daily Income Trust
Subaccount
1998.............................. $3.424415 $3.603569 81,396.693
1997.............................. 3.252838 3.424415 86,061.186
1996.............................. 3.094122 3.252838 114,662.042
1995.............................. 2.921185 3.094122 131,063.459
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
- ------------------------------------------------------------------------------
Fidelity Cash Reserves Subaccount
1998.............................. $3.443500 $3.626195 23,111.706
1997.............................. 3.268738 3.443500 23,137.187
1996.............................. 3.108117 3.268738 23,164.006
1995.............................. 2.934039 3.108117 23,192.241
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
- ------------------------------------------------------------------------------
Fidelity Government Income Fund
Subaccount
1996.............................. 4.618027 $ N/A 0.000
1995.............................. 3.911039 4.618027 8,068.949
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
1988.............................. 2.236112 2.376907 8,138.994
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
at Beginning at End of Units at End
of Year Year of Year
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Fidelity Capital and Income Fund
Subaccount
1998.............................. $8.623329 $8.793255 15,972.996
1997.............................. 7.515932 8.623329 15,980.956
1996.............................. 6.744302 7.515932 21,049.298
1995.............................. 5.777672 6.744302 25,993.308
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
</TABLE>
FORMERLY ELIGIBLE FUNDS FEE TABLE
Formerly Eligible Funds Annual Expenses(/1/)(/2/)
(as a percentage of average net assets after fee waiver and expense
reimbursement)
<TABLE>
<CAPTION>
Total Fund
Management Other Annual
Subaccount Fees Expenses Expenses
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Fidelity Daily Income Trust.................... 0.33% 0.17% 0.50%
Fidelity Cash Reserves......................... 0.20% 0.27% 0.47%
Fidelity Government Income Fund(/3/)........... 0.44% 0.24% 0.68%
Fidelity Capital and Income Fund(/4/).......... 0.59% 0.23% 0.82%
</TABLE>
(/1/) These expenses are for the last fiscal year of each fund. Actual expenses
in the current year and in the future may be higher or lower.
(/2/) The fee information relating to the formerly eligible funds was provided
to PFL by the formerly eligible funds, and PFL has not independently veri-
fied such information.
(/3/) Fidelity Government Income Fund has entered into arrangements with its
custodian and transfer agent whereby credits realized as a result of
uninvested cash balances are used to reduce custodian and transfer agent
expenses. Without these reductions, other expenses would have been 0.25%
and the total fund operating expenses would have been 0.69%.
(/4/) Fidelity Capital and Income Fund has entered into arrangements with its
custodian and transfer agent whereby credits realized as a result of
uninvested cash balances are used to reduce custodian and transfer agent
expenses. Without these reductions, other expenses would have been 0.24%
and the total fund operating expenses would have been 0.83%.
33
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
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 52499-0001
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, 1999, 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 of Additional
Information.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the prospectus for the policy and the Fidelity
Variable Annuity Account.
Dated: May 1, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PFL LIFE INSURANCE COMPANY................................................. 1
THE CONTRACTS.............................................................. 3
Reallocation of Contract Values After the Annuity Commencement Date...... 3
Accumulation Units....................................................... 3
Reinvestment of Fund Distributions....................................... 4
CONTRACT CHARGES........................................................... 5
Administrative Charge.................................................... 5
Charges for Mortality Risk............................................... 5
BENEFITS UNDER THE CONTRACT................................................ 5
Death Benefit............................................................ 5
IRS Required Distribution................................................ 5
ANNUITY PAYMENTS........................................................... 6
Annuity Unit Value....................................................... 6
Annuity Payment Rates.................................................... 6
Performance.............................................................. 7
Total Return............................................................. 8
Yields................................................................... 8
FEDERAL TAX MATTERS........................................................ 9
Tax Treatment of PFL..................................................... 9
Diversification Requirements............................................. 9
Owner Control............................................................ 9
Distribution Requirements................................................ 10
DISTRIBUTION OF THE CONTRACTS.............................................. 10
CUSTODY OF ASSETS.......................................................... 10
STATE REGULATION........................................................... 10
RECORDS AND REPORTS........................................................ 11
INDEPENDENT AUDITORS....................................................... 11
OTHER INFORMATION.......................................................... 11
FINANCIAL STATEMENTS....................................................... 11
</TABLE>
-2-
<PAGE>
PFL LIFE INSURANCE COMPANY
PFL Life Insurance Company ("PFL") 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.
All of the stock of PFL 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 Subaccount, then credited to
a Contract, into an equal value of Annuity Units of one or more other
Subaccounts. The reallocation shall be based on the relative value of the
Annuity Units of the Subaccounts 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. PFL
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 Subaccount, Net Purchase Payments are converted
into Accumulation Units of the Subaccount. The number of Accumulation Units to
be credited is determined by dividing the dollar amount allocated to each
Subaccount by the value of an Accumulation Unit for that Subaccount 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
Subaccount. 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 Subaccount 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 Subaccount and deduction of certain
charges affect the Accumulation Unit Value.
The Net Investment Factor for any Subaccount 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 Subaccount
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 Subaccount if the ex-
dividend date occurs during the current Valuation Period, plus or minus
(3) a per share credit or charge for any taxes determined by PFL to
have resulted from the investment operations of the Subaccount and for
which it has created a reserve;
(b) is the net asset value per share of the shares held in the Subaccount
determined as of the end of the immediately preceding Valuation Period.
(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 Subaccount.
-3-
<PAGE>
Illustration of Accumulation Unit Value Calculations
Formula and Illustration for Determining the Net Investment Factor
Net Investment Factor = A + B - C - E
---------
D
<TABLE>
<C> <S>
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 daily deduction for mortality risk, which totals 0.8% on an
annual basis.
On a daily basis......................... = 0.00002183
</TABLE>
Then, the Net Investment Factor = 11.57 + 0 - 0 - 0.00002183 = 1.01489045
-------------
11.40
Formula and Illustration for Determining Accumulation Unit Value
Accumulation Unit Value = A * B
<TABLE>
<C> <S>
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
</TABLE>
Then, the Accumulation Unit Value = $1.347125 * 1.01489045 = $1.367184
* = multiplication
Reinvestment of Fund Distributions
The Funds 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 Funds.
4
<PAGE>
CONTRACT CHARGES
Administrative Charge
PFL performs the administrative services for the Contracts. These services
include issuance of the Contracts, maintenance of records concerning the
Contracts, and certain valuation services.
Charges for Mortality Risk
A mortality risk charge equal to an annual charge of 0.80% of the daily net
asset value of the Variable Account is deducted daily.
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
PFL of notification of the death of the Annuitant. Either election described
above may be made by filing with PFL a written election in such form as PFL 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 PFL 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 PFL 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 PFL. If an election by the Beneficiary is not
received by PFL within ninety (90) days following the date notification of the
death of the Annuitant is received by PFL 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 PFL. Payment will be made in accordance with
any applicable laws and regulations governing payment of death benefits.
Notwithstanding the foregoing, PFL 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.
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
5
<PAGE>
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, 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 Subaccount
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 Subaccount is less than the assumed rate.
The Annuity Unit Value of each Subaccount is arbitrarily established at $1.00
for the first Valuation Period of the particular Subaccount. The Annuity Unit
Value for the particular Subaccount for any Valuation Period is determined by
multiplying the Annuity Unit Value for the particular Subaccount for the
immediately preceding Valuation Period by the Net Investment Factor for the
particular Subaccount 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 the 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 * B * C
<TABLE>
<C> <S>
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 3.5% built into
the Annuity Tables used.
Daily factor equals......................... = 0.999906
</TABLE>
Then, the Annuity Unit Value is: $1.097696 * 1.005200 * 0.999906 = $1.103300
6
<PAGE>
Formula and Illustration for Determining Amount of
First Monthly Variable Annuity Payment
First Monthly Variable Annuity Payment = A * B
--------
$1,000
<TABLE>
<C> <S>
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
</TABLE>
Then, the first Monthly Variable Annuity Payment = $15,000 * $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
<TABLE>
<C> <S>
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
</TABLE>
Then, the number of Annuity Units = $91.50 = 82.933019
-------
$1.103300
Performance
Performance information for any Subaccount may be compared, in reports and
advertising to: (1) the Standard & Poor's Composite Index of 500 Stocks ("S&P
500"), Dow Jones Industrial Average ("DJIA"), Donoghue's Money Market
Institutional Averages; (2) other variable annuity separate accounts or other
investment products tracked by Lipper Analytical Services, Morningstar, or the
Variable Annuity Research and Data Service, widely used independent research
firms which rank mutual funds and other investment companies by overall
performance, investment objectives, and assets; and (3) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
investment in a Contract. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for annuity charges and
investment management costs.
Performance information may be quoted numerically or in a table, graph, or
similar illustration. Reports and advertising may also contain other
information including (i) the ranking of any Subaccount derived from rankings
of variable annuity separate accounts or other investment products tracked by
Lipper Analytical Services or by rating services, companies, publications or
other persons who rank separate accounts or other investment products on
overall performance or other criteria, and (ii) the effect of tax deferred
compounding on a Subaccount's investment returns, or returns in general, which
may be illustrated by graphs, charts, or otherwise, and which may include a
comparison, at various points in time, of the return from an investment in a
Contract (or returns in general) on a tax-deferred basis (assuming one or more
tax rates) with the return on a taxable basis.
The table below provides performance results for each Subaccount through
12/31/98. The performance information is based on the historical investment
experience of the Subaccounts and of the Portfolios. It does not indicate or
represent future performance.
7
<PAGE>
Total Return
Total returns quoted in advertising reflect all aspects of a Subaccount's
return, including the automatic reinvestment by the separate account of all
distributions and any change in the Subaccount's value over the period. Average
annual returns are calculated by determining the growth or decline in value of
a hypothetical historical investment in the Subaccount over a stated period,
and then calculating the annually compounded percentage rate that would have
produced the same result if the rate of growth or decline in value had been
constant over the period. For example, a cumulative return of 100% over ten
years would produce an average annual return of 7.18%, which is the steady rate
that would equal 100% growth on a compounded basis in ten years. While average
annual returns are a convenient means of comparing investment alternatives,
investors should realize that the Subaccount's performance is not constant over
time, but changes from year to year, and that average annual returns represent
averaged figures as opposed to the actual year-to-year performance of a
Subaccount.
The following Table shows the average annual total return on a hypothetical
investment in the Subaccounts for the last year, three years, five years, and
from the date that the Portfolios began operations, assuming that the Contract
was surrendered December 31, 1998. For any Portfolio in existence ten years or
more, figures are shown for a ten-year period rather than for the life of the
Portfolio. The average annual total returns shown in the following Table are
computed by finding the average annual compounded rates of return over the
periods shown that would equate the initial amount invested to the withdrawal
value, in accordance with the following formula: P(1+T) = ERV where P is a
hypothetical investment payment of $1,000, T is the average annual total
return, n is the number of years, and ERV is the withdrawal value at the end of
the periods shown. The returns reflect the mortality charge (.80% on an annual
basis) and the administrative charge.
Average Annual Total Return for Period Ending on 12/31/98
<TABLE>
<CAPTION>
Subaccount
1 Year 3 Year 5 Year Life Inception Date
------ ------ ------ ---- --------------
<S> <C> <C> <C> <C> <C>
VIP Money Market* 4.64% 4.60% 4.43% 4.79% ** 03/31/82
VIP High Income <5.09%> 7.79% 7.90% 10.11% ** 09/11/85
VIP Equity-Income 10.75% 16.83% 17.80% 14.63% ** 10/08/86
VIP Growth 38.40% 24.46% 20.74% 18.37% ** 10/08/86
VIP Overseas 11.86% 11.59% 8.80% 9.14% ** 01/27/87
VIP II Investment Grade
Bond 7.99% 6.31% 5.82% 7.42% 06/05/89
VIP II Asset Manager 14.15% 15.79% 10.89% 12.82% 05/29/90
VIP II Index 500 27.32% 29.21% N/A 27.46% 09/01/95
VIP II Asset Manager:
Growth 16.65% 19.84% N/A 18.11% 09/05/95
VIP II Contrafund 28.96% 24.07% N/A 22.17% 09/01/95
VIP III Balanced 16.70% N/A N/A 19.26% 05/01/97
VIP III Growth
Opportunities 23.62% N/A N/A 28.68% 05/01/97
VIP III Growth & Income 28.56% N/A N/A 32.29% 05/01/97
</TABLE>
* There can be no assurance that the VIP Money Market Portfolio will maintain
a stable $1.00 share price. None of the portfolios are insured or guaranteed
by the U.S. Government.
** Figure is for 10 years.
Total returns are historical and include change in unit price and the automatic
reinvestment of dividends and capital gains. Principal, investment returns
(except VIP Money Market Portfolio) and yields will fluctuate and there is no
guarantee you will receive back your original principal. Average Annual Total
Returns and Yield include all insurance contract charges: 0.8% annuity
mortality risk charge and $35 annual administrative charge.
Yields
Yields quoted in advertising for the VIP Money Market Subaccount reflect the
change in value of a hypothetical investment in the Subaccount over a stated
period of time, not taking into account capital gains or losses. Yields are
annualized and stated as a percentage. Current yield for the VIP Money Market
Subaccount reflects the income generated by a Subaccount over a 7-day
8
<PAGE>
period. Current yield is calculated by determining the net change, (exclusive
of capital changes and income other than investment income), in the value of a
hypothetical account having one Accumulation Unit at the beginning of the
period adjusting for the administrative charge, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and multiplying the base period return by (365/7). The resulting
yield figure is carried to the nearest hundredth of a percent. Effective yield
for the VIP Money Market Subaccount is calculated in a similar manner to
current yield except that investment income is assumed to be reinvested
throughout the year at the 7-day rate. Effective yield is obtained by taking
the base period returns as computed above, and then compounding the base period
return by adding 1, raising the sum to a power equal to (365/7) and subtracting
one from the result, according the formula Effective Yield = [(Base Period
Return + 1)] -1. Since the reinvestment of income is assumed in the calculation
of effective yield, it will generally be higher than current yield. For the 7-
day period ending on 12/31/98 the VIP Money Market Subaccount had a current
yield of 4.278% and an effective yield of 4.369%.
FEDERAL TAX MATTERS
Tax Treatment of PFL
PFL is taxed as a life insurance company under Subchapter L of the Code. Since
the Variable Account is not an entity separate from PFL and its operations form
a part of PFL, 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, PFL
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 the contract will not be
treated as an annuity for tax purposes 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 PFL 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 diversification rules set forth in the Regulations.
Owner Control
In certain circumstances, owners of variable annuity contracts may be
considered the owners for Federal income tax purposes, of the assets of the
separate account used to support their contracts. In those circumstances,
income and gains from the separate account assets would be includable in the
variable annuity contractowner's gross income. The IRS has stated in published
ruling that a variable contractowner will be considered the owner of separate
account assets if the contractowner possesses incidents of ownership in those
assets, such as the ability to exercise investment control over the assets. The
Treasury Department has also announced, in connection with the issuance of
regulations concerning investment diversification, that those regulations "do
not provide guidance concerning the circumstances in which investor control of
the investments of a segregated asset account may cause the investor, rather
than the insurance company, to be treated as the owner of the assets in the
account." This announcement also stated that guidance would be issued by way of
regulations or rulings on the "extent to which policyholders may direct their
investments to particular subaccounts without being treated as owners of the
underlying assets."
The ownership rights under the Contract are similar to, but different in
certain respects from, those described by the Service in rulings in which it
was determined that contractowners were not owners of separate account assets.
For example, the Contract Owner has the choice of one or more Subaccounts in
which to allocate premiums and Contract values, and may be able to transfer
among Subaccounts more frequently than in such rulings. These differences could
result in the Contract Owner being treated as the owner of the assets of the
Variable Account. In addition, PFL does not know what standards will be set
forth, if
9
<PAGE>
any, in the regulations or rulings which the Treasury Department has stated it
expects to issue. PFL therefore reserves the right to modify the Contract as
necessary to attempt to prevent the Contract Owner from being considered the
owner of a pro rata share of assets of Variable Account.
Distribution Requirements
The Code also requires that the Contracts contain specific provisions for
distribution of Contract proceeds upon the death of any Owner. In order to be
treated as an annuity contract for federal income tax purposes, the Code
requires that the Contracts provide that if any Owner dies on or after the
Annuity Commencement Date and before the entire interest in the Contract has
been distributed, the remaining portion must be distributed at least as rapidly
as under the method in effect on such Owner's death. If any Owner dies before
the Annuity Commencement Date, the entire interest in the Contract must
generally be distributed within 5 years after such Owner's date of death or be
used to purchase an immediate annuity under which payments will begin within
one year of such Owner's death and will be made for the life of the Beneficiary
or for a period not extending beyond the life expectancy of the Beneficiary.
However, if such Owner's death occurs prior to the Annuity Commencement Date,
such Owner's surviving spouse is named the beneficiary, then the Contract may
be continued with the surviving spouse as the new Owner. If any Owner is not a
natural person, then for purposes of these distribution requirements, the
primary Annuitant shall be treated as the Owner and any death or change of such
primary Annuitant shall be treated as the death of the Owner. The Contract
contains provisions intended to comply with these requirements of the Code. No
regulations interpreting these requirements of the Code have yet been issued
and thus no assurance can be given that the provisions contained in the
Contracts satisfy all such Code requirements.
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 PFL does not anticipate discontinuing the offering of the
Contracts. However, PFL reserves the right to discontinue the offering of the
Contracts.
The Contracts will be distributed through Fidelity Brokerage Services, Inc.,
the principal underwriter of the Contracts, and Fidelity Insurance Agency,
Inc., which are affiliated with FMR. During 1998, the amount paid to Fidelity
Insurance Agency, Inc. for its services as a general insurance agency was
$4,547,812. Amounts paid for these services in 1997 and 1996 were $4,476,712
and $4,136,279, respectively.
CUSTODY OF ASSETS
The assets of each of the Subaccounts are held by PFL. The assets of the
Variable Account and each of the Subaccounts thereunder are kept physically
segregated and held separate and apart from the general account assets of PFL.
PFL maintains records of all purchases and redemptions of shares of the Fund
held by each of the Subaccounts. Additional protection for the assets of the
Variable Account is afforded by PFL's fidelity bond presently in the amount of
$5 million covering the acts of officers and employees of PFL.
STATE REGULATION
PFL 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 PFL 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 PFL's contract liabilities and reserves so that the
Division of Insurance may certify the items are correct. PFL'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, PFL is subject to
regulation under the insurance laws of other jurisdictions in which it may
operate.
10
<PAGE>
RECORDS AND REPORTS
All records and accounts relating to the Variable Account will be maintained by
PFL. As presently required by the Investment Company Act of 1940 and
regulations promulgated thereunder, PFL 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. PFL 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 statutory-basis financial statements and schedules of PFL Life Insurance
Company as of December 31, 1998 and 1997, and for each of three years in the
period ended December 31, 1998, and the financial statements of the subaccounts
of The Fidelity Variable Annuity Account, which are available for investment by
Fidelity Income Plus contract owners, as of December 31, 1998 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, 801 Grand Avenue, Suite 3400, Des Moines, Iowa, 50309-2764.
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 Subaccount(s). The
financial statements of PFL as contained herein should be considered only as
bearing upon PFL'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 Subaccounts.
11
<PAGE>
FINANCIAL STATEMENTS--STATUTORY BASIS
PFL LIFE INSURANCE COMPANY
Years ended December 31, 1998, 1997 and 1996
with Report of Independent Auditors
<PAGE>
PFL LIFE INSURANCE COMPANY
FINANCIAL STATEMENTS--STATUTORY BASIS
Years ended December 31, 1998, 1997 and 1996
Contents
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. 1
Audited Financial Statements
Balance Sheets--Statutory Basis........................................... 2
Statements of Operations--Statutory Basis................................. 3
Statements of Changes in Capital and Surplus--Statutory Basis............. 4
Statements of Cash Flows--Statutory Basis................................. 5
Notes to Financial Statements--Statutory Basis............................ 6
Statutory-Basis Financial Statement Schedules
Summary of Investments--Other Than Investments in Related Parties......... 24
Supplementary Insurance Information....................................... 25
Reinsurance............................................................... 26
</TABLE>
<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, 1998 and 1997, and the related statutory-
basis statements of operations, changes in capital and surplus, and cash flows
for each of the three years in the period ended December 31, 1998. Our audits
also included the accompanying statutory-basis financial statement schedules
required by Article 7 of Regulation S-X. These financial statements and
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules 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.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Insurance Division, Department of Commerce, of the State of
Iowa, which practices differ from generally accepted accounting principles.
The variances between such practices and generally accepted accounting
principles also are described in Note 1. The effects on the financial
statements of these variances are not reasonably determinable but are presumed
to be material.
In our opinion, because of the effects of the matters described in the
preceding paragraph, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of PFL Life Insurance Company at December 31, 1998 and
1997, or the results of its operations or its cash flows for each of the three
years in the period ended December 31, 1998.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of PFL Life Insurance
Company at December 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998 in conformity with accounting practices prescribed or permitted by the
Insurance Division, Department of Commerce, of the State of Iowa. Also, in our
opinion, the related financial statement schedules, when considered in
relation to the basic statutory-basis financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 19, 1999
1
<PAGE>
PFL LIFE INSURANCE COMPANY
BALANCE SHEETS--STATUTORY BASIS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31
---------------------
1998 1997
---------- ----------
ADMITTED ASSETS
---------------
<S> <C> <C>
Cash and invested assets:
Cash and short-term investments............................ $ 83,289 $ 23,939
Bonds...................................................... 4,822,442 4,913,144
Stocks:
Preferred................................................ 14,754 2,750
Common (cost: 1998--$34,731; 1997--$33,058).............. 49,448 42,345
Affiliated entities (cost: 1998--$8,060; 1997--$10,798).. 5,613 8,031
Mortgage loans on real estate.............................. 1,012,433 935,207
Real estate, at cost less accumulated depreciation ($9,500
in 1998; $8,655 in 1997):
Home office properties................................... 8,056 8,283
Properties acquired in satisfaction of debt.............. 11,778 11,814
Investment properties.................................... 44,325 36,416
Policy loans............................................... 60,058 57,136
Other invested assets...................................... 76,482 29,864
---------- ----------
Total cash and invested assets......................... 6,188,678 6,068,929
Premiums deferred and uncollected........................... 15,318 16,101
Accrued investment income................................... 65,308 69,662
Receivable from affiliate................................... 643 --
Federal income taxes recoverable............................ 639 --
Transfers from separate accounts............................ 70,866 60,193
Other assets................................................ 29,511 37,624
Separate account assets..................................... 3,348,611 2,517,365
---------- ----------
Total admitted assets.................................. $9,719,574 $8,769,874
========== ==========
<CAPTION>
LIABILITIES AND CAPITAL AND SURPLUS
-----------------------------------
<S> <C> <C>
Liabilities:
Aggregate reserves for policies and contracts:
Life..................................................... $1,357,175 $ 884,018
Annuity.................................................. 3,925,293 4,204,125
Accident and health...................................... 205,736 169,328
Policy and contract claim reserves:
Life..................................................... 9,101 8,635
Accident and health...................................... 48,906 57,713
Other policyholders' funds................................. 162,266 143,831
Remittances and items not allocated........................ 19,690 153,745
Asset valuation reserve.................................... 91,588 69,825
Interest maintenance reserve............................... 50,575 30,287
Federal income taxes payable............................... -- 1,889
Short-term notes payable to affiliates..................... 9,421 16,400
Other liabilities.......................................... 76,766 75,070
Payable for securities..................................... 57,645 --
Payable to affiliates...................................... -- 13,240
Separate account liabilities............................... 3,342,884 2,512,406
---------- ----------
Total liabilities...................................... 9,357,046 8,340,512
Commitments and contingencies
Capital and surplus:
Common stock, $10 par value, 500 shares authorized, 266
issued and outstanding.................................... 2,660 2,660
Paid-in surplus............................................ 154,282 154,282
Unassigned surplus......................................... 205,586 272,420
---------- ----------
Total capital and surplus.............................. 362,528 429,362
---------- ----------
Total liabilities and capital and surplus.............. $9,719,574 $8,769,874
========== ==========
</TABLE>
See accompanying notes.
2
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS--STATUTORY BASIS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net
of reinsurance:
Life.................................. $ 516,111 $ 202,435 $ 204,872
Annuity............................... 667,920 657,695 725,966
Accident and health................... 178,593 207,982 227,862
Net investment income................... 446,984 446,424 428,337
Amortization of interest maintenance re-
serve.................................. 8,656 3,645 2,434
Commissions and expense allowances on
reinsurance ceded...................... 32,781 49,859 73,931
---------- ---------- ----------
1,851,045 1,568,040 1,663,402
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health bene-
fits................................. 135,184 146,583 147,024
Surrender benefits.................... 732,796 658,071 512,810
Other benefits........................ 152,209 126,495 101,288
Increase (decrease) in aggregate
reserves for policies and contracts:
Life.................................. 473,158 149,575 140,126
Annuity............................... (278,665) (203,139) 188,002
Accident and health................... 36,407 30,059 26,790
Other................................. 17,550 16,998 19,969
---------- ---------- ----------
1,268,639 924,642 1,136,009
Insurance expenses:
Commissions............................. 136,569 157,300 177,466
General insurance expenses.............. 48,018 57,571 57,282
Taxes, licenses and fees................ 19,166 8,715 13,889
Net transfers to separate accounts...... 265,702 297,480 171,785
Other expenses.......................... 1,016 119 526
---------- ---------- ----------
470,471 521,185 420,948
---------- ---------- ----------
1,739,110 1,445,827 1,556,957
---------- ---------- ----------
Gain from operations before federal income
tax expense and net realized capital
gains (losses) on investments............ 111,935 122,213 106,445
Federal income tax expense................ 49,835 43,381 41,177
---------- ---------- ----------
Gain from operations before net realized
capital gains (losses) on investments.... 62,100 78,832 65,268
Net realized capital gains (losses) on
investments (net of related federal
income taxes and amounts transferred to
interest maintenance reserve)............ 3,398 7,159 (3,503)
---------- ---------- ----------
Net income................................ $ 65,498 $ 85,991 $ 61,765
========== ========== ==========
</TABLE>
See accompanying notes.
3
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS--STATUTORY BASIS
(Dollars in thousands)
<TABLE>
<CAPTION>
Total
Capital
Common Paid-in Unassigned and
Stock Surplus Surplus Surplus
------ -------- ---------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1996............... $2,660 $154,129 $ 220,739 $ 377,528
Net income............................. -- -- 61,765 61,765
Change in net unrealized capital
gains................................. -- -- 2,351 2,351
Change in non-admitted assets.......... -- -- (148) (148)
Change in asset valuation reserve...... -- -- (10,930) (10,930)
Dividend to stockholder................ -- -- (20,000) (20,000)
Prior period adjustment................ -- -- 5,025 5,025
Surplus effect of sales of divisions... -- -- (384) (384)
Surplus effect of ceding commissions
associated with the sale of a
division.............................. -- -- 29 29
Amendment of reinsurance agreement..... -- -- 421 421
Change in liability for reinsurance in
unauthorized companies................ -- -- 2,690 2,690
------ -------- --------- ---------
Balance at December 31, 1996............. 2,660 154,129 261,558 418,347
Capital contribution................... -- 153 -- 153
Net income............................. -- -- 85,991 85,991
Change in net unrealized capital
gains................................. -- -- 3,592 3,592
Change in non-admitted assets.......... -- -- (481) (481)
Change in asset valuation reserve...... -- -- (14,974) (14,974)
Dividend to stockholder................ -- -- (62,000) (62,000)
Surplus effect of sale of a division... -- -- (161) (161)
Surplus effect of ceding commissions
associated with the sale of a
division.............................. -- -- 5 5
Amendment of reinsurance agreement..... -- -- 389 389
Surplus effect of reinsurance
agreement............................. -- -- 402 402
Change in liability for reinsurance in
unauthorized companies................ -- -- (1,901) (1,901)
------ -------- --------- ---------
Balance at December 31, 1997............. 2,660 154,282 272,420 429,362
Net income............................. -- -- 65,498 65,498
Change in net unrealized capital
gains................................. -- -- 4,504 4,504
Change in non-admitted assets.......... -- -- (260) (260)
Change in asset valuation reserve...... -- -- (21,763) (21,763)
Dividend to stockholder................ -- -- (120,000) (120,000)
Increase in liability for reinsurance
in unauthorized companies............. -- -- 2,036 2,036
Tax benefit on stock options
exercised............................. -- -- 2,476 2,476
Change in surplus in separate
accounts.............................. -- -- 675 675
------ -------- --------- ---------
Balance at December 31, 1998............. $2,660 $154,282 $ 205,586 $ 362,528
====== ======== ========= =========
</TABLE>
See accompanying notes.
4
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS--STATUTORY BASIS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities
Premiums and other considerations, net
of reinsurance......................... $ 1,396,428 $ 1,119,936 $ 1,240,748
Net investment income................... 469,246 452,091 431,456
Life and accident and health claims..... (138,249) (154,383) (147,556)
Surrender benefits and other fund
withdrawals............................ (732,796) (658,071) (512,810)
Other benefits to policyholders......... (152,167) (126,462) (101,254)
Commissions, other expenses and other
taxes.................................. (197,135) (225,042) (248,321)
Net transfers to separate accounts...... (276,375) (319,146) (210,312)
Federal income taxes.................... (72,176) (47,909) (35,551)
Cash paid in conjunction with an
amendment of a reinsurance agreement... -- (4,826) (5,812)
Cash received in connection with a
reinsurance agreement.................. -- 1,477 --
Other, net.............................. (93,095) 89,693 (41,677)
Net cash provided by operating
activities............................. 203,681 127,358 368,911
Investing Activities
Proceeds from investments sold, matured
or repaid:
Bonds and preferred stocks............ 3,347,174 3,284,095 2,112,831
Common stocks......................... 34,564 34,004 27,214
Mortgage loans on real estate......... 192,210 138,162 74,351
Real estate........................... 5,624 6,897 18,077
Cash received from ceding commissions
associated with the sale of a
division............................. -- 8 45
Other................................. 7,210 57,683 22,568
----------- ----------- -----------
3,586,782 3,520,849 2,255,086
Cost of investments acquired:
Bonds and preferred stocks............ (3,251,822) (3,411,442) (2,270,105)
Common stocks......................... (36,379) (37,339) (29,799)
Mortgage loans on real estate......... (257,039) (159,577) (324,381)
Real estate........................... (11,458) (2,013) (222)
Policy loans.......................... (2,922) (2,922) (1,539)
Cash paid in association with the sale
of a division........................ -- (591) (662)
Other................................. (44,514) (15,674) (6,404)
----------- ----------- -----------
(3,604,134) (3,629,558) (2,633,112)
----------- ----------- -----------
Net cash used in investing activities... (17,352) (108,709) (378,026)
Financing Activities
Issuance (repayment) of short-term
intercompany notes payable............. $ (6,979) $ 16,400 $ --
Capital contribution.................... -- 153 --
Dividends to stockholder................ (120,000) (62,000) (20,000)
----------- ----------- -----------
Net cash used in financing activities... (126,979) (45,447) (20,000)
----------- ----------- -----------
Increase (decrease) in cash and short-
term investments....................... 59,350 (26,798) (29,115)
Cash and short-term investments at
beginning of year...................... 23,939 50,737 79,852
----------- ----------- -----------
Cash and short-term investments at end
of year................................ $ 83,289 $ 23,939 $ 50,737
=========== =========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS
(Dollars in thousands)
December 31, 1998
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 ("First
AUSA"), which, in turn, is a wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"). AEGON is an indirect wholly-owned subsidiary of AEGON N.V., a
holding company organized under the laws of The Netherlands.
In connection with the sale of certain affiliated business units, the
Company has assumed various blocks of business from these former affiliates
through mergers. In addition, the Company has canceled or entered into several
coinsurance and reinsurance agreements with affiliates and non-affiliates. The
following is a description of those transactions:
. During 1996, the Company sold its North Richland Hills, Texas health
administrative operations known as The Insurance Center. The transaction
resulted in the transfer of substantially all employees and office
facilities to United Insurance Companies, Inc. ("UICI"). All inforce
business will continue to be shared by UICI and the Company and its
affiliates through the existing coinsurance agreements. After a short
transition period, all new business produced by United Group Association,
an independent insurance agency, will be written by the insurance
subsidiaries of UICI and will not be shared with the Company and its
affiliates through coinsurance arrangements. As a result of the sale,
during 1996 the Company transferred $123 in assets, substantially all of
which was cash, and $70 of liabilities. The difference between the assets
and liabilities of $(53) plus a tax credit of $19 was charged directly to
unassigned surplus. During 1997, the Company transferred $591 in assets,
substantially all of which was cash and $343 of liabilities. The difference
between the assets and liabilities of $(248) net of a tax credit of $87 was
charged directly to unassigned surplus.
. On January 1, 1994, the Company entered into an agreement with a non-
affiliate reinsurer to annually increase reinsurance ceded (primarily group
health business) by 2 1/2% through 1997. As a result, during 1996, the
Company transferred $5,991 in assets, including $5,812 of cash and short-
term investments and liabilities of $6,146. The difference between the
assets and liabilities of $155, plus a tax credit of $266 was credited
directly to unassigned surplus. During 1997, the Company transferred $5,045
in assets, including $4,826 of cash and short-term investments, and
liabilities of $5,164. The difference between the assets and liabilities of
$119 plus a tax credit of $270 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.
During 1996, the Company paid $539 in association with this sale; the
payment, net of a tax credit of $189, was charged directly to unassigned
surplus. In addition, the Company received 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
1996, the Company received $45 for ceding commissions; the commissions net
of the related tax effect of $(16) were charged directly to unassigned
surplus. Also, during 1996, the Company paid $539 in association with this
sale; this payment, net of a tax credit of $189, was charged directly to
unassigned surplus. In 1997,
6
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(Continued)
the Company received $8 for ceding commissions; the commissions net of the
related tax effect of $3 were credited directly to unassigned surplus.
. During 1997, the Company entered into a reinsurance agreement with a non-
affiliate. As a result of the agreement, the Company received $1,480 of
assets, including $1,477 of cash and short-term securities, and $861 of
liabilities. The difference between the assets and liabilities of $619, net
of a tax effect of $217 was credited directly to unassigned surplus.
Nature of Business
The Company sells individual non-participating whole life, endowment and
term contracts, as well as a broad line of single fixed and flexible premium
annuity products. In addition, the Company offers group life, universal life,
and individual and specialty health coverages. The Company is licensed in 49
states and the District of Columbia. Sales of the Company's products are
primarily through the Company's agents and financial institutions.
Basis of Presentation
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Significant estimates and assumptions are utilized in the calculation of
aggregate policy reserves, policy and contract claim reserves, guaranty fund
assessment accruals and valuation allowances on investments. It is reasonably
possible that actual experience could differ from the estimates and
assumptions utilized which could have a material impact on the financial
statements.
The accompanying financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Insurance Division,
Department of Commerce, of the State of Iowa ("Insurance Department"), which
practices differ in some respects from generally accepted accounting
principles. The more significant of these differences are as follows: (a)
bonds are generally reported at amortized cost rather than segregating the
portfolio into held-to-maturity (reported at amortized cost), available-for-
sale (reported at fair value), and trading (reported at fair value)
classifications; (b) acquisition costs of acquiring new business are charged
to current operations as incurred rather than deferred and amortized over the
life of the policies; (c) policy reserves on traditional life products are
based on statutory mortality rates and interest which may differ from reserves
based on reasonable assumptions of expected mortality, interest, and
withdrawals which include a provision for possible unfavorable deviation from
such assumptions; (d) policy reserves on certain investment products use
discounting methodologies based on statutory interest rates rather than full
account values; (e) reinsurance amounts are netted against the corresponding
asset or liability rather than shown as gross amounts on the balance sheet;
(f) deferred income taxes are not provided for the difference between the
financial statement and income tax bases of assets and liabilities; (g) net
realized gains or losses attributed to changes in the level of interest rates
in the market are deferred and amortized over the remaining life of the bond
or mortgage loan, rather than recognized as gains or losses in the statement
of operations when the sale is completed; (h) potential declines in the
estimated realizable value of investments are provided for through the
establishment of a formula-determined statutory investment reserve (reported
as a liability), changes to which are charged directly to surplus, rather than
through recognition in the statement of operations for declines in value, when
such declines are judged to be other than temporary; (i) certain assets
designated as "non-admitted assets" have been charged to surplus rather than
being reported as assets; (j) revenues for universal life and investment
products
7
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(Continued)
consist of premiums received rather than policy charges for the cost of
insurance, policy administration charges, amortization of policy initiation
fees and surrender charges assessed; (k) pension expense is recorded as
amounts are paid; (l) adjustments to federal income taxes of prior years are
charged or credited directly to unassigned surplus, rather than reported as a
component of expense in the statement of operations; (m) gains or losses on
dispositions of business are charged or credited directly to unassigned
surplus rather than being reported in the statement of operations; and (n) a
liability is established for "unauthorized reinsurers" and changes in this
liability are charged or credited directly to unassigned surplus. The effects
of these variances have not been determined by the Company but are presumed to
be material.
In 1998, the National Association of Insurance Commissioners ("NAIC")
adopted codified statutory accounting principles ("Codification").
Codification 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.
Codification will require adoption by the various states before it becomes the
prescribed statutory basis of accounting for insurance companies domesticated
within those states. Accordingly, before Codification becomes effective for
the Company, the State of Iowa must adopt Codification as the prescribed basis
of accounting on which domestic insurers must report their statutory-basis
results to the Insurance Department. At this time, it is unclear whether the
State of Iowa will adopt Codification. However, based on current guidance,
management believes that the impact of Codification will not be material to
the Company's statutory-basis financial statements.
Cash and Cash Equivalents
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 cash equivalents.
Investments
Investments in bonds (except those to which the Securities Valuation Office
of the NAIC has ascribed a value), mortgage loans on real estate and short-
term investments are reported at cost adjusted for amortization of premiums
and accrual of discounts. Amortization is computed using methods which result
in a level yield over the expected life of the investment. The Company reviews
its prepayment assumptions on mortgage and other asset-backed securities at
regular intervals and adjusts amortization rates retrospectively when such
assumptions are changed due to experience and/or expected future patterns.
Investments in preferred stocks in good standing are reported at cost.
Investments in preferred stocks not in good standing are reported at the lower
of cost or market. Common stocks of unaffiliated and affiliated companies,
which includes shares of mutual funds and real estate investment trusts, are
carried at market value. Real estate is reported at cost less allowances for
depreciation. Depreciation is computed principally by the straight-line
method. Policy loans are reported at unpaid principal. Other invested assets
consist principally of investments in various joint ventures and are recorded
at equity in underlying net assets. Other "admitted assets" are valued,
principally at cost, as required or permitted by Iowa Insurance Laws.
Net realized capital gains and losses are determined on the basis of
specific identification and are recorded net of related federal income taxes.
The Asset Valuation Reserve ("AVR") is established by the Company to provide
for potential losses in the event of default by issuers of certain invested
assets. These amounts are determined using a formula prescribed by the NAIC
and are reported as a liability. The formula for the AVR provides for a
corresponding adjustment for realized gains and losses. Under
8
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(Continued)
a formula prescribed by the NAIC, the Company defers, in the Interest
Maintenance Reserve ("IMR"), the portion of realized gains and losses on sales
of fixed income investments, principally bonds and mortgage loans,
attributable to changes in the general level of interest rates and amortizes
those deferrals over the remaining period to maturity of the security.
Interest income is recognized on an accrual basis. The Company does not
accrue income on bonds in default, mortgage loans on real estate in default
and/or foreclosure or which are delinquent more than twelve months, or on real
estate where rent is in arrears for more than three months. Further, income is
not accrued when collection is uncertain. At December 31, 1998, 1997 and 1996,
the Company excluded investment income due and accrued of $102, $177 and
$1,541, respectively, with respect to such practices.
The Company uses interest rate swaps and caps as part of its overall
interest rate risk management strategy for certain life insurance and annuity
products. The Company entered into several interest rate swap contracts to
modify the interest rate characteristics of the underlying liabilities. The
net interest effect of such swap transactions is reported as an adjustment of
interest income from the hedged items as incurred.
The Company has entered into an interest rate cap agreement to hedge the
exposure of changing interest rates. The cash flows from the interest rate cap
will help offset losses that might occur from changes in interest rates. The
cost of such agreement is included in interest expense ratably during the life
of the agreement. Income received as a result of the cap agreement will be
recognized in investment income as earned. Unamortized cost of the agreements
is included in other invested assets.
Aggregate Policy Reserves
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables based on
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 Premium 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 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 reserves plus net unearned
premiums and the present value of amounts not yet due on both reported and
unreported claims.
9
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(Continued)
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 Accounts
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 accounts are valued at
market. Income and gains and losses with respect to the assets in the separate
accounts accrue to the benefit of the policyholders and, accordingly, the
operations of the separate accounts are not included in the accompanying
financial statements. The separate accounts do not have any minimum guarantees
and the investment risks associated with market value changes are borne
entirely by the policyholders. The Company received variable contract premiums
of $345,319, $281,095 and $227,864 in 1998, 1997 and 1996, respectively. All
variable account contracts are subject to discretionary withdrawal by the
policyholder at the market value of the underlying assets less the current
surrender charge.
Stock Option Plan
AEGON N.V. sponsors a stock option plan for eligible employees of the
Company. Under this plan, certain employees have indicated a preference to
immediately sell shares received as a result of their exercise of the stock
options; in these situations, AEGON N.V. has settled such options in cash
rather than issuing stock to these employees. These cash settlements are paid
by the Company, and AEGON N.V. subsequently reimburses the Company for such
payments. Under statutory accounting principles, the Company does not record
any expense related to this plan, as the expense is recognized by AEGON N.V.
However, the Company is allowed to record a deduction in the consolidated tax
return filed by the Company and certain affiliates. The tax benefit of this
deduction has been credited directly to surplus.
Reclassifications
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform to the 1998 presentation.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard ("SFAS") No. 107, Disclosures
about Fair Value of Financial Instruments, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
statutory-basis balance sheet, for which it is practicable to estimate that
value. SFAS No. 119, Disclosures about Derivative Financial Instruments and
Fair Value of Financial Instruments, requires additional disclosure about
derivatives. 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. SFAS No. 107 and No. 119 exclude
certain financial instruments and all nonfinancial instruments from their
disclosure requirements and allow companies to forego the
10
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(Continued)
disclosures when those estimates can only be made at excessive cost.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and 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, including affiliated mutual funds
and real estate investment trusts, are based on quoted market prices.
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 is 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.
Interest rate cap and interest rate swaps: Estimated fair value of the
interest rate cap is based upon the latest quoted market price. Estimated
fair value of interest rate swaps are based upon the pricing differential
for similar swap agreements.
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.
11
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(Continued)
The following sets forth a comparison of the fair values and carrying values
of the Company's financial instruments subject to the provisions of SFAS No.
107 and No. 119:
<TABLE>
<CAPTION>
December 31
-------------------------------------------
1998 1997
--------------------- ---------------------
Carrying Carrying
Value Fair Value Value Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Admitted Assets
Cash and short-term investments.... $ 83,289 $ 83,289 $ 23,939 $ 23,939
Bonds.............................. 4,822,442 4,900,516 4,913,144 5,046,527
Preferred stocks................... 14,754 14,738 2,750 8,029
Common stocks...................... 49,448 49,448 42,345 42,345
Affiliated common stock............ 5,613 5,613 8,031 8,031
Mortgage loans on real estate...... 1,012,433 1,089,315 935,207 983,720
Policy loans....................... 60,058 60,058 57,136 57,136
Interest rate cap.................. 4,445 725 5,618 1,513
Interest rate swaps................ 1,916 6,667 -- 2,546
Separate account assets............ 3,348,611 3,348,611 2,517,365 2,517,365
Liabilities
Investment contract liabilities.... 4,084,683 4,017,509 4,345,181 4,283,461
Separate account liabilities....... 3,271,005 3,213,251 2,452,205 2,452,205
</TABLE>
3. INVESTMENTS
The carrying value and estimated fair value of investments in debt securities
were as follows:
<TABLE>
<CAPTION>
Gross Gross
Carrying Unrealized Unrealized Estimated
Value Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1998
Bonds:
United States Government and
agencies........................ $ 150,085 $ 2,841 $ 321 $ 152,605
State, municipal and other
government...................... 62,948 918 1,651 62,215
Public utilities................. 139,732 5,053 2,555 142,230
Industrial and miscellaneous..... 2,068,086 78,141 34,493 2,111,734
Mortgage and other asset-backed
securities...................... 2,401,591 45,185 15,044 2,431,732
---------- -------- ------- ----------
4,822,442 132,138 54,064 4,900,516
Preferred stocks................... 14,754 75 91 14,738
---------- -------- ------- ----------
$4,837,196 $132,213 $54,155 $4,915,254
========== ======== ======= ==========
</TABLE>
12
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(Continued)
<TABLE>
<CAPTION>
Gross Gross
Carrying Unrealized Unrealized Estimated
Value Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1997
Bonds:
United States Government and
agencies........................ $ 188,241 $ 2,562 $ 21 $ 190,782
State, municipal and other
government...................... 61,532 2,584 1,774 62,342
Public utilities................. 121,582 5,384 2,952 124,014
Industrial and miscellaneous..... 1,955,587 85,233 7,752 2,033,068
Mortgage and other asset-backed
securities...................... 2,586,202 55,382 5,263 2,636,321
---------- -------- ------- ----------
4,913,144 151,145 17,762 5,046,527
Preferred stocks................... 2,750 5,279 -- 8,029
---------- -------- ------- ----------
$4,915,894 $156,424 $17,762 $5,054,556
========== ======== ======= ==========
</TABLE>
The carrying value and estimated fair value of bonds at December 31, 1998,
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............................... $ 151,747 $ 148,410
Due after one year through five years................. 1,211,064 1,232,329
Due after five years through ten years................ 753,543 761,787
Due after ten years................................... 304,497 326,258
---------- ----------
2,420,851 2,468,784
Mortgage and other asset-backed securities............ 2,401,591 2,431,732
---------- ----------
$4,822,442 $4,900,516
========== ==========
</TABLE>
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Interest on bonds and notes......................... $374,478 $373,496 $364,356
Dividends on equity investments..................... 1,357 1,460 1,436
Interest on mortgage loans.......................... 77,960 80,266 69,418
Rental income on real estate........................ 6,553 7,501 9,526
Interest on policy loans............................ 4,080 3,400 3,273
Other investment income............................. 2,576 613 1,799
-------- -------- --------
Gross investment income............................. 467,004 466,736 449,808
Investment expenses................................. 20,020 20,312 21,471
-------- -------- --------
Net investment income............................... $446,984 $446,424 $428,337
======== ======== ========
</TABLE>
13
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(Continued)
Proceeds from sales and maturities of debt securities and related gross
realized gains and losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Proceeds.................................... $3,347,174 $3,284,095 $2,112,831
========== ========== ==========
Gross realized gains........................ $ 48,760 $ 30,094 $ 19,876
Gross realized losses....................... (8,072) (17,265) (19,634)
---------- ---------- ----------
Net realized gains.......................... $ 40,688 $ 12,829 $ 242
========== ========== ==========
</TABLE>
At December 31, 1998, investments with an aggregate carrying value of
$5,935,160 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.
Realized investment gains (losses) and changes in unrealized gains (losses)
for investments are summarized below:
<TABLE>
<CAPTION>
Realized
---------------------------
Year Ended December 31
---------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Debt securities................................... $ 40,688 $ 12,829 $ 242
Short-term investments............................ 1,533 (19) (197)
Equity securities................................. (879) 6,972 1,798
Mortgage loans on real estate..................... 12,637 2,252 (5,530)
Real estate....................................... 3,176 4,252 1,210
Other invested assets............................. (2,523) 1,632 12
-------- -------- -------
54,632 27,918 (2,465)
Tax effect........................................ (22,290) (10,572) (1,235)
Transfer to interest maintenance reserve.......... (28,944) (10,187) 197
-------- -------- -------
Net realized gains (losses)....................... $ 3,398 $ 7,159 $(3,503)
======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
Change in Unrealized
---------------------------
Year Ended December 31
---------------------------
1998 1997 1996
-------- ------- ---------
<S> <C> <C> <C>
Debt securities.................................. $(60,604) $40,289 $(115,867)
Equity securities................................ 5,750 5,653 2,929
-------- ------- ---------
Change in unrealized appreciation
(depreciation).................................. $(54,854) $45,942 $(112,938)
======== ======= =========
</TABLE>
Gross unrealized gains and gross unrealized losses on equity securities were
as follows:
<TABLE>
<CAPTION>
December 31
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Unrealized gains..................................... $15,980 $10,356 $ 9,590
Unrealized losses.................................... (3,710) (3,836) (8,723)
------- ------- -------
Net unrealized gains................................. $12,270 $ 6,520 $ 867
======= ======= =======
</TABLE>
14
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(Continued)
During 1998, the Company issued mortgage loans with interest rates ranging
from 5.88% to 7.86%. The maximum percentage of any one mortgage loan to the
value of the underlying real estate at origination was 90% for commercial
loans and 95% for residential loans. Mortgage loans with a carrying value of
$245 were non-income producing for the previous twelve months. Accrued
interest of $89 related to these mortgage loans was excluded from investment
income. The Company requires all mortgaged properties to carry fire insurance
equal to the value of the underlying property.
At December 31, 1998 and 1997, the Company held a mortgage loan loss reserve
in the asset valuation reserve of $16,104 and $11,985, respectively. The
mortgage loan portfolio is diversified by geographic region and specific
collateral property type as follows:
Geographic Distribution
<TABLE>
<CAPTION>
December 31
-------------
1998 1997
----- -----
<S> <C> <C>
South Atlantic............................ 32% 29%
E. North Central.......................... 16 12
Pacific................................... 15 15
Mountain.................................. 10 10
Middle Atlantic........................... 10 7
W. South Central.......................... 6 9
W. North Central.......................... 5 6
E. South Central.......................... 3 8
New England............................... 3 4
</TABLE>
Property Type Distribution
<TABLE>
<CAPTION>
December 31
-------------
1998 1997
----- -----
<S> <C> <C>
Retail.................................... 35% 35%
Office.................................... 30 31
Industrial................................ 21 6
Apartment................................. 12 14
Other..................................... 2 14
</TABLE>
At December 31, 1998, the Company had no 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.
The Company utilizes a variety of off-balance sheet financial instruments as
part of its efforts to hedge and manage fluctuations in the market value of
its investment portfolio attributable to changes in general interest rate
levels and to manage duration mismatch of assets and liabilities. These
instruments include interest rate exchange agreements (swaps and caps),
options, and commitments to extend credit and all involve elements of credit
and market risks in excess of the amounts recognized in the accompanying
financial statements at a given point in time. The contract or notional
amounts of those instruments reflect the extent of involvement in the various
types of financial instruments.
The Company's exposure to credit risk is the risk of loss from a
counterparty failing to perform according to the terms of the contract. That
exposure includes settlement risk (i.e., the risk that the
15
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(Continued)
counterparty defaults after the Company has delivered funds or securities
under terms of the contract) that would result in an accounting loss and
replacement cost risk (i.e., the cost to replace the contract at current
market rates should the counterparty default prior to settlement date). Credit
loss exposure resulting from nonperformance by a counterparty for commitments
to extend credit is represented by the contractual amounts of the instruments.
At December 31, 1998 and 1997, the Company's outstanding financial
instruments with on and off-balance sheet risks, shown in notional amounts,
are summarized as follows:
<TABLE>
<CAPTION>
Notional Amount
-----------------
1998 1997
-------- --------
<S> <C> <C>
Derivative securities:
Interest rate swaps:
Receive fixed--pay floating............................... $100,000 $100,000
Receive floating (uncapped)--pay floating (capped)........ 53,011 67,229
Receive floating (LIBOR)--pay floating (S&P).............. 60,000 --
Interest rate cap agreements................................ 500,000 500,000
</TABLE>
4. 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>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Direct premiums............................. $1,533,822 $1,312,446 $1,457,450
Reinsurance assumed......................... 2,366 2,038 1,796
Reinsurance ceded........................... (173,564) (246,372) (300,546)
---------- ---------- ----------
Net premiums earned......................... $1,362,624 $1,068,112 $1,158,700
========== ========== ==========
</TABLE>
The Company received reinsurance recoveries in the amount of $173,297,
$183,638 and $168,155 during 1998, 1997 and 1996, respectively. At December
31, 1998 and 1997, estimated amounts recoverable from reinsurers that have
been deducted from policy and contract claim reserves totaled $47,956 and
$60,437, respectively. The aggregate reserves for policies and contracts were
reduced for reserve credits for reinsurance ceded at December 31, 1998 and
1997 of $2,163,905 and $2,434,130, respectively.
At December 31, 1998, amounts recoverable from unauthorized reinsurers of
$55,379 (1997--$73,080) and reserve credits for reinsurance ceded of $49,835
(1997--$78,838) were associated with a single reinsurer and its affiliates.
The Company holds collateral under these reinsurance agreements in the form of
trust agreements totaling $106,226 at December 31, 1998 that can be drawn on
for amounts that remain unpaid for more than 120 days.
16
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(Continued)
5. 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.
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to gain from operations before federal
income tax expense and net realized capital gains (losses) on investments for
the following reasons:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Computed tax at federal statutory rate (35%)......... $39,177 $42,775 $37,256
Tax reserve adjustment............................... 607 2,004 2,211
Excess tax depreciation.............................. (223) (392) (384)
Deferred acquisition costs--tax basis................ 11,827 4,308 5,583
Prior year under (over) accrual...................... 1,750 (1,016) (499)
Dividend received deduction.......................... (1,053) (941) (454)
Charitable contribution.............................. -- (848) --
Other items--net..................................... (2,250) (2,509) (2,536)
------- ------- -------
Federal income tax expense........................... $49,835 $43,381 $41,177
======= ======= =======
</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, 1998). 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 1987.
During 1996, there was a $5,025 prior period adjustment to the tax accrual.
This included a $2,100 writeoff of an intangible asset for tax purposes, and a
federal income tax refund of $1,829 for tax years 1984 through 1986 and
related interest of $1,686, net of a tax effect of $590. An examination is
underway for years 1993 through 1995.
6. POLICY AND CONTRACT ATTRIBUTES
A portion of the Company's policy reserves and other policyholders' funds
(including separate account liabilities) relates to liabilities established on
a variety of the Company's products that are not subject to significant
mortality or morbidity risk; however, there may be certain restrictions placed
upon
17
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(Continued)
the amount of funds that can be withdrawn without penalty. The amount of
reserves on these products, by withdrawal characteristics, are summarized as
follows:
<TABLE>
<CAPTION>
December 31
-------------------------------------
1998 1997
------------------ ------------------
Percent Percent
of of
Amount Total Amount Total
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal with
market value adjustment................. $ 82,048 1% $ 8,912 0%
Subject to discretionary withdrawal at
book value less surrender charge........ 515,778 5 755,300 8
Subject to discretionary withdrawal at
market value............................ 3,211,896 34 2,454,845 27
Subject to discretionary withdrawal at
book value (minimal or no charges or
adjustments)............................ 5,519,265 58 5,821,049 63
Not subject to discretionary withdrawal
provision............................... 228,030 2 203,522 2
---------- --- ---------- ---
9,557,017 100% 9,243,628 100%
Less reinsurance ceded................... 2,124,769 2,372,495
---------- ----------
Total policy reserves on annuities and
deposit fund liabilities................ $7,432,248 $6,871,134
========== ==========
</TABLE>
A reconciliation of the amounts transferred to and from the separate accounts
is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Transfers as reported in the summary of operations
of the separate accounts statement:
Transfers to separate accounts.................... $345,319 $281,095 $227,864
Transfers from separate accounts.................. 79,808 9,819 75,172
-------- -------- --------
Net transfers to separate accounts.................. 265,511 271,276 152,692
Reconciling adjustments--charges for investment
management, administration fees and contract
guarantees......................................... 191 26,204 19,093
-------- -------- --------
Transfers as reported in the summary of operations
of the life, accident and health annual statement.. $265,702 $297,480 $171,785
======== ======== ========
</TABLE>
18
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(Continued)
Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next
anniversary date. At December 31, 1998 and 1997, these assets (which are
reported as premiums deferred and uncollected) and the amounts of the related
gross premiums and loadings, are as follows:
<TABLE>
<CAPTION>
Gross Loading Net
------- ------- -------
<S> <C> <C> <C>
December 31, 1998
Life and annuity:
Ordinary direct first year business................ $ 3,346 $2,500 $ 846
Ordinary direct renewal business................... 21,435 6,365 15,070
Group life direct business......................... 1,171 536 635
Reinsurance ceded.................................. (1,367) (44) (1,323)
------- ------ -------
24,585 9,357 15,228
Accident and health:
Direct............................................. 108 -- 108
Reinsurance ceded.................................. (18) -- (18)
------- ------ -------
Total accident and health............................ 90 -- 90
------- ------ -------
$24,675 $9,357 $15,318
======= ====== =======
December 31, 1997
Life and annuity:
Ordinary direct first year business................ $ 2,316 $1,698 $ 618
Ordinary direct renewal business................... 22,724 6,834 15,890
Group life direct business......................... 1,523 646 877
Reinsurance ceded.................................. (1,464) (81) (1,383)
------- ------ -------
25,099 9,097 16,002
Accident and health:
Direct............................................. 148 -- 148
Reinsurance ceded.................................. (49) -- (49)
------- ------ -------
Total accident and health............................ 99 -- 99
------- ------ -------
$25,198 $9,097 $16,101
======= ====== =======
</TABLE>
At December 31, 1998 and 1997, the Company had insurance in force
aggregating $44,233 and $69,271, respectively, in which the gross premiums are
less than the net premiums required by the standard valuation standards
established by the Insurance Division, Department of Commerce, of the State of
Iowa. The Company established policy reserves of $998 and $1,128 to cover
these deficiencies at December 31, 1998 and 1997, respectively.
7. DIVIDEND RESTRICTIONS
The Company is subject to limitations, imposed by the State of Iowa, on the
payment of dividends to its parent company. Generally, dividends during any
twelve-month period may not be paid, without prior regulatory approval, in
excess of the greater of (a) 10 percent of statutory capital and surplus as of
the preceding December 31, or (b) statutory gain from operations for the
preceding year. Subject to
19
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(Continued)
the availability of unassigned surplus at the time of such dividend, the
maximum payment which may be made in 1999, without the prior approval of
insurance regulatory authorities, is $62,100.
The Company paid dividends to its parent of $120,000, $62,000 and $20,000 in
1998, 1997 and 1996, respectively.
8. RETIREMENT AND COMPENSATION PLANS
The Company's employees participate in a qualified benefit pension plan
sponsored by AEGON. The Company has no legal obligation for the plan. The
Company recognizes pension expense equal to its allocation from AEGON. The
pension expense is allocated among the participating companies based on the
FASB No. 87 expense as a percent of salaries. The benefits are based on years
of service and the employee's compensation during the highest five consecutive
years of employment. Pension expense aggregated $380, $422 and $1,056 for the
years ended December 31, 1998, 1997 and 1996, respectively. The plan is
subject to the reporting and disclosure requirements of the Employee
Retirement and Income Security Act of 1974.
The Company's employees also participate in a contributory defined
contribution plan sponsored by AEGON which is qualified under Section 401(k)
of the Internal Revenue Service Code. Employees of the Company who customarily
work at least 1,000 hours during each calendar year and meet the other
eligibility requirements, are participants of the plan. Participants may elect
to contribute up to fifteen percent of their salary to the plan. The Company
will match an amount up to three percent of the participant's salary.
Participants may direct all of their contributions and plan balances to be
invested in a variety of investment options. The plan is subject to the
reporting and disclosure requirements of the Employee Retirement and Income
Security Act of 1974. Expense related to this plan was $233, $226 and $297 for
the years ended December 31, 1998, 1997 and 1996, respectively.
AEGON sponsors supplemental retirement plans to provide the Company's senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory, and benefits are based on years of service and the employee's
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Service Code. In addition, AEGON has established incentive deferred
compensation plans for certain key employees of the Company. AEGON also
sponsors an employee stock option plan for individuals employed at least three
years and a stock purchase plan for its producers, with the participating
affiliated companies establishing their own eligibility criteria, producer
contribution limits and company matching formula. These plans have been
accrued or funded as deemed appropriate by management of AEGON and the
Company.
In addition to pension benefits, the Company participates in plans sponsored
by AEGON that provide postretirement medical, dental and life insurance
benefits to employees meeting certain eligibility requirements. Portions of
the medical and dental plans are contributory. The expenses of the
postretirement plans calculated on the pay-as-you-go basis are charged to
affiliates in accordance with an intercompany cost sharing arrangement. The
Company expensed $62, $62 and $184 for the years ended December 31, 1998, 1997
and 1996, respectively.
9. RELATED PARTY TRANSACTIONS
The Company shares certain offices, employees and general expenses with
affiliated companies.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1998,
1997 and 1996, the Company paid $18,706, $18,705 and $17,028, respectively,
for these services, which approximates their costs to the affiliates.
20
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(Continued)
Payables to affiliates bear interest at the thirty-day commercial paper rate
of 4.95% at December 31, 1998. During 1998, 1997 and 1996, the Company paid
net interest of $1,491, $1,188 and $174, respectively, to affiliates.
During 1997, the Company received a capital contribution of $153 in cash
from its parent.
At December 31, 1998 and 1997, the Company has short-term notes payable to
an affiliate of $9,421 and $16,400, respectively. Interest on these notes
accrues at rates ranging from 5.13% to 5.52% at December 31, 1998 and at 5.60%
at December 31, 1997.
During 1998, the Company issued life insurance policies to certain
affiliated companies, covering the lives of certain employees of those
affiliates. Premiums of $174,000 related to these policies were recognized
during the year, and aggregate reserves for policies and contracts are
$181,720 at December 31, 1998.
10. 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. The
Company has established a reserve of $17,901 and $17,700 and an offsetting
premium tax benefit of $7,631 and $7,984 at December 31, 1998 and 1997,
respectively, for its estimated share of future guaranty fund assessments
related to several major insurer insolvencies. The guaranty fund expense
(benefit) was $1,985, $(975) and $2,617 for December 31, 1998, 1997 and 1996,
respectively.
11. YEAR 2000 (UNAUDITED)
The term Year 2000 issue generally refers to the improper processing of
dates and incorrect date calculations that might occur in computer software
and hardware and embedded systems as the Year 2000 is approached. The use of
computer programs that rely on two-digit date fields to perform computations
and decision-making functions may cause systems to malfunction when processing
information involving dates after 1999. For example, any computer software
that has date-sensitive coding might recognize a code of 00 as the year 1900
rather than the year 2000.
The Company has developed a Year 2000 Project Plan (the "Plan") to address
the Year 2000 issue as it affects the Company's internal IT ("Information
Technology") and non-IT systems, and to assess Year 2000 issues relating to
third parties with whom the Company has critical relationships.
The Plan for addressing internal systems generally includes an assessment of
internal IT and non-IT systems and equipment affected by the Year 2000 issue;
definition of strategies to address affected
21
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(Continued)
systems and equipment; remediation of identified systems and equipment;
internal testing and certification that each internal system is Year 2000
compliant; and a review of existing and revised business resumption and
contingency plans to address potential Year 2000 issues. The Company has
remediated and tested substantially all of its mission-critical internal IT
systems as of December 31, 1998. The Company continues to remediate and test
certain non-critical internal IT systems, internal non-IT systems and will
continue with a revalidation testing program throughout 1999.
The Company's Year 2000 issues are more complex because a number of its
systems interface with other systems not under the Company's control. The
Company's most significant interfaces and uses of third-party vendor systems
are in the bank, financial services and trust areas. The Company utilizes
various banks to handle numerous types of financial and sales transactions.
Several of these banks also provide trustee and custodial services for the
Company's investment holdings and transactions. These services are critical to
a financial services company such as the Company as its business centers
around cash receipts and disbursements to policyholders and the investment of
policyholder funds. The Company has received written confirmation from its
vendor banks regarding their status on Year 2000. The banks indicate their
dedication to resolving any Year 2000 issues related to their systems and
services prior to December 31, 1999. The Company anticipates that a
considerable effort will be necessary to ensure that its corrected or new
systems can properly interface with those business partners with whom it
transmits and receives data and other information (external systems). The
Company has undertaken specific testing regimes with these third-party
business partners and expects to continue working with its business partners
on any interfacing of systems. However, the timing of external system
compliance cannot currently be predicted with accuracy because the
implementation of Year 2000 readiness will vary from one company to another.
The Company does have some exposure to date-sensitive embedded technology
such as micro-controllers, but the Company views this exposure as minimal.
Unlike other industries that may be equipment intensive, like manufacturing,
the Company is a life insurance, and financial services organization providing
insurance annuities and pension products to its customers. As such, the
primary equipment and electronic devices in use are computers and telephone-
related equipment. This type of hardware can have date-sensitive embedded
technology which could have Year 2000 problems. Because of this exposure, the
Company has reviewed its computer hardware and telephone systems, with
assistance from the applicable vendors, and has upgraded, or replaced, or is
in the process of replacing any equipment that will not properly process date-
sensitive data in the Year 2000 or beyond.
For the Company, a reasonably likely worst case scenario might include one
or more of the Company's significant policyholder systems being non-compliant.
Such an event could result in a material disruption of the Company's
operations. Specifically, a number of the Company's operations could
experience an interruption in the ability to collect and process premiums or
deposits, process claim payments, accurately maintain policyholder
information, accurately maintain accounting records, and/or perform adequate
customer service. Should the worst case scenario occur, it could, dependent
upon its duration, have a material impact on the Company's business and
financial condition. Simple failures can be repaired and returned to
production within a matter of hours with no material impact. Unanticipated
failures with a longer service disruption period could have a more serious
impact. For this reason, the Company is placing significant emphasis on risk
management and Year 2000 business resumption contingency planning in 1999 by
modifying its existing business resumption and disaster recovery plans to
address potential Year 2000 issues.
The actions taken by management under the Year 2000 Project Plans are
intended to significantly reduce the Company's risk of a material business
interruption based on the Year 2000 issues. It should
22
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(Continued)
be noted that the Year 2000 computer problem, and its resolution, is complex
and multifaceted, and any company's success cannot be conclusively known until
the Year 2000 is reached. In spite of its efforts or results, the Company's
ability to function unaffected to and through the Year 2000 may be adversely
affected by actions (or failure to act) of third parties beyond our knowledge
or control. It is anticipated that there may be problems that will have to be
resolved in the ordinary course of business on and after the Year 2000.
However, the Company does not believe that the problems will have a material
adverse affect on the Company's operations or financial condition.
23
<PAGE>
PFL LIFE INSURANCE COMPANY
SUMMARY OF INVESTMENTS--OTHER THAN
INVESTMENTS IN RELATED PARTIES
December 31, 1998
(Dollars in thousands)
SCHEDULE I
<TABLE>
<CAPTION>
Amount at Which
Market 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.............. $ 926,370 $ 943,313 $ 926,370
States, municipalities and political
subdivisions.......................... 107,975 114,146 107,975
Foreign governments.................... 54,670 53,950 54,670
Public utilities....................... 139,732 142,230 139,732
All other corporate bonds.............. 3,593,695 3,646,877 3,593,695
Redeemable preferred stock............... 14,754 14,738 14,754
---------- ---------- ----------
Total fixed maturities................... 4,837,196 4,915,254 4,837,196
Equity Securities
Common stocks:
Affiliated entities.................... 8,060 5,613 5,613
Banks, trust and insurance............. 5,935 7,193 7,193
Industrial, miscellaneous and all
other................................. 28,796 42,255 42,255
---------- ---------- ----------
Total equity securities.................. 42,791 55,061 55,061
Mortgage loans on real estate............ 1,012,433 1,012,433
Real estate.............................. 52,381 52,381
Real estate acquired in satisfaction of
debt.................................... 11,778 11,778
Policy loans............................. 60,058 60,058
Other long-term investments.............. 76,482 76,482
Cash and short-term investments.......... 83,289 83,289
---------- ----------
Total investments........................ $6,176,408 $6,188,678
========== ==========
</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.
24
<PAGE>
PFL LIFE INSURANCE COMPANY
SUPPLEMENTARY INSURANCE INFORMATION
(Dollars in thousands)
SCHEDULE III
<TABLE>
<CAPTION>
Future Benefits,
Policy Claims
Benefits Policy and Net Losses and Other
and Unearned Contract Premium Investment Settlement Operating Premiums
Expenses Premiums Liabilities Revenue Income* Expenses Expenses* Written
---------- -------- ----------- ---------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31,
1998
Individual life......... $1,355,283 $ -- $ 8,976 $ 514,194 $ 85,258 $ 545,720 $ 87,455 --
Individual health....... 94,294 9,631 12,123 68,963 8,004 48,144 30,442 $ 68,745
Group life and health... 93,405 10,298 36,908 111,547 11,426 82,690 54,352 108,769
Annuity................. 3,925,293 -- -- 667,920 342,296 592,085 298,222 --
---------- ------- ------- ---------- -------- ---------- --------
$5,468,275 $19,929 $58,007 $1,362,624 $446,984 $1,268,639 $470,471
========== ======= ======= ========== ======== ========== ========
Year Ended December 31,
1997
Individual life......... $ 882,003 $ -- $ 8,550 $ 200,175 $ 75,914 $ 211,921 $ 36,185 --
Individual health....... 62,033 9,207 12,821 63,548 5,934 37,706 29,216 $ 63,383
Group life and health... 88,211 11,892 44,977 146,694 11,888 103,581 91,568 143,580
Annuity................. 4,204,125 -- -- 657,695 352,688 571,434 364,216 --
---------- ------- ------- ---------- -------- ---------- --------
$5,236,372 $21,099 $66,348 $1,068,112 $446,424 $ 924,642 $521,185
========== ======= ======= ========== ======== ========== ========
Year Ended December 31,
1996
Individual life......... $ 734,350 $ -- $ 7,240 $ 202,082 $ 66,538 $ 197,526 $ 38,067 --
Individual health....... 39,219 8,680 13,631 55,871 5,263 32,903 29,511 $ 55,678
Group life and health... 78,418 14,702 53,486 174,781 12,877 105,459 122,953 171,320
Annuity................. 4,408,419 -- -- 725,966 343,659 800,121 230,417 --
---------- ------- ------- ---------- -------- ---------- --------
$5,260,406 $23,382 $74,357 $1,158,700 $428,337 $1,136,009 $420,948
========== ======= ======= ========== ======== ========== ========
</TABLE>
- -------------
* Allocations of net investment income and other operating expenses are based
on a number of assumptions and estimates, and the results would change if
different methods were applied.
25
<PAGE>
PFL LIFE INSURANCE COMPANY
REINSURANCE
(Dollars in thousands)
SCHEDULE IV
<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,
1998
Life insurance in force.. $6,384,095 $438,590 $39,116 $5,984,621 .6%
========== ======== ======= ========== ===
Premiums:
Individual life........ $ 515,164 $ 3,692 $ 2,366 $ 513,838 .5%
Individual health...... 76,438 7,475 -- 68,963 --
Group life and health.. 255,848 144,301 -- 111,547 --
Annuity................ 686,372 18,096 -- 668,276 --
---------- -------- ------- ---------- ---
$1,533,822 $173,564 $ 2,366 $1,362,624 .2%
========== ======== ======= ========== ===
Year Ended December 31,
1997
Life insurance in force.. $5,025,027 $420,519 $35,486 $4,639,994 .8%
========== ======== ======= ========== ===
Premiums:
Individual life........ $ 201,691 $ 3,554 $ 2,038 $ 200,175 1.0%
Individual health...... 73,593 10,045 -- 63,548 --
Group life and health.. 339,269 192,575 -- 146,694 --
Annuity................ 697,893 40,198 -- 657,695 --
---------- -------- ------- ---------- ---
$1,312,446 $246,372 $ 2,038 $1,068,112 .2%
========== ======== ======= ========== ===
Year Ended December 31,
1996
Life insurance in force.. $4,863,416 $477,112 $30,685 $4,416,989 .7%
========== ======== ======= ========== ===
Premiums:
Individual life........ $ 204,144 $ 3,858 $ 1,796 $ 202,082 .9%
Individual health...... 68,699 12,828 -- 55,871 --
Group life and health.. 390,296 215,515 -- 174,781 --
Annuity................ 794,311 68,345 -- 725,966 --
---------- -------- ------- ---------- ---
$1,457,450 $300,546 $ 1,796 $1,158,700 .2%
========== ======== ======= ========== ===
</TABLE>
26
<PAGE>
Financial Statements
The Fidelity Variable Annuity Account -
Fidelity Income Plus
Year ended December 31, 1998
with Report of Independent Auditors
<PAGE>
The Fidelity Variable Annuity Account -
Fidelity Income Plus
Financial Statements
Year ended December 31, 1998
Contents
Report of Independent Auditors ............................................ 1
Financial Statements
Balance Sheet ............................................................. 2
Statement of Operations ................................................... 6
Statements of Changes in Contract Owners' Equity ..........................10
Notes to Financial Statements .............................................15
<PAGE>
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 subaccounts of The
Fidelity Variable Annuity Account, which are available for investment by
Fidelity Income Plus contract owners, as of December 31, 1998, and the related
statements of operations for the year then ended and 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 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. Our procedures included
confirmation of mutual fund shares owned as of December 31, 1998, 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 the subaccounts of The Fidelity
Variable Annuity Account, which are available for investment by Fidelity Income
Plus contract owners, at December 31, 1998, and the results of its operations
for the year then ended and changes in its contract owners' equity for each of
the two years in the period then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Des Moines, Iowa
January 29, 1999
1
<PAGE>
The Fidelity Variable Annuity Account -
Fidelity Income Plus
Balance Sheet
December 31, 1998
<TABLE>
<CAPTION>
Money
Market
Total Subaccount
------------------------------------------
<S> <C> <C>
Assets
Cash $ 290 $ 253
Investments in mutual funds, at current market value:
Variable Insurance Products Fund:
Money Market Portfolio 114,532,318 114,532,318
High Income Portfolio 44,587,218 -
Equity Income Portfolio 202,962,852 -
Growth Portfolio 180,576,780 -
Overseas Portfolio 33,100,396 -
Variable Insurance Products Fund II:
Investment Grade Bond Portfolio 23,471,161 -
Asset Manager Portfolio 76,432,798 -
Asset Manager Growth Portfolio 9,128,936 -
Contrafund Portfolio 52,214,646 -
Index 500 Portfolio 61,684,597 -
Variable Insurance Products Fund III:
Growth Opportunities Portfolio 9,368,676 -
Growth & Income Portfolio 19,036,309 -
Balanced Portfolio 2,048,112 -
Fidelity Daily Income Trust 293,564 -
Fidelity Capital and Income Fund 140,520 -
Fidelity Cash Reserves Portfolio 83,900 -
------------------------------------------
Total investments in mutual funds 829,662,783 114,532,318
------------------------------------------
Total assets $829,663,073 $114,532,571
==========================================
Liabilities and contract owners' equity
Liabilities:
Contract terminations payable $ 453 $ -
------------------------------------------
453 -
Contract owners' equity:
Deferred annuity contracts terminable by owners 829,662,620 114,532,571
------------------------------------------
Total liabilities and contract owners' equity $829,663,073 $114,532,571
==========================================
</TABLE>
See accompanying notes.
2
<PAGE>
<TABLE>
<CAPTION>
Equity
High Income Income Growth Overseas
Subaccount Subaccount Subaccount Subaccount
---------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash $ -- $ 1 $ -- $ 9
Investments in mutual funds, at current market value:
Variable Insurance Products Fund:
Money Market Portfolio -- -- -- --
High Income Portfolio 44,587,218 -- -- --
Equity Income Portfolio -- 202,962,852 -- --
Growth Portfolio -- -- 180,576,780 --
Overseas Portfolio -- -- -- 33,100,396
Variable Insurance Products Fund II:
Investment Grade Bond Portfolio -- -- -- --
Asset Manager Portfolio -- -- -- --
Asset Manager Growth Portfolio -- -- -- --
Contrafund Portfolio -- -- -- --
Index 500 Portfolio -- -- -- --
Variable Insurance Products Fund III:
Growth Opportunities Portfolio -- -- -- --
Growth & Income Portfolio -- -- -- --
Balanced Portfolio -- -- -- --
Fidelity Daily Income Trust -- -- -- --
Fidelity Capital and Income Fund -- -- -- --
Fidelity Cash Reserves Portfolio -- -- -- --
---------------------------------------------------------
Total investments in mutual funds 44,587,218 202,962,852 180,576,780 33,100,396
---------------------------------------------------------
Total assets $ 44,587,218 $202,962,853 $180,576,780 $ 33,100,405
=========================================================
Liabilities and contract owners' equity
Liabilities:
Contract terminations payable $ 16 $ -- $ 11 $ --
---------------------------------------------------------
16 -- 11 --
Contract owners' equity:
Deferred annuity contracts terminable by owners 44,587,202 202,962,853 180,576,769 33,100,405
---------------------------------------------------------
Total liabilities and contract owners' equity $ 44,587,218 $202,962,853 $180,576,780 $ 33,100,405
=========================================================
<CAPTION>
Investment Asset
Grade Bond Manager
Subaccount Subaccount
----------------------------
<S> <C> <C>
Assets
Cash $ 7 $ --
Investments in mutual funds, at current market value:
Variable Insurance Products Fund:
Money Market Portfolio -- --
High Income Portfolio -- --
Equity Income Portfolio -- --
Growth Portfolio -- --
Overseas Portfolio -- --
Variable Insurance Products Fund II:
Investment Grade Bond Portfolio 23,471,161 --
Asset Manager Portfolio -- 76,432,798
Asset Manager Growth Portfolio -- --
Contrafund Portfolio -- --
Index 500 Portfolio -- --
Variable Insurance Products Fund III:
Growth Opportunities Portfolio -- --
Growth & Income Portfolio -- --
Balanced Portfolio -- --
Fidelity Daily Income Trust -- --
Fidelity Capital and Income Fund -- --
Fidelity Cash Reserves Portfolio -- --
----------------------------
Total investments in mutual funds 23,471,161 76,432,798
----------------------------
Total assets $ 23,471,168 $ 76,432,798
============================
Liabilities and contract owners' equity
Liabilities:
Contract terminations payable $ -- $ 9
----------------------------
-- 9
Contract owners' equity:
Deferred annuity contracts terminable by owners 23,471,168 76,432,789
----------------------------
Total liabilities and contract owners' equity $ 23,471,168 $ 76,432,798
============================
</TABLE>
3
<PAGE>
The Fidelity Variable Annuity Account -
Fidelity Income Plus
Balance Sheet (continued)
Asset Manager
Growth Contrafund
Subaccount Subaccount
--------------------------
Assets
Cash $ 2 $ 18
Investments in mutual funds, at current market value:
Variable Insurance Products Fund:
Money Market Portfolio -- --
High Income Portfolio -- --
Equity Income Portfolio -- --
Growth Portfolio -- --
Overseas Portfolio -- --
Variable Insurance Products Fund II:
Investment Grade Bond Portfolio -- --
Asset Manager Portfolio 9,128,936 --
Asset Manager Growth Portfolio -- 52,214,646
Contrafund Portfolio -- --
Index 500 Portfolio -- --
Variable Insurance Products Fund III:
Growth Opportunities Portfolio -- --
Growth & Income Portfolio -- --
Balanced Portfolio -- --
Fidelity Daily Income Trust -- --
Fidelity Capital and Income Fund -- --
Fidelity Cash Reserves -- --
--------------------------
Total investments in mutual funds 9,128,936 52,214,646
--------------------------
Total assets $ 9,128,938 $52,214,664
==========================
Liabilities and contract owners' equity
Liabilities:
Contract terminations payable $ -- $ --
--------------------------
-- --
Contract owners' equity:
Deferred annuity contracts terminable by owners 9,128,938 52,214,664
--------------------------
Total liabilities and contract owners' equity $ 9,128,938 $52,214,664
==========================
See accompanying notes.
4
<PAGE>
<TABLE>
<CAPTION>
Growth Growth & Fidelity Daily
Index 500 Opportunities Income Balanced Income Trust
Subaccount Subaccount Subaccount Subaccount Subaccount
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Cash $ -- $ -- $ -- $ -- $ --
Investments in mutual funds, at current market value:
Variable Insurance Products Fund:
Money Market Portfolio -- -- -- -- --
High Income Portfolio -- -- -- -- --
Equity Income Portfolio -- -- -- -- --
Growth Portfolio -- -- -- -- --
Overseas Portfolio -- -- -- -- --
Variable Insurance Products Fund II:
Investment Grade Bond Portfolio -- -- -- -- --
Asset Manager Portfolio -- -- -- -- --
Asset Manager Growth Portfolio -- -- -- -- --
Contrafund Portfolio -- -- -- -- --
Index 500 Portfolio 61,684,597 -- -- -- --
Variable Insurance Products Fund III:
Growth Opportunities Portfolio -- 9,368,676 -- -- --
Growth & Income Portfolio -- -- 19,036,309 -- --
Balanced Portfolio -- -- -- 2,048,112 --
Fidelity Daily Income Trust -- -- -- -- 293,564
Fidelity Capital and Income Fund -- -- -- -- --
Fidelity Cash Reserves -- -- -- -- --
---------------------------------------------------------------------
Total investments in mutual funds 61,684,597 9,368,676 19,036,309 2,048,112 293,564
---------------------------------------------------------------------
Total assets $61,684,597 $ 9,368,676 $19,036,309 $ 2,048,112 $ 293,564
=====================================================================
Liabilities and contract owners' equity
Liabilities:
Contract terminations payable $ 6 $ 5 $ 4 $ -- $ 245
---------------------------------------------------------------------
6 5 4 -- 245
Contract owners' equity:
Deferred annuity contracts terminable by owners 61,684,591 9,368,671 19,036,305 2,048,112 293,319
---------------------------------------------------------------------
Total liabilities and contract owners' equity $61,684,597 $ 9,368,676 $19,036,309 $ 2,048,112 $ 293,564
=====================================================================
<CAPTION>
Fidelity Fidelity
Capital and Cash
Income Fund Reserves
Subaccount Subaccount
---------------------------
<S> <C> <C>
Assets
Cash $ -- $ --
Investments in mutual funds, at current market value:
Variable Insurance Products Fund:
Money Market Portfolio -- --
High Income Portfolio -- --
Equity Income Portfolio -- --
Growth Portfolio -- --
Overseas Portfolio -- --
Variable Insurance Products Fund II:
Investment Grade Bond Portfolio -- --
Asset Manager Portfolio -- --
Asset Manager Growth Portfolio -- --
Contrafund Portfolio -- --
Index 500 Portfolio -- --
Variable Insurance Products Fund III:
Growth Opportunities Portfolio -- --
Growth & Income Portfolio -- --
Balanced Portfolio -- --
Fidelity Daily Income Trust -- --
Fidelity Capital and Income Fund 140,520 --
Fidelity Cash Reserves -- 83,900
---------------------------
Total investments in mutual funds 140,520 83,900
---------------------------
Total assets $ 140,520 $ 83,900
===========================
Liabilities and contract owners' equity
Liabilities:
Contract terminations payable $ 65 $ 92
---------------------------
65 92
Contract owners' equity:
Deferred annuity contracts terminable by owners 140,455 83,808
---------------------------
Total liabilities and contract owners' equity $ 140,520 $ 83,900
===========================
</TABLE>
5
<PAGE>
The Fidelity Variable Annuity Account -
Fidelity Income Plus
Statement of Operations
Year ended December 31, 1998
<TABLE>
<CAPTION>
Money
Market
Total Subaccount
-------------------------------
<S> <C> <C>
Net investment income (loss)
Income:
Dividends $ 70,245,053 $ 6,423,449
Expenses:
Administrative fee 243,074 38,024
Mortality and expense risk charge 6,615,000 962,500
-------------------------------
Net investment income (loss) 63,386,979 5,422,925
Net realized and unrealized capital gain (loss) from investments
Net realized capital gain (loss) from sales of investments:
Proceeds from sales 1,001,501,848 310,549,009
Cost of investments sold 950,184,055 310,549,009
-------------------------------
Net realized capital gain (loss) from sales of investments 51,317,793 --
Net change in unrealized appreciation/depreciation of
investments:
Beginning of period 90,346,635 --
End of period 99,956,944 --
-------------------------------
Net change in unrealized appreciation/depreciation of investments
9,610,309 --
Net realized and unrealized capital gain (loss) from investments 60,928,102 --
-------------------------------
Increase (decrease) from operations $ 124,315,081 $ 5,422,925
===============================
</TABLE>
See accompanying notes.
6
<PAGE>
<TABLE>
<CAPTION>
Equity
High Income Income Growth Overseas
Subaccount Subaccount Subaccount Subaccount
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income (loss)
Income:
Dividends $ 7,903,776 $ 15,302,387 $ 19,417,253 $ 2,696,961
Expenses:
Administrative fee 13,584 63,811 48,208 9,101
Mortality and expense risk charge 450,627 1,805,076 1,180,572 284,641
----------------------------------------------------------------
Net investment income (loss) 7,439,565 13,433,500 18,188,473 2,403,219
Net realized and unrealized capital gain (loss) from investments
Net realized capital gain (loss) from sales of investments:
Proceeds from sales 92,881,309 77,766,554 106,985,233 107,662,487
Cost of investments sold 99,275,153 55,465,775 90,673,230 109,237,060
----------------------------------------------------------------
Net realized capital gain (loss) from sales of investments (6,393,844) 22,300,779 16,312,003 (1,574,573)
Net change in unrealized appreciation/depreciation of
investments:
Beginning of period 1,351,233 52,342,315 17,137,120 (616,949)
End of period (1,207,346) 39,156,656 32,381,667 2,463,805
----------------------------------------------------------------
Net change in unrealized appreciation/depreciation of investments (2,558,579) (13,185,659) 15,244,547 3,080,754
Net realized and unrealized capital gain (loss) from investments (8,952,423) 9,115,120 31,556,550 1,506,181
----------------------------------------------------------------
Increase (decrease) from operations $ (1,512,858) $ 22,548,620 $ 49,745,023 $ 3,909,400
================================================================
<CAPTION>
Investment Asset
Grade Bond Manager
Subaccount Subaccount
---------------------------------
<S> <C> <C>
Net investment income (loss)
Income:
Dividends $ 1,107,008 $ 10,341,905
Expenses:
Administrative fee 5,670 27,929
Mortality and expense risk charge 178,247 632,975
---------------------------------
Net investment income (loss) 923,091 9,681,001
Net realized and unrealized capital gain (loss) from investments
Net realized capital gain (loss) from sales of investments:
Proceeds from sales 36,078,574 23,483,503
Cost of investments sold 34,937,335 20,436,195
---------------------------------
Net realized capital gain (loss) from sales of investments 1,141,239 3,047,308
Net change in unrealized appreciation/depreciation of
investments:
Beginning of period 793,238 12,360,535
End of period 329,062 10,030,204
---------------------------------
Net change in unrealized appreciation/depreciation of investments (464,176) (2,330,331)
Net realized and unrealized capital gain (loss) from investments 677,063 716,977
---------------------------------
Increase (decrease) from operations $ 1,600,154 $ 10,397,978
=================================
</TABLE>
7
<PAGE>
The Fidelity Variable Annuity Account -
Fidelity Income Plus
Statement of Operations (continued)
<TABLE>
<CAPTION>
Asset
Manager
Growth Contrafund
Subaccount Subaccount
-------------------------
<S> <C> <C>
Net investment income (loss)
Income:
Dividends $ 1,588,367 $ 2,711,726
Expenses:
Administrative fee 2,566 11,088
Mortality and expense risk charge 89,503 373,386
-------------------------
Net investment income (loss) 1,496,298 2,327,252
Net realized and unrealized capital gain (loss) from investments
Net realized capital gain (loss) from sales of investments:
Proceeds from sales 17,703,702 67,805,956
Cost of investments sold 17,692,214 61,621,381
-------------------------
Net realized capital gain (loss) from sales of investments 11,488 6,184,575
Net change in unrealized appreciation/depreciation of
investments:
Beginning of period 607,443 3,752,020
End of period 796,634 6,663,617
-------------------------
Net change in unrealized appreciation/depreciation of investments 189,191 2,911,597
Net realized and unrealized capital gain (loss) from investments 200,679 9,096,172
-------------------------
Increase (decrease) from operations $ 1,696,977 $11,423,424
=========================
</TABLE>
See accompanying notes.
8
<PAGE>
<TABLE>
<CAPTION>
Growth Growth &
Index 500 Opportunities Income Balanced
Subaccount Subaccount Subaccount Subaccount
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income (loss)
Income:
Dividends $ 2,151,203 $ 421,643 $ 47,731 $ 99,084
Expenses:
Administrative fee 15,055 2,318 4,598 714
Mortality and expense risk charge 469,470 68,776 103,065 16,162
-----------------------------------------------------------
Net investment income (loss) 1,666,678 350,549 (59,932) 82,208
Net realized and unrealized capital gain (loss) from investments
Net realized capital gain (loss) from sales of investments:
Proceeds from sales 109,772,631 13,687,157 28,519,218 8,590,142
Cost of investments sold 101,491,330 13,167,909 27,193,910 8,427,180
-----------------------------------------------------------
Net realized capital gain (loss) from sales of investments 8,281,301 519,248 1,325,308 162,962
Net change in unrealized appreciation/depreciation of
investments:
Beginning of period 2,390,084 157,875 50,738 16,023
End of period 6,193,304 1,013,113 2,078,928 63,206
-----------------------------------------------------------
Net change in unrealized appreciation/depreciation of investments 3,803,220 855,238 2,028,190 47,183
Net realized and unrealized capital gain (loss) from investments 12,084,521 1,374,486 3,353,498 210,145
-----------------------------------------------------------
Increase (decrease) from operations $ 13,751,199 $ 1,725,035 $ 3,293,566 $ 292,353
===========================================================
<CAPTION>
Fidelity Fidelity
Fidelity Daily Capital and Cash
Income Trust Income Fund Reserves
Subaccount Subaccount Subaccount
-----------------------------------------------
<S> <C> <C> <C>
Net investment income (loss)
Income:
Dividends $ 14,773 $ 13,569 $ 4,218
Expenses:
Administrative fee 246 70 92
Mortality and expense risk charge -- -- --
-----------------------------------------------
Net investment income (loss) 14,527 13,499 4,126
Net realized and unrealized capital gain (loss) from investments
Net realized capital gain (loss) from sales of investments:
Proceeds from sales 16,211 70 92
Cost of investments sold 16,211 71 92
-----------------------------------------------
Net realized capital gain (loss) from sales of investments -- (1) --
Net change in unrealized appreciation/depreciation of
investments:
Beginning of period -- 4,960 --
End of period -- (5,906) --
-----------------------------------------------
Net change in unrealized appreciation/depreciation of investments -- (10,866) --
Net realized and unrealized capital gain (loss) from investments -- (10,867) --
-----------------------------------------------
Increase (decrease) from operations $ 14,527 $ 2,632 $ 4,126
===============================================
</TABLE>
9
<PAGE>
The Fidelity Variable Annuity Account -
Fidelity Income Plus
Statements of Changes in Contract Owners' Equity
Years ended December 31, 1998 and 1997, except as noted
<TABLE>
<CAPTION>
Total Money Market Subaccount High Income Subaccount
----------------------------- -------------------------------- ------------------------------
1998 1997 1998 1997 1998 1997
----------------------------- -------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss) $ 63,386,979 $ 48,606,652 $ 5,422,925 $ 5,376,791 $ 7,439,565 $ 4,516,001
Net realized capital gain (loss) 51,317,793 73,971,587 -- -- (6,393,844) 6,136,930
Net change in unrealized
appreciation/depreciation
of investments 9,610,309 23,379,629 -- -- (2,558,579) (1,229,453)
----------------------------- -------------------------------- ------------------------------
Increase (decrease) from operations 124,315,081 145,957,868 5,422,925 5,376,791 (1,512,858) 9,423,478
Contract transactions:
Net contract purchase payments 4,558,147 11,806,899 1,010,818 2,708,017 428,091 775,021
Transfer payments from
(to) other subaccounts
or general account (222,748) 85,262 28,783,991 5,858,356 (13,329,175) (190,946)
Contract terminations,
with-drawals, and other
deductions (135,960,409) (104,275,539) (30,095,485) (29,875,279) (8,103,508) (4,360,469)
----------------------------- -------------------------------- ------------------------------
Increase (decrease)
from contract
transactions (131,625,010) (92,383,378) (300,676) (21,308,906) (21,004,592) (3,776,394)
----------------------------- -------------------------------- ------------------------------
Net increase (decrease)
in contract owners' equity (7,309,929) 53,574,490 5,122,249 (15,932,115) (22,517,450) 5,647,084
Contract owners' equity:
Beginning of period 836,972,549 783,398,059 109,410,322 125,342,437 67,104,652 61,457,568
----------------------------- -------------------------------- ------------------------------
End of period $ 829,662,620 $ 836,972,549 $ 114,532,571 $ 109,410,322 $ 44,587,202 $ 67,104,652
============================= ================================ ==============================
</TABLE>
(1) Commencement of operations, May 1, 1997.
See accompanying notes.
10
<PAGE>
<TABLE>
<CAPTION>
Equity Income Subaccount Growth Subaccount
------------------------------ ----------------------------------
1998 1997 1998 1997
------------------------------ ----------------------------------
Operations:
Net investment income (loss) $ 13,433,500 $ 20,394,268 $ 18,188,473 $ 4,094,344
Net realized capital gain (loss) 22,300,779 22,886,462 16,312,003 15,956,754
Net change in unrealized
appreciation/depreciation
of investments (13,185,659) 12,780,273 15,244,547 9,650,586
------------------------------ ----------------------------------
Increase (decrease) from operations 22,548,620 56,061,003 49,745,023 29,701,684
Contract transactions:
Net contract purchase payments 912,352 1,830,003 513,014 1,190,589
Transfer payments from
(to) other subaccounts
or general account (30,691,127) (14,244,814) 4,734,341 (19,592,463)
Contract terminations,
with-drawals, and other
deductions (33,719,191) (27,682,225) (17,094,869) (13,900,101)
------------------------------ ----------------------------------
Increase (decrease)
from contract
transactions (63,497,966) (40,097,036) (11,847,514) (32,301,975)
------------------------------ ----------------------------------
Net increase (decrease)
in contract owners' equity (40,949,346) 15,963,967 37,897,509 (2,600,291)
Contract owners' equity:
Beginning of period 243,912,199 227,948,232 142,679,260 145,279,551
------------------------------ ----------------------------------
End of period $ 202,962,853 $ 243,912,199 $ 180,576,769 $ 142,679,260
============================== ==================================
<CAPTION>
Investment Grade
Overseas Subaccount Bond Subaccount
---------------------------------- --------------------------------
1998 1997 1998 1997
---------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) $ 2,403,219 $ 2,797,171 $ 923,091 $ 758,440
Net realized capital gain (loss) (1,574,573) 4,909,981 1,141,239 (29,342)
Net change in unrealized
appreciation/depreciation
of investments 3,080,754 (2,727,821) (464,176) 559,505
---------------------------------- --------------------------------
Increase (decrease) from operations 3,909,400 4,979,331 1,600,154 1,288,603
Contract transactions:
Net contract purchase payments 85,443 394,643 28,192 100,125
Transfer payments from
(to) other subaccounts
or general account (605,656) (5,584,328) 6,691,497 3,419,943
Contract terminations,
with-drawals, and other
deductions (3,089,541) (3,294,011) (4,922,209) (1,275,904)
---------------------------------- --------------------------------
Increase (decrease)
from contract
transactions (3,609,754) (8,483,696) 1,797,480 2,244,164
---------------------------------- --------------------------------
Net increase (decrease)
in contract owners' equity 299,646 (3,504,365) 3,397,634 3,532,767
Contract owners' equity:
Beginning of period 32,800,759 36,305,124 20,073,534 16,540,767
---------------------------------- --------------------------------
End of period $ 33,100,405 $ 32,800,759 $ 23,471,168 $ 20,073,534
================================== ================================
</TABLE>
11
<PAGE>
The Fidelity Variable Annuity Account -
Fidelity Income Plus
Statements of Changes in Contract Owners' Equity (continued)
<TABLE>
<CAPTION>
Asset Manager Subaccount Asset Manager Growth Contrafund Subaccount
------------------------------ ------------------------------- ------------------------------
1998 1997 1998 1997 1998 1997
------------------------------ ------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss) $ 9,681,001 $ 8,692,101 $ 1,496,298 $ (97,203) $ 2,327,252 $ 1,124,837
Net realized capital gain (loss) 3,047,308 2,334,468 11,488 2,389,514 6,184,575 9,372,699
Net change in unrealized
appreciation/depreciation
of investments (2,330,331) 3,358,859 189,191 559,775 2,911,597 (741,619)
------------------------------ ------------------------------- ------------------------------
Increase (decrease) from operations 10,397,978 14,385,428 1,696,977 2,852,086 11,423,424 9,755,917
Contract transactions:
Net contract purchase payments 307,454 852,040 108,948 893,953 317,412 1,331,010
Transfer payments from (to)
other subaccounts or
general account (5,374,403) (3,206,963) (7,001,916) 4,720,169 (2,822,321) (3,483,116)
Contract terminations, with-
drawals, and other deductions (10,911,298) (7,174,124) (2,735,976) (763,990) (7,050,777) (9,809,751)
------------------------------ ------------------------------- ------------------------------
Increase (decrease) from contract
transactions (15,978,247) (9,529,047) (9,628,944) 4,850,132 (9,555,686) (11,961,857)
------------------------------ ------------------------------- ------------------------------
Net increase (decrease) in
contract owners' equity (5,580,269) 4,856,381 (7,931,967) 7,702,218 1,867,738 (2,205,940)
Contract owners' equity:
Beginning of period 82,013,058 77,156,677 17,060,905 9,358,687 50,346,926 52,552,866
------------------------------ ------------------------------- ------------------------------
End of period $ 76,432,789 $ 82,013,058 $ 9,128,938 $ 17,060,905 $ 52,214,664 $ 50,346,926
============================== =============================== ==============================
</TABLE>
(1) Commencement of operations, May 1, 1997.
See accompanying notes.
12
<PAGE>
<TABLE>
<CAPTION>
Growth
Index 500 Subaccount Opportunities Subaccount
---------------------------- ---------------------------------
1998 1997 1998 1997(1)
----------------------------- ---------------------------------
Operations:
Net investment income (loss) $ 1,666,678 $ 778,597 $ 350,549 $ (21,984)
Net realized capital gain (loss) 8,281,301 9,240,397 519,248 368,019
Net change in unrealized
appreciation/depreciation
of investments 3,803,220 935,584 855,238 157,875
----------------------------- ---------------------------------
Increase (decrease) from operations 13,751,199 10,954,578 1,725,035 503,910
Contract transactions:
Net contract purchase payments 552,120 1,240,820 77,700 164,096
Transfer payments from (to)
other subaccounts or
general account 4,844,053 18,679,498 3,310,955 5,501,416
Contract terminations, with-
drawals, and other deductions (13,731,771) (5,455,157) (1,441,270) (473,171)
----------------------------- ---------------------------------
Increase (decrease) from contract
transactions (8,335,598) 14,465,161 1,947,385 5,192,341
----------------------------- ---------------------------------
Net increase (decrease) in
contract owners' equity 5,415,601 25,419,739 3,672,420 5,696,251
Contract owners' equity:
Beginning of period 56,268,909 30,849,251 5,696,251 --
----------------------------- ---------------------------------
End of period $ 61,684,591 $ 56,268,990 $ 9,368,671 $ 5,696,251
============================== =================================
Growth & Income
Subaccount Balanced Subaccount
--------------------------------- ------------------------------
1998 1997(1) 1998 1997(1)
--------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) $ (59,932) $ 167,056 $ 82,208 $ (4,311)
Net realized capital gain (loss) 1,325,308 345,112 162,962 57,775
Net change in unrealized
appreciation/depreciation
of investments 2,028,190 50,738 47,183 16,023
--------------------------------- ------------------------------
Increase (decrease) from operations 3,293,566 562,906 292,353 69,487
Contract transactions:
Net contract purchase payments 196,602 299,439 20,000 27,142
Transfer payments from (to)
other subaccounts or
general account 10,536,974 7,067,726 699,990 1,204,834
Contract terminations, with-
drawals, and other deductions (2,788,921) (131,987) (259,649) (6,045)
--------------------------------- ------------------------------
Increase (decrease) from contract
transactions 7,944,655 7,235,178 460,341 1,225,931
--------------------------------- ------------------------------
Net increase (decrease) in
contract owners' equity 11,238,221 7,798,084 752,694 1,295,418
Contract owners' equity:
Beginning of period 7,798,084 -- 1,295,418 --
--------------------------------- ------------------------------
End of period $ 19,036,305 $ 7,798,084 $ 2,048,112 $ 1,295,418
================================= ==============================
</TABLE>
13
<PAGE>
The Fidelity Variable Annuity Account -
Fidelity Income Plus
Statements of Changes in Contract Owners' Equity (continued)
<TABLE>
<CAPTION>
Fidelity Daily Income Fidelity Capital and Fidelity Cash
Trust Subaccount Income Fund Subaccount Reserves Subaccount
-------------------------- ------------------------------ --------------------------
1998 1997 1998 1997 1998 1997
-------------------------- ------------------------------ --------------------------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss) $ 14,527 $ 15,393 $ 13,499 $ 11,214 $ 4,126 $ 3,937
Net realized capital gain (loss) -- -- (1) 2,818 -- --
Net change in unrealized
appreciation/depreciation
of investments -- -- (10,866) 9,304 -- --
-------------------------- ------------------------------ --------------------------
Increase (decrease) from operations 14,527 15,393 2,632 23,336 4,126 3,937
Contract transactions:
Net contract purchase payments -- -- 1 1 -- --
Transfer payments from (to)
other subaccounts or
general account 27 (64,076) 13 7 9 19
Contract terminations, with-
drawals, and other deductions (15,944) (29,585) -- (43,740) -- --
-------------------------- ------------------------------ --------------------------
Increase (decrease) from
contract transactions (15,917) (93,661) 14 (43,732) 9 19
-------------------------- ------------------------------ --------------------------
Net increase (decrease) in
contract owners' equity (1,390) (78,268) 2,646 (20,396) 4,135 3,956
Contract owners' equity:
Beginning of period 294,709 372,977 137,809 158,205 79,673 75,717
-------------------------- ------------------------------ --------------------------
End of period $ 293,319 $ 294,709 $ 140,455 $ 137,809 $ 83,808 $ 79,673
========================== ============================== ==========================
</TABLE>
(1) Commencement of operations, May 1, 1997.
See accompanying notes.
14
<PAGE>
The Fidelity Variable Annuity Account -
Fidelity Income Plus
Notes to Financial Statements
December 31, 1998
1. Organization and Summary of Significant Accounting Policies
Organization
The Fidelity Variable Annuity Account (the "Mutual Fund Account") is a
segregated investment account of PFL Life Insurance Company ("PFL Life"), an
indirect, wholly-owned subsidiary of AEGON N.V., a holding company organized
under the laws of The Netherlands.
The Mutual Fund Account is registered with the Securities Exchange Commission as
a Unit Investment Trust pursuant to provisions of the Investment Company Act of
1940. The Mutual Fund Account consists of sixteen investment subaccounts,
thirteen of which are invested in specified portfolios of Variable Insurance
Products Fund I, II, and III and the remaining three invested in the Fidelity
Daily Income Trust, the Fidelity Capital and Income Fund, and the Fidelity Cash
Reserves Portfolio. Activity in these sixteen investment subaccounts is
available to contract owners of Fidelity Income Plus. Prior to September 25,
1981, the Fidelity Daily Income Trust, the Fidelity Capital and Income Fund, and
the Fidelity Cash Reserves Portfolio were available for investment by contract
owners of the Fidelity Income Plus. Contracts funded by these subaccounts are no
longer offered, and no additional assets of the Mutual Fund Account will be
invested in shares of these funds.
The Growth Opportunities, Growth & Income and Balanced Subaccounts commenced
operations on May 1, 1997.
Investments
Net purchase payments received by the Mutual Fund Account for Fidelity Income
Plus are invested in the portfolios of the Variable Insurance Products Fund,
Variable Insurance Products Fund II and Variable Insurance Products Fund III
(collectively, the "Series Fund"), as selected by the contract owner.
Investments are stated at the closing net asset values per share on December 31,
1998.
Realized capital gains and losses from sale of shares in the Series 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 Series Funds are credited or charged to contract owners'
equity.
Dividend Income
Dividends received from the Series Funds investments are reinvested to purchase
additional mutual fund shares.
15
<PAGE>
The Fidelity Variable Annuity Account -
Fidelity Income Plus
Notes to Financial Statements (continued)
2. Investments
A summary of the mutual fund investment at December 31, 1998 follows:
<TABLE>
<CAPTION>
Number of Net Asset Value Market
Shares Held Per Share Value Cost
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Variable Insurance Products Fund:
Money Market Portfolio 114,532,317.830 $ 1.00 $114,532,318 $114,532,318
High Income Portfolio 3,867,061.446 11.53 44,587,218 45,794,564
Equity Income Portfolio 7,984,376.549 25.42 202,962,852 163,806,196
Growth Portfolio 4,024,443.494 44.87 180,576,780 148,195,113
Overseas Portfolio 1,650,892.583 20.05 33,100,396 30,636,591
Variable Insurance Products Fund II:
Investment Grade Bond Portfolio 1,811,046.367 12.96 23,471,161 23,142,099
Asset Manager Portfolio 4,208,854.502 18.16 76,432,798 66,402,594
Asset Manager Growth Portfolio 536,050.259 17.03 9,128,936 8,332,302
Contrafund Portfolio 2,136,442.139 24.44 52,214,646 45,551,029
Index 500 Portfolio 436,705.114 141.25 61,684,597 55,491,293
Variable Insurance Products Fund III:
Growth Opportunities Portfolio 409,470.086 22.88 9,368,676 8,355,563
Growth & Income Portfolio 1,178,718.828 16.15 19,036,309 16,957,381
Balanced Portfolio 127,132.942 16.11 2,048,112 1,984,906
Fidelity Daily Income Trust 293,563.512 1.00 293,564 293,564
Fidelity Capital and Income Fund 15,142.196 9.28 140,520 146,426
Fidelity Cash Reserves 83,899.680 1.00 83,900 83,900
-----------------------------
$829,662,783 $729,705,839
=============================
</TABLE>
The aggregate cost of purchases and proceeds from sales of investments were as
follows:
<TABLE>
<CAPTION>
Period ended December 31
1998 1997
---------------------------- --------------------------------
Purchases Sales Purchases Sales
---------------------------- --------------------------------
<S> <C> <C> <C> <C>
Variable Insurance Products Fund:
Money Market Portfolio $315,671,845 $310,549,009 $266,120,253 $282,028,442
High Income Portfolio 79,316,285 92,881,309 110,016,938 109,277,373
Equity Income Portfolio 27,702,062 77,766,554 56,981,867 76,684,279
Growth Portfolio 113,326,205 106,985,233 92,562,507 120,769,794
Overseas Portfolio 106,455,945 107,662,487 93,973,249 99,659,637
Variable Insurance Products Fund II:
Investment Grade Bond Portfolio 38,799,140 36,078,574 12,208,000 9,205,345
Asset Manager Portfolio 17,186,279 23,483,503 24,115,151 24,952,146
Asset Manager Growth Portfolio 9,571,044 17,703,702 24,474,997 19,722,181
Contrafund Portfolio 60,577,460 67,805,956 44,076,789 54,914,191
Index 500 Portfolio 103,103,712 109,772,631 103,187,512 87,943,806
</TABLE>
16
<PAGE>
The Fidelity Variable Annuity Account -
Fidelity Income Plus
Notes to Financial Statements (continued)
2. Investments (continued)
<TABLE>
<CAPTION>
Period ended December 31
1998 1997
--------------------------------- ---------------------------------
Purchases Sales Purchases Sales
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Variable Insurance Products Fund III:
Growth Opportunities Portfolio $ 15,985,096 $ 13,687,157 $ 15,128,082 $ 9,957,725
Growth & Income Portfolio 36,403,946 28,519,218 19,513,038 12,110,805
Balanced Portfolio 9,132,692 8,590,142 3,565,747 2,344,128
Fidelity Daily Income Trust 14,803 16,211 16,622 94,063
Fidelity Capital and Income Fund 13,582 70 11,361 43,845
Fidelity Cash Reserves 4,227 92 4,252 92
--------------------------------- ---------------------------------
$ 933,264,323 $1,001,501,848 $ 865,956,365 $ 909,707,852
================================= =================================
</TABLE>
3. Contract Owners' Equity
A summary of deferred annuity contracts terminable by owners at December 31,
1998 are as follows:
<TABLE>
<CAPTION>
Accumulation Accumulation Total Contract
Subaccount Units Owned Unit Value Value
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market 43,337,060.933 2.642832 $114,532,571
High Income 12,247,818.239 3.640420 44,587,202
Equity Income 43,094,581.632 4.709707 202,962,853
Growth 28,101,887.125 6.425788 180,576,769
Overseas 13,624,240.201 2.429523 33,100,405
Investment Grade Bond 11,759,114.123 1.995998 23,471,168
Asset Manager 26,983,405.294 2.832585 76,432,789
Asset Manager Growth 5,249,723.064 1.738937 9,128,938
Contrafund 26,840,603.665 1.945361 52,214,664
Index 500 27,546,396.903 2.239298 61,684,591
Growth Opportunities 6,147,873.836 1.523888 9,368,671
Growth & Income 11,928,129.677 1.595917 19,036,305
Balanced 1,525,895.592 1.342236 2,048,112
Fidelity Daily Income Trust 81,396.693 3.603569 293,319
Fidelity Capital and Income Fund 15,972.996 8.793255 140,455
Fidelity Cash Reserves 23,111.706 3.626195 83,808
--------------
$829,662,620
==============
</TABLE>
17
<PAGE>
The Fidelity Variable Annuity Account -
Fidelity Income Plus
Notes to Financial Statements (continued)
3. Contract Owners' Equity (continued)
At December 31, 1998, contract owners' equity was comprised of:
<TABLE>
<CAPTION>
Money High Equity
Market Income Income Growth Overseas
Total Subaccount Subaccount Subaccount Subaccount Subaccount
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Unit transactions, accumulated
net investment income and
realized capital gains $729,705,676 $114,532,571 $ 45,794,548 $163,806,197 $148,195,102 $ 30,636,600
Adjustment for appreciation
(depreciation) to market value 99,956,944 -- (1,207,346) 39,156,656 32,381,667 2,463,805
---------------------------------------------------------------------------------------------------
Total contract owners' equity $829,662,620 $114,532,571 $ 44,587,202 $202,962,853 $180,576,769 $ 33,100,405
===================================================================================================
<CAPTION>
Asset
Investment Asset Manager Growth
Grade Bond Manager Growth Contrafund Index 500 Opportunities
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Unit transactions, accumulated
net investment income and
realized capital gains $23,142,106 $66,402,585 $ 8,332,304 $45,551,047 $55,491,287 $ 8,355,558
Adjustment for appreciation
(depreciation) to market value 329,062 10,030,204 796,634 6,663,617 6,193,304 1,013,113
------------------------------------------------------------------------------------------------
Total contract owners' equity $23,471,168 $76,432,789 $ 9,128,938 $52,214,664 $61,684,591 $ 9,368,671
================================================================================================
<CAPTION>
Growth & Fidelity Daily Fidelity Capital Fidelity Cash
Income Balanced Income Trust and Income Fund Reserves
Subaccount Subaccount Subaccount Subaccount Subaccount
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unit transactions, accumulated net
investment income and realized
capital gains $16,957,377 $ 1,984,906 $ 293,319 $ 146,361 $ 83,808
Adjustment for appreciation
(depreciation) to market value 2,078,928 63,206 -- (5,906) --
---------------------------------------------------------------------------------------------
Total contract owners' equity $19,036,305 $ 2,048,112 $ 293,319 $ 140,455 $ 83,808
=============================================================================================
</TABLE>
18
<PAGE>
The Fidelity Variable Annuity Account -
Fidelity Income Plus
Notes to Financial Statements (continued)
3. Contract Owners' Equity (continued)
A summary of changes in contract owners' account units follows:
<TABLE>
<CAPTION>
Money High Equity Investment
Market Income Income Growth Overseas Grade Bond
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding at January 1, 1997 51,936,943 18,704,131 68,119,424 38,326,955 18,498,493 9,681,785
Units purchased 1,099,198 222,731 485,233 287,154 183,589 57,316
Units redeemed and transferred (9,716,626) (1,431,532) (11,252,362) (7,887,201) (3,580,492) 1,120,498
------------------------------------------------------------------------------------------
Units outstanding at December 31, 1997 43,319,515 17,495,330 57,352,295 30,726,908 15,101,590 10,859,599
Units purchased 438,238 114,684 219,505 103,271 42,283 14,771
Units redeemed and transferred (420,692) (5,362,196) (14,477,218) (2,728,292) (1,519,633) 884,744
------------------------------------------------------------------------------------------
Units outstanding at December 31, 1998 43,337,061 12,247,818 43,094,582 28,101,887 13,624,240 11,759,114
==========================================================================================
<CAPTION>
Asset
Asset Manager Growth Growth &
Manager Growth Contrafund Index 500 Opportunities Income
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding at January 1, 1997 37,212,616 7,788,605 42,901,139 23,088,441 -- --
Units purchased 376,670 673,816 1,014,090 812,591 142,747 257,468
Units redeemed and transferred (4,542,570) 2,981,046 (10,542,836) 8,088,979 4,478,362 6,024,420
------------------------------------------------------------------------------------------
Units outstanding at December 31, 1997 33,046,716 11,443,467 33,372,393 31,990,011 4,621,109 6,281,888
Units purchased 126,715 68,639 188,835 281,202 58,750 144,065
Units redeemed and transferred (6,190,026) (6,262,383) (6,720,624) (4,724,816) 1,468,015 5,502,177
------------------------------------------------------------------------------------------
Units outstanding at December 31, 1998 26,983,405 5,249,723 26,840,604 27,546,397 6,147,874 11,928,130
==========================================================================================
<CAPTION>
Fidelity Daily Fidelity Capital Fidelity Cash
Balanced Income Trust and Income Fund Reserves
Subaccount Subaccount Subaccount Subaccount
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units outstanding at January 1, 1997 -- 114,662 21,049 23,164
Units purchased 25,011 -- -- --
Units redeemed and transferred 1,101,346 (28,601) (5,068) (27)
-----------------------------------------------------------------------------
Units outstanding at December 31, 1997 1,126,357 86,061 15,981 23,137
Units purchased 15,807 -- -- --
Units redeemed and transferred 383,732 (4,664) (8) (25)
-----------------------------------------------------------------------------
Units outstanding at December 31, 1998 1,525,896 81,397 15,973 23,112
=============================================================================
</TABLE>
19
<PAGE>
The Fidelity Variable Annuity Account -
Fidelity Income Plus
Notes to Financial Statements (continued)
4. Administrative, Mortality and Expense Risk Charge
An annual charge is deducted from the unit values of the subaccounts of the
Mutual Fund Account for PFL Life's assumption of certain mortality and expense
risks incurred in connection with the contract. It is assessed daily based on
the net asset value of the Mutual Fund Account. The effective annual rate for
this charge is 0.80%.
Administrative charges include an annual policy fee of $35 per contract. The
annual policy fee is deducted proportionately from the subaccounts accumulated
value. These deductions represent reimbursement for the costs expected to be
incurred over the life of the contract for issuing and maintaining each contract
and the Mutual Fund Account.
5. Taxes
Operations of the Mutual Fund 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 Mutual Fund Account are
accounted for separately from other operations of PFL Life for purposes of
federal income taxation. The Mutual Fund 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 Mutual Fund Account, to the extent applied to increase
reserves under the variable annuity contracts, is not taxable to PFL Life.
6. Year 2000 (Unaudited)
The term Year 2000 Issue generally refers to the improper processing of dates
and incorrect date calculations that might occur in computer software and
hardware and embedded systems as the Year 2000 is approached. The use of
computer programs that rely on two-digit date fields to perform computations and
decision-making functions may cause systems to malfunction when processing
information involving dates after 1999. For example, any computer software that
has date-sensitive coding might recognize a code of 00 as the year 1900 rather
than the year 2000.
PFL Life has developed a Year 2000 Project Plan (the Plan) to address the Year
2000 issue as it affects PFL Life's internal IT and non-IT systems, and to
assess Year 2000 issues relating to third parties with whom PFL Life has
critical relationships.
20
<PAGE>
The Fidelity Variable Annuity Account -
Fidelity Income Plus
Notes to Financial Statements (continued)
6. Year 2000 (Unaudited) (continued)
The Plan for addressing internal systems generally includes an assessment of
internal IT and non-IT systems and equipment affected by the Year 2000 issue;
definition of strategies to address affected systems and equipment; remediation
of identified systems and equipment; internal testing and certification that
each internal system is Year 2000 compliant; and a review of existing and
revised business resumption and contingency plans to address potential Year 2000
issues. PFL Life has remediated and tested substantially all of its mission-
critical internal IT systems as of December 31, 1998. PFL Life continues to
remediate and test certain non-critical internal IT systems, internal non-IT
systems and will continue with a revalidation testing program throughout 1999.
PFL Life's Year 2000 issues are more complex because a number of its systems
interface with other systems not under PFL Life's control. PFL Life's most
significant interfaces and uses of third-party vendor systems are in the bank,
financial services and trust areas. PFL Life utilizes various banks to handle
numerous types of financial and sales transactions. Several of these banks also
provide trustee and custodial services for PFL Life's investment holdings and
transactions. These services are critical to a financial services company such
as PFL Life as its business centers around cash receipts and disbursements to
policyholders and the investment of policyholder funds. PFL Life has received
written confirmation from its vendor banks regarding their status on Year 2000.
The banks indicate their dedication to resolving any Year 2000 issues related to
their systems and services prior to December 31, 1999. PFL Life anticipates that
a considerable effort will be necessary to ensure that its corrected or new
systems can properly interface with those business partners with whom it
transmits and receives data and other information (external systems). PFL Life
has undertaken specific testing regimes with these third-party business partners
and expects to continue working with its business partners on any interfacing of
systems. However, the timing of external system compliance cannot currently be
predicted with accuracy because the implementation of Year 2000 readiness will
vary from one company to another.
PFL Life does have some exposure to date sensitive embedded technology such as
micro-controllers, but PFL Life views this exposure as minimal. Unlike other
industries that may be equipment intensive, like manufacturing, PFL Life is a
life insurance and financial services organization providing insurance,
annuities and pension products to its customers. As such, the primary equipment
and electronic devices in use are computers and telephone related equipment.
This type of hardware can have date sensitive embedded technology which could
have Year 2000 problems. Because of this exposure, PFL Life has reviewed its
computer hardware and telephone systems, with assistance from the applicable
vendors, and has upgraded, or replaced, or is in the process of replacing any
equipment that will not properly process date sensitive data in the Year 2000 or
beyond. This undertaking has been substantially completed for all operations.
21
<PAGE>
The Fidelity Variable Annuity Account -
Fidelity Income Plus
Notes to Financial Statements (continued)
6. Year 2000 (Unaudited) (continued)
For PFL Life, a reasonably likely worst case scenario might include one or more
of PFL Life's significant policyholder systems being non-compliant. Such an
event could result in a material disruption of PFL Life's operations.
Specifically, a number of PFL Life's operations could experience an interruption
in the ability to collect and process premiums or deposits, process claim
payments, accurately maintain policyholder information, accurately maintain
accounting records, and or perform adequate customer service. Should the worst
case scenario occur, it could, dependent upon its duration, have a material
impact on PFL Life's business and financial condition. Simple failures can be
repaired and returned to production within a matter of hours with no material
impact. Unanticipated failures with a longer service disruption period could
have a more serious impact. For this reason, PFL Life is placing significant
emphasis on risk management and Year 2000 business resumption contingency
planning in 1999 by modifying its existing business resumption and disaster
recovery plans to address potential Year 2000 issues.
The actions taken by management under the Year 2000 Project Plans are intended
to significantly reduce PFL Life's risk of a material business interruption
based on the Year 2000 issues. It should be noted that the Year 2000 computer
problem, and its resolution, is complex and multifaceted, and any company's
success cannot be conclusively known until the Year 2000 is reached. In spite of
its efforts or results, PFL Life's ability to function unaffected to and through
the Year 2000 may be adversely affected by actions (or failure to act) of third
parties beyond our knowledge or control. It is anticipated that there may be
problems that will have to be resolved in the ordinary course of business on and
after the Year 2000. However, PFL Life does not believe that the problems will
have a material adverse affect on PFL Life's operations or financial condition.
22
<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
Distributiors 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 Incoproration 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.
(iv) Participation Agreement between Variable Insurance
Products Fund III, Fidelity Distributions
Corporation (Underwriter), and PFL Life Insurance
Company (Depositor). Note 10.
(v) Termination Notice of Administrative Services
Agreement by and between PFL Life Insurance Company
and Vantage Computer Systems, Inc.
(vi) Participation Agreement between Variable Insurance
Products Funds I and II, Fidelity Distributors
Corporation and PFL Life Insurance Company, and
Addendums thereto. Note 11.
(vii) Addendum to Participation Agreement between Variable
Insurance Product Funds, Fidelity Distribution
Corporation and PFL Life Insurance Company. Note 11.
(viii) Addendums to Participation Agreements between
Variable Insurance Products Fund, Variable Insurance
Products Funds II and Variable Insurance Products
Funds III, PFL Life Insurance Company and Fidelity
Distributions. Note 12.
(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.
C - 1
<PAGE>
(10)(i) Consent of Independent Auditors. Note 12.
(10)(ii) Opinion and Consent of Actuary. Note 11.
(11) Not applicable.
(12) Not applicable.
(13) Performance Data Calulations. Note 12.
(14) Powers of Attorney (P.S. Baird, W.L. Busler,
P.E. Falconio, D.C. Kolsrud, R.J. Kontz) (Note
8). (Craig D. Vermie) Note 9. (Brenda K.
Clancy) Note 10. (Larry N. Norman) Note 12.
Note 1 Filed with 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), and filed herewith.
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), and filed herewith.
Note 4 Filed with Post-Effective Amendment No. 9, Registration
No. 2-65365, Exhibit 4 to Form N-4, filed on April 27,
1987.
Note 5 Filed with Pre-Effective Amendment No. 4 to Form S-6,
File No. 2-65365 filed on August 14, 1980.
Note 6 Filed with Post-Effective Amendment No. 1 to Form N-4,
Registration No. 33-37498, filed March 29, 1991.
Note 7 Filed with Post-Effective Amendment No. 2 to Form N-4,
Registration No. 33-37498, filed April 29, 1992.
Note 8 Filed with Post-Effective Amendment No. 5 to Form N-4,
Registration No. 33-37478, filed April 24, 1995.
Note 9 Filed with Post-Effective Amendment No. 6 to Form N-4,
Registration No. 33-37478, filed April 19, 1996.
Note 10 Filed with Post-Effective Amendment No. 7 to Form N-4,
Registration No. 33-37498 on April 29, 1997.
Note 11 Filed with Post Effective Amendment No. 8 to Form N-4,
Registration No. 33-37498 on April 29, 1998.
Note 12 Filed herewith.
C - 2
<PAGE>
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
---------------------------------------
Principal Positions
Name and and Offices with
Business Address Depositor
- ---------------- ---------
Craig D. Vermie Director, Vice President,
1111 North Charles Street Secretary and General
Baltimore, MD 21201 Counsel
William L. Busler Director, Chairman of the
4333 Edgewood Road N.E. Board and President
Cedar Rapids, IA 52499
Larry N. Norman Director and Executive Vice
4333 Edgewood Road N.E. President
Cedar Rapids, IA 52499
Robert J. Kontz Vice President and Corporate
4333 Edgewood Road N.E. Controller
Cedar Rapids, IA 52499
Brenda K. Clancy Vice President,
4333 Edgewood Road N.E. Treasurer and Chief Financial Officer
Cedar Rapids, IA 52499
Patrick S. Baird Director, Senior Vice President
4333 Edgewood Road N.E. and Chief Operating
Cedar Rapids, IA 52499 Officer
Douglas C. Kolsrud Director, Senior Vice President,
4333 Edgewood Road N.E. Chief Investment Officer
Cedar Rapids, IA 52499 and Corporate Actuary
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
WITH THE DEPOSITOR OR REGISTRANT
--------------------------------
<TABLE>
<CAPTION>
Jurisdication of Percent of Voting
Name Incorporation Securities Owned Business
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
<S> <C> <C> <C>
AEGON N.V. Netherlands 53.63% of Vereniging Holding company
Corporation AEGON Netherlands
Membership Association
Groninger Financieringen B.V. Netherlands 100% of AEGON N.V. Holding company
Corporation Netherlands Corporation
AEGON Netherland N.V. Netherlands 100% of AEGON N.V. Holding company
Corporation Netherlands Corporation
AEGON Nevak Holding B.V. Netherlands 100% of AEGON N.V. Holding company
Corporation Netherlands Corporation
AEGON International N.V. Netherlands 100% of AEGON N.V. Holding company
Corporation Netherlands Corporation
Voting Trust Delaware Voting Trust
Trustees:
K.J. Storm
Donald J. Shepard
H.B. Van Wijk
Dennis Hersch
AEGON U.S. Holding Delaware 100% of Voting Trust Holding company
Corporation
Short Hills Management New Jersey 100% of AEGON U.S. Holding company
Company Holding Corporation
CORPA Reinsurance New York 100% of AEGON U.S. Holding company
Company Holding Corporation
AEGON Management Indiana 100% of AEGON U.S. Holding company
Company Holding Corporation
RCC North America Inc. Delaware 100% of AEGON U.S. Holding company
Holding Corporation
AEGON USA, Inc. Iowa 100% AEGON U.S. Holding company
Holding Corporation
AUSA Holding Company Maryland 100% AEGON USA, Inc. Holding company
Monumental General Insurance Maryland 100% AUSA Holding Co. Holding company
Group, Inc.
Trip Mate Insurance Agency, Inc. Kansas 100% Monumental General Sale/admin. of travel
Insurance Group, Inc. insurance
Monumental General Maryland 100% Monumental General Provides management srvcs.
Administrators, Inc. Insurance Group, Inc. to unaffiliated third party
administrator
Executive Management and Maryland 100% Monumental General Provides actuarial consulting
Consultant Services, Inc. Administrators, Inc. services
Monumental General Mass Maryland 100% Monumental General Marketing arm for sale of
Marketing, Inc. Insurance Group, Inc. mass marketed insurance
coverages
Diversified Investment Delaware 100% AUSA Holding Co. Registered investment advisor
Advisors, Inc.
Diversified Investors Securities Delaware 100% Diversified Investment Broker-Dealer
Corp. Advsiors, Inc.
AEGON USA Securities, Inc. Iowa 100% AUSA Holding Co. Broker-Dealer
Supplemental Ins. Division, Inc. Tennessee 100% AUSA Holding Co. Insurance
Creditor Resources, Inc. Michigan 100% AUSA Holding Co. Credit insurance
CRC Creditor Resources Canada 100% Creditor Resources, Inc. Insurance agency
Canadian Dealer Network Inc.
AEGON USA Investment Iowa 100% AUSA Holding Co. Investment advisor
Management, Inc.
AEGON USA Realty Iowa 100% AUSA Holding Co. Provides real estate
Advisors, Inc. administrative and real
estate investment services
Quantra Corporation Delaware 100% AEGON USA Realty Real estate and financial
Advisors, Inc. software production and sales
Quantra Software Corporation Delaware 100% Quantra Corporation Manufacture and sell
mortgage loan and security
management software
Landauer Realty Advisors, Inc. Iowa 100% AEGON USA Realty Real estate counseling
Advisors, Inc.
Landauer Associates, Inc. Delaware 100% AEGON USA Realty Real estate counseling
Advisors, Inc.
Realty Information Systems, Inc. Iowa 100% AEGON USA Realty Information Systems for
Advisors, Inc. real estate investment
management
AEGON USA Realty Iowa 100% AEGON USA Real estate management
Management, Inc Realty Advisors, Inc.
USP Real Estate Investment Trust Iowa 21.89% First AUSA Life Ins. Co. Real estate investment trust
13.11% PFL Life Ins. Co.
4.86% Bankers United Life
Assurance Co.
RCC Properties Limited Iowa AEGON USA Realty Advisors, Limited Partnership
Partnership Inc. is General Partner and 5%
owner.
AUSA Financial Markets, Inc. Iowa 100% AUSA Holding Co. Marketing
Endeavor Investment Advisors California 49.9% AUSA Financial General Partnership
Markets, Inc.
Universal Benefits Corporation Iowa 100% AUSA Holding Co. Third party administrator
Investors Warranty of Iowa 100% AUSA Holding Co. Provider of automobile
America, Inc. extended maintenance
contracts
Massachusetts Fidelity Trust Co. Iowa 100% AUSA Holding Co. Trust company
Money Services, Inc. Delaware 100% AUSA Holding Co. Provides financial counseling
for employees and agents of
affiliated companies
Zahorik Company, Inc. California 100% AUSA Holding Co. Broker-Dealer
ZCI, Inc. Alabama 100% Zahorik Company, Inc. Insurance agency
AEGON Asset Management Delaware 100% AUSA Holding Co. Registered investment advisor
Services, Inc.
Intersecurities, Inc. Delaware 100% AUSA Holding Co. Broker-Dealer
ISI Insurance Agency, Inc. California 100% Western Reserve Life Insurance agency
Assurance Co. of Ohio
ISI Insurance Agency Ohio 100% ISI Insurance Agency, Inc. Insurance agency
of Ohio, Inc.
ISI Insurance Agency Texas 100% ISI Insurance Agency, Inc. Insurance agency
of Texas, Inc.
ISI Insurance Agency Massachusetts 100% ISI Insurance Agency Inc. Insurance Agency
of Massachusetts, Inc.
Associated Mariner Financial Michigan 100% Intersecurities, Inc. Holding co./management
Group, Inc. services
Mariner Financial Services, Inc. Michigan 100% Associated Mariner Broker/Dealer
Financial Group, Inc.
Mariner Planning Corporation Michigan 100% Mariner Financial Financial planning
Services, Inc.
Associated Mariner Agency, Inc. Michigan 100% Associated Mariner Insurance agency
Financial Group, Inc.
Associated Mariner Agency Hawaii 100% Associated Mariner Insurance agency
of Hawaii, Inc. Agency, Inc.
Associated Mariner Ins. Agency Massachusetts 100% Associated Mariner Insurance agency
of Massachusetts, Inc. Agency, Inc.
Associated Mariner Agency Ohio 100% Associated Mariner Insurance agency
Ohio, Inc. Agency, Inc.
Associated Mariner Agency Texas 100% Associated Mariner Insurance agency
Texas, Inc. Agency, Inc.
Associated Mariner Agency New Mexico 100% Associated Mariner Insurance agency
New Mexico, Inc. Agency, Inc.
Mariner Mortgage Corp. Michigan 100% Associated Mariner Mortgage origination
Financial Group, Inc.
Idex Investor Services, Inc. Florida 100% AUSA Holding Co. Shareholder services
Idex Management, Inc. Delaware 50% AUSA Holding Co. Investment advisor
50% Janus Capital Corp.
IDEX II Series Fund Massachusetts Various Mutual fund
IDEX Fund Massachusetts Various Mutual fund
IDEX Fund 3 Massachusetts Various Mutual fund
First AUSA Life Insurance Maryland 100% AEGON USA, Inc. Insurance holding company
Company
AUSA Life Insurance New York 100% First AUSA Life Insurance
Company, Inc. Insurance Company
Life Investors Insurance Iowa 100% First AUSA Life Ins. Co. Insurance
Company of America
Life Investors Delaware 100% LIICA Purchase, own, and
Alliance, LLC hold the equity
interest of other
entities
Bankers United Life Iowa 100% Life Investors Ins. Insurance
Assurance Company Company of America
Life Investors Agency Iowa 100% Life Investors Ins. Marketing
Group, Inc. Company of America
PFL Life Insurance Company Iowa 100% First AUSA Life Ins. Co. Insurance
AEGON Financial Services Minnesota 100% PFL Life Insurance Co. Marketing
Group, Inc.
AEGON Assignment Corporation Kentucky 100% AEGON Financial Administrator of structured
of Kentucky Services Group, Inc. settlements
AEGON Assignment Illinois 100% AEGON Financial Administrator of structured
Corporation Services Group, Inc. settlements
Southwest Equity Life Ins. Co. Arizona 100% of Common Voting Stock Insurance
First AUSA Life Ins. Co.
Iowa Fidelity Life Insurance Co. Arizona 100% of Common Voting Stock Insurance
First AUSA Life Ins. Co.
Western Reserve Life Assurance Ohio 100% First AUSA Life Ins. Co. Insurance
Co. of Ohio
WRL Series Fund, Inc. Maryland Various Mutual fund
WRL Investment Services, Inc. Florida 100% Western Reserve Life Provides administration for
Assurance Co. of Ohio affiliated mutual fund
WRL Investment Florida 100% Western Reserve Life Registered investment advisor
Management, Inc. Assurance Co. of Ohio
AEGON Equity Florida 100% Western Reserve Life Insurance Agency
Group, Inc. Assurance Co. of Ohio
Monumental Life Insurance Co. Maryland 100% First AUSA Life Ins. Co. Insurance
AEGON Special Markets Maryland 100% Monumental Life Ins. Co. Marketing
Group, Inc.
Monumental General Casualty Co. Maryland 100% First AUSA Life Ins. Co. Insurance
United Financial Services, Inc. Maryland 100% First AUSA Life Ins. Co. General agency
Bankers Financial Life Ins. Co. Arizona 100% First AUSA Life Ins. Co. Insurance
The Whitestone Corporation Maryland 100% First AUSA Life Ins. Co. Insurance agency
Cadet Holding Corp. Iowa 100% First AUSA Life Holding company
Insurance Company
Commonwealth General Delaware 100% AEGON USA Holding company
Corporation ("CGC")
PB Series Trust Massachusetts N/A Mutual fund
Monumental Agency Group, Inc. Kentucky 100% CGC Provider of srvcs. to ins. cos.
Benefit Plans, Inc. Delaware 100% CGC TPA for Peoples Security Life
Insurance Company
Durco Agency, Inc. Virginia 100% Benefit Plans, Inc. General agent
Commonwealth General. Kentucky 100% CGC Administrator of structured
Assignment Corporation settlements
AFSG Securities Corporation Pennsylvania 100% CGC Broker-Dealer
PB Investment Advisors, Inc. Delaware 100% CGC Registered investment advisor
Diversified Financial Products Delaware 100% CGC Provider of investment,
Inc. marketing and admin.
services to ins. cos.
AEGON USA Real Estate Delaware 100% Diversified Financial Real estate and mortgage
Services, Inc. Products Inc. holding company
Capital Real Estate Delaware 100% CGC Furniture and equiment lessor
Development Corporation
Capital General Development Delaware 100% CGC Holding company
Corporation
Ammest Realty Corporation Texas 100% Peoples Security Life Special purpose subsidiary
Insurance Company
JMH Operating Company, Inc. Mississippi 100% Peoples Security Life Real estate holdings
Insurance Company
Independence Automobile Florida 100% Capital Security Automobile Club
Association, Inc. Life Insurance Company
Independence Automobile Georgia 100% Capital Security Automobile Club
Club, Inc. Life Insurance Company
Capital 200 Block Corporation Delaware 100% CGC Real estate holdings
Capital Broadway Corporation Kentucky 100% CGC Real estate holdings
Southlife, Inc. Tennessee 100% CGC Investment subsidiary
Ampac Insurance Agency, Inc. Pennsylvania 100% CGC Provider of management
(EIN 23-1720755) support services
National Home Life Corporation Pennsylvania 100% Ampac Insurance Special-purpose subsidiary
Agency, Inc.
Compass Rose Development Pennsylvania 100% Ampac Insurance Special-purpose subsidiary
Corporation Agency, Inc.
Frazer Association Illinois 100% Ampac Insurance TPA license-holder
Consultants, Inc. Agency, Inc.
Valley Forge Associates, Inc. Pennsylvania 100% Ampac Insurance Furniture & equipment lessor
Agency, Inc.
Veterans Benefits Plans, Inc. Pennsylvania 100% Ampac Insurance Administator of group
Agency, Inc. insurance programs
Veterans Insurance Services, Inc. Delaware 100% Ampac Insurance Special-purpose subsidiary
Agency, Inc.
Financial Planning Services, Inc. Dist. Columbia 100% Ampac Insurance Special-purpose subsidiary
Agency, Inc.
Academy Insurance Group, Inc. Delaware 100% CGC Holding company
Academy Life Insurance Co. Missouri 100% Academy Insurance Insurance company
Group, Inc.
Pension Life Insurance New Jersey 100% Academy Insurance Insurance company
Company of America Group, Inc.
Academy Services, Inc. Delaware 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Ammest Development Corp. Inc. Kansas 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Ammest Insurance Agency, Inc. California 100% Academy Insurance General agent
Group, Inc.
Ammest Massachusetts Massachusetts 100% Academy Insurance Special-purpose subsidiary
Insurance Agency, Inc. Group, Inc.
Ammest Realty, Inc. Pennsylvania 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Ampac, Inc. Texas 100% Academy Insurance Managing general agent
Group, Inc.
Ampac Insurance Agency, Inc. Pennsylvania 100% Academy Insurance Special-purpose subsidiary
(EIN 23-2364438) Group, Inc.
Data/Mark Services, Inc. Delaware 100% Academy Insurance Provider of mgmt. services
Group, Inc.
Force Financial Group, Inc. Delaware 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Force Financial Services, Inc. Massachusetts 100% Force Fin. Group, Inc. Special-purpose subsidiary
Military Associates, Inc. Pennsylvania 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
NCOA Motor Club, Inc. Georgia 100% Academy Insurance Automobile club
Group, Inc.
NCOAA Management Company Texas 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Unicom Administrative Pennsylvania 100% Academy Insurance Provider of admin. services
Services, Inc. Group, Inc.
Unicom Administrative Germany 100% Unicom Administrative Provider of admin. servcies
Services, GmbH Services, Inc.
Providian Fire Insurance Co. Kentucky 100% Providian Property Insurance company
and Casualty Insurance Co.
Capital Liberty, L.P. Delaware 79.2% Commonwealth Life Holding Company
Insurance Company
19.8% Peoples Security Life
Insurance Company
1% CGC
Commonwealth General LLC Turks & 100% CGC Special-purpose subsidiary
Caicos Islands
Peoples Benefit Life Missouri 3.7% CGC Insurance company
Insurance Company 20% Capital Liberty, L.P.
76.3% Monumental Life
Ins. Co.
Veterans Life Insurance Co. Illinois 100% Peoples Benefit Life Insurance company
Insurance Company
Peoples Benefit Services, Inc. Pennsylvania 100% Veterans Life Ins. Co. Special-purpose subsidiary
</TABLE>
2/11/98
C - 3
<PAGE>
ITEM 27. NUMBER OF CONTRACTOWNERS
------------------------
The number of Contractowners of Registrant as of December 31,
1998, was 7,080.
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.
C - 4
<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)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices
Business Address* With Underwriter
---------------------------------------------------
<S> <C>
Roger T. Servison Director
Rodney R. Rohda Director
Robert P. Mazzarella Director and President
J. Peter Benzie Executive Vice President
Edward L. McCartney Executive Vice President
Thomas G. McNichols Vice President
Bruce MacAlpine Vice President
Kenneth Klipper Vice President and Chief
Financial Officer
Lawerence G. Smith Vice President
Jeffrey R. Larsen Legal Counsel and Clerk
Jay Freedman Assistant Clerk
Kenneth Klipper Treasurer
Gary Greenstein Assistant Treasurer
Linda Capps Holland Compliance Officer
Richard Blades Compliance Registered Options
Principal
*82 Devonshire Street, Boston, MA 02109.
</TABLE>
(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
$4,565,268 in commissions from the Registrant during the
last fiscal year. No other
C - 5
<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.
(d) PFL Life Insurance Company hereby represents that the fees and
charges deducted under the policies, in the aggregate, are
reasonable in relation to the services rendered, the expenses to
be incurred, and the risks assumed by PFL Life Insurance
Company.
PARTC
C - 6
<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 27th day of
April, 1999.
FIDELITY VARIABLE
ANNUITY ACCOUNT
PFL LIFE INSURANCE COMPANY
Depositor
/s/ William L. Busler
------------------------------
William L. Busler
President
As required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities and on the duties indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Patrick S. Baird
- -------------------------------------- Director April 27, 1999
Patrick S. Baird
/s/ Craig D. Vermie
- -------------------------------------- Director April 27, 1999
Craig D. Vermie
/s/ William L. Busler
- -------------------------------------- Director April 27, 1999
William L. Busler (Principal Executive Officer)
/s/ Larry N. Norman
- -------------------------------------- Director April 27, 1999
Larry N. Norman
/s/ Douglas C. Kolsrud
- -------------------------------------- Director April 27, 1999
Douglas C. Kolsrud
/s/ Robert J. Kontz
- -------------------------------------- Vice President and April 27, 1999
Robert J. Kontz Corporate Controller
/s/ Brenda K. Clancy
- -------------------------------------- Treasurer April 27, 1999
Brenda K. Clancy
</TABLE>
<PAGE>
Registration No.
33-37498
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
EXHIBITS
TO
FORM N-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FOR
FIDELITY VARIABLE ANNUITY ACCOUNT
_______________
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Page No.*
- ----------- ---------------------- ---------
<S> <C> <C>
(8)(viii) Addendum to Participation Agreements between Variable
Insurance Products Funds, Variable Insurance Products
Funds II and Variable Insurance Products Funds III,
Fidelity Distributors Corporation and PFL Life Insurance
Company.
(10)(i) Consent of Independent Auditors
(13) Performance Data Calculations
(14) Power of Attorney
</TABLE>
- --------------------
* Page numbers included only in manually executed original.
<PAGE>
EXHIBIT (8) (viii)
------------------
Addendum to Participation Agreements between Variable Insurance Products Funds,
Variable Insurance Products Funds II and Variable Insurance Products Funds III,
Fidelity Distributors Corporation and PFL Life Insurance Company
<PAGE>
Participation Agreement Addendum
SCHEDULE A
----------
Accounts
--------
This Schedule shall be effective as of the date of the last signature below, and
replaces and supersedes Schedule A to the Participation Agreement dated April 1,
1991 (as amended) among the Variable Insurance Products Fund, Fidelity
Distributors Corporation and PFL Life Insurance Company.
<TABLE>
<CAPTION>
Date of Resolutions of
Company's Board which
Name of Contracts Name of Accounts established the Accounts
- ------------------------------ -------------------------------- ----------------------------
<S> <C> <C>
Fidelity Income Plus Fidelity Variable Annuity August 24, 1979 (by an
Individual Variable Annuity Account affiliate subsequently
Contracts acquired by the Company)
PFL Retirement Builder PFL Retirement Builder Variable
Individual Variable Annuity Annuity Account March 29, 1996
Contracts
PFL Retirement Builder PFL Retirement Builder Variable
Immediate Variable Annuity Annuity Account March 29, 1996
Contracts
Portfolio Select Individual PFL Retirement Builder Variable
Variable Annuity Contracts Annuity Account March 29, 1996
</TABLE>
In witness whereof, we have hereunto set our hand as of the dates indicated:
PFL Life Insurance Company Variable Insurance Products Fund
By: /s/ William By: /s/ Robert
---------------------------------- -------------------------------------
Title: President Title: Senior Vice President
------------------------------ ----------------------------------
Date: 3/12/99 Date: 3/9/99
-------------------------------- ----------------------------------
Fidelity Distributors Corporation
By: /s/
---------------------------------
Title: Vice President
-----------------------------
Date: 3/4/99
------------------------------
<PAGE>
Participation Agreement Addendum
SCHEDULE A
----------
Accounts
--------
This Schedule shall be effective as of the date of the last signature below, and
replaces and supersedes Schedule A to the Participation Agreement dated April 1,
1991 (as amended) among Variable Insurance Products Fund II, Fidelity
Distributors Corporation and PFL Life Insurance Company.
<TABLE>
<CAPTION>
Date of Resolutions of
Company's Board which
Name of Contracts Name of Accounts established the Accounts
- ------------------------------- -------------------------------- ----------------------------
<S> <C> <C>
Fidelity Income Plus Fidelity Variable August 24, 1979 (by an
Individual Variable Annuity Annuity Account affiliate subsequently
Contracts acquired by the Company)
PFL Retirement Builder PFL Retirement Builder Variable
Individual Variable Annuity Annuity Account March 29, 1996
Contracts
PFL Retirement Builder PFL Retirement Builder Variable
Immediate Variable Annuity Annuity Account March 29, 1996
Contracts
Portfolio Select Individual PFL Retirement Builder Variable
Variable Annuity Contracts Annuity Account March 29, 1996
</TABLE>
In witness whereof, we have hereunto set our hand as of the dates indicated:
PFL Life Insurance Company Variable Insurance Products Fund II
By: /s/ William By: /s/ Robert
---------------------------------- -------------------------------------
Title: President Title: Senior Vice President
------------------------------ ----------------------------------
Date: 3/12/99 Date: 3/9/99
-------------------------------- ----------------------------------
Fidelity Distributors Corporation
By: /s/
---------------------------------
Title: Vice President
-----------------------------
Date: 3/4/99
------------------------------
<PAGE>
Participation Agreement Addendum
SCHEDULE A
----------
Separate Accounts and Associated Contracts
------------------------------------------
This Schedule shall be effective as of the date of the last signature below, and
replaces and supersedes Schedule A to the Participation Agreement dated March
21, 1997 among Variable Insurance Products Fund III, Fidelity Distributors
Corporation and PFL Life Insurance Company.
<TABLE>
<CAPTION>
Date of Resolutions of
Company's Board which
Name of Contracts Name of Accounts established the Accounts
- ----------------------------- --------------------------- --------------------------------
<S> <C> <C>
Fidelity Income Plus Fidelity Variable Annuity August 24, 1979 (by an
Individual Variable Annuity Account affiliate subsequently
Contracts acquired by the Company)
PFL Retirement Builder PFL Retirement Builder
Individual Variable Annuity Variable Annuity Account March 29, 1996
Contracts
PFL Retirement Builder PFL Retirement Builder
Immediate Variable Annuity Variable Annuity Account March 29, 1996
Contracts
Portfolio Select Individual PFL Retirement Builder
Variable Annuity Contracts Variable Annuity Account March 29, 1996
</TABLE>
In witness whereof, we have hereunto set our hand as of the dates indicated:
PFL Life Insurance Company Variable Insurance Products Fund III
By: /s/ William By: /s/ Robert
---------------------------------- -------------------------------------
Title: President Title: Senior Vice President
------------------------------ ----------------------------------
Date: 3/12/99 Date: 3/9/99
-------------------------------- ----------------------------------
Fidelity Distributors Corporation
By: /s/
---------------------------------
Title: Vice President
-----------------------------
Date: 3/4/99
------------------------------
<PAGE>
EXHIBIT (10)(i)
------------
CONSENT OF INDEPENDENT AUDITORS
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Financial
Statements" in the Prospectus and "Independent Auditors" in the Statement of
Additional Information and to the use of our reports dated January 29, 1999 with
respect to the financial statements of the subaccounts of The Fidelity Variable
Annuity Account, which are available for investment by Fidelity Income Plus
contract owners, and to the use of our report dated February 19, 1999 with
respect to the statutory-basis financial statements and schedules of PFL Life
Insurance Company, included in Post-Effective Amendment No. 10 to the
Registration Statement (Form N-4 No. 33-37498) and related Prospectus of
Fidelity Income Plus.
Des Moines, Iowa
April 27, 1999
<PAGE>
EXHIBIT (13)
------------
PERFORMANCE DATA CALCULATIONS
<PAGE>
FIDELITY INCOME PLUS (PFL) - MONEY MARKET SUBACCOUNT 4/1/99
RETURNS FOR PERIODS INDICATED 07:47 AM
Fund #20
Initial investment: $1,000
Inception year: 1982
Inception year contract charge: 0.000525
<TABLE>
<CAPTION>
Contract Contract
Actual Acct Value Charge Charge
AUV # Units Before Chrge Factor Deduction
--- ------- ------------ ------ ---------
<S> <C> <C> <C> <C> <C>
03/31/82 1.000000 1000 1,000.00
12/31/82 1.086122 1000 1,086.12 0.000396 0.39554795
12/31/83 1.176038 1000 1,176.04 0.000562 0.61017827
12/31/84 1.288784 1000 1,288.78 0.000573 0.67327473
12/31/85 1.382250 1000 1,382.25 0.000530 0.68209553
12/31/86 1.463177 1000 1,463.18 0.000511 0.70498850
12/31/87 1.545254 1000 1,545.25 0.001184 1.72827720
12/31/88 1.646165 1000 1,646.17 0.001056 1.62607832
12/31/89 1.783014 1000 1,783.01 0.001001 1.64041749
12/31/90 1.911406 1000 1,911.41 0.000940 1.66697087
12/31/91 2.011998 1000 2,012.00 0.000839 1.59360002
12/31/92 2.073920 1000 2,073.92 0.000783 1.56425457
12/31/93 2.124046 1000 2,124.05 0.000684 1.40746046
12/31/94 2.196945 1000 2,196.95 0.000544 1.14567326
12/31/95 2.307819 1000 2,307.82 0.000458 0.99713542
12/31/96 2.413358 1000 2,413.36 0.000394 0.90069563
12/31/97 2.525659 1000 2,525.66 0.000335 0.80053991
12/31/98 2.642832 1000 2,642.83 0.000292 0.69778404
12/31/98 2.642832 1000 2,642.83 0.000000 0.00000000
12/31/98
</TABLE>
<TABLE>
<CAPTION>
Average
Adjusted Period Beginning Ending Annual YTD
Acct Value (Years) Value Value Return % Return %
---------- ------- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C>
3/31/82 1,000.00 16.76 1,000.00 2,616.20 5.90%
12/31/82 1,085.73 8.57%
12/31/83 1,175.00 8.22%
12/31/84 1,286.97 9.53%
12/31/85 1,379.63 7.20%
12/31/86 1,459.69 5.80%
12/31/87 1,539.85 11.01 1,539.85 2,616.20 4.93% 5.49%
12/31/88 1,638.78 10.01 1,638.78 2,616.20 4.79% 6.42%
12/31/89 1,773.37 9.01 1,773.37 2,616.20 4.41% 8.21%
12/31/90 1,899.40 8.01 1,899.40 2,616.20 4.08% 7.11%
12/31/91 1,997.77 7.01 1,997.77 2,616.20 3.92% 5.18%
12/31/92 2,057.69 6.00 2,057.69 2,616.20 4.08% 3.00%
12/31/93 2,106.02 5.00 2,106.02 2,616.20 4.43% 2.35%
12/31/94 2,177.15 4.00 2,177.15 2,616.20 4.70% 3.38%
12/31/95 2,286.03 3.00 2,286.03 2,616.20 4.60% 5.00%
12/31/96 2,389.67 2.00 2,389.67 2,616.20 4.63% 4.53%
12/31/97 2,500.07 1.00 2,500.07 2,616.20 4.64% 4.62%
12/31/98 2,616.20 9.48%
12/31/98 2,616.20 0.00 2,616.20 2,616.20 0.00% 0.00%
12/31/98 2,616.20
</TABLE>
<PAGE>
FIDELITY INCOME PLUS (PFL) - HIGH INCOME SUBACCOUNT
RETURNS FOR PERIODS INDICATED
Fund #21
Initial investment: $1,000
Inception year: 1985
Inception year contract charge: 0.000530
<TABLE>
<CAPTION>
Contract Contract
Actual Acct Value Charge Charge
AUV # Units Before Chrge Factor Deduction
--- ------- ------------ ------ ---------
<S> <C> <C> <C> <C> <C>
09/11/85 1.000000 1000 1,000.00
12/31/85 1.061544 1000 1,061.54 0.000161 0.16117808
12/31/86 1.239420 1000 1,239.42 0.000511 0.54236662
12/31/87 1.244613 1000 1,244.61 0.001184 1.46660831
12/31/88 1.380187 1000 1,380.19 0.001056 1.31198789
12/31/89 1.310687 1000 1,310.69 0.001001 1.37781156
12/31/90 1.269032 1000 1,269.03 0.000940 1.22740147
12/31/91 1.703009 1000 1,703.01 0.000839 1.05967450
12/31/92 2.078934 1000 2,078.93 0.000783 1.32631002
12/31/93 2.485444 1000 2,485.44 0.000684 1.41346317
12/31/94 2.427652 1000 2,427.65 0.000544 1.34320417
12/31/95 2.904665 1000 2,904.67 0.000458 1.10394926
12/31/96 3.285775 1000 3,285.78 0.000394 1.13585581
12/31/97 3.835575 1000 3,835.58 0.000335 1.09209964
12/31/98 3.640420 1000 3,640.42 0.000292 0.95191969
12/31/98 3.640420 1000 3,640.42 0.000000 0.00000000
12/31/98
</TABLE>
<TABLE>
<CAPTION>
Average
Adjusted Period Beginning Ending Annual YTD
Acct Value (Years) Value Value Return % Return %
---------- ------- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C>
09/11/85 1,000.00 13.31 1,000.00 3,610.91 10.13%
12/31/85 1,061.38 6.14%
12/31/86 1,238.69 16.71%
12/31/87 1,242.41 11.01 1,242.41 3,610.91 10.18% 0.30%
12/31/88 1,376.44 10.01 1,376.44 3,610.91 10.11% 10.79%
12/31/89 1,305.75 -5.14%
12/31/90 1,263.02 -3.27%
12/31/91 1,693.88 34.11%
12/31/92 2,066.47 6.00 2,066.47 3,610.91 9.75% 22.00%
12/31/93 2,469.13 5.00 2,469.13 3,610.91 7.90% 19.49%
12/31/94 2,410.37 4.00 2,410.37 3,610.91 10.63% -2.38%
12/31/95 2,882.88 3.00 2,882.88 3,610.91 7.79% 19.60%
12/31/96 3,260.00 2.00 3,260.00 3,610.91 5.24% 13.08%
12/31/97 3,804.39 1.00 3,804.39 3,610.91 -5.09% 16.70%
12/31/98 3,610.91 1.00 3,610.91 3,610.91 0.00% 10.76%
12/31/98 3,610.91 0.00 3,610.91 3,610.91 0.00% 0.00%
12/31/98 3,610.91
</TABLE>
<PAGE>
FIDELITY INCOME PLUS (PFL) - EQUITY INCOME SUBACCOUNT
RETURNS FOR PERIODS INDICATED
Fund #22
Initial investment: $1,000
Inception year: 1986
Inception year contract charge: 0.000511
<TABLE>
<CAPTION>
Contract Contract
Actual Acct Value Charge Charge
AUV # Units Before Chrge Factor Deduction
--- ------- ------------ ------ ---------
<S> <C> <C> <C> <C> <C>
10/08/86 1.000000 1000 1,000.00
12/31/86 1.001137 1000 1,001.14 0.000118 0.11760000
12/31/87 0.978927 1000 978.93 0.001184 1.18520697
12/31/88 1.194265 1000 1,194.27 0.001056 1.03237390
12/31/89 1.390307 1000 1,390.31 0.001001 1.19283807
12/31/90 1.168338 1000 1,168.34 0.000940 1.30290179
12/31/91 1.523641 1000 1,523.64 0.000839 0.97615214
12/31/92 1.768091 1000 1,768.09 0.000783 1.18727676
12/31/93 2.073414 1000 2,073.41 0.000684 1.20274936
12/31/94 2.202346 1000 2,202.35 0.000544 1.12110414
12/31/95 2.951686 1000 2,951.69 0.000458 1.00205043
12/31/96 3.346303 1000 3,346.30 0.000394 1.15493220
12/31/97 4.252876 1000 4,252.88 0.000335 1.11288227
12/31/98 4.709707 1000 4,709.71 0.000292 0.97003469
12/31/98 4.709707 1000 4,709.71 0.000000 0.00000000
12/31/98
</TABLE>
<TABLE>
<CAPTION>
Average
Adjusted Period Beginning Ending Annual YTD
Acct Value (Years) Value Value Return % Return %
---------- ------- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C>
10/08/86 1,000.00 12.24 1,000.00 4,674.58 13.43%
12/31/86 1,001.02 0.10%
12/31/87 977.63 11.01 977.63 4,674.58 15.27% -2.34%
12/31/88 1,191.65 10.01 1,191.65 4,674.58 14.63% 21.89%
12/31/89 1,386.07 16.32%
12/31/90 1,163.47 -16.06%
12/31/91 1,516.32 30.33%
12/31/92 1,758.41 6.00 1,758.41 4,674.58 17.70% 15.97%
12/31/93 2,060.85 5.00 2,060.85 4,674.58 17.80% 17.20%
12/31/94 2,187.88 4.00 2,187.88 4,674.58 20.90% 6.16%
12/31/95 2,931.30 3.00 2,931.30 4,674.58 16.83% 33.98%
12/31/96 3,322.04 2.00 3,322.04 4,674.58 18.62% 13.33%
12/31/97 4,220.92 1.00 4,220.92 4,674.58 10.75% 27.06%
12/31/98 4,674.58 1.00 40.71%
12/31/98 4,674.58 0.00 4,674.58 4,674.58 0.00% 0.00%
12/31/98 4,674.58
</TABLE>
<PAGE>
FIDELITY INCOME PLUS (PFL) - GROWTH SUBACCOUNT
RETURNS FOR PERIODS INDICATED
Fund #23
Initial investment: $1,000
Inception year: 1986
Inception year contract charge: 0.000511
<TABLE>
<CAPTION>
Contract Contract
Actual Acct Value Charge Charge
AUV # Units Before Chrge Factor Deduction
<S> <C> <C> <C> <C> <C>
10/08/86 1.000000 1000 1,000.00
12/31/86 1.001140 1000 1,001.14 0.000118 0.11760000
12/31/87 1.028662 1000 1,028.66 0.001184 1.18521052
12/31/88 1.181690 1000 1,181.69 0.001056 1.08488789
12/31/89 1.540465 1000 1,540.47 0.001001 1.18028388
12/31/90 1.348850 1000 1,348.85 0.000940 1.44375971
12/31/91 1.947218 1000 1,947.22 0.000839 1.12713093
12/31/92 2.111765 1000 2,111.77 0.000783 1.51765344
12/31/93 2.500812 1000 2,500.81 0.000684 1.43676021
12/31/94 2.480539 1000 2,480.54 0.000544 1.35242014
12/31/95 3.331228 1000 3,331.23 0.000458 1.12876873
12/31/96 3.790532 1000 3,790.53 0.000394 1.30360458
12/31/97 4.643463 1000 4,643.46 0.000335 1.26078161
12/31/98 6.425788 1000 6,425.79 0.000292 1.09894994
12/31/98 6.425788 1000 6,425.79 0.000000 0.00000000
12/31/98
</TABLE>
FIDELITY INCOME PLUS (PFL) - GROWTH SUBACCOUNT
RETURNS FOR PERIODS INDICATED
Fund #23
Initial investment: $1,000
Inception year: 1986
Inception year contract charge: 0.000511
<TABLE>
<CAPTION>
Average
Adjusted Period Beginning Ending Annual YTD
Acct Value (Years) Value Value Return % Return %
<S> <C> <C> <C> <C> <C> <C>
10/08/86 1,000.00 12.24 1,000.00 6,378.91 16.34%
12/31/86 1,001.02 0.10%
12/31/87 1,027.36 11.01 1,027.36 6,378.91 18.04% 2.63%
12/31/88 1,179.10 10.01 1,179.10 6,378.91 18.37% 14.77%
12/31/89 1,535.91 30.26%
12/31/90 1,343.42 -12.53%
12/31/91 1,938.25 44.28%
12/31/92 2,100.53 6.00 2,100.53 6,378.91 20.34% 8.37%
12/31/93 2,486.07 5.00 2,486.07 6,378.91 20.74% 18.35%
12/31/94 2,464.56 4.00 2,464.56 6,378.91 26.84% -0.87%
12/31/95 3,308.64 3.00 3,308.64 6,378.91 24.46% 34.25%
12/31/96 3,763.53 2.00 3,763.53 6,378.91 30.19% 13.75%
12/31/97 4,609.12 1.00 4,609.12 6,378.91 38.40% 22.47%
12/31/98 6,378.91 69.49%
12/31/98 6,378.91 0.00 6,378.91 6,378.91 0.00% 0.00%
12/31/98 6,378.91
</TABLE>
<PAGE>
FIDELITY INCOME PLUS (PFL) - OVERSEAS SUBACCOUNT
RETURNS FOR PERIODS INDICATED
Fund #24
Initial investment: $1,000
Inception year: 1987
Inception year contract charge: 0.001184
<TABLE>
<CAPTION>
Contract Contract
Actual Acct Value Charge Charge
AUV # Units Before Chrge Factor Deduction
<S> <C> <C> <C> <C> <C>
01/27/87 1.000000 1000 1,000.00
12/31/87 0.938767 1000 938.77 0.001096 1.09641644
12/31/88 1.007020 1000 1,007.02 0.001056 0.99018014
12/31/89 1.261608 1000 1,261.61 0.001001 1.00585854
12/31/90 1.229709 1000 1,229.71 0.000940 1.18241487
12/31/91 1.319600 1000 1,319.60 0.000839 1.02769177
12/31/92 1.168866 1000 1,168.87 0.000783 1.02840209
12/31/93 1.591344 1000 1,591.34 0.000684 0.79505218
12/31/94 1.605980 1000 1,605.98 0.000544 0.86043789
12/31/95 1.747454 1000 1,747.45 0.000458 0.73068132
12/31/96 1.962599 1000 1,962.60 0.000394 0.68366213
12/31/97 2.172007 1000 2,172.01 0.000335 0.65262476
12/31/98 2.429523 1000 2,429.52 0.000292 0.56885502
12/31/98 2.429523 1000 2,429.52 0.000000 0.00000000
12/31/98
</TABLE>
FIDELITY INCOME PLUS (PFL) - OVERSEAS SUBACCOUNT
RETURNS FOR PERIODS INDICATED
Fund #24
Initial investment: $1,000
Inception year: 1987
Inception year contract charge: 0.001184
<TABLE>
<CAPTION>
Average
Adjusted Period Beginning Ending Annual YTD
Acct Value (Years) Value Value Return % Return %
<S> <C> <C> <C> <C> <C> <C>
01/27/87 1,000.00 11.93 1,000.00 2,411.05 7.66%
12/31/87 937.67 11.01 937.67 2,411.05 8.96% -6.23%
12/31/88 1,004.85 10.01 1,004.85 2,411.05 9.14% 7.16%
12/31/89 1,257.89 25.18%
12/31/90 1,224.90 -2.62%
12/31/91 1,313.41 7.23%
12/31/92 1,162.36 6.00 1,162.36 2,411.05 12.93% -11.50%
12/31/93 1,581.69 5.00 1,581.69 2,411.05 8.80% 36.08%
12/31/94 1,595.37 4.00 1,595.37 2,411.05 10.88% 0.87%
12/31/95 1,735.18 3.00 1,735.18 2,411.05 11.59% 8.76%
12/31/96 1,948.13 2.00 1,948.13 2,411.05 11.25% 12.27%
12/31/97 2,155.35 1.00 2,155.35 2,411.05 11.86% 10.64%
12/31/98 2,411.05 23.76%
12/31/98 2,411.05 0.00 2,411.05 2,411.05 0.00% 0.00%
12/31/98 2,411.05
</TABLE>
<PAGE>
FIDELITY INCOME PLUS (PFL) - INVESTMENT GRADE BOND SUBACCOUNT
RETURNS FOR PERIODS INDICATED
Fund #25
Initial investment: $1,000
Inception year: 1989
Inception year contract charge: 0.001001
<TABLE>
<CAPTION>
Contract Contract
Actual Acct Value Charge Charge
AUV # Units Before Chrge Factor Deduction
<S> <C> <C> <C> <C> <C>
06/05/89 1.000000 1000 1,000.00
12/31/89 1.059709 1000 1,059.71 0.000573 0.57317534
12/31/90 1.115679 1000 1,115.68 0.000940 0.99558768
12/31/91 1.289396 1000 1,289.40 0.000839 0.93471309
12/31/92 1.364252 1000 1,364.25 0.000783 1.00741819
12/31/93 1.501802 1000 1,501.80 0.000684 0.93044541
12/31/94 1.433937 1000 1,433.94 0.000544 0.81410766
12/31/95 1.660360 1000 1,660.36 0.000458 0.65406107
12/31/96 1.708442 1000 1,708.44 0.000394 0.65125253
12/31/97 1.848460 1000 1,848.46 0.000335 0.56954711
12/31/98 1.995998 1000 1,996.00 0.000292 0.49644107
12/31/98 1.995998 1000 1,996.00 0.000000 0.00000000
12/31/98
</TABLE>
FIDELITY INCOME PLUS (PFL) - INVESTMENT GRADE BOND SUBACCOUNT
RETURNS FOR PERIODS INDICATED
Fund #25
Initial investment: $1,000
Inception year: 1989
Inception year contract charge: 0.001001
<TABLE>
<CAPTION>
Average
Adjusted Period Beginning Ending Annual YTD
Acct Value (Years) Value Value Return % Return %
<S> <C> <C> <C> <C> <C> <C>
06/05/89 1,000.00 9.58 1,000.00 1,985.80 7.42%
12/31/89 1,059.14 5.91%
12/31/90 1,114.08 5.19%
12/31/91 1,286.61 15.49%
12/31/92 1,360.30 6.00 1,360.30 1,985.80 6.51% 5.73%
12/31/93 1,496.52 5.00 1,496.52 1,985.80 5.82% 10.01%
12/31/94 1,428.08 4.00 1,428.08 1,985.80 8.59% -4.57%
12/31/95 1,652.93 3.00 1,652.93 1,985.80 6.31% 15.74%
12/31/96 1,700.14 2.00 1,700.14 1,985.80 8.08% 2.86%
12/31/97 1,838.91 1.00 1,838.91 1,985.80 7.99% 8.16%
12/31/98 1,985.80 16.80%
12/31/98 1,985.80 0.00 1,985.80 1,985.80 0.00% 0.00%
12/31/98 1,985.80
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIDELITY INCOME PLUS (PFL) - ASSET MANAGER SUBACCOUNT
RETURNS FOR PERIODS INDICATED
Fund #26
Initial investment: $1,000
Inception year: 1990
Inception year contract charge: 0.000940
Contract Contract
Actual Acct Value Charge Charge
AUV # Units Before Chrge Factor Deduction
------ ------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C>
5/29/90 1.000000 1000 1,000.00
12/31/90 1.041041 1000 1,041.04 0.000556 0.55627397
12/31/91 1.265768 1000 1,265.77 0.000839 0.87296669
12/31/92 1.404870 1000 1,404.87 0.000783 0.98988322
12/31/93 1.687107 1000 1,687.11 0.000684 0.95907780
12/31/94 1.571804 1000 1,571.80 0.000544 0.91549440
12/31/95 1.823774 1000 1,823.77 0.000458 0.71766931
12/31/96 2.073401 1000 2,073.40 0.000394 0.71607133
12/31/97 2.481731 1000 2,481.73 0.000335 0.69193710
12/31/98 2.832585 1000 2,832.59 0.000292 0.60312130
12/31/98 2.832585 1000 2,832.59 0.000000 0.00000000
12/31/98
</TABLE>
<TABLE>
<CAPTION>
FIDELITY INCOME PLUS (PFL) - ASSET MANAGER SUBACCOUNT
RETURNS FOR PERIODS INDICATED
Fund #26
Initial investment: $1,000
Inception year: 1990
Inception year contract charge: 0.000940
Average
Adjusted Period Beginning Ending Annual YTD
Acct Value (Years) Value Value Return % Return %
---------- ------- --------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
5/29/90 1,000.00 8.60 1,000.00 2,821.17 12.82%
12/31/90 1,040.48 4.05%
12/31/91 1,264.22 21.50%
12/31/92 1,402.16 6.00 1,402.16 2,821.17 12.36% 10.91%
12/31/93 1,682.89 5.00 1,682.89 2,821.17 10.89% 20.02%
12/31/94 1,566.96 4.00 1,566.96 2,821.17 15.84% -6.89%
12/31/95 1,817.44 3.00 1,817.44 2,821.17 15.79% 15.98%
12/31/96 2,065.48 2.00 2,065.48 2,821.17 16.87% 13.65%
12/31/97 2,471.56 1.00 2,471.56 2,821.17 14.15% 19.66%
12/31/98 2,821.17 36.59%
12/31/98 2,821.17 0.00 2,821.17 2,821.17 0.00% 0.00%
12/31/98 2,821.17
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIDELITY INCOME PLUS (PFL) - ASSEST MANAGER: GROWTH SUBACCOUNT
RETURNS FOR PERIODS INDICATED
Fund #27
Initial investment: $1,000
Inception year: 1995
Inception year contract charge: 0.000458
Contract Contract
Actual Acct Value Charge Charge
AUV # Units Before Chrge Factor Deduction
------ ------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C>
9/5/95 1.000000 1000 1,000.00
12/31/95 1.009935 1000 1,009.94 0.000147 0.14681096
12/31/96 1.201587 1000 1,201.59 0.000394 0.39785655
12/31/97 1.490886 1000 1,490.89 0.000335 0.40233985
12/31/98 1.738937 1000 1,738.94 0.000292 0.35069623
12/31/98 1.738937 1000 1,738.94 0.000000 0.00000000
12/31/98
</TABLE>
<TABLE>
<CAPTION>
FIDELITY INCOME PLUS (PFL) - ASSEST MANAGER: GROWTH SUBACCOUNT
RETURNS FOR PERIODS INDICATED
Fund #27
Initial investment: $1,000
Inception year: 1995
Inception year contract charge: 0.000458
Average
Adjusted Period Beginning Ending Annual YTD
Acct Value (Years) Value Value Return % Return %
---------- ------- --------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
9/5/95 1,000.00 3.32 1,000.00 1,737.76 18.11%
12/31/95 1,009.79 3.00 1,009.79 1,737.76 19.84% 0.98%
12/31/96 1,201.01 2.00 1,201.01 1,737.76 20.29% 18.94%
12/31/97 1,489.77 1.00 1,489.77 1,737.76 16.65% 24.04%
12/31/98 1,737.76 44.69%
12/31/98 1,737.76 0.00 1,737.76 1,737.76 0.00% 0.00%
12/31/98 1,737.76
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIDELITY INCOME PLUS (PFL) - CONTRAFUND SUBACCOUNT
RETURNS FOR PERIODS INDICATED
Fund #28
Initial investment: $1,000
Inception year: 1995
Inception year contract charge: 0.000458
Contract Contract
Actual Acct Value Charge Charge
AUV # Units Before Chrge Factor Deduction
------ ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
9/5/95 1.000000 1000 1,000.00
12/31/95 1.017954 1000 1,017.95 0.000147 0.14681096
12/31/96 1.224976 1000 1,224.98 0.000394 0.40101603
12/31/97 1.508640 1000 1,508.64 0.000335 0.41017344
12/31/98 1.945361 1000 1,945.36 0.000292 0.35752431
12/31/98 1.945361 1000 1,945.36 0.000000 0.00000000
12/31/98
</TABLE>
<TABLE>
<CAPTION>
FIDELITY INCOME PLUS (PFL) - CONTRAFUND SUBACCOUNT
RETURNS FOR PERIODS INDICATED
Fund #28
Initial investment: $1,000
Inception year: 1995
Inception year contract charge: 0.000458
Average
Adjusted Period Beginning Ending Annual YTD
Acct Value (Years) Value Value Return % Return %
---------- ------- --------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
9/5/95 1,000.00 3.32 1,000.00 1,944.09 22.17%
12/31/95 1,017.81 3.00 1,017.81 1,944.09 24.07% 1.78%
12/31/96 1,224.40 2.00 1,224.40 1,944.09 26.01% 20.30%
12/31/97 1,507.52 1.00 1,507.52 1,944.09 28.96% 23.12%
12/31/98 1,944.09 58.78%
12/31/98 1,944.09 0.00 1,944.09 1,944.09 0.00% 0.00%
12/31/98 1,944.09
</TABLE>
<PAGE>
FIDELITY INCOME PLUS (PFL) - INDEX 500 SUBACCOUNT
RETURNS FOR PERIODS INDICATED
Fund #29
Initial investment: $1,000
Inception year: 1995
Inception year contract charge: 0.000458
<TABLE>
<CAPTION>
Contract Contract
Actual Acct Value Charge Charge
AUV # Units Before Chrge Factor Deduction
--- ------- ------------ ------ ---------
<S> <C> <C> <C> <C> <C>
09/05/95 1.000000 1000 1,000.00
12/31/95 1.037559 1000 1,037.56 0.000147 0.14681096
12/31/96 1.336134 1000 1,336.13 0.000394 0.40874040
12/31/97 1.768955 1000 1,758.96 0.000335 0.44740463
12/31/98 2.239298 1000 2,239.30 0.000292 0.38997657
12/31/98 2.239298 1000 2,239.30 0.000000 0.00000000
12/31/98
<CAPTION>
Average
Adjusted Period Beginning Ending Annual YTD
Acct Value (Years) Value Value Return % Return %
---------- ------- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C>
09/05/95 1,000.00 3.32 1,000.00 2,237.91 27.46%
12/31/95 1,037.41 3.00 1,037.41 2,237.91 29.21% 3.74%
12/31/96 1,335.54 2.00 1,335.54 2,237.91 29.45% 28.74%
12/31/97 1,757.72 1.00 1,757.72 2,237.91 27.32% 31.61%
12/31/98 2,237.91 67.57%
12/31/98 2,237.91 0.00 2,237.91 2,237.91 0.00% 0.00%
12/31/98 2,237.91
</TABLE>
<PAGE>
FIDELITY INCOME PLUS (PFL) - GROWTH OPPORT. SUBACCOUNT
RETURNS FOR PERIODS INDICATED
Fund #30
Initial investment: $1,000
Inception year: 1997
Inception year contract charge: 0.000394
<TABLE>
<CAPTION>
Contract Contract
Actual Acct Value Charge Charge
AUV # Units Before Chrge Factor Deduction
--- ------- ------------ ------ ---------
<S> <C> <C> <C> <C> <C>
05/01/97 1.000000 1000 1,000.00
12/31/97 1.232659 1000 1,232.66 0.000224 0.22394521
12/31/98 1.523888 1000 1,523.89 0.000292 0.29200000
12/31/98 1.523888 1000 1,523.89 0.000000 0.00000000
12/31/98
<CAPTION>
Average
Adjusted Period Beginning Ending Annual YTD
Acct Value (Years) Value Value Return % Return %
---------- ------- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C>
5/1/97 1,000.00 1.67 1,000.00 1,523.60 28.68%
12/31/97 1,232.44 1.00 1,232.44 1,523.60 23.62% 23.24%
12/31/98 1,523.60 52.36%
12/31/98 1,523.60 0.00 1,523.60 1,523.60 0.00% 0.00%
12/31/98 1,523.60
</TABLE>
<PAGE>
FIDELITY INCOME PLUS (PFL) - GROWTH & INCOME SUBACCOUNT
RETURNS FOR PERIODS INDICATED
Fund #31
Initial investment: $1,000
Inception year: 1997
Inception year contract charge: 0.000394
<TABLE>
<CAPTION>
Contract Contract
Actual Acct Value Charge Charge
AUV # Units Before Chrge Factor Deduction
--- ------- ------------ ------ ---------
<S> <C> <C> <C> <C> <C>
05/01/97 1.000000 1000 1,000.00
12/31/97 1.241360 1000 1,241.36 0.000224 0.22394521
12/31/98 1.595917 1000 1,595.92 0.000292 0.29200000
12/31/98 1.595917 1000 1,595.92 0.000000 0.00000000
12/31/98
<CAPTION>
Average
Adjusted Period Beginning Ending Annual YTD
Acct Value (Years) Value Value Return % Return %
---------- ------- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C>
05/01/97 1,000.00 1.67 1,000.00 1,595.63 32.29%
12/31/97 1,241.14 1.00 1,241.14 1,595.63 28.56% 24.11%
12/31/98 1,595.63 59.56%
12/31/98 1,595.63 0.00 1,595.63 1,595.63 0.00% 0.00%
12/31/98 1,595.63
</TABLE>
<PAGE>
FIDELITY INCOME PLUS (PFL) - BALANCED PORTFOLIO SUBACCOUNT
RETURNS FOR PERIODS INDICATED
Fund #32
Initial investment: $1,000
Inception year: 1997
Inception year contract charge: 0.000394
<TABLE>
<CAPTION>
Contract Contract
Actual Acct Value Charge Charge
AUV # Units Before Chrge Factor Deduction
--- ------- ------------ ------ ---------
<S> <C> <C> <C> <C> <C>
05/01/97 1.000000 1000 1,000.00
12/31/97 1.150095 1000 1,150.10 0.000224 0.22394521
12/31/98 1.342236 1000 1,342.24 0.000292 0.29200000
12/31/98 1.342236 1000 1,342.24 0.000000 0.00000000
12/31/98
<CAPTION>
Average
Adjusted Period Beginning Ending Annual YTD
Acct Value (Years) Value Value Return % Return %
---------- ------ ----- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C>
05/01/97 1,000.00 1.67 1,000.00 1,341.94 19.26%
12/31/97 1,149.87 1.00 1,149.87 1,341.94 16.70% 14.99%
12/31/98 1,341.94 34.19%
12/31/98 1,341.94 0.00 1,341.94 1,341.94 0.00% 0.00%
12/31/98 1,341.94
</TABLE>
<PAGE>
EXHIBIT (14)
------------
POWER OF ATTORNEY
<PAGE>
POWER OF ATTORNEY
WITH RESPECT TO
THE FIDELITY VARIABLE ANNUITY ACCOUNT
Know all men by these presents that Larry N. Norman, whose signature appears
below, constitutes and appoints Craig D. Vermie and Brenda K. Clancy, and each
of them, his attorneys-in-fact, each with the power of substitution, for him in
any and all capacities, to sign any registration statements and amendments
thereto for The Fidelity Variable Annuity Account, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute, may do or cause to be done by
virtue hereof.
/s/ Larry N. Norman
---------------------------------
Larry N. Norman
Executive Vice President
PFL Life Insurance Company
April 27, 1999
- ----------------------------------
Date
