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[SENTRY LOGO]
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Sentry Variable Account II
THE PATRIOT
A FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY
FUNDED BY NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
[GRAPHIC]
ANNUAL REPORT
DECEMBER 31, 1995
SENTRY LIFE INSURANCE COMPANY
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Dear Contract Owner: February 15, 1996
Thank you for selecting the Patriot for your long-term investment needs. Your
confidence in Sentry to provide this service is appreciated.
The comments below on the performance of the underlying investment are provided
by its investment advisor, Neuberger and Berman Management, Incorporated.
The stock and bond markets took off in 1995 after relatively unmemorable
performances in 1994. Investors will certainly look back on the harmony of the
dual bull market with fondness, as will our AMT Portfolio shareholders.
Dropping interest rates, coupled with growing company earnings despite a
cooling overall economy was music to investor's ears. All major indices reached
record highs (the S&P 500 jumped 34%, the Dow topped 33%, and the Nasdaq was up
nearly 40% for the year), and just about every sector of industry locked in
higher share prices for the year. The same decline in rates created a rebound
from 1994's dismal bond results; so good, in fact, that it was one of the best
bond market performance years in history. The Federal Reserve Board cut rates
by 0.25% in July and December, and bond investors were further encouraged by
slowing economic growth and fiscal restraint. Long-term rates went just over
7.9% at the peak in January, and ended the year at 5.94%.
The advantages of a favorable bond environment were not lost to the management
behind Neuberger & Berman AMT Limited Maturity Bond Investments or the fixed
income portion of Neuberger & Berman AMT Balanced Investments, which both took
advantage of bond price appreciation by lengthening duration in the first half
of the year, and again in the Fall. Duration (the measure of how bond prices
respond to shifts in interest rates, taking into account maturity, coupon, call
protection and other factors) was raised from 1.79 years (a weighted average
maturity of 2.1 years) in January to 2.18 years (or 2.4 years weighted average
maturity) by the end of June. The rally subsided during the third quarter as
market participants became concerned about a pick up in economic activity.
However, by the end of the third quarter, inflationary concerns waned and the
rally resumed. Duration was extended again in October--this time to 2.6 years
(2.9 years average weighted maturity); which greatly benefited fourth-quarter
performance. We remain bullish heading into 1996, and have been adding
corporate and asset-backed positions while avoiding the prepayment-plagued
mortgage arena (an area which hindered performance last year as well).
The strategy for Neuberger & Berman AMT Liquid Asset Investments during this
time was to continue to take advantage of higher yields which persisted despite
the two Federal Funds rate cuts. As the bond rally set in, the portfolio's
dollar-weighted average maturity was raised from 44 days to 62 days, then
remained between 40 and 63 days during the bond market's fits and starts during
Summer. During the last quarter, the money market yield curve inverted, meaning
higher interest rates could be found in shorter maturities--accordingly we
ended the year with a 24-day average maturity.
Among companies, the market certainly fell in love with technology and finance,
even if the affair ended by the fourth quarter and profit-taking took the froth
off of their valuations. Lowering interest rates and strong earnings results
provided the impetus for equities in 1995. Neuberger & Berman AMT Growth
Investments and the stock portion of Neuberger & Berman AMT Balanced
Investments were heavily weighted in both, as well as other prime contributors
such as HMO and other health care names, and specialty retailers which defied
the doldrums in the general retail sector. Gaming and restaurant investments
lost some ground in the fourth quarter, but it was not enough to dampen the
excellent total return performance results for the entire year.
Even though market valuations are at an all-time high, we continue to find
attractive investments selling below their intrinsic worth. This
growth-at-a-reasonable-price strategy will best serve to enhance the portfolios
and provide a solid foundation for long-term results. As always, we continue to
tackle each stock individually on a fundamental ("bottom-up") basis.
Your account with us is appreciated.
Sincerely,
Dale R. Schuh
Dale R. Schuh, President and Chief Operating Officer
Sentry Life Insurance Company
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SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABLE ACCOUNT II
STATEMENT OF ASSETS, LIABILITIES
AND CONTRACT OWNERS' EQUITY
December 31, 1995
<TABLE>
<S> <C>
ASSETS:
Investments at market value:
Neuberger & Berman Advisers Management Trust:
Liquid Asset Portfolio, 2,624,851
shares (cost $2,624,851) $ 2,624,851
Growth Portfolio, 1,335,543
shares (cost $28,869,666) 34,537,132
Limited Maturity Bond Portfolio, 584,401
shares (cost $8,118,289) 8,596,533
Balanced Portfolio, 513,994
shares (cost $7,609,383) 9,005,176
-----------
Total investments 54,763,692
Dividends receivable 10,757
-----------
Total assets 54,774,449
LIABILITIES:
Accrued expenses 2,856
-----------
Contract owners' equity (Net Assets) $54,771,593
===========
</TABLE>
The accompanying notes are an integral part of these financial statements
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SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABLE ACCOUNT II
STATEMENTS OF OPERATIONS AND CHANGES IN CONTRACT OWNERS' EQUITY
For the Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
SUB-ACCOUNTS INVESTING IN:
--------------------------
LIQUID ASSET GROWTH
PORTFOLIO PORTFOLIO
-------------------------- --------------------------
1995 1994 1995 1994
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Income:
Dividends $ 148,465 $ 124,657 $ 71,275 $ 170,811
Expenses:
Mortality and expense risk 36,040 45,814 400,743 376,544
---------- ---------- ----------- -----------
Net investment income (loss) 112,425 78,843 (329,468) (205,733)
---------- ---------- ----------- -----------
Realized net investment gain -- -- 1,608,647 1,203,944
Unrealized appreciation (depreciation), net -- -- 6,319,592 (7,090,027)
Capital gain distributions received -- 4,577 955,092 3,999,827
---------- ---------- ----------- -----------
Realized and unrealized gain (loss)
on investments and capital
gain distributions, net -- 4,577 8,883,331 (1,886,256)
---------- ---------- ----------- -----------
Net increase (decrease) in contract owners'
equity from operations 112,425 83,420 8,553,863 (2,091,989)
---------- ---------- ----------- -----------
Purchase payments 139,601 120,645 1,288,052 1,061,228
Transfers between subaccounts, net 105,468 691,753 351,441 (473,402)
Withdrawals (1,111,786) (1,796,074) (5,232,234) (4,944,874)
Contract maintenance fees (4,820) (5,538) (48,549) (51,704)
Surrender charges (6,123) (10,578) (25,366) (40,880)
Asset transfer due to VA merger (Note 7) -- 167,162 -- 1,395,045
---------- ---------- ----------- -----------
Net decrease in contract owners'
equity derived from principal transactions (877,660) (832,630) (3,666,656) (3,054,587)
---------- ---------- ----------- -----------
Total increase (decrease) in contract
owners' equity (765,235) (749,210) 4,887,207 (5,146,576)
Contract owners' equity at beginning of year 3,399,935 4,149,145 29,648,763 34,795,339
---------- ---------- ----------- -----------
Contract owners' equity at end of year $2,634,700 $3,399,935 $34,535,970 $29,648,763
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
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<TABLE>
<CAPTION>
LIMITED MATURITY BALANCED
BOND PORTFOLIO PORTFOLIO TOTAL
- ---------------------------- ----------------------------- ----------------------------
1995 1994 1995 1994 1995 1994
- ----------- ------------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
$ 501,148 $ 394,726 $ 157,249 $ 131,376 $ 878,137 $ 821,570
107,118 117,735 106,166 102,528 650,067 642,621
- ----------- ----------- ---------- ---------- ----------- -----------
394,030 276,991 51,083 28,848 228,070 178,949
- ----------- ----------- ---------- ---------- ----------- -----------
112,466 217,759 300,179 201,009 2,021,292 1,622,712
319,897 (694,494) 1,348,677 (836,053) 7,988,166 (8,620,574)
-- 58,478 50,544 217,057 1,005,636 4,279,939
- ----------- ----------- ---------- ---------- ----------- -----------
432,363 (418,257) 1,699,400 (417,987) 11,015,094 (2,717,923)
- ----------- ----------- ---------- ---------- ----------- -----------
826,393 (141,266) 1,750,483 (389,139) 11,243,164 (2,538,974)
- ----------- ----------- ---------- ---------- ----------- -----------
159,828 161,670 711,656 622,501 2,299,137 1,966,044
4,170 (378,618) (461,079) 160,267 -- --
(1,752,030) (1,861,013) (1,250,692) (1,422,567) (9,346,742) (10,024,528)
(10,934) (13,301) (11,256) (11,837) (75,559) (82,380)
(7,177) (10,027) (11,734) (16,769) (50,400) (78,254)
-- 718,133 -- 158,997 -- 2,439,337
- ----------- ----------- ---------- ---------- ----------- -----------
(1,606,143) (1,383,156) (1,023,105) (509,408) (7,173,564) (5,779,781)
- ----------- ----------- ---------- ---------- ----------- -----------
(779,750) (1,524,422) 727,378 (898,547) 4,069,600 (8,318,755)
9,375,663 10,900,085 8,277,632 9,176,179 50,701,993 59,020,748
- ----------- ----------- ---------- ---------- ----------- -----------
$ 8,595,913 $ 9,375,663 $9,005,010 $8,277,632 $54,771,593 $50,701,993
=========== =========== ========== ========== =========== ===========
</TABLE>
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NOTES TO FINANCIAL STATEMENTS
December 31, 1995 and 1994
1. ORGANIZATION AND CONTRACTS
The Sentry Variable Account II (the Variable Account) is a segregated
investment account of the Sentry Life Insurance Company (the Company) and is
registered with the Securities and Exchange Commission as a unit investment
trust pursuant to the provisions of the Investment Company Act of 1940. The
Variable Account was established by the Company on August 2, 1983 and
commenced operations on May 3, 1984. Accordingly, it is an accounting entity
wherein all segregated account transactions are reflected.
The assets of the Variable Account are invested in one or more of the
portfolios of Neuberger & Berman Advisers Management Trust (the Trust) at the
portfolio's net asset value in accordance with the selection made by the
contract owners.
A copy of the Neuberger & Berman Advisers Management Trust Annual Report is
included in the Variable Account's Annual Report.
2. SIGNIFICANT ACCOUNTING POLICIES
VALUATION OF INVESTMENTS
Investments in the Trust are valued by using net asset values which are based
on the daily closing prices of the underlying securities in the Trust's
portfolios.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded on the trade date (the date the order to
buy and sell is executed). Dividend income is recorded on the ex-dividend
date. The cost of investments sold and the corresponding capital gains and
losses are determined on a specific identification basis.
FEDERAL INCOME TAXES
The Company is taxed as a life insurance company under the provisions of the
Internal Revenue Code. The operations of the Variable Account are part of the
total operations of the Company and are not taxed as a separate entity.
Under Federal income tax law, net investment income and net realized capital
gains of the Variable Account which are applied to increase contract owners'
equity are not taxed.
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995 and 1994
3. EXPENSES
A mortality and expense risk premium is deducted by the Company from the
Variable Account on a daily basis which is equal, on an annual basis, to
1.20% (.80% mortality and .40% expense risk) of the daily net asset value of
the Variable Account. This mortality and expense risk premium compensates the
Company for assuming these risks under the variable annuity contract. The
liability for accrued mortality and expense risk premium amounted to $2,856
at December 31, 1995.
The Company deducts, on the contract anniversary date, an annual contract
maintenance charge of $30, per contract holder, from the contract value by
canceling accumulation units. If the contract is surrendered for its full
surrender value, on other than the contract anniversary, the contract
maintenance charge will be deducted at the time of such surrender. This
charge reimburses the Company for administrative expenses relating to
maintenance of the contract.
There are no deductions made from purchase payments for sales charges at the
time of purchase. However, a contingent deferred sales charge may be deducted
in the event of a surrender to reimburse the Company for expenses incurred
which are related to contract sales. Contingent deferred sales charges apply
to each purchase payment and are graded from 6% during the first contract
year to 0% in the seventh contract year.
Any premium tax payable to a governmental entity as a result of the existence
of the contracts or the Variable Account will be charged against the contract
value. Premium taxes up to 4% are currently imposed by certain states. Some
states assess their premium taxes at the time purchase payments are made;
others assess their premium taxes at the time of annuitization. In the event
contracts would be issued in states assessing their premium taxes at the time
purchase payments are made, the Company currently intends to advance such
premium taxes and deduct the premium taxes from a contract owner's contract
value at the time of annuitization or surrender.
4. INITIAL CAPITALIZATION
Initial capital of $100,000 was provided by the Company for the establishment
of the Variable Account. As an investor in the Variable Account, the Company
shares pro rata in the investment performance of the Variable Account and is
subject to the same valuation procedures and the same periodic charges as are
other contract owners in the Variable Account. The Company's investment, at
market value, was $270,496 at December 31, 1995.
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995 and 1994
5. CONTRACT OWNERS' EQUITY
Contract owners' equity is represented by accumulation units in the related
Variable Account. At December 31, 1995 ownership of the Variable Account
was represented by the following accumulation units and accumulation unit
values:
<TABLE>
<CAPTION>
ACCUMULATION ACCUMULATION
UNITS UNIT VALUE VALUE
------------ ------------ -----------
<S> <C> <C> <C>
Liquid Asset Portfolio 162,165 $16.25 $ 2,634,700
Growth Portfolio 938,909 36.78 34,535,970
Limited Maturity Bond Portfolio 384,749 22.34 8,595,913
Balanced Portfolio 550,216 16.37 9,005,010
-----------
Total contract owners' equity $54,771,593
===========
</TABLE>
At December 31, 1994 ownership of the Variable Account was represented by
the following accumulation units and accumulation unit values:
<TABLE>
<CAPTION>
ACCUMULATION ACCUMULATION
UNITS UNIT VALUE VALUE
------------ ------------ -----------
<S> <C> <C> <C>
Liquid Asset Portfolio 217,211 $15.65 $ 3,399,935
Growth Portfolio 1,049,256 28.26 29,648,763
Limited Maturity Bond Portfolio 460,025 20.38 9,375,663
Balanced Portfolio 618,542 13.38 8,277,632
-----------
Total contract owners' equity $50,701,993
===========
</TABLE>
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995 and 1994
6. PURCHASES AND SALES OF SECURITIES
In 1995, purchases and proceeds on sales of the Trust's shares aggregated
$7,134,067 and $13,071,544, respectively, and were as follows:
<TABLE>
<CAPTION>
LIQUID ASSET GROWTH LIMITED MATURITY BALANCED
PORTFOLIO PORTFOLIO BOND PORTFOLIO PORTFOLIO TOTAL
------------ --------- ---------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Purchases $1,127,073 $3,829,670 $ 979,314 $1,198,010 $7,134,067
Proceeds on sales 1,887,956 6,871,957 2,191,308 2,120,323 13,071,544
</TABLE>
In 1994, purchases and proceeds on sales of the Trust's shares aggregated
$10,806,035 and $14,575,256, respectively, and were as follows:
<TABLE>
<CAPTION>
LIQUID ASSET GROWTH LIMITED MATURITY BALANCED
PORTFOLIO PORTFOLIO BOND PORTFOLIO PORTFOLIO TOTAL
------------ --------- ---------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Purchases $2,030,380 $6,448,934 $ 814,591 $1,512,130 $10,806,035
Proceeds on sales 2,953,556 7,104,923 2,581,675 1,935,102 14,575,256
</TABLE>
7. MERGER OF VARIABLE ACCOUNT
Effective October 31, 1994 the Sentry Variable Account I of Sentry Investors
Life Insurance Company (SILICVA) was merged into the Variable Account of the
Company. Prior to the merger the variable accounts invested in identical
securities and had the same accumulation unit value. Accumulation units of
the Variable Account were issued one for one in exchange for the accumulation
units of the SILIC VA. The aggregate net assets of the Variable Account and
the SILIC VA were $51,175,180 and $2,439,337 immediately before the merger.
The combined net assets of the Variable Account at October 31, 1994 were
$53,614,517. The results of operations and changes in contract owners' equity
of the SILICVA are included with the Variable Account after October 31, 1994.
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[SENTRY LIFE INSURANCE COMPANY LOGO]
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REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS
SENTRY LIFE INSURANCE COMPANY
AND
THE CONTRACT OWNERS OF
SENTRY VARIABLE ACCOUNT II:
We have audited the accompanying statement of assets, liabilities and contract
owners' equity of the Liquid Asset Portfolio, Growth Portfolio, Limited
Maturity Bond Portfolio and Balanced Portfolio of the Sentry Variable Account
II as of December 31, 1995, and the related statements of operations and
changes in contract owners' equity for each of the two years in the period then
ended. These financial statements are the responsibility of Sentry Life
Insurance Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1995 by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Liquid Asset Portfolio,
Growth Portfolio, Limited Maturity Bond Portfolio and Balanced Portfolio of the
Sentry Variable Account II as of December 31, 1995, and the results of their
operations and the changes in their contract owners' equity for each of the two
years in the period then ended in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Chicago, Illinois
February 9, 1996
