<PAGE> 1
1933 Act File No. 2-87072
1940 Act File No. 811-3875
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. 18 [ x ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 16 [ x ]
SENTRY VARIABLE ACCOUNT II
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(Exact Name of Registrant)
SENTRY LIFE INSURANCE COMPANY
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(Name of Depositor)
1800 North Point Drive
Stevens Point, Wisconsin 54481
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(Address of Depositor's Executive Offices and Zip Code)
Telephone (715) 346-6000
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(Depositor's Telephone Number, Including Area Code)
William M. O'Reilly
Sentry Life Insurance Company
1800 North Point Drive
Stevens Point, WI 54481
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[x] on May 1, 1998, pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) 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.
Title of Securities Being Registered: Individual Variable Annuity Contracts
<PAGE> 2
CROSS REFERENCE SHEET
(Required by Rule 495)
<TABLE>
<CAPTION>
Item No. Location
<S> <C>
PART A
1 Cover Page .............................. Cover Page
2 Definitions ............................. Definitions
3 Synopsis ................................. Synopsis
4 Condensed Financial Information ......... Condensed Financial Information
5 General Description of Registrant,
Depositor, and Portfolio Companies ....... The Company; The Variable
Account; Neuberger & Berman
Advisers Management Trust
6 Deductions and Expenses ................. Charges and Deductions
7 General Description of Variable
Annuity Contracts ....................... The Contracts
8 Annuity Period .......................... Annuity Provisions
9 Death Benefit ........................... The Contracts; Annuity
Provisions
10 Purchases and Contract Value ............. Purchases and Contract Value
11 Redemptions ............................. Purchases and Contract Value
12 Taxes ................................... Federal Tax Status
13 Legal Proceedings ....................... Legal Proceedings
14 Table of Contents of the Statement
of Additional Information ................ Table of Contents of the
Statement of Additional
Information
PART B
15 Cover Page .............................. Cover Page
16 Table of Contents ....................... Table of Contents
17 General Information and History .......... The Company
18 Services ................................ Not Applicable
19 Purchase of Securities Being Offered ..... Not Applicable
20 Underwriters ............................ Distribution of Contracts
21 Calculation of Performance Data .......... Yield Calculation for
Liquid Asset Sub-Account
22 Annuity Payments ........................ Amount of Annuity Payments
23 Financial Statements ..................... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement
<PAGE> 3
PART A
<PAGE> 4
[SENTRY LOGO]
Sentry Variable Account II
THE PATRIOT
A FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY
FUNDED BY NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
[LOGO]
APPLICATION AND PROSPECTUS
MAY 1, 1998
SENTRY LIFE INSURANCE COMPANY
<PAGE> 5
SENTRY LIFE INSURANCE COMPANY
Home Office: Annuity Service Office:
1800 North Point Drive P.O. Box 867
Stevens Point, WI 54481 Stevens Point, WI 54481
Telephone: (800) 533-7827
INDIVIDUAL FLEXIBLE PURCHASE PAYMENT DEFERRED
VARIABLE ANNUITY CONTRACTS
ISSUED BY
SENTRY VARIABLE ACCOUNT II
and
SENTRY LIFE INSURANCE COMPANY
The Individual Flexible Purchase Payment Deferred Variable Annuity Contracts
(the "Contracts") described in this Prospectus provide for accumulation of
Contract Values and payment of monthly annuity payments on a variable basis. The
Contracts are designed for use by individuals in retirement plans on a Qualified
or Non-Qualified basis. The types of Qualified Plans which may purchase the
Contracts are retirement plans that receive favorable tax treatment under
Sections 403, 408 or 457 of the Internal Revenue Code. (See "Definitions" and
"Federal Tax Status.")
Purchase payments for the Contracts will be allocated to a segregated
investment account of Sentry Life Insurance Company (the "Company") which has
been designated Sentry Variable Account II (the "Variable Account"). The
Variable Account invests in shares of Neuberger & Berman Advisers Management
Trust ("the Trust") at their net asset value. (See "Neuberger & Berman Advisers
Management Trust.") Contract Owners bear the complete investment risk for all
amounts allocated to the Variable Account.
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY FINANCIAL INSTITUTION AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
INVESTMENT IN THE CONTRACTS IS SUBJECT TO RISK THAT MAY CAUSE THE VALUE OF THE
CONTRACT OWNER'S INVESTMENT TO FLUCTUATE, AND WHEN THE CONTRACTS ARE
SURRENDERED, THE VALUE MAY BE HIGHER OR LOWER THAN THE PURCHASE PAYMENT.
This Prospectus provides the basic information you should know before investing.
Please keep this Prospectus for future reference.
A Statement of Additional Information dated May 1, 1998, incorporated herein by
reference and containing further information about the Contracts, has been filed
with the Securities and Exchange Commission. You can obtain a copy at no charge
by calling or writing Sentry Equity Services, Inc., 1800 North Point Drive,
Stevens Point, WI 54481, (800) 533-7827. The Table of Contents of the Statement
of Additional Information can be found on page 26 of this Prospectus.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, the Contracts in any jurisdiction in which such offer or
solicitation may not be lawfully made.
INQUIRIES: Inquiries should be directed to the Annuity Service Office given
above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS AND THE STATEMENT OF ADDITIONAL INFORMATION ARE DATED MAY 1,
1998.
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions................................................................................................ 4
Synopsis................................................................................................... 5
Fee Table.................................................................................................. 6
Condensed Financial Information............................................................................ 8
Yield Calculation for Liquid Asset Sub-Account............................................................. 8
Performance Information.................................................................................... 8
Financial Statements....................................................................................... 9
The Company................................................................................................ 9
The Variable Account....................................................................................... 9
Neuberger & Berman Advisers Management Trust............................................................... 9
AMT Liquid Asset Investments............................................................................ 9
AMT Growth Investments.................................................................................. 10
AMT Limited Maturity Bond Investments................................................................... 10
AMT Balanced Investments................................................................................ 10
Variable Account Voting Rights.......................................................................... 10
Substitution of Securities.............................................................................. 11
Charges and Deductions..................................................................................... 11
Contingent Deferred Sales Charge........................................................................ 11
Reduction or Elimination of Contingent Deferred Sales Charge............................................ 12
Deduction for Mortality and Expense Risk Premium........................................................ 12
Deduction for Contract Maintenance Charge............................................................... 12
Deduction for Premium Taxes and Other Taxes............................................................. 13
Other Deductions and Charges............................................................................ 13
The Contracts.............................................................................................. 13
Transfers............................................................................................... 13
Change in Purchase Payments............................................................................. 14
No Default.............................................................................................. 14
Modification of the Contract............................................................................ 14
Contract Value.......................................................................................... 14
Ownership............................................................................................... 14
Assignment.............................................................................................. 15
Beneficiary............................................................................................. 15
Annuity Provisions......................................................................................... 15
Income Date and Settlement Option....................................................................... 15
Change in Income Date................................................................................... 15
Change in Settlement Option............................................................................. 15
Settlement Options...................................................................................... 16
Mortality and Expense Guarantee......................................................................... 16
Frequency of Annuity Payments........................................................................... 16
Annuity Unit............................................................................................ 16
Amount of Annuity Payments.............................................................................. 16
Additional Provisions................................................................................... 17
</TABLE>
2
<PAGE> 7
TABLE OF CONTENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Death Benefit.............................................................................................. 17
Death of the Annuitant.................................................................................. 17
Death of the Contract Owner............................................................................. 17
Purchases and Contract Value............................................................................... 18
Purchase Payments....................................................................................... 18
Allocation of Purchase Payments......................................................................... 18
Accumulation Units...................................................................................... 18
Distribution of Contracts............................................................................... 19
Surrenders................................................................................................. 19
Limitations on Withdrawals from 403(b) Annuities........................................................ 19
Texas Optional Retirement Program....................................................................... 19
Federal Tax Status......................................................................................... 20
General................................................................................................. 20
Diversification......................................................................................... 20
Multiple Contracts...................................................................................... 21
Contracts Owned by Other than Natural Persons........................................................... 21
Tax Treatment of Assignments............................................................................ 21
Income Tax Withholding.................................................................................. 22
Tax Treatment of Withdrawals - Non-Qualified Contracts
and Section 457 Contracts............................................................................. 22
Qualified Plans......................................................................................... 22
Tax Treatment of Withdrawals - Qualified Contracts...................................................... 24
Tax Sheltered Annuities - Withdrawal Limitations........................................................ 24
Section 457 - Deferred Compensation Plans............................................................... 25
Legal Proceedings.......................................................................................... 25
Table of Contents of Statement of Additional Information................................................... 26
</TABLE>
3
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DEFINITIONS
ACCUMULATION UNIT - An accounting unit of measure used to calculate Contract
Values prior to the Income Date.
ANNUITANT - The person upon whose continuation of life any annuity payment
involving life contingencies depends.
ANNUITY UNIT - An accounting unit of measure used to calculate annuity payments
after the Income Date.
COMPANY - Sentry Life Insurance Company at its Annuity Service Office.
CONTINGENT DEFERRED SALES CHARGE - The sales charge that may be applied against
amounts surrendered.
CONTINGENT OWNER - The Contingent Owner, if any, must be the spouse of the
Contract Owner named in the application.
CONTRACT ANNIVERSARY - An anniversary of the Effective Date of the Contract.
CONTRACT OWNER - The Contract Owner is named in the application, unless changed,
and has all rights under the Contract.
CONTRACT VALUE - The dollar value as of any Valuation Date of all amounts
accumulated under the Contract.
CONTRACT YEAR - Any period of 12 months commencing with the Effective Date and
each Contract Anniversary thereafter.
EFFECTIVE DATE - The date shown as the Effective Date on the Contract data page
of the Contract.
ELIGIBLE MUTUAL FUND - A mutual fund designated on the Contract data page of the
Contract.
INCOME DATE - The date on which annuity payments are to commence.
NON-QUALIFIED CONTRACTS - Contracts issued under Non-Qualified Plans.
NON-QUALIFIED PLANS - Retirement plans that do not receive favorable tax
treatment under Sections 403, 408 or 457 of the Internal Revenue Code of 1986,
as amended (the "Code").
PORTFOLIO - A segment of an Eligible Mutual Fund that constitutes a separate and
distinct class of shares.
QUALIFIED CONTRACTS - Contracts issued under Qualified Plans.
QUALIFIED PLANS - Retirement plans that receive favorable tax treatment under
Sections 403, 408 or 457 of the Code.
VALUATION DATE - Each day that the New York Stock Exchange is open for business
which is Monday through Friday, except for New Year's Day, Martin Luther King
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
VALUATION PERIOD - The period commencing at the close of business on the New
York Stock Exchange on each Valuation Date and ending at the close of business
for the next succeeding Valuation Date, as well as any other day when the
Variable Account is valued because there was a sufficient degree of trading in
the Variable Account so that the net asset value of the Accumulation Unit and
Annuity Unit was materially affected.
VARIABLE ACCOUNT - A separate investment account of the Company, designated as
Sentry Variable Account II, into which Net Purchase Payments will be allocated.
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<PAGE> 9
SYNOPSIS
THE CONTRACTS
The Individual Flexible Purchase Payment Deferred Variable Annuity Contracts
(the "Contracts") described in this Prospectus provide for accumulation of
Contract Values and payment of monthly annuity payments on a variable basis. The
Contracts are designed for use by individuals in retirement plans on a Qualified
or Non-Qualified basis. (See "Definitions" and "Federal Tax Status.")
THE VARIABLE ACCOUNT
Purchase payments for the Contracts will be allocated to a segregated investment
account of Sentry Life Insurance Company (the "Company") which has been
designated Sentry Variable Account II (the "Variable Account"). The Variable
Account invests in shares of Neuberger & Berman Advisers Management Trust at
their net asset value. (See "Neuberger & Berman Advisers Management Trust.")
Contract Owners bear the investment risk for all amounts allocated to the
Variable Account.
CONTINGENT DEFERRED SALES CHARGE
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. The Contingent Deferred Sales Charge is intended to
reimburse the Company for expenses relating to Contract sales. The Contingent
Deferred Sales Charge, if any, is based on a graded table of charges, but in no
event will the aggregate charges exceed 6% of the total purchase payments made.
(See "Charges and Deductions - Contingent Deferred Sales Charge.")
TEN-DAY FREE LOOK
Within 10 days (or longer in states where required) of the day the Contract is
received, it may be returned to the Company or to the agent through whom it was
purchased. When the Contract is received by the Company it will be voided as if
it had never been in force. The purchase payments will then be refunded in full.
MORTALITY AND EXPENSE RISK PREMIUM
A Mortality and Expense Risk Premium is deducted from the Variable Account on a
daily basis and is equal on an annual basis to 1.20% of the daily net asset
value of the Variable Account. (See "Charges and Deductions - Deduction for
Mortality and Expense Risk Premium.")
CONTRACT MAINTENANCE CHARGE
The Company deducts an annual Contract Maintenance Charge of $30 from the
Contract Value by cancelling Accumulation Units to reimburse it for
administrative expenses relating to maintenance of the Contract. Prior to the
Income Date, the Company does not guarantee the amount of the Contract
Maintenance Charge, and there is no guarantee that it will not be changed in the
future. After the Income Date, the amount of the Contract Maintenance Charge
will not be changed from the amount of the annual Contract Maintenance Charge in
effect during the Contract Year immediately preceding the Income Date. After the
Income Date, the Contract Maintenance Charge will be collected on a monthly
basis and will result in a reduction of the monthly benefit. (See "Charges and
Deductions - Deduction for Contract Maintenance Charge.")
PREMIUM TAXES
Premium taxes payable to a state or other governmental entity will be charged
against the Contract Value. Currently such premium taxes range from 0% to 4.0%.
(See "Charges and Deductions - Deduction for Premium Taxes and Other Taxes.")
TAX PENALTY UPON SURRENDER
There is a 10% federal income tax penalty applied to the income portion of any
distribution from Non-Qualified Contracts. However, the 10% penalty is not
imposed on amounts received: (1) after the taxpayer reaches age 59 1/2; (2)
after the death of the Contract Owner; (3) if the taxpayer is totally
disabled (for this purpose, disability is as defined in Section 72(m)(7) of the
Code); (4) in a series of substantially equal periodic payments made not less
frequently than annually for the life (or life expectancy) of the taxpayer or
for the joint lives (or joint life expectancies) of the taxpayer and his or her
beneficiary; (5) under an immediate annuity; or (6) which are allocable to
purchase payments made prior to August 14, 1982. The Contracts provide that if
the Annuitant dies prior to the Income Date, the Death Benefit will be paid to
the Beneficiary. A Death Benefit paid upon the death of an Annuitant who is not
the Contract Owner does not qualify for the death-of-Contract Owner exception
described above and will be subject to the 10% distribution
5
<PAGE> 10
penalty unless the Beneficiary is age 59 1/2 or one of the other exceptions to
the penalty applies. For federal income tax purposes, withdrawals are deemed to
be on a last-in-first-out basis. This discussion also applies to Qualified
Contracts issued pursuant to plans qualified under Section 457 of the Code but
does not apply to Qualified Contracts issued pursuant to plans qualified under
Sections 401, 403(b) or 408 of the Code. Separate tax withdrawal penalties and
restrictions apply to such Qualified Contracts. For a further discussion of the
taxation of the Contracts, see "Federal Tax Status."
See "Federal Tax Status - Diversification" for a discussion of Contract Owner
control of the underlying investments in a variable annuity contract.
LIMITATIONS ON WITHDRAWALS FROM 403(B) ANNUITIES
The Code limits the withdrawal of amounts attributable to contributions made
pursuant to a salary reduction agreement (as defined in Section 403(b) (11) of
the Code) to the occurrence of one of the following events: the Contract Owner
attains age 591/2, separates from service, dies or becomes disabled (within the
meaning of Section 72(m) (7) of the Code), or in a case of hardship. However,
withdrawals for hardship are restricted to the portion of the Contract Owner's
Contract Value representing contributions made by the Contract Owner and does
not include any investment results. The limitations on withdrawals became
effective January 1, 1989, and apply only to salary reduction contributions made
after December 31, 1988, to income attributable to such contributions and to
income attributable to amounts held as of December 31, 1988. The limitations on
withdrawals do not affect rollovers or transfers between certain Qualified
Plans. Tax penalties may also apply. (See "Federal Tax Status Tax Treatment of
Withdrawals Qualified Contracts.") Contract Owners should consult their own
tax counsel or other tax adviser regarding any distributions. (See "Federal Tax
Status Tax Sheltered Annuities Withdrawal Limitations.")
MULTIPLE CONTRACTS
The Code provides that multiple non-qualified annuity contracts which are issued
within a calendar year to the same Contract Owner by one company or its
affiliates are treated as one annuity contract for purposes of determining the
tax consequences of any distribution. Such treatment may result in adverse tax
consequences including more rapid taxation of the distributed amounts from such
combination of contracts. Contract Owners should consult a tax adviser prior to
purchasing more than one non-qualified annuity contract in any calendar year.
FEE TABLE
CONTRACT OWNER TRANSACTION EXPENSES
Contingent Deferred Sales Charge (see number 3 of the explanations on the
following page) (as a percentage of purchase payments)
<TABLE>
<CAPTION>
TIME BETWEEN RECEIPT OF ALLOCATED
PURCHASE PAYMENT AND DATE OF SURRENDER PERCENTAGE
-------------------------------------- ----------
<S> <C>
Less than 1 year....................................................................... 6%
At least 1 year but less than 2 years.................................................. 5%
At least 2 years but less than 3 years................................................. 4%
At least 3 years but less than 4 years................................................. 3%
At least 4 years but less than 5 years................................................. 2%
At least 5 years but less than 6 years................................................. 1%
At least 6 years....................................................................... 0%
</TABLE>
Contract Maintenance Charge $30 per Contract per year
VARIABLE ACCOUNT ANNUAL EXPENSES
(as a percentage of daily net asset value)
Mortality and Expense Risk Premium 1.20%
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST AND ADVISERS MANAGERS TRUST ANNUAL
EXPENSES(1) (as a percentage of the average daily net assets of a Portfolio)
<TABLE>
<CAPTION>
INVESTMENT
MANAGEMENT OTHER TOTAL ANNUAL
PORTFOLIO AND ADMINISTRATION FEES EXPENSES EXPENSES
- --------- ----------------------- -------- ------------
<S> <C> <C> <C>
Liquid Asset(2) 0.53% 0.47% 1.00%
Balanced 0.85% 0.19% 1.04%
Growth 0.83% 0.07% 0.90%
Limited Maturity Bond 0.65% 0.12% 0.77%
</TABLE>
6
<PAGE> 11
(1)The Trust is divided into nine portfolios ("Portfolios"), four of which are
available through the Variable Account. Each Portfolio invests all of its net
investable assets in a corresponding series ("Series") of Advisers Managers
Trust. The figures reported under "Investment Management and Administration
Fees" include the aggregate of the administration fees paid by the Portfolio and
the management fees paid by its corresponding Series. Similarly, "Other
Expenses" include all other expenses of the Portfolio and its corresponding
Series.
(2)Expenses reflect expense reimbursement. N&B Management has undertaken
to reimburse the Liquid Asset Portfolio for certain operating expenses including
the compensation of N&B Management and excluding certain other expenses that
exceed, in the aggregate, 1% of the Portfolio's average daily net asset value.
Absent such reimbursement, the "Total Annual Expenses" for the year ended
December 31, 1997 would have been 1.12% for the Liquid Asset Portfolio. This
expense reimbursement policy is subject to termination upon 60 days written
notice and there can be no assurance that it will be continued thereafter.
EXAMPLES
A Contract Owner would pay the following expenses on a $1,000 investment,
assuming a 5% annual return on assets:
1) upon surrender at the end of each time period;
2) if the Contract is not surrendered.
<TABLE>
<CAPTION>
TIME PERIODS
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Growth Portfolio a) $72.00 $ 98.00 $126.00 $252.00
b) $22.00 $ 68.00 $116.00 $252.00
Liquid Asset Portfolio a) $73.00 $100.00 $130.00 $261.00
b) $23.00 $ 70.00 $120.00 $261.00
Limited Maturity Bond Portfolio a) $71.00 $ 94.00 $119.00 $237.00
b) $21.00 $ 64.00 $109.00 $237.00
Balanced Portfolio a) $74.00 $103.00 $134.00 $268.00
b) $24.00 $ 73.00 $124.00 $268.00
</TABLE>
EXPLANATION OF FEE TABLE AND EXAMPLES
1. The purpose of the above table is to assist the Contract Owner in
understanding the various costs and expenses that will be incurred by the
Contract Owner, directly or indirectly. The table reflects expenses of the
Variable Account as well as the Trust. For additional information, see "Charges
and Deductions" in this Prospectus and "Management of the Trust The Investment
Adviser/Sub-Adviser" in the Trust Prospectus.
2. Premium taxes are not reflected. Premium taxes may apply. See "Charges
and Deductions Deduction for Premium Taxes and Other Taxes."
3. The examples do not reflect the fact that after the first Contract Year, a
Contract Owner may, not more than once annually on a non-cumulative basis, make
a surrender per Contract Year of up to 10% of aggregate purchase payments (less
any withdrawals) free from a Contingent Deferred Sales Charge provided the
Contract Value prior to the surrender exceeds $10,000.
4. Neither the fee table nor the examples include a transfer fee. Currently,
the Company does not impose a charge for effecting transfers; however, it
does reserve the right to assess a transfer fee in the future. (See "The
Contracts Transfers.")
5. THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
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CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUES
The following table includes Accumulation Unit Values for the periods indicated.
This data has been taken from the Variable Account's financial statements which
have been audited for all periods by Coopers & Lybrand L.L.P., independent
accountants, whose report thereon is included in the Statement of Additional
Information. This information should be read in conjunction with the Variable
Account's financial statements and related notes included in the Statement of
Additional Information.
<TABLE>
<CAPTION>
YEAR ENDED
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIQUID ASSET SUB-ACCOUNT
Beginning of Period $ 16.779 $16.247 $15.653 $15.311 $15.127 $14.825 $14.207 $13.368 $12.459 $11.820
End of Period $ 17.361 16.779 16.247 15.653 15.311 15.127 14.825 14.207 13.368 12.459
Number of Accum.
Units Outstanding 115,558 145,387 162,165 217,211 270,994 414,153 544,747 646,044 502,722 484,760
GROWTH SUB-ACCOUNT
Beginning of Period $ 39.662 $36.783 $28.257 $30.098 $28.524 $26.357 $20.558 $22.662 $17.711 $14.226
End of Period $ 50.557 39.662 36.783 28.257 30.098 28.524 26.357 20.558 22.662 17.711
Number of Accum.
Units Outstanding 780,148 847,224 938,909 1,049,256 1,156,057 1,231,668 1,363,149 1,375,719 1,503,684 1,481,380
LIMITED MATURITY BOND
SUB-ACCOUNT
Beginning of Period $ 23.024 $22.342 $20.381 $20.653 $19.607 $18.867 $17.147 $16.026 $14.639 $13.823
End of Period $ 24.284 23.024 22.342 20.381 20.653 19.607 18.867 17.147 16.026 14.639
Number of Accum.
Units Outstanding 258,942 317,877 384,749 460,025 527,775 624,082 696,573 765,968 837,082 885,951
BALANCED SUB-ACCOUNT
Beginning of Period $ 17.283 $16.367 $13.382 $14.010 $13.323 $12.480 $10.288 $10.000 No Accumulation Unit
End of Period $ 20.399 17.283 16.367 13.382 14.010 13.323 12.480 10.288 Values for this period.
Sales of the Contracts
in connection with this
Number of Accum. Portfolio commenced on
Units Outstanding 482,578 519,312 550,216 618,542 654,955 565,977 284,777 164,053 September 14, 1990.
</TABLE>
YIELD CALCULATION FOR LIQUID ASSET SUB-ACCOUNT
For the seven calendar days ended December 31, 1997, the annualized yield
for the sub-account funded by the Liquid Asset Portfolio was 3.59%.
PERFORMANCE INFORMATION
Periodically, the Company may advertise performance data for the various
sub-accounts under the Contracts. Such data will show the percentage change in
the value of an Accumulation Unit based on the performance of an investment
medium over a period of time, usually a calendar year, determined by dividing
the increase (decrease) in value for that Unit by the Accumulation Unit value at
the beginning of the period. This percentage figure will reflect the deduction
of any asset-based charges and any applicable Contract Maintenance Charges under
the Contracts, but will not reflect the deduction of any Contingent Deferred
Sales Charge. The deduction of any Contingent Deferred Sales Charge would reduce
any percentage increase or make greater any percentage decrease.
Any advertisement will also include total return figures calculated as described
in the Statement of Additional Information. The total return figures reflect the
deduction of any applicable Contract Maintenance Charges and Contingent Deferred
Sales Charges, as well as any asset-based charges.
In addition, the Company may distribute sales literature which compares the
percentage change in Accumulation Unit values for any of the Portfolios against
established market indices such as the Standard & Poor's 500 Composite Stock
Price Index, the Dow Jones Industrial Average or other management investment
companies which have investment objectives similar to the Portfolio being
compared.
The Balanced Portfolio of the Trust was made available for investment in
connection with the Contracts on September 14, 1990, and the date of the first
investment transaction was September 17, 1990. In order to demonstrate how the
actual investment performance of the Balanced Portfolio affects Accumulation
Unit Values, the Company may advertise hypothetical performance information
based on the historical experience of the Balanced Portfolio from September 17,
1990.
8
<PAGE> 13
FINANCIAL STATEMENTS
There are no financial statements contained in this Prospectus. Financial
statements for the Company and the Variable Account are found in the Statement
of Additional Information.
THE COMPANY
Sentry Life Insurance Company (the "Company") is a stock life insurance company
incorporated in 1958 pursuant to the laws of the State of Wisconsin. Its home
office is located at 1800 North Point Drive, Stevens Point, Wisconsin. It is
licensed to conduct life, annuity, and accident and health insurance business in
the District of Columbia and in all states, except New York. The Company is a
wholly-owned subsidiary of Sentry Insurance a Mutual Company ("SIAMCO"). SIAMCO
is a mutual insurance company incorporated under the laws of Wisconsin with
headquarters at 1800 North Point Drive, Stevens Point, Wisconsin. SIAMCO owns
and controls directly, or through subsidiary companies, a group of insurance and
related companies, including Sentry Life Insurance Company of New York and
Sentry Equity Services, Inc.
THE VARIABLE ACCOUNT
The Board of Directors of the Company adopted a resolution to establish a
segregated asset account pursuant to Wisconsin insurance law on August 2, 1983.
This segregated asset account has been designated "Sentry Variable Account II"
(the "Variable Account"). The Company has caused the Variable Account to be
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 the Company by the Securities and Exchange Commission.
The assets of the Variable Account are the property of the Company. The assets
of the Variable Account, equal to the reserves and other contract liabilities
with respect to the Variable Account, are not chargeable with liabilities
arising out of any other business the Company may conduct. The Company does not
guarantee the investment performance of the Variable Account. The Contract Value
and the amount of variable annuity payments will vary with the value of the
assets which underlie the Variable Account.
The Variable Account meets the definition of a "separate account" under federal
securities laws.
Income, gains and losses, whether or not realized, are, in accordance with the
Contracts, credited to or charged against the Variable Account without regard to
other income, gains or losses of the Company. Company obligations arising under
the Contracts are general corporate obligations of the Company.
The assets of the Variable Account are segregated by Portfolio, thus
establishing a series of sub-accounts within the Variable Account.
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
Neuberger & Berman Advisers Management Trust (the "Trust") is the funding
vehicle for the Contracts. Each Portfolio of the Trust invests all of its net
investable assets in its corresponding series (each a "Series") of Advisers
Managers Trust ("Managers Trust"), an open-end management investment company.
All Series of Managers Trust are managed by Neuberger & Berman Management
Incorporated ("N&B Management"). Each Series invests in securities in accordance
with an investment objective, policies, and limitations identical to those of
its corresponding Portfolio. This "master/feeder fund" structure is different
from that of many other investment companies which directly acquire and manage
their own portfolios of securities. For more information regarding this
structure, see the Trust's Prospectus. There are nine Portfolios, four of which
are currently available in connection with the Contracts. In that the investment
objective of each Portfolio matches that of its corresponding Series, the
following information is presented in terms of the applicable Series of Managers
Trust. The investment objective of each Series follows.
AMT Liquid Asset Investments. The investment objective of AMT Liquid Asset
Investments is to provide the highest current income consistent with safety and
liquidity. The Series invests in high quality U.S. dollar-denominated money
market instruments of U.S. and foreign issuers, including governments and their
agencies and instrumentalities, banks and other financial institutions, and
corporations, and may invest in repurchase agreements with respect to these
instruments. An investment in the Liquid Asset Portfolio is neither insured nor
guaranteed by the U.S. Government.
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<PAGE> 14
AMT Growth Investments. AMT Growth Investments seeks capital appreciation
without regard to income by investing in securities believed to have the maximum
potential for long-term capital appreciation. It does not seek to invest in
securities that pay dividends or interest, and any such income is incidental.
The Series expects to be almost fully invested in common stocks, often of
companies that may be temporarily out of favor in the market.
AMT Limited Maturity Bond Investments. The investment objective of AMT Limited
Maturity Bond Investments is to provide the highest current income consistent
with low risk to principal and liquidity; and secondarily, total return. The
Series invests in a diversified portfolio of fixed and variable rate debt
securities and seeks to increase income and preserve or enhance total return by
actively managing average portfolio maturity in light of market conditions and
trends. These are short-to-intermediate term debt securities. The Series'
dollar-weighted average portfolio maturity may range up to five years.
AMT Balanced Investments. The investment objective of AMT Balanced Investments
is long-term capital growth and reasonable current income without undue risk to
principal. The investment adviser anticipates that the Series' investments will
normally be managed so that approximately 60% of the Series' total assets will
be invested in common stocks and the remaining assets will be invested in debt
securities. However, depending on the investment adviser's view regarding
current market trends, the common stock portion of the Series' investments may
be adjusted downward to as low as 50% or upward to as high as 70%. At least 25%
of the Series' assets will be invested in fixed-income senior securities.
VARIABLE ACCOUNT VOTING RIGHTS
In accordance with its view of present applicable law, the Company will vote the
shares of the Trust held in the Variable Account at special meetings of the
shareholders of the Trust in accordance with instructions received from persons
having a voting interest in the Variable Account. The Company will vote shares
for which it has not received instructions in the same proportion as it votes
shares for which it has received instructions. The Company will vote shares that
it owns in the same proportion as it votes shares for which it has received
instructions. The Trust does not hold regular meetings of shareholders. (For a
further discussion of voting, see the Prospectus for the Trust.)
However, if the Investment Company Act of 1940 or any regulation thereunder
should be amended, or if the present interpretation thereof should change,
resulting in a determination by the Company that it is permitted to vote the
shares of the Trust in its own right, it may elect to do so.
The person having the voting interest under a Contract shall be the Contract
Owner. During the annuity payment period after the Income Date, the votes
attributable to a Contract Owner decrease as the reserves underlying the
Contract decrease.
The number of shares that a person has the right to vote will be determined as
of a date to be chosen by the Company not more than 60 days prior to the meeting
of the Trust. Voting instructions will be solicited by written communication at
least 14 days prior to such meeting.
Each person having a voting interest in the Variable Account will receive
periodic reports relating to the Trust and/or Portfolio in which he or she has
an interest, proxy material, and a form with which to give voting instructions
with respect to the proportion of the shares held in the Variable Account
corresponding to his or her interest in the Variable Account.
Shares of the Trust are issued and redeemed in connection with investment in and
payments under variable contracts issued through separate accounts of life
insurance companies which may or may not be affiliated with the Trust. Shares of
the Balanced Portfolio are also offered directly to qualified pension and
retirement plans ("Qualified Plans"). Shares of the Trust are purchased and
redeemed at net asset value. The Boards of Trustees of the Trust and Managers
Trust have undertaken to monitor the Trust and Managers Trust, respectively, for
the existence of any material irreconcilable conflict between the interests of
the variable contract owners of the life insurance companies and to determine
what action, if any, should be taken in the event of a conflict. The life
insurance companies and N&B Management are responsible for reporting any
potential or existing conflicts to the Boards. Due to differences of tax
treatment and other considerations, the interests of various variable contract
owners participating in the Trust and Managers Trust and the interests of
Qualified Plans investing in the Trust and Managers Trust may conflict. If such
a conflict were to occur, one or more life insurance company separate accounts
or Qualified Plans might withdraw their investment in the Trust. This might
force Managers Trust to sell portfolio securities at disadvantageous prices.
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<PAGE> 15
SUBSTITUTION OF SECURITIES
If the shares of any of the Eligible Mutual Funds, or any Portfolio within an
Eligible Mutual Fund, should no longer be available for investment by the
Variable Account or if, in the judgment of the Company's Board of Directors,
further investment in such Eligible Mutual Fund shares should become
inappropriate in view of the purpose of the Contract, the Company may substitute
shares of another mutual fund for fund shares already purchased or to be
purchased in the future by purchase payments under the Contracts. No
substitution of securities in any sub-account may take place without prior
approval of the Securities and Exchange Commission and under such requirements
as it may impose.
CHARGES AND DEDUCTIONS
CONTINGENT DEFERRED SALES CHARGE
The Contracts are offered without the imposition of a sales charge deduction at
the time of sale. However, the Contracts contain a provision that imposes a
deferred sales charge on surrenders of purchase payments within six years after
their being made. Thereafter the charge is equal to zero. The charge is referred
to as a Contingent Deferred Sales Charge and is intended to reimburse the
Company for expenses relating to Contract sales. To the extent the charge is
insufficient to cover all distribution costs, the Company may use the Mortality
and Expense Risk Premium to make up any difference.
If all or a portion of the Contract is surrendered (see "Surrenders"), a
Contingent Deferred Sales Charge will be calculated at the time of the surrender
and will be deducted from the Contract Value. In calculating the Contingent
Deferred Sales Charge:
(1) Purchase payments will be allocated to the amount surrendered on a
first-in-first-out basis.
(2) In no event will the aggregate Contingent Deferred Sales Charges
exceed 6% of the total purchase payments made.
The amount of the Contingent Deferred Sales Charge is calculated by:
(1) allocating purchase payments to the amount surrendered; and
(2) multiplying each such allocated purchase payment by the appropriate
percentage determined on the basis of the table below; and
(3) adding the products of each multiplication in (2) above.
<TABLE>
<CAPTION>
TIME BETWEEN RECEIPT OF ALLOCATED
PURCHASE PAYMENT AND DATE OF SURRENDER PERCENTAGE
-------------------------------------- ----------
<S> <C>
Less than 1 year....................................................................... 6%
At least 1 year but less than 2 years.................................................. 5%
At least 2 years but less than 3 years................................................. 4%
At least 3 years but less than 4 years................................................. 3%
At least 4 years but less than 5 years................................................. 2%
At least 5 years but less than 6 years................................................. 1%
At least 6 years....................................................................... 0%
</TABLE>
For a partial surrender, the Contingent Deferred Sales Charge will be deducted
from the remaining Contract Value, if sufficient; otherwise it will be deducted
from the amount surrendered. The Contingent Deferred Sales Charge percentage
will be applied against the amount requested for a partial surrender. The amount
deducted from the Contract Value will be determined by cancelling Accumulation
Units from each applicable sub-account in the ratio that the value of each
sub-account bears to the total Contract Value. The Contract Owner must specify
in writing in advance which units are to be cancelled if other than the above
method of cancellation is desired.
After the first Contract Anniversary, a Contract Owner may, but not more
frequently than once annually on a non-cumulative basis, make a surrender per
Contract Year of up to 10% of aggregate purchase payments (less any withdrawals)
free from a Contingent Deferred Sales Charge provided the Contract Value prior
to the surrender exceeds $10,000. No Contingent Deferred Sales Charge will be
deducted from purchase payments which have been held under the Contract for more
than six years or from distributions made upon death or as annuity payments. The
Company may also periodically waive the Contingent Deferred Sales Charge under
the Company procedures then in effect. (See "Charges and Deductions -- Reduction
or Elimination of Contingent Deferred Sales Charge.")
For purposes of determining the Contingent Deferred Sales Charge, surrenders
will be attributed to purchase payments on a first-in-first-out basis. Contract
Owners should note that this is contrary to the allocation method that will be
used for determining tax obligations. (See "Federal Tax Status - General.")
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<PAGE> 16
REDUCTION OR ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
The amount of the Contingent Deferred Sales Charge on the Contracts may be
reduced or eliminated when sales of the Contracts are made to individuals or to
a group of individuals that result in sales expense savings. Entitlement to such
a reduction of the Contingent Deferred Sales Charge will be determined by the
Company based on the following factors:
(1) The size and type of group to which sales are to be made will be
considered. Generally, the sales expenses for a larger group are less than for a
smaller group because of the ability to issue large numbers of Contracts with
fewer sales contacts.
(2) The total amount of purchase payments to be received will be
considered. Per Contract sales expenses are likely to be less on larger purchase
payments than on smaller ones.
(3) Any prior or existing relationship with the Company will be considered.
Per Contract sales expenses are likely to be less when there is a prior or
existing relationship because of the likelihood of issuing a Contract with fewer
sales contacts.
(4) There may be other circumstances of which the Company is not presently
aware that could result in reduced sales expenses.
If, after consideration of the foregoing factors, the Company determines that
there will be a reduction in sales expenses, the Company may provide for a
reduction in the Contingent Deferred Sales Charge.
The Contingent Deferred Sales Charge may be eliminated when the Contracts are
issued to an officer, director or employee of the Company or any of its
affiliates (including an employee's spouse and children under 21 years of age).
In no event will a reduction or elimination of the Contingent Deferred Sales
Charge be permitted where such reduction or elimination will be unfairly
discriminatory to any person.
DEDUCTION FOR MORTALITY AND EXPENSE RISK PREMIUM
Although variable annuity payments will vary in accordance with the performance
of the investments of the Variable Account, they will not be affected by the
mortality experience (death rate) of persons receiving such payments or of the
general population nor will such payments be affected by any increases in
expenses. The Company deducts a Mortality and Expense Risk Premium from the
daily net asset value of the Variable Account. This Premium compensates the
Company for providing the mortality guarantees, the death benefit, the expense
guarantee after the Income Date and the waiver of the Contingent Deferred Sales
Charge, if any, upon the death of the Annuitant. After the Income Date, the
Company guarantees that the amount of annuity payments will not be adversely
affected by variations in mortality experience or increases in expenses to
administer the Contract. In the event that the Contingent Deferred Sales Charge
is insufficient to cover distribution costs, the Mortality and Expense Risk
Premium will be used to make up the difference. This charge is also used to
defray some of the Company's expected costs that are not reimbursed from the
Contract Maintenance Charge. These costs include compensation for internal
personnel and accompanying overhead expenses, such as rent, supplies,
telephones, furniture and equipment.
The Mortality and Expense Risk Premium is deducted on a daily basis and is equal
on an annual basis to 1.20% of the daily net asset value of the Variable
Account. If this amount is insufficient to cover the actual costs, the loss will
be borne by the Company; conversely, if the amount deducted proves more than
sufficient, the excess will be a profit to the Company.
DEDUCTION FOR CONTRACT MAINTENANCE CHARGE
The Company deducts an annual Contract Maintenance Charge of $30 from the
Contract Value by cancelling Accumulation Units to reimburse it for
administrative expenses relating to maintenance of the Contract. The Contract
Maintenance Charge will be deducted from the Contract Value on each Contract
Anniversary that the Contract is in force. The number of Accumulation Units to
be cancelled will be from each applicable sub-account in the ratio that the
value of each sub-account bears to the total Contract Value. The Contract
Maintenance Charge will be deducted whether or not Purchase Payments are made.
The Company will not realize a profit from this Charge.
When 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 the surrender. Prior to the Income Date, the Company does not guarantee
the amount of the Contract Maintenance Charge and there is no guarantee that it
will not be changed in the future. After the Income Date, the amount of the
Contract Maintenance Charge will not be changed from the amount of the annual
Contract Maintenance Charge
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<PAGE> 17
in effect during the Contract Year immediately preceding the Income Date. After
the Income Date, the Contract Maintenance Charge will be collected on a monthly
basis and will result in a reduction of the monthly benefit.
DEDUCTION FOR PREMIUM TAXES AND OTHER TAXES
Any premium tax payable to any governmental entity as a result of the existence
of the Contracts or the Variable Account will be charged against the Contract
Value. Premium taxes currently imposed by certain states range from 0% to 4.0%.
Some states assess premium taxes at the time purchase payments are made; others
assess premium taxes at the time of annuitization. For Contracts issued in those
states assessing premium taxes at the time purchase payments are made, the
Company currently advances such premium taxes. The Company currently deducts the
premium taxes from a Contract Owner's Contract Value at the time of
annuitization or surrender. The applicable rates of states and other
governmental entities that impose premium taxes on annuity purchase payments are
subject to change or amendment by state legislatures, administrative
interpretations or judicial acts. Premium taxes will depend on, among other
things, the state of residence of the Contract Owner, the status of the Company
within the state and the insurance tax laws of the state.
The Company deducts from the Contract Owner's Contract Value any income taxes
resulting from the operation of the Variable Account. The Company does not
currently anticipate incurring any income taxes.
The Company will deduct any withholding taxes required by applicable law.
OTHER DEDUCTIONS AND CHARGES
There are other deductions from and expenses paid out of the assets of Neuberger
& Berman Advisers Management Trust which are described in the accompanying Trust
Prospectus.
THE CONTRACTS
In accordance with the selection made by the Contract Owner, net purchase
payments applied to the Variable Account will be invested in one or more of the
available Portfolios of Neuberger & Berman Advisers Management Trust at net
asset value in accordance with the selection made by the Contract Owner in the
application subject to the terms and conditions imposed on such selection by the
Company. The assets of the Variable Account are segregated by Portfolios, thus
establishing a series of sub-accounts within the Variable Account. The Company
may, from time to time, add new mutual funds and, when appropriate, portfolios
within a mutual fund as Eligible Mutual Funds. Contract Owners may change their
investment selection prospectively without fee, penalty or other charge upon
advance written notice to the Company.
TRANSFERS
The Contract Owner may direct the transfer of all or part of the Contract Value
between Eligible Mutual Fund(s) or Portfolio(s) no more than four times in any
Contract Year prior to the Income Date and no more than one time in any Contract
Year after the Income Date, subject to the following conditions:
(1) The Contract Owner will pay the Company any transfer fee due.
Currently, the Company does not impose a fee for effecting transfers; however,
it does reserve the right to assess a transfer fee in the future. In the event
the Company does impose such a fee, all Contract Owners will be notified in
advance. The amount of the transfer fee is not guaranteed and may be changed by
the Company at any time. The transfer fee will be deducted from the amount
transferred.
(2) The minimum amount which may be transferred from an Eligible Mutual
Fund or Portfolio is (a) $250; or, (b) if less, the remaining Contract Value in
such Eligible Mutual Fund or Portfolio.
(3) No partial transfer shall be made if the Contract Owner's remaining
Contract Value for each Eligible Mutual Fund or Portfolio will be less than
$250.
(4) Transfers shall be effected using the values determined as of the next
Valuation Period following receipt by the Company of a written transfer
direction (containing all required information). However, no such transfer may
be made effective within 7 calendar days of the date on which the first annuity
payment is due; and no initial purchase payment nor any amounts previously
transferred including increments thereon, may be transferred until 30 days after
receipt of such initial purchase payment; provided, however, the Contract Owner,
during the 30-day period prior to the date on which the first annuity payment is
due, may direct an additional transfer, to be effective no later than the
seventh calendar day prior to such due date.
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<PAGE> 18
(5) Any transfer direction must clearly specify:
(a) the amount to be transferred; and
(b) the name(s) of the Eligible Mutual Fund(s) or Portfolio(s) to be
affected.
(6) Prior to the Income Date transfers may be made from the Liquid Asset
Portfolio or the Limited Maturity Bond Portfolio to the Growth Portfolio or the
Balanced Portfolio on a pre-authorized basis. Such transfers will be made only
upon written agreement between the Contract Owner and the Company. Transfers
will be made monthly with a minimum transfer amount of $250 per month.
(7) The Company reserves the right to terminate, suspend or modify the
transfer privileges described above at any time and without notice to any
person.
When new mutual funds or portfolios are added, the Contract Owner may be
permitted to select the new Eligible Mutual Funds or Portfolios as investments
to underlie the Contract. However, the right to make any selection will be
limited by terms and conditions imposed by the Company on such transactions.
Subject to the above-identified restrictions on transfers, a Contract Owner may
elect to effect transfers between Eligible Mutual Fund(s) or Portfolio(s) by
telephone by completing the applicable section of the application.
The Company will employ reasonable procedures to confirm that telephone transfer
requests are legitimate. If it does not, the Company may be liable for any
losses due to unauthorized or fraudulent practices. The Company will not be
liable for complying with telephone transfer requests it believes to be
legitimate and for which it follows reasonable procedures to ensure legitimacy.
A telephone transfer may be effected by contacting the Annuity Service Office
identified on Page 1 and providing specific account information, including the
Contract Owner's name, Contract number, social security number and/or date of
birth. The Company may request additional information concerning the account
and/or Contract Owner to verify the validity of the request. The Company
maintains the right to reject any telephone transfer request.
Telephone transfer requests received on any business day before 3 p.m., Central
Standard Time, will effect transfers as of that day. Telephone transfer requests
received after 3 p.m., Central Standard Time, will effect transfers on the next
business day following the request.
CHANGE IN PURCHASE PAYMENTS
The Contract Owner may elect to increase, decrease or change the frequency or
the amount of purchase payments.
NO DEFAULT
Unless surrendered for the full Surrender Value, the Contract remains in force
until the Income Date and will not be in default even though no additional
purchase payments are made.
MODIFICATION OF THE CONTRACT
The Contract may not be modified by the Company without the consent of the
Contract Owner except as modifications may be required by applicable law.
CONTRACT VALUE
The Contract Value is the sum of the values for each sub-account. The value of
each sub-account is determined by multiplying the number of Accumulation Units
attributable to the sub-account by the value of an Accumulation Unit for the
sub-account.
OWNERSHIP
The Contract Owner has all rights and may receive all benefits under the
Contract. During the lifetime of the Annuitant and prior to the Income Date, the
Contract Owner shall be the person designated as such in the application, unless
changed. On and after the Income Date, the Contract Owner shall be the
Annuitant. On and after the death of the Annuitant, the Beneficiary shall be the
Contract Owner.
The Contract Owner may name a Contingent Owner or a new Contract Owner at any
time. However, a Contract Owner's spouse is the only person eligible to be the
Contingent Owner. If the Contract Owner dies, the Contingent Owner becomes the
Contract Owner. Any new choice of Contract Owner or Contingent Owner will
automatically revoke any prior choice of Contract Owner or Contingent Owner. Any
request for change must be received by the Company in writing. The change will
become effective as of the date
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<PAGE> 19
the written request is signed. A new choice of Contract Owner or Contingent
Owner will not affect any payment made or action taken by the Company prior to
the time a request for change is received. Contract Owners should consult a
competent tax adviser prior to changing Contract Owners.
For Non-Qualified Contracts, in accordance with Code Section 72(u), a deferred
annuity contract held by a corporation or other entity that is not a natural
person is not treated as an annuity contract for tax purposes. Income on the
contract is treated as ordinary income received by the owner during the taxable
year. However, for purposes of Code Section 72(u), an annuity contract held by a
trust or other entity as agent for a natural person is considered held by a
natural person and treated as an annuity contract for tax purposes. Tax advice
should be sought prior to purchasing a Contract which is to be owned by a trust
or other non-natural person.
ASSIGNMENT
The Contract Owner may assign the Contract at any time during the lifetime of
the Annuitant prior to the Income Date. The Company will not be bound by any
assignment until written notice is received by the Company. The Company is not
responsible for the validity of any assignment. The Company shall not be liable
for any payment or other settlement made by the Company before receipt of the
assignment.
If the Contract is issued pursuant to a Qualified Plan, it may not be assigned,
pledged or transferred except under conditions set forth in applicable law.
Inasmuch as an assignment may be a taxable event, Contract Owners should consult
a competent tax adviser before assigning their Contracts. (See "Federal Tax
Status - General.")
BENEFICIARY
The Beneficiary named in the application, unless changed, is entitled to receive
the benefits payable at the death of the Annuitant or Contract Owner, as
applicable.
Unless the Contract Owner provides otherwise, such benefits will be paid in
equal shares or all to the survivor as follows:
(1) to the primary Beneficiaries who survive the Annuitant's or Contract
Owner's (as applicable) death; or, if there are none,
(2) to the Contingent Beneficiaries who survive the Annuitant's or Contract
Owner's (as applicable) death; or, if there are none,
(3) to the Contract Owner, or to the estate of the Contract Owner.
The Contract Owner may change the Beneficiary(ies) or Contingent
Beneficiary(ies) at any time during the lifetime of the Annuitant. Any such
change must be made in writing in a form acceptable to the Company. The change
will take effect as of the date the notice of change is signed, but the Company
will not be liable for any payment made or action taken before it records the
change.
ANNUITY PROVISIONS
INCOME DATE AND SETTLEMENT OPTION
The Contract Owner selects an Income Date and Settlement Option at the time of
application. The Income Date must always be the first day of a calendar month
and must be at least one month after the Effective Date. The Income Date may not
be later than the first day of the calendar month following the Annuitant's 85th
birthday, unless the Contract has been issued pursuant to a Qualified Plan that
requires an earlier date.
CHANGE IN INCOME DATE
The Contract Owner may, with at least 30 days' prior written notice to the
Company, change the Income Date. In no event shall the Income Date be other than
the first day of a calendar month. However, the Income Date may not be deferred
beyond the first day of the calendar month following the Annuitant's 85th
birthday, unless the Contract has been issued pursuant to a Qualified Plan that
requires an earlier date.
CHANGE IN SETTLEMENT OPTION
The Contract Owner may, with at least 30 days' prior written notice to the
Company at any time prior to the Income Date, elect a different Settlement
Option or any other option satisfactory to the Company and the Contract Owner.
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<PAGE> 20
SETTLEMENT OPTIONS
The net proceeds payable upon settlement of the Contract may be paid under one
of the following options or any other option acceptable to the Company:
OPTION 1 - LIFE ANNUITY
An annuity payable monthly during the lifetime of the Annuitant.
Payments will cease at the death of the Annuitant. IT IS POSSIBLE UNDER
THIS OPTION TO RECEIVE ONLY ONE ANNUITY PAYMENT IF THE PAYEE DIES AFTER
THE RECEIPT OF THE FIRST PAYMENT, OR TO RECEIVE ONLY TWO PAYMENTS IF
THE PAYEE DIES AFTER RECEIPT OF THE SECOND PAYMENT, AND SO ON.
OPTION 2 - LIFE ANNUITY WITH 120 MONTHLY PAYMENTS GUARANTEED
An annuity payable monthly during the lifetime of the Annuitant with
the guarantee that if, at the death of the Annuitant, payments have
been made for less than 120 months, payments will continue to be made
to the Beneficiary for the remainder of the guarantee period.
If the Beneficiary does not desire payments to continue for the
remainder of the guarantee period, he or she may elect to have the
present value of the guaranteed annuity payments remaining, as of the
date notice of death is received by the Company, computed at the
assumed investment rate of 4%, and paid in a single sum within 7 days
of receipt of such request.
OPTION 3 - JOINT AND LAST SURVIVORSHIP
An annuity payable monthly during the joint lifetime of the Annuitant
and a designated second person and continuing thereafter during the
life of the survivor. IT IS POSSIBLE UNDER THIS OPTION TO RECEIVE ONLY
ONE ANNUITY PAYMENT IF BOTH PAYEES DIE AFTER THE RECEIPT OF THE FIRST
PAYMENT, OR TO RECEIVE ONLY TWO ANNUITY PAYMENTS IF BOTH PAYEES DIE
AFTER RECEIPT OF THE SECOND PAYMENT, AND SO ON.
If no Settlement Option is elected, Option 1 will automatically be applied.
MORTALITY AND EXPENSE GUARANTEE
The Company guarantees that the dollar amount of each annuity payment after the
first will not be affected by variations in mortality or expense experience of
the Company. The Company also guarantees certain death benefits.
FREQUENCY OF ANNUITY PAYMENTS
Annuity payments will be made as monthly installments. However, if the net
amount available under any Settlement Option is less than $5,000, the Company
will have the right to pay such amount in a single lump sum. In addition, if the
installments would be or become less than $30, the Company shall have the right
to change the frequency of installments so that the amount of each installment
payment will be at least $30.
ANNUITY UNIT
The value of an Annuity Unit when the first Eligible Mutual Fund shares were
purchased for each sub-account was arbitrarily set at $10. The value for any
later Valuation Period is determined as follows: the Annuity Unit value for a
sub-account for the last Valuation Period is multiplied by the Net Investment
Factor for the sub-account for the next Valuation Period and the result is
divided by the assumed investment factor for that Valuation Period. The Net
Investment Factor may be greater or less than one; therefore, the Annuity Unit
value may increase or decrease. (See "Net Investment Factor" in the Statement of
Additional Information.)
AMOUNT OF ANNUITY PAYMENTS
A Variable Annuity is an annuity with payments that (1) are not predetermined as
to dollar amount; and (2) will vary in amount with the net investment results of
the applicable sub-account(s) of the Variable Account. At the Income Date, the
Contract Value of the sub-accounts will be applied to the applicable annuity
tables contained in the Contract. The annuity table used will depend on the
Settlement Option chosen. The same Contract Value amount applied to each
Settlement Option may produce a different initial annuity payment. If, as of the
Income Date, the then current Settlement Option rate applicable to this class of
Contracts will provide a larger income than that guaranteed for the same form of
annuity under the Contracts offered hereby, the larger amount will be paid.
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<PAGE> 21
The actual dollar amount of variable annuity payments depends on (1) the
Contract Value at the time of annuitization; (2) the annuity table specified in
the Contract; (3) the Settlement Option selected; and (4) the investment
performance of the Portfolio selected.
The annuity tables contained in the Contract are based on a 4% assumed
investment rate. If the actual net investment rate exceeds 4%, payments will
increase. Conversely, if the actual rate is less than 4%, annuity payments will
decrease.
If a higher assumed interest rate were used, the initial payment would be
higher, but the actual net investment rate would have to be higher in order for
annuity payments to increase.
The Annuitant receives the value of the fixed number of Annuity Units each
month. The value of a fixed number of Annuity Units will reflect the investment
performance of the Portfolio selected, and the amount of each annuity payment
will vary accordingly. (See "Amount of Annuity Payments" in the Statement of
Additional Information for the calculation of the amount of the annuity
payment.)
ADDITIONAL PROVISIONS
The Company may require proof of the Annuitant's age before making any life
annuity payment provided for by the Contract. If the Annuitant's age has been
misstated, the amount payable will be the amount that the Purchase Payments
would have provided at the correct age. Once monthly life income payments have
begun, any underpayments will be made up in one sum with the next annuity
payment; overpayments will be deducted from the future annuity payments until
the total is repaid.
The Contract must be returned to the Company upon any settlement. Prior to the
settlement of a death claim, proof of the Annuitant's or Contract Owner's death,
as applicable, must be submitted to the Company.
Where any benefits under the Contract are contingent upon the recipient being
alive on a given date, the Company may require proof to its satisfaction that
such condition has been met.
The United States Supreme Court has determined that there may be a violation of
Title VII of the Civil Rights Act of 1964, as amended, under certain
circumstances when retirement benefits derived from contributions or retirement
payments made or to be made are determined on the basis of the sex of the
recipient. The Contracts offered by this Prospectus contain annuity tables which
are not based on the sex of the Annuitant.
DEATH BENEFIT
DEATH OF THE ANNUITANT
If an Annuitant who is not the Contract Owner dies prior to the Income Date, the
death benefit will be paid to the Beneficiary designated by the Contract Owner.
The value of the death benefit will be determined as of the next Valuation
Period following the date on which both proof of death and an election for a
single sum payment or Settlement Option are received by the Company. If a single
sum settlement is requested, the proceeds will be paid within seven days of
receipt of such election and proof of death. If a Settlement Option is desired,
election may be made by the Beneficiary during the 60-day period commencing on
the date notification of death is received; otherwise, a single sum settlement
will be made to the Beneficiary at the end of such 60-day period. The amount of
the death benefit will be the greater of (1) the sum of all purchase payments
made, less any amounts surrendered; or (2) the Contract Value. Death Benefits
will be paid in accordance with any applicable laws or regulations governing
payment of death benefits.
If the Annuitant dies after the Income Date, the Death Benefit, if any, will be
paid as specified in the Settlement Option elected. The Company will require
proof of the Annuitant's death.
DEATH OF THE CONTRACT OWNER
In the event the Contract is issued under a Non-Qualified Plan, the Death
Benefit will be paid as follows:
(1) If the Contract Owner (regardless of whether he or she is the
Annuitant) dies before the Income Date, the entire Contract Value must be
distributed within five years of the date of death, unless:
(a) it is payable over the lifetime of a designated Beneficiary with
distributions beginning within one year of the date of the Contract Owner's
death; or
(b) the Contingent Owner, if any, continues the Contract in his or her
own name.
(2) The Contingent Owner must be the spouse of the Contract Owner.
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If the Contract Owner is a non-natural person, for purposes of the Death
Benefit, the Annuitant will be treated as the Contract Owner and the death of
the Annuitant or a change of the Annuitant will be treated as the death of the
Contract Owner.
PURCHASES AND CONTRACT VALUE
PURCHASE PAYMENTS
The Contracts may be purchased under a flexible purchase payment plan. Purchase
payments are payable at the Annuity Service Office of the Company as frequently
and in the amount selected in the application by the Contract Owner. The initial
purchase payment is due on the Effective Date. The initial purchase payment on
both Non-Qualified and Qualified Contracts must be at least $1,000. Subsequent
purchase payments must be at least $100. However, for purchase payments made
under an employer-sponsored payroll deduction plan, the minimum initial purchase
payment is $50 for both Non-Qualified and Qualified Contracts. The minimum
subsequent purchase payment under an employer-sponsored payroll deduction plan
is $50 per month. The Company reserves the right to reject any application or
purchase payment. The Company also reserves the right to establish
administrative rules that may decrease the minimum purchase payment
requirements.
ALLOCATION OF PURCHASE PAYMENTS
Purchase payments are allocated to the appropriate sub-account within the
Variable Account. Upon allocation to the appropriate sub-account, purchase
payments are converted into Accumulation Units of the sub-account. Purchase
payments allocated to a sub-account are divided by the value of an Accumulation
Unit for the particular sub-account for the Valuation Period during which such
allocation occurs to determine the number of Accumulation Units attributable to
the purchase payments. (See "Accumulation Units.") For initial purchase
payments, if the application for a Contract is in good order, the Company will
apply the purchase payment to the Variable Account and credit the Contract with
Accumulation Units within two business days of receipt. If the application for a
Contract is not in good order, the Company will attempt to get it in good order
or the Company will return the application and the purchase payment within five
business days. Once the application is deemed to be in good order, the Company
will apply the purchase payment to the Variable Account and credit the Contract
with Accumulation Units within two business days from the time the application
is deemed to be in good order. For subsequent purchase payments, the Company
will apply the purchase payment to the Variable Account and credit the Contract
with Accumulation Units during the next Valuation Period following the Valuation
Period in which the purchase payment was received in good order.
ACCUMULATION UNITS
Purchase payments are converted into Accumulation Units. This is done by
dividing each purchase payment by the value of an Accumulation Unit for the
Valuation Period during which the purchase payment is allocated to the Variable
Account. The Accumulation Unit Value for each sub-account was arbitrarily set
initially at $10. The Accumulation Unit Value for any later Valuation Period is
determined by subtracting (2) from (1) and dividing the result by (3) where:
(1) is the net result of
(a) the assets of the sub-account, i.e., the aggregate value of the
underlying Fund shares held at the end of such Valuation Period, plus or
minus
(b) the cumulative charge or credit for taxes reserved which is
determined by the Company to have resulted from the investment operation of
the sub-account;
(2) is the cumulative unpaid charge for the mortality and expense risks;
and
(3) is the number of Accumulation Units outstanding at the end of such
Valuation Period.
The Accumulation Unit Value may increase or decrease from Valuation Period to
Valuation Period and is affected by investment performance of the Portfolio,
expenses and deduction of certain charges. The Accumulation Unit Value is
determined Monday through Friday (except for federal holidays) as of 5:00 p.m.
Eastern Standard Time. The federal holidays are as follows:
New Year's Day Independence Day
Martin Luther King Day Labor Day
President's Day Thanksgiving Day
Good Friday Christmas Day
Memorial Day
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DISTRIBUTION OF CONTRACTS
Sentry Equity Services, Inc. ("Sentry Equity"), 1800 North Point Drive, Stevens
Point, Wisconsin, a wholly-owned subsidiary of SIAMCO, is the principal
underwriter of the Contracts. The Contracts are sold through licensed insurance
agents in those states where the Contracts may be lawfully sold. The agents are
registered representatives of broker-dealers that are registered under the
Securities Exchange Act of 1934 and are members of the National Association of
Securities Dealers, Inc. Sentry Equity will be paid first-year and renewal
commissions for its services in distributing the Contracts, not to exceed 4.7%
of purchase payments. Sentry Equity will, in turn, pay all or a portion of these
amounts to a selling agent or agency.
SURRENDERS
While the Contract is in force and before the earlier of the Income Date or the
death of the Annuitant, the Company will, upon written request of the Contract
Owner, allow the surrender of all or a portion of the Contract for its Surrender
Value. Surrenders will result in the cancellation of Accumulation Units from
each applicable sub-account in the ratio that the value of each sub-account
bears to the total Contract Value. The Contract Owner must specify in writing in
advance which units are to be cancelled if other than the above-specified method
of cancellation is desired. The Company will pay the amount of any surrender
within seven days of receipt of such request.
The Surrender Value will be the Contract Value for the next Valuation Period
following the Valuation Period during which the written request to the Company
for surrender is received reduced by the sum of:
(1) the total of any applicable premium taxes not previously deducted;
(2) any applicable Contract Maintenance Charge; and
(3) any applicable Contingent Deferred Sales Charge.
Because of the potential tax consequences of a surrender, including tax
penalties, Contract Owners should consult a competent tax adviser before making
a surrender. (See "Federal Tax Status" below.)
Election to surrender must be made in writing to the Company at its Annuity
Service Office. The Company may suspend the right of withdrawal or delay payment
for more than seven days: (1) during any period when the New York Stock Exchange
is closed (other than customary weekend and holiday closings); (2) when trading
on the New York Stock Exchange is restricted; (3) when an emergency exists as a
result of which disposal of the Variable Account's or a Portfolio's investments
or determination of Accumulation Unit Value is not reasonably practicable; or
(4) when the Securities and Exchange Commission by order so permits for
protection of Contract Owners; provided that applicable rules or regulations of
the Securities and Exchange Commission will govern as to whether the conditions
in (2) and (3) exist.
LIMITATIONS ON WITHDRAWALS FROM 403(B) ANNUITIES
The Code limits the withdrawal of amounts attributable to contributions made
pursuant to a salary reduction agreement (as defined in Section 403(b) (11) of
the Code) to the occurrence of one of the following events: the Contract Owner
attains age 59-1/2, separates from service, dies, or becomes disabled (within
the meaning of Section 72(m) (7) of the Code), or in a case of hardship.
However, withdrawals for hardship are restricted to the portion of the Contract
Owner's Contract Value representing contributions made by the Contract Owner
and does not include any investment results. The limitations on withdrawals
became effective January 1, 1989, and apply only to salary reduction
contributions made after December 31, 1988, to income attributable to such
contributions and to income attributable to amounts held as of December 31,
1988. However, these limitations will apply to all amounts (regardless of when
or how contributions were originally made) which are transferred or rolled over
from a custodial account (as defined in Section 403(b)(7)) into the Contract
Owner's account. The limitations on withdrawals do not affect rollovers or
transfers between certain Qualified Plans. Tax penalties may also apply. (See
"Tax Treatment of Withdrawals - Qualified Contracts.") Contract Owners should
consult their own tax counsel or other tax adviser regarding any distributions.
TEXAS OPTIONAL RETIREMENT PROGRAM
Any Contract issued to a participant in the Texas Optional Retirement Program
("ORP") will contain an ORP endorsement that will amend the Contract in two
ways. First, if for any reason the second year of ORP participation is not
begun, the total amount of the State of Texas' first-year contribution will be
returned to the appropriate institution of higher education upon its request.
Second, no benefits will be payable, through surrender of the Contract or
otherwise, unless the participant dies, accepts retirement, terminates
employment in all Texas institutions of higher education or attains the age of
70-1/2. The value
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of the Contract may, however, be transferred to other contracts or carriers
during the period of ORP participation. A participant in ORP is required to
obtain a certificate of termination from the participant's employer before a
Contract can be redeemed.
FEDERAL TAX STATUS
NOTE: The following description is based on the Company's understanding of
current federal income tax law applicable to annuities in general. The Company
cannot predict the probability that any changes in these laws will be made.
Purchasers are cautioned to seek competent tax advice regarding the possibility
of any changes. The Company does not guarantee the tax status of the Contracts.
Purchasers bear the complete risk that the Contracts may not be treated as
"annuity contracts" under federal income tax laws. It should be further
understood that the following discussion is not exhaustive and that special
rules not described in this Prospectus may be applicable in certain situations.
Moreover, no attempt has been made to consider any applicable state or other tax
laws.
GENERAL
Section 72 of the Internal Revenue Code of 1986, as amended, ("Code") governs
taxation of annuities in general. A Contract Owner is not taxed on increases in
the value of a Contract until distribution occurs, either in the form of a lump
sum payment or as annuity payments under the Settlement Option elected. For a
lump sum payment received as a total surrender (total withdrawal), the recipient
is taxed on the portion of such payment that exceeds the cost basis of the
Contract. For Non-Qualified Contracts, this cost basis is generally the purchase
payments, while for Qualified Contracts there may be no cost basis. The taxable
portion of the lump sum payment is taxed at ordinary income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion amount
is includable in taxable income. The exclusion amount for payments based on a
variable settlement option is determined by dividing the cost basis of the
Contract (adjusted for any period certain or refund guarantee) by the number of
years over which the annuity is expected to be paid. Payments received after the
investment in the Contract has been recovered (i.e., when the total of the
excludable amount equals the investment in the Contract) are fully taxable. The
taxable portion is taxed at ordinary income tax rates. For certain types of
Qualified Plans there may be no cost basis in the Contract within the meaning of
Section 72 of the Code. Contract Owners, Annuitants and Beneficiaries under the
Contracts should seek competent financial advice about the tax consequences of
any distribution.
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Variable Account is not a separate entity from the
Company and its operations form a part of the Company.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the United States Treasury Department
("Treasury Department"), adequately diversified. Disqualification of the
Contract as an annuity contract would result in imposition of federal income tax
to the Contract Owner with respect to earnings allocable to the Contract prior
to the receipt of payments under the Contract. The Code contains a safe harbor
provision which provides that annuity contracts such as the Contracts meet the
diversification requirements if, as of the close of each quarter, the underlying
assets meet the diversification standards for a regulated investment company and
no more than 55% of the total assets consist of cash, cash items, U.S.
Government securities and securities of other regulated investment companies.
On March 2, 1989, the Treasury Department issued regulations (Treas. Reg.
1.817-5) which established diversification requirements for the investment
portfolios underlying variable contracts such as the Contracts. The regulations
amplify the diversification requirements for variable contracts set forth in the
Code and provide an alternative to the safe harbor provision described above.
Under the regulations, an investment portfolio will be deemed adequately
diversified if (1) no more than 55% of the value of the total assets of the
portfolio is represented by any one investment; (2) no more than 70% of the
value of the total assets of the portfolio is represented by any two
investments; (3) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (4) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments. For purposes of these regulations, all securities of the same
issuer are treated as a single investment.
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The Code provides that for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable contracts
by Section 817(h) of the Code have been met, "each United States government
agency or instrumentality shall be treated as a separate issuer."
The Company intends that all Eligible Mutual Funds underlying the Contracts will
be managed by the investment adviser(s) for the Eligible Mutual Funds so as to
comply with these diversification requirements.
The Treasury Department has indicated that the diversification regulations do
not provide guidance regarding the circumstances in which Contract Owner control
of the investments of the Variable Account will cause the Contract Owner to be
treated as the owner of the assets of the Variable Account, thereby resulting in
the loss of favorable tax treatment for the Contract. At this time it cannot be
determined whether additional guidance will be provided and what standards may
be contained in such guidance.
The amount of Contract Owner control which may be exercised under the Contract
is different in some respects from the situations addressed in published rulings
issued by the Internal Revenue Service in which it was held that the policy
owner was not the owner of the assets of the separate account. It is unknown
whether these differences, such as the Contract Owner's ability to transfer
among investment choices or the number and type of investment choices available,
would cause the Contract Owner to be considered the owner of the assets of the
Variable Account resulting in the imposition of federal income tax to the
Contract Owner with respect to earnings allocable to the Contract prior to
receipt of payments under the Contract.
In the event any forthcoming guidance or ruling is considered to set forth a new
position, such guidance or ruling will generally be applied only prospectively.
However, if such ruling or guidance is not considered to set forth a new
position, it may be applied retroactively resulting in the Contract Owner being
determined to retroactively be the owner of the assets of the Variable Account.
Due to uncertainty in this area, the Company reserves the right to modify the
Contract in an attempt to maintain favorable tax treatment.
MULTIPLE CONTRACTS
The Code provides that multiple non-qualified annuity contracts that are issued
within a calendar year to the same Contract Owner by one company or its
affiliates are treated as one annuity contract for purposes of determining the
tax consequences of any distribution. Such treatment may result in adverse tax
consequences including more rapid taxation of the distributed amounts from such
combination of contracts. Contract Owners should consult a tax adviser prior to
purchasing more than one non-qualified annuity contract in any calendar year.
CONTRACTS OWNED BY OTHER THAN NATURAL PERSONS
Under Section 72(u) of the Code, the investment earnings on premiums for the
Contracts will be taxed currently to the Contract Owner if the Owner is a
non-natural person, e.g., a corporation, or certain other entities. Such
Contracts generally will not be treated as annuities for federal income tax
purposes. However, this treatment is not applied to Contracts held by a trust or
other entity as an agent for a natural person, nor to Contracts held by
Qualified Plans. Purchasers should consult their own tax counsel or other tax
adviser before purchasing a Contract to be held by a non-natural person.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract may be a taxable event. Contract Owners
should consult a tax adviser before assigning or pledging their Contracts.
INCOME TAX WITHHOLDING
All distributions, or the portion thereof which is includable in the gross
income of the Contract Owner are subject to federal income tax withholding.
Generally, amounts are withheld from periodic payments at the same rate as
wages, and at the rate of 10% from non-periodic payments. However, Contract
Owners, in most cases, may elect not to have taxes withheld or to have
withholding done at a different rate.
Effective January 1, 1993, certain distributions from retirement plans qualified
under Section 401 or Section 403(b) of the Code that are not directly rolled
over to another eligible retirement plan or individual retirement account or
individual retirement annuity, are subject to mandatory 20% withholding for
federal income tax. The 20% withholding requirement generally does not apply to:
(1) a series of substantially equal payments made at least annually for the
life or life expectancy of the participant or joint and last survivor expectancy
of the participant and a designated beneficiary, or distributions for a
specified period of 10 years or more; or
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(2) distributions that are required minimum distributions; or
(3) the portion of the distribution that is not includable in gross income
(i.e., the return of any after-tax contributions).
Participants should consult their own tax counsel or other tax adviser regarding
withholding requirements.
TAX TREATMENT OF WITHDRAWALS - NON-QUALIFIED CONTRACTS AND SECTION 457 CONTRACTS
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the Contract Value exceeds the aggregate purchase
payments made, any amount withdrawn will be treated as coming first from the
earnings and then, only after the income portion is exhausted, as coming from
the principal. Withdrawn earnings are includable in gross income. It further
provides that a 10% penalty will apply to the income portion of any
distribution. However, the penalty is not imposed on amounts received: (a) after
the taxpayer reaches age 59-1/2; (b) after the death of the Contract Owner; (c)
if the taxpayer is totally disabled (for this purpose, disability is as defined
in Section 72(m)(7) of the Code); (d) in a series of substantially equal
periodic payments made not less frequently than annually for the life (or life
expectancy) of the taxpayer or for the joint lives (or joint life expectancies)
of the taxpayer and his or her Beneficiary; (e) under an immediate annuity; or
(f) that are allocable to purchase payments made prior to August 14, 1982.
The Contracts provide that if the Annuitant dies prior to the Income Date, the
Death Benefit will be paid to the Beneficiary. Such payments made upon the death
of an Annuitant who is not the Contract Owner do not qualify for the death of
Contract Owner exception described above and will be subject to the 10%
distribution penalty unless the Beneficiary is age 59-1/2 or one of the other
exceptions to the penalty applies.
The above information applies to Qualified Contracts issued pursuant to Section
457 of the Code, but does not apply to other Qualified Contracts. However,
separate tax withdrawal penalties and restrictions may apply to such other
Qualified Contracts. (See "Tax Treatment of Withdrawals - Qualified Contracts.")
QUALIFIED PLANS
The Contracts offered by this Prospectus are designed to be suitable for use
under various types of Qualified Plans. Taxation of participants in each
Qualified Plan varies with the type of Plan and terms and conditions of each
specific Plan. Contract Owners, Annuitants and Beneficiaries are cautioned that
benefits under a Qualified Plan may be subject to the terms and conditions of
the Plan, regardless of the terms and conditions of the Contracts issued
pursuant to the Plan. Some retirement plans are subject to distribution and
other requirements that are not incorporated into the Company's administrative
procedures. Contract Owners, participants and beneficiaries are responsible for
determining that contributions, distributions and other transactions with
respect to the Contracts comply with applicable law. Following are general
descriptions of the types of Qualified Plans with which the Contracts may be
used. These descriptions are not exhaustive and are for general informational
purposes only. The tax rules regarding Qualified Plans are very complex and will
have differing applications depending on individual facts and circumstances.
Each purchaser should obtain competent tax advice prior to purchasing a Contract
issued under a Qualified Plan.
Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available and described in
this Prospectus. Generally, Contracts issued pursuant to Qualified Plans are not
transferable except upon surrender or annuitization. Various penalty and excise
taxes may apply to contributions or distributions made in violation of
applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified Contracts. (See "Tax
Treatment of Withdrawals - Qualified Contracts.")
The Contracts are no longer being offered in connection with H.R. 10 Plans and
corporate pension and profit-sharing plans. The information provided below with
respect to such plans is being included herein for purposes of providing
disclosure to Contract Owners who have previously purchased Contracts in
connection with H.R. 10 Plans and corporate pension and profit-sharing plans.
(1) H.R. 10 Plans
Section 401 of the Code permits self-employed individuals to establish
Qualified Plans for themselves and their employees, commonly referred to as
"H.R. 10" or "Keogh" Plans. Contributions made to the plan for the benefit
of the employees will not be included in the gross income of the employees
until distributed from the plan. The tax consequences to participants may
vary depending upon the particular plan design. However, the Code places
limitations and restrictions on all plans including on such items as amount
of allowable contributions; form, manner, and timing of distributions;
transferability of benefits; vesting and nonforfeitability of interests;
nondiscrimination in eligibility
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and participation; and the tax treatment of distributions, withdrawals and
surrenders. (See "Tax Treatment of Withdrawals - Qualified Contracts.")
Purchasers of Contracts for use with an H.R. 10 Plan should obtain
competent tax advice as to the tax treatment and suitability of such an
investment.
(2) Tax Sheltered Annuities
Section 403(b) of the Code permits the purchase of "tax sheltered
annuities" by public schools and certain charitable, educational and
scientific organizations described in Section 501(c) (3) of the Code. These
qualifying employers may make contributions to the Contracts for the
benefit of their employees. Such contributions are not includable in the
gross income of the employees until the employees receive distributions
from the Contracts. The amount of contributions to the tax-sheltered
annuity is limited to certain maximums imposed by the Code. Furthermore,
the Code sets forth additional restrictions governing such items as
transferability, distributions, nondiscrimination and withdrawals. (See
"Tax Treatment of Withdrawals - Qualified Contracts.") An employee should
obtain competent tax advice as to the tax treatment and suitability of such
an investment.
(3) Individual Retirement Annuities
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity "
("IRA"). Under applicable limitations, certain amounts may be contributed
to an IRA which will be deductible from the individual's gross income.
These IRAs are subject to limitations on eligibility, contributions,
transferability and distributions. (See "Tax Treatment of Withdrawals -
Qualified Contracts.") Under certain conditions, distributions from other
IRAs and other Qualified Plans may be rolled over or transferred on a
tax-deferred basis into an IRA. Sales of Contracts for use with IRAs are
subject to special requirements imposed by the Code, including the
requirement that certain informational disclosure be given to persons
desiring to establish an IRA. Purchasers of Contracts to be qualified as
IRAs should obtain competent tax advice as to the tax treatment and
suitability of such an investment.
Roth IRAs
Beginning in 1998, individuals may purchase a new type of non-deductible
IRA, known as a Roth IRA. Purchase payments for a Roth IRA are limited to a
maximum of $2,000 per year. Lower maximum limitations apply to individuals
with adjusted gross incomes between $95,000 and $110,000 in the case of
single taxpayers, between $150,000 and $160,000 in the case of married
taxpayers filing joint returns, and between $0 and $10,000 in the case of
married taxpayers filing separately. An overall $2,000 annual limitation
continues to apply to all of a taxpayer's IRA contributions, including Roth
IRA and non-Roth IRA.
Qualified distributions from Roth IRAs are entirely tax free. A qualified
distribution requires that an individual has held the Roth IRA for at least
five years and, in addition, that the distribution is made either after the
individual reaches age 59-1/2, on the individual's death or disability, or
as a qualified first-time home purchase, subject to a $10,000 lifetime
maximum, for the individual, a spouse, child, grandchild, or ancestor. Any
distribution which is not a qualified distribution is taxable to the extent
of earnings in the distribution. Distributions are treated as made from
contributions first and therefore no distributions are taxable until
distributions exceed the amount of contributions to the Roth IRA. The 10%
penalty tax and the regular IRA exceptions to the 10% penalty tax apply to
taxable distributions from a Roth IRA.
Amounts may be rolled over from one Roth IRA to another Roth IRA.
Furthermore, an individual may make a rollover contribution from a non-Roth
IRA to a Roth IRA, unless the individual has adjusted gross income over
$100,000 or the individual is a married taxpayer filing a separate return.
The individual must pay tax on any portion of the IRA being rolled over
that represents income or a previously deductible IRA contribution.
However, for rollovers in 1998, the individual may pay that tax ratably
over the four taxable year period beginning with tax year 1998.
Purchasers of Contracts to be qualified as a Roth IRA should obtain
competent tax advice as to the tax treatment and suitability of such an
investment.
(4) Corporate Pension and Profit-Sharing Plans
Sections 401(a) and 401(k) of the Code permit corporate employers to
establish various types of retirement plans for employees. These retirement
plans may permit the purchase of the Contracts to provide benefits under
the plan. Contributions to the plan for the benefit of employees will not
be includable in the gross income of the employees until distributed from
the plan. The tax consequences to participants may vary depending upon the
particular plan design. However, the Code places
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limitations and restrictions on all plans, including on such items as
amount of allowable contributions; form, manner and timing of
distributions; transferability of benefits; vesting and
nonforfeitability of interests; nondiscrimination in eligibility and
participation; and the tax treatment of distributions, withdrawals
and surrenders. (See "Tax Treatment of Withdrawals - Qualified
Contracts.") Purchasers of Contracts for use with corporate pension or
profit-sharing plans should obtain competent tax advice as to the tax
treatment and suitability of such an investment.
TAX TREATMENT OF WITHDRAWALS - QUALIFIED CONTRACTS
In the case of a withdrawal under a Qualified Contract, a ratable portion of the
amount received is taxable, generally based on the ratio of the individual's
cost basis to the individual's total accrued benefit under the retirement plan.
Special tax rules may be available for certain distributions from a Qualified
Contract. Section 72(t) of the Code imposes a 10% penalty tax on the taxable
portion of any distribution from qualified retirement plans, including Contracts
issued and qualified under Code Sections 401 (H.R. 10 and corporate pension and
profit-sharing plans), 403(b) (Tax Sheltered Annuities) and 408(b) (IRAs). To
the extent amounts are not includable in gross income because they have been
rolled over to an IRA or to another eligible Qualified Plan, no tax penalty will
be imposed. The tax penalty will not apply to the following distributions: (1)
distributions made on or after the date on which the Contract Owner or Annuitant
(as applicable) reaches age 59-1/2; (2) distributions following the death or
disability of the Contract Owner or Annuitant (as applicable) (for this purpose
disability is as defined in Section 72(m) (7) of the Code); (3) after separation
from service, distributions that are part of substantially equal periodic
payments made not less frequently than annually for the life (or life
expectancy) of the Contract Owner or Annuitant (as applicable) or the joint
lives (or joint life expectancies) of such Contract Owner or Annuitant (as
applicable) and his or her designated Beneficiary; (4) distributions to a
Contract Owner or Annuitant (as applicable) who has separated from service after
age 55; (5) distributions made to the Contract Owner or Annuitant (as
applicable) to the extent such distributions do not exceed the amount allowable
as a deduction under Code Section 213 to the Contract Owner or Annuitant (as
applicable) for amounts paid during the taxable year for medical care; (6)
distributions made to an alternate payee pursuant to a qualified domestic
relations order; (7) distributions from an Individual Retirement Annuity for the
purchase of medical insurance (as described in Section 213(d)(1)(D) of the Code)
for the Contract Owner or Annuitant (as applicable) and his or her spouse and
dependents if the Contract Owner or Annuitant (as applicable) has received
unemployment compensation for at least 12 weeks (this exception no longer
applies after the Contract Owner or Annuitant (as applicable) has been
re-employed for at least 60 days); (8) distributions from an Individual
Retirement Annuity made to the Contract Owner or Annuitant (as applicable) to
the extent such distributions do not exceed the qualified higher education
expenses (as defined in Section 72(t)(7) of the Code) of the Contract Owner or
Annuitant (as applicable) for the taxable year; and (9) distributions from an
Individual Retirement Annuity made to the Contract Owner or Annuitant (as
applicable) which are qualified first-time home buyer distributions (as defined
in Section 72(t)(8) of the Code).
The exceptions stated in items (4) and (6) above do not apply in the case of an
IRA. The exception stated in (3) above applies to an IRA without the requirement
that there be a separation from service.
Generally, distributions from a qualified plan must commence no later than April
1 of the calendar year following (1) the calendar year in which the employee
attains age 70-1/2, or (2) the calendar year in which the employee retires,
whichever is later. Required distributions must be over a period not exceeding
the life expectancy of the individual or the joint lives or life expectancies of
the individual and his or her designated beneficiary. If the required minimum
distributions are not made, a 50% penalty tax is imposed on the amount not
distributed.
TAX SHELTERED ANNUITIES - WITHDRAWAL LIMITATIONS
The Code limits the withdrawal of amounts attributable to contributions made
pursuant to a salary reduction agreement (as defined in Section 403(b)(11) of
the Code) to the occurrence of one of the following events: the Contract Owner
attains age 59-1/2, separates from service, dies, or becomes disabled (within
the meaning of Section 72(m) (7) of the Code), or in a case of hardship.
However, withdrawals for hardship are restricted to the portion of the Contract
Owner's Contract Value which represents contributions made by the Contract
Owner and does not include any investment results. The limitations on
withdrawals became effective on January 1, 1989, and apply only to salary
reduction contributions made after December 31, 1988, to income attributable to
such contributions and to income attributable to amounts held as of December
31, 1988. However, these limitations will apply to all amounts (regardless of
when or how contributions were originally made) which are transferred or rolled
over from a custodial account (as defined in Section 403(b)(7)) into the
Contract Owner's account. The limitations on withdrawals do not affect
rollovers or
24
<PAGE> 29
transfers between certain Qualified Plans. Tax penalties may also apply. (See
"Tax Treatment of Withdrawals - Qualified Contracts," above.) Contract Owners
should consult their own tax counsel or other tax adviser regarding any
distributions.
SECTION 457 - DEFERRED COMPENSATION PLANS
Under Section 457 of the Code, governmental and certain other tax-exempt
employers may establish deferred compensation plans, which may invest in annuity
contracts, for the benefit of their employees. The Code, as with Qualified
Plans, establishes limitations and restrictions on eligibility, contributions
and distributions. Under these plans, contributions made for the benefit of the
employees will not be includable in the employees' gross income until
distributed from the plan. Under a Section 457 plan, the plan assets remain
solely the property of the employer, subject only to the claims of the
employer's general creditors, until such time as made available to the
participant or beneficiary. However, for plans established after August 20,
1996, it is required that plan assets must be held in trust for the benefit of
plan participants and are not subject to the claims of the general creditors of
the employer. Furthermore, this requirement must be met for all plans no later
than January 1, 1999.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account or the principal
underwriter is a party. The Company is engaged in various kinds of routine
litigation which, in the opinion of the Company, are not material in relation to
the total capital and surplus of the Company.
25
<PAGE> 30
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
ITEM PAGE
- ---- -----
<S> <C>
THE COMPANY................................................................................................ 3
DISTRIBUTION OF CONTRACTS.................................................................................. 3
ACCOUNTANTS................................................................................................ 3
LEGAL OPINIONS............................................................................................. 3
YIELD CALCULATION FOR LIQUID ASSET SUB-ACCOUNT............................................................. 3
PERFORMANCE INFORMATION.................................................................................... 4
AMOUNT OF ANNUITY PAYMENTS................................................................................. 5
Net Investment Factor ................................................................................... 5
FINANCIAL STATEMENTS....................................................................................... 6
</TABLE>
26
<PAGE> 31
PART B
<PAGE> 32
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FLEXIBLE PURCHASE PAYMENT DEFERRED
VARIABLE ANNUITY CONTRACTS
ISSUED BY
SENTRY VARIABLE ACCOUNT II
AND
SENTRY LIFE INSURANCE COMPANY
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS FOR THE INDIVIDUAL FLEXIBLE PURCHASE
PAYMENT DEFERRED VARIABLE ANNUITY CONTRACTS WHICH ARE REFERRED TO HEREIN.
THE PROSPECTUS CONCISELY PRESENTS INFORMATION THAT A PROSPECTIVE INVESTOR SHOULD
KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS CALL OR WRITE THE COMPANY
AT: 1800 NORTH POINT DRIVE, STEVENS POINT, WISCONSIN 54481, (800) 533-7827.
THIS STATEMENT OF ADDITIONAL INFORMATION AND THE PROSPECTUS ARE DATED MAY 1,
1998.
<PAGE> 33
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C>
THE COMPANY................................................................................................ 3
DISTRIBUTION OF CONTRACTS.................................................................................. 3
ACCOUNTANTS................................................................................................ 3
LEGAL OPINIONS............................................................................................. 3
YIELD CALCULATION FOR LIQUID ASSET SUB-ACCOUNT............................................................. 3
PERFORMANCE INFORMATION.................................................................................... 4
AMOUNT OF ANNUITY PAYMENTS................................................................................. 5
Net Investment Factor................................................................................... 5
FINANCIAL STATEMENTS....................................................................................... 6
</TABLE>
2
<PAGE> 34
THE COMPANY
Sentry Life Insurance Company (the "Company") is a stock life insurance company
incorporated in 1958, pursuant to the laws of the State of Wisconsin. Its home
office is located at 1800 North Point Drive, Stevens Point, Wisconsin. It is
licensed to conduct life, annuity and accident and health insurance business in
the District of Columbia and in all states except New York. The Company is a
wholly-owned subsidiary of Sentry Insurance a Mutual Company ("SIAMCO"). SIAMCO
is a mutual insurance company incorporated under the laws of Wisconsin with
headquarters at 1800 North Point Drive, Stevens Point, Wisconsin. SIAMCO owns
and controls directly, or through subsidiary companies, a group of insurance and
related companies, including Sentry Life Insurance Company of New York and
Sentry Equity Services, Inc.
DISTRIBUTION OF CONTRACTS
Sentry Equity Services, Inc. ("Sentry Equity"), 1800 North Point Drive, Stevens
Point, Wisconsin, a wholly-owned subsidiary of SIAMCO, serves as the principal
underwriter of the Contracts. The Contracts are sold through licensed insurance
agents in those states where the Contracts may be lawfully sold. The agents are
registered representatives of broker-dealers that are registered under the
Securities Exchange Act of 1934 and are members of the National Association of
Securities Dealers, Inc. Sentry Equity will be paid first-year and renewal
commissions for its services in distributing the Contracts, not to exceed 4.7%
of Purchase Payments. Sentry Equity will, in turn, pay all or a portion of these
amounts to a selling agent or agency. The Contracts are sold on a continuous
basis.
Sentry Equity also acts as principal underwriter for Sentry Fund, Inc., an
open-end management investment company. Sentry Equity was paid underwriter
commissions in the aggregate for the years 1995, 1996 and 1997 of $293,144,
$338,226 and $309,674, respectively. Of those amounts it retained $238,582,
$286,484 and $259,161, respectively.
ACCOUNTANTS
The statutory financial statements of the Company as of December 31, 1997 and
1996, and for the years then ended, and the financial statements of the Variable
Account as of December 31, 1997 and 1996, and for each of the two years in the
period then ended, have been audited by Coopers & Lybrand L.L.P., 203 North
LaSalle Street, Chicago, Illinois, independent accountants, whose reports appear
herein and have been included in reliance on their authority as experts in
accounting and auditing.
LEGAL OPINIONS
Legal matters in connection with the Contracts described herein are being passed
upon by the law firm of Blazzard, Grodd & Hasenauer, P.C., Westport,
Connecticut.
YIELD CALCULATION FOR LIQUID ASSET SUB-ACCOUNT
The Liquid Asset sub-account of the Variable Account will calculate its current
yield based upon the seven days ended on the date of calculation. For the seven
calendar days ended December 31, 1997, the annualized yield for the Liquid Asset
sub-account 3.59%.
The current yield of the Liquid Asset sub-account is computed by determining the
net change (exclusive of capital changes) in the value of a hypothetical
pre-existing Contract Owner account having a balance of one Accumulation Unit of
the sub-account at the beginning of the period, subtracting the Mortality and
Expense Risk Premium and Contract Maintenance Charge, dividing the difference by
the value of the account at the beginning of the same period to obtain the base
period return and multiplying the result by (365/7). Net investment income for
yield quotation purposes will not include either realized capital gains and
losses or unrealized appreciation and depreciation, whether reinvested or not.
The yields quoted should not be considered a representation of the yield of the
Liquid Asset sub-account in the future since the yield is not fixed. Actual
yields will depend not only on the type, quality and maturities of the
investments held by the Liquid Asset sub-account and changes in the interest
rates on such investments, but also on changes in the Liquid Asset sub-account's
expenses during the period.
Yield information may be useful in reviewing the performance of the Liquid Asset
sub-account and for providing a basis for comparison with other investment
alternatives. However, the Liquid Asset sub-
3
<PAGE> 35
account's yield fluctuates, unlike bank deposits or other investments which
typically pay a fixed yield for a stated period of time. The yield information
does not reflect the deduction of any applicable Contingent Deferred Sales
Charge at the time of the surrender. (See "Charges and Deductions - Contingent
Deferred Sales Charge" in the Prospectus.)
PERFORMANCE INFORMATION
The cumulative total return and average annual total return figures for the one-
five- and ten-year periods to December 31, 1997, are as follows:
<TABLE>
<CAPTION>
CUMULATIVE AVERAGE ANNUAL
TOTAL RETURN TOTAL RETURN
Ten Ten
One Year Five Years Years One Year Five Years Years
----------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Liquid Asset
Portfolio (1.72%) 12.46% 43.53% (1.72%) 2.38% 3.68%
Limited Maturity
Bond Portfolio (1.25%) 13.65% 55.71% (1.25%) 2.59% 4.53%
Growth Portfolio 21.87% 71.57% 241.96% 21.87% 11.40% 13.08%
Balanced Portfolio* 12.51% 49.19% 100.26% 12.51% 8.33% 9.99%
</TABLE>
*Date of inception is September 17, 1990. Ten-year column represents since
inception.
The above figures include the deduction of a 1.20% Mortality and Expense Risk
Premium, a $30 Contract Maintenance Charge and the Investment Management and
Administration Fees and other expenses paid by the Trust's Portfolios and their
corresponding Series of Managers Trust. As of May 1, 1995, the fees paid to the
manager changed. Such fees and the Trust's operating expenses are disclosed and
explained in the Fee Table within the Prospectus. The returns reported above
also reflect the deduction of the Contract's Contingent Deferred Sales Charge
from each Portfolio's one year total return, when such charge equals 5% of a
surrendered Purchase Payment, and from each Portfolio's five year total return,
when such charge equals 1% of a surrendered Purchase Payment.
The Balanced Portfolio of the Trust was made available for investment in
connection with the Contracts on September 14, 1990. The date of the first
investment transaction was September 17, 1990.
The hypothetical value of a Contract purchased for the time periods described
above is determined by using the actual Accumulation Unit values for an initial
$1,000 Purchase Payment, and deducting any applicable Contract Maintenance
Charges and any applicable Contingent Deferred Sales Charge to arrive at the
ending hypothetical value. The average annual total return is then determined by
computing the fixed interest rate that a $1,000 Purchase Payment would have to
earn annually, compounded annually, to grow to the hypothetical value at the end
of the time periods described above, as the case may be. The formula used in
these calculations is:
n
Where: P (1 + T) = ERV
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the one- five- and ten
year periods to December 31, 1997 (or fractional portion thereof),
of a hypothetical $1,000 payment made at the beginning of each
period presented to December 31, 1997.
The calculation of the cumulative total return for the Portfolios under the
Contract issued by the Company is not subject to a standardized formula. The
hypothetical value of a Contract purchased for the time periods described above
is determined by using the actual Accumulation Unit values for an initial $1,000
Purchase Payment and deducting any applicable Contract Maintenance Charge and
any applicable Contingent Deferred Sales Charge to arrive at the ending
hypothetical value. The total return percentage is then determined by
subtracting the initial investment from the ending hypothetical value and
dividing the difference by the initial investment and expressing the result as a
percentage.
4
<PAGE> 36
The cumulative total return quotation figures were calculated using the
following assumptions:
(1) The one-year figure assumes that values based on a $1,000 payment made on
December 31, 1996, were redeemed on December 31, 1997;
(2) The five-year figure assumes that values based on a $1,000 payment made on
December 31, 1992, were redeemed on December 31, 1997;
(3) For the Liquid Asset, Growth and Limited Maturity Bond Portfolios, the
ten-year figures assume that values based on a $1,000 payment made on December
31, 1987, were redeemed on December 31, 1997. For the Balanced Portfolio, the
figures for the period since inception assume that values based on a $1,000
payment on September 17, 1990, were redeemed on December 31, 1997.
ALL QUOTATION FIGURES ABOVE REPRESENT PAST PERFORMANCE OF EACH INVESTMENT
OPTION. THE TOTAL RETURN FIGURES FLUCTUATE DAILY, SO THE ABOVE QUOTATIONS ARE
NOT REPRESENTATIVE OF FUTURE RESULTS.
AMOUNT OF ANNUITY PAYMENTS
The dollar amount of annuity payments after the first payment is determined as
follows:
(1) The dollar amount of the first annuity payment is divided by the value
of an Annuity Unit as of the Income Date. This establishes the number of
Annuity Units for each monthly payment. The number of Annuity Units remains
fixed during the annuity payment period, subject to any transfers.
(2) The fixed number of Annuity Units is multiplied by the Annuity Unit
value for the last Valuation Period of the month preceding the month for
which the payment is due. This result is the dollar amount of the payment.
The total dollar amount of each Variable Annuity payment is the sum of all
sub-account Variable Annuity payments less any applicable Contract Maintenance
Charge.
The sub-account Annuity Unit value at the end of any Valuation Period is
determined by multiplying the sub-account Annuity Unit value for the immediately
preceding Valuation Period by the quotient of (1) and (2), where:
(1) is the Net Investment Factor for the Valuation Period for which the
sub-account Annuity Unit value is being determined; and
(2) is the assumed investment factor for such Valuation Period. The assumed
investment factor adjusts for the interest assumed in determining the first
Variable Annuity payment. Such factor for any Valuation Period shall be the
accumulated value of $1.00 deposited at the beginning of such period at the
assumed investment rate of 4.0%.
Net Investment Factor
The Net Investment Factor for any sub-account for any Valuation Period is
determined by dividing (1) by (2) and subtracting (3) from the result where:
(1) is the net result of:
(a) the net asset value per share of the Eligible Mutual Fund or
Portfolio held in the sub-account determined as of the current
Valuation Period; plus
(b) the per share amount of any dividend or capital gain distribution
made by the Eligible Mutual Fund or the Portfolio held in the
sub-account if the "ex-dividend" date occurs during the current
Valuation Period; plus or minus
(c) a per share charge or credit, which is determined by the Company,
for changes in tax reserves resulting from investment operations of the
sub-account;
(2) is the net result of:
(a) the net asset value per share of the Eligible Mutual Fund or
Portfolio held in the sub-account determined as of the immediately
preceding Valuation Period; plus or minus
(b) the per share charge or credit for any changes in tax reserve for
the immediately preceding Valuation Period; and
5
<PAGE> 37
(3) is the percentage factor representing the Mortality and Expense Risk
Premium.
The Net Investment Factor may be greater or less than one; therefore, the
Annuity Unit value may increase or decrease.
FINANCIAL STATEMENTS
The financial statements of the Company included herein should be considered
only as bearing upon the ability of the Company to meet its obligations under
the Contracts.
6
<PAGE> 38
SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABLE ACCOUNT II
-----------------------------
FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
7
<PAGE> 39
[COOPERS & LYBRAND LETTERHEAD]
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 and liabilities of the
Liquid Asset Portfolio, Growth Portfolio, Limited Maturity Bond Portfolio and
Balanced Portfolio of the Sentry Variable Account II as of December 31, 1997,
and the related statements of operations and changes in net assets 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 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 securities owned as of December 31, 1997 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 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 Liquid Asset Portfolio,
Growth Portfolio, Limited Maturity Bond Portfolio and Balanced Portfolio of the
Sentry Variable Account II as of December 31, 1997, and the results of their
operations and the changes in their net assets for each of the two years in the
period then ended in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Chicago, Illinois
February 11, 1998
8
<PAGE> 40
SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABLE ACCOUNT II
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments at market value:
Neuberger & Berman Advisers Management Trust:
Liquid Asset Portfolio, 1,998,992
shares (cost $1,998,992) $ 1,998,992
Growth Portfolio, 1,291,542
shares (cost $30,190,362) 39,443,700
Limited Maturity Bond Portfolio, 445,378
shares (cost $6,222,588) 6,288,736
Balanced Portfolio, 553,097
shares (cost $8,558,479) 9,845,122
-----------
Total investments 57,576,550
Dividends receivable 8,115
-----------
Total assets 57,584,665
Liabilities:
Accrued expenses 4,395
-----------
Net Assets $57,580,270
===========
</TABLE>
The accompanying notes are an integral part of these financial statements
9
<PAGE> 41
SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABLE ACCOUNT II
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
SUB-ACCOUNTS INVESTING IN:
--------------------------
Liquid Asset Growth
Portfolio Portfolio
------------------------------ -------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income:
Dividends $ 104,541 $ 112,796 $ -- $ 13,015
Expenses:
Mortality and expense charges 27,213 30,775 450,947 411,883
------------ ------------ ------------ ------------
Net investment income (loss) 77,328 82,021 (450,947) (398,868)
------------ ------------ ------------ ------------
Realized net investment gain -- -- 1,540,740 1,247,219
Unrealized appreciation (depreciation), net -- -- 4,937,957 (1,352,086)
Capital gain distributions received -- -- 2,948,192 3,045,396
------------ ------------ ------------ ------------
Realized and unrealized gain (loss)
on investments and capital
gain distributions, net -- -- 9,426,889 2,940,529
------------ ------------ ------------ ------------
Net increase in net assets
from operations 77,328 82,021 8,975,942 2,541,661
------------ ------------ ------------ ------------
Purchase payments 94,695 128,608 1,192,713 1,183,119
Transfers between subaccounts, net (37,697) 9,828 115,753 (72,898)
Withdrawals (561,881) (410,053) (4,384,625) (4,519,118)
Contract maintenance fees (3,317) (4,001) (41,415) (44,776)
Surrender charges (2,360) (1,655) (19,220) (21,399)
------------ ------------ ------------ ------------
Net decrease in net assets
derived from principal transactions (510,560) (277,273) (3,136,794) (3,475,072)
------------ ------------ ------------ ------------
Total increase (decrease) in net assets (433,232) (195,252) 5,839,148 (933,411)
Net assets at beginning of year 2,439,448 2,634,700 33,602,559 34,535,970
------------ ------------ ------------ ------------
Net assets at end of year $ 2,006,216 $ 2,439,448 $ 39,441,707 $ 33,602,559
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
10
<PAGE> 42
<TABLE>
<CAPTION>
LIMITED MATURITY BALANCED
BOND PORTFOLIO PORTFOLIO TOTAL
---------------------------- ----------------------------- -----------------------------
1997 1996 1997 1996 1997 1996
----------- ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$ 414,044 $ 703,238 $ 164,097 $ 208,712 $ 682,682 $ 1,037,761
80,334 94,708 113,868 108,809 672,362 646,175
----------- ----------- ---------- ---------- ---------- -----------
333,710 608,530 50,229 99,903 10,320 391,586
----------- ----------- ---------- ---------- ---------- -----------
2,573 42,361 213,070 199,074 1,756,383 1,488,654
18,458 (430,554) 869,649 (978,800) 5,826,064 (2,761,440)
-- -- 421,183 1,160,642 3,369,375 4,206,038
----------- ----------- ---------- ---------- ----------- -----------
21,031 (388,193) 1,503,902 380,916 10,951,822 2,933,252
----------- ----------- ---------- ---------- ----------- -----------
354,741 220,337 1,554,131 480,819 10,962,142 3,324,838
----------- ----------- ---------- ---------- ----------- -----------
220,322 107,526 441,443 604,683 1,949,173 2,023,936
(252,094) (170,136) 174,038 233,206 -- --
(1,343,699) (1,423,044) (1,281,938) (1,328,115) (7,572,143) (7,680,330)
(7,254) (9,073) (9,845) (10,399) (61,831) (68,249)
(2,672) (2,793) (8,821) (9,939) (33,073) (35,786)
----------- ----------- ---------- ---------- ----------- -----------
(1,385,397) (1,497,520) (685,123) (510,564) (5,717,874) (5,760,429)
----------- ----------- ---------- ---------- ----------- -----------
(1,030,656) (1,277,183) 869,008 (29,745) 5,244,268 (2,435,591)
7,318,730 8,595,913 8,975,265 9,005,010 52,336,002 54,771,593
----------- ----------- ---------- ---------- ----------- -----------
$ 6,288,074 $ 7,318,730 $9,844,273 $8,975,265 $57,580,270 $52,336,002
=========== =========== ========== ========== =========== ===========
</TABLE>
11
<PAGE> 43
SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABLE ACCOUNT II
--------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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 financial
statements have been prepared in conformity with generally accepted
accounting principles which permit management to make certain estimates and
assumptions at the date of the financial statements.
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 investment 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
investment gains of the Variable Account which are applied to increase
contract owners' equity are not taxed.
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 $4,395
at December 31, 1997.
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.
12
<PAGE> 44
SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABLE ACCOUNT II
--------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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. NET ASSETS
Net Assets are represented by accumulation units in the related Variable
Account.
At December 31, 1997 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 115,558 $17.36 $ 2,006,216
Growth Portfolio 780,148 50.56 39,441,707
Limited Maturity Bond Portfolio 258,942 24.28 6,288,074
Balanced Portfolio 482,578 20.40 9,844,273
-----------
Total contract owners' equity $57,580,270
===========
</TABLE>
At December 31, 1996 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 145,387 $16.78 $ 2,439,448
Growth Portfolio 847,224 39.66 33,602,559
Limited Maturity Bond Portfolio 317,877 23.02 7,318,730
Balanced Portfolio 519,312 17.28 8,975,265
-----------
Total contract owners' equity $52,336,002
===========
</TABLE>
13
<PAGE> 45
SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABLE ACCOUNT II
--------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. PURCHASES AND SALES OF SECURITIES
In 1997, purchases and proceeds on sales of the Trust's shares aggregated
$9,252,852 and $11,592,525, 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 $1,524,938 $5,657,165 $ 650,882 $1,419,867 $ 9,252,852
Proceeds on sales 1,956,814 6,298,766 1,703,235 1,633,710 11,592,525
</TABLE>
In 1996, purchases and proceeds on sales of the Trust's shares aggregated
$9,395,710 and $10,552,842, 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 $ 763,954 $5,037,322 $1,100,285 $2,494,149 $ 9,395,710
Proceeds on sales 957,938 5,862,984 1,988,567 1,743,353 10,552,842
</TABLE>
14
<PAGE> 46
SENTRY LIFE INSURANCE COMPANY
REPORT ON AUDITS OF STATUTORY-BASIS FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
15
<PAGE> 47
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Sentry Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of Sentry Life
Insurance Company (the Company) as of December 31, 1997 and 1996, and the
related statutory-basis statements of operations, changes in capital stock and
surplus and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to report
on these financial statements based on our audits.
We conducted our audits of the accompanying financial statements 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 discussed more fully in Note 1 to the financial statements, the Company
prepared these financial statements using accounting practices prescribed or
permitted by the insurance department of the state of Wisconsin, which practices
differ from generally accepted accounting principles (GAAP). We have only been
engaged by the Company to audit the accompanying financial statements on a
statutory basis of accounting. The Company is not required to prepare GAAP
financial statements and does not prepare GAAP financial statements. The effects
on the financial statements of the variances between the statutory basis of
accounting and GAAP, although not reasonably determinable, are presumed to be
material. We are therefore required in the following paragraph to issue an
adverse opinion on GAAP.
In our opinion, because of the effects of the matter discussed 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 Sentry Life Insurance Company as of December 31, 1997 and 1996, or the
results of its operations and its cash flows for the years then ended.
In our opinion, the statutory-basis financial statements referred to above
present fairly, in all material respects, the admitted assets, liabilities, and
capital stock and surplus of Sentry Life Insurance Company as of December 31,
1997 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with accounting practices prescribed or permitted
by the insurance department of the state of Wisconsin.
Our audit was conducted for the purpose of forming an opinion on the
statutory-basis financial statements taken as a whole. The accompanying
supplemental schedule of assets and liabilities is presented to comply with the
National Association of Insurance Commissioners' annual statement instructions
and is not a required part of the statutory-basis financial statements. Such
information has been subjected to the auditing procedures applied in our audit
of the statutory basis financial statements and, in our opinion, is fairly
stated, in all material respects, in relation to the statutory-basis financial
statements taken as a whole.
/s/Coopers & Lybrand L.L.P.
Chicago, Illinois
February 13, 1998
16
<PAGE> 48
SENTRY LIFE INSURANCE COMPANY
STATUTORY-BASIS BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
-------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ------ ---- ----
<S> <C> <C>
Investments:
Bonds .................................................................. $1,103,011,418 $1,055,154,229
Investments in subsidiaries............................................... 9,817,647 9,600,499
Mortgage loans............................................................ 68,657 150,967
Policy loans.............................................................. 25,020,637 25,389,248
Cash and short-term investments........................................... 20,636,124 28,736,493
-------------- --------------
Total investments ................................................ 1,158,554,483 1,119,031,436
Accrued investment income.................................................... 18,231,430 17,006,071
Premiums deferred and uncollected............................................ 4,377,983 4,233,837
Due from affiliates.......................................................... 3,008,778 11,382,247
Other assets................................................................. 6,099,831 2,749,335
Assets held in separate accounts............................................. 533,613,785 433,345,943
-------------- --------------
Total admitted assets............................................. $1,723,886,290 $1,587,748,869
============== ==============
</TABLE>
The accompanying notes are an integral part of these statutory-basis
financial statements.
17
<PAGE> 49
SENTRY LIFE INSURANCE COMPANY
STATUTORY-BASIS BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1997 AND 1996
----------------
<TABLE>
<CAPTION>
LIABILITIES 1997 1996
- ----------- ---- ----
<S> <C> <C>
Future policy benefits:
Life...................................................................... $ 250,618,823 $ 249,630,411
Accident and health....................................................... 14,967,065 8,169,020
Annuity .................................................................. 138,902,775 140,074,886
Policy and contract claims................................................... 4,720,182 3,951,309
Premium and other deposit funds.............................................. 604,285,476 596,529,186
Other policyholder funds..................................................... 26,118,724 10,334,943
Accounts payable and other liabilities....................................... 3,477,182 3,061,854
Federal income taxes accrued................................................. 11,555,703 10,908,272
Asset valuation reserve...................................................... 5,264,578 11,457,217
Interest maintenance reserve................................................. 1,175,922 6,722,122
Liabilities related to separate accounts..................................... 528,643,523 432,660,043
-------------- --------------
Total liabilities................................................. $1,594,729,953 $1,473,499,263
============== ==============
CAPITAL STOCK AND SURPLUS
- -------------------------
Capital stock, $10 par value; authorized 400,000 shares; issued
and outstanding 316,178 shares in 1997 and 1996........................... 3,161,780 3,161,780
Paid-in surplus.............................................................. 43,719,081 43,719,081
Earned surplus, unappropriated............................................... 82,275,476 67,368,745
-------------- --------------
Total capital stock and surplus................................... 129,156,337 114,249,606
-------------- --------------
Total liabilities, capital stock and surplus...................... $1,723,886,290 $1,587,748,869
============== ==============
</TABLE>
The accompanying notes are an integral part of these statutory-basis
financial statements.
18
<PAGE> 50
SENTRY LIFE INSURANCE COMPANY
STATUTORY-BASIS STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
---------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Premiums and other income:
Premiums and annuity considerations....................................... $ 74,408,562 $ 70,779,015
Other fund deposits....................................................... 52,574,356 53,285,412
Commissions and expense allowances on
reinsurance ceded...................................................... 18,912,935 28,309,773
Net investment income..................................................... 91,589,939 90,382,873
Other income.............................................................. 8,512,462 7,721,815
------------ ------------
Total premiums and other income................................... 245,998,254 250,478,888
------------ ------------
Benefits and expenses:
Policyholder benefits and fund withdrawals................................ 188,108,969 153,162,041
Increase in future life policy benefits
and other reserves..................................................... 7,695,811 648,550
Commissions............................................................... 10,638,144 16,144,524
Other expenses............................................................ 30,477,161 34,145,149
Transfers to (from) separate accounts, net................................ (16,336,976) 16,984,014
------------ ------------
Total benefits and expenses....................................... 220,553,109 221,084,278
------------ ------------
Income before federal income tax expense
and net realized losses on investments.................................... 25,445,145 29,394,610
Federal income tax expense, less tax on net realized
losses and transfers to the IMR................................. 9,177,337 9,381,864
------------ ------------
Income before net realized losses on investments............................. 16,267,808 20,012,746
Net realized losses on investments................................ 272,063 151,872
------------ ------------
Net income .................................................................. $ 15,995,745 $ 19,860,874
============ ============
</TABLE>
The accompanying notes are an integral part of these statutory-basis
financial statements.
19
<PAGE> 51
SENTRY LIFE INSURANCE COMPANY
STATUTORY-BASIS STATEMENTS OF CHANGES IN CAPITAL STOCK AND SURPLUS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
----------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Capital stock, beginning and end of year..................................... $ 3,161,780 $ 3,161,780
------------ ------------
Paid-in surplus, beginning and end of year................................... 43,719,081 43,719,081
------------ ------------
Earned surplus, unappropriated:
Balance at beginning of year.............................................. 67,368,745 55,982,007
Net income................................................................ 15,995,745 19,860,874
Change in non-admitted assets............................................. 1,850 9,224
Change in liability for reinsurance....................................... (650) -
Change in asset valuation reserve......................................... 6,192,639 (109,926)
Dividend to stockholder................................................... (7,500,000) (8,000,000)
Change in net unrealized gains on investments............................. 217,147) (373,434)
------------ ------------
Balance at end of year.................................................... 82,275,476 67,368,745
------------ ------------
Total capital stock and surplus................................... $129,156,337 $114,249,606
============ ============
</TABLE>
The accompanying notes are an integral part of these statutory-basis
financial statements.
20
<PAGE> 52
SENTRY LIFE INSURANCE COMPANY
STATUTORY-BASIS STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
-------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Premiums and annuity considerations.......................................... $ 74,046,843 $ 70,913,344
Other fund deposits.......................................................... 52,574,356 53,285,412
Other premiums, considerations and deposits.................................. 170,518 260,805
Allowances and reserve adjustments received on
reinsurance ceded......................................................... 25,981,339 30,458,213
Investment income received (excluding realized gains
and losses and net of investment expenses)................................ 88,152,129 87,375,424
Other income received........................................................ 8,341,944 7,443,291
Life and accident and health claims paid..................................... (24,600,136) (21,418,597)
Surrender benefits........................................................... (99,192,578) (85,880,726)
Other benefits to policyholders paid......................................... (46,821,006) (45,644,421)
Commissions, other expenses, and taxes paid
(excluding federal income taxes).......................................... (41,375,759) (50,351,320)
Net transfers from (to) separate accounts.................................... 16,364,694 (16,899,050)
Cash in receivable status from separate accounts............................. (4,318,844) -
Changes in asset charges receivable.......................................... 6,765 -
Dividends to policyholders paid.............................................. (316,156) (322,084)
Federal income taxes paid.................................................... (9,002,003) (8,474,783)
Net decrease in policy loans................................................. 368,610 643,281
------------ ------------
Net cash from operations.................................................. 40,380,717 21,388,789
------------ ------------
Proceeds from investments sold, matured, or repaid:
Bonds..................................................................... 101,049,805 122,548,892
Mortgage loans............................................................ 82,308 115,725
Tax on net capital gains.................................................. (105,566) 52,062
------------ ------------
Total investment proceeds......................................... 101,026,547 122,716,679
------------ ------------
Other cash provided.......................................................... 10,746,586 1,288,793
------------ ------------
Total cash provided............................................... 152,153,851 145,394,261
------------ ------------
Cost of investments acquired:
Bonds..................................................................... 146,935,141 124,810,078
Total investments acquired........................................ 146,935,141 124,810,078
------------ ------------
Other cash applied:
Dividend to stockholder................................................... 7,500,000 8,000,000
Other applications, net................................................... 5,819,079 8,359,537
------------ ------------
Total cash applied................................................ 160,254,220 141,169,615
------------ ------------
Net change in cash and short-term investments..................... (8,100,369) 4,224,646
Cash and short-term investments:
Beginning of year......................................................... 28,736,493 24,511,847
------------ ------------
End of year............................................................... $ 20,636,124 $ 28,736,493
============ ============
</TABLE>
The accompanying notes are an integral part of these statutory-basis
financial statements.
21
<PAGE> 53
SENTRY LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
-------------
(1) BASIS OF PRESENTATION AND SIGNIFICANT STATUTORY-BASIS ACCOUNTING POLICIES
BASIS OF PRESENTATION
Sentry Life Insurance Company (the Company) is a wholly-owned subsidiary of
Sentry Insurance a Mutual Company (SIAMCO). The Company writes insurance
products in all states except New York primarily through direct writers who
market the Company's individual life insurance, annuities and group health
and pension products. The Company also uses direct mail and third party
administrators for the marketing of its group life and health products.
The accompanying statutory-basis financial statements of the Company have
been prepared in conformity with the accounting practices prescribed or
permitted by the insurance department of the State of Wisconsin. Prescribed
statutory accounting principles include a variety of publications of the
National Association of Insurance Commissioners (NAIC), as well as state
laws, regulations, and general administrative rules. Permitted statutory
accounting practices encompass all accounting practices not so prescribed.
The Company does not employ any material permitted practices in the
preparation of its statutory-basis financial statements.
The accompanying statutory-basis financial statements have been prepared in
accordance with statutory accounting principles, which require management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from these estimates.
SIGNIFICANT STATUTORY ACCOUNTING POLICIES
A. INVESTMENT SECURITIES
Investments are valued in accordance with the requirements of the NAIC.
Bonds which qualify for amortization are stated at amortized cost;
bonds not qualifying are carried at the lesser of amortized cost or
NAIC market values. Under GAAP, bonds would be classified as either
trading, available for sale, or held-to-maturity. Bonds classified as
trading or as available for sale would be carried at market with
unrealized gains and losses, net of applicable taxes, recognized as net
income (trading securities) or as a direct surplus adjustment
(available for sale). Common stock of the Company's unconsolidated
subsidiary is carried at its underlying statutory capital and surplus.
The change in the subsidiary's underlying equity between years is
reflected as a change in unrealized gains (losses). Under GAAP, this
entity's balance sheet and results of operations would be consolidated
with the Company. Mortgage loans on real estate are carried at their
aggregate unpaid principal balances. Policy loans are carried at the
aggregate of unpaid principal balances plus accrued interest and are
not in excess of cash surrender values of the related policies.
Short-term investments are carried at amortized cost, which
approximates market value. Investment income is recorded when earned.
Market value adjustments, on investments carried at market, are
reflected in earned surplus as unrealized gains (losses) on
investments. Realized gains and losses are determined on the specific
identification method and are recorded directly in the statements of
operations, net of federal income taxes and after transfers to the
Interest Maintenance Reserve, as prescribed by the NAIC.
Income on mortgage-backed securities is recognized using a constant
effective yield based on anticipated prepayments and the estimated
economic life of the securities. When actual prepayments differ
significantly from anticipated prepayments, the effective yield is
recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the securities is adjusted to the
amount that would have existed had the new effective yield been applied
since the acquisition of the securities. This adjustment is reflected
in net investment income.
22
<PAGE> 54
SENTRY LIFE INSURANCE COMPANY (CONTINUED)
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
-------------
B. SEPARATE ACCOUNT BUSINESS AND LIABILITY FOR PREMIUM AND OTHER DEPOSIT
FUNDS
The Company issues group annuity contracts both to affiliated companies
and others. The deposits received in connection with these contracts
are placed in deposit administration funds and in separate accounts.
The Company also issues variable annuity contracts and variable
universal life contracts. Deposits for those contracts are also placed
in separate accounts. A separate account is an accounting entity
segregated as a discrete operation within an insurance company. The
stockholder of the Company and its policyholders have no claim to
assets held in the separate accounts. The contract holders are the only
persons having rights to any assets in the separate accounts or to
income arising from these assets. All separate and variable accounts
held by the Company are non-guaranteed and represent funds where the
benefit is determined by the performance of the investments held in the
separate account. Assets are carried at market value and reserves are
calculated using the cash value of the contract. All reserves fall into
the category allowing discretionary withdrawals at market value. For
the variable annuity contract, if it has been in effect at least six
years, there is no surrender charge. For the variable universal life
contract, there is a surrender charge through the ninth year. The
admitted asset value of separate accounts consists primarily of common
stock.
C. NON-ADMITTED ASSETS
For statutory accounting purposes, certain assets designated as
"non-admitted" (principally certain receivables) have been excluded
from the statutory-basis balance sheets and charged to earned surplus.
Under GAAP, such assets would be recognized at net realizable value.
Non-admitted assets totaled $322 and $2,172 at December 31, 1997 and
1996, respectively.
D. POLICY BENEFITS
Liabilities for traditional life and limited-payment life contracts are
computed using methods, mortality and morbidity tables and interest
rates which conform to the valuation laws of the State of Wisconsin.
The liabilities are primarily calculated on a modified reserve basis.
The effect of using a modified reserve basis partially offsets the
effect of immediately expensing acquisition costs by providing a policy
benefit reserve increase in the first policy year which is less than
the reserve increase in renewal years.
Future policy benefits for life policies and contracts were primarily
determined using the Commissioner's reserve valuation method with
interest rates ranging from 2.5% to 6%.
Future policy benefits for annuity contracts, primarily for individual
and group deferred annuities, were primarily determined using the
Commissioner's annuity reserve valuation method with interest rates
ranging from 3% to 11%. Group Health reserves consist predominantly of
long-term disability reserves representing present value of amounts not
yet due calculated using standard disability tables, and various
interest rates.
Reserves for universal life-type and investment contracts are based on
the contract account balance, if future benefit payments in excess of
the account balance are not guaranteed, or on the present value of
future benefit payments when such payments are guaranteed.
GAAP reserves are computed using mortality, withdrawal and interest
rate assumptions that are based on Company experience.
E. INTEREST MAINTENANCE RESERVE (IMR)
Realized investment gains and losses on bonds attributable to interest
rate changes are deferred in the IMR account. The IMR is recorded as a
liability and amortized into investment income over the approximate
remaining maturities of the bonds sold. This policy for recognition of
such realized gains and losses is prescribed by the NAIC in order to
smooth the impact of such activity on the Company's earned surplus. For
GAAP purposes, there is no such reserve.
23
<PAGE> 55
SENTRY LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
-------------
F. ASSET VALUATION RESERVE (AVR)
The AVR mitigates fluctuations in the values of invested assets
including bonds and mortgage loans. The AVR is recorded as a liability
and changes are charged or credited directly to earned surplus. For
GAAP purposes, a valuation allowance is established on an individual
asset basis for those securities whose cost exceeds market value and
the decline is other than temporary.
G. REVENUE AND EXPENSE RECOGNITION
Premiums for traditional life insurance policies and limited-payment
contracts are taken into income over the premium paying periods of the
policies. For investment contracts without mortality risk (such as
deferred annuities and immediate annuities with benefits paid for a
period certain) and contracts that permit the insured to make changes
in the contract terms (such as universal life products), deposits are
recorded as revenue when received. Under GAAP, deposits are recorded as
increases to liabilities and revenue is recognized as mortality and
other assessments are charged to policyholders.
As the Company has no direct employees and does not own equipment, it
utilizes services provided by employees and equipment of SIAMCO and
occupies space in SIAMCO's office building. Accordingly, the Company
participates in an expense allocation system with certain affiliated
companies. Expenses of the Company consist of direct charges incurred
and an allocation of expenses (principally salaries, salary-related
items, rent, and data processing services) between certain affiliated
companies. The Company recognized expenses of $31,900,482 and
$34,859,721 for 1997 and 1996, respectively, under this allocation
agreement.
H. ACQUISITION COSTS
Costs directly related to the acquisition of insurance premiums, such
as commissions and premium taxes, are charged to operations as
incurred. Under GAAP, such acquisition costs would be capitalized and
amortized over the policy periods.
I. FEDERAL INCOME TAX
The Company is included in the consolidated federal income tax return
of SIAMCO. Income taxes payable or recoverable are determined on a
separate return basis by the Company in accordance with a written tax
allocation agreement. Deferred federal income taxes are not provided
for temporary differences between tax and financial reporting as they
would be under GAAP. Additionally, federal income taxes are not
provided for unrealized gains (losses) on investments.
J. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS
The Company participates with SIAMCO and certain other affiliated
companies in a defined benefit pension plan which covers substantially
all of their employees. Generally, the companies' funding and
accounting policies are to make the maximum contribution required under
applicable regulations and to charge such contributions to expense in
the year they are deductible for tax purposes. GAAP periodic net
pension expense is based on the cost of incremental benefits for
employee service during the period, interest on the projected benefit
obligation, actual return on plan assets and amortization of actuarial
gains and losses.
In addition to providing the pension benefits, the Company, with SIAMCO
and its affiliated subsidiaries, provides certain health care, dental
and life insurance benefits to retired employees and their dependents.
Substantially all of the employees may become eligible for those
benefits if they reach normal retirement age while working for the
Companies. The expected costs of providing those benefits to employees
and the employees' beneficiaries and covered dependents are accounted
for on an accrual basis during the years that employees render service
in accordance with NAIC policy. SIAMCO is amortizing its transition
obligation, created upon the initial valuation of postretirement
benefits, over a period of twenty years and a portion of the annual
expense is allocated to the Company.
24
<PAGE> 56
SENTRY LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
-------------
K. RECLASSIFICATION
Certain items in prior years' financial statements have been
reclassified to conform with the 1997 presentation.
(2) INVESTMENTS
The book value and estimated market value of bonds are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
BOOK UNREALIZED UNREALIZED MARKET
AT DECEMBER 31, 1997 VALUE GAINS LOSSES VALUE
----- ----- ------ -----
<S> <C> <C> <C> <C>
US Treasury securities and
obligations of US Government
corporations and agencies $ 51,872,626 $ 3,446,572 $ (609) $ 55,318,589
Obligations of states and
political subdivisions 439,817 99,564 0 539,381
Corporate securities 757,760,027 60,329,883 (1,178,355) 816,911,555
Mortgage-backed securities 292,938,948 22,571,116 (553,953) 314,956,111
-------------- -------------- -------------- --------------
Total $1,103,011,418 $ 86,447,135 $ (1,732,917) $1,187,725,636
============== ============== ============== ==============
<CAPTION>
GROSS GROSS ESTIMATED
BOOK UNREALIZED UNREALIZED MARKET
AT DECEMBER 31, 1996 VALUE GAINS LOSSES VALUE
----- ----- ------ -----
<S> <C> <C> <C> <C>
US Treasury securities and
obligations of US Government
corporations and agencies $ 53,916,579 $ 2,167,247 $ (369,858) $ 55,713,967
Obligations of states and
political subdivisions 437,987 55,839 0 493,826
Corporate securities 691,186,142 30,898,142 (7,126,855) 714,957,429
Mortgage-backed securities 309,613,521 14,702,270 (1,366,354) 322,949,437
-------------- -------------- -------------- --------------
Total $1,055,154,229 $ 47,823,497 $ (8,863,067) $1,094,114,659
============== ============== ============== ==============
</TABLE>
Book value and estimated market value of bonds at December 31, 1997, by
contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because certain issuers have the right to call or
prepay obligations with or without call or prepayment penalties. Because
most mortgage-backed securities provide for periodic payments throughout
their lives, they are listed below in a separate category.
<TABLE>
<CAPTION>
ESTIMATED
BOOK MARKET
VALUE VALUE
-------------- --------------
<S> <C> <C>
Due in one year or less $ 7,172,153 $ 7,281,006
Due after one year through five years 55,963,265 59,146,784
Due after five years through ten years 153,794,879 162,160,043
Due after ten years 593,142,173 644,181,692
-------------- --------------
Subtotal 810,072,470 872,769,525
Mortgage-backed securities 292,938,948 314,956,111
-------------- --------------
Total $1,103,011,418 $1,187,725,636
============== ==============
</TABLE>
25
<PAGE> 57
SENTRY LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
-------------
The bond portfolio distribution by quality rating (primarily Moody's)
at December 31, 1997 is summarized as follows:
<TABLE>
<S> <C>
Aaa 32%
Aa 6%
A 38%
Baa 22%
Ba & below and not rated 2%
----
100%
====
</TABLE>
Generally, bonds with ratings Baa and above are considered to be
investment grade.
Proceeds from sales of bonds during 1997 and 1996, including maturities
and calls, were $101,049,805 and $122,548,892, respectively. In 1997
and 1996, respectively, gross gains of $1,525,602 and $1,339,605, and
gross losses of $652,460 and $2,589,270 were realized on these sales
before transfer to the IMR liability.
At December 31, 1997 and 1996, investments carried at $4,384,747 and
$4,470,358, respectively, were on deposit with various governmental
agencies as required by law.
(3) UNCONSOLIDATED SUBSIDIARIES
The Company wholly owed Sentry Life Insurance Company of New York
(SLONY) during 1997 and 1996. Condensed financial information regarding
SLONY is shown as follows:
<TABLE>
<CAPTION>
SLONY
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Investments $35,406,623 $35,216,814
Total assets 38,955,256 38,474,106
Policy reserves and benefits 19,699,749 20,136,829
Total liabilities 29,137,609 28,873,607
Statutory capital and surplus 9,817,647 9,600,499
Premium income 8,331,937 10,696,198
Net investment income 2,783,625 2,917,728
Benefits and expenses 9,917,561 12,945,335
Net income 764,439 716,983
</TABLE>
(4) NET INVESTMENT INCOME AND NET REALIZED AND UNREALIZED GAINS (LOSSES)
Sources of net investment income for 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Dividends received from affiliates $ 750,000 $ 800,000
Interest:
Bonds 87,232,271 86,148,877
Short-term investments 1,124,220 908,456
Other investments 1,763,787 1,782,534
Amortization of IMR 1,113,741 1,220,848
----------- -----------
Gross investment income 91,984,019 90,860,715
Investment expense 394,081 477,842
----------- -----------
Net investment income $91,589,939 $90,382,873
=========== ===========
</TABLE>
26
<PAGE> 58
SENTRY LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
-------------
The components of net realized gains (losses) and changes in net
unrealized gains (losses) on investments which are reflected in the
accompanying statutory-basis financial statements are as follows:
<TABLE>
<CAPTION>
REALIZED UNREALIZED
---------------------------- ---------------------
1997 1996 1997 1996
---------- ---------- ----- ------
<S> <C> <C> <C> <C>
Bonds $ 873,142 $(1,249,665) - -
Stocks - 178,648 - (171,136)
Less deferred realized (gains)
losses (873,142) 1,249,665 - -
Common stock of
consolidated subsidiaries 217,147 (202,067)
Less related federal income tax (272,063) (330,520)
---------- ---------- --------- ----------
$ (272,063) $(151,872) $ 217,147 $(373,434)
========== ========== ========= ==========
</TABLE>
(5) INCOME TAXES
Federal income tax expense in the statutory-basis statements of
operations differs from that computed based on the federal statutory
corporate income tax rate of 35%. The reasons for these differences are
as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Federal income tax calculated at statutory rate
of 35% of income before federal income taxes and
net realized gains on investments $ 8,905,800 $ 10,288,113
Changes in liability for dividends - 864,932
Accrual of bond discount (633,561) (891,625)
Adjustment for deferred acquisition costs 12,178 (14,741)
Dividends received from subsidiaries (262,500) (280,000)
Different basis used to compute future policy benefits 1,720,817 35,071
Amortization of interest maintenance reserve (389,809) (427,296)
Other, net (175,587) (192,590)
----------- ------------
Total $ 9,177,337 $ 9,381,864
=========== ============
</TABLE>
Under pre-1984 life insurance company income tax laws, a portion of a
life insurance company's "gain from operations" was not subject to
current income taxation but was accumulated, for tax purposes, in a
memorandum account designated as the "policyholders' surplus account."
The amounts included in this account are includable in taxable income
of later years at rates then in effect if the life insurance company
elects to distribute tax basis policyholders' surplus to stockholders
as dividends or takes certain other actions. Any distributions are
first made from another tax memorandum account known as the
"stockholders' surplus account." The accumulation in the tax
policyholders' surplus and stockholders' surplus accounts of the
Company were $5,605,476 and $77,917,211, respectively, at December 31,
1997.
Federal income tax returns of SIAMCO have been examined through 1993
and the Company and the Internal Revenue Service reached agreement on
all issues relating to 1993 and prior years. In the opinion of
management, the Company has adequately provided for the possible effect
of future assessments related to prior years.
(6) DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 (SFAS 107),
"Disclosures about Fair Values of Financial Instruments," requires
disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheets, for which it is
practicable to estimate those values. SFAS 107 defines fair value of a
financial instrument as the amount at which that instrument could be
exchanged in a current transaction between willing parties, other than
in a forced or liquidated sale.
The fair values presented on the next page represent management's best
estimates and may not be substantiated by comparisons to independent
markets and, in many cases, could not be realized in immediate
settlement of the instruments. Certain financial instruments and all
nonfinancial
27
<PAGE> 59
SENTRY LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
-------------
instruments are exempt from the disclosure requirements of SFAS 107.
Financial instruments which are exempt include life policy benefits
with mortality or morbidity risk. Therefore, the aggregate fair value
amounts presented do not represent the underlying value of the Company.
For cash and short-term investments and accrued investment income, the
carrying amount approximates fair value.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
BONDS
Estimated fair value is generally based on quotes provided by
independent pricing services. If a quoted market price is not
available, fair value is estimated by management based on the quoted
market price of comparable instruments.
POLICY LOANS
Policy loans have no stated maturity dates; therefore, no reasonable
estimate of fair value can be made. Interest rates range from 5 to 8
percent.
SEPARATE ACCOUNTS
The fair value of the assets held in separate accounts and offsetting
liabilities are estimated based on the fair value of the underlying
assets.
AGGREGATE RESERVES FOR INVESTMENT-TYPE CONTRACTS
The fair value of investment-type insurance contracts is estimated by
reducing the policyholder liability for applicable surrender charges.
STRUCTURED SETTLEMENTS
The fair value of the liability for structured settlements is estimated
by discounting future cash flows using the current rates being offered
for similar settlements.
LIABILITY FOR PREMIUM AND OTHER DEPOSIT FUNDS
The fair value for contracts with stated maturities is estimated by
discounting future cash flows using current rates being offered for
similar contracts. For those contracts with no stated maturity, the
fair value is estimated by calculating the surrender value.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
STATEMENT ESTIMATED
AT DECEMBER 31, 1997 VALUE FAIR VALUE
-------------- --------------
<S> <C> <C>
Assets:
Bonds $1,103,011,148 $1,187,725,636
Assets held in separate accounts 533,613,785 533,613,785
Liabilities:
Aggregate reserves for
investment-type contracts 80,815,675 80,386,603
Structured settlements 52,717,040 59,537,099
Liability for premium and
other deposit funds 604,285,476 603,300,638
Liabilities related to
separate accounts 528,643,523 528,643,523
</TABLE>
28
<PAGE> 60
SENTRY LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
-------------
<TABLE>
<CAPTION>
STATEMENT ESTIMATED
AT DECEMBER 31, 1996 VALUE FAIR VALUE
-------------- --------------
<S> <C> <C>
Assets:
Bonds $1,055,154,229 $1,094,114,659
Assets held in separate accounts 433,345,943 433,345,943
Liabilities:
Aggregate reserves for
investment-type contracts 86,160,277 85,534,609
Structured settlements 48,033,522 55,410,157
Liability for premium and
other deposit funds 596,529,186 591,498,214
Liabilities related to
separate accounts 432,660,043 432,660,043
</TABLE>
(7) PENSION AND 401K PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company participates with SIAMCO and certain other affiliated
companies in a defined benefit pension plan which covers substantially
all of their employees. The benefits are based on years of service, the
average of the three highest of the last fifteen years of an employee's
compensation and primary social security benefits, as defined in the
plan. The Company is not a separately assignable entity for purposes of
allocation of accumulated plan benefits or assets. The Company was
allocated pension expense by SIAMCO of approximately $283,000 and
$722,000 in 1997 and 1996, respectively.
The Company participates with SIAMCO and its affiliated subsidiaries in
a qualified 401k Plan. Employees who meet certain eligibility
requirements may elect to participate in the Plan. Participants must
contribute at least one percent but no more than 16 percent of base
compensation. Highly compensated employees may contribute a maximum of
10 percent on a pre-tax basis. For non-highly compensated employees,
the entire 16% may be deposited on a pre-tax basis. The Company matches
up to 25% of employee contributions up to the first 6 percent of base
salary deposited by an employee. The Company may make additional annual
contributions to the Plan based on operating profit. The Company was
allocated approximately $260,000 and $355,000 by SIAMCO for 401k Plan
benefits in 1997 and 1996, respectively.
In addition to the above-mentioned benefits, the Company, with SIAMCO
and its affiliated subsidiaries, provides certain health care, dental
and life insurance benefits to retired employees and their covered
dependents. The retiree health care benefits allocated to the Company
by SIAMCO were approximately $445,000 for 1997 and $625,000 for 1996.
(8) REINSURANCE
The Company had entered into reinsurance contracts for participation in
reinsurance pools and surplus protection for its wholly-owned
subsidiaries. Assumed life in-force amounted to approximately 30% and
30% of total in-force (before ceded reinsurance) at December 31, 1997
and 1996, respectively.
The Company has entered into reinsurance ceded contracts to limit the
net loss potential arising from large risks. Generally, life benefits
in excess of $250,000 and all group health liabilities, except for
liabilities relating to SIAMCO's employee benefit plans, are ceded to
reinsurers. The group health liabilities are ceded to SIAMCO.
29
<PAGE> 61
SENTRY LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
-------------
The Company cedes insurance to other insurers under various contracts
which cover individual risks or entire classes of business. Although
the ceding of insurance does not discharge the Company from its primary
liability to policyholders in the event any reinsurer might be unable
to meet the obligations assumed under the reinsurance agreements, it is
the practice of insurers to reduce their balances for amounts ceded.
The amounts included in the accompanying statutory-basis financial
statements for reinsurance were as follows:
<TABLE>
<CAPTION>
1997
(000'S OMITTED)
---------------
AFFILIATED UNAFFILIATED
---------- ------------
ASSUMED CEDED ASSUMED CEDED
------- ----- ------- -----
<S> <C> <C> <C> <C>
Premiums $ 306 $ 55,101 $6,628 $7,891
Benefits 8 59,973 6,602 4,437
Commissions 5 17,718 (2) 1,195
Future Policy Benefits:
Life & Annuities 34 - 19 1,347
Accident & Health - 232,386 291 159
Intercompany Receivable - 8,650 - -
<CAPTION>
1996
(000'S OMITTED)
---------------
AFFILIATED UNAFFILIATED
---------- ------------
Assumed Ceded Assumed Ceded
------- ----- ------- -----
<S> <C> <C> <C> <C>
Premiums $ 346 $112,914 $7,117 $4,377
Benefits 49 108,034 7,157 2,215
Commissions 6 27,693 (1) 617
Future Policy Benefits:
Life & Annuities 37 - 28 1,282
Accident & Health - 232,583 343 77
Intercompany Receivable - 9,188 - -
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various legal actions and
proceedings pending against the Company. In the opinion of management
and legal counsel, the ultimate resolution of these matters will not
have a material adverse impact on the Company's statutory-basis
financial statements.
State guaranty funds can assess the Company for losses of insolvent or
rehabilitated companies. Mandatory assessments may be partially
recovered through a reduction in future premium taxes in some states.
The Company believes that its ultimate cost for these assessments is
not expected to have a material adverse effect on the financial
statements.
(10) OTHER RELATED PARTY TRANSACTIONS
The Company is the direct writer of certain employee benefit plans for
SIAMCO. Premiums included in the accompanying statutory-basis
statements of operations (net of ceded premiums) are approximately
$20,360,000 and $20,364,000 in 1997 and 1996, respectively.
The Company has provided coverage in the form of annuity contracts as
structured settlements for SIAMCO workers' compensation claims.
Reserves for future policy benefits at December 31, 1997 and 1996
included $52,717,040 and $48,033,522, respectively, relating to these
contracts.
Also, see Notes 7 and 8 for other related party transactions.
(11) WITHDRAWAL CHARACTERISTICS OF ANNUITY RESERVES AND DEPOSIT LIABILITIES
Annuity reserves and deposits of approximately $1,202.0 million and
$1,104.2 million in 1997 and 1996, respectively, are subject to
withdrawal at the discretion of the annuity contract holders.
Approximately 95% and 94%, respectively, carry surrender charges.
30
<PAGE> 62
SENTRY LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF ASSETS AND LIABILITIES
FOR THE YEAR ENDED DECEMBER 31, 1997
31
<PAGE> 63
SENTRY LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF ASSETS AND LIABILITIES
FOR THE YEAR ENDED DECEMBER 31, 1997
SCHEDULE 1 - SELECTED FINANCIAL DATA
The following is a summary of certain financial data included in other exhibits
and schedules subjected to audit procedures by independent auditors and utilized
by actuaries in the determination of reserves.
<TABLE>
<S> <C>
Investment Income Earned:
Government Bonds................................................... $ 329,923
Other bonds (unaffiliated)......................................... 86,902,288
Common stocks of affiliates........................................ 750,000
Mortgage loans..................................................... 10,835
Premium notes, policy loans and liens.............................. 1,698,910
Short-term investments............................................. 1,124,220
Aggregate write-ins for investment income.......................... 54,042
---------------
Gross investment income............................................ $ 90,870,278
===============
Mortgage Loans - Book Value:
Residential mortgages.............................................. $ 68,657
===============
Mortgage Loans By Standing - Book Value:
Good standing...................................................... $ 68,657
===============
Bonds and Stocks of Parents, Subsidiaries and Affiliates - Book Value:
Common stocks...................................................... $ 9,817,647
===============
Bonds and Short-Term Investments by Class and Maturity:
Bonds by Maturity - Statement Value
Due within one year or less...................................... $ 21,897,445
Over 1 year through 5 years...................................... 147,537,985
Over 5 years through 10 years.................................... 272,735,640
Over 10 years through 20 years................................... 322,055,038
Over 20 years.................................................... 338,785,310
---------------
Total by Maturity................................................ $ 1,103,011,418
===============
</TABLE>
32
<PAGE> 64
<TABLE>
<S> <C>
Bonds by Class - Statement Value
Class 1................................................ $ 813,962,093
Class 2................................................ 275,602,903
Class 3................................................ 13,446,422
Class 4................................................ 0
Class 5................................................ 0
Class 6................................................ 0
---------------
Total by Class......................................... $ 1,103,011,418
===============
Total Bonds Publicly Traded............................ $ 1,103,011,418
===============
Total Bonds Privately Placed........................... $ 0
===============
Short-Term Investments - Book Value......................... $ 20,636,124
===============
Cash on Deposit............................................. $ 0
===============
Life Insurance In Force (000's omitted):
Ordinary................................................. $ 4,824,017
===============
Group Life............................................... $ 3,115,044
===============
Amount of Accidental Death Insurance In Force Under Ordinary
Policies (000's omitted).................................... $ 124,140
===============
Life Insurance Policies with Disability Provisions In Force:
Ordinary................................................. 22,172
===============
Group Life............................................... 130
===============
Supplementary Contracts In Force:
Ordinary - Not Involving Life Contingencies
Amount on Deposit...................................... $ 259,892
===============
Income Payable......................................... $ 359,396
===============
Ordinary - Involving Life Contingencies
Income Payable......................................... $ 104,956
===============
</TABLE>
33
<PAGE> 65
<TABLE>
<S> <C>
Annuities:
Ordinary
Immediate - Amount of Income Payable................... $ 1,587,647
==============
Deferred - Fully paid account balance.................. $ 21,397,657
==============
Deferred - Not fully paid account balance.............. $ 84,633,981
==============
Group
Amount of income payable............................... $ 5,184,535
==============
Fully paid account balance............................. $ 13,415,179
==============
Not fully paid account balance......................... $1,100,339,568
==============
Accident and Health Insurance - Premiums In Force:
Ordinary................................................. $ 190,657
==============
Group.................................................... $ 32,862,349
==============
Deposit Funds and Dividend Accumulations:
Dividend Accumulations - Account Balance................. $ 334,643
==============
Claim Payments 1997:
Group Accident and Health Year - Ended December 31, 199X
1997................................................... $ 4,854,724
==============
1996................................................... $ 162,408
==============
1995 & prior........................................... $ 53,908
==============
Other Accident & Health
1997................................................... $ 12,690
==============
1996................................................... $ 27,508
==============
1995 & prior........................................... $ 85,572
==============
</TABLE>
34
<PAGE> 66
PART C
<PAGE> 67
PART C
OTHER INFORMATION
ITEM 24 Financial Statements and Exhibits
(a) Financial Statements of Sentry Variable Account II
Included in Part A:
Condensed Financial Information
Included in Part B:
Report of Independent Accountants
Statement of Assets, Liabilities and Contract Owners'
Equity, December 31, 1997
Statements of Operations and Changes in Contract Owners'
Equity for the years ended December 31, 1997 and 1996
Notes to Financial Statements, December 31, 1997 and 1996
Financial Statements of Sentry Life Insurance Company
Included in Part B:
Report of Independent Accountants
Statutory-Basis Balance Sheets, December 31, 1997 and 1996
Statutory-Basis Statements of Operations for the years
ended December 31, 1997 and 1996
Statutory-Basis Statements of Changes in Capital Stock and
Surplus for the years ended December 31, 1997 and 1996
Statutory-Basis Statements of Cash Flow for the years
ended December 31, 1997 and 1996
Notes to Statutory-Basis Financial Statements
Supplemental Schedule of Assets and Liabilities for the
Year Ended December 31, 1997
<PAGE> 68
ITEM 24
(b) Exhibits
(1) Resolutions of the Board of Directors of
Sentry Life Insurance Company*
(2) Not Applicable
(3)(i) Principal Underwriter Agreement*
(3)(ii) Registered Representatives Agreement*
(3)(iii) General Agent Agreement*
(4)(i) Individual Flexible Purchase Payment
Deferred Variable Annuity Contract*
(4)(ii) Contract Amendment pursuant to Tax
Reform Act of 1984*
(5) Application Form*
(6)(i) Articles of Incorporation of Sentry Life
Insurance Company*
(6)(ii) Bylaws*
(7) Not Applicable
(8)(i) Sales Agreement (Fund Participation
Agreement)*
(8)(ii) Assignment and Modification Agreement**
(9) Opinion and Consent of Counsel
(10) Consent of Independent Accountants
(11) Not Applicable
(12) Agreement Governing Contribution to Sentry
Variable Account II*
(13) Calculation of Performance Information
(27) Not applicable
* Exhibits (1), (3)(i), (3)(ii), (3)(iii), (4)(i), (4)(ii), (5),
(6)(i), (6)(ii),(8)(i), and (12) are incorporated herein by
reference to such exhibit in Registrant's Post-Effective
Amendment No. 17 to Form N-4 filed electronically on or about
April 30, 1997.
** Exhibit (8)(ii) is incorporated herein by reference to such
exhibit in Registrant's Post-Effective Amendment No. 16 to
Form N-4 filed electronically on or about April 29, 1996.
ITEM 25 Directors and Officers of the Depositor
The following persons are the officers and directors of Sentry
Life Insurance Company. The principal business address for
each director and officer of the Depositor is 1800 North Point
Drive, Stevens Point, Wisconsin 54481.
Positions and Offices
Name With Depositor
---- ----------------------
Dale R. Schuh Director, Chairman of the
Board and President
Richard A. Huseby Vice President
Glen E. Scott, Jr. Vice President
William M. O'Reilly Director and Secretary
William J. Lohr Director and Treasurer
Steven R. Boehlke Director
Janet L. Fagan Director
<PAGE> 69
ITEM 26 Persons Controlled By or Under Common Control With Depositor
The following is a description of all persons who might be considered to be
directly or indirectly controlled by or under common control with the Depositor:
1. The Depositor, a Wisconsin corporation, is a wholly-owned subsidiary of
Sentry Insurance a Mutual Company ("Sentry Insurance"), a Wisconsin
corporation.
2. The following companies are also wholly-owned subsidiaries of Sentry
Insurance:
(a) Middlesex Insurance Company ("Middlesex"), a Wisconsin corporation;
(b) Dairyland Insurance Company ("Dairyland"), a Wisconsin corporation;
(c) Sentry Fund, Inc., a Maryland corporation;
(d) Parker Stevens Agency, Inc., a Wisconsin corporation;
(e) Parker Stevens Agency of Mass., Inc., a Massachusetts corporation;
(f) Sentry Investment Management, Inc., a Delaware corporation;
(g) Sentry Equity Services, Inc., a Delaware corporation;
(h) Sentry Services, Inc., a Wisconsin corporation;
(i) Sentry Aviation Services, Inc., a Wisconsin corporation; and
(j) WAULECO, Inc., a Wisconsin corporation.
3. Sentry Insurance is also affiliated with Sentry Insurance Foundation, Inc.,
a Wisconsin corporation.
4. Sentry Insurance is also affiliated with Sentry Lloyd's of Texas, a Texas
Lloyd's corporation.
5. Patriot General Insurance Company, a Wisconsin corporation, is a
wholly-owned subsidiary of Middlesex.
6. Sentry Life Insurance Company of New York, a New York corporation, is a
wholly-owned subsidiary of the Depositor.
7. Dairyland County Mutual Insurance Company of Texas, a Texas corporation, is
affiliated with Dairyland.
ITEM 27 Number of Contract Owners
As of April 1, 1998, there were 1,528 qualified contract owners and 538
non-qualified contract owners.
ITEM 28 Indemnification
Under the Bylaws of Sentry Life Insurance Company, each director and officer of
the Company shall be indemnified by the Company against all costs and expenses
actually and necessarily incurred by him or her in connection with the defense
of any action, suit or proceeding in which he or she is made a party by reason
of his or her being or having been a director or officer of the Company, whether
or not he or she continues to be a director or officer at the time of incurring
such costs or expense, except in relation to matters as to which he or she shall
be adjudged in such action, suit or proceeding to be liable for gross negligence
or willful misconduct in the performance of his or her duties as such director
or officer. This right of indemnification shall not be exclusive of other rights
to which any director or officer may be entitled as a matter of law or
agreement.
Sentry Equity Services, Inc., the principal underwriter, is a Delaware
corporation. The Delaware General Corporation Law, Section 145, provides for
indemnification of directors, officers, employees and agents as follows:
145 INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS -(a) A
corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that the person is or
was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
<PAGE> 70
trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by the person in connection with such action, suit
or proceeding if the person acted in good faith and in a manner the
person reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe the person's conduct
was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner
which the person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal
action or proceeding, had reasonable cause to believe that the person's
conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by the person in connection with the
defense or settlement of such action or suit if the person acted in
good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter
as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of
all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or
such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense
of any action, suit or proceeding referred to in subsections (a) and
(b) of this section, or in defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper
in the circumstances because the person has met the applicable standard
of conduct set forth in subsections (a) and (b) of this section. Such
determination shall be made (1) by a majority vote of the directors who
are not parties to such action, suit or proceeding, even though less
than a quorum, or (2) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion,
or (3) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the corporation
in advance of the final disposition of such action, suit or proceeding
upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that
he is not entitled to be indemnified by the corporation as authorized
in this section. Such expenses (including attorneys' fees) incurred by
other employees and agents may be so paid upon such terms and
conditions, if any, as the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be
deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or
<PAGE> 71
otherwise, both as to action in his official capacity and as to action
in another capacity while holding such office.
(g) A corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any
such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such
liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors,
officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation,
or is or was serving at the request of such constituent corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in
the same position under this section with respect to the resulting or
surviving corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to any
employee benefit plan; and references to "serving at the request of the
corporation" shall include any service as a director, officer, employee
or agent of the corporation which imposes duties on, or involves
services by, such director, officer, employee or agent with respect to
an employee benefit plan, its participants or beneficiaries; and a
person who acted in good faith and in a manner he reasonably believed
to be in the interest of the participants and beneficiaries of an
employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in
this section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be
director, officer, employee or agent and shall inure to the benefit of
the heirs, executors and administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction
to hear and determine all actions for advancement of expenses or
indemnification brought under this section or under any bylaw,
agreement, vote of stockholders or disinterested directors, or
otherwise. The Court of Chancery may summarily determine a
corporation's obligation to advance expenses (including attorneys'
fees).
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant 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 of the Registrant in the
successful defense of any 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 of 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.
<PAGE> 72
ITEM 29 Principal Underwriter
(a) Sentry Equity Services, Inc., the Principal Underwriter for the
Contracts, also acts as Principal Underwriter for:
Sentry Variable Account I Sentry Variable Life Account I
Sentry Fund, Inc.
(b) The following persons are the officers and directors
of Sentry Equity Services, Inc. The principal business
address for each director and officer of the Principal
Underwriter is 1800 North Point Drive, Stevens Point,
Wisconsin 54481:
<TABLE>
<CAPTION>
Positions and Offices
Name With Underwriter
---- ----------------------
<S> <C>
Dale R. Schuh Director and Chairman of the Board
Susan M. DeBruin President
Glen E. Scott Jr. Vice President
William M. O'Reilly Director and Secretary
William J. Lohr Director and Treasurer
Steven R. Boehlke Director
</TABLE>
(C)
<TABLE>
<CAPTION>
Name of Net Underwriting
Principal Discounts & Compensation On Brokerage
Underwriter Commissions Redemption Commissions Compensation
- ----------- ------------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Sentry Equity
Services, Inc. $ 50,513 $ 0.00 $ 0.00 $ 309,674
</TABLE>
ITEM 30 Location of Accounts and Records
As required to be maintained by Section 31(a) of the Investment Company
Act of 1940 and the rules promulgated thereunder, Sentry Equity
Services, Inc. and Sentry Life Insurance Company maintain physical
possession of the accounts, books or documents of the Separate Account
at 1800 North Point Drive, Stevens Point, Wisconsin 54481.
ITEM 31 Management Services
Not Applicable.
ITEM 32 Undertakings
(a) Registrant hereby undertakes to file a Post-Effective Amendment to
this Registration Statement as frequently as is necessary to ensure
that the audited financial statements in the Registration Statement
are never more than sixteen (16) months old for so long as payments
under the variable annuity contracts may be accepted.
(b) Registrant hereby undertakes to include either: (1) as part of any
application to purchase a contract offered by the Prospectus, a
space that an applicant can check to request a Statement of
Additional Information, or (2) 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.
(c) Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statement required to be made
available under this Form promptly upon written or oral
<PAGE> 73
request.
(d) Sentry Life Insurance Company ("Company") hereby represents that
the fees and charges deducted under the Contracts described in the
Prospectus, in the aggregate, are reasonable in relation to the
services rendered, the expenses to be incurred and the risks
assumed by the Company.
REPRESENTATIONS
The Registrant hereby represents that it is relying upon a No Action Letter
issued to the American Council of Life Insurance dated November 28, 1988
(Commission ref. IP-6-88), and that the following provisions have been complied
with:
1. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in each Registration Statement, including
the Prospectus, used in connection with the offer of the contract;
2. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in any sales literature used in
connection with the offer of the contract;
3. Instruct sales representatives who solicit participants to purchase the
contract specifically to bring the redemption restrictions imposed by
Section 403(b)(11) to the attention of the potential participants; and
4. Obtain from each plan participant who purchases a Section 403(b)
annuity contract, prior to or at the time of such purchase, a signed
statement acknowledging the participant's understanding of: (1) the
restrictions on redemption imposed by Section 403(b)(11), and (2) other
investment alternatives available under the employer's Section 403(b)
arrangement to which the participant may elect to transfer his or her
contract value.
<PAGE> 74
Signatures
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of this Registration Statement and has caused this
Registration Statement to be signed on its behalf, in the City of Stevens Point,
State of Wisconsin, on the 2Oth day of April, 1998.
Sentry Variable Account II
Registrant
By: Sentry Life Insurance Company
By: s/ Dale R. Schuh
------------------------------------
Dale R. Schuh, President,
Chairman of the Board and Director
Sentry Life Insurance Company
Depositor
By: s/Dale R. Schuh
------------------------------------
Dale R. Schuh, President, Chairman
of the Board and Director
<PAGE> 75
As required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities and on the date indicated.
s/Dale R. Schuh April 20, 1998
- -----------------------------------
Dale R. Schuh, Chairman of the
Board, President and Director
s/Richard A. Huseby April 20, 1998
- -----------------------------------
Richard A. Huseby, Vice President
s/Glen E. Scott, Jr. April 20, 1998
- -----------------------------------
Glen E. Scott, Jr., Vice President
s/William M. O'Reilly April 20, 1998
- -----------------------------------
William M. O'Reilly, Secretary and
Director
s/William J. Lohr April 20, 1998
- -----------------------------------
William J. Lohr, Treasurer and
Director
s/Steven R. Boehlke April 20, 1998
- -----------------------------------
Steven R. Boehlke, Director
s/Janet L. Fagan April 20, 1998
- -----------------------------------
Janet L. Fagan, Director
<PAGE> 76
EXHIBITS TO
POST-EFFECTIVE AMENDMENT NO. 18
TO
FORM N-4
FOR
SENTRY VARIABLE ACCOUNT II
<PAGE> 77
INDEX TO EXHIBITS
Exhibit
- -------
99.B 9 Opinion and Consent of Counsel
99.B 10 Consent of Independent Accountants
99.B 13 Calculation of Performance Information
<PAGE> 1
Exhibit 9
Opinion and Consent of Counsel
<PAGE> 2
BLAZZARD, GRODD & HASENAUER, P.C.
ATTORNEYS AT LAW CONNECTICUT OFFICE:
943 POST ROAD EAST P.O. BOX 5108
NORSE N. BLAZZARD** WESTPORT, CONNECTICUT 06881-5108
LESLIE E. GRODD* TELEPHONE (203) 226-7866
JUDITH A. HASENAUER** FACSIMILE (203) 454-4028
WILLIAM E. HASENAUER*
RAYMOND A. O'HARA III* FLORIDA OFFICE:
LYNN KORMAN STONE* SUITE 213, OCEANWALK MALL
MAUREEN M. MURPHY* 101 NORTH OCEAN DRIVE
HOLLYWOOD, FLORIDA 33019
TELEPHONE (305) 920-6590
FACSIMILE (305) 920-6902
* Admitted in Connecticut
** Admitted in Connecticut and Florida
April 8, 1998
Board of Directors
Sentry Life Insurance Company
1800 North Point Drive
Stevens Point, WI 54481
RE: Opinion of Counsel - Sentry Variable Account II
Gentlemen:
You have requested our Opinion of Counsel in connection with the filing with the
Securities and Exchange Commission of a Post-Effective Amendment to a
Registration Statement on Form N-4 for Individual Flexible Purchase Payment
Deferred Variable Annuity Contracts (the "Contracts") to be issued by Sentry
Life Insurance Company and its separate account, Sentry Variable Account II.
We have made such examination of the law and have examined such records and
documents as in our judgment are necessary or appropriate to enable us to render
the opinions expressed below.
We are of the following opinions:
1. Sentry Variable Account II is a Unit Investment Trust as that term is defined
in Section 4(2) of the Investment Company Act of 1940 (the "Act"), and is
currently registered with the Securities and Exchange Commission, pursuant to
Section 8(a) of the Act.
2. Upon the acceptance of purchase payments made by a Contract Owner pursuant to
a Contract issued in accordance with the Prospectus contained in the
Registration Statement and upon compliance with applicable law, such a Contract
Owner will have a legally-issued, fully paid, non-assessable contractual
interest under such Contract.
You may use this opinion letter, or a copy thereof, as an exhibit to the
Registration Statement.
<PAGE> 3
BLAZZARD, GRODD & HASENAUER, P.C.
Board of Directors
Sentry Life Insurance Company
April 8, 1998
Page 2
We consent to the reference to our Firm under the caption "Legal Opinions"
contained in the Statement of Additional Information which forms a part of the
Registration Statement.
Sincerely,
BLAZZARD, GRODD & HASENAUER, P.C.
By: s/Raymond A. O'Hara III
-----------------------------------
Raymond A. O'Hara III
<PAGE> 1
Exhibit (10)
Consent of Independent Accountants
<PAGE> 2
[COOPERS Coopers & Lybrand L.L.C.
& LYBRAND LOGO] a professional services firm
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in Post Effective Amendment No. 18 to the
Registration Statement of Sentry Variable Account II (the "Account") on Form N-4
of Sentry Variable Account II (File No. 2-87072) of:
(1) Our report dated February 11, 1998, on our audits of the financial
statements of the Account; and
(2) Our report dated February 13, 1998, on our audits of the statutory-basis
financial statements of Sentry Life Insurance Company.
We also consent to the reference to our Firm under the caption "Independent
Accountants."
s/ Coopers & Lybrand L.L.P.
Chicago, IL
April 27, 1998
Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International, a
limited liability association incorporated in Switzerland.
<PAGE> 1
Exhibit 13
Calculation of Performance Information
<PAGE> 2
\ SEC Rule 482- Total Return
SLIC Variable Annuity - One Year
Original Purchase - 12/31/96
Valuation Date 12/31/97
<TABLE>
<CAPTION>
LIQUID ASSET
=================
Units This Total Total
Date Transaction Type Rate Amount Unit Value Transaction Units Hold Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
12/31/96 Purchase 1,000.00 16.778906 59.599 59.599 $1,000.00
09/10/97 Contract Fee (1.00) 17.175889 (0.111) 59.488 $1,021.76
12/31/97 Value before Surr. Chg. 17.361078 0.000 59.488 $1,032.78
12/31/97 Surrender Charge 0.05 (50.00) 17.361076 (2.880) 56.608 $ 982.76
12/31/97 Remaining Value 17.361076 0.000 56.608 $ 982.76
<CAPTION>
Growth
=================
Units This Total Total
Date Transaction Type Rate Amount Unit Value Transaction Units Hold Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
12/31/96 Purchase 1,000.00 39.661966 25.213 25.213 $1,000.00
09/10/97 Contract Fee (5.99) 50.496420 (0.119) 25.094 $1,267.18
12/31/97 Value before Surr. Chg. 50.556708 0.000 25.094 $1,268.69
12/31/97 Surrender Charge 0.05 (50.00) 50.556708 (0.989) 24.105 $1,218.59
12/31/97 Remaining Value 50.556708 0.000 24.105 $1,218.69
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Bond
============= Units This Total Total
Date Transaction Type Rate Amount Unit Value Transaction Units Held Value
- ----------- ----------------------------- ------------ ------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/96 Purchase 1,000.00 23.023765 43.433 43.433 $1,000.00
09/10/97 Contract Fee (16.93) 23.906074 (0.708) 42.725 $1,021.43
12/31/97 Value before Surr.
Chg. 24.283747 0.000 42.725 $1,037.53
12/31/97 Surrender Charge 0.05 (50.00) 24.283747 (2.059) 40.666 $987.53
12/31/97 Remaining Value 24.283747 0.000 40.666 $987.53
</TABLE>
<TABLE>
<CAPTION>
Balanced
============= Units This Total Total
Date Transaction Type Rate Amount Unit Value Transaction Units Held Value
- ----------- ----------------------------- --------------- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/96 Purchase 1,000.00 17.283010 57.860 57.860 $1,000.00
09/10/97 Contract Fee (5.18) 20.302704 (0.255) 57.605 $1,169.54
12/31/97 Value before Surr.
Chg. 20.399374 0.00 57.605 $1,175.11
12/31/97 Surrender Charge 0.05 (50.00) 20.399374 (2.451) 55.154 S1,125.11
12/31197 Remaining Value 20.399374 0.000 55.154 $1,125.11
</TABLE>
<PAGE> 4
SLIC
VA SEC Ave. Annual Total Return
P(1+t)Nth power = ERV
Valuation Date 12/31/97
<TABLE>
<CAPTION>
Purchase Years Total Value of Avg. Annual Total
Portfolio Amount Invested Units Held Total Return Return
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Liquid Asset $1,000 1.00 983 -1.72% -1.72%
Growth $1,000 1.00 1,219 21.87% 21.87%
Bond $1,000 1.00 988 -1.25% -1.25%
Balanced $1,000 1.00 1,125 12.51% 12.51%
</TABLE>
<PAGE> 5
SEC Rule 482 - Total Return
SLIC Variable Annuity - Five Years
Original Purchase - 12/31/92
Valuation Date 12/31/97
<TABLE>
<CAPTION>
LIQUID ASSET
==============
Units This Total Total
Date Transaction Type Rate Amount Unit Value Transaction Units Held Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
12/31/92 Purchase 1,000.00 15.127441 66.105 66.105 $1.000.00
09/10/93 Contract Fee (2.80) 15.258026 (0.184) 65.922 $1.005.63
09/10/94 Contract Fee (2.70) 15.508169 (0.174) 65.747 $1,019.92
09/10/95 Contract Fee (2.61) 16.064606 (0.162) 65.585 $1,053.60
09/10/96 Contract Fee (2.01) 16.611965 (0.121) 65.484 $1.087.48
09/10/97 Contract Fee (1.90) 17.175889 (0.111) 65.353 $1,122.50
12/31/97 Value before Surr. Chg. 17.361076 0.000 65.353 $1,134.60
12/31/97 Surrender Charge 0.01 (10.00) 17.361076 (0.576) 64.777 $1,124.60
12/31/97 Remaining Value 17.301076 0.000 64.777 $1,124.60
<CAPTION>
Growth
==============
Units This Total Total
Date Transaction Type Rate Amount Unit Value Transaction Units Held Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
12/31/92 Purchase $1,000.00 28.524039 35.058 35.058 $1,000.00
09/10/93 Contract Fee (7.01) 29.686989 (0.286) 34.822 $1,033.76
09/10/94 Contract Fee (6.74) 29.235922 (0.231) 34.591 $1,011.31
09/10/95 Contract Fee (6.37) 38.489914 (0.165) 34.426 $1,325.05
09/10/96 Contract Fee (6.28) 36.333374 (0.173) 34.253 $1,244.33
09/10/97 Contract Fee (5.99) 50.496420 (0.119) 34.135 $1,723.67
12/31/97 Value before Surr. Chg. 50.556706 0.000 34.135 $1,725.73
12/31/97 Surrender Charge 0.01 (10.00) 50.556708 (0.188) 33.937 $1,715.73
12/31/27 Remaining Value 50.556708 0.000 33.937 $1,715.73
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
Bond
============== Units This Total Total
Date Transaction Type Rate Amount Unit Value Transaction Units Held Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/92 Purchase 1,000.00 19.606566 51.003 51.003 $1,000.00
09/10/93 Contract Fee (16.13) 20.708926 (0.779) 50.224 $1,040.09
09/10/94 Contract Fee (16.13) 20.446641 (0.789) 49.436 $1,010.79
09/10/95 Contract Fee (16.56) 21.722485 (0.762) 48.673 $1,057.30
09/10/96 Contract Fee (16.87) 22.401036 (0.753) 47.920 $1,073.46
09/10/97 Contract Fee (16.93) 23.906974 (0.708) 47.212 $1,128.89
12/31/97 Value before Surr. Chg. 24.283747 0.000 47.212 $1,146.48
12/31/97 Surrender Charge 0.01 (10.00) 24.283747 (0.412) 46.800 $1,136.48
12/31/97 Remaining Value 24.283747 0.000 46.800 $1,136.48
</TABLE>
<TABLE>
<CAPTION>
Balanced
============== Units This Total Total
Date Transaction Type Rate Amount Unit Value Transaction Units Held Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/92 Purchase 1,000.00 13.322583 75.061 75.061 $1,000.00
09/10/93 Contract Fee (4.06) 13.887021 (0.292) 74.768 $1,038.31
09/10/94 Contract Fee (4.43) 13.714103 (0.323) 74.445 $1,020.95
09/10/95 Contract Fee (4.46) 16.661507 (0.268) 74.177 $1,235.91
09/10/96 Contract Fee (4.84) 16.213209 (0.299) 73.879 $1,197.81
09/10/97 Contract Fee (5.18) 20.302704 (0.255) 73.624 $1,494.76
12/31/97 Value before Surr. Chg. 20.399374 0.000 73.624 $1,501.88
12/31/97 Surrender Charge 0.01 (10.00) 20.399374 (0.490) 73.134 $1,491.88
12/31/97 Remaining Value 20.399374 0.000 73.134 $1,491.88
</TABLE>
<PAGE> 7
SLIC
VA SEC Ave. Annual Total Return
P(1+t)Nth power = ERV
Valuation Date 12/31/97
<TABLE>
<CAPTION>
Purchase Years Total Value of Avg. Annual Total
Portfolio Amount Invested Units Held Total Return Return
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Liquid Asset $1,000 5.00 1,125 2.38% 12.46%
Growth $1,000 5.00 1,716 11.40% 71.57%
Bond $1,000 5.00 1,136 2.59% 13.65%
Balanced $1,000 5.00 1,492 8.33% 49.19%
</TABLE>
<PAGE> 8
SEC Rule 482 - Total Return
SLIC Variable Annuity - Ten Years
Original Purchase (3/1/89 Balanced Portfolio)- 12/31/87
Valuation Date 12/31/97
<TABLE>
<CAPTION>
LIQUID ASSET
==================== Units This Total Total
Date Transaction Type Rate Amount Unit Value Transaction Units Held Value
- ------------ ---------------------------------- ------------------------------------------------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
12/31/87 Purchase 1,000.00 11.820303 84.600 84.600 $1,000.00
09/10/89 Contract Fee (3.57) 12.219345 (0.292) 84.308 $1,030.19
09/12/89 Contract Fee (2.69) 13.107002 (0.205) 84.103 $1,102.34
09/11/90 Contract Fee (2.99) 13.953219 (0.214) 83.889 $1,170.51
09/10/91 Contract Fee (3.72) 14.662450 (0.254) 83.635 $1,226.29
09/10/02 Contract Fee (3.12) 15.057642 (0.207) 83.428 $1.256.22
09/10/93 Contract Fee (2.80) 15.258026 (0.184) 83.244 $1,270.14
09/10/94 Contract Fee (2.70) 15.508169 (0.174) 83.070 $1,288.26
09/10/95 Contract Fee (2.61) 16.064606 (0.162) 82.908 $1,331.88
09/10/96 Contract Fee (2.01) 16.611965 (0.121) 82.787 $1,375.25
09/10/97 Contract Fee (1.90) 17.175889 (0.111) 82.676 $1,420.03
12/3l/97 Value before Surr. Chg. 17.361076 0.000 82.676 $1,435.34
12/31/97 Surrender Charge 0.00 17.361076 0.000 82.676 $1,435.34
12/31/97 Remaining Value 17.361076 0.000 82.676 $1,435.34
</TABLE>
<TABLE>
<CAPTION>
Growth
====================
Units This Total Total
Date Transaction Type Rate Amount Unit Value Transaction Units Held Value
- ------------ ---------------------------------- ------------------------------------------------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
12/31/87 Purchase 1,000.00 14.226374 70.292 70.292 $1,000.00
09/10/88 Contract Fee (9.02) 16.534151 (0.540) 69.746 $1,153.20
09/12/89 Contract Fee (6.48) 23.632300 (0.274) 69.472 $1,641.79
09/11/90 Contract Fee (6.15) 20.218175 (0.304) 69.168 $1,398.45
09/10/91 Contract Fee (7.80) 24.162236 (0.323) 68.845 $1,663.45
09/10/92 Contract Fee (7.42) 26.222802 (0.283) 68.562 $1,797.90
09/10/93 Contract Fee (7.01) 29.686989 (0.236) 68.326 $2,028.40
09/10/94 Contract Fee (6.74) 29.235922 (0.231) 68.096 $1,990.84
09/10/95 Contract Fee (6.37) 38.489914 (0.165) 67.930 $2,614.62
09/10/96 Contract Fee (6.28) 36.333374 (0.173) 67.757 $2,461.85
09/10/97 Contract Fee (5.99) 50.496420 (0.119) 67.639 $3,415.51
12/31/97 Value before Surr. Chg. 50.556708 0.000 67.639 $3,419.59
12/31/97 Surrender Charge 0.00 50.556708 0.000 67.639 $3,419.59
12/31/97 Remaining Value 50.550708 0.000 57.639 $3,419,59
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
Bond
=================
Units This Total Total
Date Transaction Type Rate Amount Unit Value Transaction Units Held Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/87 Purchase 1,000.00 13.823344 72.341 72.341 $1,000.00
09/10/88 Contract Fee (17.42) 14.496237 (1.202) 71.140 $1,031.26
08/12/89 Contract Fee (13.33) 15.631961 (0.853) 70.287 $1,098.72
09/11/90 Contract Fee (12.65) 16.650894 (0.760) 69.527 $1,157.69
09/10/91 Contract Fee (16.88) 18.039834 (0.936) 68.592 $1,237.38
09/10/92 Contract Fee (16.22) 19.677253 (0.824) 67.767 $1,333.47
09/10/93 Contract Fee (13.13) 20.708926 (0.634) 67.133 $1,390.26
09/10/94 Contract Fee (16.13) 20.446641 (0.789) 66.344 $1,356.52
09/10/95 Contract Fee (16.56) 21.722485 (0.762) 65.582 $1,424.60
09/10/96 Contract Fee (16.87) 22.401036 (0.753) 64.829 $1,452.23
09/10/97 Contract Fee (16.93) 23.906974 (0.708) 64.121 $1,532.93
12/31/97 Value before Surr. Chg. 24.283747 0.000 64.121 $1,557.09
12/31/97 Surrender Change 0.00 24.283747 0.000 64.121 $1.557.09
12/31/97 Remaining Value 24.283747 0.000 64.121 $1.557.09
<CAPTION>
Balanced
=================
Units This Total Total
Date Transaction Type Rate Amount Unit Value Transaction Units Held Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
09/17/90 Purchase 1,000.00 10.000000 100.000 100.000 $1,000.00
09/10/91 Contract Fee (1.60) 11.539053 (0.139) 99.861 $1,152.31
09/10/92 Contract Fee (3.24) 12.638701 (0.256) 99.605 $1,258.88
09/10/93 Contract Fee (4.06) 13.887021 (0.292) 99.313 $1,379.16
09/10/94 Contract Fee (4.43) 13.714103 (0.323) 98.990 $1,357.55
09/10/95 Contract Fee (4.46) 16.661507 (0.268) 98.722 $1,644.86
09/10/96 Contract Fee (4.84) 16.213209 (0.299) 98.423 $1,595.76
09/10/97 Contract Fee (5.18) 20.302704 (0.255) 98.168 $1,993.08
12/31/97 Value before Surr. Chg. 20.399374 0.000 98.168 $2,002.57
12/31/97 Surrender Change 0 0.00 20.399374 0.000 98.168 $2,002.57
12/31/97 Remaining Value 20.399374 0.000 98.168 $2,002.57
</TABLE>
<PAGE> 10
SLIC
VA SEC Ave. Annual Total Return
P(1+t)Nth power = ERV
Valuation Date 12/31/97
<TABLE>
<CAPTION>
Purchase Years Total Value of Avg. Annual Total
Portfolio Amount Invested Units Held Total Return Return
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Liquid Asset $1,000 10.00 1,435 3.68% 43.53%
Growth $1,000 10.00 3,420 13.08% 241.96%
Bond $1,000 10.00 1,557 4.53% 55.71%
Balanced $1,000 7.29 2,003 9.99% 100.26%
(Since Inception)
</TABLE>
