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[SENTRY LOGO]
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Sentry Variable Account II
THE PATRIOT
A FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY
FUNDED BY NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
[GRAPHIC]
ANNUAL REPORT
DECEMBER 31, 1997
SENTRY LIFE INSURANCE COMPANY
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Dear Contract Owner: February 15, 1998
We are pleased to present you with the following comments of Neuberger & Berman
Management Incorporated, the investment advisors for your Patriot variable
annuity.
Jennifer Silver and Brooke Cobb took over management of Neuberger & Berman
Advisers Management Trust (AMT) Growth Portfolio and the equity portion of AMT
Balanced Portfolio in mid July. They felt it important to directly address the
shareholders and describe their investment discipline. They are growth stock
investors in the purest sense of the term. They want to own the stocks of
companies that are growing earnings faster than the average American business
and ideally, faster than the competitors in their respective industries.
They focus their research efforts on mid-cap stocks in new and/or rapidly
evolving industries. By operating in the mid-cap arena (stocks with market
capitalizations between $500 million and $8 billion), they believe they are
likely to identify more of their brand of growth stock opportunities.
Considering the currently high valuations of large cap growth stocks relative
to mid-cap stocks, with comparable or in many cases, better earnings growth
potential, they believe the portfolio is well positioned to take advantage of
what they think will be a more favorable outlook for mid-cap growth stocks in
the year ahead.
In 1997, bonds in AMT Limited Maturity Bond Portfolio and the debt portion of
AMT Balanced Portfolio benefited from low inflation and reduced inflationary
expectations, benign monetary and fiscal policies, and favorable supply/demand
factors in the fixed income marketplace. Inflation remained low and we saw
increasing evidence that the federal budget deficit was shrinking
substantially. In addition, the Treasury Department's funding policy helped
create a "scarcity" value for traditional fixed rate securities.
In the fourth quarter 1997, extreme volatility in the U.S. equity market sent
investors scurrying to the relative safety of bonds and economic upheaval in
Asia helped attract even more foreign investors to the U.S. bond market. Strong
demand and limited supply, particularly in the U.S. Treasuries market, helped
fuel the strong bond rally at the close of that year.
One of their most successful strategies in 1997 was something they didn't do,
namely invest in Southeast Asia. They took a hard look at these offerings and
their analysis showed these bonds to have below investment grade risk
characteristics with huge downside risk if the supply of external capital dried
up. Their concerns were confirmed when currency turmoil, which began in July
and accelerated through year end 1997, overwhelmed these countries and sent
bonds plummeting.
In closing, the managers are gratified by the Portfolios' performance in 1997.
The fundamental outlook for bonds remains appealing. Inflation remains low and
dis-inflationary forces resulting from Asian economic turmoil should help keep
the lid on inflation for the foreseeable future. Fiscal and monetary policy
should continue to be benign.
Thank you for choosing Sentry to help meet your long-term investment needs. We
value your business and appreciate your confidence in Sentry to provide this
service.
Sincerely,
/s/ Dale R. Schuh
Dale R. Schuh, President
Sentry Life Insurance Company
The composition and holdings of the Portfolios are subject to change. Shares of
the separate Portfolios of Neuberger & Berman Advisers Management Trust are
sold only through the currently effective prospectus and are not available to
the general public. Shares of the Advisers Management Trust Portfolios may be
purchased only by life insurance companies to be used with their separate
accounts which fund variable annuity and variable life insurance policies.
Shares of the Balanced Portfolio are also available as an underlying investment
fund for certain qualified retirement plans. This material is authorized for
distribution only when preceded or accompanied by a prospectus.
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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
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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
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<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>
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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.
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997 and 1996
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.
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.
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997 and 1996
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
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Total contract owners' equity $52,336,002
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</TABLE>
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997 and 1996
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>
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REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS
SENTRY LIFE INSURANCE COMPANY
AND
THE CONTRACT OWNERS OF
SENTRY VARIABLE ACCOUNT II:
We have audited the accompanying statement of assets 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
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[SENTRY LOGO] SENTRY LIFE
INSURANCE COMPANY
1800 North Point Drive
Stevens Point, WI 54481
32-94 2-98
