<PAGE> 1
VOLUME 1 OF 2
Sentry Variable Account II
THE PATRIOT
A FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY
FUNDED BY NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
ANNUAL REPORT
DECEMBER 31, 1998
SENTRY COMPANY LIFE INSURANCE
<PAGE> 2
Dear Contract Owner: February 15, 1999
We are pleased to present you with the following comments of Neuberger Berman
Management Inc., the investment advisors for your Patriot variable annuity.
The Neuberger Berman Advisers Management Trust (AMT) and the equity portion of
AMT Balanced Portfolio are co-managed by Jennifer Silver and Brooke Cobb. Their
goal is to invest today in the fast growing mid sized companies that will
comprise tomorrow's Fortune 500.
As was the case for virtually all equity funds, the AMT Growth portfolio
experienced a roller coaster ride in 1998. At mid-year, the portfolio had a gain
in the mid teens. At its September low, it had given back all its gains and then
some. After a breathtaking fourth quarter rally, the portfolio recaptured all
lost ground and closed the year near its highs. When three Federal Reserve
interest rate cuts injected much needed liquidity into the financial system,
mid-cap stocks rebounded strongly. Looking ahead, with financial liquidity no
longer a pressing issue and portfolio holdings priced quite reasonably relative
to favorable earnings growth prospects, we are hopeful that shareholders will
enjoy a smoother ride.
1998's biggest portfolio winners include technology holdings, healthcare
investments, and value oriented retailers. A boost was received from relatively
small positions in well known internet stocks and lesser known "net" names, all
of which were added to the portfolio in the fourth quarter. The co-managers will
continue to tread carefully in this area, sticking to real companies with the
realistic potential to meet or exceed high growth expectations. They are pleased
with the portfolio's 1998 gains in what was a truly challenging market.
Portfolio characteristics are consistent with the investment thesis that above
average earnings growth and earnings momentum coupled with reasonable valuations
relative to earnings growth rates should reward investors.
The AMT Limited Maturity Bond Portfolio and the debt portion of AMT Balanced
Portfolio are co-managed by Theodore P. Giuliano and Catherine Waterworth.
The title of Shakespeare's play All's Well That Ends Well aptly describes 1998's
fixed income markets. Strong first half returns set the stage for the high drama
of August-September, when the global economic market plot thickened and all
sectors of the fixed income market except U.S. Treasuries declined. Then in the
fourth act (fourth quarter), the hero appeared (Federal Reserve Chairman Alan
Greenspan) and three Fed rate cuts produced a very happy ending. In fact, when
the curtain came down on 1998, fixed income patrons had enjoyed the best year
since 1991.
Looking ahead, given historically wide yield spreads for a non-recession
environment, and an accommodative Fed, the managers continue to be moderately
constructive on the corporate bond sector. However, investors should expect
continued volatility.
In conclusion, as we enter 1999, inflation is at its lowest level in three
decades and economic conditions appear to be balanced. However, interest rates
and bond yields are also at or near historic lows, and the introduction of the
new Euro may siphon some money from the U.S. bond market. This could make for
choppy fixed income markets in the year ahead. We will continue to strive to
select attractive sectors, find values, and most importantly, to deliver
competitive returns with low principal risk.
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. The investments
for the Portfolio are managed by the same portfolio manager(s) who manage one or
more other mutual funds that have similar names, investment objectives and
investment styles as the Portfolio. You should be aware that the Portfolio is
likely to differ from other mutual funds in size, cash flow pattern and tax
matters. Accordingly, the holdings and performance of the Portfolio can be
expected to vary from those of the other mutual funds.
<PAGE> 3
SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABLE ACCOUNT II
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments at market value:
Neuberger Berman Advisers Management Trust:
Liquid Asset Portfolio, 2,514,730
shares (cost $2,514,730) $ 2,514,730
Growth Portfolio, 1,646,703
shares (cost $39,250,355) 43,291,814
Limited Maturity Bond Portfolio, 433,176
shares (cost $6,002,953) 5,986,497
Balanced Portfolio, 691,412
shares (cost $10,732,929) 11,297,678
-----------
Total investments 63,090,719
Dividends receivable 9,167
-----------
Total assets 63,099,886
LIABILITIES:
Accrued expenses 5,461
-----------
NET ASSETS $63,094,425
===========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 4
SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABlE ACCOUNT II
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
For the Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
SUB-ACCOUNTS INVESTING IN:
--------------------------
LIQUID ASSET GROWTH
PORTFOLIO PORTFOLIO
-------------------------- ---------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Dividends $ 115,086 $ 104,541 $ -- $ --
Expenses:
Mortality and expense charges 30,299 27,213 474,117 450,947
------- ------- ------- -------
Net investment income (loss) 84,787 77,328 (474,117) (450,947)
------- ------- -------- --------
Realized net investment gain (loss) -- -- 588,794 1,540,740
Unrealized appreciation (depreciation), net -- -- (5,211,880) 4,937,957
Capital gain distributions received -- -- 10,487,400 2,948,192
------- ------- ---------- ---------
Realized and unrealized gain (loss)
on investments and capital
gain distributions, net -- -- 5,864,314 9,426,889
------- -------- --------- ---------
Net increase in net assets
from operations 84,787 77,328 5,390,197 8,975,942
------- -------- --------- ---------
Purchase payments 1,292,248 94,695 3,248,943 1,192,713
Transfers between subaccounts, net 25,234 (37,697) (126,390) 115,753
Withdrawals (879,099) (561,881) (4,612,799) (4,384,625)
Contract maintenance fees (2,851) (3,317) (39,072) (41,415)
Surrender charges (2,826) (2,360) (13,884) (19,220)
--------- -------- ---------- ----------
Net increase (decrease) in net assets
derived from principal transactions 432,706 (510,560) (1,543,202) (3,136,794)
--------- -------- ---------- ----------
Total increase (decrease) in net assets 517,493 (433,232) 3,846,995 5,839,148
Net assets at beginning of year 2,006,216 2,439,448 39,441,707 33,602,559
--------- --------- ---------- ----------
Net assets at end of year $2,523,709 $2,006,216 $43,288,702 $39,441,707
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 5
<TABLE>
<CAPTION>
LIMITED MATURITY BALANCED
BOND PORTFOLIO PORTFOLIO TOTAL
-------------- --------- -----
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
$397,136 $414,044 $230,506 $164,097 $ 742,728 $682,682
74,360 80,334 125,291 113,868 704,067 672,362
---------- ---------- ----------- -------- ---------- --------
322,776 333,710 105,215 50,229 38,661 10,320
---------- ---------- ----------- -------- ---------- --------
(46,651) 2,573 28,391 213,070 570,534 1,756,383
(82,604) 18,458 (721,893) 869,649 (6,016,377) 5,826,064
-- -- 1,619,027 421,183 12,106,427 3,369,375
---------- ---------- ----------- -------- ---------- ---------
(129,255) 21,031 925,525 1,503,902 6,660,584 10,951,822
---------- ---------- ----------- --------- ----------- -----------
193,521 354,741 1,030,740 1,554,131 6,699,245 10,962,142
---------- ----------- --------- ----------- -----------
156,457 220,322 1,758,511 441,443 6,456,159 1,949,173
105,524 (252,094) (4,368) 174,038 -- --
(750,978) (1,343,699) (1,315,396) (1,281,938) (7,558,272) (7,572,143)
(6,327) (7,254) (9,679) (9,845) (57,929) (61,831)
(795) (2,672) (7,543) (8,821) (25,048) (33,073)
---------- ---------- ----------- ---------- ----------- -----------
(496,119) (1,385,397) 421,525 (685,123) (1,185,090) (5,717,874)
---------- ---------- ----------- ---------- ----------- -----------
(302,598) (1,030,656) 1,452,265 869,008 5,514,155 5,244,268
6,288,074 7,318,730 9,844,273 8,975,265 57,580,270 52,336,002
---------- ---------- ----------- ---------- ----------- -----------
$5,985,476 $6,288,074 $11,296,538 $9,844,273 $63,094,425 $57,580,270
========== ========== =========== ========== =========== ===========
</TABLE>
<PAGE> 6
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
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. Actual results could
differ from those estimates.
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 at the reported net asset values of such
portfolios, which value their investment securities at fair value.
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 net
assets are not taxed.
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997
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 $5,461
at December 31, 1998.
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.
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997
4. NET ASSETS
Net Assets are represented by accumulation units in the related Variable
Account.
At December 31, 1998 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 140,566 $17.95 $ 2,523,709
Growth Portfolio 750,025 57.72 43,288,702
Limited Maturity Bond Portfolio 238,960 25.05 5,985,476
Balanced Portfolio 499,567 22.61 11,296,538
-----------
Total net assets $63,094,425
===========
</TABLE>
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 net assets $57,580,270
===========
</TABLE>
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997
5. PURCHASES AND SALES OF SECURITIES
In 1998, purchases and proceeds on sales of the Trust's shares aggregated
$24,882,854 and $13,922,844, 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 $3,392,077 $15,934,442 $ 968,445 $4,587,890 $24,882,854
Proceeds on sales 2,876,339 7,463,244 1,141,430 2,441,831 13,922,844
</TABLE>
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>
<PAGE> 10
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS
SENTRY LIFE INSURANCE COMPANY
AND
THE CONTRACT OWNERS OF
SENTRY VARIABLE ACCOUNT II:
In our opinion, the accompanying combined statement of assets and liabilities
and the related combined and separate statements of operations and changes in
net assets present fairly, in all material respects, the financial position of
the Sentry Variable Account II, and the Liquid Asset Portfolio, Growth
Portfolio, Limited Maturity Bond Portfolio and Balanced Portfolio thereof, at
December 31, 1998, the results of each of their operations and changes in each
of their net assets for each of the two years in the period then ended, in
conformity with generally accepted accounting principles. 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 of these financial statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1998, by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
/s/ PricewaterhouseCooper L.L.P.
Chicago, Illinois
February 11, 1999
<PAGE> 11
[SENTRY LIFE INSURANCE COMPANY LOGO]
1800 North Point Drive
Stevens Point, WI 54481
Volume 1
