<PAGE>
VARIFLEX
1996 ANNUAL REPORT
[SBL LOGO]
Security Benefit Life Insurance Company
A Member of The Security Benefit
Group of Companies
<PAGE>
A LETTER FROM THE PRESIDENT
Security Benefit is one company dedicated to the successful mastery of our
mission: MAINTAINING A STRONG FINANCIAL POSITION AND CONSISTENT GROWTH FOR THE
PROTECTION AND SECURITY OF ALL OF OUR POLICYHOLDERS AND CUSTOMERS. All of us at
Security Benefit renew our commitment to this mission every day. We want to be
the best and do our best for you. As a member of the Security Benefit team, I am
especially proud that mastering successful growth is an achievement we have come
to expect as a team.
It is my pleasure to report that 1996 was again a record year of outstanding
achievements for Security Benefit.
* Sales surpassed 1995 results by 48%
* Profits are up 18% over last year
* Revenues and deposit funds exceeded 1995 results by 28%
* Company assets rose 17% over 1995 figures
These accomplishments would just be facts on paper without the efforts of the
people who work at Security Benefit. They are the heart of our company, and I am
proud to be part of their team.
My wish for 1997 is to have another record year for our company. Last year's
accomplishments will be difficult to top but all of us at Security Benefit have
our sights and goals set high. We are well positioned with new, creative
products designed in response to our customers' changing investment goals and
lifestyle requirements. We know true mastery does not come easily. With
perseverance and attention to constantly improving what we do best, I know we
can do it.
HOWARD R. FRICKE
Howard R. Fricke
Chairman of the Board
President and Chief Executive Officer
1
<PAGE>
BOARD OF DIRECTORS
HOWARD R. FRICKE
CHAIRMAN OF THE BOARD, PRESIDENT & CEO
Security Benefit Life Insurance Company
Topeka, Kansas
THOMAS R. CLEVENGER
Wichita, Kansas
SISTER LORETTO MARIE COLWELL
PRESIDENT
St. Francis Hospital and Medical Center
Topeka, Kansas
JOHN C. DICUS
CHAIRMAN OF THE BOARD
Capitol Federal Savings & Loan Association
Topeka, Kansas
MELANIE S. FANNIN
PRESIDENT
Kansas - Southwestern Bell Telephone
Topeka, Kansas
WILLIAM W. HANNA
PRESIDENT & CHIEF OPERATING OFFICER
Koch Industries
Wichita, Kansas
JOHN E. HAYES, JR.
CHAIRMAN OF THE BOARD, PRESIDENT & CEO
Western Resources, Inc.
Topeka, Kansas
LAIRD G. NOLLER
PRESIDENT
Noller Enterprises
Topeka, Kansas
FRANK SABATINI
CHAIRMAN OF THE BOARD AND PRESIDENT
Capital City Bank
Topeka, Kansas
ROBERT C. WHEELER
PRESIDENT
Hill's Pet Nutrition, Inc.
Topeka, Kansas
NOTICE OF POLICYOWNERS' MEETING
We encourage you to attend the annual meeting of policyowners to be held on
Tuesday, June 3, 1997 at Security Benefit Life, 700 SW Harrison St., Topeka,
Kansas, at 2:00 p.m. Each policyowner is entitled to vote, either in person or
by proxy, on all matters coming before the meeting. Proxies are available from
the corporate secretary and must be returned at least 30 days prior to the
annual meeting.
This report is submitted only for the general information of Variflex Variable
Annuity contractowners and participants. This report is not authorized for
distribution to prospective purchasers of Variflex unless it is preceded or
accompanied by an effective prospectus.
For More Information Call
1-800-888-2461
www.securitybenefit.com
2
<PAGE>
Report of Independent Auditors
The Contractowners of Variflex
and The Board of Directors of
Security Benefit Life Insurance Company
We have audited the accompanying balance sheet of Variflex (the Company) as of
December 31, 1996, and the related statements of operations and changes in net
assets for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
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 investments owned as of December 31, 1996, by correspondence
with the custodian. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Variflex at December 31, 1996,
and the results of its operations and changes in its net assets for each of the
two years in the period then ended in conformity with generally accepted
accounting principles.
Ernst & Young LLP
February 7, 1997
3
<PAGE>
VARIFLEX
Balance Sheet
December 31, 1996
(DOLLARS IN THOUSANDS)
ASSETS
Investments:
SBL Fund:
Series A (Growth Series)-24,335,456 shares at net asset value
of $24.31 per share (cost, $491,521)......................... $ 591,595
Series B (Growth-Income Series)-25,054,388 shares at net asset
value of $35.40 per share (cost, $773,880)................... 886,925
Series C (Money Market Series)-7,202,675 shares at net asset
value of $12.56 per share (cost, $90,317).................... 90,466
Series D (Worldwide Equity Series)-36,359,956 shares at net asset
value of $6.14 per share (cost, $200,363)..................... 223,250
Series E (High Grade Income Series)-9,165,850 shares at net asset
value of $12.00 per share (cost, $112,408).................... 109,990
Series J (Emerging Growth Series)-7,055,809 shares at net asset
value of $18.25 per share (cost, $114,558).................... 128,769
Series K (Global Aggressive Bond Series)-543,779 shares at net
asset value of $10.72 per share (cost, $5,880)................ 5,829
Series M (Specialized Asset Allocation Series)-1,803,897 shares
at net asset value of $12.05 per share (cost, $19,971)........ 21,737
Series N (Managed Asset Allocation Series)-994,920 shares at net
asset value of $12.02 per share (cost, $10,791)............... 11,959
Series O (Equity Income Series)-2,684,197 shares at net asset value
of $14.01 per share (cost, $33,684)........................... 37,606
Series S (Social Awareness Series)-2,796,723 shares at net asset
value of $19.08 per share (cost, $43,382)..................... 53,361
----------
Total assets $2,161,487
==========
See accompanying notes.
4
<PAGE>
LIABILITIES AND NET ASSETS
Mortality guarantee payable $ 37
Net assets are represented by (Note 3):
----------------------------
NUMBER UNIT
OF UNITS VALUE AMOUNT
----------------------------
Growth Series:
Accumulation units.............12,885,505 $45.75 $589,560
Annuity reserves............... 44,385 45.75 2,031 591,591
--------
Growth-Income Series:
Accumulation units.............18,986,176 46.58 884,317
Annuity reserves............... 56,114 46.58 2,614 886,931
--------
Money Market Series:
Accumulation units............. 4,933,370 18.26 90,095
Annuity reserves............... 20,313 18.26 371 90,466
--------
Worldwide Equity Series:
Accumulation units.............15,365,862 14.51 222,983
Annuity reserves............... 18,348 14.51 266 223,249
--------
High Grade Income Series:
Accumulation units............. 5,051,175 21.68 109,531
Annuity reserves............... 21,148 21.68 459 109,990
--------
Emerging Growth Series:
Accumulation units............. 7,123,183 18.03 128,442
Annuity reserves............... 18,109 18.03 326 128,768
--------
Global Aggressive Bond Series:
Accumulation units............. 485,157 12.00 5,823
Annuity reserves............... 480 12.00 6 5,829
--------
Specialized Asset Allocation Series:
Accumulation units............. 1,806,999 12.00 21,692
Annuity reserves............... 3,738 12.00 45 21,737
--------
Managed Asset Allocation Series:
Accumulation units............. 1,000,455 11.87 11,880
Annuity reserves............... 6,665 11.87 79 11,959
--------
Equity Income Series:
Accumulation units............. 2,727,172 13.78 37,586
Annuity reserves............... 1,466 13.78 20 37,606
--------
Social Awareness Series:
Accumulation units............. 2,829,942 18.74 53,021
Annuity reserves............... 16,185 18.74 303 53,324
--------
----------
Total liabilities and net assets.... $2,161,487
==========
5
<PAGE>
VARIFLEX
Statement of Operations and Changes in Net Assets
Year ended December 31, 1996
(IN THOUSANDS)
HIGH
GROWTH- MONEY WORLDWIDE GRADE EMERGING
GROWTH INCOME MARKET EQUITY INCOME GROWTH
SERIES SERIES SERIES SERIES SERIES SERIES
-------------------------------------------------------
Dividend
distributions......... $ 4,003 $ 17,133 $ 3,780 $ 6,404 $ 6,701 $ 202
Expenses (Note 2):
Mortality and
expense risk fee..... (6,014) (9,988) (1,246) (2,420) (1,368) (1,367)
Administrative fee... (369) (1,399) (122) (69) (267) (22)
---------------------------------------------------------
Net investment
income (loss)......... (2,380) 5,746 2,412 3,915 5,066 (1,187)
Capital gains
distributions......... 24,782 82,844 - 6,043 - 4,663
Realized gain
on investments........ 29,813 41,904 785 7,793 459 11,087
Unrealized appreciation
(depreciation) on
investments.......... 40,511 (5,823) 488 10,720 (8,258) 2,657
---------------------------------------------------------
Net realized and
unrealized gain (loss)
on investments........ 95,106 118,925 1,273 24,556 (7,799) 18,407
---------------------------------------------------------
Net increase (decrease)
in net assets resulting
from operations....... 92,726 124,671 3,685 28,471 (2,733) 17,220
Net assets at
beginning of year.... 436,043 745,482 78,686 167,450 116,344 87,329
Variable annuity
deposits
(Notes 2 and 3)...... 205,769 161,528 213,354 73,798 45,516 63,675
Terminations and
withdrawal
(Notes 2 and 3)...... (142,679) (144,272) (204,943) (46,433) (48,977) (39,303)
Annuity payments
(Notes 2 and 3)...... (255) (478) (316) (33) (161) (152)
Net mortality
guarantee transfer... (13) - - (4) 1 (1)
----------------------------------------------------------
Net assets at
end of year.......... $591,591 $886,931 $90,466 $223,249 $109,990 $128,768
==========================================================
See accompanying notes.
6
<PAGE>
GLOBAL SPECIALIZED MANAGED
AGGRESSIVE ASSET ASSET EQUITY SOCIAL
BOND ALLOCATION ALLOCATION INCOME AWARENESS
SERIES SERIES SERIES SERIES SERIES
---------------------------------------------------------
Dividend
distributions......... $ 385 $ 186 $ 57 $ 66 $ 206
Expenses (Note 2):
Mortality and
expense risk fee..... (49) (197) (110) (287) (539)
Administrative fee... (10) (15) (9) (40) (29)
---------------------------------------------------------
Net investment
income (loss)......... 326 (26) (62) (261) (362)
Capital gains
distributions......... 64 86 12 4 1,068
Realized gain
on investments........ 165 381 182 1,234 2,212
Unrealized appreciation
(depreciation) on
investments ......... (60) 1,512 911 3,221 3,689
---------------------------------------------------------
Net realized and
unrealized gain
on investments........ 169 1,979 1,105 4,459 6,969
---------------------------------------------------------
Net increase in net
assets resulting
from operations....... 495 1,953 1,043 4,198 6,607
Net assets at
beginning of year.... 2,188 9,689 5,590 9,755 35,596
Variable annuity
deposits
(Notes 2 and 3)...... 5,122 13,786 6,553 29,396 16,769
Terminations and
withdrawal
(Notes 2 and 3)...... (1,974) (3,686) (1,220) (5,738) (5,604)
Annuity payments
(Notes 2 and 3)...... (2) (2) (5) (3) (7)
Net mortality
guarantee transfer... - (3) (2) (2) (37)
---------------------------------------------------------
Net assets at
end of year.......... $ 5,829 $21,737 $11,959 $37,606 $53,324
=========================================================
7
<PAGE>
VARIFLEX
Notes to Financial Statements
December 31, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Variflex (the Account) is a separate account of Security Benefit
Life Insurance Company (SBL). The Account is registered as a unit investment
trust under the Investment Company Act of 1940, as amended. Deposits received by
the Account are invested in the SBL Fund, a mutual fund not otherwise available
to the public. As directed by the owners, amounts deposited may be invested in
shares of Series A (Growth Series - emphasis on capital appreciation), Series B
(Growth-Income Series - emphasis on capital appreciation with secondary emphasis
on income), Series C (Money Market Series - emphasis on capital preservation
while generating interest income), Series D (Worldwide Equity Series - emphasis
on long-term capital growth through investment in foreign and domestic common
stocks and equivalents), Series E (High Grade Income Series emphasis on current
income with security of principal), Series J (Emerging Growth Series - emphasis
on capital appreciation), Series K (Global Aggressive Bond Series emphasis on
high current income with secondary emphasis on capital appreciation), Series M
(Specialized Asset Allocation Series - emphasis on high total return consisting
of capital appreciation and current income), Series N (Managed Asset Allocation
Series - emphasis on high level of total return), Series O (Equity Income Series
- - emphasis on substantial dividend income and capital appreciation) and Series S
(Social Awareness Series - emphasis on high total return).
Under the terms of the investment advisory contracts, portfolio investments of
the underlying mutual fund are made by Security Management Company, LLC (SMC),
which is owned 50% by SBL and 50% by Security Benefit Group, Inc. (SBG), a
wholly-owned subsidiary of SBL. SMC has engaged Lexington Management Corporation
to provide sub-advisory services for the Worldwide Equity Series and Global
Aggressive Bond Series and has engaged T. Rowe Price Associates, Inc. to provide
sub-advisory services for the Managed Asset Allocation Series and the Equity
Income Series. SMC has also entered into agreements with Templeton Quantitative
Advisors, Inc. and Meridian Investment Management Corporation to provide certain
quantitative research services with respect to the Specialized Asset Allocation
Series.
INVESTMENT VALUATION - Investments in mutual fund shares are carried in the
balance sheet at market value (net asset value of the underlying mutual fund).
The first-in, first-out cost method is used to determine gains and losses.
Security transactions are accounted for on the trade date.
8
<PAGE>
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The cost of investments purchased and proceeds from investments sold during 1996
were as follows (In Thousands):
COST OF PROCEEDS FROM
PURCHASES SALES
--------------------------
Growth Series........................... $247,011 $161,782
Growth-Income Series.................... 270,233 164,899
Money Market Series..................... 122,800 112,293
Worldwide Equity Series................. 89,191 51,904
High Grade Income Series................ 55,000 53,555
Emerging Growth Series.................. 70,096 42,400
Global Aggressive Bond Series........... 5,717 2,181
Specialized Asset Allocation Series..... 14,523 4,368
Managed Asset Allocation Series......... 6,962 1,693
Equity Income Series.................... 30,483 7,088
Social Awareness Series................. 18,705 6,841
SBG's investment in the subaccounts represented the following number of units
and contract value of Variflex contracts owned at December 31, 1996 (DOLLARS IN
THOUSANDS):
NUMBER OF UNITS CONTRACT VALUE
------------------------------------------
Global Aggressive Bond Series........ 99,992 $1,200
Managed Asset Allocation Series...... 230,000 2,730
ANNUITY RESERVES - Annuity reserves relate to contracts that have matured and
are in the payout stage. Such reserves are computed on the basis of published
mortality tables using assumed interest rates that will provide reserves as
prescribed by law. In cases where the payout option selected is life contingent,
SBL periodically recalculates the required annuity reserves, and any resulting
adjustment is either charged or credited to SBL and not to the Account.
REINVESTMENT OF DIVIDENDS - Dividend and capital gains distributions paid by the
mutual fund to the Account are reinvested in additional shares of each
respective Series. Dividend income and capital gains distributions are recorded
as income on the ex-dividend date.
FEDERAL INCOME TAXES - Under current law, no federal income taxes are payable
with respect to the Account.
9
<PAGE>
VARIFLEX
Notes to Financial Statements
December 31, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. VARIABLE ANNUITY CONTRACT CHARGES
SBL deducts an administrative fee of $30 per year for each contract, except for
certain contracts based on a minimum account value and the period of time the
contract has been in force. Mortality and expense risks assumed by SBL are
compensated for by a fee equivalent to an annual rate of 1.2% of the asset value
of each contract, of which 0.7% is for assuming mortality risks and the
remainder is for assuming expense risks.
When applicable, an amount for state premium taxes is deducted as provided by
pertinent state law, either from the purchase payments or from the amount
applied to effect an annuity at the time annuity payments commence.
A contingent deferred sales charge is assessed by SBL against certain
withdrawals during the first eight years of the contract, declining from 8% in
the first year to 1% in the eighth year. Such surrender charges and other
contract charges totaled $1,285,380 during 1996.
10
<PAGE>
3. SUMMARY OF UNIT TRANSACTIONS (IN THOUSANDS)
UNITS
Growth Series:
Variable annuity deposits.................................... 4,887
Terminations, withdrawals and annuity payments............... 3,508
Growth-Income Series:
Variable annuity deposits.................................... 3,756
Terminations, withdrawals and annuity payments............... 3,412
Money Market Series:
Variable annuity deposits.................................... 11,926
Terminations, withdrawals and annuity payments............... 11,446
Worldwide Equity Series:
Variable annuity deposits.................................... 5,428
Terminations, withdrawals and annuity payments............... 3,434
High Grade Income Series:
Variable annuity deposits.................................... 2,124
Terminations, withdrawals and annuity payments............... 2,314
Emerging Growth Series:
Variable annuity deposits.................................... 3,810
Terminations, withdrawals and annuity payments............... 2,316
Global Aggressive Bond Series:
Variable annuity deposits.................................... 455
Terminations, withdrawals and annuity payments............... 174
Specialized Asset Allocation Series:
Variable annuity deposits.................................... 1,233
Terminations, withdrawals and annuity payments............... 333
Managed Asset Allocation Series:
Variable annuity deposits.................................... 594
Terminations, withdrawals and annuity payments............... 112
Equity Income Series:
Variable annuity deposits.................................... 2,346
Terminations, withdrawals and annuity payments............... 456
Social Awareness Series:
Variable annuity deposits.................................... 939
Terminations, withdrawals and annuity payments............... 322
11
<PAGE>
This page left blank intentionally.
12
<PAGE>
[SBG LOGO] BULK RATE
The Security Benefit Group of Companies U.S. POSTAGE PAID
700 SW Harrison St., TOPEKA, KS
Topeka, Kansas 66636-0001 PERMIT NO. 428