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VARIFLEX
1997 ANNUAL REPORT
[SBL LOGO]
Security Benefit Life Insurance Company
A Member of The Security Benefit
Group of Companies
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A LETTER FROM THE PRESIDENT
At Security Benefit we strive for the optimum in financial integrity,
operational excellence and core values. Our dedication to providing quality
products and services is a never-ending quest. It's through these commitments
that we maintain a strong financial position and consistent growth for the
protection and security of our policyholders and customers.
Capitalizing on opportunities and challenges, 1997 was a year of milestones for
Security Benefit.
* Sales were up 5%
* Profits were up 17%
* Company assets rose 11%
* Statutory equity rose 29%
We have long been positioned to meet the demand for flexible annuities. And we
took that one step further in 1997 by unveiling Variflex Signature. Our new
variable annuity offers opportunities for investors tired of low interest rates
and lack of control over their insurance investments.
Another milestone for 1997 was FORTUNE magazine citing Security Benefit as "One
of the Best 100 Companies To Work for in America." FORTUNE has discovered what
our associates already know--that Security Benefit is a quality, caring and
well-managed place to work and grow. We understand that satisfied people are
more productive people, and that translates to higher quality service to our
customers.
When it comes to quality service, 1997 was a banner season for Security Benefit.
DALBAR, an independent research firm that rates the service standards of
financial services organizations, awarded us the first Quality Tested Service
Seal. The award places Security Benefit at the pinnacle of superior customer
service in the variable annuity industry.
As we move forward, our sights are set high to continue as a leader in the
financial services industry. By anticipating evolving needs and developing
appropriate solutions, we anticipate a prosperous and successful 1998.
HOWARD R. FRICKE
Howard R. Fricke
Chairman of the Board
and Chief Executive Officer
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BOARD OF DIRECTORS
Howard R. Fricke
Chairman of the Board and CEO
Security Benefit Life Insurance Company
Topeka, Kansas
Thomas R. Clevenger
Wichita, Kansas
Sister Loretto Marie Colwell
President and CEO
St. Francis Hospital and Medical Center
Topeka, Kansas
John C. Dicus
Chairman of the Board
Capitol Federal Savings & Loan Association
Topeka, Kansas
Stephen J. Douglass
Chairman and CEO
Payless ShoeSource
Topeka, Kansas
William W. Hanna
President & Chief Operating Officer
Koch Industries
Wichita, Kansas
John E. Hayes, Jr.
Chairman of the Board and CEO
Western Resources, Inc.
Topeka, Kansas
Laird G. Noller
President
Noller Enterprises
Topeka, Kansas
Frank Sabatini
Chairman of the Board and CEO
Capital City Bank
Topeka, Kansas
Robert C. Wheeler
Chairman and CEO
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 2, 1998 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
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REPORT OF INDEPENDENT AUDITORS
The Contract Owners of Variflex and
The Board of Directors of Security Benefit Life Insurance Company
We have audited the accompanying balance sheet of Variflex (the Account) as of
December 31, 1997, and the related statement of operations and changes in net
assets for the year then ended. These financial statements are the
responsibility of the Account's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of investments 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 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, 1997,
and the results of its operations and changes in its net assets for the year
then ended in conformity with generally accepted accounting principles.
Ernst & Young LLP
February 6, 1998
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VARIFLEX
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BALANCE SHEET DECEMBER 31, 1997
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ASSETS (DOLLARS IN THOUSANDS - EXCEPT PER SHARE AND UNIT VALUES)
Investments:
SBL Fund:
Series A (Growth Series) - 27,703,230 shares at net asset
value of $29.39 per share (cost, $662,770)................... $ 814,198
Series B (Growth-Income Series) - 26,297,103 shares at net
asset value of $41.60 per share (cost, $874,010)............. 1,093,959
Series C (Money Market Series) - 5,420,257 shares at net asset
value of $12.53 per share (cost, $67,932).................... 67,916
Series D (Worldwide Equity Series) - 41,155,765 shares at net
asset value of $6.14 per share (cost, $245,440).............. 252,696
Series E (High Grade Income Series) - 9,617,282 shares at
net asset value of $12.25 per share (cost, $117,344)......... 117,812
Series J (Emerging Growth Series) - 8,803,313 shares at net
asset value of $21.33 per share (cost, $162,885)............. 187,775
Series K (Global Aggressive Bond Series) - 793,518 shares at
net asset value of $10.07 per share (cost, $8,585)........... 7,991
Series M (Specialized Asset Allocation Series) - 2,421,884
shares at net asset value of $12.29 per share (cost, $28,755) 29,765
Series N (Managed Asset Allocation Series) - 1,524,591 shares
at net asset value of $13.88 per share (cost, $19,040)....... 21,161
Series O (Equity Income Series) - 5,359,732 shares at net
asset value of $17.62 per share (cost, $79,723).............. 94,438
Series S (Social Awareness Series) - 3,524,589 shares at net
asset value of $22.25 per share (cost, $62,572).............. 78,422
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Total assets....................................................... $2,766,133
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See accompanying notes.
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LIABILITIES AND NET ASSETS
Mortality guarantee payable...... $ 19
Net assets are represented by (NOTE 3):
NUMBER UNIT
OF UNITS VALUE AMOUNT
-------- ----- ------
Growth Series:
Accumulation units............. 13,946,720 $58.19 $ 811,530
Annuity reserves............... 45,797 58.19 2,665 814,195
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Growth-Income Series:
Accumulation units............. 18,740,460 58.21 1,090,922
Annuity reserves............... 51,980 58.21 3,026 1,093,948
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Money Market Series:
Accumulation units............. 3,569,294 18.98 67,747
Annuity reserves............... 9,135 18.98 173 67,920
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Worldwide Equity Series:
Accumulation units............. 16,535,335 15.26 252,369
Annuity reserves............... 21,367 15.26 326 252,695
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High Grade Income Series:
Accumulation units............. 4,982,321 23.57 117,448
Annuity reserves............... 15,360 23.57 362 117,810
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Emerging Growth Series:
Accumulation units............. 8,757,387 21.37 187,134
Annuity reserves............... 29,936 21.37 640 187,774
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Global Aggressive Bond Series:
Accumulation units............. 638,288 12.50 7,976
Annuity reserves............... 1,172 12.50 15 7,991
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Specialized Asset
Allocation Series:
Accumulation units............. 2,359,916 12.59 29,714
Annuity reserves............... 4,062 12.59 51 29,765
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Managed Asset Allocation Series:
Accumulation units............. 1,516,831 13.89 21,075
Annuity reserves............... 6,167 13.89 86 21,161
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Equity Income Series:
Accumulation units............. 5,393,193 17.48 94,297
Annuity reserves............... 8,112 17.48 142 94,439
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Social Awareness Series:
Accumulation units............. 3,435,950 22.72 78,060
Annuity reserves............... 15,686 22.72 356 78,416
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Total liabilities and net assets. $2,766,133
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See accompanying notes.
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VARIFLEX
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STATEMENT OF OPERATIONS AND
CHANGES IN NET ASSETS YEAR ENDED DECEMBER 31, 1997
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(IN THOUSANDS)
<TABLE>
<CAPTION>
GROWTH- MONEY WORLDWIDE HIGH GRADE EMERGING
GROWTH INCOME MARKET EQUITY INCOME GROWTH
SERIES SERIES SERIES SERIES SERIES SERIES
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dividend distributions.................................. $ 4,540 $ 21,188 $ 5,040 $ 5,166 $ 7,354 $ 464
Expenses (Note 2):
Mortality and expense risk fee........................ (8,484) (12,034) (1,111) (3,086) (1,274) (1,958)
Administrative fee.................................... (438) (1,387) (118) (64) (249) (22)
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Net investment income (loss)............................ (4,382) 7,767 3,811 2,016 5,831 (1,516)
Capital gains distributions............................. 42,445 52,576 --- 11,148 --- 3,999
Realized gain (loss) on investments..................... 71,222 51,243 (219) 13,977 (219) 16,556
Unrealized appreciation (depreciation) on investments... 51,354 106,904 (165) (15,631) 2,886 10,679
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Net realized and unrealized gain (loss) on investments.. 165,021 210,723 (384) 9,494 2,667 31,234
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Net increase in net assets resulting from operations.... 160,639 218,490 3,427 11,510 8,498 29,718
Net assets at beginning of year......................... 591,591 886,931 90,466 223,249 109,990 128,768
Variable annuity deposits (Notes 2 and 3)............... 249,960 162,219 229,892 79,090 46,747 89,302
Terminations and withdrawals (Notes 2 and 3)............ (187,265) (173,157) (255,042) (60,994) (47,233) (59,424)
Annuity payments (Notes 2 and 3)........................ (705) (501) (828) (160) (191) (590)
Net mortality guarantee transfer........................ (25) (34) 5 --- (1) ---
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Net assets at end of year............................... $814,195 $1,093,948 $ 67,920 $252,695 $117,810 $187,774
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</TABLE>
See accompanying notes.
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<TABLE>
<CAPTION>
GLOBAL SPECIALIZED MANAGED ASSET EQUITY SOCIAL
AGGRESSIVE ASSET ALLOCATION ALLOCATION INCOME AWARENESS
BOND SERIES SERIES SERIES SERIES SERIES
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<S> <C> <C> <C> <C> <C>
Dividend distributions.................................. $ 650 $ 600 $ 263 $ 658 $ 125
Expenses (Note 2):
Mortality and expense risk fee........................ (92) (332) (184) (794) (769)
Administrative fee.................................... (21) (21) (15) (93) (36)
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Net investment income (loss)............................ 537 247 64 (229) (680)
Capital gains distributions............................. 196 577 171 938 3,402
Realized gain on investments............................ 130 1,077 1,042 3,898 4,159
Unrealized appreciation (depreciation) on investments... (543) (756) 953 10,793 5,871
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Net realized and unrealized gain (loss) on investments.. (217) 898 2,166 15,629 13,432
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Net increase in net assets resulting from operations.... 320 1,145 2,230 15,400 12,752
Net assets at beginning of year......................... 5,829 21,737 11,959 37,606 53,324
Variable annuity deposits (Notes 2 and 3)............... 6,637 12,513 11,907 54,189 22,273
Terminations and withdrawals (Notes 2 and 3)............ (4,783) (5,572) (4,928) (12,735) (9,858)
Annuity payments (Notes 2 and 3)........................ (12) (58) (6) (13) (31)
Net mortality guarantee transfer........................ --- --- (1) (8) (44)
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Net assets at end of year............................... $ 7,991 $29,765 $21,161 $94,439 $78,416
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</TABLE>
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VARIFLEX
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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
capital appreciation).
Under the terms of the investment advisory contracts, portfolio investments of
the underlying mutual fund are made by Security Management Company, LLC (SMC), a
limited liability company controlled by its members, SBL and 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, T. Rowe Price Associates, Inc. to
provide sub-advisory services for the Managed Asset Allocation Series and the
Equity Income Series and Meridian Investment Management Corporation to provide
sub-advisory services for 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.
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1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The cost of investments purchased and proceeds from investments sold were as
follows (In Thousands):
COST OF PROCEEDS
PURCHASES FROM SALES
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Growth Series......................... $307,630 $207,603
Growth-Income Series.................. 244,789 195,902
Money Market Series................... 242,657 264,823
Worldwide Equity Series............... 98,268 67,168
High Grade Income Series.............. 56,168 51,013
Emerging Growth Series................ 96,572 64,801
Global Aggressive Bond Series......... 7,766 5,191
Specialized Asset Allocation Series... 14,348 6,641
Managed Asset Allocation Series....... 12,903 5,696
Equity Income Series.................. 57,331 15,190
Social Awareness Series............... 26,829 11,798
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.
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VARIFLEX
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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 net 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 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 $1,653,942.
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3. SUMMARY OF UNIT TRANSACTIONS (IN THOUSANDS)
Growth Series:
Variable annuity deposits............................................ 4,775
Terminations, withdrawals, annuity payments and expense charges...... 3,713
Growth-Income Series:
Variable annuity deposits............................................ 3,118
Terminations, withdrawals, annuity payments and expense charges...... 3,368
Money Market Series:
Variable annuity deposits............................................ 12,375
Terminations, withdrawals, annuity payments and expense charges...... 13,751
Worldwide Equity Series:
Variable annuity deposits............................................ 5,104
Terminations, withdrawals, annuity payments and expense charges...... 3,932
High Grade Income Series:
Variable annuity deposits............................................ 2,073
Terminations, withdrawals, annuity payments and expense charges...... 2,147
Emerging Growth Series:
Variable annuity deposits............................................ 4,688
Terminations, withdrawals, annuity payments and expense charges...... 3,042
Global Aggressive Bond Series:
Variable annuity deposits............................................ 548
Terminations, withdrawals, annuity payments and expense charges...... 394
Specialized Asset Allocation Series:
Variable annuity deposits............................................ 1,003
Terminations, withdrawals, annuity payments and expense charges...... 450
Managed Asset Allocation Series:
Variable annuity deposits............................................ 915
Terminations, withdrawals, annuity payments and expense charges...... 399
Equity Income Series:
Variable annuity deposits............................................ 3,498
Terminations, withdrawals, annuity payments and expense charges...... 825
Social Awareness Series:
Variable annuity deposits............................................ 1,099
Terminations, withdrawals, annuity payments and expense charges...... 493
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The Security Benefit Group of Companies U.S. POSTAGE
700 SW Harrison St., PAID
Topeka, Kansas 66636-0001 SECURITY BENEFIT
