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VARIFLEX AND VARIFLEX ES
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1998 ANNUAL REPORT
[SBL LOGO]
SECURITY BENEFIT LIFE
INSURANCE COMPANY
A Member of The Security Benefit
Group of Companies
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A MESSAGE FROM THE CHAIRMAN OF THE BOARD
Security Benefit is poised on the brink of exciting change. Over the past year,
we have aggressively focused on relationship management and forging new
strategic partnerships. As good as the Security Benefit team is, as strong as
our management, research and fundamentals are, we still recognize opportunities
to bring more talent to the table. Making certain our cultures are compatible
and our goals are aligned, we've formed relationships that bring value to both
our customers and those who represent us.
Our successful team led the company to a record year of profits and sales.
* Sales totaled $1.1 billion, a 35% increase from 1997
* Profits were up 13.6%
* Assets under management rose 12% to $8.8 billion
* GAAP Equity rose 14.4%
In 1998, WORKING MOTHER magazine again selected Security Benefit as one of the
100 Best Companies for working mothers. We are very proud of the continued
recognition we receive for Security Benefit and believe that it directly affects
the quality of our service to our customers.
Security Benefit's financial strength and stability also continue to be
recognized. During 1998, Security Benefit was upgraded to an AA- (very strong)
rating from Standard & Poor's. We are also rated:
* AA- (very high) by Duff & Phelps
* A+ (superior) by A. M. Best
The strides we are making now shape our strategies and vision for the future. By
providing more products that offer choices to our customers, we position our
organization as one of the most responsive and flexible in the industry. This
combination of innovative products and service-oriented associates enables us to
continue meeting the needs of sophisticated customers well into the next
millennium.
HOWARD R. FRICKE
Howard R. Fricke
Chairman of the Board
and Chief Executive Officer
Rating information applies to Security Benefit Life Insurance Company. The
ratings should not be considered as bearing on the investment performance of
assets held in any separate account.
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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
Investments
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
STEVEN 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 (Ret.)
Western Resources, Inc.
Topeka, Kansas
LAIRD G. NOLLER
President
Noller Automotive Group
Lawrence, 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 MEETING OF MEMBERS
The annual meeting of members of Security Benefit Mutual Holding Company (the
"Mutual Holding Company") will be held on Tuesday, June 1, 1999, at 700 SW
Harrison St., Topeka, Kansas, at 1:00 p.m. Each owner of an insurance policy
issued by Security Benefit Life Insurance Company is a member of the Mutual
Holding Company and 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 no later than May 31, 1999.
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)
(comprised of the individual series indicated therein) as of December 31, 1998,
and the related statements 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 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 investments owned as of December 31, 1998, by correspondence
with the transfer agent. 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 individual series of
Variflex at December 31, 1998, and the results of their operations and changes
in their net assets for the year then ended in conformity with generally
accepted accounting principles.
Ernst & Young LLP
February 5, 1999
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VARIFLEX
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BALANCE SHEET DECEMBER 31, 1998
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ASSETS (DOLLARS IN THOUSANDS - EXCEPT PER SHARE AND UNIT VALUES)
Investments:
SBL Fund:
Series A (Growth Series) - 30,949,747 shares at net asset
value of $34.27 per share (cost, $855,261)................... $1,060,649
Series B (Growth-Income Series) - 27,183,841 shares at
net asset value of $39.68 per share (cost, $993,684)......... 1,078,657
Series C (Money Market Series) - 6,930,057 shares at net
asset value of $12.53 per share (cost, $86,005).............. 86,834
Series D (Worldwide Equity Series) - 44,633,381 shares at
net asset value of $6.74 per share (cost, $282,120).......... 300,829
Series E (High-Grade Income Series) - 9,664,090 shares at
net asset value of $12.42 per share (cost, $117,048)......... 120,028
Series J (Emerging Growth Series) - 9,955,342 shares at
net asset value of $22.51 per share (cost, $196,035)......... 224,096
Series K (Global Aggressive Bond Series) - 799,113 shares
at net asset value of $9.56 per share (cost, $8,306)......... 7,638
Series M (Specialized Asset Allocation Series) - 2,324,547
shares at net asset value of $12.87 per share (cost, $28,647) 29,917
Series N (Managed Asset Allocation Series) - 2,759,166 shares
at net asset value of $16.01 per share (cost, $38,780)....... 44,175
Series O (Equity Income Series) - 6,995,662 shares at net
asset value of $18.35 per share (cost, $118,124)............. 128,370
Series S (Social Awareness Series) - 4,373,709 shares at
net asset value of $28.40 per share (cost, $92,169).......... 124,214
Mortality guarantee receivable..................................... 24
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Total assets....................................................... $3,205,431
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See accompanying notes.
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NET ASSETS
Net assets are represented by (NOTE 3):
NUMBER UNIT
OF UNITS VALUE AMOUNT
--------------------------------
Growth Series:
Accumulation units.............. 14,662,538 $72.10 $1,057,188
Annuity reserves................ 48,182 72.10 3,474 $1,060,662
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Growth-Income Series:
Accumulation units.............. 17,378,878 61.86 1,074,978
Annuity reserves................ 59,500 61.86 3,680 1,078,658
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Money Market Series:
Accumulation units.............. 4,383,329 19.72 86,421
Annuity reserves................ 20,961 19.72 413 86,834
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Worldwide Equity Series:
Accumulation units.............. 16,573,512 18.11 300,118
Annuity reserves................ 39,280 18.11 711 300,829
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High-Grade Income Series:
Accumulation units.............. 4,741,368 25.16 119,278
Annuity reserves................ 29,983 25.16 754 120,032
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Emerging Growth Series:
Accumulation units.............. 8,921,797 24.90 222,174
Annuity reserves................ 77,163 24.90 1,922 224,096
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Global Aggressive Bond Series:
Accumulation units.............. 578,471 13.20 7,633
Annuity reserves................ 373 13.20 5 7,638
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Specialized Asset
Allocation Series:
Accumulation units.............. 2,130,273 14.01 29,848
Annuity reserves................ 4,936 14.01 69 29,917
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Managed Asset Allocation Series:
Accumulation units.............. 2,690,168 16.26 43,735
Annuity reserves................ 27,061 16.26 440 44,175
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Equity Income Series:
Accumulation units.............. 6,797,102 18.83 128,011
Annuity reserves................ 19,179 18.83 361 128,372
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Social Awareness Series:
Accumulation units.............. 4,189,028 29.50 123,597
Annuity reserves................ 21,032 29.50 621 124,218
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Total net assets.................. $3,205,431
=========
See accompanying notes.
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VARIFLEX
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STATEMENT OF OPERATIONS AND
CHANGES IN NET ASSETS YEAR ENDED DECEMBER 31, 1998
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(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH-
GROWTH- MONEY WORLDWIDE GRADE EMERGING
GROWTH INCOME MARKET EQUITY INCOME GROWTH
SERIES SERIES SERIES SERIES SERIES SERIES
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<S> <C> <C> <C> <C> <C> <C>
Dividend distributions.................................. $ 4,720 $ 18,521 $ 4,372 $ 3,672 $ 7,002 $ 1,189
Expenses (NOTE 2):
Mortality and expense risk fee........................ (10,942) (13,400) (1,198) (3,345) (1,389) (2,359)
Administrative fee.................................... (447) (1,321) (122) (48) (245) (20)
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Net investment income (loss)............................ (6,669) 3,800 3,052 279 5,368 (1,190)
Capital gains distributions............................. 60,247 117,649 --- 21,009 1 19,867
Realized gain (loss) on investments..................... 94,021 77,787 (206) 14,535 (978) 11,657
Unrealized appreciation (depreciation) on investments... 53,960 (134,976) 845 11,453 2,512 3,171
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Net realized and unrealized gain (loss) on investments.. 208,228 60,460 639 46,997 1,535 34,695
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Net increase in net assets resulting from operations.... 201,559 64,260 3,691 47,276 6,903 33,505
Net assets at beginning of year......................... 814,195 1,093,948 67,920 252,695 117,810 187,774
Variable annuity deposits (NOTES 2 AND 3)............... 282,099 169,655 254,348 96,362 77,634 69,168
Terminations and withdrawals (NOTES 2 AND 3)............ (235,347) (248,805) (237,571) (95,281) (81,192) (65,788)
Annuity payments (NOTES 2 AND 3)........................ (1,852) (419) (1,547) (223) (1,124) (563)
Net mortality guarantee transfer........................ 8 19 (7) --- 1 ---
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Net assets at end of year............................... $1,060,662 $1,078,658 $ 86,834 $300,829 $120,032 $224,096
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</TABLE>
See accompanying notes.
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<TABLE>
<CAPTION>
GLOBAL SPECIALIZED MANAGED
AGGRESSIVE ASSET ASSET EQUITY SOCIAL
BOND ALLOCATION ALLOCATION INCOME AWARENESS
SERIES SERIES SERIES SERIES SERIES
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<S> <C> <C> <C> <C> <C>
Dividend distributions.................................. $ 730 $ 624 $ 407 $ 1,512 $ 218
Expenses (NOTE 2):
Mortality and expense risk fee........................ (100) (363) (364) (1,401) (1,138)
Administrative fee.................................... (24) (20) (22) (138) (41)
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Net investment income (loss)............................ 606 241 21 (27) (961)
Capital gains distributions............................. 134 1,558 254 3,658 2,392
Realized gain (loss) on investments..................... (273) 1,071 1,615 8,677 8,159
Unrealized appreciation (depreciation) on investments... (74) 261 3,274 (4,469) 16,195
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Net realized and unrealized gain (loss) on investments.. (213) 2,890 5,143 7,866 26,746
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Net increase in net assets resulting from operations.... 393 3,131 5,164 7,839 25,785
Net assets at beginning of year......................... 7,991 29,765 21,161 94,439 78,416
Variable annuity deposits (NOTES 2 AND 3)............... 3,744 6,604 23,468 55,344 35,747
Terminations and withdrawals (NOTES 2 AND 3)............ (2,830) (9,504) (5,597) (29,182) (15,692)
Annuity payments (NOTES 2 AND 3)........................ (1,660) (79) (19) (70) (38)
Net mortality guarantee transfer........................ --- --- (2) 2 ---
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Net assets at end of year............................... $ 7,638 $29,917 $44,175 $128,372 $124,218
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</TABLE>
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VARIFLEX
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NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 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., a wholly-owned subsidiary of SBL. SMC has
engaged T. Rowe Price Associates, Inc., to provide subadvisory services for
the Managed Asset Allocation Series and the Equity Income Series; Meridian
Investment Management Corporation to provide subadvisory services for the
Specialized Asset Allocation Series and Strong Capital Management, Inc. to
provide subadvisory services to the Small Cap Series. Lexington Management
Corporation (LMC) served as subadvisor for the Worldwide Equity Series until
November 1, 1998, when LMC was replaced by OppenheimerFunds, Inc. Effective
December 31, 1998, LMC resigned as subadvisor for Global Aggressive Bond
Series, which will be advised by SMC.
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 realized
gains and losses. Security transactions are accounted for on the trade date.
The cost of investments purchased and proceeds from investments sold were as
follows:
COST OF PROCEEDS
PURCHASES FROM SALES
--------- ----------
(IN THOUSANDS)
Growth Series............................... $363,460 $264,990
Growth-Income Series........................ 318,360 276,473
Money Market Series......................... 268,091 249,812
Worldwide Equity Series..................... 124,902 102,757
High-Grade Income Series.................... 86,856 86,174
Emerging Growth Series...................... 94,457 72,964
Global Aggressive Bond Series............... 4,906 4,912
Specialized Asset Allocation Series......... 9,268 10,447
Managed Asset Allocation Series............. 24,619 6,494
Equity Income Series........................ 63,108 33,384
Social Awareness Series..................... 39,811 18,373
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 -- The operations of the Account are a part of the
operations of SBL. Under current law, no federal income taxes are allocated
by SBL to the operations of the Account.
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 charges and other contract charges
totaled $1,870,879 during 1998.
3. SUMMARY OF UNIT TRANSACTIONS (IN THOUSANDS)
Growth Series:
Variable annuity deposits........................................ 4,411
Terminations, withdrawals, annuity payments and expense charges.. 3,692
Growth-Income Series:
Variable annuity deposits........................................ 2,809
Terminations, withdrawals, annuity payments and expense charges.. 4,163
Money Market Series:
Variable annuity deposits........................................ 13,168
Terminations, withdrawals, annuity payments and expense charges.. 12,343
Worldwide Equity Series:
Variable annuity deposits........................................ 5,811
Terminations, withdrawals, annuity payments and expense charges.. 5,755
High-Grade Income Series:
Variable annuity deposits........................................ 3,175
Terminations, withdrawals, annuity payments and expense charges.. 3,401
Emerging Growth Series:
Variable annuity deposits........................................ 3,201
Terminations, withdrawals, annuity payments and expense charges.. 2,989
Global Aggressive Bond Series:
Variable annuity deposits........................................ 300
Terminations, withdrawals, annuity payments and expense charges.. 361
Specialized Asset Allocation Series:
Variable annuity deposits........................................ 502
Terminations, withdrawals, annuity payments and expense charges.. 731
Managed Asset Allocation Series:
Variable annuity deposits........................................ 1,574
Terminations, withdrawals, annuity payments and expense charges.. 379
Equity Income Series:
Variable annuity deposits........................................ 3,055
Terminations, withdrawals, annuity payments and expense charges.. 1,640
Social Awareness Series:
Variable annuity deposits........................................ 1,397
Terminations, withdrawals, annuity payments and expense charges.. 638
