<PAGE> 1
Annuity Service Office Mailing Address
116 Huntington Avenue Post Office Box 9230
Boston, Massachusetts 02116 Boston, Massachusetts
(617) 266-6008 02205-9230
(800) 344-1029
- --------------------------------------------------------------------------------
NASL VARIABLE ACCOUNT
- --------------------------------------------------------------------------------
OF
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
FLEXIBLE PURCHASE PAYMENT INDIVIDUAL DEFERRED
COMBINATION FIXED AND VARIABLE ANNUITY CONTRACT
NON-PARTICIPATING
This Prospectus describes a flexible purchase payment individual
deferred variable annuity contract (the "contract") issued by North American
Security Life Insurance Company ("the Company"), a stock life insurance company
the ultimate parent of which is The Manufacturers Life Insurance Company
("Manulife"). The contract is designed for use in connection with retirement
plans which may or may not qualify for special federal income tax treatment.
The contract provides for the accumulation of contract values and the
payment of annuity benefits on a variable and/or fixed basis. The contract
offers seventeen investment options: sixteen variable and a one year fixed
account. The contract value during the accumulation period and annuity payments,
if selected on a variable basis, will vary according to the investment
performance of sub-accounts of NASL Variable Account (the "Variable Account").
The Variable Account is a separate account established by the Company. Purchase
payments and earnings on those purchase payments may be allocated to and
transferred among one or more of sixteen sub-accounts of the Variable Account.
The assets of each sub-account are invested in shares of NASL Series Trust (the
"Trust"), a mutual fund with the following investment portfolios currently
available to the contracts: the Small/Mid Cap Trust, International Small Cap
Trust, Global Equity Trust, Pasadena Growth Trust, Equity Trust, Value Equity
Trust, Growth and Income Trust, International Growth and Income Trust, Strategic
Bond Trust, Global Government Bond Trust, Investment Quality Bond Trust, U.S.
Government Securities Trust, Money Market Trust and three Automatic Asset
Allocation Trusts (Aggressive, Moderate and Conservative) (see the accompanying
Prospectus of the Trust). Fixed contract values may be accumulated under the one
year fixed account investment option. Except as specifically noted herein and as
set forth under the caption "FIXED ACCOUNT INVESTMENT OPTION" below, this
Prospectus describes only the variable portion of the contract.
Additional information about the contract and the Variable Account is
contained in a Statement of Additional Information, dated the same date as this
Prospectus, which has been filed with the Securities and Exchange Commission and
is incorporated herein by reference. The Statement of Additional Information is
available without charge upon request by writing the Company at the above
address or telephoning (617) 266-6008. The table of contents for the Statement
of Additional Information is included on page 29 of this Prospectus.
SHARES OF THE TRUST ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY.
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. IT
CONTAINS INFORMATION ABOUT THE VARIABLE ACCOUNT AND THE CONTRACT THAT A
PROSPECTIVE PURCHASER SHOULD KNOW BEFORE INVESTING.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1996.
VV.PRO596
<PAGE> 2
<TABLE>
TABLE OF CONTENTS
<S> <C>
SPECIAL TERMS ............................................................ 3
SUMMARY .................................................................. 5
TABLE OF ACCUMULATION UNIT VALUES ........................................ 8
GENERAL INFORMATION ABOUT NORTH
AMERICAN SECURITY LIFE INSURANCE
COMPANY, NASL VARIABLE ACCOUNT
AND NASL SERIES TRUST .................................................... 10
North American Security Life Insurance Company ...................... 10
NASL Variable Account ............................................... 10
NASL Series Trust ................................................... 10
DESCRIPTION OF THE CONTRACT .............................................. 13
ACCUMULATION PROVISIONS ............................................... 13
Purchase Payments ................................................... 13
Accumulation Units .................................................. 13
Value of Accumulation Units ......................................... 13
Net Investment Factor ............................................... 13
Transfers Among Investment Options .................................. 14
Telephone Transactions .............................................. 14
Special Transfer Services - Dollar Cost Averaging ................... 14
Asset Rebalancing Program ........................................... 15
Withdrawals ......................................................... 15
Special Withdrawal Services - Systematic
Withdrawal Plan .................................................. 15
Loans ............................................................... 16
Death Benefit Before Maturity Date .................................. 16
ANNUITY PROVISIONS .................................................... 18
General ............................................................. 18
Annuity Options ..................................................... 18
Determination of Amount of the First
Variable Annuity Payment ......................................... 19
Annuity Units and the Determination
of Subsequent Variable Annuity Payments .......................... 19
Transfers After Maturity Date ....................................... 20
Death Benefit on or After Maturity Date ............................. 20
OTHER CONTRACT PROVISIONS ............................................. 20
Ten Day Right to Review ............................................. 20
Ownership ........................................................... 20
Beneficiary ......................................................... 21
Modification ........................................................ 21
Company Approval .................................................... 21
Misstatement and Proof of Age, Sex or Survival ...................... 21
FIXED ACCOUNT INVESTMENT OPTION .......................................... 21
CHARGES AND DEDUCTIONS ................................................... 23
Withdrawal Charges .................................................. 23
Reduction or Elimination of Withdrawal Charges ...................... 23
Administration Fees ................................................. 24
Distribution Fee .................................................... 24
Mortality and Expense Risk Fee ...................................... 24
Taxes ............................................................... 25
FEDERAL TAX MATTERS ...................................................... 25
INTRODUCTION .......................................................... 25
THE COMPANY'S TAX STATUS .............................................. 25
TAXATION OF ANNUITIES IN GENERAL ...................................... 25
Tax Deferral During Accumulation Period ............................. 25
Taxation of Partial and Full Withdrawals ............................ 26
Taxation of Annuity Payments ........................................ 27
Taxation of Death Benefit Proceeds .................................. 27
Penalty Tax on Premature Distributions .............................. 27
Aggregation of Contracts ............................................ 27
QUALIFIED RETIREMENT PLANS ............................................ 28
Qualified Plan Types ................................................ 28
Direct Rollovers .................................................... 29
FEDERAL INCOME TAX WITHHOLDING ........................................ 29
GENERAL MATTERS .......................................................... 30
Tax Deferral ........................................................ 30
Performance Data .................................................... 30
Financial Statements ................................................ 30
Asset Allocation and Timing Services ................................ 30
Restrictions Under the Texas Optional
Retirement Program ............................................... 30
Distribution of Contracts ........................................... 30
Contract Owner Inquiries ............................................ 31
Legal Proceedings ................................................... 31
Other Information ................................................... 31
STATEMENT OF ADDITIONAL INFORMATION-
TABLE OF CONTENTS ..................................................... 31
APPENDIX A: EXAMPLES OF CALCULATION OF
WITHDRAWAL CHARGE ..................................................... 32
APPENDIX B: STATE PREMIUM TAXES ......................................... 33
APPENDIX C: MAXIMUM MATURITY
AGES IN PENNSYLVANIA ..................................................... 34
</TABLE>
2
<PAGE> 3
SPECIAL TERMS
The following terms as used in this Prospectus have the indicated
meanings:
Accumulation Unit - A unit of measure that is used to calculate the
value of the contract before the maturity date.
Annuitant - Any natural person or persons whose life is used to
determine the duration of annuity payments involving life contingencies. If the
contract owner names more than one person as an "Annuitant," the second person
named shall be referred to as "Co-Annuitant." All provisions based on the date
of the death of the "Annuitant" will be based on the date of death of the last
to survive of the "Annuitant" or "Co-Annuitant." The "Annuitant" and
"Co-Annuitant" will be referred to collectively as "Annuitant." The "Annuitant"
is as specified in the application, unless changed.
Annuity Option - The method selected by the contract owner for annuity
payments made by the Company.
Annuity Service Office - The service office of the Company is P.O. Box
9230, Boston, Massachusetts 02205-9230.
Annuity Unit - A unit of measure that is used after the maturity date
to calculate variable annuity payments.
Beneficiary - The person, persons or entity entitled to the death
benefit under the contract upon the death of the annuitant. The beneficiary is
as specified in the application, unless changed. (See also "Successor Owner").
Contingent Beneficiary - The person, persons or entity to become the
beneficiary if the beneficiary is not alive. The contingent beneficiary is as
specified in the application, unless changed.
Contract Anniversary - The anniversary of the contract date.
Contract Date - The date of issue of the contract.
Contract Value - The total of the investment account values and, if
applicable, any amount in the loan account attributable to the contract.
Contract Year - The period of twelve consecutive months beginning on
the contract date or any anniversary thereof.
Debt - Any amounts in the loan account attributable to the contract
plus any accrued loan interest. The loan provision is applicable to certain
qualified contracts only.
Due Proof of Death - Due Proof of Death is required upon the death of
the Annuitant or the Owner. One of the following must be received at the Annuity
Service Office within one year of the date of death:
(a) A certified copy of a death certificate;
(b) A certified copy of a decree of a court of competent
jurisdiction as to the finding of death; or
(c) Any other proof satisfactory to us.
Death benefits will be paid within 7 days of receipt of due proof of death and
all required claim forms by the Company's Annuity Service Office.
Fixed Annuity - Any annuity option with payments which are
predetermined and guaranteed as to dollar amount.
General Account - All the assets of the Company other than assets in
separate accounts.
Investment Account - An account established by the Company which
represents a contract owner's interest in an investment option prior to the
maturity date.
Investment Account Value - The value of a contract owner's investment
in an investment account.
Investment Options - The investment choices available to contract
owners. There are sixteen sub-accounts of the Variable Account and a one year
fixed investment option currently available.
3
<PAGE> 4
Loan Account - The portion of the general account that is used for
collateral when a loan is taken.
Maturity Date - The date on which annuity benefits commence. The
maturity date is the date specified on the contract specifications page, unless
changed. If no date is specified, the maturity date, subject to applicable state
law, will be the later of the first day of the month following the annuitant's
85th birthday or the first month following the tenth contract anniversary.
Net Purchase Payment - The purchase payment less the amount of premium
tax, if any.
Non-Qualified Contracts - Contracts which are not issued under
qualified plans.
Owner or Contract Owner - The person, persons (co-owner) or entity
entitled to all of the ownership rights under the contract. The owner has the
legal right to make all changes in contractual designations where specifically
permitted by the contract. The owner is as specified in the application, unless
changed.
Portfolio or Trust Portfolio - A separate investment portfolio of the
Trust, a mutual fund in which the Variable Account invests, or of any successor
mutual fund.
Purchase Payment - An amount paid by a contract owner to the Company as
consideration for the benefits provided by the contract.
Qualified Contracts - Contracts issued under qualified plans.
Qualified Plans - Retirement plans which receive favorable tax
treatment under Section 401, 403, 408 or 457 of the Internal Revenue Code of
1986, as amended.
Separate Account - A segregated account of the Company that is not
commingled with the Company's general assets and obligations.
Sub-Account(s) - One or more of the sub-accounts of the Variable
Account. Each sub-account is invested in shares of a different Trust portfolio.
Successor Owner - The person, persons or entity to become the owner if
the owner dies prior to the Maturity Date. The successor owner is as specified
in the application, unless changed. If no Successor Owner is designated or the
Successor Owner dies before the Owner, the Owner's estate is the Successor
Owner. (See also "Beneficiary").
Valuation Date - Any date on which the New York Stock Exchange is open
for business and the net asset value of a Trust portfolio is determined.
Valuation Period - Any period from one valuation date to the next,
measured from the time on each such date that the net asset value of each
portfolio is determined.
Variable Account - The NASL Variable Account, which is a separate
account of the Company.
Variable Annuity - An annuity option with payments which: (1) are not
predetermined or guaranteed as to dollar amount, and (2) vary in relation to the
investment experience of one or more specified sub-accounts.
4
<PAGE> 5
SUMMARY
The Contract. The contract offered by this Prospectus is a flexible
purchase payment individual deferred variable annuity contract. The contract
provides for the accumulation of contract values on a variable basis and the
payment of annuity benefits on a variable and/or fixed basis.
Retirement Plans. The contract may be issued pursuant to either
non-qualified retirement plans or plans qualifying for special income tax
treatment under the Internal Revenue Code, such as individual retirement
accounts and annuities, pension and profit-sharing plans for corporations and
sole proprietorships/partnerships ("H.R. 10" and "Keogh" plans), tax-sheltered
annuities, and state and local government deferred compensation plans. (See
"QUALIFIED RETIREMENT PLANS")
Purchase Payments. A contract may be issued upon the making of an
initial purchase payment of $25,000 or more. Minimum subsequent purchase
payments must be $1,000, with an exception for qualified plans where minimum
subsequent purchase payments must be $30. Purchase payments may be made at any
time. If a purchase payment would cause the contract value to exceed $1,000,000,
or the contract value already exceeds $1,000,000, no additional purchase
payments will be accepted without prior approval of the Company. (See "PURCHASE
PAYMENTS")
Investment Options. Purchase payments may be allocated among the
seventeen investment options currently available under the contract: sixteen
variable account investment options and a one year fixed investment option. The
sixteen investment options are sixteen sub-accounts of the Variable Account, a
separate account established by the Company. The sub-accounts invest in
corresponding portfolios of the Trust: the Small/Mid Cap Trust, International
Small Cap Trust, Global Equity Trust, Pasadena Growth Trust, Equity Trust, Value
Equity Trust, Growth and Income Trust, International Growth and Income Trust,
Strategic Bond Trust, Global Government Bond Trust, Investment Quality Bond
Trust, U.S. Government Securities Trust, Money Market Trust and three Automatic
Asset Allocation Trusts (Aggressive, Moderate and Conservative) (see the
accompanying Prospectus of the Trust). The contract value during the
accumulation period and periodic annuity payments, if selected on a variable
basis, will reflect the investment performance of the sub-accounts selected.
(See "NASL VARIABLE ACCOUNT") Purchase payments may also be allocated to the one
year fixed account investment option. Under the fixed account investment option,
the Company guarantees the principal value of purchase payments and the rate of
interest credited to the investment account for the term of the guarantee
period. The portion of the contract value in the fixed account investment option
and monthly annuity payments, if selected on a fixed basis, will reflect such
interest and principal guarantees. (See "FIXED ACCOUNT INVESTMENT OPTION")
Subject to certain regulatory limitations, the Company may elect to add,
subtract or substitute investment options.
Transfers. Prior to the maturity date, amounts may be transferred among
the investment options. After the maturity date, amounts may be transferred from
one sub-account to another. There is no transaction charge for transfers.
Transfers from any investment account must be at least $300 or, if less, the
entire balance in the investment account. If, after the transfer the amount
remaining in the Investment Account of the contract from which the transfer is
made is less than $100, then the Company will transfer the entire amount instead
of the requested amount. The Company may impose certain additional limitations
on transfers. (See "TRANSFERS AMONG INVESTMENT OPTIONS" and "TRANSFERS AFTER
MATURITY DATE") Transfer privileges may also be used under a special service
offered by the Company to dollar cost average an investment in the contract.
(See "SPECIAL TRANSFER SERVICES - DOLLAR COST AVERAGING")
Withdrawals. Prior to the earlier of the maturity date or the death of
the annuitant, the contract owner may withdraw all or a portion of the contract
value. The amount withdrawn from any investment account must be at least $300
or, if less, the entire balance of the investment account. If a partial
withdrawal plus any applicable withdrawal charge would reduce the contract value
to less than $300, the withdrawal request will be treated as a request to
withdraw the entire contract value. A withdrawal charge and the $30 per year
administration fee, if applicable, may be imposed. (See "WITHDRAWALS") A
withdrawal may be subject to a penalty tax. (See "FEDERAL TAX MATTERS")
Withdrawal privileges may also be exercised pursuant to the Company's systematic
withdrawal plan service. (See "SPECIAL WITHDRAWAL SERVICES - SYSTEMATIC
WITHDRAWAL PLAN")
Loans. The Company offers a loan privilege to owners of contracts
issued in connection with Section 403(b) qualified plans that are not subject to
Title I of ERISA. Owners of such contracts may obtain loans using the contract
as the only security for the loan. The effective cost of a contract loan is 2%
per year of the amount borrowed. (See "LOANS")
Death Benefit. Generally, if the annuitant dies before the maturity
date, the Company will pay to the beneficiary the minimum death benefit less any
debt. If the annuitant dies on or before the first of the month following his or
her 85th birthday and had an attained age of less than 81 years on the contract
date, the minimum death benefit will be equal to the greater of: (a) the
contract value on the date due proof of death and all required claim forms are
received at the Company's Annuity Service Office, or (b) the excess of (i) the
sum of each purchase payment accumulated daily at a rate equivalent to 5% per
year starting on the date each purchase payment is allocated to the contract,
5
<PAGE> 6
subject to a maximum accumulation of two times each purchase payment, over (ii)
the sum of each withdrawal or annuitized amount, including any applicable
withdrawal charges, accumulated daily at a rate equivalent to 5% per year
starting as of the date of each such withdrawal or annuitization, with a maximum
accumulation of two times each such withdrawal or annuitized amount. If the
annuitant dies after the first of the month following his or her 85th birthday
or had attained age 81 or greater on the contract date, the minimum death
benefit will be the amount payable on total withdrawal on the date due proof of
death and all required claim forms are received at the Company's Annuity Service
Office. In certain other cases, an amount equal to the owner's interest will be
distributed when the owner dies before the maturity date. (See "DEATH BENEFIT
BEFORE MATURITY DATE") If the annuitant dies after the maturity date and annuity
payments have been selected based on an annuity option providing for payments
for a guaranteed period, the Company will make the remaining guaranteed payments
to the beneficiary. (See "DEATH BENEFIT ON OR AFTER MATURITY DATE")
Annuity Payments. The Company offers a variety of fixed and variable
annuity options. Periodic annuity payments will begin on the maturity date. The
contract owner selects the maturity date, frequency of payment and annuity
option. (See "ANNUITY PROVISIONS")
Ten Day Review. Within 10 days of receipt of a contract, the contract
owner may cancel the contract by returning it to the Company. (See "TEN DAY
RIGHT TO REVIEW")
Charges and Deductions. The following table and Example are designed to
assist contract owners in understanding the various costs and expenses that
contract owners bear directly and indirectly. The table reflects expenses of the
separate account and the underlying portfolio company. In addition to the items
listed in the following table, premium taxes may be applicable to certain
contracts and the Company reserves the right to impose an annual $30 per
contract administration fee on contracts where the contract value is less than
$10,000 as a result of a partial withdrawal. The items listed under "Contract
Owner Transaction Expenses" and "Separate Account Annual Expenses" are more
completely described in this Prospectus (see "CHARGES AND DEDUCTIONS"). The
items listed under "Trust Annual Expenses" are described in detail in the
accompanying Trust Prospectus to which reference should be made.
<TABLE>
CONTRACT OWNER TRANSACTION EXPENSES
Deferred sales load (as percentage of purchase payments)
<CAPTION>
NUMBER OF COMPLETE YEARS WITHDRAWAL CHARGE PERCENTAGE
PURCHASE PAYMENT IN CONTRACT
-----------------------------------------------------------------
<S> <C>
0 3%
1 3%
2 3%
3+ 0%
</TABLE>
<TABLE>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
<S> <C>
Mortality and expense risk fees......................................... 1.25%
Administration fee...................................................... 0.25%
Distribution fee........................................................ 0.15%
Total Separate Account Annual Expenses.................................. 1.65%
</TABLE>
6
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<TABLE>
TRUST ANNUAL EXPENSES
(as a percentage of Trust average net assets)
<CAPTION>
MANAGEMENT OTHER TOTAL TRUST
TRUST PORTFOLIO FEES EXPENSES ANNUAL EXPENSES
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small/Mid Cap....................... 1.000% 0.250%* 1.250%
International Small Cap............. 1.100% 0.300%* 1.400%
Global Equity....................... 0.900% 0.150% 1.050%
Pasadena Growth..................... 0.975% 0.000% 0.975%
Equity.............................. 0.750% 0.050% 0.800%
Value Equity........................ 0.800% 0.050% 0.850%
Growth and Income................... 0.750% 0.050% 0.800%
International Growth and Income..... 0.950% 0.520% 1.470%
Strategic Bond...................... 0.775% 0.145% 0.920%
Global Government Bond.............. 0.800% 0.130% 0.930%
Investment Quality Bond............. 0.650% 0.090% 0.740%
U.S. Government Securities.......... 0.650% 0.060% 0.710%
Money Market ....................... 0.500% 0.040% 0.540%
Aggressive Asset Allocation......... 0.750% 0.160% 0.910%
Moderate Asset Allocation........... 0.750% 0.090% 0.840%
Conservative Asset Allocation....... 0.750% 0.120% 0.870%
<FN>
* Based on estimates of payments to be made during the current fiscal year.
</TABLE>
<TABLE>
EXAMPLE
A contract owner would pay the following expenses on a $1,000
investment, assuming a 5% annual return on assets, if the contract owner
surrendered the contract at the end of the applicable time period:
<CAPTION>
TRUST PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Small/Mid Cap....................... $57 $119
International Small Cap............. 58 123
Global Equity....................... 55 113 $143 $304
Pasadena Growth..................... 54 111 139 296
Equity.............................. 53 106 131 279
Value Equity........................ 53 107 133 284
Growth and Income................... 53 106 131 279
Int'l Growth and Income............. 59 125 163 344
Strategic Bond...................... 54 109 137 291
Global Government Bond.............. 54 109 137 292
Investment Quality Bond............. 52 104 128 273
U.S. Government Securities.......... 52 103 126 270
Money Market........................ 50 98 117 253
Aggressive Asset Allocation......... 54 109 136 290
Moderate Asset Allocation........... 53 107 133 283
Conservative Asset Allocation....... 53 108 134 286
</TABLE>
7
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<TABLE>
A contract owner would pay the following expenses on a $1,000
investment, assuming a 5% annual return on assets, if the contract owner
annuitized as provided in the contract or did not surrender the contract at the
end of the applicable time period:
<CAPTION>
TRUST PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Small/Mid Cap....................... $29 $90
International Small Cap............. 31 94
Global Equity....................... 27 84 $143 $304
Pasadena Growth..................... 27 82 139 296
Equity ............................. 25 76 131 279
Value Equity........................ 25 78 133 284
Growth and Income................... 25 76 131 279
Int'l Growth and Income............. 31 96 163 344
Strategic Bond...................... 26 80 137 291
Global Government Bond.............. 26 80 137 292
Investment Quality Bond............. 24 75 128 273
U.S. Government Securities.......... 24 74 126 270
Money Market........................ 22 69 117 253
Aggressive Asset Allocation......... 26 80 136 290
Moderate Asset Allocation........... 25 78 133 283
Conservative Asset Allocation....... 26 78 134 286
</TABLE>
For purposes of presenting the foregoing Example, the Company has made
certain assumptions mandated by the Securities and Exchange Commission (the
"Commission"). The Company has assumed that, where applicable, the maximum sales
load is deducted, that there are no transfers or other transactions and that the
"Other Expenses" line item under "Trust Annual Expenses" will remain the same.
Such assumptions, which are mandated by the Commission in an attempt to provide
prospective investors with standardized data with which to compare various
annuity contracts, do not take into account certain features of the contract and
prospective changes in the size of the Trust which may operate to change the
expenses borne by contract owners. Consequently, the amounts listed in the
Example above should not be considered a representation of past or future
expenses and actual expenses borne by contract owners may be greater or lesser
than those shown.
**********
The above summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus and Statement of Additional
Information and the accompanying Prospectus and Statement of Additional
Information for the Trust, to which reference should be made.
<TABLE>
TABLE OF ACCUMULATION UNIT VALUES
<CAPTION>
SUB-ACCOUNT UNIT VALUE AT UNIT VALUE AT NUMBER OF UNITS
START OF YEAR * END OF YEAR AT END OF YEAR
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity
1993.............................. $10.000000 $12.143755 1,455,573.105
1994.............................. 12.143755 12.153179 3,592,193.950
1995.............................. 12.153179 12.872711 3,158,249.547
Pasadena Growth
1993.............................. 10.000000 9.910654 495,011.310
1994.............................. 9.910654 9.280989 1,241,595.122
1995.............................. 9.280989 11.551552 1,436,442.563
Equity
1993.............................. 10.000000 11.207514 1,310,160.137
1994.............................. 11.207514 10.965867 2,816,189.184
1995.............................. 10.965867 15.402975 3,171,418.585
Value Equity
1993.............................. 10.000000 10.669366 647,304.380
1994.............................. 10.669366 10.578121 1,934,939.580
1995.............................. 10.578121 12.870851 2,150,840.369
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
SUB-ACCOUNT UNIT VALUE AT UNIT VALUE AT NUMBER OF UNITS
START OF YEAR * END OF YEAR AT END OF YEAR
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth and Income
1993.............................. 10.000000 10.315501 1,200,427.110
1994.............................. 10.315501 10.436393 2,638,198.076
1995.............................. 10.436393 13.263871 3,076,140.695
International Growth & Income
1995.............................. 10.00000 10.528678 274,337.879
Strategic Bond
1993.............................. 10.000000 10.703311 404,454.864
1994.............................. 10.703311 9.897404 702,527.632
1995.............................. 9.897404 11.607403 691,403.558
Global Government Bond
1993.............................. 10.000000 11.068993 919,628.562
1994.............................. 11.068993 10.262238 1,430,116.858
1995.............................. 10.262238 12.434811 1,299,620.905
Investment Quality Bond (formerly called Bond Sub-account)
1993.............................. 10.000000 10.356230 341,616.109
1994.............................. 10.356230 9.713969 687,635.876
1995.............................. 9.713969 11.417606 801,133.577
U.S. Gov. Securities (formerly called U.S. Gov. Bond Sub-account)
1993.............................. 10.000000 10.262275 1,311,380.702
1994.............................. 10.262275 9.968713 1,477,293.193
1995.............................. 9.968713 11.333420 1,175,658.029
Money Market
1993.............................. 10.000000 10.073934 516,542.992
1994.............................. 10.073934 10.290731 2,071,787.931
1995.............................. 10.290731 10.692803 1,528,995.412
Aggressive Asset Allocation
1993............................. 10.000000 10.546977 165,598.227
1994............................. 10.546977 10.303433 461,965.883
1995............................. 10.303433 12.443644 439,301.069
Moderate Asset Allocation
1993.............................. 10.000000 10.493326 983,507.615
1994.............................. 10.493326 10.156264 1,725,861.503
1995.............................. 10.156264 12.056663 1,611,981.911
Conservative Asset Allocation
1993.............................. 10.000000 10.407901 544,736.049
1994.............................. 10.407901 10.050011 771,618.527
1995.............................. 10.050011 11.672867 725,546.921
<FN>
* Units under this series of contracts were first credited under the
sub-accounts on April 1, 1993, except in the case of International Growth and
Income where units were first credited under the sub-accounts on January 9,
1995.
</TABLE>
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GENERAL INFORMATION ABOUT NORTH AMERICAN
SECURITY LIFE INSURANCE
COMPANY, NASL VARIABLE ACCOUNT AND NASL SERIES TRUST
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
North American Security Life Insurance Company ("the Company") is a
stock life insurance company organized under the laws of Delaware in 1979. The
Company's principal office is located at 116 Huntington Avenue, Boston,
Massachusetts 02116. The ultimate parent of the Company is The Manufacturers
Life Insurance Company ("Manulife"), a Canadian mutual life insurance company
based in Toronto, Canada. Prior to January 1, 1996, the Company was a wholly
owned subsidiary of North American Life Assurance Company ("NAL"), a Canadian
mutual life insurance company. On January 1, 1996 NAL and Manulife merged with
the combined company retaining the Manulife name.
NASL VARIABLE ACCOUNT
The Company established the Variable Account on August 24, 1984 as a
separate account under Delaware law. The income, gains and losses, whether or
not realized, from assets of the Variable Account are, in accordance with the
contracts, credited to or charged against the Variable Account without regard to
other income, gains or losses of the Company. Nevertheless, all obligations
arising under the contracts are general corporate obligations of the Company.
Assets of the Variable Account may not be charged with liabilities arising out
of any other business of the Company.
The Variable Account is registered with the Commission under the
Investment Company Act of 1940 ("1940 Act") as a unit investment trust. A unit
investment trust is a type of investment company which invests its assets in
specified securities, such as the shares of one or more investment companies.
Registration under the 1940 Act does not involve supervision by the Commission
of the management or investment policies or practices of the Variable Account.
There are currently sixteen sub-accounts within the Variable Account
available under the contracts: the Small/Mid Cap Sub-Account, International
Small Cap Sub-Account, Global Equity Sub-Account, the Pasadena Growth
Sub-Account, the Equity Sub-Account, the Value Equity Sub-Account, the Growth
and Income Sub-Account, the International Growth and Income Sub-Account, the
Strategic Bond Sub-Account, the Global Government Bond Sub-Account, the
Investment Quality Bond Sub-Account, the U.S. Government Securities Sub-Account,
the Money Market Sub-Account and three Automatic Asset Allocation Sub-Accounts
(Aggressive, Moderate and Conservative). The Company reserves the right, subject
to compliance with applicable law, to add other sub-accounts, eliminate existing
sub-accounts, combine sub-accounts or transfer assets in one sub-account to
another sub-account established by the Company or an affiliated company. The
Company will not eliminate existing sub-accounts or combine sub-accounts without
the prior approval of the appropriate state or federal regulatory authorities.
NASL SERIES TRUST
The assets of each available sub-account of the Variable Account are
invested in shares of a corresponding portfolio of the Trust: the Small/Mid Cap
Trust, International Small Cap Trust, Global Equity Trust, Pasadena Growth
Trust, Equity Trust, Value Equity Trust, Growth and Income Trust, International
Growth and Income Trust, Strategic Bond Trust, Global Government Bond Trust,
Investment Quality Bond Trust, U.S. Government Securities Trust, Money Market
Trust and three Automatic Asset Allocation Trusts (Aggressive, Moderate and
Conservative). The Trust is registered under the 1940 Act as an open-end
management investment company. Each of the portfolios is diversified for
purposes of the 1940 Act, except for the Global Government Bond Trust which is
non-diversified so that it may invest more than 5% of its assets in securities
issued by a foreign government. The Trust receives investment subadvisory
services from NASL Financial Services, Inc.
The Trust currently has nine subadvisers. Fidelity Management Trust
Company provides investment subadvisory services to the Equity, Conservative
Asset Allocation, Moderate Asset Allocation and Aggressive Asset Allocation
Trusts. Goldman Sachs Asset Management provides investment subadvisory services
to the Value Equity Trust. Roger Engemann Management Co., Inc. provides
investment subadvisory services to the Pasadena Growth Trust. Wellington
Management Company provides investment subadvisory services to the Growth and
Income, Investment Quality Bond and Money Market Trusts. Salomon Brothers Asset
Management Inc provides investment subadvisory services to the U.S. Government
Securities and Strategic Bond Trusts. Oechsle International Advisors, L.P.
provides investment subadvisory services to the Global Equity and Global
Government Bond Trusts. J.P. Morgan Investment Management Inc. provides
investment subadvisory services to the International Growth and Income Trust.
Fred Alger Management, Inc. provides investment subadvisory services to the
Small/Mid Cap Trust and Founders Asset Management, Inc. provides investment
subadvisory services to the International Small Cap Trust.
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The following is a brief description of each portfolio:
Small/Mid Cap Trust. The investment objective of the Small/Mid Cap
Trust is to seek long term capital appreciation by investing at least 65% of its
total assets (except during temporary defensive periods) in small/mid cap equity
securities. As used herein small/mid cap equity securities are equity securities
of companies that, at the time of purchase, have total market capitalization
between $500 million and $5 billion.
International Small Cap Trust. The investment objective of the
International Small Cap Trust is to seek capital appreciation by investing
primarily in securities issued by foreign companies which have total market
capitalization or annual revenues of $1 billion or less. These securities may
represent companies in both established and emerging economies throughout the
world.
Global Equity Trust. The investment objective of the Global Equity
Trust is to obtain long-term capital appreciation by investing primarily in a
globally diversified portfolio of common stocks and securities convertible into
or exercisable for common stocks.
Pasadena Growth Trust. The principal investment objective of the
Pasadena Growth Trust is long-term growth of capital by emphasizing investments
in companies with rapidly growing earnings per share, some of which may be
smaller emerging growth companies.
Equity Trust. The principal investment objective of the Equity Trust is
to obtain growth of capital by investing primarily in common stocks of United
States issuers and securities convertible into or carrying the right to buy
common stocks. Current income is a secondary consideration although growth of
income may accompany growth of capital.
Value Equity Trust. The principal investment objective of the Value
Equity Trust is long-term growth of capital by investing primarily in common
stocks and securities convertible into or carrying the right to buy common
stocks.
Growth and Income Trust. The principal investment objective of the
Growth and Income Trust is to provide long-term growth of capital and income,
consistent with prudent investment risk, by investing primarily in a diversified
portfolio of common stocks of U.S. issuers which the subadviser believes are of
high quality.
International Growth and Income Trust. The investment objective of the
International Growth and Income Trust is to seek long-term growth of capital and
income by investing, under normal circumstances, at least 65% of its total
assets in equity securities of foreign issuers. The portfolio may also invest in
debt securities of corporate or sovereign issuers rated A or higher by Moody's
or S&P or, if unrated, of equivalent credit quality as determined by J.P.
Morgan. Under normal circumstances, the portfolio will be invested approximately
85% in equity securities and 15% in fixed income securities.
Strategic Bond Trust. The principal investment objective of the
Strategic Bond Trust is to seek a high level of total return consistent with
preservation of capital by giving its Subadviser broad discretion to deploy the
portfolio's assets among certain segments of the fixed-income market as the
Subadviser believes will best contribute to the achievement of the portfolio's
objective.
Global Government Bond Trust. The investment objective of the Global
Government Bond Trust is to obtain a high level of total return by placing
primary emphasis on high current income and the preservation of capital by
investing primarily in a global portfolio of high-quality, fixed-income
securities of foreign and United States governmental entities and supranational
issuers.
Investment Quality Bond Trust. The principal investment objective of
the Investment Quality Bond Trust is to provide a high level of current income
consistent with the maintenance of principal and liquidity by investing
primarily in a diversified portfolio of investment grade corporate bonds and
U.S. government bonds with intermediate to longer term maturities. The portfolio
may also invest up to 20% of its assets in non-investment grade fixed income
securities.
U.S. Government Securities Trust. The investment objective of the U.S.
Government Securities Trust is to obtain a high level of current income
consistent with preservation of capital and maintenance of liquidity, by
investing in debt obligations and mortgage-backed securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
derivative securities such as collateralized mortgage obligations backed by such
securities.
Money Market Trust. The investment objective of the Money Market Trust
is to obtain maximum current income consistent with preservation of principal
and liquidity by investing in high quality money market instruments with
maturities of 397 days or less issued primarily by United States entities.
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Automatic Asset Allocation Trusts. The investment objective of the
Automatic Asset Allocation Trusts is to obtain the highest total return
consistent with a specified level of risk tolerance -- conservative, moderate or
aggressive -- by investing primarily in domestic debt, equity and money market
securities.
* The Aggressive Asset Allocation Trust seeks the highest total return
consistent with an aggressive level of risk tolerance. The Trust attempts to
limit the decline in portfolio value in very adverse market conditions to 15%
over any twelve month period.
* The Moderate Asset Allocation Trust seeks the highest total return
consistent with a moderate level of risk tolerance. The Trust attempts to limit
the decline in portfolio value in very adverse market conditions to 10% over any
twelve month period.
* The Conservative Asset Allocation Trust seeks the highest total
return consistent with a conservative level of risk tolerance. The Trust
attempts to limit the decline in portfolio value in very adverse market
conditions to 5% over any twelve month period.
In pursuing the Strategic Bond and Investment Quality Bond Trusts'
investment objective, each portfolio expects to invest a portion of its assets
in high yield securities, commonly known as "junk bonds" which also present a
high degree of risk. The risks of these securities include price volatility and
risk of default in the payment of interest and principal. See "Risk Factors
Relating to High Yield Securities" contained in the NASL Series Trust prospectus
before investing in either Trust.
In pursuing the International Small Cap, Global Equity, Strategic Bond,
International Growth and Income and Global Government Bond Trusts' investment
objective, each portfolio may invest up to 100% of its assets in foreign
securities which may present additional risks. See "Foreign Securities" in the
NASL Series Trust prospectus before investing in any of these Trusts.
If the shares of a Trust portfolio are no longer available for
investment or in the Company's judgment investment in a Trust portfolio becomes
inappropriate in view of the purposes of the Variable Account, the Company may
eliminate the shares of a portfolio and substitute shares of another portfolio
of the Trust or another open-end registered investment company. Substitution may
be made with respect to both existing investments and the investment of future
purchase payments. However, no such substitution will be made without notice to
the contract owner and prior approval of the Commission to the extent required
by the 1940 Act.
The Company will vote shares of the Trust portfolios held in the
Variable Account at meetings of shareholders of the Trust in accordance with
voting instructions received from the persons having the voting interest under
the contracts. The number of portfolio shares for which voting instructions may
be given will be determined by the Company in the manner described below, not
more than 90 days prior to the meeting of the Trust. Trust proxy material will
be distributed to each person having the voting interest under the contract
together with appropriate forms for giving voting instructions. Portfolio shares
held in the Variable Account that are attributable to contract owners and as to
which no timely instructions are received and portfolio shares held in the
Variable Account that are beneficially owned by the Company will be voted by the
Company in proportion to the instructions received.
Prior to the maturity date, the person having the voting interest under
a contract is the contract owner and the number of votes as to each portfolio
for which voting instructions may be given is determined by dividing the value
of the investment account corresponding to the sub-account in which such
portfolio shares are held by the net asset value per share of that portfolio.
After the maturity date, the person having the voting interest under a contract
is the annuitant and the number of votes as to each portfolio for which voting
instructions may be given is determined by dividing the reserve for the contract
allocated to the sub-account in which such portfolio shares are held by the net
asset value per share of that portfolio. Generally, the number of votes tends to
decrease as annuity payments progress since the amount of reserves attributable
to a contract will usually decrease after commencement of annuity payments. The
Company reserves the right to make any changes in the voting rights described
above that may be permitted by the federal securities laws or regulations or
interpretations of these laws or regulations.
A full description of the Trust, including the investment objectives,
policies and restrictions of each of the portfolios, is contained in the
Prospectus for the Trust which accompanies this Prospectus and should be read by
a prospective purchaser before investing.
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DESCRIPTION OF THE CONTRACT
ACCUMULATION PROVISIONS
PURCHASE PAYMENTS
Purchase payments are paid to the Company at its Annuity Service
Office. The minimum initial purchase payment is $25,000. Minimum subsequent
purchase payments must be $1,000 with an exception for qualified plans where
minimum subsequent purchase payments must be $30. Purchase payments may be made
at any time. The Company may provide by separate agreement for purchase payments
to be automatically withdrawn from a contract owner's bank account on a periodic
basis. If a purchase payment would cause the contract value to exceed $1,000,000
or the contract value already exceeds $1,000,000, additional purchase payments
will be accepted only with the prior approval of the Company.
The Company may, at its option, cancel a contract at the end of any two
consecutive contract years in which no purchase payments have been made, if both
(i) the total purchase payments made over the life of the contract, less
withdrawals, are less than $2,000; and (ii) the contract value at the end of
such two year period is less than $2,000. Upon cancellation the Company will pay
the contract owner the contract value computed as of the valuation period during
which the cancellation occurs less any debt and less the annual $30
administration fee, if applicable. The amounts paid will be treated as
withdrawals for federal tax purposes and, thus, may be subject to income tax and
to a 10% penalty tax. (See "FEDERAL TAX MATTERS")
Purchase payments are allocated among the investment options in
accordance with the percentages designated by the contract owner in the
application. The contract owner may change the allocation of subsequent purchase
payments at any time upon written notice to the Company or by telephone in
accordance with the Company's telephone transfer procedures.
ACCUMULATION UNITS
The Company will establish an investment account for the contract owner
for each investment option to which such contract owner allocates purchase
payments. Purchase payments are credited to such investment accounts in the form
of accumulation units.
The number of accumulation units to be credited to each investment
account is determined by dividing the net purchase payment allocated to that
investment account by the value of an accumulation unit for that investment
account for the valuation period during which the purchase payment is received
at the Company's Annuity Service Office complete with all necessary information
or, in the case of the first purchase payment, pursuant to the procedures
described below.
Initial purchase payments received by mail will usually be credited in
the valuation period during which received at the Annuity Service Office, and in
any event not later than two business days after receipt of a properly completed
application and all information necessary for processing of the application. The
applicant will be informed of any deficiencies in an application if it cannot be
processed and the purchase payment credited within two business days after
receipt. If the deficiencies are not remedied within five business days, the
purchase payment will be returned promptly to the applicant, unless the
applicant specifically consents to the Company's retaining the purchase payment
until all necessary information is received. Initial purchase payments received
by wire transfer from broker-dealers will be credited in the valuation period
during which received where such broker-dealers have made special arrangements
with the Company for the collection and forwarding of contract applications.
VALUE OF ACCUMULATION UNITS
The value of accumulation units will vary from one valuation period to
the next depending upon the investment results of the particular sub-accounts to
which purchase payments are allocated. The value of an accumulation unit for
each sub-account was arbitrarily set at $10 for the first valuation period under
other contracts issued by the Company. The value of an accumulation unit for any
subsequent valuation period is determined by multiplying the value of an
accumulation unit for the immediately preceding valuation period by the net
investment factor for such sub-account (described below) for the valuation
period for which the value is being determined.
NET INVESTMENT FACTOR
The net investment factor is an index used to measure the investment
performance of a sub-account from one valuation period to the next. The net
investment factor for each sub-account for any valuation period is determined by
dividing (a) by (b) and subtracting (c) from the result:
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Where (a) is:
(1) the net asset value per share of a portfolio share held in
the sub-account determined at the end of the current valuation period,
plus
(2) the per share amount of any dividend or capital gain
distributions made by the portfolio on shares held in the sub-account
if the "ex-dividend" date occurs during the current valuation period.
Where (b) is:
the net asset value per share of a portfolio share held in the
sub-account determined as of the end of the immediately preceding
valuation period.
Where (c) is:
a factor representing the charges deducted from the
sub-account on a daily basis for certain administrative expenses, a
portion of the distribution expenses, and mortality and expense risks
fees. Such factor is equal on an annual basis to 1.65% (0.25% for
administrative expenses, 0.15% for distribution expenses and 1.25% for
mortality and expense risks).
The net investment factor may be greater or less than or equal to one;
therefore, the value of an accumulation unit may increase, decrease or remain
the same.
TRANSFERS AMONG INVESTMENT OPTIONS
Before the maturity date the contract owner may transfer amounts among
the investment options at any time and without charge upon written notice to the
Company or by telephone if the contract owner authorizes the Company in writing
to accept telephone transfer requests. Accumulation units will be canceled from
the investment account from which amounts are transferred and credited to the
investment account to which amounts are transferred. The Company will effect
such transfers so that the contract value on the date of the transfer will not
be affected by the transfer. The contract owner must transfer at least $300 or,
if less, the entire value of the investment account. If after the transfer the
amount remaining in the investment account is less than $100, then the Company
will transfer the entire amount instead of the requested amount. The Company
reserves the right to limit, upon notice, the maximum number of transfers a
contract owner may make to one per month or six at any time within a contract
year. In addition, the Company reserves the right to defer the transfer
privilege at any time that the Company is unable to purchase or redeem shares of
the Trust portfolios. The Company also reserves the right to modify or terminate
the transfer privilege at any time in accordance with applicable law.
TELEPHONE TRANSACTIONS
Contract owners are permitted to request transfers/redemptions by
telephone. The Company will not be liable for following instructions
communicated by telephone that it reasonably believes to be genuine. To be
permitted to request a transfer/redemption by telephone, a contract owner must
elect the option on the Application. (If a contract owner does not initially
elect an option in the Application form, they may request authorization by
executing an appropriate authorization form provided by the Company upon
request.) The Company will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine and may only be liable for
any losses due to unauthorized or fraudulent instructions where it fails to
employ its procedures properly. Such procedures include the following. Upon
telephoning a request, contract owners will be asked to provide their account
number, and if not available, their social security number. For the contract
owner's and Company's protection, all conversations with contract owners will be
tape recorded. All telephone transactions will be followed by a confirmation
statement of the transaction.
SPECIAL TRANSFER SERVICES - DOLLAR COST AVERAGING
The Company administers a Dollar Cost Averaging ("DCA") program which
enables a contract owner to pre-authorize a periodic exercise of the contractual
transfer rights described above. Contract owners entering into a DCA agreement
instruct the Company to transfer monthly a predetermined dollar amount from any
Sub-account or the one year fixed account investment option to other
Sub-accounts until the amount in the Sub-account from which the transfer is made
or the one year fixed account investment option is exhausted. The DCA program is
generally suitable for contract owners making a substantial deposit to the
contract and who desire to control the risk of investing at the top of a market
cycle. The DCA program allows such investments to be made in equal installments
over time in an effort to reduce such risk. Contract owners interested in the
DCA program may elect to participate in the program on the contract application
or by separate
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application. Contract owners may obtain a separate application and full
information concerning the program and its restrictions from their securities
dealer or the Annuity Service Office.
ASSET REBALANCING PROGRAM
The Company administers an Asset Rebalancing Program which enables a
contract owner to indicate to the Company the percentage levels he or she would
like to maintain in particular portfolios. On the last business day of every
calendar quarter, the contract owner's contract value will be automatically
rebalanced to maintain the indicated percentages by transfers among the
portfolios. The entire contract value must be included in the Asset Rebalancing
Program. Other investment programs, such as the DCA program, or other transfers
or withdrawals may not work in concert with the Asset Rebalancing Program.
Therefore, contract owners should monitor their use of these other programs and
any other transfers or withdrawals while the Asset Rebalancing Program is being
used. Contract owners interested in the Asset Rebalancing Program may obtain a
separate application and full information concerning the program and its
restrictions from their securities dealer or the Annuity Service Office.
WITHDRAWALS
Prior to the earlier of the maturity date or the death of the
annuitant, the contract owner may withdraw all or a portion of the contract
value upon written request, complete with all necessary information to the
Company's Annuity Service Office. For certain qualified contracts, exercise of
the withdrawal right may require the consent of the qualified plan participant's
spouse under the Internal Revenue Code and regulations promulgated by the
Treasury Department. In the case of a total withdrawal, the Company will pay the
contract value as of the date of receipt of the request at its Annuity Service
Office, less any applicable annual $30 administration fee, any debt and any
applicable withdrawal charge, and the contract will be canceled. In the case of
a partial withdrawal, the Company will pay the amount requested and cancel that
number of accumulation units credited to each investment account necessary to
equal the amount withdrawn from each investment account plus any applicable
withdrawal charge deducted from such investment account. (See "CHARGES AND
DEDUCTIONS")
When making a partial withdrawal, the contract owner should specify the
investment options from which the withdrawal is to be made. The amount requested
from an investment option may not exceed the value of that investment option
less any applicable withdrawal charge. If the contract owner does not specify
the investment options from which a partial withdrawal is to be made, the
withdrawal will be taken pro rata from the investment options: taking from each
investment option an amount which bears the same relationship to the total
amount withdrawn as the value of such investment option bears to the total
investment account values.
There is no limit on the frequency of partial withdrawals; however, the
amount withdrawn must be at least $300 or, if less, the entire balance in the
investment option. If after the withdrawal (and deduction of any withdrawal
charge) the amount remaining in the investment option is less than $100, the
Company will treat the partial withdrawal as a withdrawal of the entire amount
held in the investment option. If a partial withdrawal plus any applicable
withdrawal charge would reduce the contract value to less than $300, the Company
will treat the partial withdrawal as a total withdrawal of the contract value.
The amount of any withdrawal will be paid promptly, and in any event
within seven days of receipt of the request, complete with all necessary
information at the Company's Annuity Service Office, except that the Company
reserves the right to defer the right of withdrawal or postpone payments for any
period when: (1) the New York Stock Exchange is closed (other than customary
weekend and holiday closings), (2) trading on the New York Stock Exchange is
restricted, (3) an emergency exists as a result of which disposal of securities
held in the Variable Account is not reasonably practicable or it is not
reasonably practicable to determine the value of the Variable Account's net
assets, or (4) the Commission, by order, so permits for the protection of
security holders; provided that applicable rules and regulations of the
Commission shall govern as to whether the conditions described in (2) and (3)
exist.
Withdrawals from the contract may be subject to income tax and a 10%
penalty tax. Withdrawals are permitted from contracts issued in connection with
Section 403(b) qualified plans only under limited circumstances. (See "FEDERAL
TAX MATTERS")
Telephone Redemptions. The contract owner may request the option to
withdraw a portion of the contract value by telephone by completing the
application described under "Telephone Transactions" above. The Company reserves
the right to impose maximum withdrawal amounts and procedural requirements
regarding this privilege. For additional information on Telephone Redemptions
see "Telephone Transactions" above.
SPECIAL WITHDRAWAL SERVICES - SYSTEMATIC WITHDRAWAL PLAN
The Company administers a Systematic Withdrawal Plan ("SWP") which
enables a contract owner to pre-authorize a periodic exercise of the contractual
withdrawal rights described above. Contract owners entering into a SWP agreement
instruct the Company to withdraw a level dollar amount from specified investment
options on a periodic basis. The total of SWP withdrawals in a contract year is
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limited to not more than 10% of the purchase payments made to ensure that no
withdrawal charge will ever apply to a SWP withdrawal. If an additional
withdrawal is made from a contract participating in SWP, the SWP will terminate
automatically and may be reinstated only on or after the next contract
anniversary pursuant to a new application. SWP is not available to contracts
participating in the dollar cost averaging program or for which purchase
payments are being automatically deducted from a bank account on a periodic
basis. SWP withdrawals will be free of withdrawal charges. SWP withdrawals may,
however, be subject to income tax and a 10% penalty tax. (See "FEDERAL TAX
MATTERS") Contract owners interested in SWP may elect to participate in this
program on the contract application or by separate application. Contract owners
may obtain a separate application and full information concerning the program
and its restrictions from their securities dealer or the Annuity Service Office.
LOANS
The Company offers a loan privilege only to owners of contracts issued
in connection with Section 403(b) qualified plans that are not subject to Title
I of ERISA. Owners of such contracts may obtain loans using the contract as the
only security for the loan. Loans are subject to provisions of the Code and to
applicable retirement program rules (collectively, "loan rules"). Tax advisers
and retirement plan fiduciaries should be consulted prior to exercising loan
privileges.
Under the terms of the contract, the maximum loan value is equal to 80%
of the contract value, although loan rules may serve to reduce such maximum loan
value in some cases. The amount available for a loan at any given time is the
loan value less any outstanding debt. Debt equals the amount of any loans plus
accrued interest. Loans will be made only upon written request from the owner.
The Company will make loans within seven days of receiving a properly completed
loan application (applications are available from the Annuity Service Office),
subject to postponement under the same circumstances that payment of withdrawals
may be postponed. (See "WITHDRAWALS")
When an owner requests a loan, the Company will reduce the owner's
investment in the investment accounts and transfer the amount of the loan to the
loan account, a part of the Company's general account. The owner may designate
the investment accounts from which the loan is to be withdrawn. Absent such a
designation, the amount of the loan will be withdrawn from the investment
accounts in accordance with the rules for making partial withdrawals. (See
"WITHDRAWALS") The contract provides that owners may repay contract debt at any
time. Under applicable tax rules, loans generally must be repaid within five
years, repayments must be made at least quarterly and repayments must be made in
substantially equal amounts. When a loan is repaid, the amount of the repayment
will be transferred from the loan account to the investment accounts. The owner
may designate the investment accounts to which a repayment is to be allocated.
Otherwise, the repayment will be allocated in the same manner as the owner's
most recent purchase payment. On each contract anniversary, the Company will
transfer from the investment accounts to the loan account the amount by which
the debt on the contract exceeds the balance in the loan account.
The Company charges interest of 6% per year on contract loans. Loan
interest is payable in arrears and, unless paid in cash, the accrued loan
interest is added to the amount of the debt and bears interest at 6% as well.
The Company credits interest with respect to amounts held in the loan account at
a rate of 4% per year. Consequently, the net cost of loans under the contract is
2%. If on any date debt under a contract exceeds the contract value, the
contract will be in default. In such case the owner will receive a notice
indicating the payment needed to bring the contract out of default and will have
a thirty-one day grace period within which to pay the default amount. If the
required payment is not made within the grace period, the contract may be
foreclosed (terminated without value).
The amount of any debt will be deducted from the minimum death benefit.
(See "DEATH BENEFIT BEFORE MATURITY DATE") In addition, debt, whether or not
repaid, will have a permanent effect on the contract value because the
investment results of the investment accounts will apply only to the unborrowed
portion of the contract value. The longer debt is outstanding, the greater the
effect is likely to be. The effect could be favorable or unfavorable. If the
investment results are greater than the rate being credited on amounts held in
the loan account while the debt is outstanding, the contract value will not
increase as rapidly as it would have if no debt were outstanding. If investment
results are below that rate, the contract value will be higher than it would
have been had no debt been outstanding.
DEATH BENEFIT BEFORE MATURITY DATE
The following discussion applies principally to contracts that are not
issued in connection with qualified plans, i.e., a "non-qualified contract." The
requirements of the tax law applicable to qualified plans, and the tax treatment
of amounts held and distributed under such plans, are quite complex.
Accordingly, a prospective purchaser of the contract to be used in connection
with a qualified plan should seek competent legal and tax advice regarding the
suitability of the contract for the situation involved and the requirements
governing the distribution of benefits, including death benefits, from a
contract used in the plan. In particular, a prospective purchaser who intends to
use the contract in connection with a qualified plan should consider that the
contract provides a minimum death benefit (described below) that could be
characterized as an incidental death benefit. There are limits on the amount of
incidental benefits that may be provided under
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certain qualified plans and the provision of such benefits may result in
currently taxable income to plan participants. (See "FEDERAL TAX MATTERS".)
Death of Last Surviving Annuitant (Where the Annuitant Was Not an Owner)
The Company will pay the minimum death benefit, less any debt, to the
beneficiary if (1) the annuitant dies before the maturity date, (2) the
annuitant is not an owner, (3) there is no surviving co-annuitant, and (4) no
owner of the contract is a non-natural person. (If any owner of the contract is
a non-natural person, the death or change of any annuitant is treated as the
death of an owner -- see "Death of Owner") The beneficiary (1) may elect to
receive payment (either as a lump sum or in accordance with any annuity option
described in the contract) or (2) may elect to continue the contract, as its
owner, with the contract value on the date due proof of death and all required
claim forms are received, equal to the minimum death benefit. An election to
receive the minimum death benefit under an annuity option must be made within 60
days after the date on which the death benefit first becomes payable. (See
"Annuity Options") (In general, a beneficiary who continues the contract will
nonetheless be treated for federal income tax purposes as if he or she had
received the minimum death benefit.)
Death of Owner
Deceased Owner (Who was the Last-Surviving Annuitant): The Company will
pay the minimum death benefit, less any debt, to the beneficiary if (1) an owner
dies before the maturity date, (2) the deceased owner is an annuitant, and (3)
there is no surviving co-annuitant. If the contract is a non-qualified contract,
after the owner's death, the beneficiary's entire interest must be distributed
within five years unless (1) the beneficiary elects to receive his or her
interest as an annuity which begins within one year of the owner's death and is
paid over the beneficiary's life or over a period not extending beyond the
beneficiary's life expectancy or (2) the beneficiary is the deceased owner's
surviving spouse and elects to continue the contract, as its owner, with the
contract value on the date due proof of death and all required claim forms are
received, equal to the minimum death benefit. An election to receive the minimum
death benefit as an annuity must be made within 60 days after the date on which
the death benefit first becomes payable. (See "Annuity Options") If the spouse
continues the contract, the distribution rules applicable when a contract owner
dies generally will apply when that spouse, as the owner, dies. For purposes of
this paragraph, in determining the minimum death benefit, withdrawal charges
(applicable when an annuitant either dies after the first of the month following
his or her 85th birthday or when the annuitant had attained age 81 or greater on
the contract date -- see "Minimum Death Benefit") will be taken into account,
but only when the minimum death benefit is paid and only if such charges would
have applied if the payment had been made to the deceased owner at that time.
Deceased Owner (Who was Not the Last-Surviving Annuitant and There Are
No Surviving Owners): If (1) an owner dies before the maturity date, (2) any
annuitant survives, and (3) there are no surviving owners, the Company will
transfer the interest in the contract to the successor owner. If the contract is
a non-qualified contract, after the owner's death, the successor owner's entire
interest in the contract must be distributed within five years unless (1) the
successor owner elects to receive payment of the interest in the contract as an
annuity which begins within one year of the owner's death and is paid over the
successor owner's life or over a period not extending beyond the successor
owner's life expectancy or (2) the successor owner is the deceased owner's
surviving spouse and elects to continue the contract, as its owner, with the
contract value on the date due proof of death and all required claim forms are
received, equal to the interest in the contract. An election to receive the
interest in the contract as an annuity must be made within 60 days after the
date on which the death benefit first becomes payable. (See "Annuity Options")
If the spouse continues the contract, the distribution rules applicable when a
contract owner dies generally will apply when that spouse, as the owner, dies.
If the deceased Owner had not attained age 81 on the contract date, the interest
in the contract equals the contract value. If the deceased Owner had attained
age 81 on the contract date, the interest in the contract also equals the
contract value, but such interest may be subject to applicable withdrawal
charges when any amounts are actually paid. (See "Withdrawals") The successor
owner's right to the interest in the contract does not affect the annuitant
designations in the contract, although the successor owner may change such
designations after acquiring the interest in the contract.
Deceased Owner (Who was Not the Last-Surviving Annuitant and There Are
Surviving Owners): If (1) an owner dies before the maturity date, (2) any
annuitant survives, and (3) there is a surviving owner, the Company will
transfer the interest in the contract to the surviving owner. The amount of this
interest and the rights and restrictions attendant to this transfer are the same
as those described in the immediately preceding paragraph, except that
"surviving owner" should be substituted for "successor owner," wherever these
terms appear.
Non-Natural Owners: If any owner of a non-qualified contract is not an
individual, the death or change of any annuitant will be treated as the death of
an owner (who was not the last-surviving annuitant), unless the last-surviving
annuitant has actually died in which case the death will be treated as the death
of an owner (who is the last-surviving annuitant).
Application of Distributed Amounts Towards the Purchase of a New
Contract: A beneficiary, successor owner, or surviving owner, as the case may
be, may apply amounts required to be distributed towards the purchase of a new
contract. In general, if such distributed amounts are so applied, the
beneficiary, successor owner, or surviving owner will be treated for federal
income tax purposes as if he or she had received these distributed amounts.
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Minimum Death Benefit
If the last surviving annuitant dies on or before the first of the
month following his or her 85th birthday and had an attained age of less than 81
years on the contract date, the minimum death benefit will be equal to the
greater of: (a) the contract value on the date due proof of death and all
required claim forms are received at the Company's Annuity Service Office, or
(b) the excess of (i) the sum of each purchase payment accumulated daily, at the
equivalent of 5% per year, starting on the date each purchase payment is
allocated to the Contract, with a maximum accumulation of two times each
purchase payment, over (ii) the sum of each withdrawal or annuitized amount,
including any applicable withdrawal charges, accumulated daily at a rate
equivalent to 5% per year, starting as of the date of each such withdrawal or
annuitization, with a maximum accumulation of two times each such withdrawal or
annuitization amount. If the last surviving annuitant dies after the first of
the month following his or her 85th birthday and had an attained age of less
than 81 years on the contract date, the minimum death benefit will be equal to
the greater of: (a) the contract value on the date due proof of death and all
required claim forms are received at the Company's Annuity Service Office, or
(b) the excess of (i) the sum of all purchase payments over (ii) the sum of any
amounts deducted in connection with partial withdrawals. If the last surviving
annuitant dies and the Annuitant had an attained age of 81 or greater on the
contract date, the minimum death benefit payable on due proof of death and
receipt of all required claim forms will equal the amount payable on total
withdrawal.
Death benefits will be paid within seven days of receipt of due proof
of death and all required claim forms are received at the Company's Annuity
Service Office, subject to postponement under the same circumstances that
payment of withdrawals may be postponed. (See "WITHDRAWALS")
ANNUITY PROVISIONS
GENERAL
The proceeds of the contract payable on death, withdrawal or the
contract maturity date may be applied to the annuity options described below,
subject to the distribution of death benefit provisions. (See "DEATH BENEFIT
BEFORE MATURITY DATE")
Generally, annuity benefits under the contract will begin on the
maturity date. The maturity date is the date specified on the contract
specifications page, unless changed. If no date is specified, the maturity date
is the maximum maturity date described below. The contract owner may specify a
different maturity date at any time by written request at least one month before
both the previously specified and the new maturity date. The maximum maturity
date, subject to applicable state law, will be the later of the first day of the
month following the annuitant's 85th birthday or the first month following the
tenth contract anniversary. Distributions from qualified contracts may be
required before the maturity date. The Company may at its discretion permit an
extension of the maturity date. See Appendix C for contracts issued in
Pennsylvania. Maturity dates which occur at advanced ages, e.g., past age 85,
may in some circumstances have adverse income tax consequences. See "FEDERAL TAX
MATTERS."
The contract owner may select the frequency of annuity payments.
However, if the contract value at the maturity date is such that a monthly
payment would be less than $20, the Company may pay the contract value, less any
debt, in one lump sum to the annuitant on the maturity date.
ANNUITY OPTIONS
Annuity benefits are available under the contract on a fixed or
variable basis or any combination of fixed and variable bases. Upon purchase of
the contract, and on or before the maturity date, the contract owner may select
one or more of the annuity options described below on a fixed and/or variable
basis (except Option 5 which is available on a fixed basis only) or choose an
alternate form of settlement acceptable to the Company. If on the maturity date
you have not selected an annuity option, we will provide variable annuity
payments which will continue for ten years or for the life of the annuitant if
longer. Such variable payments will be based on the allocation of your contract
value among the sub-accounts at the time the first variable annuity payment is
determined as described under "Determination of Amount of the First Annuity
Payment" section below. Treasury Department regulations may preclude the
availability of certain annuity options in connection with certain qualified
contracts.
The following annuity options are guaranteed in the contract.
Option 1(a): Non-Refund Life Annuity - An annuity with payments
during the lifetime of the annuitant. No payments are
due after the death of the annuitant. Since there is
no guarantee that any minimum number of payments will
be made, an annuitant may receive only one payment if
the annuitant dies prior to the date the second
payment is due.
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Option 1(b): Life Annuity with Payments Guaranteed for 10 Years -
An annuity with payments guaranteed for 10 years and
continuing thereafter during the lifetime of the
annuitant. Since payments are guaranteed for 10
years, annuity payments will be made to the end of
such period if the annuitant dies prior to the end of
the tenth year.
Option 2(a): Joint & Survivor Non-Refund Life Annuity - An annuity
with payments during the lifetimes of the annuitant
and a designated co-annuitant. No payments are due
after the death of the last survivor of the annuitant
and co-annuitant. Since there is no guarantee that
any minimum number of payments will be made, an
annuitant or co-annuitant may receive only one
payment if the annuitant and co-annuitant die prior
to the date the second payment is due.
Option 2(b): Joint & Survivor Life Annuity with Payments
Guaranteed for 10 Years - An annuity with payments
guaranteed for 10 years and continuing thereafter
during the lifetimes of the annuitant and a
designated co-annuitant. Since payments are
guaranteed for 10 years, annuity payments will be
made to the end of such period if both the annuitant
and the co-annuitant die prior to the end of the
tenth year.
In addition to the foregoing annuity options which the Company is
contractually obligated to offer at all times, the Company currently offers the
following annuity options. The Company may cease offering the following annuity
options at any time and may offer other annuity options in the future.
Option 3: Life annuity with Payments Guaranteed for 5, 15 or 20
Years - An Annuity with payments guaranteed for 5, 15
or 20 years and continuing thereafter during the
lifetime of the annuitant. Since payments are
guaranteed for the specific number of years, annuity
payments will be made to the end of the last year of
the 5, 15 or 20 year period.
Option 4: Joint & Two-Thirds Survivor Non-Refund Life Annuity -
An annuity with full payments during the joint
lifetime of the annuitant and a designated
co-annuitant and two-thirds payments during the
lifetime of the survivor. Since there is no guarantee
that any minimum number of payments will be made, an
annuitant or co-annuitant may receive only one
payment if the annuitant and co-annuitant die prior
to the date the second payment is due.
Option 5: Period Certain Only Annuity for 5, 10, 15 or 20 years
- An annuity with payments for a 5, 10, 15 or 20 year
period and no payments thereafter.
DETERMINATION OF AMOUNT OF THE FIRST VARIABLE ANNUITY PAYMENT
The first variable annuity payment is determined by applying that
portion of the contract value used to purchase a variable annuity, measured as
of a date not more than ten business days prior to the maturity date (minus any
applicable premium taxes), to the annuity tables contained in the contract. (The
amount of the first and all subsequent fixed annuity payments is determined on
the same basis using the portion of the contract value used to purchase a fixed
annuity.) The rates contained in such tables depend upon the annuitant's age, as
adjusted, and annuity option selected. Under such tables, the longer the life
expectancy of the annuitant under any life annuity option or the duration of any
period for which payments are guaranteed under the option, the smaller will be
the amount of the first monthly variable annuity payment. The tables are based
on the 1983-a Individual Annuitant Mortality Table projected at Scale G, and
reflect an assumed interest rate of 4% per year.
ANNUITY UNITS AND THE DETERMINATION OF SUBSEQUENT VARIABLE ANNUITY PAYMENTS
Variable annuity payments subsequent to the first will be based on the
investment performance of the sub-accounts selected. The amount of such
subsequent payments is determined by dividing the amount of the first annuity
payment from each sub-account by the annuity unit value of such sub-account (as
of the same date the contract value to effect the annuity was determined) to
establish the number of annuity units which will thereafter be used to determine
payments. This number of annuity units for each sub-account is then multiplied
by the appropriate annuity unit value as of a uniformly applied date not more
than ten business days before the annuity payment is due, and the resulting
amounts for each sub-account are then totaled to arrive at the amount of the
payment to be made. The number of annuity units remains constant during the
annuity payment period.
The value of an annuity unit for each sub-account for any valuation
period is determined by multiplying the annuity unit value for the immediately
preceding valuation period by the net investment factor for that sub-account
(see "NET INVESTMENT FACTOR") for the valuation period for which the annuity
unit value is being calculated and by a factor to neutralize the assumed
interest rate.
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A 4% assumed interest rate is built into the annuity tables in the
contract used to determine the first variable annuity payment. A higher
assumption would mean a larger first annuity payment, but more slowly rising
subsequent payments when actual investment performance exceeds the assumed rate,
and more rapidly falling subsequent payments when actual investment performance
is less than the assumed rate. A lower assumption would have the opposite
effect. If the actual net investment performance is 4% annually, annuity
payments will be level.
TRANSFERS AFTER MATURITY DATE
Once variable annuity payments have begun, the contract owner may
transfer all or part of the investment upon which such payments are based from
one sub-account to another. Transfers will be made upon notice to the Company at
least 30 days before the due date of the first annuity payment to which the
change will apply. Transfers after the maturity date will be made by converting
the number of annuity units being transferred to the number of annuity units of
the sub-account to which the transfer is made, so that the next annuity payment
if it were made at that time would be the same amount that it would have been
without the transfer. Thereafter, annuity payments will reflect changes in the
value of the new annuity units. The Company reserves the right to limit, upon
notice, the maximum number of transfers a contract owner may make per contract
year to four. Once annuity payments have commenced, no transfers may be made
from a fixed annuity option to a variable annuity option or from a variable
annuity option to a fixed annuity option. In addition, the Company reserves the
right to defer the transfer privilege at any time that the Company is unable to
purchase or redeem shares of the Trust portfolios. The Company also reserves the
right to modify or terminate the transfer privilege at any time in accordance
with applicable law.
DEATH BENEFIT ON OR AFTER MATURITY DATE
If annuity payments have been selected based on an annuity option
providing for payments for a guaranteed period, and the annuitant dies on or
after the maturity date, the Company will make the remaining guaranteed payments
to the beneficiary. Any remaining payments will be made as rapidly as under the
method of distribution being used as of the date of the annuitant's death. If no
beneficiary is living, the Company will commute any unpaid guaranteed payments
to a single sum (on the basis of the interest rate used in determining the
payments) and pay that single sum to the estate of the last to die of the
annuitant and the beneficiary.
OTHER CONTRACT PROVISIONS
TEN DAY RIGHT TO REVIEW
The contract owner may cancel the contract by returning it to the
Company's Annuity Service Office or agent at any time within 10 days after
receipt of the contract. Within 7 days of receipt of the contract by the
Company, the Company will pay to the contract owner an amount equal to the sum
of (i) the difference between the purchase payments paid and the net purchase
payments and (ii) the contract value computed at the end of the valuation period
during which the contract is received by the Company. No withdrawal charge is
imposed upon return of the contract within the ten day right to review period.
The ten day right to review may vary in certain states in order to comply with
the requirements of insurance laws and regulations in such states. When the
contract is issued as an individual retirement annuity under Internal Revenue
Code Section 408, during the first 7 days of the 10 day period, the Company will
return all purchase payments if this is greater than the amount otherwise
payable.
OWNERSHIP
The contract owner is the person entitled to exercise all rights under
the contract. Prior to the maturity date, the contract owner is the person
designated in the application or as subsequently named. On and after the
maturity date, the annuitant is the contract owner, and after the death of the
annuitant, the beneficiary is the contract owner.
In the case of non-qualified contracts, ownership of the contract may
be changed or the contract collaterally assigned at any time during the lifetime
of the annuitant prior to the maturity date, subject to the rights of any
irrevocable beneficiary. Assigning a contract, or changing the ownership of a
contract, may be treated as a distribution of the contract value for Federal tax
purposes. (See "FEDERAL TAX MATTERS".) Any change of ownership or assignment
must be made in writing. Any change must be approved by the Company. Any
assignment and any change, if approved, will be effective as of the date on
which written. The Company assumes no liability for any payments made or actions
taken before a change is approved or assignment is accepted or responsibility
for the validity or sufficiency of any assignment.
In the case of qualified contracts, ownership of the contract generally
may not be transferred except by the trustee of an exempt employees' trust which
is part of a retirement plan qualified under Section 401 of the Internal Revenue
Code. Subject to the foregoing, a qualified contract may not be sold, assigned,
transferred, discounted or pledged as collateral for a loan or as security for
the performance of an obligation or for any other purpose to any person other
than the Company.
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BENEFICIARY
The beneficiary is the person, persons or entity designated in the
application or as subsequently named. The beneficiary may be changed during the
lifetime of the annuitant subject to the rights of any irrevocable beneficiary.
Any change must be made in writing and approved by the Company and, if approved,
will be effective as of the date on which written. The Company assumes no
liability for any payments made or actions taken before the change is approved.
Prior to the maturity date, if no beneficiary survives the annuitant, the
contract owner or the contract owner's estate will be the beneficiary. The
interest of any beneficiary is subject to that of any assignee. In the case of
certain qualified contracts, regulations promulgated by the Treasury Department
prescribe certain limitations on the designation of a beneficiary.
MODIFICATION
The contract may not be modified by the Company without the consent of
the contract owner, except as may be required to make it conform to any law or
regulation or ruling issued by a governmental agency or to improve the rights
and/or benefits under the contract.
COMPANY APPROVAL
The Company reserves the right to accept or reject any contract
application at its sole discretion.
MISSTATEMENT AND PROOF OF AGE, SEX OR SURVIVAL
The Company may require proof of age, sex or survival of any person
upon whose age, sex or survival any payment depends. If the age or sex of the
annuitant has been misstated, the benefits will be those that would have been
provided for the annuitant's correct age and sex. If the Company has made
incorrect annuity payments, the amount of any underpayment will be paid
immediately and the amount of any overpayment will be deducted from future
annuity payments.
FIXED ACCOUNT INVESTMENT OPTION
Securities Registration. Due to certain exemptive and exclusionary
provisions, interests in the one year fixed account investment option are not
registered under the Securities Act of 1933 ("1933 Act") and the Company's
general account is not registered as an investment company under the Investment
Company Act of 1940 ("1940 Act"). Accordingly, neither interests in the one year
fixed account investment option nor the general account are subject to the
provisions or restrictions of the 1933 Act or the 1940 Act and the staff of the
Commission has not reviewed the disclosures in the Prospectus relating thereto.
Disclosures relating to interests in the fixed account investment option and the
general account, however, may be subject to certain generally applicable
provisions of the federal securities laws relating to the accuracy of statements
made in a registration statement.
Guarantee. Pursuant to a Guarantee Agreement dated November 19, 1993
(originally entered into by NAL and assumed by Manulife in the merger),
Manulife, the ultimate parent of the Company, unconditionally guarantees to the
Company on behalf of and for the benefit of the Company and owners of fixed
annuity contracts issued by the Company that it will, on demand, make funds
available to the Company for the timely payment of contractual claims under
fixed annuity contracts. This Guarantee covers the fixed portion of the
contracts described in this Prospectus. This Guarantee may be terminated by
Manulife on notice to the Company. Termination will not affect Manulife's
continuing liability with respect to all fixed annuity contracts issued prior to
the termination of the Guarantee.
Reinsurance. Effective June 30, 1995, the Company entered into a
Reinsurance Agreement with Peoples Security Life Insurance Company ("Peoples")
pursuant to which Peoples reinsures certain amounts with respect to the fixed
account portion of the contract described in this Prospectus. Under this
Reinsurance Agreement, the Company remains liable for the contractual
obligations of the contracts' fixed account and Peoples agrees to reimburse the
Company for certain amounts and obligations in connection with the fixed
account. Peoples contractual liability runs solely to the Company, and no
contract owner shall have any right of action against Peoples. Peoples is a
wholly-owned subsidiary of Louisville, Kentucky based Providian Corporation, a
diversified financial services corporation. Peoples is rated A+ (Superior) by
A.M. Best for operating performance and financial stability and AAA by Standard
& Poor's Corporation for claims paying ability.
Investment Option. A one year fixed account investment option is
available under the contract. Under the one year fixed account investment
option, the Company guarantees the principal value of purchase payments and the
rate of interest credited to the investment account for the term of the
guarantee period. The portion of the contract value in the one year fixed
account investment option and monthly annuity payments, if selected on a fixed
basis, will reflect such interest and principal guarantees. The
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guaranteed interest rates on new amounts allocated or transferred to a fixed
investment account are determined from time-to-time by the Company in accordance
with market conditions. In no event will the guaranteed rate of interest be less
than 3%. Once an interest rate is guaranteed for a fixed investment account, it
is guaranteed for the duration of the guarantee period and may not be changed by
the Company.
Investment Accounts. Contract owners may allocate purchase payments, or
make transfers from the variable investment options, to the one year fixed
account investment option at any time prior to the maturity date. The Company
establishes a separate investment account each time the contract owner allocates
or transfers amounts to the fixed account investment option, except that amounts
allocated or transferred to the fixed account investment option on the same day
will establish a single investment account. Amounts may not be allocated to a
fixed account investment option that would extend the guarantee period beyond
the maturity date.
Renewals. At the end of a guarantee period, the contract owner may
establish a new investment account with a one year guarantee period at the then
current interest rate or transfer the amounts to a variable account investment
option, all without the imposition of any charge. In the case of renewals within
one year of the maturity date, the only fixed account investment option
available is to have interest accrued up to the maturity date at the then
current interest rate for one year guarantee periods.
If the contract owner does not specify the renewal option desired, the
Company will select the one year fixed account investment option. In the case of
a renewal within one year of the maturity date, the Company will credit interest
up to the maturity date at the then current interest rate for one year guarantee
periods.
Transfers. Prior to the maturity date, the contract owner may transfer
amounts from the fixed account investment option to the variable account
investment options at the end of the guaranteed period; however, amounts may be
transferred prior to the end of the guarantee period pursuant to the Dollar Cost
Averaging program.
Where there are multiple investment accounts within the one year fixed
account investment option, amounts must be transferred from the one year fixed
account investment option on a first-in-first-out basis.
Withdrawals. The contract owner may make total and partial withdrawals
of amounts held in the one year fixed account investment option at any time
prior to the maturity date or his or her death. Withdrawals from the fixed
account investment option will be made in the same manner and be subject to the
same limitations as set forth under "WITHDRAWALS" plus the following provisions
also apply to withdrawals from the fixed account investment option: (1) the
Company reserves the right to defer payment of amounts withdrawn from the fixed
account investment option for up to six months from the date it receives the
written withdrawal request (if a withdrawal is deferred for more than 30 days
pursuant to this right, the Company will pay interest on the amount deferred at
a rate not less than 3% per year (or such higher rate as may be required by the
applicable state or jurisdiction)); and (2) if there are multiple investment
accounts under the fixed account investment option, amounts must be withdrawn
from such accounts on a first-in-first-out basis.
If the contract owner does not specify the investment options from
which a partial withdrawal is to be taken, a partial withdrawal will be taken
from the variable account investment options until exhausted and then from the
one year fixed account investment option.
Withdrawals from the contract may be subject to income tax and a 10%
penalty tax. Withdrawals are permitted from contracts issued in connection with
Section 403(b) qualified plans only under limited circumstances. (See "FEDERAL
TAX MATTERS" below.)
Loans. The Company offers a loan privilege only to owners of contracts
issued in connection with Section 403(b) qualified plans that are not subject to
Title I of ERISA. Owners of such contracts may obtain loans using the contract
as the only security for the loan. Owners of such contracts may borrow amounts
allocated to the fixed investment account in the same manner and subject to the
same limitations as set forth under "LOANS" above.
Fixed Annuity Options. Subject to the distribution of death benefits
provisions (see "DEATH BENEFIT BEFORE MATURITY DATE" above), on death,
withdrawal or the maturity date of the contract, the proceeds may be applied to
a fixed annuity option. (See "ANNUITY OPTIONS" above) The amount of each fixed
annuity payment is determined by applying the portion of the proceeds (less any
applicable premium taxes) applied to purchase the fixed annuity to the
appropriate table in the
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contract. If the table in use by the Company is more favorable to the contract
owner, the Company will substitute that table. The Company guarantees the dollar
amount of fixed annuity payments.
CHARGES AND DEDUCTIONS
Charges and deductions under the contracts are assessed against
purchase payments, contract values or annuity payments. Currently, there are no
deductions made from purchase payments, except for premium taxes in certain
states. See "Taxes" below. In addition, there are deductions from and expenses
paid out of the assets of the Trust portfolios that are described in the
accompanying Prospectus of the Trust.
WITHDRAWAL CHARGES
If a withdrawal is made from the contract before the maturity date, a
withdrawal charge (contingent deferred sales charge) may be assessed against
amounts withdrawn attributable to purchase payments that have been in the
contract less than three complete contract years. There is never a withdrawal
charge with respect to earnings accumulated in the contract, certain other free
withdrawal amounts described below or purchase payments that have been in the
contract more than three complete contract years. In no event may the total
withdrawal charges exceed 3% of the total purchase payments made. The amount of
the withdrawal charge and when it is assessed is discussed below:
1. Each withdrawal from the contract is allocated first to the "free
withdrawal amount" and second to "unliquidated purchase payments". In any
contract year, the free withdrawal amount for that year is the greater of (1)
the excess of the contract value on the date of withdrawal over the unliquidated
purchase payments (the accumulated earnings on the contract) or (2) 10% of total
purchase payments less any prior partial withdrawals in that year. Withdrawals
allocated to the free withdrawal amount may be withdrawn without the imposition
of a withdrawal charge. The free withdrawal amount will be applied to a
requested withdrawal, first, to withdrawals from variable account investment
options and then to withdrawals from the one year fixed account investment
option.
2. If a withdrawal is made for an amount in excess of the free
withdrawal amount, the excess will be allocated to purchase payments which will
be liquidated on a first-in first-out basis. On any withdrawal request, the
Company will liquidate purchase payments equal to the amount of the withdrawal
request which exceeds the free withdrawal amount in the order such purchase
payments were made: the oldest unliquidated purchase payment first, the next
purchase payment second, etc....until all purchase payments have been
liquidated.
3. Each purchase payment or portion thereof liquidated in connection
with a withdrawal request that has been in the contract for less than three
years is subject to a withdrawal charge of 3%.
4. The withdrawal charge is deducted from the contract value remaining
after the contract owner is paid the amount requested, except in the case of a
complete withdrawal when it is deducted from the amount otherwise payable. In
the case of a partial withdrawal, the amount requested from an investment
account may not exceed the value of that investment account less any applicable
withdrawal charge.
5. There is generally no withdrawal charge on distributions made as a
result of the death of the contract owner or, if applicable, the annuitant (See
"Death Benefit Before Maturity Date -- Amount of Death Benefit"), and no
withdrawal charges are imposed on the maturity date if the contract owner
annuitizes as provided in the contract.
The amount collected from the withdrawal charge will be used to
reimburse the Company for the compensation paid to cover selling concessions to
broker-dealers, preparation of sales literature and other expenses related to
sales activity.
For examples of calculation of the withdrawal charge, see Appendix A.
REDUCTION OR ELIMINATION OF WITHDRAWAL CHARGES
The amount of the withdrawal charge on a contract may be reduced or
eliminated when sales of the contracts are made to individuals or to a group of
individuals in such a manner that results in savings of sales expenses. The
entitlement to such a reduction in the withdrawal charge will be determined by
the Company in the following manner:
1. The size and type of group to which sales are to be made will be
considered. Generally, sales expenses for a larger group are smaller than for a
smaller group because of the ability to implement large numbers of contracts
with fewer sales contacts.
2. The total amount of purchase payments to be received will be
considered. Per dollar sales expenses are likely to be less on larger purchase
payments than on smaller ones.
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3. Any prior or existing relationship with the Company will be
considered. Per contract sales expenses are likely to be less when there is a
prior or existing relationship because of the likelihood of implementing the
contract with fewer sales contacts.
4. The level of commissions paid to selling broker-dealers will be
considered. Certain broker-dealers may offer the contract in connection with
financial planning programs offered on a fee for service basis. In view of the
financial planning fees, such broker-dealers may elect to receive lower
commissions for sales of the contracts, thereby reducing the Company's sales
expenses.
5. There may be other circumstances of which the Company is not
presently aware, which could result in reduced sales expenses.
If, after consideration of the foregoing factors, it is determined that
there will be a reduction in sales expenses, the Company will provide a
reduction in the withdrawal charge. The withdrawal charge will be eliminated
when a contract is issued to an officer, director or employee (or a relative
thereof) of the Company, Manulife, the Trust or any of their affiliates. In no
event will reduction or elimination of the withdrawal charge be permitted where
such reduction or elimination will be unfairly discriminatory to any person.
ADMINISTRATION FEES
A daily fee in an amount equal to 0.25% of the value of each variable
investment account on an annual basis is deducted from each sub-account as an
administration fee. The fee is designed to compensate the Company for the cost
of providing administrative services attributable to the contracts and the
operations of the Variable Account and the Company in connection with the
contracts. This asset based administration fee will not be deducted from the
fixed account investment option. The fee will be reflected in the contract value
as a proportionate reduction in the value of each investment account. Because
the administration fee is a percentage of assets rather than a flat amount,
larger contracts will in effect pay a higher proportion of the administrative
expenses than smaller contracts.
Also, if the contract value falls below $10,000 as a result of a
partial withdrawal, the Company may deduct an annual administration fee of $30
as partial compensation for administrative expenses. The fee will be deducted on
the last day of each contract year. It will be withdrawn from each investment
option in the same proportion that the value of such investment option bears to
the contract value. If the entire contract value is withdrawn on other than the
last day of any contract year, the fee will be deducted from the amount paid.
The Company does not expect to recover from the administration fees any
amount in excess of its accumulated administrative expenses. Even though
administrative expenses may increase, the Company guarantees that it will not
increase the amount of the administration fees.
DISTRIBUTION FEE
A daily fee in an amount equal to 0.15% of the value of each variable
investment account on an annual basis is deducted from each sub-account as a
distribution fee. The fee is designed to compensate the Company for a portion
the sales expenses it incurs with respect to the contracts. This asset based
distribution fee will not be deducted from the fixed account investment option.
The fee will be reflected in the contract value as a proportionate reduction in
the value of each investment account. Because the distribution fee is a
percentage of assets rather than a flat amount, larger contracts will in effect
pay a higher proportion of sales expenses than smaller contracts. The Company
will monitor the performance of the contracts to ensure that the aggregate
amount of withdrawal charges and the distribution fee assessed under a contract
does not exceed 9% of the total purchase payments made.
MORTALITY AND EXPENSE RISK FEE
The mortality risk assumed by the Company is the risk that annuitants
may live for a longer period of time than estimated. The Company assumes this
mortality risk by virtue of annuity rates incorporated into the contract which
cannot be changed. This assures each annuitant that his longevity will not have
an adverse effect on the amount of annuity payments. Also, the Company
guarantees that if the annuitant dies before the maturity date, it will pay a
minimum death benefit. (See "DEATH BENEFIT BEFORE MATURITY DATE") The expense
risk assumed by the Company is the risk that the administration fees may be
insufficient to cover actual expenses.
To compensate it for assuming these risks, the Company deducts from
each sub-account a daily fee in an amount equal to 1.25% of the value of the
variable investment accounts on an annual basis, consisting of .8% for the
mortality risk and .45% for the expense risk. The fee will be reflected in the
contract value as a proportionate reduction in the value of each variable
investment account. The rate of the mortality and expense risk fee cannot be
increased. If the fee is insufficient to cover the actual cost of the mortality
and expense risks undertaken, the Company will bear the loss. Conversely, if the
fee proves more than sufficient, the excess will be profit to the Company and
will be available for any proper corporate purpose including, among other
things, payment of distribution expenses. The mortality and expense risk charge
is not assessed against the fixed account investment option.
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TAXES
The Company reserves the right to charge, or provide for, certain taxes
against purchase payments, contract values or annuity payments. Such taxes may
include premium taxes or other taxes levied by any government entity which the
Company determines to have resulted from the (i) establishment or maintenance of
the Variable Account, (ii) receipt by the Company of purchase payments, (iii)
issuance of the contacts, or (iv) commencement or continuance of annuity
payments under the contracts. In addition, the Company will withhold taxes to
the extent required by applicable law.
Except for residents in Pennsylvania and South Dakota, premium taxes
will be deducted from the contract value used to provide for fixed or variable
annuity payments unless required otherwise by applicable law. The amount
deducted will depend on the premium tax assessed in the applicable state. State
premium taxes currently range from 0% to 3.5% depending on the jurisdiction and
the tax status of the contract and are subject to change by the legislature or
other authority. (See "APPENDIX B: STATE PREMIUM TAXES") FOR RESIDENTS OF SOUTH
DAKOTA OR PENNSYLVANIA, THE FOLLOWING PREMIUM TAX ASSESSMENT WILL APPLY: A
premium tax will be assessed against all non-qualified purchase payments
received from contract owners who are residents of South Dakota. The rate of tax
is 1.25% for South Dakota residents. Purchase payments received for the period
October 1, 1992 through September 7, 1995 for non-qualified contracts of
Pennsylvania residents will be assessed a 2.00% premium tax; purchase payments
received on or after September 8, 1995 will not be assessed a premium tax. The
state premium tax will be collected upon payment of any withdrawal benefits,
upon any annuitization or payment of death benefits. In the states of
Pennsylvania and South Dakota, purchase payments received in connection with the
funding of a qualified plan are exempt from state premium tax.
FEDERAL TAX MATTERS
INTRODUCTION
The following discussion of the federal income tax treatment of the
contract is not exhaustive, does not purport to cover all situations, and is not
intended as tax advice. A qualified tax adviser should always be consulted with
regard to the application of law to individual circumstances. This discussion is
based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Department regulations, and interpretations existing on the date of this
Prospectus. These authorities, however, are subject to change by Congress, the
Treasury Department, and judicial decisions.
This discussion does not address state or local tax consequences
associated with the purchase of a contract. In addition, THE COMPANY MAKES NO
GUARANTEE REGARDING ANY TAX TREATMENT -- FEDERAL, STATE OR LOCAL -- OF ANY
CONTRACT OR OF ANY TRANSACTION INVOLVING A CONTRACT.
THE COMPANY'S TAX STATUS
The Company is taxed as a life insurance company under Subchapter L of
the Code. Since the operations of the Variable Account are a part of, and are
taxed with, the operations of the Company, the Variable Account is not
separately taxed as a "regulated investment company" under Subchapter M of the
Code. Under existing federal income tax laws, investment income and capital
gains of the Variable Account are not taxed to the extent they are applied to
increase reserves under a contract. Since, under the contracts, investment
income and realized capital gains of the Variable Account are automatically
applied to increase reserves, the Company does not anticipate that it will incur
any federal income tax liability attributable to the Variable Account, and
therefore the Company does not intend to make provision for any such taxes. If
the Company is taxed on investment income or capital gains of the Variable
Account, then the Company may impose a charge against the Variable Account in
order to make provision for such taxes.
TAXATION OF ANNUITIES IN GENERAL
TAX DEFERRAL DURING ACCUMULATION PERIOD
Under existing provisions of the Code, except as described below, any
increase in the contract value is generally not taxable to the contract owner or
annuitant until received, either in the form of annuity payments, as
contemplated by the contract, or in some other form of distribution. However,
this rule applies only if (1) the owner is an individual, (2) the investments of
the Variable Account are "adequately diversified" in accordance with Treasury
Department regulations, and (3) the Company, rather than the owner, is
considered the owner of the assets of the Variable Account for federal tax
purposes.
Non-Natural Owner. As a general rule, deferred annuity contracts held
by "non-natural persons" such as a corporation, trust or other similar entity,
as opposed to a natural person, are not treated as annuity contracts for federal
tax purposes. The investment income on such contracts is taxed as ordinary
income that is received or accrued by the owner of the contract during the
taxable year. There are several
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exceptions to this general rule for non-natural contract owners. First,
contracts will generally be treated as held by a natural person if the nominal
owner is a trust or other entity which holds the contract as an agent for a
natural person. However, this special exception will not apply in the case of
any employer who is the nominal owner of an annuity contract under a
non-qualified deferred compensation arrangement for its employees.
In addition, exceptions to the general rule for non-natural contract
owners will apply with respect to (1) contracts acquired by an estate of a
decedent by reason of the death of the decedent, (2) certain qualified
contracts, (3) contracts purchased by employers upon the termination of certain
qualified plans, (4) certain contracts used in connection with structured
settlement agreements, and (5) contracts purchased with a single premium when
the annuity starting date is no later than a year from purchase of the annuity
and substantially equal periodic payments are made, not less frequently than
annually, during the annuity period.
Diversification Requirements. For a contract to be treated as an
annuity for federal income tax purposes, the investments of the Variable Account
must be "adequately diversified" in accordance with Treasury Department
regulations. The Secretary of the Treasury has issued regulations which
prescribe standards for determining whether the investments of the Variable
Account are "adequately diversified." If the Variable Account failed to comply
with these diversification standards, a contract would not be treated as an
annuity contract for federal income tax purposes and the contract owner would be
taxable currently on the excess of the contract value over the premiums paid for
the contract.
Although the Company does not control the investments of the NASL
Series Trust, it expects that the Trust will comply with such regulations so
that the Variable Account will be considered "adequately diversified."
Ownership Treatment. In certain circumstances, variable annuity
contract owners may be considered the owners, for federal income tax purposes,
of the assets of the separate account used to support their contracts. In those
circumstances, income and gains from the separate account assets would be
includible in the contract owners' gross income. The Internal Revenue Service
(the "Service") has stated in published rulings that a variable contract owner
will be considered the owner of separate account assets if the owner possesses
incidents of ownership in those assets, such as the ability to exercise
investment control over the assets. In addition, the Treasury Department
announced, in connection with the issuance of regulations concerning investment
diversification, that those regulations "do not provide guidance concerning the
circumstances in which investor control of the investments of a separate account
may cause the investor, rather than the insurance company, to be treated as the
owner of the assets in the account." This announcement also stated that guidance
would be issued by way of regulations or rulings on the "extent to which
policyholders may direct their investments to particular sub-accounts [of a
separate account] without being treated as owners of the underlying assets." As
of the date of this Prospectus, no such guidance has been issued.
The ownership rights under this contract are similar to, but different
in certain respects from, those described by the Service in rulings in which it
was determined that contract owners were not owners of separate account assets.
For example, the owner of this contract has the choice of more investment
options to which to allocate premiums and contract values, and may be able to
transfer among investment options more frequently than in such rulings. These
differences could result in the contract owner being treated as the owner of the
assets of the Variable Account. In addition, the Company does not know what
standards will be set forth in the regulations or rulings which the Treasury
Department has stated it expects to issue. The Company therefore reserves the
right to modify the contract as necessary to attempt to prevent the contract
owner from being considered the owner of the assets of the Variable Account.
Delayed Maturity Dates. If the contract's scheduled maturity date is at
a time when the annuitant has reached an advanced age, e.g., past age 85, it is
possible that the contract would not be treated as an annuity. In that event,
the income and gains under the contract could be currently includible in the
owner's income.
The remainder of this discussion assumes that the contract will be
treated as an annuity contract for federal income tax purposes and that the
Company will be treated as the owner of the Variable Account assets.
TAXATION OF PARTIAL AND FULL WITHDRAWALS
In the case of a partial withdrawal, amounts received are includible in
income to the extent the contract value before the withdrawal exceeds the
"investment in the contract." In the case of a full withdrawal, amounts received
are includible in income to the extent they exceed the "investment in the
contract." For these purposes the investment in the contract at any time equals
the total of the purchase payments made under the contract to that time (to the
extent such payments were neither deductible when made nor excludible from
income as, for example, in the case of certain contributions to qualified plans)
less any amounts previously received from the contract which were not included
in income.
Other than in the case of certain qualified contracts, any amount
received as a loan under a contract, and any assignment or pledge (or agreement
to assign or pledge) any portion of the contract value, is treated as a
withdrawal of such amount or portion. The investment in
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the contract is increased by the amount includible as income with respect to
such assignment or pledge, though it is not affected by any other aspect of the
assignment or pledge (including its release). If an individual transfers an
annuity contract without adequate consideration to a person other than the
owner's spouse (or to a former spouse incident to divorce), the owner will be
taxed on the difference between the "contract value" and the "investment in the
contract" at the time of transfer. In such case, the transferee's investment in
the contract will be increased to reflect the increase in the transferor's
income.
The contract provides a death benefit that in certain circumstances may
exceed the greater of the purchase payments and the contract value. As described
elsewhere in this prospectus, the Company imposes certain charges with respect
to the death benefit. It is possible that some portion of those charges could be
treated for federal tax purposes as a partial withdrawal from the contract.
TAXATION OF ANNUITY PAYMENTS
Normally, the portion of each annuity payment taxable as ordinary
income is equal to the excess of the payment over the exclusion amount. In the
case of variable annuity payments, the exclusion amount is the "investment in
the contract" (defined above) allocated to the variable annuity option, adjusted
for any period certain or refund feature, when payments begin to be made divided
by the number of payments expected to be made (determined by Treasury Department
regulations which take into account the annuitant's life expectancy and the form
of annuity benefit selected). In the case of fixed annuity payments, the
exclusion amount is the amount determined by multiplying (1) the payment by (2)
the ratio of the investment in the contract allocated to the fixed annuity
option, adjusted for any period certain or refund feature, to the total expected
value of annuity payments for the term of the contract (determined under
Treasury Department regulations).
Once the total amount of the investment in the contract is excluded
using these ratios, annuity payments will be fully taxable. If annuity payments
cease because of the death of the annuitant and before the total amount of the
investment in the contract is recovered, the unrecovered amount generally will
be allowed as a deduction to the annuitant in his last taxable year.
TAXATION OF DEATH BENEFIT PROCEEDS
Amounts may be distributed from a contract because of the death of an
owner or an annuitant. In the case of a non-qualified contract, such death
benefit proceeds are includible in income as follows: (1) if distributed in a
lump sum, they are taxed in the same manner as a full withdrawal, as described
above, or (2) if distributed under an annuity option, they are taxed in the same
manner as annuity payments, as described above.
PENALTY TAX ON PREMATURE DISTRIBUTIONS
There is a 10% penalty tax on the taxable amount of any payment from a
non-qualified contract unless the payment is: (a) received on or after the
contract owner reaches age 59 1/2; (b) attributable to the contract owner's
becoming disabled (as defined in the tax law); (c) made to a beneficiary on or
after the death of the contract owner or, if the contract owner is not an
individual, on or after the death of the primary annuitant (as defined in the
tax law); (d) made as a series of substantially equal periodic payments (not
less frequently than annually) for the life (or life expectancy) of the
annuitant or the joint lives (or joint life expectancies) of the annuitant and
"designated beneficiary" (as defined in the tax law); (e) made under an annuity
contract purchased with a single premium when the annuity starting date is no
later than a year from purchase of the annuity and substantially equal periodic
payments are made, not less frequently than annually, during the annuity period;
and (f) made with respect to certain annuities issued in connection with
structured settlement agreements. There is also a 10% penalty tax on the taxable
amount of any payment from certain qualified contracts (but not section 457
plans). There are exceptions to this penalty tax which vary depending on the
type of qualified plan. In the case of an "Individual Retirement Annuity"
("IRA"), exceptions provide that the penalty tax does not apply to a payment (a)
received on or after the contract owner reaches age 59 1/2, (b) received on or
after the owner's death or because of the owner's disability (as defined in the
tax law), or (c) made as a series of substantially equal periodic payments (not
less frequently than annually) for the life (of life expectancy) of the owner or
the joint lives (or joint life expectancies) of the owner and "designated
beneficiary" (as defined in the tax law). These exceptions, as well as certain
others not described herein, generally apply to taxable distributions from other
qualified plans (although, in the case of plans qualified under sections 401 and
403, exception "c" above for substantially equal periodic payments applies only
if the owner has separated from service).
AGGREGATION OF CONTRACTS
In certain circumstances, the Service may determine the amount of an
annuity payment or a withdrawal from a contract that is includible in income by
combining some or all of the non-qualified contracts owned by an individual. For
example, if a person purchases a contract offered by this Prospectus and also
purchases at approximately the same time an immediate annuity, the Service may
treat the two contracts as one contract. In addition, if a person purchases two
or more deferred annuity contracts from the same insurance company (or its
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affiliates) during any calendar year, all such contracts will be treated as one
contract. The effects of such aggregation are not clear; however, it could
affect the time when income is taxable and the amount which might be subject to
the 10% penalty tax described above.
QUALIFIED RETIREMENT PLANS
The contracts are also designed for use in connection with certain
types of retirement plans which receive favorable treatment under the Code.
Numerous special tax rules apply to the participants in such qualified plans and
to the contracts used in connection with such qualified plans. These tax rules
vary according to the type of plan and the terms and conditions of the plan
itself. For example, for both withdrawals and annuity payments under certain
qualified contracts, there may be no "investment in the contract" and the total
amount received may be taxable. In addition, loans from qualified contracts,
where allowed, are subject to a variety of limitations, including restrictions
as to the amount that may be borrowed, the duration of the loan, and the manner
in which the loans must be repaid. (Owners should always consult their tax
advisors and retirement plan fiduciaries prior to exercising their loan
privileges.) Also, special rules apply to the time at which distributions must
commence and the form in which the distributions must be paid. For example,
failure to comply with minimum distribution requirements applicable to qualified
plans will result in the imposition of an excise tax. This excise tax generally
equals 50% of the amount by which a minimum required distribution exceeds the
actual distribution from the qualified plan. In the case of IRAs and certain
other qualified plans, distributions of minimum amounts (as specified in the tax
law) must generally commence by April 1 of the calendar year following the
calendar year in which the owner attains age 70 1/2. For these reasons, no
attempt is made to provide more than general information about the use of
contracts with the various types of qualified plans.
When issued in connection with a qualified plan, a contract will be
amended as generally necessary to conform to the requirements of the type of
plan. However, contract owners, annuitants, and beneficiaries are cautioned that
the rights of any person to any benefits under qualified plans may be subject to
the terms and conditions of the plans themselves, regardless of the terms and
conditions of the contract. In addition, the Company shall not be bound by terms
and conditions of qualified plans to the extent such terms and conditions
contradict the contract, unless the Company consents.
QUALIFIED PLAN TYPES
Following are brief descriptions of various types of qualified plans in
connection with which the Company may issue a contract.
Individual Retirement Annuities. Section 408 of the Code permits
eligible individuals to contribute to an individual retirement program known as
an "Individual Retirement Annuity" or "IRA." IRAs are subject to limits on the
amounts that may be contributed, the persons who may be eligible and on the time
when distributions may commence. Also, distributions from certain other types of
qualified retirement plans may be "rolled over" on a tax-deferred basis into an
IRA.
IRAs generally may not provide life insurance, but they may provide a
death benefit that equals the greater of the premiums paid and the contract's
cash value. The contract provides a death benefit that in certain circumstances
may exceed the greater of the purchase payments and the contract value. The
Company intends to ask the IRS to approve the use of the contract, as to form,
as an IRA, but there is no assurance that such approval will be granted.
Simplified Employee Pensions (SEP-IRAs). Section 408(k) of the Code
allows employers to establish simplified employee pension plans for their
employees, using the employees' IRAs for such purposes, if certain criteria are
met. Under these plans the employer may, within specified limits, make
deductible contributions on behalf of the employees to IRAs. Employers intending
to use the contract in connection with such plans should seek competent advice.
In particular, employers should consider that IRAs generally may not provide
life insurance, but they may provide a death benefit that equals the greater of
the premiums paid and the contract's cash value. The contract provides a death
benefit that in certain circumstances may exceed the greater of the purchase
payments and the contract value. The Company intends to ask the IRS to approve
use of the contract, as to form, as an IRA, but there is no assurance that such
approval will be granted.
Corporate and Self-Employed ("H.R. 10" and "Keogh") Pension and
Profit-Sharing Plans. Sections 401(a) and 403(a) of the Code permit corporate
employers to establish various types of tax-favored retirement plans for
employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as
amended, commonly referred to as "H.R. 10" or "Keogh," permits self-employed
individuals also to establish such tax-favored retirement plans for themselves
and their employees. Such retirement plans may permit the purchase of the
contracts in order to provide benefits under the plans. The contract provides a
death benefit that in certain circumstances may exceed the greater of the
purchase payments and the contract's cash value. It is possible that such death
benefit could be characterized as an incidental death benefit. There are
limitations on the amount of incidental benefits that may be provided under
pension and profit sharing plans. In addition, the provision of such benefits
may result in currently taxable income to participants. Employers intending to
use the contract in connection with such plans should seek competent advice.
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Tax-Sheltered Annuities. Section 403(b) of the Code permits public
school employees and employees of certain types of charitable, educational and
scientific organizations specified in Section 501(c)(3) of the Code to have
their employers purchase annuity contracts for them and, subject to certain
limitations, to exclude the amount of purchase payments from gross income for
tax purposes. These annuity contracts are commonly referred to as "tax-sheltered
annuities." Purchasers of the contracts for such purposes should seek competent
advice as to eligibility, limitations on permissible amounts of purchase
payments and other tax consequences associated with the contracts. In
particular, purchasers should consider that the contract provides a death
benefit that in certain circumstances may exceed the greater of the purchase
payments and the contract value. It is possible that such death benefit could be
characterized as an incidental death benefit. If the death benefit were so
characterized, this could result in currently taxable income to purchasers. In
addition, there are limitations on the amount of incidental death benefits that
may be provided under a tax-sheltered annuity. Even if the death benefit under
the contract were characterized as an incidental death benefit, it is unlikely
to violate those limits unless the purchaser also purchases a life insurance
contract as part of his or her tax-sheltered annuity plan.
Withdrawals from a tax-sheltered annuity attributable to contributions
made pursuant to a salary reduction agreement in a taxable year beginning after
December 31, 1988, may be paid only if the employee has reached age 59 1/2,
separated from service, died, become disabled, or in the case of hardship.
Amounts permitted to be distributed in the event of hardship are limited to
actual contributions; earnings thereon may not be distributed on account of
hardship. (These limitations on withdrawals do not apply to the extent the
Company is directed to transfer some or all of the contract value to the issuer
of another tax-sheltered annuity or into a Section 403(b)(7) custodial account.)
Deferred Compensation Plans of State and Local Governments and
Tax-Exempt Organizations. Section 457 of the Code permits employees of state and
local governments and tax-exempt organizations to defer a portion of their
compensation without paying current taxes. The employees must be participants in
an eligible deferred compensation plan. To the extent the contracts are used in
connection with an eligible plan, employees are considered general creditors of
the employer and the employer as owner of the contract has the sole right to the
proceeds of the contract. Loans to employees are not permitted under such plans.
Generally, with respect to purchase payments made after February 28, 1986, a
contract purchased by a state or local government or a tax-exempt organization
will not be treated as an annuity contract for federal income tax purposes.
Those who intend to use the contracts in connection with such plans should seek
competent advice.
DIRECT ROLLOVERS
If the contract is used in connection with a pension, profit-sharing,
or annuity plan qualified under sections 401(a) or 403(a) of the Code, or is a
tax-sheltered annuity under section 403(b) of the Code, any "eligible rollover
distribution" from the contract will be subject to the direct rollover and
mandatory withholding requirements enacted by Congress in 1992. An eligible
rollover distribution generally is any taxable distribution from a qualified
pension plan under section 401(a) of the Code, qualified annuity plan under
section 403(a) of the Code, or section 403(b) annuity or custodial account,
excluding certain amounts (such as minimum distributions required under section
401(a)(9) of the Code and distributions which are part of a "series of
substantially equal periodic payments" made for life or a specified period of 10
years or more).
Under these requirements, federal income tax equal to 20% of the
eligible rollover distribution will be withheld from the amount of the
distribution. Unlike withholding on certain other amounts distributed from the
contract, discussed below, the owner cannot elect out of withholding with
respect to an eligible rollover distribution. However, this 20% withholding will
not apply if, instead of receiving the eligible rollover distribution, the owner
elects to have it directly transferred to certain qualified plans. Prior to
receiving an eligible rollover distribution, the owner will receive a notice
explaining generally the direct rollover and mandatory withholding requirements
and how to avoid the 20% withholding by electing a direct transfer.
FEDERAL INCOME TAX WITHHOLDING
The Company will withhold and remit to the U.S. government a part of
the taxable portion of each distribution made under a contract unless the
distributee notifies the Company at or before the time of the distribution that
he or she elects not to have any amounts withheld. In certain circumstances, the
Company may be required to withhold tax, as explained above. The withholding
rates applicable to the taxable portion of periodic annuity payments (other than
eligible rollover distributions) are the same as the withholding rates generally
applicable to payments of wages. In addition, the withholding rate applicable to
the taxable portion of non-periodic payments (including withdrawals prior to the
maturity date) is 10%. As discussed above, the withholding rate applicable to
eligible rollover distributions is 20%.
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GENERAL MATTERS
TAX DEFERRAL
The status of the contract as an annuity generally allows all earnings
on the underlying investments to be tax-deferred until withdrawn or until
annuity payments begin. (See "FEDERAL TAX MATTERS") This tax deferred treatment
may be beneficial to contract owners in building assets in a long-term
investment program.
PERFORMANCE DATA
From time to time the Variable Account may publish advertisements
containing performance data relating to its sub-accounts. For periods prior to
April 1, 1993, performance data will be hypothetical figures based on the
assumption that a contract offered by this Prospectus was issued when the
sub-accounts first became available for investment under other contracts offered
by the Company. The sub-accounts may advertise both "standardized" and
"non-standardized" total return figures, although standardized figures will
always accompany non-standardized figures. Standardized performance data will
consist of total return quotations, which will always include quotations for
recent one year and, when applicable, five and ten year periods and, where less
than ten years, for the period subsequent to the date each sub-account first
became available for investment. Such quotations for such periods will be the
average annual rates of return required for an initial purchase payment of
$1,000 to equal the actual contract value attributable to such purchase payment
on the last day of the period, after reflection of all charges. Standardized
total return figures will be quoted assuming redemption at the end of the
period. Such figures may be accompanied by non-standardized total return figures
that are calculated on the same basis as the standardized returns except that
the calculations assume no redemption at the end of the period. In addition to
the non-standardized returns, each of the sub-accounts may from time to time
quote aggregate non-standardized total returns for other time periods. Except as
noted above, performance figures used by the Variable Account are based on the
actual historical performance of its sub-accounts for specified periods, and the
figures are not intended to indicate future performance. More detailed
information on the computations is set forth in the Statement of Additional
Information.
FINANCIAL STATEMENTS
Financial Statements for the Variable Account and the Company are
contained in the Statement of Additional Information.
ASSET ALLOCATION AND TIMING SERVICES
The Company is aware that certain third parties are offering asset
allocation and timing services in connection with the contracts. In certain
cases the Company has agreed to honor transfer instructions from such asset
allocation and timing services where it has received powers of attorney, in a
form acceptable to it, from the contract owners participating in the service.
THE COMPANY DOES NOT ENDORSE, APPROVE OR RECOMMEND SUCH SERVICES IN ANY WAY AND
CONTRACT OWNERS SHOULD BE AWARE THAT FEES PAID FOR SUCH SERVICES ARE SEPARATE
AND IN ADDITION TO FEES PAID UNDER THE CONTRACTS.
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Section 830.105 of the Texas Government Code permits participants in
the Texas Optional Retirement Program ("ORP") to withdraw their interest in a
variable annuity contract issued under the ORP only upon (1) termination of
employment in the Texas public institutions of higher education, (2) retirement,
(3) death, or (4) the participant's attainment of age 70 1/2. Accordingly,
before any amounts may be distributed from the contract, proof must be furnished
to the Company that one of these four events has occurred. The foregoing
restrictions on withdrawal do not apply in the event a participant in the ORP
transfers the contract value to another contract or another qualified custodian
during the period of participation in the ORP. Loans are not available under
contracts subject to the ORP.
DISTRIBUTION OF CONTRACTS
NASL Financial Services, Inc. ("NASL Financial"), 116 Huntington
Avenue, Boston, Massachusetts 02116, a wholly-owned subsidiary of the Company,
is the principal underwriter of the contracts in addition to providing advisory
services to the Trust. NASL Financial is a broker-dealer registered under the
Securities Exchange Act of 1934 ("1934 Act") and a member of the National
Association of Securities Dealers, Inc. ("NASD"). NASL Financial has entered
into a non-exclusive promotional agent agreement with Wood Logan Associates,
Inc. ("Wood Logan"). Wood Logan is a broker-dealer registered under the 1934 Act
and a member of the NASD. Wood Logan is a wholly owned subsidiary of a holding
company that is 85% owned by Manulife and approximately 15% owned by the
principals of Wood Logan. Sales of the contracts will be made by registered
representatives of broker-dealers authorized by NASL Financial to sell the
contracts. Such registered representatives will also be licensed insurance
agents of the Company. Under the promotional agent agreement, Wood Logan will
30
<PAGE> 31
recruit and provide sales training and licensing assistance to such registered
representatives. In addition, Wood Logan will prepare sales and promotional
materials for the Company's approval. NASL Financial will pay distribution
compensation to selling brokers in varying amounts which under normal
circumstances are not expected to exceed 1% of purchase payments plus 1% of the
contract value per year commencing one year after each initial purchase payment.
NASL Financial may from time to time pay additional compensation pursuant to
promotional contests. Additionally, in some circumstances, NASL Financial will
provide reimbursement of certain sales and marketing expenses. NASL Financial
will pay the promotional agent for providing marketing support for the
distribution of the contracts.
CONTRACT OWNER INQUIRIES
All contract owner inquiries should be directed to the Company's
Annuity Service Office at P.O. Box 9230, Boston, Massachusetts 02205-9230.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account is a party
or to which the assets of the Variable Account are subject. Neither the Company
nor NASL Financial are involved in any litigation that is of material importance
in relation to their total assets or that relates to the Variable Account.
OTHER INFORMATION
A registration statement has been filed with the Commission under the
Securities Act of 1933, as amended, with respect to the contracts described in
this Prospectus. Not all the information set forth in the registration
statement, amendments and exhibits thereto has been included in this Prospectus.
Statements contained in this Prospectus or the Statement of Additional
Information concerning the content of the contracts and other legal instruments
are only summaries. For a complete statement of the terms of these documents,
reference should be made to the instruments filed with the Commission.
<TABLE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<S> <C>
General Information and History..................................... 3
Performance Data.................................................... 3
Services
Independent Accountants...................................... 6
Servicing Agent.............................................. 6
Principal Underwriter........................................ 6
Cancellation of Contract..................................... 6
Financial Statements................................................ 7
</TABLE>
31
<PAGE> 32
APPENDIX A
EXAMPLES OF CALCULATION OF WITHDRAWAL CHARGE
<TABLE>
EXAMPLE 1 - Assume a single payment of $50,000 is made into the contract, no
transfers are made, no additional payments are made and there are no partial
withdrawals. The table below illustrates four examples of the withdrawal charges
that would be imposed if the contract is completely withdrawn, based on
hypothetical contract values.
<CAPTION>
WITHDRAWAL
HYPOTHETICAL FREE PURCHASE CHARGE
CONTRACT CONTRACT WITHDRAWAL PAYMENTS ----------------------
YEAR VALUE AMOUNT LIQUIDATED PERCENT AMOUNT
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 55,000 5,000(a) 50,000 3% 1,500
2 50,500 5,000(b) 45,500 3% 1,365
3 60,000 10,000(c) 50,000 3% 1,500
4 70,000 20,000(d) 50,000 0% 0
<FN>
(a) During any contract year the free withdrawal amount is the greater of
accumulated earnings, or 10% of the total purchase payments made under
the contract less any prior partial withdrawals in that contract year.
In the first contract year the earnings under the contract and 10% of
purchase payments both equal $5,000. Consequently, on total withdrawal
$5,000 is withdrawn free of the withdrawal charge, the entire $50,000
purchase payment is liquidated and the withdrawal charge is assessed
against such liquidated purchase payment (contract value less free
withdrawal amount).
(b) In the example for the second contract year, the accumulated earnings
of $500 is less than 10% of purchase payments, therefore the free
withdrawal amount is equal to 10% of purchase payments ($50,000 X 10% =
$5,000) and the withdrawal charge is only applied to purchase payments
liquidated (contract value less free withdrawal amount).
(c) In the example for the third contract year, the accumulated earnings of
$10,000 is greater than 10% of purchase payments ($5,000), therefore
the free withdrawal amount is equal to the accumulated earnings of
$10,000 and the withdrawal charge is applied to the purchase payments
liquidated (contract value less free withdrawal amount).
(d) There is no withdrawal charge on any purchase payments liquidated that
have been in the contract for at least 3 years.
</TABLE>
<TABLE>
EXAMPLE 2 - Assume a single payment of $50,000 is made into the contract, no
transfers are made, no additional payments are made and there are a series of
four partial withdrawals made during the third contract year of $2,000, $5,000,
$7,000, and $8,000.
<CAPTION>
WITHDRAWAL
HYPOTHETICAL PARTIAL FREE PURCHASE CHARGE
CONTRACT WITHDRAWAL WITHDRAWAL PAYMENTS --------------------
VALUE REQUESTED AMOUNT LIQUIDATED PERCENT AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
a) 65,000 2,000 15,000 0 3% 0
b) 49,000 5,000 3,000 2,000 3% 60
c) 52,000 7,000 4,000 3,000 3% 90
d) 44,000 8,000 0 8,000 3% 240
<FN>
(a) The free withdrawal amount during any contract year is the greater of
the contract value less the unliquidated purchase payments (accumulated
earnings), or 10% of purchase payments less 100% of all prior
withdrawals in that contract year. For the first example, accumulated
earnings of $15,000 is the free withdrawal amount since it is greater
than 10% of purchase payments less prior withdrawals ($5,000-0). The
amount requested ($2,000) is less than the free withdrawal amount so no
purchase payments are liquidated and no withdrawal charge applies.
(b) The contract has negative accumulated earnings ($49,000-$50,000), so
the free withdrawal amount is limited to 10% of purchase payments less
all prior withdrawals. Since $2,000 has already been withdrawn earlier
in the current contract year, the remaining free withdrawal amount
during the third contract year is $3,000. The $5,000 partial withdrawal
will consist
</TABLE>
32
<PAGE> 33
of $3,000 free of withdrawal charge, and the remaining $2,000 will be
subject to a withdrawal charge and result in purchase payments being
liquidated. The remaining unliquidated purchase payments are $48,000.
(c) The contract has increased in value to $52,000. The unliquidated
purchase payments are $48,000 so the accumulated earnings are $4,000,
which is greater than 10% of purchase payments less prior withdrawals
($5,000-$2,000-$5,000 less than 0). Hence the free withdrawal amount is
$4,000. Therefore, $3,000 of the $7,000 partial withdrawal will be
subject to a withdrawal charge and result in purchase payments being
liquidated. The remaining unliquidated purchase payments are $45,000.
(d) The free withdrawal amount is zero since the contract has negative
accumulated earnings ($44,000-$45,000) and the full 10% of purchase
payments ($5,000) has already been utilized. The full amount of $8,000
will result in purchase payments being liquidated subject to a
withdrawal charge. At the beginning of the next contract year the full
10% of purchase payments would be available again for withdrawal
requests during that year.
APPENDIX B
STATE PREMIUM TAXES
Premium taxes vary according to the state and are subject to change. In
many jurisdictions there is no tax at all. For current information, a tax
adviser should be consulted.
<TABLE>
<CAPTION>
TAX RATE
QUALIFIED NON-QUALIFIED
STATE CONTRACTS CONTRACTS
- --------------------------------------------------------------------------------
<S> <C> <C>
CALIFORNIA ............................... .50% 2.35%
DISTRICT OF COLUMBIA ..................... 2.25% 2.25%
KANSAS ................................... .00% 2.00%
KENTUCKY ................................. 2.00% 2.00%
MAINE .................................... .00% 2.00%
MICHIGAN ................................. .00075% .00075%
NEVADA ................................... .00% 3.50%
PUERTO RICO .............................. 1.00% 1.00%
SOUTH DAKOTA ............................. .00% 1.25%
TEXAS .................................... .04% .04%
WEST VIRGINIA ............................ 1.00% 1.00%
WYOMING .................................. .00% 1.00%
</TABLE>
33
<PAGE> 34
APPENDIX C
<TABLE>
For all contracts issued in Pennsylvania the maximum maturity age based upon the
issue age of the annuitant is as follows:
<CAPTION>
ISSUE AGE MAXIMUM MATURITY AGE
- ----------------------------------------------------------------------
<S> <C>
70 or less 85
71-75 86
76-80 88
81-85 90
86-90 93
91-93 96
94-95 98
96-97 99
98-99 101
100-101 102
102 103
103 104
104 105
105 106
</TABLE>
It is required that the annuitant exercise a settlement annuity
option no later than the maximum maturity age stated above. For example an
annuitant age 60 at issue must exercise a settlement option prior to the
attainment of age 86. The Company will use the issue age of the youngest named
annuitant in the determination of the required settlement option date.
If contracts are issued with annuitants over age 96, a withdrawal
charge could be imposed if they terminate the contract rather than elect a
settlement option upon attainment of the maximum maturity age. This is a result
of the restrictions by Pennsylvania in combination with the 3-year withdrawal
charge schedule of the contract.
34
<PAGE> 35
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
NASL VARIABLE ACCOUNT
- --------------------------------------------------------------------------------
OF
NORTH AMERICAN SECURITY
LIFE INSURANCE COMPANY
FLEXIBLE PURCHASE PAYMENT INDIVIDUAL DEFERRED
COMBINATION FIXED AND VARIABLE ANNUITY CONTRACT
NON-PARTICIPATING
This Statement of Additional Information is not a Prospectus. It
contains information in addition to that described in the Prospectus and should
be read in conjunction with the Prospectus dated the same date as this Statement
of Additional Information. The Prospectus may be obtained by writing North
American Security Life Insurance Company ("the Company") at the Annuity Service
Office, P.O. Box 9230, Boston, Massachusetts 02205-9230 or telephoning (617)
266-6008.
The date of this Statement of Additional Information is May 1, 1996.
North American Security Life Insurance Company
116 Huntington Avenue
Boston, Massachusetts 02116
(617) 266-6008
VV.SAI596
<PAGE> 36
<TABLE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<S> <C>
General Information and History.......................................... 3
Performance Data......................................................... 3
Services
Independent Accountants........................................... 6
Servicing Agent................................................... 6
Principal Underwriter............................................. 6
Cancellation of Contract.......................................... 6
Financial Statements..................................................... 7
</TABLE>
2
<PAGE> 37
GENERAL INFORMATION AND HISTORY
The NASL Variable Account ("Variable Account") is a separate investment
account of the Company, a stock life insurance company organized under the laws
of Delaware in 1979. The ultimate parent of the Company is The Manufacturers
Life Insurance Company ("Manulife"), a Canadian mutual life insurance Company
based in Toronto, Canada. Prior to January 1, 1996, the Company was a wholly
owned subsidiary of North American Life Assurance Company ("NAL"), a Canadian
mutual life insurance company. On January 1, 1996 NAL and Manulife merged with
the combined company retaining the Manulife name.
PERFORMANCE DATA
Each of the sub-accounts may in its advertising and sales materials
quote total return figures. For periods prior to April 1, 1993, performance data
will be hypothetical figures based on the assumption that a contract offered by
the Prospectus was issued when the sub-accounts first became available for
investment under other contracts offered by the Company. The sub-accounts may
advertise both "standardized" and "non-standardized" total return figures,
although standardized figures will always accompany non-standardized figures.
Such figures will always include the average annual total return for recent one
year and, when applicable, five and ten year periods and, where less than ten
years, the period since the sub-account first became available for investment.
Where the period since inception is less than one year, the total return quoted
will be the aggregate return for the period. The average annual total return is
the average annual compounded rate of return that equates a purchase payment to
the market value of such purchase payment on the last day of the period for
which such return is calculated. The aggregate total return is the percentage
change (not annualized) that equates a purchase payment to the market value of
such purchase payment on the last day of the period for which such return is
calculated. For purposes of the calculations it is assumed that an initial
payment of $1,000 is made on the first day of the period for which the return is
calculated. In calculating standardized return figures, all recurring charges
(all asset charges (mortality and expense risk fees, administrative fees and
distribution fees)) are reflected, and the asset charges are reflected in
changes in unit values. Standardized total return figures will be quoted
assuming redemption at the end of the period. Such figures may be accompanied by
non-standardized total return figures that are calculated on the same basis as
the standardized returns except that the calculations assume no redemption at
the end of the period. The Company believes such non-standardized figures are
useful to contract owners who wish to assess the performance of an ongoing
contract.
3
<PAGE> 38
<TABLE>
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN FIGURES
CALCULATED AS OF DECEMBER 31, 1995
<CAPTION>
============================================================================================================
TRUST PORTFOLIO 1 YEAR 5 YEAR SINCE INCEPTION OR INCEPTION DATE
10 YEARS, WHICHEVER
IS SHORTER
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Global Equity 3.04% 8.47% 6.30% 3/18/88
- ------------------------------------------------------------------------------------------------------------
Pasadena Growth 21.46% N/A 2.07% 12/11/92
- ------------------------------------------------------------------------------------------------------------
Equity 37.46% 14.13% 11.87+% 6/18/85
- ------------------------------------------------------------------------------------------------------------
Value Equity 18.67% N/A 10.04% 2/19/93
- ------------------------------------------------------------------------------------------------------------
Growth and Income 24.09% N/A 11.21% 4/23/91
- ------------------------------------------------------------------------------------------------------------
Int'l Growth & Income 2.43++% N/A N/A 1/09/95
- ------------------------------------------------------------------------------------------------------------
Strategic Bond 14.28% N/A 4.39% 2/19/93
- ------------------------------------------------------------------------------------------------------------
Global Government Bond 18.17% 8.56% 7.35% 3/18/88
- ------------------------------------------------------------------------------------------------------------
Investment Quality 14.54% N/A 7.67% 4/23/91
Bond*
- ------------------------------------------------------------------------------------------------------------
U.S. Government 10.69% 6.49% 6.76% 5/01/89
Securities**
- ------------------------------------------------------------------------------------------------------------
Money Market 1.09% 2.54% 3.89+% 6/18/85
- ------------------------------------------------------------------------------------------------------------
Aggressive Asset 17.77% 10.51% 6.55% 8/03/89
Allocation
- ------------------------------------------------------------------------------------------------------------
Moderate Asset 15.71% 9.58% 6.16% 8/03/89
Allocation
- ------------------------------------------------------------------------------------------------------------
Conservative Asset 13.15% 8.21% 5.56% 8/03/89
Allocation
============================================================================================================
<FN>
+ 10 Years
++ Aggregate total return from January 9, 1995 to December 31, 1995
</TABLE>
4
<PAGE> 39
<TABLE>
NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURN FIGURES
CALCULATED AS OF DECEMBER 31, 1995
<CAPTION>
============================================================================================================
TRUST PORTFOLIO 1 YEAR 5 YEAR SINCE INCEPTION OR INCEPTION DATE
10 YEARS, WHICHEVER
IS SHORTER
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Global Equity 5.92% 8.47% 6.30% 3/18/88
- ------------------------------------------------------------------------------------------------------------
Pasadena Growth 24.46% N/A 2.99% 12/11/92
- ------------------------------------------------------------------------------------------------------------
Equity 40.46% 14.13% 11.87+% 6/18/85
- ------------------------------------------------------------------------------------------------------------
Value Equity 21.67% N/A 10.91% 2/19/93
- ------------------------------------------------------------------------------------------------------------
Growth and Income 27.09% N/A 11.21% 4/23/91
- ------------------------------------------------------------------------------------------------------------
Int'l Growth & Income 5.29++% N/A N/A 1/09/95
- ------------------------------------------------------------------------------------------------------------
Strategic Bond 17.28% N/A 5.34% 2/19/93
- ------------------------------------------------------------------------------------------------------------
Global Government Bond 21.17% 8.56% 7.35% 3/18/88
- ------------------------------------------------------------------------------------------------------------
Investment Quality 17.54% N/A 7.67% 4/23/91
Bond*
- ------------------------------------------------------------------------------------------------------------
U.S. Government 13.69% 6.49% 6.76% 5/01/89
Securities**
- ------------------------------------------------------------------------------------------------------------
Money Market 3.91% 2.54% 3.89+% 6/18/85
- ------------------------------------------------------------------------------------------------------------
Aggressive Asset 20.77% 10.51% 6.55% 8/03/89
Allocation
- ------------------------------------------------------------------------------------------------------------
Moderate Asset 18.71% 9.58% 6.16% 8/03/89
Allocation
- ------------------------------------------------------------------------------------------------------------
Conservative Asset 16.15% 8.21% 5.56% 8/03/89
Allocation
============================================================================================================
<FN>
+ 10 Years
++ Aggregate total return from January 9, 1995 to December 31, 1995
* Because the Investment Quality Bond Trust changed its subadviser and
investment objective effective April 23, 1991, the Company has elected to quote
performance for the Investment Quality Bond Sub-account only since the date of
change in order to quote returns representative of its current objective and
produced by its current portfolio manager. Per share information concerning the
period prior to the change appears in the Trust's Prospectus. Average annual
total rates of return for the one, five, and ten year periods for the
sub-account are available upon request.
** The U.S. Government Securities Sub-account commenced operations on
March 18, 1988 by investing in shares of the Convertible Securities Trust. That
Trust changed its investment objective and its investment Subadviser effective
May 1, 1989, pursuant to a vote of its shareholders. In view of the change in
investment objective and portfolio manager, the U.S. Government Securities
Sub-account has elected to quote performance only since the date of the change
in order to quote returns representative of its current objective and produced
by its current portfolio manager. Per share information concerning the period
prior to the change appears in the Trust's Prospectus. Average annual total
rates of return for the one, five, and ten year periods for the sub-account are
available upon request.
</TABLE>
In addition to the non-standardized returns quoted above, each of the
sub-accounts may from time to time quote aggregate non-standardized total
returns calculated in the same manner as set forth above for other time periods.
From time to time the Trust may include
5
<PAGE> 40
in its advertising and sales literature general discussions of economic
theories, including but not limited to, discussions on how demographic and
political trends can affect the financial markets. Further, the Trust may also
include in its advertising and sales literature specific information on each of
the Trust's subadvisers, including but not limited to, research capabilities of
a subadviser, assets under management, information relating to other clients of
a subadviser, and other generalized information.
SERVICES
INDEPENDENT ACCOUNTANTS
The financial statements of the Company and the Variable Account
included in this Statement of Additional Information have been examined by
Coopers & Lybrand, L.L.P., certified public accountants, as indicated in their
reports in this Statement of Additional Information, and are included herein in
reliance upon such reports and upon the authority of such accountants as experts
in accounting and auditing.
The financial statements of the Company which are included in the
Statement of Additional Information should be considered only as bearing on the
ability of the Company to meet its obligations under the contracts. They should
not be considered as bearing on the investment performance of the assets held in
the Variable Account.
SERVICING AGENT
Vantage Computer Systems, Inc. ("Vantage") provides to the Company a
computerized data processing recordkeeping system for variable annuity
administration. Vantage provides various daily, semimonthly, monthly, semiannual
and annual reports including: daily updates on accumulation unit values,
variable annuity participants and transactions, agent production and
commissions; semimonthly commission statements; monthly summaries of agent
production and daily transaction reports; semiannual statements for contract
owners; and annual contract owner tax reports. Vantage receives approximately $7
per policy per year, plus certain other fees paid by the Company for the
services provided.
PRINCIPAL UNDERWRITER
NASL Financial Services, Inc., a wholly-owned subsidiary of the
Company, serves as principal underwriter of the contracts. Contracts are offered
on a continuous basis. The aggregate dollar amount of underwriting commissions
paid to NASL Financial Services, Inc. in 1995, 1994 and 1993 were $68,782,161,
$69,999,469 and $60,174,411 respectively. The amounts retained by NASL Financial
Services, Inc. during such periods were $ 0, $0 and $0, respectively.
CANCELLATION OF CONTRACT
The Company may, at its option, cancel a contract at the end of any two
consecutive contract years in which no purchase payments by or on behalf of the
contract owner have been made, if both (i) the total purchase payments made for
the contract, less any withdrawals, are less than $2,000; and (ii) the contract
value at the end of such two year period is less than $2,000. The Company, as a
matter of administrative practice, will attempt to notify a contract owner prior
to such cancellation in order to allow the contract owner to make the necessary
purchase payment to keep the contract in force.
6
<PAGE> 41
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY (A Wholly-Owned
Subsidiary of North American Life Assurance
Company of North York, Canada)
------------
FINANCIAL STATEMENTS
For the years ended
December 31, 1995, 1994 and 1993
<PAGE> 42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholder of North American Security
Life Insurance Company:
We have audited the accompanying statements of admitted assets, liabilities,
capital and surplus of North American Security Life Insurance Company (a
wholly-owned subsidiary of North American Life Assurance Company of North York,
Canada) as of December 31, 1995 and 1994, and the related statements of
operations, capital and surplus, and cash flows for the three years ended
December 31, 1995, 1994 and 1993. 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 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. 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 admitted assets, liabilities, capital and surplus of
North American Security Life Insurance Company as of December 31, 1995 and 1994,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1995 in conformity with accounting practices
prescribed or permitted by the Insurance Department of the State of Delaware,
which practices are considered to be generally accepted accounting principles
for wholly-owned stock life subsidiaries of mutual life insurance companies.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The information contained in Schedule 1 -
Selected Financial Data, is presented to comply with the NAIC's Annual Statement
Instructions and is not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 23, 1996
<PAGE> 43
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NORTH AMERICAN LIFE ASSURANCE COMPANY
OF NORTH YORK, CANADA)
<TABLE>
STATEMENTS OF ADMITTED ASSETS, LIABILITIES, CAPITAL AND SURPLUS
December 31, 1995 and 1994
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
ASSETS
Investments
Bonds $ 16,281,452 $ 333,973,085
Mortgages -- 115,429,834
Real estate 4,847,164 4,745,559
Common stock 20,097,789 11,039,222
Policy loans -- 2,579,308
Cash and short-term investments 1,797,230 101,578,176
-------------- --------------
Total investments 43,023,635 569,345,184
Accrued investment income 431,415 7,197,833
Other assets 4,320,909 2,427,102
Separate account assets 4,914,727,917 3,661,278,295
-------------- --------------
Total assets $4,962,503,876 $4,240,248,414
============== ==============
LIABILITIES
Aggregate reserves 1,931,894 519,092,606
Transfers from separate account, net (156,458,903) (148,035,998)
Borrowed money 107,865,148 100,023,562
Accrued interest on surplus note 3,248,219 1,648,219
Payable to Parent 3,033,665 --
Funds held account from reinsurers 9,000,000 12,000,000
Asset valuation reserve 2,895,914 5,536,860
Interest maintenance reserve -- 2,494,101
Bank overdraft 8,606,730 9,547,533
Amounts payable on reinsurance ceded 7,256,229 --
Payable to Parent on reinsurance ceded -- 8,577,268
Other liabilities 10,239,069 8,677,836
Separate account liabilities 4,914,727,917 3,661,278,295
-------------- --------------
Total liabilities 4,912,345,882 4,180,840,282
CAPITAL AND SURPLUS
Common stock (Shares authorized: 3,000;
issued and outstanding 2,600; par value $1,000) 2,600,000 2,600,000
Surplus note payable to Parent 20,000,000 20,000,000
Paid-in capital in excess of par value 110,633,000 110,633,000
Unassigned deficit (83,075,006) (73,824,868)
-------------- --------------
Total capital and surplus 50,157,994 59,408,132
-------------- --------------
Total liabilities, capital and surplus $4,962,503,876 $4,240,248,414
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements
2
<PAGE> 44
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NORTH AMERICAN LIFE ASSURANCE COMPANY
OF NORTH YORK, CANADA)
<TABLE>
STATEMENTS OF OPERATIONS
December 31, 1995, 1994 and 1993
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues
Annuity considerations and deposits $ 991,551,945 $1,139,953,302 $1,255,219,443
Net investment income 35,909,722 30,559,559 27,851,126
Commissions and expense allowances on
reinsurance ceded 14,676,544 7,019,266 586,983
Experience refund on reinsurance ceded 3,901,633 4,967,753 --
Reserve adjustments on reinsurance (48,222,552) (6,023,746) (23,681,983)
-------------- -------------- --------------
997,817,292 1,176,476,134 1,259,975,569
-------------- -------------- --------------
Expenses
Annuity benefits 269,688,906 206,710,232 195,064,882
Increase (decrease) in reserves (517,160,712) 146,552,124 5,337,935
Increase in separate account liability 415,529,185 732,768,257 971,871,375
Commissions 73,593,478 81,981,046 82,137,269
General expenses 22,872,812 19,253,764 13,475,040
Interest expense 8,980,132 4,599,441 456,196
Recapture fee on reinsurance ceded 1,445,889 8,029,909 13,300
Initial consideration on reinsurance ceded 727,522,634 -- --
-------------- -------------- --------------
1,002,472,324 1,199,894,773 1,268,355,997
Loss before federal income tax provision and
realized capital losses (4,655,032) (23,418,639) (8,380,428)
Federal income tax provision -- 6,415 193,000
-------------- -------------- --------------
Loss after federal income tax provision (4,655,032) (23,425,054) (8,573,428)
Realized capital (losses) (2,632,953) (7,029,018) (2,104,462)
-------------- -------------- --------------
Net loss $ (7,287,985) $ (30,454,072) $ (10,677,890)
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements
3
<PAGE> 45
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NORTH AMERICAN LIFE ASSURANCE COMPANY
OF NORTH YORK, CANADA)
<TABLE>
STATEMENTS OF CAPITAL AND SURPLUS
For the years ended December 31, 1995, 1994 and 1993
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Capital and Surplus - beginning of the year $59,408,132 $51,722,525 $35,773,897
Net loss (7,287,985) (30,454,072) (10,677,890)
Change in net unrealized capital gains (losses) 636,335) 3,514,108 (1,198,895)
Change in asset valuation reserve 2,640,946 1,976,033 (5,847,867)
Increase in non-admitted assets (958,941) (1,859,181) (1,326,720)
Issuance of common stock 600,000 458,000
Paid in capital in excess of par 29,400,000 4,542,000
Initial commission allowance on reinsurance ceded (3,007,823) 4,508,719 10,000,000
Surplus note from Parent -- -- 20,000,000
----------- ----------- -----------
Capital and Surplus - end of the year $50,157,994 $59,408,132 $51,722,525
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
4
<PAGE> 46
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NORTH AMERICAN LIFE ASSURANCE COMPANY
OF NORTH YORK, CANADA)
<TABLE>
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1995, 1994 and 1993
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
From operating activities:
Annuity considerations and deposits $991,551,945 $1,139,953,302 $1,255,219,443
Allowances & reserve adjustments on reinsurance ceded (33,546,008) 1,140,018 (20,898,549)
Net investment income 32,128,833 28,230,341 27,231,438
Experience refund on reinsurance ceded 3,901,633 4,967,753 --
Surrender benefits and other fund withdrawals paid (232,650,150) (175,523,156) (171,434,721)
Other benefits paid to policyholders (36,860,052) (30,555,923) (22,727,802)
Commissions, other expenses & taxes paid (97,024,418) (100,210,171) (93,392,207)
Net transfers to separate account (423,952,090) (768,208,239) (1,022,539,449)
Other operating expenses paid (735,369,347) (13,571,986) (1,546,814)
------------ -------------- --------------
Net cash provided (used) by operating activities (531,819,654) 86,221,939 (50,088,661)
------------ -------------- --------------
From investing activities:
Proceeds from investments sold, matured or
repaid:
Bonds 763,005,273 112,385,919 75,750,376
Stocks 5,080,010 5,805,050 5,818,725
Mortgage loans 110,791,047 14,076,659 6,294,101
Real estate 860,375 5,950,412 5,528,761
Cost of investments acquired:
Bonds (441,405,890) (232,208,934) (42,169,482)
Stocks (10,137,862) (488,212) (11,144,711)
Mortgage loans (136,101) (4,301,717) (3,890,750)
------------ -------------- --------------
Net cash provided (used) by investing activities 428,056,852 (98,780,823) 36,187,020
------------ -------------- --------------
Other cash provided (applied):
Capital and surplus paid-in -- 30,000,000 5,000,000
Borrowed money 7,000,000 70,000,000 80,000,000
Reinsurance ceding commission and expense allowance -- -- 25,000,000
Other sources 11,380,829 17,892,210 4,771,451
Other applications (14,398,973) (103,250,950) (4,931,341)
------------ -------------- --------------
Total other cash provided (used) 3,981,856 14,641,260 109,840,110
------------ -------------- --------------
Net change in cash and short-term investments (99,780,946) 2,082,376 95,938,469
Cash and short-term investments, beginning of year 101,578,176 99,495,800 3,557,331
------------ -------------- --------------
Cash and short-term investments, end of year $ 1,797,230 $ 101,578,176 $ 99,495,800
============ ============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE> 47
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NORTH AMERICAN LIFE ASSURANCE COMPANY
OF NORTH YORK, CANADA)
NOTES TO FINANCIAL STATEMENTS
For the year ended December 31, 1995
A. ORGANIZATION
------------
North American Security Life Insurance Company ("the Company") is a
wholly-owned subsidiary of North American Life Assurance Company of North
York, Canada ("NAL"). See Note O for subsequent event describing merger
with the Manufacturers Life Insurance Company.
The Company issues fixed and variable annuity and variable life
contracts (the "Contracts"). Amounts invested in the fixed portion of the
Contracts are allocated to the general account of the Company (see Note F
on fixed annuity reinsurance). Amounts invested in the variable portion of
the Contracts are allocated to the separate accounts of the Company. The
separate account assets are invested in shares of the NASL Series Trust, a
no-load, open-end management investment company organized as a
Massachusetts business trust.
On June 19, 1992, the Company formed First North American Life
Assurance Company ("FNA"). Subsequently, on July 22, 1992, FNA was granted
a license by the New York State Insurance Department. FNA issues fixed and
variable annuity contracts in the State of New York.
NASL Financial Services Inc. ("NASL Financial"), a wholly-owned
subsidiary of the Company, acts as investment adviser to the NASL Series
Trust and principal underwriter of the Contracts issued by the Company and
FNA. NASL Financial has entered into a promotional agent agreement with
Wood Logan Associates, an affiliate of NAL, to act as the exclusive agent
for promotion of annuity and variable life contract sales.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
BASIS OF REPORTING
------------------
The Company's financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Insurance Department of
the State of Delaware. These practices, in the case of a wholly-owned stock
life insurance subsidiary of a mutual life insurance company, are
considered to be generally accepted accounting principles (GAAP).
The Financial Accounting Standards Board issued Interpretation 40,
Applicability of Generally Accepted Accounting Principles to Mutual Life
Insurance and Other Enterprises, and Statement of Financial Accounting
Standards No. 120, Accounting and Reporting by Mutual Life Insurance
Enterprises and by Insurance Enterprises for Certain Long- Duration
participating Contracts. The American Institute of Certified Public
Accountants issued Statement of Position 95-1, Accounting for Certain
Insurance Activities of Mutual Life Insurance Enterprises. Neither of these
groups has a role in establishing regulatory accounting practices.
6
<PAGE> 48
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
BASIS OF REPORTING, CONTINUED
-----------------------------
These pronouncements will require mutual life insurance companies to modify
their financial statements in order for them to continue to be in
accordance with generally accepted accounting principles, effective for
1996 financial statements. The manner in which policy reserves, new
business acquisition costs, asset valuations and related tax effects are
recorded will change. Management has not determined the impact of such
changes on its financial statements.
Certain amounts in the 1994 and 1993 financial statements are presented
differently than in prior years to conform with 1995 presentation
guidelines.
PREPARATION OF FINANCIAL STATEMENTS
-----------------------------------
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
FINANCIAL INSTRUMENTS
---------------------
Financial instruments reported on the balance sheet consist primarily of
investments in cash and short-term investments, marketable securities, and
debt. Fair value of financial instruments have been determined through
information obtained from market sources and management estimates. At
December 31, 1995, the fair value of cash and short-term investments and
debt approximates the carrying value due to the short maturity and variable
interest rate arrangements, respectively.
Credit risk associated with concentrations can arise when changes in
economic, industry, or geographical factors affect groups of counterparties
with similar characteristics causing aggregate credit exposure to be
significant to the Company. All of the Company's investments in mortgage
loans are collaterized by real estate which is geographically dispersed
throughout the United States. During 1994, the most significant
concentrations existed in California (40%), Georgia (14%) and Illinois
(11%). The Company had no outstanding mortgages at December 31, 1995 (see
Note G). There are no other significant concentrations of credit risk (See
also Note C).
7
<PAGE> 49
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
INVESTMENTS AND INVESTMENT INCOME
---------------------------------
Investments are valued in accordance with rules promulgated by the National
Association of Insurance Commissioners ("NAIC"). Bonds and short-term
investments, where eligible under NAIC rules, are valued at amortized cost.
Investment income is recognized on the accrual basis. Unrealized gains or
losses on investments are recorded in unassigned surplus. Realized gains or
losses on investments sold are determined on the basis of the specific
identification method.
Common stocks are valued at market value except for investments in
affiliates which are carried on the equity basis; and real estate acquired
in satisfaction of debt which is stated at the lower of the appraised
market value or the outstanding principal loan balance plus accrued
interest and foreclosure costs.
There are no mortgage loans outstanding at December 31, 1995 (See Note G).
For the year ended December 31, 1994 mortgage loans in good standing
are stated at the aggregate unpaid balance. Mortgage loans are considered
to be in default if interest and principal payments are delinquent for more
than 90 days. The Company writes-down mortgage loans in default to the
lower of unpaid principal or the value of the underlying property. The
Company maintains asset valuation reserves sufficiently in excess of
minimum requirements which serve to cover the excess of the loan balance
over the underlying property values on restructured loans.
The maximum percentage of any one loan to the value of the property at the
time of the original loan commitment, exclusive of purchase money
mortgages, was 75%. Fire insurance is required on all properties covered by
mortgage loans at least equal to the excess of the loan over the maximum
loan which would be permitted by law on the land without the buildings. At
December 31, 1995, 1994, and 1993, the Company held $0, $414,974, and
$5,682,476, respectively, of mortgages in default at statement value. In
1995, 1994 and 1993, the Company wrote- down $0, $1,745,682, and
$1,915,623, respectively of mortgages held at year end to reflect the
carrying value at the lower of appraised value or outstanding principal
plus accrued interest and foreclosure costs.
In 1995, 1994 and 1993, the Company transferred, in satisfaction of debt,
mortgages with statement values of $2,405,052, $6,407,174 and $4,413,889,
respectively to foreclosed real estate. Subsequently, in 1995, 1994 and
1993, the Company wrote-down $1,360,620, $0, and $1,016,484, respectively,
on these properties to reflect the carrying value at the lower of the
current market valuation or the value transferred at the time of
foreclosure. At year end, the Company held $4,847,164 of foreclosed real
estate at adjusted book value which approximates market value.
8
<PAGE> 50
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
SHORT-TERM INVESTMENTS
----------------------
Short-term investments generally consist of U.S. Treasury bills, commercial
paper and money market instruments whose maturities at the time of
acquisition are one year or less. Short-term investments are valued at
cost, which approximates market value.
ASSET VALUATION RESERVE AND INTEREST MAINTENANCE RESERVE
--------------------------------------------------------
The Asset Valuation Reserve (AVR) is designed to mitigate the effect of
valuation and credit related losses on all invested assets with risk of
loss including mortgages, real estate, fixed-income securities, and common
stocks. Changes in the AVR are accounted for as a direct increase or
decrease in unassigned surplus.
The Interest Maintenance Reserve (IMR) captures realized capital gains and
losses which result from changes in interest rates for all fixed income
securities and amortizes these capital gains and losses into investment
income over the original life of the investments sold. During 1995,
$11,040,025 of cumulative net gains were released from IMR in connection
with a reinsurance treaty whereby the Company reinsured all of its fixed
annuity business (see Note F). This accounting was approved by the State of
Delaware Department of Insurance as a permitted practice. Total net gains
(losses) of $(59,933) and $1,807,018 were realized of which $541,484 and
$495,672 were amortized and included in net investment income in 1994 and
1993, respectively.
AGGREGATE RESERVES
------------------
The reserves, developed using accepted actuarial methods, have been
established and maintained on the basis of published mortality tables and
prescribed interest rates per the National Association of Insurance
Commissioners' standard valuation law, as adopted by the State of Delaware.
The method used for the valuation of annuities is the Commissioner's
Annuity Reserve Valuation Method (CARVM). Under this method the reserve is
the highest present value of all future guaranteed cash surrender values.
In addition, the Company has established additional reserves during 1995 to
cover the impact of guideline GGG. The method used for the valuation of
Variable Life Insurance ("VLI") is the Commissioners Reserve Valuation
Method (CRVM). Under this method, the VLI reserves are equal to the present
value of future death benefits, with a minimum of the cash surrender value.
RECOGNITION OF PREMIUM REVENUE AND RELATED EXPENSES
---------------------------------------------------
Premium revenues are recognized as received. Expenses, including
acquisition costs such as commissions and other costs in connection with
acquiring new business, are charged to operations as incurred.
9
<PAGE> 51
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
SEPARATE ACCOUNT
----------------
Separate account assets represent mutual funds held for the exclusive
benefit of both variable annuity and variable life contractholders and are
reported at fair market value. Since the contractholders receive the full
benefit and bear the full risk of the separate account investments, the
income, realized and unrealized gains and losses from such investments, is
offset by an equivalent change in the liabilities related to the separate
accounts. Transfers from separate account, net, primarily represents the
difference between the contract owner's account value and the CARVM
reserve.
UNCONSOLIDATED SUBSIDIARIES
---------------------------
The Company records its equity in the earnings of unconsolidated
subsidiaries as net investment income. The Company owns 100% of the
outstanding common stock of First North American Life Assurance Company and
NASL Financial
Services, Inc.
<TABLE>
Summarized financial data for unconsolidated subsidiaries at December 31,
1995 and 1994 is shown below:
<CAPTION>
(in thousands) 1995 1994
---- ----
<S> <C> <C>
Total assets at year-end $318,326 $194,177
Total liabilities at year-end 304,409 183,777
Net income 1,220 894
</TABLE>
INCOME TAXES
------------
The Company files a consolidated federal income tax return with
its subsidiaries, FNA and NASL Financial. The Company files
separate state income tax returns.
The method of allocation between the companies is subject to a tax sharing
agreement. Tax liability is allocated to each member on a pro rata basis
based on the relationship the member's tax liability (computed on a
separate return basis) bears to the tax liability of the consolidated
group.
10
<PAGE> 52
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
C. INVESTMENTS
-----------
<TABLE>
Net investment income was as follows:
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Bonds $18,046,504 $16,182,157 $14,861,152
Common stock 137,862 498,222 125,986
Equity in undistributed income
(loss) of subsidiaries (482,580) 737,688 (747,294)
Short-term investments 2,642,678 1,664,563 104,719
Mortgage loans 5,420,613 12,026,724 13,830,160
Real estate 1,071,080 1,248,043 635,245
Policy loan interest (32,300) 10,658 66,228
Amortization of IMR 11,040,025 541,484 495,672
Investment expenses (1,934,160) (2,349,980) (1,520,742)
----------- ----------- -----------
Net investment income $35,909,722 $30,559,559 $27,851,126
=========== =========== ===========
</TABLE>
Statement of Financial Accounting Standards No. 107 (SFAS 107),
"Disclosures about Fair Value of Financial Instruments," requires
disclosures, if practical, of fair value information about financial
instruments, whether or not recognized in the balance sheet. SFAS 107
excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Presentation of the estimated fair value
of assets without a corresponding revaluation of liabilities associated
with insurance contracts can be misinterpreted.
11
<PAGE> 53
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
<TABLE>
The amortized cost and estimated fair values of investments in debt securities
at December 31, 1995 and 1994 are as follows:
<CAPTION>
December 31, 1995
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S. $ 8,998 $362 $3 $ 9,357
Government agencies
Corporate securities 3,672 125 3 3,794
Mortgage-backed securities 3,611 195 0 3,806
------- ---- -- -------
Totals $16,281 $682 $6 $16,957
======= ==== == =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury
securities and $ 8,673 $ 70 $ 402 $ 8,341
obligations of U.S.
Government agencies
Corporate securities 294,447 939 6,185 289,201
Mortgage-backed 30,853 16 2,267 28,602
securities
-------- ------ ------ --------
Totals $333,973 $1,025 $8,854 $326,144
======== ====== ====== ========
</TABLE>
The fair value of debt securities were determined based on quoted market prices
or dealer quotes.
12
<PAGE> 54
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
<TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1995, by the contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers or
lenders may have the right to call or prepay obligations with or without
call or prepayment penalties.
<CAPTION>
Estimated
Amortized Fair
(in thousands) Cost Value
--------- ----------
<S> <C> <C>
Due in one year or less $ 2,162 $ 2,175
Due after one year through five years 5,336 5,553
Due after five years through ten years 4,281 4,439
Due after ten years 892 984
------- -------
Sub-totals 12,671 13,151
Mortgage-backed securities 3,610 3,806
------- -------
Totals $16,281 $16,957
======= =======
</TABLE>
Gross gains of $10,452,916, $1,600,852 and $2,015,587 and gross losses of
$2,035,657, $1,660,785 and $208,569 were recognized on those sales for the
years ended December 31, 1995, 1994 and 1993, respectively. Net realized
gains (losses) of $8,417,259 (see Note A), $(59,933) and $1,797,140 for the
years ended December 31, 1995, 1994 and 1993, respectively, were
transferred to IMR.
Policy loans are an integral component of insurance policies, therefore, it
is not practicable to value policy loans.
13
<PAGE> 55
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
D. FEDERAL INCOME TAXES
--------------------
At December 31, 1995 and 1994 the Company had net operating loss
carryforwards of approximately $33,000,000 and $21,000,000, respectively,
which expire between the years 2007 and 2010.
E. LIFE AND ANNUITY ACTUARIAL RESERVES
-----------------------------------
The Company issues flexible premium deferred combination fixed and variable
annuity contracts and variable life insurance contracts. Reserves for these
contracts are established using the Commissioners Annuity Reserve Valuation
Method ("CARVM") and the Commissioner's Reserve Valuation Method ("CRVM")
as adopted by the State of Delaware Insurance Department. The reserves for
the fixed portion of the contracts are subject to an indemnity reinsurance
agreement and the reserves for the variable portion of the contracts are
held in the separate account. The Company has now reinsured its Minimum
Guaranteed Death Benefit risks, and accordingly, is holding no reserve for
this risk, which relates to the excess of Death Benefit over policyholder
Account Value. The Company does not offer surrender values in excess of the
reserves.
<TABLE>
Withdrawal characteristics of Annuity Actuarial Reserves and Deposit
Liabilities are as follows:
<S> <C> <C>
Subject to discretionary withdrawal
with market value adjustment $ 467,775,126 8.53%
Subject to discretionary withdrawal
at book value less surrender charge 228,269,135 4.16
Subject to discretionary withdrawal
at market value 4,760,670,029 86.79
Subject to discretionary withdrawal
at book value 11,553,562 .21
-------------- -----
Subtotal 5,468,267,852 99.69
Not subject to discretionary
withdrawal provision 17,150,937 .31
-------------- -----
Total gross annuity actuarial reserves and
deposit fund liabilities 5,485,418,789 100%
-------------- =====
Reinsurance ceded 729,344,503
--------------
Total net annuity actuarial reserves and
deposit funds liabilities $4,756,074,286
==============
</TABLE>
14
<PAGE> 56
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
F. REINSURANCE
-----------
Effective June 30, 1995 an indemnity coinsurance agreement was entered into
between the Company and Peoples Security Life Insurance Company ("Peoples"
or "the Reinsurer"), a AAA rated subsidiary of the Providian Corporation,
to reinsure both in force and new fixed annuity business written by the
Company.
The indemnity aspects of the agreement provide that the Company remains
liable for the contractual obligations whereas the Reinsurer agrees to
indemnify the Company for any contractual claims incurred. The coinsurance
aspects of the agreement required the Company to transfer all assets
backing the fixed annuity obligations to the Reinsurer together with all
future fixed premiums received by the Company for fixed annuity contracts.
Once transferred, the assets belong to the Reinsurer. In exchange, the
Reinsurer reimburses the Company for all claims and provides expense
allowances to cover commissions and other costs associated with the fixed
annuity business.
The Reinsurer is responsible for investing the assets and is at risk for
any potential investment gains and losses. There is no recourse back to the
Company if investment losses are incurred. Under this agreement the Company
will continue to administer the fixed annuity business for which it will
earn an expense allowance. The Company has set up a reserve of $1,931,894
to recognize that expense allowances received from Providian under this
indemnity coinsurance agreement do not fully reimburse the Company for
overhead expenses allocated to the fixed annuity line of business.
The reinsurance agreement required the Company to transfer to the Reinsurer
a consideration of $726.7 million, in cash or securities, to cover all in
force business as of June 30, 1995.
<TABLE>
The financial impact of the reinsurance agreement was as follows:
(in millions)
Net loss from operations:
<S> <C>
Consideration paid to reinsurer $(726.7)
Net reserves reinsured 725.1
Expense gap reserve (1.9)
-------
(3.5)
Capital and Surplus adjustments:
Release of IMR 11.0
Market loss on sale of mortgages (2.2)
Release of bond and mortgage asset
valuation reserve 4.7
-------
Net impact on surplus $10.0
=======
</TABLE>
15
<PAGE> 57
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
REINSURANCE, CONTINUED
----------------------
Effective July 1, 1995 and August 1, 1995, respectively, the Company
entered into treaties with the Connecticut General Life Insurance Company
("CIGNA") and Swiss Re Life Company America companies to reinsure its
Minimum Death Benefit Guarantee risks. Each company has assumed 50% of the
risk. In addition, the Company reinsured 50% of its risk related to the
waiving of surrender charges at death with CIGNA. The Company is paying the
reinsurers an asset based premium, the level of which varies with both the
amount of exposure to this risk and the realized experience.
On December 7, 1995, the Company entered into a letter of intent with
Transamerica Occidental Life Insurance Company. Transamerica will reinsure
a 50% quota share of the variable portion of the Company's VLI contracts.
In addition, Transamerica will also reinsure 80% of this product's net
amount at risk in excess of the Company's retention limit of $100,000 on a
YRT basis.
During 1984, the Company assumed from its parent, NAL, approximately 26% of
NAL's ordinary and group vested annuity contracts issued in the United
States prior to 1983. In 1984, the Company received consideration from NAL
relating to the agreement of $800,000. In December, 1989 the percentage
assumed was increased to 90% and the Company recognized consideration of
$2,325,000. On March 31, 1995, this agreement was 100% recaptured. To
effect this recapture the Company paid NAL $1,445,889. At December 31,
1994, the Company's liability for future policy benefits was $1,635,097.
Effective October 1, 1988, the Company ceded 18% of its variable annuity
contracts (policy from 203-VA) to its parent NAL under a modified
coinsurance agreement. Under this agreement, NAL provides the Company with
an expense allowance on reinsured premiums which is repaid out of a portion
of future profits on the business reinsured. The agreement provides full
risk transfer of mortality, persistency and investment performance to the
reinsurer with respect to the portion reinsured. Effective July 1, 1992,
the quota share percentage was increased to 36%.
On December 31, 1993 the Company entered into a modified coinsurance
agreement with an ITT Lyndon Life, a non-related third party to cede the
remaining 64% of the Company's variable annuity contracts (policy form
203-VA) and 95% of the Company's new variable annuity contract series
issued in 1994 (policy form Ven 10). The Company received approximately $25
million in cash representing withheld premiums of $15 million and $10
million ceding commission. The amounts of withheld premiums will be repaid
with interest over 5 years. The ceding commission is payable out of future
profits generated by the business reinsured.
16
<PAGE> 58
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
REINSURANCE, CONTINUED
----------------------
Effective December 31, 1994, the Company recaptured its reinsurance with
NAL. Upon recapture, 1994 operating results were negatively impacted by a
one-time recapture fee of approximately $6.5 million. Concurrent with this
transaction, the Company ceded 31% of the recaptured contracts (policy form
203-VA) to ITT Lyndon Life bringing the portion of these contracts
reinsured by ITT Lyndon to 95%. In return, the Company received
consideration of $5.2 million which is reflected as a surplus adjustment
and will be amortized into income in future years.
Effective December 31, 1994, the Company entered into indemnity reinsurance
agreement with Paine Webber Life to reinsure a portion of its policy forms
207-VA, VFA, VENTURE.001, and VENTURE.003. The quota share percentage
varies between 15% and 35% depending on the policy form. The form of
reinsurance is modified coinsurance and only covers the variable portion of
contracts written by Paine Webber brokers. The Company received an
allowance of $1,580,896 to complete this transaction. All elements of risk
(including mortality, persistency, investment performance) have been
transferred with the exception of the minimum death benefit guarantee. The
Company receives an allowance to cover the expected cost of the minimum
death benefit guarantee.
G. RELATED PARTY TRANSACTIONS
--------------------------
In connection with the fixed annuity indemnity coinsurance agreement (See
Note F), the Company pooled its mortgage portfolio (book value of
approximately $106 million) and transferred a senior participation interest
to an affiliate of the reinsurer. The senior interest was transferred for a
purchase price of approximately $72 million and entitles an affiliate of
the reinsurer to 100% of the cash flows produced by the portfolio until
they recover in full the purchase price with interest at a rate of 7.52%.
The remaining residual interest was transferred to First North American
Realty, Inc., a wholly-owned subsidiary of NAL for a purchase price of $33
million. As a result of the sale of the senior and residual interests in
the Company's mortgages, the Company has no further economic interest in
any mortgages and hence has reported zero for mortgage loan assets on its
balance sheet as of December 31, 1995.
17
<PAGE> 59
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
RELATED PARTY TRANSACTIONS, CONTINUED
-------------------------------------
The Company utilizes various services administered by NAL, such as payroll
and investment accounting. The charges for these services were
approximately $295,000, $234,000 and $232,000, in 1995, 1994 and 1993,
respectively. At December 31, 1995, the Company had a net liability to NAL
for $5,928,889.
The Company provides various services and personnel to FNA for accounting,
actuarial, administration, and systems support. These services are
allocated on a pro rata basis and charged as incurred. The total costs
allocated for these services in 1995, 1994 and 1993 was approximately
$456,000, $418,000 and $310,000, respectively. At December 31, 1995, the
Company had a net receivable from FNA for $1,427,631.
The Company's annuity and insurance contracts are distributed through NASL
Financial pursuant to an underwriting agreement. At December 31, 1995, the
Company had a receivable from NASL Financial for $881,119.
The financial statements have been prepared from the records maintained by
the Company and may not necessarily be indicative of the financial
condition or results of operations that would have occurred if the Company
had been operated as an unaffiliated corporation.
H. INVESTMENTS ON DEPOSIT WITH REGULATORY AUTHORITIES
--------------------------------------------------
Bonds and United States Treasury Notes with a carrying value of $5,600,444
at December 31, 1995, and $6,620,154 at December 31, 1994, were on deposit
with, or in custody accounts on behalf of, certain state insurance
departments.
I. BORROWED MONEY
--------------
The Company has an unsecured line of credit with State Street Bank and
Trust, in the amount of $10 million, bearing interest at the bank's prime
rate (8.5% at December 31, 1995). There were no outstanding balances at
December 31, 1995 and 1994. Interest expense was approximately $76,000,
$81,600 and $236,000 in 1995, 1994 and 1993, respectively.
In December 1994, the Company entered into a $150 million revolving credit
and term loan agreement (the "Loan") with the Canadian Imperial Bank of
Commerce and Deutsche Bank AG ("CIBC"). The amount outstanding at December
31, 1995 was, $107 million and is payable in quarterly installments through
December 31, 1999. Interest is due at the maturity of each LIBOR contract.
The interest rate is determined based on LIBOR plus an interest rate
margin. Accrued interest at December 31, 1995 is $865,148.
18
<PAGE> 60
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
BORROWED MONEY, CONTINUED
-------------------------
The Loan is collaterized by the mortality and expense risk charges and
surrender charges due from the separate account, excluding any portion
thereof subject to existing reinsurance agreements. The Loan is
subordinated in every respect to the claims of the Company's
contractholders as directed by the Insurance Commissioner of the State of
Delaware. The Company is subject to various affirmative and negative
covenants under this Loan, whereby breach of these covenants could cause an
event of default. Such covenants require the Company to meet certain
financial ratios and places restrictions on the incurrence of additional
debt, reinsurance and capital changes.
J. SURPLUS NOTES
-------------
The Company received $20 million on December 20, 1994 pursuant to a surplus
note agreement with NAL bearing interest at 8%. The note and accrued
interest are subordinated to payments due to policyholders, and other
claimants. Principal and interest payments can be made only upon prior
approval of the Delaware Insurance Commissioner. Interest accrued at
December 31, 1995 is $3,248,219, and was paid on January 2, 1996.
K. DEFERRED COMPENSATION AND RETIREMENT PLANS
------------------------------------------
The parent, NAL, sponsors a defined benefit pension plan covering
substantially all of the Company's employees. The benefits are based on
years of service and the employee's compensation during the last five years
of employment. NAL's funding policy is to contribute annually the normal
cost up to the maximum amount that can be deducted for federal income tax
purposes and to charge each subsidiary for its allocable share of such
contributions based on a percentage of payroll. No pension cost was
allocated to the Company in 1995, 1994, and 1993 as the plan was subject to
the full funding limitation under the Internal Revenue Code.
The Company sponsors a defined contribution retirement plan pursuant to
regulation 401(k) of the Internal Revenue Code. All employees on September
1, 1990 were eligible to participate. Employees hired after September 1,
1990 will be eligible after one year of service and attaining age 21. The
Company contributes two percent of base pay plus fifty percent of the
employee savings contribution. The employee savings contribution is
limited to six percent of base pay. The Company contributed $203,248,
$167,148, and $89,218 in 1995, 1994 and 1993, respectively.
19
<PAGE> 61
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
L. LEASES
------
<TABLE>
The Company leases its office space and various office equipment under
operating lease agreements. For the years ended December 31, 1995, 1994 and
1993 the Company incurred rent expense of $1,388,780 and $840,233, and
$718,579, respectively. The Company negotiated a ten year lease for new
office space which commenced in March 1992. In connection with the lease,
the Company was required to deposit $1,500,000 in an escrow account as
security toward fulfilling the future lease commitment. The balance of the
escrow account at December 31, 1995 is $1,050,000. The minimum lease
payments associated with the office space and various office equipment
under operating lease agreements is as follows:
<CAPTION>
Minimum
Year Lease Payments
--------------------------------
<S> <C>
1996 $1,017,006
1997 1,187,665
1998 1,203,878
1999 1,203,364
2000 1,194,527
Remaining years 1,384,493
----------
Total $7,190,933
==========
</TABLE>
The Company also guarantees FNA's office space lease which has an annual
cost to FNA of approximately $72,000.
M. INTEREST RATE SWAP CONTRACT
---------------------------
The Company entered into an interest rate swap with CIBC for the purpose of
minimizing exposure to fluctuations in interest rates on a portion of the
outstanding debt held by the Company. The notional amount of the matched
swap outstanding at December 31, 1995 was $97 million. The unexpired term
at December 31, 1995 was 4 years. CIBC is a major international financial
institution. The agreement subjects the Company to financial risk that will
vary during the life of the agreement in relation to market interest rates.
Gains or losses on the swap will be recognized in investment income when
due.
20
<PAGE> 62
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
N. GUARANTEE AGREEMENT
-------------------
A guarantee agreement continues in effect, whereby NAL has agreed to
unconditionally guarantee that it will, on demand, make funds available to
the Company for the timely payment of contractual claims made under fixed
annuity and variable life contracts issued by the Company. The guarantee
covers all outstanding fixed annuity contracts, including those issued
prior to the date of the guarantee agreement. Following the merger (see
Note O), Manufacturers Life Insurance Company has assumed all of NAL's
obligations under the guarantee agreement.
O. SUBSEQUENT EVENTS
-----------------
MERGER
------
On January 1, 1995, NAL merged with the Manufacturers Life Insurance
Company ("MLI") of Canada. The surviving company will conduct business
under the name "Manufacturers Life Insurance Company".
CORPORATE RESTRUCTURING
-----------------------
Effective January 1, 1996, immediately following the merger,
the Company experienced a corporate restructuring which
resulted in the formation of a newly organized holding
corporation, NAWL Holding Company, Inc. ("NAWL"). NAWL
holds all of the outstanding shares of the Parent and Wood
Logan Associates, Inc. ("WLA").
MLI owns all class A shares of NAWL, representing 85% of the voting shares
of NAWL. Certain employees of WLA own all class B shares, which represent
the remaining 15% voting interest in NAWL.
21
<PAGE> 63
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF NORTH AMERICAN
LIFE ASSURANCE COMPANY)
<TABLE>
ANNUAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1995
Schedule 1 - Selected Financial Data
---------------
<S> <C>
Investment Income Earned
Government bonds $ 1,060,741
Other bonds (unaffiliated) 16,510,356
Common stocks of affiliates 1,287,731
Mortgages loans 5,420,613
Real estate 1,071,080
Premium notes, policy loans and liens (32,300)
Short-term investments 2,642,678
Aggregate write-ins for investment income 475,407
-----------
Gross investment Income $28,436,306
===========
Real Estate Owned - Book Value less
Encumbrances $ 4,847,164
===========
Bonds and Stocks of Parents, Subsidiaries and
Affiliates - Book Value
Common Stocks $21,282,599
===========
Bonds and Short-Term Investments by Class and Maturity:
Bonds by Maturity-Statement Value
Due within one year 3,957,418
Over 1 year through 5 years 5,477,162
Over 5 years through 10 years 4,645,633
Over 10 years through 20 years 127,972
Over 20 years 3,868,984
-----------
Total by Maturity $18,077,169
===========
Bonds by Class - Statement Value
Class 1 $16,756,213
Class 2 1,010,956
Class 3 310,000
-----------
Total by Class $18,077,169
===========
Total Bonds Publicly Traded $17,066,213
===========
Total Bonds Privately Traded $ 1,010,956
===========
</TABLE>
22
<PAGE> 64
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF NORTH AMERICAN
LIFE ASSURANCE COMPANY)
<TABLE>
ANNUAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1995
Schedule 1 - Selected Financial Data
---------------
<S> <C>
Common Stocks - Market Value $ 21,730,238
==============
Supplementary Contracts in Force
Ordinary - Involving Life Contingencies
Income Payable $ 24,442
==============
Ordinary - Not Involving Life Contingencies
Income Payable $ 341,176
==============
Annuities:
Ordinary
Immediate - Amount of Income Payable $ 2,291,184
==============
Deferred - Fully Paid Account $5,267,516,243
==============
Balance
Group
Fully Paid Account Balance $ 374,375,752
==============
</TABLE>
23
<PAGE> 65
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of
NASL Variable Account:
We have audited the accompanying statement of assets and liabilities of the
sub-accounts comprising NASL Variable Account (consisting of the Equity,
Investment Quality Bond, Growth and Income, Pasadena Growth, Money Market,
Global Equity, Global Government Bond, U.S. Government Securities, Conservative
Asset Allocation, Moderate Asset Allocation, Aggressive Asset Allocation, Value
Equity, Strategic Bond and International Growth and Income sub-accounts) of
North American Security Life Insurance Company as of December 31, 1995 and the
related statements of operations and changes in net assets of the Equity,
Investment Quality Bond, Growth and Income, Pasadena Growth, Money Market,
Global Equity, Global Government Bond, U.S. Government Securities, Conservative
Asset Allocation, Moderate Asset Allocation, Aggressive Asset Allocation, Value
Equity and Strategic Bond sub-accounts for the two years then ended and the
related statement of operations and changes in net assets of the International
Growth and Income sub-account for the period January 9, 1995 (date of
commencement of operations) to December 31, 1995. 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 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. 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 aforementioned sub-accounts
comprising NASL Variable Account of North American Security Life Insurance
Company as of December 31, 1995, and the results of their operations and the
changes in their net assets for the two years then ended or the period
indicated, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 23, 1996
<PAGE> 66
<TABLE>
NASL VARIABLE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES -- December 31, 1995
<S> <C>
ASSETS
Investments at market value:
Sub-accounts:
Equity Portfolio - 45,697,001 Shares (Cost $748,334,745) $ 950,040,654
Investment Quality Bond Portfolio - 11,175,951 Shares (Cost $126,565,276) 137,687,722
Growth and Income Portfolio - 38,987,834 Shares (Cost $516,028,619) 638,230,845
Pasadena Growth Portfolio - 23,033,499 Shares (Cost $223,563,247) 262,581,885
Money Market Portfolio - 24,720,308 Shares (Cost $247,203,082) 247,203,082
Global Equity Portfolio - 38,369,470 Shares (Cost $605,619,464) 617,748,460
Global Government Bond Portfolio - 15,639,853 Shares (Cost $209,448,407) 227,716,254
U.S. Government Securities Portfolio - 14,982,032 Shares (Cost $195,178,203) 204,504,730
Conservative Asset Allocation Portfolio - 18,951,755 Shares (Cost $199,604,166) 219,650,840
Moderate Asset Allocation Portfolio - 51,107,809 Shares (Cost $547,584,223) 633,225,754
Aggressive Asset Allocation Portfolio - 15,892,868 Shares (Cost $177,405,368) 204,223,358
Value Equity Portfolio - 25,985,404 Shares (Cost $312,465,138) 358,858,426
Strategic Bond Portfolio - 9,937,696 Shares (Cost $103,788,977) 111,898,460
International Growth and Income Portfolio - 7,976,230 Shares (Cost $81,634,511) 83,511,130
--------------
Total assets .......................................................... $4,897,081,600
==============
LIABILITIES
0
--------------
Total liabilities ................................................. 0
NET ASSETS
Variable annuity contracts .............................................. $4,895,365,586
Annuity reserves ........................................................ 1,716,014
--------------
Total net assets ................................................. $4,897,081,600
==============
</TABLE>
The accompanying notes are an integral part of the financial
2
<PAGE> 67
NASL VARIABLE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Sub-Account
---------------------------------------------------------------------------------
Investment
Equity Quality Bond Growth and Income
------------------------- ------------------------- --------------------------
Year Ended December 31, Year Ended December 31, Year Ended December 31,
------------------------- ------------------------- --------------------------
1995 1994 1995 1994 1995 1994
----------- ----------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Income:
Dividends................................. $ 3,952,413 $22,253,900 $ 6,801,549 $ 4,551,500 $12,295,900 $ 8,789,400
Expenses:
Mortality & expense risk and
administrative charges ................. 10,216,686 6,350,391 1,667,841 1,477,254 7,054,820 4,825,591
----------- ----------- ------------ ----------- ----------- ------------
Net investment income (loss)................ (6,264,273) 15,903,509 5,133,708 3,074,246 5,241,080 3,963,809
Net realized gain (loss).................... 29,102,556 10,744,790 (1,374,226) (1,048,833) 11,439,262 4,920,481
Unrealized appreciation (depreciation)
during the period....................... 208,487,783 (36,590,074) 15,585,843 (8,368,756) 101,632,851 (5,125,689)
----------- ----------- ------------ ----------- ----------- ------------
Net increase (decrease) in net assets
from operations......................... 231,326,066 (9,941,775) 19,345,325 (6,343,343) 118,313,193 3,758,601
----------- ----------- ------------ ----------- ----------- ------------
Changes from principal transactions:
Purchase payments......................... 152,243,325 160,841,107 20,615,193 27,514,787 105,864,684 105,421,732
Transfers between sub-accounts
and the Company......................... 91,976,289 10,527,048 610,884 (977,918) 53,438,203 24,558,952
Withdrawals............................... (41,022,073) (24,977,355) (9,834,428) (9,402,496) (30,901,300) (20,690,150)
Annual contract fee....................... (453,864) (300,540) (63,118) (58,951) (286,289) (202,599)
----------- ----------- ------------ ----------- ----------- ------------
Net increase in net assets
from principal transactions............. 202,743,677 146,090,260 11,328,531 17,075,423 128,115,298 109,087,934
----------- ----------- ------------ ----------- ----------- ------------
Total increase in net assets................ 434,069,743 136,148,485 30,673,856 10,732,080 246,428,491 112,846,535
Net assets at beginning of period........... 515,970,911 379,822,426 107,013,866 96,281,786 391,802,354 278,955,819
----------- ----------- ------------ ------------ ----------- ------------
Net assets at end of period.................$950,040,654 $515,970,911 $137,687,722 $107,013,866 $638,230,845 $391,802,354
=========== =========== ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
3
<PAGE> 68
<TABLE>
NASL VARIABLE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
<CAPTION>
Sub-Account
---------------------------------------------------------------------------------
Pasadena Growth Money Market Global Equity
------------------------- ------------------------- --------------------------
Year Ended December 31, Year Ended December 31, Year Ended December 31,
------------------------- ------------------------- --------------------------
1995 1994 1995 1994 1995 1994
----------- ----------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Income:
Income:
Dividends.................................$ 786,320 $ 491,100 $ 13,942,901 $ 8,915,200 $ 28,730,987 $ 7,473,600
Expenses:
Mortality & expense risk and
administrative charges ................. 2,893,560 1,717,075 3,608,339 3,212,553 8,281,164 7,450,951
------------ ------------ ------------ ------------ ------------ ------------
Net investment income (loss)................ (2,107,240) (1,225,975) 10,334,562 5,702,647 20,449,823 22,649
Net realized gain (loss).................... 2,658,959 (2,357,041) 0 0 18,159,858 19,889,019
Unrealized appreciation (depreciation)
during the period....................... 41,777,908 (4,009,835) 0 0 (3,640,061) (30,918,793)
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets
from operations......................... 42,329,627 (7,592,851) 10,334,562 5,702,647 34,969,620 (11,007,125)
------------ ------------ ------------ ------------ ------------ ------------
Changes from principal transactions:
Purchase payments......................... 48,522,911 46,741,660 126,215,692 146,929,088 73,846,536 200,013,903
Transfers between sub-accounts
and the Company......................... 39,579,399 9,644,387 (105,785,452) 29,195,804 (41,016,819) 61,282,270
Withdrawals............................... (9,818,260) (5,926,769) (52,028,607) (43,566,631) (39,666,888) (26,475,341)
Annual contract fee....................... (124,885) (83,671) (109,865) (101,914) (410,630) (319,584)
------------ ------------ ------------ ------------ ------------ ------------
Net increase in net assets
from principal transactions............. 78,159,165 50,375,608 (31,708,232) 132,456,348 (7,247,801) 234,501,249
------------ ------------ ------------ ------------ ------------ ------------
Total increase in net assets................ 120,488,792 42,782,757 (21,373,670) 138,158,995 27,721,819 223,494,124
Net assets at beginning of period........... 142,093,093 99,310,336 268,576,752 130,417,757 590,026,641 366,532,517
------------ ------------ ------------ ------------ ------------ ------------
Net assets at end of period.................$262,581,885 $142,093,093 $247,203,082 $268,576,752 $617,748,460 $590,026,641
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
4
<PAGE> 69
<TABLE>
NASL VARIABLE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
<CAPTION>
Sub-Account
---------------------------------------------------------------------------------
Global U.S. Conservative
Government Bond Government Securities Asset Allocation
------------------------- ------------------------- --------------------------
Year Ended December 31, Year Ended December 31, Year Ended December 31,
------------------------- ------------------------- --------------------------
1995 1994 1995 1994 1995 1994
----------- ----------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Income:
Dividends.................................$ 11,134,112 $ 10,695,800 $ 11,234,073 $10,912,700 $10,694,769 $15,496,900
Expenses:
Mortality & expense risk and
administrative charges ................. 3,009,593 2,973,944 2,655,339 2,806,318 3,052,427 3,306,523
------------ ------------ ------------ ----------- ----------- -----------
Net investment income (loss)................ 8,124,519 7,721,856 8,578,734 8,106,382 7,642,342 12,190,377
Net realized gain (loss).................... 2,214,020 238,463 75,470 (1,818,099) 5,148,076 2,826,007
Unrealized appreciation (depreciation)
during the period....................... 31,070,281 (24,232,538) 15,587,098 (11,972,785) 19,853,900 (23,002,822)
------------ ------------ ------------ ----------- ----------- -----------
Net increase (decrease) in net assets
from operations......................... 41,408,820 (16,272,219) 24,241,302 (5,684,502) 32,644,318 (7,986,438)
------------ ------------ ------------ ----------- ----------- -----------
Changes from principal transactions:
Purchase payments......................... 19,314,715 70,655,674 41,695,417 67,722,255 17,444,784 32,149,383
Transfers between sub-accounts
and the Company......................... (18,811,224) (32,815,445) (24,365,001) (80,123,945) (12,482,271) (27,534,113)
Withdrawals............................... (15,701,657) (11,555,506) (16,213,816) (16,422,470) (31,190,237) (30,991,374)
Annual contract fee....................... (127,214) (105,041) (90,102) (92,483) (146,082) (163,915)
------------ ------------ ------------ ----------- ----------- -----------
Net increase in net assets
from principal transactions............. (15,325,380) 26,179,681 1,026,498 (28,916,643) (26,373,806) (26,540,020)
Total increase in net assets................ 26,083,440 9,907,462 25,267,800 (34,601,145) 6,270,512 (34,526,458)
Net assets at beginning of period........... 201,632,814 191,725,352 179,236,930 213,838,075 213,380,328 247,906,786
------------ ------------ ------------ ----------- ----------- -----------
Net assets at end of period.................$227,716,254 $201,632,814 $204,504,730 $179,236,930 $219,650,840 $213,380,328
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE> 70
<TABLE>
NASL VARIABLE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
Sub-Account
---------------------------------------------------------------------------------------
Moderate Aggressive Value
Asset Allocation Asset Allocation Equity
--------------------------- ---------------------------- ---------------------------
Year Ended December 31, Year Ended December 31, Year Ended December 31,
--------------------------- ---------------------------- ---------------------------
1995 1994 1995 1994 1995 1994
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Income:
Dividends.......................... $ 28,759,406 $ 42,041,800 $ 11,134,600 $ 11,101,500 $ 3,410,640 $ 664,100
Expenses:
Mortality & expense risk and
administrative charges.......... 8,527,910 8,801,780 2,650,794 2,479,359 3,916,735 1,998,342
------------ ------------ ------------ ------------ ------------ ------------
Net investment income (loss)........ 20,231,496 33,240,020 8,483,806 8,622,141 (506,095) (1,334,242)
Net realized gain (loss)............ 15,018,509 8,083,729 7,897,507 4,985,071 5,501,447 2,037,707
Unrealized appreciation (depreciation)
during the period............... 70,271,801 (60,546,683) 19,421,882 (17,369,916) 45,616,955 (3,845,224)
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets
from operations................. 105,521,806 (19,222,934) 35,803,195 (3,762,704) 50,612,307 (3,141,759)
------------ ------------ ------------ ------------ ------------ ------------
Changes from principal transactions:
Purchase payments................. 42,501,661 94,528,916 22,202,012 33,674,065 78,127,224 90,859,559
Transfers between sub-accounts
and the Company................. (26,640,289) (44,720,185) (10,804,739) (764,703) 45,625,228 41,456,303
Withdrawals....................... (79,543,856) (75,763,521) (22,397,713) (20,923,967) (12,728,807) (6,039,315)
Annual contract fee............... (485,596) (521,671) (195,083) (195,473) (140,801) (59,538)
------------ ------------ ------------ ------------ ------------ ------------
Net increase in net assets
from principal transactions..... (64,168,080) (26,476,462) (11,195,523) 11,789,922 110,882,844 126,217,009
------------ ------------ ------------ ------------ ------------ ------------
Total increase in net assets........ 41,353,726 (45,699,396) 24,607,672 8,027,218 161,495,151 123,075,250
Net assets at beginning of period... 591,872,028 637,571,424 179,615,686 171,588,468 197,363,275 74,288,025
------------ ------------ ------------ ------------ ------------ ------------
Net assets at end of period......... $633,225,754 $591,872,028 $204,223,358 $179,615,686 $358,858,426 $197,363,275
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
6
<PAGE> 71
<TABLE>
NASL VARIABLE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
<CAPTION>
Sub-Account
----------------------------------------------
Strategic International
Bond Growth and Income
--------------------------- -----------------
Year Ended December 31, January 9, 1995
--------------------------- thru
1995 1994 December 31, 1995
------------ ----------- -----------------
<S> <C> <C> <C>
Income:
Dividends ............................ $ 3,783,473 $ 1,951,613 $ 1,766,390
Expenses:
Mortality & expense risk and
administrative charges ............. 1,283,369 987,658 606,981
------------ ----------- -----------
Net investment income (loss) ........... 2,500,104 963,955 1,159,409
Net realized gain (loss) ............... 41,813 119,939 502,507
Unrealized appreciation (depreciation)
during the period .................. 12,274,700 (6,295,983) 1,876,619
------------ ----------- -----------
Net increase (decrease) in net assets
from operations .................... 14,816,617 (5,212,089) 3,538,535
------------ ----------- -----------
Changes from principal transactions:
Purchase payments .................... 21,970,895 36,072,168 36,977,061
Transfers between sub-accounts
and the Company .................... 3,987,010 835,251 45,342,755
Withdrawals .......................... (5,783,698) (3,909,501) (2,331,931)
Annual contract fee .................. (45,959) (29,888) (15,290)
------------ ----------- -----------
Net increase in net assets
from principal transactions ........ 20,128,248 32,968,030 79,972,595
------------ ----------- -----------
Total increase in net assets ........... 34,944,865 27,755,941 83,511,130
Net assets at beginning of period ...... 76,953,595 49,197,654 0
------------ ----------- -----------
Net assets at end of period ............ $111,898,460 $76,953,595 $83,511,130
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
7
<PAGE> 72
NASL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION:
The NASL Variable Account (the "Account") is a separate account established by
North American Security Life Insurance Company (the "Company"). The Company
established the Account on August 24, 1984 as a separate account under Delaware
law. The Account operates as a Unit Investment Trust under the Investment
Company Act of 1940, as amended, and invests in the NASL Series Trust (the
"Trust"). The Account is a funding vehicle for variable annuity contracts (the
"Contracts") issued by the Company. The Account includes 12 contracts,
distinguished principally by the level of expenses and surrender charges. These
12 contracts are as follows: Venture Variable Annuity 1, 3, 7, 8, 17, 18, 20,
21, 22 and 23 ("VEN 1, 3, 7, 8, 17, 18, 20, 21, 22 and 23") and Venture Vision
Variable Annuity 5 and 25 ("VIS 5 and 25"). The Company is a wholly-owned
subsidiary of North American Life Assurance Company ("NAL"), a Canadian mutual
life insurance company. NAL merged with the Manufacturers Life Insurance Company
of Canada effective January 1, 1996. The surviving company will conduct business
under the name "Manufacturers Life Insurance Company."
2. SIGNIFICANT ACCOUNTING POLICIES:
Investments are made in the portfolios of the Trust and are valued at the
reported net asset values of such portfolios. Transactions are recorded on the
trade date. Income from dividends is recorded on the ex-dividend date. Realized
gains and losses on the sales of investments are computed on the basis of
identified cost of the investment sold.
In addition to the Account, a contract holder may also allocate funds to the
Fixed Account, which is part of the Company's general account. Because of
exemptive and exclusionary provisions, interests in the Fixed account have not
been registered under the Securities Act of 1933 and the Company's general
account has not been registered as an investment company under the Investment
Company act of 1940.
Annuity reserves are computed for contracts in the income stage according to the
1983a Individual Annuitant Mortality Table. The assumed investment return is 4%,
as regulated by the laws of the respective states. The mortality risk is fully
borne by the Company and may result in additional amounts being transferred into
the account by the Company.
The operations of the Account are included in the federal income tax return of
the Company, which is taxed as a Life Insurance Company under the provisions of
the Internal Revenue Code (the "Code"). Under the current provisions of the
Code, the Company does not expect to incur federal income taxes on the earnings
of the Account to the extent the earnings are credited under the contracts.
Based on this, no charge is being made currently to the Account for federal
income taxes. The Company will review periodically the status of such decision
based on changes in the tax law. Such a charge may be made in future years for
any federal income taxes that would be attributable to the contract.
3. AFFILIATED COMPANY TRANSACTIONS:
Administrative services necessary for the operation of the Account are borne by
the Company. The Company has an underwriting agreement with its wholly-owned
subsidiary, NASL Financial Services, Inc. ("NASL Financial"). NASL Financial has
a promotional agent agreement with Wood Logan Associates, Inc., an affiliate of
the Company, to promote the sales of annuity contracts.
8
<PAGE> 73
NASL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
4. CONTRACT CHARGES:
There are no deductions made from purchase payments for sales charges at the
time of purchase. In the event of a surrender, a contingent deferred sales
charge may be charged by the Company to cover sales expenses. An annual
administrative fee of $30 is deducted from each contract owners' account on the
contract anniversary date to cover contract administration costs. This charge is
waived on certain contracts.
Deductions from each sub-account are made daily for administrative fees and for
the assumption of mortality and expense risk charges as follows:
(i) Prior Contract Series (VEN 1): deductions from each sub-account
are made daily for the assumption of mortality and expense risks equal to an
effective annual rate of 1.30% of the contract value.
(ii) Current Contract Series (VEN 3, 7, 8, 17, 18, 20, 21, 22, 23):
deductions from each sub-account are made daily for administration and for the
assumption of mortality and expense risks equal to an effective annual rate of
0.15% and 1.25% of the contract value, respectively.
(iii) Current Contract Series (VIS 5, 25): deductions from each
sub-account are made daily for distribution fees, administration and for the
assumption of mortality and expense risks equal to an effective annual rate of
0.15%, 0.25% and 1.25% of the contract value, respectively.
5. PURCHASES AND SALES OF INVESTMENTS:
<TABLE>
The following table shows aggregate cost of shares purchased and proceeds from
sales of each sub-account for the year ended December 31, 1995.
<CAPTION>
Purchases Sales
--------- -----
<S> <C> <C>
Equity Portfolio $340,875,652 $144,396,247
Investment Quality Bond Portfolio $ 74,432,358 $ 57,970,119
Growth and Income Portfolio $183,109,759 $ 49,753,391
Pasadena Growth Portfolio $113,755,759 $ 37,703,834
Money Market Portfolio $427,663,905 $449,037,574
Global Equity Portfolio $172,985,538 $159,783,517
Global Government Bond Portfolio $ 70,819,330 $ 78,020,192
U.S. Government Securities Portfolio $105,546,174 $ 95,940,942
Conservative Asset Allocation Portfolio $ 32,726,129 $ 51,457,591
Moderate Asset Allocation Portfolio $ 74,018,277 $117,954,863
Aggressive Asset Allocation Portfolio $ 51,355,943 $ 54,067,658
Value Equity Portfolio $144,444,973 $ 34,068,225
Strategic Bond Portfolio $ 49,966,492 $ 27,338,139
International Growth and Income Portfolio $123,594,274 $ 42,462,270
</TABLE>
9
<PAGE> 74
<TABLE>
6. UNIT VALUES:
A summary of the accumulation unit values at December 31, 1994 and 1995
and the accumulation units and dollar value outstanding at December 31,
1995 are as follows:
<CAPTION>
1994 1995
---------- ---------------------------------------------
Unit Unit
Value Value Units Dollars
----- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Equity sub-account
VEN 1 Contracts......... $24.235928 $34.164256 18,793 $ 642,039
VEN 3 Contracts......... 14.786831 20.821819 2,560,363 53,311,406
VEN 7 Contracts......... 14.786831 20.821819 30,454,576 634,119,677
VEN 8 Contracts......... 14.786831 20.821819 2,259,042 47,037,372
VIS 5 Contracts......... 10.965867 15.402975 3,171,419 48,849,281
VEN 17 Contracts........ 14.786831 20.821819 810,360 16,873,172
VEN 18 Contracts........ 14.786831 20.821819 19,532 406,683
VEN 20 Contracts........ 14.786831 20.821819 4,768,927 99,297,742
VEN 21 Contracts........ 14.786831 20.821819 1,112,879 23,172,173
VEN 22 Contracts........ 14.786831 20.821819 631,813 13,155,498
VEN 23 Contracts........ 14.786831 20.821819 129,508 2,696,591
VIS 25 Contracts........ 10.965867 15.402975 663,652 10,222,223
---------- -----------
46,600,864 949,783,857
Investment Quality Bond
sub-account
VEN 1 Contracts......... 16.377174 19.318272 13,340 257,707
VEN 3 Contracts......... 14.216516 16.751499 729,995 12,228,515
VEN 7 Contracts......... 14.216516 16.751499 5,304,008 88,850,090
VEN 8 Contracts......... 14.216516 16.751499 359,190 6,016,969
VIS 5 Contracts......... 9.713969 11.417606 798,121 9,112,627
VEN 17 Contracts........ 14.216516 16.751499 141,285 2,366,739
VEN 18 Contracts........ 14.216516 16.751499 12,139 203,342
VEN 20 Contracts........ 14.216516 16.751499 723,525 12,120,130
VEN 21 Contracts........ 14.216516 16.751499 166,381 2,787,133
VEN 22 Contracts........ 14.216516 16.751499 88,027 1,474,580
VEN 23 Contracts........ 14.216516 16.751499 30,409 509,401
VIS 25 Contracts........ 9.713969 11.417606 143,843 1,642,346
---------- -----------
8,510,263 137,569,578
Growth & Income sub-account
VEN 3 Contracts......... 13.076664 16.660889 2,083,819 34,718,282
VEN 7 Contracts......... 13.076664 16.660889 24,593,427 409,748,356
VEN 8 Contracts......... 13.076664 16.660889 2,207,363 36,776,624
VIS 5 Contracts......... 10.436393 13.263871 3,073,294 40,763,776
VEN 17 Contracts........ 13.076664 16.660889 719,055 11,980,091
VEN 18 Contracts........ 13.076664 16.660889 22,958 382,506
VEN 20 Contracts........ 13.076664 16.660889 3,892,471 64,852,031
VEN 21 Contracts........ 13.076664 16.660889 1,044,506 17,402,406
VEN 22 Contracts........ 13.076664 16.660889 728,500 12,137,450
VEN 23 Contracts........ 13.076664 16.660889 187,608 3,125,711
VIS 25 Contracts........ 10.436393 13.263871 448,740 5,952,028
---------- -----------
39,001,741 637,839,262
</TABLE>
10
<PAGE> 75
<TABLE>
<CAPTION>
1994 1995
---------- ---------------------------------------------
Unit Unit
Value Value Units Dollars
-------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Pasadena sub-account
VEN 3 Contracts......... 8.837480 11.026969 677,346 7,469,070
VEN 7 Contracts......... 8.837480 11.026969 15,323,337 168,969,962
VEN 8 Contracts......... 8.837480 11.026969 1,242,713 13,703,360
VIS 5 Contracts......... 9.280989 11.551552 1,436,443 16,593,141
VEN 17 Contracts........ 8.837480 11.026969 690,555 7,614,730
VEN 18 Contracts........ 8.837480 11.026969 14,302 157,702
VEN 20 Contracts........ 8.837480 11.026969 2,684,332 29,600,048
VEN 21 Contracts........ 8.837480 11.026969 849,791 9,370,621
VEN 22 Contracts........ 8.837480 11.026969 408,845 4,508,318
VEN 23 Contracts........ 8.837480 11.026969 123,573 1,362,639
VIS 25 Contracts........ 9.280989 11.551552 274,368 3,169,379
---------- -----------
23,725,605 262,518,970
Money Market sub-account
VEN 1 Contracts......... 14.843213 15.478376 7,969 123,341
VEN 3 Contracts......... 13.623292 14.190910 2,369,684 33,627,970
VEN 7 Contracts......... 13.623292 14.190910 9,527,103 135,198,263
VEN 8 Contracts......... 13.623292 14.190910 522,909 7,420,560
VIS 5 Contracts......... 10.290731 10.692803 1,528,995 16,349,247
VEN 17 Contracts........ 13.623292 14.190910 194,629 2,761,963
VEN 18 Contracts........ 13.623292 14.190910 7,702 109,293
VEN 20 Contracts........ 13.623292 14.190910 2,609,345 37,028,975
VEN 21 Contracts........ 13.623292 14.190910 595,446 8,449,926
VEN 22 Contracts........ 13.623292 14.190910 126,100 1,789,477
VEN 23 Contracts........ 13.623292 14.190910 92,776 1,316,578
VIS 25 Contracts........ 10.290731 10.692803 282,117 3,016,617
---------- -----------
17,864,775 247,192,210
Global Equity sub-account
VEN 3 Contracts......... 15.500933 16.459655 2,636,403 43,394,284
VEN 7 Contracts......... 15.500933 16.459655 25,283,469 416,157,179
VEN 8 Contracts......... 15.500933 16.459655 2,108,360 34,702,882
VIS 5 Contracts......... 12.153179 12.872711 3,158,250 40,655,234
VEN 17 Contracts........ 15.500933 16.459655 664,163 10,931,896
VEN 18 Contracts........ 15.500933 16.459655 23,767 391,199
VEN 20 Contracts........ 15.500933 16.459655 2,880,706 47,415,435
VEN 21 Contracts........ 15.500933 16.459655 592,070 9,745,262
VEN 22 Contracts........ 15.500933 16.459655 486,869 8,013,700
VEN 23 Contracts........ 15.500933 16.459655 96,415 1,586,963
VIS 25 Contracts........ 12.153179 12.872711 361,285 4,650,719
---------- -----------
38,291,757 617,644,753
</TABLE>
11
<PAGE> 76
<TABLE>
<CAPTION>
1994 1995
---------- ---------------------------------------------
Unit Unit
Value Value Units Dollars
-------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Global Government Bond
sub-account
VEN 3 Contracts......... 14.630721 17.772344 786,252 13,973,536
VEN 7 Contracts......... 14.630721 17.772344 9,225,433 163,957,577
VEN 8 Contracts......... 14.630721 17.772344 569,655 10,124,097
VIS 5 Contracts......... 10.262238 12.434811 1,299,621 16,160,540
VEN 17 Contracts........ 14.630721 17.772344 152,343 2,707,487
VEN 18 Contracts........ 14.630721 17.772344 16,954 301,319
VEN 20 Contracts........ 14.630721 17.772344 784,307 13,938,975
VEN 21 Contracts........ 14.630721 17.772344 167,849 2,983,072
VEN 22 Contracts........ 14.630721 17.772344 94,174 1,673,689
VEN 23 Contracts........ 14.630721 17.772344 23,520 418,014
VIS 25 Contracts........ 10.262238 12.434811 108,888 1,354,002
---------- -----------
13,228,996 227,592,308
U.S. Government Securities
sub-account
VEN 3 Contracts......... 14.111357 16.083213 941,636 15,144,531
VEN 7 Contracts......... 14.111357 16.083213 8,256,341 132,788,486
VEN 8 Contracts......... 14.111357 16.083213 490,958 7,896,181
VIS 5 Contracts......... 9.968713 11.333420 1,175,658 13,324,226
VEN 17 Contracts........ 14.111357 16.083213 146,130 2,350,236
VEN 18 Contracts........ 14.111357 16.083213 3,185 51,223
VEN 20 Contracts........ 14.111357 16.083213 1,418,177 22,808,847
VEN 21 Contracts........ 14.111357 16.083213 327,333 5,264,560
VEN 22 Contracts........ 14.111357 16.083213 87,885 1,413,473
VEN 23 Contracts........ 14.111357 16.083213 48,563 781,043
VIS 25 Contracts........ 9.968713 11.333420 218,997 2,481,982
---------- -----------
13,114,863 204,304,788
Conservative Asset Allocation
sub-account
VEN 3 Contracts......... 12.298940 14.320582 3,171,219 45,413,704
VEN 7 Contracts......... 12.298940 14.320582 10,063,785 144,119,262
VEN 8 Contracts......... 12.298940 14.320582 414,923 5,941,936
VIS 5 Contracts......... 10.050011 11.672867 725,547 8,469,213
VEN 17 Contracts........ 12.298940 14.320582 143,888 2,060,554
VEN 18 Contracts........ 12.298940 14.320582 1,069 15,304
VEN 20 Contracts........ 12.298940 14.320582 537,668 7,699,717
VEN 21 Contracts........ 12.298940 14.320582 178,822 2,560,828
VEN 22 Contracts........ 12.298940 14.320582 106,721 1,528,309
VEN 23 Contracts........ 12.298940 14.320582 21,236 304,117
VIS 25 Contracts........ 10.050011 11.672867 123,692 1,443,846
---------- -----------
15,488,570 219,556,790
</TABLE>
12
<PAGE> 77
<TABLE>
<CAPTION>
1994 1995
---------- ---------------------------------------------
Unit Unit
Value Value Units Dollars
--------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Moderate Asset Allocation
sub-account
VEN 3 Contracts......... 12.396295 14.752561 9,035,442 133,295,915
VEN 7 Contracts......... 12.396295 14.752561 28,124,797 414,912,783
VEN 8 Contracts......... 12.396295 14.752561 1,426,928 21,050,842
VIS 5 Contracts......... 10.156264 12.056663 1,611,982 19,435,123
VEN 17 Contracts........ 12.396295 14.752561 383,888 5,663,326
VEN 18 Contracts........ 12.396295 14.752561 8,486 125,193
VEN 20 Contracts........ 12.396295 14.752561 1,737,509 25,632,707
VEN 21 Contracts........ 12.396295 14.752561 401,708 5,926,216
VEN 22 Contracts........ 12.396295 14.752561 260,944 3,849,595
VEN 23 Contracts........ 12.396295 14.752561 51,262 756,248
VIS 25 Contracts........ 10.156264 12.056663 205,665 2,479,635
---------- -----------
43,248,611 633,127,583
Aggressive Asset Allocation
sub-account
VEN 3 Contracts......... 12.381395 14.990551 2,706,318 40,569,200
VEN 7 Contracts......... 12.381395 14.990551 8,803,203 131,964,863
VEN 8 Contracts......... 12.381395 14.990551 419,414 6,287,251
VIS 5 Contracts......... 10.303433 12.443644 439,301 5,466,506
VEN 17 Contracts........ 12.381395 14.990551 201,631 3,022,555
VEN 18 Contracts........ 12.381395 14.990551 3,497 52,427
VEN 20 Contracts........ 12.381395 14.990551 752,249 11,276,626
VEN 21 Contracts........ 12.381395 14.990551 211,506 3,170,588
VEN 22 Contracts........ 12.381395 14.990551 81,836 1,226,765
VEN 23 Contracts........ 12.381395 14.990551 21,094 316,211
VIS 25 Contracts........ 10.303433 12.443644 67,383 838,485
---------- -----------
13,707,432 204,191,477
Value Equity sub-account
sub-account
VEN 3 Contracts......... 11.107620 13.548849 810,623 10,983,011
VEN 7 Contracts......... 11.107620 13.548849 15,423,348 208,968,608
VEN 8 Contracts......... 11.107620 13.548849 1,718,375 23,282,000
VIS 5 Contracts......... 10.578121 12.870851 2,145,334 27,612,280
VEN 17 Contracts........ 11.107620 13.548849 831,496 11,265,818
VEN 18 Contracts........ 11.107620 13.548849 23,600 319,757
VEN 20 Contracts........ 11.107620 13.548849 3,323,100 45,024,178
VEN 21 Contracts........ 11.107620 13.548849 1,130,548 15,317,622
VEN 22 Contracts........ 11.107620 13.548849 686,269 9,298,148
VEN 23 Contracts........ 11.107620 13.548849 130,666 1,770,368
VIS 25 Contracts........ 10.578121 12.870851 375,816 4,837,066
---------- -----------
26,599,175 358,678,856
</TABLE>
13
<PAGE> 78
<TABLE>
<CAPTION>
1994 1995
---------- ---------------------------------------------
Unit Unit
Value Value Units Dollars
--------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Strategic Bond sub-account
VEN 3 Contracts......... 9.965972 11.716972 207,513 2,431,421
VEN 7 Contracts......... 9.965972 11.716972 5,937,342 69,567,668
VEN 8 Contracts......... 9.965972 11.716972 656,915 7,697,049
VIS 5 Contracts......... 9.897404 11.607403 691,404 8,025,400
VEN 17 Contracts........ 9.965972 11.716972 219,646 2,573,582
VEN 18 Contracts........ 9.965972 11.716972 25,633 300,346
VEN 20 Contracts........ 9.965972 11.716972 1,009,224 11,825,045
VEN 21 Contracts........ 9.965972 11.716972 383,430 4,492,636
VEN 22 Contracts........ 9.965972 11.716972 197,193 2,310,508
VEN 23 Contracts........ 9.965972 11.716972 79,026 925,949
VIS 25 Contracts........ 9.897404 11.607403 146,877 1,704,862
---------- -----------
9,554,203 111,854,466
International Growth and Income
sub-account
VEN 3 Contracts......... -------- 10.554228 227,009 2,395,904
VEN 7 Contracts......... -------- 10.554228 4,084,598 43,109,775
VEN 8 Contracts......... -------- 10.554228 99,374 1,048,818
VIS 5 Contracts......... -------- 10.528678 274,338 2,888,415
VEN 17 Contracts........ -------- 10.554228 256,261 2,704,637
VEN 18 Contracts........ -------- 10.554228 1,101 11,622
VEN 20 Contracts........ -------- 10.554228 1,759,715 18,572,435
VEN 21 Contracts........ -------- 10.554228 628,587 6,634,250
VEN 22 Contracts........ -------- 10.554228 336,650 3,553,086
VEN 23 Contracts........ -------- 10.554228 67,146 708,670
VIS 25 Contracts........ -------- 10.528678 178,852 1,883,076
---------- -----------
7,913,631 83,510,688
$4,895,365,586
==============
</TABLE>
14
