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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
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NASL VARIABLE ACCOUNT
- --------------------------------------------------------------------------------
OF
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
FLEXIBLE PAYMENT DEFERRED COMBINATION
FIXED AND VARIABLE GROUP ANNUITY CONTRACT
NON-PARTICIPATING
This Prospectus describes a flexible purchase payment deferred combination
fixed and variable group 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. Prior to February, 1995, the Company issued a class of variable
annuity contract which is no longer being issued but under which purchase
payments may continue to be made ("prior contract"--"Ven 8" contracts), which
were sold during the period from September 1992 until February, 1995. This
prospectus principally describes the contract but also describes the Ven 8
contracts. The principal difference between the contract offered by this
Prospectus and the Ven 8 contract relate to the investment options available
under the contracts, a minimum interest rate to be credited for any guarantee
period under the fixed portion of the contracts, the charges made by the Company
and the death benefit provisions. See "Appendix D - Prior Contracts."
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 thirty-eight investment options: thirty-four variable and four fixed. The
variable portion of the contract value and annuity payments, if selected on a
variable basis, will vary according to the investment performance of the
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 thirty-four 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 having an investment portfolio for each sub-account of the Variable
Account (see the accompanying Prospectus of the Trust). Fixed contract values
may be accumulated under one, three, five and seven year fixed account
investment options. Except as specifically noted herein and as set forth under
the caption "FIXED ACCOUNT INVESTMENT OPTIONS" below, this Prospectus describes
only the variable portion of the contract.
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.
Additional information about the variable portion of the contract and
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 (the "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. In
addition, the Commission maintains a Web site (http://www.sec.gov) that contains
the Statement of Additional Information, material incorporated bye reference,
and other information regarding registrants that file electronically with the
Commission. The table of contents for the Statement of Additional Information is
included on page [47] of this Prospectus.
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. IT
CONTAINS INFORMATION ABOUT THE VARIABLE ACCOUNT AND THE VARIABLE PORTION OF THE
CONTRACT AND CERTIFICATE 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, 1997.
V22/33.PRO597
<PAGE> 2
TABLE OF CONTENTS
SPECIAL TERMS ............................................................. 3
SUMMARY ................................................................... 5
TABLE OF ACCUMULATION UNIT VALUES..........................................12
GENERAL INFORMATION ABOUT NORTH AMERICAN SECURITY LIFE INSURANCE
COMPANY, NASL VARIABLE ACCOUNT AND NASL SERIES TRUST ......................13
North American Security Life Insurance Company .......................13
NASL Variable Account.................................................13
NASL Series Trust.....................................................14
DESCRIPTION OF THE CONTRACT ...............................................18
ELIGIBLE GROUPS ........................................................18
ACCUMULATION PROVISIONS ................................................18
Purchase Payments ....................................................18
Accumulation Units ...................................................19
Value of Accumulation Units ..........................................19
Net Investment Factor ................................................19
Transfers Among Investment Options ...................................20
Maximum Number of Investment Options .................................20
Telephone Transactions ...............................................20
Special Transfer Services - Dollar Cost Averaging ....................21
Asset Rebalancing Program.............................................21
Withdrawals...........................................................21
Special Withdrawal Services - Income Plan ............................22
Loans.................................................................22
Death Benefit Before Maturity Date....................................23
ANNUITY PROVISIONS .....................................................24
General ..............................................................24
Annuity Options ......................................................25
Determination of Amount of the First Variable Annuity Payment.........26
Annuity Units and the Determination of Subsequent Variable
Annuity Payments ...................................................26
Transfers After Maturity Date ........................................26
Death Benefit on or After Maturity Date ..............................26
OTHER CONTRACT PROVISIONS ..............................................27
Ten Day Right to Review ..............................................27
Ownership.............................................................27
Beneficiary ..........................................................27
Annuitant.............................................................28
Modification .........................................................28
Discontinuance of New Owners .........................................28
Misstatement and Proof of Age, Sex or Survival .......................28
FIXED ACCOUNT INVESTMENT OPTIONS.........................................28
CHARGES AND DEDUCTIONS ..................................................31
Withdrawal Charges....................................................31
Reduction or Elimination of Withdrawal Charges .......................32
Administration Fees...................................................33
Reduction or Elimination of Annual Administration Fee.................33
Mortality and Expense Risk Charge ....................................34
Taxes ................................................................34
FEDERAL TAX MATTERS .......................................................35
INTRODUCTION ............................................................35
THE COMPANY'S TAX STATUS ................................................35
TAXATION OF ANNUITIES IN GENERAL ........................................35
Tax Deferral During Accumulation Period ..............................35
Taxation of Partial and Full Withdrawals .............................36
Taxation of Annuity Payments .........................................37
Taxation of Death Benefit Proceeds ...................................37
Penalty Tax on Premature Distributions ...............................37
Aggregation of Contracts .............................................37
QUALIFIED RETIREMENT PLANS...............................................38
Qualified Plan Types .................................................39
Direct Rollovers .....................................................40
FEDERAL INCOME TAX WITHHOLDING...........................................40
GENERAL MATTERS............................................................41
Tax Deferral..........................................................41
Performance Data......................................................41
Financial Statements..................................................41
Asset Allocation and Timing Services .................................41
Restrictions Under the Texas Optional Retirement Program .............41
Distribution of Contracts ............................................42
Owner Inquiries.......................................................42
Legal Proceedings ....................................................42
EXCHANGE OFFER AND ENHANCED DEATH BENEFIT OPTION...........................42
Exchange Offer .......................................................42
Enhanced Death Benefit Option ........................................45
OTHER INFORMATION .........................................................46
STATEMENT OF ADDITIONAL INFORMATION-TABLE OF CONTENTS......................47
APPENDIX A: EXAMPLES OF CALCULATION OF WITHDRAWAL CHARGE..................48
APPENDIX B: STATE PREMIUM TAXES...........................................50
APPENDIX C: PENNSYLVANIA MAXIMUM MATURITY AGE.............................51
APPENDIX D: PRIOR CONTRACTS (VEN 8).......................................52
2
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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 an owner's variable investment account before the maturity date.
Annuitant - Any natural person or persons whose life is used to determine
the duration of annuity payments involving life contingencies. The "annuitant"
is as designated on the certificate specifications page or in the application,
unless changed.
Annuity Option - The method selected by each owner for annuity payments
made by the Company. At the maturity date, the Company will provide an annuity
with payments guaranteed for 10 years and for the lifetime of the annuitant, if
the annuitant lives more than 10 years. This will be the annuity option unless
changed.
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.
Application - The document signed by each owner that serves as his or her
application for participation under the contract.
Beneficiary - The person, persons or entity entitled to the death benefit
under the contract upon the death of an owner or, in certain circumstances, the
annuitant. If there is a surviving owner, that person will be deemed to be the
beneficiary.
Certificate - The document issued to each owner which summarizes the rights
and benefits of the owner under the contract.
Certificate Anniversary - The anniversary of the certificate date.
Certificate Date - The date of issue of a certificate under the contract.
Certificate Year - The period of twelve consecutive months beginning on the
certificate date or any anniversary thereof.
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 Application - The document signed by the Group Holder that
evidences the Group Holder's application for a Contract.
Contract Value - The total of an owner's investment account values and, if
applicable, any amount in the loan account attributable to that owner.
Debt - Any amounts in an owner's loan account plus any accrued loan
interest. The loan provision is available only under contracts or certificates
issued in connection with Section 403(b) qualified plans that are not subject to
Title I of ERISA.
Due Proof of Death - Due Proof of Death is required upon the death of the
owner or annuitant, as applicable. 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 - An annuity option with payments which are predetermined and
guaranteed as to dollar amount.
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General Account - All the assets of the Company other than assets in
separate accounts.
Group Holder - The person, persons or entity to whom the contract is
issued.
Investment Account - An account established by the Company which represents
an owner's interest in an investment option prior to the maturity date.
Investment Account Value - The value of an owner's investment in an
investment account.
Investment Options - The investment choices available to owners. Currently,
there are thirty-four variable and four fixed investment options under the
contract.
Loan Account - The portion of the general account that is used for
collateral when a loan is taken by an owner.
Market Value Charge - A charge that may be assessed if amounts are
withdrawn or transferred from the three, five or seven year investment options
prior to the end of the interest rate guarantee period.
Maturity Date - The date on which annuity benefits commence. The maturity
date is the date specified on the certificate specifications page and is
generally the first day of the month following the later of the annuitant's 85th
birthday or the tenth contract anniversary, unless changed. See Appendix D for
information on the Maturity Date applicable to certain contracts which are no
longer being issued (Ven 8 contracts).
Net Purchase Payment - The purchase payment paid by or on behalf of an
owner less the amount of premium tax, if any.
Non-Qualified Certificates - Certificates issued under non-qualified
Contracts.
Non-Qualified Contracts - Contracts which are not issued under qualified
plans.
Owner - The person, persons or entity named in a certificate and entitled
to all of the ownership rights under the contract not expressly reserved to the
group holder. The owner is 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 or on behalf of an owner to the
Company as consideration for the benefits provided by the contract.
Qualified Certificates - Certificates issued under qualified contracts.
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.
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.
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Variable Account - The 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.
SUMMARY
The Contract. The contract offered by this Prospectus is a flexible
purchase payment deferred combination fixed and variable group annuity contract.
Specific accounts are maintained under the contract for each member of the
eligible group participating in the contract as evidenced by the issuance of
certificates. The contract provides for the accumulation of contract values and
the payment of annuity benefits on a variable and/or fixed basis. Except as
specifically noted herein and as set forth under the caption "FIXED ACCOUNT
INVESTMENT OPTIONS" below, this Prospectus describes only the variable portion
of the contract.
Eligible Groups. The contract may be issued to fund 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. Effective October 1, 1996, the minimum initial purchase
payment is $5,000 for non-qualified retirement plans and $2,000 for retirement
plans qualifying for special income tax treatment under the Internal Revenue
Code. Prior to October 1, 1996, the minimum initial purchase payment was $30
with the additional requirement that at least $300 be paid during the first
contract year. Purchase payments may be made at any time, except that if a
purchase payment would cause the owner's contract value to exceed $1,000,000, or
the owner's 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 certificate and an owner's participation
under a contract at the end of any two consecutive certificate years in which no
purchase payments by or on behalf of the owner have been made, if both (i) the
total purchase payments made for the certificate, less any withdrawals, are less
than $2,000; and (ii) the contract value for the owner at the end of such two
year period is less than $2,000. The cancellation of contract privileges may
vary in certain states in order to comply with the requirements of insurance
laws and regulations in such state. (See "PURCHASE PAYMENTS")
Investment Options. Purchase payments may be allocated among the
thirty-eight investment options currently available under the contract:
thirty-four variable account investment options and four fixed account
investment options. Due to current administrative capabilities, a contract owner
is limited to a maximum of seventeen investment options (including all fixed
account investment options) during the period prior to the maturity date of the
contract. The thirty-four variable account investment options are the
thirty-four sub-accounts of the Variable Account, a separate account established
by the Company. The sub-accounts invest in corresponding portfolios of the
Trust: the Pacific Rim Emerging Markets Trust, the Science & Technology Trust,
the International Small Cap Trust, the Emerging Growth Trust, the Pilgrim Baxter
Growth Trust, the Small/Mid Cap Trust, the International Stock Trust, the
Worldwide Growth Trust, the Global Equity Trust, the Growth Trust, the Equity
Trust, the Quantitative Equity Trust, the Blue Chip Growth Trust, the Real
Estate Securities Trust, the Value Trust, the International Growth and Income
Trust, the Growth and Income Trust, the Equity-Income Trust, the Balanced Trust,
the Aggressive Asset Allocation Trust, the High Yield Trust, the Moderate Asset
Allocation Trust, the Conservative Asset Allocation Trust, the Strategic Bond
Trust, the Global Government Bond Trust, the Capital Growth Bond Trust, the
Investment Quality Bond Trust, the U.S. Government Securities Trust, the Money
Market Trust, the Lifestyle Aggressive 1000 Trust, the Lifestyle Growth 820
Trust, the Lifestyle Balanced 640 Trust, the Lifestyle Moderate 460 Trust and
the Lifestyle Conservative 280 Trust (see the accompanying Prospectus of the
Trust). The portion of an owner's contract value in the Variable Account and
monthly 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 four fixed account
investment options: one, three, five and seven year guaranteed investment
accounts. Under the fixed account investment options, 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 an
owner's contract value in the fixed account investment options and monthly
annuity payments, if selected on a fixed basis, will reflect such interest and
principal guarantees. (See "FIXED ACCOUNT INVESTMENT OPTIONS") Subject to
certain regulatory limitations, the Company may elect to add, subtract or
substitute investment options.
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Transfers. Prior to the maturity date, amounts may be transferred among an
owner's variable account investment options and from the owner's variable
account investment options to his or her fixed account investment options
without charge. In addition, amounts may be transferred prior to the maturity
date among the owner's fixed account investment options and from the owner's
fixed account investment options to his or her variable account investment
options, subject to a one year holding period requirement and a market value
charge which may apply to such a transfer. (See "FIXED ACCOUNT INVESTMENT
OPTIONS") After the maturity date, transfers are not permitted from variable
annuity options to fixed annuity options or from fixed annuity options to
variable annuity options. 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 from which the transfer
is made is less than $100, then we 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 an
owner, the owner may withdraw all or a portion of his or her 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 owner's contract value to less
than $300, the withdrawal request will be treated as a request to withdraw the
owner's entire contract value. A withdrawal charge and an administration fee 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 under contracts or certificates
issued in connection with Section 403(b) qualified plans that are not subject to
Title I of ERISA. Where available, owners may obtain loans using their contract
value as the only security for the loan. The effective cost of a loan is 2% per
year of the amount borrowed. (See "LOANS")
Death Benefits. The Company will pay the death benefit described below
(which, as defined, is net of any debt) to the beneficiary if any owner dies
before the maturity date. If there is a surviving owner, that owner will be
deemed to be the beneficiary. No death benefit is payable on the death of any
annuitant, except that if any owner is not a natural person, the death of any
annuitant will be treated as the death of an owner. The death benefit will be
determined as of the date on which written notice and proof of death and all
required claim forms are received at the Company's Annuity Service Office.
If any owner dies on or prior to his or her 85th birthday and the oldest
owner had an attained age of less than 81 years on the certificate date, the
death benefit will be determined as follows: During the first certificate year,
the death benefit will be the greater of: (a) the contract value or (b) the sum
of all purchase payments made, less any amounts deducted in connection with
partial withdrawals made by or on behalf of the owner. During any subsequent
certificate year, the death benefit will be the greater of: (a) the contract
value or (b) the death benefit on the last day of the previous certificate year,
plus any purchase payments made and less any amounts deducted in connection with
partial withdrawals made by or on behalf of the owner since then.
If any owner dies after his or her 85th birthday and the oldest owner had
an attained age of less than 81 years on the certificate date, the death benefit
will be the greater of: (a) the contract value or (b) the excess of (i) the sum
of all purchase payments made by or on behalf of the owner over (ii) the sum of
any amounts deducted in connection with partial withdrawals made by or on behalf
of the owner. If any owner dies and the oldest owner had an attained age greater
than 80 on the certificate date, the death benefit will be the contract value
less any applicable withdrawal charges at the time of payment of benefits. (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
owner selects the maturity date, frequency of payment and annuity option. (See
"ANNUITY PROVISIONS")
Ten Day Review. Within 10 days of receipt of his or her certificate, an
owner may cancel the certificate by returning it to the Company. 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. (See "TEN DAY
RIGHT TO REVIEW")
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Modification. The contract or any certificate may not be modified by the
Company without the consent of the group holder or the owner, as applicable,
except as may be required to make it conform to any law or regulation or ruling
issued by a governmental agency. However, on 60 days' notice to the group
holder, the Company may change the withdrawal charges, administration fees,
mortality and expense risk charges, free withdrawal percentage, annuity purchase
rates and the market value charge as to any certificates issued after the
effective date of the modification. (See "MODIFICATION")
Discontinuance of New Owners. On thirty days' notice to the group holder,
the Company may limit or discontinue acceptance of new applications and the
issuance of new certificates under a contract. (See "DISCONTINUANCE OF NEW
OWNERS")
Charges and Deductions. The following table and Example are designed to
assist group holders and owners in understanding the various costs and expenses
to which they are subject 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
owners. The items listed under "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.
TRANSACTION EXPENSES
<TABLE>
Deferred sales load (as percentage of purchase payments)
<CAPTION>
NUMBER OF COMPLETE YEARS WITHDRAWAL CHARGE
PURCHASE PAYMENT IN PERCENTAGE
CONTRACT
--------------------------------------------------------------------
<S> <C>
0 6%
1 6%
2 5%
3 5%
4 4%
5 3%
6 2%
7+ 0%
ANNUAL ADMINISTRATION FEE............................................. $30(1)
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
Mortality and expense risk fees....................................... 1.25%
Administration fee - asset based..................................... 0.15%
Total Separate Account Annual Expenses................................ 1.40%
TRUST ANNUAL EXPENSES
(as a percentage of Trust average net assets)
</TABLE>
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(1) The $30 annual administration fee will not be assessed prior to the maturity
date if at the time of its assessment the sum of all the owner's investment
accounts is equal to or greater than $100,000. See Appendix D for information on
the administration fee applicable to certain contracts which are no longer being
issued (Ven 8 contracts).
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<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL TRUST
TRUST PORTFOLIO FEES EXPENSES ANNUAL EXPENSES
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Pacific Rim Emerging Markets .... 0.850% 0.300% 1.150%
Science & Technology ............ 1.100% 0.100%* 1.200%
International Small Cap ......... 1.100% 0.190%* 1.290%
Emerging Growth ................. 1.050% 0.100%* 1.150%
Pilgrim Baxter Growth ........... 1.050% 0.300%* 1.350%
Small/Mid Cap ................... 1.000% 0.100%* 1.100%
International Stock ............. 1.050% 0.200%* 1.250%
Worldwide Growth ................ 1.000% 0.300% 1.300%
Global Equity ................... 0.900% 0.110% 1.010%
Growth .......................... 0.850% 0.160%* 1.010%
Equity .......................... 0.750% 0.050% 0.800%
Quantitative Equity** ........... 0.700%** 0.060% 0.760%**
Blue Chip Growth ................ 0.925% 0.050% 0.975%
Real Estate Securities** ........ 0.700%** 0.100% 0.800%**
Value ........................... 0.800% 0.050%* 0.850%
International Growth and Income . 0.950% 0.160% 1.110%
Growth and Income ............... 0.750% 0.050% 0.800%
Equity-Income ................... 0.800% 0.050% 0.850%
Balanced ........................ 0.800% 0.150%* 0.950%
Aggressive Asset Allocation ..... 0.750% 0.150% 0.900%
High Yield ...................... 0.775% 0.145%* 0.920%
Moderate Asset Allocation ....... 0.750% 0.090% 0.840%
Conservative Asset Allocation ... 0.750% 0.120% 0.870%
Strategic Bond .................. 0.775% 0.085% 0.860%
Global Government Bond .......... 0.800% 0.100% 0.900%
Capital Growth Bond** ........... 0.650%** 0.100% 0.750%**
Investment Quality Bond ......... 0.650% 0.080% 0.730%
U.S. Government Securities ...... 0.650% 0.060% 0.710%
Money Market .................... 0.500% 0.050% 0.550%
<CAPTION>
MINIMUM TOTAL TRUST MAXIMUM TOTAL TRUST
ANNUAL EXPENSES*** [ANNUAL EXPENSES****]
[(AFTER FEE WAIVER)] [(AFTER FEE WAIVER)]
-------------------- --------------------
<S> <C> <C>
Lifestyle Aggressive 1000# 0.760% 1.350%
Lifestyle Growth 820# 0.720% 1.260%
Lifestyle Balanced 640# 0.680% 1.180%
Lifestyle Moderate 460# 0.630% 1.090%
Lifestyle Conservative 280# 0.590% 1.010%
</TABLE>
*Based on estimates of payments to be made during the current fiscal year.
** "Total Trust Annual Expenses" for the Quantitative Equity, Real Estate
Securities and Capital Growth Bond Trusts do not reflect an agreement by NASL
Financial Services, Inc. ("NASL Financial") voluntarily to waive fees payable to
it and/or reimburse expenses for a period of one year commencing January 1, 1997
to the extent necessary to prevent "Total Trust Annual Expenses" for each such
Trust from exceeding .50% of average net assets. "Management Fees" for each such
Trust do not reflect estimated fee waivers by NASL Financial pursuant to such
agreement. If such waivers were reflected "Management Fees" would be 0.440%,
0.400% and 0.400% for the Quantitative Equity Trust, Real Estate Securities
Trust and the Capital Growth Bond Trust, respectively.
*** Minimum Fees are determined assuming the following allocation for the
Underlying Portfolios: Lifestyle Aggressive 1000 Trust, 100% Quantitative Equity
Trust; Lifestyle Growth 820 Trust, 80% Quantitative Equity Trust, 20% Money
Market Trust;
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Lifestyle Balanced 640 Trust, 60% Quantitative Equity Trust, 40% Money Market
Trust; Lifestyle Moderate 460 Trust, 40% Quantitative Equity Trust, 60% Money
Market Trust; Lifestyle Conservative 280 Trust, 20% Quantitative Equity Trust,
80% Money Market Trust.
**** Maximum Fees are determined assuming the following allocation for the
Underlying Portfolios: Lifestyle Aggressive 1000 Trust, 100% Pilgrim Baxter
Growth Trust; Lifestyle Growth 820 Trust, 80% Pilgrim Baxter Growth Trust, 20%
High Yield Trust; Lifestyle Balanced 640 Trust, 60% Pilgrim Baxter Growth Trust,
40% High Yield Trust; Lifestyle Moderate 460 Trust, 40% Pilgrim Baxter Growth
Trust, 60% High Yield Trust; Lifestyle Conservative 280 Trust, 20% Pilgrim
Baxter Growth Trust, 80% High Yield Trust.
#Each Lifestyle Trust will invest in shares of the Underlying Portfolios.
Therefore, each Lifestyle Trust will, in addition to its own expenses, such as
certain Other Expenses, bear its pro rata share of the fees and expenses
incurred by the Underlying Portfolios and the investment return of each
Lifestyle Trust will be net of the Underlying Portfolio expenses. NASL Financial
has voluntarily agreed to pay the expenses of each Lifestyle Trust (excluding
the expenses of the Underlying Portfolios). This expense reimbursement may be
terminated at any time after December 31, 1997. If such expense reimbursement
was not in effect, Total Trust Annual Expenses would be .04% higher (based on
estimates of the expenses of the Lifestyle Trusts for the current fiscal year)
as noted in the chart below:
<TABLE>
<CAPTION>
Minimum Total Trust Maximum Total Trust
Annual Expenses*** Annual Expenses****
------------------- --------------------
<S> <C> <C>
Lifestyle Aggressive 1000 Trust 0.800% 1.390%
Lifestyle Growth Trust 820 0.760% 1.300%
Lifestyle Balanced Trust 640 0.720% 1.220%
Lifestyle Moderate Trust 460 0.670% 1.130%
Lifestyle Conservative 280 Trust 0.630% 1.050%
</TABLE>
EXAMPLE
A contract owner would pay the following expenses on a $1,000 investment,
assuming 5% annual return on assets, if the owner withdrew all of his or her
contract value at the end of the applicable time period:
<TABLE>
<CAPTION>
TRUST PORTFOLIO 1 YEAR 3 YEARS 5 YEARS+ 5 YEARS* 10 YEARS*
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Pacific Rim Emerging Markets $82 $131 $170 $180 $297
Science & Technology ....... 83 132
International Small Cap .... 83 135 177 187 311
Emerging Growth ............ 82 131
Pilgrim Baxter Growth ...... 84 136
Small/Mid Cap .............. 82 129 167 177 292
International Stock ........ 83 133
Worldwide Growth ........... 83 135
Global Equity .............. 81 127 163 173 283
Growth ..................... 81 127 163 173 283
Equity ..................... 79 121 152 162 262
Quantitative Equity ........ 78 119 150 160 258
Blue Chip Growth ........... 80 126 161 171 280
Real Estate Securities ..... 79 121 152 162 262
Value ...................... 79 122
Int'l Growth and Income .... 82 129 168 178 293
Growth and Income .......... 79 121 152 162 262
Equity-Income .............. 79 122 155 165 267
Balanced ................... 80 125
Aggressive Asset Allocation 80 123 157 167 272
High Yield ................. 80 124
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
TRUST PORTFOLIO 1 YEAR 3 YEARS 5 YEARS+ 5 YEARS* 10 YEARS*
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Moderate Asset Allocation ... 79 122 154 164 266
Conservative Asset Allocation 79 123 156 166 269
Strategic Bond .............. 79 122 155 165 268
Global Government Bond ...... 80 123 157 167 272
Capital Growth Bond ......... 78 119 150 160 257
Investment Quality Bond ..... 78 119 149 159 255
U.S. Government Securities .. 78 118 148 158 253
Money Market ................ 76 113 140 150 236
Lifestyle Aggressive 1000** . 81 128
Lifestyle Growth 820** ...... 81 126
Lifestyle Balanced 640** .... 80 124
Lifestyle Moderate 460** .... 79 122
Lifestyle Conservative 280** 79 121
</TABLE>
+ For prior contracts no longer issued, Ven 8 contracts, (as described in
Appendix D) only. The difference in numbers is attributable to the different
withdrawal charges. See Appendix D.
* The example of expenses for certain Trusts contains only one year and three
year examples since they are newly formed Trusts.
** The example of expenses for the Lifestyle Trusts is calculated using the
midpoint of the minimum and maximum fees set forth under Trust Annual Operating
Expenses.
A contract owner would pay the following expenses on a $1,000 investment,
assuming 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:
<TABLE>
<CAPTION>
TRUST PORTFOLIO 1 YEAR 3 YEARS 5 YEARS+ 5 YEARS* 10 YEARS*
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Pacific Rim Emerging Markets $ 27 $ 82 $140 $140 $297
Science & Technology ........ 27 83
International Small Cap ..... 28 86 147 147 311
Emerging Growth ............. 27 82
Pilgrim Baxter Growth ....... 29 88
Small/Mid Cap ............... 26 80 137 137 292
International Stock ......... 28 85
Worldwide Growth ............ 28 86
Global Equity ............... 25 78 133 133 283
Growth ...................... 25 78 133 133 283
Equity ...................... 23 71 122 122 262
Quantitative Equity ......... 23 70 120 120 258
Blue Chip Growth ............ 25 77 131 131 280
Real Estate Securities ...... 23 71 122 122 262
Value ....................... 24 73
Int'l Growth and Income ..... 26 81 138 138 293
Growth and Income ........... 23 71 122 122 262
Equity-Income ............... 24 73 125 125 267
Balanced .................... 25 76
Aggressive Asset Allocation . 24 74 127 127 272
High Yield .................. 24 75
Moderate Asset Allocation ... 24 73 124 124 266
Conservative Asset Allocation 24 74 126 126 269
Strategic Bond .............. 24 73 125 125 268
Global Government Bond ...... 24 74 127 127 272
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
TRUST PORTFOLIO 1 YEAR 3 YEARS 5 YEARS+ 5 YEARS* 10 YEARS*
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital Growth Bond ............. 23 70 120 120 257
Investment Quality Bond ......... 22 69 119 119 255
U.S. Government Securities ...... 22 69 118 118 253
Money Market .................... 21 64 110 110 236
Lifestyle Aggressive 1000* ...... 26 79
Lifestyle Growth 820* ........... 25 77
Lifestyle Balanced 640* ......... 24 75
Lifestyle Moderate 460* ......... 24 73
Lifestyle Conservative 280* ..... 23 71
</TABLE>
+ For prior contracts no longer issued, Ven 8 contracts, (as described in
Appendix D) only. The difference in numbers is attributable to the different
withdrawal charges. See Appendix D.
* The example of expenses for certain Trusts contains only one year and three
year examples since they are newly formed Trusts.
** The example of expenses for the Lifestyle Trusts is calculated using the
midpoint of the minimum and maximum fees set forth under Trust Annual Operating
Expenses.
For purposes of presenting the foregoing Example, the Company has made
certain assumptions mandated by 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.
In addition, for purposes of calculating the values in the above Example,
the Company has translated the $30 annual administration charge listed under
"Annual Administration Fee" to a 0.086% annual asset charge based on the $35,000
approximate average size of certificates of this series issued during 1996 by
the Company comparable to the certificates offered by this Prospectus. So
translated, such charge would be higher for smaller contract values and lower
for larger contract values.
* * * * * * * *
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. This Prospectus generally describes
only the variable aspects of the contract, except where fixed aspects are
specifically mentioned.
11
<PAGE> 12
<TABLE>
TABLE OF ACCUMULATION UNIT VALUES+
<CAPTION>
- ----------------------------------------------------------------------------------------
SUB-ACCOUNT UNIT VALUE AT START UNIT VALUE AT END NUMBER OF UNITS AT
OF YEAR* OF YEAR END OF YEAR
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Small Cap
1996 $12.500000 $13.493094 265,493.981
- ----------------------------------------------------------------------------------------
Small/Mid Cap
1996 $12.500000 $13.215952 684,451.580
- ----------------------------------------------------------------------------------------
Global Equity
1994 $16.715126 $15.500933 171,668.821
1995 15.500933 16.459655 583,284.547
1996 16.459655 18.276450 923,612.249
- ----------------------------------------------------------------------------------------
Growth
1996 $12.500000 $13.727312 252,538.943
- ----------------------------------------------------------------------------------------
Blue Chip
1994 $ 8.699511 $ 8.837480 67,651.751
1995 8.837480 11.026969 532,417.987
1996 11.026969 13.688523 1,036,815.886
- ----------------------------------------------------------------------------------------
Equity
1994 $14.381312 $14.786831 156,302.930
1995 14.786831 20.821819 761,321.040
1996 20.821819 24.664354 1,637,731.552
- ----------------------------------------------------------------------------------------
Value Equity
1994 $11.375744 $11.107620 147,434.130
1995 11.107620 13.548849 816,934.091
1996 13.548849 16.011513 1,486,734.204
- ----------------------------------------------------------------------------------------
Growth and Income
1994 $13.239339 $13.076664 147,028.139
1995 13.076664 16.660889 916,107.230
1996 16.660889 20.178770 2,035,385.742
- ----------------------------------------------------------------------------------------
International Growth and
Income
1995 $10.000000 $10.554228 403,796.120
1996 10.554228 11.718276 783,705.750
- ----------------------------------------------------------------------------------------
Strategic Bond
1994 $10.192707 $ 9.965972 17,448.655
1995 9.965972 11.716972 276,219.578
1996 11.716972 13.250563 696,578.665
- ----------------------------------------------------------------------------------------
Global Government Bond
1994 $14.734788 $14.630721 46,005.023
1995 14.630721 17.772344 117,694.301
1996 17.772344 19.803954 194,577.024
- ----------------------------------------------------------------------------------------
Investment Quality Bond
1994 $14.307698 $14.216516 15,254.616
1995 14.216516 16.751499 118,436.044
1996 16.751499 16.943257 276,418.440
- ----------------------------------------------------------------------------------------
U.S. Government Securities
1994 $14.188969 $14.111357 14,981.455
1995 14.111357 16.083213 136,450.591
1996 16.083213 16.393307 299,784.238
- ----------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
[SUB-ACCOUNT UNIT VALUE AT START UNIT VALUE AT END NUMBER OF UNITS AT
OF YEAR* OF YEAR END OF YEAR]
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market
1994 $13.453100 $13.623292 57,620.649
1995 13.623292 14.190910 218,876.370
1996 14.190910 14.699636 436,831.126
- ----------------------------------------------------------------------------------------
Aggressive Asset Allocation
1994 $12.538660 $12.381395 41,051.814
1995 12.381395 14.990551 102,929.895
1996 14.990551 16.701647 162,245.394
- ----------------------------------------------------------------------------------------
Moderate Asset Allocation
1994 $12.522239 $12.396295 98,925.767
1995 12.396295 14.752561 312,206.344
1996 14.752561 15.995076 518,913.471
- ----------------------------------------------------------------------------------------
Conservative Asset
Allocation
1994 $12.378545 $12.298940 33,929.162
1995 12.298940 14.320582 127,957.567
1996 14.320582 15.113142 174,512.432
- ----------------------------------------------------------------------------------------
</TABLE>
* Units under this series of contracts were first credited under the
sub-accounts on August 9, 1994, except in the case of International Growth and
Income where units were first credited under the sub-accounts on January 9,
1995, Small/Mid Cap and International Small Cap where units were first credited
March 4, 1996 and growth where units were first credited July 15, 1996.
+ See Appendix D for the TABLE of ACCUMULATION UNIT VALUES for certain contracts
which are no longer being issued (Ven 8 contracts).
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. 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, as amended ("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.
If deemed by the Company to be in the best interests of persons having voting
rights under the contracts, the Variable Account may be operated as a management
company under the 1940 Act or it may be deregistered under such Act in the event
such registration is no longer required.
13
<PAGE> 14
There are currently thirty-four sub-accounts within the Variable Account.
The Company reserves the right 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
obtaining any necessary 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. A description of each
portfolio is set forth below. 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,
Emerging Growth Trust and the five Lifestyle Trusts which are non-diversified.
The Trust receives investment subadvisory services from NASL Financial Services,
Inc.
The Trust currently has fourteen subadvisers who manage all of the
portfolios:
SUBADVISER SUBADVISER TO
---------- -------------
Fred Alger Management, Inc. Small/Mid Cap Trust
Founders Asset Management, Inc. Growth Trust
Worldwide Growth Trust
Balanced Trust
International Small Cap Trust
Oechsle International Advisors, L.P. Global Government Bond Trust
Fidelity Management Trust Company Equity Trust
Conservative Asset Allocation Trust
Moderate Asset Allocation Trust
Aggressive Asset Allocation Trust
Wellington Management Company, LLP Growth and Income Trust
Investment Quality Bond Trust
Salomon Brothers Asset Management, Inc. U.S. Government Securities Trust
Strategic Bond Trust
J.P. Morgan Investment Management Inc. International Growth and Income Trust
T. Rowe Price Associates, Inc. Science & Technology Trust
Blue Chip Growth Trust
Equity-Income Trust
Rowe Price-Fleming International, Inc. International Stock Trust
Morgan Stanley Asset Management Inc. Global Equity Trust
Miller Anderson & Sherrerd, LLP Value Trust
High Yield Trust
Warburg, Pincus Counsellors, Inc. Emerging Growth Trust
Pilgrim Baxter & Associates Pilgrim Baxter Growth Trust
14
<PAGE> 15
Manufacturers Adviser Corporation Pacific Rim Emerging Markets Trust
Quantitative Equity Trust
Real Estate Securities Trust
Capital Growth Bond Trust
Money Market Trust
Lifestyle Trusts
The following is a brief description of each portfolio:
The PACIFIC RIM EMERGING MARKETS TRUST seeks long-term growth of capital by
investing in a diversified portfolio that is comprised primarily of common
stocks and equity-related securities of corporations domiciled in countries in
the Pacific Rim region.
The SCIENCE & TECHNOLOGY TRUST seeks long-term growth of capital. Current
income is incidental to the portfolio's objective.
The INTERNATIONAL SMALL CAP TRUST seeks 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.
The EMERGING GROWTH TRUST seeks maximum capital appreciation by investing
primarily in a portfolio of equity securities of domestic companies. The
Emerging Growth Trust ordinarily will invest at least 65% of its total assets in
common stocks or warrants of emerging growth companies that represent attractive
opportunities for maximum capital appreciation.
The PILGRIM BAXTER GROWTH TRUST seeks capital appreciation by investing in
companies believed by the subadviser to have an outlook for strong earnings
growth and the potential for significant capital appreciation.
The SMALL/MID CAP TRUST seeks 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.
The INTERNATIONAL STOCK TRUST seeks long-term growth of capital by
investing primarily in common stocks of established, non-U.S. companies.
The WORLDWIDE GROWTH TRUST seeks long-term growth of capital by normally
investing at least 65% of its total assets in equity securities of growth
companies in a variety of markets throughout the world.
The GLOBAL EQUITY TRUST seeks long-term capital appreciation by investing
primarily in equity securities throughout the world, including U.S. issuers and
emerging markets.
The GROWTH TRUST seeks long-term growth of capital by investing at least
65% of the portfolio's total assets in the common stocks of well-established,
high-quality growth companies that the subadviser believes have the potential to
increase earnings faster than the rest of the market.
The EQUITY TRUST seeks 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.
The QUANTITATIVE EQUITY TRUST seeks to achieve intermediate and long-term
growth through capital appreciation and current income by investing in common
stocks and other equity securities of well established companies with promising
prospects for providing an above average rate of return.
The BLUE CHIP GROWTH TRUST seeks to achieve long-term growth of capital
(current income is a secondary objective) and many of the stocks in the
portfolio are expected to pay dividends.
The REAL ESTATE SECURITIES TRUST seeks to achieve a combination of
long-term capital appreciation and satisfactory current income by investing in
real estate related equity and debt securities.
15
<PAGE> 16
The VALUE TRUST seeks to realize an above-average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing primarily in common and preferred stocks, convertible securities,
rights and warrants to purchase common stocks, ADRs and other equity securities
of companies with equity capitalizations usually greater than $300 million.
The INTERNATIONAL GROWTH AND INCOME TRUST seeks 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 the
subadviser. Under normal circumstances, the portfolio will be invested
approximately 85% in equity securities and 15% in fixed income securities.
The GROWTH AND INCOME TRUST seeks long-term growth of capital and income,
consistent with prudent investment risk, by investing primarily in a diversified
portfolio of common stocks of United States issuers which the subadviser
believes are of high quality.
The EQUITY-INCOME TRUST seeks to provide substantial dividend income and
also long-term capital appreciation by investing primarily in dividend-paying
common stocks, particularly of established companies with favorable prospects
for both increasing dividends and capital appreciation.
The BALANCED TRUST seeks current income and capital appreciation by
investing in a balanced portfolio of common stocks, U.S. and foreign government
obligations and a variety of corporate fixed-income securities.
The HIGH YIELD TRUST seeks to realize an above-average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing primarily in high yield debt securities, including corporate bonds and
other fixed-income securities.
The AUTOMATIC ASSET ALLOCATION TRUSTS seek the highest potential total
return consistent with a specified level of risk tolerance -- conservative,
moderate or aggressive -- by investing primarily in the kinds of securities in
which the Equity, Investment Quality Bond, U.S. Government Securities and Money
Market Trusts may invest.
* The AGGRESSIVE ASSET ALLOCATION TRUST seeks the highest total return
consistent with an aggressive level of risk tolerance. This Trust attempts to
limit the decline in portfolio value in very adverse market conditions to 15%
over any three year period.
* The MODERATE ASSET ALLOCATION TRUST seeks the highest total return
consistent with a moderate level of risk tolerance. This Trust attempts to limit
the decline in portfolio value in very adverse market conditions to 10% over any
three year period.
* The CONSERVATIVE ASSET ALLOCATION TRUST seeks the highest total return
consistent with a conservative level of risk tolerance. This Trust attempts to
limit the decline in portfolio value in very adverse market conditions to 5%
over any three year period.
The STRATEGIC BOND TRUST seeks 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 achievement of the portfolio's
investment objective.
The GLOBAL GOVERNMENT BOND TRUST seeks 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.
The CAPITAL GROWTH BOND TRUST seeks to achieve growth of capital by
investing in medium-grade or better debt securities, with income as a secondary
consideration. The Capital Growth Bond Trust differs from most "bond" funds in
that its primary objective is capital appreciation, not income.
16
<PAGE> 17
The INVESTMENT QUALITY BOND TRUST seeks 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.
The U.S. GOVERNMENT SECURITIES TRUST seeks 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.
The MONEY MARKET TRUST seeks 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.
The LIFESTYLE AGGRESSIVE 1000 TRUST seeks to provide long-term growth of
capital (current income is not a consideration) by investing 100% of the
Lifestyle Trust's assets in other portfolios of the Trust ("Underlying
Portfolios") which invest primarily in equity securities.
The LIFESTYLE GROWTH 820 TRUST seeks to provide long-term growth of capital
with consideration also given to current income by investing approximately 20%
of the Lifestyle Trust's assets in Underlying Portfolios which invest primarily
in fixed income securities and approximately 80% of its assets in Underlying
Portfolios which invest primarily in equity securities.
The LIFESTYLE BALANCED 640 TRUST seeks to provide a balance between a high
level of current income and growth of capital with a greater emphasis given to
capital growth by investing approximately 40% of the Lifestyle Trust's assets in
Underlying Portfolios which invest primarily in fixed income securities and
approximately 60% of its assets in Underlying Portfolios which invest primarily
in equity securities.
The LIFESTYLE MODERATE 460 TRUST seeks to provide a balance between a high
level of current income and growth of capital with a greater emphasis given to
high income by investing approximately 60% of the Lifestyle Trust's assets in
Underlying Portfolios which invest primarily in fixed income securities and
approximately 40% of its assets in Underlying Portfolios which invest primarily
in equity securities.
The LIFESTYLE CONSERVATIVE 280 TRUST seeks to provide a high level of
current income with some consideration also given to growth of capital by
investing approximately 80% of the Lifestyle Trust's assets in Underlying
Portfolios which invest primarily in fixed income securities and approximately
20% of its assets in Underlying Portfolios which invest primarily in equity
securities.
In pursuing the Strategic Bond, High Yield 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 Pacific Rim Emerging Markets, International Stock,
Worldwide Growth, International Small Cap, Global Equity, Strategic Bond,
International Growth and Income, High Yield 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
17
<PAGE> 18
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.
DESCRIPTION OF THE CONTRACT
ELIGIBLE GROUPS
The contract may be issued to fund 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") The contract is also designed so that it may be
used with non-qualified retirement plans, such as deferred compensation and
payroll savings plans and such other groups (trusteed or non-trusteed) as may be
eligible under applicable law. Contracts have been issued to the Security Life
Trust, a trust established with United Missouri Bank, N.A., Kansas City,
Missouri, as group holder for groups comprised of persons who have brokerage
accounts with brokers having selling agreements with NASL Financial Services,
Inc., the principal underwriter of the contracts.
An eligible member of a group to which a contract has been issued may
become an owner under the contract by submitting a completed application, if
required by the Company, and a minimum purchase payment. A certificate
summarizing the rights and benefits of the owner under the contract will be
issued to an applicant acceptable to the Company. The Company reserves the right
to decline to issue a certificate to any person in its sole discretion. All
rights and privileges under the contract may be exercised by each owner as to
his or her interest unless expressly reserved to the group holder. However,
provisions of any plan in connection with which the contract was issued may
restrict an owner's ability to exercise such rights and privileges.
ACCUMULATION PROVISIONS
PURCHASE PAYMENTS
Purchase payments are paid to the Company at its Annuity Service Office.
Effective October 1, 1996, the minimum initial purchase payment is $5,000 for
non-qualified retirement plans and $2,000 for retirement plans qualifying for
special income tax treatment under the Internal Revenue Code. Prior to October
1, 1996, the minimum initial purchase payment was $30 with the additional
requirement that at least $300 be paid during the first contract year. Purchase
payments may be made at any time. The Company may provide by separate agreement
for purchase payments to be automatically withdrawn from an owner's bank account
on a periodic basis. If a purchase payment would cause the contract value for an
owner to exceed $1,000,000 or the owner's 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 certificate and an owner's
participation under a contract at the end of any two consecutive certificate
years in which no purchase payments by or on behalf of the owner have been made,
if both (i) the total purchase payments made for the certificate, less any
withdrawals, are less than $2,000; and (ii) the contract value for the owner at
the end of such two year period is less than $2,000. The cancellation of
contract privileges may vary in certain states in order to
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comply with the requirements of insurance laws and regulations in such state.
Upon cancellation the Company will pay the owner his or her contract value
computed as of the valuation period during which the cancellation occurs less
any debt and less the annual $30 administration fee. The amount paid will be
treated as a withdrawal 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 owner. In addition, owners have the
option to participate in the Guarantee Plus Program administered by the Company.
Under the Guarantee Plus Program the initial purchase payment is split between
the fixed and variable investment options. A percentage of the initial purchase
payment is allocated to the chosen fixed account, such that at the end of the
guaranteed period the fixed account will have grown to an amount at least equal
to the total initial purchase payment. The percentage depends upon the current
interest rate of the fixed investment option. The balance of the initial
purchase payment is allocated among the variable investment options as indicated
on the certificate application. Owners may elect to participate in the Guarantee
Plus Program and may obtain full information concerning the program and its
restrictions from their securities dealers or the Annuity Service Office. An
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 each owner for each
variable account investment option to which such owner allocates purchase
payments. Purchase payments are credited to such investment accounts in the form
of accumulation units. The following discussion of accumulation units, the value
of accumulation units and the net investment factor formula pertains only to the
accumulations in the variable account investment options. The parallel
discussion regarding accumulations in the fixed account investment options
appears elsewhere in this Prospectus. (See "FIXED ACCOUNT INVESTMENT OPTIONS")
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 for a certificate, pursuant to the procedures
described below.
Initial purchase payments for a certificate 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 all
information necessary for processing issuance of the certificate. The applicant
will be informed of any deficiencies preventing processing if the certificate
cannot be issued 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.
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 or $12.50 for the first valuation
period under contracts similar to the contracts described in this Prospectus.
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 administrative expenses and mortality and expense risks.
Currently, such factor is equal on an annual basis to 1.4% (0.15% for
administrative 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 an owner may transfer amounts among his or her
variable account investment options and from such investment options to his or
her fixed account investment options at any time and without charge upon written
notice to the Company or by telephone if the 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 for a certificate on the
date of the transfer will not be affected by the transfer. The 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 an owner may make to one per month or six at any
time within a certificate 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.
MAXIMUM NUMBER OF INVESTMENT OPTIONS
Due to current administrative capabilities, a contract owner is limited to
a maximum of 17 investment options (including all fixed account investment
options) during the period prior to the maturity date of the contract (the
"Contract Period"). In calculating this limit for each contract owner,
investment options to which the contract owner has allocated purchased payments
at any time during the Contract Period will be counted toward the 17 maximum
even if the contract owner no longer has contract value allocated to these
investment options.
TELEPHONE TRANSACTIONS
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, an owner must elect the option. 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, owners will
be asked to provide their account number, and if not available, their social
security number. For the owner's and Company's protection, all conversations
with owners will be tape recorded. All telephone transactions will be followed
by a confirmation statement of the transaction.
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SPECIAL TRANSFER SERVICES - DOLLAR COST AVERAGING
The Company administers a Dollar Cost Averaging ("DCA") program which
enables an owner to pre-authorize a periodic exercise of the contractual
transfer rights described above. 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 one year fixed account investment option is exhausted. The DCA program is
generally suitable for owners making a substantial deposit 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. Owners interested in the DCA program may elect to
participate in the program on the application or by separate application. 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. The contract owner's contract value
will be automatically rebalanced pursuant to the schedule described below 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.
For rebalancing programs begun on or after October 1, 1996 asset
rebalancing will only be permitted on the following time schedules:
(i) quarterly on the 25th day of the last month of the quarter (or the next
business day if the 25th is not a business day);
(ii) semi-annually on June 25th or December 26th (or the next business day
if these dates are not business days); or
(iii) annually on December 26th (or the next business day if December 26th
is not a business day).
Rebalancing will continue to take place on the last business day of every
calendar quarter for rebalancing programs begun prior to October 1, 1996.
WITHDRAWALS
Prior to the earlier of the maturity date or the death of an owner, an
owner may withdraw all or a portion of his or her 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 owner's contract value
as of the date of receipt of the request at its Annuity Service Office, less the
annual $30 administration fee if applicable, any debt and any applicable
withdrawal charge, and the owner's certificate 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 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 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 fixed account investment options, beginning with the shortest
guarantee period first and ending with the longest guarantee period last. If the
partial withdrawal is less than the total value in the variable account
investment options, the withdrawal will be taken pro rata from the variable
account investment options: taking from each such variable account investment
option an amount which bears the same relationship to the total amount withdrawn
as the value of such variable account investment option bears to the total value
of all the owner's investments in variable account investment options.
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For the rules governing the order and manner of withdrawals from the fixed
account investment options, see "FIXED ACCOUNT INVESTMENT OPTIONS."
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 owner's contract value to less than $300, the
Company will treat the partial withdrawal as a total withdrawal of the owner's
contract value.
The amount of any withdrawal from the variable account investment options
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 or certificates issued in
connection with Section 403(b) qualified plans only under limited circumstances.
(See "FEDERAL TAX MATTERS")
TELEPHONE REDEMPTIONS. The owner may request the option to withdraw a
portion of his or her contract value by telephone by completing a separate
application. 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 - INCOME PLAN
The Company administers an Income Plan ("IP") which enables an owner to
pre-authorize a periodic exercise of the contractual withdrawal rights described
above. Owners entering into an IP agreement instruct the Company to withdraw a
level dollar amount from specified investment options on a periodic basis. The
total of IP withdrawals in a certificate year is limited to not more than 10% of
the purchase payments made by or on behalf of the owner to ensure that no
withdrawal or market value charge will ever apply to an IP withdrawal. If an
additional withdrawal is made by an owner participating in an IP, the IP will
terminate automatically and may be reinstated only on or after the next
certificate anniversary. The IP is not available to owners participating in the
dollar cost averaging program or for which purchase payments are being
automatically deducted from a bank account on a periodic basis. IP withdrawals
will be free of withdrawal and market value charges. IP withdrawals may,
however, be subject to income tax and a 10% penalty tax. (See "FEDERAL TAX
MATTERS") Owners interested in an IP may elect to participate in this program
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 under contracts or certificates
issued in connection with Section 403(b) qualified plans that are not subject to
Title I of ERISA. Where available, owners may obtain loans using their contract
value 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
an owner's 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
taken by the owner 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")
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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
owner's 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 owner's
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 loan 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 owner's 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 certificate
anniversary, the Company will transfer from the owner's investment accounts to
his or her loan account the amount by which the owner's debt exceeds the balance
in his or her 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 owner's debt and bears interest at 6% as
well. The Company credits interest with respect to amounts held in the owner's
loan account at a rate of 4% per year. Consequently, the net cost of loans under
the contract is 2%. If on any date an owner's debt exceeds his or her contract
value, there will be a default as to the owner. In such case the owner will
receive a notice indicating the payment needed to cure the 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 as to that owner (terminated without value) and the certificate
canceled.
The amount of an owner's debt will be deducted from the death benefit
otherwise payable to the beneficiary. (See "DEATH BENEFIT BEFORE MATURITY DATE")
In addition, debt, whether or not repaid, will have a permanent effect on an
owner's 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 owner's 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
In General. The following discussion applies principally to contracts and
certificates that are not issued in connection with qualified plans, i.e., a
"non-qualified" contract or certificate. 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 a contract or certificate to be used in connection with a qualified
plan should seek competent legal and tax advice regarding the suitability of the
contract or certificate for the situation involved and the requirements
governing the distribution of benefits, including death benefits, from a
contract or certificate used in the plan. In particular, a prospective purchaser
who intends to use the contract or certificate in connection with a qualified
plan should consider that the contract provides a 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 certain
qualified plans and the provision of such benefits may result in currently
taxable income to plan participants. (See "FEDERAL TAX MATTERS"). See APPENDIX D
for information on death benefit provisions applicable to certain contracts
which are no longer being issued (Ven 8 contracts).
Amount of Death Benefit. If any owner dies on or prior to his or her 85th
birthday and the oldest owner had an attained age of less than 81 years on the
certificate date, the death benefit will be determined as follows: During the
first certificate year, the death benefit will be the greater of: (a) the
contract value or (b) the sum of all purchase payments made, less any amounts
deducted in connection with partial withdrawals made by or on behalf of the
owner. During any subsequent certificate year, the death benefit will be the
greater of: (a) the contract value or (b) the death benefit on the last day of
the previous certificate year, plus any purchase payments made and less any
amounts deducted in connection with partial withdrawals made by or on behalf of
the owner since then.
If any owner dies after his or her 85th birthday and the oldest owner had
an attained age of less than 81 years on the certificate date, the death benefit
will be the greater of: (a) the contract value or (b) the excess of (i) the sum
of all purchase payments made by or on behalf of the owner over (ii) the sum of
any amounts deducted in connection with partial withdrawals made by or on behalf
of the owner. If any owner dies and the oldest owner had an attained age greater
than 80 on the certificate date, the death benefit will be the contract value
less any applicable withdrawal charges at the time of payment of benefits.
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The determination of the death benefit will be made on the date written
notice and proof of death, as well as all required claims forms, are received at
the Company's Annuity Service Office. No person is entitled to the death benefit
until this time. In addition, partial withdrawals include amounts applied under
an annuity option under the contract. Also, amounts deducted in connection with
partial withdrawals include charges imposed on a partial withdrawal, but not
amounts charged in payment of the annual administration fee. If the owner has
any debt under the contract, the death benefit equals the death benefit, as
described above, less such debt.
Payment of Death Benefit. The Company will pay the death benefit (which, as
defined above, is net of any debt) to the beneficiary if any owner dies before
the maturity date. If there is a surviving owner, that owner will be deemed to
be the beneficiary. No death benefit is payable on the death of any annuitant,
except that if any owner is not a natural person, the death of any annuitant
will be treated as the death of an owner. On the death of the last surviving
annuitant, the owner, if a natural person, will become the annuitant unless the
owner designates another person as the annuitant.
The death benefit may be taken in the form of a lump sum immediately. If
not taken immediately, the certificate will continue subject to the following:
(1) The beneficiary will become the owner. (2) Any excess of the death benefit
over the contract value will be allocated to the owner's investment accounts in
proportion to their relative values on the date of the Company's receipt at its
Annuity Service Office of written notice and proof of death and all required
claim forms. (3) No additional purchase payments may be made. (4) If the
beneficiary is not the deceased's owner spouse, distribution of the owner's
entire interest in the certificate must be made within five years of the owner's
death, or alternatively, distribution may be made as an annuity, under one of
the annuity options described below, which begins within one year of the owner's
death and is payable over the life of the beneficiary or over a period not
extending beyond the life expectancy of the beneficiary. Upon the death of the
beneficiary, the death benefit will equal the contract value which must be
distributed immediately in a single sum. (5) If the owner's spouse is the
beneficiary, the certificate will continue with the spouse as the new owner. In
such a case, the distribution rules described in "(4)" applicable when an owner
dies will apply when the spouse, as the owner, dies. (6) If any owner dies and
the oldest owner had an attained age of less than 81 on the certificate date,
withdrawal charges are not applied on payment of the death benefit (whether
taken through a partial or total withdrawal or applied under an annuity option).
If any owner dies and the oldest owner had an attained age greater than 80 on
the certificate date, withdrawal charges will be assessed only upon payment of
the death benefit (if such charges are otherwise applicable), so that if the
death benefit is paid in a subsequent year, a lower withdrawal charge will be
applicable.
If the annuitant is changed and the contract owner is not a natural person,
the entire interest in the contract must be distributed to the contract owner
within five years. The amount distributed will be reduced by charges which would
otherwise apply upon withdrawal.
A substitution or addition of any owner may result in resetting the death
benefit to an amount equal to the contract value as of the date of the change
and treating such value as a payment made on that date for purposes of computing
the amount of the death benefit. In addition, all purchase payments made and all
amounts deducted in connection with partial withdrawals prior to the date of the
change of owner will not be considered in the determination of the death
benefit. Furthermore, the death benefit on the last day of the previous contract
year shall be set to zero as of the date of the owner change. No such change in
death benefit will be made if the individual whose death will cause the death
benefit to be paid is the same after the change in ownership or if ownership is
transferred to the owner's spouse.
Death benefits will be paid within seven days of the date the amount of the
death benefit is determined, as described above, subject to postponement under
the same circumstances that payment of withdrawals may be postponed. (See
"WITHDRAWALS")
ANNUITY PROVISIONS
GENERAL
Proceeds payable on death, withdrawal or the maturity date may be applied
to the annuity options described below, subject to the distribution of death
benefits provisions. ( See "DEATH BENEFIT BEFORE MATURITY DATE")
Generally, annuity benefits under the contract will begin on the maturity
date of the certificate. The maturity date is the date specified on the
certificate specifications page, unless changed. If no date is specified, the
maturity date is the maximum maturity date described below. The maximum maturity
date is the first day of the month following the later of the 85th birthday of
the annuitant or the tenth contract anniversary. An owner may specify a
different maturity date at any time by written request at
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least one month before both the previously specified and the new maturity date.
The new maturity date may not be later than the maximum maturity date unless the
Company consents. 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" Distributions from qualified contracts may be required before the
maturity date.
An owner may select the frequency of annuity payments. However, if the
owner's 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. On or before the maturity
date, an 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 an annuity option is not selected, the Company will provide as a default
option annuity payments on a fixed, variable or combined fixed and variable
basis in proportion to the Investment Account Value of each investment option at
the maturity date. Annuity payments will continue for 10 years or the life of
the annuitant, if longer. 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.
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.
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DETERMINATION OF AMOUNT OF THE FIRST VARIABLE ANNUITY PAYMENT
The first variable annuity payment is determined by applying that portion
of the contract value for a certificate 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 and the certificate. The rates contained in such tables depend upon the
annuitant's age (as adjusted depending on the annuitant's year of birth) and the
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 rates are based on the 1983
Table A projected at Scale G, assume births in year 1942 and reflect an assumed
interest rate of 3% per year. See Appendix D for information on assumed interest
rates applicable to certain contracts which are no longer being issued (Ven 8
contracts).
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 by the owner. 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 used to effect annuity
payments under a certificate 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
selected by the owner 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. A pro-rata portion of the administration fee will be deducted from each
annuity payment.
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.
A 3% 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 3% annually, annuity payments will be level.
TRANSFERS AFTER MATURITY DATE
Once variable annuity payments have begun, an 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 by the owner 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. 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. The Company
reserves the right to limit, upon notice, the maximum number of transfers an
owner may make per certificate year to four. 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
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<PAGE> 27
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
An owner may return his or her certificate to the Company's Annuity Service
Office or agent at any time within 10 days after receipt of the certificate.
Within 7 days of receipt of the certificate by the Company, the Company will pay
the owner's contract value, less any debt, computed at the end of the valuation
period during which the certificate is received by the Company, to the owner.
No withdrawal charge is imposed upon return of the certificate 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 certificate 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 is owned by the group holder. However, all contract rights and
privileges not expressly reserved to the group holder may be exercised by each
owner as to his or her interests as specified in his or her certificate. Prior
to the maturity date, an owner is the person designated on the certificate
specifications page or as subsequently named. On and after a certificate's
maturity date, the annuitant is the owner. If amounts become payable under the
certificate to any beneficiary, the beneficiary is the owner.
In the case of non-qualified contracts, an owner's interest in the contract
may be changed, or the certificate may be collaterally assigned, at any time
prior to the maturity date, subject to the rights of any irrevocable
beneficiary. Ownership of the contract may be assigned at any time by the group
holder. Assigning a contract or interest therein, or changing the ownership of a
contract or certificate, may be treated as a distribution of the contract value
for Federal tax purposes. A change of any owner may result in resetting the
death benefit to an amount equal to the contract value as of the date of the
change and treating such value as a purchase payment made on that date for
purposes of computing the amount of the death benefit. See "DEATH BENEFIT BEFORE
MATURITY DATE"
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 the Company receives the request at its Annuity
Service Office. The Company assumes no liability for any payments made or
actions taken before a change is approved or an assignment is accepted or
responsibility for the validity or sufficiency of any assignment. An absolute
assignment will revoke the interest of any revocable beneficiary.
In the case of qualified contracts, ownership of the contract or an owner's
interest in the contract generally may not be transferred except to the trustee
of an exempt employees' trust which is part of a retirement plan qualified under
Section 401 of the Internal Revenue Code or as otherwise permitted by applicable
IRS regulations. Subject to the foregoing, an owner's interest in 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.
See Appendix D for information on ownership applicable to certain contracts
which are no longer being issued (Ven 8 contracts).
BENEFICIARY
The beneficiary is the person, persons or entity designated on the
certificate specifications page or as subsequently named. However, if there is a
surviving owner, that person will be treated as the beneficiary. The beneficiary
may be changed subject to the rights of any irrevocable beneficiary. Any change
must be made in writing, 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. If no
beneficiary is living, the contingent beneficiary will be the beneficiary. The
interest of any beneficiary is subject to that of any assignee. If no
beneficiary or contingent beneficiary is living, the beneficiary is the estate
of the deceased owner. In
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<PAGE> 28
the case of certain qualified contracts or certificates, regulations promulgated
by the Treasury Department prescribe certain limitations on the designation of a
beneficiary.
See Appendix D for information on ownership applicable to certain contracts
which are no longer being issued (Ven 8 contracts).
ANNUITANT
The annuitant is any natural person or persons whose life is used to
determine the duration of annuity payments involving life contingencies. If the
owner names more than one person as an "annuitant," the second person named
shall be referred to as "co-annuitant." The annuitant is as designated on the
contract specifications page or in the application, unless changed.
On the death of the annuitant, the co-annuitant, if living, becomes the
annuitant. If there is no living co-annuitant, the owner becomes the annuitant.
In the case of certain qualified contracts, there are limitations on the ability
to designate and change the annuitant and the co-annuitant.
MODIFICATION
The contract or any certificate may not be modified by the Company without
the consent of the group holder or the owner, as applicable, except as may be
required to make it conform to any law or regulation or ruling issued by a
governmental agency. However, on 60 days' notice to the group holder, the
Company may change the withdrawal charges, administration fees, mortality and
expense risk charges, free withdrawal percentage, annuity purchase rates and the
market value charge as to any certificates issued after the effective date of
the modification. The provisions of the contract shall be interpreted so as to
comply with the requirements of Section 72(s) of the Internal Revenue Code.
See Appendix D for information on ownership applicable to certain contracts
which are no longer being issued (Ven 8 contracts).
DISCONTINUANCE OF NEW OWNERS
On thirty days' notice to the group holder, the Company may limit or
discontinue acceptance of new applications and the issuance of new certificates
under a contract.
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 OPTIONS
Due to certain exemptive and exclusionary provisions, interests in the
fixed account investment options are not registered under the Securities Act of
1933, as amended ("1933 Act") and the Company's general account is not
registered as an investment company under the 1940 Act. Accordingly, neither
interests in the fixed account investment options 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 this Prospectus
relating thereto. Disclosures relating to interests in the fixed account
investment options 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.
Pursuant to a Guarantee Agreement dated March 31, 1996, Manulife, the
ultimate parent of the Company, unconditionally guarantees to the Company on
behalf of and for the benefit of the Company and owners and groupholders 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 issued after June 27,1984. This Guarantee covers
the fixed portion of the contracts described by this Prospectus. This Guarantee
may be terminated by Manulife on notice to the Company. Termination will not
affect Manulife's
28
<PAGE> 29
continuing liability with respect to all fixed annuity contracts issued prior to
the termination of the Guarantee except if: (i) the liability to pay contractual
claims under the contracts is assumed by another insurer or (ii) the Company is
sold and the buyer's guarantee is substituted for the Manulife guarantee.
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.
Investment Options. Currently there are four fixed account investment
options under the contract: one, three, five and seven year investment accounts.
The Company may offer additional fixed account investment options for any yearly
period from two to ten years. Fixed investment accounts provide for the
accumulation of interest on purchase payments at guaranteed rates for the
duration of the guarantee period. The 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. See Appendix D for
information on fixed account investment options and the guaranteed rate of
interest applicable to certain contracts which are no longer being issued (Ven 8
contracts).
Investment Accounts. Owners may allocate purchase payments, or make
transfers from their variable investment options, to fixed account investment
options at any time prior to the maturity date. The Company establishes a
separate investment account each time an owner allocates or transfers amounts to
a fixed account investment option, except that amounts allocated or transferred
to the same 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, an owner may establish a new
investment account with the same guarantee period at the then current interest
rate, select a different fixed account investment option or transfer the amounts
to a variable account investment option, all without the imposition of any
charge. An owner may not select a guarantee period that would extend beyond the
maturity date. 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 an owner does not specify the renewal option desired, the Company will
select the same guarantee period as has just expired, so long as such period
does not extend beyond the maturity date. In the event a renewal would extend
beyond the maturity date, the Company will select the longest period that will
not extend beyond such date, except in the case of a renewal within one year of
the maturity date in which case the Company will credit interest up to the
maturity date at the then current interest rate for one year guarantee periods.
Market Value Charge. Any amount withdrawn, transferred or borrowed from an
investment account prior to the end of the guarantee period may be subject to a
market value charge. A market value charge will be calculated separately for
each investment account affected by a transaction to which a market value charge
may apply. The market value charge for an investment account will be calculated
by multiplying the amount withdrawn or transferred from the investment account
by the adjustment factor described below. The Company reserves the right to
modify the market value charge as to any certificates issued after the effective
date of a charge specified in written notice to the group holder.
The adjustment factor is determined by the following formula:
0.75x(B-A)xC/12 where:
A- The guaranteed interest rate on the investment account.
B- The guaranteed interest rate available, on the date the request is
processed, for amounts allocated to a new investment account with the
same length of guarantee period as the investment account from which
the amounts are being withdrawn.
C- The number of complete months remaining to the end of the guarantee
period.
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<PAGE> 30
For purposes of applying this calculation, the maximum difference between
"B" and "A" will be 3%. The adjustment factor may never be less than zero.
The total market value charge will be the sum of the market value charges
for each investment account being withdrawn. Where the guaranteed rate available
on the date of the request is less than the rate guaranteed on the investment
account from which the amounts are being withdrawn (B-A in the adjustment factor
is negative), there is no market value charge. There is only a market value
charge when interest rates have increased (B-A in the adjustment factor is
positive).
There will be no market value charge on withdrawals from the fixed account
investment options in the following situations: (a) death of the owner: (b)
amounts withdrawn to pay fees or charges; (c) amounts applied at the maturity
date to purchase an annuity at the guaranteed rates provided in the certificate;
(d) amounts withdrawn from investment accounts within one month prior to the end
of the guarantee period; (e) amounts withdrawn from a one-year fixed investment
account; and (f) amounts withdrawn in any certificate year that do not exceed
10% of (i) total purchase payments less (ii) any prior partial withdrawals in
that certificate year.
Notwithstanding application of the foregoing formula, in no event will the
market value charge (i) be greater than the amount by which the earnings
attributable to the amount withdrawn or transferred from an investment account
exceed an annual rate of 3%, (ii) together with any withdrawal charges for an
investment account be greater than 10% of the amount transferred or withdrawn,
or (iii) reduce the amount payable on withdrawal or transfer below the amount
required under the non-forfeiture laws of the state with jurisdiction over the
contract. The cumulative effect of the market value and withdrawal charges (or
the effect of the withdrawal charge itself) could, however, result in an owner
receiving total withdrawal proceeds of less than the owner's investment in the
contract. See Appendix D for information on the market value charge applicable
to certain contracts which are no longer being issued (Ven 8 contracts).
Transfers. Prior to the maturity date, an owner may transfer amounts among
his or her fixed account investment options and from the fixed account
investment options to his or her variable account investment options, subject to
the following conditions. An amount in a fixed investment account may not be
transferred until held in such account for at least one year, except transfers
may be made pursuant to the Dollar Cost Averaging program. Consequently, except
as noted above, amounts in one year investment accounts effectively may not be
transferred prior to the end of the guarantee period. Amounts in any other
investment accounts may be transferred after the one year holding period has
been satisfied, but the market value charge described above may apply to such a
transfer. The market value charge, if applicable, will be deducted from the
amount transferred.
An owner must specify the fixed account investment option from or to which
a transfer is to be made. Where there are multiple investment accounts within a
fixed account investment option, amounts must be withdrawn from the fixed
account investment option on a first-in-first-out basis.
Withdrawals. An owner may make total and partial withdrawals of amounts
held in his or her fixed account investment options at any time prior to the
earlier of the death of an owner or the maturity date. Withdrawals from fixed
account investment options 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 fixed account investment options: (1) the Company
reserves the right to defer payment of amounts withdrawn from fixed account
investment options for up to six months from the date it receives the written
withdrawal request and certificate if required (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); (2) if there are multiple
investment accounts under a fixed account investment option, amounts must be
withdrawn from such accounts on a first-in-first-out basis; and (3) the market
value charge described above may apply to withdrawals from any investment option
except for a one year investment option. In the event a market value charge
applies to a withdrawal from a fixed investment account, it will be calculated
with respect to the full amount in the investment account and deducted from the
amount payable in the case of a total withdrawal. In the case of a partial
withdrawal, the market value charge will be calculated on the amount requested
and deducted, if applicable, from the remaining investment account value.
Where an owner requests a partial withdrawal in excess of his or her
amounts in the variable account investment options and does not specify the
fixed account investment options from which the withdrawal is to be made, such
withdrawal will be made from his or her investment options beginning with the
shortest guarantee period. Within such sequence, where there are multiple
investment accounts within a fixed account investment option, withdrawals will
be made on a first-in-first-out basis.
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<PAGE> 31
Withdrawals from the contract may be subject to income tax and a 10%
penalty tax, and withdrawals are permitted from contracts and certificates
issued in connection with Section 403(b) qualified plans only under limited
circumstances. (See "FEDERAL TAX MATTERS")
Loans. The Company offers a loan privilege only under contracts or
certificates issued in connection with Section 403(b) qualified plans that are
not subject to Title I of ERISA. Where available, owners may obtain loans using
their contract value as the only security for the loan. Owners may borrow
amounts allocated to their fixed investment accounts in the same manner and
subject to the same limitations as set forth under "LOANS." The market value
charge described above may apply to amounts transferred from the fixed
investment accounts to the loan account in connection with such loans and, if
applicable, will be deducted from the amount so transferred.
Fixed Annuity Options. Subject to the distribution of death benefits
provisions (see "DEATH BENEFIT BEFORE MATURITY DATE)", on death, withdrawal or
the maturity date, the proceeds may be applied to a fixed annuity option. (See
"ANNUITY OPTIONS") 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 contract. If the
table in use by the Company is more favorable to the owner, the Company will
substitute that table. The Company guarantees the dollar amount of fixed annuity
payments.
CHARGES AND DEDUCTIONS
Charges and deductions 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. 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 by an owner before the maturity
date of the certificate, a withdrawal charge (contingent deferred sales charge)
may be assessed against amounts withdrawn attributable to purchase payments that
have been in the contract for the owner less than seven complete years. There is
never a withdrawal charge with respect to earnings accumulated for an owner in
the contract, certain other free withdrawal amounts described below or purchase
payments by or on behalf of the owner that have been in the contract more than
seven complete years. In no event may the total withdrawal charges exceed 6% of
the total purchase payments made by or on behalf of the owner. The amount of the
withdrawal charge and when it is assessed is discussed below:
1. Each withdrawal is allocated first to the "free withdrawal amount" and
second to "unliquidated purchase payments" for each certificate. In any
certificate year, the free withdrawal amount for that year is the greater of (1)
the excess of the owner's contract value on the date of withdrawal over the
unliquidated purchase payments made by or on behalf of the owner (the
accumulated earnings on the owner's certificate) or (2) the excess of (i) over
(ii), where (i) is 10% of total purchase payments made by or on behalf of the
owner and (ii) is all prior partial withdrawals made by or on behalf of the
owner in that certificate year. Withdrawals allocated to the free withdrawal
amount may be withdrawn without the imposition of a withdrawal charge.
2. If an owner makes a withdrawal for an amount in excess of the free
withdrawal amount, the excess will be allocated to purchase payments made by or
on behalf of the owner which will be liquidated on a first-in first-out basis.
On any withdrawal request, the Company will liquidate purchase payments made by
or on behalf of the owner 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 is subject to a withdrawal charge based on the length of time
the purchase payment has been in the contract. The amount of the withdrawal
charge is calculated by multiplying the amount of the purchase payment being
liquidated by the applicable withdrawal charge percentage obtained from the
table below.
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<PAGE> 32
<TABLE>
<CAPTION>
NUMBER OF COMPLETE YEARS
PURCHASE PAYMENT IN WITHDRAWAL CHARGE
CONTRACT PERCENTAGE
---------------------------------------------------
<S> <C>
0 6%
1 6%
2 5%
3 5%
4 4%
5 3%
6 2%
7+ 0%
</TABLE>
The total withdrawal charge will be the sum of the withdrawal charges for
the purchase payments being liquidated.
4. The withdrawal charge is deducted from the owner's contract value
remaining after the 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 plus market value charge.
5. There is generally no withdrawal charge on distributions made as a
result of the death of the owner or, if applicable, annuitant (see "Death
Benefit Before Maturity Date - Amount of Death Benefit) and no withdrawal
charges are imposed on the maturity date if the 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. See
APPENDIX D for information on withdrawal charges applicable to certain contracts
which are no longer being issued (Ven 8 contracts). Withdrawals from the fixed
account investment options may be subject to a market value charge in addition
to the withdrawal charge described above. (See "FIXED ACCOUNT INVESTMENT
OPTIONS") The Company reserves the right to modify the withdrawal charge as to
certificates issued after the effective date of a change specified in written
notice to the group holder.
REDUCTION OR ELIMINATION OF WITHDRAWAL CHARGES
The amount of the withdrawal charge on a contract or certificate may be
reduced or eliminated when some or all of the certificates are to be sold 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 the 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 sales 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.
3. Any prior or existing relationship with the Company will be considered.
Certificate sales expenses are likely to be less when there is a prior or
existing relationship because of the likelihood of implementing more sales with
fewer sales contacts.
4. The level of commissions paid to selling broker-dealers will be
considered. Certain broker-dealers may offer certificates 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 certificates, 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.
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<PAGE> 33
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 certificate 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
Except as noted below, the Company will deduct each year an annual
administration fee of $30 from each owner's contract value as partial
compensation for the cost of providing all administrative services attributable
to the contracts and certificates and the operations of the Variable Account and
the Company in connection with the contracts and certificates. However, if prior
to the maturity date the contract value is greater than or equal to $100,000 at
the time of the fee's assessment, the fee will be waived. Prior to the maturity
date, this administration fee is deducted on the last day of each certificate
year. It is withdrawn from each investment option in the same proportion that
the value of such investment option bears to the sum of the investments options.
If an owner's entire contract value is withdrawn on other than the last day of
any certificate year, the $30 administration fee will be deducted from the
amount paid. During the annuity period, the fee is deducted on a pro-rata basis
from each annuity payment. See Appendix D for the administration fee applicable
to certain contracts which are no longer being issued (Ven 8 contracts).
A daily charge in an amount equal to 0.15% of the value of each variable
investment account on an annual basis is also deducted from each sub-account to
reimburse the Company for administrative expenses. This asset-based
administrative charge will not be deducted from the fixed account investment
options. The charge will be reflected in each owner's contract value as a
proportionate reduction in the value of each variable investment account.
Because this portion of the administrative fee is a percentage of assets rather
than a flat amount, larger contract values will in effect pay a higher
proportion of this portion of the administrative expense than smaller contract
values.
The Company does not expect to recover from such 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 as to any certificates issued prior to the effective date of
the Company's modification of such fees. There is no necessary relationship
between the amount of the administrative charge imposed on a given certificate
and the amount of the expense that may be attributed to that certificate.
REDUCTION OR ELIMINATION OF ANNUAL ADMINISTRATION FEE
The amount of the annual administration fee on a contract or a certificate
may be reduced or eliminated when some or all of the certificates are to be sold
to a group of individuals in such a manner that results in savings of
administration expenses. The entitlement to such a reduction or elimination of
the administration charges will be determined by the Company in the following
manner:
1. The size and type of group to which administrative services are to be
provided will be considered.
2. The total amount of purchase payments to be received will be considered.
3. There may be other circumstances of which the Company is not presently
aware, which could result in reduced administrative expense.
If, after consideration of the foregoing factors, it is determined that
there will be a reduction or elimination of administration expenses, the Company
will provide a reduction in the annual administration fee. In no event will
reduction or elimination of the administration fees be permitted where such
reduction or elimination will be unfairly discriminatory to any person. The
Company may waive all or a portion of the administration fee when a certificate
is issued to an officer, director or employee, or relative thereof, of the
Company, Manulife, the Trust or any of their affiliates.
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MORTALITY AND EXPENSE RISK CHARGE
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 with respect to existing certificates. 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 an owner dies before the
maturity date, it will pay a death benefit. (See "DEATH BENEFIT BEFORE MATURITY
DATE") The expense risk assumed by the Company is the risk that the
administration charges or withdrawal charge may be insufficient to cover actual
expenses.
To compensate it for assuming these risks, the Company currently deducts
from each of the sub-accounts a daily charge 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 charge will be
reflected in each owner's contract value as a proportionate reduction in the
value of each variable investment account. The rate of the mortality and expense
risk charge can be increased, but only as to certificates issued after the
effective date of the increase and upon 60 days' prior written notice to the
group holder. The Company may issue contracts and certificates with a mortality
or expense risk charge at rates less than those set out above, if it concludes
that the mortality or expense risks of the groups involved are less than the
risks it has determined for persons for whom the contracts and certificates have
been generally designed. If the charge is insufficient to cover the actual cost
of the mortality and expense risks undertaken, the Company will bear the loss.
Conversely, if the charge 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. On the Period Certain Only
Annuity Option, where an owner elects benefits payable on a variable basis, the
mortality and expense risk charge is assessed although the Company bears only
the expense risk and not any mortality risk. The mortality and expense risk
charge is not assessed against the fixed account investment options.
TAXES
The Company reserves the right to charge, or provide for, certain taxes
against purchase payments (either at the time of payment or liquidation),
contract values, payment of death benefit 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 contracts or certificates, or (iv) commencement or continuance
of annuity payments under the contracts or certificates. In addition, the
Company will withhold taxes to the extent required by applicable law.
Except for residents in Pennsylvania, South Dakota and Kentucky 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 PENNSYLVANIA, SOUTH DAKOTA AND KENTUCKY 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. If the Kentucky
Revenue Cabinet's policy change on premium taxes becomes effective as expected,
a premium tax will be assessed against all purchase payments received on or
after July 1, 1997 from contract owners who are residents of Kentucky. The rate
of tax is 2.00% for Kentucky 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. For
purchase payments received on or after October 1, 1992 (July 1, 1997 for
Kentucky), the state premium tax will be collected upon payment of any
withdrawal benefits, upon any annuitization or payment of death benefits. For
payments received prior to October 1, 1992 (July 1, 1997 for Kentucky) the
premium tax will be deducted upon annuitization only. 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.
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FEDERAL TAX MATTERS
INTRODUCTION
The following discussion of the federal income tax treatment of the
contract or certificate is not exhaustive, does not purport to cover all
situations, and is not intended as tax advice. The federal income tax treatment
of a group annuity contract is unclear in certain circumstances, and 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 or certificate. In addition, THE COMPANY MAKES
NO GUARANTEE REGARDING ANY TAX TREATMENT -- FEDERAL, STATE OR LOCAL -- OF ANY
CONTRACT OR CERTIFICATE OR OF ANY TRANSACTION INVOLVING A CONTRACT OR
CERTIFICATE.
THE COMPANY'S TAX STATUS
The Company is taxed as a life insurance company under 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 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 under a contract. The Company does not anticipate
that it will incur any federal income tax liability attributable to such income
and gains of 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 an owner's contract value is generally not taxable to the owner or
annuitant until received, either in the form of annuity payments as contemplated
by the certificate, or in some other form of distribution. However, certain
requirements must be satisfied in order for this general rule to apply,
including: (1) the certificate must be owned by an individual (or treated as
owned by an individual), (2) the investments of the Variable Account must be
"adequately diversified" in accordance with Treasury Department regulations, (3)
the Company, rather than the owner, must be considered the owner of the assets
of the Variable Account for federal tax purposes, and (4) the certificate must
provide for appropriate amortization, through annuity payments, of the
certificate's purchase payments and earnings, e.g., the maturity date must not
occur at too advanced an age.
Non-Natural Owners. As a general rule, deferred annuity contracts (or
certificates) 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 (or
certificates) is taxed as ordinary income that is received or accrued by the
owner during the taxable year. There are several exceptions to this general rule
for non-natural 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. Thus, if a group annuity contract is
held by a trustee, certificate owners who are individuals should be treated as
owning an annuity contract for federal tax purposes. 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 owners will
apply with respect to (1) certificates acquired by an estate of a decedent by
reason of the death of the decedent, (2) certain qualified contracts or
certificates, (3) certain annuities purchased by employers upon the termination
of certain qualified plans, (4) certain annuities used in connection with
structured settlement agreements, and (5) annuities purchased with a single
premium when the annuity starting date (as defined in the tax law) 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.
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Diversification Requirements. For a contract to be treated as an annuity
contract 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 certificate would not be treated as an
annuity contract for federal income tax purposes and an owner would be taxable
currently on the excess of his or her contract value over the premiums he or she
paid for the certificate.
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, a variable annuity owner may
be considered the owner, for federal income tax purposes, of the assets of the
separate account used to support his or her contract. In those circumstances,
income and gains from such separate account assets would be includible in the
variable annuity owner's gross income. The Internal Revenue Service (the
"Service") has stated in published rulings that a variable annuity 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 asset 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 certificate are similar to, but different
in certain respects from, those described by the Service in rulings in which it
was determined that policyholders were not owners of separate account assets.
For example, an owner under this certificate has the choice of many 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 owner being treated as the owner of the
assets of the Variable Account and thus subject to current taxation on the
income and gains from those assets. 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 and certificate as necessary to attempt to prevent
owners from being considered the owners of the assets of the Variable Account.
Delayed Maturity Dates. If the maturity date occurs (or is scheduled to
occur) at a time when the annuitant has reached an advanced age, e.g., past age
85, it is possible that the certificate would not be treated as an annuity for
federal income tax purposes. In that event, the income and gains under the
certificate 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 owner's contract value before the withdrawal exceeds
his or her "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
any time equals the total of the purchase payments made under the certificate 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 certificate which
were not included in income.
Other than in the case of certain qualified contracts or certificates, 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. (Loans, assignments and pledges are
permitted only in limited circumstances under qualified contracts.) The
investment in the contract is increased by the amount includible in 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 a certificate 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 his or her 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.
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The certificate provides a death benefit that in certain circumstances may
exceed the greater of the purchase payments made by or on behalf of an owner 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
those charges (or some portion thereof) could be treated for federal income tax
purposes as a partial withdrawal from the certificate.
There may be special income tax issues present in situations where the
owner and the annuitant are not the same person and are not married to one
another. A tax advisor should be consulted in those situations.
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 or her last taxable year.
TAXATION OF DEATH BENEFIT PROCEEDS
Amounts may be distributed from a certificate because of the death of an
owner or an annuitant. Prior to the maturity date, 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. After the maturity date, where a
guaranteed period exists under an annuity option and the annuitant dies before
the end of that period, payments made to the beneficiary for the remainder of
that period are includible in income as follows: (1) if received in a lump sum,
they are includible in income to the extent that they exceed the unrecovered
investment in the contract at that time, or (2) if distributed in accordance
with the existing annuity option selected, they are fully excludable from income
until the remaining investment in the contract is deemed to be recovered, and
all annuity payments thereafter are fully includible in income.
PENALTY TAX ON PREMATURE DISTRIBUTIONS
There is a 10% penalty tax on the taxable amount of any payment from a
non-qualified certificate unless the payment is: (a) received on or after the
owner reaches age 59 1/2; (b) attributable to the owner's becoming disabled (as
defined in the tax law); (c) made to a beneficiary on or after the death of the
owner or, if the 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 for the joint lives (or joint
life expectancies) of the annuitant and designated beneficiary (as defined in
the tax law), (e) made under a certificate purchased with a single premium when
the annuity starting date (as defined in the tax law) is no later than a year
from purchase of the certificate and substantially equal periodic payments are
made, not less frequently than annually, during the annuity period; or (f) made
with respect to certain annuities issued in connection with structured
settlement agreements. (A similar penalty tax, applicable to distributions from
certain qualified contracts, is discussed below.)
AGGREGATION OF CONTRACTS
In certain circumstances, the amount of an annuity payment or a withdrawal
from a certificate that is includible in income may be determined by combining
some or all of the non-qualified certificates and annuity contracts owned by an
individual. For example, if a person purchases a certificate 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
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annuity contracts or certificates from the same insurance company (or its
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 amount of a withdrawal or an annuity payment that is taxable and the
amount which might be subject to the penalty tax described above.
QUALIFIED RETIREMENT PLANS
The certificates 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. Therefore, no attempt is
made in this Prospectus to provide more than general information about use of
the certificate with the various types of qualified plans.
The tax rules applicable to qualified plans 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.
Also, loans from qualified contracts (or certificates), 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 loan
must be repaid. (Owners should always consult their tax advisors and retirement
plan fiduciaries prior to exercising their loan privileges.) Both the amount of
the contribution that may be made, and the tax deduction or exclusion that the
owner may claim for such contribution, are limited under qualified plans. If
this certificate is used in connection with a qualified plan, the owner and
annuitant must be the same individual. If a co-annuitant is named, all
distributions made while the annuitant is alive must be made to the annuitant.
Also, if a co-annuitant is named who is not the annuitant's spouse, the annuity
options which are available may be limited, depending on the difference in ages
between the annuitant and co-annuitant. Furthermore, the length of any guarantee
period may be limited in some circumstances to satisfy certain minimum
distribution requirements under the Code.
In addition, 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, 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. In the case of certain other qualified plans, distributions
of such minimum amounts generally must commence by the later of this date or
April 1 of the calendar year following the calendar year in which the employee
retires.
There is also a 10% penalty tax on the taxable amount of any payment from
certain qualified contracts (but not section 457 plans). (The amount of the
penalty tax is 25% of the taxable amount of any payment received from a "SIMPLE
retirement account" during the 2 year period beginning on the date the
individual first participated in any qualified salary reduction agreement (as
defined in the tax law) maintained by the individual's employer.) 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"), including a
"SIMPLE IRA," exceptions provide that the penalty tax does not apply to a
payment (a) received on or after the 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 (or life expectancy) of the
owner or for 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).
When issued in connection with a qualified plan, a contract and certificate
will be amended as generally necessary to conform to the requirements of the
type of plan. However, 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 and certificate. 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 or certificate, unless the Company consents.
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QUALIFIED PLAN TYPES
Following are brief descriptions of various types of qualified plans in
connection with which the Company may issue a certificate.
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. It is
possible that the certificate's death benefit could be viewed as providing life
insurance coverage with the result that the certificate would not be viewed as
satisfying the requirements of an IRA.
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. As discussed above (see
Individual Retirement Annuities), there is some uncertainty regarding the tax
treatment of the certificate's death benefit for purposes of the tax rules
governing IRAs (which would include SEP-IRAs). Employers intending to use the
contract or certificates in connection with such plans should seek competent
advice.
SIMPLE IRAs. Section 408(p) of the Code permits certain small employers to
establish "SIMPLE retirement accounts," including SIMPLE IRAs, for their
employees. Under SIMPLE IRAs, certain deductible contributions are made by both
employees and employers. SIMPLE IRAs are subject to various requirements,
including limits on the amounts that may be contributed, the persons who may be
eligible, and the time when distributions may commence. As discussed above (see
Individual Retirement Annuities), there is some uncertainty regarding the proper
characterization of the certificate's death benefit for purposes of the tax
rules governing IRAs (which would include SIMPLE IRAs). Employees intending to
use the contract in connection with such plans should seek competent advice.
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
contract or certificates 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 made by or on behalf of an owner and the
contract value. It is possible that such death benefit could be characterized as
an incidental death benefit. There are limitations on the amount of incidental
death 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 or certificates in
connection with such plans should seek competent advice.
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 or certificates 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 or
certificates. In particular, purchasers should consider that the contract
provides a death benefit that in certain circumstances may exceed the greater of
the purchase payments made by or on behalf of an owner 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.
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Tax-sheltered annuity contracts must contain restrictions on withdrawals of
(i) contributions made pursuant to a salary reduction agreement in years
beginning after December 31, 1988, (ii) earnings on those contributions, and
(iii) earnings after 1988 on amounts attributable to salary reduction
contributions (and earnings on those contributions) held as of the last day of
the year beginning before January 1, 1989. These amounts can be paid only if the
employee has reached age 59 1/2, separated from service, died, or become
disabled (within the meaning of the tax law), or in the case of hardship (within
the meaning of the tax law). Amounts permitted to be distributed in the event of
hardship are limited to actual contributions; earnings thereon cannot be
distributed on account of hardship. Amounts subject to the withdrawal
restrictions applicable to section 403(b)(7) custodial accounts may be subject
to more stringent restrictions. (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. Generally, a contract or certificate
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 or certificates in connection with such plans should
seek competent advice.
DIRECT ROLLOVERS
If the certificate is used in connection with a retirement plan that is
qualified under sections 401(a), 403(a), or 403(b) of the Code, any "eligible
rollover distribution" from the certificate will be subject to "direct rollover"
and mandatory withholding requirements. An eligible rollover distribution
generally is any taxable distribution from such qualified plans, excluding
certain amounts such as (i) minimum distributions required under section
401(a)(9) of the Code, and (ii) certain distributions for life, life expectancy,
or for 10 years or more which are part of a "series of substantially equal
periodic payments."
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 certificate,
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 distributee elects
to have it directly transferred to certain qualified plans. Prior to receiving
an eligible rollover distribution, a notice will be provided explaining
generally the direct rollover and mandatory withholding requirements and how to
avoid the 20% withholding by electing a direct rollover.
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 certificate 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 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
August 9, 1994, 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. Hypothetical performance figures will also be furnished for
sub-accounts investing in NASL Series Trust portfolios established on December
31, 1996 in connection with the merger of Manulife Series Fund, Inc. with and
into NASL Series Trust. Such figures are based on the assumption that the
sub-accounts had been available for investment under a contract offered by this
Prospectus when the applicable Manulife Series Fund, Inc. portfolio first became
available under contracts issued by affiliates of 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 (i) assume no redemption a
the end of the period and (ii) do not reflect imposition of the $30 per contract
charge inasmuch as the impact of such charge varies by contract size. 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 owners participating in the service. THE COMPANY
DOES NOT ENDORSE, APPROVE OR RECOMMEND SUCH SERVICES IN ANY WAY AND
GROUPHOLDERS/OWNERS SHOULD BE AWARE THAT FEES PAID FOR SUCH SERVICES ARE
SEPARATE AND IN ADDITION TO FEES PAID UNDER THE CONTRACTS AND CERTIFICATES.
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 the four events has occurred. The foregoing
restrictions on withdrawal do not apply in the event a participant in the ORP
transfers his or her contract value to another contract or another qualified
custodian during the period of participation in the ORP. Loans are not available
under contracts issued under the ORP.
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<PAGE> 42
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 and certificates 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 an 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 and certificates will be
made by registered representatives of broker-dealers authorized by NASL
Financial to sell them. Such registered representatives will also be licensed
insurance agents of the Company. Under the promotional agent agreement, Wood
Logan will 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 6% of purchase payments. In
addition, NASL Financial may pay trail compensation after the first certificate
year, which under normal circumstances will not exceed 0.75% of contract value
per year. 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 and certificates.
OWNER INQUIRIES
All 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.
EXCHANGE OFFER AND ENHANCED DEATH BENEFIT OPTION
EXCHANGE OFFER
The certificates under Contracts described in this Prospectus ("New
Certificates") may be issued in exchange for certificates under certain group
annuity contracts previously issued by the Company ("Ven 8 contracts"). The Ven
8 contracts are described in Appendix D. New Certificates may also be issued in
exchange for certain individual annuity contracts ("Old Contracts") previously
issued by the Company in Pennsylvania, South Carolina, Texas and issued prior to
August 15, 1994 in Washington, which are substantially similar to the New
Certificates except as noted below. Ven 8 contracts and Old Contracts are
collectively referred to as "Old Certificates."
The Company will permit an owner of an outstanding Old Certificate to
exchange the Old Certificate for a New Certificate without surrender charge,
except a possible market value charge, as described below. For purposes of
computing the applicable surrender charge upon any withdrawals made subsequent
to the exchange, the New Certificate will be deemed to have been issued on the
date the Old Certificate was issued, and any purchase payment credited to the
Old Certificate will be deemed to have been credited to the New Certificate on
the date it was credited under the Old Certificate. The death benefit under the
New Certificate on the date of its issue will be the greater of the minimum
death benefit under the Old Certificate or the contract value on the date of
exchange and will "step up" annually thereafter as described in paragraph "2."
below.
Ven 8 contract owners interested in a possible exchange should carefully
review both Appendix D and the remainder of this Prospectus before deciding to
make an exchange. Old Contract owners interested in a possible exchange should
carefully review both the Old Contract prospectus and the remainder of this
Prospectus before deciding to make an exchange.
An exchange may not be in the best interests of an owner of an Old
Certificate, particularly in light of the availability of the Enhanced Death
Benefit endorsement described below. Further, under Old Certificates, a market
value charge may apply to any
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<PAGE> 43
amounts transferred from a three or six year investment account in connection
with an exchange. (Reference should be made to the discussion of the market
value charge in Appendix D in the case of Ven 8 contracts and under "Fixed
Account Investment Options" in the Old Contract prospectus in the case of Old
Contract owners.) The Company believes that an exchange of Certificates will not
be a taxable event for Federal tax purposes; however, any owner considering an
exchange should consult a tax adviser. The Company reserves the right to
terminate this exchange offer or to vary its terms at any time.
The principal differences between the Old and New Certificates are as
follows:
1. The death benefit of the New Certificate will be payable upon the death
of the owner (or first owner to die if there is more than one owner). The death
benefit of the Old Certificate is payable on the death of the annuitant (or last
annuitant to die if there is more than one annuitant); if the owner predeceases
the annuitant, the Old Certificate contract value is paid, which may be a lesser
amount than the death benefit payable on the death of the annuitant.
2. The guaranteed death benefit payable under the New Certificate will be
in most circumstances more favorable. If an owner dies on or prior to his or her
85th birthday and the oldest owner had an attained age of less than 81 years on
the certificate date, the death benefit will be the greater of (i) the contract
value or (ii) the sum of all purchase payments made less any amounts deducted in
connection with certain withdrawals. The New Certificate will step up the
measure of clause (ii) every year, so that clause (ii) will be the greater of
clause (i) or (ii) on the last day of the previous certificate year period plus
any purchase payments made and less any amounts deducted in connection with
certain withdrawals since then. Under the Old Certificate, the death benefit is
stepped up every six years instead of every year.
Under the New Certificate, if an owner dies after his or her 85th birthday
and the oldest owner had an attained age of less than 81 years on the
certificate date, the death benefit will be the greater of the contract value or
the excess of the sum of all purchase payments made by the owner less the sum of
any amounts deducted in connection with certain withdrawals by the owner. If an
owner dies and the oldest owner had an attained age greater than 80 on the
certificate date, the death benefit will be the contract value less any
applicable withdrawal charges at the time of payment. Under the Old Certificate,
if the annuitant dies after the first of the month following his or her 85th
birthday, the minimum death benefit will be the contract value. Also, if the
owner is not the annuitant and dies before the maturity date and before the
annuitant, an amount equal to the amount payable on total withdrawal, without
reduction for any withdrawal charge, will be paid.
3. The New Certificate will waive the $30 annual administration fee prior
to the maturity date if the contract value is equal to or greater than $100,000
at the time the fee is be assessed.
4. The surrender charges under the New Certificate will be higher in
certain cases. The surrender charges are the same under both Old and New
Certificates for the first three certificate years, but thereafter the charges
under the New Certificate are 5%, 4%, 3% and 2% for withdrawals made during
certificate years four, five, six and seven, respectively, while under the Old
Certificate the charges for such years are 4%, 3%, 2% and 0%, respectively.
5. The minimum interest rate to be credited for any guarantee period under
the fixed portion of the New Certificate will be three percent as opposed to
four percent under the Old Certificate. The market value charge under the New
Certificate will be limited so as to only affect accumulated earnings in excess
of three percent, whereas under the Old Certificate the market value charge is
limited so as to not invade principal.
6. The annuity purchase rates guaranteed in the New Certificate have been
determined using 3% as opposed to 4% under the Old Certificate.
7. (Old Contracts only) Old Contracts are individual deferred annuity
contracts whereas the New Certificates are group deferred annuity certificates.
Ownership of an individual contract is evidenced by the issuance of an
individual annuity contract whereas participation in a group contract is
separately accounted for by the issuance of a certificate evidencing the owner's
interest under the contract. Under the group contract, contracts have been
issued to the Security Life Trust, a trust established with United Missouri
Bank, N.A., Kansas City, Missouri, as group holder for groups comprised of
persons who have brokerage accounts with brokers having selling agreements with
NASL Financial.
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<PAGE> 44
Certificate owners who do not wish to exchange their Old Certificates for
the New Certificates may continue to make purchase payments to their Old
Certificates. Or, they can keep their Old Certificates and buy a New Certificate
to which to apply additional purchase payments.
The above comparison does not take into account differences between the Old
Certificates, as amended by qualified plan endorsements, and the New
Certificates, as amended by similar qualified plan endorsements. Owners using
their Old Certificate in connection with a qualified plan should consult a tax
advisor. See also the Federal Tax Matters section of the prospectus.
(Old Contracts Only) Additional Considerations for Ven 1 and Ven 3 Contract
Owners
The comparison of Old Contract and New Certificate provisions set forth
above does not include the Ven 1 and Ven 3 contracts (which are no longer being
issued and which are described in Appendix C to the Old Contract prospectus).
These contracts will also be eligible for voluntary exchange for the New
Contracts. Ven 3 and Ven 1 contract owners should in particular consider the
following differences between the Ven 3 and Ven 1 contracts and the New
Certificate.
1. In general, the death benefit of the New Certificate will be payable on the
death of the owner (or first owner to die if there is more than one owner).
The death benefit of the Ven 3 and Ven 1 contracts is generally payable on
the death of the annuitant (or last annuitant to die if there is more than
one annuitant); if the owner predeceases the annuitant, the Ven 3 or Ven 1
contract value (as applicable) is paid, which may be a lesser amount than
the death benefit payable on the death of the annuitant.
2. The guaranteed death benefit payable under the New Certificate will in most
circumstances be more favorable. The minimum death benefit for the Ven 1
contract is the greater of (a) the contract value or (b) the sum of all
purchase payments made, less any amount deducted in connection with partial
withdrawals. The minimum death benefit for the Ven 3 contract is described
below under "Enhanced Death Benefit Additional Considerations for Ven 3
Contract Owners." The minimum death benefit for the New Certificate is as
described above in this "Exchange Offer" section. Ven 3 contract owners
should also note that the New Certificate contains additional provisions
which limit the death benefit paid if an owner dies after his or her 85th
birthday and the oldest owner had an attained age of less than 81 years on
the contract date, to the greater of the contract value or the excess of
the sum of all purchase payments less the sum of any amounts deducted in
connection with certain withdrawals . Ven 3 contract owners should also
note that the New Certificate contains a provision which limits the death
benefit paid to the contract value less any applicable withdrawal charges
at the time of payment if the owner dies and the oldest owner had an
attained age greater than 80 on the contract date. These provisions may not
be as favorable to Ven 3 contract owners.
3. The New Certificate will waive the $30 annual administration fee prior to
the maturity date if the contract value is equal to or greater than
$100,000 at the time the fee is to be assessed.
4. The surrender charges under the New Certificate are higher in certain
cases. The New Certificate surrender charges are 6%, 6%, 5%, 5%, 4%, 3%, 2%
for withdrawals made within one, two, three, four, five, six and seven,
respectively, of payment. The surrender charges for the Ven 3 and Ven 1
contract is 5% for withdrawals made within five years of payment (certain
exceptions apply to the withdrawal charge as described in Appendix C) to
the Old Contract.
5. The New Certificate provides for thirty-eight investment options
(thirty-four variable and four fixed). Neither the Ven 3 contract nor the
Ven 1 contract provide for fixed investment options. In addition, the Ven 1
contract offers only three variable investment options.
6. The New Certificate provides for the deduction from each sub-account each
valuation period of a charge at an effective annual rate of 1.40% (1.25%
for mortality and expense risk fees and 0.15% for administration fees) of
the contract reserves allocated to such subaccount. The Ven 1 contract
provides for the deduction from each sub-account each valuation period of a
charge at an effective annual rate of 1.30% (for mortality and expense
risk) of the contract reserves allocated to such subaccount. The Ven 3
charges are the same as those for the New Certificate.
7. The annuity purchase rates guaranteed in the New Certificate have been
determined using 3% as opposed to 4% under the Ven 1 and Ven 3 contracts.
8. Certain Ven 3 and Ven 1 contracts may not be subject to some changes in the
Federal tax law that have occurred since the contracts were issued, i.e.,
the contract were "grandfathered." If such a grandfathered contract is
exchanged, the New
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<PAGE> 45
Certificate is likely to be subject to the changes in the law. For example,
annuity contract issued on or prior to April 22, 1987 are generally not
subject to Federal tax rules treating transferred of annuity contracts for
inadequate consideration as taxable events. See "Taxation of Partial and
Full Withdrawals" in the Federal Tax Matters section of the prospectus. A
New Certificate received in exchange for a Ven 3 or Ven 1 contract would,
however, typically be subject to these rules.
ENHANCED DEATH BENEFIT OPTION
As an alternative to the exchange privilege described above, the Company is
offering an Enhanced Death Benefit to any owner of an Old Certificate in the
states of Pennsylvania, Texas and Washington having a certificate date not later
than August 15, 1994. The Enhanced Death Benefit Option is not available in
South Carolina. The Enhanced Death Benefit Option is available as an endorsement
to such Certificates only upon the payment of an additional purchase payment of
at least 10% of all purchase payments made to the Old Certificate through August
15, 1994 or $10,000, whichever is greater. Old Certificates dated subsequent to
August 15 will not be eligible for the Enhanced Death Benefit endorsement.
The Enhanced Death Benefit, as described below, will provide an annual
step-up in death benefit comparable to the New Certificate death benefit
described in the prospectus under "Death Benefit Before Maturity Date," except
that the death benefit under the endorsement will be payable on the death of the
last surviving annuitant as opposed to the death of the first owner as provided
in the New Certificate.
The Enhanced Death Benefit provided by the endorsement will always be equal
to or better than the death benefit of an Old Certificate issued without the
endorsement. In the case of the death of the annuitant on or prior to the first
of the month following his or her 85th birthday, the minimum death benefit is as
described under the caption "Prior Contract Death Benefit Provision" in Appendix
D in the case of Ven 8 contracts and under "Death Benefit Before Maturity Date"
in the Old Contract prospectus in the case of the Old Contract, except that the
death benefit is stepped up each certificate year instead of each six
certificate year period. In the case of the death of the annuitant after the
first of the month following his or her 85th birthday, the minimum death benefit
is the greater of the contract value or the excess of the sum of all purchase
payments less the sum of any amounts deducted in connection with certain
withdrawals. Under an Old Certificate issued without the endorsement, if the
annuitant dies after the first of the month following his or her 85th birthday,
the death benefit is the contract value only. For purposes of computing the
Enhanced Death Benefit under an Old Certificate issued without the endorsement,
the death benefit will be computed as if the Enhanced Death Benefit endorsement
had been a part of the Old Certificate on the certificate date.
The Company believes that the addition of the Enhanced Death Benefit
endorsement to an Old Certificate will not be treated as a taxable event for
Federal tax purposes; however, any owner considering the addition of the
endorsement should consult a tax advisor.
(Old Contracts Only) Ven 1 Contract Owners
The Enhanced Death Benefit described above is not available for the Ven 1
contract.
(Old Contracts Only) Additional Considerations for Ven 3 Contract Owners
The Enhanced Death Benefit described above is available for the Ven 3
contract. For Ven 3 contracts, the Enhanced Death Benefit provided by the
endorsement will always be equal to or better than the death benefit of the Ven
3 contract issued without the endorsement . The Enhanced Death Benefit provides
that upon the death of the annuitant, the death benefit, during the first
contract year, will be the greater of (a) the contract value or (b) the sum of
all the purchase payments made, less any amount deducted in connection with
partial withdrawals and, during any subsequent year, will be (a) the contract
value or (b) the death benefit on the last day of the previous contract year
plus any purchase payments made and less any amounts deducted in connection with
partial withdrawals since then. As described in Appendix C of the Old Contract
prospectus, upon the death of the annuitant, the minimum death benefit for the
Ven 3 contract, during the first five contract years, will be the greater of (a)
the contract value or (b) the sum of all purchase payments made, less any amount
deducted in connection with partial withdrawals and, during any subsequent five
contract year period, will be the greater of (a) the contract value or (b) the
minimum death benefit determined in accordance with these provisions as of the
last day of the previous five contract year period plus any purchase payments
made and less any amount deducted in connection with partial withdrawals since
then.
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<PAGE> 46
Ven 3 contracts may not be subject to some changes in the Federal tax law
that have occurred since the contracts were issued, i.e., the contracts were
"grandfathered". If the Enhanced Death Benefit endorsement is added to such a
grandfathered contract, the amended contract is likely to be subject to the
changes in the law. For example, annuity contracts issued on or prior to April
22, 1987 are generally not subject to Federal tax rules treating transfers of
annuity contracts for inadequate consideration as taxable events. See Taxation
of Partial and Full Withdrawals in the Federal Tax Matters section of the
prospectus. A contract to which the Enhanced Death Benefit endorsement is added
may, however, be subject to these rules.
OTHER INFORMATION
A registration statement has been filed with the Commission under the 1933
Act, as amended, with respect to the variable portion of the contracts discussed
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.
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<PAGE> 47
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
General Information and History.................................... 3
Performance Data................................................... 3
Services
Independent Auditors.......................................... 6
Servicing Agent............................................... 6
Principal Underwriter......................................... 6
Cancellation of Certificate................................... 6
Financial Statements............................................... 7
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APPENDIX A
EXAMPLES OF CALCULATION OF WITHDRAWAL CHARGE
Example 1 - Assume a single payment of $50,000 is made by an owner into the
contract and a certificate is issued. 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 value of the certificate were completely withdrawn. This illustration
is based on hypothetical contract values.
<TABLE>
<CAPTION>
CERTIFICATE HYPOTHETICAL FREE WITHDRAWAL
YEAR CONTRACT WITHDRAWAL PAYMENTS CHARGE
VALUE AMOUNT LIQUIDATED --------------------
PERCENT AMOUNT
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2 55,000 5,000(a) 50,000 6% 3,000
4 50,500 5,000(b) 45,500 5% 2,275
6 60,000 10,000(c) 50,000 3% 1,500
8 70,000 20,000(d) 50,000 0% 0
</TABLE>
(a) During any certificate year the free withdrawal amount is the greater of
accumulated earnings, or 10% of the total payments made by the owner less
any prior partial withdrawals in that certificate year. In the second
certificate year the earnings under the contract and 10% of payments both
equal $5,000. Consequently, on total withdrawal $5,000 is withdrawn free of
the withdrawal charge, the entire $50,000 payment is liquidated and the
withdrawal charge is assessed against such liquidated payment (contract
value less free withdrawal amount).
(b) In the example for the fourth certificate year, the accumulated earnings of
$500 is less than 10% of payments, therefore the free withdrawal amount is
equal to 10% of payments ($50,000 X 10% = $5,000) and the withdrawal charge
is only applied to payments liquidated (contract value less free withdrawal
amount).
(c) In the example for the sixth certificate year, the accumulated earnings of
$10,000 is greater than 10% of 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 payments liquidated (contract value
less free withdrawal amount).
(d) There is no withdrawal charge on any payments liquidated that have been in
the contract for at least 7 years.
Example 2 - Assume a single payment of $50,000 is made by an owner into the
contract and a certificate is issued. No transfers are made, no additional
payments are made and there are a series of four partial withdrawals made during
the third certificate year of $2,000, $5,000, $7,000, and $8,000. The
illustration below is based on hypothetical contract values.
<TABLE>
<CAPTION>
HYPOTHETICAL PARTIAL FREE WITHDRAWAL
CONTRACT WITHDRAWAL WITHDRAWAL PAYMENTS CHARGE
VALUE REQUESTED AMOUNT LIQUIDATED ------------------
PERCENT AMOUNT
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
65,000 2,000 15,000(a) 0 5% 0
49,000 5,000 3,000(b) 2,000 5% 100
52,000 7,000 4,000(c) 3,000 5% 150
44,000 8,000 0(d) 8,000 5% 400
</TABLE>
(a) The free withdrawal amount during any certificate year is the greater of
the contract value less the unliquidated payments (accumulated earnings),
or 10% of payments less 100% of all prior withdrawals in that certificate
year. For the first example, accumulated earnings of $15,000 is the free
withdrawal amount since it is greater than 10% of payments less prior
withdrawals ($5,000-0). The amount requested ($2,000) is less than the free
withdrawal amount so no payments are liquidated and no withdrawal charge
applies.
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<PAGE> 49
(b) The contract has negative accumulated earnings ($49,000-$50,000), so the
free withdrawal amount is limited to 10% of payments less all prior
withdrawals. Since $2,000 has already been withdrawn in the current
certificate year, the remaining free withdrawal amount during the third
certificate year is $3,000. The $5,000 partial withdrawal will consist of
$3,000 free of withdrawal charge, and the remaining $2,000 will be subject
to a withdrawal charge and result in payments being liquidated. The
remaining unliquidated payments are $48,000.
(c) The contract has increased in value to $52,000. The unliquidated payments
are $48,000 so the accumulated earnings are $4,000, which is greater than
10% of payments less prior withdrawals ($5,000-$2,000-$5,000<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 payments
being liquidated. The remaining unliquidated 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 payments
($5,000) has already been withdrawn. The full amount of $8,000 will result
in payments being liquidated subject to a withdrawal charge. At the
beginning of the next certificate year the full 10% of payments would be
available again for withdrawal requests during that year.
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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%
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>
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<PAGE> 51
APPENDIX C
For all certificates issued in Pennsylvania the maximum maturity age based upon
the issue age of the annuitant is as follows:
<TABLE>
<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 certificates are issued with annuitants over age 84, a withdrawal charge
could be imposed if they terminate the certificate 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 7-year withdrawal
charge schedule of the certificate.
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APPENDIX D
PRIOR CONTRACTS
Prior to February, 1995, the Company issued a class of variable annuity
contract which is no longer being issued but under which purchase payments may
continue to be made ("prior contract") -- "Ven 8" contracts, which were sold
during the period from September 1992 until February, 1995.
The principal differences between the contract offered by this Prospectus
and the prior contract relate to the investment options available under the
contracts, a minimum interest rate to be credited for any guarantee period under
the fixed portion of the contracts, the charges made by the Company and the
death benefit provisions.
INVESTMENT OPTIONS
The investment options under the prior contract differ as follows from the
investment options described in this Prospectus. The prior contract does not
allow for investments in the five and seven year fixed account investments
options. The prior contract allows investments in a six year fixed account
investment option not available under the contract offered by this Prospectus.
The prior contract does not provide the Company the authority to offer
additional fixed account investment options for any yearly period from two to
ten years.
FIXED ACCOUNT MINIMUM INTEREST GUARANTEE
The minimum interest rate to be credited for any guarantee period under the
fixed portion of the prior contract is 4%.
MARKET VALUE CHARGE
For purposes of calculating the market value adjustment factor (see "Fixed
Account Investment Options - Market Value Charge") the maximum difference
between "B" and "A" will be 3%. The adjustment factor will never be greater than
2x(A-4%) and never less than zero. ("A" is the guaranteed interest rate on the
investment account. "B" is the guaranteed interest rate available, on the date
the request is processed, for amounts allocated to a new investment account with
the same length of guarantee period as the investment account from which the
amounts are being withdrawn.)
There will be no market value charge on withdrawals from the fixed account
investment options in the following situations: (a) death of the annuitant; (b)
amounts withdrawn to pay fees or charges; (c) amounts applied at the maturity
date to purchase an annuity as provided in the certificate; (d) amounts
withdrawn from three and six year investment accounts within one month prior to
the end of the guarantee period; and (e) amounts withdrawn in any year that do
not exceed 10% of total purchase payments less any prior partial withdrawals in
that certificate year.
Notwithstanding application of the market value adjustment formula, in no
event will the market value charge (i) exceed the earnings attributable to the
amount withdrawn from an investment account, (ii) together with any withdrawal
charges for an investment account be greater than 10% of the amount transferred
or withdrawn, or (iii) reduce the amount payable on withdrawal or transfer below
the amount required under the non-forfeiture laws of the state with jurisdiction
over the contract. The cumulative effect of the market value and withdrawal
charges (or the effect of the withdrawal charge itself) could, however, result
in a owner receiving total withdrawal proceeds of less than the owner's
investment in the contract.
WITHDRAWAL CHARGES
The withdrawal charges under the prior contract differ from the withdrawal
charges described in this Prospectus.
Prior Contract Withdrawal Charge
The withdrawal charge assessed under the prior contract is as follows:
If a withdrawal is made from the contract by an owner before the maturity
date of the certificate, a withdrawal charge (contingent deferred sales charge)
may be assessed against amounts withdrawn attributable to purchase payments that
have been in the contract for the owner less than six complete years. There is
never a withdrawal charge with respect to earnings accumulated for an owner in
the contract,
52
<PAGE> 53
certain other free withdrawal amounts described below or purchase
payments by or on behalf of the owner that have been in the contract more than
six complete years. In no event may the total withdrawal charges exceed 6% of
the total purchase payments made by or on behalf of the owner. The amount of the
withdrawal charge and when it is assessed is discussed below:
1. Each withdrawal is allocated first to the "free withdrawal amount" and
second to "unliquidated purchase payments" for each certificate. In any
certificate year, the free withdrawal amount for that year is the greater of (1)
the excess of the owner's contract value on the date of withdrawal over the
unliquidated purchase payments made by or on behalf of the owner (the
accumulated earnings on the owner's certificate) or (2) 10% of total purchase
payments made by or on behalf of the owner less any prior partial withdrawals by
the owner in that certificate year. Withdrawals allocated to the free withdrawal
amount may be withdrawn without the imposition of a withdrawal charge.
2. If an owner makes a withdrawal 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 is subject to a withdrawal charge based on the length of time
the purchase payment has been in the contract. The amount of the withdrawal
charge is calculated by multiplying the amount of the purchase payment being
liquidated by the applicable withdrawal charge percentage obtained from the
table below.
<TABLE>
<CAPTION>
NUMBER OF COMPLETE YEARS WITHDRAWAL CHARGE
PURCHASE PAYMENT IN CONTRACT PERCENTAGE
------------------------------------------------------
<S> <C>
0 6%
1 6%
2 5%
3 4%
4 3%
5 2%
6+ 0%
</TABLE>
The total withdrawal charge will be the sum of the withdrawal charges for
the purchase payments being liquidated.
4. The withdrawal charge is deducted from the owner's contract value
remaining after the 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 and market value charge.
5. There is generally no withdrawal charge on distributions made as a
result of the death of the annuitant or owner and no withdrawal charges are
imposed on the maturity date if the owner annuitizes as provided in the
contract.
OTHER CONTRACT CHARGES
The prior contract makes no provision for the waiver of the $30 annual
administration fee when prior to the maturity date the contract value equals or
exceeds $100,000 at the time of the fee's assessment.
DEATH BENEFIT PROVISIONS
Prior Contract Death Benefit Provisions
The provisions governing the death benefit prior to the maturity date under
the prior contract are as follows:
Death of Annuitant who is not the Owner. The Company will pay the minimum
death benefit, less any debt, to the beneficiary if the owner is not the
annuitant and the annuitant dies before the owner and before the maturity date.
If there is more than one such annuitant, the minimum death benefit will be paid
on the death of the last surviving co-annuitant. The minimum death benefit will
be paid either as a
53
<PAGE> 54
lump sum or in accordance with any of the annuity options available under the
contract. An election to receive the death benefit under an annuity option must
be made within 60 days after the date on which the death benefit first becomes
payable. Rather than receiving the minimum death benefit, the beneficiary may
elect to continue his or her participation under the contract as a new owner.
(In general, a beneficiary who makes such an election will nonetheless be
treated for federal income tax purposes as if he or she had received the minimum
death benefit.)
Death of Annuitant who is the Owner. The Company will pay the minimum death
benefit, less any debt, to the beneficiary if the owner is the annuitant, dies
before the maturity date and is not survived by a co-annuitant. If the
certificate is a non-qualified certificate, the owner is the annuitant and the
owner dies before the maturity date survived by a co-annuitant, the Company,
instead of paying the minimum death benefit to the beneficiary, will pay to the
successor owner an amount equal to the amount payable on total withdrawal
without reduction for any withdrawal charge. If the certificate is a
non-qualified certificate, distribution of the minimum death benefit to the
beneficiary (or of the amount payable to the successor owner) must be made
within five years after the owner's death. If the beneficiary or successor
owner, as appropriate, is an individual, in lieu of distribution within five
years of the owner's death, distribution may be made as an annuity which begins
within one year of the owner's death and is payable over the life of the
beneficiary (or the successor owner, as appropriate) or over a period not in
excess of the life expectancy of the beneficiary (or the successor owner, as
appropriate). If the owner's spouse is the beneficiary (or the successor owner,
as appropriate) that spouse may elect to continue his or her participation under
the contract as a new owner in lieu of receiving the distribution. In such a
case, the distribution rules applicable when a owner dies generally will apply
when that spouse, as the owner, dies.
Death of Owner who is not the Annuitant. If the owner is not the annuitant
and dies before the maturity date and before the annuitant, the successor owner
shall have the ownership rights of the owner and will be entitled to the owner's
interest in the contract. If the certificate is a nonqualified contract, an
amount equal to the amount payable on total withdrawal, without reduction for
any withdrawal charge, will be paid to the successor owner. Distribution of the
amount to the successor owner must be made within five years of the owner's
death. If the successor owner is an individual, in lieu of distribution within
five years of the owner's death, distribution may be made as an annuity which
begins within one year of the owner's death and is payable over the life of the
successor owner (or over a period not greater than the successor owner's life
expectancy). If the owner's spouse is the successor owner, that spouse may elect
to continue his or her participation under the contract as a new owner in lieu
of receiving the distribution. In such a case, the distribution rules applicable
when an owner dies generally will apply when that spouse, as the owner, dies.
For purposes of these death benefit provisions applicable on an owner's
death (whether or not such owner is an annuitant), if a non-qualified
certificate has more than one individual owner, death benefits must be paid as
provided in the contract upon the death of any such owner. If both owners are
individuals, the distributions will be made to the remaining owner rather than
to the successor owner.
Entity as Owner. In the case of a non-qualified certificate where the owner
is not an individual (for example, the owner is a corporation or a trust), the
special rules stated in this paragraph apply. For purposes of distributions of
death benefits before the maturity date, any annuitant under the certificate
will be treated as the owner, and a change in the annuitant or any co-annuitant
shall be treated as the death of the owner. In the case of distributions which
result from a change in an annuitant when the annuitant does not actually die,
the amount distributed will be reduced by charges which would otherwise apply
upon withdrawal.
If a non-qualified certificate has both an individual and a non-individual
owner, death benefits must be paid as provided in the contract upon the death of
any annuitant, a change in any annuitant, or the death of any individual owner,
whichever occurs earlier.
The minimum death benefit during the first six certificate years will be
equal to the greater of: (a) the owner's 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 sum of all purchase payments made by or on behalf of the
owner, less any amount deducted in connection with partial withdrawals made by
the owner. During any subsequent six contract year period, the minimum death
benefit will be the greater of (a) the owner's 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 minimum death benefit on the last day of the
previous six certificate year period plus any purchase payments made by or on
behalf of the owner and less any amount deducted in connection with partial
withdrawals made by the owner since then. If the annuitant dies after the first
of the month following his or her 85th birthday, the minimum death benefit will
be the owner's contract value on the date due proof of death and all required
claim forms are received at the Company' Annuity Service Office.
Death benefits will be paid within seven days of receipt of due proof of
death and all required claim forms at the Company's Annuity Service Office,
subject to postponement under the same circumstances that payment of withdrawals
may be postponed.
54
<PAGE> 55
Prior Contract Enhanced Death Benefit Option
The Company is offering an Enhanced Death Benefit Option to any owner of a
certificate ("Certificate") issued under a prior contract having a certificate
date not later than August 15, 1994. The Enhanced Death Benefit Option is
available as an endorsement to such Certificates only upon the payment of an
additional purchase payment of at least 10% of all purchase payments made to the
Certificate through August 15, 1994 or $10,000, whichever is greater.
Certificates dated subsequent to August 15 will not be eligible for the Enhanced
Death Benefit endorsement. (An owner of a Certificate may also exchange the
Certificate for the Certificate described in the Prospectus, see "Exchange Offer
and Enhanced Death Benefit Option" in the Prospectus.)
The Enhanced Death Benefit, as described below, will provide an annual
step-up in death benefit comparable to the death benefit described in this
Prospectus under "Death Benefit Before Maturity Date," except that the death
benefit under the endorsement will be payable on the death of the last surviving
annuitant as opposed to the death of the first owner as provided in this
Prospectus.
The Enhanced Death Benefit provided by the endorsement will always be equal
to or better than the death benefit of a Certificate issued without the
endorsement. In the case of the death of the annuitant on or prior to the first
of the month following his or her 85th birthday, the minimum death benefit is as
described in Appendix D under the caption "Prior Contract Death Benefit
Provisions" except that the death benefit is stepped up each certificate year
instead of each six certificate year period. In the case of the death of the
annuitant after the first of the month following his or her 85th birthday, the
minimum death benefit is the greater of the contract value or the excess of the
sum of all purchase payments less the sum of any amounts deducted in connection
with certain withdrawals. Under a Certificate issued without the endorsement, if
the annuitant dies after the first of the month following his or her 85th
birthday, the death benefit is the contract value only. For purposes of
computing the Enhanced Death Benefit under a Certificate issued without the
endorsement, the death benefit will be computed as if the Enhanced Death Benefit
endorsement had been a part of the Certificate on the certificate date.
OTHER CONTRACT PROVISIONS
Contract Maturity Date
Under the prior contract, the contract maturity date is the later of the
first day of the month following the 85th birthday of the annuitant or the sixth
certificate anniversary. The prior contract allows the owner to 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 new maturity date
must be the first day of a month no later than the first day of the month
following the 85th birthday of the annuitant.
Annuity Tables Assumed Interest Rate
A 4% assumed interest rate is built into the annuity tables in the prior
contract used to determine the first variable annuity payment to be made under
that contract.
Beneficiary
Under the prior contract certain provisions relating to beneficiary are as
follows:
The beneficiary is the person, persons or entity designated in the
application or as subsequently named to whom benefits will be paid on the death
of the annuitant. The beneficiary may be changed by the owner during the
lifetime of the annuitant and prior to the maturity date subject to the rights
of any irrevocable beneficiary. Any change must be made in writing, 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 owner or the 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 or certificates, regulations promulgated by the
Treasury Department prescribe certain limitations on the designation of a
beneficiary.
Ownership
Under the prior contract certain provisions relating to ownership are as
follows:
The contract is owned by the group holder. However, all contract rights and
privileges not expressly reserved to the group holder may be exercised by each
owner as to his or her interests as specified in his or her certificate. Prior
to the maturity date, an owner is the
55
<PAGE> 56
person designated in an application or as subsequently named. On and after a
certificate's maturity date, the annuitant is the owner and after the death of
the annuitant, the beneficiary is the owner.
In the case of non-qualified contracts, ownership of the contract may be
changed at any time. In the case of non-qualified certificates, an owner may
assign his or her interest in the contract during the lifetime of the annuitant
prior to the maturity date, subject to the rights of any irrevocable
beneficiary. Assigning a contract or interest therein, or changing the ownership
of a contract or certificate, may be treated as a distribution of all or a
portion of the contract value for Federal tax purposes. 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.
Modification
The prior contract does not include "free withdrawal percentage" among
contract terms the Company is authorized to change on 60 days' notice to the
group holder.
<TABLE>
TABLE OF ACCUMULATION UNIT VALUES
<CAPTION>
UNIT VALUE
AT START UNIT VALUE AT NUMBER OF UNITS
SUB-ACCOUNT OF YEAR END OF YEAR AT END OF YEAR
-------------------------------------------------------------------------------
<S> <C> <C> <C>
International Small Cap****
1996............ $12.500000 $13.493094 165,593.884
Small/Mid Cap****
1996............ $12.500000 $13.215952 293,815.378
Global Equity
1992............ $12.003976 $11.790318 28,203.763
1993............ 11.790318 15.450341 985,277.929
1994............ 15.450341 15.500933 2,268,423.530
1995............ 15.500933 16.459655 2,132,127.330
1996............ 16.459655 18.276450 1,785,966.081
Growth*****
1996............ $12.500000 $13.727312 98,424.809
Blue Chip (formerly called Pasadena Growth)
1992*........... $10.000000 $ 9.923524 58,049.495
1993............ 9.923524 $ 9.413546 707,931.534
1994............ 9.413546 8.837480 1,001,113.147
1995............ 8.837480 11.026969 1,257,014.677
1996............ 11.026969 13.688523 1,223,305.806
Equity
1992............ $12.386657 $13.143309 122,807.657
1993............ 13.143309 15.075040 1,315,253.114
1994............ 15.075040 14.786831 1,958,082.571
1995............ 14.786831 20.821819 2,278,573.962
1996............ 20.821819 24.664354 2,007,082.996
Value Equity
1993**.......... $10.000000 $11.175534 715,700.792
1994............ 11.175534 11.107620 1,432,473.155
1995............ 11.107620 13.548849 1,741,975.072
1996............ 13.548849 16.011513 1,661,006.752
</TABLE>
56
<PAGE> 57
<TABLE>
TABLE OF ACCUMULATION UNIT VALUES
<CAPTION>
UNIT VALUE
AT START UNIT VALUE AT NUMBER OF UNITS
SUB-ACCOUNT OF YEAR END OF YEAR AT END OF YEAR
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth and Income
1992............ $10.942947 $11.927411 149,476.889
1993............ 11.927411 12.893007 1,610,454.400
1994............ 12.893007 13.076664 2,142,828.604
1995............ 13.076664 16.660889 2,230,320.953
1996............ 16.660889 20.178770 2,214,190.721
International Growth and Income***
1995............ $10.000000 $10.554228 100,475.374
1996............ 10.554228 11.718276 223,718.019
Strategic Bond
1993**.......... $10.000000 $10.750617 381,406.287
1994............ 10.750617 9.965972 564,406.390
1995............ 9.965972 11.716972 682,547.892
1996............ 11.716972 13.250563 797,845.050
Global Government Bond
1992............ $13.322602 $13.415849 56,786.509
1993............ 13.415849 15.741586 745,370.831
1994............ 15.741586 14.630721 694,644.982
1995............ 14.630721 17.772344 586,608.921
1996............ 17.772344 19.803954 494,576.435
Investment Quality Bond (formerly called Bond Sub-account)
1992............ $13.147350 $13.936240 59,746.432
1993............ 13.936240 15.118716 319,417.770
1994............ 15.118716 14.216516 384,804.353
1995............ 14.216516 16.751499 371,328.627
1996............ 16.751499 16.943257 361,839.590
U.S. Gov. Securities (formerly called U.S. Gov. Bond Sub-account)
1992............ $13.015785 $13.651495 212,815.440
1993............ 13.651495 14.490734 783,550.472
1994............ 14.490734 14.111357 585,709.535
1995............ 14.111357 16.083213 494,142.862
1996............ 16.083213 16.393307 390,696.559
Money Market
1992............ $12.892485 $13.137257 28,928.622
1993............ 13.137257 13.303085 331,225.229
1994............ 13.303085 13.623292 1,079,557.666
1995............ 13.623292 14.190910 530,610.979
1996............ 14.190910 14.699636 846,105.590
Aggressive Asset Allocation
1992............ $10.880194 $11.623893 21,660.089
1993............ 11.623893 12.642493 244,300.482
1994............ 12.642493 12.381395 395,864.362
1995............ 12.381395 14.990551 422,911.593
1996............ 14.990551 16.701647 365,478.331
</TABLE>
57
<PAGE> 58
<TABLE>
TABLE OF ACCUMULATION UNIT VALUES
<CAPTION>
UNIT VALUE
AT START UNIT VALUE AT NUMBER OF UNITS
SUB-ACCOUNT OF YEAR END OF YEAR AT END OF YEAR
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Moderate Asset Allocation
1992 ........... $11.012835 $11.772128 120,020.418
1993............ 11.772128 12.775798 1,245,900.794
1994............ 12.775798 12.396295 1,690,801.919
1995............ 12.396295 14.752561 1,435,414.191
1996............ 14.752561 15.995078 1,266,755.972
Conservative Asset Allocation
1992............ $11.102574 $11.821212 56,414.765
1993............ 11.821212 12.705196 330,900.271
1994............ 12.705196 12.298940 478,239.388
1995............ 12.298940 14.320582 415,991.541
1996............ 14.320582 15.113142 325,608.369
</TABLE>
* This Sub-account commenced operations on December 11, 1992.
** This Sub-account commenced operations on February 19, 1993.
*** This Sub-account commenced operations on January 9, 1995.
**** This Sub-account commenced operations on March 4, 1996.
***** This Sub-account commenced operations on July 15, 1996.
58
<PAGE> 59
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
NASL VARIABLE ACCOUNT
- --------------------------------------------------------------------------------
OF
NORTH AMERICAN SECURITY
LIFE INSURANCE COMPANY
FLEXIBLE PAYMENT DEFERRED COMBINATION
FIXED AND VARIABLE GROUP 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, 1997.
North American Security Life Insurance Company
116 Huntington Avenue
Boston, Massachusetts 02116
(617) 266-6008
- --------------------------------------------------------------------------------
1
<PAGE> 60
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
General Information and History.................................... 3
Performance Data................................................... 3
Services
Independent Auditors.......................................... 6
Servicing Agent............................................... 6
Principal Underwriter......................................... 7
Cancellation of Certificate................................... 7
Financial Statements............................................... 8
2
<PAGE> 61
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 August 9, 1994, 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. Hypothetical
performance figures will also be furnished for sub-accounts investing in NASL
Series Trust portfolios established on December 31, 1996 in connection with the
merger of Manulife Series Fund, Inc. with and into NASL Series Trust. Such
figures are based on the assumption that the sub-accounts had been available for
investment under a contract offered by this Prospectus when the applicable
Manulife Series Fund, Inc. portfolio first became available under contracts
issued by affiliates of 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 and administration fees) and
the $30 administration fee) are reflected, the asset charges are reflected in
changes in unit values and the $30 administration fee is deducted as a dollar
amount based on the approximate average contract size of contracts of this
series issued by the Company in 1996 of $35,000. 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 (i) assume no redemption at the end of the period and (ii) do not
reflect imposition of the $30 administration fee inasmuch as the impact of such
charge varies in relation to contract value. The Company believes such
non-standardized figures are useful to owners who wish to assess the performance
of an ongoing contract of the size that is meaningful to the individual owner.
3
<PAGE> 62
<TABLE>
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN FIGURES
CALCULATED AS OF DECEMBER 31, 1996
<CAPTION>
===========================================================================================
TRUST PORTFOLIO 1 YEAR 5 YEAR SINCE INCEPTION OR INCEPTION DATE
10 YEARS, WHICHEVER IS
SHORTER
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pacific Rim 2.31% N/A 2.42% 10/4/94
Emerging Markets*
- -------------------------------------------------------------------------------------------
International Small Cap N/A N/A 1.99% 3/4/96
- -------------------------------------------------------------------------------------------
Small/Mid Cap N/A N/A -0.10% 3/4/96
- -------------------------------------------------------------------------------------------
Global Equity 4.95% 8.04% 6.99% 3/18/88
- -------------------------------------------------------------------------------------------
Growth N/A N/A 3.75% 7/15/96
- -------------------------------------------------------------------------------------------
Equity 12.37% 14.30% 12.25% 6/18/85
- -------------------------------------------------------------------------------------------
Quantitative Equity* 10.20% 9.25% 9.06% 4/30/87
- -------------------------------------------------------------------------------------------
Blue Chip Growth 18.05% N/A 7.17% 12/11/92
- -------------------------------------------------------------------------------------------
Real Estate Securities* 26.73% 15.39% 11.72% 4/30/87
- -------------------------------------------------------------------------------------------
Int'l Growth & Income 4.94% N/A 5.42% 1/09/95
- -------------------------------------------------------------------------------------------
Growth and Income 15.03% 12.39% 12.75% 4/23/91
- -------------------------------------------------------------------------------------------
Equity-Income 12.09% N/A 11.95% 2/19/93
- -------------------------------------------------------------------------------------------
Aggressive Asset Allocation 5.33% 8.28% 7.35% 8/03/89
- -------------------------------------------------------------------------------------------
Moderate Asset Allocation 2.44% 7.05% 6.61% 8/03/89
- -------------------------------------------------------------------------------------------
Conservative Asset -0.28% 5.53% 5.70% 8/03/89
Allocation
- -------------------------------------------------------------------------------------------
Strategic Bond 7.00% N/A 6.40% 2/19/93
- -------------------------------------------------------------------------------------------
Global Government Bond 5.35% 7.62% 7.97% 3/18/88
- -------------------------------------------------------------------------------------------
Capital Growth Bond* -4.49% 4.40% 5.88% 6/26/84
- -------------------------------------------------------------------------------------------
Investment Quality Bond** -4.40% 4.40% 6.25% 4/23/91
- -------------------------------------------------------------------------------------------
U.S. Government -3.67% 3.93% 6.28% 5/01/89
Securities***
- -------------------------------------------------------------------------------------------
Money Market -2.11% 1.85% 4.01% 6/18/85
- -------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 63
<TABLE>
NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURN FIGURES
CALCULATED AS OF DECEMBER 31, 1996
<CAPTION>
===========================================================================================
TRUST PORTFOLIO 1 YEAR 5 YEAR SINCE INCEPTION OR INCEPTION DATE
10 YEARS, WHICHEVER IS
SHORTER
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
International SmallCap N/A N/A 7.94% 3/4/96
- -------------------------------------------------------------------------------------------
Small/Mid Cap N/A N/A 5.73% 3/4/96
- -------------------------------------------------------------------------------------------
Global Equity 11.04% 8.70% 7.06% 3/18/88
- -------------------------------------------------------------------------------------------
Growth N/A N/A 9.82% 7/15/96
- -------------------------------------------------------------------------------------------
Equity 18.45% 14.84% 12.30% 6/18/85
- -------------------------------------------------------------------------------------------
Quantitative Equity* 16.28% 10.36% 9.12% 4/30/87
- -------------------------------------------------------------------------------------------
Blue Chip Growth 24.14% N/A 8.05% 12/11/92
- -------------------------------------------------------------------------------------------
Real Estate Securities* 32.82% 15.90% 11.77% 4/30/87
- -------------------------------------------------------------------------------------------
Int'l Growth & Income 11.03% N/A 8.35% 1/09/95
- -------------------------------------------------------------------------------------------
Growth and Income 21.11% 12.96% 13.12% 4/23/91
- -------------------------------------------------------------------------------------------
Equity-Income 18.18% N/A 12.95% 2/19/93
- -------------------------------------------------------------------------------------------
Aggressive Asset Allocation 11.41% 8.93% 7.43% 8/03/89
- -------------------------------------------------------------------------------------------
Moderate Asset Allocation 8.42% 7.73% 6.69% 8/03/89
- -------------------------------------------------------------------------------------------
Conservative Asset Allocation 5.53% 6.24% 5.78% 8/03/89
- -------------------------------------------------------------------------------------------
Strategic Bond 13.09% N/A 7.55% 2/19/93
- -------------------------------------------------------------------------------------------
Global Government Bond 11.43% 8.28% 8.04% 3/18/88
- -------------------------------------------------------------------------------------------
Capital Growth Bond* 1.06% 5.14% 5.95% 6/26/84
- -------------------------------------------------------------------------------------------
Investment Quality Bond** 1.14% 5.15% 6.71% 4/23/91
- -------------------------------------------------------------------------------------------
U.S. Government Securities*** 1.93% 4.69% 6.35% 5/01/89
- -------------------------------------------------------------------------------------------
Money Market 3.58% 2.66% 4.08% 6/18/85
- -------------------------------------------------------------------------------------------
</TABLE>
* On December 31, 1996, Manulife Series Fund, Inc. merged with NASL Series
Trust. Performance presented for these sub-accounts is based upon the
performance of the respective predecessor Manulife Series Fund portfolio for
periods to December 31, 1996. Performance for each of these sub-accounts is
based on the historical performance of the predecessor Manulife Series Fund
portfolio and reflects the current expenses that an investor would have incurred
as a holder of units of the sub-account.
5
<PAGE> 64
** 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.
* * * * *
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 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 AUDITORS
The financial statements of the Company and the Variable Account at
December 31, 1996 and for the year then ended appearing in this Statement of
Additional Information have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
is included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
The statutory balance sheet of the Company as of December 31, 1995
and the related statutory statements of operations, changes in capital and
deficit and cash flows for each of the two years in the period ended December
31,1995, appearing in this Statement of Additional Information have been
included herein in reliance on the report (which report includes an adverse
opinion as to generally accepted accounting principles and an unqualified
opinion as to statutory accounting practices prescribed or permitted by the
Insurance Department of the State of Delaware), of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
The statement of operations and changes in net assets of the Variable
Account for the year ended December 31, 1995, appearing in this Statement of
Additional Information has been included herein in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm 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;
6
<PAGE> 65
and annual contract owner tax reports. Vantage receives approximately $7.50 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 1996, 1995 and 1994 were $83,031,288,
$68,782,161 and $69,999,469 respectively. The amounts retained by NASL Financial
Services, Inc. during such periods were $0, $0 and $0, respectively.
CANCELLATION OF CERTIFICATE
The Company may, at its option, a certificate and an owner's participation
under a contract at the end of any two consecutive certificate years in which no
purchase payments by or on behalf of the owner have been made, if both (i) the
total purchase payments made for the certificate, less any withdrawals, are less
than $2,000; and (ii) the contract value for the owner 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 certificate owner prior to such cancellation
in order to allow the certificate owner to make the necessary purchase payment
to keep the certificate in force. The cancellation of certificate provisions may
vary in certain states in order to comply with the requirements of insurance
laws and regulations in such states.
7
<PAGE> 66
AUDITED STATUTORY-BASIS
FINANCIAL STATEMENTS
NORTH AMERICAN SECURITY
LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NAWL HOLDING COMPANY, INC.)
Years ended December 31, 1996, 1995
and 1994
<PAGE> 67
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Audited Statutory-Basis Financial Statements
Years ended December 31, 1996, 1995 and 1994
CONTENTS
Report of Independent Auditors.................................................1
Audited Statutory-Basis Financial Statements
Balance Sheets-Statutory-Basis.................................................2
Statements of Operations-Statutory-Basis.......................................3
Statement of Changes in Capital and Deficit-Statutory-Basis....................4
Statements of Cash Flows-Statutory-Basis.......................................5
Notes to Statutory-Basis Financial Statements..................................6
<PAGE> 68
Report of Independent Auditors
Board of Directors and Shareholder
North American Security Life Insurance Company
We have audited the accompanying statutory-basis balance sheet of North American
Security Life Insurance Company (a wholly-owned subsidiary of NAWL Holding
Company, Inc.) as of December 31, 1996, and the related statutory-basis
statements of operations, changes in capital and deficit and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Insurance Department of the State of Delaware, which practices
differ from generally accepted accounting principles. The variances between such
practices and generally accepted accounting principles are also described in
Note 1. The effects on the financial statements of these variances are not
reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of North American Security Life Insurance Company at December 31, 1996, or the
results of its operations or its cash flows for the year then ended.
Also, in our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of North American Security Life
Insurance Company at December 31, 1996 and the results of its operations and its
cash flows for the year then ended in conformity with accounting practices
prescribed or permitted by the Insurance Department of the State of Delaware.
Ernst & Young LLP
Boston, Massachusetts
February 25, 1997
<PAGE> 69
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
North American Security Life Insurance Company:
We have audited the accompanying statutory 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
New York, Canada) as of December 31, 1995 and the related statutory statements
of operations, capital and surplus, and cash flows for the two years in the
period ended December 31, 1995. These statutory 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.
As described more fully in Note 1 to the financial statements, the Company
prepared these financial statements using accounting practices prescribed or
permitted by the Insurance Department of the State of Delaware (SAP), which
practices after 1996 (upon issuance of 1996 financial statements) differ from
generally accepted accounting principles (GAAP). The effects on the financial
statements of the variances between SAP and GAAP are not currently determinable.
In our report dated February 23, 1996, we expressed our opinion that the 1995
and 1994 financial statements, prepared using SAP, presented fairly, in all
material respects, the financial position of North American Security Life
Insurance Company as of December 31, 1995 and the results of its operations, and
its cash flows for the two years in the period ended December 31, 1995 in
conformity with GAAP. As described in Note 1 to the financial statements,
financial statements of wholly-owned stock life subsidiaries of mutual life
insurance enterprises prepared in accordance with SAP are no longer considered
to be presented in conformity with GAAP. Accordingly, our present opinion on the
1995 and 1994 financial statements as presented herein is different from that
expressed in our previous report.
<PAGE> 70
In our opinion, because of the effects of the matter discussed in the two
preceding paragraphs, the financial statements referred to above do not present
fairly in conformity with GAAP, the financial position of North American
Security Life Insurance Company as of December 31, 1995, or the results of its
operations or its cash flows for the two years in the period ended December 31,
1995.
In our opinion, the statutory financial statements referred to above present
fairly, in all material respects the financial condition of North American
Security Life Insurance Company as of December 31, 1995, and the results of its
operations and its cash flows for the two years in the period ended December 31,
1995, on the basis of accounting described in Note 1.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 23, 1996, except for the information
in Note 1 - "Basis of Presentation", for which
the date is February 21, 1997
<PAGE> 71
<TABLE>
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Balance Sheets--Statutory-Basis
<CAPTION>
DECEMBER 31
1996 1995
---------------------------------
<S> <C> <C>
ADMITTED ASSETS
Investments:
Bonds $ 13,848,316 $ 16,281,452
Common stocks 30,305,498 20,097,789
Real estate 2,268,120 4,847,164
Cash and short-term investments 7,321,515 1,797,230
Policy loans 454,026
---------------------------------
Total investments 54,197,475 43,023,635
Accrued investment income 278,106 431,415
Other assets 4,008,003 4,320,909
Separate account assets 6,459,289,860 4,914,727,917
---------------------------------
Total admitted assets $6,517,773,444 $4,962,503,876
=================================
LIABILITIES, CAPITAL AND DEFICIT
Liabilities:
Aggregate reserves $ 3,674,617 $ 1,931,894
Payable to parent, subsidiaries and affiliates 405,711 3,033,665
Funds held account from reinsurers 6,000,000 9,000,000
Amount payable on reinsurance ceded 8,122,060 7,256,229
Transfers from separate accounts, net (188,238,440) (156,458,903)
Borrowed money 138,200,680 107,865,148
Accrued interest on surplus note 1,591,232 3,248,219
Asset valuation reserve 2,089,490 2,895,914
Bank overdraft 7,598,444 8,606,730
Other liabilities 9,486,084 10,239,069
Separate account liabilities 6,459,289,860 4,914,727,917
---------------------------------
Total liabilities 6,448,219,738 4,912,345,882
Capital and deficit:
Surplus note payable to Parent 20,000,000 20,000,000
Common stock (par value $1,000 per share--authorized,
3,000 shares; issued and outstanding, 2,600 shares) 2,600,000 2,600,000
Paid-in capital in excess of par value 128,633,000 110,633,000
Unassigned deficit (81,679,294) (83,075,006)
---------------------------------
Total capital and deficit 69,553,706 50,157,994
---------------------------------
Total liabilities, capital and deficit $6,517,773,444 $4,962,503,876
=================================
</TABLE>
See accompanying notes.
2
<PAGE> 72
<TABLE>
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Statements of Operations--Statutory-Basis
<CAPTION>
YEARS ENDED DECEMBER 31
1996 1995 1994
-------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums, annuity considerations and
deposits
$1,027,373,531 $ 991,551,945 $1,139,953,302
Net investment income 5,172,160 35,909,722 30,559,559
Commissions and expense allowances on
reinsurance ceded 25,222,953 14,676,544 7,019,266
Experience refunds on reinsurance ceded 3,880,075 3,901,633 4,967,753
Reserve adjustments on reinsurance (16,460,475) (48,222,552) (6,023,746)
-------------------------------------------------------
Total revenues 1,045,188,244 997,817,292 1,176,476,134
Expenses:
Annuity benefits 381,764,918 269,688,906 206,710,232
Increase (decrease) in reserves 1,742,723 (517,160,712) 146,552,124
Increase in separate account liability 525,172,444 415,529,185 732,768,257
Commissions 82,257,073 73,593,478 81,981,046
General expenses 27,587,265 22,872,812 19,253,764
Interest expense 9,822,477 8,980,132 4,599,441
Recapture fee on reinsurance ceded 11,160,053 1,445,889 8,029,909
Initial consideration on reinsurance ceded 3,204,498 727,522,634
-------------------------------------------------------
Total expenses 1,042,711,451 1,002,472,324 1,199,894,773
Gain (loss) before federal income tax provision
and realized capital gains (losses) 2,476,793 (4,655,032) (23,418,639)
Federal income tax provision 85,252 6,415
-------------------------------------------------------
Gain (loss) after federal income tax provision 2,391,541 (4,655,032) (23,425,054)
Net realized capital gains (losses) 675,367 (2,632,953) (7,029,018)
-------------------------------------------------------
Net income (loss) $ 3,066,908 $ (7,287,985) $ (30,454,072)
=======================================================
</TABLE>
See accompanying notes.
3
<PAGE> 73
<TABLE>
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Statements of Changes in Capital and Deficit--Statutory-Basis
<CAPTION>
PAID-IN
CAPITAL IN
SURPLUS EXCESS OF PAR UNASSIGNED TOTAL CAPITAL
NOTE COMMON STOCK VALUE DEFICIT AND DEFICIT
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1994 $20,000,000 $2,000,000 $ 81,233,000 $(51,510,475) $ 51,722,525
Net loss (30,454,072) (30,454,072)
Issuance of common stock 600,000 600,000
Paid-in capital in excess of par 29,400,000 29,400,000
Increase in non-admitted assets (1,859,181) (1,859,181)
Initial commission allowance on
reinsurance ceded 4,508,719 4,508,719
Decrease in asset valuation
reserves 1,976,033 1,976,033
Change in net realized gains and
losses 3,514,108 3,514,108
------------------------------------------------------------------------------
Balances at December 31, 1994 20,000,000 2,600,000 110,633,000 (73,824,868) 59,408,132
Net loss (7,287,985) (7,287,985)
Increase in non-admitted assets (958,941) (958,941)
Initial commission allowance on
reinsurance ceded (3,007,823) (3,007,823)
Decrease in asset valuation
reserves 2,640,946 2,640,946
Change in net realized gains and
losses (636,335) (636,335)
------------------------------------------------------------------------------
Balances at December 31, 1995 20,000,000 2,600,000 110,633,000 (83,075,006) 50,157,994
Net income 3,066,908 3,066,908
Paid-in capital in excess of par 18,000,000 18,000,000
Decrease in non-admitted assets 1,619,796 1,619,796
Initial commission allowance on
reinsurance ceded (3,280,000) (3,280,000)
Decrease in asset valuation
reserves 806,424 806,424
Change in net realized gains and
losses (817,416) (817,416)
------------------------------------------------------------------------------
Balances at December 31, 1996 $20,000,000 $2,600,000 $128,633,000 $(81,679,294) $ 69,553,706
==============================================================================
</TABLE>
4
<PAGE> 74
<TABLE>
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc
Statements of Cash Flows--Statutory-Basis
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Annuity considerations and deposits $1,027,373,531 $ 991,551,945 $1,139,953,302
Net investment income 2,264,748 32,128,833 28,230,341
Allowances and reserve adjustments on
reinsurance ceded 8,762,478 (33,546,008) 1,140,018
Experience refund on reinsurance ceded 3,880,075 3,901,633 4,967,753
Surrender benefits and other fund withdrawals paid (350,317,143) (232,650,150) (175,523,156)
Other benefits paid to policyholders (32,009,867) (36,860,052) (30,555,923)
Commissions, other expenses and taxes paid (109,382,073) (97,024,418) (100,210,171)
Net transfers to separate account (556,059,964) (423,952,090) (768,208,239)
Other operating expenses paid (25,079,045) (737,948,655) (12,780,263)
-----------------------------------------------------
Net cash (used for) provided by operating
activities (30,567,260) (534,398,962) 87,013,662
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid:
Bonds 9,607,009 763,005,273 112,385,919
Stocks 12,737,781 5,080,010 5,805,050
Mortgage loans 110,791,047 14,076,659
Real estate 1,602,063 860,375 5,950,412
Net gains on cash and short term investments 408
Cost of investments acquired:
Bonds (6,890,585) (441,405,890) (232,208,934)
Stocks (19,333,533) (10,137,862) (488,212)
Mortgage loans (136,101) (4,301,717)
Policy loans (454,026) 2,579,308 (791,723)
-----------------------------------------------------
Net cash (used for) provided by investing
activities (2,730,883) 430,636,160 (99,572,546)
OTHER CASH PROVIDED (APPLIED)
Capital and surplus paid-in 18,000,000 30,000,000
Borrowed money 30,864,052 7,000,000 70,000,000
Other sources 4,194,113 11,380,829 17,892,210
Other applications (14,235,737) (14,398,973) (103,250,950)
-----------------------------------------------------
Net other cash provided 38,822,428 3,981,856 14,641,260
-----------------------------------------------------
Net increase (decrease) in cash and short-term
investments 5,524,285 (99,780,946) 2,082,376
Cash and short-term investments at beginning of
year 1,797,230 101,578,176 99,495,800
-----------------------------------------------------
Cash and short-term investments at end of year $ 7,321,515 $ 1,797,230 $ 101,578,176
=====================================================
</TABLE>
See accompanying notes.
5
<PAGE> 75
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
North American Security Life Insurance Company (the Company) is a wholly-owned
subsidiary of NAWL Holding Company Inc. (NAWL). NAWL holds all the outstanding
shares of the Company and Wood Logan Associates, Inc. (WLA). Manufacturers Life
Insurance Company (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.
On January 1, 1996, North American Life Assurance Company, (NAL), the Company's
previous owner, merged with MLI. Effective January 1, 1996, immediately
following the merger, the Company's Parent went through a corporate
restructuring which resulted in the formation of a newly organized holding
corporation, NAWL.
The Company issues fixed and variable annuity contracts (the contracts). Amounts
invested in the fixed portion of the contracts are allocated to the General
Account of the Company (see Note 6 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 variable and fixed 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 as principal
underwriter of the annuity and variable life contracts issued by the Company
and annuity contracts issued by FNA. NASL Financial has a promotional agreement
with WLA to act as the promotional agent for the sale of annuity and variable
life contracts.
6
<PAGE> 76
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements (continued)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
accompanying notes. Such estimates and assumptions could change in the future as
more information becomes known which would impact the amounts reported and
disclosed herein.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Insurance Department of the
State of Delaware, which practices differ from generally accepted accounting
principals (GAAP).
The 1995 financial statements presented for comparative purposes were previously
described as being prepared in accordance with GAAP for stock life insurance
subsidiaries of a mutual life parent. Pursuant to FASB Interpretation 40,
Applicability of Generally Accepted Accounting Principals to Mutual Life
Insurance and Other Enterprises (FIN 40), as amended, which is effective for
1996 annual financial statements, financial statements based on statutory
accounting practices can no longer be described as prepared in conformity with
GAAP. Furthermore, financial statements prepared in conformity with statutory
accounting practices for periods prior to the effective date of FIN 40 are not
considered GAAP presentations when presented in comparative form with the
financial statements for periods subsequent to the effective date. Accordingly,
the 1995 financial statements are no longer considered to be presented in
conformity with GAAP.
The more significant variances from GAAP are as follows:
Investments: Investments in bonds are reported at amortized cost based on their
National Association of Insurance Commissioners (NAIC) rating; for GAAP, such
fixed maturity investments would be designated at purchase as held-to-maturity,
trading, or available-for-sale. Held-to-maturity fixed investments would be
reported at amortized cost, and the remaining fixed maturity investments are
reported at fair value with unrealized holding gains and losses reported in
operations for those designated as trading and as a separate component of
shareholders' equity for those designated as available-for-sale.
7
<PAGE> 77
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements (continued)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments in real estate are reported net of related obligations rather than
on a gross basis. Changes between cost and admitted asset investment amounts are
credited or charged directly to unassigned surplus rather than to a separate
surplus account.
The "asset valuation reserve" is determined by an NAIC prescribed formula and is
reported as a liability rather than unassigned surplus. Under GAAP, realized
capital gains and losses would be reported in the income statement on a pretax
basis in the period that the asset giving rise to the gain or loss is sold and
valuation allowances would be provided when there has been a decline in value
deemed other than temporary, in which case, the provision for such declines
would be charged to earnings.
Subsidiaries: The accounts and operations of the Company's subsidiaries are not
consolidated with the accounts and operations of the Company as would be
required under GAAP.
Policy Acquisition Costs: The costs of acquiring and renewing business are
expensed when incurred. Under GAAP, acquisition costs related to investment
products, to the extent recoverable from future gross profits, are amortized
generally in proportion to the present value of expected gross profits from
surrender charges and investment, mortality, and expense margins.
Nonadmitted Assets: Certain assets designated as "nonadmitted," principally
agents' debit balances and furniture and equipment, are excluded from the
accompanying balance sheets and are charged directly to unassigned surplus.
Annuity Considerations and Deposits: Revenues for annuity considerations and
deposits consist of the entire premium received and annuity benefits represent
the death benefits, annuitizations and withdrawals and surrenders paid and the
change in policy reserves. Under GAAP, annuity considerations and deposits
received in excess of policy charges would not be recognized as premium revenue
and annuity benefits would represent the excess of benefits paid over the policy
account value and interest credited to the account values.
Aggregate Reserves: Certain policy reserves are calculated based on statutorily
required interest and mortality assumptions rather than on estimated expected
experience or actual account balances as would be required under GAAP.
8
<PAGE> 78
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements (continued)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reinsurance: Policy and contract liabilities ceded to reinsurers have been
reported as reductions of the related reserves rather than as assets as would be
required under GAAP.
Commissions allowed by reinsurers on business ceded are reported as income when
received rather than being deferred and amortized with deferred policy
acquisition costs.
Federal Income Taxes: Deferred federal income taxes are not provided for
differences between the financial statement amounts and tax bases of assets and
liabilities.
Surplus Notes: Surplus notes are reported as surplus rather than as liabilities.
The effects of the foregoing variances from GAAP on the accompanying
statutory-basis financial statements have not been determined, but are presumed
to be material.
Other significant accounting policies are as follows:
INVESTMENTS AND INVESTMENT INCOME
Investments are valued in accordance with rules promulgated by the National
Association of Insurance Commissioners (NAIC). Bonds not backed by loans are
valued at amortized cost using the constant yield method.
Loan-backed bonds and structured securities are valued at amortized cost using
the constant yield method including anticipated prepayments. Prepayment
assumptions are obtained from broker dealer survey values. These assumptions are
consistent with the current interest rate and economic environment. The
retrospective method is being used to value all securities.
Investment income is recognized on the accrual basis. Unrealized gains or losses
on investments are recorded in unassigned deficit. Realized gains or losses on
investments sold are determined on the basis of the specific identification
method.
Common stocks, excluding investments in subsidiaries, are valued at market
value. The Company's insurance subsidiary is reported at equity in the
underlying statutory-basis of its net assets, and the Company's noninsurance
subsidiary is reported at the GAAP-basis of its net assets. Real estate acquired
in satisfaction of debt is stated at the lower of the appraised market value or
the outstanding principal loan balance plus accrued interest and foreclosed
costs.
9
<PAGE> 79
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements (continued)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In 1996, 1995 and 1994, the Company transferred, in satisfaction of debt,
mortgages with statement values of $0, $2,405,052 and $6,407,174, respectively,
to foreclosed real estate. Subsequently, in 1996, 1995 and 1994, the Company
wrote-down $929,713, $1,360,620, and $0, 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
$2,268,120 of foreclosed real estate at adjusted book value which approximates
market value.
SHORT-TERM INVESTMENTS
Short-term investments generally consist of treasury bills, commercial paper and
money market instruments whose maturities at the time of acquisition are one
year or less. Short-term instruments 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 rate 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, the 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 6). This
accounting was approved by the State of Delaware Department of Insurance as a
permitted practice. Total net gains (losses) of $(59,933) were transferred into
IMR and $541,484 was amortized and included in net investment income in 1994.
10
<PAGE> 80
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements (continued)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREMIUMS, ANNUITY CONSIDERATIONS AND DEPOSITS AND RELATED EXPENSES
Premiums, annuity considerations and deposits are recognized as revenue when
received. Expenses, including acquisition costs such as commissions and other
costs in connection with acquiring new business, are charged to operations as
incurred.
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.
Surrender values on policies do not exceed the corresponding reserves.
Additional reserves are established when the results of cash flow testing under
various interest rate scenarios indicate the need for such reserves.
SEPARATE ACCOUNT
Separate account assets and liabilities reported in the accompanying balance
sheets represent mutual funds that are separately administered for the
exclusive benefit of 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. There are no
reconciling items between the increase in separate account liability as shown
on the statement of operations and the transfers as reported in the Summary of
Operations of the Separate Account Statement. Fees charged on separate account
deposits are included in other income.
11
<PAGE> 81
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements (continued)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Annuity and variable life premiums, considerations and deposits for the separate
accounts, net of reinsurance, are $1,027,373,531, $728,682,163 and $975,538,582
for 1996, 1995 and 1994, respectively.
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, 1996
and 1995 is shown below:
<CAPTION>
1996 1995
----------------------
(In thousands)
<S> <C> <C>
Total assets at year end $471,166 $318,326
Total liabilities at year end 440,862 304,409
Net income 3,175 1,220
</TABLE>
FEDERAL INCOME TAXES
The Company will participate as a member of the NAWL affiliated group, filing a
consolidated federal income tax return. The Company will file separate state
returns.
The method of allocation between companies is subject to a tax sharing
agreement. The 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. The tax
charge to the Company shall not be more than the Company would have paid on a
separate return basis.
Income before federal income taxes differs from taxable income principally due
to policy acquisition costs, differences in annuity reserves for tax and
financial reporting purposes, the equity earnings of unconsolidated subsidiaries
and reinsurance allowances.
12
<PAGE> 82
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements (continued)
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in accordance
with accounting practices prescribed or permitted by the Insurance Department of
the State of Delaware. "Prescribed" statutory accounting practices include state
laws, regulations, and general administrative rules, as well as a variety of
publications of the NAIC. "Permitted" statutory accounting practices encompass
all accounting practices that are not prescribed, such practices may differ from
state to state, may differ from company to company within a state, and may
change in the future. The NAIC currently is in the process of recodifying
statutory accounting practices, the result of which is expected to constitute
the only source of "prescribed" statutory accounting practices. Accordingly,
that project, which is expected to be completed in 1997, will likely change, to
some extent, prescribed statutory accounting practices, and may result in
changes to the accounting practices that the Company uses to prepare its
statutory financial statements. The impact of any such changes on the Company's
statutory-surplus cannot be determined at this time and could be material.
3. INVESTMENTS
<TABLE>
The major components of investment income are as follows:
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Amortization of IMR $11,040,025 $ 541,484
Equity in undistributed income
(loss) of subsidiaries $ 3,086,798 (482,580) 737,688
Bonds 719,462 18,046,504 16,182,157
Common stock 34,993 137,862 498,222
Short-term investments 199,114 2,642,678 1,664,563
Mortgage loans 5,420,613 12,026,724
Real estate 774,673 1,071,080 1,248,043
Policy loan interest (32,300) 10,658
Interest rate swap 1,632,000
Investment expenses (1,274,880) (1,934,160) (2,349,980)
-------------------------------------------
Net investment income $ 5,172,160 $35,909,722 $30,559,559
===========================================
</TABLE>
13
<PAGE> 83
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
<TABLE>
The amortized and estimated fair value of investments in debt securities at
December 31, 1996 and 1995 are as follows:
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
DECEMBER 31, 1996:
U.S. Treasury securities and
obligations of U.S. Government
agencies
$ 6,916 $144 $ 27 $ 7,033
Corporate debt securities 6,009 2 17 5,994
Mortgage-backed securities 923 19 4 938
-------------------------------------------
Totals $13,848 $165 $ 48 $13,965
===========================================
DECEMBER 31, 1995:
U.S. Treasury securities and
obligations of U.S. Government
agencies
$ 8,998 $362 $ 3 $ 9,357
Corporate debt securities 3,672 125 3 3,794
Mortgage-backed securities 3,611 195 3,806
-------------------------------------------
Totals $16,281 $682 $ 6 $16,957
===========================================
</TABLE>
14
<PAGE> 84
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
<TABLE>
The amortized cost and estimated fair value of debt securities at December 31,
1996 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>
AMORTIZED ESTIMATED
COST FAIR VALUE
---------------------------
(In thousands)
<S> <C> <C>
Due in one year or less $ 7,136 $ 7,156
Due after one year through five years 3,494 3,539
Due after five years through ten years 1,938 1,914
Due after ten years 357 418
Mortgage-backed securities 923 938
---------------------------
Total $13,848 $13,965
===========================
</TABLE>
The proceeds from sales of debt securities for the years ended December 31,
1996, 1995 and 1994 were $8,593,009, $743,955,966 and $74,622,566, respectively.
In 1996, gross gains and losses recognized on the sales were $338,975 and
$1,775, respectively. In 1995, gross gains and losses on the sales were
$10,452,916 and $2,035,657, respectively. In 1994, gross gains and losses on the
sales were $1,600,852 and $1,660,785, respectively. Net realized gains (losses)
of $0, $8,417,259 and $(59,933) for the years ended December 31, 1996, 1995 and
1994, respectively, were transferred to IMR.
Debt securities with a carrying value of $5,458,635 and $5,600,444 at December
31, 1996 and 1995, respectively, were on deposit with, or in custody accounts on
behalf of certain state insurance departments.
4. FEDERAL INCOME TAXES
At December 31, 1996 and 1995, the Company had operating loss carryforwards of
approximately $32,000,000 and $36,000,000, respectively, which expire between
2007 and 2010. During 1996, the Company utilized approximately $4,000,000 in net
operating loss carryforwards to reduce taxable income.
15
<PAGE> 85
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements (continued)
5. 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 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
$ 385,506,134 5.64%
Subject to discretionary withdrawal at book value
less surrender charge (5% or more) 139,439,719 2.04
Subject to discretionary withdrawal at market value 6,269,263,219 91.75
Subject to discretionary withdrawal at book value 18,704,535 .27
------------------------
Subtotal 6,812,913,607 99.70
Not subject to discretionary withdrawal provision 20,342,476 .30
------------------------
Total annuity actuarial reserve and deposit fund
liabilities
6,833,256,083 100%
Expense gap reserve 1,298,797
Reinsurance ceded (559,828,843)
------------------------
Total net annuity actuarial reserves and deposit
funds liabilities $6,274,726,037
========================
</TABLE>
6. REINSURANCE
Reinsurance premiums and benefits paid or provided are accounted for on bases
consistent with those used in accounting for the original policies issued and
the terms of the reinsurance contracts. Reinsurance transactions have been
entered into primarily to improve cash flow and statutory capital.
16
<PAGE> 86
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements (continued)
6. REINSURANCE (CONTINUED)
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 require 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 asset 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 $1,298,797 and $1,931,894
at December 31, 1996 and 1995, respectively, 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):
<S> <C>
Net loss from operations:
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>
17
<PAGE> 87
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements (continued)
6. REINSURANCE (CONTINUED)
Effective July 1, 1995 and August 1, 1995, the Company entered into treaties
with the Connecticut General Life Insurance Company (CIGNA) and Swiss Re Life
Insurance Company, respectively, 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.
Effective November 1, 1995, the Company entered into a treaty with Transamerica
Occidential 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 December 1989, the percentage assumed was increased to 90%. On
March 31, 1995, this agreement was 100% recaptured. To effect this recapture,
the Company paid NAL $1,445,889. At December 31, 1996 and 1995, the Company had
no liability for future policy benefits under this contract.
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 five years. The ceding
commission is payable out of future profits generated by the business reinsured.
18
<PAGE> 88
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements (continued)
6. 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 to be amortized into income in future years.
During 1996, $3.0 million was amortized into income.
Effective December 31, 1994, the Company entered into an 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.
In the event of insolvency of a reinsurer, the Company remains primarily liable
to its policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company and, accordingly, the Company periodically
monitors the financial condition of its reinsurers.
The Company has not entered into any reinsurance agreements in which the
reinsurer may unilaterally cancel any reinsurance for reasons other than
nonpayment of premiums or other similar credits or a significant change in the
ownership of the Company. The Company does not have any reinsurance agreements
in effect in which the amount of losses paid or accrued through December 31,
1996 would result in a payment to the reinsurer of amounts which, in the
aggregate and allowing for offset of mutual credits from other reinsurance
agreements with the same reinsurer, exceed the total direct premiums collected
under the reinsured policies.
The Company has estimated that the aggregate reduction in surplus that would
occur if all reinsurance agreements currently in effect were terminated would be
$14,178,002 at December 31, 1996.
19
<PAGE> 89
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements
7. RELATED-PARTY TRANSACTIONS
In connection with the fixed annuity indemnity coinsurance agreement entered
into in 1995 (see Note 6), 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 the former Parent 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 mortgage loan assets on its balance sheet
as of December 31, 1995.
The Company utilizes various services administered by MLI in 1996 and NAL for
1995 and 1994, such as payroll and investment accounting. The charges for these
services were approximately $6,053,000, $295,000 and $234,000 in 1996, 1995 and
1994, respectively. During 1996, MLI changed the allocation method of expenses
subsequent to the merger with NAL. At December 31, 1996 and 1995, the Company
had a net liability to MLI of $4,348,511 and NAL of $5,928,889, respectively.
The Company's annuity and insurance contracts are distributed through NASL
Financial pursuant to an underwriting agreement. NASL Financial has entered into
an agreement with Wood Logan Associates, an affiliate, to act as the promotional
agent for the sale of annuity and variable life contracts. At December 31, 1996,
the Company had a payable to NASL Financial for $999,328 and at December 31,
1995, the Company had a receivable from NASL Financial for $881,119.
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 1996, 1995 and 1994 were approximately $661,000, $456,000 and
$418,000, respectively. At December 31, 1996, the Company had a net receivable
from FNA for $1,336,725.
The financial statements have been prepared from the records maintained by the
Company and may not necessarily be indicative of the financial conditions or
results of operations that would have occurred if the Company had been operated
as an unaffiliated corporation (see also Notes 1, 3, 6, 8, 9 and 12 for
additional related-party transactions).
20
<PAGE> 90
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements
8. BORROWED MONEY
The Company has an unsecured line of credit with State Street Bank and Trust in
the amount of $10,000,000, bearing interest based on the bank's money market
rate plus 50 basis points. There were no outstanding balances at December 31,
1996 and December 31, 1995. Interest expense was approximately $244,000,
$76,000 and $81,600 in 1996, 1995 and 1994, respectively.
The Company has a revolving credit line with MLI. The original term of the
agreement was seven years. Each additional borrowing under the agreement has a
seven year term from the date of each additional borrowing. The balance
outstanding at December 31, 1996 is $137,864,052. Principal and interest is
payable in quarterly installments. The interest rate is Libor plus 32.5 basis
points. Accrued interest at December 31, 1996 is $336,627.
During 1995, the Company had a $150 million revolving credit and term loan
agreement (the Loan) with the Canadian Imperial Bank of Commerce and Deutsche
Bank AG. The amount outstanding at December 31, 1995 was in the form of a term
loan of $107 million. In April of 1996, the loan was paid in full and the credit
line with MLI described above was established.
On December 20, 1994, the Company received $20,000,000 from its former Parent in
the form of a surplus note agreement with interest at 8%. This surplus note
agreement was assumed by the Parent upon the merger described in Note 1. 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 Insurance Department of the State of Delaware. Interest accrued
at December 31, 1996 and 1995 was $1,591,232 and $3,248,219, respectively.
Interest accrued at December 31, 1995 was paid during 1996.
9. DEFERRED COMPENSATION AND RETIREMENT PLANS
Prior to December 31, 1995, NAL maintained the NALACO Pension Plan (the Plan), a
defined benefit pension plan for all U.S. employees which vests at five years of
service. Sponsorship of this plan was assumed by MLI at the time of the merger.
Benefit payout is a function of years of service and average earnings during the
employee's last five years of service. MLI'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 1996 or 1995 as the plan was subject to the full
funding limitation under the Internal Revenue Code. At December 31,
21
<PAGE> 91
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements
9. DEFERRED COMPENSATION AND RETIREMENT PLANS (CONTINUED)
1996, the Plan's total accumulated benefit obligation determined in accordance
with SFAS No. 87 and valued at January 1, 1996 based on an assumed interest rate
of 7% was $10,183,862, including vested benefits of $10,094,294 and fair value
of assets of $24,427,811.
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 $298,997, $203,248 and $167,148 in 1996, 1995
and 1994, respectively.
10. LEASES
The Company leases its office space and various office equipment under operating
lease agreements. For the years ended December 31, 1996, 1995 and 1994, the
Company incurred rent expense of $1,144,402, $1,388,780 and $840,233,
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 at December 31, 1996 is
$900,000.
<TABLE>
The minimum lease payments associated with the office space and various office
equipment under operating lease agreements is as follows:
<CAPTION>
MINIMUM
LEASE
PAYMENTS
----------
<S> <C>
Year ended:
1997 $1,180,993
1998 1,204,160
1999 1,199,923
2000 1,197,368
2001 1,197,368
Remaining years 1,185,908
----------
Total $7,165,720
==========
</TABLE>
22
<PAGE> 92
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements
10. LEASES (CONTINUED)
The Company also guarantees FNA's office space lease which has an annual cost to
FNA of approximately $80,000.
11. INTEREST RATE SWAP
The Company entered into an interest rate swap in 1995 with Canadian Imperial
Bank of Commerce and Deutsche AG for the purpose of minimizing exposure to
fluctuations in interest rates on a portion of the debt outstanding at that
time. During 1996, the Company terminated this agreement and recognized a gain
of $1.6 million which is recorded as a component of investment income.
12. GUARANTEE AGREEMENT
A guarantee agreement continues in effect, whereby the Parent 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.
13. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating the
"fair value" disclosures for financial instruments in the accompanying financial
statements and notes thereto:
Cash and Short-term investments: The carrying amounts reported in the
accompanying balance sheets for these financial instruments approximate their
fair values.
Bonds: Fair values for bonds are based on quoted market prices or dealer quotes,
where applicable. For bonds not actively traded, fair values are estimated using
values obtained from independent pricing services.
Assets and Liabilities of Separate Accounts: Separate account assets and
liabilities are reported at estimated fair value in the Company's balance
sheets.
23
<PAGE> 93
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements
13. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Aggregate Reserves: Fair values of the Company's liabilities under contracts not
involving significant mortality risk (deferred annuities) are stated at the cost
the Company would incur to extinguish the liability, i.e., the cash surrender
value.
<TABLE>
The following sets forth a comparison of the carrying values and fair values of
the Company's financial instruments at December 31, 1996 and 1995:
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Bonds $ 13,848,316 $ 13,965,000 $ 16,281,452 $ 16,957,000
Common stocks 30,305,498 30,305,498 20,097,789 20,097,789
Cash and short-term investments 7,321,515 7,321,515 1,797,230 1,797,230
Assets held in separate accounts 6,459,289,860 6,459,289,860 4,914,727,917 4,914,727,917
LIABILITIES:
Aggregate reserves for deferred
annuities 3,674,617 3,674,617 1,931,894 1,931,894
Borrowed money 138,200,680 138,200,680 107,865,148 107,865,148
Liabilities held in separate
accounts 6,271,051,420 6,459,289,860 4,758,269,014 4,914,727,917
</TABLE>
24
<PAGE> 94
REPORT OF INDEPENDENT AUDITORS
To the Contract Owners of
NASL Variable Account of North American Security Life Insurance Company:
We have audited the accompanying statement of assets and contract owners' equity
of NASL Variable Account of North American Security Life Insurance Company (the
Company) as of December 31, 1996, and the related statement of operations and
changes in net assets for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above present fairly,
in all material respects, the financial position of NASL Variable Account of
North American Security Life Insurance Company at December 31, 1996, and the
results of its operations and the changes in its net assets for the year then
ended in conformity with generally accepted accounting principles.
Boston, Massachusetts
February 14, 1997
Ernst & Young LLP
<PAGE> 95
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of
NASL Variable Account:
We have audited the accompanying statement of assets and liabilities for the
sub-accounts comprising NASL Variable Account (consisting of the Equity,
Investment Quality Bond, Growth and Income, Blue Chip Growth, Money Market,
Global Equity, Global Government Bond, U.S. Government Securities, Conservative
Asset Allocation, Moderate Asset Allocation, Aggressive Asset Allocation,
Equity-Income, 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, Blue Chip Growth, Money Market,
Global Equity, Global Government Bond, U.S. Government Securities, Conservative
Asset Allocation, Moderate Asset Allocation, Aggressive Asset Allocation,
Equity-Income and Strategic Bond sub-accounts for the year 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 year then ended or the period indicated, in
conformity with generally accepted accounting principles.
Boston, Massachusetts
February 23, 1996 Coopers & Lybrand L.L.P.
<PAGE> 96
<TABLE>
NASL VARIABLE ACCOUNT
STATEMENT OF ASSETS AND CONTRACT OWNERS' EQUITY -- December 31, 1996
<CAPTION>
<S> <C>
ASSETS
Investments at market value:
Sub-accounts:
Equity Portfolio - 55,659,921 Shares (Cost $1,027,235,347) $1,259,027,422
Investment Quality Bond Portfolio - 12,225,550 Shares (Cost $140,464,480) 145,361,793
Growth and Income Portfolio - 49,632,317 Shares (Cost $725,093,543) 961,874,305
Blue Chip Growth Portfolio - 27,761,111 Shares (Cost $313,639,693) 397,261,501
Money Market Portfolio - 29,541,451 Shares (Cost $295,414,513) 295,414,513
Global Equity Portfolio - 38,398,475 Shares (Cost $619,556,808) 685,028,787
Global Government Bond Portfolio - 16,035,832 Shares (Cost $215,737,660) 240,056,406
U.S. Government Securities Portfolio - 14,062,113 Shares (Cost $182,722,170) 187,307,348
Conservative Asset Allocation Portfolio - 17,212,472 Shares (Cost $184,856,560) 200,353,173
Moderate Asset Allocation Portfolio - 47,922,107 Shares (Cost $530,263,317) 598,547,112
Aggressive Asset Allocation Portfolio - 15,783,046 Shares (Cost $182,854,406) 212,281,966
Equity-Income Portfolio - 34,629,206 Shares (Cost $449,113,434) 533,636,063
Strategic Bond Portfolio - 16,510,403 Shares (Cost $180,942,271) 197,299,313
International Growth and Income Portfolio - 14,792,022 Shares (Cost $160,071,003) 174,102,095
Growth Portfolio - 3,959,258 Shares (Cost $53,307,696) 54,360,608
Small/Mid Cap Portfolio - 12,220,796 Shares (Cost $160,214,651) 163,392,042
International Small Cap Portfolio - 6,684,989 Shares (Cost $87,430,362) 90,915,849
--------------
Total assets................................................................... $6,396,220,296
==============
CONTRACT OWNERS' EQUITY
Variable annuity contracts........................................................... $6,392,622,652
Annuity reserves..................................................................... 3,597,644
--------------
Total contract owners' equity................................................. $6,396,220,296
==============
</TABLE>
See accompanying notes.
2
<PAGE> 97
<TABLE>
NASL VARIABLE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
<CAPTION>
Sub-Account
------------------------------------------------------------------------------------------
Investment
Equity Quality Bond Growth and Income
----------------------------- --------------------------- ---------------------------
Year Ended December 31 Year Ended December 31 Year Ended December 31
----------------------------- --------------------------- ---------------------------
1996 1995 1996 1995 1996 1995
------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Income:
Dividends ........................... $ 98,211,395 $ 3,952,413 $ 8,112,676 $ 6,801,549 $ 26,099,422 $ 12,295,900
Expenses:
Mortality & expense risk and
administrative charges ............ 15,742,214 10,216,686 2,029,392 1,667,841 11,270,881 7,054,820
-------------- ------------ ------------ ------------ ------------ ------------
Net investment income (loss) .......... 82,469,181 (6,264,273) 6,083,284 5,133,708 14,828,541 5,241,080
Net realized gain (loss) .............. 70,538,266 29,102,556 1,866,806 (1,374,226) 26,208,114 11,439,262
Unrealized appreciation (depreciation)
during the period ................. 30,086,166 208,487,783 (6,225,133) 15,585,843 114,578,536 101,632,851
-------------- ------------ ------------ ------------ ------------ ------------
Net increase in net assets
from operations ................... 183,093,613 231,326,066 1,724,957 19,345,325 155,615,191 118,313,193
-------------- ------------ ------------ ------------ ------------ ------------
Changes from principal transactions:
Purchase payments ................... 176,179,265 152,243,325 26,033,539 20,615,193 156,149,545 105,864,684
Transfers between sub-accounts
and the Company ................... 21,282,426 91,976,289 (7,603,590) 610,884 62,642,334 53,438,203
Withdrawals ......................... (70,974,645) (41,022,073) (12,418,477) (9,834,428) (50,384,807) (30,901,300)
Annual contract fee ................. (593,891) (453,864) (62,358) (63,118) (378,803) (286,289)
-------------- ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets
from principal transactions ....... 125,893,155 202,743,677 5,949,114 11,328,531 168,028,269 128,115,298
-------------- ------------ ------------ ------------ ------------ ------------
Total increase (decrease) in net assets 308,986,768 434,069,743 7,674,071 30,673,856 323,643,460 246,428,491
Net assets at beginning of period ..... 950,040,654 515,970,911 137,687,722 107,013,866 638,230,845 391,802,354
-------------- ------------ ------------ ------------ ------------ ------------
Net assets at end of period ........... $1,259,027,422 $950,040,654 $145,361,793 $137,687,722 $961,874,305 $638,230,845
============== ============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 98
<TABLE>
NASL VARIABLE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
<CAPTION>
Sub-Account
---------------------------------------------------------------------------------------
Blue Chip Growth Money Market Global Equity
-------------------------- -------------------------- -----------------------------
Year Ended December 31 Year Ended December 31 Year Ended December 31
-------------------------- -------------------------- -----------------------------
1996 1995 1996 1995 1996 1995
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Income:
Dividends ........................... $ 856,382 $ 786,320 $ 14,797,551 $ 13,942,901 $ 10,705,346 $ 28,730,987
Expenses:
Mortality & expense risk and
administrative charges ............ 4,643,767 2,893,560 4,282,556 3,608,339 9,354,676 8,281,164
------------ ------------ ------------ ------------ ------------ ------------
Net investment income (loss) .......... (3,787,385) (2,107,240) 10,514,995 10,334,562 1,350,670 20,449,823
Net realized gain (loss) .............. 27,835,505 2,658,959 0 0 12,381,732 18,159,858
Unrealized appreciation (depreciation)
during the period ................. 44,603,170 41,777,908 0 0 53,342,983 (3,640,061)
------------ ------------ ------------ ------------ ------------ ------------
Net increase in net assets
from operations ................... 68,651,290 42,329,627 10,514,995 10,334,562 67,075,385 34,969,620
------------ ------------ ------------ ------------ ------------ ------------
Changes from principal transactions:
Purchase payments ................... 56,773,858 48,522,911 162,757,808 126,215,692 69,961,326 73,846,536
Transfers between sub-accounts
and the Company ................... 28,258,477 39,579,399 (52,784,116) (105,785,452) (21,060,694) (41,016,819)
Withdrawals ......................... (18,836,850) (9,818,260) (72,134,469) (52,028,607) (48,301,849) (39,666,888)
Annual contract fee ................. (167,159) (124,885) (142,787) (109,865) (393,841) (410,630)
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets
from principal transactions ....... 66,028,326 78,159,165 37,696,436 (31,708,232) 204,942 (7,247,801)
------------ ------------ ------------ ------------ ------------ ------------
Total increase (decrease) in net assets 134,679,616 120,488,792 48,211,431 (21,373,670) 67,280,327 27,721,819
Net assets at beginning of period ..... 262,581,885 142,093,093 247,203,082 268,576,752 617,748,460 590,026,641
------------ ------------ ------------ ------------ ------------ ------------
Net assets at end of period ........... $397,261,501 $262,581,885 $295,414,513 $247,203,082 $685,028,787 $617,748,460
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 99
<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
--------------------------- --------------------------- ---------------------------
1996 1995 1996 1995 1996 1995
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Income:
Dividends ............................. $ 20,353,777 $ 11,134,112 $ 12,043,963 $ 11,234,073 $ 13,280,150 $ 10,694,769
Expenses:
Mortality & expense risk and
administrative charges .............. 3,326,805 3,009,593 2,858,553 2,655,339 3,018,397 3,052,427
------------ ------------ ------------ ------------ ------------ ------------
Net investment income (loss) ............ 17,026,972 8,124,519 9,185,410 8,578,734 10,261,753 7,642,342
Net realized gain (loss) ................ 2,366,669 2,214,020 (1,404,574) 75,470 5,557,130 5,148,076
Unrealized appreciation (depreciation)
during the period ................... 6,050,899 31,070,281 (4,741,349) 15,587,098 (4,550,061) 19,853,900
------------ ------------ ------------ ------------ ------------ ------------
Net increase in net assets
from operations ..................... 25,444,540 41,408,820 3,039,487 24,241,302 11,268,822 32,644,318
------------ ------------ ------------ ------------ ------------ ------------
Changes from principal transactions:
Purchase payments ..................... 24,992,816 19,314,715 49,371,308 41,695,417 15,327,057 17,444,784
Transfers between sub-accounts
and the Company ..................... (19,896,239) (18,811,224) (49,747,858) (24,365,001) (17,748,883) (12,482,271)
Withdrawals ........................... (18,086,875) (15,701,657) (19,777,598) (16,213,816) (28,016,444) (31,190,237)
Annual contract fee ................... (114,090) (127,214) (82,721) (90,102) (128,219) (146,082)
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets
from principal transactions ......... (13,104,388) (15,325,380) (20,236,869) 1,026,498 (30,566,489) (26,373,806)
------------ ------------ ------------ ------------ ------------ ------------
Total increase (decrease) in net assets . 12,340,152 26,083,440 (17,197,382) 25,267,800 (19,297,667) 6,270,512
Net assets at beginning of period ....... 227,716,254 201,632,814 204,504,730 179,236,930 219,650,840 213,380,328
------------ ------------ ------------ ------------ ------------ ------------
Net assets at end of period ............. $240,056,406 $227,716,254 $187,307,348 $204,504,730 $200,353,173 $219,650,840
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
5
<PAGE> 100
<TABLE>
NASL VARIABLE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
<CAPTION>
Sub-Account
----------------------------------------------------------------------------------------
Moderate Aggressive Equity-
Asset Allocation Asset Allocation Income
--------------------------- --------------------------- ----------------------------
Year Ended December 31 Year Ended December 31 Year Ended December 31
--------------------------- --------------------------- ----------------------------
1996 1995 1996 1995 1996 1995
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Income:
Dividends ............................. $ 51,330,043 $ 28,759,406 $ 15,310,582 $ 11,134,600 $ 27,996,391 $ 3,410,640
Expenses:
Mortality & expense risk and
administrative charges .............. 8,696,227 8,527,910 2,962,896 2,650,794 6,323,456 3,916,735
------------ ------------ ------------ ------------ ------------ ------------
Net investment income (loss) ............ 42,633,816 20,231,496 12,347,686 8,483,806 21,672,935 (506,095)
Net realized gain (loss) ................ 24,021,437 15,018,509 7,692,646 7,897,507 14,248,677 5,501,447
Unrealized appreciation (depreciation)
during the period ................... (17,357,736) 70,271,801 2,609,570 19,421,882 38,129,341 45,616,955
------------ ------------ ------------ ------------ ------------ ------------
Net increase in net assets
from operations ..................... 49,297,517 105,521,806 22,649,902 35,803,195 74,050,953 50,612,307
------------ ------------ ------------ ------------ ------------ ------------
Changes from principal transactions:
Purchase payments ..................... 42,525,583 42,501,661 18,402,805 22,202,012 89,722,422 78,127,224
Transfers between sub-accounts
and the Company ..................... (46,406,195) (26,640,289) (9,078,642) (10,804,739) 35,937,790 45,625,228
Withdrawals ........................... (79,658,173) (79,543,856) (23,728,286) (22,397,713) (24,729,054) (12,728,807)
Annual contract fee ................... (437,374) (485,596) (187,171) (195,083) (204,474) (140,801)
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets
from principal transactions ......... (83,976,159) (64,168,080) (14,591,294) (11,195,523) 100,726,684 110,882,844
------------ ------------ ------------ ------------ ------------ ------------
Total increase (decrease) in net assets . (34,678,642) 41,353,726 8,058,608 24,607,672 174,777,637 161,495,151
Net assets at beginning of period ....... 633,225,754 591,872,028 204,223,358 179,615,686 358,858,426 197,363,275
------------ ------------ ------------ ------------ ------------ ------------
Net assets at end of period ............. $598,547,112 $633,225,754 $212,281,966 $204,223,358 $533,636,063 $358,858,426
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
6
<PAGE> 101
<TABLE>
NASL VARIABLE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
<CAPTION>
Sub-Account
--------------------------------------------------------------------------------------
Strategic International
Bond Growth and Income Growth (1)
---------------------------- ---------------------------- ------------------------
Year Ended December 31 Year Ended December 31 Period Ended December 31
---------------------------- ---------------------------- ------------------------
1996 1995 1996 1995 1996 1995
------------ ------------ ------------ ------------ ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Income:
Dividends ............................. $ 9,643,463 $ 3,783,473 $ 190,489 $ 1,766,390 $ 341,211 $0
Expenses:
Mortality & expense risk and
administrative charges .............. 2,160,517 1,283,369 1,849,647 606,981 188,200 0
------------ ------------ ------------ ------------ ------------ --
Net investment income (loss) ............ 7,482,946 2,500,104 (1,659,158) 1,159,409 153,011 0
Net realized gain (loss) ................ 2,988,289 41,813 4,120,040 502,507 291,191 0
Unrealized appreciation (depreciation)
during the period ................... 8,247,559 12,274,700 12,154,473 1,876,619 1,052,912 0
------------ ------------ ------------ ------------ ------------ --
Net increase in net assets
from operations ..................... 18,718,794 14,816,617 14,615,355 3,538,535 1,497,114 0
------------ ------------ ------------ ------------ ------------ --
Changes from principal transactions:
Purchase payments ..................... 46,182,825 21,970,895 46,387,432 36,977,061 18,581,188 0
Transfers between sub-accounts
and the Company ..................... 30,347,502 3,987,010 36,418,911 45,342,755 34,906,152 0
Withdrawals ........................... (9,790,056) (5,783,698) (6,777,863) (2,331,931) (620,165) 0
Annual contract fee ................... (58,212) (45,959) (52,870) (15,290) (3,681) 0
------------ ------------ ------------ ------------ ------------ --
Net increase (decrease) in net assets
from principal transactions ......... 66,682,059 20,128,248 75,975,610 79,972,595 52,863,494 0
------------ ------------ ------------ ------------ ------------ --
Total increase (decrease) in net assets . 85,400,853 34,944,865 90,590,965 83,511,130 54,360,608 0
Net assets at beginning of period ....... 111,898,460 76,953,595 83,511,130 0 0 0
------------ ------------ ------------ ------------ ------------ --
Net assets at end of period ............. $197,299,313 $111,898,460 $174,102,095 $ 83,511,130 $ 54,360,608 $0
============ ============ ============ ============ ============ ==
- ----------
<FN>
(1) From commencement of operations July 15, 1996
</TABLE>
See accompanying notes.
7
<PAGE> 102
<TABLE>
NASL VARIABLE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
<CAPTION>
Sub-Account
---------------------------------------------------
Small/Mid International
Cap (2) Small Cap (2) Total Total
------------------------ ------------------------ ------------- ---------------
Period Ended December 31 Period Ended December 31 Period Ended Period Ended
------------------------ ------------------------ ------------- -------------
December 31, December 31,
1996 1995 1996 1995 1996 1995
------------ ------- ----------- ------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Income:
Dividends ............................. $ 0 $0 $ 333,347 $0 $ 309,606,188 $ 148,427,533
Expenses:
Mortality & expense risk and
administrative charges .............. 1,004,534 0 599,718 0 80,312,436 59,425,556
------------ -- ----------- -- -------------- --------------
Net investment income (loss) ............ (1,004,534) 0 (266,371) 0 229,293,752 89,001,977
Net realized gain (loss) ................ 78,950 0 544,789 0 199,335,667 96,385,758
Unrealized appreciation (depreciation)
during the period ................... 3,177,391 0 3,485,487 0 284,644,208 579,817,560
------------ -- ----------- -- -------------- --------------
Net increase in net assets
from operations ..................... 2,251,807 0 3,763,905 0 713,273,627 765,205,295
------------ -- ----------- -- -------------- --------------
Changes from principal transactions:
Purchase payments ..................... 62,148,022 0 30,573,571 0 1,092,070,370 807,542,109
Transfers between sub-accounts
and the Company ..................... 102,797,240 0 58,323,270 0 186,587,885 40,653,975
Withdrawals ........................... (3,784,793) 0 (1,732,325) 0 (489,752,729) (369,163,272)
Annual contract fee ................... (20,234) 0 (12,572) 0 (3,040,457) (2,694,779)
------------ -- ----------- -- -------------- --------------
Net increase (decrease) in net assets
from principal transactions ......... 161,140,235 0 87,151,944 0 785,865,069 476,338,034
------------ -- ----------- -- -------------- --------------
Total increase (decrease) in net assets . 163,392,042 0 90,915,849 0 1,499,138,696 1,241,543,328
Net assets at beginning of period ....... 0 0 0 0 4,897,081,600 3,655,538,273
------------ -- ----------- -- -------------- --------------
Net assets at end of period ............. $163,392,042 $0 $90,915,849 $0 $6,396,220,296 $4,897,081,600
============ == =========== == ============== ==============
- ----------
<FN>
(2) From commencement of operations March 4, 1996
</TABLE>
See accompanying notes.
8
<PAGE> 103
NASL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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") which currently consists of seventeen sub-accounts. 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 NAWL Holding Company, Inc.
("NAWL"). NAWL holds all the outstanding shares of the Company and Wood Logan
Associates, Inc. ("WLA"). Manufacturers Life Insurance Company ("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. 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. 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."
On March 4, 1996, two new sub-accounts, Small/Mid Cap and International Small
Cap, commenced operations. On July 15, 1996, the Growth sub-account commenced
operations. Effective October 1, 1996, the name of Pasadena Growth was changed
to Blue Chip Growth. Effective December 31, 1996, the name of Value Equity was
changed to Equity-Income.
Effective after the close of business on December 31, 1996, the portfolios of
the Manulife Series Funds, Inc. (a series trust of MLI) were merged with the
NASL Series Trust. As a result of this merger, eight additional sub-accounts
will be available as investment options to the contract owners of the Account
beginning in 1997. Also, effective after the close of business on December 31,
1996, ten new sub-accounts were created which will be available as investment
options for contract owners in 1997. The merger and the creation of the new
funds had no effect on the statement of assets and contract owners' equity as of
December 31, 1996 nor the statement of operations and changes in net assets for
the year then ended.
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 the
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.
9
<PAGE> 104
NASL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
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.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
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.
Certain officers of the Account are officers and directors of the Company or the
Trust.
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.
10
<PAGE> 105
NASL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
<TABLE>
5. PURCHASES AND SALES OF INVESTMENTS:
The following table shows aggregate cost of shares purchased and proceeds from
sales of each sub-account for the year ended December 31, 1996.
<CAPTION>
Purchases Sales
--------- -----
<S> <C> <C>
Equity Portfolio $ 467,405,983 $ 259,043,647
Investment Quality Bond Portfolio 64,645,420 52,613,022
Growth and Income Portfolio 259,950,675 77,093,865
Blue Chip Growth Portfolio 165,496,643 103,255,702
Money Market Portfolio 597,672,257 549,460,826
Global Equity Portfolio 149,900,726 148,345,114
Global Government Bond Portfolio 65,936,774 62,014,190
U.S. Government Securities Portfolio 82,405,509 93,456,968
Conservative Asset Allocation Portfolio 40,082,371 60,387,107
Moderate Asset Allocation Portfolio 95,496,874 136,839,217
Aggressive Asset Allocation Portfolio 41,420,547 43,664,155
Equity-Income Portfolio 190,949,872 68,550,253
Strategic Bond Portfolio 125,776,519 51,611,514
International Growth and Income Portfolio 141,683,563 67,367,111
Growth Portfolio 57,792,998 4,776,493
Small/Mid Cap Portfolio 187,118,411 26,982,710
International Small Cap Portfolio 97,579,108 10,693,535
-------------- --------------
Total $2,831,314,250 $1,816,155,429
============== ==============
</TABLE>
11
<PAGE> 106
NASL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
6. UNIT VALUES:
<TABLE>
A summary of the accumulation unit values at December 31, 1995 and 1996 and the
accumulation units and dollar value outstanding at December 31, 1996 are as follows:
<CAPTION>
1995 1996
---------- -------------------------------------------------
Unit Unit
Value Value Units Dollars
---------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Equity sub-account
VEN 1 Contracts.................. $34.164256 $40.513296 18,984 $ 769,089
VEN 3 Contracts.................. 20.821819 24.664354 2,175,656 53,661,159
VEN 7 Contracts.................. 20.821819 24.664354 29,034,186 716,109,434
VEN 8 Contracts.................. 20.821819 24.664354 1,984,712 48,951,639
VIS 5 and 25 Contracts........... 15.402975 18.199588 3,896,591 70,916,345
VEN 17 Contracts................. 20.821819 24.664354 1,122,373 27,682,597
VEN 18 Contracts................. 20.821819 24.664354 22,371 551,771
VEN 20 Contracts................. 20.821819 24.664354 8,994,443 221,842,130
VEN 21 Contracts................. 20.821819 24.664354 3,147,370 77,627,845
VEN 22 Contracts................. 20.821819 24.664354 1,316,312 32,465,974
VEN 23 Contracts................. 20.821819 24.664354 321,421 7,927,629
---------- --------------
52,034,419 1,258,505,612
Investment Quality Bond sub-account
VEN 1 Contracts.................. 19.318272 19.560775 11,513 225,199
VEN 3 Contracts.................. 16.751499 16.943257 593,352 10,053,318
VEN 7 Contracts.................. 16.751499 16.943257 4,569,524 77,422,614
VEN 8 Contracts.................. 16.751499 16.943257 352,757 5,976,846
VIS 5 and 25 Contracts........... 11.417606 11.519237 1,084,870 12,496,880
VEN 17 Contracts................. 16.751499 16.943257 193,027 3,270,513
VEN 18 Contracts................. 16.751499 16.943257 9,083 153,894
VEN 20 Contracts................. 16.751499 16.943257 1,394,147 23,621,391
VEN 21 Contracts................. 16.751499 16.943257 434,182 7,356,452
VEN 22 Contracts................. 16.751499 16.943257 197,710 3,349,859
VEN 23 Contracts................. 16.751499 16.943257 78,708 1,333,569
---------- --------------
8,918,873 145,260,535
Growth and Income sub-account
VEN 3 Contracts.................. 16.660889 20.178770 1,787,490 36,069,351
VEN 7 Contracts.................. 16.660889 20.178770 25,383,756 512,212,966
VEN 8 Contracts.................. 16.660889 20.178770 2,189,350 44,178,384
VIS 5 and 25 Contracts........... 13.263871 16.024067 3,926,911 62,925,086
VEN 17 Contracts................. 16.660889 20.178770 1,135,270 22,908,355
VEN 18 Contracts................. 16.660889 20.178770 24,841 501,266
VEN 20 Contracts................. 16.660889 20.178770 8,658,969 174,727,339
VEN 21 Contracts................. 16.660889 20.178770 3,289,178 66,371,569
VEN 22 Contracts................. 16.660889 20.178770 1,507,845 30,426,452
VEN 23 Contracts................. 16.660889 20.178770 527,541 10,645,129
---------- --------------
48,431,151 960,965,897
</TABLE>
12
<PAGE> 107
NASL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
1995 1996
--------- -----------------------------------------------
Unit Unit
Value Value Units Dollars
--------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Blue Chip Growth sub-account
VEN 3 Contracts.................. 11.026969 13.688523 707,800 9,688,731
VEN 7 Contracts.................. 11.026969 13.688523 15,343,746 210,033,221
VEN 8 Contracts.................. 11.026969 13.688523 1,201,469 16,446,331
VIS 5 and 25 Contracts........... 11.551552 14.303631 2,170,279 31,042,868
VEN 17 Contracts................. 11.026969 13.688523 909,855 12,454,565
VEN 18 Contracts................. 11.026969 13.688523 21,838 298,934
VEN 20 Contracts................. 11.026969 13.688523 5,152,418 70,528,991
VEN 21 Contracts................. 11.026969 13.688523 2,356,190 32,252,759
VEN 22 Contracts................. 11.026969 13.688523 738,324 10,106,563
VEN 23 Contracts................. 11.026969 13.688523 298,492 4,085,919
---------- -----------
28,900,411 396,938,882
Money Market sub-account
VEN 1 Contracts.................. 15.478376 16.050779 5,920 95,026
VEN 3 Contracts.................. 14.190910 14.699636 1,575,179 23,154,555
VEN 7 Contracts.................. 14.190910 14.699636 9,846,532 144,740,437
VEN 8 Contracts.................. 14.190910 14.699636 840,966 12,361,888
VIS 5 and 25 Contracts........... 10.692803 11.048244 1,931,022 21,334,401
VEN 17 Contracts................. 14.190910 14.699636 302,728 4,449,987
VEN 18 Contracts................. 14.190910 14.699636 5,140 75,552
VEN 20 Contracts................. 14.190910 14.699636 3,874,503 56,953,789
VEN 21 Contracts................. 14.190910 14.699636 1,754,706 25,793,544
VEN 22 Contracts................. 14.190910 14.699636 244,417 3,592,843
VEN 23 Contracts................. 14.190910 14.699636 192,414 2,828,420
---------- -----------
20,573,527 295,380,442
Global Equity sub-account
VEN 3 Contracts.................. 16.459655 18.276450 2,060,063 37,650,644
VEN 7 Contracts.................. 16.459655 18.276450 22,555,919 412,242,122
VEN 8 Contracts.................. 16.459655 18.276450 1,757,970 32,129,452
VIS 5 and 25 Contracts........... 12.872711 14.257610 3,476,782 49,570,599
VEN 17 Contracts................. 16.459655 18.276450 807,823 14,764,135
VEN 18 Contracts................. 16.459655 18.276450 27,996 511,669
VEN 20 Contracts................. 16.459655 18.276450 5,145,277 94,037,395
VEN 21 Contracts................. 16.459655 18.276450 1,479,967 27,048,538
VEN 22 Contracts................. 16.459655 18.276450 725,911 13,267,081
VEN 23 Contracts................. 16.459655 18.276450 197,701 3,613,275
---------- -----------
38,235,409 684,834,910
</TABLE>
13
<PAGE> 108
NASL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
1995 1996
--------- -----------------------------------------------
Unit Unit
Value Value Units Dollars
--------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Global Government Bond sub-account
VEN 3 Contracts.................. 17.772344 19.803954 645,469 12,782,834
VEN 7 Contracts.................. 17.772344 19.803954 7,975,818 157,952,727
VEN 8 Contracts.................. 17.772344 19.803954 484,169 9,588,469
VIS 5 and 25 Contracts........... 12.434811 13.821405 1,388,876 19,196,224
VEN 17 Contracts................. 17.772344 19.803954 224,742 4,450,778
VEN 18 Contracts................. 17.772344 19.803954 10,407 206,107
VEN 20 Contracts................. 17.772344 19.803954 1,220,755 24,175,767
VEN 21 Contracts................. 17.772344 19.803954 393,134 7,785,608
VEN 22 Contracts................. 17.772344 19.803954 142,374 2,819,569
VEN 23 Contracts................. 17.772344 19.803954 52,203 1,033,822
---------- -----------
12,537,947 239,991,905
U.S. Government Securities sub-account
VEN 3 Contracts.................. 16.083213 16.393307 706,698 11,585,115
VEN 7 Contracts.................. 16.083213 16.393307 6,496,951 106,506,518
VEN 8 Contracts.................. 16.083213 16.393307 387,605 6,354,121
VIS 5 and 25 Contracts........... 11.333420 11.522857 1,193,266 13,749,835
VEN 17 Contracts................. 16.083213 16.393307 176,566 2,894,495
VEN 18 Contracts................. 16.083213 16.393307 3,091 50,679
VEN 20 Contracts................. 16.083213 16.393307 1,647,768 27,012,361
VEN 21 Contracts................. 16.083213 16.393307 864,829 14,177,409
VEN 22 Contracts................. 16.083213 16.393307 196,421 3,219,994
VEN 23 Contracts................. 16.083213 16.393307 103,362 1,694,443
---------- -----------
11,776,557 187,244,970
Conservative Asset Allocation sub-account
VEN 3 Contracts.................. 14.320582 15.113142 2,502,604 37,822,209
VEN 7 Contracts.................. 14.320582 15.113142 8,058,731 121,792,749
VEN 8 Contracts.................. 14.320582 15.113142 324,024 4,897,026
VIS 5 and 25 Contracts........... 11.672867 12.287873 854,258 10,497,010
VEN 17 Contracts................. 14.320582 15.113142 214,757 3,245,654
VEN 18 Contracts................. 14.320582 15.113142 1,584 23,932
VEN 20 Contracts................. 14.320582 15.113142 883,801 13,357,015
VEN 21 Contracts................. 14.320582 15.113142 397,294 6,004,357
VEN 22 Contracts................. 14.320582 15.113142 136,633 2,064,953
VEN 23 Contracts................. 14.320582 15.113142 37,880 572,483
---------- -----------
13,411,566 200,277,388
</TABLE>
14
<PAGE> 109
NASL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
1995 1996
--------- -----------------------------------------------
Unit Unit
Value Value Units Dollars
--------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Moderate Asset Allocation sub-account
VEN 3 Contracts.................. 14.752561 15.995076 7,190,308 115,009,524
VEN 7 Contracts.................. 14.752561 15.995076 22,857,443 365,606,537
VEN 8 Contracts.................. 14.752561 15.995076 1,259,589 20,147,221
VIS 5 and 25 Contracts........... 12.056663 13.039212 1,699,397 22,158,796
VEN 17 Contracts................. 14.752561 15.995076 586,159 9,375,652
VEN 18 Contracts................. 14.752561 15.995076 7,167 114,629
VEN 20 Contracts................. 14.752561 15.995076 2,649,111 42,372,724
VEN 21 Contracts................. 14.752561 15.995076 950,202 15,198,550
VEN 22 Contracts................. 14.752561 15.995076 419,129 6,703,998
VEN 23 Contracts................. 14.752561 15.995076 99,785 1,596,064
---------- -----------
37,718,290 598,283,695
Aggressive Asset Allocation sub-account
VEN 3 Contracts.................. 14.990551 16.701647 2,187,301 36,531,528
VEN 7 Contracts.................. 14.990551 16.701647 7,585,171 126,684,855
VEN 8 Contracts.................. 14.990551 16.701647 361,607 6,039,438
VIS 5 and 25 Contracts........... 12.443644 13.829135 527,340 7,292,660
VEN 17 Contracts................. 14.990551 16.701647 239,724 4,003,790
VEN 18 Contracts................. 14.990551 16.701647 3,871 64,649
VEN 20 Contracts................. 14.990551 16.701647 1,237,382 20,666,311
VEN 21 Contracts................. 14.990551 16.701647 488,150 8,152,913
VEN 22 Contracts................. 14.990551 16.701647 116,074 1,938,634
VEN 23 Contracts................. 14.990551 16.701647 46,171 771,127
---------- -----------
12,792,791 212,145,905
Equity-Income sub-account
VEN 3 Contracts.................. 13.548849 16.011513 718,170 11,498,984
VEN 7 Contracts.................. 13.548849 16.011513 16,078,400 257,439,509
VEN 8 Contracts.................. 13.548849 16.011513 1,635,658 26,189,355
VIS 5 and 25 Contracts........... 12.870851 15.172018 2,904,918 44,073,474
VEN 17 Contracts................. 13.548849 16.011513 1,120,892 17,947,170
VEN 18 Contracts................. 13.548849 16.011513 25,349 405,869
VEN 20 Contracts................. 13.548849 16.011513 6,463,654 103,492,884
VEN 21 Contracts................. 13.548849 16.011513 3,008,996 48,178,576
VEN 22 Contracts................. 13.548849 16.011513 1,187,415 19,012,314
VEN 23 Contracts................. 13.548849 16.011513 299,319 4,792,549
---------- -----------
33,442,771 533,030,684
</TABLE>
15
<PAGE> 110
NASL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
1995 1996
--------- -----------------------------------------------
Unit Unit
Value Value Units Dollars
--------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Strategic Bond sub-account
VEN 3 Contracts.................. 11.716972 13.250563 255,906 3,390,901
VEN 7 Contracts.................. 11.716972 13.250563 7,151,063 94,755,610
VEN 8 Contracts.................. 11.716972 13.250563 780,799 10,346,027
VIS 5 and 25 Contracts........... 11.607403 13.093621 1,157,303 15,153,288
VEN 17 Contracts................. 11.716972 13.250563 424,389 5,623,388
VEN 18 Contracts................. 11.716972 13.250563 17,046 225,869
VEN 20 Contracts................. 11.716972 13.250563 3,116,558 41,296,146
VEN 21 Contracts................. 11.716972 13.250563 1,301,826 17,249,932
VEN 22 Contracts................. 11.716972 13.250563 420,385 5,570,333
VEN 23 Contracts................. 11.716972 13.250563 276,194 3,659,728
---------- -----------
14,901,469 197,271,222
International Growth and Income sub-account
VEN 3 Contracts.................. 10.554228 11.718276 278,758 3,266,569
VEN 7 Contracts.................. 10.554228 11.718276 5,800,205 67,968,401
VEN 8 Contracts.................. 10.554228 11.718276 214,982 2,519,219
VIS 5 and 25 Contracts........... 10.528678 11.660474 1,038,598 12,110,541
VEN 17 Contracts................. 10.554228 11.718276 510,539 5,982,634
VEN 18 Contracts................. 10.554228 11.718276 8,736 102,373
VEN 20 Contracts................. 10.554228 11.718276 4,306,180 50,461,008
VEN 21 Contracts................. 10.554228 11.718276 1,918,371 22,479,999
VEN 22 Contracts................. 10.554228 11.718276 609,134 7,137,997
VEN 23 Contracts................. 10.554228 11.718276 174,572 2,045,687
---------- -----------
14,860,075 174,074,428
Growth sub-account
VEN 3 Contracts.................. -------- 13.727312 79,416 1,090,167
VEN 7 Contracts.................. -------- 13.727312 1,620,944 22,251,198
VEN 8 Contracts.................. -------- 13.727312 96,786 1,328,609
VIS 5 and 25 Contracts........... -------- 13.711434 193,088 2,647,515
VEN 17 Contracts................. -------- 13.727312 83,393 1,144,764
VEN 18 Contracts................. -------- 13.727312 1,639 22,502
VEN 20 Contracts................. -------- 13.727312 1,170,990 16,074,541
VEN 21 Contracts................. -------- 13.727312 458,281 6,290,972
VEN 22 Contracts................. -------- 13.727312 185,954 2,552,642
VEN 23 Contracts................. -------- 13.727312 66,585 914,032
---------- -----------
3,957,076 54,316,942
</TABLE>
16
<PAGE> 111
NASL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
1995 1996
--------- -----------------------------------------------
Unit Unit
Value Value Units Dollars
--------- --------- ---------- --------------
<S> <C> <C> <C> <C>
Small/ Mid Cap sub-account
VEN 3 Contracts.................. -------- 13.215952 278,168 3,676,250
VEN 7 Contracts.................. -------- 13.215952 5,018,758 66,327,669
VEN 8 Contracts.................. -------- 13.215952 293,815 3,883,050
VIS 5 and 25 Contracts........... -------- 13.188627 871,586 11,495,020
VEN 17 Contracts................. -------- 13.215952 232,184 3,068,532
VEN 18 Contracts................. -------- 13.215952 0 0
VEN 20 Contracts................. -------- 13.215952 3,428,562 45,311,710
VEN 21 Contracts................. -------- 13.215952 1,541,924 20,377,996
VEN 22 Contracts................. -------- 13.215952 555,856 7,346,161
VEN 23 Contracts................. -------- 13.215952 128,596 1,699,514
---------- --------------
12,349,449 163,185,902
International Small Cap sub-account
VEN 3 Contracts.................. -------- 13.493094 227,036 3,063,418
VEN 7 Contracts.................. -------- 13.493094 2,989,507 40,337,696
VEN 8 Contracts.................. -------- 13.493094 165,594 2,234,374
VIS 5 and 25 Contracts........... -------- 13.465203 457,361 6,158,462
VEN 17 Contracts................. -------- 13.493094 124,844 1,684,536
VEN 18 Contracts................. -------- 13.493094 0 0
VEN 20 Contracts................. -------- 13.493094 1,827,628 24,660,354
VEN 21 Contracts................. -------- 13.493094 681,249 9,192,161
VEN 22 Contracts................. -------- 13.493094 217,265 2,931,584
VEN 23 Contracts................. -------- 13.493094 48,228 650,748
---------- --------------
6,738,712 90,913,333
Total: $6,392,622,652
==============
</TABLE>
17
<PAGE> 112
NASL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
7. DIVERSIFICATION REQUIREMENTS:
Under the provisions of Section 817(h) of the Internal Revenue Code, a variable
annuity contract other than a contract issued in connection with certain types
of employee benefits plans, will not be treated as an annuity contract for
federal tax purposes for any period for which the investments of the segregated
asset account on which the contract is based are not adequately diversified. The
Code provides that the "adequately diversified" requirement may be met if the
underlying investments satisfy either a statutory safe harbor test or
diversification requirements set forth in regulations issued by the Secretary of
Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of the
Code. The Company believes that the Account satisfies the current requirements
of the regulations, and it intends that the Account will continue to meet such
requirements.
18
