<PAGE> 1
Annuity Service Office Mailing Address
116 Huntington Avenue Post Office Box 9230
Boston, Massachusetts 02116 Boston, Massachusetts
(617) 266-6008 02205-9230
(800) 344-1029
- --------------------------------------------------------------------------------
NASL VARIABLE ACCOUNT
- --------------------------------------------------------------------------------
OF
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
FLEXIBLE PURCHASE PAYMENT INDIVIDUAL DEFERRED
COMBINATION FIXED AND VARIABLE ANNUITY CONTRACT
NON-PARTICIPATING
This Prospectus describes a flexible purchase payment individual deferred
fixed and variable annuity contract (the "contract") issued by North American
Security Life Insurance Company ("the Company"), a stock life insurance company
the ultimate parent of which is The Manufacturers Life Insurance Company
("Manulife"). The contract is designed for use in connection with retirement
plans which may or may not qualify for special federal income tax treatment.
The contract provides for the accumulation of contract values and the
payment of annuity benefits on a variable and/or fixed basis. The contract
offers thirty-five investment options: thirty-four variable and a one year fixed
account. The contract value during the accumulation period and annuity payments,
if selected on a variable basis, will vary according to the investment
performance of 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 the one year fixed
account investment option. Except as specifically noted herein and as set forth
under the caption "FIXED ACCOUNT INVESTMENT OPTION" below, this prospectus
describes only the variable portion of the contract.
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 contract and the Variable Account is
contained in a Statement of Additional Information, dated the same date as this
Prospectus, which has been filed with the Securities and Exchange Commission
(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 by 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 39 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 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 July 23, 1997
VTG20.PRO797
<PAGE> 2
TABLE OF CONTENTS
SPECIAL TERMS ..............................................................3
SUMMARY.....................................................................5
GENERAL INFORMATION ABOUT NORTH AMERICAN SECURITY LIFE INSURANCE
COMPANY, NASL VARIABLE ACCOUNT AND NASL SERIES TRUST.......................12
North American Security Life Insurance Company .........................12
NASL Variable Account...................................................12
NASL Series Trust.......................................................12
DESCRIPTION OF THE CONTRACT ...............................................17
ACCUMULATION PROVISIONS ..................................................17
Purchase Payments ......................................................17
Payment Enhancements....................................................17
Accumulation Units .....................................................18
Value of Accumulation Units ............................................18
Net Investment Factor ..................................................19
Transfers Among Investment Options .....................................19
Maximum Number of Investment Options....................................20
Telephone Transactions .................................................20
Special Transfer Services - Dollar Cost Averaging ......................20
Asset Rebalancing Program...............................................20
Withdrawals.............................................................21
Telephone Redemptions ..................................................21
Special Withdrawal Services - the Income Plan ..........................21
Loans...................................................................22
Death Benefit Before Maturity Date......................................22
ANNUITY PROVISIONS .......................................................24
General ................................................................24
Annuity Options ........................................................24
Determination of Amount of the First Variable Annuity Payment...........25
Annuity Units and the Determination of Subsequent Variable
Annuity Payments ....................................................25
Transfers After Maturity Date ..........................................26
Death Benefit on or After Maturity Date ................................26
OTHER CONTRACT PROVISIONS ................................................26
Ten Day Right to Review ................................................26
Ownership ..............................................................26
Annuitant ..............................................................27
Beneficiary ............................................................27
Modification ...........................................................27
Company Approval .......................................................27
Misstatement and Proof of Age, Sex or Survival .........................27
FIXED ACCOUNT INVESTMENT OPTION............................................27
CHARGES AND DEDUCTIONS ....................................................29
Withdrawal Charges .....................................................29
Reduction or Elimination of Withdrawal Charges .........................30
Administration Fees.....................................................31
Mortality and Expense Risk Charge ......................................31
Taxes ..................................................................32
FEDERAL TAX MATTERS .......................................................32
INTRODUCTION .............................................................32
THE COMPANY'S TAX STATUS .................................................32
TAXATION OF ANNUITIES IN GENERAL .........................................32
2
<PAGE> 3
Tax Deferral During Accumulation Period ................................32
Taxation of Partial and Full Withdrawals ...............................34
Taxation of Annuity Payments ...........................................34
Taxation of Death Benefit Proceeds .....................................34
Penalty Tax on Premature Distributions .................................35
Aggregation of Contracts ...............................................35
QUALIFIED RETIREMENT PLANS ...............................................35
Qualified Plan Types ...................................................36
Direct Rollovers .......................................................37
FEDERAL INCOME TAX WITHHOLDING............................................37
GENERAL MATTERS............................................................38
Tax Deferral............................................................38
Performance Data........................................................38
Financial Statements....................................................38
Asset Allocation and Timing Services....................................38
Restrictions Under the Texas Optiona....................................38
Retirement Program.................................................38
Distribution of Contracts ..............................................39
Contract Owner Inquiries................................................39
Legal Proceedings ......................................................39
Other Information ......................................................39
STATEMENT OF ADDITIONAL INFORMATION-
TABLE OF CONTENTS.........................................................39
APPENDIX A: EXAMPLES OF CALCULATION OF WITHDRAWAL CHARGE..................40
APPENDIX B: STATE PREMIUM TAXES...........................................42
APPENDIX C: MAXIMUM MATURITY AGES IN PENNSYLVANIA.........................43
APPENDIX D: EXAMPLES OF PAYMENT ENHANCEMENT CALCULATION...................44
2
<PAGE> 4
SPECIAL TERMS
The following terms as used in this Prospectus have the indicated meanings:
Accumulation Unit - A unit of measure that is used to calculate the value
of the variable portion of the contract before the maturity date.
Annuitant - Any natural person or persons whose life is used to determine
the duration of annuity payments involving life contingencies. If the contract
owner names more than one person as an "annuitant," the second person named
shall be referred to as "co-annuitant." The "annuitant" and "co-annuitant" will
be referred to collectively as "annuitant." The "annuitant" is as designated on
the contract specification page or in the application, unless changed.
Annuity Option - The method selected by the contract owner for annuity
payments made by the Company. At the maturity date, the Company will provide a
variable 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 under the contract 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.
Beneficiary - The person, persons or entity entitled to the death benefit
under the contract upon the death of a contract owner or, in certain
circumstances, an annuitant. The beneficiary is as specified in the application,
unless changed. If there is a surviving contract owner, that person will be
deemed the beneficiary.
Contingent Beneficiary - The person, persons or entity to become the
beneficiary if the beneficiary is not alive. The contingent beneficiary is as
specified in the application, unless changed.
Contract Anniversary - The anniversary of the contract date.
Contract Date - The date of issue of the contract.
Contract Value - The total of the investment account values and, if
applicable, any amount in the loan account attributable to the contract.
Contract Year - The period of twelve consecutive months beginning on the
contract date or any anniversary thereof.
Debt - Any amounts in the loan account attributable to the contract plus
any accrued loan interest. The loan provision is applicable to certain qualified
contracts only.
Due Proof of Death - Due Proof of Death is required upon the death of the
contract 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.
General Account - All the assets of the Company other than assets in
separate accounts.
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Investment Account - An account established by the Company which represents
a contract owner's interest in an investment option prior to the maturity date.
Investment Account Value - The value of a contract owner's investment in an
investment account.
Investment Options - The investment choices available to contract owners.
Currently, there are thirty-four variable account investment options and a one
year fixed investment option under the contract.
Loan Account - The portion of the general account that is used for
collateral when a loan is taken.
Maturity Date - The date on which annuity benefits commence. The maturity
date is the date specified on the contract specifications page 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.
Net Purchase Payment - The purchase payment less the amount of premium tax,
if any, plus any applicable payment enhancement.
Non-Qualified Contracts - Contracts which are not issued under qualified
plans.
Owner or Contract Owner - The person, persons (co-owner) or entity entitled
to all of the ownership rights under the contract. The owner has the legal right
to make all changes in contractual designations where specifically permitted by
the contract. The owner is as specified in the application, unless changed.
Payment Enhancement - The amount added to the contract by the Company at
the time a contract owner makes a purchase payment.
Portfolio or Trust Portfolio - A separate investment portfolio of the
Trust, a mutual fund in which the Variable Account invests, or of any successor
mutual fund.
Purchase Payment - An amount paid by a contract owner to the Company as
consideration for the benefits provided by the contract.
Qualified Contracts - Contracts issued under qualified plans.
Qualified Plans - Retirement plans which receive favorable tax treatment
under Section 401, 403, 408 or 457 of the Internal Revenue Code of 1986, as
amended.
Separate Account - A segregated account of the Company that is not
commingled with the Company's general assets and obligations.
Sub-Account(s) - One or more of the sub-accounts of the Variable Account.
Each sub-account is invested in shares of a different Trust portfolio.
Valuation Date - Any date on which the New York Stock Exchange is open for
business and the net asset value of a Trust portfolio is determined.
Valuation Period - Any period from one valuation date to the next, measured
from the time on each such date that the net asset value of each portfolio is
determined.
Variable Account - The Variable Account, which is a separate account of the
Company.
Variable Annuity - An annuity option with payments which: (1) are not
predetermined or guaranteed as to dollar amount, and (2) vary in relation to the
investment experience of one or more specified sub-accounts.
4
<PAGE> 6
SUMMARY
The Contract. The contract offered by this Prospectus is a flexible
purchase payment individual deferred combination fixed and variable annuity
contract. The contract provides for the accumulation of contract values and the
payment of annuity benefits on a variable and/or fixed basis.
Retirement Plans. The contract may be issued pursuant to either
non-qualified retirement plans or plans qualifying for special income tax
treatment under the Internal Revenue Code, such as individual retirement
accounts and annuities, pension and profit-sharing plans for corporations and
sole proprietorships/partnerships ("H.R. 10" and "Keogh" plans), tax-sheltered
annuities, and state and local government deferred compensation plans. (See
"QUALIFIED RETIREMENT PLANS")
Purchase Payments. A contract may be issued upon the making of an initial
purchase payment of $10,000 or more. Minimum subsequent purchase payments must
be $30. Purchase payments may be made at any time, except that if a purchase
payment would cause the contract value to exceed $1,000,000, or the contract
value already exceeds $1,000,000, additional purchase payments will be accepted
only with the prior approval of the Company. The Company may, at its option,
cancel a contract at the end of any two consecutive contract years in which no
purchase payments have been made, if both (i) the total purchase payments made
over the life of the contract, less any withdrawls, are less than $2,000; and
(ii) the contract value 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")
Payment Enhancement. At the time a purchase payment is paid to the Company
by a contract owner, the Company will add a payment enhancement to the owner's
contract. The payment enhancement depends on the cumulative amount of purchase
payments. The next higher payment enhancement may be applied to the initial
payment. To receive the higher percentage the contract owner must provide
satisfactory evidence that the total payments within 13 months of the issue date
will be equal to or in excess of the next payment enhancement cumulative
purchase payment breakpoint. If total purchase payments received within the 13
month period do not equal or exceed the amount approved, the Company reserves
the right to recover from the contract the excess payment enhancement added to
the contract. The payment enhancement is funded from the Company's general
account. The payment enhancement is allocated among investment options in the
same proportion as the applicable purchase payment. The amount available as a
death benefit is reduced by payment enhancements applied in the prior 12 month
period (See "DEATH BENEFIT BEFORE MATURITY DATE"). The amount returned if the
contract owner exercises his or her right to return the contract during the "ten
day right to review" period is reduced by any payment enhancements applied. (See
"TEN DAY RIGHT TO REVIEW"). (See generally "PAYMENT ENHANCEMENT")
Investment Options. Purchase payments may be allocated among the
thirty-five investment options currently available under the contract:
thirty-four variable account investment options and a one year fixed investment
option. Due to current administrative capabilities, a contract owner is limited
to a maximum of seventeen investment options (including the fixed account
investment option) during the period prior to the maturity date of the contract.
The thirty-four variable 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
contract value during the accumulation period 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 one year fixed account investment option. Under the fixed
account investment option, the Company guarantees the principal value of
purchase payments and the rate of interest credited to the investment account
for the term of the guarantee period. The portion of the contract value in the
fixed account investment option and monthly annuity payments, if selected on a
fixed basis, will reflect such interest and principal guarantees. (See "FIXED
ACCOUNT INVESTMENT OPTION"). Subject to certain regulatory limitations, the
Company may elect to add, subtract or substitute investment options.
5
<PAGE> 7
Transfers. Prior to the maturity date, amounts may be transferred among the
investment options. After the maturity date, amounts may be transferred from one
sub-account to another. There is no transaction charge for transfers. Transfers
from any investment account must be at least $300 or, if less, the entire
balance in the investment account. If, after the transfer the amount remaining
in the Investment Account of the contract from which the transfer is made is
less than $100, then the Company will transfer the entire amount instead of the
requested amount. The Company may impose certain additional limitations on
transfers. (See "TRANSFERS AMONG INVESTMENT OPTIONS" and "TRANSFERS AFTER
MATURITY DATE"). Transfer privileges may also be used under a special service
offered by the Company to dollar cost average an investment in the contract.
(See "SPECIAL TRANSFER SERVICES - DOLLAR COST AVERAGING")
Withdrawals. Prior to the earlier of the maturity date or the death of the
contract owner, the owner may withdraw all or a portion of the contract value.
The amount withdrawn from any investment account must be at least $300 or, if
less, the entire balance of the investment account. If a partial withdrawal plus
any applicable withdrawal charge would reduce the contract value to less than
$300, the withdrawal request will be treated as a request to withdraw the entire
contract value. A withdrawal charge and 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 to owners of contracts issued in
connection with Section 403(b) qualified plans that are not subject to Title I
of ERISA. Owners of such contracts may obtain loans using the contract as the
only security for the loan. The effective cost of a contract loan is 2% per year
of the amount borrowed. (See "LOANS")
Death Benefits. The Company will pay the death benefit described below
(which, as defined, is net of any debt) to the beneficiary if any contract owner
dies before the maturity date. If there is a surviving contract owner, that
contract owner will be deemed to be the beneficiary. No death benefit is payable
on the death of any annuitant, except that if any contract 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 contract owner dies, the death benefit will be determined as
follows: The death benefit during the first nine contract years will be the
greater of: (a) the contract value less any payments enhancements applied in the
12 month period prior to the date of death, or (b) the excess of (i) the sum of
all purchase payments less any payment enhancements applied in the 12 month
period prior to the date of death over (ii) the sum of any amounts deducted in
connection with partial withdrawals. After the ninth contract year the death
benefit will be the greater of : (a) the contract value less any payment
enhancements applied in the 12 month period prior to the date of death or (b)
the excess of (i) the sum of all purchase payments less any payment enhancements
applied in the 12 month period prior to the date of death over (ii) the sum of
any amounts deducted in connection with partial withdrawals or (c) the death
benefit on the last day of the ninth contract year, plus the sum of all purchase
payments made and less any amount deducted in connection with partial
withdrawals since then, and less any payment enhancements applied in the 12
month period prior to the date of death.
If there is any debt under the contract, the death benefit equals the death
benefit, as described above, less such debt. (See "DEATH BENEFIT BEFORE MATURITY
DATE'). If the annuitant dies after the maturity date and annuity payments have
been selected based on an annuity option providing for payments for a guaranteed
period, the Company will make the remaining guaranteed payments to the
beneficiary. (See "DEATH BENEFIT ON OR AFTER MATURITY DATE").
Annuity Payments. The Company offers a variety of fixed and variable
annuity options. Periodic annuity payments will begin on the maturity date. The
contract owner selects the maturity date, frequency of payment and annuity
option. (See "ANNUITY PROVISIONS")
Ten Day Review. Within 10 days of receipt of a contract, the contract owner
may cancel the contract by returning it to the Company. (See "TEN DAY RIGHT TO
REVIEW")
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<PAGE> 8
Charges and Deductions. The following table and Example are designed to
assist contract owners in understanding the various costs and expenses that
contract owners bear directly and indirectly. The table reflects expenses of the
separate account and the underlying portfolio company. In addition to the items
listed in the following table, premium taxes may be applicable to certain
contracts. The items listed under "Contract Owner Transaction Expenses" and
"Separate Account Annual Expenses" are more completely described in this
Prospectus (see "CHARGES AND DEDUCTIONS"). The items listed under "Trust Annual
Expenses" are described in detail in the accompanying Trust Prospectus to which
reference should be made.
CONTRACT OWNER TRANSACTION EXPENSES
Deferred sales load (as percentage of purchase payments)*
<TABLE>
<CAPTION>
NUMBER OF COMPLETE YEARS
PURCHASE PAYMENT IN CONTRACT WITHDRAWAL CHARGE PERCENTAGE
<S> <C>
0 8.5%
1 8.5%
2 8%
3 7%
4 6%
5 5%
6 4%
7 3%
8 2%
9 0%
ANNUAL CONTRACT FEE......................................... $40(1)
(1) The $40 annual administration fee will not be assessed prior to the
maturity date if at the time of its assessment the sum of all investment
accounts is greater than or equal to $100,000.
<CAPTION>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
<S> <C>
Mortality and expense risk fees................................. 1.25%
Administration fee ............................................. 0.30%
Total Separate Account Annual Expenses.......................... 1.55%
</TABLE>
- ----------
7
<PAGE> 9
TRUST ANNUAL EXPENSES
(as a percentage of Trust average net assets)
<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 EXPENSE (AFTER EXPENSE
REIMBURSEMENT)*** REIMBURSEMENT)****
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%,
8
<PAGE> 10
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
portfolios of the Trust in which the Lifestyle Trust may invest ("Underlying
Portfolios"). See "Investment Objectives and and Policies - The Lifestyle
Trusts" in the Trust prospectus for further information on the Lifestyle
Trusts: Lifestyle Aggressive 1000 Trust, 100% Quantitative Equity Trust;
Lifestyle Growth 820 Trust, 80% Quantitative Equity Trust, 20% Money Market
Trust; 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
AnnualExpenses*** 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>
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<PAGE> 11
EXAMPLE
A contract owner would pay the following expenses on a $1,000 investment,
assuming a 3% payment enhancement and a 5% annual return on assets, if the
contract owner surrendered the contract at the end of the applicable time
period:
<TABLE>
<CAPTION>
TRUST PORTFOLIO 1 YEAR 3 YEARS 5 YEARS* 10 YEARS*
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pacific Rim Emerging Markets ..... $110 $169 $211 $320
Science & Technology.............. $110 $170
International Small Cap........... $111 $173 $218 $334
Emerging Growth................... $110 $169
Pilgrim Baxter Growth............. $112 $174
Small/Mid Cap..................... $109 $167 $209 $315
International Stock............... $111 $172
Worldwide Growth.................. $111 $173
Global Equity..................... $109 $165 $204 $306
Growth............................ $109 $165 $204 $306
Equity............................ $107 $158 $193 $285
Quantitative Equity............... $106 $157 $191 $281
Blue Chip Growth.................. $108 $163 $202 $303
Real Estate Securities............ $107 $158 $193 $285
Value............................. $107 $160
International Growth and Income .. $110 $168 $209 $316
Growth and Income................. $107 $158 $193 $285
Equity-Income..................... $107 $160 $196 $290
Balanced.......................... $108 $163
Aggressive Asset Allocation ...... $108 $161 $199 $295
High Yield........................ $108 $162
Moderate Asset Allocation ........ $107 $159 $195 $289
Conservative Asset Allocation .... $107 $160 $197 $292
Strategic Bond.................... $107 $160 $197 $291
Global Government Bond............ $108 $161 $199 $295
Capital Growth Bond............... $106 $156 $191 $280
Investment Quality Bond........... $106 $156 $190 $278
U.S. Government Securities ....... $106 $155 $189 $276
Money Market...................... $104 $150 $180 $259
Lifestyle Aggressive 1000** ...... $109 $166
Lifestyle Growth 820**............ $108 $164
Lifestyle Balanced 640**.......... $108 $162
Lifestyle Moderate 460**.......... $107 $160
Lifestyle Conservative 280** ..... $107 $158
</TABLE>
* 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 Trust is calculated using the
midpoint of the minimum and maximum fees set forth under Trust Annual Operating
Expenses.
10
<PAGE> 12
A contract owner would pay the following expenses on a $1,000 investment,
assuming a 3% payment enhancement and a 5% annual return on assets, if the
contract owner annuitized as provided in the contract or did not surrender the
contract at the end of the applicable time period:
<TABLE>
<CAPTION>
TRUST PORTFOLIO 1 YEAR 3 YEARS 5 YEARS* 10 YEARS*
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pacific Rim Emerging Markets ..... $29 $89 $151 $320
Science & Technology.............. $29 $90
International Small Cap........... $30 $93 $158 $334
Emerging Growth................... $29 $89
Pilgrim Baxter Growth............. $31 $95
Small/Mid Cap..................... $28 $87 $149 $315
International Stock............... $30 $92
Worldwide Growth.................. $30 $93
Global Equity..................... $28 $85 $144 $306
Growth............................ $28 $85 $144 $306
Equity............................ $25 $78 $133 $285
Quantitative Equity............... $25 $77 $131 $281
Blue Chip Growth.................. $27 $83 $142 $303
Real Estate Securities............ $25 $78 $133 $285
Value............................. $26 $80
International Growth and Income .. $29 $88 $149 $316
Growth and Income................. $25 $78 $133 $285
Equity-Income..................... $26 $80 $136 $290
Balanced.......................... $27 $83
Aggressive Asset Allocation ...... $26 $81 $139 $295
High Yield........................ $27 $82
Moderate Asset Allocation ........ $26 $79 $135 $289
Conservative Asset Allocation .... $26 $80 $137 $292
Strategic Bond.................... $26 $80 $137 $291
Global Government Bond............ $26 $81 $139 $295
Capital Growth Bond............... $25 $76 $131 $280
Investment Quality Bond........... $25 $76 $130 $278
U.S. Government Securities ....... $24 $75 $129 $278
Money Market...................... $23 $70 $120 $259
Lifestyle Aggressive 1000** ...... $28 $86
Lifestyle Growth 820**............ $27 $84
Lifestyle Balanced 640**.......... $27 $82
Lifestyle Moderate 460**.......... $26 $80
Lifestyle Conservative 280** ..... $25 $78
</TABLE>
* 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 Trust 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.
11
<PAGE> 13
In addition, for purposes of calculating the values in the above Example,
the Company has translated the $40 annual administration charge listed under
"Annual Contract Fee" to a 0.08% annual asset charge based on a $50,000
estimated approximate average size of contracts of this series. So translated,
such charge would be higher for smaller contracts and lower for larger
contracts.
* * * * * * * *
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.
GENERAL INFORMATION ABOUT NORTH AMERICAN
SECURITY LIFE INSURANCE COMPANY,
NASL VARIABLE ACCOUNT AND NASL SERIES TRUST
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
North American Security Life Insurance Company ("the Company") is a stock
life insurance company organized under the laws of Delaware in 1979. The
Company's principal office is located at 116 Huntington Avenue, Boston,
Massachusetts 02116. The ultimate parent of the Company is The Manufacturers
Life Insurance Company ("Manulife"), a Canadian mutual life insurance company
based in Toronto, Canada. Prior to January 1, 1996, the Company was a wholly
owned subsidiary of North American Life Assurance Company ("NAL"), a Canadian
mutual life insurance company. On January 1, 1996 NAL and Manulife merged with
the combined company retaining the Manulife name.
NASL VARIABLE ACCOUNT
The Company established the Variable Account on August 24, 1984 as a
separate account under Delaware law. The income, gains and losses, whether or
not realized, from assets of the Variable Account are, in accordance with the
contracts, credited to or charged against the Variable Account without regard to
other income, gains or losses of the Company. Nevertheless, all obligations
arising under the contracts are general corporate obligations of the Company.
Assets of the Variable Account may not be charged with liabilities arising out
of any other business of the Company.
The Variable Account is registered with the Commission under the Investment
Company Act of 1940, 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.
There are currently thirty-four sub-accounts within the Variable Account.
The Company reserves the right, subject to compliance with applicable law, to
add other sub-accounts, eliminate existing sub-accounts, combine sub-accounts or
transfer assets in one sub-account to another sub-account established by the
Company or an affiliated company. The Company will not eliminate existing
sub-accounts or combine sub-accounts without the prior approval of the
appropriate state or federal regulatory authorities.
NASL SERIES TRUST
The assets of each 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 advisory services from NASL Financial Services,
Inc.
12
<PAGE> 14
The Trust currently has fourteen subadvisers who manage all of the
portfolios:
<TABLE>
<CAPTION>
SUBADVISER SUBADVISER TO
---------- -------------
<S> <C>
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, Ltd. Pilgrim Baxter Growth Trust
Manufacturers Adviser Corporation Pacific Rim Emerging Markets Trust
Quantitative Equity Trust
Real Estate Securities Trust
Capital Growth Bond Trust
Money Market Trust
Lifestyle Trusts
</TABLE>
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.
13
<PAGE> 15
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.
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.
14
<PAGE> 16
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.
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.
15
<PAGE> 17
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 principle. 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 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.
16
<PAGE> 18
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
ACCUMULATION PROVISIONS
PURCHASE PAYMENTS
Purchase payments are paid to the Company at its Annuity Service Office.
The minimum initial purchase payment is $10,000. Minimum subsequent purchase
payments must be at least $30. Purchase payments may be made at any time. The
Company may provide for purchase payments to be automatically withdrawn from a
contract owner's bank account on a periodic basis. If a purchase payment would
cause the contract value to exceed $1,000,000 or the contract value already
exceeds $1,000,000, additional purchase payments will be accepted only with the
prior approval of the Company.
The Company may, at its option, cancel a contract at the end of any two
consecutive contract years in which no purchase payments have been made, if both
(i) the total purchase payments made over the life of the contract, less any
withdrawals, are less than $2,000; and (ii) the contract value at the end of
such two year period is less than $2,000. The cancellation of contract
privileges may vary in certain states in order to comply with the requirements
of insurance laws and regulations in such state. Upon cancellation the Company
will pay the contract owner the contract value computed as of the valuation
period during which the cancellation occurs less any debt and less the annual
$40 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 contract owner. The contract owner may
change the allocation of subsequent purchase payments at any time upon written
notice to the Company or by telephone in accordance with the Company's telephone
transfer procedures.
PAYMENT ENHANCEMENTS
At the time a purchase payment is paid to the Company by a contract owner,
the Company will add a payment enhancement to the owner's contract. The payment
enhancement is funded from the Company's general account. The payment
enhancement is allocated among investment options in the same proportion as the
applicable purchase payment. The amount available as a death benefit is reduced
by payment enhancements applied in the prior 12 month period (See "DEATH BENEFIT
BEFORE MATURITY DATE"). The amount returned if the contract owner exercises his
or her right to return the contract during the "ten day right to review" period
is reduced by any payment enhancements applied. (See "TEN DAY RIGHT TO REVIEW").
17
<PAGE> 19
The payment enhancement depends on the cumulative amount of purchase
payments. The payment enhancements, as a percentage of purchase payments are set
out below:
<TABLE>
<CAPTION>
Cumulative Purchase Payments Payment Enhancement
- ---------------------------- -------------------
<S> <C>
Less than $500,000 3.0%
$500,000 or more but less than $2,500,000 4.0%
$2,500,000 or more 5.0%
</TABLE>
Payment enhancements are payable only as a percentage of each specific purchase
payment. An example of the calculation of the payment enhancement is set forth
in Appendix D.
Payment enhancements are not considered to be "investment in the contract" for
income tax purposes. (See "FEDERAL TAX MATTERS").
Letter of Intent. The next higher payment enhancement percentage may be applied
to the initial purchase payment. To receive the higher percentage, the contract
owner must provide the Company with evidence satisfactory to the Company that
the contract owner will submit total purchase payments within 13 months of the
issue date of the contract sufficient to achieve one of the breakpoints shown
above under "Cumulative Purchase Payments" (referred to as a "Letter of
Intent"). Satisfactory evidence will require, but is not limited to, a minium
initial purchase payment of at least 50% of the breakpoint at which the Payment
Enhancement is to be determined. The Company reserves the right to recover an
amount from the contract if total purchase payments received within 13 months
from the issue date of the contract do not equal or exceed the amount of the
breakpoint used to determine the payment enhancement. The amount the Company may
recover is the greater of (a) or (b) where:
(a) is the amount of Payment Enhancement applied to the contract less the amount
of Payment Enhancement that would have been applied to the contract had the
contract owner not submitted a Letter of Intent (the "Excess Payment
Enhancement"), and
(b) the contract value multiplied by the ratio of the Excess Payment Enhancement
over total purchase payments (which exclude the payment enhancement) applied to
the contract.
Amounts recovered will be withdrawn from each investment option in the same
proportion that the value of the investment account of each investment option
bears to the contract value. IN THE EVENT THE VALUE OF ACCUMULATION UNITS FOR AN
INVESTMENT OPTION WHICH HAS BEEN ALLOCATED A PAYMENT ENHANCEMENT DECLINES, THE
COMPANY RETAINS THE RIGHT TO RECOVER THE ORIGINAL AMOUNT OF PAYMENT ENHANCEMENT
CREDITED TO THE INVESTMENT OPTION. THEREFORE, THE CONTRACT OWNER BEARS THE RISK
THAT IF THE LETTER OF INTENT IS NOT COMPLETED, THE VALUE OF THE CONTRACT MAY BE
LESS THAN HAD THE LETTER OF INTENT NOT BEEN EXECUTED. IF THE AMOUNT RECOVERED
EXCEEDS THE CONTRACT VALUE, THE COMPANY WILL TERMINATE THE CONTRACT WITHOUT
VALUE.
IF THE CONTRACT OWNER FAILS TO INFORM THE COMPANY THAT HE OR SHE INTENDS TO
SUBMIT MULTIPLE PAYMENTS WITHIN 13 MONTHS OF THE CONTRACT ISSUE DATE, THE
CONTRACT MAY RECEIVE A LOWER PAYMENT ENHANCEMENT PERCENTAGE THAN WOULD OTHERWISE
BE AVAILABLE FOR THE CONTRACT.
ACCUMULATION UNITS
The Company will establish an investment account for the contract owner
for each investment option to which such contract owner allocates purchase
payments. Purchase payments (and any payment enhancement included therewith) are
credited to such investment accounts in the form of accumulation units. The
number of accumulation units to be credited to each investment account is
determined by dividing the net purchase payment allocated to that investment
account by the value of an accumulation unit for that investment account for the
valuation period during which the purchase payment is received at the Company's
Annuity Service Office complete with all necessary information or, in the case
of the first purchase payment, pursuant to the procedures described below.
18
<PAGE> 20
Initial purchase payments received by mail will usually be credited in the
valuation period during which received at the Annuity Service Office, and in any
event not later than two business days after receipt of all information
necessary for processing issuance of the contract. The applicant will be
informed of any deficiencies preventing processing if the contract 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 other contracts issued by the Company. The value of an accumulation
unit for any subsequent valuation period is determined by multiplying the value
of an accumulation unit for the immediately preceding valuation period by the
net investment factor for such sub-account (described below) for the valuation
period for which the value is being determined.
NET INVESTMENT FACTOR
The net investment factor is an index used to measure the investment
performance of a sub-account from one valuation period to the next. The net
investment factor for each sub-account for any valuation period is determined by
dividing (a) by (b) and subtracting (c) from the result:
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.
Such factor is equal on an annual basis to 1.55% (0.30% 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 the contract owner may transfer amounts among the
investment options at any time and without charge upon written notice to the
Company or by telephone if the contract owner authorizes the Company in writing
to accept telephone transfer requests. Accumulation units will be canceled from
the investment account from which amounts are transferred and credited to the
investment account to which amounts are transferred. The Company will effect
such transfers so that the contract value on the date of the transfer will not
be affected by the transfer. The contract owner must transfer at least $300 or,
if less, the entire value of the investment account. If after the transfer the
amount remaining in the investment account is less than $100, then
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the Company will transfer the entire amount instead of the requested amount. The
Company reserves the right to limit, upon notice, the maximum number of
transfers a contract owner may make to one per month or six at any time within a
contract year. In addition, the Company reserves the right to defer the transfer
privilege at any time that the Company is unable to purchase or redeem shares of
the Trust portfolios. The Company also reserves the right to modify or terminate
the transfer privilege at any time in accordance with applicable law.
MAXIMUM NUMBER OF INVESTMENT OPTIONS
Due to current administrative capabilities, a contract owner is limited to
a maximum of seventeen investment options (including the one year fixed account
investment option) 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 purchase payments
at any time during the Contract Period will be counted toward the seventeen
maximum even if the contract owner no longer has contract value allocated to the
investment option.
TELEPHONE TRANSACTIONS
Contract owners are permitted to request transfers/redemptions by
telephone. The Company will not be liable for following instructions
communicated by telephone that it reasonably believes to be genuine. To be
permitted to request a transfer/redemption by telephone, a contract owner must
elect the option on the Application. (If a contract owner does not initially
elect an option in the Application form, he or she may request authorization by
executing an appropriate authorization form provided by the Company upon
request.) The Company will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine and may only be liable for
any losses due to unauthorized or fraudulent instructions where it fails to
employ its procedures properly. Such procedures include the following. Upon
telephoning a request, contract owners will be asked to provide their account
number, and if not available, their social security number. For the contract
owner's and Company's protection, all conversations with contract owners will be
tape recorded. All telephone transactions will be followed by a confirmation
statement of the transaction.
SPECIAL TRANSFER SERVICES - DOLLAR COST AVERAGING
The Company administers a Dollar Cost Averaging ("DCA") program which
enables a contract owner to pre-authorize a periodic exercise of the contractual
transfer rights described above. Contract owners entering into a DCA agreement
instruct the Company to transfer monthly a predetermined dollar amount from any
sub-account or the one year fixed account investment option to other
sub-accounts until the amount in the sub-account from which the transfer is made
or the one year fixed account investment option is exhausted. The DCA program is
generally suitable for contract owners making a substantial deposit to the
contract and who desire to control the risk of investing at the top of a market
cycle. The DCA program allows such investments to be made in equal installments
over time in an effort to reduce such risk. Contract owners interested in the
DCA program may elect to participate in the program on the contract application
or by separate application. Contract owners may obtain a separate application
and full information concerning the program and its restrictions from their
securities dealer or the Annuity Service Office.
ASSET REBALANCING PROGRAM
The Company administers an Asset Rebalancing Program which enables a
contract owner to indicate to the Company the percentage levels he or she would
like to maintain in particular portfolios. 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.
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
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(iii) annually on December 26th (or the next business day if December 26th
is not a business day).
WITHDRAWALS
Prior to the earlier of the maturity date or the death of the contract
owner, the owner may withdraw all or a portion of the contract value upon
written request, complete with all necessary information to the Company's
Annuity Service Office. For certain qualified contracts, exercise of the
withdrawal right may require the consent of the qualified plan participant's
spouse under the Internal Revenue Code and regulations promulgated by the
Treasury Department. In the case of a total withdrawal, the Company will pay the
contract value as of the date of receipt of the request at its Annuity Service
Office, less the annual $40 administration fee if applicable, any debt and any
applicable withdrawal charge, and the contract will be canceled. In the case of
a partial withdrawal, the Company will pay the amount requested and cancel that
number of accumulation units credited to each investment account necessary to
equal the amount withdrawn from each investment account plus any applicable
withdrawal charge deducted from such investment account. (See "CHARGES AND
DEDUCTIONS")
When making a partial withdrawal, the contract owner should specify the
investment options from which the withdrawal is to be made. The amount requested
from an investment option may not exceed the value of that investment option
less any applicable withdrawal charge. If the contract owner does not specify
the investment options from which a partial withdrawal is to be taken, the
withdrawal will be taken pro rata from the investment options: taking from each
investment option an amount which bears the same relationship to the total
amount withdrawn as the value of such investment option bears to the total
investment account values.
There is no limit on the frequency of partial withdrawals; however, the
amount withdrawn must be at least $300 or, if less, the entire balance in the
investment option. If after the withdrawal (and deduction of any withdrawal
charge) the amount remaining in the investment option is less than $100, the
Company will treat the partial withdrawal as a withdrawal of the entire amount
held in the investment option. If a partial withdrawal plus any applicable
withdrawal charge would reduce the contract value to less than $300, the Company
will treat the partial withdrawal as a total withdrawal of the contract value.
The amount of any withdrawal will be paid promptly, and in any event within
seven days of receipt of the request, complete with all necessary information at
the Company's Annuity Service Office, except that the Company reserves the right
to defer the right of withdrawal or postpone payments for any period when: (1)
the New York Stock Exchange is closed (other than customary weekend and holiday
closings), (2) trading on the New York Stock Exchange is restricted, (3) an
emergency exists as a result of which disposal of securities held in the
Variable Account is not reasonably practicable or it is not reasonably
practicable to determine the value of the Variable Account's net assets, or (4)
the Commission, by order, so permits for the protection of security holders;
provided that applicable rules and regulations of the Commission shall govern as
to whether the conditions described in (2) and (3) exist.
Withdrawals from the contract may be subject to income tax and a 10%
penalty tax. Withdrawals are permitted from contracts issued in connection with
Section 403(b) qualified plans only under limited circumstances. (See "FEDERAL
TAX MATTERS")
TELEPHONE REDEMPTIONS
The contract owner may request the option to withdraw a portion of the
contract value by telephone by completing the application described under
"Telephone Transactions" above. The Company reserves the right to impose maximum
withdrawal amounts and procedural requirements regarding this privilege. For
additional information on Telephone Redemptions see "Telephone Transactions"
above.
SPECIAL WITHDRAWAL SERVICES - THE INCOME PLAN
The Company administers an Income Plan ("IP") which enables a contract
owner to pre-authorize a periodic exercise of the contractual withdrawal rights
described above. Contract 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 contract year is limited to not
more than 10% of the purchase payments made to ensure that no withdrawal charge
will ever apply to an IP withdrawal. If an additional withdrawal is made from a
contract participating in an IP, the IP will terminate automatically and may be
reinstated only on or after the next contract anniversary pursuant to a new
application. The IP is not available to contracts participating in the
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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 charges. IP withdrawals may, however, be subject to
income tax and a 10% penalty tax. (See "FEDERAL TAX MATTERS") Contract owners
interested in an IP may obtain a separate application and full information
concerning the program and its restrictions from their securities dealer or the
Annuity Service Office.
LOANS
The Company offers a loan privilege only to owners of contracts issued in
connection with Section 403(b) qualified plans that are not subject to Title I
of ERISA. Owners of such contracts may obtain loans using the contract as the
only security for the loan. Loans are subject to provisions of the Code and to
applicable retirement program rules (collectively, "loan rules"). Tax advisers
and retirement plan fiduciaries should be consulted prior to exercising loan
privileges.
Under the terms of the contract, the maximum loan value is equal to 80% of
the contract value, although loan rules may serve to reduce such maximum loan
value in some cases. The amount available for a loan at any given time is the
loan value less any outstanding debt. Debt equals the amount of any loans plus
accrued interest. Loans will be made only upon written request from the owner.
The Company will make loans within seven days of receiving a properly completed
loan application (applications are available from the Annuity Service Office),
subject to postponement under the same circumstances that payment of withdrawals
may be postponed. (See "WITHDRAWALS")
When an owner requests a loan, the Company will reduce the owner's
investment in the investment accounts and transfer the amount of the loan to the
loan account, a part of the Company's general account. The owner may designate
the investment accounts from which the loan is to be withdrawn. Absent such a
designation, the amount of the loan will be withdrawn from the investment
accounts in accordance with the rules for making partial withdrawals. (See
"WITHDRAWALS") The contract provides that owners may repay contract debt at any
time. Under applicable 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 loan account to the investment accounts. The owner
may designate the investment accounts to which a repayment is to be allocated.
Otherwise, the repayment will be allocated in the same manner as the owner's
most recent purchase payment. On each contract anniversary, the Company will
transfer from the investment accounts to the loan account the amount by which
the debt on the contract exceeds the balance in the loan account.
The Company charges interest of 6% per year on contract loans. Loan
interest is payable in arrears and, unless paid in cash, the accrued loan
interest is added to the amount of the debt and bears interest at 6% as well.
The Company credits interest with respect to amounts held in the loan account at
a rate of 4% per year. Consequently, the net cost of loans under the contract is
2%. If on any date debt under a contract exceeds the contract value, the
contract will be in default. In such case the owner will receive a notice
indicating the payment needed to bring the contract out of default and will have
a thirty-one day grace period within which to pay the default amount. If the
required payment is not made within the grace period, the contract may be
foreclosed (terminated without value).
The amount of any debt will be deducted from the death benefit otherwise
payable under the contract. (See "DEATH BENEFIT BEFORE MATURITY DATE") In
addition, debt, whether or not repaid, will have a permanent effect on the
contract value because the investment results of the investment accounts will
apply only to the unborrowed portion of the contract value. The longer debt is
outstanding, the greater the effect is likely to be. The effect could be
favorable or unfavorable. If the investment results are greater than the rate
being credited on amounts held in the loan account while the debt is
outstanding, the contract value will not increase as rapidly as it would have if
no debt were outstanding. If investment results are below that rate, the
contract value will be higher than it would have been had no debt been
outstanding.
DEATH BENEFIT BEFORE MATURITY DATE
In General. The following discussion applies principally to contracts that
are not issued in connection with qualified plans, i.e., a "non-qualified
contract." The requirements of the tax law applicable to qualified plans, and
the tax treatment of amounts held and distributed under such plans, are quite
complex. Accordingly, a prospective purchaser of the contract to be used in
connection with a qualified plan should seek competent legal and tax advice
regarding the suitability of the contract for the situation involved and the
requirements governing the distribution of benefits, including death benefits,
from a contract used in the plan. In particular, a prospective purchaser who
intends to use the contract in connection with a qualified plan should consider
that the contract provides
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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")
Amount of Death Benefit. If any contract owner dies, the death benefit will
be determined as follows: The death benefit during the first nine contract years
will be the greater of: (a) the contract value less any payments enhancements
applied in the 12 month period prior to the date of death, or (b) the excess of
(i) the sum of all purchase payments less any payment enhancements applied in
the 12 month period prior to the date of death over (ii) the sum of any amounts
deducted in connection with partial withdrawals. After the ninth contract year,
the death benefit will be the greater of : (a) the contract value less any
payment enhancements applied in the 12 month period prior to the date of death
or (b) the excess of (i) the sum of all purchase payments less any payment
enhancements applied in the 12 month period prior to the date of death over (ii)
the sum of any amounts deducted in connection with partial withdrawals or (c)
the death benefit on the last day of the ninth contract year, plus the sum of
all purchase payments made and any amount deducted in connection with partial
withdrawals since then and less any payment enhancements applied in the 12 month
period prior to the date of death. Reference to "payment enhancements" in this
paragraph refers to the original amount of payment enhancement credited,
earnings attributable to the payment enhancement will not be deducted from the
death benefit paid.
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 to the contract in payment of the annual administration fee. If
there is 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 contract owner dies
before the maturity date. If there is a surviving contract owner, that contract
owner will be deemed to be the beneficiary. No death benefit is payable on the
death of any annuitant, except that if any contract 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 contract owner, if a natural
person, will become the annuitant unless the contract 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 contract will continue subject to the following: (1)
The beneficiary will become the contract 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 due proof of the owner's death. (3) No
additional purchase payments may be made. (4) If the beneficiary is not the
deceased owner's spouse, distribution of the contract owner's entire interest in
the contract 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 spouse continues the contract as the new owner. In such a case,
the distribution rules described in "(4)" applicable when a contract owner dies
will apply when the spouse, as the owner, dies. (6) If any contract owner dies
and the oldest owner had an attained age of less than 81 on the contract 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 contract owner dies and the oldest owner had an attained age greater than
80 on the contract 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 any annuitant is changed and any contract owner is not a natural person,
the entire interest in the contract must be distributed to the contract owner
within five years.
A substitution or addition of any contract 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
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the death benefit. This treatment of contract value as a payment is not included
in cumulative purchase payments and is not eligible for a payment enhancement.
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
The proceeds of the contract payable on death, withdrawal or the contract
maturity date may be applied to the annuity options described below, subject to
the distribution of death benefit provisions. (See "DEATH BENEFIT BEFORE
MATURITY DATE")
Generally, annuity benefits under the contract will begin on the maturity
date. The maturity date is the date specified on the contract specifications
page, unless changed. If no date is specified, the maturity date is the maximum
maturity date described below. The 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. See Appendix C for contracts issued in Pennsylvania. The
contract owner may specify a different maturity date at any time by written
request at least one month before both the previously specified and the new
maturity date. The 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.
The contract owner may select the frequency of annuity payments. However,
if the contract value at the maturity date is such that a monthly payment would
be less than $20, the Company may pay the contract value, less any debt, in one
lump sum to the annuitant on the maturity date.
ANNUITY OPTIONS
Annuity benefits are available under the contract on a fixed or variable
basis, or any combination of fixed and variable bases. Upon purchase of the
contract, and on or before the maturity date, the contract owner may select one
or more of the annuity options described below on a fixed and/or variable basis
(except Option 5 which is available on a fixed basis only) or choose an
alternate form of settlement acceptable to the Company. If an annuity option is
not selected, the Company will provide as a default option variable annuity
payments in proportion to the Investment Account Value of each investment option
at the maturity date, such payments to be made for a period certain of 10 years
and continuing thereafter during the lifetime of the annuitant. 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.
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Option 2(b): Joint & Survivor Life Annuity with Payments Guaranteed for 10
Years An annuity with payments guaranteed for 10 years and continuing
thereafter during the lifetimes of the annuitant and a designated
co-annuitant. Since payments are guaranteed for 10 years, annuity payments
will be made to the end of such period if both the annuitant and the
co-annuitant die prior to the end of the tenth year.
In addition to the foregoing annuity options which the Company is
contractually obligated to offer at all times, the Company currently offers the
following annuity options. The Company may cease offering the following annuity
options at any time and may offer other annuity options in the future.
Option 3: Life annuity with Payments Guaranteed for 5, 15 or 20 Years - An
Annuity with payments guaranteed for 5, 15 or 20 years and continuing
thereafter during the lifetime of the annuitant. Since payments are
guaranteed for the specific number of years, annuity payments will be made
to the end of the last year of the 5, 15 or 20 year period.
Option 4: Joint & Two-Thirds Survivor Non-Refund Life Annuity - An annuity
with full payments during the joint lifetime of the annuitant and a
designated co-annuitant and two-thirds payments during the lifetime of the
survivor. Since there is no guarantee that any minimum number of payments
will be made, an annuitant or co-annuitant may receive only one payment if
the annuitant and co-annuitant die prior to the date the second payment is
due.
Option 5: Period Certain Only Annuity for 5, 10, 15 or 20 years - An
annuity with payments for a 5, 10, 15 or 20 year period and no payments
thereafter.
DETERMINATION OF AMOUNT OF THE FIRST VARIABLE ANNUITY PAYMENT
The first variable annuity payment is determined by applying that portion
of the contract value used to purchase a variable annuity, measured as of a date
not more than ten business days prior to the maturity date (minus any applicable
premium taxes), to the annuity tables contained in the contract. (The amount of
the first and all subsequent fixed annuity payments is determined on the same
basis using the portion of the contract value used to purchase a fixed annuity.)
The rates contained in such tables depend upon the annuitant's sex and 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.
ANNUITY UNITS AND THE DETERMINATION OF SUBSEQUENT VARIABLE ANNUITY PAYMENTS
Variable annuity payments subsequent to the first will be based on the
investment performance of the sub-accounts selected. The amount of such
subsequent payments is determined by dividing the amount of the first annuity
payment from each sub-account by the annuity unit value of such sub-account (as
of the same date the contract value to effect the annuity was determined) to
establish the number of annuity units which will thereafter be used to determine
payments. This number of annuity units for each sub-account is then multiplied
by the appropriate annuity unit value as of a uniformly applied date not more
than ten business days before the annuity payment is due, and the resulting
amounts for each sub-account are then totaled to arrive at the amount of the
payment to be made. The number of annuity units remains constant during the
annuity payment period.
The value of an annuity unit for each sub-account for any valuation period
is determined by multiplying the annuity unit value for the immediately
preceding valuation period by the net investment factor for that sub-account
(see "NET INVESTMENT FACTOR") for the valuation period for which the annuity
unit value is being calculated and by a factor to neutralize the assumed
interest rate.
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.
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TRANSFERS AFTER MATURITY DATE
Once variable annuity payments have begun, the contract owner may transfer
all or part of the investment upon which such payments are based from one
sub-account to another. Transfers will be made upon notice to the Company at
least 30 days before the due date of the first annuity payment to which the
change will apply. Transfers after the maturity date will be made by converting
the number of annuity units being transferred to the number of annuity units of
the sub-account to which the transfer is made, so that the next annuity payment
if it were made at that time would be the same amount that it would have been
without the transfer. Thereafter, annuity payments will reflect changes in the
value of the new annuity units. The Company reserves the right to limit, upon
notice, the maximum number of transfers a contract owner may make per contract
year to four. Once annuity payments have commenced, no transfers may be made
from a fixed annuity option to a variable annuity option or from a variable
annuity option to a fixed annuity option. In addition, the Company reserves the
right to defer the transfer privilege at any time that the Company is unable to
purchase or redeem shares of the Trust portfolios. The Company also reserves the
right to modify or terminate the transfer privilege at any time in accordance
with applicable law.
DEATH BENEFIT ON OR AFTER MATURITY DATE
If annuity payments have been selected based on an annuity option providing
for payments for a guaranteed period, and the annuitant dies on or after the
maturity date, the Company will make the remaining guaranteed payments to the
beneficiary. Any remaining payments will be made as rapidly as under the method
of distribution being used as of the date of the annuitant's death. If no
beneficiary is living, the Company will commute any unpaid guaranteed payments
to a single sum (on the basis of the interest rate used in determining the
payments) and pay that single sum to the estate of the last to die of the
annuitant and the beneficiary.
OTHER CONTRACT PROVISIONS
TEN DAY RIGHT TO REVIEW
The contract owner may cancel the contract by returning it to the Company's
Annuity Service Office or agent at any time within 10 days after receipt of the
contract. Within 7 days of receipt of the contract by the Company, the Company
will pay the contract value, less any debt and any payment enhancement, computed
at the end of the valuation period during which the contract is received by the
Company, to the contract owner. The Company will recover the original amount of
the payment enhancement credited, earnings attributable to the payment
enhancement will not be deducted from the amount paid.
No withdrawal charge is imposed upon return of the contract within the ten
day right to review period. The ten day right to review may vary in certain
states in order to comply with the requirements of insurance laws and
regulations in such states. When the contract is issued as an individual
retirement annuity under Internal Revenue Code section 408, during the first 7
days of the 10 day period, the Company will return all purchase payments if this
is greater than the amount otherwise payable.
OWNERSHIP
The contract owner is the person entitled to exercise all rights under the
contract. Prior to the maturity date, the contract owner is the person
designated in the contract specifications page or as subsequently named. On and
after the maturity date, the annuitant is the contract owner. If amounts become
payable to any beneficiary under the contract, the beneficiary is the contract
owner.
In the case of non-qualified contracts, ownership of the contract may be
changed or the contract may be collaterally assigned at any time prior to the
maturity date, subject to the rights of any irrevocable beneficiary. Assigning a
contract, or changing the ownership of a contract, may be treated as a
distribution of the contract value for Federal tax purposes. (See "FEDERAL TAX
MATTERS") A change of any contract 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. This purchase payment will not be
included in cumulative purchase payments and is not eligible for a payment
enhancement. (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
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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 generally may
not be transferred except by the trustee of an exempt employees' trust which is
part of a retirement plan qualified under Section 401 of the Internal Revenue
Code or as otherwise permitted by applicable IRS regulations. Subject to the
foregoing, a qualified contract may not be sold, assigned, transferred,
discounted or pledged as collateral for a loan or as security for the
performance of an obligation or for any other purpose to any person other than
the Company.
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
contract 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.
BENEFICIARY
The beneficiary is the person, persons or entity designated in the contract
specifications page or as subsequently named. However, if there is a surviving
contract 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 contract owner. In the case of certain qualified contracts,
regulations promulgated by the Treasury Department prescribe certain limitations
on the designation of a beneficiary.
MODIFICATION
The contract may not be modified by the Company without the consent of the
contract owner, except as may be required to make it conform to any law or
regulation or ruling issued by a governmental agency. The provisions of the
contract shall be interpreted so as to comply with the requirements of Section
72(s) of the Internal Revenue Code.
COMPANY APPROVAL
The Company reserves the right to accept or reject any contract application
at its sole discretion.
MISSTATEMENT AND PROOF OF AGE, SEX OR SURVIVAL
The Company may require proof of age, sex or survival of any person upon
whose age, sex or survival any payment depends. If the age or sex of the
annuitant has been misstated, the benefits will be those that would have been
provided for the annuitant's correct age and sex. If the Company has made
incorrect annuity payments, the amount of any underpayment will be paid
immediately and the amount of any overpayment will be deducted from future
annuity payments.
FIXED ACCOUNT INVESTMENT OPTION
Securities Registration. Due to certain exemptive and exclusionary
provisions, interests in the one year fixed account investment option are not
registered under the Securities Act of 1933, 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 one year fixed account
investment option nor the general account are subject to the provisions or
restrictions of the 1933 Act or the 1940 Act and the staff of the Commission has
not reviewed the disclosures in the Prospectus relating thereto. Disclosures
relating to interests in the fixed
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account investment option and the general account, however, may be subject to
certain generally applicable provisions of the federal securities laws relating
to the accuracy of statements made in a registration statement.
Guarantee. Pursuant to a Guarantee Agreement dated 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 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 in this Prospectus. This Guarantee may
be terminated by Manulife on notice to the Company. Termination will not affect
Manulife's continuing liability with respect to all fixed annuity contracts
issued prior to the termination of the Guarantee 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.
Reinsurance. Effective June 30, 1995, the Company entered into a
Reinsurance Agreement with Peoples Security Life Insurance Company ("Peoples")
pursuant to which Peoples reinsures certain amounts with respect to the fixed
account portion of the contract described in this Prospectus. Under this
Reinsurance Agreement, the Company remains liable for the contractual
obligations of the contracts' fixed account and Peoples agrees to reimburse the
Company for certain amounts and obligations in connection with the fixed
account. Peoples contractual liability runs solely to the Company, and no
contract owner shall have any right of action against Peoples. Peoples is a
wholly-owned subsidiary of Louisville, Kentucky based Providian Corporation, a
diversified financial services corporation.
Investment Option. A one year fixed account investment option is available
under the contract. Under the one year fixed account investment option, the
Company guarantees the principal value of purchase payments and the rate of
interest credited to the investment account for the term of the guarantee
period. The portion of the contract value in the one year fixed account
investment option and monthly annuity payments if selected on a fixed basis,
will reflect such interest and principal guarantees. The guaranteed interest
rates on new amounts allocated or transferred to a fixed investment account are
determined from time-to-time by the Company in accordance with market
conditions. In no event will the guaranteed rate of interest be less than 3%.
Once an interest rate is guaranteed for a fixed investment account, it is
guaranteed for the duration of the guarantee period and may not be changed by
the Company.
Investment Accounts. Contract owners may allocate purchase payments, or
make transfers from the variable investment options, to the one year fixed
account investment option at any time prior to the maturity date. The Company
establishes a separate investment account each time the contract owner allocates
or transfers amounts to the fixed account investment option. Amounts may not be
allocated to a fixed account investment option that would extend the guarantee
period beyond the maturity date.
Renewals. At the end of a guarantee period, the contract owner may
establish a new investment account with a one year guarantee period at the then
current interest rate or transfer the amounts to a variable account investment
option, all without the imposition of any charge. In the case of renewals within
one year of the maturity date, the only fixed account investment option
available is to have interest accrued up to the maturity date at the then
current interest rate for one year guarantee periods.
If the contract owner does not specify the renewal option desired, the
Company will select the one year fixed account investment option. In the case of
a renewal within one year of the maturity date, the Company will credit interest
up to the maturity date at the then current interest rate for one year guarantee
periods.
Transfers. Prior to the maturity date, the contract owner may transfer
amounts from the fixed account investment option to the variable account
investment options at the end of the guaranteed period; however, amounts may be
transferred prior to the end of the guarantee period pursuant to the Dollar Cost
Averaging program.
Where there are multiple investment accounts within the one year fixed
account investment option, amounts must be transferred from the one year fixed
account investment option on a first-in-first-out basis.
Withdrawals. The contract owner may make total and partial withdrawals of
amounts held in the one year fixed account investment option at any time prior
to the maturity date or his or her death. Withdrawals from the fixed account
investment option will be made in the same manner and be subject to the same
limitations as set forth under "WITHDRAWALS" plus the following provisions also
apply to withdrawals from the fixed account investment option: (1) the Company
reserves the right to defer payment
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of amounts withdrawn from the fixed account investment option for up to six
months from the date it receives the written withdrawal request (if a withdrawal
is deferred for more than 30 days pursuant to this right, the Company will pay
interest on the amount deferred at a rate not less than 3% per year (or such
higher rate as may be required by the applicable state or jurisdiction)); and
(2) if there are multiple investment accounts under the fixed account investment
option, amounts must be withdrawn from such accounts on a first-in-first-out
basis.
If the contract owner does not specify the investment options from which a
partial withdrawal is to be taken, a partial withdrawal will be taken from the
variable account investment options until exhausted and then from the one year
fixed account investment option.
Withdrawals from the contract may be subject to income tax and a 10%
penalty tax. Withdrawals are permitted from contracts issued in connection with
Section 403(b) qualified plans only under limited circumstances. (See "FEDERAL
TAX MATTERS" below.)
Loans. The Company offers a loan privilege only to owners of contracts
issued in connection with Section 403(b) qualified plans that are not subject to
Title I of ERISA. Owners of such contracts may obtain loans using the contract
as the only security for the loan. Owners of such contracts may borrow amounts
allocated to the fixed investment account in the same manner and subject to the
same limitations as set forth under "LOANS" above.
Fixed Annuity Options. Subject to the distribution of death benefits
provisions (see "DEATH BENEFIT BEFORE MATURITY DATE" above), on death,
withdrawal or the maturity date of the contract, the proceeds may be applied to
a fixed annuity option. (See "ANNUITY OPTIONS" above) The amount of each fixed
annuity payment is determined by applying the portion of the proceeds (less any
applicable premium taxes) applied to purchase the fixed annuity to the
appropriate table in the contract. If the table in use by the Company is more
favorable to the contract owner, the Company will substitute that table. The
Company guarantees the dollar amount of fixed annuity payments.
CHARGES AND DEDUCTIONS
Charges and deductions under the contracts are assessed against purchase
payments, contract values or annuity payments. Currently, there are no
deductions made from purchase payments, except for premium taxes in certain
states. In addition, there are deductions from and expenses paid out of the
assets of the Trust portfolios that are described in the accompanying Prospectus
of the Trust.
WITHDRAWAL CHARGES
If a withdrawal is made from the contract before the maturity date, a
withdrawal charge (contingent deferred sales charge) may be assessed against
amounts withdrawn attributable to purchase payments that have been in the
contract less than ten complete contract years. There is never a withdrawal
charge with respect to earnings accumulated in the contract, certain other free
withdrawal amounts described below or purchase payments that have been in the
contract more than ten complete contract years. In no event may the total
withdrawal charges exceed 8.5% of the amount invested. The amount of the
withdrawal charge and when it is assessed are discussed below:
1. Each withdrawal from the contract is allocated first to the "free
withdrawal amount" and second to "unliquidated purchase payments". In any
contract year, the free withdrawal amount for that year is the greater of (1)
the excess of the contract value on the date of withdrawal over the unliquidated
purchase payments (the accumulated earnings on the contract) or (2) the excess
of (i) over (ii), where (i) is 10% of total purchase payments and (ii) is all
prior partial withdrawals in that contract year. Withdrawals allocated to the
free withdrawal amount may be withdrawn without the imposition of a withdrawal
charge. The free withdrawal amount will be applied to a requested withdrawal,
first, to withdrawals from variable account investment options and then to
withdrawals from the one year fixed account investment option.
2. If a withdrawal is made for an amount in excess of the free withdrawal
amount, the excess will be allocated to purchase payments which will be
liquidated on a first-in first-out basis. On any withdrawal request, the Company
will liquidate purchase payments equal to the amount of the withdrawal request
which exceeds the free withdrawal amount in the order such purchase
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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
PURCHASE PAYMENT IN CONTRACT WITHDRAWAL CHARGE PERCENTAGE
---------------------------- ----------------------------
<S> <C>
0 8.5%
1 8.5%
2 8%
3 7%
4 6%
5 5%
6 4%
7 3%
8 2%
9 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 contract value remaining
after the contract owner is paid the amount requested, except in the case of a
complete withdrawal when it is deducted from the amount otherwise payable. In
the case of a partial withdrawal, the amount requested from an investment
account may not exceed the value of that investment account less any applicable
withdrawal charge.
5. There is generally no withdrawal charge on distributions made as a
result of the death of the contract owner or, if applicable, the annuitant (see
"Death Benefit Before Maturity Date -- Amount of Death Benefit"), and no
withdrawal charges are imposed on the maturity date if the contract owner
annuitizes as provided in the contract.
The amount collected from the withdrawal charge will be used to reimburse
the Company for the compensation paid to cover selling concessions to
broker-dealers, preparation of sales literature and other expenses related to
sales activity.
For examples of calculation of the withdrawal charge, see Appendix A.
REDUCTION OR ELIMINATION OF WITHDRAWAL CHARGES
The amount of the withdrawal charge on a contract may be reduced or
eliminated when sales of the contracts are made to individuals or to a group of
individuals in such a manner that results in savings of sales expenses. The
entitlement to such a reduction in the withdrawal charge will be determined by
the Company in the following manner:
1. The size and type of group to which sales are to be made will be
considered. Generally, sales expenses for a larger group are smaller than for a
smaller group because of the ability to implement large numbers of contracts
with fewer sales contacts.
2. The total amount of purchase payments to be received will be considered.
Per dollar sales expenses are likely to be less on larger purchase payments than
on smaller ones.
3. Any prior or existing relationship with the Company will be considered.
Per contract sales expenses are likely to be less when there is a prior or
existing relationship because of the likelihood of implementing the contract
with fewer sales contacts.
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4. The level of commissions paid to selling broker-dealers will be
considered. Certain broker-dealers may offer the contract in connection with
financial planning programs offered on a fee for service basis. In view of the
financial planning fees, such broker-dealers may elect to receive lower
commissions for sales of the contracts, thereby reducing the Company's sales
expenses.
5. There may be other circumstances of which the Company is not presently
aware, which could result in reduced sales expenses.
If, after consideration of the foregoing factors, it is determined that
there will be a reduction in sales expenses, the Company will provide a
reduction in the withdrawal charge. 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 $40 as partial compensation for the cost of providing all
administrative services attributable to the contracts and the operations of the
Variable Account and the Company in connection with the contracts. However, if
prior to the maturity date the contract value is equal to or greater than
$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
contract year. It is withdrawn from each investment option in the same
proportion that the value of such investment option bears to the contract value.
If the entire contract is withdrawn on other than the last day of any contract
year, the $40 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.
A daily fee in an amount equal to 0.30% of the value of each variable
investment account on an annual basis is deducted from each sub-account as an
administration fee. The fee is designed to compensate the Company for the cost
of providing administrative services attributable to the contracts and the
operations of the Variable Account and the Company in connection with the
contracts. This asset based administration fee will not be deducted from the
fixed account investment option. The fee will be reflected in the contract value
as a proportionate reduction in the value of each investment account. Because
the administration fee is a percentage of assets rather than a flat amount,
larger contracts will in effect pay a higher proportion of the administrative
expenses than smaller contracts.
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.
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. This assures each annuitant that his longevity will not have
an adverse effect on the amount of annuity payments. Also, the Company
guarantees that if the contract 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 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 0.80% for the
mortality risk and 0.45% for the expense risk. The charge will be reflected in
the contract value as a proportionate reduction in the value of each investment
account. The rate of the mortality and expense risk charge cannot be increased.
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. The mortality and expense risk charge
is not assessed against the fixed account investment option.
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TAXES
The Company reserves the right to charge, or provide for, certain taxes
against purchase payments, contract values or annuity payments. Such taxes may
include premium taxes or other taxes levied by any government entity which the
Company determines to have resulted from the (i) establishment or maintenance of
the Variable Account, (ii) receipt by the Company of purchase payments, (iii)
issuance of the contacts, or (iv) commencement or continuance of annuity
payments under the contracts. In addition, the Company will withhold taxes to
the extent required by applicable law.
Except for residents in Pennsylvania and South Dakota premium taxes will be
deducted from the contract value used to provide for fixed or variable annuity
payments unless required otherwise by applicable law. The amount deducted will
depend on the premium tax assessed in the applicable state. State premium taxes
currently range from 0% to 3.5% depending on the jurisdiction and the tax status
of the contract and are subject to change by the legislature or other authority.
(See "APPENDIX B: STATE PREMIUM TAXES") FOR RESIDENTS OF PENNSYLVANIA AND SOUTH
DAKOTA THE FOLLOWING PREMIUM TAX ASSESSMENT WILL APPLY: A premium tax will be
assessed against all non-qualified purchase payments received from contract
owners who are residents of South Dakota. The rate of tax is 1.25% for South
Dakota residents. Purchase payments received for the period October 1, 1992
through September 7, 1995 for non-qualified contracts of Pennsylvania residents
will be assessed a 2.00% premium tax; purchase payments received on or after
September 8, 1995 will not be assessed a premium tax. For purchase payments
received on or after October 1, 1992, 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, the premium tax
will 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.
FEDERAL TAX MATTERS
INTRODUCTION
The following discussion of the federal income tax treatment of the
contract is not exhaustive, does not purport to cover all situations, and is not
intended as tax advice. A qualified tax adviser should always be consulted with
regard to the application of law to individual circumstances. This discussion is
based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Department regulations, and interpretations existing on the date of this
Prospectus. These authorities, however, are subject to change by Congress, the
Treasury Department, and judicial decisions.
This discussion does not address state or local tax consequences associated
with the purchase of a contract. In addition, the Company makes no guarantee
regarding any tax treatment -- federal, state or local -- of any contract or of
any transaction involving a contract.
THE COMPANY'S TAX STATUS
The Company is taxed as a life insurance company under 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 the contract value is generally not taxable to the contract owner or
annuitant until received, either in the form of annuity payments, as
contemplated by the contract, or in some other form of distribution. However,
certain requirements must be satisfied in order for this general rule to apply,
including: (1) the contract must be owned by an individual (or treated as owned
by an individual), (2) the investments of the Variable Account must be
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<PAGE> 34
"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 contract must
provide for appropriate amortization, through annuity payments, of the
contract's purchase payments and earnings, e.g., the maturity date must not
occur at too advanced an age.
Non-Natural Owner. As a general rule, deferred annuity contracts held by
"non-natural persons" such as a corporation, trust or other similar entity, as
opposed to a natural person, are not treated as annuity contracts for federal
tax purposes. The investment income on such contracts is taxed as ordinary
income that is received or accrued by the owner of the contract during the
taxable year. There are several exceptions to this general rule for non-natural
contract owners. First, contracts will generally be treated as held by a natural
person if the nominal owner is a trust or other entity which holds the contract
as an agent for a natural person. However, this special exception will not apply
in the case of any employer who is the nominal owner of an annuity contract
under a non-qualified deferred compensation arrangement for its employees.
In addition, exceptions to the general rule for non-natural contract owners
will apply with respect to (1) contracts acquired by an estate of a decedent by
reason of the death of the decedent, (2) certain qualified contracts, (3)
certain contracts purchased by employers upon the termination of certain
qualified plans, (4) certain contracts used in connection with structured
settlement agreements, and (5) contracts purchased with a single premium when
the annuity starting date (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.
Diversification Requirements. For a contract to be treated as an annuity
for federal income tax purposes, the investments of the Variable Account must be
"adequately diversified" in accordance with Treasury Department Regulations. The
Secretary of the Treasury has issued regulations which prescribe standards for
determining whether the investments of the Variable Account are "adequately
diversified." If the Variable Account failed to comply with these
diversification standards, a contract would not be treated as an annuity
contract for federal income tax purposes and the contract owner would generally
be taxable currently on the excess of the contract value over the premiums paid
for the contract.
Although the Company does not control the investments of the NASL Series
Trust, it expects that the Trust will comply with such regulations so that the
Variable Account will be considered "adequately diversified."
Ownership Treatment. In certain circumstances, a variable annuity contract
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 contract owner's gross income. The Internal Revenue Service
(the "Service") has stated in published rulings that a variable contract owner
will be considered the owner of separate account assets if the owner possesses
incidents of ownership in those assets, such as the ability to exercise
investment control over the assets. In addition, the Treasury Department
announced, in connection with the issuance of regulations concerning investment
diversification, that those regulations "do not provide guidance concerning the
circumstances in which investor control of the investments of a segregated 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 contract are similar to, but different in
certain respects from, those described by the Service in rulings in which it was
determined that contract owners were not owners of separate account assets. For
example, the owner of this contract has the choice of 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 contract 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 as necessary to attempt to prevent the contract
owner from being considered the owner of the assets of the Variable Account.
Delayed Maturity Dates. If the contract's 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 contract would not be treated as an
annuity for federal income tax purposes. In that event, the income and gains
under the contract could be currently includible in the owner's income.
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<PAGE> 35
The remainder of this discussion assumes that the contract will be treated
as an annuity contract for federal income tax purposes and that the Company will
be treated as the owner of the Variable Account assets.
TAXATION OF PARTIAL AND FULL WITHDRAWALS
In the case of a partial withdrawal, amounts received are includible in
income to the extent the contract value before the withdrawal exceeds the
"investment in the contract." In the case of a full withdrawal, amounts received
are includible in income to the extent they exceed the "investment in the
contract." For these purposes the investment in the contract at any time equals
the total of the purchase payments made under the contract to that time (to the
extent such payments were neither deductible when made nor excludible from
income as, for example, in the case of certain employer contributions to
qualified plans) less any amounts previously received from the contract which
were not included in income. In this regard, the payment enhancements provided
under a contract are not treated as purchase payments and thus do not increase
the investment in the contract.
Other than in the case of certain qualified contracts, any amount received
as a loan under a contract, and any assignment or pledge (or agreement to assign
or pledge) any portion of the contract value, is treated as a withdrawal of such
amount or portion. (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 an annuity contract
without adequate consideration to a person other than the owner's spouse (or to
a former spouse incident to divorce), the owner will be taxed on the difference
between the "contract value" and the "investment in the contract" at the time of
transfer. In such case, the transferee's investment in the contract will be
increased to reflect the increase in the transferor's income.
The contract provides a death benefit that in certain circumstances may
exceed the greater of the purchase payments and the contract value. As described
elsewhere in this Prospectus, the Company imposes certain charges with respect
to the death benefit. It is possible that those charges (or some portion
thereof) could be treated for federal income tax purposes as a partial
withdrawal from the contract.
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 non-qualified contract because of the
death of an owner or the 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
34
<PAGE> 36
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 contract unless the payment is: (a) received on or after the
contract owner reaches age 59 1/2; (b) attributable to the contract owner's
becoming disabled (as defined in the tax law); (c) made to a beneficiary on or
after the death of the contract owner or, if the contract owner is not an
individual, on or after the death of the primary annuitant (as defined in the
tax law); (d) made as a series of substantially equal periodic payments (not
less frequently than annually) for the life (or life expectancy) of the
annuitant or for the joint lives (or joint life expectancies) of the annuitant
and designated beneficiary (as defined in the tax law); (e) made under an
annuity contract purchased with a single premium when the annuity starting date
(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; 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 contract that is includible in income may be determined by combining some
or all of the non-qualified contracts owned by an individual. For example, if a
person purchases a contract offered by this Prospectus and also purchases at
approximately the same time an immediate annuity, the Service may treat the two
contracts as one contract. In addition, if a person purchases two or more
deferred annuity contracts from the same insurance company (or its 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 contracts are also designed for use in connection with certain types of
retirement plans which receive favorable treatment under the Code. Numerous
special tax rules apply to the participants in such qualified plans and to the
contracts used in connection with such qualified plans. Therefore, no attempt is
made in this Prospectus to provide more than general information about use of
the contract 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, 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 contract 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 must generally commence by the later of this date or
April 1 of the calendar year following the calendar year in which the employee
retires.
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<PAGE> 37
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 arrangement (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 contract owner reaches age 59 1/2, (b)
received on or after the owner's death or because of the owner's disability (as
defined in the tax law), or (c) made as a series of substantially equal periodic
payments (not less frequently than annually) for the life (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 will be amended
as generally necessary to conform to the requirements of the plan. However,
contract owners, annuitants, and beneficiaries are cautioned that the rights of
any person to any benefits under qualified plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the contract. In addition, the Company shall not be bound by terms and
conditions of qualified plans to the extent such terms and conditions contradict
the contract, unless the Company consents.
QUALIFIED PLAN TYPES
Following are brief descriptions of various types of qualified plans in
connection with which the Company may issue a contract.
Individual Retirement Annuities. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA." IRAs are subject to limits on the
amounts that may be contributed, the persons who may be eligible and on the time
when distributions may commence. Also, distributions from certain other types of
qualified retirement plans may be "rolled over" on a tax-deferred basis into an
IRA.
IRAs generally may not provide life insurance coverage, but they may
provide a death benefit that equals the greater of the premiums paid and the
contract 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 contract's death benefit could be viewed as
providing life insurance coverage with the result that the contract 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
treatment of the contract's death benefit for purposes of the tax rules
governing IRAs (which would include SEP-IRAs). Employers intending to use the
contract 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 contract's death benefit for purposes of the tax rules
governing IRAs (which would include SIMPLE IRAs). Employers 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
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<PAGE> 38
permit the purchase of the contracts in order to provide benefits under the
plans. The contract provides a death benefit that in certain circumstances may
exceed the greater of the purchase payments and the contract value. It is
possible that such death benefit could be characterized as an incidental death
benefit. There are limitations on the amount of incidental benefits that may be
provided under pension and profit sharing plans. In addition, the provision of
such benefits may result in current taxable income to participants. Employers
intending to use the contract 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 for such purposes should seek competent
advice as to eligibility, limitations on permissible amounts of purchase
payments and other tax consequences associated with the contracts. In
particular, purchasers should consider that the contract provides a death
benefit that in certain circumstances may exceed the greater of the purchase
payments and the contract value. It is possible that such death benefit could be
characterized as an incidental death benefit. If the death benefit were so
characterized, this could result in currently taxable income to purchasers. In
addition, there are limitations on the amount of incidental 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.
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 purchased by a
state or local government or a tax-exempt organization will not be treated as an
annuity contract for federal income tax purposes. Those who intend to use the
contracts in connection with such plans should seek competent advice.
DIRECT ROLLOVERS
If the contract is used in connection with a retirement plan that is
qualified under sections 401(a), 403(a), or 403(b) of the Code, any "eligible
rollover distribution" from the contract 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 contract,
discussed below, the owner cannot elect out of withholding with respect to an
eligible rollover distribution. However, this 20% withholding will not apply if,
instead of receiving the eligible rollover distribution, the 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 contract unless the distributee
notifies the Company at or before the time of the distribution that he or she
elects not to have any amounts withheld. In certain circumstances, the Company
may be required to withhold tax. The withholding rates applicable to the
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<PAGE> 39
taxable portion of periodic annuity payments 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%.
GENERAL MATTERS
TAX DEFERRAL
The status of the contract as an annuity generally allows all earnings on
the underlying investments to be tax-deferred until withdrawn or until annuity
payments begin. (See "FEDERAL TAX MATTERS"). This tax deferred treatment may be
beneficial to contract owners in building assets in a long-term investment
program.
PERFORMANCE DATA
Each of the sub-accounts may in its advertising and sales materials quote
total return figures. The sub-accounts may advertise both "standardized" and
"non-standardized" total return figures, although standardized figures will
always accompany non-standardized figures. Non-standardized total return
figures may be quoted assuming both (i) redemption at the end of the time
period and (ii) not assuming redemption at the end of the time period.
Standardized figures include total return figures from: (i) the inception date
of the subaccount of the Variable Account which invests in the portfolio or
(ii) ten years, whichever period is shorter. Non-standardized figures include
total return numbers from: (i) inception date of the portfolio or (ii) ten
year, whichever period is shorter. 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 inception date of the
subaccount, in the case of standardized returns, and the inception date of the
portfolio, in the case of nonstandardized returns. 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. For total return figures quoted for periods prior to the
commencement of the offering of this contract, August 4, 1997, standardized
performance data will be the historical performance of the Trust portfolio
from the date the applicable sub-account of the Variable Account first became
available for investment under other contracts offered by the Company, adjusted
to reflect current contract charges. In the case of non-standardized
performance, performance figures will be the historical performance of the
Trust portfolio from the inception date of the portfolio (or in the case of the
Trust portfolios created in connection with the merger of Manulife Series Fund,
Inc. into the Trust, the inception date of the applicable predecessor Manulife
Series Fund portfolio), adjusted to reflect current contract charges. Past
performance figures quoted are not intended to indicate future performance of
any subaccount. More detailed information on the computations is set forth in
the Statement of Additional Information.
FINANCIAL STATEMENTS
Financial Statements for the Variable Account and the Company are contained
in the Statement of Additional Information.
ASSET ALLOCATION AND TIMING SERVICES
The Company is aware that certain third parties are offering asset
allocation and timing services in connection with the contracts. In certain
cases the Company has agreed to honor transfer instructions from such asset
allocation and timing services where it has received powers of attorney, in a
form acceptable to it, from the contract owners participating in the service.
THE COMPANY DOES NOT ENDORSE, APPROVE OR RECOMMEND SUCH SERVICES IN ANY WAY AND
CONTRACT OWNERS SHOULD BE AWARE THAT FEES PAID FOR SUCH SERVICES ARE SEPARATE
AND IN ADDITION TO FEES PAID UNDER The CONTRACTS.
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
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<PAGE> 40
Section 830.105 of the Texas Government Code permits participants in the
Texas Optional Retirement Program ("ORP") to withdraw their interest in a
variable annuity contract issued under the ORP only upon (1) termination of
employment in the Texas public institutions of higher education, (2) retirement,
(3) death, or (4) the participant's attainment of age 70 1/2. Accordingly,
before any amounts may be distributed from the contract, proof must be furnished
to the Company that one of these four events has occurred. The foregoing
restrictions on withdrawal do not apply in the event a participant in the ORP
transfers the contract value to another contract or another qualified custodian
during the period of participation in the ORP. Loans are not available under
contracts subject to the ORP.
DISTRIBUTION OF CONTRACTS
NASL Financial Services, Inc. ("NASL Financial"), 116 Huntington Avenue,
Boston, Massachusetts 02116, a wholly-owned subsidiary of the Company, is the
principal underwriter of the contracts in addition to providing advisory
services to the Trust. NASL Financial is a broker-dealer registered under the
Securities Exchange Act of 1934 ("1934 Act") and a member of the National
Association of Securities Dealers, Inc. ("NASD"). NASL Financial has entered
into a non-exclusive promotional agent agreement with Wood Logan Associates,
Inc. ("Wood Logan"). Wood Logan is a broker-dealer registered under the 1934 Act
and a member of the NASD. Wood Logan is a wholly owned subsidiary of a holding
company that is 85% owned by Manulife and approximately 15% owned by the
principals of Wood Logan. Sales of the contracts will be made by registered
representatives of broker-dealers authorized by NASL Financial to sell the
contracts. Such registered representatives will also be licensed insurance
agents of the Company. Under the promotional agent agreement, Wood Logan will
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 4% of purchase payments plus up to .75%
of the contract value per year commencing 18 months after each purchase payment.
NASL Financial may from time to time pay additional compensation pursuant to
promotional contests. Additionally, in some circumstances, NASL Financial will
provide reimbursement of certain sales and marketing expenses. NASL Financial
will pay the promotional agent for providing marketing support for the
distribution of the contracts.
CONTRACT OWNER INQUIRIES
All contract owner inquiries should be directed to the Company's Annuity
Service Office at P.O. Box 9230, Boston, Massachusetts 02205-9230.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account is a party or
to which the assets of the Variable Account are subject. Neither the Company nor
NASL Financial are involved in any litigation that is of material importance in
relation to their total assets or that relates to the Variable Account.
OTHER INFORMATION
A registration statement has been filed with the Commission under the 1933
Act with respect to the contracts described in this Prospectus. Not all the
information set forth in the registration statement, amendments and exhibits
thereto has been included in this Prospectus. Statements contained in this
Prospectus or the Statement of Additional Information concerning the content of
the contracts and other legal instruments are only summaries. For a complete
statement of the terms of these documents, reference should be made to the
instruments filed with the Commission.
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
General Information and History......................................... 3
Performance Data........................................................ 3
Service
Independent Auditors............................................... 6
Servicing Agent.................................................... 6
Principal Underwriter.............................................. 6
Cancellation of Contract................................................ 6
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APPENDIX A
EXAMPLE OF CALCULATION OF WITHDRAWAL CHARGE
EXAMPLE 1 - Assume a single payment of $50,000 is made into the contract, a 3%
payment enhancement of $1,500 is credited to contract value, no additional
payments are made and there are no partial withdrawals. The table below
illustrates five examples of the withdrawal charges that would be imposed if the
contract is completely withdrawn. All contract values are hypothetical.
<TABLE>
<CAPTION>
CONTRACT YEAR HYPOTHETICAL FREE PAYMENTS WITHDRAWAL CHARGE
CONTRACT VALUE WITHDRAWAL LIQUIDATED
AMOUNT -------------------
PERCENT AMOUNT
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2 $55,000 $ 5,000 (a) $50,000 8.50% $4,250
4 $50,500 $ 5,000 (b) $45,500 7.00% $3,185
6 $60,000 $10,000 (c) $50,000 5.00% $2,500
8 $80,000 $30,000 (d) $50,000 3.00% $1,500
10 $70,000 $20,000 (e) $50,000 0.00% $ 0
</TABLE>
(a) During any contract year the free withdrawal amount is the greater of (i)
the contract value less unliquidated payments (accumulated earnings), or
(ii) 10% of total payments made under the contract less any partial
withdrawals in that contract year. In the second contract year the earnings
under the contract are $5,000 ($55,000 - $50,000 = $5,000), and 10% of
payments is equal to $5,000 (0.10 x $50,000 = $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 (the lesser of (i) total unliquidated
payments, or (ii) contract value less free withdrawal amount).
(b) In the example for the fourth contract year, there were no earnings in the
contract, therefore the free withdrawal amount is equal to 10% of payments
(0.10 x $50,000 = $5,000) and the withdrawal charge is only applied to
payments liquidated.
(c) In the example for the sixth contract 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.
(d) In the example for the eighth contract year, the accumulated earnings of
$30,000 is greater than 10% of payments ($5,000), therefore the free
withdrawal amount is equal to the accumulated earnings of $30,000 and the
withdrawal charge is applied to the payments liquidated.
(e) There is no withdrawal charge on any payments that have been in the
contract for at least 10 years.
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EXAMPLE 2 - Assume a single payment of $50,000 is made into the contract, a 3%
payment enhancement of $1,500 is credited to contract value, no transfers are
made, no additional payments are made and there are a series of four partial
withdrawals made during the third contract year of $2,000, $5,000, $7,000 and
$8,000.
<TABLE>
<CAPTION>
HYPOTHETICAL PARTIAL FREE PAYMENTS WITHDRAWAL CHARGE
CONTRACT WITHDRAWAL WITHDRAWAL LIQUIDATED
VALUE REQUESTED AMOUNT --------------------
PERCENT AMOUNT
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$65,000 $2,000 $15,000 (a) $ 0 8.00% $ 0
$49,000 $5,000 $ 3,000 (b) $2,000 8.00% $160
$52,000 $7,000 $24,000 (c) $3,000 8.00% $240
$44,000 $8,000 $ 0 (d) $8,000 8.00% $640
</TABLE>
(a) The free withdrawal amount during any contract year is the greater of (i)
the contract value less unliquidated payments (accumulated earnings), or
(ii) 10% of payments less 100% of all prior withdrawals in that contract
year. For the first example, accumulated earnings of $15,000 ($65,000 -
$50,000 = $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. Therefore, payments are
not liquidated and no withdrawal charge applies.
(b) The contract has negative accumulated earnings ($49,000 - $50,000 [Less
than]0) , so the free withdrawal amount is limited to 10% of payments less
100% of all prior withdrawals during the contract year. Since $2,000 has
already been withdrawn in the current contract year, the remaining free
withdrawal during the third contract 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 will result in
payments being liquidated. The remaining unliquidated payments after the
$5,000 partial withdrawal is $48,000 ($50,000 - $2,000 = $48,000).
(c) The contract has increased in value to $52,000. The unliquidated payments
are $48,000 which results in $4,000 of accumulated earnings ($52,000 -
$48,000 = $4,000) which is greater than 10% of payments less prior
withdrawals this contract year ($5,000 - $2,000 - $5,000 [Less than]0 ).
Hence the free withdrawal amount is $4,000 leaving $3,000 of the $7,000
partial withdrawal subject to a withdrawal charge. The unliquidated
payments are reduced by $3,000 to $45,000.
(d) The free withdrawal amount is zero since the contract has negative
accumulated earnings ($44,000 - $45,0000 [Less than]0) 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 contract year the full 10% of payments would be
available for withdrawal requests during that contract 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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APPENDIX C
MAXIMUM MATURITY AGES IN PENNSLVANIA
For all contracts 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 contracts are issued with annuitants over age 80, a withdrawal charge
could be imposed if they terminate the contract rather than elect a settlement
option upon attainment of the maximum maturity age. This is a result of the
restrictions by Pennsylvania in combination with the 9-year withdrawal charge
schedule of the contract.
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<PAGE> 45
APPENDIX D
EXAMPLES OF PAYMENT ENHANCEMENT CALCULATIONS
The payment enhancement is determined based on the cumulative amount of payments
applied to your contract. The payment enhancements, as a percentage of payments,
are shown in the table below.
<TABLE>
<CAPTION>
Payment
Cumulative Payments Enhancement
<S> <C>
$10,000 to $499,999 3.0%
$500,000 to $2,499,999 4.0%
$2,500,000 and above 5.0%
</TABLE>
Payment enhancements are payable only as a percentage of each specific payment
applied to your contract. The two examples below demonstrate how the payment
enhancement is calculated:
EXAMPLE 1 - Assume an initial payment of $400,000 and a subsequent payment of
$200,000 are made into the contract. Payment enhancements would be determined as
follows*:
(a) A payment enhancement of $12,000 (3% x $400,000) would be allocated among
the investment options in proportion to the allocation of the $400,000
initial payment.
(b) A payment enhancement of $8,000 (4% x $200,000) would be allocated among
the investment options in proportion to the allocation of the $200,000
subsequent payment.
EXAMPLE 2 - Assume an initial payment of $200,000 and a subsequent payment of
$400,000 are made into the contract. Payment enhancements would be determined as
follows*:
(a) A payment enhancement of $6,000 (3% x $200,000) would be allocated among
the investment options in proportion to the allocation of the $200,000
initial payment.
(b) A payment enhancement of $16,000 (4% x $400,000) would be allocated among
the investment options in proportion to the allocation of the $400,000
subsequent payment.
*Unless the Company receives a Letter of Intent that the additional purchase
payments will be received within 13 months of the issue date of the contract. If
the Company receives a Letter of Intent, the payment enhancement will be
determined using the payment enhancement percentage associated with the total
amount of purchase payments set forth in the Letter of Intent. (see "Payment
Enhancement")
44
<PAGE> 46
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
NASL VARIABLE ACCOUNT
- --------------------------------------------------------------------------------
OF
NORTH AMERICAN SECURITY
LIFE INSURANCE COMPANY
FLEXIBLE PURCHASE PAYMENT INDIVIDUAL DEFERRED
VARIABLE ANNUITY CONTRACT
NON-PARTICIPATING
This Statement of Additional Information is not a Prospectus. It
contains information in addition to that described in the Prospectus and should
be read in conjunction with the Prospectus dated the same date as this Statement
of Additional Information. The Prospectus may be obtained by writing North
American Security Life Insurance Company (the "Company") at the Annuity Service
Office, P.O. Box 9230, Boston, Massachusetts 02205-9230 or telephoning (617)
266-6008.
The date of this Statement of Additional Information is July 23, 1997.
North American Security Life Insurance Company
116 Huntington Avenue
Boston, Massachusetts 02116
(617) 266-6008
- --------------------------------------------------------------------------------
VTG20.SAI797
<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 Contract................................................ 7
Financial Statements.................................................... 8
3
<PAGE> 48
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. The sub-accounts may advertise both "standardized"
and "non-standardized" total return figures, although standardized figures will
always accompany non-standardized figures. Non-standardized total return figures
may be quoted assuming both (i) redemption at the end of the time period and
(ii) not assuming redemption at the end of the time period. Standardized figures
include total return figures from: (i) the inception date of the subaccount of
the Variable Account which invests in the portfolio or (ii) ten years, whichever
period is shorter. Non-standardized figures include total return numbers from:
(i) inception date of the portfolio or (ii) ten years, whichever period is
shorter. 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 inception date of the subaccount, in the case of
standardized returns, and the inception date of the portfolio, in the case of
nonstandardized returns. Where the period since inception is less than one year,
the total return quoted will be the aggregate return for the period. The average
annual total return is the average annual compounded rate of return that equates
a purchase payment to the market value of such purchase payment on the last day
of the period for which such return is calculated. The aggregate total return is
the percentage change (not annualized) that equates a purchase payment to the
market value of such purchase payment on the last day of the period for which
such return is calculated. For purposes of the calculations it is assumed that
an initial payment of $1,000 is made on the first day of the period for which
the return is calculated.
In calculating standardized return figures, all recurring charges (all
asset charges (mortality and expense risk fees, administrative fees and
distribution fees)) are reflected, and the asset charges are reflected in
changes in unit values. Standardized total return figures will be quoted
assuming redemption at the end of the period. Non-standardized total return
figures reflecting redemption at the end of the time period are calculated on
the same basis as the standardized returns. Non-standardized total return
figures not reflecting redemption at the end of the time period are calculated
on the same basis as the standardized returns except that the calculations
assume no redemption at the end of the period and does not reflect deduction of
the annual contract fee. The Company believes such non-standardized figures not
reflecting redemptions at the end of the time period are useful to contract
owners who wish to assess the performance of an ongoing contract of the size
that is meaningful to the individual contract owner.
For total return figures quoted for periods prior to the commencement
of the offering of this contract, August 4, 1997, standardized performance data
will be the historical performance of the Trust portfolio from the date the
applicable sub-account of the Variable Account first became available for
investment under other contracts offered by the Company; adjusted to reflect
current contract charges. In the case of non-standardized performance,
performance figures will be the historical performance of the Trust portfolio
from the inception date of the portfolio (or in the case of the Trust portfolios
created in connection with the merger of Manulife Series Fund, Inc. into the
Trust, the inception date of the applicable predecessor Manulife Series Fund
portfolio), adjusted to reflect current contract charges.
4
<PAGE> 49
<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 Emerging Markets N/A N/A N/A 12/31/96
------------------------------------------------------------------------------------------------------------------
International Small Cap N/A N/A 2.99% 3/4/96
------------------------------------------------------------------------------------------------------------------
Small/Mid Cap N/A N/A 0.36% 3/4/96
------------------------------------------------------------------------------------------------------------------
Global Equity 5.62% 8.25% 7.06% 3/18/88
------------------------------------------------------------------------------------------------------------------
Growth N/A N/A 9.87% 7/15/96
------------------------------------------------------------------------------------------------------------------
Equity 13.24% 14.59% 12.41%+ 6/18/85
------------------------------------------------------------------------------------------------------------------
Quantitative Equity N/A N/A N/A 12/31/96
------------------------------------------------------------------------------------------------------------------
Blue Chip Growth 19.09% N/A 7.40% 12/11/92
------------------------------------------------------------------------------------------------------------------
Real Estate Securities N/A N/A N/A 12/31/96
------------------------------------------------------------------------------------------------------------------
Int'l Growth & Income 5.61% N/A 5.78% 1/09/95
------------------------------------------------------------------------------------------------------------------
Growth and Income 15.98% 12.65% 12.98% 4/23/91
------------------------------------------------------------------------------------------------------------------
Equity-Income 12.96% N/A 12.29% 2/19/93
------------------------------------------------------------------------------------------------------------------
Aggressive Asset Allocation 6.00% 8.49% 7.10% 8/03/89
------------------------------------------------------------------------------------------------------------------
Moderate Asset Allocation 2.93% 7.24% 6.46% 8/03/89
------------------------------------------------------------------------------------------------------------------
Conservative Asset 0.09% 5.69% 5.63% 8/03/89
Allocation
------------------------------------------------------------------------------------------------------------------
Strategic Bond 7.73% N/A 6.66% 2/19/93
------------------------------------------------------------------------------------------------------------------
Global Government Bond 6.02% 7.82% 8.05% 3/18/88
------------------------------------------------------------------------------------------------------------------
Capital Growth Bond N/A N/A N/A 12/31/96
------------------------------------------------------------------------------------------------------------------
Investment Quality Bond -4.04% 4.55% 2.65%+ 6/18/85
------------------------------------------------------------------------------------------------------------------
U.S. Government Securities -3.31% 4.08% 5.12% 3/18/88
------------------------------------------------------------------------------------------------------------------
Money Market -1.75% 1.95% 4.16%+ 6/18/85
------------------------------------------------------------------------------------------------------------------
</TABLE>
* Inception date of the subaccount of the Variable Account which invests in the
portfolio.
+ 10 year average annual return.
5
<PAGE> 50
<TABLE>
NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURN FIGURES
(ASSUMING REDEMPTION AT THE END OF THE TIME PERIOD)
CALCULATED AS OF DECEMBER 31, 1996
<CAPTION>
==================================================================================================================
TRUST PORTFOLIO 1 YEAR 5 YEAR SINCE INCEPTION OR INCEPTION DATE OF
10 YEARS, WHICHEVER PORTFOLIO
IS SHORTER
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pacific Rim Emerging 2.76% N/A 3.05% 10/4/94
Markets*
------------------------------------------------------------------------------------------------------------------
International Small Cap N/A N/A 2.99% 3/4/96
------------------------------------------------------------------------------------------------------------------
Small/Mid Cap N/A N/A 0.36% 3/4/96
------------------------------------------------------------------------------------------------------------------
Global Equity 5.62% 8.25% 7.06% 3/18/88
------------------------------------------------------------------------------------------------------------------
Growth N/A N/A 9.87% 7/15/96
------------------------------------------------------------------------------------------------------------------
Equity 13.24% 14.59% 12.41%+ 6/18/85
------------------------------------------------------------------------------------------------------------------
Quantitative Equity* 11.00% 9.97% 5.36% 4/30/87
------------------------------------------------------------------------------------------------------------------
Blue Chip Growth 19.09% N/A 7.40% 12/11/92
------------------------------------------------------------------------------------------------------------------
Real Estate Securities* 28.01% 15.68% 6.92% 4/30/87
------------------------------------------------------------------------------------------------------------------
Int'l Growth & Income 5.61% N/A 5.78% 1/09/95
------------------------------------------------------------------------------------------------------------------
Growth and Income 15.98% 12.65% 12.98% 4/23/91
------------------------------------------------------------------------------------------------------------------
Equity-Income 12.96% N/A 12.29% 2/19/93
------------------------------------------------------------------------------------------------------------------
Aggressive Asset Allocation 6.00% 8.49% 7.10% 8/03/89
------------------------------------------------------------------------------------------------------------------
Moderate Asset Allocation 2.93% 7.24% 6.46% 8/03/89
------------------------------------------------------------------------------------------------------------------
Conservative Asset 0.09% 5.69% 5.63% 8/03/89
Allocation
------------------------------------------------------------------------------------------------------------------
Strategic Bond 7.73% N/A 6.66% 2/19/93
------------------------------------------------------------------------------------------------------------------
Global Government Bond 6.02% 7.82% 8.05% 3/18/88
------------------------------------------------------------------------------------------------------------------
Capital Growth Bond* -4.13% 4.55% 6.04%+ 6/26/84
------------------------------------------------------------------------------------------------------------------
Investment Quality Bond -4.04% 4.55% 2.65%+ 6/18/85
------------------------------------------------------------------------------------------------------------------
U.S. Government Securities -3.31% 4.08% 5.12% 3/18/88
------------------------------------------------------------------------------------------------------------------
Money Market -1.75% 1.95% 4.16%+ 6/18/85
------------------------------------------------------------------------------------------------------------------
</TABLE>
+ 10 year average annual return.
* On December 31, 1996, Manulife Series Fund, Inc. merged with the Trust.
Performance presented for these sub-accounts is based upon the performance of
the respective predecessor Manulife Series Fund portfolio for periods prior to
December 31, 1996. Performance for each of these sub-accounts is based on the
historical expenses and performance of the predecessor Manulife Series Fund
portfolio, adjusted to reflect current contract charges, and, therefore, does
not reflect for periods prior to December 31, 1996 the current Trust portfolio
expenses that an investor would incur as a holder of units of the sub-account.
6
<PAGE> 51
<TABLE>
NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURN FIGURES
(ASSUMING NO REDEMPTION AT THE END OF THE TIME PERIOD)
CALCULATED AS OF DECEMBER 31, 1996
<CAPTION>
==================================================================================================================
TRUST PORTFOLIO 1 YEAR 5 YEAR SINCE INCEPTION OR INCEPTION DATE OF
10 YEARS, WHICHEVER PORTFOLIO
IS SHORTER
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pacific Rim Emerging 11.34% N/A 6.51% 10/4/94
Markets*
------------------------------------------------------------------------------------------------------------------
International Small Cap N/A N/A 13.50% 3/4/96
------------------------------------------------------------------------------------------------------------------
Small/Mid Cap N/A N/A 10.69% 3/4/96
------------------------------------------------------------------------------------------------------------------
Global Equity 14.20% 9.18% 7.26% 3/18/88
------------------------------------------------------------------------------------------------------------------
Growth N/A N/A 30.29% 7/15/96
------------------------------------------------------------------------------------------------------------------
Equity 21.82% 15.34% 12.47%+ 6/18/85
------------------------------------------------------------------------------------------------------------------
Quantitative Equity* 19.58% 20.85% 9.34% 4/30/87
------------------------------------------------------------------------------------------------------------------
Blue Chip Growth 27.67% N/A 8.67% 12/11/92
------------------------------------------------------------------------------------------------------------------
Real Estate Securities* 36.59% 16.41% 11.99% 4/30/87
------------------------------------------------------------------------------------------------------------------
Int'l Growth & Income 14.19% N/A 9.81% 1/09/95
------------------------------------------------------------------------------------------------------------------
Growth and Income 24.56% 13.46% 13.54% 4/23/91
------------------------------------------------------------------------------------------------------------------
Equity-Income 21.54% N/A 13.64% 2/19/93
------------------------------------------------------------------------------------------------------------------
Aggressive Asset Allocation 14.58% 9.41% 7.43% 8/03/89
------------------------------------------------------------------------------------------------------------------
Moderate Asset Allocation 11.51% 8.20% 6.80% 8/03/89
------------------------------------------------------------------------------------------------------------------
Conservative Asset 8.54% 6.71% 5.99% 8/03/89
Allocation
------------------------------------------------------------------------------------------------------------------
Strategic Bond 16.31% N/A 8.21% 2/19/93
------------------------------------------------------------------------------------------------------------------
Global Government Bond 14.60% 8.76% 8.24% 3/18/88
------------------------------------------------------------------------------------------------------------------
Capital Growth Bond* 3.93% 5.60% 6.10%+ 6/26/84
------------------------------------------------------------------------------------------------------------------
Investment Quality Bond 4.02% 5.61% 2.73%+ 6/18/85
------------------------------------------------------------------------------------------------------------------
U.S. Government Securities 4.83% 5.15% 5.84% 3/18/88
------------------------------------------------------------------------------------------------------------------
Money Market 6.53% 3.12% 4.23%+ 6/18/85
------------------------------------------------------------------------------------------------------------------
</TABLE>
+ 10 year average annual return.
* On December 31, 1996, Manulife Series Fund, Inc. merged with the Trust.
Performance presented for these sub-accounts is based upon the performance of
the respective predecessor Manulife Series Fund portfolio for periods prior to
December 31, 1996. Performance for
7
<PAGE> 52
each of these sub-accounts is based on the historical expenses and performance
of the predecessor Manulife Series Fund portfolio, adjusted to reflect current
contract charges, and, therefore, does not reflect for periods prior to December
31, 1996 the current Trust portfolio expenses that an investor would incur as a
holder of units of the sub-account.
* * * * *
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 ended appearing in this Statement of
Additional Information have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports 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 statement 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 reports (which 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
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.
8
<PAGE> 53
SERVICING AGENT
Vantage Computer Systems, Inc. ("Vantage") provides to the Company a
computerized data processing recordkeeping system for variable annuity
administration. Vantage provides various daily, semimonthly, monthly, semiannual
and annual reports including: daily updates on accumulation unit values,
variable annuity participants and transactions, agent production and
commissions; semimonthly commission statements; monthly summaries of agent
production and daily transaction reports; semiannual statements for contract
owners; and annual contract owner tax reports. Vantage receives approximately
$7.50 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.
9
<PAGE> 54
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> 55
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of
NASL Variable Account:
We have audited the accompanying statement of operations and changes in net
assets of the sub-accounts comprising NASL Variable Account (consisting of the
Equity, Investment Quality Bond, Growth and Income, Pasadena Growth, Money
Market, Global Equity, Global Government Bond, U.S. Government Securities,
Conservative Asset Allocation, Moderate Asset Allocation, Aggressive Asset
Allocation, Value Equity, and Strategic Bond sub-accounts) for the year ended
December 31, 1995, and the statement of operations and changes in net assets of
the International Growth and Income sub-account for the period January 9, 1995
(commencement of operations) to December 31, 1995, of North American Security
Life Insurance Company. 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 statement of operations and changes in net assets
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement of operations
and changes in net assets. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement of operations and changes
in net assets. We believe that our audit of the statement of operations and
changes in net assets provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the results of operations and changes in net assets of
the aforementioned sub-accounts comprising NASL Variable Account of North
American Security Life Insurance Company for the year or indicated period ended
December 31, 1995, in conformity with generally accepted accounting principles.
Boston, Massachusetts Coopers & Lybrand L.L.P.
February 23, 1996
<PAGE> 56
NASL VARIABLE ACCOUNT
STATEMENT OF ASSETS AND CONTRACT OWNERS' EQUITY -- December 31, 1996
<TABLE>
<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> 57
NASL VARIABLE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Sub-Account
------------------------------------------------------------------------------------------
Investment
Equity Quality Bond Growth and Income
----------------------------- --------------------------- ---------------------------
Year Ended December 31 Year Ended December 31 Year Ended December 31
----------------------------- --------------------------- ---------------------------
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> 58
NASL VARIABLE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
<TABLE>
<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> 59
NASL VARIABLE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
<TABLE>
<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> 60
NASL VARIABLE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
<TABLE>
<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> 61
NASL VARIABLE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
<TABLE>
<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> 62
NASL VARIABLE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
<TABLE>
<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> 63
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> 64
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> 65
NASL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
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.
<TABLE>
<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> 66
NASL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
6. UNIT VALUES:
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:
<TABLE>
<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> 67
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> 68
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> 69
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> 70
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> 71
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> 72
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
<PAGE> 73
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> 74
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> 75
[ERNST & YOUNG LETTERHEAD]
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
1
<PAGE> 76
[Coopers & Lybrand Letterhead]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
North American Security Life Insurance Company:
We have audited the accompanying statutory balance sheets of North American
Security Life Insurance Company (a wholly-owned subsidiary of North American
Life Assurance Company of North York, Canada) as of December 31, 1995 and 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.
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 each of 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> 77
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 each of 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 each of 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 the second paragraph of Note 1 - "Basis of
Presentation", for which the date is
February 25, 1997
<PAGE> 78
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Balance Sheets--Statutory-Basis
<TABLE>
<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> 79
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Statements of Operations--Statutory-Basis
<TABLE>
<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> 80
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Statements of Changes in Capital and Deficit--Statutory-Basis
<TABLE>
<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> 81
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Statements of Cash Flows--Statutory-Basis
<TABLE>
<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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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> 92
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> 93
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> 94
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> 95
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> 96
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements (continued)
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> 97
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements (continued)
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> 98
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements (continued)
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> 99
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements (continued)
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> 100
North American Security Life Insurance Company
(a Wholly-Owned Subsidiary of NAWL Holding Company, Inc.)
Notes to Statutory-Basis Financial Statements (continued)
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
