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IMMEDIATE VARIABLE ANNUITY CONTRACT
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
("VARIABLE ANNUITY ACCOUNT"), A SEPARATE ACCOUNT OF
THE MINNESOTA MUTUAL LIF E INSURANCE COMPANY ("MINNESOTA MUTUAL")
The individual, immediate variable annuity contract offered by this
Prospectus is designed for use in connection with personal retirement plans,
some of which may qualify for federal income tax advantages available under
sections 401, 403, 408 or 457 of the Internal Revenue Code. It may also be used
apart from a qualified plan.
The owner of a contract will have contract values invested on a variable basis
in the Variable Annuity Account (the "Separate Account"). Although the Separate
Account is comprised of several sub-accounts, only one of its sub-accounts (the
"Sub-Account") is available under this contract. The Sub-Account invests only in
the Index 500 Portfolio (the "Portfolio") of Advantus Series Fund, Inc. (the
"Fund"). The value of the contract and the amount of each variable annuity
payment will vary in accordance with the performance of the Sub-Account and the
Portfolio, except to the extent limited by Minnesota Mutual's contractual
guarantee of a minimum annuity payment amount. The contract is an immediate
annuity and annuity payments must begin within 12 months after the contract is
issued. The contract provides for additional purchase payments and withdrawals
during a portion of the annuity payment period.
This Prospectus sets forth concisely the information that a prospective
investor should know before purchasing a contract, and it should be read and
kept for future reference. A Statement of Additional Information, bearing the
same date, which contains further information, has been filed with the
Securities and Exchange Commission and is incorporated by reference into this
Prospectus. A copy of the Statement of Additional Information may be obtained
without charge by calling (612) 665-3500, or by writing Minnesota Mutual at its
principal office at the Minnesota Mutual Life Center, 400 Robert Street North,
St. Paul, Minnesota 55101-2098. A Table of Contents for the Statement of
Additional Information appears in this Prospectus on page 24.
This Prospectus is not valid unless attached to a current prospectus of Advantus
Series Fund, Inc.
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.
THIS PROSPECTUS SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
[LOGO]
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY
400 ROBERT STREET NORTH
ST. PAUL, MN 55101-2098
PH 612/665-3500
http://www.minnesotamutual.com
The date of this document and the Statement of Additional Information is: May 1,
1997.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Special Terms............................................... 3
Questions and Answers About the Variable Annuity Contract... 4
Expense Table............................................... 7
Condensed Financial Information............................. 8
Performance Data............................................ 8
General Descriptions
The Minnesota Mutual Life Insurance Company............. 9
Separate Account........................................ 9
Advantus Series Fund, Inc............................... 9
Additions, Deletions or Substitutions................... 10
Contract Charges
Sales Charges........................................... 11
Risk Charge............................................. 11
Mortality and Expense Risk Charges...................... 11
Administration Charge................................... 12
Voting Rights............................................... 12
Description of the Contracts
General Provisions...................................... 12
Annuity Payments and Options............................ 14
Death Benefits.......................................... 15
Purchase Payments and Value of the Contract............. 16
Redemptions............................................. 17
Federal Tax Status.......................................... 20
Statement of Additional Information......................... 24
Appendix A--Computation and Examples of Withdrawals......... 25
Appendix B--Immediate Variable Annuity Illustration......... 27
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESMAN, OR OTHER PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THE PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
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SPECIAL TERMS
As used in this Prospectus, the following terms have the indicated meanings:
AGE: the age of a person at nearest birthday.
ANNUITANT: the person named on page one of the contract who may receive lifetime
benefits under the contract. Except in the event of the death of either
annuitant prior to the annuity payment commencement date, joint annuitants will
be considered a single entity.
ANNUITY PAYMENT COMMENCEMENT DATE: the first annuity payment date as specified
on page one of the contract.
ANNUITY PAYMENT DATE: each day indicated by the annuity payment commencement
date and the annuity payment frequency for an annuity payment to be determined.
This is shown on page one of the contract.
ANNUITY PAYMENTS: payments made at regular intervals to the annuitant or any
other payee. The annuity payments will increase or decrease in amount. The
changes will reflect the investment experience of the sub-account of the
separate account.
ANNUITY UNIT: the standard of value for the variable annuity payment amount.
BENEFICIARY: the person, persons or entity designated to receive death benefits
payable under the contract in the event of the annuitant's death.
CASH VALUE: the dollar amount available for withdrawal under the contract at any
time. A cash value exists only as long as both the number of cash value units
and the applicable factor from the cash value factor table shown in the contract
are greater than zero.
CASH VALUE PERIOD: the time during which a cash value exists under the contract.
The cash value period begins on the annuity commencement date and ends on the
cash value end date shown on page one of the contract.
CASH VALUE UNIT: the measure of your interest in the Separate Account that is
available for withdrawal under the contract during the cash value period.
CODE: the Internal Revenue Code of 1986, as amended.
CONTRACT DATE: the effective date of a contract.
FUND: Advantus Series Fund, Inc. or any mutual fund or separate investment
portfolio within a series mutual fund which is designated as an eligible
investment for the Separate Account.
GENERAL ACCOUNT: all of our assets other than those in the Separate Account or
in other separate accounts established by us.
GUARANTEED MINIMUM ANNUITY PAYMENT AMOUNT: the amount which is guaranteed as the
minimum annuity payment amount. This amount is payable regardless of the
performance of the Sub-Account. Purchase payments and cash value withdrawals
will cause this guaranteed minimum annuity payment amount to be adjusted. The
adjustment will reflect your new interest in the Separate Account.
JOINT OWNER: the person designated to share equally in the rights and privileges
provided to the owner of this contract. Only you and your spouse may be named as
a joint owner.
PLAN: a tax-qualified employer pension, profit-sharing, or annuity purchase plan
under which benefits are to be provided by the variable annuity contracts
described herein.
PURCHASE PAYMENT DATE: the date we receive a purchase payment in our home
office.
PURCHASE PAYMENTS: amounts paid to us as consideration for the benefits provided
by the contract.
SEPARATE ACCOUNT: a separate investment account entitled Minnesota Mutual
Variable Annuity Account. This separate account was established by us under
Minnesota law. The Separate Account is composed of several sub-accounts. The
assets of the Separate Account are ours. Those assets are not subject to claims
arising out of any other business which we may conduct.
SURRENDER VALUE: the surrender value of the contract shall be the total annuity
value as of the date of surrender plus the amounts deducted from purchase
payments. These include deductions for sales charges, risk charges and state
premium taxes where applicable.
TOTAL ANNUITY VALUE: the total annuity value represents your total interest in
the Separate Account.
VALUATION DATE: any date on which a Fund is valued.
VALUATION PERIOD: the period between successive valuation dates measured from
the time of one determination to the next.
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VARIABLE ANNUITY: an annuity providing for payments varying in amount in
accordance with the investment experience of the Fund.
WE, OUR, US: The Minnesota Mutual Life Insurance Company.
WRITTEN REQUEST: a request in writing signed by you. In the case of joint
owners, the signatures of both owners will be required to complete a written
request. In some cases, we may provide a form for your use. We may also require
that the contract be sent to us along with your written request.
YOU, YOUR: the owner of this contract. The owner may be the annuitant or someone
else. The owner shall be that person or entity named as owner in the
application.
1940 ACT: the Investment Company Act of 1940, as amended, or any similar
successor federal legislation.
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QUESTIONS AND ANSWERS ABOUT THE VARIABLE ANNUITY CONTRACT
WHAT IS AN ANNUITY?
An annuity is a series of payments for the life of a person or for the joint
lifetimes of the annuitant and another person and thereafter during the lifetime
of the survivor. An annuity with payments which are guaranteed as to amount
during the payment period is a fixed annuity. An annuity with payments which
vary during the payment period in accordance with the investment experience of a
separate account of an insurance company is called a variable annuity.
WHAT IS AN IMMEDIATE ANNUITY?
An immediate annuity is a contract which provides for annuity payments beginning
within a relatively short period after the issue of the contract. This type of
annuity is distinguished from a deferred annuity where contract values may be
left with an insurance company or separate account for some years prior to the
time that annuity payments begin. For the contract described in this Prospectus,
annuity payments must begin within 12 months from the day that the contract is
issued. In some states this period may be shortened so that the contract may be
considered to be an immediate annuity within that state.
WHAT IS THE CONTRACT OFFERED BY THIS PROSPECTUS?
The contract is an immediate, variable annuity contract which provides for
scheduled annuity payments. Annuity payments may be received on a monthly,
quarterly, semi-annual or annual basis. These payments may begin immediately and
must begin on a date within 12 months after the issue date of the contract.
Purchase payments received by us under a contract are allocated to the Separate
Account. In the Separate Account, your purchase payments are put into a
Sub-Account which invests only in the Index 500 Portfolio of the Fund.
IS THERE A GUARANTEED MINIMUM ANNUITY PAYMENT AMOUNT?
Yes. You will receive at least the guaranteed minimum annuity payment amount
specified in your contract. Each variable annuity payment will vary upwards or
downwards in accordance with the performance of the Sub-Account, however, unless
it would be less than the guaranteed minimum annuity payment amount. Under the
terms of the contract's guarantee provisions, at each annuity payment date, we
will pay the annuitant or annuitants the greater of: (a) the annuity payment
amount determined by multiplying the number of annuity units times the annuity
unit value; or (b) the guaranteed minimum annuity payment amount currently in
force for the contract.
We guarantee that variable annuity payments will always be at least 85% of the
initial variable annuity payment amount. This guaranteed amount is determined on
the contract issue date and shown on page one of the contract. If an additional
purchase payment is made, we will guarantee that variable annuity payments will
always be at least 85% of the annuity amount attributable to that additional
purchase payment, plus the amount already guaranteed at the time of that
purchase payment. Withdrawals of cash value amounts under the contract will
reduce the guaranteed annuity payment amount by the same proportion that the
withdrawal reduces the number of annuity units under the contract.
IS THE AMOUNT OF THE CASH VALUE OF THE CONTRACT GUARANTEED?
No. The cash value of the contract decreases as annuity payments are made and it
also increases or decreases based upon the performance of the Sub-Account of the
Separate Account as reflected in the annuity unit value. We do not guarantee the
performance of any Sub-Account, nor do we guarantee the annuity unit value,
which may fall
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to zero. The performance of the Sub-Account will not affect the duration of the
cash value period.
ARE THERE LIMITATIONS ON PURCHASE PAYMENTS?
Yes. A purchase payment in an amount of at least $10,000 will be required in
order for us to issue the contract. A contract will not be issued if an initial
purchase payment is tendered which is less than that amount.
After the contract has been issued, you may make additional purchase payments,
but only until the end cash value period of the contract. This period is shown
on page one of the contract. Additional purchase payments may be made only while
the annuitant is alive. Additional purchase payments must be in an amount of at
least $5,000. We will waive this contract limitation for amounts which are
received after the contract effective date as part of an integrated rollover or
Section 1035 transaction.
WHEN ADDITIONAL PURCHASE PAYMENTS ARE MADE UNDER AN EXISTING IMMEDIATE
VARIABLE ANNUITY CONTRACT, THOSE PURCHASE PAYMENTS FOR TAX PURPOSES WILL NOT
RESULT IN A RECALCULATION OF THE OWNER'S INVESTMENT IN THE CONTRACT AND A
DETERMINATION OF A NEW EXCLUSION AMOUNT. THE AMOUNT OF THOSE ADDITIONAL PURCHASE
PAYMENTS WILL BE TAXABLE WHEN DISTRIBUTED, AS AN ANNUITY OR OTHERWISE.
For more information on these matters, see the heading "Federal Tax Status,"
in this Prospectus.
WE RESERVE THE RIGHT TO SUSPEND THE SALE OF THESE CONTRACTS AND TO TERMINATE
YOUR ABILITY TO MAKE ADDITIONAL PURCHASE PAYMENTS INTO THE CONTRACT.
You may not make total purchase payments which exceed the amount of $1,000,000
except with our prior consent.
WHAT INVESTMENT OPTIONS ARE AVAILABLE FOR THE SEPARATE ACCOUNT?
Purchase payments are allocated to the Sub-Account and are invested only in
shares of the Index 500 Portfolio of the Fund. The Fund is a mutual fund of the
series type, which means that it has several different portfolios which it
offers for investment. Shares of the Index 500 Portfolio are made available at
net asset value to the Separate Account to fund the contracts. The Fund is also
required to redeem its shares at net asset value at our request. The investment
objectives and certain policies of the Index 500 Portfolio are as follows:
The Portfolio seeks investment results that correspond generally to the
price and yield performance of the common stocks included in the Standard &
Poor's Corporation 500 Composite Stock Price Index (the "Index"). It is
designed to provide an economical and convenient means of maintaining a
broad position in the equity market as part of an overall investment
strategy. All common stocks, including those in the Index, involve greater
investment risk than debt securities. The fact that a stock has been
included in the Index affords no assurance against declines in the price or
yield performance of that stock.
There is no assurance that the Portfolio will meet its objectives. Additional
information concerning the investment objectives and policies of the Portfolio
can be found in the current prospectus for the Fund, which is attached to this
Prospectus.
ARE OTHER PORTFOLIOS AVAILABLE?
No. All Separate Account assets of these contracts are invested in the Index 500
Portfolio of the Fund.
WHAT CHARGES ARE ASSOCIATED WITH THE CONTRACTS?
Under the contract there are certain charges which are made as deductions from
purchase payments and other charges which are made directly to the assets held
in the Separate Account.
A deduction for a sales charge and a risk charge is made from purchase
payments. The sales charge is based upon the cumulative amount of total purchase
payments made under the contracts, including any new purchase payments. In
addition, for purchases of multiple contracts made by an identical owner or
owners at different times, purchase payments made under all contracts will be
aggregated solely for the purpose of determining the sales charge applicable to
those purchase payments made to later contracts. For additional information on
multiple contracts, see the heading "Federal Tax Status," on page 20 of this
Prospectus. The charges are illustrated in the table shown below.
<TABLE>
<CAPTION>
SALES CHARGE AS A
CUMULATIVE TOTAL PURCHASE PERCENTAGE OF
PAYMENTS PURCHASE PAYMENTS
- ----------------------------- ---------------------
<S> <C>
$ 0 to 499,999.99 4.500%
500,000 to 749,999.99 4.125%
750,000 to 1,000,000.00 3.750%
</TABLE>
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The risk charge is also deducted from each purchase payment when made. This
charge is for guaranteeing the minimum annuity payment amount as shown in the
contract. The risk charge may be as much as 2% of each purchase payment.
Currently, a deduction for this charge is made at the per annum rate of 1.25% of
purchase payments made to the contract. This rate is not guaranteed for future
purchase payments made under the contract and may change based upon our
experience in guaranteeing the annuity payment levels based upon the performance
of the Index 500 Portfolio of the Fund.
A deduction is made from the value of the Sub-Account on a daily basis for our
assumption of mortality and expense risks and for administrative charges under
the contract.
We deduct from the net asset value of the Separate Account an amount, computed
daily, not to exceed an annual rate of 1.40% for mortality and expense risk
guarantees. Currently, our charge for mortality and expense risk guarantees
total .80%. This total represents a charge of .55% for our assumption of
mortality risks and .25% for our assumption of expense risks. We reserve the
right to increase the charge for our assumption of mortality risks to not more
than .80% and our charge for our assumption of expense risks to not more than
.60%. If these charges are increased to this maximum amount, then the total of
the mortality risk and expense risk charges would be 1.40% on an annual basis.
For more information on these charges, please see the heading "Contract
Charges," on page 11 of this Prospectus.
In addition, Advantus Capital Management, Inc. ("Advantus Capital"), one of
our subsidiaries, acts as the investment adviser to the Fund and deducts from
the net asset value of each Portfolio of the Fund a fee for its services which
are provided under an investment advisory agreement. The investment advisory
agreement provides that the fee shall be computed at the annual rate which may
not exceed .40% of the Index 500 Portfolio. The Fund is subject to certain
expenses that may be incurred with respect to its operation and those expenses
are allocated among the Portfolios. For more information on the Fund, see the
prospectus of the Fund which is attached to this Prospectus.
We deduct from the net asset value of the Separate Account an amount, computed
daily, not to exceed an annual rate of .40% for administrative expenses.
Currently, our administrative charge is .15% on an annual basis. For more
information on this item, please see the heading "Contract Charges," on page 11
of this Prospectus.
Deductions for any applicable premium taxes may also be made (currently such
taxes range from 0.0% to 3.5%) depending upon applicable law.
For more information on charges, see the heading "Contract Charges," in this
Prospectus.
CAN YOU SURRENDER THE CONTRACT?
Yes. At any time before annuity payments begin, you can surrender the contract
for its surrender value. The surrender value of the contract shall be its total
annuity value as of the date of surrender plus the amounts deducted from your
purchase payments for sales charges, risk charges and state premium taxes where
applicable.
CAN YOU MAKE WITHDRAWALS FROM THE CONTRACT?
Yes. At any time during the cash value period, you can make withdrawals of the
cash value of the contract, pursuant to your written request. Each withdrawal
must be in an amount of at least $500 or, if the cash value of the contract is
less than that amount, all of the total remaining cash value in the contract
must be withdrawn. Withdrawals are not allowed during the period before annuity
payments begin.
A withdrawal of all or a portion of the cash value of the contract, subject to
the dollar limitations described above, may be made during the "cash value
period" of the contract. The amount of the cash value available for withdrawal
is equal to: (a) times (b) times (c), where (a) is the number of cash value
units credited to the contract, (b) is the current annuity unit value and (c) is
the appropriate cash value factor set forth in a table included in the contract.
The cash value period begins at the annuity commencement date of the contract
and runs for a period approximately equal to the annuitant's life expectancy at
the time the contract is issued. The number of cash value units and the cash
value period are shown on page one of each contract. If you make subsequent
purchase payments or withdrawals a new page one of the contract will be provided
to you.
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When a withdrawal is made during the cash value period, the amount of the
annuity payment to be received by the annuitant after the withdrawal will be
recalculated and the guaranteed minimum annuity payment amount must be
redetermined as well, both of which will be adjusted downward to reflect the
withdrawal of cash values. For a description of the operation of the contract's
provisions on withdrawal and surrender see the heading "Redemptions," found on
page 17 of this Prospectus.
WHEN WITHDRAWALS ARE TAKEN FROM THE CASH VALUE, ALL AMOUNTS RECEIVED BY THE
TAXPAYER ARE TAXABLE AS ORDINARY INCOME IN THE YEAR IN WHICH THE WITHDRAWALS ARE
TAKEN. THOSE AMOUNTS ARE TAXABLE TO THE RECIPIENT WITHOUT REGARD TO THE OWNER'S
INVESTMENT IN THE CONTRACT OR ANY INVESTMENT GAIN IN THE CONTRACT. FOR MORE
INFORMATION ON THESE MATTERS, SEE THE HEADING "FEDERAL TAX STATUS," ON PAGE 20
OF THIS PROSPECTUS. CONSULT WITH YOUR TAX ADVISER.
DO YOU HAVE A RIGHT TO CANCEL THE CONTRACT?
Yes. You may cancel the contract any time within ten days of your receipt of the
contract by returning it to us or your agent.
WHAT ANNUITY OPTIONS ARE AVAILABLE?
The contracts allow for the selection of one of two variable annuity options.
One provides for lifetime variable annuity payments based on the life of a
single annuitant, the other provides for the lifetime variable annuity payments
based upon the combined lives of joint annuitants.
WHAT HAPPENS IF THE ANNUITANT DIES?
If the annuitant, or one of the named joint annuitants dies before annuity
payments begin, we will pay a death benefit to you or the named beneficiary.
This death benefit will be the sum of the contract's total annuity value plus
the amounts deducted from the contract's purchase payments for sales charges,
risk charges and state premium taxes, where applicable.
If the annuitant dies after annuity payments have begun, or after the second
death in the case of joint annuitants, we will pay a death benefit which shall
be equal to the cash value, if any, of the contract as of the date of the
annuitant's death. The death benefit will be paid to the beneficiary named in
the application for the contract or as subsequently changed. In each case, the
beneficiary may elect to receive annuity payments during the remainder of the
cash value period rather than a lump sum benefit. For a description of the
calculation of the amount of those annuity payments, please see the headings
"Annuity Payments and Options" and "Death Benefits" found on pages 14 and 15 of
this Prospectus, respectively.
WHAT VOTING RIGHTS DO YOU HAVE?
Contract owners and annuitants will be able to direct us as to how to vote
shares of the Portfolio held for their contracts in the Sub-Account of the
Separate Account. For more information on this subject, please see the heading
entitled "Voting Rights," found on page 12 of this Prospectus.
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EXPENSE TABLE
The following contract expense information is intended to illustrate the
expenses of the individual, immediate variable annuity contract. All expenses
shown are rounded to the nearest dollar. The information contained in the tables
must be considered with the narrative information which immediately follows them
in this heading.
INDIVIDUAL, IMMEDIATE VARIABLE ANNUITY CONTRACT
CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
SALES CHARGE AS A
CUMULATIVE PERCENTAGE OF
TOTAL PURCHASE PAYMENTS PURCHASE PAYMENTS
- --------------------------------------------- --------------------
<S> <C>
$ 0 to 499,999.99...................... 4.500%
500,000 to 749,999.99...................... 4.125%
750,000 to 1,000,000.00..................... 3.750%
</TABLE>
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<TABLE>
<S> <C>
Risk Charge....................................... 1.25%
------
Total Contract Expenses (assuming maximum 5.75%
sales charge)...............................
------
------
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
Mortality and Expense Risk Fees*.............. 0.80%
Administrative Charge*........................ 0.15%
------
Total Separate Account Annual Expenses.... 0.95%
------
------
ADVANTUS SERIES FUND, INC. INDEX 500 PORTFOLIO
ANNUAL EXPENSES
(as a percentage of average net assets)
Index 500 Portfolio
Management Fees............................... .40%
Other Expenses................................ .05%
-----
Total Index 500 Portfolio Annual .45%
Expenses................................
-----
-----
EXAMPLE:
</TABLE>
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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Whether or not you surrender your contract at
the end of the applicable time period:
You would pay the following expenses on a
$10,000 investment as of the end of the
period indicated, assuming a 5% annual
return on assets:....................... $ 709 $ 993 $ 1,297 $ 2,158
</TABLE>
*Under the terms of the contract, total mortality and expense risk fees may be
increased to as much as 1.40% (provided any necessary regulatory approvals are
obtained) and the administrative charge may be increased to as much as .40%.
These figures are based on the assumption that the contract will accumulate
value prior to the annuity payment commencement date at a 5% annual return on
assets for one, three, five and ten years, respectively. The maximum period
allowable between the issuance of a contract and the commencement of annuity
payments is one year.
The tables shown above are to assist a contract owner in understanding the
costs and expenses that a contract will bear directly or indirectly. For more
information on contract costs and expenses, see the Prospectus heading "Contract
Charges" and the information immediately following. The table does not reflect
deductions for any applicable premium taxes which may be made from each purchase
payment depending upon applicable law. The examples contained in this table
should not be considered a representation of past or future expenses. Actual
expenses may be greater or less than those shown.
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CONDENSED FINANCIAL INFORMATION
The financial statements of Minnesota Mutual Variable Annuity Account and of The
Minnesota Mutual Life Insurance Company may be found in the Statement of
Additional Information. No condensed financial information is presented as the
variable annuity contract described in this Prospectus has no accumulation units
or associated information.
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PERFORMANCE DATA
From time to time the Variable Annuity Account may publish advertisements
containing performance data relating to the Sub-Account. Performance data will
consist of average annual total return quotations for recent one-year and
five-year periods and for the period since June 1, 1987, the date the
Sub-Account first became available pursuant to other registration statements of
the Variable Annuity Account. Performance data may also include cumulative total
return quotations for the period since June 1, 1987 or average annual total
return quotations for periods other than as described above. Performance figures
are based on historical performance information on the assumption that the
contracts offered by this Prospectus were available for sale on June 1, 1987 and
could accumulate value prior to the
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commencement of annuity payments for periods in excess of one year. The figures
are not intended to suggest that such performance will continue in the future.
Average annual total return figures are the average annual compounded rates of
return required for an initial investment to equal its total annuity value at
the end of the period. The total annuity value will reflect the sales and risk
charges deducted from purchase payments as well as all other contract charges.
Cumulative total return figures are the percentage changes between the value of
an initial investment and its total annuity value at the end of the period.
Cumulative total return figures will not reflect the deduction of any amounts
from purchase payments. Cumulative total return figures will always be
accompanied by average annual total return figures. More detailed information on
the computations is set forth in the Statement of Additional Information.
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GENERAL DESCRIPTIONS
A. THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY
We are a mutual life insurance company organized in 1880 under the laws of
Minnesota. Our home office is at 400 Robert Street North, St. Paul, Minnesota
55101-2098, telephone: (612) 665-3500. We are licensed to do a life insurance
business in all states of the United States (except New York where we are an
authorized reinsurer), the District of Columbia, Canada, Puerto Rico and Guam.
B. SEPARATE ACCOUNT
A separate account called the Minnesota Mutual Variable Annuity Account was
established on September 10, 1984, by our Board of Trustees in accordance with
certain provisions of the Minnesota insurance law. The Separate Account is
registered as a "unit investment trust" with the Securities and Exchange
Commission (the "Commission") under the Investment Company Act of 1940 (the
"1940 Act"), but such registration does not signify that the Securities and
Exchange Commission supervises the management, or the investment practices or
policies, of the Separate Account. The Separate Account meets the definition of
a "separate account" under the federal securities laws.
The Minnesota law under which the Separate Account was established provides
that the assets of the Separate Account shall not be chargeable with liabilities
arising out of any other business which we may conduct, but shall be held and
applied exclusively to the benefit of the holders of those variable annuity
contracts for which the Separate Account was established. The investment
performance of the Separate Account is entirely independent of both the
investment performance of our General Account and of any other separate account
which we may have established or may later establish. All obligations under the
contracts are general corporate obligations of Minnesota Mutual.
The Separate Account has one Sub-Account to which contract owners may allocate
purchase payments to the contracts described in this Prospectus. The only
Sub-Account which is available to the contract is that which invests in the
Index 500 Portfolio.
C. ADVANTUS SERIES FUND, INC.
The Variable Annuity Account currently invests exclusively in Advantus Series
Fund, Inc. (the "Fund"), a mutual fund of the series type which is advised by
Advantus Capital Management, Inc. Prior to May 1, 1997, the name of the Fund was
"MIMLIC Series Fund, Inc." On January 14, 1997, the Fund's Board of Directors
approved an amendment of the Fund's Articles of Incorporation for the purpose of
changing the name of the Fund to "Advantus Series Fund, Inc." effective May 1,
1997. The purpose of the name change is to provide the Fund with a more
distinctive name which may provide greater visibility and name recognition,
which reflects the name of its adviser, and which may provide additional
marketing opportunities for variable contracts investing in shares of the Fund.
The change in the Fund's name will not result in any change in investment
objectives, policies or practices for the Fund or any of its Portfolios. The
Fund is registered with the Securities and Exchange Commission as a diversified,
open-end management investment company, but such registration does not signify
that the Commission supervises the management, or the investment practices or
policies, of the Fund. The Fund issues its shares, continually and without sales
charge, only to us and our separate accounts, which currently include the
Variable Annuity Account, the Group Variable Annuity Account, Variable Fund D,
the Variable Life Account and the Variable Universal Life Account. The Fund may
be made available to other separate accounts as new products are
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<PAGE>
developed and may be used as the underlying investment medium for separate
accounts of the Northstar Life Insurance Company, a wholly-owned life insurance
subsidiary of ours domiciled in the state of New York. Shares are sold and
redeemed at net asset value. In the case of a newly issued contract, purchases
of shares of the Portfolio of the Fund in connection with the first purchase
payment will be based on the values next determined after issuance of the
contract by us. Redemptions of shares of the Portfolio of the Fund are made at
the net asset value next determined after we receive a request for transfer,
partial withdrawal or surrender at our home office. In the case of outstanding
contracts, purchases of shares of the Portfolio of the Fund for the Variable
Annuity Account are made at the net asset value of such shares next determined
after receipt by us of contract purchase payments.
The Fund's investment adviser is Advantus Capital Management, Inc. ("Advantus
Capital"). Advantus Capital is a wholly-owned subsidiary of MIMLIC Asset
Management Company ("MIMLIC Management") which, prior to May 1, 1997, served as
investment adviser to the Fund. MIMLIC Management is a wholly-owned subsidiary
of Minnesota Mutual. The same portfolio managers and other personnel who
previously provided investment advisory services to the Fund through MIMLIC
Management continue to provide the same services through Advantus Capital. It
acts as an investment adviser to the Fund pursuant to an advisory agreement.
The only Portfolio of the Fund which is available for investment by the
contract described in this Prospectus is the Index 500 Portfolio.
A prospectus for the Fund is attached to this Prospectus. A person should
carefully read the Fund's prospectus before investing in the contract.
D. ADDITIONS, DELETIONS OR SUBSTITUTIONS
We retain the right, subject to any applicable law, to make substitutions with
respect to the investments of the Sub-Accounts of the Separate Account. If
investment in a fund should no longer be possible or if we determine it becomes
inappropriate for contracts of this class, we may substitute another fund for a
sub-account. Substitution may be with respect to existing total annuity values
and cash values, future purchase payments and future annuity payments.
We reserve the right to transfer assets of the separate account to another
separate account. If this type of transfer is made, the term separate account,
as used in the contract, shall then mean the separate account to which the
assets were transferred.
We may also establish additional Sub-Accounts in the Separate Account and we
reserve the right to add, combine or remove any Sub-Accounts of the Separate
Account. Each additional Sub-Account will purchase shares in a new portfolio or
mutual fund. Such Sub-Accounts may be established when, in our sole discretion,
marketing, tax, investment or other conditions warrant such action. Similar
considerations will be used by us should there be a determination to eliminate
one or more of the Sub-Accounts of the Separate Account. The addition of any
investment option will be made available to existing contract owners on such
basis as may be determined by us.
We also reserve the right, when permitted by law, to de-register the Separate
Account under the Investment Company Act of 1940 (the "1940 Act"), to restrict
or eliminate any voting rights of the contract owners, and to combine the
Separate Account with one or more of our other separate accounts.
Shares of the Portfolios of the Fund are also sold to other of our separate
accounts, which are used to receive and invest premiums paid under our variable
life policies. It is conceivable that in the future it may be disadvantageous
for variable life insurance separate accounts and variable annuity separate
accounts to invest in the Fund simultaneously. Although neither Minnesota Mutual
nor the Fund currently foresees any such disadvantages either to variable life
insurance policy owners or to variable annuity contract owners, the Fund's Board
of Directors intends to monitor events in order to identify any material
conflicts between such policy owners and contract owners and to determine what
action, if any, should be taken in response thereto. Such action could include
the sale of Fund shares by one or more of the separate accounts, which could
have adverse consequences. Material conflicts could result from, for example,
(1) changes in state insurance laws, (2) changes in federal income tax laws, (3)
changes in the investment management of any of the Portfolios of the Fund, or
(4) differences in voting instructions between those given by policy owners and
those given by contract owners.
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CONTRACT CHARGES
Under this contract, there are certain deductions for charges which are made
from purchase payments and other charges which are made directly to the Separate
Account. Deductions from purchase payments are made for sales charges, risk
charges and state premium taxes, where applicable. Deductions for the mortality
risk charge, expense risk charge and the administrative charge are all deducted
on each valuation date from the Separate Account.
A. SALES CHARGES
A sales charge is deducted from the purchase payments using the percentages
shown in the table below:
<TABLE>
<CAPTION>
SALES CHARGE AS A
CUMULATIVE TOTAL PURCHASE PERCENTAGE OF PURCHASE
PAYMENTS PAYMENTS
- ----------------------------- ----------------------
<S> <C>
$ 0 to 499,999.99 4.500%
500,000 to 749,999.99 4.125%
750,000 to 1,000,000.00 3.750%
</TABLE>
The applicable percentage from the chart will be based on the total cumulative
purchase payments to the date of payment, including the new purchase payment. In
addition, for purchases of multiple contracts made by an identical owner or
owners at different times, purchase payments made under all contracts will be
aggregated solely for the purpose of determining the sales charge applicable to
those purchase payments made to later contracts. For additional information on
multiple contracts, see the heading "Federal Tax Status," on page 20 of this
Prospectus.
These sales charges may be waived in whole or in part in certain circumstances
where sales expenses are not paid at the time of sale to registered
representatives and broker-dealers responsible for the sale of the contracts or
where the contract is sold in anticipation of reduced expenses in group or
group-type situations. No elimination or reduction of the sales charge will be
permitted where that reduction or elimination would be unfairly discriminatory
to any person or class of persons.
B. RISK CHARGE
A risk charge is also deducted from each purchase payment for our guarantee of
the minimum annuity payment amount shown on page one of the contract and
described herein under the heading "The Guaranteed Minimum Annuity Payment
Amount", on page 15 of this Prospectus. The risk charge may be as much as 2% of
each purchase payment. Currently, a deduction for this charge is made at the per
annum rate of 1.25% of purchase payments made to the contract. This rate is not
guaranteed for future purchase payments made under the contract and may change
based upon our experience in guaranteeing the annuity payment levels based upon
the performance of the Portfolio.
If this deduction proves to be insufficient to cover the actual cost of the
risk assumed by us in providing a guaranteed minimum as to the amount of each
variable annuity payment made under a contract, then we will absorb the
resulting losses and make sufficient transfers to the Separate Account from our
General Account, where appropriate. Conversely, if these deductions prove to be
more than sufficient after the establishment of any contingency reserves deemed
prudent or required by law, any excess will be profit (or "surplus") to us.
C. MORTALITY AND EXPENSE RISK CHARGES
We assume the mortality risk under the contracts by our obligation to continue
to make scheduled annuity payments, determined in accordance with the annuity
rate tables and other provisions contained in the contracts, to each annuitant
regardless of how long that annuitant lives or all annuitants as a group live.
This assures an annuitant that neither the annuitant's own longevity nor an
improvement in life expectancy generally will have an adverse effect on the
scheduled annuity payments received under the contract. Actual mortality results
incurred by us shall not adversely affect any payments or values under this
contract.
We assume an expense risk by assuming the risk that deductions provided for in
the contracts for the sales and administrative expenses will be adequate to
cover our actual expenses incurred. Actual expense results incurred by us shall
not adversely affect any payments or values under this contract.
For assuming these risks, we currently make a deduction from the net asset
value of the Separate Account of an amount, computed daily, equal to an annual
rate of .80% for mortality and expense risk guarantees. This is composed of a
deduction of 0.55% for the mortality expense risk charge and 0.25% for the
expense risk charge. We reserve the right to increase the charge for the
assumption of the mortality risk to 0.80% and the assumption of expense risks to
0.60%. If these charges are increased to the maximum amount, then the
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<PAGE>
total for the mortality risk and expense risk charges would be 1.40% on an
annual basis.
For a discussion of how these charges are applied in the calculation of the
annuity unit value, please see the discussion entitled "Purchase Payments and
Value of the Contract" on page 16.
If these deductions prove to be insufficient to cover the actual cost of the
expense and mortality risks assumed by us, then we will absorb the resulting
losses and make sufficient transfers to the Separate Account from our General
Account, where appropriate. Conversely, if these deductions prove to be more
than sufficient after the establishment of any contingency reserves deemed
prudent or required by law, any excess will be profit (or "surplus") to us. Some
or all of such profit may be used to cover any distribution costs not recovered
through the sales charge.
D. ADMINISTRATION CHARGE
We perform all administrative services relative to the contract. These services
include the review of applications for compliance with our issue criteria, the
preparation and issue of the contract, the receipt of purchase payments,
forwarding amounts to the Fund for investment, the calculation of the guaranteed
minimum annuity payment amount, the preparation and mailing of periodic reports
and the performance of other services.
As consideration for providing these services, we currently make a deduction
from the Separate Account at the annual rate of 0.15%. We reserve the right to
increase this charge, based upon our experience with these contracts, to a
maximum which shall not exceed the amount of 0.40%.
- ------------------------------------------------------------------------
VOTING RIGHTS
We will vote fund shares held in the Separate Account at the regular and special
meetings of the Fund. We will vote shares attributable to contracts in
accordance with instructions received from the annuitant or annuitants or,
during the surrender period of the contract, from the owner, if different from
the annuitants. In the event no instructions are received from the person or
persons entitled to direct such a vote, we will vote shares attributable to that
contract in the same proportion as shares of the Portfolio held by the
Sub-Account for which instructions have been received. If, however, the 1940
Act, any regulation under that Act, or any interpretations of that Act or the
regulations under it, should change so that we may be allowed to vote shares in
our own right, then we may elect to do so.
The number of votes will be determined by dividing the total annuity value for
each contract allocated to the Sub-Account by the net asset value per share of
the underlying Fund shares held by that Sub-Account. The votes attributable to
any particular contract will decrease as the reserves decrease. In determining
any voting interest, fractional shares will be recognized.
We will notify each person entitled to vote of a Fund shareholders' meeting if
the shares held for his or her contract may be voted at that meeting. We will
also provide proxy materials and a form of instruction to facilitate provision
of voting instructions.
- ------------------------------------------------------------------------
DESCRIPTION OF THE CONTRACTS
A. GENERAL PROVISIONS
1. TYPES OF CONTRACTS OFFERED
(a) Variable Annuity Contract
The contract is an individual, immediate, variable annuity contract issued
by us which provides for scheduled annuity payments on a monthly, quarterly,
semi-annual or annual basis. These payments may begin immediately and must
begin on a date within 12 months after the issue date of the contract.
Purchase payments received by us under a contract are allocated to the
Separate Account. In the Separate Account, your purchase payments are put
into a Sub-Account which are then invested in the Portfolio.
This type of contract may be used in connection with a pension or profit
sharing plan under which plan contributions have been accumulating. It may
be used in connection with a plan which has previously been funded with
insurance or annuity contracts. It may also be purchased by individuals not
as a part of any qualified plan. The contract provides for a variable
annuity which is paid on the basis of a single or joint life annuity. Once
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<PAGE>
made, the annuity option elected may not be changed.
2. ISSUANCE OF CONTRACTS
The contracts are issued to you, the contract owner named in the application.
The owner of the contract may be the annuitant or someone else and the contract
may be owned by two persons jointly.
3. MODIFICATION OF THE CONTRACTS
A contract may be modified at any time by written agreement between you and us.
However, no such modification will adversely affect the rights of an annuitant
under the contract unless the modification is made to comply with a law or
government regulation. Such a modification will be in writing. You will have the
right to accept or reject the modification, except in circumstances where, when
the contract is used in a tax-qualified arrangement, and the change is required
to conform the contract with tax laws or regulations.
4. ASSIGNMENT
The annuitant, or the joint annuitants, can direct or assign the annuity
payments to be made under the contract so that they are paid to someone else. We
will not be bound by any assignment until we have recorded a written request of
it at our home office. We are not responsible for the validity of any
assignment. An assignment will not apply to any payment or action before it was
recorded. Any claim made by an assignee will be subject to proof of the
assignee's interest and the extent of the assignment.
If the contract is sold in connection with a tax-qualified program (including
employer-sponsored employee pension benefit plans, tax-sheltered annuities and
individual retirement annuities), your or the annuitant's interest may not be
assigned, sold, transferred, discounted or pledged as collateral for a loan or
as security for the performance of an obligation or for any other purpose. To
the maximum extent permitted by law, benefits payable under the contract shall
be exempt from the claims of creditors.
5. LIMITATIONS ON PURCHASE PAYMENTS
Purchase payments must be made at our home office. Our home office is at 400
Robert Street North, St. Paul, Minnesota 55101-2098. When we receive a purchase
payment from you at our home office, we will send you a confirmation statement
and an updated page one for the contract.
A purchase payment in an amount of at least $10,000 will be required in order
for us to issue the contract. A contract will not be issued if an initial
purchase payment is made which is less than that amount.
After the contract has been issued, you may make additional purchase payments,
but only during the cash value period of the contract as shown on page one.
These additional purchase payments may be made only while the annuitant is
alive. Additional purchase payments must be in an amount of at least $5,000. We
will waive this contract provision for amounts which are received after the
contract effective date as part of an integrated rollover or Section 1035
transaction. When additional purchase payments are made, those purchase payments
will not result in a recalculation of the owner's investment in the contract and
a determination of a new exclusion amount. For more information on these
matters, see the heading "Federal Tax Status," in this Prospectus. You may also
wish to consult with your tax adviser. WE RESERVE THE RIGHT TO SUSPEND THE SALE
OF THESE CONTRACTS AND TO TERMINATE YOUR ABILITY TO MAKE ADDITIONAL PURCHASE
PAYMENTS INTO THE CONTRACT.
You may not make total purchase payments which exceed the amount of $1,000,000
except with our prior consent.
Some states will limit these contracts to a single purchase payment and
contracts issued there are so limited.
There may be limits on the maximum contributions to retirement plans that
qualify for special tax treatment.
6. DEFERMENT OF PAYMENT
Whenever any payment under a contract is to be made in a single sum, payment
will be made within seven days after the date such payment is called for by the
terms of the contract, except as payment may be subject to postponement for:
(a) any period during which the New York Stock Exchange is closed other than
customary weekend and holiday closings, or during which trading on the
New York Stock Exchange is restricted, as determined by the Commission;
(b) any period during which an emergency exists as determined by the
Commission as a result of which it is not reasonably practical to
dispose of securities in the Fund or to fairly
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<PAGE>
determine the value of the assets of the Fund; or
(c) such other periods as the Commission may by order permit for the
protection of the contract owners.
7. PARTICIPATION IN DIVISIBLE SURPLUS
The contracts participate in our divisible surplus, according to the annual
determination of our Board of Trustees as to the portion, if any, of our
divisible surplus which has accrued on the contracts.
No assurance can be given as to the amount of divisible surplus, if any, that
will be distributable under these contracts in the future. Such amount may arise
if mortality and expense experience is more favorable than assumed. When any
distribution of divisible surplus is made, it will take the form of the purchase
of additional annuity units.
B. ANNUITY PAYMENTS AND OPTIONS
1. ANNUITY PAYMENTS
Variable annuity payments are determined on the basis of (a) the mortality table
specified in the contract, which reflects the age of the annuitant or the joint
annuitants, and (b) the investment performance of the Sub-Account. The amount of
the variable annuity payments will not be affected by adverse mortality
experience or by an increase in our expenses in excess of the expense deductions
provided for in the contract. The annuitant will receive the value of a fixed
number of annuity units on each scheduled annuity payment date. The value of
such units, and thus the amount of each scheduled annuity payment will reflect
investment gains and losses and investment income of the Portfolio. The amount
of the annuity payment may increase or decrease from one annuity payment date to
the next unless affected by the guaranteed minimum annuity payment amount.
2. ELECTING THE ANNUITY COMMENCEMENT DATE
The contracts are issued as immediate annuities on the contract date. When you
purchase a contract, you must indicate the annuity commencement date which, in
any event, must be within 12 months from the contract date. Some jurisdictions
may restrict this time limit to a shorter period.
An annuity payment may begin on any day of the month. Annuity payments may be
received on a monthly, quarterly, semi-annual or annual basis.
Benefits under retirement plans that qualify for special tax treatment
generally must commence no later than the April 1 following the year in which
the participant reaches age 70 1/2 and are subject to other conditions and
restrictions.
3. ANNUITY FORMS
The contracts provide for two lifetime annuity forms, a life annuity or a joint
and last survivor annuity. Each annuity payment option is available only as a
variable annuity. No additional optional annuity forms are provided or allowed
under the contracts.
LIFE ANNUITY
This is a scheduled annuity payable during the lifetime of the annuitant.
Annuity payments terminate with the last scheduled payment preceding the death
of the annuitant if the annuitant's death occurs after the cash value period has
expired. If the annuitant dies during the cash value period, the beneficiary
will be paid a death benefit that permits the beneficiary to elect to continue
receiving payments until the end of the cash value period or to withdraw some or
all of the cash value amount. Annuity payment amounts payable as a death benefit
will be reduced for any cash value withdrawals received by the beneficiary.
JOINT AND LAST SURVIVOR ANNUITY
This is a scheduled annuity payable during the joint lifetime of the annuitant
and a designated joint annuitant and continuing thereafter during the remaining
lifetime of the survivor. If the last surviving annuitant dies during the cash
value period, the beneficiary will be paid a death benefit that permits the
beneficiary to elect to continue receiving payments until the end of the cash
value period or to withdraw some or all of the cash value. Annuity payment
amounts payable as a death benefit will be reduced for any cash value
withdrawals received by the beneficiary. If this option is elected, the contract
and payments shall then be the joint property of the annuitant and the
designated joint annuitant.
The amount of the first scheduled payment depends on the annuity form elected
and the age of the annuitant and the joint annuitant, if any.
4. DETERMINATION OF AMOUNT OF VARIABLE ANNUITY PAYMENTS
Unless annuity payments are based on the guaranteed minimum annuity payment
amount, the dollar amount of each variable annuity
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<PAGE>
payment is equal to the number of annuity units credited to the contract
multiplied by the annuity unit value as of the due date of the payment. A number
of annuity units is credited at issuance of the contract based upon the initial
annuity payment amount attributable to the initial purchase payment received for
the contract. The number of annuity units to be credited is determined by
dividing the initial annuity payment amount by the annuity unit value as of the
contract date. The number of annuity units remains unchanged except as adjusted
for additional purchase payments, cash value withdrawals or an annuitant's
death. For further information on the crediting of annuity units, see "Crediting
Annuity and Cash Value Units" below.
The initial annuity payment amount is determined by applying the purchase
payment, net of deductions, to the appropriate annuity purchase rate per $1,000.
Deductions from purchase payments may include premium taxes imposed by certain
states depending upon the type of plan involved. Where applicable, these taxes
currently range from 0% to 3.5%.
The initial annuity payment amount depends on the annuity form elected and
upon the adjusted age of the annuitant and the joint annuitant, if any. A
formula for determining the adjusted age of persons receiving contract payments
is contained in the contract. The initial annuity payment amount is also based
upon annuity payment purchase rate tables which assume an interest rate of 4.5%
per annum. The 4.5% interest rate assumed in the variable annuity determination
will produce level annuity payments if the net investment performance remains
constant at 4.5% per year. Subsequent payments will decrease, remain the same or
increase depending upon whether the actual net investment performance is less
than, equal to, or greater than 4.5%.
5. AMOUNT OF SECOND AND SUBSEQUENT SCHEDULED ANNUITY PAYMENTS
Unless annuity payments are based on the guaranteed minimum annuity payment
amount, the dollar amount of the second and later variable annuity payments is
equal to the number of annuity units determined for the Sub-Account times the
annuity unit value for that Sub-Account as of the due date of the payment. This
amount may increase or decrease from payment to payment.
6. THE GUARANTEED MINIMUM ANNUITY PAYMENT AMOUNT
You will receive at least the guaranteed minimum annuity payment amount
specified in your contract. Each variable annuity payment will vary upwards or
downwards in accordance with the performance of the Sub-Account unless it would
be less than the guaranteed minimum annuity payment amount. Under the terms of
the contract's guarantee provisions, at each annuity payment date, we will pay
the annuitant or annuitants the greater of: (a) the annuity payment amount
determined by multiplying the number of annuity units times the annuity unit
value; or (b) the guaranteed minimum annuity payment amount currently in force
for the contract.
We guarantee that variable annuity payments will always be at least 85% of the
initial variable annuity payment amount. This guaranteed amount is determined on
the contract issue date and shown on page one of the contract. If an additional
purchase payment is made, we will guarantee that variable annuity payments will
always be at least 85% of the annuity amount attributable to that additional
purchase payment, plus the amount already guaranteed at the time of that
purchase payment. Withdrawals of cash value amounts under the contract will
reduce the guaranteed annuity payment amount by the same proportion that the
withdrawal reduces the number of annuity units under the contract.
C. DEATH BENEFITS
The contracts provide that in the event of the death of the annuitant or a joint
annuitant before the annuity commencement date, a death benefit will be paid to
you or, if applicable, to your beneficiary. This death benefit will be paid when
we receive due proof, satisfactory to us, of the death at our home office. This
death benefit will be the sum of the total annuity value of the contract plus
the amounts deducted from your purchase payments for sales charges, risk charges
and state premium taxes where applicable. Death proceeds will be paid in a
single sum to the beneficiary designated to receive a lump sum benefit. Payment
will be made within seven days after we receive due proof of death. Except as
noted below, the entire interest in the contract must be distributed within five
years of an owner's death.
The contracts provide that in the event of the death of the annuitant or the
second joint annuitant after annuity payments have begun, we will pay the cash
value of the contract, if any,
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<PAGE>
as a lump sum death benefit. The beneficiary will be the person or persons named
in the application for this contract or as subsequently changed by you. In that
event, we will pay the death benefit to the beneficiary named in your last
change of beneficiary request as provided for in the contract.
If you are not an annuitant and you die, or if any joint owner who is not an
annuitant dies, a death benefit will be paid. This death benefit will be the
same amount as the amount that would be paid on the death of the annuitant or
joint annuitant and will be paid out in the same manner, except that if death
occurs before the annuity payment commencement date, such death benefit will be
paid out within five years of the date of death. On the payment of such a death
benefit in the event of the death of the owner, no other contract benefits are
then payable.
You can file a written request with us to change the beneficiary. Your written
request will not be effective until it is recorded in our home office records.
After it has been recorded, it will take effect as of the date you signed the
request. However, if a death occurs before the request has been recorded, the
request will not be effective as to any death proceeds we have paid before the
request was recorded in our home office. If a beneficiary dies, that
beneficiary's interest in a contract ends with his or her death. Only those
beneficiaries who survive will be eligible to share in the amount payable to the
beneficiary at the annuitant's death. If there is no surviving beneficiary upon
the death of the annuitant, any remaining value of death benefit payable to the
beneficiary will be paid to the annuitant's estate.
If the death benefit is payable after annuity payments have begun, the
beneficiary may elect to receive annuity payments during the remainder of the
cash value period rather than a lump sum benefit. However, the number of annuity
units will be set as a number equal to the number of cash value units as of the
date of the annuitant's death. The annuity payments to the beneficiary will
terminate at the end of the cash value period and the guaranteed minimum annuity
payment amount will be adjusted in proportion to any change in the number of
annuity units. The new guaranteed minimum annuity payment amount will be equal
to the guaranteed minimum annuity payment amount just prior to the annuitant's
death, multiplied by the number of annuity units after the annuitant's death
divided by the number of annuity units prior to the annuitant's death.
If the beneficiary elects to continue the annuity payments, the cash value
will also continue on the beneficiary's behalf as part of the death benefit.
This allows the beneficiary to withdraw any or all of the cash value available
at any time during the remaining cash value period. As with cash value
withdrawals while the annuitant is alive, cash value withdrawals by the
beneficiary after the annuitant's death will reduce future annuity payments and
the guaranteed minimum annuity payment amount based on the reduced interest in
the Separate Account as described under the heading "Withdrawals and Surrender"
on page 17 of this Prospectus.
Death benefits payable after the annuitant's death must be distributed at
least as rapidly as under the method elected by the annuitant or annuitants.
D. PURCHASE PAYMENTS AND VALUE OF THE CONTRACT
1. CREDITING ANNUITY AND CASH VALUE UNITS
Application forms are completed by the applicant and forwarded to our home
office when the contract is originally issued. We will review each application
form submitted to us for compliance with our issue criteria and, if it is
accepted, a contract will be issued. The initial purchase payment for the
contract must be an amount of at least $10,000.
If the initial purchase payment is accompanied by an incomplete application,
that purchase payment will not be credited until the valuation date coincident
with or next following the date a completed application is received and
accepted. We will offer to return the initial purchase payment accompanying an
incomplete application if it appears that the application cannot be completed
within five business days.
Purchase payments will be credited to the contract in the form of annuity
units and cash value units. Each purchase payment is credited on the valuation
date coincident with or next following the date such purchase payment is
received by us at our home office, except for the initial purchase payment. The
number of annuity and cash value units credited with respect to each purchase
payment is determined by dividing the initial annuity payment amount
attributable to the purchase payment by the then current annuity unit value for
the Sub-Account on the date the purchase payment is credited.
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<PAGE>
The net amount of each purchase payment, after deductions, will be applied to
purchase an additional initial annuity payment amount at least as great as that
determined by using the guaranteed annuity payment purchase rate table for new
purchase payments included in the contract. The guaranteed annuity payment
purchase rates used for new purchase payments as shown in the contract are based
on a 4.5% assumed interest rate and Individual Annuity 1983 Table A mortality
rates projected to the terminal age of the table using projections scale G. If,
when a purchase payment is made, we are using a table of annuity payment
purchase rates for new purchase payments for this class of contract which would
result in a larger initial annuity payment, we will use that table instead.
The number of annuity and cash value units so determined shall not be changed
by any subsequent change in the value of a unit, but the value of a unit will
vary from valuation date to valuation date to reflect the investment experience
of the Sub-Account.
We will determine the value of annuity units on each day on which the
Portfolio of the Fund is valued.
Cash value units will be credited for each purchase payment in a number equal
to the number of annuity units credited for each respective purchase payment.
2. TOTAL ANNUITY VALUE OF THE CONTRACT
The total annuity value of the contract at any time is the present value of the
future annuity payments expected to be made under the contract. The total
annuity value represents your total interest in the Separate Account.
When the annuitant is alive, the total annuity value is equal to the sum of
the number of cash value units, multiplied by the annuity unit value, multiplied
by the appropriate factor from the total annuity value factor table(s) included
in the contract; plus the number of annuity units in excess of the number of
cash value units, multiplied by the annuity unit value, multiplied by the
appropriate factor from the total annuity value factor table(s) included in the
contract.
After the annuitant's death, if the beneficiary elects to continue annuity
payments for the remainder of the cash value period, the total annuity value
will be equal to the cash value at all times during the cash value period.
3. VALUE OF THE ANNUITY UNIT
The value of an annuity unit for the Sub-Account is determined on each valuation
date by using the product of: (a) the value of an annuity unit on the preceding
valuation date, (b) the net investment factor for the Sub-Account for the
valuation period ending on the current valuation date, and (c) a daily factor
(.999879) which adjusts the value for the effect in the valuation period of the
4.5% annual assumed interest rate that has already been built into each
contract's total annuity value, cash value and annuity payment calculations.
4. NET INVESTMENT FACTOR FOR EACH VALUATION PERIOD
The net investment factor is an index used to measure the investment performance
of a Sub-Account from one valuation period to the next. For the Sub-Account, the
net investment factor for a valuation period is the gross investment rate for
the valuation period, less a deduction for the mortality and expense risk
charges and the administrative charge at the current rate of 0.95% per annum.
The gross investment rate is equal to: (1) the net asset value of a Portfolio
share determined at the end of the current valuation period, plus (2) the per
share amount of any dividend or capital gain distribution by the Portfolio if
the "ex-dividend" date occurs during the current valuation period, divided by
(3) the net asset value of a Portfolio share determined at the end of the
preceding valuation period. The gross investment rate may be positive or
negative.
E. REDEMPTIONS
1. WITHDRAWALS AND SURRENDER
Withdrawals are not allowed prior to the "cash value period" which commences
when annuity payments begin. At any time during the cash value period of the
contract, you may request a withdrawal from the cash value of the contract. Each
withdrawal must be in an amount of at least $500 or, if the cash value of the
contract is less than that amount, the total of any remaining cash value in the
contract must be withdrawn. Other restrictions on withdrawals may be present
when the contract is used in conjunction with tax qualified programs. See the
heading "Federal Tax Status," on page 20 in this Prospectus. You must make a
written request for any withdrawal or surrender.
You may surrender the contract at any time before the annuity payment
commencement date. The annuity payment commencement date is the day the first
annuity payment is made under the contract and it is the beginning of the cash
value period. If you make a surrender request, you will receive the contract's
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surrender value. The surrender value will be determined on the valuation date
coincident with or next following the day your written request is received at
our home office.
Withdrawal or surrender proceeds will be paid in a single sum within seven
days of our receipt of your written request.
(a) Determination of Surrender Value
The surrender value of a contract is the total annuity value of the contract
as of the date of surrender plus the amounts deducted from your purchase
payments for sales charges, risk charges and state premium taxes where
applicable. As this surrender value is available only until the time the
first annuity payment is made under the contract, this provision has the
effect of providing a return of your contract's charges, the net purchase
payments, plus or minus investment gains or losses and less Separate Account
charges, up until the time of that payment. As the maximum period of
deferral is 12 months after the Contract Date, this provision offers a
benefit which is limited in time.
(b) Determination of Cash Value
The cash value of the contract is not guaranteed. The cash value decreases
as annuity payments are made, but also increases or decreases based on the
performance of the Sub-Account of the Separate Account given by the relative
change in the annuity unit value.
A withdrawal of all or a portion of the cash value of the contract, subject
to the dollar limitations described above, may be made during the "cash
value period" of the contract. The amount of the cash value available for
withdrawal is equal to: (a) times (b) times (c), where (a) is the number of
cash value units credited to the contract, (b) is the current annuity unit
value and (c) is the appropriate cash value factor set forth in a table in
the contract. The cash value period begins at the annuity payment
commencement date of the contract and runs for a period approximately equal
to the annuitant's life expectancy at the time the contract is issued. The
number of cash value units and the cash value period are shown on page one
of the contract. A new page one will be provided to you if you make
subsequent purchase payments or withdrawals. This will inform you of the
number of cash value units remaining in your contract.
The number of cash value units credited under a contract is based on
purchase payments to, and cash withdrawals from, the contract. On the issue
date of the contract the number of cash value units will be equal to the
number of annuity units credited to the contract. (The crediting of annuity
units is discussed under the heading "Crediting Annuity and Cash Value
Units" found on page 16 in this Prospectus.) Normally, withdrawals will
reduce both the number of cash value units and the number of annuity units
but at different rates, so that after a withdrawal the number of cash value
units will no longer equal the number of annuity units. For a description of
the manner in which withdrawals affect the cash value of the contract, see
"Effect of Withdrawals on Cash Value," below.
(c) Effect of Withdrawals on Cash Value
A withdrawal during the cash value period reduces the number of cash value
units of the contract. The new number of cash value units after a withdrawal
is equal to the number of cash value units just prior to the withdrawal,
multiplied by the cash value prior to withdrawal, less the cash value
withdrawn, divided by the cash value prior to withdrawal. Cash value units
are reduced on a last in, first out basis. Therefore, if additional purchase
payments were made to the contract after its issue, the value of the cash
value units attributable to those payments will be valued and cashed out as
withdrawals first, running backwards in time until the values attributable
to the initial purchase payment are reached.
(d) Annuity Payment Determinations after Withdrawals
A cash value withdrawal will affect future annuity payments by reducing the
number of annuity units, the basis for determining the amount of such
payments. The new number of annuity units following a cash value withdrawal
will depend on whether or not the annuitant is alive at the time the cash
value withdrawal is made. If the annuitant is not alive, in other words if
the withdrawal is made by the beneficiary as part of the death benefit, the
new number of
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annuity units will equal the number of cash value units following the
withdrawal. At the death of the annuitant, the number of annuity units is
adjusted, if necessary, to equal the then number of cash value units, and
this equivalency is continued through any subsequent cash value withdrawals.
If the annuitant is alive at the time of the withdrawal, the adjustment of
subsequent annuity payments that occurs after a withdrawal is designed to
produce a new level of annuity payments--assuming a rate of return exactly
equal to 4.5%--over the remaining lifetime of the contract, including the
period after the end of the cash value period. After such a withdrawal,
there will be less cash value to support benefit payments during the cash
value period, so that the same level of annuity payments as before the
withdrawal cannot be maintained during the cash value period. In order to
levelize payments-- again, based on the assumption of a 4.5% return--both
before and after the end of the cash value period, it is necessary to
"redistribute" annuity payments, reducing payments after the end of the cash
value period and using the portion of the excess reserves attributable to
the reduction to increase payments during the cash value period above the
level that could be supported by the remaining cash value alone to the level
payable after the cash value period. (As a result, even if all of a
contract's cash value is withdrawn, annuity payments will continue to be
made, although at a considerably reduced level.)
If the annuitant is alive at the time of the withdrawal, annuity payments
after a withdrawal are determined as follows. When a withdrawal occurs, the
total annuity value of the contract is recomputed by adding the sum of the
new cash value immediately after the withdrawal and the contract's excess
reserves. The new total annuity value is then converted into a new "initial
annuity payment amount," based on tables set forth in the contract, and the
new initial annuity payment amount is in turn converted into annuity units
by dividing it by the annuity unit value on the date of the withdrawal. The
tables are actuarially computed to produce a level annuity payment for the
remaining lifetime of the contract based on an interest rate of 4.5% and the
mortality rates originally applied to purchase payments received under the
contract (which cannot be less favorable than the Individual Annuity 1983
Table A mortality rates projected to the terminal age of the table using
projection scale G). When a cash value withdrawal is made, we will inform
you of the new number of annuity units by sending you a new page one for
your contract.
Redistribution of annuity payments after withdrawals do not adjust
redistributions made in connection with prior withdrawals. Despite
redistributions, the original mortality guarantees associated with each
purchase payment are preserved.
While annuity payments will be reduced as a result of cash value
withdrawals, so long as the annuitant is alive, annuity payments will never
be eliminated by cash value withdrawals even if all available cash value is
completely withdrawn. Some level of annuity benefit, under the option
elected, will always be payable. Also, a new guaranteed annuity amount will
always be in effect after cash withdrawals. While a new initial annuity
payment amount is determined after a cash withdrawal, additional cash values
are not created.
A description of the computation used to determine the new initial annuity
payment amount and examples of the computation are set forth in Appendix A
of this Prospectus.
For an example which assumes a pattern of withdrawals and the effect of such
withdrawals on contract values, please see Appendix A to this Prospectus.
2. RIGHT OF CANCELLATION
You should read the contract carefully as soon as it is received. You may cancel
the purchase of a contract within ten days after its delivery, for any reason,
by giving us written notice at 400 Robert Street North, St. Paul, Minnesota
55101-2098, of your intention to cancel. If the contract is canceled and
returned, we will refund to you the greater of (a) the total annuity value of
the contract attributable to your purchase payments, plus the amounts deducted
from your purchase payments, or (b) the amount of purchase payments paid under
this contract. Payment of the requested refund will be made to you within seven
days after we receive notice of cancellation.
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FEDERAL TAX STATUS
INTRODUCTION
The discussion contained herein is general in nature and is not intended as tax
advice. Each person concerned should consult a competent tax adviser. No attempt
is made to consider any applicable state or other tax laws. In addition, this
discussion is based on our understanding of federal income tax laws as they are
currently interpreted. No representation is made regarding the likelihood of
continuation of current income tax laws or the current interpretations of the
Internal Revenue Service.
We are taxed as a "life insurance company" under the Internal Revenue Code.
The operations of the Separate Account form a part of, and are taxed with, our
other business activities. Currently, no federal income tax is payable by us on
income dividends received by the Separate Account or on capital gains arising
from the Separate Account's activities. The Separate Account is not taxed as a
"regulated investment company" under the Code and it does not anticipate any
change in that tax status.
TAXATION OF ANNUITY CONTRACTS IN GENERAL
Section 72 of the Code governs taxation of nonqualified annuities in general and
some aspects of qualified programs. No taxes are imposed on increases in the
value of a contract until distribution occurs, either in the form of a payment
in a single sum or as annuity payments under the annuity option elected. As a
general rule, annuity contracts held by 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 is an exception to this general rule for immediate
annuity contracts. An immediate annuity contract for these purposes is an
annuity (i) purchased with a single premium or annuity consideration, (ii) the
annuity starting date of which commences within one year from the date of the
purchase of the annuity, and (iii) which provides for a series of substantially
equal periodic payments (to be made not less frequently than annually) during
the annuity period. Corporations, trusts and other similar entities, other than
natural persons, seeking to take advantage of this exception for immediate
annuity contracts should consult with a tax adviser.
Under current guidance, the tax consequences of additional premium payments
and partial withdrawals under nonqualified and qualified annuities are unclear,
including the effect on taxation of distributions, required distribution
provisions and penalty taxes. Consult a qualified tax adviser before submitting
additional premium payments or requesting a partial withdrawal.
For payments made in the event of a full surrender of an annuity not part of a
qualified program, the taxable portion is generally the amount in excess of the
cost basis of the contract. Amounts withdrawn from the variable annuity
contracts are generally treated first as taxable income to the extent of the
excess of the contract value over the purchase payments made under the contract.
Such taxable portion is taxed at ordinary income tax rates.
In the case of a withdrawal under an annuity that is part of a qualified
program, a portion of the amount received is taxable based on the ratio of the
"investment in the contract" to the individual's balance in the retirement plan,
generally the value of the annuity. The "investment in the contract" generally
equals the portion of any deposits made by or on behalf of an individual under
an annuity which was not excluded from the gross income of the individual. For
annuities issued in connection with qualified plans, the "investment in the
contract" can be zero.
For annuity payments, the taxable portion is generally determined by a formula
that establishes a specific dollar amount of each payment that is not taxed. In
this respect, Congress has indicated that the Treasury Department may have
authority to treat the combination purchase of an immediate annuity contract and
a separate deferred annuity contract as a single annuity contract under its
general authority to prescribe rules as may be necessary to enforce the income
tax laws. A prospective purchaser of more than one annuity contract in a
calendar year should consult a tax adviser. The taxable part of each annuity
payment is taxed at ordinary income rates.
If a taxable distribution is made under the variable annuity contracts, an
additional tax of 10% of the amount of the taxable distribution may apply. This
additional tax does not apply where the payment is made under an immediate
annuity contract, as defined above, or where the taxpayer is 59 1/2 or older,
where payment is made on account of the taxpayer's disability or where payment
is made by reason
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of the death of an owner, and in certain other circumstances.
The Code also provides an exception to the 10% additional tax for
distributions, in periodic payments, of substantially equal installments, being
made for the life (or life expectancy) of the taxpayer or the joint lives (or
joint life expectancies) of the taxpayer and beneficiary.
For some types of qualified plans, other tax penalties may apply to certain
distributions.
A transfer of ownership of a contract, the designation of an annuitant or
other payee who is not also the contract owner, or the assignment of the
contract may result in certain income or gift tax consequences to the contract
owner that are beyond the scope of this discussion. A contract owner who is
contemplating any such transfer, designation or assignment should consult a
competent tax adviser with respect to the potential tax effects of that
transaction.
NOTICE -- PLEASE READ CAREFULLY
WE HAVE BEEN ADVISED THAT IT IS THE POSITION OF THE INTERNAL REVENUE SERVICE
THAT WHEN WITHDRAWALS (OTHER THAN ANNUITY PAYMENTS) ARE TAKEN FROM THE CASH
VALUE OF AN IMMEDIATE VARIABLE ANNUITY CONTRACT, SUCH AS THAT OFFERED BY THIS
PROSPECTUS, THEN ALL AMOUNTS RECEIVED BY THE TAXPAYER ARE TAXABLE AT ORDINARY
INCOME RATES AS AMOUNTS "NOT RECEIVED AS AN ANNUITY." IN ADDITION, SUCH AMOUNTS
ARE TAXABLE TO THE RECIPIENT WITHOUT REGARD TO THE OWNER'S INVESTMENT IN THE
CONTRACT OR ANY INVESTMENT GAIN WHICH MIGHT BE PRESENT IN THE CURRENT ANNUITY
VALUE. FOR EXAMPLE, UNDER THIS VIEW, A CONTRACT OWNER WITH A CASH VALUE OF
$100,000, SEEKING TO OBTAIN $20,000 OF THE CASH VALUE IMMEDIATELY AFTER ISSUE,
WOULD PAY INCOME TAXES ON THE ENTIRE $20,000 AMOUNT IN THAT TAX YEAR. FOR SOME
TAXPAYERS, SUCH AS THOSE UNDER AGE 59 1/2, ADDITIONAL TAX PENALTIES MAY ALSO
APPLY. THIS ADVERSE TAX RESULT MEANS THAT OWNERS OF NONQUALIFIED CONTRACTS
SHOULD CONSIDER CAREFULLY THE TAX IMPLICATIONS OF ANY WITHDRAWAL REQUESTS AND
THEIR NEED FOR CONTRACT FUNDS PRIOR TO THE EXERCISE OF THIS RIGHT. CONTRACT
OWNERS SHOULD ALSO CONTACT THEIR TAX ADVISER PRIOR TO MAKING WITHDRAWALS.
IN ADDITION, WE HAVE BEEN ADVISED THAT IT IS THE POSITION OF THE INTERNAL
REVENUE SERVICE THAT WHEN ADDITIONAL PURCHASE PAYMENTS ARE MADE UNDER AN
EXISTING IMMEDIATE VARIABLE ANNUITY CONTRACT, SUCH AS THAT OFFERED BY THIS
PROSPECTUS, THOSE PURCHASE PAYMENTS WILL NOT RESULT IN A RECALCULATION OF THE
OWNER'S INVESTMENT IN THE CONTRACT AND A DETERMINATION OF A NEW EXCLUSION
AMOUNT. FOR EXAMPLE, A CONTRACT OWNER AGED 60 MIGHT PURCHASE A CONTRACT FOR THE
SUM OF $100,000, WHICH WOULD RESULT IN AN INITIAL LIFETIME ANNUITY PAYMENT OF
$460.00 PER MONTH. EACH YEAR, $4,132.23 WOULD BE RECEIVED AS A RETURN OF
INVESTMENT IN THE CONTRACT AND THE EXCESS WOULD BE TAXED AS ORDINARY INCOME. IF
WE ASSUME THAT THE CONTRACT OWNER MAKES AN ADDITIONAL PURCHASE PAYMENT OF
$20,000, THE EXCLUSION AMOUNT OF $4,123.23 WOULD NOT CHANGE, EVEN THOUGH
ADDITIONAL CASH VALUE WILL RESULT IN A NEW VARIABLE ANNUITY PAYMENT. THIS
POSITION OF THE SERVICE WILL RESULT IN THE OWNER'S INABILITY TO RECOVER HIS OR
HER INVESTMENT OVER THE PERIOD OF THE PAYMENTS. ACCORDINGLY, CONTRACT OWNERS,
ESPECIALLY THOSE INTENDING TO MAKE SUBSTANTIAL AND MATERIAL ADDITIONAL PAYMENTS,
SHOULD CONSIDER PURCHASING AN ADDITIONAL CONTRACT INSTEAD OF MAKING AN
ADDITIONAL PAYMENT. FOR FURTHER INFORMATION YOU SHOULD CONSULT YOUR OWN
QUALIFIED TAX ADVISER.
DIVERSIFICATION REQUIREMENTS
Section 817(h) of the Code authorizes the Treasury to set standards by
regulation or otherwise for the investments of the Separate Account to be
"adequately diversified" in order for the contract to be treated as a life
insurance contract for federal tax purposes. The Separate Account, through the
Fund, intends to comply with the diversification requirements prescribed in
Regulations Section 1.817-5, which affect how the Fund's assets may be invested.
Although the investment adviser is an affiliate of Minnesota Mutual, Minnesota
Mutual does not have control over the Fund or its investments. Nonetheless,
Minnesota Mutual believes that the Portfolio of the Fund in which the Separate
Account owns shares will be operated in compliance with the requirements
prescribed by the Treasury.
In certain circumstances, owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the assets of the
Separate Account used to support their contracts. In those circumstances, income
and gains from the Separate Account assets would be includible in the variable
annuity contract owner's gross income. The IRS has stated in published rulings
that a variable contract owner will be considered the owner of Separate Account
assets if the contract owner possesses incidents of ownership in those assets,
such as the ability to exercise investment control over the assets. The Treasury
Department has also announced, in
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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 (i.e., the contract owner), rather than the
insurance company, to be treated as the owner of the assets in the account."
This announcement also states 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 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 the contract are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that contract owners were not owners of separate account assets.
These differences could result in a contract owner being treated as the owner of
the assets of the Separate Account. In addition, Minnesota Mutual does not know
what standards will be set forth, if any, in the regulations or rulings which
the Treasury Department has stated it expects to issue. Minnesota Mutual
therefore reserves the right to modify the contract as necessary to attempt to
prevent a contract owner from being considered the owner of a pro rata share of
the assets of the Separate Account.
REQUIRED DISTRIBUTIONS
In order to be treated as an annuity contract for federal income tax purposes,
Section 72(s) of the Code requires any nonqualified contract issued after
January 18, 1985 to provide that (a) if an owner dies on or after the annuity
starting date but prior to the time the entire interest in the contract has been
distributed, the remaining portion of such interest will be distributed at least
as rapidly as under the method of distribution being used as of the date of that
owner's death; and (b) if an owner dies prior to the annuity starting date, the
entire interest in the contract must be distributed within five years after the
date of the owner's death. These requirements shall be considered satisfied if
any portion of the owner's interest which is payable to or for the benefit of a
"designated beneficiary" is distributed over the life of such beneficiary or
over a period not extending beyond the life expectancy of that beneficiary and
such distributions begin within one year of that owner's death. The owner's
"designated beneficiary" is the person designated by such owner as a beneficiary
and to whom ownership of the contract passes by reason of death. It must be a
natural person. However, if the owner's "designated beneficiary" is the
surviving spouse of the owner, the contract may be continued with the surviving
spouse as the new owner.
Nonqualified contracts issued after January 18, 1985 contain provisions which
are intended to comply with the requirements of Section 72(s) of the Code,
although no regulations interpreting these requirements have yet been issued.
Minnesota Mutual intends to review such provisions and modify them if necessary
to assure that they comply with the requirements of Code Section 72(s) when
clarified by regulation or otherwise.
Other rules may apply to qualified contracts.
TAXATION OF DEATH BENEFIT PROCEEDS
Amounts may be distributed from a contract because of the death of an owner.
Generally, such amounts are includable in the income of the recipient as
follows: (1) if distributed in a lump sum, they are taxed in the same manner as
a full surrender of the contract, as described above, or (2) if distributed
under an annuity option, they are taxed in the same manner as annuity payments,
as described above. For these purposes, the investment in the contract is not
affected by the owner's death. That is, the investment in the contract remains
the amount of any purchase payments paid which were not excluded from gross
income.
POSSIBLE LEGISLATION
In the past years, legislation has been proposed that would have adversely
modified the federal taxation of certain annuities. For example, one such
proposal would have changed the tax treatment of nonqualified annuities that did
not have "substantial life contingencies" by taxing income as it is credited to
the annuity. Although as of the date of this Prospectus Congress is not actively
considering any legislation regarding the taxation of annuities, there is always
the possibility that the tax treatment of annuities could change by legislation
or other means (such as IRS regulations, revenue rulings, judicial decisions,
etc.). Moreover, it is also possible that any change could be retroactive (that
is, effective prior to the date of the change).
TAX QUALIFIED PROGRAMS
The annuity is designed for use with several types of retirement plans that
qualify for special tax treatment. The tax rules applicable to
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participants and beneficiaries in retirement plans vary according to the type of
plan and the terms and conditions of the plan. Special favorable tax treatment
may be available for certain types of contributions and distributions. Adverse
tax consequences may result from contributions in excess of specified limits;
distributions prior to age 59 1/2 (subject to certain exceptions); distributions
that do not conform to specified minimum distribution rules; aggregate
distributions in excess of a specified annual amount; and in other specified
circumstances.
We make no attempt to provide more than general information about use of
annuities with the various types of retirement plans. Some retirement plans are
subject to distribution and other requirements that are not incorporated in the
annuity. Owners and participants under retirement plans as well as annuitants
and beneficiaries are cautioned that the rights of any person to any benefits
under annuities purchased in connection with these plans may be subject to the
terms and conditions of the plans themselves, regardless of the terms and
conditions of the annuity issued in connection with such a plan. Some retirement
plans are subject to distribution and other requirements that are not
incorporated into our annuity administration procedures. Owners, participants
and beneficiaries are responsible for determining that contributions,
distributions and other transactions with respect to the annuities comply with
applicable law. Purchasers of annuities for use with any retirement plan should
consult their legal counsel and tax adviser regarding the suitability of the
contract.
PUBLIC SCHOOL SYSTEMS AND CERTAIN TAX EXEMPT ORGANIZATIONS
Under Code Section 403(b), payments made by public school systems and certain
tax exempt organizations to purchase annuity contracts for their employees are
excludable from the gross income of the employee, subject to certain
limitations. However, these payments may be subject to FICA (Social Security)
taxes.
Code Section 403(b)(11) restricts the distribution under Code Section 403(b)
annuity contracts of: (1) elective contributions made in years beginning after
December 31, 1988; (2) earnings on those contributions; and (3) earnings in such
years on amounts held as of the last year beginning before January 1, 1989.
Distribution of those amounts may only occur upon death of the employee,
attainment of age 59 1/2, separation from service, disability, or financial
hardship. In addition, income attributable to elective contributions may not be
distributed in the case of hardship.
INDIVIDUAL RETIREMENT ANNUITIES
Code Sections 219 and 408 permit individuals or their employers to contribute to
an individual retirement program known as an "Individual Retirement Annuity" or
"IRA". Individual Retirement Annuities are subject to limitations on the amount
which may be contributed and deducted and the time when distributions may
commence. In addition, distributions from certain other types of retirement
plans may be placed into an Individual Retirement Annuity on a tax deferred
basis. Employers may establish Simplified Employee Pension (SEP) Plans for
making IRA contributions on behalf of their employees.
SIMPLE RETIREMENT ACCOUNTS
Beginning January 1, 1997, certain small employers may establish Simple
Retirement Accounts as provided by Section 408(p) of the Code, under which
employees may elect to defer up to $6,000 (as increased for cost of living
adjustments) as a percentage of compensation. The sponsoring employer is
required to make a matching contribution on behalf of contributing employees.
Distributions from a Simple Retirement Account are subject to the same
restrictions that apply to IRA distributions and are taxed as ordinary income.
Subject to certain exceptions, premature distributions prior to age 59 1/2 are
subject to a 10% penalty tax, which is increased to 25% if the distribution
occurs within the first two years after the commencement of the employee's
participation in the plan. The failure of the Simple Retirement Account to meet
Code requirements may result in adverse tax consequences.
CORPORATE PENSION AND PROFIT-SHARING PLANS AND H.R. 10 PLANS
Code Section 401(a) permits employers to establish various types of retirement
plans for employees, and permits self-employed individuals to establish
retirement plans for themselves and their employees. These retirement plans may
permit the purchase of the contracts to accumulate retirement savings under the
plans. Adverse tax or other legal consequences to the plan, to the participant
or to both may result if this annuity is assigned or transferred to any
individual as a means to provide benefit payments, unless the plan
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complies with all legal requirements applicable to such benefits prior to
transfer of the annuity.
DEFERRED COMPENSATION PLANS
Code Section 457 provides for certain deferred compensation plans. These plans
may be offered with respect to service for state governments, local governments,
political subdivisions, agencies, instrumentalities and certain affiliates of
such entities, and tax exempt organizations. The plans may permit participants
to specify the form of investment for their deferred compensation account. With
respect to non-governmental Section 457 plans, all investments are owned by the
sponsoring employer and are subject to the claims of the general creditors of
the employer and depending on the terms of the particular plan, the employer may
be entitled to draw on deferred amounts for purposes unrelated to its Section
457 plan obligations. In general, all amounts received under a Section 457 plan
are taxable and are subject to federal income tax withholding as wages.
WITHHOLDING
In general, distributions from annuities are subject to federal income tax
withholding unless the recipient elects not to have tax withheld. Different
rules may apply to payments delivered outside the United States. Some states
have enacted similar rules.
Recent changes to the Code allow the rollover of most distributions from
tax-qualified plans and Section 403(b) annuities directly to other tax-qualified
plans that will accept such distributions and to individual retirement accounts
and individual retirement annuities. Distributions which may not be rolled over
are those which are: (1) one of a series of substantially equal annual (or more
frequent) payments made (a) over the life or life expectancy of the employee,
(b) the joint lives or joint expectancies of the employee and the employee's
designated beneficiary, or (c) for a specified period of ten years or more; (2)
a required minimum distribution; or (3) the non-taxable portion of a
distribution.
Any distribution eligible for rollover, which may include payment to an
employee, an employee's surviving spouse or an ex-spouse who is an alternate
payee, will be subject to federal tax withholding at a 20% rate unless the
distribution is made as a direct rollover to a tax-qualified plan or to an
individual retirement account or annuity. It may be noted that amounts received
by individuals which are eligible for rollover may still be placed in another
tax-qualified plan or individual retirement account or individual retirement
annuity if the transaction is completed within 60 days after the distribution
has been received. Such a taxpayer must replace withheld amounts with other
funds to avoid taxation on the amount previously withheld.
SEE YOUR OWN TAX ADVISER
It should be understood that the foregoing description of the federal income tax
consequences under these contracts is not exhaustive and that special rules are
provided with respect to situations not discussed herein. It should also be
understood that should a plan lose its qualified status, employees will lose
some of the tax benefits described. Statutory changes in the Internal Revenue
Code with varying effective dates, and regulations adopted thereunder may also
alter the tax consequences of specific factual situations. Due to the complexity
of the applicable laws, tax advice may be needed by a person contemplating the
purchase of a variable annuity contract or exercising elections under such a
contract. For further information a qualified tax adviser should be consulted.
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STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information, which contains additional information
including financial statements, is available from the offices of Minnesota
Mutual at your request. The Table of Contents for that Statement of Additional
Information is as follows:
Trustees and Principal Management Officers of Minnesota Mutual
Distribution of Contracts
Performance Data
Auditors
Registration Statement
Financial Statements
24
<PAGE>
APPENDIX A--COMPUTATION AND EXAMPLES OF WITHDRAWALS
A cash value withdrawal will affect future annuity payments by reducing the
number of annuity units, the basis for determining the amount of such payments.
If the annuitant is alive at the time of the withdrawal, the new number of
annuity units is determined by first computing a new initial annuity payment
amount and then dividing that amount by the annuity unit value at the time of
the withdrawal.
IF NO PRIOR WITHDRAWALS
If no prior cash withdrawals have been made, the new initial annuity payment
amount is the sum of
(i) the product of the number of cash value units after the withdrawal
times the current annuity unit value, and
(ii) the product of ([(a) X (b)]/1000) times (c), where
(a) is the excess of the total annuity value over the cash value
immediately prior to the withdrawal,
(b) is the ratio of the cash value withdrawn over the cash value prior
to the withdrawal, and
(c) is the applicable annuity purchase rate set forth in the contract in
the table captioned "Total Annuity Value Factors and Annuity Payment
Purchase Rates Applicable at a Cash Value Withdrawal while the
Annuitant is Alive" ("Table I").
In the above computation "(i)" reflects the portion of the new initial annuity
payment amount supported by the reserves attributable to the cash value of the
contract, and "(ii)" reflects the portion of the new initial annuity payment
amount supported by the annuity reserves in excess of the cash value. The excess
reserves, "(ii) (a)," are multiplied by the proportionate reduction in the cash
value, "(ii) (b)," to determine the portion of the excess reserves that are to
be redistributed, and the redistribution is effected by dividing the portion so
determined by 1000 and multiplying the result by the appropriate annuity
purchase rate.
An example of the withdrawal calculation may serve as a useful illustration.
Assume a contract issued to a woman, age 60, for an initial purchase payment of
$100,000, and assume further that the net Sub-Account performance matches the
assumed interest rate of 4.5% so that we need not consider the variation in
annuity payments as a result of fluctuations in investment performance. Assume
also that the annuity unit value is and remains $1.00. At the time of issue of
the contract, the initial annuity payment amount, if paid as a life annuity,
will be $460.99, and the number of annuity units and cash value units will be
460.9900. The guaranteed minimum annuity payment amount is $391.84 (85% X
$460.99).
Assume that at year five, the contract owner makes a withdrawal of 60% of the
cash value. Immediately prior to the withdrawal, the contract has a total
annuity value of $85,594, which is determined by multiplying the current annuity
payment amount, $460.99, by the appropriate factor set forth in the contract
applicable to cash value units in Table I, 185.6737. The total annuity reserves
amount is $85,594. The cash value of the contract immediately prior to the
withdrawal is $70,890, which is determined by multiplying the current annuity
payment amount, $460.99, by the appropriate factor set forth in the contract in
the table captioned "Cash Value Factors." ("Table II"), 153.7783. $70,890 is the
amount of the annuity reserves attributable to the cash value of the contract.
The cash value after the withdrawal is $28,356 ($70,890 - $42,534 (60% X
$70,890)), and the new number of cash value units is 184.3960 (460.9900 X
($28,356/$70,890)).
The new initial annuity payment amount is $235.19, the sum of
(i) $184.40, the product of the number of cash value units after the
withdrawal (184.3960) times the annuity unit value ($1.00), and
(ii) $50.79, the product of ([(a) X (b)]/1000) times (c), where
(a) is $14,704, the excess of the total annuity value ($85,594) over the
cash value ($70,890) immediately prior to the withdrawal,
(b) is .6, the ratio of the cash value withdrawn ($42,534) over the cash
value prior to the withdrawal ($70,890), and
(c) is 5.7568, the applicable annuity purchase rate set forth in the
contract in Table I.
The new guaranteed minimum annuity payment amount after the withdrawal is
$199.91 ($391.84 X (235.1900/460.9900)).
25
<PAGE>
IF PRIOR WITHDRAWALS
Where prior withdrawals have been made, the above formula is adjusted in the
manner shown in the following example. Assume that after the withdrawal of 60%
of the cash value in the contract described above the owner withdraws 75% of the
remaining cash value at year 15.
Immediately prior to the transaction the contract has a total annuity value of
$32,003. This is determined by multiplying the two components of the current
annuity payment amount $184.40 -- the portion attributable to the cash value
reserves, and $50.79 -- the portion attributable to the annuity reserves in
excess of the cash value, by the appropriate factors set forth in the contract
applicable to cash value units and annuity units in excess of cash value units,
respectively, in Table I, namely, 137.7353 and 130.0297 ($32,003 = ($184.40 X
137.7353) + ($50.79 X 130.0297)). The cash value of the contract immediately
prior to the withdrawal is $16,289, which is determined by multiplying the
portion of the current annuity payment amount attributable to the cash value,
$184.40, by the appropriate factor set forth in the contract in Table II,
88.3373 ($16,289 = $184.40 X 88.3373). The cash value after the withdrawal is
$4,072 ($16,289 - $12,217 (75% X $16,289)), and the new number of cash value
units is 46.0962 (184.3960 X ($4,072/$16,289)).
The new initial annuity payment amount is $149.44, the sum of
(i) $46.10, the product of the number of cash value units after the
withdrawal (46.0962) times the current annuity unit value ($1.00),
(ii) $50.79, the product of the number of annuity units (235.19) minus the
number of cash value units (184.40), each prior to the withdrawal,
times the current annuity unit value ($1.00), and
(iii) $52.55, the product of ([(a) X (b)]/1000) times (c), where
(a) is $9110, which is
(A) $15,714, the excess of the total annuity value ($32,003) over
the cash value ($16,289) immediately prior to the withdrawal,
minus
(B) $6,604, the value is (ii) above ($50.79) multiplied by the
appropriate factor as of the withdrawal date applicable to
annuity units in excess of cash value units set forth in the
contract in Table I (130.0297),
(b) is .75, the ratio of the cash value withdrawn ($12,217) over the
cash value prior to the withdrawal ($16,289), and
(c) is 7.6905, the applicable annuity purchase rate set forth in the
contract in Table I.
The new initial annuity payment amount has a new guaranteed minimum annuity
payment amount associated with it of $127.02 ($199.91 X 149.4400/235.1900).
26
<PAGE>
APPENDIX B--IMMEDIATE VARIABLE ANNUITY ILLUSTRATION
PREPARED FOR: Jane M. Doe
DATE OF BIRTH: 10/01/35 SEX: Female
STATE: MN
PREPARED BY: Minnesota Mutual
FUNDS: Non-Qualified
LIFE EXPECTANCY: 24.2 (IRS)
ANNUITIZATION OPTION: Single Life
QUOTATION DATE: 10/01/95
COMMENCEMENT DATE: 10/01/95
SINGLE PAYMENT RECEIVED: $100,000.00
INCOME FREQUENCY: Monthly
INITIAL PERIODIC INCOME: $460.99
GUARANTEED MINIMUM INCOME AT ISSUE: $391.84
*ESTIMATED ANNUAL EXCLUSION AMOUNT AT ISSUE: $3,471.07
The variable annuity income amount shown below assumes a constant annual
investment return. The initial interest rate of 4.5% is the assumed rate used to
calculate the first payment. Thereafter, payments will increase or decrease
based upon the relationship between the initial interest rate and the
performance of the Index 500 Portfolio of the Advantus Series Fund, Inc. The
investment returns shown are hypothetical and not a representation of future
results. Actual value of the contract will fluctuate depending on the
performance of the underlying sub-account.
The cash value is the dollar amount available for withdrawal under this
contract at a given point in time. The total annuity value represents your total
interest in the sub-account.
<TABLE>
<CAPTION>
0.00% GROSS (-1.40% NET)
---------------------------------------------------
GUARANTEED PROJECTED TOTAL ANNUITY
DATE BEG OF YR. AGE INCOME INCOME CASH VALUE VALUE
- --------------- ---------- --- ---------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Oct 1, 1995.... 1 60 $392 $461 $81,667 $93,789
Oct 1, 1996.... 2 61 392 435 75,197 87,076
Oct 1, 1997.... 3 62 392 410 69,119 80,764
Oct 1, 1998.... 4 63 392 392 63,409 74,829
Oct 1, 1999.... 5 64 392 392 58,048 69,250
Oct 1, 2004.... 10 69 392 392 35,792 46,059
Oct 1, 2009.... 15 74 392 392 19,667 29,277
Oct 1, 2014.... 20 79 392 392 8,092 17,514
Oct 1, 2018.... 24 83 392 392 1,303 11,160
Oct 1, 2019.... 25 84 392 392 0 9,980
Oct 1, 2024.... 30 89 392 392 0 5,654
Oct 1, 2029.... 35 94 392 392 0 3,173
Oct 1, 2034.... 40 99 392 392 0 1,687
Oct 1, 2035.... 41 100 392 392 0 1,447
</TABLE>
* This calculation does not include future contributions or withdrawals.
Deductions from your purchase payments are made for sales charges, risk
charges and state premium taxes where applicable. Sales charges are based on
your total cumulative purchase payments (see prospectus for schedule). A risk
charge is deducted for Minnesota Mutual's guarantee of a minimum annuity payment
amount. This charge is 1.25% of each purchase payment.
Net rates of return reflect expenses totaling 1.40%, which consist of the .95%
Variable Annuity Account mortality and expense risk charge and administrative
charge, and .45% for the Series Fund management fee and other expenses.
Minnesota Mutual variable immediate annuities are available through registered
representatives of MIMLIC Sales Corporation. This illustration must be
accompanied or preceded by a current prospectus for the Minnesota Mutual
Variable Annuity Account and for the Advantus Series Fund, Inc.
Page 1 of 4
Not valid without all pages.
This is an illustration only and not a contract.
Prepared by The Minnesota Mutual Life Insurance Company
27
<PAGE>
IMMEDIATE VARIABLE ANNUITY ILLUSTRATION
PREPARED FOR: Jane M. Doe
DATE OF BIRTH: 10/01/35 SEX: Female
STATE: MN
PREPARED BY: Minnesota Mutual
FUNDS: Non-Qualified
LIFE EXPECTANCY: 24.2 (IRS)
ANNUITIZATION OPTION: Single Life
QUOTATION DATE: 10/01/95
COMMENCEMENT DATE: 10/01/95
SINGLE PAYMENT RECEIVED: $100,000.00
INCOME FREQUENCY: Monthly
INITIAL PERIODIC INCOME: $460.99
GUARANTEED MINIMUM INCOME AT ISSUE: $391.84
*ESTIMATED ANNUAL EXCLUSION AMOUNT AT ISSUE: $3,471.07
The variable annuity income amount shown below assumes a constant annual
investment return. The initial interest rate of 4.5% is the assumed rate used to
calculate the first payment. Thereafter, payments will increase or decrease
based upon the relationship between the initial interest rate and the
performance of the Index 500 Portfolio of the Advantus Series Fund, Inc. The
investment returns shown are hypothetical and not a representation of future
results. Actual value of the contract will fluctuate depending on the
performance of the underlying sub-account.
The cash value is the dollar amount available for withdrawal under this
contract at a given point in time. The total annuity value represents your total
interest in the sub-account.
<TABLE>
<CAPTION>
5.90% GROSS (4.50% NET)
---------------------------------------------------
GUARANTEED PROJECTED TOTAL ANNUITY
DATE BEG OF YR. AGE INCOME INCOME CASH VALUE VALUE
- ---------------------------------------- ---------- --- ---------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Oct 1, 1995............................. 1 60 $392 $461 $81,667 $93,789
Oct 1, 1996............................. 2 61 392 461 79,697 92,286
Oct 1, 1997............................. 3 62 392 461 77,638 90,718
Oct 1, 1998............................. 4 63 392 461 75,487 89,081
Oct 1, 1999............................. 5 64 392 461 73,239 87,373
Oct 1, 2004............................. 10 69 392 461 60,387 77,708
Oct 1, 2009............................. 15 74 392 461 44,371 66,050
Oct 1, 2014............................. 20 79 392 461 24,412 52,838
Oct 1, 2018............................. 24 83 392 461 4,961 42,480
Oct 1, 2019............................. 25 84 392 461 0 40,261
Oct 1, 2024............................. 30 89 392 461 0 30,498
Oct 1, 2029............................. 35 94 392 461 0 22,888
Oct 1, 2034............................. 40 99 392 461 0 16,272
Oct 1, 2035............................. 41 100 392 461 0 14,791
</TABLE>
* This calculation does not include future contributions or withdrawals.
Deductions from your purchase payments are made for sales charges, risk
charges and state premium taxes where applicable. Sales charges are based on
your total cumulative purchase payments (see prospectus for schedule). A risk
charge is deducted for Minnesota Mutual's guarantee of a minimum annuity payment
amount. This charge is 1.25% of each purchase payment.
Net rates of return reflect expenses totaling 1.40%, which consist of the .95%
Variable Annuity Account mortality and expense risk charge and administrative
charge, and .45% for the Series Fund management fee and other expenses.
Minnesota Mutual variable immediate annuities are available through registered
representatives of MIMLIC Sales Corporation. This illustration must be
accompanied or preceded by a current prospectus for the Minnesota Mutual
Variable Annuity Account and for the Advantus Series Fund, Inc.
Page 2 of 4
Not valid without all pages.
This is an illustration only and not a contract.
Prepared by The Minnesota Mutual Life Insurance Company
28
<PAGE>
IMMEDIATE VARIABLE ANNUITY ILLUSTRATION
PREPARED FOR: Jane M. Doe
DATE OF BIRTH: 10/01/35 SEX: Female
STATE: MN
PREPARED BY: Minnesota Mutual
FUNDS: Non-Qualified
LIFE EXPECTANCY: 24.2 (IRS)
ANNUITIZATION OPTION: Single Life
QUOTATION DATE: 10/01/95
COMMENCEMENT DATE: 10/01/95
SINGLE PAYMENT RECEIVED: $100,000.00
INCOME FREQUENCY: Monthly
INITIAL PERIODIC INCOME: $460.99
GUARANTEED MINIMUM INCOME AT ISSUE: $391.84
*ESTIMATED ANNUAL EXCLUSION AMOUNT AT ISSUE: $3,471.07
The variable annuity income amount shown below assumes a constant annual
investment return. The initial interest rate of 4.5% is the assumed rate used to
calculate the first payment. Thereafter, payments will increase or decrease
based upon the relationship between the initial interest rate and the
performance of the Index 500 Portfolio of the Advantus Series Fund, Inc. The
investment returns shown are hypothetical and not a representation of future
results. Actual value of the contract will fluctuate depending on the
performance of the underlying sub-account.
The cash value is the dollar amount available for withdrawal under this
contract at a given point in time. The total annuity value represents your total
interest in the sub-account.
<TABLE>
<CAPTION>
12.00% GROSS (10.60% NET)
---------------------------------------------------
GUARANTEED PROJECTED TOTAL ANNUITY
DATE BEG OF YR. AGE INCOME INCOME CASH VALUE VALUE
- --------------- ---------- --- ---------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Oct 1, 1995.... 1 60 $392 $461 $81,667 $93,789
Oct 1, 1996.... 2 61 392 488 84,349 97,673
Oct 1, 1997.... 3 62 392 516 86,967 101,618
Oct 1, 1998.... 4 63 392 547 89,493 105,609
Oct 1, 1999.... 5 64 392 578 91,896 109,631
Oct 1, 2004.... 10 69 392 768 100,622 129,484
Oct 1, 2009.... 15 74 392 1,020 98,184 146,157
Oct 1, 2014.... 20 79 392 1,355 71,736 155,269
Oct 1, 2018.... 24 83 392 1,700 18,291 156,630
Oct 1, 2019.... 25 84 392 1,799 0 157,116
Oct 1, 2024.... 30 89 392 2,389 0 158,052
Oct 1, 2029.... 35 94 392 3,173 0 157,516
Oct 1, 2034.... 40 99 392 4,213 0 148,711
Oct 1, 2035.... 41 100 392 4,459 0 143,069
</TABLE>
* This calculation does not include future contributions or withdrawals.
Deductions from your purchase payments are made for sales charges, risk
charges and state premium taxes where applicable. Sales charges are based on
your total cumulative purchase payments (see prospectus for schedule). A risk
charge is deducted for Minnesota Mutual's guarantee of a minimum annuity payment
amount. This charge is 1.25% of each purchase payment.
Net rates of return reflect expenses totaling 1.40%, which consist of the .95%
Variable Annuity Account mortality and expense risk charge and administrative
charge, and .45% for the Series Fund management fee and other expenses.
Minnesota Mutual variable immediate annuities are available through registered
representatives of MIMLIC Sales Corporation. This illustration must be
accompanied or preceded by a current prospectus for the Minnesota Mutual
Variable Annuity Account and for the Advantus Series Fund, Inc.
Page 3 of 4
Not valid without all pages.
This is an illustration only and not a contract.
Prepared by The Minnesota Mutual Life Insurance Company
29
<PAGE>
IMMEDIATE VARIABLE ANNUITY ILLUSTRATION
SPECIAL TAX RULES APPLY TO NON-QUALIFIED IMMEDIATE ANNUITIES
When withdrawals are taken from the cash value of an immediate variable annuity
contract, all amounts received by the taxpayer are taxable as ordinary income in
the year in which the withdrawals are taken. Under certain circumstances, you
may be able to get an offsetting deduction.
When additional purchase payments are made under an existing immediate
variable annuity contract, those purchase payments will not result in a
recalculation of the owner's investment in the contract and a determination of a
new exclusion amount.
For more information on these matters, see your prospectus under the heading
Federal Tax Status. Consult with your tax adviser.
VARIABLE EXCLUSION AMOUNT
The annual variable exclusion amount is based on a cost basis of $0 and
represents the amount of variable payments that are excluded from taxation in
each calendar year. This annual amount is prorated in the first calendar year
and may be recalculated in any year where the total value of the annuity
payments is less than the exclusion amount. Exclusion calculations apply only
until the cost basis is returned, thereafter, all payments are fully taxable.
Page 4 of 4
Not valid without all pages.
This is an illustration only and not a contract.
Prepared by The Minnesota Mutual Life Insurance Company
30
<PAGE>
PART B
INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
Minnesota Mutual Variable Annuity Account
Cross Reference Sheet to Statement of Additional Information
Form N-4
Item Number Caption in Statement of Additional Information
15. Cover Page
16. Cover Page
17. Trustees and Principal Management Officers of Minnesota Mutual
18. Not Applicable
19. Not Applicable
20. Distribution of Contracts
21. Performance Data
22. Not Applicable
23. Financial Statements
<PAGE>
Minnesota Mutual Variable Annuity Account
("Variable Annuity Account"), a Separate Account of
The Minnesota Mutual Life Insurance Company
("Minnesota Mutual")
400 Robert Street North
St. Paul, Minnesota 55101-2098
Telephone: (612) 665-3500
Statement of Additional Information
The date of this document and the Prospectus is: May 1, 1997
This Statement of Additional Information is not a prospectus. Much of the
information contained in this Statement of Additional Information expands upon
subjects discussed in the Prospectus. Therefore, this Statement should be read
in conjunction with the Fund's current Prospectus, bearing the same date, which
may be obtained by calling The Minnesota Mutual Life Insurance Company at (612)
665-3500, or writing to Minnesota Mutual at Minnesota Mutual Life Center, 400
Robert Street North, St. Paul, Minnesota 55101-2098.
Trustees and Principal Management Officers of Minnesota Mutual
Distribution of Contracts
Performance Data
Auditors
Registration Statement
Financial Statements
-1-
<PAGE>
TRUSTEES AND PRINCIPAL MANAGEMENT OFFICERS OF MINNESOTA MUTUAL
Trustees Principal Occupation
-------- --------------------
Giulio Agostini Senior Vice President, Finance and Administrative
Services, Minnesota Mining and Manufacturing
Company, Maplewood, Minnesota
Anthony L. Andersen Chair-Board of Directors, H. B. Fuller Company,
St. Paul, Minnesota, since June 1995, prior
thereto for more than five years President and
Chief Executive Officer, H. B. Fuller Company
(Adhesive Products)
John F. Grundhofer Chairman of the Board, President and Chief
Executive Officer, First Bank System, Inc.,
Minneapolis, Minnesota (Banking)
Harold V. Haverty Retired since May 1995, prior thereto, for more
than five years Chairman of the Board, President
and Chief Executive Officer, Deluxe Corporation,
Shoreview, Minnesota (Check Printing)
David S. Kidwell, Ph.D. Dean and Professor of Finance, The Curtis L.
Carlson School of Management, University of
Minnesota
Reatha C. King, Ph.D. President and Executive Director, General Mills
Foundation, Minneapolis, Minnesota
Thomas E. Rohricht Member, Doherty, Rumble & Butler Professional
Association, St. Paul, Minnesota (Attorneys)
Terry Tinson Saario, Ph.D. Prior to March 1996, and for more than five years,
President, Northwest Area Foundation, St. Paul,
Minnesota (Private Regional Foundation)
Robert L. Senkler Chairman of the Board, President and Chief
Executive Officer, The Minnesota Mutual Life
Insurance Company, since August 1995; prior
thereto for more than five years Vice President
and Actuary, The Minnesota Mutual Life Insurance
Company
Michael E. Shannon Chairman, Chief Financial and Administrative
Officer, Ecolab, Inc., St. Paul, Minnesota, since
August 1992, prior thereto President, Residential
Services Group, Ecolab, Inc., St. Paul, Minnesota
from October 1990 to July 1992 (Develops and
Markets Cleaning and Sanitizing Products)
Frederick T. Weyerhaeuser Chairman, Clearwater Investment Trust since May
1996, prior thereto for more than five years,
Chairman, Clearwater Management Company, St. Paul,
Minnesota (Financial Management)
-2-
<PAGE>
Principal Officers (other than Trustees)
Name Position
John F. Bruder Senior Vice President
Keith M. Campbell Vice President
Paul H. Gooding Vice President and Treasurer
Robert E. Hunstad Executive Vice President
James E. Johnson Senior Vice President and Actuary
Richard D. Lee Vice President
Joel W. Mahle Vice President
Dennis E. Prohofsky Senior Vice President, General Counsel and
Secretary
Gregory S. Strong Vice President and Actuary
Terrence S. Sullivan Senior Vice President
Randy F. Wallake Senior Vice President
All Trustees who are not also officers of Minnesota Mutual have had the
principal occupation (or employers) shown for at least five years. All
officers of Minnesota Mutual have been employed by Minnesota Mutual for
at least five years.
DISTRIBUTION OF CONTRACTS
The contract will be sold in a continuous offering by our life insurance
agents who are also registered representatives of MIMLIC Sales Corporation
("MIMLIC Sales") or other broker-dealers who have entered into selling
agreements with MIMLIC Sales. MIMLIC Sales acts as principal underwriter of
the contracts. MIMLIC Sales is a wholly-owned subsidiary of MIMLIC Asset
Management Company, which in turn is a wholly-owned subsidiary of Minnesota
Mutual. MIMLIC Sales is registered as a broker-dealer under the Securities
Exchange Act of 1934 and is a member of the National Association of Securities
Dealers, Inc. The amount paid by Minnesota Mutual to the underwriter for 1996
was $83,366 for payments to associated dealers on the sale of this class of
variable annuity contracts issued through the Variable Annuity Account. Agents
of Minnesota Mutual who are also registered representatives of MIMLIC Sales are
compensated directly by Minnesota Mutual.
PERFORMANCE DATA
TOTAL RETURN FIGURES FOR THE SUB-ACCOUNT
Average annual total return figures for one-year and five-year periods and for
the period since the Sub-Account became available pursuant to other registration
statements of the Variable Annuity Account are presented. Average annual total
return figures are the average annual compounded rates of return required for an
initial investment of $10,000 to equal the total annuity value of that same
investment at the end of the period. The total annuity value will reflect the
deduction of the sales and risk charges applicable to the contract. The average
annual total return figures published by the Variable Annuity Account will
reflect Minnesota Mutual's voluntary absorption of certain Fund expenses.
During 1986 and from January 1 to March 8, 1987, Minnesota Mutual voluntarily
absorbed all fees and expenses of the Index 500 Portfolio that exceeded .75% of
the average daily net assets of the Portfolio. For the period subsequent to
March 8, 1986, Minnesota Mutual is voluntarily absorbing the fees and expenses
that exceed .55% of the daily net assets of the Index 500 Portfolio. There is
no specified or minimum period of time during which Minnesota Mutual has agreed
to continue its voluntary absorption of these expenses, and Minnesota Mutual may
in its discretion cease its absorption of expenses at any time. Should
Minnesota Mutual cease absorbing expenses the effect would be to increase
substantially Fund expenses and thereby reduce investment return.
The average annual rates of return for the Sub-Account, in connection with the
contract described in the Prospectus, for the specified periods ended
December 31, 1996 are shown in the table below. The figures in parentheses show
what the average annual rates of return would have been had Minnesota Mutual not
absorbed Fund expenses as described above. These figures also assume that the
contracts described herein were issued when the underlying Portfolio first
became available to the Variable Annuity Account.
<TABLE>
<CAPTION>
Year Ended Five Years From Inception Date of
12/31/96 Ended 12/31/96 to 12/31/96 Inception
---------- -------------- --------------- ---------
<S> <C> <C> <C> <C>
Index 500 Sub-Account 18.47% (18.47%) 13.24% (13.22%) 11.32% (11.28%) 6/1/87
</TABLE>
-3-
<PAGE>
AUDITORS
The financial statements of Minnesota Mutual included herein have been
audited by KPMG Peat Marwick LLP, 4200 Norwest Center, 90 South Seventh Street,
Minneapolis, Minnesota 55402, independent auditors, whose reports thereon
appear elsewhere herein, and have been so included in reliance upon the reports
of KPMG Peat Marwick LLP and upon the authority of said firm as experts in
accounting and auditing.
-4-
<PAGE>
REGISTRATION STATEMENT
We have filed with the Securities and Exchange Commission a registration
statement under the Securities Act of 1933, as amended, with respect to the
contracts offered hereby. This Prospectus does not contain all the information
set forth in the registration statement and amendments thereto and the exhibits
filed as a part thereof, to all of which reference is hereby made for further
information concerning the Variable Annuity Account, Minnesota Mutual, and the
contracts. Statements contained in this Statement of Additional Information as
to the contents of contracts and other legal instruments are summaries, and
reference is made to such instruments as filed.
-5-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees of The Minnesota Mutual Life Insurance Company
and Contract Owners of Minnesota Mutual Variable Annuity Account:
We have audited the accompanying statement of assets and liabilities of the
Index 500 Segregated Sub-Account of the Minnesota Mutual Variable Annuity
Account (the Account) (contracts offered for individual, immediate annuity
contracts for personal retirement plans) as of December 31, 1996 and the related
statement of operations, statement of changes in net assets for the period from
June 4, 1996, commencement of operations, to December 31, 1996. These financial
statements and the financial highlights are the responsibility of the Account's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights 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. Investments owned at
December 31, 1996 were verified by examination of the underlying portfolios of
MIMLIC Series Fund, Inc. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Index 500 Segregated Sub-
Account of Minnesota Mutual Variable Annuity Account at December 31, 1996 and
the results of its operations, changes in its net assets for the period stated
in the first paragraph above, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 14, 1997
<PAGE>
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments in shares of MIMLIC Series Fund, Inc - Index 500 Portfolio,
849,898 shares at net asset value of $2.409 per share (cost $1,911,768). . . . . . $ 2,047,159
Receivable from MIMLIC Series Fund, Inc. for investments sold. . . . . . . . . . . . 78
------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,047,237
------------
LIABILITIES
Payable to Minnesota Mutual for contract terminations and mortality and
expense charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
------------
Net assets applicable to annuity contract owners. . . . . . . . . . . . . . . . $ 2,047,159
------------
------------
CONTRACT OWNERS' EQUITY
Contracts in annuity payment period (note 2) . . . . . . . . . . . . . . . . . . . . $ 2,047,159
------------
Total contract owners' equity . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,047,159
------------
------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF OPERATIONS
PERIOD FROM JUNE 4, 1996, COMMENCEMENT OF OPERATIONS, TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Investment income (loss):
Mortality and expense charges (note 3) . . . . . . . . . . . . . . . . . . . . . . $ (3,538)
Administrative charges (note 3). . . . . . . . . . . . . . . . . . . . . . . . . . (664)
------------
Investment loss - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,202)
------------
Realized and unrealized gains on investments - net:
Realized gains on sales of investments:
Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,036
Cost of investments sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . (77,062)
------------
Net realized gains on investments . . . . . . . . . . . . . . . . . . . . . . . 5,974
------------
Net change in unrealized appreciation or depreciation of investments . . . . . . . . 135,391
------------
Net gains on investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 141,365
------------
Net increase in net assets resulting from operations. . . . . . . . . . . . . . $ 137,163
------------
------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
PERIOD FROM JUNE 4, 1996, COMMENCEMENT OF OPERATIONS, TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Operations:
Investment loss - net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,202)
Net realized gains on investments. . . . . . . . . . . . . . . . . . . . . . . . . 5,974
Net change in unrealized appreciation or depreciation of investments . . . . . . . 135,391
------------
Net increase in net assets resulting from operations . . . . . . . . . . . . . . . . 137,163
------------
Contract transactions (notes 2, 3 and 4):
Contract purchase payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,988,830
Contract terminations and withdrawal payments. . . . . . . . . . . . . . . . . . . (61,520)
Actuarial adjustments for mortality experience on annuities in payment period. . . 4,483
Annuity benefit payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,797)
------------
Increase in net assets from contract transactions. . . . . . . . . . . . . . . . . . 1,909,996
------------
Increase in net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,047,159
Net assets at the beginning of period. . . . . . . . . . . . . . . . . . . . . . . . -
------------
Net assets at the end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,047,159
------------
------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION
The Minnesota Mutual Variable Annuity Account (the Account) was established
on September 10, 1984 as a segregated asset account of The Minnesota Mutual
Life Insurance Company (Minnesota Mutual) under Minnesota law and is
registered as a unit investment trust under the Investment Company Act of
1940 (as amended). There are currently four types of contracts each
consisting of one to fourteen segregated sub-accounts. The financial
statements presented herein include only the segregated sub-account offered
in connection with the sale of the individual, immediate variable annuity
contracts for personal retirement plans (Adjustable Income Annuity).
The assets of the Account are held for the exclusive benefit of the
immediate variable annuity contract owners and are not chargeable with
liabilities arising out of the business conducted by any other account or
by Minnesota Mutual. Purchase payments made by contract owners are
invested in shares of the Index 500 Portfolio of the MIMLIC Series Fund,
Inc. The MIMLIC Series Fund, Inc. (the Fund) was organized by Minnesota
Mutual as the investment vehicle for its variable annuity contracts and
variable life policies. The Fund is registered under the Investment
Company Act of 1940 (as amended) as a diversified, open-end management
investment company.
MIMLIC Sales Corporation acts as the underwriter for the Account. MIMLIC
Asset Management Company acts as the investment adviser for the Fund.
MIMLIC Sales Corporation is a wholly-owned subsidiary of MIMLIC Asset
Management Company. MIMLIC Asset Management Company is a wholly-owned
subsidiary of Minnesota Mutual.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increases and decreases in
net assets resulting from operations during the period. Actual results
could differ from those estimates.
INVESTMENTS IN MIMLIC SERIES FUND, INC.
Investments in shares of the Fund are stated at market value which is the
net asset value per share as determined daily by the Fund. Investment
transactions are accounted for on the
<PAGE>
2
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
INVESTMENTS IN MIMLIC SERIES FUND, INC. - CONTINUED
date the shares are purchased or sold. The cost of investments sold is
determined on the average cost method. All dividend distributions received
from the Fund are reinvested in additional shares of the Fund and are
recorded by the segregated sub-account on the ex-dividend date.
FEDERAL INCOME TAXES
The Account is treated as part of Minnesota Mutual for federal income tax
purposes. Under current interpretations of existing federal income tax
law, no income taxes are payable on investment income or capital gain
distributions received by the Account from the Fund.
CONTRACTS IN ANNUITY PAYMENT PERIOD
Annuity reserves are computed for currently payable contracts according to
the Individual Annuity 1983 Table A, using an assumed interest rate of 4.5
percent. Charges to annuity reserves for mortality and risk expense are
reimbursed to Minnesota Mutual if the reserves required are less than
originally estimated. If additional reserves are required, Minnesota
Mutual reimburses the Account.
(3) CONTRACT CHARGES
The mortality and expense risk charge paid to Minnesota Mutual is computed
daily and is equal, on an annual basis, to .80 percent of the average daily
net assets of the Account. Under certain conditions, the charge may be
increased to 1.40 percent of the average daily net assets of the Account.
The administrative charge paid to Minnesota Mutual is computed daily and is
equal, on an annual basis, to .15 percent of the average daily net assets
of the Account. Under certain conditions, the administrative charge may be
increased to not more than .40 percent of the average daily net assets of
the Account.
Contract purchase payments are reflected net of the following charges paid
to Minnesota Mutual:
A sales charge ranging from 3.75 to 4.50 percent, depending upon the
total amount of purchase payments, is deducted from each contract
purchase payment. Total sales
<PAGE>
3
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(3) CONTRACT CHARGES - CONTINUED
charges deducted from contract purchase payments for the period from
June 4, 1996, commencement of operations, to December 31, 1996
amounted to $89,278.
A risk charge in the amount of 1.25 percent is deducted from each
contract purchase payment. Under certain conditions, the risk charge
may be as high as 2.00 percent. Total risk charges deducted from
contract purchase payments for the period from June 4, 1996,
commencement of operations, to December 31, 1996 amounted to $26,559.
A premium tax charge of up to 2.00 percent is deducted from each
contract purchase payment. Total premium tax charges deducted from
contract purchase payments for the period from June 4, 1996,
commencement of operations, to December 31, 1996 amounted to $2,307.
(4) INVESTMENT TRANSACTIONS
The Account's purchases of Index 500 Portfolio shares amounted to
$1,988,830 for the period from June 4, 1996, commencement of operations, to
December 31, 1996.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
The Minnesota Mutual Life Insurance Company
We have audited the accompanying consolidated balance sheets of The Minnesota
Mutual Life Insurance Company and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations and policyowners'
surplus and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Minnesota Mutual Life Insurance Company and subsidiaries as of December 31,
1996 and 1995, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles. As discussed in Note
2 to the consolidated financial statements, the Company adopted Statement of
Financial Accounting Standards No. 120, "Accounting and Reporting by Mutual
Life Insurance Enterprises and by Insurance Enterprises for Certain Long-
Duration Participating Contracts," in 1996.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information included
in the accompanying schedules is presented for purposes of additional analysis
and is not a required part of the basic financial statements. Such information
has been subjected to the auditing procedures applied in the audits of the
basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 10, 1997
53
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Fixed maturity securities:
Available-for-sale, at fair value (amortized cost
$4,558,975 and $4,525,352) $ 4,674,082 $ 4,761,561
Held-to-maturity, at amortized cost (fair value
$1,179,112 and $1,281,523) 1,125,638 1,180,654
Equity securities, at fair value (cost $429,509 and
$277,554) 549,797 384,882
Mortgage loans, net 608,808 608,537
Real estate, net 43,082 47,256
Policy loans 204,178 198,716
Short-term investments 122,772 72,841
Other invested assets 98,247 91,530
----------- -----------
Total investments 7,426,604 7,345,977
Cash 57,140 48,358
Finance receivables, net 259,192 226,720
Deferred policy acquisition costs 589,517 539,732
Accrued investment income 90,996 98,373
Premiums receivable 77,140 85,247
Property and equipment, net 55,050 50,809
Reinsurance recoverables 126,629 102,198
Other assets 54,798 46,530
Separate account assets 3,706,256 2,609,460
----------- -----------
Total assets $12,443,322 $11,153,404
=========== ===========
LIABILITIES AND POLICYOWNERS' SURPLUS
Liabilities:
Policy and contract account balances $ 4,310,015 $ 4,287,083
Future policy and contract benefits 1,638,720 1,554,898
Pending policy and contract claims 70,577 55,812
Other policyowner funds 396,848 371,537
Policyowner dividends payable 49,899 50,450
Unearned premiums and fees 207,111 210,494
Federal income tax liability:
Current 25,643 39,516
Deferred 149,665 173,905
Other liabilities 286,042 320,607
Notes payable 319,000 279,967
Separate account liabilities 3,691,374 2,596,285
----------- -----------
Total liabilities 11,144,894 9,940,554
Policyowners' surplus:
Unassigned surplus 1,190,116 1,059,598
Net unrealized investment gains 108,312 153,252
----------- -----------
Total policyowners' surplus 1,298,428 1,212,850
----------- -----------
Total liabilities and policyowners' surplus $12,443,322 $11,153,404
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
54
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND POLICYOWNERS' SURPLUS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Premiums $ 612,359 $ 603,770 $ 562,018
Policy and contract fees 245,966 214,203 188,115
Net investment income 530,987 515,047 486,101
Net realized investment gains 59,546 66,643 25,769
Finance charge income 46,932 39,937 34,258
Other income 51,630 40,250 30,106
---------- ---------- ---------
Total revenues 1,547,420 1,479,850 1,326,367
---------- ---------- ---------
Benefits and expenses:
Policyowner benefits 541,520 517,771 498,424
Interest credited to policies and con-
tracts 288,967 297,145 283,626
General operating expenses 302,618 273,425 253,317
Commissions 103,370 93,465 87,631
Administrative and sponsorship fees 79,360 76,223 71,143
Dividends to policyowners 24,804 27,282 26,672
Interest on notes payable 22,798 11,128 7,295
Increase in deferred policy acquisition
costs (15,312) (29,822) (43,974)
---------- ---------- ---------
Total benefits and expenses 1,348,125 1,266,617 1,184,134
---------- ---------- ---------
Income from operations before taxes 199,295 213,233 142,233
Federal income tax expense:
Current 68,033 71,379 63,641
Deferred 744 11,995 (1,511)
---------- ---------- ---------
Total federal income tax expense 68,777 83,374 62,130
Net income $ 130,518 $ 129,859 $ 80,103
========== ========== =========
STATEMENTS OF POLICYOWNERS' SURPLUS
Policyowners' surplus, beginning of year $1,212,850 $ 874,577 $ 892,510
Net income 130,518 129,859 80,103
Change in net unrealized investment
gains and losses (44,940) 208,414 (98,036)
---------- ---------- ---------
Policyowners' surplus, end of year $1,298,428 $1,212,850 $ 874,577
========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
55
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 130,518 $ 129,859 $ 80,103
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to annuity and insur-
ance contracts 275,968 288,218 277,863
Fees deducted from policy and contract
balances (206,780) (201,575) (188,226)
Change in future policy benefits 84,389 100,025 63,328
Change in other policyowner liabilities 16,099 (4,762) (16,794)
Change in deferred policy acquisition
costs (15,312) (29,822) (43,974)
Change in premiums due and other receiv-
ables (26,142) (18,039) 38,166
Change in federal income tax liabilities (12,055) 18,376 17,854
Net realized investment gains (59,546) (66,643) (25,769)
Other, net 29,987 36,561 28,958
---------- ---------- ----------
Net cash provided by operating activi-
ties 217,126 252,198 231,509
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of:
Fixed maturity securities, available-
for-sale 877,682 1,349,348 653,498
Equity securities 352,901 203,493 88,645
Mortgage loans 15,567 4,315 20,912
Real estate 11,678 15,948 17,571
Other invested assets 12,280 10,775 28,305
Proceeds from maturities and repayments
of:
Fixed maturity securities, available-
for-sale 329,550 253,576 327,337
Fixed maturity securities, held-to-matu-
rity 114,222 127,617 75,648
Mortgage loans 94,703 104,730 126,134
Cost of purchases of:
Fixed maturity securities, available-
for-sale (1,228,048) (1,975,130) (1,123,125)
Fixed maturity securities, held-to-matu-
rity (60,612) (140,763) (131,820)
Equity securities (446,599) (212,142) (131,483)
Mortgage loans (108,691) (209,399) (145,964)
Real estate (3,786) (16,554) (10,985)
Other invested assets (29,271) (20,517) (12,732)
Finance receivable originations or pur-
chases (175,876) (167,298) (134,867)
Finance receivable principal payments 142,723 123,515 104,539
Other, net (43,662) (19,292) 15,309
---------- ---------- ----------
Net cash used for investing activities (145,239) (567,778) (233,078)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits credited to annuity and insurance
contracts 657,405 710,525 647,237
Withdrawals from annuity and insurance
contracts (702,681) (563,569) (645,969)
Proceeds from issuance of surplus notes -- 124,967 --
Proceeds from issuance of debt by subsidi-
ary 60,000 50,000 30,000
Payments on debt by subsidiary (21,000) (10,000) (9,100)
Other, net (6,898) (3,801) (5,940)
---------- ---------- ----------
Net cash provided by (used for) fi-
nancing activities (13,174) 308,122 16,228
---------- ---------- ----------
Net increase (decrease) in cash and short-
term investments 58,713 (7,458) 14,659
Cash and short-term investments, beginning
of year 121,199 128,657 113,998
---------- ---------- ----------
Cash and short-term investments, end of
year $ 179,912 $ 121,199 $ 128,657
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
56
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
The Minnesota Mutual Life Insurance Company (the Company), both directly and
through its subsidiaries, provides a diversified array of insurance and
financial products and services designed principally to protect and enhance the
long-term financial well-being of individuals and families.
The Company's strategy is to be successful in carefully selected niche
markets, primarily in the United States, while focusing on the retention of
existing business and the maintenance of profitability. To achieve this
objective, the Company has divided its businesses into four strategic business
units which focus on various markets: Individual, Financial Services, Group,
and Pension. Revenues reported in 1996 by these business units were
$780,250,000, $279,554,000, $213,461,000 and $104,059,000, respectively.
Additional revenues of $170,096,000 were reported by the Company's
subsidiaries.
At December 31, 1996, the Company was one of the 11 largest mutual life
insurance company groups in the United States, as measured by total assets. The
Company serves nearly seven million people through more than 4,000 associates
located at its St. Paul headquarters and in 81 general agencies and 43 regional
offices throughout the United States.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP), which vary in
certain respects from accounting practices prescribed or permitted by state
insurance regulatory authorities. The consolidated financial statements include
the accounts of The Minnesota Mutual Life Insurance Company and its
subsidiaries (collectively, "the Company"). All material intercompany
transactions and balances have been eliminated.
The preparation of financial statements in conformity with GAAP requires
management to make certain estimates and assumptions that affect reported
assets and liabilities, including reporting or disclosure of contingent assets
and liabilities as of the balance sheet date and the reported amounts of
revenues and expenses during the reporting period. Actual results could vary
from management's estimates.
New Accounting Principles
In 1995 and prior years, the Company prepared its financial statements
according to statutory accounting practices prescribed or permitted by the
Commerce Department of the State of Minnesota (Department of Commerce), and
these accounting practices were considered GAAP for mutual life insurance
companies.
In April 1993, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 40 (the Interpretation), "Applicability of Generally
Accepted Accounting Principles to Mutual Life Insurance and Other Enterprises."
The Interpretation was supposed to become effective for fiscal years beginning
after December 15, 1994 and stated that financial statements prepared in
accordance with statutory accounting practices would no longer be considered to
be in conformity with GAAP. The Interpretation requires all mutual life
insurance companies that report their financial statements in conformity with
GAAP to apply all applicable authoritative GAAP pronouncements, with the
exception of Statements of Financial Accounting Standards (SFAS) No. 60,
"Accounting and Reporting by Insurance Enterprises," No. 97, "Accounting and
Reporting by Insurance Enterprises for Certain Long Duration Contracts and
Realized Gains and Losses from the Sale of Investments," and No. 113,
"Accounting for Reinsurance of Short-Duration and Long-Duration Contracts."
In January 1995, the FASB issued SFAS 120, "Accounting and Reporting by
Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long
Duration Participating Contracts." This statement deferred the implementation
of the Interpretation to fiscal years beginning after December 15, 1995 and
extended the requirements of SFAS Nos. 60, 97 and 113 to mutual life insurance
enterprises.
SFAS No. 120 also requires mutual life insurance enterprises to adopt
Statement of Position 95-1, "Accounting for Certain Insurance Activities of
Mutual Life Insurance Enterprises," which was issued by the American Institute
of Certified Public Accountants.
57
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company adopted SFAS No. 120 on January 1, 1996, and the accompanying
1994 and 1995 financial statements and related notes have been restated to
conform with the presentation of the 1996 GAAP financial statements.
The Company will continue to prepare financial statements according to
statutory accounting practices prescribed or permitted by the Department of
Commerce for purposes of filing with the Department of Commerce, the National
Association of Insurance Commissioners and states in which the Company is
licensed to do business. The significant differences between statutory and GAAP
financial results are presented in Note 12.
Insurance Revenues and Expenses
Premiums on traditional life products, which include individual whole life and
term insurance and immediate annuities, are credited to revenue when due. For
accident and health and group life products, premiums are credited to revenue
over the contract period as earned. Benefits and expenses are recognized in
relation to premiums over the contract period via a provision for future policy
benefits and the amortization of deferred policy acquisition costs.
Nontraditional life products include individual adjustable and variable life
insurance and group universal and variable life insurance. Revenue from
nontraditional life products and deferred annuities is comprised of policy and
contract fees charged for the cost of insurance, policy administration and
surrenders. Expenses include the portion of claims not covered by and interest
credited to the related policy and contract account balances. Policy
acquisition costs are amortized relative to gross margins.
Deferred Policy Acquisition Costs
The costs of acquiring new and renewal business, which vary with and are
primarily related to the production of new and renewal business, are generally
deferred to the extent recoverable from future premiums or expected gross
profits. Deferrable costs include commissions, underwriting expenses and
certain other selling and issue costs.
For traditional life, accident and health and group life products, deferred
acquisition costs are amortized over the premium paying period in proportion to
the ratio of annual premium revenues to ultimate anticipated premium revenues.
The ultimate premium revenues are estimated based upon the same assumptions
used to calculate the future policy benefits.
For nontraditional life products and deferred annuities, deferred acquisition
costs are amortized over the estimated lives of the contracts in relation to
the present value of estimated gross profits from surrender charges and
investment, mortality and expense margins.
Deferred acquisition costs amortized were $125,978,000, $104,940,000 and
$86,477,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Finance Charge Income and Receivables
Finance charge income represents fees and interest charged on consumer loans.
The Company uses the interest (actuarial) method of accounting for finance
charges and interest on finance receivables. Accrual of finance charges and
interest is suspended when a loan is contractually delinquent for more than 60
days and is subsequently recognized when received. Accrual is resumed when the
loan is contractually less than 60 days past due. An allowance for
uncollectible amounts is maintained by direct charges to operations at an
amount which management believes, based upon historical losses and economic
conditions, is adequate to absorb probable losses on existing receivables that
may become uncollectible. The reported receivables are net of this allowance.
Valuation of Investments
Fixed maturity securities (bonds) which the Company has the positive intent and
ability to hold to maturity are classified as held-to-maturity and are carried
at amortized cost, net of write-downs for other than temporary declines in
value. Premiums and discounts are amortized or accreted over the estimated
lives of the securities based on the interest yield method. Fixed maturity
securities which may be sold prior to maturity are classified as available-for-
sale and carried at fair value.
58
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Equity securities (common stocks and preferred stocks) are carried at fair
value. Equity securities also include initial contributions to affiliated
registered investment funds that are managed by a subsidiary of the Company.
These contributions are carried at the market value of the underlying net
assets of the funds.
Mortgage loans are carried at amortized cost less an allowance for
uncollectible amounts. Premiums and discounts are amortized or accreted over
the terms of the mortgage loans based on the interest yield method. A mortgage
loan is considered impaired if it is probable that contractual amounts due will
not be collected. Impaired mortgage loans are valued at the fair value of the
underlying collateral. Interest income on impaired mortgage loans is recorded
on an accrual basis. However, when the likelihood of collection is doubtful,
interest income is recognized when received.
Fair values of fixed maturity securities and equity securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are estimated using values obtained from independent
pricing services which specialize in matrix pricing and modeling techniques for
estimating fair values. Fair values of mortgage loans are based upon discounted
cash flows, quoted market prices and matrix pricing.
Real estate is carried at cost less accumulated depreciation and an allowance
for estimated losses. Accumulated depreciation on real estate at December 31,
1996 and 1995, was $5,968,000 and $8,342,000, respectively.
Policy loans are carried at the unpaid principal balance.
Derivative Financial Instruments
The Company entered into equity swaps in 1996 as part of an overall risk
management strategy. The swaps are used to hedge exposure to market risk on
$400,000,000 of the Company's common stock portfolio. The swaps are based upon
certain stock indices, and settlement with the counterparties will take place
in January 1998. If, at the time of settlement for a particular swap, the
designated stock index has fallen below a specified level, the counterparty
will pay the Company an amount based upon the decline in the index and the
stock portfolio value protected by the swap. If, at the time of settlement, the
designated stock index has risen, the Company will pay the counterparty an
amount based upon the increase in the index and 25% of the stock portfolio
value protected by the swap.
The basic types of risks associated with derivatives are market risk (that
the value of the derivative will be adversely affected by changes in the
market) and credit risk (that the counterparty will not perform according to
the contract terms). To reduce credit risk, the swap contracts require that the
counterparties maintain sufficient credit ratings and provide collateral under
certain circumstances.
The swaps are carried at fair value, which is based upon dealer quotes.
Changes in fair value are recorded directly in policyowners' surplus. Upon
settlement of the swaps, gains or losses are recognized in income.
Capital Gains and Losses
Realized and unrealized capital gains and losses are determined on the specific
identification method. Write-downs of held-to-maturity securities and the
provision for credit losses on mortgage loans and real estate are recorded as
realized losses.
Changes in the fair value of fixed maturity securities available-for-sale and
equity securities are recorded as a separate component of policyowners'
surplus, net of taxes and related adjustments to deferred policy acquisition
costs and unearned policy and contract fees.
Property and Equipment
Property and equipment are carried at cost, net of accumulated depreciation of
$81,962,000 and $75,507,000 at December 31, 1996 and 1995, respectively.
Buildings are depreciated over 40 years and equipment is generally depreciated
over 5 to 10 years. Depreciation expense for the years ended December 31, 1996,
1995 and 1994, was $6,454,000, $5,941,000 and $8,136,000, respectively.
59
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Separate Accounts
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the exclusive benefit of certain policyowners
and contractholders. The Company receives administrative and investment
advisory fees for services rendered on behalf of these funds. Separate account
assets and liabilities are carried at fair value, based upon the market value
of the investments held in the segregated funds.
The Company periodically invests money in its separate accounts. The market
value of such investments is included with separate account assets and amounted
to $14,882,000 and $13,175,000 as of December 31, 1996 and 1995, respectively.
Policyowner Liabilities
Policy and contract account balances represent the net accumulation of funds
associated with nontraditional life products and deferred annuities. Additions
to the account balances include premiums, deposits and interest credited by the
Company. Decreases in the account balances include surrenders, withdrawals,
benefit payments, and charges assessed for the cost of insurance, policy
administration and surrenders.
Future policy and contract benefits are comprised of reserves for traditional
life, group life, and accident and health products. The reserves were
calculated using the net level premium method based upon assumptions regarding
investment yield, mortality, morbidity, and withdrawal rates determined at the
date of issue, commensurate with the Company's experience. Provision has been
made in certain cases for adverse deviations from these assumptions.
Other policyowner funds are comprised of dividend accumulations, premium
deposit funds and supplementary contracts without life contingencies.
Participating Business
Substantially all of the Company's premium revenues are derived from
participating policies. Dividends and other discretionary payments are declared
by the Board of Trustees based upon actuarial determinations which take into
consideration current mortality, interest earnings, expense factors and federal
income taxes. Dividends are recognized as expenses consistent with the
recognition of premiums.
Income Taxes
Current income taxes are charged to operations based upon amounts estimated to
be payable as a result of taxable operations for the current year. Deferred
income tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between financial statement
carrying amounts and income tax bases of assets and liabilities.
Reinsurance Recoverables
Insurance liabilities are reported before the effects of ceded reinsurance.
Reinsurance recoverables represent amounts due from reinsurers for paid and
unpaid benefits, expense reimbursements, prepaid premiums and future policy
benefits.
60
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INVESTMENTS
Net investment income for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities $433,985 $426,114 $417,698
Equity securities 14,275 8,883 4,485
Mortgage loans 63,865 58,943 49,676
Real estate (475) 497 648
Policy loans 13,828 12,821 11,800
Short-term investments 6,535 6,716 4,262
Other invested assets 4,901 5,168 3,212
-------- -------- --------
Gross investment income 536,914 519,142 491,781
Investment expenses (5,927) (4,095) (5,680)
-------- -------- --------
Total $530,987 $515,047 $486,101
======== ======== ========
</TABLE>
Net realized capital gains (losses) for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities $(6,536) $24,025 $(2,528)
Equity securities 57,770 36,374 11,268
Mortgage loans (721) (207) (82)
Real estate 7,088 2,436 3,915
Other invested assets 1,945 4,015 13,196
------- ------- -------
Total $59,546 $66,643 $25,769
======= ======= =======
</TABLE>
Gross realized gains (losses) on the sales of fixed maturity securities and
equity securities for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities, available-for-sale:
Gross realized gains $ 19,750 $ 34,898 $ 13,375
Gross realized losses (26,286) (10,873) (15,903)
Equity securities:
Gross realized gains 79,982 52,670 21,538
Gross realized losses (22,212) (16,296) (10,270)
</TABLE>
Net unrealized gains (losses) included in policyowners' surplus at December
31 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Gross unrealized gains $314,576 $358,877
Gross unrealized losses (77,337) (13,713)
Adjustment to deferred policy acquisition costs (65,260) (99,732)
Adjustment to unearned policy and contract fees (8,192) (11,665)
Deferred federal income taxes (55,475) (80,515)
-------- --------
Net unrealized gains $108,312 $153,252
======== ========
</TABLE>
61
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3)INVESTMENTS (CONTINUED)
The amortized cost and fair value of investments in marketable securities by
type of investment were as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ---------------- FAIR
COST GAINS LOSSES VALUE
---------- -------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Available-for-sale:
United States government and gov-
ernment agencies and authorities $ 302,820 $ 2,397 $ 6,756 $ 298,461
States, municipalities, and polit-
ical subdivisions 11,296 759 -- 12,055
Foreign governments 1,926 -- 54 1,872
Corporate securities 2,450,126 115,846 19,554 2,546,418
Mortgage-backed securities 1,792,807 64,834 42,365 1,815,276
---------- -------- ------- ----------
Total fixed maturities 4,558,975 183,836 68,729 4,674,082
Equity securities--unaffiliated 353,983 107,172 5,168 455,987
Equity securities--affiliated 75,526 18,284 -- 93,810
---------- -------- ------- ----------
Total equity securities 429,509 125,456 5,168 549,797
---------- -------- ------- ----------
Total available-for-sale 4,988,484 309,292 73,897 5,223,879
Held-to-maturity:
Corporate securities 904,994 50,187 3,130 952,051
Mortgage-backed securities 220,644 7,833 1,416 227,061
---------- -------- ------- ----------
Total held-to-maturity 1,125,638 58,020 4,546 1,179,112
---------- -------- ------- ----------
Total $6,114,122 $367,312 $78,443 $6,402,991
========== ======== ======= ==========
DECEMBER 31, 1995
Available-for-sale:
United States government and gov-
ernment agencies and authorities $ 261,669 $ 10,911 $ 440 $ 272,140
States, municipalities, and polit-
ical subdivisions 26,317 3,262 -- 29,579
Foreign governments 1,704 223 -- 1,927
Corporate securities 2,523,889 169,329 6,098 2,687,120
Mortgage-backed securities 1,711,773 62,510 3,488 1,770,795
---------- -------- ------- ----------
Total fixed maturities 4,525,352 246,235 10,026 4,761,561
Equity securities--unaffiliated 196,355 91,269 1,590 286,034
Equity securities--affiliated 81,199 17,649 -- 98,848
---------- -------- ------- ----------
Total equity securities 277,554 108,918 1,590 384,882
---------- -------- ------- ----------
Total available-for-sale 4,802,906 355,153 11,616 5,146,443
Held-to-maturity:
United States government and gov-
ernment agencies and authorities 250 3 -- 253
States, municipalities, and polit-
ical subdivisions 525 6 -- 531
Corporate securities 953,511 89,962 525 1,042,948
Mortgage-backed securities 226,368 11,540 117 237,791
---------- -------- ------- ----------
Total held-to-maturity 1,180,654 101,511 642 1,281,523
---------- -------- ------- ----------
Total $5,983,560 $456,664 $12,258 $6,427,966
========== ======== ======= ==========
</TABLE>
62
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3)INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
--------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less $ 33,390 $ 33,429 $ 4,889 $ 4,948
Due after one year through five
years 435,040 459,870 163,206 168,527
Due after five years through ten
years 1,383,954 1,429,460 223,848 235,754
Due after ten years 913,784 936,047 513,051 542,822
---------- ---------- ---------- ----------
2,766,168 2,858,806 904,994 952,051
Mortgage-backed securities 1,792,807 1,815,276 220,644 227,061
---------- ---------- ---------- ----------
Total $4,558,975 $4,674,082 $1,125,638 $1,179,112
========== ========== ========== ==========
</TABLE>
At December 31, 1996 and 1995, bonds and certificates of deposit with a
carrying value of $12,934,000 and $15,296,000, respectively, were on deposit
with various regulatory authorities as required by law.
Allowances for credit losses on investments are reflected on the consolidated
balance sheets as a reduction of the related assets and were as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Mortgage loans $ 1,895 $ 1,711
Foreclosed real estate 535 400
Investment real estate 2,529 2,565
------- -------
Total $ 4,959 $ 4,676
======= =======
</TABLE>
At December 31, 1996, the recorded investment in mortgage loans that were
considered to be impaired was $6,518,000 before allowance for credit losses.
Included in this amount is $2,225,000 of impaired loans, for which the related
allowance for credit losses is $395,000, and $4,293,000 of impaired loans that,
as a result of adequate fair market value of underlying collateral, do not have
an allowance for credit losses.
At December 31, 1995, the recorded investment in mortgage loans that were
considered to be impaired was $12,232,000 before allowance for credit losses.
Included in this amount is $3,256,000 of impaired loans, for which the related
allowance for credit losses is $211,000, and $8,976,000 of impaired loans that,
as a result of adequate fair market value of underlying collateral, do not have
an allowance for credit losses.
In addition to the allowance for credit losses on impaired mortgage loans, a
general allowance for credit losses was established for potential impairments
in the remainder of the mortgage loan portfolio. The general allowance was
$1,500,000 at December 31, 1996, 1995 and 1994.
Changes in the allowance for credit losses on mortgage loans were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $1,711 $2,449 $2,412
Provision for credit losses 381 127 622
Charge-offs (197) (865) (585)
------ ------ ------
Balance at end of year $1,895 $1,711 $2,449
====== ====== ======
</TABLE>
63
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3)INVESTMENTS (CONTINUED)
Below is a summary of interest income on impaired mortgage loans.
<TABLE>
<CAPTION>
1996 1995 1994
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Average impaired mortgage loans $9,375 $15,845 $20,236
Interest income on impaired mortgage loans--contractual 1,796 1,590 2,103
Interest income on impaired mortgage loans--collected 1,742 1,515 1,963
</TABLE>
(4) NET FINANCE RECEIVABLES
Finance receivables as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Direct installment loans $204,038 $178,262
Retail installment notes 30,843 32,345
Retail revolving credit 24,863 14,864
Credit card receivables 3,541 4,479
Accrued interest 3,404 3,147
-------- --------
Gross receivables 266,689 233,097
Allowance for uncollectible amounts (7,497) (6,377)
-------- --------
Finance receivables, net $259,192 $226,720
======== ========
</TABLE>
Direct installment loans at December 31, 1996 consisted of $93,127,000 of
discount basis loans (net of unearned finance charges) and $110,911,000 of
interest-bearing loans. As of December 31, 1995, discount basis loans amounted
to $92,351,000 and interest-bearing loans amounted to $85,911,000. Direct
installment loans generally have a maximum term of 84 months. Retail
installment notes are principally discount basis, arise from the sale of
household appliances, furniture, and sundry services, and generally have a
maximum term of 48 months. Experience has shown that a substantial portion of
finance receivables will be renewed, converted or paid in full prior to
maturity.
Principal cash collections of direct installment loans amounted to
$92,438,000, $75,865,000 and $70,941,000, and the percentage of these cash
collections to average net balances was 48%, 47% and 55% for the years ended
December 31, 1996, 1995 and 1994, respectively.
Changes in the allowance for uncollectible amounts for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 6,377 $5,360 $4,801
Provision for credit losses 10,086 6,140 4,652
Charge-offs (11,036) (6,585) (5,305)
Recoveries 2,070 1,462 1,212
------- ------ ------
Balance at end of year $ 7,497 $6,377 $5,360
======= ====== ======
</TABLE>
64
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) INCOME TAXES
Income tax expense varies from the amount computed by applying the federal
income tax rate of 35% to income from operations before taxes. The significant
components of this difference were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed tax expense $69,753 $74,631 $49,781
Differences between
computed and actual tax
expense:
Dividends received
deduction (2,534) (1,710) (1,293)
Special tax on mutual
life insurance
companies 2,760 10,134 9,880
Tax credits (3,475) (1,840) (1,150)
Expense adjustments and
other 2,273 2,159 4,912
------- ------- -------
Total tax expense $68,777 $83,374 $62,130
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to the Company's net
deferred federal tax liability were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Policyowner liabilities $ 15,854 $ 22,151
Unearned fee income 43,232 43,576
Pension and post-retirement benefits 21,815 20,187
Tax deferred policy acquisition costs 58,732 47,228
Net realized capital losses 8,275 7,881
Other 19,229 17,997
-------- --------
Gross deferred tax assets 167,137 159,020
Deferred tax liabilities:
Deferred policy acquisition costs 206,331 188,906
Real estate and property and equipment depreciation 10,089 9,049
Basis difference on investments 8,605 7,402
Net unrealized capital gains 81,339 119,604
Other 10,438 7,964
-------- --------
Gross deferred tax liabilities 316,802 332,925
-------- --------
Net deferred tax liability $149,665 $173,905
======== ========
</TABLE>
A valuation allowance for deferred tax assets was not considered necessary as
of December 31, 1996 and 1995, because the Company believes that it is more
likely than not that the deferred tax assets will be realized through future
reversals of existing taxable temporary differences and future taxable income.
Income taxes paid for the years ended December 31, 1996, 1995 and 1994, were
$79,026,000, $64,390,000 and $45,268,000, respectively.
65
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) LIABILITY FOR UNPAID ACCIDENT AND HEALTH CLAIMS AND CLAIM ADJUSTMENT
EXPENSES
Activity in the liability for unpaid accident and health claims and claim
adjustment expenses is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1 $377,302 $349,311 $323,304
Less: reinsurance recoverable 80,333 61,624 51,549
-------- -------- --------
Net balance at January 1 296,969 287,687 271,755
-------- -------- --------
Incurred related to:
Current year 134,727 129,896 129,028
Prior years 4,821 (4,014) 860
-------- -------- --------
Total incurred 139,548 125,882 129,888
-------- -------- --------
Paid related to:
Current year 51,695 47,620 46,270
Prior years 70,073 68,980 67,686
-------- -------- --------
Total paid 121,768 116,600 113,956
-------- -------- --------
Net balance at December 31 314,749 296,969 287,687
Plus: reinsurance recoverable 102,161 80,333 61,624
-------- -------- --------
Balance at December 31 $416,910 $377,302 $349,311
======== ======== ========
</TABLE>
The liability for unpaid accident and health claims and claim adjustment
expenses is included in future policy and contract benefits and pending policy
and contract claims on the consolidated balance sheets.
Incurred claims related to prior years are due to the differences between
actual and estimated claims incurred as of the end of the prior year and
interest credited to future policy and contract benefits.
(7) EMPLOYEE BENEFIT PLANS
Pension Plans
The Company has noncontributory defined benefit retirement plans covering
substantially all employees and certain agents. Benefits are based upon years
of participation and the employee's average monthly compensation or the agent's
adjusted annual compensation. Plan assets are comprised of mostly stocks and
bonds which are held in the general and separate accounts of the Company and
administered under group annuity contracts issued by the Company. The Company's
funding policy is to contribute annually the minimum amount required by
applicable regulations. The Company also has an unfunded noncontributory
defined benefit retirement plan which provides certain employees with benefits
in excess of limits for qualified retirement plans.
Net periodic pension cost for the years ended December 31 included the
following components:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the period $ 6,019 $ 5,294 $ 4,880
Interest accrued on projected benefit obligation 8,541 7,935 7,382
Actual return on plan assets (12,619) (18,061) (1,331)
Net amortization and deferral 4,698 11,811 (5,094)
-------- -------- -------
Net periodic pension cost $ 6,639 $ 6,979 $ 5,837
======== ======== =======
</TABLE>
66
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) EMPLOYEE BENEFIT PLANS (CONTINUED)
The funded status for the Company's plans as of December 31 was calculated as
follows:
<TABLE>
<CAPTION>
FUNDED PLANS UNFUNDED PLAN
------------------ ----------------
1996 1995 1996 1995
-------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of benefit ob-
ligations:
Vested benefit obligation $ 61,328 $ 56,428 $ -- $ --
Non-vested benefit obligation 19,119 16,599 5,912 4,539
-------- -------- ------- -------
Accumulated benefit obligation $ 80,447 $ 73,027 $ 5,912 $ 4,539
======== ======== ======= =======
Pension liability included in other li-
abilities:
Projected benefit obligation $117,836 $105,180 $12,576 $10,430
Plan assets at fair value 115,107 102,594 -- --
-------- -------- ------- -------
Plan assets less than projected bene-
fit obligation 2,729 2,586 12,576 10,430
Unrecognized net gain (loss) 3,633 2,095 (2,332) (1,187)
Unrecognized prior service cost (364) (213) -- --
Unamortized transition asset (obliga-
tion) 2,422 2,643 (8,451) (9,219)
Additional minimum liability -- -- 4,119 4,515
-------- -------- ------- -------
Net pension liability $ 8,420 $ 7,111 $ 5,912 $ 4,539
======== ======== ======= =======
</TABLE>
A weighted average discount rate of 7.5% and a weighted average rate of
increase in future compensation levels of 5.8% were used in determining the
actuarial present value of the projected benefit obligation at December 31,
1996 and 1995. The assumed long-term rate of return on plan assets was either
7.5% or 8.5%, depending on the plan.
Profit Sharing Plans
The Company also has profit sharing plans covering substantially all employees
and agents. The Company's contribution rate to the employee plan is determined
annually by the trustees of the Company and is applied to each participant's
prior year earnings. The Company's contribution to the agent plan is made as a
certain percentage, based upon years of service, applied to each agent's total
annual compensation. The Company recognized contributions to the plans during
1996, 1995 and 1994 of $6,092,000, $6,595,000 and $6,866,000, respectively.
Participants may elect to receive a portion of their contributions in cash.
Postretirement Benefits Other than Pensions
The Company also has unfunded postretirement plans that provide certain health
care and life insurance benefits to substantially all retired employees and
agents. Eligibility is determined by age at retirement and years of service
after age 30. Health care premiums are shared with retirees, and other cost-
sharing features include deductibles and co-payments.
Components of net periodic postretirement benefit cost for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the period $1,011 $1,276 $1,760
Interest accrued on projected benefit obligation 2,041 2,452 2,298
Amortization of prior service cost (513) (513) (223)
Amortization of net gain (177) -- --
------ ------ ------
Net periodic postretirement benefit cost $2,362 $3,215 $3,835
====== ====== ======
</TABLE>
67
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) EMPLOYEE BENEFIT PLANS (CONTINUED)
The accumulated postretirement benefit obligation and the accrued
postretirement benefit liability for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $10,238 $11,875
Other fully eligible plan participants 4,594 5,535
Other active plan participants 9,514 9,809
------- -------
Total accumulated postretirement benefit obligation 24,346 27,219
Unrecognized prior service cost 4,107 4,620
Unrecognized net gain 9,880 4,743
------- -------
Accrued postretirement benefit liability $38,333 $36,582
======= =======
</TABLE>
The discount rate used in determining the accumulated postretirement benefit
obligation for 1996 and 1995 was 7.5%. The 1996 net health care cost trend rate
was 9.0%, graded to 5.5% over 7 years, and the 1995 rate was 11.0%, graded to
5.5% over 11 years.
The assumptions presented herein are based on pertinent information available
to management as of December 31, 1996 and 1995. Actual results could differ
from those estimates and assumptions. For example, increasing the assumed
health care cost trend rates by one percentage point in each year would
increase the postretirement benefit obligation as of December 31, 1996 by
$4,262,000 and the estimated eligibility cost and interest cost components of
net periodic postretirement benefit costs for 1996 by $583,000.
(8) REINSURANCE
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance companies. To the extent that a reinsurer is
unable to meet its obligations under the reinsurance agreement, the Company
remains liable. The Company evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk to minimize its exposure to
significant losses from reinsurer insolvencies.
Reinsurance is accounted for over the life of the underlying reinsured
policies using assumptions consistent with those used to account for the
underlying policies.
The effect of reinsurance on premiums for the years ended December 31 was as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Direct premiums $615,098 $600,841 $558,066
Reinsurance assumed 64,489 64,792 60,939
Reinsurance ceded (67,228) (61,863) (56,987)
-------- -------- --------
Net premiums $612,359 $603,770 $562,018
======== ======== ========
</TABLE>
Reinsurance recoveries on ceded reinsurance contracts were $72,330,000,
$58,338,000 and $60,970,000 during 1996, 1995 and 1994, respectively.
68
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments has been
determined using available market information as of December 31, 1996 and 1995.
Although management is not aware of any factors that would significantly affect
the estimated fair values, such amounts have not been comprehensively revalued
since those dates. Therefore, estimates of fair value subsequent to the
valuation dates may differ significantly from the amounts presented herein.
Considerable judgment is required to interpret market data to develop the
estimates of fair value. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
Please refer to Note 2 for additional fair value disclosures concerning fixed
maturity securities, equity securities, mortgages and derivatives. The carrying
amounts for policy loans, cash, short term investments and finance receivables
approximate the assets' fair values.
The interest rates on the finance receivables outstanding as of December 31,
1996 and 1995, are consistent with the rates at which loans would currently be
made to borrowers of similar credit quality and for the same maturity; as such,
the carrying value of the finance receivables outstanding as of December 31,
1996 and 1995, approximate the fair value for those respective dates.
The fair values of deferred annuities, annuity certain contracts, and other
fund deposits, which have guaranteed interest rates and surrender charges, are
estimated to be the amount payable on demand as of December 31, 1996 and 1995.
The amount payable on demand equates to the account balance less applicable
surrender charges. Contracts without guaranteed interest rates and surrender
charges have fair values equal to their accumulation values plus applicable
market value adjustments. The fair values of guaranteed investment contracts
and supplementary contracts without life contingencies are calculated using
discounted cash flows, based on interest rates currently offered for similar
products with maturities consistent with those remaining for the contracts
being valued.
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of notes payable.
The carrying amounts and fair values of the Company's financial instruments
which were classified as assets as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed maturity securities:
Available-for-sale $4,674,082 $4,674,082 $4,761,561 $4,761,561
Held-to-maturity 1,125,638 1,179,112 1,180,654 1,281,523
Equity securities 549,797 549,797 384,882 384,882
Mortgage loans:
Commercial 432,198 445,976 373,897 391,089
Residential 176,610 180,736 234,640 239,723
Policy loans 204,178 204,178 198,716 198,716
Short-term investments 122,772 122,772 72,841 72,841
Cash 57,140 57,140 48,358 48,358
Finance receivables, net 259,192 259,192 226,720 226,720
Derivatives 1,197 1,197 -- --
---------- ---------- ---------- ----------
Total financial assets $7,602,804 $7,674,182 $7,482,269 $7,605,413
========== ========== ========== ==========
</TABLE>
69
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and fair values of the Company's financial instruments
which were classified as liabilities as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deferred annuities $2,178,355 $2,152,636 $2,178,223 $2,156,886
Annuity certain contracts 52,636 53,962 48,492 50,732
Other fund deposits 808,592 805,709 856,535 847,975
Guaranteed investment contracts 18,770 18,866 47,426 47,987
Supplementary contracts without
life contingencies 47,966 47,536 41,431 39,962
Notes payable 319,000 325,974 279,967 294,103
---------- ---------- ---------- ----------
Total financial liabilities $3,425,319 $3,404,683 $3,452,074 $3,437,645
========== ========== ========== ==========
</TABLE>
(10) NOTES PAYABLE
In September 1995, the Company issued surplus notes with a face value of
$125,000,000, at 8.25%, due in 2025. The surplus notes are subordinate to all
current and future policyowners' interests, including claims, and indebtedness
of the Company. All payments of interest and principal on the notes are subject
to the approval of the Department of Commerce. The approved accrued interest
was $3,008,000 as of December 31, 1996 and 1995. The issuance costs of
$1,403,000 are deferred and amortized over 30 years on a straight-line basis.
Notes payable as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Corporate--surplus notes, 8.25%, 2025 $125,000 $124,967
Consumer finance subsidiary--senior, 6.53%--8.77%, through
2003 194,000 155,000
-------- --------
Total notes payable $319,000 $279,967
======== ========
</TABLE>
At December 31, 1996, the aggregate minimum annual notes payable maturities
for the next five years were as follows: 1997, $21,000,000; 1998, $31,000,000;
1999, $49,000,000; 2000, $33,000,000; 2001, $26,000,000.
Long-term borrowing agreements involving the consumer finance subsidiary
include provisions with respect to borrowing limitations, payment of cash
dividends on or purchases of common stock, and maintenance of liquid net worth.
As of December 31, 1996, the consumer finance subsidiary was required to have a
minimum liquid net worth of $41,354,000. Liquid net worth at that date was
$51,803,000.
Interest paid on debt for the years ended December 31, 1996, 1995 and 1994,
was $21,849,000, $6,504,000 and $5,378,000, respectively.
(11) COMMITMENTS AND CONTINGENCIES
The Company is involved in various pending or threatened legal proceedings
arising out of the normal course of business. In the opinion of management, the
ultimate resolution of such litigation will not have a material adverse effect
on operations or the financial position of the Company.
The Company has issued certain participating group annuity and life insurance
contracts jointly with another life insurance company. The joint contract
issuer has liabilities related to these contracts of
70
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)
$328,346,000 as of December 31, 1996. To the extent the joint contract issuer
is unable to meet its obligation under the agreement, the Company remains
liable.
The Company has long-term commitments to fund venture capital and real estate
investments totaling $142,469,000 as of December 31, 1996. The Company
estimates that $35,000,000 of these commitments will be invested in 1997, with
the remaining $107,469,000 invested over the next four years.
As of December 31, 1996, the Company had committed to purchase bonds and
mortgage loans totaling $74,123,000 but had not completed the purchase
transactions.
At December 31, 1996, the Company had guaranteed the payment of $68,700,000
in policyowner dividends and discretionary amounts payable in 1997. The Company
has pledged bonds, valued at $70,336,000, to secure this guarantee.
The Company is contingently liable under state regulatory requirements for
possible assessments pertaining to future insolvencies and impairments of
unaffiliated insurance companies. The Company records a liability for future
guaranty fund assessments based upon known insolvencies, according to data
received from the National Organization of Life and Health Insurance Guaranty
Associations. An asset is held for the amount of guaranty fund assessments paid
which can be recovered through future premium tax credits.
(12) STATUTORY FINANCIAL DATA
Statutory accounting is primarily focused on solvency and surplus adequacy.
Therefore, fundamental differences exist between statutory and GAAP accounting,
and their effects on income and policyowners' surplus are illustrated below:
<TABLE>
<CAPTION>
POLICYOWNERS' SURPLUS NET INCOME
---------------------- ----------------------------
1996 1995 1996 1995 1994
---------- ---------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Statutory basis $ 682,886 $ 601,565 $115,797 $ 88,706 $ 65,123
Adjustments:
Deferred policy acquisi-
tion costs 589,517 539,732 15,312 29,822 43,974
Net unrealized invest-
ment gains 111,575 235,143 -- -- --
Statutory asset valua-
tion reserve 240,474 201,721 -- -- --
Statutory interest main-
tenance reserve 24,707 32,899 (8,192) 12,976 (4,426)
Premiums and fees de-
ferred or receivable (75,716) (77,444) 1,587 497 (2,310)
Change in reserve basis 98,406 77,464 20,114 12,382 (1,444)
Separate accounts (40,755) (36,010) (6,304) (854) (5,837)
Unearned policy and con-
tract fees (121,843) (122,786) (2,530) (4,410) (10,406)
Surplus notes (125,000) (124,967) -- -- --
Net deferred taxes (149,665) (173,905) 744 (11,995) 1,511
Nonadmitted assets 31,531 28,211 -- -- --
Policyowner dividends 57,765 57,263 502 4,660 2,446
Other (25,454) (26,036) (6,512) (1,925) (8,528)
---------- ---------- -------- -------- --------
As reported in the
accompanying
consolidated
financial statements $1,298,428 $1,212,850 $130,518 $129,859 $ 80,103
========== ========== ======== ======== ========
</TABLE>
71
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
AS SHOWN
MARKET ON THE BALANCE
TYPE OF INVESTMENT COST(3) VALUE SHEET(1)
- ------------------ ---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Bonds:
United States government and government
agencies and authorities $ 302,820 $ 298,461 $ 298,461
States, municipalities and political
subdivisions 11,296 12,055 12,055
Foreign governments 1,926 1,872 1,872
Public utilities 547,228 590,445 573,030
Mortgage-backed securities 2,013,451 2,042,337 2,035,920
All other corporate bonds 2,807,892 2,908,024 2,878,382
---------- ---------- ----------
Total bonds 5,684,613 5,853,194 5,799,720
---------- ---------- ----------
Equity securities:
Common stocks:
Public utilities 510 611 611
Banks, trusts and insurance companies 12,824 21,484 21,484
Industrial, miscellaneous and all
other 329,792 422,401 422,401
Nonredeemable preferred stocks 10,857 11,491 11,491
---------- ---------- ----------
Total equity securities 353,983 455,987 455,987
---------- ---------- ----------
Mortgage loans on real estate 608,808 xxxxxx 608,808
Real estate (2) 43,082 xxxxxx 43,082
Policy loans 204,178 xxxxxx 204,178
Other long-term investments 98,247 xxxxxx 98,247
Short-term investments 122,772 xxxxxx 122,772
---------- ----------
Total $1,077,087 xxxxxx $1,077,087
---------- ----------
Total investments $7,115,683 xxxxxx $7,332,794
========== ==========
</TABLE>
- -------
(1) Amortized cost for bonds classified as held-to-maturity and fair value for
common stocks and bonds classified as available-for-sale.
(2) The carrying value of real estate acquired in satisfaction of indebtedness
is $1,810,000.
(3) Original cost for equity securities and original cost reduced by repayments
and adjusted for amortization of premiums or accrual of discounts for bonds
and other investments.
72
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------- ------------------------------------------------------------
FUTURE POLICY AMORTIZATION
DEFERRED BENEFITS OTHER POLICY BENEFITS, OF DEFERRED
POLICY LOSSES, CLAIMS CLAIMS AND NET CLAIMS, LOSSES POLICY OTHER
ACQUISITION AND SETTLEMENT UNEARNED BENEFITS PREMIUM INVESTMENT AND SETTLEMENT ACQUISITION OPERATING
SEGMENT COSTS EXPENSES(1) PREMIUMS(2) PAYABLE REVENUE(3) INCOME EXPENSES COSTS EXPENSES
- ------- ----------- -------------- ----------- ------------ ---------- ---------- -------------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996:
Life insurance $456,461 $2,123,148 $149,152 $51,772 $568,874 $223,762 $478,228 $ 97,386 $290,525
Accident and
health insurance 62,407 437,118 33,770 18,774 160,097 34,202 96,743 14,017 87,222
Annuity 70,649 3,360,614 -- 31 79,245 267,473 243,387 14,575 111,366
Property and
liability
insurance -- 27,855 24,189 -- 50,109 5,550 36,933 -- 19,033
-------- ---------- -------- ------- -------- -------- -------- -------- --------
$589,517 $5,948,735 $207,111 $70,577 $858,325 $530,987 $855,291 $125,978 $508,146
======== ========== ======== ======= ======== ======== ======== ======== ========
1995:
Life insurance $430,829 $2,009,154 $151,864 $41,212 $540,353 $203,487 $454,299 $ 80,896 $266,090
Accident and
health insurance 55,888 400,950 34,847 14,567 153,505 33,358 93,482 11,448 83,345
Annuity 53,015 3,401,760 -- 33 74,899 272,499 260,854 12,596 86,716
Property and
liability
insurance -- 30,117 23,783 -- 49,216 5,703 33,563 -- 18,090
-------- ---------- -------- ------- -------- -------- -------- -------- --------
$539,732 $5,841,981 $210,494 $55,812 $817,973 $515,047 $842,198 $104,940 $454,241
======== ========== ======== ======= ======== ======== ======== ======== ========
1994:
Life insurance $510,117 $1,867,170 $133,221 $47,099 $505,300 $192,141 $443,233 $ 59,351 $245,791
Accident and
health insurance 46,506 352,955 36,529 17,142 136,619 30,119 93,359 12,401 75,380
Annuity 92,664 3,263,042 -- 12 60,479 258,196 238,301 14,725 79,498
Property and
liability
insurance -- 32,807 21,865 -- 47,735 5,645 33,829 -- 18,717
-------- ---------- -------- ------- -------- -------- -------- -------- --------
$649,287 $5,515,974 $191,615 $64,253 $750,133 $486,101 $808,722 $ 86,477 $419,386
======== ========== ======== ======= ======== ======== ======== ======== ========
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
PREMIUMS
SEGMENT WRITTEN(4)
- ------- ----------
(IN THOUSANDS)
<S> <C>
1996:
Life insurance
Accident and
health insurance
Annuity
Property and
liability
insurance 50,515
-------
$50,515
=======
1995:
Life insurance
Accident and
health insurance
Annuity
Property and
liability
insurance 51,133
-------
$51,133
=======
1994:
Life insurance
Accident and
health insurance
Annuity
Property and
liability
insurance 47,073
-------
$47,073
=======
</TABLE>
- -----
(1) Includes policy and contract account balances
(2) Includes unearned policy and contract fees
(3) Includes policy and contract fees
(4) Applies only to property and liability insurance
73
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
OTHER FROM OTHER NET ASSUMED TO
GROSS AMOUNT COMPANIES COMPANIES AMOUNT NET
------------ ----------- ----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1996:
Life insurance in force $116,445,975 $15,164,764 $22,957,287 $124,238,498 18.5%
============ =========== =========== ============
Premiums:
Life insurance $ 347,056 $ 45,988 $ 63,044 $ 364,112 17.3%
Accident and health
insurance 174,219 15,511 1,389 160,097 0.9%
Annuity 38,041 -- -- 38,041 --
Property and liability
insurance 55,782 5,729 56 50,109 0.1%
------------ ----------- ----------- ------------
Total premiums $ 615,098 $ 67,228 $ 64,489 $ 612,359 10.5%
============ =========== =========== ============
1995:
Life insurance in force $106,228,277 $15,620,303 $24,289,241 $114,897,215 21.1%
============ =========== =========== ============
Premiums:
Life insurance $ 342,433 $ 44,778 $ 62,169 $ 359,824 17.3%
Accident and health
insurance 163,412 12,296 2,389 153,505 1.6%
Annuity 41,225 -- -- 41,225 --
Property and liability
insurance 53,771 4,789 234 49,216 0.5%
------------ ----------- ----------- ------------
Total premiums $ 600,841 $ 61,863 $ 64,792 $ 603,770 10.7%
============ =========== =========== ============
1994:
Life insurance in force $ 99,220,067 $13,570,369 $23,520,616 $109,170,314 21.5%
============ =========== =========== ============
Premiums:
Life insurance $ 322,799 $ 38,088 $ 59,064 $ 343,775 17.2%
Accident and health
insurance 145,333 10,007 1,293 136,619 0.9%
Annuity 33,889 -- -- 33,889 --
Property and liability
insurance 56,045 8,892 582 47,735 1.2%
------------ ----------- ----------- ------------
Total premiums $ 558,066 $ 56,987 $ 60,939 $ 562,018 10.8%
============ =========== =========== ============
</TABLE>
74
