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[SENTRY LOGO]
Sentry Variable Account II
THE PATRIOT
A FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY
FUNDED BY NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
[SENTRY LOGO]
ANNUAL REPORT
DECEMBER 31, 1996
SENTRY LIFE INSURANCE COMPANY
<PAGE> 2
Dear Contract Owner February 15, 1997
Thank you for selecting the Patriot for your long-term investment needs. As
always we appreciate the confidence you have in Sentry to provide you with this
variable annuity program.
As an owner of the Patriot Variable Annuity, your contribution is invested in
the Advisers Management Trust (AMT), managed by the investment firm of
Neuberger & Berman Management Inc. The information below is provided by
Neuberger & Berman on the four respective investment options available in the
Patriot: the AMT Growth Portfolio, the AMT Balanced Portfolio, the AMT Limited
Bond Portfolio and the AMT Liquid Asset Portfolio.
In 1996, the stock market continued its record-breaking run while the bond
market raced up and down until settling on a positive note during the last
third of the year. Generally, AMT Portfolio shareholders benefited from this
wild ride.
During 1996, three of the best performing sectors of the AMT Growth Portfolio
and the stock portion of the AMT Balanced Portfolio were financial services,
restaurants and technology. The success of companies in the technology sector
can be partly attributed to continued demand by end-users in combination with
lower prices. Two lagging sectors during the year were Communications and
Healthcare. These two sectors comprised about 8%-10% of the Portfolios during
most of the year. Cable stocks went through their lowest valuations in 1996 due
to worries about competition from the satellite industry. As a result, the
Portfolios reduced positions in a few cable companies. The Portfolios increased
exposure to HMOs during the year. Overall, this industry did not contribute
positively to the Portfolios.
1996 ended on an upbeat note for the bond market and the AMT Limited Maturity
Bond ("Limited Bond") Portfolio and the fixed income portion of the AMT
Balanced Portfolio as yields across the curve fell during the last four months
of the year. Yields that we focus on, in the 1- to 5- year part of the curve,
ended the year higher than at the start of the year. In between, however, the
bond market was on a roller coaster ride with interest rates falling early in
the period, then rising extremely rapidly, and finally reversing its course
once again for the final rally. Our weighted average portfolio duration
("duration" is a measure of a portfolio's exposure to interest rate risk)
management during this period of volatility remained consistent with our
trend-following style, and the Portfolios' risk level remained low compared to
longer-duration bond funds. Corporate bonds remained the largest sector in the
Portfolios as we continued to find value through our bottom-up bond selection
process (looking at individual bonds rather than average sector prices) despite
a generally expensive corporate market. Investments in mortgage-backed and
asset-backed securities accounted for the majority of the remainder of the
Portfolios.
The AMT Liquid Asset Portfolio ("Liquid Asset") took advantage of positive
movement in the money markets and extended the weighted average maturity of the
Liquid Asset Portfolio to a high of 73 days during the last quarter of 1996.
When possible the Liquid Asset Portfolio selected issues from among those with
six-month maturities to lock in higher rates, and whose credit quality
continues to be exclusively first tier. There has not been any significant
change in the spreads between Treasury and Agency issues versus commercial
paper and bank issues. Therefore, the Liquid Asset Portfolio maintained the
highest concentration in the commercial paper and bank issue sector of the
short-term debt market at a spread of approximately 25 to 30 basis points over
comparable Treasuries..
Please feel free to contact us at any time should you have questions about the
Patriot or the information contained in this report.
Sincerely,
Dale R. Schuh
Dale R. Schuh, President
Sentry Life Insurance Company
The composition and holdings of the Portfolios are subject to change. Shares of
the separate Portfolios of Neuberger & Berman Advisers Management Trust are
sold only through the currently effective prospectus and are not available to
the general public. Shares of the Government Income, Growth, Limited Maturity
Bond, Liquid Asset and Partners Portfolio may be purchased only by life
insurance companies to be used with their separate accounts which fund variable
annuity and variable life insurance policies. Shares of the Balanced Portfolio
are also available as a underlying investment fund for certain qualified
retirement plans.
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SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABLE ACCOUNT II
STATEMENT OF ASSETS, LIABILITIES
AND CONTRACT OWNERS' EQUITY
December 31, 1996
<TABLE>
<S> <C>
ASSETS:
Investments at market value:
Neuberger & Berman Advisers Management Trust:
Liquid Asset Portfolio, 2,430,868
shares (cost $2,430,868) $ 2,430,868
Growth Portfolio, 1,303,592
shares (cost $29,291,223) 33,606,604
Limited Maturity Bond Portfolio, 521,001
shares (cost $7,272,368) 7,320,058
Balanced Portfolio, 563,835
shares (cost $8,559,253) 8,976,246
----------
Total investments 52,333,776
Dividends receivable 9,259
----------
Total assets 52,343,035
LIABILITIES:
Accrued expenses 7,033
----------
CONTRACT OWNERS' EQUITY (NET ASSETS) $52,336,002
===========
</TABLE>
The accompanying notes are an integral part of these financial statements
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SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABLE ACCOUNT II
STATEMENTS OF OPERATIONS AND CHANGES IN CONTRACT OWNERS' EQUITY
For the Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
SUB-ACCOUNTS INVESTING IN:
--------------------------
LIQUID ASSET GROWTH
PORTFOLIO PORTFOLIO
--------------------------- --------------------------
1996 1995 1996 1995
------------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Income:
Dividends $ 112,796 $ 148,465 $ 13,015 $ 71,275
Expenses:
Mortality and expense risk 30,775 36,040 411,883 400,743
---------- ---------- ---------- ----------
Net investment income (loss) 82,021 112,425 (398,868) (329,468)
---------- ---------- ---------- ----------
Realized net investment gain -- -- 1,247,219 1,608,647
Unrealized appreciation (depreciation), net -- -- (1,352,086) 6,319,592
Capital gain distributions received -- -- 3,045,396 955,092
---------- ---------- ---------- ----------
Realized and unrealized gain (loss)
on investments and capital
gain distributions, net -- -- 2,940,529 8,883,331
---------- ---------- ---------- ----------
Net increase in contract owners'
equity from operations 82,021 112,425 2,541,661 8,553,863
---------- ---------- ---------- ----------
Purchase payments 128,608 139,601 1,183,119 1,288,052
Transfers between subaccounts, net 9,828 105,468 (72,898) 351,441
Withdrawals (410,053) (1,111,786) (4,519,118) (5,232,234)
Contract maintenance fees (4,001) (4,820) (44,776) (48,549)
Surrender charges (1,655) (6,123) (21,399) (25,366)
---------- ---------- ---------- ----------
Net decrease in contract owners'
equity derived from principal transactions (277,273) (877,660) (3,475,072) (3,666,656)
---------- ---------- ---------- ----------
Total increase (decrease) in contract
owners' equity (195,252) (765,235) (933,411) 4,887,207
Contract owners' equity at beginning of year 2,634,700 3,399,935 34,535,970 29,648,763
---------- ---------- ----------- -----------
Contract owners' equity at end of year $2,439,448 $2,634,700 $33,602,559 $34,535,970
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
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<TABLE>
<CAPTION>
LIMITED MATURITY BALANCED
BOND PORTFOLIO PORTFOLIO TOTAL
- ------------------------- ----------------------- --------------------------
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
$ 703,238 $ 501,148 $ 208,712 $ 157,249 $ 1,037,761 $ 878,137
94,708 107,118 108,809 106,166 646,175 650,067
- ----------- ----------- ---------- ---------- ----------- -----------
608,530 394,030 99,903 51,083 391,586 228,070
- ----------- ----------- ---------- ---------- ----------- -----------
42,361 112,466 199,074 300,179 1,488,654 2,021,292
(430,554) 319,897 (978,800) 1,348,677 (2,761,440) 7,988,166
-- -- 1,160,642 50,544 4,206,038 1,005,636
- ----------- ----------- ---------- ---------- ----------- -----------
(388,193) 432,363 380,916 1,699,400 2,933,252 11,015,094
- ----------- ----------- ---------- ---------- ----------- -----------
220,337 826,393 480,819 1,750,483 3,324,838 11,243,164
- ----------- ----------- ---------- ---------- ----------- -----------
107,526 159,828 604,683 711,656 2,023,936 2,299,137
(170,136) 4,170 233,206 (461,079) -- --
(1,423,044) (1,752,030) (1,328,115) (1,250,692) (7,680,330) (9,346,742)
(9,073) (10,934) (10,399) (11,256) (68,249) (75,559)
(2,793) (7,177) (9,939) (11,734) (35,786) (50,400)
- ----------- ----------- ---------- ---------- ----------- -----------
(1,497,520) (1,606,143) (510,564) (1,023,105) (5,760,429) (7,173,564)
- ----------- ----------- ---------- ---------- ----------- -----------
(1,277,183) (779,750) (29,745) 727,378 (2,435,591) 4,069,600
8,595,913 9,375,663 9,005,010 8,277,632 54,771,593 50,701,993
- ----------- ----------- ---------- ---------- ----------- -----------
$ 7,318,730 $ 8,595,913 $8,975,265 $9,005,010 $52,336,002 $54,771,593
=========== =========== ========== ========== =========== ===========
</TABLE>
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NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1995
1. ORGANIZATION AND CONTRACTS
The Sentry Variable Account II (the Variable Account) is a segregated
investment account of the Sentry Life Insurance Company (the Company) and
is registered with the Securities and Exchange Commission as a unit
investment trust pursuant to the provisions of the Investment Company Act
of 1940. The Variable Account was established by the Company on August 2,
1983 and commenced operations on May 3, 1984. Accordingly, it is an
accounting entity wherein all segregated account transactions are
reflected.
The assets of the Variable Account are invested in one or more of the
portfolios of Neuberger & Berman Advisers Management Trust (the Trust) at
the portfolio's net asset value in accordance with the selection made by
the contract owners.
A copy of the Neuberger & Berman Advisers Management Trust Annual Report is
included in the Variable Account's Annual Report.
2. SIGNIFICANT ACCOUNTING POLICIES
VALUATION OF INVESTMENTS
Investments in the Trust are valued by using net asset values which are
based on the daily closing prices of the underlying securities in the
Trust's portfolios.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded on the trade date (the date the order
to buy and sell is executed). Dividend income is recorded on the
ex-dividend date. The cost of investments sold and the corresponding
investment gains and losses are determined on a specific identification
basis.
FEDERAL INCOME TAXES
The Company is taxed as a life insurance company under the provisions of
the Internal Revenue Code. The operations of the Variable Account are part
of the total operations of the Company and are not taxed as a separate
entity.
Under Federal income tax law, net investment income and net realized
investment gains of the Variable Account which are applied to increase
contract owners' equity are not taxed.
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1995
3. EXPENSES
A mortality and expense risk premium is deducted by the Company from the
Variable Account on a daily basis which is equal, on an annual basis, to
1.20% (.80% mortality and .40% expense risk) of the daily net asset value
of the Variable Account. This mortality and expense risk premium
compensates the Company for assuming these risks under the variable annuity
contract. The liability for accrued mortality and expense risk premium
amounted to $7,033 at December 31, 1996.
The Company deducts, on the contract anniversary date, an annual contract
maintenance charge of $30, per contract holder, from the contract value by
canceling accumulation units. If the contract is surrendered for its full
surrender value, on other than the contract anniversary, the contract
maintenance charge will be deducted at the time of such surrender. This
charge reimburses the Company for administrative expenses relating to
maintenance of the contract.
There are no deductions made from purchase payments for sales charges at
the time of purchase. However, a contingent deferred sales charge may be
deducted in the event of a surrender to reimburse the Company for expenses
incurred which are related to contract sales. Contingent deferred sales
charges apply to each purchase payment and are graded from 6% during the
first contract year to 0% in the seventh contract year.
Any premium tax payable to a governmental entity as a result of the
existence of the contracts or the Variable Account will be charged against
the contract value. Premium taxes up to 4% are currently imposed by certain
states. Some states assess their premium taxes at the time purchase
payments are made; others assess their premium taxes at the time of
annuitization. In the event contracts would be issued in states assessing
their premium taxes at the time purchase payments are made, the Company
currently intends to advance such premium taxes and deduct the premium
taxes from a contract owner's contract value at the time of annuitization
or surrender.
4. INITIAL CAPITALIZATION
Initial capital of $100,000 was provided by the Company for the
establishment of the Variable Account. The Company removed the investment
during 1996. The value at the disposal date was $277,479.
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1995
5. CONTRACT OWNERS' EQUITY
Contract owners' equity is represented by accumulation units in the related
Variable Account. At December 31, 1996 ownership of the Variable Account
was represented by the following accumulation units and accumulation unit
values:
<TABLE>
<CAPTION>
ACCUMULATION ACCUMULATION
UNITS UNIT VALUE VALUE
------------ ------------ -----------
<S> <C> <C> <C>
Liquid Asset Portfolio 145,387 $16.78 $ 2,439,448
Growth Portfolio 847,224 39.66 33,602,559
Limited Maturity Bond Portfolio 317,877 23.02 7,318,730
Balanced Portfolio 519,312 17.28 8,975,265
-----------
Total contract owners' equity $52,336,002
===========
</TABLE>
At December 31, 1995 ownership of the Variable Account was represented by
the following accumulation units and accumulation unit values:
<TABLE>
<CAPTION>
ACCUMULATION ACCUMULATION
UNITS UNIT VALUE VALUE
------------ ------------ -----------
<S> <C> <C> <C>
Liquid Asset Portfolio 162,165 $16.25 $ 2,634,700
Growth Portfolio 938,909 $36.78 $34,535,970
Limited Maturity Bond Portfolio 384,749 $22.34 $ 8,595,913
Balanced Portfolio 550,216 $16.37 $ 9,005,010
-----------
Total contract owners' equity $54,771,593
===========
</TABLE>
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1995
6. Purchases and Sales of Securities
In 1996, purchases and proceeds on sales of the Trust's shares aggregated
$9,395,710 and $10,552,842, respectively, and were as follows:
<TABLE>
<CAPTION>
LIQUID ASSET GROWTH LIMITED MATURITY BALANCED
PORTFOLIO PORTFOLIO BOND PORTFOLIO PORTFOLIO TOTAL
------------ ----------- ---------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Purchases $763,954 $5,037,322 $1,100,285 $2,494,149 $ 9,395,710
Proceeds on sales $957,938 5,862,984 1,988,567 1,743,353 10,552,842
</TABLE>
In 1995, purchases and proceeds on sales of the Trust's shares aggregated
$7,134,067 and $13,071,544, respectively, and were as follows:
<TABLE>
<CAPTION>
LIQUID ASSET GROWTH LIMITED MATURITY BALANCED
PORTFOLIO PORTFOLIO BOND PORTFOLIO PORTFOLIO TOTAL
------------ ----------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Purchases $1,127,073 $3,829,670 $ 979,314 $1,198,010 $ 7,134,067
Proceeds on sales 1,887,956 6,871,957 2,191,308 2,120,323 13,071,544
</TABLE>
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REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS
SENTRY LIFE INSURANCE COMPANY
AND
THE CONTRACT OWNERS OF
SENTRY VARIABLE ACCOUNT II:
We have audited the accompanying statement of assets, liabilities and contract
owners' equity of the Liquid Asset Portfolio, Growth Portfolio, Limited Maturity
Bond Portfolio and Balanced Portfolio of the Sentry Variable Account II as of
December 31, 1995, and the related statements of operations and changes in
contract owners' equity for each of the two years in the period then ended.
These financial statements are the responsibility of Sentry Life Insurance
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1995 by correspondence with
the custodian. 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 Liquid Asset Portfolio,
Growth Portfolio, Limited Maturity Bond Portfolio and Balanced Portfolio of the
Sentry Variable Account II as of December 31, 1995, and the results of their
operations and the changes in their contract owners' equity for each of the two
years in the period then ended in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Chicago, Illinois
February 10, 1997
