WRL FREEDOM ELITESM
INDIVIDUAL FLEXIBLE
PREMIUM VARIABLE LIFE
INSURANCE POLICY
Issued by
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
570 Carillon Parkway
St. Petersburg, Florida 33716
1-800-851-9777
(727) 299-1800
The individual flexible premium variable life insurance policy ("Policy")
issued by Western Reserve Life Assurance Co. of Ohio ("Western Reserve") and
described in this Prospectus is designed to provide lifetime insurance
protection and maximum flexibility in connection with premium payments and
death benefits. A Policyowner may, subject to certain restrictions, vary the
timing and amount of premium payments and increase or decrease the level of
life insurance benefits payable under the Policy. This flexibility allows a
Policyowner to provide for changing insurance needs under a single life
insurance policy. The minimum Specified Amount for a Policy at issue is
$250,000 for Issue Ages 0-60, and $100,000 for Issue Ages above 60.
The Policy provides a death benefit payable at the Insured's death, and a
Net Surrender Value that can be obtained by completely or partially
surrendering the Policy. Net premiums are allocated according to the
Policyowner's directions among the Sub-Accounts of the WRL Series Life Account
("Series Account"), or to a fixed interest account ("Fixed Account") or a
combination of both. With respect to amounts allocated to Sub-Accounts of the
Series Account, the amount of the death benefit may, and the Cash Value will,
vary to reflect both the investment experience of the Sub-Accounts and the
timing and amount of additional premium payments. However, as long as the
Policy remains In Force, Western Reserve guarantees that the death benefit will
never be less than the Specified Amount of the Policy. While additional premium
payments are not required under the Policy, additional premium payments may be
necessary to prevent Lapse if there is insufficient Net Surrender Value.
The Policy provides a free-look period allowing the Policyowner to cancel
the Policy within 10 days after receipt. Certain states require a free-look
period longer than 10 days, either for all Policyowners or certain classes of
Policyowners.
The assets of each Sub-Account of the Series Account will be invested
solely in a corresponding Portfolio of the WRL Series Fund, Inc. (the "Fund").
The Prospectus for the Fund describes the investment objectives and the risks
of investing in the Portfolios of the Fund corresponding to the Sub-Accounts
currently available under the Policy. The Policyowner bears the entire
investment risk for all amounts allocated to the Series Account; there is no
guaranteed minimum Cash Value.
It may not be to your advantage to replace existing insurance or
supplement an existing flexible premium variable life insurance policy with a
Policy described in this Prospectus.
Please read this Prospectus and the Prospectus for the Fund carefully and
retain for future reference.
The Policy is not a deposit or obligation of, or guaranteed or endorsed by, any
bank or depository institution, and the Policy is not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board or any other
agency, and involves investment risk, including possible loss of principal
amount invested.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus does not constitute an offering in any jurisdiction in which
such offering may not lawfully be made. No dealer, salesperson or other person
is authorized to give any information or make any representations in connection
with this offering other than those contained in this Prospectus, and, if given
or made, such other information or representations must not be relied upon.
THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY THE CURRENT PROSPECTUS
FOR THE WRL SERIES FUND, INC. CERTAIN PORTFOLIOS MAY NOT BE AVAILABLE IN ALL
STATES. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
Prospectus Dated January 2, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
DEFINITIONS ............................................ 1
INTRODUCTION ........................................... 2
INVESTMENT EXPERIENCE INFORMATION ...................... 6
Rates of Return ....................................... 7
Death Benefit, Cash Value and Net Surrender
Value Illustrations ............................... 7
Other Performance Data ................................ 12
WESTERN RESERVE AND THE
SERIES ACCOUNT ......................................... 13
Western Reserve Life Assurance Co.
of Ohio ........................................... 13
The Series Account .................................... 13
POLICY BENEFITS ........................................ 13
Death Benefit ......................................... 13
When Insurance Coverage Takes Effect .................. 16
Cash Value ............................................ 16
INVESTMENTS OF THE SERIES ACCOUNT ...................... 17
WRL Series Fund, Inc. ................................. 17
Addition, Deletion, or Substitution
of Investments .................................... 19
PAYMENT AND ALLOCATION OF PREMIUMS ..................... 20
Issuance of a Policy .................................. 20
Premiums .............................................. 20
Allocation of Premiums and Cash Value ................. 21
Dollar Cost Averaging ................................. 22
Asset Rebalancing Program ............................. 22
Policy Lapse and Reinstatement ........................ 23
CHARGES AND DEDUCTIONS ................................. 24
Contingent Deferred Surrender Charges ................. 24
Pro Rata Decrease Charge .............................. 25
Cash Value Charges .................................... 25
Optional Cash Value Charges ........................... 26
Charges Against the Series Account .................... 26
Expenses of the Fund .................................. 26
POLICY RIGHTS .......................................... 27
Loan Privileges ....................................... 27
Surrender Privileges .................................. 28
Examination of Policy Privilege ("Free-Look") ......... 28
Conversion Rights ..................................... 29
Benefits at Maturity .................................. 29
Payment of Policy Benefits ............................ 29
GENERAL PROVISIONS ..................................... 29
Postponement of Payments .............................. 29
The Contract .......................................... 29
Suicide ............................................... 30
Incontestability ...................................... 30
</TABLE>
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Change of Owner or Beneficiary ........................ 30
Assignment ............................................ 30
Misstatement of Age or Sex ............................ 30
Reports and Records ................................... 30
Optional Insurance Benefits ........................... 30
THE FIXED ACCOUNT ...................................... 32
Fixed Account Value ................................... 32
Minimum Guaranteed and Current
Interest Rates .................................... 32
Allocations, Transfers and Withdrawals ................ 32
DISTRIBUTION OF THE POLICIES ........................... 33
FEDERAL TAX MATTERS .................................... 33
Introduction .......................................... 33
Tax Charges ........................................... 33
Tax Status of the Policy .............................. 33
Tax Treatment of Policy Benefits ...................... 34
Possible Tax Law Changes .............................. 35
Employment-Related Benefit Plans ...................... 36
SAFEKEEPING OF THE SERIES
ACCOUNT'S ASSETS ....................................... 36
VOTING RIGHTS OF THE SERIES ACCOUNT .................... 36
STATE REGULATION OF WESTERN
RESERVE ................................................ 36
REINSURANCE ............................................ 36
EXECUTIVE OFFICERS AND DIRECTORS
OF WESTERN RESERVE ..................................... 36
LEGAL MATTERS .......................................... 37
LEGAL PROCEEDINGS ...................................... 37
EXPERTS ................................................ 37
ADDITIONAL INFORMATION ................................. 38
YEAR 2000 MATTERS ...................................... 38
INFORMATION ABOUT
WESTERN RESERVE'S
FINANCIAL STATEMENTS ................................... 38
APPENDIX A - ILLUSTRATION
OF BENEFITS ............................................ 39
APPENDIX B - WEALTH INDICES OF
INVESTMENTS IN THE U.S. CAPITAL
MARKETS ................................................ 42
APPENDIX C - SURRENDER CHARGE BASE
PREMIUMS ............................................... 44
INDEX TO FINANCIAL
STATEMENTS ............................................. 45
</TABLE>
The Policy is not available in the State of New York
i
<PAGE>
DEFINITIONS
ACCOUNTS -- Allocation options including the Fixed Account and
Sub-Accounts of the Series Account.
ATTAINED AGE -- The Issue Age plus the number of completed Policy years.
ANNIVERSARY -- The same day and month as the Policy Date for each
succeeding year the Policy remains In Force.
BENEFICIARY -- The person or persons specified by the Owner as entitled
to receive the death benefit proceeds under the Policy.
CASH VALUE -- The sum of the values in each Sub-Account plus the Policy's
value in the Fixed Account.
FIXED ACCOUNT -- An allocation option other than the Series Account. The
Fixed Account is part of Western Reserve's General Account.
FUND -- WRL Series Fund, Inc., a registered management investment company
in which the assets of the Series Account are invested.
GENERAL ACCOUNT -- The assets of Western Reserve other than those
allocated to the Series Account or any other separate account.
IN FORCE -- Condition under which the coverage under the Policy or a
rider is active and the Insured's life remains insured.
INITIAL PREMIUM -- The amount which must be paid before coverage begins.
INSURED -- The person whose life is insured under the Policy.
ISSUE AGE -- Issue Age refers to the age on the Insured's birthday
nearest the Policy Date.
LAPSE -- Termination of the Policy at the end of the grace period.
LOAN RESERVE -- A part of the Fixed Account to which amounts are
transferred as collateral for Policy loans.
MATURITY DATE -- The Anniversary nearer the Insured's 95th birthday, when
coverage under the Policy will terminate if the Insured is living and the
Policy is In Force. The Maturity Date may be extended under the Extension of
Maturity Date provision of the Policy.
MONTHLY ANNIVERSARY OR MONTHIVERSARY -- The same date in each succeeding
month as the Policy Date. For purposes of the Series Account, whenever the
Monthly Anniversary falls on a date other than a Valuation Date, the Monthly
Anniversary will be deemed to be the next Valuation Date.
NET SURRENDER VALUE -- The amount payable upon surrender of the Policy
equal to the Cash Value as of the date of surrender, less any Contingent
Deferred Surrender Charges, less any outstanding Policy loan and plus any
interest the Owner paid in advance on the loan for the period between the date
of surrender and the next Policy Anniversary.
NO LAPSE DATE -- The last Valuation Date of the third Policy year. It is
the date prior to which the Policy will not lapse if certain conditions are
met, even though the Net Surrender Value may be insufficient to meet the
monthly deductions.
OFFICE -- The administrative office of Western Reserve whose mailing
address is P. O. Box 5068, Clearwater, Florida 33758-5068.
PLANNED PERIODIC PREMIUM -- A scheduled premium of a level amount at a
fixed interval over a specified period of time.
POLICY -- The flexible premium variable life insurance policy offered by
Western Reserve and described in this Prospectus.
POLICY DATE -- The date set forth in the Policy when Western Reserve
deems all underwriting requirements satisfied, insurance coverage is effective,
the premium(s) is allocated to the Money Market Sub-Account and monthly
deductions commence under the Policy. The Policy Date is used to determine
Policy years and Policy Months. Policy Anniversaries are measured from the
Policy Date.
POLICY MONTH -- A month beginning on the Monthly Anniversary.
POLICYOWNER ("OWNER") -- The person who owns the Policy and who may
exercise all rights under the Policy while living.
PORTFOLIO -- A separate investment portfolio of the Fund.
PREMIUM -- The portion of the premium available for allocation to either
the Fixed Account or the Sub-Accounts of the Series Account, equal to the
premium paid by the Policyowner.
RECORD DATE -- The date when the Policy is recorded on the books of
Western Reserve as an In Force Policy, and premiums are allocated from the
Money Market Sub-Account to the Accounts as elected by the Owner on the
application.
SERIES ACCOUNT -- WRL Series Life Account, a separate investment account
established by Western Reserve to receive and invest Net Premiums allocated
under the Policy.
SPECIFIED AMOUNT -- The minimum death benefit payable under the Policy as
long as the Policy remains In Force. The Specified Amount is shown on the
Policy Schedule Page. It will be reduced by the dollar amount of any cash
withdrawal if the Policyowner has chosen the Option A death benefit. The
Specified Amount may be reduced by a decrease in the Specified Amount, as
described herein.
SUB-ACCOUNT -- A sub-division of the Series Account. Each Sub-Account
invests exclusively in the shares of a specified Portfolio of the Fund.
SURRENDER CHARGE BASE PREMIUM -- The amount shown on the Policy's
Schedule Page, used to help determine Contingent Deferred Surrender Charges.
TERMINATION -- Condition when the Insured's life is no longer insured
under the coverage provided.
VALUATION DATE -- Each day on which the New York Stock Exchange is open
for business.
VALUATION PERIOD -- The period commencing at the end of one Valuation
Date and continuing to the end of the next succeeding Valuation Date.
1
<PAGE>
INTRODUCTION
1. WHAT IS THE DIFFERENCE BETWEEN THE POLICY AND A CONVENTIONAL FIXED-BENEFIT
LIFE INSURANCE POLICY?
Like conventional fixed-benefit life insurance, as long as the
Policy remains In Force, the Policy can provide for: (1) the payment of a
minimum death benefit to a Beneficiary upon the Insured's death; (2) the
accumulation of Cash Value; and (3) surrender rights and Policy loan
privileges.
The Policy differs from conventional fixed-benefit life insurance by
allowing Policyowners to allocate Premiums to one or more Sub-Accounts, or
to the Fixed Account, or to a combination of both. Each Sub-Account invests
in a designated Portfolio of the Fund. The amount and/or duration of the
life insurance coverage and the Cash Value of the Policy are not guaranteed
and may increase or decrease depending upon the investment experience of the
Sub-Accounts. The Policyowner bears the investment risk of any depreciation
in value of the underlying assets of the Series Account but reaps the
benefits of any appreciation in value. (See Allocation of Premiums and Cash
Value - Allocation of Premiums, p. 21.) Unlike conventional fixed-benefit
life insurance, a Policyowner also has the flexibility, subject to certain
restrictions (see Premiums - Premium Limitations, p. 20), to vary the
frequency and amount of premium payments and to adjust the death benefits
payable under the Policy by decreasing the Specified Amount. Thus, unlike
conventional fixed-benefit life insurance, the Policy does not require a
Policyowner to adhere to a fixed premium schedule. Moreover, the failure to
pay a scheduled premium ("Planned Periodic Premium") will not itself cause
the Policy to Lapse. Additional premium payments may be necessary to prevent
Lapse if Net Surrender Value is insufficient to pay the monthly deduction,
and a grace period expires without a sufficient payment. (See Policy Lapse
and Reinstatement - Lapse, p. 23.)
2. WHAT DEATH BENEFIT OPTIONS ARE AVAILABLE UNDER THE POLICY?
The Policy provides the payment of benefits upon the death of the
Insured. The Policy contains two death benefit options. Under Death Benefit
Option A, the death benefit is the greater of the current Specified Amount
of the Policy or a specified percentage times the Cash Value of the Policy
on the date of death of the Insured. Under Death Benefit Option B, the death
benefit is the greater of the Specified Amount of the Policy plus the Cash
Value of the Policy on the date of death of the Insured or a specified
percentage times the Cash Value of the Policy on the date of death of the
Insured. If the Owner chooses Death Benefit Option A, the Specified Amount
will be reduced by the dollar amount of any withdrawal. The amount of death
benefit will be reduced by any outstanding Policy loan and any due and
unpaid charges. The death benefit proceeds will be increased by any interest
the Owner paid in advance on the loan for the period between the date of
death and the next Policy Anniversary, and by any additional insurance
benefits added by rider and any unearned loan interest. Under Western
Reserve's current rules, the minimum Specified Amount for a Policy at issue
is $250,000 for Issue Ages 0-60, and $100,000 for Issue Ages above 60. The
minimum Specified Amount is stated in the Policyowner's Policy. (See Policy
Benefits - Death Benefit, p. 13.)
Optional insurance benefits offered under the Policy include a
Children's Insurance Rider; an Other Insured Rider; an Accidental Death
Benefit Rider; a Disability Waiver Rider; a Disability Waiver and Income
Rider; a Primary Insured Rider and a Primary Insured Rider Plus. (See
Optional Cash Value Charges - Optional Insurance Benefits, p. 26.) The cost
of these optional insurance benefits will be deducted from Cash Value as
part of the monthly deduction. (See Charges and Deductions - Cash Value
Charges, p. 25.)
A Terminal Illness Accelerated Death Benefit Rider is automatically
included with every Policy at no additional charge. (This Rider may not be
available in all states.) This rider makes a "Single Sum Benefit" available
prior to the Insured's death if the Insured has incurred a condition
resulting from illness which, as determined by a Physician, has reduced the
Insured's life expectancy as defined in the rider. (See General Provisions -
Optional Insurance Benefits - Terminal Illness Accelerated Death Benefit
Rider, p. 31.)
Benefits under the Policy may be paid in a lump sum or under one of
the settlement options set forth in the Policy. (See Payment of Policy
Benefits - Settlement Options, p. 29.)
3. HOW MAY THE AMOUNT OF THE DEATH BENEFIT AND CASH VALUE VARY?
Under either death benefit option, as long as the Policy remains In
Force, the death benefit will not be less than the current Specified Amount
of the Policy. The amount of death benefit will be reduced by any
outstanding policy loan, and any due and unpaid charges. The death benefit
amount will be increased by any interest the Owner paid in advance on the
loan for the period between the date of death and the next Policy
Anniversary, and by any insurance benefits added by rider. The death benefit
may exceed the Specified Amount depending upon the death benefit option
chosen and the Cash Value of the Policy. (See Policy Benefits - Death
Benefit, p. 13.)
The Policy's Cash Value in the Series Account will reflect the
amount and frequency of premium payments, the investment experience of the
chosen Sub-Accounts, any cash withdrawals, and any charges imposed in
connection with the Policy. The entire investment risk for amounts allocated
to the Sub-Accounts is borne by the Policyowner; Western Reserve does not
guarantee a minimum Cash Value. (See Policy Benefits - Cash Value, p. 16.)
2
<PAGE>
4. WHAT FLEXIBILITY DOES A POLICYOWNER HAVE TO ADJUST THE AMOUNT OF THE DEATH
BENEFIT?
The Policyowner has significant flexibility to adjust the death
benefit payable by changing the Death Benefit Option, by decreasing the
Specified Amount of the Policy or by adding riders to increase the total
death benefit payable. No change in the Death Benefit Option may be made
during the first three Policy years. The Policyowner may change the Death
Benefit Option only once each Policy year after the third Policy year. (See
Death Benefit - Change in Death Benefit Option, p. 14.) No decrease in the
Specified Amount may be requested during the first three Policy years. (See
Policy Benefits - Death Benefit, p. 13.) (See Cash Value Charges - Cost of
Insurance, p. 25.)
5. WHAT FLEXIBILITY DOES A POLICYOWNER HAVE IN CONNECTION WITH PREMIUM
PAYMENTS?
A Policyowner has considerable flexibility concerning the amount and
frequency of premium payments. Western Reserve will require the Policyowner
to pay an Initial Premium at least equal to a minimum monthly first year
premium set forth in the Policy before insurance coverage is In Force.
Thereafter, a Policyowner may, subject to certain restrictions, make premium
payments in any amount and at any frequency. (See Payment and Allocation of
Premiums - Premiums, p. 20.) Each Policyowner will also determine a Planned
Periodic Premium schedule. The schedule will provide a premium payment of a
level amount at a fixed interval over a specified period of time. The amount
and frequency of Planned Periodic Premium payments will be set forth in the
Policy. The amount and frequency of Planned Periodic Premium payments may be
changed upon written request. (See Premiums - Planned Periodic Premiums, p.
20.)
6. HOW LONG WILL THE POLICY REMAIN IN FORCE?
The Policy will Lapse only when Net Surrender Value is insufficient
to pay the monthly deduction (see Charges and Deductions - Cash Value
Charges, p. 25), and a grace period expires without a sufficient payment by
the Policyowner. (See Loan Privileges - Indebtedness, p. 28.) During the
first three Policy years (that is, until the No Lapse Date), the Policy will
remain In Force and no grace period will begin provided: (1) no riders have
been added since the Policy Date; and (2) the total premiums received (minus
any withdrawals, any outstanding loans and any pro rata Decrease Charge)
equals or exceeds the minimum monthly guarantee premium times the number of
months since the Policy Date, including the current month. The minimum
monthly guarantee premium is set forth in the Policy, unless changed due to
a requested change under the Policy by the Policyowner, at which time the
Policyowner will be notified of the new minimum monthly guarantee premium
and its effective date. The Policy, therefore, differs in two important
respects from a conventional life insurance policy. First, the failure to
pay a Planned Periodic Premium will not automatically cause the Policy to
Lapse. Second, after the No Lapse Date the Policy can lapse even if Planned
Periodic Premiums or premiums in other amounts have been paid, if Net
Surrender Value is insufficient to pay the monthly deduction, and a grace
period expires without a sufficient payment. Such a Lapse could happen if
the investment experience has been sufficiently unfavorable to have resulted
in a decrease in the Net Surrender Value, or the Net Surrender Value has
decreased because not enough premiums have been paid to offset the monthly
deductions. If the Insured is alive and the Policy is In Force on the
Maturity Date, which is the Insured's 95th birthday, the Policy will then
terminate and no longer be In Force. The Net Surrender Value as of the
Maturity Date will be paid to the Policyowner. Upon written request, Western
Reserve will extend the Maturity Date, as elected by the Policyowner, to one
of the following: (1) if the Death Benefit Option Type is other than Option
A, the Option Type will be changed to Option A. On each Valuation Date, the
Specified Amount will be adjusted to equal the Cash Value, and the
Limitation Percentage will be 100%. No additional premium payments will be
permitted except to prevent lapse of the Policy. All future monthly
deductions will be waived; or (2) the Maturity Date will automatically be
extended until the next Policy Anniversary. The Policyowner must request in
writing that the Maturity Date be extended prior to each Policy Anniversary
thereafter. (See Policy Rights - Benefits at Maturity, p. 29.)
7. HOW ARE PREMIUMS ALLOCATED?
The full premium is available for allocation ("Premium"). The
Policyowner initially determines the allocation of the Premium among the
Sub-Accounts, each of which invests in shares of a designated Portfolio of
the Fund, or to the Fixed Account, or a combination of both. Each Portfolio
has a different investment objective. (See Investments of the Series Account
- WRL Series Fund, Inc., p. 17.) The allocation of future Premiums may be
changed at any time by providing Western Reserve with written notification
from the Policyowner, or by calling Western Reserve's toll-free number,
1-800-851-9777. Western Reserve reserves the right to impose a $25 charge
for each allocation change in excess of one per Policy year quarter.
8. IS THERE A "FREE-LOOK" PERIOD?
Yes, the Policy provides a free-look period. The Policyowner may
cancel the Policy within 10 days after the Policyowner receives it. Certain
states require a Free-Look period longer than 10 days, either for all
Policyowners or for certain classes of Policyowners. In most states, Western
Reserve will refund the current value of the amounts allocated to the
Accounts plus any charges previously deducted. In certain states, the refund
3
<PAGE>
will be the total of all premiums paid. (See Policy Rights - Examination
of Policy Privilege, p. 28.)
9. MAY THE POLICY BE SURRENDERED?
Yes, the Policyowner may totally surrender the Policy at any time
and receive the Net Surrender Value of the Policy. Subject to certain
limitations, the Policyowner may also make cash withdrawals from the Policy
at any time after the first Policy year and prior to the Maturity Date. (See
Policy Rights - Surrender Privileges, p. 28.) If Death Benefit Option A is
in effect, cash withdrawals will reduce the Policy's Specified Amount by the
amount of the cash withdrawal.
10. WHAT IS THE LOAN PRIVILEGE?
After the first Policy Anniversary, a Policyowner may obtain a
Policy loan in any amount which is not greater than 90% of the Cash Value
less any surrender charge and any already outstanding loan. Western Reserve
reserves the right to permit a Policy Loan prior to the first Policy
Anniversary for Policies issued pursuant to a transfer of cash values from
another life insurance policy, under Section 1035(a) of the Internal Revenue
Code of 1986, as amended. It should be noted, however, that a loan taken
from, or secured by, a Policy may be treated as a taxable distribution, and
also may be subject to a Federal income tax penalty. (See Federal Tax
Matters, p. 33.)
The interest rate charged on Policy loans is at the rate of 5.2%
payable annually in advance (equivalent to an effective annual rate of
5.5%). The requested loan amount, plus interest in advance, will be
transferred from the Accounts to the Loan Reserve and credited at the end of
each Policy year with guaranteed interest at a rate of 4% per year. Western
Reserve may from time to time, and in its sole discretion, credit the Loan
Reserve with additional interest at a rate higher than 4% per year. The Loan
Reserve is currently credited with a rate higher than 4% per year. The
minimum loan amount is generally $500. (See Policy Rights - Loan Privileges,
p. 27.) Upon repayment of a loan, amounts in the Loan Reserve in excess of
the outstanding value of the loan are currently transferred to the Accounts
in the same manner as Premium allocations; however, Western Reserve may in
the future require these amounts to be transferred to the Fixed Account.
(See The Fixed Account, p. 32.)
There are risks involved in taking a Policy loan, including the
potential for a Policy to lapse if anticipated earnings, taking into account
any outstanding loans, are not achieved. There are also adverse tax
consequences which occur if a Policy lapses with loans outstanding. (See
Federal Tax Matters - Tax Treatment of Policy Benefits, p. 34.)
11. WHAT CHARGES ARE ASSESSED IN CONNECTION WITH THE POLICY?
"Contingent Deferred Surrender Charges" are deducted if the Policy
is surrendered during the first fifteen Policy years. The surrender charges
consist of an Issue Charge of $5.00 per $1,000 of Specified Amount, and also
consists of a Sales Charge equal to 26.5% of the Surrender Charge Base
Premium and not more than 8.4% of premiums above that amount. A declining
percentage of the surrender charge is assessed after the tenth year. Under
some circumstances the level of contingent deferred surrender charges might
result in no net surrender value available in the first few policy years in
the event of a surrender. In addition, a pro rata Decrease Charge equal to
the Contingent Deferred Surrender Charges on a full surrender multiplied by
the ratio of the requested decrease in Specified Amount to the initial full
Specified Amount will be calculated and charged to the Cash Value for any
decreases in the Policy's Specified Amount which occur during the first
fifteen Policy years. Any future Contingent Deferred Surrender Charges will
be reduced proportionately by an amount equal to the surrender charge
multiplied by the ratio of any prior decreases in Specified Amount to the
initial full Specified Amount. The Contingent Deferred Surrender Charges
imposed upon early surrender or a decrease in Specified Amount will be
significant. As a result, you should purchase a Policy only if you have the
financial capability to keep it In Force at the initial Specified Amount for
a substantial period of time. (See Charges and Deductions - Contingent
Deferred Surrender Charge, p. 24 and Pro Rata Decrease Charge, p. 25.)
Cost of insurance charges and a $5.00 monthly Policy Charge, are
deducted monthly from the Cash Value of each Policy to compensate Western
Reserve for the cost of administering the Policy. Cost of insurance charges
will vary with the Policy's Specified Amount, the Death Benefit Option
chosen and the investment experience of the Portfolios in which the Policy
is invested. (See Charges and Deductions - Cash Value Charges, p. 25.)
Optional Cash Value charges are deducted from the Policy as a result
of Policyowner changes or elections made to the Policy. Optional Cash Value
charges include charges for: optional insurance benefits, change in Premium
allocation, certain Cash Value transfers and cash withdrawals. (See Charges
and Deductions - Optional Cash Value Charges, p. 26.)
Western Reserve charges the Sub-Accounts for the mortality and
expense risks Western Reserve assumes. The charge is made daily at an
effective annual rate of 0.90% of the average daily net assets of each
Sub-Account. This charge is guaranteed to be reduced to 0.60% after the
first fifteen Policy years. Western Reserve intends to reduce this charge to
0.30% starting in the sixteenth Policy year. However, the reduction to 0.30%
is not guaranteed and Western Reserve reserves the right to maintain this
charge at 0.60% level after the fifteenth Policy year. (See Charges and
Deductions - Charges Against the Series Account, p. 26.)
4
<PAGE>
Each Sub-Account invests in a corresponding Portfolio of the Fund.
Each Portfolio pays investment management fees based on a percentage of the
Portfolio's average daily net assets. The annual management fees and other
Fund expenses for the Portfolios are provided on p. 6, under the heading
Fund Annual Expenses. Effective January 1, 1997, the Fund adopted a Plan of
Distribution pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended (the "1940 Act") ("Distribution Plan") and pursuant to the
Plan, entered into a Distribution Agreement with InterSecurities, Inc.
("ISI"), principal underwriter for the Fund.
Under the Distribution Plan, the Fund, on behalf of the Portfolios,
is authorized to pay to various service providers, as direct payment for
expenses incurred in connection with the distribution of a Portfolio's
shares, amounts equal to actual expenses associated with distributing a
Portfolio's shares, up to a maximum rate of 0.15% (fifteen one-hundredths of
one percent) on an annualized basis of the average daily net assets. This
fee is measured and accrued daily and paid monthly. ISI has determined that
it will not seek payment by the Fund of distribution expenses incurred with
respect to any Portfolio until April 30, 1999. Prior to ISI seeking
reimbursement, Policyowners will be notified in advance. In addition, the
Portfolios incur certain operating expenses. (See Investments of the Series
Account - WRL Series Fund, Inc., p. 17.)
No charges are currently made from the Series Account for Federal or
state income taxes. Should Western Reserve determine that such taxes may be
imposed by Federal or state agencies, Western Reserve may make deductions
from the Series Account to pay these taxes. (See Federal Tax Matters, p.
33.)
12. ARE TRANSFERS PERMITTED AMONG THE ACCOUNTS?
Yes. A Policyowner may transfer Cash Value among the Sub-Accounts or
from the Sub-Accounts to the Fixed Account. Transfers may also be made from
the Fixed Account to the Sub-Accounts subject to certain restrictions. (See
the Fixed Account - Allocations, Transfers and Withdrawals, p. 32.) Twelve
Cash Value transfers are permitted without charge in a Policy year. Each
additional transfer will be subject to a transfer charge of $10. This charge
will not be increased. Certain restrictions apply to transfers from the
Fixed Account. Western Reserve may at any time revoke or modify the transfer
privilege. (See Payment and Allocation of Premiums - Allocation of Premiums
and Cash Value - Transfers, p. 21.)
13. WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF PURCHASING A POLICY?
At present, there is only limited guidance for determining whether a
Policy meets the requirements prescribed by tax legislation for tax
treatment as a life insurance contract under Section 7702 of the Internal
Revenue Code. With respect to a Policy that is issued on the basis of a rate
class using non-tobacco use Ultimate Select, non-tobacco use Select, tobacco
use Ultimate Standard or tobacco use Standard guaranteed rates, while there
is some uncertainty due to the limited guidance on Section 7702, Western
Reserve nonetheless believes that such a Policy should meet the Section 7702
definition of a life insurance contract. With respect to a Policy that is
issued on a substandard rate class, there is even less guidance to determine
whether such a Policy meets the Section 7702 definition of a life insurance
contract. Thus, it is not clear whether such a Policy would satisfy Section
7702, particularly if the Policyowner pays the full amount of premiums
permitted under the Policy. If it is subsequently determined that a Policy
does not qualify as a life insurance contract, Western Reserve will take
whatever steps are appropriate and reasonable to attempt to have such a
Policy comply with Section 7702. For these reasons, Western Reserve reserves
the right to modify the Policy as necessary to attempt to qualify it as a
life insurance contract under Section 7702. Assuming that a Policy qualifies
as a life insurance contract for Federal income tax purposes, Western
Reserve believes that the death benefit paid under the Policy generally
should be fully excludable from the gross income of the Beneficiary for
Federal income tax purposes. Moreover, the Owner should not be deemed in
constructive receipt of Cash Values under a Policy until there is a
distribution from the Policy.
A Policy may be treated as a "modified endowment contract" depending
upon the amount of premiums paid in relation to the death benefit. (See Tax
Treatment of Policy Benefits - Modified Endowment Contracts, p. 34.) If the
Policy is a modified endowment contract, then all pre-death distributions,
including Policy loans and loans secured by a Policy, will be treated first
as a distribution of taxable income to the extent of any gain and then as a
return of basis or investment in the contract. In addition, prior to age
59-1/2 any distributions of gains generally will be subject to a 10% Federal
income tax penalty.
If the Policy is not a modified endowment contract, distributions
generally will be treated first as a return of basis or investment in the
contract and then as disbursing taxable income. Moreover, loans and loans
secured by a Policy will not be treated as distributions. Finally, neither
distributions nor loans from a Policy that is not a modified endowment
contract are subject to the 10% Federal income tax penalty. For further
elaboration on the tax consequences of a Policy, see Federal Tax Matters, p.
33.
5
<PAGE>
FUND ANNUAL EXPENSES* (AS A % OF FUND AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
Aggressive Emerging
Growth Growth Growth
Portfolio Portfolio Portfolio
------------ ----------- -----------
<S> <C> <C> <C>
Management Fees .............................. 0.80% 0.80% 0.80%
Other Expenses (after reimbursement) ......... 0.16% 0.13% 0.07%
Total Fund Annual Expenses ................... 0.96% 0.93% 0.87%
<CAPTION>
C.A.S.E.
Global Balanced Value Equity Growth
Portfolio Portfolio Portfolio Portfolio
----------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
Management Fees .............................. 0.80% 0.80% 0.80% 0.80%
Other Expenses (after reimbursement) ......... 0.20% 0.14% 0.09% 0.20%
Total Fund Annual Expenses ................... 1.00% 0.94% 0.89% 1.00%
</TABLE>
<TABLE>
<CAPTION>
Strategic Growth & Money
Bond Total Return Income Market
Portfolio Portfolio Portfolio Portfolio
----------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Management Fees .................... 0.45% 0.80% 0.75% 0.40%
Other Expenses
(after reimbursement) ............. 0.14% 0.08% 0.21% 0.08%
Total Fund Annual Expenses ......... 0.59% 0.88% 0.96% 0.48%
<CAPTION>
Tactical Third Real
Asset International Avenue Estate
Allocation Equity U.S. Equity Value Securities
Portfolio Portfolio Portfolio Portfolio** Portfolio**
------------ --------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Management Fees .................... 0.80% 1.00% 0.80% 0.80% 0.80%
Other Expenses
(after reimbursement) ............. 0.07% 0.50% 0.50% 0.20% 0.20%
Total Fund Annual Expenses ......... 0.87% 1.50% 1.30% 1.00% 1.00%
</TABLE>
* Effective January 1, 1997, the Fund adopted a Plan of Distribution pursuant
to Rule 12b-1 under the 1940 Act ("Distribution Plan") and pursuant to the
Plan, entered into a Distribution Agreement with InterSecurities, Inc.
("ISI"), principal underwriter for the Fund. Under the Distribution Plan,
the Fund, on behalf of the Portfolios, is authorized to pay to various
service providers, as direct payment for expenses incurred in connection
with the distribution of a Portfolio's shares, amounts equal to actual
expenses associated with distributing a Portfolio's shares, up to a maximum
rate of 0.15% (fifteen one-hundredths of one percent) on an annualized
basis of the average daily net assets. This fee is measured and accrued
daily and paid monthly. ISI has determined that it will not seek payment by
the Fund of distribution expenses incurred with respect to any Portfolio
until April 30, 1999. Prior to ISI seeking reimbursement, Policyowners will
be notified in advance.
** Because the Third Avenue Value Portfolio commenced operations on January 2,
1998, and the Real Estate Securities Portfolio commenced operations on May
1, 1998, the percentages set forth as "Other Expenses" and "Total Fund
Annual Expenses" reflect estimates of "Other Expenses" for the first year
of operations.
The purpose of the preceding Table is to assist the Policyowner in
understanding the various costs and expenses that a Policyowner will bear
directly and indirectly. The Table reflects charges and expenses of the
Portfolios of the Fund for the fiscal year ended December 31, 1997, except that
the "Other Expenses" and "Total Fund Annual Expenses" for the Third Avenue
Value and Real Estate Securities Portfolios are estimates. Expenses of the Fund
may be higher or lower in the future. Certain states and other governmental
entities may impose a premium tax, which the Table does not include. For more
information on the charges described in this Table, see "Charges And
Deductions" on page 24 and the Fund Prospectus which accompanies this
Prospectus.
WRL Investment Management, Inc. ("WRL Management") has undertaken, until
at least April 30, 1999, to pay Fund expenses on behalf of the Portfolios to
the extent normal operating expenses of a Portfolio exceed a stated percentage
of each Portfolio's average daily net assets. The expense limitation for the
Aggressive Growth, Emerging Growth, Growth, Global, Balanced, Value Equity,
C.A.S.E. Growth, Third Avenue Value, Strategic Total Return, Growth & Income,
Tactical Asset Allocation and Real Estate Securities Portfolios is 1.00% of the
average daily net assets; 0.70% of the average daily net assets of the Bond and
Money Market Portfolios; 1.50% of the average daily net assets of the
International Equity Portfolio; and 1.30% of the average daily net assets of
the U.S. Equity Portfolio. In 1997, WRL Management, the Fund's Investment
Adviser, reimbursed the C.A.S.E. Growth Portfolio in the amount of $50,000, the
International Equity Portfolio in the amount of $179,000 and the U.S. Equity
Portfolio in the amount of $29,000. Without such reimbursement, the total
annual Fund expenses during 1997 for the C.A.S.E. Growth Portfolio,
International Equity Portfolio and U.S. Equity Portfolio would have been 1.13%,
3.12% and 1.49%, respectively.
INVESTMENT EXPERIENCE INFORMATION
THE INFORMATION PROVIDED IN THIS SECTION SHOWS THE HISTORICAL INVESTMENT
EXPERIENCE OF THE FUND AND HYPOTHETICAL ILLUSTRATIONS OF THE POLICY BASED ON
THE HISTORICAL INVESTMENT EXPERIENCE OF THE FUND. IT DOES NOT REPRESENT OR
PROJECT FUTURE INVESTMENT PERFORMANCE.
The Policies became available for sale in January of 1999. The Series
Account and the Fund commenced operations on October 2, 1986. The rates of
return shown below depict the historic investment experience of each Portfolio
of the Fund for the periods shown and assumes that the rate of return for each
Portfolio in each calendar year was uniformly earned throughout the year. The
actual performance of the Portfolios, however, has and will vary throughout the
year, and will result in variable monthly deductions from Cash Value that could
affect performance. The illustrations of death benefits, Cash Values and Net
Surrender Values shown below depict these Policy features for a hypothetical
Policy as if it had been purchased on January 1, 1987, for an Insured in the
age and risk classes indicated, based on the historical investment experience
of the Portfolio indicated since January 1 of the year following a Portfolio's
inception. The actual rate of return for each Portfolio in each calendar year
was assumed to be uniformly earned throughout that year. The actual performance
of the Portfolios, however, has and will vary throughout the year.
6
<PAGE>
RATES OF RETURN
The rates of return shown below are based on the historic investment
performance, as described above, after the deduction of investment management
fees and direct Fund expenses, of the Portfolios of the Fund. The rates are
average annual compounded rates of return for the periods ended on December 31,
1997. (See Investments of the Series Account - WRL Series Fund, Inc., p. 17.)
These rates of return do not reflect the annual charge against the assets
of the Series Account for mortality and expense risks. These rates of return
also do not reflect the monthly deductions from Cash Value, or surrender
charges. (See Contingent Deferred Surrender Charges, p. 24; and Cash Value
Charges, p. 25.) Accordingly, these rates of return do not illustrate how
actual investment performance will affect benefits under the Policies. (See,
however, Death Benefit, Cash Value and Net Surrender Value Illustrations,
below.) Moreover, these rates of return are not an estimate, projection or
guarantee of future performance.
Also shown are comparable figures for the unmanaged Standard & Poor's
Index of 500 Common Stocks ("S&P 500"), a widely used measure of stock market
performance. As an unmanaged index, the S&P 500 does not reflect any deduction
for the expense of operating and managing an investment portfolio.
AVERAGE ANNUAL COMPOUNDED RATES OF RETURN
FOR THE PERIODS ENDED ON DECEMBER 31, 1997
<TABLE>
<CAPTION>
10 5 3 1
Fund Portfolio Inception* Years Years Years Year
- ------------------------ ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Growth 17.65% 18.66% 14.23% 26.83% 17.54%
Global 20.41% N/A 20.38% 23.13% 18.75%
Bond 7.77% 8.98% 7.24% 10.37% 9.16%
Money Market 5.00% 5.06% 4.31% 5.22% 5.24%
Emerging Growth 20.33% N/A N/A 28.45% 21.45%
Strategic Total Return 15.07% N/A N/A 20.43% 21.85%
Aggressive Growth 17.72% N/A N/A 23.73% 24.25%
Balanced 10.44% N/A N/A 15.81% 17.10%
Growth & Income 14.17% N/A N/A 20.35% 24.65%
Tactical Asset
Allocation 17.04% N/A N/A 17.01% 16.59%
C.A.S.E Growth 20.09% N/A N/A N/A 15.03%
Value Equity 23.14% N/A N/A N/A 25.04%
International Equity 7.50% N/A N/A N/A 7.50%
U.S. Equity 27.01% N/A N/A N/A 27.01%
S&P 500 16.95% 18.06% 20.27% 31.15% 33.36%
</TABLE>
* The Growth, Bond and Money Market Portfolios of the Fund commenced operations
on October 2, 1986. The Global Portfolio commenced operations on December
3, 1992. The Emerging Growth and Strategic Total Return Portfolios
commenced operations on March 1, 1993. The Aggressive Growth, Balanced and
Growth & Income Portfolios commenced operations on March 1, 1994. The
Tactical Asset Allocation Portfolio commenced operations on January 3,
1995. The C.A.S.E. Growth Portfolio commenced operations on May 1, 1995.
The Value Equity Portfolio commenced operations on May 1, 1996. The
International Equity and U.S. Equity Portfolios commenced operations on
January 2, 1997. The S&P 500 returns are based on an inception date of
October 2, 1986.
Because the Third Avenue Value and Real Estate Securities Portfolios had not
yet commenced operations as of December 31, 1997, the above chart does not
reflect rates of return for these Portfolios.
Additional information regarding the investment performance of the
Portfolios of the Fund appears in the attached Prospectus for the Portfolios of
the Fund.
DEATH BENEFIT, CASH VALUE AND NET SURRENDER VALUE
ILLUSTRATIONS
In order to demonstrate how the historic investment experience of the
Portfolios could have affected the Option A death benefits, the Policy Cash
Value and the Net Surrender Value, the following hypothetical illustrations are
based on the historic investment experience of each Portfolio. These
hypothetical illustrations are designed to show the performance that could have
resulted if the Policy available for purchase today had been in existence
during the period of time illustrated. The actual rate of return in each
calendar year was assumed to be uniformly earned throughout that year. The
actual performance of the Portfolios, however, has and will vary throughout the
year, and will result in variable monthly deductions from Cash Value that could
affect performance. These illustrations do not represent what may happen in the
future.
For each Portfolio, the illustrations show Option A based on the payment
of annual premiums of $5,500 at the beginning of each Policy year, and a
Specified Amount of $500,000 for a male age 35. The illustrations assume that
the Insured is placed in Western Reserve's non-tobacco use Ultimate Select
underwriting rate class. (See Cash Value Charges - Cost of Insurance, p. 25.)
The illustrations also assume that the Policy's entire Cash Value is allocated
to the Sub-Account corresponding to the Portfolio shown. The illustrated values
would be different if the Policyowner had chosen Option B death benefits.
The amounts shown for death benefits, Cash Values and Net Surrender
Values take into account all charges and deductions from the Policy, the Series
Account and the Fund (see Charges and Deductions - Charges Against the Series
Account, p. 26, and Investments of the Series Account - WRL Series Fund, Inc.,
p. 17).
For each Portfolio of the Fund, one illustration is based on the
guaranteed cost of insurance rates, while the other illustration is based on
the current cost of insurance rates. These examples of Policy performance are
for the specific age, sex, rate class, premium payment pattern and Policy set
forth above. The amount and timing of premium payments would affect individual
Policy benefits as would any withdrawals or loans.
This Prospectus also contains illustrations based on hypothetical rates
of return. (See Appendix A, pages 39-41.)
The following example shows how the hypothetical net return of the Growth
Portfolio of the Fund would have affected benefits for a Policy dated January
1, 1987. This example assumes that the Premiums and related Cash Values were in
the Sub-Account for the entire period and that the values were determined on
the first Valuation Date following January 1st of each year.
7
<PAGE>
GROWTH PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
1988 ............................... $ 5,230 $ 5,157 $ 1,357 $ 1,284
1989* .............................. 11,490 11,310 7,155 6,975
1990* .............................. 24,123 23,719 19,325 18,921
1991* .............................. 27,907 27,375 22,647 22,115
1992* .............................. 52,102 51,062 46,381 45,340
1993* .............................. 57,475 56,266 51,291 50,083
1994* .............................. 63,480 62,076 56,834 55,431
1995* .............................. 61,646 60,203 54,539 53,096
1996* .............................. 97,318 95,030 89,749 87,460
1997* .............................. 118,226 115,441 110,195 107,409
1998* .............................. 144,947 141,570 138,152 134,776
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the Bond
Portfolio of the Fund would have affected benefits for a Policy dated January
1, 1987. This example assumes that Premiums and related Cash Values were in the
Sub-Account for the entire period and that the values were determined on the
first Valuation Date following January 1st of each year.
BOND PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1988 ............................... $ 4,421 $ 4,354 $ 548 $ 481
1989* .............................. 9,648 9,486 5,313 5,151
1990* .............................. 16,440 16,134 11,643 11,337
1991* .............................. 22,369 21,896 17,110 16,637
1992* .............................. 31,344 30,631 25,623 24,910
1993* .............................. 38,503 37,574 32,320 31,390
1994* .............................. 47,783 46,571 41,138 39,926
1995* .............................. 48,358 47,060 41,251 39,953
1996* .............................. 64,439 62,697 56,870 55,127
1997* .............................. 67,734 65,890 59,702 57,859
1998* .............................. 78,666 76,562 71,871 69,767
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
8
<PAGE>
The following example shows how the hypothetical net return of the Money
Market Portfolio of the Fund would have affected benefits for a Policy dated
January 1, 1987. This example assumes that Premiums and related Cash Values
were in the Sub-Account for the entire period and that the values were
determined on the first Valuation Date following January 1st of each year.
MONEY MARKET PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1988 ............................... $ 4,939 $ 4,868 $ 1,066 $ 995
1989* .............................. 10,133 9,968 5,798 5,632
1990* .............................. 15,862 15,569 11,065 10,772
1991* .............................. 21,837 21,376 16,578 16,117
1992* .............................. 27,578 26,942 21,857 21,220
1993* .............................. 32,839 32,026 26,655 25,843
1994* .............................. 37,883 36,884 31,238 30,239
1995* .............................. 43,418 42,206 36,311 35,098
1996* .............................. 49,882 48,468 42,312 40,899
1997* .............................. 56,352 54,748 48,320 46,717
1998* .............................. 63,090 61,330 56,295 54,536
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the Global
Portfolio of the Fund would have affected benefits for a Policy dated January
1, 1993. This example assumes that Premiums and related Cash Values were in the
Sub-Account for the entire period and that the values were determined on the
first Valuation Date following January 1st of each year.
GLOBAL PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1994 ............................... $ 6,383 $ 6,302 $ 2,509 $ 2,428
1995* .............................. 11,008 10,839 6,673 6,504
1996* .............................. 19,249 18,919 14,452 14,121
1997* .............................. 29,868 29,295 24,609 24,036
1998* .............................. 41,264 40,416 35,543 34,694
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the
Emerging Growth Portfolio of the Fund would have affected benefits for a Policy
dated January 1, 1994. This example assumes that Premiums and related Cash
Values were in the Sub-Account for the entire period and that the values were
determined on the first Valuation Date following January 1st of each year.
EMERGING GROWTH PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1995 ............................... $ 4,281 $ 4,214 $ 407 $ 341
1996* .............................. 13,323 13,117 8,987 8,781
1997* .............................. 21,002 20,642 16,205 15,845
1998* .............................. 31,182 30,587 25,923 25,328
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
9
<PAGE>
The following example shows how the hypothetical net return of the
Strategic Total Return Portfolio of the Fund would have affected benefits for a
Policy dated January 1, 1994. This example assumes that Premiums and related
Cash Values were in the Sub-Account for the entire period and that the values
were determined on the first Valuation Date following January 1st of each year.
STRATEGIC TOTAL RETURN PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1995 ............................... $ 4,631 $ 4,562 $ 758 $ 689
1996* .............................. 11,644 11,460 7,309 7,124
1997* .............................. 18,395 18,069 13,598 13,271
1998* .............................. 28,146 27,589 22,887 22,330
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the
Aggressive Growth Portfolio of the Fund would have affected benefits for a
Policy dated January 1, 1995. This example assumes that Premiums and related
Cash Values were in the Sub-Account for the entire period and that the values
were determined on the first Valuation Date following January 1st of each year.
AGGRESSIVE GROWTH PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current an Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1996 ............................... $ 6,666 $ 6,583 $ 2,792 $ 2,709
1997* .............................. 12,314 12,132 7,978 7,797
1998* .............................. 21,153 20,803 16,355 16,005
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the
Balanced Portfolio of the Fund would have affected benefits for a Policy dated
January 1, 1995. This example assumes that Premiums and related Cash Values
were in the Sub-Account for the entire period and that the values were
determined on the first Valuation Date following January 1st of each year.
BALANCED PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1996 ............................... $ 5,654 $ 5,578 $ 1,781 $ 1,704
1997* .............................. 11,244 11,069 6,908 6,734
1998* .............................. 18,785 18,457 13,988 13,660
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
10
<PAGE>
The following example shows how the hypothetical net return of the Growth
& Income Portfolio of the Fund would have affected benefits for a Policy dated
January 1, 1995. This example assumes that Premiums and related Cash Values
were in the Sub-Account for the entire period and that the values were
determined on the first Valuation Date following January 1st of each year.
GROWTH & INCOME PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1996 ............................... $ 5,950 $ 5,872 $ 2,077 $ 1,999
1997* .............................. 11,584 11,407 7,249 7,071
1998* .............................. 20,274 19,929 15,477 15,132
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the
Tactical Asset Allocation Portfolio of the Fund would have affected benefits
for a Policy dated January 1, 1995. This example assumes that Premiums and
related Cash Values were in the Sub-Account for the entire period and that the
values were determined on the first Valuation Date following January 1st of
each year.
TACTICAL ASSET ALLOCATION PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1996 ............................... $ 5,703 $ 5,626 $ 1,829 $ 1,753
1997* .............................. 11,672 11,492 7,336 7,157
1998* .............................. 18,980 18,652 14,183 13,855
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the
C.A.S.E. Growth Portfolio of the Fund would have affected benefits for a Policy
dated January 1, 1996, if the C.A.S.E. Growth Portfolio had been offered by the
Policy as of January 1, 1996. This example assumes that Premiums and related
Cash Values were in the Sub-Account for the entire period and that the values
were determined on the first Valuation Date following January 1st of each year.
C.A.S.E. GROWTH PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1997 ............................... $ 5,447 $ 5,373 $1,574 $1,499
1998* .............................. 11,759 11,577 7,424 7,242
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
11
<PAGE>
The following example shows how the hypothetical net return of the Value
Equity Portfolio of the Fund would have affected benefits for a Policy dated
January 1, 1997. This example assumes that Premiums and related Cash Values
were in the Sub-Account for the entire period and that the values were
determined on the first Valuation Date following January 1st of each year.
VALUE EQUITY PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1998 ............................... $5,906 $5,829 $2,033 $1,955
</TABLE>
The following example shows how the hypothetical net return of the U.S.
Equity Portfolio of the Fund would have affected benefits for a Policy dated
January 1, 1997. This example assumes that Premiums and related Cash Values
were in the Sub-Account for the entire period and that the values were
determined on the first Valuation Date following January 1st of each year.
U.S. EQUITY PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1998 ............................... $6,006 $5,927 $2,133 $2,054
</TABLE>
The following example shows how the hypothetical net return of the
International Equity Portfolio of the Fund would have affected benefits for a
Policy dated January 1, 1997. This example assumes that Premiums and related
Cash Values were in the Sub-Account for the entire period and that the values
were determined on the first Valuation Date following January 1st of each year.
INTERNATIONAL EQUITY PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1998 ............................... $5,035 $4,964 $1,162 $1,090
</TABLE>
Because the Third Avenue Value Portfolio and Real Estate Securities
Portfolio had not yet commenced operations as of December 31, 1997, there are
no hypothetical illustrations for these Portfolios.
OTHER PERFORMANCE DATA
Western Reserve may compare the performance of each Sub-Account in
advertising and sales literature to the performance of other variable life
issuers in general, or to the performance of particular types of variable life
insurance policies investing in mutual funds, or investment series of mutual
funds, with investment objectives similar to each of the Sub-Accounts whose
performance is reported by Lipper Analytical Services, Inc. ("Lipper") and
Morningstar, Inc. ("Morningstar") or reported by other services, companies,
individuals or other industry or financial publications of general interest,
such as FORBES, MONEY, THE WALL STREET JOURNAL, BUSINESS WEEK, BARRON'S,
KIPLINGER'S PERSONAL FINANCE and FORTUNE. Lipper and Morningstar are widely
used independent research services which monitor and rank the performance of
variable life insurance policies in each of the major categories of investment
objectives on an industry-wide basis.
Lipper's and Morningstar's rankings include variable annuity contracts as
well as variable life insurance policies. The performance analyses prepared by
Lipper and Morningstar rank such policies and contracts on the basis of total
return, assuming reinvestment of distributions, but do not take sales charges,
redemption fees or certain expense deductions at the separate account level
into consideration.
Western Reserve may also compare the performance of each Sub-Account in
advertising and sales literature to the S&P 500, a widely used measure of stock
market performance, or
12
<PAGE>
other widely recognized indices. Unmanaged indices may assume the reinvestment
of dividends, but usually do not reflect any "deduction" for the expense of
operating or managing an investment portfolio.
Western Reserve is a member of the Insurance Marketplace Standards
Association ("IMSA"), and as such may include the IMSA logo and information
about IMSA membership in its advertisements. Companies that belong to IMSA
subscribe to a set of ethical standards covering the various aspects of sales
and service for individually sold life insurance and annuities.
In addition, Western Reserve may, as appropriate, compare each
Sub-Account's performance to that of other types of investments such as
certificates of deposit, savings accounts and U.S. Treasuries, or to certain
interest rate and inflation indices, such as the Consumer Price Index, which is
published by the U.S. Department of Labor and measures the average change in
prices over time of a fixed "market basket" of certain specified goods and
services. Similar comparisons of Sub-Account performance may also be made with
appropriate indices measuring the performance of a defined group of securities
widely recognized by investors as representing a particular segment of the
securities markets. For example, Sub-Account performance may be compared with
Donoghue Money Market Institutional Average (money market rates), Lehman
Brothers Corporate Bond Index (corporate bond interest rates) or Lehman
Brothers Government Bond Index (long-term U.S. Government obligation interest
rates).
WESTERN RESERVE AND THE SERIES ACCOUNT
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Western Reserve was originally incorporated under the laws of Ohio on
October 1, 1957. Western Reserve is engaged in the business of writing life
insurance policies and annuity contracts. Western Reserve is admitted to do
business in 49 states and the District of Columbia. The Office of Western
Reserve is located in St. Petersburg, Florida; however, the mailing address is
P.O. Box 5068, Clearwater, FL 33758-5068. Western Reserve is a wholly-owned
subsidiary of First AUSA Life Insurance Company ("First AUSA"), a stock life
insurance company which is wholly-owned by AEGON USA, Inc. ("AEGON USA"). AEGON
USA is a financial services holding company whose primary emphasis is on life
and health insurance and annuity and investment products. AEGON USA is a
wholly-owned indirect subsidiary of AEGON nv, a Netherlands corporation, which
is a publicly traded international insurance group.
PUBLISHED RATINGS OF WESTERN RESERVE. Western Reserve may from time to
time publish in advertisements, sales literature and reports to Policyowners,
the ratings and other information assigned to it by one or more independent
rating organizations such as A.M. Best Company ("A.M. Best"), Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Insurance Rating Services
("Standard & Poor's"), and Duff & Phelps Credit Rating Co. ("Duff & Phelps").
A.M. Best's and Moody's ratings reflect their current opinion of the relative
financial strength and operating performance of an insurance company in
comparison to the norms of the life/ health insurance industry. Standard &
Poor's and Duff & Phelps provide ratings which measure the claims-paying
ability of insurance companies. These ratings are opinions of an operating
insurance company's financial capacity to meet the obligations of its insurance
policies in accordance with their terms. Claims-paying ability ratings do not
refer to an insurer's ability to meet non-policy obligations (i.e.,
debt/commercial paper). These ratings do not apply to the Series Account, its
Sub-Accounts, the Fund, its Portfolios, or to their performance.
THE SERIES ACCOUNT
WRL Series Life Account ("Series Account") was established by Western
Reserve as a separate account on July 16, 1985. The Series Account meets the
definition of a "separate account" under the Federal securities laws. The
Series Account will receive and invest the Net Premiums paid under this Policy
and other flexible premium variable life insurance policies issued by Western
Reserve.
Although the assets of the Series Account are the property of Western
Reserve, the Code of Ohio, under which the Series Account was established,
provides that the assets in the Series Account attributable to the Policies are
not chargeable with liabilities arising out of any other business which Western
Reserve may conduct. The assets of the Series Account shall, however, be
available to cover the liabilities of the General Account of Western Reserve to
the extent that the Series Account's assets exceed its liabilities arising under
the Policies supported by it.
The Series Account is currently divided into sixteen Sub-Accounts. Each
Sub-Account invests exclusively in shares of a single Portfolio of the Fund.
Income and both realized and unrealized gains or losses from the assets of each
Sub-Account of the Series Account are credited to or charged against that
Sub-Account without regard to income, gains or losses from any other Sub-Account
or arising out of any other business Western Reserve may conduct.
POLICY BENEFITS
DEATH BENEFIT
Policyowners designate in the initial application one of two death
benefit options offered under the Policy: Death Benefit Option A ("Option A")
and Death Benefit Option B ("Option B"). As long as the Policy remains In
Force, (see Policy Lapse and Reinstatement - Lapse, p. 23), Western Reserve
will, upon receiving due proof of the Insured's death, pay the death benefit
proceeds of a Policy to the named Beneficiary in accordance with the designated
death benefit option. The amount of the death benefit proceeds payable will be
determined at the end of the Valuation Period during which the Insured dies.
The proceeds may be paid in a lump sum or under one or more of the settlement
options set forth in the Policy. (See Payment of Policy Benefits - Settlement
Options, p. 29.) Western Reserve guarantees that as long as the Policy remains
In Force (see Policy Lapse and Reinstatement - Lapse, p. 23), the death benefit
proceeds under either option will never be less than the
13
<PAGE>
Specified Amount of the Policy, but the proceeds will be reduced by any
outstanding indebtedness and any due and unpaid charges. These proceeds will be
increased by any additional insurance In Force provided by rider and any
unearned loan interest.
OPTION A. The death benefit is the greater of (i) the current Specified
Amount of the Policy or (ii) a specified percentage (the "limitation
percentage") times the Cash Value of the Policy on the date of death of the
Insured. A cash withdrawal will reduce the Specified Amount by the dollar
amount of the withdrawal. No pro rata Decrease Charge is charged when the
Specified Amount is decreased as a result of a cash withdrawal. The limitation
percentage is 250% for an Insured age 40 or below on the Policy Anniversary
prior to the date of death. For an Insured with an Attained Age over 40 on a
Policy Anniversary, the percentage declines as shown in the following
Limitation Percentage Table. Accordingly, under Option A the death benefit will
remain level unless the limitation percentage times the Cash Value exceeds the
Specified Amount, in which case the amount of the death benefit will vary as
the Cash Value varies.
ILLUSTRATION OF OPTION A. For purposes of this illustration, assume
that the Insured's Attained Age is under 40, there have been no withdrawals or
decreases in Specified Amount and that there is no outstanding indebtedness.
Under Option A, a Policy with a $500,000 current Specified Amount will
generally pay $500,000 in death benefits. However, because the death benefit
must be equal to or be greater than 250% of Cash Value, any time the Cash Value
of the Policy exceeds $200,000, the death benefit will exceed the $500,000
Specified Amount. Each additional dollar added to Cash Value above $200,000
will increase the death benefit by $2.50.
Similarly, so long as the Cash Value exceeds $200,000, each dollar taken
out of the Cash Value will reduce the death benefit by $2.50. If at any time,
however, the Cash Value multiplied by the limitation percentage is less than
the Specified Amount, the death benefit will equal the Specified Amount of the
Policy, reduced by the dollar value of any cash withdrawals.
LIMITATION PERCENTAGE TABLE
ATTAINED AGE PER YEAR
OF INSURED LESS OVER AGE
- ---------------------- ------ ---------
40 and under ......... 250%
41 - 45 .............. 250% 7% 40
46 - 50 .............. 215% 6% 45
51 - 55 .............. 185% 7% 50
56 - 60 .............. 150% 4% 55
61 - 65 .............. 130% 2% 60
66 - 70 .............. 120% 1% 65
71 - 75 .............. 115% 2% 70
76 - 90 .............. 105% 0% 75
91 - 95 .............. 105% 1% 90
OPTION B. The death benefit is equal to the greater of (i) the
Specified Amount plus the Cash Value of the Policy on the date of death of the
Insured or (ii) the limitation percentage times the Cash Value of the Policy on
or prior to the date of death of the Insured. The applicable percentage is 250%
for an Insured age 40 or below on the Policy Anniversary prior to the date of
death. For Insureds with an Attained Age over 40 on a Policy Anniversary, the
percentage declines as shown in the Limitation Percentage Table above.
Accordingly, under Option B the amount of the death benefit will always vary as
the Cash Value varies.
ILLUSTRATION OF OPTION B. For purposes of this illustration, assume
that the Insured is under the age of 40 and that there is no outstanding
indebtedness. Under Option B, a Policy with a Specified Amount of $500,000 will
generally pay a death benefit of $500,000 plus Cash Value. Thus, for example, a
Policy with a Cash Value of $100,000 will have a death benefit of $600,000
($500,000 + $100,000). The death benefit, however, must be at least 250% of
Cash Value. As a result, if the Cash Value of the Policy exceeds $333,333, the
death benefit will be greater than the Specified Amount plus Cash Value. Each
additional dollar of Cash Value above $333,333 will increase the death benefit
by $2.50.
Similarly, any time Cash Value exceeds $333,333, each dollar taken out of
Cash Value will reduce the death benefit by $2.50. If at any time, however,
Cash Value multiplied by the limitation percentage is less than the Specified
Amount plus the Cash Value, then the death benefit will be the Specified Amount
plus the Cash Value of the Policy.
CHOOSING DEATH BENEFIT OPTION A OR OPTION B. Assuming the death benefit
is not determined by reference to the limitation percentage, Option A will
provide a Specified Amount of death benefit which does not vary with changes in
Cash Value. Thus, under Option A, as Cash Value increases, Western Reserve's
net amount at risk and therefore the pure insurance protection under the Policy
will decline. In contrast, Option B involves a constant net amount at risk,
assuming that the death benefit is not determined by reference to the
limitation percentage. Assuming positive investment experience, the deduction
for cost of insurance under a Policy with an Option A death benefit will be
less than under a corresponding Policy with an Option B death benefit. Because
of this, if investment performance is positive, Cash Value under Option A will
increase faster than under Option B but the total death benefit under Option B
will generally be greater. Thus, Option A could be considered more suitable for
Policyowners whose goal is increasing Cash Value based upon positive investment
experience while Option B could be considered more suitable for Policyowners
whose goal is increasing total death benefit.
CHANGE IN DEATH BENEFIT OPTION. Generally, the death benefit option in
effect may be changed by the Policyowner once each Policy year after the third
Policy year by sending Western Reserve a written request for change. A change
in death benefit option may have Federal income tax consequences. (See Federal
Tax Matters, p. 33.)
Under Western Reserve's current rules, no change may be made if it would
result in a Specified Amount less than the
14
<PAGE>
minimum Specified Amount set forth in the Policy. The effective date of any
change will be the Monthly Anniversary on or following receipt of the request.
No charges will be imposed for making a change in death benefit option.
If the death benefit option is changed from Option B to Option A, the
Specified Amount will be increased by an amount equal to the Policy's Cash
Value on the effective date of change. If the death benefit option is changed
from Option A to Option B, the Specified Amount will be decreased by an amount
equal to the Cash Value on the effective date of the change. The Policyowner
may either change the Death Benefit Option or decrease the Specified Amount,
but not both, only once each Policy year after the third Policy year.
CORRIDOR PERCENTAGE. If, pursuant to requirements of the Internal
Revenue Code of 1986, as amended, the death benefit under a Policy is
determined by reference to the limitation percentages discussed above, the
Policy is described as "in the corridor," and an increase in the Cash Value of
the Policy will increase the net amount at risk assumed by Western Reserve and
consequently increase the cost of insurance deducted from the Cash Value of the
Policy. (See Cash Value Charges - Cost of Insurance, p. 25.)
INSURANCE PROTECTION. A Policyowner may increase or decrease the pure
insurance protection provided by a Policy (I.E., the difference between the
death benefit and the Cash Value) in one of several ways as insurance needs
change. These ways include decreasing the Specified Amount of insurance,
changing the level of premium payments, and, to a lesser extent, making a cash
withdrawal from the Policy. Although the consequences of each of these methods
will depend upon the individual circumstances, they may be generally summarized
as follows:
(a) A decrease in the Specified Amount will, subject to the limitation
percentage (see Policy Benefits - Death Benefit, p. 13), in general
decrease the insurance protection and the charges under the Policy
without reducing the Cash Value. A pro rata Decrease Charge will be
assessed against Cash Value at the time of decrease prior to the
end of the 15th Policy year. (See Charges and Deductions - Pro Rata
Decrease Charge, p. 25)
(b) If Option A is elected, an increased level of premium payments will
reduce the pure insurance protection, until the limitation
percentage times the Cash Value exceeds the Specified Amount.
Increased premiums should increase the amount of Net Surrender
Value available to keep the Policy In Force.
(c) A cash withdrawal will reduce the death benefit. (See Surrender
Privileges - Cash Withdrawals, p. 28.) However, it has no effect on
the amount of pure insurance protection and charges under the
Policy, unless the death benefit payable is governed by the
limitation percentages. It results in a reduced amount of Net
Surrender Value available to pay the monthly deduction, thereby
increasing the possibility that the Policy will lapse.
(d) A reduced level of premium payments also generally increases the
amount of pure insurance protection if Option A is elected, or
maintains the same amount of pure insurance protection if Option B
is elected, again depending on the limitation percentage. It
results in a reduced amount of Cash Value and increases the
possibility that the Policy will Lapse.
HOW DEATH BENEFITS MAY VARY IN AMOUNT. As long as the Policy remains In
Force, Western Reserve guarantees that the death benefit will never be less
than the current Specified Amount of the Policy. These proceeds will be reduced
by any outstanding policy loan and any due and unpaid charges.The proceeds are
increased by any interest the Owner paid in advance on the loan for the period
between the date of death and the next Policy Anniversary, and by any insurance
benefits added by rider.
The death benefit may, however, vary with the Policy's Cash Value. Under
Option A, the death benefit will only vary when the Cash Value multiplied by
the limitation percentage exceeds the Specified Amount of the Policy. The death
benefit under Option B will always vary with the Cash Value because the death
benefit equals either the Specified Amount plus the Cash Value or the
limitation percentage times the Cash Value.
DECREASE IN SPECIFIED AMOUNT. Subject to certain limitations, a
Policyowner may decrease the Specified Amount of a Policy. We reserve the right
to limit any decrease to no more than 20% of the then current Specified Amount.
A decrease in Specified Amount may affect the net amount at risk, which may
affect a Policyowner's cost of insurance charge. (See Cash Value Charges - Cost
of Insurance, p. 25.) A decrease in Specified Amount may also have Federal
income tax consequences. (See Federal Tax Matters, p. 33.) The Policyowner may
either change the death benefit Option or decrease the Specified Amount, but
not both, only once each Policy year after the third Policy year. A pro rata
Decrease Charge will be assessed against Cash Value at the time of decrease
prior to the end of the 15th Policy year. (See Charges and Deductions - Pro
Rata Decrease Charge, p. 25.)
No requested decrease in the Specified Amount will be permitted during
the first three Policy years. Thereafter, any decrease in the Specified Amount
will become effective on the Monthly Anniversary date on or following receipt
of a written request from the Policyowner by Western Reserve. The Specified
Amount remaining In Force after any requested decrease may not be less than the
minimum Specified Amount set forth in the Policy. Western Reserve reserves the
right to limit any decrease to no more than 20% of the Specified Amount
immediately prior to the decrease. If, following the decrease in Specified
Amount, the Policy would not comply with the maximum premium limitations
required by Federal tax law (see Premiums - Premium Limitations, p. 20), the
decrease may be limited to the extent necessary to meet these requirements.
15
<PAGE>
NO INCREASE IN SPECIFIED AMOUNT. No increase in Specified Amount will
be permitted. Even if the Owner decreases the Specified Amount, Western Reserve
will not permit any later increases to the Specified Amount.
WHEN INSURANCE COVERAGE TAKES EFFECT
No life insurance coverage shall take effect unless the proposed Insured
and all additional Insureds proposed for coverage are alive and in the same
condition of health as described in the application when the policy is
delivered to the Policyowner and the full Initial Premium is paid. However, if
the full Initial Premium is paid as set forth in the conditional receipt
attached to the application, and the conditional receipt is delivered to the
Policyowner, the terms of the conditional receipt shall apply.
CONDITIONAL INSURANCE COVERAGE. Each and every person proposed for
insurance must be insurable and acceptable to Western Reserve under its
underwriting rules for the amount, Policy and risk classification applied for
on the later of: (a) the date of application, or (b) the date of completion of
all medical tests and examinations required by Western Reserve. Any check given
for payment must be honored on first presentation. The conditional receipt and
all coverages applied for on the application are void if a check or draft
received for payment of the Initial Premium is not honored when first presented
for payment.
AMOUNT OF CONDITIONAL LIFE INSURANCE COVERAGE. If conditional insurance
coverage becomes effective under the terms of the conditional receipt, then the
amount of conditional life insurance coverage on any person proposed for
insurance is the lesser of: (a) the amount of life insurance applied for on
such person, or (b) $300,000 reduced by the amounts payable under all other
life insurance or accidental death benefits then in force or pending with
Western Reserve.
WHEN CONDITIONAL LIFE INSURANCE COVERAGE BEGINS. If the conditions listed
above are fulfilled, then the amount of conditional insurance coverage
specified above shall take effect on the later of: (a) the date of the
application, or (b) the date of the completion of all medical tests and
examinations required by Western Reserve. All conditional coverages for each
and every person proposed for insurance will be deemed void if the application
contains material misrepresentation or is fraudulently completed. Benefits
under the conditional receipt coverage will be denied if any person proposed
for insurance commits suicide.
WHEN CONDITIONAL LIFE INSURANCE COVERAGE ENDS. Conditional life insurance
coverage shall terminate automatically, without notice, on the earliest of the
following dates: (a) the date Western Reserve approves the Policy as applied
for, or (b) 10 days following any counteroffer by Western Reserve to offer
insurance to any person proposed for insurance under a different Policy or at
an increased premium or on a different rate class or (c) at the end of the
fraction of a year which the payment bears to the premium required to provide
one month of insurance coverage in the amount as described above, or (d) at the
beginning of the 60th day following the date of the conditional receipt.
CASH VALUE
At the end of any Valuation Period, the Cash Value of the Policy is equal
to the sum of the Policy's value in each Sub-Account plus the Fixed Account
Value. There is no guaranteed minimum Cash Value.
NET SURRENDER VALUE. A Policyowner may at any time surrender the Policy
and receive the Policy's Net Surrender Value. (See Policy Rights - Surrender
Privileges, p. 28.) The Net Surrender Value as of any date is equal to:
(1) the Cash Value as of such date; minus
(2) any surrender charge as of such date (as described on p. 24); minus
(3) any outstanding Policy loan; plus
(4) any interest the Owner paid in advance on the loan for the period
between the date of surrender and the next Policy Anniversary.
DETERMINATION OF VALUES IN THE SERIES ACCOUNT. On the Record Date, the
Policy's value in a Sub-Account will equal the portion of any Premium allocated
to the Sub-Account, reduced by the portion of the first monthly deduction
allocated to that Sub-Account. (See Payment and Allocation of Premiums -
Allocation of Premiums and Cash Value, p. 21.) Thereafter, on each Valuation
Date, the Policy's value in a Sub-Account will equal the number of units in the
Sub-Account, multiplied by the unit value of that Sub-Account.
The number of units that the Policy has in each Sub-Account is equal to:
(1) The initial units purchased on the Policy Date; plus
(2) Units purchased at the time additional Premiums are allocated to the
Sub-Account; plus
(3) Units purchased through transfers from another Sub-Account or
the Fixed Account; minus
(4) Units redeemed to pay for monthly deductions as they are due; minus
(5) Units redeemed to pay for any cash withdrawals; minus
(6) Units redeemed as part of any transfer to another Sub-Account or the
Fixed Account; minus
(7) Units redeemed to pay for a pro rata Decrease Charge because of any
Specified Amount decreases.
The Policy's total value in the Series Account equals the sum of the
Policy's value in each Sub-Account. (For a description of how the values of the
Fixed Account are calculated, see The Fixed Account - Fixed Account Value, p.
32.) Because the Cash Value is dependent upon a number of variables, including
the investment experience of the chosen Sub-Accounts of the Series Account, the
frequency and amount of premium payments, transfers and surrenders, and charges
assessed in connection with the Policy, a Policy's Cash Value cannot be
predetermined.
16
<PAGE>
UNIT VALUE. The unit value of each Sub-Account was originally
established at $10 per unit. The unit value may increase or decrease from one
Valuation Period to the next. Unit values also will vary between Sub-Accounts.
The unit value of any Sub-Account at the end of a Valuation Period is the
result of:
(1) The total value of the assets held in the Sub-Account, determined by
multiplying the number of shares of the designated Portfolio owned
by the Sub-Account times the Portfolio's net asset value per share;
minus
(2) A deduction for the charge for mortality and expense risks. This
charge is used to compensate Western Reserve for its assumption of
certain mortality and expense risks. The daily amount of this
charge is equal to the net assets of the Sub-Account times the
daily pro rata portion of the annual Mortality and Expense Risk
Charge rate. This annual rate is equal to ninety one-hundredths of
one percent (0.90%). This charge is guaranteed to be reduced to
0.60% after the first fifteen Policy years. Western Reserve intends
to reduce this charge to 0.30% starting in the sixteenth Policy
year. However, the reduction to 0.30% is not guaranteed; minus
(3) The accrued amount of reserve for any taxes or other economic burden
resulting from the application of tax laws that are determined by
Western Reserve to be properly attributable to the Sub-Account; and
the result divided by
(4) The number of outstanding units in the Sub-Account.
VALUATION DATE AND VALUATION PERIOD. The net asset value per share of
shares of the Fund is determined, once daily, as of the close of the regular
session of business on the New York Stock Exchange ("Exchange") (usually 4:00
p.m., Eastern time), on each day the Exchange is open.
INVESTMENTS OF THE SERIES ACCOUNT
WRL SERIES FUND, INC.
The Series Account invests in shares of the Fund, a series mutual fund
which is registered with the Commission as an open-end management investment
company. Such registration does not involve supervision of the management or
investment practices or policies of the Fund by the Commission.
Currently, the Portfolios of the Fund corresponding to the Sub-Accounts
are: Aggressive Growth Portfolio, Emerging Growth Portfolio, Growth Portfolio,
Global Portfolio, Balanced Portfolio, Strategic Total Return Portfolio, Bond
Portfolio, Growth & Income Portfolio, Money Market Portfolio, Tactical Asset
Allocation Portfolio, C.A.S.E. Growth Portfolio, Value Equity Portfolio, U.S.
Equity Portfolio, International Equity Portfolio, Third Avenue Value Portfolio
and Real Estate Securities Portfolio. The assets of each Portfolio are held
separate from the assets of the other Portfolios, and each Portfolio has
investment objectives and policies which are different from those of the other
Portfolios. Thus, each Portfolio operates as a separate investment fund, and
the income or losses of one Portfolio generally have no effect on the
investment performance of any other Portfolio. Pending any prior approval by a
state insurance regulatory authority, certain Sub-Accounts and corresponding
Portfolios may not be available to residents of some states.
The investment objective and policies of each Portfolio are summarized
below. THERE IS NO ASSURANCE THAT ANY OF THE PORTFOLIOS WILL ACHIEVE ITS STATED
OBJECTIVE. More detailed information, including a description of risks, can be
found in the Prospectus for the Fund which should be read carefully.
AGGRESSIVE GROWTH PORTFOLIO: This Portfolio seeks long-term capital
appreciation by investing in a diversified, actively managed portfolio of
equity securities.
EMERGING GROWTH PORTFOLIO: This Portfolio seeks capital appreciation by
investing primarily in common stocks of small and medium sized companies.
GROWTH PORTFOLIO: This Portfolio seeks growth of capital by investing
primarily in common stocks listed on a national securities exchange or traded
on NASDAQ.
GLOBAL PORTFOLIO: This Portfolio seeks long-term growth of capital in a
manner consistent with preservation of capital, primarily through investments
in common stocks of foreign and domestic issuers.
BALANCED PORTFOLIO: This Portfolio seeks preservation of capital,
reduced volatility, and superior long-term risk adjusted returns by investing
primarily in common stock, convertible securities and fixed-income securities.
STRATEGIC TOTAL RETURN PORTFOLIO: This Portfolio seeks to provide
current income, long-term growth of income and capital appreciation by
investing primarily in a blend of equity and fixed-income securities, including
common stocks, income producing securities convertible into common stocks, and
fixed-income securities.
BOND PORTFOLIO: This Portfolio seeks the highest possible current
income within the confines of the primary goal of insuring the protection of
capital by investing at least 65%, and usually a higher percentage, of its
assets in debt securities issued by the U.S. Government and its agencies and
instrumentalities and in other medium to high-quality debt securities.
GROWTH & INCOME PORTFOLIO: This Portfolio's objective is to seek total
return by investing in securities that have defensive characteristics. The
Portfolio will invest primarily in a diversified portfolio of equity and debt
securities with an emphasis on sector investing.
MONEY MARKET PORTFOLIO: This Portfolio seeks to obtain maximum current
income consistent with preservation of principal and maintenance of liquidity.
The Portfolio maintains a dollar-weighted average portfolio maturity of not
more than 90 days by investing in U.S. dollar-denominated securities which have
effective maturities of not more than 13 months and present minimal credit
risks.
17
<PAGE>
TACTICAL ASSET ALLOCATION PORTFOLIO: This Portfolio seeks preservation
of capital and competitive investment returns by investing primarily in stocks,
United States Treasury bonds, notes and bills, and money market funds.
C.A.S.E. GROWTH PORTFOLIO: This Portfolio seeks annual growth of
capital through investment in companies whose management, financial resources
and fundamentals appear attractive on a scale measured against each company's
present value.
VALUE EQUITY PORTFOLIO: This Portfolio seeks to achieve maximum,
consistent total return with minimum risk to principal by investing primarily
in common stocks with above-average statistical value which, in the
Sub-Adviser's opinion, are in fundamentally attractive industries and are
undervalued at the time of purchase.
INTERNATIONAL EQUITY PORTFOLIO: This Portfolio seeks long-term growth
of capital by investing primarily in the common stock of foreign issuers traded
on overseas exchanges and in foreign over-the-counter markets.
U.S. EQUITY PORTFOLIO: This Portfolio seeks long-term growth of capital
by investing primarily in equity securities of U.S. companies.
THIRD AVENUE VALUE PORTFOLIO: This Portfolio seeks long-term capital
appreciation by investing primarily in a portfolio of equity securities of
well-financed companies believed to be priced below their private market values
and debt securities providing strong protective covenants and high, effective
yields.
REAL ESTATE SECURITIES PORTFOLIO: This Portfolio seeks long-term total
return from investments primarily in equity securities of real estate
companies. Total return will consist of realized and unrealized capital gains
and losses plus income.
WRL Investment Management, Inc. ("WRL Management"), located at 570
Carillon Parkway, St. Petersburg, FL 33716, a wholly-owned subsidiary of
Western Reserve, serves as investment adviser to the Fund and manages the Fund
in accordance with policies and guidelines established by the Board of
Directors of the Fund.
Each Sub-Adviser is a registered investment adviser under the Investment
Advisers Act of 1940, as amended.
Janus Capital Corporation ("Janus") is sub-adviser to the Growth and
Global Portfolios of the Fund. WRL Management and Janus will divide equally
monthly compensation at a current annual rate of 0.80% of the aggregate average
daily net assets each of the Growth Portfolio and Global Portfolio.
AEGON USA Investment Management, Inc. ("AIMI") is sub-adviser to the Bond
and Balanced Portfolios of the Fund. AIMI is a wholly-owned subsidiary of AEGON
USA and thus is an affiliate of Western Reserve. WRL Management and AIMI will
divide equally monthly compensation at the current annual rate of 0.80% of the
aggregate average daily net assets of the Balanced Portfolio. WRL Management
will receive monthly compensation at the current annual rate of 0.45% and AIMI
will receive 0.20% of the aggregate average daily net assets of the Bond
Portfolio. AIMI's compensation will be reduced by 50% of the amount paid by WRL
Management on behalf of the Bond and Balanced Portfolios pursuant to any
expense limitation or other reimbursement.
Van Kampen Asset Management Inc. ("Van Kampen") is sub-adviser to the
Emerging Growth Portfolio of the Fund. Van Kampen is an indirect wholly-owned
subsidiary of VK/AC Holding, Inc. ("VK/AC Holding"). VK/AC Holding is a
wholly-owned subsidiary of MSAM Holdings II, Inc., which, in turn, is a
wholly-owned subsidiary of Morgan Stanley Group, Inc. WRL Management and Van
Kampen will divide equally monthly compensation at the current annual rate of
0.80% of the aggregate average daily net assets of the Emerging Growth
Portfolio. Van Kampen's compensation will be reduced by 50% of the amount paid
by WRL Management on behalf of the Emerging Growth Portfolio pursuant to any
expense limitation or other reimbursement.
Luther King Capital Management Corporation ("Luther King") is sub-adviser
to the Strategic Total Return Portfolio of the Fund. Ultimate control of Luther
King is exercised by J. Luther King, Jr. WRL Management and Luther King will
divide equally monthly compensation at the current annual rate of 0.80% of the
aggregate average daily net assets of the Strategic Total Return Portfolio.
Federated Investment Counseling ("Federated") is sub-adviser to the Growth
& Income Portfolio of the Fund. Federated is a wholly-owned subsidiary of
Federated Investors. WRL Management will receive monthly compensation at the
current annual rate of 0.75% of the aggregate average daily net assets of the
Growth & Income Portfolio. From this amount, as compensation for its services,
Federated will receive payment of fees equal to 0.50% of the first $30 million
of average daily net assets, 0.35% of the next $20 million of average daily net
assets, and 0.25% of average daily net assets in excess of $50 million of the
Growth & Income Portfolio.
Fred Alger Management, Inc. ("Fred Alger") is sub-adviser to the
Aggressive Growth Portfolio of the Fund. Fred Alger is a wholly-owned subsidiary
of Fred Alger & Company, Incorporated, which, in turn, is a wholly-owned
subsidiary of Alger Associates, Inc., a financial services holding company. WRL
Management and Fred Alger will divide equally monthly compensation at the
current annual rate of 0.80% of the aggregate average daily net assets of the
Aggressive Growth Portfolio.
Dean Investment Associates, a Division of C.H. Dean and Associates, Inc.
("Dean") is sub-adviser to the Tactical Asset Allocation Portfolio of the Fund.
Dean is wholly-owned by C.H. Dean and Associates, Inc. WRL Management and Dean
will divide equally monthly compensation at the current annual rate of 0.80% of
the aggregate average daily net assets of the Tactical Asset Allocation
Portfolio. Dean's compensation will be reduced by 50% of the amount paid by WRL
Management on behalf of the Tactical Asset Allocation Portfolio pursuant to any
expense limitation or other reimbursement.
18
<PAGE>
J.P. Morgan Investment Management Inc. ("J.P. Morgan") is sub-adviser to
the Money Market and Real Estate Securities Portfolios of the Fund. J.P. Morgan
is a wholly-owned subsidiary of J.P. Morgan & Co. Incorporated. WRL Management
will receive monthly compensation at the current annual rate of 0.40% of the
aggregate average daily net assets of the Money Market Portfolio and 0.80% of
the aggregate average daily net assets of the Real Estate Securities Portfolio.
From this amount, as compensation for its services, J.P. Morgan will receive
0.15% of the average daily net assets of the Money Market Portfolio and 0.40%
of the average daily net assets of the Real Estate Securities Portfolio.
C.A.S.E. Management, Inc. ("C.A.S.E.") is sub-adviser to the C.A.S.E.
Growth Portfolio of the Fund. C.A.S.E. is a wholly-owned subsidiary of C.A.S.E.
Inc. C.A.S.E. Inc. is indirectly controlled by William Edward Lange, president
and chief executive officer of C.A.S.E. WRL Management and C.A.S.E. will divide
equally monthly compensation at the current annual rate of 0.80% of the
aggregate average daily net assets of the C.A.S.E. Growth Portfolio.
NWQ Investment Management Company, Inc. ("NWQ Investment") is sub-adviser
to the Value Equity Portfolio of the Fund. NWQ Investment was founded in 1982
and is a wholly-owned subsidiary of United Asset Management Corporation. WRL
Management and NWQ Investment will divide equally monthly compensation at the
current annual rate of 0.80% of the aggregate average daily net assets of the
Value Equity Portfolio. NWQ Investment's compensation will be reduced by 50% of
the amount paid by WRL Management on behalf of the Value Equity Portfolio
pursuant to any expense limitation or other reimbursement.
Scottish Equitable Investment Management Limited ("Scottish Equitable")
is co-sub-adviser to the International Equity Portfolio. Scottish Equitable is
a wholly-owned subsidiary of Scottish Equitable plc, successor to Scottish
Equitable Life Assurance Society, which was founded in Edinburgh in 1831.
Scottish Equitable is also an indirect wholly-owned subsidiary of AEGON nv. WRL
Management receives monthly compensation at the annual rate of 1.00% of the
aggregate average daily net assets of the International Equity Portfolio. From
this amount, Scottish Equitable receives 0.50% of average daily net assets of
the Portfolio managed by Scottish Equitable.
GE Investment Management Incorporated ("GEIM") also is a co-sub-adviser
to the International Equity Portfolio and is sub-adviser to the U.S. Equity
Portfolio. GEIM is a wholly-owned subsidiary of General Electric Company
("GE"). GEIM's principal officers and directors serve in similar capacities
with respect to General Electric Investment Corporation ("GEIC," and, together
with GEIM, collectively referred to as "GE Investments"), which like GEIM is a
wholly-owned subsidiary of GE. WRL Management receives monthly compensation at
the annual rate of 1.00% of the aggregate average daily net assets of the
International Equity Portfolio. From this amount, GEIM, receives 0.50% of
average daily net assets managed by GEIM.
With respect to the U.S. Equity Portfolio, WRL Management and GEIM will
divide equally monthly compensation at the current annual rate of 0.80% of the
aggregate average daily net assets of the U.S. Equity Portfolio.
EQSF Advisers, Inc. ("EQSF") is sub-adviser to the Third Avenue Value
Portfolio. EQSF is a New York corporation organized in 1988 and is controlled
by Martin J. Whitman. WRL Management and EQSF divide equally monthly
compensation at the current annual rate of 0.80% of the aggregate average daily
net assets of the Third Avenue Value Portfolio. EQSF's compensation will be
reduced by 50% of the amount paid by WRL Management on behalf of the Third
Avenue Value Portfolio pursuant to any expense limitation or other
reimbursement.
In addition to the Series Account, shares of the Fund are also sold to
the WRL Series Annuity Account, a separate account established by Western
Reserve for its variable annuity contracts, and to various separate accounts of
PFL Life Insurance Company and AUSA Life Insurance Company, Inc., all
affiliates of Western Reserve. It is conceivable that, in the future, it may
become disadvantageous for variable life insurance separate accounts and
variable annuity separate accounts to invest in the Fund simultaneously.
Although neither Western Reserve nor the Fund currently foresees any such
disadvantages, either to variable life insurance policyowners or to variable
annuity contract owners, the Fund's Board of Directors intends to monitor
events in order to identify any material conflicts between the interests of
such variable life insurance policyowners and variable annuity contract owners
and to determine what action, if any, it should take. 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, or
(3) differences in voting instructions between those given by variable life
insurance policyowners and those given by variable annuity contract owners. If
the Board of Directors were to conclude that separate funds should be
established for variable life and variable annuity separate accounts, Western
Reserve will bear the attendant expenses, but variable life insurance
policyowners and variable annuity contract owners would no longer have the
economies of scale resulting from a larger combined fund.
ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS
Western Reserve reserves the right to transfer assets of the Series
Account to another separate account which Western Reserve determines to be
associated with the class of contracts to which the Policy belongs. Western
Reserve also reserves the right, subject to compliance with applicable law, to
make additions to, deletions from, or substitutions for the investments that
are held by any Sub-Account or that any Sub-Account may purchase. Any such
addition, deletion or substitution by Western Reserve of shares of another
Portfolio of the Fund or of another open-end, registered investment company,
will only be taken if the shares of a Portfolio are no longer available for
19
<PAGE>
investment, or if in Western Reserve's judgement further investment in any
Portfolio should become inappropriate in view of the purposes of the Series
Account. Western Reserve will not add, delete or substitute any shares
attributable to a Policyowner's interest in a Sub-Account of the Series Account
without notice to and prior approval of the Commission, to the extent required
by the 1940 Act or other applicable law. Nothing contained herein shall prevent
the Series Account from purchasing other securities for other Portfolios or
classes of policies, or from permitting a conversion between Portfolios or
classes of policies on the basis of requests made by Policyowners.
Western Reserve also reserves the right to establish additional
Sub-Accounts, each of which would invest in a new Portfolio of the Fund, or in
shares of another investment company, with a specified investment objective.
New Sub-Accounts may be established when, in the sole discretion of Western
Reserve, marketing, tax or investment conditions warrant, and any new
Sub-Accounts will be made available to existing Policyowners on a basis to be
determined by Western Reserve. Western Reserve may also eliminate one or more
Sub-Accounts if, in its sole discretion, marketing, tax, or investment
conditions warrant.
In the event of any such substitution or change, Western Reserve may make
such changes in this and other policies as may be necessary or appropriate to
reflect such substitution or change. If deemed by Western Reserve to be in the
best interests of persons having voting rights under the Policies, and when
permitted by law, the Series Account may be (1) operated as a management
company under the 1940 Act, (2) deregistered under the 1940 Act in the event
such registration is no longer required, (3) managed under the direction of a
committee, or (4) combined with one or more other separate accounts, or
sub-accounts.
PAYMENT AND ALLOCATION OF PREMIUMS
ISSUANCE OF A POLICY
Individuals wishing to purchase a Policy must send a completed
application to Western Reserve, P.O. Box 628069, Orlando, Florida 32862-8069
for Policies submitted by World Marketing Alliance distribution systems; and to
Western Reserve, P.O. Box 628078, Orlando, Florida 32862-8078 for Policies
submitted by all other distribution systems, including ISI. Under Western
Reserve's current rules, the minimum Specified Amount of a Policy is $250,000
for Issue Ages 0-60, and $100,000 for Issue Ages above 60. Policies will
generally be issued only to Insureds 80 years of age or under who supply
satisfactory evidence of insurability sufficient to Western Reserve. Western
Reserve may, however, at its sole discretion, issue a Policy to an individual
above the age of 80. Acceptance is subject to Western Reserve's underwriting
rules and Western Reserve reserves the right to reject an application for any
reason permitted by law.
PREMIUMS
Subject to certain limitations, a Policyowner has flexibility in
determining the frequency and amount of premiums.
PREMIUM FLEXIBILITY. Unlike conventional insurance policies, this
Policy frees the Policyowner from the requirement that premiums be paid in
accordance with a rigid and inflexible premium schedule. Western Reserve may
require the Policyowner to pay an Initial Premium at least equal to a minimum
monthly guarantee premium set forth in the Policy before issuing the Policy.
Thereafter, subject to the minimum and maximum premium limitations described on
p. 21, a Policyowner may make unscheduled premium payments at any time in any
amount.
PLANNED PERIODIC PREMIUMS. Each Policyowner will determine a Planned
Periodic Premium schedule that provides for the payment of a level premium at a
fixed interval over a specified period of time. The Policyowner is not required
to pay premiums in accordance with this schedule. Furthermore, the Policyowner
has considerable flexibility to alter the amount, frequency, and the time
period over which Planned Periodic Premiums are paid.
The payment of a Planned Periodic Premium will not guarantee that the
Policy remains In Force. Instead, the duration of the Policy depends upon the
Policy's Net Surrender Value. Thus, even if Planned Periodic Premiums are paid
by the Policyowner, the Policy will nonetheless lapse any time Net Surrender
Value is insufficient to pay certain monthly charges, and a grace period
expires without a sufficient payment. However, during the first three Policy
years (that is, prior to the No Lapse Date), the Policy will remain In Force
and no grace period will begin provided the total premiums received (minus any
withdrawals, any outstanding loans and any pro rata Decrease Charge) is equal
to or exceeds the minimum monthly guarantee premium times the number of months
since the Policy Date, including the current month. (See Policy Lapse and
Reinstatement - Lapse, p. 23.) The minimum monthly guarantee premium is set
forth in the Policy, unless changed due to a requested change under the Policy
by the Policyowner, at which time the Policyowner will be notified of the new
minimum monthly guarantee premium.
PREMIUM LIMITATIONS. In no event may the total of all premiums paid,
both scheduled and unscheduled, exceed the current maximum premium limitations
which qualify the Policy as life insurance according to Federal tax laws. If at
any time a premium is paid which would result in total premiums exceeding the
current maximum premium limitation, Western Reserve will only accept that
portion of the premium which will make total premiums equal the maximum. Any
part of the premium in excess of that amount will be returned and no further
premiums will be accepted until allowed by the current maximum premium
limitations set forth in the Policy. Every premium payment, whether scheduled
or unscheduled, must be at least the minimum payment amount required. Under
Western Reserve's current rules, the minimum payment amount is $84 if paid
monthly, or $1,000 if paid annually. Premium payments less than this minimum
amount may be returned to the Policyowner.
20
<PAGE>
PAYMENT OF PREMIUMS. As an accommodation to Policyowners, Western
Reserve will accept transmittal of initial and subsequent premiums of at least
$1,000 by wire transfer. Policyowners wishing to make payments via bank wire
should instruct their banks to wire Federal Funds as follows:
First National Bank of Maryland
ABA # 052000113
For credit to: Western Reserve Life
Account #: 89539639
Policyowner's Name:
Policy Number:
Attention: General Accounting
Fax Number: (727) 299-1600
ALLOCATION OF PREMIUMS AND CASH VALUE
PREMIUMS. When an Initial Premium accompanies the application, monthly
deductions from the Cash Value of the Policy commence on the Policy Date.
ALLOCATION OF PREMIUMS. In the application for a Policy, the
Policyowner will allocate Premiums to one or more of the Sub-Accounts, to the
Fixed Account, or to a combination of both. Notwithstanding the allocation in
the application, the Initial Premium, will first be allocated on the first
Valuation Date on or following the Policy Date, to the Money Market Sub-Account
as specified on the Policy Schedule Page and will be reallocated in accordance
with the Policyowner's directions in the application on the first Valuation
Date on or following the Record Date. The Record Date of the Policy will be the
date on which the Policy is recorded on Western Reserve's books as an In Force
Policy. (See Payment and Allocation of Premiums beginning on page 20, and
Policy Benefits - When Conditional Life Insurance Coverage Begins, p. 16.)
Premiums paid after the Record Date will be allocated in accordance with
the Policyowner's instructions. Western Reserve does not currently require that
allocation of Premiums to an Account meet a minimum percentage. Western Reserve
does reserve the right to limit allocation of Premiums to any Account to no
less than 1% of each Premium payment. No fractional percentages are permitted.
The allocation of future Premiums may be changed at any time by providing
Western Reserve with written notification from the Policyowner, or by calling
Western Reserve's toll-free number, 1-800-851-9777. Western Reserve reserves
the right to impose a $25 charge for each allocation change in excess of one
per Policy year quarter. Western Reserve will employ the same procedures to
confirm that such telephone instructions are genuine as it employs regarding
transfers among Sub-Accounts and the Fixed Account by telephone. Upon
instructions from the Policyowner, the registered representative/agent of
record may also change the allocation of future Premiums. Western Reserve
reserves the right to limit the number of changes of the allocation of Premiums
to one per year. INVESTMENT RETURNS FROM THE AMOUNTS ALLOCATED TO SUB-ACCOUNTS
WILL VARY WITH THE INVESTMENT EXPERIENCE OF THESE SUB-ACCOUNTS. THE POLICYOWNER
BEARS THE ENTIRE INVESTMENT RISK.
TRANSFERS. Cash Value may be transferred among the Sub-Accounts or from
the Sub-Accounts to the Fixed Account. Transfers may also be made from the
Fixed Account to the Sub-Accounts, subject to certain restrictions. (See The
Fixed Account - Allocations, Transfers and Withdrawals, p. 32.) The amount of
Cash Value available for transfer from any Sub-Account, or the Fixed Account,
is determined at the end of the Valuation Period during which the transfer
request is received at Western Reserve's Office. The net asset value for each
share of the corresponding Portfolio of any Sub-Account is determined, once
daily, as of the close of the regular business session of the New York Stock
Exchange ("Exchange") (usually 4:00 p.m., Eastern time), which coincides with
the end of each Valuation Period. (See Policy Benefits - Cash Value - Valuation
Date and Valuation Period, p. 17.) Therefore, any transfer request received
after the close of the regular business session of the Exchange, on any day the
Exchange is open, will be processed on the next day the Exchange is open for
business, utilizing the net asset value for each share of the applicable
Portfolio determined as of the close of the regular business session of the
Exchange. Cash Value available for transfer from the Fixed Account will be
determined in the same manner.
Policyowners may make transfer requests in writing, or by telephone.
Written requests must be in a form acceptable to Western Reserve. The
registered representative/agent of record for the Policy may, upon instructions
from the Policyowner for each transfer, make telephone transfers upon request
without the necessity for the Policyowner to have previously authorized
telephone transfers in writing. If, for any reason, a Policyowner does not want
the ability to make transfers by telephone, the Policyowner should provide
written notice to Western Reserve at its Office. All telephone transfers should
be made by calling Western Reserve at the toll-free number 1-800-851-9777.
Western Reserve will not be liable for complying with telephone instructions it
reasonably believes to be authentic, nor for any loss, damage, cost or expense
in acting on such telephone instructions, and Policyowners will bear the risk
of any such loss. Western Reserve will employ reasonable procedures to confirm
that telephone instructions are genuine. If Western Reserve does not employ
such procedures, it may be liable for losses due to unauthorized or fraudulent
instructions. Such procedures may include, among others, requiring forms of
personal identification prior to acting upon such telephone instructions,
providing written confirmation of such transactions to Policyowners, and/or
tape recording of telephone instructions received from Policyowners. Western
Reserve may, at any time, revoke or modify the transfer privilege. Under
Western Reserve's current procedures, it will effect transfers and determine
all values in connection with transfers at the end of the Valuation Period
during which the transfer request is received at Western Reserve's Office.
Twelve Cash Value transfers are permitted without charge during any one
Policy year. Western Reserve will impose a charge of $10 for each subsequent
transfer. The transfer charge
21
<PAGE>
will not be increased. (See Optional Cash Value Charges - Cash Value Transfers,
p. 26.) All transfers made in any one day will be considered a single transfer
and any transfer charges will be deducted in an equal amount from each
Sub-Account from which a transfer was made. Transfers resulting from policy
loans, the exercise of conversion rights, and the reallocation of Cash Value
immediately after the Record Date, will not be treated as a transfer for the
purpose of this charge. No transfer charge will apply to transfers from the
Fixed Account to a Sub-Account or to the exercise of the Conversion Rights.
(See Policy Rights - Conversion Rights, p. 29.)
Western Reserve or an affiliate may provide administrative or other
support services to independent third parties authorized by Policyowners to
conduct transfers on a Policyowner's behalf, or who provide recommendations as
to how Sub-Account values should be allocated. This includes, but is not
limited to, transferring Sub-Account values among Sub-Accounts in accordance
with various investment allocation strategies such third party may employ. Such
independent third parties may or may not be appointed Western Reserve agents
for the sale of Policies. However, WESTERN RESERVE DOES NOT ENGAGE ANY THIRD
PARTIES TO OFFER INVESTMENT ALLOCATION SERVICES OF ANY TYPE, SO THAT PERSONS OR
FIRMS OFFERING SUCH SERVICES DO SO INDEPENDENT FROM ANY AGENCY RELATIONSHIP
THEY MAY HAVE WITH WESTERN RESERVE FOR THE SALE OF POLICIES. WESTERN RESERVE
THEREFORE TAKES NO RESPONSIBILITY FOR THE INVESTMENT ALLOCATIONS AND TRANSFERS
TRANSACTED ON A POLICYOWNER'S BEHALF BY SUCH THIRD PARTIES OR ANY INVESTMENT
ALLOCATION RECOMMENDATIONS MADE BY SUCH PARTIES. Western Reserve does not
currently charge a Policyowner any additional fees for providing these support
services.
DOLLAR COST AVERAGING
The Policyowner may direct Western Reserve to automatically transfer
specified amounts from the Money Market Sub-Account, the Bond Sub-Account, the
Fixed Account or any combination of these Accounts on a monthly basis to a Sub-
Account. This service is intended to allow the Owner to utilize "Dollar Cost
Averaging," a long-term investment strategy which provides for regular, level
investments over time. Western Reserve makes no guarantees that Dollar Cost
Averaging will result in a profit or protect against loss. To qualify for
Dollar Cost Averaging a minimum of $5,000 must be in each Account from which
transfers will be made and at least $100, in the aggregate, must be transferred
each month, unless Western Reserve consents to a smaller amount.
To further qualify for Dollar Cost Averaging from the Fixed Account, no
more than one-tenth (1/10) of the amount in the Fixed Account at the
commencement of Dollar Cost Averaging can be transferred each month. Other
types of transfers from the Fixed Account may also be subject to certain other
restrictions. (See The Fixed Account - Allocations, Transfers and Withdrawals
on p. 32.)
A written election of this service, on a form provided by Western
Reserve, must be completed by the Policyowner in order to begin transfers. The
first transfer will occur during the month which follows receipt of the form,
providing the form is received by the 25th day of the month. Once elected,
transfers from the Money Market or Bond Sub-Accounts or the Fixed Account will
be processed monthly until the entire value of each Account from which
transfers are made is completely depleted or the Policyowner instructs Western
Reserve in writing to cancel the monthly transfers. For example, if $15,000 was
allocated to the Money Market Sub-Account and $10,000 was allocated to the Bond
Sub-Account and transfers of $500 are made each month from each of these
Sub-Accounts to the Growth Sub-Account, transfers of $500 per month would
continue to be made from the Money Market Sub-Account even though transfers
from the Bond Sub-Account had ceased as a result of depletion of value.
There is no charge for Dollar Cost Averaging. Each transfer which occurs
under the Dollar Cost Averaging service will not be counted towards the twelve
free transfers allowed during each Policy year. (See Payment and Allocation of
Premiums - Allocation of Premiums and Cash Value - Transfers on p. 21.) Western
Reserve may discontinue, modify, or suspend Dollar Cost Averaging at any time,
following prior written notice to Policyowners. Dollar Cost Averaging is not
available if the Owner has elected the Asset Rebalancing Program, or has
elected an asset allocation service provided by a third party.
ASSET REBALANCING PROGRAM
Western Reserve will offer a program under which the Policyowner may
authorize Western Reserve to transfer automatically Cash Value periodically to
maintain a particular percentage allocation among the Sub-Accounts. The Cash
Value allocated to each Sub-Account will grow or decline in value at different
rates. The Asset Rebalancing Program automatically reallocates the Cash Value
in the Sub-Accounts at the end of each period to match the Contract's currently
effective Net Premium allocation schedule. The Asset Rebalancing Program is
intended to transfer Cash Value from those Sub-Accounts that have increased in
value to those Sub-Accounts that have declined in value. Over time, this method
of investing may help an Owner buy low and sell high. This investment method
does not guarantee gains, nor does it assure that any Sub-Account will not have
losses.
To qualify for Asset Rebalancing, a minimum Cash Value of $5,000 for an
existing Policy, or a minimum Initial Premium of $5,000 for a new Policy, is
required. To participate in the Asset Rebalancing Program, a properly completed
Asset Rebalancing Request Form must be received by Western Reserve at its
Administrative Office. An Asset Rebalancing Request Form is available upon
request.
Owners may elect rebalancing to occur on each quarterly, semi-annual or
annual anniversary of the Policy Date. Following receipt of the Asset
Rebalancing Request Form, Western Reserve will effect the initial rebalancing
of Cash Value on the next such anniversary, in accordance with the Policy's
current Net Premium allocation schedule. The amounts transferred will be
credited at the unit value next determined on the dates the
22
<PAGE>
transfers are made. If a day on which rebalancing would ordinarily occur falls
on a day on which the New York Stock Exchange is closed, rebalancing will occur
on the next day the New York Stock Exchange is open. The Asset Rebalancing
Program is available only before the Maturity Date, and is not available if the
Policyowner has elected Dollar Cost Averaging, or has elected an asset
allocation service provided by a third party. There is no charge for the Asset
Rebalancing Program. Each reallocation which occurs under the Asset Rebalancing
Program will not be counted towards the twelve free transfers allowed during
each Policy year. (See Payment and Allocation of Premiums - Allocation of
Premiums and Cash Value - Transfers on p. 21.)
The Policyowner may terminate participation at any time in the Asset
Rebalancing Program by oral or written request to Western Reserve.
Participating in the Asset Rebalancing Program will terminate automatically if
any transfer is made to, or from, any Sub-Account, other than on account of a
scheduled rebalancing. If the Policyowner wishes to resume the Asset
Rebalancing Program after it has been canceled, a new Asset Rebalancing Request
Form must be completed and sent to Western Reserve. The Policyowner may start
and stop participation in the Asset Rebalancing Program at any time; however,
Western Reserve reserves the right to restrict entry into the Asset Rebalancing
Program to once per Policy Year. Cash Value allocated to the Fixed Account may
not be included in the Asset Rebalancing Program.
Western Reserve may discontinue, modify, or suspend, the Asset
Rebalancing Program at any time, following prior written notice to
Policyowners.
POLICY LAPSE AND REINSTATEMENT
LAPSE. Unlike conventional life insurance policies, the failure to make
a Planned Periodic Premium payment will not itself cause the Policy to lapse.
Conversely, paying all Planned Periodic Premium payments will not necessarily
guarantee that the Policy will not lapse (except if certain conditions are met
during the first three Policy years, as explained below). Lapse will only occur
where Net Surrender Value is insufficient to cover the monthly deduction, and a
grace period expires without a sufficient payment by the Policyowner. If the
Net Surrender Value on any Monthly Anniversary is insufficient to cover the
monthly deduction on such day, Western Reserve will mail a notice to the last
known address of the Policyowner and any assignee of record. A grace period of
61 days after the mailing date of the notice will be allowed for the payment of
premiums. The notice will specify the minimum payment and the final date on
which such payment must be received by Western Reserve to keep the Policy In
Force. (See Charges and Deductions, p. 24.) If Western Reserve does not receive
a sufficient payment within the grace period, Lapse of the Policy will result.
If a sufficient payment is received during the grace period, any resulting
Premium will be allocated among the Accounts, and any monthly deductions due
will be charged to such Accounts, in accordance with the Policyowner's then
current instructions. (See Allocation of Premiums and Cash Value - Allocation
of Premiums, p. 21 and Charges and Deductions - Cash Value Charges, p. 25.) If
the Insured dies during the grace period, the death benefit proceeds will equal
the amount of the death benefit proceeds immediately prior to the commencement
of the grace period, reduced by any due and unpaid charges.
However, until the No Lapse Date as provided in the Policy (that is, the
last Valuation Date of the third Policy year), the Policy will not lapse and no
grace period will begin provided: (1) no riders have been added since the
Policy Date, including the current month, and (2) the total of the premiums
received (minus any withdrawals, outstanding loans, and any pro rata Decrease
Charge) equals or exceeds the minimum monthly guarantee premium shown in the
Policy times the number of months since the Policy Date, including the current
month.
The addition of any rider after the Policy Date will terminate the No
Lapse Period. If the addition of any rider after the Policy Date but prior to
the No Lapse Date would cause the Policy to lapse, the Policyowner will be
notified that the grace period has begun.
Essentially, the Policy will not lapse prior to the No Lapse Date, as
long as the conditions in (1) and (2) above have been met, and even though Net
Surrender Value at any point during the No Lapse Date is insufficient to cover
the monthly deduction and a grace period has expired without a payment
sufficient to cover the monthly deduction. Such a Lapse could happen if the
investment experience has been sufficiently unfavorable to have resulted in a
decrease in the Net Surrender Value, or the Net Surrender Value has decreased
because not enough premiums have been paid to offset the monthly charges.
REINSTATEMENT. A lapsed Policy may be reinstated any time within five
years after the date of Lapse and before the Maturity Date by submitting the
following items to Western Reserve:
1. A written application for reinstatement from the Policyowner;
2. Evidence of insurability satisfactory to Western Reserve; and
3. A premium that is large enough to cover:
(a) one monthly deduction at the time of termination;
(b) the next two monthly deductions which will become due after the
time of reinstatement; and
(c) an amount sufficient to cover any surrender charge (as described
below) calculated from the Policy Date to the date of
reinstatement.
Any indebtedness on the date of Lapse will not be reinstated. The Cash
Value of the Loan Reserve on the date of reinstatement will be zero. The amount
of Cash Value on the date of reinstatement will be equal to the Net Premiums
paid at reinstatement, less the amounts paid in accordance with 3(a) and (c)
above (that is, the one monthly deduction and any surrender charge).
23
<PAGE>
Upon approval of the application for reinstatement, the effective date of
reinstatement will be the first Monthly Anniversary on or next following the
date Western Reserve approves the application for reinstatement. Western
Reserve reserves the right to decline a reinstatement request.
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate
Western Reserve for: (1) providing the insurance benefits set forth in the
Policy and any optional insurance benefits added by rider; (2) administering
the Policy; (3) assuming certain risks in connection with the Policy; and (4)
incurring expenses in distributing the Policy. The nature and amount of these
charges are described more fully below.
CONTINGENT DEFERRED SURRENDER CHARGES
If the Policy is totally surrendered (or the Net Surrender Value is
applied under a settlement option) prior to the end of the fifteenth (15th)
Policy year, a surrender charge for the Specified Amount at issue will be
deducted from the Policy's Cash Value. The surrender charge imposed on early
surrenders will be significant. You should carefully calculate this charge
before you consider a surrender. Under some circumstances the level of
contingent deferred surrender charges might result in no net surrender value
available in the first few policy years in the event of a surrender. This will
depend upon a number of factors, but is more likely if the premiums paid are
equal to or not much higher than the minimum monthly guarantee premium shown in
the Policy, or if investment performance is too low.
See Appendix C for a chart that shows the relationship between the
Specified Amount and the Surrender Charge Base Premium, depending upon the
Insured's age, gender and underwriting class.
The surrender charge always consists of the sum of:
(a) an Issue Charge and
(b) a Sales Charge.
The sum of (a) and (b) are multiplied by (c), the applicable SURRENDER
CHARGE FACTOR.
(a) ISSUE CHARGE. The Issue Charge is a level charge of $5.00 per
thousand of Specified Amount on the Policy Date .
(b) SALES CHARGE. The Sales Charge is (1) 26.5% of the sum of all
premiums paid up to the Surrender Charge Base Premium shown in the Policy and,
(2) for the sum of all premiums paid in excess of the first Surrender Charge
Base Premium ("excess premium charge"), a percentage which varies by the Issue
Age and sex of the Insured as follows:
<TABLE>
<CAPTION>
Issue Age Percentage Unisex
- --------------------- ------------ -------------------------
Male Female Issue Age Percentage
- --------- --------- ----------- -----------
<S> <C> <C> <C> <C>
0 - 55 0 - 62 8.4% 0 - 55 8.95%
56 - 63 63 - 69 4.4% 56 - 63 6.84%
64 - 68 70 - 74 3.6% 64 - 68 3.52%
69 - 73 75 - 79 3.1% 69 - 73 2.31%
74 - 78 80+ 2.5% 74 - 78 1.79%
79+ 2.0% 79+ 1.20%
</TABLE>
(c) SURRENDER CHARGE FACTOR. As stated above, the factor is applied to
the sum of the Issue Charge and Sales Charge due upon any surrender of a Policy
during the first fifteen Policy years. In Policy years 1-10 this factor is 1.00
for male Insureds at Issue Ages 0-65 and female Insureds at Issue Ages 0-70,
and then declines at the rate of 0.20 per year until reaching zero at the end
of the fifteenth (15th) Policy year as shown below. For Insureds with older
Issue Ages, this factor is less than 1.00 at the end of the tenth (10th) Policy
year and declines to 0 at the end of the fifteenth (15th) Policy year.
Therefore, application of the factor to the sum of the Issue Charge and Sales
Charge in the event of any surrender during the eleventh through fifteenth
Policy years will result in reduced surrender charges. If a surrender occurs
after the fifteenth (15th) Policy year, there are no Issue Charge or Sales
Charge due. The Surrender Charge Factor is always determined from the Policy
Date to the date of surrender, regardless of whether there were any prior
lapses and reinstatements. See Example (2) below.
SURRENDER CHARGE FACTORS
MALES ISSUE AGES 0-65
FEMALES ISSUE AGES 0-70
<TABLE>
<CAPTION>
Surrender Charge Factor
End of Policy Year* Factor
- ------------------------ -------
<S> <C>
At Issue 1.00
1-10 1.00
11 .80
12 .60
13 .40
14 .20
15 0
16+ 0
</TABLE>
* THE FACTOR ON ANY DATE OTHER THAN AN ANNIVERSARY WILL BE INTERPOLATED BETWEEN
THE TWO END OF YEAR FACTORS.
(d) EXAMPLE (1) Assume a male Insured purchases the Policy when age 35
for $250,000 of Specified Amount, paying the Surrender Charge Base Premium of
$2,518, and an additional premium amount of $482 in excess of the Surrender
Charge Base Premium, for a total premium of $3,000 per year for four years
($12,000 total for four years), and then surrenders the Policy. The surrender
charge would be calculated as follows:
24
<PAGE>
<TABLE>
<S> <C> <C> <C>
(i) ISSUE CHARGE - [250 x $5.00]
($5.00/$1,000 of Initial Specified Amount
at issue) = $1,250.00
(ii) SALES CHARGE:
(1) 26.5% of Surrender Charge Base
Premium paid
[26.5% x $2,518], and = $ 667.27
(2) 8.4% of premiums paid in excess
of Surrender Charge
Base Premium
[8.4% x $9,482] = $ 796.49
(iii) APPLICABLE SURRENDER CHARGE FACTOR = 1.00
[(a)$1,250 + (b)($667.27 + $796.49)]
x 1.00
SURRENDER CHARGES = [$1,250.00 +
$1,463.76]
x 1.00 = $2,713.76
=========
</TABLE>
EXAMPLE (2) - Assume the same facts as in Example (1), EXCEPT the Owner
surrenders the Policy on the 14th Policy Anniversary:
<TABLE>
<S> <C> <C> <C>
(i) ISSUE CHARGE - [250 x $5.00] = $1,250.00
(ii) SALES CHARGE
(1) [26.5% x $2,518], and = $ 667.27
(2) [8.4% x $39,482] = $3,316.49
(III) APPLICABLE SURRENDER CHARGE FACTOR = .20
[(a)$1,250.00 + (b)($667.27 + $3,316.49)]
x .20
SURRENDER CHARGE = [$1,250.00 +
$3,983.76] x .20 = $1,046.75
=========
</TABLE>
If the Owner waits until the 15th Policy Anniversary or after, there will
be no surrender charges.
PRO RATA DECREASE CHARGE
If, during the first 15 Policy years, the Specified Amount is decreased,
a pro rata Decrease Charge will be deducted from the Cash Value. Western
Reserve will determine the pro rata Decrease Charge by first calculating the
Contingent Deferred Surrender Charge that would apply if the Policy was being
surrendered. It will then multiply the Contingent Deferred Surrender Charge by
the ratio of the requested decrease in Specified Amount to the initial full
Specified Amount.The pro rata Decrease Charge is equal to:
(1) the amount of the Specified Amount decrease; divided by
(2) the full Specified Amount on the Policy Date; multiplied by
(3) the then current Contingent Deferred Surrender Charges as of the date
of the decrease based on the Specified Amount on the Policy Date,
as determined under the Surrender Charge provision.
This pro rata Decrease Charge will not be deducted from the Cash Value
when a Specified Amount decrease results from (a) a change in the Death Benefit
Option, or (b) a withdrawal when the Death Benefit is Option A, as described in
the Cash Withdrawals section, p. 26. The pro rata Decrease Charge is determined
from the Policy Date to the date of the decrease using the formula above,
regardless of whether there were any prior lapses and reinstatements or
decreases in Specified Amount. If a pro rata Decrease Charge is deducted due to
a decrease in Specified Amount, any future Contingent Deferred Surrender
Charges incurred during the first fifteen Policy years will be reduced
proportionately. This means that once calculated, the Contingent Deferred
Surrender Charge will be reduced by an amount equal to the surrender charge
multiplied by the ratio of any prior decreases in Specified Amount to the
initial full Specified Amount.
CASH VALUE CHARGES
Charges will be deducted monthly from the Cash Value of each Policy
("monthly deduction") to compensate Western Reserve for certain administrative
costs, the cost of insurance and optional benefits added by rider. The monthly
deduction will be deducted on each Monthly Anniversary and will be allocated
among the Accounts on the same basis as Premiums are allocated. If the value of
any Account is insufficient to pay its part of the monthly deduction, the
monthly deduction will be taken on a pro rata basis from all Accounts. Because
portions of the monthly deduction, such as the cost of insurance, can vary from
month-to-month, the monthly deduction itself will vary in amount from
month-to-month.
COST OF INSURANCE. Western Reserve will determine the monthly cost of
insurance charge by multiplying the applicable cost of insurance rates by the
net amount at risk for each Policy Month. The net amount at risk for a Policy
Month is (a) the death benefit at the beginning of the Policy Month divided by
1.0024663 (which reduces the net amount at risk, solely for purposes of
computing the cost of insurance, by taking into account assumed monthly
earnings at an annual rate of 3%), less (b) the Cash Value at the beginning of
the Policy Month.
Cost of insurance rates will be based on the sex, Attained Age and rate
class of the Insured, and the length of time a Policy has been In Force. The
actual monthly cost of insurance rates will be based on Western Reserve's
expectations as to future experience. They will not, however, be greater than
the guaranteed cost of insurance rates set forth in the Policy. These
guaranteed rates are based on the 1980 Commissioners Standard Ordinary (C.S.O.)
Mortality Tables and the Insured's sex, Attained Age and rate class. For
standard rate classes, these rates will not exceed rates contained in the 1980
C.S.O. Tables. Western Reserve also may guarantee that actual cost of insurance
rates will not be changed for a specified period of time (E.G., one year). Any
change in the cost of insurance rates will apply to all Insureds of the same
age, sex, and rate class whose Policies have been In Force for the same length
of time.
The Policies offered by this Prospectus are based on mortality tables
that distinguish between men and women. As a result, the Policy pays different
benefits to men and women of
25
<PAGE>
the same age. The State of Montana prohibits the use of actuarial tables that
distinguish between men and women in determining premiums and policy benefits
for policies issued on the lives of its residents. The State of Massachusetts
formerly had a similar prohibition and has introduced legislation which would
reinstate such prohibition. Therefore, Policies offered by this Prospectus to
insure residents of the states of Montana and Massachusetts will have premiums
and benefits which are based on actuarial tables that do not differentiate on
the basis of sex.
The rate class of an Insured will affect the cost of insurance rate.
Western Reserve currently places Insureds into the following five standard rate
classes: Ultimate Select, non-tobacco use; Select, non-tobacco use; Ultimate
Standard, tobacco use; Standard, tobacco use; and Juvenile (under 18); as well
as various other sub-standard rate classes involving a higher mortality risk.
In an otherwise identical Policy, the cost of insurance rate is generally
higher for tobacco use than for non-tobacco use and, within these two
categories, higher for Insureds not in the Ultimate category than for Insureds
in the Ultimate category. Ultimate rate classes are available only if the
Specified Amount (Primary Insured) or Face Amount of Riders for other Insureds
require blood testing at the proposed Insured's age under current Western
Reserve underwriting guidelines.
Western Reserve may also issue certain Policies on a "simplified" or
expedited basis to certain categories of individuals (for example, Policies
issued at a predetermined Specified Amount or underwritten on a group basis).
Policies issued on this basis will have guaranteed cost of insurance rates no
higher than the guaranteed rates for Select, non-tobacco use or Standard
tobacco use categories (as appropriate); however, due to the special
underwriting criteria established for these issues, actual rates may be higher
or lower than the current cost of insurance rates charged under otherwise
identical Policies that are underwritten using standard underwriting criteria.
MONTHLY POLICY CHARGE. Western Reserve has primary responsibility for
the administration of the Policy and the Series Account. Annual administrative
expenses include recordkeeping, processing death benefit claims, Policy
changes, reporting and overhead costs. As reimbursement for administrative
expenses related to the maintenance of each Policy and the Series Account,
Western Reserve assesses a monthly administration charge from each Policy. This
charge is currently $5.00 per Policy Month and will not be increased. Western
Reserve reserves the right to waive the Monthly Policy Charge on additional
policies issued to existing Policyowners at the time the second policy is
issued.
OPTIONAL CASH VALUE CHARGES
The following optional Cash Value charges will be deducted from the
Policy as the result of changes or elections made to the Policy and initiated
by the Policyowner.
OPTIONAL INSURANCE BENEFITS. The monthly deduction will include charges
for any optional insurance benefits added to the Policy by rider.
CHANGE IN PREMIUM ALLOCATION. Western Reserve does not currently levy
or charge when changes are made to allocation of Premium. However, Western
Reserve reserves the right to impose a $25 charge for each change of Premium
allocation in excess of one change per Policy year quarter. If Western Reserve
decides to impose this charge, Policyowners will be notified in writing in
advance.
CASH VALUE TRANSFERS. After twelve (12) free transfers per year,
Western Reserve will impose and deduct from each amount transferred a transfer
charge of $10 to compensate Western Reserve for the costs in effectuating the
transfer. The transfer charge will not be increased in the future.
CASH WITHDRAWALS. A processing fee equal to the lesser of $25 or 2% of
the amount withdrawn will be deducted from amounts withdrawn from the Policy
and the balance will then be paid to the Policyowner. This fee will not be
increased.
CHARGES AGAINST THE SERIES ACCOUNT
Certain expenses will be deducted as a percentage of the value of the net
assets of the Series Account to compensate Western Reserve for certain risks
assumed in connection with the Policy.
MORTALITY AND EXPENSE RISK CHARGE. Western Reserve will deduct a daily
charge from the Series Account at an annual rate of 0.90% of the average daily
net assets of the Series Account. Western Reserve guarantees to reduce this
charge to 0.60% after the first fifteen Policy years. Western Reserve intends
to reduce this charge to 0.30% starting in the sixteenth Policy year. However,
the reduction to 0.30% is not guaranteed and Western Reserve reserves the right
to maintain this charge at 0.60% level after the sixteenth Policy year. Under
Western Reserve's current procedures, these amounts are paid to the General
Account monthly.
The mortality risk assumed by Western Reserve is that Insureds may live
for a shorter time than projected. The expense risk assumed is that expenses
incurred in issuing and administering the Policies will exceed the limits on
administrative charges set in the Policies. Western Reserve also assumes risks
with respect to other contingencies including the incidence of Policy loans,
which may cause Western Reserve to incur greater costs than anticipated when
designing the Policies.
TAXES. Currently no charge is made to the Series Account for Federal
income taxes that may be attributable to the Series Account. Western Reserve
may, however, make such a charge in the future. Charges for other taxes, if
any, attributable to the Series Account may also be made. (See Federal Tax
Matters, p. 33.)
EXPENSES OF THE FUND
Because the Series Account purchases shares of the Fund, the net assets
of the Series Account will reflect the investment management fee and other
expenses incurred by the Fund. (See
26
<PAGE>
p. 6 for a table of the Fund Annual Expenses and pp. 18-19 for a discussion of
the investment management fees of each Portfolio.)
Effective January 1, 1997, the Fund adopted a Plan of Distribution
pursuant to Rule 12b-1 under the 1940 Act ("Distribution Plan") and pursuant to
the Plan, entered into a Distribution Agreement with ISI, principal underwriter
for the Fund.
Under the Distribution Plan, the Fund, on behalf of the Portfolios, is
authorized to pay to various service providers, as direct payment for expenses
incurred in connection with the distribution of a Portfolio's shares, amounts
equal to actual expenses associated with distributing a Portfolio's shares, up
to a maximum rate of 0.15% (fifteen one-hundredths of one percent) on an
annualized basis of the average daily net assets. This fee is measured and
accrued daily and paid monthly. ISI has determined that it will not seek
payment by the Fund of distribution expenses incurred with respect to any
Portfolio until April 30, 1999. Prior to ISI seeking reimbursement,
Policyowners will be notified in advance.
POLICY RIGHTS
LOAN PRIVILEGES
POLICY LOAN. After the first Policy year and so long as the Policy
remains In Force, the Policyowner may borrow money from Western Reserve using
the Policy as the only security for the loan. Western Reserve reserves the
right to permit a Policy loan prior to the first Policy Anniversary for
Policies issued pursuant to a transfer of cash values from another life
insurance policy under Section 1035(a) of the Internal Revenue Code of 1986, as
amended. The maximum amount that may be borrowed is 90% of the Cash Value, less
any surrender charge and any already outstanding Policy loan. Western Reserve
reserves the right to limit the amount of any Policy loan to not less than
$500. Outstanding loans have priority over the claims of any assignee or other
person. The loan may be repaid totally or in part before the Maturity Date of
the Policy and while the Policy is In Force. A loan which is taken from, or
secured by, a Policy may have Federal income tax consequences. (See Federal Tax
Matters, p. 33.)
An amount equal to the loan plus interest in advance until the next
Policy Anniversary will be withdrawn from the Account or Accounts specified and
transferred to the Loan Reserve until the loan is repaid. The Loan Reserve is a
portion of the Fixed Account used as collateral for a Policy loan. The
Sub-Accounts of the Series Account may be specified. If no Account is
specified, the loan amount will be withdrawn from each Account in the same
manner as the current allocation instructions.
The amount of the loan will normally be paid within seven days after
receipt of a proper request in a manner permitted by Western Reserve.
Postponement of loans may take place under certain conditions. (See General
Provisions - Postponement of Payments, p. 29.) Under Western Reserve's current
procedures, at each Anniversary, Western Reserve will compare the amount of the
outstanding loan (including loan interest in advance until the next Policy
Anniversary, if not paid) to the amount in the Loan Reserve (including interest
credited to the Loan Reserve during the previous Policy year). Western Reserve
will also make this comparison any time the Policyowner repays all of the loan,
or makes a request to borrow an additional amount. At each such time, if the
amount of the outstanding loan exceeds the amount in the Loan Reserve, Western
Reserve will withdraw the difference from the Accounts and transfer it to the
Loan Reserve in the same manner as when a loan is made. If the amount in the
Loan Reserve exceeds the amount of the outstanding loan, Western Reserve will
withdraw the difference from the Loan Reserve and transfer it to the Accounts
in accordance with the Policyowner's current allocation instructions. Western
Reserve reserves the right to require the transfer of such amounts to the Fixed
Account, if such loans were originally transferred from the Fixed Account. (See
The Fixed Account, p. 32.) No charge will be imposed for these transfers.
INTEREST RATE CHARGED. The interest rate on a Policy loan is 5.2%
payable annually in advance. If unpaid when due, interest will be added to the
amount of the loan and will become part of the loan and bear interest at the
same rate. Interest paid on a Policy loan is generally not tax deductible.
LOAN RESERVE INTEREST RATE CREDITED. The amount transferred to the Loan
Reserve will accrue interest at a minimum effective annual rate not less than
4%. Western Reserve may credit a higher rate, but it is not obligated to do so.
Currently, Western Reserve is crediting, in arrears, an effective annual
interest rate of 4.75%, on all amounts borrowed during the first ten Policy
years. On amounts borrowed after the tenth Policy year that are part of the
Cash Value in excess of the cost basis (premiums less withdrawals) of the
Policy the interest rate credited is currently equal to the interest rate being
charged on the total loan while the remaining portion, if any, of the loan is
credited the current rate of 4.75% for loans during the first ten Policy years.
EFFECT OF POLICY LOANS. A Policy loan affects the Policy, because the
death benefit and Net Surrender Value under the Policy are reduced by the
amount of the loan. Repayment of the loan causes the death benefit and Net
Surrender Value to increase by the amount of the repayment.
As long as a loan is outstanding, an amount equal to the loan plus
interest in advance until the next Policy Anniversary is held in the Loan
Reserve. This amount will not be affected by the Series Account's investment
performance. Amounts transferred from the Series Account to the Loan Reserve
will affect the Series Account value because such amounts will be credited with
an interest rate declared by Western Reserve rather than a rate of return
reflecting the investment performance of the Series Account. (See The Fixed
Account - Minimum Guaranteed and Current Interest Rates, p. 32.)
There are risks involved in taking a Policy loan, a few of which include
the potential for a Policy to lapse if projected earnings, taking into account
outstanding loans, are not achieved, as well as adverse tax consequences which
occur if
27
<PAGE>
a Policy lapses with loans outstanding. (See Federal Tax Matters - Tax
Treatment of Policy Benefits, p. 34.)
INDEBTEDNESS. Indebtedness equals the total of all Policy loans less
any unearned loan interest on the loans. If indebtedness exceeds the Cash Value
less the then applicable surrender charge, Western Reserve will notify the
Policyowner and any assignee of record. If a sufficient payment equal to excess
indebtedness is not received by Western Reserve within 61 days from the date
notice is sent, the Policy will Lapse and terminate without value. The Policy,
however, may later be reinstated. (See Policy Lapse and Reinstatement, p. 23.)
REPAYMENT OF INDEBTEDNESS. Indebtedness may be repaid any time before
the Maturity Date of the Policy and while the Policy is In Force. Payments made
by the Policyowner while there is indebtedness will be treated as premium
payments unless the Policyowner indicates that the payment should be treated as
a loan repayment. (See Policy Rights - Benefits at Maturity, p. 29.) If not
repaid, Western Reserve may deduct indebtedness from any amount payable under
the Policy. As indebtedness is repaid, the Policy's value in the Loan Reserve
securing the indebtedness repaid will be transferred from the Loan Reserve to
the Accounts in the same manner as Premiums are allocated. However, Western
Reserve reserves the right to require the transfer to the Fixed Account.
Western Reserve will allocate the repayment of indebtedness at the end of the
Valuation Period during which the repayment is received.
SURRENDER PRIVILEGES
At any time before the earlier of the death of the Insured or the
Maturity Date, the Policyowner may totally surrender or, after the first Policy
year, make a cash withdrawal from the Policy by sending a written request to
Western Reserve. A Surrender Charge may apply. The amount available for
surrender is the Net Surrender Value at the end of the Valuation Period during
which the surrender request is received at Western Reserve's Office. The Net
Surrender Value is equal to the Cash Value as of the date of Surrender, less
any surrender charge, and less any outstanding Policy loan, plus any interest
the Owner paid in advance on the loan for the period between the date of
surrender and the next Policy Anniversary. (See Charges and Deductions -
Contingent Deferred Surrender Charges, p. 24.) Surrenders from the Series
Account will generally be paid within seven days of receipt of the written
request. Postponement of payments may, however, occur in certain circumstances.
(See General Provisions - Postponement of Payments, p. 29.) Additional
restrictions may be applied to surrenders from the Fixed Account. (See The
Fixed Account - Allocations, Transfers and Withdrawals, p. 32.) For the
protection of Policyowners, all requests for cash withdrawals or total
surrenders of more than $100,000, or where the withdrawal or surrender proceeds
are to be sent to an address other than the address of record will require a
signature guarantee. All required guarantees of signatures must be made by a
national or state bank, a member firm of a national stock exchange or any other
institution which is an eligible guarantor institution as defined by rules and
regulations of the Commission. If the Policyowner is a corporation,
partnership, trust or fiduciary, evidence of the authority of the person
seeking redemption is required before the request for withdrawal is accepted,
including withdrawals under $100,000. For additional information, Policyowners
may call Western Reserve at 1-800-851-9777. A cash withdrawal or total
surrender may have Federal income tax consequences. (See Federal Tax Matters,
p. 33.)
TOTAL SURRENDERS. When the Policy is being totally surrendered, the
Policy itself must be returned to Western Reserve along with the request. A
Policyowner may elect to have the amount paid in a lump sum or under a
settlement option. (See Payment of Policy Benefits - Settlement Options, p.
29.)
CASH WITHDRAWALS. For a cash withdrawal, the amount available may be
limited to no less than $500 and to no more than 10% of the Net Surrender
Value. Western Reserve intends to allow a cash withdrawal up to 25% of the Net
Surrender Value after the fifteenth Policy year. The amount paid plus a
processing fee equal to the lesser of $25 or 2% of the amount withdrawn will be
deducted from the Policy's Cash Value at the end of the Valuation Period during
which the request is received. The amount will be deducted from the Accounts in
the same manner as the current allocation instructions unless the Policyowner
directs otherwise. Cash withdrawals are allowed only once each Policy year
after the first Policy year.
Cash withdrawals will affect both the Policy's Cash Value and the death
benefit payable under the Policy. The Policy's Cash Value will be reduced by
the amount of the cash withdrawal. Moreover, the death benefit proceeds payable
under a Policy will generally be reduced by at least the amount of the cash
withdrawal.
In addition, when death benefit Option A is in effect, the Specified
Amount will be reduced by the cash withdrawal. No cash withdrawal will be
permitted which would result in a Specified Amount lower than the minimum
Specified Amount set forth in the Policy or would deny the Policy status as
life insurance under the Internal Revenue Code and applicable regulations. (See
Cash Value Charges - Cost of Insurance, p. 25; Death Benefit - Insurance
Protection, p. 15; and Federal Tax Matters - Tax Treatment of Policy Benefits,
p. 34.)
EXAMINATION OF POLICY PRIVILEGE ("FREE-LOOK")
The Policyowner may cancel the Policy within 10 days after the
Policyowner receives it. Certain states require a Free-Look period longer than
10 days, either for all Policyowners or for certain classes of Policyowners. In
such states, Western Reserve will comply with the specific requirements of
those states. The Policyowner should mail or deliver the Policy to either
Western Reserve or the agent who sold it. If the Policy is cancelled in a
timely fashion, a refund will be made to the Policyowner equal to the sum of:
(i) the total amount of monthly deductions made and any other charges imposed
on amounts allocated to the Accounts; and (ii) the value of amounts allocated
to the Accounts on the date Western Reserve or its agent receives the returned
Policy. If state law prohibits the calculation above, the refund will equal the
total of all premiums paid for the Policy.
28
<PAGE>
CONVERSION RIGHTS
At any time upon written request within 24 months of the Policy Date, the
Policyowner may elect to transfer all Sub-Account values to the Fixed Account.
No transfer charge will be assessed.
BENEFITS AT MATURITY
If the Insured is living and the Policy is In Force, Western Reserve will
pay the Net Surrender Value of the Policy on the Maturity Date. (See Cash Value
- - Net Surrender Value, p. 16.) The Policy will mature on the Anniversary
nearest the Insured's 95th birthday, if the Insured is living and the Policy is
In Force. Western Reserve will extend the Maturity Date provided the Policy is
still In Force on the Maturity Date. Extension of the Maturity Date will be
made upon written request to Western Reserve, between 90 and 180 days prior to
the Maturity Date, as elected by the Policyowner, to one of the following: (1)
if the Death Benefit Option Type is other than Option A, the Option Type will
be changed to Option A. On each Valuation Date, the Specified Amount will be
adjusted to equal the Cash Value, and the Limitation Percentage will be 100%.
No additional premium payments will be permitted except to prevent lapse of the
Policy. All future monthly deductions will be waived; or (2) the Maturity Date
will automatically be extended until the next Policy Anniversary. The
Policyowner must request in writing that the Maturity Date be extended prior to
each Policy Anniversary thereafter.
PAYMENT OF POLICY BENEFITS
Death benefits under the Policy will ordinarily be paid within seven days
after Western Reserve receives due proof of death, and verifies the validity of
the claim. Other benefits will ordinarily be paid within seven days of receipt
of proper written request (including an election as to tax withholding).
Payments may be postponed in certain circumstances. (See General Provisions -
Postponement of Payments, p. 29 and The Fixed Account - Allocations, Transfers
and Withdrawals, p. 32.) The Policyowner may decide the form in which the
benefits will be paid. During the Insured's lifetime, the Policyowner may
arrange for the death benefits to be paid in a lump sum or under one or more of
the settlement options described below. These choices are also available if the
Policy is surrendered or matures. If no election is made, Western Reserve will
pay the benefits in a lump sum.
When death benefits are payable in a lump sum, the Beneficiary may select
one or more of the settlement options. If death benefits become payable under a
settlement option and the Beneficiary has the right to withdraw the entire
amount, the Beneficiary may name and change contingent Beneficiaries.
SETTLEMENT OPTIONS. Policyowners and Beneficiaries, subject to a prior
election of the Policyowner, may elect to have benefits paid in a lump sum or
in accordance with a variety of settlement options offered under the Policy.
Once a settlement option is in effect, there will no longer be value in the
Series Account or the Fixed Account. Western Reserve may make other settlement
options available on the Fixed Account in the future. The effective date of a
settlement provision will be either the date of surrender or the date of death
of the Insured. For additional information concerning these options, see the
Policy itself.
OPTION A - PAYMENTS FOR A FIXED PERIOD. The proceeds plus interest will
be paid in equal monthly installments for the period chosen until paid in full.
The period chosen may not exceed 30 years.
OPTION B - LIFE INCOME. The proceeds will be paid in equal installments
for the guaranteed payment period elected and continue for the life of the
person on whose life the option is based. Such installments will be payable:
(a) during the lifetime of the payee or (b) during a fixed period certain and
for the remaining lifetime of the payee or (c) until the sum of installments
paid equals the proceeds applied and for the remaining life of the payee.
Guaranteed payment periods may be elected for 5 and 10 years, or the period in
which the total payments will equal the amount retained.
OPTION C - JOINT AND SURVIVOR LIFE INCOME. The proceeds will be paid
during the joint lifetime of two persons and (a) continue upon the death of the
first payee for the remaining lifetime of the survivor or (b) be reduced by
one-third upon the death of the first payee and continue for the remaining
lifetime of the survivor.
GENERAL PROVISIONS
POSTPONEMENT OF PAYMENTS
GENERAL. Payment of any amount from the Series Account upon complete
surrender, cash withdrawal, Policy loan, or benefits payable at death or
maturity may be postponed whenever: (i) the New York Stock Exchange is closed
other than customary weekend and holiday closing, or trading on the New York
Stock Exchange is restricted as determined by the Commission; (ii) the
Commission by order permits postponement for the protection of Policyowners; or
(iii) an emergency exists, as determined by the Commission, as a result of
which disposal of securities is not reasonably practicable or it is not
reasonably practicable to determine the value of the Series Account's net
assets. Transfers may also be postponed under these circumstances. For
restrictions applicable to payments from the Fixed Account, see The Fixed
Account - Allocations, Transfers and Withdrawals, p. 32.
PAYMENT BY CHECK. Payments under the Policy of any amounts derived from
premiums paid by check or bank draft may be delayed until such time as the
check or bank draft has cleared the Policyowner's bank.
THE CONTRACT
The Policy and attached copy of the application and any supplemental
applications are the entire contract. Only statements in the application and
any supplemental applications can be used to void the Policy or defend a claim.
The statements are considered representations and not warranties. No Policy
provision can be waived or changed except by endorsement. Only the President or
Secretary of Western Reserve can agree to change or waive any provisions of the
Policy.
29
<PAGE>
SUICIDE
If the Insured, while sane or insane, commits suicide within two years
after the Policy Date, Western Reserve will pay only the premiums received,
less any cash withdrawals and outstanding indebtedness. In the event of Lapse
of the Policy, the suicide period will be measured from the effective date of
reinstatement. If the Insured, while sane or insane, commits suicide within two
years after the effective date of any increase in insurance or any
reinstatement, Western Reserve's total liability with respect to such increase
or reinstatement will be the cost of insurance charges deducted for such
increase or reinstatement.
INCONTESTABILITY
Western Reserve cannot contest the Policy as to the initial Specified
Amount after it has been In Force during the lifetime of the Insured for two
years from the Policy Date. If a lapsed Policy is reinstated, a new two year
contestability period (apart from any remaining contestability period) will
apply from the date of the application for reinstatement and will apply only to
statements made in the application for reinstatement.
CHANGE OF OWNER OR BENEFICIARY
The Beneficiary, as named in the Policy application or subsequently
changed, will receive the Policy benefits at the Insured's death. If the named
Beneficiary dies before the Insured, the contingent Beneficiary, if named,
becomes the Beneficiary. If no Beneficiary survives the Insured, the benefits
payable at the Insured's death will be paid to the Policyowner or the
Policyowner's estate. As long as the Policy is In Force, the Policyowner or
Beneficiary may be changed by written request from the Policyowner in a form
acceptable to Western Reserve. The Policy need not be returned unless requested
by Western Reserve. The change will take effect as of the date the request is
signed, regardless of whether the Insured is living when the request is
received by Western Reserve. Western Reserve will not, however, be liable for
any payment made or action taken before receipt of the request.
ASSIGNMENT
The Policy may be assigned by the Policyowner. Western Reserve will not
be bound by the assignment until a written copy has been received at its Office
and will not be liable with respect to any payment made prior to receipt.
Western Reserve assumes no responsibility for determining whether an assignment
is valid or the extent of the assignee's interest.
MISSTATEMENT OF AGE OR SEX
If the age or sex of the Insured has been misstated, the death benefit
will be adjusted based on what the cost of insurance charge for the most recent
monthly deduction would have purchased based on the correct age and sex.
REPORTS AND RECORDS
Western Reserve will maintain all records relating to the Series Account
and the Fixed Account. Western Reserve will mail to each Policyowner, at the
last known address of record, reports required by applicable laws and or
regulations.
Western Reserve will send Policyowners written confirmation within seven
days of the following transactions: unplanned and certain planned premium
payments, Cash Value transfers, change in death benefit option or Specified
Amount, total surrender or cash withdrawals, and Policy loans or repayments.
Western Reserve will also send each Policyowner an annual statement at the end
of the Policy year showing for the year, among other things, the month and
amount of each: premium payment made, monthly deduction, transfer, cash
withdrawal and Policy loan or repayment. The annual statement will also show
Policy year-end Net Surrender Value, death benefit and Policy loan value, as
well as other Policy activity during the year.
OPTIONAL INSURANCE BENEFITS
Subject to certain requirements, one or more of the following optional
insurance benefits may be added to a Policy by rider. The cost of any optional
insurance benefits will be deducted as part of the monthly deduction. (See
Charges and Deductions - Optional Cash Value Charges, p. 26.) For purposes of
the riders, the person insured under the Policy is referred to as the Primary
Insured, and the term "Face Amount" refers to the level term insurance amount
payable at death.
CHILDREN'S INSURANCE RIDER: Provides a Face Amount on each of the
Primary Insured's children, as defined in the rider. Under the terms of the
rider, the death benefit will be payable to the Primary Insured upon receipt of
proof that the death of an insured child occurred while the rider and coverage
on such child was In Force. Upon the Primary Insured's death, while the rider
is In Force, the rider will terminate 31 days after such death and a separate
life insurance policy will be offered to each insured child for an amount equal
to the level death benefit amount of the rider at a premium based upon the
attained age of each insured child.
ACCIDENTAL DEATH BENEFIT RIDER: Provides a Face Amount if the Primary
Insured's death results from accidental bodily injury, as defined in the rider.
Certain risks, as defined in the rider, are not covered. Under the terms of the
rider, the additional benefits provided in the rider will be paid upon receipt
of proof by Western Reserve that death resulted from bodily injuries effected
directly and independently of all other causes through external, violent and
accidental means; occurred within 90 days from the date of accident causing
such injuries; and occurred while the rider was In Force. The rider will
terminate on the earliest of the Policy Anniversary nearest the Primary
Insured's 70th birthday, the date the Policy terminates, or the Monthiversary
on which the rider is terminated on request by the Policyowner.
OTHER INSURED RIDER: Provides that Western Reserve will pay the Face
Amount of the rider to the Primary Insured upon receipt of due proof of the
other Insured's death. On any Monthiversary while the rider is In Force, the
Policyowner may exchange the rider without evidence of insurability for a new
Policy on the other Insured's life upon written request subject to the
following: (a) the rider has not reached the Anniversary
30
<PAGE>
nearest the other Insured's 70th birthday; (b) the new policy is any permanent
plan of insurance then offered by Western Reserve; (c) the amount of insurance
upon conversion will equal the Face Amount then In Force under the rider; and
(d) the payment of the premium will be based on the other Insured's rate class
under the rider.
DISABILITY WAIVER RIDER: Provides a waiver of the monthly deductions
for the Policy while the Insured is disabled. Under the terms of the rider, the
monthly deductions will be waived upon receipt of proof adequate to Western
Reserve that: the Insured is totally disabled, as defined in the rider; the
disability commenced while the rider was In Force; the disability began before
the Anniversary nearest the Insured's 60th birthday; and total disability has
existed continuously for at least six months. No monthly deduction will be
waived which falls due more than one year prior to receipt by Western Reserve
of written notice of a claim. Certain risks, as defined in the rider, are not
covered.
DISABILITY WAIVER AND INCOME RIDER: Provides the identical benefit as
the Disability Waiver Rider and, in addition, a monthly income benefit up to a
maximum 120 monthly payments.
PRIMARY INSURED RIDER (|P`PIR|P') AND PRIMARY INSURED RIDER PLUS (|P`PIR
PLUS|P'): Provides term insurance coverage for the insured on a basis different
from the coverage provided under the Policy. The PIR may be purchased at any
time, either at the time of application for the Policy, or after the Record
Date. The PIR Plus may only be purchased at the time of application.
PIR or PIR Plus increases the death benefit provided under the Policy by
the Face Amount of the rider. The PIR terminates at age 90; the PIR Plus
terminates at age 85. No additional Surrender Charge is assessed in connection
with PIR or PIR Plus coverage. Generally, coverage provided by PIR or PIR Plus
has a lower cost than that provided under the Policy, but has no Cash Value
associated with it. Owners may reduce or cancel coverage under a PIR or PIR
Plus rider separately from reducing the Specified Amount of a Policy. Likewise,
the Specified Amount of a Policy may be decreased, subject to certain minimums,
without reducing the coverage under PIR or PIR Plus. Continuing coverage on an
increment of Specified Amount under the Policy may have a cost of insurance
that is higher than the cost of the same amount of coverage under PIR or PIR
Plus.
There may be circumstances in which it will be to your advantage to
obtain a portion of your insurance coverage under PIR or PIR Plus. These
circumstances depend on many factors, including the premium levels, amounts and
duration of coverage needed, as well as the age, sex and risk classification of
the Insured. Your registered representative can provide you with further
information explaining how PIR and PIR Plus coverage can affect your Policy
values under different assumptions. Western Reserve reserves the right to
discontinue the availability of these riders for new Policies at any time, and
also reserves the right to modify the terms of these riders for new Policies,
subject to approval by the state insurance departments.
TERMINAL ILLNESS ACCELERATED DEATH BENEFIT RIDER: In states where this
rider has been approved by that state's department of insurance, upon receipt
of proof satisfactory to Western Reserve that the Insured has incurred a
condition resulting from illness which, as determined by a Physician, has
reduced life expectancy to not more than 12 months from the date of the
Physician's Statement (a "Terminal Condition"), Western Reserve will pay to the
Policyowner a "Single Sum Benefit", equal to:
(a) the Death Benefit in effect on the date the Single Sum Benefit is
paid; multiplied by
(b) the Election Percentage; divided by
(c) 1 + i, where i equals the greater of (A) and (B) on the date the
Single Sum Benefit is paid. (A) equals the interest rate determined
under Internal Revenue Code section 846(c)(2), as it may be amended
from time to time; and (B) equals the Policy Loan Interest Rate;
minus
(d) indebtedness, if any, at the time the Single Sum Benefit is paid,
multiplied by the Election Percentage.
"Death Benefit" under the Rider means the amount payable at death of the
Insured under the Policy, plus the benefit payable under any In Force Primary
Insured Rider. (See Optional Insurance Benefits - Primary Insured Rider, above)
"Election Percentage" means a percentage, selected by the Policyowner, not to
exceed 100% of the Policy's Death Benefit, as defined under the Rider; however,
in no event will the Election Percentage result in a Single Sum Benefit greater
than $500,000. A "Physician" may be a Doctor of Medicine or a Doctor of
Osteopathy, licensed to practice medicine and treat injury or illness in the
state in which treatment is received and who is acting within the scope of that
license, and must be someone other than the Insured, the Policyowner, a person
who lives with the Insured or Policyowner, or a person who is part of the
Insured's or Policyowner's "Immediate Family" (spouse, child, brother, sister,
parent, grandparent or grandchild of the Insured). The "Physician's Statement"
must be a written statement signed by a Physician which provides the
Physician's diagnosis of the Insured's non-correctable medical condition. It
must state with reasonable medical certainty that the non-correctable medical
condition will result in the death of the Insured within 12 months of the
Physician's Statement, taking into consideration the ordinary and reasonable
medical care, advice and treatment available in the same or similar
communities.
The Rider will not pay benefits for a Terminal Condition resulting from
self-inflicted bodily injuries occurring within the same period specified in
the Policy's suicide provision. The Rider terminates at the earliest of (a) the
date the Policy terminates, (b) the effective date of a settlement option
elected under the Policy, (c) the date the Single Sum Benefit is paid, or (d)
the date the Policyowner elects to terminate the Rider.
31
<PAGE>
Pursuant to the recently enacted Health Insurance Portability and
Accountability Act of 1996, Western Reserve believes that for Federal income
tax purposes a Single Sum Benefit payment made under the Terminal Illness
Accelerated Death Benefit Rider should be fully excludable from the gross
income of the Beneficiary, as long as the Beneficiary is the insured under the
Policy. However, a Policyowner should consult a qualified tax advisor about the
consequences of adding this Rider to a Policy or requesting a Single Sum
Benefit payment under this Rider.
There is no additional charge for this rider. This rider may not be
available in all states or, if available, the terms of the rider may vary, in
accordance with the requirements of each state's insurance laws.
THE FIXED ACCOUNT
A Policyowner may allocate Premiums and transfer Cash Value to the Fixed
Account, which is part of Western Reserve's General Account. Because of
exemptive and exclusionary provisions, interests in the Fixed Account have not
been registered under the Securities Act of 1933 and neither the Fixed Account
nor the General Account has been registered as an investment company under the
1940 Act. Accordingly, neither the Fixed Account, the General Account nor any
interests therein are generally subject to the provisions of these acts and
Western Reserve has been advised that the staff of the Commission has not
reviewed the disclosures in this Prospectus relating to the Fixed Account.
Disclosures regarding the Fixed Account may, however, be subject to certain
generally applicable provisions of the Federal securities laws relating to the
accuracy and completeness of statements made in prospectuses.
The portion of the Cash Value allocated to the Fixed Account (the "Fixed
Account Value") will be credited with rates of interest, as described below.
Because the Fixed Account Value becomes part of Western Reserve's General
Account, Western Reserve assumes the risk of investment gain or loss on this
amount. All assets in the General Account are subject to Western Reserve's
general liabilities from business operations.
FIXED ACCOUNT VALUE
At the end of any Valuation Period, the Fixed Account Value is equal to:
1. The sum of all Premium payments allocated to the Fixed Account; plus
2. Any amounts transferred from a Sub-Account to the Fixed Account; plus
3. Total interest credited to the Fixed Account; minus
4. Any amounts charged to pay for monthly deductions as they are due;
minus
5. Any cash withdrawals or surrenders from the Fixed Account; minus
6. Any amounts transferred to a Sub-Account from the Fixed Account; minus
7. Any amounts withdrawn from the Fixed Account to pay the pro rata
Decrease Charge incurred as a result of a decrease in the Specified
Amount.
MINIMUM GUARANTEED AND CURRENT INTEREST RATES
The Fixed Account Value is guaranteed to accumulate at a minimum
effective annual interest rate of 3% per year on unloaned amounts, and a
minimum guaranteed effective annual interest rate of 4% per year for loaned
amounts. Western Reserve presently credits the Fixed Account Value with current
rates in excess of the minimum guarantee but it is not obligated to do so.
Western Reserve has no specific formula for determining current interest rates.
Some of the factors that Western Reserve may consider, in its sole discretion,
in determining whether to credit interest in excess of the 3% guaranteed rate
are: general economic trends, rates of return currently available and
anticipated on the company's investments, regulatory and tax requirements, and
competitive factors. The Fixed Account Value will not share in the investment
performance of the company's general account or any portion thereof. Because
Western Reserve, at its sole discretion, anticipates changing the current
interest rate from time to time, different allocations to and from the Fixed
Account Value will be credited different current interest rates.
Western Reserve further guarantees that when a higher current interest
rate is declared on an allocation to the Fixed Account, that interest rate will
be guaranteed on such allocation for at least a one year period (the "Guarantee
Period"), unless the Cash Value associated with an allocation has been
transferred to the Loan Reserve. Western Reserve reserves the right to apply a
different current interest rate to that part of the Cash Value equal to the
Loan Reserve. At the end of the Guarantee Period, Western Reserve reserves the
right to declare a new current interest rate on such allocation and accrued
interest thereon (which may be a different current interest rate than the
current interest rate on new allocations to the Fixed Account on that date).
The rate declared on such allocation and accrued interest thereon at the end of
each Guarantee Period will be guaranteed again for another Guarantee Period. At
the end of any Guarantee Period, any interest credited on the Policy's Cash
Value in the Fixed Account in excess of the minimum guaranteed rate of 3% per
year will be determined in the sole discretion of Western Reserve. The
Policyowner assumes the risk that interest credited may not exceed the
guaranteed minimum rate.
Allocations from the Fixed Account Value to provide: a) cash withdrawal
amounts, b) transfers to the Series Account, or c) monthly deduction charges
are currently, for the purpose of crediting interest, accounted for on a last
in, first out ("LIFO") method.
Western Reserve reserves the right to change the method of crediting
interest from time to time, provided that such changes will not have the effect
of reducing the guaranteed rate of interest below 3% per annum or shorten the
Guarantee Period to less than one year.
ALLOCATIONS, TRANSFERS AND WITHDRAWALS
Premium payments and transfers to the Fixed Account will be allocated to
the Fixed Account on the first Valuation Date on or following the date Western
Reserve receives the
32
<PAGE>
payment or transfer request at its Office, except that any allocation of
Premium received prior to the Record Date will take place on the Policy Date
(or the Record Date, if later).
For transfers from the Fixed Account to a Sub-Account, Western Reserve
reserves the right to limit the transfers to one per Policy year and require
that transfer requests be in writing and received at Western Reserve's Office
within 30 days after a Policy Anniversary. The maximum amount that may be
transferred is limited to the greater of (a) 25% of the amount in the Fixed
Account, or (b) the amount transferred in the prior Policy year from the Fixed
Account, unless Western Reserve consents otherwise. Please consult your Policy
for details. No transfer charge will apply to transfers from the Fixed Account
to a Sub-Account. Amounts may be withdrawn from the Fixed Account for cash
withdrawals and surrenders only upon written request of the Policyowner, and
are subject to any applicable requirement for a signature guarantee. (See
Policy Rights - Surrender Privileges, p. 28.) Western Reserve further reserves
the right to defer payment of transfers, cash withdrawals, or surrenders from
the Fixed Account for up to six months. In addition, Policy provisions relating
to transfers, cash withdrawals or surrenders from the Series Account will also
apply to Fixed Account transactions.
DISTRIBUTION OF THE POLICIES
The Policy will be sold by individuals who, in addition to being licensed
as life insurance agents for Western Reserve, are also registered
representatives of ISI, an affiliate of Western Reserve and the principal
underwriter of the Policies, or of broker-dealers who have entered into written
sales agreements (|P`Sales Agreements|P') with the principal underwriter for
promotion and sale of the Policies. ISI is registered with the Commission under
the Securities Exchange Act of 1934 as a broker-dealer and is a member of the
National Association of Securities Dealers, Inc. No amounts have been retained
by ISI for acting as principal underwriter for the Policies. The compensation
payable to registered representatives who are appointed agents of Western
Reserve for sales of the Policies may vary with the Sales Agreement, but is not
expected to exceed 65% of all premiums paid during the first Policy year, and
2.10% of all premium payments in years 2 through 10. An additional sales
commission of up to 0.10% (ten one-hundredths of one percent) of the Policy's
Cash Value is payable on the fifth Policy Anniversary, and on each Anniversary
thereafter, provided the Policy's Cash Value at such times, minus any amounts
attributable to Policy loans, is at least $10,000. In addition, certain
production, persistency and managerial bonuses may be paid.
FEDERAL TAX MATTERS
INTRODUCTION
The ultimate effect of Federal income taxes on the Cash Value and on the
economic benefit to the Policyowner or Beneficiary depends on Western Reserve's
tax status and upon the tax status of the individual concerned. The discussion
contained herein is general in nature and is not intended as tax advice. For
complete information on Federal and state tax considerations, a qualified tax
adviser should be consulted. No attempt is made to consider any applicable
state or other tax laws. Because the discussion herein is based upon Western
Reserve's understanding of Federal income tax laws as they are currently
interpreted, Western Reserve cannot guarantee the tax status of any Policy.
Western Reserve makes no representations regarding the likelihood of
continuation of the current Federal income tax laws, Treasury Regulations, or
of the current interpretations by the Internal Revenue Service ("IRS"). Western
Reserve reserves the right to make changes to the Policy in order to assure
that it will continue to qualify as life insurance for tax purposes.
TAX CHARGES
At the present time, Western Reserve makes no charge for any Federal,
state or local taxes (other than premium taxes) that the Company incurs that
may be attributable to such Account or to the Policies. Western Reserve,
however, reserves the right in the future to make a charge for any such tax or
other economic burden resulting from the application of the tax laws that it
determines to be properly attributable to the Series Account or to the
Policies.
TAX STATUS OF THE POLICY
Section 7702 of the Code sets forth a definition of a life insurance
contract for Federal tax purposes. The Secretary of the Treasury (the
"Treasury") has recently issued proposed regulations that would specify what
will be considered reasonable mortality charges under Section 7702. Guidance as
to how Section 7702 is to be applied is, however, limited. If a Policy were
determined not to be a life insurance contract for purposes of Section 7702,
such Policy would not provide most of the tax advantages normally provided by a
life insurance policy.
With respect to a Policy that is issued on the basis of a rate class
using Ultimate Select, non-tobacco use; Select, non-tobacco use; Ultimate
Standard, tobacco use; Standard tobacco use, guaranteed rates or Juvenile,
while there is some uncertainty due to the limited guidance on Section 7702,
Western Reserve nonetheless believes that such a Policy should meet the Section
7702 definition of a life insurance contract. With respect to a Policy that is
issued on a substandard rate class, there is even less guidance to determine
whether such a Policy meets the Section 7702 definition of a life insurance
contract. Thus, it is not clear whether such a Policy would satisfy Section
7702, particularly if the Policyowner pays the full amount of premiums
permitted under the Policy. If it is subsequently determined that a Policy does
not satisfy Section 7702, Western Reserve will take whatever steps are
appropriate and reasonable to attempt to cause such a Policy to comply with
Section 7702, including possibly refunding any premiums paid that exceed the
limitation allowable under Section 7702 (together with interest or other
earnings on any such premiums refunded as required by law). For these reasons,
Western Reserve reserves the right to modify the Policy as necessary to attempt
to qualify it as a life insurance contract under Section 7702.
Section 817(h) of the Code authorizes the Treasury to set standards by
regulation or otherwise for the investments of the Series Account to be
"adequately diversified" in order for the
33
<PAGE>
Policy to be treated as a life insurance contract for Federal tax purposes. The
Series Account, through the Fund, intends to comply with the diversification
requirements prescribed by the Treasury in Reg. sec. 1.817-5, which affect how
the Fund's assets may be invested. Western Reserve believes that the Fund will
be operated in compliance with the requirements prescribed by the Treasury.
In certain circumstances, owners of variable life insurance policies may
be considered the owners, for Federal income tax purposes, of the assets of the
separate account used to support their policies. In those circumstances, income
and gains from the separate account assets would be includable in the owner's
gross income. The IRS has stated in published rulings that the owner of a
variable life insurance policy will be considered the owner of separate account
assets if the owner possesses incidents of ownership in those assets, such as
the ability to exercise investment control over the assets. The Treasury
Department also announced, in connection with the issuance of regulations
concerning 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 policyowner), rather
than the insurance company, to be treated as the owner of the assets in the
account." This announcement also stated that guidance would be issued by way of
regulations or rulings on the "extent to which policyholders may direct their
investments to particular sub-accounts without being treated as owners of the
underlying assets."
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policyowners were not owners of separate account assets. For
example, the Policyowner has additional flexibility in allocating premium
payments and Policy values. These differences could result in a Policyowner
being treated as the owner of a pro rata portion of the assets of the Series
Account. In addition, Western Reserve 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. Western Reserve therefore reserves the right to
modify the Policy as necessary to attempt to prevent a Policyowner from being
considered the owner of a pro rata share of the assets of the Series Account.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
1. IN GENERAL. Western Reserve believes that the proceeds and Cash Value
increases of a Policy should be treated in a manner consistent with a
fixed-benefit life insurance policy for Federal income tax purposes. Thus, the
death benefit under the Policy should be excludable from the gross income of
the Beneficiary under section 101(a)(1) of the Code.
A change in a Policy's Specified Amount, the payment of an unscheduled
premium, the taking of a Policy loan, a cash withdrawal, a total surrender, a
Policy Lapse with an outstanding indebtedness, a change in death benefit
options, the exchange of a Policy, or the assignment of a Policy may have tax
consequences depending upon the circumstances. In addition, Federal estate and
state and local estate, inheritance, and other tax consequences of ownership or
receipt of Policy proceeds depend upon the circumstances of each Policyowner or
Beneficiary. A competent tax adviser should be consulted for further
information.
The Policy may also be used in various arrangements, including
nonqualified deferred compensation or salary continuance plans, split dollar
insurance plans, executive bonus plans, retiree medical benefit plans and
others. The tax consequences of such plans may vary depending on the particular
facts and circumstances of each individual arrangement. Therefore, if a
Policyowner is contemplating the use of a Policy in any arrangement the value
of which depends in part on its tax consequences, that Policyowner should be
sure to consult a qualified tax adviser regarding the tax attributes of the
particular arrangement.
Generally, the Policyowner will not be deemed to be in constructive
receipt of the Cash Value, including increments thereof, under the Policy until
there is a distribution. The tax consequences of distributions from, and loans
taken from, or secured by, a Policy depend on whether the Policy is classified
as a "modified endowment contract" under Section 7702A. Section 7702A generally
applies to Policies entered into or materially changed after June 20, 1988.
2. MODIFIED ENDOWMENT CONTRACTS. A Policy may be treated as a modified
endowment contract depending upon the amount of premiums paid in relation to
the death benefit provided under such Policy. The premium limitation rules for
determining whether such a Policy is a modified endowment contract are
extremely complex. In general, however, a Policy will be a modified endowment
contract if the accumulated premiums paid at any time during the first seven
Policy years exceed the sum of the net level premiums which would have been
paid on or before such time if the Policy provided for paid-up future benefits
after the payment of seven level annual premiums. In addition, if a Policy is
"materially changed," it may cause such Policy to be treated as a modified
endowment contract. The material change rules for determining whether a Policy
is a modified endowment contract are also extremely complex. In general,
however, the determination whether a Policy will be a modified endowment
contract after a material change depends upon the relationship of the death
benefit at the time of change to the Cash Value at the time of such change and
the additional premiums paid in the seven Policy years starting with the date
on which the material change occurs.
Under Western Reserve's current procedures, the Policyowner will be
notified at the time a Policy is issued whether, according to Western Reserve's
calculations, the Policy is or is not classified as a modified endowment
contract based on the premium then received. The Policyowner will also be
notified of the amount of the maximum annual premium which can be paid without
causing a Policy to be classified as a modified endowment contract.
34
<PAGE>
Due to the Policy's flexibility, classification of a Policy as a modified
endowment contract will depend upon the circumstances of each Policy.
Accordingly, a prospective Policyowner should contact a competent tax adviser
before purchasing a Policy to determine the circumstances under which the
Policy would be a modified endowment contract. In addition, a Policyowner
should contact a competent tax adviser before making any change to, including
an exchange of, a Policy to determine whether such change would cause the
Policy (or the new policy in the case of an exchange) to be treated as a
modified endowment contract.
If a Policy becomes a modified endowment contract, distributions that
occur during the Policy year it becomes a modified endowment contract and any
subsequent Policy year will be taxed as distributions from a modified endowment
contract. In addition, distributions from a Policy within two years before it
becomes a modified endowment contract will be taxed in this manner. This means
that a distribution made from a Policy that is not a modified endowment
contract could later become taxable as a distribution from a modified endowment
contract.
3. DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED ENDOWMENT
CONTRACTS. Policies classified as modified endowment contracts are subject to
the following tax rules: First, all pre-death distributions from such a Policy
(including distributions upon surrender, distributions made in anticipation of
the Policy becoming a modified endowment contract, and benefits paid at
maturity) are treated as ordinary income subject to tax up to the amount equal
to the excess (if any) of the Cash Value immediately before the distribution
over the investment in the Policy (described below) at such time. Second, loans
taken from, or secured by, such a Policy are treated as distributions from such
a Policy and taxed accordingly. (Unpaid Policy loan interest will be treated as
a loan for these purposes.) Third, a 10% Federal income tax penalty is imposed
on the portion of any distribution from, or loan taken from, or secured by,
such a Policy that is included in income except where the distribution or loan
is made on or after the Owner attains age 59-1/2, is attributable to the
Policyowner's becoming disabled, or is part of a series of substantially equal
periodic payments for the life (or life expectancy) of the Policyowner or the
joint lives (or joint life expectancies) of the Policyowner and the
Policyowner's Beneficiary.
4. DISTRIBUTIONS FROM POLICIES NOT CLASSIFIED AS MODIFIED ENDOWMENT
CONTRACTS. Distributions from a Policy that is not classified as a modified
endowment contract are generally treated as first recovering the investment in
the Policy (described below) and then, only after the return of all such
investment in the Policy, as distributing taxable income. An exception to this
general rule occurs in the case of a cash withdrawal, a decrease in the
Policy's death benefit, or any other change that reduces benefits under the
Policy in the first 15 years after the Policy is issued and results in a cash
distribution to the Policyowner in order for the Policy to continue complying
with the Section 7702 definitional limits. In that case, such distribution will
be taxed in whole or in part as ordinary income (to the extent of any gain in
the Policy) under rules prescribed in Section 7702.
Loans from, or secured by, a Policy that is not a modified endowment
contract are generally not treated as distributions. Instead, such loans are
treated as indebtedness of the Policyowner. However, the tax treatment of a
loan from a Policy that is not a modified endowment contract is uncertain to
the extent that the interest rate credited is equal to the interest rate
charged on the amount borrowed. A tax advisor should be consulted.
Finally, distributions (including distributions upon surrender or lapse)
or loans from, or secured by, a Policy that is not a modified endowment
contract are not subject to the 10% Federal income tax penalty.
5. POLICY LOAN INTEREST. INTEREST PAID ON A POLICY LOAN GENERALLY IS NOT
TAX DEDUCTIBLE. Therefore, a Policyowner should consult a competent tax advisor
before deducting any Policy loan interest.
6. INVESTMENT IN THE POLICY. Investment in the Policy means (i) the
aggregate amount of any premiums or other consideration paid for a Policy,
minus (ii) the aggregate amount received under the Policy which is excluded
from the gross income of the Policyowner (except that the amount of any loan
from, or secured by, a Policy that is a modified endowment contract, to the
extent such amount is excluded from gross income, will be disregarded), plus
(iii) the amount of any loan from, or secured by, a Policy that is a modified
endowment contract to the extent that such amount is included in the gross
income of the Policyowner.
7. MULTIPLE POLICIES. All modified endowment contracts that are issued by
Western Reserve (or its affiliates) to the same Policyowner during any calendar
year are treated as one modified endowment contract for purposes of determining
the amount includable in gross income under Section 72(e) of the Code.
8. TERMINAL ILLNESS ACCELERATED DEATH BENEFIT RIDER. Pursuant to the
recently enacted Health Insurance Portability and Accountability Act of 1996,
Western Reserve believes that for Federal income tax purposes a Single Sum
Benefit payment made under the Terminal Illness Accelerated Death Benefit Rider
should be fully excludable from the gross income of the beneficiary, as long as
the beneficiary is the Insured under the Policy. However, a Policyowner should
consult a qualified tax advisor about the consequences of adding this Rider to
a Policy or requesting a Single Sum Benefit payment under this Rider.
9. BUSINESS-OWNED INSURANCE. In recent years, Congress has adopted new
rules relating to life insurance owned by businesses. Any business
contemplating the purchase of a new Policy or a change in an existing Policy
should consult a tax advisor.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is
always the possibility that the tax treatment of the
35
<PAGE>
Policy could change by legislation or otherwise. For instance, the President's
1999 Budget Proposal recommended legislation that, if enacted, would adversely
modify the Federal taxation of this Policy. It is possible that any legislative
change could be retroactive (that is, effective prior to the date of the
change.) A tax advisor should be consulted with respect to legislative
developments and their effect on the Policy.
EMPLOYMENT-RELATED BENEFIT PLANS
On July 6, 1983, the Supreme Court held in ARIZONA GOVERNING COMMITTEE V.
NORRIS that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women on the basis of sex. The Policy described in this
Prospectus contains guaranteed cost of insurance rates and guaranteed purchase
rates for certain payment options that distinguish between men and women.
Accordingly, employers and employee organizations should consider, in
consultation with legal counsel, the impact of NORRIS, and Title VII generally,
on any employment-related insurance or benefit program for which a Policy may
be purchased.
SAFEKEEPING OF THE
SERIES ACCOUNT'S ASSETS
Western Reserve holds the assets of the Series Account. The assets are
kept physically segregated and held separate and apart from the General
Account. Western Reserve maintains records of all purchases and redemptions of
Fund shares by each of the Sub-Accounts. Additional protection for the assets
of the Series Account is provided by a blanket bond issued to AEGON U.S.
Holding Corporation ("AEGON U.S.") in the amount of $5 million (subject to a $1
million deductible), covering all of the employees of AEGON U.S. and its
affiliates, including Western Reserve. A Stockbrokers Blanket Bond, issued to
AEGON U.S.A. Securities, Inc. provides additional fidelity coverage, to a limit
of $12 million.
VOTING RIGHTS OF THE SERIES ACCOUNT
To the extent required by law, Western Reserve will vote the Fund shares
held in the Series Account at shareholder meetings of the Fund in accordance
with instructions received from persons having voting interests in the
corresponding Sub-Account. Except as required by the 1940 Act, the Fund does
not hold regular or special shareholder meetings. If the 1940 Act or any
regulation thereunder should be amended or if the present interpretation
thereof should change, and as a result Western Reserve determines that it is
permitted to vote the Fund shares in its own right, it may elect to do so.
The number of votes which a Policyowner has the right to instruct will be
calculated separately for each Sub-Account. The number of votes which each
Policyowner has the right to instruct will be determined by dividing a Policy's
Cash Value in that Sub-Account by $100. Fractional shares will be counted. The
number of votes of the Portfolio which the Policyowner has the right to
instruct will be determined as of the date coincident with the date established
by that Portfolio for determining shareholders eligible to vote at the meeting
of the Fund. Voting instructions will be solicited by written communications
prior to such meeting in accordance with procedures established by the Fund.
Western Reserve will vote Fund shares as to which no timely instructions
are received and Fund shares which are not attributable to Policyowners in
proportion to the voting instructions which are received with respect to all
Policies participating in that Portfolio. Voting instructions to abstain on any
item to be voted upon will reduce the votes eligible to be cast by Western
Reserve.
Each person having a voting interest in a Sub-Account will receive proxy
materials, reports and other materials relating to the appropriate Portfolio.
DISREGARD OF VOTING INSTRUCTIONS. Western Reserve may, when required by
state insurance regulatory authorities, disregard voting instructions if the
instructions require that the shares be voted so as to cause a change in the
sub-classification or investment objective of the Fund or one or more of its
Portfolios or to approve or disapprove an investment advisory contract for a
Portfolio of the Fund. In addition, Western Reserve itself may disregard voting
instructions in favor of changes initiated by a Policyowner in the investment
policy or the investment adviser of a Portfolio of the Fund if Western Reserve
reasonably disapproves of such changes. A change would be disapproved only if
the proposed change is contrary to state law or prohibited by state regulatory
authorities or Western Reserve determined that the change would have an adverse
effect on its General Account in that the proposed investment policy for a
Portfolio may result in overly speculative or unsound investments. In the event
Western Reserve does disregard voting instructions, a summary of that action
and the reasons for such action will be included in the next annual report to
Policyowners.
STATE REGULATION OF WESTERN RESERVE
As a life insurance company organized and operated under Ohio law,
Western Reserve is subject to provisions governing such companies and to
regulation by the Ohio Commissioner of Insurance.
Western Reserve's books and Accounts are subject to review and
examination by the Ohio Insurance Department at all times and a full
examination of its operations is conducted by the National Association of
Insurance Commissioners at least once every three years.
REINSURANCE
Western Reserve intends to reinsure a portion of the risks assumed under
the Policies.
EXECUTIVE OFFICERS AND DIRECTORS
OF WESTERN RESERVE
JOHN R. KENNEY(1), CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE OFFICER
AND PRESIDENT. Chairman of the Board of Directors (1987 - present) and
Chief Executive Officer (1982 - present), President, (1978 - 1987 and
December, 1992 - present), Director (1978 - present),
36
<PAGE>
Western Reserve Life Assurance Co. of Ohio; Chairman of the Board of
Directors (1985 - present), President (March, 1993 - present), WRL Series
Fund, Inc.; Chairman of the Board (September, 1996 - present), WRL
Investment Management, Inc.; Chairman of the Board (September, 1996 -
present), WRL Investment Services, Inc.; Chairman of the Board of
Directors (February, 1997 - present), AEGON Asset Management Services,
Inc., Largo, Florida; Chairman of the Board of Directors and Chief
Executive Officer (1988 - February, 1991), President (1988 - 1989),
Director (1976 - February, 1991), Executive Vice President (1972 - 1988),
Pioneer Western Corporation (financial services), Largo, Florida; Trustee
(1987 - present), Chairman (December, 1989 to September, 1990 and
November, 1990 to present) and President and Chief Executive Officer
(November, 1986 to September, 1990), IDEX Series Fund; former Trustee of
IDEX Fund, IDEX II Series Fund and IDEX Fund 3 (investment companies), all
of Largo, Florida.
ALAN M. YAEGER(1), EXECUTIVE VICE PRESIDENT, ACTUARY AND CHIEF FINANCIAL
OFFICER. Executive Vice President (June, 1993 - present), Chief Financial
Officer (December, 1995 - present), Senior Vice President (1981 - June,
1993) and Actuary (1972 - present), Western Reserve Life Assurance Co. of
Ohio; Director (September, 1996 - present), WRL Investment Management,
Inc.; Director (September, 1996 - present), WRL Investment Services, Inc.;
Executive Vice President (September, 1993 - present), WRL Series Fund,
Inc.
WILLIAM H. GEIGER(1), SENIOR VICE PRESIDENT, SECRETARY AND CORPORATE COUNSEL.
Senior Vice President, Secretary and Corporate Counsel (March, 1998 -
present); Senior Vice President, Secretary and General Counsel (July, 1990
- March, 1998) of Western Reserve Life Assurance Co. of Ohio; Vice
President, Secretary and General Counsel of Pioneer Western Corporation
(financial services) and Secretary of its subsidiaries (May, 1990 to
February, 1991); Vice President and Assistant Secretary (November, 1990 to
present) and Secretary (June, 1990 to September, 1990) IDEX Series Fund,
former Vice President and Assistant Secretary of IDEX Fund, IDEX II Series
Fund and IDEX Fund 3 (investment companies), all of Largo, Florida.
ALLAN J. HAMILTON(1), VICE PRESIDENT, TREASURER AND CONTROLLER. Vice President
and Controller (1987 - present), Treasurer, (February, 1997 - present),
Assistant Vice President and Assistant Controller (1983 - 1987), Western
Reserve Life Assurance Co. of Ohio; Treasurer and Principal Financial
Officer (February, 1997 - present), WRL Series Fund, Inc.; Vice President
and Controller (1988 to February 1991), Pioneer Western Corporation
(financial services), Largo, Florida.
PATRICK S. BAIRD, DIRECTOR, 4333 Edgewood Road, NE, Cedar Rapids, Iowa 52499,
Director (February, 1991 to present), Western Reserve Life Assurance Co.
of Ohio; Vice President and Chief Tax Officer (1984 - present), Chief
Financial Officer (1992 - present) AEGON USA, Inc., formerly known as Life
Investors, Inc., (financial services holding company), Cedar Rapids, Iowa.
JACK E. ZIMMERMAN, DIRECTOR, 507 St. Michel Circle, Kettering, Ohio 45429,
Director (1987 - present), Western Reserve Life Assurance Co. of Ohio;
Trustee, IDEX Series Fund, former Trustee of IDEX Fund, IDEX II Series
Fund and IDEX Fund 3 (investment companies); Director, Regional Marketing,
(1986 - January, 1993), Martin Marietta Corporation, Dayton, Ohio.
LYMAN H. TREADWAY, DIRECTOR, 30195 Chagrin Blvd. Ste. 210N, Cleveland, Ohio
44124, Director (September, 1994 - present), Western Reserve Life
Assurance Co. of Ohio; Consultant (1988 - 1993), Cleveland, Ohio.
JAMES R. WALKER, DIRECTOR, 3320 Office Park Dr., Dayton, Ohio 45439, Director
(June, 1996 - present) Western Reserve Life Assurance Co. of Ohio;
Self-employed, Public Accountant (1996 - present); Partner, C.P.A. (1990 -
1995), Walker-Davis C.P.A.'s, Dayton, Ohio.
- ------------------------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 33758-5068
LEGAL MATTERS
Sutherland Asbill & Brennan LLP, Washington, D.C., has provided advice on
certain legal matters concerning Federal securities laws in connection with the
Policies. All matters of Ohio law pertaining to the Policy, including the
validity of the Policy and Western Reserve's right to issue the Policy under
Ohio Insurance Law, have been passed upon by Thomas E. Pierpan, Vice President,
Assistant Secretary and Associate General Counsel of Western Reserve.
LEGAL PROCEEDINGS
Western Reserve, like other life insurance companies, is involved in
lawsuits. Western Reserve is not aware of any class action lawsuits naming it
as a Defendant or involving the Series Account. In some lawsuits involving
other insurers, substantial damages have been sought and/or material settlement
payments have been made. Although the outcome of any litigation cannot be
predicted with certainty, Western Reserve believes that at the present time
there are no pending or threatened lawsuits that are reasonably likely to have
a material adverse impact on the Series Account or Western Reserve.
EXPERTS
The financial statements of WRL Series Life Account as of December 31,
1997 and for the year then ended have been included herein in reliance upon the
report of PricewaterhouseCoopers LLP, independent accountants, and upon the
authority of that firm as experts in accounting and auditing.
The statutory-basis financial statements and schedules of Western Reserve
Life Assurance Co. of Ohio at December 31,
37
<PAGE>
1997 and 1996 and for each of the three years in the period ended December 31,
1997, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their reports
thereon appearing elsewhere herein which are based in part on the reports of
Price Waterhouse LLP, independent accountants. The financial statements
referred to above are included in reliance upon such reports given upon the
authority of such firms as experts in accounting and auditing.
Actuarial matters included in this Prospectus have been examined by Alan
Yaeger as stated in the opinion filed as an exhibit to the registration
statement.
ADDITIONAL INFORMATION
A registration statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933, as amended, with respect to the
Policy offered hereby. This Prospectus does not contain all the information set
forth in the registration statement and the amendments and exhibits to the
registration statement, to all of which reference is made for further
information concerning the Series Account, Western Reserve and the Policy
offered hereby. Statements contained in this Prospectus as to the contents of
the Policy and other legal instruments are summaries. For a complete statement
of the terms thereof reference is made to such instruments as filed.
YEAR 2000 MATTERS
In October 1996, Western Reserve adopted and presently has in place a
Year 2000 Assessment and Planning Project (the "Plan") to review and analyze
existing hardware and software systems, as well as voice and data
communications systems, to determine if they are Year 2000 compatible. Western
Reserve has also engaged the services of a third-party provider that is
specialized in Year 2000 issues to work on the Plan.
As of the date of this Prospectus, Western Reserve has identified and
made available what it believes are the appropriate resources of hardware,
people, and dollars, including the engagement of outside third parties, to
ensure that the Plan will be completed.
The Year 2000 computer problem, and its resolution, is complex and
multifaceted, and success of a response plan cannot be conclusively known until
the Year 2000 is reached (or an earlier date to the extent that the systems or
equipment addresses Year 2000 data prior to the Year 2000). Even with the
appropriate and diligent pursuit of a well-conceived response plan, including
testing procedures, there is no certainty that any company will achieve
complete success. Further, notwithstanding its efforts or results, Western
Reserve's ability to function unaffected to and through the Year 2000 may be
adversely affected by actions (or failure to act) of third parties beyond our
knowledge or control. See the Fund's prospectus for information on the Fund's
preparation for Year 2000.
INFORMATION ABOUT WESTERN RESERVE'S FINANCIAL STATEMENTS
The financial statements of Western Reserve which are included in this
Prospectus (see p. 79) should be considered only as bearing on the ability of
Western Reserve to meet its obligations under the Policies. They should not be
considered as bearing on the investment performance of the assets held in the
Series Account.
Financial statements for Western Reserve for the years ended December 31,
1997, 1996 and 1995, have been prepared on the basis of statutory accounting
principles, rather than generally accepted accounting principles ("GAAP").
38
<PAGE>
APPENDIX A
ILLUSTRATION OF BENEFITS
The tables in Appendix A illustrate the way in which a Policy operates.
They show how the death benefit, Cash Value and Net Surrender Value of a Policy
issued to an Insured of a given age and a given premium could vary over an
extended period of time assuming hypothetical gross rates of return equivalent
to constant after tax annual rates of 0%, 6% and 12%. The tables illustrate the
Policy values that would result based on the assumptions that the premium is
paid as indicated, that the Owner has not requested a decrease in the Specified
Amount of the Policy, and that no cash withdrawals or Policy loans have been
made.
The death benefits, Cash Values and Net Surrender Values under a Policy
would be different from those shown if the actual rate of return averages 0%,
6% or 12% over a period of years, but fluctuates above and below those averages
for individual Policy years. They would also differ if any Policy loans were
made during the period of time illustrated.
The illustration on page 40 is based on a Policy for an Insured who is a
35 year old male in the non-tobacco user Ultimate Select rate class, annual
premiums of $5,500, a $500,000 Specified Amount and Death Benefit Option A. The
illustrations on that page also assume cost of insurance charges based on
Western Reserve's CURRENT cost of insurance rates.
The illustration on page 41 is based on the same factors as those on page
40, except that cost of insurance rates are based on the GUARANTEED cost of
insurance rates (based on the 1980 Commissioners Standard Ordinary Mortality
Table).
The amounts shown for the death benefits, Cash Values and Net Surrender
Values take into account (1) the daily charge for assuming mortality and
expense risks assessed against each Sub-Account which is equivalent to an
annual charge of 0.90% of the average net assets of the Sub-Accounts during the
first fifteen Policy years and 0.30% thereafter. However, the reduced annual
charge after the first fifteen Policy years is guaranteed to be 0.60%; (2)
estimated daily expenses equivalent to an effective average annual expense
level of 0.95% of the average daily net assets of the Portfolios of the Fund;
and (3) applicable Cash Value charges. The 0.95% average Portfolio expense
level assumes an equal allocation of amounts among the sixteen Sub-Accounts and
is based on an average 0.76% investment advisory fee and estimated 1997 average
normal operating expenses of 0.19% for each of the Portfolios in operation
during 1997. Calculation of the average annual expense level utilized
annualized actual audited expenses incurred during 1997 for the Money Market
(0.48%), Bond (0.64%), Growth (0.85%) (including voluntary fee reductions
effective May 1, 1998), Strategic Total Return (0.88%), Emerging Growth
(0.93%), Global (1.00%), Aggressive Growth (0.96%), Balanced (0.94%), Growth &
Income (0.96%), C.A.S.E. Growth (1.00%), Tactical Asset Allocation (0.87%),
Value Equity (0.89%), International Equity (1.50%), and U.S. Equity (1.30%). In
addition, because the Third Avenue Value and Real Estate Securities Portfolios
had not commenced operations as of December 31, 1997, the estimated average
annual Portfolio expense level reflects estimated expenses for each of these
two Portfolios at 1.00%, for 1998. WRL Management has undertaken until April
30, 1999 to pay expenses to the extent normal operating expenses of a Portfolio
exceed a stated percentage of the Portfolio's average daily net assets. Taking
into account the assumed charges of 1.85%, the gross annual investment return
rates of 0%, 6% and 12% are equivalent to net annual investment return rates of
- -1.85%, 4.15% and 10.15% during the first fifteen Policy years and -1.25%,
4.75% and 10.75% thereafter.
The hypothetical returns shown in the tables are without any tax charges
that may be attributable to the Series Account, because Western Reserve is not
currently making such charges. In order to produce after tax returns of 0%, 6%
or 12% if such charges are made in the future, the Series Account would have to
earn a sufficient amount in excess of 0%, 6% or 12% to cover any tax charges.
(See Charges Against the Series Account - Taxes, p. 26.)
The "Premium Accumulated at 5%" column of each table shows the amount
which would accumulate if an amount equal to the premium were invested to earn
interest at 5% per year, compounded annually.
Western Reserve will furnish, upon request, a comparable illustration
reflecting the proposed Insured's age, sex, risk classification and desired
plan features.
39
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATIONS
MALE ISSUE AGE 35
Specified Amount $500,000 Ultimate Select Class
Annual Premium $5,500 Option Type A
Using Current Cost of Insurance Rates
<TABLE>
<CAPTION>
DEATH BENEFIT
ASSUMING HYPOTHETICAL GROSS AND NET
END OF PREMIUMS ANNUAL INVESTMENT RETURN OF
POLICY ACCUMULATED 0% (GROSS) 6% (GROSS) 12% (GROSS)
YEAR AT 5%
-1.85% (NET) YEARS 1-15 4.15% (NET) YEARS 1-15 10.15% (NET) YEARS 1-15
-1.25% (NET) YEARS 16+ 4.75% (NET) YEARS 16+ 10.75% (NET) YEARS 16+
<S> <C> <C> <C> <C>
1 5,775 500,000 500,000 500,000
2 11,839 500,000 500,000 500,000
3 18,206 500,000 500,000 500,000
4 24,891 500,000 500,000 500,000
5 31,911 500,000 500,000 500,000
6 39,281 500,000 500,000 500,000
7 47,020 500,000 500,000 500,000
8 55,146 500,000 500,000 500,000
9 63,678 500,000 500,000 500,000
10 72,637 500,000 500,000 500,000
15 124,616 500,000 500,000 500,000
20 190,956 500,000 500,000 500,000
30(AGE 65) 383,684 500,000 500,000 1,095,334
40(AGE 75) 697,619 500,000 501,201 2,724,666
50(AGE 85) 1,208,985 * 845,195 7,423,634
60(AGE 95) 2,041,946 * 1,335,588 19,490,445
</TABLE>
<TABLE>
<CAPTION>
CASH VALUE NET SURRENDER VALUE
END OF ASSUMING HYPOTHETICAL GROSS AND NET ASSUMING HYPOTHETICAL GROSS AND NET
POLICY YEAR ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
0% (GROSS) 6% (GROSS) 12% (GROSS) 0% (GROSS) 6% (GROSS) 12% (GROSS)
-1.85% (NET) 4.15% (NET) 10.15% (NET) -1.85% (NET) 4.15% (NET) 10.15% (NET)
YEARS 1-15 YEARS 1-15 YEARS 1-15 YEARS 1-15 YEARS 1-15 YEARS 1-15
-1.25% (NET) 4.75% (NET) 10.75% (NET) -1.25% (NET) 4.75% (NET) 10.75% (NET)
YEARS 16+ YEARS 16+ YEARS 16+ YEARS 16+ YEARS 16+ YEARS 16+
<S> <C> <C> <C> <C> <C> <C>
1 4,581 4,885 5,189 708 1,011 1,315
2 9,065 9,960 10,892 4,730 5,625 6,557
3 13,445 15,225 17,155 8,647 10,428 12,357
4 17,726 20,693 24,039 12,467 15,434 18,779
5 21,879 26,339 31,575 16,158 20,618 25,854
6 25,902 32,169 39,828 19,719 25,985 33,645
7 29,789 38,181 48,866 23,143 31,536 42,220
8 33,542 44,386 58,771 26,435 37,279 51,664
9 37,098 50,726 69,569 29,528 43,157 62,000
10 40,488 57,237 81,388 32,456 49,206 73,356
15 54,796 92,444 159,866 54,796 92,444 159,866
20 66,653 136,754 294,347 66,653 136,754 294,347
30(AGE 65) 83,405 263,904 897,815 83,405 263,904 897,815
40(AGE 75) 73,075 468,412 2,546,417 73,075 468,412 2,546,417
50(AGE 85) * 804,948 7,070,127 * 804,948 7,070,127
60(AGE 95) * 1,322,364 19,297,470 * 1,322,364 19,297,470
</TABLE>
* In the absence of an additional payment, the Policy would lapse.
The hypothetical investment rates of return shown above and elsewhere in the
Prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return.
Actual investment rates of return may be more or less than those shown and will
depend on a number of factors, including the investment allocations by an Owner
and the different investment rates of return for the Fund. The Death Benefit,
Cash Value and Net Surrender Value for a Policy would be different from those
shown if the actual investment rates of return averaged 0%, 6% and 12% over a
period of years, but fluctuated above or below that average for individual
Policy years. No representation can be made by Western Reserve or the Fund that
these hypothetical investment rates of return can be achieved for any one year
or sustained over any period of time. This illustration must be preceded or
accompanied by a current Prospectus.
40
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATIONS
MALE ISSUE AGE 35
<TABLE>
<S> <C>
Specified Amount $500,000 Ultimate Select Class
Annual Premium $5,500 Option Type A
Using Guaranteed Cost of Insurance Rates
</TABLE>
<TABLE>
<CAPTION>
DEATH BENEFIT
ASSUMING HYPOTHETICAL GROSS AND NET
END OF PREMIUMS ANNUAL INVESTMENT RETURN OF
POLICY ACCUMULATED 0% (GROSS) 6% (GROSS) 12% (GROSS)
YEAR AT 5%
-1.85% (NET) YEARS 1-15 4.15% (NET) YEARS 1-15 10.15% (NET) YEARS 1-15
-1.25% (NET) YEARS 16+ 4.75% (NET) YEARS 16+ 10.75% (NET) YEARS 16+
<S> <C> <C> <C> <C>
1 5,775 500,000 1500,000 500,000
2 11,839 500,000 500,000 500,000
3 18,206 500,000 500,000 500,000
4 24,891 500,000 500,000 500,000
5 31,911 500,000 500,000 500,000
6 39,281 500,000 500,000 500,000
7 47,020 500,000 500,000 500,000
8 55,146 500,000 500,000 500,000
9 63,678 500,000 500,000 500,000
10 72,637 500,000 500,000 500,000
15 124,616 500,000 500,000 500,000
20 190,956 500,000 500,000 500,000
30(AGE 65) 383,684 500,000 500,000 1,058,623
40(AGE 75) 697,619 * 500,000 2,593,787
50(AGE 85) 1,208,985 * 720,735 6,923,820
60(AGE 95) 2,041,946 * 1,106,564 17,490,930
</TABLE>
<TABLE>
<CAPTION>
CASH VALUE NET SURRENDER VALUE
END OF ASSUMING HYPOTHETICAL GROSS AND NET ASSUMING HYPOTHETICAL GROSS AND NET
POLICY YEAR ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
0% (GROSS) 6% (GROSS) 12% (GROSS) 0% (GROSS) 6% (GROSS) 12% (GROSS)
-1.85% (NET) 4.15% (NET) 10.15% (NET) -1.85% (NET) 4.15% (NET) 10.15% (NET)
YEARS 1-15 YEARS 1-15 YEARS 1-15 YEARS 1-15 YEARS 1-15 YEARS 1-15
-1.25% (NET) 4.75% (NET) 10.75% (NET) -1.25% (NET) 4.75% (NET) 10.75% (NET)
YEARS 16+ YEARS 16+ YEARS 16+ YEARS 16+ YEARS 16+ YEARS 16+
<S> <C> <C> <C> <C> <C> <C>
1 4,513 4,814 5,116 640 941 1,243
2 8,911 9,797 10,719 4,576 5,461 6,384
3 13,182 14,940 16,847 8,385 10,143 12,049
4 17,326 20,249 23,548 12,066 14,990 18,289
5 21,334 25,721 30,876 15,613 20,000 25,154
6 25,207 31,361 38,891 19,023 25,178 32,707
7 28,933 37,164 47,654 22,287 30,518 41,009
8 32,516 43,138 57,246 25,409 36,030 50,139
9 35,946 49,280 67,744 28,377 41,710 60,174
10 39,227 55,599 79,246 31,196 47,568 71,215
15 53,072 89,802 155,713 53,072 89,802 155,713
20 63,465 131,831 286,041 63,465 131,831 286,041
30(AGE 65) 68,562 245,033 867,724 68,562 245,033 867,724
40(AGE 75) * 406,533 2,424,100 * 406,533 2,424,100
50(AGE 85) * 686,414 6,594,114 * 686,414 6,594,114
60(AGE 95) * 1,095,608 17,317,752 * 1,095,608 7,317,752
</TABLE>
* In the absence of an additional payment, the Policy would lapse
The hypothetical investment rates of return shown above and elsewhere in the
Prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return.
Actual investment rates of return may be more or less than those shown and will
depend on a number of factors, including the investment allocations by an Owner
and the different investment rates of return for the Fund. The Death Benefit,
Cash Value and Net Surrender Value for a Policy would be different from those
shown if the actual investment rates of return averaged 0%, 6% and 12% over a
period of years, but fluctuated above or below that average for individual
Policy years. No representation can be made by Western Reserve or the Fund that
these hypothetical investment rates of return can be achieved for any one year
or sustained over any period of time. This illustration must be preceded or
accompanied by a current Prospectus.
41
<PAGE>
APPENDIX B
WEALTH INDICES OF INVESTMENTS IN THE
U.S. CAPITAL MARKETS
The information below graphically depicts the growth of $1.00 invested in
large company stocks, small company stocks, long-term government bonds,
Treasury bills, and a hypothetical asset returning the inflation rate over the
period from the end of 1925 to the end of 1997. All results assume reinvestment
of dividends on stocks or coupons on bonds and no taxes. Transaction costs are
not included, except in the small stock index starting in 1982.
Each of the cumulative index values is initialized at $1.00 at year-end
1925. The graph illustrates that large company stocks and small company stocks
have the best performance over the entire 72-year period; investments of $1.00
in these assets would have grown to $1,828.33 and $5,519.97, respectively, by
year-end 1997. This higher growth was earned by investments involving
substantial risk. In contrast, long-term government bonds (with an approximate
20-year maturity), which exposed the holder to much less risk, grew to only
$39.07.
The lowest-risk strategy over the past 72 years (for those with
short-term time horizons) was to buy U.S. Treasury bills. Since Treasury bills
tended to track inflation, the resulting real (inflation-adjusted) returns were
near zero for the entire 1926 - 1997 period.
COMPOUND
ANNUAL
RETURN
- Small Company Stocks 12.7%
Dimensional Fund Advices
Small Company Fund
- Large Company Stocks 11.0%
S&P 500
- Long-Term Government Bonds 5.2%
20-year U.S. Government Bonds
- Treasury Bills 3.8%
30-day U.S. T-Bills
- Inflation 3.1%
Consumer Price Index
[GRAPHIC OMITTED]
* Used with permission. /COPYRIGHT/1998 IBBOTSON ASSOCIATES, Inc. All rights
reserved. [Certain portions of this work were derived from copyrighted works of
Roger G. Ibbotson and Rex Sinquefield.
42
<PAGE>
COMPOUND ANNUAL RATES OF RETURN BY DECADE
<TABLE>
<CAPTION>
1920s* 1930s 1940s 1950s 1960s 1970s 1980s 1990s** 1988-97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Large Company ............. 19.2% -0.1% 9.2% 19.4% 7.8% 5.9% 17.5% 16.6% 18.0%
Small Company ............. -4.5 1.4 20.7 16.9 15.5 11.5 15.8 16.5 16.5
Long-Term Corp. ........... 5.2 6.9 2.7 1.0 1.7 6.2 13.0 10.2 10.8
Long-Term Govt. ........... 5.0 4.9 3.2 -0.1 1.4 5.5 12.6 10.7 11.3
Inter-Term Govt. .......... 4.2 4.6 1.8 1.3 3.5 7.0 11.9 8.0 8.3
Treasury Bills ............ 3.7 0.6 0.4 1.9 3.9 6.3 8.9 5.0 5.4
Inflation ................. -1.1 -2.0 5.4 2.2 2.5 7.4 5.1 3.1 3.4
</TABLE>
- ------------------------------
* Based on the period 1926-1929.
** Based on the period 1990-1997.
Used with permission. /copyright/1998 Ibbotson Associates, Inc. All rights
reserved. [Certain portions of this work were derived from copyrighted works of
Roger G. Ibbotson and Rex Sinquefield.]
THE WRL FREEDOM ELITESM
AND THE "DOLLAR COST AVERAGING" INVESTMENT STRATEGY
As the Long Term Market Trends graph indicates, the investment
performance of many common stocks has generally been positive over certain
relatively long periods. Common stocks have, however, also been subject to
market declines, often dramatic ones, and general volatility of prices over
shorter time periods. The price fluctuations of common stocks has historically
been greater than that of high grade debt securities.
The relative volatility of common stock prices as compared with prices of
high grade debt instruments offers both advantages and disadvantages to
investors. Unfortunately, many investors who otherwise might be interested in
common stocks see only the disadvantages and not the advantages of stock price
fluctuation. The primary disadvantage, of course, is that price declines can be
prolonged and substantial, and when this occurs, investors cannot liquidate
their investments without realizing losses. Price declines, however, also offer
investors important opportunities.
Opportunity arises from the fact that investors can purchase more common
stock for the same amount of money than they would before prices declined.
Investors may take advantage of this if they remain willing to continue
investing in both rising and falling markets. The dollar cost averaging
strategy of investing demonstrates this.
In this method of investing:
/bullet/ Relatively constant dollar amounts are invested at regular
intervals (monthly, quarterly, or annually),
/bullet/ Stock Market fluctuations, especially the savings on purchases
from price declines, are exploited for the investor's benefit.
HOW DOLLAR COST AVERAGING WORKS
INVESTMENTS AT COMMON STOCK SHARES
REGULAR INTERVALS MARKET PRICE PURCHASED
- ------------------- -------------- ----------
$150 $20 7.5
150 15 10.0
150 10 15.0
150 5 30.0
150 10 15.0
150 15 10.0
----------- ----
$900 87.5
Total Value of 87.5 shares @ $15/share $1,312.50
Less Investment made (900.00)
---------
Gain/Profit $ 412.50
Though the market price has not returned to the initial high of $20 per
share, dollar cost averaging has permitted the investor to purchase more shares
at a savings and thus realize a significant gain. Obviously, the dollar cost
averaging strategy is for the investor who can continue to invest relatively
constant amounts over a long period of time.
This plan of investing does not assure a profit or protect against a loss
in declining markets; it does allow investors to take advantage of market
fluctuations. Since the success of this strategy is dependent on systematic
investing, purchasers should consider their ability to sustain their payments
through all periods of market fluctuations.
How does the dollar cost averaging method relate to the WRL Freedom
Elitesm? A Policyowner may invest his or her Premium in a Sub-Account, and
although a Policy's value in a Sub-Account or Sub-Accounts is affected by
several factors other than investment experience (E.G., Cash Value charges and
charges against the Series Account), the dollar cost averaging strategy can be
generally applied to the Policy to the extent that the Policyowner pays a
Planned Periodic Premium on a regular basis and he or she allocates Premium
resulting from those Planned Periodic Premiums to Sub-Accounts in relatively
constant amounts.
43
<PAGE>
APPENDIX C
APPENDIX C -- SURRENDER CHARGE BASE PREMIUMS
(PER THOUSAND OF SPECIFIED AMOUNT)
MALE MALE FEMALE FEMALE
AGE STANDARD SELECT STANDARD SELECT
- ------ ---------- -------- ---------- -------
0 3.28 3.28 2.48 2.48
1 3.23 3.23 2.46 2.46
2 3.35 3.35 2.54 2.54
3 3.47 3.47 2.83 2.83
4 3.81 3.61 2.73 2.73
5 3.75 3.75 2.83 2.83
6 3.80 3.90 2.94 2.94
7 4.08 4.08 3.08 3.08
8 4.24 4.24 3.18 3.18
9 4.43 4.43 3.31 3.31
10 4.63 4.63 3.45 3.45
11 4.84 4.84 3.60 3.60
12 5.07 5.07 3.78 3.78
13 5.30 5.30 3.92 3.92
14 5.54 5.54 4.09 4.09
15 5.78 5.78 4.27 4.27
16 6.01 6.01 4.45 4.46
17 6.25 6.25 4.84 4.84
18 6.48 4.88 4.84 4.08
19 6.73 5.06 5.05 4.24
20 6.98 5.25 5.25 4.42
21 7.25 5.44 5.49 4.61
22 7.53 5.85 5.73 4.80
23 7.83 5.88 5.98 5.01
24 8.15 6.11 6.25 5.23
25 8.50 6.37 6.53 5.46
26 8.87 6.84 6.82 5.70
27 9.27 8.94 7.14 5.96
28 9.70 7.25 7.47 8.23
29 10.18 7.58 7.81 8.51
30 10.85 7.94 8.18 8.81
31 11.17 8.32 8.57 7.13
32 11.73 8.72 8.98 7.47
33 12.32 9.14 9.41 7.82
34 12.84 9.60 9.57 8.20
35 13.61 10.07 10.35 8.59
36 14.31 10.58 10.88 9.01
37 15.06 11.12 11.40 9.45
38 15.85 11.69 11.97 9.92
39 16.69 12.29 12.58 10.41
40 17.57 12.93 13.18 10.93
MALE MALE FEMALE FEMALE
AGE STANDARD SELECT STANDARD SELECT
- ------ ---------- -------- ---------- ---------
41 18.50 13.80 13.82 11.47
42 19.49 14.32 14.50 12.04
43 20.52 15.08 15.21 12.84
44 21.62 15.88 15.95 13.27
45 22.77 16.74 16.72 13.94
46 23.99 17.84 17.54 14.85
47 25.29 18.61 18.40 15.40
48 26.65 19.83 19.31 16.19
49 28.10 20.72 20.28 17.03
50 29.84 21.88 21.27 17.92
51 31.28 23.12 22.33 18.88
52 33.01 24.45 23.46 19.88
53 34.84 25.85 24.65 20.93
54 36.78 27.38 25.90 22.06
55 38.82 28.96 27.23 23.25
56 40.98 30.68 28.63 24.53
57 43.27 32.48 30.12 25.89
58 45.69 34.42 31.71 27.36
59 48.26 38.50 33.42 28.92
60 50.99 38.72 35.28 30.61
61 53.91 41.11 37.25 32.43
62 57.00 43.68 39.38 34.39
63 60.28 46.39 41.69 36.51
64 63.75 49.31 44.14 38.78
65 67.41 52.43 46.74 41.20
66 71.28 55.76 49.51 43.81
67 75.32 59.33 52.48 46.80
68 79.83 83.18 55.88 49.63
69 84.21 67.27 59.13 52.91
70 89.11 71.70 62.91 58.50
71 94.32 76.48 67.08 60.43
72 99.87 81.53 71.57 84.72
73 105.74 87.01 76.48 89.40
74 111.91 92.84 81.72 74.48
75 118.35 99.03 87.36 79.94
76 125.04 105.80 93.38 86.85
77 131.98 112.58 99.84 92.24
78 139.25 120.04 106.79 99.18
79 148.95 128.06 114.35 106.77
80 155.17 138.75 122.61 115.12
44
<PAGE>
INDEX TO FINANCIAL STATEMENTS
WRL SERIES LIFE ACCOUNT:
Statements of assets, liabilities and equity accounts as of September 30,
1998, statements of operations for the nine months ended September 30,
1998 and statements of change in equity accounts for the nine months
ended September 30, 1998 (unaudited) and year ended December 31, 1997
Selected per unit data and ratios for the period ended September 30, 1998
(unaudited) and for the years ended December 31, 1997, 1996, 1995, 1994
and 1993
Notes to Financial Statements (unaudited)
Report of Independent Accountants dated January 30, 1998
Statements of assets, liabilities and equity accounts and statements of
operations for the year ended December 31, 1997
Statements of changes in equity accounts for the years ended December 31,
1997 and 1996
Selected per unit data and ratios for the years ended December 31, 1997,
1996, 1995, 1994 and 1993
Notes to Financial Statements
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO:
Statutory-Basis Balance Sheet as of September 30, 1998 (unaudited)
Statutory-Basis Statement of Operations for the nine months ended
September 30, 1998 (unaudited)
Statutory-Basis Statement of Cash Flows for the nine months ended
September 30, 1998 (unaudited)
Statutory-Basis Statement of Changes in Capital and Surplus for the nine
months ended September 30, 1998 (unaudited)
Note to Statutory-Basis Financial Statements (unaudited)
Report of Independent Auditors dated February 27, 1998
Statutory-Basis Balance Sheets at December 31, 1997 and 1996
Statutory-Basis Statements of Operations for the years ended December 31,
1997, 1996 and 1995
Statutory-Basis Statements of Changes in Capital and Surplus for the
years ended December 31, 1997, 1996 and 1995
Statutory-Basis Statements of Cash Flows for the years ended December 31,
1997, 1996, and 1995
Notes to Statutory-Basis Financial Statements
Statutory-Basis Financial Statement Schedules
WRL00005-01/99
45
<PAGE>
WRL SERIES LIFE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
At September 30, 1998
All amounts (except unit value) in thousands
(unaudited)
<TABLE>
<CAPTION>
MONEY MARKET BOND GROWTH GLOBAL
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C> <C> <C>
ASSETS:
Investment in WRL Series Fund, Inc.:
Shares ............................................. 27,609 2,157 12,976 8,883
======== ========= ========= =========
Cost ............................................... $ 27,609 $ 24,395 $ 404,462 $ 167,929
======== ========= ========= =========
Investment, at net asset value ...................... $ 27,609 $ 26,345 $ 604,812 $ 180,998
Transfers receivable from depositor ................. 212 0 0 0
-------- --------- --------- ---------
Total assets ....................................... 27,821 26,345 604,812 180,998
-------- --------- --------- ---------
LIABILITIES:
Accrued expenses .................................... 1 1 15 5
Transfers payable to depositor ...................... 0 10 133 23
-------- --------- --------- ---------
Total liabilities .................................. 1 11 148 28
-------- --------- --------- ---------
Net assets ......................................... $ 27,820 $ 26,334 $ 604,664 $ 180,970
======== ========= ========= =========
NET ASSETS:
Policy Owners' equity:
Units .............................................. 1,670 1,144 8,435 9,509
======== ========= ========= =========
Unit value ......................................... $ 16.66 $ 23.03 $ 71.68 $ 19.03
======== ========= ========= =========
Policy Owners' equity .............................. $ 27,820 $ 26,334 $ 604,664 $ 180,970
-------- --------- --------- ---------
Depositor's equity:
Units .............................................. N/A N/A N/A N/A
======== ========= ========= =========
Unit value ......................................... $ N/A $ N/A $ N/A $ N/A
======== ========= ========= =========
Depositor's equity ................................. $ N/A $ N/A $ N/A $ N/A
-------- --------- --------- ---------
Net assets applicable to outstanding units ......... $ 27,820 $ 26,334 $ 604,664 $ 180,970
======== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
STRATEGIC EMERGING AGGRESSIVE
TOTAL RETURN GROWTH GROWTH BALANCED
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C> <C> <C>
ASSETS:
Investment in WRL Series Fund, Inc.:
Shares ............................................. 5,767 9,061 7,079 1,106
======== ========= ========= =========
Cost ............................................... $ 77,243 $ 159,047 $ 109,523 $ 12,827
======== ========= ========= =========
Investment, at net asset value ...................... $ 87,483 $ 197,347 $ 128,068 $ 12,868
Transfers receivable from depositor ................. 0 0 0 2
-------- --------- --------- ---------
Total assets ....................................... 87,483 197,347 128,068 12,870
-------- --------- --------- ---------
LIABILITIES:
Accrued expenses .................................... 2 5 3 0
Transfers payable to depositor ...................... 4 43 53 0
-------- --------- --------- ---------
Total liabilities .................................. 6 48 56 0
-------- --------- --------- ---------
Net assets ......................................... $ 87,477 $ 197,299 $ 128,012 $ 12,870
======== ========= ========= =========
NET ASSETS:
Policy Owners' equity:
Units .............................................. 4,751 7,895 6,193 939
======== ========= ========= =========
Unit value ......................................... $ 18.41 $ 24.99 $ 20.67 $ 13.70
======== ========= ========= =========
Policy Owners' equity .............................. $ 87,477 $ 197,299 $ 128,012 $ 12,870
-------- --------- --------- ---------
Depositor's equity:
Units .............................................. N/A N/A N/A N/A
======== ========= ========= =========
Unit value ......................................... $ N/A $ N/A $ N/A $ N/A
======== ========= ========= =========
Depositor's equity ................................. $ N/A $ N/A $ N/A $ N/A
-------- --------- --------- ---------
Net assets applicable to outstanding units ......... $ 87,477 $ 197,299 $ 128,012 $ 12,870
======== ========= ========= =========
</TABLE>
The Notes to the Financial Statements are an integral part of this report.
46
<PAGE>
WRL SERIES LIFE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
At September 30, 1998
All amounts (except unit value) in thousands
(unaudited)
<TABLE>
<CAPTION>
TACTICAL ASSET
GROWTH & INCOME ALLOCATION C.A.S.E. GROWTH VALUE EQUITY
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C> <C> <C>
ASSETS:
Investment in WRL Series Fund, Inc.:
Shares ............................................. 1,222 2,685 1,178 1,946
======== ======== ========= ========
Cost ............................................... $ 15,095 $ 34,654 $ 16,899 $ 26,167
======== ======== ========= ========
Investment, at net asset value ...................... $ 14,846 $ 35,929 $ 12,930 $ 23,513
Transfers receivable from depositor ................. 0 0 0 0
-------- -------- --------- --------
Total assets ....................................... 14,846 35,929 12,930 $ 25,513
-------- -------- --------- --------
LIABILITIES:
Accrued expenses .................................... 0 1 0 1
Transfers payable to depositor ...................... 0 3 11 1
-------- -------- --------- --------
Total liabilities .................................. 0 4 11 2
-------- -------- --------- --------
Net assets ......................................... $ 14,846 $ 35,925 $ 12,919 $ 23,511
======== ======== ========= ========
NET ASSETS:
Policy Owners' equity:
Units .............................................. 939 2,303 1,304 1,948
======== ======== ========= ========
Unit value ......................................... $ 15.81 $ 15,60 $ 9.91 $ 12.07
======== ======== ========= ========
Policy Owners' equity .............................. $ 14,846 $ 35,925 $ 12,919 $ 23,511
-------- -------- --------- --------
Depositor's equity:
Units .............................................. N/A N/A N/A N/A
======== ======== ========= ========
Unit value ......................................... $ N/A $ N/A $ N/A $ N/A
======== ======== ========= ========
Depositor's equity ................................. $ N/A $ N/A $ N/A $ N/A
-------- -------- --------- --------
Net assets applicable to outstanding units ......... $ 14,846 $ 35,925 $ 12,919 $ 23,511
======== ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL U.S. THIRD AVENUE REAL ESTATE
EQUITY EQUITY VALUE SECURITIES
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT(a) SUB-ACCOUNT(b)
<S> <C> <C> <C> <C>
ASSETS:
Investment in WRL Series Fund, Inc.:
Shares ............................................. 408 727 278 75
======== ======== ======== ======
Cost ............................................... $ 4,894 $ 9,573 $ 2,742 $ 724
======== ======== ======== ======
Investment, at net asset value ...................... $ 4,235 $ 9,056 $ 2,198 $ 651
Transfers receivable from depositor ................. 0 23 17 0
-------- -------- -------- ------
Total assets ....................................... 4,235 9,079 2,215 651
-------- -------- -------- ------
LIABILITIES:
Accrued expenses .................................... 0 0 0 0
Transfers payable to depositor ...................... 0 0 0 0
-------- -------- -------- ------
Total liabilities .................................. 1 0 0 0
-------- -------- -------- ------
Net assets ......................................... $ 4,234 $ 9,079 $ 2,215 $ 651
======== ======== ======== ======
NET ASSETS:
Policy Owners' equity:
Units .............................................. 413 707 262 36
======== ======== ======== ======
Unit value ......................................... $ 10.26 $ 12.85 $ 7.85 $ 8.61
======== ======== ======== ======
Policy Owners' equity .............................. $ 4,234 $ 9,079 $ 2,058 $ 306
-------- -------- -------- ------
Depositor's equity:
Units .............................................. N/A N/A 20 40
======== ======== ======== ======
Unit value ......................................... $ N/A $ N/A $ 7.85 $ 8.61
======== ======== ======== ======
Depositor's equity ................................. $ N/A $ N/A $ 157 $ 345
-------- -------- -------- ------
Net assets applicable to outstanding units ......... $ 4,234 $ 9,079 $ 2,215 $ 651
======== ======== ======== ======
</TABLE>
(a) The inception date of this sub-account was January 2, 1998.
(b) The inception date of this sub-account was May 1, 1998.
The Notes to the Financial Statements are an integral part of this report.
47
<PAGE>
WRL SERIES LIFE ACCOUNT
STATEMENT OF OPERATIONS
For the nine months or period ended September 30, 1998
All amounts in thousands
(unaudited)
<TABLE>
<CAPTION>
MONEY MARKET BOND GROWTH GLOBAL
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income ....................................................... $ 792 $ 29 $ 404 $ 1,093
Capital gain distributions ............................................ 0 0 5,200 0
----- ------- --------- -------
Total investment income (loss) ....................................... 792 29 5,604 1,093
EXPENSES:
Mortality and expense risk ............................................ 135 138 3,790 1,242
----- ------- --------- -------
Net investment income (loss) ......................................... 657 (109) 1,814 (149)
----- ------- --------- -------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) from securities transactions ................ 0 386 9,788 3,024
Change in unrealized appreciation (depreciation) ..................... 0 1,619 109,541 4,085
----- ------- --------- -------
Net gain (loss) on investments ....................................... 0 2,005 119,329 7,109
----- ------- --------- -------
Net increase (decrease) in equity accounts resulting from operations $ 657 $ 1,896 $ 121,143 $ 6,960
===== ======= ========= =======
</TABLE>
<TABLE>
<CAPTION>
STRATEGIC EMERGING AGGRESSIVE
TOTAL RETURN GROWTH GROWTH BALANCED
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income ....................................................... $ 237 $ 0 $ 356 $ 44
Capital gain distributions ............................................ 619 352 2,001 13
--------- ------- -------- -------
Total investment income (loss) ....................................... 856 352 2,357 57
EXPENSES:
Mortality and expense risk ............................................ 594 1,310 804 84
--------- ------- -------- -------
Net investment income (loss) ......................................... 262 (958) 1,553 (27)
--------- ------- -------- -------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) from securities transactions ................ 724 3,158 2,023 191
Change in unrealized appreciation (depreciation) ..................... (3,530) 7,123 9,513 (636)
--------- ------- -------- -------
Net gain (loss) on investments ....................................... (2,806) 10,281 11,536 (445)
--------- ------- -------- -------
Net increase (decrease) in equity accounts resulting from operations $ (2,544) $ 9,323 $ 13,089 $ (472)
========= ======= ======== =======
</TABLE>
The Notes to the Financial Statements are an integral part of this report.
48
<PAGE>
WRL SERIES LIFE ACCOUNT
STATEMENT OF OPERATIONS
For the nine months or period ended September 30, 1998
All amounts in thousands
(unaudited)
<TABLE>
<CAPTION>
TACTICAL ASSET
GROWTH & INCOME ALLOCATION C.A.S.E. GROWTH VALUE EQUITY
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income ............................................... $ 239 $ 80 $ 368 $ 17
Capital gain distributions .................................... 48 754 90 74
------- -------- --------- ---------
Total investment income (loss) ............................... 287 834 458 91
EXPENSES:
Mortality and expense risk .................................... 84 230 94 207
------- -------- --------- ---------
Net investment income (loss) ................................. 203 604 364 (116)
------- -------- --------- ---------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) from securities transactions ........ 290 309 231 1,139
Change in unrealized appreciation (depreciation) ............. (731) (1,214) (3,734) (5,832)
------- -------- --------- ---------
Net gain (loss) on investments ............................... (441) (905) (3,503) (4,693)
------- -------- --------- ---------
Net increase (decrease) in equity accounts resulting
from operations ............................................ $ (238) $ (301) $ (3,139) $ (4,809)
======= ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL U.S. THIRD AVENUE REAL ESTATE
EQUITY EQUITY VALUE SECURITIES
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT(A) SUB-ACCOUNT(B)
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income ................................................ $ 3 $ 63 $ 0 $ 0
Capital gain distributions ..................................... 0 10 0 0
------- ------- ------- ------
Total investment income (loss) ................................ 3 73 0 0
EXPENSES:
Mortality and expense risk ..................................... 24 46 13 2
------- ------- ------- ------
Net investment income (loss) .................................. (21) 27 (13) (2)
------- ------- ------- ------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) from securities transactions ......... 131 315 8 (27)
Change in unrealized appreciation (depreciation) .............. (556) (532) (544) (73)
------- ------- ------- ------
Net gain (loss) on investments ................................ (425) (217) (536) (100)
------- ------- ------- ------
Net increase (decrease) in equity accounts resulting
from operations ............................................. $ (446) $ (190) $ (549) $ (102)
======= ======= ======= ======
</TABLE>
(a) The inception date of this sub-account was January 2, 1998.
(b) The inception date of this sub-account was May 1, 1998.
The Notes to the Financial Statements are an integral part of this report.
49
<PAGE>
WRL SERIES LIFE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
For the period ended
All amounts in thousands
(unaudited)
<TABLE>
<CAPTION>
MONEY MARKET
SUB-ACCOUNT
------------------------------
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ......................... $ 657 $ 639
Net gain (loss) on investments ....................... 0 0
-------- --------
Net increase (decrease) in equity accounts resulting
from operations ..................................... 657 639
-------- --------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (redeemed) .................. 14,742 7,719
-------- --------
Less cost of units redeemed:
Administrative charges .............................. 2,375 3,108
Policy loans ........................................ 782 687
Surrender benefits .................................. 854 854
Death benefits ...................................... 8 9
-------- --------
4,019 4,658
-------- --------
Increase (decrease) in equity accounts from capital
unit transactions .................................. 10,723 3,061
-------- --------
Net increase (decrease) in equity accounts .......... 11,380 3,700
Depositor's equity contribution (redemption) ......... 0 0
NET ASSETS:
Beginning of period .................................. 16,440 12,740
-------- --------
End of period ........................................ $ 27,820 $ 16,440
======== ========
<CAPTION>
BOND GROWTH
SUB-ACCOUNT SUB-ACCOUNT
------------------------------ -----------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1997 1998 1997
--------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ......................... $ (109) $ 661 $ 1,814 $ 44,206
Net gain (loss) on investments ....................... 2,005 418 119,329 15,238
-------- -------- --------- ---------
Net increase (decrease) in equity accounts resulting
from operations ..................................... 1,896 1,079 121,143 59,444
-------- -------- --------- ---------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (redeemed) .................. 9,580 7,506 96,915 106,236
-------- -------- --------- ---------
Less cost of units redeemed:
Administrative charges .............................. 1,669 1,633 32,989 37,231
Policy loans ........................................ 386 428 11,833 11,212
Surrender benefits .................................. 697 437 15,859 15,746
Death benefits ...................................... 47 15 2,984 711
-------- -------- --------- ---------
2,799 2,513 63,665 64,900
-------- -------- --------- ---------
Increase (decrease) in equity accounts from capital
unit transactions .................................. 6,781 4,993 33,250 41,336
-------- -------- --------- ---------
Net increase (decrease) in equity accounts .......... 8,677 6,072 154,393 100,780
Depositor's equity contribution (redemption) ......... 0 0 0 0
NET ASSETS:
Beginning of period .................................. 17,657 11,585 450,271 349,491
-------- -------- --------- ---------
End of period ........................................ $ 26,334 $ 17,657 $ 604,664 $ 450,271
======== ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
GLOBAL
SUB-ACCOUNT
------------------------------
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ......................... $ (149) $ 15,859
Net gain (loss) on investments ....................... 7,109 805
--------- ---------
Net increase (decrease) in equity accounts resulting
from operations ..................................... 6,960 16,664
--------- ---------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (redeemed) .................. 51,521 64,272
--------- ---------
Less cost of units redeemed:
Administrative charges .............................. 14,090 12,590
Policy loans ........................................ 3,714 2,948
Surrender benefits .................................. 4,183 3,391
Death benefits ...................................... 541 149
--------- ---------
22,528 19,078
--------- ---------
Increase (decrease) in equity accounts from capital
unit transactions .................................. 28,993 45,194
--------- ---------
Net increase (decrease) in equity accounts .......... 35,953 61,858
Depositor's equity contribution (redemption) ......... 0 0
NET ASSETS:
Beginning of period .................................. 145,017 83,159
--------- ---------
End of period ........................................ $ 180,970 $ 145,017
========= =========
<CAPTION>
STRATEGIC
TOTAL RETURN EMERGING GROWTH
SUB-ACCOUNT SUB-ACCOUNT
------------------------------ -----------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1997 1998 1997
--------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ......................... $ 262 $ 6,101 $ (958) $ 13,841
Net gain (loss) on investments ....................... (2,806) 6,521 10,281 10,932
-------- -------- --------- ---------
Net increase (decrease) in equity accounts resulting
from operations ..................................... (2,544) 12,622 9,323 24,773
-------- -------- --------- ---------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (redeemed) .................. 18,671 22,072 46,925 54,392
-------- -------- --------- ---------
Less cost of units redeemed:
Administrative charges .............................. 5,653 6,025 14,342 14,518
Policy loans ........................................ 1,550 1,624 3,920 3,692
Surrender benefits .................................. 1,934 2,044 5,115 3,986
Death benefits ...................................... 266 148 274 192
-------- -------- --------- ---------
9,403 9,841 23,651 22,388
-------- -------- --------- ---------
Increase (decrease) in equity accounts from capital
unit transactions .................................. 9,268 12,231 23,274 32,004
-------- -------- --------- ---------
Net increase (decrease) in equity accounts .......... 6,724 24,853 32,597 56,777
Depositor's equity contribution (redemption) ......... 0 0 0 0
NET ASSETS:
Beginning of period .................................. 80,753 55,900 164,702 107,925
-------- -------- --------- ---------
End of period ........................................ $ 87,477 $ 80,753 $ 197,299 $ 164,702
======== ======== ========= =========
</TABLE>
The Notes to the Financial Statements are an integral part of this report.
50
<PAGE>
WRL SERIES LIFE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
For the period ended
All amounts in thousands
(unaudited)
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH
SUB-ACCOUNT
------------------------------
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ......................... $ 1,553 $ 7,795
Net gain (loss) on investments ....................... 11,536 6,524
--------- --------
Net increase (decrease) in equity accounts resulting
from operations ..................................... 13,089 14,319
--------- --------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (redeemed) .................. 36,460 40,282
--------- --------
Less cost of units redeemed:
Administrative charges .............................. 10,156 9,888
Policy loans ........................................ 2,585 1,926
Surrender benefits .................................. 3,244 2,485
Death benefits ...................................... 204 58
--------- --------
16,189 14,357
--------- --------
Increase (decrease) in equity accounts from capital
unit transactions .................................. 20,271 25,925
--------- --------
Net increase (decrease) in equity accounts .......... 33,360 40,244
Depositor's equity contribution (redemption) ......... 0 0
NET ASSETS:
Beginning of period .................................. 94,652 54,408
--------- --------
End of period ........................................ $ 128,012 $ 94,652
========= ========
<CAPTION>
BALANCED GROWTH & INCOME
SUB-ACCOUNT SUB-ACCOUNT
------------------------------ -----------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1997 1998 1997
--------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ......................... $ (27) $ 992 $ 203 $ 1,214
Net gain (loss) on investments ....................... (445) 226 (441) 283
------- -------- -------- -------
Net increase (decrease) in equity accounts resulting
from operations ..................................... (472) 1,218 (238) 1,497
------- -------- -------- -------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (redeemed) .................. 4,174 4,373 7,718 3,232
------- -------- -------- -------
Less cost of units redeemed:
Administrative charges .............................. 1,025 958 1,137 733
Policy loans ........................................ 230 179 163 163
Surrender benefits .................................. 283 153 328 260
Death benefits ...................................... 10 3 69 11
------- -------- -------- -------
1,548 1,293 1,697 1,167
------- -------- -------- -------
Increase (decrease) in equity accounts from capital
unit transactions .................................. 2,626 3,080 6,021 2,065
------- -------- -------- -------
Net increase (decrease) in equity accounts .......... 2,154 4,298 5,783 3,562
Depositor's equity contribution (redemption) ......... 0 0 0 0
NET ASSETS:
Beginning of period .................................. 10,716 6,418 9,063 5,501
------- -------- -------- -------
End of period ........................................ $12,870 $ 10,716 $ 14,846 $ 9,063
======= ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
TACTICAL ASSET
ALLOCATION
SUB-ACCOUNT
------------------------------
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ......................... $ 604 $ 1,913
Net gain (loss) on investments ....................... (905) 1,362
-------- --------
Net increase (decrease) in equity accounts resulting
from operations ..................................... (301) 3,275
-------- --------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (redeemed) .................. 11,086 11,386
-------- --------
Less cost of units redeemed:
Administrative charges .............................. 2,498 2,219
Policy loans ........................................ 589 463
Surrender benefits .................................. 737 742
Death benefits ...................................... 159 60
-------- --------
3,983 3,484
-------- --------
Increase (decrease) in equity accounts from capital
unit transactions .................................. 7,103 7,902
-------- --------
Net increase (decrease) in equity accounts .......... 6,802 11,177
Depositor's equity contribution (redemption) ......... 0 0
NET ASSETS:
Beginning of period .................................. 29,123 17,946
-------- --------
End of period ........................................ $ 35,925 $ 29,123
======== ========
<CAPTION>
C.A.S.E. GROWTH VALUE EQUITY
SUB-ACCOUNT SUB-ACCOUNT
------------------------------ -----------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1997 1998 1997
--------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ......................... $ 364 $ 994 $ (116) $ 183
Net gain (loss) on investments ....................... (3,503) (252) (4,693) 3,038
-------- -------- -------- --------
Net increase (decrease) in equity accounts resulting
from operations ..................................... (3,139) 742 (4,809) 3,221
-------- -------- -------- --------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (redeemed) .................. 6,509 8,029 4,452 17,023
-------- -------- -------- --------
Less cost of units redeemed:
Administrative charges .............................. 1,726 970 2,108 1,257
Policy loans ........................................ 413 146 349 542
Surrender benefits .................................. 198 144 239 388
Death benefits ...................................... 60 6 150 0
-------- -------- -------- --------
2,397 1,266 2,846 2,187
-------- -------- -------- --------
Increase (decrease) in equity accounts from capital
unit transactions .................................. 4,112 6,763 1,606 14,836
-------- -------- -------- --------
Net increase (decrease) in equity accounts .......... 973 7,505 (3,203) 18,057
Depositor's equity contribution (redemption) ......... 0 (25) 0 (230)
NET ASSETS:
Beginning of period .................................. 11,946 4,466 26,714 8,887
-------- -------- -------- --------
End of period ........................................ $ 12,919 $ 11,946 $ 23,511 $ 26,714
======== ======== ======== ========
</TABLE>
The Notes to the Financial Statements are an integral part of this report.
51
<PAGE>
WRL SERIES LIFE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
For the period ended
All amounts in thousands
(unaudited)
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY
SUB-ACCOUNT
------------------------------
SEPTEMBER 30, DECEMBER 31,
1998 1997(a)
--------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ............................................... $ (21) $ (4)
Net gain (loss) on investments ............................................. (425) 31
------- ------
Net increase (decrease) in equity accounts resulting from operations ....... (446) 27
------- ------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (redeemed) ........................................ 2,931 2,458
------- ------
Less cost of units redeemed:
Administrative charges .................................................... 291 117
Policy loans .............................................................. 116 59
Surrender benefits ........................................................ 27 14
Death benefits ............................................................ 106 0
------- ------
540 190
------- ------
Increase (decrease) in equity accounts from capital unit transactions ..... 2,391 2,268
------- ------
Net increase (decrease) in equity accounts ................................ 1,945 2,295
Depositor's equity contribution (redemption) ............................... 0 (6)
NET ASSETS:
Beginning of period ........................................................ 2,289 0
------- ------
End of period .............................................................. $ 4,234 $2,289
======= ======
<CAPTION>
U.S. EQUITY
SUB-ACCOUNT
-----------------------------
SEPTEMBER 30, DECEMBER 31,
1998 1997(a)
--------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ............................................... $ 27 $ 107
Net gain (loss) on investments ............................................. (217) 96
------- -------
Net increase (decrease) in equity accounts resulting from operations ....... (190) 203
------- -------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (redeemed) ........................................ 6,705 3,208
------- -------
Less cost of units redeemed:
Administrative charges .................................................... 522 91
Policy loans .............................................................. 58 56
Surrender benefits ........................................................ 51 9
Death benefits ............................................................ 63 0
------- -------
694 156
------- -------
Increase (decrease) in equity accounts from capital unit transactions ..... 6,011 3,052
------- -------
Net increase (decrease) in equity accounts ................................ 5,821 3,255
Depositor's equity contribution (redemption) ............................... 0 3
NET ASSETS:
Beginning of period ........................................................ 3,258 0
------- -------
End of period .............................................................. $ 9,079 $ 3,258
======= =======
</TABLE>
<TABLE>
<CAPTION>
THIRD AVENUE REAL ESTATE
VALUE SECURITIES
SUB-ACCOUNT SUB-ACCOUNT
--------------- --------------
SEPTEMBER 30, SEPTEMBER 30,
1998(b) 1998(c)
--------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ............................................... (13) $ (2)
Net gain (loss) on investments ............................................. (536) (100)
---- ------
Net increase (decrease) in equity accounts resulting from operations ....... (549) (102)
---- ------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (redeemed) ........................................ 2,675 360
----- ------
Less cost of units redeemed:
Administrative charges .................................................... 87 2
Policy loans .............................................................. 8 5
Surrender benefits ........................................................ 16 0
Death benefits ............................................................ 0 0
----- ------
111 7
----- ------
Increase (decrease) in equity accounts from capital unit transactions ..... 2,564 353
----- ------
Net increase (decrease) in equity accounts ................................ 2,015 251
Depositor's equity contribution (redemption) ............................... 200 400
NET ASSETS:
Beginning of period ........................................................ 0 0
----- ------
End of period .............................................................. $ 2,215 $ 651
======= ======
</TABLE>
(a) The inception date of this sub-account was January 2, 1997.
(b) The inception date of this sub-account was January 2, 1998.
(c) The inception date of this sub-account was May 1, 1998.
The Notes to the Financial Statements are an integral part of this report.
52
<PAGE>
WRL SERIES LIFE ACCOUNT
SELECTED PER UNIT DATA AND RATIOS*
For the year or period ended
(unaudited)
<TABLE>
<CAPTION>
MONEY MARKET SUB-ACCOUNT
---------------------------
SEPTEMBER 30, DECEMBER 31,
--------------- ------------
1998 1997
--------------- -----------
<S> <C> <C>
Accumulation unit value, beginning of period ...................... $ 16.13 $ 15.45
Income from operations:
Net investment income (loss) .................................... 0.53 0.68
Net realized and unrealized gain (loss) on investments .......... 0.00 0.00
------- -------
Net income (loss) from operations .............................. 0.53 0.68
------- -------
Accumulation unit value, end of period ............................ $ 16.66 $ 16.13
======= =======
Total return (a) .................................................. 3.29% 4.37%
Ratios and supplemental data:
Net assets at end of period (in thousands) ....................... $27,820 $16,440
Ratios of net investment income (loss) to average net assets (b) . 4.30% 4.28%
<CAPTION>
MONEY MARKET SUB-ACCOUNT
-----------------------------------------------
DECEMBER 31,
-----------------------------------------------
1996 1995 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Accumulation unit value, beginning of period ...................... $ 14.83 $ 14.19 $ 13.84 $ 13.63
Income from operations:
Net investment income (loss) .................................... 0.62 0.64 0.35 0.21
Net realized and unrealized gain (loss) on investments .......... 0.00 0.00 0.00 0.00
------- ------- ------- -------
Net income (loss) from operations .............................. 0.62 0.64 0.35 0.21
------- ------- ------- -------
Accumulation unit value, end of period ............................ $ 15.45 $ 14.83 $ 14.19 $ 13.84
======= ======= ======= =======
Total return (a) .................................................. 4.17% 4.49% 2.58% 1.52%
Ratios and supplemental data:
Net assets at end of period (in thousands) ....................... $12,740 $10,759 $ 9,706 $ 4,985
Ratios of net investment income (loss) to average net assets (b) . 4.07% 4.37% 2.66% 1.51%
</TABLE>
<TABLE>
<CAPTION>
BOND SUB-ACCOUNT
---------------------------
SEPTEMBER 30, DECEMBER 31,
--------------- ------------
1998 1997
--------------- -----------
<S> <C> <C>
Accumulation unit value, beginning of period ...................... $ 21.12 $ 19.53
Income from operations:
Net investment income (loss) .................................... (0.12) 1.01
Net realized and unrealized gain (loss) on investments .......... 2.03 0.58
------- -------
Net income (loss) from operations .............................. 1.91 1.59
------- -------
Accumulation unit value, end of period ............................ $ 23.03 $ 21.12
======= =======
Total return (a) .................................................. 9.01% 8.18%
Ratios and supplemental data:
Net assets at end of period (in thousands) ....................... $26,334 $17,657
Ratios of net investment income (loss) to average net assets (b) . ( 0.71)% 5.06%
<CAPTION>
BOND SUB-ACCOUNT
-----------------------------------------------
DECEMBER 31,
-----------------------------------------------
1996 1995 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Accumulation unit value, beginning of period ...................... $ 19.67 $ 16.14 $ 17.50 $ 15.57
Income from operations:
Net investment income (loss) .................................... 0.99 1.05 0.89 2.11
Net realized and unrealized gain (loss) on investments .......... (1.13) 2.48 (2.25) (0.18)
------- ------- -------- -------
Net income (loss) from operations .............................. (0.14) 3.53 (1.36) 1.93
------- ------- -------- -------
Accumulation unit value, end of period ............................ $ 19.53 $ 19.67 $ 16.14 $ 17.50
======= ======= ======== =======
Total return (a) .................................................. ( 0.75)% 21.89% ( 7.77)% 12.40%
Ratios and supplemental data:
Net assets at end of period (in thousands) ....................... $11,585 $10,066 $ 6,259 $ 6,985
Ratios of net investment income (loss) to average net assets (b) . 5.34% 5.80% 5.57% 12.92%
</TABLE>
<TABLE>
<CAPTION>
GROWTH SUB-ACCOUNT
----------------------------
SEPTEMBER 30, DECEMBER 31,
--------------- ------------
1998 1997
--------------- ------------
<S> <C> <C>
Accumulation unit value, beginning of period .......................... $ 56.48 $ 48.48
Income from operations:
Net investment income (loss) ........................................ 0.22 5.83
Net realized and unrealized gain (loss) on investments .............. 14.98 2.17
-------- -------
Net income (loss) from operations .................................. 15.20 8.00
-------- -------
Accumulation unit value, end of period ................................ $ 71.68 $ 56.48
======== ========
Total return (a) ...................................................... 26.92% 16.50%
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................... $604,664 $450,271
Ratios of net investment income (loss) to average net assets (b) ..... 0.43% 10.84%
<CAPTION>
GROWTH SUB-ACCOUNT
---------------------------------------------------
DECEMBER 31,
---------------------------------------------------
1996 1995 1994 1993
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
Accumulation unit value, beginning of period .......................... $ 41.47 $ 28.44 $ 31.30 $ 30.37
Income from operations:
Net investment income (loss) ........................................ 2.88 3.89 0.04 0.46
Net realized and unrealized gain (loss) on investments .............. 4.13 9.14 (2.90) 0.47
-------- -------- ------- --------
Net income (loss) from operations .................................. 7.01 13.03 (2.86) 0.93
-------- -------- ------- --------
Accumulation unit value, end of period ................................ $ 48.48 $ 41.47 $ 28.44 $ 31.30
======== ======== ======= ========
Total return (a) ...................................................... 16.91% 45.81% (9.13)% 3.06%
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................... $349,491 $262,467 $161,490 $169,757
Ratios of net investment income (loss) to average net assets (b) ..... 6.41% 11.05% 0.16% 1.56%
</TABLE>
The Notes to the Financial Statements are an integral part of this report.
53
<PAGE>
WRL SERIES LIFE ACCOUNT
SELECTED PER UNIT DATA AND RATIOS*
For the year or period ended
(unaudited)
<TABLE>
<CAPTION>
GLOBAL SUB-ACCOUNT
----------------------------
SEPTEMBER 30, DECEMBER 31,
--------------- ------------
1998 1997
--------------- ------------
<S> <C> <C>
Accumulation unit value, beginning of period ....................... $ 17.80 $ 15.13
Income from operations:
Net investment income (loss) ..................................... (0.02) 2.30
Net realized and unrealized gain (loss) on investments ........... 1.25 0.37
-------- --------
Total income (loss) from operations ............................. 1.23 2.67
-------- --------
Accumulation unit value, end of period ............................. $ 19.03 $ 17.80
======== ========
Total return (a) ................................................... 6.89% 17.69%
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................ $180,970 $145,017
Ratios of net investment income (loss) to average net assets (b) .. (0.11)% 13.39%
<CAPTION>
GLOBAL SUB-ACCOUNT
-----------------------------------
DECEMBER 31,
-----------------------------------
1996 1995 1994(d)
----------- ----------- -----------
<S> <C> <C> <C>
Accumulation unit value, beginning of period ....................... $ 11.95 $ 9.80 $ 10.00
Income from operations:
Net investment income (loss) ..................................... 1.50 0.45 0.71
Net realized and unrealized gain (loss) on investments ........... 1.68 1.70 (0.91)
------- ------- -------
Total income (loss) from operations ............................. 3.18 2.15 (0.20)
------- ------- -------
Accumulation unit value, end of period ............................. $ 15.13 $ 11.95 $ 9.80
======= ======= =======
Total return (a) ................................................... 26.60% 21.96% (2.02)%
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................ $83,159 $37,049 $21,672
Ratios of net investment income (loss) to average net assets (b) .. 11.09% 4.25% 8.86%
</TABLE>
<TABLE>
<CAPTION>
STRATEGIC TOTAL RETURN
SUB-ACCOUNT
---------------------------
SEPTEMBER 30, DECEMBER 31,
--------------- ------------
1998 1997
--------------- -----------
<S> <C> <C>
Accumulation unit value, beginning of period ....................... $ 18.91 $ 15.66
Income from operations:
Net investment income (loss) ..................................... 0.06 1.56
Net realized and unrealized gain (loss) on investments ........... (0.56) 1.69
------- -------
Total income (loss) from operations ............................. (0.50) 3.25
------- -------
Accumulation unit value, end of period ............................. $ 18.41 $ 18.91
======= =======
Total return (a) ................................................... (2.63)% 20.77%
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................ $87,477 $80,753
Ratios of net investment income (loss) to average net assets (b) .. 0.39% 8.89%
<CAPTION>
STRATEGIC TOTAL RETURN SUB-ACCOUNT
-----------------------------------------------
DECEMBER 31,
-----------------------------------------------
1996 1995 1994 1993(c)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Accumulation unit value, beginning of period ....................... $ 13.74 $ 11.12 $ 11.28 $ 10.00
Income from operations:
Net investment income (loss) ..................................... 0.82 0.68 0.18 0.19
Net realized and unrealized gain (loss) on investments ........... 1.10 1.94 (0.34) 1.09
------- ------- ------- -------
Total income (loss) from operations ............................. 1.92 2.62 (0.16) 1.28
------- ------- ------- -------
Accumulation unit value, end of period ............................. $ 15.66 $ 13.74 $ 11.12 $ 11.28
======= ======= ======= =======
Total return (a) ................................................... 13.97% 23.55% (1.42)% 12.81%
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................ $55,900 $39,648 $23,649 $13,343
Ratios of net investment income (loss) to average net assets (b) .. 5.76% 5.47% 1.93% 2.27%
</TABLE>
<TABLE>
<CAPTION>
EMERGING GROWTH SUB-ACCOUNT
---------------------------
SEPTEMBER 30, DECEMBER 31,
--------------- ------------
1998 1997
--------------- -----------
<S> <C> <C>
Accumulation unit value, beginning of period ........................ $ 23.48 $ 19.51
Income from operations:
Net investment income (loss) ...................................... (0.13) 2.20
Net realized and unrealized gain (loss) on investments ............ 1.64 1.77
-------- -------
Total income (loss) from operations .............................. 1.51 3.97
-------- -------
Accumulation unit value, end of period .............................. $ 24.99 $ 23.48
======== =======
Total return (a) .................................................... 6.41% 20.37%
Ratios and supplemental data:
Net assets at end of period (in thousands) ......................... $197,299 $64,702
Ratios of net investment income (loss) to average net assets (b) ... (0.65)% 10.18%
<CAPTION>
EMERGING GROWTH SUB-ACCOUNT
-------------------------------------------------
DECEMBER 31,
-------------------------------------------------
1996 1995 1994 1993(c)
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Accumulation unit value, beginning of period ........................ $ 16.56 $ 11.38 $ 12.40 $ 10.00
Income from operations:
Net investment income (loss) ...................................... 0.82 0.65 (0.09) (0.09)
Net realized and unrealized gain (loss) on investments ............ 2.13 4.53 (0.93) 2.49
--------- ------- ------- -------
Total income (loss) from operations .............................. 2.95 5.18 (1.02) 2.40
--------- ------- ------- -------
Accumulation unit value, end of period .............................. $ 19.51 $ 16.56 $ 11.38 $ 12.40
========= ======= ======= =======
Total return (a) .................................................... 17.82% 45.49% (8.18)% 23.96%
Ratios and supplemental data:
Net assets at end of period (in thousands) ......................... 107,925 $67,905 $36,687 $18,620
Ratios of net investment income (loss) to average net assets (b) ... 4.51% 4.66% (0.86)% (0.92)%
</TABLE>
The Notes to the Financial Statements are an integral part of this report.
54
<PAGE>
WRL SERIES LIFE ACCOUNT
SELECTED PER UNIT DATA AND RATIOS*
For the year or period ended
(unaudited)
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH
SUB-ACCOUNT
---------------------------
SEPTEMBER 30, DECEMBER 31,
--------------- ------------
1998 1997
--------------- -----------
<S> <C> <C>
Accumulation unit value, beginning of period ............................. $ 18.10 $ 14.70
Income from operations:
Net investment income (loss) ........................................... 0.28 1.75
Net realized and unrealized gain (loss) on investments ................. 2.29 1.65
-------- -------
Total income (loss) from operations ................................... 2.57 3.40
-------- -------
Accumulation unit value, end of period ................................... $ 20.67 $ 18.10
======== =======
Total return (a) ......................................................... 14.23% 23.14%
Ratios and supplemental data:
Net assets at end of period (in thousands) .............................. $128,012 $94,652
Ratios of net investment income (loss) to average net assets (b) ........ 1.72% 10.26%
<CAPTION>
AGGRESSIVE GROWTH SUB-ACCOUNT
-----------------------------------
DECEMBER 31,
-----------------------------------
1996 1995 1994(d)
----------- ----------- -----------
<S> <C> <C> <C>
Accumulation unit value, beginning of period ............................. $ 13.43 $ 9.82 $ 10.00
Income from operations:
Net investment income (loss) ........................................... 0.36 0.37 (0.06)
Net realized and unrealized gain (loss) on investments ................. 0.91 3.24 (0.12)
------- ------- --------
Total income (loss) from operations ................................... 1.27 3.61 (0.18)
------- ------- --------
Accumulation unit value, end of period ................................... $ 14.70 $ 13.43 $ 9.82
======= ======= ========
Total return (a) ......................................................... 9.46% 36.79% (1.85)%
Ratios and supplemental data:
Net assets at end of period (in thousands) .............................. $54,408 $32,904 $ 8,909
Ratios of net investment income (loss) to average net assets (b) ........ 2.65% 2.93% (0.72)%
</TABLE>
<TABLE>
<CAPTION>
BALANCED SUB-ACCOUNT
---------------------------
SEPTEMBER 30, DECEMBER 31,
--------------- ------------
1998 1997
--------------- -----------
<S> <C> <C>
Accumulation unit value, beginning of period ............................. $ 14.17 $ 12.21
Income from operations:
Net investment income (loss) ........................................... (0.03) 1.55
Net realized and unrealized gain (loss) on investments ................. (0.44) 0.41
------- -------
Total income (loss) from operations ................................... (0.47) 1.96
------- -------
Accumulation unit value, end of period ................................... $ 13.70 $ 14.17
======= =======
Total return (a) ......................................................... (3.30)% 16.06%
Ratios and supplemental data:
Net assets at end of period (in thousands) .............................. $12,870 $10,716
Ratios of net investment income (loss) to average net assets (b) ........ (0.29)% 11.62%
<CAPTION>
BALANCED SUB-ACCOUNT
----------------------------------
DECEMBER 31,
----------------------------------
1996 1995 1994(d)
----------- ---------- -----------
<S> <C> <C> <C>
Accumulation unit value, beginning of period ............................. $ 11.13 $ 9.37 $ 10.00
Income from operations:
Net investment income (loss) ........................................... 0.36 0.37 0.22
Net realized and unrealized gain (loss) on investments ................. 0.72 1.39 (0.85)
------- ------- --------
Total income (loss) from operations ................................... 1.08 1.76 (0.63)
------- ------- --------
Accumulation unit value, end of period ................................... $ 12.21 $ 11.13 $ 9.37
======= ======= ========
Total return (a) ......................................................... 9.73% 18.73% (6.29)%
Ratios and supplemental data:
Net assets at end of period (in thousands) .............................. $ 6,418 $ 3,795 $ 2,145
Ratios of net investment income (loss) to average net assets (b) ........ 3.18% 3.59% 3.06%
</TABLE>
<TABLE>
<CAPTION>
GROWTH & INCOME SUB-ACCOUNT
---------------------------
SEPTEMBER 30, DECEMBER 31,
--------------- ------------
1998 1997
--------------- -----------
<S> <C> <C>
Accumulation unit value, beginning of period ............................. $ 16.09 $ 13.03
Income from operations:
Net investment income (loss) ........................................... 0.26 2.61
Net realized and unrealized gain (loss) on investments ................. (0.54) 0.45
------- -------
Total income (loss) from operations ................................... (0.28) 3.06
------- -------
Accumulation unit value, end of period ................................... $ 15.81 $ 16.09
======= =======
Total return (a) ......................................................... (1.79)% 23.54%
Ratios and supplemental data:
Net assets at end of period (in thousands) .............................. $14,846 $ 9,063
Ratios of net investment income (loss) to average net assets (b) ........ 2.15% 18.50%
<CAPTION>
GROWTH & INCOME SUB-ACCOUNT
----------------------------------
DECEMBER 31,
----------------------------------
1996 1995 1994(d)
----------- ---------- -----------
<S> <C> <C> <C>
Accumulation unit value, beginning of period ............................. $ 11.77 $ 9.49 $ 10.00
Income from operations:
Net investment income (loss) ........................................... 0.76 0.49 0.29
Net realized and unrealized gain (loss) on investments ................. 0.50 1.79 (0.80)
------- ------- --------
Total income (loss) from operations ................................... 1.26 2.28 (0.51)
------- ------- --------
Accumulation unit value, end of period ................................... $ 13.03 $ 11.77 $ 9.49
======= ======= ========
Total return (a) ......................................................... 10.64% 24.14% (5.15)%
Ratios and supplemental data:
Net assets at end of period (in thousands) .............................. $ 5,501 $ 2,631 $ 1,215
Ratios of net investment income (loss) to average net assets (b) ........ 6.38% 4.57% 3.71%
</TABLE>
The Notes to the Financial Statements are an integral part of this report.
55
<PAGE>
WRL SERIES LIFE ACCOUNT
SELECTED PER UNIT DATA AND RATIOS*
For the year or period ended
(unaudited)
<TABLE>
<CAPTION>
TACTICAL ASSET ALLOCATION SUB-ACCOUNT
---------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
--------------- -----------------------------------
1998 1997 1996 1995(e)
--------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Accumulation unit value, beginning of period ............................. $ 15.60 $ 13.50 $ 11.90 $ 10.00
Income from operations:
Net investment income (loss) ........................................... 0.29 1.20 0.53 0.61
Net realized and unrealized gain (loss) on investments ................. (0.29) 0.90 1.07 1.29
------- ------- ------- -------
Total income (loss) from operations ................................... 0.00 2.10 1.60 1.90
------- ------- ------- -------
Accumulation unit value, end of period ................................... $ 15.60 $ 15.60 $ 13.50 $ 11.90
======= ======= ======= =======
Total return (a) ......................................................... 0.03% 15.55% 13.40% 19.03%
Ratios and supplemental data:
Net assets at end of period (in thousands) .............................. $35,925 $29,123 $17,946 $ 9,446
Ratios of net investment income (loss) to average net assets (b) ........ 2.34% 8.14% 4.35% 5.47%
</TABLE>
<TABLE>
<CAPTION>
C.A.S.E. GROWTH SUB-ACCOUNT
-------------------------------------------
SEPTEMBER 30, DECEMBER 31,
--------------- -------------------------
1998 1997 1996(f)
--------------- ----------- -----------
<S> <C> <C> <C>
Accumulation unit value, beginning of period ............................. $ 12.32 $ 10.81 $ 10.00
Income from operations:
Net investment income (loss) ........................................... 0.32 1.51 0.37
Net realized and unrealized gain (loss) on investments ................. (2.73) 0.00 0.44
-------- ------- -------
Total income (loss) from operations ................................... (2.41) 1.51 0.81
-------- ------- -------
Accumulation unit value, end of period ................................... $ 9.91 $ 12.32 $ 10.81
======== ======= =======
Total return (a) ......................................................... (19.60)% 14.00% 8.09%
Ratios and supplemental data:
Net assets at end of period (in thousands) .............................. $ 12,919 $11,946 $ 4,466
Ratios of net investment income (loss) to average net assets (b) ........ 3.46% 12.65% 6.11%
</TABLE>
<TABLE>
<CAPTION>
VALUE EQUITY SUB-ACCOUNT
-------------------------------------------
SEPTEMBER 30, DECEMBER 31,
--------------- -------------------------
1998 1997 1996(f)
--------------- ----------- -----------
<S> <C> <C> <C>
Accumulation unit value, beginning of period ............................. $ 13.94 $ 11.25 $ 10.00
Income from operations:
Net investment income (loss) ........................................... (0.05) 0.14 0.05
Net realized and unrealized gain (loss) on investments ................. (1.82) 2.55 1.20
-------- ------- -------
Total income (loss) from operations ................................... (1.87) 2.69 1.25
-------- ------- -------
Accumulation unit value, end of period ................................... $ 12.07 $ 13.94 $ 11.25
======== ======= =======
Total return (a) ......................................................... (13.46)% 23.93% 12.51%
Ratios and supplemental data:
Net assets at end of period (in thousands) .............................. $ 23,511 $26,714 $ 8,887
Ratios of net investment income (loss) to average net assets (b) ........ (0.50)% 1.05% 0.77%
</TABLE>
The Notes to the Financial Statements are an integral part of this report.
56
<PAGE>
WRL SERIES LIFE ACCOUNT
SELECTED PER UNIT DATA AND RATIOS*
For the year or period ended
(unaudited)
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY
SUB-ACCOUNT
------------------------------
SEPTEMBER 30, DECEMBER 31,
1998 1997(g)
--------------- --------------
<S> <C> <C>
Accumulation unit value, beginning of period .......................... $ 10.65 $ 10.00
Income from operations:
Net investment income (loss) ........................................ (0.07) (0.03)
Net realized and unrealized gain (loss) on investments .............. (0.32) 0.68
-------- --------
Total income (loss) from operations ................................ (0.39) 0.65
-------- --------
Accumulation unit value, end of period ................................ $ 10.26 $ 10.65
======== ========
Total return (a) ...................................................... (3.69)% 6.54%
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................... $ 4,234 $ 2,289
Ratios of net investment income (loss) to average net assets (b) ..... (0.77)% (0.28)%
<CAPTION>
U.S. EQUITY
SUB-ACCOUNT
-----------------------------
SEPTEMBER 30, DECEMBER 31,
1998 1997(g)
--------------- -------------
<S> <C> <C>
Accumulation unit value, beginning of period .......................... $ 12.59 $ 10.00
Income from operations:
Net investment income (loss) ........................................ 0.05 0.99
Net realized and unrealized gain (loss) on investments .............. 0.21 1.60
------- -------
Total income (loss) from operations ................................ 0.26 2.59
------- -------
Accumulation unit value, end of period ................................ $ 12.85 $ 12.59
======= =======
Total return (a) ...................................................... 2.06% 25.89%
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................... $ 9,079 $ 3,258
Ratios of net investment income (loss) to average net assets (b) ..... 0.51% 8.28%
</TABLE>
<TABLE>
<CAPTION>
THIRD AVENUE REAL ESTATE
VALUE SECURITIES
SUB-ACCOUNT SUB-ACCOUNT
--------------- --------------
SEPTEMBER 30, SEPTEMBER 30,
1998(h) 1998(i)
--------------- --------------
<S> <C> <C>
Accumulation unit value, beginning of period .......................... $ 10.00 $ 10.00
Income from operations:
Net investment income (loss) ........................................ (0.06) (0.03)
Net realized and unrealized gain (loss) on investments .............. (2.09) (1.36)
-------- --------
Total income (loss) from operations ................................ (2.15) (1.39)
-------- --------
Accumulation unit value, end of period ................................ $ 7.85 $ 8.61
======== ========
Total return (a) ...................................................... (21.47)% (13.86)%
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................... $ 2,215 $ 651
Ratios of net investment income (loss) to average net assets (b) ..... (0.88)% (0.50)%
</TABLE>
* The above tables illustrate the change for a unit outstanding computed using
average units outstanding throughout each period. See Notes to Selected Per
Unit Data and Ratios.
NOTES TO SELECTED PER UNIT DATA AND RATIOS:
(a) For periods less than one year, the total return is not annualized.
(b) For periods less than one year, the ratio of net investment income to
average net assets is annualized.
(c) The inception date of this Sub-Account was March 1, 1993.
(d) The inception date of this Sub-Account was March 1, 1994.
(e) The inception date of this Sub-Account was January 3, 1995.
(f) The inception date of this Sub-Account was May 1, 1996.
(g) The inception date of this Sub-Account was January 2, 1997.
(h) The inception date of this Sub-Account was January 2, 1998.
(i) The inception date of this Sub-Account was May 1, 1998.
The Notes to the Financial Statements are an integral part of this report.
57
<PAGE>
WRL SERIES LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 1. ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
The WRL Series Life Account (the "Life Account"), was established as a
variable life insurance separate account of Western Reserve Life Assurance Co.
of Ohio ("WRL") and is registered as a unit investment trust ("Trust") under
the Investment Company Act of 1940, as amended. The Life Account contains
sixteen investment options referred to as sub-accounts. Each sub-account
invests in the corresponding Portfolio of the WRL Series Fund, Inc.
(collectively referred to as the "Fund" and individually as a "Portfolio"), a
registered management investment company under the Investment Company Act of
1940, as amended.
The Fund has entered into annually renewable investment advisory
agreements foreach Portfolio with WRL Investment Management, Inc. ("WRL
Management") as investment adviser. Costs incurred in connection with the
advisory services rendered by WRL Management are paid by each Portfolio. WRL
Management has entered into sub-advisory agreements with various management
companies, some of which are affiliates of WRL. Each sub-adviser is compensated
directly by WRL Management.
On January 2, 1998 and May 1, 1998, WRL made initial contributions
totaling $600,000 to the Life Account. The respective amounts of the
contributions and units received are as follows:
SUB-ACCOUNT CONTRIBUTION UNITS
- ------------------------ -------------- --------------
Third Avenue Value $ 200,000 20,000.00
Real Estate Securities $ 400,000 40,000.00
The Life Account holds assets to support the benefits under certain
flexible premium variable universal life insurance policies (the "Policies")
issued by WRL. The Life Account's equity transactions are accounted for using
the appropriate effective date at the corresponding accumulation unit value.
The following significant accounting policies, which are in conformity
with generally accepted accounting principles for unit investment trusts, have
been consistently applied in the preparation of the Trust's financial
statements.
A. VALUATION OF INVESTMENTS AND SECURITIES TRANSACTIONS
Investments in the Fund's shares are stated at the closing net asset value
("NAV") per share as determined by the Fund. Investment transactions are
accounted for on the trade date at the Fund NAV next determined after receipt of
sale or redemption orders without sales charges. Dividend income and capital
gains distributions are recorded on the ex-dividend date. The cost of
investments sold is determined on a first-in, first-out basis.
B. FEDERAL INCOME TAXES
The operations of the Life Account are a part of and are taxed with the
total operations of WRL, which is taxed as a life insurance company under the
Internal Revenue Code. Under current law, the investment income of the Life
Account, including realized and unrealized capital gains, is not taxable to
WRL. Accordingly, no provision for Federal income taxes has been made.
C. ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles required management to make estimates and
assumptions that effect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
NOTE 2. CHARGES AND DEDUCTIONS
Charges are assessed by WRL in connection with the issuance and
administration of the Policies.
A. POLICY CHARGES
Under some forms of the Policies, a sales charge and premium taxes are
deducted by WRL prior to allocation of policyowner payments to the
sub-accounts. Thereafter, monthly administrative and cost of insurance charges
are deducted from the sub-accounts. Contingent surrender charges also apply.
Under the other forms of the Policies, such "front-end" and other
administrative charges are deducted prior to allocation of the initial premium
payment but may reside as contingent surrender charges.
Under all forms of the Policy, monthly charges against policy cash values
are made to compensate WRL for costs of insurance provided.
B. LIFE ACCOUNT CHARGES
A daily charge equal to an annual rate of 0.90% of average daily net
assets is assessed to compensate WRL for assumption
58
<PAGE>
WRL SERIES LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(CONTINUED)
NOTE 2. CHARGES AND DEDUCTIONS
--(CONTINUED)
of mortality and expense risks and administrative services in connection with
issuance and administration of the Policies. This charge (not assessed at the
individual contract level) effectively reduces the value of a unit outstanding
during the year.
NOTE 3. DIVIDENDS AND DISTRIBUTIONS
Dividends of the Money Market Portfolio are declared daily and reinvested
monthly. Dividends of the remaining Portfolios are typically declared and
reinvested semi-annually, while capital gains distributions are declared and
reinvested annually. Dividends and distributions of the Fund are recorded on the
ex-date and generally are paid to and reinvested by the Life Account on the next
business day after the ex-date. Dividends are not declared by the Life Account,
since the increase in the value of the underlying investment in the Fund is
reflected daily in the unit price used to calculate the equity value within the
Life Account. Consequently, a dividend distribution by the underlying Fund does
not change either the unit price or equity values within the Life Account.
NOTE 4. SECURITIES TRANSACTIONS
Securities transactions are summarized as follows:
For the year or period ended September 30, 1998 (in thousands)
<TABLE>
<CAPTION>
MONEY MARKET BOND GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C> <C>
Purchase of long-term securities .................... $ 43,044 $ 11,151 $ 52,127
Proceeds from sales of long-term securities ......... 31,816 4,429 16,706
STRATEGIC TOTAL EMERGING
GLOBAL RETURN GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
Purchase of long-term securities .................... $ 36,766 $ 11,908 $ 29,251
Proceeds from sales of long-term securities ......... 7,700 2,292 6,810
AGGRESSIVE GROWTH &
GROWTH BALANCED INCOME
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
Purchase of long-term securities .................... $ 26,763 $ 3,336 $ 8,600
Proceeds from sales of long-term securities ......... 4,748 723 2,335
TACTICAL ASSET C.A.S.E. VALUE
ALLOCATION GROWTH EQUITY
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
Purchase of long-term securities .................... $ 9,232 $ 6,168 $ 9,199
Proceeds from sales of long-term securities ......... 1,323 1,659 7,644
INTERNATIONAL U.S. THIRD AVENUE
EQUITY EQUITY VALUE
SUB-ACCOUNT (a) SUB-ACCOUNT SUB-ACCOUNT (a)
Purchase of long-term securities .................... $ 4,256 $ 8,741 $ 3,376
Proceeds from sales of long-term securities ......... 1,879 2,715 642
REAL ESTATE
SECURITIES
SUB-ACCOUNT (b)
Purchase of long-term securities .................... $ 933
Proceeds from sales of long-term securities ......... 182
</TABLE>
(a) The inception date of this sub-account was January 2, 1998.
(b) The inception date of this sub-account was May 1, 1998.
59
<PAGE>
WRL SERIES LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(CONTINUED)
NOTE 5. EQUITY TRANSACTIONS
For the period ended September 30, 1998 (in thousands)
<TABLE>
<CAPTION>
MONEY MARKET BOND GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C> <C>
Units balance - beginning of year ........... 1,019 836 7,972
Units issued ................................ 8,644 777 2,204
Units redeemed .............................. 7,993 469 1,741
----- --- -----
Units balance - end of year ................. 1,670 1,144 8,435
===== ===== =====
STRATEGIC TOTAL EMERGING
GLOBAL RETURN GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
Units balance - beginning of year ........... 8,145 4,270 7,013
Units issued ................................ 4,079 1,498 3,035
Units redeemed .............................. 2,715 1,017 2,153
----- ----- -----
Units balance - end of year ................. 9,509 4,751 7,895
===== ===== =====
AGGRESSIVE GROWTH &
GROWTH BALANCED INCOME
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
Units balance - beginning of year ........... 5,230 756 563
Units issued ................................ 2,789 446 779
Units redeemed .............................. 1,826 263 403
----- --- ---
Units balance - end of year ................. 6,193 939 939
===== === ===
TACTICAL ASSET C.A.S.E. VALUE
ALLOCATION GROWTH EQUITY
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
Units balance - beginning of year ........... 1,867 969 1,916
Units issued ................................ 1,078 946 1,395
Units redeemed .............................. 642 611 1,363
----- ----- -----
Units balance - end of year ................. 2,303 1,304 1,948
===== ===== =====
INTERNATIONAL U.S. THIRD AVENUE
EQUITY EQUITY VALUE
SUB-ACCOUNT (a) SUB-ACCOUNT SUB-ACCOUNT (a)
Units balance - beginning of period ......... 215 259 N/A
Units issued ................................ 530 908 419
Units redeemed .............................. 332 460 137
----- --- ---
Units balance - end of period ............... 413 707 282
===== === ===
REAL ESTATE
SECURITIES
SUB-ACCOUNT (b)
Units balance - beginning of period ......... N/A
Units issued ................................ 98
Units redeemed .............................. 22
---
Units balance - end of period ............... 76
===
</TABLE>
(a) The inception date of this sub-account was January 2, 1998.
(b) The inception date of this sub-account was May 1, 1998.
60
<PAGE>
WRL SERIES LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(CONTINUED)
NOTE 6. OTHER MATTERS
At September 30, 1998, the equity accounts included net unrealized appreciation
(depreciation) on investments as follows (in thousands):
SUB-ACCOUNT
-----------
Money Market ................... $ N/A
Bond ........................... 1,950
Growth ......................... 200,350
Global ......................... 13,690
Strategic Total Return ......... 10,240
Emerging Growth ................ 38,300
Aggressive Growth .............. 18,545
Balanced ....................... 41
Growth & Income ................ (249)
Tactical Asset Allocation ...... 1,275
C.A.S.E. Growth ................ (3,969)
Value Equity ................... (2,654)
International Equity ........... (659)
U.S. Equity .................... (517)
Third Avenue Value ............. (544)
Real Estate Securities ......... (73)
61
<PAGE>
WRL SERIES LIFE ACCOUNT
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Western Reserve Life Assurance Co. of Ohio and
Policy Owners of the WRL Series Life Account
In our opinion, the accompanying statements of assets, liabilities and
equity accounts and the related statements of operations and of changes in
equity accounts and the selected per unit data and ratios present fairly, in
all material respects, the financial position of each of the Sub-Accounts
constituting the WRL Series Life Account (a separate account of Western Reserve
Life Assurance Co. of Ohio, hereafter referred to as the "Life Account") at
December 31, 1997, the results of each of their operations, the changes in each
of their equity accounts and the selected per unit data and ratios for each of
the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and selected per unit data and ratios
(hereafter referred to as "financial statements") are the responsibility of the
Life Account's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Kansas City, Missouri
January 30, 1998
62
<PAGE>
WRL SERIES LIFE ACCOUNT
STATEMENTS OF ASSETS, LIABILITIES AND EQUITY ACCOUNTS
At December 31, 1997
All amounts (except unit value, units and shares) in thousands
<TABLE>
<CAPTION>
MONEY MARKET BOND GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C> <C>
ASSETS:
Investments
Investment in WRL Series Fund, Inc.:
Shares ................................ 16,381,111 1,581,226 12,215,272
================= =============== =================
Cost .................................. $ 16,381 $ 17,287 $ 359,253
================= =============== =================
Investments at net asset value ......... $ 16,381 $ 17,618 $ 450,062
Accrued transfers from depositor ....... 59 39 209
----------------- --------------- -----------------
Total assets .......................... 16,440 17,657 450,271
----------------- --------------- -----------------
LIABILITIES: ............................. 0 0 0
----------------- --------------- -----------------
Net assets ............................ $ 16,440 $ 17,657 $ 450,271
================= =============== =================
EQUITY ACCOUNTS:
Policy Owners' equity:
Units ................................. 1,019,515.089795 835,870.193630 7,972,011.504966
================= =============== =================
Unit value ............................ $ 16.125159 $ 21.123535 $ 56.481417
================= =============== =================
Policy Owners' equity ................. $ 16,440 $ 17,657 $ 450,271
----------------- --------------- -----------------
Depositor's equity:
Units ................................. N/A N/A N/A
================= =============== =================
Unit value ............................ $ N/A $ N/A $ N/A
================= =============== =================
Depositor's equity .................... $ N/A $ N/A $ N/A
----------------- --------------- -----------------
Total equity .......................... $ 16,440 $ 17,657 $ 450,271
================= =============== =================
</TABLE>
<TABLE>
<CAPTION>
STRATEGIC
GLOBAL TOTAL RETURN EMERGING GROWTH AGGRESSIVE GROWTH
SUB-ACCOUNT SUB-ACCOUNT (a) SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C> <C> <C>
ASSETS:
Investments
Investment in WRL Series Fund, Inc.:
Shares ................................ 7,604,927 5,163,177 8,082,693 5,890,842
================= ================= ================= =================
Cost .................................. $ 135,839 $ 66,903 $ 133,448 $ 85,485
================= ================= ================= =================
Investments at net asset value ......... $ 144,823 $ 80,673 $ 164,625 $ 94,517
Accrued transfers from depositor ....... 194 80 77 135
----------------- ----------------- ----------------- -----------------
Total assets .......................... 145,017 80,753 164,702 94,652
----------------- ----------------- ----------------- -----------------
LIABILITIES: ............................. 0 0 0 0
----------------- ----------------- ----------------- -----------------
Net assets ............................ $ 145,017 $ 80,753 $ 164,702 $ 94,652
================= ================= ================= =================
EQUITY ACCOUNTS:
Policy Owners' equity:
Units ................................. 8,144,902.999720 4,270,324.925754 7,013,376.822852 5,230,271.098013
================= ================= ================= =================
Unit value ............................ $ 17.804656 $ 18.910375 $ 23.484030 $ 18.096966
================= ================= ================= =================
Policy Owners' equity ................. $ 145,017 $ 80,753 $ 164,702 $ 94,652
----------------- ----------------- ----------------- -----------------
Depositor's equity:
Units ................................. N/A N/A N/A N/A
================= ================= ================= =================
Unit value ............................ $ N/A $ N/A $ N/A $ N/A
================= ================= ================= =================
Depositor's equity .................... $ N/A $ N/A $ N/A $ N/A
----------------- ----------------- ----------------- -----------------
Total equity .......................... $ 145,017 $ 80,753 $ 164,702 $ 94,652
================= ================= ================= =================
</TABLE>
63
<PAGE>
WRL SERIES LIFE ACCOUNT
STATEMENTS OF ASSETS, LIABILITIES AND EQUITY ACCOUNTS
At December 31, 1997
All amounts (except unit value, units and shares) in thousands
<TABLE>
<CAPTION>
GROWTH & TACTICAL ASSET
BALANCED INCOME ALLOCATION
SUB-ACCOUNT SUB-ACCOUNT (b) SUB-ACCOUNT
<S> <C> <C> <C>
ASSETS:
Investments
Investment in WRL Series Fund, Inc.:
Shares .................................. 891,005 718,410 2,124,794
=============== =============== =================
Cost .................................... $ 10,023 $ 8,540 $ 26,436
=============== =============== =================
Investments at net asset value ........... $ 10,700 $ 9,022 $ 28,925
Accrued transfers from depositor ......... 16 41 198
--------------- --------------- -----------------
Total assets ............................ 10,716 9,063 29,123
--------------- --------------- -----------------
LIABILITIES: ............................... 0 0 0
--------------- --------------- -----------------
Net assets .............................. $ 10,716 $ 9,063 $ 29,123
=============== =============== =================
EQUITY ACCOUNTS:
Policy Owners' equity:
Units ................................... 756,353.665747 563,129.649597 1,867,261.033017
=============== =============== =================
Unit value .............................. $ 14.168361 $ 16.093919 $ 15.596453
=============== =============== =================
Policy Owners' equity ................... $ 10,716 $ 9,063 $ 29,123
--------------- --------------- -----------------
Depositor's equity:
Units ................................... N/A N/A N/A
=============== =============== =================
Unit value .............................. $ N/A $ N/A $ N/A
=============== =============== =================
Depositor's equity ...................... $ N/A $ N/A $ N/A
--------------- --------------- -----------------
Total equity ............................ $ 10,716 $ 9,063 $ 29,123
=============== =============== =================
</TABLE>
<TABLE>
<CAPTION>
C.A.S.E. GROWTH VALUE EQUITY INTERNATIONAL EQUITY U.S. EQUITY
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT (c) SUB-ACCOUNT (c)
<S> <C> <C> <C> <C>
ASSETS:
Investments
Investment in WRL Series Fund, Inc.:
Shares .................................. 851,094 1,916,676 213,262 265,402
=============== ================= =============== ===============
Cost .................................... $ 12,159 $ 23,473 $ 2,386 $ 3,232
=============== ================= =============== ===============
Investments at net asset value ........... $ 11,924 $ 26,651 $ 2,283 $ 3,247
Accrued transfers from depositor ......... 22 63 6 11
--------------- ----------------- --------------- ---------------
Total assets ............................. 11,946 26,714 2,289 3,258
--------------- ----------------- --------------- ---------------
LIABILITIES: ............................... 0 0 0 0
--------------- ----------------- --------------- ---------------
Net assets .............................. $ 11,946 $ 26,714 $ 2,289 $ 3,258
=============== ================= =============== ===============
EQUITY ACCOUNTS:
Policy Owners' equity:
Units ................................... 969,379.081066 1,915,887.724063 214,889.042226 258,812.833059
=============== ================= =============== ===============
Unit value .............................. $ 12.322854 $ 13.943236 $ 10.654082 $ 12.588589
=============== ================= =============== ===============
Policy Owners' equity ................... $ 11,946 $ 26,714 $ 2,289 $ 3,258
--------------- ----------------- --------------- ---------------
Depositor's equity:
Units ................................... N/A N/A N/A N/A
=============== ================= =============== ===============
Unit value .............................. $ N/A $ N/A $ N/A $ N/A
=============== ================= =============== ===============
Depositor's equity ...................... $ N/A $ N/A $ N/A $ N/A
--------------- ----------------- --------------- ---------------
Total equity ............................ $ 11,946 $ 26,714 $ 2,289 $ 3,258
=============== ================= =============== ===============
</TABLE>
(a) Prior to May 1, 1997, this sub-account was known as Equity-Income.
(b) Prior to May 1, 1997, this sub-account was known as Utility.
(c) The inception date of this sub-account was January 2, 1997.
64
<PAGE>
WRL SERIES LIFE ACCOUNT
STATEMENT OF OPERATIONS
For the year ended December 31, 1997
All amounts in thousands
<TABLE>
<CAPTION>
MONEY MARKET BOND GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income ............................................................. $ 772 $ 778 $ 3,046
Capital gain distributions .................................................. 0 0 44,809
----- ------- --------
772 778 47,855
EXPENSES:
Mortality and expense risk .................................................. 133 117 3,649
----- ------- --------
Net investment income (loss) ............................................... 639 661 44,206
----- ------- --------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from securities transactions ...................... 0 (191) 5,459
Change in unrealized appreciation (depreciation) ........................... 0 609 9,779
----- ------- --------
Net gain (loss) on investments ............................................ 0 418 15,238
----- ------- --------
Net increase (decrease) in equity accounts resulting from operations ..... $ 639 $ 1,079 $ 59,444
===== ======= ========
</TABLE>
<TABLE>
<CAPTION>
GLOBAL
SUB-ACCOUNT
<S> <C>
INVESTMENT INCOME:
Dividend income ........................................................ $ 8,033
Capital gain distributions ............................................. 8,885
--------
16,918
EXPENSES:
Mortality and expense risk ............................................. 1,059
--------
Net investment income (loss) .......................................... 15,859
--------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from securities transactions ................. 910
Change in unrealized appreciation (depreciation) ...................... (105)
--------
Net gain (loss) on investments ....................................... 805
--------
Net increase (decrease) in equity accounts resulting from operations $ 16,664
========
<CAPTION>
STRATEGIC EMERGING AGGRESSIVE
TOTAL RETURN GROWTH GROWTH
SUB-ACCOUNT (a) SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income ........................................................ $ 1,894 $ 0 $ 2,430
Capital gain distributions ............................................. 4,821 15,057 6,045
-------- -------- --------
6,715 15,057 8,475
EXPENSES:
Mortality and expense risk ............................................. 614 1,216 680
-------- -------- --------
Net investment income (loss) .......................................... 6,101 13,841 7,795
-------- -------- --------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from securities transactions ................. 484 2,278 1,053
Change in unrealized appreciation (depreciation) ...................... 6,037 8,654 5,471
-------- -------- --------
Net gain (loss) on investments ....................................... 6,521 10,932 6,524
-------- -------- --------
Net increase (decrease) in equity accounts resulting from operations $ 12,622 $ 24,773 $ 14,319
======== ======== ========
</TABLE>
65
<PAGE>
WRL SERIES LIFE ACCOUNT
STATEMENT OF OPERATIONS
For the year ended December 31, 1997
All amounts in thousands
<TABLE>
<CAPTION>
GROWTH & TACTICAL ASSET
BALANCED INCOME ALLOCATION
SUB-ACCOUNT SUB-ACCOUNT (b) SUB-ACCOUNT
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income ........................................................ $ 548 $ 670 $ 1,051
Capital gain distributions ............................................. 521 603 1,072
------- ------- -------
1,069 1,273 2,123
EXPENSES:
Mortality and expense risk ............................................. 77 59 210
------- ------- -------
Net investment income (loss) .......................................... 992 1,214 1,913
------- ------- -------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from securities transactions ................. 114 137 339
Change in unrealized appreciation (depreciation) ...................... 112 146 1,023
------- ------- -------
Net gain (loss) on investments ....................................... 226 283 1,362
------- ------- -------
Net increase (decrease) in equity accounts resulting from operations $ 1,218 $ 1,497 $ 3,275
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
C.A.S.E. GROWTH VALUE EQUITY
SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C>
INVESTMENT INCOME:
Dividend income ........................................................ $ 979 $ 292
Capital gain distributions ............................................. 85 46
------- -------
1,064 338
EXPENSES:
Mortality and expense risk ............................................. 70 155
------- -------
Net investment income (loss) .......................................... 994 183
------- -------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from securities transactions ................. 205 393
Change in unrealized appreciation (depreciation) ...................... (457) 2,645
------- -------
Net gain (loss) on investments ....................................... (252) 3,038
------- -------
Net increase (decrease) in equity accounts resulting from operations $ 742 $ 3,221
======= =======
<CAPTION>
INTERNATIONAL U.S.
EQUITY EQUITY
SUB-ACCOUNT (c) SUB-ACCOUNT (c)
<S> <C> <C>
INVESTMENT INCOME:
Dividend income ........................................................ $ 10 $ 108
Capital gain distributions ............................................. 0 11
------- -----
10 119
EXPENSES:
Mortality and expense risk ............................................. 14 12
------- -----
Net investment income (loss) .......................................... (4) 107
-------- -----
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from securities transactions ................. 134 81
Change in unrealized appreciation (depreciation) ...................... (103) 15
------- -----
Net gain (loss) on investments ....................................... 31 96
------- -----
Net increase (decrease) in equity accounts resulting from operations $ 27 $ 203
======= =====
</TABLE>
(a) Prior to May 1, 1997, this sub-account was known as Equity-Income.
(b) Prior to May 1, 1997, this sub-account was known as Utility.
(c) The inception date of this sub-account was January 2, 1997.
66
<PAGE>
WRL SERIES LIFE ACCOUNT
STATEMENT OF CHANGES IN EQUITY ACCOUNTS
For the year ended
All amounts in thousands
<TABLE>
<CAPTION>
MONEY MARKET BOND
SUB-ACCOUNT SUB-ACCOUNT
DECEMBER 31 DECEMBER 31
----------------------- ------------------------
1997 1996 1997 1996
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ............................. $ 639 $ 491 $ 661 $ 553
Net gain (loss) on investments ........................... 0 0 418 (614)
-------- -------- -------- --------
Net increase (decrease) in equity accounts resulting
from operations ......................................... 639 491 1,079 (61)
-------- -------- -------- --------
EQUITY TRANSACTIONS:
Proceeds from units sold (redeemed) ...................... 7,719 5,217 7,506 3,452
-------- -------- -------- --------
Less cost of units redeemed:
Administrative charges .................................. 3,108 2,639 1,633 1,314
Policy loans ............................................ 687 286 428 191
Surrender benefits ...................................... 854 776 437 339
Death benefits .......................................... 9 26 15 28
-------- -------- -------- --------
4,658 3,727 2,513 1,872
-------- -------- -------- --------
Increase (decrease) in equity accounts from capital
unit transactions ...................................... 3,061 1,490 4,993 1,580
-------- -------- -------- --------
Net increase (decrease) in equity accounts .............. 3,700 1,981 6,072 1,519
Depositor's equity contribution (net redemption) ......... 0 0 0 0
EQUITY ACCOUNTS:
Beginning of period ...................................... 12,740 10,759 11,585 10,066
-------- -------- -------- --------
End of period ............................................ $ 16,440 $ 12,740 $ 17,657 $ 11,585
======== ======== ======== ========
<CAPTION>
GROWTH
SUB-ACCOUNT
DECEMBER 31
-------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ............................. $ 44,206 $ 19,310
Net gain (loss) on investments ........................... 15,238 26,919
--------- ---------
Net increase (decrease) in equity accounts resulting
from operations ......................................... 59,444 46,229
--------- ---------
EQUITY TRANSACTIONS:
Proceeds from units sold (redeemed) ...................... 106,236 91,556
--------- ---------
Less cost of units redeemed:
Administrative charges .................................. 37,231 29,331
Policy loans ............................................ 11,212 8,443
Surrender benefits ...................................... 15,746 12,386
Death benefits .......................................... 711 601
--------- ---------
64,900 50,761
--------- ---------
Increase (decrease) in equity accounts from capital
unit transactions ...................................... 41,336 40,795
--------- ---------
Net increase (decrease) in equity accounts .............. 100,780 87,024
Depositor's equity contribution (net redemption) ......... 0 0
EQUITY ACCOUNTS:
Beginning of period ...................................... 349,491 262,467
--------- ---------
End of period ............................................ $ 450,271 $ 349,491
========= =========
</TABLE>
<TABLE>
<CAPTION>
STRATEGIC
GLOBAL TOTAL RETURN
SUB-ACCOUNT SUB-ACCOUNT (a)
DECEMBER 31 DECEMBER 31
--------------------------- -------------------------
1997 1996 1997 1996
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ............................. $ 15,859 $ 6,524 $ 6,101 $ 2,646
Net gain (loss) on investments ........................... 805 6,374 6,521 3,636
--------- -------- -------- --------
Net increase (decrease) in equity accounts resulting
from operations ......................................... 16,664 12,898 12,622 6,282
--------- -------- -------- --------
EQUITY TRANSACTIONS:
Proceeds from units sold (redeemed) ...................... 64,272 43,697 22,072 16,832
--------- -------- -------- --------
Less cost of units redeemed:
Administrative charges .................................. 12,590 6,463 6,025 4,528
Policy loans ............................................ 2,948 1,466 1,624 921
Surrender benefits ...................................... 3,391 2,226 2,044 1,301
Death benefits .......................................... 149 62 148 112
--------- -------- -------- --------
19,078 10,217 9,841 6,862
--------- -------- -------- --------
Increase (decrease) in equity accounts from capital
unit transactions ...................................... 45,194 33,480 12,231 9,970
--------- -------- -------- --------
Net increase (decrease) in equity accounts .............. 61,858 46,378 24,853 16,252
Depositor's equity contribution (net redemption) ......... 0 (268) 0 0
EQUITY ACCOUNTS:
Beginning of period ...................................... 83,159 37,049 55,900 39,648
--------- -------- -------- --------
End of period ............................................ $ 145,017 $ 83,159 $ 80,753 $ 55,900
========= ======== ======== ========
</TABLE>
67
<PAGE>
WRL SERIES LIFE ACCOUNT
STATEMENT OF CHANGES IN EQUITY ACCOUNTS
For the year ended
All amounts in thousands
<TABLE>
<CAPTION>
EMERGING GROWTH
SUB-ACCOUNT
DECEMBER 31
-------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ............................. $ 13,841 $ 3,935
Net gain (loss) on investments ........................... 10,932 9,284
--------- ---------
Net increase (decrease) in equity accounts resulting
from operations ......................................... 24,773 13,219
--------- ---------
EQUITY TRANSACTIONS:
Proceeds from units sold (redeemed) ...................... 54,392 40,944
--------- ---------
Less cost of units redeemed:
Administrative charges .................................. 14,518 9,201
Policy loans ............................................ 3,692 2,096
Surrender benefits ...................................... 3,986 2,754
Death benefits .......................................... 192 92
--------- ---------
22,388 14,143
--------- ---------
Increase (decrease) in equity accounts from capital
unit transactions ...................................... 32,004 26,801
--------- ---------
Net increase (decrease) in equity accounts .............. 56,777 40,020
Depositor's equity contribution (net redemption) ......... 0 0
EQUITY ACCOUNTS:
Beginning of period ...................................... 107,925 67,905
--------- ---------
End of period ............................................ $ 164,702 $ 107,925
========= =========
<CAPTION>
AGGRESSIVE GROWTH BALANCED
SUB-ACCOUNT SUB-ACCOUNT
DECEMBER 31 DECEMBER 31
----------------------- -----------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ............................. $ 7,795 $ 1,139 $ 992 $ 154
Net gain (loss) on investments ........................... 6,524 2,797 226 341
-------- -------- -------- -------
Net increase (decrease) in equity accounts resulting
from operations ......................................... 14,319 3,936 1,218 495
-------- -------- -------- -------
EQUITY TRANSACTIONS:
Proceeds from units sold (redeemed) ...................... 40,282 26,224 4,373 3,090
-------- -------- -------- -------
Less cost of units redeemed:
Administrative charges .................................. 9,888 6,413 958 575
Policy loans ............................................ 1,926 863 179 78
Surrender benefits ...................................... 2,485 1,350 153 85
Death benefits .......................................... 58 30 3 4
-------- -------- -------- -------
14,357 8,656 1,293 742
-------- -------- -------- -------
Increase (decrease) in equity accounts from capital
unit transactions ...................................... 25,925 17,568 3,080 2,348
-------- -------- -------- -------
Net increase (decrease) in equity accounts .............. 40,244 21,504 4,298 2,843
Depositor's equity contribution (net redemption) ......... 0 0 0 (220)
EQUITY ACCOUNTS:
Beginning of period ...................................... 54,408 32,904 6,418 3,795
-------- -------- -------- -------
End of period ............................................ $ 94,652 $ 54,408 $ 10,716 $ 6,418
======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
GROWTH & TACTICAL ASSET
INCOME ALLOCATION
SUB-ACCOUNT (b) SUB-ACCOUNT
DECEMBER 31 DECEMBER 31
--------------------- -----------------------
1997 1996 1997 1996
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ............................. $ 1,214 $ 246 $ 1,913 $ 584
Net gain (loss) on investments ........................... 283 210 1,362 1,179
------- ------- -------- --------
Net increase (decrease) in equity accounts resulting
from operations ......................................... 1,497 456 3,275 1,763
------- ------- -------- --------
EQUITY TRANSACTIONS:
Proceeds from units sold (redeemed) ...................... 3,232 3,245 11,386 9,062
------- ------- -------- --------
Less cost of units redeemed:
Administrative charges .................................. 733 440 2,219 1,135
Policy loans ............................................ 163 73 463 306
Surrender benefits ...................................... 260 82 742 866
Death benefits .......................................... 11 3 60 18
------- ------- -------- --------
1,167 598 3,484 2,325
------- ------- -------- --------
Increase (decrease) in equity accounts from capital
unit transactions ...................................... 2,065 2,647 7,902 6,737
------- ------- -------- --------
Net increase (decrease) in equity accounts .............. 3,562 3,103 11,177 8,500
Depositor's equity contribution (net redemption) ......... 0 (233) 0 0
EQUITY ACCOUNTS:
Beginning of period ...................................... 5,501 2,631 17,946 9,446
------- ------- -------- --------
End of period ............................................ $ 9,063 $ 5,501 $ 29,123 $ 17,946
======= ======= ======== ========
<CAPTION>
C.A.S.E. GROWTH
SUB-ACCOUNT
DECEMBER 31
-----------------------
1997 1996
------------ ----------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ............................. $ 994 $ 70
Net gain (loss) on investments ........................... (252) 228
-------- -------
Net increase (decrease) in equity accounts resulting
from operations ......................................... 742 298
-------- -------
EQUITY TRANSACTIONS:
Proceeds from units sold (redeemed) ...................... 8,029 4,302
-------- -------
Less cost of units redeemed:
Administrative charges .................................. 970 140
Policy loans ............................................ 146 7
Surrender benefits ...................................... 144 12
Death benefits .......................................... 6 0
-------- -------
1,266 159
-------- -------
Increase (decrease) in equity accounts from capital
unit transactions ...................................... 6,763 4,143
-------- -------
Net increase (decrease) in equity accounts .............. 7,505 4,441
Depositor's equity contribution (net redemption) ......... (25) 25
EQUITY ACCOUNTS:
Beginning of period ...................................... 4,466 0
-------- -------
End of period ............................................ $ 11,946 $ 4,466
======== =======
</TABLE>
68
<PAGE>
WRL SERIES LIFE ACCOUNT
STATEMENT OF CHANGES IN EQUITY ACCOUNTS
For the year ended
All amounts in thousands
<TABLE>
<CAPTION>
VALUE EQUITY
SUB-ACCOUNT
DECEMBER 31
------------------------
1997 1996 (c)
------------ ---------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ............................. $ 183 $ 19
Net gain (loss) on investments ........................... 3,038 603
-------- -------
Net increase (decrease) in equity accounts resulting
from operations ......................................... 3,221 622
-------- -------
EQUITY TRANSACTIONS:
Proceeds from units sold (redeemed) ...................... 17,023 8,292
-------- -------
Less cost of units redeemed:
Administrative charges .................................. 1,257 153
Policy loans ............................................ 542 36
Surrender benefits ...................................... 388 38
Death benefits .......................................... 0 0
-------- -------
2,187 227
-------- -------
Increase (decrease) in equity accounts from capital
unit transactions ...................................... 14,836 8,065
-------- -------
Net increase (decrease) in equity accounts .............. 18,057 8,687
Depositor's equity contribution (net redemption) ......... (230) 200
EQUITY ACCOUNTS:
Beginning of period ...................................... 8,887 0
-------- -------
End of period ............................................ $ 26,714 $ 8,887
======== =======
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL U.S.
EQUITY EQUITY
SUB-ACCOUNT SUB-ACCOUNT
DECEMBER 31 DECEMBER 31
1997 (d) 1997 (d)
--------------- ------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ............................. $ (4) $ 107
Net gain (loss) on investments ........................... 31 96
------- -------
Net increase (decrease) in equity accounts resulting
from operations ......................................... 27 203
------- -------
EQUITY TRANSACTIONS:
Proceeds from units sold (redeemed) ...................... 2,458 3,208
------- -------
Less cost of units redeemed:
Administrative charges .................................. 117 91
Policy loans ............................................ 59 56
Surrender benefits ...................................... 14 9
Death benefits .......................................... 0 0
------- -------
190 156
------- -------
Increase (decrease) in equity accounts from capital
unit transactions ...................................... 2,268 3,052
------- -------
Net increase (decrease) in equity accounts .............. 2,295 3,255
Depositor's equity contribution (net redemption) ......... (6) 3
EQUITY ACCOUNTS:
Beginning of period ...................................... 0 0
------- -------
End of period ............................................ $ 2,289 $ 3,258
======= =======
</TABLE>
(a) Prior to May 1, 1997, this sub-account was known as Equity-Income.
(b) Prior to May 1, 1997, this sub-account was known as Utility.
(c) The inception date of this sub-account was May 1, 1996.
(d) The inception date of this sub-account was January 2, 1997.
69
<PAGE>
WRL SERIES LIFE ACCOUNT
SELECTED PER UNIT DATA AND RATIOS*
FOR THE PERIOD ENDED
<TABLE>
<CAPTION>
MONEY MARKET SUB-ACCOUNT
DECEMBER 31
-------------------------
1997 1996
------------ ------------
<S> <C> <C>
Accumulation unit value, beginning of period ......................... $ 15.45 $ 14.83
Income from operations:
Net investment income (loss) ....................................... 0.68 0.62
Net realized and unrealized gain (loss) on investments ............. 0.00 0.00
-------- --------
Total income (loss) from operations ............................... 0.68 0.62
-------- --------
Accumulation unit value, end of period ............................... $ 16.13 $ 15.45
======== ========
Total return (a) ..................................................... 4.37% 4.17%
Ratios and supplemental data:
Net assets at end of period (in thousands) .......................... $ 16,440 $ 12,740
Ratios of net investment income (loss) to average net assets (b) .... 4.28% 4.07%
<CAPTION>
MONEY MARKET SUB-ACCOUNT
DECEMBER 31
------------------------------------
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Accumulation unit value, beginning of period ......................... $ 14.19 $ 13.84 $ 13.63
Income from operations:
Net investment income (loss) ....................................... 0.64 0.35 0.21
Net realized and unrealized gain (loss) on investments ............. 0.00 0.00 0.00
-------- ------- -------
Total income (loss) from operations ............................... 0.64 0.35 0.21
-------- ------- -------
Accumulation unit value, end of period ............................... $ 14.83 $ 14.19 $ 13.84
======== ======= =======
Total return (a) ..................................................... 4.49% 2.58% 1.52%
Ratios and supplemental data:
Net assets at end of period (in thousands) .......................... $ 10,759 $ 9,706 $ 4,985
Ratios of net investment income (loss) to average net assets (b) .... 4.37% 2.66% 1.51%
</TABLE>
<TABLE>
<CAPTION>
BOND SUB-ACCOUNT
DECEMBER 31
-------------------------
1997 1996
------------ ------------
<S> <C> <C>
Accumulation unit value, beginning of period ......................... $ 19.53 $ 19.67
Income from operations:
Net investment income (loss) ....................................... 1.01 0.99
Net realized and unrealized gain (loss) on investments ............. 0.58 (1.13)
-------- -------
Total income (loss) from operations ............................... 1.59 (0.14)
-------- -------
Accumulation unit value, end of period ............................... $ 21.12 $ 19.53
======== =======
Total return (a) ..................................................... 8.18% (0.75%)
Ratios and supplemental data:
Net assets at end of period (in thousands) .......................... $ 17,657 $ 11,585
Ratios of net investment income (loss) to average net assets (b) .... 5.06% 5.34%
<CAPTION>
BOND SUB-ACCOUNT
DECEMBER 31
----------------------------------
1995 1994 1993
----------- ------------ ---------
<S> <C> <C> <C>
Accumulation unit value, beginning of period ......................... $ 16.14 $ 17.50 $ 15.57
Income from operations:
Net investment income (loss) ....................................... 1.05 0.89 2.11
Net realized and unrealized gain (loss) on investments ............. 2.48 (2.25) (0.18)
------- -------- -------
Total income (loss) from operations ............................... 3.53 (1.36) 1.93
------- -------- -------
Accumulation unit value, end of period ............................... $ 19.67 $ 16.14 $ 17.50
======= ======== =======
Total return (a) ..................................................... 21.89% (7.77%) 12.40%
Ratios and supplemental data:
Net assets at end of period (in thousands) .......................... $10,066 $ 6,259 $ 6,985
Ratios of net investment income (loss) to average net assets (b) .... 5.80% 5.57% 12.92%
</TABLE>
<TABLE>
<CAPTION>
GROWTH SUB-ACCOUNT
DECEMBER 31
---------------------------
1997 1996
------------- -------------
<S> <C> <C>
Accumulation unit value, beginning of period ......................... $ 48.48 $ 41.47
Income from operations:
Net investment income (loss) ....................................... 5.83 2.88
Net realized and unrealized gain (loss) on investments ............. 2.17 4.13
--------- ---------
Total income (loss) from operations ............................... 8.00 7.01
--------- ---------
Accumulation unit value, end of period ............................... $ 56.48 $ 48.48
========= =========
Total return (a) ..................................................... 16.50% 16.91%
Ratios and supplemental data:
Net assets at end of period (in thousands) .......................... $ 450,271 $ 349,491
Ratios of net investment income (loss) to average net assets (b) .... 10.84% 6.41%
<CAPTION>
GROWTH SUB-ACCOUNT
DECEMBER 31
------------------------------------------
1995 1994 1993
------------- -------------- -------------
<S> <C> <C> <C>
Accumulation unit value, beginning of period ......................... $ 28.44 $ 31.30 $ 30.37
Income from operations:
Net investment income (loss) ....................................... 3.89 0.04 0.46
Net realized and unrealized gain (loss) on investments ............. 9.14 (2.90) 0.47
--------- -------- ---------
Total income (loss) from operations ............................... 13.03 (2.86) 0.93
--------- -------- ---------
Accumulation unit value, end of period ............................... $ 41.47 $ 28.44 $ 31.30
========= ======== =========
Total return (a) ..................................................... 45.81% (9.13%) 3.06%
Ratios and supplemental data:
Net assets at end of period (in thousands) .......................... $ 262,467 $ 161,490 $ 169,757
Ratios of net investment income (loss) to average net assets (b) .... 11.05% 0.16% 1.56%
</TABLE>
70
<PAGE>
WRL SERIES LIFE ACCOUNT
SELECTED PER UNIT DATA AND RATIOS*
FOR THE PERIOD ENDED
<TABLE>
<CAPTION>
GLOBAL SUB-ACCOUNT
DECEMBER 31
--------------------------------------------------
1997 1996 1995 1994 (d)
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Accumulation unit value, beginning of period ......................... $ 15.13 $ 11.95 $ 9.80 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 2.30 1.50 0.45 0.71
Net realized and unrealized gain (loss) on investments ............. 0.37 1.68 1.70 (0.91)
--------- ------- ------- -------
Total income (loss) from operations ............................... 2.67 3.18 2.15 (0.20)
--------- ------- ------- -------
Accumulation unit value, end of period ............................... $ 17.80 $ 15.13 $ 11.95 $ 9.80
========= ======= ======= =======
Total return (a) ..................................................... 17.69% 26.60% 21.96% (2.02%)
Ratios and supplemental data:
Net assets at end of period (in thousands) .......................... $ 145,017 $83,159 $37,049 $21,672
Ratios of net investment income (loss) to average net assets (b) .... 13.39% 11.09% 4.25% 8.86%
</TABLE>
<TABLE>
<CAPTION>
STRATEGIC TOTAL RETURN
SUB-ACCOUNT (h)
DECEMBER 31
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
Accumulation unit value, beginning of period ......................... $ 15.66 $ 13.74
Income from operations:
Net investment income (loss) ....................................... 1.56 0.82
Net realized and unrealized gain (loss) on investments ............. 1.69 1.10
------- -------
Total income (loss) from operations ............................... 3.25 1.92
------- -------
Accumulation unit value, end of period ............................... $ 18.91 $ 15.66
======= =======
Total return (a) ..................................................... 20.77% 13.97%
Ratios and supplemental data:
Net assets at end of period (in thousands) .......................... $80,753 $55,900
Ratios of net investment income (loss) to average net assets (b) .... 8.89% 5.76%
<CAPTION>
STRATEGIC TOTAL RETURN SUB-ACCOUNT
DECEMBER 31
------------------------------------
1995 1994 1993 (c)
----------- ------------ -----------
<S> <C> <C> <C>
Accumulation unit value, beginning of period ......................... $ 11.12 $ 11.28 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 0.68 0.18 0.19
Net realized and unrealized gain (loss) on investments ............. 1.94 (0.34) 1.09
------- ------- -------
Total income (loss) from operations ............................... 2.62 (0.16) 1.28
------- ------- -------
Accumulation unit value, end of period ............................... $ 13.74 $ 11.12 $ 11.28
======= ======= =======
Total return (a) ..................................................... 23.55% (1.42%) 12.81%
Ratios and supplemental data:
Net assets at end of period (in thousands) .......................... $39,648 $23,649 $13,343
Ratios of net investment income (loss) to average net assets (b) .... 5.47% 1.93% 2.27%
</TABLE>
<TABLE>
<CAPTION>
EMERGING GROWTH SUB-ACCOUNT
DECEMBER 31
---------------------------
1997 1996
------------- -------------
<S> <C> <C>
Accumulation unit value, beginning of period ......................... $ 19.51 $ 16.56
Income from operations:
Net investment income (loss) ....................................... 2.20 0.82
Net realized and unrealized gain (loss) on investments ............. 1.77 2.13
--------- ---------
Total income (loss) from operations ............................... 3.97 2.95
--------- ---------
Accumulation unit value, end of period ............................... $ 23.48 $ 19.51
========= =========
Total return (a) ..................................................... 20.37% 17.82%
Ratios and supplemental data:
Net assets at end of period (in thousands) .......................... $ 164,702 $ 107,925
Ratios of net investment income (loss) to average net assets (b) .... 10.18% 4.51%
<CAPTION>
EMERGING GROWTH SUB-ACCOUNT
DECEMBER 31
------------------------------------
1995 1994 1993 (c)
----------- ------------ -----------
<S> <C> <C> <C>
Accumulation unit value, beginning of period ......................... $ 11.38 $ 12.40 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 0.65 (0.09) (0.09)
Net realized and unrealized gain (loss) on investments ............. 4.53 (0.93) 2.49
------- ------- -------
Total income (loss) from operations ............................... 5.18 (1.02) 2.40
------- ------- -------
Accumulation unit value, end of period ............................... $ 16.56 $ 11.38 $ 12.40
======= ======= =======
Total return (a) ..................................................... 45.49% (8.18%) 23.96%
Ratios and supplemental data:
Net assets at end of period (in thousands) .......................... $67,905 $36,687 $18,620
Ratios of net investment income (loss) to average net assets (b) .... 4.66% (0.86%) (0.92%)
</TABLE>
71
<PAGE>
WRL SERIES LIFE ACCOUNT
SELECTED PER UNIT DATA AND RATIOS*
FOR THE PERIOD ENDED
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH SUB-ACCOUNT
DECEMBER 31
------------------------------------------------------
1997 1996 1995 1994 (d)
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Accumulation unit value, beginning of period ......................... $ 14.70 $ 13.43 $ 9.82 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 1.75 0.36 0.37 (0.06)
Net realized and unrealized gain (loss) on investments ............. 1.65 0.91 3.24 (0.12)
------- ------- ------- -------
Total income (loss) from operations ............................... 3.40 1.27 3.61 (0.18)
------- ------- ------- -------
Accumulation unit value, end of period ............................... $ 18.10 $ 14.70 $ 13.43 $ 9.82
======= ======= ======= =======
Total return (a) ..................................................... 23.14% 9.46% 36.79% (1.85%)
Ratios and supplemental data:
Net assets at end of period (in thousands) .......................... $94,652 $54,408 $32,904 $ 8,909
Ratios of net investment income (loss) to average net assets (b) .... 10.26% 2.65% 2.93% (0.72%)
</TABLE>
<TABLE>
<CAPTION>
BALANCED SUB-ACCOUNT
DECEMBER 31
------------------------------------------------------
1997 1996 1995 1994 (d)
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Accumulation unit value, beginning of period ......................... $ 12.21 $ 11.13 $ 9.37 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 1.55 0.36 0.37 0.22
Net realized and unrealized gain (loss) on investments ............. 0.41 0.72 1.39 (0.85)
------- ------- -------- -------
Total income (loss) from operations ............................... 1.96 1.08 1.76 (0.63)
------- ------- -------- -------
Accumulation unit value, end of period ............................... $ 14.17 $ 12.21 $ 11.13 $ 9.37
======= ======= ======== =======
Total return (a) ..................................................... 16.06% 9.73% 18.73% (6.29%)
Ratios and supplemental data:
Net assets at end of period (in thousands) .......................... $10,716 $ 6,418 $ 3,795 $ 2,145
Ratios of net investment income (loss) to average net assets (b) .... 11.62% 3.18% 3.59% 3.06%
</TABLE>
<TABLE>
<CAPTION>
GROWTH & INCOME SUB-ACCOUNT (i)
DECEMBER 31
------------------------------------------------------
1997 1996 1995 1994 (d)
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Accumulation unit value, beginning of period ......................... $ 13.03 $ 11.77 $ 9.49 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 2.61 0.76 0.49 0.29
Net realized and unrealized gain (loss) on investments ............. 0.45 0.50 1.79 (0.80)
-------- -------- -------- -------
Total income (loss) from operations ............................... 3.06 1.26 2.28 (0.51)
-------- -------- -------- -------
Accumulation unit value, end of period ............................... $ 16.09 $ 13.03 $ 11.77 $ 9.49
======== ======== ======== =======
Total return (a) ..................................................... 23.54% 10.64% 24.14% (5.15%)
Ratios and supplemental data:
Net assets at end of period (in thousands) .......................... $ 9,063 $ 5,501 $ 2,631 $ 1,215
Ratios of net investment income (loss) to average net assets (b) .... 18.50% 6.38% 4.57% 3.71%
</TABLE>
72
<PAGE>
WRL SERIES LIFE ACCOUNT
SELECTED PER UNIT DATA AND RATIOS*
FOR THE PERIOD ENDED
<TABLE>
<CAPTION>
TACTICAL ASSET ALLOCATION SUB-ACCOUNT
DECEMBER 31
---------------------------------------
1997 1996 1995 (e)
----------- ----------- -----------
<S> <C> <C> <C>
Accumulation unit value, beginning of period ......................... $ 13.50 $ 11.90 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 1.20 0.53 0.61
Net realized and unrealized gain (loss) on investments ............. 0.90 1.07 1.29
------- ------- --------
Total income (loss) from operations ............................... 2.10 1.60 1.90
------- ------- --------
Accumulation unit value, end of period ............................... $ 15.60 $ 13.50 $ 11.90
======= ======= ========
Total return (a) ..................................................... 15.55% 13.40% 19.03%
Ratios and supplemental data:
Net assets at end of period (in thousands) .......................... $29,123 $17,946 $ 9,446
Ratios of net investment income (loss) to average net assets (b) .... 8.14% 4.35% 5.47%
</TABLE>
<TABLE>
<CAPTION>
C.A.S.E. GROWTH
SUB-ACCOUNT
DECEMBER 31
-------------------------
1997 1996 (f)
----------- -----------
<S> <C> <C>
Accumulation unit value, beginning of period ......................... $ 10.81 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 1.51 0.37
Net realized and unrealized gain (loss) on investments ............. 0.00 0.44
------- -------
Total income (loss) from operations ............................... 1.51 0.81
------- -------
Accumulation unit value, end of period ............................... $ 12.32 $ 10.81
======= =======
Total return (a) ..................................................... 14.00% 8.09%
Ratios and supplemental data:
Net assets at end of period (in thousands) .......................... $11,946 $ 4,466
Ratios of net investment income (loss) to average net assets (b) .... 12.65% 6.11%
</TABLE>
<TABLE>
<CAPTION>
VALUE EQUITY
SUB-ACCOUNT
DECEMBER 31
-------------------------
1997 1996 (f)
----------- -----------
<S> <C> <C>
Accumulation unit value, beginning of period ......................... $ 11.25 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 0.14 0.05
Net realized and unrealized gain (loss) on investments ............. 2.55 1.20
------- --------
Total income (loss) from operations ............................... 2.69 1.25
------- --------
Accumulation unit value, end of period ............................... $ 13.94 $ 11.25
======= ========
Total return (a) ..................................................... 23.93% 12.51%
Ratios and supplemental data:
Net assets at end of period (in thousands) .......................... $26,714 $ 8,887
Ratios of net investment income (loss) to average net assets (b) .... 1.05% 0.77%
</TABLE>
73
<PAGE>
WRL SERIES LIFE ACCOUNT
SELECTED PER UNIT DATA AND RATIOS*
FOR THE PERIOD ENDED
<TABLE>
<CAPTION>
INTERNATIONAL U.S.
EQUITY EQUITY
SUB-ACCOUNT SUB-ACCOUNT
DECEMBER 31 DECEMBER 31
1997 (g) 1997 (g)
--------------- ------------
<S> <C> <C>
Accumulation unit value, beginning of period ......................... $ 10.00 $ 10.00
Income from operations:
Net investment income (loss) ....................................... (0.03) 0.99
Net realized and unrealized gain (loss) on investments ............. 0.68 1.60
------- --------
Total income (loss) from operations ............................... 0.65 2.59
------- --------
Accumulation unit value, end of period ............................... $ 10.65 $ 12.59
======= ========
Total return (a) ..................................................... 6.54% 25.89%
Ratios and supplemental data:
Net assets at end of period (in thousands) .......................... $ 2,289 $ 3,258
Ratios of net investment income (loss) to average net assets (b) .... (0.28%) 8.28%
</TABLE>
* The above tables illustrate the change for a unit outstanding computed using
average units outstanding throughout each period. See Notes to Selected Per
Unit Data and Ratios below.
NOTES TO SELECTED PER UNIT DATA AND RATIOS:
(a) For periods less than one year, the total return is not annualized.
(b) For periods less than one year, the ratio of net investment income to
average net assets is annualized.
(c) The inception date of this sub-account was March 1, 1993.
(d) The inception date of this sub-account was March 1, 1994.
(e) The inception date of this sub-account was January 3, 1995.
(f) The inception date of this sub-account was May 1, 1996.
(g) The inception date of this sub-account was January 2, 1997.
(h) Prior to May 1, 1997, this sub-account was known as Equity-Income.
(i) Prior to May 1, 1997, this sub-account was known as Utility.
74
<PAGE>
WRL SERIES LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 -- ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING
POLICIES
The WRL Series Life Account (the "Life Account"), was established as a
variable life insurance separate account of Western Reserve Life Assurance Co.
of Ohio ("WRL") and is registered as a unit investment trust ("Trust") under
the Investment Company Act of 1940, as amended. The Life Account contains
fourteen investment options referred to as sub-accounts. Each sub-account
invests in the corresponding Portfolio of the WRL Series Fund, Inc.
(collectively referred to as the "Fund" and individually as a "Portfolio"), a
registered management investment company under the Investment Company Act of
1940, as amended.
The Fund has entered into annually renewable investment advisory
agreements for each Portfolio with WRL Investment Management, Inc. ("WRL
Management") as investment adviser. Costs incurred in connection with the
advisory services rendered by WRL Management are paid by each Portfolio. WRL
Management has entered into sub-advisory agreements with various management
companies, some of which are affiliates of WRL. Each sub-adviser is compensated
directly by WRL Management.
Effective May 1, 1997, the names of the Equity-Income and Utility
Sub-Accounts were changed to the Strategic Total Return and Growth & Income
Sub-Accounts, respectively.
On December 16, 1997, pursuant to an exemptive order (Rel. No. IC-22944)
received from the Securities and Exchange Commission for the substitution of
securities issued by the WRL Series Fund and held by the Life Series Account to
support individual premium variable life insurance policies, investments were
transferred from the Short-to-Intermediate Government Sub-Account to the Bond
Sub-Account.
On January 2, 1997, WRL made an initial contribution of $ 600,000 to the
Life Account. The amount of the contribution and units received were as
follows:
SUB-ACCOUNT CONTRIBUTION UNITS
- ---------------------- -------------- ----------------
International Equity $ 400,000 40,000.000000
U.S. Equity $ 200,000 20,000.000000
On April 28, 1997, WRL redeemed the initial contribution in the
International Equity Sub-Account for $ 406,299 and the U.S. Equity sub-account
for $ 197,490.
The Life Account holds assets to support the benefits under certain
flexible premium variable universal life insurance policies (the "Policies")
issued by WRL. The Life Account's equity transactions are accounted for using
the appropriate effective date at the corresponding accumulation unit value.
The following significant accounting policies, which are in conformity
with generally accepted accounting principles for unit investment trusts, have
been consistently applied in the preparation of the Trust's financial
statements.
A. VALUATION OF INVESTMENTS AND SECURITIES TRANSACTIONS
Investments in the Fund's shares are stated at the closing net asset
value ("NAV") per share as determined by the Fund. Investment transactions are
accounted for on the trade date at the Fund NAV next determined after receipt
of sale or redemption orders without sales charges. Dividend income and capital
gains distributions are recorded on the ex-dividend date. The cost of
investments sold is determined on a first-in, first-out basis.
B. FEDERAL INCOME TAXES
The operations of the Life Account are a part of and are taxed with the
total operations of WRL, which is taxed as a life insurance company under the
Internal Revenue Code. Under current law the investment income of the Life
Account, including realized and unrealized capital gains, is not taxable to
WRL. Accordingly, no provision for Federal income taxes has been made.
C. ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
NOTE 2 --CHARGES AND DEDUCTIONS
Charges are assessed by WRL in connection with the issuance and
administration of the Policies.
A. POLICY CHARGES
Under some forms of the Policies, a sales charge and premium taxes are
deducted by WRL prior to allocation of policyowner payments to the
sub-accounts. Thereafter, monthly administrative and cost of insurance charges
are deducted from the sub-accounts. Contingent surrender charges also apply.
75
<PAGE>
WRL SERIES LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(CONTINUED)
NOTE 2 --CHARGES AND DEDUCTIONS
--(CONTINUED)
Under the other forms of the Policies, such "front-end" and other
administrative charges are deducted prior to allocation of the initial premium
payment but may reside as contingent surrender charges.
Under all forms of the Policy, monthly charges against policy cash values
are made to compensate WRL for costs of insurance provided.
B. LIFE ACCOUNT CHARGES
A daily charge equal to an annual rate of 0.90% of average daily net
assets is assessed to compensate WRL for assumption of mortality and expense
risks and administrative services in connection with issuance and
administration of the Policies. This charge (not assessed at the individual
contract level) effectively reduces the value of a unit outstanding during the
year.
NOTE 3 -- DIVIDENDS AND DISTRIBUTIONS
Dividends of the Money Market Portfolio are declared daily and reinvested
monthly. Dividends of the remaining Portfolios are typically declared and
reinvested semi-annually, while capital gains distributions are declared and
reinvested annually. Dividends and distributions of the Fund are recorded on
the ex-date and generally are paid to and reinvested by the Life Account on the
next business day after the ex-date. Dividends are not declared by the Life
Account, since the increase in the value of the underlying investment in the
Fund is reflected daily in the unit price used to calculate the equity value
within the Life Account. Consequently, a dividend distribution by the
underlying Fund does not change either the unit price or equity values within
the Life Account.
NOTE 4 -- SECURITIES TRANSACTIONS
Securities transactions are summarized as follows:
For the year or period ended December 31, 1997 (in thousands)
<TABLE>
<CAPTION>
MONEY MARKET BOND GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C> <C>
Purchase of long-term securities .............................. $ 31,536 $ 7,334 $ 95,096
Proceeds from sales of long-term securities ................... 27,586 1,711 9,617
STRATEGIC TOTAL EMERGING
GLOBAL RETURN GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
Purchase of long-term securities .............................. $ 63,481 $ 20,134 $ 51,532
Proceeds from sales of long-term securities ................... 2,595 1,789 5,791
AGGRESSIVE GROWTH &
GROWTH BALANCED INCOME
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
Purchase of long-term securities .............................. $ 36,390 $ 4,654 $ 3,925
Proceeds from sales of long-term securities ................... 2,757 571 683
TACTICAL ASSET C.A.S.E. VALUE
ALLOCATION GROWTH EQUITY
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
Purchase of long-term securities .............................. $ 11,192 $ 8,860 $ 16,770
Proceeds from sales of long-term securities ................... 1,496 1,124 2,030
INTERNATIONAL U.S.
EQUITY EQUITY
SUB-ACCOUNT (a) SUB-ACCOUNT (a)
Purchase of long-term securities .............................. $ 4,574 $ 4,082
Proceeds from sales of long-term securities ................... 2,322 931
</TABLE>
(a) The inception date of this sub-account was January 2, 1997.
76
<PAGE>
WRL SERIES LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(CONTINUED)
NOTE 5 -- EQUITY TRANSACTIONS
For the year or period ended December 31, 1997
<TABLE>
<CAPTION>
MONEY MARKET BOND GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C> <C>
Units balance - beginning of year ........... 824,579.964824 593,289.952352 7,208,481.980640
Units issued ................................ 9,508,542.992920 567,591.792111 2,877,261.682232
Units redeemed .............................. 9,313,607.867949 325,011.550833 2,113,732.157906
---------------- -------------- ----------------
Units balance - end of year ................. 1,019,515.089795 835,870.193630 7,972,011.504966
================ ============== ================
STRATEGIC TOTAL EMERGING
GLOBAL RETURN GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
Units balance - beginning of year ........... 5,497,026.869725 3,569,906.038362 5,531,857.748031
Units issued ................................ 5,204,689.424549 1,808,954.429690 4,085,290.537514
Units redeemed .............................. 2,556,813.294554 1,108,535.542298 2,603,771.462693
---------------- ---------------- ----------------
Units balance - end of year ................. 8,144,902.999720 4,270,324.925754 7,013,376.822852
================ ================ ================
AGGRESSIVE GROWTH &
GROWTH BALANCED INCOME
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
Units balance - beginning of year ........... 3,702,244.184822 525,703.773282 422,239.257570
Units issued ................................ 3,540,013.078309 471,558.712099 351,937.078911
Units redeemed .............................. 2,011,986.165118 240,908.819634 211,046.686884
---------------- ---------------- ----------------
Units balance - end of year ................. 5,230,271.098013 756,353.665747 563,129.649597
================ ================ ================
TACTICAL ASSET C.A.S.E. VALUE
ALLOCATION GROWTH EQUITY
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
Units balance - beginning of year ........... 1,329,562.261984 413,189.701539 789,884.882222
Units issued ................................ 1,163,050.985561 930,816.590801 1,771,718.827803
Units redeemed .............................. 625,352.214528 374,627.211274 645,715.985962
---------------- ---------------- ----------------
Units balance - end of year ................. 1,867,261.033017 969,379.081066 1,915,887.724063
================ ================ ================
INTERNATIONAL U.S.
EQUITY EQUITY
SUB-ACCOUNT (a) SUB-ACCOUNT (a)
Units balance - beginning of period ......... N/A N/A
Units issued ................................ 484,482.761817 392,911.124759
Units redeemed .............................. 269,593.719591 134,098.291700
---------------- ----------------
Units balance - end of period ............... 214,889.042226 258,812.833059
================ ================
</TABLE>
(a) The inception date of this sub-account was January 2, 1997.
77
<PAGE>
WRL SERIES LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(CONTINUED)
NOTE 6 -- OTHER MATTERS
At December 31, 1997, the equity accounts included net unrealized appreciation
(depreciation) on investments as follows (in thousands):
Sub-Account
-----------
Money Market ................... $ N/A
Bond ........................... 331
Growth ......................... 90,809
Global ......................... 8,984
Strategic Total Return ......... 13,770
Emerging Growth ................ 31,177
Aggressive Growth .............. 9,032
Balanced ....................... 677
Growth & Income ................ 482
Tactical Asset Allocation ...... 2,489
C.A.S.E. Growth ................ (235)
Value Equity ................... 3,178
International Equity ........... (103)
U.S. Equity .................... 15
78
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
BALANCE SHEET - STATUTORY BASIS
AS OF SEPTEMBER 30, 1998
(IN THOUSANDS) (UNAUDITED)
<TABLE>
<S> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments .................................... $ 15,308
Bonds .............................................................. 208,443
Common stock, at market ............................................ 916
Mortgage loans on real estate ...................................... 4,633
Home office properties, at cost less accumulated Depreciation ...... 34,330
Investment real estate ............................................. 11,594
Due from broker .................................................... 507
Policy loans ....................................................... 102,353
----------
Total cash and invested assets ...................................... 378,084
Premiums deferred and uncollected ................................... 44,222
Accrued investment income ........................................... 3,641
Transfers from separate accounts .................................... 328,650
Federal income tax benefit .......................................... 6,657
Other assets ........................................................ 7,136
Separate account assets ............................................. 5,691,780
----------
Total admitted assets ............................................... $6,460,170
==========
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life .............................................................. $ 221,261
Annuity ........................................................... 265,636
Policy and contract claim reserves ................................. 11,617
Other policyholders' funds ......................................... 22
Remittances and items not allocated ................................ 16,462
Asset valuation reserve ............................................ 2,616
Interest maintenance reserve ....................................... 9,330
Short-term note payable to affiliate ............................... 60,600
Payable to affiliate ............................................... 12,743
Other liabilities .................................................. 60,416
Separate account liabilities ....................................... 5,690,066
----------
Total liabilities ................................................... 6,350,769
Capital and surplus:
Common stock, $1.00 par value, 1,500 shares authorized,
issued and outstanding ........................................... 1,500
Paid-in surplus .................................................... 88,107
Unassigned surplus ................................................. 19,794
----------
Total capital and surplus ........................................... 109,401
----------
Total liabilities and capital and surplus ........................... $6,460,170
==========
</TABLE>
79
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENT OF OPERATIONS - STATUTORY BASIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS) (UNAUDITED)
<TABLE>
<S> <C>
Revenues:
Premiums and other considerations, net of reinsurance:
Life ................................................................................... $ 354,897
Annuity ................................................................................ 621,889
Net investment income ................................................................... 26,663
Amortization of interest maintenance reserve ............................................ 165
Commissions and expense allowances on reinsurance ceded ................................. 9,985
Other income ............................................................................ 42,318
----------
1,055,917
Benefits and expenses:
Benefits paid or provided for:
Life ................................................................................... 33,387
Surrender benefits ..................................................................... 415,594
Other benefits ......................................................................... 54,339
Increase (decrease) in aggregate reserves for policies and contracts:
Life .................................................................................. 34,738
Annuity ............................................................................... (30,655)
Other ................................................................................. 3,028
----------
510,431
Insurance expenses:
Commissions ............................................................................ 156,964
General insurance expenses ............................................................. 70,278
Taxes, licenses and fees ............................................................... 13,362
Transfer to separate accounts .......................................................... 323,377
Other expenses ......................................................................... (25)
----------
563,956
----------
1,074,387
----------
Loss from operations before federal income taxes and realized capital gains on investments (18,470)
Federal income tax expense ............................................................... (13,005)
----------
Loss from operations before realized capital gains on investments ........................ (5,465)
Net realized capital gains on investments (net of related federal income taxes and
amounts transferred to interest maintenance reserve) .................................... 1,155
----------
Net loss ................................................................................. (4,310)
==========
</TABLE>
80
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENT OF CHANGES IN CAPITAL AND SURPLUS - STATUTORY BASIS
(IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK PAID-IN SURPLUS UNASSIGNED SURPLUS TOTAL CAPITAL AND SURPLUS
-------------- ----------------- -------------------- --------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 .................. $1,500 $88,015 $ 25,348 $114,863
Net loss ................................... 0 0 (4,310) (4,310)
Net unrealized gains ....................... 0 0 75 75
Change in non-admitted assets .............. 0 0 (678) (678)
Change in asset valuation reserve .......... 0 0 (180) (180)
Change in surplus in separate accounts ..... 0 0 (560) (560)
Other adjustments .......................... 0 92 99 191
------ ------- -------- --------
Balance at September 30, 1998 ............... $1,500 $88,107 $ 19,794 $109,401
====== ======= ======== ========
</TABLE>
81
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENT OF CASH FLOW - STATUTORY BASIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS) (UNAUDITED)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Premiums and other considerations, net of reinsurance ......... $1,034,150
Net investment income ......................................... 26,268
Life and accident and health claims ........................... (33,810)
Surrender benefits to policyholders ........................... (415,914)
Other benefits to policyholders ............................... (23,202)
Commissions, other expenses and other taxes ................... (239,513)
Other, net .................................................... (24,073)
Net transfers to separate accounts ............................ (373,060)
----------
Net cash used in operating activities ......................... (49,154)
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid:
Bonds and preferred stocks ................................... 120,086
Mortgage loans on real estate ................................ 191
----------
120,277
Cost of investments acquired:
Bonds and preferred stocks ................................... 70,014
Common stock ................................................. 93
Real estate .................................................. 25,960
Policy loans ................................................. 25,612
Miscellaneous applications ................................... 525
----------
122,204
----------
Net cash used in investing activities ......................... (1,927)
----------
FINANCING ACTIVITIES
Borrowed money ................................................ 52,493
----------
Net cash provided by financing activities ..................... 52,493
Increase in cash and short-term investments ................... 1,412
Cash and short-term investments at beginning of year .......... 13,896
----------
Cash and short-term investments at end of year ................ $ 15,308
==========
</TABLE>
82
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY BASIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
(UNAUDITED)
1 -- BASIS OF PRESENTATION
The accompanying unaudited statutory basis financial statements have been
prepared in accordance with statutory accounting principles for interim
financial information and the instructions to Article 10 of Regulation S-X.
Accordingly, they do not include all the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine month period ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998. For further information, refer to the accompanying statutory
basis financial statements and notes thereto for the year ended December 31,
1997.
83
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Western Reserve Life Assurance Co. of Ohio
We have audited the accompanying statutory-basis balance sheets of Western
Reserve Life Assurance Co. of Ohio as of December 31, 1997 and 1996, and the
related statutory-basis statements of operations, changes in capital and
surplus, and cash flows for each of the three years in the period ended
December 31, 1997. Our audits also included the statutory-basis financial
statement schedules required by Regulation S-X, Article 7. These financial
statements and schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the "Separate Account Assets" and "Separate
Account Liabilities" in the balance sheets of the Company. The Separate Account
financial statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to the data included
for the Separate Account, is based solely upon the reports of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company presents
its financial statements in conformity with accounting practices prescribed or
permitted by the Insurance Department of the State of Ohio, which practices
differ from generally accepted accounting principles. The variances between
such practices and generally accepted accounting principles are also described
in Note 1. The effects on the financial statements of these variances are not
reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matters described in the
preceding paragraph, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of Western Reserve Life Assurance Co. of Ohio at December
31, 1997 and 1996, or the results of its operations or its cash flows for each
of the three years in the period ended December 31, 1997.
Also, in our opinion, based on our audits and the reports of other
auditors, the financial statements referred to above present fairly, in all
material respects, the financial position of Western Reserve Life Assurance Co.
of Ohio at December 31, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997 in conformity with accounting practices prescribed or permitted by the
Insurance Department of the State of Ohio. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
statutory-basis financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Des Moines, Iowa
February 27, 1998
84
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
BALANCE SHEETS - STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------ ------------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments ................... $ 13,896 $ 2,480
Bonds ............................................. 255,919 359,579
Common stocks:
Affiliated entities (cost: 1997 - $150) ......... 319 -
Other (cost: 1997 and 1996 - $302) .............. 428 597
Mortgage loans on real estate ..................... 4,824 6,049
Home office properties ............................ 19,964 7,962
Policy loans ...................................... 76,741 52,604
---------- ----------
Total cash and invested assets ..................... 372,091 429,271
Premiums deferred and uncollected .................. 1,928 1,943
Accrued investment income .......................... 4,088 5,940
Receivable from affiliates ......................... - 1,165
Transfers from separate accounts ................... 279,958 204,181
Other assets ....................................... 5,221 3,962
Separate account assets ............................ 4,814,594 3,527,145
---------- ----------
Total admitted assets .............................. $5,477,880 $4,173,607
========== ==========
SEE ACCOMPANYING NOTES.
</TABLE>
85
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
BALANCE SHEETS - STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------- ------------
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life ................................................. $ 186,523 $ 155,166
Annuity .............................................. 296,290 332,230
Policy and contract claim reserves .................... 10,929 8,584
Other policyholders' funds ............................ 3,877 3,104
Remittances and items not allocated ................... 9,184 9,107
Federal income taxes payable .......................... 2,283 1,266
Asset valuation reserve ............................... 2,436 5,710
Interest maintenance reserve .......................... 9,134 7,451
Short-term note payable to affiliate .................. 8,200 -
Payable to affiliate .................................. 1,925 20,463
Other liabilities ..................................... 19,257 13,082
Separate account liabilities .......................... 4,812,979 3,521,888
---------- ----------
Total liabilities ...................................... 5,363,017 4,078,051
Commitments and contingencies
Capital and surplus:
Common stock, $1.00 par value, 1,500 shares authorized,
issued and outstanding .............................. 1,500 1,500
Paid-in surplus ....................................... 88,015 68,015
Unassigned surplus .................................... 25,348 26,041
---------- ----------
Total capital and surplus .............................. 114,863 95,556
---------- ----------
Total liabilities and capital and surplus .............. $5,477,880 $4,173,607
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
86
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENTS OF OPERATIONS - STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
------------- ------------ -----------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net of reinsurance:
Life ............................................................................... $ 394,370 $ 293,590 $ 191,508
Annuity ............................................................................ 822,149 740,125 378,390
Net investment income ............................................................... 40,013 36,067 40,891
Amortization of interest maintenance reserve ........................................ 1,576 1,335 882
Commissions and expense allowances on reinsurance ceded ............................. 11 11 11
Other income ........................................................................ 3,016 13,398 8,237
---------- ---------- ----------
1,261,135 1,084,526 619,919
Benefits and expenses:
Benefits paid or provided for:
Life ............................................................................... 28,060 21,256 17,844
Surrender benefits ................................................................. 431,939 286,406 206,250
Other benefits ..................................................................... 28,112 23,270 19,530
Increase (decrease) in aggregate reserves for policies and contracts: ..............
Life .............................................................................. 29,485 80,139 (15,132)
Annuity ........................................................................... (35,940) 12,877 5,229
Other ............................................................................. 794 422 109
---------- ---------- ----------
482,450 424,370 233,830
Insurance expenses:
Commissions ........................................................................ 179,106 140,261 82,903
General insurance expenses ......................................................... 70,546 47,406 37,246
Taxes, licenses and fees ........................................................... 13,101 10,848 8,919
Transfer to separate accounts ...................................................... 519,214 452,471 242,427
Other expenses ..................................................................... 21 60 34
---------- ---------- ----------
781,988 651,046 371,529
---------- ---------- ----------
1,264,438 1,075,416 605,359
---------- ---------- ----------
Gain (loss) from operations before federal income taxes and realized capital gains
(losses) on investments ............................................................. (3,303) 9,110 14,560
Federal income tax expense ........................................................... 469 9,297 8,917
---------- ---------- ----------
Gain (loss) from operations before realized capital gains (losses)
on investments ...................................................................... (3,772) (187) 5,643
Net realized capital gains (losses) on investments (net of related
federal income taxes and amounts transferred to interest
maintenance reserve) ................................................................ 747 (811) (1,678)
---------- ---------- ----------
Net income (loss) .................................................................... $ (3,025) $ (998) $ 3,965
========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
87
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS - STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK PAID-IN SURPLUS
-------------- -----------------
<S> <C> <C>
Balance at January 1, 1995 ........................... $1,500 $68,015
Net income for 1995 ................................. - -
Net unrealized capital losses ....................... - -
Decrease in non-admitted assets ..................... - -
Decrease in asset valuation reserve ................. - -
Increase in surplus in separate accounts ............ - -
Change in reserve valuation ......................... - -
Other adjustments ................................... - -
------ -------
Balance at December 31, 1995 ......................... 1,500 68,015
Net loss for 1996 ................................... - -
Net unrealized capital gains ........................ - -
Decrease in non-admitted assets ..................... - -
Increase in asset valuation reserve ................. - -
Increase in surplus in separate accounts ............ - -
Change in reserve valuation ......................... - -
------ -------
Balance at December 31, 1996 ......................... 1,500 68,015
Net loss for 1997 ................................... - -
Increase in non-admitted assets ..................... - -
Decrease in asset valuation reserve ................. - -
Decrease in surplus in separate accounts ............ - -
Change in reserve valuation ......................... - -
Capital contribution ................................ - 20,000
Tax effect of capital loss carry-forward utilized
by affiliates ..................................... - -
------ -------
Balance at December 31, 1997 ......................... $1,500 $88,015
====== =======
<CAPTION>
UNASSIGNED SURPLUS TOTAL CAPITAL AND SURPLUS
-------------------- --------------------------
<S> <C> <C>
Balance at January 1, 1995 ........................... $ 25,505 $ 95,020
Net income for 1995 ................................. 3,965 3,965
Net unrealized capital losses ....................... (500) (500)
Decrease in non-admitted assets ..................... 903 903
Decrease in asset valuation reserve ................. 2,901 2,901
Increase in surplus in separate accounts ............ 541 541
Change in reserve valuation ......................... (3,496) (3,496)
Other adjustments ................................... (1,395) (1,395)
-------- --------
Balance at December 31, 1995 ......................... 28,424 97,939
Net loss for 1996 ................................... (998) (998)
Net unrealized capital gains ........................ 1,294 1,294
Decrease in non-admitted assets ..................... 199 199
Increase in asset valuation reserve ................. (120) (120)
Increase in surplus in separate accounts ............ 237 237
Change in reserve valuation ......................... (2,995) (2,995)
-------- --------
Balance at December 31, 1996 ......................... 26,041 95,556
Net loss for 1997 ................................... (3,025) (3,025)
Increase in non-admitted assets ..................... (702) (702)
Decrease in asset valuation reserve ................. 3,274 3,274
Decrease in surplus in separate accounts ............ (2,115) (2,115)
Change in reserve valuation ......................... (1,872) (1,872)
Capital contribution ................................ - 20,000
Tax effect of capital loss carry-forward utilized
by affiliates ..................................... 3,747 3,747
-------- --------
Balance at December 31, 1997 ......................... $ 25,348 $114,863
======== --------
</TABLE>
SEE ACCOMPANYING NOTES.
88
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENTS OF CASH FLOWS - STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums and other considerations, net of reinsurance ...... $1,224,228 $1,046,548 $ 577,986
Net investment income ...................................... 43,802 38,666 42,359
Life and accident and health claims ........................ (26,005) (20,655) (16,759)
Surrender benefits and other fund withdrawals .............. (431,939) (286,406) (206,250)
Other benefits to policyholders ............................ (28,147) (22,129) (19,041)
Commissions, other expenses and other taxes ................ (261,352) (196,373) (128,341)
Net transfers to separate accounts ......................... (596,347) (658,326) (242,427)
Federal income taxes paid .................................. (5,006) (9,449) (7,531)
Interest paid .............................................. (731) - -
Other, net ................................................. (6,768) 28,325 (4,284)
---------- ---------- ----------
Net cash used in operating activities ...................... (88,265) (79,799) (4,288)
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid:
Bonds and preferred stocks ................................ 146,963 122,820 108,554
Common stocks ............................................. - - 2,108
Mortgage loans on real estate ............................. 2,116 132 1,954
Real estate ............................................... - 4,304 -
Other ..................................................... - 175 -
---------- ---------- ----------
149,079 127,431 112,616
Cost of investments acquired ...............................
Bonds and preferred stocks ................................ (40,418) (26,826) (139,402)
Common stocks ............................................. (150) (4) (589)
Mortgage loans on real estate ............................. (891) - (6)
Real estate ............................................... (12,002) (7,837) (449)
Policy loans .............................................. (24,137) (15,479) (9,605)
Other ..................................................... - (5) -
---------- ----------- ----------
(77,598) (50,151) (150,051)
---------- ---------- ----------
Net cash provided by (used in) investing activities ........ 71,481 77,280 (37,435)
FINANCING ACTIVITIES
Issuance of short-term note payable to affiliate ........... 8,200 - -
Capital contribution ....................................... 20,000 - -
---------- ---------- ----------
Net cash provided by financing activities .................. 28,200 - -
---------- ---------- ----------
Increase (decrease) in cash and short-term investments ..... 11,416 (2,519) (41,723)
Cash and short-term investments at beginning of year ....... 2,480 4,999 46,722
---------- ---------- ----------
Cash and short-term investments at end of year ............. $ 13,896 $ 2,480 $ 4,999
========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
89
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1997
NOTE 1 -- ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Western Reserve Life Assurance Co. of Ohio ("the Company") is a stock life
insurance company and is a wholly-owned subsidiary of First AUSA Life Insurance
Company which, in turn, is a wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"). AEGON is a wholly-owned subsidiary of AEGON nv, a holding company
organized under the laws of the Netherlands.
NATURE OF BUSINESS
The Company operates predominantly in the variable universal life and variable
annuity areas of the life insurance business. The Company is licensed in 49
states and the District of Columbia. Sales of the Company's products are
through financial planners, independent representatives, financial institutions
and stockbrokers. The majority of the Company's new life insurance written and
a substantial portion of new annuities written is done through one marketing
organization; the Company expects to maintain this relationship for the
foreseeable future.
BASIS OF PRESENTATION
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in
the financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known, which could
impact the amounts reported and disclosed herein.
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Insurance Department of the
State of Ohio, which practices differ from generally accepted accounting
principles. The more significant of these differences are as follows: (a) bonds
are generally carried at amortized cost rather than segregating the portfolio
into held-to-maturity (reported at amortized cost), available-for-sale (reported
at fair value), and trading (reported at fair value) classifications; (b)
acquisition costs of acquiring new business are expensed as incurred rather than
deferred and amortized over the life of the policies; (c) policy reserves on
traditional life products are based on statutory mortality rates and interest
which may differ from reserves based on reasonable assumptions of expected
mortality, interest, and withdrawals which include a provision for possible
unfavorable deviation from such assumptions; (d) policy reserves on certain
investment products use discounting methodologies utilizing statutory interest
rates rather than full account values; (e) reinsurance amounts are netted
against the corresponding asset or liability rather than shown as gross amounts
on the balance sheet; (f) deferred income taxes are not provided for the
difference between the financial statement amounts and income tax bases of
assets and liabilities; (g) net realized gains or losses attributed to changes
in the level of interest rates in the market are deferred and amortized over the
remaining life of the bond or mortgage loan, rather than recognized as gains or
losses in the statement of operations when the sale is completed; (h) declines
in the estimated realizable value of investments are provided for through the
establishment of a formula-determined statutory investment reserve (reported as
a liability) changes to which are charged directly to surplus, rather than
through recognition in the statement of operations for declines in value, when
such declines are judged to be other than temporary; (i) certain assets
designated as "non-admitted assets" have been charged to surplus rather than
being reported as assets; (j) revenues for universal life and investment
products consist of the entire premiums received rather than policy charges for
the cost of insurance, policy administration charges, amortization of policy
initiation fees and surrender charges assessed; (k) pension expense is recorded
as amounts are paid rather than accrued and expensed during the periods in which
the employers provide service; and (l) the financial statements of wholly-owned
affiliates are not consolidated with those of the Company. The effects of these
variances have not been determined by the Company.
The National Association of Insurance Commissioners (NAIC) currently is in the
process of recodifying statutory accounting practices, the result of which is
expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in
1998, will likely change, to some extent, prescribed statutory accounting
practices and may result in changes to the accounting practices that the
Company uses to prepare its statutory-basis financial statements. The impact of
any such changes on the Company's statutory surplus cannot be determined at
this time and could be material.
90
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO THE FINANCIAL STATEMENTS -- STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 1 -- ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
Other significant statutory accounting practices are as follows:
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with remaining maturities of one year or less when purchased
to be cash equivalents.
INVESTMENTS
Investments in bonds (except those to which the Securities Valuation Office of
the NAIC has ascribed a value), mortgage loans on real estate and short-term
investments are reported at cost adjusted for amortization of premiums and
accrual of discounts. Amortization is computed using methods which result in a
level yield over the expected life of the security. The Company reviews its
prepayment assumptions on mortgage and other asset backed securities at regular
intervals and adjusts amortization rates retrospectively when such assumptions
are changed due to experience and/or expected future patterns. Common stocks of
unaffiliated companies are carried at market and include shares of mutual funds
(money market and other), and the related unrealized capital gains/(losses) are
reported in unassigned surplus without any adjustment for federal income taxes.
Common stocks of the Company's wholly-owned affiliates are recorded at the
equity in net assets. Home office property is reported at cost less allowances
for depreciation. Depreciation is computed principally by the straight-line
method. Policy loans are reported at unpaid principal. Other "admitted assets"
are valued, principally at cost, as required or permitted by Ohio Insurance
Laws.
Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for anticipated
losses in the event of default by issuers of certain invested assets. These
amounts are determined using a formula prescribed by the NAIC and are reported
as a liability. The formula for the AVR provides for a corresponding adjustment
for realized gains and losses. Under a formula prescribed by the NAIC, the
Company defers, in the Interest Maintenance Reserve (IMR), the portion of
realized gains and losses on sales of fixed income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity of the security.
During 1997, 1996 and 1995, net realized capital gains of $3,259, $2,394 and
$554, respectively, were credited to the IMR rather than being immediately
recognized in the statements of operations. Amortization of these net gains
aggregated $1,576, $1,335 and $882 for the years ended December 31, 1997, 1996
and 1995, respectively.
Interest income is recognized on an accrual basis. The Company does not accrue
income on bonds in default, mortgage loans on real estate in default and/or
foreclosure or which are delinquent more than twelve months, or real estate
where rent is in arrears for more than three months. Further, income is not
accrued when collection is uncertain. No investment income due and accrued has
been excluded for the years ended December 31, 1997, 1996 and 1995, with
respect to such practices.
AGGREGATE RESERVES FOR POLICIES
Life and annuity reserves are developed by actuarial methods and are determined
based on published tables using statutorily specified interest rates and
valuation methods that will provide, in the aggregate, reserves that are
greater than or equal to the minimum required by law.
The aggregate policy reserves for life insurance policies are based principally
upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary Mortality and
American Experience Mortality Tables. The reserves are calculated using
interest rates ranging from 2.25 to 5.50 percent and are computed principally
on the Net Level Premium Valuation and the Commissioners' Reserve Valuation
Methods. Reserves for universal life policies are based on account balances
adjusted for the Commissioners' Reserve Valuation Method.
Deferred annuity reserves are calculated according to the Commissioners'
Annuity Reserve Valuation Method including excess interest reserves to cover
situations where the future interest guarantees plus the decrease in surrender
charges are in excess of the maximum valuation rates of interest. Reserves for
91
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO THE FINANCIAL STATEMENTS -- STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 1 -- ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
immediate annuities and supplementary contracts with life contingencies are
equal to the present value of future payments assuming interest rates ranging
from 5.75 to 8.75 percent and mortality rates, where appropriate, from a
variety of tables.
POLICY AND CONTRACT CLAIM RESERVES
Claim reserves represent the estimated accrued liability for claims reported to
the Company and claims incurred but not yet reported through the statement
date. These reserves are estimated using either individual case-basis
valuations or statistical analysis techniques. These estimates are subject to
the effects of trends in claim severity and frequency. The estimates are
continually reviewed and adjusted as necessary as experience develops or new
information becomes available.
SEPARATE ACCOUNTS
Assets held in trust for purchases of variable universal life and variable
annuity contracts and the Company's corresponding obligation to the contract
owners are shown separately in the balance sheets. The assets in the separate
accounts are valued at market. Income and gains and losses with respect to the
assets in the separate accounts accrue to the benefit of the policyholders and,
accordingly, the operations of the separate accounts are not included in the
accompanying financial statements. The separate accounts do not have any
minimum guarantees and the investment risks associated with market value
changes are borne entirely by the policyholders. The Company received variable
contract premiums of $1,164,013, $997,513 and $466,822 in 1997, 1996 and 1995,
respectively. All variable account contracts are subject to discretionary
withdrawal by the policyholder at the market value of the underlying assets
less the current surrender charge. Separate account contractholders have no
claim against the assets of the general account.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
NOTE 2 -- FAIR VALUES OF FINANCIAL
INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statutory-basis
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparisons to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
Statement of Financial Accounting Standards No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements
and allows companies to forego the disclosures when those estimates can only be
made at excessive cost. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the
statutory-basis balance sheet for these instruments approximate their fair
values.
INVESTMENT SECURITIES: Fair values for fixed maturity securities (including
redeemable preferred stocks) are based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair values are
estimated using values obtained from independent pricing services or (in the
case of private placements) are estimated by discounting expected future cash
flows using a current market rate applicable to the yield, credit quality, and
maturity of the investments. The fair values for equity securities are based on
quoted market prices.
MORTGAGE LOANS AND POLICY LOANS: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans are assumed to equal their carrying
value.
92
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO THE FINANCIAL STATEMENTS -- STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 2 -- FAIR VALUES OF FINANCIAL
INSTRUMENTS--(CONTINUED)
INVESTMENT CONTRACTS: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash flow
calculations, based on interest rates currently being offered for similar
contracts with maturities consistent with those remaining for the contracts
being valued.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The following sets forth a comparison of the fair values and carrying values of
the Company's financial instruments subject to the provisions of Statement of
Financial Accounting Standards No. 107:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds ................ $ 255,919 $ 267,763 $ 359,579 $ 372,319
Common stocks ........ 747 747 597 597
Mortgage loans
on real estate ..... 4,824 5,143 6,049 6,134
Policy loans ......... 76,741 76,741 52,604 52,604
Cash and
short-term
investments ........ 13,896 13,896 2,480 2,480
Separate account
assets ............. 4,814,594 4,814,594 3,527,145 3,527,145
LIABILITIES
Investment
contract
liabilities ........ 280,121 276,113 321,293 314,748
Separate account
annuities .......... 3,615,255 3,565,557 2,692,614 2,647,266
</TABLE>
NOTE 3 -- INVESTMENTS
The carrying value and estimated fair value of investments in debt securities
are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Bonds:
United States
Government
and agencies ...... $ 3,675 $ 9 $ 30 $ 3,654
State, municipal
and other
government ........ 3,855 360 - 4,215
Public utilities ..... 15,794 904 403 16,295
Industrial and
miscellaneous ..... 121,513 7,700 710 128,503
Mortgage-backed
securities ........ 111,082 4,198 184 115,096
-------- ------- ------ --------
Total bonds .......... $255,919 $13,171 $1,327 $267,763
======== ======= ====== ========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Bonds:
United States Govern-
ment and agencies ......... $ 11,422 $ 13 $ 292 $ 11,143
State, municipal and
other government .......... 5,504 274 - 5,778
Public utilities .............. 14,808 848 80 15,576
Industrial and miscel-
laneous ................... 173,097 8,889 910 181,076
Mortgage-backed
securities ................ 154,748 4,617 619 158,746
-------- ------- ------ --------
Total bonds ................... $359,579 $14,641 $1,901 $372,319
======== ======= ====== ========
</TABLE>
The carrying value and fair value of bonds at December 31, 1997 by contractual
maturity are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without penalties.
93
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO THE FINANCIAL STATEMENTS -- STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3 -- INVESTMENTS--(CONTINUED)
ESTIMATED
CARRYING FAIR
VALUE VALUE
---------- ----------
Due in one year or less ............................ $ 18,310 $ 18,467
Due one through five years ......................... 67,005 70,952
Due five through ten years ......................... 29,508 30,621
Due after ten years ................................ 30,014 32,627
-------- --------
144,837 152,667
Mortgage and other asset backed securities ......... 111,082 115,096
-------- --------
$255,919 $267,763
======== ========
A detail of net investment income is presented below:
YEAR ENDED DECEMBER 31
------------------------------------
1997 1996 1995
---------- ---------- ----------
Interest on bonds ....................... $25,723 $33,969 $38,624
Dividends on equity investments ......... 10,855 - 30
Interest on mortgage loans .............. 478 559 573
Rental income on real estate ............ 1,371 919 1,014
Interest on policy loans ................ 4,656 3,339 2,353
Other investment income ................. 26 9 328
------- ------- -------
Gross investment income ................. 43,109 38,795 42,922
Investment expenses ..................... (3,096) (2,728) (2,031)
------- ------- -------
Net investment income ................... $40,013 $36,067 $40,891
======= ======= =======
Proceeds from sales and maturities of debt securities and related gross
realized gains and losses were as follows:
YEAR ENDED DECEMBER 31
---------------------------------------
1997 1996 1995
----------- ----------- -----------
Proceeds ...................... $146,963 $122,820 $108,554
======== ======== ========
Gross realized gains .......... $ 3,921 $ 2,984 $ 1,631
Gross realized losses ......... 626 791 1,346
-------- -------- --------
Net realized gains ............ $ 3,295 $ 2,193 $ 285
======== ======== ========
At December 31, 1997, bonds with an aggregate carrying value of $5,474 were on
deposit with certain state regulatory authorities or were restrictively held in
bank custodial accounts for benefit of such state regulatory authorities, as
required by statute.
Realized investment gains (losses) and changes in unrealized gains (losses) for
investments are summarized below:
<TABLE>
<CAPTION>
REALIZED
---------------------------------------
YEAR ENDED DECEMBER 31
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Debt securities .................................. $3,295 $2,193 $ 285
Mortgage loans ................................... - - (1,409)
Real estate ...................................... - (606) -
Other invested assets ............................ - (4) -
------ ------- -------
3,295 1,583 (1,124)
Tax benefit ...................................... (711) - -
Transfer to interest maintenance reserve ......... (3,259) (2,394) (554)
------ ------ -------
Net realized gains (losses) ...................... $ 747 $ (811) $(1,678)
====== ====== =======
</TABLE>
CHANGE IN UNREALIZED
---------------------------------------
YEAR ENDED DECEMBER 31
---------------------------------------
1997 1996 1995
---------- ------------- ----------
Debt securities ................. $ (896) $(14,442) $36,399
Common stock .................... - (66) (236)
------ -------- -------
Change in unrealized appreciation
(depreciation) ................ $ (896) $(14,508) $36,163
====== ======== =======
Gross unrealized gains (losses) on common stocks were as follows:
UNREALIZED
-------------------------
YEAR ENDED DECEMBER 31
-------------------------
1997 1996 1995
------ ------ -------
Unrealized gains ............. $295 $295 $361
Unrealized losses ............ - - -
---- ---- ----
Net unrealized gains ......... $295 $295 $361
==== ==== ====
During 1997, the Company issued one mortgage loan with an interest rate of
8.07%. The maximum percentage of any one mortgage loan to the value of the
underlying real estate at origination was 69%. The Company requires all
mortgagees to carry fire insurance equal to the value of the underlying
property.
94
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO THE FINANCIAL STATEMENTS -- STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3 -- INVESTMENTS--(CONTINUED)
During 1997, 1996 and 1995, no mortgage loans were foreclosed and transferred
to real estate. During 1997 and 1996, the Company held a mortgage loan loss
reserve in the asset valuation reserve of $54 and $138, respectively.
At December 31, 1997, the Company had no investments (excluding U. S.
Government guaranteed or insured issues) which individually represented more
than ten percent of capital and surplus and the asset valuation reserve.
NOTE 4 -- REINSURANCE
The Company reinsures portions of certain insurance policies which exceed its
established limits, thereby providing a greater diversification of risk and
minimizing exposure on larger risks. The Company remains contingently liable
with respect to any insurance ceded, and this would become an actual liability
in the event that the assuming insurance company became unable to meet its
obligations under the reinsurance treaty.
1997 1996 1995
------------- ------------- -----------
Direct premiums .............. $1,219,271 $1,034,757 $570,413
Reinsurance assumed .......... 2,389 2,063 1,569
Reinsurance ceded ............ (5,141) (3,105) (2,084)
---------- ---------- --------
Net premiums earned .......... $1,216,519 $1,033,715 $569,898
========== ========== ========
The Company received reinsurance recoveries in the amount of $2,288, $2,156 and
$512 during 1997, 1996 and 1995, respectively. At December 31, 1997 and 1996,
estimated amounts recoverable from reinsurers that have been deducted from
policy and contract claim reserves totaled $2,721 and $974, respectively. The
aggregate reserves for policies and contracts were reduced for reserve credits
for reinsurance ceded at December 31, 1997 and 1996 of $1,369 and $1,140,
respectively.
NOTE 5 -- INCOME TAXES
For federal income tax purposes, the Company joins in a consolidated tax return
filing with certain affiliated companies. Under the terms of a tax-sharing
agreement between the Company and its affiliates, the Company computes federal
income tax expense as if it were filing a separate income tax return, except
that tax credits and net operating loss carryforwards are determined on the
basis of the consolidated group. Additionally, the alternative minimum tax is
computed for the consolidated group and the resulting tax, if any, is allocated
back to the separate companies on the basis of the separate companies'
alternative minimum taxable income.
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to gain from operations before taxes and
realized capital gains (losses) for the following reasons:
<TABLE>
<CAPTION>
1997 1996 1995
------------ --------- ---------
<S> <C> <C> <C>
Computed tax at federal statutory rate
(35%) ....................................... $ (1,156) $3,189 $5,096
Deferred acquisition costs - tax basis ......... 9,164 7,172 4,241
Tax reserve valuation .......................... (194) (696) (34)
Excess tax depreciation ........................ (127) (65) (49)
Amortization of IMR ............................ (552) (467) (309)
Dividend received deduction .................... (5,326) - -
Other, net ..................................... (1,340) 164 (28)
-------- ------ ------
Federal income tax expense ..................... $ 469 $9,297 $8,917
======== ====== ======
</TABLE>
For the year ended December 31, 1997, federal income tax benefit differs from
the amount computed by applying the statutory federal income tax rate to
realized gains due to the recognition for tax purposes of a deferred loss
previously incurred on a transfer of bonds from the Company to an affiliate.
Prior to 1984, as provided for under the Life Insurance Company Tax Act of
1959, a portion of statutory income was not subject to current taxation, but
was accumulated for income tax purposes in a memorandum account referred to as
the policyholders' surplus account. No federal income taxes have been provided
for in the financial statements on income deferred in the policyholders'
surplus account ($293 at December 31, 1997). To the extent dividends are paid
from the amount accumulated in the policyholders' surplus account, net earnings
would be reduced by the amount of tax required to be paid. Should the entire
amount in the policyholders' surplus account become taxable, the tax thereon
computed at current rates would amount to approximately $103.
In 1995, the Company reached a final settlement with the Internal Revenue
Service for 1987 through 1993 resulting in taxes of $1,275 and interest of $120
(net of $65 tax effect). The assessment was charged to surplus as a prior
period adjustment. An examination is currently underway for years 1994 through
1995.
95
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO THE FINANCIAL STATEMENTS -- STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 5 -- INCOME TAXES--(CONTINUED)
At December 31, 1996, the Company had capital loss carryforwards of
approximately $10,705, which were utilized by the Company's affiliates in the
consolidated tax return filing in 1997. This transaction resulted in a receipt
from the Company's affiliate of $3,747, which was credited directly to
unassigned surplus.
NOTE 6 -- POLICY AND CONTRACT ATTRIBUTES
Participating life insurance policies are issued by the Company which entitle
policyholders to a share in the earnings of the participating policies,
provided that a dividend distribution, which is determined annually based on
mortality and persistency experience of the participating policies, is
authorized by the Company. Participating insurance constituted approximately
.03% and .04% of life insurance in force at December 31, 1997 and 1996,
respectively.
A portion of the Company's policy reserves and other policyholders' funds
relate to liabilities established on a variety of the Company's products,
primarily separate accounts, that are not subject to significant mortality or
morbidity risk; however, there may be certain restrictions placed upon the
amount of funds that can be withdrawn without penalty. The amount of reserves
on these products, by withdrawal characteristics are summarized as follows:
DECEMBER 31
----------------------------------------------
1997 1996
----------------------- ----------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------------ ---------- ------------ ---------
Subject to discretionary
withdrawal with market
value adjustment .............. $ 13,812 1% $ 14,881 1%
Subject to discretionary
withdrawal at book value
less surrender charge ......... 68,376 2 63,619 2
Subject to discretionary
withdrawal at market value 3,615,255 91 2,692,614 89
Subject to discretionary
withdrawal at book value
(minimal or no charges or
adjustments) .................. 201,457 5 239,204 7
Not subject to discretionary
withdrawal provision .......... 16,572 1 17,603 1
---------- -- ---------- --
3,915,472 100% 3,027,921 100%
==== ====
DECEMBER 31
----------------------------------------------
1997 1996
----------------------- ----------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------------ ---------- ------------ ---------
Less reinsurance ceded .......... - -
---------- ----------
Total policy reserves on
annuities and deposit fund
liabilities ................... $3,915,472 $3,027,921
========== ==========
A reconciliation of the amounts transferred to and from the separate accounts
is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -----------
<S> <C> <C> <C>
Transfers as reported in the
summary of operations of the
separate accounts statement:
Transfers to separate accounts .......... $1,164,013 $997,513 $466,882
Transfers from separate
accounts ............................. 646,477 339,523 224,416
---------- -------- ---------
Net transfers to separate
accounts ............................. 517,536 657,990 242,466
Reconciling adjustments - change
in accruals for investment
management, administration
fees and contract guarantees,
and separate account surplus ......... 1,678 (205,519) (39)
---------- -------- ---------
Transfers as reported in the
summary of operations of the
life, accident and health annual
statement ............................ $ 519,214 $452,471 $242,427
========== ======== =========
</TABLE>
Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next
anniversary date. At December 31, 1997 and 1996, these assets (which are
reported as premiums deferred and uncollected) and the amounts of the related
gross premiums and loadings, are as follows:
96
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO THE FINANCIAL STATEMENTS -- STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 6 -- POLICY AND CONTRACT ATTRIBUTES--(CONTINUED)
GROSS LOADING NET
--------- --------- --------
DECEMBER 31, 1997
Ordinary direct first year business ......... $ 2 $ 1 $ 1
Ordinary direct renewal business ............ 1,350 140 1,210
Group life direct business .................. 717 - 717
------ ---- ------
$2,069 $141 $1,928
====== ==== ======
DECEMBER 31, 1996
Ordinary direct first year business ......... $ 40 $ 9 $ 31
Ordinary direct renewal business ............ 1,431 225 1,206
Group life direct business .................. 622 - 622
Annuity renewal business .................... 94 10 84
------ ---- ------
$2,187 $244 $1,943
====== ==== ======
At December 31, 1997 and 1996, the Company had insurance in force aggregating
$1,710 and $1,904, respectively, in which the gross premiums are less than the
net premiums required by the standard valuation standards established by the
Insurance Department of the State of Ohio. The Company established policy
reserves of $26 and $27 to cover these deficiencies at December 31, 1997 and
1996, respectively.
In 1994, the NAIC enacted a guideline to clarify reserving methodologies for
contracts that require immediate payment of claims upon proof of death of the
insured. Companies were allowed to grade the effects of the change in reserving
methodologies over five years. A direct charge to surplus of $1,872, $2,995 and
$3,496 was made for the years ended December 31, 1997, 1996 and 1995,
respectively, related to the change in reserve methodology.
NOTE 7 -- DIVIDEND RESTRICTIONS
Generally, an insurance company's ability to pay dividends is limited to the
amount that their net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements. However,
payment of such amounts as dividends may be subject to approval by regulatory
authorities.
NOTE 8 -- RETIREMENT AND COMPENSATION PLANS
The Company's employees participate in a qualified benefit plan sponsored by
AEGON. The Company has no legal obligation for the plan. The Company recognizes
pension expense equal to its allocation from AEGON. The pension expense is
allocated among the participating companies based on the FASB Statement No. 87
expense as a percent of salaries. The benefits are based on years of service and
the employee's compensation during the highest five consecutive years of
employment. Pension expense aggregated $659, $581 and $505 for the years ended
December 31, 1997, 1996 and 1995, respectively. The plan is subject to the
reporting and disclosure requirements of the Employee Retirement and Income
Security Act of 1974.
The Company's employees also participate in a contributory defined contribution
plan sponsored by AEGON which is qualified under Section 401(k) of the Internal
Revenue Service Code. Employees of the Company who customarily work at least
1,000 hours during each calendar year and meet the other eligibility
requirements are participants of the plan. Participants may elect to contribute
up to fifteen percent of their salary to the plan. The Company will match an
amount up to three percent of the participant's salary. Participants may direct
all of their contributions and plan balances to be invested in a variety of
investment options. The plan is subject to the reporting and disclosure
requirements of the Employee Retirement and Income Security Act of 1974.
Pension expense related to this plan was $448, $184 and $305 for the years
ended December 31, 1997, 1996 and 1995, respectively.
AEGON sponsors supplemental retirement plans to provide the Company's senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory and benefits are based on years of service and the employee's
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Code. In addition, AEGON has established incentive deferred
compensation plans for certain key employees of the Company. AEGON also
sponsors an employee stock option plan for individuals employed at least three
years and a stock purchase plan for its producers, with the participating
affiliated companies establishing their own eligibility criteria, producer
contribution limits and company matching formula. These plans have been accrued
or funded as deemed appropriate by management of AEGON and the Company.
In addition to pension benefits, the Company participates in plans sponsored by
AEGON that provide postretirement medical, dental and life insurance benefits
to employees meeting certain eligibility requirements. Portions of the medical
and dental plans are contributory. The expenses of the postretirement plans
calculated on the pay-as-you-go basis are
97
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO THE FINANCIAL STATEMENTS -- STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 8 -- RETIREMENT AND COMPENSATION PLANS--(CONTINUED)
charged to affiliates in accordance with an intercompany cost sharing
arrangement. The Company expensed $99, $98 and $86 for the years ended December
31, 1997, 1996 and 1995, respectively.
NOTE 9 -- RELATED PARTY TRANSACTIONS
The Company shares certain officers, employees and general expenses with
affiliated companies.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1997,
1996 and 1995, the Company paid $10,040, $10,038 and $8,825, respectively, for
such services, which approximates their costs to the affiliates. Company
provides office space, marketing and administrative services to certain
affiliates. During 1997, 1996 and 1995, the Company received $4,395, $3,271 and
$4,545, respectively, for such services, which approximates their cost. The
Company had a net payable with affiliates of $1,925 and $19,298 at December 31,
1997 and 1996, respectively.
Payable to affiliates and intercompany borrowings bear interest at the
thirty-day commercial paper rate of 5.33% at December 31, 1997. During 1997,
1996 and 1995, the Company paid (received) net interest of $364, $138 and
$(294), respectively, to (from) affiliates.
The Company received capital contributions of $20,000 from its parent in 1997.
At December 31, 1997, the Company has a $8,200 short-term note payable to an
affiliate. Interest on this note accrues at 5.60%.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business.
Although such litigation sometimes includes substantial demands for
compensatory and punitive damages in addition to contract liability, it is
management's opinion, after consultation with counsel and a review of available
facts, that damages arising from such demands will not be material to the
Company's financial position.
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the event of insolvency of
other insurance companies. Assessments are charged to operations when received
by the Company except where right of offset against other taxes paid is allowed
by law; amounts available for future offsets are recorded as an asset on the
Company's balance sheet. The future obligation has been based on the most recent
information available from the National Organization of Life and Health
Insurance Guaranty Association. Potential future obligations for unknown
nsolvencies are not determinable by the Company. The Company has established a
reserve of $4,007 and $4,344 and an offsetting premium tax benefit of $1,070 and
$1,218 at December 31, 1997 and 1996, respectively, for its estimated share of
future guaranty fund assessments related to several major insurer insolvencies.
The guaranty fund expense was $0, $212 and $1,950 at December 31, 1997, 1996 and
1995, respectively.
NOTE 11 -- YEAR 2000 (UNAUDITED)
AEGON has adopted and has in place a Year 2000 Assessment and Planning Project
(the "Project") to review and analyze its information technology and systems to
determine if they are Year 2000 compatible. The Company has begun to convert or
modify, where necessary, critical data processing systems. It is contemplated
that the plan will be substantially completed by early 1999. The Company does
not expect this project to have a significant effect on operations. However, to
mitigate the effect of outside influences upon the success of the project, the
Company has undertaken communications with its significant customers, suppliers
and other third parties to determine their Year 2000 compatibility and
readiness. Management believes that the issues associated with the Year 2000
will be resolved with no material financial impact on the Company.
Since the Year 2000 computer problem, and its resolution is complex and
multifaceted, the success of a response plan cannot be conclusively known until
the Year 2000 is reached (or an earlier date to the extent that systems or
equipment addresses Year 2000 date data prior to the Year 2000). Even with
appropriate and diligent pursuit of a well-conceived Project, including testing
procedures, there is no certainty that any company will achieve complete
success. Notwithstanding the efforts or results of the Company, its ability to
function unaffected to and through the Year 2000 may be adversely affected by
actions (or failure to act) of third parties beyond its knowledge or control.
98
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1997
SCHEDULE I
<TABLE>
<CAPTION>
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET
- ------------------ ---------- ---------- ----------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds:
United States Government and government agencies and authorities .. $ 65,611 $ 68,452 $ 65,611
States, municipalities and political subdivisions ................. 1,840 1,974 1,840
Foreign governments ............................................... 2,015 2,241 2,015
Public utilities .................................................. 15,794 16,295 15,794
All other corporate bonds ......................................... 170,659 178,801 170,659
-------- -------- --------
Total fixed maturities ............................................. 255,919 267,763 255,919
EQUITY SECURITIES
Common stocks:
Industrial, miscellaneous and all other ........................... 452 747 747
-------- -------- --------
Total equity securities ............................................ 452 747 747
Mortgage loans on real estate ...................................... 4,824 4,824
Real estate ........................................................ 19,964 19,964
Policy loans ....................................................... 76,741 76,741
Cash and short-term investments .................................... 13,896 13,896
-------- --------
Total investments .................................................. $371,796 $372,091
======== ========
</TABLE>
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accruals of discounts.
99
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)
SCHEDULE III
<TABLE>
<CAPTION>
BENEFITS,
CLAIMS,
FUTURE POLICY POLICY AND NET LOSSES AND OTHER
BENEFITS AND CONTRACT PREMIUM INVESTMENT SETTLEMENT OPERATING
EXPENSES LIABILITIES REVENUE INCOME* EXPENSES EXPENSES*
--------------- ------------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Individual life ............... $177,088 $ 9,533 $ 390,452 $13,742 $ 88,738 $176,303
Group life .................... 9,435 805 3,918 810 3,986 3,292
Annuity ....................... 296,290 591 822,149 25,461 389,726 83,179
-------- ------- ---------- ------- -------- --------
$482,813 $10,929 $1,216,519 $40,013 $482,450 $262,774
======== ======= ========== ======= ======== ========
YEAR ENDED DECEMBER 31, 1996
Individual life ............... $145,964 $ 7,017 $ 289,375 $ 8,228 $125,861 $124,181
Group life and health ......... 9,202 713 4,215 3,940 3,828 2,818
Annuity ....................... 332,230 854 740,125 23,899 294,681 71,576
-------- ------- ---------- ------- -------- --------
$487,396 $ 8,584 $1,033,715 $36,067 $424,370 $198,575
======== ======= ========== ======= ======== ========
YEAR ENDED DECEMBER 31, 1995
Individual life ............... $ 64,128 $ 5,811 $ 188,143 $ 9,470 $ 20,048 $ 83,709
Group life .................... 7,904 701 3,365 1,054 2,774 946
Annuity ....................... 319,353 100 378,390 30,367 211,008 44,447
-------- ------- ---------- ------- -------- --------
$391,385 $ 6,612 $ 569,898 $40,891 $233,830 $129,102
======== ======= ========== ======= ======== ========
</TABLE>
* Allocations of net investment income and other operating expenses are based on
a number of assumptions and estimates, and the results would change if
different methods were applied.
100
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
REINSURANCE
(DOLLARS IN THOUSANDS)
SCHEDULE IV
<TABLE>
<CAPTION>
CEDED TO ASSUMED PERCENTAGE OF
OTHER FROM OTHER NET AMOUNT ASSUMED
GROSS AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------------- ------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Life insurance in force ......... $40,221,361 $6,776,447 $2,692,822 $36,137,736 7.5%
=========== ========== ========== =========== ===
Premiums:
Individual life ................ $ 395,361 $ 4,910 $ - $ 390,452 0.0%
Group life and health .......... 1,761 231 2,389 3,918 61.0
Annuity ........................ 822,149 - - 822,149 0.0
----------- ---------- ---------- ----------- ----
$ 1,219,271 $ 5,141 $ 2,389 $ 1,216,519 0.2%
=========== ========== ========== =========== ====
YEAR ENDED DECEMBER 31, 1996
Life insurance in force ......... $28,168,880 $4,463,986 $2,210,601 $25,915,495 8.5%
=========== ========== ========== =========== ====
Premiums:
Individual life ................ $ 292,239 $ 2,863 $ - $ 289,376 0.0%
Group life and health .......... 2,393 242 2,063 4,214 49.0
Annuity ........................ 740,125 - - 740,125 0.0
----------- ---------- ---------- ----------- ----
$ 1,034,757 $ 3,105 $ 2,063 $ 1,033,715 0.2%
=========== ========== ========== =========== ====
YEAR ENDED DECEMBER 31, 1995
Life insurance in force ......... $19,438,203 $1,365,119 $1,619,378 $19,692,462 8.2%
=========== ========== ========== =========== ====
Premiums:
Individual life ................ $ 189,870 $ 1,727 $ - $ 188,143 0.0%
Group life ..................... 2,153 357 1,569 3,365 46.6
Annuity ........................ 378,390 - - 378,390 0.0
----------- ---------- ---------- ----------- ----
$ 570,413 $ 2,084 $ 1,569 $ 569,898 0.2%
=========== ========== ========== =========== ====
</TABLE>
101
