STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL VARIABLE DEFERRED ANNUITY CONTRACTS
issued by
CONSECO VARIABLE INSURANCE COMPANY
(formerly Great American Reserve Insurance Company)
and
CONSECO VARIABLE ANNUITY ACCOUNT C
(formerly Great American Reserve Variable Annuity Account C)
11815 N. PENNSYLVANIA ST., CARMEL, IN 46032
(317) 817-3700
MAY 1, 1999
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS DATED MAY 1, 1999 FOR CONSECO VARIABLE
ANNUITY ACCOUNT C - INDIVIDUAL VARIABLE DEFERRED ANNUITY CONTRACTS. YOU CAN
OBTAIN A COPY OF THE PROSPECTUS BY CONTACTING CONSECO VARIABLE INSURANCE COMPANY
AT THE ADDRESS OR TELEPHONE NUMBER GIVEN ABOVE.
TABLE OF CONTENTS
Page
GENERAL INFORMATION AND HISTORY...................................... 3
INDEPENDENT ACCOUNTANTS.............................................. 3
DISTRIBUTION......................................................... 3
VOTING RIGHTS ....................................................... 4
CALCULATION OF YIELD QUOTATIONS...................................... 4
CALCULATION OF TOTAL RETURN QUOTATIONS............................... 6
OTHER PERFORMANCE DATA............................................... 10
FEDERAL TAX STATUS .................................................. 14
ANNUITY PROVISIONS .................................................. 22
FINANCIAL STATEMENTS................................................. 24
GENERAL INFORMATION AND HISTORY
Conseco Variable Insurance Company (the "Company" or "Conseco Variable") is an
indirect wholly owned subsidiary of Conseco, Inc. On or about October 7,1998,
the Company changed its name from Great American Reserve Insurance Company to
its present name. In certain states, the Company may continue to use the name
Great American Reserve Insurance Company until the name change is approved in
that state. The operations of the Company are handled by Conseco, Inc. Conseco,
Inc. is a publicly owned financial services holding company, the principal
operations of which are in the development, marketing and administration of
specialized annuity and life insurance products. The Company has its principal
offices at 11815 N. Pennsylvania Street, Carmel, Indiana 46032. The Variable
Account was established by the Company.
INDEPENDENT ACCOUNTANTS
The financial statements of Conseco Variable Annuity Account C and Conseco
Variable Insurance Company have been examined by PricewaterhouseCoopers LLP,
independent accountants, for the periods indicated in their reports as stated in
their opinion and have been so included in reliance upon such opinion given upon
the authority of that firm as experts in accounting and auditing.
DISTRIBUTION
The Company continuously offers the Contracts through associated persons of
the principal underwriter for Variable Account, Conseco Equity Sales, Inc.
("Conseco Equity Sales"), a registered broker-dealer and member of the National
Association of Securities Dealers, Inc. Conseco Equity Sales is located at 11815
N. Pennsylvania Street, Carmel, Indiana 46032, and is an affiliate of the
Company. For the years ending December 31, 1998, 1997 and 1996, the Company paid
Conseco Equity Sales total underwriting commissions of $1,723,064, $1,896,989
and $1,930,300, respectively. In addition, certain Contracts may be sold by life
insurance/registered representatives of other registered broker-dealers.
Conseco Equity Sales performs the sales functions relating to the Contracts
and the company provides all administrative services. To cover the sales
expenses and administrative expenses (including such items as salaries, rent,
postage, telephone, travel, legal, actuarial, audit, office equipment and
printing), the Company makes sales and administrative deductions, varying by
type of Contract. See "Charges and Deductions" in the Prospectus.
VOTING RIGHTS
Contract Owners may instruct Conseco Variable as to the voting of Fund shares
attributable to their respective interests under the Contracts at meetings of
shareholders of the Funds. Contract Owners entitled to vote will receive proxy
material and a form on which voting instructions may be given. Conseco Variable
will vote the shares of each Sub-Account held by the Variable Account
attributable to the Contracts in accordance with instructions received from
Contract Owners. Shares held in each Sub-Account for which timely instructions
have not been received from Contract Owners will be voted by Conseco Variable
for or against any proposition, or Conseco Variable will abstain, in the same
proportion as shares in that Sub-account for which instructions are received.
Conseco Variable will vote, or abstain from voting, any shares that are not
attributable to Contract Owners in the same proportion as all Contract Owners in
the Variable Account vote or abstain. However, if Conseco Variable determines
that it is permitted to vote such shares of the Funds in its own right, it may
elect to do so, subject to the then-current interpretation of the 1940 Act and
the rules thereunder.
Under certain Variable Annuity Contracts, participants and annuitants have the
right to instruct the Contract Owner with respect to the number of votes
attributable to their Individual Accounts or valuation reserve. Votes
attributable to participants and annuitants who do not instruct the Contract
Owner will be cast by the Contract Owner for or against each proposal to be
voted upon, in the same proportion as votes for which instructions have been
received. Participants and annuitants entitled to instruct the casting of votes
will receive a notice of each meeting of Contract Owners, and proxy solicitation
materials, and a statement of the number of votes attributable to their
participation under the Contract.
The number of shares held in a Sub-Account deemed attributable to a Contract
Owner's interest under a Contract will be determined on the basis of the value
of the Accumulation Units credited to the Contract Owner's account as of the
record date. On or after the commencement of Annuity payments, the number of
attributable shares will be based on the amount of assets held to meet annuity
obligations to the payee under the Contract as of the record date. During the
annuity period, the number of votes attributable to a Contract will generally
decrease since funds set aside for Annuitants will decrease as payments are
made.
CALCULATION OF YIELD QUOTATIONS
The Money Market Sub-account's standard yield quotations may appear in sales
material and advertising as calculated by the standard method prescribed by
rules of the Securities and Exchange Commission. Under this method, the yield
quotation is based on a seven-day period and computed as follows: The Money
Market Sub-account's daily net investment factor minus one (1.00) is multiplied
by 365 to produce an annualized yield. The annualized yields of the seven-day
period are then averaged and carried to the nearest one-hundredth of one
percent. This yield reflects investment results less deductions for investment
advisory fees and mortality and expense risk fees but does not include
deductions for any applicable annual administrative fees. Because of these
deductions, the yield for the Money Market Sub-account will be lower than the
yield for the corresponding Portfolio of the Conseco Series Trust.
The Money Market Sub-account's effective yield may appear in sales material
and advertising for the same seven-day period, determined on a compound basis.
The effective yield is calculated by compounding the unannualized base period
return by adding one to the base period return, raising the sum to a power equal
to 365 divided by 7, and subtracting one from the result.
The yield on the Money Market Sub-account will generally fluctuate on a daily
basis. Therefore, the yield for any given past period is not an indication or
representation of future yields or rates of return. The actual yield is affected
by changes in interest rates on money market securities, average portfolio
maturity, the types and quality of portfolio securities held by the
corresponding Portfolio of Conseco Series Trust and its operating expenses.
The Portfolios of the eligible Funds may advertise investment performance
figures, including yield. Each Sub-account's yield will be based upon a stated
30-day period and will be computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last day of the period, according to the following formula:
YIELD = 2 ((A-B) + 1)6 -1)
-----
CD
Where:
A = the net investment income earned during the period by the Portfolio.
B = the expenses accrued for the period (net of reimbursements, if any).
C = the average daily number of accumulation units outstanding during the
period.
D = the maximum offering price per accumulation unit on the last day of the
period.
CALCULATION OF TOTAL RETURN QUOTATIONS
Conseco Variable may include certain total return quotations for one or more
of the Portfolios of the eligible Funds in advertising, sales literature or
reports to Contract Owners or prospective purchasers. Such total return
quotations will be expressed as the average annual rate of total return over
one-, five- and 10-year periods ended as of the end of the immediately preceding
calendar quarter, and as the dollar amount of annual total return on a
year-to-year, rolling 12-month basis ended as of the end of the immediately
preceding calendar quarter.
Average annual total return quotations are computed according to the
following formula:
n
P (1+T) = ERV
Where:
P = beginning purchase payment of $1,000.
T = average annual total return.
n = number of years in period.
ERV = ending redeemable value of a hypothetical $1,000 purchase payment
made at the beginning of the one-, five- or 10-year period at the end of
the one-, five- or 10-year period (or fractional portion thereof).
INDIVIDUAL FLEXIBLE PREMIUM PAYMENT ANNUITY
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDING 12/31/98:
VARIABLE ACCOUNT SUB-ACCOUNTS 10 YEARS
OR SINCE
1 YEAR 5 YEARS INCEPTION
------- ------- ---------
CONSECO SERIES TRUST
Balanced Portfolio (1)................... 1.25% 14.82% 14.48%
Equity Portfolio ........................ 6.54% 20.87% 17.59%
Fixed Income Portfolio................... (2.34)% 5.51% 9.08%
Government Securities Portfolio (1) (1.77)% 4.41% 4.68%
THE ALGER AMERICAN FUND
Alger American Growth Portfolio (3)...... 35.87% N/A 35.11%
Alger American Leveraged AllCap
Portfolio (2) ......................... 44.83% N/A 32.78%
Alger American MidCap Growth
Portfolio (3) ......................... 19.55% N/A 24.84%
Alger American Small Capitalization
Portfolio (2) ......................... 5.99% N/A 12.33%
AMERICAN CENTURY VARIABLE
PORTFOLIOS, INC
VP International (3) .................... 8.96% N/A 11.90%
VP Value (3) ............................ (3.85)% N/A 11.22%
VP Income and Growth (4)................. N/A N/A .89%
BERGER INSTITUTIONAL
PRODUCTS TRUST
Berger IPT - 100 Fund (3) ............... 6.69% N/A 12.87%
Berger IPT - Growth and Income
Fund (3) .............................. 14.71% N/A 22.97%
Berger IPT - Small Company
Growth Fund (3) ....................... (6.56)% N/A 16.87%
Berger/BIAM IPT - International
Fund (3) .............................. 6.55% N/A 2.78%
THE DREYFUS SOCIALLY RESPON-
SIBLE GROWTH FUND, INC (2) ............ 18.71% N/A 24.54%
DREYFUS STOCK INDEX FUND (2) ............ 17.64% N/A 25.30%
FEDERATED INSURANCE SERIES
Federated High Income Bond
Fund II (2) ........................... (5.79)% N/A 8.10%
Federated International Equity
Fund II (2) ........................... 15.22% N/A 10.35%
Federated Utility Fund II (2) ........... 4.53% N/A 15.49%
JANUS ASPEN SERIES
Aggressive Growth Portfolio (2) ......... 23.19% N/A 19.91%
Growth Portfolio (2) .................... 24.47% N/A 23.56%
Worldwide Growth Portfolio (2) .......... 18.29% N/A 25.88%
NEUBERGER BERMAN
ADVISERS MANAGEMENT TRUST
Limited Maturity Bond Portfolio (3)...... (4.23)% N/A .73%
Partners Portfolio (3) .................. (4.40)% N/A 11.59%
STRONG VARIABLE INSURANCE
FUNDS, INC
Strong Mid Cap Growth Fund II (3) ....... 18.06% N/A 28.45%
STRONG OPPORTUNITY FUND, INC.
Strong Opportunity Fund II (3) .......... 4.17% N/A 16.90%
VAN ECK WORLDWIDE
INSURANCE TRUST
Worldwide Bond Fund (2) ................. 3.45% N/A 3.13%
Worldwide Emerging Markets
Fund (3) .............................. (39.60)% N/A (34.54)%
Worldwide Hard Assets Fund (2) .......... (36.66)% N/A (6.02)%
Worldwide Real Estate Fund (4)........... N/A N/A (29.42)%
DREYFUS VARIABLE INVESTMENT FUND
Disciplined Stock Portfolio (4)....... N/A N/A (.49)%
International Value Portfolio (4)..... N/A N/A (17.97)%
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO VIF - High Yield Fund (4)..... N/A N/A (16.81)%
INVESCO VIF - Equity Income Fund (4).. N/A N/A (6.34)%
LAZARD RETIREMENT SERIES, INC.
Lazard Retirement Equity
Portfolio (4)....................... N/A N/A (2.79)%
Lazard Retirement Small Cap
Portfolio (4)....................... N/A N/A (28.93)%
LORD ABBETT SERIES FUND, INC.
Growth and Income Portfolio (4)....... N/A N/A (9.67)%
MITCHELL HUTCHINS SERIES TRUST
Growth & Income Portfolio (4)......... N/A N/A (11.65)%
- ----------------------------------
(1) Since inception (May 1, 1993).
(2) Since inception (June 1, 1995).
(3) Since inception (May 1, 1997).
(4) Since inception (May 1, 1998).
INDIVIDUAL SINGLE PREMIUM PAYMENT ANNUITY
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDING 12/31/98:
VARIABLE ACCOUNT SUB-ACCOUNTS 10 YEARS
OR SINCE
1 YEAR 5 YEARS INCEPTION
------- ------- ---------
CONSECO SERIES TRUST
Balanced Portfolio (1)................... 1.52% 15.06% 15.05%
Equity Portfolio ........................ 6.73% 21.10% 17.57%
Fixed Income Portfolio................... (2.09)% 5.72% 9.08%
Government Securities Portfolio (1)...... (1.52)% 4.63% 5.24%
THE ALGER AMERICAN FUND
Alger American Growth Portfolio (3)...... 36.21% N/A 35.41%
Alger American Leveraged AllCap
Portfolio (2) ......................... 45.20% N/A 33.14%
Alger American MidCap Growth
Portfolio (3) ......................... 19.86% N/A 25.09%
Alger American Small Capitalization
Portfolio (2) ......................... 6.26% N/A 12.64%
AMERICAN CENTURY VARIABLE
PORTFOLIOS, INC
VP International (3) .................... 9.24% N/A 12.12%
VP Value (3) ............................ (3.60)% N/A 11.45%
VP Income & Growth (4)................... N/A N/A 1.25%
BERGER INSTITUTIONAL
PRODUCTS TRUST
Berger IPT - 100 Fund (3) ............... 6.97% N/A 13.10%
Berger IPT - Growth and Income
Fund (3) .............................. 15.00% N/A 23.22%
Berger IPT - Small Company Growth
Fund (3) .............................. (6.31)% N/A 17.10%
Berger/BIAM IPT - International
Fund (3) .............................. 6.82% N/A 2.99%
THE DREYFUS SOCIALLY RESPON-
SIBLE GROWTH FUND, INC (2) ............ 19.01% N/A 24.87%
DREYFUS STOCK INDEX FUND (2) ............ 17.94% N/A 25.63%
FEDERATED INSURANCE SERIES
Federated High Income Bond
Fund II (2) ........................... (5.54)% N/A 8.40%
Federated International Equity
Fund II (2) ........................... 15.52% N/A 10.66%
Federated Utility Fund II (2) ........... 4.81% N/A 15.80%
JANUS ASPEN SERIES
Aggressive Growth Portfolio (2) ......... 23.50% N/A 20.24%
Growth Portfolio (2) .................... 24.79% N/A 23.90%
Worldwide Growth Portfolio (2) .......... 18.59% N/A 26.23%
NEUBERGER BERMAN
ADVISERS MANAGEMENT TRUST
Limited Maturity Bond Portfolio (3) (3.98)% N/A .93%
Partners Portfolio (3) .................. (4.15)% N/A 11.82%
STRONG VARIABLE INSURANCE
FUNDS, INC
Strong Mid Cap Growth Fund II (3) ....... 18.36% N/A 28.71%
STRONG OPPORTUNITY FUND, INC.
Strong Opportunity Fund II (3) .......... 4.43% N/A 17.14%
VAN ECK WORLDWIDE
INSURANCE TRUST
Worldwide Bond Fund (2) ................. 3.71% N/A 3.42%
Worldwide Emerging Markets
Fund (3) .............................. (39.44)% N/A (34.40)%
Worldwide Hard Assets Fund (2) .......... (36.49)% N/A (5.75)%
Worldwide Real Estate Fund (4)........... N/A N/A (29.16)%
DREYFUS VARIABLE INVESTMENT FUND
Disciplined Stock Portfolio (4)....... N/A N/A (.14)%
International Value Portfolio (4)..... N/A N/A (17.68)%
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO VIF - High Yield Fund 4)...... N/A N/A (16.52)%
INVESCO VIF - Equity Income Fund (4).. N/A N/A (6.01)%
LAZARD RETIREMENT SERIES, INC.
Lazard Retirement Equity
Portfolio (4)....................... N/A N/A (2.45)%
Lazard Retirement Small Cap
Portfolio (4)....................... N/A N/A (28.68)%
LORD ABBETT SERIES FUND, INC.
Growth and Income Portfolio (4)....... N/A N/A (9.35)%
MITCHELL HUTCHINS SERIES TRUST
Growth & Income Portfolio (4)......... N/A N/A (11.33)%
- -----------------------------------
(1) Since inception (May 1, 1993).
(2) Since inception (June 1, 1995).
(3) Since inception (May 1, 1997).
(4) Since inception (May 1, 1998).
OTHER PERFORMANCE DATA
Conseco Variable may from time to time also illustrate average annual total
returns in a non-standard format as appears in the following "Gross Average
Annual Total Returns" tables, in conjunction with the standard format described
above. The non-standard format will be identical to the standard format except
that the withdrawal charge percentage will be assumed to be zero.
INDIVIDUAL FLEXIBLE PREMIUM PAYMENT ANNUITY
GROSS AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDING 12/31/98:
VARIABLE ACCOUNT SUB-ACCOUNTS 10 YEARS
OR SINCE
1 YEAR 5 YEARS INCEPTION
------- ------- ---------
CONSECO SERIES TRUST
Balanced Portfolio (1)................... 9.27% 15.74% 15.09%
Equity Portfolio ........................ 14.88% 21.79% 17.60%
Fixed Income Portfolio................... 5.39% 6.32% 9.09%
Government Securities Portfolio (1)...... 6.01% 5.26% 5.25%
THE ALGER AMERICAN FUND
Alger American Growth Portfolio (3)...... 46.60% N/A 40.51%
Alger American Leveraged AllCap
Portfolio (2) ......................... 56.26% N/A 34.54%
Alger American MidCap Growth
Portfolio (3) ......................... 29.00% N/A 29.83%
Alger American Small Capitalization
Portfolio (2) ......................... 14.38% N/A 13.80%
AMERICAN CENTURY VARIABLE
PORTFOLIOS, INC
VP International (3) .................... 17.58% N/A 16.38%
VP Value (3) ............................ 3.77% N/A 15.68%
VP Income & Growth (4)................... N/A N/A 12.90%
BERGER INSTITUTIONAL
PRODUCTS TRUST
Berger IPT - 100 Fund (3) ............... 15.13% N/A 17.40%
Berger IPT - Growth and Income
Fund (3) .............................. 23.79% N/A 27.89%
Berger IPT - Small Company Growth
Fund (3) .............................. .85% N/A 21.55%
Berger/BIAM IPT - International
Fund (3) .............................. 14.97% N/A 6.91%
THE DREYFUS SOCIALLY RESPON-
SIBLE GROWTH FUND, INC (2) ............ 28.10% N/A 26.16%
DREYFUS STOCK INDEX FUND (2) ............ 26.94% N/A 26.93%
FEDERATED INSURANCE SERIES
Federated High Income Bond
Fund II (2) ........................... 1.68% N/A 9.55%
Federated International Equity
Fund II (2) ........................... 24.33% N/A 11.84%
Federated Utility Fund II (2) ........... 12.82% N/A 17.04%
JANUS ASPEN SERIES
Aggressive Growth Portfolio (2) ......... 32.92% N/A 21.51%
Growth Portfolio (2) .................... 34.31% N/A 25.22%
Worldwide Growth Portfolio (2) .......... 27.64% N/A 27.56%
NEUBERGER BERMAN
ADVISERS MANAGEMENT TRUST
Limited Maturity Bond Portfolio (3) 3.35% N/A 4.77%
Partners Portfolio (3) .................. 3.17% N/A 16.06%
STRONG VARIABLE INSURANCE
FUNDS, INC
Strong Mid Cap Growth Fund II (3) ....... 27.40% N/A 33.59%
STRONG OPPORTUNITY FUND, INC.
Strong Opportunity Fund II (3) .......... 12.41% N/A 21.57%
VAN ECK WORLDWIDE
INSURANCE TRUST
Worldwide Bond Fund (2) ................. 11.63% N/A 4.53%
Worldwide Emerging Markets
Fund (3) .............................. (34.80)% N/A (31.88)%
Worldwide Hard Assets Fund (2) .......... (31.62)% N/A (4.74)%
Worldwide Real Estate Fund (4)........... N/A N/A (21.00)%
DREYFUS VARIABLE INVESTMENT FUND
Disciplined Stock Portfolio (4)....... N/A N/A 11.35%
International Value Portfolio (4)..... N/A N/A (8.20)%
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO VIF - High Yield Fund (4)..... N/A N/A (6.90)%
INVESCO VIF - Equity Income Fund (4).. N/A N/A 4.81%
LAZARD RETIREMENT SERIES, INC.
Lazard Retirement Equity
Portfolio (4)....................... N/A N/A 8.78%
Lazard Retirement Small Cap
Portfolio (4)....................... N/A N/A (20.45)%
LORD ABBETT SERIES FUND, INC.
Growth and Income Portfolio (4)....... N/A N/A 1.09%
MITCHELL HUTCHINS SERIES TRUST
Growth & Income Portfolio (4)......... N/A N/A (1.12)%
- -------------------------------------
(1) Since inception (May 1, 1993).
(2) Since inception (June 1, 1995).
(3) Since inception (May 1, 1997).
(4) Since inception (May 1, 1998).
INDIVIDUAL SINGLE PREMIUM PAYMENT ANNUITY
GROSS AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDING 12/31/98:
VARIABLE ACCOUNT SUB-ACCOUNTS 10 YEARS
OR SINCE
1 YEAR 5 YEARS INCEPTION
------- ------- -----------
CONSECO SERIES TRUST
Balanced Portfolio (1)................... 9.27% 15.74% 15.09%
Equity Portfolio ........................ 14.88% 21.79% 17.60%
Fixed Income Portfolio................... 5.39% 6.32% 9.09%
Government Securities Portfolio (1)...... 6.01% 5.26% 5.25%
THE ALGER AMERICAN FUND
Alger American Growth Portfolio (3)...... 46.60% N/A 40.51%
Alger American Leveraged AllCap
Portfolio (2) ......................... 56.26% N/A 34.54%
Alger American MidCap Growth
Portfolio (3) ......................... 29.00% N/A 29.83%
Alger American Small Capitalization
Portfolio (2) ......................... 14.38% N/A 13.80%
AMERICAN CENTURY VARIABLE
PORTFOLIOS, INC
VP International (3) .................... 17.58% N/A 16.38%
VP Value (3) ............................ 3.77% N/A 15.68%
VP Income & Growth (4)................... N/A N/A 12.90%
BERGER INSTITUTIONAL
PRODUCTS TRUST
Berger IPT - 100 Fund (3) ............... 15.13% N/A 17.40%
Berger IPT - Growth and Income
Fund (3) .............................. 23.79% N/A 27.89%
Berger IPT - Small Company Growth
Fund (3) .............................. .85% N/A 21.55%
Berger/BIAM IPT - International
Fund (3) .............................. 14.97% N/A 6.91%
THE DREYFUS SOCIALLY RESPON-
SIBLE GROWTH FUND, INC (2) ............ 28.10% N/A 26.16%
DREYFUS STOCK INDEX FUND (2) ............ 26.94% N/A 26.93%
FEDERATED INSURANCE SERIES
Federated High Income Bond
Fund II (2) ........................... 1.68% N/A 9.55%
Federated International Equity
Fund II (2) ........................... 24.33% N/A 11.84%
Federated Utility Fund II (2) ........... 12.82% N/A 17.04%
JANUS ASPEN SERIES
Aggressive Growth Portfolio (2) ......... 32.92% N/A 21.51%
Growth Portfolio (2) .................... 34.31% N/A 25.22%
Worldwide Growth Portfolio (2) .......... 27.64% N/A 27.56%
NEUBERGER BERMAN
ADVISERS MANAGEMENT TRUST
Limited Maturity Bond Portfolio (3) 3.35% N/A 4.77%
Partners Portfolio (3) .................. 3.17% N/A 16.06%
STRONG VARIABLE INSURANCE
FUNDS, INC
Strong Mid Cap Growth Fund II (3) ....... 27.40% N/A 33.59%
STRONG OPPORTUNITY FUND, INC.
Strong Opportunity Fund II (3) .......... 12.41% N/A 21.59%
VAN ECK WORLDWIDE
INSURANCE TRUST
Worldwide Bond Fund (2) ................. 11.63% N/A 4.53%
Worldwide Emerging Markets
Fund (3) .............................. (34.80)% N/A (31.88)%
Worldwide Hard Assets Fund (2) .......... (31.62)% N/A (4.74)%
Worldwide Real Estate Fund (4)........... N/A N/A (21.00)%
DREYFUS VARIABLE INVESTMENT FUND
Disciplined Stock Portfolio (4)....... N/A N/A 11.35%
International Value Portfolio (4)..... N/A N/A (8.20)%
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO VIF - High Yield Fund (4)..... N/A N/A (6.90)%
INVESCO VIF - Equity Income Fund (4).. N/A N/A 4.81%
LAZARD RETIREMENT SERIES, INC.
Lazard Retirement Equity
Portfolio (4)....................... N/A N/A 8.78%
Lazard Retirement Small Cap
Portfolio (4)....................... N/A N/A (20.45)%
LORD ABBETT SERIES FUND, INC.
Growth and Income Portfolio (4)....... N/A N/A 1.09%
MITCHELL HUTCHINS SERIES TRUST
Growth & Income Portfolio (4)......... N/A N/A (1.12)%
- -----------------------------------
(1) Since inception (May 1, 1993).
(2) Since inception (June 1, 1995).
(3) Since inception (May 1, 1997).
(4) Since inception (May 1, 1998).
All non-standard performance data will only be advertised if the standard
performance data for the same period, as well as for the required periods, is
also illustrated.
Performance data for the Variable Account investment options may be compared
in advertisements, sales literature and reports to Contract Owners, with the
investment returns of various mutual funds, stocks, bonds, certificates of
deposit, tax free bonds, or common stock and bond indices, and other groups of
variable annuity separate accounts or other investment products tracked by
Morningstar, Inc., a widely used independent research firm which ranks mutual
funds and other investment companies by overall performance, investment
objectives, and assets, or tracked by other services, companies, publications,
or persons who rank such investment companies on overall performance or other
criteria.
Reports and promotional literature may also contain other information,
including the effect of tax-deferred compounding on an investment options
performance returns, or returns in general, which may be illustrated by graphs,
charts or otherwise, and which may include a comparison, at various points in
time, of the return from an investment in a Contract (or returns in general) on
a tax-deferred basis (assuming one or more tax rates) with the return on a
taxable basis.
Reports and promotional literature may also contain the ratings Conseco
Variable has received from independent rating agencies. However, Conseco
Variable does not guarantee the investment performance of the Variable Account
investment options.
FEDERAL TAX STATUS
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING OF
CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE COMPANY
CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE MADE.
PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE POSSIBILITY
OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF THE CONTRACTS.
PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE TREATED AS
"ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS. IT SHOULD BE FURTHER
UNDERSTOOD THAT THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE AND THAT SPECIAL
RULES NOT DESCRIBED HEREIN MAY BE APPLICABLE IN CERTAIN SITUATIONS. MOREOVER, NO
ATTEMPT HAS BEEN MADE TO CONSIDER ANY APPLICABLE STATE OR OTHER TAX LAWS.
GENERAL
Section 72 of the Internal Revenue Code of 1986, as amended ("Code") governs
taxation of annuities in general. An Owner is not taxed on increases in the
value of a Contract until distribution occurs, either in the form of a lump sum
payment or as annuity payments under the annuity option selected. For a lump sum
payment received as a total withdrawal (total surrender), the recipient is taxed
on the portion of the payment that exceeds the cost basis of the Contract. For
non-qualified Contracts, this cost basis is generally the purchase payments,
while for Qualified Contracts there may be no cost basis. The taxable portion of
the lump sum payment is taxed at ordinary income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion
amount is includable in taxable income. The exclusion amount for payments based
on a fixed annuity option is determined by multiplying the payment by the ratio
that the cost basis of the Contract (adjusted for any period or refund feature)
bears to the expected return under the Contract. The exclusion amount for
payments based on a variable annuity option is determined by dividing the cost
basis of the Contract (adjusted for any period certain or refund guarantee) by
the number of years over which the annuity is expected to be paid. Payments
received after the investment in the Contract has been recovered (i.e. when the
total of the excludable amount equals the investment in the Contract) are fully
taxable. The taxable portion is taxed at ordinary income tax rates. For certain
types of Qualified Plans there may be no cost basis in the Contract within the
meaning of Section 72 of the Code. Owners, annuitants and beneficiaries under
the Contracts should seek competent financial advice about the tax consequences
of any distributions.
Conseco Variable is taxed as a life insurance company under the Code. For
federal income tax purposes, the Variable Account is not a separate entity from
Conseco Variable, and its operations form a part of Conseco Variable.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the United States Treasury Department
("Treasury Department"), adequately diversified. Disqualification of the
Contract as an annuity contract would result in the imposition of federal income
tax to the Owner with respect to earnings allocable to the Contract prior to the
receipt of payments under the Contract. The Code contains a safe harbor
provision which provides that annuity contracts such as the Contract meet the
diversification requirements if, as of the end of each quarter, the underlying
assets meet the diversification standards for a regulated investment company and
no more than fifty-five percent (55%) of the total assets consist of cash, cash
items, U.S. Government securities and securities of other regulated investment
companies.
Regulations issued by the Treasury Department (the "Regulations") amplify the
diversification requirements for variable contracts set forth in the Code and
provide an alternative to the safe harbor provision described above. Under the
Regulations, an investment portfolio will be deemed adequately diversified if:
(1) no more than 55% of the value of the total assets of the portfolio is
represented by any one investment; (2) no more than 70% of the value of the
total assets of the portfolio is represented by any two investments; (3) no more
than 80% of the value of the total assets of the portfolio is represented by any
three investments; and (4) no more than 90% of the value of the total assets of
the portfolio is represented by any four investments.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable contracts
by Section 817(h) of the Code have been met, "each United States government
agency or instrumentality shall be treated as a separate issuer."
Conseco Variable intends that all Variable Account Investment Options
underlying the Contracts will be managed in such a manner as to comply with
these diversification requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which Owner control of the
investments of the Variable Account will cause the Owner to be treated as the
owner of the assets of the Variable Account, thereby resulting in the loss of
favorable tax treatment for the Contract. At this time it cannot be determined
whether additional guidance will be provided and what standards may be contained
in such guidance.
The amount of Owner control which may be exercised under the Contract is
different in some respects from the situations addressed in published rulings
issued by the Internal Revenue Service in which it was held that the policy
owner was not the owner of the assets of the separate account. It is unknown
whether these differences, such as the Owner's ability to transfer among
investment choices or the number and type of investment choices available, would
cause the Owner to be considered as the owner of the assets of the Variable
Account resulting in the imposition of federal income tax to the Owner with
respect to earnings allocable to the Contract prior to receipt of payments under
the Contract.
In the event any forthcoming guidance or ruling is considered to set forth a
new position, such guidance or ruling will generally be applied only
prospectively. However, if such ruling or guidance was not considered to set
forth a new position, it may be applied retroactively resulting in the Owners
being retroactively determined to be the owners of the assets of the Separate
Account.
Due to the uncertainty in this area, Conseco Variable reserves the right to
modify the Contract in an attempt to maintain favorable tax treatment.
MULTIPLE CONTRACTS
The Code provides that multiple non-qualified annuity contracts which are
issued within a calendar year to the same contract owner by one company or its
affiliates are treated as one annuity contract for purposes of determining the
tax consequences of any distribution. Such treatment may result in adverse tax
consequences including more rapid taxation of the distributed amounts from such
combination of contracts. For purposes of this rule, contracts received in a
Section 1035 exchange will be considered issued in the year of the exchange.
Owners should consult a tax adviser prior to purchasing more than one
non-qualified annuity contract in any calendar year.
CONTRACTS OWNED BY OTHER THAN NATURAL PERSONS
Under Section 72(u) of the Code, the investment earnings on premiums for the
Contracts will be taxed currently to the Owner if the Owner is a non-natural
person, e.g., a corporation or certain other entities. Such Contracts generally
will not be treated as annuities for federal income tax purposes. However, this
treatment is not applied to a Contract held by a trust or other entity as an
agent for a natural person nor to Contracts held by Qualified Plans. Purchasers
should consult their own tax counsel or other tax adviser before purchasing a
Contract to be owned by a non-natural person.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract may be a taxable event. Owners should
therefore consult competent tax advisers should they wish to assign or pledge
their Contracts.
If the Contract is issued pursuant to a retirement plan which receives
favorable treatment under the provision of Sections 403(b) or 457 of the Code,
it may not be assigned, pledged or otherwise transferred except as allowed under
applicable law.
INCOME TAX WITHHOLDING
All distributions or the portion thereof which is includable in the gross
income of the Owner are subject to federal income tax withholding. Generally,
amounts are withheld from periodic payments at the same rate as wages and at the
rate of 10% from non-periodic payments. However, the Owner, in many cases, may
elect not to have taxes withheld or to have withholding done at a different
rate.
Certain distributions from retirement plans qualified under Section 401 or
Section 403(b) of the Code, which are not directly rolled over to another
eligible retirement plan or individual retirement account or individual
retirement annuity, are subject to a mandatory 20% withholding for federal
income tax. The 20% withholding requirement generally does not apply to: a) a
series of substantially equal payments made at least annually for the life or
life expectancy of the participant or joint and last survivor expectancy of the
participant and a designated beneficiary or for a specified period of 10 years
or more; or b) distributions which are required minimum distributions; or c) the
portion of the distributions not includable in gross income (i.e. Returns of
after-tax contributions), or d) hardship withdrawals. Participants should
consult their own tax counsel or other tax adviser regarding withholding
requirements.
TAX TREATMENT OF WITHDRAWALS - NON-QUALIFIED CONTRACTS
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the Contract Value exceeds the aggregate purchase
payments made, any amount withdrawn will be treated as coming first from the
earnings and then, only after the income portion is exhausted, as coming from
the principal. Withdrawn earnings are includable in gross income. It further
provides that a ten percent (10%) penalty will apply to the income portion of
any premature distribution. However, the penalty is not imposed on amounts
received: (a) after you reach age 59 1/2; (b) after your death; (c) if you
become totally disabled (for this purpose disability is as defined in Section
72(m)(7) of the Code); (d) in a series of substantially equal periodic payments
made not less frequently than annually for your life (or life expectancy) or for
the joint lives (or joint life expectancies) of you and your Beneficiary; (e)
under an immediate annuity; or (f) which are allocable to purchase payments made
prior to August 14, 1982.
With respect to (d) above, if the series of substantially equal periodic
payments is modified before the later of your attaining age 59 1/2 or 5 years
from the date of the first periodic payment, then the tax for the year of the
modification is increased by an amount equal to the tax which would have been
imposed (the 10% penalty tax) but for the exception, plus interest for the tax
years in which the exception was used.
The Contract provides that upon the death of the Annuitant prior to Maturity
Date, the death proceeds will be paid to the beneficiary. Such payments made
upon the death of the Annuitant who is not the Owner of the Contract do not
qualify for the death of Owner exception described above, and will be subject to
the ten (10%) percent distribution penalty unless the beneficiary is 59 1/2
years old or one of the other exceptions to the penalty applies.
The above information does not apply to Qualified Contracts. However,
separate tax withdrawal penalties and restrictions may apply to such Qualified
Contracts. (See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
QUALIFIED PLANS
The Contracts offered herein are designed to be suitable for use under
various types of Qualified Plans. Taxation of participants in each Qualified
Plan varies with the type of plan and terms and conditions of each specific
plan. Owners, Annuitants and beneficiaries are cautioned that benefits under a
Qualified Plan may be subject to the terms and conditions of the plan regardless
of the terms and conditions of the Contracts issued pursuant to the plan. Some
retirement plans are subject to distribution and other requirements that are not
incorporated into the Company's administrative procedures. Owners, participants
and beneficiaries are responsible for determining that contributions,
distributions and other transactions with respect to the Contracts comply with
applicable law. Following are general descriptions of the types of Qualified
Plans with which the Contracts may be used. Such descriptions are not exhaustive
and are for general informational purposes only. The tax rules regarding
Qualified Plans are very complex and will have differing applications depending
on individual facts and circumstances. Each purchaser should obtain competent
tax advice prior to purchasing a Contract issued under a Qualified Plan.
Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available as described
herein. Generally, Contracts issued pursuant to Qualified Plans are not
transferable except upon surrender or annuitization. Various penalty and excise
taxes may apply to contributions or distributions made in violation of
applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified Contracts. (See "Tax
Treatment of Withdrawals - Qualified Contracts" below.)
On July 6, 1983, the Supreme Court decided 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. The Contracts sold by Conseco Variable in connection
with Qualified Plans will utilize annuity tables which do not differentiate on
the basis of sex. Such annuity tables will also be available for use in
connection with certain non-qualified deferred compensation plans.
a. TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of "tax-sheltered annuities"
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. These qualifying
employers may make contributions to the Contracts for the benefit of their
employees. Such contributions are not includable in the gross income of the
employees until the employees receive distributions from the Contracts. The
amount of contributions to the tax-sheltered annuity is limited to certain
maximums imposed by the Code. Furthermore, the Code sets forth additional
restrictions governing such items as transferability, distributions,
nondiscrimination and withdrawals. (See "Tax Treatment of Withdrawals Qualified
Contracts" and "Tax-Sheltered Annuities - Withdrawal Limitations" below.) Any
employee should obtain competent tax advice as to the tax treatment and
suitability of such an investment.
b. GOVERNMENT AND TAX-EXEMPT ORGANIZATION'S DEFERRED COMPENSATION PLANS
Under Code provisions, employees and independent contractors performing
services for state and local governments and other tax-exempt organizations may
participate in Deferred Compensation Plans. While participants in such Plans may
be permitted to specify the form of investment in which their Plan accounts will
participate, all such investments are owned by the sponsoring employer and are
subject to the claims of its creditors until December 31, 1998, or such earlier
date as may be established by Plan amendment. However, amounts deferred under a
Plan created on or after August 20, 1996 and amounts deferred under any 457 Plan
after December 31, 1998 must be held in trust, custodial account or annuity
contract for the exclusive benefit of Plan participants and their beneficiaries.
The amounts deferred under a Plan which meets the requirements of Section 457 of
the Code are not taxable as income to the participant until paid or otherwise
made available to the participant or beneficiary. As a general rule, the maximum
amount which can be deferred in any one year is the lesser of $7,500 ($8,000
beginning in 1998, as indexed for inflation) or 331/3 percent of the
participant's includable compensation. However, in limited circumstances, up to
$15,000 may be deferred in each of the last three years before normal retirement
age. Furthermore, the Code provides additional requirements and restrictions
regarding eligibility and distributions.
TAX TREATMENT OF WITHDRAWALS - QUALIFIED CONTRACTS
In the case of a withdrawal under a Qualified Contract, a ratable portion
of the amount received is taxable, generally based on the ratio of the
individual's cost basis to the individual's total accrued benefit under the
retirement plan. Special tax rules may be available for certain distributions
from a Qualified Contract. Section 72(t) of the Code imposes a 10% penalty tax
on the taxable portion of any distribution from qualified retirement plans,
including Contracts issued and qualified under Code Section
(403(b)(Tax-Sheltered Annuities). To the extent amounts are not includable in
gross income because they have been rolled over to an IRA or to another eligible
Qualified Plan, no tax penalty will be imposed. The tax penalty will not apply
to the following distributions: (a) made on or after the date on which the Owner
or Annuitant (as applicable) reaches age 59 1/2; (b) following the death or
disability of the Owner or Annuitant (as applicable) (for this purpose
disability is as defined in Section 72(m) (7) of the Code); (c) after separation
from service, distributions that are part of substantially equal periodic
payments made not less frequently than annually for the life (or life
expectancy) of the Owner or Annuitant (as applicable) or the joint lives (or
joint life expectancies) of such Owner or Annuitant (as applicable) and his or
her designated Beneficiary; (d) to an Owner or Annuitant (as applicable) who has
separated from service after he has attained age 55; (e) made to the Owner or
Annuitant (as applicable) to the extent such distributions do not exceed the
amount allowable as a deduction under Code Section 213 to the Owner or Annuitant
(as applicable) for amounts paid during the taxable year for medical care; and
(f) made to an alternate payee pursuant to a qualified domestic relations order.
With respect to (c) above, if the series of substantially equal periodic
payments is modified before the later of your attaining age 59 1/2 or 5 years
from the date of the first periodic payment, then the tax for the year of the
modification is increased by an amount equal to the tax which would have been
imposed (the 10% penalty tax) but for the exception, plus interest for the tax
years in which the exception was used.
TAX-SHELTERED ANNUITIES - WITHDRAWAL LIMITATIONS
The Code limits the withdrawal of amounts attributable to contributions made
pursuant to a salary reduction agreement (as defined in Section 403(b)(11) of
the Code) to circumstances only when the Owner: (1) attains age 59 1/2; (2)
separates from service; (3) dies; (4) becomes disabled (within the meaning of
Section 72(m)(7) of the Code); or (5) in the case of hardship. However,
withdrawals for hardship are restricted to the portion of the Owner's Contract
Value which represents contributions made by the Owner and does not include any
investment results. The limitations on withdrawals became effective on January
1, 1989 and apply only to salary reduction contributions made after December 31,
1988, to income attributable to such contributions and to income attributable to
amounts held as of December 31, 1988. The limitations on withdrawals do not
affect rollovers and transfers between certain Qualified Plans. Owners should
consult their own tax counsel or other tax adviser regarding any distributions.
MANDATORY DISTRIBUTIONS - QUALIFIED PLANS
Generally, distributions from a qualified plan must begin no later than April
1st of the calendar year following the later of (a) the year in which the
employee attains age 70 1/2 or (b) the calendar year in which the employee
retires. Required distributions must be over a period not exceeding the life
expectancy of the individual or the joint lives or life expectancies of the
individual and his or her designated beneficiary. If the required minimum
distributions are not made, a 50% penalty tax is imposed as to the amount not
distributed.
ANNUITY PROVISIONS
DETERMINATION OF AMOUNT OF THE FIRST MONTHLY VARIABLE ANNUITY PAYMENT. When
annuity payments commence, the value of the Individual Account is determined as
the total of the product(s) of (a) the value of an Accumulation Unit for each
investment medium at the end of the Valuation Period immediately preceding the
Valuation Period in which the first annuity payment is due and (b) the number of
Accumulation Units credited to the Individual Account with respect to each
investment medium as of the date the Annuity is to commence. Premium tax, if
assessed at such time by the applicable jurisdiction, will be deducted from the
Individual Account value. Any portion of the Individual Account value for which
a fixed annuity election has been made is applied to provide fixed-dollar
payments under the option elected.
The amount of the first monthly variable annuity payment is then calculated
by multiplying the Individual Account value which is to be applied to provide
variable payments by the amount of first monthly payment per $1,000 of value, in
accordance with annuity tables contained in the Contract. The annuity tables are
based on the Progressive Annuity Table, assuming births in the year 1900. For
annuitants whose year of birth is after 1915, an "adjusted age" is used, which
is one year less than actual age. The amount of first monthly payment per $1,000
of value varies according to the form of annuity selected, the age of the
annuitant (for certain options) and the assumed net investment rate selected by
the Contract Owner. The standard assumed net investment rate is 3 1/2 percent
per annum; however, an alternative 5 percent per annum, or such other rate as
Conseco Variable may offer, may be selected prior to the commencement of annuity
payments.
The assumed net investment rates built into the annuity tables affect both
the amount of the first monthly variable annuity payment and the amount by which
subsequent payments may increase or decrease. Selection of a 5 percent rate,
rather than the standard 3 1/2 percent rate, would produce a higher first
payment but subsequent payments would increase more slowly in periods when
Annuity Unit values are rising and decrease more rapidly in periods when Annuity
Unit values are declining. With either assumed rate, if the actual net
investment rate during any two or more successive months were equal to the
assumed rate, the annuity payments would be level during that period.
If a greater first monthly payment would result, Conseco Variable will
compute the first monthly payment on the same mortality basis as used in
determining the first payment under immediate annuity contracts being issued for
a similar class of annuitants at the date the first monthly payment is due under
the Contract.
VALUE OF AN ANNUITY UNIT. At the commencement of the Annuity Period, a number
of Annuity Units is established for the Contract Owner for each Investment
Option on which variable annuity payments are to be based. For each Sub-Account
of Variable Account, the number of Annuity Units established is calculated by
dividing (i) the amount of the first monthly variable annuity payment on that
basis by (ii) the annuity unit value for that basis for the current Valuation
Period. That number of Annuity Units remains constant throughout the Annuity
Period and is the basis for calculating the amount of the second and subsequent
annuity payments.
The Annuity Unit value is determined for each Valuation Period, for each
Investment Option, and is equal to the Annuity Unit value for the preceding
Valuation Period multiplied by the product of (i) the net investment factor for
the appropriate Sub-Account for the immediately preceding Valuation Period and
(ii) a factor to neutralize the assumed net investment rate built into the
annuity tables (discussed under the preceding caption), for it is replaced by
the actual net investment rate in step (i). The daily factor for a 3 1/2 percent
assumed net investment rate is .99990576; for a 5 percent rate, the daily factor
is .99986634.
AMOUNTS OF SUBSEQUENT MONTHLY VARIABLE ANNUITY PAYMENTS. The amounts of
second and subsequent monthly variable annuity payments are determined by
multiplying (i) the number of Annuity Units established for the annuitant for
the applicable Sub-Account by (ii) the Annuity Unit value for the Sub-Account.
If Annuity Units are established for more than one Sub-Account, the
calculation is made separately and the results are combined to determine the
total monthly variable annuity payment.
1. EXAMPLE OF CALCULATION OF MONTHLY VARIABLE ANNUITY PAYMENTS. The
determination of the amount of the variable annuity payments can be illustrated
by the following hypothetical example. The example assumes that the monthly
payments are based on the investment experience of only one Sub-Account. If
payments were based on the investment experience of more than one Sub-Account,
the same procedure would be followed to determine the portion of the monthly
payment attributed to each Sub-Account.
2. FIRST MONTHLY PAYMENT. Assume that at the date of retirement there are 40,000
Accumulation Units credited under a particular Individual Account and that the
value of an Accumulation Unit for the Valuation Period immediately prior to
retirement was $1.40000000; this produces a total value for the Individual
Account of $56,000. Assume also that no premium tax is payable and that the
annuity tables in the Contract provide, for the option elected, a first monthly
variable annuity payment of $6.57 per $1,000 of value applied; the first monthly
payment to the Annuitant would thus be 56 multiplied by $6.57, or $367.92.
Assume that the Annuity Unit value for the Valuation Period in which the
first monthly payment was due was $1.30000000. This is divided into the amount
of the first monthly payment to establish the number of Annuity Units for the
Participant: $367.92 /$1.30000000 produces 283.015 Annuity Units. The value of
this number of Annuity Units will be paid in each subsequent month.
3. SECOND MONTHLY PAYMENT. The current Annuity Unit value is first calculated.
Assume a net investment factor of 1.01000000 for the Valuation Period
immediately preceding the due date of the second monthly payment. This is
multiplied by .99713732 to neutralize the assumed net investment rate of 3 1/2
percent per annum built into the number of Annuity Units determined above (if an
assumed net investment rate of 5 percent had been elected, the neutralization
factor would be .99594241), producing a result of 1.00710869. This is then
multiplied by the Annuity Unit value for the Valuation Period preceding the due
date of the second monthly payment (assume this value to be $1.30000000) to
produce the current Annuity Unit value, $1.30924130.
The second monthly payment is then calculated by multiplying the constant
number of Annuity Units by the current Annuity Unit value: 283.015 times
$1.30924130 produces a payment of $370.53.
FINANCIAL STATEMENTS
Audited Financial Statements of Conseco Variable Annuity Account C and
Conseco Variable Insurance Company as of December 31, 1998 are included here.
Table of Contents
December 31, 1998
================================================================================
Great American Reserve Variable Annuity Account C Page
Statement of Assets and Liabilities as of December 31, 1998 ................ 2
Statements of Operations for the Years Ended
December 31, 1998 and 1997 ................................................ 5
Statements of Changes in Net Assets for the Years Ended
December 31, 1998 and 1997 ................................................ 5
Notes to Financial Statements .............................................. 6
Report of Independent Accountants .......................................... 8
<PAGE>
GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT C
Statement of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
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Shares Cost Value
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<S> <C> <C> <C>
Assets:
Investments in portfolio shares, at net asset value (Note 2):
The Alger American Fund:
Growth Portfolio .................................................... 11,149.7 $ 508,822 $ 593,389
Leveraged AllCap Portfolio .......................................... 39,844.0 962,015 1,390,555
MidCap Growth Portfolio ............................................. 4,597.4 118,610 132,726
Small Capitalization Portfolio ...................................... 54,628.7 2,256,203 2,402,023
American Century Variable Portfolios, Inc.:
International Fund .................................................. 17,811.0 134,749 135,720
Value Fund .......................................................... 21,090.5 145,345 141,939
Income and Growth Fund .............................................. 14,667.6 84,886 99,447
Berger Institutional Products Trust:
100 Fund ............................................................ 19,930.8 234,935 256,907
Growth and Income Fund .............................................. 10,470.9 151,123 174,132
Small Company Growth Fund ........................................... 9,380.0 114,894 115,186
BIAM International Fund ............................................. 0.1 1 2
Conseco Series Trust:
Asset Allocation Portfolio .......................................... 1,191,919.6 15,988,448 16,291,143
Common Stock Portfolio .............................................. 8,510,918.6 170,109,446 183,714,329
Corporate Bond Portfolio ............................................ 1,468,555.5 14,655,047 14,751,679
Government Securities Portfolio ..................................... 77,402.6 948,349 940,135
Money Market Portfolio .............................................. 5,468,639.0 5,468,639 5,468,639
The Dreyfus Socially Responsible Growth Fund, Inc. .................... 59,457.2 1,643,784 1,847,929
Dreyfus Stock Index Fund .............................................. 436,107.6 11,638,392 14,182,220
Dreyfus Variable Investment Fund:
Disciplined Stock Portfolio ......................................... 843.8 16,621 19,365
Federated Insurance Series:
High Income Bond Fund II ............................................ 51,180.6 559,449 558,892
International Equity Fund II ........................................ 14,940.2 227,873 229,930
Utility Fund II ..................................................... 49,327.1 691,854 753,226
Invesco Variable Investment Funds, Inc.:
High Yield Portfolio ................................................ 1,914.5 22,854 21,673
Industrial Income Portfolio ......................................... 1,925.8 34,526 35,840
Janus Aspen Series:
Aggressive Growth Portfolio ......................................... 108,325.8 2,148,101 2,988,707
Growth Portfolio .................................................... 164,036.6 3,145,770 3,861,423
Worldwide Growth Portfolio .......................................... 526,760.7 12,582,299 15,323,468
Lazard Retirement Series Inc.:
Small Cap Portfolio ................................................. 388.4 3,336 3,697
Lord Abbett Series Fund, Inc.:
Growth and Income Portfolio ......................................... 677.2 13,488 13,983
Mitchell Hutchins Series Trust:
Growth and Income Portfolio ......................................... 354.6 5,096 5,252
Neuberger & Berman Advisers Management Trust:
Limited Maturity Bond Portfolio ..................................... 17,670.4 243,155 244,205
Partners Portfolio .................................................. 22,810.5 429,570 431,803
Strong Variable Insurance Funds, Inc.:
Growth Fund II ...................................................... 14,719.9 231,540 235,813
Strong Opportunity Fund II, Inc. ...................................... 5,707.3 115,417 123,962
Van Eck Worldwide Insurance Trust:
Worldwide Hard Assets Fund .......................................... 18,153.3 234,575 167,010
Worldwide Bond Fund ................................................. 2,945.2 32,708 36,167
Worldwide Emerging Markets Fund ..................................... 13,168.3 112,040 93,758
Worldwide Real Estate Fund .......................................... 293.4 2,635 2,799
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Total assets ...................................................... 267,789,073
Liabilities:
Amounts due to Conseco Variable Insurance Company ....................... 215,506
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets (Note 6) ............................................... $267,573,567
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT C
Statement of Assets and Liabilities - Continued
December 31, 1998
<TABLE>
<CAPTION>
====================================================================================================================================
UNITS UNIT VALUE REPORTED VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net assets attributable to:
Contract owners' deferred annuity reserves:
The Alger American Fund:
Growth Portfolio ............................................................... 335,852.3 $ 1.765379 $ 592,907
Leveraged AllCap Portfolio ..................................................... 479,431.7 2.898075 1,389,429
Midcap Growth Portfolio ........................................................ 85,728.9 1.546930 132,617
Small Capitalization Portfolio ................................................. 1,509,931.8 1.589518 2,400,064
American Century Variable Portfolios, Inc.:
International Fund ............................................................. 105,232.7 1.288519 135,594
Value Fund ..................................................................... 111,174.7 1.275597 141,814
Income and Growth Fund ......................................................... 91,593.4 1.084816 99,362
Berger Institutional Products Trust:
100 Fund ....................................................................... 196,341.6 1.307378 256,693
Growth and Income Fund ......................................................... 115,344.2 1.508510 173,998
Small Company Growth Fund ...................................................... 83,064.3 1.385556 115,090
BIAM International Fund ........................................................ 0.0 1.118101 0
Conseco Series Trust:
Asset Allocation Portfolio ..................................................... 7,300,113.8 2.218603 16,196,057
Common Stock Portfolio
Qualified .................................................................... 7,294,849.0 24.295266 177,230,301
Nonqualified ................................................................. 223,506.1 19.231766 4,298,417
Corporate Bond Portfolio
Qualified .................................................................... 2,455,410.8 5.738363 14,090,040
Nonqualified ................................................................. 93,115.4 5.513550 513,396
Government Securities Portfolio ................................................ 702,664.8 1.336418 939,054
Money Market Portfolio
Qualified .................................................................... 1,791,071.6 2.821406 5,053,340
Nonqualified ................................................................. 131,045.9 2.821405 369,734
The Dreyfus Socially Responsible Growth Fund, Inc. ............................... 802,406.0 2.301103 1,846,419
Dreyfus Stock Index Fund ......................................................... 5,996,869.5 2.351933 14,104,234
Dreyfus Variable Investment Fund:
Disciplined Stock Portfolio .................................................... 18,002.3 1.074802 19,349
Federated Insurance Series:
High Income Bond Fund II ....................................................... 402,613.1 1.387018 558,432
International Equity Fund II ................................................... 153,805.0 1.493697 229,738
Utility Fund II ................................................................ 428,132.7 1.757846 752,591
Invesco Variable Investment Funds, Inc.:
High Yield Portfolio ........................................................... 22,718.7 0.953146 21,654
Industrial Income Portfolio .................................................... 34,697.3 1.032042 35,809
Janus Aspen Series:
Aggressive Growth Portfolio .................................................... 1,484,764.6 2.011276 2,986,271
Growth Portfolio ............................................................... 1,722,620.7 2.239752 3,858,243
Worldwide Growth Portfolio ..................................................... 6,332,820.3 2.393977 15,160,624
Lazard Retirement Series Inc.:
Small Cap Portfolio ............................................................ 4,307.2 0.857665 3,694
Lord Abbett Series Fund, Inc.:
Growth and Income Portfolio .................................................... 13,870.3 1.007282 13,971
Mitchell Hutchins Series Trust:
Growth and Income Portfolio .................................................... 5,287.1 0.992464 5,247
Neuberger & Berman Advisers Management Trust:
Limited Maturity Bond Portfolio ................................................ 225,717.1 1.080994 243,999
Partners Portfolio ............................................................. 336,370.8 1.282632 431,440
Strong Variable Insurance Funds, Inc.:
Growth Fund II ................................................................. 145,329.2 1.622454 235,790
Strong Opportunity Fund II, Inc. ................................................. 89,350.2 1.386225 123,859
Van Eck Worldwide Insurance Trust:
Worldwide Hard Assets Fund ..................................................... 198,619.0 0.840028 166,846
Worldwide Bond Fund ............................................................ 30,830.4 1.172096 36,136
Worldwide Emerging Markets Fund ................................................ 177,923.9 0.526522 93,681
Worldwide Real Estate Fund ..................................................... 3,276.4 0.853728 2,797
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets attributable to contract owners' deferred annuity reserves ...... $265,058,731
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT C
Statement of Assets and Liabilities - Continued
December 31, 1998
<TABLE>
<CAPTION>
==================================================================================================
REPORTED
VALUE
- --------------------------------------------------------------------------------------------------
<S> <C>
Net assets attributable to contract owners' deferred annuity reserves (from page 3) $265,058,731
- --------------------------------------------------------------------------------------------------
Contract owners' annuity payment reserves:
Conseco Series Trust:
Asset Allocation Portfolio
Qualified ................................................................ 95,125
Common Stock Portfolio
Qualified ................................................................ 2,123,088
Nonqualified ............................................................. 22,287
Corporate Bond Portfolio
Qualified ................................................................ 95,748
Money Market Portfolio
Qualified ................................................................ 26,603
Dreyfus Stock Index Fund ................................................... 49,385
Janus Aspen Worldwide Growth Portfolio ..................................... 102,600
- --------------------------------------------------------------------------------------------------
Net assets attributable to contract owners' annuity payment reserves ... 2,514,836
- --------------------------------------------------------------------------------------------------
Net assets .......................................................... $267,573,567
==================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT C
Statements of Operations
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
====================================================================================================================================
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Investment income:
<S> <C> <C>
Dividends from investments in portfolio shares .............................................. $ 19,540,381 $ 48,081,385
Expenses:
Mortality and expense risk fees ............................................................. 1,827,897 1,556,503
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income ..................................................................... 17,712,484 46,524,882
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized gains (losses) and unrealized appreciation (depreciation) of investments:
Net realized gains on sales of investments in portfolio shares .............................. 9,273,245 2,417,325
Net change in unrealized appreciation (depreciation) of investments in portfolio shares ..... 8,806,324 (14,329,631)
- ------------------------------------------------------------------------------------------------------------------------------------
Net gain (loss) on investments in portfolio shares ........................................ 18,079,569 (11,912,306)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations .............................................. $ 35,792,053 $ 34,612,576
====================================================================================================================================
</TABLE>
Statements of Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
====================================================================================================================================
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Changes from operations:
Net investment income ....................................................................... $ 17,712,484 $ 46,524,882
Net realized gains on sales of investments in portfolio shares .............................. 9,273,245 2,417,325
Net change in unrealized appreciation (depreciation) of investments in portfolio shares ..... 8,806,324 (14,329,631)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations ................................................ 35,792,053 34,612,576
- ------------------------------------------------------------------------------------------------------------------------------------
Changes from contract owners' transactions:
Net contract purchase payments .............................................................. 25,628,081 26,160,248
Contract redemptions ........................................................................ (34,314,124) (14,213,522)
Net transfers ............................................................................... (8,796,326) 4,514,784
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from contract owners' transactions .................. (17,482,369) 16,461,510
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets .............................................................. 18,309,684 51,074,086
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, beginning of year .................................................................. 249,263,883 198,189,797
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (Note 6) ...................................................... $ 267,573,567 $ 249,263,883
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT C
Notes to Financial Statements
December 31, 1998
================================================================================
(1) General
Conseco Variable Insurance Company (formerly Great American Reserve
Insurance Company prior to its name change in October 1998) Variable Annuity
Account C ("Account C") was established in 1980 as a segregated investment
account for individual and group variable annuity contracts which are registered
under the Securities Act of 1933. It is anticipated that on May 1, 1999, a
filing will be made with the Securities and Exchange Commission to change the
name of Great American Reserve Variable Account C to Conseco Variable Account C.
Account C is registered under the Investment Company Act of 1940, as amended
(the "Act"), as a unit investment trust. Account C was originally registered
with the U.S. Securities and Exchange Commission as a diversified open-end
management investment company under the Act. Effective May 1, 1993, Account C
was restructured into a single unit investment trust which invested solely in
shares of the portfolios of the Conseco Series Trust, a diversified open-end
management investment company. Thereafter, additional investment options were
offered.
The operations of Account C are included in the operations of Conseco
Variable Insurance Company (the "Company") pursuant to the provisions of the
Texas Insurance Code. The Company is an indirect wholly owned subsidiary of
Conseco, Inc., a publicly-held specialized financial services holding company
listed on the New York Stock Exchange.
Currently, the following investment options are available (effective date
in parenthesis):
THE ALGER AMERICAN FUND
Growth Portfolio (May 1, 1997)
Leveraged AllCap Portfolio (June 1, 1995)
MidCap Growth Portfolio (May 1, 1997)
Small Capitalization Portfolio (June 1, 1995)
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
Income and Growth Fund (May 1, 1998)
International Fund (May 1, 1997)
Value Fund (May 1, 1997)
BERGER INSTITUTIONAL PRODUCTS TRUST (MAY 1, 1997)
100 Fund
Growth and Income
Fund Small Company Growth Fund
BIAM International Fund
CONSECO SERIES TRUST
Asset Allocation Portfolio
Common Stock Portfolio
Corporate Bond Portfolio
Government Securities Portfolio
Money Market Portfolio
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
(JUNE 1, 1995)
DREYFUS STOCK INDEX FUND (JUNE 1, 1995)
DREYFUS VARIABLE INVESTMENT FUND (MAY 1, 1998)
International Value Portfolio
Disciplined Stock Portfolio
FEDERATED INSURANCE SERIES (JUNE 1, 1995)
High Income Bond Fund II
International Equity Fund II
Utility Fund II
INVESCO VARIABLE INVESTMENT FUNDS, INC. (MAY 1, 1998)
High Yield Portfolio
Industrial Income Portfolio
JANUS ASPEN SERIES (JUNE 1, 1995)
Aggressive Growth Portfolio
Growth Portfolio
Worldwide Growth Portfolio
LAZARD RETIREMENT SERIES, INC. (MAY 1, 1998)
Equity Portfolio
Small Cap Portfolio
LORD ABBETT SERIES FUND, INC. (MAY 1, 1998)
Growth and Income Portfolio
MITCHELL HUTCHINS SERIES TRUST (MAY 1, 1998)
Growth and Income Portfolio
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
(MAY 1, 1997)
Limited Maturity Bond Portfolio
Partners Portfolio
STRONG VARIABLE INSURANCE FUNDS, INC.
Growth Fund II (May 1, 1997)
STRONG OPPORTUNITY FUND II, Inc. (MAY 1, 1997)
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Bond Fund (June 1, 1995)
Worldwide Emerging Markets Fund (June 1, 1996)
Worldwide Hard Assets Fund (June 1,1995)
Worldwide Real Estate Fund (May 1, 1998)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported increases and decreases in net assets from
operations during the reporting period. Actual results could differ from those
estimates.
(2) Summary of Significant Accounting Policies
Investment Valuation, Transactions and Income
Investments in portfolio shares are valued using the net asset value of the
respective portfolios at the end of each New York Stock Exchange business day.
Investment share transactions are accounted for on a trade date basis (the date
the order to purchase or redeem shares is executed) and dividend income is
recorded on the ex-dividend date. The cost of investments in portfolio shares
sold is determined on a first-in first-out basis. Account C does not hold any
investments which are restricted as to resale.
Net investment income and net realized gains (losses) and unrealized
appreciation (depreciation) on investments are allocated to the contracts on
each valuation date based on each contract's pro rata share of the assets of
Account C as of the beginning of the valuation date.
Federal Income Taxes
No provision for federal income taxes has been made in the accompanying
financial statements because the operations of Account C are included in the
total operations of the Company, which is treated as a life insurance company
for federal income tax purposes under the Internal Revenue Code. Net investment
income and realized gains (losses) are retained in Account C and are not taxable
until received by the contract owner or beneficiary in the form of annuity
payments or other distributions.
6
<PAGE>
GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT C
Notes to Financial Statements (continued)
December 31, 1998
================================================================================
(2) Summary of Significant Accounting Policies
(Continued)
Annuity Reserves
Deferred annuity contract reserves are comprised of net contract purchase
payments less redemptions and benefits. These reserves are adjusted daily for
the net investment income and net realized gains (losses) and unrealized
appreciation (depreciation) on investments.
Annuity payment reserves for contracts under which contract owners are
receiving periodic retirement payments are computed according to the Progressive
Annuity Mortality Table and the 1983 Group Annuity Mortality Table. The assumed
net investment rate is equal to the assumed rate of accumulation. The annuity
unit values for periodic retirement payments are as follows:
December 31, December 31,
1998 1997
- --------------------------------------------------------------------------------
Conseco Series Trust:
Asset Allocation ............................ $1.043 $0.999
Common Stock
Qualified ................................. 7.308 6.600
Nonqualified .............................. 6.766 6.111
Corporate Bond
Qualified ................................. 5.012 4.934
Nonqualified .............................. 5.016 4.937
Money Market
Qualified ................................. 1.019 1.012
Dreyfus Stock Index Fund ....................... 1.097 N/A
Janus Aspen Worldwide Growth ................... 1.660 0.999
================================================================================
(3) Purchases and Sales of Investments in
Portfolio Shares
The aggregate cost of purchases of investments in portfolio shares were
$63,530,550 and $80,455,901 for the years ended December 31, 1998 and 1997,
respectively. The aggregate proceeds from sales of investments in portfolio
shares were $63,152,626 and $17,579,585 for the years ended December 31, 1998
and 1997, respectively.
(4) Deductions and Expenses
Although periodic retirement payments to contract owners vary according to
the investment performance of the portfolios, such payments are not affected by
mortality or expense experience because the Company assumes the mortality and
expense risks under the contracts.
The mortality risk assumed by the Company results from the life annuity
payment option in the contracts in which the Company agrees to make annuity
payments regardless of how long a particular annuitant or other payee lives. The
annuity payments are determined in accordance with annuity purchase rate
provisions established at the time the contracts are issued. Based on the
actuarial determination of expected mortality, the Company is required to fund
any deficiency in the annuity payment reserves from its general account assets.
The expense risk assumed by the Company is the risk that the deductions for
sales and administrative expenses may prove insufficient to cover the actual
sales and administrative expenses.
The Company deducts daily from Account C a fee, which is equal on an annual
basis to 1.00 percent of the daily value of the total investments of Account C,
for assuming the mortality and expense risks except for the Common Stock,
Corporate Bond, and Money Market portfolios of the Conseco Series Trust which
the fees are 0.64 percent, 0.74 percent and 0.99 percent, respectively. These
fees were $1,827,897 and $1,556,503 for the years ended December 31, 1998 and
1997, respectively.
Pursuant to an agreement between Account C and the Company (which may be
terminated by the Company at any time), the Company provides sales and
administrative services to Account C, as well as a minimum death benefit prior
to retirement for certain contracts. Under individual contracts and group
deferred compensation contracts, the Company may deduct a percentage of amounts
surrendered to cover sales expenses. The percentage varies up to 8.00 percent
based on the type of contract and the number of years the contract has been
held. In addition, the Company deducts units from certain contracts annually and
upon full surrender to cover an administrative fee of $15, $20, or $25. This fee
is recorded as a redemption in the accompanying Statement of Changes of Net
Assets. Under group contracts no longer being sold, the Company deducts a
percentage of the renewal contract purchase payments to cover sales and
administrative expenses and the minimum death benefit prior to retirement of the
contract owners. Sales and administrative charges were $597,806 and $226,805 for
the years ended December 31, 1998 and 1997, respectively.
(5) Other Transactions With Affiliates
Conseco Equity Sales, Inc., an affiliate of the Company, is the principal
underwriter and performs all variable annuity sales functions on behalf of the
Company through various retail broker/dealers including Conseco Financial
Services, Inc., an affiliate of the Company.
(6) Net Assets
Net assets consisted of the following at December 31, 1998:
- --------------------------------------------------------------------------------
Proceeds from the sales of units since organization,
less cost of units redeemed ................................ $ 62,371,700
Undistributed net investment income ........................... 138,040,184
Undistributed net realized gains on sales of investments ...... 45,389,205
Net unrealized appreciation of investments .................... 21,772,478
- --------------------------------------------------------------------------------
Net assets ............................................... $267,573,567
================================================================================
7
<PAGE>
Report of Independent Accountants
================================================================================
To The Board of Directors of Conseco Variable Insurance Company and Contract
Owners of Great American Reserve Variable Annuity Account C
In our opinion, the accompanying statement of assets and liabilities and
the related statements of operations and of changes in net assets present
fairly, in all material respects, the financial position of the Great American
Reserve Variable Annuity Account C (the "Account") at December 31, 1998, and the
results of its operations and the changes in its net assets for each of the two
years in the period then ended, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the 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, which included
confirmation of portfolio shares owned at December 31, 1998 by correspondence
with the custodians, provide a reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
Indianapolis, Indiana
February 10, 1999>>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Conseco Variable Insurance Company
In our opinion, the accompanying balance sheet and the related statements
of operations, shareholder's equity and cash flows present fairly, in all
material respects, the financial position of Conseco Variable Insurance Company
(the "Company") at December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these 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/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Indianapolis, Indiana
March 30, 1999
F-1
<TABLE>
<CAPTION>
CONSECO VARIABLE INSURANCE COMPANY
BALANCE SHEET
December 31, 1998 and 1997
(Dollars in millions)
ASSETS
1998 1997
---- ----
Investments:
Actively managed fixed maturities at fair value (amortized cost:
<S> <C> <C> <C> <C> <C> <C>
1998 - $1,520.5; 1997 - $1,705.2)............................................... $1,524.1 $1,734.0
Equity securities at fair value (cost: 1998 - $46.0 million; 1997 - $25.1 million). 45.7 25.4
Mortgage loans..................................................................... 110.2 146.1
Policy loans....................................................................... 79.6 80.6
Other invested assets ............................................................. 103.1 62.8
Short-term investments............................................................. 48.4 49.5
Assets held in separate accounts................................................... 696.4 402.1
---------- ----------
Total investments............................................................ 2,607.5 2,500.5
Accrued investment income.............................................................. 30.5 30.5
Cost of policies purchased............................................................. 98.0 106.4
Cost of policies produced.............................................................. 82.5 55.9
Reinsurance receivables................................................................ 22.2 21.9
Goodwill (net of accumulated amortization: 1998 - $14.7; 1997 - $13.2)................. 46.7 48.2
Other assets........................................................................... 24.3 8.3
----------- ------------
Total assets................................................................. $2,911.7 $2,771.7
======== ========
</TABLE>
(continued on next page)
The accompanying notes are an integral part
of the financial statements.
F-2
CONSECO VARIABLE INSURANCE COMPANY
BALANCE SHEET (Continued)
December 31, 1998 and 1997
(Dollars in millions, except per share amount)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
1998 1997
---- ----
<S> <C> <C>
Liabilities:
Insurance liabilities:
Interest sensitive products..................................................... $1,365.2 $1,522.1
Traditional products............................................................ 246.2 248.3
Claims payable and other policyholder funds..................................... 62.6 62.5
Liabilities related to separate accounts........................................ 696.4 402.1
Income tax liabilities............................................................. 37.5 44.2
Investment borrowings.............................................................. 65.7 61.0
Other liabilities.................................................................. 33.0 14.6
----------- -----------
Total liabilities.......................................................... 2,506.6 2,354.8
--------- ---------
Shareholder's equity:
Common stock and additional paid-in capital (par value $4.80 per share, 1,065,000
shares authorized, 1,043,565 shares issued and outstanding).................... 380.8 380.8
Accumulated other comprehensive income:
Unrealized gains of fixed maturity securities (net of applicable deferred
income taxes: 1998 - $.5; 1997 - $4.4)...................................... 1.0 8.2
Unrealized gains (losses) of other investments (net of applicable deferred
income taxes: 1998 - $(.9); 1997 - $.3)..................................... (1.8) .5
Retained earnings.................................................................. 25.1 27.4
----------- -----------
Total shareholder's equity................................................. 405.1 416.9
---------- ----------
Total liabilities and shareholder's equity................................. $2,911.7 $2,771.7
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
CONSECO VARIABLE INSURANCE COMPANY
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
for the years ended December 31, 1998, 1997 and 1996
(Dollars in millions)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Insurance policy income.......................................... $ 73.6 $ 75.7 $ 81.4
Net investment income............................................ 198.0 222.6 218.4
Net investment gains............................................. 18.5 13.3 2.7
-------- -------- ---------
Total revenues............................................. 290.1 311.6 302.5
------- ------- -------
Benefits and expenses:
Insurance policy benefits........................................ 170.6 191.0 180.6
Amortization..................................................... 33.6 27.1 20.3
Other operating costs and expenses............................... 38.7 32.2 60.5
-------- -------- --------
Total benefits and expenses................................ 242.9 250.3 261.4
------- ------- -------
Income before income taxes................................. 47.2 61.3 41.1
Income tax expense................................................... 16.6 22.1 15.4
-------- -------- --------
Net income................................................. $ 30.6 $ 39.2 $ 25.7
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
CONSECO VARIABLE INSURANCE COMPANY
<TABLE>
<CAPTION>
STATEMENT OF SHAREHOLDER'S EQUITY
for the years ended December 31, 1998, 1997 and 1996
(Dollars in millions)
Common stock Accumulated other
and additional comprehensive Retained
Total paid-in capital income (loss) earnings
----- --------------- ------------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1995................................. $442.6 $380.8 $ 12.4 $ 49.4
Comprehensive income, net of tax:
Net income............................................ 25.7 - - 25.7
Change in unrealized appreciation (depreciation) of
securities (net of applicable income taxes of ($9.7)) (17.0) - (17.0) -
-------
Total comprehensive income........................ 8.7
Dividends on common stock............................... (54.4) - - (54.4)
------- ---------- ----------- ---------
Balance, December 31, 1996................................. 396.9 380.8 (4.6) 20.7
Comprehensive income, net of tax:
Net income............................................ 39.2 - - 39.2
Change in unrealized appreciation (depreciation) of
securities (net of applicable income taxes of $7.2). 13.3 - 13.3 -
--------
Total comprehensive income........................ 52.5
Dividends on common stock............................... (32.5) - - (32.5)
------- ---------- ----------- ------
Balance, December 31, 1997................................. 416.9 380.8 8.7 27.4
Comprehensive income, net of tax:
Net income............................................ 30.6 - - 30.6
Change in unrealized appreciation (depreciation) of
securities (net of applicable income taxes of $(5.1)) (9.5) - (9.5) -
--------
Total comprehensive income........................ 21.1
Dividends on common stock............................... (32.9) - - (32.9)
------- ---------- ----------- ------
Balance, December 31, 1998................................. $405.1 $380.8 $ (.8) $ 25.1
====== ====== ======== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<TABLE>
<CAPTION>
CONSECO VARIABLE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
for the years ended December 31, 1998, 1997 and 1996
(Dollars in millions)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................$ 30.6 $ 39.2 $ 25.7
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization................................................ 43.0 27.1 20.3
Income taxes................................................ (1.2) 6.7 (3.9)
Insurance liabilities....................................... 120.0 95.2 112.5
Accrual and amortization of investment income................. 1.6 .3 3.1
Deferral of cost of policies produced ....................... (35.3) (31.8) (13.2)
Investment gains.............................................. (18.5) (13.3) (2.7)
Other......................................................... (38.3) (4.6) (8.8)
--------- ---------- ------------
Net cash provided by operating activities................... 101.9 118.8 133.0
----------- -------- -----------
Cash flows from investing activities:
Sales of investments.............................................. 1,185.0 755.2 988.9
Maturities and redemptions........................................ 145.5 150.4 101.7
Purchases of investments.......................................... (1,420.7) (923.5) (1,049.6)
---------- -------- ---------
Net cash provided (used) by investing activities............ (90.2) (17.9) 41.0
----------- --------- ------------
Cash flows from financing activities:
Deposits to insurance liabilities................................. 400.4 255.9 169.8
Investment borrowings............................................. 4.7 12.6 (35.8)
Withdrawals from insurance liabilities............................ (385.0) (302.2) (267.7)
Dividends paid on common stock.................................... (32.9) (32.5) (44.5)
------------ -------- -----------
Net cash used by financing activities....................... (12.8) (66.2) (178.2)
------------ --------- ----------
Net increase (decrease) in short-term
investments............................................... (1.1) 34.7 (4.2)
Short-term investments, beginning of year............................ 49.5 14.8 19.0
------------- --------- ------------
Short-term investments, end of year..................................$ 48.4 $ 49.5 $ 14.8
============= ======== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
CONSECO VARIABLE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Conseco Variable Insurance Company ("we" or the "Company") markets
tax-qualified annuities and certain employee benefit-related insurance products
through professional independent agents. Prior to its name change in October
1998, the Company was named Great American Reserve Insurance Company. Since
August 1995, the Company has been a wholly owned subsidiary of Conseco, Inc.
("Conseco"), a financial services holding company operating throughout the
United States. Conseco's life insurance subsidiaries develop, market and
administer supplemental health insurance, annuity, individual life insurance,
individual and group major medical insurance and other insurance products.
Conseco's finance subsidiaries originate, purchase, sell and service consumer
and commercial finance loans.
The following summary explains the accounting policies we use to arrive at
the more significant numbers in our financial statements. We prepare our
financial statements in accordance with generally accepted accounting principles
("GAAP"). We follow the accounting standards established by the Financial
Accounting Standards Board, the American Institute of Certified Public
Accountants and the Securities and Exchange Commission. We reclassified certain
amounts in our 1997 and 1996 financial statements and notes to conform with the
1998 presentation.
Investments
Fixed maturities are securities that mature more than one year after
issuance and include bonds, notes receivable and redeemable preferred stock.
Fixed maturities that we may sell prior to maturity are classified as actively
managed and are carried at estimated fair value, with any unrealized gain or
loss, net of tax and related adjustments, recorded as a component of
shareholder's equity. Fixed maturity securities that we intend to sell in the
near term are classified as trading and included in other invested assets. We
include any unrealized gain or loss on trading securities in net investment
gains.
Equity securities include investments in common stocks and non-redeemable
preferred stock. We carry these investments at estimated fair value. We record
any unrealized gain or loss, net of tax and related adjustments, as a component
of shareholder's equity.
Mortgage loans held in our investment portfolio are carried at amortized
unpaid balances, net of provisions for estimated losses.
Policy loans are stated at their current unpaid principal balances.
Other invested assets include trading securities and certain
non-traditional investments. Non-traditional investments include investments in
venture capital funds, limited partnerships, mineral rights and promissory
notes; we account for them using either the cost method, or for investments in
partnerships over whose operations the Company exercises significant influence,
the equity method.
Short-term investments include commercial paper, invested cash and other
investments purchased with maturities of less than three months. We carry them
at amortized cost, which approximates their estimated fair value. We consider
all short-term investments to be cash equivalents.
We defer any fees received or costs incurred when we originate investments
(primarily mortgage loans). We amortize fees, costs, discounts and premiums as
yield adjustments over the contractual lives of the investments. We consider
anticipated prepayments on mortgage-backed securities in determining estimated
future yields on such securities.
F-7
CONSECO VARIABLE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
When we sell a security (other than a trading security), we report the
difference between our sale proceeds and its amortized cost (determined based on
specific identification) as an investment gain or loss.
We regularly evaluate all of our investments based on current economic
conditions, credit loss experience and other investee-specific developments. If
there is a decline in a security's net realizable value that is other than
temporary, we treat it as a realized loss and reduce our cost basis of the
security to its estimated fair value.
Separate Accounts
Separate accounts are funds on which investment income and gains or losses
accrue directly to certain policyholders. The assets of these accounts are
legally segregated. They are not subject to the claims that may arise out of any
other business of the Company. We report separate account assets at market
value; the underlying investment risks are assumed by the contract holders. We
record the related liabilities at amounts equal to the market value of the
underlying assets.
Cost of Policies Produced
The costs that vary with, and are primarily related to, producing new
insurance business are referred to as cost of policies produced. We amortize
these costs using the interest rate credited to the underlying policy; (I) in
relation to the estimated gross profits for universal life-type and
investment-type products; or (ii) in relation to future anticipated premium
revenue for other products.
When we sell investments backing our universal life or investment-type
product business at a gain or loss, we adjust the amortization to reflect the
change in future investment yields resulting from the sale (thereby changing the
future amortization to offset the change in yield). We also adjust the cost of
policies produced for the change in amortization that would have been recorded
if actively managed fixed maturity securities had been sold at their stated
aggregate fair value and the proceeds reinvested at current yields. We include
the impact of this adjustment in net unrealized appreciation (depreciation)
within shareholder's equity.
Each year, we evaluate the recoverability of the unamortized balance of the
cost of policies produced. We consider estimated future gross profits or future
premiums, expected mortality or morbidity, interest earned and credited rates,
persistency and expenses in determining whether the balance is recoverable.
Cost of Policies Purchased
The cost assigned to the right to receive future cash flows from contracts
existing at the date of an acquisition is referred to as cost of policies
purchased. This balance is amortized, evaluated for recoverability, and adjusted
for the impact of realized and unrealized gains (losses) in the same manner as
the cost of policies produced described above.
Goodwill
Goodwill is the excess of the amount paid to acquire the Company over the
fair value of its net assets. We amortize goodwill on the straight-line basis
over a 40-year period. We continually monitor the value of our goodwill based on
our estimates of future earnings. We determine whether goodwill is fully
recoverable from projected undiscounted net cash flows over the remaining
amortization period. If we were to determine that changes in such projected cash
flows no longer support the recoverability of goodwill over the remaining
amortization period, we would reduce its carrying value with a corresponding
charge to expense or shorten the amortization period (no such changes have
occurred).
Recognition of Insurance Policy Income and Related Benefits and Expenses on
Insurance Contracts
Generally, we recognize insurance premiums for traditional life and
accident and health contracts as earned over the
F-8
CONSECO VARIABLE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
premium-paying periods. We establish reserves for future benefits on a net-level
premium method based upon assumptions as to investment yields, mortality,
morbidity, withdrawals and dividends. We record premiums for universal life-type
and investment-type contracts that do not involve significant mortality or
morbidity risk as deposits to insurance liabilities. Revenues for these
contracts consist of mortality, morbidity, expense and surrender charges. We
establish reserves for the estimated present value of the remaining net costs of
all reported and unreported claims.
Reinsurance
In the normal course of business, we seek to limit our exposure to loss on
any single insured or to certain groups of policies by ceding reinsurance to
other insurance enterprises. We currently retain no more than $.5 million of
mortality risk on any one policy. We diversify the risk of reinsurance loss by
using a number of reinsurers that have strong claims-paying ratings. If any
reinsurer could not meet its obligations, the Company would assume the
liability. The likelihood of a material loss being incurred as the result of the
failure of one of our reinsurers is considered remote. The cost of reinsurance
ceded totaled $21.0 million, $24.2 million and $24.6 million in 1998, 1997 and
1996, respectively. Reinsurance recoveries netted against insurance policy
benefits totaled $21.8 million, $14.9 million and $19.4 million in 1998, 1997
and 1996, respectively.
Income Taxes
Our income tax expense includes deferred income taxes arising from
temporary differences between the tax and financial reporting bases of assets
and liabilities. In assessing the realization of deferred income tax assets, we
consider whether it is more likely than not that the deferred income tax assets
will be realized. The ultimate realization of deferred income tax assets depends
upon generating future taxable income during the periods in which temporary
differences become deductible. If future income is not generated as expected,
deferred income tax assets may need to be written off (no such write-offs have
occurred).
Investment Borrowings
As part of our investment strategy, we may enter into reverse repurchase
agreements and dollar-roll transactions to increase our investment return or to
improve our liquidity. We account for these transactions as collateral
borrowings, where the amount borrowed is equal to the sales price of the
underlying securities. Reverse repurchase agreements involve a sale of
securities and an agreement to repurchase the same securities at a later date at
an agreed-upon price. Dollar rolls are similar to reverse repurchase agreements
except that, with dollar rolls, the repurchase involves securities that are only
substantially the same as the securities sold. We account for these transactions
as short-term collateralized borrowings. Such borrowings averaged approximately
$66.0 million during 1998 (compared with an average of $90.4 million during
1997) and were collateralized by investment securities with fair values
approximately equal to the loan value. The weighted average interest rate on
short-term collateralized borrowings was 4.4 percent in both 1998 and 1997. The
primary risk associated with short-term collateralized borrowings is that a
counterparty will be unable to perform under the terms of the contract. Our
exposure is limited to the excess of the net replacement cost of the securities
over the value of the short-term investments (such excess was not material at
December 31, 1998). We believe the counterparties to our reverse repurchase and
dollar-roll agreements are financially responsible and that the counterparty
risk is minimal.
Use of Estimates
When we prepare financial statements in conformity with GAAP, we are
required to make estimates and assumptions that significantly affect various
reported amounts of assets and liabilities, and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reporting periods. For example, we use significant estimates
and assumptions in calculating values for the cost of policies produced, the
cost of policies purchased, goodwill, liabilities for insurance and deposit
products, liabilities related to litigation, guaranty fund assessment accruals,
gain on sale of finance receivables and deferred income taxes. If our future
experience differs materially from these estimates and assumptions, our
financial statements could be affected.
F-9
CONSECO VARIABLE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Fair Values of Financial Instruments
We use the following methods and assumptions to determine the estimated
fair values of financial instruments:
Investment securities. For fixed maturity securities (including redeemable
preferred stocks) and for equity and trading securities, we use quotes from
independent pricing services, where available. For investment securities
for which such quotes are not available, we use values obtained from
broker-dealer market makers or by discounting expected future cash flows
using a current market rate appropriate for the yield, credit quality, and
(for fixed maturity securities) the maturity of the investment being
priced.
Short-term investments. We use quoted market prices. The carrying amount
for these instruments approximates their estimated fair value.
Mortgage loans and policy loans. We discount future expected cash flows for
loans included in our investment portfolio based on interest rates
currently being offered for similar loans to borrowers with similar credit
ratings. We aggregate loans with similar characteristics in our
calculations.
Other invested assets. We use quoted market prices, where available.
When quotes are not available, we assume a market value equal to carrying
value.
Insurance liabilities for investment contracts. We discount future expected
cash flows based on interest rates currently being offered for similar
contracts with similar maturities.
Investment borrowings. Due to the short-term nature of these borrowings
(terms generally less than 30 days), estimated fair values are assumed to
approximate the carrying amount reported in the balance sheet.
Here are the estimated fair values of our financial instruments:
<TABLE>
<CAPTION>
1998 1997
----------------------- ------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
(Dollars in millions)
<S> <C> <C> <C> <C>
Financial assets:
Actively managed fixed maturities............................ $1,524.1 $1,524.1 $1,734.0 $1,734.0
Equity securities ........................................... 45.7 45.7 25.4 25.4
Mortgage loans............................................... 110.2 119.0 146.1 154.6
Policy loans................................................. 79.6 79.6 80.6 80.6
Other invested assets........................................ 103.1 103.1 62.8 62.8
Short-term investments....................................... 48.4 48.4 49.5 49.5
Financial liabilities:
Insurance liabilities for investment contracts (1)........... 1,036.0 1,036.0 1,177.5 1,177.5
Investment borrowings........................................ 65.7 65.7 61.0 61.0
<FN>
(1) The estimated fair value of the liabilities for investment contracts was
approximately equal to its carrying value at December 31, 1998 and 1997.
This was because interest rates credited on the vast majority of account
balances approximate current rates paid on similar investment contracts
and because these rates are not generally guaranteed beyond one year. We
are not required to disclose fair values for insurance liabilities, other
than those for investment contracts. However, we take into consideration
the estimated fair values of all insurance liabilities in our overall
management of interest rate risk. We attempt to minimize exposure to
changing interest rates by matching investment maturities with amounts due
under insurance contracts.
</FN>
</TABLE>
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") was issued in
June 1998. SFAS 133 requires all derivative instruments to be recorded on
the balance sheet at estimated fair value. Changes in the fair value of
derivative instruments are to be recorded each period either in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, on the type of hedge
transaction. SFAS 133 is effective for year 2000. We are currently evaluating
the impact of SFAS 133; at present, we do not believe it will have a material
effect on our financial position or results of operations.
F-10
CONSECO VARIABLE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
2. INVESTMENTS:
At December 31, 1998, the amortized cost and estimated fair value of
actively managed fixed maturities and equity securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Investment grade:
Corporate securities................................................ $ 860.4 $20.7 $15.0 $ 866.1
United States Treasury securities and obligations of
United States government corporations and agencies................ 26.9 .8 .2 27.5
States and political subdivisions................................... 17.3 .3 - 17.6
Debt securities issued by foreign governments....................... 11.7 - .8 10.9
Mortgage-backed securities ......................................... 487.4 8.0 1.2 494.2
Below-investment grade (primarily corporate securities)................ 116.8 1.2 10.2 107.8
---------- ------- ------ ----------
Total actively managed fixed maturities........................... $1,520.5 $31.0 $27.4 $1,524.1
======== ===== ===== ========
Equity securities......................................................$ 46.0 $ .8 $ 1.1 $ 45.7
========== ======= ====== ==========
</TABLE>
At December 31, 1997, the amortized cost and estimated fair value of
actively managed fixed maturities and equity securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Investment grade:
Corporate securities................................................ $ 955.8 $28.3 $ 5.3 $ 978.8
United States Treasury securities and obligations of
United States government corporations and agencies................ 28.0 .7 - 28.7
States and political subdivisions................................... 20.4 1.1 .1 21.4
Debt securities issued by foreign governments....................... 13.5 .1 .7 12.9
Mortgage-backed securities ......................................... 551.6 8.6 .4 559.8
Below-investment grade (primarily corporate securities)................ 135.9 1.8 5.3 132.4
---------- ------- ------- ----------
Total actively managed fixed maturities........................... $1,705.2 $40.6 $11.8 $1,734.0
======== ===== ===== ========
Equity securities......................................................$ 25.1 $ .5 $ .2 $ 25.4
========== ======= ======= ==========
</TABLE>
Net unrealized gains (losses) on actively managed fixed maturity
investments included in shareholders' equity as of December 31, 1998 and 1997,
were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(Dollars in millions)
<S> <C> <C>
Net unrealized gains on actively managed fixed maturity investments.................................. $ 3.6 $ 28.8
Adjustments to cost of policies purchased and cost of policies produced.............................. (2.1) (16.2)
Deferred income tax benefit.......................................................................... (.5) (4.4)
------- --------
Net unrealized gain on actively managed fixed maturity investments........................... $ 1.0 $ 8.2
====== ========
</TABLE>
F-11
CONSECO VARIABLE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The following table sets forth the amortized cost and estimated fair value
of actively managed fixed maturities at December 31, 1998, by contractual
maturity. Actual maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Most of the mortgage-backed securities shown below
provide for periodic payments throughout their lives.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Due in one year or less........................................................................ $ 14.5 $ 14.5
Due after one year through five years.......................................................... 132.1 133.4
Due after five years through ten years......................................................... 249.3 245.6
Due after ten years............................................................................ 637.2 636.4
---------- ----------
Subtotal.................................................................................. 1,033.1 1,029.9
Mortgage-backed securities..................................................................... 487.4 494.2
---------- ----------
Total actively managed fixed maturities ............................................... $1,520.5 $1,524.1
======== ========
</TABLE>
Net investment income consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Actively managed fixed maturity securities........................................... $118.4 $133.6 $146.4
Equity securities.................................................................... 3.2 1.7 1.6
Mortgage loans....................................................................... 12.1 16.4 19.0
Policy loans......................................................................... 5.1 5.4 5.0
Other invested assets................................................................ 13.3 7.7 9.8
Short-term investments............................................................... 2.9 3.4 2.3
Separate accounts.................................................................... 44.1 55.7 35.6
-------- -------- --------
Gross investment income.......................................................... 199.1 223.9 219.7
Investment expenses.................................................................. 1.1 1.3 1.3
--------- --------- ---------
Net investment income......................................................... $198.0 $222.6 $218.4
====== ====== ======
</TABLE>
The Company had no significant fixed maturity investments and mortgage
loans that were not accruing investment income in 1998, 1997 and 1996.
F-12
CONSECO VARIABLE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Investment gains (losses), net of investment expenses, were included in
revenue as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Fixed maturities:
Gross gains........................................................................ $ 34.0 $20.6 $16.6
Gross losses....................................................................... (12.4) (5.1) (9.2)
Other than temporary decline in fair value......................................... - (.3) (.2)
----------- -------- -------
Net investment gains from fixed maturities before expenses.................... 21.6 15.2 7.2
Other.................................................................................. .1 2.2 (.6)
---------- ------- -------
Net investment gains before expenses.......................................... 21.7 17.4 6.6
Investment expenses.................................................................... 3.2 4.1 3.9
--------- ------- -------
Net investment gains.......................................................... $ 18.5 $13.3 $ 2.7
======= ===== ======
</TABLE>
At December 31, 1998, the mortgage loan balance was primarily comprised of
commercial loans. Approximately 15 percent, 12 percent, 12 percent, 11 percent
and 8 percent of the mortgage loan balance were on properties located in
California, Michigan, Florida, Texas and Georgia, respectively. No other state
comprised greater than 8 percent of the mortgage loan balance. Noncurrent
mortgage loans were insignificant at December 31, 1998. At December 31, 1998,
our allowance for loss on mortgage loans was $.8 million.
Life insurance companies are required to maintain certain investments on
deposit with state regulatory authorities. Such assets had an aggregate carrying
value of $16.1 million at December 31, 1998.
The Company had no investments in any single entity in excess of 10 percent
of shareholder's equity at December 31, 1998, other than investments issued or
guaranteed by the United States government or a United States government agency.
3. INSURANCE LIABILITIES:
These liabilities consisted of the following:
<TABLE>
<CAPTION>
Interest
Withdrawal Mortality rate
assumption assumption assumption 1998 1997
---------- ---------- ---------- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Future policy benefits:
Interest-sensitive products:
Investment contracts............................ N/A N/A (C) $1,036.0 $1,177.5
Universal life-type contracts................... N/A N/A 4.8% 329.2 344.6
---------- ----------
Total interest-sensitive products............. 1,365.2 1,522.1
--------- ---------
Traditional products:
Traditional life insurance contracts............ Company (a) 7.6% 139.9 142.8
experience
Limited-payment contracts....................... None (b) 7.6% 106.3 105.5
---------- ----------
Total traditional products.................... 246.2 248.3
---------- ----------
Claims payable and other policyholder funds ........ N/A N/A N/A 62.6 62.5
Liabilities related to separate accounts............ N/A N/A N/A 696.4 402.1
---------- ----------
Total........................................... $2,370.4 $2,235.0
======== ========
F-13
CONSECO VARIABLE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
<FN>
- -------------
(a) Principally modifications of the 1975 - 80 Basic, Select and Ultimate
Tables.
(b) Principally the 1984 United States Population Table and the NAIC 1983
Individual Annuitant Mortality Table.
(c) At December 31, 1998 and 1997, approximately 95 percent and 97 percent,
respectively, of this liability represented account balances where future
benefits are not guaranteed. The weighted average interest rate on the
remainder of the liabilities representing the present value of guaranteed
future benefits was approximately 6 percent at December 31, 1998.
</FN>
</TABLE>
4. INCOME TAXES:
Income tax liabilities were comprised of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
(Dollars in millions)
Deferred income tax liabilities (assets):
<S> <C> <C>
Investments (primarily actively managed fixed maturities).................................. $ 5.4 $ 9.8
Cost of policies purchased and cost of policies produced................................... 56.7 52.2
Insurance liabilities...................................................................... (28.2) (19.5)
Unrealized appreciation (depreciation)..................................................... (.4) 4.7
Other...................................................................................... (2.2) (4.0)
-------- ------
Deferred income tax liabilities....................................................... 31.3 43.2
Current income tax liabilities (assets)........................................................ 6.2 1.0
--------- -------
Income tax liabilities................................................................ $ 37.5 $ 44.2
======= ======
</TABLE>
Income tax expense was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Current tax provision..................................................................... $20.8 $16.3 $10.5
Deferred tax provision (benefit).......................................................... (4.2) 5.8 4.9
------ ------- -------
Income tax expense............................................................... $16.6 $22.1 $15.4
===== ===== =====
</TABLE>
A reconciliation of the income tax provisions based on the U.S. statutory
corporate tax rate to the provisions reflected in the statement of operations is
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Tax on income before income taxes at statutory rate....................................... 35.0% 35.0% 35.0%
State taxes............................................................................... 1.0 .7 1.5
Other..................................................................................... (.8) .3 1.0
----- ------ -------
Income tax expense............................................................... 35.2% 36.0% 37.5%
==== ==== ====
</TABLE>
5. OTHER DISCLOSURES:
Litigation
The Company is involved on an ongoing basis in lawsuits related to its
operations. Although the ultimate outcome of certain of such matters cannot be
predicted, none of such lawsuits currently pending against the Company is
expected, individually or in the aggregate, to have a material adverse effect
on the Company's financial condition, cash flows or results of operations.
F-14
CONSECO VARIABLE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Guaranty Fund Assessments
The balance sheet at December 31, 1998, includes: (i) accruals of $2.4
million, representing our estimate of all known assessments that will be levied
against the Company by various state guaranty associations based on premiums
written through December 31, 1998; and (ii) receivables of $1.9 million that we
estimate will be recovered through a reduction in future premium taxes as a
result of such assessments. These estimates are subject to change when the
associations determine more precisely the losses that have occurred and how such
losses will be allocated among the insurance companies. We recognized expense
for such assessments of $1.1 million in 1998, $1.2 million in 1997 and $1.4
million in 1996.
Related Party Transactions
The Company operates without direct employees through management and
service agreements with subsidiaries of Conseco. Fees for such services
(including data processing, executive management and investment management
services) are based on Conseco's direct and directly allocable costs plus a 10
percent margin. Total fees incurred by the Company under such agreements were
$37.8 million in 1998, $36.7 million in 1997 and $44.1 million in 1996.
During 1998 and 1997, the Company purchased $13.0 million and $11.2 million
par value, respectively, of senior subordinated notes issued by subsidiaries of
Conseco. Such notes had a carrying value of $45.5 million and $29.8 million at
December 31, 1998 and 1997, respectively, and are classified as "other invested
assets" in the accompanying balance sheet. In addition, during 1997, a
subsidiary of Conseco redeemed $16.5 million par value of such notes which were
purchased in 1996.
6. OTHER OPERATING STATEMENT DATA:
Insurance policy income consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Traditional products:
Direct premiums collected......................................................... $445.8 $309.6 $241.3
Reinsurance assumed............................................................... 15.6 14.9 1.7
Reinsurance ceded................................................................. (21.0) (24.2) (24.6)
------- ------- -------
Premiums collected, net of reinsurance...................................... 440.4 300.3 218.4
Less premiums on universal life and products
without mortality and morbidity risk which are
recorded as additions to insurance liabilities ................................ 400.4 255.9 169.8
------- ------- -------
Premiums on traditional products with mortality or morbidity risk,
recorded as insurance policy income...................................... 40.0 44.4 48.6
Fees and surrender charges on interest sensitive products............................. 33.6 31.3 32.8
-------- -------- --------
Insurance policy income..................................................... $ 73.6 $ 75.7 $ 81.4
======= ======= =======
</TABLE>
The five states with the largest shares of 1998 collected premiums were
Texas (17 percent), Florida (16 percent), California (13 percent), Michigan (7.1
percent) and Indiana (6.2 percent). No other state accounted for more than 5.0
percent of total collected premiums.
F-15
CONSECO VARIABLE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Changes in the cost of policies purchased were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Balance, beginning of year............................................................ $106.4 $143.0 $120.0
Amortization...................................................................... (21.1) (15.4) (15.3)
Amounts related to fair value adjustment of actively managed fixed maturities..... 11.8 (21.2) 36.6
Other ............................................................................ .9 - 1.7
---------- ----------- ---------
Balance, end of year.................................................................. $ 98.0 $106.4 $143.0
======= ====== ======
</TABLE>
Based on current conditions and assumptions as to future events on all
policies in force, the Company expects to amortize approximately 10 percent of
the December 31, 1998, balance of cost of policies purchased in 1999, 9 percent
in 2000, 9 percent in 2001, 8 percent in 2002 and 8 percent in 2003. The
discount rates used to determine the amortization of the cost of policies
purchased ranged from 3.6 percent to 8.0 percent and averaged 5.8 percent.
Changes in the cost of policies produced were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Balance, beginning of year............................................................ $ 55.9 $38.2 $24.0
Additions......................................................................... 35.3 31.8 13.2
Amortization...................................................................... (11.0) (10.2) (3.5)
Amounts related to fair value adjustment of actively managed fixed maturities..... 2.3 (3.9) 4.5
--------- ------- -------
Balance, end of year.................................................................. $ 82.5 $55.9 $38.2
======= ===== =====
</TABLE>
7. STATEMENT OF CASH FLOWS:
Income taxes paid during 1998, 1997, and 1996, were $17.1 million, $14.8
million and $18.1 million, respectively.
Short-term investments having original maturities of three months or less
are considered to be cash equivalents. All cash is invested in short-term
investments.
8. STATUTORY INFORMATION:
Statutory accounting practices prescribed or permitted for insurance
companies by regulatory authorities differ from generally accepted accounting
principles. The Company reported the following amounts to regulatory agencies:
<TABLE>
<CAPTION>
1998 1997
---- ----
(Dollars in millions)
<S> <C> <C>
Statutory capital and surplus.................................................. $134.0 $140.7
Asset valuation reserve........................................................ 30.9 29.2
Interest maintenance reserve................................................... 73.1 68.8
-------- --------
Total...................................................................... $238.0 $238.7
====== ======
</TABLE>
F-16
CONSECO VARIABLE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The Company's statutory net income was $32.7 million, $32.7 million and
$32.6 million in 1998, 1997 and 1996, respectively.
State insurance laws generally restrict the ability of insurance companies
to pay dividends or make other distributions. Approximately $32.9 million of the
Company's net assets at December 31, 1998, are available for distribution in
1999 without permission of state regulatory authorities.
F-17
