<PAGE> 1
FINANCIAL STATEMENTS
AMERICAN REPUBLIC VARIABLE ANNUITY ACCOUNT
YEAR ENDED DECEMBER 31, 1997
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE> 2
American Republic Variable Annuity Account
Financial Statements
Year ended December 31, 1997
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors................................................. 1
Audited Financial Statements
Statement of Net Assets........................................................ 2
Statement of Operations........................................................ 5
Statements of Changes in Net Assets............................................ 7
Notes to Financial Statements.................................................. 9
</TABLE>
<PAGE> 3
Report of Independent Auditors
The Board of Directors
American Republic Insurance Company
We have audited the accompanying statement of net assets of American Republic
Variable Annuity Account (comprising, respectively, the Money Market, Growth,
Growth and Income, Global Growth, Global Income, Strategic Fixed Income, and
Balanced Divisions) as of December 31, 1997, and the related statements of
operations for the year then ended and changes in net assets for each of the
two years in the period then ended. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1997 by
correspondence with the transfer agent. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Republic Variable
Annuity Account at December 31, 1997, and the results of its operations for the
year then ended 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.
/s/ Ernst & Young LLP
Des Moines, Iowa
January 14, 1998
1
<PAGE> 4
American Republic Variable Annuity Account
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
COMBINED
---------------
<S> <C>
ASSETS
Investments at net asset value:
PaineWebber Series Trust Money Market Portfolio, 2,509,866 shares at $1.00 per
share (cost -- $2,509,866) $ 2,509,866
PaineWebber Series Trust Growth Portfolio, 762,786 shares at $15.63 per share
(cost -- $12,230,449) 11,922,345
PaineWebber Series Trust Growth and Income Portfolio, 437,127 shares at $13.69
per share (cost -- $4,937,680) 5,984,267
PaineWebber Series Trust Global Growth Portfolio, 389,424 shares at $14.62 per
share (cost -- $4,880,436) 5,693,383
PaineWebber Series Trust Global Income Portfolio, 735,519 shares at $10.81 per
share (cost -- $8,379,301) 7,950,960
PaineWebber Series Trust Strategic Fixed Income Portfolio, 346,370 shares at
$10.64 per share (cost -- $3,811,790) 3,685,373
PaineWebber Series Trust Balanced Portfolio, 736,521 shares at $11.33 per share
(cost -- $7,969,337) 8,344,778
---------------
Total investments (cost -- $44,718,859) 46,090,972
Accrued investment income 7,134,747
---------------
Total net assets $53,225,719
===============
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
MONEY GROWTH AND GLOBAL GLOBAL STRATEGIC
MARKET GROWTH INCOME GROWTH INCOME FIXED INCOME BALANCED
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$2,509,866
$11,922,345
$5,984,267
$5,693,383
$7,950,960
$3,685,373
$ 8,344,778
------------------------------------------------------------------------------------------------------------------
2,509,866 11,922,345 5,984,267 5,693,383 7,950,960 3,685,373 8,344,778
- 3,487,468 1,119,934 40,748 525,086 241,550 1,719,961
------------------------------------------------------------------------------------------------------------------
$2,509,866 $15,409,813 $7,104,201 $5,734,131 $8,476,046 $3,926,923 $10,064,739
==================================================================================================================
</TABLE>
3
<PAGE> 6
American Republic Variable Annuity Account
Statement of Net Assets (continued)
<TABLE>
<S> <C>
Net assets represented by:
Currently payable annuity contracts:
Money Market Division $ 56,365
Growth Division 73,418
Growth and Income Division 70,973
Global Growth Division 29,151
Global Income Division 81,137
Strategic Fixed Income Division 69,913
Balanced Division 119,717
-------------
500,674
</TABLE>
<TABLE>
<CAPTION>
UNITS VALUE
---------------------
<S> <C> <C> <C>
Contracts in accumulation period:
Money Market Division 171,161 $14.33 2,453,501
Growth Division 434,062 35.33 15,336,395
Growth and Income Division 381,968 18.41 7,033,228
Global Growth Division 339,261 16.82 5,704,980
Global Income Division 474,349 17.70 8,394,909
Strategic Fixed Income Division 221,671 17.40 3,857,010
Balanced Division 401,753 24.75 9,945,022
---------------
52,725,045
---------------
$53,225,719
===============
</TABLE>
See accompanying notes.
4
<PAGE> 7
American Republic Variable Annuity Account
Statement of Operations
Year ended December 31, 1997
<TABLE>
<CAPTION>
MONEY
MARKET GROWTH
COMBINED DIVISION DIVISION
-----------------------------------------------
<S> <C> <C> <C>
NET INVESTMENT INCOME (LOSS)
Income:
Dividends $1,241,835 $190,130 $ 20,543
Capital gains distributions 6,091,484 - 3,466,925
Expenses (Note 2):
Administrative charges (87,918) (6,193) (25,265)
Mortality, distribution and expense risk (849,273) (60,896) (230,818)
-----------------------------------------------
Net investment income (loss) 6,396,128 123,041 3,231,385
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
(Note 4)
Net realized gain (loss) on investments 2,385,868 - 853,134
Change in net unrealized appreciation/
depreciation of investments (1,621,083) - (2,057,997)
-----------------------------------------------
Net increase in net assets resulting from
operations $7,160,913 $123,041 $2,026,522
===============================================
</TABLE>
See accompanying notes.
5
<PAGE> 8
<TABLE>
<CAPTION>
GROWTH GLOBAL GLOBAL STRATEGIC
AND INCOME GROWTH INCOME FIXED INCOME BALANCED
DIVISION DIVISION DIVISION DIVISION DIVISION
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 45,499 $ 16,611 $521,803 $241,550 $ 205,699
1,075,386 24,137 9,206 - 1,515,830
(7,404) (13,120) (13,978) (7,261) (14,697)
(98,314) (102,350) (144,460) (61,883) (150,552)
- ------------------------------------------------------------------------------------------------------
1,015,167 (74,722) 372,571 172,406 1,556,280
719,303 503,597 (103,365) (96,099) 509,298
114,389 (8,771) (125,872) 300,398 156,770
- ------------------------------------------------------------------------------------------------------
$1,848,859 $420,104 $143,334 $376,705 $2,222,348
======================================================================================================
</TABLE>
6
<PAGE> 9
American Republic Variable Annuity Account
Statements of Changes in Net Assets
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
MONEY
MARKET
COMBINED DIVISION
----------------------------------
<S> <C> <C>
NET ASSETS AT JANUARY 1, 1996 $108,513,684 $15,041,183
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) 5,939,085 232,407
Net realized gain (loss) on investments 2,783,561 -
Change in net unrealized appreciation/depreciation of investments (352,783) -
----------------------------------
Net increase in net assets resulting from operations 8,369,863 232,407
Changes from principal transactions:
Purchase payments 93,441 1,655
Contract distributions and terminations (47,452,035) (12,205,680)
Transfer payments (to) from other divisions or other contracts 932,168 2,106,570
Annuity payments and related actuarial adjustment in reserves (158,030) (25,908)
----------------------------------
Decrease in net assets derived from principal transactions (46,584,456) (10,123,363)
----------------------------------
Total decrease (38,214,593) (9,890,956)
----------------------------------
Net assets at December 31, 1996 70,299,091 5,150,227
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) 6,396,128 123,041
Net realized gain (loss) on investments 2,385,868 -
Change in net unrealized appreciation/depreciation of investments (1,621,083) -
----------------------------------
Net increase in net assets resulting from operations 7,160,913 123,041
Changes from principal transactions:
Purchase payments 92,856 20,420
Contract distributions and terminations (24,648,081) (3,342,317)
Transfer payments (to) from other divisions or other contracts 347,607 561,618
Annuity payments and related actuarial adjustment in reserves (26,667) (3,123)
----------------------------------
Decrease in net assets derived from principal transactions (24,234,285) (2,763,402)
----------------------------------
Total decrease (17,073,372) (2,640,361)
----------------------------------
Net assets at December 31, 1997 $53,225,719 $ 2,509,866
==================================
</TABLE>
See accompanying notes.
7
<PAGE> 10
<TABLE>
<CAPTION>
GROWTH AND GLOBAL GLOBAL STRATEGIC FIXED
GROWTH INCOME GROWTH INCOME INCOME BALANCED
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$25,228,536 $7,491,212 $12,178,300 $23,135,425 $9,063,049 $16,375,979
2,771,146 946,213 (112,336) 598,400 271,861 1,231,394
2,174,232 590,992 134,027 (55,576) (366,068) 305,954
(1,823,105) (249,540) 1,232,211 142,769 122,835 222,047
- ---------------------------------------------------------------------------------------------------
3,122,273 1,287,665 1,253,902 685,593 28,628 1,759,395
51,536 7,936 13,947 2,646 3,360 12,361
(8,987,652) (2,489,204) (3,891,049) (10,160,961) (3,694,413) (6,023,076)
8,368 825,892 (644,445) (625,504) (273,180) (465,533)
(28,946) (25,913) (4,352) (45,988) (2,844) (24,079)
- ---------------------------------------------------------------------------------------------------
(8,956,694) (1,681,289) (4,525,899) (10,829,807) (3,967,077) (6,500,327)
- ---------------------------------------------------------------------------------------------------
(5,834,421) (393,624) (3,271,997) (10,144,214) (3,938,449) (4,740,932)
- ---------------------------------------------------------------------------------------------------
19,394,115 7,097,588 8,906,303 12,991,211 5,124,600 11,635,047
3,231,385 1,015,167 (74,722) 372,571 172,406 1,556,280
853,134 719,303 503,597 (103,365) (96,099) 509,298
(2,057,997) 114,389 (8,771) (125,872) 300,398 156,770
- ---------------------------------------------------------------------------------------------------
2,026,522 1,848,859 420,104 143,334 376,705 2,222,348
31,844 3,273 9,643 6,478 6,218 14,980
(5,240,367) (2,481,083) (3,186,575) (4,313,884) (1,863,267) (4,220,588)
(790,009) 640,955 (426,820) (338,685) 271,009 429,539
(12,292) (5,391) 11,476 (12,408) 11,658 (16,587)
- ---------------------------------------------------------------------------------------------------
(6,010,824) (1,842,246) (3,592,276) (4,658,499) (1,574,382) (3,792,656)
- ---------------------------------------------------------------------------------------------------
(3,984,302) 6,613 (3,172,172) (4,515,165) (1,197,677) (1,570,308)
- ---------------------------------------------------------------------------------------------------
$15,409,813 $7,104,201 $ 5,734,131 $ 8,476,046 $3,926,923 $10,064,739
===================================================================================================
</TABLE>
8
<PAGE> 11
American Republic Variable Annuity Account
Notes to Financial Statements
December 31, 1997
1. INVESTMENT AND ACCOUNTING POLICIES
ORGANIZATION
American Republic Variable Annuity Account (the Account) was organized by
American Republic Insurance Company (the Company) in accordance with the
provisions of Iowa Insurance laws and is a part of the total operations of the
Company. The assets and liabilities of the Account are clearly identified and
distinguished from the other assets and liabilities of the Company. The Account
invests solely in specified portfolios of PaineWebber Series Trust, an open-end
management investment company under the Investment Company Act of 1940, as
directed by eligible contract owners. All series of shares are diversified
except Global Income Portfolio.
INVESTMENT OPERATIONS
Investments are stated at the closing net asset values per share on December
31, 1997.
The average cost method is used to determine realized gains and losses.
Dividends are taken into income on an accrual basis as of the ex-dividend date.
ANNUITY RESERVES
Currently payable annuity contract reserves are computed according to the
Individual Annuity Valuation 1983 Table using an assumed interest rate of 4.0%.
If the amount paid to the contractholder is less than originally estimated,
charges paid for mortality and expense risks are reimbursed to the Company. If
additional amounts are required, the Company reimburses the Account.
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
accompanying notes. Such estimates and assumptions could change in the future
as more information becomes known, which could impact the amounts reported and
disclosed herein.
2. EXPENSES
The Company is compensated for certain expenses. Mortality, distribution, and
expense risks assumed by the Company are compensated for by a charge equivalent
to an annual rate of 1.40% of the total net assets of each division. These
charges amounted to $849,273 in 1997.
9
<PAGE> 12
American Republic Variable Annuity Account
Notes to Financial Statements (continued)
2. EXPENSES (CONTINUED)
An annual contract administration charge of $30 is deducted on the last
valuation date of each calendar year, upon full withdrawal of a contract's
value or upon commencement of annuity payments if such withdrawal is made or
annuity payments commence prior to the last valuation date of the year. A
transfer charge of $10 will be imposed on each transfer between divisions
(portfolios) of the account in excess of six in any one calendar year. However,
the Company has waived this charge until further notice. An early withdrawal
charge may be imposed in the event of withdrawal of any portion of the contract
value or upon annuitization. The early withdrawal charge is 5% of the amount
withdrawn for purchase payments made within five years prior to the date of
withdrawal. A withdrawal transaction charge of $10 will be imposed on each
withdrawal in excess of three per calendar year. Total administrative charges
amounted to $87,918 in 1997.
3. FEDERAL INCOME TAXES
Operations of the Account are part of the operations of the Company. Under
current practice, no federal income taxes are allocated by the Company to the
operations of the Account.
4. PURCHASES AND SALES OF INVESTMENT SECURITIES
The aggregate cost of purchases and proceeds from sales of investments were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------- ------------------------------
PURCHASES SALES PURCHASES SALES
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Portfolio:
Money Market $ 2,612,991 $ 5,253,352 $ 6,669,873 $16,560,914
Growth 4,052,326 7,225,946 4,707,339 11,817,070
Growth and Income 2,310,046 3,195,502 1,024,433 2,742,046
Global Growth 268,582 3,927,233 990,326 5,677,656
Global Income 1,023,925 5,000,681 2,638,021 11,706,788
Strategic Fixed Income 781,332 2,095,774 2,142,908 5,268,132
Balanced 1,944,039 4,470,474 1,686,439 6,897,555
------------------------------- ------------------------------
$12,993,241 $31,168,962 $19,859,339 $60,670,161
=============================== ==============================
</TABLE>
10
<PAGE> 13
American Republic Variable Annuity Account
Notes to Financial Statements (continued)
5. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS
Transactions in units were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------- ----------------------------
PURCHASED REDEEMED PURCHASED REDEEMED
--------------------------- ----------------------------
<S> <C> <C> <C> <C>
Division:
Money Market 169,421 368,544 462,861 1,203,441
Growth 28,736 219,459 87,118 412,487
Growth and Income 74,885 196,007 73,162 208,363
Global Growth 12,006 230,595 65,888 374,686
Global Income 9,619 279,891 35,860 687,175
Strategic Fixed Income 26,314 125,580 56,476 317,278
Balanced 22,122 196,455 13,351 370,326
--------------------------- ----------------------------
343,103 1,616,531 794,716 3,573,756
=========================== ============================
</TABLE>
6. NET ASSETS
Net assets at December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
MONEY GROWTH
MARKET GROWTH AND INCOME
COMBINED DIVISION DIVISION DIVISION
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Unit transactions $23,060,038 $1,682,820 $ 6,499,725 $2,876,384
Accumulated net investment
income 28,793,568 827,046 9,218,192 3,181,230
Net unrealized
appreciation/depreciation of
investments 1,372,113 - (308,104) 1,046,587
-----------------------------------------------------------------
$53,225,719 $2,509,866 $15,409,813 $7,104,201
=================================================================
</TABLE>
<TABLE>
<CAPTION>
GLOBAL GLOBAL STRATEGIC
GROWTH INCOME FIXED INCOME BALANCED
DIVISION DIVISION DIVISION DIVISION
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Unit transactions $2,754,069 $4,327,160 $2,492,346 $ 2,427,534
Accumulated net investment
income 2,167,115 4,577,227 1,560,994 7,261,764
Net unrealized
appreciation/depreciation of
investments 812,947 (428,341) (126,417) 375,441
-----------------------------------------------------------------
$5,734,131 $8,476,046 $3,926,923 $10,064,739
=================================================================
</TABLE>
11
<PAGE> 14
American Republic Variable Annuity Account
Notes to Financial Statements (continued)
7. YEAR 2000 (UNAUDITED)
Based on a study of its computer software and hardware, the Company has
determined its exposure to the Year 2000 change of the century date issue. The
Company has developed a plan to modify its information technology to be ready
for the Year 2000. Efforts began in 1996 to modify its systems. This project is
expected to be substantially completed early in 1999. While additional testing
will be conducted on its systems through the Year 2000, the Company does not
expect this project to have a significant effect on the Account's operations.
To mitigate the effect of outside influences and other dependencies relative to
the Year 2000, the Company is contacting significant customers, suppliers and
other third parties. To the extent these third parties would be unable to
transact business in the Year 2000 and thereafter, the Account's operations
could be adversely affected.
12
