<PAGE> 1
FINANCIAL STATEMENTS
AMERICAN REPUBLIC VARIABLE ANNUITY ACCOUNT
YEAR ENDED DECEMBER 31, 1998
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE> 2
American Republic Variable Annuity Account
Financial Statements
Year ended December 31, 1998
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
[ERNST & YOUNG LLP LETTERHEAD]
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 as of December 31, 1998, 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 mutual fund shares owned as of December 31, 1998 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, 1998, 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
-----------------------
Ernst & Young LLP
January 15, 1999
1
<PAGE> 4
<TABLE>
<CAPTION>
MONEY GROWTH GLOBAL GLOBAL STRATEGIC
MARKET GROWTH AND INCOME GROWTH INCOME FIXED INCOME BALANCED
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$2,340,971 $ - $ - $ - $ - $ - $ -
- 14,722,923 - - - - -
- - 6,339,237 - - - -
- - - 4,044,408 - - -
- - - - 5,958,594 - -
- - - - - 3,116,034 -
- - - - - - 7,596,042
- ---------------------------------------------------------------------------------------------------
2,340,971 14,722,923 6,339,237 4,044,408 5,958,594 3,116,034 7,596,042
- 1,824,882 473,828 850,114 418,553 224,504 1,108,584
- ---------------------------------------------------------------------------------------------------
$2,340,971 $16,547,805 $6,813,065 $4,894,522 $6,377,147 $3,340,538 $8,704,626
===================================================================================================
</TABLE>
3
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American Republic Variable Annuity Account
Statement of Net Assets (continued)
<TABLE>
<S> <C>
Net assets represented by:
Currently payable annuity contracts:
Money Market Division $ 44,423
Growth Division 77,138
Growth and Income Division 61,318
Global Growth Division 30,594
Global Income Division 73,964
Strategic Fixed Income Division 57,046
Balanced Division 207,087
--------------------
551,570
</TABLE>
<TABLE>
<CAPTION>
UNITS VALUE
---------------------------
<S> <C> <C> <C>
Contracts in accumulation period:
Money Market Division 155,461 $14.77 2,296,548
Growth Division 362,261 45.47 16,470,667
Growth and Income Division 319,847 21.11 6,751,747
Global Growth Division 257,972 18.85 4,863,928
Global Income Division 329,199 19.15 6,303,183
Strategic Fixed Income Division 176,265 18.63 3,283,492
Balanced Division 298,308 28.49 8,497,539
-------------------
48,467,104
-------------------
$49,018,674
===================
</TABLE>
See accompanying notes.
4
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<TABLE>
<CAPTION>
GROWTH GLOBAL GLOBAL STRATEGIC
AND INCOME GROWTH INCOME FIXED INCOME BALANCED
DIVISION DIVISION DIVISION DIVISION DIVISION
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 27,761 $ - $329,388 $197,999 $ 178,557
446,067 850,114 97,533 26,504 930,026
- -----------------------------------------------------------------------------------------
473,828 850,114 426,921 224,503 1,108,583
(96,751) (76,037) (101,158) (52,330) (131,420)
(5,097) (5,819) (7,131) (2,502) (7,463)
- -----------------------------------------------------------------------------------------
(101,848) (81,856) (108,289) (54,832) (138,883)
- -----------------------------------------------------------------------------------------
371,980 768,258 318,632 169,671 969,700
416,468 309,251 (44,058) 15,393 377,203
171,147 (467,933) 275,130 66,932 6,665
- -----------------------------------------------------------------------------------------
$959,595 $609,576 $549,704 $251,996 $1,353,568
=========================================================================================
</TABLE>
6
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<TABLE>
<CAPTION>
GROWTH AND GLOBAL GLOBAL STRATEGIC
GROWTH INCOME GROWTH INCOME FIXED INCOME BALANCED
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$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
1,680,734 371,980 768,258 318,632 169,671 969,700
156,653 416,468 309,251 (44,058) 15,393 377,203
1,942,564 171,147 (467,933) 275,130 66,932 6,665
- ---------------------------------------------------------------------------------------------------------
3,779,951 959,595 609,576 549,704 251,996 1,353,568
7,421 4,150 2,437 - - 7,487
(2,604,973) (1,364,249) (1,198,799) (2,281,763) (919,535) (2,610,044)
(29,926) 128,086 (250,822) (301,128) 98,469 (81,150)
(14,481) (18,718) (2,001) (65,712) (17,315) (29,974)
- ---------------------------------------------------------------------------------------------------------
(2,641,959) (1,250,731) (1,449,185) (2,648,603) (838,381) (2,713,681)
- ---------------------------------------------------------------------------------------------------------
1,137,992 (291,136) (839,609) (2,098,899) (586,385) (1,360,113)
- ---------------------------------------------------------------------------------------------------------
$16,547,805 $6,813,065 $4,894,522 $ 6,377,147 $3,340,538 $ 8,704,626
=========================================================================================================
</TABLE>
8
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American Republic Variable Annuity Account
Notes to Financial Statements
December 31, 1998
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 Mitchell Hutchins Series Trust (the
"Series Trust"), an open-end management investment company under the Investment
Company Act of 1940, as directed by eligible contract owners. Effective November
19, 1997, the name of the Series Trust was changed from PaineWebber Series Trust
to Mitchell Hutchins Series Trust by approval of the Series Trust's board of
trustees. All series of shares are diversified except the Global Income
Portfolio and Strategic Fixed Income Portfolio.
The Company has elected to terminate sales efforts of the Account. As a result,
the Account is no longer available to new contract owners. Existing contract
owners may continue to allocate purchase payments to, or transfers into, the
Account.
INVESTMENT OPERATIONS
Investments are stated at the closing net asset values per share on December 31,
1998.
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.
9
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American Republic Variable Annuity Account
Notes to Financial Statements (continued)
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 $705,938 in 1998.
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 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 $40,830 in 1998.
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, 1998 DECEMBER 31, 1997
------------------------------------- ------------------------------------
PURCHASES SALES PURCHASES SALES
------------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
Portfolio:
Money Market $ 2,078,979 $ 2,247,874 $ 2,612,991 $ 5,253,352
Growth 4,759,381 4,058,020 4,052,326 7,225,946
Growth and Income 1,796,159 2,028,804 2,310,046 3,195,502
Global Growth 65,333 1,555,626 268,582 3,927,233
Global Income 587,381 2,810,819 1,023,925 5,000,681
Strategic Fixed Income 469,779 1,121,443 781,332 2,095,774
Balanced 2,187,680 3,320,284 1,944,039 4,470,474
------------------------------------- ------------------------------------
$11,944,692 $17,142,870 $12,993,241 $31,168,962
===================================== ====================================
</TABLE>
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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, 1998 DECEMBER 31, 1997
-------------------------------- ---------------------------------
PURCHASED REDEEMED PURCHASED REDEEMED
-------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Division:
Money Market 135,347 151,047 169,421 368,544
Growth 31,020 102,821 28,736 219,459
Growth and Income 34,715 96,836 74,885 196,007
Global Growth 1,283 82,572 12,006 230,595
Global Income 3,071 148,221 9,619 279,891
Strategic Fixed Income 12,826 58,232 26,314 125,580
Balanced 14,876 118,321 22,122 196,455
-------------------------------- ---------------------------------
233,138 758,050 343,103 1,616,531
================================ =================================
</TABLE>
6. NET ASSETS
Net assets at December 31, 1998 consisted of the following:
<TABLE>
<CAPTION>
MONEY GROWTH
MARKET GROWTH AND INCOME
COMBINED DIVISION DIVISION DIVISION
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unit transactions $11,557,198 $1,436,373 $ 3,857,766 $1,625,653
Accumulated net invest-
ment income 34,094,858 904,598 11,055,579 3,969,678
Net unrealized apprecia-
tion/depreciation of
investments 3,366,618 - 1,634,460 1,217,734
---------------------------------------------------------------------
$49,018,674 $2,340,971 $16,547,805 $6,813,065
=====================================================================
</TABLE>
<TABLE>
<CAPTION>
GLOBAL GLOBAL STRATEGIC
GROWTH INCOME FIXED INCOME BALANCED
DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unit transactions $1,304,884 $1,678,557 $1,653,965 $ -
Accumulated net invest-
ment income 3,244,624 4,851,801 1,746,058 8,322,520
Net unrealized apprecia-
tion/depreciation of
investments 345,014 (153,211) (59,485) 382,106
---------------------------------------------------------------------
$4,894,522 $6,377,147 $3,340,538 $8,704,626
=====================================================================
</TABLE>
11
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American Republic Variable Annuity Account
Notes to Financial Statements (continued)
7. YEAR 2000 (UNAUDITED)
The Company has performed an assessment of its direct and indirect exposures due
to the processing of the Year 2000 by information systems. Based on this
assessment, the Company developed a plan to modify its information technology to
be ready for the Year 2000 and began efforts to modify its systems in 1996. 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 has developed a process for
contacting significant customers, suppliers and other third parties to obtain an
understanding of their Year 2000 readiness efforts. 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.
While the Company believes that it is addressing its Year 2000 concerns, it has
initiated a project to develop contingency/recovery plans to ensure the
continuity of critical business functions in the event of a disruption to
operations due to internal and external problems due to the Year 2000. This
project is expected to be substantially complete by July 1999. The Company
believes these contingency plans and existing disaster recovery plans will
reduce the impact Year 2000 issues may have on the Company.
12