<PAGE>
Registration No. 33-11158
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 15
TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUST
REGISTERED ON FORM N-8B-2
ALLIANZ LIFE VARIABLE ACCOUNT A
- -------------------------------
(Exact Name of Trust)
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
- -----------------------------------------------
(Name of Depositor)
1750 Hennepin Avenue, Minneapolis, MN 55403-2195
- ----------------------------------------------- ----------
(Address of Depositor's Principal Executive Offices) (Zip Code)
Name and Address of Agent for Service
- -------------------------------------
Michael T. Westermeyer
Allianz Life Insurance Company of North America
1750 Hennepin Avenue
Minneapolis, MN 55403-2195
Copies to:
Judith A. Hasenauer
Blazzard, Grodd & Hasenauer, P.C.
P.O. Box 5108
Westport, CT 06881
(203) 226-7866
Title and amount of Securities being Registered:
Individual Flexible Premium Variable Life Insurance Policies.
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to paragraph(b) of Rule 485
_X_ on May 1, 1999 pursuant to paragraph (b) of Rule 485
___ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
___ on (date) pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
CROSS REFERENCE TO ITEMS REQUIRED
BY FORM N-8B-2
<TABLE>
<CAPTION>
N-8B-2 ITEM CAPTION ON PROSPECTUS
- ----------- ---------------------
<S> <C>
1 The Company, The Separate Account
2 The Company
3 Not Applicable
4 Distributors
5 The Variable Account
6(a) Not Applicable
(b) Not Applicable
9 Not Applicable
10 Purchases
11 Investment Choices
12 Investment Choices
13 Expenses
14 Purchases
15 The Separate Account
16 Investment Choices
17 Policy Account, Transfers
18 Purchases
19 Not Applicable
20 Not Applicable
21 Not Applicable
22 Not Applicable
23 Not Applicable
24 Not Applicable
25 The Company
26 The Company
27 The Company
28 The Company
29 The Company
30 The Company
31 Not Applicable
32 Not Applicable
33 Not Applicable
34 Not Applicable
35 The Company
37 Not Applicable
38 Distributors
39 Distributor
40 Not Applicable
41(a) Distributor
42 Not Applicable
43 Not Applicable
44 Purchases
45 Not Applicable
46 Policy Account, Transfers
47 Not Applicable
48 Not Applicable
49 Not Applicable
50 Not Applicable
51 The Company
52 Investment Choices
53 Taxes, Federal Tax Status
54 Financial Statements
55 Not Applicable
</TABLE>
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ISSUED BY
ALLIANZ LIFE VARIABLE ACCOUNT A
AND
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
This prospectus describes the Allianz ValueLife Flexible Premium Variable
Life Insurance Policy that we (Allianz Life Insurance Company of North America)
are offering.
The policy is a variable benefit policy. We have designed the policy for use
in estate and retirement planning and other insurance needs of individuals.
You, the policyowner, have a number of investment choices in the policy.
These investment choices include a fixed account (which is part of our general
account) as well as 17 variable options. When you buy a policy and allocate
funds to the variable options you are subject to investment risk. This means
that the value of your Policy Account may increase and decrease depending upon
the investment performance of the variable option(s) you select. Under some
circumstances, the death benefit and the duration of the policy will also
increase and decrease depending upon investment performance.
Each variable option invests in one portfolio of Franklin Valuemark Funds.
The following 17 portfolios of Franklin Valuemark Funds are currently available
with the policy:
PORTFOLIO SEEKING CAPITAL PRESERVATION AND INCOME
Money Market Fund
PORTFOLIOS SEEKING CURRENT INCOME
High Income Fund
Templeton Global Income Securities Fund
U.S. Government Securities Fund
PORTFOLIOS SEEKING GROWTH AND INCOME
Global Utilities Securities Fund
Growth and Income Fund
Income Securities Fund
Mutual Shares Securities Fund
Real Estate Securities Fund
Rising Dividends Fund
Templeton Global Asset Allocation Fund
PORTFOLIOS SEEKING CAPITAL GROWTH
Natural Resources Securities Fund
Small Cap Fund
Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton International Equity Fund
Templeton Pacific Growth Fund
Please read this prospectus before investing and keep it on file for future
reference. It contains important information about the Allianz ValueLife
Flexible Premium Variable Life Insurance Policy. The Securities and Exchange
Commission (SEC) maintains a Web site (http://www.sec.gov) that contains
information regarding companies that file electronically with the SEC.
THE POLICY:
- IS NOT A BANK DEPOSIT.
- IS NOT FEDERALLY INSURED.
- IS NOT ENDORSED BY ANY BANK OR GOVERNMENT AGENCY.
THE POLICY IS SUBJECT TO INVESTMENT RISK. YOU MAY BE SUBJECT TO LOSS OF
PRINCIPAL.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES NOR HAS IT DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities in any state, country,
or jurisdiction in which we are not authorized to sell the policies. You should
rely only on the information contained in this prospectus or that we have
referred you to. We have not authorized anyone to provide you with information
that is different.
Date: May 1, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
SPECIAL TERMS.................................. 2
SUMMARY........................................ 3
The Variable Life Insurance Policy........... 3
Purchases.................................... 3
Investment Choices........................... 3
Expenses..................................... 4
Death Benefit................................ 5
Taxes........................................ 5
Access to Your Money......................... 5
Other Information............................ 6
Inquiries.................................... 6
PART I
THE VARIABLE LIFE INSURANCE POLICY............. 7
PURCHASES...................................... 7
Premiums..................................... 7
Application For a Policy..................... 7
Planned Periodic Premiums.................... 7
Unscheduled Premiums......................... 7
Grace Period................................. 7
Reinstatement................................ 8
Allocation of Premium........................ 9
Policy Account............................... 9
Method of Determining your Policy Account
Allocated to a Variable Option............. 9
Your Cash Value, Net Cash Value.............. 10
Our Right to Reject or Return a Premium
Payment.................................... 10
INVESTMENT CHOICES............................. 10
Substitution and Limitations on Further
Investments................................ 11
Transfers.................................... 11
Dollar Cost Averaging........................ 12
EXPENSES....................................... 12
Mortality and Expense Risk Charge............ 12
Administrative Charges....................... 12
Insurance Risk Charges....................... 13
Charges for Additional Benefit Riders........ 13
Surrender Charges............................ 14
Partial Surrender Fee........................ 14
<CAPTION>
PAGE
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<S> <C>
Premium Tax Charge........................... 14
Transfer Fee................................. 14
Income Tax Charge............................ 14
Franklin Valuemark Funds' Annual Expenses.... 15
DEATH BENEFIT.................................. 16
Change in Death Benefit...................... 16
Change in Face Amount of Insurance........... 16
Guaranteed Death Benefit Rider............... 17
Accelerated Death Benefit Rider.............. 18
TAXES.......................................... 18
Life Insurance in General.................... 18
Taking Money Out of Your Policy.............. 18
Diversification.............................. 18
ACCESS TO YOUR MONEY........................... 19
Policy Loans................................. 19
Loan Interest Charged........................ 19
Loan Limit................................... 20
Security..................................... 20
Restrictions on Making Loans................. 20
Repaying Policy Debt......................... 20
Partial Surrenders........................... 20
Full Surrenders.............................. 21
OTHER INFORMATION.............................. 21
The Company.................................. 21
Year 2000.................................... 21
The Separate Account......................... 21
Distributor.................................. 22
Suspension of Payments or Transfers.......... 22
Ownership.................................... 22
PART II
Executive Officers And Directors............. 24
Voting....................................... 25
Disregard of Voting Instructions............. 25
Legal Opinions............................... 25
Our Right to Contest......................... 25
Federal Tax Status........................... 26
Reports to Owners............................ 29
Legal Proceedings............................ 29
Experts...................................... 29
Financial Statements......................... 29
APPENDIX -- Illustrations of Policy Values..... A-1
</TABLE>
i
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SPECIAL TERMS
This prospectus is written in plain English to make it as understandable as
possible. However, by the very nature of the policy, certain technical words or
terms are unavoidable. We have identified some of these words or terms. For some
we have provided you with a definition. For the remainder, we believe that you
will find an adequate discussion in the text. We have identified these terms and
provided you with a page number that indicates where you will find the
explanation for the word or term. To help you find the word or term on the page
it is in italics.
Annual Guaranteed Coverage Premium. Your Annual Guaranteed Coverage Premium is
equal to twelve times the Guaranteed Coverage Premium.
Cash Value. Your Policy Account minus the surrender charge.
Face Amount of Insurance. The amount of coverage chosen by you. This amount is
used to determine the death benefit. The minimum Face Amount of Insurance is
$100,000.
Guaranteed Coverage Premium. Your Guaranteed Coverage Premium is a monthly
target premium amount which will vary by the issue age, sex and underwriting
classification of the insured as well as the amount and type of coverage. There
is a distinct Guaranteed Coverage Premium for the base policy and for each rider
attached to the base policy.
Insurance Risk Amount. The excess of the death benefit over the value of your
Policy Account.
Net Cash Value. The Cash Value of your Policy minus any Policy Debt you may
have outstanding.
Policy Account. The sum of any amounts you may have in the fixed account and in
the variable options you have selected.
Policy Debt. The total of any outstanding loans you have made on your policy,
including interest paid in advance for the current policy year.
Surrender Charge Premium. The Surrender Charge Premium is equal to the Annual
Guaranteed Coverage Premium for a base policy death benefit coverage on a person
insured as a standard risk. The Surrender Charge Premium will vary with the
issue age, sex and smoking clarification of the insured as well as the face
amount of the base policy.
Total Guaranteed Coverage Premium. The Total Guaranteed Coverage Premium is the
sum of the Guaranteed Coverage Premium of the base policy and the Guaranteed
Coverage Premium of any riders attached to the base policy. During the first ten
years after the policy is issued the Total Guaranteed Coverage Premium is used
in the Calculation of the Minimum Required Premium to keep the policy in force
regardless of fund performance.
<TABLE>
<CAPTION>
PAGE
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<S> <C>
BENEFICIARY, CONTINGENT BENEFICIARY............. 22
BUSINESS DAY.................................... 10
INSURED......................................... 16
ISSUE DATE...................................... 8
MATURITY BENEFIT................................ 23
MATURITY DATE................................... 23
MONTHLY ANNIVERSARY............................. 8
OWNER........................................... 22
POLICY MONTH.................................... 8
POLICY YEAR, POLICY ANNIVERSARY................. 8
REALLOCATION DATE............................... 6
</TABLE>
2
<PAGE>
The Prospectus is divided into three sections: the Summary, Part I and Part
II. The sections in the Summary correspond to sections in Part I of this
Prospectus which discuss the topics in more detail. Part II contains even more
detailed information.
SUMMARY
1. THE VARIABLE LIFE INSURANCE POLICY
The Allianz ValueLife variable life insurance policy is a contract between
you, the owner, and us, an insurance company. The policy provides for the
payment of a death benefit to your selected beneficiary upon the death of the
insured. This death benefit is distributed free from federal income taxes. The
policy can be used as part of your estate planning or used to save for
retirement. The insured is the person you chose to have his or her life insured
under the policy. You, the owner, can also be the insured, but you do not have
to be.
The policy described in this prospectus is a flexible premium variable life
insurance policy. The policy is "flexible" because:
- the frequency and amount of premium payments can vary;
- you can choose between death benefit options; and
- you can increase or decrease the amount of insurance coverage, all
within the same policy of insurance.
The policy is "variable" because the Policy Account, when allocated to the
variable options, may increase or decrease depending upon the investment results
of the selected variable options. Under certain circumstances, the death benefit
and the duration of your policy may also vary.
During the life of the insured, you can surrender the policy for all or part
of its Net Cash Value. You may also obtain a policy loan, using the Policy
Account as security.
We make available a number of riders to meet a variety of your estate
planning needs. See the "Death Benefit" section for a description of the
guaranteed death benefit rider and the accelerated benefit rider.
2. PURCHASES
You purchase the policy by completing the proper forms. Your registered
representative can help you complete the forms. In some circumstances, we may
contact you for additional information regarding the insured. We may require the
insured to provide us with medical records, physicians' statements or a complete
paramedical examination.
The minimum initial premium we accept is computed for you based on the face
amount you request. The policy is designed for the payment of subsequent
premiums. You can establish planned periodic premiums. The minimum subsequent
premium that we accept is $25 ($50 in Maryland).
3. INVESTMENT CHOICES
You can put your money in the fixed account or in the variable options.
Currently, you may invest in a maximum of 7 investment choices (which include
the fixed account and any variable option you select) at any one time throughout
the life of the policy. Each variable option invests in one Class 1 share
portfolio of Franklin Valuemark Funds. The portfolios are listed below and are
described in the prospectus for Franklin Valuemark Funds.
The following is a list of the portfolios available under the policy:
PORTFOLIO SEEKING CAPITAL PRESERVATION AND INCOME
Money Market Fund
PORTFOLIOS SEEKING CURRENT INCOME
High Income Fund
Templeton Global Income Securities Fund
U.S. Government Securities Fund
3
<PAGE>
PORTFOLIOS SEEKING GROWTH AND INCOME
Global Utilities Securities Fund
Growth and Income Fund
Income Securities Fund
Mutual Shares Securities Fund
Real Estate Securities Fund
Rising Dividends Fund
Templeton Global Asset Allocation Fund
PORTFOLIOS SEEKING CAPITAL GROWTH
Natural Resources Securities Fund
Small Cap Fund
Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton International Equity Fund
Templeton Pacific Growth Fund
4. EXPENSES
We make certain deductions from your premiums, your Policy Account and from
the variable options. These deductions are made for premium taxes, mortality and
expense risks, administrative expenses, sales charges and for providing life
insurance protection. There are also operating expenses of the portfolios. These
deductions are summarized as follows:
Charge for Premium Taxes. This charge is for state and local premium
taxes (in states which charge a premium tax). It is also used to pay for
other expenses associated with premium collection. The charge is deducted
from each premium payment. The charge is equal to 2.5% of each premium
payment and approximates our average expenses associated with premium
collection.
Mortality and Expense Risk Charge. This risk charge is guaranteed not
to exceed, on an annual basis, 0.90% of your average Policy Account value
and is deducted each business day. The current risk charge is 0.60%.
Administrative Charges. These charges are equal to:
1) 0.15%, on an annual basis, of your average Policy Account value
and is deducted each business day; plus
2) $20 per policy month for the first policy year, and $9 per
policy month guaranteed thereafter. Currently, the charge is $5 per
policy month after the first policy year. These amounts are deducted
from your Policy Account on the monthly anniversary date.
Charges for Additional Benefit Riders. The amount of the charge, if any,
each policy month for additional benefit riders is determined in accordance
with the rider and is shown on the coverage page of your policy.
Insurance Risk Charge. On each monthly anniversary date, we deduct from
your Policy Account the cost of insurance for the next policy month. This
charge provides death benefit protection.
Surrender Charges. A surrender charge may be deducted in the event you
make a full or partial surrender of your Policy Account. The surrender
charges contain: a deferred administrative expense and a deferred sales
load. The deferred administrative expense is $5.00 per $1,000 of Face Amount
of Insurance for the first 3 policy years, then grades to zero over policy
years 4 through 13. The deferred sales load is the lesser of 30% of the
Surrender Charge Premium, plus 5% of all premiums over the Surrender Charge
Premium (SCP), or the following percentage of SCP:
<TABLE>
<CAPTION>
YEARS % OF SCP
- ------------------------ -----------
<S> <C>
1-8..................... 65%
9...................... 60%
10..................... 55%
11..................... 44%
12..................... 33%
13..................... 22%
14..................... 11%
15+.................... 0%
</TABLE>
The SCP is equal to the Annual Guaranteed Coverage Premium for the base
policy death benefit for a life insured at standard risk. The SCP will vary
with the issue age, sex, and smoking classification of the insured, and the
face amount of the base policy.
4
<PAGE>
Partial Surrender Fee. If you surrender only a portion of the Net Cash
Value at any time during the insured's lifetime, there is an administrative
fee assessed. The fee is currently equal to the lesser of $25 or 2% of the
partial surrender amount you take out of the policy.
You may make a partial surrender once each policy year that does not
exceed 10% of the Net Cash Value without incurring a surrender charge or the
partial surrender fee.
Transfer Fee. You may transfer values from one variable option to
another, or to or from the fixed account. The first 12 transfers in a policy
year are free. The fee for each additional transfer is the lesser of $25 or
2% of the amount transferred. Prescheduled automatic dollar cost averaging
transfers are not counted.
Other Expenses. There are deductions from and operating expenses paid
out of the assets of the portfolios of Franklin Valuemark Funds.
5. DEATH BENEFIT
The amount of the death benefit depends on:
- the Face Amount of Insurance of your policy;
- the death benefit option in effect at the time of death; and
- under some circumstances, the value of your Policy Account.
There are two death benefit options: Option A and Option B. If death benefit
Option A is in effect, the death benefit is the greater of your total Face
Amount in effect or your Policy Account multiplied by the applicable factor.
Under this option, the amount of the death benefit is fixed, except when we use
the factor to determine the benefit percentage.
If death benefit Option B is in effect, the death benefit is the greater of
your total Face Amount of Insurance in effect plus the Policy Account or the
Policy Account multiplied by the applicable factor. Under this option, the
amount of the death benefit is variable.
Under certain circumstances you can change death benefit options. You can
also change the Face Amount of Insurance under certain circumstances.
At the time of application for a policy, you designate a beneficiary. The
beneficiary is the person or persons who will receive the death proceeds. You
can change your beneficiary unless you have designated an irrevocable
beneficiary. The beneficiary does not have to be a natural person.
6. TAXES
Your policy has been designed to comply with the definition of life
insurance in the Internal Revenue Code. As a result, the death proceeds paid
under the policy should be excludable from the gross income of your beneficiary.
Any earnings in your policy are not taxed until you take them out. The tax
treatment of the loan proceeds and surrender proceeds will depend on whether the
policy is considered a Modified Endowment Contract (MEC). Proceeds taken out of
a MEC are considered to come from earnings first and are includible in taxable
income. If you are younger than 59 1/2 when you take money out of a MEC, you may
also be subject to a 10% federal tax penalty on the earnings withdrawn.
7. ACCESS TO YOUR MONEY
You can terminate your policy at any time and we will pay you the Net Cash
Value. At any time during the insured's life and before your policy has
terminated, you may surrender a part of your Net Cash Value subject to the
requirements of the policy. When you terminate your policy or make a partial
surrender, a surrender charge may be assessed. Also, when you make a partial
surrender we assess a partial surrender fee of $25 or 2% of the partial
surrender amount, whichever is less. Once each policy year, on a non-cumulative
basis, you may make a free partial surrender up to 10% of your unloaned Policy
Value.
You can also borrow some of your Policy Value.
5
<PAGE>
8. OTHER INFORMATION
Free Look. You can cancel the policy within 20 days after you receive
it (or whatever period is required in your state) or the 45th day after you
sign your application. We will refund all premiums paid less any Policy
Debt. When we receive your initial net premium, we will allocate it to the
suspense account until the issue date. When the Policy is issued, your
initial net premium will be allocated to the Money Market Fund until the
REALLOCATION DATE, which occurs 30 days after the policy is issued and
mailed. After that, we will invest your Policy Account value and any
subsequent premiums as you requested.
Purchasing Considerations. The policy is designed for individuals and
businesses that have a need for death protection but who also desire to
potentially increase the values in their policies through investment in the
variable options. The policy offers the following to individuals:
- create or conserve one's estate;
- supplement retirement income; and
- access to funds through loans and surrenders.
If you currently own a variable life insurance policy on the life of the
insured, you should consider whether the purchase of the policy described in
this prospectus is appropriate. Replacement of an existing policy with this
policy may not be advantageous to your situation.
Also, you should carefully consider whether the policy should be used to
replace an existing policy on the life of the insured.
Additional Features. The following additional features are offered:
- You can arrange to have a regular amount of money automatically
transferred from the Money Market Fund or the U.S. Government Securities
Fund to selected variable options each month, theoretically giving you a
lower average cost per unit over time than a single one time purchase.
We call this feature the dollar cost averaging option.
- If the insured becomes terminally ill, we will pay you a portion of the
death benefit. We call this feature the accelerated death benefit rider.
- If you pay a certain required premium, we guarantee that the policy will
not lapse even if your Policy Account value is not sufficient to cover
the monthly deductions. We call this feature the guaranteed minimum
death benefit rider.
- We also offer a number of additional riders that are common to life
insurance policies.
These features and riders may not be available in your state and may not be
suitable for your particular situation.
9. INQUIRIES
If you need more information about buying a policy, please contact us at:
Allianz Life Insurance Company of
North America
1750 Hennepin Avenue
Minneapolis, MN 55403
(800) 542-5427
If you need policyowner service (such as changes in policy information,
inquiry into Policy Account values, or to make a loan), please contact us at our
service center:
Allianz Life ValueLife Service Center
c/o CSC Financial Services Group
5525 LBJ Freeway, Suite 500
Dallas, TX 75240-6211
or
P.O. Box 219066
Dallas, TX 75221
(800) 525-7330
6
<PAGE>
PART I
1. THE VARIABLE LIFE INSURANCE POLICY
The Allianz ValueLife variable life insurance policy is a contract between
you, the owner, and us, an insurance company. This kind of policy is most
commonly used for retirement planning and/or estate planning.
The policy provides for life insurance coverage on the insured. It has
Policy Account values, a death benefit, surrender rights, loan privileges and
other characteristics associated with traditional and universal life insurance.
However, since the policy is a variable life insurance policy, the value of your
policy will increase or decrease depending upon the investment experience of the
variable option(s) you choose. The duration or amount of the death benefit may
also vary based on the investment performance of the underlying portfolios of
Franklin Valuemark Funds. To the extent you select any of the variable options,
you bear the investment risk. If your Net Cash Value is insufficient to pay the
monthly deductions, the policy may terminate. However, if you have paid the
Guaranteed Coverage Premium and have not taken out a loan, your policy will not
lapse even if your Net Cash Value is insufficient to pay the monthly deductions.
Because the policy is like traditional and universal life insurance, it
provides a death benefit which is paid to your named beneficiary. When the
insured dies, the death proceeds are paid to your beneficiary. These proceeds
should be excludable from the gross income of the beneficiary, however estate
taxes may apply. The tax-free death proceeds makes this an excellent way to
accumulate money you do not think you will use in your lifetime. It is also a
tax-efficient way to provide for those you leave behind. If you need access to
your money, you can borrow from the policy or make a total or partial surrender.
2. PURCHASES
PREMIUMS
We will send you your policy only after you pay the initial premium. Before
we send out the policy, the application and the premium must be in good order as
determined by our administrative rules. The policy is not designed for
professional market timing organizations, other entities, or persons using
programmed, large, or frequent transfers.
APPLICATION FOR A POLICY
In order to purchase a policy, you must submit an application to us that
requests information about the proposed insured. In some cases, we will ask for
additional information. We may request that the insured provide us with medical
records, a physician's statement or possibly require other medical tests.
PLANNED PERIODIC PREMIUMS
The policy is designed to allow you to make subsequent premium payments. You
can elect to make planned periodic premium payments. Planned periodic premiums
may be paid annually, semi-annually, quarterly or monthly. You select the
planned periodic premium and payment interval at the time of application. You
may change the amount and frequency of premiums. We have the right to limit the
amount of any increase. Each premium after the initial premium must be at least
$25 ($50 in Maryland). Except in Maryland, we may increase this minimum amount
90 days after we send you a written notice to that effect.
UNSCHEDULED PREMIUMS
You can make additional unscheduled premium payments at any time while the
policy is in force. However, in order to preserve the favorable tax status of
the policy, we may limit the amount of the premiums and may return any premiums
that exceed the limits stated under the U.S. tax laws.
GRACE PERIOD
When a policy is about to terminate, under some circumstances, the policy
provides a grace period in order for you to make a premium payment or a loan
repayment in order to keep your policy in force.
7
<PAGE>
During the first 10 policy years (5 years in Massachusetts), a grace period
will begin on your monthly anniversary date when:
- your Net Cash Value is not large enough to cover the monthly deduction
made on that date; and
- your adjusted premium payments are less than your accumulated Guaranteed
Coverage Premiums.
Your adjusted premium payments as of the monthly anniversary date equal:
- the total of your premium payments received by us; minus
- any partial surrenders you have made to date; minus
- any Policy Debt.
Your accumulated Guaranteed Coverage Premiums as of the monthly anniversary
date equal:
- the total Guaranteed Coverage Premium; multiplied by
- one plus the number of months the policy has been in force as of that
monthly anniversary date.
If you have not had the same total Guaranteed Coverage Premium in effect
every month, your accumulated Guaranteed Coverage Premiums will be based on the
different premiums that were in effect and the number of months for which each
applied.
During the first 10 policy years (5 years in Massachusetts), the premium
payment that you need to make to keep your policy from terminating at the end of
the grace period is the lesser of:
- three monthly deductions; or
- the accumulated Guaranteed Coverage Premiums for the monthly anniversary
date when the grace period began minus adjusted premium payments as of
that date.
After the first 10 policy years (5 years in Massachusetts), a grace period
will begin on the monthly anniversary date when your Net Cash Value is not large
enough to cover the monthly deductions to be made on that date.
After the first 10 policy years (5 years in Massachusetts), the premium
required to keep the Policy from terminating at the end of a grace period equals
three monthly deductions.
When your policy is in a grace period, we will continue the policy for 61
days. If your insured dies during a grace period, we will deduct the premium
that would have been required to keep your policy from terminating from the
amount we would otherwise pay out.
Your policy will terminate without value at the end of a grace period unless
we receive a premium payment during the grace period large enough to keep your
policy from terminating at the end of that grace period.
We will notify you in writing at least 31 days before a grace period ends.
This notice will show how much must be paid to keep the policy from terminating.
We send notices to the last address you have given us.
Your first POLICY YEAR starts on the day the coverage is effective under
your policy. We call that date the ISSUE DATE. Future policy years start on the
same day and month in each subsequent year. We call that date a POLICY
ANNIVERSARY. Your first POLICY MONTH starts on the issue date. Future policy
months start on the same day in each subsequent month. We call that date a
MONTHLY ANNIVERSARY.
REINSTATEMENT
If your policy terminated at the end of a grace period, you can request that
we reinstate it (restore your insurance coverage) anytime within 5 years after
its termination. To reinstate your policy you must:
- submit an application for reinstatement;
- submit proof satisfactory to us that the insured is still insurable at
the risk classification that applies for the latest Face Amount of
Insurance portion then in effect;
- pay or agree to reinstatement of any Policy Debt; and
8
<PAGE>
- pay the premium required to reinstate the policy.
The premium required to reinstate the policy equals the total of the
following amounts:
- the amounts that would have been required for the policy to continue in
force without entering into a grace period for each month during the
grace period; and
- the amount that will be required for the policy to continue in force
without entering a grace period for the next 3 months after the
reinstatement date.
The reinstatement date is the monthly anniversary date on or following the
day we approve the application for reinstatement. The Policy Account on the
reinstatement date is equal to the Policy Account on the monthly anniversary
date when the grace period ended. The surrender charge on the reinstatement date
is equal to the surrender charge on the monthly anniversary date when the grace
period ended.
The policy may not be reinstated after:
- it has been surrendered for its Net Cash Value;
- the insured's death; or
- the maturity date.
ALLOCATION OF PREMIUM
Your premium is allocated to the fixed account or one or more of the
variable options, as selected by you. Prior to the reallocation date, the
initial premium is allocated to the Money Market Fund.
On the reallocation date, the Policy Account is allocated to the fixed
account and/or the variable options in accordance with your selections. This
allocation is not subject to the transfer fee provision (see "transfer fee").
However, we reserve the right to limit the number of investment choices
(currently, 17 variable options and the fixed account) that you may invest in at
any one time. Currently, you may invest in a maximum of 7 investment choices
(which include the fixed account and any variable option you select) at any one
time throughout the life of the policy.
POLICY ACCOUNT
On the issue date, the value of your Policy Account is:
- your initial premium less the charge for premium taxes, less the initial
insurance risk charge and less the initial charge for any additional
benefit riders; minus
- the monthly deduction for the first policy month.
After the reallocation date the Policy Account equals the sum of the policy
amounts in the fixed account and in the variable options you have selected.
METHOD OF DETERMINING YOUR POLICY ACCOUNT ALLOCATED TO A VARIABLE OPTION
The value of your policy will go up or down depending upon the investment
performance of the variable option(s) you choose and the charges and deductions
made against your Policy Account. In order to keep track of the value of your
Policy Account, we use a unit of measure we call a valuation unit. (A valuation
unit works like a share of a mutual fund.)
Every day we determine the value of the valuation unit for each variable
option. We do this by:
- determining the total amount of money invested by all policyowners in
the particular variable option;
- subtracting from that amount all the charges that we make from the value
of the variable option. These charges are:
- the daily mortality and expense risk charge;
- the daily charge for the administrative charge deducted from the
variable options; and
- any charge for taxes or other similar deductions.
- dividing this amount by the number of outstanding valuation units.
The value of a valuation unit may go up or down from day to day.
9
<PAGE>
When you make a premium payment, we credit your policy with valuation units.
The number of valuation units credited is determined by dividing the amount of
premiums allocated to the variable option by the value of the valuation unit for
that variable option.
When we assess any charges we do so by deducting valuation units from your
policy. When you take a loan we reduce the number of the valuation units in your
policy and transfer the amount to the fixed account.
Our BUSINESS DAY is each day that the New York Stock Exchange is open for
business. Our business day closes when the New York Stock Exchange closes,
usually 4:00 p.m. Eastern Time.
YOUR CASH VALUE, NET CASH VALUE
Your Cash Value equals:
- your Policy Account; minus
- the surrender charges.
Your Net Cash Value equals:
- the Cash Value; minus
- any Policy Debt you may have incurred.
During your insured's life, you may:
- take loans based on the Cash Value;
- make partial surrenders; or
- surrender the policy for its Net Cash Value.
OUR RIGHT TO REJECT OR RETURN A PREMIUM PAYMENT
In order to receive the tax treatment for life insurance under the Internal
Revenue Code (Code), a policy must initially qualify and continue to qualify as
life insurance under the Code. To maintain this qualification, we have reserved
the right under the policy to return any premiums paid which we have determined
will cause the policy to fail as life insurance. We also have the right to make
changes in the policy or to make a distribution to the extent we determine this
is necessary to continue to qualify the policy as life insurance. Such
distributions may have current income tax consequences to you.
If subsequent premiums will cause your policy to become a Modified Endowment
Contract (MEC), we will contact you prior to applying the premium to your
policy. If you elect to have the premium applied, we require that you
acknowledge in writing that you understand the tax consequences of a MEC before
we will apply the premiums.
3. INVESTMENT CHOICES
The policy offers variable options which invest in Class 1 shares of
portfolios of Franklin Valuemark Funds. Franklin Valuemark Funds (Trust) is
comprised of 25 portfolios, 17 of which are currently available in connection
with the policy we are offering here.
PURCHASERS SHOULD READ THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS FOR
FRANKLIN VALUEMARK FUNDS CAREFULLY BEFORE INVESTING. CERTAIN PORTFOLIOS ARE NOT
AVAILABLE UNDER THE POLICY OFFERED BY THIS PROSPECTUS.
The Trust is the mutual fund underlying the policy. Each portfolio has its
own investment objective. The Trust issues two classes of shares which are
described in the attached Trust prospectus. Only Class 1 shares are available
with your policy. Investment managers for each portfolio are listed in the table
below and are as follows: Franklin Advisers, Inc. (FA), Franklin Advisory
Services, LLC (FAS), Franklin Mutual Advisers, LLC (FMA), Templeton Asset
Management Ltd. (TAM), and Templeton Global Advisors Limited (TGA). Certain
managers have retained one or more affiliated subadvisers to help them manage
the portfolios.
10
<PAGE>
The following is a list of the portfolios available under the policy:
<TABLE>
<CAPTION>
INVESTMENT
AVAILABLE PORTFOLIOS MANAGERS
<S> <C>
- --------------------------------------------------------
PORTFOLIO SEEKING CAPITAL PRESERVATION AND
INCOME
Money Market Fund........................ FA
PORTFOLIOS SEEKING CURRENT INCOME
High Income Fund......................... FA
Templeton Global Income Securities
Fund................................... FA
U.S. Government Securities Fund.......... FA
PORTFOLIOS SEEKING GROWTH AND INCOME
Global Utilities Securities Fund......... FA
Growth and Income Fund................... FA
Income Securities Fund................... FA
Mutual Shares Securities Fund............ FMA
Real Estate Securities Fund.............. FA
Rising Dividends Fund.................... FAS
Templeton Global Asset Allocation Fund... TGA
PORTFOLIOS SEEKING CAPITAL GROWTH
Natural Resources Securities Fund........ FA
Small Cap Fund........................... FA
Templeton Developing Markets Equity
Fund................................... TAM
Templeton Global Growth Fund............. TGA
Templeton International Equity Fund...... FA
Templeton Pacific Growth Fund............ FA
</TABLE>
Franklin Valuemark Funds serves as the underlying mutual fund for variable
life insurance policies we offer and variable annuity contracts offered by us
and our affiliates. Franklin Valuemark Funds believes that offering its shares
in this manner will not be disadvantageous to you.
SUBSTITUTION AND LIMITATIONS ON FURTHER INVESTMENTS
We may substitute one of the variable options you have selected with another
variable option. We will not do this without the prior approval of the
Securities and Exchange Commission. We may also limit further investment in a
variable option. We will give you notice of our intention to do this.
TRANSFERS
At your request, we will transfer amounts from your Policy Account in any
variable option to another variable option, or to the fixed account. The minimum
amount that can be transferred is the lesser of the minimum transfer amount
(currently $500) or the total value in that variable option. You may transfer on
any policy anniversary an amount from the unloaned value in the fixed account to
one or more variable options.
However, transfers out of the fixed account can be made only if:
- we receive the request at least 30 days before that policy anniversary;
and
- the amount requested is not more than the greater of 25% of the unloaned
value in the fixed account on that anniversary or the minimum transfer
amount.
We will not transfer more than the unloaned value from the fixed account.
The minimum amount that we will transfer from the fixed account on any policy
anniversary is the lesser of the minimum transfer amount, currently $500, or the
unloaned value in the fixed account on that date.
You can make 12 transfers in a policy year without charge. We may charge a
transfer fee for additional transfers in a policy year. The current transfer fee
is the lesser of $25 or 2% of the amount transferred. You may tell us how much
of the transfer fee is to come from the unloaned value in the fixed account and
from the values in each of the variable options. If you do not tell us, we will
make a deduction proportionally based on the relation the unloaned values in the
fixed account and the value in the variable options have to the total unloaned
value in the Policy Account.
We have not designed this policy or the underlying portfolios for use by
professional market timing organizations, other entities, or persons using
programmed, large, or frequent transfers. Such activity may be disruptive to a
portfolio.
11
<PAGE>
You may elect to make transfers by telephone. To elect this option, you must
do so in writing. If there are joint owners, the instructions will be accepted
from either one of the joint owners unless you inform us otherwise. We will use
reasonable procedures to confirm that instructions communicated by telephone are
genuine. If we do not, we may be liable for any losses due to unauthorized or
fraudulent instructions. We tape record all telephone instructions.
DOLLAR COST AVERAGING
Dollar Cost Averaging is a program which enables you to transfer specified
dollar amounts from the Money Market Fund or the U.S. Government Securities Fund
to other portfolios (maximum of 5) at regular intervals. By allocating on a
regularly scheduled basis, you may be less susceptible to the impact of market
fluctuations.
Dollar Cost Averaging may be selected for a period of 12 to 36 months. The
minimum amount per period that can be transferred is $1,000. All dollar cost
averaging transfers are made effective the 10th of the month (or the next
business day if the 10th of the month is not a business day). You can elect to
participate in this program at any time by:
- properly completing the Dollar Cost Averaging election form;
- returning it to us by the first of the month (to be effective that
month); and
- insuring that sufficient value is in either the Money Market Fund or the
U.S. Government Securities Fund.
Dollar Cost Averaging will terminate when any of the following occurs:
1) the number of designated transfers has been completed;
2) you do not have enough money in the Money Market Fund or the U.S.
Government Securities Fund to make the transfer (if less money is available,
that amount will be dollar cost averaged and the program will end);
3) you request termination in writing and the writing is received by
the first of the month; or
4) your policy is terminated.
There is no current charge for Dollar Cost Averaging but we reserve the
right to charge for this program in the future.
4. EXPENSES
There are charges and other expenses associated with the policy that reduce
the return on your investment in the policy. The charges and expenses are:
MORTALITY AND EXPENSE RISK CHARGE
We deduct a mortality and expense risk charge from each variable option each
business day. This risk charge is guaranteed not to exceed, on an annual basis,
0.90% of your average Policy Account value. The current risk charge is equal to
0.60%.
This risk charge compensates us for assuming the mortality and expense risks
under the policy. The mortality risk assumed by us is that the insureds, as a
group, may not live as long as expected. The expense risk assumed by us is that
actual expenses may be greater than those assumed. We are responsible for the
administration of the policy. We expect to profit from this charge.
ADMINISTRATIVE CHARGES
We deduct administrative charges from each variable option each business day
and from your Policy Account on each monthly anniversary date. The charge is
equal, on an annual basis, to 0.15% of your average Policy Account value. There
is also a policy charge which is equal to $20 per policy month for the first
policy year. Thereafter, it is guaranteed to not exceed $9 per policy month.
Currently, the charge is $5 per policy month after the first policy year.
The charges reimburse us for expenses incurred in the administration of the
policies. Such expenses include: confirmations, annual account statements,
maintenance of policy records, maintenance of variable account records,
administrative personnel costs, mailing costs, data processing costs, legal
fees, accounting fees, filing fees, the costs of other services necessary for
policy owner servicing and all accounting, valuation, regulatory and updating
requirements.
12
<PAGE>
INSURANCE RISK CHARGES
This charge compensates us for the insurance coverage we provide in the
month following the charge. The insurance risk charge for each policy month
equals the total of the insurance risk charges for the policy month for each
Face Amount of Insurance portion then in effect. To determine the insurance risk
charge for a Face Amount of Insurance portion for a policy month, we multiply:
- the Insurance Risk Amount for the Face Amount of Insurance portion for
that month; by
- the cost of insurance rate that applies to the Face Amount of Insurance
portion for that month.
The Insurance Risk Amount for a Face Amount of Insurance portion for a
policy month equals the excess of:
- the death benefit associated with that Face Amount of Insurance portion;
over
- the value of the Policy Account at the beginning of the policy month,
before the monthly deduction for the month is subtracted.
The cost of insurance rate for a Face Amount of Insurance portion for a
policy month equals the sum of:
- the standard cost of insurance rate for that month from the table of our
standard cost of insurance rates; and
- an additional rate for any extra mortality risk classification that
applies for the Face Amount of Insurance portion.
The additional rate for an extra mortality risk classification for any
policy month equals the amount of extra mortality that the risk classification
represents for that month.
The total cost of insurance rate for a policy month will be uniform for all
Face Amount of Insurance portions that:
- are in the same Face Amount band, sex, and risk classification;
- take effect when the insureds are the same age; and
- have been in force the same length of time.
We may change our standard cost of insurance rates from time to time based
on our expectations as to future cost elements such as: investment earnings,
mortality, persistency, expenses and taxes. Any change we make will apply to all
Face Amount portions in the same risk classification.
The declared standard cost of insurance rates for each policy month will not
be more than the amount shown in the table contained in your policy. The table
is based on the insured's age at his or her last birthday at the beginning of
each year (attained age), the insured's sex and whether or not the insured has
qualified for the non-smoker classification. For the initial Face Amount of
Insurance, the insured's attained age is determined at the beginning of each
policy year. For each Face Amount increase, attained age is determined at the
beginning of each policy year measured from the date the increase took effect.
Since the mortality tables used with the policy distinguish between males
and females, the cost of insurance and the benefits payable will differ between
males and females of the same age. Employers, employee plans and employee
organizations should seek legal advice to determine whether the Civil Rights Act
of 1964, Title VII, or other applicable law prohibits the use of sex distinct
mortality tables. We will offer the policy based upon unisex mortality tables
where required.
CHARGES FOR ADDITIONAL BENEFIT RIDERS
The amount of the charge, if any, each policy month for additional benefit
riders is determined in accordance with the rider and is shown on the coverage
page of your policy.
SURRENDER CHARGES
A surrender charge may be deducted if you make a full or partial surrender.
The surrender charge consists of 2 parts: a deferred administrative expense and
a deferred sales load. The maximum surrender charge varies by issue age, face
amount, sex, smoking status, and contract duration. This charge will never
exceed the sum of the deferred administrative expense and the deferred sales
load, assuming the Surrender
13
<PAGE>
Charge Premium (SCP) is paid yearly during the first fifteen years.
The deferred administrative expense is $5.00 per $1,000 of Face Amount of
Insurance for the first 3 policy years. The charge then grades down to zero over
policy years 4 through 13.
The deferred sales load is the lesser of 30% of the Surrender Charge Premium
(SCP), plus 5% of all premiums over the SCP, or the following percentage of SCP.
<TABLE>
<CAPTION>
YEARS % OF SCP
- -------------------------------------------- -------------
<S> <C>
1-8......................................... 65%
9.......................................... 60%
10......................................... 55%
11......................................... 44%
12......................................... 33%
13......................................... 22%
14......................................... 11%
15+........................................ 0%
</TABLE>
The SCP is equal to the Annual Guaranteed Coverage Premium for the base
policy death benefit coverage of a standard mortality risk. The SCP varies with
the issue age, sex, and smoking classification of the insured as well as the
Face Amount of the base policy. The SCP will not exceed the amount shown in the
following table.
<TABLE>
<CAPTION>
ISSUE AGE PER $1,000
- ------------------------------------------- -------------
<S> <C>
0-29...................................... $ 6
30-39...................................... $ 11
40-49...................................... $ 21
50-59...................................... $ 40
60-69...................................... $ 75
70-80...................................... $ 150
</TABLE>
For some higher issue ages, the Standard Non-Forfeiture Law of the state
where the policy is delivered may limit surrender charges to amounts less than
those defined above.
The surrender charge may also be deducted in the event of a decrease in Face
Amount.
The surrender charge at any time during the first policy year equals the
surrender charge at the end of the year. The surrender charge during any
subsequent policy year is calculated based on end of year surrender charges and
the portion of the year that has been completed.
When the policy terminates, your Policy Account may be less than the
surrender charge. If this happens, you will not have to pay the difference. If
the policy is reinstated, the surrender charge will also be reinstated.
PARTIAL SURRENDER FEE
If you surrender only a portion of your Net Cash Value at any time during
the insured's lifetime, there is an administrative fee assessed. This fee is
currently equal to the lesser of $25 or 2% of the partial surrender amount. You
can make a partial surrender once each policy year that does not exceed 10% of
the Net Cash Value without incurring a surrender charge or the partial surrender
fee.
PREMIUM TAX CHARGE
This charge is used to pay for premium taxes charged by some states and
other governmental entities (E.G., municipalities). Allianz Life is responsible
for the payment of these taxes and will make a deduction from the value of the
policy for them. This charge is also used to pay for other expenses associated
with premium collection. The charge is equal to 2.5% of each premium payment.
TRANSFER FEE
You may transfer values from one variable option to another, or to or from
the fixed account. The first 12 transfers in a policy year are free. The fee for
each additional transfer is currently the lesser of $25 or 2% of the amount
transferred. Prescheduled automatic dollar cost averaging transfers are not
counted nor is the transfer of the initial premium at the end of the free look
period counted when we determine transfer fees.
INCOME TAX CHARGE
We do not currently assess any charge for income taxes. We reserve the right
to assess a charge for such taxes against the variable options or your Policy
Account if we determine that such taxes will be incurred.
14
<PAGE>
FRANKLIN VALUEMARK FUNDS' ANNUAL EXPENSES: CLASS 1 SHARES
(as a percentage of Franklin Valuemark Funds' average net assets)
The Management and Portfolio Administration Fees and Total Annual Expenses
for each Portfolio are based on a percentage of that Portfolio's average net
assets for the most recent fiscal year. See the prospectus for Franklin
Valuemark Funds for more information.
<TABLE>
<CAPTION>
MANAGEMENT AND
PORTFOLIO
ADMINISTRATION OTHER TOTAL ANNUAL
FEES(1) EXPENSES EXPENSES
------------------- ------------- ---------------
<S> <C> <C> <C>
Global Utilities Securities Fund....................................... .47% .03% .50%
Growth and Income Fund................................................. .47% .02% .49%
High Income Fund....................................................... .50% .03% .53%
Income Securities Fund................................................. .47% .02% .49%
Money Market Fund...................................................... .51% .02% .53%
Mutual Shares Securities Fund.......................................... .74% .03% .77%
Natural Resources Securities Fund...................................... .62% .02% .64%
Real Estate Securities Fund............................................ .52% .02% .54%
Rising Dividends Fund.................................................. .70% .02% .72%
Small Cap Fund......................................................... .75% .02% .77%
Templeton Developing Markets Equity Fund............................... 1.25% .16% 1.41%
Templeton Global Asset Allocation Fund................................. .80% .04% .84%
Templeton Global Growth Fund........................................... .83% .05% .88%
Templeton Global Income Securities Fund................................ .57% .06% .63%
Templeton International Equity Fund.................................... .80% .08% .88%
Templeton Pacific Growth Fund.......................................... .99% .11% 1.10%
U.S. Government Securities Fund........................................ .48% .02% .50%
</TABLE>
- ------------------
1. The Portfolio Administration Fee is a direct expense for the Templeton
Global Asset Allocation Fund and the Mutual Shares Securities Fund; other
portfolios pay for similar services indirectly through the Management Fee.
See "Management" in the Franklin Valuemark Funds prospectus for further
information regarding these fees.
15
<PAGE>
5. DEATH BENEFIT
The amount of the death benefit depends on the total Face Amount of
Insurance, your Policy Account on the date of the insured's death and the death
benefit option (Option A or Option B) in effect at that time. The INSURED is the
person whose life is covered by this policy. The insured is named on the
coverage page. The actual amount we pay the beneficiary will be reduced by any
outstanding Policy Debt.
The total Face Amount is the sum of all of the Face Amount portions. The
initial Face Amount and each Face Amount increase still in effect are Face
Amount portions. The initial Face Amount and the death benefit option in effect
on the issue date (the date when the insured's life is covered under the policy)
are shown on the coverage page of your policy.
Option A. The amount of the death benefit under Option A is the greater of:
- the total Face Amount at the beginning of the policy month when the
death occurs; or
- the Policy Account on the date of death multiplied by the applicable
factor from the Table of Death Benefit Factors contained in your policy.
Option B. The amount of the death benefit under Option B is the greater of:
- the total Face Amount at the beginning of the policy month when the
death occurs plus the Policy Account on the date of death; or
- the Policy Account on the date of death multiplied by the applicable
factor from the Table of Death Benefit Factors contained in your policy.
CHANGE IN DEATH BENEFIT
You may change the death benefit option after your policy has been in force
for at least one year, subject to the following requirements:
- you must request the change in writing;
- once you have changed the death benefit option, it cannot be changed
again for the next 3 years;
- if you want to change death benefit Option A to Option B, you must
submit proof satisfactory to us that the insured is still insurable at
the risk classification that applies for the initial Face Amount. The
Face Amount will not change; and
- if you want to change death benefit Option B to Option A, the Face
Amount will be increased by an amount equal to the Policy Account on the
date of the change. The risk classification for the last Face Amount
portion to go into effect which is still in force will apply to the Face
Amount increase. This increase will not result in any increase in
premiums, expense charges or surrender charges.
Any change in a death benefit option will take effect on the monthly
anniversary date on or following the date we approve the request for the change.
CHANGE IN FACE AMOUNT OF INSURANCE
You may change the Face Amount of Insurance of your policy on any monthly
anniversary date after your policy has been in force at least one year. Once the
Face Amount has been changed, it cannot be changed again for the next 12 months.
Face Amount Increases. To increase the Face Amount of Insurance you must:
- submit an application for the increase;
- submit proof satisfactory to us that the insured is an insurable risk;
and
- pay any additional premium which is required.
The Face Amount of your policy can only be increased before your insured
reaches age 81. Each Face Amount increase must be at least as large as the
minimum Face Amount increase (currently $25,000). A Face Amount increase will
take effect on the monthly anniversary date on or following the day we approve
the application for the increase.
The risk classification that applies for any Face Amount increase may be
different from the risk classification that applies for the initial Face Amount.
16
<PAGE>
The following changes will be made to reflect the increase:
- The Guaranteed Coverage Premium will be increased.
- The monthly administrative charge will increase to $20 per month for the
12 months following the increase.
- Additional surrender charges equal to the Face Amount increase (in
$1,000's) multiplied by the surrender charge factors will apply for 13
years following the increase.
We will furnish a revised coverage page of your policy that shows:
- the risk classification and the amount of the increase; and
- the values for the changes described above.
Face Amount Decreases. You must request in writing any decrease in Face
Amount of Insurance. The decrease will take effect on the later of:
- the monthly anniversary date on or following the day we receive your
request for the decrease; or
- the monthly anniversary date one year after the last change you made in
Face Amount.
A Face Amount decrease will be used to reduce any previous Face Amount
increases which are then in effect starting with the latest increase and
continuing in the reverse order in which the increases were made. If any portion
of the decrease is left after all Face Amount increases have been reduced, it
will be used to reduce the initial Face Amount. We will not permit a Face Amount
decrease that would reduce the initial Face Amount below the minimum Face
Amount, currently $100,000.
The Guaranteed Coverage Premium will be reduced to reflect the Face Amount
decrease. The new Guaranteed Coverage Premium will be shown on a revised
coverage page of your policy.
We will deduct a charge from the Policy Account when the Face Amount is
decreased. The maximum charge we will deduct each time the Face Amount is
decreased is the lesser of:
- the total of the current surrender charge for the amount of each Face
Amount portion reduced; or
- the Policy Account when the decrease is made.
The charge will be deducted for each Face Amount portion reduced, starting
with the charge for the first Face Amount portion reduced, and continuing in the
same order in which the reductions are made until the charge is completely
deducted.
Future surrender charges will be reduced proportionately for any charges
deducted. After the Face Amount is decreased, the surrender charges for each
Face Amount portion for which a charge is deducted will be equal to the
surrender charges shown for that Face Amount portion on the coverage page of
your policy, or in the revised coverage page, multiplied by the ratio of:
- the amount of the surrender charge in effect for the Face Amount portion
at the time the charge is deducted minus the amount of the charge
deducted for the Face Amount portion; divided by
- the amount of the surrender charge in effect for the Face Amount portion
at the time the charge is deducted.
GUARANTEED DEATH BENEFIT RIDER
You can elect a Guaranteed Death Benefit Rider. This rider provides that the
Policy will remain in force to attained age 95 for death benefit Option A
policies and to attained age 80 for death benefit Option B policies, regardless
of the performance of the underlying portfolios, so long as you pay the minimum
required premium. The premium required is significantly higher than the minimum
premium required to issue the policy and to keep it in force. There is an
additional charge for this benefit, currently $0.01 per $1000 of Face Amount per
policy month. A policy cannot have both the Guaranteed Death Benefit Rider and
any of the following riders:
- Insured Term Rider
- Spouse Term Rider
17
<PAGE>
ACCELERATED DEATH BENEFIT RIDER
You can elect the Accelerated Benefit Rider. This rider provides that you
may elect to receive some of the death benefit proceeds of the policy if the
insured is suffering from a terminal illness, as defined in the rider. Receipt
of an accelerated death benefit amount may be taxable. You should contact your
personal tax or financial adviser for specific information.
Death benefits, Cash Values, if any, and loan values, if any, will be
reduced if a benefit is paid pursuant to this rider.
There is an administrative charge for this benefit which is guaranteed not
to exceed the lesser of $1,000 or 2% of the benefit. This limit may vary
depending on the state in which the policy was purchased. The current
administrative charge is $150.
The receipt of an accelerated death benefit amount may adversely affect the
recipient's eligibility for Medicaid or other government benefits or
entitlements.
6. TAXES
NOTE: WE HAVE PREPARED THE FOLLOWING INFORMATION ON FEDERAL INCOME TAXES AS
A GENERAL DISCUSSION OF THE SUBJECT. IT IS NOT INTENDED AS TAX ADVISE TO ANYONE.
YOU SHOULD CONSULT YOUR TAX ADVISER ABOUT YOUR OWN CIRCUMSTANCES. WE HAVE
INCLUDED AN ADDITIONAL DISCUSSION REGARDING TAXES IN PART II.
LIFE INSURANCE IN GENERAL
Life insurance, such as this policy, is a means of providing for death
protection and setting aside money for future needs. Congress recognized the
importance of such planning and provided special rules in the Internal Revenue
Code (Code) for life insurance.
Simply stated, these rules provide that you will not be taxed on the
earnings on the money held in your life insurance policy until you take the
money out. Beneficiaries generally are not taxed when they receive the death
proceeds upon the death of the insured. However, estate taxes may apply.
TAKING MONEY OUT OF YOUR POLICY
You, as the owner, will not be taxed on increases in the value of your
policy until a distribution occurs either as a surrender or as a loan. If your
policy is a MEC, any loans or surrenders from the policy will be treated as
first coming from earnings and then from your investment in the policy.
Consequently, these distributed earnings are included in taxable income.
The Code also provides that any amount received from a MEC which is included
in income may be subject to a 10% penalty. The penalty will not apply if the
income received is:
1) paid on or after the taxpayer reaches age 59 1/2 ;
2) paid if the taxpayer becomes totally disabled (as that term is defined in
the Code); or
3) in a series of substantially equal payments made annually (or more
frequently) for the life or life expectancy of the taxpayer.
If your policy is not a MEC, any surrender proceeds will be treated as first
a recovery of the investment in the policy and to that extent will not be
included in taxable income. Furthermore any loan will be treated as indebtedness
under the policy and not as a taxable distribution. See "Federal Tax Status" in
Part II for more details including an explanation of whether your policy is a
MEC.
DIVERSIFICATION
The Code provides that the underlying investments for a variable life policy
must satisfy certain diversification requirements in order to be treated as a
life insurance contract. We believe that the portfolios are being managed so as
to comply with such requirements.
Under current federal tax law, it is unclear as to the circumstances under
which you, because of the degree of control you exercise over the underlying
investments, and not us would be considered the owner of the shares of the
portfolios. If you are considered the owner of the investments, it will result
in the loss of the favorable tax treatment for the policy. It is unknown to what
extent owners are permitted to select portfolios, to make transfers among the
portfolios or
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the number and type of portfolios owners may select from without being
considered the owner of the shares. If guidance from the Internal Revenue
Service is provided which is considered a new position, the guidance would
generally be applied prospectively. However, if such guidance is considered not
to be a new position, it may be applied retroactively. This would mean that you,
as the owner of the policy, could be treated as the owner of the portfolios. Due
to the uncertainty in this area, we reserve the right to modify the policy in an
attempt to maintain favorable tax treatment.
7. ACCESS TO YOUR MONEY
POLICY LOANS
We will loan money to you at the loan interest rate we establish for each
policy year during which the loan is outstanding. Your request for a loan must
be in writing.
The policy loan will be divided into two parts, the preferred loan and the
non-preferred loan. A preferred loan may be made not more than once per policy
year, beginning the later of:
- the tenth policy anniversary; or
- the anniversary following the insured's 60th birthday.
No more than 10% of the Cash Value of your policy at the time of the loan
may be made as a preferred loan. Any portion of a loan that is not a preferred
loan is a non-preferred loan.
The policy loan will be allocated to the fixed account. If the policy loan
requested exceeds the loan limit, you may also request a transfer of values from
the variable options to the fixed account. These values will be determined at
the time you request the transfer. If you do not indicate the proportions of the
variable options to be transferred, we will make the transfers based on the
proportions that your Policy Account in the variable options bear to the total
unloaned value in the Policy Account. Policy loans may have federal tax
consequences (see "Federal Tax Status").
LOAN INTEREST CHARGED
There may be a lower declared loan interest rate each year for the preferred
loan than for the non-preferred loan. We will determine the loan interest rates
for a policy year at least 60 days before the policy year begins. The maximum
annual loan interest rates we will use for preferred and non-preferred loans for
a policy (the maximum allowable rate) are the greater of:
- the guaranteed interest rate for the fixed account shown on the coverage
page of your policy for a policy year (currently 3.5% for all policy
years) plus 1%; or
- Moody's Corporate Bond Yield Average, Monthly Average Corporates as
published by Moody's Investors Service, Inc., for the calendar month
ending two months before the date on which the loan interest rate is
determined.
If Moody's Corporate Bond Yield Average, Monthly Average Corporates is no
longer published on a timely basis, we will use a substantially similar average
approved by the insurance department in the state where your policy was
delivered to determine the maximum allowable rate.
If the maximum allowable rate for a policy is at least 1/2% lower than the
loan interest rate in effect for the previous policy year, we will decrease the
loan interest rate to not more than the maximum allowable rate. If the maximum
allowable rate for a policy year is at least 1/2% higher than either loan
interest rate in effect for the previous policy year, we may increase either
loan interest rate to not more than the maximum allowable rate. We will not use
a loan interest rate for any policy year that exceeds 15%.
We will notify you as to the preferred loan and non-preferred loan interest
rates that apply at the time a new loan is made or when any Policy Debt is
reinstated. If either loan interest rate that applies to an existing policy loan
is increased, we will notify you in writing at least 30 days before the new rate
takes effect.
When a loan is made, interest for the rest of the current policy year must
be paid in advance. If interest is not paid when due, it will be added to the
Policy Debt and allocated to the fixed account. The accumulation of preferred
loans, together with interest on such loans, is the preferred debt. The
accumulation of non-preferred loans, together with interest on such loans, is
the non-preferred debt.
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Total Policy Debt is the sum of the preferred debt and the non-preferred
debt, and equals the total outstanding loan with interest. If the total Policy
Debt (including interest in advance) exceeds the fixed account, we will transfer
values from the variable options to the fixed account if such values are
available, based on the proportions that the values in the variable options bear
to the total value of the variable options. The unpaid interest will then be
treated as part of the Policy Debt and will bear interest at the loan rates.
LOAN LIMIT
A loan may be for any amount which does not exceed the loan limit.
The loan limit equals:
- the Cash Value on the date the loan is made; minus
- interest for the rest of the current policy year; minus
- any existing Policy Debt.
SECURITY
The policy will be the only security for the loan.
RESTRICTIONS ON MAKING LOANS
Loans will not be available during a grace period or after the insured dies.
REPAYING POLICY DEBT
The Policy Debt, or any part, may be repaid at any time as long as the
policy is in force. We have the right to not accept partial loan repayments for
amounts less than $50. Any Policy Debt outstanding will be deducted before any
benefit proceeds are paid or applied under a payment option.
Repayments will be applied first to the non-preferred debt, and then to the
preferred debt, unless you specify differently.
Repayments will be allocated to the fixed account and to the variable
options based on the premium allocation schedule then in effect, unless a
different allocation is requested.
When there is Policy Debt outstanding, any payments received will be applied
first as repayment of debt, rather than as premium, unless we are instructed
otherwise. If total Policy Debt equals or exceeds the Cash Value, we can
terminate the policy. A notice of termination will be mailed to the last address
we have on file 61 days prior to termination.
PARTIAL SURRENDERS
You may make a partial surrender from the Net Cash Value at any time during
the insured's life and before the policy has terminated. The minimum partial
surrender amount is currently $500. The partial surrender may not exceed the Net
Cash Value, less $300.
We will assess a partial surrender fee when a partial surrender is made. The
maximum partial surrender fee we will charge is $50 and the current charge is
the lesser of 2% of the partial surrender amount or $25. In addition, a
surrender charge may be assessed on the amount surrendered. See "Surrender
Charges" above. You may make a partial surrender once each policy year that does
not exceed 10% of the Net Cash Value without incurring a surrender charge or the
partial surrender fee.
When a partial surrender is made, the amount of the partial surrender, the
partial surrender fee and the surrender charge, if any, will be deducted from
the Policy Account. You elect how much of each partial surrender, partial
surrender fee and surrender charge is to come from the unloaned value in the
fixed account and from values in each of the variable options. If you do not so
elect, or if we cannot make the surrender on the basis of the your direction or
those allocation percentages, we will make it based on the proportions that the
unloaned value in the fixed account and unloaned values in the variable options
bear to the total unloaned value in the Policy Account.
The Face Amount will be reduced if death benefit Option A is in effect when
a partial surrender is made. Such a reduction will be equal to the amount of the
partial surrender minus the excess, if any, of:
- the death benefit at the time the partial surrender is made; over
- the Face Amount at the time the partial surrender is made.
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However, if the amount of the partial surrender is less than or equal to the
excess described above, the Face Amount will not be reduced.
Any Face Amount reduction will be used first to reduce any Face Amount
increases then in effect starting with the latest increase and continuing in the
reverse order in which the increases were made. If any of the reduction is left
after all Face Amount increases have been reduced, it will be used to reduce the
initial Face Amount.
We will not permit a partial surrender that would reduce the Face Amount
below the minimum Face Amount (currently $100,000). We may limit the number of
partial surrenders you can make in a policy year, but you will always be allowed
to make at least one partial surrender if the surrender meets these
requirements.
FULL SURRENDERS
You may completely surrender your policy and receive the Net Cash Value
anytime during the insured's life and before the policy has terminated.
The full surrender will take effect on the later of:
- the date we receive your written request for the surrender; or
- the date you request, in writing, for the surrender to take effect.
The policy and all coverage under it will terminate at 12:01 a.m. at our
ValueLife Service Center on the date the surrender takes effect.
Partial and full surrenders may have federal tax consequences (see "Federal
Tax Status").
8. OTHER INFORMATION
THE COMPANY
Allianz Life Insurance Company of North America is a life insurance company
organized under the laws of the state of Minnesota in 1896.
We are a wholly-owned subsidiary of Allianz Versicherungs-AG Holding
("Allianz"). Allianz is headquartered in Munich, Germany, and has subsidiaries
throughout the world. We offer fixed and variable life insurance and annuities,
and group life, accident and health insurance.
Administration for the policy is provided at our service center:
Allianz Life ValueLife Service Center
c/o CSC Financial Services Group
5525 LBJ Freeway, Suite 500
Dallas, TX 75240-6211
or
P.O. Box 219066
Dallas, TX 75221
(800) 525-7330
YEAR 2000
Allianz Life has initiated programs to ensure that all of the computer
systems utilized to provide services and administer policies will function
properly in the year 2000. An assessment of the total expected costs
specifically related to the year 2000 conversion has been completed. These costs
are expensed as incurred and total costs are not expected to have a significant
effect on Allianz Life's financial position or results of operations. Allianz
Life believes it is taking steps that are reasonably designed to address the
potential failure of computer systems used by its service providers and to
ensure its year 2000 program is completed on a timely basis. There can be no
assurance, however, that the steps taken by Allianz Life will be adequate to
avoid any adverse impact.
THE SEPARATE ACCOUNT
We established a separate account, Allianz Life Separate Account A (Separate
Account), to hold the assets that underlie the policies.
The assets of the Separate Account are held in our name on behalf of the
Separate Account and legally belong to us. However, those assets that underlie
the policies, are not chargeable with liabilities arising out of any other
business we may conduct. All the income, gains and losses (realized or
unrealized) resulting from those assets are credited to or against the policies
and not against any other policies we may issue. The Separate Account is divided
into variable options. (The variable options are referred to as sub-accounts in
the policy.)
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DISTRIBUTOR
The policy is sold by licensed insurance agents, where the policy may be
lawfully sold, who are registered representatives of broker-dealers which are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc.
The policy is distributed through the principal underwriter, NALAC Financial
Plans, LLC, 1750 Hennepin Avenue, Minneapolis, MN, 55403, a wholly-owned
subsidiary of ours. NALAC Financial Plans, LLC provides marketing services, and
is reimbursed for expenses incurred in the distribution of the policies.
Commissions will be paid to broker-dealers who sell the policies.
Broker-dealers will be paid commissions and expense reimbursements up to an
amount equal to 100% of the first Guaranteed Coverage Premium; 4% of the next
six Guaranteed Coverage Premiums; and 2% of all premiums paid thereafter.
Similar commissions are paid on premiums received after any increase in Face
Amount, or the addition of a rider. In addition, broker-dealers may also receive
additional compensation, based on meeting certain production standards.
SUSPENSION OF PAYMENTS OR TRANSFERS
We may be required to suspend or postpone any payments or transfers for any
period when:
1) the New York Stock Exchange is closed (other than customary weekend
and holiday closings);
2) trading on the New York Stock Exchange is restricted;
3) an emergency exists as a result of which disposal of shares of the
portfolios is not reasonably practicable or we cannot reasonably value the
shares of the portfolios;
4) during any other period when the Securities and Exchange Commission,
by order, so permits for the protection of owners.
We may defer the portion of any transfer, amount payable or surrender, or
Policy Loan from the fixed account for not more than 6 months.
OWNERSHIP
OWNER. You, as the OWNER of the policy, have all of the rights under the
policy subject to:
- the rights of any assignee; and
- the rights of any irrevocable beneficiary.
The OWNER can also be the insured. If you die while the policy is still in
force and the insured is living, ownership passes to your successor owner or if
you have not designated a successor owner, then your estate becomes the owner.
JOINT OWNER. The policy can be owned by joint owners. Authorization of both
joint owners is required for all policy changes except for telephone transfers.
BENEFICIARY. The BENEFICIARY is the person(s) or entity(ies) you name to
receive any death proceeds. The beneficiary is named at the time the policy is
issued unless changed at a later date. You can name a CONTINGENT BENEFICIARY
prior to the death of the insured. Unless an irrevocable beneficiary has been
named, you can change the beneficiary at any time before the insured dies. If
there is an irrevocable beneficiary, all policy changes except premium
allocations and transfers require the consent of the beneficiary.
Primary and contingent beneficiaries are as named in the application, unless
you make a change. To change a beneficiary, you must send us a written request.
We may require the policy to record the change. The request will take effect
when signed, subject to any action we may take before receiving it.
One or more irrevocable beneficiaries may be named.
If a beneficiary is a minor, we will make payment to the guardian of his or
her estate. We may require proof of age of any beneficiary.
Proceeds payable to a beneficiary will be free from the claims of creditors,
to the extent allowed by law.
ASSIGNMENT. You can assign (transfer ownership) the policy. A copy of any
assignment must
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be filed with the ValueLife Service Center. We are not responsible for the
validity of any assignment. If you assign the policy, your rights and those of
any revocably-named person will be subject to the assignment. An assignment will
not affect any payments we may make or actions we may take before such
assignment has been recorded at our ValueLife Service Center. This may be a
taxable event. You should consult a tax adviser if you wish to assign the
policy.
MATURITY BENEFIT. This is an amount equal to the Policy Account less any
outstanding Policy Debt on your policy. This amount is paid to you on the
maturity date.
MATURITY DATE. The policy provides that we will pay the Policy Account
value, less any Policy Debt, to you on the maturity date if the policy is still
in force. We will not accept any premiums after the maturity date.
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PART II
EXECUTIVE OFFICERS AND DIRECTORS
As of May 1, 1999, the directors and executive officers of Allianz Life
Insurance Company of North America (Allianz Life) and their principal
occupations for the past 5 years are as follows:
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS
- ------------------------------ ----------------------------------------------------------------------------------
<S> <C>
Lowell C. Anderson Chairman of the Board, President and Chief Executive Officer of Allianz Life since
October, 1988.
Herbert F. Hansmeyer Chairman of the Board of Allianz of America Corp. Member of the Board of
Management of Allianz-AG, Munich, Germany, since 1986.
Dr. Gerhard G. Rupprecht Chairman of the Board of Management -- Allianz Lebensversicherungs, since 1979.
Michael P. Sullivan President, Chief Executive Officer and Director of International Dairy Queen, Inc.
since 1987.
Michael T. Westermeyer Vice President -- Corporate Legal Officer and Secretary of Allianz Life since
April 1997. Formerly Second Vice President, Senior Counsel and Assistant Secretary
of Allianz Life.
Paul M. Howman Vice President -- Underwriting of Allianz Life since 1995.
Robert S. James President -- Individual Division of Allianz Life since March 31, 1995. Previously
President of Financial Markets Division.
Edward J. Bonach Executive Vice President -- Chief Financial Officer and Treasurer of Allianz Life
since 1993.
Ronald L. Wobbeking President -- Mass Marketing Division of Allianz Life since September 1991.
Rev. Dennis J. Dease President, University of St. Thomas, St. Paul since July 1991.
James R. Campbell Chairman and Chief Executive Officer of Norwest Bank MN, N.A. since 1998.
Previously Executive Vice President since February 1988.
Robert M. Kimmitt Partner in the law firm of Wilmer, Cutler & Pickering.
</TABLE>
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VOTING
Pursuant to our view of present applicable law, we will vote the shares of
the portfolios at special meetings of shareholders in accordance with
instructions received from all owners having a voting interest. We will vote
shares for which we have not received instructions. We will vote all shares in
the same proportion as the shares for which we have received instructions. We
will vote our shares in the same manner. Franklin Valuemark Funds does not hold
regular meetings of shareholders.
If the Investment Company Act of 1940 or any regulation thereunder is
amended or if the present interpretation of the Act changes so as to permit us
to vote the shares in our own right, we may elect to do so.
Your voting interest in the portfolios is determined as follows:
- You may cast one vote for each $100 of Account Value which is allocated
to a variable option on the record date. Fractional votes are counted.
- The number of shares which you can vote will be determined as of the
date chosen by us. This will be done not more than 60 days prior to the
meeting of the portfolio. Voting instructions will be solicited by
written communication at least 14 days prior to such meeting.
- You will receive periodic reports relating to the portfolios in which
you have an interest, as well as any proxy material and a form with
which to give us such voting instructions.
DISREGARD OF VOTING INSTRUCTIONS
We may, when required to do so by state insurance authorities, vote shares
of the portfolios without regard to instructions from owners. We will do this if
such instructions would require the shares to be voted to cause a portfolio to
make, or refrain from making, investments which would result in changes in the
sub-classification or investment objectives of the portfolio. We may also
disapprove changes in the investment policy initiated by owners or
trustees/directors of the portfolios, if such disapproval:
- is reasonable and is based on a good faith determination by us that the
change would violate state or federal law;
- the change would not be consistent with the investment objectives of the
portfolios; or
- which varies from the general quality and nature of investments and
investment techniques used by other portfolios with similar investment
objectives underlying other variable contracts offered by us or of an
affiliated company.
In the event we do disregard voting instructions, a summary of this action
and the reasons for such action will be included in the next semi-annual report
to owners.
LEGAL OPINIONS
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut has provided advice
on certain matters relating to the federal securities and income tax laws in
connection with the policies.
OUR RIGHT TO CONTEST
We cannot contest the validity of the policy except in the case of fraud
after it has been in effect during the insured's lifetime for two years. If the
policy is reinstated, the two-year period is measured from the date of
reinstatement. In addition, if the insured commits suicide in the two-year
period, or such period as specified in state law, the benefit payable will be
limited to premiums paid less Policy Debt and less any surrenders. We also have
the right to adjust any benefits under the policy if the answers in the
application regarding the use of tobacco are not correct.
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<PAGE>
FEDERAL TAX STATUS
NOTE: The following description is based upon our understanding of current
federal income tax law applicable to life insurance in general. We 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. Section 7702 of the Internal Revenue Code of 1986, as amended ("Code"),
defines the term "life insurance contract" for purposes of the Code. We believe
that the policies to be issued will qualify as "life insurance contracts" under
section 7702. We do not guarantee the tax status of the policies. Purchasers
bear the complete risk that the policies may not be treated as "life insurance"
under federal income tax laws. Purchasers should consult their own tax advisers.
It should be further understood that the following discussion is not exhaustive
and that special rules not described in this prospectus may be applicable in
certain situations.
Introduction. The discussion contained herein is general in nature and is
not intended as tax advice. Each person concerned should consult a competent tax
adviser. No attempt is made to consider any applicable state or other tax laws.
Moreover, the discussion herein is based upon our understanding of current
federal income tax laws as they are currently interpreted. No representation is
made regarding the likelihood of continuation of those current federal income
tax laws or of the current interpretations by the Internal Revenue Service.
We are taxed as a life insurance company under the Code. For federal income
tax purposes, the Separate Account is not a separate entity from us and its
operations form a part of us.
Diversification. Section 817(h) of the Code imposes certain diversification
standards on the underlying assets of variable life insurance policies. The Code
provides that a variable life insurance policy will not be treated as life
insurance 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 policy as a life insurance contract would result in imposition of federal
income tax to the owner with respect to earnings allocable to the policy prior
to the receipt of payments under the policy. The Code contains a safe harbor
provision which provides that life insurance policies, such as these policies,
will meet the diversification requirements if, as of the close of each quarter,
the underlying assets meet the diversification standards for a regulated
investment company and no more than fifty-five (55%) percent of the total assets
consist of cash, cash items, U.S. Government securities and securities of other
regulated investment companies. There is an exception for securities issued by
the U.S. Treasury in connection with variable life insurance policies.
On March 2, 1989, the Treasury Department issued regulations (Treas. Reg.
Section 1.817-5), which established diversification requirements for the
investment portfolios underlying variable contracts such as the policies. 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: (i) no more than 55% of the value of the total assets
of the portfolio is represented by any one investment; (ii) no more than 70% of
the value of the total assets of the portfolio is represented by any two
investments; (iii) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (iv) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments. For purposes of these regulations, all securities of the same
issuer are treated as a single investment. 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."
We intend that each portfolio underlying the policies will be managed by the
investment managers in such a manner as to comply with these diversification
requirements.
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<PAGE>
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 separate account will cause the owner to be treated as
the owner of the assets of the separate account, thereby resulting in the loss
of favorable tax treatment for the policy. 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 policy 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 policyowner
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 the owner of the assets of the separate account.
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 you being
retroactively determined to be the owner of the assets of the separate account.
Due to the uncertainty in this area, we reserve the right to modify the
policy in an attempt to maintain favorable tax treatment.
Tax Treatment of the Policy. The policy has been designed to comply with
the definition of life insurance contained in Section 7702 of the Code. Although
some interim guidance has been provided and proposed regulations have been
issued, final regulations have not been adopted. Section 7702 of the Code
requires the use of reasonable mortality and other expense charges. In
establishing these charges, we have relied on the interim guidance provided in
IRS Notice 88-128 and proposed regulations issued on July 5, 1991. Currently,
there is even less guidance as to a policy issued on a substandard risk basis
and thus it is even less clear whether a policy issued on such basis would meet
the requirements of Section 7702 of the Code.
While we have attempted to comply with Section 7702, the law in this area is
very complex and unclear. There is a risk, therefore, that the Internal Revenue
Service will not concur with our interpretations of Section 7702 that were made
in determining such compliance. In the event the policy is determined not to so
comply, it would not qualify for the favorable tax treatment usually accorded
life insurance policies. You should consult your own tax advisers with respect
to the tax consequences of purchasing the policy.
Policy Proceeds. The tax treatment accorded to loan proceeds and/or
surrender payments from the policies will depend on whether the policy is
considered to be a MEC. (See "Tax Treatment of Loans and Surrenders.")
Otherwise, we believe that the policy should receive the same federal income tax
treatment as any other type of life insurance. As such, the death benefit
thereunder is excludable from the gross income of the beneficiary under Section
101(a) of the Code. Also, you are not deemed to be in constructive receipt of
the Net Cash Value, including increments thereon, under a policy until there is
a distribution of such amounts.
Federal, state and local estate, inheritance and other tax consequences of
ownership, or receipt of policy proceeds, depend on the circumstances of each
owner or beneficiary.
Tax Treatment of Loans And Surrenders. Section 7702A of the Code sets forth
the rules for determining when a life insurance policy will be deemed to be a
MEC. A MEC is a contract which is entered into or materially changed on or after
June 21, 1988 and fails to meet the 7-pay test. A policy fails to meet the 7-pay
test when the cumulative amount paid under the policy at any time during the
first 7 policy years exceeds the sum of the net level premiums which would have
been paid on or before such time if the policy provided for paid-up future
benefits after the payment of seven (7) level annual premiums. A material change
would include any increase in the future benefits or addition of qualified
additional benefits provided under a policy unless the increase is attributable
to: (1) the payment of premiums necessary to fund
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<PAGE>
the lowest death benefit and qualified additional benefits payable in the first
seven policy years; or (2) the crediting of interest or other earnings
(including policyholder dividends) with respect to such premiums.
Furthermore, any policy received in exchange for a policy classified as a
MEC will be treated as a MEC regardless of whether it meets the 7-pay test.
However, an exchange under Section 1035 of the Code of a life insurance policy
entered into before June 21, 1988 for the policy will not cause the policy to be
treated as a MEC if no additional premiums are paid.
Due to the flexible premium nature of the policy, the determination of
whether it qualifies for treatment as a MEC depends on the individual
circumstances of each policy.
If the policy is classified as a MEC, then surrenders and/or loan proceeds
are taxable to the extent of income in the policy. Such distributions are deemed
to be on a last-in, first-out basis, which means the taxable income is
distributed first. Loan proceeds and/or surrender payments including those
resulting from the lapse of the policy, may also be subject to an additional 10%
federal income tax penalty applied to the income portion of such distribution.
The penalty shall not apply, however, to any distributions: (1) made on or after
the date on which the taxpayer reaches age 59 1/2; (2) which is attributable to
the taxpayer becoming disabled (within the meaning of Section 72(m)(7) of the
Code); or (3) which is part of a series of substantially equal periodic payments
made not less frequently than annually for the life (or life expectancy) of the
taxpayer or the joint lives (or joint life expectancies) of such taxpayer and
his beneficiary.
If a policy is not classified as a MEC, then any surrenders shall be treated
first as a recovery of the investment in the policy which would not be received
as taxable income. However, if a distribution is the result of a reduction in
benefits under the policy within the first fifteen years after the policy is
issued in order to comply with Section 7702, such distribution will, under rules
set forth in Section 7702, be taxed as ordinary income to the extent of income
in the policy.
Any loans from a policy which is not classified as a MEC, will be treated as
indebtedness of the owner and not a distribution. Upon complete surrender or
lapse of the policy, if the amount received plus loan indebtedness exceeds the
total premiums paid that are not treated as previously surrendered by the policy
owner, the excess generally will be treated as ordinary income.
Personal interest payable on a loan under a policy owned by an individual is
generally not deductible. Furthermore, no deduction will be allowed for interest
on loans under policies covering the life of any employee or officer of the
taxpayer or any person financially interested in the business carried on by the
taxpayer to the extent the indebtedness for such employee, officer or
financially interested person exceeds $50,000. The deductibility of interest
payable on policy loans may be subject to further rules and limitations under
Sections 163 and 264 of the Code.
Policy owners should seek competent tax advice on the tax consequences of
taking loans, distributions, exchanging or surrendering any policy.
Multiple Policies. The Code further provides that multiple MEC which are
issued within a calendar year period to the same owner by one company or its
affiliates are treated as one MEC for purposes of determining the taxable
portion of any loans or distributions. Such treatment may result in adverse tax
consequences including more rapid taxation of the loans or distributed amounts
from such combination of contracts. You should consult a tax adviser prior to
purchasing more than one MEC in any calendar year period.
Tax Treatment of Assignments. An assignment of a policy or the change of
ownership of a policy may be a taxable event. You should therefore consult a
competent tax adviser should you wish to assign or change the owner of your
policy.
Qualified Plans. The policies may be used in conjunction with certain
Qualified Plans. Because the rules governing such use are complex, you should
not do so until you have consulted a competent Qualified Plans consultant.
Income Tax Withholding. All distributions or the portion thereof which is
includible in gross
28
<PAGE>
income of the policy owner are subject to federal income tax withholding.
However, in most cases you may elect not to have taxes withheld. You may be
required to pay penalties under the estimated tax rules, if withholding and
estimated tax payments are insufficient.
REPORTS TO OWNERS
We will, at a minimum, send an annual report of the portfolios. Within 30
days after each policy anniversary, we will send you an annual statement. We may
elect to send these more often. The statement will show the current amount of
death benefit payable under the policy, the current Policy Account value, the
current Net Cash Value, current Policy Debt and will show all transactions
previously confirmed. The statement will also show premiums paid and all charges
deducted during the policy year.
We will mail you confirmations within seven days of any transaction
regarding: (a) the receipt of premium; (b) any transfer between variable
options; (c) any loan, interest repayment, or loan repayment; (d) any surrender;
(e) exercise of the free look privilege; and (f) payment of the death benefit
under the policy.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account or the
Distributor is a party or to which the assets of the Separate Account are
subject. We are not involved in any litigation that is of material importance in
relation to our total assets or that relates to the Separate Account.
EXPERTS
The financial statements of Allianz Life Variable Account A and our
consolidated financial statements as of and for the year ended December 31, 1998
included in this prospectus have been audited by KPMG Peat Marwick LLP,
independent auditors, as indicated in their reports included in this prospectus,
and are included herein, in reliance upon such reports and upon the authority of
said firm as experts in accounting and auditing.
FINANCIAL STATEMENTS
The consolidated financial statements of the Company included herein should
be considered only as bearing upon the ability of the Company to meet its
obligations under the Policies.
29
<PAGE>
ALLIANZ LIFE VARIABLE ACCOUNT A
OF
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Financial Statements
December 31, 1998
<PAGE>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Independent Auditors'Report
The Board of Directors of Allianz Life Insurance Company of North America and
Policyholders of Allianz Life Variable Account A:
We have audited the accompanying statements of assets and liabilities of the
sub-accounts of Allianz Life Variable Account A as of December 31, 1998, and the
related statements of operations and changes in net assets for each of the years
in the three-year period then ended. These financial statements are the
responsibility of the Variable 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. Investment securities
held in custody for the benefit of the Variable Account were confirmed to us by
the Franklin Valuemark Funds. 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 assets and liabilities of the sub-accounts of Allianz
Life Variable Account A at December 31, 1998, and the results of their
operations and the changes in their net assets for each of the years in the
three-year period then ended, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 29, 1999
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements
Statements of Assets and Liabilities
December 31, 1998
Capital Global Health Global Utilities Growth and High Income Money
Growth Care Securities Securities Income Income Securities Market
Fund Fund Fund Fund Fund Fund Fund
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments at net asset value:
Franklin Valuemark Funds:
Capital Growth Fund,
20,238 shares, cost $291,200 $325,424 - - - - - -
Global Health Care Securities Fund,
774 shares, cost $6,591 - 8,285 - - - - -
Global Utilities Securities Fund,
85,290 shares, cost $1,292,716 - - 1,743,335 - - - -
Growth and Income Fund,
142,817 shares, cost $2,429,075 - - - 2,907,763 - - -
High Income Fund,
124,657 shares, cost $1,592,204 - - - - 1,655,443 - -
Income Securities Fund,
92,113 shares, cost $1,526,016 - - - - - 1,558,547 -
Money Market Fund,
1,906,414 shares, cost $1,906,414 - - - - - - 1,906,414
- ---------------------------------------------------------------------------------------------------------------------------
Total assets 325,424 8,285 1,743,335 2,907,763 1,655,443 1,558,547 1,906,414
Liabilities:
Accrued mortality and expense risk charges 505 16 1,268 1,458 1,194 1,226 1,822
Accrued administrative charges 126 4 316 364 298 306 456
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 631 20 1,584 1,822 1,492 1,532 2,278
Net assets $324,793 8,265 1,741,751 2,905,941 1,653,951 1,557,015 1,904,136
- ---------------------------------------------------------------------------------------------------------------------------
Policy owners' equity (note 4) $324,793 8,265 1,741,751 2,905,941 1,653,951 1,557,015 1,904,136
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Assets and Liabilities (cont.)
December 31, 1998
<CAPTION>
Templeton
Mutual Mutual Natural Developing
Discovery Shares Resources Real Estate Rising Small Markets
SecuritiesSecuritiesSecurities Securities Dividends Cap Equity
Fund Fund Fund Fund Fund Fund Fund
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments at net asset value:
Franklin Valuemark Funds:
Mutual Discovery Securities Fund,
36,383 shares, cost $433,409 $410,762 - - - - - -
Mutual Shares Securities Fund,
86,962 shares, cost $1,021,958 - 1,040,062 - - - - -
Natural Resources Securities Fund,
15,067 shares, cost $182,925 - - 126,410 - - - -
Real Estate Securities Fund,
30,309 shares, cost $636,087 - - - 604,058 - - -
Rising Dividends Fund,
55,775 shares, cost $933,572 - - - - 1,010,086 - -
Small Cap Fund,
59,126 shares, cost $833,923 - - - - - 811,211 -
Templeton Developing Markets Equity Fund,
81,734 shares, cost $832,181 - - - - - - 564,782
- ---------------------------------------------------------------------------------------------------------------------------
Total assets 410,762 1,040,062 126,410 604,058 1,010,086 811,211 564,782
Liabilities:
Accrued mortality and expense risk charges 511 1,141 1,078 1,100 1,186 1,161 1,058
Accrued administrative charges 127 285 269 275 297 290 264
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 638 1,426 1,347 1,375 1,483 1,451 1,322
- ---------------------------------------------------------------------------------------------------------------------------
Net assets $410,124 1,038,636 125,063 602,683 1,008,603 809,760 563,460
- ---------------------------------------------------------------------------------------------------------------------------
Policy owners' equity (note 4) $410,124 1,038,636 125,063 602,683 1,008,603 809,760 563,460
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Assets and Liabilities (cont.)
December 31, 1998
Templeton
Templeton Templeton Templeton TempletonInternationalTempleton U.S.
Global Asset Global Global IncomeInternationalSmaller PacificGovernment
Allocation Growth Securities Equity Companies Growth Securities
Fund Fund Fund Fund Fund Fund Fund
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments at net asset value:
Franklin Valuemark Funds:
Templeton Global Asset Allocation Fund,
18,881 shares, cost $217,784 $239,226 - - - - - -
Templeton Global Growth Fund,
120,846 shares, cost $1,659,909 - 1,784,902 - - - - -
Templeton Global Income Securities Fund,
14,806 shares, cost $189,049 - - 190,556 - - - -
Templeton International Equity Fund,
117,816 shares, cost $1,768,945 - - - 1,828,501 - - -
Templeton International Smaller Companies Fund,
1,986 shares, cost $23,637 - - - - 18,267 - -
Templeton Pacific Growth Fund,
36,695 shares, cost $418,438 - - - - - 275,579 -
U.S. Government Securities Fund,
65,484 shares, cost $805,338 - - - - - - 909,579
- ---------------------------------------------------------------------------------------------------------------------------
Total assets 239,226 1,784,902 190,556 1,828,501 18,267 275,579 909,579
Liabilities:
Accrued mortality and expense risk charges 503 1,225 978 1,309 131 1,006 1,074
Accrued administrative charges 125 306 243 327 33 251 269
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 628 1,531 1,221 1,636 164 1,257 1,343
- ---------------------------------------------------------------------------------------------------------------------------
Net assets $238,598 1,783,371 189,335 1,826,865 18,103 274,322 908,236
Policy owners' equity (note 4) $238,598 1,783,371 189,335 1,826,865 18,103 274,322 908,236
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Assets and Liabilities (cont.)
December 31, 1998
Value Zero Zero Zero Total
Securities Coupon Coupon Coupon All
Fund Fund - 2000Fund - 2005Fund - 2010 Funds
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments at net asset value:
Franklin Valuemark Funds:
Value Securities Fund, 398 shares, cost $3,393 $3,104 - - -
Zero Coupon Fund - 2000, 23,849 shares, cost $274,490 - 353,200 - -
Zero Coupon Fund - 2005 22,076 shares, cost $264,413 - - 391,631 -
Zero Coupon Fund - 2010 23,983 shares, cost $358,785 - - - 456,868
- ---------------------------------------------------------------------------------------------------------------------------
Total assets 3,104 353,200 391,631 456,868 21,123,995
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities:
Accrued mortality and expense risk charges 6 515 531 545 22,547
Accrued administrative charges - 129 132 136 5,628
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 6 644 663 681 28,175
Net assets $3,098 352,556 390,968 456,187 21,095,820
Policy owners' equity (note 4) $3,098 352,556 390,968 456,187 21,095,820
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Operations
For the years ended December 31, 1998, 1997, and 1996
Adjustable U.S. Global Health Care
Government Fund Capital Growth Fund Securities Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends reinvested in fund shares $- - 18,030 833 7 - - - -
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charges - - 740 1,287 96 2 54 - -
Administrative charges - - 185 322 24 - 13 - -
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses - - 925 1,609 120 2 67 - -
Investment income (loss), net - - 17,105 (776) (113) (2) (67) - -
Realized gains (losses) and unrealized
appreciation (depreciation) on investments:
Realized capital gain distributions
on mutual funds - - - - - - - - -
Realized gains (losses) on sales of
investments, net - - (10,027) 989 (11) - 2 - -
- ---------------------------------------------------------------------------------------------------------------------------
Realized gains (losses) on investments, net - - (10,027) 989 (11) - 2 - -
Net change in unrealized appreciation
(depreciation) on investments - - (200) 34,912 (548) (140) 1,694 - -
- ---------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses) and unrealized
appreciation (depreciation) on investments, net - - (10,227) 35,901 (559) (140) 1,696 - -
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations $- - 6,878 35,125 (672) (142) 1,629 - -
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Operations (cont.)
For the years ended December 31, 1998, 1997, and 1996
Global Utilities Securities Fund Growth and Income Fund High Income Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends reinvested in fund shares $ 63,845 66,211 75,714 86,614 61,679 28,758 160,598 153,512 167,136
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charges 10,459 9,862 11,220 16,628 14,386 9,969 10,568 12,094 12,310
Administrative charges 2,615 2,466 2,805 4,157 3,597 2,492 2,642 3,023 3,077
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 13,074 12,328 14,025 20,785 17,983 12,461 13,210 15,117 15,387
- ---------------------------------------------------------------------------------------------------------------------------
Investment income (loss), net 50,771 53,883 61,689 65,829 43,696 16,297 147,388 138,395 151,749
Realized gains (losses) and unrealized
appreciation (depreciation) on investments:
Realized capital gain distributions
on mutual funds 93,096 91,611 - 203,765 59,819 101,857 9,531 5,036 8,872
Realized gains (losses) on sales of
investments, net 56,812 59,135 118,555 27,735 75,044 25,750 29,193 43,795 33,892
- ---------------------------------------------------------------------------------------------------------------------------
Realized gains (losses)
on investments, net 149,908 150,746 118,555 231,500 134,863 127,607 38,724 48,831 42,764
Net change in unrealized appreciation
(depreciation) on investments (40,828)116,553 (93,370) (118,668) 283,057 37,916 (177,480) 4,999 26,432
- ---------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses) and unrealized
appreciation (depreciation)
on investments, net 109,080 267,299 25,185 112,832 417,920 165,523 (138,756) 53,830 69,196
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations $159,851 321,182 86,874 178,661 461,616 181,820 8,632 192,225 220,945
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Operations (cont.)
For the years ended December 31, 1998, 1997, and 1996
Investment Grade
Income Securities Fund Intermediate Bond Fund Money Market Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends reinvested in fund shares $111,419 71,443 33,370 - - 3,706 62,012 35,286 32,922
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charges 8,671 7,189 4,656 - - 366 7,539 4,368 4,291
Administrative charges 2,168 1,797 1,164 - - 91 1,885 1,092 1,073
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 10,839 8,986 5,820 - - 457 9,424 5,460 5,364
- ---------------------------------------------------------------------------------------------------------------------------
Investment income (loss), net 100,580 62,457 27,550 - - 3,249 52,588 29,826 27,558
Realized gains (losses) and unrealized
appreciation (depreciation) on investments:
Realized capital gain distributions
on mutual funds 26,313 15,347 5,550 - - - - - -
Realized gains (losses) on sales
of investments, net 3,544 7,042 2,373 - - 1,981 - - -
- ---------------------------------------------------------------------------------------------------------------------------
Realized gains (losses)
on investments, net 29,857 22,389 7,923 - - 1,981 - - -
Net change in unrealized appreciation
(depreciation) on investments (115,794) 68,874 37,183 - - (3,575) - - -
- ---------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses)
and unrealized appreciation
(depreciation) on investments, net (85,937) 91,263 45,106 - - (1,594) - - -
Net increase (decrease) in net
assets from operations $ 14,643 153,720 72,656 - - 1,655 52,588 29,826 27,558
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Operations (cont.)
For the years ended December 31, 1998, 1997, and 1996
Mutual Discovery Mutual Shares Natural Resources
Securities Fund Securities Fund Securities Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends reinvested in fund shares $5,534 40 - 11,623 72 - 2,271 1,844 2,102
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charges 2,229 1,140 22 6,003 2,067 31 461 416 1,012
Administrative charges 557 285 5 1,501 517 8 115 104 253
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 2,786 1,425 27 7,504 2,584 39 576 520 1,265
Investment income (loss), net 2,748 (1,385) (27) 4,119 (2,512) (39) 1,695 1,324 837
Realized gains (losses) and unrealized
appreciation (depreciation) on investments:
Realized capital gain distributions
on mutual funds 5,149 - - 10,153 - - - - 1,927
Realized gains (losses) on sales
of investments, net 5,744 166 - 10,137 2,034 2 (8,058)(1,936) 14,498
- ---------------------------------------------------------------------------------------------------------------------------
Realized gains (losses) on
investments, net 10,893 166 - 20,290 2,034 2 (8,058) (1,936) 16,425
Net change in unrealized appreciation
(depreciation) on investments (49,861) 26,719 495 (35,219) 51,689 1,634 (35,420)(25,118)(8,994)
- ---------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses) and
unrealized appreciation (depreciation)
on investments, net (38,968) 26,885 495 (14,929) 53,723 1,636 (43,478)(27,054) 7,431
Net increase (decrease) in net
assets from operations ($36,220) 25,500 468 (10,810) 51,211 1,597 (41,783)(25,730) 8,268
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Operations (cont.)
For the years ended December 31, 1998, 1997, and 1996
Real Estate Securities Fund Rising Dividends Fund Small Cap Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends reinvested in fund shares $ 26,119 12,965 7,943 9,265 5,990 3,981 386 384 -
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charges 3,282 3,466 1,883 5,177 3,657 1,632 3,458 1,277 105
Administrative charges 821 867 471 1,294 914 408 865 319 26
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 4,103 4,333 2,354 6,471 4,571 2,040 4,323 1,596 131
Investment income (loss), net 22,016 8,632 5,589 2,794 1,419 1,941 (3,937)(1,212) (131)
Realized gains (losses) and unrealized
appreciation (depreciation) on investments:
Realized capital gain distributions
on mutual funds 16,168 6,191 - 113,543 10,229 - 49,628 4,546 -
Realized gains (losses) on sales
of investments, net 15,172 17,125 1,980 6,199 18,073 2,703 (1,660) 2,723 472
- ---------------------------------------------------------------------------------------------------------------------------
Realized gains (losses)
on investments, net 31,340 23,316 1,980 119,742 28,302 2,703 47,968 7,269 472
Net change in unrealized appreciation
(depreciation) on investments (179,557) 57,737 58,343 (77,635) 93,007 44,265 (48,794)22,458 3,624
- ---------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses) and
unrealized appreciation (depreciation)
on investments, net (148,217) 81,053 60,323 42,107 121,309 46,968 (826)29,727 4,096
Net increase (decrease) in net
assets from operations ($126,201) 89,685 65,912 44,901 122,728 48,909 (4,763) 28,515 3,965
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Operations (cont.)
For the years ended December 31, 1998, 1997, and 1996
Templeton Developing Templeton Global Templeton Global
Markets Equity Fund Asset Allocation Fund Growth Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends reinvested in fund shares $19,038 10,159 2,914 10,932 7,863 228 39,344 15,984 8,202
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charges 2,862 3,802 2,551 1,629 2,512 2,065 9,684 7,051 3,948
Administrative charges 715 950 638 407 628 516 2,421 1,763 987
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 3,577 4,752 3,189 2,036 3,140 2,581 12,105 8,814 4,935
Investment income (loss), net 15,461 5,407 (275) 8,896 4,723 (2,353) 27,239 7,170 3,267
Realized gains (losses) and unrealized
appreciation (depreciation) on investments:
Realized capital gain distributions
on mutual funds 61,907 16,114 5,391 13,002 2,268 456 143,312 5,328 8,202
Realized gains (losses) on sales
of investments, net (23,346) 1,960 2,603 11,507 23,197 12,194 13,548 15,707 2,914
- ---------------------------------------------------------------------------------------------------------------------------
Realized gains (losses)
on investments, net 38,561 18,074 7,994 24,509 25,465 12,650 156,860 21,035 11,116
Net change in unrealized appreciation
(depreciation) on investments (198,108)(127,265) 56,503 (31,637) 11,716 41,378 (70,051) 80,562 91,158
- ---------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses) and unrealized
appreciation (depreciation) on
investments, net (159,547)(109,191) 64,497 (7,128) 37,181 54,028 86,809 101,597 102,274
Net increase (decrease) in net
assets from operations ($144,086)(103,784) 64,222 1,768 41,904 51,675 114,048 108,767 105,541
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Operations (cont.)
For the years ended December 31, 1998, 1997, and 1996
Templeton Global Templeton International Templeton International
Income Securities Fund Equity Fund Smaller Companies Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends reinvested in fund shares $12,826 10,037 7,568 55,115 33,230 19,177 488 17 -
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charges 1,127 903 745 10,176 8,366 6,014 99 29 3
Administrative charges 282 226 186 2,544 2,092 1,504 25 7 1
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 1,409 1,129 931 12,720 10,458 7,518 124 36 4
Investment income (loss), net 11,417 8,908 6,637 42,395 22,772 11,659 364 (19) (4)
Realized gains (losses) and unrealized appreciation (depreciation) on
investments:
Realized capital gain distributions
on mutual funds - - - 110,714 50,952 23,468 565 - -
Realized gains (losses) on sales
of investments, net (315) 668 432 9,119 13,328 4,043 (121) (2) 119
- ---------------------------------------------------------------------------------------------------------------------------
Realized gains (losses)
on investments, net (315) 668 432 119,833 64,280 27,511 444 (2) 119
Net change in unrealized appreciation
(depreciation) on investments (521) (6,915) 2,837 (97,026) 25,384 114,314 (4,295)(1,075) -
- ---------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses) and unrealized
appreciation (depreciation) on investments, net (836) (6,247) 3,269 22,807 89,664 141,825 (3,851) (1,077)
119
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations $10,581 2,661 9,906 65,202 112,436 153,484 (3,487)(1,096) 115
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Operations (cont.)
For the years ended December 31, 1998, 1997, and 1996
Templeton Pacific Growth Fund U.S. Government Securities Fund Value Securities Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends reinvested in fund shares $10,966 8,455 10,710 64,457 52,576 45,170 - - -
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charges 1,388 214 2,726 5,484 5,796 4,926 - - -
Administrative charges 347 53 682 1,371 1,449 1,231 - - -
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 1,735 267 3,408 6,855 7,245 6,157 - - -
Investment income (loss), net 9,231 8,188 7,302 57,602 45,331 39,013 - - -
Realized gains (losses) and unrealized appreciation (depreciation) on
investments:
Realized capital gain distributions
on mutual funds 3,337 - 6,208 - - - - - -
Realized gains (losses) on sales
of investments, net (38,525) 907 6,092 17,179 27,003 18,468 (3) - -
- ---------------------------------------------------------------------------------------------------------------------------
Realized gains (losses)
on investments, net (35,188) 907 12,300 17,179 27,003 18,468 (3) - -
Net change in unrealized appreciation
(depreciation) on investments (7,500)(164,185)12,362 (18,101) 136 (37,068) (289) - -
- ---------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses) and
unrealized appreciation (depreciation)
on investments, net (42,688)(163,278)24,662 (922) 27,139 (18,600) (292) - -
Net increase (decrease) in net
assets from operations ($33,457) (155,090)31,964 56,680 72,470 20,413 (292) - -
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Operations (cont.)
For the years ended December 31, 1998, 1997, and 1996
Zero Coupon Fund - 2000 Zero Coupon Fund - 2005 Zero Coupon Fund - 2010
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends reinvested in fund shares $27,976 24,296 19,213 22,733 25,018 19,668 25,369 22,065 8,167
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charges 2,236 2,223 2,212 2,431 2,373 2,270 2,862 2,535 1,411
Administrative charges 559 556 553 608 593 568 716 634 353
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 2,795 2,779 2,765 3,039 2,966 2,838 3,578 3,169 1,764
Investment income (loss), net 25,181 21,517 16,448 19,694 22,052 16,830 21,791 18,896 6,403
Realized gains (losses) and unrealized appreciation (depreciation) on
investments:
Realized capital gain distributions
on mutual funds 4,476 550 190 5,259 87 - 3,510 176 2,213
Realized gains (losses) on sales
of investments, net 4,953 5,922 2,734 2,463 11,706 4,146 2,415 1,074 6,865
- ---------------------------------------------------------------------------------------------------------------------------
Realized gains (losses)
on investments, net 9,429 6,472 2,924 7,722 11,793 4,146 5,925 1,250 9,078
Net change in unrealized appreciation
(depreciation) on investments (11,643) (6,554)(13,736) 13,788 1,480 (21,955) 27,536 35,571 4,806
- ---------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses) and
unrealized appreciation (depreciation)
on investments, net (2,214) (82)(10,812) 21,510 13,273 (17,809) 33,461 36,821 13,884
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations $22,967 21,435 5,636 41,204 35,325 (979) 55,252 55,717 20,287
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Operations (cont.)
For the years ended December 31, 1998, 1997, and 1996
Total All Funds
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income:
Dividends reinvested in fund shares $ 829,763 619,133 514,679
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charges 115,794 95,822 77,110
Administrative charges 28,950 23,956 19,277
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 144,744 119,778 96,387
Investment income (loss), net 685,019 499,355 418,292
Realized gains (losses) and unrealized appreciation (depreciation) on
investments:
Realized capital gain distributions on mutual funds 873,428 268,254 164,334
Realized gains (losses) on sales of investments, net 144,683 324,660 252,789
- ---------------------------------------------------------------------------------------------------------------------------
Realized gains (losses) on investments, net 1,018,111 592,914 417,123
Net change in unrealized appreciation (depreciation) on investments (1,240,497) 548,282 354,212
- ---------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses) and unrealized appreciation
(depreciation) on investments, net (222,386)1,141,196 771,335
Net increase (decrease) in net assets from operations $ 462,633 1,640,551 1,189,627
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Changes in Net Assets
For the years ended December 31, 1998, 1997 and 1996
Global Health
Adjustable U.S. Government Fund Capital Growth Fund Care Securities Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income (loss), net $- - 17,105 (776) (113) (2) (67) - -
Realized gains (losses) on investments, net - - (10,027) 989 (11) - 2 - -
Net change in unrealized appreciation
(depreciation) on investments - - (200) 34,912 (548) (140) 1,694 - -
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations - - 6,878 35,125 (672) (142) 1,629 - -
Policy transactions (note 4):
Purchase payments - - 6,969 - - - - - -
Transfers between funds - - (34,766) 194,912 94,715 4,560 6,656 - -
Surrenders and terminations - - (1,178) - - - - - -
Rescissions - - - - - - - - -
Policy loan transactions - - 74 - - - - - -
Other transactions (note 2) - - (2,842) (3,276) (429) - (20) - -
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from policy transactions - - (31,743) 191,636 94,286 4,560 6,636 - -
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets - - (24,865) 226,761 93,614 4,418 8,265 - -
Net assets at beginning of year - - 24,865 98,032 4,418 - - - -
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $- - - 324,793 98,032 4,418 8,265 - -
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
For the years ended December 31, 1998, 1997 and 1996
Global Utilities Securities Fund Growth and Income Fund High Income Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income (loss), net $ 50,771 53,883 61,689 65,829 43,696 16,297 147,388 138,395 151,749
Realized gains (losses) on
investments, net 149,908 150,746 118,555 231,500 134,863 127,607 38,724 48,831 42,764
Net change in unrealized
appreciation (depreciation)
on investments (40,828) 116,553 ( 93,370) (118,668) 283,057 37,916 (177,480) 4,999 26,432
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets from
operations 159,851 321,182 86,874 178,661 461,616 181,820 8,632 192,225 220,945
- ---------------------------------------------------------------------------------------------------------------------------
Policy transactions (note 4):
Purchase payments 104,584 116,828 127,511 427,399 387,084 347,781 55,984 50,642 57,851
Transfers between funds (38,007) (67,788) (163,650) 282,965 194,269 289,040 (12,125) (140,178) 344,787
Surrenders and terminations (46,228) (8,311) (80,389) (66,385) (271,440) (28,415) (21,000) (67,891) (3,551)
Rescissions - - - - - - - - -
Policy loan transactions 32,511 (60,609) (97,734) (31,446) 3,110 8,174 (168,452) (33,557) 8,073
Other transactions (note 2) (65,057) (60,143) (65,596) (202,446) (163,700) (145,312) (43,702) (41,580) (35,494)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase
(decrease) in net
assets resulting from
policy transactions (12,197) (80,023) (279,858) 410,087 149,323 471,268 (189,295) (232,564) 371,666
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease)
in net assets 147,654 241,159 (192,984) 588,748 610,939 653,088 (180,663) (40,339) 592,611
Net assets at beginning
of year 1,594,097 1,352,938 1,545,922 2,317,193 1,706,254 1,053,166 1,834,614 1,874,953 1,282,342
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $1,741,751 1,594,097 1,352,938 2,905,941 2,317,193 1,706,254 1,653,951 1,834,614 1,874,953
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
For the years ended December 31, 1998, 1997 and 1996
Investment Grade
Income Securities Fund Intermediate Bond Fund Money Market Fund
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income (loss), net$ 100,580 62,457 27,550 - - 3,249 52,588 29,826 27,558
Realized gains (losses)
on investments, net 29,857 22,389 7,923 - - 1,981 - - -
Net change in unrealized
appreciation (depreciation)
on investments (115,794) 68,874 37,183 - - (3,575) - - -
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets
from operations 14,643 153,720 72,656 - - 1,655 52,588 29,826 27,558
- --------------------------------------------------------------------------------------------------------------------------------
Policy transactions (note 4):
Purchase payments 219,675 255,347 275,281 - - 11,940 3,668,991 1,996,782 2,288,562
Transfers between funds 295,129 46,671 120,002 - - (72,421) (2,423,871) (2,136,510) (2,221,762)
Surrenders and terminations (50,336) (11,918) (20,210) - - (751) (25,503) (52,158) (27,431)
Rescissions - - - - - - (29,369) - -
Policy loan transactions (12,262) (25,240) (4,239) - - - (9,864) (25,633) (5,692)
Other transactions (note 2) (101,921) (96,044) (98,005) - - (5,413) (39,778) 168,886 (13,338)
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets resulting
from policy transactions 350,285 168,816 272,829 - - (66,645) 1,140,606 (48,633) 20,339
- --------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in
net assets 364,928 322,536 345,485 - - (64,990) 1,193,194 (18,807) 47,897
Net assets at
beginning of year 1,192,087 869,551 524,066 - - 64,990 710,942 729,749 681,852
- --------------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $1,557,015 1,192,087 869,551 - - - 1,904,136 710,942 729,749
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
For the years ended December 31, 1998, 1997 and 1996
Mutual Discovery Mutual Shares Natural Resources
Securities Fund Securities Fund Securities Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income (loss), net $ 2,748 (1,385) (27) 4,119 (2,512) (39) 1,695 1,324 837
Realized gains (losses) on
investments, net 10,893 166 - 20,290 2,034 2 (8,058) (1,936) 16,425
Net change in unrealized appreciation
(depreciation) on investments (49,861) 26,719 495 (35,219) 51,689 1,634 (35,420) (25,118) (8,994)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations (36,220) 25,500 468 (10,810) 51,211 1,597 (41,783) (25,730) 8,268
- ---------------------------------------------------------------------------------------------------------------------------
Policy transactions (note 4):
Purchase payments - - - 74,363 16,585 - 13,268 15,837 18,730
Transfers between funds 155,186 281,309 50,000 214,033 776,453 84,053 59,479 (5,829) (46,431)
Surrenders and terminations - - - (3,707) - - (5,593) (52) (7,791)
Rescissions - - - - - - - - -
Policy loan transactions (56,263) - - (111,671) (1,956) - 789 172 (524)
Other transactions (note 2) (7,963) (1,893) - (41,817) (9,654) (44) (6,590) (6,922) (9,019)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from policy transactions 90,960 279,416 50,000 131,201 781,428 84,009 61,353 3,206 (45,035)
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets 54,740 304,916 50,468 120,391 832,639 85,606 19,570 (22,524) (36,767)
Net assets at beginning of year 355,384 50,468 - 918,245 85,606 - 105,493 128,017 164,784
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $410,124 355,384 50,468 1,038,636 918,245 85,606 125,063 105,493 128,017
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
For the years ended December 31, 1998, 1997 and 1996
Real Estate Securities Fund Rising Dividends Fund Small Cap Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income (loss), net $ 22,016 8,632 5,589 2,794 1,419 1,941 (3,937) (1,212) (131)
Realized gains (losses) on
investments, net 31,340 23,316 1,980 119,742 28,302 2,703 47,968 7,269 472
Net change in
unrealized appreciation
(depreciation) on
investments (179,557) 57,737 58,343 (77,635) 93,007 44,265 (48,794) 22,458 3,624
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets from
operations (126,201) 89,685 65,912 44,901 122,728 48,909 (4,763) 28,515 3,965
- ---------------------------------------------------------------------------------------------------------------------------
Policy transactions (note 4):
Purchase payments 115,546 92,480 67,454 161,902 108,408 74,745 113,167 44,998 683
Transfers between funds 37,909 176,166 86,682 244,722 193,808 86,767 400,975 248,658 51,952
Surrenders and terminations (10,028) (2,795) (1,098) (14,872) (17,668) (7,693) (9,697) (965)
75
Rescissions - - - - - - - - -
Policy loan transactions (4,950) (15,416) (1,340) (4,345) (5,874) (1,876) (575) - -
Other transactions (note 2) (55,881) (43,348) (27,619) (78,620) (51,398) (33,070) (47,188) (19,801)
(239)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets resulting from
policy transactions 82,596 207,087 124,079 308,787 227,276 118,873 456,682 272,890 52,471
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in
net assets (43,605) 296,772 189,991 353,688 350,004 167,782 451,919 301,405 56,436
Net assets at beginning
of year 646,288 349,516 159,525 654,915 304,911 137,129 357,841 56,436 -
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $602,683 646,288 349,516 1,008,603 654,915 304,911 809,760 357,841 56,436
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
For the years ended December 31, 1998, 1997 and 1996
Templeton Developing Markets Templeton Global Templeton Global
Equity Fund Asset Allocation Fund Growth Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income (loss), net $ 15,461 5,407 (275) 8,896 4,723 (2,353) 27,239 7,170 3,267
Realized gains (losses) on
investments, net 38,561 18,074 7,994 24,509 25,465 12,650 156,860 21,035 11,116
Net change in unrealized
appreciation (depreciation)
on investments (198,108) (127,265) 56,503 (31,637) 11,716 41,378 (70,051) 80,562 91,158
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets
from operations (144,086) (103,784) 64,222 1,768 41,904 51,675 114,048 108,767 105,541
- ---------------------------------------------------------------------------------------------------------------------------
Policy transactions (note 4):
Purchase payments 159,440 191,340 215,896 1,438 430 439 318,275 317,636 335,873
Transfers between funds 5,954 2,200 267,310 5,929 (108,898) 333,332 262,188 272,672 119,840
Surrenders and terminations (19,910) (24,839) (10,080) - (108) - (42,480) (35,910) (12,771)
Rescissions - - - - - - - - -
Policy loan transactions (16,461) (20,884) (2,638) (77,494) - - (11,353) (19,640) (8,767)
Other transactions (note 2) (56,866) (77,790) (73,383) (4,852) (5,240) (1,945)(144,669) (131,055) (113,183)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets resulting
from policy transactions 72,157 70,027 397,105 (74,979) (113,816) 331,826 381,961 403,703 320,992
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in
net assets (71,929) (33,757) 461,327 (73,211) (71,912) 383,501 496,009 512,470 426,533
Net assets at beginning
of year 635,389 669,146 207,819 311,809 383,721 220 1,287,362 774,892 348,359
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $563,460 635,389 669,146 238,598 311,809 383,721 1,783,371 1,287,362 774,892
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
For the years ended December 31, 1998, 1997 and 1996
Templeton Global Templeton International Templeton International
Income Securities Fund Equity Fund Smaller Companies Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income (loss), net $ 11,417 8,908 6,637 42,395 22,772 11,659 364 (19) (4)
Realized gains (losses)
on investments, net (315) 668 432 119,833 64,280 27,511 444 (2) 119
Net change in unrealized
appreciation (depreciation)
on investments (521) (6,915) 2,837 (97,026) 25,384 114,314 (4,295) (1,075) -
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets from
operations 10,581 2,661 9,906 65,202 112,436 153,484 (3,487) (1,096) 115
- ---------------------------------------------------------------------------------------------------------------------------
Policy transactions (note 4):
Purchase payments 43,650 42,795 39,862 343,054 359,829 371,300 - - -
Transfers between funds 8,645 (1,929) 9,506 214,070 170,913 100,214 9,480 13,608 (115)
Surrenders and terminations (2,203) (1,422) (2,101) (77,537) (30,410) (30,572) - - -
Rescissions - - - - - - - - -
Policy loan transactions (4,262) (2,728) (425) (14,359) (37,789) (10,040) - - -
Other transactions (note 2) (18,506) (17,463) (16,260) (150,458) (138,095) (129,653) (360) (42) -
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets resulting
from policy transactions 27,324 19,253 30,582 314,770 324,448 301,249 9,120 13,566 (115)
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets37,905 21,914 40,488 379,972 436,884 454,733 5,633 12,470 -
Net assets at beginning of year 151,430 129,516 89,028 1,446,893 1,010,009 555,276 12,470 - -
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $189,335 151,430 129,516 1,826,865 1,446,893 1,010,009 18,103 12,470 -
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
For the years ended December 31, 1998, 1997 and 1996
Templeton Pacific Growth Fund U.S. Government Securities Fund Value Securities Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income (loss), net $ 9,231 8,188 7,302 57,602 45,331 39,013 - - -
Realized gains (losses)
on investments, net (35,188) 907 12,300 17,179 27,003 18,468 (3) - -
Net change in unrealized
appreciation (depreciation)
on investments (7,500) (164,185) 12,362 (18,101) 136 (37,068) (289) - -
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets from
operations (33,457) (155,090) 31,964 56,680 72,470 20,413 (292) - -
- ---------------------------------------------------------------------------------------------------------------------------
Policy transactions (note 4):
Purchase payments 91,236 134,478 181,194 36,225 40,913 26,467 - - -
Transfers between funds (25,732) (41,449) 14,234 2,433 (108,226) 261,674 3,405 - -
Surrenders and terminations (15,757) (10,217) (20,255) (28,787) (20,318) (7,837) - - -
Rescissions - - - - - - - - -
Policy loan transactions (2,091) (13,651) (2,894) (7,674) (7,823) (424) - - -
Other transactions (note 2) (29,702) (52,839) (73,664) (28,339) (27,460) (19,100) (15) - -
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets resulting
from policy transactions 17,954 16,322 98,615 (26,142) (122,914) 260,780 3,390 - -
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in
net assets (15,503) (138,768) 130,579 30,538 (50,444) 281,193 3,098 - -
Net assets at beginning
of year 289,825 428,593 298,014 877,698 928,142 646,949 - - -
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $274,322 289,825 428,593 908,236 877,698 928,142 3,098 - -
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
For the years ended December 31, 1998, 1997 and 1996
Zero Coupon Fund - 2000 Zero Coupon Fund - 2005 Zero Coupon Fund - 2010
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income (loss), net $ 25,181 21,517 16,448 19,694 22,052 16,830 21,791 18,896 6,403
Realized gains (losses) on
investments, net 9,429 6,472 2,924 7,722 11,793 4,146 5,925 1,250 9,078
Net change in unrealized appreciation
(depreciation) on investments (11,643) (6,554) (13,736) 13,788 1,480 (21,955) 27,536 35,571 4,806
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations 22,967 21,435 5,636 41,204 35,325 (979) 55,252 55,717 20,287
- ---------------------------------------------------------------------------------------------------------------------------
Policy transactions (note 4):
Purchase payments - - - - - - - - -
Transfers between funds - (17,434) - - (61,213) 57,145 - 3,652 223,644
Surrenders and terminations (9,045) - - - - (3,894) - - -
Rescissions - - - - - - - - -
Policy loan transactions (7,106) (73) (64) - - - (1,739) (183) (176)
Other transactions (note 2) (4,490) (4,421) (4,271) (4,873) (4,798) (4,109) (6,849) (5,717) (3,437)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from policy transactions (20,641)(21,928) (4,335) (4,873) (66,011) 49,142 (8,588) (2,248) 220,031
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets 2,326 (493) 1,301 36,331 (30,686) 48,163 46,664 53,469 240,318
Net assets at beginning of year 350,230 350,723 349,422 354,637 385,323 337,160 409,523 356,054 115,736
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $352,556 350,230 350,723 390,968 354,637 385,323 456,187 409,523 356,054
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
For the years ended December 31, 1998, 1997 and 1996
Total All Funds
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income (loss), net $ 685,019 499,355 418,292
Realized gains (losses) on investments, net 1,018,111 592,914 417,123
Net change in unrealized appreciation (depreciation) on investments (1,240,497) 548,282 354,212
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from operations 462,633 1,640,551 1,189,627
Policy transactions (note 4):
Purchase payments 5,948,197 4,172,412 4,448,538
Transfers between funds (95,665) (214,360) (34,403)
Surrenders and terminations (449,068) (556,422) (265,942)
Rescissions (29,369) - -
Policy loan transactions (509,067) (267,774) (120,512)
Other transactions (note 2) (1,144,238) (790,946) (874,996)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from policy transactions 3,720,790 2,342,910 3,152,685
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets 4,183,423 3,983,461 4,342,312
Net assets at beginning of year 16,912,397 12,928,936 8,586,624
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $21,095,820 16,912,397 12,928,936
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Notes to Financial Statements
December 31, 1998
1. ORGANIZATION
Allianz Life Variable Account A (Variable Account) is a segregated investment
account of Allianz Life Insurance Company of North America (Allianz Life)
registered with the Securities and Exchange Commission as a unit investment
trust pursuant to the provisions of the Investment Company Act of 1940 (as
amended). The Variable Account was established on May 31, 1985 and commenced
operations September 8, 1987. Accordingly, it is an accounting entity wherein
all segregated account transactions are reflected.
The Variable Account's assets are the property of Allianz Life and are held for
the benefit of the owners and other persons entitled to payments under variable
life policies issued through the Variable Account and underwritten by Allianz
Life. The assets of the Variable Account, equal to the reserves and other
liabilities of the Variable Account, are not chargeable with liabilities that
arise from any other business which Allianz Life may conduct.
The Variable Account's sub-accounts may invest, at net asset values, in one or
more of the funds of the Franklin Valuemark Funds (FVF), managed by Franklin
Advisers, Inc. and its Templeton and Franklin affiliates, in accordance with the
selection made by the policy owner. Not all funds are available as investment
options for the products which comprise the Variable Account.
Certain officers and trustees of the FVF are also officers and/or directors of
Franklin Advisers, Inc. and/or Allianz Life.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
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 amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Investments
Investments of the Variable Account are valued daily at market value using net
asset values provided by Franklin Advisers, Inc.
Realized investment gains include realized gain distributions received from the
respective funds and gains on the sale of fund shares as determined by the
average cost method. Realized gain distributions are reinvested in the
respective funds. Dividend distributions received from the FVF are reinvested in
additional shares of the FVF and are recorded as income to the Variable Account
on the ex-dividend date.
A Fixed Account investment option is available to variable universal life policy
owners. This account is comprised of equity and fixed income investments which
are part of the general assets of Allianz Life. The liabilities of the Fixed
Account are part of the general obligations of Allianz Life and are not included
in the Variable Account. The guaranteed minimum rate of return on the Fixed
Account is 3 %.
The Global Health Care Securities Fund and Value Securities Fund were added as
available investment options on May 1, 1998. The Capital Growth Fund and
Templeton International Smaller Companies Fund were added as available
investment options on May 1, 1996. The Mutual Discovery Securities Fund and
Mutual Shares Securities Fund were added as available investment options on
November 8, 1996. The Investment Grade Intermediate Bond Fund and Adjustable
U.S. Government Fund were closed on October 25, 1996 when shares of the U.S.
Government Securities Fund were substituted for all shares of both funds.
On May 1, 1998, the Utility Equity Fund name was changed to Global Utilities
Securities Fund. The Precious Metals Fund name was changed to Natural Resources
Securities Fund on May 1, 1997. On May 1, 1996, the Global Income Fund name was
changed to Templeton Global Income Securities Fund.
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Expenses
Asset Based Expenses
A mortality and expense risk charge is deducted from the Variable Account on a
daily basis equal, on an annual basis, to .60% of the daily net assets of the
Variable Account.
An administrative charge is deducted from the Variable Account on a daily basis
equal, on an annual basis, to .15% of the daily net assets of the Variable
Account.
Contract Based Expenses
A cost of insurance charge is deducted against each policy by liquidating units.
The amount of the charge is based upon age, sex, rate class and net amount at
risk (death benefit less total cash surrender value). Total cost of insurance
charges paid by the policy owners for the years ended December 31, 1998, 1997
and 1996 were $939,693, $832,417 and $715,700, respectively.
A deferred issue charge is deducted annually, at the end of the policy year,
from each single premium variable life policy for the first ten policy years by
liquidating units. The amount of the charge is 7% of the single premium
consisting of 2.5% for premium taxes, 4% for sales charge and .5% for policy
issue charge (in the State of California, 2.35%, 4.15% and .5%, respectively).
If the policy is surrendered before the full amount is collected, the
uncollected portion of this charge is deducted from the account value. Total
deferred issue charges paid by the policy owners for the years ended December
31, 1998, 1997 and 1996 were $40,600, $37,629, and $28,152, respectively.
A policy charge is deducted on each monthly anniversary date from each variable
universal life policy by liquidating units. The amount of the charge is equal to
2.5% of each premium payment for premium taxes plus $20 per month for the first
policy year and $9 per month guaranteed thereafter. Currently, Allianz Life has
agreed to voluntarily limit the charge to $5 per month after the first policy
year. Total policy charges paid by the policy owners for the years ended
December 31, 1998, 1997 and 1996 were $213,159, $211,485, and $204,321,
respectively.
Twelve free transfers are permitted each contract year. Thereafter, the fee is
the lesser of $25 or 2% of the amount transferred. No transfer charges were paid
by the policy owners during the years ended December 31, 1998, 1997 and 1996,
respectively. Net transfers to the Fixed Account during the years ended December
31, 1998, 1997 and 1996 were $95,665, $214,360, and $34,403, respectively.
The cost of insurance, deferred issue, policy and transfer charges paid are
reflected in the Statements of Changes in Net Assets as Other transactions.
3. FEDERAL INCOME TAXES
Operations of the Variable Account form a part of, and are taxed with,
operations of Allianz Life, which is taxed as a life insurance company under the
Internal Revenue Code.
Allianz Life does not expect to incur any federal income taxes in the operation
of the Variable Account. If, in the future, Allianz Life determines that the
Variable Account may incur federal income taxes, it may then assess a charge
against the Variable Account for such taxes.
<PAGE>
<TABLE>
<CAPTION>
4. POLICY TRANSACTIONS - UNIT ACTIVITY
Transactions in units for each fund for the years ended December 31, 1998, 1997
and 1996, were as follows:
Global Global Investment Mutual
Adjustable U.S Capital Health Care Utilities Growth and High Income Grade Money Discovery
Government Growth Securities Securities Income Income Securities Intermediate Market Securities
Fund Fund Fund Fund Fund Fund Fund Bond Fund Fund Fund
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Units outstanding at
December 31, 1995 2,013 - - 66,198 38,021 65,333 26,614 4,259 45,768 -
Policy transactions:
Purchase payments 553 - - 5,397 12,119 2,801 13,495 778 147,764 -
Transfers between funds (2,257) 391 - (6,933) 9,962 17,863 5,904 (4,635) (143,612) 4,953
Surrenders and terminations (94) - - (3,354) (1,005) (177) (1,004) (49) (1,836) -
Policy loan transactions 6 - - (4,007) 311 405 (212) - (376) -
Other transactions (221) - - (2,782) (5,057) (1,722) (4,812) (353) (778) -
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in units resulting from
policy transactions (2,013) 391 - (11,679) 16,330 19,170 13,371 (4,259) 1,162 4,953
Units outstanding at
December 31, 1996 - 391 - 54,519 54,351 84,503 39,985 - 46,930 4,953
Policy transactions:
Purchase payments - - - 4,451 10,974 2,141 11,090 - 125,344 -
Transfers between funds - 7,029 - (2,894) 5,516 (5,679) 1,881 - (120,861) 24,650
Surrenders and terminations - - - (304) (7,932) (3,022) (513) - (3,267) -
Policy loan transactions - - - (2,428) (68) (1,471) (1,113) - (1,621) -
Other transactions - (34) - (2,288) (4,624) (1,789) (4,161) - (2,758) (164)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in units resulting from
policy transactions - 6,995 - (3,463) 3,866 (9,820) 7,184 - (3,163) 24,486
- ---------------------------------------------------------------------------------------------------------------------------
Units outstanding at
December 31, 1997 - 7,386 - 51,056 58,217 74,683 47,169 - 43,767 29,439
- ---------------------------------------------------------------------------------------------------------------------------
Policy transactions:
Purchase payments - - - 3,254 10,356 2,263 8,710 - 216,819 -
Transfers between funds - 13,340 778 (1,327) 6,612 (511) 11,713 - (142,026) 11,424
Surrenders and terminations - - - (1,451) (1,628) (852) (1,996) - (1,535) -
Rescissions - - - - - - - - (1,784) -
Policy loan transactions - - - 1,042 (754) (6,603) (481) - (599) (4,187)
Other transactions - (230) (2) (2,025) (4,902) (1,762) (4,044) - (2,394) (647)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in units resulting from
policy transactions - 13,110 776 (507) 9,684 (7,465) 13,902 - 68,481 6,590
- ---------------------------------------------------------------------------------------------------------------------------
Units outstanding at
December 31, 1998 - 20,496 776 50,549 67,901 67,218 61,071 - 112,248 36,029
- ---------------------------------------------------------------------------------------------------------------------------
<PAGE>
4. POLICY TRANSACTIONS - UNIT ACTIVITY (CONT.)
Templeton
Mutual Natural Templeton Templeton Templeton Global Templeton
Shares Resources Real Estate Rising Small Developing Global Asset Global Income International
Securities Securities Securities Dividends Cap Markets Equity Allocation Growth Securities Equity
Fund Fund Fund Fund Fund Fund Fund Fund Fund Fund
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Units outstanding at
December 31, 1995 - 10,831 7,628 10,700 - 22,210 21 31,471 5,801 40,830
Policy transactions:
Purchase payments - 1,115 2,975 5,400 54 20,769 39 28,048 2,551 24,859
Transfers between
funds 8,284 (2,791) 3,397 6,298 4,297 24,526 30,441 9,880 609 6,586
Surrenders and
terminations - (438) (51) (581) 6 (952) - (1,089) (138) (2,070)
Policy loan transactions - (29) (62) (134) - (251) - (718) (26) (665)
Other transactions (4) (536) (1,209) (2,379) (19) (7,042) (169) (9,435) (1,041) (8,691)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase
(decrease) in units
resulting from policy
transactions 8,280 (2,679) 5,050 8,604 4,338 37,050 30,311 26,686 1,955 20,019
- ---------------------------------------------------------------------------------------------------------------------------
Units outstanding at
December 31, 1996 8,280 8,152 12,678 19,304 4,338 59,260 30,332 58,157 7,756 60,849
- ---------------------------------------------------------------------------------------------------------------------------
Policy transactions:
Purchase payments 1,460 1,090 3,106 5,847 3,088 15,655 31 21,703 2,567 19,816
Transfers between
funds 67,284 (400) 5,867 10,275 17,595 (2,887) (7,728) 18,498 (108) 9,327
Surrenders and
terminations - (6) (93) (909) (74) (1,900) (9) (2,308) (85) (1,686)
Policy loan transactions (184) (7) (534) (334) - (1,728) - (1,348) (164) (2,099)
Other transactions (841) (475) (1,455) (2,780) (1,348) (6,291) (396) (8,935) (1,050) (7,573)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase
(decrease) in units
resulting from
policy transactions 67,719 202 6,891 12,099 19,261 2,849 (8,102) 27,610 1,160 17,785
- ---------------------------------------------------------------------------------------------------------------------------
Units outstanding at
December 31, 1997 75,999 8,354 19,569 31,403 23,599 62,109 22,230 85,767 8,916 78,634
- ---------------------------------------------------------------------------------------------------------------------------
Policy transactions:
Purchase payments 6,140 1,227 3,889 7,667 7,774 18,632 102 20,228 2,504 17,692
Transfers between
funds 16,707 4,888 1,042 11,079 26,906 714 445 16,458 502 10,775
Surrenders and
terminations (307) (544) (354) (668) (631) (2,188) - (2,700) (129) (3,966)
Rescissions - - - - - - - - - -
Policy loan transactions (8,559) 57 (163) (199) (47) (1,902) (5,298) (677) (244) (733)
Other transactions (3,446) (609) (1,880) (3,711) (3,266) (6,572) (335) (9,229) (1,062) (7,641)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase
(decrease) in units
resulting from
policy transactions 10,535 5,019 2,534 14,168 30,736 8,684 (5,086) 24,080 1,571 16,127
- ---------------------------------------------------------------------------------------------------------------------------
Units outstanding at
December 31, 1998 86,534 13,373 22,103 45,571 54,335 70,793 17,144 109,847 10,487 94,761
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
4. POLICY TRANSACTIONS - UNIT ACTIVITY (CONT.)
Templeton
International Templeton U.S. Zero Zero Zero
Smaller Pacific Government Value Coupon Coupon Coupon Total
Companies Growth Securities Securities Fund - Fund - Fund - All
Fund Fund Fund Fund 2000 2005 2010 Funds
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Units outstanding at December 31, 1995 - 21,322 32,402 - 14,874 12,382 3,735 462,413
Policy transactions:
Purchase payments - 12,100 1,329 - - 2,260 - 282,146
Transfers between funds - 802 12,856 - 1 (149) 8,290 (2,628)
Surrenders and terminations - (1,318) (400) - - - - (14,699)
Policy loan transactions - (189) (22) - (3) - (7) (5,979)
Other transactions - (4,907) (961) - (185) (162) (122) (52,587)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in units
resulting from policy transactions - 6,488 12,802 - (187) 1,949 8,161 206,253
- ---------------------------------------------------------------------------------------------------------------------------
Units outstanding at December 31, 1996 - 27,810 45,204 - 14,687 14,331 11,896 668,666
Policy transactions:
Purchase payments - 9,779 1,925 - - - - 240,067
Transfers between funds 1,143 (2,629) (5,101) - (707) (2,226) 119 17,964
Surrenders and terminations - (759) (952) - - - - (23,819)
Policy loan transactions - (884) (382) - (3) - (6) (14,374)
Other transactions (4) (3,737) (1,294) - (181) (173) (183) (52,534)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in units
resulting from policy transactions 1,139 1,770 (5,804) - (891) (2,399) (70) 167,304
- ---------------------------------------------------------------------------------------------------------------------------
Units outstanding at December 31, 1997 1,139 29,580 39,400 - 13,796 11,932 11,826 835,970
Policy transactions:
Purchase payments - 11,546 1,572 - - - - 340,375
Transfers between funds 795 (2,703) 45 401 - - - (11,943)
Surrenders and terminations - (2,018) (1,237) - (346) - - (22,550)
Rescissions - - - - - - - (1,784)
Policy loan transactions - (247) (332) - (263) - (45) (30,234)
Other transactions (35) (3,684) (1,215) (2) (171) (154) (184) (59,202)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in units
resulting from policy transactions 760 2,894 (1,167) 399 (780) (154) (229) 214,662
Units outstanding at December 31, 1998 1,899 32,474 38,233 399 13,016 11,778 11,597 1,050,632
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
5. UNIT VALUES
A summary of unit values and units outstanding for variable life contracts and
the expense ratios, including expenses of the underlying funds, for each of the
five years in the period ended December 31, 1998 follows.
Ratio of
Expenses to
Units Average
Outstanding Unit Value Net Assets Net Assets*
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Adjustable U.S. Government Fund
December 31,
19961 18,047 $12,873 $232,322 1.34%
1995 2,013 12.352 24,865 1.34
1994 654 11.374 7,427 1.32
1993 403 11.481 4,622 1.33
Capital Growth Fund
December 31,
1998 20,496 15.847 324,793 1.52
1997 7,386 13.273 98,032 1.52
19962 391 11.303 4,418 1.52
Global Health Care Securities Fund
December 31,
19983 776 10.656 8,265 1.59
Global Utilities Securities Fund
December 31,
1998 50,549 34.456 1,741,751 1.25
1997 51,056 31.223 1,594,097 1.25
1996 54,519 24.816 1,352,938 1.25
1995 66,198 23.353 1,545,922 1.25
1994 59,969 17.912 1,074,173 1.27
Growth and Income Fund
December 31,
1998 67,901 42.797 2,905,941 1.24
1997 58,217 39.803 2,317,193 1.24
1996 54,351 31.393 1,706,254 1.25
1995 38,021 27.700 1,053,166 1.27
1994 29,795 21.010 625,982 1.29
High Income Fund
December 31,
1998 67,218 24.606 1,653,951 1.28
1997 74,683 24.565 1,834,614 1.28
1996 84,503 22.188 1,874,953 1.29
1995 65,333 19.628 1,282,342 1.31
1994 63,380 16.512 1,046,519 1.35
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
5. UNIT VALUES (CONT.)
Ratio of
Expenses to
Units Average
Outstanding Unit Value Net Assets Net Assets*
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income Securities Fund
December 31,
1998 61,071 $25.496 $1,557,015 1.24%
1997 47,169 25.273 1,192,087 1.25
1996 39,985 21.747 869,551 1.25
1995 26,614 19.691 524,066 1.26
1994 10,514 16.208 170,404 1.29
Investment Grade Intermediate Bond Fund
December 31,
19961 4,699 15.617 73,376 1.35
1995 4,259 15.260 64,990 1.36
1994 6,002 13.978 83,891 1.38
1993 582 14.017 8,158 1.41
Money Market Fund
December 31,
1998 112,248 16.964 1,904,136 1.20
1997 43,767 16.244 710,942 1.20
1996 46,930 15.550 729,749 1.18
1995 45,768 14.898 681,852 1.15
1994 37,381 14.194 530,565 1.21
Mutual Discovery Securities Fund
December 31,
1998 36,029 11.383 410,124 1.75
1997 29,439 12.072 355,384 1.81
19964 4,953 10.190 50,468 2.12
Mutual Shares Securities Fund
December 31,
1998 86,534 12.002 1,038,636 1.52
1997 75,999 12.082 918,245 1.55
19964 8,280 10.339 85,606 1.75
Natural Resources Securities Fund
December 31,
1998 13,373 9.353 125,063 1.39
1997 8,354 12.629 105,493 1.44
1996 8,152 15.704 128,017 1.40
1995 10,831 15.214 164,784 1.41
1994 13,441 14.977 201,295 1.43
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
5. UNIT VALUES (CONT.)
Ratio of
Expenses to
Units Average
Outstanding Unit Value Net Assets Net Assets*
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real Estate Securities Fund
December 31,
1998 22,103 $27.267 $602,683 1.29%
1997 19,569 33.025 646,288 1.29
1996 12,678 27.568 349,516 1.32
1995 7,628 20.913 159,525 1.34
1994 4,368 17.928 78,309 1.37
Rising Dividends Fund
December 31,
1998 45,571 22.132 1,008,603 1.47
1997 31,403 20.855 654,915 1.49
1996 19,304 15.795 304,911 1.51
1995 10,700 12.816 137,129 1.53
1994 4,474 9.952 44,527 1.55
Small Cap Fund
December 31,
1998 54,335 14.903 809,760 1.52
1997 23,599 15.164 357,841 1.52
1996 4,338 13.011 56,436 1.52
19955 - 10.157 - 1.65
Templeton Developing Markets Equity Fund
December 31,
1998 70,793 7.959 563,460 2.16
1997 62,109 10.230 635,389 2.17
1996 59,260 11.292 669,146 2.24
1995 22,210 9.357 207,819 2.16
19946 6,099 9.173 55,951 2.28
Templeton Global Asset Allocation Fund
December 31,
1998 17,144 13.917 238,598 1.59
1997 22,230 14.027 311,809 1.69
1996 30,332 12.651 383,721 1.61
19957 21 10.637 220 1.65
Templeton Global Growth Fund
December 31,
1998 109,847 16.235 1,783,371 1.63
1997 85,767 15.010 1,287,362 1.63
1996 58,157 13.324 774,892 1.68
1995 31,471 11.069 348,359 1.72
19946 6,748 9.894 66,760 1.89
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
5. UNIT VALUES (CONT.)
Ratio of
Expenses to
Units Average
Outstanding Unit Value Net Assets Net Assets*
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Templeton Global Income Securities Fund
December 31,
1998 10,487 $18.052 $189,335 1.38%
1997 8,916 16.985 151,430 1.37
1996 7,756 16.700 129,516 1.36
1995 5,801 15.347 89,028 1.39
1994 3,175 13.483 42,818 1.46
Templeton International Equity Fund
December 31,
1998 94,761 19.278 1,826,865 1.63
1997 78,634 18.400 1,446,893 1.64
1996 60,849 16.598 1,010,009 1.64
1995 40,830 13.600 555,276 1.67
1994 11,403 12.390 141,293 1.74
Templeton International Smaller Companies Fund
December 31,
1998 1,899 9.528 18,103 1.85
1997 1,139 10.943 12,470 1.81
19962 - 11.194 - 1.53
Templeton Pacific Growth Fund
December 31,
1998 32,474 8.447 274,322 1.85
1997 29,580 9.798 289,825 1.78
1996 27,810 15.412 428,593 1.74
1995 21,322 13.977 298,014 1.76
1994 12,635 13.042 164,784 1.82
U.S. Government Securities Fund
December 31,
1998 38,233 23.755 908,236 1.25
1997 39,400 22.276 877,698 1.25
1996 45,204 20.532 928,142 1.26
1995 32,402 19.966 646,949 1.27
1994 31,714 16.840 534,051 1.28
Value Securities Fund
December 31,
19983 399 7.751 3,098 1.87
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
5. UNIT VALUES (CONT.)
Ratio of
Expenses to
Units Average
Outstanding Unit Value Net Assets Net Assets*
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Zero Coupon Fund - 2000
December 31,
1998 13,016 $27.086 $352,556 1.15%
1997 13,796 25.386 350,230 1.15
1996 14,687 23.880 350,723 1.15
1995 14,874 23.491 349,422 1.15
1994 14,594 19.614 286,240 1.15
Zero Coupon Fund - 2005
December 31,
1998 11,778 33.196 390,968 1.15
1997 11,932 29.722 354,637 1.15
1996 14,331 26.888 385,323 1.15
1995 12,382 27.229 337,160 1.15
1994 12,559 20.821 261,513 1.15
Zero Coupon Fund - 2010
December 31,
1998 11,597 39.336 456,187 1.15
1997 11,826 34.629 409,523 1.15
1996 11,896 29.931 356,054 1.15
1995 3,735 30.991 115,736 1.15
1994 3,804 21.866 83,178 1.15
<FN>
*For the year ended December 31, including the effect of the expenses of the underlying funds.
Annualized.
1Period from January 1, 1996 to October 25, 1996 (fund closure). 2Period from
May 1, 1996 (fund commencement) to December 31, 1996. 3Period from May 1, 1998
(fund commencement) to December 31, 1998. 4Period from November 8, 1996 (fund
commencement) to December 31, 1996. 5Period from November 1, 1995 (fund
commencement) to December 31, 1995. 6Period from July 1, 1994 (fund
commencement) to December 31, 1994. 7Period from May 1, 1995 (fund commencement)
to December 31, 1995.
</FN>
</TABLE>
ALLIANZ LIFE INSURANCE
COMPANY OF NORTH AMERICA
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1998 and 1997
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Independent Auditors' Report
The Board of Directors
Allianz Life Insurance Company of North America:
We have audited the accompanying consolidated balance sheets of Allianz Life
Insurance Company of North America and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, stockholder's equity
and cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Allianz
Life Insurance Company of North America and subsidiaries as of December 31, 1998
and 1997, and the results of their operations, changes in stockholder's equity
and cash flows for each of the years in the three-year period ended December 31,
1998, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 5, 1999
<PAGE>
<TABLE>
<CAPTION>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Financial Statements
Consolidated Balance Sheets
December 31, 1998 and 1997
(in thousands)
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments:
Fixed maturities, at fair value $ 2,538,291 2,705,210
Equity securities, at fair value 512,404 442,607
Mortgage loans on real estate 457,128 318,683
Certificates of deposit and short-term securities 166,366 117,124
Policy loans 7,118 5,695
Other invested assets 95,746 51,863
Investment in LifeUSA Holdings Inc. 80,928 0
- ---------------------------------------------------------------------------------------------------------------------------
Total investments 3,857,981 3,641,182
Cash 67,195 26,871
Accrued investment income 36,649 38,345
Receivables (net of allowance for uncollectible accounts of $3,254 in 1998 and $3,122 in 1997) 323,971 262,676
Reinsurance receivable:
Funds held on deposit 1,170,170 1,145,210
Recoverable on future policy benefit reserves 1,191,098 1,120,663
Recoverable on unpaid claims 293,179 219,443
Receivable on paid claims 24,986 31,158
Deferred acquisition costs 930,059 927,080
Other assets 35,755 34,475
Federal income tax recoverable 4,060 20,761
- ---------------------------------------------------------------------------------------------------------------------------
Assets, exclusive of separate account assets 7,935,103 7,467,864
Separate account assets 9,915,150 10,756,929
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $17,850,253 18,224,793
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Financial Statements (continued)
Consolidated Balance Sheets (cont.)
December 31, 1998 and 1997
(in thousands)
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities:
Future benefit reserves:
Life $ 1,445,844 1,297,269
Annuity 3,588,491 3,251,829
Policy and contract claims 770,846 607,011
Unearned premiums 53,778 50,168
Reinsurance payable 129,397 111,684
Deferred income on reinsurance 106,065 115,688
Deferred income taxes 257,903 228,861
Accrued expenses 91,631 93,341
Commissions due and accrued 41,000 39,517
Other policyholder funds 20,586 30,208
Other liabilities 89,038 424,696
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities, exclusive of separate account liabilities 6,594,579 6,250,272
Separate account liabilities 9,915,150 10,756,929
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 16,509,729 17,007,201
Stockholder's equity:
Common stock, $1 par value, 20 million shares authorized, issued and outstanding 20,000 20,000
Preferred stock, $1 par value, cumulative, 200 million shares authorized,
No shares outstanding in 1998, 25 million shares outstanding in 1997 0 25,000
Additional paid-in capital 407,088 407,088
Retained earnings 673,857 574,447
Accumulated other comprehensive income 239,579 191,057
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholder's equity 1,340,524 1,217,592
Commitments and contingencies (notes 6, 12 and 13)
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $17,850,253 18,224,793
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Financial Statements (continued)
Consolidated Statements of Income
Years ended December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Life insurance premiums $ 416,199 339,841 284,084
Other life policy considerations 52,668 83,816 85,747
Annuity considerations 222,632 219,262 170,656
Accident and health premiums 773,570 747,718 603,230
- ---------------------------------------------------------------------------------------------------------------------------
Total premiums and considerations 1,465,069 1,390,637 1,143,717
Premiums and annuity considerations ceded 411,316 438,018 277,163
- ---------------------------------------------------------------------------------------------------------------------------
Net premiums and considerations 1,053,753 952,619 866,554
Investment income, net 217,066 162,350 222,622
Realized investment gains 89,226 61,488 28,561
Equity in earnings of LifeUSA Holdings Inc. 2,207 0 0
Other 75,967 53,760 6,193
- ---------------------------------------------------------------------------------------------------------------------------
Total revenue 1,438,219 1,230,217 1,123,930
Benefits and expenses:
Life insurance benefits 461,891 336,090 281,441
Annuity benefits 251,463 206,189 153,238
Accident and health insurance benefits 623,640 566,746 434,793
- ---------------------------------------------------------------------------------------------------------------------------
Total benefits 1,336,994 1,109,025 869,472
Benefit recoveries 501,719 426,607 249,552
- ---------------------------------------------------------------------------------------------------------------------------
Net benefits 835,275 682,418 619,920
Commissions and other agent compensation 322,697 310,665 267,714
General and administrative expenses 116,007 106,744 99,018
Taxes, licenses and fees 15,848 20,605 19,959
Increase in deferred acquisition costs, net (2,979) (63,742) (36,344)
- ---------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 1,286,848 1,056,690 970,267
Income from operations before income taxes 151,371 173,527 153,663
Income tax expense:
Current 48,410 31,571 21,936
Deferred 2,822 28,283 30,559
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax expense 51,232 59,854 52,495
Net income $ 100,139 113,673 101,168
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Financial Statements (continued)
Consolidated Statements of Comprehensive Income
Years ended December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $100,139 113,673 101,168
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax benefit of $949, $525, and $10 in
1998, 1997, and 1996 respectively (1,761) (975) (18)
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on fixed maturities and equity securities:
Unrealized holding gains (losses) arising during the period net of tax expense (benefit)
of $57,703, $71,594 and $(10,289) in 1998, 1997, and 1996 respectively 107,162 132,961 (19,107)
Reclassification adjustment for gains included in net income, net of tax expense of
$30,627, $21,588, and $9,401 in 1998, 1997, and 1996 respectively (56,879) (40,093) (17,460)
- ---------------------------------------------------------------------------------------------------------------------------
Total unrealized holding gains (losses) 50,283 92,868 (36,567)
Total other comprehensive income (loss) 48,522 91,893 (36,585)
Total comprehensive income $148,661 205,566 64,583
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Financial Statements (continued)
Consolidated Statements of Stockholder's Equity
Years ended December 31, 1998,
1997 and 1996
(in thousands)
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock:
Balance at beginning and end of year $ 20,000 20,000 20,000
- ---------------------------------------------------------------------------------------------------------------------------
Preferred stock:
Balance at beginning of year 25,000 25,000 25,000
Redemption of stock during the year (25,000) 0 0
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of year 0 25,000 25,000
Additional paid-in capital:
Balance at beginning and end of year 407,088 407,088 407,088
- ---------------------------------------------------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of year 574,447 462,925 363,357
Net income 100,139 113,673 101,168
Cash dividend to stockholder (729) (2,151) (1,600)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of year 673,857 574,447 462,925
Accumulated other comprehensive income:
Accumulated unrealized holding gain:
Balance at beginning of year 195,505 102,637 139,204
Net unrealized gain (loss) on investments during the year, net of deferred federal income taxes 50,283
92,868 (36,567)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of year 245,788 195,505 102,637
Accumulated unrealized foreign currency (loss):
Balance at beginning of year (4,448) (3,473) (3,455)
Net unrealized (loss) on foreign currency translation during the year,
net of deferred federal income taxes (1,761) (975) (18)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of year (6,209) (4,448) (3,473)
Total accumulated comprehensive income 239,579 191,057 99,164
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholder's equity $1,340,524 1,217,592 1,014,177
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Financial Statements (continued)
Consolidated Statements of Cash Flows
December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income $100,139 113,673 101,168
- ---------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Realized investment gains (89,226) (61,488) (28,561)
Deferred federal income tax expense 2,822 28,283 30,559
Charges to policy account balances (104,681) (148,159) (87,865)
Interest credited to policy account balances 262,956 251,182 202,243
Change in:
Accrued investment income 1,696 (2,215) 728
Receivables (61,295) (107,398) (30,578)
Reinsurance receivables (162,959) (1,205,410) (76,003)
Deferred acquisition costs (2,979) (63,742) (36,344)
Future benefit reserves 25,183 138,370 71,193
Policy and contract claims and other policyholder funds 154,213 92,230 37,055
Unearned premiums 3,610 17,992 (2,005)
Reinsurance payable 17,713 68,725 24,019
Current tax recoverable 16,701 (8,306) (8,508)
Accrued expenses and other liabilities 14,797 12,113 15,506
Commissions due and accrued 1,483 2,414 14,124
Depreciation and amortization (12,711) (13,312) (25,874)
Equity in earnings of LifeUSA Holdings Inc. (2,207) 0 0
Other, net 94 18 (1,568)
- ---------------------------------------------------------------------------------------------------------------------------
Total adjustments 65,210 (998,703) 98,121
Net cash provided by (used in) operating activities 165,349 (885,030) 199,289
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Financial Statements (continued)
Consolidated Statements of Cash Flows (cont.)
Years ended December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities 165,349 (885,030) 199,289
Cash flows provided by (used in) investing activities:
Purchase of fixed maturities $(1,256,653) (1,748,950)(1,324,676)
Purchase of equity securities (1,518,096) (1,699,847) (137,304)
Purchase of stock in LifeUSA Holdings, Inc. (79,091) 0 0
Funding of mortgage loans (168,870) (103,626) (70,265)
Sale of fixed maturities 1,460,969 1,921,534 1,043,748
Matured fixed maturities 28,152 1,150 2,711
Sale of equity securities 1,560,695 1,691,789 122,788
Repayment of mortgage loans 29,105 29,520 23,317
Net change in certificates of deposit and short-term securities (49,242) 87,848 (173,471)
Other (46,256) 82,797 (20,566)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (39,287) 262,215 (533,718)
Cash flows provided by (used in) financing activities:
Policyholders' deposits to account balances $ 864,446 748,430 591,926
Policyholders' withdrawals from account balances (562,667) (524,579) (384,550)
Change in assets held under reinsurance agreements 7,876 150,526 0
Funds borrowed (repaid) on dollar reverse repurchase agreements, net (369,664) 239,468 130,196
Redemption of preferred stock (25,000) 0 0
Cash dividends paid (729) (2,151) (1,600)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (85,738) 611,694 335,972
Net change in cash 40,324 (11,121) 1,543
Cash at beginning of year 26,871 37,992 36,449
- ---------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 67,195 26,871 37,992
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(1) Summary of Significant Accounting Policies
Allianz Life Insurance Company of North America (the Company) is a wholly owned
subsidiary of Allianz of America, Inc. (AZOA), a majority-owned subsidiary of
Allianz A.G. Holding, a Federal Republic of Germany company.
The Company is a life insurance company which is licensed to sell group and
individual life, annuity and accident and health policies in the United States,
Canada and several U.S. territories. Based on 1998 net revenues and
considerations, 36%, 16% and 48% of the Company's business is life, annuity and
accident and health, respectively. The Company's primary distribution channels
are through strategic alliances with other insurance companies and third party
marketing organizations. The Company has a significant relationship with The
Franklin Templeton Group and its broker/dealer network related to sales of its
variable life and variable annuity products and another significant
administration, marketing and reinsurance relationship with LifeUSA Holding Inc.
(LifeUSA), a publicly traded insurance company in which it holds a 21.4%
ownership interest at December 31, 1998.
Following is a summary of the significant accounting policies reflected in the
accompanying consolidated financial statements.
Basis of Presentation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP) which vary in certain respects
from accounting rules prescribed or permitted by state insurance regulatory
authorities. The accounts of the Company's major subsidiary, Preferred Life
Insurance Company of New York and other less significant subsidiaries have been
consolidated. All significant intercompany balances and transactions have been
eliminated in consolidation.
The preparation of financial statements in conformity with GAAP requires
management to make certain estimates and assumptions that affect reported assets
and liabilities including reporting or disclosure of contingent assets and
liabilities as of the balance sheet date and the reported amounts of revenues
and expenses during the reporting period.
Actual results could vary significantly from management's estimates.
Traditional Life, Group Life and Group Accident and Health Insurance
Traditional life products include products with guaranteed premiums and benefits
and consist principally of whole life and term insurance policies, limited
payment contracts and certain annuity products with life contingencies.
Premiums on traditional life and group life products are recognized as income
when due. Group accident and health premiums are recognized as earned on a pro
rata basis over the risk coverage periods. Benefits and expenses for traditional
and group products are matched with earned premiums so that profits are
recognized over the premium paying periods of the contracts. This matching is
accomplished by establishing provisions for future policy benefits and policy
and contract claims, and deferring and amortizing related policy acquisition
costs.
Nontraditional and Variable Life and Annuity Business
Nontraditional and variable life insurance and interest sensitive contracts that
have significant mortality or morbidity risk are accounted for in accordance
with the retrospective deposit method. Interest sensitive contracts that do not
have significant mortality or morbidity risk are accounted for in a manner
consistent with interest bearing financial instruments. For both types of
contracts, premium receipts are reported as deposits to the contractholder's
account while revenues consist of amounts assessed against contractholders
including surrender charges and earned administrative service fees. Mortality or
morbidity charges are also accounted for as revenue on those contracts
containing mortality or morbidity risk. Benefits consist of interest credited to
contractholder's accounts and claims or benefits incurred in excess of the
contractholder's balance.
Deferred Acquisition Costs
Acquisition costs, consisting of commissions and other costs which vary with and
are primarily related to production of new business, are deferred. For
traditional life and group life products, such costs are amortized over the
revenue-producing period of the related policies using the same actuarial
assumptions used in computing future policy benefit reserves. Acquisition costs
for accident and health insurance
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(1) Summary of Significant Accounting Policies (cont.)
Deferred Acquisition Costs (cont.)
policies are deferred and amortized over the lives of the policies in the same
manner as premiums are earned. For interest sensitive products, acquisition
costs are amortized in relation to the present value of expected future gross
profits from investment margins and mortality, morbidity and expense charges.
Deferred acquisition costs amortized during 1998, 1997 and 1996 were $202,644,
$219,266, and $137,618, respectively.
Future Policy Benefit Reserves
Future policy benefit reserves on traditional life products are computed by the
net level premium method based upon estimated future investment yield, mortality
and withdrawal assumptions, commensurate with the Company's experience, modified
as necessary to reflect anticipated trends, including possible unfavorable
deviations. Most life reserve interest assumptions range from 7.5% to 5.5%.
Future policy benefit reserves for interest sensitive products are generally
carried at accumulated contract values. Reserves on some deferred annuity
contracts are computed based on contractholder cash value accumulations,
adjusted for mortality, withdrawal and interest margin assumptions.
Fair values of investment contracts, which include deferred annuities and other
annuities without significant mortality risk, were determined by testing amounts
payable on demand against discounted cash flows using interest rates
commensurate with the risks involved. Fair values are based on the amount
payable on demand at December 31.
Policy and Contract Claims
Policy and contract claims represent an estimate of claims and claim adjustment
expenses that have been reported but not yet paid and incurred but not yet
reported as of December 31.
Reinsurance
Insurance liabilities are reported before the effects of reinsurance. Amounts
paid or deemed to have been paid for claims covered by reinsurance contracts are
recorded as reinsurance receivable. Reinsurance receivables are recognized in a
manner consistent with the liabilities related to the underlying reinsured
contracts.
Investments
The Company has classified all of its fixed maturity and equity portfolio as
"available-for-sale" and, accordingly, the securities are carried at fair value.
Short-term investments are carried at amortized cost, which approximates market
value. Policy loans are reflected at their unpaid principal balances. Mortgage
loans are reflected at unpaid principal balances adjusted for premium and
discount amortization and an allowance for uncollectible balances. The Company
analyzes loan impairment at least once a year when assessing the adequacy of the
allowance for possible credit losses. The Company does not accrue interest on
impaired loans and accounts for interest income on such loans on a cash basis.
The Company accounts for its investment in LifeUSA under the equity method of
accounting and carries its investment at cost, adjusted for its share of
LifeUSA's earnings, amortization of goodwill and dividends received. The
difference between the cost of the investment and underlying equity is amortized
into net income over ten years.
Realized gains and losses are computed based on the specific identification
method.
As of December 31, 1998 and 1997, investments with a carrying value of $116,197
and $103,590, respectively, were held on deposit with various insurance
departments and in other trusts as required by statutory regulations.
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(1) Summary of Significant Accounting Policies (cont.)
Investments (cont.)
The fair values of invested assets, excluding investments in real estate, are
deemed by management to approximate their estimated market values. The fair
value of mortgage loans has been calculated using discounted cash flows and is
based on pertinent information available to management as of year-end. Policy
loan balances which are supported by the underlying cash value of the policies
approximate fair value. Changes in market conditions subsequent to year-end may
cause estimates of fair values to differ from the amounts presented herein.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Separate Accounts
Separate accounts represent funds for which investment income and investment
gains and losses accrue directly to the policyholders and contractholders. Each
account has specific investment objectives and the assets are carried at fair
value. The assets of each account are legally segregated and are not subject to
claims which arise out of any other business of the Company.
Fair values of separate account assets were determined using the market value of
the underlying investments held in segregated fund accounts. Fair values of
separate account liabilities were determined using the cash surrender values of
the policyholder's and contractholder's account.
Receivables
Receivable balances approximate estimated fair values. This is based on
pertinent information available to management as of year-end including the
financial condition and credit worthiness of the parties underlying the
receivables. Changes in market conditions subsequent to year-end may cause
estimates of fair values to differ from the amounts presented herein.
Accounting Changes
In 1998, the Company adopted Statement of Financial Accounting Standard (SFAS)
No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, and SFAS No. 132, Employers Disclosures about
Pensions and Other Postretirement Benefits. No adjustments were made to the
consolidated financial statements upon adoption of these pronouncements.
In 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. A
Consolidated Statement of ComprehensiveIncome is now included in these
financial statements.
Accounting Pronouncements to be Adopted
In December 1997, the AICPA issued Statement of Position (SOP) 97-3, Accounting
by Insurance and Other Enterprises for Insurance-Related Assessments. The SOP
provides guidance for determining when to recognize a liability for guaranty
fund assessments, how to measure the liability and for determining when an asset
may be recognized for premium tax offset recoveries. The SOP is effective for
years beginning after December 15, 1998. The Company will adopt SOP 97-3 on
January 1, 1999. Adoption of this SOP is not expected to have a significant
impact on the consolidated financial statements.
In February 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. The SOP provides
guidance for determining whether computer software is in fact internal-use
software and offers guidelines on accounting for the proceeds of computer
software originally developed or obtained for internal use and subsequently
marketed and sold to the public. The
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(1) Summary of Significant Accounting Policies (cont.)
Accounting Pronouncements to be Adopted (cont.)
SOP applies to all non-government entities and is effective for years beginning
after December 15, 1998. The Company will adopt SOP 98-1 on January 1, 1999.
Adoption of this SOP is not expected to have a significant impact on the
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. The statement
establishes accounting and reporting standards for derivative financial
instruments and other similar financial instruments and for hedging activities.
The statement is effective for fiscal years beginning after June 15, 1999. The
Company will adopt SFAS No. 133 on January 1, 2000. Adoption of this statement
is not expected to have a significant impact on the consolidated financial
statements.
Reclassifications
Certain prior year balances have been reclassified to conform to the current
year presentation.
<TABLE>
(2) Investments
Investments at December 31, 1998 consist of:
Amount
shown on
Amortized Estimated consolidated
cost fair balance
or cost value sheet
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
U.S. government $ 274,813 311,296 311,296
States and political subdivisions 94,640 101,121 101,121
Foreign government 34,652 36,731 36,731
Public utilities 66,236 71,982 71,982
Corporate securities 1,441,359 1,498,702 1,498,702
Mortgage backed securities 401,505 428,304 428,304
Collateralized mortgage obligations 80,599 90,155 90,155
- ---------------------------------------------------------------------------------------------------------------------------
Total fixed maturities $2,393,804 2,538,291 2,538,291
Equity securities:
Common stocks:
Banks, trusts and insurance companies 18,824 31,194 31,194
Industrial and miscellaneous 252,122 469,566 469,566
Nonredeemable preferred stocks 7,807 11,644 11,644
- ---------------------------------------------------------------------------------------------------------------------------
Total equity securities $ 278,753 512,404 512,404
Other investments:
Mortgage loans on real estate 457,128 XXXXXXXXX 457,128
Certificates of deposit and short-term securities 166,366 XXXXXXXXX 166,366
Policy loans 7,118 XXXXXXXXX 7,118
Other invested assets 95,746 XXXXXXXXX 95,746
Investment in LifeUSA Holdings Inc. 80,928 XXXXXXXXX 80,928
- ---------------------------------------------------------------------------------------------------------------------------
Total other investments $ 807,286 XXXXXXXXX 807,286
Total investments $3,479,843 XXXXXXXXX 3,857,981
</TABLE>
<PAGE>
<TABLE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(2) Investments (cont.)
At December 31, 1998 and 1997, the amortized cost, gross unrealized gains, gross
unrealized losses and estimated fair values of securities are as follows:
Amortized Gross Gross Estimated
cost unrealized unrealized fair
or cost gains losses value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
U.S. government $ 274,813 36,717 234 311,296
States and political subdivisions 94,640 6,481 0 101,121
Foreign government 34,652 2,079 0 36,731
Public utilities 66,236 5,948 202 71,982
Corporate securities 1,441,359 67,234 9,891 1,498,702
Mortgage backed securities 401,505 26,799 0 428,304
Collateralized mortgage obligations 80,599 10,141 585 90,155
- ---------------------------------------------------------------------------------------------------------------------------
Total fixed maturities 2,393,804 155,399 10,912 2,538,291
Equity securities 278,753 245,913 12,262 512,404
- ---------------------------------------------------------------------------------------------------------------------------
Total $2,672,557 401,312 23,174 3,050,695
1997:
U.S. government 499,652 29,191 186 528,657
States and political subdivisions 82,287 3,561 19 85,829
Foreign government 35,858 1,876 0 37,734
Public utilities 44,151 4,086 0 48,237
Corporate securities 1,206,392 60,016 15,876 1,250,532
Mortgage backed securities 628,307 35,584 0 663,891
Collateralized mortgage obligations 86,246 4,086 2 90,330
- ---------------------------------------------------------------------------------------------------------------------------
Total fixed maturities 2,582,893 138,400 16,083 2,705,210
Equity securities 264,144 205,632 27,169 442,607
- ---------------------------------------------------------------------------------------------------------------------------
Total $2,847,037 344,032 43,252 3,147,817
- ---------------------------------------------------------------------------------------------------------------------------
The changes in unrealized gains on fixed maturity securities were $22,170,
$58,422, and $(97,973) in each of the years ended December 31, 1998, 1997 and
1996, respectively.
The changes in unrealized gains in equity investments, which include common
stocks and nonredeemable preferred stocks were $55,188, $84,718, and $40,895 for
the years ended December 31, 1998, 1997 and 1996, respectively.
The amortized cost and estimated fair value of fixed maturities at December 31,
1998, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
</TABLE>
<TABLE>
Amortized Estimated
cost fair value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 19,578 19,831
Due after one year through five years 542,463 558,635
Due after five years through ten years 700,012 741,834
Due after ten years 649,647 699,532
Mortgage backed securities and collateralized mortgage obligations 482,104 518,459
- ---------------------------------------------------------------------------------------------------------------------------
Totals $2,393,804 2,538,291
</TABLE>
<PAGE>
<TABLE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(2) Investments (cont.)
Gross gains of $105,723, $70,335, and $43,696 and gross losses of $18,217,
$8,654, and $16,834 were realized on sales of securities in 1998, 1997 and 1996,
respectively.
Net realized investment gains (losses) for the respective years ended December
31 are summarized as follows:
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities, at market $30,299 40,268 8,897
Equity securities 57,207 21,413 17,964
Mortgage loans (1,320) (982) (1,129)
Real estate 3,133 635 3,104
Other (93) 154 (275)
- ---------------------------------------------------------------------------------------------------------------------------
Net gains before taxes 89,226 61,488 28,561
Tax expense on net realized gains 31,229 21,521 9,996
- ---------------------------------------------------------------------------------------------------------------------------
Net gains after taxes $57,997 39,967 18,565
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
During the first two months of 1998 and all of 1997, the Company entered into
mortgage backed security reverse repurchase transactions ("dollar rolls") with
certain securities dealers. Under this program, the Company sold certain
securities for delivery in the current month and simultaneously contracted with
the same dealer to repurchase similar, but not identical, securities on a
specified future date. The Company gave up the right to receive principal and
interest on the securities sold. As of December 31, 1998 there were no
outstanding amounts under the Company's dollar roll program. As of December 31,
1997, mortgage backed securities underlying such agreements were carried at a
market value of $350,985 and other liabilities were $369,664 for funds received
under these agreements. Average balances outstanding for the first two months of
1998 and all of 1997, respectively were $120,525 and $183,530 and weighted
average interest rates were 6.5% and 7.2%. The maximum balance outstanding
during 1998 and 1997 was $120,525 and $369,664, respectively.
The valuation allowances on mortgage loans at December 31, 1998, 1997 and 1996
and the changes in the allowance for the years then ended are summarized as
follows:
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Beginning of Year $8,279 7,279 10,487
Charged to operations 1,320 1,000 0
Recoveries 0 0 (3,208)
- ---------------------------------------------------------------------------------------------------------------------------
End of Year $9,599 8,279 7,279
- ---------------------------------------------------------------------------------------------------------------------------
Major categories of net investment income for the respective years ended
December 31 are:
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Interest:
Fixed maturities $155,397 211,335 178,664
Mortgage loans 34,449 25,232 19,267
Policy loans 497 6,526 7,013
Short-term investments 15,022 12,804 10,688
Dividends:
Preferred stock 668 748 818
Common stock 5,190 4,603 4,527
Interest on assets held by reinsurers 8,272 8,858 9,709
Other invested assets 8,637 9,438 5,344
- ---------------------------------------------------------------------------------------------------------------------------
Total investment income 228,132 279,544 236,030
Investment expenses related to coinsurance agreement (note 6) 2,689 98,417 0
Investment expenses 8,377 18,777 13,408
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income $217,066 162,350 222,622
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(3) Summary Table of Fair Value Disclosures
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets Fixed maturities, at market:
U.S. Government $ 311,296 311,296 528,657 528,657
States and political subdivisions 101,121 101,121 85,829 85,829
Foreign governments 36,731 36,731 37,734 37,734
Public utilities 71,982 71,982 48,237 48,237
Corporate securities 1,546,342 1,546,342 1,250,532 1,250,532
Mortgage backed securities 380,664 380,664 663,891 663,891
Collateralized mortgage obligations 90,155 90,155 90,330 90,330
Equity securities 512,404 512,404 442,607 442,607
Mortgage loans 457,128 495,202 318,683 333,540
Short term investments 166,366 166,366 117,124 117,124
Policy loans 7,118 7,118 5,695 5,695
Other long term investments 95,746 95,746 51,863 51,863
Investment in LifeUSA Holdings Inc. 80,928 68,290 0 0
Receivables 323,971 323,971 262,676 262,676
Separate accounts assets 9,915,150 9,915,150 10,756,92910,756,929
Financial liabilities
Investment contracts 3,645,657 3,035,787 3,536,690 2,945,366
Separate account liabilities 9,915,150 9,765,791 10,756,92910,565,205
Dollar reverse repurchase agreements 0 0 369,664 369,664
See Note 1 "Summary of Significant Accounting Policies" for description of the
methods and significant assumptions used to estimate fair values.
(4) Receivables
Receivables at December 31 consist of the following:
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Premiums due $270,657 207,293
Agents balances 10,088 3,186
Related party receivables 3,852 1,445
Reinsurance commission receivable 8,022 23,921
Scholarship enrollment fees 12,010 8,401
Due from administrators 13,271 13,630
Other 6,071 4,800
- ---------------------------------------------------------------------------------------------------------------------------
Total receivables $323,971 262,676
</TABLE>
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(5) Accident and Health Claims Reserves
Accident and health claims reserves are based on estimates which are subject to
uncertainty. Uncertainty regarding reserves of a given accident year is
gradually reduced as new information emerges each succeeding year, thereby
allowing more reliable re-evaluations of such reserves. While management
believes that reserves as of December 31, 1998 are adequate, uncertainties in
the reserving process could cause such reserves to develop favorably or
unfavorably in the near term as new or additional information emerges. Any
adjustments to reserves are reflected in the operating results of the periods in
which they are made. Movements in reserves which are small relative to the
amount of such reserves could significantly impact future reported earnings of
the Company.
Activity in the accident and health claims reserves, exclusive of long term
care, hospital indemnity and AIDS reserves of $9,918, $12,479, and $14,348 in
1998, 1997 and 1996, respectively, is summarized as follows:
<TABLE>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, net of reinsurance recoverables of $141,033,
$124,320, and $99,292 $312,886 273,813 240,602
Incurred related to:
Current year 417,042 346,901 279,717
Prior years (12,217) (12,087) (11,642)
- ---------------------------------------------------------------------------------------------------------------------------
Total incurred 404,825 334,814 268,075
Paid related to:
Current year 204,100 150,942 107,842
Prior years 147,186 144,798 127,022
- ---------------------------------------------------------------------------------------------------------------------------
Total paid 351,286 295,740 234,864
Balance at December 31, net of reinsurance recoverables of $128,764,
$141,033, and $124,320 $366,425 312,887 273,813
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Due to lower than anticipated losses related to prior years, the provision for
claims and claim adjustment expenses decreased.
(6) Reinsurance
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
risks under excess coverage and coinsurance contracts. The Company retains a
maximum of $1 million coverage per individual life. Reinsurance contracts do not
relieve the Company from its obligations to policyholders. Failure of reinsurers
to honor their obligations could result in losses to the Company. The Company
evaluates the financial condition of its reinsurers and monitors concentrations
of credit risk to minimize its exposure to significant losses from reinsurer
insolvencies.
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(6) Reinsurance (cont.)
<TABLE>
Life insurance, annuities and accident and health business assumed from and
ceded to other companies is as follows:
Percentage
Assumed Ceded of amount
Direct from other to other Net assumed
Year ended amount companies companies amount to net
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1998:
Life insurance in force $34,118,554 98,832,792 19,483,581 113,467,765 87.1%
- ---------------------------------------------------------------------------------------------------------------------------
Premiums:
Life 244,416 224,451 93,812 375,055 59.8%
Annuities 220,812 1,820 50,385 172,247 1.1%
Accident and health 479,237 294,333 267,119 506,451 58.1%
- ---------------------------------------------------------------------------------------------------------------------------
Total premiums 944,465 520,604 411,316 1,053,753 49.4%
December 31, 1997:
Life insurance in force $32,234,241 72,682,842 19,873,094 85,043,989 85.5%
- ---------------------------------------------------------------------------------------------------------------------------
Premiums:
Life 252,859 170,798 110,579 313,078 54.6%
Annuities 217,353 1,910 30,789 188,474 1.0%
Accident and health 436,105 311,612 296,650 451,067 69.1%
- ---------------------------------------------------------------------------------------------------------------------------
Total premiums 906,317 484,320 438,018 952,619 50.8%
December 31, 1996:
Life insurance in force $37,527,994 44,073,247 6,126,541 75,474,700 58.4%
- ---------------------------------------------------------------------------------------------------------------------------
Premiums:
Life 235,837 133,994 37,986 331,845 40.4%
Annuities 169,503 1,153 12,769 157,887 0.7%
Accident and health 396,051 207,179 226,408 376,822 55.0%
- ---------------------------------------------------------------------------------------------------------------------------
Total premiums 801,391 342,326 277,163 866,554 39.5%
- ---------------------------------------------------------------------------------------------------------------------------
Included in reinsurance receivables at December 31, 1998 are $1,170,697,
$863,477 and $307,228 recoverable from three insurers who, as of December 31,
1998, were rated A+, A- and A+, respectively, by A.M. Best's Insurance Reports.
A contingent liability exists to the extent that the Company's reinsurers are
unable to meet their contractual obligations. Management is of the opinion that
no liability will accrue to the Company with respect to this contingency.
Effective January 1, 1997, the Company entered into a 100% coinsurance agreement
with an unrelated insurance company to coinsure a block of business with life
insurance inforce of $13,200,000 and 1997 premium of $90,000. The coinsured
block included certain universal life and traditional life insurance policies
and annuity contracts. In connection with this agreement, the Company recognized
a recoverable on future benefit reserves of $1,102,000, received a ceding
commission of $138,500 and transferred assets of $881,000 which support the
business. The unearned ceding commission represents deferred revenue which will
be amortized over the revenue-producing period of the related reinsured
policies. The servicing of the coinsured business was also transferred to a
third party insurer who is also the retrocessionaire of the block. During 1998
and 1997, $15,965 and $22,647, respectively, was amortized and included in other
revenue in the consolidated statements of income. Effective January 1, 1998, the
coinsurance agreement was amended to include another block of business with
future benefit reserves of $66,000, capitalized deferred acquisition costs of
$1,935 and deferred income of $750.
</TABLE>
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(6) Reinsurance (cont.)
Of the amounts ceded to others, the Company ceded life insurance inforce of
$2,067,664, $1,163,533, and $381,381 in 1998, 1997 and 1996, respectively, and
life insurance premiums earned of $4,165, $2,538, and $1,293 in 1998, 1997 and
1996, respectively, to its ultimate parent Allianz Aktiengesellshaft. The
Company also ceded accident and health premiums earned to Allianz
Aktiengesellshaft of $2,817, $2,467, and $1,922 in 1998, 1997 and 1996.
<TABLE>
(7) Income Taxes
Income Tax Expense
Total income tax expense (benefit) for the years ended December 31 are as
follows:
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense attributable to operations:
Current tax expenses $48,410 31,571 21,936
Deferred tax expense 2,822 28,283 30,559
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax expense attributable to operations $51,232 59,854 52,495
Income tax effect on equity:
Income tax allocated to stockholder's equity:
Attributable to unrealized gains and losses for the year 26,127 49,748 (19,967)
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax effect on equity $77,359 109,602 32,528
- ---------------------------------------------------------------------------------------------------------------------------
Components of Income Tax Expense
Income tax expense computed at the statutory rate of 35% varies from tax expense
reported in the Consolidated Statements of Income for the respective years ended
December 31 as follows:
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Income tax expense computed at the statutory rate $52,980 60,735 53,782
Dividends received deductions and tax-exempt interest (3,294) (2,792) (650)
Foreign tax (133) 916 (2,723)
Interest on tax deficiency 900 1,100 261
Other 779 (105) 1,824
- ---------------------------------------------------------------------------------------------------------------------------
Income tax expense as reported $51,232 59,854 52,494
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
<TABLE>
(7) Income Taxes (cont.)
Components of Deferred Tax Assets and Liabilities on the Balance Sheet
Tax effects of temporary differences giving rise to the significant components
of the net deferred tax liability at December 31 are as follows:
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Provision for post retirement benefits $ 2,223 2,100
Allowance for uncollectible accounts 929 929
Policy reserves 173,414 177,442
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 176,566 180,471
Deferred tax liabilities:
Deferred acquisition costs 272,815 277,627
Net unrealized gain 128,883 102,756
Other 32,771 28,949
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 434,469 409,332
Net deferred tax liability $257,903 228,861
- ---------------------------------------------------------------------------------------------------------------------------
Although realization is not assured, the Company believes it is not necessary to
establish a valuation allowance for the deferred tax asset as it is more likely
than not the deferred tax asset will be realized principally through future
reversals of existing taxable temporary differences and future taxable income.
The amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future reversals of existing taxable
temporary differences and future taxable income are reduced.
The Company files a consolidated federal income tax return with AZOA and all of
its wholly owned subsidiaries. The consolidated tax allocation agreement
stipulates that each company participating in the return will bear its share of
the tax liability pursuant to United States Treasury Department regulations. The
Company and each of its insurance subsidiaries generally will be paid for the
tax benefit on their losses, and any other tax attributes, to the extent they
could have obtained a benefit against their post-1990 separate return taxable
income or tax. Income taxes paid by the Company were $30,808, $39,914, and
$30,946 in 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997 the
Company had a tax recoverable from AZOA of $3,030 and $20,689, respectively.
(8) Related Party Transactions
The Company reimbursed AZOA $2,495, $2,519, and $1,743 in 1998, 1997 and 1996,
respectively, for certain administrative and investment management services
performed. The Company's liability to AZOA for such services was $490 and $437
at December 31, 1998 and 1997, respectively.
The Company shares a data center with affiliated insurance companies. Usage
charges paid to the data center by the Company were $1,019, $2,826, and $3,275
in 1998, 1997 and 1996, respectively. The Company's liability for data center
charges was $377
and $292 at December 31, 1998 and 1997, respectively.
The Company has 200 million authorized shares of preferred stock with a par
value of $1 per share. This preferred stock is issuable in series with the
number of shares, redemption rights and dividend rate designated by the Board of
Directors for each series. Dividends are cumulative at a rate reflective of
prevailing market conditions at time of issue and are payable semiannually.
Dividend payments are restricted by provisions in State of Minnesota statutes.
The Company had 25 million shares of Series A preferred stock outstanding held
by AZOA with a dividend rate of 6.4% and a book value of $25,000. In March 1998,
the Company redeemed and canceled the 25 million shares of Series A preferred
stock issued to AZOA.
</TABLE>
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(8) Related Party Transactions (cont.)
As of December 31, 1996, the Company sold to AZOA, without recourse, two
receivables due from third parties amounting to $6,600. These receivables,
valued at $5,827, were repurchased by the Company in 1997.
(9) Investment in LifeUSA
In 1995, in conjunction with an expanded marketing agreement, the Company
provided LifeUSA with $30,000 in exchange for a fifteen year convertible
debenture paying 5% interest for the first five years with the interest rate
reset annually thereafter based on LIBOR plus 1%. In connection with a
definitive agreement signed in January 1998, the Company converted its debenture
to equity, extended the existing marketing agreement between the two companies
to December 31, 2000, and agreed to acquire up to a 35% equity ownership in Life
USA. Two members of the Company's management were named to LifeUSA's board of
directors in January 1998. The Company also retains additional rights of
nomination to LifeUSA's board of directors in the future based on the Company's
proportional ownership.
Acquisition of the Company's equity ownership during 1998 was accomplished
through the following:
o Conversion of the $30,000 debenture for 2.43 million shares of common stock
(conversion price of $12.34 per share);
o Exercise of the Company's preemptive right to purchase 241,846 shares of
common stock at $12.36 per share;
o Purchase of 925,000 shares of common stock from certain members of LifeUSA
management at $16.44 per share;
o Acquisition of an additional 1.3 million shares of common stock in open
market purchases.
o Acquisition of 406,092 shares of common stock at $24.63 per share as part of
a commitment to purchase $100,000 in newly issued common stock in increments of
$10,000 semi-annually over a five year period beginning in August 1998.
As of December 31, 1998, the company held 21.41% of the outstanding common stock
of LifeUSA with an approximate market value of $68,290. The carrying value of
the LifeUSA investment at year-end 1998 is $80,928, which is $20,983 higher than
the current equity in net assets of $59,945.
In February 1999, the Company purchased 395,062 shares of LifeUSA common stock
at $25.31 per share. In addition, the stock purchase agreement was amended to
allow the Company to purchase an additional 300,000 shares on the open market
for one year beyond the original agreement date.
Effective April 1, 1998, the Company began assuming business from LifeUSA. Under
this arrangement, the Company assumes 12.5% of annuity business and 16.7% of
universal life business sold by LifeUSA. As of December 31, 1998, the Company
assumed $40,000 of life and annuity reserves from LifeUSA.
The company has also guaranteed a credit agreement between LTC America Holding,
Inc., a LifeUSA subsidiary, and Norwest Bank. The agreement is for a $15,000
revolving credit line with an interest rate of LIBOR +.75% per annum and a
maturity date of December 21, 2003.
(10) Employee Benefit Plans
The Company participates in the Allianz Primary Retirement Plan (Primary
Retirement Plan), a defined contribution plan. The Company makes contributions
to a money purchase pension plan on behalf of eligible participants. All
employees, excluding agents, are eligible to participate in the Primary
Retirement Plan after two years of service. The contributions are based on a
percentage of the participant's salary with the participants being 100% vested
upon eligibility. It is the Company's policy to fund the plan costs as accrued.
Total pension contributions were $756, $810, and $808 in 1998, 1997 and 1996,
respectively.
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(10) Employee Benefit Plans (cont.)
The Company participates in the Allianz Asset Accumulation Plan (Allianz Plan),
a defined contribution plan sponsored by AZOA. Under the Allianz Plan
provisions, the Company will match from 75% to 100% of eligible employees'
contributions up to a maximum of 6% of a participant's compensation. The total
Company match for Plan participants was 75%, 90% and 100% in 1998, 1997 and
1996, respectively. All employees are eligible to participate after one year of
service and are fully vested in the Company's matching contribution after three
years of service. The Allianz Plan will accept participants' pretax or after-tax
contributions up to 15% of the participant's compensation. It is the Company's
policy to fund the Allianz Plan costs as accrued. The Company has accrued $868,
$1,057, and $1,105 in 1998, 1997 and 1996, respectively, toward planned
contributions.
The Company provides certain postretirement benefits to employees who retired on
or before December 31, 1988 or who were hired before December 31, 1988 and who
have at least ten years of service when they reach age 55. The Company's plan
obligation at December 31, 1998 and 1997 was $6,352 and $6,001, respectively.
This liability is included in "Other liabilities" in the accompanying balance
sheet.
(11) Statutory Financial Data and Dividend Restrictions
Statutory accounting is directed toward insurer solvency and protection of
policyholders. Accordingly, certain items recorded in financial statements
prepared under GAAP are excluded or vary in determining statutory policyholders'
surplus and net gain from operations. Currently, these items include, among
others, deferred acquisition costs, furniture and fixtures, accident and health
premiums receivable which are more than 90 days past due, deferred taxes and
undeclared dividends to policyholders. Additionally, future life and annuity
benefit reserves calculated for statutory accounting do not include provisions
for withdrawals.
The differences between stockholder's equity and net income reported in
accordance with statutory accounting practices and the accompanying consolidated
financial statements as of and for the year ended December 31 are as follows:
<TABLE>
Stockholder's equity Net income
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Statutory basis $ 654,371 635,711 35,188 72,343 67,995
Adjustments:
Change in reserve basis (226,145) (255,816) 13,787 (85,110) 13,324
Deferred acquisition costs 930,059 927,080 2,979 63,742 36,344
Net deferred taxes (257,903) (228,861) (2,822) (28,283) (30,559)
Statutory asset valuation reserve 178,011 151,675 0 0 0
Statutory interest maintenance reserve 48,697 34,336 14,361 7,994 1,183
Modified coinsurance reinsurance (2,358) (31,953) 29,595 81,790 5,435
Unrealized gains on investments 158,391 124,754 0 0 0
Nonadmitted assets 14,943 14,824 0 0 0
Deferred income on reinsurance (105,465) (115,688) 0 0 0
Other (52,077) (38,470) 7,051 1,197 7,446
- ---------------------------------------------------------------------------------------------------------------------------
As reported in the accompanying consolidated
financial statements $1,340,524 1,217,592 100,139 113,673 101,168
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company is required to meet minimum statutory capital and surplus
requirements. The Company's statutory capital and surplus as of December 31,
1998 and 1997 were in compliance with these requirements. The maximum amount of
dividends that can be paid by Minnesota insurance companies to stockholders
without prior approval of the Commissioner of Commerce is subject to
restrictions relating to statutory earned surplus, also known as unassigned
funds. Unassigned funds are determined in accordance with the accounting
procedures and practices governing preparation of the statutory annual
statement, minus 25% of earned surplus attributable to unrealized capital gains.
In accordance with Minnesota Statutes, the Company may declare and pay from its
surplus, cash dividends of not more than the greater of 10% of its beginning of
the year statutory surplus in any year, or the net gain from operations of the
insurer, not including realized gains,
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(11) Statutory Financial Data and Dividend Restrictions (cont.)
for the 12-month period ending the 31st day of the next preceding year. In 1998
and 1997, the Company paid AZOA dividends on preferred stock in the amount of
$729 and $1,600, respectively. A common stock dividend of $551 was paid in 1997.
Dividends of $63,678 could
be paid in 1999 without prior approval of the Commissioner of Commerce.
Regulatory Risk Based Capital
An insurance enterprise's state of domicile imposes minimum risk-based capital
requirements that were developed by the National Association of Insurance
Commissioners (NAIC). The formulas for determining the amount of risk-based
capital specify various weighting factors that are applied to financial balances
or various levels of activity based on the perceived degree of risk. Regulatory
compliance is determined by a ratio of an enterprise's regulatory total adjusted
capital to its authorized control level risk-based capital, as defined by the
NAIC. Enterprises below specific triggerpoints or ratios are classified within
certain levels, each of which requires specified corrective action. The levels
and ratios are as follows:
Ratio of total adjusted capital to
authorized control level risk-based
Regulatory Event capital (less than or equal to)
- --------------------------------------------------------------------------------
Company action level 2 (or 2.5 with negative trends)
Regulatory action level 1.5
Authorized control level 1
Mandatory control level 0.7
The Company's adjusted capital is in excess of the Company action level as of
December 31, 1998 and 1997.
Permitted Statutory Accounting Practices
The Company is required to file annual statements with insurance regulatory
authorities which are prepared on an accounting basis prescribed or permitted by
such authorities. Currently, prescribed statutory accounting practices include
state laws, regulations, and general administrative rules, as well as a variety
of publications of the NAIC. Permitted statutory accounting practices encompass
all accounting practices that are not prescribed; such practices differ from
state to state, may differ from company to company within a state, and may
change in the future. The Company does not currently use permitted statutory
accounting practices that have a significant impact on its statutory financial
statements. Furthermore, the NAIC has completed a project to codify statutory
accounting practices, the result of which will constitute the only source of
"prescribed" statutory accounting practices. Accordingly, that project which is
currently in the process of state adoption, will change the definition of what
comprises prescribed versus permitted statutory accounting practices, and may
result in changes to existing accounting policies insurance enterprises use to
prepare their statutory financial statements.
(12) Commitments and Contingencies
The Company and its subsidiaries are involved in various pending or threatened
legal proceedings arising from the conduct of their business. In the opinion of
management, the ultimate resolution of such litigation will not have a material
effect on the consolidated financial position of the Company.
The Company is contingently liable for possible future assessments under
regulatory requirements pertaining to insolvencies and impairments of
unaffiliated insurance companies. Provision has been made for assessments
currently received and assessments anticipated for known insolvencies.
(13) Year 2000
The Company is expending significant resources to assure that its computer
systems are reprogrammed in time to effectively deal with transactions in the
year 2000 and beyond. Additional costs associated with this effort are not
expected to be material and will be expensed as incurred. This "Year 2000
Computer Problem" creates risk for the Company from unforeseen problems in its
own computer systems and
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(13) Year 2000 (cont.)
from third parties with whom the Company deals on financial transactions
worldwide. Failures of the Company and/or third parties' computer systems could
have a material impact on the Company's ability to conduct its business and
especially to process and account for the transfer of data and funds
electronically.
(14) Foreign Currency Translation
The net assets of the Company's foreign operations are translated into U.S.
dollars using exchange rates in effect at each year-end. Translation adjustments
arising from differences in exchange rates from period to period are included in
the accumulated foreign currency translation adjustment reported as a separate
component of stockholder's equity. An analysis of this account for the
respective years ended December 31 follows:
<TABLE>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning amount of cumulative translation adjustments $(4,448) (3,473) (3,455)
- ---------------------------------------------------------------------------------------------------------------------------
Aggregate adjustment for the period resulting from translation adjustments (2,710) (1,500) (28)
Amount of income tax benefit for period related to aggregate adjustment 949 525 10
- ---------------------------------------------------------------------------------------------------------------------------
Net aggregate translation included in equity (1,761) (975) (18)
Ending amount of cumulative translation adjustments $(6,209) (4,448) (3,473)
Canadian foreign exchange rate at end of year 0.6535 0.6992 0.7297
</TABLE>
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
<TABLE>
(15) Supplementary Insurance Information
The following table summarizes certain financial information by line of business
for 1998, 1997 and 1996:
As of December 31 For the year ended December 31
- ---------------------------------------------------------------------------------------------------------------------------
Future policy Other Premium Benefits, Net change
Deferred benefits, policy revenue claims in
policy losses, claims and and other Net losses, and policy Other
acquisitio claims and Unearned benefits contract investment settlement acquisition operating
costs loss expense premiums payable considerations income expenses costs (a) expenses
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998:
Life $217,262 1,445,844 3,859 97,647 375,055 34,731 306,318 (27,291) 141,705
Annuities 694,388 3,588,491 0 1,727 172,247 158,458 135,356 23,333 151,719
Accident and health 18,409 0 49,919 671,472 506,451 23,877 393,601 979
161,128
- ---------------------------------------------------------------------------------------------------------------------------
$930,059 5,034,335 53,778 770,846 1,053,753 217,066 835,275 (2,979) 454,552
1997:
Life $189,971 1,297,269 5,215 63,572 313,078 24,352 230,357 (14,363) 99,913
Annuities 717,721 3,251,829 0 1,881 188,474 118,028 124,535 (44,924) 186,789
Accident and health 19,388 0 44,953 487,660 451,067 19,970 327,526 (4,455)
151,312
- ---------------------------------------------------------------------------------------------------------------------------
$927,080 4,549,098 50,168 553,113 952,619 162,350 682,418 (63,742) 438,014
1996:
Life $175,608 1,204,633 5,502 62,369 331,845 89,049 258,221 4,308 103,352
Annuities 672,797 2,879,221 0 1,859 157,887 113,537 105,335 (43,283) 161,002
Accident and health 14,933 0 26,674 374,596 376,822 20,036 256,364 2,631
122,337
- ---------------------------------------------------------------------------------------------------------------------------
$863,338 4,083,854 32,176 438,824 866,554 222,622 619,920 (36,344) 386,691
<FN>
(a) See note 1 for total gross amortization.
</FN>
</TABLE>
<PAGE>
APPENDIX
ILLUSTRATION OF POLICY VALUES
The following tables illustrate how Policy Account values, Net Cash Values
and death benefits of a policy change based on the investment experience of the
variable options. The illustrations are hypothetical and may not be used to
project or predict investment results. The Policy Account values, Net Cash
Values and death benefits in the tables take into account all charges and
deductions against the policy. These tables assume that the cost of insurance
rates for the policy are based on the current and guaranteed rates appropriate
to the class shown. These tables also assume that a level annual premium of
$1,200 was paid. These tables assume that the insured is in the most favorable
male risk status, I.E., non-smoker. For insureds who are classified as smoker or
less favorable risk status, the cost of insurance will be greater and the policy
values will be less given the same assumed hypothetical gross annual investment
rates of return. The cost of insurance will be less and the policy values will
be greater for female insureds of comparable risk status. Some states require
that the policies contain tables based upon unisex rates.
Gross investment returns of 0%, 6% and 12% are assumed to be level for all
years shown. The values would be different if the rates of return averaged 0%,
6% and 12% over the period of years but fluctuated above and below those
averages during individual years.
The values shown reflect the fact that the net investment return of the
variable options is lower than the gross investment return on the assets held in
the portfolios because of the charges assessed on amounts in the variable
options. The daily investment advisory fee for the portfolios of Franklin
Valuemark Funds is assumed to be equal to an annual rate of 0.672% of the net
assets of the portfolios (which is the average of the investment advisory fees
assessed in 1998). The values also assume that each portfolio will incur
operating expenses annually which are assumed to be 0.047% of the average net
assets of the portfolio. This is the average in 1998. The variable options will
be assessed for mortality and expense risks at a guaranteed annual rate not to
exceed 0.90% (the current annual rate is 0.60%) of the average daily net assets
of the variable option and for administrative expenses at an annual rate of
0.15% of the average daily net assets of the variable option. After taking these
expenses and charges into consideration, the illustrated gross annual investment
rates of 0%, 6% and 12% are equivalent to net rates of -1.46%, 4.45% and 10.37%.
We deduct an insurance risk premium for a policy month from the Policy
Account values. The insurance risk premium rate is based on the sex (where
permitted by state law), attained age and rate class of the insured.
Upon request, we will provide a comparable illustration based upon the
attained age, sex (where permitted by state law) and rate class of the proposed
insured and for the Face Amount or premium requested.
A-1
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
VARIABLE UNIVERSAL LIFE
PREPARED FOR: CLIENT INITIAL DEATH BENEFIT: $100,000
ISSUE AGE: 35, NON-SMOKER ANNUAL PREMIUM: $1,200.00
SEX: MALE INITIAL DEATH BENEFIT OPTION: A
<TABLE>
<CAPTION>
CURRENT VALUES
--------------------------------------------------------------------
VALUES PROJECTED AT VALUES PROJECTED AT
0.00% 6.00%
ACCUM @ --------------------------------- ---------------------------------
ANNUAL 5.00% POLICY NET CASH NET DEATH POLICY NET CASH NET DEATH
END OF YR. AGE PREMIUM PREMIUM ACCOUNT VALUE BENEFIT ACCOUNT VALUE BENEFIT
--- --- ----------- ----------- ----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 35 1,200 1,260 757 35 100,000 813 92 100,000
2 36 1,200 2,583 1,674 893 100,000 1,840 1,059 100,000
3 37 1,200 3,972 2,573 1,731 100,000 2,908 2,066 100,000
4 38 1,200 5,431 3,453 2,602 100,000 4,017 3,166 100,000
5 39 1,200 6,962 4,316 3,495 100,000 5,172 4,351 100,000
6 40 1,200 8,570 5,156 4,385 100,000 6,368 5,598 100,000
7 41 1,200 10,259 5,984 5,264 100,000 7,620 6,899 100,000
8 42 1,200 12,032 6,792 6,121 100,000 8,919 8,249 100,000
9 43 1,200 13,893 7,583 6,995 100,000 10,273 9,685 100,000
10 44 1,200 15,848 8,359 7,853 100,000 11,685 11,179 100,000
15 49 1,200 27,189 11,909 11,909 100,000 19,607 19,607 100,000
20 54 1,200 41,633 14,640 14,640 100,000 29,981 29,981 100,000
25 59 1,200 60,136 16,173 16,173 100,000 39,941 39,941 100,000
30 64 1,200 83,713 15,860 15,860 100,000 52,733 52,733 100,000
35 69 1,200 113,804 12,394 12,394 100,000 67,873 67,873 100,000
<CAPTION>
VALUES PROJECTED AT
12.00%
---------------------------------
POLICY NET CASH NET DEATH
END OF YR. ACCOUNT VALUE BENEFIT
--- ----------- --------- ---------
<S> <C> <C> <C>
1 870 148 100,000
2 2,013 1,232 100,000
3 3,270 2,428 100,000
4 4,652 3,800 100,000
5 6,173 5,352 100,000
6 7,843 7,072 100,000
7 9,689 8,968 100,000
8 11,720 11,049 100,000
9 13,960 13,372 100,000
10 16,432 15,926 100,000
15 33,147 33,147 100,000
20 60,392 60,392 100,000
25 104,978 104,978 139,551
30 176,956 176,956 214,172
35 292,481 292,481 336,602
</TABLE>
CURRENT VALUES ARE BASED ON PROJECTED INTEREST RATES AND CURRENT EXPENSES
AND COST OF INSURANCE CHARGES NOW IN EFFECT, WHICH ARE SUBJECT TO CHANGE.
THE CURRENT MONTHLY EXPENSE CHARGES ARE $20.00 PER MONTH IN YEAR 1 AND $5.00
PER MONTH THEREAFTER.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN IN THIS
ILLUSTRATION ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND UPON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY THE OWNER, PREVAILING INTEREST RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND NET CASH VALUE FOR A POLICY WOULD BE DIFFERENT
THAN THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND
12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR
THE TRUST THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE
YEAR OR SUSTAINED OVER A PERIOD OF TIME.
A-2
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
VARIABLE UNIVERSAL LIFE
PREPARED FOR: CLIENT INITIAL DEATH BENEFIT: $100,000
ISSUE AGE: 35, NON-SMOKER ANNUAL PREMIUM: $1,200.00
SEX: MALE INITIAL DEATH BENEFIT OPTION: A
<TABLE>
<CAPTION>
GUARANTEED VALUES
--------------------------------------------------------------------
VALUES PROJECTED AT VALUES PROJECTED AT
0.00% 6.00%
ACCUM @ --------------------------------- ---------------------------------
ANNUAL 5.00% POLICY NET CASH NET DEATH POLICY NET CASH NET DEATH
END OF YR. AGE PREMIUM PREMIUM ACCOUNT VALUE BENEFIT ACCOUNT VALUE BENEFIT
--- --- ----------- ----------- ----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 35 1,200 1,260 747 25 100,000 803 81 100,000
2 36 1,200 2,583 1,601 819 100,000 1,764 982 100,000
3 37 1,200 3,972 2,430 1,589 100,000 2,754 1,912 100,000
4 38 1,200 5,431 3,235 2,383 100,000 3,776 2,924 100,000
5 39 1,200 6,962 4,016 3,196 100,000 4,830 4,010 100,000
6 40 1,200 8,570 4,762 3,992 100,000 5,908 5,137 100,000
7 41 1,200 10,259 5,486 4,766 100,000 7,021 6,300 100,000
8 42 1,200 12,032 6,177 5,506 100,000 8,161 7,490 100,000
9 43 1,200 13,893 6,835 6,247 100,000 9,329 8,741 100,000
10 44 1,200 15,848 7,461 6,955 100,000 10,527 10,021 100,000
15 49 1,200 27,189 10,104 10,104 100,000 16,996 16,996 100,000
20 54 1,200 41,633 11,637 11,637 100,000 24,130 24,130 100,000
25 59 1,200 60,136 11,435 11,435 100,000 31,601 31,601 100,000
30 64 1,200 83,713 8,373 8,373 100,000 38,870 38,870 100,000
35 69 1,200 113,804 37 37 100,000 44,868 44,868 100,000
<CAPTION>
VALUES PROJECTED AT
12.00%
---------------------------------
POLICY NET CASH NET DEATH
END OF YR. ACCOUNT VALUE BENEFIT
--- ----------- --------- ---------
<S> <C> <C> <C>
1 859 138 100,000
2 1,933 1,152 100,000
3 3,105 2,264 100,000
4 4,385 3,534 100,000
5 5,784 4,965 100,000
6 7,303 6,535 100,000
7 8,967 8,250 100,000
8 10,780 10,115 100,000
9 12,759 12,178 100,000
10 14,921 14,424 100,000
15 29,231 29,231 100,000
20 51,962 51,962 100,000
25 88,793 88,793 118,078
30 147,297 147,297 178,342
35 238,869 238,869 275,011
</TABLE>
GUARANTEED VALUES ARE BASED ON PROJECTED INTEREST RATES AND GUARANTEED
EXPENSES AND COST OF INSURANCE CHARGES NOW IN EFFECT, WHICH ARE SUBJECT TO
CHANGE. THE GUARANTEED MONTHLY EXPENSE CHARGES ARE $20.00 PER MONTH IN YEAR
1 AND $9.00 PER MONTH THEREAFTER.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN IN THIS
ILLUSTRATION ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND UPON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY THE OWNER, PREVAILING INTEREST RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND NET CASH VALUE FOR A POLICY WOULD BE DIFFERENT
THAN THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND
12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR
THE TRUST THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE
YEAR OR SUSTAINED OVER A PERIOD OF TIME.
A-3
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
VARIABLE UNIVERSAL LIFE
PREPARED FOR: CLIENT INITIAL DEATH BENEFIT: $100,000
ISSUE AGE: 35, NON-SMOKER ANNUAL PREMIUM: $1,200.00
SEX: MALE INITIAL DEATH BENEFIT OPTION: B
<TABLE>
<CAPTION>
CURRENT VALUES
--------------------------------------------------------------------
VALUES PROJECTED AT VALUES PROJECTED AT
0.00% 6.00%
ACCUM @ --------------------------------- ---------------------------------
ANNUAL 5.00% POLICY NET CASH NET DEATH POLICY NET CASH NET DEATH
END OF YR. AGE PREMIUM PREMIUM ACCOUNT VALUE BENEFIT ACCOUNT VALUE BENEFIT
--- --- ----------- ----------- ----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 35 1,200 1,260 755 34 100,755 812 90 100,812
2 36 1,200 2,583 1,670 888 101,670 1,835 1,054 101,835
3 37 1,200 3,972 2,564 1,722 102,564 2,897 2,055 102,897
4 38 1,200 5,431 3,438 2,586 103,438 3,999 3,147 103,999
5 39 1,200 6,962 4,292 3,471 104,292 5,142 4,322 105,142
6 40 1,200 8,570 5,121 4,351 105,121 6,324 5,554 106,324
7 41 1,200 10,259 5,938 5,217 105,938 7,558 6,837 107,558
8 42 1,200 12,032 6,732 6,061 106,732 8,835 8,164 108,835
9 43 1,200 13,893 7,507 6,919 107,507 10,162 9,574 110,162
10 44 1,200 15,848 8,264 7,758 108,264 11,542 11,036 111,542
15 49 1,200 27,189 11,677 11,677 111,677 19,185 19,185 119,185
20 54 1,200 41,633 14,141 14,141 114,141 27,878 27,878 127,878
25 59 1,200 60,136 15,180 15,180 115,180 37,252 37,252 137,252
30 64 1,200 83,713 14,031 14,031 114,031 46,485 46,485 146,485
35 69 1,200 113,804 9,350 9,350 109,350 53,813 53,813 153,813
<CAPTION>
VALUES PROJECTED AT
12.00%
---------------------------------
POLICY NET CASH NET DEATH
END OF YR. ACCOUNT VALUE BENEFIT
--- ----------- --------- ---------
<S> <C> <C> <C>
1 868 147 100,868
2 2,008 1,226 102,008
3 3,258 2,416 103,258
4 4,630 3,778 104,630
5 6,136 5,316 106,136
6 7,786 7,016 107,786
7 9,606 8,886 109,606
8 11,603 10,933 111,603
9 13,800 13,212 113,800
10 16,218 15,712 116,218
15 32,372 32,372 132,372
20 57,899 57,899 157,899
25 98,054 98,054 198,054
30 161,036 161,036 261,036
35 259,406 259,406 359,406
</TABLE>
CURRENT VALUES ARE BASED ON PROJECTED INTEREST RATES AND CURRENT EXPENSES
AND COST OF INSURANCE CHARGES NOW IN EFFECT, WHICH ARE SUBJECT TO CHANGE.
THE CURRENT MONTHLY EXPENSE CHARGES ARE $20.00 PER MONTH IN YEAR 1 AND $5.00
PER MONTH THEREAFTER.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN IN THIS
ILLUSTRATION ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND UPON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY THE OWNER, PREVAILING INTEREST RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND NET CASH VALUE FOR A POLICY WOULD BE DIFFERENT
THAN THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND
12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR
THE TRUST THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE
YEAR OR SUSTAINED OVER A PERIOD OF TIME.
A-4
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
VARIABLE UNIVERSAL LIFE
PREPARED FOR: CLIENT INITIAL DEATH BENEFIT: $100,000
ISSUE AGE: 35, NON-SMOKER ANNUAL PREMIUM: $1,200.00
SEX: MALE INITIAL DEATH BENEFIT OPTION: B
<TABLE>
<CAPTION>
GUARANTEED VALUES
--------------------------------------------------------------------
VALUES PROJECTED AT VALUES PROJECTED AT
0.00% 6.00%
ACCUM @ --------------------------------- ---------------------------------
ANNUAL 5.00% POLICY NET CASH NET DEATH POLICY NET CASH NET DEATH
END OF YR. AGE PREMIUM PREMIUM ACCOUNT VALUE BENEFIT ACCOUNT VALUE BENEFIT
--- --- ----------- ----------- ----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 35 1,200 1,260 745 24 100,745 801 80 100,801
2 36 1,200 2,583 1,597 815 101,597 1,759 977 101,759
3 37 1,200 3,972 2,421 1,579 102,421 2,743 1,901 102,743
4 38 1,200 5,431 3,219 2,367 103,219 3,756 2,905 103,756
5 39 1,200 6,962 3,991 3,171 103,991 4,799 3,979 104,799
6 40 1,200 8,570 4,726 3,955 104,726 5,861 5,090 105,861
7 41 1,200 10,259 5,436 4,715 105,436 6,954 6,233 106,954
8 42 1,200 12,032 6,110 5,439 106,110 8,068 7,397 108,068
9 43 1,200 13,893 6,748 6,160 106,748 9,203 8,615 109,203
10 44 1,200 15,848 7,351 6,845 107,351 10,361 9,855 110,361
15 49 1,200 27,189 9,818 9,818 109,818 16,472 16,472 116,472
20 54 1,200 41,633 11,026 11,026 111,026 22,758 22,758 122,758
25 59 1,200 60,136 10,278 10,278 110,278 28,329 28,329 128,329
30 64 1,200 83,713 6,459 6,459 106,459 31,563 31,563 131,563
35 69 1,200 113,804 0 0 0 29,374 29,374 129,374
<CAPTION>
VALUES PROJECTED AT
12.00%
---------------------------------
POLICY NET CASH NET DEATH
END OF YR. ACCOUNT VALUE BENEFIT
--- ----------- --------- ---------
<S> <C> <C> <C>
1 858 136 100,858
2 1,928 1,146 101,928
3 3,092 2,251 103,092
4 4,362 3,510 104,362
5 5,745 4,925 105,745
6 7,243 6,472 107,243
7 8,878 8,157 108,878
8 10,652 9,981 110,652
9 12,579 11,991 112,579
10 14,674 14,178 114,674
15 28,268 28,268 128,268
20 48,827 48,827 148,827
25 79,552 79,552 179,552
30 125,010 125,010 225,010
35 191,285 191,285 291,285
</TABLE>
GUARANTEED VALUES ARE BASED ON PROJECTED INTEREST RATES AND GUARANTEED
EXPENSES AND COST OF INSURANCE CHARGES NOW IN EFFECT, WHICH ARE SUBJECT TO
CHANGE. THE GUARANTEED MONTHLY EXPENSE CHARGES ARE $20.00 PER MONTH IN YEAR
1 AND $9.00 PER MONTH THEREAFTER.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN IN THIS
ILLUSTRATION ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND UPON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY THE OWNER, PREVAILING INTEREST RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND NET CASH VALUE FOR A POLICY WOULD BE DIFFERENT
THAN THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND
12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR
THE TRUST THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE
YEAR OR SUSTAINED OVER A PERIOD OF TIME.
A-5
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ISSUED BY
ALLIANZ LIFE VARIABLE ACCOUNT A
AND
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
This prospectus describes the Allianz ValueLife Flexible Premium Variable
Life Insurance Policy that we (Allianz Life Insurance Company of North America)
are offering.
The policy is a variable benefit policy. We have designed the policy for use
in estate and retirement planning and other insurance needs of individuals.
You, the policyowner, have a number of investment choices in the policy.
These investment choices include a fixed account (which is part of our general
account) as well as 24 variable options. When you buy a policy and allocate
funds to the variable options you are subject to investment risk. This means
that the value of your Policy Account may increase and decrease depending upon
the investment performance of the variable option(s) you select. Under some
circumstances, the death benefit and the duration of the policy will also
increase and decrease depending upon investment performance.
Each variable option invests in one portfolio of Franklin Valuemark Funds.
The following 24 portfolios of Franklin Valuemark Funds are currently available
with the policy:
PORTFOLIO SEEKING CAPITAL PRESERVATION AND INCOME
Money Market Fund
PORTFOLIOS SEEKING CURRENT INCOME
High Income Fund
Templeton Global Income Securities Fund
U.S. Government Securities Fund
Zero Coupon Funds -- 2005 and 2010
PORTFOLIOS SEEKING GROWTH AND INCOME
Global Utilities Securities Fund
Growth and Income Fund
Income Securities Fund
Mutual Shares Securities Fund
Real Estate Securities Fund
Rising Dividends Fund
Templeton Global Asset Allocation Fund
Value Securities Fund
PORTFOLIOS SEEKING CAPITAL GROWTH
Capital Growth Fund
Global Health Care Securities Fund
Mutual Discovery Securities Fund
Natural Resources Securities Fund
Small Cap Fund
Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton International Equity Fund
Templeton International Smaller Companies
Fund
Templeton Pacific Growth Fund
Please read this prospectus before investing and keep it on file for future
reference. It contains important information about the Allianz ValueLife
Flexible Premium Variable Life Insurance Policy. The Securities and Exchange
Commission (SEC) maintains a Web site
(http://www.sec.gov) that contains information regarding companies that file
electronically with the SEC.
THE POLICY:
- IS NOT A BANK DEPOSIT.
- IS NOT FEDERALLY INSURED.
- IS NOT ENDORSED BY ANY BANK OR GOVERNMENT AGENCY.
THE POLICY IS SUBJECT TO INVESTMENT RISK. YOU MAY BE SUBJECT TO LOSS OF
PRINCIPAL.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES NOR HAS IT DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities in any state, country,
or jurisdiction in which we are not authorized to sell the policies. You should
rely only on the information contained in this prospectus or that we have
referred you to. We have not authorized anyone to provide you with information
that is different.
Date: May 1, 1999
as amended June 2, 1999
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TABLE OF CONTENTS
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SPECIAL TERMS.................................. 2
SUMMARY........................................ 3
The Variable Life Insurance Policy........... 3
Purchases.................................... 3
Investment Choices........................... 3
Expenses..................................... 4
Death Benefit................................ 5
Taxes........................................ 5
Access to Your Money......................... 5
Other Information............................ 5
Inquiries.................................... 6
PART I
THE VARIABLE LIFE INSURANCE POLICY............. 7
PURCHASES...................................... 7
Premiums..................................... 7
Application For a Policy..................... 7
Planned Periodic Premiums.................... 7
Unscheduled Premiums......................... 7
Grace Period................................. 7
Reinstatement................................ 8
Allocation of Premium........................ 9
Policy Account............................... 9
Method of Determining your Policy Account
Allocated to a Variable Option............. 9
Your Cash Value, Net Cash Value.............. 10
Our Right to Reject or Return a Premium
Payment.................................... 10
INVESTMENT CHOICES............................. 10
Substitution and Limitations on Further
Investments................................ 11
Transfers.................................... 11
Dollar Cost Averaging........................ 12
EXPENSES....................................... 12
Mortality and Expense Risk Charge............ 12
Administrative Charges....................... 12
Insurance Risk Charges....................... 13
Charges for Additional Benefit Riders........ 14
Surrender Charges............................ 14
Partial Surrender Fee........................ 14
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<S> <C>
Premium Fee.................................. 14
Transfer Fee................................. 14
Income Tax Charge............................ 14
Franklin Valuemark Funds' Annual Expenses.... 15
DEATH BENEFIT.................................. 16
Change in Death Benefit...................... 16
Change in Face Amount of Insurance........... 16
Guaranteed Death Benefit Rider............... 17
Accelerated Death Benefit Rider.............. 17
TAXES.......................................... 18
Life Insurance in General.................... 18
Taking Money Out of Your Policy.............. 18
Diversification.............................. 18
ACCESS TO YOUR MONEY........................... 19
Policy Loans................................. 19
Loan Interest Charged........................ 19
Loan Limit................................... 20
Security..................................... 20
Restrictions on Making Loans................. 20
Repaying Policy Debt......................... 20
Partial Surrenders........................... 20
Full Surrenders.............................. 21
OTHER INFORMATION.............................. 21
The Company.................................. 21
Year 2000.................................... 21
The Separate Account......................... 21
Distributor.................................. 22
Suspension of Payments or Transfers.......... 22
Ownership.................................... 22
PART II
Executive Officers And Directors............. 24
Voting....................................... 25
Disregard of Voting Instructions............. 25
Legal Opinions............................... 25
Our Right to Contest......................... 25
Federal Tax Status........................... 26
Reports to Owners............................ 29
Legal Proceedings............................ 29
Experts...................................... 29
Financial Statements......................... 29
APPENDIX -- Illustrations of Policy Values..... A-1
</TABLE>
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SPECIAL TERMS
This prospectus is written in plain English to make it as understandable as
possible. However, by the very nature of the policy, certain technical words or
terms are unavoidable. We have identified some of these words or terms. For some
we have provided you with a definition. For the remainder, we believe that you
will find an adequate discussion in the text. We have identified these terms and
provided you with a page number that indicates where you will find the
explanation for the word or term. To help you find the word or term on the page
it is in italics.
Annual Guaranteed Coverage Premium. Your Annual Guaranteed Coverage Premium is
equal to twelve times the Guaranteed Coverage Premium.
Cash Value. Your Policy Account minus the surrender charge.
Face Amount of Insurance. The amount of coverage chosen by you. This amount is
used to determine the death benefit. The minimum Face Amount of Insurance is
$100,000.
Guaranteed Coverage Premium. Your Guaranteed Coverage Premium is a monthly
target premium amount which will vary by the issue age, sex and underwriting
classification of the insured as well as the amount and type of coverage. There
is a distinct Guaranteed Coverage Premium for the base policy and for each rider
attached to the base policy.
Insurance Risk Amount. The excess of the death benefit over the value of your
Policy Account.
Net Cash Value. The Cash Value of your Policy minus any Policy Debt you may
have outstanding.
Policy Account. The sum of any amounts you may have in the fixed account and in
the variable options you have selected.
Policy Debt. The total of any outstanding loans you have made on your policy,
including interest paid in advance for the current policy year.
Surrender Charge Premium. The Surrender Charge Premium is equal to the Annual
Guaranteed Coverage Premium for a base policy death benefit coverage on a person
insured as a standard risk. The Surrender Charge Premium will vary with the
issue age, sex and smoking clarification of the insured as well as the face
amount of the base policy.
Total Guaranteed Coverage Premium. The Total Guaranteed Coverage Premium is the
sum of the Guaranteed Coverage Premium of the base policy and the Guaranteed
Coverage Premium of any riders attached to the base policy. During the first ten
years after the policy is issued the Total Guaranteed Coverage Premium is used
in the Calculation of the Minimum Required Premium to keep the policy in force
regardless of fund performance.
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BENEFICIARY, CONTINGENT BENEFICIARY............. 22
BUSINESS DAY.................................... 10
INSURED......................................... 16
ISSUE DATE...................................... 8
MATURITY BENEFIT................................ 23
MATURITY DATE................................... 23
MONTHLY ANNIVERSARY............................. 8
OWNER........................................... 22
POLICY MONTH.................................... 8
POLICY YEAR, POLICY ANNIVERSARY................. 8
REALLOCATION DATE............................... 6
</TABLE>
2
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The Prospectus is divided into three sections: the Summary, Part I and Part
II. The sections in the Summary correspond to sections in Part I of this
Prospectus which discuss the topics in more detail. Part II contains even more
detailed information.
SUMMARY
1. THE VARIABLE LIFE INSURANCE POLICY
The Allianz ValueLife variable life insurance policy is a contract between
you, the owner, and us, an insurance company. The policy provides for the
payment of a death benefit to your selected beneficiary upon the death of the
insured. This death benefit is distributed free from federal income taxes. The
policy can be used as part of your estate planning or used to save for
retirement. The insured is the person you chose to have his or her life insured
under the policy. You, the owner, can also be the insured, but you do not have
to be.
The policy described in this prospectus is a flexible premium variable life
insurance policy. The policy is "flexible" because:
- the frequency and amount of premium payments can vary;
- you can choose between death benefit options; and
- you can increase or decrease the amount of insurance coverage, all
within the same policy of insurance.
The policy is "variable" because the Policy Account, when allocated to the
variable options, may increase or decrease depending upon the investment results
of the selected variable options. Under certain circumstances, the death benefit
and the duration of your policy may also vary.
During the life of the insured, you can surrender the policy for all or part
of its Net Cash Value. You may also obtain a policy loan, using the Policy
Account as security.
We make available a number of riders to meet a variety of your estate
planning needs. See the "Death Benefit" section for a description of the
guaranteed death benefit rider and the accelerated benefit rider.
2. PURCHASES
You purchase the policy by completing the proper forms. Your registered
representative can help you complete the forms. In some circumstances, we may
contact you for additional information regarding the insured. We may require the
insured to provide us with medical records, physicians' statements or a complete
paramedical examination.
The minimum initial premium we accept is computed for you based on the face
amount you request. The policy is designed for the payment of subsequent
premiums. You can establish planned periodic premiums. The minimum subsequent
premium that we accept is $25 ($50 in Maryland).
3. INVESTMENT CHOICES
You can put your money in the fixed account or in the variable options.
Currently, you may invest in a maximum of 10 investment choices (which include
the fixed account and any variable option you select) at any one time throughout
the life of the policy. Each variable option invests in one Class 1 share
portfolio of Franklin Valuemark Funds. The portfolios are listed below and are
described in the prospectus for Franklin Valuemark Funds.
The following is a list of the portfolios available under the policy:
PORTFOLIO SEEKING CAPITAL PRESERVATION
AND INCOME
Money Market Fund
PORTFOLIOS SEEKING CURRENT INCOME
High Income Fund
Templeton Global Income Securities Fund
U.S. Government Securities Fund
Zero Coupon Funds -- 2005 and 2010
PORTFOLIOS SEEKING GROWTH AND INCOME
Global Utilities Securities Fund
Growth and Income Fund
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Income Securities Fund
Mutual Shares Securities Fund
Real Estate Securities Fund
Rising Dividends Fund
Templeton Global Asset Allocation Fund
Value Securities Fund
PORTFOLIOS SEEKING CAPITAL GROWTH
Capital Growth Fund
Global Health Care Securities Fund
Mutual Discovery Securities Fund
Natural Resources Securities Fund
Small Cap Fund
Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton International Equity Fund
Templeton International Smaller Companies
Fund
Templeton Pacific Growth Fund
4. EXPENSES
We make certain deductions from your premiums, your Policy Account and from
the variable options. These deductions are made for premium fees, mortality and
expense risks, administrative expenses, sales charges and for providing life
insurance protection. There are also operating expenses of the portfolios. These
deductions are summarized as follows:
Premium Fee. This charge is for state and local premium taxes (in
states which charge a premium tax). It is also used to pay for other
expenses associated with premium collection. The charge is deducted from
each premium payment. The charge is equal to 2.5% of each premium payment
and approximates our average expenses associated with premium collection.
Mortality and Expense Risk Charge. This risk charge is guaranteed not to
exceed, on an annual basis, 0.90% of your average Policy Account value and
is deducted each business day. The current risk charge is 0.60%.
Administrative Charges. These charges are equal to:
1) 0.15%, on an annual basis, of your average Policy Account value
and is deducted each business day; plus
2) $20 per policy month for the first policy year, and $9 per
policy month guaranteed thereafter. Currently, the charge is $5 per
policy month after the first policy year. These amounts are deducted
from your Policy Account on the monthly anniversary date. This part of
the charge will be waived if the Policy Account is equal to or greater
than 15% of the initial Face Amount plus the requested Face Amount
increases.
Charges for Additional Benefit Riders. The amount of the charge, if
any, each policy month for additional benefit riders is determined in
accordance with the rider and is shown on the coverage page of your policy.
Insurance Risk Charge. On each monthly anniversary date, we deduct from
your Policy Account the cost of insurance for the next policy month. This
charge provides death benefit protection.
Surrender Charges. A surrender charge may be deducted in the event you
make a full or partial surrender of your Policy Account. The surrender
charges contain: a deferred administrative expense and a deferred sales
load. The deferred administrative expense is $5.00 per $1,000 of Face Amount
of Insurance for the first 3 policy years, then grades to zero over policy
years 4 through 13. The deferred sales load is the lesser of 30% of the
Surrender Charge Premium, plus 5% of all premiums over the Surrender Charge
Premium (SCP), or the following percentage of SCP:
<TABLE>
<CAPTION>
YEARS % OF SCP
- ------------------------ -----------
<S> <C>
1-8..................... 65%
9...................... 60%
10..................... 55%
11..................... 44%
12..................... 33%
13..................... 22%
14..................... 11%
15+.................... 0%
</TABLE>
The SCP is equal to the Annual Guaranteed Coverage Premium for the base
policy death benefit for a life insured at standard risk. The SCP will vary
with the issue age, sex, and smoking classification of the insured, and the
face amount of the base policy.
4
<PAGE>
Partial Surrender Fee. If you surrender only a portion of the Net Cash
Value at any time during the insured's lifetime, there is an administrative
fee assessed. The fee is currently equal to the lesser of $25 or 2% of the
partial surrender amount you take out of the policy.
You may make a partial surrender once each policy year that does not
exceed 10% of the Net Cash Value without incurring a surrender charge or the
partial surrender fee.
Transfer Fee. You may transfer values from one variable option to
another, or to or from the fixed account. The first 12 transfers in a policy
year are free. The fee for each additional transfer is the lesser of $25 or
2% of the amount transferred. Prescheduled automatic dollar cost averaging
transfers are not counted.
Other Expenses. There are deductions from and operating expenses paid
out of the assets of the portfolios of Franklin Valuemark Funds.
5. DEATH BENEFIT
The amount of the death benefit depends on:
- the Face Amount of Insurance of your policy;
- the death benefit option in effect at the time of death; and
- under some circumstances, the value of your Policy Account.
There are two death benefit options: Option A and Option B. If death benefit
Option A is in effect, the death benefit is the greater of your total Face
Amount in effect or your Policy Account multiplied by the applicable factor.
Under this option, the amount of the death benefit is fixed, except when we use
the factor to determine the benefit percentage.
If death benefit Option B is in effect, the death benefit is the greater of
your total Face Amount of Insurance in effect plus the Policy Account or the
Policy Account multiplied by the applicable factor. Under this option, the
amount of the death benefit is variable.
Under certain circumstances you can change death benefit options. You can
also change the Face Amount of Insurance under certain circumstances.
At the time of application for a policy, you designate a beneficiary. The
beneficiary is the person or persons who will receive the death proceeds. You
can change your beneficiary unless you have designated an irrevocable
beneficiary. The beneficiary does not have to be a natural person.
6. TAXES
Your policy has been designed to comply with the definition of life
insurance in the Internal Revenue Code. As a result, the death proceeds paid
under the policy should be excludable from the gross income of your beneficiary.
Any earnings in your policy are not taxed until you take them out. The tax
treatment of the loan proceeds and surrender proceeds will depend on whether the
policy is considered a Modified Endowment Contract (MEC). Proceeds taken out of
a MEC are considered to come from earnings first and are includible in taxable
income. If you are younger than 59 1/2 when you take money out of a MEC, you may
also be subject to a 10% federal tax penalty on the earnings withdrawn.
7. ACCESS TO YOUR MONEY
You can terminate your policy at any time and we will pay you the Net Cash
Value. At any time during the insured's life and before your policy has
terminated, you may surrender a part of your Net Cash Value subject to the
requirements of the policy. When you terminate your policy or make a partial
surrender, a surrender charge may be assessed. Also, when you make a partial
surrender we assess a partial surrender fee of $25 or 2% of the partial
surrender amount, whichever is less. Once each policy year, on a non-cumulative
basis, you may make a free partial surrender up to 10% of your unloaned Policy
Value.
You can also borrow some of your Policy Value.
8. OTHER INFORMATION
Free Look. You can cancel the policy within 20 days after you receive it
(or whatever period is required in your state) or the 45th day
5
<PAGE>
after you sign your application. We will refund the greater of premiums paid or
the Policy Account less any Policy Debt. During the underwriting process, we
will allocate your initial net premium to the Money Market Fund until the
REALLOCATION DATE, which occurs 30 days after the policy is issued and mailed.
After that, we will invest your Policy Account value and any subsequent premiums
as you requested.
Purchasing Considerations. The policy is designed for individuals and
businesses that have a need for death protection but who also desire to
potentially increase the values in their policies through investment in the
variable options. The policy offers the following to individuals:
- create or conserve one's estate;
- supplement retirement income; and
- access to funds through loans and surrenders.
If you currently own a variable life insurance policy on the life of the
insured, you should consider whether the purchase of the policy described in
this prospectus is appropriate. Replacement of an existing policy with this
policy may not be advantageous to your situation.
Also, you should carefully consider whether the policy should be used to
replace an existing policy on the life of the insured.
Additional Features. The following additional features are offered:
- You can arrange to have a regular amount of money automatically
transferred from the Money Market Fund or the U.S. Government Securities
Fund to selected variable options each month, theoretically giving you a
lower average cost per unit over time than a single one time purchase.
We call this feature the dollar cost averaging option.
- If the insured becomes terminally ill, we will pay you a portion of the
death benefit. We call this feature the accelerated death benefit rider.
- If you pay a certain required premium, we guarantee that the policy will
not lapse even if your Policy Account value is not sufficient to cover
the monthly deductions. We call this feature the guaranteed minimum
death benefit rider.
- We also offer a number of additional riders that are common to life
insurance policies.
These features and riders may not be available in your state and may not be
suitable for your particular situation.
9. INQUIRIES
If you need more information about buying a policy, please contact us at:
Allianz Life Insurance Company of
North America
1750 Hennepin Avenue
Minneapolis, MN 55403
(800) 542-5427
If you need policyowner service (such as changes in policy information,
inquiry into Policy Account values, or to make a loan), please contact us at our
service center:
Allianz Life ValueLife Service Center
300 Berwyn Park
P.O. Box 3031
Berwyn, Pennsylvania 19312-0031
(800) 336-0320
6
<PAGE>
PART I
1. THE VARIABLE LIFE INSURANCE POLICY
The Allianz ValueLife variable life insurance policy is a contract between
you, the owner, and us, an insurance company. This kind of policy is most
commonly used for retirement planning and/or estate planning.
The policy provides for life insurance coverage on the insured. It has
Policy Account values, a death benefit, surrender rights, loan privileges and
other characteristics associated with traditional and universal life insurance.
However, since the policy is a variable life insurance policy, the value of your
policy will increase or decrease depending upon the investment experience of the
variable option(s) you choose. The duration or amount of the death benefit may
also vary based on the investment performance of the underlying portfolios of
Franklin Valuemark Funds. To the extent you select any of the variable options,
you bear the investment risk. If your Net Cash Value is insufficient to pay the
monthly deductions, the policy may terminate. However, if you have paid the
Guaranteed Coverage Premium and have not taken out a loan, your policy will not
lapse even if your Net Cash Value is insufficient to pay the monthly deductions.
Because the policy is like traditional and universal life insurance, it
provides a death benefit which is paid to your named beneficiary. When the
insured dies, the death proceeds are paid to your beneficiary. These proceeds
should be excludable from the gross income of the beneficiary, however estate
taxes may apply. The tax-free death proceeds makes this an excellent way to
accumulate money you do not think you will use in your lifetime. It is also a
tax-efficient way to provide for those you leave behind. If you need access to
your money, you can borrow from the policy or make a total or partial surrender.
2. PURCHASES
PREMIUMS
We will send you your policy only after you pay the initial premium. Before
we send out the policy, the application and the premium must be in good order as
determined by our administrative rules. The policy is not designed for
professional market timing organizations, other entities, or persons using
programmed, large, or frequent transfers.
APPLICATION FOR A POLICY
In order to purchase a policy, you must submit an application to us that
requests information about the proposed insured. In some cases, we will ask for
additional information. We may request that the insured provide us with medical
records, a physician's statement or possibly require other medical tests.
PLANNED PERIODIC PREMIUMS
The policy is designed to allow you to make subsequent premium payments. You
can elect to make planned periodic premium payments. Planned periodic premiums
may be paid annually, semi-annually, quarterly or monthly. You select the
planned periodic premium and payment interval at the time of application. You
may change the amount and frequency of premiums. We have the right to limit the
amount of any increase. Each premium after the initial premium must be at least
$25 ($50 in Maryland). Except in Maryland, we may increase this minimum amount
90 days after we send you a written notice to that effect.
UNSCHEDULED PREMIUMS
You can make additional unscheduled premium payments at any time while the
policy is in force. However, in order to preserve the favorable tax status of
the policy, we may limit the amount of the premiums and may return any premiums
that exceed the limits stated under the U.S. tax laws.
GRACE PERIOD
When a policy is about to terminate, under some circumstances, the policy
provides a grace period in order for you to make a premium payment or a loan
repayment in order to keep your policy in force.
7
<PAGE>
During the first 10 policy years (5 years in Massachusetts), a grace period
will begin on your monthly anniversary date when:
- your Net Cash Value is not large enough to cover the monthly deduction
made on that date; and
- your adjusted premium payments are less than your accumulated Guaranteed
Coverage Premiums.
Your adjusted premium payments as of the monthly anniversary date equal:
- the total of your premium payments received by us; minus
- any partial surrenders you have made to date; minus
- any Policy Debt.
Your accumulated Guaranteed Coverage Premiums as of the monthly anniversary
date equal:
- the total Guaranteed Coverage Premium; multiplied by
- one plus the number of months the policy has been in force as of that
monthly anniversary date.
If you have not had the same total Guaranteed Coverage Premium in effect
every month, your accumulated Guaranteed Coverage Premiums will be based on the
different premiums that were in effect and the number of months for which each
applied.
During the first 10 policy years (5 years in Massachusetts), the premium
payment that you need to make to keep your policy from terminating at the end of
the grace period is the lesser of:
- three monthly deductions; or
- the accumulated Guaranteed Coverage Premiums for the monthly anniversary
date when the grace period began minus adjusted premium payments as of
that date.
After the first 10 policy years (5 years in Massachusetts), a grace period
will begin on the monthly anniversary date when your Net Cash Value is not large
enough to cover the monthly deductions to be made on that date.
After the first 10 policy years (5 years in Massachusetts), the premium
required to keep the Policy from terminating at the end of a grace period equals
three monthly deductions.
When your policy is in a grace period, we will continue the policy for 61
days. If your insured dies during a grace period, we will deduct the premium
that would have been required to keep your policy from terminating from the
amount we would otherwise pay out.
Your policy will terminate without value at the end of a grace period unless
we receive a premium payment during the grace period large enough to keep your
policy from terminating at the end of that grace period.
We will notify you in writing at least 31 days before a grace period ends.
This notice will show how much must be paid to keep the policy from terminating.
We send notices to the last address you have given us.
Your first POLICY YEAR starts on the day the coverage is effective under
your policy. We call that date the ISSUE DATE. Future policy years start on the
same day and month in each subsequent year. We call that date a POLICY
ANNIVERSARY. Your first POLICY MONTH starts on the issue date. Future policy
months start on the same day in each subsequent month. We call that date a
MONTHLY ANNIVERSARY.
REINSTATEMENT
If your policy terminated at the end of a grace period, you can request that
we reinstate it (restore your insurance coverage) anytime within 5 years after
its termination. To reinstate your policy you must:
- submit an application for reinstatement;
- submit proof satisfactory to us that the insured is still insurable at
the risk classification that applies for the latest Face Amount of
Insurance portion then in effect;
- pay or agree to reinstatement of any Policy Debt; and
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- pay the premium required to reinstate the policy.
The premium required to reinstate the policy equals the total of the
following amounts:
- the amounts that would have been required for the policy to continue in
force without entering into a grace period for each month during the
grace period; and
- the amount that will be required for the policy to continue in force
without entering a grace period for the next 3 months after the
reinstatement date.
The reinstatement date is the monthly anniversary date on or following the
day we approve the application for reinstatement. The Policy Account on the
reinstatement date is equal to the Policy Account on the monthly anniversary
date when the grace period ended. The surrender charge on the reinstatement date
is equal to the surrender charge on the monthly anniversary date when the grace
period ended.
The policy may not be reinstated after:
- it has been surrendered for its Net Cash Value;
- the insured's death; or
- the maturity date.
ALLOCATION OF PREMIUM
Your premium is allocated to the fixed account or one or more of the
variable options, as selected by you. Prior to the reallocation date, the
initial premium is allocated to the Money Market Fund.
On the reallocation date, the Policy Account is allocated to the fixed
account and/or the variable options in accordance with your selections. This
allocation is not subject to the transfer fee provision (see "transfer fee").
However, we reserve the right to limit the number of investment choices
(currently, 24 variable options and the fixed account) that you may invest in at
any one time. Currently, you may invest in a maximum of 10 investment choices
(which include the fixed account and any variable option you select) at any one
time throughout the life of the policy.
POLICY ACCOUNT
On the issue date, the value of your Policy Account is:
- your initial premium less the charge for premium fees, less the initial
insurance risk charge and less the initial charge for any additional
benefit riders; minus
- the monthly deduction for the first policy month.
After the reallocation date the Policy Account equals the sum of the policy
amounts in the fixed account and in the variable options you have selected.
METHOD OF DETERMINING YOUR POLICY ACCOUNT ALLOCATED TO A VARIABLE OPTION
The value of your policy will go up or down depending upon the investment
performance of the variable option(s) you choose and the charges and deductions
made against your Policy Account. In order to keep track of the value of your
Policy Account, we use a unit of measure we call a valuation unit. (A valuation
unit works like a share of a mutual fund.)
Every day we determine the value of the valuation unit for each variable
option. We do this by:
- determining the total amount of money invested by all policyowners in
the particular variable option;
- subtracting from that amount all the charges that we make from the value
of the variable option. These charges are:
- the daily mortality and expense risk charge;
- the daily charge for the administrative charge deducted from the
variable options; and
- any charge for taxes or other similar deductions.
- dividing this amount by the number of outstanding valuation units.
The value of a valuation unit may go up or down from day to day.
9
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When you make a premium payment, we credit your policy with valuation units.
The number of valuation units credited is determined by dividing the amount of
premiums allocated to the variable option by the value of the valuation unit for
that variable option.
When we assess any charges we do so by deducting valuation units from your
policy. When you take a loan we reduce the number of the valuation units in your
policy and transfer the amount to the fixed account.
Our BUSINESS DAY is each day that the New York Stock Exchange is open for
business. Our business day closes when the New York Stock Exchange closes,
usually 4:00 p.m. Eastern Time.
YOUR CASH VALUE, NET CASH VALUE
Your Cash Value equals:
- your Policy Account; minus
- the surrender charges.
Your Net Cash Value equals:
- the Cash Value; minus
- any Policy Debt you may have incurred.
During your insured's life, you may:
- take loans based on the Cash Value;
- make partial surrenders; or
- surrender the policy for its Net Cash Value.
OUR RIGHT TO REJECT OR RETURN A PREMIUM PAYMENT
In order to receive the tax treatment for life insurance under the Internal
Revenue Code (Code), a policy must initially qualify and continue to qualify as
life insurance under the Code. To maintain this qualification, we have reserved
the right under the policy to return any premiums paid which we have determined
will cause the policy to fail as life insurance. We also have the right to make
changes in the policy or to make a distribution to the extent we determine this
is necessary to continue to qualify the policy as life insurance. Such
distributions may have current income tax consequences to you.
If subsequent premiums will cause your policy to become a Modified Endowment
Contract (MEC), we will contact you prior to applying the premium to your
policy. If you elect to have the premium applied, we require that you
acknowledge in writing that you understand the tax consequences of a MEC before
we will apply the premiums.
3. INVESTMENT CHOICES
The policy offers variable options which invest in Class 1 shares of
portfolios of Franklin Valuemark Funds. Franklin Valuemark Funds (Trust) is
comprised of 25 portfolios, 24 of which are currently available in connection
with the policy we are offering here.
PURCHASERS SHOULD READ THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS FOR
FRANKLIN VALUEMARK FUNDS CAREFULLY BEFORE INVESTING. CERTAIN PORTFOLIOS ARE NOT
AVAILABLE UNDER THE POLICY OFFERED BY THIS PROSPECTUS.
The Trust is the mutual fund underlying the policy. Each portfolio has its
own investment objective. The Trust issues two classes of shares which are
described in the attached Trust prospectus. Only Class 1 shares are available
with your policy. Investment managers for each portfolio are listed in the table
below and are as follows: Franklin Advisers, Inc. (FA), Franklin Advisory
Services, LLC (FAS), Franklin Mutual Advisers, LLC (FMA), Templeton Asset
Management Ltd. (TAM), Templeton Global Advisors Limited (TGA), and Templeton
Investment Counsel, Inc. (TIC). Certain managers have retained one or more
affiliated subadvisers to help them manage the portfolios.
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<PAGE>
The following is a list of the portfolios available under the policy:
<TABLE>
<CAPTION>
INVESTMENT
AVAILABLE PORTFOLIOS MANAGERS
<S> <C>
- --------------------------------------------------------
PORTFOLIO SEEKING CAPITAL PRESERVATION AND
INCOME
Money Market Fund........................ FA
PORTFOLIOS SEEKING CURRENT INCOME
High Income Fund......................... FA
Templeton Global Income Securities
Fund................................... FA
U.S. Government Securities Fund.......... FA
Zero Coupon Funds -- 2005 and 2010....... FA
PORTFOLIOS SEEKING GROWTH AND INCOME
Global Utilities Securities Fund......... FA
Growth and Income Fund................... FA
Income Securities Fund................... FA
Mutual Shares Securities Fund............ FMA
Real Estate Securities Fund.............. FA
Rising Dividends Fund.................... FAS
Templeton Global Asset Allocation Fund... TGA
Value Securities Fund.................... FAS
PORTFOLIOS SEEKING CAPITAL GROWTH
Capital Growth Fund...................... FA
Global Health Care Securities Fund....... FA
Mutual Discovery Securities Fund......... FMA
Natural Resources Securities Fund........ FA
Small Cap Fund........................... FA
Templeton Developing Markets Equity
Fund................................... TAM
Templeton Global Growth Fund............. TGA
Templeton International
Equity Fund............................ FA
Templeton International Smaller Companies
Fund................................... TIC
Templeton Pacific Growth Fund............ FA
</TABLE>
Franklin Valuemark Funds serves as the underlying mutual fund for variable
life insurance policies we offer and variable annuity contracts offered by us
and our affiliates. Franklin Valuemark Funds believes that offering its shares
in this manner will not be disadvantageous to you.
SUBSTITUTION AND LIMITATIONS ON FURTHER
INVESTMENTS
We may substitute one of the variable options you have selected with another
variable option. We will not do this without the prior approval of the
Securities and Exchange Commission. We may also limit further investment in a
variable option. We will give you notice of our intention to do this.
TRANSFERS
At your request, we will transfer amounts from your Policy Account in any
variable option to another variable option, or to the fixed account. The minimum
amount that can be transferred is the lesser of the minimum transfer amount
(currently $500) or the total value in that variable option. You may transfer on
any policy anniversary an amount from the unloaned value in the fixed account to
one or more variable options.
However, transfers out of the fixed account can be made only if:
- we receive the request at least 30 days before that policy anniversary;
and
- the amount requested is not more than the greater of 25% of the unloaned
value in the fixed account on that anniversary or the minimum transfer
amount.
We will not transfer more than the unloaned value from the fixed account.
The minimum amount that we will transfer from the fixed account on any policy
anniversary is the lesser of the minimum transfer amount, currently $500, or the
unloaned value in the fixed account on that date.
You can make 12 transfers in a policy year without charge. We may charge a
transfer fee for additional transfers in a policy year. The current transfer fee
is the lesser of $25 or 2% of the amount transferred. You may tell us how much
of the transfer fee is to come from the unloaned value in the fixed account and
from the values in each of the variable options. If you do not tell us, we will
make a deduction proportionally based on the relation the unloaned values in the
fixed account and the value in the variable options have to the total unloaned
value in the Policy Account.
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<PAGE>
We have not designed this policy or the underlying portfolios for use by
professional market timing organizations, other entities, or persons using
programmed, large, or frequent transfers. Such activity may be disruptive to a
portfolio.
You may elect to make transfers by telephone. To elect this option, you must
do so in writing. If there are joint owners, the instructions will be accepted
from either one of the joint owners unless you inform us otherwise. We will use
reasonable procedures to confirm that instructions communicated by telephone are
genuine. If we do not, we may be liable for any losses due to unauthorized or
fraudulent instructions. We tape record all telephone instructions.
DOLLAR COST AVERAGING
Dollar Cost Averaging is a program which enables you to transfer specified
dollar amounts from the Money Market Fund or the U.S. Government Securities Fund
to other portfolios (maximum of 8) at regular intervals. By allocating on a
regularly scheduled basis, you may be less susceptible to the impact of market
fluctuations.
Dollar Cost Averaging may be selected for a period of 12 to 36 months. The
minimum amount per period that can be transferred is $1,000. All dollar cost
averaging transfers are made effective the 10th of the month (or the next
business day if the 10th of the month is not a business day). You can elect to
participate in this program at any time by:
- properly completing the Dollar Cost Averaging election form;
- returning it to us by the first of the month (to be effective that
month); and
- insuring that sufficient value is in either the Money Market Fund or the
U.S. Government Securities Fund.
Dollar Cost Averaging will terminate when any of the following occurs:
1) the number of designated transfers has been completed;
2) you do not have enough money in the Money Market Fund or the U.S.
Government Securities Fund to make the transfer (if less money is available,
that amount will be dollar cost averaged and the program will end);
3) you request termination in writing and the writing is received by
the first of the month; or
4) your policy is terminated.
There is no current charge for Dollar Cost Averaging but we reserve the
right to charge for this program in the future.
4. EXPENSES
There are charges and other expenses associated with the policy that reduce
the return on your investment in the policy. The charges and expenses are:
MORTALITY AND EXPENSE RISK CHARGE
We deduct a mortality and expense risk charge from each variable option each
business day. This risk charge is guaranteed not to exceed, on an annual basis,
0.90% of your average Policy Account value. The current risk charge is equal to
0.60%.
This risk charge compensates us for assuming the mortality and expense risks
under the policy. The mortality risk assumed by us is that the insureds, as a
group, may not live as long as expected. The expense risk assumed by us is that
actual expenses may be greater than those assumed. We are responsible for the
administration of the policy. We expect to profit from this charge.
ADMINISTRATIVE CHARGES
We deduct administrative charges from each variable option each business day
and from your Policy Account on each monthly anniversary date. The charge is
equal, on an annual basis, to 0.15% of your average Policy Account value. There
is also a policy charge which is equal to $20 per policy month for the first
policy year. Thereafter, it is guaranteed to not exceed $9 per policy month.
Currently, the charge is $5 per policy
12
<PAGE>
month after the first policy year. This part of the charge will be waived if the
Policy Account is equal to or greater than 15% of the initial face amount plus
the requested face amount increases.
The charges reimburse us for expenses incurred in the administration of the
policies. Such expenses include: confirmations, annual account statements,
maintenance of policy records, maintenance of variable account records,
administrative personnel costs, mailing costs, data processing costs, legal
fees, accounting fees, filing fees, the costs of other services necessary for
policy owner servicing and all accounting, valuation, regulatory and updating
requirements.
INSURANCE RISK CHARGES
This charge compensates us for the insurance coverage we provide in the
month following the charge. The insurance risk charge for each policy month
equals the total of the insurance risk charges for the policy month for each
Face Amount of Insurance portion then in effect. To determine the insurance risk
charge for a Face Amount of Insurance portion for a policy month, we multiply:
- the Insurance Risk Amount for the Face Amount of Insurance portion for
that month; by
- the cost of insurance rate that applies to the Face Amount of Insurance
portion for that month.
The Insurance Risk Amount for a Face Amount of Insurance portion for a
policy month equals the excess of:
- the death benefit associated with that Face Amount of Insurance portion;
over
- the value of the Policy Account at the beginning of the policy month,
before the monthly deduction for the month is subtracted.
The cost of insurance rate for a Face Amount of Insurance portion for a
policy month equals the sum of:
- the standard cost of insurance rate for that month from the table of our
standard cost of insurance rates; and
- an additional rate for any extra mortality risk classification that
applies for the Face Amount of Insurance portion.
The additional rate for an extra mortality risk classification for any
policy month equals the amount of extra mortality that the risk classification
represents for that month.
The total cost of insurance rate for a policy month will be uniform for all
Face Amount of Insurance portions that:
- are in the same Face Amount band, sex, and risk classification;
- take effect when the insureds are the same age; and
- have been in force the same length of time.
We may change our standard cost of insurance rates from time to time based
on our expectations as to future cost elements such as: investment earnings,
mortality, persistency, expenses and taxes. Any change we make will apply to all
Face Amount portions in the same risk classification.
The declared standard cost of insurance rates for each policy month will not
be more than the amount shown in the table contained in your policy. The table
is based on the insured's age at his or her last birthday at the beginning of
each year (attained age), the insured's sex and whether or not the insured has
qualified for the non-smoker classification. For the initial Face Amount of
Insurance, the insured's attained age is determined at the beginning of each
policy year. For each Face Amount increase, attained age is determined at the
beginning of each policy year measured from the date the increase took effect.
Since the mortality tables used with the policy distinguish between males
and females, the cost of insurance and the benefits payable will differ between
males and females of the same age. Employers, employee plans and employee
organizations should seek legal advice to determine whether the Civil Rights Act
of 1964, Title VII, or other applicable law prohibits the use of sex distinct
mortality tables. We will offer the policy based upon unisex mortality tables
where required.
13
<PAGE>
CHARGES FOR ADDITIONAL BENEFIT RIDERS
The amount of the charge, if any, each policy month for additional benefit
riders is determined in accordance with the rider and is shown on the coverage
page of your policy.
SURRENDER CHARGES
A surrender charge may be deducted if you make a full or partial surrender.
The surrender charge consists of 2 parts: a deferred administrative expense and
a deferred sales load. The maximum surrender charge varies by issue age, face
amount, sex, smoking status, and contract duration. This charge will never
exceed the sum of the deferred administrative expense and the deferred sales
load, assuming the Surrender Charge Premium (SCP) is paid yearly during the
first fifteen years.
The deferred administrative expense is $5.00 per $1,000 of Face Amount of
Insurance for the first 3 policy years. The charge then grades down to zero over
policy years 4 through 13.
The deferred sales load is the lesser of 30% of the Surrender Charge Premium
(SCP), plus 5% of all premiums over the SCP, or the following percentage of SCP.
<TABLE>
<CAPTION>
YEARS % OF SCP
- -------------------------------------------- -------------
<S> <C>
1-8......................................... 65%
9.......................................... 60%
10......................................... 55%
11......................................... 44%
12......................................... 33%
13......................................... 22%
14......................................... 11%
15+........................................ 0%
</TABLE>
The SCP is equal to the Annual Guaranteed Coverage Premium for the base
policy death benefit coverage of a standard mortality risk. The SCP varies with
the issue age, sex, and smoking classification of the insured as well as the
Face Amount of the base policy. The SCP will not exceed the amount shown in the
following table.
<TABLE>
<CAPTION>
ISSUE AGE PER $1,000
- ------------------------------------------- -------------
<S> <C>
0-29...................................... $ 6
30-39...................................... $ 11
40-49...................................... $ 21
50-59...................................... $ 40
60-69...................................... $ 75
70-80...................................... $ 150
</TABLE>
For some higher issue ages, the Standard Non-Forfeiture Law of the state
where the policy is delivered may limit surrender charges to amounts less than
those defined above.
The surrender charge may also be deducted in the event of a decrease in Face
Amount.
The surrender charge at any time during the first policy year equals the
surrender charge at the end of the year. The surrender charge during any
subsequent policy year is calculated based on end of year surrender charges and
the portion of the year that has been completed.
When the policy terminates, your Policy Account may be less than the
surrender charge. If this happens, you will not have to pay the difference. If
the policy is reinstated, the surrender charge will also be reinstated.
PARTIAL SURRENDER FEE
If you surrender only a portion of your Net Cash Value at any time during
the insured's lifetime, there is an administrative fee assessed. This fee is
currently equal to the lesser of $25 or 2% of the partial surrender amount. You
can make a partial surrender once each policy year that does not exceed 10% of
the Net Cash Value without incurring a surrender charge or the partial surrender
fee.
PREMIUM FEE
This fee is used to pay for premium taxes charged by some states and other
governmental entities (E.G., municipalities). Allianz Life is responsible for
the payment of these taxes and will make a deduction from the value of the
policy for them. This fee is also used to pay for other expenses associated with
premium collection. The charge is equal to 2.5% of each premium payment.
TRANSFER FEE
You may transfer values from one variable option to another, or to or from
the fixed account. The first 12 transfers in a policy year are free. The fee for
each additional transfer is currently the lesser of $25 or 2% of the amount
transferred. Prescheduled automatic dollar cost averaging transfers are not
counted nor is the transfer of the initial premium at the end of the free look
period counted when we determine transfer fees.
INCOME TAX CHARGE
We do not currently assess any charge for income taxes. We reserve the right
to assess a charge for such taxes against the variable options or your Policy
Account if we determine that such taxes will be incurred.
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<PAGE>
FRANKLIN VALUEMARK FUNDS' ANNUAL EXPENSES: CLASS 1 SHARES
(as a percentage of Franklin Valuemark Funds' average net assets)
The Management and Portfolio Administration Fees and Total Annual Expenses
for each Portfolio are based on a percentage of that Portfolio's average net
assets for the most recent fiscal year. See the prospectus for Franklin
Valuemark Funds for more information.
<TABLE>
<CAPTION>
MANAGEMENT AND
PORTFOLIO OTHER TOTAL ANNUAL
ADMINISTRATION FEES(1) EXPENSES EXPENSES
----------------------- ------------- ---------------
<S> <C> <C> <C>
Capital Growth Fund............................................... .75% .02% .77%
Global Health Care Securities Fund(2)............................. .75% .09% .84%
Global Utilities Securities Fund.................................. .47% .03% .50%
Growth and Income Fund............................................ .47% .02% .49%
High Income Fund.................................................. .50% .03% .53%
Income Securities Fund............................................ .47% .02% .49%
Money Market Fund................................................. .51% .02% .53%
Mutual Discovery Securities Fund.................................. .95% .05% 1.00%
Mutual Shares Securities Fund..................................... .74% .03% .77%
Natural Resources Securities Fund................................. .62% .02% .64%
Real Estate Securities Fund....................................... .52% .02% .54%
Rising Dividends Fund............................................. .70% .02% .72%
Small Cap Fund.................................................... .75% .02% .77%
Templeton Developing Markets Equity Fund.......................... 1.25% .16% 1.41%
Templeton Global Asset Allocation Fund............................ .80% .04% .84%
Templeton Global Growth Fund...................................... .83% .05% .88%
Templeton Global Income Securities Fund........................... .57% .06% .63%
Templeton International Equity Fund............................... .80% .08% .88%
Templeton International Smaller Companies Fund.................... 1.00% .10% 1.10%
Templeton Pacific Growth Fund..................................... .99% .11% 1.10%
U.S. Government Securities Fund................................... .48% .02% .50%
Value Securities Fund(2).......................................... .75% .08% .83%
Zero Coupon Fund -- 2005.......................................... .63% .03% .66%
Zero Coupon Fund -- 2010.......................................... .62% .04% .66%
</TABLE>
- ------------------
1. The Portfolio Administration Fee is a direct expense for the Global Health
Care Securities Fund, the Mutual Discovery Securities Fund, the Mutual
Shares Securities Fund, the Templeton Global Asset Allocation Fund, the
Templeton International Smaller Companies Fund, and the Value Securities
Fund; other portfolios pay for similar services indirectly through the
Management Fee. See "Management" in the Franklin Valuemark Funds prospectus
for further information regarding these fees.
2. The Global Health Care Securities Fund and the Value Securities Fund
commenced operations May 1, 1998. The expenses shown for these Portfolios
are estimated for 1999.
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<PAGE>
5. DEATH BENEFIT
The amount of the death benefit depends on the total Face Amount of
Insurance, your Policy Account on the date of the insured's death and the death
benefit option (Option A or Option B) in effect at that time. The INSURED is the
person whose life is covered by this policy. The insured is named on the
coverage page. The actual amount we pay the beneficiary will be reduced by any
outstanding Policy Debt.
The total Face Amount is the sum of all of the Face Amount portions. The
initial Face Amount and each Face Amount increase still in effect are Face
Amount portions. The initial Face Amount and the death benefit option in effect
on the issue date (the date when the insured's life is covered under the policy)
are shown on the coverage page of your policy.
Option A. The amount of the death benefit under Option A is the greater
of:
- the total Face Amount at the beginning of the policy month when the
death occurs; or
- the Policy Account on the date of death multiplied by the applicable
factor from the Table of Death Benefit Factors contained in your policy.
Option B. The amount of the death benefit under Option B is the greater
of:
- the total Face Amount at the beginning of the policy month when the
death occurs plus the Policy Account on the date of death; or
- the Policy Account on the date of death multiplied by the applicable
factor from the Table of Death Benefit Factors contained in your policy.
CHANGE IN DEATH BENEFIT
You may change the death benefit option after your policy has been in force
for at least one year, subject to the following requirements:
- you must request the change in writing;
- once you have changed the death benefit option, it cannot be changed
again for the next 3 years;
- if you want to change death benefit Option A to Option B, you must
submit proof satisfactory to us that the insured is still insurable at
the risk classification that applies for the initial Face Amount. The
Face Amount will not change; and
- if you want to change death benefit Option B to Option A, the Face
Amount will be increased by an amount equal to the Policy Account on the
date of the change. The risk classification for the last Face Amount
portion to go into effect which is still in force will apply to the Face
Amount increase. This increase will not result in any increase in
premiums, expense charges or surrender charges.
Any change in a death benefit option will take effect on the monthly
anniversary date on or following the date we approve the request for the change.
CHANGE IN FACE AMOUNT OF INSURANCE
You may change the Face Amount of Insurance of your policy on any monthly
anniversary date after your policy has been in force at least one year. Once the
Face Amount has been changed, it cannot be changed again for the next 12 months.
Face Amount Increases. To increase the Face Amount of Insurance you must:
- submit an application for the increase;
- submit proof satisfactory to us that the insured is an insurable risk;
and
- pay any additional premium which is required.
The Face Amount of your policy can only be increased before your insured
reaches age 81. Each Face Amount increase must be at least as large as the
minimum Face Amount increase (currently $25,000). A Face Amount increase will
take effect on the monthly anniversary date on or following the day we approve
the application for the increase.
The risk classification that applies for any Face Amount increase may be
different from the risk classification that applies for the initial Face Amount.
16
<PAGE>
The following changes will be made to reflect the increase:
- The Guaranteed Coverage Premium will be increased.
- The monthly administrative charge will increase to $20 per month for the
12 months following the increase.
- Additional surrender charges equal to the Face Amount increase (in
$1,000's) multiplied by the surrender charge factors will apply for 13
years following the increase.
We will furnish a revised coverage page of your policy that shows:
- the risk classification and the amount of the increase; and
- the values for the changes described above.
Face Amount Decreases. You must request in writing any decrease in Face
Amount of Insurance. The decrease will take effect on the later of:
- the monthly anniversary date on or following the day we receive your
request for the decrease; or
- the monthly anniversary date one year after the last change you made in
Face Amount.
A Face Amount decrease will be used to reduce any previous Face Amount
increases which are then in effect starting with the latest increase and
continuing in the reverse order in which the increases were made. If any portion
of the decrease is left after all Face Amount increases have been reduced, it
will be used to reduce the initial Face Amount. We will not permit a Face Amount
decrease that would reduce the initial Face Amount below the minimum Face
Amount, currently $100,000.
The Guaranteed Coverage Premium will be reduced to reflect the Face Amount
decrease. The new Guaranteed Coverage Premium will be shown on a revised
coverage page of your policy.
We will deduct a charge from the Policy Account when the Face Amount is
decreased. The maximum charge we will deduct each time the Face Amount is
decreased is the lesser of:
- the total of the current surrender charge for the amount of each Face
Amount portion reduced; or
- the Policy Account when the decrease is made.
The charge will be deducted for each Face Amount portion reduced, starting
with the charge for the first Face Amount portion reduced, and continuing in the
same order in which the reductions are made until the charge is completely
deducted.
Future surrender charges will be reduced proportionately for any charges
deducted. After the Face Amount is decreased, the surrender charges for each
Face Amount portion for which a charge is deducted will be equal to the
surrender charges shown for that Face Amount portion on the coverage page of
your policy, or in the revised coverage page, multiplied by the ratio of:
- the amount of the surrender charge in effect for the Face Amount portion
at the time the charge is deducted minus the amount of the charge
deducted for the Face Amount portion; divided by
- the amount of the surrender charge in effect for the Face Amount portion
at the time the charge is deducted.
GUARANTEED DEATH BENEFIT RIDER
You can elect a Guaranteed Death Benefit Rider. This rider provides that the
Policy will remain in force to attained age 95 for death benefit Option A
policies and to attained age 80 for death benefit Option B policies, regardless
of the performance of the underlying portfolios, so long as you pay the minimum
required premium. The premium required is significantly higher than the minimum
premium required to issue the policy and to keep it in force. There is an
additional charge for this benefit, currently $0.01 per $1000 of Face Amount per
policy month. A policy cannot have both the Guaranteed Death Benefit Rider and
any of the following riders:
- Insured Term Rider
- Spouse Term Rider
ACCELERATED DEATH BENEFIT RIDER
You can elect the Accelerated Benefit Rider. This rider provides that you
may elect to receive
17
<PAGE>
some of the death benefit proceeds of the policy if the insured is suffering
from a terminal illness, as defined in the rider. Receipt of an accelerated
death benefit amount may be taxable. You should contact your personal tax or
financial adviser for specific information.
Death benefits, Cash Values, if any, and loan values, if any, will be
reduced if a benefit is paid pursuant to this rider.
There is an administrative charge for this benefit which is guaranteed not
to exceed the lesser of $1,000 or 2% of the benefit. This limit may vary
depending on the state in which the policy was purchased. The current
administrative charge is $150.
The receipt of an accelerated death benefit amount may adversely affect the
recipient's eligibility for Medicaid or other government benefits or
entitlements.
6. TAXES
NOTE: WE HAVE PREPARED THE FOLLOWING INFORMATION ON FEDERAL INCOME TAXES AS
A GENERAL DISCUSSION OF THE SUBJECT. IT IS NOT INTENDED AS TAX ADVISE TO ANYONE.
YOU SHOULD CONSULT YOUR TAX ADVISER ABOUT YOUR OWN CIRCUMSTANCES. WE HAVE
INCLUDED AN ADDITIONAL DISCUSSION REGARDING TAXES IN PART II.
LIFE INSURANCE IN GENERAL
Life insurance, such as this policy, is a means of providing for death
protection and setting aside money for future needs. Congress recognized the
importance of such planning and provided special rules in the Internal Revenue
Code (Code) for life insurance.
Simply stated, these rules provide that you will not be taxed on the
earnings on the money held in your life insurance policy until you take the
money out. Beneficiaries generally are not taxed when they receive the death
proceeds upon the death of the insured. However, estate taxes may apply.
TAKING MONEY OUT OF YOUR POLICY
You, as the owner, will not be taxed on increases in the value of your
policy until a distribution occurs either as a surrender or as a loan. If your
policy is a MEC, any loans or surrenders from the policy will be treated as
first coming from earnings and then from your investment in the policy.
Consequently, these distributed earnings are included in taxable income.
The Code also provides that any amount received from a MEC which is included
in income may be subject to a 10% penalty. The penalty will not apply if the
income received is:
1) paid on or after the taxpayer reaches age 59 1/2;
2) paid if the taxpayer becomes totally disabled (as that term is defined in
the Code); or
3) in a series of substantially equal payments made annually (or more
frequently) for the life or life expectancy of the taxpayer.
If your policy is not a MEC, any surrender proceeds will be treated as first
a recovery of the investment in the policy and to that extent will not be
included in taxable income. Furthermore any loan will be treated as indebtedness
under the policy and not as a taxable distribution. See "Federal Tax Status" in
Part II for more details including an explanation of whether your policy is a
MEC.
DIVERSIFICATION
The Code provides that the underlying investments for a variable life policy
must satisfy certain diversification requirements in order to be treated as a
life insurance contract. We believe that the portfolios are being managed so as
to comply with such requirements.
Under current federal tax law, it is unclear as to the circumstances under
which you, because of the degree of control you exercise over the underlying
investments, and not us would be considered the owner of the shares of the
portfolios. If you are considered the owner of the investments, it will result
in the loss of the favorable tax treatment for the policy. It is unknown to what
extent owners are permitted to select portfolios, to make transfers among the
portfolios or the number and type of portfolios owners may select from without
being considered the owner of the shares. If guidance from the Internal Revenue
Service is provided which is considered a new position, the guidance would
generally be applied prospectively. However, if such guidance is considered not
to be a new position, it may be applied retroactively. This would mean that you,
as the owner of the policy, could be treated as
18
<PAGE>
the owner of the portfolios. Due to the uncertainty in this area, we reserve the
right to modify the policy in an attempt to maintain favorable tax treatment.
7. ACCESS TO YOUR MONEY
POLICY LOANS
We will loan money to you at the loan interest rate we establish for each
policy year during which the loan is outstanding. Your request for a loan must
be in writing.
The policy loan will be divided into two parts, the preferred loan and the
non-preferred loan. A preferred loan may be made not more than once per policy
year, beginning the later of:
- the tenth policy anniversary; or
- the anniversary following the insured's 60th birthday.
No more than 10% of the Cash Value of your policy at the time of the loan
may be made as a preferred loan. Any portion of a loan that is not a preferred
loan is a non-preferred loan.
The policy loan will be allocated to the fixed account. If the policy loan
requested exceeds the loan limit, you may also request a transfer of values from
the variable options to the fixed account. These values will be determined at
the time you request the transfer. If you do not indicate the proportions of the
variable options to be transferred, we will make the transfers based on the
proportions that your Policy Account in the variable options bear to the total
unloaned value in the Policy Account. Policy loans may have federal tax
consequences (see "Federal Tax Status").
LOAN INTEREST CHARGED
There may be a lower declared loan interest rate each year for the preferred
loan than for the non-preferred loan. We will determine the loan interest rates
for a policy year at least 60 days before the policy year begins. The maximum
annual loan interest rates we will use for preferred and non-preferred loans for
a policy (the maximum allowable rate) are the greater of:
- the guaranteed interest rate for the fixed account shown on the coverage
page of your policy for a policy year (currently 3.5% for all policy
years) plus 1%; or
- Moody's Corporate Bond Yield Average, Monthly Average Corporates as
published by Moody's Investors Service, Inc., for the calendar month
ending two months before the date on which the loan interest rate is
determined.
If Moody's Corporate Bond Yield Average, Monthly Average Corporates is no
longer published on a timely basis, we will use a substantially similar average
approved by the insurance department in the state where your policy was
delivered to determine the maximum allowable rate.
If the maximum allowable rate for a policy is at least 1/2% lower than the
loan interest rate in effect for the previous policy year, we will decrease the
loan interest rate to not more than the maximum allowable rate. If the maximum
allowable rate for a policy year is at least 1/2% higher than either loan
interest rate in effect for the previous policy year, we may increase either
loan interest rate to not more than the maximum allowable rate. We will not use
a loan interest rate for any policy year that exceeds 15%.
We will notify you as to the preferred loan and non-preferred loan interest
rates that apply at the time a new loan is made or when any Policy Debt is
reinstated. If either loan interest rate that applies to an existing policy loan
is increased, we will notify you in writing at least 30 days before the new rate
takes effect.
When a loan is made, interest for the rest of the current policy year must
be paid in advance. If interest is not paid when due, it will be added to the
Policy Debt and allocated to the fixed account. The accumulation of preferred
loans, together with interest on such loans, is the preferred debt. The
accumulation of non-preferred loans, together with interest on such loans, is
the non-preferred debt.
Total Policy Debt is the sum of the preferred debt and the non-preferred
debt, and equals the total outstanding loan with interest. If the total Policy
Debt (including interest in advance) exceeds the fixed account, we will transfer
values from the variable options to the fixed account if such values are
available, based on the proportions that the values in the variable options bear
to the total value of the variable options. The unpaid interest will then be
treated as part of the
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Policy Debt and will bear interest at the loan rates.
LOAN LIMIT
A loan may be for any amount which does not exceed the loan limit.
The loan limit equals:
- the Cash Value on the date the loan is made; minus
- interest for the rest of the current policy year; minus
- any existing Policy Debt.
SECURITY
The policy will be the only security for the loan.
RESTRICTIONS ON MAKING LOANS
Loans will not be available during a grace period or after the insured dies.
REPAYING POLICY DEBT
The Policy Debt, or any part, may be repaid at any time as long as the
policy is in force. We have the right to not accept partial loan repayments for
amounts less than $50. Any Policy Debt outstanding will be deducted before any
benefit proceeds are paid or applied under a payment option.
Repayments will be applied first to the non-preferred debt, and then to the
preferred debt, unless you specify differently.
Repayments will be allocated to the fixed account and to the variable
options based on the premium allocation schedule then in effect, unless a
different allocation is requested.
When there is Policy Debt outstanding, any payments received will be applied
first as repayment of debt, rather than as premium, unless we are instructed
otherwise. If total Policy Debt equals or exceeds the Cash Value, we can
terminate the policy. A notice of termination will be mailed to the last address
we have on file 61 days prior to termination.
PARTIAL SURRENDERS
You may make a partial surrender from the Net Cash Value at any time during
the insured's life and before the policy has terminated. The minimum partial
surrender amount is currently $500. The partial surrender may not exceed the Net
Cash Value, less $300.
We will assess a partial surrender fee when a partial surrender is made. The
maximum partial surrender fee we will charge is $50 and the current charge is
the lesser of 2% of the partial surrender amount or $25. In addition, a
surrender charge may be assessed on the amount surrendered. See "Surrender
Charges" above. You may make a partial surrender once each policy year that does
not exceed 10% of the Net Cash Value without incurring a surrender charge or the
partial surrender fee.
When a partial surrender is made, the amount of the partial surrender, the
partial surrender fee and the surrender charge, if any, will be deducted from
the Policy Account. You elect how much of each partial surrender, partial
surrender fee and surrender charge is to come from the unloaned value in the
fixed account and from values in each of the variable options. If you do not so
elect, or if we cannot make the surrender on the basis of the your direction or
those allocation percentages, we will make it based on the proportions that the
unloaned value in the fixed account and unloaned values in the variable options
bear to the total unloaned value in the Policy Account.
The Face Amount will be reduced if death benefit Option A is in effect when
a partial surrender is made. Such a reduction will be equal to the amount of the
partial surrender minus the excess, if any, of:
- the death benefit at the time the partial surrender is made; over
- the Face Amount at the time the partial surrender is made.
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However, if the amount of the partial surrender is less than or equal to the
excess described above, the Face Amount will not be reduced.
Any Face Amount reduction will be used first to reduce any Face Amount
increases then in effect starting with the latest increase and continuing in the
reverse order in which the increases were made. If any of the reduction is left
after all Face Amount increases have been reduced, it will be used to reduce the
initial Face Amount.
We will not permit a partial surrender that would reduce the Face Amount
below the minimum Face Amount (currently $100,000). We may limit the number of
partial surrenders you can make in a policy year, but you will always be allowed
to make at least one partial surrender if the surrender meets these
requirements.
FULL SURRENDERS
You may completely surrender your policy and receive the Net Cash Value
anytime during the insured's life and before the policy has terminated.
The full surrender will take effect on the later of:
- the date we receive your written request for the surrender; or
- the date you request, in writing, for the surrender to take effect.
The policy and all coverage under it will terminate at 12:01 a.m. at our
ValueLife Service Center on the date the surrender takes effect.
Partial and full surrenders may have federal tax consequences (see "Federal
Tax Status").
8. OTHER INFORMATION
THE COMPANY
Allianz Life Insurance Company of North America is a life insurance company
organized under the laws of the state of Minnesota in 1896.
We are a wholly-owned subsidiary of Allianz Versicherungs-AG Holding
("Allianz"). Allianz is headquartered in Munich, Germany, and has subsidiaries
throughout the world. We offer fixed and variable life insurance and annuities,
and group life, accident and health insurance.
Administration for the policy is provided at our service center:
Allianz Life ValueLife Service Center
300 Berwyn Park
P.O. Box 3031
Berwyn, Pennsylvania 19312-0031
(800) 336-0320
YEAR 2000
Allianz Life has initiated programs to ensure that all of the computer
systems utilized to provide services and administer policies will function
properly in the year 2000. An assessment of the total expected costs
specifically related to the year 2000 conversion has been completed. These costs
are expensed as incurred and total costs are not expected to have a significant
effect on Allianz Life's financial position or results of operations. Allianz
Life believes it is taking steps that are reasonably designed to address the
potential failure of computer systems used by its service providers and to
ensure its year 2000 program is completed on a timely basis. There can be no
assurance, however, that the steps taken by Allianz Life will be adequate to
avoid any adverse impact.
THE SEPARATE ACCOUNT
We established a separate account, Allianz Life Separate Account A (Separate
Account), to hold the assets that underlie the policies.
The assets of the Separate Account are held in our name on behalf of the
Separate Account and legally belong to us. However, those assets that underlie
the policies, are not chargeable with liabilities arising out of any other
business we may conduct. All the income, gains and losses (realized or
unrealized) resulting from those assets are credited to or against the policies
and not against any other policies we may issue. The Separate Account is divided
into variable options. (The variable options are referred to as sub-accounts in
the policy.)
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DISTRIBUTOR
The policy is sold by licensed insurance agents, where the policy may be
lawfully sold, who are registered representatives of broker-dealers which are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc.
The policy is distributed through the principal underwriter, NALAC Financial
Plans, LLC, 1750 Hennepin Avenue, Minneapolis, MN, 55403, a wholly-owned
subsidiary of ours. NALAC Financial Plans, LLC provides marketing services, and
is reimbursed for expenses incurred in the distribution of the policies.
Commissions will be paid to broker-dealers who sell the policies.
Broker-dealers will be paid commissions and expense reimbursements up to an
amount equal to 100% of the first Guaranteed Coverage Premium; 4% of the next
six Guaranteed Coverage Premiums; and 2% of all premiums paid thereafter.
Similar commissions are paid on premiums received after any increase in Face
Amount, or the addition of a rider. In addition, broker-dealers may also receive
additional compensation, based on meeting certain production standards.
SUSPENSION OF PAYMENTS OR TRANSFERS
We may be required to suspend or postpone any payments or transfers for any
period when:
1) the New York Stock Exchange is closed (other than customary weekend
and holiday closings);
2) trading on the New York Stock Exchange is restricted;
3) an emergency exists as a result of which disposal of shares of the
portfolios is not reasonably practicable or we cannot reasonably value the
shares of the portfolios;
4) during any other period when the Securities and Exchange Commission,
by order, so permits for the protection of owners.
We may defer the portion of any transfer, amount payable or surrender, or
Policy Loan from the fixed account for not more than 6 months.
OWNERSHIP
OWNER. You, as the OWNER of the policy, have all of the rights under the
policy subject to:
- the rights of any assignee; and
- the rights of any irrevocable beneficiary.
The OWNER can also be the insured. If you die while the policy is still in
force and the insured is living, ownership passes to your successor owner or if
you have not designated a successor owner, then your estate becomes the owner.
JOINT OWNER. The policy can be owned by joint owners. Authorization of both
joint owners is required for all policy changes except for telephone transfers.
BENEFICIARY. The BENEFICIARY is the person(s) or entity(ies) you name to
receive any death proceeds. The beneficiary is named at the time the policy is
issued unless changed at a later date. You can name a CONTINGENT BENEFICIARY
prior to the death of the insured. Unless an irrevocable beneficiary has been
named, you can change the beneficiary at any time before the insured dies. If
there is an irrevocable beneficiary, all policy changes except premium
allocations and transfers require the consent of the beneficiary.
Primary and contingent beneficiaries are as named in the application, unless
you make a change. To change a beneficiary, you must send us a written request.
We may require the policy to record the change. The request will take effect
when signed, subject to any action we may take before receiving it.
One or more irrevocable beneficiaries may be named.
If a beneficiary is a minor, we will make payment to the guardian of his or
her estate. We may require proof of age of any beneficiary.
Proceeds payable to a beneficiary will be free from the claims of creditors,
to the extent allowed by law.
ASSIGNMENT. You can assign (transfer ownership) the policy. A copy of any
assignment must
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be filed with the ValueLife Service Center. We are not responsible for the
validity of any assignment. If you assign the policy, your rights and those of
any revocably-named person will be subject to the assignment. An assignment will
not affect any payments we may make or actions we may take before such
assignment has been recorded at our ValueLife Service Center. This may be a
taxable event. You should consult a tax adviser if you wish to assign the
policy.
MATURITY BENEFIT. This is an amount equal to the Policy Account less any
outstanding Policy Debt on your policy. This amount is paid to you on the
maturity date.
MATURITY DATE. The policy provides that we will pay the Policy Account
value, less any Policy Debt, to you on the maturity date if the policy is still
in force. We will not accept any premiums after the maturity date.
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PART II
EXECUTIVE OFFICERS AND DIRECTORS
As of May 1, 1999, the directors and executive officers of Allianz Life
Insurance Company of North America (Allianz Life) and their principal
occupations for the past 5 years are as follows:
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS
- ------------------------------ ----------------------------------------------------------------------------------
<S> <C>
Lowell C. Anderson Chairman of the Board, President and Chief Executive Officer of Allianz Life since
October, 1988.
Herbert F. Hansmeyer Chairman of the Board of Allianz of America Corp. Member of the Board of
Management of Allianz-AG, Munich, Germany, since 1986.
Dr. Gerhard G. Rupprecht Chairman of the Board of Management -- Allianz Lebensversicherungs, since 1979.
Michael P. Sullivan President, Chief Executive Officer and Director of International Dairy Queen, Inc.
since 1987.
Michael T. Westermeyer Vice President -- Corporate Legal Officer and Secretary of Allianz Life since
April 1997. Formerly Second Vice President, Senior Counsel and Assistant Secretary
of Allianz Life.
Paul M. Howman Vice President -- Underwriting of Allianz Life since 1995.
Robert S. James President -- Individual Division of Allianz Life since March 31, 1995. Previously
President of Financial Markets Division.
Edward J. Bonach Executive Vice President -- Chief Financial Officer and Treasurer of Allianz Life
since 1993.
Ronald L. Wobbeking President -- Mass Marketing Division of Allianz Life since September 1991.
Rev. Dennis J. Dease President, University of St. Thomas, St. Paul since July 1991.
James R. Campbell Chairman and Chief Executive Officer of Norwest Bank MN, N.A. since 1998.
Previously Executive Vice President since February 1988.
Robert M. Kimmitt Partner in the law firm of Wilmer, Cutler & Pickering.
</TABLE>
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VOTING
Pursuant to our view of present applicable law, we will vote the shares of
the portfolios at special meetings of shareholders in accordance with
instructions received from all owners having a voting interest. We will vote
shares for which we have not received instructions. We will vote all shares in
the same proportion as the shares for which we have received instructions. We
will vote our shares in the same manner. Franklin Valuemark Funds does not hold
regular meetings of shareholders.
If the Investment Company Act of 1940 or any regulation thereunder is
amended or if the present interpretation of the Act changes so as to permit us
to vote the shares in our own right, we may elect to do so.
Your voting interest in the portfolios is determined as follows:
- You may cast one vote for each $100 of Account Value which is allocated
to a variable option on the record date. Fractional votes are counted.
- The number of shares which you can vote will be determined as of the
date chosen by us. This will be done not more than 60 days prior to the
meeting of the portfolio. Voting instructions will be solicited by
written communication at least 14 days prior to such meeting.
- You will receive periodic reports relating to the portfolios in which
you have an interest, as well as any proxy material and a form with
which to give us such voting instructions.
DISREGARD OF VOTING INSTRUCTIONS
We may, when required to do so by state insurance authorities, vote shares
of the portfolios without regard to instructions from owners. We will do this if
such instructions would require the shares to be voted to cause a portfolio to
make, or refrain from making, investments which would result in changes in the
sub-classification or investment objectives of the portfolio. We may also
disapprove changes in the investment policy initiated by owners or
trustees/directors of the portfolios, if such disapproval:
- is reasonable and is based on a good faith determination by us that the
change would violate state or federal law;
- the change would not be consistent with the investment objectives of the
portfolios; or
- which varies from the general quality and nature of investments and
investment techniques used by other portfolios with similar investment
objectives underlying other variable contracts offered by us or of an
affiliated company.
In the event we do disregard voting instructions, a summary of this action
and the reasons for such action will be included in the next semi-annual report
to owners.
LEGAL OPINIONS
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut has provided advice
on certain matters relating to the federal securities and income tax laws in
connection with the policies.
OUR RIGHT TO CONTEST
We cannot contest the validity of the policy except in the case of fraud
after it has been in effect during the insured's lifetime for two years. If the
policy is reinstated, the two-year period is measured from the date of
reinstatement. In addition, if the insured commits suicide in the two-year
period, or such period as specified in state law, the benefit payable will be
limited to premiums paid less Policy Debt and less any surrenders. We also have
the right to adjust any benefits under the policy if the answers in the
application regarding the use of tobacco are not correct.
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FEDERAL TAX STATUS
NOTE: The following description is based upon our understanding of current
federal income tax law applicable to life insurance in general. We 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.
Section 7702 of the Internal Revenue Code of 1986, as amended ("Code"), defines
the term "life insurance contract" for purposes of the Code. We believe that the
policies to be issued will qualify as "life insurance contracts" under section
7702. We do not guarantee the tax status of the policies. Purchasers bear the
complete risk that the policies may not be treated as "life insurance" under
federal income tax laws. Purchasers should consult their own tax advisers. It
should be further understood that the following discussion is not exhaustive and
that special rules not described in this prospectus may be applicable in certain
situations.
Introduction. The discussion contained herein is general in nature and is
not intended as tax advice. Each person concerned should consult a competent tax
adviser. No attempt is made to consider any applicable state or other tax laws.
Moreover, the discussion herein is based upon our understanding of current
federal income tax laws as they are currently interpreted. No representation is
made regarding the likelihood of continuation of those current federal income
tax laws or of the current interpretations by the Internal Revenue Service.
We are taxed as a life insurance company under the Code. For federal income
tax purposes, the Separate Account is not a separate entity from us and its
operations form a part of us.
Diversification. Section 817(h) of the Code imposes certain diversification
standards on the underlying assets of variable life insurance policies. The Code
provides that a variable life insurance policy will not be treated as life
insurance 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 policy as a life insurance contract would result in imposition of federal
income tax to the owner with respect to earnings allocable to the policy prior
to the receipt of payments under the policy. The Code contains a safe harbor
provision which provides that life insurance policies, such as these policies,
will meet the diversification requirements if, as of the close of each quarter,
the underlying assets meet the diversification standards for a regulated
investment company and no more than fifty-five (55%) percent of the total assets
consist of cash, cash items, U.S. Government securities and securities of other
regulated investment companies. There is an exception for securities issued by
the U.S. Treasury in connection with variable life insurance policies.
On March 2, 1989, the Treasury Department issued regulations (Treas. Reg.
Section 1.817-5), which established diversification requirements for the
investment portfolios underlying variable contracts such as the policies. 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: (i) no more than 55% of the value of the total assets
of the portfolio is represented by any one investment; (ii) no more than 70% of
the value of the total assets of the portfolio is represented by any two
investments; (iii) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (iv) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments. For purposes of these regulations, all securities of the same
issuer are treated as a single investment. 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."
We intend that each portfolio underlying the policies will be managed by the
investment managers in such a manner as to comply with these diversification
requirements.
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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 separate account will cause the owner to be treated as
the owner of the assets of the separate account, thereby resulting in the loss
of favorable tax treatment for the policy. 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 policy 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 policyowner
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 the owner of the assets of the separate account.
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 you being
retroactively determined to be the owner of the assets of the separate account.
Due to the uncertainty in this area, we reserve the right to modify the
policy in an attempt to maintain favorable tax treatment.
Tax Treatment of the Policy. The policy has been designed to comply with
the definition of life insurance contained in Section 7702 of the Code. Although
some interim guidance has been provided and proposed regulations have been
issued, final regulations have not been adopted. Section 7702 of the Code
requires the use of reasonable mortality and other expense charges. In
establishing these charges, we have relied on the interim guidance provided in
IRS Notice 88-128 and proposed regulations issued on July 5, 1991. Currently,
there is even less guidance as to a policy issued on a substandard risk basis
and thus it is even less clear whether a policy issued on such basis would meet
the requirements of Section 7702 of the Code.
While we have attempted to comply with Section 7702, the law in this area is
very complex and unclear. There is a risk, therefore, that the Internal Revenue
Service will not concur with our interpretations of Section[7702 that were made
in determining such compliance. In the event the policy is determined not to so
comply, it would not qualify for the favorable tax treatment usually accorded
life insurance policies. You should consult your own tax advisers with respect
to the tax consequences of purchasing the policy.
Policy Proceeds. The tax treatment accorded to loan proceeds and/or
surrender payments from the policies will depend on whether the policy is
considered to be a MEC. (See "Tax Treatment of Loans and Surrenders.")
Otherwise, we believe that the policy should receive the same federal income tax
treatment as any other type of life insurance. As such, the death benefit
thereunder is excludable from the gross income of the beneficiary under Section
101(a) of the Code. Also, you are not deemed to be in constructive receipt of
the Net Cash Value, including increments thereon, under a policy until there is
a distribution of such amounts.
Federal, state and local estate, inheritance and other tax consequences of
ownership, or receipt of policy proceeds, depend on the circumstances of each
owner or beneficiary.
Tax Treatment of Loans And Surrenders. Section 7702A of the Code sets forth
the rules for determining when a life insurance policy will be deemed to be a
MEC. A MEC is a contract which is entered into or materially changed on or after
June 21, 1988 and fails to meet the 7-pay test. A policy fails to meet the 7-pay
test when the cumulative amount paid under the policy at any time during the
first 7 policy years exceeds the sum of the net level premiums which would have
been paid on or before such time if the policy provided for paid-up future
benefits after the payment of seven (7) level annual premiums. A material change
would include any increase in the future benefits or addition of qualified
additional benefits provided under a policy unless the increase is attributable
to: (1) the payment of premiums necessary to fund
27
<PAGE>
the lowest death benefit and qualified additional benefits payable in the first
seven policy years; or (2) the crediting of interest or other earnings
(including policyholder dividends) with respect to such premiums.
Furthermore, any policy received in exchange for a policy classified as a
MEC will be treated as a MEC regardless of whether it meets the 7-pay test.
However, an exchange under Section 1035 of the Code of a life insurance policy
entered into before June 21, 1988 for the policy will not cause the policy to be
treated as a MEC if no additional premiums are paid.
Due to the flexible premium nature of the policy, the determination of
whether it qualifies for treatment as a MEC depends on the individual
circumstances of each policy.
If the policy is classified as a MEC, then surrenders and/or loan proceeds
are taxable to the extent of income in the policy. Such distributions are deemed
to be on a last-in, first-out basis, which means the taxable income is
distributed first. Loan proceeds and/or surrender payments including those
resulting from the lapse of the policy, may also be subject to an additional 10%
federal income tax penalty applied to the income portion of such distribution.
The penalty shall not apply, however, to any distributions: (1) made on or after
the date on which the taxpayer reaches age 59 1/2; (2) which is attributable to
the taxpayer becoming disabled (within the meaning of Section 72(m)(7) of the
Code); or (3) which is part of a series of substantially equal periodic payments
made not less frequently than annually for the life (or life expectancy) of the
taxpayer or the joint lives (or joint life expectancies) of such taxpayer and
his beneficiary.
If a policy is not classified as a MEC, then any surrenders shall be treated
first as a recovery of the investment in the policy which would not be received
as taxable income. However, if a distribution is the result of a reduction in
benefits under the policy within the first fifteen years after the policy is
issued in order to comply with Section 7702, such distribution will, under rules
set forth in Section 7702, be taxed as ordinary income to the extent of income
in the policy.
Any loans from a policy which is not classified as a MEC, will be treated as
indebtedness of the owner and not a distribution. Upon complete surrender or
lapse of the policy, if the amount received plus loan indebtedness exceeds the
total premiums paid that are not treated as previously surrendered by the policy
owner, the excess generally will be treated as ordinary income.
Personal interest payable on a loan under a policy owned by an individual is
generally not deductible. Furthermore, no deduction will be allowed for interest
on loans under policies covering the life of any employee or officer of the
taxpayer or any person financially interested in the business carried on by the
taxpayer to the extent the indebtedness for such employee, officer or
financially interested person exceeds $50,000. The deductibility of interest
payable on policy loans may be subject to further rules and limitations under
Sections 163 and 264 of the Code.
Policy owners should seek competent tax advice on the tax consequences of
taking loans, distributions, exchanging or surrendering any policy.
Multiple Policies. The Code further provides that multiple MEC which are
issued within a calendar year period to the same owner by one company or its
affiliates are treated as one MEC for purposes of determining the taxable
portion of any loans or distributions. Such treatment may result in adverse tax
consequences including more rapid taxation of the loans or distributed amounts
from such combination of contracts. You should consult a tax adviser prior to
purchasing more than one MEC in any calendar year period.
Tax Treatment of Assignments. An assignment of a policy or the change of
ownership of a policy may be a taxable event. You should therefore consult a
competent tax adviser should you wish to assign or change the owner of your
policy.
Qualified Plans. The policies may be used in conjunction with certain
Qualified Plans. Because the rules governing such use are complex, you should
not do so until you have consulted a competent Qualified Plans consultant.
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Income Tax Withholding. All distributions or the portion thereof which is
includible in gross income of the policy owner are subject to federal income tax
withholding. However, in most cases you may elect not to have taxes withheld.
You may be required to pay penalties under the estimated tax rules, if
withholding and estimated tax payments are insufficient.
REPORTS TO OWNERS
We will, at a minimum, send you an annual report of the portfolios. Within
30 days after each policy anniversary, we will send you an annual statement. We
may elect to send these more often. The statement will show the current amount
of death benefit payable under the policy, the current Policy Account value, the
current Net Cash Value, current Policy Debt and will show all transactions
previously confirmed. The statement will also show premiums paid and all charges
deducted during the policy year.
We will mail you confirmations within seven days of any transaction
regarding: (a) the receipt of premium; (b) any transfer between variable
options; (c) any loan, interest repayment, or loan repayment; (d) any surrender;
(e) exercise of the free look privilege; and (f) payment of the death benefit
under the policy.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account or the
Distributor is a party or to which the assets of the Separate Account are
subject. We are not involved in any litigation that is of material importance in
relation to our total assets or that relates to the Separate Account.
EXPERTS
The financial statements of Allianz Life Variable Account A and our
consolidated financial statements as of and for the year ended December 31, 1998
included in this prospectus have been audited by KPMG Peat Marwick LLP,
independent auditors, as indicated in their reports included in this prospectus,
and are included herein, in reliance upon such reports and upon the authority of
said firm as experts in accounting and auditing.
FINANCIAL STATEMENTS
The consolidated financial statements of the Company included herein should
be considered only as bearing upon the ability of the Company to meet its
obligations under the Policies.
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ALLIANZ LIFE VARIABLE ACCOUNT A
OF
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Financial Statements
December 31, 1998
<PAGE>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Independent Auditors'Report
The Board of Directors of Allianz Life Insurance Company of North America and
Policyholders of Allianz Life Variable Account A:
We have audited the accompanying statements of assets and liabilities of the
sub-accounts of Allianz Life Variable Account A as of December 31, 1998, and the
related statements of operations and changes in net assets for each of the years
in the three-year period then ended. These financial statements are the
responsibility of the Variable 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. Investment securities
held in custody for the benefit of the Variable Account were confirmed to us by
the Franklin Valuemark Funds. 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 assets and liabilities of the sub-accounts of Allianz
Life Variable Account A at December 31, 1998, and the results of their
operations and the changes in their net assets for each of the years in the
three-year period then ended, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 29, 1999
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements
Statements of Assets and Liabilities
December 31, 1998
Capital Global Health Global Utilities Growth and High Income Money
Growth Care Securities Securities Income Income Securities Market
Fund Fund Fund Fund Fund Fund Fund
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments at net asset value:
Franklin Valuemark Funds:
Capital Growth Fund,
20,238 shares, cost $291,200 $325,424 - - - - - -
Global Health Care Securities Fund,
774 shares, cost $6,591 - 8,285 - - - - -
Global Utilities Securities Fund,
85,290 shares, cost $1,292,716 - - 1,743,335 - - - -
Growth and Income Fund,
142,817 shares, cost $2,429,075 - - - 2,907,763 - - -
High Income Fund,
124,657 shares, cost $1,592,204 - - - - 1,655,443 - -
Income Securities Fund,
92,113 shares, cost $1,526,016 - - - - - 1,558,547 -
Money Market Fund,
1,906,414 shares, cost $1,906,414 - - - - - - 1,906,414
- ---------------------------------------------------------------------------------------------------------------------------
Total assets 325,424 8,285 1,743,335 2,907,763 1,655,443 1,558,547 1,906,414
Liabilities:
Accrued mortality and expense risk charges 505 16 1,268 1,458 1,194 1,226 1,822
Accrued administrative charges 126 4 316 364 298 306 456
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 631 20 1,584 1,822 1,492 1,532 2,278
Net assets $324,793 8,265 1,741,751 2,905,941 1,653,951 1,557,015 1,904,136
- ---------------------------------------------------------------------------------------------------------------------------
Policy owners' equity (note 4) $324,793 8,265 1,741,751 2,905,941 1,653,951 1,557,015 1,904,136
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Assets and Liabilities (cont.)
December 31, 1998
<CAPTION>
Templeton
Mutual Mutual Natural Developing
Discovery Shares Resources Real Estate Rising Small Markets
SecuritiesSecuritiesSecurities Securities Dividends Cap Equity
Fund Fund Fund Fund Fund Fund Fund
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments at net asset value:
Franklin Valuemark Funds:
Mutual Discovery Securities Fund,
36,383 shares, cost $433,409 $410,762 - - - - - -
Mutual Shares Securities Fund,
86,962 shares, cost $1,021,958 - 1,040,062 - - - - -
Natural Resources Securities Fund,
15,067 shares, cost $182,925 - - 126,410 - - - -
Real Estate Securities Fund,
30,309 shares, cost $636,087 - - - 604,058 - - -
Rising Dividends Fund,
55,775 shares, cost $933,572 - - - - 1,010,086 - -
Small Cap Fund,
59,126 shares, cost $833,923 - - - - - 811,211 -
Templeton Developing Markets Equity Fund,
81,734 shares, cost $832,181 - - - - - - 564,782
- ---------------------------------------------------------------------------------------------------------------------------
Total assets 410,762 1,040,062 126,410 604,058 1,010,086 811,211 564,782
Liabilities:
Accrued mortality and expense risk charges 511 1,141 1,078 1,100 1,186 1,161 1,058
Accrued administrative charges 127 285 269 275 297 290 264
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 638 1,426 1,347 1,375 1,483 1,451 1,322
- ---------------------------------------------------------------------------------------------------------------------------
Net assets $410,124 1,038,636 125,063 602,683 1,008,603 809,760 563,460
- ---------------------------------------------------------------------------------------------------------------------------
Policy owners' equity (note 4) $410,124 1,038,636 125,063 602,683 1,008,603 809,760 563,460
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Assets and Liabilities (cont.)
December 31, 1998
Templeton
Templeton Templeton Templeton TempletonInternationalTempleton U.S.
Global Asset Global Global IncomeInternationalSmaller PacificGovernment
Allocation Growth Securities Equity Companies Growth Securities
Fund Fund Fund Fund Fund Fund Fund
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments at net asset value:
Franklin Valuemark Funds:
Templeton Global Asset Allocation Fund,
18,881 shares, cost $217,784 $239,226 - - - - - -
Templeton Global Growth Fund,
120,846 shares, cost $1,659,909 - 1,784,902 - - - - -
Templeton Global Income Securities Fund,
14,806 shares, cost $189,049 - - 190,556 - - - -
Templeton International Equity Fund,
117,816 shares, cost $1,768,945 - - - 1,828,501 - - -
Templeton International Smaller Companies Fund,
1,986 shares, cost $23,637 - - - - 18,267 - -
Templeton Pacific Growth Fund,
36,695 shares, cost $418,438 - - - - - 275,579 -
U.S. Government Securities Fund,
65,484 shares, cost $805,338 - - - - - - 909,579
- ---------------------------------------------------------------------------------------------------------------------------
Total assets 239,226 1,784,902 190,556 1,828,501 18,267 275,579 909,579
Liabilities:
Accrued mortality and expense risk charges 503 1,225 978 1,309 131 1,006 1,074
Accrued administrative charges 125 306 243 327 33 251 269
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 628 1,531 1,221 1,636 164 1,257 1,343
- ---------------------------------------------------------------------------------------------------------------------------
Net assets $238,598 1,783,371 189,335 1,826,865 18,103 274,322 908,236
Policy owners' equity (note 4) $238,598 1,783,371 189,335 1,826,865 18,103 274,322 908,236
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Assets and Liabilities (cont.)
December 31, 1998
Value Zero Zero Zero Total
Securities Coupon Coupon Coupon All
Fund Fund - 2000Fund - 2005Fund - 2010 Funds
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments at net asset value:
Franklin Valuemark Funds:
Value Securities Fund, 398 shares, cost $3,393 $3,104 - - -
Zero Coupon Fund - 2000, 23,849 shares, cost $274,490 - 353,200 - -
Zero Coupon Fund - 2005 22,076 shares, cost $264,413 - - 391,631 -
Zero Coupon Fund - 2010 23,983 shares, cost $358,785 - - - 456,868
- ---------------------------------------------------------------------------------------------------------------------------
Total assets 3,104 353,200 391,631 456,868 21,123,995
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities:
Accrued mortality and expense risk charges 6 515 531 545 22,547
Accrued administrative charges - 129 132 136 5,628
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 6 644 663 681 28,175
Net assets $3,098 352,556 390,968 456,187 21,095,820
Policy owners' equity (note 4) $3,098 352,556 390,968 456,187 21,095,820
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Operations
For the years ended December 31, 1998, 1997, and 1996
Adjustable U.S. Global Health Care
Government Fund Capital Growth Fund Securities Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends reinvested in fund shares $- - 18,030 833 7 - - - -
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charges - - 740 1,287 96 2 54 - -
Administrative charges - - 185 322 24 - 13 - -
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses - - 925 1,609 120 2 67 - -
Investment income (loss), net - - 17,105 (776) (113) (2) (67) - -
Realized gains (losses) and unrealized
appreciation (depreciation) on investments:
Realized capital gain distributions
on mutual funds - - - - - - - - -
Realized gains (losses) on sales of
investments, net - - (10,027) 989 (11) - 2 - -
- ---------------------------------------------------------------------------------------------------------------------------
Realized gains (losses) on investments, net - - (10,027) 989 (11) - 2 - -
Net change in unrealized appreciation
(depreciation) on investments - - (200) 34,912 (548) (140) 1,694 - -
- ---------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses) and unrealized
appreciation (depreciation) on investments, net - - (10,227) 35,901 (559) (140) 1,696 - -
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations $- - 6,878 35,125 (672) (142) 1,629 - -
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Operations (cont.)
For the years ended December 31, 1998, 1997, and 1996
Global Utilities Securities Fund Growth and Income Fund High Income Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends reinvested in fund shares $ 63,845 66,211 75,714 86,614 61,679 28,758 160,598 153,512 167,136
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charges 10,459 9,862 11,220 16,628 14,386 9,969 10,568 12,094 12,310
Administrative charges 2,615 2,466 2,805 4,157 3,597 2,492 2,642 3,023 3,077
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 13,074 12,328 14,025 20,785 17,983 12,461 13,210 15,117 15,387
- ---------------------------------------------------------------------------------------------------------------------------
Investment income (loss), net 50,771 53,883 61,689 65,829 43,696 16,297 147,388 138,395 151,749
Realized gains (losses) and unrealized
appreciation (depreciation) on investments:
Realized capital gain distributions
on mutual funds 93,096 91,611 - 203,765 59,819 101,857 9,531 5,036 8,872
Realized gains (losses) on sales of
investments, net 56,812 59,135 118,555 27,735 75,044 25,750 29,193 43,795 33,892
- ---------------------------------------------------------------------------------------------------------------------------
Realized gains (losses)
on investments, net 149,908 150,746 118,555 231,500 134,863 127,607 38,724 48,831 42,764
Net change in unrealized appreciation
(depreciation) on investments (40,828)116,553 (93,370) (118,668) 283,057 37,916 (177,480) 4,999 26,432
- ---------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses) and unrealized
appreciation (depreciation)
on investments, net 109,080 267,299 25,185 112,832 417,920 165,523 (138,756) 53,830 69,196
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations $159,851 321,182 86,874 178,661 461,616 181,820 8,632 192,225 220,945
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Operations (cont.)
For the years ended December 31, 1998, 1997, and 1996
Investment Grade
Income Securities Fund Intermediate Bond Fund Money Market Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends reinvested in fund shares $111,419 71,443 33,370 - - 3,706 62,012 35,286 32,922
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charges 8,671 7,189 4,656 - - 366 7,539 4,368 4,291
Administrative charges 2,168 1,797 1,164 - - 91 1,885 1,092 1,073
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 10,839 8,986 5,820 - - 457 9,424 5,460 5,364
- ---------------------------------------------------------------------------------------------------------------------------
Investment income (loss), net 100,580 62,457 27,550 - - 3,249 52,588 29,826 27,558
Realized gains (losses) and unrealized
appreciation (depreciation) on investments:
Realized capital gain distributions
on mutual funds 26,313 15,347 5,550 - - - - - -
Realized gains (losses) on sales
of investments, net 3,544 7,042 2,373 - - 1,981 - - -
- ---------------------------------------------------------------------------------------------------------------------------
Realized gains (losses)
on investments, net 29,857 22,389 7,923 - - 1,981 - - -
Net change in unrealized appreciation
(depreciation) on investments (115,794) 68,874 37,183 - - (3,575) - - -
- ---------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses)
and unrealized appreciation
(depreciation) on investments, net (85,937) 91,263 45,106 - - (1,594) - - -
Net increase (decrease) in net
assets from operations $ 14,643 153,720 72,656 - - 1,655 52,588 29,826 27,558
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Operations (cont.)
For the years ended December 31, 1998, 1997, and 1996
Mutual Discovery Mutual Shares Natural Resources
Securities Fund Securities Fund Securities Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends reinvested in fund shares $5,534 40 - 11,623 72 - 2,271 1,844 2,102
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charges 2,229 1,140 22 6,003 2,067 31 461 416 1,012
Administrative charges 557 285 5 1,501 517 8 115 104 253
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 2,786 1,425 27 7,504 2,584 39 576 520 1,265
Investment income (loss), net 2,748 (1,385) (27) 4,119 (2,512) (39) 1,695 1,324 837
Realized gains (losses) and unrealized
appreciation (depreciation) on investments:
Realized capital gain distributions
on mutual funds 5,149 - - 10,153 - - - - 1,927
Realized gains (losses) on sales
of investments, net 5,744 166 - 10,137 2,034 2 (8,058)(1,936) 14,498
- ---------------------------------------------------------------------------------------------------------------------------
Realized gains (losses) on
investments, net 10,893 166 - 20,290 2,034 2 (8,058) (1,936) 16,425
Net change in unrealized appreciation
(depreciation) on investments (49,861) 26,719 495 (35,219) 51,689 1,634 (35,420)(25,118)(8,994)
- ---------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses) and
unrealized appreciation (depreciation)
on investments, net (38,968) 26,885 495 (14,929) 53,723 1,636 (43,478)(27,054) 7,431
Net increase (decrease) in net
assets from operations ($36,220) 25,500 468 (10,810) 51,211 1,597 (41,783)(25,730) 8,268
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Operations (cont.)
For the years ended December 31, 1998, 1997, and 1996
Real Estate Securities Fund Rising Dividends Fund Small Cap Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends reinvested in fund shares $ 26,119 12,965 7,943 9,265 5,990 3,981 386 384 -
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charges 3,282 3,466 1,883 5,177 3,657 1,632 3,458 1,277 105
Administrative charges 821 867 471 1,294 914 408 865 319 26
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 4,103 4,333 2,354 6,471 4,571 2,040 4,323 1,596 131
Investment income (loss), net 22,016 8,632 5,589 2,794 1,419 1,941 (3,937)(1,212) (131)
Realized gains (losses) and unrealized
appreciation (depreciation) on investments:
Realized capital gain distributions
on mutual funds 16,168 6,191 - 113,543 10,229 - 49,628 4,546 -
Realized gains (losses) on sales
of investments, net 15,172 17,125 1,980 6,199 18,073 2,703 (1,660) 2,723 472
- ---------------------------------------------------------------------------------------------------------------------------
Realized gains (losses)
on investments, net 31,340 23,316 1,980 119,742 28,302 2,703 47,968 7,269 472
Net change in unrealized appreciation
(depreciation) on investments (179,557) 57,737 58,343 (77,635) 93,007 44,265 (48,794)22,458 3,624
- ---------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses) and
unrealized appreciation (depreciation)
on investments, net (148,217) 81,053 60,323 42,107 121,309 46,968 (826)29,727 4,096
Net increase (decrease) in net
assets from operations ($126,201) 89,685 65,912 44,901 122,728 48,909 (4,763) 28,515 3,965
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Operations (cont.)
For the years ended December 31, 1998, 1997, and 1996
Templeton Developing Templeton Global Templeton Global
Markets Equity Fund Asset Allocation Fund Growth Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends reinvested in fund shares $19,038 10,159 2,914 10,932 7,863 228 39,344 15,984 8,202
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charges 2,862 3,802 2,551 1,629 2,512 2,065 9,684 7,051 3,948
Administrative charges 715 950 638 407 628 516 2,421 1,763 987
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 3,577 4,752 3,189 2,036 3,140 2,581 12,105 8,814 4,935
Investment income (loss), net 15,461 5,407 (275) 8,896 4,723 (2,353) 27,239 7,170 3,267
Realized gains (losses) and unrealized
appreciation (depreciation) on investments:
Realized capital gain distributions
on mutual funds 61,907 16,114 5,391 13,002 2,268 456 143,312 5,328 8,202
Realized gains (losses) on sales
of investments, net (23,346) 1,960 2,603 11,507 23,197 12,194 13,548 15,707 2,914
- ---------------------------------------------------------------------------------------------------------------------------
Realized gains (losses)
on investments, net 38,561 18,074 7,994 24,509 25,465 12,650 156,860 21,035 11,116
Net change in unrealized appreciation
(depreciation) on investments (198,108)(127,265) 56,503 (31,637) 11,716 41,378 (70,051) 80,562 91,158
- ---------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses) and unrealized
appreciation (depreciation) on
investments, net (159,547)(109,191) 64,497 (7,128) 37,181 54,028 86,809 101,597 102,274
Net increase (decrease) in net
assets from operations ($144,086)(103,784) 64,222 1,768 41,904 51,675 114,048 108,767 105,541
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Operations (cont.)
For the years ended December 31, 1998, 1997, and 1996
Templeton Global Templeton International Templeton International
Income Securities Fund Equity Fund Smaller Companies Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends reinvested in fund shares $12,826 10,037 7,568 55,115 33,230 19,177 488 17 -
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charges 1,127 903 745 10,176 8,366 6,014 99 29 3
Administrative charges 282 226 186 2,544 2,092 1,504 25 7 1
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 1,409 1,129 931 12,720 10,458 7,518 124 36 4
Investment income (loss), net 11,417 8,908 6,637 42,395 22,772 11,659 364 (19) (4)
Realized gains (losses) and unrealized appreciation (depreciation) on
investments:
Realized capital gain distributions
on mutual funds - - - 110,714 50,952 23,468 565 - -
Realized gains (losses) on sales
of investments, net (315) 668 432 9,119 13,328 4,043 (121) (2) 119
- ---------------------------------------------------------------------------------------------------------------------------
Realized gains (losses)
on investments, net (315) 668 432 119,833 64,280 27,511 444 (2) 119
Net change in unrealized appreciation
(depreciation) on investments (521) (6,915) 2,837 (97,026) 25,384 114,314 (4,295)(1,075) -
- ---------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses) and unrealized
appreciation (depreciation) on investments, net (836) (6,247) 3,269 22,807 89,664 141,825 (3,851) (1,077)
119
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations $10,581 2,661 9,906 65,202 112,436 153,484 (3,487)(1,096) 115
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Operations (cont.)
For the years ended December 31, 1998, 1997, and 1996
Templeton Pacific Growth Fund U.S. Government Securities Fund Value Securities Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends reinvested in fund shares $10,966 8,455 10,710 64,457 52,576 45,170 - - -
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charges 1,388 214 2,726 5,484 5,796 4,926 - - -
Administrative charges 347 53 682 1,371 1,449 1,231 - - -
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 1,735 267 3,408 6,855 7,245 6,157 - - -
Investment income (loss), net 9,231 8,188 7,302 57,602 45,331 39,013 - - -
Realized gains (losses) and unrealized appreciation (depreciation) on
investments:
Realized capital gain distributions
on mutual funds 3,337 - 6,208 - - - - - -
Realized gains (losses) on sales
of investments, net (38,525) 907 6,092 17,179 27,003 18,468 (3) - -
- ---------------------------------------------------------------------------------------------------------------------------
Realized gains (losses)
on investments, net (35,188) 907 12,300 17,179 27,003 18,468 (3) - -
Net change in unrealized appreciation
(depreciation) on investments (7,500)(164,185)12,362 (18,101) 136 (37,068) (289) - -
- ---------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses) and
unrealized appreciation (depreciation)
on investments, net (42,688)(163,278)24,662 (922) 27,139 (18,600) (292) - -
Net increase (decrease) in net
assets from operations ($33,457) (155,090)31,964 56,680 72,470 20,413 (292) - -
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Operations (cont.)
For the years ended December 31, 1998, 1997, and 1996
Zero Coupon Fund - 2000 Zero Coupon Fund - 2005 Zero Coupon Fund - 2010
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends reinvested in fund shares $27,976 24,296 19,213 22,733 25,018 19,668 25,369 22,065 8,167
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charges 2,236 2,223 2,212 2,431 2,373 2,270 2,862 2,535 1,411
Administrative charges 559 556 553 608 593 568 716 634 353
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 2,795 2,779 2,765 3,039 2,966 2,838 3,578 3,169 1,764
Investment income (loss), net 25,181 21,517 16,448 19,694 22,052 16,830 21,791 18,896 6,403
Realized gains (losses) and unrealized appreciation (depreciation) on
investments:
Realized capital gain distributions
on mutual funds 4,476 550 190 5,259 87 - 3,510 176 2,213
Realized gains (losses) on sales
of investments, net 4,953 5,922 2,734 2,463 11,706 4,146 2,415 1,074 6,865
- ---------------------------------------------------------------------------------------------------------------------------
Realized gains (losses)
on investments, net 9,429 6,472 2,924 7,722 11,793 4,146 5,925 1,250 9,078
Net change in unrealized appreciation
(depreciation) on investments (11,643) (6,554)(13,736) 13,788 1,480 (21,955) 27,536 35,571 4,806
- ---------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses) and
unrealized appreciation (depreciation)
on investments, net (2,214) (82)(10,812) 21,510 13,273 (17,809) 33,461 36,821 13,884
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations $22,967 21,435 5,636 41,204 35,325 (979) 55,252 55,717 20,287
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Operations (cont.)
For the years ended December 31, 1998, 1997, and 1996
Total All Funds
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income:
Dividends reinvested in fund shares $ 829,763 619,133 514,679
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charges 115,794 95,822 77,110
Administrative charges 28,950 23,956 19,277
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 144,744 119,778 96,387
Investment income (loss), net 685,019 499,355 418,292
Realized gains (losses) and unrealized appreciation (depreciation) on
investments:
Realized capital gain distributions on mutual funds 873,428 268,254 164,334
Realized gains (losses) on sales of investments, net 144,683 324,660 252,789
- ---------------------------------------------------------------------------------------------------------------------------
Realized gains (losses) on investments, net 1,018,111 592,914 417,123
Net change in unrealized appreciation (depreciation) on investments (1,240,497) 548,282 354,212
- ---------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses) and unrealized appreciation
(depreciation) on investments, net (222,386)1,141,196 771,335
Net increase (decrease) in net assets from operations $ 462,633 1,640,551 1,189,627
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Changes in Net Assets
For the years ended December 31, 1998, 1997 and 1996
Global Health
Adjustable U.S. Government Fund Capital Growth Fund Care Securities Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income (loss), net $- - 17,105 (776) (113) (2) (67) - -
Realized gains (losses) on investments, net - - (10,027) 989 (11) - 2 - -
Net change in unrealized appreciation
(depreciation) on investments - - (200) 34,912 (548) (140) 1,694 - -
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations - - 6,878 35,125 (672) (142) 1,629 - -
Policy transactions (note 4):
Purchase payments - - 6,969 - - - - - -
Transfers between funds - - (34,766) 194,912 94,715 4,560 6,656 - -
Surrenders and terminations - - (1,178) - - - - - -
Rescissions - - - - - - - - -
Policy loan transactions - - 74 - - - - - -
Other transactions (note 2) - - (2,842) (3,276) (429) - (20) - -
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from policy transactions - - (31,743) 191,636 94,286 4,560 6,636 - -
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets - - (24,865) 226,761 93,614 4,418 8,265 - -
Net assets at beginning of year - - 24,865 98,032 4,418 - - - -
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $- - - 324,793 98,032 4,418 8,265 - -
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
For the years ended December 31, 1998, 1997 and 1996
Global Utilities Securities Fund Growth and Income Fund High Income Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income (loss), net $ 50,771 53,883 61,689 65,829 43,696 16,297 147,388 138,395 151,749
Realized gains (losses) on
investments, net 149,908 150,746 118,555 231,500 134,863 127,607 38,724 48,831 42,764
Net change in unrealized
appreciation (depreciation)
on investments (40,828) 116,553 ( 93,370) (118,668) 283,057 37,916 (177,480) 4,999 26,432
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets from
operations 159,851 321,182 86,874 178,661 461,616 181,820 8,632 192,225 220,945
- ---------------------------------------------------------------------------------------------------------------------------
Policy transactions (note 4):
Purchase payments 104,584 116,828 127,511 427,399 387,084 347,781 55,984 50,642 57,851
Transfers between funds (38,007) (67,788) (163,650) 282,965 194,269 289,040 (12,125) (140,178) 344,787
Surrenders and terminations (46,228) (8,311) (80,389) (66,385) (271,440) (28,415) (21,000) (67,891) (3,551)
Rescissions - - - - - - - - -
Policy loan transactions 32,511 (60,609) (97,734) (31,446) 3,110 8,174 (168,452) (33,557) 8,073
Other transactions (note 2) (65,057) (60,143) (65,596) (202,446) (163,700) (145,312) (43,702) (41,580) (35,494)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase
(decrease) in net
assets resulting from
policy transactions (12,197) (80,023) (279,858) 410,087 149,323 471,268 (189,295) (232,564) 371,666
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease)
in net assets 147,654 241,159 (192,984) 588,748 610,939 653,088 (180,663) (40,339) 592,611
Net assets at beginning
of year 1,594,097 1,352,938 1,545,922 2,317,193 1,706,254 1,053,166 1,834,614 1,874,953 1,282,342
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $1,741,751 1,594,097 1,352,938 2,905,941 2,317,193 1,706,254 1,653,951 1,834,614 1,874,953
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
For the years ended December 31, 1998, 1997 and 1996
Investment Grade
Income Securities Fund Intermediate Bond Fund Money Market Fund
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income (loss), net$ 100,580 62,457 27,550 - - 3,249 52,588 29,826 27,558
Realized gains (losses)
on investments, net 29,857 22,389 7,923 - - 1,981 - - -
Net change in unrealized
appreciation (depreciation)
on investments (115,794) 68,874 37,183 - - (3,575) - - -
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets
from operations 14,643 153,720 72,656 - - 1,655 52,588 29,826 27,558
- --------------------------------------------------------------------------------------------------------------------------------
Policy transactions (note 4):
Purchase payments 219,675 255,347 275,281 - - 11,940 3,668,991 1,996,782 2,288,562
Transfers between funds 295,129 46,671 120,002 - - (72,421) (2,423,871) (2,136,510) (2,221,762)
Surrenders and terminations (50,336) (11,918) (20,210) - - (751) (25,503) (52,158) (27,431)
Rescissions - - - - - - (29,369) - -
Policy loan transactions (12,262) (25,240) (4,239) - - - (9,864) (25,633) (5,692)
Other transactions (note 2) (101,921) (96,044) (98,005) - - (5,413) (39,778) 168,886 (13,338)
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets resulting
from policy transactions 350,285 168,816 272,829 - - (66,645) 1,140,606 (48,633) 20,339
- --------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in
net assets 364,928 322,536 345,485 - - (64,990) 1,193,194 (18,807) 47,897
Net assets at
beginning of year 1,192,087 869,551 524,066 - - 64,990 710,942 729,749 681,852
- --------------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $1,557,015 1,192,087 869,551 - - - 1,904,136 710,942 729,749
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
For the years ended December 31, 1998, 1997 and 1996
Mutual Discovery Mutual Shares Natural Resources
Securities Fund Securities Fund Securities Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income (loss), net $ 2,748 (1,385) (27) 4,119 (2,512) (39) 1,695 1,324 837
Realized gains (losses) on
investments, net 10,893 166 - 20,290 2,034 2 (8,058) (1,936) 16,425
Net change in unrealized appreciation
(depreciation) on investments (49,861) 26,719 495 (35,219) 51,689 1,634 (35,420) (25,118) (8,994)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations (36,220) 25,500 468 (10,810) 51,211 1,597 (41,783) (25,730) 8,268
- ---------------------------------------------------------------------------------------------------------------------------
Policy transactions (note 4):
Purchase payments - - - 74,363 16,585 - 13,268 15,837 18,730
Transfers between funds 155,186 281,309 50,000 214,033 776,453 84,053 59,479 (5,829) (46,431)
Surrenders and terminations - - - (3,707) - - (5,593) (52) (7,791)
Rescissions - - - - - - - - -
Policy loan transactions (56,263) - - (111,671) (1,956) - 789 172 (524)
Other transactions (note 2) (7,963) (1,893) - (41,817) (9,654) (44) (6,590) (6,922) (9,019)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from policy transactions 90,960 279,416 50,000 131,201 781,428 84,009 61,353 3,206 (45,035)
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets 54,740 304,916 50,468 120,391 832,639 85,606 19,570 (22,524) (36,767)
Net assets at beginning of year 355,384 50,468 - 918,245 85,606 - 105,493 128,017 164,784
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $410,124 355,384 50,468 1,038,636 918,245 85,606 125,063 105,493 128,017
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
For the years ended December 31, 1998, 1997 and 1996
Real Estate Securities Fund Rising Dividends Fund Small Cap Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income (loss), net $ 22,016 8,632 5,589 2,794 1,419 1,941 (3,937) (1,212) (131)
Realized gains (losses) on
investments, net 31,340 23,316 1,980 119,742 28,302 2,703 47,968 7,269 472
Net change in
unrealized appreciation
(depreciation) on
investments (179,557) 57,737 58,343 (77,635) 93,007 44,265 (48,794) 22,458 3,624
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets from
operations (126,201) 89,685 65,912 44,901 122,728 48,909 (4,763) 28,515 3,965
- ---------------------------------------------------------------------------------------------------------------------------
Policy transactions (note 4):
Purchase payments 115,546 92,480 67,454 161,902 108,408 74,745 113,167 44,998 683
Transfers between funds 37,909 176,166 86,682 244,722 193,808 86,767 400,975 248,658 51,952
Surrenders and terminations (10,028) (2,795) (1,098) (14,872) (17,668) (7,693) (9,697) (965)
75
Rescissions - - - - - - - - -
Policy loan transactions (4,950) (15,416) (1,340) (4,345) (5,874) (1,876) (575) - -
Other transactions (note 2) (55,881) (43,348) (27,619) (78,620) (51,398) (33,070) (47,188) (19,801)
(239)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets resulting from
policy transactions 82,596 207,087 124,079 308,787 227,276 118,873 456,682 272,890 52,471
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in
net assets (43,605) 296,772 189,991 353,688 350,004 167,782 451,919 301,405 56,436
Net assets at beginning
of year 646,288 349,516 159,525 654,915 304,911 137,129 357,841 56,436 -
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $602,683 646,288 349,516 1,008,603 654,915 304,911 809,760 357,841 56,436
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
For the years ended December 31, 1998, 1997 and 1996
Templeton Developing Markets Templeton Global Templeton Global
Equity Fund Asset Allocation Fund Growth Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income (loss), net $ 15,461 5,407 (275) 8,896 4,723 (2,353) 27,239 7,170 3,267
Realized gains (losses) on
investments, net 38,561 18,074 7,994 24,509 25,465 12,650 156,860 21,035 11,116
Net change in unrealized
appreciation (depreciation)
on investments (198,108) (127,265) 56,503 (31,637) 11,716 41,378 (70,051) 80,562 91,158
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets
from operations (144,086) (103,784) 64,222 1,768 41,904 51,675 114,048 108,767 105,541
- ---------------------------------------------------------------------------------------------------------------------------
Policy transactions (note 4):
Purchase payments 159,440 191,340 215,896 1,438 430 439 318,275 317,636 335,873
Transfers between funds 5,954 2,200 267,310 5,929 (108,898) 333,332 262,188 272,672 119,840
Surrenders and terminations (19,910) (24,839) (10,080) - (108) - (42,480) (35,910) (12,771)
Rescissions - - - - - - - - -
Policy loan transactions (16,461) (20,884) (2,638) (77,494) - - (11,353) (19,640) (8,767)
Other transactions (note 2) (56,866) (77,790) (73,383) (4,852) (5,240) (1,945)(144,669) (131,055) (113,183)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets resulting
from policy transactions 72,157 70,027 397,105 (74,979) (113,816) 331,826 381,961 403,703 320,992
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in
net assets (71,929) (33,757) 461,327 (73,211) (71,912) 383,501 496,009 512,470 426,533
Net assets at beginning
of year 635,389 669,146 207,819 311,809 383,721 220 1,287,362 774,892 348,359
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $563,460 635,389 669,146 238,598 311,809 383,721 1,783,371 1,287,362 774,892
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
For the years ended December 31, 1998, 1997 and 1996
Templeton Global Templeton International Templeton International
Income Securities Fund Equity Fund Smaller Companies Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income (loss), net $ 11,417 8,908 6,637 42,395 22,772 11,659 364 (19) (4)
Realized gains (losses)
on investments, net (315) 668 432 119,833 64,280 27,511 444 (2) 119
Net change in unrealized
appreciation (depreciation)
on investments (521) (6,915) 2,837 (97,026) 25,384 114,314 (4,295) (1,075) -
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets from
operations 10,581 2,661 9,906 65,202 112,436 153,484 (3,487) (1,096) 115
- ---------------------------------------------------------------------------------------------------------------------------
Policy transactions (note 4):
Purchase payments 43,650 42,795 39,862 343,054 359,829 371,300 - - -
Transfers between funds 8,645 (1,929) 9,506 214,070 170,913 100,214 9,480 13,608 (115)
Surrenders and terminations (2,203) (1,422) (2,101) (77,537) (30,410) (30,572) - - -
Rescissions - - - - - - - - -
Policy loan transactions (4,262) (2,728) (425) (14,359) (37,789) (10,040) - - -
Other transactions (note 2) (18,506) (17,463) (16,260) (150,458) (138,095) (129,653) (360) (42) -
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets resulting
from policy transactions 27,324 19,253 30,582 314,770 324,448 301,249 9,120 13,566 (115)
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets37,905 21,914 40,488 379,972 436,884 454,733 5,633 12,470 -
Net assets at beginning of year 151,430 129,516 89,028 1,446,893 1,010,009 555,276 12,470 - -
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $189,335 151,430 129,516 1,826,865 1,446,893 1,010,009 18,103 12,470 -
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
For the years ended December 31, 1998, 1997 and 1996
Templeton Pacific Growth Fund U.S. Government Securities Fund Value Securities Fund
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income (loss), net $ 9,231 8,188 7,302 57,602 45,331 39,013 - - -
Realized gains (losses)
on investments, net (35,188) 907 12,300 17,179 27,003 18,468 (3) - -
Net change in unrealized
appreciation (depreciation)
on investments (7,500) (164,185) 12,362 (18,101) 136 (37,068) (289) - -
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets from
operations (33,457) (155,090) 31,964 56,680 72,470 20,413 (292) - -
- ---------------------------------------------------------------------------------------------------------------------------
Policy transactions (note 4):
Purchase payments 91,236 134,478 181,194 36,225 40,913 26,467 - - -
Transfers between funds (25,732) (41,449) 14,234 2,433 (108,226) 261,674 3,405 - -
Surrenders and terminations (15,757) (10,217) (20,255) (28,787) (20,318) (7,837) - - -
Rescissions - - - - - - - - -
Policy loan transactions (2,091) (13,651) (2,894) (7,674) (7,823) (424) - - -
Other transactions (note 2) (29,702) (52,839) (73,664) (28,339) (27,460) (19,100) (15) - -
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets resulting
from policy transactions 17,954 16,322 98,615 (26,142) (122,914) 260,780 3,390 - -
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in
net assets (15,503) (138,768) 130,579 30,538 (50,444) 281,193 3,098 - -
Net assets at beginning
of year 289,825 428,593 298,014 877,698 928,142 646,949 - - -
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $274,322 289,825 428,593 908,236 877,698 928,142 3,098 - -
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
For the years ended December 31, 1998, 1997 and 1996
Zero Coupon Fund - 2000 Zero Coupon Fund - 2005 Zero Coupon Fund - 2010
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income (loss), net $ 25,181 21,517 16,448 19,694 22,052 16,830 21,791 18,896 6,403
Realized gains (losses) on
investments, net 9,429 6,472 2,924 7,722 11,793 4,146 5,925 1,250 9,078
Net change in unrealized appreciation
(depreciation) on investments (11,643) (6,554) (13,736) 13,788 1,480 (21,955) 27,536 35,571 4,806
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations 22,967 21,435 5,636 41,204 35,325 (979) 55,252 55,717 20,287
- ---------------------------------------------------------------------------------------------------------------------------
Policy transactions (note 4):
Purchase payments - - - - - - - - -
Transfers between funds - (17,434) - - (61,213) 57,145 - 3,652 223,644
Surrenders and terminations (9,045) - - - - (3,894) - - -
Rescissions - - - - - - - - -
Policy loan transactions (7,106) (73) (64) - - - (1,739) (183) (176)
Other transactions (note 2) (4,490) (4,421) (4,271) (4,873) (4,798) (4,109) (6,849) (5,717) (3,437)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from policy transactions (20,641)(21,928) (4,335) (4,873) (66,011) 49,142 (8,588) (2,248) 220,031
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets 2,326 (493) 1,301 36,331 (30,686) 48,163 46,664 53,469 240,318
Net assets at beginning of year 350,230 350,723 349,422 354,637 385,323 337,160 409,523 356,054 115,736
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $352,556 350,230 350,723 390,968 354,637 385,323 456,187 409,523 356,054
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
For the years ended December 31, 1998, 1997 and 1996
Total All Funds
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income (loss), net $ 685,019 499,355 418,292
Realized gains (losses) on investments, net 1,018,111 592,914 417,123
Net change in unrealized appreciation (depreciation) on investments (1,240,497) 548,282 354,212
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from operations 462,633 1,640,551 1,189,627
Policy transactions (note 4):
Purchase payments 5,948,197 4,172,412 4,448,538
Transfers between funds (95,665) (214,360) (34,403)
Surrenders and terminations (449,068) (556,422) (265,942)
Rescissions (29,369) - -
Policy loan transactions (509,067) (267,774) (120,512)
Other transactions (note 2) (1,144,238) (790,946) (874,996)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from policy transactions 3,720,790 2,342,910 3,152,685
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets 4,183,423 3,983,461 4,342,312
Net assets at beginning of year 16,912,397 12,928,936 8,586,624
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $21,095,820 16,912,397 12,928,936
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
Allianz Life Variable Account A
of Allianz Life Insurance Company of North America
Notes to Financial Statements
December 31, 1998
1. ORGANIZATION
Allianz Life Variable Account A (Variable Account) is a segregated investment
account of Allianz Life Insurance Company of North America (Allianz Life)
registered with the Securities and Exchange Commission as a unit investment
trust pursuant to the provisions of the Investment Company Act of 1940 (as
amended). The Variable Account was established on May 31, 1985 and commenced
operations September 8, 1987. Accordingly, it is an accounting entity wherein
all segregated account transactions are reflected.
The Variable Account's assets are the property of Allianz Life and are held for
the benefit of the owners and other persons entitled to payments under variable
life policies issued through the Variable Account and underwritten by Allianz
Life. The assets of the Variable Account, equal to the reserves and other
liabilities of the Variable Account, are not chargeable with liabilities that
arise from any other business which Allianz Life may conduct.
The Variable Account's sub-accounts may invest, at net asset values, in one or
more of the funds of the Franklin Valuemark Funds (FVF), managed by Franklin
Advisers, Inc. and its Templeton and Franklin affiliates, in accordance with the
selection made by the policy owner. Not all funds are available as investment
options for the products which comprise the Variable Account.
Certain officers and trustees of the FVF are also officers and/or directors of
Franklin Advisers, Inc. and/or Allianz Life.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
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 amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Investments
Investments of the Variable Account are valued daily at market value using net
asset values provided by Franklin Advisers, Inc.
Realized investment gains include realized gain distributions received from the
respective funds and gains on the sale of fund shares as determined by the
average cost method. Realized gain distributions are reinvested in the
respective funds. Dividend distributions received from the FVF are reinvested in
additional shares of the FVF and are recorded as income to the Variable Account
on the ex-dividend date.
A Fixed Account investment option is available to variable universal life policy
owners. This account is comprised of equity and fixed income investments which
are part of the general assets of Allianz Life. The liabilities of the Fixed
Account are part of the general obligations of Allianz Life and are not included
in the Variable Account. The guaranteed minimum rate of return on the Fixed
Account is 3 %.
The Global Health Care Securities Fund and Value Securities Fund were added as
available investment options on May 1, 1998. The Capital Growth Fund and
Templeton International Smaller Companies Fund were added as available
investment options on May 1, 1996. The Mutual Discovery Securities Fund and
Mutual Shares Securities Fund were added as available investment options on
November 8, 1996. The Investment Grade Intermediate Bond Fund and Adjustable
U.S. Government Fund were closed on October 25, 1996 when shares of the U.S.
Government Securities Fund were substituted for all shares of both funds.
On May 1, 1998, the Utility Equity Fund name was changed to Global Utilities
Securities Fund. The Precious Metals Fund name was changed to Natural Resources
Securities Fund on May 1, 1997. On May 1, 1996, the Global Income Fund name was
changed to Templeton Global Income Securities Fund.
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Expenses
Asset Based Expenses
A mortality and expense risk charge is deducted from the Variable Account on a
daily basis equal, on an annual basis, to .60% of the daily net assets of the
Variable Account.
An administrative charge is deducted from the Variable Account on a daily basis
equal, on an annual basis, to .15% of the daily net assets of the Variable
Account.
Contract Based Expenses
A cost of insurance charge is deducted against each policy by liquidating units.
The amount of the charge is based upon age, sex, rate class and net amount at
risk (death benefit less total cash surrender value). Total cost of insurance
charges paid by the policy owners for the years ended December 31, 1998, 1997
and 1996 were $939,693, $832,417 and $715,700, respectively.
A deferred issue charge is deducted annually, at the end of the policy year,
from each single premium variable life policy for the first ten policy years by
liquidating units. The amount of the charge is 7% of the single premium
consisting of 2.5% for premium taxes, 4% for sales charge and .5% for policy
issue charge (in the State of California, 2.35%, 4.15% and .5%, respectively).
If the policy is surrendered before the full amount is collected, the
uncollected portion of this charge is deducted from the account value. Total
deferred issue charges paid by the policy owners for the years ended December
31, 1998, 1997 and 1996 were $40,600, $37,629, and $28,152, respectively.
A policy charge is deducted on each monthly anniversary date from each variable
universal life policy by liquidating units. The amount of the charge is equal to
2.5% of each premium payment for premium taxes plus $20 per month for the first
policy year and $9 per month guaranteed thereafter. Currently, Allianz Life has
agreed to voluntarily limit the charge to $5 per month after the first policy
year. Total policy charges paid by the policy owners for the years ended
December 31, 1998, 1997 and 1996 were $213,159, $211,485, and $204,321,
respectively.
Twelve free transfers are permitted each contract year. Thereafter, the fee is
the lesser of $25 or 2% of the amount transferred. No transfer charges were paid
by the policy owners during the years ended December 31, 1998, 1997 and 1996,
respectively. Net transfers to the Fixed Account during the years ended December
31, 1998, 1997 and 1996 were $95,665, $214,360, and $34,403, respectively.
The cost of insurance, deferred issue, policy and transfer charges paid are
reflected in the Statements of Changes in Net Assets as Other transactions.
3. FEDERAL INCOME TAXES
Operations of the Variable Account form a part of, and are taxed with,
operations of Allianz Life, which is taxed as a life insurance company under the
Internal Revenue Code.
Allianz Life does not expect to incur any federal income taxes in the operation
of the Variable Account. If, in the future, Allianz Life determines that the
Variable Account may incur federal income taxes, it may then assess a charge
against the Variable Account for such taxes.
<PAGE>
<TABLE>
<CAPTION>
4. POLICY TRANSACTIONS - UNIT ACTIVITY
Transactions in units for each fund for the years ended December 31, 1998, 1997
and 1996, were as follows:
Global Global Investment Mutual
Adjustable U.S Capital Health Care Utilities Growth and High Income Grade Money Discovery
Government Growth Securities Securities Income Income Securities Intermediate Market Securities
Fund Fund Fund Fund Fund Fund Fund Bond Fund Fund Fund
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Units outstanding at
December 31, 1995 2,013 - - 66,198 38,021 65,333 26,614 4,259 45,768 -
Policy transactions:
Purchase payments 553 - - 5,397 12,119 2,801 13,495 778 147,764 -
Transfers between funds (2,257) 391 - (6,933) 9,962 17,863 5,904 (4,635) (143,612) 4,953
Surrenders and terminations (94) - - (3,354) (1,005) (177) (1,004) (49) (1,836) -
Policy loan transactions 6 - - (4,007) 311 405 (212) - (376) -
Other transactions (221) - - (2,782) (5,057) (1,722) (4,812) (353) (778) -
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Net increase (decrease)
in units resulting from
policy transactions (2,013) 391 - (11,679) 16,330 19,170 13,371 (4,259) 1,162 4,953
Units outstanding at
December 31, 1996 - 391 - 54,519 54,351 84,503 39,985 - 46,930 4,953
Policy transactions:
Purchase payments - - - 4,451 10,974 2,141 11,090 - 125,344 -
Transfers between funds - 7,029 - (2,894) 5,516 (5,679) 1,881 - (120,861) 24,650
Surrenders and terminations - - - (304) (7,932) (3,022) (513) - (3,267) -
Policy loan transactions - - - (2,428) (68) (1,471) (1,113) - (1,621) -
Other transactions - (34) - (2,288) (4,624) (1,789) (4,161) - (2,758) (164)
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Net increase (decrease)
in units resulting from
policy transactions - 6,995 - (3,463) 3,866 (9,820) 7,184 - (3,163) 24,486
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Units outstanding at
December 31, 1997 - 7,386 - 51,056 58,217 74,683 47,169 - 43,767 29,439
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Policy transactions:
Purchase payments - - - 3,254 10,356 2,263 8,710 - 216,819 -
Transfers between funds - 13,340 778 (1,327) 6,612 (511) 11,713 - (142,026) 11,424
Surrenders and terminations - - - (1,451) (1,628) (852) (1,996) - (1,535) -
Rescissions - - - - - - - - (1,784) -
Policy loan transactions - - - 1,042 (754) (6,603) (481) - (599) (4,187)
Other transactions - (230) (2) (2,025) (4,902) (1,762) (4,044) - (2,394) (647)
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Net increase (decrease)
in units resulting from
policy transactions - 13,110 776 (507) 9,684 (7,465) 13,902 - 68,481 6,590
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Units outstanding at
December 31, 1998 - 20,496 776 50,549 67,901 67,218 61,071 - 112,248 36,029
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<PAGE>
4. POLICY TRANSACTIONS - UNIT ACTIVITY (CONT.)
Templeton
Mutual Natural Templeton Templeton Templeton Global Templeton
Shares Resources Real Estate Rising Small Developing Global Asset Global Income International
Securities Securities Securities Dividends Cap Markets Equity Allocation Growth Securities Equity
Fund Fund Fund Fund Fund Fund Fund Fund Fund Fund
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Units outstanding at
December 31, 1995 - 10,831 7,628 10,700 - 22,210 21 31,471 5,801 40,830
Policy transactions:
Purchase payments - 1,115 2,975 5,400 54 20,769 39 28,048 2,551 24,859
Transfers between
funds 8,284 (2,791) 3,397 6,298 4,297 24,526 30,441 9,880 609 6,586
Surrenders and
terminations - (438) (51) (581) 6 (952) - (1,089) (138) (2,070)
Policy loan transactions - (29) (62) (134) - (251) - (718) (26) (665)
Other transactions (4) (536) (1,209) (2,379) (19) (7,042) (169) (9,435) (1,041) (8,691)
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Net increase
(decrease) in units
resulting from policy
transactions 8,280 (2,679) 5,050 8,604 4,338 37,050 30,311 26,686 1,955 20,019
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Units outstanding at
December 31, 1996 8,280 8,152 12,678 19,304 4,338 59,260 30,332 58,157 7,756 60,849
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Policy transactions:
Purchase payments 1,460 1,090 3,106 5,847 3,088 15,655 31 21,703 2,567 19,816
Transfers between
funds 67,284 (400) 5,867 10,275 17,595 (2,887) (7,728) 18,498 (108) 9,327
Surrenders and
terminations - (6) (93) (909) (74) (1,900) (9) (2,308) (85) (1,686)
Policy loan transactions (184) (7) (534) (334) - (1,728) - (1,348) (164) (2,099)
Other transactions (841) (475) (1,455) (2,780) (1,348) (6,291) (396) (8,935) (1,050) (7,573)
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Net increase
(decrease) in units
resulting from
policy transactions 67,719 202 6,891 12,099 19,261 2,849 (8,102) 27,610 1,160 17,785
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Units outstanding at
December 31, 1997 75,999 8,354 19,569 31,403 23,599 62,109 22,230 85,767 8,916 78,634
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Policy transactions:
Purchase payments 6,140 1,227 3,889 7,667 7,774 18,632 102 20,228 2,504 17,692
Transfers between
funds 16,707 4,888 1,042 11,079 26,906 714 445 16,458 502 10,775
Surrenders and
terminations (307) (544) (354) (668) (631) (2,188) - (2,700) (129) (3,966)
Rescissions - - - - - - - - - -
Policy loan transactions (8,559) 57 (163) (199) (47) (1,902) (5,298) (677) (244) (733)
Other transactions (3,446) (609) (1,880) (3,711) (3,266) (6,572) (335) (9,229) (1,062) (7,641)
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Net increase
(decrease) in units
resulting from
policy transactions 10,535 5,019 2,534 14,168 30,736 8,684 (5,086) 24,080 1,571 16,127
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Units outstanding at
December 31, 1998 86,534 13,373 22,103 45,571 54,335 70,793 17,144 109,847 10,487 94,761
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</TABLE>
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<TABLE>
<CAPTION>
4. POLICY TRANSACTIONS - UNIT ACTIVITY (CONT.)
Templeton
International Templeton U.S. Zero Zero Zero
Smaller Pacific Government Value Coupon Coupon Coupon Total
Companies Growth Securities Securities Fund - Fund - Fund - All
Fund Fund Fund Fund 2000 2005 2010 Funds
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Units outstanding at December 31, 1995 - 21,322 32,402 - 14,874 12,382 3,735 462,413
Policy transactions:
Purchase payments - 12,100 1,329 - - 2,260 - 282,146
Transfers between funds - 802 12,856 - 1 (149) 8,290 (2,628)
Surrenders and terminations - (1,318) (400) - - - - (14,699)
Policy loan transactions - (189) (22) - (3) - (7) (5,979)
Other transactions - (4,907) (961) - (185) (162) (122) (52,587)
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Net increase (decrease) in units
resulting from policy transactions - 6,488 12,802 - (187) 1,949 8,161 206,253
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Units outstanding at December 31, 1996 - 27,810 45,204 - 14,687 14,331 11,896 668,666
Policy transactions:
Purchase payments - 9,779 1,925 - - - - 240,067
Transfers between funds 1,143 (2,629) (5,101) - (707) (2,226) 119 17,964
Surrenders and terminations - (759) (952) - - - - (23,819)
Policy loan transactions - (884) (382) - (3) - (6) (14,374)
Other transactions (4) (3,737) (1,294) - (181) (173) (183) (52,534)
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Net increase (decrease) in units
resulting from policy transactions 1,139 1,770 (5,804) - (891) (2,399) (70) 167,304
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Units outstanding at December 31, 1997 1,139 29,580 39,400 - 13,796 11,932 11,826 835,970
Policy transactions:
Purchase payments - 11,546 1,572 - - - - 340,375
Transfers between funds 795 (2,703) 45 401 - - - (11,943)
Surrenders and terminations - (2,018) (1,237) - (346) - - (22,550)
Rescissions - - - - - - - (1,784)
Policy loan transactions - (247) (332) - (263) - (45) (30,234)
Other transactions (35) (3,684) (1,215) (2) (171) (154) (184) (59,202)
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Net increase (decrease) in units
resulting from policy transactions 760 2,894 (1,167) 399 (780) (154) (229) 214,662
Units outstanding at December 31, 1998 1,899 32,474 38,233 399 13,016 11,778 11,597 1,050,632
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</TABLE>
<PAGE>
<TABLE>
<CAPTION>
5. UNIT VALUES
A summary of unit values and units outstanding for variable life contracts and
the expense ratios, including expenses of the underlying funds, for each of the
five years in the period ended December 31, 1998 follows.
Ratio of
Expenses to
Units Average
Outstanding Unit Value Net Assets Net Assets*
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Adjustable U.S. Government Fund
December 31,
19961 18,047 $12,873 $232,322 1.34%
1995 2,013 12.352 24,865 1.34
1994 654 11.374 7,427 1.32
1993 403 11.481 4,622 1.33
Capital Growth Fund
December 31,
1998 20,496 15.847 324,793 1.52
1997 7,386 13.273 98,032 1.52
19962 391 11.303 4,418 1.52
Global Health Care Securities Fund
December 31,
19983 776 10.656 8,265 1.59
Global Utilities Securities Fund
December 31,
1998 50,549 34.456 1,741,751 1.25
1997 51,056 31.223 1,594,097 1.25
1996 54,519 24.816 1,352,938 1.25
1995 66,198 23.353 1,545,922 1.25
1994 59,969 17.912 1,074,173 1.27
Growth and Income Fund
December 31,
1998 67,901 42.797 2,905,941 1.24
1997 58,217 39.803 2,317,193 1.24
1996 54,351 31.393 1,706,254 1.25
1995 38,021 27.700 1,053,166 1.27
1994 29,795 21.010 625,982 1.29
High Income Fund
December 31,
1998 67,218 24.606 1,653,951 1.28
1997 74,683 24.565 1,834,614 1.28
1996 84,503 22.188 1,874,953 1.29
1995 65,333 19.628 1,282,342 1.31
1994 63,380 16.512 1,046,519 1.35
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
5. UNIT VALUES (CONT.)
Ratio of
Expenses to
Units Average
Outstanding Unit Value Net Assets Net Assets*
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<S> <C> <C> <C> <C>
Income Securities Fund
December 31,
1998 61,071 $25.496 $1,557,015 1.24%
1997 47,169 25.273 1,192,087 1.25
1996 39,985 21.747 869,551 1.25
1995 26,614 19.691 524,066 1.26
1994 10,514 16.208 170,404 1.29
Investment Grade Intermediate Bond Fund
December 31,
19961 4,699 15.617 73,376 1.35
1995 4,259 15.260 64,990 1.36
1994 6,002 13.978 83,891 1.38
1993 582 14.017 8,158 1.41
Money Market Fund
December 31,
1998 112,248 16.964 1,904,136 1.20
1997 43,767 16.244 710,942 1.20
1996 46,930 15.550 729,749 1.18
1995 45,768 14.898 681,852 1.15
1994 37,381 14.194 530,565 1.21
Mutual Discovery Securities Fund
December 31,
1998 36,029 11.383 410,124 1.75
1997 29,439 12.072 355,384 1.81
19964 4,953 10.190 50,468 2.12
Mutual Shares Securities Fund
December 31,
1998 86,534 12.002 1,038,636 1.52
1997 75,999 12.082 918,245 1.55
19964 8,280 10.339 85,606 1.75
Natural Resources Securities Fund
December 31,
1998 13,373 9.353 125,063 1.39
1997 8,354 12.629 105,493 1.44
1996 8,152 15.704 128,017 1.40
1995 10,831 15.214 164,784 1.41
1994 13,441 14.977 201,295 1.43
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
5. UNIT VALUES (CONT.)
Ratio of
Expenses to
Units Average
Outstanding Unit Value Net Assets Net Assets*
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<S> <C> <C> <C> <C>
Real Estate Securities Fund
December 31,
1998 22,103 $27.267 $602,683 1.29%
1997 19,569 33.025 646,288 1.29
1996 12,678 27.568 349,516 1.32
1995 7,628 20.913 159,525 1.34
1994 4,368 17.928 78,309 1.37
Rising Dividends Fund
December 31,
1998 45,571 22.132 1,008,603 1.47
1997 31,403 20.855 654,915 1.49
1996 19,304 15.795 304,911 1.51
1995 10,700 12.816 137,129 1.53
1994 4,474 9.952 44,527 1.55
Small Cap Fund
December 31,
1998 54,335 14.903 809,760 1.52
1997 23,599 15.164 357,841 1.52
1996 4,338 13.011 56,436 1.52
19955 - 10.157 - 1.65
Templeton Developing Markets Equity Fund
December 31,
1998 70,793 7.959 563,460 2.16
1997 62,109 10.230 635,389 2.17
1996 59,260 11.292 669,146 2.24
1995 22,210 9.357 207,819 2.16
19946 6,099 9.173 55,951 2.28
Templeton Global Asset Allocation Fund
December 31,
1998 17,144 13.917 238,598 1.59
1997 22,230 14.027 311,809 1.69
1996 30,332 12.651 383,721 1.61
19957 21 10.637 220 1.65
Templeton Global Growth Fund
December 31,
1998 109,847 16.235 1,783,371 1.63
1997 85,767 15.010 1,287,362 1.63
1996 58,157 13.324 774,892 1.68
1995 31,471 11.069 348,359 1.72
19946 6,748 9.894 66,760 1.89
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
5. UNIT VALUES (CONT.)
Ratio of
Expenses to
Units Average
Outstanding Unit Value Net Assets Net Assets*
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<S> <C> <C> <C> <C>
Templeton Global Income Securities Fund
December 31,
1998 10,487 $18.052 $189,335 1.38%
1997 8,916 16.985 151,430 1.37
1996 7,756 16.700 129,516 1.36
1995 5,801 15.347 89,028 1.39
1994 3,175 13.483 42,818 1.46
Templeton International Equity Fund
December 31,
1998 94,761 19.278 1,826,865 1.63
1997 78,634 18.400 1,446,893 1.64
1996 60,849 16.598 1,010,009 1.64
1995 40,830 13.600 555,276 1.67
1994 11,403 12.390 141,293 1.74
Templeton International Smaller Companies Fund
December 31,
1998 1,899 9.528 18,103 1.85
1997 1,139 10.943 12,470 1.81
19962 - 11.194 - 1.53
Templeton Pacific Growth Fund
December 31,
1998 32,474 8.447 274,322 1.85
1997 29,580 9.798 289,825 1.78
1996 27,810 15.412 428,593 1.74
1995 21,322 13.977 298,014 1.76
1994 12,635 13.042 164,784 1.82
U.S. Government Securities Fund
December 31,
1998 38,233 23.755 908,236 1.25
1997 39,400 22.276 877,698 1.25
1996 45,204 20.532 928,142 1.26
1995 32,402 19.966 646,949 1.27
1994 31,714 16.840 534,051 1.28
Value Securities Fund
December 31,
19983 399 7.751 3,098 1.87
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
5. UNIT VALUES (CONT.)
Ratio of
Expenses to
Units Average
Outstanding Unit Value Net Assets Net Assets*
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Zero Coupon Fund - 2000
December 31,
1998 13,016 $27.086 $352,556 1.15%
1997 13,796 25.386 350,230 1.15
1996 14,687 23.880 350,723 1.15
1995 14,874 23.491 349,422 1.15
1994 14,594 19.614 286,240 1.15
Zero Coupon Fund - 2005
December 31,
1998 11,778 33.196 390,968 1.15
1997 11,932 29.722 354,637 1.15
1996 14,331 26.888 385,323 1.15
1995 12,382 27.229 337,160 1.15
1994 12,559 20.821 261,513 1.15
Zero Coupon Fund - 2010
December 31,
1998 11,597 39.336 456,187 1.15
1997 11,826 34.629 409,523 1.15
1996 11,896 29.931 356,054 1.15
1995 3,735 30.991 115,736 1.15
1994 3,804 21.866 83,178 1.15
<FN>
*For the year ended December 31, including the effect of the expenses of the underlying funds.
Annualized.
1Period from January 1, 1996 to October 25, 1996 (fund closure). 2Period from
May 1, 1996 (fund commencement) to December 31, 1996. 3Period from May 1, 1998
(fund commencement) to December 31, 1998. 4Period from November 8, 1996 (fund
commencement) to December 31, 1996. 5Period from November 1, 1995 (fund
commencement) to December 31, 1995. 6Period from July 1, 1994 (fund
commencement) to December 31, 1994. 7Period from May 1, 1995 (fund commencement)
to December 31, 1995.
</FN>
</TABLE>
ALLIANZ LIFE INSURANCE
COMPANY OF NORTH AMERICA
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1998 and 1997
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Independent Auditors' Report
The Board of Directors
Allianz Life Insurance Company of North America:
We have audited the accompanying consolidated balance sheets of Allianz Life
Insurance Company of North America and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, stockholder's equity
and cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Allianz
Life Insurance Company of North America and subsidiaries as of December 31, 1998
and 1997, and the results of their operations, changes in stockholder's equity
and cash flows for each of the years in the three-year period ended December 31,
1998, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 5, 1999
<PAGE>
<TABLE>
<CAPTION>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Financial Statements
Consolidated Balance Sheets
December 31, 1998 and 1997
(in thousands)
1998 1997
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Assets
Investments:
Fixed maturities, at fair value $ 2,538,291 2,705,210
Equity securities, at fair value 512,404 442,607
Mortgage loans on real estate 457,128 318,683
Certificates of deposit and short-term securities 166,366 117,124
Policy loans 7,118 5,695
Other invested assets 95,746 51,863
Investment in LifeUSA Holdings Inc. 80,928 0
- ---------------------------------------------------------------------------------------------------------------------------
Total investments 3,857,981 3,641,182
Cash 67,195 26,871
Accrued investment income 36,649 38,345
Receivables (net of allowance for uncollectible accounts of $3,254 in 1998 and $3,122 in 1997) 323,971 262,676
Reinsurance receivable:
Funds held on deposit 1,170,170 1,145,210
Recoverable on future policy benefit reserves 1,191,098 1,120,663
Recoverable on unpaid claims 293,179 219,443
Receivable on paid claims 24,986 31,158
Deferred acquisition costs 930,059 927,080
Other assets 35,755 34,475
Federal income tax recoverable 4,060 20,761
- ---------------------------------------------------------------------------------------------------------------------------
Assets, exclusive of separate account assets 7,935,103 7,467,864
Separate account assets 9,915,150 10,756,929
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $17,850,253 18,224,793
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Financial Statements (continued)
Consolidated Balance Sheets (cont.)
December 31, 1998 and 1997
(in thousands)
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities:
Future benefit reserves:
Life $ 1,445,844 1,297,269
Annuity 3,588,491 3,251,829
Policy and contract claims 770,846 607,011
Unearned premiums 53,778 50,168
Reinsurance payable 129,397 111,684
Deferred income on reinsurance 106,065 115,688
Deferred income taxes 257,903 228,861
Accrued expenses 91,631 93,341
Commissions due and accrued 41,000 39,517
Other policyholder funds 20,586 30,208
Other liabilities 89,038 424,696
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities, exclusive of separate account liabilities 6,594,579 6,250,272
Separate account liabilities 9,915,150 10,756,929
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 16,509,729 17,007,201
Stockholder's equity:
Common stock, $1 par value, 20 million shares authorized, issued and outstanding 20,000 20,000
Preferred stock, $1 par value, cumulative, 200 million shares authorized,
No shares outstanding in 1998, 25 million shares outstanding in 1997 0 25,000
Additional paid-in capital 407,088 407,088
Retained earnings 673,857 574,447
Accumulated other comprehensive income 239,579 191,057
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholder's equity 1,340,524 1,217,592
Commitments and contingencies (notes 6, 12 and 13)
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $17,850,253 18,224,793
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Financial Statements (continued)
Consolidated Statements of Income
Years ended December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Life insurance premiums $ 416,199 339,841 284,084
Other life policy considerations 52,668 83,816 85,747
Annuity considerations 222,632 219,262 170,656
Accident and health premiums 773,570 747,718 603,230
- ---------------------------------------------------------------------------------------------------------------------------
Total premiums and considerations 1,465,069 1,390,637 1,143,717
Premiums and annuity considerations ceded 411,316 438,018 277,163
- ---------------------------------------------------------------------------------------------------------------------------
Net premiums and considerations 1,053,753 952,619 866,554
Investment income, net 217,066 162,350 222,622
Realized investment gains 89,226 61,488 28,561
Equity in earnings of LifeUSA Holdings Inc. 2,207 0 0
Other 75,967 53,760 6,193
- ---------------------------------------------------------------------------------------------------------------------------
Total revenue 1,438,219 1,230,217 1,123,930
Benefits and expenses:
Life insurance benefits 461,891 336,090 281,441
Annuity benefits 251,463 206,189 153,238
Accident and health insurance benefits 623,640 566,746 434,793
- ---------------------------------------------------------------------------------------------------------------------------
Total benefits 1,336,994 1,109,025 869,472
Benefit recoveries 501,719 426,607 249,552
- ---------------------------------------------------------------------------------------------------------------------------
Net benefits 835,275 682,418 619,920
Commissions and other agent compensation 322,697 310,665 267,714
General and administrative expenses 116,007 106,744 99,018
Taxes, licenses and fees 15,848 20,605 19,959
Increase in deferred acquisition costs, net (2,979) (63,742) (36,344)
- ---------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 1,286,848 1,056,690 970,267
Income from operations before income taxes 151,371 173,527 153,663
Income tax expense:
Current 48,410 31,571 21,936
Deferred 2,822 28,283 30,559
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax expense 51,232 59,854 52,495
Net income $ 100,139 113,673 101,168
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Financial Statements (continued)
Consolidated Statements of Comprehensive Income
Years ended December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $100,139 113,673 101,168
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax benefit of $949, $525, and $10 in
1998, 1997, and 1996 respectively (1,761) (975) (18)
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on fixed maturities and equity securities:
Unrealized holding gains (losses) arising during the period net of tax expense (benefit)
of $57,703, $71,594 and $(10,289) in 1998, 1997, and 1996 respectively 107,162 132,961 (19,107)
Reclassification adjustment for gains included in net income, net of tax expense of
$30,627, $21,588, and $9,401 in 1998, 1997, and 1996 respectively (56,879) (40,093) (17,460)
- ---------------------------------------------------------------------------------------------------------------------------
Total unrealized holding gains (losses) 50,283 92,868 (36,567)
Total other comprehensive income (loss) 48,522 91,893 (36,585)
Total comprehensive income $148,661 205,566 64,583
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Financial Statements (continued)
Consolidated Statements of Stockholder's Equity
Years ended December 31, 1998,
1997 and 1996
(in thousands)
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock:
Balance at beginning and end of year $ 20,000 20,000 20,000
- ---------------------------------------------------------------------------------------------------------------------------
Preferred stock:
Balance at beginning of year 25,000 25,000 25,000
Redemption of stock during the year (25,000) 0 0
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of year 0 25,000 25,000
Additional paid-in capital:
Balance at beginning and end of year 407,088 407,088 407,088
- ---------------------------------------------------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of year 574,447 462,925 363,357
Net income 100,139 113,673 101,168
Cash dividend to stockholder (729) (2,151) (1,600)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of year 673,857 574,447 462,925
Accumulated other comprehensive income:
Accumulated unrealized holding gain:
Balance at beginning of year 195,505 102,637 139,204
Net unrealized gain (loss) on investments during the year, net of deferred federal income taxes 50,283
92,868 (36,567)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of year 245,788 195,505 102,637
Accumulated unrealized foreign currency (loss):
Balance at beginning of year (4,448) (3,473) (3,455)
Net unrealized (loss) on foreign currency translation during the year,
net of deferred federal income taxes (1,761) (975) (18)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of year (6,209) (4,448) (3,473)
Total accumulated comprehensive income 239,579 191,057 99,164
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholder's equity $1,340,524 1,217,592 1,014,177
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Financial Statements (continued)
Consolidated Statements of Cash Flows
December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income $100,139 113,673 101,168
- ---------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Realized investment gains (89,226) (61,488) (28,561)
Deferred federal income tax expense 2,822 28,283 30,559
Charges to policy account balances (104,681) (148,159) (87,865)
Interest credited to policy account balances 262,956 251,182 202,243
Change in:
Accrued investment income 1,696 (2,215) 728
Receivables (61,295) (107,398) (30,578)
Reinsurance receivables (162,959) (1,205,410) (76,003)
Deferred acquisition costs (2,979) (63,742) (36,344)
Future benefit reserves 25,183 138,370 71,193
Policy and contract claims and other policyholder funds 154,213 92,230 37,055
Unearned premiums 3,610 17,992 (2,005)
Reinsurance payable 17,713 68,725 24,019
Current tax recoverable 16,701 (8,306) (8,508)
Accrued expenses and other liabilities 14,797 12,113 15,506
Commissions due and accrued 1,483 2,414 14,124
Depreciation and amortization (12,711) (13,312) (25,874)
Equity in earnings of LifeUSA Holdings Inc. (2,207) 0 0
Other, net 94 18 (1,568)
- ---------------------------------------------------------------------------------------------------------------------------
Total adjustments 65,210 (998,703) 98,121
Net cash provided by (used in) operating activities 165,349 (885,030) 199,289
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Financial Statements (continued)
Consolidated Statements of Cash Flows (cont.)
Years ended December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities 165,349 (885,030) 199,289
Cash flows provided by (used in) investing activities:
Purchase of fixed maturities $(1,256,653) (1,748,950)(1,324,676)
Purchase of equity securities (1,518,096) (1,699,847) (137,304)
Purchase of stock in LifeUSA Holdings, Inc. (79,091) 0 0
Funding of mortgage loans (168,870) (103,626) (70,265)
Sale of fixed maturities 1,460,969 1,921,534 1,043,748
Matured fixed maturities 28,152 1,150 2,711
Sale of equity securities 1,560,695 1,691,789 122,788
Repayment of mortgage loans 29,105 29,520 23,317
Net change in certificates of deposit and short-term securities (49,242) 87,848 (173,471)
Other (46,256) 82,797 (20,566)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (39,287) 262,215 (533,718)
Cash flows provided by (used in) financing activities:
Policyholders' deposits to account balances $ 864,446 748,430 591,926
Policyholders' withdrawals from account balances (562,667) (524,579) (384,550)
Change in assets held under reinsurance agreements 7,876 150,526 0
Funds borrowed (repaid) on dollar reverse repurchase agreements, net (369,664) 239,468 130,196
Redemption of preferred stock (25,000) 0 0
Cash dividends paid (729) (2,151) (1,600)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (85,738) 611,694 335,972
Net change in cash 40,324 (11,121) 1,543
Cash at beginning of year 26,871 37,992 36,449
- ---------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 67,195 26,871 37,992
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(1) Summary of Significant Accounting Policies
Allianz Life Insurance Company of North America (the Company) is a wholly owned
subsidiary of Allianz of America, Inc. (AZOA), a majority-owned subsidiary of
Allianz A.G. Holding, a Federal Republic of Germany company.
The Company is a life insurance company which is licensed to sell group and
individual life, annuity and accident and health policies in the United States,
Canada and several U.S. territories. Based on 1998 net revenues and
considerations, 36%, 16% and 48% of the Company's business is life, annuity and
accident and health, respectively. The Company's primary distribution channels
are through strategic alliances with other insurance companies and third party
marketing organizations. The Company has a significant relationship with The
Franklin Templeton Group and its broker/dealer network related to sales of its
variable life and variable annuity products and another significant
administration, marketing and reinsurance relationship with LifeUSA Holding Inc.
(LifeUSA), a publicly traded insurance company in which it holds a 21.4%
ownership interest at December 31, 1998.
Following is a summary of the significant accounting policies reflected in the
accompanying consolidated financial statements.
Basis of Presentation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP) which vary in certain respects
from accounting rules prescribed or permitted by state insurance regulatory
authorities. The accounts of the Company's major subsidiary, Preferred Life
Insurance Company of New York and other less significant subsidiaries have been
consolidated. All significant intercompany balances and transactions have been
eliminated in consolidation.
The preparation of financial statements in conformity with GAAP requires
management to make certain estimates and assumptions that affect reported assets
and liabilities including reporting or disclosure of contingent assets and
liabilities as of the balance sheet date and the reported amounts of revenues
and expenses during the reporting period.
Actual results could vary significantly from management's estimates.
Traditional Life, Group Life and Group Accident and Health Insurance
Traditional life products include products with guaranteed premiums and benefits
and consist principally of whole life and term insurance policies, limited
payment contracts and certain annuity products with life contingencies.
Premiums on traditional life and group life products are recognized as income
when due. Group accident and health premiums are recognized as earned on a pro
rata basis over the risk coverage periods. Benefits and expenses for traditional
and group products are matched with earned premiums so that profits are
recognized over the premium paying periods of the contracts. This matching is
accomplished by establishing provisions for future policy benefits and policy
and contract claims, and deferring and amortizing related policy acquisition
costs.
Nontraditional and Variable Life and Annuity Business
Nontraditional and variable life insurance and interest sensitive contracts that
have significant mortality or morbidity risk are accounted for in accordance
with the retrospective deposit method. Interest sensitive contracts that do not
have significant mortality or morbidity risk are accounted for in a manner
consistent with interest bearing financial instruments. For both types of
contracts, premium receipts are reported as deposits to the contractholder's
account while revenues consist of amounts assessed against contractholders
including surrender charges and earned administrative service fees. Mortality or
morbidity charges are also accounted for as revenue on those contracts
containing mortality or morbidity risk. Benefits consist of interest credited to
contractholder's accounts and claims or benefits incurred in excess of the
contractholder's balance.
Deferred Acquisition Costs
Acquisition costs, consisting of commissions and other costs which vary with and
are primarily related to production of new business, are deferred. For
traditional life and group life products, such costs are amortized over the
revenue-producing period of the related policies using the same actuarial
assumptions used in computing future policy benefit reserves. Acquisition costs
for accident and health insurance
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(1) Summary of Significant Accounting Policies (cont.)
Deferred Acquisition Costs (cont.)
policies are deferred and amortized over the lives of the policies in the same
manner as premiums are earned. For interest sensitive products, acquisition
costs are amortized in relation to the present value of expected future gross
profits from investment margins and mortality, morbidity and expense charges.
Deferred acquisition costs amortized during 1998, 1997 and 1996 were $202,644,
$219,266, and $137,618, respectively.
Future Policy Benefit Reserves
Future policy benefit reserves on traditional life products are computed by the
net level premium method based upon estimated future investment yield, mortality
and withdrawal assumptions, commensurate with the Company's experience, modified
as necessary to reflect anticipated trends, including possible unfavorable
deviations. Most life reserve interest assumptions range from 7.5% to 5.5%.
Future policy benefit reserves for interest sensitive products are generally
carried at accumulated contract values. Reserves on some deferred annuity
contracts are computed based on contractholder cash value accumulations,
adjusted for mortality, withdrawal and interest margin assumptions.
Fair values of investment contracts, which include deferred annuities and other
annuities without significant mortality risk, were determined by testing amounts
payable on demand against discounted cash flows using interest rates
commensurate with the risks involved. Fair values are based on the amount
payable on demand at December 31.
Policy and Contract Claims
Policy and contract claims represent an estimate of claims and claim adjustment
expenses that have been reported but not yet paid and incurred but not yet
reported as of December 31.
Reinsurance
Insurance liabilities are reported before the effects of reinsurance. Amounts
paid or deemed to have been paid for claims covered by reinsurance contracts are
recorded as reinsurance receivable. Reinsurance receivables are recognized in a
manner consistent with the liabilities related to the underlying reinsured
contracts.
Investments
The Company has classified all of its fixed maturity and equity portfolio as
"available-for-sale" and, accordingly, the securities are carried at fair value.
Short-term investments are carried at amortized cost, which approximates market
value. Policy loans are reflected at their unpaid principal balances. Mortgage
loans are reflected at unpaid principal balances adjusted for premium and
discount amortization and an allowance for uncollectible balances. The Company
analyzes loan impairment at least once a year when assessing the adequacy of the
allowance for possible credit losses. The Company does not accrue interest on
impaired loans and accounts for interest income on such loans on a cash basis.
The Company accounts for its investment in LifeUSA under the equity method of
accounting and carries its investment at cost, adjusted for its share of
LifeUSA's earnings, amortization of goodwill and dividends received. The
difference between the cost of the investment and underlying equity is amortized
into net income over ten years.
Realized gains and losses are computed based on the specific identification
method.
As of December 31, 1998 and 1997, investments with a carrying value of $116,197
and $103,590, respectively, were held on deposit with various insurance
departments and in other trusts as required by statutory regulations.
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(1) Summary of Significant Accounting Policies (cont.)
Investments (cont.)
The fair values of invested assets, excluding investments in real estate, are
deemed by management to approximate their estimated market values. The fair
value of mortgage loans has been calculated using discounted cash flows and is
based on pertinent information available to management as of year-end. Policy
loan balances which are supported by the underlying cash value of the policies
approximate fair value. Changes in market conditions subsequent to year-end may
cause estimates of fair values to differ from the amounts presented herein.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Separate Accounts
Separate accounts represent funds for which investment income and investment
gains and losses accrue directly to the policyholders and contractholders. Each
account has specific investment objectives and the assets are carried at fair
value. The assets of each account are legally segregated and are not subject to
claims which arise out of any other business of the Company.
Fair values of separate account assets were determined using the market value of
the underlying investments held in segregated fund accounts. Fair values of
separate account liabilities were determined using the cash surrender values of
the policyholder's and contractholder's account.
Receivables
Receivable balances approximate estimated fair values. This is based on
pertinent information available to management as of year-end including the
financial condition and credit worthiness of the parties underlying the
receivables. Changes in market conditions subsequent to year-end may cause
estimates of fair values to differ from the amounts presented herein.
Accounting Changes
In 1998, the Company adopted Statement of Financial Accounting Standard (SFAS)
No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, and SFAS No. 132, Employers Disclosures about
Pensions and Other Postretirement Benefits. No adjustments were made to the
consolidated financial statements upon adoption of these pronouncements.
In 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. A
Consolidated Statement of ComprehensiveIncome is now included in these
financial statements.
Accounting Pronouncements to be Adopted
In December 1997, the AICPA issued Statement of Position (SOP) 97-3, Accounting
by Insurance and Other Enterprises for Insurance-Related Assessments. The SOP
provides guidance for determining when to recognize a liability for guaranty
fund assessments, how to measure the liability and for determining when an asset
may be recognized for premium tax offset recoveries. The SOP is effective for
years beginning after December 15, 1998. The Company will adopt SOP 97-3 on
January 1, 1999. Adoption of this SOP is not expected to have a significant
impact on the consolidated financial statements.
In February 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. The SOP provides
guidance for determining whether computer software is in fact internal-use
software and offers guidelines on accounting for the proceeds of computer
software originally developed or obtained for internal use and subsequently
marketed and sold to the public. The
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(1) Summary of Significant Accounting Policies (cont.)
Accounting Pronouncements to be Adopted (cont.)
SOP applies to all non-government entities and is effective for years beginning
after December 15, 1998. The Company will adopt SOP 98-1 on January 1, 1999.
Adoption of this SOP is not expected to have a significant impact on the
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. The statement
establishes accounting and reporting standards for derivative financial
instruments and other similar financial instruments and for hedging activities.
The statement is effective for fiscal years beginning after June 15, 1999. The
Company will adopt SFAS No. 133 on January 1, 2000. Adoption of this statement
is not expected to have a significant impact on the consolidated financial
statements.
Reclassifications
Certain prior year balances have been reclassified to conform to the current
year presentation.
<TABLE>
(2) Investments
Investments at December 31, 1998 consist of:
Amount
shown on
Amortized Estimated consolidated
cost fair balance
or cost value sheet
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
U.S. government $ 274,813 311,296 311,296
States and political subdivisions 94,640 101,121 101,121
Foreign government 34,652 36,731 36,731
Public utilities 66,236 71,982 71,982
Corporate securities 1,441,359 1,498,702 1,498,702
Mortgage backed securities 401,505 428,304 428,304
Collateralized mortgage obligations 80,599 90,155 90,155
- ---------------------------------------------------------------------------------------------------------------------------
Total fixed maturities $2,393,804 2,538,291 2,538,291
Equity securities:
Common stocks:
Banks, trusts and insurance companies 18,824 31,194 31,194
Industrial and miscellaneous 252,122 469,566 469,566
Nonredeemable preferred stocks 7,807 11,644 11,644
- ---------------------------------------------------------------------------------------------------------------------------
Total equity securities $ 278,753 512,404 512,404
Other investments:
Mortgage loans on real estate 457,128 XXXXXXXXX 457,128
Certificates of deposit and short-term securities 166,366 XXXXXXXXX 166,366
Policy loans 7,118 XXXXXXXXX 7,118
Other invested assets 95,746 XXXXXXXXX 95,746
Investment in LifeUSA Holdings Inc. 80,928 XXXXXXXXX 80,928
- ---------------------------------------------------------------------------------------------------------------------------
Total other investments $ 807,286 XXXXXXXXX 807,286
Total investments $3,479,843 XXXXXXXXX 3,857,981
</TABLE>
<PAGE>
<TABLE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(2) Investments (cont.)
At December 31, 1998 and 1997, the amortized cost, gross unrealized gains, gross
unrealized losses and estimated fair values of securities are as follows:
Amortized Gross Gross Estimated
cost unrealized unrealized fair
or cost gains losses value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
U.S. government $ 274,813 36,717 234 311,296
States and political subdivisions 94,640 6,481 0 101,121
Foreign government 34,652 2,079 0 36,731
Public utilities 66,236 5,948 202 71,982
Corporate securities 1,441,359 67,234 9,891 1,498,702
Mortgage backed securities 401,505 26,799 0 428,304
Collateralized mortgage obligations 80,599 10,141 585 90,155
- ---------------------------------------------------------------------------------------------------------------------------
Total fixed maturities 2,393,804 155,399 10,912 2,538,291
Equity securities 278,753 245,913 12,262 512,404
- ---------------------------------------------------------------------------------------------------------------------------
Total $2,672,557 401,312 23,174 3,050,695
1997:
U.S. government 499,652 29,191 186 528,657
States and political subdivisions 82,287 3,561 19 85,829
Foreign government 35,858 1,876 0 37,734
Public utilities 44,151 4,086 0 48,237
Corporate securities 1,206,392 60,016 15,876 1,250,532
Mortgage backed securities 628,307 35,584 0 663,891
Collateralized mortgage obligations 86,246 4,086 2 90,330
- ---------------------------------------------------------------------------------------------------------------------------
Total fixed maturities 2,582,893 138,400 16,083 2,705,210
Equity securities 264,144 205,632 27,169 442,607
- ---------------------------------------------------------------------------------------------------------------------------
Total $2,847,037 344,032 43,252 3,147,817
- ---------------------------------------------------------------------------------------------------------------------------
The changes in unrealized gains on fixed maturity securities were $22,170,
$58,422, and $(97,973) in each of the years ended December 31, 1998, 1997 and
1996, respectively.
The changes in unrealized gains in equity investments, which include common
stocks and nonredeemable preferred stocks were $55,188, $84,718, and $40,895 for
the years ended December 31, 1998, 1997 and 1996, respectively.
The amortized cost and estimated fair value of fixed maturities at December 31,
1998, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
</TABLE>
<TABLE>
Amortized Estimated
cost fair value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 19,578 19,831
Due after one year through five years 542,463 558,635
Due after five years through ten years 700,012 741,834
Due after ten years 649,647 699,532
Mortgage backed securities and collateralized mortgage obligations 482,104 518,459
- ---------------------------------------------------------------------------------------------------------------------------
Totals $2,393,804 2,538,291
</TABLE>
<PAGE>
<TABLE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(2) Investments (cont.)
Gross gains of $105,723, $70,335, and $43,696 and gross losses of $18,217,
$8,654, and $16,834 were realized on sales of securities in 1998, 1997 and 1996,
respectively.
Net realized investment gains (losses) for the respective years ended December
31 are summarized as follows:
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities, at market $30,299 40,268 8,897
Equity securities 57,207 21,413 17,964
Mortgage loans (1,320) (982) (1,129)
Real estate 3,133 635 3,104
Other (93) 154 (275)
- ---------------------------------------------------------------------------------------------------------------------------
Net gains before taxes 89,226 61,488 28,561
Tax expense on net realized gains 31,229 21,521 9,996
- ---------------------------------------------------------------------------------------------------------------------------
Net gains after taxes $57,997 39,967 18,565
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
During the first two months of 1998 and all of 1997, the Company entered into
mortgage backed security reverse repurchase transactions ("dollar rolls") with
certain securities dealers. Under this program, the Company sold certain
securities for delivery in the current month and simultaneously contracted with
the same dealer to repurchase similar, but not identical, securities on a
specified future date. The Company gave up the right to receive principal and
interest on the securities sold. As of December 31, 1998 there were no
outstanding amounts under the Company's dollar roll program. As of December 31,
1997, mortgage backed securities underlying such agreements were carried at a
market value of $350,985 and other liabilities were $369,664 for funds received
under these agreements. Average balances outstanding for the first two months of
1998 and all of 1997, respectively were $120,525 and $183,530 and weighted
average interest rates were 6.5% and 7.2%. The maximum balance outstanding
during 1998 and 1997 was $120,525 and $369,664, respectively.
The valuation allowances on mortgage loans at December 31, 1998, 1997 and 1996
and the changes in the allowance for the years then ended are summarized as
follows:
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Beginning of Year $8,279 7,279 10,487
Charged to operations 1,320 1,000 0
Recoveries 0 0 (3,208)
- ---------------------------------------------------------------------------------------------------------------------------
End of Year $9,599 8,279 7,279
- ---------------------------------------------------------------------------------------------------------------------------
Major categories of net investment income for the respective years ended
December 31 are:
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Interest:
Fixed maturities $155,397 211,335 178,664
Mortgage loans 34,449 25,232 19,267
Policy loans 497 6,526 7,013
Short-term investments 15,022 12,804 10,688
Dividends:
Preferred stock 668 748 818
Common stock 5,190 4,603 4,527
Interest on assets held by reinsurers 8,272 8,858 9,709
Other invested assets 8,637 9,438 5,344
- ---------------------------------------------------------------------------------------------------------------------------
Total investment income 228,132 279,544 236,030
Investment expenses related to coinsurance agreement (note 6) 2,689 98,417 0
Investment expenses 8,377 18,777 13,408
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income $217,066 162,350 222,622
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(3) Summary Table of Fair Value Disclosures
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets Fixed maturities, at market:
U.S. Government $ 311,296 311,296 528,657 528,657
States and political subdivisions 101,121 101,121 85,829 85,829
Foreign governments 36,731 36,731 37,734 37,734
Public utilities 71,982 71,982 48,237 48,237
Corporate securities 1,546,342 1,546,342 1,250,532 1,250,532
Mortgage backed securities 380,664 380,664 663,891 663,891
Collateralized mortgage obligations 90,155 90,155 90,330 90,330
Equity securities 512,404 512,404 442,607 442,607
Mortgage loans 457,128 495,202 318,683 333,540
Short term investments 166,366 166,366 117,124 117,124
Policy loans 7,118 7,118 5,695 5,695
Other long term investments 95,746 95,746 51,863 51,863
Investment in LifeUSA Holdings Inc. 80,928 68,290 0 0
Receivables 323,971 323,971 262,676 262,676
Separate accounts assets 9,915,150 9,915,150 10,756,92910,756,929
Financial liabilities
Investment contracts 3,645,657 3,035,787 3,536,690 2,945,366
Separate account liabilities 9,915,150 9,765,791 10,756,92910,565,205
Dollar reverse repurchase agreements 0 0 369,664 369,664
See Note 1 "Summary of Significant Accounting Policies" for description of the
methods and significant assumptions used to estimate fair values.
(4) Receivables
Receivables at December 31 consist of the following:
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Premiums due $270,657 207,293
Agents balances 10,088 3,186
Related party receivables 3,852 1,445
Reinsurance commission receivable 8,022 23,921
Scholarship enrollment fees 12,010 8,401
Due from administrators 13,271 13,630
Other 6,071 4,800
- ---------------------------------------------------------------------------------------------------------------------------
Total receivables $323,971 262,676
</TABLE>
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(5) Accident and Health Claims Reserves
Accident and health claims reserves are based on estimates which are subject to
uncertainty. Uncertainty regarding reserves of a given accident year is
gradually reduced as new information emerges each succeeding year, thereby
allowing more reliable re-evaluations of such reserves. While management
believes that reserves as of December 31, 1998 are adequate, uncertainties in
the reserving process could cause such reserves to develop favorably or
unfavorably in the near term as new or additional information emerges. Any
adjustments to reserves are reflected in the operating results of the periods in
which they are made. Movements in reserves which are small relative to the
amount of such reserves could significantly impact future reported earnings of
the Company.
Activity in the accident and health claims reserves, exclusive of long term
care, hospital indemnity and AIDS reserves of $9,918, $12,479, and $14,348 in
1998, 1997 and 1996, respectively, is summarized as follows:
<TABLE>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, net of reinsurance recoverables of $141,033,
$124,320, and $99,292 $312,886 273,813 240,602
Incurred related to:
Current year 417,042 346,901 279,717
Prior years (12,217) (12,087) (11,642)
- ---------------------------------------------------------------------------------------------------------------------------
Total incurred 404,825 334,814 268,075
Paid related to:
Current year 204,100 150,942 107,842
Prior years 147,186 144,798 127,022
- ---------------------------------------------------------------------------------------------------------------------------
Total paid 351,286 295,740 234,864
Balance at December 31, net of reinsurance recoverables of $128,764,
$141,033, and $124,320 $366,425 312,887 273,813
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Due to lower than anticipated losses related to prior years, the provision for
claims and claim adjustment expenses decreased.
(6) Reinsurance
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
risks under excess coverage and coinsurance contracts. The Company retains a
maximum of $1 million coverage per individual life. Reinsurance contracts do not
relieve the Company from its obligations to policyholders. Failure of reinsurers
to honor their obligations could result in losses to the Company. The Company
evaluates the financial condition of its reinsurers and monitors concentrations
of credit risk to minimize its exposure to significant losses from reinsurer
insolvencies.
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(6) Reinsurance (cont.)
<TABLE>
Life insurance, annuities and accident and health business assumed from and
ceded to other companies is as follows:
Percentage
Assumed Ceded of amount
Direct from other to other Net assumed
Year ended amount companies companies amount to net
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1998:
Life insurance in force $34,118,554 98,832,792 19,483,581 113,467,765 87.1%
- ---------------------------------------------------------------------------------------------------------------------------
Premiums:
Life 244,416 224,451 93,812 375,055 59.8%
Annuities 220,812 1,820 50,385 172,247 1.1%
Accident and health 479,237 294,333 267,119 506,451 58.1%
- ---------------------------------------------------------------------------------------------------------------------------
Total premiums 944,465 520,604 411,316 1,053,753 49.4%
December 31, 1997:
Life insurance in force $32,234,241 72,682,842 19,873,094 85,043,989 85.5%
- ---------------------------------------------------------------------------------------------------------------------------
Premiums:
Life 252,859 170,798 110,579 313,078 54.6%
Annuities 217,353 1,910 30,789 188,474 1.0%
Accident and health 436,105 311,612 296,650 451,067 69.1%
- ---------------------------------------------------------------------------------------------------------------------------
Total premiums 906,317 484,320 438,018 952,619 50.8%
December 31, 1996:
Life insurance in force $37,527,994 44,073,247 6,126,541 75,474,700 58.4%
- ---------------------------------------------------------------------------------------------------------------------------
Premiums:
Life 235,837 133,994 37,986 331,845 40.4%
Annuities 169,503 1,153 12,769 157,887 0.7%
Accident and health 396,051 207,179 226,408 376,822 55.0%
- ---------------------------------------------------------------------------------------------------------------------------
Total premiums 801,391 342,326 277,163 866,554 39.5%
- ---------------------------------------------------------------------------------------------------------------------------
Included in reinsurance receivables at December 31, 1998 are $1,170,697,
$863,477 and $307,228 recoverable from three insurers who, as of December 31,
1998, were rated A+, A- and A+, respectively, by A.M. Best's Insurance Reports.
A contingent liability exists to the extent that the Company's reinsurers are
unable to meet their contractual obligations. Management is of the opinion that
no liability will accrue to the Company with respect to this contingency.
Effective January 1, 1997, the Company entered into a 100% coinsurance agreement
with an unrelated insurance company to coinsure a block of business with life
insurance inforce of $13,200,000 and 1997 premium of $90,000. The coinsured
block included certain universal life and traditional life insurance policies
and annuity contracts. In connection with this agreement, the Company recognized
a recoverable on future benefit reserves of $1,102,000, received a ceding
commission of $138,500 and transferred assets of $881,000 which support the
business. The unearned ceding commission represents deferred revenue which will
be amortized over the revenue-producing period of the related reinsured
policies. The servicing of the coinsured business was also transferred to a
third party insurer who is also the retrocessionaire of the block. During 1998
and 1997, $15,965 and $22,647, respectively, was amortized and included in other
revenue in the consolidated statements of income. Effective January 1, 1998, the
coinsurance agreement was amended to include another block of business with
future benefit reserves of $66,000, capitalized deferred acquisition costs of
$1,935 and deferred income of $750.
</TABLE>
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(6) Reinsurance (cont.)
Of the amounts ceded to others, the Company ceded life insurance inforce of
$2,067,664, $1,163,533, and $381,381 in 1998, 1997 and 1996, respectively, and
life insurance premiums earned of $4,165, $2,538, and $1,293 in 1998, 1997 and
1996, respectively, to its ultimate parent Allianz Aktiengesellshaft. The
Company also ceded accident and health premiums earned to Allianz
Aktiengesellshaft of $2,817, $2,467, and $1,922 in 1998, 1997 and 1996.
<TABLE>
(7) Income Taxes
Income Tax Expense
Total income tax expense (benefit) for the years ended December 31 are as
follows:
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense attributable to operations:
Current tax expenses $48,410 31,571 21,936
Deferred tax expense 2,822 28,283 30,559
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax expense attributable to operations $51,232 59,854 52,495
Income tax effect on equity:
Income tax allocated to stockholder's equity:
Attributable to unrealized gains and losses for the year 26,127 49,748 (19,967)
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax effect on equity $77,359 109,602 32,528
- ---------------------------------------------------------------------------------------------------------------------------
Components of Income Tax Expense
Income tax expense computed at the statutory rate of 35% varies from tax expense
reported in the Consolidated Statements of Income for the respective years ended
December 31 as follows:
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Income tax expense computed at the statutory rate $52,980 60,735 53,782
Dividends received deductions and tax-exempt interest (3,294) (2,792) (650)
Foreign tax (133) 916 (2,723)
Interest on tax deficiency 900 1,100 261
Other 779 (105) 1,824
- ---------------------------------------------------------------------------------------------------------------------------
Income tax expense as reported $51,232 59,854 52,494
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
<TABLE>
(7) Income Taxes (cont.)
Components of Deferred Tax Assets and Liabilities on the Balance Sheet
Tax effects of temporary differences giving rise to the significant components
of the net deferred tax liability at December 31 are as follows:
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Provision for post retirement benefits $ 2,223 2,100
Allowance for uncollectible accounts 929 929
Policy reserves 173,414 177,442
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 176,566 180,471
Deferred tax liabilities:
Deferred acquisition costs 272,815 277,627
Net unrealized gain 128,883 102,756
Other 32,771 28,949
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 434,469 409,332
Net deferred tax liability $257,903 228,861
- ---------------------------------------------------------------------------------------------------------------------------
Although realization is not assured, the Company believes it is not necessary to
establish a valuation allowance for the deferred tax asset as it is more likely
than not the deferred tax asset will be realized principally through future
reversals of existing taxable temporary differences and future taxable income.
The amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future reversals of existing taxable
temporary differences and future taxable income are reduced.
The Company files a consolidated federal income tax return with AZOA and all of
its wholly owned subsidiaries. The consolidated tax allocation agreement
stipulates that each company participating in the return will bear its share of
the tax liability pursuant to United States Treasury Department regulations. The
Company and each of its insurance subsidiaries generally will be paid for the
tax benefit on their losses, and any other tax attributes, to the extent they
could have obtained a benefit against their post-1990 separate return taxable
income or tax. Income taxes paid by the Company were $30,808, $39,914, and
$30,946 in 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997 the
Company had a tax recoverable from AZOA of $3,030 and $20,689, respectively.
(8) Related Party Transactions
The Company reimbursed AZOA $2,495, $2,519, and $1,743 in 1998, 1997 and 1996,
respectively, for certain administrative and investment management services
performed. The Company's liability to AZOA for such services was $490 and $437
at December 31, 1998 and 1997, respectively.
The Company shares a data center with affiliated insurance companies. Usage
charges paid to the data center by the Company were $1,019, $2,826, and $3,275
in 1998, 1997 and 1996, respectively. The Company's liability for data center
charges was $377
and $292 at December 31, 1998 and 1997, respectively.
The Company has 200 million authorized shares of preferred stock with a par
value of $1 per share. This preferred stock is issuable in series with the
number of shares, redemption rights and dividend rate designated by the Board of
Directors for each series. Dividends are cumulative at a rate reflective of
prevailing market conditions at time of issue and are payable semiannually.
Dividend payments are restricted by provisions in State of Minnesota statutes.
The Company had 25 million shares of Series A preferred stock outstanding held
by AZOA with a dividend rate of 6.4% and a book value of $25,000. In March 1998,
the Company redeemed and canceled the 25 million shares of Series A preferred
stock issued to AZOA.
</TABLE>
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(8) Related Party Transactions (cont.)
As of December 31, 1996, the Company sold to AZOA, without recourse, two
receivables due from third parties amounting to $6,600. These receivables,
valued at $5,827, were repurchased by the Company in 1997.
(9) Investment in LifeUSA
In 1995, in conjunction with an expanded marketing agreement, the Company
provided LifeUSA with $30,000 in exchange for a fifteen year convertible
debenture paying 5% interest for the first five years with the interest rate
reset annually thereafter based on LIBOR plus 1%. In connection with a
definitive agreement signed in January 1998, the Company converted its debenture
to equity, extended the existing marketing agreement between the two companies
to December 31, 2000, and agreed to acquire up to a 35% equity ownership in Life
USA. Two members of the Company's management were named to LifeUSA's board of
directors in January 1998. The Company also retains additional rights of
nomination to LifeUSA's board of directors in the future based on the Company's
proportional ownership.
Acquisition of the Company's equity ownership during 1998 was accomplished
through the following:
o Conversion of the $30,000 debenture for 2.43 million shares of common stock
(conversion price of $12.34 per share);
o Exercise of the Company's preemptive right to purchase 241,846 shares of
common stock at $12.36 per share;
o Purchase of 925,000 shares of common stock from certain members of LifeUSA
management at $16.44 per share;
o Acquisition of an additional 1.3 million shares of common stock in open
market purchases.
o Acquisition of 406,092 shares of common stock at $24.63 per share as part of
a commitment to purchase $100,000 in newly issued common stock in increments of
$10,000 semi-annually over a five year period beginning in August 1998.
As of December 31, 1998, the company held 21.41% of the outstanding common stock
of LifeUSA with an approximate market value of $68,290. The carrying value of
the LifeUSA investment at year-end 1998 is $80,928, which is $20,983 higher than
the current equity in net assets of $59,945.
In February 1999, the Company purchased 395,062 shares of LifeUSA common stock
at $25.31 per share. In addition, the stock purchase agreement was amended to
allow the Company to purchase an additional 300,000 shares on the open market
for one year beyond the original agreement date.
Effective April 1, 1998, the Company began assuming business from LifeUSA. Under
this arrangement, the Company assumes 12.5% of annuity business and 16.7% of
universal life business sold by LifeUSA. As of December 31, 1998, the Company
assumed $40,000 of life and annuity reserves from LifeUSA.
The company has also guaranteed a credit agreement between LTC America Holding,
Inc., a LifeUSA subsidiary, and Norwest Bank. The agreement is for a $15,000
revolving credit line with an interest rate of LIBOR +.75% per annum and a
maturity date of December 21, 2003.
(10) Employee Benefit Plans
The Company participates in the Allianz Primary Retirement Plan (Primary
Retirement Plan), a defined contribution plan. The Company makes contributions
to a money purchase pension plan on behalf of eligible participants. All
employees, excluding agents, are eligible to participate in the Primary
Retirement Plan after two years of service. The contributions are based on a
percentage of the participant's salary with the participants being 100% vested
upon eligibility. It is the Company's policy to fund the plan costs as accrued.
Total pension contributions were $756, $810, and $808 in 1998, 1997 and 1996,
respectively.
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(10) Employee Benefit Plans (cont.)
The Company participates in the Allianz Asset Accumulation Plan (Allianz Plan),
a defined contribution plan sponsored by AZOA. Under the Allianz Plan
provisions, the Company will match from 75% to 100% of eligible employees'
contributions up to a maximum of 6% of a participant's compensation. The total
Company match for Plan participants was 75%, 90% and 100% in 1998, 1997 and
1996, respectively. All employees are eligible to participate after one year of
service and are fully vested in the Company's matching contribution after three
years of service. The Allianz Plan will accept participants' pretax or after-tax
contributions up to 15% of the participant's compensation. It is the Company's
policy to fund the Allianz Plan costs as accrued. The Company has accrued $868,
$1,057, and $1,105 in 1998, 1997 and 1996, respectively, toward planned
contributions.
The Company provides certain postretirement benefits to employees who retired on
or before December 31, 1988 or who were hired before December 31, 1988 and who
have at least ten years of service when they reach age 55. The Company's plan
obligation at December 31, 1998 and 1997 was $6,352 and $6,001, respectively.
This liability is included in "Other liabilities" in the accompanying balance
sheet.
(11) Statutory Financial Data and Dividend Restrictions
Statutory accounting is directed toward insurer solvency and protection of
policyholders. Accordingly, certain items recorded in financial statements
prepared under GAAP are excluded or vary in determining statutory policyholders'
surplus and net gain from operations. Currently, these items include, among
others, deferred acquisition costs, furniture and fixtures, accident and health
premiums receivable which are more than 90 days past due, deferred taxes and
undeclared dividends to policyholders. Additionally, future life and annuity
benefit reserves calculated for statutory accounting do not include provisions
for withdrawals.
The differences between stockholder's equity and net income reported in
accordance with statutory accounting practices and the accompanying consolidated
financial statements as of and for the year ended December 31 are as follows:
<TABLE>
Stockholder's equity Net income
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Statutory basis $ 654,371 635,711 35,188 72,343 67,995
Adjustments:
Change in reserve basis (226,145) (255,816) 13,787 (85,110) 13,324
Deferred acquisition costs 930,059 927,080 2,979 63,742 36,344
Net deferred taxes (257,903) (228,861) (2,822) (28,283) (30,559)
Statutory asset valuation reserve 178,011 151,675 0 0 0
Statutory interest maintenance reserve 48,697 34,336 14,361 7,994 1,183
Modified coinsurance reinsurance (2,358) (31,953) 29,595 81,790 5,435
Unrealized gains on investments 158,391 124,754 0 0 0
Nonadmitted assets 14,943 14,824 0 0 0
Deferred income on reinsurance (105,465) (115,688) 0 0 0
Other (52,077) (38,470) 7,051 1,197 7,446
- ---------------------------------------------------------------------------------------------------------------------------
As reported in the accompanying consolidated
financial statements $1,340,524 1,217,592 100,139 113,673 101,168
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company is required to meet minimum statutory capital and surplus
requirements. The Company's statutory capital and surplus as of December 31,
1998 and 1997 were in compliance with these requirements. The maximum amount of
dividends that can be paid by Minnesota insurance companies to stockholders
without prior approval of the Commissioner of Commerce is subject to
restrictions relating to statutory earned surplus, also known as unassigned
funds. Unassigned funds are determined in accordance with the accounting
procedures and practices governing preparation of the statutory annual
statement, minus 25% of earned surplus attributable to unrealized capital gains.
In accordance with Minnesota Statutes, the Company may declare and pay from its
surplus, cash dividends of not more than the greater of 10% of its beginning of
the year statutory surplus in any year, or the net gain from operations of the
insurer, not including realized gains,
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(11) Statutory Financial Data and Dividend Restrictions (cont.)
for the 12-month period ending the 31st day of the next preceding year. In 1998
and 1997, the Company paid AZOA dividends on preferred stock in the amount of
$729 and $1,600, respectively. A common stock dividend of $551 was paid in 1997.
Dividends of $63,678 could
be paid in 1999 without prior approval of the Commissioner of Commerce.
Regulatory Risk Based Capital
An insurance enterprise's state of domicile imposes minimum risk-based capital
requirements that were developed by the National Association of Insurance
Commissioners (NAIC). The formulas for determining the amount of risk-based
capital specify various weighting factors that are applied to financial balances
or various levels of activity based on the perceived degree of risk. Regulatory
compliance is determined by a ratio of an enterprise's regulatory total adjusted
capital to its authorized control level risk-based capital, as defined by the
NAIC. Enterprises below specific triggerpoints or ratios are classified within
certain levels, each of which requires specified corrective action. The levels
and ratios are as follows:
Ratio of total adjusted capital to
authorized control level risk-based
Regulatory Event capital (less than or equal to)
- --------------------------------------------------------------------------------
Company action level 2 (or 2.5 with negative trends)
Regulatory action level 1.5
Authorized control level 1
Mandatory control level 0.7
The Company's adjusted capital is in excess of the Company action level as of
December 31, 1998 and 1997.
Permitted Statutory Accounting Practices
The Company is required to file annual statements with insurance regulatory
authorities which are prepared on an accounting basis prescribed or permitted by
such authorities. Currently, prescribed statutory accounting practices include
state laws, regulations, and general administrative rules, as well as a variety
of publications of the NAIC. Permitted statutory accounting practices encompass
all accounting practices that are not prescribed; such practices differ from
state to state, may differ from company to company within a state, and may
change in the future. The Company does not currently use permitted statutory
accounting practices that have a significant impact on its statutory financial
statements. Furthermore, the NAIC has completed a project to codify statutory
accounting practices, the result of which will constitute the only source of
"prescribed" statutory accounting practices. Accordingly, that project which is
currently in the process of state adoption, will change the definition of what
comprises prescribed versus permitted statutory accounting practices, and may
result in changes to existing accounting policies insurance enterprises use to
prepare their statutory financial statements.
(12) Commitments and Contingencies
The Company and its subsidiaries are involved in various pending or threatened
legal proceedings arising from the conduct of their business. In the opinion of
management, the ultimate resolution of such litigation will not have a material
effect on the consolidated financial position of the Company.
The Company is contingently liable for possible future assessments under
regulatory requirements pertaining to insolvencies and impairments of
unaffiliated insurance companies. Provision has been made for assessments
currently received and assessments anticipated for known insolvencies.
(13) Year 2000
The Company is expending significant resources to assure that its computer
systems are reprogrammed in time to effectively deal with transactions in the
year 2000 and beyond. Additional costs associated with this effort are not
expected to be material and will be expensed as incurred. This "Year 2000
Computer Problem" creates risk for the Company from unforeseen problems in its
own computer systems and
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
(13) Year 2000 (cont.)
from third parties with whom the Company deals on financial transactions
worldwide. Failures of the Company and/or third parties' computer systems could
have a material impact on the Company's ability to conduct its business and
especially to process and account for the transfer of data and funds
electronically.
(14) Foreign Currency Translation
The net assets of the Company's foreign operations are translated into U.S.
dollars using exchange rates in effect at each year-end. Translation adjustments
arising from differences in exchange rates from period to period are included in
the accumulated foreign currency translation adjustment reported as a separate
component of stockholder's equity. An analysis of this account for the
respective years ended December 31 follows:
<TABLE>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning amount of cumulative translation adjustments $(4,448) (3,473) (3,455)
- ---------------------------------------------------------------------------------------------------------------------------
Aggregate adjustment for the period resulting from translation adjustments (2,710) (1,500) (28)
Amount of income tax benefit for period related to aggregate adjustment 949 525 10
- ---------------------------------------------------------------------------------------------------------------------------
Net aggregate translation included in equity (1,761) (975) (18)
Ending amount of cumulative translation adjustments $(6,209) (4,448) (3,473)
Canadian foreign exchange rate at end of year 0.6535 0.6992 0.7297
</TABLE>
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(in thousands, except share data)
<TABLE>
(15) Supplementary Insurance Information
The following table summarizes certain financial information by line of business
for 1998, 1997 and 1996:
As of December 31 For the year ended December 31
- ---------------------------------------------------------------------------------------------------------------------------
Future policy Other Premium Benefits, Net change
Deferred benefits, policy revenue claims in
policy losses, claims and and other Net losses, and policy Other
acquisitio claims and Unearned benefits contract investment settlement acquisition operating
costs loss expense premiums payable considerations income expenses costs (a) expenses
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998:
Life $217,262 1,445,844 3,859 97,647 375,055 34,731 306,318 (27,291) 141,705
Annuities 694,388 3,588,491 0 1,727 172,247 158,458 135,356 23,333 151,719
Accident and health 18,409 0 49,919 671,472 506,451 23,877 393,601 979
161,128
- ---------------------------------------------------------------------------------------------------------------------------
$930,059 5,034,335 53,778 770,846 1,053,753 217,066 835,275 (2,979) 454,552
1997:
Life $189,971 1,297,269 5,215 63,572 313,078 24,352 230,357 (14,363) 99,913
Annuities 717,721 3,251,829 0 1,881 188,474 118,028 124,535 (44,924) 186,789
Accident and health 19,388 0 44,953 487,660 451,067 19,970 327,526 (4,455)
151,312
- ---------------------------------------------------------------------------------------------------------------------------
$927,080 4,549,098 50,168 553,113 952,619 162,350 682,418 (63,742) 438,014
1996:
Life $175,608 1,204,633 5,502 62,369 331,845 89,049 258,221 4,308 103,352
Annuities 672,797 2,879,221 0 1,859 157,887 113,537 105,335 (43,283) 161,002
Accident and health 14,933 0 26,674 374,596 376,822 20,036 256,364 2,631
122,337
- ---------------------------------------------------------------------------------------------------------------------------
$863,338 4,083,854 32,176 438,824 866,554 222,622 619,920 (36,344) 386,691
<FN>
(a) See note 1 for total gross amortization.
</FN>
</TABLE>
<PAGE>
APPENDIX
ILLUSTRATION OF POLICY VALUES
The following tables illustrate how Policy Account values, Net Cash Values
and death benefits of a policy change based on the investment experience of the
variable options. The illustrations are hypothetical and may not be used to
project or predict investment results. The Policy Account values, Net Cash
Values and death benefits in the tables take into account all charges and
deductions against the policy. These tables assume that the cost of insurance
rates for the policy are based on the current and guaranteed rates appropriate
to the class shown. These tables also assume that a level annual premium of
$1,200 was paid. These tables assume that the insured is in the most favorable
male risk status, I.E., non-smoker. For insureds who are classified as smoker or
less favorable risk status, the cost of insurance will be greater and the policy
values will be less given the same assumed hypothetical gross annual investment
rates of return. The cost of insurance will be less and the policy values will
be greater for female insureds of comparable risk status. Some states require
that the policies contain tables based upon unisex rates.
Gross investment returns of 0%, 6% and 12% are assumed to be level for all
years shown. The values would be different if the rates of return averaged 0%,
6% and 12% over the period of years but fluctuated above and below those
averages during individual years.
The values shown reflect the fact that the net investment return of the
variable options is lower than the gross investment return on the assets held in
the portfolios because of the charges assessed on amounts in the variable
options. The daily investment advisory fee for the portfolios of Franklin
Valuemark Funds is assumed to be equal to an annual rate of 0.672% of the net
assets of the portfolios (which is the average of the investment advisory fees
assessed in 1998). The values also assume that each portfolio will incur
operating expenses annually which are assumed to be 0.047% of the average net
assets of the portfolio. This is the average in 1998. The variable options will
be assessed for mortality and expense risks at a guaranteed annual rate not to
exceed 0.90% (the current annual rate is 0.60%) of the average daily net assets
of the variable option and for administrative expenses at an annual rate of
0.15% of the average daily net assets of the variable option. After taking these
expenses and charges into consideration, the illustrated gross annual investment
rates of 0%, 6% and 12% are equivalent to net rates of -1.46%, 4.45% and 10.37%.
We deduct an insurance risk premium for a policy month from the Policy
Account values. The insurance risk premium rate is based on the sex (where
permitted by state law), attained age and rate class of the insured.
Upon request, we will provide a comparable illustration based upon the
attained age, sex (where permitted by state law) and rate class of the proposed
insured and for the Face Amount or premium requested.
A-1
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
VARIABLE UNIVERSAL LIFE
PREPARED FOR: CLIENT INITIAL DEATH BENEFIT: $100,000
ISSUE AGE: 35, NON-SMOKER ANNUAL PREMIUM: $1,200.00
SEX: MALE INITIAL DEATH BENEFIT OPTION: A
<TABLE>
<CAPTION>
CURRENT VALUES
--------------------------------------------------------------------
VALUES PROJECTED AT VALUES PROJECTED AT
0.00% 6.00%
ACCUM @ --------------------------------- ---------------------------------
ANNUAL 5.00% POLICY NET CASH NET DEATH POLICY NET CASH NET DEATH
END OF YR. AGE PREMIUM PREMIUM ACCOUNT VALUE BENEFIT ACCOUNT VALUE BENEFIT
--- --- ----------- ----------- ----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 35 1,200 1,260 757 35 100,000 813 92 100,000
2 36 1,200 2,583 1,674 893 100,000 1,840 1,059 100,000
3 37 1,200 3,972 2,573 1,731 100,000 2,908 2,066 100,000
4 38 1,200 5,431 3,453 2,602 100,000 4,017 3,166 100,000
5 39 1,200 6,962 4,316 3,495 100,000 5,172 4,351 100,000
6 40 1,200 8,570 5,156 4,385 100,000 6,368 5,598 100,000
7 41 1,200 10,259 5,984 5,264 100,000 7,620 6,899 100,000
8 42 1,200 12,032 6,792 6,121 100,000 8,919 8,249 100,000
9 43 1,200 13,893 7,583 6,995 100,000 10,273 9,685 100,000
10 44 1,200 15,848 8,359 7,853 100,000 11,685 11,179 100,000
15 49 1,200 27,189 11,909 11,909 100,000 19,800 19,800 100,000
20 54 1,200 41,633 14,675 14,675 100,000 29,566 29,566 100,000
25 59 1,200 60,136 16,501 16,501 100,000 41,036 41,036 100,000
30 64 1,200 83,713 16,480 16,480 100,000 54,520 54,520 100,000
35 69 1,200 113,804 13,265 13,265 100,000 70,666 70,666 100,000
<CAPTION>
VALUES PROJECTED AT
12.00%
---------------------------------
POLICY NET CASH NET DEATH
END OF YR. ACCOUNT VALUE BENEFIT
--- ----------- --------- ---------
<S> <C> <C> <C>
1 870 148 100,000
2 2,013 1,232 100,000
3 3,270 2,428 100,000
4 4,652 3,800 100,000
5 6,173 5,352 100,000
6 7,843 7,072 100,000
7 9,689 8,968 100,000
8 11,720 11,049 100,000
9 13,960 13,372 100,000
10 16,495 15,989 100,000
15 33,645 33,645 100,000
20 61,619 61,619 100,000
25 107,358 107,358 142,715
30 181,185 181,185 219,290
35 299,677 299,677 344,884
</TABLE>
CURRENT VALUES ARE BASED ON PROJECTED INTEREST RATES AND CURRENT EXPENSES
AND COST OF INSURANCE CHARGES NOW IN EFFECT, WHICH ARE SUBJECT TO CHANGE.
THE CURRENT MONTHLY EXPENSE CHARGES ARE $20.00 PER MONTH IN YEAR 1 AND $5.00
PER MONTH THEREAFTER.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN IN THIS
ILLUSTRATION ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND UPON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY THE OWNER, PREVAILING INTEREST RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND NET CASH VALUE FOR A POLICY WOULD BE DIFFERENT
THAN THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND
12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR
THE TRUST THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE
YEAR OR SUSTAINED OVER A PERIOD OF TIME.
A-2
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
VARIABLE UNIVERSAL LIFE
PREPARED FOR: CLIENT INITIAL DEATH BENEFIT: $100,000
ISSUE AGE: 35, NON-SMOKER ANNUAL PREMIUM: $1,200.00
SEX: MALE INITIAL DEATH BENEFIT OPTION: A
<TABLE>
<CAPTION>
GUARANTEED VALUES
--------------------------------------------------------------------
VALUES PROJECTED AT VALUES PROJECTED AT
0.00% 6.00%
--------------------------------- ---------------------------------
ACCUM NET NET NET NET
ANNUAL @ 5.00% POLICY CASH DEATH POLICY CASH DEATH
END OF YR. AGE PREMIUM PREMIUM ACCOUNT VALUE BENEFIT ACCOUNT VALUE BENEFIT
--- --- ----------- ----------- ----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 35 1,200 1,260 747 25 100,000 803 81 100,000
2 36 1,200 2,583 1,601 819 100,000 1,764 982 100,000
3 37 1,200 3,972 2,430 1,589 100,000 2,754 1,912 100,000
4 38 1,200 5,431 3,235 2,383 100,000 3,776 2,924 100,000
5 39 1,200 6,962 4,016 3,196 100,000 4,830 4,010 100,000
6 40 1,200 8,570 4,762 3,992 100,000 5,908 5,137 100,000
7 41 1,200 10,259 5,486 4,766 100,000 7,021 6,300 100,000
8 42 1,200 12,032 6,177 5,506 100,000 8,161 7,490 100,000
9 43 1,200 13,893 6,835 6,247 100,000 9,329 8,741 100,000
10 44 1,200 15,848 7,461 6,955 100,000 10,527 10,021 100,000
15 49 1,200 27,189 10,104 10,104 100,000 16,996 16,996 100,000
20 54 1,200 41,633 11,637 11,637 100,000 24,130 24,130 100,000
25 59 1,200 60,136 11,435 11,435 100,000 31,601 31,601 100,000
30 64 1,200 83,713 8,373 8,373 100,000 38,870 38,870 100,000
35 69 1,200 113,804 37 37 100,000 44,868 44,868 100,000
<CAPTION>
VALUES PROJECTED AT
12.00%
---------------------------------
NET NET
POLICY CASH DEATH
END OF YR. ACCOUNT VALUE BENEFIT
--- ----------- --------- ---------
<S> <C> <C> <C>
1 859 138 100,000
2 1,933 1,152 100,000
3 3,105 2,264 100,000
4 4,385 3,534 100,000
5 5,784 4,965 100,000
6 7,303 6,535 100,000
7 8,967 8,250 100,000
8 10,780 10,115 100,000
9 12,759 12,178 100,000
10 14,921 14,424 100,000
15 29,231 29,231 100,000
20 51,962 51,962 100,000
25 88,793 88,793 118,078
30 147,297 147,297 178,342
35 238,869 238,869 275,011
</TABLE>
CURRENT VALUES ARE BASED ON PROJECTED INTEREST RATES AND CURRENT EXPENSES
AND COST OF INSURANCE CHARGES NOW IN EFFECT, WHICH ARE SUBJECT TO CHANGE.
THE CURRENT MONTHLY EXPENSE CHARGES ARE $20.00 PER MONTH IN YEAR 1 AND $9.00
PER MONTH THEREAFTER.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN IN THIS
ILLUSTRATION ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND UPON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY THE OWNER, PREVAILING INTEREST RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND NET CASH VALUE FOR A POLICY WOULD BE DIFFERENT
THAN THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND
12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR
THE TRUST THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE
YEAR OR SUSTAINED OVER A PERIOD OF TIME.
A-3
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
VARIABLE UNIVERSAL LIFE
PREPARED FOR: CLIENT INITIAL DEATH BENEFIT: $100,000
ISSUE AGE: 35, NON-SMOKER ANNUAL PREMIUM: $1,200.00
SEX: MALE INITIAL DEATH BENEFIT OPTION: B
<TABLE>
<CAPTION>
CURRENT VALUES
--------------------------------------------------------------------
VALUES PROJECTED AT VALUES PROJECTED AT
0.00% 6.00%
--------------------------------- ---------------------------------
ACCUM NET NET NET NET
ANNUAL @ 5.00% POLICY CASH DEATH POLICY CASH DEATH
END OF YR. AGE PREMIUM PREMIUM ACCOUNT VALUE BENEFIT ACCOUNT VALUE BENEFIT
--- --- ----------- ----------- ----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 35 1,200 1,260 755 34 100,755 812 90 100,812
2 36 1,200 2,583 1,670 888 101,670 1,835 1,054 101,835
3 37 1,200 3,972 2,564 1,722 102,564 2,897 2,055 102,897
4 38 1,200 5,431 3,438 2,586 103,438 3,999 3,147 103,999
5 39 1,200 6,962 4,292 3,471 104,292 5,142 4,322 105,142
6 40 1,200 8,570 5,121 4,351 105,121 6,324 5,554 106,324
7 41 1,200 10,259 5,938 5,217 105,938 7,558 6,837 107,558
8 42 1,200 12,032 6,732 6,061 106,732 8,835 8,164 108,835
9 43 1,200 13,893 7,507 6,919 107,507 10,162 9,574 110,162
10 44 1,200 15,848 8,264 7,758 108,264 11,542 11,036 111,542
15 49 1,200 27,189 11,677 11,677 111,677 19,377 19,377 119,377
20 54 1,200 41,633 14,141 14,141 114,141 28,453 28,453 128,453
25 59 1,200 60,136 15,426 15,426 115,426 38,303 38,303 138,303
30 64 1,200 83,713 14,534 14,534 114,534 48,128 48,128 148,128
35 69 1,200 113,804 9,846 9,846 109,846 56,191 56,191 156,191
<CAPTION>
VALUES PROJECTED AT
12.00%
---------------------------------
NET NET
POLICY CASH DEATH
END OF YR. ACCOUNT VALUE BENEFIT
--- ----------- --------- ---------
<S> <C> <C> <C>
1 868 147 100,868
2 2,008 1,226 102,008
3 3,258 2,416 103,258
4 4,630 3,778 104,630
5 6,136 5,316 106,136
6 7,786 7,016 107,786
7 9,606 8,886 109,606
8 11,603 10,933 111,603
9 13,800 13,212 113,800
10 16,276 15,770 116,276
15 32,856 32,856 132,856
20 59,081 59,081 159,081
25 100,379 100,379 200,379
30 165,233 165,233 265,233
35 266,668 266,668 366,668
</TABLE>
CURRENT VALUES ARE BASED ON PROJECTED INTEREST RATES AND CURRENT EXPENSES
AND COST OF INSURANCE CHARGES NOW IN EFFECT, WHICH ARE SUBJECT TO CHANGE.
THE CURRENT MONTHLY EXPENSE CHARGES ARE $20.00 PER MONTH IN YEAR 1 AND $5.00
PER MONTH THEREAFTER.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN IN THIS
ILLUSTRATION ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND UPON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY THE OWNER, PREVAILING INTEREST RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND NET CASH VALUE FOR A POLICY WOULD BE DIFFERENT
THAN THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND
12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR
THE TRUST THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE
YEAR OR SUSTAINED OVER A PERIOD OF TIME.
A-4
<PAGE>
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
VARIABLE UNIVERSAL LIFE
<TABLE>
<S> <C>
PREPARED FOR: CLIENT INITIAL DEATH BENEFIT: $100,000
ISSUE AGE: 35, NON-SMOKER ANNUAL PREMIUM: $1,200.00
SEX: MALE INITIAL DEATH BENEFIT OPTION: B
</TABLE>
<TABLE>
<CAPTION>
GUARANTEED VALUES
---------------------------------------------------------------------------------
VALUES
PROJECTED
VALUES PROJECTED AT VALUES PROJECTED AT AT
0.00% 6.00% 12.00%
ACCUM --------------------------------- --------------------------------- -----------
END OF ANNUAL @ 5.00% POLICY NET CASH NET DEATH POLICY NET CASH NET DEATH POLICY
YR. AGE PREMIUM PREMIUM ACCOUNT VALUE BENEFIT ACCOUNT VALUE BENEFIT ACCOUNT
--- --- ----------- ----------- ----------- --------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 35 1,200 1,260 745 24 100,745 801 80 100,801 858
2 36 1,200 2,583 1,597 815 101,597 1,759 977 101,759 1,928
3 37 1,200 3,972 2,421 1,579 102,421 2,743 1,901 102,743 3,092
4 38 1,200 5,431 3,219 2,367 103,219 3,756 2,905 103,756 4,362
5 39 1,200 6,962 3,991 3,171 103,991 4,799 3,979 104,799 5,745
6 40 1,200 8,570 4,726 3,955 104,726 5,861 5,090 105,861 7,243
7 41 1,200 10,259 5,436 4,715 105,436 6,954 6,233 106,954 8,878
8 42 1,200 12,032 6,110 5,439 106,110 8,068 7,397 108,068 10,652
9 43 1,200 13,893 6,748 6,160 106,748 9,203 8,615 109,203 12,579
10 44 1,200 15,848 7,351 6,845 107,351 10,361 9,855 110,361 14,674
15 49 1,200 27,189 9,818 9,818 109,818 16,472 16,472 116,472 28,268
20 54 1,200 41,633 11,026 11,026 111,026 22,758 22,758 122,758 48,827
25 59 1,200 60,136 10,278 10,278 110,278 28,329 28,329 128,329 79,552
30 64 1,200 83,713 6,459 6,459 106,459 31,563 31,563 131,563 125,010
35 69 1,200 113,804 0 0 0 29,374 29,374 129,374 191,285
<CAPTION>
END OF NET CASH NET DEATH
YR. VALUE BENEFIT
--- --------- ---------
<S> <C> <C>
1 136 100,858
2 1,146 101,928
3 2,251 103,092
4 3,510 104,362
5 4,925 105,745
6 6,472 107,243
7 8,157 108,878
8 9,981 110,652
9 11,991 112,579
10 14,178 114,674
15 28,268 128,268
20 48,827 148,827
25 79,552 179,552
30 125,010 225,010
35 191,285 291,285
</TABLE>
CURRENT VALUES ARE BASED ON PROJECTED INTEREST RATES AND CURRENT EXPENSES
AND COST OF INSURANCE CHARGES NOW IN EFFECT, WHICH ARE SUBJECT TO CHANGE.
THE CURRENT MONTHLY EXPENSE CHARGES ARE $20.00 PER MONTH IN YEAR 1 AND $9.00
PER MONTH THEREAFTER.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN IN THIS
ILLUSTRATION ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND UPON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY THE OWNER, PREVAILING INTEREST RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND NET CASH VALUE FOR A POLICY WOULD BE DIFFERENT
THAN THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND
12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR
THE TRUST THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE
YEAR OR SUSTAINED OVER A PERIOD OF TIME.
A-5
<PAGE>
PART II
UNDERTAKINGS TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents, and reports as may be prescribed by any rule or regulation of the
Commission theretofore or hereafter duly adopted pursuant to authority conferred
in that section.
REPRESENTATION
Allianz Life Insurance Company of North America ("Company") hereby represents
that the fees and charges deducted under the Policy described in the Prospectus,
in the aggregate, are reasonable in relation to the services rendered, the
expenses to be incurred and the risks assumed by the Company.
INDEMNIFICATION
The Bylaws of the Company provide that:
Each person (and the heirs, executors, and administrators of such person) made
or threatened to be made a party to any action, civil or criminal, by reason of
being or having been a director, officer, or employee of the corporation (or by
reason of serving any other organization at the request of the corporation)
shall be indemnified to the extent permitted by the laws of the State of
Minnesota, and in the manner prescribed therin.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted for directors and officers or controlling persons of the
Company pursuant to the foregoing, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the Policies issued by the Variable
Account, the Company will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet
The Prospectus consisting of __ pages
Undertakings to File Reports.
The signatures
Written consents of the following persons: Counsel, Actuary, Independent
Auditors
The following exhibits:
A. Copies of all exhibits required by paragraph A of instructions for
Exhibits in Form N-8B-2.
1. Resolution of the Board of Directors of the Company (4)
2. Not Applicable
3. a. Principal Underwriter Agreement (5)
3. b. Selling Agreement (4)
4. Not Applicable
5. Individual Variable Life Insurance Policy (3)
i. Individual Variable Life Insurance Policy Endorsements (4)
6. a. Copy of Articles of Incorporation of the Company (4)
6. b. Copy of the Bylaws of the Company (4)
7. Not Applicable
8. Not Applicable
9. a. Administrative Agreement (filed confidentially) (2)
9. b. Form of Fund Participation Agreement (3)
10. Application for Individual Variable Life Insurance Policy (3)
12. Memorandum of Exchange Rights (1)
13. Powers of Attorney (5)
27. Not Applicable
B. Opinion and Consent of Counsel
C. Consent of Actuary
D. Independent Auditors' Consent
(1) Incorporated by reference to Registrant's Form N-8 B-2.
(2) Incorporated by reference to Registrant's Pre-Effective
Amendment No. 1
(3) Incorporated by reference to Registrant's Post-Effective
Amendment No. 9 to Form S-6, File Nos. 33-11158 and
811-4965 as electronically filed on April 24, 1996.
(4) Incorporated by reference to Registrant's Post-Effective
Amendment No. 11 to Form S-6, File Nos. 33-11158 and
811-4965 as electronically filed on April 30, 1997.
(5) Incorporated by reference to Registrant's Post-Effective
Amendment No. 12 to Form S-6, File Nos. 33-11158 and
811-4965 as electronically filed on April 29, 1998.
<PAGE>
REPRESENTATIONS
1. Registrant represents that Section (b)(13)(iii)(F) of Rule 6e-3(T) is
being relied on.
2. Registrant represents that the level of the risk charge is within the
range of industry practice for comparable flexible contracts.
3. Registrant represents that it has analyzed the risk charge taking into
consideration such facts as current charge levels, potential adverse
mortality, the manner in which charges are imposed, the markets in
which the Policy will be offered and anticipated sales and lapse rates.
Registrant also represents that a memorandum has been prepared in
connection with the analysis of the risk charge as set forth above.
Registrant undertakes to keep and make available to the Commission on
request a copy of the memorandum.
4. Registrant represents that the Company has concluded that there is a
reasonable likelihood that the distribution financing arrangements of
the Variable Account will benefit the Variable Account and
policyholders and will keep and make available to the Commission on
request a memorandum setting forth the basis for this representation.
5. Registrant represents that the Variable Account will invest only in
management investment companies which have undertaken to have a Board
of Directors, a majority of whom are not interested persons of the
Company, formulate and approve any plan under Rule 12b_1 to finance
distribution expenses.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, the Registrant certifies that it
meets all the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and it has duly caused
this Registration Statement to be signed on its behalf by the undersigned
thereunto duly authorized in the City of Minneapolis and State of Minnesota, on
this 26th day of April, 1999.
<TABLE>
<CAPTION>
<S> <C>
ALLIANZ LIFE
VARIABLE ACCOUNT A
(Registrant)
By: ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA
(Depositor)
By: /S/ MICHAEL T. WESTERMEYER
---------------------------
Michael T. Westermeyer
Attest:/S/ CATHERINE L. MIELKE
------------------------
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature and Title
<S> <C> <C>
Lowell C. Anderson* Chairman of the Board, 04/26/99
Lowell C. Anderson President and Chief Executive Officer Date
Herbert F. Hansmeyer* Director 04/26/99
Herbert F. Hansmeyer Date
Michael P. Sullivan* Director 04/26/99
Michael P. Sullivan Date
Dr. Gerhard G. Rupprecht* Director 04/26/99
Dr. Gerhard G. Rupprecht Date
Edward J. Bonach* Executive Vice President, Chief 04/26/99
Edward J. Bonach Financial Officer and Treasurer Date
Rev. Dennis J. Dease* Director 04/26/99
Rev. Dennis J. Dease Date
James R. Campbell* Director 04/26/99
James R. Campbell Date
Robert M. Kimmitt* Director 04/26/99
Robert M. Kimmitt Date
</TABLE>
*By Power of Attorney
By:/S/ MICHAEL T. WESTERMEYER
--------------------------------
Michael T. Westermeyer
Attorney-in-Fact
<PAGE>
EXHIBITS
TO
POST-EFFECTIVE AMENDMENT NO. 15
TO
FORM S-6
ALLIANZ LIFE VARIABLE ACCOUNT A
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
<PAGE>
INDEX TO EXHIBITS
Exhibit Page
- ------- ----
EX-99.B Opinion and Consent of Counsel
EX-99.C Consent of Actuary
EX-99.D Independent Auditors' Consent
<PAGE>
Blazzard, Grodd & Hasenauer, P.C.
943 Post Road East
Westport, CT 06880
(203) 226-7866
April 19, 1999
Board of Directors
Allianz Life Insurance Company of North America
1750 Hennepin Avenue
Minneapolis, MN 55403
RE: Opinion and Consent of Counsel
Allianz Life Variable Account A
Dear Sir or Madam:
You have requested our Opinion of Counsel in connection with the filing with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended, of a Registration Statement on Form S-6 for the Individual Flexible
Premium Variable Life Insurance Policies to be issued by Allianz Life Insurance
Company of North America and its separate account, Allianz Life Variable Account
A.
We are of the following opinions:
1. Allianz Life Variable Account A is a unit investment trust as that term is
defined in Section 4(2) of the Investment Company Act of 1940 (the "Act"),
and is currently registered with the Securities and Exchange Commission,
pursuant to Section 8(a) of the Act.
2. Upon the acceptance of premium payments made by a Policy Owner pursuant to a
Policy issued in accordance with the Prospectus contained in the
Registration Statement and upon compliance with applicable law, such a
Policy Owner will have a legally-issued, fully-paid, non-assessable
contractual interest under such Policy.
You may use this opinion letter, or copy hereof, as an exhibit to the
Registration Statement.
We consent to the reference to our Firm under the caption "Legal Opinions"
contained in the Prospectus which forms a part of the Registration Statement.
Sincerely,
BLAZZARD, GRODD & HASENAUER, P.C.
By:/S/LYNN KORMAN STONE
-------------------------------
Lynn Korman Stone
<PAGE>
Allianz Life Insurance Company of North America [Allianz Logo]
Jack L. Baumer, FSA, MAAA
Assistant Vice President and Actuary
Variable Products Administration
1750 Hennepin Avenue
Minneapolis, MN 55403-2195
Telephone: 612/ 337-6180
Telefax: 612/ 337-6136
www.allianzlife.com
April 14, 1999
The Board of Directors
Allianz Life Insurance Company of North America
1750 Hennepin Avenue
Minneapolis, MN 55403
CONSENT OF ACTUARY
I hereby consent to the inclusion of the Illustrations of Policy Values
contained in Appendix A in a Registration Statement Form S-6 registering
Flexible Premium Variable Life Insurance Policies. The illustrations have been
prepared in accordance with standard actuarial principles and reflect the
operation of the Policy by taking into account all charges under the Policy and
in the underlying fund, and are shown for the male, non-smoker risk
classification.
Sincerely,
/s/Jack L. Baumer
Jack L. Baumer, FSA, MAAA
JLB/rar
<PAGE>
KPMG Peat Marwick LLP
4200 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402
Independent Auditors' Consent
The Board of Directors of Allianz Life Insurance Company of North America and
Policy Owners of Allianz Life Variable Account A:
We consent to the use of our report, dated January 29, 1999, on the financial
statements of Allianz Life Variable Account A and our report dated February 5,
1999, on the consolidated financial statements of Allianz Life Insurance Company
of North America and subsidiaries included herein and to the reference to our
Firm under the heading "EXPERTS".
KPMG Peat Marwick LLP
Minneapolis, Minnesota
April 23, 1999
