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SUPPLEMENT DATED JULY 15, 1996 TO CURRENT PROSPECTUS FOR
NASL VARIABLE LIFE ACCOUNT
Effective July 15, 1996, one new investment portfolio will be added to NASL
Series Trust (the "Trust"), the underlying investment medium for the variable
portion of your contract. The new portfolio is the Growth Trust (the
"Portfolio"). Founders Asset Management, Inc. ("Founders") will provide
investment subadvisory services to the Portfolio. Below is a brief description
of the Portfolio's investment objective and certain policies relating to that
objective and a schedule of fees applicable to the Portfolio.
INVESTMENT OBJECTIVE AND POLICIES
Growth Trust
The investment objective of the Growth Trust is to seek long term
growth of capital. Founders will pursue this objective by investing at least 65%
of the portfolio's total assets (except during temporary defensive periods) in
well-established, high-quality growth companies that Founders believes have the
potential to increase earnings faster than the rest of the market.
For more information on the Portfolio and Founders, see the NASL Series Trust
prospectus dated July 11, 1996.
The Contract Illustrations contained in the Prospectus have been revised to
reflect the estimated average expenses of the Growth Trust.
Loans
The "Loans" section of the Prospectus is amended to clarify that additional
payments are first applied to the amount of any debt under any outstanding loan.
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NASL VARIABLE LIFE ACCOUNT
OF
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
VENTURE LIFE
MODIFIED SINGLE PAYMENT VARIABLE
LIFE INSURANCE CONTRACT
NON-PARTICIPATING
This Prospectus describes Venture Life, a modified single payment
combination fixed and variable life insurance contract (the "contract"), offered
by North American Security Life Insurance Company (the "Company"), a stock life
insurance company the ultimate parent of which is The Manufacturers Life
Insurance Company ("Manulife"). The contract is designed primarily for use in
estate planning. The contract requires the contract owner to make an initial
premium payment of at least $10,000 and, subject to certain restrictions,
permits additional premium payments.
The contract provides for a face amount which is the minimum death
benefit while the contract is in force. The contract can be issued on either a
single life or last survivor basis. At the death of the insured while the
contract is in force, the Company will pay the death benefit (minus any
indebtedness) to the beneficiary.
Values under the contract may be allocated to a fixed investment option
and held in the Company's general account, or to one or more of sixteen
currently available variable investment options and held in NASL Variable Life
Account (the "Variable Account"), a separate account of the Company. Except as
specifically noted herein and as set forth in the caption "FIXED INVESTMENT
OPTION" below, this Prospectus describes only the variable portion of the
contract.
Assets allocated to the Variable Account will be held in one or more of
sixteen sub-accounts of the Variable Account (the "Sub-Accounts"). The assets of
each Sub-Account are invested in shares of NASL Series Trust (the "Trust"), a
mutual fund having sixteen investment portfolios: the Small/Mid Cap Trust, the
International Small Cap Trust, the Global Equity Trust, Pasadena Growth Trust,
Equity Trust, Value Equity Trust, Growth and Income Trust, International Growth
and Income Trust, Strategic Bond Trust, Global Government Bond Trust, Investment
Quality Bond Trust, U.S. Government Securities Trust, Money Market Trust, and
three Automatic Asset Allocation Trusts (Aggressive, Moderate and Conservative).
See the accompanying Prospectus of the Trust. The value of a contract owner's
interest in the Variable Account will, and a contract's death benefit may, vary
with the investment performance of the portfolios underlying the Sub-Accounts to
which values are allocated. The Company does not guarantee the performance of
any portfolio.
BECAUSE THE CONTRACT WILL TYPICALLY BE TREATED AS A MODIFIED ENDOWMENT
CONTRACT FOR FEDERAL INCOME TAX PURPOSES, LOANS, PARTIAL WITHDRAWALS OR
SURRENDER OF THE CONTRACT MAY BE SUBJECT TO INCOME TAX AND A 10% PENALTY TAX.
It may not be advantageous to purchase variable life insurance as a
replacement for existing insurance.
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. IT
CONTAINS INFORMATION ABOUT THE VARIABLE ACCOUNT AND THE VARIABLE PORTION OF THE
CONTRACT THAT A PROSPECTIVE PURCHASER SHOULD KNOW BEFORE INVESTING.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of the Prospectus is May 1, 1996,
as supplemented July 15, 1996.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS ................................................................................................................ 3
SUMMARY ...................................................................................................................... 5
GENERAL INFORMATION ABOUT NORTH AMERICAN
SECURITY LIFE INSURANCE COMPANY, NASL VARIABLE
LIFE ACCOUNT AND NASL SERIES TRUST ........................................................................................... 8
North American Security Life Insurance Company....................................................................... 8
NASL Variable Life Account........................................................................................... 8
NASL Series Trust.................................................................................................... 8
DESCRIPTION OF THE CONTRACT................................................................................................... 10
Application for a Contract........................................................................................... 10
Payments............................................................................................................. 11
Allocation of Payments............................................................................................... 11
Variable Investment Options.......................................................................................... 12
Transfers Among Investment Options................................................................................... 12
Telephone Transactions............................................................................................... 12
Dollar Cost Averaging ............................................................................................... 12
Asset Rebalancing Program............................................................................................ 13
Loans................................................................................................................ 13
Withdrawals.......................................................................................................... 14
Death Benefit........................................................................................................ 14
Annuity Payment Options.............................................................................................. 15
Termination.......................................................................................................... 16
Reinstatement........................................................................................................ 17
Fixed Investment Option.............................................................................................. 17
Ten Day Right to Review.............................................................................................. 18
Ownership............................................................................................................ 18
Beneficiary.......................................................................................................... 18
Miscellaneous Contract Provisions.................................................................................... 19
CHARGES AND DEDUCTIONS........................................................................................................ 20
Monthly Deduction.................................................................................................... 20
Distribution Charge.................................................................................................. 20
Premium Tax Charge................................................................................................... 20
Federal Tax Charge................................................................................................... 20
Administration Charge................................................................................................ 20
Cost of Insurance Charge............................................................................................. 21
Mortality and Expense Risk Charge.................................................................................... 21
Withdrawal Charge.................................................................................................... 21
Other Taxes.......................................................................................................... 22
FEDERAL TAX MATTERS........................................................................................................... 22
Introduction......................................................................................................... 22
Tax Status of the Company............................................................................................ 22
Taxation of Life Insurance Contracts in General...................................................................... 22
Federal Income Tax Withholding....................................................................................... 26
OTHER MATTERS................................................................................................................. 26
Voting Rights........................................................................................................ 26
Notices and Reports to Contract Owners............................................................................... 26
Distribution of the Contract......................................................................................... 27
Officers and Directors of the Company................................................................................ 27
Legal Proceedings.................................................................................................... 29
Legal Matters........................................................................................................ 29
Independent Accountants.............................................................................................. 29
Safekeeping of Variable Account Assets............................................................................... 29
Other Information.................................................................................................... 29
Contract Owner Inquiries............................................................................................. 29
CONTRACT ILLUSTRATIONS........................................................................................................ 29
FINANCIAL STATEMENTS.......................................................................................................... 37
</TABLE>
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SPECIAL TERMS
Age and Attained Age The age at the insured's last birthday on the
contract date. If the insured is more than one
person, "age" is the joint equivalent age
specified on the contract specifications page.
"Attained age" is age plus the number of complete
contract years.
Annuity Option One of several alternative methods by which
payment of the proceeds may be made. If no
annuity option is specified, then proceeds will
be paid in a lump-sum.
Beneficiary The person, persons, or entity to whom the death
benefit proceeds are payable following the death
of the insured.
Cash Value The contract value minus any applicable
withdrawal charge.
Company North American Security Life Insurance Company.
Contingent The person, persons or entity who becomes the
Beneficiary beneficiary if the beneficiary is not alive.
Contract The anniversary of the contract date.
Anniversary
Code The Internal Revenue Code of 1986, as amended.
Contract Date The date from which contract anniversary,
contract year and monthly anniversary day are
determined. The contract date is specified on the
contract specifications page.
Contract Value The total of the investment account values and,
if applicable, any amount in the loan account
attributable to the contract.
Contract Year The period of twelve consecutive months beginning
on the contract date or any contract anniversary
thereafter.
Death Benefit The death benefit is determined on the date of
the insured's death and will be the greater of
(a) the face amount or (b) the contract value
multiplied by the death benefit factor stated in
the contract.
Debt Any amounts in the loan account attributable to
the contract plus any accrued loan interest.
Face Amount The minimum death benefit provided by the
contract. The initial face amount is shown on the
contract specifications page. The face amount may
be reduced as a result of partial withdrawals and
may be increased as the result of additional
premium payments.
General Account All of the assets of the Company other than
assets in separate accounts.
In Force The contract is in effect, beginning on the later
of the issue date or receipt of the initial
payment, until the contract is terminated.
Insured The person whose life is covered by the contract,
as specified on the contract specifications page.
If more than one person is so named, all
provisions of the contract which are based on the
death of the insured will be based on the date of
the death of the last survivor of those persons.
Investment Account An account the Company establishes for the owner
which represents the owner's interest in an
investment option.
Investment Account Value The value of the owner's investment in an
investment account.
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Investment Options The fixed and variable investments available to
contract owners. Currently, one fixed and sixteen
variable investment options are available under
the contract. The Company currently limits the
number of investment options to which an owner
may allocate contract value to ten.
Issue Date The date the application is approved and the
contract is issued, as specified on the contract
specification page.
Loan Account The portion of the assets held in the Company's
general account that is used as collateral when a
loan is taken.
Maturity Date The date on which proceeds are payable if the
insured is living, and the contract has not been
surrendered for payment of its surrender value,
as specified on the contract specifications page
(the contract anniversary when the insured has
attained age 100, unless the extended maturity
option is elected).
Monthly Anniversary Day The same day each month as the contract date. If
there is no monthly anniversary day in a calendar
month, the monthly anniversary day will be the
last day of the current calendar month.
Owner or The person, persons or entity entitled to the
Contract Owner ownership rights under the contract.
Payment or An amount paid by a contract owner to the
Premium Payment Company as consideration for the benefits
provided by the contract.
Portfolio or The registered management investment companies
Trust Portfolio (or any successor companies offered under the
contract) in which the separate account may
invest.
Proceeds Upon the death of the insured while the contract
is in force prior to the maturity date, the
amount to be paid to the beneficiary (the death
benefit minus any debt). Upon surrender of the
contract or on the maturity date, the surrender
value to be paid to the contract owner.
Separate Account A segregated account of the Company that is not
commingled with the Company's general assets and
obligations.
Service Office Any office the Company designates for the receipt
of payments and processing of contract owner
requests.
Sub-Account(s) The subdivisions of the separate account used to
permit a contract owner's contract value, less
indebtedness, to be allocated among the
portfolios.
Surrender Value The cash value less any debt.
Trust NASL Series Trust.
Unliquidated The sum of all payments under the contract, minus
Payments the sum of payments liquidated, if any, due to
partial withdrawals.
Valuation Date Any date on which the New York Stock Exchange
is open for business and the net asset value of
a portfolio is determined.
Valuation Period Any period from one valuation date to the next,
measured from the time on each valuation date
that the net asset value of each portfolio is
determined.
Variable Account NASL Variable Life Account, which is a separate
account of the Company.
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SUMMARY
THE CONTRACT
The contract is a modified single payment variable life insurance
contract. The contract provides a death benefit and is designed for use in
estate planning. During the insured's life, the contract provides that the
contract value will accumulate on a fixed and/or variable basis. The variable
portion of the contract will vary with the investment performance of an owner's
variable investment accounts. Any portion of contract value allocated to the
fixed investment option will accumulate based on the interest rate(s) credited
by the Company.
PAYMENTS
The contract requires the contract owner to make an initial payment of
at least $10,000 and, subject to certain restrictions, permits additional
payments. After the first contract anniversary, one additional premium payment
of at least $1,000 may be made at any time during each contract year. Provided
that the insured is between ages 40 and 70, up to the lesser of $5,000 or 5% of
the initial payment may be paid without submitting new evidence of insurability.
Additional payments may or may not increase the contract's face amount. (See
"PAYMENTS")
INVESTMENT OPTIONS
Payments may be allocated among the seventeen investment options
currently available under the contract: sixteen variable investment options and
one fixed investment option. Contract value may be allocated to a maximum of ten
investment options at any one time. The sixteen variable investment options are
the sixteen sub-accounts of the Variable Account, a separate account established
by the Company. The sub-accounts invest in corresponding portfolios of the
Trust: the Small/Mid Cap Trust, the International Small Cap Trust, the Global
Equity Trust, Pasadena Growth Trust, Equity Trust, Value Equity Trust, Growth
and Income Trust, International Growth and Income Trust, Strategic Bond Trust,
Global Government Bond Trust, Investment Quality Bond Trust, U.S. Government
Securities Trust, Money Market Trust, and three Automatic Asset Allocation
Trusts (Aggressive, Moderate and Conservative) (see the accompanying Prospectus
of the Trust). The portion of the contract value in the Variable Account will
reflect the investment performance of the Sub-Accounts selected. (See "NASL
VARIABLE LIFE ACCOUNT") Premium payments may also be allocated to the fixed
investment option. Under the fixed investment option, the Company guarantees the
principal value of payments and the rate of interest credited to the investment
account until the next contract anniversary. The portion of the contract value
in the fixed investment option will reflect such interest and principal
guarantees. (See "FIXED INVESTMENT OPTION") Subject to certain regulatory
limitations, the Company may elect to add, subtract or substitute investment
options.
If the initial payment is received at the Service Office prior to the
issue date, the entire payment will be allocated to the Company's General
Account. This amount will be allocated to the Money Market Sub-Account as of the
issue date of the contract. The contract value will then be allocated among the
investment accounts in accordance with the applicant's instructions on the later
of (a) fifteen days after the issue date of the contract or (b) the date the
initial payment is received at the Service Office.
TRANSFERS
Prior to the maturity date, amounts may be transferred among the
variable investment options and from the variable investment options to the
fixed investment option without charge. In addition, amounts may be transferred
prior to the maturity date from the fixed investment option to the variable
investment options within 30 days of each contract anniversary (and in other
limited circumstances). (See "FIXED INVESTMENT OPTION") After the maturity date,
transfers are not permitted. Transfers from any investment account must be at
least $300 or, if less, the entire balance in the investment account. If after
the transfer the amount remaining in the investment account of the contract from
which the transfer is made is less than $100, then the Company will transfer the
entire amount instead of the requested amount. The Company may impose certain
additional limitations on transfers. (See "TRANSFERS AMONG INVESTMENT OPTIONS")
Transfer privileges may also be used under a special service offered by the
Company to dollar cost average an investment in the contract. (See "DOLLAR COST
AVERAGING")
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WITHDRAWALS
Prior to the earlier of the maturity date or the death of the insured,
the owner may withdraw all or a portion of the contract value. The amount
withdrawn from any investment account must be at least $300 or, if less, the
entire balance of the investment account. If a partial withdrawal plus any
applicable withdrawal charge would reduce the contract value to less than $300,
the withdrawal request will be treated as a request to withdraw the entire
contract value. A withdrawal charge may be imposed. (See "WITHDRAWALS") A
withdrawal may be subject to income tax and a 10% penalty tax. (See "FEDERAL TAX
MATTERS")
LOANS
A owner may obtain one or both of two types of loans using the contract
as the sole security for the loan. At the time a loan is requested, the
aggregate amount of all loans (including the currently applied for loan) may not
exceed 90% of the cash value. (See "LOANS") A loan may be subject to income tax
and a 10% penalty tax. (See "FEDERAL TAX MATTERS")
CHARGES AND DEDUCTIONS
Contract Charges
No deduction is made from premium payments under the contract. On each
monthly anniversary day (or, if the monthly anniversary is not a valuation date,
the next valuation date after the monthly anniversary), charges are deducted
proportionately from all investment accounts.
Certain charges are expressed as an annual percentage of the owner's
contract value:
Three of these charges are deducted only during the first ten
contract years:
* 0.25% for distribution costs incurred by the Company,
* 0.25% for state premium taxes to be paid by the Company as a
result of receipt of premium payments, and
* 0.15% for the Company's increased federal taxes
caused by its receipt of premium payments.
Two of these charges are deducted for all contract years:
* A 0.40% charge for contract administration, and
* A 0.35% charge for the death benefit provided by
the contract (0.55% after the first ten contract
years). If there is more than one insured, this
charge is 0.10% (0.30% after the first ten contract
years). This cost of insurance charge may vary;
however, it is guaranteed not to exceed charges based
upon the Commissioner's 1980 Standard Ordinary
Mortality Table (the "1980 CSO Table").
In addition, there are two other contract charges:
* A charge at an annual rate of 0.90% of the value of each
variable investment account is deducted monthly for the
mortality and expense risks assumed by the Company in
connection with the contract.
* A monthly administrative charge of $2.50 per month will
be imposed upon contracts with less than $100,000 of
total premium payments.
(See "CHARGES AND DEDUCTIONS")
Trust Charges
There are deductions from and expenses paid out of the assets of the
Trust portfolios that are described in the accompanying Prospectus of the Trust.
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DEATH BENEFIT
The contract provides for a face amount which is the minimum death
benefit under the contract. The death benefit may be greater than the face
amount as a result of favorable investment performance. At the death of the
insured, the Company will pay the proceeds to the beneficiary. The proceeds
equal the death benefit less any debt under the contract. (See "DEATH BENEFIT")
TEN DAY REVIEW
Within 10 days of receipt of a contract, the contract owner may cancel
the contract by returning it to the Company. (See "TEN DAY RIGHT TO REVIEW")
TERMINATION
The contract will terminate and life insurance coverage will cease if
the owner surrenders the contract, or if the insured dies. It also will
terminate 61 days after a monthly anniversary day when the contract surrender
value is less than zero unless the owner makes payments within the 61 day grace
period sufficient to prevent the termination. Unless the owner elects the
extended maturity option, the contract will also terminate on the maturity date
specified on the contract specifications page (the contract anniversary when the
attained age of the insured is 100). (See "TERMINATION")
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GENERAL INFORMATION ABOUT
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY,
NASL VARIABLE LIFE ACCOUNT AND NASL SERIES TRUST
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
North American Security Life Insurance Company ("the Company") is a
stock life insurance company organized under the laws of Delaware in 1979. The
Company's principal office is located at 116 Huntington Avenue, Boston,
Massachusetts 02116. The Company is also the depositor of NASL Variable Account,
a separate account of the Company that issues variable annuity contracts. The
ultimate parent of the Company is The Manufacturers Life Insurance Company
("Manulife"), a Canadian mutual life insurance company based in Toronto, Canada.
Prior to January 1, 1996, the Company was a wholly owned subsidiary of North
American Life Assurance Company ("North American Life"), a Canadian mutual life
insurance company. On January 1, 1996 North American Life and Manulife merged
with the combined company retaining the name Manulife.
NASL VARIABLE LIFE ACCOUNT
The Company established the Variable Account in 1986, as a separate
account under Delaware law. The income, gains and losses, whether or not
realized, from assets of the Variable Account are, in accordance with the
contract, credited to or charged against the Variable Account without regard to
other income, gains or losses of the Company. Nevertheless, all obligations
arising under the contract are general corporate obligations of the Company.
Assets of the Variable Account may not be charged with liabilities arising out
of any other business of the Company.
The Variable Account is registered with the Securities and Exchange
Commission (the "Commission") under the Investment Company Act of 1940 ("1940
Act") as a unit investment trust. A unit investment trust is a type of
investment company which invests its assets in specified securities, such as the
shares of one or more investment companies. Registration under the 1940 Act does
not involve supervision by the Commission of the management or investment
policies or practices of the Variable Account. If deemed by the Company to be in
the best interests of persons having voting rights under the contract, the
Variable Account may be operated as a management company under the 1940 Act or
it may be deregistered if registration under that Act is no longer required.
There are currently sixteen Sub-Accounts within the Variable Account,
one for each of the sixteen portfolios described below. The Company reserves the
right to add other Sub-Accounts, eliminate existing Sub-Accounts, combine
Sub-Accounts or transfer assets in one Sub-Account to another Sub-Account
established by the Company or an affiliated company. The Company will not
eliminate existing Sub-Accounts or combine Sub-Accounts without obtaining any
necessary approval of the appropriate state or federal regulatory authorities.
NASL SERIES TRUST
The assets of each Sub-Account are invested in shares of a
corresponding portfolio: the Small/Mid Cap Trust, the International Small Cap
Trust, the Global Equity Trust, the Pasadena Growth Trust, the Equity Trust, the
Value Equity Trust, the Growth and Income Trust, the International Growth and
Income Trust, the Strategic Bond Trust, the Global Government Bond Trust, the
Investment Quality Bond Trust, the U.S. Government Securities Trust, the Money
Market Trust, and three Automatic Asset Allocation Trusts (Aggressive, Moderate
and Conservative). The Trust is registered under the 1940 Act as an open-end
management investment company. Each portfolio is diversified for purposes of the
1940 Act, except for the Global Government Bond Trust, which is non-diversified
so that it may invest more than 5% of its assets in securities issued by a
foreign government. The Trust receives investment advisory services from NASL
Financial Services, Inc. NASL Financial Services, Inc. is also the investment
adviser and distributor of the North American Funds, a publicly offered
management investment company.
The Trust currently has nine subadvisers. Oechsle International
Advisors, L.P., provides investment subadvisory services to the Global Equity
and Global Government Bond Trusts. Roger Engemann Management Co., Inc., provides
investment subadvisory services to the Pasadena Growth Trust. Fidelity
Management Trust Company provides investment subadvisory services to the Equity,
Aggressive Asset Allocation, Moderate Asset Allocation and Conservative Asset
Allocation Trusts. Goldman Sachs Asset Management provides investment
subadvisory services to the Value Equity Trust. Wellington Management Company
provides investment
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subadvisory services to the Growth and Income, Investment Quality Bond and Money
Market Trusts. Salomon Brothers Asset Management Inc provides investment
subadvisory services to the Strategic Bond and U.S. Government Securities
Trusts. J.P. Morgan Investment Management Inc. provides investment subadvisory
services to the International Growth and Income Trust. Fred Alger Management,
Inc. provides investment subadvisory services to the Small/Mid Cap Trust and
Founders Asset Management, Inc. provides investment subadvisory services to the
International Small Cap Trust.
The following is a brief description of each Trust portfolio:
THE SMALL/MID CAP TRUST seeks long term capital appreciation by
investing at least 65% of its total assets (except during temporary defensive
periods) in small/mid cap equity securities. As used herein small/mid cap equity
securities are equity securities of companies that, at the time of purchase,
have total market capitalization between $500 million and $5 billion.
THE INTERNATIONAL SMALL CAP TRUST seeks capital appreciation by
investing primarily in securities issued by foreign companies which have total
market capitalization or annual revenues of $1 billion or less. These securities
may represent companies in both established and emerging economies throughout
the world.
THE GLOBAL EQUITY TRUST seeks long-term capital appreciation, by
investing primarily in a globally diversified portfolio of common stocks and
securities convertible into or exercisable for common stocks.
THE PASADENA GROWTH TRUST seeks to achieve long-term growth of capital
by emphasizing investments in companies with rapidly growing earnings per share,
some of which may be smaller emerging growth companies.
THE EQUITY TRUST seeks growth of capital, by investing primarily in
common stocks of United States issuers and securities convertible into or
carrying the right to buy common stocks.
THE VALUE EQUITY TRUST seeks long-term growth of capital by investing
primarily in common stocks and securities convertible into or carrying the right
to buy common stocks.
THE GROWTH AND INCOME TRUST seeks long-term growth of capital and
income, consistent with prudent investment risk, by investing primarily in a
diversified portfolio of common stocks of United States issuers which that
portfolio's subadviser believes are of high quality.
THE INTERNATIONAL GROWTH AND INCOME TRUST seeks long-term growth of
capital and income by investing, under normal circumstances, at least 65% of its
total assets in equity securities of foreign issuers.
THE STRATEGIC BOND TRUST seeks a high level of total return consistent
with preservation of capital by giving its subadviser broad discretion to deploy
the portfolio's assets among certain segments of the fixed-income market as the
subadviser believes will best contribute to achievement of the portfolio's
investment objective.
THE GLOBAL GOVERNMENT BOND TRUST seeks a high level of total return by
placing primary emphasis on high current income and the preservation of capital,
by investing primarily in a global portfolio of high-quality, fixed-income
securities of foreign and United States governmental entities and supranational
issuers.
THE INVESTMENT QUALITY BOND TRUST seeks a high level of current income
consistent with the maintenance of principal and liquidity, by investing
primarily in a diversified portfolio of investment grade corporate bonds and
U.S. Government bonds with intermediate to longer term maturities. The portfolio
may also invest up to 20% of its assets in non-investment grade fixed income
securities.
THE U.S. GOVERNMENT SECURITIES TRUST seeks a high level of current
income consistent with preservation of capital and maintenance of liquidity, by
investing in debt obligations and mortgage-backed securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
derivative securities such as collateralized mortgage obligations backed by such
securities.
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THE MONEY MARKET TRUST seeks maximum current income consistent with
preservation of principal and liquidity by investing in high quality money
market instruments with maturities of thirteen months or less issued primarily
by United States entities.
THE AUTOMATIC ASSET ALLOCATION TRUSTS seek the highest potential total
return consistent with a specified level of risk tolerance -- conservative,
moderate or aggressive -- by investing primarily in the kinds of securities in
which the Equity, Investment Quality Bond, U.S. Government Securities and Money
Market Trusts may invest.
* THE AGGRESSIVE ASSET ALLOCATION TRUST seeks the highest total return
consistent with an aggressive level of risk tolerance. This portfolio attempts
to limit the decline in portfolio value in very adverse market conditions to 15%
over any twelve month period.
* THE MODERATE ASSET ALLOCATION TRUST seeks the highest total return
consistent with a moderate level of risk tolerance. This portfolio attempts to
limit the decline in portfolio value in very adverse market conditions to 10%
over any twelve month period.
* THE CONSERVATIVE ASSET ALLOCATION TRUST seeks the highest total
return consistent with a conservative level of risk tolerance. This portfolio
attempts to limit the decline in portfolio value in very adverse market
conditions to 5% over any twelve month period.
If the shares of any portfolio are no longer available for investment
or in the Company's judgment, investment in a portfolio becomes inappropriate in
view of the purposes of the Variable Account, the Company may eliminate the
shares of a portfolio and substitute shares of another portfolio or another
open-end registered investment company. Substitution may be made with respect to
both existing investments and the investment of future payments. However, no
substitution will be made without notice to contract owners and prior approval
of the Commission to the extent required by the 1940 Act. The Variable Account
may purchase other securities for additional Sub-Accounts or to fund classes of
contract not offered through this Prospectus without giving such notice or
seeking Commission approval.
A full description of the Trust, including the investment objectives,
policies and restrictions and expenses of each of the portfolios and a
description of procedures for handling potential conflicts of interest arising
from the use of the Trust to fund both variable annuity and variable life
insurance contracts, is contained in the Prospectus for the Trust which
accompanies this Prospectus and should be read by a prospective purchaser before
investing.
DESCRIPTION OF THE CONTRACT
APPLICATION FOR A CONTRACT
To purchase a contract a prospective contract owner must submit an
application to the Company. A contract will be issued only on the lives of
insureds from ages 20 through 80 who supply evidence of insurability
satisfactory to the Company. Contracts insuring more than one person will only
be issued to a male life/female life combination where the difference in their
"adjusted ages" (age last birthday plus three years if tobacco user) is not more
than 15 years. Acceptance is subject to the Company's underwriting rules. The
Company reserves the right to reject an application for any lawful reason
provided similarly-situated risks are treated in a consistent manner and unfair
discrimination is avoided. IF A CONTRACT IS NOT ISSUED, THE PREMIUM PAYMENTS
WILL BE RETURNED WITHOUT INTEREST. No change in the terms or conditions of a
contract will be made without the consent of the owner.
The contract will be effective on the contract date only after the
Company has received all outstanding delivery requirements and received the
initial payment. The contract date is the date used to determine all future
cyclical transactions on the contract, e.g., monthly anniversary day and
contract years. The contract date may be prior to, or the same as, the date the
contract is issued.
If the face amount exceeds current limits established by the Company,
the initial payment will not be accepted with the application. In other cases
where an initial payment is received with the application, the Company will
provide conditional insurance during underwriting according to the terms of a
prepayment receipt and temporary life insurance agreement. The conditional
insurance will be the insurance applied for, up to a
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<PAGE> 12
maximum of $100,000. If no payment was submitted with the application, on
contract delivery we will require sufficient payment to place the insurance in
force.
PAYMENTS
The contract is designed to permit an initial payment and, subject to
certain conditions, additional payments. The initial payment purchases a death
benefit initially equal to the contract's face amount. The minimum initial
payment is $10,000.
Under current underwriting rules, which are subject to change, proposed
insureds are eligible for simplified underwriting without a medical examination
if their application responses and initial payment meet simplified underwriting
standards. Customary underwriting standards will apply to all other proposed
insureds. The maximum initial premium currently permitted on a simplified
underwriting basis varies with the issue age of the insured according to the
following table:
SIMPLIFIED UNDERWRITING
ISSUE AGE MAXIMUM INITIAL PAYMENT
20-39 Not available
40-44 $20,000
45-54 $30,000
55-64 $50,000
65-80 $100,000
If the additional payment is greater than the Guaranteed Additional Payment (as
defined below) and is not made to avoid termination of the contract, new
evidence of insurability of the insured will be required. No additional payment
will be accepted until evidence of insurability is provided to the Company.
Additional payments may be made at any time and in any amount necessary
to avoid termination of the contract. Other additional payments may be made at
any time after the first contract anniversary, subject to the following
conditions:
(1) each additional payment must be at least $1,000;
(2) only one payment may be paid in any contract year;
(3) the attained age of the insured must be less than 81; and
(4) absent submission of new evidence of insurability of the
insured, the maximum additional payment permitted in a
contract year is the "Guaranteed Additional Payment." The
Guaranteed Additional Payment is the lesser of $5,000 or a
percentage of the initial payment (5% for attained ages 40-70,
and 0% for attained ages 20-39 and 71-80).
An additional payment may result in an increase in the face amount of
insurance. If necessary, the Company will increase the face amount by an amount
sufficient to permit the contract to remain within the definition of a "life
insurance contract" under section 7702 of the Code.
ALLOCATION OF PAYMENTS
The Company will establish an investment account for the contract owner
for each variable investment option to which the contract owner allocates
payments. The contract owner may allocate contract value to a maximum of ten
investment options at any one time.
If the initial payment is received at the Service Office prior to the
issue date, the entire payment will be allocated to the Company's General
Account. On the issue date, this amount will be allocated to the Money Market
Sub-Account as of the date the initial payment is received at the Service
Office. The contract value will then be allocated among the investment accounts
in accordance with the applicant's instructions on the later of (a) fifteen days
after the issue date of the contract or (b) the date the initial payment is
received at the Service Office. Additional payments will be allocated among
investment options in accordance with the contract owner's instructions as of
the date the payment is received at the Service Office.
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<PAGE> 13
VARIABLE INVESTMENT OPTIONS
The investment account for a variable investment option represents the
contract owner's interest in that investment option. The value of a variable
investment account may increase or decrease daily depending on the net
investment experience (described below) for a Sub-Account. The investment
account value reflects payments, amounts transferred to the investment account,
the net investment experience of the Sub-Account, and any withdrawals, loans,
transfers and charges taken from the investment account.
The net investment experience for a variable investment account is the
investment performance of the underlying Trust portfolio of a Sub-Account from
one valuation period to the next. The net investment experience for any
valuation period is determined by dividing (a) by (b):
Where (a) is:
(1) the net asset value of a portfolio share held in the
Sub-Account determined at the end of the current valuation period, plus
(2) the per share amount of any dividend or capital gain
distributions made by the portfolio on shares held in the Sub-Account if the
"ex-dividend" date occurs during the current valuation period.
Where (b) is:
the net asset value of a portfolio share held in the
Sub-Account determined as of the end of the immediately preceding valuation
period.
TRANSFERS AMONG INVESTMENT OPTIONS
Before the maturity date the contract owner may transfer amounts among
the variable investment options and from such investment options to the fixed
investment option at any time and without charge upon written notice to the
Company or by telephone if the contract owner authorizes the Company in writing
to accept telephone transfer requests. Amounts may only be transferred from the
fixed investment option to the variable investment options within 30 days of the
contract anniversary. The Company will effect such transfers so that the
contract value on the date of the transfer will not be affected by the transfer.
The contract owner must transfer at least $300 or, if less, the entire value of
the investment account. If after the transfer the amount remaining in the
investment account is less than $100, then the Company will transfer the entire
amount instead of the requested amount. The Company reserves the right to limit,
upon notice, the maximum number of transfers a contract owner may make to one
per month or six at any time within a contract year. In addition, the Company
reserves the right to defer the transfer privilege at any time that the Company
is unable to purchase or redeem shares of the Trust portfolios. The Company also
reserves the right to modify or terminate the transfer privilege at any time in
accordance with applicable law.
TELEPHONE TRANSACTIONS
Contract owners are permitted to request transfers or withdrawals by
telephone. The Company will not be liable for following instructions
communicated by telephone that it reasonably believes to be genuine. To be
permitted to request transfers or withdrawals by telephone, a contract owner
must elect the option on an appropriate authorization form provided by the
Company. The Company will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine and may only be liable for
any losses due to unauthorized or fraudulent instructions where it fails to
employ its procedures properly. Such procedures include the following: Upon
telephoning a request, contract owners will be asked to provide certain
identifying information. For the contract owner's and Company's protection, all
conversations with contract owners will be tape recorded. All telephone
transactions will be followed by a confirmation statement of the transaction.
DOLLAR COST AVERAGING
The Company administers a Dollar Cost Averaging ("DCA") program which
enables a contract owner to pre-authorize a periodic exercise of the contractual
transfer rights described above. Contract owners entering into a DCA agreement
instruct the Company to transfer monthly a predetermined dollar amount from any
Sub-Account or the fixed investment option to other Sub-Accounts until the
amount in the Sub-Account from which the transfer is made or the fixed
investment option is exhausted. The DCA program is generally suitable for
contract owners
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<PAGE> 14
making a substantial deposit to the contract and who desire to control the risk
of investing at the top of a market cycle. The DCA program allows such
investments to be made in equal installments over time in an effort to reduce
such risk. Contract owners interested in the DCA program may obtain a separate
application and full information concerning the program and its restrictions
from their securities dealer or the Service Office.
ASSET REBALANCING PROGRAM
The Company administers an Asset Rebalancing Program which enables a
contract owner to indicate to the Company the percentage levels he or she would
like to maintain in particular Trust portfolios. On the last business day of
every calendar quarter, the contract owner's contract value will be
automatically rebalanced to maintain the indicated percentages by transfers
among the portfolios. (The fixed investment option is not eligible for
participation in the Asset Rebalancing Program.) The entire value of the
contract owners' variable investment accounts must be included in the Asset
Rebalancing Program. Other investment programs, such as the DCA program, or
other transfers or withdrawals may not work in concert with the Asset
Rebalancing Program. Therefore, contract owners should monitor their use of
these programs and other transfers or withdrawals while the Asset Rebalancing
Program is being used. Contract owners interested in the Asset Rebalancing
Program may obtain a separate application and full information concerning the
program from their securities dealer or the Service Office.
LOANS
While the contract is in force, the owner may obtain loans using the
owner's contract as the sole security for the loan. The maximum loan amount is
90% of cash value at the time of the loan; the minimum loan amount is $1,000.
Contract loans may be subject to income tax and a 10% penalty tax. (See "FEDERAL
TAX MATTERS") When an owner requests a loan, the Company will reduce the owner's
investment in the investment accounts and transfer the amount of the loan to the
loan account, a part of the Company's general account. The owner may designate
the investment accounts from which the loan is to be withdrawn. Absent such a
designation, the amount of the loan will be withdrawn from the investment
accounts on a pro rata basis. On each contract anniversary, the Company will
transfer from the investment accounts to the loan account the amount by which
the debt on the contract exceeds the balance in the loan account.
The Company charges interest of 6% per year on contract loans. Loan
interest is payable in arrears and, unless paid in cash, the accrued loan
interest is added to the amount of the debt and bears interest at 6% as well.
Except for the target loan amount described below, the loan account will be
credited interest at the rate of 4% per year.
The target loan amount is equal to the greater of:
(a) the excess of the contract value over the unliquidated payments, or
(b) 10% of total payments made under the contract.
The amount of the loan account that is less than or equal to the target
loan amount will be credited interest at the rate of 6% per year (unless a lower
rate becomes necessary in order to maintain the tax status of the contract). The
portion of the loan account that qualifies as target loan amount is determined
on the contract date and each monthly anniversary day.
If on any date debt under a contract exceeds the contract value, the
contract will be in default. In such case, the owner will receive a notice
indicating the payment needed to bring the contract out of default and will have
a sixty-one day grace period within which to pay that amount. If the required
payment is not made within the grace period, the contract will be terminated.
The amount of any debt will be deducted from the death benefit
otherwise payable under the contract. (See "DEATH BENEFIT") In addition, debt,
whether or not repaid, will have a permanent effect on the contract value
because the investment results of the investment accounts will apply only to the
unborrowed portion of the contract value. The longer debt is outstanding, the
greater the effect is likely to be. The effect could be favorable or
unfavorable. If the investment results are greater than the rate being credited
on amounts held in the loan account while the debt is outstanding, the contract
value will not increase as rapidly as it would have if no debt were outstanding.
If investment results are below that rate, the contract value will be higher
than it would have been had no debt been outstanding.
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<PAGE> 15
The owner may repay any debt in whole or in part at any time while the
contract is in force. An amount equal to the amount of the loan repayment will
be transferred from the loan account and allocated among the investment accounts
in the same percentage as additional payments are allocated, unless the owner
requests otherwise.
WITHDRAWALS
Prior to the earlier of the maturity date or the death of the insured,
the owner may withdraw all or a portion of the contract value upon written
request, complete with all necessary information to the Service Office. In the
case of a total withdrawal, the Company will pay the surrender value as of the
date of receipt of the request at the Service Office, and the contract will
terminate. In the case of a partial withdrawal from an investment account, the
Company will pay the amount requested and deduct that amount plus any applicable
withdrawal charge from such investment account. (See "CHARGES AND DEDUCTIONS")
When making a partial withdrawal, the contract owner should specify the
investment accounts from which the withdrawal is to be made. The amount
requested from an investment account may not exceed the value of that investment
account less any applicable withdrawal charge. If the contract owner does not
specify the investment account from which a partial withdrawal is to be taken, a
partial withdrawal will be taken from all the investment accounts. The face
amount will be reduced proportionally to the reduction in the contract value due
to the partial withdrawal.
For the rules governing the order and manner of withdrawals from the
fixed investment option, see "FIXED INVESTMENT OPTION."
There is no limit on the frequency of partial withdrawals; however, the
amount withdrawn must be at least $300 or, if less, the entire balance in the
investment account. If after the withdrawal (and deduction of any withdrawal
charge) the amount remaining in the investment account is less than $100, the
Company will treat the partial withdrawal as a withdrawal of the entire amount
held in the investment account. If a partial withdrawal plus any applicable
withdrawal charge would reduce the contract value to less than $300, the Company
will treat the partial withdrawal as a total withdrawal of the contract value.
The amount of any withdrawal from the variable investment options will
be paid promptly, and in any event within seven days of receipt of the request,
complete with all necessary information at the Service Office, except that the
Company reserves the right to defer the right of withdrawal or postpone payments
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
securities held in the Variable Account is not reasonably practicable or it is
not reasonably practicable to determine the value of the Variable Account's net
assets, or (4) the Commission, by order, so permits for the protection of
security holders; provided that applicable rules and regulations of the
Commission shall govern as to whether the conditions described in (2) and (3)
exist.
Withdrawals from the contract may be subject to income tax and a 10%
penalty tax. (See "FEDERAL TAX MATTERS")
Telephone Withdrawals
The contract owner may request the option to withdraw a portion of the
contract value by telephone by completing the application described under
"Telephone Transactions" above. The Company reserves the right to impose maximum
withdrawal amounts and procedural requirements regarding this privilege.
See "TELEPHONE TRANSACTIONS"
DEATH BENEFIT
Upon receipt of proof of the death of the insured while the contract is
in force, the Company will pay the death benefit proceeds to the beneficiary.
The amount of the death benefit is determined on the date the Company receives
proof of the insured's death and will be the greater of (a) the face amount or
(b) the contract value times the death benefit factor from the following table:
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<PAGE> 16
<TABLE>
<CAPTION>
Death Death
Attained Benefit Attained Benefit
Age Factor Age Factor
-------- ------- -------- -------
<S> <C> <C> <C>
40 or
younger 250% 60 130%
41 243% 61 128%
42 236% 62 126%
43 229% 63 124%
44 222% 64 122%
45 215% 65 120%
46 209% 66 119%
47 203% 67 118%
48 197% 68 117%
49 191% 69 116%
50 185% 70 115%
51 178% 71 113%
52 171% 72 111%
53 164% 73 109%
54 157% 74 107%
55 150% 75-90 105%
56 146% 91 104%
57 142% 92 103%
58 138% 93 102%
59 134% 94-99 101%
</TABLE>
Proof of death is received when one of the following is received at the
Service Office:
(a) A certified copy of a death certificate; or
(b) A certified copy of a decree of a court of competent jurisdiction
as to the finding of death; or
(c) Any other proof satisfactory to the Company.
All or part of the death benefit proceeds may be paid in cash or
applied under an annuity option. (See "ANNUITY PAYMENT OPTIONS") If there is any
debt under the contract, the death benefit proceeds equal the death benefit, as
described above, less such debt.
ANNUITY PAYMENT OPTIONS
Proceeds payable under the contract are payable either in a lump sum or
in accordance with one or more annuity options. If no annuity option is
specified, then proceeds will be paid in a lump sum. The person to receive
payments under an option is called the payee and for joint and survivor
annuities, the second person named is called the co-payee. An annuity option may
be chosen only if the amount to be applied for any payee is at least $2,000.
Each periodic payment must be at least $25. In addition to the annuity options
described below, the owner may choose any form of settlement acceptable to the
Company.
The following options are guaranteed in the contract.
Option 1(a): Non-Refund Life Annuity - An annuity with payments during
the lifetime of the payee. No payments are due after the death of the
payee. Since there is no guarantee that any minimum number of payments
will be made, an annuitant may receive only one payment if the
annuitant dies prior to the date the second payment is due.
Option 1(b): Life Annuity with Payments Guaranteed for 10 Years - An
annuity with payments guaranteed for 10 years and continuing thereafter
during the lifetime of the payee. Since payments are guaranteed for 10
years, annuity payments will be made to the end of such period if the
payee dies prior to the end of the tenth year.
Option 2(a): Joint & Survivor Non-Refund Life Annuity - An annuity with
payments during the lifetimes of the payee and a designated co-payee.
No Payments are due after the death of the last survivor of the
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<PAGE> 17
payee and co-payee. Since there is no guarantee that any minimum number
of payments will be made, a payee or co-payee may receive only one
payment if the payee and co-payee die prior to the date the second
payment is due.
Option 2(b): Joint & Survivor Life Annuity with Payments Guaranteed for
10 Years - An annuity with payments guaranteed for 10 years and
continuing thereafter during the lifetimes of the payee and a
designated co-payee. Since payments are guaranteed for 10 years,
annuity payments will be made to the end of that period if both the
payee and the co-payee die prior to the end of the tenth year.
In addition to the foregoing annuity options which the Company is
contractually obligated to offer at all times, the Company currently offers the
following annuity options. The Company may cease offering the following annuity
options at any time and may offer other annuity options in the future.
Option 3: Life annuity with Payments Guaranteed for 5, 15 or 20 Years -
An annuity with payments guaranteed for 5, 15 or 20 years and
continuing thereafter during the lifetime of the payee. Since payments
are guaranteed for the specific number of years, annuity payments will
be made to the end of the last year of the 5, 15 or 20 year period.
Option 4: Joint & Two-Thirds Survivor No-Refund Life Annuity - An
annuity with full payments during the joint lifetime of the payee and a
designated co-payee and two-thirds payments during the lifetime of the
survivor. Since there is no guarantee that any minimum number of
payments will be made, a payee or co-payee may receive only one payment
if the payee and co-payee die prior to the date the second payment is
due.
Death Benefit under Annuity Payment Options
If annuity payments have been selected based on an annuity option
providing for payments for a guaranteed period, and the payee(s) dies, the
Company will make the remaining guaranteed payments to the payee's named
beneficiary. If no beneficiary is living, the Company will commute any unpaid
guaranteed payments to a single sum (on the basis of the interest rate used in
determining the payments) and pay that single sum to the estate of the payee.
TERMINATION
The contract will terminate and life insurance coverage will cease on
the earliest of the following:
(a) the date the owner surrenders the contract; or
(b) the maturity date of the contract; or
(c) the end of the grace period described below; or
(d) the death of the insured.
A grace period of 61 days commences on a monthly anniversary day on
which the contract's surrender value is less than zero. If sufficient payment is
not made by the end of the grace period, the contract will terminate without
value. The Company will mail the owner and any assignee written notice of the
amount of payment that will be required to continue the contact in force at
least 61 days before the end of the grace period. The payment required will be
no greater than the amount required to pay the monthly deduction for three
months as of the day the grace period began. If payment is not made by the end
of the grace period, the owner's contract will terminate without value.
Termination on the maturity date may be avoided if the insured is
living on that date and if the owner sends the Company written notice that the
owner elects the contract's extended maturity option prior to the maturity date.
If the extended maturity option is elected, the entire contract value will be
transferred to the fixed investment account on the maturity date and no further
cost of insurance charges will be incurred. Death benefit proceeds will then be
equal to the surrender value. A decision to elect, or not to elect, the extended
maturity option will have income tax consequences. (See "FEDERAL TAX MATTERS").
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<PAGE> 18
REINSTATEMENT
During the life of the insured, this contract may be reinstated within
two years from the end of the grace period unless it was surrendered for payment
of its surrender value. To reinstate, the Company must receive satisfactory
proof of the insurability of the insured, and any debt must be repaid or
reinstated. Sufficient payment must be made to cover:
(a) all monthly deductions that are due and unpaid during the
grace period, and
(b) three months of the guaranteed maximum cost of insurance as
of the date of reinstatement.
The contract value on the reinstated date will reflect:
(a) the contract value at the time of termination; plus
(b) payments made at the time of reinstatement.
The withdrawal charge will be based on the number of contract years from the
original contract date.
FIXED INVESTMENT OPTION
Investment Option. A one year fixed investment option is available
under the contract. Under the one year fixed investment option, the Company
guarantees the principal value of payments and the rate of interest credited to
the investment account until the next contract anniversary. The portion of the
contract value in the one year fixed investment option will reflect such
interest and principal guarantees. The guaranteed interest rates on new amounts
allocated or transferred to the fixed investment account are determined from
time-to-time by the Company in accordance with market conditions. The effective
interest rate credited at any time to the fixed investment account of a contract
is the weighted average of all guaranteed rates for the contract. In no event
will the guaranteed rate of interest be less than 3%. Once an interest rate is
guaranteed for an amount in the fixed investment account, it is guaranteed until
the next contract anniversary and may not be changed by the Company.
Pursuant to a Guarantee Agreement dated November 19, 1993, (originally
entered into by North American Life and assumed by Manulife in the merger),
Manulife, the ultimate parent of the Company, unconditionally guarantees to the
Company on behalf of and for the benefit of the Company and owners of fixed
contracts issued by the Company that it will, on demand, make funds available to
the Company for the timely payment of contractual claims under fixed contracts.
This Guarantee covers the fixed portion of the contracts described in this
Prospectus. This Guarantee may be terminated by Manulife on notice to the
Company. Termination will not affect Manulife's continuing liability with
respect to all fixed contracts issued prior to the termination of the Guarantee.
Investment Account. Contract owners may allocate payments, or make
transfers from the variable investment options, to the fixed investment option
at any time prior to the maturity date. The Company will establish an investment
account when amounts are allocated to the fixed investment option.
Renewals. At the end of a guarantee period, the contract owner may
establish a new investment account with a one year guarantee period at the then
current interest rate or transfer the amounts to a variable investment option,
all without the imposition of any charge. If the contract owner does not specify
the renewal option desired, the Company will select the fixed investment option.
Transfers. Prior to the maturity date, the contract owner may transfer
amounts from the fixed investment account to the variable investment options
within 30 days of the contract anniversary. Amounts in the fixed investment
account may be transferred prior to the end of the contract year "pursuant to
the Dollar Cost Averaging program."
Withdrawals. The contract owner may make total and partial withdrawals
of amounts held in the fixed investment account at any time prior to the
maturity date or his or her death. Withdrawals from the fixed investment account
will be made in the same manner and be subject to the same limitations as set
forth under "WITHDRAWALS." The Company reserves the right to defer payment of
amounts withdrawn from the fixed investment account for up to six months from
the date it receives the written withdrawal request (if a withdrawal is deferred
for more than 30 days pursuant to this right, the Company will pay interest on
the amount deferred at a rate not less than 3% per year or such higher rate as
may be required by the applicable state or jurisdiction).
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<PAGE> 19
Withdrawals allocated to the free withdrawal amount may be withdrawn
without the imposition of a withdrawal charge. If withdrawals are taken from
more than one investment account, the free withdrawal amount will be applied to
all investment accounts on a pro rata basis.
Withdrawals from the contract may be subject to income tax and a 10%
penalty tax. (See "FEDERAL TAX MATTERS" in the Prospectus)
Securities Registration. Due to certain exemptive and exclusionary
provisions, interests in the fixed investment account are not registered under
the Securities Act of 1933 ("1933 Act") and the Company's general account is not
registered as an investment company under the Investment Company Act of 1940
("1940 Act"). Accordingly, neither interests in the fixed investment account nor
the general account are subject to the provisions or restrictions of the 1933
Act or the 1940 Act and the staff of the Commission has not reviewed the
disclosures in the Prospectus relating thereto. Disclosures relating to
interests in the fixed investment account and the general account, however, may
be subject to certain generally applicable provisions of the federal securities
laws relating to the accuracy of statements made in a registration statement.
TEN DAY RIGHT TO REVIEW
The contract owner may cancel the contract by returning it to the
Service Office or agent at any time within 10 days after receipt of the
contract. Within 7 days of receipt of the contract by the Company, the Company
will refund the payment made for the contract, less any debt or partial
withdrawals.
No withdrawal charge is imposed upon return of the contract within the
ten day right to review period. The ten day right to review may vary in certain
states in order to comply with the requirements of insurance laws and
regulations in such states.
OWNERSHIP
The contract owner is the person entitled to exercise all rights under
the contract and is the person designated in the contract specifications page or
as subsequently named. If amounts become payable to any beneficiary under the
contract, the beneficiary is the contract owner.
Any change of ownership or assignment must be made in writing. Any
change must be approved by the Company. Any assignment and any change, if
approved, will be effective as of the date the Company receives the request at
the Service Office. The Company assumes no liability for any payments made or
actions taken before a change is approved or an assignment is accepted or
responsibility for the validity or sufficiency of any assignment. An absolute
assignment will revoke the interest of any revocable beneficiary.
BENEFICIARY
The beneficiary is the person, persons or entity designated in the
contract specifications page or as subsequently named. The beneficiary may be
changed subject to the rights of any irrevocable beneficiary. Any change must be
made in writing, approved by the Company and if approved, will be effective as
of the date on which written. The Company assumes no liability for any payments
made or actions taken before the change is approved. If no beneficiary is
living, the contingent beneficiary will be the beneficiary. The interest of any
revocable beneficiary is subject to that of any assignee. If no beneficiary or
contingent beneficiary is living, the beneficiary is the owner or the owner's
estate.
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<PAGE> 20
MISCELLANEOUS CONTRACT PROVISIONS
Limit on Right to Contest
With regard to the life of each insured, the contract will be
incontestable after it has been in force during the lifetime of the insured for
two years from the issue date. Any increase in face amount for which evidence of
insurability was obtained will be incontestable only after the increase has been
in force, during the insured's lifetime, for two years from the effective date
of the increase. The two year incontestability period may vary in certain states
in order to comply with the requirements of insurance laws and regulations in
such states.
In issuing the contract, the Company has relied upon the application.
The statements in that application, in the absence of fraud, are considered
representations and not warranties. No statement made in connection with the
contract application will be used by the Company to void the contract or to deny
a claim unless that statement is a part of the contract application or any
amendments thereof.
Suicide Exclusion
If any insured commits suicide, while sane or insane, within two years
of the issue date, the Company will return payments made, less any debt and any
partial withdrawals. If any insured commits suicide, while sane or insane,
within two years from the effective date of any increase in face amount for
which evidence of insurability was established, the Company will return the
additional payment which increased the face amount.
Misrepresentation of Age or Sex
If the age or sex of any insured has been misstated, the death benefit
proceeds will be limited to those which would have been appropriate for the
insured's correct age and sex.
Assignment
While the insured is alive, the owner may assign the contract. No
assignment will be binding on the Company unless it is written in a form
acceptable to the Company and received at the Service Office. The Company will
not be liable for any payments made or actions taken before the Company accepts
the assignment. An absolute assignment will revoke the interest of any revocable
beneficiary. The Company will not be responsible for the validity of any
assignment. An assignment may result in income tax and a 10% penalty tax. (See
"FEDERAL TAX MATTERS")
Creditors' Claims
To the extent permitted by law, no benefits payable under this
contract will be subject to the claims of the contract owner's or the
beneficiary's creditors.
Non-Participation
The contract is non-participating and will not share in the Company's
profits or surplus earnings. The Company will pay no dividends on the contract.
Notices and Elections
To be effective, all notices and elections made under the contract must
be in writing, signed by the owner and received by the Company at the Service
Office. Certain exceptions may apply. See "Telephone Transactions" Unless
otherwise provided in the contract, all notices, requests and elections will be
effective when received at the Service Office, complete with all necessary
information.
Modification
The Company will not change or modify the contract without the owner's
consent except to the extent necessary to conform to any applicable law or
regulation or any ruling issued by a government agency. The provisions of the
contract shall be interpreted so as to comply with the requirements of Section
7702 of the Internal Revenue Code.
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CHARGES AND DEDUCTIONS
Charges and deductions under the contracts are assessed against
contract values. In addition, there are deductions from and expenses paid out of
the assets of the Trust portfolios that are described in the accompanying
Prospectus of the Trust.
MONTHLY DEDUCTION
On each monthly anniversary day, a deduction is made from contract
value to compensate the Company for the cost of insurance and certain other
expenses incurred in connection with the contract. The monthly deduction amount
is determined as of that valuation date, or if the monthly anniversary day is
not a valuation date, the immediately following valuation date is used. The
monthly deduction will be allocated among the investment accounts on a pro rata
basis. The monthly deduction will vary from month to month. If the surrender
value is insufficient to cover the monthly deduction due on any monthly
anniversary day, the contract may terminate without value. (See "TERMINATION")
DISTRIBUTION CHARGE
During the first ten contract years, a distribution charge equal to an
annual rate of 0.25% of contract value will be deducted monthly as compensation
for a portion of the sales expenses the Company incurs with respect to the
contract (See "DISTRIBUTION OF THE CONTRACT"). The Company will monitor
distribution charges, federal tax charges and contingent deferred sale charges
deducted under a contract to ensure that the sum of these charges will never
exceed 9% of aggregate payments made under that contract.
PREMIUM TAX CHARGE
During the first ten contract years, a premium tax charge equal to an
annual rate of 0.25% of contract value will be deducted monthly to defray
premium taxes the Company pays to state and local governments in connection with
the contract. This charge is designed to offset the average premium tax the
Company expects to pay with respect to a contract (approximately 2.50% of
premium payments received), but will not necessarily equal the premium tax paid
by the Company with respect to a particular contract.
FEDERAL TAX CHARGE
During the first ten contract years, a federal tax charge equal to an
annual rate of 0.15% of contract value will be deducted monthly to defray an
increased federal tax liability resulting from the application of Section 848 of
the Code. The Company currently treats this federal tax charge as if it were
sales load for purposes of determining compliance with maximum sales loads
permitted under Commission rules.
ADMINISTRATION CHARGE
An administration charge equal to an annual rate of 0.40% of contract
value will be deducted monthly as compensation for administrative expenses,
including those for insurance underwriting and contract issuance, establishing
and maintaining contract records, calculating contract values, providing reports
to contract owners, preparation and filing of tax records and forms and
processing contract transactions such as transfers, contract loans, partial
withdrawals and surrenders. The administration charge is guaranteed never to
increase over the life of the contract, and was established to cover average
anticipated administrative expenses to be incurred over the period this class of
contract will be in force.
An administrative charge of $2.50 per month will be imposed upon
contracts with less than $100,000 of total premium payments. This charge, when
imposed, offsets the lower asset base from which the Company can recover its
costs of contract administration through the asset-based administrative charge
described above.
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<PAGE> 22
COST OF INSURANCE CHARGE
The Company will make a monthly deduction for the cost of providing
life insurance coverage for the insured. This charge is guaranteed not to exceed
the maximum cost of insurance charge determined on the basis of the mortality
table guaranteed in the contract, calculated using the 1980 CSO Table.
Currently, a cost of insurance charge equal to an annual rate of 0.35% of
contract value (0.55% of contract value after the first ten contract years) will
be deducted monthly. If there is more than one insured, a cost of insurance
charge equal to an annual rate of 0.10% of contract value (0.30% of contract
value after the first ten contract years). The Company reserves the right to
increase or decrease this current cost of insurance charge so long as the
maximum charges guaranteed in the contract are not exceeded.
MORTALITY AND EXPENSE RISK CHARGE
A mortality and expense risk charge equal to an annual rate of 0.90% of
the value of variable investment accounts will be deducted monthly for assuming
the mortality and expense risks under the contract. The mortality risk assumed
under the contract is the risk that the cost of providing the death benefit will
exceed the maximum guaranteed cost of insurance charge. The expense risk assumed
under the contract is the risk that the cost of providing administrative
services will exceed the revenues from the administration charges.
WITHDRAWAL CHARGE
If the contract owner makes a partial withdrawal or surrenders the
contract during the first nine contract years, the Company will impose a
withdrawal charge which declines during that nine-year period, however, no
withdrawal charges will be imposed upon death of the insured. The withdrawal
charge consists of two components: a contingent deferred sales charge and an
unrecovered premium tax charge. The withdrawal charge is applicable only to that
portion of the proceeds of a surrender or partial withdrawal that exceeds the
"free withdrawal amount." The free withdrawal amount is the greater of (a) or
(b) as defined below; however, the free withdrawal amount may never exceed the
surrender value.
(a) the excess of the contract value on the date of withdrawal or
surrender over the unliquidated payments; or
(b) 10% of total payments less all prior partial withdrawals in that
contract year.
The total amount of the withdrawal charge is determined by multiplying the
amount withdrawn or surrendered in excess of the free withdrawal amount by the
applicable total withdrawal charge percentage shown in the following table:
<TABLE>
<CAPTION>
Total
Contract Unrecovered Withdrawal
Year CDSC Premium Tax Charge
-------- ---- ----------- ----------
<S> <C> <C> <C>
1 6.75% 2.25% 9.00%
2 6.50% 2.00% 8.50%
3 6.25% 1.75% 8.00%
4 5.50% 1.50% 7.00%
5 4.75% 1.25% 6.00%
6 4.00% 1.00% 5.00%
7 3.25% 0.75% 4.00%
8 2.50% 0.50% 3.00%
9 1.75% 0.25% 2.00%
10+ 0% 0% 0%
</TABLE>
The Company will monitor distribution charges, federal tax charge and contingent
deferred sale charges deducted under a contract to ensure that the sum of these
charges will never exceed 9% of aggregate payments made under that contract.
The total withdrawal charge will be eliminated when a contract is
issued to an officer, director or employee (or a relative thereof) of the
Company, Manulife, the Trust or any of their affiliates.
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<PAGE> 23
The revenues from the contingent deferred sales charge and the
distribution charge may be insufficient to defray all distribution expenses. If
there is a shortfall, the Company will bear the expense from its general account
assets. Such assets may include profits, if any, from the cost of insurance and
mortality and expense risk charges described above.
The unrecovered premium tax charge is designed to reimburse the Company
upon a surrender or partial withdrawal during the first nine contract years for
state premium taxes it will have paid in connection with receipt of contract
payments. The amounts deducted pursuant to the asset-based charge for premium
taxes prior to withdrawal, plus the deferred premium tax charges deducted upon
the amounts surrendered or withdrawn, will approximately equal the Company's
expected state premium tax obligations as a result of its receipt of contract
payments, based upon an estimated 2.5% average premium tax obligation.
OTHER TAXES
The Company reserves the right to make charges for any additional tax
obligations that may be incurred in the future as a result of establishing or
maintaining the Variable Account, issuing a contract,receiving payments under a
contract, or from commencing or continuing annuity option payments under a
contract.
FEDERAL TAX MATTERS
INTRODUCTION
The following discussion of the federal income tax treatment of the
contract is not exhaustive, does not purport to cover all situations, and is not
intended as tax advice. The federal income tax treatment of the contract is
unclear in certain circumstances, and a qualified tax adviser should always be
consulted with regard to the application of law to individual circumstances.
This discussion is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury Department regulations, and interpretations existing on the
date of this Prospectus. These authorities, however, are subject to change by
Congress, the Treasury Department, and judicial decisions.
This discussion does not address state or local tax consequences
associated with the purchase of the contract. In addition, THE COMPANY MAKES NO
GUARANTEE REGARDING ANY TAX TREATMENT -- FEDERAL, STATE OR LOCAL -- OF ANY
CONTRACT OR OF ANY TRANSACTION INVOLVING A CONTRACT.
TAX STATUS OF THE COMPANY
The Company is taxed as a life insurance company under the Code. Since
the operations of the Variable Account are a part of, and are taxed with, the
operations of the Company, the Variable Account is not separately taxed as a
"regulated investment company" under the Code. Under existing federal income tax
laws, investment income and capital gains of the Variable Account are not taxed
to the extent they are applied to increase reserves under a contract. Since,
under the contracts, investment income and capital gains of the Variable Account
are automatically applied to increase reserves, the Company does not anticipate
that it will incur any federal income tax liability attributable to the Variable
Account, and therefore the Company does not intend to make any provision for
such taxes. The Company's federal tax liability is increased, however, in
respect of the contracts because of the federal tax law's treatment of deferred
acquisition costs (for which the Company imposes a federal tax charge). (See
"CHARGES AND DEDUCTIONS")
TAXATION OF LIFE INSURANCE CONTRACTS IN GENERAL
Tax Status of the Contract
Section 7702 of the Code establishes a statutory definition of life
insurance for federal tax purposes. The Company believes that the contract will
meet the statutory definition of life insurance, which places limitations on the
amount of premium payments that may be made and the contract values that can
accumulate relative to the
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<PAGE> 24
death benefit. As a result, the death benefit payable under the contract will
generally be excludable from the beneficiary's gross income, and interest and
other income credited under the contract will not be taxable unless certain
withdrawals are made (or are deemed to be made) from the contract prior to the
insured's death, as discussed below. This tax treatment will only apply,
however, if (1) the investments of the Variable Account are "adequately
diversified" in accordance with Treasury Department regulations, and (2) the
Company, rather than the contract owner, is considered the owner of the assets
of the Variable Account for federal income tax purposes.
Diversification Requirements. The Code and Treasury Department
regulations prescribe the manner in which the investments of a segregated asset
account, such as the Variable Account, are to be "adequately diversified." If
the Variable Account fails to comply with these diversification standards, the
contract will not be treated as a life insurance contract for federal income tax
purposes and the owner would generally be taxable currently on the income on the
contract (as defined in the tax law) beginning with the period or periods of
non-diversification. The Company expects that the Variable Account, through the
Trust, will comply with these diversification requirements. Although the
investment adviser of the Trust is an affiliate of the Company, the Company does
not have control over the Trust or its investments. Nonetheless, the Company
believes that each Trust portfolio in which the Variable Account owns shares
will be operated in compliance with the diversification requirements prescribed
by the Code and Treasury Department regulations.
Ownership Treatment. In certain circumstances, variable life insurance
contract owners may be considered the owners, for federal income tax purposes,
of the assets of a segregated asset account, such as the Variable Account, used
to support their contracts. In those circumstances, income and gains from the
segregated asset account would be includible in the contract owners' gross
income. The Internal Revenue Service (the "IRS") has stated in published rulings
that a variable contract owner will be considered the owner of the assets of a
segregated asset account if the owner possesses incidents of ownership in those
assets, such as the ability to exercise investment control over the assets. In
addition, the Treasury Department announced, in connection with the issuance of
regulations concerning investment diversification, that those regulations "do
not provide guidance concerning the circumstances in which investor control of
the investments of a segregated asset account may cause the investor, rather
than the insurance company, to be treated as the owner of the assets in the
account." This announcement also stated that guidance would be issued by way of
regulations or rulings on the "extent to which policyholders may direct their
investments to particular sub-accounts [of a segregated asset account] without
being treated as owners of the underlying assets." As of the date of this
Prospectus, no such guidance has been issued.
The ownership rights under the contract are similar to, but different
in certain respects from, those described by the IRS in rulings in which it was
determined that contract owners were not owners of the assets of a segregated
asset account. For example, the owner of this contract has the choice of more
investment options to which to allocate premium payments and variable investment
account values, and may be able to transfer among investment options more
frequently, than in such rulings. These differences could result in the contract
owner being treated as the owner of a portion of the assets of the Variable
Account. In addition, the Company does not know what standards will be set forth
in the regulations or rulings which the Treasury Department has stated it
expects to issue. The Company therefore reserves the right to modify the
contract as necessary to attempt to prevent contract owners from being
considered the owners of the assets of the Variable Account. However, there is
no assurance that such efforts would be successful.
The remainder of this discussion assumes that the contract will be
treated as a life insurance contract for federal tax purposes.
Tax Treatment of Life Insurance Death Benefit Proceeds
In general, the amount of the death benefit payable from a contract by
reason of the death of the insured is excludable from gross income under section
101 of the Code. Certain transfers of the contract for valuable consideration,
however, may result in a portion of the death benefit being taxable.
If the death benefit is not received in a lump sum and is, instead,
applied under one of the settlement options, payments generally will be prorated
between amounts attributable to the death benefit which will be excludable from
the beneficiary's income and amounts attributable to interest (accruing after
the insured's death) which will be includible in the beneficiary's income.
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<PAGE> 25
Tax Deferral During Accumulation Period
Under existing provisions of the Code, except as described below, any
increase in an owner's contract value is generally not taxable to the owner
unless amounts are received (or are deemed to be received) from the contract
prior to the insured's death. If there is a total withdrawal from the contract,
the surrender value will be includible in the owner's income to the extent the
amount received exceeds the "investment in the contract." (If there is any debt
at the time of a total withdrawal, such debt will be treated as an amount
received by the owner.) The "investment in the contract" generally is the
aggregate amount of premium payments and other consideration paid for the
contract, less the aggregate amount received under the contract previously to
the extent such amounts received were excludable from gross income. Whether
partial withdrawals (or other amounts deemed to be distributed) from the
contract constitute income to the owner depends, in part, upon whether the
contract is considered a "modified endowment contract" ("MEC") for federal
income tax purposes.
Contracts Which Are MECs
Characterization of a Contract as a MEC. In general, this contract will
constitute a MEC unless (1) it was received in exchange for another life
insurance contract which was not a MEC, (2) no premium payments or other
consideration (other than the exchanged contract) are paid into the contract
during the first 7 contract years, and (3) there is no withdrawal or reduction
in the death benefit during the first 7 contract years. In addition, even if the
contract initially is not a MEC, it may, in certain circumstances, become a MEC
if there is a later increase in benefits or any other "material change" of the
contract, within the meaning of the tax law.
Tax Treatment of Withdrawals, Loans, Assignments and Pledges under
MECs. If the contract is a MEC, withdrawals from the contract will be considered
first as withdrawals of income and then as a recovery of premium payments. Thus,
withdrawals will be includible in income to the extent the contract value
exceeds the investment in the contract. The amount of any loan (including unpaid
interest thereon) under the contract will be treated as a withdrawal from the
contract for tax purposes. In addition, if the owner assigns or pledges any
portion of the value of a contract (or agrees to assign or pledge any portion),
such portion will be treated as a withdrawal from the contract for tax purposes.
The owner's investment in the contract is increased by the amount includible in
income with respect to such assignment, pledge, or loan, though it is not
affected by any other aspect of the assignment, pledge, or loan (including its
release or repayment). Before assigning, pledging, or requesting a loan under a
contract which is a MEC, an owner should consult a qualified tax advisor.
Penalty Tax. Generally, withdrawals (or the amount of any deemed
withdrawals) from a MEC are subject to a penalty tax equal to 10% of the portion
of the withdrawal that is includible in income, unless the withdrawals are made
(1) after the owner attains age 59 1/2, (2) because the owner has become
disabled (as defined in the tax law), or (3) as substantially equal periodic
payments over the life or life expectancy of the owner (or the joint lives or
life expectancies of the owner and his or her beneficiary, as defined in the tax
law).
Aggregation of Contracts. All life insurance contracts which are MECs
and which are purchased by the same person from the Company or any of its
affiliates within the same calendar year will be aggregated and treated as one
contract for purposes of determining the amount of a withdrawal (including a
deemed withdrawal) that is includible in income. The effects of such aggregation
are not clear; however, it could affect the time when income is taxable and the
amount which might be subject to the 10% penalty tax described above.
Contracts Which Are Not MECs
Tax Treatment of Withdrawals Generally. If the contract is not a MEC
(described above), the amount of any withdrawal from the contract will be
considered first a non-taxable recovery of premium payments and then income from
the contract. Thus, a withdrawal under a contract that is not a MEC will not be
includible in income except to the extent it exceeds the investment in the
contract immediately before the withdrawal.
Certain Distributions Required by the Tax Law in the First 15 Contract
Years. As indicated above, section 7702 places limitations on the amount of
premium payments that may be made and the contract values that can accumulate
relative to the death benefit. Where cash distributions are required under
section 7702 in connection with a reduction in benefits during the first 15
years after the contract is issued (or if withdrawals are made in anticipation
of a reduction in benefits, within the meaning of the tax law, during this
period), some or all of such amounts may be includible in income.
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<PAGE> 26
Tax Treatment of Loans. If a contract is not a MEC, a loan received
under the contract generally will be treated as indebtedness of the owner. As a
result, no part of any loan under such a contract will constitute income to the
owner so long as the contract remains in force. Nevertheless, in those
situations where the interest rate credited to the loan account equals the
interest rate charged for the loan, it is possible that some or all of the loan
proceeds may be includible in income. Generally, interest paid on any loans
under this contract will not be tax deductible, regardless of whether such
interest is incurred in connection with a taxpayer's trade or business.
Last Survivor Contracts
Although the Company believes that the contract, when issued as a last
survivor contract, complies with section 7702 of the Code, the manner in which
section 7702 should be applied to last survivor contracts is not directly
addressed by section 7702. In the absence of final regulations or other guidance
issued under section 7702 regarding this form of contract, there is necessarily
some uncertainty whether a last survivor contract will meet the section 7702
definition of a life insurance contract. Prospective owners considering purchase
of the contract as a last survivor contract should consult a qualified tax
advisor.
Where the owner of the contract is the last surviving insured, the
death proceeds will generally be includible in the contract owner's estate on
his or her death for purposes of the federal estate tax. If the contract owner
dies and was not the last surviving insured, the fair market value of the
contract would be included in the contract owner's estate. In general, nothing
would be includible in the last surviving insured's estate if he or she neither
retained incidents of ownership at death nor had given up ownership within three
years before death.
Treatment of Maturity Benefits and Extension of Maturity Date
At the maturity date, the surrender value will be paid to the contract
owner, and this amount will be includible in income to the extent the amount
received exceeds the investment in the contract. If the contract owner elects to
extend the maturity date past the year in which the insured attains age 100
(which must be done prior to the original maturity date), the Company believes
the contract will continue to qualify as a life insurance contract for Federal
tax purposes. However, there is some uncertainty regarding this treatment, and
it is possible that the contract owner would be viewed as constructively
receiving the cash value in the year the insured attains age 100. If this were
the case, an amount equal to the excess of the cash value over the investment in
the contract would be includible in the contract owner's income at that time.
Actions to Ensure Compliance with the Tax Law
The Company believes that the maximum amount of premium payments it has
determined for the contracts will comply with the federal tax definition of life
insurance. The Company will monitor the amount of premium payments, and, if the
premium payments during a contract year exceed those permitted by the tax law,
the Company will refund the excess premiums within 60 days of the end of the
contract year and will pay interest and other earnings (which will be includible
in income subject to tax) as required by law on the amount refunded. The Company
also reserves the right to increase the death benefit (which may result in
larger charges under a contract) or to take any other action deemed necessary to
ensure the compliance of the contract with the federal tax definition of life
insurance.
Other Considerations
Changing the owner, exchanging the contract, and other changes under
the contract may have tax consequences (in addition to those discussed herein)
depending on the circumstances of such change.
Federal estate tax, state and local estate and inheritance tax, and
other tax consequences of ownership or receipt of contract proceeds depend on
the circumstances of each contract owner or beneficiary. Federal estate tax is
integrated with federal gift tax under a unified rate schedule. In general,
estates less than $600,000 will not incur a federal estate tax liability. In
addition, an unlimited marital deduction may be available for federal estate and
gift tax purposes.
If the contract owner (whether or not he or she is an insured)
transfers ownership of the contract to someone two or more generations younger,
the transfer may be subject to the generation-skipping tax, the amount subject
to tax being the value of the contract. The generation-skipping tax provisions
generally apply to transfers
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<PAGE> 27
which would be subject to the gift or estate tax rules. Individuals are
generally allowed an aggregate generation-skipping tax exemption of $1 million.
Because the federal estate tax, gift tax, and generation skipping tax
rules are complex, prospective contract owners should consult a qualified tax
advisor before using this contract for estate planning purposes.
FEDERAL INCOME TAX WITHHOLDING
The Company will withhold and remit to the federal government a part of
the taxable portion of withdrawals made under a contract unless the owner
notifies the Company in writing at or before the time of the withdrawal that he
or she elects not to have any amounts withheld. Regardless of whether the owner
requests that no taxes be withheld or whether the Company withholds a sufficient
amount of taxes, the owner will be responsible for the payment of any taxes and
early distribution penalties that may be due on the amounts received. The owner
may also be required to pay penalties under the estimated tax rules, if the
owner's withholding and estimated tax payments are insufficient to satisfy the
owner's total tax liability.
OTHER MATTERS
VOTING RIGHTS
The Company will vote shares of the Trust portfolios held in the
Variable Account at meetings of shareholders of the Trust in accordance with
voting instructions received from the persons having the voting interest under
the contracts. The number of portfolio shares for which voting instructions may
be given will be determined by the Company in the manner described below, not
more than 90 days prior to the meeting of the Trust. Trust proxy material will
be distributed to each person having the voting interest under the contract
together with appropriate forms for giving voting instructions. Portfolio shares
held in the Variable Account that are attributable to contract owners and as to
which no timely instructions are received and portfolio shares held in the
Variable Account that are beneficially owned by the Company will be voted by the
Company in proportion to the instructions received.
Prior to the maturity date, the person having the voting interest under
a contract is the contract owner and the number of votes as to each portfolio
for which voting instructions may be given is determined by dividing the value
of the investment account corresponding to the Sub-Account in which such
portfolio shares are held by the net asset value per share of that portfolio.
The Company may, if required by state insurance officials, disregard
voting instructions that would require shares to be voted to change the
sub-classification or investment policies of a portfolio or to approve or
disapprove an investment advisory contract for a portfolio. In addition, the
Company may disregard voting instructions that would require changes in the
investment policies or investment adviser or subadviser of a portfolio if the
Company reasonably disapproves of these changes in accordance with applicable
federal regulations. If the Company disregards any voting instructions, it will
advise contract owners of that action, and its reasons therefore, in its next
communication to contract owners.
The Company reserves the right to make any changes in the voting rights
described above that may be permitted by the securities laws or regulations or
interpretations of these laws or regulations. In particular, if applicable
securities laws or regulations are amended or present interpretations of them
change, and, as a result, the Company determines that it is permitted to vote in
its own right shares of the portfolios held in the Variable Account, the Company
may elect to do so.
NOTICES AND REPORTS TO CONTRACT OWNERS
Within 30 days after each calendar quarter, the Company will send the
owner a statement showing, among other things, the contract value and
information concerning any loans. Within 10 days after any transaction involving
purchase, sale or transfer of amounts allocated to the Variable Account, the
owner will be sent a confirmation statement. The owner also will be sent an
annual and semi-annual report for the Variable Account and each portfolio, which
will include a list of the securities held in each portfolio.
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<PAGE> 28
At least once each contract year, the Company will send to contract
owners a statement showing the face amount and the contract value of the
contract and any outstanding loan secured by the contract as of the date of the
statement. The statement will also show premium payments, and monthly deductions
under the contract since the last statement, and any other information required
by any applicable law or regulation.
DISTRIBUTION OF THE CONTRACT
NASL Financial Services, Inc. ("NASL Financial"), 116 Huntington
Avenue, Boston, Massachusetts, 02116, a wholly-owned subsidiary of the Company,
is the principal underwriter of the contract in addition to providing advisory
services to the Trust. NASL Financial is a broker-dealer registered under the
Securities Exchange Act of 1934 ("1934 Act") and a member of the National
Association of Securities Dealers, Inc. (the "NASD"). NASL Financial has entered
into a non-exclusive promotional agent agreement with Wood Logan Associates,
Inc. ("Wood Logan"). Wood Logan is a wholly owned subsidiary of a holding
company that is 85% owned by Manulife and approximately 15% owned by the
principals of Wood Logan. Wood Logan is a broker-dealer registered under the
1934 Act and a member of the NASD. Sales of the contract will be made by
registered representatives of broker-dealers authorized by NASL Financial to
sell the contracts. Such registered representatives will also be licensed
insurance agents of the Company. Under the promotional agent agreement, Wood
Logan will recruit and provide sales training and licensing assistance to such
registered representatives. In addition, Wood Logan will prepare sales and
promotional materials for the Company's approval. NASL Financial will pay
distribution compensation to selling brokers in varying amounts which under
normal circumstances are not expected to exceed 7% of purchase payments. NASL
Financial may from time to time pay additional compensation pursuant to
promotional contests. Additionally, in some circumstances, NASL Financial will
provide reimbursement of certain sales and marketing expenses. NASL Financial
will pay Wood Logan for providing marketing support for the distribution of the
contract.
OFFICERS AND DIRECTORS OF THE COMPANY
The directors and executive officers of the Company, together with
their principal occupations during the past five years, are as follows:
<TABLE>
<CAPTION>
NAME POSITION WITH THE PRINCIPAL OCCUPATION
COMPANY
<S> <C> <C>
William J. Atherton Director and President Vice President, U.S. Annuities, of Manulife
January 1, 1996 to present, Director and
President of the Company.
Peter S. Hutchinson Director Senior Vice President, Corporate Taxation, of
Manulife, January 1, 1996 to present;
Executive Vice President and Chief Financial
Officer of North American Life, September
1994 to December 1995; Senior Vice President
and Chief Actuary, North American Life, April
1992 to August 1994; Vice President and Chief
Actuary, North American Life, September 1990
to March 1992.
Brian L. Moore Director and Chairman of Executive Vice President, Canadian Insurance
the Board of Directors Operations, of Manulife, January 1996 to
present; Chief Executive Officer and President,
The North American Group Inc., and Chief
Executive Officer, North American Life, January
1995 to December, 1995; President, The North
American Group Inc. and Vice-Chairman and Director,
North American Life, October 1993 to December 1994,
President, North American Life Financial Services,
Inc., July 1992 to October 1993, Executive Vice President
and C.F.O., North American Life, prior to October
1988.
</TABLE>
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<PAGE> 29
<TABLE>
<CAPTION>
NAME POSITION WITH THE PRINCIPAL OCCUPATION
COMPANY
<S> <C> <C>
James D. Gallagher Vice President, Secretary Vice President, Legal Services U.S.
and General Counsel Operations, of Manulife, January 1996 to
present; Vice President, Secretary and
General Counsel of the Company, June 1994
to present; Vice President and Associate
General Counsel, The Prudential Insurance
Company of America, 1990-1994.
Richard C. Hirtle Senior Vice President, Vice President, Chief Financial Officer,
Treasurer, Chief Financial Annuities, of Manulife, January 1996 to
Officer and Chief present; Senior Vice President, Treasurer,
Operating Officer Chief Financial Officer and Chief
Operating Officer of the Company, November
1988 to present.
Hugh C. McHaffie Vice President and Product Vice President, Product Management, of Manulife,
Actuary January 1996 to present; Vice President and
Product Actuary of the Company, August 1994
to present; Product Development Executive of the
Company, August 1990 to August 1994.
Iain W. Scott Vice President, Life Vice President, Single Premium Variable Life,
Products of Manulife, January 1996 to present; Vice
President, Life Products of the Company, 1994
to present; Vice President of U.S.
Distribution, North American Life, 1992 to
1994; Vice President, Marketing, M Financial
Group of Portland, Oregon, 1990 to 1992.
Janet Sweeney Vice President, Human Vice President, Human Resources, of Manulife,
Resources January, 1996 to present; Vice President,
Corporate Services of the Company, January,
1995 to January 1996; Executive, Corporate
Services of the Company, July, 1989 to
December 1994.
Scott L. Stolz Vice President, Annuity Vice President, Annuity Customer Service, of
Administration and Systems Manulife, January 1996 to present; Vice
President, Annuity Administration and Systems
of the Company, November, 1994 to date;
Senior Vice President of Annuity
Administration and Corporate Services,
SunAmerica Inc., October 1991 to October
1994; Senior Vice President and National
Sales Manager, SunAmerica Inc., August 1990
to October 1991.
John G. Vrysen Vice President and Chief Vice President and Chief Financial Officer,
Actuary U.S. Operations, of Manulife, January, 1996
to present; Vice President and Chief Actuary
of the Company, January 1986 to present.
</TABLE>
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<PAGE> 30
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account is a party
or to which the assets of the Variable Account are subject. Neither the Company
nor NASL Financial are involved in any litigation that is of material importance
in relation to their total assets or that relates to the Variable Account.
LEGAL MATTERS
All matters of applicable state law pertaining to the contract,
including the Company's right to issue the contract thereunder, have been passed
upon by James D. Gallagher, Esq., Vice President, Secretary and General Counsel
of the Company. Certain matters relating to the federal securities laws have
been passed upon by Jones & Blouch L.L.P., Washington, D.C.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company and the Variable Account
included in this Prospectus have been examined by Coopers & Lybrand, L.L.P.,
certified public accountants, as indicated in their report in this Prospectus,
and are included herein in reliance upon that report and upon the authority of
those accountants as experts in accounting and auditing.
SAFEKEEPING OF VARIABLE ACCOUNT ASSETS
The assets of the Variable Account are held by the Company. The assets
of the Variable Account are kept physically segregated and held separate and
apart from the general account of the Company. The Company maintains records of
all purchases and redemptions of shares of each Trust portfolio. Additional
protection for the assets of the Variable Account is afforded by the Company's
blanket fidelity bond issued by American Home Assurance Company, in the
aggregate amount of $50 million ($25 million for any one claim) , covering all
of the officers and employees of the Company.
OTHER INFORMATION
A registration statement has been filed with the Commission under the Securities
Act of 1933, as amended, with respect to the variable portion of the contracts
discussed in the Prospectus. Not all the information set forth in the
registration statement, amendments and exhibits thereto has been included in
this Prospectus. Statements contained in this Prospectus concerning the content
of the contracts and other legal instruments are only summaries. For a complete
statement of the terms of these documents, reference should be made to the
instruments filed with the Commission.
CONTRACT OWNER INQUIRIES
All contract owner inquiries should be directed to the Service Office.
CONTRACT ILLUSTRATIONS
The following tables have been prepared to illustrate the way in which
a contract operates. The tables assume that an initial premium payment of
$25,000 is allocated equally among the Sub-Accounts of the Variable Account,
with no allocation to the fixed investment account, and that no subsequent
payments, transfers, partial withdrawals, or loans have been made. A female
nonsmoker age 55 and a male nonsmoker age 65 with face amounts of $85,564 and
$51,179, respectively, are illustrated for an individual insured. The
illustration for a contract with two insureds assumes a joint equal age of 65
with a face amount of $79,644.
The tables illustrate how the contract value, the surrender value and
the death benefit of a contract would vary over time if the investment return on
the assets of each portfolio were a uniform, gross (i.e., before taking into
consideration fees or expenses incurred by each portfolio, other than
transaction expenses such as brokerage commissions) after-tax annual rates of
0%, 6% or 12%. The contract value, surrender value and death benefit would be
different from those shown if the returns averaged 0%, 6% or 12%, but fluctuated
over and under those averages throughout the years.
29
<PAGE> 31
The charges reflected in the tables include the (1) distribution charge
equal to an annual rate of 0.25% of contract value for the first ten contract
years, (2) premium tax charge equal to an annual rate of 0.25% of contract value
for the first ten contract years, (3) federal tax charge equal to an annual rate
of 0.15% of contract value for the first ten contract years, (4) administration
charge equal to an annual rate of 0.40% of contract value, (5) mortality and
expense charge equal to an annual rate of 0.90% of variable investment account
values, (6) $2.50 monthly maintenance fee, (7) current and guaranteed cost of
insurance charges, and (8) any withdrawal charge which may be applicable in the
first nine contract years. A simple average of the total expenses of the sixteen
portfolios also is reflected in the tables. That average expense figure is
0.95%, based upon the 1995 expense ratios of the portfolios and estimated
expense ratio of 1.25%, 1.40% and 1.10% for the Small/Mid Cap Trust, the
International Small Cap Trust and the Growth Trust, respectively. The expenses
of the portfolios may fluctuate from year to year, but are assumed to remain
constant for purposes of these tables.
The tables reflect the fact that no charges (other than those described
above) for federal, state or local taxes are currently made against the Variable
Account. If such a charge is made in the future, it would take a higher gross
rate of return to produce after-tax returns of 0%, 6% and 12% than it does now.
Surrender values in the tables do not reflect any tax consequences of a
surrender, as those consequences would vary according to the individual
circumstances of the contract owner. It should be noted that surrenders of the
contract may be subject to income tax and a 10% penalty tax. (See "FEDERAL TAX
MATTERS")
Upon request, the Company will furnish comparable illustrations based
on the insured's age, gender, smoking status, risk class, the initial premium
payment, and the investment option selected by the contract owner or prospective
owner.
From time to time, in supplemental sales literature for the contract
that quotes performance data for one or more of the Trust portfolios, the
Company may include surrender values and death benefit figures computed using
the same methodology as that used in the following illustrations, but with the
average annual total return of the portfolio for which performance data is shown
in the sales literature replacing the hypothetical rates of return in the
following tables. This information may be shown in the form of graphs, charts,
tables and examples. The contract will be offered to the public only on or after
the date of this Prospectus. However, total return data may be used in sales
literature for as long a period as a portfolio has been in existence. The
results for any period prior to the contract being offered would be calculated
as if the contract had been offered during that period of time, with all charges
assumed to be those applicable to the contract.
30
<PAGE> 32
<TABLE>
$25,000 INITIAL PAYMENT: $51,179 FACE AMOUNT
MALE NONSMOKER5: AGE 65
CURRENT VALUES
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
----------------------- ----------------------- -----------------------
Payment
Plus Contract Contract Contract
Policy Interest Contract Surrender Death Contract Surrender Death Contract Surrender Death
Year at 5% Value Value Benefit Value Value Benefit Value Value Benefit
---- ----- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 26,250 $24,170 $22,220 $51,179 $25,622 $23,541 $51,179 $ 27,073 $ 24,861 $ 51,179
2 27,563 23,367 21,594 51,179 26,260 24,240 51,179 29,320 27,195 51,179
3 28,941 22,590 20,983 51,179 26,914 24,961 51,179 31,757 29,757 51,179
4 30,388 21,838 20,484 51,179 27,586 25,836 51,179 34,399 32,649 51,179
5 31,907 21,109 19,993 51,179 28,275 26,775 51,179 37,263 35,763 51,179
6 33,502 20,404 19,509 51,179 28,982 27,732 51,179 40,368 39,118 51,179
7 35,178 19,722 19,033 51,179 29,708 28,708 51,179 43,734 42,734 51,179
8 36,936 19,061 18,564 51,179 30,452 29,702 51,179 47,384 46,634 52,596
9 38,783 18,422 18,103 51,179 31,216 30,716 51,179 51,341 50,841 55,961
10 40,722 17,803 17,803 51,179 32,000 32,000 51,179 55,631 55,631 59,525
15 51,973 15,336 15,336 51,179 37,064 37,064 51,179 85,726 85,726 90,012
20 66,332 13,191 13,191 51,179 42,956 42,956 51,179 131,197 131,197 137,757
25 84,659 11,327 11,327 51,179 49,810 49,810 52,301 200,809 200,809 210,850
30 108,049 9,706 9,706 51,179 57,891 57,891 58,470 308,028 308,028 311,109
<FN>
ASSUMPTIONS : (1) No loans or partial withdrawals have been made. (2) Current
values reflect current cost of insurance charges and a $2.50 monthly maintenance
fee. (3) Net investment returns are calculated as the hypothetical gross
investment return less all current contract charges and deductions shown in the
prospectus and current average fund expense of 0.95%.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus 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 on a number of factors, including the
investment allocations made by an owner, prevailing economic conditions,
prevailing rates and rates of inflation. The death benefit and contract value
would be different from those shown if the actual rates of return averaged 0%,
6%, and 12% over a period of years but also fluctuated above or below those
averages for individual contract years. No representation can be made by North
American Security Life or the Trust that these hypothetical rates of return can
be achieved for any one year or sustained over any period of time.
</TABLE>
31
<PAGE> 33
<TABLE>
$25,000 INITIAL PAYMENT: $85,564 FACE AMOUNT
FEMALE NONSMOKER5: AGE 55
CURRENT VALUES
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
----------------------- ----------------------- -----------------------
Payment
Plus Contract Contract Contract
Policy Interest Contract Surrender Death Contract Surrender Death Contract Surrender Death
Year at 5% Value Value Benefit Value Value Benefit Value Value Benefit
---- ----- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 26,250 $24,170 $22,220 $85,564 $25,622 $23,541 $85,564 $ 27,073 $ 24,861 $ 85,564
2 27,563 23,367 21,594 85,564 26,260 24,240 85,564 29,320 27,195 85,564
3 28,941 22,590 20,983 85,564 26,914 24,961 85,564 31,757 29,757 85,564
4 30,388 21,838 20,484 85,564 27,586 25,836 85,564 34,399 32,649 85,564
5 31,907 21,109 19,993 85,564 28,275 26,775 85,564 37,263 35,763 85,564
6 33,502 20,404 19,509 85,564 28,982 27,732 85,564 40,368 39,118 85,564
7 35,178 19,722 19,033 85,564 29,708 28,708 85,564 43,734 42,734 85,564
8 36,936 19,061 18,564 85,564 30,452 29,702 85,564 47,384 46,634 85,564
9 38,783 18,422 18,103 85,564 31,216 30,716 85,564 51,341 50,841 85,564
10 40,722 17,803 17,803 85,564 32,000 32,000 85,564 55,631 55,631 85,564
15 51,973 15,336 15,336 85,564 37,064 37,064 85,564 85,563 85,563 99,254
20 66,332 13,191 13,191 85,564 42,956 42,956 85,564 132,547 132,547 141,825
25 84,659 11,327 11,327 85,564 49,810 49,810 85,564 205,879 205,879 216,173
30 108,049 9,706 9,706 85,564 57,784 57,784 85,564 316,770 316,770 332,608
<FN>
ASSUMPTIONS : (1) No loans or partial withdrawals have been made. (2) Current
values reflect current cost of insurance charges and a $2.50 monthly maintenance
fee. (3) Net investment returns are calculated as the hypothetical gross
investment return less all current contract charges and deductions shown in the
prospectus and current average fund expense of 0.95%.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus 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 on a number of factors, including the
investment allocations made by an owner, prevailing economic conditions,
prevailing rates and rates of inflation. The death benefit and contract value
would be different from those shown if the actual rates of return averaged 0%,
6%, and 12% over a period of years but also fluctuated above or below those
averages for individual contract years. No representation can be made by North
American Security Life or the Trust that these hypothetical rates of return can
be achieved for any one year or sustained over any period of time.
</TABLE>
32
<PAGE> 34
<TABLE>
$25,000 INITIAL PAYMENT: $79,644 FACE AMOUNT
LAST SURVIVOR: JOINT EQUIVALENT: AGE 65
CURRENT VALUES
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
----------------------- ----------------------- -----------------------
Payment
Plus Contract Contract Contract
Policy Interest Contract Surrender Death Contract Surrender Death Contract Surrender Death
Year at 5% Value Value Benefit Value Value Benefit Value Value Benefit
---- ----- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 26,250 $24,240 $22,283 $79,644 $25,696 $23,609 $79,644 $ 27,152 $ 24,934 $ 79,644
2 27,563 23,494 21,709 79,644 26,402 24,370 79,644 29,480 27,355 79,644
3 28,941 22,769 21,148 79,644 27,128 25,158 79,644 32,010 30,010 79,644
4 30,388 22,066 20,697 79,644 27,875 26,125 79,644 34,760 33,010 79,644
5 31,907 21,384 20,251 79,644 28,644 27,144 79,644 37,749 36,249 79,644
6 33,502 20,722 19,811 79,644 29,434 28,184 79,644 40,998 39,748 79,644
7 35,178 20,080 19,377 79,644 30,247 29,247 79,644 44,529 43,529 79,644
8 36,936 19,457 18,948 79,644 31,084 30,334 79,644 48,366 47,616 79,644
9 38,783 18,852 18,525 79,644 31,944 31,444 79,644 52,537 52,037 79,644
10 40,722 18,265 18,265 79,644 32,829 32,829 79,644 57,071 57,071 79,644
15 51,973 15,936 15,936 79,644 38,509 38,509 79,644 88,592 88,592 93,022
20 66,332 13,887 13,887 79,644 45,200 45,200 79,644 137,470 137,470 144,343
25 84,659 12,083 12,083 79,644 53,081 53,081 79,644 213,072 213,072 223,725
30 108,049 10,495 10,495 79,644 62,366 62,366 79,644 330,777 330,777 334,085
<FN>
ASSUMPTIONS : (1) No loans or partial withdrawals have been made. (2) Current
values reflect current cost of insurance charges and a $2.50 monthly maintenance
fee. (3) Net investment returns are calculated as the hypothetical gross
investment return less all current contract charges and deductions shown in the
prospectus and current average fund expense of 0.95%.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus 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 on a number of factors, including the
investment allocations made by an owner, prevailing economic conditions,
prevailing rates and rates of inflation. The death benefit and contract value
would be different from those shown if the actual rates of return averaged 0%,
6%, and 12% over a period of years but also fluctuated above or below those
averages for individual contract years. No representation can be made by North
American Security Life or the Trust that these hypothetical rates of return can
be achieved for any one year or sustained over any period of time.
</TABLE>
33
<PAGE> 35
<TABLE>
$25,000 INITIAL PAYMENT: $51,179 FACE AMOUNT
MALE NONSMOKER5: AGE 65
GUARANTEED VALUES
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
----------------------- ----------------------- -----------------------
Payment
Plus Contract Contract Contract
Policy Interest Contract Surrender Death Contract Surrender Death Contract Surrender Death
Year at 5% Value Value Benefit Value Value Benefit Value Value Benefit
---- ----- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 26,250 $23,660 $21,755 $51,179 $25,118 $23,082 $51,179 $ 26,577 $ 24,410 $ 51,179
2 27,563 22,260 20,580 51,179 25,178 23,250 51,179 28,271 26,146 51,179
3 28,941 20,789 19,326 51,179 25,171 23,358 51,179 30,101 28,101 51,179
4 30,388 19,232 18,061 51,179 25,089 23,508 51,179 32,087 30,337 51,179
5 31,907 17,570 16,665 51,179 24,917 23,572 51,179 34,255 32,755 51,179
6 33,502 15,776 15,113 51,179 24,637 23,531 51,179 36,635 35,385 51,179
7 35,178 13,820 13,367 51,179 24,226 23,357 51,179 39,266 38,266 51,179
8 36,936 11,656 11,381 51,179 23,651 23,017 51,179 42,195 41,445 51,179
9 38,783 9,235 9,100 51,179 22,877 22,469 51,179 45,491 44,991 51,179
10 40,722 6,499 6,499 51,179 21,859 21,859 51,179 49,221 49,221 52,666
15 51,973 * * * 11,779 11,779 51,179 75,827 75,827 79,618
20 66,332 * * * * * * 115,519 115,519 121,295
25 84,659 * * * * * * 172,808 172,808 181,449
30 108,049 * * * * * * 260,522 260,522 263,127
<FN>
ASSUMPTIONS : (1) No loans or partial withdrawals have been made. (2) Guaranteed
values reflect guaranteed cost of insurance charges and a $2.50 monthly
maintenance fee. (3) Net investment returns are calculated as the hypothetical
gross investment return less all guaranteed contract charges and deductions
shown in the prospectus and current average fund expense of 0.95%.
* Unless additional payment is made, the contract will not stay inforce
resulting in loss of insurance coverage. See "TERMINATION" and "REINSTATEMENT".
The hypothetical investment rates of return shown above and elsewhere in this
prospectus 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 on a number of factors, including the
investment allocations made by an owner, prevailing economic conditions,
prevailing rates and rates of inflation. The death benefit and contract value
would be different from those shown if the actual rates of return averaged 0%,
6%, and 12% over a period of years but also fluctuated above or below those
averages for individual contract years. No representation can be made by North
American Security Life or the Trust that these hypothetical rates of return can
be achieved for any one year or sustained over any period of time.
</TABLE>
34
<PAGE> 36
<TABLE>
$25,000 INITIAL PAYMENT: $85,564 FACE AMOUNT
FEMALE NONSMOKER5: AGE 55
GUARANTEED VALUES
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
----------------------- ----------------------- -----------------------
Payment
Plus Contract Contract Contract
Policy Interest Contract Surrender Death Contract Surrender Death Contract Surrender Death
Year at 5% Value Value Benefit Value Value Benefit Value Value Benefit
---- ----- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 26,250 $23,870 $21,947 $85,564 $25,322 $23,268 $85,564 $ 26,773 $ 24,588 $ 85,564
2 27,563 22,738 21,018 85,564 25,626 23,661 85,564 28,686 26,561 85,564
3 28,941 21,601 20,073 85,564 25,915 24,042 85,564 30,756 28,756 85,564
4 30,388 20,461 19,203 85,564 26,187 24,529 85,564 32,998 31,248 85,564
5 31,907 19,310 18,302 85,564 26,438 25,002 85,564 35,430 33,930 85,564
6 33,502 18,144 17,362 85,564 26,663 25,455 85,564 38,067 36,817 85,564
7 35,178 16,950 16,372 85,564 26,852 25,878 85,564 40,925 39,925 85,564
8 36,936 15,716 15,319 85,564 26,993 26,258 85,564 44,023 43,273 85,564
9 38,783 14,424 14,186 85,564 27,071 26,580 85,564 47,382 46,882 85,564
10 40,722 13,063 13,063 85,564 27,077 27,077 85,564 51,031 51,031 85,564
15 51,973 5,227 5,227 85,564 26,713 26,713 85,564 77,764 77,764 90,206
20 66,332 * * * 22,422 22,422 85,564 120,447 120,447 128,878
25 84,659 * * * 7,218 7,218 85,564 187,068 187,068 196,421
30 108,049 * * * * * * 287,743 287,743 302,130
<FN>
ASSUMPTIONS : (1) No loans or partial withdrawals have been made. (2) Guaranteed
values reflect guaranteed cost of insurance charges and a $2.50 monthly
maintenance fee. (3) Net investment returns are calculated as the hypothetical
gross investment return less all guaranteed contract charges and deductions
shown in the prospectus and current average fund expense of 0.95%.
* Unless additional payment is made, the contract will not stay inforce
resulting in loss of insurance coverage. See "TERMINATION" and "REINSTATEMENT".
The hypothetical investment rates of return shown above and elsewhere in this
prospectus 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 on a number of factors, including the
investment allocations made by an owner, prevailing economic conditions,
prevailing rates and rates of inflation. The death benefit and contract value
would be different from those shown if the actual rates of return averaged 0%,
6%, and 12% over a period of years but also fluctuated above or below those
averages for individual contract years. No representation can be made by North
American Security Life or the Trust that these hypothetical rates of return can
be achieved for any one year or sustained over any period of time. $25,000
INITIAL PAYMENT: $79,644 FACE AMOUNT LAST SURVIVOR : JOINT EQUIVALENT AGE 65
</TABLE>
35
<PAGE> 37
<TABLE>
$25,000 INITIAL PAYMENT: $79,644 FACE AMOUNT
LAST SURVIVOR: JOINT EQUIVALENT: AGE 65
GUARANTEED VALUES
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
----------------------- ----------------------- -----------------------
Payment
Plus Contract Contract Contract
Policy Interest Contract Surrender Death Contract Surrender Death Contract Surrender Death
Year at 5% Value Value Benefit Value Value Benefit Value Value Benefit
---- ----- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 26,250 $24,240 $22,283 $79,644 $25,696 $23,609 $79,644 $ 27,152 $ 24,934 $ 79,644
2 27,563 23,465 21,683 79,644 26,377 24,348 79,644 29,459 27,334 79,644
3 28,941 22,666 21,052 79,644 27,035 25,072 79,644 31,930 29,930 79,644
4 30,388 21,831 20,478 79,644 27,661 25,911 79,644 34,574 32,824 79,644
5 31,907 20,947 19,841 79,644 28,242 26,742 79,644 37,404 35,904 79,644
6 33,502 19,998 19,123 79,644 28,766 27,516 79,644 40,432 39,182 79,644
7 35,178 18,964 18,306 79,644 29,216 28,216 79,644 43,673 42,673 79,644
8 36,936 17,822 17,362 79,644 29,573 28,823 79,644 47,150 46,400 79,644
9 38,783 16,549 16,268 79,644 29,818 29,318 79,644 50,889 50,389 79,644
10 40,722 15,105 15,105 79,644 29,921 29,921 79,644 54,921 54,921 79,644
15 51,973 4,254 4,254 79,644 28,259 28,259 79,644 84,414 84,414 88,635
20 66,332 * * * 16,948 16,948 79,644 130,939 130,939 137,486
25 84,659 * * * * * * 201,589 201,589 211,669
30 108,049 * * * * * * 311,016 311,016 314,127
30 108,049 * * * * * * 312,026 312,026 315,146
<FN>
ASSUMPTIONS : (1) No loans or partial withdrawals have been made. (2) Guaranteed
values reflect guaranteed cost of insurance charges and a $2.50 monthly
maintenance fee. (3) Net investment returns are calculated as the hypothetical
gross investment return less all guaranteed contract charges and deductions
shown in the prospectus and current average fund expense of 0.95%.
* Unless additional payment is made, the contract will not stay inforce
resulting in loss of insurance coverage. See "TERMINATION" and "REINSTATEMENT".
The hypothetical investment rates of return shown above and elsewhere in this
prospectus 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 on a number of factors, including the
investment allocations made by an owner, prevailing economic conditions,
prevailing rates and rates of inflation. The death benefit and contract value
would be different from those shown if the actual rates of return averaged 0%,
6%, and 12% over a period of years but also fluctuated above or below those
averages for individual contract years. No representation can be made by North
American Security Life or the Trust that these hypothetical rates of return can
be achieved for any one year or sustained over any period of time.
</TABLE>
36
<PAGE> 38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Policy Owners of
NASL Variable Life Account:
We have audited the accompanying statement of assets and liabilities of the
sub-accounts comprising NASL Variable Life Account (consisting of the Equity,
Investment Quality Bond, Growth and Income, Pasadena Growth, Money Market,
Global Equity, Global Government Bond, U.S. Government Securities, Conservative
Asset Allocation, Moderate Asset Allocation, Aggressive Asset Allocation, Value
Equity, Strategic Bond and International Growth and Income sub-accounts) of
North American Security Life Insurance Company as of December 31, 1995 and the
related statements of operations and changes in net assets of the Equity,
Investment Quality Bond, Growth and Income, Pasadena Growth, Money Market,
Global Equity, Global Government Bond, U.S. Government Securities, Conservative
Asset Allocation, Moderate Asset Allocation, Aggressive Asset Allocation, Value
Equity and Strategic Bond sub-accounts for the two years then ended and the
related statement of operations and changes in net assets of the International
Growth and Income sub-account for the period January 9, 1995 (date of
commencement of operations) to December 31, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits 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 financial statements referred to above present fairly, in
all material respects, the financial position of the aforementioned sub-accounts
comprising NASL Variable Life Account of North American Security Life Insurance
Company as of December 31, 1995, and the results of their operations and the
changes in their net assets for the two years then ended or the period
indicated, in conformity with generally accepted accounting principles.
Boston, Massachusetts
February 23, 1996
Coopers & Lybrand L.L.P.
<PAGE> 39
NASL VARIABLE LIFE ACCOUNT
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES -- December 31, 1995
<CAPTION>
ASSETS
<S> <C>
Investments at market value:
Sub-accounts:
Equity Portfolio - 1,815 Shares (Cost $37,594) $ 37,734
Investment Quality Bond Portfolio - no Shares 0
Growth and Income Portfolio - 3,850 Shares (Cost $62,660) 63,022
Pasadena Growth Portfolio - 1,107 Shares (Cost $12,529) 12,618
Money Market Portfolio - no Shares 0
Global Equity Portfolio - no Shares 0
Global Government Bond Portfolio - no Shares 0
U.S. Government Securities Portfolio - 919 Shares (Cost $12,529) 12,547
Conservative Asset Allocation Portfolio - no Shares 0
Moderate Asset Allocation Portfolio - no Shares 0
Aggressive Asset Allocation Portfolio - 1,960 Shares (Cost $25,065) 25,183
Value Equity Portfolio - no Shares 0
Strategic Bond Portfolio - no Shares 0
International Growth and Income Portfolio - no Shares 0
--------
Total assets ................................................ $151,104
========
LIABILITIES
0
--------
Total liabilities ........................................... 0
NET ASSETS
Variable life contracts ........................................... $151,104
--------
Total net assets ........................................... $151,104
========
</TABLE>
The accompanying notes are an integral part of the financial statements
2
<PAGE> 40
NASL VARIABLE LIFE ACCOUNT
<TABLE>
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
<CAPTION>
Sub-Account
-------------------------------------------------------------------------
Investment
Equity Quality Bond Growth and Income
---------------------- ----------------------- -----------------------
Year Ended December 31 Year Ended December 31, Year Ended December 31,
---------------------- ----------------------- -----------------------
1995 1994 1995 1994 1995 1994
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Income:
Dividends ......................... $ 0 $0 $0 $0 $ 0 $0
Expenses:
Mortality & expense risk and
administrative charges .......... 0 0 0 0 0 0
------- -- -- -- ------- --
Net investment income (loss) ........ 0 0 0 0 0 0
Net realized gain (loss) ............ 0 0 0 0 0 0
Unrealized appreciation (depreciation)
during the period ............... 140 0 0 0 362 0
------- -- -- -- ------- --
Net increase (decrease) in net assets
from operations ................. 140 0 0 0 362 0
------- -- -- -- ------- --
Changes from principal transactions:
Purchase payments ................. 0 0 0 0 0 0
Transfers between sub-accounts
and the Company ................. 37,594 0 0 0 62,660 0
Withdrawals ....................... 0 0 0 0 0 0
Annual contract fee ............... 0 0 0 0 0 0
------- -- -- -- ------- --
Net increase in net assets
from principal transactions ..... 37,594 0 0 0 62,660 0
------- -- -- -- ------- --
Total increase in net assets ........ 37,734 0 0 0 63,022 0
Net assets at beginning of period ... 0 0 0 0 0 0
------- -- -- -- ------- --
Net assets at end of period ......... $37,734 $0 $0 $0 $63,022 $0
======= == == == ======= ==
</TABLE>
The accompanying notes are an integral part of the financial statements
3
<PAGE> 41
NASL VARIABLE LIFE ACCOUNT
<TABLE>
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
<CAPTION>
Sub-Account
--------------------------------------------------------------------------------
Pasadena Growth Money Market Global Equity
----------------------- ------------------------ -----------------------
Year Ended December 31 Year Ended December 31, Year Ended December 31,
----------------------- ------------------------ -----------------------
1995 1994 1995 1994 1995 1994
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income:
Dividends ............................. $ 0 $0 $ 326 $0 $0 $0
Expenses:
Mortality & expense risk and
administrative charges .............. 0 0 0 0 0 0
------- -- --------- -- -- --
Net investment income (loss) ............ 0 0 326 0 0 0
Net realized gain (loss) ................ 0 0 0 0 0 0
Unrealized appreciation (depreciation)
during the period ................... 89 0 0 0 0 0
------- -- --------- -- -- --
Net increase (decrease) in net assets
from operations ..................... 89 0 326 0 0 0
------- -- --------- -- -- --
Changes from principal transactions:
Purchase payments ..................... 0 0 150,051 0 0 0
Transfers between sub-accounts
and the Company ..................... 12,529 0 (150,377) 0 0 0
Withdrawals ........................... 0 0 0 0 0 0
Annual contract fee ................... 0 0 0 0 0 0
------- -- --------- -- -- --
Net increase in net assets
from principal transactions ......... 12,529 0 (326) 0 0 0
------- -- --------- -- -- --
Total increase in net assets ............ 12,618 0 0 0 0 0
Net assets at beginning of period ....... 0 0 0 0 0 0
------- -- --------- -- -- --
Net assets at end of period ............. $12,618 $0 $ 0 $0 $0 $0
======= == ========= == == ==
</TABLE>
The accompanying notes are an integral part of the financial statements
4
<PAGE> 42
NASL VARIABLE LIFE ACCOUNT
<TABLE>
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
<CAPTION>
Sub-Account
--------------------------------------------------------------------------
Global U.S. Conservative
Government Bond Government Securities Asset Allocation
---------------------- ----------------------- -----------------------
Year Ended December 31 Year Ended December 31, Year Ended December 31,
---------------------- ----------------------- -----------------------
1995 1994 1995 1994 1995 1994
----- ------ ------ ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Income:
Dividends ........................ $0 $0 $ 0 $0 $0 $0
Expenses:
Mortality & expense risk and
administrative charges ......... 0 0 0 0 0 0
-- -- ------- -- -- --
Net investment income (loss) ....... 0 0 0 0 0 0
Net realized gain (loss) ........... 0 0 0 0 0 0
Unrealized appreciation (depreciation)
during the period .............. 0 0 18 0 0 0
-- -- ------- -- -- --
Net increase (decrease) in net assets
from operations ................ 0 0 18 0 0 0
-- -- ------- -- -- --
Changes from principal transactions:
Purchase payments ................ 0 0 0 0 0 0
Transfers between sub-accounts
and the Company ................ 0 0 12,529 0 0 0
Withdrawals ...................... 0 0 0 0 0 0
Annual contract fee .............. 0 0 0 0 0 0
-- -- ------- -- -- --
Net increase in net assets
from principal transactions .... 0 0 12,529 0 0 0
-- -- ------- -- -- --
Total increase in net assets ....... 0 0 12,547 0 0 0
Net assets at beginning of period .. 0 0 0 0 0 0
-- -- ------- -- -- --
Net assets at end of period ........ $0 $0 $12,547 $0 $0 $0
== == ======= == == ==
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE> 43
NASL VARIABLE LIFE ACCOUNT
<TABLE>
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
<CAPTION>
Sub-Account
-----------------------------------------------------------------------------
Moderate Aggressive Value
Asset Allocation Asset Allocation Equity
---------------------- ----------------------- -----------------------
Year Ended December 31 Year Ended December 31, Year Ended December 31,
---------------------- ----------------------- -----------------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Income:
Dividends.................... $0 $0 $0 $0 $0 $0
Expenses:
Mortality & expense risk and
administrative charges .... 0 0 0 0 0 0
-- -- ------- -- -- --
Net investment income (loss)... 0 0 0 0 0 0
Net realized gain (loss)....... 0 0 0 0 0 0
Unrealized appreciation
(depreciation) during
the period................. 0 0 118 0 0 0
-- -- ------- -- -- --
Net increase (decrease) in net
assets from operations..... 0 0 118 0 0 0
-- -- ------- -- -- --
Changes from principal
transactions:
Purchase payments............ 0 0 0 0 0 0
Transfers between
sub-accounts and the
Company.................... 0 0 25,065 0 0 0
Withdrawals.................. 0 0 0 0 0 0
Annual contract fee.......... 0 0 0 0 0 0
-- -- ------- -- -- --
Net increase in net assets
from principal
transactions............... 0 0 25,065 0 0 0
-- -- ------- -- -- --
Total increase in net assets... 0 0 25,183 0 0 0
Net assets at beginning of
period....................... 0 0 0 0 0 0
-- -- ------- -- -- --
Net assets at end of period.... $0 $0 $25,183 $0 $0 $0
== == ======= == == ==
</TABLE>
The accompanying notes are an integral part of the financial statements
6
<PAGE> 44
NASL VARIABLE LIFE ACCOUNT
<TABLE>
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
<CAPTION>
Sub-Account
-------------------------------------------------
Strategic International Total Total
Bond Growth and Income ------------ ------------
----------------------- ----------------------- Year Ended Year Ended
Year Ended December 31, Year Ended December 31, December 31, December 31,
----------------------- ----------------------- ------------ ------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Income:
Dividends .......................... $0 $0 $0 $0 $ 326 $0
Expenses:
Mortality & expense risk and
administrative charges ........... 0 0 0 0 0 0
-- -- -- -- -------- --
Net investment income (loss) ......... 0 0 0 0 326 0
Net realized gain (loss) ............. 0 0 0 0 0 0
Unrealized appreciation (depreciation)
during the period ................ 0 0 0 0 727 0
-- -- -- -- -------- --
Net increase (decrease) in net assets
from operations .................. 0 0 0 0 1,053 0
-- -- -- -- -------- --
Changes from principal transactions:
Purchase payments .................. 0 0 0 0 150,051 0
Transfers between sub-accounts
and the Company .................. 0 0 0 0 0 0
Withdrawals ........................ 0 0 0 0 0 0
Annual contract fee ................ 0 0 0 0 0 0
-- -- -- -- -------- --
Net increase in net assets
from principal transactions ...... 0 0 0 0 150,051 0
-- -- -- -- -------- --
Total increase in net assets ......... 0 0 0 0 151,104 0
Net assets at beginning of period .... 0 0 0 0 0 0
-- -- -- -- -------- --
Net assets at end of period .......... $0 $0 $0 $0 $151,104 $0
== == == == ======== ==
</TABLE>
The accompanying notes are an integral part of the financial statements
7
<PAGE> 45
NASL VARIABLE LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION:
The NASL Variable Life Account (the "Account") is a separate account
established by North Amerifan Security Life Insurance Company (the "Company").
The Account became effective at the commencement of operations on November 1,
1995, as a separate account under Delaware law. The Account operates as a Unit
Investment Trust under the Investment Company Act of 1940, as amended, and
invests in the NASL Series Trust (the "Trust"). The Account is a funding vehicle
for variable life contracts (the "Contracts") issued by the Company. The Company
is a wholly-owned subsidiary of North American Life Assurance Company ("NAL"), a
Canadian mutual life insurance company. NAL merged with the Manufacturers Life
Insurance Company of Canada effective January 1, 1996. The surviving company
will conduct business under the name "Manufacturers Life Insurance Company."
2. SIGNIFICANT ACCOUNTING POLICIES:
Investments are made in the portfolios of the Trust and are valued at the
reported net asset values of such portfolios. Transactions are recorded on the
trade date. Income from dividents is recorded on the ex-dividend date. Realized
gains and losses on the sales of investments are computed on the basis of
identified cost of the investment sold.
In addition to the Account, a contract holder may also allocate funds to the
Fixed Account, which is part of the Company's general account. Because of
exemptive and exclusionary provisions, interests in the Fixed account have not
been registered under the Securities Act of 1933 and the Company's general
account has not been registerd as an investment company under the Company act of
1940.
The operations of the Account are included in the federal income tax return of
the Company, which is taxed as a Life Insurance Company under the provisions of
the Internal Revenue Code (the "Code"). Under the current provisions of the
Code, the Company does not expect to incur federal income taxes on the earnings
of the Account to the extent the earnings are credited under the contracts.
Based on this, no charge is being made currently to the Account for federal
income taxes. The Company will review periodically the status of such decision
based on changes in the tax law. Such a charge may be made in future years for
any federal income taxes that would be attributable to the contract.
3. AFFILIATED COMPANY TRANSACTIONS:
Administrative services necessary for the operation of the Account are borne by
the Company. The Company has an underwriting agreement with its wholly-owned
subsidiary, NASL Financial Services, Inc. ("NASL Financial"). NASL Financial has
a promotional agent agreement with Wood Logan Associates, Inc., an affiliate of
the Company, to promote the sales of annuity contracts.
-8-
<PAGE> 46
NASL VARIABLE LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
4. CONTRACT CHARGES:
There are no deductions made form purchase payments for sales charges at the
time of purchase. In the event of a surrender, a contingent deferred sales
charge may be charged by the Company to cover sales expenses. A monthly
administrative charge of $2.50 per month is imposed upon contracts with less
than $100,000 of total premium payments.
On each monthly contract anniversary day, charges are deducted propotionately
from all investment accounts. Certain charges are exressed as an annual
percentage of the owner's contract value.
Three of these charges are deducgted only during the first ten contract
years:
(i) 0.25% for distribution cost incurred by the Company.
(ii) 0.25% for state premium taxes to be paid by company as aresult of
premium payments.
(iii) 0.15% for the Company's increased federal taxes caused by its
receipt of premium payments.
Two of these charges are deducted for all contract years:
(i) 0.40% charge for contract administration
(ii) 0.35% charge for the death benefit provided by the contract
(0.55%) after the first ten contract years). If there is more than one
insured, this charge is 0.10% (0.30% after the first ten contract
years).
(iii) A charge at an annual rate of 0.90% of the value of each
variable investment account is deducted monthly for the mortality and
expense risks assumed by the Company in connection with contract.
5. PURCHASES AND SALES OF INVESTMENTS:
<TABLE>
The following table shows aggregate cost of shares purchased and proceeds from
sales of each sub-account for the year ended December 31, 1995.
<CAPTION>
Purchases Sales
--------- -----
<S> <C> <C>
Equity Portfolio $ 37,594 $ 0
Investment Quality Bond Portfolio $ 0 $ 0
Growth and Income Portfolio $ 62,660 $ 0
Pasadena Growth Portfolio $ 12,529 $ 0
Money Market Portfolio $150,232 $150,284
Global Equity Portfolio $ 0 $ 0
Global Government Bond Portfolio $ 0 $ 0
U.S. Government Securities Portfolio $ 12,529 $ 0
Conservative Asset Allocation Portfolio $ 0 $ 0
Moderate Asset Allocation Portfolio $ 0 $ 0
Aggressive Asset Allocation Portfolio $ 25,065 $ 0
Value Equity Portfolio $ 0 $ 0
Stategic Bond Portfolio $ 0 $ 0
International Growth and Income Portfolio $ 0 $ 0
</TABLE>
9
<PAGE> 47
<PAGE> 48
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A Wholly-Owned Subsidiary of North American Life Assurance
Company of North York, Canada)
------------
FINANCIAL STATEMENTS
For the years ended
December 31, 1995, 1994 and 1993
<PAGE> 49
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholder of North American Security
Life Insurance Company:
We have audited the accompanying statements of admitted assets, liabilities,
capital and surplus of North American Security Life Insurance Company (a
wholly-owned subsidiary of North American Life Assurance Company of North York,
Canada) as of December 31, 1995 and 1994, and the related statements of
operations, capital and surplus, and cash flows for the three years ended
December 31, 1995, 1994 and 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits 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 financial statements referred to above present fairly, in
all material respects, the admitted assets, liabilities, capital and surplus of
North American Security Life Insurance Company as of December 31, 1995 and 1994,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1995 in conformity with accounting practices
prescribed or permitted by the Insurance Department of the State of Delaware,
which practices are considered to be generally accepted accounting principles
for wholly-owned stock life subsidiaries of mutual life insurance companies.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The information contained in Schedule 1 -
Selected Financial Data, is presented to comply with the NAIC's Annual Statement
Instructions and is not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
Boston, Massachusetts
February 23, 1996
Coopers & Lybrand L.L.P.
<PAGE> 50
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NORTH AMERICAN LIFE ASSURANCE COMPANY
OF NORTH YORK, CANADA)
<TABLE>
STATEMENTS OF ADMITTED ASSETS, LIABILITIES, CAPITAL AND SURPLUS
December 31, 1995 and 1994
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
ASSETS
Investments
Bonds $ 16,281,452 $ 333,973,085
Mortgages -- 115,429,834
Real estate 4,847,164 4,745,559
Common stock 20,097,789 11,039,222
Policy loans -- 2,579,308
Cash and short-term investments 1,797,230 101,578,176
-------------- --------------
Total investments 43,023,635 569,345,184
Accrued investment income 431,415 7,197,833
Other assets 4,320,909 2,427,102
Separate account assets 4,914,727,917 3,661,278,295
-------------- --------------
Total assets $4,962,503,876 $4,240,248,414
============== ==============
LIABILITIES
Aggregate reserves 1,931,894 519,092,606
Transfers from separate account, net (156,458,903) (148,035,998)
Borrowed money 107,865,148 100,023,562
Accrued interest on surplus note 3,248,219 1,648,219
Payable to Parent 3,033,665 --
Funds held account from reinsurers 9,000,000 12,000,000
Asset valuation reserve 2,895,914 5,536,860
Interest maintenance reserve -- 2,494,101
Bank overdraft 8,606,730 9,547,533
Amounts payable on reinsurance ceded 7,256,229 --
Payable to Parent on reinsurance ceded -- 8,577,268
Other liabilities 10,239,069 8,677,836
Separate account liabilities 4,914,727,917 3,661,278,295
-------------- --------------
Total liabilities 4,912,345,882 4,180,840,282
CAPITAL AND SURPLUS
Common stock (Shares authorized: 3,000;
issued and outstanding 2,600; par value $1,000) 2,600,000 2,600,000
Surplus note payable to Parent 20,000,000 20,000,000
Paid-in capital in excess of par value 110,633,000 110,633,000
Unassigned deficit (83,075,006) (73,824,868)
-------------- --------------
Total capital and surplus 50,157,994 59,408,132
-------------- --------------
Total liabilities, capital and surplus $4,962,503,876 $4,240,248,414
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements
3
<PAGE> 51
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NORTH AMERICAN LIFE ASSURANCE COMPANY
OF NORTH YORK, CANADA)
<TABLE>
STATEMENTS OF OPERATIONS
December 31, 1995, 1994 and 1993
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues
Annuity considerations and deposits $ 991,551,945 $1,139,953,302 $1,255,219,443
Net investment income 35,909,722 30,559,559 27,851,126
Commissions and expense allowances on
reinsurance ceded 14,676,544 7,019,266 586,983
Experience refund on reinsurance ceded 3,901,633 4,967,753 --
Reserve adjustments on reinsurance (48,222,552) (6,023,746) (23,681,983)
-------------- -------------- --------------
997,817,292 1,176,476,134 1,259,975,569
-------------- -------------- --------------
Expenses
Annuity benefits 269,688,906 206,710,232 195,064,882
Increase (decrease) in reserves (517,160,712) 146,552,124 5,337,935
Increase in separate account liability 415,529,185 732,768,257 971,871,375
Commissions 73,593,478 81,981,046 82,137,269
General expenses 22,872,812 19,253,764 13,475,040
Interest expense 8,980,132 4,599,441 456,196
Recapture fee on reinsurance ceded 1,445,889 8,029,909 13,300
Initial consideration on reinsurance ceded 727,522,634 -- --
-------------- -------------- --------------
1,002,472,324 1,199,894,773 1,268,355,997
-------------- -------------- --------------
Loss before federal income tax provision and (23,418,639)
realized capital losses (4,655,032) (8,380,428)
Federal income tax provision -- 6,415 193,000
-------------- -------------- --------------
Loss after federal income tax provision (4,655,032) (23,425,054) (8,573,428)
Realized capital (losses) (2,632,953) (7,029,018) (2,104,462)
-------------- -------------- --------------
Net loss $ (7,287,985) $ (30,454,072) $ (10,677,890)
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements
4
<PAGE> 52
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NORTH AMERICAN LIFE ASSURANCE COMPANY
OF NORTH YORK, CANADA)
<TABLE>
STATEMENTS OF CAPITAL AND SURPLUS
For the years ended December 31, 1995, 1994 and 1993
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Capital and Surplus - beginning of the year $59,408,132 $ 51,722,525 $ 35,773,897
Net loss (7,287,985) (30,454,072) (10,677,890)
Change in net unrealized capital gains (losses) (636,335) 3,514,108 (1,198,895)
Change in asset valuation reserve 2,640,946 1,976,033 (5,847,867)
Increase in non-admitted assets (958,941) (1,859,181) (1,326,720)
Issuance of common stock -- 600,000 458,000
Paid in capital in excess of par -- 29,400,000 4,542,000
Initial commission allowance on reinsurance ceded (3,007,823) 4,508,719 10,000,000
Surplus note from Parent -- -- 20,000,000
----------- ------------ ------------
Capital and Surplus - end of the year $50,157,994 $ 59,408,132 $ 51,722,525
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE> 53
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NORTH AMERICAN LIFE ASSURANCE COMPANY
OF NORTH YORK, CANADA)
<TABLE>
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1995, 1994 and 1993
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
From operating activities:
Annuity considerations and deposits $ 991,551,945 $1,139,953,302 $ 1,255,219,443
Allowances & reserve adjustments on reinsurance
ceded (33,546,008) 1,140,018 (20,898,549)
Net investment income 32,128,833 28,230,341 27,231,438
Experience refund on reinsurance ceded 3,901,633 4,967,753 --
Surrender benefits and other fund withdrawals paid (232,650,150) (175,523,156) (171,434,721)
Other benefits paid to policyholders (36,860,052) (30,555,923) (22,727,802)
Commissions, other expenses & taxes paid (97,024,418) (100,210,171) (93,392,207)
Net transfers to separate account (423,952,090) (768,208,239) (1,022,539,449)
Other operating expenses paid (735,369,347) (13,571,986) (1,546,814)
------------- -------------- ---------------
Net cash provided (used) by operating activities (531,819,654) 86,221,939 (50,088,661)
------------- -------------- ---------------
From investing activities:
Proceeds from investments sold, matured or
repaid:
Bonds 763,005,273 112,385,919 75,750,376
Stocks 5,080,010 5,805,050 5,818,725
Mortgage loans 110,791,047 14,076,659 6,294,101
Real estate 860,375 5,950,412 5,528,761
Cost of investments acquired:
Bonds (441,405,890) (232,208,934) (42,169,482)
Stocks (10,137,862) (488,212) (11,144,711)
Mortgage loans (136,101) (4,301,717) (3,890,750)
------------- -------------- ---------------
Net cash provided (used) by investing activities 428,056,852 (98,780,823) 36,187,020
------------- -------------- ---------------
Other cash provided (applied):
Capital and surplus paid-in -- 30,000,000 5,000,000
Borrowed money 7,000,000 70,000,000 80,000,000
Reinsurance ceding commission and expense
allowance -- -- 25,000,000
Other sources 11,380,829 17,892,210 4,771,451
Other applications (14,398,973) (103,250,950) (4,931,341)
------------- -------------- ---------------
Total other cash provided (used) 3,981,856 14,641,260 109,840,110
------------- -------------- ---------------
Net change in cash and short-term investments (99,780,946) 2,082,376 95,938,469
Cash and short-term investments, beginning of year 101,578,176 99,495,800 3,557,331
------------- -------------- ---------------
Cash and short-term investments, end of year $ 1,797,230 $ 101,578,176 $ 99,495,800
============= ============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements
6
<PAGE> 54
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NORTH AMERICAN LIFE ASSURANCE COMPANY
OF NORTH YORK, CANADA)
NOTES TO FINANCIAL STATEMENTS
For the year ended December 31, 1995
A. Organization
------------
North American Security Life Insurance Company ("the Company") is a
wholly-owned subsidiary of North American Life Assurance Company of North
York, Canada ("NAL"). See Note O. For subsequent event describing merger
with Manufacturers Life Insurance Company.
The Company issues fixed and variable annuity and variable life contracts
(the "Contracts"). Amounts invested in the fixed portion of the Contracts
are allocated to the general account of the Company (see Note F on fixed
annuity reinsurance). Amounts invested in the variable portion of the
Contracts are allocated to the separate accounts of the Company. The
separate account assets are invested in shares of the NASL Series Trust, a
no-load, open-end management investment company organized as a
Massachusetts business trust.
On June 19, 1992, the Company formed First North American Life Assurance
Company ("FNA"). Subsequently, on July 22, 1992, FNA was granted a license
by the New York State Insurance Department. FNA issues fixed and variable
annuity contracts in the State of New York.
NASL Financial Services Inc. ("NASL Financial"), a wholly-owned subsidiary
of the Company, acts as investment adviser to the NASL Series Trust and
principal underwriter of the Contracts issued by the Company and FNA. NASL
Financial has entered into a promotional agent agreement with Wood Logan
Associates, an affiliate of NAL, to act as the exclusive agent for
promotion of annuity and variable life contract sales.
B. Summary of Significant Accounting Policies
------------------------------------------
Basis of Reporting
------------------
The Company's financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Insurance Department of
the State of Delaware. These practices, in the case of a wholly-owned stock
life insurance subsidiary of a mutual life insurance company, are
considered to be generally accepted accounting principles (GAAP).
The Financial Accounting Standards Board issued Interpretation 40,
Applicability of Generally Accepted Accounting Principles to Mutual Life
Insurance and Other Enterprises, and Statement of Financial Accounting
Standards No. 120, Accounting and Reporting by Mutual Life Insurance
Enterprises and by Insurance Enterprises for Certain Long-Duration
participating Contracts. The American Institute of Certified Public
Accountants issued Statement of Position 95-1, Accounting for Certain
Insurance Activities of Mutual Life Insurance Enterprises. Neither of these
groups has a role in establishing regulatory accounting practices.
7
<PAGE> 55
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
Basis of Reporting, continued
-----------------------------
These pronouncements will require mutual life insurance companies to modify
their financial statements in order for them to continue to be in
accordance with generally accepted accounting principles, effective for
1996 financial statements. The manner in which policy reserves, new
business acquisition costs, asset valuations and related tax effects are
recorded will change. Management has not determined the impact of such
changes on its financial statements.
Certain amounts in the 1994 and 1993 financial statements are presented
differently than in prior years to conform with 1995 presentation
guidelines.
Preparation of Financial Statements
-----------------------------------
The preparation of financial statements 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.
Financial Instruments
---------------------
Financial instruments reported on the balance sheet consist primarily of
investments in cash and short-term investments, marketable securities, and
debt. Fair value of financial instruments have been determined through
information obtained from market sources and management estimates. At
December 31, 1995, the fair value of cash and short-term investments and
debt approximates the carrying value due to the short maturity and variable
interest rate arrangements, respectively.
Credit risk associated with concentrations can arise when changes in
economic, industry, or geographical factors affect groups of counterparties
with similar characteristics causing aggregate credit exposure to be
significant to the Company. All of the Company's investments in mortgage
loans are collaterized by real estate which is geographically dispersed
throughout the United States. During 1994, the most significant
concentrations existed in California (40%), Georgia (14%) and Illinois
(11%). The Company had no outstanding mortgages at December 31, 1995 (see
Note G). There are no other significant concentrations of credit risk (See
also Note C).
8
<PAGE> 56
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
Investments and Investment Income
---------------------------------
Investments are valued in accordance with rules promulgated by the National
Association of Insurance Commissioners ("NAIC"). Bonds and short-term
investments, where eligible under NAIC rules, are valued at amortized cost.
Investment income is recognized on the accrual basis. Unrealized gains or
losses on investments are recorded in unassigned surplus. Realized gains or
losses on investments sold are determined on the basis of the specific
identification method.
Common stocks are valued at market value except for investments in
affiliates which are carried on the equity basis; and real estate acquired
in satisfaction of debt which is stated at the lower of the appraised
market value or the outstanding principal loan balance plus accrued
interest and foreclosure costs.
There are no mortgage loans outstanding at December 31, 1995 (See Note G).
For the year ended December 31, 1994 mortgage loans in good standing are
stated at the aggregate unpaid balance. Mortgage loans are considered to be
in default if interest and principal payments are delinquent for more than
90 days. The Company writes-down mortgage loans in default to the lower of
unpaid principal or the value of the underlying property. The Company
maintains asset valuation reserves sufficiently in excess of minimum
requirements which serve to cover the excess of the loan balance over the
underlying property values on restructured loans.
The maximum percentage of any one loan to the value of the property at the
time of the original loan commitment, exclusive of purchase money
mortgages, was 75%. Fire insurance is required on all properties covered by
mortgage loans at least equal to the excess of the loan over the maximum
loan which would be permitted by law on the land without the buildings. At
December 31, 1995, 1994, and 1993, the Company held $0, $414,974, and
$5,682,476, respectively, of mortgages in default at statement value. In
1995, 1994 and 1993, the Company wrote-down $0, $1,745,682, and $1,915,623,
respectively of mortgages held at year end to reflect the carrying value at
the lower of appraised value or outstanding principal plus accrued interest
and foreclosure costs.
In 1995, 1994 and 1993, the Company transferred, in satisfaction of debt,
mortgages with statement values of $2,405,052, $6,407,174 and $4,413,889,
respectively to foreclosed real estate. Subsequently, in 1995, 1994 and
1993, the Company wrote-down $1,360,620, $0, and $1,016,484, respectively,
on these properties to reflect the carrying value at the lower of the
current market valuation or the value transferred at the time of
foreclosure. At year end, the Company held $4,847,164 of foreclosed real
estate at adjusted book value which approximates market value.
9
<PAGE> 57
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
Short-Term Investments
----------------------
Short-term investments generally consist of U.S. Treasury bills, commercial
paper and money market instruments whose maturities at the time of
acquisition are one year or less. Short-term investments are valued at
cost, which approximates market value.
Asset Valuation Reserve and Interest Maintenance Reserve
--------------------------------------------------------
The Asset Valuation Reserve (AVR) is designed to mitigate the effect of
valuation and credit related losses on all invested assets with risk of
loss including mortgages, real estate, fixed-income securities, and common
stocks. Changes in the AVR are accounted for as a direct increase or
decrease in unassigned surplus.
The Interest Maintenance Reserve (IMR) captures realized capital gains and
losses which result from changes in interest rates for all fixed income
securities and amortizes these capital gains and losses into investment
income over the original life of the investments sold. During 1995,
$11,040,025 of cumulative net gains were released from IMR in connection
with a reinsurance treaty whereby the Company reinsured all of its fixed
annuity business (see Note F). This accounting was approved by the State of
Delaware Department of Insurance as a permitted practice. Total net gains
(losses) of $(59,933) and $1,807,018 were realized of which $541,484 and
$495,672 were amortized and included in net investment income in 1994 and
1993, respectively.
Aggregate Reserves
------------------
The reserves, developed using accepted actuarial methods, have been
established and maintained on the basis of published mortality tables and
prescribed interest rates per the National Association of Insurance
Commissioners' standard valuation law, as adopted by the State of Delaware.
The method used for the valuation of annuities is the Commissioner's
Annuity Reserve Valuation Method (CARVM). Under this method the reserve is
the highest present value of all future guaranteed cash surrender values.
In addition, the Company has established additional reserves during 1995 to
cover the impact of guideline GGG. The method used for the valuation of
Variable Life Insurance ("VLI") is the Commissioners Reserve Valuation
Method (CRVM). Under this method, the VLI reserves are equal to the present
value of future death benefits, with a minimum of the cash surrender value.
Recognition of Premium Revenue and Related Expenses
---------------------------------------------------
Premium revenues are recognized as received. Expenses, including
acquisition costs such as commissions and other costs in connection with
acquiring new business, are charged to operations as incurred.
10
<PAGE> 58
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
Separate Account
----------------
Separate account assets represent mutual funds held for the exclusive
benefit of both variable annuity and variable life contractholders and are
reported at fair market value. Since the contractholders receive the full
benefit and bear the full risk of the separate account investments, the
income, realized and unrealized gains and losses from such investments, is
offset by an equivalent change in the liabilities related to the separate
accounts. Transfers from separate account, net, primarily represents the
difference between the contract owner's account value and the CARVM
reserve.
Unconsolidated Subsidiaries
---------------------------
The Company records its equity in the earnings of unconsolidated
subsidiaries as net investment income. The Company owns 100% of the
outstanding common stock of First North American Life Assurance Company and
NASL Financial Services, Inc.
<TABLE>
Summarized financial data for unconsolidated subsidiaries at December 31,
1995 and 1994 is shown below:
<CAPTION>
(in thousands) 1995 1994
---- ----
<S> <C> <C>
Total assets at year-end $318,326 $194,177
Total liabilities at year-end 304,409 183,777
Net income 1,220 894
</TABLE>
Income Taxes
------------
The Company files a consolidated federal income tax return with its
subsidiaries, FNA and NASL Financial. The Company files separate state
income tax returns.
The method of allocation between the companies is subject to a tax sharing
agreement. Tax liability is allocated to each member on a pro rata basis
based on the relationship the member's tax liability (computed on a
separate return basis) bears to the tax liability of the consolidated
group.
11
<PAGE> 59
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
C. Investments
-----------
<TABLE>
Net investment income was as follows:
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Bonds $18,046,504 $16,182,157 $14,861,152
Common stock 137,862 498,222 125,986
Equity in undistributed income
(loss) of subsidiaries (482,580) 737,688 (747,294)
Short-term investments 2,642,678 1,664,563 104,719
Mortgage loans 5,420,613 12,026,724 13,830,160
Real estate 1,071,080 1,248,043 635,245
Policy loan interest (32,300) 10,658 66,228
Amortization of IMR 11,040,025 541,484 495,672
Investment expenses (1,934,160) (2,349,980) (1,520,742)
------------ ------------ ------------
Net investment income $ 35,909,722 $ 30,559,559 $ 27,851,126
============ ============ ============
</TABLE>
Statement of Financial Accounting Standards No. 107 (SFAS 107),
"Disclosures about Fair Value of Financial Instruments," requires
disclosures, if practical, of fair value information about financial
instruments, whether or not recognized in the balance sheet. SFAS 107
excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Presentation of the estimated fair value
of assets without a corresponding revaluation of liabilities associated
with insurance contracts can be misinterpreted.
12
<PAGE> 60
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
<TABLE>
The amortized cost and estimated fair values of investments in debt securities
at December 31, 1995 and 1994 are as follows:
<CAPTION>
December 31, 1995
-------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
---------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S.
Government agencies $ 8,998 $ 362 $ 3 $ 9,357
Corporate securities 3,672 125 3 3,794
Mortgage-backed securities 3,611 195 0 3,806
-------- ------ ------ --------
Totals $ 16,281 $ 682 $ 6 $ 16,957
======== ====== ====== ========
<CAPTION>
December 31, 1994
-------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
---------------- -------------- --------------- -----------------
U.S. Treasury securities and
obligations of U.S.
Government agencies $ 8,673 $ 70 $ 402 $ 8,341
Corporate securities 294,447 939 6,185 289,201
Mortgage-backed securities 30,853 16 2,267 28,602
-------- ------ ------ --------
Totals $333,973 $1,025 $8,854 $326,144
======== ====== ====== ========
</TABLE>
The fair value of debt securities were determined based on quoted market prices
or dealer quotes.
13
<PAGE> 61
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
<TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1995, by the contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers or
lenders may have the right to call or prepay obligations with or without
call or prepayment penalties.
<CAPTION>
Estimated
Amortized Fair
(in thousands) Cost Value
--------- -----------
<S> <C> <C>
Due in one year or less $ 2,162 $ 2,175
Due after one year through five years 5,336 5,553
Due after five years through ten years 4,281 4,439
Due after ten years 892 984
------- -------
Sub-totals 12,671 13,151
Mortgage-backed securities 3,610 3,806
------- -------
Totals $16,281 $16,957
======= =======
</TABLE>
Gross gains of $10,452,916, $1,600,852 and $2,015,587 and gross losses of
$2,035,657, $1,660,785 and $208,569 were recognized on those sales for the
years ended December 31, 1995, 1994 and 1993, respectively. Net realized
gains (losses) of $8,417,259 (see Note A), $(59,933) and $1,797,140 for the
years ended December 31, 1995, 1994 and 1993, respectively, were
transferred to IMR.
Policy loans are an integral component of insurance policies, therefore, it
is not practicable to value policy loans.
14
<PAGE> 62
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
D. Federal Income Taxes
--------------------
At December 31, 1995 and 1994 the Company had net operating loss
carryforwards of approximately $33,000,000 and $21,000,000, respectively,
which expire between the years 2007 and 2010.
E. Life and Annuity Actuarial Reserves
-----------------------------------
The Company issues flexible premium deferred combination fixed and variable
annuity contracts and variable life insurance contracts. Reserves for these
contracts are established using the Commissioners Annuity Reserve Valuation
Method ("CARVM") and the Commissioner's Reserve Valuation Method ("CRVM")
as adopted by the State of Delaware Insurance Department. The reserves for
the fixed portion of the contracts are subject to an indemnity reinsurance
agreement and the reserves for the variable portion of the contracts are
held in the separate account. The Company has now reinsured its Minimum
Guaranteed Death Benefit risks, and accordingly, is holding no reserve for
this risk, which relates to the excess of Death Benefit over policyholder
Account Value. The Company does not offer surrender values in excess of the
reserves.
<TABLE>
Withdrawal characteristics of Annuity Actuarial Reserves and Deposit
Liabilities are as follows:
<S> <C> <C>
Subject to discretionary withdrawal with
market value adjustment $ 467,775,126 8.53%
Subject to discretionary withdrawal at book value 228,269,135 4.16
less surrender charge
Subject to discretionary withdrawal 4,760,670,029 86.79
at market value
Subject to discretionary withdrawal at book value 11,553,562 .21
------------- -----
Subtotal 5,468,267,852 99.69
Not subject to discretionary withdrawal
provision 17,150,937 .31
------------- -----
Total gross annuity actuarial reserves and
deposit fund liabilities 5,485,418,789 100%
------------- -----
Reinsurance ceded 729,344,503
-------------
Total net annuity actuarial reserves and deposit
funds liabilities $4,756,074,286
==============
</TABLE>
15
<PAGE> 63
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
F. Reinsurance
-----------
Effective June 30, 1995 an indemnity coinsurance agreement was entered into
between the Company and Peoples Security Life Insurance Company ("Peoples"
or "the Reinsurer"), a AAA rated subsidiary of the Providian Corporation,
to reinsure both in force and new fixed annuity business written by the
Company.
The indemnity aspects of the agreement provide that the Company remains
liable for the contractual obligations whereas the Reinsurer agrees to
indemnify the Company for any contractual claims incurred. The coinsurance
aspects of the agreement required the Company to transfer all assets
backing the fixed annuity obligations to the Reinsurer together with all
future fixed premiums received by the Company for fixed annuity contracts.
Once transferred, the assets belong to the Reinsurer. In exchange, the
Reinsurer reimburses the Company for all claims and provides expense
allowances to cover commissions and other costs associated with the fixed
annuity business.
The Reinsurer is responsible for investing the assets and is at risk for
any potential investment gains and losses. There is no recourse back to the
Company if investment losses are incurred. Under this agreement the Company
will continue to administer the fixed annuity business for which it will
earn an expense allowance. The Company has set up a reserve of $1,931,894
to recognize that expense allowances received from Providian under this
indemnity coinsurance agreement do not fully reimburse the Company for
overhead expenses allocated to the fixed annuity line of business.
The reinsurance agreement required the Company to transfer to the Reinsurer
a consideration of $726.7 million, in cash or securities, to cover all in
force business as of June 30, 1995.
<TABLE>
The financial impact of the reinsurance agreement was as follows:
<CAPTION>
(in millions)
<S> <C>
Net loss from operations:
Consideration paid to reinsurer $(726.7)
Net reserves reinsured 725.1
Expense gap reserve (1.9)
-------
(3.5)
Capital and Surplus adjustments:
Release of IMR 11.0
Market loss on sale of mortgages (2.2)
Release of bond and mortgage asset
valuation reserve 4.7
-------
Net impact on surplus $ 10.0
=======
</TABLE>
16
<PAGE> 64
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
Reinsurance, continued
----------------------
Effective July 1, 1995 and August 1, 1995, respectively, the Company
entered into treaties with the Connecticut General Life Insurance Company
("CIGNA") and Swiss Re Life Company America companies to reinsure its
Minimum Death Benefit Guarantee risks. Each company has assumed 50% of the
risk. In addition, the Company reinsured 50% of its risk related to the
waiving of surrender charges at death with CIGNA. The Company is paying the
reinsurers an asset based premium, the level of which varies with both the
amount of exposure to this risk and the realized experience.
On December 7, 1995, the Company entered into a letter of intent with
Transamerica Occidental Life Insurance Company. Transamerica will reinsure
a 50% quota share of the variable portion of the Company's VLI contracts.
In addition, Transamerica will also reinsure 80% of this product's net
amount at risk in excess of the Company's retention limit of $100,000 on a
YRT basis.
During 1984, the Company assumed from its parent, NAL, approximately 26% of
NAL's ordinary and group vested annuity contracts issued in the United
States prior to 1983. In 1984, the Company received consideration from NAL
relating to the agreement of $800,000. In December, 1989 the percentage
assumed was increased to 90% and the Company recognized consideration of
$2,325,000. On March 31, 1995, this agreement was 100% recaptured. To
effect this recapture the Company paid NAL $1,445,889. At December 31,
1994, the Company's liability for future policy benefits was $1,635,097.
Effective October 1, 1988, the Company ceded 18% of its variable annuity
contracts (policy from 203-VA) to its parent NAL under a modified
coinsurance agreement. Under this agreement, NAL provides the Company with
an expense allowance on reinsured premiums which is repaid out of a portion
of future profits on the business reinsured. The agreement provides full
risk transfer of mortality, persistency and investment performance to the
reinsurer with respect to the portion reinsured. Effective July 1, 1992,
the quota share percentage was increased to 36%.
On December 31, 1993 the Company entered into a modified coinsurance
agreement with an ITT Lyndon Life, a non-related third party to cede the
remaining 64% of the Company's variable annuity contracts (policy form
203-VA) and 95% of the Company's new variable annuity contract series
issued in 1994 (policy form Ven 10). The Company received approximately $25
million in cash representing withheld premiums of $15 million and $10
million ceding commission. The amounts of withheld premiums will be repaid
with interest over 5 years. The ceding commission is payable out of future
profits generated by the business reinsured.
17
<PAGE> 65
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
Reinsurance, continued
----------------------
Effective December 31, 1994, the Company recaptured its reinsurance with
NAL. Upon recapture, 1994 operating results were negatively impacted by a
one-time recapture fee of approximately $6.5 million. Concurrent with this
transaction, the Company ceded 31% of the recaptured contracts (policy form
203-VA) to ITT Lyndon Life bringing the portion of these contracts
reinsured by ITT Lyndon to 95%. In return, the Company received
consideration of $5.2 million which is reflected as a surplus adjustment
and will be amortized into income in future years.
Effective December 31, 1994, the Company entered into indemnity reinsurance
agreement with Paine Webber Life to reinsure a portion of its policy forms
207-VA, VFA, VENTURE.001, and VENTURE.003. The quota share percentage
varies between 15% and 35% depending on the policy form. The form of
reinsurance is modified coinsurance and only covers the variable portion of
contracts written by Paine Webber brokers. The Company received an
allowance of $1,580,896 to complete this transaction. All elements of risk
(including mortality, persistency, investment performance) have been
transferred with the exception of the minimum death benefit guarantee. The
Company receives an allowance to cover the expected cost of the minimum
death benefit guarantee.
G. Related Party Transactions
--------------------------
In connection with the fixed annuity indemnity coinsurance agreement (See
Note F), the Company pooled its mortgage portfolio (book value of
approximately $106 million) and transferred a senior participation interest
to an affiliate of the reinsurer. The senior interest was transferred for a
purchase price of approximately $72 million and entitles an affiliate of
the reinsurer to 100% of the cash flows produced by the portfolio until
they recover in full the purchase price with interest at a rate of 7.52%.
The remaining residual interest was transferred to First North American
Realty, Inc., a wholly-owned subsidiary of NAL for a purchase price of $33
million. As a result of the sale of the senior and residual interests in
the Company's mortgages, the Company has no further economic interest in
any mortgages and hence has reported zero for mortgage loan assets on its
balance sheet as of December 31, 1995.
18
<PAGE> 66
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
Related Party Transactions, continued
-------------------------------------
The Company utilizes various services administered by NAL, such as payroll
and investment accounting. The charges for these services were
approximately $295,000, $234,000 and $232,000, in 1995, 1994 and 1993,
respectively. At December 31, 1995, the Company had a net liability to NAL
for $5,928,889.
The Company provides various services and personnel to FNA for accounting,
actuarial, administration, and systems support. These services are
allocated on a pro rata basis and charged as incurred. The total costs
allocated for these services in 1995, 1994 and 1993 was approximately
$456,000, $418,000 and $310,000, respectively. At December 31, 1995, the
Company had a net receivable from FNA for $1,427,631.
The Company's annuity and insurance contracts are distributed through NASL
Financial pursuant to an underwriting agreement. At December 31, 1995, the
Company had a receivable from NASL Financial for $881,119.
The financial statements have been prepared from the records maintained by
the Company and may not necessarily be indicative of the financial
condition or results of operations that would have occurred if the Company
had been operated as an unaffiliated corporation.
H. Investments on Deposit with Regulatory Authorities
--------------------------------------------------
Bonds and United States Treasury Notes with a carrying value of $5,600,444
at December 31, 1995, and $6,620,154 at December 31, 1994, were on deposit
with, or in custody accounts on behalf of, certain state insurance
departments.
I. Borrowed Money
--------------
The Company has an unsecured line of credit with State Street Bank and
Trust, in the amount of $10 million, bearing interest at the bank's prime
rate (8.5% at December 31, 1995). There were no outstanding balances at
December 31, 1995 and 1994. Interest expense was approximately $76,000,
$81,600 and $236,000 in 1995, 1994 and 1993, respectively.
In December 1994, the Company entered into a $150 million revolving credit
and term loan agreement (the "Loan") with the Canadian Imperial Bank of
Commerce and Deutsche Bank AG ("CIBC"). The amount outstanding at December
31, 1995 was, $107 million and is payable in quarterly installments through
December 31, 1999. Interest is due at the maturity of each LIBOR contract.
The interest rate is determined based on LIBOR plus an interest rate
margin. Accrued interest at December 31, 1995 is $865,148.
19
<PAGE> 67
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
Borrowed Money, continued
-------------------------
The Loan is collaterized by the mortality and expense risk charges and
surrender charges due from the separate account, excluding any portion
thereof subject to existing reinsurance agreements. The Loan is
subordinated in every respect to the claims of the Company's
contractholders as directed by the Insurance Commissioner of the State of
Delaware. The Company is subject to various affirmative and negative
covenants under this Loan, whereby breach of these covenants could cause an
event of default. Such covenants require the Company to meet certain
financial ratios and places restrictions on the incurrence of additional
debt, reinsurance and capital changes.
J. Surplus Notes
-------------
The Company received $20 million on December 20, 1994 pursuant to a surplus
note agreement with NAL bearing interest at 8%. The note and accrued
interest are subordinated to payments due to policyholders, and other
claimants. Principal and interest payments can be made only upon prior
approval of the Delaware Insurance Commissioner. Interest accrued at
December 31, 1995 is $3,248,219, and was paid on January 2, 1996.
K. Deferred Compensation and Retirement Plans
------------------------------------------
The parent, NAL, sponsors a defined benefit pension plan covering
substantially all of the Company's employees. The benefits are based on
years of service and the employee's compensation during the last five years
of employment. NAL's funding policy is to contribute annually the normal
cost up to the maximum amount that can be deducted for federal income tax
purposes and to charge each subsidiary for its allocable share of such
contributions based on a percentage of payroll. No pension cost was
allocated to the Company in 1995, 1994, and 1993 as the plan was subject to
the full funding limitation under the Internal Revenue Code.
The Company sponsors a defined contribution retirement plan pursuant to
regulation 401(k) of the Internal Revenue Code. All employees on September
1, 1990 were eligible to participate. Employees hired after September 1,
1990 will be eligible after one year of service and attaining age 21. The
Company contributes two percent of base pay plus fifty percent of the
employee savings contribution. The employee savings contribution is limited
to six percent of base pay. The Company contributed $203,248, $167,148, and
$89,218 in 1995, 1994 and 1993, respectively.
20
<PAGE> 68
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
L. Leases
------
The Company leases its office space and various office equipment under
operating lease agreements. For the years ended December 31, 1995, 1994 and
1993 the Company incurred rent expense of $1,388,780 and $840,233, and
$718,579, respectively. The Company negotiated a ten year lease for new
office space which commenced in March 1992. In connection with the lease,
the Company was required to deposit $1,500,000 in an escrow account as
security toward fulfilling the future lease commitment. The balance of the
escrow account at December 31, 1995 is $1,050,000.
<TABLE>
The minimum lease payments associated with the office space and various
office equipment under operating lease agreements is as follows:
<CAPTION>
Minimum
Year Lease Payments
---------------------------------------
<S> <C>
1996 $1,017,006
1997 1,187,665
1998 1,203,878
1999 1,203,364
2000 1,194,527
Remaining years 1,384,493
----------
Total $7,190,933
==========
</TABLE>
The Company also guarantees FNA's office space lease which has an annual
cost to FNA of approximately $72,000.
M. Interest Rate Swap Contract
---------------------------
The Company entered into an interest rate swap with CIBC for the purpose of
minimizing exposure to fluctuations in interest rates on a portion of the
outstanding debt held by the Company. The notional amount of the matched
swap outstanding at December 31, 1995 was $97 million. The unexpired term
at December 31, 1995 was 4 years. CIBC is a major international financial
institution. The agreement subjects the Company to financial risk that will
vary during the life of the agreement in relation to market interest rates.
Gains or losses on the swap will be recognized in investment income when
due.
21
<PAGE> 69
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------
N. Guarantee Agreement
-------------------
A guarantee agreement continues in effect, whereby NAL has agreed to
unconditionally guarantee that it will, on demand, make funds available to
the Company for the timely payment of contractual claims made under fixed
annuity and variable life contracts issued by the Company. The guarantee
covers all outstanding fixed annuity contracts, including those issued
prior to the date of the guarantee agreement. Following the merger (see
Note O), Manufacturers Life Insurance Company has assumed all of NAL's
obligations under the guarantee agreement.
O. Subsequent Events
-----------------
Merger
------
On January 1, 1995, NAL merged with the Manufacturers Life Insurance
Company ("MLI") of Canada. The surviving company will conduct business
under the name "Manufacturers Life Insurance Company".
Corporate Restructuring
-----------------------
Effective January 1, 1996, immediately following the merger, the Company
experienced a corporate restructuring which resulted in the formation of a
newly organized holding corporation, NAWL Holding Company, Inc. ("NAWL").
NAWL holds all of the outstanding shares of the Parent and Wood Logan
Associates, Inc. ("WLA").
MLI owns all class A shares of NAWL, representing 85% of the voting shares
of NAWL. Certain employees of WLA own all class B shares, which represent
the remaining 15% voting interest in NAWL.
22
<PAGE> 70
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF NORTH AMERICAN
LIFE ASSURANCE COMPANY)
<TABLE>
ANNUAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1995
Schedule 1 - Selected Financial Data
---------------
<S> <C>
Investment Income Earned
Government bonds $ 1,060,741
Other bonds (unaffiliated) 16,510,356
Common stocks of affiliates 1,287,731
Mortgages loans 5,420,613
Real estate 1,071,080
Premium notes, policy loans and liens (32,300)
Short-term investments 2,642,678
Aggregate write-ins for investment income 475,407
------------
Gross investment Income $ 28,436,306
============
Real Estate Owned - Book Value less
Encumbrances $ 4,847,164
============
Bonds and Stocks of Parents, Subsidiaries and
Affiliates - Book Value
Common Stocks $ 21,282,599
============
Bonds and Short-Term Investments by Class and Maturity:
Bonds by Maturity-Statement Value
Due within one year 3,957,418
Over 1 year through 5 years 5,477,162
Over 5 years through 10 years 4,645,633
Over 10 years through 20 years 127,972
Over 20 years 3,868,984
------------
Total by Maturity $ 18,077,169
============
Bonds by Class - Statement Value
Class 1 $ 16,756,213
Class 2 1,010,956
Class 3 310,000
------------
Total by Class $ 18,077,169
============
Total Bonds Publicly Traded $ 17,066,213
============
Total Bonds Privately Traded $ 1,010,956
============
</TABLE>
23
<PAGE> 71
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF NORTH AMERICAN
LIFE ASSURANCE COMPANY)
<TABLE>
ANNUAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1995
Schedule 1 - Selected Financial Data
---------------
<S> <C>
Common Stocks - Market Value $ 21,730,238
==============
Supplementary Contracts in Force
Ordinary - Involving Life Contingencies
Income Payable $ 24,442
==============
Ordinary - Not Involving Life-Contingencies
Income Payable $ 341,176
==============
Annuities:
Ordinary
Immediate - Amount of Income Payable $ 2,291,184
==============
Deferred - Fully Paid Account Balance $5,267,516,243
==============
Group
Fully Paid Account Balance $ 374,375,752
==============
</TABLE>
