<PAGE> 1
NASL SERIES TRUST
Supplement to Prospectus dated May 1, 1995,
as amended August 28, 1995
FNAL VARIABLE ACCOUNT
NASL VARIABLE ACCOUNT
Supplement to Prospectus
dated May 1, 1995
NASL VARIABLE LIFE ACCOUNT
Supplement to Prospectus
dated October 16, 1995
On January 1, 1996, North American Life Assurance Company ("NAL") and
The Manufacturers Life Insurance Company merged with the combined company
retaining the name The Manufacturers Life Insurance Company ("Manulife"). NAL
is the ultimate parent of NASL Financial Services, Inc. ("NASL Financial"), the
investment adviser to NASL Series Trust (the "Trust"). Manulife, like NAL,
is a Canadian mutual life insurance company based in Toronto, Canada. The
merger may be considered to give rise to the assignment and automatic
termination of the investment advisory agreement between NASL Financial and the
Trust as well as the assignment and automatic termination of each of the
underlying subadvisory agreements for each of the portfolios (including the
consulting agreement between Salomon Brothers Asset Management Inc. ("SBAM")
and Salomon Brothers Asset Management Limited ("SBAM Limited") relating to the
Strategic Bond Portfolio) (collectively, the "Existing Agreements").
Therefore, at the Trust's Board of Trustees meeting held September 28-29, 1995,
the Trustees of the Trust (including all the noninterested Trustees) voted to
approve a new advisory agreement between the Trust and NASL Financial, new
subadvisory agreements between NASL Financial and each of the subadvisors, and
a new consulting agreement between SBAM and SBAM Limited (collectively, the
"New Agreements"), and to submit the New Agreements to shareholders for their
consideration. The New Agreements were approved by shareholders of each series
of the Trust on December 5, 1995. THE NEW AGREEMENTS ARE SUBSTANTIALLY
IDENTICAL TO THE EXISTING AGREEMENTS. THEREFORE, THE NEW AGREEMENTS WILL NOT
RESULT IN ANY CHANGES IN ADVISORY FEES PAID BY THE TRUST, THE INVESTMENT
MANAGEMENT OR OPERATIONS OF EITHER NASL FINANCIAL OR THE SUBADVISERS, THE
INVESTMENT PERSONNEL MANAGING THE TRUST OR THE SHAREHOLDER SERVICES OR OTHER
BUSINESS ACTIVITIES OF THE TRUST.
NASL.SUPP196
V7.SUPP.196
V20/21.SUPP196
V22/23.196
V9.SUPP.196
VV.SUPP.196
VIS.SUPP.196
VLSUPP196
THE DATE OF THIS SUPPLEMENT IS JANUARY 2, 1996
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NASL VARIABLE LIFE ACCOUNT
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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 that is a wholly-owned subsidiary of North
American Life Assurance Company ("North American Life"). 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 fourteen
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
fourteen 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 fourteen investment portfolios: 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. IT SHOULD
BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR THE TRUST.
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 October 16, 1995.
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<TABLE>
TABLE OF CONTENTS
<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.................................... 28
Legal Matters........................................ 28
Independent Accountants.............................. 28
Safekeeping of Variable Account Assets............... 28
Other Information.................................... 29
Contract Owner Inquiries............................. 29
CONTRACT ILLUSTRATIONS....................................... 29
FINANCIAL STATEMENTS......................................... 37
</TABLE>
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<TABLE>
SPECIAL TERMS
<S> <C>
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 additiona 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 The value of the owner's investment in an investment
Value account.
</TABLE>
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<TABLE>
<S> <C>
Investment Options The fixed and variable investments available to
contract owners. Currently, one fixed and fourteen
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 The same day each month as the contract date. If there
Day 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 ownership
Contract Owner rights under the contract.
Payment or An amount paid by a contract owner to the Company as
Premium Payment consideration for the benefits provided by the contract.
Portfolio or The registered management investment companies (or any
Trust Portfolio 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 the
Payments 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.
</TABLE>
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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 fifteen investment options
currently available under the contract: fourteen 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 fourteen variable investment
options are the fourteen sub-accounts of the Variable Account, a separate
account established by the Company. The sub-accounts invest in corresponding
portfolios of the 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 con tract. 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 a wholly-owned subsidiary of North
American Life, 5650 Yonge Street, North York, Ontario M2M 4G4, a mutual life
insur ance company established in 1881 in Canada. The Company is also the
depositor of NASL Variable Account, a separate account of the Company that
issues variable annuity contracts.
On September 7, 1995, North American Life and The Manufacturers Life
Insurance Company ("Manulife") signed an agreement to merge the companies
effective on or about January 1, 1996, subject to regulatory approval and the
approval of the policyholders of North American Life and Manulife. In addition,
in the event the merger is not effected, Manulife and North American Life have
also agreed that under certain circumstances, North American Life can require
Manulife, and under certain other circumstances, Manulife has the right, to
purchase a controlling interest in the Company. Manulife, like North American
Life, is a Canadian mutual life insurance company based in Toronto, Canada.
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 fourteen Sub-Accounts within the Variable Account,
one for each of the fourteen 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 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.
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The Trust currently has seven 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 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.
The following is a brief description of each Trust portfolio:
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.
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.
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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 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.
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<PAGE> 12
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.
<TABLE>
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:
<CAPTION>
Simplified Underwriting
Issue Age Maximum Initial Payment
<S> <C>
20-39 Not available
40-44 $ 20,000
45-54 $ 30,000
55-64 $ 50,000
65-80 $100,000
</TABLE>
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
12
<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:
14
<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
15
<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, North
American Life, 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 North American Life on notice
to the Company. Termination will not affect North American Life'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 as follows:
(i) transfers may be made pursuant to the Dollar Cost Averaging program and
(ii) transfers may be made from the fixed investment account to the variable
investment options if, at the time of the transfer, the guaranteed interest
rate for the funds to be transferred is equal to or greater than the then
current guaranteed rate for funds being transferred into the fixed investment
account. The Company may withdraw its permission to make the transfers
described in (ii) above at any time after April 30, 1996.
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
17
<PAGE> 19
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).
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.
19
<PAGE> 21
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.
20
<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 con tract 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 surren ders 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% 8.00%
3 6.25% 1.75% 8.50%
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, North American Life, the Trust or any of their affiliates.
21
<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 mor tality 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 approxi mately 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 regula tions, and interpretations existing on the
date of this Prospec tus. These authorities, however, are subject to change by
Congress, the Treasury Department, and judicial decisions.
This discussion does not address state or local tax conse quences
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 TRANSAC TION 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
22
<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 invest ments 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.
23
<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" 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.
24
<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 re serves 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
25
<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 govern ment 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 with holds 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 that are not
attributable to contract owners 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.
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
26
<PAGE> 28
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 an exclusive promotional agent
agreement with Wood Logan Associates, Inc. ("Wood Logan"). Wood
Logan, approximately 20% owned by North American Life and its
affiliates, 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 PRINCIPAL OCCUPATION
THE COMPANY
<S> <C> <C>
William J. Atherton Director and Director and President of
President the Company
Peter S. Hutchinson Director Executive Vice President
and Chief Financial
Officer of North American
Life, September 1994 to
present; 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; Vice
President and Corporate
Actuary, North American
Life, September 1988 to
September 1990.
Brian L. Moore Director and Chief Executive Officer,
Chairman of the The North American Group,
Board of Direc October 1993 to date;
tors Executive Vice President
and Chief Financial Officer,
North American Life,
September 1988 to October
1993.
James D. Gallagher Vice President, Vice President, Secretary
Secretary and and General Counsel of
General Counsel the Company, June 1994 to
date; Vice President and
Associate General Counsel,
The Prudential Insurance
Company of America, 1990-1994.
Richard C. Hirtle Vice President, Vice President, Treasurer
Treasurer and and Chief Financial Officer
Chief Financial of the Company, November
Officer 1988 to date.
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
<S> <C> <C>
Hugh C. McHaffie Vice President Vice President and Product
and Product Actuary of the Company,
Actuary August 1994 to present;
Product Development
Executive of the Company,
August 1990 to August
1994.
Iain W. Scott Vice President, Vice President, Life
Life Products of the Company,
Products 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, Vice President, Corporate
Corporate Services of the Company,
Services January, 1995 to date;
Executive, Corporate
Services of the Company,
July, 1989 to December
1994.
Scott L. Stolz Vice President, Vice President, Annuity
Annuity Administration and Systems
Administration of the Company, November,
and Systems 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 Vice President and Actuary
and Actuary of the Company, January
1986 to date.
</TABLE>
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, Washington, D.C.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company 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.
28
<PAGE> 30
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 $84,176 and
$49,801, 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 $73,965.
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.
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 fourteen portfolios also is reflected in the tables. That
average expense figure is 0.88%, based upon the 1994 expense ratios of the
portfolios and an estimated expense ratio of 1.25% for the International Growth
and Income Trust. 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
29
<PAGE> 31
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
NONSMOKER : AGE 65
CURRENT VALUES
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
Payment
Plus 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 $24,187 $21,937 $51,179 $25,640 $23,390 $51,179 $27,092 $24,842 $51,179
2 27,563 23,400 21,275 51,179 26,296 24,171 51,179 29,362 27,237 51,179
3 28,941 22,638 20,888 51,179 26,971 25,221 51,179 31,824 30,074 51,179
4 30,388 21,899 20,399 51,179 27,663 26,163 51,179 34,495 32,995 51,179
5 31,907 21,184 19,934 51,179 28,374 27,124 51,179 37,394 36,144 51,179
6 33,502 20,491 19,491 51,179 29,104 28,104 51,179 40,538 39,538 51,179
7 35,178 19,819 19,069 51,179 29,854 29,104 51,179 43,949 43,199 51,179
8 36,936 19,169 18,669 51,179 30,624 30,124 51,179 47,651 47,151 52,892
9 38,783 18,539 18,289 51,179 31,414 31,164 51,179 51,666 51,416 56,316
10 40,722 17,929 17,929 51,179 32,226 32,226 51,179 56,023 56,023 59,944
15 51,973 15,500 15,500 51,179 37,458 37,458 51,179 86,634 86,634 90,966
20 66,332 13,381 13,381 51,179 43,567 43,567 51,179 133,054 133,054 139,707
25 84,659 11,532 11,532 51,179 50,698 50,698 53,233 204,369 204,369 214,587
30 108,049 9,920 9,920 51,179 59,133 59,133 59,724 314,591 314,591 317,737
</TABLE>
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 0.88%.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only 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.
31
<PAGE> 33
<TABLE>
$25,000 INITIAL PAYMENT: $85,564 FACE AMOUNT
FEMALE NONSMOKER : AGE 55
CURRENT VALUES
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
Payment
Plus 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 $24,187 $21,937 $85,564 $25,640 $23,390 $85,564 $27,092 $24,842 $85,564
2 27,563 23,400 21,275 85,564 26,296 24,171 85,564 29,362 27,237 85,564
3 28,941 22,638 20,888 85,564 26,971 25,221 85,564 31,824 30,074 85,564
4 30,388 21,899 20,399 85,564 27,663 26,163 85,564 34,495 32,995 85,564
5 31,907 21,184 19,934 85,564 28,374 27,124 85,564 37,394 36,144 85,564
6 33,502 20,491 19,491 85,564 29,104 28,104 85,564 40,538 39,538 85,564
7 35,178 19,819 19,069 85,564 29,854 29,104 85,564 43,949 43,199 85,564
8 36,936 19,169 18,669 85,564 30,624 30,124 85,564 47,651 47,151 85,564
9 38,783 18,539 18,289 85,564 31,414 31,164 85,564 51,666 51,416 85,564
10 40,722 17,929 17,929 85,564 32,226 32,226 85,564 56,023 56,023 85,564
15 51,973 15,500 15,500 85,564 37,458 37,458 85,564 86,497 86,497 100,336
20 66,332 13,381 13,381 85,564 43,567 43,567 85,564 134,465 134,465 143,877
25 84,659 11,532 11,532 85,564 50,698 50,698 85,564 209,593 209,593 220,073
30 108,049 9,920 9,920 85,564 59,023 59,023 85,564 323,618 323,618 339,799
</TABLE>
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 0.88%.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only 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.
32
<PAGE> 34
<TABLE>
$25,000 INITIAL PAYMENT: $79,644 FACE AMOUNT
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
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 $25,000 $24,257 $22,007 $79,644 $25,714 $23,464 $79,644 $27,171 $24,921 $79,644
2 26,250 23,527 21,402 79,644 26,439 24,314 79,644 29,522 27,397 79,644
3 27,563 22,817 21,067 79,644 27,185 25,435 79,644 32,078 30,328 79,644
4 28,941 22,128 20,628 79,644 27,954 26,454 79,644 34,858 33,358 79,644
5 30,388 21,459 20,209 79,644 28,744 27,494 79,644 37,882 36,632 79,644
6 31,907 20,810 19,810 79,644 29,558 28,558 79,644 41,171 40,171 79,644
7 33,502 20,179 19,429 79,644 30,396 29,646 79,644 44,748 43,998 79,644
8 35,178 19,566 19,066 79,644 31,259 30,759 79,644 48,639 48,139 79,644
9 36,936 18,972 18,722 79,644 32,147 31,897 79,644 52,870 52,620 79,644
10 38,783 18,394 18,394 79,644 33,061 33,061 79,644 57,473 57,473 79,644
15 49,498 16,107 16,107 79,644 38,918 38,918 79,644 89,547 89,547 94,024
20 63,174 14,086 14,086 79,644 45,842 45,842 79,644 139,441 139,441 146,413
25 80,628 12,302 12,302 79,644 54,027 54,027 79,644 216,887 216,887 227,732
30 102,903 10,725 10,725 79,644 63,703 63,703 79,644 337,885 337,885 341,263
</TABLE>
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 0.88%.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only 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.
33
<PAGE> 35
<TABLE>
$25,000 INITIAL PAYMENT: $51,179 FACE AMOUNT
MALE NONSMOKER: 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 $23,677 $21,427 $51,179 $25,136 $22,886 $51,179 $ 26,596 $ 24,346 $ 51,179
2 27,563 22,293 20,168 51,179 25,215 23,090 51,179 28,312 26,187 51,179
3 28,941 20,837 19,087 51,179 25,229 23,479 51,179 30,169 28,419 51,179
4 30,388 19,294 17,794 51,179 25,168 23,668 51,179 32,187 30,687 51,179
5 31,907 17,645 16,395 51,179 25,020 23,770 51,179 34,392 33,142 51,179
6 33,502 15,864 14,864 51,179 24,765 23,765 51,179 36,816 35,816 51,179
7 35,178 13,919 13,169 51,179 24,381 23,631 51,179 39,499 38,749 51,179
8 36,936 11,766 11,266 51,179 23,836 23,336 51,179 42,492 41,992 51,179
9 38,783 9,355 9,105 51,179 23,094 22,844 51,179 45,864 45,614 51,179
10 40,722 6,628 6,628 51,179 22,113 22,113 51,179 49,674 49,674 53,151
15 51,973 * * * 12,316 12,316 51,179 76,795 76,795 80,635
20 66,332 * * * * * * 117,406 117,406 123,277
25 84,659 * * * * * * 176,250 176,250 185,063
30 108,049 * * * * * * 266,646 266,646 269,312
<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 0.88%.
* Unless additional payment is made, the contract will not stay inforce resulting in loss of insurance coverage.
See "TERMINATION" and "REINSTATEMENT".
</TABLE>
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.
34
<PAGE> 36
<TABLE>
$25,000 INITIAL PAYMENT: $85,564 FACE AMOUNT
FEMALE NONSMOKER: 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 $23,887 $21,637 $85,564 $25,339 $23,089 $85,564 $ 26,792 $ 24,542 $85,564
2 27,563 22,771 20,646 85,564 25,663 23,538 85,564 28,727 26,602 85,564
3 28,941 21,649 19,899 85,564 25,972 24,222 85,564 30,823 29,073 85,564
4 30,388 20,522 19,022 85,564 26,264 24,764 85,564 33,095 31,595 85,564
5 31,907 19,384 18,134 85,564 26,538 25,288 85,564 35,561 34,311 85,564
6 33,502 18,229 17,229 85,564 26,785 25,785 85,564 38,238 37,238 85,564
7 35,178 17,046 16,296 85,564 26,998 26,248 85,564 41,142 40,392 85,564
8 36,936 15,821 15,321 85,564 27,164 26,664 85,564 44,293 43,793 85,564
9 38,783 14,538 14,288 85,564 27,269 27,019 85,564 47,713 47,463 85,564
10 40,722 13,185 13,185 85,564 27,303 27,303 85,564 51,432 51,432 85,564
15 51,973 5,379 5,379 85,564 27,118 27,118 85,564 78,729 78,729 91,325
20 66,332 * * * 23,088 23,088 85,564 122,372 122,372 130,938
25 84,659 * * * 8,326 8,326 85,564 190,728 190,728 200,264
30 108,049 * * * * * * 294,404 294,404 309,124
<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 0.88%.
* Unless additional payment is made, the contract will not stay inforce resulting in loss of insurance coverage.
See "TERMINATION" and "REINSTATEMENT".
</TABLE>
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.
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 $ 25,000 $24,257 $22,007 $79,644 $25,714 $23,464 $79,644 $ 27,171 $ 24,921 $ 79,644
2 26,250 23,498 21,373 79,644 26,414 24,289 79,644 29,501 27,376 79,644
3 27,563 22,714 20,964 79,644 27,092 25,342 79,644 31,998 30,248 79,644
4 28,941 21,893 20,393 79,644 27,739 26,239 79,644 34,672 33,172 79,644
5 30,388 21,023 19,773 79,644 28,344 27,094 79,644 37,538 36,288 79,644
6 31,907 20,086 19,086 79,644 28,891 27,891 79,644 40,606 39,606 79,644
7 33,502 19,064 18,314 79,644 29,367 28,617 79,644 43,896 43,146 79,644
8 35,178 17,933 17,433 79,644 29,751 29,251 79,644 47,427 46,927 79,644
9 36,936 16,670 16,420 79,644 30,025 29,775 79,644 51,231 50,981 79,644
10 38,783 15,236 15,236 79,644 30,158 30,158 79,644 55,338 55,338 79,644
15 49,498 4,426 4,426 79,644 28,709 28,709 79,644 85,442 85,442 89,714
20 63,174 * * * 17,766 17,766 79,644 133,000 133,000 139,650
25 80,628 * * * * * * 205,484 205,484 215,759
30 102,903 * * * * * * 318,141 318,141 321,322
<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 0.88%.
* Unless additional payment is made, the contract will not stay inforce resulting in loss of insurance coverage.
See "TERMINATION" and "REINSTATEMENT".
</TABLE>
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.
36
<PAGE> 38
FINANCIAL STATEMENTS
37
<PAGE> 39
<TABLE>
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NORTH AMERICAN LIFE ASSURANCE COMPANY
OF NORTH YORK, CANADA)
STATEMENTS OF ADMITTED ASSETS, LIABILITIES, CAPITAL AND SURPLUS
(Unaudited)
<CAPTION>
ASSETS June 30, 1995
-------------
<S> <C>
Investments
Bonds at amortized cost $ 15,036,356
Real estate 6,675,476
Common stock 17,956,313
Short-term investments 261,869,128
Cash 6,607,060
--------------
Total investments 308,144,333
Accrued investment income 341,192
Other assets 37,110,991
Separate account assets 4,197,766,952
--------------
Total assets $4,543,363,468
==============
LIABILITIES
Aggregate reserves 4,942,384
Transfers from separate account, net (157,088,476)
Borrowed money 97,920,375
Funds held account from reinsurers 12,000,000
Amount due to reinsurer 303,182,368
Asset valuation reserve 2,437,594
Accrued surplus note interest 2,448,219
Other liabilities 7,683,704
Separate account liabilities 4,197,766,952
--------------
Total liabilities 4,471,293,120
CAPITAL AND SURPLUS
Common stock
(Shares authorized 3,000, issued and outstanding
2,600, par value $1,000) 2,600,000
Surplus note payable to Parent 20,000,000
Paid-in capital in excess of par value 110,633,000
Unassigned deficit (61,162,652)
--------------
Total capital and surplus 72,070,348
--------------
Total liabilities, capital and surplus $4,543,363,468
</TABLE> ==============
1
<PAGE> 40
<TABLE>
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NORTH AMERICAN LIFE ASSURANCE COMPANY
OF NORTH YORK, CANADA)
STATEMENTS OF OPERATIONS
For the six months ended June 30, 1995 and 1994
(Unaudited)
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Revenues
Annuity considerations and deposits $487,274,690 $663,330,855
Net investment income 37,630,389 11,870,263
Commissions and expense allowances on
reinsurance ceded 4,275,450 4,933,086
Experience refund on reinsurance ceded 1,312,578 2,902,665
Reserve adjustments on reinsurance (26,510,455) 30,964,177
------------ ------------
503,982,652 714,001,046
------------ ------------
Expenses
Annuity benefits 142,203,295 91,954,053
Increase (decrease) in reserves (514,150,222) 43,317,445
Reinsurance 725,592,129 ---
Increase in separate account liability 83,904,584 529,294,422
Commissions 35,016,561 47,585,785
General expenses 11,401,811 9,582,676
Interest expense 4,216,703 953,515
Recapture fee on reinsurance ceded 1,445,889 15,933
Interest paid on funds held account --- 83,474
------------ ------------
489,630,750 722,787,303
------------ ------------
Income (loss) before federal income tax
provision and realized capital losses 14,351,902 (8,786,257)
Federal income tax provision --- 6,981
------------ ------------
Income (loss) after federal income tax
provision 14,351,902 (8,793,238)
Realized capital losses (2,333,736) (880,150)
------------ ------------
Net (loss) income $ 12,018,166 $ (9,673,388
============ ============
</TABLE>
2
<PAGE> 41
<TABLE>
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NORTH AMERICAN LIFE ASSURANCE COMPANY
OF NORTH YORK, CANADA)
STATEMENTS OF CAPITAL AND SURPLUS
For the six months ended June 30, 1995 and 1994
(Unaudited)
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Capital and Surplus - beginning of
the year $59,408,132 $51,722,525
Net income (loss) 12,018,166 (9,673,388)
Change in net unrealized capital
gains (losses) (407,218) (574,270)
Change in asset valuation reserve 3,099,266 1,020,697
Increase in non-admitted assets (681,608) (387,782)
Paid in capital in excess of par --- 10,000,000
Initial commission allowance on
reinsurance ceded (1,366,390) ---
Surplus adjustment on reinsurance
ceded --- (1,000,000)
Capital and Surplus - end of the ----------- -----------
year $72,020,348 $51,107,782
=========== ===========
</TABLE>
3
<PAGE> 42
<TABLE>
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NORTH AMERICAN LIFE ASSURANCE COMPANY
OF NORTH YORK, CANADA)
STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1995 and 1994
(Unaudited)
<CAPTION>
1995 1994
----- ----
<S> <C> <C>
From operating activities:
Annuity considerations and deposits $487,274,689 $663,330,855
Allowances & reserve adjustments on (22,235,005) 35,587,104
reinsurance ceded
Net investment income 30,471,702 12,152,286
Experience refund on reinsurance ceded 1,312,578 2,902,665
Surrender benefits and other fund
withdrawals paid (115,722,915) (75,350,820)
Other benefits paid to policyholders (27,109,067) (15,613,541)
Commissions, other expenses & taxes paid (48,055,354) (57,177,246)
Net transfers to separate account (92,957,062) (561,129,154)
Reinsurance and other operating expenses
paid (728,674,413) (1,427,244)
------------ -----------
Net cash provided (used) by operating
activities (515,745,847) 3,264,905
------------ -----------
From investing activities:
Proceeds from investments sold, matured
or repaid:
Bonds 760,780,013 28,658,092
Stocks 5,080,000
Mortgage loans 111,813,926 5,208,451
Real estate 2,505,052 1,143,824
Cost of investments acquired:
Bonds (433,374,110 (55,614,974)
Stocks (10,000,000)
Mortgage loans --- (982,500)
Real estate (2,505,052) ---
Net cash provided (used) by investing
activities 434,299,829) (21,587,107)
------------ ------------
Other cash provided (applied):
Capital and surplus paid-in --- 10,000,000
Borrowed money (3,000,000) ---
Other sources 308,216,194 35,279,244
Other applications (56,872,164) (98,696,695)
------------ ------------
Total other cash provided 248,344,030 (53,417,451)
------------ ------------
Net change in cash and short-term
investments 166,898,012 (71,739,653)
Cash and short-term investments,
beginning of year 101,578,176 99,495,800
------------ ------------
Cash and short-term investments, end of
year $268,476,188 $27,7756,147
</TABLE> ============ ============
4
<PAGE> 43
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 six months ended June 30, 1995 and 1994
(Unaudited)
The unaudited financial statements of North American Security Life Insurance
Company (the "Company") as of June 30, 1995 and 1994, reflect, in the opinion
of management, all adjustments necessary to present fairly the statements of
admitted assets, liabilities, capital and surplus, the statements of
operations, capital and surplus, and cash flows. Interim results are not
indicative of the results which may be expected for the full year. For a
description of accounting policies, see notes to Consolidated Financial
Statements for the year ended December 31, 1994.
Note 1 - Reinsurance
- --------------------
Effective June 30, 1995, the Company entered into an indemnity coinsurance
agreement for all fixed business with the Providian Corporation, through its
wholly owned subsidiary Peoples Security Life Insurance Company. The indemnity
aspects of the agreement provide that, the Company will remain liable for the
fixed account contractual obligations. The coinsurance aspects of the agrrement
require the Company to sell or transfer all assets backing the fixed annuity
obligations to the reinsurer together with all future fixed premiums received
by the Company. In exchange, the reinsurer will reimburse the Company for all
claims and provide expense allowances to cover commissions and other costs
associated with the fixed annuity business.
This agreement does not cover the fixed business written by First Northern
American Life Assurance Company, a wholly owned subsidiary of the Company.
To effect reinsurance with respect to policies in force on June 30, 1995 the
Company shall pay or owe to the reinsurer cash or other assets representing the
Initial Consideration. The Initial Consideration was approximately $727 million
and was funded by 1) the direct transfer of bonds and acccrued interest of
approximately $348 million, 2) transfer of cash from the sale of mortgage
participations of approximately $105 million, 3) transfer of cash from the sale
of mortgage participations of approximately $105 million, 3) transfer of cash
from the sale of bonds of approximately $271 million, 4) direct transfer of
policy loans for approximately $3 million.
As of June 30, 1995 approximately $432 million of the Initial Consideration was
paid to the reinsurer. The balance was held as a liability due to reinsurer as
of June 30, 1995 and subsequently paid. As a result of this transaction there
was a net increase in the statement of operations of approximately $7 million
for the six months ended June 30, 1995. Additionally, there was a direct
increase in surplus of approximately $5 million due to the release of the Asset
Valuation Reserve, applicable to the investments sold under the reinsurance
agreement.
<PAGE> 44
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, 1994, 1993 and 1992
<PAGE> 45
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, 1994 and 1993, and the related
statements of operations, capital and surplus, and cash flows for each of the
three years in the period ended December 31, 1994. 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,
1994 and 1993, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1994 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 24, 1995
/s/ Coopers & Lybrand L.L.P.
<PAGE> 46
<TABLE>
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NORTH AMERICAN LIFE ASSURANCE COMPANY
OF NORTH YORK, CANADA)
STATEMENTS OF ADMITTED ASSETS, LIABILITIES, CAPITAL AND SURPLUS
December 31, 1994 and 1993
<CAPTION>
ASSETS 1994 1993
---- ----
<S> <C> <C>
Investments
Bonds at amortized cost $ 333,973,085 $ 215,189,979
Mortgages 115,429,834 133,647,221
Real estate 4,745,559 4,326,996
Common stock 11,039,222 16,547,831
Policy loans 2,579,308 1,787,585
Short-term investments 101,578,176 99,495,800
-------------- --------------
Total investments 569,345,184 470,995,412
Accrued investment income 7,197,833 4,899,232
Other assets 2,427,102 2,252,988
-------------- --------------
Separate account assets 3,661,278,295 2,937,436,423
-------------- --------------
Total assets $4,240,248,414 $3,415,584,055
============== ==============
LIABILITIES
Aggregate reserves 519,092,606 372,540,482
Transfers from separate account, net (148,035,998) (112,596,016)
Borrowed money 100,023,562 30,000,000
Payable for investments purchased --- 63,153,661
Payable to Parent --- 30,408,997
Funds held account from reinsurers 12,000,000 17,874,070
Asset valuation reserve 5,536,860 7,512,893
Interest maintenance reserve 2,494,101 3,095,519
Bank overdraft 9,547,533 3,710,350
Payable to Parent on reinsurance ceded 8,577,268 2,652,952
Other liabilities 10,326,055 8,072,199
Separate account liabilities 3,661,278,295 2,937,436,423
-------------- --------------
Total liabilities 4,180,840,282 3,363,861,530
CAPITAL AND SURPLUS
Common stock (Shares authorized:
3,000 and 2,000 at December 31, 1994
and 1993, respectively; issued and
outstanding 2,600 and 2,000 at December
31, 1994 and 1993, respectively:
par value $1,000) 2,600,000 2,000,000
Surplus note payable to Parent 20,000,000 20,000,000
Paid-in capital in excess of par value 110,633,000 81,233,000
Unassigned deficit (73,824,868) (51,510,475)
-------------- --------------
Total capital and surplus 59,408,132 51,722,525
-------------- --------------
Total liabilities, capital
and surplus $4,240,248,414 $3,415,584,055
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements
2
<PAGE> 47
<TABLE>
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NORTH AMERICAN LIFE ASSURANCE COMPANY
OF NORTH YORK, CANADA)
STATEMENTS OF OPERATIONS
December 31, 1994, 1993 AND 1992
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Revenues
Annuity considerations and
deposits $1,139,953,302 $1,255,219,443 $471,449,106
Net investment income 30,559,559 27,851,126 30,537,627
Commissions and expense
allowances on
reinsurance ceded 7,019,266 586,983 9,377,752
Experience refund on
reinsurance ceded 4,967,753 --- ---
Reserve adjustments on
reinsurance (5,879,248) (23,455,222) 114,566,879
-------------- -------------- ------------
1,176,620,632 1,260,202,330 625,931,364
-------------- -------------- ------------
Expenses
Annuity benefits 206,710,232 195,064,882 115,654,343
Increase in reserves 146,552,124 5,337,935 20,902,062
Increase in separate account
liability 732,768,257 971,871,375 428,856,978
Commissions 81,981,046 82,137,269 43,291,399
General expenses 19,253,764 13,475,040 10,825,845
Interest expense 4,599,441 456,196 230,812
Recapture fee on
reinsurance ceded 8,029,909 13,300 25,102,649
Interest paid on funds
held account 144,498 226,761 1,149,536
-------------- -------------- ------------
1,200,039,271 1,268,582,758 646,013,624
============== ============== ============
Loss before federal income tax
provision and
realized capital losses (23,418,639) (8,380,428) (20,082,260)
Federal income tax
provision 6,415 193,000 ---
-------------- -------------- ------------
Loss after federal
income tax provision (23,425,054) (8,573,428) (20,082,260)
Realized capital losses (7,029,018) (2,104,462) (228,493)
-------------- -------------- -------------
Net loss $ (30,454,072)$ (10,677,890)$ (20,310,753)
============== ============== =============
</TABLE>
The accompanying notes are an integral part of the financial statements
3
<PAGE> 48
<TABLE>
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NORTH AMERICAN LIFE ASSURANCE COMPANY
OF NORTH YORK, CANADA)
STATEMENTS OF CAPITAL AND SURPLUS
For the years ended December 31, 1994, 1993 and 1992
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Capital and Surplus - beginning
of the year $51,722,525 $35,773,897 $34,654,342
Net loss (30,454,072) (10,677,890) (20,310,753)
Change in net unrealized capital
gains (losses) 3,514,108 (1,198,895) (2,537,720)
Change in asset valuation reserve 1,976,033 (5,847,867) 164,300
Increase in non-admitted assets (1,859,181) (1,326,720) (196,272)
Issuance of common stock 600,000 458,000 ---
Paid in capital in excess of par 29,400,000 4,542,000 24,000,000
Initial commission allowance on
reinsurance ceded 4,508,719 10,000,000 ---
Surplus note from Parent --- 20,000,000 ---
----------- ----------- -----------
Capital and Surplus - end of the
year $59,408,132 $51,722,525 $35,773,897
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
4
<PAGE> 49
<TABLE>
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NORTH AMERICAN LIFE ASSURANCE COMPANY
OF NORTH YORK, CANADA)
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1994, 1993 and 1992
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
From operating activities:
Annuity considerations and
deposits $1,139,953,302 $1,255,219,443 $471,449,106
Allowances & reserve adjustments
on reinsurance ceded 1,140,018 (20,898,549) 122,978,892
Net investment income 28,230,341 27,231,438 31,053,104
Experience refund on reinsurance
ceded 4,967,753 --- ---
Surrender benefits and other fund
withdrawals paid (175,523,156) (171,434,721) (94,687,168)
Other benefits paid to
policyholders (30,555,923) (22,727,802) (21,143,676)
Commissions, other expenses &
taxes paid (100,210,171) (93,392,207) (53,504,225)
Net transfers to separate account (768,208,239) (1,022,539,449) (459,303,106)
Other operating expenses paid (13,571,986) (1,546,814) (27,113,635)
-------------- -------------- ------------
Net cash provided (used) by
operating activities 86,221,939 (50,088,661) (30,270,708)
-------------- -------------- ------------
From investing activities:
Proceeds from investments sold,
matured or repaid:
Bonds 112,385,919 75,750,376 85,154,445
Stocks 5,805,050 5,818,725 ---
Mortgage loans 14,076,659 6,294,101 1,438,425
Real estate 5,950,412 5,528,761 1,592,984
Cost of investments acquired:
Bonds (232,208,934) (42,169,482) (69,517,083)
Stocks (488,212) (11,144,711) (7,500,000)
Mortgage loans (4,301,717) (3,890,750) (3,173,750)
-------------- -------------- ------------
Net cash provided (used) by
investing activities (98,780,823) 36,187,020 7,995,021
-------------- -------------- ------------
Other cash provided (applied):
Capital and surplus paid-in 30,000,000 5,000,000 24,000,000
Borrowed money 70,000,000 80,000,000 ---
Reinsurance ceding commission and
expenseallowance --- 25,000,000 ---
Other sources 17,892,210 4,771,451 1,309,229
Other applications (103,250,950) (4,931,341) (1,862,121)
-------------- -------------- ------------
Total other cash
provided 14,641,260 109,840,110 23,447,108
-------------- -------------- ------------
Net change in cash and short-term
investments 2,082,376 95,938,469 1,171,421
Cash and short-term investments,
beginning of year 99,495,800 3,557,331 2,385,910
-------------- -------------- ------------
Cash and short-term investments,
end of year $ 101,578,176 $ 99,495,800 $ 3,557,331
============== ============== ============
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE> 50
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, 1994
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").
The Company issues fixed and variable annuity contracts. Amounts invested
in variable annuity 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 variable annuity contracts issued by the
Company and FNA.
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.
6
<PAGE> 51
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 1993 and 1992 financial statements are presented
differently than in prior years to conform with 1994 presentation
guidelines.
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.
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 and minimum lending rates for mortgage loans were 9.00% and
7.25% in 1994, 8.625% and 6.750% in 1993, and 10% and 8% in 1992,
respectively.
7
<PAGE> 52
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
-------------
Investments and Investment Income, continued
--------------------------------------------
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, 1994, 1993, and 1992, the Company held
$414,974, $5,682,476, and $3,245,424, respectively, of mortgages in
default at statement value. As of year end, there were no mortgages with
interest overdue in excess of one year. In 1994, 1993 and 1992, the
Company wrote-down $1,745,682, $1,915,623, and $2,119,018, 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 1994, 1993 and 1992, the Company transferred, in satisfaction of debt,
mortgages with statement values of $6,407,174, $4,413,889 and $7,088,100,
respectively to foreclosed real estate. Subsequently, in 1994, 1993 and
1992, the Company wrote-down $0, $1,016,484, and $2,119,018, 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 $4,217,786 of foreclosed real
estate.
Short-Term Investments
----------------------
Short-term investments generally consist of bonds, 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) provides an expected reserve for
investment losses from mortgages, real estate and other invested assets as
well as from 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 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. Total net gains
(losses) of $(59,933), $1,807,018 and $1,727,845 were realized of which
$541,484, $495,672 and $130,957 were amortized and included in net
investment income in 1994, 1993 and 1992, respectively.
8
<PAGE> 53
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
--------------------
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.
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.
Separate Account
----------------
Separate account assets represent mutual funds held for the exclusive
benefit of the variable annuity 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 are offset by an
equivalent change in the liabilities related to the separate accounts.
Transfers from separate account, net, primarily represent the difference
between the contract owner's account value and the CARVM reserve.
Income Taxes
------------
The Company files a consolidated federal income tax return with its
subsidiaries, FNA and NASL Financial. The Company will continue to file
separate state income tax returns.
9
<PAGE> 54
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
------------------
<TABLE>
C. Investments
-----------
Net investment income was as follows:
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Bonds $16,182,157 $14,861,152 $17,162,210
Common stock 498,222 125,986 84,307
Equity in
undistributed income
737,688 (747,294) (419,385)
Short-term investments 1,664,563 104,719 245,950
Mortgage loans 12,026,724 13,830,160 14,283,015
Real estate 1,248,043 635,245 734,140
Policy loan interest 10,658 66,228 35,931
Amortization of IMR 541,484 495,672 130,957
Investment expenses (2,349,980) (1,520,742) (1,719,498)
----------- ----------- -----------
Net investment income $30,559,559 $27,851,126 $30,537,627
=========== =========== ===========
</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.
10
<PAGE> 55
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, 1994 and 1993 are as follows:
<CAPTION>
December 31, 1994
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands) ---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
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>
<TABLE>
<CAPTION>
December 31, 1993
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands) ---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury
securities and
obligations of U.S.
Government agencies $ 42,933 $ 736 $ 2 $ 43,667
Corporate securities 143,432 3,232 877 145,787
Mortgage-backed
securities 28,825 -- -- 28,825
-------- ------ ---- --------
Totals $215,190 $3,968 $879 $218,279
======== ====== ==== ========
</TABLE>
11
<PAGE> 56
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, 1994, 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 $ 31,093 $ 29,045
Due after one year
through five years 174,214 173,698
Due after five years
through ten years 77,282 75,043
Due after ten years 20,531 19,756
-------- --------
Sub-totals 303,120 297,542
Mortgage-backed
securities 30,853 28,602
-------- --------
Totals $333,973 $326,144
======== ========
</TABLE>
Gross gains of $1,600,852, $2,015,587 and $2,386,986 and gross losses of
$1,660,785, $208,569 and $659,141 were recognized on those sales for the
years ended December 31, 1994, 1993 and 1992, respectively. Net realized
gains (losses) of $(59,933), $1,797,140 and $1,925,009 respectivley, were
transferred to IMR.
The statement and fair market value of the Company's mortgage loans at
December 31, 1994, were as follows (in thousands):
<TABLE>
<CAPTION>
Statement Value Fair Market Value
--------------- -----------------
<S> <C>
$115,430 $114,867
======== ========
</TABLE>
The market value of the Company's mortgage loans were determined using a
discounted cash flow formula with interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality. For
mortgage loans classified as non-performing, the market value was set
equal to the lesser of discounted cash flows or the market value of the
underlying property. The carrying amount of accrued interest approximates
its fair value.
Policy loans are an integral component of insurance policies, therefore,
it is not practicable to value policy loans.
12
<PAGE> 57
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
------------------
D. Federal Income Taxes
--------------------
The Company prepares a consolidated federal income tax return with FNA and
NASL Financial. At December 31, 1994 and 1993 the Company had operating
loss carryforwards of approximately $23,000,000 and $12,000,000,
respectively, which expire between the years 2007 and 2009. The Company
also has a capital loss carryforward of $920,000 which will expire in
1999.
<TABLE>
E. Life and Annuity Actuarial Reserves
-----------------------------------
The Company issues flexible premium deferred combination fixed and
variable annuity contracts. Reserves for these contracts are established
using the Commissioners Annuity Reserve Valuation Method ("CARVM") as
adopted by the State of Delaware Insurance Department. The reserves for
the fixed portion of the contracts are held in the general account and the
reserves for the variable portion of the contracts are held in the
separate account. In addition, the Company holds a minimum death benefit
guarantee reserve in the general account, in the amount of $3,947,231 to
cover the death benefit guarantees on the variable portion of the
contracts. The Company does not offer surrender values in excess of the
reserves.
<CAPTION>
Withdrawal characteristics of Annuity Actuarial Reserves and
Deposit Liabilities are as follows:
<S> <C> <C>
Subject to discretionary
withdrawal with market
value $ 392,213,535 9.72%
Subject to discretionary
withdrawal
91,926,118 2.28
Subject to discretionary
withdrawal at market value
3,518,554,701 87.23
Subject to discretionary
withdrawal at book value 14,552,228 .36
-------------- -----
Subtotal 4,017,246,582 99.59%
Not subject to discretionary
withdrawal provision 16,453,493 .41
-------------- -----
Total annuity actuarial
reserves and deposit fund
liabilites $4,033,700,075 100%
============== =====
</TABLE>
13
<PAGE> 58
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------------
F. Reinsurance
-----------
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. At December 31, 1994 and 1993, the Company's
liability for future policy benefits was $1,635,097 and $1,963,273,
respectively. The benefit payments under this agreement are substantially
offset by investment income and the reduction in reserves.
During 1987, the Company entered into a modified coinsurance agreement
with an unaffiliated reinsurer to cede 90% of its variable annuity
contracts (policy form 203-VA). Effective October 1, 1988, the Company
recaptured 18% to it's parent, NAL, under substantially similar terms to
the agreement with the unaffiliated reinsurer. The recapture fee paid to
the unaffiliated reinsurer was substantially offset by the initial
allowance received from NAL.
Effective July 1, 1992, the Company recaptured all remaining third party
reinsurance and ceded an additional 18% of policy form 203-VA to NAL. Upon
recapture, 1992 operating results were negatively affected by the cost of
the net recapture fee which resulted in a non-recurring charge of $14
million.
The modified coinsurance agreement with NAL provided an expense allowance
on premiums received to be repaid out of a portion of the gross margins on
the product. The agreement transferred full risk of mortality,
persistency and investment risks to the reinsurer with respect to the
portion reinsured.
On December 31, 1993 the Company entered into a modified coinsurance
agreement with an unaffiliated reinsurer 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 1993 (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.
14
<PAGE> 59
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, a non- related third party
bringing the portion of these conracts 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 29, 1994, the Company entered into a Letter of Intent
to reinsure a portion of its policy forms 207-VA, VFA, VENTURE.001, and
VENTURE.003 with Paine Webber Life. 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. 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. In return for this reinsurance, the Company expects to
receive a net consideration of approximately $1.3 million as of December
31, 1994. This amount has been recorded as a surplus adjustment.
G. Related Party Transactions
--------------------------
The Company utilizes various services administered by NAL, such as payroll
and investment accounting. The charges for these services was
approximately $234,000, $232,000 and $180,000, in 1994, 1993 and 1992,
respectively. At December 31, 1994, the Company had a net liability to
NAL for $979,931.
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 1994, 1993 and 1992 were approximately
$418,000, $310,000 and $128,000, respectively. At December 31, 1994, the
Company had a net receivable from FNA for $728,117.
The Company's insurance contracts are distributed through NASL Financial
pursuant to an underwriting agreement. 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 contract
sales. At December 31, 1994, the Company had a receivable from NASL
Financial for $162,905.
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.
15
<PAGE> 60
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
---------------------
H. Investments on Deposit with Regulatory Authorities
--------------------------------------------------
Bonds and United States Treasury Notes with a carrying value of $6,260,154
at December 31, 1994, and $6,571,966 at December 31, 1993, were on deposit
with, or in custody accounts on behalf of, certain state insurance
departments.
I. Borrowed Money
--------------
The Company has a line of credit with State Street Bank and Trust, in the
amount of $10,000,000, bearing interest at the bank's prime rate (8.5% at
December 31, 1994) . The line of credit is unsecured. There were no
outstanding balances at December 31, 1994 and 1993. Interest expense was
approximately $81,600, $236,000 and $231,000 in 1994, 1993 and 1992,
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. The amount outstanding at December 31,
1994 in the form of a term loan, $100 million, is payable in twenty equal
quarterly installments over five years. Interest is due quarterly in
arrears. The interest rate was initially determined at the greater of the
prime rate or the Federal Funds rate plus 0.50% and subsequently converted
on January 5, 1995 to LIBOR plus an interest rate margin. Accrued
interest at December 31, 1994 is $23,652.
The $50 million revolving credit facility has a term that terminates on
December 30, 1996. Borrowings during the first year will convert to a
four year term loan payable in sixteen equal quarterly installments.
Borrowings during the second year will convert to a three year term loan
payable in twelve equal quarterly installments.
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.
16
<PAGE> 61
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
----------------------
J. Payable to Parent
-----------------
On June 29, 1994, the Company paid $30,600,000 to NAL Resources Limited,
an affiliate of NAL, representing principal and interest due on the
$30,000,000, discount promissory note.
K. Surplus Notes
-------------
The Company received $20,000,000 on December 20, 1993 pursuant to a
surplus note agreement with 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,
1994 is $1,648,219.
L. 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 1994, 1993, and 1992 as the plan was
subject to the full funding limitation under the Internal Revenue Code.
At December 31, 1994 the NAL plan's total accumulated benefit obligation,
determined in accordance with Financial Accounting Standards No. 87, and
valued as of January 1, 1994 based on an assumed interest rate of 7%, was
$9,735,913, including vested benefits of $9,607,626, and fair value asset
$23,064,906.
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 $167,148, $145,356, and $89,218 in 1994, 1993 and 1992,
respectively.
17
<PAGE> 62
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
-------------------
M. Leases
------
The Company leases its office space and various office equipment under
operating lease agreements. For the years ended December 31, 1994, 1993
and 1992 the Company incurred rent expense of $840,233 and $718,579, and
$714,934, 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, 1994 is $1,200,000.
<TABLE>
Leases
------
The minimum lease payments associated with the office space and various
office equipment under operating lease agreements is as follows:
<CAPTION>
Minimum
Lease
Year Payments
--------------- ----------
<S> <C>
1995 $ 995,741
1996 999,958
1997 1,035,167
1998 1,025,433
1999 1,025,183
Remaining years 3,075,549
----------
Total $8,157,031
</TABLE> ==========
The Company also guarantees FNA's office space lease which has an annual
cost to FNA of approximately $77,000.
N. Interest Rate Swap Contract
---------------------------
The Company entered into an interest rate agreement with NAL for the
purpose of minimizing exposure to fluctuations in interest rates of
specific assets held by the Company. The notional amount of the matched
swap outstanding at December 31, 1994 and 1993 was $5,000,000. The
unexpired term at December 31, 1994 was 5 years, 4 months. During the
term of a swap, the net swap settlement amount is accrued over time as an
adjustment over the remaining life of the underlying financial instrument.
There are no matched swaps in a loss position as of December 31, 1994 and
1993. The Company did not enter into any unmatched interest rate swap
agreements during 1994 or 1993. Any credit risk is considered remote.
18
<PAGE> 63
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, continued
-----------------
O. 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 contracts issued by the Company. The guarantee covers all
outstanding fixed annuity contracts, including those issued prior to the
date of the guarantee agreement.
19
<PAGE> 64
<TABLE>
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY (A WHOLLY-OWNED
SUBSIDIARY OF NORTH AMERICAN
LIFE ASSURANCE COMPANY)
ANNUAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1994
<CAPTION>
Schedule 1 - Selected Financial Data
---------------
<S> <C>
Investment Income Earned
Government bonds $ 3,010,196
Other bonds (unaffiliated) 13,009,438
Common stocks of affiliates 1,235,910
Mortgages loans 12,026,724
Real estate 1,248,043
Premium notes, policy loans and liens 10,658
Short-term investments 1,664,563
Aggregate write-ins for investment income 162,523
------------
Gross investment Income $ 32,368,055
============
Real Estate Owned - Book Value less
Encumbrances $ 4,745,558
============
Mortgate Loans - Book Value
Commerical mortgages $115,429,835
============
Total mortgage loans $115,429,835
============
Mortgage Loans By Standing - Book Value:
Good Standing $100,806,913
============
Good standing with restructured terms $ 14,207,948
============
Interest overdue more than three months,
not in foreclosure 0
============
Foreclosure in process $ 414,974
============
Bonds and Stocks of Parents, Subsidiaries and
Affiliates - Book Value
Common Stocks $ 10,994,472
============
Bonds and Short-Term Investments by Class
and Maturity:
Bonds by Maturity-Statement Value
Due within one year $132,672,076
Over 1 year through 5 years 174,432,495
Over 5 years through 10 years 80,553,003
Over 10 years through 20 years 12,472,656
Over 20 years 35,421,032
------------
Total by Maturity $435,551,262
============
Bonds by Class - Statement Value
Class 1 $381,088,020
Class 2 52,153,242
Class 3 2,310,000
------------
Total by Class $435,551,262
============
Total Bonds Publicly Traded $435,551,262
============
</TABLE>
20
<PAGE> 65
<TABLE>
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY (A WHOLLY-OWNED
SUBSIDIARY OF NORTH AMERICAN
LIFE ASSURANCE COMPANY)
ANNUAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1994
<CAPTION>
Schedule 1 - Selected Financial Data
---------------
<S> <C>
Common Stocks - Market Value $ 11,039,222
==============
Supplementary Contracts in Force
Ordinary - Involving Life Contingencies
Income Payable $ 316,599
==============
Ordinary - Not Involving Life-Contingencies
Income Payable $ 1,314,981
==============
Annuities:
Ordinary
Immediate - Amount of Income Payable $ 2,935,874
==============
Deferred - Fully Paid Account Balance $3,942,976,224
==============
Group
Fully Paid Account Balance $ 229,641,487
==============
</TABLE>
21
