SCUDDER HORIZON PLAN
PROSPECTUS FOR
FLEXIBLE PREMIUM VARIABLE DEFERRED ANNUITY
This Prospectus describes the no sales load Flexible Premium Variable
Deferred Annuity (the "Contract") offered by Charter National Life
Insurance Company ("Charter"), 8301 Maryland Avenue, St. Louis, Missouri
63105. The Contract is designed to provide for accumulation of capital on
a tax-deferred basis for retirement or other long-term purposes. The
Contract is available to individuals, as well as to certain retirement
plans and individual retirement accounts that qualify for special federal
income tax treatment. The Contract also may be purchased for use as an
Individual Retirement Annuity that qualifies for special federal income tax
treatment applicable to "IRAs."
The Contract may be purchased for a minimum initial payment of $2,500.
No commission or sales charge is deducted from the purchase payments or
from amounts payable upon surrender of the Contract. The owner of a
Contract (the "Owner") may make additional payments subject to certain
conditions and limitations.
An Owner may direct that payments accumulate on a completely variable
basis, a completely fixed basis, or a combination variable and fixed basis.
To the extent that an Owner elects to have payments accumulate on a
variable basis, payments under the Contract will be allocated to one or
more subaccounts (the "Subaccounts") of the Charter National Variable
Annuity Account (the "Variable Account"). Each Subaccount invests
exclusively in one of the following mutual fund portfolios of the Scudder
Variable Life Investment Fund, an investment company registered under the
Investment Company Act of 1940, as amended (the "Fund"): the Money Market
Portfolio, the Bond Portfolio, the Capital Growth Portfolio, the Balanced
Portfolio, the Growth and Income Portfolio, and the International
Portfolio. Scudder, Stevens & Clark, Inc. acts as sole investment adviser
to the Fund. The Owner bears the complete investment risk for all payments
allocated to the Variable Account. (Continued on next page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Date of This Prospectus is May 1, 1995
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(Continued from cover page)
Please read this Prospectus carefully and retain it for future
reference. The Prospectus sets forth the information that a prospective
investor should know before investing in a Contract. A Statement of
Additional Information about the Contract and the Variable Account, which
has the same date as this Prospectus, has been filed with the Securities
and Exchange Commission and is incorporated herein by reference. The
Statement of Additional Information is available at no cost by writing to
Charter National Life Insurance Company, 8301 Maryland Avenue, St. Louis,
Missouri 63105 or by calling (800) 242-4402. The table of contents of the
Statement of Additional Information is included at the end of this
Prospectus.
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TABLE OF CONTENTS
Page
DEFINITIONS 1
SUMMARY 4
FEE TABLE 8
CONDENSED FINANCIAL INFORMATION 10
Financial Statements for the Variable Account and Charter 11
CALCULATION OF YIELDS AND TOTAL RETURNS 11
OTHER PERFORMANCE DATA 12
CHARTER AND THE VARIABLE ACCOUNT 13
Charter National Life Insurance Company 13
Charter National Variable Annuity Account 13
SCUDDER VARIABLE LIFE INVESTMENT FUND 14
Addition, Deletion, or Substitution of Investments 16
THE GENERAL ACCOUNT 17
THE CONTRACT 18
Contract Application and Issuance of Contracts 18
Examination Period 19
Payments 20
Allocation of Payments 21
Transfers 22
Account Value 23
Contract Ownership 25
Assignment of Contract 25
State Exceptions 26
DISTRIBUTIONS UNDER THE CONTRACT 26
Full and Partial Surrender Privileges 26
Annuity Payments 27
Annuity Income Options 28
Maturity Date 30
Death Benefit 30
Beneficiary Provisions 31
Death of Owner 31
Employment-Related Benefit Plans 31
CHARGES AND DEDUCTIONS 32
Mortality and Expense Risk Charge 32
Contract Administration Charge 33
Records Maintenance Charge 33
Premium Taxes 34
Other Taxes 34
Transfer Charges 34
Charges Against the Fund 34
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TABLE OF CONTENTS
Page
CERTAIN FEDERAL INCOME TAX CONSEQUENCES 35
Tax Status of the Contract 36
Taxation of Annuities 38
Taxation of Charter 41
GENERAL PROVISIONS 41
The Contract 41
Deferment of Payment and Transfers 42
Contract Expiration 42
Misstatement of Age or Sex 42
Nonparticipating Contract 43
Written Notices and Requests; Owner Inquiries 43
Records and Reports 43
DISTRIBUTION OF THE CONTRACT 43
VOTING RIGHTS 44
LEGAL PROCEEDINGS 45
ADDITIONAL INFORMATION 45
TABLE OF CONTENTS FOR STATEMENT
OF ADDITIONAL INFORMATION 46
If you have any questions about your Contract please call or write our home
office at 8301 Maryland Avenue, St. Louis, Missouri 63105, (800) 242-4402.
The Contract is not available in all States.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESMAN, OR OTHER
PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON.
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DEFINITIONS
Account Value -- The total on any Valuation Date of the amount(s) in
the Subaccount(s) and General Account of a Contract. The Account Value is
referred to in the Contract as the Accumulated Value.
Age -- The Annuitant's age on his or her birthday nearest to the
Contract Anniversary.
Annuitant -- The person whose life is used to determine the duration
and amount of any Annuity Payments and upon whose death prior to the
Maturity Date a Death Benefit under the Contract is paid.
Annuity Income Option -- A method of receiving Annuity Payments.
Annuity Payments -- A series of payments made under the Contract,
payable if the Annuitant is living on the Maturity Date and the Contract is
in force at such time.
Beneficiary -- The person(s) designated under the Contract to receive
the benefits of the Contract if no Owner is living.
Charter -- Charter National Life Insurance Company.
Code -- The Internal Revenue Code of 1986, as amended, or any
successor provision or provisions.
Contract -- The no sales load Flexible Premium Variable Deferred
Annuity offered by Charter and described in this Prospectus. It includes
the Contract, application, riders, and any endorsements.
Contract Anniversary -- The same date in each year as the Contract
Date.
Contract Date -- The date set forth in the Contract that is used to
determine Contract Years, Contract Months, and Contract Anniversaries. The
Contract Date will be the same as the Effective Date unless the Effective
Date is the 29th, 30th, or 31st of a month, in which case the Contract Date
will be the 28th of the same month.
Contract Month -- A period beginning on a Monthly Anniversary and
ending on the day immediately preceding the next Monthly Anniversary.
Contract Year -- A period beginning on a Contract Anniversary and
ending on the day immediately preceding the next Contract Anniversary.
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Death Benefit -- An amount equal to the greater of the Account Value
or the Guaranteed Death Benefit, payable under the Contract in the event of
the death of the Annuitant prior to the Maturity Date.
Declaration Period -- A period of time between 1 and 10 years during
which specified rates of interest will be paid on Payments allocated to the
General Account.
Effective Date -- A date within two business days after a completed
application and the full initial Payment have been received by Charter.
Examination Period -- The period of time during which the Owner may
cancel the Contract and receive a refund of the initial Payment plus or
minus gains or losses on investments of the Payment in selected Subaccounts
and/or interest credited on Payment amounts allocated to the General
Account. The Owner may cancel the Contract within 10 days after receipt of
such Contract.
Fund -- The Scudder Variable Life Investment Fund, an open-end,
diversified management investment company in which the Subaccounts invest.
General Account -- The account containing assets of Charter other than
those allocated to the Variable Account or any other separate account of
Charter. By allocating Payments to the General Account the Owner is
entitled to a specified rate of interest for a period of 1 to 10 years.
Guaranteed Death Benefit --The sum of the Payments made less any
partial surrenders.
Home Office -- The principal office of Charter, located at 8301
Maryland Avenue, St. Louis, Missouri 63105.
Joint Annuitant -- If Annuity Income Option 2 is selected, the person
designated by the Owner whose life, in addition to the life of the
Annuitant, is used to determine the duration of the Annuity Payments.
Joint Owner -- A person sharing the privileges of ownership as stated
in the Contract. If a Joint Owner is named, Charter will presume ownership
to be as joint tenants with right of survivorship.
Maturity Date -- The date on which Annuity Payments are scheduled to
begin if the Annuitant is living.
Monthly Anniversary -- The same date in each month as the Contract
Date.
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Net Payment -- A Payment less any applicable premium taxes.
Nonqualified Contract -- A Contract other than a Qualified Contract.
Owner -- The person having the privileges of ownership stated in the
Contract, including the right to receive Annuity Payments if the Annuitant
is living on the Maturity Date and the Contract is in force.
Payment -- Any amount paid to purchase or increase the investment in
the Contract. Payments are referred to in the Contract as Premiums.
Portfolio -- One of the separate investment portfolios of the Fund in
which the Variable Account invests. They are: the Money Market Portfolio,
the Bond Portfolio, the Capital Growth Portfolio, the Balanced Portfolio,
the Growth and Income Portfolio, and the International Portfolio.
Proof of Death -- One of the following: (i) a certified copy of a
death certificate, (ii) a copy of a certified decree of a court of
competent jurisdiction as to the finding of death, or (iii) any other proof
satisfactory to Charter.
Qualified Contract -- A Contract that qualifies as an individual
retirement annuity under Section 408(b) of the Code or a Contract purchased
and held by a retirement plan or as an individual retirement account that
qualifies for special federal income tax treatment under Section 401(a) or
408(a) of the Code.
SEC -- Securities and Exchange Commission.
Subaccount -- An investment division of the Variable Account. Each
Subaccount invests in shares of a different mutual fund Portfolio.
Unit Value -- The value of each unit which is calculated each
Valuation Period. It is similar to the net asset value of a mutual fund.
The Unit Value for each Subaccount is stated in the section of the
prospectus entitled "CONDENSED FINANCIAL INFORMATION" under the heading
"Accumulation Unit Value".
Valuation Date -- Each day on which valuation of the assets of the
Variable Account is required by applicable law, which currently is each day
that the New York Stock Exchange is open for trading.
Valuation Period -- The period that begins on the close of one
Valuation Date and ends on the close of the succeeding Valuation Date.
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Variable Account -- Charter National Variable Annuity Account, which
is a separate account of Charter consisting of assets allocated under the
Contracts to the Variable Account as well as assets allocated under other
variable annuity contracts issued by Charter.
Written Notice (or Written Request) -- A notice or request in writing
by the Owner or other person to Charter. Such notice or request must be on
the form provided by Charter and/or contain such information as Charter
requires to process the notice or request. All written notices and
requests must be directed to Charter at its Home Office.
1940 Act -- The Investment Company Act of 1940, as amended.
SUMMARY
This summary contains certain basic information about the Contract.
The following questions and answers should be read in conjunction with the
more detailed information appearing elsewhere in this Prospectus.
Why should a person consider purchasing a Contract?
The Contract is designed to provide for accumulation of capital on a
tax-deferred basis for retirement or other long-term purposes.
How can a Contract be purchased?
The Contract may be purchased for a minimum initial Payment of $2,500.
No commission or sales charge is deducted from the purchase price or from
amounts payable upon surrender of the Contract. Payments may be from a
variety of sources, including salary, wages, savings, inheritance, a real
estate sale, and rental or investment income. An Owner may make additional
Payments under the Contract, subject to certain conditions and limitations.
As with the initial Payment, an Owner will not be charged a commission or
sales charge for additional Payments invested in the Contract. (See
"Contract Application and Issuance of Contracts," p. 18 and "Payments," p.
20)
Can this Contract be used as an IRA?
Yes, the Contract is available to certain individuals purchasing
individual retirement annuities. It is also available to certain
retirement plans and retirement accounts that qualify for special federal
income tax treatment. Charter requires that persons purchase separate
Contracts if they desire to invest moneys qualifying for different annuity
tax treatment under the Code.
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What variable investment options are available under the Contract?
Currently, an Owner may invest in the following mutual fund
Portfolios: the Money Market Portfolio, the Bond Portfolio, the Capital
Growth Portfolio, the Balanced Portfolio, the Growth and Income Portfolio,
and the International Portfolio. All Portfolios are part of the Scudder
Variable Life Investment Fund. The assets of each Portfolio are held
separately from the other Portfolios and each has separate investment
objectives and policies. The investment objectives and policies are
described more fully in the attached prospectus for the Fund. The
investment adviser for all Portfolios is Scudder, Stevens & Clark, Inc.
(See "Scudder Variable Life Investment Fund," p. 14)
What fixed rate options are available under the Contract?
An Owner may allocate funds to the General Account in order to receive
a specified rate of return. Payments to the General Account will receive
specified rates of interest that are declared and guaranteed by Charter for
periods of between 1 and 10 years. At the end of the Declaration Period,
the Owner has the option to move funds into any available Subaccount or
into another Declaration Period that has a new specified rate of interest,
which is guaranteed to be no less than 3.5%. Scudder, Stevens & Clark,
Inc. provides investment advice to Charter regarding assets in the General
Account derived from Horizon Plan Contracts. (See "The General Account,"
p. 17)
How are Payments allocated under the Contract?
The Owner may allocate amounts to one or more Subaccounts and/or the
General Account. Each Subaccount invests in a separate mutual fund
Portfolio with distinct investment objectives and policies. The Account
Value will vary with the investment performance of the selected Subaccounts
(and corresponding mutual fund Portfolios). Amounts allocated to the
General Account will earn interest at rates declared and guaranteed by
Charter. (See "Allocation of Payments," p. 21, "Charter National Variable
Annuity Account," p. 13 and "The General Account," p. 17)
What is the purpose of the Variable Account?
The Variable Account was established by Charter under the laws of the
State of Missouri on May 15, 1987, to invest payments received under
variable annuities offered by Charter, including the Contracts. Under
Missouri law, the assets in the Variable Account associated with the
Contracts are not affected by, nor chargeable with, liabilities arising out
of any other business conducted by Charter. To the extent that an Owner
allocates Payments to the Variable Account, the Account Value will vary in
accordance with the investment performance of the Subaccount(s) selected by
the Owner. Therefore, the Owner bears the entire investment risk under the
Contract for any amounts allocated to the Variable Account. (See "Charter
National Variable Annuity Account," p. 13)
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Can assets be transferred within the Contract?
Yes. The Owner has the flexibility to transfer assets within the
Contract. Amounts may be transferred among the Subaccounts and from the
Subaccounts to the General Account at any time. Amounts may be transferred
from the General Account to the Subaccounts or within the General Account
at the end of a Declaration Period. Currently, no charge is being imposed
for any transfers among Subaccounts or the General Account. In the future,
Charter, at its sole discretion, may decide at any time to impose a
transfer charge of $10 from each Subaccount from which funds are
transferred for the third and subsequent transfer requests made during a
Contract Year. (See "Transfers," p. 22)
What are the current charges and deductions associated with the Contract?
Deductions will be made from the Contract's Account Value on a daily
basis for (i) costs incurred by Charter in administering the Contract at an
annual rate of .30% of the value of net assets in each Subaccount, and (ii)
the assumption by Charter of certain mortality and expense risks in
connection with the Contract at an annual rate of .40% of the value of net
assets in each Subaccount. These daily charges are not imposed against the
General Account. (See "Charges and Deductions," p. 32)
Currently, Charter does not charge an annual maintenance fee; however,
the Contract permits Charter to deduct a maximum amount of $40. (See
"Records Maintenance Charge," p. 33)
Upon purchase of the Contract or investment of additional Payments,
Charter may deduct any applicable premium tax. The amount of premium tax
varies from state to state. Currently, most states do not assess a premium
tax. (See "Premium Taxes," p. 34)
The charges noted above are those currently being deducted by Charter.
For a more detailed discussion, including maximum level of charges set
forth in the Contract, see "Charges and Deductions," p. 32.
Finally, the net asset value of the Subaccounts reflects the
investment advisory fee and other expenses incurred by the Fund. (See
"Charges Against the Fund," p. 34)
What are the annuity benefits under the Contract?
If the Annuitant is living on the Maturity Date and the Contract is in
force, Annuity Payments will be made to the Owner in accordance with the
terms of the Contract and the Annuity Income Option selected by the Owner.
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Three Annuity Income Options are currently available: life annuity with
installment refund, joint and survivor life annuity with installment
refund, and installments for life. In addition, an Owner may select any
other Annuity Income Option which is offered by Charter on the Maturity
Date of the Contract. The amount of the Annuity Payments under the Annuity
Income Options will be fixed at the Maturity Date.
What other distributions can be made under the Contract?
A full or partial surrender of the Contract may be made at any time,
subject to certain conditions. No commission or surrender charge is
deducted from the Account Value upon full or partial surrender of the
Contract. No partial or full surrender may be made after the Maturity Date
or the Annuitant's death. (See "Full and Partial Surrender Privileges," p.
26) If the Annuitant dies before the Maturity Date, the greater of the
Account Value or the Guaranteed Death Benefit will be paid to the Owner of
the Contract. (See "Death Benefit," p. 30) If the Owner of a Nonqualified
contract dies before the Maturity Date and prior to the Annuitant's death,
the Account Value will be paid in a lump sum no later than 5 years
following the Owner's death. (See "Death of Owner," p. 31)
What are the federal income tax consequences of investment in the Contract?
With respect to Owners who are natural persons, there should be no
federal income tax payable on increases in the Account Value until there is
a distribution or deemed distribution under the Contract. Generally, a
portion of any distribution resulting from an Annuity Payment or full or
partial surrender of the Contract, or deemed distribution resulting from a
pledge or assignment of the Contract prior to the Maturity Date, will be
taxable as ordinary income. The taxable portion of certain distributions
will be subject to withholding unless the recipient elects otherwise. In
addition, a penalty tax may apply to distributions or deemed distributions
under certain circumstances. (See "Certain Federal Income Tax
Consequences," p. 35)
Can the Contract be returned after it is delivered?
Yes. The Contract contains a provision for an Examination Period,
which permits a purchaser to cancel a Contract by returning the Contract to
Charter at its Home Office within 10 days after receipt of the Contract.
Except as noted in "Examination Period" and "State Exceptions", in the
event of cancellation Charter will return the initial Payment, plus or
minus gains or losses from investment of the Payment in the selected
Subaccount(s) plus interest earned on Payment amounts allocated to the
General Account. (See "Examination Period," p. 19 and "State Exceptions,"
p. 26)
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FEE TABLE
The following illustrates the current charges and deductions under the
Contract, as well as fees and expenses of the Fund for the 1994 calendar
year. The purpose of this table is to assist in understanding the various
cost and expenses that the Owner will bear directly and indirectly.
Information pertaining to the Fund has been provided by the Fund. For more
information see "CHARGES AND DEDUCTIONS" and the Fund's prospectus that is
attached to this Prospectus.
Contract Owner Transaction Expenses
Sales Load Imposed on Payments NONE
Deferred Sales Load NONE
Surrender Fee NONE
Transfer Charge NONE
Annual Records Maintenance Charge NONE
Variable Account Annual Expenses
Mortality and Expense Risk Charge 0.40%
Contract Administration Charge 0.30%
Total Variable Account Annual Expenses 0.70%
Scudder Variable Life Investment Fund Annual Expenses
(as a percentage of average net assets for the 1994 calendar year)
Other Total
Expenses Portfolio
Management (after Reim- Operating
Fees bursement) Expenses
Money Market Portfolio 0.370% 0.190% 0.560%
Bond Portfolio 0.475% 0.105% 0.580%
Capital Growth Portfolio 0.475% 0.105% 0.580%
Balanced Portfolio 0.475% 0.275% 0.750%*
International Portfolio 0.875% 0.205% 1.080%
Growth and Income Portfolio 0.000% 0.750% 0.750%**
* Scudder, Stevens & Clark, Inc. (the Adviser) voluntarily did not impose
part of its administrative fee in 1994. Had the fee been imposed, the
ratio of operating expenses to average net assets for the year ended
12/31/94 would have been .780% for the Balanced Portfolio.
** Scudder, Stevens & Clark, Inc. (the Adviser) voluntarily did not impose
all of its management fee and part of its administrative fee in 1994. Had
the fee been imposed, the ratio of operating expenses to average net assets
for the year ended 12/31/94 would have been 1.610% for the Growth & Income
Portfolio. The management fee may or may not be imposed in the future.
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Example
The following example illustrates the expenses the Owner would pay on a
$1,000 investment, assuming 5% annual return on assets, if the Owner
continued the Contract, surrendered or annuitized at the end of each
period:
1 Year 3 Years 5 Years 10 Years
Money Market Subaccount $13 $40 $69 $152
Bond Subaccount $13 $41 $70 $155
Capital Growth Subaccount $13 $41 $70 $155
Balanced Subaccount $15 $46 $79 $174
International Subaccount $18 $56 $96 $209
Growth and Income Subaccount $15 $46 $79 $174
The fee table and example set forth above are based upon the current
level of charges deducted by Charter. Charter reserves the right to
increase the Mortality and Expense Risk Charge to .70% per year, establish
a Records Maintenance Charge of up to $40 per year and impose a transfer
charge of $10 for the third and each subsequent transfer request made
during a Contract Year. For a more detailed description of all charges set
forth in the Contract, see "CHARGES AND DEDUCTIONS."
Neither the fee table nor the example reflects any premium tax which
may be deducted. See "CHARGES AND DEDUCTIONS -- Premium Taxes."
Charter, as well as other insurance companies whose separate accounts
invest in the Fund, has agreed to reimburse the Fund to the extent that the
total operating expenses exceed .75% for each Portfolio except for the
International Portfolio, where total operating expenses are to be
reimbursed to the extent they exceed 1.50%.
This example should not be considered representative of past or future
expenses, performance or return. Actual expenses may be greater or less
than those shown. The assumed 5% annual return is hypothetical; past or
future annual returns may be greater or less than the assumed return.
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CONDENSED FINANCIAL INFORMATION
The following condensed financial information is derived from the financial
statements of the Variable Account. The data should be read in conjunction with
the financial statements, related notes, and other financial information
included in the Statement of Additional Information.
The following table sets forth certain information regarding the
Subaccounts for a Contract for the period from commencement of business
operations through December 31, 1994.
Accumulation unit value:
<TABLE>
<CAPTION>
Year Ended December 31, Commencement
Subaccount 1994 1993 1992 1991 1990 1989 1988 Date*
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market 16.507 16.030 15.740 15.341 14.606 13.683 12.694 12.500
Bond 19.181 20.287 18.179 17.109 14.653 13.697 12.392 12.500
Capital Growth 22.222 24.773 20.638 19.514 14.096 15.389 12.664 12.500
Balanced 20.270 20.840 19.531 18.389 14.592 15.029 12.704 12.500
International 24.641 25.027 18.287 19.003 17.174 18.830 13.772 12.500
Growth and Income 13.053 N/A N/A N/A N/A N/A N/A 12.500
* All Subaccounts commenced operations on October 6, 1988 except for the Growth
and Income Subaccount which commenced operations on May 1, 1994.
Number of units outstanding at end of period:
<CAPTION>
Year Ended December 31,
Subaccount 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C>
Money Market 3,197,824 1,491,258 1,380,156 972,042 989,667 344,621 6,238
Bond 690,782 755,914 631,581 406,545 210,921 182,698 1,882
Capital Growth 2,683,112 2,351,022 1,798,119 933,120 400,044 227,343 0
Balanced 1,426,280 1,477,645 1,243,891 779,317 492,406 399,068 9,264
International 3,543,387 2,767,700 785,559 446,099 370,916 107,751 1,741
Growth and Income 1,311,518 N/A N/A N/A N/A N/A N/A
</TABLE>
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Financial Statements for the Variable Account and Charter
The financial statements and reports of independent certified public
accountants for the Variable Account and Charter are contained in the
Statement of Additional Information.
CALCULATION OF YIELDS AND TOTAL RETURNS
From time to time, Charter may advertise yields and average annual
total returns for the Subaccounts. In addition, Charter may advertise the
effective yield of the Money Market Subaccount for a Contract. These
figures will be based on historical earnings and are not intended to
indicate future performance.
The yield of a Money Market Subaccount for a Contract refers to the
annualized income generated by an investment under a Contract in the
Subaccount over a specified seven-day period. The yield is calculated by
assuming that the income generated for that seven-day period is generated
each seven-day period over a 52-week period and is shown as a percentage of
the investment. The effective yield is calculated similarly but, when
annualized, the income earned by an investment under a Contract in the
Subaccount is assumed to be reinvested. The effective yield will be
slightly higher than the yield because of the compounding effect of this
assumed reinvestment.
The yield of a Subaccount (except the Money Market Subaccount) for a
Contract refers to the annualized income generated by an investment under a
Contract in the Subaccount over a specified thirty-day period. The yield
is calculated by assuming that the income generated by the investment
during that thirty-day period is generated each thirty-day period over a 12-
month period and is shown as a percentage of the investment.
The average annual total return of a Subaccount for a Contract refers
to return quotations assuming an investment under a Contract has been held
in the Subaccount for various periods of time including, but not limited
to, a period measured from the date the Subaccount commenced operations.
When a Subaccount has been in operation for 1, 5, and 10 years,
respectively, the average annual total return for these periods will be
provided. The total return quotations for a Contract will represent the
average annual compounded rates of return that would equate an initial
investment of $1,000 under a Contract to the redemption value of that
investment as of the last day of each of the periods for which total return
quotations are provided.
The yield and total return calculations for a Contract do not reflect
the effect of any premium taxes that may be applicable to a particular
Contract. To the extent that a premium tax is applicable to a particular
Contract, the yield and/or total return of that Contract will be reduced.
Because charges differ under different variable annuity contracts funded by
the Subaccounts, the yield and total return calculations for the
Subaccounts will be different for the Contracts than for other such
variable annuity contracts.
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For additional information regarding yields and total returns
calculated using the standard formats briefly described above, please refer
to the Statement of Additional Information, a copy of which may be obtained
from Charter.
OTHER PERFORMANCE DATA
Charter may from time to time disclose average annual total return in
non-standard formats and cumulative total return for Contracts funded by
the Subaccounts.
Charter may from time to time also disclose yield, standard total
returns, and non-standard total returns for the Fund's Portfolios,
including such disclosure for periods prior to the date the Variable
Account commenced operations. For periods prior to the date the Variable
Account commenced operations, performance information for Contracts funded
by the Subaccounts will be calculated based on the performance of the
Fund's Portfolios and the assumption that the Subaccounts were in existence
for the same periods as those indicated for the Fund's Portfolios, with the
level of Contract charges that were in effect at the inception of the
Subaccounts for the Contracts.
Non-standard performance data will only be disclosed if the standard
performance data for the required periods is also disclosed. For
additional information regarding the calculation of other performance data,
please refer to the Statement of Additional Information, a copy of which
may be obtained from Charter.
Expenses and performance information for the Contract and each
Subaccount may be compared in advertising, sales literature, and other
communications to expenses and performance information of other variable
annuity products tracked by independent services such as Lipper Analytical
Services, Inc. ("Lipper"), Morningstar and the Variable Annuity Research
Data Service ("V.A.R.D.S.") which monitor and rank the performance and
expenses of variable annuity issuers on an industry-wide basis. From time
to time, Charter may also compare using other indices that measure
performance, such as Standard & Poor's 500 Composite ("S & P 500") or the
Dow Jones Industrial Average ("Dow"). Unmanaged indices may assume
reinvestment of dividends that generally do not reflect deductions for
administrative and management cost and expenses.
Charter may also report other information including the effect of tax-
deferred compounding on a Subaccount's investment returns, or returns in
general, which may be illustrated by tables, graphs, or charts. All income
and capital gains derived from Subaccount investments are reinvested and
compound tax deferred until distributed. Such tax-deferred compounding can
lead to substantial long-term accumulation of assets, provided that the
underlying Portfolio's investment experience is positive.
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CHARTER AND THE VARIABLE ACCOUNT
Charter National Life Insurance Company
Charter is a stock life insurance company incorporated under the laws
of the State of Missouri on December 7, 1955. Charter, with assets of $2.9
billion as of December 31, 1994, is engaged principally in the offering of
insurance products on a direct marketed basis. Charter is authorized to
conduct business in 49 states, the District of Columbia and Puerto Rico.
The rating of Charter as an insurance company by A. M. Best may be referred
to in sales literature, advertisements or other reports from time to time.
These ratings reflect their current opinion of the relative financial
strength and operating performance of an insurance company in comparison to
the norms of the life/health industry. Best's Ratings range from A++ to F.
An A rating means, in the opinion of A. M. Best, that the insurer has
demonstrated a strong ability to meet its respective policyholder and
other contractual obligations. These ratings have no bearing on the
Variable Accounts investment performance. The principal offices of Charter
are located at 8301 Maryland Avenue, St. Louis, Missouri 63105, and its
telephone number at that address is (800) 242-4402.
Charter also is engaged in the insurance business through various
subsidiary companies. Charter's subsidiaries include the Colonial Penn
Group, Inc. which offers life, health, and auto insurance through its two
life and four casualty subsidiaries. Intramerica Life Insurance Company, a
Colonial Penn subsidiary, offers Scudder Horizon Plan to residents of New
York.
Charter is a wholly owned subsidiary of Leucadia National Corporation
("Leucadia"), a New York corporation. Leucadia is a diversified holding
company, the common stock of which is listed on the New York Stock Exchange
and the Pacific Stock Exchange under the symbol ("LUK").
Campet, Inc., a Leucadia subsidiary owns all of the outstanding stock
of CNL, Inc. ("CNL") the principal underwriter for the Contracts. See
"DISTRIBUTION OF THE CONTRACT."
Charter National Variable Annuity Account
The Variable Account was established by Charter as a separate
investment account under the laws of the State of Missouri on May 15, 1987.
The Variable Account will receive and invest the Payments under the
Contracts. In addition, the Variable Account may receive and invest
payments for other variable annuities offered by Charter.
Under Missouri law, that portion of the assets of the Variable Account
equal to the reserves and other contracts liabilities with respect to the
account shall not be chargeable with liabilities arising out of any other
business Charter may conduct. However, assets of the Variable Account will
be available to cover the liabilities of the general account of Charter to
the extent that the assets of the Variable Account exceed its liabilities
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arising under the variable annuity contracts it supports. The obligations
under the Contracts are obligations of Charter.
The Variable Account is divided into Subaccounts. Each Subaccount
invests exclusively in shares of one of the Portfolios of the Fund.
Income, gains, and losses from the assets of each Subaccount are credited
to or charged against such Subaccount without regard to income, gains, or
losses of any other Subaccount or income, gains, or losses arising out of
any other business conducted by Charter.
The Variable Account is registered with the SEC as a unit investment
trust under the 1940 Act and meets the definition of a "separate account"
under the Federal securities laws. Registration with the SEC does not
involve supervision of the management or investment practices or policies
of the Variable Account or Charter by the SEC.
SCUDDER VARIABLE LIFE INVESTMENT FUND
The Variable Account will invest exclusively in shares of the Scudder
Variable Life Investment Fund (the "Fund"). The Fund is registered with
the SEC under the 1940 Act as an open-end, diversified management
investment company. Scudder, Stevens & Clark, Inc. is investment adviser
to the mutual fund Portfolios available under the Contract. The
registration of the Fund does not involve supervision of its management or
investment practices or policies by the SEC. The Fund is designed to
provide an investment vehicle for variable annuity contracts and variable
life insurance policies. Therefore, shares of the Fund are sold only to
insurance company separate accounts, including the Variable Account and
another separate account of Charter. Charter cannot guarantee that the
Fund will always be available for the Contracts, but in the unlikely event
that it is not available, Charter will do everything reasonably practical
to secure the availability of a comparable fund.
In addition to the Variable Account, shares of the Fund are being sold
to variable life insurance and variable annuity separate accounts of other
insurance companies, including an insurance company affiliated with
Charter. In the future, it may be disadvantageous for variable annuity
separate accounts of other life insurance companies, or for both variable
life insurance separate accounts and variable annuity separate accounts, to
invest simultaneously in the Fund, although currently neither Charter nor
the Fund foresees any such disadvantages to either variable annuity owners
or variable life insurance owners. The management of the Fund intends to
monitor events in order to identify any material conflicts between or among
variable annuity owners and variable life insurance owners and to determine
what action, if any, should be taken in response. In addition, if Charter
believes that the Fund's response to any of those events or conflicts
insufficiently protects Owners, it will take appropriate action on its own.
For more information see "Investment Concept of the Fund" in the Fund's
prospectus.
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The Fund currently consists of the following Portfolios: the Money
Market Portfolio, the Bond Portfolio, the Capital Growth Portfolio, the
Balanced Portfolio, the Growth and Income Portfolio, and the International
Portfolio. The Growth and Income Portfolio was added to the Fund on May 1,
1994. Each Portfolio represents, in effect, a separate mutual fund with
its own distinct investment objectives and policies. The income or losses
of one Portfolio generally have no effect on the investment performance of
any other Portfolio.
The investment objectives and policies of the Portfolios available
under the Contracts are summarized below:
Money Market Portfolio: This Portfolio seeks to maintain stability of
capital and, consistent therewith, to maintain liquidity of capital and to
provide current income. This Portfolio seeks to maintain a constant net
asset value of $1.00 per share. It will invest in money market securities
such as U.S. Treasury obligations, commercial paper, and certificates of
deposit and bankers' acceptances of domestic and foreign banks, including
foreign branches of domestic banks, and will enter into repurchase
agreements.
Bond Portfolio: This Portfolio pursues a policy of investing for a
high level of income consistent with a high quality portfolio of debt
securities. It primarily invests in U.S. Government, corporate, and other
notes and bonds.
Capital Growth Portfolio: This Portfolio seeks long-term capital
appreciation and, consistent therewith, current income through a broad and
flexible investment program. The Portfolio seeks to achieve these
objectives by investing primarily in income-producing publicly traded
equity securities, including common stocks and securities convertible into
common stocks.
Balanced Portfolio: This Portfolio seeks a balance of growth and
income from a diversified portfolio of equity and fixed income securities.
The Portfolio also seeks long-term preservation of capital through a
quality-oriented investment approach that is designed to reduce risk.
Growth and Income Portfolio: This Portfolio seeks long-term growth of
capital, current income and growth of income. It primarily invests in
common stocks, preferred stocks, and securities convertible into common
stocks of companies which offer the prospect for growth of earnings while
paying higher than average current dividends.
International Portfolio: This Portfolio seeks long-term growth of
capital primarily through diversified holdings of marketable foreign equity
investments. It invests in companies, wherever organized, which do
business primarily outside the United States. The Portfolio intends to
diversify investments among several countries and not to concentrate
investments in any particular industry.
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There can be no assurance that any Portfolio will achieve its
objective. More detailed information, including a description of the risks
involved in investing in each of the Portfolios, is contained in the
Scudder Variable Life Investment Fund prospectus, a current copy of which
is attached to this Prospectus. Information contained in the Fund's
prospectus should be read carefully before investing in a Contract.
Scudder, Stevens & Clark, Inc. (the "Adviser"), an investment adviser
registered with the SEC under the Investment Advisers Act of 1940, as
amended, manages daily investments and business affairs of the Fund,
subject to the policies established by the Trustees of the Fund. For
rendering advisory services to the Portfolios, the Adviser receives
compensation monthly at annual rates equal to .370%, .475%, .475%, .475%,
.475%, and .875% of the average daily net asset values of the Money Market
Portfolio, Bond Portfolio, Capital Growth Portfolio, Balanced Portfolio,
Growth and Income Portfolio, and the International Portfolio, respectfully.
For additional information, see the Fund's prospectus, a current copy of
which is attached to this Prospectus.
Addition, Deletion, or Substitution of Investments
Charter retains the right, subject to any applicable law, to make
certain changes in the Variable Account and its investments. Charter
reserves the right to eliminate the shares of any Portfolio and to
substitute shares of another Portfolio of the Fund, or of another
registered open-end management investment company, for the shares of any
Portfolio if the shares of the Portfolio are no longer available for
investment or if, in Charter's judgment, investment in any Portfolio would
be inappropriate in view of the purposes of the Variable Account. To the
extent required by the 1940 Act, substitutions or eliminations of shares
attributable to an Owner's interest in a Subaccount will not be made
without prior notice to the Owner and the prior approval of the SEC.
Nothing contained herein shall prevent the Variable Account from purchasing
other securities for other series or classes of variable annuity contracts,
or from effecting an exchange between series or classes of variable annuity
contracts on the basis of requests made by Owners.
New Subaccounts may be established when, in the sole discretion of
Charter, marketing, tax, investment, or other conditions warrant such
additions. Any new Subaccounts may be made available to existing Owners on
a basis to be determined by Charter. Each additional Subaccount will
purchase shares in a Portfolio of the Fund or in another mutual fund or
investment vehicle. Charter may also eliminate one or more Subaccounts if,
in its sole discretion, marketing, tax, investment, or other conditions
warrant such elimination. In the event any Subaccount is eliminated,
Charter will notify Owners and request a reallocation of the amounts
invested in the eliminated Subaccount. If no such reallocation is
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<PAGE>
provided by the Owner, Charter will reinvest the amounts invested in the
eliminated Subaccount in the Subaccount that invests in the Money Market
Portfolio (the "Money Market Subaccount").
In the event of any such substitution, change, or elimination, Charter
may, by appropriate endorsement, make such changes in the Contracts as may
be necessary or appropriate to reflect such substitution, change, or
elimination. Furthermore, if deemed to be in the best interests of persons
having voting rights under the Contracts, the Variable Account may be (i)
operated as a management company under the 1940 Act or any other form
permitted by law, (ii) deregistered under the 1940 Act, in the event such
registration is no longer required, or (iii) combined with one or more
other separate accounts. To the extent permitted by applicable law, Charter
also may transfer the assets of the Variable Account associated with the
Contracts to another separate account.
THE GENERAL ACCOUNT
Payments allocated or transferred to the General Account under the
Contracts become part of the general account assets of Charter, which
support annuity and insurance obligations. The General Account includes
all of Charter's assets, except those assets segregated in separate
accounts. It is Charter's responsibility to invest the assets of the
General Account, subject to applicable law. Scudder, Stevens & Clark, Inc.
assists Charter in managing the assets of the General Account attributable
to the Contracts. Because of exemptive and exclusionary provisions,
interests in the General Account have not been registered under the
Securities Act of 1933 (the "1933 Act"), nor is the General Account
registered as an investment company under the 1940 Act. Accordingly,
neither the General Account nor any interest therein is subject to the
provisions of such statutes, and, as a result, the staff of the SEC has not
reviewed the disclosures in this Prospectus relating to the General
Account. However, disclosures about the General Account may be subject to
certain generally applicable provisions of the federal securities laws
relating to the accuracy and completeness of statements made in
prospectuses.
Charter guarantees that it will credit interest at an effective annual
rate of at least 3.5% compounded monthly. Charter may, at its sole
discretion, declare higher interest rates for amounts allocated or
transferred to the General Account ("Declared Rates"). Each such Declared
Rate will be fixed and guaranteed by Charter and applied to a specific
period of time, which will not be less than one year or more than 10 years
(the "Declaration Period"). An Owner must specify one or more of the
Declaration Periods currently offered by Charter when allocating or
transferring funds to or within the General Account. At any one time, an
Owner may have amounts earning different Declared Rates within a
Declaration Period because amounts were allocated or transferred to that
Declaration Period at different times. Charter will not accept
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<PAGE>
allocations to the General Account which would increase a Contract's value
in the General Account over $500,000. Subject to deductions for any
applicable charges, Charter guarantees that the value held in the General
Account will equal all amounts allocated or transferred to the General
Account, plus any interest credited thereto, less any amounts surrendered
or transferred from the General Account. An Owner is not entitled to share
in the investment experience of the General Account.
An amount allocated or transferred to the General Account may not be
transferred from or within the General Account prior to the end of the
Declaration Period with which it is associated. Charter will notify Owners
having funds invested in an expiring Declaration Period 30 days prior to
the end of such Declaration Period and will request instructions as to the
reallocation of such amounts. If no instructions are received from the
Owner prior to the end of the Declaration Period, the portion of the
Account Value attributable to such Declaration Period will be transferred
to the Money Market Subaccount at the end of the Declaration Period.
For a discussion of transfer rights and surrender privileges relating
to amounts allocated to the General Account, see "THE CONTRACT --
Transfers" and "DISTRIBUTIONS UNDER THE CONTRACT -- Full and Partial
Surrender Privileges."
THE CONTRACT
The description of the Contract contained in this Prospectus is
qualified in its entirety by reference to the contract for the Flexible
Premium Variable Deferred Annuity, a copy of which has been filed as an
exhibit to the Registration Statement for the Contract and which is
available upon request from Charter.
Contract Application and Issuance of Contracts
The Contract is available to certain retirement plans and individual
retirement accounts that qualify for special federal income tax treatment,
to individuals purchasing individual retirement annuities that qualify for
special federal income tax treatment, and to individuals and entities that
do not qualify for such special tax treatment. The Contract is not
available for use as a "Tax-sheltered Annuity" qualifying under Section
403(b) of the Code. An Owner who purchases a Contract which qualifies as
an individual retirement annuity under Section 408(b) of the Code should be
aware that the Code requires that such a Contract contain certain
restrictive terms. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Tax
Status of the Contract."
Charter, before it will issue a Contract, must receive a properly
completed Contract application and a minimum initial Payment of $2,500.
Upon request, a Premium Receipt form will be mailed to the Owner. The
Annuitant must be named in the Contract application. In the case of a
Contract qualifying as an individual retirement annuity under Section
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408(b) of the Code, the Owner must be the Annuitant. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES -- Tax Status of the Contract." Acceptance of an
application is subject to Charter's sole discretion, and Charter reserves
the right to decline an application for any reason. In the event an
application is declined, the initial Payment will be refunded in full.
After underwriting is completed and the Contract is delivered to the
Owner, the term of the Contract will be deemed to have commenced as of the
Effective Date. The Effective Date is a date within two business days
after a completed application and the full initial Payment have been
received by Charter. The Contract Date will be the same as the Effective
Date unless the Effective Date is the 29th, 30th, or 31st of the month, in
which case the Contract Date will be the 28th day of the same month. The
Contract Date is the date used to determine Contract Years, Contract
Months, and Contract Anniversaries.
Examination Period
The Contract contains a provision for an Examination Period, which
permits the Owner to cancel a Contract, generally within 10 to 30 days
after receipt of such Contract. Depending on the laws of the state of
issue and age of the Owner, Charter will refund the initial Payment in one
of the following methods. See the "Right to Examine" provision of the
Contract and the "State Exceptions" section of this prospectus for state
details.
Return of premium plus or minus investment experience. In most
states, upon return of the Contract, Charter will refund the initial
Payment plus or minus gains or losses from investment of the Payment in the
selected Subaccount(s) plus interest earned on Payments allocated to the
General Account. Charter will calculate such refund as of the date the
Contract is received by Charter. If the Owner allocated all or part of the
Payment to the Variable Account, the amount may be more or less than the
initial Payment, depending upon the investment performance of the selected
Subaccount(s). If all of the Payment was allocated to the General Account,
the amount refunded will always be equal to or greater than the Payment.
See "THE CONTRACT -- Payments, Allocation of Payments and Account Value".
Return of premium. If the Owner of a Contract issued in a state that
requires refund of premium returns the Contract, Charter will refund the
greater of (1) the initial Payment, or (2) the Account Value plus any
amount deducted for taxes or charges from the initial Payment. Charter will
calculate such refund as of the date the Contract is received by Charter.
During the Examination Period, the portion of the initial Payment allocated
to the Variable Account will be invested in the Money Market Subaccount.
Once the Examination Period expires, generally 10 to 30 days, the
Accumulated Value will be allocated to the Subaccount(s) as specified by
the Contract Owner in the application. See "THE CONTRACT -- Payments and
Allocation of Payments".
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Payments
All checks or drafts should be made payable as directed on the
application. Payments also can be made by requesting on the application
that Scudder Investor Services, Inc. redeem shares in an existing Scudder
mutual fund account and apply the proceeds toward a Payment.
Initial Payment. The minimum initial Payment needed to purchase a
Contract is $2,500. The initial Payment is the only Payment required to be
made under the Contract. At the time the initial Payment is made, a
prospective Owner must specify whether the purchase will be a Nonqualified
or Qualified Contract. If the initial Payment is derived from an exchange
or surrender of another annuity contract, Charter may require that the
prospective purchaser provide information with regard to the federal income
tax status of the previous annuity contract. Charter will require that
persons purchase separate Contracts if they desire to invest moneys
qualifying for different annuity tax treatment under the Code. Each such
separate Contract would require a minimum initial Payment of $2,500. The
Company reserves the right to waive the minimum initial Payment amount and
accept less than $2,500 at its discretion.
The initial Net Payment will be credited to the Contract within two
business days after receipt of the Payment if a properly completed Contract
application is received with such Payment, or within two business days
after an application which was incomplete upon receipt by Charter is made
complete. If, for any reason, the Payment is not credited to the
prospective purchaser's account within three business days, the Payment
will be returned immediately to the prospective purchaser unless such
prospective purchaser, after receiving notice of the delay from Charter,
specifically requests that the Payment not be returned.
Additional Payments. While the Annuitant is living and prior to the
Maturity Date, the Owner may, subject to the limitations discussed below,
make additional Payments. Currently, there is no minimum additional
Payment amount nor is there a maximum number of additional Payments that
may be made per Contract Year. The Contract, however, gives Charter the
right to require that each additional Payment be at least $1,000 and to
limit the frequency of additional Payments to a maximum of four per
Contract Year. Charter, at any time, in its discretion, may require
additional Payments to comply with the limitations it is permitted to
impose under the Contract.
Additional Payments with respect to a Contract must qualify for the
same federal income tax treatment as the initial Payment made under the
Contract. Charter will not accept an additional Payment if the federal
income tax treatment of such Payment will be different from that of the
initial Payment. Any additional Payments will be credited to the Contract
upon receipt at Charter's Home Office.
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Automatic Investment Plan. The Owner may arrange to make regular
investments ($50 minimum) into any of the variable Subaccounts through
automatic deductions from a checking account. The Automatic Investment
Plan option is not available for allocations into the General Account.
Please call 800-242-4402 for more information and an Automatic Investment
Plan application.
Limitations on Payments. Charter reserves the right to reject any
initial Payment. Charter may require a prospective purchaser to complete a
financial questionnaire for Payments in excess of $250,000. Charter also
may reject any additional Payment that would cause the total Payments made
by the Owner of a Contract to exceed $1,000,000. Charter will reject any
additional Payment that would cause a Contract's value in the General
Account to exceed $500,000. With respect to Contracts that qualify as
individual retirement annuities under Section 408(b) of the Code, the total
Payments (including the initial Payment), with respect to any calendar
year, may not exceed $2,000 unless the portion of such Payments in excess
of $2,000 qualifies as a rollover amount or contribution under Section
402(a)(5) or 408(d)(3) or other applicable provisions of the Code. See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Tax Status of the Contract."
Allocation of Payments
An Owner may allocate Payments to one or more of the Subaccounts, to
the General Account, or to both the Subaccount(s) and the General Account.
If any portion of a Payment is allocated to the General Account, the Owner
must specify the Declaration Period(s) to which such funds are being
allocated. See "THE GENERAL ACCOUNT." The Owner must specify in the
Contract application the allocations of the Payment. Upon receipt at
Charter's Home Office, the initial Payment will be allocated as directed by
the Owner. During the Examination Period in states that require return of
premium, the portion of the initial Payment allocated to the Variable
Account will be invested in the Money Market Subaccount.
All allocations must be made in whole percentages and must total 100%. If
the allocations do not total 100%, Charter will recompute the allocations
proportionately by dividing the percentage in each Subaccount selected, as
indicated on the application, by the sum of the percentages indicated.
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This new percentage will be applied to the Payment. The following example
illustrates how this recomputation will be made.
Example
Indicated Actual
Allocation Allocation
Subaccount #1 25% 25% / 105% = 24%
Subaccount #2 40% 40% / 105% = 38%
Subaccount #3 40% 40% / 105% = 38%
Total 105% 100%
All Payments will be allocated at the time such Payments are credited
to the Owner's Contract.
Additional Payments made directly by the Owner will be allocated to
the Subaccount(s) and/or the General Account in the same proportion as the
initial Payment, unless Written Notice to the contrary is received with
such additional Payments. Once a change in allocation is made, all future
Payments will be allocated in accordance with the new allocation, unless
contrary instructions are received with such additional Payments. However,
if an Owner has funds deducted from a checking account and applied under
the Automatic Investment Plan option, he or she must provide Charter with
Written Notice to change the allocation of future Additional Payments.
Transfers
Subject to certain conditions, amounts may be transferred among the
Subaccounts, between the Subaccounts and the General Account, and between
different Declaration Periods in the General Account.
An amount may be transferred from the General Account to any
Subaccount(s) and to different Declaration Periods in the General Account
only at the end of the Declaration Period to which such amount was
allocated. Transfer of amounts from a Subaccount to the General Account may
be made at any time, provided that such transfer would not cause a
Contract's value in the General Account to exceed $500,000. See "THE
GENERAL ACCOUNT."
Currently, no charge is being imposed for any transfers. The
Contract, however, permits Charter to deduct $10 from each Subaccount from
which funds are transferred for the third and subsequent transfer requests
made during a Contract Year. Charter, in its sole discretion, may impose
the transfer charge for the third and subsequent transfer requests at any
time. For a discussion of transfer charges, see "CHARGES AND DEDUCTIONS --
Transfer Charges."
Transfer requests must be made by sending Written Notice or by
telephone if elected by a currently valid telephone transfer request form
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on file with Charter. Charter employs reasonable procedures to confirm that
instructions communicated by telephone are genuine and if it follows such
procedures it will not be liable for any losses due to unauthorized or
fraudulent instructions. Charter, however, may be liable for such losses if
it does not follow those reasonable procedures. The procedures Charter
follows for telephone transfers include confirming the correct name,
contract number and personal code for each telephone transfer. See
"GENERAL PROVISIONS --Written Notices and Requests; Owner Inquiries."
Transfers will be deemed effective, and values in connection with transfers
will be determined, as of the end of the Valuation Period during which the
transfer request is received, except that Charter may be permitted to delay
the effective date of a transfer in certain circumstances. See "GENERAL
PROVISIONS -- Deferment of Payment and Transfers."
Account Value
On the Effective Date, the Account Value equals the initial Payment
less amounts deducted for premium taxes, if any. Thereafter, the Account
Value equals the Account Value from the previous Valuation Date increased
by: (i) any additional Net Payments received by Charter, (ii) any increase
in the Account Value due to investment results of the selected
Subaccount(s), and (iii) any interest earned on that portion of the Account
Value held in the General Account during the Valuation Period; and reduced
by: (i) any decrease in the Account Value due to investment results of the
selected Subaccount(s), (ii) a daily charge to cover the mortality and
expense risks assumed by Charter and the cost of administering the
Contract, (iii) any amounts charged against the Account Value for records
maintenance, (iv) amounts deducted for partial surrenders, and (v) amounts
deducted, if any, for transfer charges with respect to transfers that
occurred during the Valuation Period. See "CHARGES AND DEDUCTIONS."
A Valuation Period is the period between successive Valuation Dates.
It begins at the close of business on each Valuation Date and ends at the
close of business on the next succeeding Valuation Date. A Valuation Date
is each day that the New York Stock Exchange is open for business.
The Account Value is expected to change from Valuation Period to
Valuation Period, reflecting the investment experience of the selected
Subaccount(s) and any interest earned in the General Account, as well as
the deduction of charges. The amount available for distribution of Annuity
Payments is equal to the Account Value on the Maturity Date; a Contract
ceases to accumulate value after the Maturity Date.
Unit Value. Each Subaccount has a distinct value (the "Unit Value").
In addition, because of differences in variable annuity contracts funded by
the Subaccounts, units in a Subaccount attributable to the Contracts will
have different unit values than those attributable to other variable
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annuity contracts funded by the Subaccount. When a Payment is allocated or
an amount is transferred to a Subaccount, a number of units is purchased
based on the Unit Value of the Subaccount for the Contracts as of the end
of the Valuation Period during which the allocation is made. When amounts
are transferred out of, or deducted from a Subaccount, units are redeemed
in a similar manner.
For each Subaccount, the Unit Value for the Contracts on a given
Valuation Date is based on the net asset value of a share of the
corresponding Portfolio in which such Subaccount invests. (For the
calculation of the net asset value with respect to a Portfolio, see the
prospectus for the Fund, a current copy of which is attached to this
Prospectus.) Each Valuation Period has a single Unit Value for each type
of variable annuity contract funded by the Subaccount. This unit value
applies for each day in that period. The Unit Value for the Contracts for
each subsequent Valuation Period is the Investment Experience Factor for
the Contracts (described below) for that Valuation Period multiplied by the
Unit Value for the Contracts for the immediately preceding Valuation
Period.
Investment Experience Factor. The "Investment Experience Factor"
measures the investment performance of a Subaccount during a Valuation
Period. An Investment Experience Factor is calculated separately for the
Contracts for each of the Subaccounts. The Investment Experience Factor of
a Subaccount for the Contracts for a Valuation Period equals (a) divided by
(b), minus (c), where:
(a) is (i) the value of the net assets of the
Subaccount at the end of the preceding Valuation
Period, plus
(ii) the investment income and capital gains,
realized or unrealized, credited to the net assets
of that Subaccount during the Valuation Period for
which the Investment Experience Factor is being
determined, minus
(iii) the capital losses, realized or
unrealized, charged against those assets during
the Valuation Period, minus
(iv) any amount charged against the
Subaccount for taxes or any amount set aside
during the Valuation Period by Charter as a
provision for taxes attributable to the operation
or maintenance of that Subaccount (see "CHARGES
AND DEDUCTIONS--Other Taxes"); and
(b) is the value of the net assets of that Subaccount at the end
of the preceding Valuation Period; and
(c) is a charge that compensates Charter for certain
administrative expenses and mortality and expense risks which are
assumed by Charter in connection with the Contracts. See
"CHARGES AND DEDUCTIONS -- Mortality and Expense Risk Charge and
Contract Administration Charge."
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Contract Ownership
Subject to certain restrictions discussed below, an Owner may
designate a new Owner or Joint Owner at any time during the life of the
Annuitant. Under the terms of the Contract, if a Joint Owner is named,
unless otherwise specified by the Owner, Charter will presume the ownership
to be as joint tenants with right of survivorship. If any Owner dies
before the Annuitant and before the Maturity Date, the rights of the Owner
will belong to the Joint Owner, if any, otherwise to the Beneficiary. The
interest of any Owner or Joint Owner may be subject to the rights of any
assignee. See "THE CONTRACT -- Assignment of Contract."
A new Owner or a Joint Owner may not be designated with respect to a
Contract that qualifies as an individual retirement annuity under Section
408(b) of the Code. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Tax
Status of the Contract." An Owner's designation of a new Owner may be
subject to federal income tax. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- Taxation of Annuities."
An Owner may designate a new Owner by submitting Written Notice to
Charter. The change will take effect as of the date the Written Notice was
signed. Charter will not be liable for any payment made or other action
taken before the Written Notice was received and recorded by Charter.
Assignment of Contract
Except in the case of a Contract that qualifies as an individual
retirement annuity under Section 408(b) of the Code, an Owner may assign:
(i) all or a portion of his or her right to receive Annuity Payments under
the Contract or (ii) the Contract as collateral security. An assignment by
the Owner before the Maturity Date of any portion of the right to receive
Annuity Payments entitles the assignee to receive the assigned Annuity
Payments in a lump sum, as of the Maturity Date. Such lump sum payment
generally will be made within seven days. An assignment by the Owner after
the Maturity Date of any portion of the right to receive Annuity Payments
entitles the assignee to receive the assigned Annuity Payments in
accordance with the Annuity Income Option in effect on the Maturity Date.
The assignee may not select an Annuity Income Option or change an existing
Annuity Income Option. See "THE CONTRACT -- Contract Ownership."
In the case of a Qualified Contract, certain assignments permissible
under the Contract may adversely affect the qualification for special
federal income tax treatment of the underlying retirement plan or
individual retirement account. Potential purchasers of Qualified Contracts
are urged to consult their tax advisers.
If the right to receive Annuity Payments is assigned or the Contract
is assigned as collateral security, the Owner's rights and those of any
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Beneficiary will be subject to such assignment. Charter is not responsible
for the adequacy of any assignment and will not be bound by the assignment
until satisfactory written evidence of the assignment has been received.
In certain circumstances, an assignment will be subject to federal income
tax. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Taxation of
Annuities."
State Exceptions
The Contracts issued in various states may vary according to the
requirements of specific state insurance departments. At the time of
printing of this prospectus, the following state variations were in effect:
Massachusetts and Montana Residents:
At the time the contract form was filed, the Commonwealth of
Massachusetts and the State of Montana prohibited the use of actuarial
tables that distinguish between men and women in determining benefits for
annuity contracts issued on the lives of residents. Therefore, Contracts
offered by this Prospectus on the lives of Montana and Massachusetts
residents will have Annuity Income Options which are based on actuarial
tables that do not differentiate on the basis of sex. See "DISTRIBUTIONS
UNDER THE CONTRACT -- Annuity Payments and Annuity Income Options."
Missouri, North Carolina, Oklahoma, South Carolina and Utah:
An Owner of a Contract issued in Missouri, North Carolina, Oklahoma,
South Carolina and Utah who cancels the Contract within the Ten Day Right
to Examine the Contract will receive the greater of (1) a full refund of
the initial Payment, or (2) the Account Value plus any amount deducted for
taxes or charges from the initial Payment. See "THE CONTRACT --
Examination Period".
Washington:
An Owner of a Contract issued in Washington who cancels the Contract within
the Ten Day Right to Examine the Contract will receive a refund of the
initial Payment. See "THE CONTRACT -- Examination Period".
DISTRIBUTIONS UNDER THE CONTRACT
Full and Partial Surrender Privileges
A full or partial surrender of the Contract may be made at any time
subject to certain conditions. No full or partial surrenders may be made
after the Maturity Date. The total amount available for any surrender is
the Account Value.
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No commission or redemption charge is deducted from the Account Value
upon full or partial surrender of a Contract.
In addition to the conditions set forth above, the ability of an Owner
to make a partial surrender of a Contract is subject to the further
conditions that: (i) the minimum amount that can be withdrawn in a partial
surrender is $500 and (ii) the Contract must have an Account Value of at
least $2,500 after the surrender. In addition, a partial surrender request
must contain explicit instructions as to the withdrawal of amounts,
including the amount to be withdrawn from each of the selected Subaccounts
and/or the General Account. If any portion of the surrender is to be
withdrawn from the General Account, the amount requested will be deducted
proportionately from each Declaration Period, and will be on a first-in,
first-out basis within the Declaration Period(s). A partial surrender
cannot be made in the absence of specific direction from the Owner with
respect to the allocation of 100% of the surrender amount to be withdrawn
from the Subaccount and/or the General Account.
An Owner may make a partial surrender by sending a Written Request or
by telephone if a currently valid telephone transfer request form is on
file with Charter. An Owner may make a full surrender only by sending a
Written Request to Charter. The Account Value payable to the Owner upon a
full or partial surrender will be calculated at the price next computed
after Charter receives a request for surrender. Charter generally will pay
the Owner any Account Value owed in respect of a full or partial surrender
within seven days of receipt of the request for surrender. If, at the time
an Owner makes a partial or full surrender request, such Owner has not
provided Charter with a written election not to have federal income taxes
withheld, Charter, by law, must withhold such taxes from the taxable
portion of any full or partial surrender. In addition, the Code provides
that a federal penalty tax may be imposed on certain surrenders. See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Taxation of Annuities."
Because the Owner assumes the investment risk with respect to amounts
allocated to the Variable Account, the total amount paid upon surrender of
the Contract (taking into account any prior withdrawals) may be more or
less than the total Payments made under the Contract. See "THE CONTRACT --
Account Value."
Annuity Payments
If the Annuitant is living on the Maturity Date and the Contract is in
force, Annuity Payments will be made to the Owner in accordance with the
terms of the Contract and the Annuity Income Option selected by the Owner.
The first Annuity Payment will be made within seven days after the Maturity
Date.
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The amount of the periodic Annuity Payments will depend upon (i) the
Account Value on the Maturity Date, (ii) the age and sex of the Annuitant
(or, in the case of Annuity Income Option 2, the age and sex of the
Annuitant and the Joint Annuitant) on the Maturity Date, and (iii) the
Annuity Income Option selected. See "DISTRIBUTIONS UNDER THE CONTRACT --
Annuity Income Options" and "THE CONTRACT -- State Exceptions." At the
Maturity Date, the dollar amount of each periodic Annuity Payment under an
Annuity Income Option is fixed and will not change. After the Maturity
Date, the Contract will no longer participate in the Variable Account. If,
at the time of an Annuity Payment, the Owner has not provided Charter with
a written election not to have federal income taxes withheld, Charter, by
law, must withhold such taxes from the taxable portion of such Annuity
Payment. In addition, the Code provides that a federal penalty tax may be
imposed on certain premature Annuity Payments. See "CERTAIN FEDERAL INCOME
TAX CONSEQUENCES --Taxation of Annuities."
The amount of the monthly Annuity Payments under Annuity Income
Options 1, 2, and 3, described below, may be determined by dividing the
Account Value on the Maturity Date by 1,000 and multiplying the result by
the appropriate factor contained in the table for the Annuity Income Option
selected. The appropriate factor is based on a guaranteed minimum annual
interest rate of 3.5%. This factor will be determined at the time of
maturity, subject to current market conditions. The annuity tables for
Annuity Income Options 1, 2, and 3 are contained in the Contract.
Information concerning the amount of the periodic payments under additional
Annuity Income Options that become available, if any, will be provided to
the Owner prior to the Maturity Date. See "DISTRIBUTIONS UNDER THE
CONTRACT -- Annuity Income Options" and "THE CONTRACT --State Exceptions."
Annuity Income Options
At any time prior to the Maturity Date, the Owner may designate the
Annuity Income Option under which Annuity Payments are to be made. If the
Owner does not select an Annuity Income Option by the Maturity Date,
monthly Annuity Payments will be made to the Owner (i) for the life of the
Annuitant or (ii) until the sum of the monthly Annuity Payments made under
the Contract equals the Account Value on the Maturity Date, whichever is
longer (Annuity Income Option 1). Except with the consent of Charter or as
otherwise required by state law, Annuity Income Options are not available
if the Account Value is less than $5,000 and is insufficient to produce
monthly payments of at least $100. In such cases, the Account Value will
be paid in a lump sum by Charter.
Subject to the exceptions discussed above, three Annuity Income
Options are available under the Contract. In addition, an Owner may select
any other Annuity Income Option which is offered to Owners by Charter on
the Maturity Date of the Contract. Information concerning the availability
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of additional Annuity Income Options, if any, will be provided prior to the
time an Annuity Income Option has to be selected.
The following Annuity Income Options currently are available:
Option 1. Life Annuity with Installment Refund - Monthly Annuity
Payments will be made to the Owner (i) for the life of the Annuitant or
(ii) until the sum of the monthly Annuity Payments made under the Contract
equals the Account Value on the Maturity Date, whichever is longer. If the
Owner dies before the sum of the monthly Annuity Payments made equals the
Account Value on the Maturity Date, the remaining Annuity Payments will be
made to the Beneficiary designated by the Owner. See "DISTRIBUTIONS UNDER
THE CONTRACT -- Beneficiary Provisions."
Option 2. Joint and Survivor Life Annuity with Installment Refund -
Monthly Annuity Payments will be made to the Owner under the Contract (i)
for as long as either the Annuitant or the Joint Annuitant is living or
(ii) until the sum of the monthly Annuity Payments made under the Contract
equals the Account Value on the Maturity Date, whichever is longer. If all
Owner(s) die before the sum of the monthly Annuity Payments made under the
Contract equals the Account Value on the Maturity Date, the remaining
Annuity Payments will be made to the Beneficiary designated by the Owner.
See "DISTRIBUTIONS UNDER THE CONTRACT --Beneficiary Provisions."
Option 3. Installments for Life - Monthly Annuity Payments will be
made to the Owner for as long as the Annuitant is living. Payments under
this option will end with the last payment made prior to the death of the
Annuitant. It would be possible under this option for the Owner to receive
only one annuity payment if the Annuitant dies prior to the date of the
second payment, two if he or she dies before the third annuity payment
date, etc.
At any time before the Maturity Date, the Owner may select Annuity
Income Option 1, 2, or 3 or may change a prior selection of an Annuity
Income Option by sending Written Notice to Charter. In addition, on the
Maturity Date, an Owner may elect to receive Annuity Payments under any
other Annuity Income Option made available by Charter.
Upon selection of Annuity Income Option 2, the Owner must designate a
Joint Annuitant. The life of the Joint Annuitant also will be used to
determine the duration of Annuity Payments under Annuity Income Option 2.
The amount of the monthly Annuity Payments under Annuity Income Option 2
will be determined by the age and sex of both the Annuitant and the Joint
Annuitant. Prior to the Maturity Date, the Owner may select a new Joint
Annuitant at any time by sending Written Notice to Charter. The Owner may
not select a new Joint Annuitant after the Maturity Date.
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In the case of a Contract qualifying as an individual retirement
annuity under Section 408(b) of the Code, an Annuity Income Option may not
be selected with a Period Certain that will guarantee Annuity Payments
beyond the life (or life expectancy) of the Annuitant. See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES -- Tax Status of the Contract."
Maturity Date
The Owner may specify in the Contract application the Contract
Anniversary on which Annuity Payments are to begin. If no Maturity Date is
specified in the Contract application, the Maturity Date will be the later
of the tenth Contract Anniversary or the Contract Anniversary nearest the
Annuitant's 80th birthday.
In the case of a Qualified Contract, other than an individual
retirement annuity qualifying under Section 408(b) of the Code, selection
of certain Maturity Dates permissible under the Contract may adversely
affect the qualification of the underlying retirement plan or individual
retirement account for special federal income tax treatment. Potential
purchasers of such Qualified Contracts are urged to consult their tax
advisers. In the case of a Contract qualifying as an individual retirement
annuity under Section 408(b) of the Code, the Maturity Date must be no
later than April 1 of the calendar year following the calendar year in
which the Annuitant attains age 70-1/2. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- Tax Status of the Contract."
Subject to the preceding discussion with respect to individual
retirement annuities, the Owner may advance or defer the Maturity Date at
any time while the Annuitant is living. The new Maturity Date chosen by
the Owner must be a Contract Anniversary not later than (i) the Contract
Anniversary nearest the Annuitant's 80th birthday; or (ii) ten years from
the upcoming Contract Anniversary, whichever is later. A Maturity Date may
be changed only by Written Request to Charter prior to the scheduled
Maturity Date.
Death Benefit
If the Annuitant dies prior to the Maturity Date, a Death Benefit will
be paid to the Owner as specified in the Contract. No Death Benefit is
payable if the Annuitant dies on or after the Maturity Date.
If the Annuitant dies prior to the Maturity Date, a Death Benefit
equal to the greater of (i) the Account Value or (ii) the sum of the
Payments made less the sum of any partial surrenders will be paid in a lump
sum to the Owner. If the Owner is a natural person, the Owner may elect to
continue the Contract and he or she becomes the Annuitant if the deceased
Annuitant was not an Owner. The amount of the Death Benefit will be
calculated at the price next computed after Charter receives Proof of Death
of the Annuitant and will be paid to the Owner within seven days after
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Charter receives Proof of Death, or as soon thereafter as Charter has
sufficient information to make the payment.
Beneficiary Provisions
The Beneficiary will receive any amounts payable under the Contract if
the Beneficiary survives the Owner(s). If no Beneficiary is specified, or
if no Beneficiary survives the Owner by 30 days, the estate of the Owner
will receive any remaining amounts payable under the Contract.
While the Annuitant is living, the Owner may change the Beneficiary or
Beneficiaries by sending Written Notice to Charter. Once the notice is
received by Charter, the change will take effect as of the date the Written
Notice was signed. Charter will not be liable for any payment made or
other action taken before such Written Notice was received and recorded by
Charter at its Home Office. A Beneficiary named irrevocably may not be
changed without written consent of such Beneficiary. The interest of any
Beneficiary is subject to the rights of any assignee. See "THE CONTRACT --
Assignment of Contract."
Death of Owner
In the case of a Nonqualified Contract in which the Owner or any Joint
Owner (i) is a natural person, (ii) is not the Annuitant, and (iii) dies
before the Maturity Date and prior to the Annuitant's death, the Death
Benefit provisions described above do not apply. The Account Value will
be paid in a lump sum no later than five years following the date of the
Owner's death to the Joint Owner, if applicable; otherwise to the
beneficiary. See "THE CONTRACT --Contract Ownership." The Account Value
will be calculated at the price next computed after Charter receives Proof
of Death of the Owner. If the Joint Owner, if applicable, or the
Beneficiary is the surviving spouse of the Owner, he or she may elect to
continue the Contract as if he or she were the original Owner.
Employment-Related Benefit Plans
In 1983, the Supreme Court held in Arizona Governing Committee v.
Norris that optional annuity payments provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of
1964, vary between men and women on the basis of sex. The Contract
described in this Prospectus contains Annuity Payment rates for certain
Annuity Income Options that distinguish between men and women.
Accordingly, employers and employee organizations should consider, in
consultation with legal counsel, the impact of Norris, and Title VII
generally, on any employment-related insurance or benefit program for which
a Contract may be purchased.
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CHARGES AND DEDUCTIONS
No commissions or sales charges are deducted from Payments invested in
the Contract or from amounts payable to the Owner upon full or partial
surrender of the Contract. Charter pays distribution expenses out of its
own funds, which may include amounts derived from the Mortality and Expense
Risk Charge discussed below.
As more fully described below, certain charges and deductions will be
made in connection with the Contract to compensate Charter for (i)
providing the Annuity Payments, (ii) assuming certain risks in connection
with the Contract, and (iii) administering the Contract.
Charter incurs certain costs in connection with the distribution of
the Contracts. Costs of distributing the Contracts will be paid from
Charter's general assets. These assets may include proceeds from the
Mortality and Expense Risk Charge described below. See "DISTRIBUTION OF
THE CONTRACT."
Mortality and Expense Risk Charge
Charter deducts a daily charge from the Account Value for certain
mortality and expense risks in connection with the Contracts. A daily rate
of .000010997 of the value of net assets in each Subaccount attributable to
the Contracts is charged currently, which corresponds to an annual rate of
.40%. Of such amount, approximately .30% is charged to cover mortality
risks assumed by Charter in connection with the Contract and approximately
.10% is charged to cover expense risks assumed by Charter in connection
with the Contract. Charter reserves the right at any time to increase the
Mortality and Expense Risk Charge to .70%, which corresponds to a daily
rate of .000019275, the maximum set forth in the Contract. The Mortality
and Expense Risk Charge is applicable only during the period from the
Effective Date to the Maturity Date and is not imposed against the General
Account. This charge is reflected in the Investment Experience Factor for
the Contracts for each Subaccount.
The Account Value and Annuity Payments are not affected by changes in
actual mortality experience or by actual expenses incurred by Charter. The
mortality risks assumed by Charter arise from the contractual obligations
to pay Death Benefits prior to the Maturity Date and to make Annuity
Payments for the entire life of the Annuitant (or, in the case of Annuity
Income Option 2, the entire life of the Annuitant and the Joint Annuitant).
Thus, an Owner is assured that neither the Annuitant's longevity (or, in
the case of Annuity Income Option 2, the Annuitant's and the Joint
Annuitant's longevity) nor an improvement in life expectancy in general
which is greater than expected, will have an adverse effect on the Annuity
Payments; this eliminates the risk of outliving the funds accumulated for
retirement in instances in which the Contract is purchased to provide funds
for retirement.
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With respect to expense risks, Charter assumes the risk that the
actual expenses involved in administering the Contracts, including Contract
maintenance costs, administrative costs, mailing costs, data processing
costs, and costs of other services may exceed the amount recovered from any
administrative charges.
If the Mortality and Expense Risk Charge is insufficient to cover the
actual costs, the loss will be borne by Charter; conversely, if the amount
deducted proves more than sufficient, the excess will be profit to Charter.
Charter expects a profit on this charge. To the extent this charge results
in a profit to Charter, such profit will be available for use by Charter
for, among other things, the payment of distribution, sales and other
expenses.
Contract Administration Charge
Charter has primary responsibility for the administration of the
Contract and the Variable Account. Administrative expenses for Charter
include expenses with respect to (i) processing applications, Contract
changes, tax reporting, cash surrenders, death claims, and initial and
subsequent Payments; (ii) annual and semiannual reports to Owners and
regulatory compliance reports; and (iii) overhead costs. Charter deducts a
daily charge from the Account Value for incurring administrative expenses
in connection with the Contract and the Variable Account. The Contract
Administration Charge was established at a level which Charter determined
necessary to recover the actual cost of administering the Contracts. This
asset-based charge may have no relationship to the actual costs associated
with administering a particular Contract. A daily rate of .000008248 of the
value of net assets in each Subaccount attributable to the Contracts is
charged; this corresponds to an annual rate of .30%. This rate is
guaranteed not to increase for the life of the Contract. The Contract
Administration Charge is applicable only during the period from the
Effective Date to the Maturity Date and is not imposed against the General
Account. This charge is reflected in the Investment Experience Factor for
the Contracts for each Subaccount.
Records Maintenance Charge
Currently, no charge is being imposed for records maintenance. The
Contract, however, permits Charter to deduct a maximum amount of $40 from
the Account Value for each Contract at the beginning of each Contract Year
to reflect the cost of performing records maintenance for the Contracts.
If this charge were imposed it would be deducted proportionately from each
of the Subaccounts and each of the Declaration Period(s) in the General
Account (on a first-in, first-out basis within each Declaration Period) in
which the Owner has funds allocated. The Records Maintenance Charge, if
deducted, would apply only during the period from the Effective Date to the
Maturity Date and would not be prorated if the Owner surrendered the
Contract during a Contract Year.
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Premium Taxes
Most states and political subdivisions do not assess premium taxes.
Where state premium taxes are assessed, Charter will deduct the amount of
tax due from each Payment at rates ranging from a minimum of .5% to a
maximum of 3.5%. Any premium taxes levied by political subdivisions will
likewise be deducted from Payments; such taxes are generally at rates of
less than 1%.
On an initial Payment or an Additional Payment in which the premium
tax exceeds 3.5% of the Payment, Charter will accept the Payment only if
the Owner provides written authorization allowing the deduction from the
Account Value of the applicable premium tax after receiving notice of such
tax.
Other Taxes
No charges currently are made against the Variable Account for
federal, state, or local taxes other than premium taxes. Should Charter
determine that any such taxes may be imposed with respect to the Variable
Account, Charter may deduct such taxes from amounts held in the Variable
Account. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Taxation of
Charter."
Transfer Charges
Currently, no charge is being imposed for transfers among Subaccounts.
The Contract, however, permits Charter to deduct $10 from each Subaccount
from which funds are transferred for the third and each subsequent transfer
request made by the Owner during a Contract Year. For the purpose of
determining whether a transfer charge is payable, initial allocations of
Payments are not considered transfers, nor are transfers of amounts among
Declaration Periods within the General Account or transfers to any
Subaccount(s) at the end of a Declaration Period. All transfer requests
made at the same time will be treated as one request. No transfer charges
will be imposed for transfers which are not at the Owner's request.
Charter may impose the transfer charge described above at any time. See
"THE CONTRACT -- Transfers."
Charges Against the Fund
Scudder, Stevens & Clark, Inc. provides investment advisory services
for the Portfolios under the investment advisory agreements between the
Fund, on behalf of the Portfolios, and the Adviser. The Fund is
responsible for all of its other expenses. The net assets of the Variable
Account will reflect deductions in connection with the investment advisory
fee and other expenses incurred by the Fund. The investment advisory fees
differ with respect to each of the Portfolios. See "SCUDDER VARIABLE
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LIFE INVESTMENT FUND." For more information concerning the investment
advisory fee and other charges against the Portfolios, see the prospectus
for the Fund, a current copy of which is attached to this Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary is a general discussion of certain of the
expected federal income tax consequences of investment in and distributions
with respect to a Contract, based on the Code, proposed and final Treasury
Regulations thereunder, judicial authority, and current administrative
rulings and practice. This summary discusses only certain federal income
tax consequences to "United States Persons," and does not discuss state,
local, or foreign tax consequences. United States Persons means citizens
or residents of the United States, domestic corporations, domestic
partnerships, and trusts or estates that are subject to United States
federal income tax regardless of the source of their income. This summary
does not discuss the consequences of an exchange of another annuity
contract for a Contract or a surrender of another annuity contract to
provide funds for investment in a Contract. Additional information
regarding such exchanges or surrenders is contained in the Statement of
Additional Information, which is available at no cost to any person
requesting a copy by writing to Charter or by calling (800) 242-4402.
The Qualified Contract was designed for use by retirement plans and
individual retirement accounts that qualify for special federal income tax
treatment under Section 401(a) or 408(a) of the Code and individuals
purchasing individual retirement annuities that qualify for special federal
income tax treatment under Section 408(b) of the Code. Certain
requirements must be satisfied in purchasing a Qualified Contract for the
plan, account, or annuity to retain its special tax treatment. This
summary does not discuss such requirements, and assumes that Qualified
Contracts are purchased pursuant to retirement plans or individual
retirement accounts, or are individual retirement annuities, that qualify
for such special tax treatment. Additionally, because any distribution with
respect to a Qualified Contract, other than an individual retirement
annuity qualifying under Section 408(b) of the Code, will be made to an
entity that is exempt from federal income tax, this summary does not
discuss the annuity consequences with respect to Qualified Contracts other
than such individual retirement annuities.
THE DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL PURPOSES ONLY.
EACH POTENTIAL PURCHASER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISER AS
TO THE CONSEQUENCES OF INVESTMENT IN A CONTRACT UNDER FEDERAL AND
APPLICABLE STATE, LOCAL, AND FOREIGN TAX LAWS BEFORE MAKING ANY PAYMENT.
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Tax Status of the Contract
Section 817(h) of the Code provides that in order for a variable
contract which is based on a segregated asset account to qualify as an
annuity contract under the Code, the investments made by such account must
be "adequately diversified" in accordance with Treasury regulations. The
Treasury regulations issued under Section 817(h) apply a diversification
formula to each of the Subaccounts. The Variable Account, through the Fund
and its Portfolios, intends to comply with the diversification requirements
of the Treasury regulations. Charter and the Fund have entered into
agreements regarding participation in the Fund that require the Fund and
its Portfolios to be operated in compliance with the Treasury regulations.
In certain circumstances, owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the assets of
the separate accounts used to support their contracts. In those
circumstances, income and gains from the separate account assets would be
includible in the variable contract owner's gross income. The IRS has
stated in published rulings that a variable contract owner will be
considered the owner of separate account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. The Treasury Department has
also announced, in connection with the issuance of regulations concerning
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 (i.e., the Policyowner),
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 subaccounts
without being treated as owners of the underlying assets."
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 policyowners were not owners of separate account
assets. For example, the Owner has additional flexibility in allocating
premium payments and contract values. These differences could result in an
Owner being treated as the owner of a pro rata portion of the assets of the
Variable Account. In addition, Charter does not know what standards will
be set forth, if any, in the regulations or rulings which the Treasury
Department has stated it expects to issue. Charter therefore reserves the
right to modify the Contract as necessary to attempt to prevent an Owner
from being considered the owner of a pro rata share of the assets of the
Variable Account.
The Code also requires that Nonqualified Contracts contain specific
provisions for distribution of contract proceeds upon the death of an
Owner. In order to be treated as an annuity contract for federal income tax
purposes, the Code requires that such Contracts provide that (a) if any
Owner dies on or after the Maturity Date and before the entire interest
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in the Contract has been distributed, the remaining portion must be
distributed at least as rapidly as under the method in effect on the
Owner's death, or (b) if any Owner dies before the Maturity Date, the
entire interest in the Contract must generally be distributed within five
years after the Owner's date of death. These requirements will be
considered satisfied if the entire interest in the Contract is used to
purchase an immediate annuity under which payments will begin within one
year of the Owner's death and will be made for the life of the "designated
beneficiary" or for a period not extending beyond the life expectancy of
the designated beneficiary. Under Section 72(s) the designated beneficiary
is the person to whom ownership of the Contract passes by reason of death
and must be a natural person in order to take advantage of the exceptions
noted. If the designated beneficiary is the Owner's surviving spouse and
the Owner dies before the Maturity Date, the Contract may be continued with
the surviving spouse as the new Owner. The Nonqualified Contracts contain
provisions intended to comply with these requirements of the Code. No
regulations interpreting these requirements of the Code have yet been
issued, and thus no assurance can be given that the provisions contained in
the Contracts satisfy all such Code requirements. The provisions contained
in the Nonqualified Contracts will be reviewed and modified if necessary to
assure that they comply with the Code requirements when clarified by
regulation or otherwise. Similar rules apply to Qualified Contracts. See
"DISTRIBUTIONS UNDER THE CONTRACT -- Death of Owner."
Other rules may apply to Qualified Contracts.
Natural Persons. With respect to Owners who are natural persons, the
Contract should be treated as an annuity contract for federal income tax
purposes, the taxation of which is described below. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES -- Taxation of Annuities."
Non-natural Persons. Pursuant to Section 72(u) of the Code, an
annuity contract held by a taxpayer other than a natural person generally
will not be treated as an annuity contract under the Code; accordingly, an
Owner who is not a natural person will recognize as ordinary income for a
taxable year the excess of (i) the sum of the Account Value as of the close
of the taxable year and all distributions under the Contract paid in the
taxable year and previous taxable years over (ii) the sum of the Payments
paid for the taxable year and any prior taxable year and the amounts
includable in gross income for any prior taxable year with respect to the
Contract. Section 72(u) of the Code does not apply to (i) a Contract in
which the nominal Owner is not a natural person but the beneficial Owner is
a natural person, (ii) a Qualified Contract, or (iii) a single-payment
annuity the Maturity Date for which is no later than one year from the date
of the single Payment and provides for a series of substantially equal
periodic payments during the annuity period. Instead, such Contracts are
taxed as described below under the heading "Taxation of Annuities."
37
<PAGE>
Individual Retirement Annuities. In order to qualify as an individual
retirement annuity under Section 408(b) of the Code, a Contract must
contain certain provisions, including the following; (i) the Owner must be
the Annuitant; (ii) the Contract may not be transferable by the Owner,
e.g., the Owner may not designate a new Owner or assign the Contract as
collateral security; (iii) the total Payments for any Contract Year may not
exceed $2,000, unless the portion of such Payments in excess of $2,000
qualifies as a rollover amount or contribution under Section 402(a)(5) or
408(d)(3) of the Code; (iv) Annuity Payments must begin no later than April
1 of the calendar year following the calendar year in which the Annuitant
attains age 70-1/2 and meet certain other requirements; (v) an Annuity
Income Option with a Period Certain that will guarantee Annuity Payments
beyond the life expectancy of the Annuitant and the Beneficiary may not be
selected; and (vi) certain payments of Death Benefits must be made in the
event the Annuitant dies prior to the distribution of the Account Value.
Contracts intended to qualify as individual retirement annuities under
Section 408(b) of the Code contain such provisions.
Other Qualified Contracts. A Contract may be purchased by a trust or
custodial account that forms a retirement plan qualified under Section
401(a) of the Code or an individual retirement account qualified under
Section 408(a) of the Code. The contributions and benefits in respect of a
participant in such a plan or account will be determined by the terms and
conditions of the plan or account, rather than the Contract. Charter shall
be under no obligation either (i) to determine whether any payment,
distribution or other transaction under the Contract complies with the
provisions, terms and conditions of such plan or account or of applicable
law or (ii) to administer such plan or account, including without
limitation any provisions required by the Retirement Equity Act of 1984.
The Contract is intended for use by such plans and accounts solely for the
accumulation of retirement savings. Adverse tax consequences to the plan
or account, the participant or both may result if this Contract is
transferred or assigned by the plan or account to any individual as a means
to provide benefit payments. A qualified tax adviser should be consulted
with respect to the use of the Contract in connection with such a plan or
account.
Taxation of Annuities
The discussion below applies only to those Contracts that qualify as
annuity contracts for federal income tax purposes.
In General. An Owner of a Contract should not be taxed on increases
in the Account Value until distribution occurs either in the form of
amounts received in partial or full surrender or as Annuity Payments under
the Annuity Income Option selected. The taxable portion of any such
distribution generally will be taxed as ordinary income. For this purpose,
the assignment, pledge, or agreement to assign or pledge any portion of the
Account Value (including assignment prior to the Maturity Date of an
38
<PAGE>
Owner's right to receive Annuity Payments) generally will be treated as a
distribution in the amount of such portion of the Account Value.
Additionally, when an Owner designates a new Owner prior to the Maturity
Date without receiving full and adequate consideration, the old Owner
generally will be treated as receiving a distribution under the Contract in
an amount equal to the excess (if any) of the Account Value at the time of
such designation over the Investment in the Contract at such time.
"Investment in the Contract" means (i) the aggregate amount of any Payments
paid by or on behalf of the recipient or deemed recipient minus (ii) the
aggregate amount received under the Contract which was excluded from the
gross income of the recipient or deemed recipient (except that the amount
of any loan secured by a Contract will be disregarded to the extent such
amount is excluded from gross income) plus (iii) the amount of any loan
secured by a Contract to the extent that such amount is included in the
gross income of the Owner. Any such deemed distribution generally will be
taxable in an amount equal to the excess (if any) of the Account Value
immediately before the distribution is deemed to occur over the Investment
in the Contract at such time. Additionally, the assignment prior to the
Maturity Date of an Owner's right to receive Annuity Payments without full
and adequate consideration generally will be treated as a distribution
under the Contract in an amount equal to the excess of the Account Value at
the time of such assignment over the Investment in the Contract at such
time; any such deemed distribution will be taxable in full.
Surrenders. In the case of a partial surrender under a Nonqualified
Contract, the amount received generally will be taxable in an amount equal
to the excess (if any) of the Account Value immediately before the
surrender over the Investment in the Contract at such time. In the case of
a partial surrender under a Qualified Contract, generally a portion of the
amount received, based on the ratio of the Investment in the Contract to
the Account Value, will be includable in the recipient's taxable income.
In the case of a full surrender under a Nonqualified or Qualified Contract,
the amount received generally will be taxable only to the extent it exceeds
the Investment in the Contract. In the case of a Qualified Contract (i)
the Investment in the Contract may be zero and (ii) certain surrenders will
not be taxed if they qualify under Section 402(a) or 408(d)(3) of the Code
as rollover contributions to certain retirement plans and individual
retirement arrangements.
Annuity Payments. Generally, a portion of each of the Annuity
Payments will be includable in the taxable income of the recipient. There
is, in general, no tax on the portion of each Annuity Payment that bears
the same ratio to the amount of such Annuity Payment as the Investment in
the Contract on the Maturity Date bears to the total "Expected Return"
under the Contract as of the Maturity Date; the remainder of each Annuity
Payment is taxable. Once the aggregate amount received under the Contract
39
<PAGE>
on or after the Maturity Date that was excluded from gross income equals
the Investment in the Contract on the Maturity Date, any additional Annuity
Payments will be included in gross income in their entirety. If, after the
Maturity Date, Annuity Payments cease by reason of the death of the
Annuitant, the excess (if any) of the Investment in the Contract as of the
Maturity Date over the aggregate amount of Annuity Payments received on or
after the Maturity Date that was excluded from gross income is allowable as
a deduction for the last taxable year of the Annuitant.
Penalty Taxes. In the case of a deemed distribution under a
Nonqualified Contract resulting from a pledge, assignment, or agreement to
pledge or assign; a surrender of a Nonqualified Contract; or an Annuity
Payment with respect to a Nonqualified Contract, there may be imposed on
the taxpayer a federal penalty tax equal to 10% of the amount of the
distribution (or deemed distribution) that is includable in gross income.
The penalty tax generally will not apply to any distribution (i) made on or
after the date on which the taxpayer attains age 59-1/2; (ii) made as a
result of the death of the Owner; (iii) attributable to the disability of
the taxpayer; or (iv) which is part of a series of substantially equal
periodic payments made (not less frequently than annually) for the life (or
life expectancy) of the taxpayer or the joint lives (or joint life
expectancies) of such taxpayer and his beneficiary. Similar penalties apply
to Qualified Contracts. In addition, if a minimum distribution is required
under a Qualified Contract as a result of the Annuitant's death or
attainment of age 70-1/2, a 50% excise tax will apply to the portion of any
such required minimum distribution that is not actually distributed. In
the case of Qualified Contracts, penalty taxes or other adverse tax
consequences may result if excess contributions are made, if an annual
distribution from the individual retirement annuity and certain other
retirement arrangements exceed specified amounts, or in certain other
circumstances.
Transfer of Ownership. A transfer of ownership of a Contract or
assignment of a Contract may result in certain tax consequences to the
Owner that are not discussed herein. An Owner contemplating any such
transfer or assignment of a Contract should contact a competent tax adviser
with respect to the potential tax effects of such a transaction.
Withholding. The portion of any distribution under a Contract that is
includable in gross income will be subject to federal income tax
withholding unless the recipient of such distribution elects not to have
federal income tax withheld. Election forms will be provided at the time
distributions are requested or made. Effective January 1, 1993 certain
distributions from retirement plans qualified under Section 401(a) of the
Code are subject to mandatory withholding.
40
<PAGE>
Multiple Contracts. All nonqualified deferred annuity contracts
entered into after October 21, 1988, that are issued by Charter (or its
affiliates) to the same Contract Owner during any calendar year will be
treated as one annuity contract for purposes of determining the amount
includable in gross income under Section 72(e) of the Code. The Treasury
Department has specific authority to issue regulations that prevent the
avoidance of Section 72(e) through the serial purchase of annuity contracts
or otherwise. There may also be other situations in which the Treasury may
conclude that it would be appropriate to aggregate two or more annuity
contracts purchased by the same Owner. Accordingly, an Owner should
consult a competent tax adviser before purchasing more than one annuity
contract.
Taxation of Death Benefit Proceeds. Amounts may be distributed from a
Contract because of the death of the Owner or the Annuitant. Generally,
such amounts are includable in the income of the recipient as follows: (i)
if distributed in a lump sum, they are taxed in the same manner as a full
surrender of the Contract, as described above, or (ii) if distributed under
an Annuity Option, they are taxed in the same manner as Annuity Payments,
as described above.
Tax Legislation. In past years, legislation has been proposed in the
U.S. Congress which would have adversely modified the federal taxation of
certain annuities. For example, one such proposal would have adversely
affected annuities that do not have "substantial life contingencies" by
taxing income as it is credited to the annuity. Although Congress is not
now actively considering any legislation regarding the taxation of
annuities, there is no way of knowing if legislation affecting the taxation
of annuities will, at some time, be enacted, or the extent to which any
change in the taxation of annuities would be retroactive in effect (i.e.,
effective prior to the date of enactment).
Taxation of Charter
At the present time, Charter makes no charge to the Variable Account
for any Federal, state or local taxes that it incurs which may be
attributable to such Account or to the Contracts. Charter, however,
reserves the right in the future to make a charge for any such tax or other
economic burden resulting from the application of the tax laws that it
determines to be properly attributable to the Variable Account or to the
Contracts.
GENERAL PROVISIONS
The Contract
The Contract, its endorsements, riders, and the Contract application
constitute the entire contract between Charter and the Owner. Only the
41
<PAGE>
President, a Vice President, the Secretary, or an Assistant Secretary of
Charter is authorized to change or waive the terms of a Contract. Any
change or waiver must be in writing and signed by one of those persons.
Deferment of Payment and Transfers
Payment of any amount due from the Variable Account with respect to a
surrender, the Death Benefit, or the death of the Owner of a Nonqualified
Contract generally will occur within seven days from the date Written
Notice is received, except that Charter may be permitted to defer such
payment if: (i) the New York Stock Exchange is closed for other than usual
weekends or holidays, or trading on the Exchange is otherwise restricted;
(ii) an emergency exists as defined by the SEC or the SEC requires that
trading be restricted; or (iii) the SEC permits a delay for the protection
of Owners. In addition, transfers of amounts from the Subaccounts may be
deferred under these circumstances.
Payments and Transfers from the General Account. Charter anticipates
that payments and transfers from the General Account will occur within
seven business days after receipt. In accordance with state insurance law
to the extent any payments are to be made from the General Account, such
payments may be postponed for up to six months in certain circumstances.
Payment Not Honored by Bank. Any Payment which is derived, all or in
part, from any amount paid to Charter by check or draft may be postponed
until such time as Charter determines that such instrument has been
honored.
Contract Expiration
The Contract will expire and be of no effect when the Account Value is
insufficient to cover deductions for the Mortality and Expense Risk Charge,
the Contract Administration Charge, any Records Maintenance Charge which
may be imposed, and transfer charges, if any.
Misstatement of Age or Sex
If the Annuitant's age or sex (and/or the Joint Annuitant's age or
sex, if Annuity Income Option 2 is selected) has been misstated on the
application, Charter will recalculate the Annuity Payments to reflect the
calculations that would have been made had the Annuitant's age and sex
(and/or the Joint Annuitant's age and sex, if Annuity Income Option 2 is
selected) been correctly stated.
42
<PAGE>
Nonparticipating Contract
The Contract does not participate in the divisible surplus of Charter.
No dividends are payable on the Contract.
Written Notices and Requests; Owner Inquiries
Any Written Notice or Written Request required to be sent to Charter
should be sent to 8301 Maryland Avenue, St. Louis, Missouri 63105. Any
notice or request must be on the required form provided by Charter and
contain such information as Charter requires to process such notice or
request, including the Contract number and the Owner's full name and
signature. Any notice sent by Charter to an Owner will be sent to the
address shown in the application unless a Written Notice of an address
change has been filed with Charter. All Owner inquiries should be
addressed to Charter at its Home Office or made by calling (800) 242-4402
and should include the Contract number and the Owner's full name.
Records and Reports
Charter will maintain all records relating to the Variable Account.
At the end of each calendar quarter, Charter will send Owners, at their
last known address of record, statements listing the Account Value,
additional Payments, transfers, any charges, and any partial surrenders
made during the year. Owners will also be sent annual and semiannual
reports for the Fund, which will include a list of the securities held by
each Portfolio as of the current date of the report to the extent required
by the 1940 Act.
DISTRIBUTION OF THE CONTRACT
The principal underwriter of the Contracts is CNL. CNL is registered
with the SEC as a broker-dealer under the Securities Exchange Act of 1934,
as amended (the "1934 Act") and is a member of the National Association of
Securities Dealers, Inc. The principal address of CNL is 8301 Maryland
Avenue, St. Louis, Missouri 63105.
For its services as Principal Underwriter, Charter pays to CNL, on a
monthly basis, .50% of new and additional Payments for the Contracts.
Charter and CNL have also entered into a general expense reimbursement
agreement for expenses incurred by CNL in connection with distribution
expenses relating to the offering of the Contracts and other variable
annuity and variable life insurance contracts issued by Charter.
Commissions relating to the sale of the Contracts totaling $464,600.72,
$346,403.71 and $239,903.75 were paid by Charter to CNL in 1994, 1993 and
1992, respectively.
43
<PAGE>
CNL has contracted with Scudder Investor Services, Inc. ("Scudder")
for Scudder's services in connection with the distribution of the
Contracts. Scudder is registered with the SEC as a broker-dealer under the
1934 Act and is a member of the National Association of Securities Dealers,
Inc. Individuals directly involved in the sale of the Contracts are
registered representatives of Scudder and licensed agents of Charter. The
principal address of Scudder is Two International Place, Boston,
Massachusetts 02110-4103.
CNL is doing business under the following names in the states
indicated: CNL Insurance Marketing, Inc. in California, Florida, Minnesota,
Montana, New Hampshire, and New Jersey; CNL Insurance & Financial Services,
Inc. in Illinois, Kentucky, Maine, Maryland, Nevada, Rhode Island, and
Utah; and CNL, Inc. of Missouri in Vermont.
The Contracts will be offered to the public on a continuous basis, and
neither CNL nor Scudder anticipates discontinuing the offering of the
Contracts. However, both CNL and Scudder reserve the right to discontinue
the offering at any time.
VOTING RIGHTS
To the extent required by law, Charter will vote the Fund's shares
held in the Variable Account at regular and special shareholder meetings of
the Fund in accordance with instructions received from persons having
voting interests in the corresponding Subaccounts. If, however, the 1940
Act or any regulation thereunder should be amended or if the present
interpretation thereof should change, and as a result Charter determines
that it is permitted to vote the Fund's shares in its own right, it may
elect to do so.
The number of votes that an Owner has the right to instruct will be
calculated separately for each Subaccount. The number of votes for each
Subaccount that an Owner has the right to instruct will be determined by
dividing a Contract's value in a Subaccount by the net asset value per
share of the corresponding Portfolio in which the Subaccount invests.
Fractional shares will be counted. The number of votes of a Portfolio that
the Owner has the right to instruct will be determined as of the date
coincident with the date established by the Fund for determining
shareholders eligible to vote at the meeting of the Fund. Voting
instructions will be solicited by written communications prior to that
meeting in accordance with procedures established by the Fund.
Charter will vote shares of the Fund as to which no timely
instructions are received in proportion to the voting instructions which
are received with respect to all variable annuity contracts (including the
Contracts) issued by Charter and participating in that Portfolio. Charter
also will vote shares it owns that are not attributable to variable annuity
contracts in the same proportion.
Separate accounts of other insurance companies, including insurance
companies affiliated with Charter, may also invest premiums for variable
44
<PAGE>
life and variable annuity contracts in the Fund. It is to be expected that
Fund shares held by those separate accounts will be voted according to the
instructions of the owners of those variable life and variable annuity
contracts. This will dilute the effect of the Owners' voting instructions.
Charter does not see any disadvantages to this dilution.
Each person having a voting interest in a Subaccount will receive
proxy material, reports, and other materials relating to the appropriate
Portfolio.
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. Charter
is not involved in any litigation that is of material importance in
relation to its total assets or that relates to the Variable Account.
ADDITIONAL INFORMATION
A registration statement has been filed with the SEC under the
Securities Act of 1933, as amended and the 1940 Act with respect to the
Contract offered hereby. This Prospectus does not contain all the
information set forth in the registration statement and the amendments and
exhibits to the registration statement to all of which reference is made
for further information concerning the Variable Account, Charter, and the
Contract offered hereby. Statements contained in this Prospectus as to the
contents of the Contract and other legal instruments are summaries. For a
complete statement of the terms thereof, reference is made to such
instruments as filed.
45
<PAGE>
TABLE OF CONTENTS FOR
STATEMENT OF ADDITIONAL INFORMATION
Prospectus
Page Reference*
STATE REGULATION OF CHARTER 1
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
OF CERTAIN EXCHANGES AND SURRENDERS 1 35
SAFEKEEPING OF THE VARIABLE ACCOUNTS
ASSETS 1
CALCULATION OF YIELDS
AND TOTAL RETURNS 2 11
Money Market Subaccount Yields. 2
Other Subaccount Yields. 3
Total Returns. 4
Effect of the Records Maintenance Charge
on Performance Data. 5
OTHER PERFORMANCE DATA 6 12
Cumulative Total Returns. 6
Comparison of Performance and
Expense Information.. 7
LEGAL MATTERS 7 45
INDEPENDENT ACCOUNTANTS 7
FINANCIAL STATEMENTS. 8 10
* The corresponding section headings may be found in the Prospectus at
the pages indicated.
46
<PAGE>
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
Two International Place
Boston, Massachusetts 02110-4103
(A Mutual Fund)
Scudder Variable Life Investment Fund (the "Fund") is an open-end management
investment company which offers shares of beneficial interest of six diversified
Portfolios. The Money Market Portfolio seeks stability and current income from a
portfolio of money market instruments. The Money Market Portfolio will maintain
a dollar-weighted average maturity of 90 days or less in an effort to maintain a
constant net asset value of $1.00 per share. An investment in the Money Market
Portfolio is neither insured nor guaranteed by the United States Government and
there can be no assurance that the Portfolio will be able to maintain a stable
net asset value of $1.00 per share. The Bond Portfolio seeks high income from a
high quality portfolio of bonds. The Balanced Portfolio seeks a balance of
growth and income, as well as long-term preservation of capital, from a
diversified portfolio of equity and fixed income securities. The Growth and
Income Portfolio seeks long-term growth of capital, current income and growth of
income from a portfolio consisting primarily of common stocks and securities
convertible into common stocks. The Capital Growth Portfolio seeks to maximize
long-term capital growth from a portfolio consisting primarily of equity
securities. The International Portfolio seeks long-term growth of capital
principally from a diversified portfolio of foreign equity securities.
This prospectus sets forth concisely the information about the Fund that a
prospective investor should know before applying for certain variable annuity
contracts and variable life insurance policies offered in the separate accounts
of certain insurance companies ("Participating Insurance Companies"). Please
read it carefully and retain it for future reference. If you require more
detailed information, a Statement of Additional Information dated May 1, 1995,
as supplemented from time to time, is available upon request without charge and
may be obtained by calling a Participating Insurance Company or by writing to
broker/dealers offering the above mentioned variable annuity contracts and
variable life insurance policies, or Scudder Investor Services, Inc., Two
International Place, Boston, Massachusetts 02110-4103. The Statement of
Additional Information, which is incorporated by reference into this prospectus,
has been filed with the Securities and Exchange Commission.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. SHARES OF THE FUND ARE AVAILABLE AND ARE BEING MARKETED
EXCLUSIVELY AS A POOLED FUNDING VEHICLE FOR LIFE INSURANCE COMPANIES WRITING ALL
TYPES OF VARIABLE LIFE INSURANCE POLICIES AND VARIABLE ANNUITY CONTRACTS.
PROSPECTUS
May 1, 1995
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INVESTMENT CONCEPT OF THE FUND 1
FINANCIAL HIGHLIGHTS 2
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS 8
Money Market Portfolio 8
Bond Portfolio 8
Balanced Portfolio 9
Growth and Income Portfolio 11
Capital Growth Portfolio 11
International Portfolio 12
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS 13
Repurchase Agreements 13
Convertible Securities 13
Mortgage and Other Asset-Backed Securities 13
Foreign Securities 14
When-Issued Securities 14
Indexed Securities 15
Loans of Portfolio Securities 15
Zero Coupon Securities 15
Derivatives 15
Options 15
Options on Securities Indexes 15
Futures Contracts 16
Forward Foreign Currency Exchange Contracts, Foreign
Currency Futures Contracts and Foreign Currency Options 16
INVESTMENT RESTRICTIONS 17
INVESTMENT ADVISER 18
Portfolio Management 19
Money Market Portfolio 19
Bond Portfolio 19
Balanced Portfolio 19
Growth and Income Portfolio 19
Capital Growth Portfolio 20
International Portfolio 20
DISTRIBUTOR 20
PURCHASES AND REDEMPTIONS 21
NET ASSET VALUE 21
PERFORMANCE INFORMATION 21
Money Market Portfolio 21
Bond Portfolio 22
All Portfolios 22
VALUATION OF PORTFOLIO SECURITIES 22
Money Market Portfolio 22
Other Portfolios 22
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS 23
SHAREHOLDER COMMUNICATIONS 23
ADDITIONAL INFORMATION 24
Fund Organization and Shareholder Indemnification 24
Other Information 24
TRUSTEES AND OFFICERS 25
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT CONCEPT OF THE FUND
- --------------------------------------------------------------------------------
Scudder Variable Life Investment Fund (the "Fund") is an open-end, registered
management investment company comprised of the following diversified series: the
Money Market Portfolio, Bond Portfolio, Balanced Portfolio, Growth and Income
Portfolio, Capital Growth Portfolio, and International Portfolio (individually
or collectively hereinafter referred to as a "Portfolio" or the "Portfolios").
Additional Portfolios may be created from time to time. The Fund is intended to
be the funding vehicle for variable annuity contracts ("VA contracts") and
variable life insurance policies ("VLI policies") to be offered by the separate
accounts of certain life insurance companies ("Participating Insurance
Companies"). The Fund currently does not foresee any disadvantages to the
holders of VA contracts and VLI policies arising from the fact that the
interests of the holders of such contracts and policies may differ.
Nevertheless, the Fund's Trustees intend to monitor events in order to identify
any material irreconcilable conflicts which may possibly arise and to determine
what action, if any, should be taken in response thereto. The VA contracts and
the VLI policies are described in the separate prospectuses issued by the
Participating Insurance Companies. The Fund assumes no responsibility for such
prospectuses.
Individual VA contract holders and VLI policyholders are not the "shareholders"
of the Fund. Rather, the Participating Insurance Companies and their separate
accounts are the shareholders or investors (the "Shareholders"), although such
companies may pass through voting rights to their VA contract and VLI
policyholders.
1
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Money Market Portfolio
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Portfolio's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1994 and may be
obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering the previously mentioned variable annuity
contracts and variable life insurance policies, or Scudder Investor Services,
Inc.
<TABLE>
<CAPTION>
Six For the Period
Months July 16, 1985
Ended (commencement
Years Ended December 31, December of operations)
------------------------------------------------------------------------------- 31, to June 30,
1994 1993 1992 1991 1990 1989 1988 1987 1986(e) 1986
------------------------------------------------------------------------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period .. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000(b)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income from investment
operations:
Net investment
income (a) .......... .037 .025 .033 .057 .076 .088 .068 .060 .026 .064
Less distributions from
net investment income (.037) (.025) (.033) (.057) (.076) (.088) (.068) (.060) (.026) (.064)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value,
end of period ........ $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Total Return (%) ....... 3.72 2.54 3.33 5.81 7.83 8.84 7.08 5.95 2.59(d) 6.59(d)
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) .. 90 49 34 28 32 15 11 8 3 --
Ratio of operating
expenses, net to
average daily net
assets (%) (a) ....... .56 .66 .64 .67 .69 .72 .75 .75 .75(c) .60(c)
Ratio of net investment
income to average
daily net assets (%) . 3.80 2.55 3.26 5.67 7.57 8.53 6.99 6.06 5.10(c) 6.75(c)
(a) Portion of expenses
reimbursed ........ -- -- -- -- -- $ .001 $ .003 $ .006 $ .022 $ .133
(b) Original capital
(c) Annualized
(d) Not annualized
(e) On August 22, 1986, the Trustees voted to change the year end of the Fund from June 30 to December 31.
</TABLE>
2
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Bond Portfolio
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Portfolio's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1994 and may be
obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering the previously mentioned variable annuity
contracts and variable life insurance policies, or Scudder Investor Services,
Inc.
<TABLE>
<CAPTION>
Six For the Period
Months July 16, 1985
Ended (commencement
Years Ended December 31, (e) December of operations)
-------------------------------------------------------------------------- 31, to June 30,
1994 1993 1992 1991 1990 1989 1988 1987 1986(e)(f) 1986
-------------------------------------------------------------------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period . $ 7.42 $ 7.19 $ 7.37 $ 6.73 $ 6.72 $ 6.39 $ 6.47 $ 6.67 $ 6.56 $ 6.00(b)
------- -------- ------- -------- ------- -------- -------- -------- ------- -------
Income from investment
operations:
Net investment
income (a) ........ .43 .48 .49 .52 .53 .54 .54 .49 .23 .45
Net realized and
unrealized gain
(loss) on
investment
transactions ...... (.77) .38 (.02) .61 (.02) .18 (.19) (.40) .08 .44
---- --- ---- --- ---- --- ---- ---- --- ---
Total from investment
operations ........... (.34) .86 .47 1.13 .51 .72 .35 .09 .31 .89
---- --- --- ---- --- --- --- --- --- ---
Less distributions from:
Net investment income (.43) (.48) (.46) (.47) (.50) (.39) (.43) (.29) (.17) (.33)
Net realized gains on
on investment
transactions ........ (.17) (.15) (.19) (.02) -- -- -- -- (.03) --
---- ---- ---- ---- ----
Total distributions .... (.60) (.63) (.65) (.49) (.50) (.39) (.43) (.29) (.20) (.33)
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net asset value,
end of period ........ $ 6.48 $ 7.42 $ 7.19 $ 7.37 $ 6.73 $ 6.72 $ 6.39 $ 6.47 $ 6.67 $ 6.56
======= ======== ======= ======== ======= ======== ======== ======== ======= =======
Total Return (%) ....... (4.79) 12.38 7.01 17.61 8.06 11.65 5.46 1.22 4.90(d) 15.11(d)
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) .. 142 129 113 74 42 22 3 3 1 --
Ratio of operating
expenses, net to
average net
assets (%) (a) ....... .58 .61 .63 .69 .73 .75 .75 .75 .75(c) .60(c)
Ratio of net investment
income to average
net assets (%) ....... 6.43 6.59 6.89 7.51 8.05 8.04 7.86 7.53 6.88(c) 7.48(c)
Portfolio turnover
rate (%) ............. 96.55 125.15 87.00 115.86 71.02 103.41 245.23 186.05 23.82(c) 6.27(c)
(a) Portion of expenses
reimbursed .......... $ -- $ -- $ -- $ -- $ -- $ .01 $ .04 $ .08 $ .21 $ .80
(b) Original capital
(c) Annualized
(d) Not annualized
(e) Per share amounts, for each of the periods identified, have been calculated
using the monthly average shares outstanding during the period method.
(f) On August 22, 1986, the Trustees voted to change the year end of the Fund
from June 30 to December 31.
</TABLE>
3
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Balanced Portfolio
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Portfolio's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1994 and may be
obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering the previously mentioned variable annuity
contracts and variable life insurance policies, or Scudder Investor Services,
Inc.
<TABLE>
<CAPTION>
Six For the Period
Months July 16, 1985
Ended (commencement
Years Ended December 31,(e) December of operations)
-------------------------------------------------------------------------- 31, to June 30,
1994 1993 1992 1991 1990 1989 1988 1987 1986(e)(f) 1986
-------------------------------------------------------------------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ..... $ 10.23 $ 10.02 $ 9.85 $ 8.10 $ 8.75 $ 7.62 $ 6.88 $ 7.35 $ 7.58 $ 6.00(b)
-------- -------- ------- ------- ------- ------- -------- -------- ------- -------
Income from investment
operations:
Net investment
income (a) ........... .29 .30 .29 .35 .42 .40 .33 .34 .15 .31
Net realized and
unrealized gain (loss)
on investment
transactions ......... (.48) .42 .36 1.77 (.59) 1.06 .64 (.45) (.11) 1.50
---- --- --- ---- ---- ---- --- ---- ---- ----
Total from investment
operations ............ (.19) .72 .65 2.12 (.17) 1.46 .97 (.11) .04 1.81
---- --- --- ---- ---- ---- --- ---- --- ----
Less distributions from:
Net investment
income ............... (.30) (.28) (.29) (.37) (.43) (.33) (.23) (.23) (.18) (.23)
Net realized gains
on investment
transactions ......... (.77) (.23) (.19) -- (.05) -- -- (.13) (.09) --
---- ---- ---- ---- ---- ----
Total distributions ..... (1.07) (.51) (.48) (.37) (.48) (.33) (.23) (.36) (.27) (.23)
----- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net asset value,
end of period ......... $ 8.97 $ 10.23 $ 10.02 $ 9.85 $ 8.10 $ 8.75 $ 7.62 $ 6.88 $ 7.35 $ 7.58
======== ======== ======= ======= ======= ======= ======== ======== ======= =======
Total Return (%) ........ (2.05) 7.45 6.96 26.93 (1.91) 19.50 14.21 (1.68) .46(d) 30.60(d)
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) ... 46 45 37 25 16 18 11 12 1 --
Ratio of operating
expenses, net to
average net
assets (%) (a) ........ .75 .75 .75 .75 .75 .75 .75 .75 .75(c) .60(c)
Ratio of net investment
income to average
net assets (%) ........ 3.19 3.01 3.01 4.00 5.15 4.74 4.48 4.42 4.20(c) 4.87(c)
Portfolio turnover
rate (%) .............. 101.64 133.95* 51.66 62.03 49.03 77.98 109.95 111.00 28.86(c) 64.12(c)
(a) Portion of expenses
reimbursed ........... $ -- $ -- $ -- $ .01 -- $ .01 $ .03 $ .03 $ .17 $ .80
(b) Original capital
(c) Annualized
(d) Not annualized
(e) Per share amounts, for each of the periods identified, have been calculated
using the monthly average shares outstanding during the period method.
(f) On August 22, 1986, the Trustees voted to change the year end of the Fund
from June 30 to December 31.
* On May 1, 1993, the Portfolio adopted its present name and investment
objective which is a balance of growth and income from a diversified
portfolio of equity and fixed income securities. Prior to that date, the
Portfolio was known as the Managed Diversified Portfolio and its investment
objective was to realize a high level of long-term total rate of return
consistent with prudent investment risk. The portfolio turnover rate
increased due to implementing the present investment objective. Financial
highlights for the nine periods ended December 31, 1993 should not be
considered representative of the present Portfolio.
</TABLE>
4
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Growth and Income Portfolio
The following table includes selected data for a share outstanding throughout
the period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Portfolio's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1994 and may be
obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering the previously mentioned variable annuity
contracts and variable life insurance policies, or Scudder Investor Services,
Inc.
<TABLE>
<CAPTION>
For the Period
May 2, 1994
(commencement
of operations)
to December 31,
1994
------------
<S> <C>
Net asset value, beginning of period ............................... $ 6.00(b)
-------
Income from investment operations:
Net investment income (a) ........................................ .13
Net realized and unrealized gain (loss) on investment transactions .17(f)
---
Total from investment operations ................................... .30
---
Less distributions from net investment income ...................... (.04)
----
Net asset value, end of period ..................................... $ 6.26
=======
Total Return (%) ................................................... 4.91(d)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ............................ 20
Ratio of operating expenses, net to average net assets (%)(a) ..... .75(c)
Ratio of net investment income to average net assets (%) .......... 3.63(c)
Portfolio turnover rate (%) ....................................... 28.41(c)
(a) Portion of expenseswaived ...................................... $ .03
(b) Original capital
(c) Annualized
(d) Not annualized
(e) Per share amounts have been calculated using the monthly average shares
outstanding during the period method.
(f) The amount shown for a share outstanding throughout the period does not
accord with the change in the aggregate gains and losses in the portfolio
securities during the period because of the timing of sales and purchases
of Portfolio shares in relation to fluctuating market values during the
period.
</TABLE>
5
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Capital Growth Portfolio
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Portfolio's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1994 and may be
obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering the previously mentioned variable annuity
contracts and variable life insurance policies, or Scudder Investor Services,
Inc.
<TABLE>
<CAPTION>
Six For the Period
Months July 16, 1985
Ended (commencement
Years Ended December 31,(e) December of operations)
-------------------------------------------------------------------------- 31, to June 30,
1994 1993 1992 1991 1990 1989 1988 1987 1986(e)(f) 1986
-------------------------------------------------------------------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period .. $ 14.95 $ 12.71 $ 12.28 $ 8.99 $ 10.21 $ 8.53 $ 7.06 $ 7.67 $ 7.93 $ 6.00(b)
------- ------- ------- ------- ------- ------- -------- -------- ------- -------
Income from investment
operations:
Net investment
income (a) .......... .06 .06 .11 .16 .25 .35 .16 .15 .09 .19
Net realized and
unrealized gain
(loss) on investment
transactions ........ (1.42) 2.52 .66 3.35 (1.00) 1.58 1.40 (.28) (.07) 1.87
----- ---- --- ---- ----- ---- ---- ---- ---- ----
Total from investment
operations ........... (1.36) 2.58 .77 3.51 (.75) 1.93 1.56 (.13) .02 2.06
----- ---- --- ---- ---- ---- ---- ---- --- ----
Less distributions from:
Net investment
income .............. (.05) (.07) (.11) (.22) (.24) (.25) (.09) (.09) (.07) (.13)
Net realized gains
on investment
transactions ........ (1.31) (.27) (.23) -- (.23) -- -- (.39) (.21) --
----- ---- ---- ---- ---- ----
Total distributions .... (1.36) (.34) (.34) (.22) (.47) (.25) (.09) (.48) (.28) (.13)
----- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net asset value,
end of period ........ $ 12.23 $ 14.95 $ 12.71 $ 12.28 $ 8.99 $ 10.21 $ 8.53 $ 7.06 $ 7.67 $ 7.93
======= ======= ======= ======= ======= ======= ======== ======== ======= =======
Total Return (%) ....... (9.67) 20.88 6.42 39.56 (7.45) 22.75 22.07 (1.88) .26(d) 34.66(d)
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) .. 257 257 167 108 45 45 17 10 1 --
Ratio of operating
expenses, net to
average net
assets (%) (a) ....... .58 .60 .63 .71 .72 .75 .75 .75 .75(c) .60(c)
Ratio of net investment
income to average
net assets (%) ....... .47 .46 .95 1.49 2.71 3.51 2.17 1.68 2.21(c) 2.95(c)
Portfolio turnover
rate (%) ............. 66.44 95.31 56.29 58.88 61.39 63.96 129.75 113.34 38.78(c) 86.22(c)
(a) Portion of expenses
reimbursed .......... $ -- $ -- $ -- $ -- $ -- $ .01 $ .01 $ .04 $ .20 $ .81
(b) Original capital
(c) Annualized
(d) Not annualized
(e) Per share amounts, for each of the periods identified, have been calculated
using the monthly average shares outstanding during the period method.
(f) On August 22, 1986, the Trustees voted to change the year end of the Fund
from June 30 to December 31.
</TABLE>
6
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
International Portfolio
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Portfolio's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1994 and may be
obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering the previously mentioned variable annuity
contracts and variable life insurance policies, or Scudder Investor Services,
Inc.
<TABLE>
<CAPTION>
For the Period
May 1, 1987
(commencement
Years Ended December 31, of operations)
---------------------------------------------------------------------------- December 31,
1994(e) 1993(e) 1992(e) 1991(e) 1990(e) 1989(e) 1988 1987
---------------------------------------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ................ $ 10.85 $ 8.12 $ 8.47 $ 7.78 $ 8.46 $ 6.14 $ 5.26 $ 6.00(b)
------- ------- ------- ------- ------- ------- -------- --------
Income from investment
operations:
Net investment income (a) .......... .06 .09 .10 .12 .25 .10 .09 --
Net realized and unrealized
gain (loss) on investment
transactions ...................... (.15) 2.90 (.36) .77 (.89) 2.22(f) .79 (.64)
---- ---- ---- --- ---- ---- --- ----
Total from investment
operations ......................... (.09) 2.99 (.26) .89 (.64) 2.32 .88 (.64)
---- ---- ---- --- ---- ---- --- ----
Less distributions:
From net investment income ......... (.07) (.14) (.09) (.20) (.04) -- -- --
In excess of net investment income . -- (.12) -- -- -- -- -- --
From net realized gains on
investment transactions ........... -- -- -- -- -- -- -- (.10)
---- ---- ---- --- ---- ---- --- ----
Total distributions .................. (.07) (.26) (.09) (.20) (.04) -- -- (.10)
---- ---- ---- ---- ---- ----
Net asset value, end of period ....... $ 10.69 $ 10.85 $ 8.12 $ 8.47 $ 7.78 $ 8.46 $ 6.14 $ 5.26
======= ======= ======= ======= ======= ======= ======== ========
Total Return (%) ..................... (.85) 37.82 (3.08) 11.45 (7.65) 37.79 16.73 (10.64)(d)
Ratios and Supplemental Data
Net assets, end of period ($ millions) 472 238 65 41 35 17 3 3
Ratio of operating expenses,
net to average net assets (%) (a) .. 1.08 1.20 1.31 1.39 1.38 1.50 1.50 1.50(c)
Ratio of net investment income
to average net assets (%) .......... .57 .91 1.23 1.43 2.89 1.30 1.59 .02(c)
Portfolio turnover rate (%) .......... 33.52 20.36 34.42 45.01 26.67 57.69 110.42 146.08(c)
(a) Portion of expenses reimbursed .. $ -- $ -- $ -- $ -- $ -- $ .02 $ .14 $ .07
(b) Original capital
(c) Annualized
(d) Not annualized
(e) Per share amounts, for each of the periods identified, have been calculated
using the monthly average shares outstanding during the period method.
(f) Includes provision for federal income tax of $.03 per share.
</TABLE>
7
<PAGE>
- --------------------------------------------------------------------------------
POLICIES OF THE PORTFOLIOS
- --------------------------------------------------------------------------------
Each type of Portfolio has a different investment objective which it pursues
through separate investment policies, as described below. The differences in
objectives and policies among the Portfolios can be expected to affect the
degree of market and financial risk to which each Portfolio is subject and the
return of each Portfolio. The investment objectives and policies of each
Portfolio may, unless otherwise specifically stated, be changed by the Trustees
of the Fund without a vote of the Shareholders. There is no assurance that the
objectives of any Portfolio will be achieved.
MONEY MARKET PORTFOLIO
The Money Market Portfolio seeks to maintain the stability of capital and,
consistent therewith, to maintain the liquidity of capital and to provide
current income. The Portfolio seeks to maintain a constant net asset value of
$1.00 per share, although there can be no assurance that this will be achieved.
The Portfolio uses the amortized cost method of securities valuation.
The Money Market Portfolio purchases money market securities such as U.S.
Treasury, agency and instrumentality obligations, finance company and corporate
commercial paper, bankers' acceptances and certificates of deposit of domestic
and foreign banks (i.e., banks which at the time of their most recent annual
financial statements show total assets in excess of $1 billion), including
foreign branches of domestic banks, which involve different risks than those
associated with investments in certificates of deposit of domestic banks, and
corporate obligations. The Money Market Portfolio may also enter into repurchase
agreements. The Money Market Portfolio may also invest in certificates of
deposit issued by banks and savings and loan institutions which had at the time
of their most recent annual financial statements total assets of less than $1
billion, provided that (i) the principal amounts of such certificates of deposit
are insured by an agency of the U.S. Government, (ii) at no time will the
Portfolio hold more than $100,000 principal amount of certificates of deposit of
any one such bank, and (iii) at the time of acquisition, no more than 10% of the
Portfolio's assets (taken at current value) are invested in certificates of
deposit of such banks having total assets not in excess of $1 billion.
Investments are limited to those that are dollar-denominated and at the time of
purchase are rated, or judged by the Fund's investment adviser, Scudder, Stevens
& Clark, Inc. (the "Adviser"), subject to the supervision of the Trustees, to be
equivalent to those rated high quality (i.e., rated in the two highest
categories) by any two nationally-recognized rating services such as Moody's
Investors Service, Inc. ("Moody's") and Standard & Poor's ("S&P"). In addition,
the Adviser seeks through its own credit analysis to limit investments to high
quality instruments presenting minimal credit risks. The portfolio is subject to
certain additional quality and diversification restrictions which are set forth
in the Fund's Statement of Additional Information.
The remaining maturity of each investment in the Money Market Portfolio is 397
calendar days or less. The dollar-weighted average maturity of the Portfolio's
investments varies with money market conditions, but is always 90 days or less.
As a money market fund with a short-term maturity, the Portfolio's income
fluctuates with changes in interest rates, but its price to the public or
"offering price," is expected to remain fixed at $1.00 per share.
BOND PORTFOLIO
The Bond Portfolio pursues a policy of investing for a high level of income
consistent with a high quality portfolio of debt securities. Under normal
circumstances, the Portfolio invests at least 65% of its assets in bonds,
including those of the U.S. Government and its agencies, and those of
corporations and other notes and bonds paying high current income. It will
attempt to moderate the effect of market price fluctuation relative to that of a
long-term bond by investing in securities with varying maturities and by
entering into futures contracts on debt securities and related options for
hedging purposes.
The Portfolio is actively managed. The Portfolio may invest in a broad range of
short-, intermediate-, and long-term securities. Proportions among maturities
and types of securities may vary depending upon the prospects for income
relative to the outlook for the economy and the securities markets, the quality
of available investments, the level of interest rates, and other factors. The
Portfolio may also invest in preferred stocks consistent with the Portfolio's
objectives.
8
<PAGE>
The Bond Portfolio may purchase corporate notes and bonds including issues
convertible into common stock and obligations of municipalities. It may purchase
U.S. Government securities and obligations of federal agencies that are not
backed by the full faith and credit of the U.S. Government, such as obligations
of Federal Home Loan Banks, Farm Credit Banks and the Federal Home Loan Mortgage
Corporation. In addition, it may purchase obligations of international agencies
such as the International Bank for Reconstruction and Development, and the
Inter-American Development Bank. Other eligible investments include foreign
securities, such as non-U.S. dollar-denominated foreign debt securities and U.S.
dollar-denominated foreign debt securities (such as those issued by the Dominion
of Canada and its provinces) including, without limitation, Eurodollar Bonds and
Yankee Bonds, mortgage and other asset-backed securities, and money market
instruments such as commercial paper, and bankers' acceptances and certificates
of deposit issued by domestic and foreign branches of U.S. banks. The Portfolio
may also enter into repurchase agreements and may invest in zero coupon
securities.
The Bond Portfolio is of high quality. No purchase will be made if, as a result
thereof, less than 50% of the Portfolio's net assets would be invested in debt
obligations, including money market instruments, that (a) are issued or
guaranteed by the U.S. Government, (b) are rated at the time of purchase within
the two highest ratings categories by any of the nationally-recognized rating
services or (c) if not rated, are judged by the Adviser to be of a quality
comparable to obligations rated as described in (b) above. Not less than 80% of
the debt obligations in which the Portfolio invests will, at the time of
purchase, be rated within the three highest ratings categories of any such
service or, if not rated, will be judged to be of comparable quality by the
Adviser. The Fund may invest up to 20% of its assets in bonds rated below A but
no lower than B by Moody's or S&P, or unrated securities judged by the Adviser
to be of comparable quality. Debt securities which are rated below
investment-grade (that is, rated below Baa by Moody's or below BBB by S&P and
commonly referred to as "junk bonds") and unrated securities of comparable
quality, which usually entail greater risk (including the possibility of default
or bankruptcy of the issuers of such securities), generally involve greater
volatility of price and risk of loss of principal and income, and may be less
liquid than securities in the higher rating categories. Securities rated B
involve a high degree of speculation with respect to the payment of principal
and interest. Should the rating of any security held by the Portfolio be
downgraded after the time of purchase, the Adviser will determine whether it is
in the best interest of the Portfolio to retain or dispose of the security.
During the year ended December 31, 1994, the average monthly dollar-weighted
market value of the bonds held by the Portfolio, by ratings categories, was as
follows: 72.0% in AAA/Aaa securities, 1.0% in AA/Aa securities, 19.0% in A
securities, 4.0% in BBB/Baa securities, 2.0% in BB/Ba securities and 2.0% in
unrated securities, respectively. Future asset composition may vary.
The Portfolio may, for hedging purposes, purchase forward foreign currency
exchange contracts and foreign currencies in the form of bank deposits. The
Portfolio may also purchase other foreign money market instruments, including,
but not limited to, bankers' acceptances, certificates of deposit, commercial
paper, short-term government obligations and repurchase agreements.
Except for limitations imposed by the Bond Portfolio's investment restrictions
(see "INVESTMENT RESTRICTIONS"), there is no limit as to the proportions of the
Portfolio which may be invested in any of the eligible investments; however, it
is a policy of the Portfolio that its non-governmental investments will be
spread among a variety of companies and will not be concentrated in any
industry.
The Bond Portfolio cannot guarantee a gain or eliminate the risk of loss. The
net asset value of the Portfolio's shares will fluctuate with changes in the
market price of the Portfolio's investments, which tend to vary inversely with
changes in prevailing interest rates and, to a lesser extent, changes in foreign
currency exchange rates. As interest rates fall, the prices of debt securities
tend to rise and vice versa.
BALANCED PORTFOLIO
The Balanced Portfolio seeks a balance of growth and income from a diversified
portfolio of equity and fixed income securities. The Portfolio also seeks
long-term preservation of capital through a quality-oriented investment approach
that is designed to reduce risk.
In seeking its objectives of a balance of growth and income, as well as
long-term preservation of capital, the Portfolio invests in a diversified
portfolio of equity and fixed income securities. The Portfolio invests, under
normal circumstances, at least 50%, but no more than 75%, of its net assets in
common stocks and other equity investments. The Portfolio's equity investments
consist of common stocks, preferred stocks, warrants and securities convertible
into common stocks, of companies that, in the Adviser's judgment, are of
above-average financial quality and offer the prospect for above-average growth
in earnings, cash flow, or assets relative to the overall market as defined by
the Standard and Poor's 500 Composite Stock Price Index ("S&P 500"). The
9
<PAGE>
Portfolio will invest primarily in securities issued by medium- to large-sized
domestic companies with annual revenues or market capitalization of at least
$600 million, and which, in the opinion of the Adviser, offer above-average
potential for price appreciation. The Portfolio seeks to invest in companies
that have relatively consistent and above-average rates of growth; companies
that are in a strong financial position with high credit standings and
profitability; firms with important business franchises, leading products, or
dominant marketing and distribution systems; companies guided by experienced and
motivated managements; and companies selling at attractive market valuations.
The Adviser believes that companies with these characteristics will be rewarded
by the market with higher stock prices over time and provide investment returns,
on average, in excess of the S&P 500.
At least 65% of the value of the Portfolio's common stocks will be of issuers
which qualify, at the time of purchase, for one of the three highest equity
earnings and dividends ranking categories (A+, A, or A-) of S&P, or if not
ranked by S&P, are judged to be of comparable quality by the Adviser. S&P
assigns earnings and dividends rankings to corporations based on a number of
factors, including stability and growth of earnings and dividends. Rankings by
S&P are not an appraisal of a company's creditworthiness, as is true for S&P's
debt security ratings, nor are these rankings intended as a forecast of future
stock market performance. In addition to using S&P rankings of earnings and
dividends of common stocks, the Adviser conducts its own analysis of a company's
history, current financial position, and earnings prospects.
To enhance income and stability, the Portfolio's remaining assets are allocated
to bonds and other fixed income securities, including cash reserves. The
Portfolio will normally invest 25% to 50% of its net assets in fixed income
securities. However, at least 25% of the Portfolio's net assets will always be
invested in fixed income securities. The Portfolio can invest in a broad range
of corporate bonds and notes, convertible bonds, and preferred and convertible
preferred securities. It may also purchase U.S. Government securities and
obligations of federal agencies and instrumentalities that are not backed by the
full faith and credit of the U.S. Government, such as obligations of the Federal
Home Loan Banks, Farm Credit Banks, and the Federal Home Loan Mortgage
Corporation. The Portfolio may also invest in obligations of international
agencies, foreign debt securities (both U.S. and non-U.S. dollar-denominated),
mortgage-backed and other asset-backed securities, municipal obligations,
restricted securities issued in private placements and zero coupon securities.
For liquidity and defensive purposes, the Portfolio may invest without limit in
cash and in money market securities such as commercial paper, bankers'
acceptances, and certificates of deposit issued by domestic and foreign branches
of U.S. banks. The Portfolio may also enter into repurchase agreements with
respect to U.S. Government securities.
Not less than 50% of the Portfolio's debt securities will be invested in debt
obligations, including money market instruments, that (a) are issued or
guaranteed by the U.S. Government, (b) are rated at the time of purchase within
the two highest ratings categories by any nationally-recognized rating service
or (c) if not rated, are judged by the Adviser to be of a quality comparable to
obligations rated as described in (b) above. Not less than 80% of the debt
obligations in which the Portfolio invests will, at the time of purchase, be
rated within the three highest ratings categories of any such service or, if not
rated, will be judged to be of comparable quality by the Adviser. Up to 20% of
the Portfolio's debt securities may be invested in bonds rated below A but no
lower than B by Moody's or S&P, or unrated securities judged by the Adviser to
be of comparable quality. Debt securities which are rated below investment-grade
(that is, rated below Baa by Moody's or below BBB by S&P and commonly referred
to as "junk bonds") and unrated securities of comparable quality, which usually
entail greater risk (including the possibility of default or bankruptcy of the
issuers of such securities), generally involve greater volatility of price and
risk of principal and income, and may be less liquid than securities in the
higher rating categories. Securities rated B involve a high degree of
speculation with respect to the payment of principal and interest. Should the
rating of any security held by the Portfolio be downgraded after the time of
purchase, the Adviser will determine whether it is in the best interest of the
Portfolio to retain or dispose of the security. During the year ended December
31, 1994, the average monthly dollar-weighted market value of the bonds held by
the Portfolio, by ratings categories, was as follows: 69.0% in AAA/Aaa
securities, 3.0% in AA/Aa securities, 13.0% in A securities, 12.0% in BBB/Baa
securities, 2.0% in BB/Ba securities and 1.0% in unrated securities,
respectively. Future asset composition may vary.
The Portfolio will, on occasion, adjust its mix of investments among equity
securities, bonds, and cash reserves. In reallocating investments, the Adviser
weighs the relative values of different asset classes and expectations for
future returns. In doing so, the Adviser analyzes, on a global basis, the level
and direction of interest rates, capital flows, inflation expectations,
anticipated growth of corporate profits, monetary and fiscal policies around the
world, and other related factors. The Portfolio does not take extreme investment
positions as part of an effort to "time the market." Shifts between stocks and
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fixed income investments are expected to occur in generally small increments
within the guidelines adopted in this prospectus. The Portfolio is designed as a
conservative long-term investment program.
While the Portfolio emphasizes U.S. equity and debt securities, it may invest a
portion of its assets in foreign securities, including depositary receipts. The
Portfolio's foreign holdings will meet the criteria applicable to its domestic
investments. The international component of the Portfolio's investment program
is intended to increase diversification, thus reducing risk, while providing the
opportunity for higher returns.
In addition, the Portfolio may invest in securities on a when-issued or forward
delivery basis. The Portfolio may, for hedging purposes, purchase forward
foreign currency exchange contracts and foreign currencies in the form of bank
deposits. The Portfolio may also purchase other foreign money market
instruments, including, but not limited to, bankers' acceptances, certificates
of deposit, commercial paper, short-term government obligations and repurchase
agreements.
The Balanced Portfolio cannot guarantee a gain or eliminate the risk of loss.
The net asset value of the shares of the Portfolio will increase or decrease
with changes in the market price of the Portfolio's investments and, to a lesser
extent, changes in foreign currency exchange rates.
GROWTH AND INCOME PORTFOLIO
The Growth and Income Portfolio seeks long-term growth of capital, current
income and growth of income. In pursuing these three objectives, the Portfolio
invests primarily in common stocks, preferred stocks, and securities convertible
into common stocks of companies which offer the prospect for growth of earnings
while paying higher than average current dividends. Over time, continued growth
of earnings tends to lead to higher dividends and enhancement of capital value.
The Portfolio allocates its investments among different industries and
companies, and changes its portfolio securities for investment considerations
and not for trading purposes.
The Portfolio attempts to achieve its investment objectives by investing
primarily in dividend paying common stocks, preferred stocks and securities
convertible into common stocks. The Portfolio may also purchase such securities
which do not pay current dividends but which offer prospects for growth of
capital and future income. Convertible securities (which may be current coupon
or zero coupon securities) are bonds, notes, debentures, preferred stocks and
other securities which may be converted or exchanged at a stated or determinable
exchange ratio into underlying shares of common stock. The Portfolio may also
invest in nonconvertible preferred stocks consistent with the Portfolio's
objectives. From time to time, for temporary defensive purposes, when the
Adviser feels such a position is advisable in light of economic or market
conditions, the Portfolio may invest a portion of its assets in cash and cash
equivalents. The Portfolio may invest in foreign securities and in repurchase
agreements.
The Portfolio may, for hedging purposes, purchase forward foreign currency
exchange contracts and foreign currencies in the form of bank deposits. The
Portfolio may also purchase other foreign money market instruments, including,
but not limited to, bankers' acceptances, certificates of deposit, commercial
paper, short-term government obligations and repurchase agreements.
The Growth and Income Portfolio cannot guarantee a gain or eliminate the risk of
loss. The net asset value of the Portfolio's shares will increase or decrease
with changes in the market prices of the Portfolio's investments and, to a
lesser extent, changes in foreign currency exchange rates.
CAPITAL GROWTH PORTFOLIO
The Capital Growth Portfolio seeks to maximize long-term capital growth through
a broad and flexible investment program. The Portfolio invests in marketable
securities, principally common stocks and, consistent with its objective of
long-term capital growth, preferred stocks. However, in order to reduce risk, as
market or economic conditions periodically warrant, the Portfolio may also
invest up to 25% of its assets in short-term debt instruments.
In its examination of potential investments, the Adviser considers, among other
things, the issuer's financial strength, management reputation, absolute size
and overall industry position.
Equity investments can have diverse financial characteristics, and the Trustees
believe that the opportunity for capital growth may be found in many different
sectors of the market at any particular time. In contrast to the specialized
investment policies of some capital appreciation funds, the Portfolio is
therefore free to invest in a wide range of marketable securities offering the
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potential for growth. This enables the Portfolio to pursue investment values in
various sectors of the stock market including:
1. Companies that generate or apply new technologies, new and improved
distribution techniques, or new services, such as those in the business
equipment, electronics, specialty merchandising, and health service
industries.
2. Companies that own or develop natural resources, such as energy
exploration or precious metals companies.
3. Companies that may benefit from changing consumer demands and
lifestyles, such as financial service organizations and
telecommunications companies.
4. Foreign companies.
While emphasizing investments in companies with above-average growth prospects,
the Portfolio may also purchase and hold equity securities of companies that may
have only average growth prospects, but seem undervalued due to factors thought
to be of a temporary nature which may cause their securities to be out of favor
and to trade at a price below their potential value.
The Portfolio, as a matter of nonfundamental policy, may invest up to 20% of its
net assets in intermediate to longer term debt securities when management
anticipates that the total return on debt securities is likely to equal or
exceed the total return on common stocks over a selected period of time. The
Portfolio may purchase investment-grade debt securities, which are those rated
Aaa, Aa, A or Baa by Moody's, or AAA, AA, A or BBB by S&P, or, if unrated, of
equivalent quality as determined by the Adviser. Bonds that are rated Baa by
Moody's or BBB by S&P have some speculative characteristics. The Portfolio's
intermediate to longer term debt securities may also include those which are
rated below investment grade, as long as no more than 5% of its net assets are
invested in such securities. As interest rates fall the prices of debt
securities tend to rise and vice versa. Should the rating of any security held
by the Portfolio be downgraded after the time of purchase, the Adviser will
determine whether it is in the best interest of the Portfolio to retain or
dispose of the security.
The Portfolio may, for hedging purposes, purchase forward foreign currency
exchange contracts and foreign currencies in the form of bank deposits. The
Portfolio may also purchase other foreign money market instruments, including,
but not limited to, bankers' acceptances, certificates of deposit, commercial
paper, short-term government obligations and repurchase agreements.
The Capital Growth Portfolio cannot guarantee a gain or eliminate the risk of
loss. The net asset value of the shares of the Portfolio will increase or
decrease with changes in the market price of the Portfolio's investments and, to
a lesser extent, changes in foreign currency exchange rates.
INTERNATIONAL PORTFOLIO
The International Portfolio seeks long-term growth of capital primarily through
diversified holdings of marketable foreign equity investments. The Portfolio
invests in companies, wherever organized, which do business primarily outside
the United States. The Portfolio intends to diversify investments among several
countries and to have represented in its holdings business activities in not
less than three different countries. The Portfolio does not intend to
concentrate investments in any particular industry.
The Portfolio invests primarily in equity securities of established companies,
listed on foreign exchanges, which the Adviser believes have favorable
characteristics. It may also invest in fixed income securities of foreign
governments and companies. However, management intends to maintain a portfolio
consisting primarily of equity securities. Investing in foreign securities may
involve a greater degree of risk than investing in domestic securities due to
the possibility of exchange rate fluctuations and exchange controls, less
publicly available information, more volatile markets, less securities
regulation, less favorable tax provisions, war and expropriation (see "POLICIES
AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS--Foreign Securities").
The Portfolio has no present intention of altering its general policy of being
primarily invested under normal conditions in foreign securities. However, in
the event of exceptional conditions abroad, the Portfolio may temporarily invest
all or a portion of its assets in Canadian or U.S. Government obligations or
currencies, or securities of companies incorporated in and having their
principal activities in Canada or the United States.
The Portfolio may, for hedging purposes, purchase forward foreign currency
exchange contracts, foreign currency options and futures contracts and foreign
currencies in the form of bank deposits. The Portfolio may also purchase other
foreign money market instruments, including, but not limited to, bankers'
acceptances, certificates of deposit, commercial paper, short-term government
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and corporate obligations and repurchase agreements.
The International Portfolio cannot guarantee a gain or eliminate the risk of
loss. The net asset value of the shares of the Portfolio will increase or
decrease with changes in the market price of the Portfolio's investments and
changes in foreign currency exchange rates.
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APPLICABLE TO THE PORTFOLIOS
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Except as otherwise noted below, the following description of additional
investment policies and techniques is applicable to all of the Portfolios.
REPURCHASE AGREEMENTS
As a means of earning income for periods as short as overnight, the Fund, on
behalf of a Portfolio, may enter into repurchase agreements with U.S. and
foreign banks, and any broker-dealer which is recognized as a reporting
government securities dealer, if the creditworthiness of the bank or
broker-dealer has been determined by the Adviser to be of a sufficiently high
quality. Under a repurchase agreement, a Portfolio acquires securities, subject
to the seller's agreement to repurchase those securities at a specified time and
price. Securities subject to a repurchase agreement are held in a segregated
account and the seller agrees to maintain the market value of such securities at
least equal to 100.5% of the repurchase price on a daily basis. If the seller
under a repurchase agreement becomes insolvent and the Fund has failed to
perfect its interest in the underlying securities, the Fund might be deemed an
unsecured creditor of the seller and may encounter delay and incur costs before
being able to sell the security. Also, if a seller defaults, the value of such
securities might decline before the Fund is able to dispose of them. The
Trustees have set standards of counterparty creditworthiness and monitor
compliance with such standards.
CONVERTIBLE SECURITIES
The Bond, Balanced, Growth and Income and Capital Growth Portfolios may each
invest in convertible securities (bonds, notes, debentures, preferred stocks and
other securities convertible into common stocks) which may offer higher income
than the common stocks into which they are convertible. The convertible
securities in which each Portfolio may invest include fixed income or zero
coupon debt securities, which may be converted or exchanged at a stated or
determinable exchange ratio into underlying shares of common stock. Prior to
their conversion, convertible securities may have characteristics similar to
non-convertible securities.
While convertible securities generally offer lower yields than non-convertible
debt securities of similar quality, their prices may reflect changes in the
value of the underlying common stock. Although to a lesser extent than with debt
securities generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. Convertible securities entail less credit risk than the
issuer's common stock. The ratings of the convertible securities in which the
Portfolios invest will be comparable to the ratings of the Portfolios' fixed
income securities.
MORTGAGE AND OTHER ASSET-BACKED SECURITIES
The Bond Portfolio and the Balanced Portfolio may each invest in mortgage-backed
securities, which are securities representing interests in pools of mortgage
loans. These securities provide shareholders with payments consisting of both
interest and principal as the mortgages in the underlying mortgage pools are
paid off.
The timely payment of principal and interest on mortgage-backed securities
issued or guaranteed by the Government National Mortgage Association ("GNMA") is
backed by GNMA and the full faith and credit of the U.S. Government. These
guarantees, however, do not apply to the market value or yield of
mortgage-backed securities or to the value of Portfolio shares. Also, GNMA and
other mortgage-backed securities may be purchased at a premium over the maturity
value of the underlying mortgages. This premium is not guaranteed and will be
lost if prepayment occurs. In addition, either Portfolio may invest in
mortgage-backed securities issued by other issuers, such as the Federal National
Mortgage Association, ("FNMA"), which are not guaranteed by the U.S. Government.
Moreover, the Portfolios may invest in debt securities which are secured with
collateral consisting of mortgage-backed securities, such as collateralized
mortgage obligations ("CMOs"), and in other types of mortgage-related
securities.
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Unscheduled or early payments on the underlying mortgages may shorten the
securities' effective maturities and lessen their growth potential. Either
Portfolio may agree to purchase or sell these securities with payment and
delivery taking place at a future date. A decline in interest rates may lead to
a faster rate of repayment of the underlying mortgages, and expose the Portfolio
to a lower rate of return upon reinvestment. To the extent that such
mortgage-backed securities are held by the Portfolio, the prepayment right of
mortgagors may limit the increase in net asset value of the Portfolio because
the value of the mortgage-backed securities held by the Portfolio may not
appreciate as rapidly as the price of non-callable debt securities.
The Portfolios may also invest in securities representing interests in pools of
certain other consumer loans, such as automobile loans or credit card
receivables. In some cases, principal and interest payments are partially
guaranteed by a letter of credit from a financial institution. Asset-backed
securities are subject to the risk of prepayment and the risk that the
underlying loans will not be repaid.
FOREIGN SECURITIES
The Bond, Balanced, Growth and Income, Capital Growth and International
Portfolios may each invest without limit, except as may be applicable to debt
securities generally, in U.S. dollar-denominated foreign debt securities
(including those issued by the Dominion of Canada and its provinces and other
debt securities which meet the criteria applicable to a Portfolio's domestic
investments), and in certificates of deposit issued by foreign banks and foreign
branches of United States banks, to any extent deemed appropriate by the
Adviser. The Bond Portfolio may invest up to 20% of its assets in non-U.S.
dollar-denominated foreign debt securities. The Balanced Portfolio may invest up
to 20% of its debt securities in non-U.S. dollar-denominated foreign debt
securities, and may invest up to 25% of its equity securities in non-U.S.
dollar-denominated foreign equity securities. The Growth and Income Portfolio
may invest up to 25% of its assets in non-U.S. dollar-denominated securities of
foreign issuers. The Capital Growth Portfolio may invest up to 25% of its
assets, and the International Portfolio may invest without limit, in non-U.S.
dollar-denominated equity securities of foreign issuers. Global investing
involves considerations not typically found in investing in U.S. markets. These
considerations, which may favorably or unfavorably affect a Portfolio's
performance, include changes in exchange rates and exchange rate controls (which
may include suspension of the ability to transfer currency from a given
country), costs incurred in conversions between currencies, devaluations in the
currencies in which a Portfolio's securities are denominated, non-negotiable
brokerage commissions, less publicly available information, different accounting
standards, lower trading volume and greater market volatility, the difficulty of
enforcing obligations in other countries, less securities regulation, different
tax provisions (including withholding on dividends paid to the Fund), war,
expropriation, political and social instability and diplomatic developments.
Further, the settlement period of securities transactions in foreign markets may
be longer than in domestic markets and payment for securities may be required
before delivery. These considerations generally are more of a concern in
developing countries. For example, the possibility of revolution and the
dependence on foreign economic assistance may be greater in these countries than
in developed countries. The Adviser seeks to mitigate the risks associated with
these considerations through diversification and active professional management.
WHEN-ISSUED SECURITIES
A Portfolio may from time to time purchase securities on a "when-issued" or
"forward delivery" basis. Debt securities are often issued on this basis. The
price of such securities, which may be expressed in yield terms, is fixed at the
time a commitment to purchase is made, but delivery and payment for such
securities take place at a later date. During the period between purchase and
settlement, no payment is made by a Portfolio and no interest accrues to the
Portfolio. To the extent that assets of a Portfolio are held in cash pending the
settlement of a purchase of securities, that Portfolio would earn no income;
however, it is the Fund's intention that each Portfolio will be fully invested
to the extent practicable and subject to the policies stated above. While
when-issued or forward delivery securities may be sold prior to the settlement
date, the Portfolio intends to purchase such securities with the purpose of
actually acquiring them unless a sale appears desirable for investment reasons.
At the time a Portfolio makes the commitment to purchase a security on a
when-issued or forward delivery basis, it will record the transaction and
reflect the amount due and the value of the security in determining the net
asset value of a Portfolio. The market value of the when-issued or forward
delivery securities may be more or less than the purchase price payable at the
settlement date. The Fund does not believe that a Portfolio's net asset value or
income will be adversely affected by the purchase of securities on a when-issued
or forward delivery basis. Each Portfolio will establish a segregated account
with its custodian in which it will maintain cash, U.S. Government securities
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<PAGE>
and other high-grade debt obligations at least equal in value to commitments for
when-issued or forward delivery securities. Such segregated securities either
will mature or, if necessary, be sold on or before the settlement date.
INDEXED SECURITIES
The Bond Portfolio and the Balanced Portfolio may each invest in indexed
securities, the value of which is linked to currencies, interest rates,
commodities, indices or other financial indicators ("reference instruments").
The interest rate or (unlike most fixed-income securities) the principal amount
payable at maturity of an indexed security may be increased or decreased,
depending on changes in the value of the reference instrument. Indexed
securities may be positively or negatively indexed, so that appreciation of the
reference instrument may produce an increase or a decrease in the interest rate
or value at maturity of the security. In addition, the change in the interest
rate or value at maturity of the security may be some multiple of the change in
the value of the reference instrument. Thus, in addition to the credit risk of
the security's issuer, the Fund will bear the market risk of the reference
instrument.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend the portfolio securities of any Portfolio (other than the
Money Market Portfolio) provided: (1) the loan is secured continuously by
collateral consisting of U.S. Government securities, or cash or cash equivalents
adjusted daily to have a market value at least equal to the current market value
of the securities loaned; (2) the Fund may at any time call the loan and regain
the securities loaned; (3) the Portfolio will receive any interest or dividends
paid on the loaned securities; and (4) the aggregate market value of securities
loaned will not at any time exceed one-third of the total assets of the
Portfolio. In addition, it is anticipated that the Portfolio may share with the
borrower some of the income received on the collateral for the loan or that it
will be paid a premium for the loan. Before a Portfolio enters into a loan, the
Adviser considers all relevant facts and circumstances including the
creditworthiness of the borrower.
ZERO COUPON SECURITIES
The Bond Portfolio and the Balanced Portfolio may each invest in zero coupon
securities, including U.S. Government securities and privately stripped coupons
on and receipts for U.S. Government securities. These securities pay no cash
income but are issued at substantial discounts from their value at maturity.
When held to maturity, their entire return, which consists of the accretion of
discount, comes from the difference between their issue price and their maturity
value. Because they do not pay interest until maturity, zero coupon securities
tend to be subject to greater interim fluctuation of market value in response to
changes in interest rates than interest-paying securities of similar maturities.
DERIVATIVES
The following descriptions of Options, Options on Securities Indexes, Futures
Contracts, and Forward Foreign Currency Exchange Contracts, Foreign Currency
Futures Contracts and Foreign Currency Options discuss types of derivatives in
which certain of the Portfolios may invest.
OPTIONS
The Fund may write covered call options on securities of any Portfolio (other
than the Money Market Portfolio) in an attempt to earn income. The Balanced,
Growth and Income, Capital Growth and International Portfolios may each also
write put options to a limited extent on their portfolio securities in an
attempt to earn additional income on their portfolios, consistent with their
investment objectives, and they may purchase call and put options for hedging
purposes. Risks associated with writing put options include the possible
inability to effect closing transactions at favorable prices. In addition, the
Fund may engage in over-the-counter options transactions with broker-dealers who
make markets in these options. Over-the-counter options purchased by the Fund
and portfolio securities "covering" the Fund's obligation pursuant to an
over-the-counter option may be deemed to be illiquid and may not be readily
marketable. The Adviser will monitor the creditworthiness of dealers with whom
the Fund enters into such options transactions under the general supervision of
the Fund's Trustees. The Fund may forego the benefit of appreciation in its
Portfolios on securities sold pursuant to call options.
OPTIONS ON SECURITIES INDEXES
The Balanced, Growth and Income, Capital Growth and International Portfolios may
each purchase put and call options on securities indexes to hedge against the
risk of unfavorable price movements adversely affecting the value of a
Portfolio's securities. Options on securities indexes are similar to options on
securities except that settlement is made in cash.
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Unlike a securities option, which gives the holder the right to purchase or sell
a specified security at a specified price, an option on a securities index gives
the holder the right to receive a cash "exercise settlement amount" equal to (i)
the difference between the exercise price of the option and the value of the
underlying stock index on the exercise date, multiplied by (ii) a fixed "index
multiplier." In exchange for undertaking the obligation to make such cash
payment, the writer of the securities index option receives a premium.
Gains or losses on a Portfolio's transactions in securities index options depend
on price movements in the stock market generally (or, for narrow market indexes,
in a particular industry or segment of the market) rather than the price
movements of individual securities held by a Portfolio of the Fund. In this
respect, purchasing a stock index put option is analogous to the purchase of a
put on a securities index futures contract.
A Portfolio may sell securities index options prior to expiration in order to
close out its positions in securities index options which it has purchased. A
Portfolio may also allow options to expire unexercised.
FUTURES CONTRACTS
To protect against the effects of adverse changes in interest rates (sometimes
known as "hedging"), the Bond, Balanced, and International Portfolios may each,
to a limited extent, enter into futures contracts on debt securities. Such
futures contracts obligate the Fund, at maturity, to purchase or sell certain
debt securities. The Bond, Balanced, Growth and Income, Capital Growth and
International Portfolios may each enter into securities index futures contracts
to protect against changes in securities market prices. Each of these five
Portfolios may purchase and write put and call options on futures contracts of
the type which such Portfolio is authorized to enter into and may engage in
related closing transactions. This type of option must be traded on a U.S. or
foreign exchange or board of trade.
When interest rates are rising or stock or security prices are falling, futures
contracts can offset a decline in the value of a Portfolio's current portfolio
securities. When rates are falling or stock or security prices are rising, these
contracts can secure better rates or prices for a Portfolio than might later be
available in the market when it makes anticipated purchases.
The Fund will engage in transactions in futures contracts and options thereon
only in an effort to protect a Portfolio against a decline in the value of the
Portfolio's securities or an increase in the price of securities that the
Portfolio intends to acquire. Also, the initial margin deposits for futures
contracts and premiums paid for related options may not be more than 5% of a
Portfolio's total assets. These transactions involve brokerage costs and require
the Fund to segregate assets, such as cash, U.S. Government securities and
high-grade debt obligations, of a Portfolio to cover contracts which would
require it to purchase securities. A Portfolio may lose the expected benefit of
the transactions if interest rates or stock prices move in an unanticipated
manner. Such unanticipated changes in interest rates or stock prices may also
result in poorer overall performance in a Portfolio than if the Fund had not
entered into any futures transactions for that Portfolio. A Portfolio would be
required to make and maintain "margin" deposits in connection with transactions
in futures contracts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS, FOREIGN CURRENCY FUTURES CONTRACTS
AND FOREIGN CURRENCY OPTIONS
The Bond, Balanced, Growth and Income, Capital Growth and International
Portfolios may each enter into forward foreign currency exchange contracts
("forward contracts") to the extent of 15% of the value of their respective
total assets, for hedging purposes. A forward contract is a contract
individually negotiated and privately traded by currency traders and their
customers. A forward contract involves an obligation to purchase or sell a
specific currency for an agreed price at a future date, which may be any fixed
number of days from the date of the contract. The agreed price may be fixed or
with a specified range of prices.
The International Portfolio may also enter into foreign currency futures
contracts and foreign currency options to the extent of 15% of the value of its
total assets, for hedging purposes. Foreign currency futures contracts are
standardized contracts traded on commodities exchanges which involve an
obligation to purchase or sell a predetermined amount of currency at a
predetermined date at a specified price. The purpose of entering into these
contracts is to minimize the risk to the Portfolio from adverse changes in the
relationship between the U.S. dollar and foreign currencies. At the same time,
such contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. The Portfolio may
purchase options on foreign currencies for hedging purposes in a manner similar
to that of transactions in forward contracts. Unanticipated changes in currency
prices may result in poorer overall performance for the Portfolio than if it had
not engaged in forward contracts, foreign currency futures contracts and foreign
currency options.
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INVESTMENT RESTRICTIONS
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Unless specified to the contrary, the following restrictions may not be changed
with respect to any Portfolio without the approval of the majority of
outstanding voting securities of that Portfolio (which, under the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules thereunder and
as used in this prospectus, means the lesser of (1) 67% of the shares of that
Portfolio present at a meeting if the holders of more than 50% of the
outstanding shares of that Portfolio are present in person or by proxy, or (2)
more than 50% of the outstanding shares of that Portfolio). Any investment
restrictions which involve a maximum percentage of securities or assets shall
not be considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition or encumbrance of securities
or assets of, or borrowings by or on behalf of, a Portfolio.
The Fund may not, on behalf of any Portfolio:
(1) with respect to 75% of the value of the total assets of a Portfolio,
invest more than 5% of the value of the Portfolio's total assets in
the securities of any one issuer, except U.S. Government securities
and, with respect to 100% of the value of the total assets of a
Portfolio, the Fund may not invest more than 25% of the value of the
Portfolio's total assets in the securities of any one issuer, except
U.S. Government securities;
(2) pledge, mortgage or hypothecate its assets, except that, to secure
borrowings permitted by the investment restriction (8) below, it may
pledge securities having a market value at the time of pledge not
exceeding 15% of the value of a Portfolio's total assets and except in
connection with the writing of covered call options and the purchase
and sale of futures contracts and options on futures contracts;
(3) make loans to other persons, except loans of portfolio securities and
except to the extent that the purchase of debt obligations in
accordance with its investment objectives and policies and the entry
into repurchase agreements may be deemed to be loans;
(4) enter into repurchase agreements or purchase any securities if, as a
result thereof, more than 10% of the total assets of a Portfolio
(taken at market value) would be, in the aggregate, subject to
repurchase agreements maturing in more than seven days and invested in
restricted securities or securities which are not readily marketable;
(5) purchase the securities of any issuer if such purchase would cause
more than 10% of the voting securities of such issuer to be held by a
Portfolio;
(6) purchase securities if such purchase would cause more than 25% in the
aggregate of the market value of the total assets of a Portfolio at
the time of such purchase to be invested in the securities of one or
more issuers having their principal business activities in the same
industry, provided that there is no limitation in respect to
investments in obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities (for the purposes of this
restriction, telephone companies are considered to be a separate
industry from gas and electric public utilities, and wholly-owned
finance companies are considered to be in the industry of their
parents if their activities are primarily related to financing the
activities of the parents).
(7) purchase or sell any put or call options or any combination thereof,
except that the Fund may purchase and sell options on futures
contracts on debt securities, options on securities indexes and
securities index futures contracts and write covered call option
contracts on securities owned by a Portfolio, and may also purchase
call options for the purpose of terminating its outstanding
obligations with respect to securities upon which covered call option
contracts have been written (i.e., "closing purchase transactions"),
and except that the International Portfolio may also purchase and sell
options on foreign currency and on foreign currency futures contracts.
(8) borrow money except from banks as a temporary measure for
extraordinary or emergency purposes (each Portfolio is required to
maintain asset coverage (including borrowings) of 300% for all
borrowings) and no purchases of securities for a Portfolio will be
made while borrowings of that Portfolio exceed 5% of the Portfolio's
assets (the payment of interest on borrowings by a Portfolio will
reduce that Portfolio's income). In addition, the Board of Trustees
has adopted a policy whereby each Portfolio of the Fund may borrow up
to 10% of its total assets; provided, however, that each Portfolio may
borrow up to 25% of its total assets for extraordinary or emergency
purposes, including the facilitation of redemptions.
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<PAGE>
"Value" for the purposes of all investment restrictions shall mean the value
used in determining a Portfolio's net asset value (see "NET ASSET VALUE").
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
The Fund retains the investment advisory firm of Scudder, Stevens & Clark, Inc.,
a Delaware corporation, Two International Place, Boston, Massachusetts
02110-4103, to manage each Portfolio's daily investment and business affairs
subject to the policies established by the Trustees. The Trustees have overall
responsibility for the management of the Fund under Massachusetts law. The
Adviser is one of the most experienced investment counsel firms in the United
States. It was established in 1919 and pioneered the practice of providing
investment counsel to individual clients on a fee basis. The principal source of
the Adviser's income is professional fees received from providing continuing
investment advice, and the firm derives no income from brokerage, insurance or
underwriting of securities. Today, it provides investment counsel for many
individuals and institutions, including insurance companies, colleges,
industrial corporations, and financial and banking organizations. Directly or
through affiliates, the Adviser provides investment advice to over 50 mutual
fund portfolios.
For its advisory services to the Portfolios, the Adviser receives compensation
monthly at the following annual rates for each Portfolio:
Percent of the average
daily net asset values
Portfolio of each Portfolio
- --------- -----------------
Money Market Portfolio .370%
Bond Portfolio .475%
Balanced Portfolio .475%
Growth and Income Portfolio .475%
Capital Growth Portfolio .475%
International Portfolio .875%
The investment advisory fee for the International Portfolio is higher than those
charged many funds which invest primarily in U.S. securities, but is not
necessarily higher than those charged to funds with investment objectives
similar to the investment objectives of this Portfolio.
Under the investment advisory agreements between the Fund, on behalf of each
Portfolio, and the Adviser, the Fund is responsible for all its other expenses,
including clerical salaries; fees and expenses incurred in connection with
membership in investment company organizations; brokers' commissions; legal,
auditing and accounting expenses; taxes and governmental fees; the charges of
custodians, transfer agents and other agents; any other expenses, including
clerical expenses, of issue, sale, underwriting, distribution, redemption or
repurchase of shares; the expenses of and fees for registering or qualifying
securities for sale; the fees and expenses of the Trustees of the Fund who are
not affiliated with the Adviser; the cost of preparing and distributing reports
and notices to shareholders. The Fund is also responsible for its expenses
incurred in connection with litigation, proceedings and claims and the legal
obligation it may have to indemnify its officers and Trustees with respect
thereto. The Adviser, through Scudder Investor Services, Inc., a wholly-owned
subsidiary of the Adviser, places portfolio transactions on behalf of the Fund's
Portfolios. In so doing, the Adviser seeks to obtain the most favorable net
results. Subject to the foregoing, the Adviser may consider sales of variable
life insurance policies and variable annuity contracts for which the Fund is an
investment option, as a factor in the selection of firms to execute portfolio
transactions.
In addition to payments for investment advisory services provided by the
Adviser, the Trustees, consistent with the Fund's investment advisory agreements
and underwriting agreement, have approved payments to the Adviser, Scudder
Investor Services, Inc. and Scudder Fund Accounting Corporation for clerical,
accounting and certain other services they may provide the Fund.
For a period of five years from the date of execution of a Participation
Agreement with the Fund, and from year to year thereafter as agreed by the Fund
and the Participating Insurance Company, each of the Participating Insurance
Companies have agreed to contribute to the capital of the Fund to the extent
that the annual operating expenses of any Portfolio (except the International
Portfolio) of the Fund exceed 3/4 of 1% of the average daily net assets of that
Portfolio for any year of the Fund. The Participating Insurance Companies have
18
<PAGE>
agreed to contribute to the capital of the Fund to the extent that such expenses
of the International Portfolio exceed 1.5% of the average daily net assets of
the Portfolio for any year of the Fund. The different capital contribution
requirement for the International Portfolio reflects the higher operating costs
(such as custodian and investment advisory fees) of operating a portfolio
investing primarily in foreign securities. Other Participating Insurance
Companies will be required to enter into similar arrangements with the Fund. The
obligation of each Participating Insurance Company in relation to the total
capital contribution due to a Portfolio will be the proportion that the average
value of the shares of such Portfolio held during the year by a separate account
or separate accounts of such company (or $1 million, if greater) bears to such
average daily net assets. To date, Charter National Life Insurance Company,
Mutual of America Life Insurance Company and Banner Life Insurance Company have
been Participating Insurance Companies for the past eight, six and five years,
respectively, and have made arrangements with the Adviser to continue their
participation.
In addition to the contributions to capital by Participating Insurance Companies
noted above, until April 30, 1996, the Adviser has agreed to waive part or all
of its fees for the Growth and Income Portfolio to the extent that the
Portfolio's expenses will be maintained at 0.75%.
PORTFOLIO MANAGEMENT
Each Portfolio is managed by a team of Scudder investment professionals who each
play an important role in the Portfolio's management process. Team members work
together to develop investment strategies and select securities for the
Portfolios. They are supported by Scudder's large staff of economists, research
analysts, traders, and other investment specialists who work in Scudder's
offices across the United States and abroad. Scudder believes its team approach
benefits Fund investors by bringing together many disciplines and leveraging
Scudder's extensive resources.
MONEY MARKET PORTFOLIO
Lead Portfolio Manager Robert T. Neff has led Money Market Portfolio's
day-to-day management since 1985. Mr. Neff joined Scudder in 1972 and has more
than 20 years of experience managing short-term fixed-income assets. Nicca
Alcantara, Portfolio Manager, has responsibility for the Portfolio's day-to-day
investments. Ms. Alcantara, who came to Scudder in 1984, has worked as a
portfolio manager since 1989 and joined the team in 1990. Prior to becoming a
portfolio manager, Ms. Alcantara worked as an account assistant in Scudder's
Reserve Asset Management Group. Stephen L. Akers, Portfolio Manager, joined the
team in 1995 and has managed several fixed-income portfolios since joining
Scudder in 1984.
BOND PORTFOLIO
Lead Portfolio Manager Ruth Heisler has had responsibility for overseeing the
Portfolio's day-to-day operations and has guided the Portfolio's investment
strategy since 1988. Ms. Heisler, who has over 40 years of fixed-income
investing experience, joined the team in 1986. William M. Hutchinson, Portfolio
Manager, helps set Scudder's overall fixed-income investment strategy. Mr.
Hutchinson, who has 21 years of investment experience, came to Scudder in 1986
as a portfolio manager and joined the team in 1987. Renee L. Ross, Portfolio
Manager, has been a member of the team since 1988. Ms. Ross, who joined Scudder
in 1981, has nine years of experience as a portfolio manager and focuses on
fixed-income analysis and investing.
BALANCED PORTFOLIO
Lead Portfolio Manager Bruce F. Beaty has responsibility for the day-to-day
operations of the Portfolio. Prior to joining Scudder as a portfolio manager in
1991, Mr. Beaty spent 11 years in the securities brokerage business. Ruth
Heisler, Portfolio Manager, has had responsibility for the Portfolio's
fixed-income investments since she joined the team in 1986. Ms. Heisler has been
involved with bond research and investing at Scudder since 1953. Renee L. Ross,
Portfolio Manager, assists Ms. Heisler with the bond portion of the Portfolio.
Ms. Ross, who has nine years of experience as a portfolio manager, has worked on
the team since 1988 and at Scudder since 1981. William F. Gadsden, Portfolio
Manager, joined the team in 1995. Mr. Gadsden joined Scudder in 1983 and has 13
years of investment experience.
GROWTH AND INCOME PORTFOLIO
Lead Portfolio Manager Robert T. Hoffman has responsibility for setting Growth
and Income Portfolio's stock investing strategy and oversees the Portfolio's
day-to-day operations. Mr. Hoffman, who joined Scudder in 1990 as a portfolio
manager, has 11 years of experience in the investment industry, including
19
<PAGE>
several years of pension fund management experience. Kathleen T. Millard,
Portfolio Manager, has worked in the investment industry since 1983 and as a
portfolio manager since 1986. Ms. Millard, who joined Scudder in 1991, also
focuses on stock investing strategy and stock selection. Benjamin W. Thorndike,
Portfolio Manager, is the Portfolio's chief analyst and strategist for
convertible securities. Mr. Thorndike, who has 16 years of investment
experience, joined Scudder in 1983 as a portfolio manager.
CAPITAL GROWTH PORTFOLIO
Lead Portfolio Manager Steven P. Aronoff assumed responsibility for setting
Capital Growth Portfolio's stock investing strategy and overseeing the
Portfolio's day-to-day operations in 1995. Mr. Aronoff, who joined Scudder in
1969 and the team in 1989, has 27 years of experience in stock research and
investing, including six years of experience as a full-time portfolio manager.
William F. Gadsden, Portfolio Manager, joined the team in 1989 and Scudder in
1983. Mr. Gadsden has 13 years of investment experience. Julia D. Cox, Portfolio
Manager, a member of the team since 1985, has been involved in the investment
industry since 1969 and at Scudder since 1980. Ms. Cox, who has 15 years'
experience as a portfolio manager, offers expertise on financial and technology
stocks.
INTERNATIONAL PORTFOLIO
Lead Portfolio Manager Carol L. Franklin sets International Portfolio's
investment strategy and has responsibility for the Portfolio's daily operation.
Ms. Franklin, who joined the team in 1989, has worked on equity investing at
Scudder as a portfolio manager since 1981. Nicholas Bratt, Portfolio Manager,
has been a member of the Portfolio team since 1987 and has 21 years of
experience in worldwide investing, including 19 years of experience as a
portfolio manager. Mr. Bratt, who has worked at Scudder since 1976, is the head
of Scudder's Global Equity Department. Joan Gregory, Portfolio Manager, focuses
on stock selection, a role she has played since joining Scudder in 1992. Ms.
Gregory has been involved with investment in global and international stocks as
an assistant portfolio manager since 1989.
- --------------------------------------------------------------------------------
DISTRIBUTOR
- --------------------------------------------------------------------------------
The Fund has an underwriting agreement with Scudder Investor Services, Inc. (the
"Distributor"), a wholly-owned subsidiary of Scudder, Stevens & Clark, Inc.
Located at Two International Place, Boston, Massachusetts 02110-4103, the
Distributor is a Massachusetts corporation formed in 1947. Under the principal
underwriting agreement between the Fund and the Distributor, the Fund is
responsible for the payment of all fees and expenses in connection with the
preparation and filing of any registration statement and prospectus covering the
issue and sale of shares, and the registration and qualification of shares for
sale with the Securities and Exchange Commission and in the various states,
including registering the Fund as a broker or dealer. The Fund will also pay the
fees and expenses of preparing, printing and mailing prospectuses annually to
existing shareholders and any notice, proxy statement, report, prospectus or
other communication to shareholders of the Fund, printing and mailing
confirmations of purchases of shares, any issue taxes or any initial transfer
taxes, a portion of toll-free telephone service for shareholders, wiring funds
for share purchases and redemptions (unless paid by the shareholder who
initiates the transaction), printing and postage of business reply envelopes and
a portion of the computer terminals used by both the Fund and the Distributor.
The Distributor will pay for printing and distributing prospectuses or reports
prepared for its use in connection with the offering of the shares, and
preparing, printing and mailing any other literature or advertising in
connection with the offering of the shares to the Participating Insurance
Companies. The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under Federal and state
laws, a portion of the toll-free telephone service and of computer terminals,
and of any activity which is primarily intended to result in the sale of shares
issued by the Fund, unless a Plan pursuant to Rule 12b-1 under the 1940 Act, as
amended, is in effect which provides that the Fund shall bear some or all of
such expenses.
As agent, the Distributor currently offers shares of each Portfolio of the Fund
continuously to the separate accounts of Participating Insurance Companies in
all states in which it is registered or where permitted by applicable law. The
underwriting agreement provides that the Distributor accepts orders for shares
at net asset value, as no sales commission or load is charged. The Distributor
has made no firm commitment to acquire shares of the Fund.
20
<PAGE>
NOTE:
Although the Fund does not currently have a 12b-1 Plan and shareholder approval
would be required in order to adopt one, the underwriting agreement provides
that the Fund will also pay those fees and expenses permitted to be paid or
assumed by the Fund pursuant to a 12b-1 Plan, if adopted by the Fund,
notwithstanding any other provision to the contrary in the underwriting
agreement, and the Fund or a third party will pay those fees and expenses not
specifically allocated to the Distributor in the underwriting agreement.
- --------------------------------------------------------------------------------
PURCHASES AND REDEMPTIONS
- --------------------------------------------------------------------------------
The separate accounts of the Participating Insurance Companies place orders to
purchase and redeem shares of each Portfolio based on, among other things, the
amount of premium payments to be invested and surrender and transfer requests to
be effected on that day pursuant to VA contracts and VLI policies. Orders
received by the Fund or its agent are effected on days on which the New York
Stock Exchange (the "Exchange") is open for trading. For orders received before
the close of regular trading on the Exchange (normally 4 p.m., eastern time),
such purchases and redemptions of the shares of each Portfolio are effected at
the respective net asset values per share determined as of the close of regular
trading on the Exchange on that same day except that, in the case of the Money
Market Portfolio, purchases will not be effected until the next determination of
net asset value after federal funds have been made available to the Fund (see
"NET ASSET VALUE"). Payment for redemptions will be made by State Street Bank
and Trust Company on behalf of the Fund and the relevant Portfolios within seven
days thereafter. No fee is charged the shareholders when they redeem Portfolio
shares.
The Fund may suspend the right of redemption of shares of any Portfolio and may
postpone payment for any period: (i) during which the Exchange is closed, other
than customary weekend and holiday closings or during which trading on the
Exchange is restricted; (ii) when the Securities and Exchange Commission
determines that a state of emergency exists which may make payment or transfer
not reasonably practicable; (iii) as the Securities and Exchange Commission may
by order permit for the protection of the security holders of the Fund; or (iv)
at any time when the Fund may, under applicable laws and regulations, suspend
payment on the redemption of its shares.
Should any conflict between VA contract and VLI policy holders arise which would
require that a substantial amount of net assets be withdrawn from the Fund,
orderly portfolio management could be disrupted to the potential detriment of
such contract and policy holders.
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
Scudder Fund Accounting Corporation, a wholly-owned subsidiary of the Adviser,
determines net asset value per share as of the close of regular trading on the
Exchange, normally 4 p.m., eastern time, on each day the Exchange is open for
trading. Net asset value per share is calculated for purchases and redemptions
for each Portfolio by dividing the current market value (amortized cost value in
the case of the Money Market Portfolio) of total Portfolio assets, plus other
assets, less all liabilities, by the total number of shares outstanding.
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
From time to time, quotations of the Money Market Portfolio's "yield" and
"effective yield" may be included in advertisements, sales literature or reports
to shareholders or prospective investors. Both yield figures are based on the
historical performance of the Portfolio and show the performance of a
hypothetical investment and are not intended to indicate future performance. The
yield of the Money Market Portfolio refers to the net investment income
generated by the Portfolio over a specified seven-day period (the ending date of
which will be stated). Included in "net investment income" is the amortization
of market premium or accretion of market and original issue discount. This
income is then "annualized." That is, the amount of income generated by the
Portfolio during that week is assumed to be generated during each week over a
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<PAGE>
52-week period and is shown as a percentage. The effective yield is expressed
similarly but, when annualized, the income earned by an investment in the
Portfolio is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment. Yield and effective yield for the Portfolio will vary based on,
among other things, changes in market conditions, the level of interest rates
and the level of the Portfolio's expenses.
BOND PORTFOLIO
From time to time, quotations of the Bond Portfolio's yield may be included in
advertisements, sales literature or reports to shareholders or prospective
investors. Yield figures are based on historical performance of the Bond
Portfolio and show the performance of a hypothetical investment and are not
intended to indicate future performance. The yield of the Bond Portfolio refers
to net investment income generated by the Bond Portfolio over a specified
thirty-day (or one month) period. This income is then "annualized." That is, the
amount of income generated by the Bond Portfolio during that thirty-day (or one
month) period is assumed to be generated over a 12-month period and is shown as
a percentage of net asset value.
ALL PORTFOLIOS
From time to time, quotations of a Portfolio's total return may be included in
advertisements, sales literature or reports to shareholders or prospective
investors. Total return figures are based on historical performance of the
Portfolio and show the performance of a hypothetical investment and are not
intended to indicate future performance. The total return of a Portfolio refers
to return assuming an investment has been held in the Portfolio for one year,
five years and for the life of the Portfolio (the ending date of which will be
stated). The total return quotations may be expressed in terms of average annual
or cumulative rates of return for all periods quoted. Average annual total
return refers to the average annual compound rate of return of an investment in
a Portfolio. Cumulative total return represents the cumulative change in value
of an investment in a Portfolio. Both will assume that all dividends and capital
gains distributions were reinvested.
Yield and total return for a Portfolio will vary based on, among other things,
changes in market conditions and the level of the Portfolio's expenses.
- --------------------------------------------------------------------------------
VALUATION OF PORTFOLIO SECURITIES
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
Pursuant to a Rule of the Securities and Exchange Commission, the Money Market
Portfolio will be valued at amortized cost. Under the amortized cost method of
valuation, securities are valued at cost plus constant accretion/amortization to
maturity of any discount/premium every day.
By using amortized cost valuation, the Fund seeks to maintain a constant net
asset value of $1.00 per share for the Money Market Portfolio, despite minor
shifts in the market value of its portfolio securities. The yield on a
shareholder's investment may be more or less than that which would be recognized
if the net asset value per share of the Money Market Portfolio were not constant
and were permitted to fluctuate with the market value of the portfolio
securities of the Money Market Portfolio. However, as a result of certain
procedures adopted by the Fund, the Adviser believes any difference will
normally be minimal.
OTHER PORTFOLIOS
An exchange-traded equity security (not subject to resale restrictions) is
valued at its most recent sale price as of the close of regular trading on the
Exchange on each day the Exchange is open for trading. Lacking any sales, the
security is valued at the calculated mean between the most recent bid quotation
and the most recent asked quotation. An unlisted equity security which is traded
on the NASDAQ system is valued at the most recent sale price or, if there are no
such sales, the security is valued at the high or "inside" bid quotation
supplied through such system. Debt securities, other than short-term securities,
are valued at prices supplied by the Fund's pricing agent. Short-term securities
with remaining maturities of sixty days or less are valued by the amortized cost
method, which the Trustees believe approximates market value. Foreign currency
forward contracts are valued at the value of the underlying currency at the
prevailing currency exchange rate. Securities for which current market
quotations are not readily available are valued at fair value as determined in
good faith by the Trustees, although the actual calculations may be made by
persons acting pursuant to the direction of the Trustees. Please refer to the
22
<PAGE>
section entitled "NET ASSET VALUE" in the Fund's Statement of Additional
Information for more information concerning valuation of portfolio securities.
- --------------------------------------------------------------------------------
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
The Internal Revenue Code of 1986 (the "Code") provides that each portfolio of a
series fund is to be treated as a separate taxpayer. Accordingly, each Portfolio
of the Fund intends to qualify as a separate regulated investment company under
Subchapter M of the Code.
Each Portfolio of the Fund intends to comply with the diversification
requirements of Code Section 817(h). By meeting this and other requirements, the
Participating Insurance Companies, rather than the holders of VA contracts and
VLI policies, should be subject to tax on distributions received with respect to
Portfolio shares. For further information concerning federal income tax
consequences for the holders of the VA contracts and VLI policies, such holders
should consult the prospectus used in connection with the issuance of their
particular contracts or policies.
As a regulated investment company, each Portfolio generally will not be subject
to tax on its ordinary income and net realized capital gains to the extent such
income and gains are distributed in conformity with applicable distribution
requirements under the Code to the separate accounts of the Participating
Insurance Companies which hold its shares. Distributions of income and the
excess of net short-term capital gain over net long-term capital loss will be
treated as ordinary income and distributions of the excess of net long-term
capital gain over net short-term capital loss will be treated as long-term
capital gain by the Participating Insurance Companies. Participating Insurance
Companies should consult their own tax advisers as to whether such distributions
are subject to federal income tax if they are retained as part of policy
reserves.
The Money Market Portfolio will declare a dividend of its net investment income
daily and distribute such dividend monthly. Distributions will be made shortly
after the first business day of each month following declaration of the
dividend. The Bond, Balanced, Growth and Income and Capital Growth Portfolios
will declare and distribute dividends from their net investment income, if any,
quarterly, in January, April, July and October. The International Portfolio
intends to distribute its net investment income annually within three months of
December 31, its fiscal year-end. Each of these Portfolios will distribute its
capital gains, if any, within three months of the fiscal year-end. For all
Portfolios, dividends declared in October, November or December with a record
date in such a month will be deemed to have been received by shareholders on
December 31 if paid during January of the following year. All distributions will
be reinvested in shares of such Portfolios unless an election is made on behalf
of a separate account to receive distributions in cash. Participating Insurance
Companies will be informed about the amount and character of distributions from
the relevant Portfolio for federal income tax purposes.
For the fiscal year ended December 31, 1994, the average annual portfolio
turnover rate for the Balanced Portfolio was 101.64%. A higher rate involves
greater brokerage and transaction expenses to the Portfolios and may result in
the realization of net capital gains, which would be taxable to shareholders
when distributed.
- --------------------------------------------------------------------------------
SHAREHOLDER COMMUNICATIONS
- --------------------------------------------------------------------------------
Owners of policies and contracts issued by Participating Insurance Companies for
which shares of one or more Portfolios are the investment vehicle will receive
from the Participating Insurance Companies unaudited semi-annual financial
statements and audited year-end financial statements certified by the Fund's
independent public accountants. Each report will show the investments owned by
the Fund and the market values thereof as determined by the Trustees and will
provide other information about the Fund and its operations.
Participating Insurance Companies with inquiries regarding the Fund may call the
Fund's underwriter, Scudder Investor Services, Inc. at 1-617-295-1000 or write
Scudder Investor Services, Inc., Two International Place, Boston, Massachusetts
02110-4103.
23
<PAGE>
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
FUND ORGANIZATION AND SHAREHOLDER INDEMNIFICATION
The Fund was organized in the Commonwealth of Massachusetts as a "Massachusetts
business trust" on March 15, 1985. The Fund's shares of beneficial interest are
presently divided into six separate series. Additional series may be created
from time to time.
Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. The Declaration of Trust contains an express disclaimer of shareholder
liability in connection with the Fund property or the acts, obligations or
affairs of the Fund. The Declaration of Trust also provides for indemnification
out of the Fund property of any shareholder held personally liable for the
claims and liabilities to which a shareholder may become subject by reason of
being or having been a shareholder. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Fund itself would be unable to meet its obligations. The Trustees
believe that, in view of the above, the risk of personal liability of
shareholders is remote.
OTHER INFORMATION
The activities of the Fund are supervised by the Trustees.
Although the Fund does not intend to hold annual meetings, shareholders of the
Fund have certain rights, as set forth in the Declaration of Trust of the Fund,
including the right to call a meeting of shareholders for the purpose of voting
on the removal of one or more Trustees. Shareholders have one vote for each
share held. Fractional shares have fractional votes.
As of December 31, 1994, Aetna Life Insurance and Annuity Company owned 9.58%,
American Skandia Life Assurance Corporation owned 4.53%, AUSA Life Insurance
Company owned 0.08%, Banner Life Insurance Company owned 0.53%, Charter National
Life Insurance Company owned 45.29%, Fortis Benefits Life Insurance Company
owned 0.05%, Intramerica Life Insurance Company owned 3.59%, Lincoln Benefit
Life Insurance Company owned 0.04%, Mutual of America Life Insurance Company
owned 19.96%, Paragon Life Insurance Company owned 0.03%, Providentmutual Life
and Annuity Company of America owned 0.18%, Safeco Life Insurance Companies
owned 0.55%, The Union Central Life Insurance Company owned 15.52% and United of
Omaha owned 0.07% of the Fund's outstanding shares.
Each Portfolio of the Fund has a December 31 fiscal year end.
Portfolio securities of the Fund are held separately, pursuant to a custodian
agreement, by State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, as custodian.
Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts 02107-2291, is
the transfer and dividend paying agent for the Fund.
The firm of Dechert Price & Rhoads, Boston, Massachusetts, is counsel for the
Fund.
The Fund's Statement of Additional Information and this prospectus omit certain
information contained in the Registration Statement which the Fund has filed
with the Securities and Exchange Commission under the Securities Act of 1933,
and reference is hereby made to the Registration Statement and its amendments,
for further information with respect to the Fund and the securities offered
hereby. The Registration Statement and its amendments, are available for
inspection by the public at the Securities and Exchange Commission in
Washington, D.C.
24
<PAGE>
- --------------------------------------------------------------------------------
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
David B. Watts*
President and Trustee
Dr. Kenneth Black, Jr.
Trustee; Regents' Professor Emeritus
of Insurance, Georgia State University
Peter B. Freeman
Trustee; Corporate Director and Trustee
Dr. J. D. Hammond
Trustee; Dean, Smeal College of Business
Administration, Pennsylvania State University
Daniel Pierce*
Vice President and Trustee
Pamela A. McGrath*
Vice President and Treasurer
Thomas S. Crain*
Vice President
Jerard K. Hartman*
Vice President
Richard A. Holt*
Vice President
Thomas W. Joseph*
Vice President
David S. Lee*
Vice President
Steven M. Meltzer*
Vice President
Edward J. O'Connell*
Vice President and Assistant Treasurer
Randall K. Zeller*
Vice President
Thomas F. McDonough*
Secretary
Kathryn L. Quirk*
Vice President and Assistant Secretary
Coleen Downs Dinneen*
Assistant Secretary
*Scudder, Stevens & Clark, Inc.
25
<PAGE>
<PAGE>
APPENDIX
Graphic Material
The attached prospectuses are bound together with a cover that contains a
picture of the Scudder Helmsman and the following caption:
Scudder Horizon Plan
A tax-advantaged
asset-building program
The lower left hand corner of the cover states:
This Booklet Contains Prospectuses For:
A Flexible Premium Variable Deferred Annuity
Offered by Charter National Life Insurance Company
The Scudder Variable Life Investment Fund
Managed by Scudder, Stevens & Clark, Inc.
The back cover also contains a picture of the Scudder Helmsman and has the
following instruction:
If you would like more information about Horizon Plan, please call or write
us at:
Scudder Insurance Agency, Inc.
Two International Place
Boston, MA 02110
1-800-225-2470
<PAGE>
<PAGE>
CHARTER NATIONAL
VARIABLE ANNUITY ACCOUNT
STATEMENT OF
ADDITIONAL INFORMATION
FOR THE FLEXIBLE PREMIUM
VARIABLE DEFERRED ANNUITY
Offered by
CHARTER NATIONAL
LIFE INSURANCE COMPANY
(A Missouri Stock Company)
8301 Maryland Avenue
St. Louis, Missouri 63105
This Statement of Additional Information expands upon subjects discussed in
the current Prospectus for the Flexible Premium Variable Deferred Annuity
(the "Contract") offered by Charter National Life Insurance Company. You
may obtain a copy of the Prospectus dated May 1, 1995, by calling (800) 225-
2470, or writing to Scudder Investor Services, Inc., Two International
Place, Boston, Massachusetts 02110-4103. Terms used in the current
Prospectus for the Contract are incorporated in this Statement.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE
READ ONLY IN CONJUNCTION WITH THE PROSPECTUS FOR THE CONTRACT.
Dated May 1, 1995
<PAGE>
TABLE OF CONTENTS
Prospectus
Page Reference*
STATE REGULATION OF CHARTER 1
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
OF CERTAIN EXCHANGES AND SURRENDERS 1 35
SAFEKEEPING OF THE VARIABLE ACCOUNTS ASSETS 1
CALCULATION OF YIELDS AND TOTAL RETURNS 2 11
Money Market Subaccount Yields 2
Other Subaccount Yields 3
Total Returns 4
Effect of the Records Maintenance Charge
on Performance Data 5
OTHER PERFORMANCE DATA 6 12
Cumulative Total Returns 6
Comparison of Performance and
Expense Information 7
LEGAL MATTERS 7 45
INDEPENDENT ACCOUNTANTS 7
FINANCIAL STATEMENTS 8 10
* The section headings corresponding to those contained herein may be
found in the Prospectus at the pages indicated.
<PAGE>
In order to supplement the description in the Prospectus, the following
provides additional information about Charter and the Contract which may be
of interest to an Owner.
STATE REGULATION OF CHARTER
Charter is a stock life insurance company organized under the laws of
Missouri, and is subject to regulation by the Missouri State Department of
Insurance. Quarterly statements are filed with the Missouri Director of
Insurance covering the operations and reporting on the financial condition
of Charter. Periodically, the Missouri Director of Insurance examines the
financial condition of Charter, which examination includes the liabilities
and reserves of the Variable Account and other separate accounts of which
Charter is the depositor.
In addition, Charter is subject to the insurance laws and regulations of
all the states in which it is licensed to operate. The availability of the
Contract and certain contract rights and provisions depends on state
approval and/or filing and review processes. Where required by state law
or regulation, the Contract will be modified accordingly.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF
CERTAIN EXCHANGES AND SURRENDERS
Under Section 1035 of the Code, generally no gain or loss is recognized on
a qualifying exchange of an annuity contract for another annuity contract.
A direct exchange of an annuity contract for a Contract should qualify as
an exchange under Section 1035 of the Code. There are, however, certain
exceptions to this rule. Moreover, although the issue is not free from
doubt, certain surrenders under an annuity contract followed by an
investment in a Contract also may qualify as exchanges under Section 1035
of the Code. Due to the uncertainty of the rules regarding the
determination of whether a transaction qualifies under Section 1035 of the
Code, prospective purchasers are urged to consult their own tax advisors.
In addition to being nontaxable events, certain exchanges qualifying under
Section 1035 of the Code may also result in a carry-over of the federal
income tax treatment of the old annuity contract to the new annuity
contract. Due to the complexity of the rules regarding the proper
treatment of an exchange qualifying under Section 1035 of the Code,
however, prospective purchasers are urged to consult their own tax
advisors.
SAFEKEEPING OF THE VARIABLE ACCOUNT'S ASSETS
Charter holds the assets of the Variable Account. The assets are kept
segregated and held separate and apart from the general funds of Charter.
Charter maintains records of all purchases and redemptions of the shares of
each Portfolio. A blanket fidelity bond in the amount of $1,000,000 covers
all of the officers and employees of Charter.
1
<PAGE>
CALCULATION OF YIELDS AND TOTAL RETURNS
From time to time, Charter may disclose yields, total returns and other
performance data pertaining to the Contracts for the Subaccounts in
accordance with the standards defined by the Securities and Exchange
Commission. Because of the charges and deductions imposed under a
Contract, the yield for the Subaccounts will be lower than the yield for
their respective Portfolios. Also, because of differences in Variable
Account charges for different variable annuity contracts invested in the
Variable Account, the yields, total returns and other performance data for
the Subaccounts will be different for the Contract than for such other
variable annuity contracts. The calculations of yields, total returns and
other performance data do not reflect the effect of any premium tax that
may be applicable to a particular Contract. Most states and political
subdivisions do not assess premium taxes. Where state premium taxes are
assessed, Charter will deduct the amount of tax due from each payment at
rates ranging from a minimum of .5% to a maximum of 3.5%. Any premium
taxes levied by political subdivisions will likewise be deducted from
payments; such taxes are generally at rates of less than 1%.
The performance data for periods prior to the date the Subaccounts
commenced operations is based on the performance of the Scudder Variable
Life Investment Fund's Portfolios and the assumption that the Subaccounts
were in existence for the same periods as the Fund's Portfolios with a
level of charges equal to those currently assessed against the Subaccounts.
Portfolios and Subaccounts commenced operations as indicated:
Subaccount/Portfolio Subaccount Portfolio
Money Market October, 1988 July, 1985
Bond October, 1988 July, 1985
Balanced October, 1988 July, 1985
Capital Growth October, 1988 July, 1985
International October, 1988 May, 1987
Growth and Income May, 1994 May, 1994
Money Market Subaccount Yields
Based on the method of calculation described below, the Current Yield and
Effective Yield on amounts held in the Money Market Subaccount for the
seven-day period ending December 31, 1994, were as follows:
Current Yield: = 4.42%
Effective Yield: = 4.51%
The Current Yield is computed by determining the net change (exclusive of
realized gains and losses on the sale of securities and unrealized
appreciation and depreciation) at the end of the seven-day period in the
value of a hypothetical account under a Contract having a balance of 1 unit
of the Money Market Subaccount at the beginning of the period, dividing
2
<PAGE>
such net change in account value by the value of the account at the
beginning of the period to determine the base period return, and
annualizing this quotient on a 365-day basis. The net change in account
value reflects (i) net income from the Portfolio attributable to the
hypothetical account and (ii) charges and deductions imposed under the
Contract which are attributable to the hypothetical account. The charges
and deductions include the per unit charges for the hypothetical account
for the Administration Charge and the Mortality and Expense Risk Charge.
Current Yield is calculated according to the following formula:
Current Yield = ((NCS - ES) / UV) x (365 / 7)
The seven-day Effective Yield is calculated by compounding the
unannualized base period return according to the following formula:
Effective Yield = (1 + ((NCS - ES) / UV))to the power of 365/7 - 1
Where, for both formulas:
NCS = The net change in the value of the Portfolio (exclusive of realized
gains and losses on the sale of securities and unrealized appreciation and
depreciation) for the seven-day period attributable to a hypothetical
account having a balance of one Subaccount unit under a Contract.
ES = Per unit expenses of the Subaccount for the Contracts for the seven-
day period.
UV = The unit value for a Contract on the first day of the seven-day
period.
The Current and Effective Yields on amounts held in the Money Market
Subaccount normally will fluctuate on a daily basis. Therefore, the
disclosed yield for any given past period is not an indication or
representation of future yields or rates of return. The Money Market
Subaccount's actual yield is affected by changes in interest rates on money
market securities, average portfolio maturity, the types and quality of
portfolio securities held, and the operating expenses.
Other Subaccount Yields
Based on the method of calculation described below, for the thirty-day
period ending December 31, 1994, the Yield for the Bond Subaccount was as
follows:
Yield = 6.80%
The 30-day Yield refers to income generated by the Bond Subaccount over a
specific 30-day period. Because the yield is annualized, the yield
generated during the 30-day period is assumed to be generated each 30-day
period over a 12-month period. The yield is computed by: (i) dividing the
net investment income of the Portfolio attributable to the Subaccount units
less Subaccount expenses attributable to the Contracts for the period, by
(ii) the maximum offering price per unit on the last day of the period
3
<PAGE>
times the daily average number of units outstanding for the period, by(iii)
compounding that yield for a 6-month period, and by (iv) multiplying that
result by 2. Expenses attributable to the Bond Subaccount for the
Contracts include the Administration Charge and the Mortality and Expense
Risk Charge. The 30-day Yield is calculated according to the following
formula:
30-Day Yield = 2 x ((((NI - ES) / (U x UV)) + 1)to the power of 6 - 1)
Where:
NI = Net income of the portfolio for the 30-day period attributable to the
Subaccount's units.
ES = Expenses of the Subaccount for the Contracts for the 30-day period.
U = The average daily number of units outstanding attributable to the
Contracts.
UV = The unit value for a Contract at the close (highest) of the last day
in the 30-day period.
The 30-Day Yield on amounts held in the Bond Subaccount normally will
fluctuate over time. Therefore, the disclosed yield for any given past
period is not an indication or representation of future yields or rates of
return. The Bond Subaccount's actual yield is affected by the types and
quality of portfolio securities held by the Portfolio, and its operating
expenses.
Total Returns
Based on the method of calculation described below, the Average Annual
Total Returns for the Subaccounts for the periods ending December 31, 1994,
were as follows:
Inception of Inception of One Year Five Year
the Subaccount the Portfolio Period Ending Period Ending
Subaccount to 12/31/94 to 12/31/94 12/31/94 12/31/94
Money Market 4.56% 4.80% 2.98% 3.83%
Bond 7.11% 7.18% - 5.45% 6.96%
Balanced 8.06% 9.05% - 2.74% 6.16%
Capital Growth 9.67% 11.25% - 10.33% 7.62%
International 11.50% 8.25% - 1.54% 5.52%
Growth and Income * 6.68% 6.68% N/A N/A
* One Year/Five Year Average Annual Total Returns are not applicable for
the Growth and Income Subaccount as it commenced operation on May 1, 1994.
Charter may disclose Total Returns for one or more of the Subaccounts for
various periods of time. One of the periods of time will include the
period measured from the date the Subaccount commenced operations. When a
Subaccount has been in operation for 1, 5, and 10 years, respectively, the
Total Return for these periods will be provided. Total Returns for other
periods of time may, from time to time, also be disclosed.
4
<PAGE>
Total Returns for a Contract represent the average annual compounded rates
of return that would equate a single investment of $1,000 to the redemption
value of that investment as of the last day of each of the periods. The
ending date for each period for which Total Return quotations are provided
will be for the most recent month end practicable, considering the type and
media of the communication, and will be stated in the communication.
Total Returns will be calculated using Subaccount Unit Values which Charter
calculates on each Valuation Date based on the performance of the
Subaccount's underlying Portfolio, and the deductions for the Mortality and
Expense Risk Charge, the Contract Administration Charge and (for periods
prior to January 25, 1991) the Records Maintenance Charge. The Records
Maintenance Charge of $35 per year per Contract was deducted at the
beginning of each Contract Year. The Total Return is calculated according
to the following formula:
TR = (ERV / P)to the power of 1/N - 1
Where:
TR = The average annual total return net of Subaccount recurring charges
for the Contracts.
ERV = The ending redeemable value of the hypothetical account at the end of
the period.
P = A hypothetical single payment of $1,000.
N = The number of years in the period.
Effect of the Records Maintenance Charge on Performance Data
The Contract provides for a $40 Records Maintenance Charge to be deducted
annually at the beginning of each Contract Year. As a matter of current
practice, Charter is not deducting a Records Maintenance Charge. On
performance information prior to January 25, 1991, $35 was deducted
annually at the beginning of each Contract Year proportionately from each
Subaccount based on the value of the amounts in each Subaccount. For
purposes of reflecting the Records Maintenance Charge in yield and total
return quotations Charter converted the $35 annual charge into a per dollar
per day charge based on the average Account Value of all Contracts on the
last day of the period for which quotations were provided and assumed that
the charge would be applied to all Contracts. The per dollar per day
average charge was then adjusted to reflect the basis upon which the
particular quotation was calculated.
The assumed average Records Maintenance Charge was not, except in rare
instances, reflective of its actual effect on a particular Contract.
5
<PAGE>
OTHER PERFORMANCE DATA
Cumulative Total Returns
Based on the method of calculation described below, the Cumulative Total
Returns for the Subaccounts for the periods ending December 31, 1994, were
as follows:
Inception of Inception of One Year Five Year
the Subaccount the Portfolio Period Ending Period Ending
Subaccount to 12/31/94 to 12/31/94 12/31/94 12/31/94
Money Market 32.06% 55.79% 2.98% 20.69%
Bond 53.45% 92.70% - 5.45% 40.04%
Balanced 62.16% 127.05% - 2.74% 34.87%
Capital Growth 77.77% 174.06% - 10.30% 44.40%
International 97.13% 83.57% - 1.54% 30.86%
Growth and Income * 4.42% 4.42% N/A N/A
* One Year/Five Year Returns are not applicable for the Growth and
Income Subaccount as it commenced operation on May 1, 1994.
Charter may disclose Cumulative Total Returns in conjunction with the
standard format described above. The Cumulative Total Returns will be
calculated using the following formula:
CTR = (ERV / P) - 1
Where:
CTR = The Cumulative Total Return net of Subaccount recurring charges for
the period.
ERV = The ending redeemable value of the hypothetical investment at the end
of the period.
P = A hypothetical single payment of $1,000.
Charter may also disclose yield and total returns for the Fund's
Portfolios, including such disclosure for periods prior to the date the
Variable Account commenced operations. For periods prior to the date the
Variable Account commenced operations, performance information for the
Subaccounts will be calculated based on the performance of the Fund's
Portfolios and the assumption that the Subaccounts were in existence for
the same periods as those indicated for the Funds Portfolios, with the
level of Contract charges that were in effect at the inception of the
Subaccounts.
All non-standard performance data will only be disclosed if the standard
performance data for the required periods is also disclosed.
6
<PAGE>
Comparison of Performance and Expense Information
Expenses and performance information for the Contract and each Subaccount
may be compared in advertising, sales literature, and other communications
to expenses and performance information of other variable annuity products
tracked by independent services such as Lipper Analytical Services, Inc.
("Lipper"), Morningstar and the Variable Annuity Research Data Service
("V.A.R.D.S.") which monitor and rank the performance and expenses of
variable annuity issuers on an industry-wide basis. From time to time,
Charter may also compare using other indices that measure performance, such
as Standard & Poor's 500 Composite ("S & P 500") or the Dow Jones
Industrial Average ("Dow"). Unmanaged indices may assume reinvestment of
dividends that generally do not reflect deductions for administrative and
management cost and expenses.
LEGAL MATTERS
Sutherland, Asbill & Brennan of Washington, D. C. has provided advice on
certain legal matters relating to the Federal Securities Laws. All matters
of Missouri law pertaining to the Contracts, including the validity of the
Contract and Charter's authority to issue the Contract under Missouri
Insurance Law, have been passed upon by Alexis M. Berg, General Counsel of
Charter National Life Insurance Company.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of Charter National Life Insurance
Company and Subsidiaries as of December 31, 1994 and 1993 and for each of
the three years in the period ended December 31, 1994 and the financial
statements of the Charter National Variable Annuity Account as of December
31, 1994 and for each of the two years in the period ended December 31,
1994 included in this Registration Statement have been included herein in
reliance on the reports of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of said firm as experts in accounting
and auditing.
FINANCIAL STATEMENTS
The financial statements of Charter, which are included in this
Statement of Additional Information, should be considered only as bearing
on the ability of Charter to meet its obligation under the Contract. They
should not be considered as bearing on the investment performance of the
assets held in the Variable Account.
7
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND
FINANCIAL STATEMENT SCHEDULES
PAGES
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
Report of Independent Accountants 9
Financial Statements:
Statement of Assets and Liabilities as of December 31, 1994 10
Statement of Operations for the year ended December 31, 1994 11
Statements of Changes in Net Assets for the years ended
December 31, 1994 and 1993 12-13
Notes to Financial Statements 14-17
CHARTER NATIONAL LIFE INSURANCE COMPANY
Report of Independent Accountants 18
Consolidated Financial Statements:
Balance Sheets as of December 31, 1994 and 1993 19
Statements of Income for the years ended December 31, 1994,
1993 and 1992 20
Statements of Stockholder's Equity for the years ended
December 31, 1994, 1993 and 1992 21
Statements of Cash Flows for the years ended December 31, 1994,
1993 and 1992 22-23
Notes to Consolidated Financial Statements 24-54
Report of Independent Accountants on Financial Statement Schedules 55
Consolidated Financial Statement Schedules:
Schedule III - Supplementary Insurance Information as of and for
the years ended December 31, 1994, 1993 and 1992 56
Schedule IV - Reinsurance as of and for the years ended
December 31, 1994, 1993 and 1992 57
Schedule V - Valuation and Qualifying Accounts for the years
ended December 31, 1994, 1993 and 1992 58
Schedule VI - Supplemental Information Concerning Property
Casualty Operations for the years ended December 31, 1994,
1993 and 1992 59
FINANCIAL STATEMENTS AND SCHEDULES OMITTED
All other schedules are not submitted because they are not required
or because the required information is included in the financial
statements or notes thereto.
8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Charter National Life Insurance Company:
We have audited the accompanying statement of assets and liabilities of the
Charter National Variable Annuity Account (comprising, respectively the
Money Market, Bond, Capital Growth, Balanced, International and Growth and
Income Subaccounts) as of December 31, 1994 and the related statement of
operations for the year then ended and the statements of changes in net
assets for each of the two years in the period then ended. These financial
statements are the responsibility of the management of the Charter National
Variable Annuity Account. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities held by the
custodian as of December 31, 1994. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of each of the respective
subaccounts comprising the Charter National Variable Annuity Account as of
December 31, 1994, the results of their operations for the year then ended
and the changes in their net assets for each of the two years in the period
then ended, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 10, 1995
9
<PAGE>
<TABLE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
<CAPTION>
Money Capital
Total Market Bond Growth
<S> <C> <C> <C> <C>
Assets:
Investment in series mutual
funds, at net asset value
(cost $271,418,499 in
total; and $54,318,690,
$15,156,831, $65,342,975,
$31,483,742, $87,392,445
and $17,723,816 for each
portfolio, respectively.) $269,188,311 $54,318,690 $14,166,231 $62,915,686
Amounts receivable from Charter
National Life Insurance
Company 464 467
Total net assets $269,188,775 $54,318,690 $14,166,698 $62,915,686
Net assets:
For variable annuity contracts $268,667,314 $54,318,690 $14,166,698 $62,915,686
Retained in separate account by
Charter National Life
Insurance Company 521,461
Total net assets $269,188,775 $54,318,690 $14,166,698 $62,915,686
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
Growth and
Balanced International Income
Assets:
Investment in series mutual
funds, at net asset value
(cost $271,418,499 in
total; and $54,318,690,
$15,156,831, $65,342,975,
$31,483,742, $87,392,445
and $17,723,816 for each
portfolio, respectively.) $29,843,602 $90,303,885 $17,640,217
Amounts receivable from Charter
National Life Insurance
Company (3)
Total net assets $29,843,602 $90,303,882 $17,640,217
Net assets:
For variable annuity contracts $29,843,602 $90,303,882 $17,118,756
Retained in separate account by
Charter National Life
Insurance Company 0 0 521,461
Total net assets $29,843,602 $90,303,882 $17,640,217
The accompanying notes are an integral part of these financial statements.
10a
<PAGE>
<TABLE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF OPERATIONS
For the year ended December 31, 1994
<CAPTION>
Money Capital
Total Market Bond Growth
<S> <C> <C> <C> <C>
Investment income:
Dividend income $13,320,546 $1,670,910 $1,318,791 $6,173,449
Less administrative expenses
and mortality and expense
risk charges 1,825,687 319,961 111,423 468,208
Net investment income 11,494,859 1,350,949 1,207,368 5,705,241
Gains (losses) on investments:
Realized gains (losses):
Proceeds from sales
of fund shares 337,823,576 143,448,681 13,060,937 98,097,179
Cost of fund shares sold 338,021,117 143,448,681 13,809,728 102,181,517
Net realized gains (losses) (197,541) (748,791) (4,084,338)
Unrealized gains (losses):
Beginning of year 19,133,927 411,016 6,435,725
End of year (2,230,188) (990,600) (2,427,289)
Change in unrealized gains
and losses (21,364,115) (1,401,616) (8,863,014)
Net realized and unrealized
losses on investments (21,561,656) (2,150,407) (12,947,352)
Increase (decrease) in net
assets from operations ($10,066,797) $1,350,949 ($943,039) ($7,242,111)
</TABLE>
* The Growth and Income Portfolio was added to the Fund on May 1, 1994.
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF OPERATIONS
For the year ended December 31, 1994
Growth and
Balanced International Income *
Investment income:
Dividend income $3,541,318 $539,448 $76,630
Less administrative expenses
and mortality and expense
risk charges 230,165 656,196 39,734
Net investment income 3,311,153 (116,748) 36,896
Gains (losses) on investments:
Realized gains (losses):
Proceeds from sales
of fund shares 15,561,737 62,882,851 4,772,191
Cost of fund shares sold 15,941,051 57,876,879 4,763,261
Net realized gains (losses) (379,314) 5,005,972 8,930
Unrealized gains (losses):
Beginning of year 2,261,023 10,026,163
End of year (1,640,140) 2,911,440 (83,599)
Change in unrealized gains
and losses (3,901,163) (7,114,723) (83,599)
Net realized and unrealized
losses on investments (4,280,477) (2,108,751) (74,669)
Increase (decrease) in net
assets from operations ($969,324) ($2,225,499) ($37,773)
* The Growth and Income Portfolio was added to the Fund on May 1, 1994.
The accompanying notes are an integral part of these financial statements.
11a
<PAGE>
<TABLE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
For the year ended December 31, 1994
<CAPTION>
Money Capital
Total Market Bond Growth
<S> <C> <C> <C> <C>
Changes in assets:
Operations:
Net investment income $11,494,859 $1,350,949 $1,207,368 $5,705,241
Net realized gains (losses) (197,541) (748,791) (4,084,338)
Change in unrealized gains and losses (21,364,115) (1,401,616) (8,863,014)
Net change from operations (10,066,797) 1,350,949 (943,039) (7,242,111)
Capital share transactions:
Premiums 90,125,359 25,224,817 3,885,041 19,172,577
Transfer charges (1,760) (820) (20) (790)
Records maintenance charges (5,962) (1,062) (342) (2,146)
Capital contributions (withdrawals) 450,000 (10,000) (10,000) (10,000)
Change in amounts retained in separate acct. (134,297) (32,692) (7,363) (49,530)
Contract claims (586,836) (19,026) (38,220) (207,543)
Contract surrenders (22,975,254) (8,610,617) (1,332,802) (4,392,195)
Portfolio transfers, net 10,219,703 (3,963,090) (8,674,535)
Transfers (to) from general account (270,674) 212,103 (171,642) (48,343)
Net change from capital share transactions 66,600,576 26,982,406 (1,638,438) 5,787,495
Total change in assets 56,533,779 28,333,355 (2,581,477) (1,454,616)
Changes in liabilities:
Amounts payable to Charter
National Life Insurance Company (164,641) (17,658) (13,625) (65,316)
Net change in liabilities (164,641) (17,658) (13,625) (65,316)
Total change in net assets $56,698,420 $28,351,013 ($2,567,852) ($1,389,300)
Net assets:
Beginning of year $212,490,355 $25,967,677 $16,734,550 $64,304,986
End of year 269,188,775 54,318,690 14,166,698 62,915,686
Total change in net assets $56,698,420 $28,351,013 ($2,567,852) ($1,389,300)
</TABLE>
* The Growth and Income Portfolio was added to the Fund on May 1, 1994.
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
<TABLE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
For the year ended December 31, 1994
<CAPTION>
Growth and
Balanced International Income *
<S> <C> <C> <C>
Changes in assets:
Operations:
Net investment income $3,311,153 ($116,748) $36,896
Net realized gains (losses) (379,314) 5,005,972 8,930
Change in unrealized gains and losses (3,901,163) (7,114,723) (83,599)
Net change from operations (969,324) (2,225,499) (37,773)
Capital share transactions:
Premiums 8,453,516 28,873,019 4,516,389
Transfer charges (30) (100)
Records maintenance charges (640) (1,772)
Capital contributions (withdrawals) (10,000) (10,000) 500,000
Change in amounts retained in separate acct. (14,356) (28,231) (2,125)
Contract claims (187,350) (134,697)
Contract surrenders (2,281,111) (5,811,044) (547,485)
Portfolio transfers, net (7,504,214) (3,285,519) 13,207,655
Transfers (to) from general account (203,288) (63,060) 3,556
Net change from capital share transactions (1,747,473) 19,538,596 17,677,990
Total change in assets (2,716,797) 17,313,097 17,640,217
Changes in liabilities:
Amounts payable to Charter
National Life Insurance Company (18,200) (49,842)
Net change in liabilities (18,200) (49,842)
Total change in net assets ($2,698,597) $17,362,939 $17,640,217
Net assets:
Beginning of year $32,542,199 $72,940,943 $0
End of year 29,843,602 90,303,882 17,640,217
Total change in net assets ($2,698,597) $17,362,939 $17,640,217
</TABLE>
* The Growth and Income Portfolio was added to the Fund on May 1, 1994.
The accompanying notes are an integral part of these financial statements.
12a
<PAGE>
<TABLE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
For the year ended December 31, 1993
<CAPTION>
Money
Total Market Bond
<S> <C> <C> <C>
Changes in assets:
Operations:
Net investment income $3,954,089 $448,103 $1,215,063
Net realized gains 7,345,700 309,760
Change in unrealized gains and losses 13,874,212 144,145
Net change from operations 25,174,001 448,103 1,668,968
Capital share transactions:
Premiums 73,518,979 14,595,017 5,378,994
Transfer charges (2,900) (1,540) (70)
Records maintenance charges (6,826) (1,437) (381)
Capital withdrawals (25,000) (5,000) (5,000)
Change in amounts retained in separate acct. (19,542) (6,336) (10,565)
Contract claims (707,689) (17,860) (216,313)
Contract surrenders (11,603,081) (4,756,282) (1,222,701)
Portfolio transfers, net (10,512,597) (1,710,550)
Transfers (to) from general account 1,596,250 1,484,025 (71,860)
Net change from capital share transactions 62,750,191 777,990 2,141,554
Total change in assets 87,924,192 1,226,093 3,810,522
Changes in liabilities:
Amounts payable to Charter
National Life Insurance Company 12,677 (5,920) (6,945)
Net change in liabilities 12,677 (5,920) (6,945)
Total change in net assets $87,911,515 $1,232,013 $3,817,467
Net assets:
Beginning of year 124,578,840 24,735,664 12,917,083
End of year 212,490,355 25,967,677 16,734,550
Total change in net assets $87,911,515 $1,232,013 $3,817,467
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
<TABLE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
For the year ended December 31, 1993
<CAPTION>
Capital
Growth Balanced International
<S> <C> <C> <C>
Changes in assets:
Operations:
Net investment income $776,188 $1,243,049 $271,686
Net realized gains 5,060,305 754,680 1,220,955
Change in unrealized gains and losses 3,374,546 (47,414) 10,402,935
Net change from operations 9,211,039 1,950,315 11,895,576
Capital share transactions:
Premiums 18,834,746 11,102,785 23,607,437
Transfer charges (1,290)
Records maintenance charges (2,764) (817) (1,427)
Capital withdrawals (5,000) (5,000) (5,000)
Change in amounts retained in separate acct. (10,492) (10,849) 18,700
Contract claims (292,782) (64,899) (115,835)
Contract surrenders (2,250,976) (1,728,725) (1,644,397)
Portfolio transfers, net (5,768,991) (4,553,490) 22,545,628
Transfers (to) from general account 54,177 (3,038) 132,946
Net change from capital share transactions 10,556,628 4,735,967 44,538,052
Total change in assets 19,767,667 6,686,282 56,433,628
Changes in liabilities:
Amounts payable to Charter
National Life Insurance Company 16,779 (16,472) 25,235
Net change in liabilities 16,779 (16,472) 25,235
Total change in net assets $19,750,888 $6,702,754 $56,408,393
Net assets:
Beginning of year 44,554,098 25,839,445 16,532,550
End of year 64,304,986 32,542,199 72,940,943
Total change in net assets $19,750,888 $6,702,754 $56,408,393
</TABLE>
The accompanying notes are an integral part of these financial statements.
13a
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS
1. Organization:
The Charter National Variable Annuity Account (the "Variable Account")
is a unit investment trust registered under the Investment Company Act
of 1940, as amended. The Variable Account was established by Charter
National Life Insurance Company ("Charter National"), a wholly-owned
subsidiary of Leucadia National Corporation ("Leucadia"), as a separate
investment account on May 15, 1987.
The Variable Account receives funds representing premiums collected
under the variable annuity contracts (the "Contracts") offered by
Charter National. The funds are directed by the Contract owners into
one or more subaccounts, each of which, in turn, invests exclusively in
the shares of up to six portfolios of the Scudder Variable Life
Investment Fund (the "Fund"), an open-end, diversified investment
company managed by Scudder, Stevens & Clark, Inc. (the "Adviser"). The
Fund, at December 31, 1994, consists of the Money Market Portfolio, the
Bond Portfolio, the Capital Growth Portfolio, the Balanced Portfolio,
the International Portfolio and the Growth and Income Portfolio
(collectively referred to as the "Portfolios"). The Growth and Income
Portfolio was added to the Fund on May 1, 1994.
The Advisor receives compensation for its management and advisory
services. Total annual compensation received by the Advisor in 1994 and
1993 as a percentage of average net assets was as follows:
1994 1993
Money Market Portfolio .560% .660%
Bond Portfolio .580% .610%
Capital Growth Portfolio .580% .600%
Balanced Portfolio .750% .750%
International Portfolio 1.080% 1.200%
Growth and Income Portfolio .750% *
* The Growth and Income Portfolio was added to the Fund on May 1,
1994
Charter National has an agreement with the Adviser whereby it reimburses
the Adviser for its share of the annual operating expenses incurred by
the Adviser that exceed 1.50% of the average daily net assets in the
International Portfolio and .75% of the average daily net assets in the
remaining Portfolios. Charter National's share of such excess expenses
are determined by the proportion of its investment in the Fund to the
total investment of all companies participating in the Fund.
14
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS, Continued
1. Organization, continued:
Each subaccount is denominated in units having a distinct value (the
"Unit Value"). For each subaccount, the Unit Value for the Contracts on
a given date is based on the net asset value of a share of the
corresponding Portfolio in which such subaccount invests. In addition,
because of differences in Contracts funded by the subaccounts, units in
a subaccount attributable to certain Contracts will have different Unit
Values than those attributable to other Contracts funded by the
subaccount. When a payment is allocated or an amount is transferred to
a subaccount, a number of units is purchased based on the Unit Value of
the subaccount. When amounts are transferred out of or deducted from a
subaccount, units are redeemed in a similar manner.
Charter National is domiciled in the State of Missouri. Under Missouri
insurance regulations, the assets of the Variable Account are the
property of Charter National. The assets of each subaccount
attributable to the Contracts, and the income arising therefrom, may not
be used to settle the liabilities arising from any other subaccount or
from any other business operations of Charter National. The assets of
each subaccount in excess of those attributable to the Contracts, and
the income arising therefrom, are available for Charter National's
general use.
2. Summary of Significant Accounting Policies:
Investment Valuation:
Investments made in the Portfolios of the Fund are valued at their
respective net asset values. Transactions are recorded on the trade
date. Dividend income is recognized when declared in all Portfolios
except the Money Market Portfolio, which recognizes income based upon
a daily earnings rate. Gains and losses on investments, both realized
and unrealized, are determined on the basis of the weighted average
cost of the aggregate shares held in each of the Portfolios of the
Fund.
Federal Income Taxes:
Under current law, the net income and realized gains and losses
attributable to the Contracts are subject to taxation, under certain
circumstances, upon the withdrawal of such funds. The Variable
Account makes no provision for such future, potentially taxable events
as any such taxes that would then become payable would be the
responsibility of the owners of the Contracts. Similar items
attributable to Charter National's capital contribution are included
in its federal income tax return, with provisions for such tax
included in the accounts of Charter National.
At the present time, Charter makes no charge to the Variable Account
for any federal, state or local taxes that it incurs which may be
attributable to such Account or to the Contracts. Charter,
15
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
Federal Income Taxes, continued:
however, reserves the right in the future to make a charge for any
such tax or other economic burden resulting from the application of
the tax laws that it determines to be properly attributable to the
Variable Account or to the Contracts.
3. Charges and Deductions:
Mortality and Expense Risk Charges and Administrative Expenses:
Charter National assumes certain mortality and expense risks related
to the operation of the Variable Account and deducts daily charges
from the Contracts' values at an annual rate of .40% to .90%. Charter
National reserves the right to increase the mortality and expense risk
charge to an annual rate of .70% to .90%. In addition, similar
deductions are made on a daily basis for administrative expenses at an
annual rate of .30% to .40%.
Records Maintenance Charge:
On certain Contracts, Charter National annually deducts an amount of
$30 per Contract for the cost of performing records maintenance. The
Contract permits Charter National to deduct a records maintenance
charge of up to $40 from certain Contracts at the beginning of each
Contract year to reflect the cost of performing records maintenance.
Transfer Charge:
The Contract permits Charter National to deduct a transfer charge of
$10 for the third and each subsequent transfer request made during a
Contract year. No charge is currently being imposed for transfers.
4. Distribution of the Contracts:
CNL, Inc. ("CNL"), a wholly-owned subsidiary of Leucadia, acts as the
principal underwriter for the Contracts. CNL is registered as a broker-
dealer with the Securities and Exchange Commission (the "SEC") and is a
member of the National Association of Securities Dealers, Inc. (the
"NASD"). CNL receives commissions and underwriting fees directly from
Charter National. CNL and Charter National have contracted with Scudder
Fund Distributors, Inc. ("Scudder") for Scudder's services in connection
with the distribution of the Contracts. Scudder is registered with the
SEC as a broker-dealer and is a member of the NASD.
16
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS, Continued
5. Investments:
The following table presents selected data regarding the investments
in each of the Portfolios of the Fund at December 31, 1994.
Number of Net Asset Value
Portfolio Shares Cost Total Per Share
Money Market 54,318,690 $54,318,690 $54,318,690 $1.00
Bond 2,186,147 15,156,831 14,166,231 6.48
Capital Growth 5,144,373 65,342,975 62,915,686 12.23
Balanced 3,327,046 31,483,742 29,843,602 8.97
International 8,447,510 87,392,445 90,303,885 10.69
Growth and Income* 2,817,926 17,723,816 17,640,217 6.26
Total $271,418,499 $269,188,311
The number and cost of Fund shares purchased and sold for the years
ended December 31, 1994 and 1993 are as follows:
Portfolio Purchases Sales
Shares Cost Shares Cost
1994
Money Market 171,782,036 $171,782,036 143,448,681 $143,448,681
Bond 1,865,701 12,629,400 1,936,720 13,809,728
Capital Growth 8,590,941 109,589,915 7,752,274 102,181,517
Balanced 1,816,927 17,125,417 1,672,716 15,941,051
International 7,471,402 82,304,702 5,751,153 57,876,879
Growth and Income* 3,578,448 22,487,077 760,522 4,763,261
Total $415,918,547 $338,021,117
Portfolio Purchases Sales
Shares Cost Shares Cost
1993
Money Market 84,395,393 $84,395,393 83,169,300 $83,169,300
Bond 2,147,497 15,753,220 1,689,726 12,086,843
Capital Growth 5,872,576 79,802,481 5,076,125 63,409,360
Balanced 1,792,558 17,927,213 1,191,970 11,193,517
International 6,428,668 61,404,086 1,740,466 15,373,393
Total $259,282,393 $185,232,413
* The Growth and Income Portfolio was added to the Fund on May 1, 1994.
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Charter National Life Insurance Company:
We have audited the accompanying consolidated balance sheets of Charter
National Life Insurance Company and Subsidiaries (a wholly-owned subsidiary
of Leucadia National Corporation), as of December 31, 1994 and 1993 and the
related consolidated statements of income, stockholder's equity and cash
flows for each of the three years in the period ended December 31, 1994.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Charter National Life Insurance Company and Subsidiaries as of
December 31, 1994 and 1993 and the consolidated results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its methods of accounting for income taxes, postemployment
benefits and certain investments in debt and equity securities in 1993.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 10, 1995
18
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1994 and 1993
(Dollars in thousands except par value)
1994 1993
ASSETS
Investments and accrued investment income:
Available for sale (aggregate cost of $1,545,770 $1,591,927
$1,591,970 and $1,541,020)
Trading securities (aggregate cost of 51,661 40,363
$51,372 and $38,694)
Held to maturity (aggregate fair value of 27,461 39,501
$25,971 and $41,097)
Policyholder loans 17,943 18,138
Preferred stock of affiliates 40,000 40,000
Accrued interest income 24,477 24,044
Other investments 540 2,298
Total investments and accrued
investment income 1,707,852 1,756,271
Cash and cash equivalents 165,866 229,992
Reinsurance receivable, net 265,339 420,800
Premiums and other receivables, net 126,778 98,938
Prepaids and other assets 31,790 27,609
Property and equipment, net 19,509 3,336
Deferred policy acquisition costs 45,698 29,488
Federal income tax recoverable 2,892
Deferred income taxes 111,028 88,355
Assets held in separate and
variable accounts 420,398 335,357
Total assets $2,894,258 $2,993,038
The accompanying notes are an integral part of these consolidated
financial statements.
19
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1994 and 1993
(Dollars in thousands except par value)
1994 1993
LIABILITIES AND STOCKHOLDER'S EQUITY
Future policy benefits $863,854 $1,013,543
Policy and contract claims 642,378 686,963
Unearned premiums 259,180 243,794
Other policyholder funds 7,056 10,193
Accounts payable and accrued expenses 100,651 89,638
Income taxes payable 865
Other liabilities 116,269 104,860
Liabilities related to separate and variable 419,355 334,636
accounts
Surplus notes and accrued interest 47,925 77,010
Total liabilities 2,457,533 2,560,637
Stockholder's equity:
Common stock, $31 par value per share,
110,000 shares authorized, issued
and outstanding 3,410 3,410
Additional paid-in capital 6,140 6,140
Net unrealized gain (loss) on investments (30,003) 33,148
Retained earnings 457,178 389,703
Total stockholder's equity 436,725 432,401
Total liabilities and stockholder's
equity $2,894,258 $2,993,038
The accompanying notes are an integral part of these consolidated
financial statements.
19a
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1994, 1993 and 1992
(Dollars in thousands)
1994 1993 1992
Revenues:
Insurance revenues $615,867 $630,702 $685,120
Net investment income 107,705 130,425 190,365
Net securities gains (losses) (5,292) 42,466 42,278
Surrender and other administrative
charges 3,559 2,966 2,707
Service fee revenue 13,958 2,454 3,261
Other 2,555 317 615
Total revenues 738,352 809,330 924,346
Benefits and expenses:
Policyholder benefits, claims and 545,644 575,702 299,583
settlement expenses
Increase (decrease) in future policy
benefits (45,062) (70,148) 328,923
Administrative and general expenses 131,894 145,090 138,044
Outside marketing costs 18,164 12,511 6,654
Commissions 7,357 9,804 17,687
Interest 6,002 8,097 12,015
Amortization of deferred policy
acquisition costs 25,427 33,900 32,028
Capitalization of policy acquisition costs (41,637) (30,629) (24,028)
Total benefits and expenses 647,789 684,327 810,906
Income before income taxes and cumulative
effects of changes in accounting principles 90,563 125,003 113,440
Income taxes:
Current 12,237 51,321 41,148
Deferred 10,851 (17,502) (11,398)
Total provision for income taxes 23,088 33,819 29,750
Income before cumulative effects of
changes in accounting principles 67,475 91,184 83,690
Cumulative effects of changes in 84,277
accounting principles
Net income $67,475 $175,461 $83,690
The accompanying notes are an integral part of these consolidated
financial statements.
20
<PAGE>
<TABLE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
For the years ended December 31, 1994, 1993 and 1992
(Dollars in thousands)
<CAPTION>
Common Net
Stock, Additional Unrealized
$31 Par Paid-in Gain(Loss) on Retained
Value Capital Investments Earnings Total
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1992 $3,410 $6,140 $264 $131,072 $140,886
Net income 83,690 83,690
Cash dividend paid to parent (520) (520)
Net change in unrealized gain
(loss) on investments (255) (255)
Balance, December 31, 1992 3,410 6,140 9 214,242 223,801
Net income 175,461 175,461
Net change in unrealized gain
on investments 33,139 33,139
Balance, December 31, 1993 3,410 6,140 33,148 389,703 432,401
Net income 67,475 67,475
Net change in unrealized gain
(loss) on investments (63,151) (63,151)
Balance, December 31, 1994 $3,410 $6,140 ($30,003) $457,178 $436,725
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
21
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1994, 1993 and 1992
(Dollars in thousands)
1994 1993 1992
Net cash flows from operating activities:
Net income $67,475 $175,461 $83,690
Adjustments to reconcile net income to net
cash provided by (used for) operations:
Cumulative effects of changes in (84,277)
accounting principles
Net securities (gains) losses 5,292 (42,466) (42,278)
Gain on reinsurance transaction with John
Hancock (exclusive of security gains
and write-off of deferred policy
acquisition costs) (11,956)
Provision(benefit) for deferred income tax 10,851 (17,502) (11,398)
Provision for doubtful accounts 1,408
Net change in deferred policy
acquisition costs (16,210) 23,623 8,000
Net change in future policy benefits 7,791 (299,770) 37,783
Net change in policy and contract claims (44,585) 39,541 (87,789)
Net change in unearned premiums 13,472 31,184 17,883
Net change in accrued investment income (195) 5,829 1,004
Net change in premiums and other (8,638) (37,466) 1,881
receivables, net
Net change in reinsurance receivable 15,083 225,605 6,117
Net change in income taxes payable 3,757 (10,706) 6,409
Net change in other assets (2,169) (7,162) (7,701)
Net change in accounts payable, accrued 6,398 (8,069) (106,731)
expenses, and other liabilities
Purchases of investments classified
as trading (132,752) (73,448)
Proceeds from sales of investments
classified as trading 215,288 48,036
Short positions covered and written
options closed (82,720) 13,426
Continued
22
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1994, 1993 and 1992
(Dollars in thousands)
1994 1993 1992
Cash related to reinsurance
transaction with John Hancock (510,698)
Amortization of net investment
discount/premium 1,186 6,149 (3,730)
Depreciation and amortization of
property and equipment 1,964 1,335 1,058
Net change in accrued interest and
discount on surplus notes (10,086) 6,039 (443)
Net cash provided by (used for)
operating activities 52,610 (527,292) (96,245)
Net cash flows from investing activities:
Purchases of investments (other
than trading) ($830,834) ($958,019) ($1,942,846)
Proceeds from sales of investments
(other than trading) 515,499 1,008,523 1,984,879
Proceeds from maturities of
investments (other than trading) 307,407 338,966 403,518
Principal collections on loan
receivables 4,587
Purchases of installment loans (18,550)
Purchase of Colonial Penn Madison
Insurance Company (37,539)
Cash related to disposition of
subsidiary (431)
Net change in equity in separate
and variable accounts (330) 1,936
Net acquisitions of property and
equipment (17,891) 1,842 (3,253)
Net cash provided by (used for)
investing activities (77,651) 393,248 441,867
Continued
22a
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
For the years ended December 31, 1994, 1993 and 1992
(Dollars in thousands)
1994 1993 1992
Net cash flows from financing activities:
Net change in policyholder account
balances (17,302) (95,554) (170,412)
Net change in other policyholder
funds (3,137) 139 243
Net change in capital leases 354 (2,923) (2,092)
Cash dividend paid to parent (515)
Surplus notes (paid down) (19,000) (332)
Revolving credit note issued
(paid down) (7,500) 33,000
Net cash used for financing
activities (39,085) (105,838) (140,108)
Net increase (decrease) in cash
and cash equivalents (64,126) (239,882) 205,514
Cash and cash equivalents at
January 1, 229,992 469,874 264,360
Cash and cash equivalents at
December 31, $165,866 $229,992 $469,874
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $15,834 $2,176 $14,247
Income tax payments $13,307 $65,882 $38,409
The accompanying notes are an integral part of these consolidated
financial statements.
23
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Charter National Life Insurance Company is a wholly-owned subsidiary of
Leucadia National Corporation ("Leucadia"), a publicly traded holding
company domiciled in the state of New York.
a. Principles of Consolidation:
The consolidated financial statements include the accounts of Charter
National Life Insurance Company and its subsidiaries (collectively,
"Charter"), including Colonial Penn Group, Inc. ("CPG"), acquired in a
purchase transaction ("the acquisition") from FPL Group, Inc.
("Seller") on August 16, 1991, CNL, Inc., until its transfer as a
dividend to Leucadia on September 30, 1992, and Colonial Penn Madison
Insurance Company ("Colonial Penn Madison"), (formerly Madison
Assurance Company) since its purchase from WMAC Investment Corporation
("WMAC Investment"), an affiliate, on June 30, 1994.
Certain amounts in the prior years' financial statements have been
reclassified to conform with the 1994 presentation.
b. Investments:
Effective as of December 31, 1993, Charter adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). The adoption
of SFAS 115 had no material effect on results of operations but did
increase stockholder's equity by approximately $33,139,000 at December
31, 1993. While the adoption of SFAS 115 did not have, and is not
expected to have, a material effect on results of operations, Charter
believes SFAS 115 is likely to result in substantial fluctuations in
stockholder's equity, as occurred in 1994. During 1994, principally
as a result of increases in market interest rates, the unrealized gain
on investments reported in stockholder's equity at December 31, 1993
of approximately $33,148,000 (net of deferred taxes) became an
unrealized loss of approximately $30,003,000 (net of deferred taxes)
as of December 31, 1994.
At acquisition, debt and equity securities are classified into one of
three categories: held-to-maturity, available for sale, or trading.
Debt securities categorized as held-to-maturity represent only those
securities which Charter has both the ability and positive intent to
hold to maturity, and are carried at amortized cost. Securities
categorized as available for sale are carried at market value, with
the unrealized gains and losses reported net of deferred taxes as a
separate component of stockholder's equity. Net unrealized gain
(loss) on investments available for sale
24
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. Summary of Significant Accounting Policies, continued:
b. Investments, continued:
are net of deferred income taxes of approximately ($16,155,000) and
$17,849,000 at December 31, 1994 and 1993, respectively. Trading
securities represent those securities that are bought and held for the
purpose of selling them in the near term, and are carried at market
value with the unrealized gains and losses included in earnings.
Declines in market value below cost which are considered other than
temporary are charged to results of operations. During 1993 and 1992,
Charter provided approximately $153,000 and $2,826,000, respectively,
to reflect potential losses on such investments. No such write-down
was made in 1994.
Carrying values for the following other investments at both December
31, 1994 and 1993 were as follows:
Affiliated equity securities Cost
Policy loans Unpaid principal balance
Cash equivalents Amortized cost
Gains or losses on sales of investments are determined on a specific
cost identification basis.
Short-term investments with a maturity of three months or less when
purchased are classified as cash equivalents.
c. Insurance Revenues and Surrender and Other Administrative
Charges:
Premiums on property and casualty and health insurance products are
recognized as revenues over the term of the policy using the daily pro
rata basis.
Charter has written several investment oriented insurance products
(collectively the "IOP products"), principally consisting of single
premium whole life ("SPWL") products, a variable life ("VL") product,
variable annuity ("VA") products and a single premium deferred annuity
("SPDA") product. The principal IOP product offered during the three
year period ended December 31, 1994 was a VA product. IOP product
premiums are reflected in a manner similar to a deposit; revenues
reflect only mortality charges and other amounts assessed against the
holder of the insurance policies and annuity contracts. Other life
premiums are recognized as revenues when due.
25
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. Summary of Significant Accounting Policies, continued:
c. Insurance Revenues and Surrender and Other Administrative
Charges, continued:
Premiums for the VA and VL products are directed by the policyholder
to be invested generally in a unit investment trust solely for the
benefit and risk of the policyholder. Such investments are considered
a "separate account". Policyholders' accounts are charged for the
cost of insurance provided, administrative and certain other charges.
d. Deferred Policy Acquisition Costs:
Policy acquisition costs principally consist of direct response
marketing costs, premium taxes and policy issuance expenses. Policy
acquisition costs of ordinary life insurance are deferred and
amortized over the premium paying period of the related policies in
proportion to the ratio of annual premium revenue to the total premium
revenue expected. The assumptions used to estimate the future expected
premium are consistent with the assumptions used in computing the
liabilities for future policy benefits. Policy acquisition costs
applicable to the property and casualty insurance operations are
deferred and amortized ratably over the terms of the related policies.
On a regular basis, Charter reviews the actual experience of its
products to ascertain the continuing validity of the underlying
actuarial assumptions and the recoverability of the remaining
unamortized deferred policy acquisition costs. If recoverability of
such costs from future premiums and related investment income is not
anticipated, the amounts not considered recoverable are charged to
operations. During the three years ended December 31, 1994, Charter
has written-off or reduced deferred policy acquisition costs in
connection with dispositions of blocks of business or reinvestment of
proceeds from security sales at the lower prevailing interest rates.
e. Service Fee Revenue
Charter has acquired blocks of private passenger automobile assigned
risk business from other insurance companies. In addition to the
premiums paid by policyholders, Charter also receives service fee
revenue from the insurance company from which the business was
acquired. This revenue is recognized as the services are rendered and
a liability is maintained (in other liabilities) relating to unearned
fees received in advance of providing the services.
26
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. Summary of Significant Accounting Policies, continued:
f. Property and Equipment:
Property and equipment is stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are
provided using the straight-line method over the estimated useful
lives of the assets (2-10 years on furniture and equipment and 30-39
years on real estate, excluding land).
g. Separate and Variable Account Assets and Liabilities:
Separate and variable account assets and liabilities relate to funds
received from Charter's VL and VA products, the assets and liabilities
of CPG's and Phlcorp, Inc.'s (a wholly-owned subsidiary of Leucadia)
non-contributory defined benefit pension plans, and the assets and
liabilities of CPG's deferred compensation ("401(k)") plan. Separate
and variable account assets and liabilities are carried at fair market
value.
h. Liabilities for Future Policy Benefits, Unearned Premiums
and Policy and Contract Claims:
Benefit reserves for IOP products are determined following a deposit
method and consist principally of policy values before any surrender
charges. Liabilities for future policy benefits on ordinary life and
health insurance are generally calculated on a net level premium
method, using modifications of various industry and company mortality,
morbidity and withdrawal studies, and interest assumptions
approximating investment yields existing at the time the policies were
issued. Such liabilities include provisions for adverse deviation in
experience.
Interest rate assumptions are 4.5% to 8.6% for life and health
policies, 4.0% to 8.75% for individual annuities and 6.9% for group
annuities.
Liabilities for unpaid losses and loss adjustment expenses applicable
to the property and casualty insurance operations are determined using
case basis evaluations, statistical analyses for losses incurred but
not reported and estimates for salvage and subrogation recoverable and
represent estimates of ultimate net claim costs and loss adjustment
expenses. The methods of making such estimates and establishing the
resulting liabilities are continually reviewed and updated and any
adjustments resulting therefrom are reflected in operations currently.
Unearned premiums represent the portion of premium written which is
applicable to the unexpired terms of policies in force calculated
principally by the application of the daily earned method.
27
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. Summary of Significant Accounting Policies, continued:
i. Reinsurance:
In the normal course of business, Charter seeks to reduce the loss
that may arise from catastrophes or other events that cause
unfavorable underwriting results by reinsuring certain levels of risk
in various areas of exposure with other insurance enterprises or
reinsurers. Charter obtained reinsurance for casualty risks in excess
of $2,000,000 in 1994 and 1993. Additionally, Charter's property and
casualty insurance subsidiaries have entered into certain excess of
loss and catastrophe treaties to protect against certain losses.
Charter's retention of lower level losses in such treaties was
$11,000,000 in 1994 and 1993, and $4,000,000 in 1992. Although
Charter has completed its 1995 reinsurance program at acceptable upper
loss limits, it was unable to obtain 1994 levels of deductibility at
reasonable cost. Accordingly, Charter's retention of lower level
losses was increased to $15,000,000. Charter has also entered into
reinsurance transactions in connection with dispositions of blocks of
business. Reinsurance contracts do not relieve Charter from its
obligations to policyholders.
Effective January 1, 1993, Charter adopted Statement of Financial
Accounting Standards No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts" ("SFAS
113"). Under SFAS 113, reinsurance recoverables are reported as
assets rather than the previously accepted practice of netting such
amounts against related liabilities. As a result of the adoption of
SFAS 113, certain assets (principally reinsurance receivables) and
policy reserves were each greater by approximately $261,226,000 and
$412,667,000 at December 31, 1994 and 1993, respectively, representing
reinsured amounts that, prior to the adoption of SFAS 113, would have
been deducted from the related asset or liability. Appropriate
provisions are made for uncollectible reinsurance receivables.
Premiums earned and other underwriting expenses are stated net of
reinsurance in the consolidated statements of income. The adoption of
SFAS 113 had no material effect on results of operations.
j. Pension Plans and Other Postemployment and Postretirement
Benefits:
Charter and its subsidiaries sponsor non-contributory trusteed pension
plans, covering certain employees, which generally provide for
retirement benefits based on salary and length of service. The plans
are funded in amounts sufficient to satisfy minimum ERISA funding
requirements.
Certain subsidiaries provide health care and other benefits to certain
eligible retired employees. The plans (most of which require employee
contributions) are unfunded. Prior to January 1, 1993, the costs of
such benefits were expensed generally as incurred, although
liabilities for benefits were recorded in connection with the
acquisition of CPG.
28
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. Summary of Significant Accounting Policies, continued:
j. Pension Plans and Other Postemployment and Postretirement
Benefits, continued:
Effective January 1, 1993, Charter adopted Statements of Financial
Accounting Standards Nos. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("SFAS 106"), and 112,
"Employers' Accounting for Postemployment Benefits" ("SFAS 112"),
which require accruals for benefits that previously had been expensed
as incurred. SFAS 106 and SFAS 112 had no material effect on income
before cumulative effects of changes in accounting principle for 1993,
and are not expected to have a material effect on results of future
operations. As a result of adoption of SFAS 112, the cumulative
effect of such change through January 1, 1993 of ($1,122,000), net of
income tax benefit of $578,000 was recorded as of the date of adoption
and was reflected in results of operations as a component of
"Cumulative effects of changes in accounting principles".
k. Income Taxes:
Charter and its non-life insurance subsidiaries file a consolidated
federal income tax return with Leucadia. Charter and its non-life
subsidiaries pay to, or receive from Leucadia the amount of tax it
would have paid or received as computed on a separate return basis.
The life insurance subsidiaries file separate federal income tax
returns.
Charter provides for income taxes using the liability method. Under
the liability method, deferred income taxes are provided at the
statutorily enacted rates for differences between the tax and
accounting bases of substantially all assets and liabilities and
carryforwards. A valuation allowance is provided if deferred tax
assets are not considered more likely than not to be realized.
Effective January 1, 1993, Charter adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). As a result of adoption of SFAS 109, the cumulative effect of
such change through January 1, 1993 of $85,399,000 was recorded as of
the date of adoption and was reflected in results of operations as a
component of "Cumulative effects of changes in accounting principles".
Prior to adoption of SFAS 109, the benefit from utilization of tax
loss carryforwards and future deductions was only recognized when
utilized and under certain other limited circumstances. Under SFAS
109, the future benefit of certain tax loss carryforwards and future
deductions is recorded as an asset, net of valuation allowance, if
necessary, and the provisions for income taxes for periods ending
after December 31, 1992 are not reduced for the benefit from
utilization of such deductions. Accordingly, the provisions for
income taxes for the years ended December 31, 1994 and 1993 are not
comparable to the provision for income taxes for the year ended
December 31, 1992.
29
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Insurance Operations:
a. Life and Health Insurance:
The principal life and health insurance products are "Graded Benefit
Life", "Investment Oriented" and "Medicare Supplement" insurance.
Graded Benefit Life: "Graded Benefit Life" is a guaranteed-issue
product. These modified-benefit, whole life policies are offered on
an individual basis primarily to persons age 50 to 80, principally in
face amounts of $350 to $10,000.
Investment Oriented Products: The principal IOP product offered is a
no-load VA product. The VA product is marketed as an investment
vehicle to individuals seeking to defer, for federal income tax
purposes, the annual increase in their account balance. Premiums from
this VA product either are invested at the policyholders' election in
unaffiliated mutual funds where the policyholder bears the entire
investment risk or in a fixed account where the funds earn interest
at rates determined by Charter. Charter's VA product is currently
marketed in conjunction with a mutual fund manager. Previously,
Charter offered several other IOP products including SPDA, SPWL and VL
products. Premiums received on IOP products amounted to approximately
$108,080,000, $88,312,000 and $68,035,000 for the years ended December
31, 1994, 1993 and 1992, respectively.
On June 23, 1993, Charter reinsured substantially all of its existing
block of SPWL business with a subsidiary of John Hancock Mutual Life
Insurance Company ("John Hancock"). In connection with the
transaction, Charter realized a net pre-tax gain of approximately
$16,700,000 for the year ended December 31, 1993. Such net pre-tax
gain consists of net gains on sales of investments sold in connection
with the transaction (approximately $24,100,000) which are included in
the caption "Net securities gains (losses)," reduced by a net loss of
approximately $7,400,000 (principally the write-off of deferred policy
acquisition costs of approximately $26,900,000 less the premium
received on the transaction of approximately $19,500,000 which are
both included in the caption "Amortization of deferred policy
acquisition costs"). In 1994, Charter received approximately
$1,458,000, and may receive additional consideration in future years,
based on the persistence of this block of business. For financial
reporting purposes, Charter will continue to reflect the policy
liabilities assumed by John Hancock (in future policy benefits), with
an offsetting receivable from John Hancock of the same amount (in
reinsurance receivable, net), until Charter is relieved of its legal
obligation to the SPWL policyholders.
30
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Insurance Operations, continued:
a. Life and Health Insurance, continued:
As of December 31, 1994 and 1993, approximately $179,452,000 and
$322,351,000, respectively, of Charter's future policy benefits (net
of policy loans) related to ceded SPWL business for which Charter is
not relieved of its legal obligation to its policyholders. Excluded
from Charter's policy reserves at December 31, 1994 and 1993 is
approximately $349,081,000 and $200,096,000, respectively, in reserves
related to SPWL business for which the legal liability to the
policyholders has been transferred to John Hancock.
During the three years ended December 31, 1994, Charter sold, at
gains, substantial amounts of investments, including dispositions in
connection with the transfer of blocks of business, and, in certain
cases, reinvested proceeds at the lower prevailing interest rates.
Since certain of these rates were lower than had previously been
expected on certain fixed rate annuity policies, Charter provided
additional reserves of approximately $850,000 in 1994, $6,800,000 in
1993 and $2,700,000 in 1992. In addition, because of the lower
anticipated investment earnings, Charter also recalculated deferred
policy acquisition costs and provided additional amounts for
amortization of deferred policy acquisition costs of $2,100,000 in
1992.
Medicare Supplement: Charter, through certain subsidiaries, offers
health insurance products primarily designed to supplement medicare
benefits for the older population on an underwritten guaranteed
renewable basis.
b. Property and Casualty Insurance:
The principal property and casualty business is providing private
passenger automobile and homeowners insurance coverage to the age
50-and-over population. Charter expects to continue this emphasis.
CPG also previously wrote certain commercial property and casualty
insurance.
31
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Investments:
Net investment income was as follows for the years ended December 31,
1994, 1993 and 1992, in thousands of dollars:
1994 1993 1992
Interest income:
Bonds and short-term
investments $104,091 $124,582 $185,943
Policy loans 962 3,521 5,662
Other long-term investments 1,167 2,131 269
Dividends and other (1) 5,148 4,782 5,751
Total investment income 111,368 135,016 197,625
Less: Investment expenses 3,663 4,591 7,260
Net investment income $107,705 $130,425 $190,365
(1)Includes dividends on the 10% cumulative preferred stock of Leucadia
Financial Corporation ("LFC"), an affiliate, of $4,000,000, $4,000,000 and
$1,089,000 in 1994, 1993 and 1992, respectively.
32
<PAGE>
<TABLE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Investments, continued:
The cost (amortized for bonds), gross unrealized gains and losses and estimated fair
value of investments classified as available for sale and held to maturity at December 31,
1994 and 1993 were as follows, in thousands of dollars:
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
1994 Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available for sale:
Bonds and notes:
U. S. Government agencies and authorities $746,120 $1,623 $21,504 $726,239
States, municipalities and political subdivisions 91,892 63 771 91,184
Foreign governments 3,090 181 2,909
Public utilities 75,647 123 2,705 73,065
Other corporate debt 285,136 1,102 8,607 277,631
Mortgage-backed securities 388,667 415 16,807 372,275
Total fixed maturities 1,590,552 3,326 50,575 1,543,303
Equity securities - preferred stock-unaffiliated 1,418 1,067 18 2,467
Total investments available for sale $1,591,970 $4,393 $50,593 $1,545,770
Held to maturity:
Bonds and notes:
U. S. Government agencies and authorities $26,213 $32 $1,532 $24,713
States, municipalities and political subdivisions 343 10 353
Other corporate debt 905 905
Total investments held to maturity $27,461 $42 $1,532 $25,971
</TABLE>
33
<PAGE>
<TABLE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Investments, continued:
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
1993 Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available for sale:
Bonds and notes:
U. S. Government agencies and authorities $670,797 $21,150 $978 $690,969
States, municipalities and political subdivisions 68,158 891 66 68,983
Foreign governments 9,240 498 9,738
Public utilities 102,292 4,179 319 106,152
Other corporate debt 242,153 15,408 436 257,125
Mortgage-backed securities 445,401 10,199 737 454,863
Preferred stock (non-equity) 267 2 2 267
Total fixed maturities 1,538,308 52,327 2,538 1,588,097
Equity securities - preferred stock-unaffiliated 2,712 1,151 33 3,830
Total investments available for sale $1,541,020 $53,478 $2,571 $1,591,927
Held to maturity:
Bonds and notes:
U. S. Government agencies and authorities $38,956 $1,598 $47 $40,507
States, municipalities and political subdivisions 515 45 560
Other corporate debt 30 30
Total investments held to maturity $39,501 $1,643 $47 $41,097
</TABLE>
33a
<PAGE>
<TABLE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Investments, continued:
The amortized cost and estimated fair value of investments classified as available for
sale and held to maturity at December 31, 1994, by contractual maturity are shown below, in
thousands of dollars. Expected maturities are likely to differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties.
<CAPTION>
Available for Sale Held to Maturity
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $147,941 $147,978 $302 $306
Due after one year through five years 862,101 838,291 20,594 19,610
Due after five years through ten years 72,145 67,656 4,472 3,948
Due after ten years 119,698 117,103 2,093 2,107
1,201,885 1,171,028 27,461 25,971
Mortgage-backed securities 388,667 372,275
Total $1,590,552 $1,543,303 $27,461 $25,971
</TABLE>
34
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Investments, continued:
Certain information with respect to trading securities at December 31, 1994
and 1993 is as follows, in thousands of dollars:
Amortized Fair Carrying
Cost Value Value
1994
Fixed maturities -
Corporate bonds and notes $37,478 $37,961 $37,961
Equity securities -
Preferred stocks 13,750 13,532 13,532
Options 144 168 168
Total trading securities $51,372 $51,661 $51,661
1993
Fixed maturities -
Corporate bonds and notes $25,029 $26,172 $26,172
Equity securities -
Preferred stocks 13,337 13,901 13,901
Options 328 290 290
Total trading securities $38,694 $40,363 $40,363
At December 31, 1994 and 1993, Charter did not hold investments in
securities of a single issuer which exceeded, in the aggregate, 10% of
Charter's stockholder's equity at that date.
34a
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Investments, continued:
Net securities gains (losses) reflected in the accompanying consolidated
statements of income for the years ended December 31, 1994, 1993 and
1992 were as follows, in thousands of dollars:
1994 1993 1992
Fixed Maturities ($4,966) $42,446 $42,464
Equity Securities 314 1 (243)
Other (216) 441 57
Net unrealized loss on
trading securities (424) 422)
Net securities gains (losses) ($5,292) $42,466 $42,278
Gross gains and losses on sale of fixed maturities were approximately
$9,887,000 and $14,853,000, respectively, in 1994, $45,156,000 and
$2,710,000, respectively, in 1993, and $49,580,000 and $7,116,000,
respectively, in 1992.
4. Reinsurance:
In addition to the reinsurance transactions related to the SPWL block
of business discussed in Note 2 above, Charter enters into various
reinsurance agreements to limit its exposure to loss on any single
insured and to reduce the loss in the event of catastrophes.
Reinsurance does not relieve Charter from its obligation to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to Charter; consequently, allowances are established
for amounts receivable from reinsurers which are deemed uncollectible.
Charter evaluates the financial condition of its reinsurers and
monitors concentrations of credit risks arising from similar
geographic regions, activities or economic characteristics of the
reinsurers to minimize its exposure to significant losses from
reinsurer insolvencies.
35
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Reinsurance, continued:
The effect of reinsurance on property and casualty premiums written
and earned for the years ended December 31, 1994 and 1993,
respectively, are as follows, in thousands of dollars:
1994 1993
Written Earned Written Earned
Direct $451,840 $434,245 $466,611 $433,698
Assumed 28,577 29,764 33,884 33,122
Ceded (16,572) (16,987) (13,007) (14,173)
Net premiums $463,845 $447,022 $487,488 $452,647
The effect of reinsurance on life and health premiums for the years ended
December 31, 1994 and 1993 are as follows, in thousands of dollars:
1994 1993
Direct premiums (net of
surrender and other
administrative charges
of $3,559 and $2,966) $169,885 $181,502
Reinsurance assumed 1,127 (1,592)
Reinsurance ceded (2,167) (1,855)
Net premiums $168,845 $178,055
Life insurance in force ceded to other carriers amounted to approximately
$271,019,000 and $622,956,000 at December 31, 1994 and 1993, respectively.
This represented approximately 12% and 23% of the total amount in force at
those dates.
Premiums ceded to other carriers were approximately $67,406,000 for the
year ended December 31, 1992.
36
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Reinsurance, continued:
The effect of reinsurance on policyholder benefits for the years ended
December 31, 1994 and 1993 are as follows, in thousands of dollars:
1994 1993
Direct $487,810 $495,743
Assumed 38,891 21,688
Ceded (26,119) (11,877)
Net policyholder benefits $500,582 $505,554
Reinsurance receivables are net of allowance for doubtful accounts of
approximately $4,046,000 and $83,825,000 at December 31, 1994 and 1993,
respectively. The decrease in the allowance from 1993 principally
reflects the write-off of reinsurance receivables that had been fully
reserved. As discussed in Note 2, at December 31, 1994 and 1993,
reinsurance receivables, net includes approximately $179,452,000 and
$322,351,000, respectively, due from a subsidiary of John Hancock.
5. Premiums and Other Receivables, Net:
A summary of premiums and other receivables, net at December 31, 1994
and 1993 is as follows, in thousands of dollars:
1994 1993
Uncollected premiums $104,879 $95,002
Amounts due on sale of securities 5,799 693
Amounts due from affiliates 3,360 2,666
Auto loans (net of allowance
for doubtful accounts of $809) 12,674
Other 66 577
Total premiums and other
receivables, net $126,778 $98,938
37
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Prepaids and Other Assets:
A summary of prepaids and other assets at December 31, 1994 and 1993
is as follows, in thousands of dollars:
1994 1993
Prepaid reinsurance premiums $ 3,756 $197
Prepaid expenses 2,259 1,415
Equity in pools and associations 13,004 21,517
Investment in associated companies 4,076 4,142
Segregated account assets 8,674
Other 21 338
Total prepaids and other assets $31,790 $27,609
7. Property and Equipment, Net:
At December 31, 1994 and 1993, property and equipment consisted of the
following, in thousands of dollars:
1994 1993
Furniture, fixtures, equipment and
leasehold improvements, at cost $10,956 $5,091
Land and buildings 12,033
Subtotal 22,989 5,091
Less: Accumulated depreciation and
amortization 3,480 1,755
Total property and equipment, net $19,509 $3,336
During 1994, in separate transactions, Charter acquired two properties
with combined space of approximately 230,000 square feet to be used in
its insurance operations.
During 1993, Charter sold an office building which had a cost basis
and accumulated depreciation at the time of sale of approximately
$4,168,000 and $1,016,000, respectively. Charter recognized a loss of
approximately $1,130,000 on the sale, which is included in
administrative and general expense.
38
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Income Taxes:
The principal components of the deferred tax asset at December 31,
1994 and 1993, are as follows, in thousands of dollars:
1994 1993
Insurance reserves and unearned
premiums $ 52,844 $60,566
Unrealized (gain) loss on
investments 20,305 (18,176)
Other accrued liabilities 13,723 13,388
Employee benefits and compensation 6,913 7,253
Policy acquisition costs 7,428 12,127
Prepaid tax on intercompany
security gains 2,280 4,088
Other, net 7,535 9,109
Total deferred tax asset $111,028 $88,355
Charter believes it is more likely than not that the recorded deferred
tax asset will be realized; such realization will principally result
from taxable income generated by future operations.
The table below reconciles the "expected" statutory federal income tax
to the actual income tax expense, in thousands of dollars:
1994 1993 1992
"Expected" federal income tax $31,697 $43,751 $38,570
State income taxes 147 732 (16)
Non-taxable interest income on
state and municipal bonds (1,141) (147) (87)
Dividends received deduction (1,486) (1,450) (389)
Tax (benefit) applicable to
prior years (3,773) (2,825) 177
Net operating losses (utilized) (3,068) (1,945) (3,826)
Deductions resulting from the
CPG acquisition (5,100)
Effects of changes in federal
tax rates (2,629)
Other 712 (1,668) 421
Total provision for income taxes $23,088 $33,819 $29,750
The provisions for income taxes for 1994 and 1993 were calculated
under SFAS 109. Accordingly, the provisions for 1994 and 1993 are not
comparable to the provision for 1992.
39
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Income Taxes, continued:
Charter had taxes due (to) from affiliates of approximately
($4,724,000) and $3,225,000 at December 31, 1994 and 1993,
respectively.
At December 31, 1994, the Company had loss carryforwards for income
tax purposes totaling approximately $10,587,000 which expire as
follows: $113,000 in 1995, $2,203,000 in 1996, $679,000 in 1999 and
$4,292,000 in 2005, and $3,300,000 in 2008.
Under prior law, Charter National Life Insurance Company (on a parent
company only basis) had accumulated approximately $15,447,000 of
special federal income tax deductions allowed life insurance companies
as of December 31, 1994 and the CPG life insurance subsidiaries had
accumulated approximately $161,000,000 of such special deductions.
Under certain conditions, such amounts could become taxable in future
periods. Except with respect to amounts applicable to CPG's life
insurance subsidiaries, for which the Seller has assumed such
liability contractually, Charter does not anticipate any transactions
occurring which would cause these amounts to become taxable. In
connection with the Internal Revenue Service's ("IRS") examination of
certain pre-acquisition tax returns of the CPG life insurance
companies, the IRS had asserted that approximately $93,025,000 of
special federal income tax deductions allowed life insurance companies
should have been reflected in taxable income in 1986, which would
result in a tax (exclusive of interest and penalties) of approximately
$42,792,000. Recently the IRS notified the life subsidiaries that it
will not pursue this issue for the 1986 tax year; however, the IRS has
indicated that it may pursue this issue for the 1988 and 1989 tax
years. As noted above, the Seller is contractually liable for any
such taxes (including interest and penalties) which may be assessed.
To date, no formal assessment has been made.
40
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Accounts Payable and Accrued Expenses, and Other Liabilities:
A summary of accounts payable and accrued expenses, and other
liabilities at December 31, 1994 and 1993 is as follows, in thousands
of dollars:
1994 1993
Accounts payable and accrued expenses:
Drafts payable $10,663 $15,398
Taxes other than income 10,680 12,666
Guarantee association assessments 8,143 7,060
Accrued compensation, severance,
and other employee benefits 13,261 9,188
Commissions 1,010 4,007
Pension liability 4,608 1,458
Payables related to securities 41,709 28,592
Other 10,577 11,269
Total accounts payable and
accrued expenses $100,651 $89,638
Other liabilities:
Lease obligations $9,909 $12,783
Revolving credit note due to Leucadia 25,500 25,500
Liability for postretirement and
postemployment benefits 7,955 9,244
Premiums received in advance 5,300 6,032
Unclaimed funds 2,212 3,032
Reserve for future solicitation
expenses 28,833 33,094
Due to affiliates 9,131 712
Unearned service fee income 14,398 2,541
Capital leases 3,682 3,328
Other 9,349 8,594
Total other liabilities $116,269 $ 104,860
41
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10.Pension Plans and Other Postemployment and Postretirement Benefits:
CPG and its subsidiaries participate in a non-contributory
defined benefit pension plan covering substantially all employees.
Plan benefits are generally based on years of service and employees'
compensation during the last years of employment. CPG's policy is to
fund the pension cost calculated under the unit credit funding method
provided that this amount is at least equal to the Employee Retirement
Income Security Act minimum funding requirements and is not greater
than the maximum tax deductible amount for the year.
CPG's pension expense charged to operations for the years ended
December 31, 1994 and 1993 included the following components, in
thousands of dollars:
1994 1993 1992
Service cost $2,965 $2,438 $2,798
Interest cost 3,902 3,429 3,343
Actual return on plan assets 1,526 (4,807) (2,033)
Net amortization and deferral (5,244) 932 (1,704)
Net pension expense $3,149 $1,992 $2,404
The funded status of the defined benefit pension plan at December 31,
1994 and 1993 was as follows, in thousands of dollars:
1994 1993
Actuarial present value of
accumulated benefit obligation:
Vested $40,209 $43,073
Nonvested 873 997
Total $41,082 $44,070
Projected benefit obligation $51,386 $55,389
Plan assets at fair value 51,116 55,435
Funded status of plan (270) 46
Unrecognized prior service cost 3,550 682
Unrecognized net gain from experience
differences and assumption changes (7,888) (2,186)
Accrued pension liability ($4,608) ($1,458)
The projected benefit obligation at December 31, 1994 and 1993 was
determined using an assumed discount rate of 8.0% and 7.0%,
respectively, a long-term rate of return on plan assets of 7.5%, and
a salary increase rate of 5.0% and 5.5%, respectively. Plan assets
consist primarily of fixed income securities.
42
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. Pension Plans and Other Postemployment and Postretirement Benefits,
continued:
Substantially all of the employees of Charter National Life
Insurance Company participate in a defined contribution retirement
plan. Contributions to the plan are funded as incurred and are
based on years of service and eligible employee compensation. In
addition, Charter participates in certain deferred compensation
(401(k)) plans. Expenses related to the defined contribution
retirement and 401(k) plans were approximately $931,000, $996,000
and $1,054,000 for the years ended December 31, 1994, 1993 and
1992, respectively. The defined contribution retirement plan was
merged into the 401(k) plan as of December 31, 1994. Charter
National Life Insurance Company employees will participate in the
defined benefit pension plan as of January 1, 1995.
Charter provides health care and other benefits to certain
eligible retired employees. The plans (most of which require
employee contributions) are unfunded. The costs of such benefits
prior to January 1, 1993 were generally expensed as incurred,
although liabilities for benefits were recorded in connection with
the acquisition of CPG. SFAS 106 and SFAS 112 require companies to
accrue the cost of providing certain postretirement and
postemployment benefits during the employees' period of service.
Amounts charged to expense related to such benefits were
approximately $489,000 in 1994, $535,000 in 1993 and $500,000 in
1992, and consisted primarily of interest on the liabilities.
The accumulated postretirement benefit obligation at December
31, 1994 and 1993, is as follows, in thousands of dollars:
1994 1993
Retirees $ 5,124 $5,694
Fully eligible active plan
participants 1,526 1,544
Accumulated postretirement
benefit obligation $ 6,650 $7,238
The discount rate used in determining the accumulated
postretirement benefit obligation was 8% and 7% at December 31,
1994 and 1993, respectively. The assumed health care cost trend
rate used in measuring the accumulated postretirement benefit
obligation was 10% and 11% for 1994 and 1993, respectively,
declining to an ultimate rate of 6% by 2006.
If the health care cost trend rate were increased by 1%, the
accumulated postretirement obligation as of December 31, 1994 and
1993 would have increased by approximately $614,000 and $627,000,
respectively. The effect of this change on the aggregate of
service and interest cost for 1994 and 1993 would be immaterial.
43
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. Leases:
Charter rents office space and office equipment under non-
cancelable operating leases with terms generally varying from one
to seven years. Rental expense (net of sublease rental income)
charged to operations was approximately $7,910,000 in 1994,
$8,068,000 in 1993 and $8,614,000 in 1992. In addition, CPG leases
office equipment under certain capital leases that have a carrying
value of approximately $2,738,000 as of December 31, 1994.
Future minimum net rental payments under non-cancelable operating
leases (exclusive of real estate taxes, maintenance and certain
other charges) and future minimum lease payments under capital
leases relating to facilities or equipment under lease in effect at
December 31, 1994 were as follows, in thousands of dollars:
Future Sublease Net Capital
Rental Rental Operating Lease
Payments Income Leases Payments
1995 $13,050 $4,362 $8,688 $1,007
1996 6,259 1,172 5,087 842
1997 2,347 2,347 688
1998 2,234 2,234 648
1999 2,127 2,127 497
Thereafter 674 674
Total minimum lease
payments $26,691 $5,534 $21,157 3,682
Less: Amounts
representing interest 367
Present value of net
minimum capital lease payments $3,315
As part of the CPG purchase price allocation, certain amounts have
been reserved for excess lease commitments. At December 31, 1994
and 1993, reserves established for excess lease commitments were
approximately $9,909,000 and $12,783,000, respectively.
44
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. Commitments and Contingencies:
Charter is subject to various litigation which arises in the normal
course of its business. Based on discussions with counsel,
Management is of the opinion that such litigation will have no
material adverse effect on the consolidated financial position of
Charter or its consolidated results of operations.
Charter National Life Insurance Company and its insurance
subsidiaries are members of state insurance funds which provide
certain protection to policyholders of insolvent insurers doing
business in those states. Due to insolvencies of certain insurers
in recent years, Charter has been assessed certain amounts and is
likely to be assessed additional amounts by the state insurance
funds. Charter has provided for all anticipated assessments and
does not expect any additional assessments to have a material
effect on results of operations.
CPG's property and casualty insurance subsidiaries are subject to a
rate "roll-back" refund on California insurance premiums for
certain pre-acquisition years. In November 1994, a rollback
liability order was received by the subsidiaries requiring them to
refund approximately $35,300,000, plus $21,700,000 of interest.
The subsidiaries disagree with the calculation of this assessment
and are in discussions with the California Department of Insurance.
The subsidiaries have filed a request for a formal hearing should
informal discussions fail to come to a satisfactory conclusion.
Charter believes that the ultimate resolution of this matter will
not have a material adverse effect on its financial condition or
results of operations and will not exceed reserves established in
prior years.
In addition, New Jersey's insurance laws require all automobile
insurers to share in the losses of the successor (the "MTF") to its
insurance pool for high risk drivers (the "JUA"), based on their
depopulation share of the JUA, as set by New Jersey. The
subsidiaries paid approximately $5,293,000 to the MTF in 1994,
relieving them of any further obligation in this matter.
45
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. Segment Information:
Certain information concerning Charter's operations is presented in
the following table for the years ended December 31, 1994, 1993 and
1992, in thousands of dollars:
1994 1993 1992
Total revenues:
Life and health insurance $ 228,578 $ 287,528 $ 390,382
Property and casualty
insurance 509,774 521,802 533,964
Total revenues $ 738,352 $ 809,330 $ 924,346
Income before income taxes and
cumulative effects of changes
in accounting principles:
Life and health insurance $ 23,057 $ 27,130 $ 43,734
Property and casualty
insurance 67,506 97,873 69,706
Total income before income
taxes and cumulative
effects of changes in
accounting principles $ 90,563 $125,003 $ 113,440
Identifiable assets employed:
Life and health insurance $1,607,987 $1,684,347 $1,875,091
Property and casualty
insurance 1,286,271 1,308,691 1,094,762
Total assets $2,894,258 $2,993,038 $2,969,853
14. Related Party Transactions:
Charter incurred expenses for various management services and operating
expenses incurred on its behalf by Leucadia and other affiliated
companies. In a similar manner, Charter was reimbursed for salaries and
other expenses incurred for the benefit of Leucadia and other
affiliates. Net incurred expenses for the years ended December 31,
1994, 1993 and 1992 were approximately $45,000, $53,000 and $301,000,
respectively .
Charter has general service and expense reimbursement agreements with
Leucadia. Under the terms of the agreements, Leucadia provides certain
services for the benefit of Charter. These services include general
legal advice and services, review and development of marketing
strategies, accounting
46
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. Related Party Transactions, continued:
services, and strategic planning and investigation of proposed business
acquisitions. Expenses incurred were approximately $4,121,000,
$4,367,000 and $4,826,000 for the years ended December 31, 1994, 1993
and 1992, respectively.
In addition, Charter has entered into agreements with Leucadia whereby
Leucadia provides certain investment advisory services related to the
management of the investment portfolio. Expenses incurred were
approximately $2,444,000, $3,042,000 and $3,743,000 for the years ended
December 31, 1994, 1993 and 1992, respectively.
During 1994, Charter provided administrative services to affiliated
property and casualty companies, for which it received approximately
$301,000.
During 1993, Charter used certain affiliated property and casualty
insurance companies for the purpose of providing administrative
services, including processing, underwriting and collection activities
for small blocks of private passenger automobile and commercial
automobile assigned risk business. Expenses incurred in 1993 were
approximately $315,000.
From time to time, Charter acquired various short-term investments of
its affiliates. Net investment income earned on such transactions was
approximately $3,000 and $1,096,000 for the years ended December 31,
1993 and 1992, respectively. Charter had no such investments during
1994.
During 1992, Charter issued a variable rate revolving credit note to
Leucadia for $33,000,000. The outstanding principal balance on the note
was $25,500,000 at December 31, 1994 and 1993. Interest expense
incurred as a result of the note was approximately $1,212,000,
$1,245,000 and $393,000 for the years ended December 31, 1994, 1993 and
1992, respectively.
On August 15, 1991, Charter, in exchange for a cash payment of
approximately $25,332,000 (representing the purchase price of CPG in
excess of $100,000,000), issued a 10% surplus note to Leucadia for
$130,000,000. The terms of the note provided for interest of 10% per
annum on the outstanding principal with a maturity date of August 15,
2001. The surplus note was recorded at its fair value of approximately
$25,332,000.
47
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. Related Party Transactions, continued:
Effective July 31, 1992, with the approval of the Missouri Department of
Insurance, the $130,000,000 surplus note (the "old note") was replaced
with a $25,000,000 surplus note (the "new note"). The terms of the new
note provide for interest of 7.75% per annum on the outstanding
principal and interest, with a maturity date of July 31, 2004. Charter
recorded the new note at its face value of $25,000,000 and paid
accumulated interest on the old note of approximately $12,458,000
to Leucadia in 1992. In 1994, the Company paid interest on the new note
of approximately $5,046,000, representing all accrued interest through
December 31, 1994. Payments of both principal and interest on the new
note are subject to the approval of the Missouri Department of
Insurance. At December 31, 1993, accumulated unpaid interest on the new
note was approximately $2,846,000. Related interest charged to
operations in 1994, 1993, and 1992 was approximately $2,200,000,
$2,039,000 and $8,015,000, respectively.
On September 16, 1991, Charter issued a surplus note to Leucadia, Inc.,
for $40,000,000, in exchange for a cash payment of $40,000,000. The
terms of the note provide for interest of 10% per annum on the
outstanding principal. The maturity date of the note is September 16,
2001. Charter made a partial principal repayment of $19,000,000, and
paid accumulated interest of approximately $9,164,000 in 1994. Related
interest expense charged to operations was approximately $2,258,000,
$4,000,000 and $4,000,000 in 1994, 1993 and 1992, respectively. At
December, 31, 1994 and 1993, accumulated unpaid interest was
approximately $1,925,000 and $9,164,000, respectively.
On September 29, 1992, Charter exchanged 100% of the common stock of its
wholly-owned subsidiary, Colonial Penn Capital Corporation ("CPCC"), for
$40,000,000 of preferred stock of LFC. Prior to 1991, CPCC provided all
of the marketing services for the CPG insurance companies. Under
marketing agreements, the CPG insurance companies will continue to pay
renewal commissions to CPCC until the business fails to renew. Charter
paid renewal commissions to CPCC of approximately $15,753,000,
$16,866,000, and $4,298,000 in 1994, 1993 and 1992, respectively. The
gain on the sale of CPCC of approximately $39,677,000 was deferred as a
credit to other liabilities in 1992. Charter is amortizing the gain
through credits to administrative and general expenses in relation to
expected future renewal commission expenses. Amortization of the
deferred gain was approximately $4,261,000, $4,797,000, and $1,786,000
for 1994, 1993 and 1992, respectively.
During 1994, Charter purchased installment loans totalling $18,550,000
from American Investment Bank, an affiliate, and paid related service
fees of $396,000.
48
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. Related Party Transactions, continued:
On June 30, 1994, Colonial Penn Franklin Insurance Company, an indirect
subsidiary of Charter, purchased 100% of the common stock of Colonial
Penn Madison from WMAC Investment for approximately $59,350,000, the
estimated fair market value of the net assets of Colonial Penn Madison
at the time of acquisition. The purchase price consisted of
approximately $51,295,000 of cash and investments plus $8,055,000,
representing the value of the residual equity in a segregated account of
Colonial Penn Madison. This acquisition has been accounted for under
the purchase method of accounting.
15. Fair Value of Financial Instruments:
The following table presents fair value information about certain
financial instruments, whether or not recognized on the balance sheet.
Where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. The fair value
amounts presented do not purport to represent and should not be
considered representative of the underlying "market" or franchise value
of Charter.
The methods and assumptions used to estimate the fair values of each
class of the financial instruments described below are as follows:
(a) Investments: The estimated fair values of fixed maturities
and marketable equity securities are substantially based on
quoted market prices. It is not practicable to determine the
fair value of policyholder loans since such loans generally
have no stated maturity, are not separately transferable and
are often repaid by reductions to benefits and surrenders.
(b) Cash equivalents: The statement value of cash equivalents
approximates fair value.
(c) Separate and variable accounts: Separate and variable
account assets and liabilities are carried at quoted market
prices, which is a reasonable estimate of fair value.
(d) Investment contract reserves: SPDA reserves are carried at
account value, which is a reasonable estimate of fair value.
The fair value of other investment contracts is estimated by
discounting the future payments at rates which would
currently be offered for contracts with similar terms.
49
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. Fair Value of Financial Instruments, continued:
(e) Other liabilities:
The fair value of capital lease obligations is estimated by
discounting the future minimum capital lease payments at
rates which would currently be offered for similar
contracts. The fair value of the variable rate revolving
credit note is estimated to be the carrying value.
(f) Surplus notes:
Principal and interest payments on the surplus notes are
subject to regulatory approval. Consequently, the timing
and certainty of principal and interest payments are not
determinable. Therefore, the fair value of the surplus
notes is estimated to be the carrying value.
The carrying amounts and estimated fair values of Charter's financial
instruments at December 31, 1994 and 1993 are as follows, in thousands
of dollars:
1994 1993
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets:
Investments:
Practicable to
estimate fair
value $1,625,432 $1,623,942 $1,674,089 $1,675,685
Preferred stocks
of affiliates 40,000 40,000 40,000 40,000
Policyholder loans 17,943 17,943 18,138 18,138
Cash equivalents 154,979 154,979 218,782 218,782
Separate and variable
accounts 420,398 420,398 335,357 335,357
Financial liabilities:
Investment contract
reserves 84,606 86,170 105,398 109,597
Other liabilities:
Capital lease
obligations 3,682 3,315 3,328 2,266
Variable rate
revolving
credit note 25,500 25,500 25,500 25,500
Separate and variable
accounts 419,355 419,355 334,636 334,636
Surplus notes 47,925 47,925 77,010 77,010
50
PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
16. Statutory Information:
Charter National Life Insurance Company and its insurance
subsidiaries are subject to regulation based, in part, on an
accounting basis prescribed by regulatory authorities.
Charter National Life Insurance Company's statutory assets (on an
unconsolidated basis) were approximately $731,682,000 and
$644,018,000 at December 31, 1994 and 1993, respectively, with
statutory capital and surplus of approximately $335,903,000 and
$303,986,000 at those dates, respectively. Charter National Life
Insurance Company's net statutory gains from operations (on an
unconsolidated basis) were approximately $8,250,000, $30,954,000
and $52,313,000 for the years ended December 31, 1994, 1993 and
1992, respectively.
Statutory net income (loss) (on an unconsolidated basis) of
Charter National Life Insurance Company's insurance subsidiaries
for the years ended December 31, 1994, 1993 and 1992 was as
follows, in thousands of dollars:
1994 1993 1992
Property/Casualty subsidiaries $44,598 $75,148 $24,786
Life/Health subsidiaries 5,981 (34,585) 541
Statutory capital and surplus of Charter National Life Insurance
Company's insurance subsidiaries was as follows, in thousands of
dollars:
At December 31,
1994 1993
Property/Casualty subsidiaries $288,738 $297,976
Life/Health subsidiaries 70,213 74,926
Certain insurance subsidiaries are owned by other insurance
subsidiaries. As a result, in addition to Charter National Life
Insurance Company's investment in insurance subsidiaries, which
increased its statutory surplus by approximately $305,848,000 and
$281,956,000 at December 31, 1994 and 1993, respectively, the
Property and Casualty subsidiaries' surplus included approximately
$35,900,000 and $42,251,000 of statutory surplus related to an
investment in a Life/Health subsidiary.
Charter had securities on deposit with state insurance
departments with book values aggregating approximately $27,461,000
and $39,501,000 at December 31, 1994 and 1993, respectively.
51
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
16. Statutory Information, continued:
Statutory regulations restrict annual stockholder dividends,
without regulatory approval, to the higher of gain from operations
or 10% of statutory surplus. Under this restriction, Charter
National Life Insurance Company would be permitted to pay
approximately $33,249,000 in dividends in 1995 without regulatory
approval. In conjunction with the acquisition of CPG, Charter
National Life Insurance Company entered into an agreement with the
State of California Department of Insurance. Under the provisions
of this agreement, Charter National Life Insurance Company will not
make any distributions to its parent in excess of the lesser of
cash dividends received from CPG or the statutory earnings of
Charter National Life Insurance Company which could otherwise be
legally paid as a dividend without regulatory consent.
17. Liabilities for Losses and Loss Adjustment Expense:
The following table summarizes the activity for losses and loss
adjustment expense for the years ended December 31, 1994, 1993 and
1992, in thousands of dollars:
1994 1993 1992
Life and health insurance $132,987 $163,457 $242,117
Property and casualty insurance 367,595 342,097 386,389
Total $500,582 $505,554 $628,506
The liabilities for policy and contract claims at December 31,
1994 and 1993 are as follows, in thousands of dollars:
1994 1993
Life and health insurance $ 25,802 $ 29,804
Property and casualty insurance 616,576 657,159
Total $642,378 $686,963
52
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
17. Liabilities for Losses and Loss Adjustment Expense, continued:
Activity in the liability for unpaid Property and Casualty losses and
loss adjustment expense (LAE) is summarized as follows, in thousands
of dollars:
1994 1993 1992
Liability for losses and LAE
at beginning of year $657,159 $750,678 $803,632
Less reinsurance receivables (122,014) (168,967) (145,927)
Net balance at beginning of year 535,145 581,711 657,705
Provision for losses and LAE for
claims occurring in the
current year 432,648 419,109 430,570
Decrease in estimated losses and
LAE for claims occurring in prior
years (net of incurred losses on
reinsurance of $3,331, ($6,792),
and $2,928 ceded in prior years
and excluded from the liability
roll-forward) (61,722) (83,804) (41,253)
Total incurred losses and LAE 370,926 335,305 389,317
Reclass of uncollectible reinsurance
reserves due to commutations -
prior years 15,528
Losses and LAE payments for claims
occurring for:
Current year 192,072 176,639 182,088
Prior years 207,024 205,232 283,223
NJ MTF deficit assessment from
prior year reserve 5,293
Total paid 404,389 381,871 465,311
Net balance at end of year 517,210 535,145 581,711
Plus reinsurance recoverables 99,366 122,014 168,967
Liability for losses and LAE at
end of year $616,576 $657,159 $750,678
53
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
17. Liabilities for Losses and Loss Adjustment Expense, continued:
As a result of changes in estimates of insured events in prior
years, the provisions of losses and LAE decreased by approximately
$65,053,000, $77,012,000 and $44,181,000 in 1994, 1993 and 1992,
respectively, because of conservative reserving practices adopted by
the Company.
54
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Charter National Life Insurance Company:
Our report on the consolidated financial statements of Charter National
Life Insurance Company and Subsidiaries is included on page 18 of this Form
N-4. In connection with our audits of such consolidated financial
statements, we have also audited the related consolidated financial
statement schedules listed in the index on page 8 of this Form N-4.
In our opinion, the consolidated financial statement schedules referred to
above, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 10, 1995
55
<PAGE>
<TABLE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
As of and for the years ended December 31, 1994, 1993 and 1992
(Dollars in thousands)
<CAPTION>
Deferred Policy Future Separate and Policy and
Acquisition Policy Unearned Variable Account Contract Premium
Costs Benefits Premiums Liabilities Claims Revenue
<S> <C> <C> <C> <C> <C> <C>
1994
Life and health
insurance $32,286 $863,854 $10,039 $419,355 $25,802 $168,845
Property and casualty
insurance 13,412 249,141 616,576 447,022
Total $45,698 $863,854 $259,180 $419,355 $642,378 $615,867
1993
Life and health
insurance $21,204 $1,013,543 $13,035 $334,636 $29,804 $178,055
Property and casualty
insurance 8,284 230,759 657,159 452,647
Total $29,488 $1,013,543 $243,794 $334,636 $686,963 $630,702
1992
Life and health
insurance $45,692 $1,408,867 $18,240 $213,492 $31,438 $229,043
Property and casualty
insurance 7,419 194,370 615,984(a) 456,077
Total $53,111 $1,408,867 $212,610 $213,492 $647,422 $685,120
(a) For 1992, prior to adoption of SFAS 113, the liability is shown net of
reinsurance recoverable of $134,694.
</TABLE>
See notes to consolidated financial statements included in this Form N-4.
56
<PAGE>
<TABLE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
As of and for the years ended December 31, 1994, 1993 and 1992
(Dollars in thousands)
<CAPTION>
Policyholder
Benefits Claims Amortization
Settlement of Deferred
Net Expenses and Policy Other Non-Life
Investment Change in Future Acquisition Operating Written
Income Policy Benefits Costs Expenses Premium
<S> <C> <C> <C> <C> <C>
1994
Life and health
insurance $55,165 $132,987 $5,257 $59,672 $49,319
Property and casualty
insurance 52,540 367,595 20,170 72,222 463,845
Total $107,705 $500,582 $25,427 $131,894 $513,164
1993
Life and health
insurance $74,384 $163,457 $16,910 $82,544 $59,405
Property and casualty
insurance 56,041 342,097 16,990 62,546 487,488
Total $130,425 $505,554 $33,900 $145,090 $546,893
1992
Life and health
insurance $123,194 $242,117 $21,064 $79,664 $114,468
Property and casualty
insurance 67,171 386,389 10,964 58,380 483,574
Total $190,365 $628,506 $32,028 $138,044 $598,042
</TABLE>
See notes to consolidated financial statements included in this Form N-4.
56a
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
As of and for the years ended December 31, 1994, 1993 and 1992
(Dollars in thousands)
Percentage
Ceded Assumed of Amount
Direct to Other from Other Net Assumed
Business Companies Companies Amount to Net
1994
Life insurance
in force $2,285,238 $271,019 $161,458 $2,175,677 7.40%
Premium revenue:
Life insurance $117,161 $1,484 $1,121 $116,798 0.90%
Accident and
health insurance 52,724 683 6 52,047 0.00%
Property and
liability ins. 434,245 16,987 29,764 447,022 6.70%
Total premium
revenue $604,130 $19,154 $30,891 $615,867 5.00%
1993
Life insurance
in force $2,696,138 $622,955 $191,440 $2,264,623 8.45%
Premium revenue:
Life insurance $114,539 $1,084 $143 $113,598 0.12%
Accident and
health insurance 66,963 771 (1,735) 64,457 (2.69)%
Property and
liability ins. 433,698 14,173 33,122 452,647 7.32%
Total premium
revenue $615,200 $16,028 $31,530 $630,702 4.98%
1992
Life insurance
in force $3,513,000 $61,000 $189,000 $3,641,000 5.19%
Premium revenue:
Life insurance $113,557 ($1,780) ($632) $114,705 (.55)%
Accident and
health insurance 85,783 822 29,377 114,338 25.69%
Property and
liability ins. 509,957 68,364 14,484 456,077 3.18%
Total premium
revenue $709,297 $67,406 $43,229 $685,120 6.31%
See notes to consolidated financial statements included in this Form N-4.
57
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1994, 1993 and 1992
(Dollars in thousands)
Additions
Balance at Charged to
Beginning Costs and
of Period Expenses Recoveries Other
1994
Loan receivable of banking
and lending subsidiaries $0 $1,408 $596 $0
Trade, notes and other
receivables 0 0 0 0
Total allowance for
doubtful accounts $0 $1,408 $596 $0
Reinsurance receivable $83,825 ($2,799) $0 $0
1993
Loan receivable of banking
and lending subsidiaries $0 $0 $0 $0
Trade, notes and other
receivables 0 0 0 0
Total allowance for
doubtful accounts $0 $0 $0 $0
Reinsurance receivable $0 $5,753 $0 $78,072 (a)
1992
Loan receivable of banking
and lending subsidiaries $0 $0 $0 $0
Trade, notes and other
receivables 0 0 0 0
Total allowance for
doubtful accounts $0 $0 $0 $0
(a) Relates to SFAS 113 reclass of beginning balance at
implementation in 1993.
See notes to consolidated financial statements included in this Form N-4.
58
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1994, 1993 and 1992
(Dollars in thousands)
Deductions
Sale of Balance at
Write offs Receivables End of Period
1994
Loan receivable of banking
and lending subsidiaries $1,195 $0 $809
Trade, notes and other
receivables 0 0 0
Total allowance for
doubtful accounts $1,195 $0 $809
Reinsurance receivable $76,980 (b) $0 $4,046
1993
Loan receivable of banking
and lending subsidiaries $0 $0 $0
Trade, notes and other
receivables 0 0 0
Total allowance for
doubtful accounts $0 $0 $0
Reinsurance receivable $0 $0 $83,825
1992
Loan receivable of banking
and lending subsidiaries $0 $0 $0
Trade, notes and other
receivables 0 0 0
Total allowance for
doubtful accounts $0 $0 $0
(b) Principally relates to the write-off of fully reserved
receivable for unpaid losses.
See notes to consolidated financial statements included in this
Form N-4.
58a
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY CASUALTY INSURANCE OPERATIONS
For the years ended December 31, 1994, 1993 and 1992
(Dollars in thousands)
Discount, if
any, Deducted
in Reserves for
Unpaid Claims Claims and Claim Paid Claims
and Claim Adjujstment Expense and Claim
Adjustment Incurred Related to: Adjustment
Expense Current year Prior year Expenses
1994
Automobile $387,544 ($55,050) $358,841
Commercial (4,219) 4,676
Miscellaneous
& personal 45,104 (5,784) 40,872
Total $0 $432,648 ($65,053) $404,389
1993
Automobile $383,285 ($72,999) $348,801
Commercial (933) 5,284 1,237
Miscellaneous
& personal 36,757 (9,297) 31,833
Total $0 $419,109 ($77,012) $381,871
1992
Automobile $363,534 ($34,154) $420,438
Commercial 23,426 (7,889) 10,017
Miscellaneous
& personal 43,610 (2,138) 40,201
Total $0 $430,570 ($44,181) $470,656 (a)
(a) For 1992, paid claims include ceded special risk payments of $5,345
that are shown net in the liability roll-forward in Note 17.
See notes to consolidated financial statements included in this Form N-4.
59
