As filed with the Securities and Exchange Commission on April 23, 1997
Registration No. 33-22925
811-5279
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-4
REGISTRATION UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. __
Post-Effective Amendment No. 16
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 18
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
(Exact Name of Registrant)
CHARTER NATIONAL LIFE INSURANCE COMPANY
(Name of Depositor)
8301 Maryland Avenue St. Louis, Missouri 63105
(Address of Depositor's Principal Executive Offices)
(314) 725-7575
(Depositor's Telephone Number, including Area Code)
Richard G. Petitt
Charter National Life Insurance Company
8301 Maryland Avenue
St. Louis, Missouri 63105
(Name and Address of Agent for Service)
Copy to:
Stephen E. Roth, Esq.
Sutherland, Asbill & Brennan, L.L.P.
1275 Pennsylvania Avenue, N. W.
Washington, D. C. 20004-2404
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Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of the Registration Statement.
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to paragraph (b)
_X_ on May 1, 1997 pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(i)
___ on pursuant to paragraph (a)(i)
___ 75 days after filing pursuant to paragraph (a)(ii)
___ on __________ pursuant to paragraph (a)(ii) of Rule 485
If appropriate check the following box:
______ this Post-Effective Amendment designates a new effective date for a
previously filed Post Effective Amendment.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant has registered an indefinite number or amount of securities
under the Securities Act of 1933. The Registrant filed the Rule 24f-2
Notice for the year ended December 31, 1996 on February 21, 1997.
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Cross Reference Sheet
Pursuant to Rule 481
Showing Location in Part A (Prospectus) and Part B
(Statement of Additional Information) of
Registration Statement of Information Required by Form N-4
PART A
Item of Form N-4 Prospectus Caption
1. Cover Page Cover Page
2. Definitions Definitions
3. Synopsis or Highlights Summary; Fee Table
4. Condensed Financial
Information Condensed Financial Information;
Calculation of Yields and Total
Returns; Other Performance Data
5. General Description of Registrant,
Depositor, and Portfolio Companies
(a) Depositor Charter National Life Insurance
Company
(b) Registrant Summary; Charter National
Variable Annuity Account
(c) Portfolio Company Summary; Scudder Variable Life
Investment Fund
(d) Fund Prospectus Scudder Variable Life Investment
Fund
(e) Voting Rights Voting Rights
(f) Administrators Records and Reports; Written
Notices and Requests; Owner
Inquiries
6. Deductions and Expenses Summary; Charges and Deductions
(a) General Summary; Mortality and Expense
Risk Charge; Contract
Administration Charge; Records
Maintenance Charge; Premium
Taxes; Other Taxes; Transfer
Charges
(b) Sales Load Summary; Charges and Deductions
(c) Special Purchase Plan Employment-Related Benefit Plans
(d) Commissions Distribution of the Contract
(e) Expenses - Registrant Summary; Other Taxes
(f) Fund Expenses Summary; Scudder Variable Life
Investment Fund; Charges Against
the Fund
(g) Organizational Expenses N/A
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Item of Form N-4 Prospectus Caption
7. General Description of Variable
Annuity Contracts
(a) Persons with Rights Summary; The Contract;
Distributions Under the Contract;
Voting Rights
(b) (I) Allocation of
Premium Payments Summary; Allocation of Payments
(ii) Transfers Summary; Transfers
(iii)Exchanges N/A
(c) Changes Addition, Deletion, or Substitution
of Investments; The Contract
(d) Inquiries Records and Reports; Written
Notices and Requests; Owner
Inquiries
8. Annuity Period Summary; Annuity Payments;
Maturity Date; Annuity Income
Options; State Exception
9. Death Benefit Summary; Death Benefit; Death of
Owner; Employment-Related Benefit
Plans; Annuity Income Options
10. Purchases and Contract Value
(a) Purchases Contract Application and Issuance
of Contracts; Payments; Allocation
of Payments; Account Value;
Contract Ownership
(b) Valuation Account Value
(c) Daily Calculation Account Value
(d) Underwriter Distribution of the Contract
11. Redemptions
(a) By Owner Summary; Full and Partial
Surrender Privileges; Death
Benefit; Annuity Payments;
Annuity Income Options
(b) Texas ORP N/A
(c) Check Delay Deferment of Payment and Transfers
(d) Lapse Contract Expiration
(e) Free Look Examination Period
12. Taxes Summary; Certain Federal Income
Tax Consequences
13. Legal Proceedings Legal Proceedings
14. Table of Contents of the Statement
of Additional Information Index to Statement of Additional
Information
PART B
Statement of Additional
Item of Form N-4 Information Caption
15. Cover Page Cover Page
16. Table of Contents Table of Contents
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Statement of Additional
Item of Form N-4 Information Caption
17. General Information and History State Regulation of Charter
18. Services
(a) Fees and Expenses
of Registrant N/A
(b) Management Contracts N/A
(c) Custodian Safekeeping of the Variable
Account's Assets
Independent Public
Accountants Financial Statements; Independent
Accountants
(d) Assets of Registrant N/A
(e) Affiliated Persons N/A
(f) Principal Underwriter Part A -- Distribution of the
Contract
19. Purchase of Securities
Being Offered Part A -- The Contract;
Distribution of the Contract
20. Underwriters Part A -- Distribution of the
Contract
21. Calculation of Performance Data Calculation of Yields and Total
Returns
22. Annuity Payments Part A -- Annuity Payments;
Annuity Income Options
23. Financial Statements Financial Statements
PART C
Item of Form N-4 Part C Caption
24. Financial Statements and Exhibits Financial Statements and Exhibits
(a) Financial Statements (a) Financial Statements
(b) Exhibits (b) Exhibits
25. Directors and Officers of the
Depositor Directors and Officers of the
Depositor
26. Persons Controlled By or Under
Common Control With the
Depositor or Registrant Persons Controlled By or Under
Common Control With the
Depositor or Registrant
27. Number of Contractowners Number of Contractowners
28. Indemnification Indemnification
29. Principal Underwriters Principal Underwriters
30. Location of Accounts and Records Location of Accounts and Records
31. Management Services Management Services
32. Undertakings Undertakings
SIGNATURES
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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 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 Fund offers one class of
shares for the Money Market Portfolio and two classes of shares (Class A
shares and Class B shares) for the other portfolios. The Subaccounts
invest exclusively in the Money Market Portfolio and Class A shares of the
Bond Portfolio, the Capital Growth Portfolio, the Balanced Portfolio, the
Growth and Income Portfolio, the International Portfolio, and the Global
Discovery Portfolio. (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, 1997
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(Continued from cover page)
Class B shares are subject to a 12b-1 fee or charge equal to an annual rate
of up to 0.25% of the average daily net asset value of its Class B shares
of the applicable portfolio. Class A shares are not subject to such
charges. A more complete description of Class A and Class B shares is set
forth in the attached prospectus for the Fund. 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.
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 25
Contract Ownership 27
Assignment of Contract 27
State Exceptions 28
DISTRIBUTIONS UNDER THE CONTRACT 28
Full and Partial Surrender Privileges 28
Annuity Payments 30
Annuity Income Options 31
Maturity Date 32
Death Benefit 33
Beneficiary Provisions 33
Death of Owner 34
Employment-Related Benefit Plans 34
CHARGES AND DEDUCTIONS 34
Mortality and Expense Risk Charge 34
Contract Administration Charge 35
Records Maintenance Charge 36
Premium Taxes 36
Other Taxes 36
Transfer Charges 36
Charges Against the Fund 37
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TABLE OF CONTENTS
Page
CERTAIN FEDERAL INCOME TAX CONSEQUENCES 37
Tax Status of the Contract 38
Taxation of Annuities 41
Taxation of Charter 44
GENERAL PROVISIONS 44
The Contract 44
Deferment of Payment and Transfers 44
Contract Expiration 44
Misstatement of Age or Sex 45
Nonparticipating Contract 45
Written Notices and Requests; Owner Inquiries 45
Records and Reports 45
DISTRIBUTION OF THE CONTRACT 45
VOTING RIGHTS 46
LEGAL PROCEEDINGS 47
ADDITIONAL INFORMATION 47
TABLE OF CONTENTS FOR STATEMENT
OF ADDITIONAL INFORMATION 48
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
and Class A shares of the Bond Portfolio, the Capital Growth Portfolio, the
Balanced Portfolio, the Growth and Income Portfolio, the International
Portfolio, and the Global Discovery 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 Subaccounts: Money
Market, Bond, Capital Growth, Balanced, Growth and Income, International,
and Global Discovery. Each Subaccount invests in Class A shares of the
corresponding mutual fund 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
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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)
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. 34)
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. 36)
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. 36)
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. 34.
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. 37)
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.
28) 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. 33) 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. 34)
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. 37)
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. 28)
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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 1996 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 1996 calendar year)
Total
Portfolio
Management - Other Operating
Fees Expenses Expenses
Money Market Portfolio 0.370% 0.090% 0.460%
Bond Portfolio 0.475% 0.135% 0.610%
Capital Growth Portfolio 0.475% 0.055% 0.530%
Balanced Portfolio 0.475% 0.125% 0.600%
International Portfolio 0.863% 0.187% 1.050%
Growth and Income Portfolio 0.475% 0.185% 0.660%
Global Discovery Portfolio 0.155% 1.345% 1.500%*
* Scudder, Stevens & Clark. Inc. (the Adviser) voluntarily did not impose
part of its management fee in 1996. Had the fee been imposed, the
management fee would have been 0.975% and the ratio of operating expenses
to average net assets for the year ended 12/31/96 would have been 2.32% for
the Global Discovery Portfolio.
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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 $12 $37 $64 $141
Bond Subaccount $13 $42 $72 $158
Capital Growth Subaccount $13 $39 $68 $149
Balanced Subaccount $13 $41 $71 $157
International Subaccount $18 $55 $95 $206
Growth and Income Subaccount $14 $43 $74 $164
Global Discovery Subaccount $22 $69 N/A N/A
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 and Global Discovery Portfolios, 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.
9
<PAGE>
<TABLE>
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, 1996.
<CAPTION>
Accumulation unit value:
Year Ended December 31, Commencement
Subaccount 1996 1995 1994 1993 1992 1991 1990 1989 1988 Date*
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market 18.074 17.316 16.507 16.030 15.740 15.341 14.606 13.683 12.694 12.500
Bond 22.979 22.508 19.181 20.287 18.179 17.109 14.653 13.697 12.392 12.500
Capital Growth 33.863 28.388 22.222 24.773 20.638 19.514 14.096 15.389 12.664 12.500
Balanced 28.326 25.496 20.270 20.840 19.531 18.389 14.592 15.029 12.704 12.500
International 30.987 27.188 24.641 25.027 18.287 19.003 17.174 18.830 13.772 12.500
Growth and Income 20.713 17.075 13.053 N/A N/A N/A N/A N/A N/A 12.500
Global Discovery 13.126 N/A N/A N/A N/A N/A N/A N/A N/A 12.500
* The Money Market, Bond, Capital Growth, Balanced and International Subaccounts commenced
operations on October 6, 1988. The Growth and Income Subaccount commenced operations on May 1,
1994. The Global Discovery Subaccount commenced operations on May 1, 1996.
</TABLE>
<TABLE>
<CAPTION>
Number of units outstanding at end of period:
Year Ended December 31,
Subaccount 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market 2,615,942 2,260,561 3,197,824 1,491,258 1,380,156 972,042 989,667 344,621 6,238
Bond 764,803 896,538 690,782 755,914 631,581 406,545 210,921 182,698 1,882
Capital Growth 2,729,711 2,884,663 2,683,112 2,351,022 1,798,119 933,120 400,044 227,343 0
Balanced 1,490,127 1,603,656 1,426,280 1,477,645 1,243,891 779,317 492,406 399,068 9,264
International 2,593,037 2,869,930 3,543,387 2,767,700 785,559 446,099 370,916 107,751 1,741
Growth and Income 3,491,709 2,659,025 1,311,518 N/A N/A N/A N/A N/A N/A
Global Discovery 1,025,244 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
10
<PAGE>
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.
11
<PAGE>
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.
12
<PAGE>
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
$3.048 billion as of December 31, 1996, 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 five 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 contract 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
arising under the variable
13
<PAGE>
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.
14
<PAGE>
The Fund currently consists of the following Portfolios: the Money
Market Portfolio and Class A shares of the Bond Portfolio, the Capital
Growth Portfolio, the Balanced Portfolio, the Growth and Income Portfolio,
the International Portfolio, and the Global Discovery Portfolio. The
Global Discovery Portfolio commenced operations on May 1, 1996. 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.
15
<PAGE>
Global Discovery Portfolio: This Portfolio seeks above-average capital
appreciation over the long term. It primarily invests in equity securities
of small companies located around the world.
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%, .875%, and .975% of the average daily net asset values of the Money
Market Portfolio, Bond Portfolio, Capital Growth Portfolio, Balanced
Portfolio, Growth and Income Portfolio, International Portfolio, and the
Global Discovery Portfolio, respectively.
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
16
<PAGE>
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 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
17
<PAGE>
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 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."
18
<PAGE>
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
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
19
<PAGE>
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".
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 five 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.
20
<PAGE>
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.
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
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selected, as indicated on the application, by the sum of the percentages
indicated. 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
on file
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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."
Asset Rebalancing Option. In order to maintain a particular
percentage allocation among the Subaccounts, the Owner may select the asset
rebalancing option. With asset rebalancing, Charter automatically
reallocates the Account Value in the Subaccounts quarterly to the
allocation selected by the Owner. Over a period of time, this method of
investing may help an Owner buy low and sell high although there can be no
assurance of this. This investment method does not assure profits and does
not protect against loss in declining markets.
To elect the asset rebalancing option, the Account Value in the
Contract must be at least $2,500 and a completed Asset Rebalancing Option
form must be received at Charter's Home Office. The Owner must designate
the applicable Subaccounts and the percentage allocations for each of the
applicable Subaccounts to be rebalanced quarterly. If the asset
rebalancing option is elected, all amounts allocated to the variable
Subaccounts must be included in the asset rebalancing option. The Owner
may not participate in dollar cost averaging and asset rebalancing at the
same time. The General Account is not available for the asset rebalancing
option.
Selection of asset rebalancing will result in the transfer of funds to
one or more of the Subaccounts on the date specified by the Owner. If the
Owner has specified, or the form is received on the 29th, 30th or 31st,
Charter will consider the effective date to be the first Valuation Date of
the following month. If no date is specified or if the request is
received after the specified date, Charter will transfer funds on the date
of receipt of the Asset Rebalancing Option form and on the quarterly
anniversary of the applicable date thereafter. The amounts transferred
will receive the Unit Values for the affected Subaccounts at the end of the
Valuation Date on which the transfers occur. If the effective date is not
a Valuation Date, the transfer will occur on the next Valuation Date.
The Owner may terminate this option at any time by Written Notice. In
the event of a transfer by written request or telephone instructions, this
option will terminate automatically. In either event, the amounts in the
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Subaccounts that have not been transferred will remain in those Subaccounts
regardless of the percentage allocation unless the Owner instructs
otherwise. If the Owner wishes to resume the asset rebalancing option
after it has been canceled, a new Asset Rebalancing Option form must be
completed and sent to Charter's Home Office. Charter may discontinue,
modify, or suspend the asset rebalancing option at any time.
Dollar Cost Averaging. Dollar cost averaging is a systematic method
of investing in which units are purchased in fixed dollar amounts so that
the cost is averaged over time. The Owner may dollar cost average their
allocations in the Subaccounts under the Contract by authorizing Charter to
make periodic transfers from any one Subaccount to one or more other
Subaccounts. Amounts transferred will purchase units in those Subaccounts
at the Unit Value of that Subaccount as of the Valuation Date the transfer
occurs. Since the value of the units will vary, the amounts transferred to
a Subaccount will result in the purchase of a greater number of units when
the Unit Value is low and the purchase of a lesser number of units when the
Unit Value is high. Similarly, the amounts transferred to a Subaccount
will result in the liquidation of a greater number of units when the Unit
Value is low and the liquidation of a fewer number of units when the Unit
Value is high. Dollar cost averaging does not assure a profit and does not
protect against loss in declining markets.
To elect dollar cost averaging, the Account Value in the Contract must
be at least $2,500 and a completed Dollar Cost Averaging form must be
received at Charter's Home Office. The Owner must designate the frequency
and period of time of the transfers, the Subaccount from which transfers
are to be made and the Subaccounts and allocation percentages to which
funds are to be transferred. The Owner may not participate in dollar cost
averaging and asset rebalancing at the same time. The General Account is
not available for the dollar cost averaging option.
After Charter has received a completed Dollar Cost Averaging form,
Charter will transfer the amounts designated by the Owner from the
Subaccount from which transfers are to be made to the Subaccount or
Subaccounts chosen by the Owner. The minimum amount that may be
transferred is $50. Each transfer will occur on the date specified by the
Owner. If the Owner has specified, or the form is received on the 29th,
30th or 31st, Charter will consider the effective date to be the first
Valuation Date of the following month. If no date is specified, funds will
be transferred on the monthly, quarterly, semiannual or annual anniversary,
(whichever corresponds to the frequency selected by the Owner), of the date
of receipt of a completed Dollar Cost Averaging form. The amounts
transferred will receive the Unit Values for the affected Subaccounts at
the end of the Valuation Date on which the transfers occur. If the
anniversary is not a Valuation Date, the transfer will occur on the next
Valuation Date. Dollar cost averaging will terminate when the total amount
elected has been transferred, or when the value in the Subaccount from
which transfers are made is insufficient to transfer the requested amount.
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The Owner may terminate this option at any time by Written Notice.
Upon receipt of Written Notice, the value in the Subaccount from which
transfers were being made will remain in that Subaccount unless the Owner
instructs otherwise. If the Owner wishes to continue transferring on a
dollar cost averaging basis after the expiration of the applicable period,
or the amount in the Subaccount elected is insufficient to transfer the
total requested amount, or after the dollar cost averaging option has been
canceled, a new Dollar Cost Averaging Option form must be completed and
sent to Charter's Home Office. Charter may discontinue, modify, or suspend
the dollar cost averaging option at any time.
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
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
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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
Beneficiary will be subject to such assignment. Charter is not responsible
for the adequacy
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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."
Systematic Withdrawals. Charter currently offers an option under
which partial surrenders of the Contract may be elected by systematic
withdrawals. The Owner may elect to receive systematic withdrawals before
the Maturity Date by sending a completed Systematic Withdrawal form to
Charter at its Home Office. The completed form must include the written
consent of any assignee or irrevocable beneficiary, if applicable. The
Owner may designate the systematic withdrawal amount as a percentage of the
Account Value allocated to the Subaccounts and/or General Account, or as a
specified dollar amount. The Owner may designate that systematic
withdrawals be made monthly, quarterly, semiannually, or annually. If the
Owner has
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specified, or the form is received on the 29th, 30th or 31st, Charter will
consider the effective date to be the first Valuation Date of the following
month. If no date is specified, the systematic withdrawal option will
commence on the date of receipt of the form.
Each systematic withdrawal must be at least $250. The systematic
withdrawal option will terminate if the amount to be withdrawn exceeds the
Account Value or would cause the Account Value to be below $2,500. If any
portion of the systematic withdrawal 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).
Each systematic withdrawal will occur as of the end of the Valuation
Period during which the withdrawal is scheduled. The systematic withdrawal
will be deducted from the Owner's Account Value in the Subaccounts and/or
the General Account as directed by the Owner.
The Owner may terminate this option at any time by Written Notice. If
this option is terminated, either by Written Notice by the Owner, or if the
amount to be withdrawn has caused the Account Value to be below $2,500, and
the Owner wishes to resume systematic withdrawals, a new Systematic
Withdrawal form must be completed and sent to Charter's Home Office.
Charter may discontinue, modify, or suspend the systematic withdrawal
option at any time. The tax consequences of a systematic withdrawal,
including a 10% penalty tax imposed on withdrawals made prior to the Owner
attaining age 59 1/2 should be carefully considered. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES -- Taxation of Annuities".
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.
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
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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 $2,500 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
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."
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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.
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.
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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 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 minimum required distribution
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, 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
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
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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.
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.
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.
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
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.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%. Charter reserves the right at any time to increase the Mortality and
Expense Risk Charge to .70%, which corresponds to a daily rate of
.000019245, 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.
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.
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.
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%. 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.
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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.
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
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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 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
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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.
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
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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 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
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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 includible 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."
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
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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
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
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on the ratio of the Investment in the Contract to the Account Value, will
be includible 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 includible 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
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 includible 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.
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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
includible 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.
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
includible 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 includible 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. For these purposes, the investment in the Contract is
not affected by the Owner's or Annuitant's death. That is, the investment
in the contract remains the amount of any purchase payments paid which were
not excluded from gross income.
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).
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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
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
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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.
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
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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 $230,970.90,
$189,809.18 and $464,600.72 were paid by Charter to CNL in 1996, 1995 and
1994, respectively.
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
46
<PAGE>
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
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.
47
<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 37
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 47
INDEPENDENT ACCOUNTANTS 7
FINANCIAL STATEMENTS 8 10
* The corresponding section headings may be found in the Prospectus at
the pages indicated.
48
<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,
1997, by calling (800) 225-2470, or writing to Scudder Investment 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, 1997
<PAGE>
TABLE OF CONTENTS
Prospectus
Page Reference*
STATE REGULATION OF CHARTER 1
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
OF CERTAIN EXCHANGES AND SURRENDERS 1 37
SAFEKEEPING OF THE VARIABLE ACCOUNT'S 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 47
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 the 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
advisers.
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
advisers.
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 $10,000,000
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
Global Discovery May, 1996 May, 1996
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, 1996, were as follows:
Current Yield = 4.30%
Effective Yield = 4.39%
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
such net change in account value by the value
2
<PAGE>
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 Yield 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, 1996, the Yield for the Bond Subaccount was as
follows:
Yield = 5.41%
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 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
3
<PAGE>
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, 1996,
were as follows:
Inception of Inception of One Year Five Year
the Subaccount the Portfolio Period Ending Period Ending
Subaccount to 12/31/96 to 12/31/96 12/31/96 12/31/96
Money Market 4.58% 4.77% 4.38% 3.33%
Bond 7.67% 7.57% 2.09% 6.07%
Balanced 10.44% 10.59% 11.10% 9.01%
Capital Growth 12.85% 13.28% 19.28% 11.64%
International 11.65% 9.04% 13.97% 10.26%
Growth and Income* 20.81% 20.81% 21.30% N/A
Global Discovery** 7.58% 7.58% N/A N/A
* Five Year Average Annual Total Returns are not applicable for the Growth
and Income Subaccount as it commenced operation on May 1, 1994.
** One and Five Year Average Annual Total Returns are not applicable for
the Global Discovery Subaccount as it commenced operation on May 1, 1996.
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, 1996,
were as follows:
Inception of Inception of One Year Five Year
the Subaccount the Portfolio Period Ending Period Ending
Subaccount to 12/31/96 to 12/31/96 12/31/96 12/31/96
Money Market 44.59% 70.58% 4.38% 17.81%
Bond 83.83% 130.86% 2.09% 34.31%
Balanced 126.61% 217.29% 11.10% 54.04%
Capital Growth 170.90% 317.63% 19.28% 73.53%
International 147.90% 130.84% 13.97% 63.07%
Growth and Income* 65.70% 65.70% 21.30% N/A
Global Discovery** 5.01% 5.01% N/A N/A
* Five Year Returns are not applicable for the Growth and Income
Subaccount as it commenced operation on May 1, 1994.
** One and Five Year Cumulative Total Returns are not applicable for the
Global Discovery Subaccount as it commenced operation on May 1, 1996.
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 & Poors 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, L.L.P. 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, 1996 and 1995 and for
each of the three years in the period ended December 31, 1996 and the
financial statements of the Charter National Variable Annuity Account as of
December 31, 1996 and for each of the two years in the period ended
December 31, 1996 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, 1996 10
Statement of Operations for the year ended December 31, 1996 11
Statements of Changes in Net Assets for the years ended
December 31, 1996 and 1995 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, 1996 and 1995 19
Statements of Income for the years ended
December 31, 1996, 1995 and 1994 20
Statements of Changes in Stockholder's Equity for the
years ended December 31, 1996, 1995 and 1994 21
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 22-23
Notes to Consolidated Financial Statements 24-51
Report of Independent Accountants on Financial Statement Schedules 52
Consolidated Financial Statement Schedules:
Schedule III-Supplementary Insurance Information as of and for
the years ended December 31, 1996, 1995 and 1994 53
Schedule IV-Reinsurance as of and for the years ended
December 31, 1996, 1995 and 1994 54
Schedule V-Valuation and Qualifying Accounts for the
years ended December 31, 1996, 1995 and 1994 55
Schedule VI-Supplemental Information Concerning Property
Casualty Insurance Operations for the years ended
December 31, 1996, 1995 and 1994 56
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, Growth and
Income and Global Discovery Subaccounts) as of December 31, 1996 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, 1996. 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, 1996, 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, 1997
9
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<CAPTION>
Money Capital
Total Market Bond Growth
<S> <C> <C> <C> <C>
Assets:
Investment in series mutual
funds, at net asset value
(cost $328,786,549 in
total; and $48,138,555,
$18,670,829, $82,800,918,
$36,743,802, $68,949,870,
$60,063,983 and $13,418,592
for each portfolio, respectively.) $372,536,101 $48,138,555 $18,406,534 $94,823,132
Total net assets $372,536,101 $48,138,555 $18,406,534 $94,823,132
Net assets:
For variable annuity contracts $372,008,601 $48,138,555 $18,406,534 $94,823,132
Retained in separate account by
Charter National Life Insurance
Company 527,500
Total net assets $372,536,101 $48,138,555 $18,406,534 $94,823,132
The accompanying notes are an integral part of these financial statements.
</TABLE>
10
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<CAPTION>
Growth and Global
Balanced International Income Discovery
<S> <C> <C> <C> <C>
Assets:
Investment in series mutual
funds, at net asset value
(cost $328,786,549 in
total; and $48,138,555,
$18,670,829, $82,800,918,
$36,743,802, $68,949,870,
$60,063,983 and $13,418,592
for each portfolio, respectively.) $43,120,710 $81,739,416 $72,323,186 $13,984,568
Total net assets $43,120,710 $81,739,416 $72,323,186 $13,984,568
Net assets:
For variable annuity contracts $43,120,710 $81,739,416 $72,323,186 $13,457,068
Retained in separate account by
Charter National Life Insurance
Company 527,500
Total net assets $43,120,710 $81,739,416 $72,323,186 $13,984,568
The accompanying notes are an integral part of these financial statements.
</TABLE>
10a
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF OPERATIONS
For the year ended December 31, 1996
<TABLE>
<CAPTION>
Money Capital
Total Market Bond Growth
<S> <C> <C> <C> <C>
Investment income:
Dividend income $18,508,247 $2,258,309 $1,770,752 $8,124,333
Less administrative expenses and
mortality and expense risk charges 2,482,190 324,819 140,373 642,777
Net investment income 16,026,057 1,933,490 1,630,379 7,481,556
Gains (losses) on investments:
Realized gains (losses):
Proceeds from sales of fund shares 252,208,855 95,266,246 10,017,061 69,174,645
Cost of fund shares sold 237,924,486 95,266,246 10,234,630 63,849,333
Net realized gains (losses) 14,284,369 0 (217,569) 5,325,312
Unrealized gains (losses):
Beginning of year 29,942,229 856,388 9,567,865
End of year 43,749,552 (264,295) 12,022,214
Change in unrealized gains
and losses 13,807,323 (1,120,683) 2,454,349
Net realized and unrealized
gains (losses) on investments 28,091,692 (1,338,252) 7,779,661
Increase in net assets from
operations $44,117,749 $1,933,490 $292,127 $15,261,217
The accompanying notes are an integral part of these financial statements.
</TABLE>
11
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF OPERATIONS
For the year ended December 31, 1996
<TABLE>
<CAPTION>
Growth and Global
Balanced International Income Discovery*
<S> <C> <C> <C> <C>
Investment income:
Dividend income $2,250,259 $1,992,554 $2,112,040 $0
Less administrative expenses and
mortality and expense risk charges 300,573 616,402 402,544 54,702
Net investment income 1,949,686 1,376,152 1,709,496 (54,702)
Gains (losses) on investments:
Realized gains (losses):
Proceeds from sales of fund shares 10,370,636 39,600,114 25,258,651 2,521,502
Cost of fund shares sold 9,174,768 34,974,706 21,927,338 2,497,465
Net realized gains (losses) 1,195,868 4,625,408 3,331,313 24,037
Unrealized gains (losses):
Beginning of year 5,193,326 7,945,848 6,378,802
End of year 6,376,908 12,789,546 12,259,203 565,976
Change in unrealized gains and
losses 1,183,582 4,843,698 5,880,401 565,976
Net realized and unrealized
gains (losses) on investments 2,379,450 9,469,106 9,211,714 590,013
Increase in net assets from
operations $4,329,136 $10,845,258 $10,921,210 $535,311
* The Global Discovery Portfolio was added to the Fund on May 1, 1996.
The accompanying notes are an integral part of these financial statements.
</TABLE>
11a
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
For the year ended December 31, 1996
<TABLE>
<CAPTION>
Money Capital
Total Market Bond Growth
<S> <C> <C> <C> <C>
Changes in assets:
Operations:
Net investment income $16,026,057 $1,933,490 $1,630,379 $7,481,556
Net realized gains (losses) 14,284,369 (217,569) 5,325,312
Change in unrealized gains
and losses 13,807,323 (1,120,683) 2,454,349
Net change from operations 44,117,749 1,933,490 292,127 15,261,217
Capital share transactions:
Premiums 43,110,837 11,424,905 1,434,928 7,941,006
Records maintenance and
transfer charges (3,783) (743) (115) (1,294)
Capital contributions 500,000
Contract claims (2,099,950) (447,527) (116,051) (488,469)
Contract surrenders (28,585,219) (9,268,415) (845,515) (6,114,013)
Transfers (to) from general
account and portfolio
transfers, net 1,213,069 4,071,669 (3,476,973) (6,778,672)
Net change from capital share
transactions 14,134,954 5,779,889 (3,003,726) (5,441,442)
Total change in net assets $58,252,703 $7,713,379 ($2,711,599) $9,819,775
Net assets:
Beginning of year $314,283,398 $40,425,176 $21,118,133 $85,003,357
End of year 372,536,101 48,138,555 18,406,534 94,823,132
Total change in net assets $58,252,703 $7,713,379 ($2,711,599) $9,819,775
The accompanying notes are an integral part of these financial statements.
</TABLE>
12
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
For the year ended December 31, 1996
<TABLE>
<CAPTION>
Growth and Global
Balanced International Income Discovery*
<S> <C> <C> <C> <C>
Changes in assets:
Operations:
Net investment income $1,949,686 $1,376,152 $1,709,496 ($54,702)
Net realized gains (losses) 1,195,868 4,625,408 3,331,313 24,037
Change in unrealized gains
and losses 1,183,582 4,843,698 5,880,401 565,976
Net change from operations 4,329,136 10,845,258 10,921,210 535,311
Capital share transactions:
Premiums 4,165,325 5,345,696 10,501,404 2,297,573
Records maintenance and
transfer charges (487) (1,144)
Capital contributions 500,000
Contract claims (202,793) (388,763) (456,347)
Contract surrenders (2,136,434) (7,170,559) (2,929,580) (120,703)
Transfers (to) from general
account and portfolio
transfers, net (4,872,183) (7,386,442) 8,883,283 10,772,387
Net change from capital share
transactions (3,046,572) (9,601,212) 15,998,760 13,449,257
Total change in net assets $1,282,564 $1,244,046 $26,919,970 $13,984,568
Net assets:
Beginning of year $41,838,146 $80,495,370 $45,403,216 $0
End of year 43,120,710 81,739,416 72,323,186 13,984,568
Total change in net assets $1,282,564 $1,244,046 $26,919,970 $13,984,568
* The Global Discovery Portfolio was added to the Fund on May 1, 1996.
The accompanying notes are an integral part of these financial statements.
</TABLE>
12a
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
For the year ended December 31, 1995
<TABLE>
<CAPTION>
Money Capital
Total Market Bond Growth
<S> <C> <C> <C> <C>
Changes in assets:
Operations:
Net investment income $6,935,058 $2,201,188 $997,553 $2,186,380
Net realized gains (losses) 7,372,109 (39,840) 2,927,314
Change in unrealized gains
and losses 32,172,417 1,846,988 11,995,154
Net change from operations 46,479,584 2,201,188 2,804,701 17,108,848
Capital share transactions:
Premiums 39,101,508 11,001,618 2,245,495 7,895,633
Records maintenance and
transfer charges (5,050) (989) (197) (1,705)
Capital withdrawals (626,892)
Contract claims (2,162,428) (323,563) (116,287) (609,151)
Contract surrenders (37,032,225) (15,346,765) (2,475,313) (6,902,196)
Transfers (to) from general
account and portfolio
transfers, net (659,874) (11,425,003) 4,493,036 4,596,242
Net change from capital
share transactions (1,384,961) (16,094,702) 4,146,734 4,978,823
Total change in net assets $45,094,623 ($13,893,514) $6,951,435 $22,087,671
Net assets:
Beginning of year $269,188,775 $54,318,690 $14,166,698 $62,915,686
End of year 314,283,398 40,425,176 21,118,133 85,003,357
Total change in net assets $45,094,623 ($13,893,514) $6,951,435 $22,087,671
The accompanying notes are an integral part of these financial statements.
</TABLE>
13
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
For the year ended December 31, 1995
<TABLE>
<CAPTION>
Growth and
Balanced International Income
<S> <C> <C> <C>
Changes in assets:
Operations:
Net investment income $1,034,421 ($186,169) $701,685
Net realized gains (losses) 421,887 2,717,854 1,344,894
Change in unrealized gains
and losses 6,833,466 5,034,408 6,462,401
Net change from operations 8,289,774 7,566,093 8,508,980
Capital share transactions:
Premiums 3,325,490 5,889,416 8,743,856
Records maintenance and
transfer charges (515) (1,644)
Capital withdrawals (626,892)
Contract claims (275,538) (773,233) (64,656)
Contract surrenders (3,073,448) (6,689,175) (2,545,328)
Transfers (to) from general
account and portfolio
transfers, net 3,728,781 (15,799,969) 13,747,039
Net change from capital
share transactions 3,704,770 (17,374,605) 19,254,019
Total change in net assets $11,994,544 ($9,808,512) $27,762,999
Net assets:
Beginning of year $29,843,602 $90,303,882 $17,640,217
End of year 41,838,146 80,495,370 45,403,216
Total change in net assets $11,994,544 ($9,808,512) $27,762,999
The accompanying notes are an integral part of these financial statements.
</TABLE>
13a
<PAGE>
<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 seven 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, 1996,
consists of the Money Market Portfolio, the Bond Portfolio, the Capital
Growth Portfolio, the Balanced Portfolio, the International Portfolio, the
Growth and Income Portfolio and the Global Discovery Portfolio
(collectively referred to as the "Portfolios"). The Global Discovery
Portfolio was added to the Fund on May 1, 1996.
The Adviser receives compensation for its management and advisory services.
Total annual compensation received by the Adviser in 1996 and 1995 as a
percentage of average net assets was as follows:
1996 1995
Money Market Portfolio .460% .500%
Bond Portfolio .610% .560%
Capital Growth Portfolio .530% .570%
Balanced Portfolio .600% .650%
International Portfolio 1.050% 1.080%
Growth and Income Portfolio .660% .750%
Global Discovery Portfolio 1.500% *
* The Global Discovery Portfolio was added to the Fund on May 1, 1996.
Charter National has an agreement whereby it reimburses the Fund 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 and Global
Discovery Portfolios 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.
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
14
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS, Continued
1. Organization, continued:
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. 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 National 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 National,
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.
15
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS, Continued
2. Significant Accounting Policies, continued:
Use of Estimates in Preparing Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Basis of Presentation:
Certain amounts in the prior year's financial statements have been
reclassified to conform with the 1996 presentation.
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 and Transfer Charges:
On certain Contracts, Charter National annually deducts an amount of $30
per Contract for the cost of performing records maintenance. On certain
other Contracts, Charter National is permitted to, but does not currently,
deduct a records maintenance charge of up to $40 at the beginning of each
Contract year to reflect the cost of performing records maintenance.
On certain Contracts, Charter National deducts a transfer charge of $10 for
the third and each subsequent transfer request made during a Contract year.
On certain other Contracts, Charter National is permitted to, but does not
currently, deduct a transfer charge of $10 for the third and each
subsequent transfer request made during a Contract year.
4. Distribution of the Contracts:
CNL, Inc. ("CNL") is a wholly-owned subsidiary of Campet, Inc., which is a
wholly-owned subsidiary of Leucadia. CNL, which acts as the principal
underwriter for the Contracts, 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, 1996.
Number of Net Asset Value
Portfolio Shares Cost Total Per Share
Money Market 48,138,555 $48,138,555 $48,138,555 $1.00
Bond 2,734,998 18,670,829 18,406,534 6.73
Capital Growth 5,746,856 82,800,918 94,823,132 16.50
Balanced 3,714,101 36,743,802 43,120,710 11.61
International 6,169,013 68,949,870 81,739,416 13.25
Growth and Income 7,718,590 60,063,983 72,323,186 9.37
Global Discovery* 2,209,253 13,418,592 13,984,568 6.33
Total $328,786,549 $372,536,101
The number and cost of Fund shares purchased and sold for the years ended
December 31, 1996 and 1995 are as follows:
Portfolio Purchases Sales
1996 Shares Cost Shares Cost
Money Market 102,979,625 $102,979,625 95,266,246 $95,266,246
Bond 1,280,551 8,643,714 1,490,899 10,234,630
Capital Growth 4,698,302 71,214,759 4,588,273 63,849,333
Balanced 834,931 9,273,750 941,665 9,174,768
International 2,556,375 31,375,054 3,197,461 34,974,706
Growth and Income 5,026,274 42,966,907 2,997,310 21,927,338
Global Discovery * 2,621,756 15,916,057 412,503 2,497,465
Total $282,369,866 $237,924,486
Portfolio Purchases Sales
1995 Shares Cost Shares Cost
Money Market 102,834,162 $102,834,162 116,727,676 $116,727,676
Bond 2,310,078 15,713,001 1,550,879 10,608,087
Capital Growth 5,659,759 75,914,912 5,167,305 65,822,395
Balanced 1,443,524 14,154,828 949,735 8,993,750
International 3,613,436 39,962,229 5,250,847 54,805,152
Growth and Income 5,106,307 35,825,273 2,234,607 14,524,675
Total $284,404,405 $271,481,735
* The Global Discovery Portfolio was added to the Fund on May 1, 1996.
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, 1996 and 1995 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, 1996.
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, 1996 and 1995 and the consolidated results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 10, 1997
18
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(Dollars in thousands except par value)
1996 1995
ASSETS
Investments
Available for sale (aggregate cost of
$1,567,848 and $1,602,497) $1,567,194 $1,622,448
Trading securities (aggregate cost of
$55,732 and $45,073) 58,269 47,413
Held to maturity (aggregate fair value
of $30,868 and $29,765) 30,858 29,237
Policyholder loans 17,813 17,768
Preferred stock of affiliate 40,000 40,000
Other investments, including accrued
interest income 19,531 22,389
Total investments 1,733,665 1,779,255
Cash and cash equivalents 214,355 157,062
Reinsurance receivable, net 210,881 219,022
Premiums and other receivables, net 151,370 155,255
Prepaids and other assets 15,931 16,813
Property, equipment and leasehold
improvements, net 28,493 27,630
Deferred policy acquisition costs 70,892 62,990
Federal income tax recoverable 3,453
Deferred income taxes 77,732 73,875
Assets held in separate and variable accounts 546,074 472,837
Total assets $3,049,393 $2,968,192
LIABILITIES AND STOCKHOLDER'S EQUITY
Future policy benefits $793,245 $815,310
Policy and contract claims 603,253 638,348
Unearned premiums 287,828 269,982
Accounts payable and accrued expenses 125,524 113,342
Income taxes payable 11,263
Other liabilities 76,082 81,859
Liabilities related to separate and
variable accounts 545,019 472,837
Surplus note 25,000 25,000
Total liabilities 2,467,214 2,416,678
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 (262) 12,968
Retained earnings 572,891 528,996
Total stockholder's equity 582,179 551,514
Total liabilities and stockholder's equity $3,049,393 $2,968,192
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1996, 1995 and 1994
(Dollars in thousands)
1996 1995 1994
Revenues:
Insurance revenues $656,304 $653,230 $615,867
Net investment income 118,555 115,872 107,705
Service fee revenue 25,393 27,451 13,958
Net securities gains (losses) 15,338 4,620 (5,292)
Surrender and other
administrative charges 3,169 3,025 3,559
Other 2,160 3,285 2,555
Total revenues 820,919 807,483 738,352
Benefits and expenses:
Policyholder benefits, claims
and settlement expenses 545,863 613,497 545,644
Increase (decrease) in future
policy benefits 6,195 (74,334) (45,062)
Administrative and general
expenses 126,456 128,755 122,038
Outside marketing costs 24,320 22,123 18,164
Amortization of deferred policy
acquisition costs 43,884 38,683 25,427
Capitalization of policy
acquisition costs (51,786) (55,975) (41,637)
Commissions 12,191 22,926 17,213
Interest 2,463 4,146 6,002
Total benefits and expenses 709,586 699,821 647,789
Income before income taxes 111,333 107,662 90,563
Income taxes:
Current 34,173 17,129 12,237
Deferred 3,265 14,015 10,851
Total provision for
income taxes 37,438 31,144 23,088
Net income $73,895 $76,518 $67,475
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
For the years ended December 31, 1996, 1995 and 1994
(Dollars in thousands, except par value)
Net
Common Unrealized
Stock, Additional Gain
$31 Par Paid-in (Loss) on Retained
Value Capital Investments Earnings Total
Balance, January 1, 1994 $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
Net income 76,518 76,518
Dividend paid to parent (4,700) (4,700)
Net change in unrealized
gain (loss) on
investments 42,971 42,971
Balance, December 31, 1995 3,410 6,140 12,968 528,996 551,514
Net income 73,895 73,895
Dividend paid to parent (30,000) (30,000)
Net change in unrealized
gain (loss) on
investments (13,230) (13,230)
Balance, December 31,1996 $3,410 $6,140 ($262) $572,891 $582,179
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, 1996, 1995 and 1994
(Dollars in thousands)
1996 1995 1994
Net cash flows from operating activities:
Net income $73,895 $76,518 $67,475
Adjustments to reconcile net income
to net cash provided by (used for)
operations:
Provision (benefit) for deferred
income taxes 3,265 14,015 10,851
Depreciation and amortization of
property, equipment and leasehold
improvements 5,028 3,683 1,964
Amortization of net investment
(discount) premium (1,000) (4,171) 1,186
Net securities (gains) losses (15,338) (4,620) 5,292
Purchases of investments classified
as trading (486,934) (285,423) (215,472)
Proceeds from sales of investments
classified as trading 483,208 278,188 215,288
Net change in:
Accrued investment income 2,512 2,884 (195)
Reinsurance receivable (11,651) 7,949 15,083
Premiums and other receivables,
net (14,099) (11,647) (8,638)
Provision for doubtful accounts (32) (31) 1,408
Prepaids and other assets 364 16,805 (2,169)
Deferred policy acquisition costs (7,902) (17,292) (16,210)
Future policy benefits 6,219 (1,336) 7,791
Policy and contract claims (35,095) (4,030) (44,585)
Unearned premiums 17,846 10,802 13,472
Accounts payable, accrued
expenses, and other
liabilities 12,016 (5,876) 6,398
Accrued interest on surplus notes (18) (2,007) (10,086)
Income taxes payable 14,716 (4,318) 3,757
Net cash provided by operating
activities 47,000 70,093 52,610
Continued
22
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996, 1995 and 1994
(Dollars in thousands)
1996 1995 1994
Net cash flows from investing activities:
Purchases of investments (other
than short-term) ($1,367,997) ($1,193,260) ($830,834)
Proceeds from maturities of
investments 278,906 351,491 307,407
Proceeds from sales of
investments 1,134,639 849,840 515,499
Purchase of Colonial Penn Madison
Insurance Company (37,539)
Purchases of installment loans (3) (22,039) (18,550)
Principal collections on
installment loans 14,727 6,371 4,587
Net acquisitions of property and
equipment (5,891) (11,804) (17,891)
Net change in equity in separate
and variable accounts (1,000) 1,230 (330)
Net cash provided by (used for)
investing activities 53,381 (18,171) (77,651)
Net cash flows from financing activities:
Revolving credit note repayments (3,000) (22,500)
Mortgage proceeds (repayments) (332) 2,685
Net change in capital leases (1,264) 685 354
Net change in policyholder
account balances (8,492) (15,896) (20,439)
Surplus note repayments (21,000) (19,000)
Dividend paid to parent (30,000) (4,700)
Net cash used for financing
activities (43,088) (60,726) (39,085)
Net increase (decrease) in cash
and cash equivalents 57,293 (8,804) (64,126)
Cash and cash equivalents at January 1, 157,062 165,866 229,992
Cash and cash equivalents at
December 31, $214,355 $157,062 $165,866
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $2,649 $6,311 $15,834
Income tax payments, net of refunds $23,294 $23,847 $13,307
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. Nature of Operations
Charter National Life Insurance Company ("Charter") is a wholly-owned
subsidiary of Leucadia National Corporation ("Leucadia"), a publicly traded
holding company domiciled in the state of New York. Charter is a specialty
markets provider of personal lines property and casualty and life and
health products to niche markets throughout the United States. The
principal personal lines insurance products are automobile insurance,
homeowners insurance, graded benefit life insurance and medicare supplement
insurance, all marketed primarily to the age 50-and-over population, and
variable annuity products.
2. Significant Accounting Policies:
a. Use of Estimates in Preparing Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements
and disclosures of contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those estimates.
b. Principles of Consolidation:
The consolidated financial statements include the accounts of Charter
National Life Insurance Company and its subsidiaries. Charter's major
subsidiary is Colonial Penn Group, Inc. ("CPG"), which includes 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 for prior periods have been reclassified to be consistent
with the 1996 presentation.
c. Statements of Cash Flows:
Charter considers short-term investments, which have maturities of less
than three months at the time of acquisition, to be cash equivalents. Cash
and cash equivalents include short-term investments of approximately
$205,321,000 and $149,582,000 at December 31, 1996 and 1995, respectively.
24
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Significant Accounting Policies, continued:
d. Investments:
At acquisition, marketable debt and equity securities are designated as
either i) held to maturity, which are carried at amortized cost, ii)
trading, which are carried at estimated fair value with unrealized gains
and losses reflected in results of operations, or iii) available for sale,
which are carried at estimated fair value with unrealized gains and losses
reflected as a separate component of stockholder's equity, net of taxes.
Held to maturity investments are made with the intention of holding such
securities to maturity, which Charter has the ability to do. Estimated
fair values are principally based on quoted market prices.
Carrying values for the following other investments are as follows:
preferred stock of affiliate is carried at cost, policy loans are carried
at unpaid principal balance, and cash equivalents are carried at amortized
cost.
Gains or losses on sales of investments are determined on a specific cost
identification basis.
Charter is subject to interest rate risk to the extent its investment
portfolio cash flows are not matched to its insurance liabilities. Charter
believes it manages this risk through modeling of the cash flows under
reasonable scenarios. Charter's assets are also subject to credit risk,
but this is minimized through a significant concentration in U. S.
government securities
e. 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.
Premiums for investment oriented insurance ("IOP") products 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. The principal IOP product offered during the three year
period ended December 31, 1996 was a variable annuity ("VA") product.
Other life premiums are recognized as revenues when due.
25
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Significant Accounting Policies, continued:
e. Insurance Revenues and Surrender and Other Administrative
Charges, continued:
Premiums for the VA product 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.
f. Deferred Policy Acquisition Costs:
Policy acquisition costs principally consist of direct response marketing
costs, commissions, 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.
g. 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.
h. Property, Equipment and Leasehold Improvements:
Property, equipment and leasehold improvements are 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, 30-39 years on real
estate, excluding land), and the term of the lease for leasehold
improvements.
26
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Significant Accounting Policies, continued:
i. Separate and Variable Account Assets and Liabilities:
Separate and variable account assets and liabilities relate to funds
received from Charter's VA and variable life ("VL") products, the assets
and liabilities of the non-contributory defined benefit pension plans of
Charter and Phlcorp, Inc. (a wholly-owned subsidiary of Leucadia), and the
assets and liabilities of Charter's deferred compensation ("401(k)") plan.
Separate and variable account assets and liabilities are carried at fair
market value.
j. Liabilities for Future Policy Benefits, Unearned Premiums and
Policy and Contract Claims:
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. As more information becomes available and claims are settled,
the estimated liabilities are adjusted upward or downward with the effect
of decreasing or increasing net income at the time of adjustment.
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.
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.
27
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Significant Accounting Policies, continued:
k. Reinsurance:
In the normal course of business, Charter seeks to reduce the loss that may
arise from catastrophes and to limit losses from large exposures by
reinsuring certain levels of risk in various geographic areas of exposure
with other insurance enterprises. Charter obtained reinsurance for
casualty losses in excess of $2 million per occurrence in 1996, 1995, and
1994. 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 $15 million in 1996 and 1995, and $11 million in 1994.
In 1997, Charter's property and casualty insurance subsidiaries entered
into "second event" reinsurance that will provide up to $10 million of
recovery if multiple catastrophe losses not covered under their basic
agreement exceed $20 million. 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.
Reinsurance recoverables are reported as assets net of provisions for
uncollectible amounts. Premiums earned, losses incurred, loss adjustment
expenses and other underwriting expenses are stated net of reinsurance in
the consolidated statements of income.
l. Pension Plans and Other Postemployment and Postretirement
Benefits:
Charter sponsors 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.
m. Income Taxes:
Charter National Life Insurance Company and its non-life insurance
subsidiaries file a consolidated federal income tax return with Leucadia.
Charter National Life Insurance Company 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. The future
benefit of certain tax loss carryforwards and future deductions is recorded
as an asset, and the provisions for income taxes are not reduced for the
benefit from utilization of such deductions. A valuation allowance is
provided if deferred tax assets are not considered more likely than not to
be realized.
28
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. 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. Premiums received on IOP products amounted to approximately
$52,267,000, $50,202,000 and $108,080,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
In 1993, Charter reinsured substantially all of its existing block of
single premium whole life ("SPWL") business with a subsidiary of John
Hancock Mutual Life Insurance Company ("John Hancock"). In each of the
three years ending in 1996, Charter received approximately $1,458,000, and
may receive additional consideration in future years, based on the
persistency 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.
As of December 31, 1996 and 1995, approximately $121,296,000 and
$141,084,000, 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.
Medicare Supplement: Charter, through certain subsidiaries, has a closed
block of health insurance products primarily designed to supplement
medicare benefits for the older population on an underwritten guaranteed
renewable basis.
29
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Insurance Operations, continued:
b. Property and Casualty Insurance:
Charter's primary property and casualty business is providing private
passenger automobile insurance and homeowners insurance. Charter uses a
relationship marketing strategy supplemented by direct solicitation
campaigns to acquire new policyholders. Charter also writes direct
assigned risk business under Limited Assignment Distribution plans that
underwrite residual market risks in many states ("service business").
Under these programs, the Company writes the involuntary private passenger
and commercial auto policies that would normally have been assigned to
other companies. Charter charges these other companies a service fee to
compensate for the risks and costs associated with writing this business.
In addition, Charter writes a small amount of umbrella business.
4. Investments:
Net investment income was as follows for the years ended December 31, 1996,
1995 and 1994, in thousands of dollars:
1996 1995 1994
Interest income:
Bonds and short-term investments $114,946 $112,624 $104,091
Policy loans 1,014 1,021 962
Other long-term investments 533 897 1,167
Dividends and other (1) 5,678 5,197 5,148
Total investment income 122,171 119,739 111,368
Less: Investment expenses 3,616 3,867 3,663
Net investment income $118,555 $115,872 $107,705
(1) Includes dividends on the 10% cumulative preferred stock of
Leucadia Financial Corporation ("LFC"), an affiliate, of $4,000,000 in each
of the three years ended December 31, 1996.
30
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. 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, 1996 and 1995 were as follows, in
thousands of dollars:
Gross Gross Estimated
Unrealized Unrealized Fair
1996 Cost Gains Losses Value
Available for sale:
Bonds and notes:
U. S. Government agencies
and authorities $1,221,908 $7,097 $12,048 $1,216,957
States, municipalities and
political subdivisions 14,613 72 37 14,648
Foreign governments 12,129 2,505 (1) 14,635
Public utilities 44,417 464 514 44,367
Other corporate debt 272,478 4,989 3,503 273,964
Total fixed maturities 1,565,545 15,127 16,101 1,564,571
Equity Securities:
Preferred stock 2,293 331 1 2,623
Common stocks - industrial
and other 10 10 0
Total equity securities 2,303 331 11 2,623
Total investments available
for sale $1,567,848 $19,785 $20,439 $1,567,194
Held to maturity:
Bonds and notes:
U. S. Government agencies
and authorities $ 30,858 $ 296 $ 286 $ 30,868
1995
Available for sale:
Bonds and notes:
U. S. Government agencies
and authorities $1,226,334 $16,118 $1,939 $1,240,513
States, municipalities and
political subdivisions 3,367 50 32 3,385
Foreign governments 20,949 1,142 1,334 20,757
Public utilities 43,502 961 500 43,963
Other corporate debt 306,980 7,131 2,010 312,101
Total fixed maturities 1,601,132 25,402 5,815 1,620,719
Equity Securities:
Common stock - Industrial
and other 365 54 10 409
Common stock - Bank, trust
and insurance
companies 1,000 320 1,320
Total equity securities 1,365 374 10 1,729
Total investments available
for sale $1,602,497 $25,776 $5,825 $1,622,448
Held to maturity:
Bonds and notes:
U. S. Government agencies
and authorities $ 29,237 $ 662 $ 134 $ 29,765
31
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Investments, continued:
The amortized cost and estimated fair value of investments classified as
available for sale and held to maturity at December 31, 1996, 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.
Available for Sale Held to Maturity
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
Due in one year or less $ 106,309 $ 106,308 $ 5,309 $ 5,324
Due after one year through
five years 767,649 765,263 24,433 24,321
Due after five years through
ten years 188,449 188,680
Due after ten years 136,084 134,769 1,116 1,223
1,198,491 1,195,020 30,858 30,868
Mortgage-backed securities 367,054 369,551
Total $1,565,545 $1,564,571 $30,858 $30,868
The following is selected information regarding trading securities at
December 31, 1996 and 1995 in thousands of dollars:
Amortized Fair Carrying
Cost Value Value
1996
Fixed maturities -
Corporate bonds and notes $33,430 $33,897 $33,897
Equity securities - preferred stocks 16,260 16,823 16,823
Equity securities - common stocks 4,842 5,803 5,803
Options 1,200 1,746 1,746
Total trading securities $55,732 $58,269 $58,269
1995
Fixed maturities -
Corporate bonds and notes $26,356 $27,194 $27,194
Equity securities - preferred stocks 17,785 19,079 19,079
Equity securities - common stocks 142 148 148
Options 790 992 992
Total trading securities $45,073 $47,413 $47,413
At December 31, 1996 and 1995, Charter did not hold investments in
securities of a single issuer other than U.S. government securities which
exceeded, in the aggregate, 10% of Charter's stockholder's equity at that
date.
32
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Investments, continued:
Net securities gains (losses) reflected in the accompanying consolidated
statements of income for the years ended December 31, 1996, 1995 and 1994
were as follows, in thousands of dollars:
1996 1995 1994
Fixed maturities $13,527 $8,253 ($4,966)
Equity securities (80) (5,242) 314
Other 287 549 (216)
Net unrealized gains (losses)
on trading securities 1,604 1,060 (424)
Net securities gains (losses) $15,338 $4,620 ($5,292)
Gross gains and losses on sale of fixed maturities were approximately
$20,784,000 and $7,257,000, respectively, in 1996, $19,067,000 and
$10,814,000, respectively, in 1995 and $9,887,000 and $14,853,000,
respectively, in 1994.
Gross gains and losses on sale of equity securities were approximately
$15,549,000 and $15,629,000, respectively, in 1996, $10,142,000 and
$15,384,000, respectively, in 1995 and $6,250,000 and $5,936,000,
respectively, in 1994.
5. Reinsurance:
In addition to the reinsurance transactions related to the SPWL block of
business discussed in Note 3 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.
33
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. Reinsurance, continued:
The effect of reinsurance on premiums written and earned for the years
ended December 31, 1996, 1995 and 1994, is as follows, in thousands of
dollars:
1996 1995 1994
Written Earned Written Earned Written Earned
Direct Premiums $704,635 $684,566 $679,970 $657,900 $622,095 $604,130
Assumed 2,422 4,932 6,773 21,437 31,099 30,891
Ceded (32,730) (33,194) (24,887) (26,107) (18,107) (19,154)
Net premiums $674,327 $656,304 $661,856 $653,230 $635,087 $615,867
Direct premiums are net of surrender and administrative charges of
approximately $3,169,000, $3,025,000 and $3,559,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Life insurance in force ceded to other carriers amounted to approximately
$141,842,000, $186,665,000 and $271,019,000 at December 31, 1996, 1995, and
1994 respectively. This represented approximately 7%, 9% and 12% of the
total amount in force at those dates.
The effect of reinsurance on policyholder benefits and future policy
benefits for the years ended December 31, 1996, 1995 and 1994 are as
follows, in thousands of dollars:
1996 1995 1994
Direct $569,205 $533,144 $487,810
Assumed 4,518 27,131 38,891
Ceded (21,665) (21,112) (26,119)
Net policyholder benefits $552,058 $539,163 $500,582
Reinsurance receivables are net of allowance for doubtful accounts of
approximately $3,458,000 and $4,804,000 at December 31, 1996 and 1995,
respectively. As discussed in Note 3, at December 31, 1996 and 1995,
reinsurance receivables, net includes approximately $121,296,000 and
$141,084,000, respectively, due from a subsidiary of John Hancock.
34
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Premiums and Other Receivables, Net:
A summary of premiums and other receivables, net at December 31, 1996 and
1995 is as follows, in thousands of dollars:
1996 1995
Uncollected premiums $129,294 $113,509
Amounts due on sale of securities 3,599 6,808
Amounts due from affiliates 12,878 25,168
Installment loans (net of allowance
for doubtful accounts of $209 and $412) 2,773 6,442
Other 2,826 3,328
Total premiums and other receivables, net $151,370 $155,255
7. Prepaids and Other Assets:
A summary of prepaids and other assets at December 31, 1996 and 1995 is as
follows, in thousands of dollars:
1996 1995
Equity in pools and associations $6,002 $7,659
Prepaid reinsurance premiums 721
Investment in associated companies 3,888 3,980
Trust account - executive compensation plan 3,367 2,462
Other prepaid expenses and assets 1,953 2,712
Total prepaids and other assets $15,931 $16,813
35
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Property, Equipment, and Leasehold Improvements, Net:
At December 31, 1996 and 1995, property and equipment consisted of the
following, in thousands of dollars:
1996 1995
Furniture, fixtures, equipment and
leasehold improvements, at cost $24,237 $18,553
Land and buildings 16,122 16,048
Subtotal 40,359 34,601
Less: Accumulated depreciation and
amortization 11,866 6,971
Total property and equipment, net $28,493 $27,630
Property with a carrying amount of approximately $7,324,000 and $7,669,000
is pledged as collateral for mortgage loans, with aggregate balances of
approximately $2,353,000 and $2,685,000 at December 31, 1996 and 1995,
respectively.
9. Income Taxes:
The principal components of the deferred tax asset at December 31, 1996 and
1995, are as follows, in thousands of dollars:
1996 1995
Insurance reserves and unearned premiums $62,574 $59,660
Unrealized (gain) loss on investments 140 (6,983)
Other accrued liabilities 1,657 2,991
Employee benefits and compensation 9,187 9,718
Policy acquisition costs (2,450) (50)
Prepaid tax on intercompany security gains 1,514 1,199
Tax loss carryforwards 2,019
Other, net 5,110 5,321
Net deferred tax asset $77,732 $73,875
Charter believes it is more likely than not that the recorded deferred tax
asset will be realized principally from taxable income generated by
profitable operations.
36
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Income Taxes, continued:
The table below reconciles the "expected" statutory federal income tax to
the actual income tax expense, in thousands of dollars:
1996 1995 1994
"Expected" federal income tax $38,967 $37,681 $31,697
Non-taxable interest income on
state and municipal bonds (25) (460) (1,141)
Dividends received deduction (1,530) (1,444) (1,486)
Tax (benefit) applicable to
prior years (18) (509) (3,773)
Net operating losses (utilized) (3,068)
Favorable resolution of federal
tax contingencies (4,000)
Other 44 (124) 859
Total provision for income taxes $37,438 $31,144 $23,088
Charter had taxes due from affiliates of approximately $7,338,000 and
$1,867,000 at December 31, 1996 and 1995, respectively.
At December 31, 1996, Charter had no loss carryforwards for income tax
purposes.
Under prior law, Charter National Life Insurance Company had accumulated
$15,447,000 of special federal income tax deductions allowed life insurance
companies and the CPG life insurance subsidiaries had accumulated
$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, Charter does not
anticipate any transaction occurring which would cause these amounts to
become taxable. With respect to the CPG life insurance subsidiaries, the
IRS has asserted that certain of such special federal income tax deductions
should have been reflected in taxable income in prior years, and has
assessed additional taxes (excluding interest) of $2,899,000 and
$19,132,000, for 1989 and 1988, respectively. Under the terms of the
purchase agreement whereby CPG was acquired from FPL Group Capital Inc.
(the "Seller"), the Seller assumed the obligation to reimburse Charter for
any such taxes.
Pursuant to the purchase agreement, Charter complied with the Seller's
instructions and agreed to the 1989 assessment. To date, Seller has failed
to comply with its contractual obligation to reimburse Charter for payment
of the 1989 assessment, the related interest and the loss of certain
minimum tax credit carryforwards, an aggregate of $3,766,000, to which
Charter is entitled under Seller's indemnification. In a response to a
legal proceeding initiated by Charter to collect such amount due under the
Seller's indemnification obligation, the Seller has alleged that Charter
has breached the purchase agreement and,
37
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Income Taxes, continued:
on that basis, Seller has denied liability for the 1989 assessment.
Charter believes it has not breached the purchase agreement and the Seller
remains liable for all such taxes and interest. The Seller is currently
exercising its right under the purchase agreement to control the contest of
the 1988 IRS assessment. If the Seller is unsuccessful in contesting the
1988 IRS assessment, no assurance can be given that the Seller will comply
with its indemnification obligations under the purchase agreement. Charter
intends to enforce its indemnification rights against the Seller and to
seek other relief, including relief for Seller's bad faith.
10. Accounts Payable and Accrued Expenses, and Other Liabilities:
A summary of accounts payable and accrued expenses, and other liabilities
at December 31, 1996 and 1995 is as follows, in thousands of dollars:
1996 1995
Accounts payable and accrued expenses:
Drafts payable $14,183 $13,234
Taxes other than income 9,707 12,144
Reserve for guarantee association assessments 7,557 7,852
Accrued compensation, severance, and other
employee benefits 12,871 13,087
Commissions 1,994 3,043
Pension liability 8,125 7,571
Payables related to securities 42,771 43,250
Funds held by company under reinsurance
treaties 17,163 2,837
Other 11,153 10,324
Total accounts payable and accrued expenses $125,524 $113,342
Other liabilities:
Lease obligations $1,588 $3,815
Unearned service fee income 23,373 15,302
Reserve for future solicitation expenses 21,659 25,037
Revolving credit note due to Leucadia 3,000
Liability for postretirement and
postemployment benefits 8,413 8,221
Premiums received in advance 3,578 4,871
Unclaimed funds 2,378 2,076
Due to affiliates 451 462
Capital leases 5,456 7,052
Deferred compensation plan 2,910 3,945
Other 6,276 8,078
Total other liabilities $76,082 $81,859
38
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. Pension Plans and Other Postemployment and Postretirement Benefits:
Charter maintains non-contributory defined benefit pension plans covering
substantially all employees. Benefits are generally based on years of
service and employees' compensation during the last years of employment.
Charter'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.
Charter's pension expense charged to operations for the years ended
December 31, 1996, 1995 and 1994 included the following components, in
thousands of dollars:
1996 1995 1994
Service cost $3,020 $2,287 $2,965
Interest cost 3,993 4,033 3,902
Actual return on plan assets (2,921) (5,554) 1,526
Net amortization and deferral (58) 1,866 (5,244)
Net pension expense $4,034 $2,632 $3,149
During 1996, Charter recognized a curtailment loss of approximately
$238,000 upon the conversion of one of its non-qualified defined benefit
plans to a defined contribution plan. In addition, during 1996, Charter
recognized a settlement loss of approximately $69,000 upon voluntary
termination of plan participants.
The funded status of the defined benefit pension plans at December 31, 1996
and 1995 was as follows, in thousands of dollars:
1996 1995
Actuarial present value of accumulated
benefit obligation:
Vested $41,996 $45,264
Nonvested 785 754
Total $42,781 $46,018
Projected benefit obligation ($56,314) ($56,293)
Plan assets at fair value 49,025 45,678
Funded status of plan (7,289) (10,615)
Unrecognized prior service cost 2,945 3,291
Unrecognized net gain from experience
differences and assumption changes (3,668) (247)
Adjustment to recognize minimum liability (113)
Accrued pension liability ($ 8,125) ($ 7,571)
39
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. Pension Plans and Other Postemployment and Postretirement Benefits,
continued:
The projected benefit obligation at December 31, 1996 and 1995 was
determined using an assumed discount rate of 7.5% and 7.0%, respectively,
a long-term rate of return on plan assets of 7.5%, and salary increase
rates of 5.0% in both 1996 and 1995. Plan assets consist primarily of U.
S. Government and agencies bonds and corporate bonds and notes.
Charter participates in certain deferred compensation (401(k)) and defined
contribution plans. Expenses related to the defined contribution
retirement and 401(k) plans were approximately $947,000, $922,000 and
$931,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Charter provides health care and other benefits to certain eligible retired
employees. The plans (most of which require employee contributions) are
unfunded. 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 $447,000 in 1996, $439,000 in 1995 and
$489,000 in 1994, and consisted primarily of interest on the liabilities.
The liability for postretirement and postemployment benefits at December
31, 1996 and 1995, is as follows, in thousands of dollars:
1996 1995
Retirees $5,425 $5,747
Fully eligible active plan participants 883 877
Accumulated postretirement benefit obligation 6,308 6,624
Unrecognized net loss 1,020 512
Liability for postretirement benefits 7,328 7,136
Liability for postemployment benefits 1,085 1,085
Total liability for postretirement and
postemployment benefits $8,413 $8,221
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.5% and 7.0% at December 31, 1996 and 1995,
respectively. The assumed health care cost trend rate used in measuring
the accumulated postretirement benefit obligation was 8.0% and 9.0% for
1996 and 1995, respectively, declining to an ultimate rate of 6.0% by 2006.
If the health care cost trend rate were increased by 1.0%, the accumulated
postretirement obligation as of December 31, 1996 and 1995 would have
increased by approximately $507,000 and $530,000, respectively. The effect
of this change on the aggregate of service and interest cost for 1996 and
1995 would be immaterial.
40
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. 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 $6,474,000 in 1996, $6,270,000 in 1995 and $7,910,000 in
1994. In addition, Charter leases equipment under certain capital leases
that have a carrying value of approximately $2,958,000 as of December 31,
1996.
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, 1996 were as follows, in
thousands of dollars:
Future Capital
Rental Lease
Payments Payments
1997 $4,592 $1,373
1998 4,293 1,295
1999 3,990 753
2000 1,902
2001 1,047
Thereafter 2,868
Total minimum lease payments $18,692 3,421
Less: Amounts representing interest 318
Present value of net minimum capital
lease payments $3,103
As part of the CPG purchase price allocation, certain amounts have been
reserved for excess lease commitments. At December 31, 1996 and 1995,
reserves established for excess lease commitments were approximately
$1,588,000 and $3,815,000, respectively.
41
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. 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.
In December 1995, certain of CPG's property and casualty insurance
subsidiaries entered into an agreement with the California Department of
Insurance to settle its Proposition 103 liability for approximately
$17,700,000. The settlement did not exceed reserves established in prior
years. Charter paid the settlement during the first quarter of 1996.
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.
Charter has exposure to environmental and asbestos claims under general
liability policies and the participation in the assumed reinsurance
treaties from commercial lines of business written from 1983 to 1988. In
establishing the liability for unpaid losses and loss adjustment expenses
related to environmental and asbestos exposures management considers facts
currently known and the current state of the law and coverage litigation.
Liabilities are recognized for known claims and losses incurred but not
reported (including the cost of litigation). Estimates of the liabilities
are reviewed and updated continually based on previous Charter and industry
experience. The liability for unpaid losses and loss adjustment expenses
related to environmental and asbestos was $15,327,000 and $10,888,000 as of
December 31, 1996 and 1995, respectively. Developed case law and adequate
loss history do not exist for such claims, especially because significant
uncertainty exists about the outcome of coverage litigation and whether
past loss experience will be representative of future loss experience.
42
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. Segment Information:
Certain information concerning Charter's operations is presented in the
following table for the years ended December 31, 1996, 1995 and 1994, in
thousands of dollars:
1996 1995 1994
Total revenues:
Life and health insurance $ 226,156 $ 227,420 $ 228,578
Property and casualty insurance 594,763 580,063 509,774
Total revenues $ 820,919 $ 807,483 $ 738,352
Income before income taxes:
Life and health insurance $ 31,083 $ 30,728 $ 23,057
Property and casualty insurance 80,250 76,934 67,506
Total income before income taxes $ 111,333 $ 107,662 $ 90,563
Identifiable assets employed:
Life and health insurance $1,661,388 $1,612,132 $1,607,987
Property and casualty insurance 1,388,005 1,356,060 1,286,271
Total assets $3,049,393 $2,968,192 $2,894,258
15. 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. Charter also
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
services, and strategic planning and investigation of proposed business
acquisitions.
43
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. Related Party Transactions, continued:
Expenses incurred were approximately $4,652,000, $4,277,000 and $4,166,000
for the years ended December 31, 1996, 1995 and 1994, 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 $2,644,000, $2,582,000 and $2,444,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Charter provided administrative services to affiliated property and
casualty companies, for which it received approximately $147,000, $166,000
and $301,000 during 1996, 1995 and 1994, respectively.
In 1996, Charter entered into an agreement with Providential Life Insurance
Company, an affiliate, to provide administrative services, for which it
received approximately $300,000 during 1996.
During 1992, Charter issued a variable rate revolving credit note to
Leucadia for $33,000,000. The outstanding principal balance on the note
was $3,000,000 at December 31, 1995. The note was fully paid in 1996.
Interest expense incurred as a result of the note was approximately
$95,000, $1,056,000 and $1,212,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
In 1995, Charter entered into an agreement with C. P. Real Estate Services
Corp., an affiliate, for the performance of facility related services.
Expenses incurred were approximately $492,000 and $229,000 for the years
ended December 31, 1996 and 1995, respectively.
Charter has agreements with CNL, Inc., an affiliate, for the underwriting
and distribution of its VA and VL products. Expenses incurred were
approximately $245,000, $220,000 and $477,000 for the years ended December
31, 1996, 1995 and 1994, respectively.
In 1992, Charter issued a 7.75% surplus note to Leucadia for $25,000,000.
The terms of the 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 note at its face value of $25,000,000. In 1994,
the Company paid interest on the note of approximately $5,046,000,
representing all accrued interest through December 31, 1994. Also, the
Company paid interest on the note of approximately $1,975,000 in both 1996
and 1995. Payments of both principal and interest on the note are subject
to the approval of the Missouri Department of Insurance.
44
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. Related Party Transactions, continued:
Related interest charged to operations was approximately $1,975,000 in
both 1996 and 1995, and $2,200,000 in 1994.
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 provided for interest of 10% per annum on the outstanding
principal. The maturity date of the note was September 16, 2001. The note
was fully repaid in 1995. Charter made principal repayments of $21,000,000
and $19,000,000, and paid accumulated interest of approximately $2,707,000
and $9,164,000 in 1995 and 1994, respectively. Related interest expense
charged to operations was approximately $782,000, and $2,258,000 in 1995
and 1994, 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 LFC until the business lapses. Charter paid renewal
commissions to LFC of approximately $12,846,000, $14,153,000 and
$15,753,000 in 1996, 1995 and 1994, respectively. The gain on the sale of
CPCC of approximately $39,677,000 was deferred in 1992. The balance is
included in other liabilities as reserve for future solicitation expenses.
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 $3,378,000,
$3,796,000 and $4,261,000 for 1996, 1995 and 1994, respectively.
Charter purchased installment loans of approximately $3,000, $164,000 and
$18,550,000 from American Investment Bank ("AIB"), an affiliate, in 1996,
1995 and 1994, respectively, and paid related service fees of approximately
$170,000, $319,000 and $396,000 in 1996, 1995 and 1994, respectively.
Approximately $2,773,000 and $6,442,000 in installment loans were
outstanding at December 31, 1996 and 1995, respectively, and are included
in premiums and other receivables.
In addition, Charter held certificates of approximately $10,555,000 and
$21,875,000, at December 31, 1996 and 1995, respectively, evidencing a
fractional undivided interest in the AIB Recoverable Trust (the "Trust").
The Trust's property includes a pool of retail installment sale contracts
secured by new and used automobiles and light trucks, sold to the Trust by
AIB. Such amount is included in premiums and other receivables as amounts
due from affiliates. Earnings from the Trust were approximately $1,127,000
and $1,267,000 for 1996 and 1995, respectively, and are included in other
revenues.
45
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. 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 was accounted for under the purchase method of accounting.
16. Fair Value of Financial Instruments:
Following is 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 maturity
securities 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 and cash equivalents: The carrying amount of cash equivalents
approximates fair value.
(c) Separate and variable accounts: Separate and variable accounts
assets and liabilities are carried at market value, 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.
46
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
16. Fair Value of Financial Instruments, continued:
(e) Other liabilities: The fair value of mortgages is estimated by
discounting the future minimum 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, 1996 and 1995 are as follows, in thousands of
dollars:
1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets:
Investments:
Practicable to
estimate fair value $1,656,676 $1,656,686 $1,699,837 $1,700,365
Preferred stocks of
affiliate 40,000 40,000 40,000 40,000
Policyholder loans 17,813 17,813 17,768 17,768
Cash and cash
equivalents 214,355 214,355 157,062 157,062
Separate and
variable accounts 546,074 546,074 472,837 472,837
Financial liabilities:
Investment contract
reserves 37,658 41,404 67,254 72,803
Other liabilities:
Mortgages 2,353 1,905 2,685 1,989
Variable rate revolving
credit note 3,000 3,000
Separate and variable
accounts 545,019 545,019 472,837 472,837
Surplus notes 25,000 25,000 25,000 25,000
47
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
17. Statutory Information:
Charter National Life Insurance Company and its insurance subsidiaries are
subject to regulation based, in part, on accounting bases prescribed by
regulatory authorities.
Charter National Life Insurance Company's statutory assets (on an
unconsolidated basis) were approximately $913,570,000 and $830,455,000 at
December 31, 1996 and 1995, respectively, with statutory capital and
surplus of approximately $400,717,000 and $376,219,000 at those dates,
respectively. Charter National Life Insurance Company's net statutory
gains from operations (on an unconsolidated basis) were approximately
$35,550,000, $7,623,000 and $8,250,000 for the years ended December 31,
1996, 1995 and 1994, respectively, and included dividends received from
subsidiaries of approximately $36,120,000, $6,840,000, and $9,162,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.
Statutory net income (on an unconsolidated basis) of Charter National Life
Insurance Company's insurance subsidiaries for the years ended December 31,
1996, 1995 and 1994 was as follows, in thousands of dollars:
1996 1995 1994
Property/Casualty subsidiaries $51,370 $61,567 $44,598
Life/Health subsidiaries 9,995 5,223 5,981
Statutory capital and surplus of Charter National Life Insurance Company's
insurance subsidiaries was as follows, in thousands of dollars:
At December 31,
1996 1995
Property/Casualty subsidiaries $340,743 $322,139
Life/Health subsidiaries 69,364 61,931
Certain insurance subsidiaries are owned by other insurance subsidiaries.
As a result, in addition to Charter National Life Insurance Company's
investment in CPG and its subsidiaries, which increased its statutory
surplus by approximately $361,567,000 and $342,665,000 at December 31, 1996
and 1995, respectively, the Property and Casualty subsidiaries' surplus
included approximately $24,472,000 and $29,324,000 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 $29,742,000 and $34,258,000 at
December 31, 1996 and 1995, respectively.
48
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
17. 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 $39,731,000 in dividends in
1997 without regulatory approval.
The National Association of Insurance Commissioners has adopted model laws
incorporating the concept of a "risk based capital" ("RBC") requirement for
insurance companies. Generally, the RBC formula is designed to measure the
adequacy of an insurer's statutory capital in relation to the risks
inherent in its business. The RBC formula is used by the states as an
early warning tool to identify weakly capitalized companies for the purpose
of initiating regulatory action. The RBC ratios of Charter National Life
Insurance Company and its insurance subsidiaries as of December 31, 1996
and 1995 substantially exceeded minimum requirements.
18. Liabilities for Losses and Loss Adjustment Expense:
The following table summarizes the activity for policyholder benefits,
claims, and settlement expenses for the years ended December 31, 1996, 1995
and 1994, in thousands of dollars:
1996 1995 1994
Life and health insurance $124,040 $201,647 $178,049
Property and casualty insurance 421,823 411,850 367,595
Total $545,863 $613,497 $545,644
The liabilities for policy and contract claims at December 31, 1996 and
1995 are as follows, in thousands of dollars:
1996 1995
Life and health insurance $25,105 $ 26,818
Property and casualty insurance 578,148 611,530
Total $603,253 $638,348
49
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
18. 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:
1996 1995 1994
Liability for losses and LAE
at beginning of year $611,530 $616,576 $657,159
Less reinsurance receivables (88,581) (99,366) (122,014)
Net balance at beginning of year 522,949 517,21 535,145
Provision for losses and LAE for claims
occurring in the current year 461,173 466,578 432,648
Decrease in estimated losses and LAE for
claims occurring in prior years (net
of incurred losses on reinsurance of
$5,940, $3,880 and $3,331 ceded in
prior years and excluded from the
liability roll-forward) (33,410) (50,848) (61,722)
Total incurred losses and LAE 427,763 415,730 370,926
Reclass of uncollectible reinsurance reserves
due to commutations - prior years 15,528
Losses and LAE payments for claims
occurring for:
Current year 211,497 196,150 192,072
Prior years 237,177 213,841 207,024
NJ MTF deficit assessment from prior
year reserve 5,293
Total paid 448,674 409,991 404,389
Net balance at end of year 502,038 522,949 517,210
Plus reinsurance recoverables 76,110 88,581 99,366
Liability for losses and LAE at
end of year $578,148 $611,530 $616,576
50
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
18. Liabilities for Losses and Loss Adjustment Expense, continued:
Changes in estimates of insured events in prior years primarily resulted in
decreases in the provisions for losses and LAE of approximately
$39,350,000, $54,728,000 and $65,053,000 in 1996, 1995 and 1994,
respectively, because of conservative reserving practices adopted by
Charter.
19. Concentration of Credit Risk
Financial instruments, which potentially subject Charter to concentration
of credit risk, consist principally of cash. Charter places its cash with
high quality financial institutions. At times, such amounts may be in
excess of the Federal Deposit Insurance Corporation insurance limits.
51
<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, 1997
52
<PAGE>
<TABLE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
As of and for the years ended December 31, 1996, 1995 and 1994
(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>
1996
Life and health
insurance $55,823 $793,245 $6,924 $545,019 $25,105 $159,684
Property and casualty
insurance 15,069 280,904 578,148 497,084
Total $70,892 $793,245 $287,828 $545,019 $603,253 $656,768
1995
Life and health
insurance $45,423 $815,310 $7,950 $472,837 $26,818 $162,755
Property and casualty
insurance 17,567 262,032 611,530 490,475
Total $62,990 $815,310 $269,982 $472,837 $638,348 $653,230
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
See notes to consolidated financial statements included in this Form N-4.
</TABLE>
53
<PAGE>
<TABLE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
As of and for the years ended December 31, 1996, 1995 and 1994
(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>
1996
Life and health
insurance $56,004 $130,235 $9,377 $54,831 $34,388
Property and casualty
insurance 62,551 421,823 34,507 71,625 516,412
Total $118,555 $552,058 $43,884 $126,456 $550,800
1995
Life and health
insurance $56,589 $127,313 $5,901 $59,474 $39,885
Property and casualty
insurance 59,283 441,850 32,782 69,281 504,283
Total $115,872 $539,163 $38,683 $128,755 $544,168
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 62,366 463,845
Total $107,705 $500,582 $25,427 $122,038 $513,164
See notes to consolidated financial statements included in this Form N-4.
</TABLE>
53a
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
As of and for the years ended December 31, 1996, 1995 and 1994
(Dollars in thousands)
Percentage
Ceded Assumed of Amount
Direct to Other from Other Net Assumed
Business Companies Companies Amount to Net
1996
Life insurance
in force $2,092,582 $141,842 $31,754 $1,982,494 1.60%
Premium revenue:
Life insurance $125,228 $884 $132 $124,476 0.11%
Accident and
health insurance 35,778 573 3 35,208 0.00%
Property and
liability insurance 524,024 31,737 4,797 497,084 0.97%
Total premium revenue $685,030 $33,194 $4,932 $656,768 0.75%
1995
Life insurance
in force $2,167,848 $186,665 $36,079 $2,017,262 1.79%
Premium revenue:
Life insurance $121,511 $904 $392 $120,999 0.32%
Accident and
health insurance 42,369 617 4 41,756 0.00%
Property and
liability insurance 494,020 24,586 21,041 490,475 4.29%
Total premium revenue $657,900 $26,107 $21,437 $653,230 3.28%
1994
Life insurance
in force $2,285,238 $271,019 $161,458 $2,175,677 7.42%
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 insurance 434,245 16,987 29,764 447,022 6.66%
Total premium revenue $604,130 $19,154 $30,891 $615,867 5.02%
See notes to consolidated financial statements included in this Form N-4.
54
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1996, 1995 and 1994
(Dollars in thousands)
Additions
Balance at Charged to
Beginning Costs and
of Period Expenses Recoveries Other
Description
1996
Loan receivable of banking
and lending subsidiaries $412 ($32) $493 $0
Trade, notes and other
receivables 0 0 0 0
Total allowance for
doubtful accounts $412 ($32) $493 $0
Reinsurance receivable $4,804 ($988) $0 $0
1995
Loan receivable of banking
and lending subsidiaries $809 ($31) $884 $0
Trade, notes and other
receivables 0 0 0 0
Total allowance for
doubtful accounts $809 ($31) $884 $0
Reinsurance receivable $4,046 $969 $0 $0
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
See notes to consolidated financial statements included in this Form N-4.
55
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1996, 1995 and 1994
(Dollars in thousands)
Deductions
Sale of Balance at
Write offs Receivables End of Period
Description
1996
Loan receivable of banking
and lending subsidiaries $664 $0 $209
Trade, notes and other
receivables 0 0 0
Total allowance for
doubtful accounts $664 $0 $209
Reinsurance receivable $358 $0 $3,458
1995
Loan receivable of banking
and lending subsidiaries $1,250 $0 $412
Trade, notes and other
receivables 0 0 0
Total allowance for
doubtful accounts $1,250 $0 $412
Reinsurance receivable $211 $0 $4,804
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 (a) $0 $4,046
(a) 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.
55a
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY CASUALTY INSURANCE OPERATIONS
For the years ended December 31, 1996, 1995 and 1994
(Dollars in thousands)
Discount, if any,
Deducted in Claims and Claim Paid Claims
Reserves for Unpaid Adjustment Expense and Claim
Claims and Claim Incurred Related to: Adjustment
Adjustment Expense Current year Prior Year Expenses
1996
Automobile $0 $428,765 ($28,473) $419,984
Commercial (5,244) (828)
Miscellaneous &
personal lines 32,408 (5,633) 29,518
Total Property
and Casualty $0 $461,173 ($39,350) $448,674
1995
Automobile $0 $437,007 ($52,134) $380,081
Commercial 3,006 4,350
Miscellaneous &
personal lines 29,571 (5,600) 25,560
Total Property
and Casualty $0 $466,578 ($54,728) $409,991
1994
Automobile $0 $387,544 ($55,050) $358,841
Commercial (4,219) 4,676
Miscellaneous
& personal lines 45,104 (5,784) 40,872
Total Property
and Casualty $0 $432,648 ($65,053) $404,389
See notes to consolidated financial statements included in this Form N-4.
56
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
All required financial statements are included in Part B of this
Registration Statement.
(b) Exhibits
(1) -- Resolutions of the Board of Directors of Charter National
Life Insurance Company authorizing establishment of the Variable Annuity
Account. i
(2) -- Not Applicable.
(3) (a) -- Form of Principal Underwriting Agreement between Charter
National Life Insurance Company on its own behalf and on behalf of Charter
National Variable Annuity Account, and CNL, Inc. i
(b) -- Form of Expense Reimbursement Agreement between Charter
National Life Insurance Company and CNL, Inc. i
(c) -- Marketing and Solicitation Agreement dated as of
September 30, 1988 among Scudder Investor Services, Inc., Charter National
Life Insurance Company, Charter National Variable Annuity Account, and CNL,
Inc. i
(d) -- Principal Underwriting Agreement - Schedule A. i
(4) (a) -- Form of Contract for the Flexible Premium Variable
Deferred Annuity. i
(b) -- State Variations in Contract Form. i
(c) -- General Account Endorsement. i
(d) -- Individual Retirement Provision Contract Rider. i
(e) -- Change in Ownership and Annuitant Contract Rider. i
(f) -- Charges Endorsement. i
(5) (a) -- Form of Application for the Flexible Premium Variable
Deferred Annuity. i
(b) -- State Variations of Application Form. i
(6) (a) -- Articles of Incorporation of Charter National Life
Insurance Company. i
(b) -- By-Laws of Charter National Life Insurance Company. i
(7) -- Not Applicable.
(8) (a) -- Participation Agreement dated September 3, 1993 between
Scudder Variable Life Investment Fund and Charter National Life Insurance
Company. i
(b) -- Reimbursement Agreement dated June 9, 1986 between
Scudder, Stevens & Clark Inc. and Charter National Life Insurance Company.i
(c) -- Participating Contract and Policy Agreement and
Amendments thereto dated June 4, 1986 between Scudder Investor Services,
Inc. and CNL, Inc. i
(d) -- Amendment to Participating Contract and Policy Agreement
dated February 20, 1996. i
(9) (a) -- Opinion and Consent of Counsel. i
(b) -- Written consent of Sutherland, Asbill & Brennan.
(c) -- Written consent of Alexis Berg, General Counsel of
Charter National Life Insurance Company.
(10) -- Written consent of Independent Accountants.
(11) -- Not applicable.
(12) -- Not applicable.
(13) -- Schedule for Computation of Performance Data. i
(14) -- Power of Attorney i
i Incorporated herein by reference to Post-Effective Amendment No. 15 to
Form N-4 for Charter National Variable Annuity Account, Registration File
No. 33-22925, filed on February 24, 1997
C-1
<PAGE>
Item 25. Directors and Officers of the Depositor
Name and Principal Positions and Offices
Business Address* with Depositor
Richard G. Petitt Chairman of the Board,
Colonial Penn Life Insurance Co Director and Chief Executive Officer
399 Market Street
Philadelphia, PA 19181
Gregory R. Barstead President, Director and
Colonial Penn Life Insurance Co Chief Operating Officer
399 Market Street
Philadelphia, PA 19181
Elizabeth A. Clifford Senior Vice President, Controller,
Colonial Penn Life Insurance Co Director and Treasurer
399 Market Street
Philadelphia, PA 19181
Timothy C. Sentner Senior Vice President
Colonial Penn Life Insurance Co.
399 Market Street
Philadelphia, PA 19181
David L. Baxter Senior Vice President and Chief
Colonial Penn Life Insurance Co. Actuary
399 Market Street
Philadelphia, PA 19181
A. Sales Miller Vice President - Marketing
Henry Wulsin Director
Colonial Penn Franklin Insurance Co.
2650 Audubon Road
Norristown, PA 19403
Alexis M. Berg Vice President, Secretary, General
Colonial Penn Life Insurance Co. Counsel and Director
399 Market Street
Philadelphia, PA 19181
Karen M. Henneberg Assistant Vice President - Compliance
Colonial Penn Life Insurance Co.
399 Market Street
Philadelphia, PA 19181
Kathleen A. Urbanowicz Assistant Secretary and Assistant Vice
President - Customer Service
Ian M. Cumming Director
Leucadia National Corporation
529 East South Temple
Salt Lake City, UT 84102
C-2
<PAGE>
Name and Principal Positions and Offices
Business Address* with Depositor
Ruth E. Klindtworth Director and Assistant Secretary
Leucadia National Corporation
315 Park Avenue South
New York, N.Y. 10010
Jesse C. Nichols III Director
Nichols Industries
5001 E. 59th Street
Kansas City, MO 64130
Joseph S. Steinberg Director
Leucadia National Corporation
315 Park Avenue South
New York, N.Y. 10010
Joseph A. Orlando Director
Leucadia National Corporation
315 Park Avenue South
New York, N.Y. 10010
* The principal business address of each person listed, unless otherwise
indicated, is Charter National Life Insurance Company, 8301 Maryland
Avenue, St. Louis, Missouri 63105.
Item 26. Persons Controlled By or Under Common Control With the Depositor
or Registrant
Charter is the depositor of Charter National Variable Account, a separate
account formed in connection with the sale of variable life insurance
policies by Charter. Charter also is the depositor of the Charter National
Variable Annuity Account formed in connection with the sale of variable
annuity contracts by Charter.
As described in the Prospectus, Charter 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 five casualty subsidiaries. Intramerica
Life Insurance Company, a Colonial Penn subsidiary, offers the Contract to
residents of New York.
Charter is a wholly owned subsidiary of Leucadia National Corporation
("Leucadia"), a New York corporation. Campet, Inc., a Leucadia subsidiary
owns all the outstanding stock of CNL, Inc. ("CNL"), the principal
underwriter of the Variable Account. CNL, a Missouri corporation, 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. Leucadia is
a diversified holding company, the common stock of which is traded on the
New York Stock Exchange and the Pacific Stock Exchange.
Set forth below is certain information concerning each of the active
persons under common control with Charter (other than CNL), including state
of organization, percentage of voting securities owned or other basis of
control and principal business.
C-3
<PAGE>
Percent of
Jurisdiction Voting
of Securities Principal
Name Incorporation Owned* Business
Campet, Inc. Delaware 100% Investments
Centurion Ins. Co. New York 100% Insurance
WMAC Investment Corp. Wisconsin 100% Holding Company
Colonial Penn Madison
Insurance Co. Wisconsin 100% Insurance
Bellpet, Inc. Delaware 100% Holding Company
Baldwin-CIS L.L.C. Delaware 100% Investments
Solana Corporation Utah 100% Holding Company
Baldwin Forest Products
L.L.C. Delaware 100% Investments
Conwed Corporation Delaware 100% Real Estate
Leucadia Film Corporation Utah 100% Film Products
Neward Corporation New York 100% Owner and Operator
of Oil Wells
Rastin Investing Corp. Delaware 100% Investments
HSD Venture California 100% Real Estate
American Investment Company Delaware 100% Holding Company
Leucadia Aviation, Inc. Delaware 100% Aviation
LNC Investments, Inc. Delaware 100% Investments
The Sperry and
Hutchinson Co., Inc. New Jersey 100% Trading Stamps
Leucadia, Inc. New York 100% Manufacturing &
Investments
College Life
Development Corp Indiana 100% Real Estate
Phlcorp, Inc. Pennsylvania 100% Holding Company
Empire Insurance Co. New York 100% Insurance
American Investment
Bank, N.A. Utah 100% Banking
Wedgewood Investments
L.L.C. Delaware 100% Investments
Leucadia Financial
Corporation Utah 100% Real Estate
AIC Financial Corp. Delaware 100% Real Estate
Leucadia Cellars Ltd. Delaware 100% Investments
American Investment
Financial Utah 100% Thrift Loan
Allcity Insurance Co. New York 89.8% Insurance
Charter National Life
Insurance Company Missouri 100% Insurance
Colonial Penn Franklin
Insurance Company Pennsylvania 100% Insurance
Colonial Penn Administrative
Services Delaware 100% Administrator
Colonial Penn Group, Inc. Delaware 100% Holding Company
Bay Colony Insurance
Company California 100% Insurance
Colonial Penn Holdings,
Inc. Delaware 100% Holding Company
Colonial Penn Ins. Co. Pennsylvania 100% Insurance
Colonial Penn Life Ins. Co. Pennsylvania 100% Insurance
CPI Investment, Inc. Delaware 100% Investments
Intramerica Life Ins. Co. New York 100% Insurance
Leucadia Properties, Inc. Utah 100% Real Estate
Terracor II Utah 100% Real Estate
CPAX, Inc. Delaware 100% Holding Company
The Village at Inlet Beach,
Inc. Florida 100% Real Estate
Pennpark Investors L.L.C. Illinois 80% Real Estate
Professional Data
Management, Inc. Indiana 100% Real Estate
C-4
<PAGE>
Percent of
Jurisdiction Voting
of Securities Principal
Name Incorporation Owned* Business
Bayside Casualty
Insurance Company New Jersey 100% Insurance
Leucadia Investors, Inc. New York 100% Investments
Silver Mountain Industries,
Inc. Utah 100% Real Estate
Telluride Properties
Acquisition, Inc. Utah 100% Real Estate
Baldwin Enterprises, Inc. Colorado 100% Holding Company
Commercial Loan Insurance
Company Wisconsin 100% Insurance
NSAC, Inc. Colorado 100% Real Estate
RERCO, Inc. Delaware 100% Finance
330 MAD. PARENT CORP. Delaware 100% Investments
WMAC Credit Insurance Corp. Wisconsin 100% Insurance
Providential Life
Insurance Co. Arkansas 100% Insurance
Andrus Vineyard Co.,
L.L.C. California 95% Vineyard
CDS Devco, Inc. California 80% Investments
San Elijo Ranch, Inc. California 68% Real Estate
RRP, Inc. Colorado 100% Real Estate
CDS Holding Corporation Delaware 100% Holding Company
International Bottlers
L.L.C. Delaware 75% Holding Company
Pepsi International
Bottlers L.L.C. Delaware 75% Holding Company
LUK-REN, Inc. New York 100% Real Estate
Pine Ridge Associates, L.P. Texas 75% Winery
Leucadia Bottling L.L.C. Utah 100% Holding Company
Leucadia Power Holdings,
Inc. Utah 100% Holding Company
Colonial Penn De Mexico,
Inc. Mexico 100% Insurance
* Unless otherwise noted, voting securities are owned by Leucadia. A
number of subsidiaries of Leucadia are not included on this list. Taken
together and considered as a single subsidiary, they would not constitute a
significant subsidiary of Leucadia. More detailed information will be
supplied upon request. In addition, inactive companies are not included on
this list.
Item 27. Number of Contract Owners
As of December 31, 1996, there were 8,997 owners of the flexible premium
variable deferred annuity, of which 8,833 were Non-qualified and 164 were
Qualified, issued by the Variable Account. As of December 31, 1996, there
were 129 owners of the single premium variable deferred annuity, of which
99 were Non-qualified and 30 were Qualified, issued by the Variable
Account.
Item 28. Indemnification
Currently, there are no provisions or arrangements for indemnification of
any individual either by the Registrant or by Charter pursuant to its
Articles of Incorporation or By-Laws. However, Section 351.355 of the
Missouri General and Business Corporation Law, in brief, allows a
corporation to indemnify any person who is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a director, officer, employee or agent
of the corporation, against expenses, including attorneys' fees, judgments,
fines and amounts paid in settlement actually and reasonably incurred by
him in connection with such action if he acted in good faith and in a
manner reasonably believed to be in or not opposed to the best interest of
the corporation. Where any person was or is a party or is threatened to be
made a party in an action or suit by or in the right of the corporation to
procure a judgment in its favor, indemnification may not be paid where such
person shall have been adjudged to be liable for negligence or misconduct
in the performance of his duty to the corporation, unless a court
determines that the person is fairly and reasonably entitled to indemnity.
A corporation has the power to give any further indemnity,
C-5
<PAGE>
to any person who is or was a director, officer, employee or agent,
provided for in the Articles of Incorporation or as authorized by any by-law
which has been adopted by vote of the shareholders, provided that no
such indemnity shall indemnify any person whose action was finally adjudged
to have been knowingly fraudulent, deliberately dishonest of the result of
willful misconduct.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to directors, officers, and controlling persons of Charter
pursuant to the foregoing statute, or otherwise, Charter has been advised
that in the opinion of the SEC such indemnification is against public
policy as expressed in the 1933 Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by Charter of expenses incurred or paid by a director,
officer or controlling person of Charter in successful defense or any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
Charter will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issue.
Item 29. Principal Underwriter
CNL is the principal underwriter of the Variable Account. CNL is also the
principal underwriter for the Charter National Variable Account, a separate
account of Charter formed in connection with the distribution of variable
life insurance policies issued by Charter. The directors and officers of
CNL are as follows:
Name and Principal Positions and Offices
Business Address* with Underwriter
Richard G. Petitt Chairman and Director
Colonial Penn Life Insurance Co.
399 Market Street
Philadelphia, PA 19181
Allen S. Miller President and Director
Gregory R. Barstead Executive Vice President, Treasurer and
Colonial Penn Life Insurance Co. Director
399 Market Street
Philadelphia, PA 19181
Karen M. Henneberg Vice President and Secretary
Colonial Penn Life Insurance Co.
399 Market Street
Philadelphia, PA 19181
Elizabeth A. Clifford Senior Vice President and Controller
Colonial Penn Life Insurance Co.
399 Market Street
Philadelphia, PA 19181
Ronald L. Stitt Assistant Secretary
Colonial Penn Life Insurance Co.
399 Market Street
Philadelphia, PA 19181
Kathleen A. Urbanowicz Vice President and Assistant Secretary
C-6
<PAGE>
Name and Principal Positions and Offices
Business Address* with Underwriter
Alexis M. Berg Director
Colonial Penn Life Insurance Co.
399 Market Street
Philadelphia, PA 19181
* The principal business address of each person listed, unless otherwise
indicated, is Charter National Life Insurance Company, 8301 Maryland
Avenue, St. Louis, Missouri 63105.
Item 30. Location of Accounts and Records
All financial accounts and records required to be maintained by Section
31(a) of the 1940 Act and the rules under it are maintained by Charter at
its Philadelphia Office. All Contract Owner accounts and documents
required to be maintained by Section 31(a) of the 1940 Act and the rules
under it are maintained by Charter at its Home Office.
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
Charter National Life Insurance Company hereby represents that the fees and
charges deducted under the Contract, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred,
and the risks assumed by Charter National Life Insurance Company.
C-7
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company
Act of 1940, the Registrant certifies that it meets the requirements of
Securities Act Rule 485(b) for effectiveness of this amended Registration
Statement and has duly caused this amended Registration Statement to be
signed on its behalf in the City of Philadelphia and the State of
Pennsylvania, on the 22nd day of April, 1997.
Charter National Variable Annuity Account
(Registrant)
(Seal) Charter National Life Insurance Company
(Depositor)
Attest: /S/ Alexis M. Berg By: /S/ Karen M. Henneberg
Alexis M. Berg Karen M. Henneberg
Vice President, Assistant Vice President, Compliance
General Counsel,
Corporate Secretary
& Director
As required by the Securities Act of 1933 this amended Registration
Statement has been signed by the following persons in their capacities on
the dates indicated.
Signature Title Date
*________________________ Chairman of the Board _______
Richard G. Petitt and Director
(Chief Executive Officer)
*________________________ President and Director _______
Gregory R. Barstead (Chief Operating Officer)
*________________________ Director _______
Ian M. Cumming
*________________________ Senior Vice President, Controller, _______
Elizabeth A. Clifford Treasurer and Director
*________________________ Senior Vice President _______
Timothy C. Sentner
<PAGE>
Signature Title Date
*________________________ Senior Vice President and _______
David L. Baxter Chief Actuary
*________________________ Director and Assistant _______
Ruth Klindtworth Secretary
*________________________ Director _______
Jesse C. Nichols III
*________________________ Vice President _______
Mark Hornstein
*________________________ Director _______
Joseph S. Steinberg
*________________________ Vice President _______
A. Sales Miller
*________________________ Director _______
Joseph A. Orlando
*________________________ Director _______
Henry H. Wulsin
*Pursuant to Power of Attorney
(Seal) Date: April 22, 1997
Attest: /S/ Alexis M. Berg By: /S/Karen M. Henneberg
Alexis M. Berg Karen M. Henneberg
Vice President, Assistant Vice President, Compliance
General Counsel,
Corporate Secretary
& Director
EXHIBIT LIST
(9)(b) Written consent of Sutherland, Asbill & Brennan
(9)(c) Written consent of Alexis Berg, General Counsel of Charter National
Life Insurance Company
(10) Written consent of Independent Accountants
<PAGE>
Sutherland, Asbill & Brennan, L.L.P.
1275 Pennsylvania Avenue
Washington, D.C. 20004-2404
April 16, 1997
VIA EDGARLINK
Board of Directors
Charter National Life Insurance Company
8301 Maryland Avenue
St. Louis, Missouri 63105
Ladies and Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the Statement of Additional Information filed as part of Post
- -Effective Amendment No. 16 to the registration statement on Form N-4 for
Charter National Variable Annuity Account (File No. 33-22925). In giving
this consent, we do not admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act of 1933.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN, L.L.P.
BY:____________________________________
/S/ Stephen E. Roth
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY
399 Market Street- Philadelphia, Pennsylvania 19181
April 22, 1997
Board of Directors
Charter National Life Insurance Company
8301 Maryland Avenue
St. Louis, Missouri 63105
Ladies and Gentlemen:
With reference to Post -Effective Amendment No. 16 to the Registration
Statement on Form N-4, soon to be filed by Charter National Life Insurance
Company (the "Company"), and Charter National Variable Annuity Account (the
"Account") with the Securities and Exchange Commission covering the
registration under the Securities Act of 1933 of certain variable annuity
contracts (the "Contracts") to be funded by the Account, I have examined
such documents and such law as I considered necessary and appropriate, and
on the basis of such examination it is my opinion that:
1. The Company is duly organized and validly existing under the laws of the
State of Missouri and has been duly authorized to issue Variable Annuity
Contracts by the Department of Insurance of the State of Missouri.
2. The Contracts, when issued after the Post-Effective Amendment becomes
effective and in the manner contemplated by the Post-Effective Amendment,
will be, under Missouri law, legally issued and will represent binding
obligations of the Company.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of my name under the heading "Legal
Matters" in the Registration Statement.
Sincerely,
Alexis M. Berg
Vice President, General Counsel
& Corporate Secretary
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Charter National Life Insurance Company:
We consent to the inclusion of the following in Post-Effective Amendment
No. 16 to the Registration Statement of the Charter National Variable
Annuity Account on Form N-4 (File No. 811-5279 and Registration No. 33-
22925):
- - Our report dated February 10, 1997, on our audits of the financial
statements of Charter National Variable Annuity Account as of December 31,
1996 and for each of the two years in the period ended December 31, 1996.
- - Our report dated February 10, 1997, on our audits of the consolidated
financial statements of Charter National Life Insurance Company and
Subsidiaries as of December 31, 1996 and 1995 and for each of the three
years in the period ended December 31, 1996.
- - Our report dated February 10, 1997, of our audits of the consolidated
financial statement schedules of Charter National Life Insurance Company as
of December 31, 1996 and 1995 and for each of the three years in the period
ended December 31, 1996.
- - The reference to our Firm under the caption "Independent Accountants".
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 22, 1997
