As filed with the Securities and Exchange Commission on April 24, 1998
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. 17
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 19
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
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, 1998 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.
i
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 Services Agreement, 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
ii
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
iii
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 Services Agreement
(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
iv
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, 1998
(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 Kemper Investments,
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.
TABLE OF CONTENTS
Page
DEFINITIONS 1
SUMMARY 4
FEE TABLE 9
CONDENSED FINANCIAL INFORMATION 11
Financial Statements for the Variable Account and Charter 13
CALCULATION OF YIELDS AND TOTAL RETURNS 13
OTHER PERFORMANCE DATA 14
CHARTER AND THE VARIABLE ACCOUNT 15
Charter National Life Insurance Company 15
Charter National Variable Annuity Account 16
Agreements with Allstate Life Insurance Company 16
SCUDDER VARIABLE LIFE INVESTMENT FUND 17
Addition, Deletion, or Substitution of Investments 19
THE GENERAL ACCOUNT 20
THE CONTRACT 21
Contract Application and Issuance of Contracts 22
Examination Period 22
Payments 23
Allocation of Payments 25
Transfers 26
Account Value 28
Contract Ownership 30
Assignment of Contract 31
State Exceptions 31
DISTRIBUTIONS UNDER THE CONTRACT 32
Full and Partial Surrender Privileges 32
Annuity Payments 34
Annuity Income Options 35
Maturity Date 36
Death Benefit 37
Beneficiary Provisions 37
Death of Owner 38
Employment-Related Benefit Plans 38
CHARGES AND DEDUCTIONS 38
Mortality and Expense Risk Charge 39
Contract Administration Charge 39
Records Maintenance Charge 40
TABLE OF CONTENTS
Page
Premium Taxes 40
Other Taxes 40
Transfer Charges 41
Charges Against the Fund 41
CERTAIN FEDERAL INCOME TAX CONSEQUENCES 41
Tax Status of the Contract 42
Taxation of Annuities 46
Taxation of Charter 49
GENERAL PROVISIONS 49
The Contract 49
Deferment of Payment and Transfers 50
Contract Expiration 50
Misstatement of Age or Sex 50
Nonparticipating Contract 51
Written Notices and Requests; Owner Inquiries 51
Records and Reports 51
Year 2000 Disclosure 51
SERVICES AGREEMENT 52
DISTRIBUTION OF THE CONTRACT 52
VOTING RIGHTS 53
LEGAL PROCEEDINGS 54
ADDITIONAL INFORMATION 54
TABLE OF CONTENTS FOR STATEMENT
OF ADDITIONAL INFORMATION 55
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.
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.
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.
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 (including a Roth
individual retirement annuity under Section 408A of the Code) or a Contract
purchased and held by a retirement plan or as an individual retirement
account (including a Roth individual retirement account under Section 408A
of the Code) 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.
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. 22 and "Payments," p.
23)
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.
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 Kemper Investments, Inc.
(See "Scudder Variable Life Investment Fund," p. 17)
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 Kemper Investments,
Inc. provides investment advice regarding assets in the General Account
derived from Horizon Plan Contracts. (See "The General Account," p. 20)
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. 25, "Charter National Variable
Annuity Account," p. 16 and "The General Account," p. 20)
What is the purpose of the Variable Account?
The Variable Account was established by Charter under the laws of the
State of Missouri on May 15, 1987, to invest payments received under
variable annuities offered by Charter, including the Contracts. Under
Missouri law, the assets in the Variable Account associated with the
Contracts are not affected by, nor chargeable with, liabilities arising out
of any other business conducted by Charter. To the extent that an Owner
allocates Payments to the Variable Account, the Account Value will vary in
accordance with the investment performance of the Subaccount(s) selected by
the Owner. Therefore, the Owner bears the entire investment risk under the
Contract for any amounts allocated to the Variable Account. (See "Charter
National Variable Annuity Account," p. 16)
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 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. 26)
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 in administering the Contract at an
annual rate of .30% of the value of net assets in each Subaccount, and (ii)
the assumption 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. 38)
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. 40)
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. 40)
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. 38.
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. 41)
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.
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.
32) 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. 37) 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. 38)
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. 41)
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. 22 and "State Exceptions,"
p. 31)
FEE TABLE
The following illustrates the current charges and deductions under the
Contract, as well as fees and expenses of the Fund for the 1997 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 1997 calendar year)
Total
Portfolio
Management Other Operating
Fees Expenses Expenses
Money Market Portfolio 0.37% 0.09% 0.46%
Bond Portfolio 0.48% 0.14% 0.62%
Capital Growth Portfolio 0.47% 0.04% 0.51%
Balanced Portfolio 0.48% 0.09% 0.57%
International Portfolio 0.83% 0.17% 1.00%
Growth and Income Portfolio 0.48% 0.10% 0.58%
Global Discovery Portfolio 0.67% 0.83% 1.50%*
* Scudder Kemper Investments, Inc. (the Adviser) voluntarily did not
impose part of its management fee in 1997. 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 12/31/97 would have been 1.79% for
the Global Discovery Portfolio.
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 $159
Capital Growth Subaccount $12 $38 $66 $147
Balanced Subaccount $13 $40 $70 $153
International Subaccount $17 $54 $92 $201
Growth and Income Subaccount $13 $41 $70 $155
Global Discovery Subaccount $22 $69 $118 $253
The fee table and example set forth above are based upon the current
level of charges deducted under the Contract. 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."
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.
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, 1997.
Money Market Subaccount
Accumulation Unit Value Number Of Accumulation
At End Of Year Units At End Of Year
1997 18.890 2,521,329
1996 18.074 2,615,942
1995 17.316 2,260,561
1994 16.507 3,197,824
1993 16.030 1,491,258
1992 15.740 1,380,156
1991 15.341 972,042
1990 14.606 989,667
1989 13.683 344,621
1988* 12.694 6,238
Bond Subaccount
Accumulation Unit Value Number Of Accumulation
At End Of Year Units At End Of Year
1997 24.894 951,724
1996 22.979 764,803
1995 22.508 896,538
1994 19.181 690,782
1993 20.287 755,914
1992 18.179 631,581
1991 17.109 406,545
1990 14.653 210,921
1989 13.697 182,698
1988* 12.392 1,882
Capital Growth Subaccount
Accumulation Unit Value Number Of Accumulation
At End Of Year Units At End Of Year
1997 45.649 2,923,166
1996 33.863 2,729,711
1995 28.388 2,884,663
1994 22.222 2,683,112
1993 24.773 2,351,022
1992 20.638 1,798,119
1991 19.514 933,120
1990 14.096 400,044
1989 15.389 227,343
1988* 12.664 0
Balanced Subaccount
Accumulation Unit Value Number Of Accumulation
At End Of Year Units At End Of Year
1997 34.936 1,527,371
1996 28.326 1,490,127
1995 25.496 1,603,656
1994 20.270 1,426,280
1993 20.840 1,477,645
1992 19.531 1,243,891
1991 18.389 779,317
1990 14.592 492,406
1989 15.029 399,068
1988* 12.704 9,264
International Subaccount
Accumulation Unit Value Number Of Accumulation
At End Of Year Units At End Of Year
1997 33.560 2,251,880
1996 30.987 2,593,037
1995 27.188 2,869,930
1994 24.641 3,543,387
1993 25.027 2,767,700
1992 18.287 785,559
1991 19.003 446,099
1990 17.174 370,916
1989 18.830 107,751
1988* 13.772 1,741
Growth and Income Subaccount
Accumulation Unit Value Number Of Accumulation
At End of Year Units At End Of Year
1997 26.835 4,225,162
1996 20.713 3,491,709
1995 17.075 2,659,025
1994* 13.053 1,311,518
Global Discovery Subaccount
Accumulation Unit Value Number Of Accumulation
At End Of Year Units At End Of Year
1997 14.648 986,445
1996* 13.126 1,025,244
* 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. The Unit Value at
Commencement was 12.500.
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 investment 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.
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.
CHARTER AND THE VARIABLE ACCOUNT
Charter National Life Insurance Company
Charter is a stock life insurance company incorporated under the laws
of the State of Missouri on December 7, 1955. Charter, with assets of
$2.051 billion as of December 31, 1997, 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 its
subsidiary Intramerica Life Insurance Company, ("Intramerica"), a Charter
affiliate that 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").
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 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.
Agreements with Allstate Life Insurance Company
On February 11, 1998 Charter and Leucadia entered into an agreement
("the Agreement") with Allstate Life Insurance Company ("Allstate")
pursuant to which Allstate and Charter will enter into a coinsurance
agreement reinsuring all of Charter's rights, liabilities and obligations
with respect to the Contracts. The Agreement also provides that Allstate
and Charter will enter into an administrative services agreement pursuant
to which Allstate or an affiliate will administer the Contracts. (See
"Services Agreement," p. 52) It is anticipated that Charter and Allstate
will finalize the coinsurance and administrative services agreements on or
about May 31, 1998. None of these agreements will change the fact that
Charter is primarily liable to You under Your Contract. Moreover, at this
time there will be no changes to the address or phone numbers that You are
currently using.
Currently, Leucadia owns all of the stock of CNL, Inc. ("CNL"), the
principal underwriter of the Contracts. Pursuant to the Agreement,
Leucadia has agreed to sell CNL to Allstate. It is anticipated that the
sale will take place on or about May 31, 1998. Subsequent to the sale, CNL
will continue as the principal underwriter of the Contracts. (See,
"Distribution of the Contract," p. 52)
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 Kemper Investments, 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.
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.
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.
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 Kemper Investments, 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 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. Pursuant to the coinsurance agreement to be executed on or about
May 31, 1998, between Charter and Allstate, the assets of the General
Account attributable to the Contracts will be transferred to Allstate.
Pursuant to this agreement it will be Allstate's responsibility to invest
the assets of the General Account, subject to applicable law. 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 declare
higher interest rates for amounts allocated or transferred to the General
Account ("Declared Rates"). Each such Declared Rate will be fixed and
guaranteed by Charter and applied to a specific period of time, which will
not be less than one year or more than 10 years (the "Declaration Period").
An Owner must specify one or more of the Declaration Periods currently
offered by Charter when allocating or transferring funds to or within the
General Account. At any one time, an Owner may have amounts earning
different Declared Rates within a Declaration Period because amounts were
allocated or transferred to that Declaration Period at different times.
Charter will not accept allocations to the General Account which would
increase a Contract's value in the General Account over $500,000. Subject
to deductions for any applicable charges, Charter guarantees that the value
held in the General Account will equal all amounts allocated or transferred
to the General Account, plus any interest credited thereto, less any
amounts surrendered or transferred from the General Account. An Owner is
not entitled to share in the investment experience of the General Account.
An amount allocated or transferred to the General Account may not be
transferred from or within the General Account prior to the end of the
Declaration Period with which it is associated. Charter will notify Owners
having funds invested in an expiring Declaration Period 30 days prior to
the end of such Declaration Period and will request instructions as to the
reallocation of such amounts. If no instructions are received from the
Owner prior to the end of the Declaration Period, the portion of the
Account Value attributable to such Declaration Period will be transferred
to the Money Market Subaccount at the end of the Declaration Period.
For a discussion of transfer rights and surrender privileges relating
to amounts allocated to the General Account, see "THE CONTRACT Transfers"
and "DISTRIBUTIONS UNDER THE CONTRACT -- Full and Partial Surrender
Privileges."
THE CONTRACT
The description of the Contract contained in this Prospectus is
qualified in its entirety by reference to the contract for the Flexible
Premium Variable Deferred Annuity, a copy of which has been filed as an
exhibit to the Registration Statement for the Contract and which is
available upon request from Charter.
Contract Application and Issuance of Contracts
The Contract is available to certain retirement plans and individual
retirement accounts that qualify for special federal income tax treatment,
to individuals purchasing individual retirement annuities that qualify for
special federal income tax treatment, and to individuals and entities that
do not qualify for such special tax treatment. The Contract is not
available for use as a "Tax-sheltered Annuity" qualifying under Section
403(b) of the Code. An Owner who purchases a Contract which qualifies as
an individual retirement annuity under Section 408(b) of the Code should be
aware that the Code requires that such a Contract contain certain
restrictive terms. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Tax
Status of the Contract."
Charter, before it will issue a Contract, must receive a properly
completed Contract application and a minimum initial Payment of $2,500.
Upon request, a Premium Receipt form will be mailed to the Owner. The
Annuitant must be named in the Contract application. In the case of a
Contract qualifying as an individual retirement annuity under Section
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 discretion, and Charter
reserves the right to decline an application for any reason. In the event
an application is declined, the initial Payment will be refunded in full.
After underwriting is completed and the Contract is delivered to the
Owner, the term of the Contract will be deemed to have commenced as of the
Effective Date. The Effective Date is a date within two business days
after a completed application and the full initial Payment have been
received by Charter. The Contract Date will be the same as the Effective
Date unless the Effective Date is the 29th, 30th, or 31st of the month, in
which case the Contract Date will be the 28th day of the same month. The
Contract Date is the date used to determine Contract Years, Contract
Months, and Contract Anniversaries.
Examination Period
The Contract contains a provision for an Examination Period, which
permits the Owner to cancel a Contract, generally within 10 to 30 days
after receipt of such Contract. Depending on the laws of the state of
issue and age of the Owner, Charter will refund the initial Payment in one
of the following methods. See the "Right to Examine" provision of the
Contract and the "State Exceptions" section of this prospectus for state
details.
Return of premium plus or minus investment experience. In most
states, upon return of the Contract, Charter will refund the initial
Payment plus or minus gains or losses from investment of the Payment in the
selected Subaccount(s) plus interest earned on Payments allocated to the
General Account. Charter will calculate such refund as of the date the
Contract is received by Charter. If the Owner allocated all or part of the
Payment to the Variable Account, the amount may be more or less than the
initial Payment, depending upon the investment performance of the selected
Subaccount(s). If all of the Payment was allocated to the General Account,
the amount refunded will always be equal to or greater than the Payment.
See "THE CONTRACT-- Payments, Allocation of Payments and Account Value".
Return of premium. If the Owner of a Contract issued in a state that
requires refund of premium returns the Contract, Charter will refund the
greater of (1) the initial Payment, or (2) the Account Value plus any
amount deducted for taxes or charges from the initial Payment. Charter will
calculate such refund as of the date the Contract is received by Charter.
During the Examination Period, the portion of the initial Payment allocated
to the Variable Account will be invested in the Money Market Subaccount.
Once the Examination Period expires, generally 10 to 30 days, the
Accumulated Value will be allocated to the Subaccount(s) as specified by
the Contract Owner in the application. See "THE CONTRACT -- Payments and
Allocation of Payments".
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. 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
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 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 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
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.
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. The dollar cost averaging option may be
discontinued, modified or suspended 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 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 to compensate for certain administrative
expenses and mortality and expense risks which are
assumed in connection with the Contracts. See "CHARGES
AND DEDUCTIONS -- Mortality and Expense Risk Charge and
Contract Administration Charge."
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 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."
Iowa, Missouri, North Carolina, Oklahoma, South Carolina and Utah:
An Owner of a Contract issued in Iowa, 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.
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 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 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."
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.
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, other than a Roth IRA, 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 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. In the event that
there are profits from fees and charges deducted under the Contract,
including but not limited to mortality and expense risk charges, such
profits could be used to finance the distribution of the Contracts.
Mortality and Expense Risk Charge
Charter deducts a daily charge from the Account Value for certain
mortality and expense risks in connection with the Contracts. A daily rate
of .000010997 of the value of net assets in each Subaccount attributable to
the Contracts is charged currently, which corresponds to an annual rate of
.40%. 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 . The mortality risks 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.
The expense risk is 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. Pursuant to the Agreement, Charter will
enter into an administrative services agreement with Allstate whereby
Allstate, or an affiliate, will provide administrative services to the
Separate Account and the Contracts. Administrative expenses for the
Contracts 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. A daily charge is
deducted 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.
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 the deduction of $10 from each Subaccount
from which funds are transferred for the third and each subsequent transfer
request made by the Owner during a Contract Year. For the purpose of
determining whether a transfer charge is payable, initial allocations of
Payments are not considered transfers, nor are transfers of amounts among
Declaration Periods within the General Account or transfers to any
Subaccount(s) at the end of a Declaration Period. All transfer requests
made at the same time will be treated as one request. No transfer charges
will be imposed for transfers which are not at the Owner's request. The
transfer charge described above may be imposed at any time. See "THE
CONTRACT -- Transfers."
Charges Against the Fund
Scudder Kemper Investments, 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), 408(a) or 408A of the Code and individuals
purchasing individual retirement annuities that qualify for special federal
income tax treatment under Section 408(b) or 408A of the Code. Certain
requirements must be satisfied in purchasing a Qualified Contract for the
plan, account, or annuity to retain its special tax treatment. This
summary does not discuss such requirements, and assumes that Qualified
Contracts are purchased pursuant to retirement plans or individual
retirement accounts, or are individual retirement annuities, that qualify
for such special tax treatment. Additionally, because any distribution with
respect to a Qualified Contract, other than an individual retirement
annuity qualifying under Section 408(b) of the Code, will be made to an
entity that is exempt from federal income tax, this summary does not
discuss the annuity consequences with respect to Qualified Contracts other
than such individual retirement annuities.
THE DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL PURPOSES ONLY.
EACH POTENTIAL PURCHASER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISER AS
TO THE CONSEQUENCES OF INVESTMENT IN A CONTRACT UNDER FEDERAL AND
APPLICABLE STATE, LOCAL, AND FOREIGN TAX LAWS BEFORE MAKING ANY PAYMENT.
Tax Status of the Contract
Section 817(h) of the Code provides that in order for a variable
contract which is based on a segregated asset account to qualify as an
annuity contract under the Code, the investments made by such account must
be "adequately diversified" in accordance with Treasury regulations. The
Treasury regulations issued under Section 817(h) apply a diversification
formula to each of the Subaccounts. The Variable Account, through the Fund
and its Portfolios, intends to comply with the diversification requirements
of the Treasury regulations. Charter and the Fund have entered into
agreements regarding participation in the Fund that require the Fund and
its Portfolios to be operated in compliance with the Treasury regulations.
In certain circumstances, owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the assets of
the separate accounts used to support their contracts. In those
circumstances, income and gains from the separate account assets would be
includible in the variable contract owner's gross income. The IRS has
stated in published rulings that a variable contract owner will be
considered the owner of separate account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. The Treasury Department has
also announced, in connection with the issuance of regulations concerning
diversification, that those regulations "do not provide guidance concerning
the circumstances in which investor control of the investments of a
segregated asset account may cause the investor (i.e., the Policyowner),
rather than the insurance company, to be treated as the owner of the assets
in the account." This announcement also stated that guidance would be
issued by way of regulations or rulings on the "extent to which
policyholders may direct their investments to particular subaccounts
without being treated as owners of the underlying assets."
The ownership rights under the Contract are similar to, but different
in certain respects from, those described by the IRS in rulings in which it
was determined that policyowners were not owners of separate account
assets. For example, the Owner has additional flexibility in allocating
premium payments and contract values. These differences could result in an
Owner being treated as the owner of a pro rata portion of the assets of the
Variable Account. In addition, Charter does not know what standards will
be set forth, if any, in the regulations or rulings which the Treasury
Department has stated it expects to issue. Charter therefore reserves the
right to modify the Contract as necessary to attempt to prevent an Owner
from being considered the owner of a pro rata share of the assets of the
Variable Account.
The Code also requires that Nonqualified Contracts contain specific
provisions for distribution of contract proceeds upon the death of an
Owner. In order to be treated as an annuity contract for federal income tax
purposes, the Code requires that such Contracts provide that (a) if any
Owner dies on or after the Maturity Date and before the entire interest 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. For qualified plans
under Section 401(a) the Code requires that distributions generally must
commence no later than the later of April 1 of the calendar year following
the calendar year in which the Owner (or plan participant) (i) reaches age
70 1/2 or (ii) retires, and must be made in a specified form or manner. If
the plan participant is a "5 percent owner" (as defined in the Code),
distributions generally must begin no later than April 1 of the calendar
year following the calendar year in which the Owner (or plan participant)
reaches age 70 1/2. For IRAs described in Section 408, distributions
generally must commence no later than April 1 of the calendar year
following the calendar year in which the Owner (or plan participant)
reaches age 70 1/2. For qualified plans and IRAs, additional rules apply
following the Owner's (or plan participant's) death. Roth IRAs under
Section 408A do not require distributions at any time prior to the Owner's
death.
Natural Persons. With respect to Owners who are natural persons, the
Contract should be treated as an annuity contract for federal income tax
purposes, the taxation of which is described below. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES -- Taxation of Annuities."
Non-natural Persons. Pursuant to Section 72(u) of the Code, an
annuity contract held by a taxpayer other than a natural person generally
will not be treated as an annuity contract under the Code; accordingly, an
Owner who is not a natural person will recognize as ordinary income for a
taxable year the excess of (i) the sum of the Account Value as of the close
of the taxable year and all distributions under the Contract paid in the
taxable year and previous taxable years over (ii) the sum of the Payments
paid for the taxable year and any prior taxable year and the amounts
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 408(d)(3),
402(c), 403(a)(4), 403(b)(8), 408A(e), 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; and (vii) the owner's
entire interest in the annuity must be nonforfeitable. Contracts intended
to qualify as individual retirement annuities under Section 408(b) of the
Code contain such provisions.
Earnings in an IRA are not taxed until distribution. IRA
contributions are limited each year to the lesser of $2,000 or 100% of the
Owner's adjusted gross income and may be deductible in whole or in part
depending on the individual's income and whether the individual is a
participant in a qualified plan. The limit on the amount contributed to an
IRA does not apply to distributions from certain other types of qualified
plans that are "rolled over" on a tax-deferred basis into an IRA. Amounts
in the IRA (other than nondeductible contributions) are taxed when
distributed from the IRA. Distributions prior to age 59 1/2 (unless
certain exceptions apply) are subject to a 10% penalty tax.
Roth IRAs. Effective January 1, 1998, section 408A of the Code
permits certain eligible individuals to contribute to a Roth IRA. Roth
IRAs are not currently available to Owners. However they may be made
available at sometime in the future. Contributions to a Roth IRA, which
are subject to certain limitations, are not deductible and must be made in
cash or as a rollover or transfer from another Roth IRA or other IRA. A
rollover from a conversion of an IRA to a Roth IRA may be subject to tax
and other special rules may apply. You should consult a tax adviser before
combining any converted amounts with any other Roth IRA contributions,
including any other conversion amounts from other tax years. Distributions
from a Roth IRA generally are not taxed, except that, once aggregate
distributions exceed contributions to the Roth IRA, income tax and a 10%
penalty tax may apply to distributions made (1) before age 59 1/2 (subject
to certain exceptions) or (2) during the five taxable years starting with
the year in which the first contribution is made to the Roth IRA.
Other Qualified Contracts. A Contract may be purchased by a trust or
custodial account that forms a retirement plan qualified under Section
401(a) of the Code or an individual retirement account qualified under
Section 408(a) of the Code. The contributions and benefits in respect of a
participant in such a plan or account will be determined by the terms and
conditions of the plan or account, rather than the Contract. Charter shall
be under no obligation either (i) to determine whether any payment,
distribution or other transaction under the Contract complies with the
provisions, terms and conditions of such plan or account or of applicable
law or (ii) to administer such plan or account, including without
limitation any provisions required by the Retirement Equity Act of 1984.
The Contract is intended for use by such plans and accounts solely for the
accumulation of retirement savings. Adverse tax consequences to the plan
or account, the participant or both may result if this Contract is
transferred or assigned by the plan or account to any individual as a means
to provide benefit payments. A qualified tax adviser should be consulted
with respect to the use of the Contract in connection with such a plan or
account.
Taxation of Annuities
The discussion below applies only to those Contracts that qualify as
annuity contracts for federal income tax purposes.
In General. Section 72 of the Code governs taxation of annuities 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. 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, 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.
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.
Partial and Full Surrenders. In the case of a partial surrender under
a Nonqualified Contract, the amount received generally will be taxable in
an amount equal to the excess (if any) of the Account Value immediately
before the surrender over the Investment in the Contract at such time. In
the case of a partial surrender under a Qualified Contract, generally a
portion of the amount received, based on the ratio of the Investment in the
Contract to the Account Value, will be 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(c),
403(a)(4), 403(b)(8) 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.
Investment in the Contract. "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.
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 or in
certain other circumstances.
Transfer of Ownership. A transfer of ownership of a Contract or
assignment of a Contract may result in certain tax consequences to the
Owner that are not discussed herein. An Owner contemplating any such
transfer or assignment of a Contract should contact a competent tax adviser
with respect to the potential tax effects of such a transaction.
Withholding. The portion of any distribution under a Contract that is
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. "Eligible rollover distributions" from
section 401(a) plans and section 403(b) tax-sheltered annuities are subject
to a mandatory federal income tax withholding of 20%. An eligible rollover
distribution is the taxable portion of any distribution from such a plan,
except certain distributions such as distributions required by the Code or
distributions in a specified annuity form. The 20% withholding does not
apply, however, if the Owner chooses a "direct rollover" from the plan to
another tax-qualified plan or IRA.
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. Although the likelihood of legislative change is
uncertain, there is always the possibility that the tax treatment of the
Contracts could change by legislation or other means. For instance, the
President's 1999 Budget Proposal recommended legislation that, if enacted,
would adversely modify the federal taxation of the Contracts. It is also
possible that any change could be retroactive (that is, effective prior to
the date of the change). A tax adviser should be consulted with respect to
legislative developments and their effect on the Contract.
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 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 anticipates entering into an administrative services agreement
("Services Agreement") with Allstate on or about May 31, 1998, pursuant to
which Allstate, or its designee, will provide the administrative services
in connection with the Contracts and the Variable Account on behalf of
Charter. (See "Services Agreement," p. 52) At the end of each calendar
quarter, Allstate, or its designee, on behalf of 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.
Year 2000 Disclosure
Like all financial services providers, Charter, Allstate and its
affiliates utilize systems that may be affected by Year 2000 transition
issues and rely on service providers including banks, custodians,
administrators and investment managers that also may be affected. Charter,
Allstate and its affiliates have developed and are in the process of
implementing a Year 2000 transition plan, and are confirming that its
service providers are also engaged. The resources that are being devoted
to this effort are substantial. It is difficult to predict with precision
whether the amount of resources ultimately devoted, or the outcome of these
efforts, will have any negative impact on Charter, Allstate and its
affiliates. However, as of the date of this prospectus, it is not
anticipated that contract owners will experience negative effects on their
investment, or on the services provided in connection therewith, as a
result of Year 2000 transition implementation. Charter, Allstate and its
affiliates currently anticipate that their systems will be Year 2000
compliant on or about December 1998, but there can be no assurance that
Charter, Allstate or its affiliates will be successful, or that interaction
with other service providers will not impair Charter, Allstate or its
affiliates services at that time.
SERVICES AGREEMENT
Charter anticipates entering into an administrative services agreement
("Services Agreement") with Allstate on or about May 31, 1998, pursuant to
which Allstate, or its designee, will provide the administrative services
in connection with the Contracts and the Variable Account on behalf of
Charter. Included among such services will be premium payment processing,
all transfer, withdrawal or surrender requests, preparation of records
(including records of all purchases and redemption of the shares of each
portfolio) and reports relating to the Variable Account and the Contracts.
In addition Allstate will be responsible for payment of all expenses in
connection with the Contract and Separate Account. Allstate's principal
address is 3100 Sanders Road, Northbrook, Illinois 60062. However, at this
time there will be no changes to the address or phone numbers that You are
currently using.
DISTRIBUTION OF THE CONTRACT
The principal underwriter of the Contracts is CNL. CNL is registered
with the SEC as a broker-dealer under the Securities Exchange Act of 1934,
as amended (the "1934 Act") and is a member of the National Association of
Securities Dealers, Inc. The principal address of CNL is 8301 Maryland
Avenue, St. Louis, Missouri 63105.
For its services as Principal Underwriter, Charter pays to CNL, on a
monthly basis, .50% of new and additional Payments for the Contracts.
Charter and CNL have also entered into a general expense reimbursement
agreement for expenses incurred by CNL in connection with distribution
expenses relating to the offering of the Contracts and other variable
annuity and variable life insurance contracts issued by Charter.
Commissions relating to the sale of the Contracts totaling $238,447.78,
$230,970.90 and $189,809.18 were paid by Charter to CNL in 1997, 1996 and
1995, 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.
Both CNL and Scudder reserve the right to discontinue the offering
at any time.
VOTING RIGHTS
To the extent required by law, Charter will vote the Fund's shares
held in the Variable Account at regular and special shareholder meetings of
the Fund in accordance with instructions received from persons having
voting interests in the corresponding Subaccounts. If, however, the 1940
Act or any regulation thereunder should be amended or if the present
interpretation thereof should change, and as a result Charter determines
that it is permitted to vote the Fund's shares in its own right, it may
elect to do so.
The number of votes that an Owner has the right to instruct will be
calculated separately for each Subaccount. The number of votes for each
Subaccount that an Owner has the right to instruct will be determined by
dividing a Contract's value in a Subaccount by the net asset value per
share of the corresponding Portfolio in which the Subaccount invests.
Fractional shares will be counted. The number of votes of a Portfolio that
the Owner has the right to instruct will be determined as of the date
coincident with the date established by the Fund for determining
shareholders eligible to vote at the meeting of the Fund. Voting
instructions will be solicited by written communications prior to that
meeting in accordance with procedures established by the Fund.
Charter will vote shares of the Fund as to which no timely
instructions are received in proportion to the voting instructions which
are received with respect to all variable annuity contracts (including the
Contracts) issued by Charter and participating in that Portfolio. Charter
also will vote shares it owns that are not attributable to variable annuity
contracts in the same proportion.
Separate accounts of other insurance companies, including insurance
companies affiliated with Charter, may also invest premiums for variable
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
The Company and its subsidiaries, like other life insurance companies,
are involved in lawsuits, including class action lawsuits. In some class
action and other lawsuits involving insurers, substantial damages have been
sought and/or material settlement payments have been made. Although the
outcome of any litigation cannot be predicted with certainty, the Company
believes that at the present time there are not pending or threatened
lawsuits that are reasonably likely to have a material adverse impact on
the Variable Account or the Company.
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.
<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 41
SAFEKEEPING OF THE VARIABLE
ACCOUNTS ASSETS 1
SERVICES AGREEMENT 1 52
CALCULATION OF YIELDS
AND TOTAL RETURNS 2 13
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 5 14
Cumulative Total Returns 5
Comparison of Performance and
Expense Information 6
LEGAL MATTERS 7 53
INDEPENDENT ACCOUNTANTS 7
FINANCIAL STATEMENTS 8 11
* The corresponding section headings may be found in the Prospectus at
the pages indicated.
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,
1998, 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, 1998
<PAGE>
TABLE OF CONTENTS
Prospectus
Page Reference*
STATE REGULATION OF CHARTER 1
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
OF CERTAIN EXCHANGES AND SURRENDERS 1 41
SAFEKEEPING OF THE VARIABLE ACCOUNT'S ASSETS 1
SERVICES AGREEMENT 1 52
CALCULATION OF YIELDS AND TOTAL RETURNS 2 13
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 5 14
Cumulative Total Returns 5
Comparison of Performance and Expense
Information 6
LEGAL MATTERS 7 53
INDEPENDENT ACCOUNTANTS 7
FINANCIAL STATEMENTS 8 11
* The section headings corresponding to those contained herein may be
found in the Prospectus at the pages indicated.
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. > A blanket fidelity bond in the amount of $10,000,000
covers all of the officers and employees of Charter.
SERVICES AGREEMENT
On February 11, 1998 Charter and Leucadia entered into an agreement
("the Agreement") with Allstate Life Insurance Company ("Allstate")
pursuant to which Allstate and Charter will enter into a coinsurance
agreement reinsuring all of Charter's rights, liabilities and obligations
with respect to the Contracts. The Agreement also provides that Allstate
and Charter will enter into an administrative services agreement ("Services
Agreement") pursuant to which Allstate, or its designee, will provide the
administrative services in connection with the Contracts and the Variable
Account on behalf of Charter. Included among such services will be premium
payment processing, all transfer, withdrawal or surrender requests,
preparation of records (including records of all purchases and redemption
of the shares of each portfolio) and reports relating to the Variable
Account and the Contracts. As compensation for its services, Allstate will
retain the charges deducted from Separate Account or Contract Values but
will be responsible for payment of all expenses in connection with the
Contract and the Separate Account. Allstate's principal adddress is 3100
Sanders Rd., Northbrook, Illinois 60062.
CALCULATION OF YIELDS AND TOTAL RETURNS
From time to time, Charter may disclose historic performance data for
the Subaccounts, including yields, standard annual total returns and other
nonstandard measures of performance. Such performance will be computed, or
accompanied by performance data computed 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, 1997, were as follows:
Current Yield = 4.61%
Effective Yield = 4.71%
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 and exclusive of income other than investment
income) 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 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 Company may also disclose the Effective Yield of the Money Market
Variable Account for the same seven-day period, determined on a compounded
basis. 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 and exclusive of income
other than investment income) 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, 1997, the Yield for the Bond Subaccount was as
follows:
Yield = 5.53%
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 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, 1997,
were as follows:
Inception of Inception of One Year Five Year
the Subaccount the Portfolio Period Ending Period Ending
Subaccount to 12/31/97 to 12/31/97 12/31/97 12/31/97
Money Market* 4.57% 4.75% 4.52% 3.71%
Bond 7.74% 7.63% 8.33% 6.48%
Balanced 11.76% 11.57% 23.34% 12.33%
Capital Growth 15.05% 14.87% 34.81% 17.20%
International 11.28% 8.97% 8.30% 12.90%
Growth and Income** 23.13% 23.13% 29.56% N/A
Global Discovery*** 9.97% 9.97% 11.60% N/A
* The Yield quotations for the Money Market Subaccount quoted above more
closely reflect the current earnings of this subaccount than the total
return quotations.
** Five Year Average Annual Total Returns are not applicable for the
Growth and Income Subaccount as it commenced operation on May 1, 1994.
*** 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.
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.
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, 1997,
were as follows:
Inception of Inception of One Year Five Year
the Subaccount the Portfolio Period Ending Period Ending
Subaccount to 12/31/97 to 12/31/97 12/31/97 12/31/97
Money Market 51.12% 78.28% 4.52% 20.01%
Bond 99.15% 150.10% 8.33% 36.94%
Balanced 179.49% 291.34% 23.34% 78.87%
Capital Growth 265.19% 462.99% 34.81% 121.18%
International 168.48% 150.01% 8.30% 83.52%
Growth and Income* 114.68% 114.68% 29.56% N/A
Global Discovery** 17.18% 17.18% 11.60% N/A
* Five Year Returns are not applicable for the Growth and Income
Subaccount as it commenced operation on May 1, 1994.
** 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.
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 John R. Petrowski,
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, 1997 and 1996 and
for each of the three years in the period ended December 31, 1997 and the
financial statements of the Charter National Variable Annuity Account as of
December 31, 1997 and for each of the two years in the period ended
December 31, 1997 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.
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, 1997 10
Statement of Operations for the year ended December 31, 1997 11
Statements of Changes in Net Assets for the years ended
December 31, 1997 and 1996 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, 1997 and 1996 19
Statements of Income for the years ended
December 31, 1997, 1996 and 1995 20
Statements of Changes in Stockholder's Equity for the
years ended December 31, 1997, 1996 and 1995 21
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 22-23
Notes to Consolidated Financial Statements 24-41
Report of Independent Accountants on Financial Statement Schedules 42
Consolidated Financial Statement Schedules:
Schedule IV-Reinsurance as of and for the years ended
December 31, 1997, 1996 and 1995 43
Schedule V-Valuation and Qualifying Accounts for the
years ended December 31, 1997, 1996 and 1995 44
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, 1997 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, 1997. 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, 1997, 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
March 20, 1998
9
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
Money Capital
Total Market Bond Growth
<S> <C> <C> <C> <C>
Assets:
Investment in series mutual
funds, at net asset value
(cost $393,710,723 in
total; and $48,177,231,
$24,255,924, $110,340,981,
$42,842,274, $66,769,980,
$88,252,866 and $13,071,467
for each portfolio, respectively.) $467,234,067 $48,177,231 $24,493,820 $135,971,876
Total net asset $467,234,067 $48,177,231 $24,493,820 $135,971,876
Net assets:
For variable annuity contracts $467,234,067 $48,177,231 $24,493,820 $135.971,876
Total net asset $467,234,067 $48,177,231 $24,493,820 $135,971,876
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<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 $393,710,723 in
total; and $48,177,231,
$24,255,924, $110,340,981,
$42,842,274, $66,769,980,
$88,252,866 and $13,071,467
for each portfolio, respectively.) $54,410,500 $76,348,601 $113,382,604 $14,449,435
Total net asset $54,410,500 $76,348,601 $113,382,604 $14,449,435
Net assets:
For variable annuity contracts $54,410,500 $76,348,601 $113,382,604 $14,449,435
Total net asset $54,410,500 $76,348,601 $113,382,604 $14,449,435
</TABLE>
The accompanying notes are an integral part of these financial statements.
10a
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF OPERATIONS
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Money Capital
Total Market Bond Growth
<S> <C> <C> <C> <C>
Investment income:
Dividend income $23,118,459 $2,551,734 $1,187,499 $8,482,140
Less administrative expenses and
mortality and expense risk charges 3,070,595 356,958 135,940 854,396
Net investment income 20,047,864 2,194,776 1,051,559 7,627,744
Gains (losses) on investments:
Realized gains (losses):
Proceeds from sales of fund shares 303,588,692 121,517,892 8,564,282 70,393,387
Cost of fund shares sold 275,204,411 121,517,892 8,646,122 58,811,129
Net realized gains (losses) 28,384,281 0 (81,840) 11,582,258
Unrealized gains (losses):
Beginning of year 43,749,552 (264,295) 12,022,214
End of year 73,523,344 237,896 25,630,895
Change in unrealized gains
and losses 29,773,792 502,191 13,608,681
Net realized and unrealized
gains on investments 58,158,073 420,351 25,190,939
Increase in net assets from
operations $78,205,937 $2,194,776 $1,471,910 $32,818,683
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF OPERATIONS
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Growth and Global
Balanced International Income Discovery
<S> <C> <C> <C> <C>
Investment income:
Dividend income $3,593,916 $1,984,990 $5,248,628 $69,552
Less administrative expenses and
mortality and expense risk charges 341,804 622,346 658,891 100,260
Net investment income 3,252,112 1,362,644 4,589,737 (30,708)
Gains (losses) on investments:
Realized gains (losses):
Proceeds from sales of fund shares 8,308,141 55,956,572 28,968,135 9,880,283
Cost of fund shares sold 6,957,505 46,654,039 23,427,148 9,190,576
Net realized gains (losses) 1,350,636 9,302,533 5,540,987 689,707
Unrealized gains (losses):
Beginning of year 6,376,908 12,789,546 12,259,203 565,976
End of year 11,568,226 9,578,621 25,129,738 1,377,968
Change in unrealized gains
and losses 5,191,318 (3,210,925) 12,870,535 811,992
Net realized and unrealized
gains on investments 6,541,954 6,091,608 18,411,522 1,501,699
Increase in net assets from
operations $9,794,066 $7,454,252 $23,001,259 $1,470,991
</TABLE>
The accompanying notes are an integral part of these financial statements.
11a
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Money Capital
Total Market Bond Growth
<S> <C> <C> <C> <C>
Changes in assets:
Operations:
Net investment income $20,047,864 $2,194,776 $1,051,559 $7,627,744
Net realized gains (losses) 28,384,281 (81,840) 11,582,258
Change in unrealized gains and losses 29,773,792 502,191 13,608,681
Net change from operations 78,205,937 2,194,776 1,471,910 32,818,683
Capital share transactions:
Premiums 47,487,583 10,336,923 1,528,875 9,079,795
Records maintenance and
transfer charges (2,169) (534) (90) (686)
Capital withdrawals (518,748)
Contract claims (1,511,626) (405,520) (75,279) (448,730)
Contract surrenders (28,850,270) (7,848,722) (1,480,123) (5,932,659)
Transfers (to) from general account
and portfolio transfers, net (112,741) (4,238,247) 4,641,993 5,632,341
Net change from capital share
transactions 16,492,029 (2,156,100) 4,615,376 8,330,061
Total change in net assets $94,697,966 $38,676 $6,087,286 $41,148,744
Net assets:
Beginning of year $372,536,101 $48,138,555 $18,406,534 $94,823,132
End of year 467,234,067 48,177,231 24,493,820 135,971,876
Total change in net assets $94,697,966 $38,676 $6,087,286 $41,148,744
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Growth and Global
Balanced International Income Discovery
<S> <C> <C> <C> <C>
Changes in assets:
Operations:
Net investment income $3,252,112 $1,362,644 $4,589,737 ($30,708)
Net realized gains (losses) 1,350,636 9,302,533 5,540,987 689,707
Change in unrealized gains and losses 5,191,318 (3,210,925) 12,870,535 811,992
Net change from operations 9,794,066 7,454,252 23,001,259 1,470,991
Capital share transactions:
Premiums 4,089,100 5,663,171 14,772,184 2,017,535
Records maintenance and
transfer charges (383) (476)
Capital withdrawals (518,748)
Contract claims (122,603) (228,457) (200,548) (30,489)
Contract surrenders (2,370,707) (5,973,316)
(3,854,601) (1,390,142)
Transfers (to) from general account
and portfolio transfers, net (99,683) (12,305,989)
7,341,124 (1,084,280)
Net change from capital share
transactions 1,495,724 (12,845,067)
18,058,159 (1,006,124)
Total change in net assets $11,289,790 ($5,390,815)
$41,059,418 $464,867
Net assets:
Beginning of year $43,120,710 $81,739,416
$72,323,186 $13,984,568
End of year 54,410,500 76,348,601
113,382,604 14,449,435
Total change in net assets $11,289,790 ($5,390,815)
$41,059,418 $464,867
</TABLE>
The accompanying notes are an integral part of these financial statements.
12a
<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 in unrealized gains
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 Global Discovery Portfolio was added to the Fund on May 1, 1996.
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<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
</TABLE>
* The Global Discovery Portfolio was added to the Fund on May 1, 1996.
The accompanying notes are an integral part of these financial statements.
13a
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS
1. Organization:
The Charter National Variable Annuity Account (the "Variable Account") is a
unit investment trust registered under the Investment Company Act of 1940,
as amended. The Variable Account was established by Charter National Life
Insurance Company ("Charter National"), a wholly-owned subsidiary of
Leucadia National Corporation ("Leucadia"), as a separate investment
account on May 15, 1987.
The Variable Account receives funds representing premiums collected under
the variable annuity contracts (the "Contracts") offered by Charter
National. The funds are directed by the Contract owners into one or more
subaccounts, each of which, in turn, invests exclusively in the shares of
up to seven portfolios of the Scudder Variable Life Investment Fund (the
"Fund"), an open-end, diversified investment company managed by Scudder
Kemper Investors, Inc. (the "Adviser"). The Fund, at December 31, 1997,
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 Adviser receives compensation for its management and advisory services.
Total annual compensation received by the Adviser in 1997 and 1996 as a
percentage of average net assets was as follows:
1997 1996
Money Market Portfolio .460% .460%
Bond Portfolio .620% .610%
Capital Growth Portfolio .510% .530%
Balanced Portfolio .570% .600%
International Portfolio 1.000% 1.050%
Growth and Income Portfolio .580% .660%
Global Discovery Portfolio 1.500% 1.500%
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.
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 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, 1997.
Number of Net Asset Value
Portfolio Shares Cost Total Per Share
Money Market 48,177,231 $48,177,231 $48,177,231 $1.00
Bond 3,565,331 24,255,924 24,493,820 6.87
Capital Growth 6,590,978 110,340,981 135,971,876 20.63
Balanced 4,091,015 42,842,274 54,410,500 13.30
International 5,410,958 66,769,980 76,348,601 14.11
Growth and Income 9,876,533 88,252,866 113,382,604 11.48
Global Discovery 2,040,881 13,071,467 14,449,435 7.08
Total $393,710,723 $467,234,067
The number and cost of Fund shares purchased and sold for the years ended
December 31, 1997 and 1996 are as follows:
Portfolio Purchases Sales
1997 Shares Cost Shares Cost
Money Market 121,556,568 $121,556,568 121,517,892 $121,517,892
Bond 2,101,808 14,231,217 1,271,475 8,646,122
Capital Growth 4,652,306 86,351,192 3,808,184 58,811,129
Balanced 1,064,378 13,055,977 687,464 6,957,505
International 3,180,612 44,474,149 3,938,667 46,654,039
Growth and Income 4,978,875 51,616,031 2,820,932 23,427,148
Global Discovery 1,313,532 8,843,451 1,481,904 9,190,576
Total $340,128,585 $275,204,411
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
* 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, 1997 and 1996 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, 1997.
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, 1997 and 1996 and the consolidated results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 20, 1998
18
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(Dollars in thousands except par value)
1997 1996
ASSETS
Investments
Available for sale (aggregate cost
of $515,328 and $54,575) $515,849 $53,826
Held to maturity (aggregate fair value
of $6,838 and $5,389) 6,838 5,402
Policyholder loans 5,050 4,955
Preferred stock of affiliate 40,000 40,000
Other investments, including accrued
interest income 3,358 1,909
Total investments 571,095 106,092
Cash and cash equivalents 379,481 13,199
Reinsurance receivable, net 145,740 126,231
Premiums and other receivables, net 413,365 9,980
Prepaids and other assets 113 116
Property, equipment and leasehold
improvements, net 89 386
Assets held in separate and variable accounts 541,546 436,992
Net assets of discontinued operations 518,289
Total assets $2,051,429 $1,211,285
LIABILITIES AND STOCKHOLDER'S EQUITY
Future policy benefits, unearned premiums,
policy and contract claims $191,377 $142,978
Accounts payable and accrued expenses 14,711 12,295
Current income taxes payable 15,638 1,830
Deferred income taxes payable 7,387 3,358
Other liabilities 33,313 7,708
Liabilities related to separate and
variable accounts 541,546 435,937
Surplus note 25,000 25,000
Total liabilities 828,972 629,106
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 6,159 6,140
Net unrealized gain (loss) on investments 339 (262)
Retained earnings 1,212,549 572,891
Total stockholder's equity 1,222,457 582,179
Total liabilities and stockholder's equity $2,051,429 $1,211,285
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, 1997, 1996 and 1995
(Dollars in thousands)
1997 1996 1995
Revenues:
Insurance revenues $1,253 $1,140 $1,576
Net investment income
Net securities gains (losses) (532) 624 2,153
Surrender and other administrative
charges 3,714 3,076 2,612
Other 590 731 1,977
Total revenues 31,091 15,052 18,090
Benefits and expenses:
Policyholder benefits and change
in future policy benefits 1,898 1,587 (765)
Administrative and general expenses 7,218 3,900 3,201
Salaries and bonuses 444 1,328 1,391
Provision for doubtful receivable (85) (32) (31)
Commissions 127 248 259
Interest 1,975 2,070 3,813
Total benefits and expenses 11,577 9,101 7,868
Income from continuing operations
before income taxes 19,514 5,951 10,222
Income taxes:
Current 14,189 1,047 1,133
Deferred (8,818) (315) 672
Total provision for
income taxes 5,371 732 1,805
Net income from
continued operations $14,143 $5,219 $8,417
Income from discontinued
operations, net of taxes 54,398 68,676 68,101
Gain on disposal of
discontinued operations,
net of taxes of $246,799 606,897
Net income $675,438 $73,895 $76,518
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, 1997, 1996 and 1995
(Dollars in thousands, except par value)
Net
Common Unrealized
Stock, Additional Gain (Loss)
$31 Par Paid-in On Retained
Value Capital Investments Earnings Total
Balance, January 1, 1995 $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
Net income 675,438 675,438
Dividend paid to parent (35,780) (35,780)
Contribution from parent 19 19
Net change in unrealized
gain (loss) on
investments 601 601
Balance, December 31,1997 $3,410 $6,159 $339 $1,218,420 $1,222,457
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, 1997, 1996 and 1995
(Dollars in thousands)
1997 1996 1995
Net cash flows from operating activities:
Net income $675,438 $73,895 $76,518
Adjustments to reconcile net income
to net cash provided by (used for)
operations:
Gain on disposal of discontinued
operations (606,897)
Income taxes provided on disposal
of discontinued operations (246,799)
Provision (benefit) for deferred
income taxes (8,818) (315) 672
Depreciation and amortization (2,974) (541) (742)
Net securities (gains) losses 532 (624) (2,153)
(Gain) loss on sale of property 261 (80) (8)
Net change in:
Accrued investment income (1,557) (180) 306
Reinsurance receivable 1,358 20,152 38,847
Premiums and other receivables, net (7,163) 968 3,931
Net assets of discontinued operations (41,737) (59,036)
Future policy benefits, unearned
premiums, and policy and contract claim (2,468) (23,093) (46,894)
Accounts payable, accrued expenses, and
other liabilities 28,021 (3,136) 6,133
Accrued interest on surplus notes (18) (2,007)
Current income taxes payable 13,808 3,730 681
Proceeds from reinsurance, net 19,517
Other 469 3,615 98
Net cash provided by (used for)
operating activities ($137,272) $32,636 16,346
Continued
22
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
For the years ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
1997 1996 1995
Net cash flows from investing activities:
Purchases of investments (other
than short-term) ($577,934) ($97,633) ($84,278)
Proceeds from maturities of investments 45,621 52,744 73,671
Proceeds from sales of investments 70,670 46,236 27,947
Purchases of installment loans (3) (164)
Principal collections on installment loans 1,846 3,666 6,371
Proceeds from disposal of discontinued
operations 998,099
Net acquisitions of property and equipment (42) (445)
Net change in equity in separate and
variable accounts 1,055 (1,000) 1,230
Net cash provided by investing
activities 539,315 4,010 24,332
Net cash flows from financing activities:
Revolving credit note repayments (3,000) (22,500)
Surplus note repayments (21,000)
Contribution from parent 19
Dividend paid to parent (35,780) (30,000) (4,700)
Net cash used for financing activities (35,761) (33,000) (48,200)
Net increase (decrease) in cash and
cash equivalents 366,282 3,646 (7,522)
Cash and cash equivalents at January 1, 13,199 9,553 17,075
Cash and cash equivalents at December 31, $379,481 $13,199 $9,553
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $4,738 $2,090 $5,820
Income tax payments, net of refunds $192,408 $2,005 $1,005
Non-cash proceeds from disposal of
discontinued operations $400,000
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's principal
product is a variable annuity product.
In 1997, Charter sold substantially all of its insurance operations and
classified as discontinued operations the property and casualty insurance
operations of Colonial Penn Insurance Company and its subsidiaries (the
"Colonial Penn P&C Group") and the life and health insurance operations of
Colonial Penn Life Insurance Company ("Colonial Penn Life"). Prior period
financial statements have been restated to conform with this presentation.
In addition, see Note 17, with respect to the variable annuity business.
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 LUK-CPG, Inc. ("CPG"), which owns Intramerica Life Insurance
Company ("Intramerica") and several non-insurance companies.
Certain amounts for prior periods have been reclassified to be consistent
with the 1997 presentation and for discontinued operations.
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
$377,679,000 and $12,601,000 at December 31, 1997 and 1996, respectively.
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.
24
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Significant Accounting Policies, continued:
d. Investments, continued:
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 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, 1997 was a variable annuity ("VA") product.
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. 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) and the term of the
lease for leasehold improvements.
g. 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. Separate and
variable account assets and liabilities are carried at fair market value.
25
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Significant Accounting Policies, continued:
h. Liabilities for Future Policy Benefits, Unearned Premiums and
Policy and Contract Claims:
Benefit reserves for IOP products are determined following a deposit method
and consist principally of policy values before any surrender charges.
Liabilities for future policy benefits on ordinary life and health
insurance are generally calculated on a net level premium method, using
modifications of various industry and company mortality, morbidity and
withdrawal studies, and interest assumptions approximating investment
yields existing at the time the policies were issued. Such liabilities
include provisions for adverse deviation in experience.
Interest rate assumptions are 4.0% to 8.75% for individual annuities and 3%
to 6% for individual life policies.
i. Reinsurance:
Charter has 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.
j. 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.
k. 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. Charter's life insurance
subsidiary, Intramerica, files a separate federal income tax return.
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.
26
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Insurance Operations:
The principal products are "Investment Oriented" products.
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
$53,178,000, $47,265,000 and $43,717,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
Charter received surrender and administrative charges of approximately
$3,714,000, $3,076,000 and $2,612,000 for the years ended December 31,
1997, 1996 and 1995, 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"). 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, 1997 and 1996, approximately $114,433,000 and
$121,296,000, 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.
4. Discontinued Operations:
In September 1997, Charter completed the sale of Colonial Penn Life to
Conseco, Inc. for $400,000,000 in notes maturing on January 2, 2003
collateralized by non-cancelable letters of credit. Colonial Penn Life is
principally engaged in the sale of graded benefit life insurance policies
through direct marketing. Charter reported a pre-tax gain of approximately
$274,817,000 on the sale. In connection with the sale of Colonial Penn
Life, Charter reinsured certain life insurance policies for a premium of
$25,000,000. The gain on this reinsurance will be deferred and amortized
into income based on actuarial estimates of the premium revenue of the
underlying insurance contracts, or will be recognized earlier if converted
to assumption reinsurance. As of December 31, 1997, approximately
$50,867,000 of Charter's future policy benefits related to life insurance
ceded to Conseco, Inc.
27
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Discontinued Operations, continued:
In November 1997, Charter completed the sale of the property and casualty
insurance business of the Colonial Penn P&C Group to General Electric
Capital Corporation for total cash consideration of $998,099,000, plus
$14,300,000 for retention of certain employee benefit liabilities. The
Group's primary business is providing private passenger automobile
insurance to the mature adult population through direct response marketing.
The Company reported a pre-tax gain of approximately $578,879,000 on the
sale.
At December 31, 1996, the components of net assets of discontinued
operations are as follows, in thousands of dollars:
Investments $1,627,573
Cash and cash equivalents 201,156
Separate account assets 109,082
Deferred policy acquisition costs 70,892
Other 350,521
Total assets 2,359,224
Policy reserves 1,253,520
Unearned premiums 287,828
Separate account liabilities 109,082
Other 190,505
Total liabilities 1,840,935
Net assets of discontinued
operations $ 518,289
A summary of the results of discontinued operations is as follows for 1997
(through the date of sale) and for the years ended December 31, 1996 and
1995 (in thousands of dollars):
1997 1996 1995
Colonial Penn P & C Group:
Revenues $ 514,626 $594,489 $581,319
Expenses:
Provision for insurance losses and
policy benefits 370,102 421,823 411,850
Other operating expenses 86,449 93,614 92,535
456,551 515,437 504,385
Income before income taxes 58,075 79,052 76,934
Income taxes 20,279 27,837 23,036
Income from discontinued operations,
net of taxes $ 37,796 $ 51,215 $ 53,898
28
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Discontinued Operations, continued:
Colonial Penn Life:
Revenues $147,838 $212,582 $210,528
Expenses:
Provision for insurance losses and
policy benefits 89,086 128,648 128,078
Other operating expenses 35,206 58,802 61,944
124,292 187,450 190,022
Income before income taxes 23,546 25,132 20,506
Income taxes 6,944 7,671 6,303
Income from discontinued operations,
net of taxes $ 16,602 $ 17,461 $ 14,203
5. Investments:
Net investment income was as follows for the years ended December 31, 1997,
1996 and 1995, in thousands of dollars:
1997 1996 1995
Interest income:
Bonds and short-term investments $14,952 $4,984 $5,423
Policy loans 297 317 383
Other long-term investments 6,877 32 101
Dividends and other (1) 4,000 4,235 4,011
Total investment income 26,126 9,568 9,918
Less: Investment expenses 60 87 146
Net investment income $26,066 $9,481 $9,772
(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, 1997.
29
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. 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, 1997 and 1996 were as follow, in thousands
of dollars:
Gross Gross Estimated
Unrealized Unrealized Fair
1997 Cost Gains Losses Value
Available for sale:
Bonds and notes:
U. S. Government agencies
and authorities $514,777 $757 $251 $515,283
Other corporate debt 541 30 5 566
Total fixed maturities 515,318 787 256 515,849
Equity Securities:
Common stocks - industrial
and other 10 10
Total equity securities 10 0 10 0
Total investments available
for sale $515,328 $787 $266 $515,849
Held to maturity:
Bonds and notes:
U. S. Government agencies
and authorities $ 6,838 $ 9 $ 9 $ 6,838
1996
Available for sale:
Bonds and notes:
U. S. Government agencies
and authorities $54,396 $264 $1,136 $53,524
Other corporate debt 169 133 302
Total fixed maturities 54,565 397 1,136 53,826
Equity Securities:
Common stocks - industrial
and other 10 10
Total equity securities 10 0 10 0
Total investments available
for sale $54,575 $397 $1,146 $53,826
Held to maturity:
Bonds and notes:
U. S. Government agencies
and authorities $ 5,402 $ 38 $ 51 $ 5,389
30
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. Investments, continued:
The amortized cost and estimated fair value of investments classified
as available for sale and held to maturity at December 31, 1997, 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 $292,894 $292,885 $3,108 $3,104
Due after one year through
five years 212,806 213,252 3,730 3,734
Due after five years through
ten years 2,018 2,094
Due after ten years 43 74
Mortgage-backed securities 7,557 7,544
Total $515,318 $515,849 $6,838 $6,838
At December 31, 1997 and 1996, 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.
Net securities gains (losses) reflected in the accompanying
consolidated statements of income for the years ended December 31,
1997, 1996 and 1995 were as follows, in thousands of dollars:
1997 1996 1995
Fixed maturities ($571) $624 $827
Equity securities 1,326
Other 39
Net securities gains (losses) ($532) $624 $2,153
Gross gains and losses on sale of fixed maturities were approximately
$251,000 and $822,000, respectively, in 1997, $666,000 and $42,000,
respectively in 1996 and $835,000 and $8,000, respectively, in 1995.
Gross gains and losses on sale of equity securities were approximately
$1,326,000 and $0, respectively, in 1995. There were no sales of
equity securities in 1997 and 1996.
31
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Reinsurance:
The effect of reinsurance on premiums written and earned for the years
ended December 31, 1997, 1996 and 1995, is as follows, in thousands
of dollars:
1997 1996 1995
Written Earned Written Earned Written Earned
Direct Premiums $14,508 $15,065 $14,667 $15,048 $14,332 $14,880
Assumed (4,110)
Ceded (13,542) (13,812) (13,908) (13,908) (13,329) (13,304)
Net premiums $ 966 $ 1,253 $ 759 $1,140 $(3,107) $ 1,576
Life insurance in force ceded to other carriers amounted to
approximately $241,360,000, $141,842,000 and $186,665,000 at December
31, 1997 ,1996, and 1995 respectively. This represented approximately
78%, 7% and 9% 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, 1997, 1996 and 1995 are as
follows, in thousands of dollars:
1997 1996 1995
Direct $20,863 $10,533 $13,691
Assumed (3,582)
Ceded (18,965) (8,946) 10,874)
Net policyholder benefits $ 1,898 $ 1,587 $ (765)
As discussed in Notes 3 and 4, at December 31, 1997 and 1996,
reinsurance receivables, net includes approximately $114,433,000 and
$121,296,000, respectively, due from a subsidiary of John Hancock, and
approximately $50,867,000 due from Conseco, Inc. at December 31, 1997.
32
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. Premiums and Other Receivables, Net:
A summary of premiums and other receivables, net at December 31, 1997
and 1996 is as follows, in thousands of dollars:
1997 1996
Notes receivable from Conseco, Inc. $400,000
Accrued interest on Conseco, Inc. notes 6,223
Amounts due from affiliates 3,924 $4,946
Installment loans (net of allowance for
doubtful accounts of $75 and $209) 998 2,773
Other 2,220 2,261
Total premiums and other receivables, net $413,365 $9,980
8. Income Taxes:
The principal components of the deferred tax liability at December 31,
1997 and 1996, are as follows, in thousands of dollars:
1997 1996
Insurance reserves and unearned premiums $ 381 $ 577
Deferred tax on installment sale 12,523
Unrealized (gain) loss on investments 183 (141)
Employee benefits and compensation
Policy acquisition costs (1,741) (474)
Deferred reinsurance gain (5,832)
Other, net 1,873 3,396
Net deferred tax liability $7,387 $3,358
33
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Income Taxes, continued:
The table below reconciles the "expected" statutory federal income tax
to the actual income tax expense, in thousands of dollars:
1997 1996 1995
"Expected" federal income tax $6,830 $2,083 $3,578
Dividends received deduction (1,400) (1,400) (1,400)
Tax (benefit) applicable to
prior years (16) 24 (368)
Other (43) 25 (5)
Total provision for income taxes $5,371 $ 732 $1,805
At December 31, 1997, 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 a portion 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.
("FPL"), FPL is obligated to reimburse Charter for any such taxes.
Pursuant to the purchase agreement, Charter complied with FPL's
instructions and agreed to the 1989 assessment. To date, FPL 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 FPL's indemnification.
In a response to a legal proceeding initiated by Charter to collect
such amount due under FPL's indemnification obligation, FPL has
alleged that Charter has breached the purchase agreement and, on that
basis, FPL has denied liability for the 1989 IRS assessment. Charter
believes it has not breached the purchase agreement and FPL remains
liable for all such taxes and interest. FPL is currently exercising
its right under the purchase agreement to control the contest of the
1988 IRS assessment. If FPL is unsuccessful in contesting the 1988
IRS assessment, Charter believes that FPL may again refuse to comply
with its indemnification obligations under the purchase agreement.
Should that occur, Charter would seek to compel FPL to honor its
indemnification obligations under the purchase agreement and to pursue
all other available remedies against FPL.
34
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Income Taxes, continued:
In September 1997, Charter sold Colonial Penn Life to Conseco, Inc.
Under the terms of the purchase agreement, Charter indemnified
Conseco, Inc. for Colonial Penn Life's taxes for periods prior to
1997, which include periods for which FPL has indemnified Charter.
9. Pension Plans and Other Postemployment and Postretirement
Benefits:
Charter maintains non-contributory defined benefit pension plans
covering substantially all employees of its continuing operations.
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.
Plan participation was suspended for employees of the discontinued
operations as of the respective dates of the sales.
Pension expense charged to continuing operations was approximately
$75,000, $78,000 and $83,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
The funded status of the defined benefit pension plans at December 31,
1997 and 1996 was as follows, in thousands of dollars:
1997 1996
Actuarial present value of
accumulated benefit obligation:
Vested $56,409 $41,704
Nonvested 73 757
Total $56,482 $42,462
Projected benefit obligation ($57,149) ($55,761)
Plan assets at fair value 53,562 49,025
Funded status of plan (3,587) (6,736)
Unrecognized prior service cost 161 2,589
Unrecognized net gain from experience
differences and assumption changes 408 (3,830)
Accrued pension liability ($3,018) ($ 7,977)
35
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Pension Plans and Other Postemployment and Postretirement
Benefits, continued:
The projected benefit obligation at December 31, 1997 and 1996 was
determined using an assumed discount rate of 7.0% and 7.5%,
respectively, a long-term rate of return on plan assets of 7.5%, and
salary increase rates of 5.0% in both 1997 and 1996. 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 $7,000,
$5,000 and $5,000 for the years ended December 31, 1997, 1996 and
1995, 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.
Periodic postretirement benefit costs were approximately $3,000,
$8,000 and $14,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
The liability for postretirement and postemployment benefits at
December 31, 1997 and 1996, is as follows, in thousands of dollars:
1997 1996
Retirees $4,725 $5,425
Fully eligible active plan participants 0 883
Accumulated postretirement benefit obligation 4,725 6,308
Unrecognized net loss 2,345 1,020
Liability for postretirement benefits 7,070 7,328
Liability for postemployment benefits 0 210
Total liability for postretirement and
postemployment benefits $7,070 $7,538
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.0% and 7.5% at December 31, 1997 and 1996,
respectively. The assumed health care cost trend rate used in
measuring the accumulated postretirement benefit obligation was 8.0%
for 1997 and 1996, respectively, declining to an ultimate rate of 6.0%
by 2007.
If the health care cost trend rate were increased by 1.0%, the
accumulated postretirement obligation as of December 31, 1997 and 1996
would have increased by approximately $331,000 and $507,000,
respectively. The effect of this change on the aggregate of service
and interest cost for 1997 and 1996 would be immaterial.
36
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. Leases:
Charter rents office space under a non-cancelable operating lease that
expires in 1999. Rental expense (net of sublease rental income)
charged to operations was approximately $58,000 in 1997, $154,000 in
1996 and $282,000 in 1995.
Future minimum net rental payments under non-cancelable operating
leases (exclusive of real estate taxes, maintenance and certain other
charges) were as follows, in thousands of dollars:
Future
Rental
Payments
1998 $45
1999 15
Total minimum lease payments $60
11. 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 Intramerica 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.
12. 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.
37
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. Related Party Transactions, continued:
Expenses incurred were approximately $916,000, $1,131,000 and $993,000
and for the years ended December 31, 1997, 1996 and 1995,
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 $594,000, $383,000 and $394,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Charter received administrative services from an affiliated property
and casualty company, for which it paid approximately $90,000 during
1997.
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 and $1,056,000 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 $244,000, $245,000 and $220,000 for the
years ended December 31, 1997, 1996 and 1995, 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. Charter paid interest on the note of approximately
$1,975,000 in 1997, 1996 and 1995. Payments of both principal and
interest on the note are subject to the approval of the Missouri
Department of Insurance.
Related interest charged to operations was approximately $1,975,000
in 1997, 1996 and 1995.
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 paid accumulated interest of
approximately $2,707,000 in 1995. Related interest expense charged
to operations was approximately $782,000 in 1995.
38
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. Related Party Transactions, continued:
Charter purchased installment loans of approximately $0, $3,000 and
$164,000 and from American Investment Bank ("AIB"), an affiliate, in
1997, 1996 and 1995, respectively, and paid related service fees of
approximately $88,000, $170,000 and $319,000 in 1997, 1996 and 1995,
respectively. Approximately $998,000 and $2,773,000 in installment
loans were outstanding at December 31, 1997 and 1996, respectively,
and are included in premiums and other receivables.
13. 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.
(e) 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.
39
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. Fair Value of Financial Instruments, continued:
The carrying amounts and estimated fair values of Charter's financial
instruments at December 31, 1997 and 1996 are as follows, in thousands
of dollars:
Adj for Sale
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets:
Investments:
Practicable to
estimate fair value $526,045 $526,045 $61,137 $61,124
Preferred stocks of affiliate 40,000 40,000 40,000 40,000
Policyholder loans 5,050 5,050 4,955 4,955
Cash and cash equivalents 379,481 379,481 13,199 13,199
Separate and variable accounts 541,546 541,546 436,992 436,992
Financial liabilities:
Investment contract reserves 8,107 8,107 6,331 6,331
Other liabilities:
Separate and variable accounts 541,546 541,546 435,937 435,937
Surplus notes 25,000 25,000 25,000 25,000
14. Statutory Information:
Charter National Life Insurance Company and Intramerica 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 $1,813,308,000 and
$913,570,000 at December 31, 1997 and 1996, respectively, with
statutory capital and surplus of approximately $1,285,763,000 and
$400,717,000 at those dates, respectively. Charter National Life
Insurance Company's net statutory gains from operations (on an
unconsolidated basis) were approximately $1,267,834,000, $35,550,000
and $7,623,000 for the years ended December 31, 1997, 1996 and 1995,
respectively, and included dividends received from subsidiaries of
approximately $1,268,836,000, $36,120,000 and $6,840,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
Intramerica's statutory net income (on an unconsolidated basis) for
the years ended December 31, 1997, 1996 and 1995 was approximately
$18,602,000, $1,034,000 and $1,807,000, respectively.
40
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. Statutory Information, continued:
Intramerica's statutory capital and surplus was approximately
$13,014,000 and $24,971,000 at December 31, 1997 and 1996,
respectively.
Charter had securities on deposit with state insurance departments
with book values aggregating approximately $6,838,000 and $5,402,000
at December 31, 1997 and 1996, respectively.
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
$1,230,079,000 in dividends in 1998 without regulatory approval.
During the first quarter of 1998, having made the required regulatory
notification, Charter paid such amount to Leucadia, consisting of
approximately $830,000,000 in cash, and the notes from Conseco, Inc.
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
Intramerica as of December 31, 1997 and 1996 substantially exceeded
minimum requirements.
15. 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.
16. Event Subsequent to the Balance Sheet Date:
In February 1998, Charter agreed to reinsure all of its remaining
insurance business to Allstate Life Insurance Company and a subsidiary
thereof in an indemnity reinsurance transaction. Consummation of this
transaction, which is expected to occur in the second quarter of 1998,
is subject to regulatory approval and the satisfaction of certain
other conditions. The premium to be received on this transaction is
approximately $30,000,000. The gain on the reinsurance transaction
will be deferred and amortized into income based upon actuarial
estimates of the premium revenue of the underlying insurance contracts
or will be recognized earlier in income if converted to assumption
reinsurance.
41
<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
March 20, 1998
42
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
As of and for the years ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
Percentage
Ceded Assumed of Amount
Direct to Other from Other Net Assumed
Business Companies Companies Amount to Net
1997
Life insurance
in force $310,508 $241,360 $0 $69,148 0.00%
Premium revenue:
Life insurance $18,757 $13,789 $4,968 0.00%
Accident and
health insurance 23 23 0.00%
Total premium revenue $18,780 $13,812 $0 $0 0.00%
1996
Life insurance
in force $145,000 $72,000 $0 $73,000 0.00%
Premium revenue:
Life insurance $4,561 $354 $34 $4,241 0.80%
Accident and
health insurance 153 153 0.00%
Total premium revenue $4,714 $354 $34 $4,394 0.77%
1995
Life insurance
in force $177,000 $98,000 $0 $79,000 0.00%
Premium revenue:
Life insurance $4,228 $297 $297 $4,228 7.02%
Accident and
health insurance 1,169 1,169
Total premium revenue $5,397 $297 $297 $5,397 5.50%
See notes to consolidated financial statements included in this Form N-4.
43
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
Additions
Balance at Charged to
Beginning Costs and
of Period Expenses Recoveries Other
Description
1997
Loan receivable of banking
and lending subsidiaries $209 ($85) $271 $0
Trade, notes and other
receivables
Total allowance for
doubtful accounts $209 ($85) $271 $0
Reinsurance receivable $0 $0 $0 $0
1996
Loan receivable of banking
and lending subsidiaries $412 ($32) $493
Trade, notes and other
receivables
Total allowance for
doubtful accounts $412 ($32) $493 $0
Reinsurance receivable $0 $0 $0 $0
1995
Loan receivable of banking
and lending subsidiaries $809 ($31) $884
Trade, notes and other
receivables
Total allowance for
doubtful accounts $809 ($31) $884 $0
Reinsurance receivable $0 $0 $0 $0
See notes to consolidated financial statements included in this Form N-4.
44
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
Deductions
Sale of Balance at
Write offs Receivables End of Period
Description
1997
Loan receivable of banking
and lending subsidiaries $320 $0 $75
Trade, notes and other
receivables
Total allowance for
doubtful accounts $320 $0 $75
Reinsurance receivable $0 $0 $0
1996
Loan receivable of banking
and lending subsidiaries $664 $209
Trade, notes and other
receivables
Total allowance for
doubtful accounts $664 $0 $209
Reinsurance receivable $0 $0 $0
1995
Loan receivable of banking
and lending subsidiaries $1,250 $412
Trade, notes and other
receivables
Total allowance for
doubtful accounts $1,250 $0 $412
Reinsurance receivable $0 $0 $0
See notes to consolidated financial statements included in this Form N-4.
44a
<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
(e)Purchase Agreement dated February 11, 1998 between Charter
National Life Insurance Company, Leucadia National Corporation
and Allstate Life Insurance Company.
(f)Form of Coinsurance Agreement between Charter National Life
Insurance Company and Allstate Life Insurance Company.
(g)Form of Administrative Services Agreement between Charter
National Life Insurance Company and Allstate Life Insurance
Company.
(9)(a)Opinion and Consent of Counsel. i
(b)Written consent of Sutherland, Asbill & Brennan.
(c)Written consent of John R. Petrowski, 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 Incorporated herein by reference to Post-Effective Amendment No. 15 for
Charter National Variable Annuity Account, Registration File No. 33-22925,
filed on February 24, 1997.
C-1
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, President,
Empire Insurance Group Director, Chief Executive Officer,
122 Fifth Avenue and Chief Operating Officer
New York, NY 10011
John R. Petrowski Vice President, General Counsel,
Empire Insurance Group Corporate Secretary and Director
122 Fifth Avenue
New York, NY 10011
Timothy C. Sentner Senior Vice President
Leucadia National Corporation
315 Park Avenue South
New York, NY 10010
Mark Hornstein Vice President and Director
Leucadia National Corporation
315 Park Avenue South
New York, NY 10010
A. Sales Miller Vice President - Marketing
James E. Jordan Director
9 West 57th St.
Suite 4000
New York, NY 10019
John Burns Assistant Vice President
Leucadia National Corporation
315 Park Avenue South
New York, NY 10010
Kathleen A. Urbanowicz Assistant Vice President - Compliance
Laura Ulbrandt Assistant Secretary
Leucadia National Corporation
315 Park Avenue South
New York, NY 10010
Ian M. Cumming Director
Leucadia National Corporation
529 East South Temple
Salt Lake City, UT 84102
C-2
Name and Principal Positions and Offices
Business Address* with Depositor
Barbara Lowenthal Vice President
Leucadia National Corporation
315 Park Avenue South
New York, N.Y. 10010
Jesse Clyde Nichols III Director
Nichols Industries, Inc.
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 Vice President and 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. Intramerica Life Insurance Company, a Charter subsidiary, offers
the Contract to residents of New York.
Charter is a wholly owned subsidiary of Leucadia National Corporation
("Leucadia"), a New York corporation. Currently, Leucadia owns all the
outstanding stock of CNL, Inc. ("CNL"), the principal underwriter of the
Variable Account. Pursuant to an agreement between Leucadia and Allstate
Life Insurance Company, it is anticipated that CNL will be sold to Allstate
on or about May 31, 1998. 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
Percent of
Jurisdiction Voting
of Securities Principal
Name Incorporation Owned* Business
Centurion Ins. Co. New York 100% Insurance
WMAC Investment Corp. Wisconsin 100% Holding Company
Bellpet, Inc. Delaware 100% Holding Company
Baldwin-CIS L.L.C. Delaware 100% Investments
Conwed Corporation Delaware 100% Real Estate
Leucadia Film
Corporation Utah 100% Film Products
Neward Corporation Delaware 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. United States 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
LUK-CP Administrative
Services, Inc. Delaware 100% Administrator
LUK-CPG, Inc. Delaware 100% Holding Company
LUK-CPH, Inc. Delaware 100% Holding Company
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
Rosemary Beach Land Co. Florida 100% Real Estate
Rosemary Beach Cottage
Rental Co. Delaware 100% Real Estate Rental
Professional Data
Management, Inc. Indiana 100% Real Estate
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
C-4
Percent of
Jurisdiction Voting
of Securities Principal
Name Incorporation Owned* Business
330 MAD. PARENT CORP. Delaware 100% Investments
WMAC Credit Insurance
Corp. Wisconsin 100% Insurance
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 71% Holding Company
Pepsi International
Bottlers L.L.C. Delaware 71% 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
* 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, 1997 there were 9,531 owners of the flexible premium
variable deferred annuity, of which 9,332 were Non-qualified and 199 were
Qualified, issued by the Variable Account. As of December 31, 1997 there
were 91 owners of the single premium variable deferred annuity, of which 75
were Non-qualified and 16 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, 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
C-5
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
Empire Insurance Group
122 Fifth Avenue
New York, NY 10011
A. Sales Miller President and Director
John R. Petrowski Vice President, General Counsel and
Empire Insurance Group Director
122 Fifth Avenue
New York, NY 10011
Rocco Nittoli Vice President, Controller and
Empire Insurance Group Treasurer
122 Fifth Avenue
New York, NY 10011
Kathleen A. Urbanowicz Vice President and Secretary
* 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-6
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 St. Louis and the State of Missouri, on
the 24th day of April, 1998.
Charter National Variable Annuity Account
(Registrant)
(Seal) Charter National Life Insurance Company
(Depositor)
Attest:/S/A. Sales Miller By:/S/Kathleen A. Urbanowicz
A. Sales Miller Kathleen A. Urbanowicz
Vice President Assistant Vice President,
Compliance
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 President and Director
(Chief Executive Officer)
(Chief Operating Officer)
*______________________________ Director ________
Ian M. Cumming
*______________________________ Senior Vice President ________
Timothy C. Sentner
*_____________________________ Vice President, General ________
John R. Petrowski Counsel, Corporate
Secretary and Director
*_____________________________ Assistant Secretary ________
Laura Ulbrandt
*_____________________________ Director ________
Jesse C. Nichols III
Signature Title Date
*_____________________________ Director and Vice
Mark Hornstein President ________
*_____________________________ Director ________
Joseph S. Steinberg
*_____________________________ Vice President ________
Barbara Lowenthal
*_____________________________ Director and Vice ________
Joseph A. Orlando President
*______________________________ Assistant Vice ________
John Burns President
*______________________________ Director ________
James Jordan
*Pursuant to Power of Attorney
(Seal) Date: April 24, 1998
Attest:/S/A. Sales Miller By:/S/Kathleen A. Urbanowicz
A. Sales Miller Kathleen A. Urbanowicz
Vice President Assistant Vice President,
Compliance
EXHIBIT LIST
(8) (e) Purchase Agreement dated February 11, 1998 between
Charter National Life Insurance Company, Leucadia
National Corporation and Allstate Life Insurance Company
(8) (f) Form of Coinsurance Agreement between Charter National
Life Insurance Company and Allstate Life Insurance
Company
(8) (g) Form of Administrative Services Agreement between Charter
National Life Insurance Company and Allstate Life
Insurance Company
(9) (b) Written consent of Sutherland, Asbill & Brennan
(9) (c) Written consent of John R. Petrowski, General Counsel of
Charter National Life Insurance Company
(10) Written consent of Independent Accountants
(14) Power of Attorney
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (this "Agreement") is made this 11th
day of February, 1998, by and among Allstate Life Insurance
Company, an Illinois insurance corporation ("Buyer"), Allstate
Life Insurance Company of New York, a New York insurance company
("Buyer Subsidiary"), Charter National Life Insurance Company, a
Missouri insurance company ("Charter"), Intramerica Life
Insurance Company, a New York insurance company ("ILIC"), and
Leucadia National Corporation, a New York corporation ("Leucadia"
and, together with Charter and ILIC, the "Sellers").
RECITALS:
WHEREAS, Charter and ILIC are engaged in the business of
underwriting, issuing and administering variable life insurance
products, variable annuity products and certain other life
insurance products (the "Business");
WHEREAS, CNL, Inc., a Missouri corporation and wholly owned
subsidiary of Leucadia ("CNL"), acts as principal underwriter for
Charter and ILIC in connection with the Business;
WHEREAS, Sellers wish to sell to Buyer and Buyer Subsidiary,
and Buyer and Buyer Subsidiary wish to purchase from Sellers, the
Business effective as of January 1, 1998 (the "Effective Time")
and Leucadia wishes to sell to Buyer, and Buyer wishes to
purchase from Leucadia, all of the outstanding capital stock of
CNL (collectively, the "Transaction");
WHEREAS, in connection with the Transaction, Charter desires
to cede to Buyer, and Buyer desires to reinsure from Charter, all
of Charter's rights, liabilities and obligations in respect of
Charter's variable life insurance products, variable annuity
products and certain other life insurance and annuity products
identified in the Charter Coinsurance Agreement and the Charter
Reinsurance Agreement (as such terms are defined below)
(collectively, the "Charter Policies") effective as of the
Effective Time;
WHEREAS, in connection with the Transaction, ILIC desires to
cede to Buyer Subsidiary, a wholly owned subsidiary of Buyer and
Buyer Subsidiary desires to reinsure from ILIC, all of ILIC's
rights, liabilities and obligations in respect of ILIC's variable
annuity products identified in the ILIC Coinsurance Agreement (as
such term is defined below) (the "ILIC Policies" and together
with the Charter Policies, the "Policies") effective as of the
Effective Time;
WHEREAS, in connection with the Transaction, Leucadia
desires to sell to Buyer, and Buyer desires to purchase from
Leucadia, all of the issued and outstanding shares of common
stock, no par value, of CNL (the "Common Stock"), all in
accordance with the provisions of this Agreement;
WHEREAS, in connection with the Transaction, the parties
hereto desire that Buyer or Buyer Subsidiary, as appropriate, (i)
pay all costs and expenses associated with the administration of
the Business from the Effective Time through the Closing Date and
(ii) assume and provide all support and administrative services
relating to the Business effective from and after the Closing
Date;
WHEREAS, in connection with the Transaction, (i) Charter and
Buyer intend to enter into the Charter Administrative Services
Agreement (as defined in Section 6.1) and (ii) ILIC and Buyer
Subsidiary intend to enter into the ILIC Administrative Services
Agreement (as defined in Section 6.1); and
WHEREAS, each of Buyer, Buyer Subsidiary, Charter, ILIC, and
Leucadia desire to make certain representations, warranties and
agreements in connection with the Transaction and also desire to
set forth various conditions precedent thereto.
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements herein contained, the
parties hereto agree as follows:
ARTICLE I.
THE TRANSACTION
SECTION 1.1 Reinsurance and Administration. On the terms
and subject to the conditions hereof, at the Closing (as
hereinafter defined), Buyer and Charter shall execute and deliver
each of the Charter Coinsurance Agreement and the Charter
Reinsurance Agreement (as such terms are defined in Section 6.1),
and Buyer Subsidiary and ILIC shall execute and deliver the ILIC
Coinsurance Agreement (as such term is defined in Section 6.1).
SECTION 1.2 Purchase and Sale of Common Stock. On the
terms and subject to the conditions hereof, at the Closing,
Leucadia will sell, assign, transfer and convey to Buyer, and
Buyer will purchase and acquire from Leucadia, all right, title
and interest of Leucadia in and to the Common Stock, free and
clear of all liens, claims, pledges, encumbrances and security
interests ("Liens").
SECTION 1.3 Payment of Consideration. The aggregate
consideration payable by Buyer and Buyer Subsidiary in respect of
the Transaction shall be $30.25 million (the "Purchase Price").
The Purchase Price shall be allocable to the Transaction as set
forth in Exhibit A attached hereto. The Purchase Price shall be
payable in accordance with Exhibit A-1 attached hereto which
exhibit contains a schedule of payments and transfers
contemplated under this Agreement, the Charter Coinsurance
Agreement, Charter Reinsurance Agreement, and ILIC Coinsurance
Agreement. Such schedule is intended to transfer to Buyer all of
the income of the Business (excluding CNL) from and after the
Effective Time to the Closing Date and to compensate Sellers
fully for all expenses of the Business from and after the
Effective Time to the Closing Date. If and to the extent that
any items are inadvertently omitted from Exhibit A-1, such items
shall be, for all purposes of this Agreement, the Charter
Coinsurance Agreement, Charter Reinsurance Agreement, and ILIC
Coinsurance Agreement, deemed to have been included therein. On
the Closing Date, Buyer and Buyer Subsidiary shall pay, in the
aggregate, that amount shown on Exhibit A-1 as "Total Cash Due
Sellers at Closing" (the "Closing Payment") by wire transfer of
immediately available funds to such account or accounts as
Sellers shall have designated at least two days prior to the
Closing Date.
SECTION 1.4 Post-Closing Adjustment. As promptly as
practicable after Closing (but in no event more than 30 days
thereafter), Sellers shall recalculate each item under the "Post
Effective Time Cash Flows" on Exhibit A-1 for the period
beginning with the first day of the quarter in which the Closing
took place through the Closing Date (the "Adjustment Period").
Once the total of such items (as provided for in Exhibit A-1) has
been calculated, Sellers shall send an exhibit in the same form
as Exhibit A-1 for the Adjustment Period to Buyer, Buyer shall
have five business days to review Sellers' calculation.
Following such review period, Buyer and Buyer Subsidiary or
Sellers (as applicable) shall pay the total amount due for the
Adjustment Period to the appropriate party by wire transfer of
immediately available funds to such account or accounts as Buyer
and Buyer Subsidiary or Sellers (as applicable) shall have
designated.
SECTION 1.5 Closing.
(a) The closing of the transactions contemplated by this
Agreement (the "Closing") will take place at the offices of Weil,
Gotshal & Manges, L.L.P., 767 Fifth Avenue, New York, New York
10153, at 10:00 a.m., local time on the later of (a) the last day
of the month in which the last remaining condition set forth in
ARTICLES V and VI hereof has been satisfied or waived, or (b)
such other date as Buyer and Sellers may agree upon in writing
(the "Closing Date").
(b) At the Closing, Buyer and Buyer Subsidiary shall (i)
pay the Closing Payment to Sellers by wire transfer of
immediately available funds to such accounts as Sellers specify
to Buyer and Buyer Subsidiary; and (ii) deliver to Sellers such
documents and instruments required to be delivered by Buyer and
Buyer Subsidiary under the terms of this Agreement (including
without limitation the documents described in Section 6.2
required to be executed and delivered by Buyer and Buyer
Subsidiary (the "Buyer Documents")).
(c) At the Closing, Sellers shall deliver to Buyer and
Buyer Subsidiary such documents and instruments required to be
delivered by Sellers under the terms of this Agreement (including
without limitation the documents described in Section 6.1
required to be executed and delivered by Sellers (the "Seller
Documents")).
ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF SELLERS
Each Seller, jointly and not severally, makes the following
representations and warranties to Buyer and Buyer Subsidiary:
SECTION 2.1 Organization and Good Standing. Sellers and
CNL are corporations duly organized, validly existing and in good
standing under the Laws (as defined below) of their respective
jurisdictions of incorporation. Sellers and CNL have all
requisite corporate power and authority to own, lease or
otherwise hold their respective assets and to conduct their
respective portions of the Business as presently conducted. Each
Seller and CNL is duly qualified as a foreign corporation and is
in good standing in each jurisdiction which its respective
ownership, lease or use of assets or property or conduct of
business makes such qualification necessary, except where the
failure to be so qualified does not have and cannot reasonably be
expected to have a Material Adverse Effect (as defined below).
As used in this Agreement, the term "Laws" shall mean all laws,
statutes, and regulations of the United States of America or any
state or commonwealth thereof. As used in this Agreement, the
term "Material Adverse Effect" shall mean a material adverse
effect on (i) the Business, (ii) the validity or enforceability
of this Agreement, or (iii) on Sellers' ability to perform their
respective obligations under this Agreement.
SECTION 2.2 Authorization of Agreement; Binding Obligation.
Sellers have all requisite corporate power and authority to
execute and deliver this Agreement and the Seller Documents and
to perform their obligations hereunder and thereunder. The
execution and delivery by Sellers of this Agreement and the
Seller Documents and the performance by Sellers of their
obligations hereunder and thereunder have been duly authorized by
all necessary corporate and stockholder action on the part of
Sellers. This Agreement has been (and the Seller Documents will
be) duly executed and delivered by duly authorized officers of
Sellers and, assuming the due execution and delivery of this
Agreement and the Seller Documents by the other parties hereto
and thereto, constitutes (and each of the Seller Documents will
constitute) valid and binding obligations of Sellers enforceable
against them in accordance with their respective terms, except to
the extent enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar Laws affecting
creditors' rights in general and subject to general principles of
equity (regardless of whether such enforceability is considered
in a proceeding in equity or at law).
SECTION 2.3 No Conflicts. The execution and delivery of
this Agreement and the Seller Documents by Sellers do not, and
the performance by Sellers of their obligations hereunder and
thereunder will not, (a) conflict with the articles or
certificate of incorporation or by-laws of any Seller, (b) except
as otherwise previously disclosed in writing to Buyer, conflict
with, result in any violation of, constitute a default (with or
without notice or lapse of time, or both) under, or give rise to
a right of termination, cancellation or acceleration under, any
contract, permit, order, judgment or decree to which any Seller
is a party other than those that individually or in the aggregate
with other such conflicts, violations, defaults, and rights of
termination, cancellation, and acceleration, do not have and
cannot reasonably be expected to have a Material Adverse Effect,
(c) subject to obtaining the approvals and making the filings
described on Schedule 2.3, constitute a violation of any Law
applicable to any Seller other than those that, individually or
in the aggregate with other such violations, do not have and
cannot reasonably be expected to have a Material Adverse Effect,
(d) require any Seller to obtain or make any consent, approval,
order or authorization of, or registration, declaration or filing
with, any domestic or foreign court, government, governmental
agency, authority, entity or instrumentality ("Governmental
Entity") or other person or entity (a "Person"), other than (i)
as described on Schedule 2.3 and (ii) those which the failure to
obtain, make, or give individually or in the aggregate with other
such failures do not have and cannot reasonably be expected to
have a Material Adverse Effect.
SECTION 2.4 Capitalization of CNL. The authorized capital
stock of CNL consists of 30,000 shares, all of which are
designated Common Stock. As of the date hereof, CNL has 10,000
shares of Common Stock issued and outstanding, all of which have
been validly issued, are fully paid and non-assessable and were
not issued in violation of any preemptive rights. There are no
options, warrants, calls, subscriptions, conversion or other
rights, agreements or commitments obligating CNL to issue any
additional shares of capital stock or any other securities
convertible into, exchangeable for or evidencing the right to
subscribe for any shares of capital stock of CNL.
SECTION 2.5 Title to Common Stock of CNL. Leucadia is the
holder of record and owns beneficially all of the shares of
Common Stock free and clear of any Liens.
SECTION 2.6 Licenses.
(a) Sellers and CNL own or hold all licenses,
permits and authorizations required in connection with the
conduct of their respective portions of the Business other than
those that the failure to own or hold individually or in the
aggregate with other such failures do not have and cannot
reasonably be expected to have a Material Adverse Effect.
(b) Sellers and CNL have complied with the material
terms and conditions of each license, permit and authorization
required in connection with the conduct of their respective
portions of the Business, and all such licenses, permits and
authorizations are valid, binding and in full force and effect.
(c) Charter has the right to use, free and clear of
any royalty or other payment obligations, claims of infringement
or alleged infringement or other liens, the Transferred Software
(as defined in Section 4.8); and none of the Sellers is in
conflict with or violation or infringement of, nor has any Seller
received any notice of any such conflict with or violation or
infringement of, any asserted rights of any other Person with
respect to the Transferred Software.
SECTION 2.7 Reinsurance. Set forth on Schedule 2.7 is a
list of all reinsurance agreements relating to all or any portion
of the Business. Each such reinsurance agreement is in full
force and effect and constitutes a legal, valid, and binding
obligation of each party thereto. Neither Seller has received
any notice, whether written or oral, of termination or intention
to terminate from any other party to such reinsurance agreements.
Neither Seller nor, to the best knowledge of Sellers, any other
party to such reinsurance agreements is in violation or breach of
or default under any such reinsurance agreements (or with or
without notice or lapse of time or both, would be in violation or
breach of or default under any such reinsurance agreements) other
than those violations, breaches, or defaults that individually or
in the aggregate with other such violations, breaches, or
defaults do not have and cannot reasonably be expected to have a
Material Adverse Effect.
SECTION 2.8 Litigation. There are no actions, suits,
investigations, arbitrations, or similar proceedings pending, or
(to the knowledge of Sellers) threatened, against any Seller or
CNL or any of their respective assets or properties, at law or in
equity, in, before, or by any Governmental Entity other than
actions, suits, investigations, arbitrations or proceedings that
individually or in the aggregate with other such actions, suits,
investigations, arbitrations or proceedings do not have and
cannot reasonably be expected to have a Material Adverse Effect.
There is no order, writ, judgment, injunction or decree
outstanding against any Seller or CNL or any of their respective
assets or properties other than orders, writs, judgments,
injunctions or decrees that individually or in the aggregate with
other such orders, writs, judgments, injunctions or decrees do
not have and cannot reasonably be expected to have a Material
Adverse Effect.
SECTION 2.9 Compliance with Laws. Sellers and CNL are not
in violation (or with or without notice or lapse of time or both,
would be in violation) of any Law, order, writ, judgment,
injunction or decree applicable to their respective business,
operations, affairs, assets or properties other than such
violations which individually or in the aggregate with other such
violations do not have and cannot reasonably be expected to have
a Material Adverse Effect.
SECTION 2.10 Seller Financial Statements. Sellers have
previously delivered or made available to Buyer true and complete
copies of the following:
(a) the annual statements for Charter and ILIC as
of and for the years ended December 31, 1995 and 1996; and
(b) the quarterly statements for Charter and ILIC
as of and for the quarters ended March 31, 1997, June 30, 1997,
and September 30, 1997.
Each such statement (i) was prepared in all material
respects in accordance with the accounting practices required or
permitted by the insurance regulatory authority in the applicable
state, consistently applied throughout the specified period and
in the comparable period in the immediately preceding year and
(ii) presents fairly in all material respects the financial
position of Charter or ILIC (as appropriate) as of the respective
dates thereof and the related summary of operations and changes
in capital and surplus and in cash flows of Charter or ILIC (as
appropriate) for and during the respective periods covered
thereby (subject, in the case of the quarterly statements, to
normal year-end adjustments).
SECTION 2.11 CNL Financial Statements.
(a) Sellers have previously delivered or made
available to Buyer true and complete copies of the CNL's audited
statements of financial condition as of December 31, 1995 and
1996, together with the related audited statements of income,
changes in stockholders' equity and cash flows for the calendar
years then ended. Each such statement (i) was prepared in all
material respects in accordance with generally accepted
accounting principles ("GAAP") consistently applied throughout
the specified period and in the comparable period in the
immediately preceding year and (ii) presents fairly in all
material respects the financial position of CNL as of the
respective dates thereof and the related results of operations
and changes in cash flows of CNL for and during the respective
periods covered thereby.
(b) Sellers have previously delivered or made
available to Buyer true and complete copies of CNL's unaudited
FOCUS Reports - Part II(A) containing statements of assets,
liabilities, and ownership equity as of March 31, 1997, June 30,
1997, and September 30, 1997, together with the related income
statements for the respective quarters ended on such dates. The
totals presented in the statements of assets, liabilities,
ownership equity, and income contained therein (i) were prepared
in all material respects in accordance with GAAP consistently
applied throughout the specified period and in the comparable
period in the immediately preceding year and (ii) present fairly
in all material respects the financial position of CNL as of the
respective dates thereof and the related results of operations of
CNL for and during the respective periods covered thereby.
SECTION 2.12 Material Changes. Except as disclosed in
Schedule 2.12 or as permitted or otherwise contemplated by this
Agreement, since September 30, 1997:
(a) there has not been, occurred, or arisen any
change, event (including without limitation any damage,
destruction, or loss, whether or not covered by insurance),
condition, circumstance, or development of any character other
than those that individually or in the aggregate with other such
changes, events, conditions, circumstances, and developments do
not have and cannot reasonably be expected to have a Material
Adverse Effect; and
(b) Sellers and CNL have conducted their respective
portions of the Business solely in the ordinary course of
business and consistent with past practice.
SECTION 2.13 Brokers' Fees and Commissions. None of
Sellers (or any of their respective directors, officers,
employees or agents) has employed any investment banker, broker
or finder in connection with the transactions contemplated
hereby.
SECTION 2.14 Tax Matters.
(a) Except as set forth on Schedule 2.14(a)(i),
Sellers have filed or caused to be filed, or will file or cause
to be filed on or prior to the Closing Date, all Tax Returns (as
defined in Section 2.14(c) below) that are required to be filed
by, or with respect to, any subsidiaries included with the
affiliated group that includes or included CNL on or prior to the
Closing Date (collectively, the "Seller Returns"); (ii) CNL has
filed or caused to be filed, or will file or cause to be filed on
or prior to the Closing Date, all Tax Returns that are required
to be filed by, or with respect to CNL on or prior to the Closing
Date (collectively, the "CNL Returns"); (iii) the Seller Returns
and CNL Returns are true, complete and accurate in all material
respects; (iv) all Taxes (as defined in Section 2.14(c) below)
due and payable by or with respect to CNL have been, or prior to
the Closing Date will be, timely paid or adequate reserves have
been or will have been established therefor; (v) there is no
claim, audit, action, suit, proceeding or investigation now
pending or, to the knowledge of Sellers, threatened against or
with respect to CNL with respect to any Tax for which CNL could
be liable; (vi) there are no requests for rulings or
determinations in respect of any Tax pending between CNL and any
taxing authority; (vii) CNL has not been a member of an
affiliated, consolidated, combined or unitary group other than
the one of which any of Sellers is the common parent; (viii) CNL
is not currently under any obligation to pay any amounts as a
result of being party, or having been a party, to any tax sharing
agreement other than the tax sharing agreement between Sellers
and CNL; (ix) to the knowledge of Sellers, there are no Liens for
Taxes upon the assets of CNL; (x) CNL will not be required to
include any adjustment in taxable income for any tax period
ending after the Closing Date under Section 481(c) of the
Internal Revenue Code of 1986, as amended (the "Code") (or any
similar provision of the Tax laws of any jurisdiction), as a
result of a change in method of accounting for a taxable period
ending before, or beginning before and ending after, the Closing
Date or pursuant to the provisions of any agreement entered into
with any taxing authority with regard to the Tax liability of
CNL; and (xi) all Taxes that CNL is required by Law to withhold
or collect have been duly withheld or collected, and have been
paid over to the appropriate authorities to the extent due and
payable.
(b) Except to the extent that the tax treatment of
any Policy is not materially less favorable than the tax
treatment of substantially similar products sold or offered by
other insurance companies, the tax treatment under the Code of
all Policies is and at all times has been the same to the
purchaser, policyholder or intended beneficiaries thereof as the
tax treatment under the Code for which such Policies were
purported to qualify or were treated as qualifying, and Sellers
have complied in all respects with all requirements of the Code
with respect to the Policies, including without limitation
withholding and reporting requirements. For purposes of this
Section 2.14(b), the provisions of the Code relating to the tax
treatment of such contracts shall include, but not be limited to,
Sections 72, 79, 101, 401, 408, 457, 818, 7702 and 7702A.
(c) For purposes of this Agreement, (i) the term
"Tax Return" means any return, declaration, report, claim for
refund, or information return or statement relating to Taxes
including any schedule or attachment thereto; and (ii) the term
"Taxes" means (A) any federal, foreign, state or local income,
business, alternative or add-on minimum tax, gross income, gross
receipts, sales, use, ad valorem, value added, transfer, transfer
gains, net worth, franchise, profits, license, withholding,
payroll, employment, salaries, interest, production, excise,
severance, stamp, occupation, premium, property (real or
personal), environmental or windfall profit tax, custom, duty or
other tax, governmental fee, or other like assessment or charge
of any kind whatsoever, together with any interest, penalty,
addition to tax, or additional amount imposed by any governmental
or taxing authority and (B) any liability of the relevant Person
or any subsidiary of the relevant Person for the payment of any
amounts of the type described in (i) as a result of being a
member of an affiliated, consolidated, combined or unitary group,
or being a party to any agreement or arrangement whereby
liability of the relevant Person or any subsidiary of the
relevant Person for payment of such amounts was determined or
taken into account with reference to the liability of any other
Person.
SECTION 2.15 CNL Closing Date Equity. On the Closing Date,
CNL will have net shareholders' equity (determined on a GAAP
basis) of not less than $250,000.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer makes the following representations and warranties to
each Seller:
SECTION 3.1 Organization and Qualification. Each of Buyer
and Buyer Subsidiary is a corporation duly organized, validly
existing and in good standing under the Laws of the jurisdiction
of its incorporation, with all requisite corporate power and
authority to own, lease and operate its properties and to carry
on its businesses as now being conducted. Each of Buyer and
Buyer Subsidiary is qualified or licensed to do business and is
in good standing in each jurisdiction in which the ownership or
leasing of property by it or the conduct of its business requires
such licensing or qualification, except where the failure to be
so qualified or licensed does not have and cannot reasonably be
expected to have a Buyer Material Adverse Effect (as defined
below). As used in this Agreement, the term "Buyer Material
Adverse Effect" shall mean a material adverse effect on (i) the
validity or enforceability of this Agreement or (ii) on Buyer's
and/or Buyer Subsidiary's ability to perform its obligations
under this Agreement
SECTION 3.2 Authorization of Agreement; Binding Obligation.
Each of Buyer and Buyer Subsidiary has all requisite corporate
power and authority to execute and deliver this Agreement and the
Buyer Documents to which it is a party and to perform its
obligations hereunder and thereunder. The execution and delivery
by Buyer and Buyer Subsidiary of this Agreement and the Buyer
Documents to which it is a party and the performance by it of its
obligations hereunder and thereunder have been duly authorized by
all necessary corporate action on the part of Buyer and Buyer
Subsidiary. This Agreement has been (and the Buyer Documents to
which it is a party will be) duly executed and delivered by Buyer
and Buyer Subsidiary and, assuming the due execution and delivery
of this Agreement and the Buyer Documents by the other parties
hereto and thereto, constitutes (and each of the Buyer Documents
to which it is a party will constitute) valid and binding
obligations of Buyer and Buyer Subsidiary, enforceable against
Buyer and Buyer Subsidiary in accordance with their terms, except
to the extent enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar Laws
affecting creditors' rights in general and subject to general
principles of equity (regardless of whether such enforceability
is considered in a proceeding in equity or at law).
SECTION 3.3 No Conflicts. The execution and delivery of
this Agreement and the Buyer Documents by Buyer and Buyer
Subsidiary do not, and the performance by Buyer and Buyer
Subsidiary of their respective obligations hereunder and
thereunder will not, (a) conflict with the articles or
certificate of incorporation or by-laws of Buyer or Buyer
Subsidiary, (b) conflict with, result in any violation of,
constitute a default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, cancellation
or acceleration under, any contract, permit, order, judgment or
decree to which Buyer or Buyer Subsidiary is a party other than
those which individually or in the aggregate with other such
conflicts, violations, defaults, and rights of termination,
cancellation, and acceleration do not have and cannot reasonably
be expected to have a Buyer Material Adverse Effect, (c) subject
to obtaining the approvals described on Schedule 3.3, constitute
a violation of any Law applicable to Buyer or Buyer Subsidiary,
other than violations which individually or in the aggregate with
other such violations do not have and cannot reasonably be
expected to have a Buyer Material Adverse Effect, (d) require
Buyer or Buyer Subsidiary to obtain or make any consent,
approval, order or authorization of, or registration, declaration
or filing with, any Governmental Entity or other Person, other
than (i) as described on Schedule 3.3 and (ii) those which the
failure to obtain, make, or give individually or in the aggregate
with other such failures do not have and cannot reasonably be
expected to have a Buyer Material Adverse Effect.
SECTION 3.4 Licenses.
(a) Each of Buyer and Buyer Subsidiary owns or
holds all licenses, permits and authorizations required in order
to perform its obligations under this Agreement and the Buyer
Documents to which it is a party other than those that the
failure to own or hold individually or in the aggregate with
other such failures do not have and cannot reasonably be expected
to have a Buyer Material Adverse Effect.
(b) Each of Buyer and Buyer Subsidiary has complied
with the material terms and conditions of each license, permit
and authorization required in order to perform its obligations
under this Agreement and the Buyer Documents to which it is a
party, and all such licenses, permits and authorizations are
valid, binding and in full force and effect.
SECTION 3.5 Brokers' Fees and Commissions. Except for
Global Reinsurance Intermediaries (all of the fees, expenses, and
other liabilities of which will be paid by Buyer), neither Buyer
nor Buyer Subsidiary nor any of their respective directors,
officers, employees or agents has employed any investment banker,
broker or finder in connection with the transactions contemplated
hereby.
SECTION 3.6 Litigation. There are no actions, suits,
investigations, arbitrations, or similar proceedings pending, or
(to the knowledge of Buyer or Buyer Subsidiary) threatened,
against Buyer or Buyer Subsidiary or any of their respective
assets or properties, at law or in equity, in, before, or by any
Governmental Entity other than actions, suits, investigations,
arbitrations, or proceedings that individually or in the
aggregate with other such actions, suits, investigations,
arbitrations, and proceedings do not have and cannot reasonably
be expected to have a Buyer Material Adverse Effect. There is no
order, writ, judgment, injunction or decree outstanding against
Buyer or Buyer Subsidiary or any of their respective assets or
properties other than orders, writs, judgments, injunctions or
decrees that individually or in the aggregate with other such
orders, writs, judgments, injunctions or decrees do not have and
cannot reasonably be expected to have a Buyer Material Adverse
Effect.
SECTION 3.7 Compliance with Laws. Neither Buyer nor Buyer
Subsidiary is in violation (or with or without notice or lapse of
time or both, would be in violation) of any Law, order, writ,
judgment, injunction or decree applicable to its business,
operations, affairs, assets or properties other than such
violations which individually or in the aggregate with other such
violations do not have and cannot reasonably be expected to have
a Buyer Material Adverse Effect.
SECTION 3.8 Certain Agreements. Buyer has received and
reviewed (i) the Marketing and Solicitation Agreement dated
September 30, 1988 by and among Scudder Fund Distributors, Inc.
("Scudder"), Charter, Charter National Variable Annuities Account
and CNL and (ii) the Marketing and Solicitation Agreement dated
October 25, 1989 by and among Scudder, ILIC, ILIC Variable
Annuities Account and CNL (collectively, the "Scudder
Agreements"). Buyer understands and acknowledges that the
services under the Scudder Agreements are not exclusive and that
each party thereunder is free to render similar services to
others. In addition, Buyer understands and acknowledges that the
Scudder Agreements (i) are not assignable without the consent of
the parties thereto and (ii) may be terminated by Scudder,
Charter, or ILIC at any time upon 90 days written notice.
Buyer has also received and reviewed (i) the
Participation Agreement dated September 3, 1993 by and between
Scudder Variable Life Investment Fund (the "Fund Organization")
and Charter and (ii) the Participation Agreement dated May 11,
1994 by and between the Fund Organization and ILIC (collectively,
the "Participation Agreements"). Buyer understands and
acknowledges that the Participation Agreements (i) are not
assignable without the consent of the parties thereto and (ii)
may be terminated by any of the parties thereto at any time upon
120 days written notice.
ARTICLE IV.
COVENANTS
Each of the parties hereto covenants and agrees that it
shall comply with all covenants and provisions of this ARTICLE IV
applicable to it, except to the extent (i) Buyer may otherwise
consent in writing, (ii) otherwise required by applicable Law, or
(iii) otherwise required or permitted by this Agreement.
SECTION 4.1 Access to Information. Prior to the Closing,
Charter and ILIC will (and Leucadia will cause CNL to) provide to
the officers, employees, attorneys, accountants and other
representatives of Buyer full access during normal business hours
to the employees, agents, facilities and books and records of
such entities reasonably related to this Agreement and the
transactions contemplated hereby. Buyer will be permitted to
make copies of such books and records at Buyer's sole expense as
may be reasonably necessary in connection therewith.
SECTION 4.2 Conduct of Business. Except as otherwise
provided by this Agreement, during the period from the date of
this Agreement and continuing until the Closing Date:
(a) Charter and ILIC shall carry on their
respective portions of the Business in the usual, regular and
ordinary course as presently conducted and consistent with past
practice;
(b) Charter and ILIC shall use all commercially
reasonable efforts to (i) maintain in full force and effect all
licenses, permits and authorizations necessary to conduct their
respective portions of the Business, (ii) keep available the
services of the present employees of their respective portions of
the Business, and (iii) maintain the goodwill associated with
their respective portions of the Business, including but not
limited to preserving the relationships with policyholders,
agents, suppliers and others having business dealings with
Charter and ILIC;
(c) Charter and ILIC shall refrain from taking any
action to terminate the Scudder Agreements or the Fund
Distribution Agreements; and
(d) Leucadia shall cause CNL to refrain from (i)
paying any dividends or other distributions to Leucadia
(provided, however, that Leucadia may cause CNL to pay one or
more dividends to Leucadia at or prior to the Closing so long as
CNL's shareholders' equity (determined in accordance with GAAP)
on the Closing Date is not less than $250,000) or (ii) entering
into any agreements of any kind outside of the ordinary usual,
regular and ordinary course of business as presently conducted
and consistent with past practice.
SECTION 4.3 Consents. Each party hereto will (a) use all
commercially reasonable efforts to obtain before Closing all
consents, approvals, orders and authorizations of (and prepare
and submit all filings and notifications to) every Governmental
Entity and other Person necessary for such party to perform its
obligations hereunder; and (b) cooperate with the other parties
hereto in obtaining before Closing all consents, approvals,
orders and authorizations of (and preparing and submitting all
filings and notifications to) every Governmental Entity and other
Person necessary for such other parties to perform their
obligations hereunder.
SECTION 4.4 Public Announcements and Employee
Communications. At all times prior to the Closing Date, Buyer
and Sellers will consult with each other and will mutually agree
(the agreement of each party not to be unreasonably withheld)
upon the content and timing of any press release or any written
or oral communication with employees with respect to the
Transaction, and shall not issue any such press release or
employee communication prior to such consultation and agreement,
except as may be required by applicable Law or by obligations
pursuant to any listing agreement with any securities exchange or
any stock exchange regulations; provided, however, that, if
possible, Buyer and Sellers will give prior notice to the other
party as promptly as practicable under the circumstances of the
content and timing of any such press release or employee
communication required by applicable Law or by obligations
pursuant to any listing agreement with any securities exchange or
any stock exchange regulations.
SECTION 4.5 Disclosure Supplements. From time to time
prior to the Closing, each of the parties hereto will supplement
or amend the schedules delivered in connection herewith with
respect to any matter which, if existing or occurring at or prior
to the date of this Agreement, would have been required to be set
forth or described in any such schedule or which is necessary to
correct any information in such schedule which has been rendered
inaccurate thereby. If the Closing occurs, Buyer waives any
right or claim it may otherwise have or have had on account of
any matter so disclosed in such supplement or amendment.
SECTION 4.6 Financial Statements.
(a) As promptly as practicable until the Closing
Date, Sellers shall deliver to Buyer true and complete copies of
(i) the annual statement filed by Charter and ILIC with their
respective states of domicile for the year ended December 31,
1997; and (ii) each quarterly statement filed by Charter and ILIC
with their respective states of domicile for calendar quarters
ended after December 31, 1997. Each such statement will be
prepared in all material respects in accordance with the
accounting practices required or permitted by the insurance
regulatory authority in the applicable state, consistently
applied throughout the specified period and in the comparable
period in the immediately preceding year.
(b) As promptly as practicable until the Closing
Date, Sellers shall deliver to Buyer true and complete copies of
CNL's audited statement of financial condition as of December 31,
1997, together with the related audited statements of income,
changes in stockholders' equity and cash flows for the calendar
year then ended. Such statement will be prepared in all material
respects in accordance with GAAP consistently applied throughout
the specified period and in the comparable period in the
immediately preceding year.
(c) As promptly as practicable until the Closing
Date, Sellers shall deliver to Buyer true and complete copies of
CNL's unaudited FOCUS Reports - Part II(A) containing statements
of assets, liabilities, and ownership equity as of the last day
of each calendar quarter after December 31, 1997, together with
the related income statements for the respective quarters ended
on such dates.
SECTION 4.7 Administration.
(a) Administration of the Business. From and after
the Closing Date, Buyer and Buyer Subsidiary shall administer the
Business pursuant to and in accordance with the terms of the
Charter Administrative Services Agreement and the ILIC
Administrative Services Agreement, respectively. At the Closing,
in accordance with Section 1.3 above, Buyer and Buyer Subsidiary
shall pay Sellers an amount of cash equal to the sum of all
expenses incurred by Sellers for costs relating to Sellers'
operations conducted at the Facility and for all amounts paid to
third parties in administering the Business, in each case from
the Effective Time through the end of the last quarter preceding
the Closing Date (collectively, "Administrative Expenses"). The
term "Administrative Expenses" shall include without limitation
the following expense categories: employee benefits, payroll,
taxes, rent, supplies and other overhead expenses.
(b) Employee Matters. (i) Effective as of the
Closing, (x) Buyer shall offer employment to the employees of
Sellers identified on Schedule 4.7 (the "Employees") at annual
salaries not less than those identified on such schedule and (y)
Buyer shall grant or make available (as appropriate) to such
Employees all employee benefits granted or made available to
other employees of Buyer employed in comparable positions at
comparable locations; (ii) on or before February 18, 1998, Buyer
will give each of the Employees individual letters detailing (x)
the severance program for such Employee, which for the two
Employees identified on Schedule 4.7 with an asterisk (the
"Identified Employees") will at least equal 26 weeks of
severance, and which for each of the other Employees shall not
exceed two weeks of severance for each year of service as an
employee of Charter or Buyer, and (y) the terms of a retention
bonus for each such Employee which shall be mutually acceptable
to Buyer and Sellers; (iii) Sellers shall be responsible for all
items listed on the May 5, 1997 letter to each of the Identified
Employees (previously provided to Buyer), other than the
severance provisions outlined in the first bullet point of each
such letter for which Buyer's severance program shall be
substituted; and (iv) in no event shall Buyer be liable or
responsible for accrued liabilities under any of Seller's
employee benefit plans. Nothing in this Agreement shall be
construed as limiting in any way the rights of Buyer as the
employer of the Employees on and after the Closing Date,
including, but not limited to the right to change salary or wages
or to modify benefits or other terms and conditions of employment
of Employees to the extent that any such changes are done in
accordance with Buyer's normal practices and to the further
extent that any modification to benefits or other terms and
conditions of employment of any Employee apply generally to
employees of Buyer.
(c) Facility Matters. At Closing, Buyer shall
assume from Charter, and Charter shall assign to Buyer, all of
Charter's rights and obligations under that certain lease
agreement, dated April 1, 1994, between Kupper Parker Properties,
Inc. and Charter (as amended through the Closing Date) relating
to Charter's offices at 8301 Maryland Avenue, Clayton, Missouri
63105 (the "Facility").
(d) Sale of Facility Assets. At the Closing, Buyer
shall purchase from Charter all of the furniture, fixtures, and
other assets located at the Facility and described on Schedule
4.7(d) (the "Facility Assets") at the net book value thereof
(determined in accordance with GAAP) as of December 31, 1997 (the
"Assets Payment"), the consideration for which will be paid
pursuant to Section 1.3.
(e) Transition Services. To the extent that
Sellers' Employees are reasonably able to perform such services,
Sellers shall provide to Buyer reasonable and normal services
relating to the effectuation of an orderly transition of the
operation and administration of the Business to Buyer (the
"Transition Services"). To the extent that Sellers' employees
are not reasonably able to perform Transition Services requested
by Buyer, Sellers shall promptly offer to arrange for the
provision of such Transition Services by one or more third
parties (a "Third Party Provider"). Such offer shall be made by
means of a written notice to Buyer indicating the estimated fees
and expenses of such Third Party Provider to perform such
services. Should Buyer respond in writing to Sellers that Buyer
desires the Third Party Provider to provide such services,
Sellers shall arrange for the provision of such services by the
Third Party Provider and Buyer shall be solely responsible for
all fees, expenses, and other costs of such Third Party Provider.
In addition, prior to the Closing Date, Sellers shall provide to
Buyer copies of all policy forms, and all other related forms,
including drafts and check stock, used by Sellers in its
administration of the Reinsured Policies.
Buyer agrees to provide reasonable expense
reimbursement to Sellers in the event that Sellers are requested
by Buyer to provide services beyond the reasonable and normal
Transition Services described in Section 2(e) above, such
reimbursement to be negotiated by the parties in advance which
shall be reasonable and customary under industry standards. In
addition, Buyer shall reimburse Sellers for any amounts paid by
Sellers to Third Party Providers in connection with Section 2(e)
above.
If and to the extent that Buyer requests that Sellers
perform Transition Services, on or before the 15th day of each
month, Sellers shall provide Buyer with a reasonably detailed
invoice setting forth amounts due from Buyer with respect to
Transition Services provided hereunder during the immediately
preceding month. Within ten business days after receipt by Buyer
of each such invoice, Buyer shall pay to Sellers in cash the
amounts reflected on such invoice to the extent that such amounts
have not already been paid to Sellers.
SECTION 4.8 Transfer of Software Licenses. At Closing,
Charter shall assign and transfer to Buyer, and Buyer shall
assume from Charter, all of Charter's right, title, and interest
in and to the software licenses described on Schedule 4.8 hereto
(the "Transferred Software").
SECTION 4.9 Termination and Recapture of Reinsurance. From
and after the Closing Date, Sellers shall use all commercially
reasonable efforts to terminate all reinsurance agreements
relating to the Business and recapture all policy liabilities
thereunder (other than the Charter Coinsurance Agreement, Charter
Reinsurance Agreement, and ILIC Coinsurance Agreement).
Notwithstanding the foregoing, Sellers shall not be obligated to
terminate any reinsurance agreement if the costs and expenses
associated with such termination, together with the costs and
expenses associated with all other such terminations, is
reasonably estimated to exceed 10% of the reinsurance reserve
credits under such reinsurance agreements. Buyer shall reimburse
Sellers for any costs and expenses incurred by Sellers in
connection with such terminations, but in no event shall such
costs and expenses exceed 10% of the reinsurance reserve credits
under such reinsurance agreements. Upon termination of each such
reinsurance agreement, Buyer shall reinsure (pursuant to and in
accordance with the Charter Coinsurance Agreement and the Charter
Reinsurance Agreement) all obligations under the portions of the
Business that were covered by such agreement. To the extent that
Sellers are unable to terminate any such reinsurance agreement on
or before the first anniversary of the Closing Date, Sellers
shall use all commercially reasonable efforts to assign all of
Sellers' rights and obligations under such reinsurance agreement
to Buyer. To the extent that any termination or recapture
amounts are paid to Sellers as a result of any termination or
recapture effected pursuant to this Section 4.9, Sellers shall
promptly pay such amounts to Buyer.
SECTION 4.10 New Policies. Pursuant to and in accordance
with the Charter Coinsurance Agreement, Charter will, at Buyer's
request, continue to underwrite and issue new annuity contracts
at and after the Closing Date to residents of certain states
until the earlier to occur of (i) 90 days after receipt by
Charter of a written notice from Buyer requesting that Charter
cease underwriting and issuing such contracts or (ii) the third
anniversary of the Closing Date. Pursuant to and in accordance
with the ILIC Coinsurance Agreement, ILIC will, at Buyer
Subsidiary's request, continue to underwrite and issue new
annuity contracts at and after the Closing Date to residents of
the State of New York until the earlier to occur of (i) 90 days
after receipt by ILIC of a written notice from Buyer Subsidiary
requesting that ILIC cease underwriting and issuing such
contracts or (ii) the third anniversary of the Closing Date.
SECTION 4.11 Scudder and Participation Agreements. The
parties agree that: (i) neither the Scudder Agreements nor the
Participation Agreements will be assigned to Buyer or Buyer
Subsidiary and (ii) under the Administrative Services Agreements,
Buyer and Buyer Subsidiary shall administer, perform and enforce
the Scudder Agreements and the Participation Agreements, insofar
as they relate to the Business, on behalf of Sellers, and will
bear the cost of such administration, performance and
enforcement. Buyer shall have the right to cause Sellers to
effect the termination of any Scudder Agreement and/or
Participation Agreement and/or to enter into new marketing and/or
participation agreements relating to the Business or underlying
funding media for the Separate Accounts. Any such termination
shall be on terms and conditions acceptable to Buyer at no cost
to Sellers. Without the prior written consent of Buyer, Sellers
shall not agree to any amendment or termination of any of the
Scudder Agreements or Participation Agreements or any other
agreements or arrangements with Scudder or the Fund Organization.
SECTION 4.12 Principal Underwriter Agreements. Immediately
after Closing, Buyer shall cause CNL to enter into, and Sellers
shall enter into, any agreements (the "New CNL Underwriter
Agreements") between CNL and Sellers that are required for CNL to
perform, commencing on the Closing Date, the functions of a
principal underwriter (as such term is defined in the Investment
Company Act of 1940, as amended, together with related rules,
regulations, interpretations, and releases thereunder) of the
Policies and any New Policies sold pursuant to the Charter
Coinsurance Agreement and the ILIC Coinsurance Agreement. Any
such agreements shall contain terms substantially similar to
those contained in the Principal Underwriter Agreements to which
CNL is currently a party with Charter and ILIC.
SECTION 4.13 Disclosure. Buyer and Sellers shall (i) draft
disclosure materials describing the transactions contemplated by
this Agreement to be distributed to policyholders and
contractholders of Charter and ILIC in accordance with applicable
Law and (ii) ensure that such materials are finalized by the
Closing Date. As promptly as practicable after the Closing Date
(but in no event more than 10 Business Days thereafter), Buyer
and Buyer Subsidiary shall distribute such materials by first
class U.S. mail to all holders of insurance policies and annuity
contracts constituting part of the Business. In addition to the
foregoing, Buyer, Buyer Subsidiary and Sellers shall draft post
effective amendments to the registration statements as may be
necessary for the Policies describing the transactions
contemplated by this Agreement. Such post effective amendments
shall include as exhibits material documents relating to the
Transaction, including the Charter Coinsurance Agreement, the
Charter Reinsurance Agreement, the Charter Administrative
Services Agreement, the ILIC Coinsurance Agreement, and the ILIC
Administrative Services Agreement.
SECTION 4.14 Post-Closing Form BD. As promptly as
practicable following the Closing Date (but in any event within
the time prescribed therefor by applicable requirements of the
National Association of Securities Dealers ("NASD")), Buyer shall
cause CNL to file an amended FORM BD for CNL with the NASD
reflecting the change in ownership of CNL resulting from the
consummation of the transactions contemplated by this Agreement.
SECTION 4.15 Cooperation; Contest. From and after the
Closing Date, each of Sellers and Buyer agrees to provide or
cause its affiliates to provide at no cost and within a
reasonable time any information reasonably necessary for the
preparation of any Tax Returns or for addressing any audit
issues. Each of Sellers, on the one hand, and Buyer, on the
other hand, shall promptly notify the other (the "Other Party")
in the event it becomes aware of any claim, audit, examination or
proceeding relating to any Tax for which the Other Party would be
responsible under the terms of this contract. The Other Party
shall control every aspect of any such claim, examination or
proceeding, including the contest, disposition and settlement
thereof.
SECTION 4.16 Other Tax Matters. Without limiting the
generality of Section 10.4 below, Buyer shall promptly notify
Sellers of any claim, audit, examination, or proceeding of which
it becomes aware relating to the matters described in Section
2.14 above. Responses to any such claim, audit, examination, or
proceeding shall be subject to the prior review and approval of
Sellers. Sellers shall file (or prior to the Closing Date cause
CNL to file) (i) all federal tax returns for CNL for the period
commencing on the Effective Time and ending on the Closing Date
and (ii) all other tax returns for CNL that are required to be
filed prior to the Closing Date. From and after the Closing
Date, Buyer shall file (or cause CNL to file) all other tax
returns for CNL that are required to be filed on and after the
Closing Date. Sellers and Buyer shall cooperate fully with each
other and make available to each other in a timely fashion such
Tax data and other information as may be reasonably required by
Sellers or Buyer in connection with the preparation or filing of
any Tax Return and any audit, claim, examination, or proceeding
in respect of Taxes.
SECTION 4.17 Transfer of Administration. From and after
the date hereof, Buyer and Sellers shall use all commercially
reasonable efforts to (i) set up in the Facility information
systems of Buyer to be used in providing administrative services
under the Charter Administrative Services Agreement and the ILIC
Administrative Services Agreement and (ii) transfer all data
necessary to administer the Business to such information systems.
SECTION 4.18 Interim Administrative Platform. If the
Closing does not occur on or before the date of termination of
Charter's temporary license (the "Continuum License") with CSC
Continuum, Inc., as such may, at Buyer's sole expense, be (i)
extended beyond June 30, 1998, (ii) modified or (iii) replaced
with a permanent license or another temporary license, in each
case upon consultation with Buyer (the "Expiration Date"), from
and after the Expiration Date until the Closing Date, Buyer shall
provide, to the extent permitted under Buyer's licenses (at
Buyer's sole cost and expense), all software and information
systems which, together with the Transferred Software, will
enable Sellers to continue to administer the Business during such
period in compliance with applicable Law and Sellers'
administrative practices in effect as of the date hereof
(collectively, the "Interim Administrative Platform"). Buyer
shall make such software and information systems available to
Sellers at the Facility. In the event that this Agreement is
terminated for any reason, Buyer shall (i) continue to provide
the Interim Administrative Platform to Sellers for a period of
one year following the termination of this Agreement, (ii) assist
and cooperate with Sellers to effectuate a prompt and orderly
transfer to Sellers or its designee(s) of all data and other
materials transferred to the Interim Administrative Platform
pursuant to this Section and Section 4.17, and (iii) otherwise
assist and cooperate with Sellers in transitioning the
administration of the Business from the Interim Administrative
Platform to a platform of Sellers' choice. In the event that
this Agreement is terminated for any reason, Sellers shall (i)
pay Buyer an aggregate fee of $10,000 per month for each month
from the Expiration Date through the first anniversary of the
termination of this Agreement and (ii) reimburse Buyer for any
reasonable out-of-pocket costs and expenses incurred by Buyer in
connection with such transition.
If Buyer is unable to provide the Interim
Administrative Platform under Buyer's software licenses then in
effect, from and after the Expiration Date to the Closing Date
(or, if this Agreement shall be terminated, from and after the
Expiration Date to the first anniversary of the date of
termination of this Agreement), Buyer shall pay all costs of
obtaining licenses necessary to permit Sellers to continue to
administer the Business in compliance with applicable Law and
Sellers' administrative practices in effect on the date hereof.
SECTION 4.19 Books and Records. On the Closing Date,
Sellers will deliver to Buyer all books and records of CNL. If
(at any time after the Closing) any of Sellers discovers in its
possession or under its control any other books and records of
CNL, such Seller will promptly deliver such books and records to
Buyer.
SECTION 4.20 CNL True-Up. Within 30 days after the Closing
Date, either (i) Buyer shall pay Leucadia an amount of cash equal
to the excess of the net shareholders' equity (determined on a
GAAP basis) of CNL as of the Closing Date over $250,000 or (ii)
Leucadia shall pay Buyer an amount of cash equal to the
deficiency of the net shareholders' equity (determined on a GAAP
basis) of CNL as of the Closing Date under $250,000.
ARTICLE V.
CONDITIONS TO CLOSING
SECTION 5.1 Conditions Precedent to Obligations of Buyer
and Buyer Subsidiary. The obligations of Buyer and Buyer
Subsidiary under this Agreement to consummate the transactions
contemplated hereby will be subject to the satisfaction, at or
prior to Closing, of all of the following conditions, any one or
more of which may be waived in whole or in part at the option of
Buyer:
(a) Representations, Warranties and Covenants.
(i) All representations and warranties of Sellers
contained in this Agreement (or in any exhibit, schedule,
certificate or document delivered pursuant to this Agreement)
that are qualified as to materiality shall be true and correct
and all representations and warranties of Sellers made in this
Agreement (or in any exhibit, schedule, certificate or document
delivered pursuant to this Agreement) that are not so qualified
shall be true and complete in all material respects, in each case
as of the date hereof and on and as of the Closing Date as if
made on and as of the Closing Date (except to the extent that
they expressly relate only to an earlier time, in which case they
shall have been true and complete as of such earlier time).
(ii) All of the terms, covenants and conditions
to be complied with and performed by Sellers on or prior to the
Closing Date shall have been complied with or performed in all
materials respects.
(iii) Buyer and Buyer Subsidiary shall have
received a certificate, dated as of the Closing Date, executed by
Sellers, certifying that the conditions specified in Sections
5.1(a)(i) and (ii) have been satisfied.
(b) Closing Documents. Sellers shall have executed
and delivered the Seller Documents.
(c) No Injunction. There shall not be in effect on
the Closing Date any writ, judgment, injunction, decree, or
similar order of any court or governmental or regulatory
authority restraining, enjoining, or otherwise preventing
consummation of any of the transactions contemplated by this
Agreement in accordance with the terms of this Agreement.
(d) Consents. The consents, approvals, orders,
authorizations, filings, and notifications described on Schedules
2.3 and 3.3 shall have been obtained or made.
(e) Scudder Agreements. Buyer and Scudder and
Buyer Subsidiary and Scudder shall have entered into marketing
and solicitation agreements in form and substance reasonably
satisfactory to Buyer.
(f) Termination of Tax Allocation Agreement. Any
tax allocation or tax sharing agreement that may have been
entered into by CNL,Inc. shall be terminated as of the Closing
Date.
SECTION 5.2 Conditions Precedent to Obligations of Sellers.
The obligations of Sellers under this Agreement to consummate the
transactions contemplated hereby will be subject to the
satisfaction, at or prior to the Closing, of all the following
conditions, any one or more of which may be waived at the option
of Sellers:
(a) Representations, Warranties and Covenants.
(i) All representations and warranties of Buyer
contained in this Agreement (or in any exhibit, schedule,
certificate or document delivered pursuant to this Agreement)
that are qualified as to materiality shall be true and correct
and all representations and warranties of Buyer made in this
Agreement (or in any exhibit, schedule, certificate or document
delivered pursuant to this Agreement) that are not so qualified
shall be true and complete in all material respects, in each case
as of the date hereof and on and as of the Closing Date as if
made on and as of the Closing Date (except to the extent that
they expressly relate only to an earlier time, in which case they
shall have been true and complete as of such earlier time).
(ii) All of the terms, covenants and conditions
to be complied with and performed by Buyer and Buyer Subsidiary
on or prior to the Closing Date shall have been complied with or
performed in all material respects.
(iii) Sellers shall have received a certificate,
dated as of the Closing Date, executed by Buyer, certifying that
the conditions specified in Sections 5.2(a)(i) and (ii) have been
satisfied.
(b) Closing Documents. Each of Buyer and Buyer
Subsidiary shall have executed and delivered the Buyer Documents
to which it is a party.
(c) No Injunction. There shall not be in effect on
the Closing Date any writ, judgment, injunction, decree, or
similar order of any court or governmental or regulatory
authority restraining, enjoining, or otherwise preventing
consummation of any of the transactions contemplated by this
Agreement in accordance with the terms of this Agreement.
(d) Consents. The consents, approvals, orders,
authorizations, filings, and notifications described on Schedules
2.3 and 3.3 shall have been obtained or made.
ARTICLE VI
DOCUMENTS TO BE DELIVERED AT THE CLOSING
SECTION 6.1 Documents to be Delivered by Sellers. At the
Closing, Sellers shall deliver to Buyer and Buyer Subsidiary, as
applicable, the following:
(a) Officer's Certificate. The certificate, dated
the Closing Date, duly executed by Sellers as required by Section
5.1(a)(iii).
(b) Stock Certificates. A certificate or
certificates representing all the shares of Common Stock in
appropriate form for transfer to Buyer or accompanied by stock
powers duly executed in blank.
(c) Charter Coinsurance Agreement. A coinsurance
agreement, in the form attached hereto as Exhibit B (the "Charter
Coinsurance Agreement"), duly executed by Charter.
(d) Charter Reinsurance Agreement. A reinsurance
agreement, in the form attached hereto as Exhibit C (the "Charter
Reinsurance Agreement"), duly executed by Charter.
(e) Charter Administrative Services Agreement. An
administrative services agreement, in the form attached hereto as
Exhibit D (the "Charter Administrative Services Agreement"), duly
executed by Charter.
(f) ILIC Coinsurance Agreement. A coinsurance
agreement, in the form attached hereto as Exhibit E (the "ILIC
Coinsurance Agreement"), duly executed by ILIC.
(g) ILIC Administrative Services Agreement. An
administrative services agreement, in the form attached hereto as
Exhibit F (the "ILIC Administrative Services Agreement"), duly
executed by ILIC.
(h) Evidence of Approvals. Evidence of receipt of
the consents and approvals described on Schedule 2.3 and Section
4.3.
(i) Bill of Sale. A bill of sale in a form
mutually acceptable to the parties hereto effecting the sale of
the Facility Assets to Buyer in exchange for the Assets Payment
pursuant to Section 4.7(d), duly executed by Charter.
SECTION 6.2 Documents to be Delivered by Buyer. At the
Closing, Buyer and Buyer Subsidiary, as applicable, will deliver
to Sellers the following:
(a) Closing Payment. Evidence of a wire transfer
in the amount of the Closing Payment in accordance with Section
1.3.
(b) Officer's Certificate. The certificate, dated
the Closing Date, duly by Buyer as required by Section
5.2(a)(iii).
(c) Other Buyer Documents. The Charter Coinsurance
Agreement, the Charter Reinsurance Agreement, and the Charter
Administrative Services Agreement, each duly executed by Buyer.
(d) Other Buyer Subsidiary Documents. The ILIC
Coinsurance Agreement and the ILIC Administrative Services
Agreement, each duly executed by Buyer Subsidiary.
(e) Evidence of Approvals. Evidence of receipt of
the consents and approvals described on Schedule 3.3 and Section
4.3.
ARTICLE VII.
TERMINATION AND ABANDONMENT
SECTION 7.1 Termination. This Agreement may be terminated
and the transactions contemplated hereby may be abandoned at any
time prior to the Closing:
(a) by mutual consent of Sellers and Buyer; or
(b) by any Seller or Buyer:
(i) if a court of competent jurisdiction or
Governmental Authority shall have issued an order, decree or
ruling or taken any other action (which order, decree or ruling
the parties hereto shall use their reasonable best efforts to
lift), in each case permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated by this
Agreement, and such order, decree, ruling or other action shall
have become final and nonappealable; or
(ii) if the Closing shall not have occurred on or
before September 30, 1998; provided, however, that (A) Sellers
shall have the right, in their sole discretion, to extend the
time period in this Section 7.1(b)(ii) for an additional 60 days
and (B) the right to terminate this Agreement shall not be
available to any party whose breach of this Agreement has been
the cause of, or resulted in, the failure of the Closing to occur
on or before such date.
SECTION 7.2 Procedure and Effect of Termination. In the
event of termination and abandonment of the transactions
contemplated hereby pursuant to Section 7.1, written notice
thereof shall be given to the other parties to this Agreement and
this Agreement shall terminate and the transactions contemplated
hereby shall be abandoned, without further action by any of the
parties hereto. If this Agreement is terminated as provided
herein:
(a) Upon request therefor, each party will
redeliver all documents, work papers and other material of any
other party relating to the transactions contemplated hereby,
whether obtained before or after the execution hereof, to the
party furnishing the same; and
(b) No party hereto shall have any liability or
further obligation to any other party to this Agreement resulting
from such termination except (i) that the provision of this
Section 7.2 and Sections 4.18, 11.4, 11.11 and 11.13 shall remain
in full force and effect, and (ii) no party waives any claim or
right against a breaching party to the extent that such
termination results from the breach by a party hereto of any of
its representations, warranties, covenants or agreements set
forth in this Agreement.
ARTICLE VIII.
NON-COMPETITION
SECTION 8.1 Non-Competition. In consideration of the
benefits of this Agreement to Leucadia and in order to induce
Buyer and Buyer Subsidiary to enter into this Agreement, Leucadia
hereby covenants and agrees that for a period of (a) three years
following the Closing Date neither Leucadia nor any of its
affiliates under actual control of Leucadia shall commence
selling any variable annuity contracts or variable life insurance
policies in the United States and (b) ten years following the
Closing Date, neither Leucadia nor any of its affiliates under
actual control of Leucadia will enter into any form of a
marketing and solicitation agreement with Scudder Kemper
Investments, Inc., Scudder Fund Distributors, Inc., Scudder
Variable Life Investment Fund, or any successor thereto for the
sale of variable annuity products and variable life insurance
products. Notwithstanding the foregoing, Leucadia retains the
right to acquire insurance companies that are not engaged
primarily in the business of offering variable annuity contracts
or variable life insurance policies. Leucadia specifically
agrees that this covenant is an integral part of the inducement
of Buyer to enter into this Agreement and that Buyer (or its
successor assigns) shall be entitled to injunctive relief in
addition to all other legal and equitable rights and remedies
available to it in connection with a breach by Leucadia or any of
its affiliates of any provision of this Section 8.1 and that,
notwithstanding the foregoing, no right, power or remedy
conferred upon or reserved or exercised by Buyer in this Section
8.1 is intended to be exclusive of any other right, power or
remedy, each and every one of which (now or hereafter existing at
law, in equity, by status or otherwise) shall be cumulative and
concurrent. Each of Leucadia and Buyer agrees that in the event
that either the length of time or area set forth herein is deemed
too restrictive by any governmental entity of competent
jurisdiction, the covenants and agreements in this Section 8.1
shall be enforceable for such time and within such geographical
area as such governmental entity may deem reasonable under the
circumstances.
ARTICLE IX.
SURVIVAL OF PROVISIONS
SECTION 9.1 Survival. The representations and warranties
required to be made by the Sellers and Buyer in this Agreement or
in any certificate delivered pursuant hereto will survive until
the second anniversary of the Closing Date, except that (i) the
representations and warranties of Sellers set forth in Sections
2.4, 2.5, 2.13, and 2.14 hereof will survive until 30 days after
the expiration of all statutes of limitation applicable to each
such Section and (ii) the representations and warranties of Buyer
set forth in Section 3.5 hereof will survive until 30 days after
the expiration of all statutes of limitation applicable to such
Section. Notwithstanding the foregoing, any representation or
warranty shall survive the time it would otherwise terminate
pursuant to this Section to the extent that notice of a breach
thereof giving rise to a right of indemnification shall have been
given by a party hereto prior to the expiration of the relevant
survival period in accordance with Article X below.
ARTICLE X.
INDEMNIFICATION
SECTION 10.1 Indemnification by Sellers. Subject to the
provisions of Sections 9.1, 10.3, and 10.4 hereof, the Sellers
shall indemnify and hold harmless Buyer and Buyer Subsidiary for
(a) any and all monetary damages, charges, losses, deficiencies,
liabilities, obligations, costs, fees, and expenses (including,
without limitation, reasonable fees and disbursements of counsel
incident to the enforcement of rights under Section 10.1 or 10.2
hereof) (collectively, "Damages") resulting from or relating to
any breach by the Sellers of any representation, warranty,
covenant, or agreement made by the Sellers in this Agreement,
(b)(i) any Taxes of CNL with respect to taxable periods ending on
or before the Closing Date; (ii) any Taxes imposed on or in
respect of CNL with respect to taxable periods including but not
ending on the Closing Date which are allocable to the portion of
such taxable period ending on the Closing Date; and (iii) any
Taxes imposed on or in respect of any corporation (other than any
Taxes imposed on CNL or Buyer or any affiliate of Buyer for any
Tax period) with which CNL filed a Tax Return on a combined or
consolidated basis for any taxable period that includes the
Closing Date, or that ends on, as of the close of or before the
Closing Date (including, without limitation, any Taxes for which
CNL would be liable pursuant to the provisions of Treasury
Regulation Section 1.1502-6), and (c) any Direct Economic Loss
(as defined below) suffered by Buyer as a result of the rejection
by Charter or ILIC of a recommendation of Buyer or Buyer
Subsidiary, as the case may be (a "Recommendation"), pursuant to
Article II(D) of the Charter Coinsurance Agreement, Article II(D)
of the ILIC Coinsurance Agreement or Article II(D) of the Charter
Reinsurance Agreement. Notwithstanding the foregoing, Sellers
shall have no liability under clause (c) above if (i) following
the Recommendation would create a violation of any applicable Law
(a "Violation"), (ii) following the Recommendation would cause a
breach of any Policy (a "Policy Breach"), or (iii) Buyer does not
cause to be delivered to Sellers (within 30 days after receipt by
Buyer of a request therefor based upon Sellers' good faith belief
that implementation of such Recommendation could result in a
Violation or a Policy Breach) an opinion of counsel reasonably
acceptable to Sellers to the effect that following the
Recommendation would neither create a Violation nor a Policy
Breach. The term "Direct Economic Loss" shall mean the amount
due to holders of Policies in respect of the period to which such
Recommendation relates in excess of the amount due to such
holders in respect of such period if Charter or ILIC (as
applicable) had followed such Recommendation.
SECTION 10.2 Indemnification by Buyer. Subject to the
provisions of Sections 9.1, 10.3, and 10.4 hereof, Buyer shall
indemnify and hold harmless each Seller (a) in respect of any and
all Damages resulting from or relating to any breach by Buyer of
any representation, warranty, covenant, or agreement made by
Buyer in this Agreement and (b)(i) any Taxes of CNL with respect
to taxable periods that begin on or after the Closing Date, and
(ii) any Taxes imposed on or in respect of CNL with respect to
taxable periods including but not ending on the Closing Date
which are allocable to the portion of such period beginning after
the Closing Date.
SECTION 10.3 Limitations on Indemnification.
(a) No claim by any Person for indemnification
under this Article X (an "Indemnitee") against any Person (an
"Indemnifying Party"), which claim relates to a breach of a
representation or warranty made in this Agreement, may be made
unless notice of such breach is given in accordance with this
Article X prior to the time the survival period for such
representation or warranty expired.
(b) Notwithstanding anything to the contrary
contained in this Agreement, (i) Sellers will not be liable under
any circumstances for indemnification under Section 10.1 hereof
in an aggregate amount in excess of $2,000,000 and (ii) Buyer
will not be liable under any circumstances for indemnification
under Section 10.2 hereof in an aggregate amount in excess of
$2,000,000.
(c) If an Indemnitee recovers from any third party
(including insurers) all or any part of any amount paid to it by
an Indemnifying Party pursuant to Section 10.1 or 10.2 hereof,
such Indemnitee will promptly pay over to the Indemnifying Party
the amount so recovered (after deducting therefrom the full
amount of the expenses incurred by it in procuring such recovery,
including any taxes and net of any tax benefit resulting from
such recovery and payment), but not in excess of any amount
previously so paid by the Indemnifying Party. If an Indemnitee
recovers from any third party (including insurers) any amount as
to which indemnification may be claimed pursuant to Section 10.1
or 10.2 hereof, such Indemnitee will have no right to claim
indemnification for such amount from the Indemnifying Party.
(d) The Indemnitee shall prosecute diligently and
in good faith any claim for indemnification with any applicable
third party (including insurers) prior to collecting any
indemnification payment pursuant to Section 10.1 or 10.2 hereof.
SECTION 10.4 Notice of Defense of Claims. Promptly after
receipt of notice of any claim or Damages for which an Indemnitee
seeks indemnification under this Article, such Indemnitee shall
give written notice thereof to the Indemnifying Party, but such
notification shall not be a condition to indemnification
hereunder except to the extent of actual prejudice to the
Indemnifying Party. The notice shall state the information then
available regarding the amount and nature of such claim or
Damages and shall specify the provision or provisions of this
Agreement under which the right to indemnification is asserted.
If within 30 days after receiving such notice the Indemnifying
Party gives written notice to the Indemnitee stating that it
intends to defend against such claim or Damages at its own cost
and expense, then defense of such matter, including selection of
counsel (subject to the consent of the Indemnitee which consent
shall not be unreasonably withheld), shall be by the Indemnifying
Party and the Indemnitee shall make no payment in respect of such
claim or Damages as long as the Indemnifying party is conducting
a good faith and diligent defense. Notwithstanding the
foregoing, the Indemnitee shall at all times have the right to
fully participate in such defense at its own expense directly or
through counsel; provided, however, if the named parties to the
action or proceeding include both the Indemnifying Party and the
Indemnitee and representation of both parties by the same counsel
would be inappropriate under applicable standards of professional
conduct, the expenses of one separate counsel for the Indemnitee
shall be paid by the Indemnifying Party. If no such notice of
intent to dispute and defend is given by the Indemnifying Party,
or if such diligent good faith defense is not being or ceases to
be conducted, the Indemnitee shall, at the expense of the
Indemnifying Party, undertake the defense of such claim or
Damages with counsel selected by the Indemnitee, and shall have
the right to compromise or settle the same exercising reasonable
business judgment with the consent of the Indemnifying Party,
which consent shall not be unreasonably withheld. The Indemnitee
shall make available all information and assistance that the
Indemnifying Party may reasonably request and shall cooperate
with the Indemnifying Party in such defense. Notwithstanding
anything herein to the contrary, the Indemnifying Party shall
have the right to settle all claims of third parties for which
indemnification is payable hereunder without the consent of the
Indemnitee so long as such settlement releases the Indemnitee
from all liability for or in connection with such action and does
not materially and adversely impair the ability of the Indemnitee
to carry on its business and does not contain any admission of
wrong doing on the part of the Indemnitee.
ARTICLE XI.
MISCELLANEOUS PROVISIONS
SECTION 11.1 Amendment and Modification. This Agreement
may be amended, modified or supplemented by a written instrument
signed by the parties hereto.
SECTION 11.2 Waiver of Compliance; Consents. Any failure
of Buyer or Buyer Subsidiary, on the one hand, or of Sellers on
the other hand, to comply with any obligation, covenant,
agreement or condition contained herein may be waived in writing
by Sellers or Buyer, respectively, but such waiver or failure to
insist upon strict compliance with such obligation, covenant,
agreement or condition shall not operate as a waiver of, or
estoppel with respect to, any other failure.
SECTION 11.3 Validity. The invalidity or unenforceability
of any provision of this Agreement shall not affect the validity
or enforceability of any other provisions of this Agreement,
which shall remain in full force and effect.
SECTION 11.4 Expenses and Obligations. All costs and
expenses incurred in connection with the consummation of the
transactions contemplated by this Agreement by Buyer or Buyer
Subsidiary shall be paid by Buyer or Buyer Subsidiary, and all
costs and expenses incurred in connection with the consummation
of the transactions contemplated by this Agreement by Sellers
shall be paid by Sellers.
SECTION 11.5 Notices. Any notice or other communication
given pursuant to this Agreement must be in writing and (a)
delivered personally, (b) sent by telefacsimile or other similar
facsimile transmission, (c) delivered by overnight express, or
(d) sent by registered or certified mail, postage prepaid, as
follows:
If to Buyer or Buyer Subsidiary, to:
Allstate Life Insurance Company
3075 Sanders Road, Suite G2H
Northbrook, Illinois 60062
Attention: James P. Zils
Facsimile No.: (847) 402-9116
with a copy to:
Allstate Insurance Company
2775 Sanders Road, Suite A8
Northbrook, Illinois 60062
Attention: Susan L. Lees
Facsimile No.: (847) 402-0158
If to Sellers, to:
Charter National Life Insurance Company
Intramerica Life Insurance Company
c/o Richard G. Petitt
Empire Insurance Group
122 Fifth Avenue
New York, New York 10011
Facsimile No.: (212) 387-2689
and to:
Leucadia National Corporation
315 Park Avenue South
New York, New York 10010
Attention: Joseph S. Steinberg, President
Facsimile No.: (212) 598-3245
with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Stephen E. Jacobs
Facsimile No.: (212) 310-8007
All notices and other communications required or permitted under
this Agreement that are addressed as provided in this Section
will (A) if delivered personally or by overnight express, be
deemed given upon delivery; (B) if delivered by telefacsimile or
similar facsimile transmission, be deemed given when
electronically confirmed; and (C) if sent by registered or
certified mail, be deemed given when received. Any party from
time to time may change its address for the purpose of notices to
that party by giving a similar notice specifying a new address,
but no such notice will be deemed to have been given until it is
actually received by the party sought to be charged with the
contents thereof.
SECTION 11.6 Governing Law. This Agreement shall be
governed by and construed in accordance with the Laws of the
State of New York.
SECTION 11.7 No Third Party Beneficiary. The terms and
provisions of this Agreement are intended solely for the benefit
of Sellers, Buyer, Buyer Subsidiary, and their respective
successors and permitted assigns, and it is not the intention of
the parties to confer third-party beneficiary rights upon any
other Person.
SECTION 11.8 Counterparts. This Agreement may be executed
in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the
same agreement.
SECTION 11.9 Headings. The article and section headings
contained in this Agreement are solely for the purpose of
reference, are not part of the agreement of the parties and shall
not affect in any way the meaning or interpretation of this
Agreement.
SECTION 11.10 Entire Agreement. This Agreement and the
exhibits and schedules attached hereto embody the entire
agreement and understanding of the parties hereto in respect of
the subject matter contained herein or therein. There are no
agreements, representations, warranties or covenants other than
those expressly set forth herein or therein. This Agreement and
the exhibits and schedules attached hereto supersede all prior
agreements and understandings between the parties with respect to
such subject matter.
SECTION 11.11 Assignment. Neither this Agreement nor any
right or obligation hereunder or part hereof may be assigned by
any party hereto without the prior written consent of the other
party hereto (and any attempt to do so will be void), except as
otherwise specifically provided herein.
SECTION 11.12 Jurisdiction and Venue. The parties hereto
agree that any suit, action or proceeding arising out of or
relating to this Agreement shall be instituted only in the County
of New York in the State of New York. Each party waives any
objection it may have now or hereafter to the laying of the venue
of any such suit, action or proceeding, and irrevocably submits
to the jurisdiction of any such court in any such suit, action or
proceeding.
SECTION 11.13 Confidentiality. Subject to Section 4.13
hereof, for the three years following the Effective Time, Buyer
shall refrain, and shall cause its officers, directors,
employees, agents, auditors, counsel, affiliates and other
representatives (collectively, "Representatives") to refrain,
from directly or indirectly:
(a) disclosing to any Person, other than
Representatives of Buyer or Buyer Subsidiary ("Buyer's
Representatives") the terms and conditions of this Agreement or
any records, files, documents, data (including without limitation
claims or loss data), or information concerning any of Sellers or
CNL or their respective affiliates that the Buyer or Buyer
Subsidiary prepares, maintains, uses, or receives in connection
with the transactions contemplated by this Agreement, unless (i)
disclosure is compelled by any court or administrative agency or
by other applicable requirements of law or (ii) such records,
files, documents, data, or information can be shown to have been
(x) generally available to the public other than as a result of a
disclosure by Buyer, Buyer Subsidiary or Buyer's Representatives
or (y) available to Buyer on a non-confidential basis from a
source other than Sellers or their Representatives, provided that
such source is not known by Buyer or Buyer Subsidiary to be bound
by a confidentiality agreement with, or other obligation of
secrecy of, any Seller or another party; or
(b) using such records, files, documents, data or
information for any purpose (including without limitation
directly or indirectly competing with Sellers or any affiliate
thereof) except pursuant to this Agreement.
Notwithstanding the foregoing, from and after the Closing
Date, Buyer and Buyer Subsidiary shall be entitled to use
information concerning, derived from, or related to the Business
for any lawful purpose in connection with the transaction of
Buyer's or Buyer Subsidiary's business under the Charter
Coinsurance Agreement, the Charter Reinsurance Agreement, and the
ILIC Coinsurance Agreement, provided that Buyer and Buyer
Subsidiary shall comply with all Laws applicable to the use of
such information (including, without limitation, Laws relating to
the use of such information that would otherwise be applicable to
Charter or ILIC, as applicable, as the issuers of the insurance
policies and annuity contracts constituting the Business).<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has
caused this Agreement to be signed on its behalf by its duly
authorized officers, all as of the day and year first above
written.
ALLSTATE LIFE INSURANCE COMPANY
By: /S/
James P. Zils
Treasurer
CHARTER NATIONAL LIFE INSURANCE
COMPANY
By: /S/
Richard G. Petitt,
Chairman and Chief Executive Officer
INTRAMERICA LIFE INSURANCE
COMPANY
By: /S/
Richard G. Petitt,
Chairman and Chief Executive Officer
LEUCADIA NATIONAL CORPORATION
By: /S/
Joseph A. Orlando,
Vice President and Chief Financial Officer
ALLSTATE LIFE INSURANCE COMPANY OF
NEW YORK
By: /S/
James P. Zils
Treasurer
DAFS01...:\30\76830\0137\1170\AGRD157T.55L
COINSURANCE AGREEMENT
THIS COINSURANCE AGREEMENT (this "Agreement"), dated as of
, 1998 (the "Closing Date"), is made by and between CHARTER NATIONAL
LIFE INSURANCE COMPANY, a Missouri stock insurance company (the "Company"),
and ALLSTATE LIFE INSURANCE COMPANY, an Illinois insurance company (the
"Reinsurer").
WHEREAS, the Company, the Reinsurer, Allstate Life Insurance
Company of New York, a New York insurance company, Intramerica Life
Insurance Company, a New York insurance company, and Leucadia National
Corporation, a New York corporation, have entered into that certain
Purchase Agreement, dated as of February 11, 1998 (the "Purchase
Agreement"), which agreement calls for, among other things, the reinsurance
transactions described in this Agreement;
WHEREAS, upon the terms and conditions set forth herein, the
Company desires to cede, on a coinsurance or modified coinsurance basis (as
specified herein), to the Reinsurer the Company's rights, liabilities, and
obligations in respect of its variable life insurance and variable annuity
products; and
WHEREAS, upon the terms and conditions set forth herein, the
Reinsurer desires to reinsure on a coinsurance or modified coinsurance
basis all of the rights, liabilities, and obligations in respect of the
Company's products referred to above;
NOW, THEREFORE, in consideration of the mutual covenants and
promises, and upon the terms and conditions, hereinafter set forth, the
parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
Unless otherwise defined herein, capitalized terms used herein
shall have the meanings given them in Exhibit A
ARTICLE II.
BUSINESS REINSURED
A. General. Effective as of 12:01 a.m., Eastern Time, on January
1, 1998 (the "Effective Time"), the Company hereby cedes to and reinsures
with the Reinsurer, and the Reinsurer hereby assumes and reinsures from the
Company, on an indemnity reinsurance basis, 100% of the Policy Liabilities
under any and all Policies. Such indemnity reinsurance shall be based on
(i) 100% coinsurance with respect to general account Statutory Reserve
liabilities established by the Company with respect to the Policies and
(ii) 100% modified coinsurance with respect to separate account Statutory
Reserve liabilities established with respect to the Policies.
B. Liability. From and after the Effective Time, as between the
parties, the Reinsurer shall bear and shall have responsibility for paying
all Policy Liabilities, including but not limited to liabilities for
surrenders, withdrawals, and claims for benefits incurred on or after the
Effective Time. The Reinsurer hereby agrees to pay directly any Policy
Liabilities under the Policies on behalf of, and in the name of, the
Company; provided, however, that the Reinsurer shall have no direct or
indirect obligation itself to insureds, claimants, or beneficiaries under
such Policies.
C. Defenses. The Reinsurer accepts, reinsures, and assumes the
Policy Liabilities subject to any and all defenses, setoffs, and
counterclaims to which the Company would be entitled with respect to the
Policy Liabilities, it being expressly understood and agreed by the parties
hereto that no such defenses, setoffs, or counterclaims are or shall be
waived by the execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby and that the Reinsurer is and shall
be fully subrogated in and to all such defenses, setoffs, and
counterclaims.
D. Declaration of Non-Guaranteed Elements. Some of the Policies
ceded under this Agreement provide that the Company may in its discretion,
from time to time, as provided in the policy or contract, declare interest
rates, cost of insurance rates or other non-guaranteed elements that are
used to determine policy or contract values. During the Reinsurance
Period, the Company agrees to set such discretionary interest rates, cost
of insurance rates or other non-guaranteed elements to be declared on the
Policies and the effective dates thereof, taking into account the
recommendations of the Reinsurer with respect thereto. With respect to the
Policies, the Company shall, in its discretion after giving due
consideration to such recommendations of the Reinsurer, either (i) follow
such recommendations or (ii) reject such recommendations. To the extent
permitted by applicable Law, the Company agrees to allow the Reinsurer to
notify policyholders and contractholders of such changes and the effective
dates thereof. To the best of the Company's knowledge, the Company has
complied and is in compliance with all contract provisions, laws and
regulations associated with interest rates, cost of insurance rates or
other non-guaranteed elements concerning the Policies, and all supporting
documents requested by the Reinsurer relating to historical changes and
pricing formulas for prospective changes have been provided to the
Reinsurer.
ARTICLE III.
NEW POLICIES
A. Issuance of New Policies. The parties hereto acknowledge and
agree that the Company shall, at the Reinsurer's request, continue to
underwrite and issue new policies, endorsements, riders, certificates, and
other contracts of insurance and annuity contracts on forms identified on
Exhibit C hereto (the "New Policies") at and after the Closing Date to
residents of the jurisdictions listed on Exhibit D hereto until the earlier
to occur of (i) 90 days after receipt by the Company of a written notice
from the Reinsurer requesting that the Company cease underwriting and
issuing New Policies or (ii) the third anniversary of the Closing Date (the
"Transition Termination Date"). In no event shall the Company be required
to underwrite or issue new policies, endorsements, riders, certificates and
other contracts of insurance or annuity contracts after the Transition
Termination Date.
B. Reinsurance of New Policies. Notwithstanding any provision in
this Agreement to the contrary, (i) the terms "Policy" and "Policies" shall
be deemed to include all New Policies and (ii) all New Policies shall be
immediately ceded by the Company to the Reinsurer, and reinsured by the
Reinsurer from the Company, on a 100% coinsurance or modified coinsurance
basis (as appropriate under Article I above) under the terms of this
Agreement.
C. New Policy Marketing. Any and all New Policies shall be
marketed, sold, underwritten, and issued in accordance with standards,
guidelines, procedures, and practices of the Company and CNL, Inc. in
existence immediately prior to the Closing Date and in accordance with all
applicable Laws.
D. Policy Expenses. The Reinsurer shall be solely responsible for
all costs and expenses incurred by the Company in connection with the
Policies issued from and after the Effective Time through the Closing Date
(collectively, "Policy Expenses"), including, without limitation, the
marketing, underwriting, issuance, and administration thereof and all legal
and compliance expenses relating thereto. On the Closing Date, an amount
equal to the sum of all Policy Expenses incurred by the Company and its
affiliates from the Effective Time through and including the end of the
last quarter preceding the Closing Date shall be payable by the Reinsurer
to the Company in accordance with the provisions of Section 1.3 of the
Purchase Agreement. As promptly as practicable after the Closing Date (but
in no event more than 30 days thereafter), an amount equal to the sum of
all Policy Expenses incurred by the Company and its affiliates from the
first day of the quarter in which the Closing occurred through and
including the Closing Date shall be payable by the Reinsurer to the Company
in accordance with the provisions of Section 1.4 of the Purchase Agreement.
E. Reinsurer Policies. The Reinsurer agrees to use all
commercially reasonable efforts to obtain or receive as promptly as
practicable (but in no event later than the Transition Termination Date)
all regulatory approvals, licenses, and other qualifications necessary to
permit the Reinsurer (or a wholly owned subsidiary thereof) to market,
sell, underwrite, and issue policies, riders, endorsements, certificates,
and contracts of insurance, and annuity contracts, generally similar to the
Policies to residents of the jurisdictions listed on Exhibit D hereto
directly in its own right. The Reinsurer shall keep the Company fully
informed with respect to such efforts.
ARTICLE IV.
GUARANTY FUND ASSESSMENTS
A. Reimbursement of the Company. In the event the Company is
required to pay any assessment to any insurance guaranty, insolvency,
comprehensive health association or other similar fund maintained by any
jurisdiction allocable to any insurer insolvency that occurs on or after
the Effective Time, the portion, if any, of such assessment that relates to
Policies (the "Related Assessment") shall be reimbursed by the Reinsurer.
The Reinsurer shall not be obligated to reimburse the Company for any such
assessment allocable to any insurer insolvency that occurs at any time
prior to the Effective Time. The Reinsurer shall pay to the Company any
Related Assessment which shall have become due, promptly on written demand
therefor by the Company, submitted together with documentation evidencing
such assessment and the payment therefor by the Company. If at any time
the Company shall subsequently recover all or part of any such assessment
reimbursed by the Reinsurer (e.g., through policy surcharges or through
reduction of or credits against premium taxes as to the Policies), the
portion of any such recovery received or otherwise realized by the Company
attributable to the Related Assessment shall be reimbursed to the Reinsurer
(based upon the total portion of such recovery attributable to Policies).
The Company shall provide the Reinsurer with semi-annual reports of any
such recoveries regardless of the form in which received.
B. Reimbursement of the Reinsurer. In the event the Reinsurer is
required to pay any assessment to any insurance guaranty, insolvency,
comprehensive health association or other similar fund maintained by any
jurisdiction allocable to any insurer insolvency that occurs prior to the
Effective Time, the portion, if any, of such assessment that relates to
Policies (the "Related Prior Period Assessment") shall be reimbursed by the
Company. The Company shall not be obligated to reimburse the Reinsurer for
any such assessment allocable to any insurer insolvency that occurs at any
time after the Effective Time. The Company shall pay to the Reinsurer any
Related Prior Period Assessment which shall have become due, promptly on
written demand therefor by the Reinsurer, submitted together with
documentation evidencing such assessment and the payment therefor by the
Reinsurer. If at any time the Reinsurer shall subsequently recover all or
part of any such assessment reimbursed by the Company (e.g., through policy
surcharges or through reduction of or credits against premium taxes as to
the Policies), the portion of any such recovery received or otherwise
realized by the Reinsurer attributable to the Related Prior Period
Assessment shall be reimbursed to the Company (based upon the total portion
of such recovery attributable to Policies). The Reinsurer shall provide
the Company with semi-annual reports of any such recoveries regardless of
the form in which received.
ARTICLE V.
TERRITORY; TERM
This Agreement shall apply to Policies covering lives and risks
wherever resident or situated. Subject to Article X below, this Agreement
shall remain in force and effect until the expiration or termination of all
Policy Liabilities in respect of the Policies and until all obligations of
either party hereunder have been discharged in full.
ARTICLE VI.
RESERVES
A. Establishment of General Account Reserves. The Reinsurer shall
be responsible for establishing and maintaining the proper general account
Statutory Reserves for the Policies as required by state insurance
regulatory authorities.
B. Establishment of Separate Account Reserves.
(1) Policy Account. For each Policy, an amount equal to the
accumulated value (as defined in the Policies) thereof invested on a
variable basis shall be held by the Company in the Separate Accounts.
(2) Policy Account Reserve. The total Policy Account
Statutory Reserve liability for each Policy relating to the assets held in
the Policy Account pursuant to Article VI(B)(1) shall be shown by the
Company on its Separate Account balance sheets, consistent with SAP.
C. Reserve Reports. The Reinsurer or its designee shall provide
the Company, within 20 Business Days after the end of each calendar
quarter, valuation summary reports which shall itemize reserves and
contracts in force by plan code, in a format mutually agreed upon by the
Company and the Reinsurer. Such reports shall reflect 100% of any changes
in the reserves described in Articles VI(A) and VI(B) above which occurred
during the accounting period for which such reports are made. These
reports shall include statutory, tax and GAAP reserves.
D. Reinsurance Reserve Credits. If the full statutory reinsurance
reserve credit contemplated by this Agreement is or becomes unavailable to
the Company with respect to any jurisdiction, the Reinsurer shall take any
and all action necessary to make such full statutory reinsurance reserve
credit available to the Company. In doing so, the Reinsurer shall have the
discretion to utilize any means available in the applicable jurisdiction to
make such full statutory reinsurance reserve credit available to the
Company, which may include, but not be limited to, permitting the Company
to withhold funds, establishing a reserve trust account or posting a letter
of credit. If a letter of credit is utilized it shall be furnished and
maintained by the Reinsurer for the benefit of the Company and be clean,
irrevocable and unconditional and otherwise of such nature and amount as to
satisfy the requirements of the particular jurisdiction for purposes of
establishing full statutory reinsurance reserve credit for the Company.
In the event that the Reinsurer shall fail or refuse to fulfill
any of its obligations under this Agreement relating to the payment of
liability, the Company shall be entitled to proceed under the terms and
conditions of any letter of credit, trust agreement or any other agreement
relating to the same and seize and take possession of the funds represented
by the same and apply those funds to reduce the Reinsurer's obligations to
the Company.
ARTICLE VII.
ACCOUNTING AND SETTLEMENT
A. Net Daily Adjustment. With respect to any day, the "Net Daily
Adjustment" shall be the amount calculated by comparing:
(1) the sum of:
(i) the gross premium collected on all Policies, net
of net premiums (as defined in the Policies) to be allocated to the
Separate Accounts pursuant to contract owner instructions;
(ii) the interest payments and principal repayments on
all Policy loans;
(iii) the mortality and expense risk, administrative,
cost of insurance, and other charges deducted under the Policies and/or
from the Separate Accounts (whether through the calculation of unit values
or by direct deduction);
(iv) the amount of funds transferred from the Separate
Accounts to the general account of the Company in connection with (a) the
payment of Policy benefits, including without limitation death benefits
(net of reimbursements under Third Party Reinsurance Agreements), full or
partial cash surrender benefits, full or partial withdrawal benefits,
maturity benefits, annuity payments, Policy loan benefits, and premium (or
other) refunds, (b) annuitization, or (c) in connection with a transfer to
a fixed account option within a Policy;
(v) the amount of any net gain from any investment or
disinvestment in the Separate Accounts, whenever occurring, having resulted
in a value other than the corresponding value charged or credited under the
Policies (i.e., breakage); and
(vi) any other fees, charges, premiums, costs, or other
amounts, or portion(s) thereof, collected during the preceding Business
Day, which would be payable to the general account of the Company in the
absence of the reinsurance of the Policies effected by this Agreement.
(2) with the sum of the following:
(i) the Policy benefits paid, including death benefits
(net of reimbursements under Third Party Reinsurance Agreements), full or
partial cash surrender benefits, full or partial withdrawal benefits,
maturity benefits, annuity payments, Policy loan benefits and premium (or
other) refunds;
(ii) the amount of funds transferred from the general
account of the Company to the Separate Accounts in connection with
maintaining the Policy Account (including without limitation transfers to a
Separate Account from a fixed account option within a Policy);
(iii) the amount of any net loss from any investment or
disinvestment in the Separate Accounts, whenever occurring, having resulted
in a value other than the corresponding value charged or credited under the
Policies (i.e., breakage); and
(iv) any other fees, charges, premiums, costs, and other
amounts, or portion(s) thereof, payable on such day by the general account
of the Company under the terms of the Policies.
Reimbursements listed above shall not be made with respect to
items accrued (other than claims incurred but not reported as of the
Effective Time and claims in course of settlement as of the Effective Time)
by the Company prior to the Effective Time.
If the sum of items in Article VII(A)(1) exceeds the sum of items
in Article VII(A)(2) for the preceding Business Day, then (subject to the
provisions of Article VII(C)) such excess (to the extent not already paid
to or on behalf of the Reinsurer) shall be paid by the Company to the
Reinsurer by wire transfer of immediately available funds before the end of
business on the current Business Day. Conversely, if the sum of the items
in Article VII(A)(2) exceeds the sum of the items in Article VII(A)(1) for
the preceding Business Day, then (subject to the provisions of Article
VII(C)) such excess (to the extent not already paid to or on behalf of the
Company) shall be paid by the Reinsurer to the Company by wire transfer of
immediately available funds before the end of business on the current
Business Day.
B. Benefit Payments. The Reinsurer shall have full responsibility
and authority for all benefit payment determinations or settlements, and
shall be solely responsible for all expenses associated with benefit
payment determinations or settlements pursuant to and in accordance with
the Administrative Services Agreement, dated as of the date of this
Agreement, between the Company and the Reinsurer, as the same may be
amended from time to time (the "Charter Administrative Services
Agreement").
C. Cash Settlement and Accounting.
(1) Daily Cash Settlements. At the end of each Business Day,
the Reinsurer shall notify the Company of the payments required the next
Business Day under Article VII(A) above. The Reinsurer or the Company, as
the case may be, shall make the required payments on such next Business Day
by wire transfer of immediately available funds. Daily statements may be
based upon reasonable approximations. Daily statements shall be in a form
agreed to by the Company and the Reinsurer in writing.
(2) Monthly Cash Statements. At the end of the twentieth
Business Day next succeeding the end of each calendar month, the Reinsurer
will provide the Company with a statement for the month. Monthly
statements shall be in a form agreed to by the Company and the Reinsurer in
writing. The statement may reflect a correction or adjustment, in which
event the Reinsurer or the Company, as the case may be, shall make any
required payment on the day following notification thereof in accordance
with the method for cash payments prescribed by Article VII(C)(1) above.
Any further adjustment as may be required shall be made promptly following
agreement of the parties or completion of any audit pursuant to Article
VII(C)(4) below.
(3) Form of Statements. All statements provided pursuant to
Articles VII(C)(1) and (2) above shall summarize the items to be settled in
reasonable detail. It is intended that the statements be transmitted by
facsimile or other similar means of convenient written communication, but,
in the event that any statement cannot be transmitted after application of
commercially reasonable efforts, the Reinsurer may notify the Company of
any settlement due by oral communication, in which case the Reinsurer shall
provide hard copy of the settlement statement as promptly as practicable.
(4) Right to Audit. The Company shall have the right to
audit the amounts contained in any statements delivered under Article
VII(C)(3). For such purposes, the Company and its employees, professional
advisors and agents shall have a right to review and copy the relevant
books and records of the Reinsurer and to discuss such matters with
employees or the Reinsurer during normal business hours. The Reinsurer
agrees to render reasonable assistance to the Company in conducting any
such audit and to instruct its independent public accountants and actuaries
to provide information to the Company.
(5) General Right of Offset. Notwithstanding any provision
of this Agreement, any and all amounts due from the Reinsurer to the
Company or from the Company to the Reinsurer under this Agreement may be
offset against amounts due from one party to the other under this Agreement
or under any other written agreement hereafter entered into by and between
the parties, in settling and making payments on a net basis of amounts due
under this Agreement and any subsequent written agreements.
(D) Monthly Report. At the end of the twentieth Business Day next
succeeding the end of each calendar month, the Reinsurer shall provide the
Company with a statement for the month setting forth the following
information:
(1) the commissions paid (net of refunds) on behalf of the
Company for all Policies;
(2) the amount of any state, municipal or other premium or
gross receipts taxes paid on behalf of the Company with respect to Policy
premiums collected;
(3) the amount of brokerage and any similar charges paid on
behalf of the Company in connection with the purchases, sale, redemption or
maintenance of Separate Account assets;
(4) the premiums (net of refunds) paid on behalf of the
Company under the Third Party Reinsurance Agreements;
(5) any amounts paid on behalf of the Company pursuant to the
existing participation agreements or any other agreement or arrangement
between the Company and the mutual fund organization in which assets of the
Separate Accounts are invested (net of any amounts paid to the Company
pursuant to such agreements and arrangements); and
(6) any other amounts paid on behalf of the Company with
respect to the Policies.
E. Closing Date True-Up. On the Closing Date, settlement shall be
made of all amounts (not previously paid to the applicable party) owed
under this Agreement by the Company to the Reinsurer or by the Reinsurer to
the Company (as applicable) for the period commencing on the Effective Time
and ending on the last day of the calendar quarter immediately preceding
the Closing Date, in accordance with the provisions of Section 1.3 of the
Purchase Agreement. Such settlement shall be made in satisfaction of the
parties' respective obligations under this Article with respect to such
period.
As promptly as practicable after the Closing Date (but in no
event more than 30 days thereafter), the Company shall prepare a post
closing accounting for the period commencing on the first day of the
calendar quarter in which the Closing takes place through the Closing Date,
in accordance with the provisions of Section 1.4 of the Purchase Agreement.
Settlement shall be made of all amounts (not previously paid to the
applicable party) owed under this Agreement by the Company to the Reinsurer
or by the Reinsurer to the Company (as applicable). Such settlement shall
be made in satisfaction of the Parties' respective obligations under this
Article with respect to such period. All settlements of account between
the Company and the Reinsurer shall be made in cash or its equivalent.
ARTICLE VIII
ADMINISTRATION; RECORDS; NOTICES
A. Administration. Administration and servicing of all of the
Policies shall be conducted pursuant to the terms and subject to the
conditions set forth in the Charter Administrative Services Agreement.
Reports, files, and other records and information relating to the Policies
shall be transferred and maintained pursuant to the terms and subject to
the conditions set forth in the Charter Administrative Services Agreement.
B. Transfer of Books and Records. The Company shall forward to
the Reinsurer all reports, records, underwriting files, policy files,
claims files and information in any form in its possession relating to the
Policies pursuant to and in accordance with the Charter Administrative
Services Agreement.
C. Maintenance of Books and Records. The Reinsurer agrees to
maintain a true and complete set of books and records relating to all
transactions under this Agreement, including without limitation all such
records as may be required by applicable Law. The Reinsurer shall maintain
such books and records at the Reinsurer's expense and in accordance with
prudent standards of insurance recordkeeping and all applicable Laws. The
books and records shall be available (at their place of keeping) for
inspection, examination, and audit by the Company and state and federal
regulatory authorities (in each case together with their respective
representatives) at all reasonable times. The Reinsurer shall furnish to
the Company (i) at the Reinsurer's expense, copies of any books or records
relating to the transactions under this Agreement as may be reasonably
required by the Company in connection with the preparation of the Company's
financial statements, state and federal income and other tax returns, and
any other filings or reports required to be filed with, or requested by,
state or federal regulatory authorities or any rating agencies and (ii) at
the Company's expense, copies of any such books and records for any other
reason. Without limiting the generality of the foregoing, the Reinsurer
shall provide the Company (at the Reinsurer's expense) all information
concerning the Policies required to be included in the Company's state
premium tax returns (in a format suitable for direct insertion therein).
D. Notices. The Company agrees that, after the Effective Time, it
shall forward promptly to the Reinsurer all notices and other written
communications received by it relating to the Policies (including without
limitation all inquiries or complaints from state insurance regulators,
agents, brokers and insureds and all notices of claims, suits and actions
for which it receives service of process). The Company shall be entitled
to retain copies of all such materials.
ARTICLE IX
TRANSFER OF ASSETS
As to Policies in force on the Effective Time, the Company shall
transfer to the Reinsurer on the Closing Date amounts in accordance with
the provisions of Section 1.3 of the Purchase Agreement with respect to the
general account Statutory Reserve liabilities established by the Company
with respect to the Policies (as set out in Exhibit E).
The Company hereby also transfers to the Reinsurer all Policy
loans and due and accrued Policy premiums outstanding on the Closing Date.
The Company and the Reinsurer acknowledge and agree that the Company has
and will retain sole and absolute title to and possession of the separate
account Statutory Reserves, and that the Reinsurer has no right, title, or
interest (whether legal, equitable, secured, or otherwise) in or to any of
the separate account Statutory Reserves.
ARTICLE X
RECAPTURE; TRUST
A. Right of Recapture or Trust. At any time after the occurrence
(or nonoccurrence, as the case may be) of any of the following, the Company
shall have the right, upon delivery of written notice to the Reinsurer, to
(i) recapture any and all of the Policies or (ii) require that the
Reinsurer establish a trust reasonably acceptable to the Company (the
"Trust") and deposit Qualifying Assets therein having a fair market value
equal to the amount of the general account Statutory Reserves:
(1) if the Reinsurer materially breaches any provision of
this Agreement or the Charter Administrative Services Agreement, which
breach is not cured within 60 days after receipt by the Reinsurer of notice
thereof from the Company;
(2) if the Reinsurer files an RBC Report that indicates that
its Adjusted Capital is less than 2.5 times its authorized control level
RBC, as each such term is defined in Article 11A of the Illinois Insurance
Code in effect on the Effective Time; or
(3) if the Reinsurer or its direct parent company is placed
in receivership, conservatorship, rehabilitation, or liquidation by any
insurance regulatory authority or becomes (whether voluntarily or
involuntarily) the subject of a proceeding under any local, state, or
federal bankruptcy or insolvency Law.
B. Effect of Recapture. Upon the receipt of the Company's notice
to recapture pursuant to Article X(A) hereof, and without further action by
the Reinsurer, the Reinsurer will be deemed to have (i) ceded, transferred,
and assigned to the Company all Policy Liabilities; (ii) transferred and
assigned to the Company Qualifying Assets (including all Policy loans)
having an aggregate market value (or book value in the case of Policy
loans) as of the date of recapture equal to the aggregate general account
reserve liability amount established by the Company as of such date with
respect to the Policies (without giving effect to the reinsurance under
this Agreement), together with all interest, dividend, or other investment
income accrued on such assets from the date of the Reinsurer's receipt of
such recapture notice until the date of the Company's receipt of such
assets; and (iii) sold, transferred, and assigned to the Company any and
all of the Reinsurer's right, title, and interest in and to all gross
premiums, premium adjustments, amounts recoverable from reinsurers, and
other similar payments and receivables that are or may be due or payable
under the Policies. The Reinsurer shall cooperate with the Company in
effecting any recapture of Policies pursuant to Article X(A) hereof,
including without limitation by promptly transferring amounts to the
Company described in clause (ii) above and by executing and delivering such
other documents, instruments and certificates effectuating the recapture
described in this Article and reasonably requested by the Company.
C. Trust. Upon the receipt of the Company's notice to require the
establishment of a trust pursuant to Article X(A) hereof, and without
further action by the Reinsurer, the Reinsurer will be deemed to have
transferred and assigned to the Trust assets of the Reinsurer having an
aggregate market value as of the effective date of such notice equal to the
aggregate general account reserve liability amount established by the
Company as of such date with respect to the Policies (without giving effect
to the reinsurance under this Agreement), together with all interest,
dividend, or other investment income accrued on such assets from the date
of the Reinsurer's receipt of such recapture notice until the date of the
Trust's receipt of such assets. The Reinsurer shall cooperate with the
Company in effecting the creation and funding of the Trust pursuant to
Article X(A) hereof, including without limitation by promptly transferring
amounts to the Trust described in the preceding sentence and by executing
and delivering such other documents, instruments and certificates
effectuating the establishment, funding, and maintenance of the Trust
described in this Article and reasonably requested by the Company.
D. Liquidated Damages. Upon the recapture of all Policies or
establishment of the Trust pursuant to Article X(A) hereof, the Reinsurer
shall pay to the Company (within five Business Days after the Reinsurer's
receipt of the Company's notice under Article X(A)) actual damages, which
amount shall not exceed $800,000.
E. Termination by the Reinsurer. This Agreement may be terminated
by the Reinsurer (1) if the Company materially breaches this Agreement or
the Charter Administrative Services Agreement, which breach is not cured
within 60 days after receipt by the Company of written notice from the
Reinsurer describing such breach; or (2) if the Reinsurer assumes on a
novation basis or replaces all of the Policies pursuant to Article XVII of
this Agreement.
F. Refund of Purchase Price. In the event of termination of this
Agreement or recapture pursuant to paragraph A or E.(1) of this Article X,
the Company shall refund to Reinsurer a portion of the Purchase Price based
on an appraisal of the Policies as of the date of termination (which
appraisal shall take into consideration the effect of the termination of
this Agreement) prepared by Milliman & Robertson, Inc., or another
nationally recognized actuarial firm reasonably acceptable to the parties.
Such refund shall be paid promptly with interest at an annual rate of 7%
accruing from the date of termination until the date of payment.
ARTICLE XI
RIGHT OF INSPECTION
Each party hereto and its respective authorized representatives
shall have the right, at all reasonable times during normal business hours,
to inspect and review all books, records, accounts, reports, tax returns,
files and information of the other party hereto relating to the Policies
and Policy Liabilities under such Policies.
ARTICLE XII
INDEMNIFICATION
The Reinsurer agrees to indemnify, defend and hold the Company
harmless from and against all liability, damages, costs and expenses,
including attorneys' fees, arising from Policy Liabilities. The Company
agrees to indemnify, defend, and hold the Reinsurer harmless from and
against all liability, damages, costs and expenses, including attorneys'
fees, arising from Extra Contractual Obligations based on acts, errors or
omissions by the Company or any of its officers, employees, agents or
representatives, and any attorneys' fees incurred by the Company related to
such Extra Contractual Obligations. Within ten days after receipt by an
indemnified party of notice of any demand, claim, suit or proceeding
indemnified under this Article, or such shorter period as may be necessary
to enable the indemnifying party to respond timely thereto, the indemnified
party shall give notice to the indemnifying party of such demand, claim,
suit or proceeding and the indemnifying party shall at its expense assume
the defense of any such demand, claim, suit or proceeding; provided,
however, that the failure by the indemnified party to give timely notice as
provided herein shall not relieve the indemnifying party of its
indemnification obligations under this Agreement except to the extent that
such failure results in a failure of actual notice to the indemnifying
party and the indemnifying party is damaged as a result of the failure to
receive such notice. In the event that the indemnifying party has not
assumed the defense of any matter within a reasonable period of time after
timely notice as above provided, the indemnified party, at the cost and
expense of the indemnifying party, shall have a full right to defend
against any such claim, suit or proceeding and shall be entitled to settle
or agree to pay in full such claim or demand, in its sole discretion.
ARTICLE XIII
INSOLVENCY
The Reinsurer hereby agrees that, as to all reinsurance made,
ceded, renewed or otherwise becoming effective hereunder, the portion of
any risk or obligation assumed by the Reinsurer, when such portion is
ascertained, shall be payable immediately on demand of the Company at the
same time as the Company shall pay its retained portion of such risk or
obligation, with reasonable provision for verification before payment, and
the reinsurance shall be payable by the Reinsurer on the basis of the
liability of the Company under the Policy or Policies reinsured, without
diminution because of the insolvency of the Company, directly to the
Company or to its liquidator, receiver, or other statutory successor. It
is agreed that in the event of the insolvency of the Company, the
liquidator, receiver or other statutory successor of the Company shall give
prompt written notice to the Reinsurer of the pendency or submission of a
claim under the Policy or Policies reinsured. During the pendency of such
claim, the Reinsurer may investigate such claim and interpose, at its own
expense, in the proceeding where such claim is to be adjudicated any
defense available to the Company or its receiver. The expense thus
incurred by the Reinsurer is chargeable against the Company, subject to any
court approval, as a part of the expense of liquidation to the extent of a
proportionate share of the benefit which accrues to the Company solely as a
result of the defense undertaken by the Reinsurer.
ARTICLE XIV
NO THIRD PARTY RIGHTS
The Reinsurer's coinsurance of the Policy Liabilities pursuant to
this Agreement with respect to any of the Policies is intended for the sole
benefit of the parties to this Agreement and shall not create any right on
the part of any policyholder, insured, claimant or beneficiary under such
Policies against the Reinsurer or any legal relationship between such
policyholders, insureds, claimants or beneficiaries and the Reinsurer.
ARTICLE XV
DUTY OF COOPERATION
Each party hereto shall cooperate fully with the other party
hereto in all reasonable respects in order to accomplish the objectives of
this Agreement.
ARTICLE XVI
ARBITRATION
In the event any dispute arises between the parties hereto with
reference to any aspect of this Agreement, such dispute may be submitted
for resolution by arbitration if both parties hereto agree in writing.
Within 30 days after such agreement, each party shall select one arbitrator
(for a total of two), and such selected arbitrators shall select a third
arbitrator within 60 days after such agreement. If either party fails to
select an arbitrator within such time period, the arbitrator that was
timely selected by the other party shall serve as the sole arbitrator. All
arbitrators shall have had experience serving as an arbitrator for
reinsurance disputes or shall have served as an officer of a life, accident
or health insurance or reinsurance company. No arbitrator shall be or have
been affiliated with or employed by any party hereto or their respective
affiliates. The arbitration shall occur in a mutually acceptable location
and be governed pursuant to the rules of commercial arbitration of the
American Arbitration Association and the Laws of the State of Missouri.
The arbitrators shall make their determination within 30 days after the
appointment of the last arbitrator. Judgment may be entered upon the final
decision of the arbitrators in any court having jurisdiction, and
notwithstanding any provision in this Agreement to the contrary, such
arbitration determination shall be final and conclusive for all legal
purposes and may not be appealed to any court or other forum. Each party
shall pay the expenses incurred by it and by the one arbitrator selected by
it. Each party shall pay one-half of the fees and out-of-pocket expenses
of the American Arbitration Association (if any) and the third arbitrator.
ARTICLE XVII
NOVATION; REPLACEMENT
At the option of the Reinsurer, the Reinsurer may at any time (i)
assume the Policies on a novation basis pursuant to an assumption
reinsurance agreement to be entered into by the Company and the Reinsurer
at such time having terms mutually acceptable to such parties or (ii)
replace the Policies pursuant to replacement offers made to the owners of
such Policies. The Reinsurer is responsible for paying all costs and
obtaining all approvals. Each party hereto shall cooperate with the other
in effecting any assumption or replacement under this Article.
ARTICLE XVIII
GENERAL PROVISIONS
A. DAC Tax Reimbursement. On a quarterly basis, the Reinsurer
shall reimburse (or be reimbursed by, as the facts may provide) the Company
for DAC Taxes incurred on Policies issued on or after the Effective Time
and on additional premiums paid on Policies on or after the Effective Time.
The DAC Tax reimbursement shall be computed by multiplying the DAC Tax
Factor by the net consideration earned by the Company for Policies issued
on or after the Effective Time and for additional premiums paid on Policies
on or after the Effective Time that is subject to DAC tax pursuant to the
provisions of Section 848 of the Internal Revenue Code of 1986, as amended
(the "Code"), and its related Treasury Regulations. The "DAC Tax Factor"
shall mean 0.215% for "annuities," 0.252% for "group life" contracts, and
0.94% for "other life and accident and health" contracts, as such terms are
defined in Section 848 of the Code. The Company and the Reinsurer mutually
agree to prospectively adjust the DAC Tax Factor to reflect any changes in
the Federal income tax rate applicable to the Company or changes to Section
848 of the Code or to the related Treasury Regulations.
B. DAC Tax Election. With respect to this Agreement, the Company
and the Reinsurer hereby make the election provided for in Section
1.848-2(g)(8) of the Treasury Regulations issued under Section 848 of the
Code, and as set forth in Exhibit F. Each of the parties hereto agrees to
take such further actions as may be necessary to ensure the effectiveness
of such election.
C. Notices. Any notice or communication given pursuant to this
Agreement must be in writing and (a) delivered personally, (b) sent by
facsimile transmission, (c) delivered by overnight express, or (d) sent by
registered or certified mail, postage prepaid, as follows:
If to the Reinsurer: Allstate Life Insurance Company
3075 Sanders Road, Suite G2H
Northbrook, Illinois 60062
Attention: James P. Zils
Facsimile No.: (847) 402-9116
with a copy to:
Allstate Insurance Company
2775 Sanders Road, Suite A8
Northbrook, Illinois 60062
Attention: Susan L. Lees
Facsimile No.: (847) 402-0158
If to the Company: Charter National Life Insurance Company
c/o Richard G. Petitt
Empire Insurance Group
122 Fifth Avenue
New York, New York 10011
Facsimile No.: (212) 387-2689
with a copy to:
Leucadia National Corporation
315 Park Avenue South
New York, New York 10010
Attention: Joseph S. Steinberg, President
Telecopy: (212) 598-3245
and a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Stephen E. Jacobs
Facsimile No.: (212) 310-8007
All notices and other communications required or permitted under the terms
of this Agreement that are addressed as provided in this Article shall (i)
if delivered personally or by overnight express, be deemed given upon
delivery; (ii) if delivered by facsimile transmission, be deemed given when
electronically confirmed; and (iii) if sent by registered or certified
mail, be deemed given when received. Any party from time to time may
change its address for notice purposes by giving a similar notice
specifying a new address, but no such notice shall be deemed to have been
given until it is actually received by the party sought to be charged with
the contents thereof.
D. Entire Agreement. This Agreement (including the Exhibits
hereto) contains the entire agreement and understanding between the parties
with respect to the transactions contemplated hereby, and supersedes all
prior agreements and understandings, written or oral, with respect thereto.
E. Expenses. Except as may be otherwise expressly provided in
this Agreement, whether or not the transactions contemplated hereby are
consummated, each of the parties hereto shall pay its own costs and
expenses incident to preparing for, entering into and carrying out this
Agreement and the consummation of the transactions contemplated hereby.
F. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same instrument and shall become effective
when one or more counterparts have been signed by each of the parties and
delivered to the other parties.
G. No Third Party Beneficiary. Except as otherwise provided
herein, the terms and provisions of this Agreement are intended solely for
the benefit of the parties hereto, and their respective successors or
permitted assigns, and it is not the intention of the parties to confer
third-party beneficiary rights upon any other person, and no such rights
shall be conferred upon any person or entity not a party to this Agreement.
H. Amendment. This Agreement may only be amended or modified by a
written instrument executed on behalf of both parties hereto.
I. Assignment; Binding Effect. Neither this Agreement nor any of
the rights, interests or obligations under this Agreement shall be
assigned, in whole or in part, by any of the parties hereto without the
prior written consent of the other party, and any such assignment that is
attempted without such consent shall be null and void. Subject to the
preceding sentence, this Agreement shall be binding upon, inure to the
benefit of, and be enforceable by the parties and their respective
successors and permitted assigns.
J. Invalid Provisions. If any provision of this Agreement is held
to be illegal, invalid, or unenforceable under any present or future Law,
and if the rights or obligations of the parties hereto under this Agreement
will not be materially and adversely affected thereby, (a) such provision
shall be fully severable; (b) this Agreement shall be construed and
enforced as if such illegal, invalid, or unenforceable provision had never
comprised a part hereof; and (c) the remaining provisions of this Agreement
shall remain in full force and effect and shall not be affected by the
illegal, invalid, or unenforceable provision or by its severance herefrom.
K. Governing Law. This Agreement shall be governed by and
construed in accordance with the Laws of the State of Missouri, regardless
of the Laws that might otherwise govern under applicable principles of
conflicts of laws thereof.
L. Waiver. Any term or condition of this Agreement may be waived
in writing at any time by the party that is entitled to the benefit
thereof. A waiver on one occasion shall not be deemed to be a waiver of
the same or any other breach or nonfulfillment on a future occasion. All
remedies, either under the terms of this Agreement, or by Law or otherwise
afforded, shall be cumulative and not alternative, except as otherwise
provided by Law.
M. Headings, etc. The headings used in this Agreement have been
inserted for convenience and do not constitute matter to be construed or
interpreted in connection with this Agreement. Unless the context of this
Agreement otherwise requires, (a) words using the singular or plural number
also include the plural or singular number, respectively; (b) the terms
"hereof," "herein," "hereby," "hereto," "hereunder," and derivative or
similar words refer to this entire Agreement (including the exhibits
hereto); (c) the term "Article" refers to the specified Article of this
Agreement; and (d) the term "party" means, on the one hand, the Company,
and on the other hand, the Reinsurer.
N. Offset. Any debits or credits incurred after the Effective
Time in favor of or against either the Company or the Reinsurer with
respect to this Agreement are deemed mutual debits or credits, as the case
may be, and shall be set off, and only the balance shall be allowed or
paid.
O. Compliance with Laws. The parties hereto shall at all times
comply with all applicable Laws in performing their obligations under this
Agreement.
P. Errors and Oversights. Each party to this Agreement will act
reasonably in all matters within the terms of this Agreement. Clerical
errors and oversights occasioned in good faith in carrying out this
Agreement will not prejudice either party, and will be rectified promptly
on an equitable basis.
IN WITNESS WHEREOF, the Company and the Reinsurer have each
executed this Agreement as of the date first written above.
ALLSTATE LIFE INSURANCE COMPANY
By:
Name:
Title:
CHARTER NATIONAL LIFE INSURANCE
COMPANY
By:
Richard G. Petitt,
Chairman and Chief Executive Officer
DAFS02...:\30\76830\0137\1170\AGR1158T.26H
CNLIC Exhibit D
to Purchase
Agreement
ADMINISTRATIVE SERVICES AGREEMENT
THIS ADMINISTRATIVE SERVICES AGREEMENT (this "Agreement") is made
this ____ day of ________, 1998 (the "Closing Date"), by and between
CHARTER NATIONAL LIFE INSURANCE COMPANY, a Missouri insurance company (the
"Company"), and ALLSTATE LIFE INSURANCE COMPANY, an Illinois insurance
company (the "Service Provider").
RECITALS:
WHEREAS, the Company, the Service Provider, Allstate Life
Insurance Company of New York, a New York insurance company, Intramerica
Life Insurance Company, a New York insurance company, and Leucadia National
Corporation, a New York corporation ("Leucadia"), have entered into that
certain Purchase Agreement, dated as of February 11, 1998 (the "Purchase
Agreement"), which agreement calls for, among other things, the provision
of administrative services described in this Agreement (unless otherwise
defined herein, capitalized terms used herein shall have the meanings given
them in the Purchase Agreement);
WHEREAS, the Company and the Service Provider are entering into
the Charter Coinsurance Agreement, pursuant to which the Company shall cede
to the Service Provider, on a 100% coinsurance or modified coinsurance
basis (as indicated therein), the Company's rights, liabilities, and
obligations in respect of the variable life insurance products and variable
annuity contracts identified in the Charter Coinsurance Agreement
(including, without limitation, the New Policies (as defined in the Charter
Coinsurance Agreement)) (the "Variable Policies");
WHEREAS, the Company and the Service Provider are entering into
the Charter Reinsurance Agreement, pursuant to which the Company shall cede
to the Service Provider, on a 100% coinsurance basis, the Company's rights,
liabilities, and obligations in respect of the life insurance products and
annuity contracts identified in the Charter Reinsurance Agreement
(collectively with the Variable Policies, the "Reinsured Policies");
WHEREAS, in connection with the Charter Coinsurance Agreement and
the Charter Reinsurance Agreement, the parties hereto desire that the
Service Provider perform all services required for complete support and
administration of the Reinsured Policies on behalf of the Company in
accordance with the terms and subject to the conditions of this Agreement;
and
NOW, THEREFORE, in consideration of the transactions contemplated
pursuant to the Purchase Agreement, the Charter Coinsurance Agreement, and
the Charter Reinsurance Agreement, and the mutual covenants and promises
contained herein and for other good and valuable consideration, and
intending to be legally bound hereby, the parties hereto agree as follows:
1. TERM
This Agreement shall be effective as of the Closing Date, and
shall remain in full force and effect until terminated in accordance with
Section 10 below.
2. SERVICES
(a) Services. From and after the Closing Date, the Service
Provider shall provide to the Company all services required for complete
support and administration of all Reinsured Policies, including without
limitation the services set forth on Exhibit A hereto (the "Services").
(b) Performance Standards. The Service Provider shall
perform the Services (i) at a level of accuracy and responsiveness not less
favorable than the practices of the Service Provider in administering
products comparable to the Reinsured Policies issued by it or serviced by
it for other companies during the term of this Agreement, (ii) in
accordance with all applicable Laws and insurance department requirements,
(iii) in accordance with recognized industry standards, and (iv) as the
parties may agree in writing from time to time.
(c) Authority. The Service Provider shall perform the
Services in the name and on behalf of the Company only as provided in this
Agreement or as directed by the Company in writing. Except as specifically
set forth in this Agreement or authorized by the Company in writing, the
Service Provider shall not have authority to issue new insurance policies
or annuity contracts in the name of the Company or enter into any
agreements on the Company's behalf. None of the terms or provisions of
this Agreement shall prohibit the Service Provider or any of its affiliates
from conducting business of whatever nature in their own names and on
behalf of any person or entity other than the Company. The Company shall
take all actions necessary to grant the Service Provider the authority to
disburse funds from bank accounts on the Company's draft or check stock for
the purpose of carrying out the Service Provider's responsibilities under
this Agreement.
3. COMPENSATION
The Service Provider shall provide the Services in consideration
of the execution and delivery by the Company of the Purchase Agreement, the
Charter Coinsurance Agreement, and the Charter Reinsurance Agreement and
the consummation of the transactions contemplated thereby, and the Service
Provider shall neither impose on the Company nor otherwise be entitled to
receive any additional or separate consideration for the provision of
Services in accordance with this Agreement.
4. PERSONNEL, FACILITIES, AND COSTS
(a) Personnel. The Service Provider shall furnish all
personnel necessary to provide the Services.
(b) Facilities. The Services shall be performed by Service
Provider using furniture, fixtures, and equipment (including computer
hardware) owned or leased by the Service Provider (collectively, the
"Facilities"). All Facilities owned by Service Provider shall remain the
property of Service Provider, and the Company acknowledges and agrees that
it shall not have any right, title, or interest in or to the Facilities.
(c) Systems. The Service Provider shall furnish all Systems
(as hereinafter defined) that are necessary for the Service Provider to
provide the Services. The term "Systems" shall mean all computer programs
and programming aids (together with supporting documentation), including
without limitation input and output formats, program listings, systems flow
charts, narrative descriptions, operating instructions, and the tangible
media upon which such programs are recorded.
(d) Costs. The Service Provider shall pay all personnel and
other costs and expenses to provide the Services (including without
limitation all applicable filing and similar fees).
5. COMPLIANCE WITH APPLICABLE LAWS
Each of the parties hereto agrees to comply with all applicable
Laws as they apply to the performance of such party's obligations under
this Agreement.
6. LICENSING
The Service Provider hereby represents and warrants to the
Company that the Service Provider has all licenses, qualifications, and
other authorizations necessary to provide the Services to or on behalf of
the Company. At all times during the term of this Agreement, the Service
Provider shall maintain in full force and effect all licenses,
qualifications, and other authorizations necessary under applicable Laws to
provide the Services to or on behalf of the Company. The Service Provider
agrees to provide the Company with copies of any such documents upon
request.
7. SUPERVISION BY BOARD OF DIRECTORS
The Service Provider acknowledges that the Board of Directors of
the Company is vested with the power, authority and responsibility for
managing the business and affairs of the Company, including administrative
services. The Service Provider acknowledges that any and all actions or
services, whether supervisory or ministerial, taken or provided pursuant to
this Agreement by the Service Provider shall be subject to the continuous
supervision of the Board of Directors of the Company and, to the extent
designated by such Board of Directors, the appropriate designated officers
of the Company.
8. MAINTENANCE OF RECORDS
The Service Provider agrees to (a) maintain a true and complete
set of books and records relating to all transactions under this Agreement
and (b) preserve such books and records for the term of this Agreement plus
five years thereafter (or such longer period as may be required by
applicable Law). The Service Provider shall maintain such books and
records and the Transferred Records (as defined in Section 13 below) at the
Service Provider's expense and in accordance with prudent standards of
insurance recordkeeping and all applicable Laws. The books and records
shall be available (at their place of keeping) for inspection, examination,
and audit by the Company and state and federal regulatory authorities (in
each case together with their respective representatives) at all reasonable
times. The Service Provider shall furnish to the Company (i) at the
Service Provider's expense, copies of any books or records relating to the
transactions under this Agreement as may be reasonably required by the
Company in connection with the preparation of the Company's financial
statements, state and federal income and other tax returns, and any other
filings or reports required to be filed with, or requested by, state or
federal regulatory authorities or any rating agencies and (ii) at the
Company's expense, copies of any such books and records for any other
reason.
9. POWER OF ATTORNEY
The Company grants to the Service Provider authority in all
matters relating to risk management and administration of the Policies to
the extent such authority (a) may be granted pursuant to applicable Law and
(b) is reasonably necessary for the Service Provider to provide the
Services hereunder. In order to assist and to more fully evidence this
authority, the Company hereby nominates, constitutes, and appoints the
Service Provider as its attorney-in-fact with respect to the rights,
duties, privileges, and obligations of the Company in, to and under the
Reinsured Policies, with full power and authority to act in the name,
place, and stead of the Company with respect to the Reinsured Policies,
including, without limitation, the power, without reservation, to service
all Reinsured Policies, to adjust, to defend, to settle, and to pay all
claims and benefits, to administer the Separate Accounts, and to take such
other and further actions as may be reasonably necessary to effect the
transactions contemplated by this Agreement, the Charter Coinsurance
Agreement, and the Charter Reinsurance Agreement.
10. TERMINATION
(a) Termination by the Company. The Company may terminate
this Agreement immediately, by delivery of written notice to the Service
Provider, upon the occurrence of any of the following events:
(1) The Service Provider pursuant to or within the
meaning of Title 11, U.S. Code, or any similar Federal, state or foreign
Law for the relief of debtors, including without limitation any state
insolvency or rehabilitation statutes (collectively, "Bankruptcy Laws"):
(A) commences a voluntary case or proceeding;
(B) consents to the entry of an order for relief
against it in an involuntary case or proceeding;
(C) consents to the appointment of a Custodian of
it or for all or for a substantial part of its property;
(D) makes a general assignment for the benefit of
its creditors; or
(E) fails to contest any involuntary case or
proceeding filed against it within the time period fixed by any applicable
rules, and any extensions granted by the court where such involuntary case
or proceeding is pending;
(2) A court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that remains unstayed and in effect for 60
days and that:
(A) is for relief against the Service Provider in
an involuntary case or proceeding;
(B) appoints a custodian of the Service Provider or
a custodian for all or for a substantial part of the property of the
Service Provider; or
(C) orders the liquidation of the Service Provider;
or
(3) Failure by the Service Provider to comply with any
material provision of this Agreement which has not been corrected within 60
days after written notice thereof is delivered to the Service Provider by
the Company.
(b) Effect of Termination. Upon termination of this
Agreement, (i) no party hereto shall be relieved of any liability for any
breach of any provision of this Agreement, (ii) any amounts owing hereunder
by either party hereto to the other party hereto shall be immediately due
and payable (pro-rated for any partial periods), and (iii) all rights and
obligations hereunder will terminate except that Sections 8 [maintenance of
records], 10(b) [effect of termination], 11 through 14 [indemnification,
confidentiality, transfer of records, and notification], and 17 [expenses]
hereof will continue to survive any such termination.
11. INDEMNIFICATION
(a) Indemnification by the Company. Subject to the provisions of
Sections 11(c) and 11(d) hereof, the Company shall indemnify and hold
harmless the Service Provider for any and all monetary damages, charges,
losses, deficiencies, liabilities, obligations, costs, fees, and expenses
(including, without limitation, reasonable fees and disbursements of
counsel incident to the enforcement of rights under Section 11(a) or 11(b)
hereof but net of any tax benefit) (collectively, "Damages") resulting from
or relating to (i) any breach by the Company of any representation,
warranty, covenant or agreement made by the Company in this Agreement or
(ii) the Company's administration of the Policies prior to the Closing
Date.
(b) Indemnification by the Service Provider. Subject to the
provisions of Sections 11(c) and 11(d) hereof, the Service Provider shall
indemnify and hold harmless the Company in respect of any and all Damages
resulting from or relating to any breach by the Service Provider of any
representation, warranty, covenant or agreement made by the Service
Provider in this Agreement.
(c) Limitations on Indemnification.
(A) If a person claiming indemnification under this Section
(an "Indemnitee") against any person (an "Indemnifying Party") recovers
from any third party (including insurers) all or any part of any amount
paid to it by an Indemnifying Party pursuant to Section 11(a) or 11(b)
hereof, such Indemnitee will promptly pay over to the Indemnifying Party
the amount so recovered (after deducting therefrom the full amount of the
expenses incurred by it in procuring such recovery, including any taxes and
net of any tax benefit resulting from such recovery and payment), but not
in excess of any amount previously so paid by the Indemnifying Party. If
an Indemnitee recovers from any third party (including insurers) any amount
as to which indemnification may be claimed pursuant to Section 11(a) or
11(b) hereof, such Indemnitee will have no right to claim indemnification
for such amount from the Indemnifying Party.
(B) The Indemnitee shall prosecute diligently and in good
faith any claim for indemnification with any applicable third party
(including insurers) prior to collecting any indemnification payment
pursuant to Section 11(a) or 11(b) hereof.
(d) Notice of Defense of Claims. Promptly after receipt of notice
of any claim or Damages for which an Indemnitee seeks indemnification under
this Section, such Indemnitee shall give written notice thereof to the
Indemnifying Party, but such notification shall not be a condition to
indemnification hereunder except to the extent of actual prejudice to the
Indemnifying Party. The notice shall state the information then available
regarding the amount and nature of such claim or Damages and shall specify
the provision or provisions of this Agreement under which the right to
indemnification is asserted. If within 30 days after receiving such notice
the Indemnifying Party gives written notice to the Indemnitee stating that
it intends to defend against such claim or Damages at its own cost and
expense, then defense of such matter, including selection of counsel
(subject to the consent of the Indemnitee which consent shall not be
unreasonably withheld), shall be by the Indemnifying Party and the
Indemnitee shall make no payment in respect of such claim or Damages as
long as the Indemnifying party is conducting a good faith and diligent
defense. Notwithstanding the foregoing, the Indemnitee shall at all times
have the right to fully participate in such defense at its own expense
directly or through counsel; provided, however, if the named parties to the
action or proceeding include both the Indemnifying Party and the Indemnitee
and representation of both parties by the same counsel would be
inappropriate under applicable standards of professional conduct, the
expenses of one separate counsel for the Indemnitee shall be paid by the
Indemnifying Party. If no such notice of intent to dispute and defend is
given by the Indemnifying Party, or if such diligent good faith defense is
not being or ceases to be conducted, the Indemnitee shall, at the expense
of the Indemnifying Party, undertake the defense of such claim or Damages
with counsel selected by the Indemnitee, and shall have the right to
compromise or settle the same exercising reasonable business judgment with
the consent of the Indemnifying Party, which consent shall not be
unreasonably withheld. The Indemnitee shall make available all information
and assistance that the Indemnifying Party may reasonably request and shall
cooperate with the Indemnifying Party in such defense. Notwithstanding
anything herein to the contrary, the Indemnifying Party shall have the
right to settle all claims of third parties for which indemnification is
payable hereunder without the consent of the Indemnitee so long as such
settlement releases the Indemnitee from all liability for or in connection
with such action and does not materially and adversely impair the ability
of the Indemnitee to carry on its business and does not contain any
admission of wrong doing on the part of the Indemnitee.
(e) Contribution. In order to provide for contribution in
circumstances in which the indemnification provided for in this Section is
for any reason held to be unavailable from the Service Provider or is
insufficient to hold harmless a party indemnified hereunder, the Service
Provider, on the one hand, and the Company, on the other hand, shall
contribute to the aggregate losses, claims, damages, liabilities and
expenses of the nature contemplated by such indemnification provision
(including any investigation, legal and other expenses incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claims asserted) to which the Service Provider and the
Company may be subject, in such proportion as is appropriate to reflect the
relative fault of the Service Provider, on the one hand, and the Company,
on the other hand, in connection with the acts, statements or omissions
which resulted in such losses, claims, damages, liabilities or expenses, as
well as any other relevant equitable considerations. The relative fault of
the Service Provider, on the one hand, and of the Company, on the other
hand, shall be determined by reference to, among other things, whether the
act, statement or omission relates to acts taken or omitted or information
supplied by or not provided by the Service Provider or the Company and the
parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such act, statement or omission.
The Service Provider and the Company agree that it would not be
just and equitable if contribution pursuant to this Section 16(d) were
determined by pro rata allocation or by any other method of allocation
which does not take into account the equitable considerations referred to
above. Notwithstanding the provisions of this Section 16(d), no person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f)
of the Securities Act of 1933, as amended (the "Act")) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
For purposes of this Section 16(d), (A) each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and (B) the respective officers, directors, partners, employees,
representatives and agents of the Company or any controlling person thereof
shall have the same rights to contribution as the Company, and each person,
if any, who controls the Service Provider within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act shall have the same rights
to contribution as the Service Provider, subject in each case to the last
sentence of the preceding paragraph.
Any party entitled to contribution will, promptly after receipt
of notice of commencement of any action, suit or proceeding against such
party in respect of which a claim for contribution may be made against
another party or parties under this paragraph, notify such party or parties
from whom contribution may be sought, but the failure to so notify such
party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have under
this paragraph or otherwise. No party shall be liable for contribution
with respect to any action or claim settled without its prior written
consent; provided, however, that such written consent was not unreasonably
withheld.
12. CONFIDENTIALITY
Subject to Section 4.13 of the Purchase Agreement, for a period
of three years after the date hereof, the Service Provider shall refrain,
and shall cause its officers, directors, employees, agents, auditors,
counsel, affiliates and other representatives (collectively,
"Representatives") to refrain, from directly or indirectly:
(a) disclosing to any person or entity (other than the Service
Provider's Representatives) the terms and conditions of this Agreement or
any records, files, documents, data (including without limitation claims or
loss data), or information concerning the Company or its affiliates that
the Service Provider prepares, maintains, uses, or receives in connection
with the transactions contemplated by this Agreement, unless (i) disclosure
is compelled by any court or administrative agency or by other applicable
requirements of Law or (ii) such records, files, documents, data, or
information can be shown to have been (x) generally available to the public
other than as a result of a disclosure by the Service Provider or its
Representatives or (y) available to the Service Provider on a non confidential
basis from a source other than the Company or the Company's
Representatives, provided that such source is not known by the Service
Provider to be bound by a confidentiality agreement with, or other
obligation of secrecy of, the Company or another party; or
(b) using such records, files, documents, data or information for
any purpose (including without limitation directly or indirectly competing
with the Company or any affiliate thereof) except pursuant to this
Agreement.
Notwithstanding the foregoing, from and after the Closing Date,
the Service Provider shall be entitled to use information concerning,
derived from, or related to the Business for any lawful purpose in
connection with the transaction of the Service Provider's business under
the Charter Coinsurance Agreement and the Charter Reinsurance Agreement,
provided that the Service Provider shall comply with all Laws applicable to
the use of such information (including, without limitation, Laws relating
to the use of such information that would otherwise be applicable to the
Company as the issuer of the Reinsured Policies).
For a period of three years after the date hereof, the Company
shall refrain, and shall cause its Representatives to refrain, from
directly or indirectly:
(A) disclosing to any person or entity (other than the
Company's Representatives) the terms and conditions of this Agreement or
any records, files, documents, data (including without limitation claims or
loss data), or information concerning the Service Provider or its
affiliates that the Company prepares, maintains, uses, or receives in
connection with the transactions contemplated by this Agreement, unless
(i) disclosure is compelled by any court or administrative agency or by
other applicable requirements of Law or (ii) such records, files,
documents, data, or information can be shown to have been (x) generally
available to the public other than as a result of a disclosure by the
Company or its Representatives or (y) available to the Company on a non
confidential basis from a source other than the Service Provider or the
Service Provider's Representatives, provided that such source is not known
by the Company to be bound by a confidentiality agreement with, or other
obligation of secrecy of, the Service Provider or another party; or
(B) using such records, files, documents, data or information
for any purpose (including without limitation directly or indirectly
competing with the Company or any affiliate thereof) except pursuant to
this Agreement.
13. TRANSFER OF RECORDS
On the Closing Date or as soon thereafter as the parties shall
agree is reasonably practical, the Company shall forward to the Service
Provider (at the Service Provider's expense) all reports, records,
underwriting files, policy files, claims files and information in any form
in its possession relating to the Reinsured Policies (the "Transferred
Records"). All of such Transferred Records shall remain the property of
the Company or the party on whose behalf the Company is maintaining such
records, as applicable. Such Transferred Records shall be available (at
their place of keeping) for inspection, examination, and audit by the
Company (and its representatives) at all reasonable times. The Service
Provider shall provide to the Company (a) at the Service Provider's
expense, copies of such Transferred Records as may be reasonably required
in connection with the preparation of the Company's financial statements,
state and federal income and other tax returns, and any other filings or
reports required to be filed with, or requested by, state or federal
regulatory authorities or any rating agencies and (b) at the Company's
expense, copies of such Transferred Records for any other reason.
14. NOTIFICATION
The Company shall forward promptly to the Service Provider all
notices and other written communications received by or served upon the
Company relating to the Services or the Reinsured Policies, including,
without limitation (a) all inquiries or complaints from state insurance
regulators, agents, brokers and insureds and (b) all notices of claims,
suits and actions for which the Company receives service of process. The
Company shall be entitled to retain copies of all such materials.
The Service Provider shall forward promptly to the Company copies
of all notices and other written communications received by or served upon
the Service Provider relating to the Services or the Reinsured Policies
including, without limitation (a) all inquiries or complaints from state
insurance regulators, agents, brokers and insureds and (b) all notices of
claims (excluding routine claim notices), suits and actions for which the
Service Provider receives service of process.
15. ALTERNATIVE DISPUTE RESOLUTION
(a) Any dispute arising out of or relating to this Agreement
shall be resolved in accordance with the procedures specified in this
Section 15, which shall be the sole and exclusive procedures for the
resolution of any such disputes.
(b) The parties shall attempt in good faith to resolve any
dispute arising out of or relating to this Agreement promptly by
negotiation between executives who have authority to settle the controversy
and who are at a higher level of management than the persons with direct
responsibility for administration of this Agreement. Any party may give
the other party written notice of any dispute not resolved in the normal
course of business. Within 30 days after delivery of the notice, the
receiving party shall submit to the other a written response. The notice
and the response shall include: (a) a statement of each party's position
and a summary of arguments supporting that position, and (b) the name and
title of the executive who will represent that party and of any other
person who will accompany the executive. Within 30 days after delivery of
the disputing party's notice, the executives of both parties shall meet at
the Company's headquarters, or at such other location as mutually agreed by
the parties, at a mutually convenient time, and thereafter as often as they
reasonably deem necessary, to attempt to resolve the dispute. All
reasonable requests for information made by one party to the other will be
honored.
(c) If the matter has not been resolved within 60 days of the
disputing party's notice, or if the parties fail to meet within 30 days,
either party may initiate litigation of the controversy.
(d) All negotiations, discussions, and communications made or
conducted pursuant to the procedures set forth in paragraph (b) above are
confidential and shall be treated as compromise and settlement negotiations
for purposes of the Federal Rules of Evidence and any other applicable
rules of evidence.
16. NOTICE
Any notice or communication given pursuant to this Agreement must
be in writing and (a) delivered personally, (b) sent by facsimile
transmission, (c) delivered by overnight express, or (d) sent by registered
or certified mail, postage prepaid, as follows:
Service Provider: Allstate Life Insurance Company
3075 Sanders Road, Suite G2H
Northbrook, Illinois 60062
Attention: James P. Zils
Facsimile No.: (847) 402-9116
with a copy to:
Allstate Insurance Company
2775 Sanders Road, Suite A8
Northbrook, Illinois 60062
Attention: Susan L. Lees
Facsimile No.: (847) 402-0158
Company: Charter National Life Insurance Company
c/o Richard G. Petitt
Empire Insurance Group
122 Fifth Avenue
New York, New York 10011
Facsimile No.: (212) 387-2689
with a copy to:
Leucadia National Corporation
315 Park Avenue South
New York, New York 10010
Attention: Joseph S. Steinberg
Telecopy: (212) 598-3245
and a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Stephen E. Jacobs
Facsimile No.: (212) 310-8007
All notices and other communications required or permitted under this
Agreement that are addressed as provided in this Section shall (i) if
delivered personally or by overnight express, be deemed given upon
delivery; (ii) if delivered by facsimile transmission, be deemed given when
electronically confirmed; and (iii) if sent by registered or certified
mail, be deemed given when received. Any party from time to time may
change its address for notice purposes by giving a similar notice
specifying a new address, but no such notice shall be deemed to have been
given until it is actually received by the party sought to be charged with
the contents thereof.
17. EXPENSES
Except as otherwise expressly provided herein, each of the
parties hereto shall pay its own costs and expenses in connection with this
Agreement and its respective obligations hereunder.
18. GOVERNING LAW
This Agreement shall be governed by and construed in accordance
with the Laws of the State of New York, regardless of the Laws that might
otherwise govern under applicable principles of conflicts of laws thereof.
19. INTEGRATION
This Agreement (including the Exhibits hereto), together with
Purchase Agreement, the Charter Coinsurance Agreement, and the Charter
Reinsurance Agreement, contain the entire agreement and understanding
between the parties with respect to the transactions contemplated hereby,
and supersede all prior agreements and understandings, written or oral,
with respect thereto.
20. ASSIGNMENT; BINDING EFFECT
Neither this Agreement nor any of the rights, interests or
obligations under this Agreement shall be assigned, in whole or in part, by
any of the parties hereto without the prior written consent of the other
party in its sole discretion, and any such assignment that is attempted
without such consent shall be null and void. Subject to the preceding
sentence, this Agreement shall be binding upon, inure to the benefit of,
and be enforceable by the parties and their respective successors and
permitted assigns.
21. AMENDMENT
This Agreement may only be amended or modified by a written
instrument executed on behalf of both parties hereto.
22. INDEPENDENT CONTRACTORS
The Service Provider shall be deemed an independent contractor of
the Company for all purposes hereunder. This Agreement shall not be
construed to create an employment, partnership, or joint venture
relationship between the parties hereto.
23. HEADINGS; INTERPRETATION
The headings used in this Agreement have been inserted for
convenience and do not constitute matter to be construed or interpreted in
connection with this Agreement. Unless the context of this Agreement
otherwise requires, (a) words using the singular or plural number also
include the plural or singular number, respectively; (b) the terms
"hereof," "herein," "hereby," "hereto," and derivative or similar words
refer to this entire Agreement (including the exhibits hereto); (c) the
term "Section" refers to the specified Section of this Agreement; (d) the
term "party" means, on the one hand, the Company, and on the other hand,
the Service Provider; and (e) with respect to any party, the term
"affiliate" shall include, without limitation, any person or entity that
becomes an affiliate of such party after the date of this Agreement.
24. REMEDIES
Any term or condition of this Agreement may be waived in writing
at any time by the party that is entitled to the benefit thereof. A waiver
on one occasion shall not be deemed to be a waiver of the same or any other
breach or nonfulfillment on a future occasion. All remedies, either under
this Agreement, or by Law or otherwise afforded, shall be cumulative and
not alternative.
25. SEVERABILITY
If any provision of this Agreement is held to be illegal,
invalid, or unenforceable under any present or future Law, and if the
rights or obligations of the parties hereto under this Agreement will not
be materially and adversely affected thereby, (a) such provision shall be
fully severable; (b) this Agreement shall be construed and enforced as if
such illegal, invalid, or unenforceable provision had never comprised a
part hereof; and (c) the remaining provisions of this Agreement shall
remain in full force and effect and shall not be affected by the illegal,
invalid, or unenforceable provision or by its severance herefrom.
26. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which shall constitute one
and the same instrument and shall become effective when one or more
counterparts have been signed by each of the parties and delivered to the
other parties.
27. NO THIRD PARTY BENEFICIARY
Except as otherwise provided herein, the terms and provisions of
this Agreement are intended solely for the benefit of the parties hereto,
and their respective successors or permitted assigns, and it is not the
intention of the parties to confer third-party beneficiary rights upon any
other person, and no such rights shall be conferred upon any person or
entity not a party to this Agreement.
28. GOOD FAITH
Each party shall act reasonably and in good faith in all matters
within the terms of this Agreement. Clerical errors and oversights
occasioned in good faith in the administration of the Agreement shall not
prejudice any party hereto and shall be rectified appropriately.
29. FORCE MAJEURE
Each party shall be excused from performance for any period and
to the extent that the party is prevented from performing any of its
responsibilities, in whole or in part, as a result of an act of God, war,
civil disturbance, court order, labor dispute, or causes beyond that
party's reasonable control including, but not limited to, failures or
fluctuation in electric power, heat, light, air conditioning, or
telecommunications equipment, and such nonperformance shall not constitute
a default.
IN WITNESS WHEREOF, the parties have executed this Agreement by
their duly authorized officers as of the date first set forth above.
CHARTER NATIONAL LIFE INSURANCE
COMPANY
By:
Richard G. Petitt,
Chairman and Chief Executive Officer
ALLSTATE LIFE INSURANCE COMPANY
By:
James P. Zils
Treasurer
EXHIBIT A
SERVICES
The Service Provider shall provide the following services to the Company:
1. Premium Collection. The Service Provider shall bill and collect all
premiums due under the Reinsured Policies, return any unearned premiums or
other premiums to be refunded, and reconcile amounts paid with returned
billing statements or other remittance media. The Service Provider shall
update the contract owner master records and all other records to reflect
payments received.
2. Premium Auditing. The Service Provider shall audit premium payments
with respect to the Reinsured Policies to ensure the accuracy and
acceptability of such payments.
3. Records Maintenance. The Service Provider shall maintain
applications, policyholder, annuitant, participant, contract owner,
premium, and other necessary records, including all computer records, to
determine the true and accurate status of the Reinsured Policies. Such
records on any Reinsured Policy are and shall remain the property of the
Company. The Service Provider shall maintain and preserve records with
respect to the Separate Accounts as required by Rules 31a-1 and 31a-2 under
the Investment Company Act of 1940, as amended, the Securities Exchange Act
of 1934, as amended, and the rules promulgated by the National Association
of Securities Dealers (the "NASD"). Upon request of the Company or any
state or federal regulatory authorities, the Service Provider shall forward
a complete copy of any record to the requesting party by overnight
delivery.
4. Lapse of Coverage. The Service Provider shall inform policyholders
of any lapse in coverage under the Reinsured Policies.
5. Provision of Forms. The Service Provider shall provide, at the
Service Provider's own expense, forms and supplies necessary to the
performance of the Service Provider's obligations under this Agreement
including, without limitation, confirmation statements and issue-related
forms, contracts, endorsements, and adoption agreements.
6. Performance of Obligations. The Service Provider shall perform all
of the Company's obligations under (i) the participation agreement between
the Company and the mutual fund organization in which assets of the
Separate Accounts are invested (the "Participation Agreement"), (ii) the
Principal Underwriting Agreement to be entered into by the Company and CNL,
Inc. pursuant to the Purchase Agreement, and (iii) the Marketing and
Solicitation Agreement dated September 30, 1988 by and among Scudder Fund
Distributors, Inc., the Company, Charter National Variable Annuities
Account and CNL, Inc.
7. Claims Administration. The Service Provider shall administer claims
on the Reinsured Policies as appropriate, including the following:
(a) Reviewing and paying all claims for benefits which the Service
Provider's review determines to be qualified for payment in accordance with
applicable Reinsured Policy provisions. Any such payments shall be made
within the time periods and in the manner prescribed by applicable Law.
Each payment made by the Service Provider with respect to claims subject to
this Agreement shall, where appropriate, be made in full and final
discharge of the obligations of the Company or the Service Provider under
the applicable Reinsured Policy with respect to such payment;
(b) Reviewing and compromising or denying, as is appropriate based
on the guidelines of the Company and CNL, Inc. in effect immediately prior
to the Effective Time, all claims for benefits which the Service Provider's
review determines to be qualified for such denial or compromise, in
reliance on applicable Reinsured Policy provisions. In the event of non
payment of claims on account of incomplete or insufficient data, the
Service Provider shall acknowledge such fact to the claimant by the earlier
of (i) ten working days from date of receipt of the claim or (ii) the
number of days provided by applicable Law;
(c) Communicating with claimants with respect to the submission,
approval and payment, compromise or denial of claims made under the
Reinsured Policies administered under this Agreement;
(d) Maintaining such files and records as are necessary to enable
the Company, at any time, to determine the true and accurate claim
experience on the Reinsured Policies. Said files and records on any
Reinsured Policy are and shall remain the property of the Company;
(e) Conforming to the reasonable requirements set by the Company
for monthly submission of claims reports; and
(f) Performing such other claim services as may be reasonably
required in connection with the support and administration of the Reinsured
Policies.
(g) Preparing all required Federal tax reports, including without
limitation 1099-R, W-2P, W-2 and 5498 for contract owners and beneficiaries
as required and distributing the same to contract owners and beneficiaries
and appropriate authorities.
(h) Responding to any requests from plan administrators or
trustees for policy information affecting the plan or participants for
qualified plans.
(i) Responding to requests for calculations applicable to annuity
payments as may be necessary for tax calculations.
8. Litigation.
(a) The Service Provider shall defend and prosecute in a manner
consistent with all applicable Law, at its sole cost and expense, all
suits, actions and proceedings arising out of underwriting of the Reinsured
Policies and claims for benefits thereunder. The Company shall have the
right, at its sole cost and expense, to participate in any suit, action or
proceeding arising under the Reinsured Policies. Notwithstanding any
provision in this Agreement to the contrary, the Service Provider shall
have final authority with respect to such defense and prosecution,
including any settlement or compromise thereof without the consent of the
Company, so long as all amounts for which the Company may be held liable
are 100% reinsured under the Charter Coinsurance Agreement or the Charter
Reinsurance Agreement and any such settlement or compromise releases the
Company from all liability for or in connection with such suit, action or
proceeding and does not materially and adversely impair the ability of the
Company to carry on its business and does not contain any admission of
wrongdoing on the part of the Company.
(b) As soon as practicable after receipt by the Service Provider
of notice or threat of the commencement of any suit, action or proceeding
naming the Company as a party, the Service Provider shall provide a copy of
all documentation received in respect thereof (with, where appropriate,
notation as to time and place of service and the identity of the person
served) to the Company. If the Company receives notice or threat of the
commencement of any suit, action or proceeding naming the Service Provider
as a party, the Company shall promptly deliver all documentation received
in respect thereof (with, where appropriate, notation as to time and place
of service and the identity of the person served) to the Service Provider.
The Company shall have the right, at its sole cost and expense, to examine
all files and papers relating to all claims, suits, actions or proceedings
arising under the Reinsured Policies, and the Service Provider shall
cooperate in such examination and consultation. The parties shall provide
each other with a quarterly statement of litigation in progress. The
Service Provider shall not file any complaint or initiate any legal
proceeding in the name of the Company without the written consent of the
Company.
9. Policyholder Services. The Service Provider shall provide general
policyholder services to individuals under the Reinsured Policies,
including, but not limited to, the following:
(a) Responding to inquiries with respect to the scope and amounts
of coverage provided under the Reinsured Policies;
(b) Supplying claimants, policyowners and insureds with
appropriate instructions and forms for reporting claims and for submitting
relevant information;
(c) Issuing timely reports, statements, and confirmations as
required by the Reinsured Policies or the Company's practices in effect
immediately prior to the Effective Time;
(d) Issuing tax reporting forms and other information as required
by applicable regulatory rules;
(e) Processing and recording changes in the Reinsured Policies
(such changes may include but are not limited to, (i) changes of ownership,
beneficiary, amount of insurance, options under the Reinsured Policies, and
(ii) changes in name, changes in address and changes in other data related
to the policyowners and insureds under the Reinsured Policies),
reissuances, and transfer requests (i.e., from one subaccount to another);
(f) Processing policy loans, surrenders, policy conversions and
reinstatements;
(g) Complying with Company guidelines in effect immediately prior
to the Effective Time (subject to adjustment as required by applicable Law)
with respect to replacements and exchange requests;
(h) Calculating (on a daily basis) the net asset value and the
accumulation unit value of each subaccount of the Separate Accounts that
are funding options for the Reinsured Policies in accordance with the
provisions of the Reinsured Policies, as well as with the prospectus and
statement of additional information disclosure on any day when such
calculation is required by the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder.
(i) Calculating (on a daily basis) the mortality and expense
charges, administrative charges, and cost of insurance in accordance with
the provisions of the Reinsured Policies, as well as with the prospectus
and statement of additional information disclosure.
(j) Transmitting orders pursuant to the Participation Agreement
for the purchase or redemption of shares in the investment companies in
which the assets of the Separate Account are invested to such investment
companies or their authorized agents and paying and receiving funds in
connection with such purchases or redemptions as required by any applicable
agreement.
(k) Providing all administrative services required in connection
with the Third Party Reinsurance Agreements (as defined in the Charter
Coinsurance Agreement).
10. Agent Compensation. The Service Provider shall, on behalf of the
Company, pay the compensation due from the Company to the agents or brokers
of record for the Reinsured Policies as determined pursuant to any
agreements under which any payments become due after the Effective Time.
11. Accounting and Reporting Services. With respect to the Reinsured
Policies, the Service Provider shall perform all accounting and reporting
of direct and ceded premiums, claims and other policyholder disbursements,
reserves, policy loans, commissions, and premium tax payments and accruals.
Such services shall include all accounting and reporting necessary to
provide the Company with all required statutory, regulatory, and GAAP data
needed for financial statements and filings and state and federal income
and premium tax reporting and filings.
12. Agent Licensing. The Service Provider shall (i) maintain the
appointment of all necessary resident/countersignature and other agents
used by the Company and (ii) remit compensation to such agents in
accordance with the terms and provisions of their agreements with the
Company.
13. Actuarial Services. The Service Provider shall provide the Company
with the following actuarial services:
(a) Experience analysis (loss ratios, persistency, mortality, and
special studies);
(b) Calculation of all actuarial reserves and liabilities and
other actuarial items necessary to prepare SAP and GAAP financial
statements and supporting exhibits and tax filings and schedules;
(c) Determination of rate changes;
(d) Calculation of tax reserves;
(e) Preparation of all necessary actuarial opinions, memoranda
and/or certifications for annual and quarterly statements;
(f) Maintenance of product files on system;
(g) Ongoing support, as necessary, to compliance function;
(h) Providing responses to state regulators as required;
(i) Providing miscellaneous support to policyowner service; and
(j) Providing the formal actuarial opinions and related reports
required by the NAIC Annual Statement blank and other state requirements,
the Securities and Exchange Commission (the "SEC"), the NASD, any other
regulatory authorities, and external auditors.
14. Compliance Services. The Service Provider shall provide the Company
with the following compliance services:
(a) Federal and state regulatory review and compliance;
(b) Subject to the restrictions set forth in Section 2(c) of the
Agreement, the development and filing of policy forms, riders,
endorsements, and disclosure statements as may be required from time to
time by applicable Law;
(c) Filing of rate changes, as required;
(d) Preparation and submission of (and provision of financial data
required for) all reports required by the SEC (including without limitation
forms N-SAR and 24f-2 Notices), the NASD, and the states (in each case only
after review and approval thereof by the Company);
(e) Review and approval of customer communications;
(f) Coordination of special mailings; and
(g) Handling complaints;
With respect to the Reinsured Policies:
(i) The Service Provider shall advise the Company of any
customer complaint threatening the commencement of legal action or
regulatory action or of any inquiry or complaint received from or forwarded
by a state insurance department or other government agency, better business
bureau or an attorney representing any customer (collectively, a "customer
complaint") within 24 hours of receipt, if possible, but in no instance
later than five business days after receipt thereof, and shall, if
requested by the Company, provide the Company with copies of all pertinent
files and correspondence relating thereto.
(ii) The Service Provider shall be responsible for the
investigation and preparation of responses to all customer complaints and
regulatory inquiries or complaints, provided that no response to a customer
complaint threatening the commencement of legal action or regulatory action
or an inquiry or complaint received from or forwarded by a state insurance
department or other government agency, better business bureau or any
attorney representing any customer shall be sent to said customer,
government agency, better business bureau or attorney if the Company
promptly notifies the Service Provider that the Company intends to respond
to such complaint.
(iii) Subject to the foregoing, all customer complaints shall
be handled in accordance with applicable Law (including without limitation
any response time requirements applicable thereto). With respect to each
customer complaint, the Service Provider shall use all commercially
reasonable efforts to resolve or acknowledge such customer complaint by the
fifth business day after receipt thereof (with respect to customer
complaints from state insurance departments, other regulatory agencies, or
attorneys threatening legal or regulatory action) or by the tenth business
day after receipt thereof (with respect to customer complaints from
consumers or others). A record of all customer complaints shall be
maintained in a log showing the date received, the nature of the complaint,
the action taken (if any) and the date of the response.
(iv) As used herein, a "customer complaint" shall be deemed
to include any written communication primarily expressing a grievance
against the Company or the Service Provider.
Notwithstanding the foregoing, with respect to the Variable
Policies, all complaints and other grievances shall be handled by the
Service Provider in accordance with NASD requirements.
(h) Drafting and filing registration statements and other SEC
related documents, where required, and perform services necessary to meet
SEC requirements with respect to any of the Variable Policies. In
addition, the Service Provider shall distribute at its expense to policy
owners all required prospectuses, post-effective amendments or supplements
to the registration statements of the Separate Account or of any underlying
funds as well as annual and semi-annual reports.
(i) Making all filings and obtaining all regulatory approvals
required with regard to advertising of the Reinsured Policies, including
without limitation all filings and approvals required by applicable Laws
and NASD requirements (except to the extent that such services are
performed by other entities pursuant to written agreements with the
Company).
(j) Providing regulatory supervision and compliance, to the extent
the Reinsurer is legally permitted, as to all servicing functions
contemplated by this Agreement.
(k) Ensuring SEC and NASD compliance for variable contracts,
prospectuses, and registration statements including the submission of any
required information, conducting annual compliance audits, quarterly
complaint reporting, registering and terminating representatives and
monitoring continuing education requirements; and
(l) Monitoring statutes and regulations of the insurance
departments in the various states in which the policy owners or Reinsured
Policies are located to ensure compliance therewith and to ensure that any
actions or communications required by such regulations or statutes are
properly made.
(m) Monitoring the federal securities statutes and the rules,
regulations, orders, and interpretations thereunder and the securities
statutes and rules, regulations, orders, and interpretations thereunder of
the various states in which policy owners or Reinsured Policies are located
to ensure compliance therewith and to ensure that any actions or
communications required thereby are properly made.
(n) Monitoring the federal tax and labor statutes and the rules,
regulations, orders, and interpretations thereunder and the tax and labor
statutes and rules, regulations, orders, and interpretations thereunder of
the various states in which policy owners or Reinsured Policies are located
to ensure compliance therewith and to ensure that any actions or
communications required thereby are properly made.
(o) Providing such services as the Company may require under its
direction in connection with responding to inquiries from the SEC, NASD,
NAIC or the insurance or securities departments of the various states in
which the policy owners or the Reinsured Policies are located.
15. Data Processing. The Service Provider shall provide all data
processing services, software, and facilities necessary to provide the
Services.
16. General Services and Oversight. The Service Provider shall provide
appropriate management oversight of the financial performance and monitor
significant activities relating to the Reinsured Policies, providing
appropriate data to the Company in an agreed-upon format, including the
following:
(a) Making all records relating to the Reinsured Policies
available to the Company for audit upon reasonable notice and during the
regular business hours of the Service Provider. Such records shall
include, but not be limited to, federal tax documentation, policyholder
records, in-force listings, premium records, claim forms, itemized
billings, eligibility documentation, and agent records and files; and
(b) Performing such other administrative services as may be
reasonably required in connection with the support and administration of
the Reinsured Policies.
17. Contract Issue and Underwriting.
a. The Service Provider shall (i) review each application for a
New Policy and (ii) apply the Company's issue and underwriting criteria to
such application. Such criteria shall be the issue and underwriting
criteria of the Company on the Effective Time, and such criteria may be
amended only by mutual written agreement of the Company and the Reinsurer.
The Service Provider shall cause to have printed and maintain an adequate
supply of forms of Company insurance and annuity contracts that may be
issued as New Policies.
b. The Service Provider shall (i) prepare contract data pages,
(ii) issue contracts for paid business and (iii) mail such materials to
contract owners or agents, as appropriate.
18. Proxy Processing.
a. The Service Provider shall receive record date information and
proxy solicitation from underlying investment vehicle(s).
b. The Service Provider shall prepare proxy ballots.
c. The Service Provider shall mail solicitation and
resolicitations, if necessary.
d. The Service Provider shall maintain all proxy registers and
other required proxy material.
DAFS02...:\30\76830\0137\1170\AGRD177W.08J
Sutherland, Asbill & Brennan, L.L.P.
1275 Pennsylvania Avenue
Washington, D.C. 20004-2404
April 22, 1998
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. 17 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
April 15, 1998
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. 17 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,
/S/
John R. Petrowski
Vice President, General Counsel
& Corporate Secretary
CONSENT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Charter National Life Insurance Company
We consent to the inclusion of the following in the 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 March 20, 1998, on our audits of the financial
statements of Charter National Variable Annuity Account as of December 31,
1997 and for each of the two years in the period ended December 31, 1997.
- Our report dated March 20, 1998, on our audits of the consolidated
financial statements of Charter National Life Insurance Company and
Subsidiaries as of December 31, 1997 and 1996 and for each of the three
years in the period ended December 31, 1997.
- Our report dated March 20, 1998, of our audits of the consolidated
financial statement schedules of Charter National Life Insurance Company as
of December 31, 1997 and 1996 and for each of the three years in the period
ended December 31, 1997.
- The reference to our Firm under the caption "Independent
Accountants".
/S/
COOPERS AND LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 22, 1998
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each Officer/Director whose signature
appears below hereby constitutes and appoints Kathleen A. Urbanowicz and A.
Sales Miller of Charter National Life Insurance Company, and each of them
(with power to each of them to act alone), as such person's true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for such person and in such person's name, place, and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to the Registration Statements on Form S-6,
(File No. 33-3446), Form N-4, (File No. 33-16482) and Form N-4, (File No.
33-22925) filed under the Securities Act of 1933 and the Investment Company
Act of 1940, and to file all exhibits thereto, and all other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as
fully and to all intents and purposes as such person might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or a substitute or substitutes, may or shall lawfully do or cause
to be done by virtue hereof.
Signature Date Signature Date
______________________ 2/23/98 ______________________ 2/23/98
/S/Richard G. Petitt /S/Ian M. Cumming
______________________ 2/23/98 ______________________ 2/23/98
/S/Mark Hornstein /S/James Jordan
______________________ 2/23/98 ______________________ 2/23/98
/S/Jesse C. Nichols III /S/Joseph A. Orlando
______________________ 2/23/98 ______________________ 2/23/98
/S/John R. Petrowski /S/Joseph S. Steinberg
______________________ 2/23/98 ______________________ 2/23/98
/S/John Burns /S/Barbara Lowenthal
______________________ 2/23/98 ______________________ 2/23/98
/S/Timothy C. Sentner /S/Laura Ulbrandt
