SCUDDER HORIZON PLAN
PROSPECTUS DATED MAY 1, 2000
A NO-LOAD FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY
offered by
CHARTER NATIONAL LIFE INSURANCE COMPANY
through the
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
This prospectus describes the Scudder Horizon Plan Contract ("Contract"). The
Contract has 10 investment alternatives -- a general account (paying a
guaranteed minimum fixed rate of interest) and 9 sub-accounts of the Charter
National Variable Annuity Account. Money you direct to a sub-account is invested
exclusively in a single portfolio of the SCUDDER VARIABLE LIFE INVESTMENT FUND.
The 9 mutual fund portfolios we offer through the sub-accounts under this
Contract are:
SCUDDER VARIABLE LIFE INVESTMENT FUND
Balanced Portfolio International Portfolio
Bond Portfolio Large Company Growth Portfolio
Capital Growth Portfolio Money Market Portfolio
Global Discovery Portfolio 21st Century Growth Portfolio*
Growth and Income Portfolio
* Prior to May 1, 2000, the 21st Century Growth Portfolio was named the Small
Company Growth Portfolio.
VARIABLE ANNUITY CONTRACTS INVOLVE CERTAIN RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
o The investment performance of the portfolios in which the sub-accounts
invest will vary.
o We do not guarantee how any of the portfolios will perform.
o The Contract is not a deposit or obligation of any bank, and no bank
endorses or guarantees the contract.
o Neither the U.S. Government nor any Federal agency insures your investment
in the Contract.
Please read this prospectus carefully before investing and keep it for future
reference. It contains important information about the Contract.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THIS CONTRACT IS NOT AVAILABLE IN ALL STATES.
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The Contract is designed to aid you in long-term financial planning.
To learn more about the Contract, you may want to look at the Statement of
Additional Information dated May 1, 2000 (the "SAI"). For a free copy of the
SAI, contact us at:
Scudder Horizon Plan
Customer Service Center
PO Box 80469 Lincoln,
NE 68501-0469
Overnight Mailing Address:
2940 S. 84th Street
Lincoln, NE 68506 1-800-242-4402
Charter has filed the SAI with the U.S.
Securities and Exchange Commission (the "SEC") and has incorporated it by
reference into this prospectus. The SAI's table of contents appears at the end
of this prospectus.
The SEC maintains an Internet Web site (http://www.sec.gov) that contains the
SAI, material incorporated by reference, and other information. You may also
read and copy any of these documents at the SEC's public reference room in
Washington, D.C. Please call 1-800-SEC-0330 for further information on the
operation of the public reference room.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
DEFINITIONS........................................................................5
SUMMARY............................................................................7
EXPENSE TABLE.....................................................................11
Financial Statements.........................................................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....................................15
Services Agreements with Allstate............................................16
SCUDDER VARIABLE LIFE INVESTMENT FUND.............................................16
THE CONTRACT......................................................................18
Contract Application and Issuing the Contract................................18
Examination Period...........................................................18
Payments.....................................................................19
Allocating Payments..........................................................21
Transfers....................................................................21
Account Value................................................................24
Contract Ownership...........................................................26
Assignment of Contract.......................................................26
ACCESS TO YOUR MONEY..............................................................27
Full and Partial Surrenders..................................................27
Annuity Payments.............................................................28
Annuity Income Options.......................................................29
Maturity Date................................................................30
Death Benefit................................................................31
Beneficiary Provisions.......................................................31
Death of Owner...............................................................31
Employment-Related Benefit Plans.............................................32
EXPENSES..........................................................................32
Mortality and Expense Risk Charge............................................32
Contract Administration Charge...............................................33
Records Maintenance Charge...................................................33
Premium Taxes................................................................34
Other Taxes..................................................................34
Transfer Charges.............................................................34
Portfolio Charges............................................................34
FEDERAL TAX MATTERS...............................................................35
Taxation of Annuities in General.............................................35
GENERAL PROVISIONS................................................................40
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The Contract.................................................................40
Delay of Payment and Transfers...............................................40
Contract Expiration..........................................................41
Misstatement of Age or Sex...................................................41
Nonparticipating Contract....................................................41
Notices and Inquiries........................................................41
Records and Reports..........................................................42
Year 2000....................................................................42
SERVICES AGREEMENT................................................................42
DISTRIBUTION OF THE CONTRACT......................................................43
THE GENERAL ACCOUNT...............................................................44
VOTING RIGHTS.....................................................................45
LEGAL MATTERS.....................................................................46
ADDITIONAL INFORMATION............................................................46
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION........................47
APPENDIX A-- CONDENSED FINANCIAL INFORMATION.....................................48
</TABLE>
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DEFINITIONS
ACCOUNT VALUE -- Your Contract's total value in the sub-accounts and the general
account. The Contract refers to account value as "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. If the annuitant dies before the Maturity Date, we will
pay a death benefit.
ANNUITY PAYMENTS -- After the Maturity Date, we promise to pay you an income in
the form of regular fixed annuity payments. The amount of the annuity payments
depends on the amount of money you accumulate in the Contract before the
Maturity Date and on the annuity income option you choose.
BENEFICIARY -- The person(s) you select to receive the benefits of the Contract
if no Owner is living.
CONTRACT DATE -- The date listed in the Contract that we use to determine
Contract years, Contract months, and Contract anniversaries. The Contract Date
is usually the same date as the Effective Date.
DEATH BENEFIT -- An amount we pay if the annuitant dies before the Maturity
Date. The death benefit is the greater of the account value or the Guaranteed
Death Benefit.
DECLARATION PERIOD -- A period of time between 1 and 3 years during which we
will credit specified rates of interest on payments you allocate to the general
account.
EFFECTIVE DATE -- A date within two business days after we have
received a completed application and the full initial payment.
FUND -- The Scudder Variable Life Investment Fund, an open-end, diversified
management investment company in which the sub-accounts invest.
GENERAL ACCOUNT -- The account containing all of Charter's assets, other than
those held in its separate accounts.
GUARANTEED DEATH BENEFIT -- The sum of the payments you made, less any partial
surrenders.
HOME OFFICE -- The home office of Charter is located at 3100 Sanders Road,
Northbrook, IL 60062. Charter's customer service center and administrative
office are located at 2940 S. 84th Street, Lincoln, NE 68506.
JOINT ANNUITANT -- If you select annuity income option 2, you may designate a
joint annuitant. We will use the joint annuitant's life, in addition to the
annuitant's life, 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.
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MATURITY DATE -- The date on which your account value is applied to an annuity
income option, 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 (YOU, YOUR) -- 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.
PORTFOLIO -- A separate investment portfolio of the Fund in which a sub-account
of the Variable Account invests.
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 issued in connection with a retirement plan
that qualifies for special Federal income tax treatment.
SUB-ACCOUNT -- An investment division of the Variable Account. Each sub-account
invests exclusively in a single portfolio of the Fund.
UNIT VALUE -- The value of each unit of a sub-account. It is calculated each
Valuation Period. It is similar to the net asset value of a mutual fund.
VALUATION DATE -- Each day on which we value the assets in the sub-accounts,
which is each day on which the New York Stock Exchange (NYSE) is open for
trading. We are open for business on each day the NYSE is open.
VALUATION PERIOD -- The period that begins at the close of one Valuation Date
and ends at the close of the next Valuation Date.
VARIABLE ACCOUNT -- Charter National Variable Annuity Account, a separate
account composed of sub-accounts which we established to receive and invest the
portion of net payments under the Contract that you do not allocate to our
general account.
WE, US, OUR, CHARTER, THE COMPANY -- Charter National Life Insurance Company.
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SUMMARY
This summary answers certain basic questions you may have about the Contract.
More detailed information about the Contract appears later in this Prospectus.
Please read this Prospectus carefully.
WHY SHOULD I PURCHASE THIS CONTRACT?
The Contract provides a way for you to invest on a tax-deferred basis in the
sub-accounts of the Variable Account and in the general account. The Contract is
designed to enable you to accumulate money for retirement and other long-term
investment purposes. "Tax-deferred" means that earnings and appreciation on the
assets in your Contract are not taxed until you take money out by a full or
partial cash surrender or by annuitizing the Contract, or until we pay the death
benefit.
HOW CAN I PURCHASE THE CONTRACT?
You may purchase the Contract from us (Charter National Life Insurance Company)
for a minimum payment of $2,500 ($2,000 for certain Qualified Contracts). We do
not deduct a commission or sales charge from any payment you make. You may make
additional payments under the Contract, subject to certain conditions. Send your
payments to:
Scudder Horizon Plan
Customer Service Center
Mailing address:
P.O. Box 80469
Lincoln, NE 68501-0469
Overnight Mailing Address:
2940 S. 84th Street
Lincoln, NE 68506
WHAT ANNUITY BENEFITS ARE OFFERED UNDER THE CONTRACT?
The Contract allows you to receive fixed annuity payments under one of three
annuity income options. Annuity payments begin after the Maturity Date, provided
the annuitant is living. The three annuity income options currently available
are: (i) life annuity with installment refund; (ii) joint and survivor life
annuity with installment refund; and (iii) installments for life.
Other annuity income options may be available on the Maturity Date. The dollar
amount of each annuity payment will be fixed on the Maturity Date and guaranteed
by us.
WHAT INVESTMENTS ARE AVAILABLE UNDER THE CONTRACT?
You may invest your money in any of the following portfolios of the Scudder
Variable Life Investment Fund by directing your payments into the corresponding
sub-accounts:
o Balanced
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o Bond
o Capital Growth
o Global Discovery
o Growth and Income
o International
o Large Company Growth
o Money Market
o 21st Century Growth*
* Prior to May 1, 2000, the 21st Century Growth Sub-account was named the Small
Company Growth Sub-account.
Each sub-account invests in Class A shares of its corresponding portfolio. The
assets of each portfolio are held separately from the assets of other portfolios
and each has separate investment objectives and policies. The attached
prospectus for the Fund more fully describes the portfolios. Scudder Kemper
Investments Inc. is the investment adviser for the portfolios.
Your investment in the sub-accounts will fluctuate daily based on the investment
results of the portfolios in which you invest, and on the fees and charges
deducted. You bear the investment risk for amounts you invest in the
sub-accounts.
WHAT FIXED RATE OPTIONS ARE AVAILABLE UNDER THE CONTRACT?
You may allocate funds to the general account and receive a specified rate of
return. We will credit interest to your payments for the length of the
Declaration Period you choose at a guaranteed rate we specify in advance. We
offer Declaration Periods of 1 and 3 years. At the end of the Declaration
Period, you have the option to move funds into any available sub-account or into
another Declaration Period that has a new specified rate of interest that we
guarantee will be no less than 3.5%.
We guarantee interest, as well as principal, on money placed in the general
account.
WHAT IS THE PURPOSE OF THE VARIABLE ACCOUNT?
We established the Variable Account to invest the payments we receive under our
variable annuities, including this Contract. The Variable Account is divided
into sub-accounts. Each sub-account invests exclusively in a portfolio of the
Fund. Under Illinois law, the assets in the Variable Account associated with the
Contract are not affected by, nor chargeable with, liabilities arising out of
any other business we conduct.
CAN I TRANSFER ASSETS WITHIN THE CONTRACT?
Yes. You have the flexibility to transfer assets within the Contract. You may
transfer amounts among the sub-accounts and from the sub-accounts to the general
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account at any time. You may also transfer amounts from the general account to
the sub-accounts or within the general account at the end of a Declaration
Period.
We do not impose a charge for any transfers. In the future, we may impose a
transfer charge of $10 for the third and subsequent transfer requests made
during a Contract Year.
WHAT ARE MY EXPENSES UNDER THE CONTRACT?
On each Valuation Date, we deduct an Administrative Expense Charge at an annual
rate of 0.30%, and a Mortality and Expense Risk Charge at an annual rate of
0.40%, from the amount you have invested in each sub-account. These charges are
not deducted from the general account. We do not charge an annual maintenance
fee, although the Contract permits us to deduct a maximum fee of $40 in the
future.
We will deduct state premium taxes, which currently range from 0% to 3.5%, if
your state requires us to pay premium taxes. We will deduct the taxes either
when we incur the tax or at a later time.
We do not deduct any surrender charges on full or partial surrenders.
The portfolios also deduct investment charges from amounts you have invested in
the portfolios through the sub-accounts. These charges range from 0.43% to 1.63%
annually, depending on the portfolio. See the prospectus for the Fund and the
Fee Table in this Prospectus.
DO I HAVE ACCESS TO MY MONEY IN THE CONTRACT?
Yes. You may make a full or partial surrender of the Contract at any time before
the Maturity Date or the annuitant's death. No surrender charges apply.
For Qualified Contracts issued under the Internal Revenue Code ("Code") Section
403(b), certain restrictions will apply. You may also have to pay Federal income
taxes and a penalty tax on any money you take out of the Contract.
WHAT IS THE DEATH BENEFIT?
If the annuitant dies before the Maturity Date, we pay you, the owner, the
greater of the account value or the Guaranteed Death Benefit. If the owner of a
Nonqualified Contract dies before the Maturity Date and before the annuitant's
death, then we will pay the account value in a lump sum to the joint owner no
later than 5 years following the owner's death (if there is no joint owner, then
we will pay the beneficiary).
WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF INVESTING IN THE CONTRACT?
The Contract's earnings are generally not taxed until you take them out. For
Federal tax purposes, if you take money out before the Maturity Date, earnings
come out first and are taxed as income. If you are younger than 59 1/2 when you
take money out, you may be charged a 10% Federal penalty tax on the earnings.
The annuity payments you receive after the Maturity Date are considered partly a
return of your original investment; that part of each payment is not taxable as
income.
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Different tax consequences may apply for a Contract used in connection
with a qualified plan.
CAN THE CONTRACT BE RETURNED AFTER I RECEIVE IT?
Yes. You may return the Contract for a refund by returning the Contract to our
customer service center within 10 days after you receive it. As permitted by
federal or state law, the amount of the refund will generally be the initial
payment, plus (or minus) gains (or losses) from investing the payment in the
sub-accounts you selected on your application, plus interest earned on amounts
you allocated to the general account. In some states you may have more than 10
days, or receive a different refund amount. See "Examination Period" and "State
Exceptions."
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EXPENSE TABLE
This Expense Table illustrates the current charges and deductions under the
Contract, as well as the Fund's fees and expenses for the 1999 calendar year.
The purpose of this table is to assist you in understanding the various cost and
expenses that you will bear directly and indirectly. The Fund has provided the
information pertaining to the Fund.
<TABLE>
<CAPTION>
CONTRACT OWNER TRANSACTION EXPENSES
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<S> <C>
Sales Load Imposed on Payments NONE
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Deferred Sales Load NONE
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Surrender Fee NONE
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Transfer Charge (transfers made between sub-accounts and/or to the NONE*
general account during a Contract Year)
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ANNUAL RECORDS MAINTENANCE CHARGE NONE*
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VARIABLE ACCOUNT ANNUAL EXPENSES (as a percentage of your average net
assets in the Variable Account)
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Mortality and Expense Risk Charge 0.40%
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Contract Administration Charge 0.30%
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Total Variable Account Annual Expenses 0.70%
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</TABLE>
* Charter does not currently impose a transfer charge or annual Records
Maintenance Charge, but we reserve the right to impose either or both of
these charges in the future.
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SCUDDER VARIABLE LIFE INVESTMENT FUND ANNUAL EXPENSES (after voluntary
reductions and reimbursements) (as a percentage of average net assets for the
1999 calendar year)
<TABLE>
<CAPTION>
TOTAL ANNUAL
MANAGEMENT FEES OTHER EXPENSES EXPENSES AFTER
PORTFOLIO FEE WAIVER
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced 0.47% 0.08% 0.55%
Bond 0.47% 0.09% 0.56%
Capital Growth 0.46% 0.03% 0.49%
Global Discovery* 0.98% 0.65% 1.63%
Growth and Income 0.48% 0.08% 0.56%
International 0.85% 0.18% 1.03%
Large Company Growth** 0.00% 1.25% 1.25%***
Money Market 0.37% 0.06% 0.43%
21st Century Growth** 0.00% 1.50% 1.50%
- ------------------------------------------------------------------------------------
</TABLE>
* Beginning May 1, 2000, the portfolio's adviser has agreed to waive a
portion of its fees to the extent necessary to limit the expenses of the
Global Discovery Portfolio to 1.25% of average daily net assets. This
expense limit will remain in effect until April 30, 2001.
** Until April 30, 2001, the portfolio's adviser has agreed to waive a portion
of its fees to the extent necessary to limit the expenses of the Large
Company Growth Portfolio and 21st Century Growth Portfolio to 1.25% and
1.50% respectively. As a result, actual 1999 expenses without giving effect
to the expense limitation, the total expenses for the Large Company Growth
Portfolio and 21st Century Growth Portfolio were 3.47% and 2.90%
respectively.
*** Actual 1999 total expenses for the Large Company Growth Portfolio reflect a
.355% reimbursement of fees from the portfolio's adviser to the portfolio.
EXAMPLE
The following example illustrates the expenses that you would pay on a $1,000
investment, assuming 5% annual return on assets, if you continued the Contract,
surrendered or annuitized at the end of each period:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SUB-ACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Balanced $13 $40 $69 $152
Bond $13 $40 $70 $153
Capital Growth $12 $38 $66 $145
Global Discovery $24 $74 $126 $269
Growth and Income $13 $40 $70 $153
International $18 $55 $95 $205
Large Company Growth $20 $62 $106 $229
Money Market $12 $36 $63 $138
21st Century Growth $23 $70 $119 $255
- --------------------------------------------------------------------------------
</TABLE>
The fee table and example above are based upon the current level of charges
deducted under the Contract. In the future, we may increase the Mortality and
Expense Risk Charge to .70% per year, establish a Records Maintenance Charge of
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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. We currently have no
intention of changing our charges.
Neither the fee table nor the example reflects the deduction of any premium tax.
You should not consider this example to represent past or future expenses,
performance or return. The example assumes that any fund expense waivers or
reimbursement arrangements described in the footnotes on page 12 are in effect
for the time periods shown. 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.
A financial history of each sub-account is included in Appendix A of this
Prospectus.
FINANCIAL STATEMENTS
The financial statements of Charter and the Variable Account are included in the
SAI.
CALCULATION OF YIELDS AND TOTAL RETURNS
We may periodically advertise yields and standard total returns for the
sub-accounts and the portfolios. These figures will be based on historical
earnings and are not intended to indicate future performance.
Yields and standard total returns include all charges and expenses you would pay
under the Contract -- the Mortality and Expense Risk Charge (0.40%) and the
Contract Administration Charge (0.30%).
The yield of the Money Market sub-account refers to the annualized investment
income that an investment in the sub-account generates over a specified
seven-day period. The effective yield of the Money Market sub-account is
calculated in a similar way but, when annualized, we assume that the income
earned by the investment has been reinvested. The effective yield will be
slightly higher than the yield because of the compounding effect of the assumed
reinvestment.
The yield of a sub-account (except the Money Market sub-account) refers to the
annualized income that an investment in the sub-account generates over a
specified thirty-day period.
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The average annual total return of a sub-account assumes that an investment has
been held in the sub-account for certain periods of time including the period
measured from the date the sub-account began operations. We will provide the
average annual total return for each sub-account that has been in operation for
1, 5, and 10 years. The total return quotations will represent the average
annual compounded rates of return that an initial investment of $1,000 would
earn as of the last day of the 1, 5 and 10 year periods.
The yield and total return calculations are not reduced by any premium taxes.
Applying premium taxes will reduce the yield and total return of a Contract.
For additional information regarding yield and total return calculations, please
refer to the SAI.
OTHER PERFORMANCE DATA
We may disclose other performance data, such as cumulative total return and
nonstandard total returns. This means that the data may be presented for
different time periods and different dollar amounts.
We may also present historic performance data for the portfolios since their
inception that is reduced by some or all of the fees and charges under the
Contract. Such adjusted historic performance data includes data that precedes
the inception dates of the sub-accounts, but is designed to show the performance
that would have resulted if the Contract had been available during that time.
We will only disclose non-standard performance data if we also disclose the
standard performance data. For additional information regarding the calculation
of other performance data, please refer to the SAI.
Advertising, sales literature, and other communications may compare the expense
and performance data for the Contract and each sub-account with other variable
annuities tracked by independent services such as Lipper Analytical Services,
Inc., Morningstar and the Variable Annuity Research Data Service. These services
monitor and rank the performance and expenses of variable annuity issuers on an
industry-wide basis. We may also make comparisons using other indices that
measure performance, such as Standard & Poor's 500 Composite or the Dow Jones
Industrial Average. Unmanaged indices may assume reinvestment of dividends but
do not deduct administrative and management costs and expenses.
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We may report other information including the effect of tax-deferred compounding
on a sub-account's returns, illustrated by tables, graphs, or charts.
Tax-deferred compounding can lead to substantial long-term accumulation of
assets, if the portfolio's investment experience is positive. Sales literature,
advertisements or other reports may refer to A.M. Best's rating of Charter as an
insurance company.
CHARTER AND THE VARIABLE ACCOUNT
CHARTER NATIONAL LIFE INSURANCE COMPANY
Charter was originally incorporated as a stock life insurance company under the
laws of the State of Missouri on December 7, 1955. On December 21, 1999, Charter
was redomesticated to the State of Illinois. Charter principally engages in the
offering of insurance products. We are authorized to conduct business in 49
states, the District of Columbia and Puerto Rico. Our home office is located at:
3100 Sanders Road, Northbrook, IL 60062.
On July 1, 1999, Charter became a wholly owned subsidiary of Allstate Life
Insurance Company ("Allstate"), a stock life insurance company incorporated
under the laws of the State of Illinois. Charter was previously a wholly owned
subsidiary of Leucadia National Corporation ("Leucadia"). Allstate is a wholly
owned subsidiary of Allstate Insurance Company, a stock property-liability
insurance company incorporated under the laws of the State of Illinois. Allstate
Insurance Company is wholly owned by The Allstate Corporation, a Delaware
corporation.
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
Charter originally established the Variable Account as a separate investment
account under the laws of the State of Missouri on May 15, 1987. Since December
21, 1999, in conjunction with the redomestication of Charter to the State of
Illinois, the Variable Account has been governed by the laws of the State of
Illinois. The Variable Account receives and invests the payments under the
Contracts. We may offer other variable annuities for which the Variable Account
may receive and invest payments.
Under Illinois law, that portion of the assets of the Variable Account equal to
the reserves and other contract liabilities connected with the account shall not
be chargeable with liabilities arising out of any other business we may conduct.
The assets of the Variable Account, however, will be available to cover the
liabilities of our general account to the extent that Variable Account assets
exceed its liabilities arising under the variable annuity contracts it supports.
The obligations under the Contracts are obligations of Charter.
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The Variable Account is divided into sub-accounts. Each sub-account invests
exclusively in shares of one of the Fund's portfolios. Income, gains and losses
from each sub-account's assets are credited to or charged against such
sub-account without regard to income, gains or losses of any other sub-account
or income, gains, or losses arising out of our other business. The Variable
Account is registered with the Securities and Exchange Commission ("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.
SERVICES AGREEMENTS WITH ALLSTATE
On September 2, 1998, Charter and Leucadia entered into a coinsurance agreement
with Allstate Life Insurance Company reinsuring 100% of Charter's rights,
liabilities and obligations with respect to the Variable Account under the
Contracts. On the same date, Charter and Allstate entered into an administrative
services agreement under which Allstate or an affiliate will administer the
Contracts. Neither of these agreements will change the fact that Charter is
primarily liable to you under your Contract.
SCUDDER VARIABLE LIFE INVESTMENT FUND
The Variable Account invests exclusively in shares of the Scudder Variable Life
Investment Fund (the "Fund"). The Fund is registered with the SEC under the
Investment Company Act of 1940, as amended ("1940 Act") as an open-end,
diversified management investment company. Scudder Kemper Investments, Inc. is
the investment adviser to the mutual fund portfolios available under the
Contract.
If the shares of any of the Portfolios are no longer available for investment by
the Variable Account or if, in our judgment, further investment in such shares
is no longer desirable in view of the purposes of the Contract, we may eliminate
that Portfolio and substitute shares of another eligible investment fund. Any
substitution of Securities will comply with the requirements of the 1940 Act. We
also may add new Variable Sub-accounts that invest in additional mutual funds.
We will notify you in advance of any changes.
In addition to the Variable Account, the Fund's shares are sold to variable life
insurance and variable annuity separate accounts of other insurance companies,
including an insurance company affiliated with us. Someday, 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. But, currently
neither the Fund nor Charter foresees any such disadvantages to either variable
annuity owners or variable life insurance owners. The Fund's management 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
response, if any, they should take. In addition, if we believe that the Fund's
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response to any of those events or conflicts insufficiently protects our Owners,
then we will take appropriate action.
The sub-accounts invest exclusively in the Class A shares of following
portfolios of the Fund:
o Balanced Portfolio
o Bond Portfolio
o Capital Growth Portfolio
o Global Discovery Portfolio
o Growth and Income Portfolio
o International Portfolio
o Large Company Growth Portfolio
o Money Market Portfolio
o 21st Century Growth 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 have no effect on another portfolio's investment performance.
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 that the Fund's Trustees established. See the Fund's prospectus for
information regarding the Adviser's fees.
The general public may not purchase these underlying portfolios. Their
investment objectives and policies may be similar to other portfolios and mutual
funds managed by the same investment adviser that are sold directly to the
public. You should not expect that the investment results of the other
portfolios would be similar to those of the underlying portfolios.
THERE IS NO ASSURANCE THAT ANY PORTFOLIO WILL ACHIEVE ITS OBJECTIVE. THE SCUDDER
VARIABLE LIFE INVESTMENT FUND PROSPECTUS CONTAINS MORE DETAILED INFORMATION,
INCLUDING A DESCRIPTION OF THE RISKS INVOLVED IN INVESTING IN EACH PORTFOLIO AND
A DESCRIPTION OF EACH PORTFOLIO'S INVESTMENT OBJECTIVE. A COPY OF THE FUND'S
PROSPECTUS IS ATTACHED TO THIS PROSPECTUS. YOU SHOULD CAREFULLY READ THE FUND'S
PROSPECTUS BEFORE INVESTING IN A CONTRACT.
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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. We have filed a copy of the Contract as an exhibit to this Registration
Statement. It is available upon request from us.
CONTRACT APPLICATION AND ISSUING THE CONTRACT
The Contract is available to individuals, certain retirement plans and
individual retirement accounts (IRA) that qualify for special Federal income tax
treatment. The Contract is not available for use as a "Tax-Sheltered Annuity"
qualifying under Section 403(b) of the Code.
If you purchase a Contract which qualifies as an IRA under Section 408(b), you
should be aware that the Code imposes certain restrictions on those Contracts.
Before we issue a Contract, we must receive your properly completed application
and a minimum payment of $2,500 ($2,000 in the case of some Qualified
Contracts). We will mail you a Premium Receipt form if you request one. You must
name the annuitant in the Contract application. If the Contract qualifies as an
IRA under Section 408(b), then you must be the annuitant. We reserve the right
to decline an application for any reason. If we decline an application, then we
will refund the full initial payment.
After underwriting is completed and the Contract is delivered to you, the
Contract will be deemed to have commenced as of the Effective Date. The
Effective Date is a date within two business days after we receive a completed
application and the full initial payment. 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.
We use the Contract Date to determine Contract Years, Contract Months, and
Contract Anniversaries.
EXAMINATION PERIOD
You may cancel the Contract for a refund within 10 days after you receive the
Contract, or any longer period your state may require. Depending on the laws of
the state of issue and your age, we will refund the initial payment in one of
the following methods. See your Contract for details.
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RETURN OF PREMIUM PLUS OR MINUS INVESTMENT EXPERIENCE. In most states, if you
return the Contract, we will refund the initial payment, plus or minus gains or
losses from investing the payment in the sub-accounts you chose on your
application, plus any interest earned on the amount you allocated to the general
account. We will calculate these refunds as of the date that we receive the
Contract. If you allocate all or part of the payment to the sub-accounts, then
the amount of your refund may be more or less than the initial payment,
depending on the investment performance of your selected sub-accounts. If you
allocate all of the payment to the general account, then we will always refund
an amount equal to or greater than the payment.
RETURN OF PREMIUM. If your state requires us to refund your premium to you, then
we 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. We will
calculate your refund as of the date we receive the Contract. During the
Examination Period, the portion of the initial payment you allocated to the
Variable Account will be invested in the Money Market sub-account. Once the
Examination Period expires, we will reallocate the account value to the
sub-accounts you select.
PAYMENTS
You should make all checks or drafts payable as directed on the application. You
can also make payments by requesting on your 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 you must pay to purchase a Contract
is $2,500 ($2,000 in the case of some Qualified Contracts). The initial payment
is the only payment we require you to make under the Contract. When you make the
initial payment, you must specify whether it is for a purchase of a Nonqualified
or Qualified Contract.
If the initial payment is derived from an exchange or surrender of another
annuity contract, then we may require that you provide information about the
Federal income tax status of the previous annuity contract. If you desire to
invest monies qualifying for different annuity tax treatment under the Code,
then we will require you to purchase separate Contracts. Each separate Contract
requires a minimum initial payment of $2,500 ($2,000 in the case of some
Qualified Contracts). We reserve the right to waive the minimum initial payment
amount and accept less than $2,500.
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If we receive a properly completed application with the initial payment, then we
will credit that payment to the Contract within two business days of receiving
the payment. We may deduct premium taxes from the payment before we credit it to
the Contract. If we receive an incomplete application, then we will credit the
payment within two business days of receiving the completed application. If, for
any reason, we do not credit the payment to your account within five business
days, then we will immediately return the payment to you. You may, after
receiving notice of our delay, specifically request that we do not return the
payment.
ADDITIONAL PAYMENTS. You may make additional payments while the annuitant is
living and before the Maturity Date. Currently, there is no minimum additional
payment amount or maximum number of additional payments per Contract Year. In
the future, we may require that each additional payment be at least $1,000 and
limit the frequency of additional payments to a maximum of four per Contract
Year.
Additional payments must qualify for the same Federal income tax treatment as
the initial payment made under the Contract. IF THE FEDERAL INCOME TAX TREATMENT
OF A PAYMENT WILL BE DIFFERENT FROM THAT OF THE INITIAL PAYMENT, THEN WE WILL
NOT ACCEPT IT. We will credit any additional payments to the Contract upon
receiving them at our customer service center.
AUTOMATIC INVESTMENT PLAN. You may arrange to make regular investments ($50
minimum) into any of the sub-accounts through automatic deductions from your
checking account. The Automatic Investment Plan cannot be used to allocate money
to the general account. Please call (800) 242-4402 for more information.
LIMITATIONS ON PAYMENTS. We reserve the right to reject any initial payment. We
may require you to complete a financial questionnaire for payments in excess of
$250,000. If any additional payments would cause your total payments to exceed
$1,000,000, we may reject those payments. We will reject any payment that would
cause the account value in the general account to exceed $500,000.
For Contracts that qualify as IRAs under Section 408(b) of the Code, the total
payments (including the initial payment) in any calendar year may not exceed
$2,000, unless the portion in excess of $2,000 qualifies as a rollover amount or
contribution under Section 402(c), 403(b)(8), or 408(d)(3) or other applicable
provisions of the Code.
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ALLOCATING PAYMENTS
You may allocate payments to one or more of the sub-accounts, to the general
account, or to both. If you allocate any portion of a payment to the general
account, then you must specify the Declaration Period(s) to which you are
allocating those funds. You must specify the payment allocations in your
application. We will allocate the initial payment according to your
specifications, once we receive it at our customer service center.
You must make all allocations in whole percentages and they must total 100%. If
the allocations do not total 100%, then we will recompute the allocations
proportionately by dividing the percentage in each sub-account you selected, by
the sum of the percentages you indicated. We will apply this new percentage to
the payment. The following example illustrates how we make this recomputation:
<TABLE>
<CAPTION>
Example
Indicated Allocation Actual Allocation
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sub-account #1 25% 25% / 105% = 24%
Sub-account #2 40% 40% / 105% = 38%
Sub-account #3 40% 40% / 105% = 38%
--- ---
Total 105% 100%
- -----------------------------------------------------------------------------------
</TABLE>
WE WILL ALLOCATE ALL PAYMENTS AT THE TIME WE CREDIT SUCH PAYMENTS TO YOUR
CONTRACT.
We will allocate any additional payments you make to the sub-accounts and/or the
general account in the same proportion as the initial payment. You may change
the allocation percentages by sending us written notice. Once you make a change
in allocation, we will allocate all future payments in accordance with your new
allocation percentages. This will continue until you send us written notice of
any changes. However, if you have funds deducted from a checking account under
the Automatic Investment Plan option, then you must provide us with written
notice to change the allocation of future additional payments.
TRANSFERS
Before the Maturity Date, you may transfer amounts among the sub-accounts,
between the sub-accounts and the general account, and between different
Declaration Periods in the general account.
You may transfer amounts from the general account to any of the sub-accounts and
to different Declaration Periods in the general account only at the end of the
Declaration Period to which you allocated that amount. You may transfer amounts
from a sub-account to the general account at any time, as long as that transfer
would not cause your Contract's value in the general account to exceed $500,000.
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We do not impose a charge for any transfers. In the future, if you request more
than two transfers during a Contract Year, we may deduct $10 from each
sub-account from which you transfer funds.
You must request a transfer by sending us written notice or by telephone (if you
have a currently valid telephone transfer request form on file with us). We
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If we follow such procedures, then we will not be liable
for any losses due to unauthorized or fraudulent instructions. If we do not
follow those reasonable procedures, then we may be liable for such losses. The
procedures we follow for telephone transfers include confirming the correct
name, the contract number and the personal code for each telephone transfer.
We will deem transfers effective and determine values in connection with
transfers at the end of the Valuation Period during which we receive the
transfer request.
ASSET REBALANCING OPTION. You may select the Asset Rebalancing Option if you
wish to maintain a particular percentage allocation among the sub-accounts. With
Asset Rebalancing, we automatically reallocate the account value in the
sub-accounts quarterly to your selected allocations. Over a period of time, this
method of investing may help you 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 a loss in declining markets.
To elect the Asset Rebalancing Option, the account value in your Contract must
be at least $2,500 and we must receive a completed Asset Rebalancing Option form
at our customer service center. You must designate the sub-accounts and the
percentage allocations that you want us to rebalance each quarter. The
percentages must total 100%. If you elect the Asset Rebalancing Option, then all
the new money you direct into the sub-accounts will be included in the Asset
Rebalancing Option. You 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.
Selecting Asset Rebalancing will result in the transfer of funds to one or more
of the sub-accounts on the date you specify. If you have specified, or we
receive the form on, the 29th, 30th or 31st, then we will consider the effective
date to be the first Valuation Date of the following month. If you do not
specify a date or if we receive the request after your specified date, then we
will transfer funds on the date we receive the Asset Rebalancing Option form and
on the quarterly anniversary of the applicable date thereafter. We will execute
the rebalancing and determine all values in connection with the rebalancing at
the end of the Valuation Date on which the transfers occur. If the effective
date is not a Valuation Date, then the transfer will occur on the next Valuation
Date.
You may terminate this option at any time by sending us written notice. We will
automatically terminate this option if you request any transfers outside the
Asset Rebalancing program. If you wish to resume the Asset Rebalancing Option
after it
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has been canceled, then you must complete a new Asset Rebalancing
Option form and send it to our customer service center. We may discontinue,
modify, or suspend the Asset Rebalancing Option at any time.
DOLLAR COST AVERAGING. Dollar Cost Averaging is a systematic method of investing
by which you purchase units in fixed dollar amounts so that the cost is averaged
over time. You may begin Dollar Cost Averaging by authorizing us to make
periodic transfers from any one sub-account to one or more other sub-accounts.
Amounts transferred will purchase units in those sub-accounts at that
sub-account's Unit Value as of the Valuation Date on which the transfer occurs.
Since the value of the units will vary, the amounts transferred to a sub-account
will purchase more units when the Unit Value is low and fewer units when the
Unit Value is high. Similarly, the amounts transferred to a sub-account will
result in the liquidation of more units when the Unit Value is low and fewer
units when the Unit Value is high. Dollar cost averaging does not assure a
profit or protect against a loss in declining markets.
You may elect Dollar Cost Averaging if the account value in your Contract is at
least $2,500 and you send our customer service center a completed Dollar Cost
Averaging form. You must designate the frequency of the transfers, the
expiration date for the program, the sub-account from which to take the
transfers, the sub-accounts to receive the funds, and the allocation
percentages.
You 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 we receive a completed Dollar Cost Averaging form, we will transfer your
designated amounts from the sub-account from which you wish to make transfers to
your chosen sub-accounts. $50 is the minimum amount that you may transfer. Each
transfer occurs on your specified date. If you specify, or we receive the form
on the 29th, 30th or 31st, then we will consider the effective date to be the
first Valuation Date of the following month. If you do not specify a date, then
we will transfer the funds on the monthly, quarterly, semiannual or annual
anniversary (whichever corresponds to your selected frequency) of the date that
we received your completed Dollar Cost Averaging form. The amounts transferred
will receive the Unit Values for the affected sub-accounts at the end of the
Valuation Date on which the transfers occur. If the anniversary is not a
Valuation Date, then the transfer will occur on the next Valuation Date. Dollar
Cost Averaging will terminate when we have transferred the total amount elected,
or when the value in the sub-account from which transfers are made is
insufficient to support the requested transfer amount.
You may terminate this option at any time by sending us written notice. When we
receive written notice that you want to terminate Dollar Cost Averaging, then we
will stop all transfers, unless you instruct otherwise. You must complete a new
Dollar Cost Averaging option form and send it to our customer service center if
you wish to continue Dollar Cost Averaging after the expiration date you
specified, or the amount in the elected sub-account is depleted, or you canceled
the Dollar Cost Averaging option.
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We may discontinue, modify, or suspend the Dollar Cost Averaging option at any
time.
ACCOUNT VALUE
On the Effective Date your account value equals your initial payment minus any
amounts we deducted for premium taxes. On any other day your account value
equals:
your account value from the previous Valuation Date
INCREASED BY:
1. any additional net payments we receive;
2. any increase in the account value due to positive investment results of the
sub-accounts you selected; and
3. any interest earned on your account value held in the general account;
AND REDUCED BY:
1. any decrease in the account value due to negative investment results of the
sub-accounts you selected;
2. a daily charge to cover our assumed mortality and expense risks and the
cost of administering the Contract; and
3. any amounts you withdrew from the Contract.
If we charge a records maintenance fee or transfer fee in the future we will
deduct those amounts from your account value.
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 Valuation Date. A Valuation Date is each day that the New
York Stock Exchange (NYSE) is open for business.
You should expect your account value to change between the Valuation Periods to
reflect the investment experience of the sub-accounts in which you invest, any
interest earned in the general account, and the deduction of charges. Your
Contract stops accumulating value after the Maturity Date.
UNIT VALUE. Each sub-account has a distinct value ("Unit Value"). When you
allocate a payment or transfer an amount to a sub-account, we base the number of
units you purchase on the Unit Value of the sub-account at the end of the
Valuation Period during which you make the allocation. Units are redeemed in a
similar manner when you transfer amounts out of, or withdraw amounts from, a
sub-account.
For each sub-account, the Unit Value on a given Valuation Date is based on the
net asset value of a share of the corresponding portfolio in which such
sub-account invests. Each Valuation Period has a single Unit Value that applies
to each day in the Valuation Period and which is calculated as of the end of the
Valuation Period. The Unit Value for each subsequent Valuation Period is the
Investment Experience Factor (described below) for that Valuation Period
multiplied by the Unit Value for the immediately preceding Valuation Period.
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INVESTMENT EXPERIENCE FACTOR. The Investment Experience Factor measures a
sub-account's investment performance during a Valuation Period. An Investment
Experience Factor is calculated separately for each of the sub-accounts. A
sub-account's Investment Experience Factor for a Valuation Period equals (a)
divided by (b), minus (c), where:
(a) is (i)the value of the net assets held in the sub-account at the end
of the Valuation Period; PLUS
(ii) the investment income and capital gains (realized or unrealized)
credited to the net assets of that sub-account during the
Valuation Period for which we determine the Investment Experience
Factor; MINUS
(iii)the capital losses (realized or unrealized) charged against
those assets during the Valuation Period; MINUS
(iv) any amount charged against the sub-account for taxes or any
amount that we set aside during the Valuation Period as a
provision for taxes attributable to the operation or maintenance
of that sub-account; and
(b) is the value of the net assets of that sub-account at the end of the
preceding Valuation Period; and
(c) is a charge to compensate us for certain administrative expenses and
mortality and expense risks that we assume in connection with the
Contracts.
CONTRACT OWNERSHIP
You may designate a new Owner or joint owner at any time during the annuitant's
life. If you name a joint owner, then we will presume the ownership to be as
joint tenants with right of survivorship, unless you otherwise specify. If any
Owner dies before the annuitant and before the Maturity Date, then the Owner's
rights will belong to the joint owner, if any, or otherwise to the beneficiary.
The interest of any Owner or joint owner may be subject to the rights of any
assignee.
A NEW OWNER OR A JOINT OWNER MAY NOT BE DESIGNATED UNDER A CONTRACT THAT
QUALIFIES AS AN INDIVIDUAL RETIREMENT ANNUITY UNDER SECTION 408(B) OF THE CODE.
An Owner's designation of a new Owner may be subject to Federal income tax.
Please consult a qualified tax adviser before you designate a new Owner.
You may designate a new Owner by sending us written notice. The change will take
effect as of the date you sign the written notice. We will not be liable for any
payment made or other action taken before we receive and record the written
notice.
ASSIGNMENT OF CONTRACT
Except in the case of a Contract that qualifies as an individual retirement
annuity under Section 408(b) of the Code, you may assign all or a portion of
your right to
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receive annuity payments under the Contract or assign the Contract
as collateral security. If you assign any portion of the right to receive
annuity payments before the Maturity Date, then the assignee is entitled to
receive the assigned annuity payments in a lump sum, as of the Maturity Date. If
you assign any portion of the right to receive the assigned annuity payments,
after the Maturity Date, then the assignee will 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.
For a Qualified Contract, certain assignments may adversely affect the
qualification for special Federal income tax treatment of the underlying
retirement plan or individual retirement account. We urge potential purchasers
of Qualified Contracts to consult their tax advisers.
If you assign the right to receive annuity payments or assign the Contract as
collateral security, then your rights and those of any beneficiary will be
subject to the assignment. We are not responsible for the adequacy of any
assignment and will not be bound by the assignment until we receive satisfactory
written evidence of the assignment. In certain circumstances, an assignment will
be subject to Federal income tax.
ACCESS TO YOUR MONEY
FULL AND PARTIAL SURRENDERS
At any time before the Maturity Date, you may fully or partial surrender the
Contract, subject to certain conditions. If you surrender the Contract, you will
receive the full account value.
We do not deduct surrender charges from full or partial surrenders of the
Contract.
The minimum amount of a partial surrender is $500. The Contract must have an
account value of at least $2,500 after the partial surrender.
Your partial surrender request must specify the amount you want withdrawn from
each of the sub-accounts and/or the general account. If you withdraw value from
the general account, we will deduct the requested amount proportionately from
each Declaration Period on a first-in, first-out basis within the Declaration
Period(s).
YOU MUST PROVIDE US WITH SPECIFIC INSTRUCTIONS ABOUT HOW WE SHOULD WITHDRAW
VALUE FROM THE SUB-ACCOUNTS AND/OR THE GENERAL ACCOUNT.
To make a partial surrender, you should send us a written request or call us, if
you have a valid telephone transfer request form on file with us. You may make a
full surrender only by sending us a written request. We will calculate the
account value payable to you upon a full or partial surrender at the price next
computed after we receive your surrender request.
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If, when you make a surrender request, you have not provided us with a written
election, not to have Federal income taxes withheld, then we, by law, must
withhold taxes from the taxable portion of the surrender. A Federal penalty tax
may be assessed.
SYSTEMATIC WITHDRAWALS. We offer an option under which you may take partial
surrenders of the Contract by systematic withdrawals. You may elect to receive
systematic withdrawals before the Maturity Date by sending a completed
Systematic Withdrawal form to our customer service center which includes the
written consent of any assignee or irrevocable beneficiary. You may designate
the systematic withdrawal amount as either a percentage of the account value or
as a specified dollar amount. You may designate that systematic withdrawals be
made monthly, quarterly, semiannually, or annually on a specific date. If you do
not specify a date, then the systematic withdrawal option will begin on the date
we receive the form. We will consider the effective date to be the first
Valuation Date of the following month if we receive the form on the 29th, 30th
or 31st or if you specify one of those dates.
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, then we will
deduct the requested amount proportionately from each Declaration Period on a
first-in, first-out basis within the Declaration Period(s).
Each systematic withdrawal will occur at the end of the Valuation Period during
which you scheduled a withdrawal. We deduct the systematic withdrawal from your
account value in the sub-accounts and/or the general account, according to your
specifications.
You may terminate this option at any time by sending us written notice. We will
terminate this option if the amount to be withdrawn has caused the account value
to be below $2,500. If you wish to resume systematic withdrawals, then you must
send us a new Systematic Withdrawal form at our customer service center. We may
discontinue, modify, or suspend the systematic withdrawal option at any time.
You should carefully consider the tax consequences of a systematic withdrawal,
including a 10% penalty tax imposed on withdrawals made before you attain age 59
1/2.
ANNUITY PAYMENTS
If the annuitant is living on the Maturity Date and the Contract is in force,
then we will make fixed annuity payments to you under the annuity income option
you select. We will make the first annuity payment within seven days after the
Maturity Date.
The amount of the periodic annuity payments you receive depends upon:
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(i) the account value you have accumulated on the Maturity Date,
(ii) the annuitant's age and sex (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 you selected.
On the Maturity Date, we determine the dollar amount of each annuity payment.
That amount is fixed and will not change.
After the Maturity Date, the Contract no longer participates in the Variable
Account. If, at the time of an annuity payment, you have not provided us with a
written election not to withhold Federal income taxes, then we, 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.
We determine the amount of the monthly annuity payments under annuity income
options 1, 2, and 3, described below, by dividing the account value on the
Maturity Date by 1,000 and multiplying the result by the appropriate factor. The
factor is calculated based on Market interest rates at the time of Maturity. The
factor will be equal to or greater than that contained in the applicable table
in your Contract.
ANNUITY INCOME OPTIONS
At any time before the Maturity Date, you may designate the annuity income
option under which we will pay annuity payments. If you do not select an annuity
income option by the Maturity Date, then we will make monthly annuity payments
to you under annuity income option 1.
If the account value is less than $2,500 or if it is insufficient to produce
monthly payments of at least $100, then no annuity income options will be
available unless we consent or as otherwise required by state law. In such
cases, we will pay the account value in a lump sum.
We may offer other annuity income options on the Maturity Date. We will provide
you with information concerning the availability of any additional annuity
income options before the time that you have to select an annuity income option.
We currently offer the following annuity income options:
OPTION 1. LIFE ANNUITY WITH INSTALLMENT REFUND -- We will make monthly annuity
payments to you for the longer of: (i) the annuitant's life; or (ii) until the
sum of the monthly annuity payments equals the account value on the Maturity
Date.
If the Owner dies before the sum of the monthly annuity payments we paid equals
the account value on the Maturity Date, then we will pay the remaining annuity
payments to your designated beneficiary.
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OPTION 2. JOINT AND SURVIVOR LIFE ANNUITY WITH INSTALLMENT REFUND -- We will
make monthly annuity payments to you for the longer of:
(i) either the annuitant's or the joint annuitant's life; or
(ii) until the sum of the monthly annuity payments made under the Contract
equals the account value on the Maturity Date.
If all Owners die before the sum of the monthly annuity payments we paid equals
the account value on the Maturity Date, then we will pay the remaining annuity
payments to your designated beneficiary.
If you select annuity income option 2, then you must designate a joint
annuitant. We will use the joint annuitant's life to determine the duration of
annuity payments under annuity income option 2. The age and sex of both the
annuitant and the joint annuitant determine the amount of the monthly annuity
payments under annuity income option 2. At any time before the Maturity Date,
you may select a different joint annuitant by sending us written notice. You may
not select a new joint annuitant after the Maturity Date.
OPTION 3. INSTALLMENTS FOR LIFE -- We will make monthly annuity payments to you
for as long as the annuitant lives. Payments under this option will end with the
last payment made before the annuitant's death. Under this option it is possible
that you will receive only one annuity payment if the annuitant died before the
date of the second payment, two if he or she dies before the third annuity
payment date, etc.
For a Contract qualifying as an individual retirement annuity under Section
408(b) of the Code, you may not select an annuity income option with a Period
Certain that will guarantee annuity payments beyond the annuitant's life (or
life expectancy).
MATURITY DATE
The Maturity Date is the date on which we apply your account value to an annuity
income option. You may specify the Maturity Date in your application. You may
change the Maturity Date at any time during the annuitant's life by sending us a
written request before the currently scheduled Maturity Date.
The Maturity Date must be a Contract Anniversary that is not later than:
(i) the Contract Anniversary nearest the annuitant's 80th birthday; or
(ii) ten years from the next Contract Anniversary, whichever is later.
If you do not specify a Maturity Date, then the Maturity Date will be the later
of: (a) the 10th Contract Anniversary; or (b) the Contract Anniversary nearest
the annuitant's 80th birthday.
For a Qualified Contract, other than an IRA that satisfied Section 408(b) of the
Code, the selection of certain Maturity Dates may adversely affect qualifying
the underlying retirement plan for special federal income tax treatment. We urge
potential purchasers of such Qualified Contracts to consult their tax advisers.
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For a Qualified Contract that is an IRA under Section 408(b) of the Code, the
minimum required distribution must be no later than April 1 of the calendar year
following the calendar year in which the annuitant attains age 70 1/2. Roth IRAs
established under 408A of the Code are not subject to this requirement.
DEATH BENEFIT
If the annuitant dies before the Maturity Date, then we will pay you, the Owner,
a death benefit as specified in the Contract. We do not pay a death benefit if
the annuitant dies on or after the Maturity Date.
If the annuitant dies before the Maturity Date, then we will pay you a lump sum
death benefit equal to the greater of:
(i) the account value; or
(ii) the sum of the payments you made, minus the sum of any partial surrenders.
If the Owner is a natural person, then the Owner may elect to continue the
Contract and become the annuitant if the deceased annuitant was not an Owner. We
calculate the amount of the death benefit at the price next computed after we
receive Proof of Death for the annuitant. We will pay you within seven days of
receiving the Proof of Death, or as soon as we have sufficient information to
make the payment. If the deceased annuitant was an Owner, then we will in all
events pay the Death Benefit within five years of the date of the deceased
annuitant's death.
BENEFICIARY PROVISIONS
If the beneficiary survives the Owner(s), then the beneficiary will receive
amounts payable under the Contract. If you do not specify a beneficiary, or if
no beneficiary survives you by 30 days, then your estate will receive any
remaining amounts payable under the Contract.
While the annuitant is living, you may change the beneficiary or beneficiaries
by sending us written notice. Once we receive the notice, we will initiate the
change as of the date you signed the written notice. We will not be liable for
any payment made or other action taken before we receive and record such written
notice at our customer service center. A beneficiary named irrevocably may not
be changed without written consent of such beneficiary. Any beneficiary's
interest is subject to the rights of any assignee.
DEATH OF OWNER
For a Nonqualified Contract in which any owner is a natural person, is not the
annuitant, and dies before the Maturity Date and before the annuitant's death,
the death benefit provisions described above do not apply.
In such circumstances, we will pay to the joint owner the account value in a
lump sum no later than five years following the date of the Owner's death. If
there is no joint owner, then we will pay the beneficiary. We calculate the
account value at the price next computed after we receive the Owner's Proof of
Death. If the joint
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owner or the beneficiary is the Owner's surviving spouse, then 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. This Contract 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 they may
purchase a Contract.
EXPENSES
We do not deduct commissions or sales charges from your payments when you invest
in the Contract. Nor do we not take surrender charges upon full or partial
surrender of the Contract. We pay distribution expenses out of our own funds.
We will deduct certain charges and deductions from your account value to
compensate us for providing the annuity payments, assuming certain risks in
connection with the Contract, and administering the Contract.
If there are profits from the fees and charges that we deduct under the
Contract, including but not limited to Mortality and Expense Risk Charges, then
we may use such profits to finance the distribution of the Contracts.
MORTALITY AND EXPENSE RISK CHARGE
We deduct a charge from your Contract's value in the sub-accounts for certain
mortality and expense risks in connection with the Contracts. We deduct the
charge daily at an annual rate of 0.40% of the average daily net assets you have
in each sub-account. We reserve the right to increase the Mortality and Expense
Risk Charge to 0.70%, the maximum set forth in the Contract.
The Mortality and Expense Risk Charge only applies during the period from the
Effective Date to the Maturity Date and is not imposed against the general
account. The Investment Experience Factor for each sub-account reflects this
charge.
Changes in actual mortality experience or actual expense do not affect the
account value or annuity payments. The mortality risks arise from the
contractual obligations to pay death benefit before the Maturity Date and to
make annuity payments for the annuitant's entire life (or, in the case of
annuity income option 2, the entire life of the annuitant and the joint
annuitant). Thus, we assure you 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 a greater than expected
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improvement in life expectancy, will adversely affect 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
The Contract's administrative expenses include processing applications, Contract
changes, tax reporting, full and partial surrenders, death claims, and initial
and subsequent payments; preparing annual and semiannual reports to Owners and
regulatory compliance reports; and overhead costs.
We deduct a charge from your Contract's value in the sub-accounts for the
administrative expenses we incur in connection with the Contract and the
Variable Account. We deduct the charge daily at an annual rate of 0.30% of the
average daily net assets you have in each sub-account. The Contract
Administration Charge only applies during the period from the Effective Date to
the Maturity Date and is not imposed against the general account. The Investment
Experience Factor for each sub-account reflects this charge.
RECORDS MAINTENANCE CHARGE
Currently, we do not charge for records maintenance. The Contract permits us to
deduct a maximum amount of $40 from your account value at the beginning of each
Contract Year to reflect the cost of performing records maintenance for the
Contracts. If we imposed this charge, then we would deduct it proportionately
from each sub-account and each of the Declaration Period(s) in the general
account (on a first-in, first-out basis within each Declaration Period) in which
you have allocated funds. If we deducted a Records Maintenance Charge, then it
would apply only during the period from the Effective Date to the Maturity Date.
If you surrender the Contract during a Contract Year, then we would not prorate
it.
PREMIUM TAXES
Most states and political subdivisions do not assess premium taxes. Where state
premium taxes are assessed, we will deduct the amount of tax due from each
payment at rates ranging from a minimum of 0.5% to a maximum of 3.5%. We will
deduct any premium taxes levied by political subdivisions from payments. Such
taxes are generally at rates of less than 1%.
If the premium tax exceeds 3.5% of the payment, we will accept the payment only
if you provide written authorization allowing us to deduct the applicable
premium tax from the account value.
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OTHER TAXES
We currently do not charge the Variable Account for any Federal, state, or local
taxes other than premium taxes. If we decide to impose any such taxes on the
Variable Account, then we may deduct such taxes from amounts you have invested
in the Variable Account.
TRANSFER CHARGES
We do not charge for transfers among sub-accounts. However, the Contract permits
us to deduct $10 from each sub-account for each transfer you make in excess of
two in a Contract Year.
We do not consider the following to be transfers: (i) initial allocations of
payments, (ii) reallocations among the Declaration Periods within the general
account, or (iii) reallocations from the general account to any sub-accounts at
the end of a Declaration Period.
We treat all transfer requests, made at the same time, as one request. We may
impose the transfer charge at any time.
PORTFOLIO CHARGES
The portfolios deduct investment charges from amounts you have invested in the
portfolios. These charges range from 0.43% to 1.63% annually, depending on the
portfolio. For more information, see the Fund's prospectus.
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FEDERAL TAX MATTERS
INTRODUCTION
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE. CHARTER
MAKES NO GUARANTEE REGARDING THE TAX TREATMENT OF ANY CONTRACT OR TRANSACTION
INVOLVING A CONTRACT. Federal, state, local and other tax consequences of
ownership or receipt of distributions under an annuity contract depend on your
individual circumstances. If you are concerned about any tax consequences with
regard to your individual circumstances, you should consult a competent tax
adviser.
TAXATION OF ANNUITIES IN GENERAL
TAX DEFERRAL
Generally, you are not taxed on increases in the account value until a
distribution occurs. This rule applies only where:
1. the owner is a natural person;
2. the investments of the Variable Account are "adequately diversified"
according to Treasury Department regulations; and
3. Charter is considered the owner of the Variable Account assets for federal
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income tax purposes.
NON-NATURAL OWNERS
As a general rule, annuity contracts owned by non-natural
persons such as corporations, trusts, or other entities are not treated as
annuity contracts for federal income tax purposes. The income on such contracts
is taxed as ordinary income received or accrued by the owner during the taxable
year. Please see the Statement of Additional Information for a discussion of
several exceptions to the general rule for contracts owned by non-natural
persons.
DIVERSIFICATION REQUIREMENTS
For a contract to be treated as an annuity for federal income tax purposes, the
investments in the Variable Account must be "adequately diversified" consistent
with standards under Treasury Department regulations. If the investments in the
Variable Account are not adequately diversified, the Contract will not be
treated as an annuity contract for federal income tax purposes. As a result, the
income on the Contract will be taxed as ordinary income received or accrued by
the owner during the taxable year. Although Charter does not have control over
the Portfolios or their investments, we expect the Portfolios to meet the
diversification requirements.
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OWNERSHIP TREATMENT
The IRS has stated that you will be considered the owner of Variable Account
assets if you possess incidents of ownership in those assets, such as the
ability to exercise investment control over the assets. At the time the
diversification regulations were issued, the Treasury Department announced that
the regulations do not provide guidance concerning circumstances in which
investor control of the Variable Account investments may cause an investor to be
treated as the owner of the Variable Account. The Treasury Department also
stated that future guidance would be issued regarding the extent that owners
could direct sub-account investments without being treated as owners of the
underlying assets of the Variable Account.
Your rights under this contract are different than those described by the IRS in
rulings in which it found that contract owners were not owners of Variable
Account assets. For example, you have the choice to allocate premiums and
contract values among more investment options. Also, you may be able to transfer
among investment options more frequently than in such rulings. These differences
could result in you being treated as the owner of the Variable Account. If this
occurs, income and gain from the Variable Account assets would be includible in
your gross income. Charter does not know what standards will be set forth in any
regulations or rulings that the Treasury Department may issue. It is possible
that future standards announced by the Treasury Department could adversely
affect the tax treatment of your contract. We reserve the right to modify the
Contract as necessary to attempt to prevent you from being considered the
federal tax owner of the assets of the Variable Account. However, we make no
guarantee that such modification to the Contract will be successful.
TAXATION OF PARTIAL AND FULL WITHDRAWALS
If you make a partial withdrawal under a Nonqualified Contract, amounts received
are taxable to the extent the account value, without regard to surrender
charges, exceeds the investment in the Contract. The investment in the Contract
is the gross premium paid for the Contract minus any amounts previously received
from the Contract if such amounts were properly excluded from your gross income.
If you make a partial withdrawal under a Qualified Contract, the portion of the
payment that bears the same ratio to the total payment that the investment in
the contract (i.e., nondeductible IRA contributions, after tax contributions to
qualified plans) bears to the account value, is excluded from your income. If
you make a full withdrawal under a Nonqualified Contract or a Qualified
Contract, the amount received will be taxable only to the extent it exceeds the
investment in the contract.
"Nonqualified distributions" from Roth IRAs are treated as made from
contributions first and are included in gross income only to the extent that
distributions exceed contributions. "Qualified distributions" from Roth IRAs are
not included in gross income. "Qualified distributions" are any distributions
made more than five taxable years after the taxable year of the first
contribution to any Roth IRA and which are:
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o made on or after the date the individual attains age 59 ;
o made to a beneficiary after the owner's death;
o attributable to the owner being disabled; or
o for a first time home purchase (first time home purchases are subject to a
lifetime limit of $10,000).
If you transfer a Nonqualified Contract without full and adequate consideration
to a person other than your spouse (or to a former spouse incident to a
divorce), you will be taxed on the difference between the account value and the
investment in the Contract at the time of transfer. Except for certain Qualified
Contracts, any amount you receive as a loan under a Contract, and any assignment
or pledge (or agreement to assign or pledge) of the account value is treated as
a withdrawal of such amount or portion.
TAXATION OF ANNUITY PAYMENTS
Generally, the rule for income taxation of annuity payments received from a
Nonqualified Contract provides for the return of your investment in the Contract
in equal tax-free amounts over the payment period. The balance of each payment
received is taxable. For fixed annuity payments, the amount excluded from income
is determined by multiplying the payment by the ratio of the investment in the
Contract (adjusted for any refund feature or period certain) to the total
expected value of annuity payments for the term of the Contract. If you elect
variable annuity payments, the amount excluded from taxable income is determined
by dividing the investment in the Contract by the total number of expected
payments. The annuity payments will be fully taxable after the total amount of
the investment in the Contract is excluded using these ratios. If you die, and
annuity payments cease before the total amount of the investment in the contract
is recovered, the unrecovered amount will be allowed as a deduction for your
last taxable year.
TAXATION OF ANNUITY DEATH BENEFITS
Death of an owner, or death of the annuitant if the Contract is owned by a
non-natural person, will cause a distribution of death benefits from a Contract.
Generally, such amounts are included in income as follows:
1. if distributed in a lump sum, the amounts are taxed in the same manner as a
full withdrawal; or
2. if distributed under an annuity option, the amounts are taxed in the same
manner as an annuity payment.
Please see the Statement of Additional Information for more detail on
distribution at death requirements.
PENALTY TAX ON PREMATURE DISTRIBUTIONS
A 10% penalty tax applies to the taxable amount of any premature distribution
from a Nonqualified Contract. The penalty tax generally applies to any
distribution made
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prior to the date you attain age 59 1/2. However, no penalty tax is incurred on
distributions:
1. made on or after the date the owner attains age 59 1/2;
2. made as a result of the owner's death or disability;
3. made in substantially equal periodic payments over the owner's life
or life expectancy;
4. made under an immediate annuity; or
5. attributable to investment in the contract before August 14, 1982.
You should consult a competent tax advisor to determine if any other exceptions
to the penalty apply to your situation. Similar exceptions may apply to
distributions from Qualified Contracts.
AGGREGATION OF ANNUITY CONTRACTS
All nonqualified deferred annuity contracts issued by Charter (or its
affiliates) to the same owner during any calendar year will be aggregated and
treated as one annuity contract for purposes of determining the taxable amount
of a distribution.
TAX QUALIFIED CONTRACTS
Charter reserves the right to limit the availability of the Contract for use
with any of the qualified plans listed below. In the case of certain qualified
plans, the terms of the plans may govern the right to benefits, regardless of
the terms of the Contract. The income on qualified plan and IRA investments is
tax deferred and variable annuities held by such plans do not receive any
additional tax deferral. You should review the annuity features, including all
benefits and expenses, prior to purchasing a variable annuity in a qualified
plan or IRA. Contracts may be used as investments with certain qualified plans
such as:
o Individual Retirement Annuities or Accounts (IRAs) under Section 408 of the
Code;
o Roth IRAs under Section 408A of the Code;
o Simplified Employee Pension Plans under Section 408(k) of the Code;
o Savings Incentive Match Plans for Employees (SIMPLE) Plans under Section
408(p) of the Code;
o Tax Sheltered Annuities under Section 403(b) of the Code;
o Corporate and Self Employed Pension and Profit Sharing Plans; and
o State and Local Government and Tax-Exempt Organization Deferred
Compensation Plans.
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RESTRICTIONS UNDER SECTION 403(B) PLANS
Section 403(b) of the Tax Code provides tax-deferred retirement savings plans
for employees of certain non-profit and educational organizations. Under Section
403(b), any Contract used for a 403(b) plan must provide that distributions
attributable to salary reduction contributions made after 12/31/88, and all
earnings on salary reduction contributions, may be made only on or after the
date the employee:
o attains age 59 1/2;
o separates from service;
o dies;
o becomes disabled; or
o on account of hardship (earnings on salary reduction contributions may
not be distributed on the account of hardship).
These limitations do not apply to withdrawals where Charter is directed to
transfer some or all of the account value to another Section 403(b) plan.
INCOME TAX WITHHOLDING
Charter is required to withhold federal income tax at a rate of 20% on all
"eligible rollover distributions" unless you elect to make a "direct rollover"
of such amounts to an IRA or eligible retirement plan. Eligible rollover
distributions generally include all distributions from Qualified Contracts,
excluding IRAs, with the exception of:
1. required minimum distributions; or
2. a series of substantially equal periodic payments made over a period
of at least 10 years; or
3. over the life (joint lives) of the participant (and beneficiary).
Charter may be required to withhold federal and state income taxes on any
distributions from Nonqualified Contracts, or Qualified Contracts that are not
eligible rollover distributions, unless you notify us of your election to not
have taxes withheld.
GENERAL PROVISIONS
THE CONTRACT
The Contract, its endorsements, riders, and the Contract application constitute
the entire contract between Charter and the owner. Only an officer of Charter is
authorized to change or waive the terms of a Contract. Any change or waiver must
be in writing and signed by an officer.
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DELAY OF PAYMENT AND TRANSFERS
We will pay any amount due from the Variable Account for a full or partial
surrender, the death benefit, or the death of the owner of a Nonqualified
Contract, generally within seven days from the date we receive written notice.
We may be permitted to defer such payment, and transfers, if:
o the NYSE is closed for other than usual weekends or holidays, or trading on
the Exchange is otherwise restricted;
o an emergency exists as defined by the SEC or the SEC requires that trading
be restricted; or
o the SEC permits a delay for the protection of Owners.
We anticipate that payments and transfers from the general account will occur
within seven business days after receipt of written notice. Pursuant to state
insurance law requirements, we reserve the right to defer payments to be made
from the general account for up to six months.
We may postpone any payment that is derived, all or in part, from any amount
paid to us by check or draft until we determine 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, or transfer
charges.
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, then
we will recalculate the annuity payments to reflect the calculations that would
have been made had the annuitant's (and/or joint annuitant's) age and sex been
correctly stated.
NONPARTICIPATING CONTRACT
The Contract does not participate in our divisible surplus. The Contract does
not pay dividends.
NOTICES AND INQUIRIES
Please send any written notice or request to:
Scudder Horizon Plan
Customer Service Center
P.O. Box 80469
Lincoln, NE 68501-0469
Overnight Mailing Address:
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2940 S. 84th Street
Lincoln, NE 68506
Any notice or request must be on the form and contain the information we
require. This includes the Contract number and your full name and signature. Any
notice that we send you will be sent to the address shown in the application
unless we have on file a written notice of an address change. All inquiries
should include your Contract number and full name. If you need additional
information, you may call us at (800) 242-4402.
RECORDS AND REPORTS
At the end of each calendar quarter, Allstate, or its designee, on our behalf,
will send you, at your last known address of record, statements listing the
account value, additional payments, transfers, any charges, and any partial
surrenders made during the year. You will also be sent the Fund's annual and
semiannual reports.
YEAR 2000
Charter, Allstate, and Allstate's affiliates ("we") are heavily dependent upon
complex systems for all phases of our operations, including customer service and
policy and contract administration. Since many of our older computer software
programs recognize only the last two digits of the year in any date, some
software may have failed to operate properly in or after the year 1999, if the
software was not reprogrammed or replaced ("Year 2000 Issues"). We believe that
many of our counterparties and suppliers also had potential Year 2000 Issues
that could affect us. In 1995, Allstate Insurance Company commenced a four-phase
plan intended to mitigate and/or prevent the adverse effects of Year 2000
Issues. These strategies included normal development and enhancement of new and
existing systems, upgrades to operating systems already covered by maintenance
agreements, and modifications to existing systems to make them Year 2000
compliant. The plan also included us actively working with our major external
counterparties and suppliers to assess their compliance efforts and our exposure
to them . Because of the accuracy of this plan, and its timely completion, we
have experienced no material impacts on our results of operations, liquidity or
financial position due to the Year 2000 issue. Year 2000 costs are expensed as
incurred.
SERVICES AGREEMENT
On September 2, 1998, we entered into an administrative services agreement
("Services Agreement") with Allstate under which Allstate, or its designee,
provides the administrative services in connection with the Contracts and the
Variable Account on our behalf. Included among the services are 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 is responsible for payment of all expenses in connection with
the Contract and
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Variable Account. Allstate's principal address is: 3100 Sanders Road,
Northbrook, Illinois 60062.
DISTRIBUTION OF THE CONTRACT
ALFS, Inc.* ("ALFS"), located at 3100 Sanders Road, Northbrook, IL 60062, serves
as principal underwriter of the Contracts. Prior to March 31, 2000, the
principal underwriter of the Contracts was CNL, Inc. ALFS is a wholly owned
subsidiary of Allstate Life Insurance Company. ALFS is a registered broker
dealer under the Securities and Exchange Act of 1934, as amended ("Exchange
Act"), and is a member of the National Association of Securities Dealers, Inc.
We will pay commissions to broker-dealers who sell the Contracts. Commissions
paid may vary, but we estimate that the total commissions paid on all Contract
sales will not exceed 8% of any purchase payments. Sometimes, we also pay the
broker-dealer a persistency bonus in addition to the standard commissions. A
persistency bonus is not expected to exceed 1.2%, on an annual basis, of the
purchase payments considered in connection with the bonus. These commissions are
intended to cover distribution expenses. In some states, Contracts may be sold
by representatives or employees of banks which may be acting as broker-dealers
without separate registration under the Exchange Act, pursuant to legal and
regulatory exceptions.
Charter does not pay ALFS a commission for distribution of the Contracts. The
underwriting agreement with ALFS provides that we will reimburse ALFS for any
liability to Owners arising out of services rendered or Contracts issued.
ALFS has contracted with Scudder Investor Services, Inc. ("Scudder") for
Scudder's services in connection with the distribution of the contracts. Scudder
is registered with 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 are licensed agents. The principal address of Scudder is 345 Park Avenue,
New York, New York 10154.
The Contracts will be offered to the public on a continuous basis. Both ALFS and
Scudder reserve the right to discontinue the offering at any time.
* Effective May 1, 2000 Allstate Life Financial Services, Inc. was renamed ALFS,
Inc.
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THE GENERAL ACCOUNT
Amounts you allocate or transfer to the general account become part of our
general account assets that support our annuity and insurance obligations. The
general account includes all of our assets, except those assets segregated in
separate accounts. According to the coinsurance agreement executed on September
2, 1998, between Charter and Allstate, the assets of the general account
attributable to the Contracts were transferred to Allstate. This agreement makes
it Allstate's responsibility to invest the assets of the general account,
subject to applicable law.
Because of exemptive and exclusionary provisions in the Federal securities laws,
we have not registered interests in the general account under the Securities Act
of 1933 (the "1933 Act"), and the general account is not 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.
We guarantee that we will credit interest to amounts you allocate to the general
account at an effective annual rate of at least 3.5% compounded monthly. We may
declare higher interest rates from time to time at our discretion. We will
credit the declared interest rate for a specific period of time called a
Declaration Period. A Declaration Period will not be less than one year or more
than 3 years. You may elect one or more Declaration Periods currently offered
when you allocate or transfer funds to the general account. At any one time,
your money held in a Declaration Period may be earning different declared
interest rates, if you allocated funds to that Declaration Period at different
times.
We cannot accept allocations to the general account that would increase your
Contract's value in the general account to over $500,000. We guarantee that the
value held in the general account will equal all amounts that you allocated or
transferred to the general account, plus any interest credited, less any amounts
that you surrendered or transferred from the general account, and less any
applicable charges. Amounts you allocate to the general account do not share in
the investment experience of the general account.
You may not allocate or transfer an amount from or within the general account to
the general account before the end of that amount's Declaration Period. We will
send notice to you 30 days before the expiration of a Declaration Period and ask
you how to reallocate the amounts in the expiring Declaration Period. IF WE DO
NOT RECEIVE YOUR INSTRUCTIONS BEFORE THE END OF THE DECLARATION PERIOD, THEN WE
WILL TRANSFER YOUR VALUE IN THE EXPIRING DECLARATION PERIOD TO THE MONEY MARKET
SUB-ACCOUNT.
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VOTING RIGHTS
We will vote the Fund's shares held in the Variable Account at regular and
special shareholder meetings of the Fund in accordance with instructions we
received from persons having voting interests in the sub-accounts. If we
determine that the law permits us to vote the Fund's shares in our own right,
then we may elect to do so.
We will separately calculate the number of votes that you have the right to
instruct for each sub-account. We will determine the number of votes for each
sub-account, that you have the right to instruct, by dividing your Contract's
value in a sub-account by the net asset value per share of the corresponding
portfolio in which the sub-account invests. We count fractional shares. The
number of votes of a portfolio, that you have 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 before that meeting in
accordance with procedures established by the Fund.
We will vote the Fund's shares, for which we do not receive timely instructions,
in proportion to the voting instructions which we receive for all of the
variable annuity contracts (including the Contracts) that we issue and are
participating in that portfolio. We will also vote our shares that are not
attributable to variable annuity contracts in the same proportion.
Separate accounts of other insurance companies, including insurance companies
affiliated with us, 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 your voting instructions. We do not see any disadvantages to
this dilution.
Each person having a voting interest in a sub-account will receive proxy
material, reports, and other materials relating to the appropriate portfolio.
LEGAL MATTERS
Freedman, Levy, Kroll & Simonds, Washington, D.C., has advised Charter on
certain federal securities law matters. All matters of Illinois law pertaining
to the Contracts, including the validity of the Contracts and Charter's right to
issue such Contracts under Illinois insurance law, have been passed upon by
Michael J. Velotta, General Counsel of Charter.
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 of the information set forth in the full
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<PAGE>
registration statement. For instance, this prospectus only summarizes the
contents of the Contract and other legal instruments contained in the full
registration statement. For a complete statement of the terms of those
documents, please refer to the full registration statement as filed.
44
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS FOR STATEMENT OF
ADDITIONAL INFORMATION
<S> <C>
STATE REGULATION OF CHARTER......................................................3
ADDITIONS, DELETIONS, OR SUBSTITUTIONS
OF INVESTMENTS..............................................................3
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF
CERTAIN EXCHANGES AND SURRENDERS............................................3
FEDERAL TAX MATTERS..............................................................3
SAFEKEEPING OF THE VARIABLE ACCOUNT'S ASSETS 6
CALCULATION OF YIELDS AND TOTAL RETURNS..........................................7
Money Market Sub-account Yields.............................................8
Other Sub-account Yields....................................................8
Total Returns ..............................................................9
Effect of the Records Maintenance Charge on
Performance Data.......................................................10
OTHER PERFORMANCE DATA .........................................................11
Cumulative Total Returns...................................................11
Adjusted Historical Portfolio Performance..................................11
Comparison of Performance and Expense Information..........................12
EXPERTS ........................................................................13
FINANCIAL STATEMENTS............................................................13
</TABLE>
45
<PAGE>
APPENDIX A -- CONDENSED
FINANCIAL INFORMATION
The following condensed financial information is derived from the financial
statements of the Variable Account. You should read the data along with the
financial statements, related notes, and other financial information included in
the Statement of Additional Information.
The following table sets forth information regarding the sub-accounts for a
Contract for the period from December 31, 1990 through
December 31, 1999.
<TABLE>
<CAPTION>
BALANCED SUB-ACCOUNT
ACCUMULATION UNIT NUMBER OF ACCUMULATION
VALUE AT END OF YEAR UNITS AT END OF YEAR
- -----------------------------------------------------------------------------------
<S> <C> <C>
1999 $48.936 1,492,679
1998 $42.735 1,895,133
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
- -----------------------------------------------------------------------------------
BOND SUB-ACCOUNT
ACCUMULATION UNIT NUMBER OF ACCUMULATION
VALUE AT END OF YEAR UNITS AT END OF YEAR
- -----------------------------------------------------------------------------------
1999 $25.911 779,612
1998 $26.344 1,338,386
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
- -----------------------------------------------------------------------------------
46
<PAGE>
CAPITAL GROWTH SUB-ACCOUNT
ACCUMULATION UNIT NUMBER OF ACCUMULATION
VALUE AT END OF YEAR UNITS AT END OF YEAR
- -----------------------------------------------------------------------------------
1999 $75.010 2,648,610
1998 $55.857 3,421,630
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
- -----------------------------------------------------------------------------------
GLOBAL DISCOVERY SUB-ACCOUNT
ACCUMULATION UNIT NUMBER OF ACCUMULATION
VALUE AT END OF YEAR UNITS AT END OF YEAR
- -----------------------------------------------------------------------------------
1999 $27.900 1,143,919
1998 $16.937 1,004,053
1997 $14.648 986,445
1996* $13.126 1,025,244
- -----------------------------------------------------------------------------------
GROWTH AND INCOME SUB-ACCOUNT
ACCUMULATION UNIT NUMBER OF ACCUMULATION
VALUE AT END OF YEAR UNITS AT END OF YEAR
- -----------------------------------------------------------------------------------
1999 $30.005 2,816,347
1998 $28.485 3,836,652
1997 $26.835 4,225,162
1996 $20.713 3,491,709
1995 $17.075 2,659,025
1994* $13.053 1,311,518
- -----------------------------------------------------------------------------------
47
<PAGE>
INTERNATIONAL SUB-ACCOUNT
ACCUMULATION UNIT NUMBER OF ACCUMULATION
VALUE AT END OF YEAR UNITS AT END OF YEAR
- -----------------------------------------------------------------------------------
1999 $60.583 1,998,019
1998 $39.486 2,282,222
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
- -----------------------------------------------------------------------------------
LARGE COMPANY GROWTH SUB-ACCOUNT
ACCUMULATION UNIT NUMBER OF ACCUMULATION
VALUE AT END OF YEAR UNITS AT END OF YEAR
- -----------------------------------------------------------------------------------
1999* $13.536 314,336
- -----------------------------------------------------------------------------------
MONEY MARKET SUB-ACCOUNT
ACCUMULATION UNIT NUMBER OF ACCUMULATION
VALUE AT END OF YEAR UNITS AT END OF YEAR
- -----------------------------------------------------------------------------------
1999 $20.592 3,099,978
1998 $19.749 3,438,822
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
- -----------------------------------------------------------------------------------
48
<PAGE>
21ST CENTURY GROWTH SUB-ACCOUNT**
ACCUMULATION UNIT NUMBER OF ACCUMULATION
VALUE AT END OF YEAR UNITS AT END OF YEAR
- -----------------------------------------------------------------------------------
1999* $17.584 666,238
- -----------------------------------------------------------------------------------
* The Growth and Income sub-account commenced operations on May 1, 1994. The
Global Discovery Sub-account commenced operations on May 1, 1996. The
Large Company Growth and 21st Century Growth Sub-accounts commenced on May
3, 1999. The Unit Value for these Sub-accounts at commencement was 12.500.
** Prior to May 1, 2000, the 21st Century Growth Sub-account was named the Small
Company Growth Sub-account.
</TABLE>
49
<PAGE>
This page
intentionally
left blank.
50
<PAGE>
Statement of Additional Information
For the
Scudder Horizon Plan
a Flexible Premium Variable Deferred Annuity
Issued Through
Charter National Variable Annuity Account
Offered by
Charter National Life Insurance Company
(An Illinois Stock Company)
Customer Service Center
PO Box 8046
Lincoln, NE 68501-0469
Or
Overnight Mailing Address:
2940 S. 84th Street
Lincoln, NE 68506
(800) 242-4402
-----------
This Statement of Additional Information expands upon
subjects discussed in the current Prospectus for the
Scudder Horizon Plan, a flexible premium variable
deferred annuity (the "Contract") offered by Charter
National Life Insurance Company.
You may obtain a copy of the Scudder Variable Life Insurance Fund
Prospectus, dated May 1, 2000, 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 of Additional Information.
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, 2000,
which you can obtain by calling (800) 242-4402 or writing to us at our Customer
Service Center address listed above.
Dated May 1, 2000
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
PAGE
<S> <C>
STATE REGULATION OF CHARTER 3
ADDITIONS, DELETIONS OR SUBSTITUTIONS OF INVESTMENTS 3
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF CERTAIN EXCHANGES AND SURRENDERS 3
FEDERAL TAX MATTERS 3
SAFEKEEPING OF THE VARIABLE ACCOUNT'S ASSETS 6
CALCULATION OF YIELDS AND TOTAL RETURNS 7
Money Market Sub-account Yields 8
Other Sub-account Yields 8
Total Returns 9
Effect of the Records Maintenance Charge on Performance Data 10
OTHER PERFORMANCE DATA 11
Cumulative Total Returns 11
Adjusted Historical Performance 11
Comparison of Performance and Expense Information 12
EXPERTS 13
FINANCIAL STATEMENTS 13
</TABLE>
<PAGE>
In order to supplement the description in the Prospectus, this document provides
additional information about Charter and the Contract that may be of interest to
you.
STATE REGULATION OF CHARTER
We are a stock life insurance company organized under the laws of the state of
Illinois, and are subject to regulation by the Illinois Department of Insurance.
We file quarterly statements covering the operations and reporting on the
financial condition of Charter with the Illinois Director of Insurance.
Periodically, the Illinois Director of Insurance examines the financial
condition of Charter, including the liabilities and reserves of the Variable
Account and other separate accounts for which Charter is the depositor.
In addition, we are subject to the insurance laws and regulations of all the
states in which we are licensed to operate. The availability of the Contract and
certain contract rights and provisions depend on state approval and/or filing
and review processes. Where required by state law or regulation, the Contract
will be modified accordingly.
Charter is a wholly owned subsidiary of Allstate Life Insurance Company
("Allstate"), an Illinois stock life insurance company. Allstate is a wholly
owned subsidiary of Allstate Insurance Company, an Illinois stock property
liability insurance company. The Allstate Corporation owns all of the
outstanding capital stock of Allstate Insurance Company.
Charter originally established the Variable Account as a separate investment
account under the laws of the State of Missouri on May 15, 1987. Since December
21, 1999, in conjunction with the redomestication of Charter to the State of
Illinois, the Variable Account has been governed by the laws of the State of
Illinois.
ALFS, Inc.* is the principal underwriter of the Contract. Prior to its
dissolution on March 31, 2000, CNL, Inc. ("CNL") was the Contract's principal
underwriter.
*Effective May 1, 2000, Allstate Life Financial Service, Inc. was renamed ALF,
Inc.
ADDITIONS, DELETIONS OR SUBSTITUTIONS OF INVESTMENTS
From time to time, we may make certain changes in the Variable Account and its
investments. We may substitute shares of any portfolio for shares of another
portfolio of the Fund or another registered open-end management investment
company. We may do so if the shares of the portfolio are no longer available for
investment or if we decide that investment in any portfolio would be
inappropriate in view of the purposes of the Variable Account. We will not
substitute or eliminate the shares of a portfolio in which your Contract is
invested without prior approval of the SEC and we will notify you of our intent.
This will be done to the extent required by the 1940 Act.
We may add or delete sub-accounts in our discretion when we decide that
marketing, tax, investment, or other conditions warrant such additions or
deletions. Each additional sub-account will purchase shares in a portfolio of
the Fund or in another mutual fund or investment vehicle. If we eliminate a
sub-account, then we will notify you and request that you reallocate the amounts
you have invested in the eliminated sub-account. If you do not provide us with
your desired reallocations, then we will reinvest the amounts in the eliminated
sub-account into the sub-account that invests in the Money Market Portfolio. In
the event of any such substitution, change, or elimination, we may, by
appropriate endorsement, change the Contracts as may be necessary or appropriate
to reflect such substitution, change, or elimination. Furthermore, if we deem it
to be in the best interests of persons having voting rights under the Contracts,
then the Variable Account may be: (i) operated as a management company under the
1940 Act or any other form permitted by law, (ii) de-registered 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 applicable law permits,
we may transfer the assets of the Variable Account associated with the Contracts
to another separate account.
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.
FEDERAL TAX MATTERS
Introduction
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE. CHARTER
MAKES NO GUARANTEE REGARDING THE TAX TREATMENT OF ANY CONTRACT OR TRANSACTION
INVOLVING A CONTRACT. Federal, state, local and other tax consequences of
ownership or receipt of distributions under an annuity contract depend on the
individual circumstances of each person. If you are concerned about any tax
consequences with regard to your individual circumstances, you should consult a
competent tax adviser.
<PAGE>
Taxation of Charter
Charter is taxed as a life insurance company under Part I of Subchapter L of the
Internal Revenue Code. The Variable Account is not an entity separate from
Charter, and its operations form a part of the Company. As a consequence, the
Variable Account will not be taxed separately as a "Regulated Investment
Company" under Subchapter M of the Code. Investment income and realized capital
gains of the Variable Account are automatically applied to increase reserves
under the contract. Under current federal tax law, Charter believes that the
Separate Account investment income and capital gains will not be taxed to the
extent that such income and gains are applied to increase the reserves under the
Contract. Generally, reserves are amounts that Charter is legally required to
accumulate and maintain in order to meet future obligations under the Contracts.
Charter does not anticipate that it will incur any federal income tax liability
attributable to the Variable Account. Therefore, we do not intend to make
provisions for any such taxes. If we are taxed on investment income or capital
gains of the Variable Account, then we may impose a charge against the Variable
Account in order to make provision for such taxes.
Exceptions to the Non-natural Owner Rule
Generally, Contracts held by a non-natural owner are not treated as annuity
contracts for federal income tax purposes, unless one of several exceptions
applies. Contracts will generally be treated as held by a natural person if the
nominal owner is a trust or other entity that holds the Contract for the benefit
of a natural person. However, this special exception will not apply in the case
of an employer who is the nominal owner of a Contract under a non-qualified
deferred compensation arrangement for employees. Other exceptions to the
non-natural owner rule are:
(1) Contracts acquired by an estate of a decedent by reason of the death of the
decedent;
(2) certain Qualified Contracts;
(3) Contracts purchased by employers upon the termination of certain
qualified plans;
(4) certain Contracts used in connection with structured settlement agreements,
and
(5)Contracts purchased with a single premium when the annuity starting date is
no later than a year from date of purchase of the annuity and substantially
equal periodic payments are made, not less frequently than annually, during
the annuity period.
IRS Required Distribution at Death Rules
To qualify as an annuity contract for federal income tax purposes, a
Nonqualified Contract must provide:
(1) if any owner dies on or after the annuity start date, but before the entire
interest in the Contract has been distributed, the remaining portion of
such interest must be distributed at least as rapidly as under the method
of distribution being used as of the date of the owner's death; and
(2) if any owner dies prior to the annuity start date, the entire interest in
the Contract must be distributed within five years after the date of the
owner's death.
The five year requirement is satisfied if:
(1)any portion of the owner's interest which is payable to a designated
beneficiary is distributed over the life of such beneficiary (or over
a period not extending beyond the life expectancy of the
beneficiary); and
(2)the distributions begin within one year of the owner's death.
If the owner's designated beneficiary is a surviving spouse the Contract may be
continued with the surviving spouse as the new owner. If the owner of the
Contract is a non-natural person, the annuitant is treated as the owner for
purposes of applying the distribution at death rules. In addition, a change in
the annuitant on a Contract owned by a non-natural person is treated as the
death of the owner.
<PAGE>
Qualified Plans
This Contract may be used with several types of qualified plans. Charter
reserves the right to limit the availability of the Contract for use with any of
the qualified plans listed below. The income on qualified plan and IRA
investments is tax deferred and variable annuities held by such plans do not
receive any additional tax deferral. You should review the annuity features,
including all benefits and expenses, prior to purchasing a variable annuity in a
qualified plan or IRA. The tax rules applicable to participants inqualified
plans vary according to the type of plan and the terms and conditions of the
plan. Qualified plan participants, and owners, annuitants and beneficiaries
under the Contract may be subject to the terms and conditions of the qualified
plan regardless of the terms of the Contract.
Types of Qualified Plans
IRAs
Section 408 of the Code permits eligible individuals to contribute to an
individual retirement plan known as an IRA. IRAs are subject to limitations on
the amount that can be contributed and on the time when distributions may
commence. Certain distributions from other types of qualified plans may be
"rolled over" on a tax-deferred basis into an IRA. An IRA generally may not
provide life insurance, but it may provide a death benefit that equals the
greater of the premiums paid or the account value. The Contract provides a death
benefit that in certain situations may exceed the greater of the payments or the
account value. If the IRS treats the death benefit as violating the prohibition
on investment in life insurance contracts, the Contract would not qualify as an
IRA.
Roth IRAs
Section 408A of the Code permits eligible individuals to make nondeductible
contributions to an individual retirement plan known as a Roth IRA. Roth IRAs
are subject to limitations on the amount that can be contributed. In certain
instances, distributions from Roth IRAs are excluded from gross income. Subject
to certain limits, a traditional Individual Retirement Account or Annuity may be
converted or "rolled over" to a Roth IRA. The taxable portion of a conversion or
rollover distribution is included in gross income, but is exempt from the 10%
penalty tax on premature distributions.
Simplified Employee Pension Plans
Section 408(k) of the Code allows employers to establish simplified employee
pension plans for their employees using the employees' IRAs if certain criteria
are met. Under these plans the employer may, within limits, make deductible
contributions on behalf of the employees to their individual retirement
annuities. Employers intending to use the contract in connection with such plans
should seek competent advice. In particular, employers should consider that an
IRA generally may not provide life insurance, but it may provide a death benefit
that equals the greater of the premiums paid and the contract's cash value. The
Contract provides a death benefit that in certain circumstances may exceed the
greater of the payments and the account value.
Savings Incentive Match Plans for Employees (SIMPLE Plans)
Sections 408(p) and 401(k) of the Tax Code allow employers with 100 or fewer
employees to establish SIMPLE retirement plans for their employees. SIMPLE plans
may be structured as a SIMPLE retirement account using an employee's IRA to hold
the assets, or as a Section 401(k) qualified cash or deferred arrangement. In
general, a SIMPLE plan consists of a salary deferral program for eligible
employees and matching or nonelective contributions made by employers. Employers
intending to use the Contract in conjunction with SIMPLE plans should seek
competent tax and legal advice.
Tax Sheltered Annuities
Section 403(b) of the Tax Code permits public school employees and employees of
certain types of tax-exempt organizations (specified in Section 501(c)(3) of the
Code) to have their employers purchase Contracts for them. Subject to certain
limitations, a Section 403(b) plan allows an employer to exclude the purchase
payments from the employees' gross income. A Contract used for a Section 403(b)
plan must provide that distributions attributable to salary reduction
contributions made after 12/31/88, and all earnings on salary reduction
contributions, may be made only on or after:
o the date the employee attains age 59 1/2;
o separates from service;
o dies;
o becomes disabled; or
o on the account of hardship (earnings on salary reduction contributions
may not be distributed for hardship).
These limitations do not apply to withdrawals where Charter is directed to
transfer some or all of the account value to another 403(b) plan.
<PAGE>
Corporate and Self-Employed Pension and Profit Sharing Plans
Sections 401(a) and 403(a) of the Tax Code permit corporate employers to
establish various types of tax favored retirement plans for employees. The Tax
Code permits self-employed individuals to establish tax favored retirement plans
for themselves and their employees. Such retirement plans may permit the
purchase of Contracts to provide benefits under the plans.
State and Local Government and Tax-Exempt Organization
Deferred Compensation Plans
Section 457 of the Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current income taxes. The employees must be participants in an eligible deferred
compensation plan. Employees with Contracts under the plan are considered
general creditors of the employer. The employer, as owner of the Contract, has
the sole right to the proceeds of the Contract. Generally, under the non-natural
owner rules, such Contracts are not treated as annuity contracts for federal
income tax purposes. Under these plans, contributions made for the benefit of
the employees will not be included in the employees' gross income until
distributed from the plan. However, all compensation deferred under a 457 plan
must remain the sole property of the employer. As property of the employer, the
assets of the plan are subject only to the claims of the employer's general
creditors, until such time as the assets become available to the employee or a
beneficiary.
Safekeeping of the Variable Account's Assets
We hold the assets of the Variable Account. The assets are kept segregated
and held separate and apart from Charter's general funds. We maintain records of
all purchases and redemptions of the shares of each Portfolio. A blanket
fidelity bond in the amount of $10,000,000 covers all of the officers and
employees of Charter.
<PAGE>
Calculation of Yields and Total Returns
From time to time we may disclose yields, total returns and other
performance data pertaining to the Contracts for the Sub-accounts in accordance
with the standards deemed by the Securities and Exchange Commission. Because of
the charges and deductions imposed under the Contract, the yield for the
Sub-accounts 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 Sub-accounts 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 yields and total returns for periods prior to the date the Sub-accounts
commenced operations, when disclosed, are based on the performance of the
Scudder Variable Life Investment Fund's Portfolios and the assumption that the
Sub-accounts were in existence for the same periods as the Fund's Portfolios
with the level of Contract charges equal to those currently assessed against the
Sub-accounts. The Sub-accounts and Portfolios commenced operations as indicated:
<PAGE>
Sub-account/Portfolio Sub-account Portfolio
Balanced October, 1988 July, 1985
Bond October, 1988 July, 1985
Capital Growth October, 1988 July, 1985
Global Discovery May, 1996 May, 1996
Growth and Income May, 1994 May, 1994
International October, 1988 May, 1987
Large Company Growth May, 1999 May, 1999
Money Market October, 1988 July, 1985
21st Century Growth May, 1999 May, 1999
Money Market Sub-account Yields
We compute the Current Yield by determining the net change (exclusive of
realized gains and losses on the sale of securities and unrealized appreciation
and depreciation) at the end of the seven-day period in the value of a
hypothetical under a Contract having a balance of 1 unit of the Money Market
Sub-account at the beginning of the period, dividing the 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. The
Current Yield is calculated according to the following formula:
Current Yield = ((NCS - ES) / UV) x (365 / 7)
We may also disclose the Effective Yield of the Money Market Sub-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))(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 Sub-account unit under a Contract.
ES = Per unit expenses of the Sub-account for the Contracts for the seven-day
period.
UV = The unit value for a Contract on the first day of the seven-day period.
<PAGE>
The Current and Effective Yield on amounts held in the Money Market
Sub-account 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 Sub-account'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 Sub-account Yields
The 30-Day Yield refers to income generated by the Bond Sub-account 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 Sub-account units less Sub-account
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 Sub-account 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
Sub-account's units.
ES = Expenses of the Sub-account 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 Sub-account 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 Sub-account's actual yield is affected by the types and quality of
portfolio securities held by the Portfolio, and its operating expenses.
<PAGE>
Total Returns
We may disclose Standard Average Annual Total Returns ("Total Returns") for
one or more of the Sub-accounts for various periods of time. One of the periods
of time will include the period measured from the date the Sub-account commenced
operations. When a Sub-account has been in operation for one, five and ten
years, respectively, the Total Returns for these periods will be provided. Total
Returns for other periods of time may, from time to time, also be disclosed.
Based on the method of calculation described below, the Average Annual Total
Returns for the sub-accounts are set out below. The inception date for each of
the sub-accounts appears under "Calculation of Yields and Returns, " above.
<TABLE>
One Year Period Five Year Period Ten Year Period
Sub-account Ending 12/31/99 Ending 12/31/99 Ending 12/31/99 or
Since Portfolio Inception
- ----------------------- --------------------- -------------------- ---------------------
<S> <C> <C> <C>
Balanced 14.51% 19.28% 12.53%
Bond -1.64% 6.20% 6.58%
Capital Growth 34.29% 27.55% 17.16%
Global Discovery** 64.73% N/A 24.49%
Growth and Income* 5.34% 18.12% 16.72%
International 53.43% 19.71% 12.40%
Large Company N/A N/A 57.94%
Growth****
21st Century N/A N/A 134.42%
Growth***
</TABLE>
*Ten-Year Average Annual Total Returns are not available for the Growth and
Income Sub-account as it began operations on May 1, 1994.
** Five and Ten-Year Average Annual Total Returns are not available for the
Global Discovery Sub-account as it began operations on May 1, 1996.
*** One, Five and Ten-Year Average Annual Total Returns are not available for
the Large Company Growth and 21st Century Growth Sub-accounts as they began
operations on May 3, 1999. The Average Annual Total Returns shown are
annualized.
<PAGE>
Total Returns 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.
We will calculate Total Returns using sub-account Unit Values which Charter
calculates on each Valuation Date based on the performance of the sub-account's
underlying Portfolio, and the deductions for the Mortality and Expense Risk
Charge of 0.40%, the Contract Administration Charge of 0.30% 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 Sub-account 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
While the Contract provides for a $40 Records Maintenance Charge to be deducted
annually at the beginning of each Contract Year, we are not deducting the
Records Maintenance Charge at this time. On performance information prior to
January 25, 1991, $35 was deducted annually at the beginning of each Contract
Year proportionately from each Sub-account based on the value of the amounts in
each Sub-account. For purposes of reflecting the Records Maintenance Charge in
yield and total return quotations, we 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 did not, except in rare
instances, reflect its actual effect on a particular Contract.
<PAGE>
Other Performance Data
Cumulative Total Returns
Based on the method of calculation described below, the Cumulative Total Returns
for the sub-accounts for the periods ending December 31, 1999, are set out
below. The inception date for each of the sub-accounts appears under
"Calculaiton of Yields and Returns", above.
<TABLE>
One Year Period Five Year Period Ten Year Period
Ending 12/31/99 Ending 12/31/99 Ending 12/31/9 or
Sub-account Since Portfolio Inception
- ----------------------- --------------------- -------------------- ---------------------
<S> <C> <C> <C>
Balanced 14.51% 141.43% 225.60%
Bond -1.64% 35.09% 89.17%
Capital Growth 34.29% 237.55% 387.42%
International 53.43% 145.86% 221.73%
Global Discovery** 64.73% N/A 123.20%
Growth and Income* 5.34% 129.88% 140.05%
Large Company N/A N/A 35.37%
Growth***
21st Century N/A N/A 75.85%
Growth***
</TABLE>
*Ten-Year Cumulative Average Annual Total Returns are not available for the
Growth and Income Sub-account as it began operations on May 1, 1994.
** Five- and Ten-Year Cumulative Average Annual Total Returns are not available
for the Global Discovery Sub-account as it began operations on May 1, 1996.
*** One-, Five- and Ten-Year Cumulative Average Annual Total Returns are not
available for the Large Company Growth and 21st Century Growth Sub-accounts as
they began operations on May 3, 1999. The Cumulative Average Annual Total
Returns shown are annualized.
<PAGE>
The Cumulative Total Returns are calculated using the following formula:
CTR = (ERV / P) - 1
Where:
CTR = The Cumulative Total Return net of Sub-account 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.
All non-standard performance data will only be disclosed if the standard
performance data for the required periods is also disclosed.
Adjusted Historical Performance
We may also disclose yield and total return for periods before the date the
Sub-accounts began operations. For periods prior to the date the Sub-accounts
commenced operations, adjusted historical performance information will be
calculated based on the performance of the underlying Portfolios adjusted to
reflect some or all of the charges equal to those currently assessed against the
Sub-accounts under the Contract.
In the tables below, average annual total returns for the Sub-accounts were
reduced by all current fees and charges under the Contract, including the
Mortality and Expense Risk Charge of 0.40% and an Administrative Expense Charge
of 0.30%.
<TABLE>
Ten Year Period Portfolio
One Year Period Five Year Period Ending 12/31/99 or Inception
Sub-Account Ending 12/31/99 Ending 12/31/99 Since Portfolio Inception Dates
- ----------------------- --------------------- -------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
Balanced 14.51% 19.28% 12.53% 7/16/85
Bond -1.64% 6.20% 6.58% 7/16/85
Capital Growth 34.29% 27.55% 17.16% 7/16/85
Global Discovery 64.73% N/A 24.49% 5/1/96
Growth and Income 5.34% 18.12% 16.72% 5/2/94
International 53.43% 19.71% 12.40% 5/1/87
Large Company Growth N/A N/A 57.94% 5/3/99
21st Century Growth N/A N/A 134.42% 5/3/99
</TABLE>
<PAGE>
Comparison of Performance and Expense Information
Expenses and performance information for the Contract and each sub-account may
be compared in advertising, sales literature, and other communications to
expenses and performance information of other variable annuity products
investing in mutual funds (or investment portfolios of mutual funds) with
investment objectives similar to each of the sub-accounts tracked by independent
services such as Lipper Analytical Services, Inc. ("Lipper"), Morningstar and
the Variable Annuity Research Data Service ("V.A.R.D.S."). Lipper, Morningstar
and V.A.R.D.S. monitor and rank the performance and expenses of variable annuity
issuers in each of the major categories of investment objectives on an
industry-wide basis.
Lipper's and Morningstar's rankings include variable life insurance issuers as
well as variable annuity issuers. V.A.R.D.S. rankings only compare variable
annuity issuers. The performance analyses prepared by Lipper and V.A.R.D.S. each
rank such issuers on the basis of total return, assuming reinvestment of
distributions, but do not take sales charges or certain expense deductions at
the separate account level into consideration. The performance analyses prepared
by Morningstar rate sub-account performance relative to its investment class
based on total returns. Morningstar deducts front-end loads from total returns
and deducts half of the surrender charge, if applicable, for the relevant time
period when calculating performance figures. In addition, Morningstar and
V.A.R.D.S. prepare risk adjusted rankings, which consider the effects of market
risk on total return performance. This type of ranking provides data as to which
funds provide the highest total return within various categories defined by the
degree of risk inherent in their investment objectives.
From time to time, we 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 such as these may assume
reinvestment of dividends that generally do not reflect deductions for the
expenses of operating and managing an investment portfolio.
<PAGE>
EXPERTS
The consolidated financial statements of Charter as of December 31, 1999 and for
the year then ended and the related financial statement schedules that appear in
this Statement of Additional Information have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The financial statements of the Variable Account as of December 31, 1999 and for
the year then ended that appear in this Statement of Additional Information have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
The Statement of Changes in Net Assets of the Variable Account for the year
ended December 31, 1998, included in this Statement of Additional Information
and registration statement, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
FINANCIAL STATEMENTS
The financial statements of the Variable Account as of December 31, 1999 and for
each of the periods in the two years then ended, the consolidated financial
statements of Charter as of December 31, 1999 and 1998 and for each of the three
years in the period ended December 31, 1999 and the related financial statement
schedule and the accompanying Independent Auditors' Reports appear in the pages
that follow. The financial statements and schedules of Charter included herein
should be considered only as bearing upon the ability of Charter to meet its
obligations under the Contacts. They should not be considered as bearing on the
investment performance of the assets held in the Variable Account.
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
CHARTER NATIONAL LIFE INSURANCE COMPANY:
We have audited the accompanying Statement of Financial Position of Charter
National Life Insurance Company (the "Company", an affiliate of The Allstate
Corporation) as of December 31, 1999 and the related Statements of Operations
and Comprehensive Income, Shareholder's Equity and Cash Flows for the period
from January 1, 1999 through June 30, 1999 (Predecessor Period), and for the
period from July 1, 1999 through December 31, 1999 (Successor Period). Our audit
also included Schedule IV - Reinsurance and Schedule V - Valuation and
Qualifying Accounts for the period from January 1, 1999 through June 30, 1999
(Predecessor Period), and for the period from July 1, 1999 through December 31,
1999 (Successor Period). These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1999 and the
results of its operations and its cash flows for the period from January 1, 1999
through June 30, 1999 (Predecessor Period) and for the period from July 1, 1999
through December 31, 1999 (Successor Period), in conformity with generally
accepted accounting principles. Also, in our opinion, Schedule IV - Reinsurance
and Schedule V - Valuation and Qualifying Accounts for the period from January
1, 1999 through June 30, 1999 (Predecessor Period), and for the period from July
1, 1999 through December 31, 1999 (Successor Period), when considered in
relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information set forth therein.
As more fully described in Note 2 to the financial statements, The Allstate
Corporation acquired the Company as of July 1, 1999, in a business combination
accounted for as a purchase. As a result of the acquisition, the financial
statements for the Successor Periods are presented on a different basis of
accounting than that of the Predecessor Periods and therefore are not completely
comparable.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 25, 2000
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholder
of Charter National Life Insurance Company:
In our opinion, the accompanying consolidated statement of financial position
and the related consolidated statements of operations and comprehensive income,
in shareholder's equity, and cash flows present fairly, in all material
respects, the financial position of Charter National Life Insurance Company (the
Company) (a wholly-owned subsidiary of Leucadia National Corporation) and its
subsidiaries at December 31, 1998, and the results of their operations and cash
flows for each of the two years in the period ended December 31, 1998 in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, Schedule IV - Reinsurance and Schedule V -
Valuation and Qualifying Accounts present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
financial statements. These financial statements and financial statement
schedules are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
February 17, 1999
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION AS OF DECEMBER 31, 1999 (SUCCESSOR)
AND CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS OF
DECEMBER 31, 1998 (PREDECESSOR)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1999 1998
(SUCCESSOR) (PREDECESSOR)
------------- -------------
<S> <C> <C>
($ in thousands, except par value data)
ASSETS
Investments
Fixed income securities:
Available for sale, at fair value
(amortized cost $18,479 and $45,526) $ 18,529 $ 46,224
Held to maturity, at amortized cost
(fair value $3,040 in 1998) - 2,971
Equity securities of affiliate - 155
Short-term 975 232
------------- -------------
Total investments 19,504 49,582
Cash 4,328 506
Reinsurance recoverables from Allstate
Life Insurance Company 17,924 10,697
Reinsurance recoverables from non-affiliates 107,970 113,327
Current income tax recoverable 13 -
Deferred income taxes 14 9,269
Other assets 2,055 801
Separate Accounts 648,754 564,040
------------- -------------
TOTAL ASSETS $ 800,562 $ 748,222
------------- -------------
------------- -------------
LIABILITIES
Reserve for life-contingent contract benefits $ 7,342 $ 8,174
Contractholder funds 118,552 115,572
Surplus note - 25,000
Current income tax payable - 733
Other liabilities and accrued expenses 388 22,535
Payable to affiliates, net 957 -
Separate Accounts 648,754 564,040
------------- -------------
TOTAL LIABILITIES 775,993 736,054
------------- -------------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 14)
SHAREHOLDER'S EQUITY
Common stock, $31 par value, 110,000 shares
authorized, issued and outstanding 3,410 3,410
Additional capital paid-in 21,166 4,907
Retained (loss) income (39) 3,397
Accumulated other comprehensive income:
Unrealized net capital gains 32 454
------------- -------------
TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME 32 454
------------- -------------
TOTAL SHAREHOLDER'S EQUITY 24,569 12,168
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 800,562 $ 748,222
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
3
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE PERIOD
FROM JULY 1, 1999 THROUGH DECEMBER 31, 1999 (SUCCESSOR) AND FOR
THE PERIOD FROM JANUARY 1, 1999 THROUGH JUNE 30, 1999 (PREDECESSOR) AND THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 (PREDECESSOR) AND
DECEMBER 31, 1997 (PREDECESSOR)
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1999 PERIOD FROM
THROUGH JANUARY 1, 1999 YEAR ENDED DECEMBER 31,
DECEMBER 31, THROUGH JUNE 30, ------------------------------------
1999 1999 1998 1997
($ in thousands) (SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
REVENUES
Premiums and contract charges (net of reinsurance
ceded of $2,419, $2,690, $19,503 and $13,812) $ - $ - $ 275 $ 4,967
Net investment income 332 1,347 24,051 26,066
Realized capital gains and losses (379) (574) 411 (532)
Gain on reinsurance - 1,061 4,464 -
Other income - - - 590
---------------- ---------------- ---------------- ----------------
(47) 1,834 29,201 31,091
---------------- ---------------- ---------------- ----------------
COSTS AND EXPENSES
Contract benefits (net of reinsurance recoveries
of $3,357, $7,517, $23,582 and $18,965) - - (646) 1,898
Operating costs and expenses 12 483 8,987 7,704
Interest expense - 960 1,976 1,975
---------------- ---------------- ---------------- ----------------
12 1,443 10,317 11,577
---------------- ---------------- ---------------- ----------------
(LOSS) INCOME FROM OPERATIONS BEFORE
INCOME TAX (BENEFIT) EXPENSE (59) 391 18,884 19,514
Income tax (benefit) expense (20) 135 8,795 5,371
---------------- ---------------- ---------------- ----------------
(LOSS) INCOME FROM CONTINUING OPERATIONS (39) 256 10,089 14,143
Income from discontinued operations, net of tax - - - 54,398
Gain on disposal of discontinued operations, net
taxes of $246,799 - - - 606,897
---------------- ---------------- ---------------- ----------------
NET (LOSS) INCOME (39) 256 10,089 675,438
---------------- ---------------- ---------------- ----------------
OTHER COMPREHENSIVE INCOME (LOSS), AFTER-TAX
Change in unrealized net capital gains and losses 32 (615) 115 601
---------------- ---------------- ---------------- ----------------
COMPREHENSIVE (LOSS) INCOME $ (7) $ (359) $ 10,204 $ 676,039
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
</TABLE>
See notes to financial statements.
4
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENTS OF SHAREHOLDER'S EQUITY FOR THE PERIOD
FROM JULY 1, 1999 THROUGH DECEMBER 31, 1999 (SUCCESSOR) AND FOR
THE PERIOD FROM JANUARY 1, 1999 THROUGH JUNE 30, 1999 (PREDECESSOR) AND THE
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1998 (PREDECESSOR) AND DECEMBER 31, 1997 (PREDECESSOR)
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1999 PERIOD FROM
THROUGH JANUARY 1, 1999 DECEMBER 31,
DECEMBER 31, THROUGH JUNE 30, ------------------------------------
1999 1999 1998 1997
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
($ in thousands)
COMMON STOCK $ 3,410 $ 3,410 $ 3,410 $ 3,410
---------------- ---------------- ---------------- ----------------
ADDITIONAL CAPITAL PAID-IN
Balance, beginning of period $ - $ 4,907 $ 6,159 $ 6,140
New capitalization 21,541 - - -
Capital contribution - - - 19
Return of capital (375) - (1,252) -
---------------- ---------------- ---------------- ----------------
Balance, end of period 21,166 4,907 4,907 6,159
---------------- ---------------- ---------------- ----------------
RETAINED (LOSS) INCOME
Balance, beginning of period $ - $ 3,397 $ 1,212,549 $ 572,891
Net (loss) income (39) 256 10,089 675,438
Dividends - - (1,219,241) (35,780)
---------------- ---------------- ---------------- ----------------
Balance, end of period (39) 3,653 3,397 1,212,549
---------------- ---------------- ---------------- ----------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance, beginning of period $ - $ 454 $ 339 $ (262)
Change in unrealized net capital gains and losses 32 (615) 115 601
---------------- ---------------- ---------------- ----------------
Balance, end of period 32 (161) 454 339
---------------- ---------------- ---------------- ----------------
TOTAL SHAREHOLDER'S EQUITY $ 24,569 $ 11,809 $ 12,168 $ 1,222,457
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
</TABLE>
See notes to financial statements.
5
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JULY 1, 1999
THROUGH DECEMBER 31, 1999 (SUCCESSOR) AND FOR THE PERIOD FROM
JANUARY 1, 1999 THROUGH JUNE 30, 1999 (PREDECESSOR) AND THE
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1998 (PREDECESSOR) AND DECEMBER 31, 1997 (PREDECESSOR)
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1999 PERIOD FROM
THROUGH JANUARY 1, 1999 YEAR ENDED DECEMBER 31,
DECEMBER 31, THROUGH JUNE 30, -----------------------------
1999 1999 1998 1997
($ in thousands) (SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
------------ ---------------- ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ (39) $ 256 $ 10,089 $ 675,438
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on disposal of discontinued operations - - - (606,897)
Income taxes provided on disposal of
discontinued operations - - - (246,799)
Depreciation, amortization and other
non-cash items 448 76 (7,976) (2,974)
Realized capital gains and losses 379 574 (411) 532
Changes in:
Life-contingent contract benefits and
contractholder funds - 278 (46,123) (1,110)
Income taxes payable 2,430 (2,843) (19,354) 4,990
Other operating assets and liabilities 2,331 (2,485) 2,238 20,031
Proceeds from reinsurance, net - - - 19,517
------------ ---------------- ------------- -------------
Net cash provided by (used in) operating activities 5,549 (4,144) (61,537) (137,272)
------------ ---------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed income securities
Proceeds from sales 13,475 25,519 44,374 70,670
Investment collections 1,133 7,486 2,223 45,621
Investment purchases (16,951) (2,519) (354,674) (577,934)
Change in short-term investments, net (325) (401) 377,438 (365,078)
Change in policy loans, net - - 6,062 1,846
Proceeds from disposal of discontinued operations - - - 998,099
Purchase of property and equipment, net - - 89 (42)
Participation in Separate Accounts - - - 1,055
------------ ---------------- ------------- -------------
Net cash (used in) provided by investing activities (2,668) 30,085 75,512 174,237
------------ ---------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividend paid - - (15,271) (35,780)
Repayment of surplus note - (25,000) - -
Capital contribution - - - 19
------------ ---------------- ------------- -------------
Net cash used in financing activities - (25,000) (15,271) (35,761)
------------ ---------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH 2,881 941 (1,296) 1,204
CASH AT THE BEGINNING OF PERIOD 1,447 506 1,802 598
------------ ---------------- ------------- -------------
CASH AT END OF PERIOD $ 4,328 $ 1,447 $ 506 $ 1,802
------------ ---------------- ------------- -------------
------------ ---------------- ------------- -------------
Supplemental disclosures of cash flow information:
Non-cash proceeds from disposal of
discontinued operations $ - $ - $ - $ 400,000
Non-cash dividend to parent $ 375 $ - $ 1,205,222 $ -
</TABLE>
See notes to financial statements.
6
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
BASIS OF PRESENTATION
The accompanying 1999 financial statements include the accounts of Charter
National Life Insurance Company (the "Company"). On July 1, 1999, the Company
became a wholly owned subsidiary of Allstate Life Insurance Company ("ALIC"),
which is wholly owned by Allstate Insurance Company ("AIC"), a wholly owned
subsidiary of The Allstate Corporation (the "Corporation"). Prior to July 1,
1999, the Company was a wholly owned subsidiary of Leucadia National Corporation
("Leucadia").
The accompanying 1998 and 1997 consolidated financial statements include the
accounts of Charter National Life Insurance Company and its subsidiaries (the
"Company"). The Company's major subsidiary was LUK-CPG, Inc ("LUK-CPG"). On
December 30, 1998, the Company paid a common stock dividend of all the
outstanding common shares of LUK-CPG to Leucadia. LUK-CPG owned 98% of
Intramerica Life Insurance Company ("Intramerica") and several non-insurance
subsidiaries. The Company owned the remaining 2% of Intramerica directly. In
1997, the Company sold substantially all of its insurance operations and
classified as discontinued operations the property-casualty insurance operations
of Colonial Penn Insurance Company and its subsidiaries ("Colonial Penn P&C
Group") and the life and health operations of Colonial Penn Life Insurance
Company ("Colonial Penn Life"). The Company's 1998 consolidated statement of
financial position includes a 2% equity interest in Intramerica. The
consolidated financial statements presented for 1997 include LUK-CPG and 100% of
Intramerica.
These financial statements have been prepared in conformity with generally
accepted accounting principles.
To conform with the 1999 presentation, certain amounts in the prior years'
financial statements and notes have been reclassified.
NATURE OF OPERATIONS
The Company markets variable annuity and variable life products through direct
marketing channels. The financial statements also include the impacts of life
and savings products, including traditional life, interest-sensitive life, fixed
annuities and immediate annuities without life contingencies, which the Company
no longer actively sells.
The Company re-domesticated its operations from Missouri to Illinois in December
1999.
The Company monitors economic and regulatory developments which have the
potential to impact its business. Recently enacted federal legislation will
allow for banks and other financial organizations to have greater participation
in the securities and insurance businesses. This legislation may present an
increased level of competition for sales of the Company's products. Furthermore,
the market for the Company's products is enhanced by the tax incentives
available under current law. Any legislative changes which lessen these
incentives are likely to negatively impact the demand for these products.
Additionally, traditional demutualizations of mutual insurance companies and
enacted and pending state legislation to permit mutual insurance companies to
convert to a hybrid structure known as a mutual holding company could have a
number of significant effects on the Company by (1) increasing industry
competition through consolidation caused by mergers and acquisitions related to
the new corporate form of business; and (2) increasing competition in capital
markets.
The Company is authorized to sell variable annuity and life products in all
states except New York, as well as in the District of Columbia and Puerto Rico.
The top geographic locations for statutory premiums and deposits for the Company
were California, Texas, Florida and Massachusetts for the year ended December
7
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
31, 1999. No other jurisdiction accounted for more than 5% of statutory premiums
and deposits. Starting in 1999, all premiums and deposits are ceded under
reinsurance agreements.
2. ACQUISITION
On July 1, 1999, ALIC acquired 110,000 shares of common stock, representing 100%
of the issued and outstanding shares of the Company for $24.9 million (the
"Acquisition") from Leucadia. The Acquisition was accounted for using the
purchase method of accounting. Since 100% of the Company was acquired by a new
controlling shareholder, management was required to "push down" the new basis of
accounting in the accompanying financial statements.
The 1999 financial statements reflect the allocation of the purchase price based
on the estimated fair value of the assets and liabilities at the acquisition
date. The excess of the purchase price over the fair value of the net assets,
$1.7 million, was recorded as goodwill and is being amortized on a straight-line
basis over twenty years.
Effective January 1, 1998 and prior to the acquisition by ALIC, the Company
entered into a reinsurance agreement to cede its variable life, variable annuity
and traditional life business to ALIC. The Company received a premium of $27.7
million from ALIC for reinsuring its variable annuity business. A gain of $23.5
million, net of related assets, was deferred and was intended to be amortized
into income based on actuarial estimates of the premium revenue of the
underlying insurance contracts. At the date of acquisition, the unamortized
deferred gain was reclassified to additional capital paid-in.
On June 30, 1999, with the approval of the Missouri Department of Insurance, the
Company paid Leucadia $25.1 million in principal and interest to terminate the
surplus note with Leucadia. The terms of the note provided for interest at the
rate of 7.75% per annum on the outstanding principal and interest. The Company
paid $960 thousand of interest on this debt for the period of January 1, 1999
through June 30, 1999 and $1.9 million in both 1998 and 1997, respectively.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies have been applied in both the pre-acquisition
and post-acquisition periods. The basis of both the assets and liabilities are
different in the post-acquisition financial statements due to ALIC applying the
purchase method of accounting whereby all assets and liabilities are valued at
the estimated fair market value at June 30, 1999.
INVESTMENTS
Fixed income securities include bonds and mortgage-backed securities. At
December 31, 1999, all fixed income securities are carried at fair value and may
be sold prior to their contractual maturity ("available for sale"). The
difference between amortized cost and fair value, net of deferred income taxes,
is reflected as a component of shareholder's equity. Upon acquisition by ALIC,
the Company designated its fixed income securities portfolio as available for
sale. Prior to the Acquisition, a portion of fixed income securities was
classified as held to maturity (see Note 5). Provisions are recognized for
declines in the value of fixed income securities that are other than temporary.
Such writedowns are included in realized capital gains and losses.
Equity securities of affiliate consists of the Company's 2% ownership of
Intramerica. On September 1, 1999, the Company transferred its 2% interest in
Intramerica as a dividend to ALIC (see Note 4).
8
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Short-term investments are carried at cost or amortized cost, which approximates
fair value.
Investment income consists primarily of interest and short-term investment
dividends. Interest is recognized on an accrual basis and dividends are recorded
at the ex-dividend date. Interest income on mortgage-backed securities is
determined on the effective yield method, based on the estimated principal
repayments. Accrual of income is suspended for fixed income securities that are
in default or when the receipt of interest payments is in doubt. Realized
capital gains and losses are determined on a specific identification basis.
REINSURANCE RECOVERABLES
The Company has reinsurance agreements whereby premiums, contract charges,
policy benefits, credited interest and certain expenses are ceded. Such amounts
are reflected net of such reinsurance in the statements of operations and
comprehensive income. The amounts shown in the Company's statements of
operations and comprehensive income relate to the investment of those assets of
the Company that are not transferred under reinsurance agreements. Reinsurance
recoverables and the related reserve for life-contingent contract benefits and
contractholder funds are reported separately in the statements of financial
position. The Company continues to have primary liability as the direct insurer
for risks reinsured.
RECOGNITION OF INSURANCE REVENUE AND RELATED BENEFITS AND INTEREST CREDITED
Traditional life insurance products consist principally of products with fixed
and guaranteed premiums and benefits, primarily term and whole life insurance
products. Premiums for these products are recognized as revenue when due.
Benefits are recognized in relation to such revenue so as to result in the
recognition of profits over the life of the policy and are reflected in contract
benefits.
Interest-sensitive life contracts are insurance contracts whose terms are not
fixed and guaranteed. The terms that may be changed include premiums paid by the
contractholder, interest credited to the contractholder account balance and one
or more amounts assessed against the contractholder. Premiums from these
contracts are reported as deposits to contractholder funds. Contract charge
revenue consists of fees assessed against the contractholder account balance for
cost of insurance (mortality risk), contract administration and surrender
charges. Contract benefits include interest credited to contracts and claims
incurred in excess of related contractholder account balance.
Contracts that do not subject the Company to significant risk arising from
mortality or morbidity are referred to as investment contracts. Fixed rate
annuities and immediate annuities without life contingencies are considered
investment contracts. Deposits received for such contracts are reported as
deposits to contractholder funds. Contract charge revenue for investment
contracts consists of charges assessed against the contractholder account
balance for contract administration and surrenders. Contract benefits include
interest credited and claims incurred in excess of the related contractholder
account balance.
Investment contracts also include variable annuity and variable life contracts
which are sold as Separate Accounts products. The assets supporting these
products are legally segregated and available only to settle Separate Accounts
contract obligations. Deposits received are reported as Separate Accounts
liabilities. The Company's contract charge revenue for these contracts consists
of charges assessed against the Separate Accounts fund balances for contract
maintenance, administration, mortality, expense and surrenders.
INCOME TAXES
The income tax provision is calculated under the liability method. Subsequent to
the Acquisition, income taxes are presented net of reinsurance. Deferred tax
assets and liabilities are recorded based on the
9
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
difference between the financial statement and tax bases of assets and
liabilities at the enacted tax rates. Deferred income taxes arise primarily from
unrealized capital gains and losses on fixed income securities carried at fair
value and differences in the tax bases of investments. In 1998, deferred income
taxes also arose from deferred gains on reinsurance.
SEPARATE ACCOUNTS
The Company issues deferred variable annuity and variable life contracts, the
assets and liabilities of which are legally segregated and recorded as assets
and liabilities of the Separate Accounts. The contractholders bear the
investment risk that the Separate Accounts' funds may not meet their stated
investment objectives.
The assets of the Separate Accounts are carried at fair value. Separate Accounts
liabilities represent the contractholders' claim to the related assets and are
carried at the fair value of the assets. Investment income and realized capital
gains and losses of the Separate Accounts accrue directly to the contractholders
and therefore, are not included in the Company's statements of operations and
comprehensive income. Revenues to the Company from the Separate Accounts consist
of contract maintenance and administration fees, and mortality, surrender and
expense charges.
RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS
The reserve for life-contingent contract benefits, which relates to traditional
life insurance is computed on the basis of assumptions as to mortality, future
investment yields, terminations and expenses at the time the policy is issued.
These assumptions are applied using the net level premium method and include
provisions for adverse deviation and generally vary by such characteristics as
type of coverage, year of issue and policy duration. Detailed reserve
assumptions and reserve interest rates are outlined in Note 7.
CONTRACTHOLDER FUNDS
Contractholder funds arise from the issuance of interest-sensitive life and
certain investment contracts. Deposits received are recorded as interest-bearing
liabilities. Contractholder funds are equal to deposits received and interest
credited to the benefit of the contractholder less withdrawals, mortality
charges and administrative expenses. Detailed information on crediting rates and
surrender and withdrawal protection on contractholder funds are outlined in
Note 7.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS
In 1999, the Company adopted Statement of Position ("SOP") 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments." The SOP
provides guidance concerning when to recognize a liability for insurance-related
assessments and how those liabilities should be measured. Specifically,
insurance-related assessments should be recognized as liabilities when all of
the following criteria have been met: 1) an assessment has been imposed or it is
probable that an assessment will be imposed, 2) the event obligating an entity
to pay an assessment has occurred and 3) the amount of the assessment can be
reasonably estimated. Adoption of this statement was not material to the
Company's results of operations or financial position.
10
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
4. RELATED PARTY TRANSACTIONS
REINSURANCE
The Company has reinsurance agreements whereby variable annuity and variable
life contract charges and traditional life premiums, policy benefits and certain
expenses are ceded to ALIC and reflected net of such reinsurance in the
statements of operations and comprehensive income. Reinsurance recoverable and
the related reserve for life-contingent contract benefits and contractholder
funds are reported separately in the statements of financial position. The
Company continues to have primary liability as the direct insurer for risks
reinsured.
Investment income earned on the assets which support the reserve for
life-contingent contract benefits and contractholder funds are not included in
the Company's financial statements as those assets are owned and managed under
terms of the reinsurance agreements. The following amounts were ceded to ALIC
under reinsurance agreements, effective January 1, 1998.
<TABLE>
<CAPTION>
($ in thousands) PERIOD FROM PERIOD FROM
JULY 1, 1999 JANUARY 1, 1999
THROUGH THROUGH YEAR ENDED
DECEMBER 31, 1999 JUNE 30, 1999 DECEMBER 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Premiums $ 6 $ 49 $ 219
Contract charges 2,341 2,373 1,284
Policy benefits and
certain expenses 410 502 1,514
</TABLE>
BUSINESS OPERATIONS
ALIC began providing certain services to the Company in November 1998.
Subsequent to the Acquisition, the Company expanded its use of services and
began to utilize business facilities leased and operated by ALIC in conducting
its business activities. The Company reimburses ALIC for the operating expenses
incurred on behalf of the Company. The Company is charged for the cost of these
operating expenses based on the level of services provided. Operating expenses,
including compensation and retirement and other benefit programs, allocated to
the Company were $189 thousand for the period of July 1, 1999 through December
31, 1999. Of these costs, the Company retains investment related expenses. All
other costs are ceded to ALIC under reinsurance agreements.
Prior to the Acquisition, the Company incurred expenses for various management
services and operating expenses on its behalf by Leucadia and other affiliated
companies. In a similar manner, the Company was reimbursed for salaries and
other expenses incurred for the benefit of Leucadia and other affiliates. The
Company also had general service and expense reimbursement agreements with
Leucadia and other affiliates. Under the terms of the agreements, Leucadia and
other affiliates would provide certain services for the benefit of the Company.
These services included general legal advice and services, accounting services
and strategic planning and investigation of proposed business transactions.
Expenses incurred by the Company for these services were $360 thousand, $6.4
million and $1.6 million for the period of January 1, 1999 through June 30, 1999
and for the years ended December 31, 1998 and 1997, respectively. On the
acquisition date, all service agreements with Leucadia and affiliates were
terminated.
The Company had agreements with CNL, Inc., ("CNL"), a broker-dealer, for the
underwriting and distribution of its variable annuity and variable life
products. On September 2, 1998, Leucadia sold CNL to ALIC. Commissions and
expenses incurred were approximately $29 thousand, $176 thousand and $244
thousand
11
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
for the period of July 1, 1999 through December 31, 1999, the period ended
September 2, 1998, and for the year ended December 31, 1997, respectively.
DIVIDEND OF EQUITY IN AFFILIATE
On September 1, 1999, the Company dividended its 2% equity ownership interest in
Intramerica to ALIC. The Company's basis in its equity investment was $375
thousand, which was equivalent to its market value at the date of the
Acquisition.
INSTALLMENT LOANS
The Company purchased installment loans from American Investment Bank, a former
affiliate, and paid related service fees of approximately $46 thousand and $88
thousand in 1998 and 1997, respectively. There were no installment loans
outstanding at December 31, 1999 or 1998.
5. INVESTMENTS
On July 1, 1999, the Company designated its fixed income securities as available
for sale.
FAIR VALUES
The amortized cost, gross unrealized gains and losses, and fair value for fixed
income securities are as follows:
($ in thousands)
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ---------------- FAIR
COST GAINS LOSSES VALUE
------- ------- -------- -------
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1999
AVAILABLE FOR SALE
U.S. government and agencies $14,072 $ 223 $ (81) $14,214
Corporate 3,247 - (61) 3,186
Mortgage-backed securities 1,160 - (31) 1,129
------- ------- -------- -------
Total available for sale securities $18,479 $ 223 $ (173) $18,529
------- ------- -------- -------
------- ------- -------- -------
AT DECEMBER 31, 1998
AVAILABLE FOR SALE
U.S. government and agencies $41,028 $ 745 $ (85) $41,688
Corporate 4,498 45 (7) 4,536
------- ------- -------- -------
Total available for sale securities $45,526 $ 790 $ (92) $46,224
------- ------- -------- -------
------- ------- -------- -------
HELD TO MATURITY
U.S. government and agencies $ 2,971 $ 69 $ - $ 3,040
------- ------- -------- -------
Total held to maturity securities $ 2,971 $ 69 $ - $ 3,040
------- ------- -------- -------
------- ------- -------- -------
</TABLE>
12
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SCHEDULED MATURITIES
The scheduled maturities for fixed income securities are as follows at December
31, 1999:
($ in thousands)
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
-------- --------
<S> <C> <C>
Due in one year or less $ 5,142 $ 5,143
Due after one year through five years 8,093 8,267
Due after five years through ten years 1,902 1,857
Due after ten years 2,182 2,133
-------- --------
17,319 17,400
Mortgage-backed securities 1,160 1,129
-------- --------
Total $ 18,479 $ 18,529
-------- --------
-------- --------
</TABLE>
Actual maturities may differ from those scheduled as a result of prepayments by
the issuers.
NET INVESTMENT INCOME
($ in thousands)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JULY 1, 1999 JANUARY 1, 1999 YEAR ENDED DECEMBER 31,
THROUGH THROUGH -----------------------
DECEMBER 31, 1999 JUNE 30, 1999 1998 1997
----------------- --------------- -----------------------
<S> <C> <C> <C> <C>
Fixed income securities $ 299 $ 1,334 $ 10,028 $ 10,213
Short-term investments 33 13 4,777 4,739
Other (1) - - 9,246 11,174
------ ------- -------- ---------
Investment income, before expense 332 1,347 24,051 26,126
Investment expense - - - 60
------ ------- -------- ---------
Net investment income $ 332 $ 1,347 $ 24,051 $ 26,066
------ ------- -------- ---------
------ ------- -------- ---------
</TABLE>
(1) Includes dividends on the 10% cumulative preferred stock of Leucadia
Financial Corporation, a former affiliate, of $4.0 million for the years ended
December 31, 1998 and 1997.
REALIZED CAPITAL GAINS AND LOSSES
($ in thousands)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JULY 1, 1999 JANUARY 1, 1999 YEAR ENDED DECEMBER 31,
THROUGH THROUGH -----------------------
DECEMBER 31, 1999 JUNE 30, 1999 1998 1997
----------------- --------------- -----------------------
<S> <C> <C> <C> <C>
Fixed income securities $ (379) $ (573) $ 421 $ (571)
Equity securities - - (10) -
Other (1) - (1) - 39
------ ------- -------- ---------
Realized capital gains and losses (379) (574) 411 (532)
Income taxes 133 201 (144) 186
------ ------- -------- ---------
Realized capital gains and losses, after-tax $ (246) $ (373) $ 267 $ (346)
------ ------- -------- ---------
------ ------- -------- ---------
</TABLE>
Excluding calls and prepayments, gross gains of $57 thousand, $1.5 million and
$251 thousand were realized on sales of fixed income securities during the
period of January 1, 1999 through June 30, 1999 and the years ending
December 31, 1998 and 1997, respectively. There were no gross gains, excluding
calls
13
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
and prepayments, realized on the sales of fixed income securities during the
period of July 1, 1999 through December 31, 1999. Gross losses, excluding calls
and prepayments, of $379 thousand, $630 thousand, $1.0 million and $822 thousand
were realized on the sales of fixed income securities during the period of July
1, 1999 through December 31, 1999, the period of January 1, 1999 through June
30, 1999, and years ending December 31, 1998 and 1997, respectively.
UNREALIZED NET CAPITAL GAINS
Unrealized net capital gains on fixed income securities included in
shareholder's equity at December 31, 1999 are as follows:
($ in thousands)
<TABLE>
<CAPTION>
COST/ FAIR GROSS UNREALIZED UNREALIZED
AMORTIZED COST VALUE GAINS LOSSES NET GAINS
-------------- -------- ----- ------- ----------
<S> <C> <C> <C> <C> <C>
Fixed income securities $ 18,479 $ 18,529 $ 223 $ (173) $ 50
-------- -------- ----- -------
-------- -------- ----- -------
Deferred income taxes (18)
----------
Unrealized net capital gains $ 32
----------
----------
</TABLE>
CHANGE IN UNREALIZED NET CAPITAL GAINS
($ in thousands)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JULY 1, 1999 JANUARY 1, 1999 YEAR ENDED DECEMBER 31,
THROUGH THROUGH -----------------------
DECEMBER 31, 1999 JUNE 30, 1999 1998 1997
----------------- --------------- ---- ----
<S> <C> <C> <C> <C>
Fixed income securities $ 50 $ (946) $ 177 $ 925
Deferred income taxes (18) 331 (62) (324)
------ ------- ------ ------
Increase (decrease) in unrealized
net capital gains $ 32 $ (615) $ 115 $ 601
------ ------- ------ ------
------ ------- ------ ------
</TABLE>
SECURITIES ON DEPOSIT
At December 31, 1999, fixed income securities with a carrying value of $5.0
million were on deposit with regulatory authorities as required by law.
6. FINANCIAL INSTRUMENTS
In the normal course of business, the Company invests in various financial
assets and incurs various financial liabilities. The fair value estimates of
financial instruments presented on the following page are not necessarily
indicative of the amounts the Company might pay or receive in actual market
transactions. Potential taxes and other transaction costs have not been
considered in estimating fair value. The disclosures that follow do not reflect
the fair value of the Company as a whole since a number of the Company's
significant assets (including reinsurance recoverables and deferred income
taxes) and liabilities (including traditional life and interest-sensitive life
insurance reserves) are not considered financial instruments and are not carried
at fair value. Other assets and liabilities considered financial instruments,
such as accrued investment income and cash are generally of a short-term nature.
Their carrying values are deemed to approximate fair value.
14
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FINANCIAL ASSETS
The carrying value and fair value of financial assets at December 31, are as
follows:
($ in thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
<S> <C> <C> <C> <C>
Fixed income securities $ 18,529 $ 18,529 $ 49,195 $ 49,264
Equity securities of affiliate - - 155 155
Short-term investments 975 975 232 232
Separate Accounts 648,754 648,754 564,040 564,040
</TABLE>
Fair values for fixed income securities and equity securities of affiliate are
based on quoted market prices where available. Non-quoted securities are valued
based on discounted cash flows using current interest rates for similar
securities. Short-term investments are highly liquid investments with maturities
of less than one year whose carrying value are deemed to approximate fair value.
Separate Accounts assets are carried in the statements of financial position at
fair value based on quoted market prices.
FINANCIAL LIABILITIES
The carrying value and fair value of financial liabilities at December 31, are
as follows:
($ in thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
<S> <C> <C> <C> <C>
Contractholder funds on
investment contracts $ 5,720 $ 5,720 $ 8,252 $ 8,252
Separate Accounts 648,754 648,754 564,040 564,040
Surplus notes - - 25,000 25,000
</TABLE>
The fair value of contractholder funds on investment contracts is based on the
terms of the underlying contracts. Reserves on investment contracts with no
stated maturities (single premium and flexible premium deferred annuities) are
valued at the account balance less surrender charges. The fair value of
immediate annuities and annuities without life contingencies with fixed terms is
estimated using discounted cash flow calculations based on interest rates
currently offered for contracts with similar terms and durations. Separate
Accounts liabilities are carried at the fair value of the underlying assets.
Since the timing and certainty of the principal and interest payments of the
surplus notes are subject to regulatory approval, its fair value is estimated to
be the carrying value.
7. RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS AND CONTRACTHOLDER FUNDS
At December 31, 1999 and 1998, the reserve for life-contingent contract benefits
consisted of reserves for traditional life insurance. The assumptions for
mortality generally utilized in calculating reserves include actual Company
experience for traditional life. Interest rate assumptions for traditional life
insurance vary from 4.0% to 11.3%. Other estimation methods used include the net
level premium method using the Company's withdrawal experience rates for
traditional life.
15
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
At December 31, contractholder funds consists of the following:
($ in thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Interest-sensitive life $ 109,225 $107,771
Fixed annuities:
Immediate annuities 7,419 5,731
Deferred annuities 1,908 2,070
--------- --------
Total contractholder funds $ 118,552 $115,572
--------- --------
--------- --------
</TABLE>
Contractholder funds are equal to deposits received and interest credited to the
benefit of the contractholder less withdrawals, mortality charges and
administrative expenses. Interest rates credited range from 4.5% to 6.3% for
interest-sensitive life contracts; 3.8% to 7.5% for immediate annuities and 3.8%
to 5.0% for deferred annuities. Withdrawal and surrender charge protection
includes i) for interest-sensitive life, either a percentage of account balance
or dollar amount grading off generally over 20 years; and for ii) deferred
annuities, either a declining or a level percentage charge generally over nine
years or less.
8. REINSURANCE
The Company has entered into reinsurance transactions with third parties
primarily in connection with dispositions of blocks of business. The Company
continues to have primary liability as a direct insurer for risks reinsured. The
information presented should be read in conjunction with Notes 3, 4 and 15.
In 1993, the Company reinsured substantially all of its existing block of single
premium whole life business ("SPWL"), a type of interest-sensitive life product,
with a subsidiary of John Hancock Mutual Life Insurance Company ("John
Hancock"). For financial reporting purposes, the Company will continue to
reflect the policy liabilities assumed by John Hancock (in contractholder
funds), with an offsetting receivable from John Hancock at the same amount (in
reinsurance recoverables from non-affiliates), until the Company is relieved of
its legal obligation to the SPWL policyholders. At December 31, 1999 and 1998,
approximately $104.4 million and $106.5 million, respectively, of the Company's
contractholder funds (net of policy loans) is related to ceded SPWL business for
which the Company is not relieved of its legal obligation to its policyholders.
The effects of reinsurance, including related party agreements, on premiums and
contract charges are as follows:
($ in thousands)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JULY 1, 1999 JANUARY 1, 1999 YEAR ENDED DECEMBER 31,
THROUGH THROUGH -----------------------
DECEMBER 31, 1999 JUNE 30, 1999 1998 1997
----------------- --------------- ---- ----
<S> <C> <C> <C> <C>
Direct $ 2,419 $ 2,690 $ 19,778 $ 18,779
Ceded (2,419) (2,690) (19,503) (13,812)
-------- -------- -------- --------
Premiums and contract charges,
net of reinsurance $ - $ - $ 275 $ 4,967
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
16
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The effects of reinsurance, including related party agreements, on contract
benefits are as follows:
($ in thousands)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JULY 1, 1999 JANUARY 1, 1999 YEAR ENDED DECEMBER 31,
THROUGH THROUGH -----------------------
DECEMBER 31, 1999 JUNE 30, 1999 1998 1997
----------------- --------------- ---- ----
<S> <C> <C> <C> <C>
Direct $ 3,357 $ 7,517 $ 23,635 $ 20,863
Assumed - - (699) -
Ceded (3,357) (7,517) (23,582) (18,965)
-------- -------- -------- --------
Contract benefits, net of reinsurance $ - $ - $ (646) $ 1,898
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
9. CORPORATION RESTRUCTURING
On November 10, 1999 the Corporation announced a series of strategic initiatives
to aggressively expand its selling and service capabilities. The Corporation
also announced that it is implementing a program to reduce expenses by
approximately $600 million. The reduction will result in the elimination of
approximately 4,000 current non-agent positions, across all employment grades
and categories by the end of 2000, or approximately 10% of the Corporation's
non-agent work force. The impact of the reduction in employee positions is not
expected to materially impact the results of operations of the Company.
These cost reductions are part of a larger initiative to redeploy the cost
savings to finance new initiatives including investments in direct access and
internet channels for new sales and service capabilities, new competitive
pricing and underwriting techniques, new agent and claim technology and enhanced
marketing and advertising. As a result of the cost reduction program, the
Corporation recorded restructuring and related charges of $81 million pretax
during the fourth quarter of 1999. The Corporation anticipates that additional
pretax restructuring related charges of approximately $100 million will be
expensed as incurred throughout 2000. The Company's allocable share of these
expenses were immaterial in 1999 and are expected to be immaterial in 2000.
10. INCOME TAXES
Prior to the Acquisition, the Company filed a consolidated tax return with
Leucadia. The Company paid to or received from Leucadia the amount, if any, by
which the consolidated income tax liability was affected by virtue of inclusion
of the Company in the consolidated federal income tax return. Effectively, this
resulted in the Company's annual income tax provision being computed as if the
Company filed a separate return.
Subsequent to the Acquisition, the Company will file a separate tax return until
it can be consolidated with the Corporation.
The Internal Revenue Service ("IRS") has completed its review of Leucadia's
federal income tax return through the 1995 tax year. Any adjustments that may
result from the IRS examinations of tax returns are not expected to have a
material impact on the financial position, liquidity or results of operations of
the Company.
17
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The components of the deferred income tax assets and liabilities at December 31,
are as follows:
($ in thousands)
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
DEFERRED ASSETS
Life and annuity reserves $ - $ 192
Deferred reinsurance gain - 7,531
Other assets - 1,790
Differences in the tax bases of investments 32 -
------ ------
Total deferred assets 32 9,513
DEFERRED LIABILITIES
Unrealized net capital gains (18) (244)
------ ------
Total deferred liabilities (18) (244)
------ ------
Net deferred asset $ 14 $9,269
------ ------
------ ------
</TABLE>
Although realization is not assured, management believes it is more likely than
not that the deferred tax assets will be realized based on the assumptions that
certain levels of income will be achieved.
The components of income tax (benefit) expense are as follows:
($ in thousands)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JULY 1, 1999 JANUARY 1, 1999 YEAR ENDED DECEMBER 31,
THROUGH THROUGH -----------------------
DECEMBER 31, 1999 JUNE 30, 1999 1998 1997
----------------- --------------- ---- ----
<S> <C> <C> <C> <C>
Current $ 11 $ (209) $ 18,126 $ 14,189
Deferred (31) 344 (9,331) (8,818)
------ ------ -------- --------
Total income tax (benefit) expense $ (20) $ 135 $ 8,795 $ 5,371
------ ------ -------- --------
------ ------ -------- --------
</TABLE>
The Company paid income taxes of $24 thousand, $18.8 million and $192.4 million
for the period of July 1, 1999 through December 31, 1999, and for the years
ending December 31, 1998 and 1997, respectively. The Company received a refund
of $316 thousand during the period of January 1, 1999 through June 30, 1999.
18
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
A reconciliation of the statutory federal income tax rate to the effective
income tax rate on income from operations is as follows:
($ in thousands)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JULY 1, 1999 JANUARY 1, 1999 YEAR ENDED DECEMBER 31,
THROUGH THROUGH -----------------------
DECEMBER 31, 1999 JUNE 30, 1999 1998 1997
----------------- --------------- ---- ----
<S> <C> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0% 35.0%
Dividends received deduction - - (7.4) (7.2)
Tax on distribution from
policyholder's surplus - - 28.6 -
Benefits applicable to prior year - - (10.4) (.1)
Non-deductible expenses (1.1) - - -
Other - (.5) .8 (.2)
---- ---- ---- ----
Effective income tax rate 33.9% 34.5% 46.6% 27.5%
---- ---- ---- ----
---- ---- ---- ----
</TABLE>
11. STATUTORY FINANCIAL INFORMATION
The Company's statutory capital and surplus was $22.9 million and $46.2 million
at December 31, 1999 and 1998, respectively. The Company's statutory net income
was $419 thousand, $28.9 million and $1.27 billion for the period of July 1,
1999 through December 31, 1999, and the years ending December 31, 1998 and 1997,
respectively. The Company's statutory net loss for the period of January 1, 1999
through June 30, 1999 was $44 thousand.
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company prepares its statutory financial statements in accordance with
accounting practices prescribed or permitted by the Illinois Department of
Insurance. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners ("NAIC"), as
well as state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed. The Company does not follow any permitted statutory accounting
practices that have a significant impact on statutory surplus or statutory net
income.
The NAIC's codification initiative has produced a comprehensive guide of
statutory accounting principles, which the Company will implement in January
2001. The Company's state of domicile, Illinois, has passed legislation revising
various statutory accounting requirements to conform to codification. These
requirements are not expected to have a material impact on the statutory surplus
of the Company.
DIVIDENDS
The ability of the Company to pay dividends is dependent on business conditions,
income, cash requirements of the Company and other relevant factors. The payment
of shareholder dividends by the Company without the prior approval of the state
insurance regulator is limited to formula amounts based on net income and
capital and surplus, determined in accordance with statutory accounting
practices, as well as the timing and amount of dividends paid in the preceding
twelve months. The maximum amount of dividends that the Company can distribute
during 2000 without prior approval of the Illinois Department of Insurance is
$1.6 million.
19
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
RISK-BASED CAPITAL
The NAIC has a standard for assessing the solvency of insurance companies, which
is referred to as risk-based capital ("RBC"). The requirement consists of a
formula for determining each insurer's RBC and a model law specifying regulatory
actions if an insurer's RBC falls below specified levels. The RBC formula for
life insurance companies establishes capital requirements relating to insurance,
business, asset and interest rate risks. At December 31, 1999, RBC for the
Company was significantly above a level that would require regulatory action.
12. BENEFIT PLANS
In 1997 and prior, the Company participated in a non-contributory benefit
pension plan sponsored by LUK-CPG, a former subsidiary. Prior to December 30,
1998, the Company transferred its remaining employees to Leucadia and as such,
all vested retirement benefits were assumed by LUK-CPG as part of the assets and
liabilities dividended to Leucadia on December 30, 1998. The Company has no
pension or postretirement benefit obligations as of December 31, 1998.
In prior years, the Company's participation in the non-contributory defined
benefit pension plan covered substantially all employees of its continuing
operations. Benefits were generally based on years of service and employees'
compensation during the last years of employment. LUK-CPG's policy was 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 was not greater than the maximum tax deductible
amount for the year.
Plan participation was terminated for employees of the discontinued operations
(see Note 15) as of the respective dates of the sales.
Pension expense charged to continuing operations was approximately $387 thousand
and $75 thousand for the years ended December 31, 1998 and 1997, respectively.
Pension expense charged to operations included the following components:
($ in thousands)
<TABLE>
1998 1997
-------- --------
<S> <C> <C>
Service cost $ 411 $ 2,255
Interest cost 2,606 4,264
Expected return on plan assets (2,651) (3,610)
Amortization of prior service cost 13 226
Recognized actuarial loss 8 4
-------- --------
Net pension expense $ 387 $ 3,139
-------- --------
-------- --------
</TABLE>
20
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The funded status of the defined benefit pension plans at December 31, 1998 was
as follows:
($ in thousands)
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Projected Benefit Obligation:
Projected benefit obligation at January 1, $ 57,149
Service cost 411
Interest cost 2,606
Actuarial loss 590
Benefits paid (1,864)
Settlements (28,809)
Curtailment (667)
Dividend of LUK-CPG to Leucadia (29,416)
--------
Projected benefit obligation at December 31, $ -
--------
--------
($ in thousands)
<CAPTION>
1998
--------
<S> <C>
Change In Plan Assets:
Fair value of plan assets at January 1, $ 53,562
Actual return on plan assets 2,421
Employer contributions 322
Benefits paid (1,864)
Administrative expenses (539)
Settlements (28,756)
Dividend of LUK-CPG to Leucadia (25,146)
--------
Fair value of plan assets at December 31, $ -
--------
--------
</TABLE>
The Company participated in certain deferred compensation (401(k)) and defined
contribution plans. Expenses related to the defined contribution retirement and
401(k) plans were approximately $9 thousand and $7 thousand for the years ended
December 31, 1998 and 1997, respectively.
The Company provided health care and other benefits to certain eligible retired
employees. The plans (most of which require employee contributions) were
unfunded. SFAS No. 106 and SFAS No. 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 $3 thousand for the year ended December 31, 1997 and were zero for
both years ended December 31, 1999 and 1998.
21
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The liability for postretirement and postemployment benefits at December 31,
1998 was as follows:
($ in thousands)
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Accumulated postretirement benefit obligation at January 1, $ 4,725
Interest cost 331
Contributions by plan participants 71
Actuarial loss 56
Benefits paid (441)
Dividend of LUK-CPG to Leucadia (4,742)
--------
Accumulated postretirement benefit obligation at December 31, -
Unrecognized net actuarial gain -
--------
Accrued postretirement benefit obligation $ -
--------
--------
</TABLE>
22
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
13. OTHER COMPREHENSIVE INCOME
The components of other comprehensive income on a pretax and after-tax basis are
as follows:
<TABLE>
<CAPTION>
($ in thousands) PERIOD FROM PERIOD FROM
JULY 1, 1999 JANUARY 1, 1999
THROUGH THROUGH
DECEMBER 31, 1999 JUNE 30, 1999
------------------------------- -------------------------------
After- After-
Pretax Tax tax Pretax Tax tax
------ --- --- ------ --- ---
<S> <C> <C> <C> <C> <C> <C>
UNREALIZED CAPITAL GAINS
AND LOSSES:
- -----------------------------
Unrealized holding losses
arising during the period $(329) $ 115 $(214) $ (1,520) $ 532 $ (988)
Less: reclassification
adjustments (379) 133 (246) (574) 201 (373)
----- ----- ----- -------- ----- ------
Unrealized net capital
gains (losses) 50 (18) 32 (946) 331 (615)
----- ----- ----- -------- ----- ------
Other comprehensive
income (loss) $ 50 $ (18) $ 32 $ (946) $ 331 $ (615)
----- ----- ----- -------- ----- ------
----- ----- ----- -------- ----- ------
<CAPTION>
($ in thousands) YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
----------------------------- -----------------------------
After- After-
Pretax Tax tax Pretax Tax tax
------ --- --- ------ --- ---
<S> <C> <C> <C> <C> <C> <C>
UNREALIZED CAPITAL GAINS
AND LOSSES:
- -----------------------------
Unrealized holding gains
arising during the period $ 342 $(120) $ 222 $ 925 $ (324) $ 601
Less: reclassification
adjustments 165 (58) 107 - - -
----- ----- ----- ----- ------ -----
Unrealized net capital
gains 177 (62) 115 925 (324) 601
----- ----- ----- ----- ------ -----
Other comprehensive
income $ 177 $ (62) $ 115 $ 925 $ (324) $ 601
----- ----- ----- ----- ------ -----
----- ----- ----- ----- ------ -----
</TABLE>
14. COMMITMENTS AND CONTINGENT LIABILITIES
LEASES
The Company leased certain office facilities and equipment. Total net rent
expense for all leases was $14 thousand, $21 thousand and $58 thousand for the
period of January 1, 1999 through June 30, 1999 and for the years ending
December 31, 1998 and 1997.
REGULATION AND LEGAL PROCEEDINGS
The Company's business is subject to the effects of a changing social, economic
and regulatory environment. Public and regulatory initiatives have varied and
have included employee benefit regulations, removal of barriers preventing banks
from engaging in the securities and insurance business, tax law changes
affecting the taxation of insurance companies, the tax treatment of insurance
products and its impact on the relative desirability of various personal
investment vehicles, and proposed legislation
23
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
to prohibit the use of gender in determining insurance rates and benefits. The
ultimate changes and eventual effects, if any, of these initiatives are
uncertain.
From time to time the Company is involved in pending and threatened litigation
in the normal course of its business in which claims for monetary damages are
asserted. In the opinion of management, the ultimate liability, if any, arising
from such pending or threatened litigation is not expected to have a material
effect on the results of operations, liquidity or financial position of the
Company.
GUARANTY FUNDS
Under state insurance guaranty fund laws, insurers doing business in a state can
be assessed, up to prescribed limits, for certain obligations of insolvent
insurance companies to policyholders and claimants. The Company's expenses
related to these funds have been immaterial. Subsequent to the Acquisition,
these expenses are ceded to ALIC under reinsurance agreements.
15. DISCONTINUED OPERATIONS
In September 1997, the Company completed the sale of Colonial Penn Life to
Conseco, Inc. for $400.0 million 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. The Company reported a pre-tax gain of approximately
$274.8 million on the sale. In connection with the sale of Colonial Penn Life,
Intramerica reinsured certain life insurance policies for a premium of $25.0
million. 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 $50.9 million of the Company's reserve
for life-contingent contract benefits related to life insurance ceded to
Conseco, Inc. On December 30, 1998, the Company dividended 98% of Intramerica
with LUK-CPG to Leucadia.
24
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
In November 1997, the Company 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 $998.1 million, plus $14.3 million
for retention of certain employee benefit liabilities. The Colonial Penn P&C
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 $578.9 million on the sale.
A summary of the results of discontinued operations is as follows for 1997
(through the date of sale):
($ in thousands)
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Colonial Penn P&C Group:
Revenues $514,626
--------
Expenses:
Contract benefits 370,102
Other operating expenses 86,449
--------
456,551
--------
Income before income taxes 58,075
Income taxes 20,279
--------
Income from discontinued operations, net of taxes $ 37,796
--------
--------
Colonial Penn Life:
Revenues $147,838
--------
Expenses:
Contract benefits 89,086
Other operating expenses 35,206
--------
124,292
--------
Income before income taxes 23,546
Income taxes
6,944
--------
Income from discontinued operations, net of taxes $ 16,602
--------
--------
</TABLE>
25
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
SCHEDULE IV -- REINSURANCE
($ in thousands)
<TABLE>
<CAPTION>
PERIOD FROM JULY 1, 1999 THROUGH GROSS NET
DECEMBER 31, 1999 AMOUNT CEDED AMOUNT
- -------------------------------- ------ ----- ------
<S> <C> <C> <C>
Life insurance in force $ 106,706 $ 106,706 $ -
------------- ------------ -----------
------------- ------------ -----------
Premiums and contract charges:
Life and annuities $ 2,419 $ 2,419 $ -
------------- ------------ -----------
------------- ------------ -----------
<CAPTION>
PERIOD FROM JANUARY 1, 1999 THROUGH GROSS NET
JUNE 30, 1999 AMOUNT CEDED AMOUNT
- ----------------------------------- ------ ----- ------
<S> <C> <C> <C>
Life insurance in force $ 109,009 $ 109,009 $ -
------------- ------------ -----------
------------- ------------ -----------
Premiums and contract charges:
Life and annuities $ 2,690 $ 2,690 $ -
------------- ------------ -----------
------------- ------------ -----------
<CAPTION>
GROSS NET
YEAR ENDED DECEMBER 31, 1998 AMOUNT CEDED AMOUNT
- ---------------------------- ------ ----- ------
<S> <C> <C> <C>
Life insurance in force $ 115,146 $ 115,146 $ -
------------- ------------ -----------
------------- ------------ -----------
Premiums and contract charges:
Life and annuities $ 19,778 $ 19,503 $ 275
------------- ------------ -----------
------------- ------------ -----------
<CAPTION>
GROSS NET
YEAR ENDED DECEMBER 31, 1997 AMOUNT CEDED AMOUNT
- ---------------------------- ------ ----- ------
<S> <C> <C> <C>
Life insurance in force $ 310,508 $ 241,360 $ 69,148
------------- ------------ -----------
------------- ------------ -----------
Premiums and contract charges:
Life and annuities $ 18,779 $ 13,812 $ 4,967
------------- ------------ -----------
------------- ------------ -----------
</TABLE>
26
<PAGE>
CHARTER NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
SCHEDULE V -- VALUATION AND QUALIFYING ACCOUNTS
($ in thousands)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PERIOD FROM JULY 1, 1999 THROUGH
DECEMBER 31, 1999
- --------------------------------
Allowance for doubtful receivable accounts $ - $ - $ - $ -
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
PERIOD FROM JANUARY 1, 1999 THROUGH
JUNE 30, 1999
- -----------------------------------
Allowance for doubtful receivable accounts $ - $ - $ - $ -
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
YEAR ENDED DECEMBER 31, 1998
- ----------------------------
Allowance for doubtful receivable accounts $ 75 $ 17 $ 92 $ -
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
YEAR ENDED DECEMBER 31, 1997
- ----------------------------
Allowance for doubtful receivable accounts $ 209 $ 186 $ 320 $ 75
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
27
<PAGE>
<PAGE>
---------------------------------------------------------
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND FOR THE
PERIODS ENDED DECEMBER 31, 1999 AND DECEMBER 31,
1998 AND INDEPENDENT AUDITORS' REPORTS
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
Charter National Life Insurance Company:
We have audited the accompanying statement of net assets of Charter National
Variable Annuity Account as of December 31, 1999 (including the assets of each
of the individual sub-accounts which comprise the Account as disclosed in Note
1), and the related statements of operations changes in net assets for the
period then ended for each of the individual sub-accounts which comprise the
Account. These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned at December 31, 1999 by correspondence with the
account custodians. 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, such financial statements present fairly, in all material
respects, the financial position of Charter National Variable Annuity Account as
of December 31, 1999 (including the assets of each of the individual
sub-accounts which comprise the Account), and the results of operations for each
of the individual sub-accounts and the changes in their net assets for the
period then ended in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Chicago, Illinois
March 27, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Charter National Life Insurance Company:
In our opinion, the accompanying statement of changes in net assets of the
Charter National Variable Annuity Account (the Money Market, Bond, Capital
Growth, Balanced, International, Growth and Income, and Global Discovery
Subaccounts) presents fairly, in all material respects, the changes in net
assets of the respective subaccounts for the year ended December 31, 1998, in
conformity with accounting principles generally accepted in the United States.
This financial statement is the responsibility of the management of the Charter
National Variable Annuity Account; our responsibility is to express an opinion
on this financial statement based on our audit. We conducted our audit of this
statement in accordance with auditing standards generally accepted in the United
States which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement, assessing the accounting
principles used and significant estimates made by management and evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
February 17, 1999
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS
DECEMBER 31, 1999
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Allocation to Sub-Accounts investing in the Scudder Variable Life Investment Fund:
Money Market, 64,349,216 shares (cost $64,349,216) $ 64,349,216
Bond, 3,194,413 shares (cost $21,749,903) 20,731,740
Capital Growth, 6,919,865 shares (cost $144,873,052) 201,575,659
Balanced, 4,590,692 shares (cost $55,177,068) 73,956,041
International, 5,982,572 shares (cost $89,998,309) 121,685,506
Growth and Income, 7,710,472 shares (cost $77,469,748) 84,506,774
Global Discovery, 2,421,524 shares (cost $21,666,923) 31,915,684
Large Company Growth, 521,464 shares (cost $3,576,361) 4,255,139
Small Company Growth, 1,105,255 shares (cost $8,926,745) 11,715,702
-------------
Total Assets $ 614,691,461
=============
</TABLE>
See notes to financial statements.
3
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------------------
Scudder Variable Life Investment Fund Sub-Accounts
-------------------------------------------------------------------------
For the Year Ended December 31, 1999
-------------------------------------------------------------------------
Money Capital
Market Bond Growth Balanced International
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends $ 3,895,833 $ 1,266,231 $17,366,283 $ 6,221,575 $ 8,146,693
Charges from Charter National Life Insurance Company:
Mortality and expense risk (255,293) (91,495) (651,444) (269,772) (330,735)
Administrative expense (220,317) (80,284) (562,762) (234,282) (288,119)
----------- ----------- ----------- ----------- -------------
Net investment income (loss) 3,420,223 1,094,452 16,152,077 5,717,521 7,527,839
----------- ----------- ----------- ----------- -------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Realized gains (losses) from sales of investments:
Proceeds from sales 172,060,975 10,739,615 85,272,675 14,267,257 108,448,921
Cost of investments sold 172,060,975 10,951,931 70,356,301 11,217,447 98,955,954
----------- ----------- ----------- ----------- -------------
Net realized gains (losses) -- (212,316) 14,916,374 3,049,810 9,492,967
----------- ----------- ----------- ----------- -------------
Change in unrealized gains (losses) -- (1,410,555) 21,784,453 838,136 24,871,262
----------- ----------- ----------- ----------- -------------
Net gains (losses) on investments -- (1,622,871) 36,700,827 3,887,946 34,364,229
----------- ----------- ----------- ----------- -------------
CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS $ 3,420,223 $ (528,419) $52,852,904 $ 9,605,467 $ 41,892,068
============ =========== =========== =========== ============
</TABLE>
See notes to financial statements.
4
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------------
Scudder Variable Life Investment Fund Sub-Accounts
------------------------------------------------------------
For the Year Ended December 31, 1999
------------------------------------------------------------
Growth Global Large Company Small Company
and Income Discovery Growth (a) Growth (a)
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends $ 8,320,388 $ 186,842 $ -- $ --
Charges from Charter National Life Insurance Company:
Mortality and expense risk (349,110) (68,148) (6,739) (9,815)
Administrative expense (316,838) (59,515) (5,052) (7,358)
------------ ------------ ------------- -------------
Net investment income (loss) 7,654,440 59,179 (11,791) (17,173)
------------ ------------ ------------- -------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Realized gains (losses) from sales of investments:
Proceeds from sales 42,811,092 16,523,909 5,272,868 3,151,018
Cost of investments sold 38,356,793 13,790,085 5,188,780 2,828,905
------------ ------------ ------------- -------------
Net realized gains (losses) 4,454,299 2,733,824 84,088 322,113
------------ ------------ ------------- -------------
Change in unrealized gains (losses) (7,772,144) 8,051,257 678,778 2,788,958
------------ ------------ ------------- -------------
Net gains (losses) on investments (3,317,845) 10,785,081 762,866 3,111,071
------------ ------------ ------------- -------------
CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS $ 4,336,595 $ 10,844,260 $ 751,075 $ 3,093,898
============ ============ ============= =============
</TABLE>
(a) For the Period Beginning May 3, 1999 and Ended December 31, 1999.
See notes to financial statements.
5
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------------------
Scudder Variable Life Investment Fund Sub-Accounts
-----------------------------------------------------------------------------------------
Money Market Bond Capital Growth
---------------------------- ---------------------------- ----------------------------
1999 1998 1999 1998 1999 1998
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 3,420,223 $ 2,604,624 $ 1,094,452 $ 1,381,399 $ 16,152,077 $ 7,516,619
Net realized gains (losses) -- -- (212,316) 65,173 14,916,374 13,344,319
Change in unrealized gains (losses) -- -- (1,410,555) 154,496 21,784,453 9,287,259
------------- ------------- ------------- ------------- ------------- -------------
Change in net assets resulting from
operations 3,420,223 2,604,624 (528,419) 1,601,068 52,852,904 30,148,197
------------- ------------- ------------- ------------- ------------- -------------
FROM CAPITAL TRANSACTIONS
Deposits 4,271,893 9,533,579 698,048 1,818,775 3,209,888 7,818,317
Benefit payments (677,385) (762,697) (129,326) (170,311) (401,972) (899,145)
Payments on termination (12,051,044) (11,523,470) (2,935,263) (1,896,705) (13,920,447) (7,135,685)
Transfers among the sub-accounts
and with the Fixed Account - net 8,765,609 12,590,653 (3,551,812) 1,331,865 (5,890,755) (177,519)
------------- ------------- ------------- ------------- ------------- -------------
Change in net assets resulting
from capital transactions 309,073 9,838,065 (5,918,353) 1,083,624 (17,003,286) (394,032)
------------- ------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN NET ASSETS 3,729,296 12,442,689 (6,446,772) 2,684,692 35,849,618 29,754,165
NET ASSETS AT BEGINNING OF PERIOD 60,619,920 48,177,231 27,178,512 24,493,820 165,726,041 135,971,876
------------- ------------- ------------- ------------- ------------- -------------
NET ASSETS AT END OF PERIOD $ 64,349,216 $ 60,619,920 $ 20,731,740 $ 27,178,512 $ 201,575,659 $ 165,726,041
============= ============= ============= ============= ============= =============
</TABLE>
See notes to financial statements.
6
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------------
Scudder Variable Life Investment Fund Sub-Accounts
---------------------------------------------------------------------------------------------
Balanced International Growth and Income
----------------------------- ----------------------------- -----------------------------
1999 1998 1999 1998 1999 1998
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 5,717,521 $ 3,914,556 $ 7,527,839 $ 10,074,254 $ 7,654,440 $ 9,436,374
Net realized gains (losses) 3,049,810 2,152,935 9,492,967 6,262,934 4,454,299 7,305,210
Change in unrealized gains (losses) 838,136 6,372,610 24,871,262 (2,765,685) (7,772,144) (10,320,567)
------------- ------------- ------------- ------------- ------------- -------------
Change in net assets resulting from
operations 9,605,467 12,440,101 41,892,068 13,571,503 4,336,595 6,421,017
------------- ------------- ------------- ------------- ------------- -------------
FROM CAPITAL TRANSACTIONS
Deposits 1,972,612 3,751,507 1,387,979 2,029,556 2,303,321 9,733,619
Benefit payments 29,364 (559,121) (99,123) (524,248) (315,310) (748,389)
Payments on termination (6,135,039) (2,871,722) (5,996,289) (4,812,850) (12,348,894) (5,266,784)
Transfers among the sub-accounts
and with the Fixed Account - net (1,478,989) 2,791,361 632,143 (2,743,834) (19,288,241) (13,702,764)
------------- ------------- ------------- ------------- ------------- -------------
Change in net assets resulting
from capital transactions (5,612,052) 3,112,025 (4,075,290) (6,051,376) (29,649,124) (9,984,318)
------------- ------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN NET ASSETS 3,993,415 15,552,126 37,816,778 7,520,127 (25,312,529) (3,563,301)
NET ASSETS AT BEGINNING OF PERIOD 69,962,626 54,410,500 83,868,728 76,348,601 109,819,303 113,382,604
------------- ------------- ------------- ------------- ------------- -------------
NET ASSETS AT END OF PERIOD $ 73,956,041 $ 69,962,626 $ 121,685,506 $ 83,868,728 $ 84,506,774 $ 109,819,303
============= ============= ============= ============= ============= =============
</TABLE>
See notes to financial statements.
7
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------
Scudder Variable Life Investment Fund Sub-Accounts
-----------------------------------------------------------
Large Company Small Company
Global Discovery Growth Growth
--------------------------- ------------- -------------
1999 1998 1999 (a) 1999 (a)
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 59,179 $ 288,811 $ (11,791) $ (17,173)
Net realized gains (losses) 2,733,824 1,196,171 84,088 322,113
Change in unrealized gains (losses) 8,051,257 819,536 678,778 2,788,958
------------ ------------ ------------- -------------
Change in net assets resulting from
operations 10,844,260 2,304,518 751,075 3,093,898
------------ ------------ ------------- -------------
FROM CAPITAL TRANSACTIONS
Deposits 694,461 1,318,371 103,650 237,518
Benefit payments (20,563) (35,352) -- --
Payments on termination (1,647,886) (624,458) (153,698) (177,273)
Transfers among the sub-accounts
and with the Fixed Account - net 5,012,006 (379,108) 3,554,112 8,561,559
------------ ------------ ------------- -------------
Change in net assets resulting
from capital transactions 4,038,018 279,453 3,504,064 8,621,804
------------ ------------ ------------- -------------
INCREASE (DECREASE) IN NET ASSETS 14,882,278 2,583,971 4,255,139 11,715,702
NET ASSETS AT BEGINNING OF PERIOD 17,033,406 14,449,435 -- --
------------ ------------ ------------- -------------
NET ASSETS AT END OF PERIOD $ 31,915,684 $ 17,033,406 $ 4,255,139 $ 11,715,702
============ ============ ============= =============
</TABLE>
(a) For the Period Beginning May 3, 1999 and Ended December 31, 1999.
See notes to financial statements.
8
<PAGE>
CHARTER NATIONAL VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION
Charter National Variable Annuity Account (the "Account"), a unit
investment trust registered with the Securities and Exchange Commission
under the Investment Company Act of 1940, is a Separate Account of Charter
National Life Insurance Company ("Charter National"). The assets of the
Account are legally segregated from those of Charter National. On July 1,
1999, Charter National became a wholly owned subsidiary of Allstate Life
Insurance Company, which is wholly owned by Allstate Insurance Company, a
wholly owned subsidiary of The Allstate Corporation. Prior to July 1,
1999, Charter National was a wholly owned subsidiary of Leucadia National
Corporation.
Charter National issues the Scudder Horizon Plan variable annuity
contract, the deposits of which are invested at the direction of the
contractholders in the sub-accounts that comprise the Account. Charter
National also issued the Helmsman variable annuity contract which no
longer accepts deposits from new contractholders. Absent any contract
provisions wherein Charter National contractually guarantees either a
minimum return or account value to the beneficiaries of the
contractholders in the form of a death benefit, the contractholders bear
the investment risk that the sub-accounts may not meet their stated
objectives. The sub-accounts invest in the following underlying mutual
fund portfolios of the Scudder Variable Life Investment Fund, Inc. (the
"Funds"):
Money Market Growth and Income
Bond Global Discovery
Capital Growth Large Company Growth
Balanced Small Company Growth
International
Charter National provides insurance and administrative services to the
contractholders for a fee. Charter National also maintains a fixed account
("Fixed Account"), to which contractholders may direct their deposits and
receive a fixed rate of return. Charter National has sole discretion to
invest the assets of the Fixed Account, subject to applicable law.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
VALUATION OF INVESTMENTS - Investments consist of shares of the Funds and
are stated at fair value based on quoted market prices at December 31,
1999.
INVESTMENT INCOME - Investment income consists of dividends declared by
the Funds and is recognized on the ex-dividend date.
REALIZED GAINS AND LOSSES - Realized gains and losses represent the
difference between the proceeds from sales of portfolio shares by the
Account and the cost of such shares, which is determined on a weighted
average basis.
FEDERAL INCOME TAXES - The Account intends to qualify as a segregated
asset account as defined in the Internal Revenue Code ("Code"). As such,
the operations of the Account are included in the tax return of Charter
National. Charter National is taxed as a life insurance company under the
Code. No federal income taxes are allocable to the Account as the Account
did not generate taxable income.
9
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
3. EXPENSES
CONTRACT ADMINISTRATION CHARGE - Charter National deducts administrative
expense charges daily at a rate equal to .30% per annum of the daily net
assets of the Account for the Scudder Horizon Plan contract and .40% per
annum of the daily net assets of the Account for the Helmsman contract.
RECORDS MAINTENANCE CHARGE - Charter National deducts an annual
maintenance charge of $30 for the Helmsman contract if the accumulated
value is less than $50,000. Charter National is permitted to deduct an
annual maintenance charge of $40 for the Scudder Horizon contract but did
not do so in 1999 or 1998.
MORTALITY AND EXPENSE RISK CHARGE - Charter National assumes mortality and
expense risks related to the operations of the Account and currently
deducts charges daily from the Scudder Horizon at a rate equal to .40% per
annum of the daily net assets of the Account, but reserves the right to
increase the charges to .70%. For the Helmsman contract, the rate is .90%
per annum. The mortality and expense risk charge covers insurance benefits
available with the contract and certain expenses of the contract. It also
covers the risk that the current charges will not be sufficient in the
future to cover the cost of administering the contract.
10
<PAGE>
4. UNITS ISSUED AND REDEEMED
(Units in whole amounts)
<TABLE>
<CAPTION>
Scudder Horizon Plan Contracts
Unit activity during 1999:
---------------------------------------------
Accumulation
Units Outstanding Units Units Units Outstanding Unit Value
December 31, 1998 Issued Redeemed December 31, 1999 December 31, 1999
------------------- ----------- ------------ ------------------- -------------------
<S> <C> <C> <C> <C> <C>
Investments in Scudder Variable Life
Investment Fund Sub-Accounts:
Money Market 3,059,436 8,897,470 (8,856,928) 3,099,978 $ 20.59
Bond 1,001,787 198,531 (420,706) 779,612 25.91
Capital Growth 2,917,455 1,236,701 (1,505,546) 2,648,610 75.01
Balanced 1,612,847 231,235 (351,403) 1,492,679 48.94
Growth and Income 3,836,652 571,063 (1,591,368) 2,816,347 30.01
International 2,101,277 2,396,711 (2,499,969) 1,998,019 60.58
Global Discovery 1,004,053 1,050,054 (910,188) 1,143,919 27.90
Large Company Growth - 809,365 (495,029) 314,336 13.54
Small Company Growth - 930,735 (264,497) 666,238 17.58
</TABLE>
11
<PAGE>
4. UNITS ISSUED AND REDEEMED
(Units in whole amounts)
<TABLE>
<CAPTION>
Helmsman Contracts
Unit activity during 1999:
--------------------------------------------------
Accumulation
Units Outstanding Units Units Units Outstanding Unit Value
December 31, 1998 Issued Redeemed December 31, 1999 December 31, 1999
------------------- -------------- -------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
Investments in Scudder Variable Life
Investment Fund Sub-Accounts:
Money Market 379,386 274,188 (336,722) 316,852 $ 1.62
Bond 336,599 320 (77,181) 259,738 2.04
Capital Growth 504,175 100,017 (160,546) 443,646 6.54
Balanced 282,286 100 (56,691) 225,695 4.03
International 180,945 38,005 (87,511) 131,439 4.85
</TABLE>
12
