As filed with the Securities and Exchange Commission on April 22, 1997
Registration No. 33-49556
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. ___ [ ]
POST-EFFECTIVE AMENDMENT NO. 9 [X]
---
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Amendment No. 47 (X)
(Check appropriate box or boxes)
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WRL SERIES ANNUITY ACCOUNT
(Exact Name of Registrant)
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
(Name of Depositor)
201 Highland Avenue
Largo, Florida 33770
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code:
(813) 585-6565
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Thomas E. Pierpan, Esq.
Vice President and Associate General Counsel
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, Florida 33770
(Name and Address of Agent for Service)
Copy to:
Stephen E. Roth, Esq.
Sutherland, Asbill & Brennan, L.L.P.
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
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It is proposed that this filing will become effective (check appropriate space):
___ immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on MAY 1, 1997, pursuant to paragraph (b) of Rule 485
- --- -----------
___ 60 days after filing pursuant to paragraph (a) of Rule 485
___ on DATE, pursuant to paragraph (a) of Rule 485
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The Registrant has chosen to register an indefinite number of securities in
accordance with Rule 24f-2. The Rule 24f-2 Notice for Registrant's most recent
fiscal year was filed on February 21, 1997.
<PAGE>
WRL SERIES ANNUITY ACCOUNT
POST-EFFECTIVE AMENDMENT NO. 9 TO
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 ON FORM N-4
Cross Reference Sheet
Showing Location in Prospectus
and Statement of Additional Information
As Required by Form N-4
<TABLE>
<CAPTION>
FORM N-4 ITEM PROSPECTUS CAPTION
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<S> <C> <C>
1. Cover Page................................... Cover Page
2. Definitions.................................. Definitions of Special Terms
3. Synopsis or Highlights....................... Summary
4. Condensed Financial
Information.................................. Condensed Financial
Information (See Appendix A
to the Prospectus)
5. General Description of
Registrant, Depositor,
and Portfolio Companies...................... Western Reserve, the Series
Account, and the Fund; Voting Rights
6. Deductions................................... Charges and Deductions;
Distribution of the
Contracts
7. General Description of
Variable Annuity Contracts................... Western Reserve, the Series
Account, and the Fund; The
Contract; Statement of
Additional Information
8. Annuity Period............................... The Contract - Annuity Provisions
9. Death Benefit................................ The Contract - Accumulation
Provisions - Death Benefits during the
Accumulation Period; The Contract - Annuity
Provisions - Death Benefits after the
Maturity Date
10. Purchases and Contract
Value........................................ The Contract - Accumulation
Provisions - Purchase Payments, Net Purchase
Payments, Accumulation Unit Value;
Distribution of the Contracts
(i)
<PAGE>
<CAPTION>
FORM N-4 ITEM PROSPECTUS CAPTION
- ------------- ------------------
11. Redemptions.................................. The Contract - Accumulation
Provisions - Partial Withdrawals and
Surrenders; Other Matters Relating to the
Contract - Right to Examine Contract
12. Taxes........................................ Federal Tax Matters
13. Legal Proceedings............................ Legal Proceedings
14. Table of Contents of the
Statement of Additional
Information.................................. Statement of Additional
Information
STATEMENT OF ADDITIONAL
FORM N-4 ITEM INFORMATION CAPTION
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15. Cover Page................................... Cover Page
16. Table of Contents............................ Table of Contents
17. General Information and
History...................................... Not Applicable
18. Services..................................... Custodian; Independent
Accountants
19. Purchase of Securities Being
Offered...................................... Addition, Deletion, and
Substitution of Investments
20. Underwriters................................. Distribution of Contracts
21. Calculation of Performance
Data......................................... Calculation of Performance
Related Information
22. Annuity Payments............................. Not Applicable
23. Financial Statements......................... Financial Statements
</TABLE>
(ii)
<PAGE>
PART A
INFORMATION REQUIRED IN A PROSPECTUS
WRL FREEDOM ATTAINER PROSPECTUS
<PAGE>
WRL WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
FREEDOM
ATTAINER(R) 201 HIGHLAND AVENUE
LARGO, FLORIDA 33770
Flexible Payment (800) 851-9777
Variable Accumulation (813) 585-6565
Deferred Annuity
Contract This Prospectus describes the WRL Freedom Attainer(R)
Variable Annuity (the "Contract"), a tax deferred
variable annuity contract issued by Western Reserve Life
Assurance Co. of Ohio ("Western Reserve").
The Contract provides for accumulation of Contract values
on a variable basis, a fixed basis, or a combination of
both. The Contract also provides for the payment of
periodic annuity payments on a variable basis or a fixed
basis. If the variable basis is chosen, Contract values
will be held in the WRL Series Annuity Account (the
"Series Account") and will vary according to the
investment performance of the underlying investment
portfolios of the WRL Series Fund, Inc. (the "Fund"). If
the fixed basis is chosen, Contract values will be
allocated to the Fixed Account and earn interest at no
less than the minimum guaranteed rate.
There are currently sixteen Sub-Accounts of the Series
Account (in addition to the Fixed Account) available
through this Contract during the Accumulation Period and
after the Maturity Date. Each Sub-Account invests in one
investment portfolio of the Fund and Net Purchase
Payments will be allocated to one or more of these
Sub-Accounts or the Fixed Account as directed by the
Owner. These sixteen investment portfolios of the Fund
are: the Aggressive Growth Portfolio, Emerging Growth
Portfolio, Growth Portfolio, Global Portfolio, Balanced
Portfolio, Strategic Total Return (formerly known as
Equity-Income) Portfolio, Bond Portfolio,
Short-to-Intermediate Government Portfolio, Growth &
Income (formerly known as Utility) Portfolio, Money
Market Portfolio, Tactical Asset Allocation Portfolio,
Value Equity Portfolio, C.A.S.E. Growth Portfolio, Global
Sector Portfolio, International Equity Portfolio and U.S.
Equity Portfolio.
This Prospectus sets forth information about the Contract
that a prospective investor should know before investing.
PROSPECTUS DATED Additional information about the Series Account has been
May 1, 1997 filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated May 1, 1997,
which is incorporated herein by reference. The Statement
of Additional Information is available upon written or
oral request and without charge from Western Reserve,
P.O. Box 9051, Clearwater, FL 34618-9051; telephone
number (800) 851-9777. The table of contents for the
Statement of Additional Information appears on page 26.
THE CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR
GUARANTEED OR ENDORSED BY, A BANK OR DEPOSITORY
INSTITUTION, AND THE CONTRACT IS NOT FEDERALLY INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY, AND INVOLVES
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE. NO DEALER, SALESPERSON OR OTHER PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON.
THIS PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT
PROSPECTUS FOR THE WRL SERIES FUND, INC. CERTAIN
PORTFOLIOS MAY NOT BE AVAILABLE IN ALL STATES. ALL
PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
DEFINITIONS OF SPECIAL TERMS .......................................... 1
SUMMARY ............................................................... 3
CALCULATION OF YIELDS AND TOTAL RETURNS .............................. 6
OTHER PERFORMANCE DATA ................................................ 7
/bullet/ Sub-Adviser Performance .................................... 8
/bullet/ Other Information .......................................... 8
PUBLISHED RATINGS ...................................................... 8
WESTERN RESERVE, THE SERIES ACCOUNT, AND THE FUND ..................... 9
/bullet/ Western Reserve Life Assurance Co. of Ohio .................. 9
/bullet/ WRL Series Annuity Account ................................. 9
/bullet/ WRL Series Fund, Inc. ....................................... 9
CHARGES AND DEDUCTIONS ................................................ 10
/bullet/ Withdrawal Charge .......................................... 10
/bullet/ Transfer Charge ............................................. 11
/bullet/ Mortality and Expense Risk Charge ........................... 11
/bullet/ Annual Contract Charge .................................... 11
/bullet/ Administrative Charge ....................................... 11
/bullet/ Premium Taxes ............................................. 12
/bullet/ Deductions for Other Taxes ................................. 12
/bullet/ Expenses of the Fund ....................................... 12
THE CONTRACT
ACCUMULATION PROVISIONS ............................................. 12
/bullet/ Purchase Payments .......................................... 12
/bullet/ Net Purchase Payments ....................................... 13
/bullet/ Accumulation Unit Value .................................... 13
/bullet/ Computing Sub-Account Value ................................. 13
/bullet/ Transfers to and from, and among Allocation Options ......... 14
/bullet/ Dollar Cost Averaging ....................................... 14
/bullet/ Asset Rebalancing Program ................................. 14
/bullet/ Partial Withdrawals and Surrenders ........................ 15
/bullet/ Contract Loans For 401(a), 401(k), and 403(b) Contracts ... 16
/bullet/ Death Benefits during the Accumulation Period ............... 17
ANNUITY PROVISIONS ................................................... 18
/bullet/ Maturity Date and Selection of Annuity Options ............ 18
/bullet/ Fixed Account Annuity Options .............................. 19
/bullet/ Series Account Annuity Options .............................. 19
/bullet/ Death Benefits after the Maturity Date ..................... 19
/bullet/ Improved Annuity Rates .................................... 20
/bullet/ Proof of Age, Sex, and Survival ........................... 20
OTHER MATTERS RELATING TO THE CONTRACT ................................. 20
/bullet/ Changes in Purchase Payments .............................. 20
/bullet/ Right To Examine Contract ................................. 20
/bullet/ Contract Payments .......................................... 20
/bullet/ Ownership ................................................... 20
/bullet/ Annuitant ................................................... 20
/bullet/ Beneficiary ................................................ 20
/bullet/ Modification or Waiver .................................... 21
FEDERAL TAX MATTERS ................................................... 21
/bullet/ Introduction ................................................ 21
/bullet/ Company Tax Status .......................................... 21
/bullet/ Taxation of Annuities ....................................... 21
/bullet/ Qualified Plans ............................................. 22
/bullet/ Additional Considerations ................................. 23
THE FIXED ACCOUNT ...................................................... 24
/bullet/ Minimum Guaranteed and Current Interest Rates ............... 25
/bullet/ Fixed Account Value ....................................... 25
/bullet/ Allocations, Transfers and Partial Withdrawals ............ 25
DISTRIBUTION OF THE CONTRACTS .......................................... 25
VOTING RIGHTS ......................................................... 25
LEGAL PROCEEDINGS ...................................................... 26
STATEMENT OF ADDITIONAL INFORMATION .................................... 26
APPENDIX A - Condensed Financial Information ........................... A-1
</TABLE>
<PAGE>
DEFINITIONS OF SPECIAL TERMS
<TABLE>
<S> <C>
ACCUMULATION PERIOD The period between the Contract Date and the Maturity Date while the Contract is
In Force.
ACCUMULATION UNIT An accounting unit of measure used to calculate Sub-Account values during the
VALUE Accumulation Period.
ADMINISTRATIVE OFFICE Western Reserve's administrative office for variable annuity products, the address
of which is P.O. Box 9051, Clearwater, Florida 34618-9051. Telephone
number: 1-800-851-9777; Fax number: 1-800-572-0159.
ALLOCATION OPTIONS The Fixed Account and the Sub-Accounts of the Series Account.
ANNUITANT The person named in the application, or as subsequently changed, to receive annuity
payments. The Annuitant may be changed as provided in the Contract's
death benefit provisions and annuity provisions.
ANNUITY PROCEEDS The amount applied to purchase periodic annuity payments. Such amount is the
Annuity Value on the Maturity Date, less any applicable premium tax.
ANNUITY VALUE The sum of the Series Account Value and the Fixed Account Value.
ANNUITY UNIT VALUE An accounting unit of measure used to calculate annuity payments from certain
Sub-Accounts after the Maturity Date.
ANNIVERSARY The same day and month as the Contract Date for each succeeding year the
Contract remains In Force.
ATTAINED AGE The Issue Age plus the number of completed Contract Years.
BENEFICIARY The person(s) entitled to receive the death benefit proceeds under the Contract.
CASH VALUE The Annuity Value less any applicable premium taxes and any Withdrawal
Charge.
CODE The Internal Revenue Code of 1986, as amended.
CONTINGENT The person named in the application, or subsequently designated, to become the
BENEFICIARY new Beneficiary upon the current Beneficiary's death.
CONTRACT DATE The later of the date on which the initial Purchase Payment is received and the
date that the properly completed application is received at Western Reserve's
Administrative Office.
CONTRACT YEAR A period of twelve consecutive months beginning on the Contract Date and any
Anniversary thereafter.
FIXED ACCOUNT An Allocation Option under the Contract, other than the Series Account, that
provides for accumulation of Net Purchase Payments, and options for annuity
payments on a fixed basis. For Contracts issued in the States of New Jersey and
Washington, the Fixed Account is used solely for Contract loans, and is not available
for allocation of Net Purchase Payments or transfers of Annuity Value from
the Sub-Accounts.
FIXED ACCOUNT VALUE During the Accumulation Period, a Contract's value allocated to the Fixed Account.
FUND WRL Series Fund, Inc.
IN FORCE Condition under which the Contract is active and the Owner is entitled to exercise
all rights under the Contract.
ISSUE AGE Refers to the age on the birthday nearest the Contract Date.
MATURITY DATE The date on which the Accumulation Period ends and annuity payments are to
commence.
NET PURCHASE
PAYMENT The Purchase Payment less any applicable premium taxes.
NON-QUALIFIED
CONTRACTS Contracts issued other than in connection with retirement plans. Non-Qualified
Contracts do not qualify for special Federal income tax treatment under the Code.
OWNER The person(s) entitled to exercise all rights under the Contract. The Annuitant is
the Owner unless the application states otherwise, or unless a change of
ownership is made at a later time.
</TABLE>
1
<PAGE>
DEFINITIONS OF SPECIAL TERMS (CONTINUED)
<TABLE>
<S> <C>
PORTFOLIO A separate investment portfolio of the Fund.
PURCHASE PAYMENTS Amounts paid by an Owner or on the Owner's behalf to Western Reserve as
consideration for the benefits provided by the Contract.
QUALIFIED CONTRACTS Contracts issued in connection with retirement plans that qualify for special
Federal income tax treatment under the Code.
SERIES ACCOUNT (OR WRL Series Annuity Account, a separate investment account composed of
SEPARATE ACCOUNT) several Sub-Accounts established to receive and invest Net Purchase Payments
not allocated to the Fixed Account.
SERIESACCOUNTVALUE During the Accumulation Period, the value in the Series Account allocable to a
Contract, which value is equal to the total of the values allocable to a Contract
in each of the Sub-Accounts during the Accumulation Period.
SUB-ACCOUNT A sub-division of the Series Account that invests exclusively in the shares of a
specified Portfolio and supports the Contracts. Sub-Accounts corresponding to
each applicable Portfolio hold assets under the Contract during the Accumulation
Period. Other Sub-Accounts corresponding to each applicable Portfolio will hold
assets after the Maturity Date if a Series Account annuity option is selected.
SURRENDER The termination of a Contract at the option of the Owner.
VALUATION DATE Each day on which the New York Stock Exchange is open for business.
VALUATION PERIOD The period commencing at the end of one Valuation Date and continuing to the
end of the next succeeding Valuation Date.
</TABLE>
2
<PAGE>
SUMMARY
This summary provides you with an overview of the tax deferred variable annuity
contract offered by Western Reserve and funded by the Series Account and the
Fixed Account.
THE CONTRACT
The Contract is a tax deferred variable annuity contract that may be purchased
by submitting a completed application to Western Reserve for its approval. The
Contract provides for accumulation of Annuity Values on a variable basis, a
fixed basis, or a combination of both. The Contract also provides for the
payment of periodic annuity payments on a variable basis or a fixed basis. (See
"THE CONTRACT ACCUMULATION PROVISIONS" on page 12 and "-ANNUITY PROVISIONS" on
page 18.) (For information about tax status, see "FEDERAL TAX MATTERS" on pages
21-24.)
RIGHT TO EXAMINE CONTRACT
If an Owner is not satisfied with the Contract, it may be cancelled by returning
it within ten days after receipt together with a written request for
cancellation. In such event, Western Reserve will pay the Owner an amount equal
to the sum of: (i) the Purchase Payments received; plus (or minus) (ii) the
accumulated gains (or losses), if any, in the Series Account for the Contract as
of the date Western Reserve receives the returned Contract. (In certain states,
Western Reserve will refund the Purchase Payments.) (See "OTHER MATTERS RELATING
TO THE CONTRACT-Right to Examine Contract" on page 20.)
THE FUND
The underlying variable investments for the Contracts are shares of sixteen
Portfolios of the Fund, namely: the Aggressive Growth Portfolio, Emerging Growth
Portfolio, Growth Portfolio, Global Portfolio, Balanced Portfolio, Strategic
Total Return (formerly known as Equity-Income) Portfolio, Bond Portfolio,
Short-to-Intermediate Government Portfolio, Growth & Income (formerly known as
Utility) Portfolio, Money Market Portfolio, Tactical Asset Allocation Portfolio,
Value Equity Portfolio, C.A.S.E. Growth Portfolio, Global Sector Portfolio,
International Equity Portfolio and U.S. Equity Portfolio. Western Reserve
reserves the right to offer additional investment portfolios or other mutual
funds with differing investment objectives. (See "WESTERN RESERVE, THE SERIES
ACCOUNT, AND THE FUND-WRL Series Fund, Inc." on page 9.)
PURCHASE PAYMENTS
The Owner may make Purchase Payments at such frequency as the Owner elects. The
initial Purchase Payment generally must accompany the application, and for
Non-Qualified Contracts must be at least $5,000; however, a minimum initial
Purchase Payment of $1,000 is allowed provided the application reflects
anticipated additional monthly periodic Purchase Payments of at least $100, via
electronic funds transfer from the Owner's bank account. For Individual
Retirement Annuities ("IRAs"), the minimum initial Purchase Payment is $1,000.
For Qualified Contracts other than IRAs, the minimum initial Purchase Payment is
$50. For all Contracts, subsequent Purchase Payments must be at least $50,
unless Western Reserve consents to a smaller amount. The maximum amount of
Purchase Payments that may be made in any Contract Year is $1,000,000, unless
Western Reserve consents to a larger amount. Western Reserve reserves the right
to reject any Purchase Payment for any reason permitted by law. (See
"ACCUMULATION PROVISIONS-Purchase Payments" on page 12.)
PARTIAL WITHDRAWAL AND SURRENDER PRIVILEGE
A Contract may be surrendered or portions of the Cash Value may be partially
withdrawn at any time prior to the Maturity Date. The Cash Value may not,
however, be reduced by any partial withdrawal to less than $10,000. (See "THE
CONTRACT-Partial Withdrawals and Surrenders" on page 15.) For Qualified
Contracts issued under Code Section 403(b), certain restrictions will apply.
Moreover, a partial withdrawal or Surrender may have Federal income tax
consequences. (See "FEDERAL TAX MATTERS-Qualified Plans" on page 22.)
WITHDRAWAL CHARGE
No deductions for sales expenses are made from Purchase Payments. A Withdrawal
Charge, which is a contingent deferred sales charge, may, however, be assessed
against Annuity Value when partially withdrawn or surrendered.
The length of time from receipt of a Purchase Payment to the time of a partial
withdrawal or Surrender of that Purchase Payment determines whether the
Withdrawal Charge will be deducted. The charge is a percentage of the amount of
each Purchase Payment partially withdrawn or surrendered within five years of
its payment. In determining which amounts withdrawn are subject to the
Withdrawal Charge, partial withdrawals and Surrenders will be deemed made first
from Purchase Payments on a first-in, first-out basis and then from any Contract
earnings. The charge is as follows:
<TABLE>
<CAPTION>
NUMBER OF YEARS
FROM RECEIPT OF EACH
CHARGE PURCHASE PAYMENT
- --------- ----------------------
<S> <C>
6% 0-2
4% 3
3% 4
2% 5
0% Over 5
</TABLE>
For the first withdrawal or series of Systematic Partial Withdrawals during each
Contract Year, the Withdrawal Charge is waived for the first 10% of the Annuity
Value that otherwise would be subject to the Withdrawal Charge. No Withdrawal
Charge will be assessed if Annuity Values are applied to any annuity option
under the Contract. (See "CHARGES AND DEDUCTIONS-Withdrawal Charge" on page 10.)
Additionally, a 10% penalty tax under Code Section 72(q) is currently imposed on
partial withdrawals or Surrenders from Non-Qualified Contracts if such partial
withdrawals or Surrenders are made prior to age 59-1/2 and other exceptions do
not apply. (See "FEDERAL TAX MATTERS" on page 21.)
MORTALITY AND EXPENSE RISK CHARGE
For assuming mortality and expense risks under the Contracts, during the
Accumulation Period, Western Reserve imposes a 1.10% per annum charge against
all Annuity Value held in the Series Account. After the Maturity Date,
3
<PAGE>
the charge will equal 1.25% per annum of all Annuity Value held in the Series
Account. (See "CHARGES AND DEDUCTIONS-Mortality and Expense Risk Charge" on page
11.)
ANNUAL CONTRACT CHARGE
An Annual Contract Charge of $30 is deducted annually on each Contract
Anniversary. (See "CHARGES AND DEDUCTIONS-Annual Contract Charge", page 11.)
ADMINISTRATIVE CHARGE
Western Reserve imposes a daily Administrative Charge equal to an annual rate of
0.15% against all Annuity Value held in the Series Account. (See "CHARGES AND
DEDUCTIONS-Administrative Charge" on page 11.)
PREMIUM TAXES
No deduction is made for premium taxes unless Western Reserve incurs a premium
tax under state law. Certain states impose premium taxes ranging up to 3.5% of
Purchase Payments, (See "CHARGES AND DEDUCTIONS-Premium Taxes" on page 12.)
CHARGES BY THE FUND
The Fund is subject to certain fees, charges and expenses. (See "WESTERN
RESERVE, THE SERIES ACCOUNT, AND THE FUND-WRL Series Fund, Inc." on page 10 and
the Prospectus for the Fund.) TOTAL FUND ANNUAL EXPENSES FOR THE GLOBAL SECTOR
PORTFOLIO EXCEEDS 2.00%.
OTHER CONTRACTS
Western Reserve offers other variable annuity contracts which also invest in the
same Portfolios of the Fund. These contracts may have different charges that
could affect Sub-Account performance, and may offer different benefits more
suitable to your needs. To obtain more information about these contracts,
contact your agent, or call (800) 851-9777.
SUMMARY OF CHARGES AND EXPENSES
The following illustrates the charges and deductions under the Contract during
the Accumulation Period, as well as the fees and expenses of the Fund.
<TABLE>
<S> <C>
OWNER TRANSACTION EXPENSES
Sales Load Imposed on Purchases .................. None
Maximum Withdrawal Charge
(as a % of each Purchase Payment
surrendered or partially withdrawn within
5 years of receipt) .............................. 6%
Transfer Charge
On first 12 transfers each year .................. None
On each transfer thereafter ..................... $10.00
ANNUAL CONTRACT CHARGE ........................... $30.00 Per Contract
SEPARATE ACCOUNT ANNUAL EXPENSES (as a %
of average account value)
DURING ACCUMULATION PERIOD
Mortality and Expense Risk Charge ............... 1.10%
Other Account Fees and Expenses
(See "Administrative Charge," page 13) ......... 0.15%
Total Separate Account Annual Expenses ............ 1.25%
AFTER ACCUMULATION PERIOD
Mortality and Expense Risk Charge ............... 1.25%
Other Account Fees and Expenses
(See "Administrative Charge," page 19) ......... 0.15%
Total Separate Account Annual Expenses ............ 1.40%
</TABLE>
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FUND ANNUAL EXPENSES* (as a % of Fund average net assets)
<TABLE>
<CAPTION>
AGGRESSIVE EMERGING
GROWTH GROWTH GROWTH GLOBAL
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Management Fees ........................... 0.80% 0.80% 0.80% 0.80%
Other Expenses (after reimbursement) ...... 0.18% 0.14% 0.08% 0.19%
Total Fund Annual Expenses ............... 0.98% 0.94% 0.88% 0.99%
<CAPTION>
GLOBAL C.A.S.E.
BALANCED SECTOR VALUE EQUITY GROWTH
PORTFOLIO PORTFOLIO** PORTFOLIO** PORTFOLIO
------------ -------------- --------------- -----------
<S> <C> <C> <C> <C>
Management Fees ........................... 0.80% 1.10% 0.80% 0.80%
Other Expenses (after reimbursement) ...... 0.17% 1.27% 0.20% 0.20%
Total Fund Annual Expenses ............... 0.97% 2.37% 1.00% 1.00%
</TABLE>
<TABLE>
<CAPTION>
SHORT-TO-
INTERMEDIATE STRATEGIC
BOND GOVERNMENT TOTAL RETURN
PORTFOLIO PORTFOLIO PORTFOLIO***
------------ --------------- ---------------
<S> <C> <C> <C>
Management Fees ........................... 0.50% 0.60% 0.80%
Other Expenses (after reimbursement) ...... 0.14% 0.16% 0.11%
Total Fund Annual Expenses ............... 0.64% 0.76% 0.91%
<CAPTION>
TACTICAL
GROWTH & MONEY ASSET INTERNATIONAL
INCOME MARKET ALLOCATION EQUITY U.S. EQUITY
PORTFOLIO**** PORTFOLIO PORTFOLIO PORTFOLIO** PORTFOLIO**
---------------- ------------ ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Management Fees ........................... 0.75% 0.40% 0.80% 1.00% 0.80%
Other Expenses (after reimbursement) ...... 0.25% 0.12% 0.10% 0.30% 0.25%
Total Fund Annual Expenses ............... 1.00% 0.52% 0.90% 1.30% 1.05%
</TABLE>
- ----------------
* Effective January 1, 1997, the Fund adopted a Plan of Distribution pursuant
to Rule 12b-1 under the 1940 Act ("Distribution Plan") and pursuant to the
Plan, has entered into a Distribution Agreement with InterSecurities, Inc.
("ISI"), principal underwriter for the Fund. Under the Distribution Plan,
the Fund, on behalf of the Portfolios, is authorized to pay to various
service providers, as direct payment for expenses incurred in connection
with the distribution of a Portfolio's shares, amounts equal to actual
expenses associated with distributing a Portfolio's shares, up to a maximum
rate of 0.15% (fifteen one-hundredths of one percent) on an annualized
basis of the average daily net assets. This fee is measured and accrued
daily and paid monthly. ISI has determined that it will not seek payment by
the Fund of distribution expenses with respect to any Portfolio during the
fiscal year ending December 31, 1997. Prior to ISI's seeking reimbursement,
Policyowners will be notified in advance.
** Because the Value Equity and Global Sector Portfolios commenced operations
on May 1, 1996 the "Other Expenses" and "Total Fund Annual Expenses" are
annualized. Because the International Equity and U.S. Equity Portfolios
commenced operations on January 2, 1997, the percentages set forth as
"Other Expenses" and "Total Fund Annual Expenses" are estimates.
*** Prior to May 1, 1997, this Portfolio was known as Equity-Income.
**** Prior to May 1, 1997, this Portfolio was known as Utility.
The purpose of the preceding Table is to assist the Owner in understanding the
various costs and expenses that an Owner will bear directly and indirectly. The
Table reflects charges and expenses of the Separate Account as well as the
Portfolios of the Fund for the fiscal year ended December 31, 1996, except that
the "Other Expenses" and "Total Fund Annual Expenses" for the Value Equity and
Global Sector Portfolios are annualized and the "Other Expenses" and "Total
4
<PAGE>
Fund Annual Expenses" for the International Equity and U.S. Equity Portfolios
are estimates. Expenses of the Fund may be higher or lower in the future.
Certain states and other governmental entities may impose a premium tax, which
the Table does not include. For more information on the charges described in
this Table, see "CHARGES AND DEDUCTIONS" on page 12 and the Fund Prospectus
which accompanies this Prospectus.
WRL Investment Management, Inc. has undertaken, until at least April 30, 1998,
to pay Fund expenses on behalf of the Portfolios to the extent normal operating
expenses of a Portfolio exceed the following percentage of a Portfolio's average
daily net assets: 0.70% for the Bond and Money Market Portfolios; 1.00% for the
Aggressive Growth, Emerging Growth, Growth, Global, Balanced, Strategic Total
Return, Short-to-Intermediate Government, Growth & Income, Tactiacl Asset
Allocation, Value Equity, C.A.S.E. Growth Portfolios; 1.50% for the
International Equity Portfolio; and 1.30% for the U.S. Equity Portfolio. No
expense limit applies to the Global Sector Portfolio. In 1996, Western Reserve,
the Fund's Investment Adviser prior to January 1, 1997, reimbursed the Value
Equity Portfolio in the amount of $13,672, and the C.A.S.E. Growth Portfolio in
the amount of $73,269. Without such reimbursement, the total annual Fund
expenses during 1996 for the Value Equity Portfolio and the C.A.S.E. Growth
Portfolio would have been 1.03% and 1.64%, respectively. See the Fund's
prospectus for a description of the expense limitation applicable to each
Portfolio.
EXAMPLES
1. If you surrender your Contract at the end of the applicable time period:
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Aggressive Growth Sub-Account ..................... $84 $112 $144 $266
Emerging Growth Sub-Account ........................ 83 111 142 262
Growth Sub-Account ................................. 83 109 139 255
Global Sub-Account ................................. 84 113 145 267
Balanced Sub-Account .............................. 83 112 144 265
Strategic Total Return Sub-Account ............... 83 110 141 259
Bond Sub-Account ................................. 80 102 127 231
Short-to-Intermediate Government Sub-Account ...... 81 106 133 243
Growth & Income Sub-Account ........................ 84 113 145 268
Money Market Sub-Account ........................... 79 98 121 218
Tactical Asset Allocation Sub-Account ............ 83 110 140 258
Value Equity Sub-Account ........................... 84 113 145 268
C.A.S.E. Growth Sub-Account ........................ 84 113 145 268
Global Sector Sub-Account ........................ 97 153 212 396
International Equity Sub-Account .................. 87 122 N/A N/A
U.S. Equity Sub-Account ........................... 84 115 N/A N/A
</TABLE>
2. If you annuitize or do not surrender at the end of the applicable time period
(note that annuitization is not available prior to a Contract's fifth
Anniversary):
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Aggressive Growth Sub-Account ..................... $24 $72 $124 $266
Emerging Growth Sub-Account ........................ 23 71 122 262
Growth Sub-Account ................................. 23 69 119 255
Global Sub-Account ................................. 24 73 125 267
Balanced Sub-Account .............................. 23 72 124 265
Strategic Total Return Sub-Account ............... 23 70 121 259
Bond Sub-Account ................................. 20 62 107 231
Short-to-Intermediate Government Sub-Account ...... 21 66 113 243
Growth & Income Sub-Account ........................ 24 73 125 268
Money Market Sub-Account ........................... 19 58 101 218
Tactical Asset Allocation Sub-Account ............ 23 70 120 258
Value Equity Sub-Account ........................... 24 73 125 268
C.A.S.E. Growth Sub-Account ........................ 24 73 125 268
Global Sector Sub-Account ........................ 37 113 192 396
International Equity Sub-Account .................. 27 82 N/A N/A
U.S. Equity Sub-Account ........................... 24 75 N/A N/A
</TABLE>
THE ABOVE EXAMPLES ASSUME THAT NO TRANSFER CHARGES HAVE BEEN ASSESSED. IN
ADDITION, THE EXAMPLES FACTOR IN THE $30 ANNUAL CONTRACT CHARGE BASED ON AN
AVERAGE SERIES ACCOUNT VALUE PER CONTRACT OF $33,136, WHICH CONVERTS THAT CHARGE
TO AN ANNUAL RATE OF 0.09% OF THE SERIES ACCOUNT VALUE.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND THE ACTUAL EXPENSES PAID MAY BE GREATER OR LESS THAN THOSE SHOWN.
THE ASSUMED 5% ANNUAL RETURN IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE ANNUAL RETURNS, WHICH MAY BE GREATER OR LESS
THAN THE ASSUMED AMOUNT.
5
<PAGE>
DEATH BENEFIT
If the Annuitant is also the Owner or if the Owner is not a natural person, and
the Annuitant dies at any time before the Maturity Date, a death benefit will be
provided, unless certain elections have been made that would keep the Contract
In Force. After the Maturity Date, death benefits will be paid in accordance
with the annuity option then in effect. (See "ACCUMULATION PROVISIONS-Death
Benefits during the Accumulation Period" on page 17 and "ANNUITY
PROVISIONS-Death Benefits after the Maturity Date" on page 19.)
ANNUITY PAYMENT OPTIONS
Annuity payment options are available under the Contract for distribution of the
Annuity Proceeds after the Maturity Date. The Maturity Date may not be earlier
than the end of the fifth Contract Year and cannot be deferred beyond the
Annuitant reaching Attained Age 90. Subject to these limitations, the default
Maturity Date may be changed by the Owner, at any time prior to that date, by
delivering a written request to Western Reserve. (See "ANNUITY
PROVISIONS-Maturity Date and Selection of Annuity Options" on page 18.)
TRANSFERS
Prior to the Maturity Date, the Owner may transfer any or all of the Annuity
Value from a Sub-Account to the Fixed Account, from the Fixed Account to a
Sub-Account (subject to certain restrictions), or among the Sub-Accounts. (For
Contracts issued in the States of New Jersey and Washington, the Fixed Account
is not available for transfers of Annuity Value from the Sub-Accounts.) (See
"THE CONTRACT-ACCUMULATION PROVISIONS-Transfers to and from, and among
Allocation Options" on page 14.) Twelve transfers are permitted without charge
in a Contract Year. Each additional transfer will be subject to a transfer
charge of $10. This charge will not be increased. Certain restrictions apply to
transfers from the Fixed Account. Western Reserve may, at any time, revoke or
modify the transfer privilege. (See "ACCUMULATION PROVISIONS-Transfers to and
from, and among Allocation Options" on page 14 and "THE FIXED
ACCOUNT-Allocations, Transfers and Partial Withdrawals" on page 25.)
FIXED ACCOUNT
Fixed Account Values will be held in the general account of Western Reserve and
earn interest at no less than the minimum guaranteed rate. The Fixed Account is
discussed in the section entitled "THE FIXED ACCOUNT" beginning on page
24.
CONDENSED FINANCIAL INFORMATION
A table that contains the accumulation unit history of the Sub-Accounts is
presented in Appendix A - Condensed Financial Information.
CALCULATION OF YIELDS AND TOTAL RETURNS
From time to time, Western Reserve may disclose in advertisements and sales
literature yields and total returns for the Sub-Accounts representing the
Accumulation Period under a Contract. In addition, Western Reserve may, on the
same basis, advertise the effective yield of the Money Market Sub-Account under
a Contract. THESE YIELDS AND TOTAL RETURNS ARE BASED ON THE SUB-ACCOUNTS'
HISTORICAL PERFORMANCE ONLY AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
For more detailed information about the performance data calculations described
below, see the Statement of Additional Information.
YIELD
The yield of the Money Market Sub-Account refers to the annualized income
produced by a hypothetical Series Account Value in the Money Market Sub-Account
under a Contract over a specified seven day period. The yield calculation
assumes that the same amount of income produced for that seven day period is
also produced for each seven day period over a fifty-two week period and is
shown as a percentage of the Series Account Value. The effective yield is
calculated similarly but, when annualized, the income earned by the Series
Account Value in the Money Market Sub-Account is assumed to be reinvested. The
effective yield will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment of income. Based on the method
of calculation described in the Statement of Additional Information, for the
seven-day period ended December 31, 1996, the current yield and effective yield
for the Money Market Sub-Account were as follows:
Current Yield = 3.79%
Effective Yield = 3.86%
The yield of a Sub-Account other than the Money Market Sub-Account ("other
Sub-Account"), refers to the income produced by a hypothetical Series Account
Value in the other Sub-Account over a specified thirty day period expressed as a
percentage rate of return for that period. The yield is calculated by assuming
that the income produced by the investment during that thirty day period is
produced each thirty day period over a twelve month period and is shown as a
percentage of the Series Account Value. Based on the method of calculation
described in the Statement of Additional Information, for the thirty day period
ended December 31, 1996, the yield for the following Sub-Account(s) was as
follows:
Bond Sub-Account = 4.27%
Short-to-Intermediate
Government Sub-Account = 3.96%
TOTAL RETURN
The average annual total return of the Sub-Accounts shown below is based upon
the actual historical performance of the Sub-Accounts. The calculations
represent the performance of a hypothetical initial Purchase Payment of $1,000
over certain stated periods of time. Total return is calculated according to the
formula provided in the Statement of Additional Information.
THE STANDARD TOTAL RETURN CALCULATIONS IN THE TABLE BELOW HAVE BEEN REDUCED BY
ALL FEES AND CHARGES UNDER THE CONTRACT. Such fees and charges include the
Mortality and Expense Risk Charge of 1.10%, the Administrative Charge of 0.15%,
and the $30 Annual Contract Charge based on an average Series Account Value of
$33,136, which translates into an annual charge of 0.09%. The total return
calculations in the table below also
6
<PAGE>
assume a complete surrender of the Contract at the end of the period, and
therefore THE WITHDRAWAL CHARGE IS DEDUCTED.
THE STANDARD AVERAGE ANNUAL TOTAL RETURNS OF THE SUB-ACCOUNTS SINCE THE
INCEPTION OF EACH SUB-ACCUNT IS:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31, 1996
-----------------------------------------------------
ONE THREE FIVE FROM INCEPTION
SUB-ACCOUNT YEAR YEARS YEARS INCEPTION DATE*
- ----------- --------- --------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Growth ..................... 10.29% 14.13% 9.32% 16.44% 2/24/89
Bond ..................... -7.26% 1.94% 5.00% 7.78% 2/24/89
Money Market ............... -2.31% 2.01% 2.14% 3.60% 2/24/89
Global ..................... 19.98% 13.80% N/A 18.80% 12/3/92
Short-to-Intermediate
Government ............... -3.91% 2.72% N/A 3.13% 12/3/92
Emerging Growth ............ 11.24% 14.81% N/A 17.88% 3/1/93
Strategic Total Return** ... 7.44% 9.97% N/A 11.16% 3/1/93
Aggressive Growth ......... 2.95% N/A N/A 12.37% 3/1/94
Balanced .................. 3.24% N/A N/A 4.94% 3/1/94
Growth & Income*** ......... 4.14% N/A N/A 7.49% 3/1/94
Tactical Asset Allocation .. 6.88% N/A N/A 13.12% 1/3/95
C.A.S.E. Growth ......... N/A N/A N/A 1.76% 5/1/96
Value Equity ............... N/A N/A N/A 6.18% 5/1/96
Global Sector .............. N/A N/A N/A -0.87% 5/1/96
</TABLE>
- ----------------
* Commencement of operations of the Sub-Account.
** Prior to May 1, 1997, this Sub-Account was known as Equity-Income.
*** Prior to May 1, 1997, this Sub-Account was known as Utility.
Because the International Equity and U.S. Equity Sub-Accounts had not yet
commenced operations as of December 31, 1996, no performance information is
provided for these Sub-Accounts.
OTHER PERFORMANCE DATA
Western Reserve may from time to time disclose in advertisements and sales
literature average annual total return in non-standard formats and cumulative
total return for Contracts funded by the Sub-Accounts.
Western Reserve may from time to time also disclose in advertisements and sales
literature yields and non-standard total returns for the Sub-Accounts (some of
which do not include Contract and Series Account fees and charges) including
such disclosure for periods prior to the date the Series Account commenced
operations.
Western Reserve may present hypothetical illustrations that present average
total return performance information for the hypothetical Contract, assuming
allocation of net premium payments to the Sub-Accounts, and reflects the
performance of those Sub-Accounts for the duration of the allocations under the
hypothetical Contract. The information presented may be compared to various
indices.
Western Reserve may also present total returns based on the performance of the
Portfolios from the time the Portfolios began operations. Some Portfolios were
in existence before their corresponding Sub-Accounts. The calculations in the
table below show the actual average annual total return for the Portfolios
reduced by all fees and charges under the Contract, as if the Contract had been
in existence. Such fees and charges include the Mortality and Expense Risk
Charge of 1.10%, the Administrative Charge of 0.15%, and the $30 Annual Contract
Charge based on an average Series Account Value of $33,136, which translates
that charge into an annual rate of 0.09%. The total return calculations below
also assume a complete surrender of the Contract at the end of the period, and
therefore THE WITHDRAWAL CHARGE IS DEDUCTED.
THE STANDARD AVERAGE ANNUAL TOTAL RETURNS OF THE SUB-ACCOUNTS SINCE THE
INCEPTION OF EACH PORTFOLIO IS:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31, 1996
------------------------------------------------------
ONE THREE FIVE TEN FROM INCEPTION
SUB-ACCOUNT YEAR YEAR YEARS YEARS INCEPTION DATE
- ----------- --------- --------- -------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Growth*** ...... 10.29% 14.13% 9.32% 16.40% 16.08% 10/2/86*
Bond*** ......... -7.26% 1.94% 5.00% 5.96% 6.19% 10/2/86*
Money
Market*** ...... -2.31% 2.01% 2.14% 3.58% 3.57% 10/2/86*
Global ......... 19.98% 13.80% N/A N/A 18.80% 12/3/92**
Short-to-
Intermediate
Government ...... -3.91% 2.72% N/A N/A 3.13% 12/3/92**
Emerging
Growth ......... 11.24% 14.81% N/A N/A 17.88% 3/1/93**
Strategic Total
Return**** ...... 7.44% 9.97% N/A N/A 11.16% 3/1/93**
Aggressive
Growth ......... 2.95% N/A N/A N/A 12.37% 3/1/94**
Balanced ......... 3.24% N/A N/A N/A 4.94% 3/1/94**
Growth &
Income***** ..... 4.14% N/A N/A N/A 7.49% 3/1/94**
Tactical Asset
Allocation ...... 6.88% N/A N/A N/A 13.12% 1/3/95**
C.A.S.E.
Growth ......... 9.92% N/A N/A N/A 15.57% 5/1/95*
Value Equity ... N/A N/A N/A N/A 6.18% 5/1/96**
Global Sector .... N/A N/A N/A N/A -0.87% 5/1/96**
</TABLE>
- ----------------
* Commencement of operations of the Fund's Portfolio.
** Commencement of operations of the Sub-Account.
*** The calculation of total return performance for the Growth,
Bond and Money Market Sub-Accounts prior to December 3, 1992 reflects
deductions for the mortality and expense risk charge on a monthly basis,
rather than a daily basis. The monthly deduction is made at the beginning
of each month and generally approximates the performance that would have
resulted if the Sub-Accounts
had actually been in existence since the inception of the Portfolio.
**** Prior to May 1, 1997, this Sub-Account was known as Equity-Income.
***** Prior to May 1, 1997, this Sub-Account was known as Utility.
NON-STANDARD PERFORMANCE DATA WILL ONLY BE DISCLOSED IF THE STANDARD PERFORMANCE
DATA FOR THE REQUIRED PERIODS IS ALSO DISCLOSED.
Western Reserve may also present non-standard total returns based on the actual
performance of the Portfolios, which were in existence prior to the
Sub-Account's inception. The table below shows the actual average annual total
return for the Portfolios reduced by all fees and charges of the Contract, as if
the Contract had been in existence, EXCEPT THAT THE WITHDRAWAL CHARGE IS NOT
DEDUCTED. Such fees and charges include the Mortality and Expense Risk Charge of
1.10%, the Administrative Charge of 0.15%, and the $30 Annual Contract Charge
based on an average Series Account Value of $33,136, which translates that
charge into an annual rate of 0.09%.
7
<PAGE>
THE NON-STANDARD AVERAGE ANNUAL TOTAL RETURNS OF THE SUB-ACCOUNTS SINCE THE
INCEPTION OF EACH PORTFOLIO IS:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31, 1996
---------------------------------------------------
ONE THREE FIVE TEN FROM INCEPTION
SUB-ACCOUNT YEAR YEAR YEARS YEARS INCEPTION DATE
- ----------- --------- --------- -------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Growth ......... 16.29% 15.14% 9.59% 16.40% 16.08% 10/2/86*
Bond ............ -1.26% 3.21% 5.32% 5.96% 6.19% 10/2/86*
Money Market ... 3.69% 3.27% 2.51% 3.58% 3.57% 10/2/86*
Global ......... 25.98% 14.82% N/A N/A 19.23% 12/3/92**
Short-to-
Intermediate
Government ...... 2.09% 3.97% N/A N/A 3.79% 12/3/92**
Emerging
Growth ......... 17.24% 15.81% N/A N/A 18.53% 3/1/93**
Strategic Total
Return*** ...... 13.44% 11.06% N/A N/A 11.93% 3/1/93**
Aggressive
Growth ......... 8.95% N/A N/A N/A 14.05% 3/1/94**
Balanced ......... 9.24% N/A N/A N/A 6.84% 3/1/94**
Growth &
Income**** ...... 10.14% N/A N/A N/A 9.31% 3/1/94**
Tactical Asset
Allocation ...... 12.88% N/A N/A N/A 15.76% 1/3/95**
C.A.S.E. Growth 15.92% N/A N/A N/A 21.57% 5/1/95*
Value Equity ... N/A N/A N/A N/A 12.18% 5/1/96**
Global Sector ... N/A N/A N/A N/A 5.11% 5/1/96**
</TABLE>
- ----------------
* Commencement of operations of the Fund's Portfolio.
** Commencement of operations of the Sub-Account.
*** Prior to May 1, 1997, this Sub-Account was known as Equity-Income.
**** Prior to May 1, 1997, this Sub-Account was known as Utility.
Because the International Equity and U.S. Equity Sub-Accounts had not yet
commenced operations as of December 31, 1996, no performance information is
provided for these Sub-Accounts.
SUB-ADVISER PERFORMANCE
The Prospectus for the Fund presents the total returns of certain existing
SEC-registered funds that are managed by Sub-Advisers for the Portfolios and
that have investment objectives, policies and strategies substantially similar
to those of certain Portfolios ("Similar Sub-Adviser Funds"). The Prospectus for
the Fund also presents the hypothetical total returns of a composite of private
accounts managed by certain Sub-Advisers for the Portfolios that have investment
objectives, policies and strategies substantially similar to those of certain
Portfolios ("Similar Sub-Adviser Accounts"). NONE OF THE FEES AND CHARGES UNDER
THE CONTRACT HAVE BEEN DEDUCTED FROM SUCH SUB-ADVISER PERFORMANCE DATA. IF THOSE
FEES AND CHARGES WERE DEDUCTED, THE INVESTMENT RETURNS WOULD BE LOWER. THE
SIMILAR SUB-ADVISER FUNDS AND SIMILAR SUB-ADVISER ACCOUNTS ARE NOT AVAILABLE FOR
INVESTMENT UNDER THE CONTRACT. For more information on Sub-Adviser Performance,
see the Prospectus for the Fund.
OTHER INFORMATION
Western Reserve may compare the performance of each Sub-Account in advertising
and sales literature to the performance of other variable annuity issuers in
general or to the performance of particular types of variable annuities
investing in mutual funds, or investment series of mutual funds, with investment
objectives similar to each of the Sub-Accounts. For this purpose, Western
Reserve may use as sources of performance comparison such organizations as
Lipper Analytical Services, Inc. ("Lipper"), Variable Annuity Research &
Data Service ("VARDS"), CDA Investment Technologies, Inc. ("CDA")
and Morningstar, Inc. ("Morningstar"), or other services, companies,
individuals or other industry or financial publications of general interest,
such as FORBES, MONEY, THE WALL STREET JOURNAL, BUSINESS WEEK, BARRON'S,
KIPLINGER'S PERSONAL FINANCE and FORTUNE. Lipper, VARDS, CDA and Morningstar
are independent services which monitor and rank the performances 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. VARDS and CDA rankings compare only variable
annuity issuers. The performance analysis prepared by Lipper, VARDS, CDA and
Morningstar each rank such issuers on the basis of total return, assuming
reinvestment of distributions, but do not take sales charges, redemption fees or
certain expense deductions at the separate account level into consideration. In
addition, VARDS prepares 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 of
funds defined by the degree of risk inherent in their investment objectives.
Western Reserve may also compare, as appropriate, the performance of each
Sub-Account in advertising and sales literature to widely used measures of
market performance, such as the Standard and Poor's Index of 500 Common Stocks,
Dow Jones Industrials Average, Value Line (Arithmetic) Index, CDA/Wiesenberger
Long Term Growth Average-VA, Wilshire 5000, Financial Times (FT) World Index
Ex-USA, Morgan Stanley Capital International World Index, FT World Index, Lehman
Brothers Government/Corporate Bond Index, Dow Jones Utilities Average,
Donoghue's Taxable Money Fund Average and others. Unmanaged indices may assume
the reinvestment of dividends, but usually do not reflect any "deduction"
for the expense of operating or managing an investment portfolio.
In addition, Western Reserve may, as appropriate, compare each Sub-Account's
performance to that of other types of investments such as certificates of
deposit, savings accounts and U.S. Treasuries, or to certain interest rate and
inflation indices, such as the Consumer Price Index, which is published by the
U.S. Department of Labor and measures the average change in prices over time of
a fixed "market basket" of certain specified goods and services. Similar
comparisons of Sub-Account performance may also be made with appropriate indices
measuring the performance of a defined group of securities widely recognized by
investors as representing a particular segment of the securities markets. For
example, Sub-Account performance may be compared with Donoghue Money Market
Institutional Averages (money market rates), Lehman Brothers Corporate Bond
Index (corporate bond interest rates) or Lehman Brothers Government Bond Index
(long-term U.S. Government obligation interest rates).
PUBLISHED RATINGS
Western Reserve may from time to time publish in advertisements, sales
literature and reports to Owners, the ratings and other information assigned to
it by one or more independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service, Inc.
8
<PAGE>
("Moody's"), Standard & Poor's Insurance Rating Services ("Standard & Poor's"),
and Duff & Phelps Credit Rating Co. ("Duff & Phelps"). A.M. Best's and Moody's
ratings reflect their current opinion on the relative financial strength and
operating performance of an insurance company in comparison to the norms of the
life/health insurance industry. Standard & Poor's and Duff & Phelps provide
ratings which measure the claims-paying ability of insurance companies. These
ratings are opinions of an operating insurance company's financial capacity to
meet the obligations of its insurance policies in accordance with their terms.
Claims-paying ability ratings do not refer to an insurer's ability to meet
non-policy obligations (I.E., debt/commercial paper).
WESTERN RESERVE, THE SERIES ACCOUNT, AND THE FUND
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Western Reserve was originally incorporated under the laws of Ohio on October 1,
1957. Western Reserve is engaged in the business of writing life insurance
policies and annuity contracts. Western Reserve is admitted to do business in 49
states and the District of Columbia. The Administrative Office of Western
Reserve is located in Largo, Florida; however, the mailing address is P.O. Box
9051, Clearwater, FL 34618-9051. Western Reserve is wholly-owned by First AUSA
Life Insurance Company ("First AUSA"), a stock life insurance company which is
wholly-owned by AEGON USA, Inc. ("AEGON"). AEGON is a financial services holding
company whose primary emphasis is on life and health insurance and annuity and
investment products. AEGON is a wholly-owned indirect subsidiary of AEGON nv, a
Netherlands corporation, which is a publicly traded international insurance
group.
WRL SERIES ANNUITY ACCOUNT
The Series Account was established by Western Reserve as a separate account and
a unit investment trust on April 12, 1988. The Series Account meets the
definition of a separate account under the Federal securities laws. The Series
Account will receive and invest Net Purchase Payments paid under the Contracts.
In addition, the Series Account may be used for other variable annuity contracts
issued by Western Reserve.
Although the assets of the Series Account belong to Western Reserve, Ohio
insurance law provides that the assets in the Series Account attributable to
variable annuity contracts are not chargeable with liabilities arising out of
any other business of Western Reserve. However, the assets of the Series Account
are available to cover the liabilities of the general asset account of Western
Reserve to the extent that the Series Account's assets exceed the liabilities
arising under variable annuity contracts supported by it.
The Series Account is currently divided into twenty-one Sub-Accounts, sixteen of
which are offered under this Contract. Each Sub-Account invests exclusively in
shares of a single Portfolio of the Fund. Income and both realized and
unrealized gains or losses from the assets of each Sub-Account are credited to
or charged against that Sub-Account without regard to income, gains or losses
from any other Sub-Account or arising out of any other business of Western
Reserve. Western Reserve may add, delete or substitute investments held by the
Sub-Accounts, and Western Reserve reserves the right to add or remove
Sub-Accounts. Western Reserve further reserves the right to change the
investment objective of any Sub-Account, subject to applicable law as described
in the Statement of Additional Information.
WRL SERIES FUND, INC.
The Series Account currently invests only in shares of the Fund, a series mutual
fund that is registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940, as amended (the "1940 Act") as an
open-end diversified management investment company.
The Fund currently has twenty-one Portfolios, sixteen of which are offered under
this Contract: the Aggressive Growth Portfolio, Emerging Growth Portfolio,
Growth Portfolio, Global Portfolio, Balanced Portfolio, Strategic Total Return
Portfolio, Bond Portfolio, Short-to-Intermediate Government Portfolio, Growth &
Income Portfolio, Money Market Portfolio, Tactical Asset Allocation Portfolio,
Value Equity Portfolio, C.A.S.E. Growth Portfolio, Global Sector Portfolio,
International Equity Portfolio and U.S. Equity Portfolio. The assets of each
Portfolio are held separate from the assets of the other Portfolios, and each
Portfolio has different investment objectives and policies. Thus, each Portfolio
operates as a separate investment vehicle, and the income or losses of one
Portfolio are unrelated to that of any other Portfolio.
The name and sub-adviser for each Portfolio is stated below. THERE IS NO
ASSURANCE THAT ANY PORTFOLIO WILL ACHIEVE ITS INVESTMENT OBJECTIVE. More
detailed information, including a description of risks and the investment
objective of each Portfolio, can be found in the Prospectus for the Fund, which
should be read carefully before investing.
AGGRESSIVE GROWTH PORTFOLIO: Sub-Adviser - Fred Alger Management, Inc.
EMERGING GROWTH PORTFOLIO: Sub-Adviser - Van Kampen American Capital Asset
Management, Inc.
GROWTH PORTFOLIO: Sub-Adviser - Janus Capital Corporation.
GLOBAL PORTFOLIO: Sub-Adviser - Janus Capital Corporation.
BALANCED PORTFOLIO: Sub-Adviser - AEGON USA Investment Management, Inc.
STRATEGIC TOTAL RETURN PORTFOLIO: (Prior to May 1, 1997, this Portfolio was
known as Equity-Income.) Sub-Adviser - Luther King Capital Management
Corporation.
BOND PORTFOLIO: Sub-Adviser - Janus Capital Corporation.
SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO: Sub-Adviser - AEGON USA Investment
Management, Inc.
GROWTH & INCOME PORTFOLIO: (Prior to May 1, 1997, this Portfolio was known as
Utility.) Sub-Adviser - Federated Investment Counseling.
MONEY MARKET PORTFOLIO: Sub-Adviser - J.P. Morgan Investment Management Inc.
TACTICAL ASSET ALLOCATION PORTFOLIO: Sub-Adviser - Dean Investment Associates.
9
<PAGE>
VALUE EQUITY PORTFOLIO: Sub-Adviser - NWQ Investment Management Company, Inc.
C.A.S.E. GROWTH PORTFOLIO: Sub-Adviser - C.A.S.E. Management, Inc.
GLOBAL SECTOR PORTFOLIO: Sub-Adviser - Meridian Investment Management
Corporation.
INTERNATIONAL EQUITY PORTFOLIO: Co-Sub-Advisers - Scottish Equitable Investment
Management Limited and GE Investment Management Incorporated.
U.S. EQUITY PORTFOLIO: Sub-Adviser - GE Investment Management Incorporated.
WRL Investment Management, Inc. ("WRL Management"), a wholly-owned subsidiary of
Western Reserve, serves as investment adviser to the Fund and manages its assets
in accordance with policies, programs and quidelines estabished by the Board of
Directors of the Fund.
Shares of other Portfolios of the Fund are sold through different variable
annuity contracts offered through the Series Account. In addition to the Series
Account, shares of certain Portfolios of the Fund are sold to the WRL Series
Life Account, a separate account established by Western Reserve for its variable
life insurance policies, the PFL Endeavor Variable Annuity Account, and PFL
Endeavor Platinum Variable Annuity Account, separate accounts of PFL Life
Insurance Company, the AUSA Endeavor Variable Annuity Account and to the AUSA
Series Life Account, separate accounts of AUSA Life Insurance Company, Inc., all
affiliates of Western Reserve.
Shares of the Fund may in the future be sold to other separate accounts,
including separate accounts established for variable life insurance policies or
variable annuity contracts issued by Western Reserve or its affiliates. It is
conceivable that, in the future, it may become disadvantageous for variable life
insurance separate accounts and variable annuity separate accounts to invest in
the Fund simultaneously. Although neither Western Reserve nor the Fund currently
foresees any such disadvantages, either to variable life insurance policyowners
or to variable annuity contract owners, the Fund's Board of Directors intends
to monitor events in order to identify any material conflicts between the
interests of such variable life insurance policyowners and variable annuity
contract owners and to determine what action, if any, it should take. Such
action could include the sale of Fund shares by one or more of the separate
accounts, which could have adverse consequences. Material conflicts could result
from, for example, (1) changes in state insurance laws, (2) changes in Federal
income tax laws, or (3) differences in voting instructions between those given
by variable life insurance policyowners and those given by variable annuity
contract owners. If the Board of Directors were to conclude that separate funds
should be established for variable life and variable annuity separate accounts,
Western Reserve will bear the attendant expenses, but variable life insurance
policyowners and variable annuity contract owners would no longer have the
economies of scale resulting from a larger combined fund.
CHARGES AND DEDUCTIONS
Certain charges will be deducted in connection with the Contracts to compensate
Western Reserve for (1) administering the Contracts; (2) assuming certain risks
in connection with the Contracts; and (3) incurring expenses in distributing the
Contracts. The nature and amount of these charges are described more fully
below.
WITHDRAWAL CHARGE
No deductions for sales expenses are made from Purchase Payments. A Withdrawal
Charge, which is a contingent deferred sales charge, may be assessed against
Annuity Values when partially withdrawn or surrendered. No Withdrawal Charge
will be assessed if Annuity Values are applied to an annuity option provided
under the Contract.
For the first partial withdrawal or Systematic Partial Withdrawal (see "THE
CONTRACT-ACCUMULATION PROVISIONS-Partial Withdrawals and Surrenders," page 15),
during each Contract Year, any applicable Withdrawal Charge is currently waived
on that portion of the amount withdrawn which equals 10% of the Contract's
Annuity Value on the date of the withdrawal. For example, if the amount of the
first partial withdrawal during a Contract Year is $2,000, and the Contract's
Annuity Value on the date of the withdrawal is $25,000, then 10% of $25,000
equals $2,500, and the Withdrawal Charge is waived on the entire $2,000
withdrawn. Thereafter, the full amount of any subsequent partial withdrawal or
Systematic Partial Withdrawal during the remainder of that Contract Year will be
subject to the Withdrawal Charge. However, no waiver of a Withdrawal Charge will
be made in connection with a Surrender. In determining which amounts withdrawn
are subject to the Withdrawal Charge, partial withdrawals and Surrenders will be
deemed made first from Purchase Payments on a first-in, first-out basis, and
then from any Contract earnings.
The length of time from receipt of a Purchase Payment to the time of a partial
withdrawal or surrender determines whether the Withdrawal Charge will be
deducted. The charge is a percentage of the amount of each Purchase Payment
partially withdrawn or surrendered within five years of its payment. The charge
is as follows:
<TABLE>
<CAPTION>
NUMBER OF YEARS
FROM RECEIPT OF EACH
CHARGE PURCHASE PAYMENT
- ----------- ----------------------
<S> <C>
6% ...... 0-2
4% ...... 3
3% ...... 4
2% ...... 5
0% ...... Over 5
</TABLE>
For Contracts issued with an appropriate endorsement, if the Owner is confined
to a nursing care facility (as defined in the endorsement) for thirty (30)
consecutive days or longer, Western Reserve will also waive the Withdrawal
Charge on partial withdrawals or Surrenders as follows. Such confinement must
begin after the Contract Date. Western Reserve must receive satisfactory written
evidence of such confinement within two (2) months after the
10
<PAGE>
confinement ends. Western Reserve will waive the Withdrawal Charge under the
endorsement only for Surrenders and partial withdrawals made during such
confinement or within two (2) months after the confinement ends. The endorsement
is not available in all states.
The Withdrawal Charge is imposed to enable Western Reserve to recover sales
expenses it advances, including compensation to broker-dealers, the cost of
printing prospectuses and sales literature and any advertising costs. The
Withdrawal Charge is deducted from the Annuity Value by cancelling the number of
units equal to the charge. The amount of the Withdrawal Charge will be
determined as of the date the partial withdrawal or Surrender payment is
processed. In the event of a partial withdrawal, the Owner will receive the full
amount requested and an amount equal to the Withdrawal Charge will also be
withdrawn in order for the Owner to receive the amount requested. For example,
if the Owner requests a distribution in the amount of $100 during the second
Contract Year (such distribution is deemed to be made from the initial Purchase
Payment) and the Withdrawal Charge is to be imposed on the full amount, the
Owner would receive $100, the total Annuity Value partially withdrawn would be
$106.38, and the Withdrawal Charge would be $6.38 (which is 6% of $106.38). Any
partial withdrawal or Surrender may be subject to tax and the Owner should,
therefore, consult with his or her tax advisor before requesting any partial
withdrawal or Surrender. (See "FEDERAL TAX MATTERS-Taxation of Annuities" on
page 21 and "-Qualified Plans" on page 22.)
The Withdrawal Charge may be reduced when sales of Contracts are made to a group
of directors, officers and employees of the same employer (including directors,
officers and employees of Western Reserve and its affiliates), as outlined in
the following paragraph. The amount of reduction will depend on factors such as
the size of the group, total Purchase Payments, and other relevant factors that
might tend to reduce expenses incurred in connection with such sales.
The Withdrawal Charge may be eliminated for the sale of the Contract to: (a)
current and retired directors, officers, full-time employees and agents of
Western Reserve and its affiliates; (b) current and retired directors, officers,
fulltime employees and registered representatives of ISI an affiliate of Western
Reserve, and any broker-dealer which has a sales agreement with ISI; (c) any
Trust, pension, profit-sharing or other employee benefit plan of any of the
foregoing persons or entities; (d) current and retired directors, officers and
full-time employees of WRL Series Fund, Inc. and any IDEX mutual fund, and any
investment adviser or investment sub-adviser thereto; and (e) any member of a
family of any of the foregoing (E.G., spouse, child, sibling, parent or
parent-in-law). Western Reserve reserves the right to modify or terminate this
arrangement at any time.
TRANSFER CHARGE
After twelve free transfers of Annuity Value among the Sub-Accounts during any
one Contract Year, each additional transfer will be subject to a Transfer Charge
of $10, which will be deducted from the amount transferred to compensate Western
Reserve for the costs of the transfer. All transfers made on any one day will be
considered a single transfer, with any transfer charge allocated equally. The
Transfer Charge will not be increased. Western Reserve may, at any time, revoke
or modify this transfer privilege.
MORTALITY AND EXPENSE RISK CHARGE
During the Accumulation Period, Western Reserve will deduct a daily Mortality
and Expense Risk Charge from the Series Account at an annual rate of 1.10% of
the average daily net assets of the Series Account. After the Maturity Date,
Western Reserve will deduct a daily Mortality and Expense Risk Charge from the
Series Account at an annual rate of 1.25% of the average daily net assets of the
Series Account. Western Reserve assumes two mortality risks: (1 ) that the
annuity rates under the Contracts cannot be changed to the detriment of Owners
even if Annuitants live longer than projected; and (2) Western Reserve may be
obligated to pay a death benefit claim in excess of a Contract's Cash Value.
(See "ANNUITY PROVISIONS-Improved Annuity Rates" on page 20 and
"ACCUMULATION PROVISIONS-Death Benefits during the Accumulation Period" on
page 17.) Western Reserve also assumes an expense risk through its guarantee not
to increase the charges for issuing and administering the Contracts and the
Series Account, regardless of its actual expenses.
This charge is deducted from the Series Account both during the Accumulation
Period and after the Maturity Date. The Mortality and Expense Risk Charge will
not be assessed against either the Fixed Account Value or monies that have been
applied to purchase a Fixed Account annuity option.
ANNUAL CONTRACT CHARGE
On each Anniversary through the Maturity Date, Western Reserve will deduct an
Annual Contract Charge of $30 as partial compensation for the cost of providing
administrative services under the Contracts. The Annual Contract Charge is
deducted from each Sub-Account and the Fixed Account in proportion to the value
each bears to the Annuity Value. If the Annuity Value is surrendered other than
on an Anniversary, a full $30 fee will be deducted.
Western Reserve may reduce the amount of the Annual Contract Charge when sales
of Contracts are made to a group of employees of the same employer, employer
group or similar party, under an arrangement which results in a savings in
administrative service expenses. Even if administrative expenses of the Account
increase, Western Reserve guarantees that it will not increase the amount of the
Annual Contract Charge.
ADMINISTRATIVE CHARGE
Western Reserve deducts a daily Administrative Charge from values remaining in
the Series Account at an annual rate of 0.15% of the average daily net assets of
the Series Account for the cost of providing administrative services under the
Contracts and the Account. This charge is deducted from the Series Account both
during the Accumulation Period and after the Maturity Date. Even if
administrative expenses of the Contract and the Account increase, Western
Reserve guarantees that it will not increase the amount of the Administrative
Charge.
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<PAGE>
PREMIUM TAXES
Certain states and other governmental entities may impose a premium tax, ranging
up to 3.5% of Purchase Payments. If applicable, and if Western Reserve has
incurred or reasonably expects to incur expenses in respect of premium taxes,
the tax will be deducted, either from the Purchase Payment when received, from
amounts partially withdrawn or surrendered, from death benefit proceeds, or from
the amount applied to effect an annuity at the time annuity payments commence.
Western Reserve will deduct any applicable premium taxes when it incurs them,
but reserves the right to defer deduction to a later date as long as such
deferral is equitable to Owners.
Premium tax rates are subject to change by the respective state legislatures,
administrative interpretations, or judicial acts. The amount of any such tax
will depend on, among other things, the Owner's state of residence, the status
of Western Reserve in that state, and the insurance tax laws of such state.
DEDUCTIONS FOR OTHER TAXES
Currently, no charge is made to the Series Account for Federal income taxes
attributable to the Series Account. Western Reserve may, however, make such a
charge in the future subject to obtaining any necessary regulatory approvals.
Charges for any other applicable taxes including any tax or other economic
burden resulting from the application of tax laws that Western Reserve
determines to be properly attributable to the Account may also be made. (See
"FEDERAL TAX MATTERS-Company Tax Status" on page 21.)
EXPENSES OF THE FUND
Because the Series Account purchases shares of the Portfolios of the Fund, the
net assets of the Series Account will reflect the investment management fee and
other expenses incurred by the Portfolios of the Fund, as described in the
Prospectus for the Fund.
Effective January 1, 1997, the Fund adopted a Plan of Distribution pursuant to
Rule 12b-1 under the 1940 Act ("Distribution Plan") and pursuant to the
Plan, has entered into a Distribution Agreement with ISI, principal underwriter
for the Fund.
Under the Distribution Plan, the Fund, on behalf of the Portfolios, is
authorized to pay to various service providers, as direct payment for expenses
incurred in connection with the distribution of a Portfolio's shares, amounts
equal to actual expenses associated with distributing a Portfolio's shares, up
to a maximum rate of 0.15% (fifteen one-hundredths of one percent) on an
annualized basis of the average daily net assets. This fee is measured and
accrued daily and paid monthly. ISI has determined that it will not seek payment
by the Fund of distribution expenses with respect to any Portfolio during the
fiscal year ending December 31, 1997. Prior to ISI's seeking reimbursement,
Policyowners will be notified in advance.
THE CONTRACT
ACCUMULATION PROVISIONS
PURCHASE PAYMENTS
Owners may make Purchase Payments as frequently as they elect. Purchase Payments
after the initial Purchase Payment are payable at Western Reserve's
Administrative Office. The initial Purchase Payment generally must accompany the
application, and for Non-Qualified Contracts must be at least $5,000; however, a
minimum initial Purchase Payment of $1,000 is allowed provided the application
reflects anticipated additional monthly periodic Purchase Payments of at least
$100, via electronic funds transfer from the Owner's bank account. For IRAs the
minimum initial Purchase Payment is $1,000 and for Qualified Contracts other
than IRAs the minimum initial Purchase Payment is $50. For all Contracts,
subsequent Purchase Payments are not required but may be made at any time and in
any amount provided that each payment is for a minimum of $50, unless Western
Reserve consents to a smaller amount and further provided that total Purchase
Payments in any Contract Year do not exceed $1,000,000, unless Western Reserve
consents to a larger amount.
As an accommodation to Owners, Western Reserve will accept transmittal of both
initial and subsequent Purchase Payments of at least $1,000 by wire transfer.
For initial Purchase Payments, the wire transfer must be accompanied by a
simultaneous telephone facsimile transmission of an application ("FAXED
Application"). Initial Purchase Payments accepted via wire transfer with FAXED
Application will be invested at the value next determined following receipt.
Initial Purchase Payments made by wire transfer not accompanied by simultaneous
FAXED Application, or accompanied by an incomplete FAXED application, will be
retained for a period up to five business days while Western Reserve attempts to
obtain the FAXED Application or complete the essential information required to
establish the Contract and allocate the initial Purchase Payment at the
Accumulation Unit Value which will be determined after receipt of the FAXED
Application or information necessary to complete the application. If Western
Reserve cannot obtain the FAXED Application or essential information within five
business days, Western Reserve will return the initial Purchase Payment to the
applicant, unless the applicant consents to allow Western Reserve to retain the
initial Purchase Payment until the required FAXED Application or essential
information is received. When the FAXED Application contains all information
necessary to issue the Contract and allocate the Net Purchase Payment, but the
FAXED Application has not been signed by the Owner, Western Reserve will issue
the Contract and allocate the Net Purchase Payment as indicated in the FAXED
Application. At the same time, Western Reserve will also electronically prepare
a new application form, containing the same information received on the FAXED
Application, for delivery with the Contract to the Owner. Upon delivery, the
Owner will sign the electronically prepared application, which will be retained
by Western Reserve.
In the event the original application with original signature is later received
and the allocation instructions in that application are, for any reason,
inconsistent with those previously designated on the FAXED Application, the
initial Purchase Payment will be reallocated in accordance with the allocation
instructions in the application with original signature at the Accumulation Unit
Value next determined after receipt of such application.
12
<PAGE>
Owners wishing to make payments via bank wire should instruct their banks to
wire Federal Funds as follows to:
Barnett Bank of Pinellas County
ABA # 063000047
For credit to: Western Reserve Life
Account #: 1263627596
Owner's Name:
Contract Number:
Attention:Annuity Accounting
Fax Number: (813) 588-1620
Western Reserve may reject any application or Purchase Payment for any reason
permitted by law.
NET PURCHASE PAYMENTS
The Net Purchase Payment is equal to the Purchase Payment less any premium
taxes. (See "Premium Taxes," page 14.) Initial and subsequent Net Purchase
Payments are allocated according to the Owner's direction among the
Sub-Accounts of the Series Account, to the Fixed Account, or to a combination of
both. Western Reserve does not currently require that allocation of Net Purchase
Payments to an Account meet a minimum percentage. Western Reserve does reserve
the right to limit allocation of Net Purchase Payments to any Account to no less
than 10% of each Net Purchase Payment. No fractional percentages are permitted.
(For Contracts issued in the States of New Jersey and Washington, the Fixed
Account is not available for allocation of Net Purchase Payments.) The Owner, or
the registered representative/agent of record for the Contract upon instructions
from the Owner, may change the allocation of subsequent Purchase Payments at any
time upon written notice to Western Reserve, or by telephone by calling Western
Reserve's toll-free number, 1-800-851-9777. Western Reserve will employ the
same procedures to confirm that such telephone instructions are genuine as it
employs regarding transfers among Sub-Accounts and the Fixed Account by
telephone. Western Reserve reserves the right to limit such change to once each
Contract Year.
Upon allocation to the Series Account, Net Purchase Payments are converted into
units of the appropriate Sub-Account based upon the Accumulation Unit Value in
that Sub-Account on or following the Valuation Date on which the Purchase
Payment is received at Western Reserve's Administrative Office. (See
"Accumulation Unit Value" on this page.) If the Contract application and other
information necessary for processing the request to apply the Purchase Payment
(collectively "application") are complete upon receipt, Western Reserve will
accept the application and apply the initial Net Purchase Payment within two
business days of receipt. If it is incomplete, Western Reserve will attempt to
have it properly completed within five business days of receipt, and if unable
to do so, Western Reserve will inform the prospective purchaser of the reasons
that the application is incomplete and request that the prospective purchaser
consent to Western Reserve retaining the Purchase Payment until the application
is properly completed. If such consent is not obtained, Western Reserve will
immediately return the entire Purchase Payment. Once the application is
complete, Western Reserve will accept it and apply the initial Net Purchase
Payment within two business days.
ACCUMULATION UNIT VALUE
The Accumulation Unit Value will vary from one Valuation Period to the next
depending on the investment results experienced by each Sub-Account. When the
Sub-Accounts were first established, the initial Accumulation Unit Value for
each Sub-Account was arbitrarily set at $10. The Accumulation Unit Value for
each Sub-Account at the end of a Valuation Period is the result of:
1. The total value of the assets held in the Sub-Account. This value is
determined by multiplying the number of shares of the designated Fund
Portfolio owned by the Sub-Account times the Portfolio's net asset value
per share; minus
2. The accrued daily percentage for the Administrative Charge and Mortality and
Expense Risk Charge multiplied by the net assets of the Sub-Account; minus
3. The accrued amount of reserve for any taxes that are determined by Western
Reserve to have resulted from the investment operations of the Sub-Account;
divided by
4. The number of outstanding units in the Sub-Account.
The Mortality and Expense Risk Charge is deducted at an annual rate of 1.10% of
net assets for each day in the Valuation Period and compensates Western Reserve
for certain mortality and expense risks. The Administrative Charge is deducted
at an annual rate of 0.15% of net assets for each day in the Valuation Period
and compensates Western Reserve for certain administrative expenses. (See
"CHARGES AND DEDUCTIONS-Mortality and Expense Risk Charge" on page 11 and
"-Administrative Charge" on page 11.) The Accumulation Unit Value may increase,
decrease, or remain the same from Valuation Period to Valuation Period.
COMPUTING SUB-ACCOUNT VALUE
At the end of any Valuation Period, a Sub-Account's value is equal to the
number of units that the Contract has in the Sub-Account, multiplied by the
Accumulation Unit Value of that Sub-Account.
The number of units that a Contract has in each Sub-Account is equal to:
1. The initial units purchased on the Contract Date; plus
2. Units purchased at the time additional Net Purchase Payments are allocated to
the Sub-Account; plus
3. Units purchased through transfers from another Sub-Account or the Fixed
Account; minus
4. Any units that are redeemed to pay for partial withdrawals; minus
5. Any units that are redeemed as part of a transfer to another Sub-Account or
the Fixed Account; minus
6. Any units that are redeemed to pay the Annual Contract Charge, any premium
taxes and any transfer charges.
PORTFOLIO SHARE NET ASSET VALUE. The net asset value per share of shares of the
Fund is determined, once daily, as of the close of the regular session of
business on the New York Stock Exchange ("Exchange") (usually 4:00 p.m.,
Eastern time), on each day the Exchange is open.
13
<PAGE>
TRANSFERS TO AND FROM, AND AMONG ALLOCATION OPTIONS
Before the Maturity Date, the Owner may, at any time, transfer amounts among
Sub-Accounts or from Sub-Accounts to the Fixed Account. (For Contracts issued
in the States of New Jersey and Washington, the Fixed Account is not available
to receive Annuity Value transferred from the Sub-Accounts.) Transfers may also
be made from the Fixed Account to the Sub-Accounts, subject to certain
restrictions. (See "THE FIXED ACCOUNT-Allocations, Transfers and Partial
Withdrawals" on page 25.) Transfers are not available if the Owner has elected
Dollar Cost Averaging, the Asset Rebalancing Program or Systematic Partial
Withdrawals.
The amount available for transfer from any Sub-Account or the Fixed Account is
determined at the end of the Valuation Period during which the transfer request
is received at Western Reserve's Administrative Office. As explained in the
previous paragraph, the net asset value for each share of the corresponding
Portfolio of any Sub-Account is determined, once daily, as of the close of the
regular business session of the Exchange (usually 4:00 p.m., Eastern time),
which coincides with the end of each Valuation Period. Therefore, any transfer
request received after 4:00 p.m., Eastern time, on any day the Exchange is open
for business will be processed utilizing the net asset value for each share of
the applicable Portfolio determined as of 4:00 p.m., Eastern time, on the next
day the Exchange is open for business.
The amount available for transfer from the Fixed Account will be determined in
the same manner. The registered representative/agent of record for the Contract
may, upon instructions from the Owner, make telephone transfers upon request
without the necessity for the Owner to have previously authorized telephone
transfers in writing. Written requests must be in a form acceptable to Western
Reserve. If, for any reason, an Owner does not want the ability to make
transfers by telephone, the Owner should provide written notice to Western
Reserve. All telephone transfers should be made by calling Western Reserve at
the toll-free number 1-800-851-9777.
Western Reserve will not be liable for complying with telephone instructions it
reasonably believes to be authentic, nor for any loss, damage, costs or expense
in acting on such telephone instructions, and Owners will bear the risk of any
such loss. Western Reserve will employ reasonable procedures to confirm that
telephone instructions are genuine. If Western Reserve does not employ such
procedures, it may be liable for losses due to unauthorized or fraudulent
instructions. Such procedures may include, among others, requiring forms of
personal identification prior to acting upon such telephone instructions,
providing written confirmation of such transactions to Owners and/or tape
recording of telephone transfer request instructions received from Owners.
Western Reserve may, at any time, revoke or modify the transfer privilege.
Western Reserve ordinarily will effect transfers and determine all values in
connection with transfers at the end of the Valuation Period during which the
transfer request is received at Western Reserve's Administrative Office. Western
Reserve currently imposes a $10 charge for each transfer after the first twelve
transfers during any Contract Year. (See "CHARGES AND DEDUCTIONS-Transfer
Charge" on page 11.)
DOLLAR COST AVERAGING
The Owner may direct Western Reserve to automatically transfer specified amounts
from the Money Market Sub-Account, the Bond Sub-Account, the Fixed Account or
any combination of these Accounts on a monthly basis to any other Sub-Account.
This service is intended to allow the Owner to utilize "Dollar Cost Averaging,"
a long-term investment method which provides for regular, level investments over
time. Western Reserve makes no guarantees that Dollar Cost Averaging will result
in a profit or protect against loss.
To qualify for Dollar Cost Averaging, a minimum of $10,000 must be in each
Account from which transfers will be made and at least $1,000, in the aggregate,
must be transferred each month, unless Western Reserve consents to a smaller
amount. To further qualify for Dollar Cost Averaging from the Fixed Account, no
more than one-tenth (1/10) of the amount in the Fixed Account at the
commencement of Dollar Cost Averaging can be transferred each month. Other types
of transfers from the Fixed Account may also be subject to other certain
restrictions. (See "THE FIXED ACCOUNT-Allocations, Transfers and Partial
Withdrawals" on page 25.)
A written election of this service, on a form provided by Western Reserve, must
be completed by the Owner in order to begin transfers. The first transfer will
occur during the month which follows receipt of the form, providing the form is
received by the 25th day of the month. Once elected, transfers from the Money
Market or Bond Sub-Accounts or the Fixed Account will be processed monthly
until the entire value of each Account from which transfers are made is
completely depleted or the Owner instructs Western Reserve in writing to cancel
the monthly transfers. For example, if $15,000 was allocated to the Money Market
Sub-Account and $10,000 was allocated to the Bond Sub-Account and transfers of
$500 are made each month from each of these Sub-Accounts to the Growth
Sub-Account, transfers of $500 per month would continue to be made from the
Money Market Sub-Account even though transfers from the Bond Sub-Account had
ceased as a result of depletion of value.
There is no charge for Dollar Cost Averaging. However, each transfer which
occurs under the Dollar Cost Averaging service will be counted towards the
twelve free transfers allowed during each Contract Year. (See "CHARGES AND
DEDUCTIONS-Transfer Charge" on page 11.) Western Reserve reserves the right
to discontinue offering Dollar Cost Averaging upon 30 days' written notice to
Owners. Dollar Cost Averaging is not available if the Owner has elected the
Asset Rebalancing Program or Systematic Partial Withdrawals.
ASSET REBALANCING PROGRAM
Western Reserve offers a program under which an Owner may authorize Western
Reserve to transfer automatically Annuity Value each quarter to maintain a
particular percentage allocation among the Sub-Accounts. Annuity Value allocated
to the Fixed Account may not be included in the Asset Rebalancing Program. The
Annuity Value allocated to each Sub-Account will grow or decline in
14
<PAGE>
value at different rates. The Asset Rebalancing Program automatically
reallocates the Annuity Value in the Sub-Accounts at the end of each period to
match the Contract's currently effective Net Purchase Payment allocation
schedule. The Asset Rebalancing Program is intended to transfer Annuity Value
from those Sub-Accounts that have increased in value to those Sub-Accounts
that have declined in value. Over time, this method of investing may help an
Owner buy low and sell high. This investment method does not guarantee gains,
nor does it assure that any Sub-Account will not have losses.
To qualify for Asset Rebalancing, a minimum Annuity Value of $10,000 for an
existing Contract, or a minimum initial purchase payment of $10,000 for a new
Contract, is required, unless Western Reserve consents to a smaller amount. To
participate in the Asset Rebalancing Program, a properly completed Asset
Rebalancing Request Form must be received by Western Reserve at its
Administrative Office. An Asset Rebalancing Request Form is available upon
request.
Owners may elect rebalancing to occur on each quarterly, semi-annual or annual
anniversary of the Contract Date. Following receipt of the Asset Rebalancing
Request Form, Western Reserve will effect the initial rebalancing of Annuity
Value on the next such anniversary, in accordance with the Contract's current
Net Purchase Payment allocation schedule. The amounts transferred will be
credited at the Accumulation Unit Value as of the end of the Valuation Dates on
which the transfers are made. If a day on which rebalancing would ordinarily
occur falls on a day on which the New York Stock Exchange is closed, rebalancing
will occur on the next day the New York Stock Exchange is open. There is no
charge for the Asset Rebalancing Program. However, each reallocation which
occurs under the Asset Rebalancing Program will be counted towards the twelve
free transfers allowed during each Contract Year. (See "CHARGES AND
DEDUCTIONS-Transfer Charge" on page 11.)
An Owner may terminate participation at any time in the Asset Rebalancing
Program by verbal or written request to Western Reserve's Administrative
Office. Participation in the Asset Rebalancing Program will terminate
automatically if any transfer is made to, or from, any Sub-Account, other than
on account of a scheduled rebalancing. If an Owner wishes to resume the Asset
Rebalancing Program after it has been canceled, a new Asset Rebalancing Request
Form must be completed and sent to Western Reserve's Administrative Office.
Owners may start and stop participation in the Asset Rebalancing Program at any
time; however, Western Reserve reserves the right to restrict entry into the
Asset Rebalancing Program to once per Contract Year. The Asset Rebalancing
Program is available only during the Accumulation Period, and is not available
if the Owner has elected Dollar Cost Averaging or Systematic Partial
Withdrawals.
Western Reserve may discontinue, modify, or suspend the Asset Rebalancing
Program at any time.
PARTIAL WITHDRAWALS AND SURRENDERS
1. PARTIAL WITHDRAWALS. Prior to the earlier of the Maturity Date or the death
of the Annuitant (when no contingent Annuitant has been named), the Owner may
partially withdraw a portion of the Series Account Value upon written request,
complete with all necessary information, to Western Reserve's Administrative
Office. Unless Western Reserve consents, no partial withdrawal is permitted if
the Cash Value would be reduced below $10,000. No partial withdrawals from the
Fixed Account may be made without the consent of Western Reserve. (See "THE
FIXED ACCOUNT-Allocations, Transfers and Partial Withdrawals" on page 25.) All
requests for partial withdrawals are processed at the Accumulation Unit Value
for each Sub-Account next computed after receipt and acceptance of the request
by Western Reserve at its Administrative Office. Western Reserve will cancel
units equal to the amount requested from each Sub-Account, and an amount equal
to the Withdrawal Charge and any premium tax will also be withdrawn in order for
the Owner to receive the full amount requested. (See "CHARGES AND
DEDUCTIONS-Withdrawal Charge" on page 10 and "-Premium Taxes" on page 12.) The
Sub-Accounts for a partial withdrawal may be specified and the amount requested
to be withdrawn from each specified Sub-Account may not exceed the value of that
Sub-Account. If not specified, the amount requested will be withdrawn on a pro
rata basis from each Sub-Account.
2. SYSTEMATIC PARTIAL WITHDRAWALS. The Owner may elect in writing on a form
provided by Western Reserve to partially withdraw from the Series Account up to
10% of the Cash Value annually (10% of the initial Purchase Payment if elected
at time of application for a Contract), in equal monthly payments
("Systematic Partial Withdrawals") of at least $200 per month. The first
withdrawal will occur during the month which follows receipt of the form,
providing the form is received by the 25th day of the month. If Systematic
Partial Withdrawals are elected at the time of application for a Contract, a
minimum initial Purchase Payment of at least $25,000 must accompany the
application, unless Western Reserve consents to a smaller amount. A subsequent
election is subject to the Contract then having a minimum of $25,000 of Cash
Value, unless Western Reserve consents to a smaller amount. Western Reserve will
pay the Systematic Partial Withdrawal amount requested and cancel units equal to
the amount withdrawn from the Sub-Accounts in the same manner as the current Net
Purchase Payment allocation instructions, except no Systematic Partial
Withdrawals are permitted from the Fixed Account. The amount to be partially
withdrawn from each Sub-Account may not exceed the Cash Value of the
Sub-Account. Western Reserve will not process a Systematic Partial Withdrawal if
the Cash Value for the entire Contract would be reduced below $10,000.
Generally, under a Non-Qualified Contract, Systematic Partial Withdrawals, like
other distributions prior to the Maturity Date, are first treated as taxable
income to the extent that the Contract Value immediately before a withdrawal
exceeds the "investment in the contract" at that time. Any additional
amount withdrawn is not taxable. Further, under a Non-Qualified Contract, a 10%
penalty tax will generally be imposed on the taxable portion of a Systematic
Partial Withdrawal made prior to the Owner's age 59-1/2, unless certain
exceptions apply. The Owner should, therefore, consult with his or her tax
advisor before
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requesting any Systematic Partial Withdrawals. (See "FEDERAL TAX
MATTERS-Taxation of Annuities" on pages 21-22.)
Systematic Partial Withdrawals are not available if the Owner has elected Dollar
Cost Averaging or the Asset Rebalancing Program. Systematic Partial Withdrawals
may be discontinued by the Owner at any time by notifying Western Reserve in
writing. Western Reserve reserves the right to discontinue offering Systematic
Partial Withdrawals upon 30 days' written notice to Owners.
3. SURRENDERS. The Owner may completely surrender the Contract at any time prior
to the Maturity Date. All requests for Surrender are processed at the
Accumulation Unit Value for each Sub-Account next computed after receipt and
acceptance of the Surrender request by Western Reserve at its Administrative
Office. Western Reserve will deduct from the Surrender proceeds the $30 Annual
Contract Charge, any applicable premium taxes, and any applicable Withdrawal
Charge.
4. PARTIAL WITHDRAWALS AND SURRENDERS. The amount of any partial withdrawal or
Surrender will be paid promptly, and in any event within seven days of receipt
of the request, complete with all necessary information at Western Reserve's
Administrative Office, except that Western Reserve reserves the right to defer
the right of partial withdrawal or Surrender under certain circumstances. (See
"OTHER MATTERS RELATING TO THE CONTRACT-Contract Payments" on page 20.) Under
Non-Qualified Contracts, Western Reserve will withhold from each partial
withdrawal, systematic partial withdrawal or Surrender for tax purposes the
minimum amount required by law, unless the Owner affirmatively elects, before
payments begin, to have either nothing withheld or a different amount withheld.
When Western Reserve incurs extraordinary charges, such as wire transfers or
overnight mail expenses, for expediting delivery of a partial withdrawal or
Surrender payment to a Contract Owner, Western Reserve will deduct such charges
from the payment. The current charge for a wire transfer is $15. The current
charge for overnight delivery is $20. For the protection of Owners, all requests
for partial withdrawals or Surrenders of more than $100,000, or where the
partial withdrawal or surrender proceeds are to be sent to an address other than
the address of record, will require a signature guarantee. All required
guarantees of signatures must be made by a national or state bank, a member firm
of a national stock exchange or any other institution which is an eligible
guarantor institution as defined by rules and regulations of the SEC. If the
Owner is a corporation, partnership, trust or fiduciary, evidence of the
authority of the person seeking redemption is required before the request for
withdrawal is accepted, including withdrawals under $100,000. For additional
information, Policyowners may call Western Reserve at (800) 851-9777. Partial
withdrawals and Surrenders may be subject to tax including a penalty tax. (See
"FEDERAL TAX MATTERS-Taxation of Annuities" on pages 21-22.) For certain
Qualified Contracts, a partial withdrawal may require the consent of the Owner's
spouse under the Code and the regulations promulgated thereunder by the Treasury
Department (the "Treasury Regulations"). (See "FEDERAL TAX MATTERS-Oualified
Plans" on pages 22-23.) For Qualified Contracts issued under Code Section 403(b)
and Contracts issued under the Texas Optional Retirement Program, certain
restrictions will apply. (See "FEDERAL TAX MATTERS-Qualified Plans" on pages
22-23.)
CONTRACT LOANS FOR 401(A), 401(K), AND 403(B) CONTRACTS
After the ten day Right to Examine Contract Period and during the Accumulation
Period, (1) Owners of Contracts used in connection with a Tax Sheltered Annuity
Plan ("TSA Plan") under Section 403(b) of the Code, if the TSA Plan is not
subject to the Employee Retirement Income Security Act of 1974, and (2) Owners
of Contracts purchased by a pension, profit-sharing, or other similar plan
qualified under Section 401(a) of the Code (a "401 Plan"), including a
Section 401(k) plan, where a plan trustee is the Owner, may elect a Contract
loan endorsement under which the Owner can receive Contract loans. The
availability of Contract loans will also be governed by the provisions of the
TSA Plans or 401 Plans involved. An Owner of a Contract used in connection with
a TSA Plan or 401 Plan may be subject to income tax or tax penalties if loans
from the plan are not repaid in accordance with applicable provisions of the
Code. In addition, Internal Revenue Service authorities suggest that a Contract
loan may, at least in certain circumstances, result in adverse tax consequences
for the TSA Plan or 401 Plan. Accordingly, a competent tax advisor should be
consulted before a Contract loan is requested.
If the Contract loan endorsement is available, the Owner can borrow against the
Contract an amount which may not exceed the lesser of (1) 50% of the Annuity
Value or (2) $50,000 reduced by the highest outstanding loan balance during the
1-year period ending on the day before the loan date (determined below).
However, if the Annuity Value is less than $20,000, the Owner may borrow against
the Contract the lesser of (1) 80% of the Annuity Value or (2) $10,000. In all
events, the minimum amount that can be borrowed is $1,000. The Owner has the
sole responsibility for requesting loans and making loan repayments that comply
with applicable tax requirements.
When a loan is made, an amount equal to the loan will be withdrawn from the
Sub-Accounts specified by the Owner and transferred to the loan reserve. The
loan reserve is part of the Fixed Account used as collateral for any Contract
loan. If no Sub-Accounts are specified, the loan will be made from each
Sub-Account in accordance with the Owner's current Purchase Payment allocation.
Amounts transferred to the loan reserve do not participate in the investment
experience of the Sub-Accounts from which they were withdrawn.
All loan requests are processed at the Accumulation Unit Value for each
Sub-Account next computed after receipt and acceptance of the loan request by
Western Reserve at its Administrative Office. The loan date is the date Western
Reserve processes the loan request. Under its current procedures, Western
Reserve does not charge a fee to cover loan processing and expenses associated
with establishment and administration of the loan reserve. However, Western
Reserve reserves the right to charge such a fee or change it from time to time.
The Contract will be the sole security for the loan. Western Reserve
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reserves the right to limit the number of loans an Owner may make during a
Contract Year.
On each Contract Anniversary, Western Reserve will compare the amount of the
outstanding loan to the amount in the loan reserve. Western Reserve will also
make this comparison whenever the Owner repays all or part of the loan. At each
such time, if the amount of the outstanding loan (plus any unpaid interest)
exceeds the amount in the loan reserve, Western Reserve will withdraw the
difference from the Contract's Sub-Accounts and transfer it to the loan
reserve, in the same fashion as when a loan is made. If the amount in the loan
reserve exceeds the amount of the outstanding loan, Western Reserve will
withdraw the difference from the loan reserve and transfer it to the
Sub-Accounts in accordance with the Owner's current payment allocation.
However, Western Reserve reserves the right to require the transfer to the Fixed
Account if the amount was transferred from the Fixed Account to establish the
loan.
If the Contract loan at any time exceeds the Cash Value of the Contract, Western
Reserve will mail a notice to the last known address of the Owner and any
assignee of record. If the excess amount is not paid within 31 days after
mailing of the notice, the Contract will terminate without value.
LOAN INTEREST. Interest on any loan will be at the Contract loan annual rate of
6% in arrears unless, under a 401 Plan, a higher rate is requested by the Owner
in the loan application. (See "Repayment of Loans," below.)
Amounts in the loan reserve will earn interest at a minimum guaranteed effective
annual interest rate of 4% per year. Western Reserve may declare from time to
time higher current interest rates. Different current interest rates may be
applied to the Fixed Account attributable to the loan reserve than to the rest
of the Fixed Account.
REPAYMENT OF LOANS. Principal and interest must be repaid in substantially level
quarterly or monthly payments over a 5-year period or, if the loan is used to
acquire the Owner's principal residence, a 10, 15, or 20-year period, but such
an extended period cannot go beyond the year the Owner attains age 70-1/2. If a
loan installment repayment is not received within 31 days from the installment's
original due date, a deemed distribution of the entire amount of the outstanding
loan principal, interest due, and any applicable charges under the Contract
including any Withdrawal Charge, will take place. Under a Qualified Plan, this
distribution may be subject to income tax and a penalty tax, and may cause the
Contract to fail to qualify under the Code. (See "FEDERAL TAX MATTERS-Qualified
Plans," page 22.).
While the Contract is In Force and during the Accumulation Period, any loan may
be repaid in full. IF NOT REPAID, LOANS WILL AUTOMATICALLY REDUCE THE AMOUNT OF
ANY DEATH BENEFIT PROCEEDS, THE AMOUNT PAYABLE UPON A PARTIAL WITHDRAWAL OR
SURRENDER OF THE CONTRACT AND THE AMOUNT APPLIED ON THE MATURITY DATE TO PROVIDE
ANNUITY PAYMENTS.
DEATH BENEFITS DURING THE ACCUMULATION PERIOD
1. GENERAL
If the Annuitant dies during the Accumulation Period and the Owner is a natural
person other than the Annuitant, the Owner will automatically become the new
Annuitant, the Contract will continue In Force and no death benefit will be
payable to the Beneficiary. If the Annuitant dies during the Accumulation Period
and an Owner is either the same individual as the Annuitant or other than a
natural person, Western Reserve will pay the death benefit proceeds to the
Beneficiary in a lump sum upon receipt of due proof of death, unless a written
Alternative Election, as described below, is made.
2. AMOUNT OF DEATH BENEFIT PROCEEDS
IF THE ANNUITANT DIES DURING THE ACCUMULATION PERIOD AND PRIOR TO THE SIXTH
CONTRACT YEAR and an Owner is either the same person as the Annuitant or other
than a natural person, the death benefit proceeds, if payable, will be the
greater of: (i) the Annuity Value as of the date Western Reserve receives due
proof of death and a written election as to the method of payment, as described
above; or (ii) the excess of (a) the amount of Purchase Payments paid less (b)
any amounts partially withdrawn from the Contract to pay for partial
withdrawals, increased by 5% on each Contract Anniversary prior to the Owner's
age 80 (Annuitant's age 80 if the Owner is not a natural person), up to an
amount not to exceed 200% of the Purchase Payments less partial withdrawals.
IF THE ANNUITANT DIES DURING THE ACCUMULATION PERIOD AND AFTER THE FIFTH
CONTRACT YEAR and an Owner is either the same person as the Annuitant or other
than a natural person, the death benefit proceeds, if payable, will be the
greatest of: (i) the Annuity Value as of the date Western Reserve receives due
proof of death and a written election as to the method of payment, as described
above; or (ii) the excess of (a) the amount of Purchase Payments paid less (b)
any amounts partially withdrawn from the Contract to pay for partial
withdrawals, increased by 5% on each Contract Anniversary prior to the Owner's
age 80 (Annuitant's age 80 if the Owner is not a natural person), up to an
amount not to exceed 200% of the Purchase Payments less partial withdrawals; or
(iii) the Annuity Value as of the fifth Contract Anniversary, less any amounts
partially withdrawn from the Contract after the fifth Contract Year to pay for
partial withdrawals. In certain states, the calculation of death benefit
proceeds under item (iii) may vary. The Contract should be consulted for
details.
The Insurance Departments of Missouri, New Jersey, Pennsylvania, South Carolina
and Washington have disapproved for Contracts issued in these States that
portion of item (ii) of the death benefit provision described in the two
preceding paragraphs, which increases the death benefit payable by 5% on each
Contract Anniversary. Therefore, for Contracts issued in these States, when the
amount of death benefit payable under the Contract is the excess of (a) the
amount of Purchase Payments paid less (b) any amounts partially withdrawn from
the Contract to pay for partial withdrawals, such amount of death benefit will
not be increased by 5% on each Contract Anniversary.
3. ALTERNATIVE ELECTIONS
If the Beneficiary is entitled to receive the death benefit proceeds as in 2.
above, and is the spouse of the deceased Annuitant, then the spousal Beneficiary
may elect to become the new Owner and Annuitant and keep the Contract In Force
in lieu of receiving the death benefit proceeds.
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If the Beneficiary is not the spouse of the deceased Annuitant and is entitled
to receive the death benefit proceeds, the Beneficiary may elect, in lieu of a
lump sum payment, one of the following options that provide for complete
distribution of the death benefit proceeds and termination of the Contract: (i)
within five years of the date of such Annuitant's death; (ii) over the lifetime
of the Beneficiary; or (iii) over a period that does not exceed the life
expectancy of such Beneficiary, as defined by the Code and the Treasury
Regulations. Options (ii) and (iii) may be elected only if the Beneficiary is a
natural person and payments start within one year of the date of the
Annuitant's death. (For a more detailed explanation of these requirements, see
"FEDERAL TAX MATTERS-Additional Considerations" on page 23.) Multiple
Beneficiaries may choose individually among any of the three options.
Under options (i) and (iii) above, the Annuity Value as of the date Western
Reserve receives due proof of death and a written election as to the method of
payment, if any, will be adjusted to equal the death benefit proceeds, as
described below, and the Contract will remain In Force as a deferred annuity
until the end of the elected distribution period.
Under option (i) above, Western Reserve will:
/bullet/ Allow the Beneficiary, at the time of electing (i), to make a
partial withdrawal. Further partial withdrawals during the
duration of the five-year period are not permitted;
/bullet/ Allow the Beneficiary, at the time of electing (i), to make
"one-time" transfer of Contract values among Sub-Accounts and to
the Fixed Account, and transfers from the Fixed Account to the
Sub-Accounts;
/bullet/ Not deduct the Annual Contract Charge during the duration of the
five-year period;
/bullet/ Not apply the Withdrawal Charge in the event of a partial
withdrawal upon election of (i), or upon a total distribution of
all Contract values during or at the end of the five-year period;
/bullet/ Not allow annuitization during or at the end of the five-year
period. Distribution of all Contract values will be made in a
lump sum;
/bullet/ In the event of the death of the Beneficiary prior to the end of
the five-year period, pay remaining Contract value, according to
its value at the time of payment, to the Beneficiary's estate,
unless a Contingent Beneficiary has been named by the Owner, in
which event payment will be made to the Contingent Beneficiary.
The Beneficiary is NOT entitled to name his or her own
beneficiary of the Contract's value.
Under option (ii), the Maturity Date will be changed to the date Western Reserve
receives due proof of death and a written election as to the method of payment,
if any, and the death benefit proceeds will be used to purchase annuity payments
under the annuity provisions of the Contract. (See "ANNUITY PROVISIONS"
page 18.)
4. DEATH OF AN OWNER WHO IS NOT AN ANNUITANT
If an Owner is not the same individual as the Annuitant and dies before the
Annuitant:
(a) If no Successor Owner has been named or, if named, is no longer alive, the
Owner's estate will become the new Owner. The Cash Value must be distributed
within five years of the former Owner's death; or
(b) If a Successor Owner has been named, is alive and is the Owner's spouse,
the Contract will continue with the spouse as the new Owner; or
(c) If a Successor Owner has been named, is alive and is not the Owner's
spouse, the Successor Owner will become the new Owner. The Cash Value must be
distributed either:
(1) within five years of the former Owner's death; or
(2) over the lifetime of the new Owner, if a natural person, with payments
beginning within one year of the former Owner's death; or
(3) over a period that does not exceed the life expectancy (as defined by the
Internal Revenue Code and Regulations adopted under the Code) of the new Owner,
if a natural person, with payments beginning within one year of the former
Owner's death.
5. QUALIFIED CONTRACTS
If a Qualified Contract is issued to a retirement plan, similar provisions will
apply upon the death of the plan participant. However, the required distribution
rules are more complex in the case of a Qualified Contract held by a plan. Plan
participants should consult a qualified pension or tax advisor concerning the
operation of these rules.
ANNUITY PROVISIONS
MATURITY DATE AND SELECTION OF ANNUITY OPTIONS
Provided the Contract is still In Force, annuity payments will begin on the
Maturity Date, which is, for both Non-Qualified Contracts and Qualified
Contracts, the Anniversary nearest the Annuitant's Attained Age 90. However, the
Owner may change the Maturity Date at any time prior to the Maturity Date by
written request. Any new Maturity Date must be at least five years after the
Contract Date, and the Attained Age of the Annuitant as of the new Maturity Date
cannot be greater than 90. After the Maturity Date, no additional purchase
payments, partial withdrawals, transfers, full Surrenders, or change of
Annuitants or annuity options may be made under the Contract. The Qualified
Contract is designed for use with several types of qualified plans. A tax
advisor should be consulted about the use of a Qualified Contract with qualified
plans, including the specified minimum distribution rules applicable to such
plans.
Annuity Payments will be paid under Option D (described on page 22), with 120
payments guaranteed, unless the Owner elects otherwise. The Owner may change the
annuity option by written request at any time prior to the Maturity Date. Thirty
days prior to the Maturity Date, Western Reserve will mail to the Owner a notice
and a form upon which the Owner can select Allocation Options for the Annuity
Proceeds as of the Maturity Date, which cannot be changed thereafter and will
remain in effect until the Contract terminates. If a Series Account annuity
option is chosen, the Owner must include in the written notice the Sub-Account
allocation of the Annuity Proceeds as of the Maturity Date. If Western Reserve
does not receive that form or other written notice acceptable to Western Reserve
prior to the Maturity Date, the Contract's existing Allocation Options will
remain in effect until the
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Contract terminates. The Owner may also, prior to the Maturity Date, select or
change the frequency of annuity payments, which may be monthly, quarterly,
semi-annually or annually, provided that the annuity option and payment
frequency provides for payments of at least $100 per period. If none of these is
possible, a lump sum payment will be made.
The Owner may select one of the Fixed Account annuity options or Series Account
annuity options described below or any alternate form of settlement acceptable
to Western Reserve. Treasury Regulations may preclude the availability of
certain annuity options in connection with certain Qualified Contracts.
Fixed Account annuity options provide equal periodic (monthly, quarterly,
semi-annual or annual) payments of a specific amount that Western Reserve
guarantees will not change. The amount of the periodic annuity payment will be
based on the Annuity Proceeds on the Maturity Date, the annuity option selected
(I.E., the form and duration of payments), the age of the Annuitant or
Beneficiary (or ages of co-annuitants), the sex of the Annuitant (except for
certain Qualified Contracts), and the applicable annuity rate shown in the
Contract (or a more favorable current rate available under the Contracts on the
Maturity Date). The annuity rates shown in the Contract are based on the Society
of Actuaries 1983 Table A with projection and an assumed investment rate of 3%.
Western Reserve may in its sole discretion increase the amount of a payment or
payments once payments begin.
Series Account annuity options (I.E., variable annuity options) are similar to
fixed annuity options except that the amount of each periodic payment after the
first will vary to reflect the net investment experience of the Sub-Accounts
selected by the Owner. The amount of the first annuity payment is determined in
the manner described in the Statement of Additional Information for a Series
Account annuity option. Under a Series Account annuity option, the Owner applies
the Annuity Proceeds to one or more of the sixteen Sub-Accounts designated to
support annuity payments by purchasing units issued in connection with one or
more of these Sub-Accounts. The number of units purchased is equal to the amount
of the first annuity payment allocated to a particular Sub-Account divided by
the Annuity Unit Value for that Sub-Account on the Maturity Date. The number of
units of a particular Sub-Account supporting payments to an Annuitant never
changes, but the second and subsequent payments will vary with the Annuity Unit
Value because each payment will equal the number of units in each selected
Sub-Account multiplied by the Annuity Unit Value of that Sub-Account on the date
the payment is processed. Annuity Proceeds allocated to Series Account annuity
options are subject to a daily Mortality and Expense Risk Charge of 1.25% per
annum and a daily Administrative Charge of 0.15% per annum.
The Annuity Unit Value for a Sub-Account, designed to support annuity payments,
is first calculated in the same manner as the Accumulation Unit Value
corresponding to the same Fund Portfolio would be calculated (see "THE
CONTRACT-ACCUMULATION PROVISIONS," page 12) (except that the Mortality and
Expense Risk Charge is at an annual rate of 1.25% of the average daily net
assets of the Series Account), and then is adjusted to reflect a 5% assumed
investment return. The adjustment results in the Annuity Unit Value increasing
to the extent that the net investment factor increases at greater than an annual
rate of 6.4%. It results in the Annuity Unit Value decreasing to the extent that
the net investment factor decreases or increases at less than an annual rate of
6.4%. Consequently, if, for a monthly periodic payment, the net investment
experience of a Sub-Account for a given month exceeds an annual rate of 6.4%,
the monthly payment from that Sub-Account will be greater than the previous
payment. Likewise, if the net investment experience for that month is less than
an annual rate of 6.4%, the payment will be less than the previous payment.
FIXED ACCOUNT ANNUITY OPTIONS
The following options are available for payment of fixed account monthly annuity
payments.
OPTION A-FIXED INSTALLMENTS. The Annuity Proceeds will be paid in equal
installments over a fixed period of 5, 10, 15, or 20 years or any other fixed
period acceptable to Western Reserve.
OPTION B-LIFE INCOME. The Annuity Proceeds will be paid in equal installments:
(1) during the lifetime of the Annuitant only ("Life Annuity"); (2) during
a 10 year fixed period certain and for the remaining lifetime of the Annuitant
("Certain Period"); or (3) until the sum of installments paid equals the
Annuity Proceeds applied and for the remaining life of the Annuitant
("Installment Refund").
OPTION C-JOINT AND SURVIVOR LIFE INCOME. The Annuity Proceeds will be paid
during the joint lifetimes of the Annuitant and a designated Co-Annuitant and
will continue upon the death of the first payee for the remaining lifetime of
the survivor.
SERIES ACCOUNT ANNUITY OPTIONS
Under the Series Account annuity options, the Contract's Annuity Proceeds will
be used to purchase units of the Sub-Accounts selected by the Owner. The
following Series Account annuity options are available:
OPTION D-VARIABLE LIFE INCOME. The Annuity Proceeds will be paid in installments
determined in accordance with the table set forth in the Contract. Such
installments are payable (1) during the payee's lifetime only ("Variable
Life Annuity"); or (2) during a 10 year fixed period certain and for the
payee's remaining lifetime ("Variable Certain Period").
OPTION E-VARIABLE JOINT AND SURVIVOR LIFE INCOME. The Annuity Proceeds will be
paid in installments during the joint lifetime of two payees and continuing upon
the death of the first payee for the remaining lifetime of the survivor.
DEATH BENEFITS AFTER THE MATURITY DATE
The death benefit, if any, payable after the Maturity Date and after the
commencement of annuity payments depends upon the annuity option selected. If a
payee dies on or after the commencement of annuity payments, the remaining
portion of any interest in the Contract will be distributed at least as rapidly
as under the method of distribution being used as of the date of the payee's
death. (For additional information about death benefit payments under the
Contract, See "ACCUMULATION PROVISIONS-Death Benefits during the Accumulation
Period" on page 17.)
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IMPROVED ANNUITY RATES
Western Reserve may offer improved annuity rates to Owners if, at the Maturity
Date, it is offering annuity contracts of the same type and class as the
Contract with more favorable rates than those contained in the Contract's
income tables.
PROOF OF AGE, SEX, AND SURVIVAL
Western Reserve may require proper proof of age and sex of any Annuitant or
Co-Annuitant prior to making the first annuity payment. Prior to making any
payment, Western Reserve may require proper proof that the Annuitant or
Co-Annuitant is alive and legally qualified to receive such payment. If required
by law to ignore differences in sex of any payee, annuity payments will be
determined using unisex rates.
OTHER MATTERS RELATING TO THE CONTRACT
CHANGES IN PURCHASE PAYMENTS
The Owner may change the amount and the mode of the anticipated Purchase Payment
pattern specified in the Contract if agreed to by Western Reserve.
RIGHT TO EXAMINE CONTRACT
An Owner may, within ten days of receipt of the Contract (the "Free-Look
Period"), return it to Western Reserve at its Administrative Office, and
obtain a refund equal to the sum of: (1) the Purchase Payments received; plus
(or minus) (2) the accumulated gains (or losses), if any, in the Series Account
for the Contract as of the date Western Reserve receives the returned Contract.
Certain states require a Free-Look Period longer than ten days, either for all
Contract Owners or for certain classes of Contract Owners. The Owner bears the
investment risk during the Free-Look Period. Certain states require Western
Reserve to refund the Purchase Payment, which may be greater or less than the
amount computed above. In these states, Western Reserve bears the investment
risk during the Free-Look Period. The specific terms applicable to a particular
Contract will be set forth in the "Right to Examine Contract" provision of
that Contract.
CONTRACT PAYMENTS
All payments under the Contract will be paid in one sum unless the Owner elects
otherwise. Western Reserve reserves the right to suspend or postpone the right
of partial withdrawal and Surrender or postpone the date of payment for any
period: (1) the New York Stock Exchange is closed, other than customary weekend
and holiday closing, or trading on the New York Stock Exchange is restricted as
determined by the SEC; (2) the SEC by order permits postponement for the
protection of Owners; or (3) an emergency exists, as determined by the SEC, as a
result of which valuation or disposal of securities is not reasonably
practicable. Transfers may also be postponed under these circumstances.
Payments of any amounts derived from Purchase Payments paid by check or bank
draft may be delayed until the check or bank draft has cleared the payor's
bank.
OWNERSHIP
The Owner is the person entitled to exercise all rights under the Contract.
Prior to the Maturity Date, the Owner is the person designated on the Contract
Schedule Page or as subsequently named. These rights may be subject to the
consent of any assignee or irrevocable Beneficiary.
A Successor Owner can be named in the application for the Contract or by
notifying Western Reserve in writing. If the Owner is not the Annuitant, the
Successor Owner will become the new Owner of the Contract upon the death of the
Owner prior to the death of the Annuitant. (See "THE CONTRACT-ACCUMULATION
PROVISIONS-Death Benefits during the Accumulation Period - 4. Death of an Owner
Who is not an Annuitant," on page 18.)
With regard to Non-Qualified Contracts, ownership of the Contract may be changed
or the Contract collaterally assigned at any time during the lifetime of the
Annuitant and prior to the Maturity Date, subject to the rights of any
irrevocable Beneficiary. The assignment of a Contract will be treated as a
distribution of the Annuity Value for Federal tax purposes. (See "FEDERAL TAX
MATTERS-Taxation of Annuities" on pages 21-22.) Any change of ownership or
assignment must be made in writing and accepted by Western Reserve, and, if
accepted, will be effective as of the date accepted by Western Reserve. Western
Reserve assumes no liability for any payments made or actions taken before a
change is accepted and shall not be responsible for the validity or effect of
any change of ownership or assignment.
Changing the Owner or naming a new Successor Owner cancels any prior designation
of Successor Owner, but it does not change the Beneficiary or Annuitant.
With regard to Qualified Contracts, ownership of the Contract generally may be
assigned, but any assignment may be subject to restrictions, penalties, or even
prohibition under the Code and must also be permitted under the terms of the
underlying retirement plan.
ANNUITANT
The Annuitant is the person named in the application to receive annuity
payments. If no person is so named, the Owner will be the Annuitant. As of the
Maturity Date, and upon agreement with Western Reserve, the Owner may elect a
different Annuitant or, if either annuity Option C or Option E has been
selected, add a joint annuitant. On the Maturity Date, the Annuitant(s) will
become the payee(s) and receive the annuity payments.
BENEFICIARY
The Beneficiary is the person or persons named in the application or as
subsequently changed. The Beneficiary may be changed during the lifetime of the
Annuitant, subject to the rights of any irrevocable Beneficiary. Any change must
be made in writing and received at Western Reserve's Administrative Office and,
if accepted, will be effective as of the date on which signed by the Owner.
Western Reserve assumes no liability for any payments made or actions taken
before the change is received and shall not be responsible for the validity or
effect of the change. Prior to the Maturity Date, if no Beneficiary survives the
Annuitant, the Owner, if living, or the Owner's estate will be the Beneficiary.
The interest of any Beneficiary is subject to that of any assignee. In the case
of certain Qualified Contracts, the Treasury Regulations prescribe certain
limitations on the designation of a Beneficiary.
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Unless Western Reserve receives written notice from the Owner to the contrary,
no Beneficiary may assign any payments under the Contract before such payments
are due. To the extent permitted by law, no payments under the Contract will be
subject to the claims of any Beneficiary's creditors.
MODIFICATION OR WAIVER
The contract and the application constitute the entire Contract. Only statements
in the application can be used to void the Contract or defend a claim. The
statements are considered representations and not warranties. No Contract
provision can be waived or changed except by endorsement. Only the President or
Secretary of Western Reserve can agree to change or waive any provision of the
Contract.
The Contract may not be modified by Western Reserve without the consent of the
Owner, except as may be required to make it conform to any law or regulation or
ruling issued by a governmental agency or to improve the rights and/or benefits
under the Contract.
FEDERAL TAX MATTERS
INTRODUCTION
The Contracts are designed for use by individuals to accumulate Annuity Value
and may be used by retirement plans, regardless of whether the plans qualify for
special Federal income tax treatment. The ultimate effect of Federal income
taxes on the amounts held under a Contract, on annuity payments, and on the
economic benefits to the Owner, Annuitant or Beneficiary depends on Western
Reserve's tax status, on the type of retirement plan for which the Contract is
purchased, and upon the tax and employment status of the individual concerned.
The following discussion is general in nature and is not intended as tax advice.
Each person concerned should consult a competent tax advisor. No attempt is made
to consider any applicable state or other tax laws. Moreover, the discussion is
based upon Western Reserve's understanding of the Federal income tax
laws as they are currently interpreted. Western Reserve makes no representations
regarding the likelihood of continuation of the Federal income tax laws, the
Treasury Regulations, or the current interpretations by the Internal Revenue
Service (the "Service"). For a discussion of Federal income taxes as they
relate to the Fund, please see the accompanying Prospectus for the Portfolios.
COMPANY TAX STATUS
Western Reserve is taxed as a life insurance company under Part 1 of Subchapter
L of the Code. Because the Series Account is not an entity separate from Western
Reserve and its operations form a part of Western Reserve, it will not be taxed
separately as a "regulated investment company" under Subchapter M of the
Code. Investment income and realized capital gains on the assets of the Series
Account are reinvested and taken into account in determining the Annuity Value.
Western Reserve believes that under existing Federal income tax law, the Series
Account's investment income, including realized net capital gains, will not be
taxed to Western Reserve. Based upon this belief, it is anticipated that no
charges will be made against the Series Account for Federal income tax. If any
such charge is made, a Contract's Annuity Value will reflect a deduction for
the charge. Western Reserve reserves the right to make a deduction from the
assets of the Series Account should any tax or other economic burden resulting
from the application of tax laws that Western Reserve determines to be properly
attributable to the Account be imposed with respect to such items in the future.
TAXATION OF ANNUITIES
The following discussion assumes the Contract will qualify as an annuity
contract for Federal income tax purposes.
1. IN GENERAL. Code Section 72 governs taxation of annuities. In general, an
Owner is not taxed on increases in value under a Contract until some form of
distribution is made under the Contract. The exception to this rule is that
generally, an Owner of any deferred annuity contract who is not a natural person
must include in income any increase in the excess of the Contract's Annuity
Value over the investment in the Contract during the taxable year. However,
there are some exceptions to this exception and you may wish to discuss these
with your tax counsel. The taxable portion of a distribution (in the form of an
annuity or lump sum payment) is generally taxed as ordinary income. For this
purpose, the assignment, pledge, or agreement to assign or pledge any portion of
the Annuity Value generally will be treated as a distribution.
2. PARTIAL WITHDRAWALS AND SURRENDERS. In the case of a partial withdrawal,
Systematic Partial Withdrawal, or Surrender distributed to a participant or
Beneficiary under a Qualified Contract (other than a Qualified Contract used in
a retirement plan that qualifies for special Federal income tax treatment under
section 457 of the Code as to which there are special rules), a ratable portion
of the amount received is taxable, generally based on the ratio of the
investment in the Contract to the total Annuity Value. The "investment in the
contract" generally equals the portion, if any, of any Purchase Payments paid
by or on behalf of an individual under a Contract which is not excluded from the
individual's gross income. For Contracts issued in connection with qualified
plans, the "investment in the contract" can be zero.
Generally, in the case of a partial withdrawal, Systematic Partial Withdrawal,
or Surrender under a Non-Qualified Contract before the Maturity Date, amounts
received are first treated as taxable income to the extent that the Annuity
Value immediately before the partial withdrawal, Systematic Partial Withdrawal,
or Surrender exceeds the "investment in the contract" at that time. Any
additional amount partially withdrawn, applied to a Systematic Partial
Withdrawal, or Surrender is not taxable. In the event of a partial withdrawal or
Systematic Partial Withdrawal from, or Surrender of, a Non-Qualified Contract,
Western Reserve will withhold for tax purposes the minimum amount required by
law, unless the Owner affirmatively elects, before payments begin, to have
either nothing withheld or a different amount withheld.
3. ANNUITY PAYMENTS. Although the tax consequences may vary depending on the
Annuity Payment elected under the Contract, in general, only the portion of the
Annuity Payment that represents the amount by which the Annuity Value exceeds
the "investment in the contract" will be taxed; after the "investment in the
contract" is
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recovered, the full amount of any additional Annuity Payments is taxable. For
variable annuity payments, the taxable portion is generally determined by an
equation that establishes a specific dollar amount of each payment that is not
taxed. The dollar amount is determined by dividing the "investment in the
contract" by the total number of expected periodic payments. However, the
entire distribution will be taxable once the recipient has recovered the dollar
amount of his or her "investment in the contract." For Fixed Annuity
Payments, in general, there is no tax on the portion of each payment which
represents the same ratio that the "investment in the contract" bears to
the total expected value of the Annuity Payments for the term of the payments;
however, the remainder of each Annuity Payment is taxable until the recovery of
the "investment in the contract," and thereafter the full amount or each
Annuity Payment is taxable. If death occurs before full recovery of the
"investment in the contract," the unrecovered amount may be deducted on
the Annuitant's final tax return.
4. PENALTY TAX ON CERTAIN DISTRIBUTIONS. In the case of a distribution pursuant
to a Non-Qualified Contract, a penalty tax may be imposed equal to 10% of the
amount treated as taxable income. The penalty tax is not imposed in certain
circumstances, including, generally, distributions: (1) made on or after the
date on which the Owner attains age 59-1/2, (2) made as a result of death of the
Owner or disability of the taxpayer, or (3) received in substantially equal
installments as a life annuity. Other tax penalties may apply to certain
distributions pursuant to a Qualified Contract.
5. TAXATION OF DEATH BENEFIT PROCEEDS. Amounts may be distributed from a
Contract because of the death of an Owner or an Annuitant. Generally, such
amounts are includable in the income of the recipient as follows: (1) if
distributed in a lump sum, they are taxed in the same manner as a full Surrender
of the Contract, as described above, or (2) if distributed under an annuity
option, they are taxed in the same manner as Annuity Payments, as described
above. For these purposes, the investment in the Contract is not affected by the
Owner's or Annuitant's death. That is, the investment in the Contract remains
the amount of any Purchase Payments paid which were not excluded from gross
income.
6. MULTIPLE CONTRACTS. All non-qualified, deferred annuity contracts entered
into after October 21, 1988 that are issued by Western Reserve (or its
affiliates) to the same Owner during any calendar year are to be treated as one
annuity contract for purposes of determining the amount includable in an
individual's gross income. There may be other situations in which the Treasury
may conclude that it would be appropriate to aggregate two or more annuity
contracts purchased by the same owner. Accordingly, an Owner should consult a
competent tax advisor before purchasing more than one Contract or other annuity
contracts.
7. TRANSFERS, ASSIGNMENTS OR EXCHANGES OF CONTRACTS. A transfer of ownership or
assignment of a Contract, the designation of an Annuitant or other Beneficiary
who is not also the Owner, the selection of certain Maturity Dates, or a change
of Annuitant, may result in certain income or gift tax consequences to the Owner
that are beyond the scope of this discussion. An Owner contemplating any such
transfer, assignment, selection, or change should contact a competent tax
advisor in respect to the potential tax effects of such a transaction.
8. POSSIBLE CHANGES IN TAXATION. In past years, legislation has been proposed
that would have adversely modified the Federal taxation of certain annuities.
For example, one such proposal would have changed the tax treatment of
non-qualified annuities that did not have "substantial life contingencies"
by taxing income as it is credited to the annuity. Although as of the date of
this Prospectus Congress is not considering any legislation regarding the
taxation of annuities, there is always the possibility that the tax treatment of
annuities could change by legislation or other means (such as the IRS
regulations, revenue rulings, judicial decisions, etc.). Moreover, it is also
possible that any change could be effective prior to the date of the change.
QUALIFIED PLANS
The Qualified Contract is designed for use with several types of qualified
retirement plans. The tax rules applicable to participants and beneficiaries in
such qualified plans vary according to the type of plan and the terms and
conditions of the plan itself. Special favorable tax treatment may be available
for certain types of contributions and distributions (including special rules
for certain lump sum distributions). Adverse tax consequences may result from
contributions in excess of specified limits, distributions prior to age 59-1/2
(subject to certain exceptions), distributions that do not conform to specified
minimum distribution rules, aggregate distributions in excess of a specified
annual amount, and in certain other circumstances. Therefore, Western Reserve
makes no attempt to provide more than general information about use of the
Contract with the various types of qualified plans. Owners and participants
under qualified plans as well as Annuitants and Beneficiaries are cautioned that
the rights of any person to any benefits under qualified plans may be subject to
the terms and conditions of the plan themselves, regardless of the terms and
conditions of the Contract issued in connection therewith. Some retirement plans
are subject to distribution and other requirements that are not incorporated
into our Contract administration procedures. Owners, participants and
beneficiaries are responsible for determining that contributions, distributions
and other transactions with respect to the Contracts comply with applicable law.
Purchasers of Contracts for use with any qualified plan should seek competent
legal and tax advice regarding the suitability of the Contract therefor.
1. (A) SECTION 403(B) PLANS. Under Section 403(b) of the Code, payments made by
public school systems and certain tax exempt organizations to purchase annuity
policies for their employees are excludable from the gross income of the
employee, subject to certain limitations. However, such payments may be subject
to FICA (Social Security) taxes. Additionally, in accordance with the
requirements of the Code, Section 403(b) annuities generally may not permit
distribution of (i) elective contributions made in years beginning after
December 31, 1988, and (ii) earnings on those contributions, and (iii) earnings
on amounts attributed to elective contributions held as of the end of the last
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year beginning before January 1, 1989. Distributions of such amounts will be
allowed only upon the death of the employee, on or after attainment of age
59-1/2, separation from service, disability, or financial hardship, except that
income attributable to elective contributions may not be distributed in the case
of hardship.
(B) RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAMS. Section 36.105 of
the Texas Educational Code permits participants in the Texas Optional Retirement
Program (ORP) to withdraw their interest in a variable annuity contract issued
under the ORP only upon: (1) termination of employment in the Texas public
institutions of higher education; (2) retirement; or (3) death. Accordingly, a
participant in the ORP (or the participant's estate if the participant has
died) will be required to obtain a certificate of termination from the employer
or a certificate of death before the account can be redeemed.
2. INDIVIDUAL RETIREMENT ANNUITIES. Sections 219 and 408 of the Code permit
individuals or their employers to contribute to an individual retirement program
known as an "Individual Retirement Annuity" or an "IRA." Individual
Retirement Annuities are subject to limitation on the amount which may be
contributed and deducted and the time when distributions may commence. In
addition, distributions from certain other types of qualified plans may be
placed into an IRA on a tax deferred basis. The Service has not reviewed the
Contract for qualification as an IRA, and has not addressed in a ruling of
general applicability whether a death benefit provision such as the provision in
the Contract comports with IRA qualification requirements.
3. CORPORATE PENSION AND PROFIT-SHARING PLANS AND H.R. 10 PLANS. Section 401(a)
and 403(a) of the Code permit corporate employers to establish various types of
retirement plans for employees and permit self-employed individuals to establish
qualified plans for themselves and their employees. Such retirement plans may
permit the purchase of the Contracts to provide benefits under the plans. These
retirement plans may permit the purchase of the Contracts to accumulate
retirement savings under the plans. Adverse tax or other legal consequences to
the plan, to the participant or to both may result if this Contract is assigned
or transferred to any individual as a means to provide benefit payments.
4. DEFERRED COMPENSATION PLANS. Section 457 of the Code, although not actually
providing for a qualified plan as that term is normally used, provides for
certain deferred compensation plans with respect to service for state
governments, local governments, political subdivisions, agencies,
instrumentalities and certain affiliates of such entities and tax exempt
organizations which enjoy special treatment. The Contracts can be used with such
plans. Such plans may permit a participant to specify the form of investment in
which his or her participation will be made. In general, for non-governmental
plans, such investments, however, are owned by, and are subject to, the claims
of the general creditors of the sponsoring employer. Depending on the terms of
the particular plan, a non-governmental employer may be entitled to draw on
deferred amounts for purposes unrelated to its section 457 plan obligations. In
general, all amounts received under a section 457 plan are taxable and are
subject to federal income tax withholding as wages.
5. DISTRIBUTIONS FROM QUALIFIED PLANS. Under the tax qualification rules for
Section 401(a), 403(b), 408 and 457 plans, distributions generally must commence
no later than the later of April 1 of the calendar year following the calendar
year in which the Owner (or plan participant) (i) reaches age 70-1/2, or (ii)
retires, and must be made in a specified form and manner. If the plan
participant is a "five percent owner" (as defined in the Code),
distributions generally must begin no later than the date described in (i).
Special rules and other restrictions may apply depending on the type of plan and
the particular circumstances. Each Owner is responsible for requesting
distributions under the Contract that satisfy applicable tax rules, and should
consult a qualified tax advisor.
6. RESTRICTIONS UNDER QUALIFIED CONTRACTS. Other restrictions with respect to
the election, commencement, or distribution of benefits may apply under
Qualified Contracts or under the terms of the plans in respect of which
Qualified Contracts are issued.
The above description of Federal income tax consequences pertaining to the
different types of qualified plans that may be funded by the Contracts is only a
brief summary and is not intended as tax advice. The rules governing the
provisions of qualified plans are extremely complex and often difficult to
comprehend. In addition, the Tax Reform Act has significantly changed a great
many rules for qualified plans. Anything less than full compliance with the
applicable rules, all of which are subject to change, may have significant
adverse tax consequences. A prospective purchaser considering the purchase of a
Contract in connection with a qualified plan should first consult a qualified
and competent tax advisor with regard to the suitability of the Contract as an
investment vehicle for the qualified plan.
ADDITIONAL CONSIDERATIONS
1. DIVERSIFICATION. Section 817(h) of the Code requires that the investments of
the Series Account must be "adequately diversified" in accordance with
Treasury Regulations in order for the Contracts to qualify as annuity contracts
under Section 72 of the Code. The Series Account, through the Fund, intends to
comply with the diversification requirements prescribed by the Treasury in Reg.
Sec. 1.817.5, which affect how the Fund's assets may be invested. Western
Reserve believes the Series Account will, thus, meet the diversification
requirements of Section 817(h). If the Series Account does not meet those
diversification requirements, Owners would be taxed currently on any investment
income under the Contract.
In certain circumstances, owners of variable annuity contracts may be considered
the owners, for Federal income tax purposes, of the assets of the separate
account used to support their contracts. In those circumstances, income and
gains from the separate account assets would be includable in the variable
annuity contract owner's gross income. The Treasury Department has stated in
published rulings that a variable annuity contract owner will be considered the
owner of separate account assets if the contract owner possesses incidents of
ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has also announced, in connection with
the issuance of regulations
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concerning investment diversification, that those regulations "do not provide
guidance concerning the circumstances in which investor control of the
investments of a segregated asset account may cause the investor (I.E., the
contract owner), rather than the insurance company, to be treated as the owner
of the assets in the account." This announcement further states that guidance
would be issued by way of regulations or rulings on the "extent to which
policyholders may direct their investments to particular sub-accounts without
being treated as owners of the underlying assets."
The ownership rights under the Contract are similar to, but different in certain
respects from, those described by the IRS in rulings in which it was determined
that contract owners were not owners of separate account assets. For example,
the owner of a Contract has the choice of more Sub-Accounts in which to allocate
net purchase payments and Contract values, and may be able to transfer among
Sub-Accounts more frequently than in such rulings. These differences could
result in an Owner being treated as the owner of the assets of the Series
Account. In addition, Western Reserve does not know what standards will be set
forth, if any, in the regulations or rulings which the Treasury Department has
stated it expects to issue. Western Reserve therefore reserves the right to
modify the Contract as necessary to attempt to prevent an Owner from being
considered the owner of a pro rata share of the assets of the Series Account.
2. DISTRIBUTION-AT-DEATH RULES. The Code also requires Non-Qualified Contracts
to contain specific provisions for distribution of the Contract proceeds upon
the death of an Owner. In order to be treated as an annuity contract for Federal
income tax purposes, the Code requires that such Contract provide that (a) if
any Owner dies on or after the Maturity Date and before the entire interest in
the Contract has been distributed, the remaining portion must be distributed at
least as rapidly as under the method in effect on the Owner's death; and (b) if
any Owner dies before the Maturity Date, the entire interest in the Contract
must generally be distributed within five years after the Owner's date of death.
These requirements will be considered satisfied if the entire interest of the
Contract is used to purchase an immediate annuity under which payments will
begin within one year of the Owner's death and will be made for the life of the
Beneficiary or for a period not extending beyond the life expectancy of the
Beneficiary. The Owner's Beneficiary is the person to whom ownership of the
Contract passes because of death and must be a natural person. (In the Contract,
the successor owner is the Owner's Beneficiary.) If the Beneficiary is the
Owner's surviving spouse, the Contract may be continued with the surviving
spouse as the new Owner. Non-Qualified Contracts will be reviewed and modified
if necessary to attempt to assure that they comply with the Code requirements
when clarified by regulation or otherwise. Other rules may apply to Qualified
Contracts.
3. WITHHOLDING. Withholding of Federal income taxes on the taxable portion of
all distributions may be required unless the recipient elects not to have any
such amounts withheld and properly notifies Western Reserve of that election.
Different rules may apply to United States citizens or expatriates living
abroad. In addition, some states have enacted legislation requiring withholding.
Effective January 1, 1993, certain distributions from Section 401(a), 403(a) and
403(b) plans are subject to mandatory withholding.
4. SECTION 1035 EXCHANGES. Code Section 1035 generally provides that no gain or
loss shall be recognized on the exchange of one annuity contract for another. If
the surrendered Contract was issued prior to August 14, 1982, the tax rules that
formerly provided that the Surrender was taxable only to the extent the amount
received exceeds the Owner's investment in the Contract will continue to apply
to amounts allocable to investment in the Contract before August 14, 1982. In
contrast, Contracts issued on or after January 19, 1985 in a Code Section 1035
exchange are treated as new Contracts for purposes of the penalty and
distribution-at-death rules. Special rules and procedures apply to Code Section
1035 transactions. Prospective purchasers wishing to take advantage of Code
Section 1035 should consult their tax advisors.
5. DIVERSIFICATION AND QUALIFIED PLANS. Code Section 817(h) applies to variable
annuity contracts other than pension plan contracts. The regulations reiterate
that the diversification requirements do not apply to pension plan contracts.
All of the qualified retirement plans (described above) are defined as pension
plan contracts for these purposes. Notwithstanding the exception of Qualified
Contracts from application of the diversification rules, the investment vehicle
for Western Reserve's Qualified Contracts (I.E., the Fund) will be structured
to comply with the diversification standards because it serves as the investment
vehicle for Non-Qualified Contracts as well as Qualified Contracts.
THE FIXED ACCOUNT
An Owner may allocate Net Purchase Payments and transfer Annuity Value to the
Fixed Account, which is part of Western Reserve's general account. The
Insurance Department of the States of New Jersey and Washington have
disapproved, for Contracts issued in New Jersey and Washington, the ability both
to allocate Net Purchase Payments to the Fixed Account and to transfer Annuity
Value from Sub-Accounts to the Fixed Account.
Because of exemptive and exclusionary provisions, interests in the Fixed Account
have not been registered under the Securities Act of 1933 and neither the Fixed
Account nor the general account has been registered as an investment company
under the 1940 Act. Accordingly, neither the Fixed Account, the general account
nor any interests therein are generally subject to the provisions of these acts,
and Western Reserve has been advised that the staff of the SEC has not reviewed
the disclosure in this Prospectus relating to the Fixed Account. Disclosure
regarding the Fixed Account may, however, be subject to certain generally
applicable provisions of the Federal securities laws relating to the accuracy
and completeness of statements made in prospectuses.
The portion of the Annuity Value allocated to the Fixed Account (the "Fixed
Account Value") will be credited with rates of interest, as described below.
Because the Fixed Account Value becomes part of Western Reserve's general
account, Western Reserve assumes the risk of
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investment gain or loss on this amount. All assets in the general account are
subject to Western Reserve's general liabilities from business operations.
MINIMUM GUARANTEED AND CURRENT INTEREST RATES
The Fixed Account Value is guaranteed to accumulate at a minimum effective
annual interest rate of 4%. Western Reserve presently credits the Fixed Account
Value with current rates in excess of the minimum guarantee, but it is not
obligated to do so. These current interest rates are influenced by, but do not
necessarily correspond to, prevailing general market interest rates. Because
Western Reserve, at its sole discretion, anticipates changing the current
interest rate from time to time, different allocations to and from the Fixed
Account Value will be credited with different current interest rates.
Western Reserve further guarantees that when a higher or lower current interest
rate is declared on an allocation to the Fixed Account Value, that new interest
rate will be guaranteed on such allocation for at least a one year period
measured from the date of each Purchase Payment or transfer (the "Guarantee
Period"). At the end of the Guarantee Period, Western Reserve reserves the
right to declare a new current interest rate on such allocation and accrued
interest thereon (which may be a different current interest rate than the
current interest rate on new allocations to the Fixed Account Value on that
date). The rate declared on such allocation and accrued interest thereon at the
end of each Guarantee Period will be guaranteed again for another Guarantee
Period. At the end of any Guarantee Period, any interest credited on the Fixed
Account Value in excess of the minimum guaranteed rate of 4% per year will be
determined in the sole discretion of Western Reserve. The Owner assumes the risk
that interest credited may not exceed the guaranteed minimum rate.
Allocations from the Fixed Account Value to provide: a) partial withdrawal
amounts, b) transfers to the Series Account, or c) the Annual Contract Charge
are currently, for the purpose of crediting interest, accounted for on a last
in, first out ("LIFO") method.
Western Reserve reserves the right to change the method of crediting interest
from time to time, provided that such changes will not have the effect of
reducing the guaranteed rate of interest below 4% per annum.
FIXED ACCOUNT VALUE
At the end of any Valuation Period, the Fixed Account Value is equal to:
1. The sum of all Net Purchase Payments allocated to the Fixed Account; plus
2. Any amounts transferred from a Sub-Account to the Fixed Account; plus
3. Total interest credited to the Fixed Account; minus
4. Any amounts withdrawn from the Fixed Account to pay for partial withdrawals;
minus
5. Any amounts transferred to a Sub-Account from the Fixed Account; minus
6. Any amounts charged to pay the Annual Contract Charge, premium tax, and
transfer charges, if any.
ALLOCATIONS, TRANSFERS AND PARTIAL WITHDRAWALS
Net Purchase Payments and transfers to the Fixed Account will be allocated to
the Fixed Account on the first Valuation Date on or following the date Western
Reserve receives the payment or transfer request at its Administrative Office,
except that any allocation of the initial Net Purchase Payment will take place
on the Contract Date.
Transfers may be made from the Fixed Account to a Sub-Account once each Contract
Year. The amount that may be transferred is the greater of (a) 25% of the amount
in the Fixed Account, or (b) the amount transferred in the prior Contract Year
from the Fixed Account, unless Western Reserve consents otherwise. No transfer
charge will apply to transfers from the Fixed Account to a Sub-Account. Amounts
may be withdrawn from the Fixed Account for partial withdrawals and Surrenders
only upon written request and (other than for Surrenders) only with Western
Reserve's consent. Western Reserve further reserves the right to defer payment
of transfers, partial withdrawals, or Surrenders from the Fixed Account for up
to six months. In addition, Contract provisions relating to transfers, partial
withdrawals or Surrenders from the Series Account will also apply to the Fixed
Account. Dollar Cost Averaging may be done from the Fixed Account. (See "THE
CONTRACT ACCUMULATION PROVISIONS-Transfers to and from, and among Allocation
Options" on page 14.)
DISTRIBUTION OF THE CONTRACTS
The Contracts will be sold by individuals who, in addition to being licensed as
life insurance agents for Western Reserve, are also registered representatives
of ISI, which has the same address as Western Reserve, an affiliate of Western
Reserve and the principal underwriter of the Contracts, or of broker-dealers who
have entered into written sales agreements with the principal underwriter. ISI
is registered with the SEC under the Securities Exchange Act of 1934 and is a
member of the National Association of Securities Dealers, Inc. No amounts have
been retained by ISI for acting as principal underwriter for the Contracts.
Broker-dealers will generally receive first year sales commissions of up to 5%
of Purchase Payments. In addition, broker-dealers may receive renewal
commissions at an annual rate of up to 0.20% (twenty one-hundredths of one
percent) of the Annuity Value as of each Contract Anniversary, beginning with
the first Contract Anniversary, providing the Policy has an Annuity Value of
$25,000 or more on each Anniversary. Certain production, persistency and
managerial bonuses may also be paid. Subject to applicable Federal and state
laws and regulations, Western Reserve may also pay compensation to banks and
other financial institutions for their services in connection with the sale and
servicing of the Contracts. The level of such compensation will not exceed that
paid to broker-dealers for their sale of the Contracts. The offering of
Contracts will be made on a continuing basis.
VOTING RIGHTS
To the extent required by law, Western Reserve will vote the Fund shares held in
the Series Account at shareholder meetings of the Fund in accordance with
instructions
25
<PAGE>
received from persons having voting interests in the corresponding Sub-Accounts
of the Series Account. Except as required by the 1940 Act, the Fund does not
hold regular or special shareholder meetings. If the 1940 Act or any regulation
thereunder should be amended or if the present interpretation thereof should
change, and as a result Western Reserve determines that it is permitted to vote
the Fund shares in its own right, it may elect to do so.
The number of votes that an Owner has the right to instruct will be calculated
separately for each Sub-Account, and will be determined during the Accumulation
Period by dividing the portion of the Annuity Value in that Sub-Account by $100.
Fractional shares will be counted. After the Maturity Date, the number of votes
that an Annuitant has the right to instruct will be calculated based on the
liability for future variable annuity payments. This liability will be
calculated on the basis of the mortality assumptions used in determining the
number of units purchased by the Annuitant. Because this liability generally
declines as any Annuitant ages, the number of votes attributable to that
Annuitant will decrease over time.
The number of votes of the Portfolio that the Owner or Annuitant has the right
to instruct will be determined as of the date established by that Portfolio for
determining shareholders eligible to vote at the meeting of the Fund. Voting
instructions will be solicited by written communications prior to such meeting
in accordance with procedures established by the Fund.
Western Reserve will vote Fund shares as to which no timely instructions are
received and Fund shares that are not attributable to Owners in proportion to
the voting instructions that are received with respect to all Contracts
participating in that Portfolio. Voting instructions to abstain on any item to
be voted upon will reduce the votes eligible to be cast by Western Reserve.
Each person having a voting interest in a Sub-Account will receive proxy
materials, reports and other materials relating to the appropriate Portfolio.
LEGAL PROCEEDINGS
There are at present no legal proceedings to which the Series Account is a party
or to which the assets of the Series Account are subject. Western Reserve is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Series Account. ISI, the Series Account's
principal underwriter, is not presently a party to any legal proceedings that
are likely to have a material adverse effect upon its ability to perform its
contract with the Series Account.
STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information contains information and financial
statements relating to the Series Account and Western Reserve. The Table of
Contents of the Statement of Additional Information is set forth below:
1. Custodian
2. Independent Accountants
3. Legal Matters
4. Calculation of Performance Related Information
5. Addition, Deletion, and Substitution of Investments
6. Calculation of Variable Annuity Payments
7. Financial Statements
Inquiries and requests for a Statement of Additional Information should be
directed to Western Reserve Life Assurance Co. of Ohio, P.O. Box 9051,
Clearwater, Florida 34618-9051; telephone number (800) 851-9777.
WRL05024-05/97
26
<PAGE>
APPENDIX A
CONDENSED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1992
---------------------------------------------------------------
NUMBER OF
ACCUMULATION UNIT ACCUMULATION UNIT ACCUMULATION UNITS
VALUE AT BEGINNING VALUE AT END OUTSTANDING AT END
SUB-ACCOUNT OF PERIOD OF PERIOD OF PERIOD
- ----------- --------------------- -------------------- --------------------
<S> <C> <C> <C>
Growth ............ $20.848 $21.071 26,351,578
Bond ............ 13.894 14.650 3,565,475
Money Market ...... 11.681 11.888 3,459,934
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM DECEMBER 3, 1992* TO DECEMBER 31, 1992
---------------------------------------------------------------
NUMBER OF
ACCUMULATION UNIT ACCUMULATION UNIT ACCUMULATION UNITS
VALUE AT BEGINNING VALUE AT END OUTSTANDING AT END
SUB-ACCOUNT OF PERIOD OF PERIOD OF PERIOD
- ----------- --------------------- -------------------- --------------------
<S> <C> <C> <C>
Global ............ 10.000 10.152 25,000
Short-to-
Intermediate
Government ...... 10.000 10.036 85,000
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
---------------------------------------------------------------
NUMBER OF
ACCUMULATION UNIT ACCUMULATION UNIT ACCUMULATION UNITS
VALUE AT BEGINNING VALUE AT END OUTSTANDING AT END
SUB-ACCOUNT OF PERIOD OF PERIOD OF PERIOD
- ----------- --------------------- -------------------- --------------------
<S> <C> <C> <C>
Growth ............ $21.071 $21.640 51,102,682
Bond ............ 14.650 16.400 10,252,041
Money Market ...... 11.888 12.030 6,109,073
Global ............ 10.152 13.540 16,946,574
Short-to-
Intermediate
Government ...... 10.036 10.360 4,497,755
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM MARCH 1, 1993* TO DECEMBER 31, 1993
---------------------------------------------------------------
NUMBER OF
ACCUMULATION UNIT ACCUMULATION UNIT ACCUMULATION UNITS
VALUE AT BEGINNING VALUE AT END OUTSTANDING AT END
SUB-ACCOUNT OF PERIOD OF PERIOD OF PERIOD
- ----------- --------------------- -------------------- --------------------
<S> <C> <C> <C>
Emerging
Growth ......... $10.000 $12.370 12,707,276
Strategic Total
Return** ...... 10.000 11.250 11,975,467
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
---------------------------------------------------------------
NUMBER OF
ACCUMULATION UNIT ACCUMULATION UNIT ACCUMULATION UNITS
VALUE AT BEGINNING VALUE AT END OUTSTANDING AT END
SUB-ACCOUNT OF PERIOD OF PERIOD OF PERIOD
- ----------- --------------------- -------------------- --------------------
<S> <C> <C> <C>
Growth ............ $21.640 $19.595 3,115,147
Bond ............ 16.400 15.076 744,082
Money Market ...... 12.030 12.294 1,443,347
Global ............ 13.540 13.403 3,414,543
Short-to-
Intermediate
Government ...... 10.360 10.192 454,524
Emerging
Growth ......... 12.370 11.315 2,416,688
Strategic Total
Return** ......... 11.250 11.055 3,041,559
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM MARCH 1, 1994* TO DECEMBER 31, 1994
---------------------------------------------------------------
NUMBER OF
ACCUMULATION UNIT ACCUMULATION UNIT ACCUMULATION UNITS
VALUE AT BEGINNING VALUE AT END OUTSTANDING AT END
SUB-ACCOUNT OF PERIOD OF PERIOD OF PERIOD
- ----------- --------------------- -------------------- --------------------
<S> <C> <C> <C>
Aggressive
Growth ......... $10.000 $9.792 403,363
Balanced ......... 10.000 9.348 382,988
Growth &
Income*** ...... 10.000 9.463 243,051
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------------------
NUMBER OF
ACCUMULATION UNIT ACCUMULATION UNIT ACCUMULATION UNITS
VALUE AT BEGINNING VALUE AT END OUTSTANDING AT END
SUB-ACCOUNT OF PERIOD OF PERIOD OF PERIOD
- ----------- --------------------- -------------------- --------------------
<S> <C> <C> <C>
Growth ............ $19.595 $28.471 3,502,872
Bond ............ 15.076 18.312 782,376
Money Market ...... 12.294 12.799 1,155,403
Global ............ 13.403 16.289 3,252,745
Short-to-
Intermediate
Government ...... 10.192 11.429 469,460
Emerging Growth. 11.315 16.403 2,705,009
Strategic Total
Return** ......... 11.055 13.610 3,629,843
Aggressive Growth 9.792 13.347 1,805,793
Balanced ......... 9.348 11.060 499,597
Growth &
Income*** ...... 9.463 11.705 547,514
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM JANUARY 3, 1995* TO DECEMBER 31, 1995
---------------------------------------------------------------
NUMBER OF
ACCUMULATION UNIT ACCUMULATION UNIT ACCUMULATION UNITS
VALUE AT BEGINNING VALUE AT END OUTSTANDING AT END
SUB-ACCOUNT OF PERIOD OF PERIOD OF PERIOD
- ----------- --------------------- -------------------- --------------------
<S> <C> <C> <C>
Tactical Asset
Allocation ...... $10.000 $11.861 1,261,509
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------------
NUMBER OF
ACCUMULATION UNIT ACCUMULATION UNIT ACCUMULATION UNITS
VALUE AT BEGINNING VALUE AT END OUTSTANDING AT END
SUB-ACCOUNT OF PERIOD OF PERIOD OF PERIOD
- ----------- --------------------- -------------------- --------------------
<S> <C> <C> <C>
Growth ............ $28.471 $33.168 4,146,053
Bond ............ 18.312 18.110 897,671
Money Market ...... 12.799 13.287 1,695,656
Global ............ 16.289 20.548 4,631,785
Short-to-
Intermediate
Government ...... 11.429 11.680 417,939
Emerging Growth.... 16.403 19.258 3,400,959
Strategic Total
Return** ......... 13.610 15.457 4,433,972
Aggressive Growth 13.347 14.558 2,277,536
Balanced ......... 11.060 12.094 639,226
Growth &
Income*** ...... 11.705 12.905 553,607
Tactical Asset
Allocation ...... 11.861 13.403 2,708,476
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM MAY 1, 1996* TO DECEMBER 31, 1996
---------------------------------------------------------------
NUMBER OF
ACCUMULATION UNIT ACCUMULATION UNIT ACCUMULATION UNITS
VALUE AT BEGINNING VALUE AT END OUTSTANDING AT END
SUB-ACCOUNT OF PERIOD OF PERIOD OF PERIOD
- ----------- --------------------- -------------------- --------------------
<S> <C> <C> <C>
Value Equity ...... $10.000 $11.225 728,916
Global Sector ..... 10.000 10.519 63,376
C.A.S.E. Growth ... 12.874 13.883 150,091
</TABLE>
- ----------------
* Commencement of operations for these Sub-Accounts.
** Prior to May 1, 1997, this Sub-Account was known as Equity-Income.
*** Prior to May 1, 1997, this Sub-Account was known as Utility.
Because the International Equity and U.S. Equity Sub-Accounts did not commence
operations until January 2, 1997, there is no condensed financial information
for these Sub-Accounts for the year ended December 31, 1996.
A-1
<PAGE>
PART B
INFORMATION REQUIRED IN A STATEMENT OF
ADDITIONAL INFORMATION
WRL FREEDOM ATTAINER STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
WRL SERIES ANNUITY ACCOUNT
WRL FREEDOM ATTAINER(R)
Flexible Payment Variable
Deferred Annuity Contract
Issued by
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, Florida 33770
Telephone: (800) 851-9777
(813) 585-6565
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a Prospectus and should be read
in conjunction with the WRL Freedom Attainer(R) Prospectus, dated May 1, 1997,
which is available without charge by contacting Western Reserve Life Assurance
Co. of Ohio ("Western Reserve") at P. 0. Box 9051, Clearwater, Florida
34618-9051 at the telephone number above.
May 1, 1997
WRL00027-05/97
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Custodian ................................................ 3
Independent Accountants ................................. 3
Legal Matters ............................................. 3
Calculation of Performance Related Information ............ 3
Addition, Deletion, and Substitution of Investments ...... 6
Calculation of Variable Annuity Payments .................. 6
Financial Statements .................................... 7
</TABLE>
2
<PAGE>
CUSTODIAN
The assets of WRL Series Annuity Account (the "Series Account") are
held by Western Reserve. The assets of the Series Account are kept physically
segregated and held apart from the general account and any other separate
accounts of Western Reserve. WRL Investment Services, Inc. maintains records of
all purchases and redemptions of shares of the WRL Series Fund, Inc. (the
"Fund"). Additional protection for the assets of the Series Account is
provided by a blanket bond issued to AEGON U.S. Holding Corporation ("AEGON
U.S.") in the amount of $5 million (subject to a $1 million deductible),
covering all of the employees of AEGON U.S. and its affiliates, including
Western Reserve. A Stockbrokers Blanket Bond, issued to AEGON U.S.A. Securities,
Inc., provides additional fidelity coverage to a limit of $12 million, subject
to a $50,000 deductible.
INDEPENDENT ACCOUNTANTS
The accounting firm of Price Waterhouse LLP, independent accountants,
provided audit services to the Series Account for the year ended December 31,
1996. The principal business address of Price Waterhouse LLP is 1055 Broadway,
Kansas City, Missouri 64105. The accounting firm of Ernst & Young LLP,
independent auditors, provided audit services to Western Reserve for the year
ended December 31, 1996. The principal business address of Ernst & Young LLP is
801 Grand Avenue, Suite 3400, Des Moines, Iowa 50309-2764.
LEGAL MATTERS
Sutherland, Asbill & Brennan, L.L.P., Washington, D.C., has provided advice
on certain legal matters concerning Federal securities laws in connection with
the Contracts. All matters of Ohio law pertaining to the Contracts, including
the validity of the Contracts and Western Reserve's right to issue the
Contracts under Ohio insurance law, have been passed upon by Thomas E. Pierpan,
Esq., Vice President, Associate General Counsel and Assistant Secretary of
Western Reserve.
CALCULATION OF PERFORMANCE RELATED INFORMATION
A. YIELD AND EFFECTIVE YIELD QUOTATIONS FOR THE MONEY MARKET SUB-ACCOUNT
YIELD - The yield quotation set forth in the Prospectus for the Money
Market Sub-Account is for the seven days ended on the date of the most recent
balance sheet of the Series Account included in the registration statement, and
is computed by determining the net change, exclusive of capital changes, in the
value of a hypothetical pre-existing account having a balance of one unit in the
Money Market Sub-Account at the beginning of the period, subtracting a
hypothetical charge reflecting deductions from Owner accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and multiplying the base period return by (365/7)
with the resulting figure carried to at least the nearest hundredth of one
percent.
EFFECTIVE YIELD - The effective yield quotation for the Money Market
Sub-Account set forth in the Prospectus is for the seven days ended on the date
of the most recent balance sheet of the Series Account included in the
registration statement. The effective yield is computed by determining the net
change, exclusive of capital changes, in the value of a hypothetical preexisting
Sub-Account having a balance of one unit in the Money Market Sub-Account at the
beginning of the period. A hypothetical charge, reflecting deductions from Owner
accounts, is subtracted from the balance. The difference is divided by the value
of the Sub-Account at the beginning of the base period to obtain the base period
return, which is then compounded by adding 1. Next, the sum is raised to a power
equal to 365 divided by 7, and 1 is subtracted from the result. The following
formula describes the computation:
EFFECTIVE YIELD = ({BASE PERIOD RETURN - 1}365/7) - 1
The effective yield is shown at least to the nearest hundredth of one
percent.
3
<PAGE>
HYPOTHETICAL CHARGE - For purposes of the yield and effective yield
computations, the hypothetical charge reflects all fees and charges that are
charged to all Owner accounts in proportion to the length of the base period.
Such fees and charges include the $30 Annual Contract Charge, calculated on the
basis of an average Series Account Value per Contract of $33,136, which converts
that charge to an annual rate of 0.09% of the Series Account Value. The yield
and effective yield quotations do not reflect any deduction for premium taxes or
transfer charges that may be applicable to a particular Contract, nor do they
reflect the Withdrawal Charge that may be assessed at the time of redemption in
an amount ranging up to 6% of the requested redemption amount. The specific
Withdrawal Charge percentage applicable to a particular redemption depends on
the length of time Purchase Payments have been held under the Contract and
whether redemptions have been previously made during that Contract Year. (See
"Charges and Deductions-Withdrawal Charge" on pages 10-11 of the Prospectus.) No
fees or sales charges are assessed upon annuitization under the Contracts,
except premium taxes. Realized gains and losses from the sale of securities, and
unrealized appreciation and depreciation of assets held by the Money Market
Sub-Account and the Fund are excluded from the calculation of yield.
B. TOTAL RETURN AND YIELD QUOTATIONS FOR THE AGGRESSIVE GROWTH, EMERGING
GROWTH, GROWTH, GLOBAL, BALANCED, STRATEGIC TOTAL RETURN, BOND,
SHORT-TO-INTERMEDIATE GOVERNMENT, GROWTH & INCOME, TACTICAL ASSET
ALLOCATION, C.A.S.E. GROWTH, VALUE EQUITY, GLOBAL SECTOR, INTERNATIONAL
EQUITY AND U.S. EQUITY SUB-ACCOUNTS
The total return quotations set forth in the Prospectus for all of these
Sub-Accounts, except the Money Market Sub-Account, holding assets for the
Contracts during the Accumulation Period are average annual total return
quotations for the one, three, five, and ten-year periods (or, while a
Sub-Account has been in existence for a period of less than one, three, five or
ten years, for such lesser period) ended on the date of the most recent balance
sheet of the Series Account and for the period from the date the Sub-Accounts
commenced operations until the aforesaid date. The quotations are computed by
determining the average annual compounded rates of return over the relevant
periods that would equate the initial amount invested to the ending redeemable
value, according to the following formula:
P(l - T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the particular period of a
hypothetical $1,000 payment made at the beginning of the
particular period.
For purposes of the total return quotations for all of these Sub-Accounts,
except the Money Market Sub-Account, the calculations take into account all fees
that are charged to all Owner accounts during the Accumulation Period. Such fees
include the $30 Annual Contract Charge, calculated on the basis of an average
Series Account Value per Contract of $33,136, which converts that charge to an
annual rate of 0.09% of the Series Account Value. The calculations also assume a
complete surrender as of the end of the particular period. The calculations do
not reflect any deductions for premium taxes or any transfer charges that may be
applicable to a particular Contract.
The yield quotations for all of these Sub-Accounts, except the Money Market
Sub-Account, representing the Accumulation Period set forth in the Prospectus is
based on the thirty-day period ended on the date of the most recent balance
sheet of the Series Account and are computed by dividing the net investment
income per unit earned during the period by the maximum offering price per unit
on the last date of the period, according to the following formula:
a-b
YIELD = 2 [ ( --- + 1)6 - 1]
cd
Where: a = net investment income earned during the period by the
corresponding Portfolio of the Fund attributable to shares owned
by the Sub-Account
b = expenses accrued for the period (net of reimbursement)
4
<PAGE>
c = the average daily number of units outstanding during the period
d = the maximum offering price per unit on the last day of the period
For purposes of the yield quotations for the Bond, Growth, Global, and
Short-to-Intermediate Government Sub-Accounts, the calculations take into
account all fees that are charged to all Owner accounts during the Accumulation
Period. Such fees include the $30 Annual Contract Charge, calculated on the
basis of an average Series Account Value per Contract of $33,136, which converts
that charge to an annual rate of 0.09% of the Series Account Value. The
calculations do not take into account any premium taxes, the Withdrawal Charge
or any transfer charges.
Premium taxes currently range from 0% to 3.5% of Purchase Payments
depending upon the jurisdiction in which the Contract is delivered. A Withdrawal
Charge may be assessed at the time of surrender in an amount ranging up to 6% of
the requested redemption amount, with the specific percentage applicable to a
particular redemption depending on the length of time Purchase Payments were
held under the Contract, and whether redemptions had been previously made during
that Contract Year. (See "Charges and Deductions-Withdrawal Charge" on pages
10-11 of the Prospectus.)
C. OTHER PERFORMANCE DATA
Western Reserve may from time to time disclose average annual total return
in non-standard formats and cumulative total return for Contracts funded by
these Sub-Accounts.
Western Reserve may from time to time also disclose in advertisements and
sales literature yields and non-standard total returns for the Sub-Accounts
(some of which do not include Contract and Series Account fees and charges)
including such disclosure for the Sub-Accounts for periods prior to the date the
Sub-Accounts commenced operations.
For periods prior to the date each Sub-Account commenced operations,
performance information will be calculated based on the performance of the
Fund's corresponding Portfolios that commenced operations prior to each
Sub-Account, and the assumption that each Sub-Account was in existence for the
same periods as those indicated for each respective Portfolio, with a level of
fees and charges approximately equal to those currently assessed against each
Sub-Account and the Contract. The Prospectus contains a table which shows
average annual total returns for periods prior to the date each Sub-Account
commenced operations. The Prospectus also contains a similar table for the same
periods which shows average annual total returns which do not reflect any charge
on amounts partially withdrawn or surrendered. The total returns in the second
table are calculated in exactly the same manner as those in the preceding table,
except that the ending redeemable value of the hypothetical account for the
periods is replaced with an ending value for the periods that does not take into
account any charge on amounts partially withdrawn or surrendered. Non-standard
performance data will only be disclosed if the standard performance data for the
required periods is also disclosed.
D. ADVERTISING AND SALES LITERATURE
From time to time Western Reserve may refer to the diversifying process of
asset allocation based on the Modern Portfolio Theory developed by Nobel Prize
winning economist Harry Markowitz. The basic assumptions of Modern Portfolio
Theory are the selection of individual investments has little impact on
portfolio performance, market timing strategies seldom work, markets are
efficient, and portfolio selection should be made among asset classes. Modern
Portfolio Theory allows an investor to determine an efficient portfolio
selection that will provide a higher return with the same risk or the same
return with lower risk.
When presenting the asset allocation process Western Reserve may outline
the process of personal and investment risk analysis including determining
individual risk tolerances and a discussion of the different types of investment
risk. Western Reserve may classify investors into four categories based on their
risk tolerance and will quote various industry experts on which types of
investments are best suited to each of the four risk categories. The industry
experts quoted may include lbbotson Associates, CDA Investment Technologies,
Lipper Analytical Services and any other expert which has been deemed by the
Company to be appropriate. Western Reserve may also provide a historical
overview of the performance of a variety of
5
<PAGE>
investment market indices, the performance of these indices over time, and the
performance of different asset classes, such as stocks, bonds, cash equivalents,
etc. Western Reserve may also discuss investment volatility including the range
of returns for different asset classes and over different time horizons, and the
correlation between the returns of different asset classes. Western Reserve may
also discuss the basis of portfolio optimization including the required inputs
and the construction of efficient portfolios using sophisticated computer-based
techniques. Finally, Western Reserve may describe various investment strategies
and methods of implementation, the periodic rebalancing of diversified
portfolios, the use of dollar cost averaging techniques, a comparison of the tax
impact of purchase payments made on a "before tax" basis through a
tax-qualified plan with those made on an "after tax" basis outside of a
tax-qualified plan, and a comparison of tax-deferred versus non tax-deferred
accumulation of purchase payments.
ADDITION, DELETION, AND SUBSTITUTION OF INVESTMENTS
Western Reserve reserves the right, subject to compliance with applicable
law, to make additions to, deletions from or substitutions for the shares that
are held by the Series Account or that the Series Account may purchase. Western
Reserve reserves the right to eliminate the shares of any of the Portfolios of
the Fund and to substitute shares of another Portfolio of the Fund or of another
open-end registered investment company, if the shares of a Portfolio are no
longer available for investment, or if in Western Reserve's judgment further
investment in any Portfolio should become inappropriate in view of the purposes
of the Series Account. Western Reserve will not, however, substitute any shares
attributable to an Owner's interest in a Sub-Account without notice to and
prior approval of the Securities and Exchange Commission, to the extent required
by the Investment Company Act of 1940, as amended (the "1940 Act") or
other applicable law.
Western Reserve also reserves the right to establish additional
Sub-Accounts, each of which would invest in a new Portfolio of the Fund, or in
shares of another investment company, with a specified investment objective. New
Sub-Accounts may be established when, in the sole discretion of Western Reserve,
marketing, tax or investment conditions warrant, and any new Sub-Accounts will
be made available to existing Owners on a basis to be determined by Western
Reserve. Western Reserve may also eliminate one or more Sub-Accounts if, in its
sole discretion, marketing, tax or investment conditions warrant.
In the event of any such substitution or change, Western Reserve may make
such changes in the Contracts and other annuity contracts as may be necessary or
appropriate to reflect such substitution or change. If deemed by Western Reserve
to be in the best interests of persons having voting rights under the Contracts,
the Series Account may be operated as a management company under the 1940 Act,
or, subject to any required approval, it may be deregistered under that Act in
the event such registration is no longer required.
Western Reserve reserves the right to change the investment objective of
any Sub-Account. Additionally, if required by law or regulation, Western Reserve
will not materially change an investment objective of the Series Account or of a
Portfolio designated for a Sub-Account unless a statement of the change is filed
with and approved by the appropriate insurance official of the state of Western
Reserve's domicile or deemed approved in accordance with such law or regulation.
CALCULATION OF VARIABLE ANNUITY PAYMENTS
Under a Series Account annuity option, the Owner applies his or her Annuity
Proceeds (or a portion thereof) on the Maturity Date to one or more of the
sixteen Sub-Accounts designated to support annuity payments by purchasing units
issued in connection with each Sub-Account selected by the Owner. The Annuity
Unit Value of any Sub-Account will increase or decrease in accordance with the
investment experience of that Sub-Account. The Annuity Unit Value of any
Sub-Account at the end of a Valuation Period is equal to the product of (a) the
Annuity Unit Value for that Sub-Account at the end of the immediately
6
<PAGE>
preceding Valuation Period, multiplied by (b) the net investment factor for that
Sub-Account for the Valuation Period, multiplied by (c) the "assumed
investment return adjustment factor" for the Valuation Period.
The "assumed investment return adjustment factor" for a Valuation
Period is the product of discount factors of .99986634 per day, and is designed
to recognize the 5% effective annual assumed investment return.
The net investment factor used to calculate the Annuity Unit Value of each
Sub-Account for the Valuation Period is equal to (a) the net result of (1) the
net asset value of a Fund share held in that Sub-Account determined as of the
end of the current Valuation Period; plus (2) the per share amount of any
dividend or capital gain distributions made by the Fund for shares held in that
Sub-Account if the ex-dividend date occurs during the Valuation Period; plus or
minus (3) a per share charge or credit for any taxes reserved for which Western
Reserve determines to have resulted from the investment operations of the
Sub-Account; divided by (b) the net asset value of a Fund share held in the
Sub-Account determined as of the end of the immediately preceding Valuation
Period; minus (c) a factor representing the mortality and expense risk charge
and administrative charge. This factor is equal, on an annual basis, to 1.40% of
the daily net asset value of a Fund share held in the Series Account for the
Sub-Account.
DETERMINATION OF THE FIRST VARIABLE PAYMENT. The amount of the first
variable payment is determined by multiplying the Annuity Proceeds times the
appropriate rate for the variable option selected. The rates are based on the
Society of Actuaries 1983 Individual Mortality Table A with projection and a 5%
effective annual assumed investment return and assuming a Maturity Date in the
year 2000. Gender based mortality tables will be used unless prohibited by law.
The amount of the first payment depends upon the adjusted age of the
Annuitant. The adjusted age is the Annuitant's actual age nearest birthday at
the Maturity Date adjusted as follows:
<TABLE>
<CAPTION>
Maturity Date Adjusted Age
- ------------- ------------
<S> <C>
Before 2001 Actual Age
2001 - 2010 Actual Age minus 1
2011 - 2020 Actual Age minus 2
2021 - 2030 Actual Age minus 3
2030 - 2040 Actual Age minus 4
</TABLE>
After the year 2040 as determined by Western Reserve.
DETERMINATION OF SUBSEQUENT VARIABLE PAYMENTS. The amount of variable
annuity payments after the first will increase or decrease according to the
Annuity Unit Value which reflects the investment experience of the selected
Sub-Account(s). Each variable annuity payment after the first will be equal to
the number of units attributable to the Contract in each selected Sub-Account
multiplied by the Annuity Unit Value of that Sub-Account on the date the payment
is processed. The number of such units is determined by dividing the first
payment allocated to that Sub-Account by the Annuity Unit Value of that
Sub-Account on the date the first annuity payment is processed.
FINANCIAL STATEMENTS
The financial statements of Western Reserve which are included in this
Statement of Additional Information should be considered only as bearing on the
ability of Western Reserve to meet its obligations under the Contracts. They
should not be considered as bearing on the investment performance of the assets
held in the Series Account.
Financial Statements for Western Reserve for the years ended December 31,
1996, 1995 and 1994 have been prepared on the basis of statutory accounting
principles, rather than generally accepted accounting principles ("GAAP").
7
<PAGE>
INDEX TO FINANCIAL STATEMENTS
WRL SERIES ANNUITY ACCOUNT (FREEDOM AND ATTAINER VARIABLE ANNUITIES):
Report of Independent Accountants dated January 31, 1997
Statements of assets, liabilities and equity accounts and statements of
operations for the year ended December 31, 1996
Statements of changes in equity accounts for the years ended December 31,
1996 and 1995
Selected per unit data and ratios for the years ended December 31, 1996,
1995, 1994, 1993 and 1992
Notes to financial statements
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO:
Report of Independent Auditors dated February 21, 1997
Statutory-Basis balance sheets at December 31, 1996 and 1995
Statutory-Basis statements of operations for the years ended December 31,
1996, 1995 and 1994
Statutory-Basis statements of changes in capital and surplus for the years
ended December 31, 1996, 1995 and 1994
Statutory-Basis statements of cash flows for the years ended December 31,
1996, 1995 and 1994
Notes to Statutory-Basis financial statements
Statutory-Basis financial statement schedules
8
<PAGE>
WRL SERIES ANNUITY ACCOUNT
FREEDOM AND ATTAINER
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Western Reserve Life Assurance Co. of Ohio and
Contract Owners of the WRL Series Annuity Account - WRL Freedom Variable Annuity
and WRL Freedom Attainer Contracts
In our opinion, the accompanying statements of assets, liabilities and equity
accounts and the related statements of operations and of changes in equity
accounts and the selected per unit data and ratios present fairly, in all
material respects, the financial position of each of the Sub-Accounts
constituting the WRL Freedom Variable Annuity and WRL Freedom Attainer Contracts
of the WRL Series Annuity Account (a separate account of Western Reserve Life
Assurance Co. of Ohio, hereafter referred to as the "Annuity Account") at
December 31, 1996, the results of each of their operations, the changes in each
of their equity accounts and the selected per unit data and ratios for each of
the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and selected per unit data and ratios
(hereafter referred to as "financial statements") are the responsibility of the
Annuity Account's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
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.
PRICE WATERHOUSE LLP
Kansas City, Missouri
January 31, 1997
9
<PAGE>
WRL SERIES ANNUITY ACCOUNT
FREEDOM AND ATTAINER
STATEMENTS OF ASSETS, LIABILITIES AND EQUITY ACCOUNTS
At December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHORT-TO-
INTERMEDIATE
MONEY MARKET BOND GROWTH GOVERNMENT
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C> <C> <C>
ASSETS:
Investments
Investment in WRL Series Fund, Inc.:
Shares ..................................... 51,138,160.550 4,254,266.463 16,458,439.520 841,351.902
================= ================= ================== ===============
Cost ....................................... $ 51,138,161 $ 47,679,739 $ 445,847,640 $ 8,730,422
================= ================= ================== ===============
Investments, at net asset value ............. $ 51,138,161 $ 45,551,426 $ 576,066,441 $ 8,619,507
Accrued transfers from (to) depositor - net . 2,627 (35,017) 48,946 5,375
----------------- ----------------- ------------------ ---------------
Total assets ............................... 51,140,788 45,516,409 576,115,387 8,624,882
----------------- ----------------- ------------------ ---------------
LIABILITIES: .................................. 0 0 0 0
----------------- ----------------- ------------------ ---------------
Total net assets ........................... $ 51,140,788 $ 45,516,409 $ 576,115,387 $ 8,624,882
================= ================= ================== ===============
EQUITY ACCOUNTS:
Contract Owners' equity:
Units ...................................... 3,848,980.206975 2,513,341.667873 17,369,774.620879 738,461.226280
================= ================= ================== ===============
Unit value ................................. $ 13.286841 $ 18.109917 $ 33.167695 $ 11.679533
================= ================= ================== ===============
Contract Owners' equity .................... $ 51,140,788 $ 45,516,409 $ 576,115,387 $ 8,624,882
----------------- ----------------- ------------------ ---------------
Depositor's equity:
Units ...................................... N/A N/A N/A N/A
================= ================= ================== ===============
Unit value ................................. $ N/A $ N/A $ N/A $ N/A
================= ================= ================== ===============
Depositor's equity ......................... $ N/A $ N/A $ N/A $ N/A
----------------- ----------------- ------------------ ---------------
Total equity ............................... $ 51,140,788 $ 45,516,409 $ 576,115,387 $ 8,624,882
================= ================= ================== ===============
</TABLE>
<TABLE>
<CAPTION>
AGGRESSIVE
GLOBAL EQUITY INCOME EMERGING GROWTH GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C> <C> <C>
ASSETS:
Investments
Investment in WRL Series Fund, Inc.:
Shares ..................................... 12,233,889.584 9,786,721.502 7,754,180.658 4,503,242.177
================== ================= ================= =================
Cost ....................................... $ 182,349,154 $ 115,114,224 $ 107,887,527 $ 62,252,043
================== ================= ================= =================
Investments, at net asset value ............. $ 221,618,940 $ 136,742,208 $ 143,151,054 $ 63,847,033
Accrued transfers from (to) depositor - net . (434,311) 46,815 130,627 (4,195)
------------------ ----------------- ----------------- -----------------
Total assets ............................... 221,184,629 136,789,023 143,281,681 63,842,838
------------------ ----------------- ----------------- -----------------
LIABILITIES: .................................. 0 0 0 0
------------------ ----------------- ----------------- -----------------
Total net assets ........................... $ 221,184,629 $ 136,789,023 $ 143,281,681 $ 63,842,838
================== ================= ================= =================
EQUITY ACCOUNTS:
Contract Owners' equity:
Units ...................................... 10,764,226.518931 8,849,836.119981 7,440,062.350527 4,385,415.675763
================== ================= ================= =================
Unit value ................................. $ 20.548121 $ 15.456673 $ 19.258129 $ 14.557990
================== ================= ================= =================
Contract Owners' equity .................... $ 221,184,629 $ 136,789,023 $ 143,281,681 $ 63,842,838
------------------ ----------------- ----------------- -----------------
Depositor's equity:
Units ...................................... N/A N/A N/A N/A
================== ================= ================= =================
Unit value ................................. $ N/A $ N/A $ N/A $ N/A
================== ================= ================= =================
Depositor's equity ......................... $ N/A $ N/A $ N/A $ N/A
------------------ ----------------- ----------------- -----------------
Total equity ............................... $ 221,184,629 $ 136,789,023 $ 143,281,681 $ 63,842,838
================== ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
BALANCED UTILITY
SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C>
ASSETS:
Investments
Investment in WRL Series Fund, Inc.:
Shares ..................................... 1,193,098.378 1,053,224.651
================= ===============
Cost ....................................... $ 12,180,525 $ 11,633,916
================= ===============
Investments, at net asset value ............. $ 13,594,982 $ 12,388,918
Accrued transfers from (to) depositor - net . 2,616 8,405
----------------- ---------------
Total assets ............................... 13,597,598 12,397,323
----------------- ---------------
LIABILITIES: .................................. 0 0
----------------- ---------------
Total net assets ........................... $ 13,597,598 $ 12,397,323
================= ===============
EQUITY ACCOUNTS:
Contract Owners' equity: 1,124,365.141725 960,651.569215
Units ...................................... ================= ===============
$ 12.093578 $ 12.905119
Unit value ................................. ================= ===============
$ 13,597,598 $ 12,397,323
Contract Owners' equity .................... ----------------- ---------------
Depositor's equity: N/A N/A
Units ...................................... ================= ===============
$ N/A $ N/A
Unit value ................................. ================= ===============
$ N/A $ N/A
Depositor's equity ......................... ----------------- ---------------
$ 13,597,598 $ 12,397,323
Total equity ............................... ================= ===============
</TABLE>
10
<PAGE>
WRL SERIES ANNUITY ACCOUNT
FREEDOM AND ATTAINER
STATEMENTS OF OPERATIONS
For the year or period ended December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHORT-TO-
INTERMEDIATE
MONEY MARKET BOND GROWTH GOVERNMENT
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income ................................. $2,318,177 $ 2,726,380 $ 5,703,766 $ 427,720
Capital gain distributions ...................... 0 0 30,982,138 0
---------- ------------ ----------- ---------
2,318,177 2,726,380 36,685,904 427,720
---------- ------------ ----------- ---------
EXPENSES:
Mortality and expense risk ...................... 581,835 609,357 7,089,696 108,059
---------- ------------ ----------- ---------
Net investment income (loss) ................ 1,736,342 2,117,023 29,596,208 319,661
---------- ------------ ----------- ---------
Net realized and unrealized gain (loss)
on investments:
Net realized gain (loss) from securities
transactions ............................... 0 (894,887) 19,049,009 203,213
Change in unrealized appreciation (depreciation) 0 (2,059,236) 36,040,068 (343,649)
---------- ------------ ----------- ---------
Net gain (loss) on investments ................ 0 (2,954,123) 55,089,077 (140,436)
---------- ------------ ----------- ---------
Net increase (decrease) in equity accounts
resulting from operations ................... $1,736,342 $ (837,100) $84,685,285 $ 179,225
========== ============ =========== =========
</TABLE>
The notes to the financial statements are an integral part of this report.
<TABLE>
<CAPTION>
AGGRESSIVE
GLOBAL EQUITY-INCOME EMERGING GROWTH GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income .................................. $ 2,398,560 $ 2,987,391 $ 5,938 $ 805,763
Capital gain distributions ....................... 16,556,571 4,643,304 6,301,328 1,108,485
----------- ----------- ----------- -----------
18,955,131 7,630,695 6,307,266 1,914,248
----------- ----------- ----------- -----------
EXPENSES:
Mortality and expense risk ....................... 2,403,768 1,588,877 1,689,428 791,978
----------- ----------- ----------- -----------
Net investment income (loss) ................. 16,551,363 6,041,818 4,617,838 1,122,270
----------- ----------- ----------- -----------
Net realized and unrealized gain (loss)
on investments:
Net realized gain (loss) from securities
transactions ................................ 3,629,444 2,456,417 5,871,308 5,388,425
Change in unrealized appreciation (depreciation) 22,139,297 7,750,988 9,527,527 (1,464,474)
----------- ----------- ----------- -----------
Net gain (loss) on investments ............... 25,768,741 10,207,405 15,398,835 3,923,951
----------- ----------- ----------- -----------
Net increase (decrease) in equity accounts
resulting from operations .................. $42,320,104 $16,249,223 $20,016,673 $ 5,046,221
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
BALANCED UTILITY
SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C>
INVESTMENT INCOME:
Dividend income ................................. $ 318,130 $ 343,073
Capital gain distributions ...................... 116,253 320,533
---------- -----------
434,383 663,606
---------- -----------
EXPENSES:
Mortality and expense risk ...................... 153,488 153,091
---------- -----------
Net investment income (loss) ................ 280,895 510,515
---------- -----------
Net realized and unrealized gain (loss)
on investments:
Net realized gain (loss) from securities
transactions .............................. 303,521 938,461
Change in unrealized appreciation (depreciation) 510,671 (345,673)
---------- -----------
Net gain (loss) on investments .............. 814,192 592,788
---------- -----------
Net increase (decrease) in equity accounts
resulting from operations ................. $1,095,087 $ 1,103,303
========== ===========
</TABLE>
The notes to the financial statements are an integral part of this report.
11
<PAGE>
WRL SERIES ANNUITY ACCOUNT
FREEDOM AND ATTAINER
STATEMENTS OF ASSETS, LIABILITIES AND EQUITY ACCOUNTS
At December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TACTICAL ASSET MERIDIAN/INVESCO
ALLOCATION C.A.S.E. GROWTH GLOBAL SECTOR VALUE EQUITY
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C> <C> <C>
ASSETS:
Investments
Investment in WRL Series Fund, Inc.:
Shares ................................... 4,923,286.903 270,709.091 228,542.062 1,478,564.186
================= ================ ================= =================
Cost ..................................... $ 56,485,830 $ 3,410,503 $ 2,328,309 $ 15,479,239
================= ================ ================= =================
Investments at net asset value ............. $ 62,086,158 $ 3,632,088 $ 2,411,645 $ 16,658,260
Accrued transfers from (to) depositor -
net ...................................... 109,274 (20,473) 5,153 20,457
----------------- ---------------- ----------------- -----------------
Total assets ............................. 62,195,432 3,611,615 2,416,798 16,678,717
----------------- ---------------- ----------------- -----------------
LIABILITIES: .................................. 0 0 0 0
----------------- ---------------- ----------------- -----------------
Total net assets ......................... $ 62,195,432 $ 3,611,615 $ 2,416,798 $ 16,678,717
================= ================ ================= =================
EQUITY ACCOUNTS:
Contract Owners' equity:
Units .................................... 4,640,508.914581 260,151.966141 179,748.125878 1,470,890.372880
================= ================ ================= =================
Unit value ............................... $ 13.402718 $ 13.882712 $ 10.519446 $ 11.224729
================= ================ ================= =================
Contract Owners' equity .................. $ 62,195,432 $ 3,611,615 $ 1,890,851 $ 16,510,346
----------------- ---------------- ----------------- -----------------
Depositor's equity:
Units .................................... N/A N/A 49,997.602730 15,000.000000
================= ================ ================= =================
Unit value ............................... $ N/A $ N/A $ 10.519446 $ 11.224729
================= ================ ================= =================
Depositor's equity ....................... $ N/A $ N/A $ 525,947 $ 168,371
----------------- ---------------- ----------------- -----------------
Total equity ............................. $ 62,195,432 $ 3,611,615 $ 2,416,798 $ 16,678,717
================= ================ ================= =================
</TABLE>
WRL SERIES ANNUITY ACCOUNT
FREEDOM AND ATTAINER
STATEMENTS OF OPERATIONS
For the year or period ended December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TACTICAL ASSET MERIDIAN/INVESCO
ALLOCATION C.A.S.E. GROWTH GLOBAL SECTOR VALUE EQUITY
SUB-ACCOUNT SUB-ACCOUNT(A) SUB-ACCOUNT(B) SUB-ACCOUNT(B)
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income ................................. $1,358,726 $ 13,501 $ 4,127 $ 54,476
Capital gain distributions ...................... 1,124,308 60,238 8,435 23,016
---------- ---------- ---------- ----------
2,483,034 73,739 12,562 77,492
---------- ---------- ---------- ----------
EXPENSES:
Mortality and expense risk ...................... 625,676 16,148 13,507 62,393
---------- ---------- ---------- ----------
Net investment income (loss) ................ 1,857,358 57,591 (945) 15,099
---------- ---------- ---------- ----------
Net realized and unrealized gain (loss)
on investments:
Net realized gain (loss) from securities
transactions ................................ 1,214,979 6,286 54,832 17,249
Change in unrealized appreciation (depreciation) 3,264,959 221,585 83,336 1,179,022
---------- ---------- ---------- ----------
Net gain (loss) on investments .............. 4,479,938 227,871 138,168 1,196,271
---------- ---------- ---------- ----------
Net increase (decrease) in equity accounts
resulting from operations ................. $6,337,296 $ 285,462 $ 137,223 $1,211,370
========== ========== ========== ==========
</TABLE>
(a) This sub-account option became effective May 1, 1996.
(b) The inception date of this sub-account was May 1, 1996.
The notes to the financial statements are an integral part of this report.
12
<PAGE>
WRL SERIES ANNUITY ACCOUNT
FREEDOM AND ATTAINER
STATEMENTS OF CHANGES IN EQUITY ACCOUNTS
For the year or period ended
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY MARKET BOND
SUB-ACCOUNT SUB-ACCOUNT
DECEMBER 31 DECEMBER 31
------------------------------- ------------------------------
1996 1995 1996 1995
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ....... $ 1,736,342 $ 1,688,168 $ 2,117,023 $ 2,463,557
Net gain (loss) on investments ..... 0 0 (2,954,123) 7,173,790
-------------- --------------- -------------- --------------
Net increase (decrease) in equity
accounts resulting from operations 1,736,342 1,688,168 (837,100) 9,637,347
-------------- --------------- -------------- --------------
EQUITY TRANSACTIONS:
Proceeds from units sold (redeemed) 20,115,791 (5,902,965) (1,163,641) 2,542,773
-------------- --------------- -------------- --------------
Less cost of units redeemed:
Administrative charges ............. 26,252 29,037 37,247 44,441
Policy loans ....................... 9,353 519 8,380 22,037
Surrender benefits ................. 12,019,796 8,795,944 5,573,331 4,815,578
Death benefits ..................... 251,461 682,261 973,057 381,877
-------------- --------------- -------------- --------------
12,306,862 9,507,761 6,592,015 5,263,933
-------------- --------------- -------------- --------------
Increase (decrease) in equity
accounts from capital unit
transactions ..................... 7,808,929 (15,410,726) (7,755,656) (2,721,160)
-------------- --------------- -------------- --------------
Net increase (decrease) in equity
accounts ......................... 9,545,271 (13,722,558) (8,592,756) 6,916,187
Depositors' equity contribution
(redemption) ..................... 0 0 0 0
EQUITY ACCOUNTS:
Beginning of period ................. 41,595,517 55,318,075 54,109,165 47,192,978
-------------- ------------- -------------- --------------
End of period ....................... $51,140,788 $41,595,517 $45,516,409 $54,109,165
============== ============= ============== ==============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
GROWTH
SUB-ACCOUNT
DECEMBER 31
--------------------------------
1996 1995
--------------- ----------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ....... $ 29,596,208 $ 45,360,822
Net gain (loss) on investments ..... 55,089,077 124,914,006
--------------- ---------------
Net increase (decrease) in equity
accounts resulting from operations 84,685,285 170,274,828
--------------- ---------------
EQUITY TRANSACTIONS:
Proceeds from units sold (redeemed) 20,058,281 (5,005,493)
--------------- ---------------
Less cost of units redeemed:
Administrative charges ............. 488,816 506,610
Policy loans ....................... 223,257 248,376
Surrender benefits ................. 57,167,796 39,094,973
Death benefits ..................... 3,394,348 2,653,999
--------------- ---------------
61,274,217 42,503,958
--------------- ---------------
Increase (decrease) in equity
accounts from capital unit
transactions ..................... (41,215,936) (47,509,451)
--------------- ---------------
Net increase (decrease) in equity
accounts ......................... 43,469,349 122,765,377
Depositors' equity contribution
(redemption) ..................... 0 0
EQUITY ACCOUNTS:
Beginning of period ................. 532,646,038 409,880,661
--------------- ---------------
End of period ....................... $576,115,387 $532,646,038
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
SHORT-TO-INTERMEDIATE
GOVERNMENT GLOBAL EQUITY-INCOME
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
DECEMBER 31 DECEMBER 31 DECEMBER 31
1996 1995 1996 1995 1996 1995
---------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ....... $ 319,661 $ 384,381 $ 16,551,363 $ 3,845,538 $ 6,041,818 $ 4,829,923
Net gain (loss) on investments ..... (140,436) 571,227 25,768,741 21,401,529 10,207,405 16,256,046
---------- ---------- ------------ ------------ ------------ ------------
Net increase (decrease) in equity
accounts resulting from operations 179,225 955,608 42,320,104 25,247,067 16,249,223 21,085,969
---------- ---------- ------------ ------------ ------------ ------------
EQUITY TRANSACTIONS:
Proceeds from units sold (redeemed) (75,931) 1,015,750 52,563,710 (18,151,534) 14,094,848 13,068,987
---------- ---------- ------------ ------------ ------------ ------------
Less cost of units redeemed:
Administrative charges ............ 4,880 5,833 137,643 125,566 81,004 78,077
Policy loans ...................... 0 0 83,013 93,720 43,799 76,572
Surrender benefits ................ 656,540 369,692 14,292,685 9,634,079 9,351,749 5,988,610
Death benefits .................... 29,829 218,964 610,901 522,441 452,886 244,625
---------- ---------- ------------ ------------ ------------ ------------
691,249 594,489 15,124,242 10,375,806 9,929,438 6,387,884
---------- ---------- ------------ ------------ ------------ ------------
Increase (decrease) in equity
accounts from capital unit
transactions .................... (767,180) 421,261 37,439,468 (28,527,340) 4,165,410 6,681,103
---------- ---------- ------------ ------------ ------------ ------------
Net increase (decrease) in equity
accounts ........................ (587,955) 1,376,869 79,759,572 (3,280,273) 20,414,633 27,767,072
Depositors' equity contribution
(redemption) .................... 0 0 0 0 0 0
EQUITY ACCOUNTS:
Beginning of period ................ 9,212,837 7,835,968 141,425,057 144,705,330 116,374,390 88,607,318
---------- ---------- ------------ ------------ ------------ ------------
End of period ...................... $8,624,882 $9,212,837 $221,184,629 $141,425,057 $136,789,023 $116,374,390
========== ========== ============ ============ ============ ============
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
EMERGING GROWTH AGGRESSIVE GROWTH BALANCED
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
DECEMBER 31 DECEMBER 31 DECEMBER 31
--------------------------- -------------------------- -------------------------
1996 1995 1996 1995 1996 1995
------------ ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ....... $ 4,617,838 $ 3,589,652 $ 1,122,270 $ 1,120,016 $ 280,895 $ 272,734
Net gain (loss) on investments ..... 15,398,835 32,014,723 3,923,951 10,026,368 814,192 1,354,330
------------ ------------ ----------- ----------- ---------- ----------
Net increase (decrease) in equity
accounts resulting from operations 20,016,673 35,604,375 5,046,221 11,146,384 1,095,087 1,627,064
------------ ------------ ----------- ----------- ---------- ----------
EQUITY TRANSACTIONS:
Proceeds from units sold (redeemed) 17,337,483 4,113,982 (1,289,738) 39,257,963 2,215,506 1,328,562
------------ ------------ ----------- ----------- ---------- ----------
Less cost of units redeemed:
Administrative charges ............ 99,632 87,206 47,456 33,386 8,994 7,018
Policy loans ...................... 89,701 68,066 28,385 6,188 7,719 2,452
Surrender benefits ................ 9,349,520 6,989,309 5,021,875 2,866,706 789,474 967,365
Death benefits .................... 330,930 256,599 482,273 113,112 30,797 15,181
------------ ------------ ----------- ----------- ---------- ----------
9,869,783 7,401,180 5,579,989 3,019,392 836,984 992,016
------------ ------------ ----------- ----------- ---------- ----------
Increase (decrease) in equity
accounts from capital unit
transactions .................... 7,467,700 (3,287,198) (6,869,727) 36,238,571 1,378,522 336,546
------------ ------------ ----------- ----------- ---------- ----------
Net increase (decrease) in equity
accounts ........................ 27,484,373 32,317,177 (1,823,506) 47,384,955 2,473,609 1,963,610
Depositors' equity contribution
(redemption) .................... 0 0 0 (273,355) (218,651) 0
EQUITY ACCOUNTS:
Beginning of period ................ 115,797,308 83,480,131 65,666,344 18,554,744 11,342,640 9,379,030
------------ ------------ ----------- ----------- ----------- -----------
End of period ...................... $143,281,681 $115,797,308 $63,842,838 $65,666,344 $13,597,598 $11,342,640
============ ============ =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
TACTICAL ASSET
UTILITY ALLOCATION C.A.S.E. GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
DECEMBER 31 DECEMBER 31 DECEMBER 31
--------------------------- -------------------------- ----------------
1996 1995 1996 1995(A) 1996(B)
------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ....... $ 510,515 $ 374,648 $ 1,857,358 $ 1,087,280 $ 57,591
Net gain (loss) on investments ..... 592,788 1,474,907 4,479,938 2,594,191 227,871
------------ ----------- ----------- ------------ ----------
Net increase (decrease) in equity
accounts resulting from operations 1,103,303 1,849,555 6,337,296 3,681,471 285,462
------------ ----------- ----------- ------------ ----------
EQUITY TRANSACTIONS:
Proceeds from units sold (redeemed) 1,291,325 5,047,279 24,484,490 32,279,325 3,388,144
------------ ----------- ----------- ------------ ----------
Less cost of units redeemed:
Administrative charges ............ 6,938 5,178 25,024 10,562 462
Policy loans ...................... 1,483 3,519 0 34,893 813
Surrender benefits ................ 1,580,568 491,819 3,369,971 983,608 60,716
Death benefits .................... 67,595 12,014 141,303 14,621 0
------------ ----------- ----------- ------------ ----------
1,656,584 512,530 3,536,298 1,043,684 61,991
------------ ----------- ----------- ------------ ----------
Increase (decrease) in equity
accounts from capital unit
transactions .................... (365,259) 4,534,749 20,948,192 31,235,641 3,326,153
------------ ----------- ----------- ------------ ----------
Net increase (decrease) in equity
accounts ........................ 738,044 6,384,304 27,285,488 34,917,112 3,611,615
Depositors' equity contribution
(redemption) .................... (231,034) 0 0 (7,168) 0
EQUITY ACCOUNTS:
Beginning of period ................ 11,890,313 5,506,009 34,909,944 0 0
------------ ----------- ----------- ------------ ----------
End of period ...................... $ 12,397,323 $11,890,313 $62,195,432 $ 34,909,944 $3,611,615
============ =========== =========== ============ ==========
</TABLE>
<TABLE>
<CAPTION>
MERIDIAN/INVESCO
GLOBAL SECTOR VALUE EQUITY
SUB-ACCOUNT SUB-ACCOUNT
DECEMBER 31 DECEMBER 31
----------------- ---------------
1996(C) 1996(C)
----------------- ---------------
<C> <C>
OPERATIONS:
Net investment income (loss) ....... $ (945) $ 15,099
Net gain (loss) on investments ..... 138,168 1,196,271
----------- -----------
Net increase (decrease) in equity
accounts resulting from operations 137,223 1,211,370
----------- -----------
EQUITY TRANSACTIONS:
Proceeds from units sold (redeemed) 2,131,630 15,672,280
----------- -----------
Less cost of units redeemed:
Administrative charges ............ 213 1,691
Policy loans ...................... 3,515 589
Surrender benefits ................ 348,327 263,664
Death benefits .................... 0 88,989
----------- -----------
352,055 354,933
----------- -----------
Increase (decrease) in equity
accounts from capital unit
transactions .................... 1,779,575 15,317,347
----------- -----------
Net increase (decrease) in equity
accounts ........................ 1,916,798 16,528,717
Depositors' equity contribution
(redemption) .................... 500,000 150,000
EQUITY ACCOUNTS:
Beginning of period ................ 0 0
----------- -----------
End of period ...................... $ 2,416,798 $16,678,717
=========== ===========
</TABLE>
(a) The inception date of this sub-account was January 3, 1995.
(b) This sub-account option became effective May 1, 1996.
(c) The inception date of this sub-account was May 1, 1996.
The notes to the financial statements are an integral part of this report.
14
<PAGE>
WRL SERIES ANNUITY ACCOUNT
FREEDOM AND ATTAINER
SELECTED PER UNIT DATA AND RATIOS*
For the period ended
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY MARKET
SUB-ACCOUNT
DECEMBER 31
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Accumulation unit value, beginning
of period ........................... $ 12.80 $ 12.29 $ 12.03 $ 11.89 $ 11.68
Income from operations:
Net investment income (loss) ...... 0.49 0.51 0.26 0.14 0.21
Net realized and unrealized gain
(loss) on investments ........... 0.00 0.00 0.00 0.00 0.00
---------- ---------- ---------- ---------- ----------
Total income (loss) from
operations .................. 0.49 0.51 0.26 0.14 0.21
---------- ---------- ---------- ---------- ----------
Accumulation unit value,
end of period ....................... $ 13.29 $ 12.80 $ 12.29 $ 12.03 $ 11.89
========== ========== ========== ========== ==========
Total return (a) ...................... 3.81% 4.12% 2.22% 1.16% 1.77%
Ratios and supplemental data:
Net assets at end of period
(in thousands) .................... $51,141 $41,596 $55,318 $32,943 $41,133
Ratio of net investment income (loss)
to average net assets (b) ......... 3.72% 4.03% 2.28% 1.15% 1.73%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
BOND
SUB-ACCOUNT
DECEMBER 31
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Accumulation unit value, beginning
of period ........................... $ 18.31 $ 15.08 $ 16.40 $ 14.65 $ 13.89
Income from operations:
Net investment income (loss) ...... 0.77 0.83 0.72 1.67 1.16
Net realized and unrealized gain
(loss) on investments ........... (0.97) 2.40 (2.04) 0.08 (0.40)
---------- ---------- ---------- ---------- ----------
Total income (loss) from
operations .................. (0.20) 3.23 (1.32) 1.75 0.76
---------- ---------- ---------- ---------- ----------
Accumulation unit value,
end of period ....................... $ 18.11 $ 18.31 $ 15.08 $ 16.40 $ 14.65
========== ========== ========== ========== ==========
Total return (a) ...................... (1.10%) 21.46% (8.10%) 11.97% 5.44%
Ratios and supplemental data:
Net assets at end of period
(in thousands) .................... $ 45,516 $ 54,109 $ 47,193 $ 66,483 $ 52,234
Ratio of net investment income (loss)
to average net assets (b) ......... 4.34% 4.94% 4.69% 10.94% 8.18%
</TABLE>
<TABLE>
<CAPTION>
GROWTH
SUB-ACCOUNT
DECEMBER 31
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Accumulation unit value, beginning
of period ........................... $ 28.47 $ 19.60 $ 21.64 $ 21.07 $ 20.85
Income from operations:
Net investment income (loss) ...... 1.64 2.35 (0.06) 0.20 0.80
Net realized and unrealized gain
(loss) on investments ........... 3.06 6.52 (1.98) 0.37 (0.58)
----------- ----------- ----------- ----------- -----------
Total income (loss) from
operations .................. 4.70 8.87 (2.04) 0.57 0.22
----------- ----------- ----------- ----------- -----------
Accumulation unit value,
end of period ....................... $ 33.17 $ 28.47 $ 19.60 $ 21.64 $ 21.07
=========== =========== =========== =========== ===========
Total return (a) ...................... 16.50% 45.29% (9.45%) 2.69% 1.07%
Ratios and supplemental data:
Net assets at end of period
(in thousands) .................... $576,115 $532,646 $409,881 $575,024 $555,268
Ratio of net investment income (loss)
to average net assets (b) ......... 5.22% 9.81% (0.28%) 0.99% 4.07%
</TABLE>
<TABLE>
<CAPTION>
SHORT-TO-INTERMEDIATE
GOVERNMENT
SUB-ACCOUNT
DECEMBER 31
-------------------------------------------------------
1996 1995 1994 1993 1992(C)
--------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Accumulation unit value, beginning
of period ........................... $11.43 $ 10.19 $ 10.36 $ 10.04 $10.00
Income from operations:
Net investment income (loss) ...... 0.42 0.49 0.37 0.21 0.01
Net realized and unrealized gain
(loss) on investments ........... (0.17) 0.75 (0.54) 0.11 0.03
--------- --------- ---------- ---------- ---------
Total income (loss) from
operations .................. 0.25 1.24 (0.17) 0.32 0.04
--------- --------- ---------- ---------- ---------
Accumulation unit value,
end of period ....................... $11.68 $ 11.43 $ 10.19 $ 10.36 $10.04
========= ========== ========== ========== =========
Total return (a) ...................... 2.20% 12.13% (1.66%) 3.28% 0.36%
Ratios and supplemental data:
Net assets at end of period
(in thousands) ..................... $8,625 $ 9,213 $ 7,836 $10,010 $ 853
Ratio of net investment income (loss)
to average net assets (b) .......... 3.70% 4.59% 3.67% 2.08% 1.68%
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
GLOBAL
SUB-ACCOUNT
DECEMBER 31
-------------------------------------------------------------
1996 1995 1994 1993 1992(C)
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Accumulation unit value, beginning
of period ........................... $ 16.29 $ 13.40 $ 13.54 $ 10.15 $ 10.00
Income from operations:
Net investment income (loss) ..... 1.62 0.42 0.45 0.16 (0.01)
Net realized and unrealized gain
(loss) on investments ........... 2.64 2.47 (0.59) 3.23 0.16
--------- --------- ---------- --------- ----------
Total income (loss) from
operations .................. 4.26 2.89 (0.14) 3.39 0.15
--------- --------- ---------- --------- ---------
Accumulation unit value,
end of period ....................... $ 20.55 $ 16.29 $ 13.40 $ 13.54 $ 10.15
========= ========= ========== ========= =========
Total return (a) ...................... 26.15% 21.53% (0.99%) 33.34% 1.52%
Ratios and supplemental data:
Net assets at end of period
(in thousands) .................... $221,185 $141,425 $144,705 $ 69,665 $ 254
Ratio of net investment income (loss)
to average net assets (b) ......... 8.60% 2.89% 3.40% 1.40% (1.20%)
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
EQUITY-INCOME
SUB-ACCOUNT
DECEMBER 31
------------------------------------------------
1996 1995 1994 1993(D)
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Accumulation unit value, beginning
of period ........................... $ 13.61 $ 11.06 $ 11.25 $ 10.00
Income from operations:
Net investment income (loss) ..... 0.68 0.59 0.16 0.16
Net realized and unrealized gain
(loss) on investments ........... 1.17 1.96 (0.35) 1.09
----------- ----------- ---------- ----------
Total income (loss) from
operations .................. 1.85 2.55 (0.19) 1.25
----------- ----------- ---------- ----------
Accumulation unit value,
end of period ....................... $ 15.46 $ 13.61 $ 11.06 $ 11.25
=========== =========== ========== ==========
Total return (a) ...................... 13.57% 23.11% (1.77%) 12.54%
Ratios and supplemental data:
Net assets at end of period
(in thousands) .................... $136,789 $116,374 $88,607 $49,240
Ratio of net investment income (loss)
to average net assets (b) ......... 4.75% 4.74% 1.43% 1.84%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EMERGING GROWTH AGGRESSIVE GROWTH
SUB-ACCOUNT SUB-ACCOUNT
DECEMBER 31 DECEMBER 31
------------------------------------------------ ----------------------------------
1996 1995 1994 1993(D) 1996 1995 1994(E)
----------- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value, beginning
of period ........................... $ 16.40 $ 11.31 $ 12.37 $ 10.00 $ 13.35 $ 9.79 $ 10.00
Income from operations:
Net investment income (loss) ..... 0.63 0.51 (0.13) (0.12) 0.25 0.29 (0.08)
Net realized and unrealized gain
(loss) on investments ........... 2.23 4.58 (0.93) 2.49 0.96 3.27 (0.13)
-------- -------- -------- -------- ------- ------- --------
Total income (loss) from
operations .................. 2.86 5.09 (1.06) 2.37 1.21 3.56 (0.21)
-------- -------- -------- -------- ------- ------- --------
Accumulation unit value,
end of period ....................... $ 19.26 $ 16.40 $ 11.31 $ 12.37 $ 14.56 $ 13.35 $ 9.79
======== ======== ======== ======== ======= ======= ========
Total return (a) ...................... 17.41% 44.97% (8.51%) 23.67% 9.07% 36.31% (2.08%)
Ratios and supplemental data:
Net assets at end of period
(in thousands) .................... $143,282 $115,797 $83,480 $58,794 $63,843 $65,666 $18,555
Ratio of net investment income (loss)
to average net assets (b) .......... 3.42% 3.68% (1.21%) (1.30%) 1.77% 2.28% (1.04%)
</TABLE>
BALANCED
SUB-ACCOUNT
DECEMBER 31
----------------------------------
1996 1995 1994(E)
---------- ---------- ----------
Accumulation unit value, beginning
of period ........................... $ 11.06 $ 9.35 $ 10.00
Income from operations:
Net investment income (loss) ..... 0.26 0.29 0.21
Net realized and unrealized gain
(loss) on investments ........... 0.77 1.42 (0.86)
---------- ---------- ----------
Total income (loss) from
operations .................. 1.03 1.71 (0.65)
---------- ---------- ----------
Accumulation unit value,
end of period ....................... $ 12.09 $ 11.06 $ 9.35
========== ========== ==========
Total return (a) ...................... 9.34% 18.31% (6.52%)
Ratios and supplemental data:
Net assets at end of period
(in thousands) .................... $13,598 $11,343 $ 9,379
Ratio of net investment income (loss)
to average net assets (b) ......... 2.29% 2.85% 2.63%
* The above table illustrates the change for a unit outstanding computed using
average units outstanding throughout each period. See Notes to Selected Per Unit
Data and Ratios on page 12.
The notes to the financial statements are an integral part of this report.
16
<PAGE>
WRL SERIES ANNUITY ACCOUNT
FREEDOM AND ATTAINER
SELECTED PER UNIT DATA AND RATIOS*
For the period ended
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TACTICAL ASSET C.A.S.E.
UTILITY ALLOCATION GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
DECEMBER 31 DECEMBER 31 DECEMBER 31
---------------------------------- ---------------------- --------------
1996 1995 1994(E) 1996 1995(F) 1996(G)
---------- ---------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Accumulation unit value, beginning
of period ........................... $ 11.71 $ 9.46 $ 10.00 $ 11.86 $ 10.00 $12.87
Income from operations:
Net investment income (loss) ..... 0.50 0.45 0.32 0.46 0.58 .39
Net realized and unrealized gain
(loss) on investments ........... 0.70 1.80 (0.86) 1.08 1.28 .62
---------- ---------- ---------- ---------- ---------- ----------
Total income (loss) from
operations .................. 1.20 2.25 (0.54) 1.54 1.86 1.01
---------- ---------- ---------- ---------- ---------- ----------
Accumulation unit value,
end of period ....................... $ 12.91 $ 11.71 $ 9.46 $ 13.40 $ 11.86 $13.88
========== ========== ========== ========== ========== ==========
Total return (a) ...................... 10.25% 23.70% (5.37%) 13.00% 18.61% 7.84%
Ratios and supplemental data:
Net assets at end of period
(in thousands) .................... $12,397 $11,890 $ 5,506 $62,195 $34,910 $3,612
Ratio of net investment income (loss)
to average net assets (b) ......... 4.17% 4.26% 4.07% 3.71% 5.25% 4.43%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
MERIDIAN/
INVESCO
GLOBAL SECTOR VALUE EQUITY
SUB-ACCOUNT SUB-ACCOUNT
DECEMBER 31 DECEMBER 31
------------- ------------
1996(H) 1996(H)
------------- ------------
Accumulation unit value, beginning
of period ........................... $10.00 $10.00
Income from operations:
Net investment income (loss) ..... (0.01) 0.02
Net realized and unrealized gain
(loss) on investments ........... 0.53 1.20
------ ------
Total income (loss) from
operations ................... 0.52 1.22
------ ------
Accumulation unit value,
end of period ....................... $10.52 $11.22
====== ======
Total return (a) ...................... 5.19% 12.25%
Ratios and supplemental data:
Net assets at end of period
(in thousands) .................... $2,417 $16,679
Ratio of net investment income (loss)
to average net assets (b) ......... (0.09%) 0.30%
* The above table illustrates the change for a unit outstanding computed
using average units outstanding throughout each period. See Notes to
Selected Per Unit Data and Ratios below.
NOTES TO SELECTED PER UNIT DATA AND RATIOS
- ------------------------------------------
(a) For periods less than one year the total return is not annualized.
(b) For periods less than one year the ratio of net investment income to
average net assets is annualized.
(c) The inception date of this sub-account was December 3, 1992.
(d) The inception date of this sub-account was March 1, 1993.
(e) The inception date of this sub-account was March 1, 1994.
(f) The inception date of this sub-account was January 3, 1995.
(g) This sub-account option became effective May 1, 1996.
(h) The inception date of this sub-account was May 1, 1996.
The notes to the financial statements are an integral part of this report.
17
<PAGE>
WRL SERIES ANNUITY ACCOUNT
FREEDOM AND ATTAINER
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
NOTE 1 - ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
The WRL Series Annuity Account (the "Annuity Account") was established as
a variable accumulation deferred annuity separate account of Western Reserve
Life Assurance Co. of Ohio ("WRL") and is registered as a unit investment
trust ("Trust") under the Investment Company Act of 1940, as amended. The
Annuity Account encompasses various contract types: the WRL Freedom Variable
Annuity and the WRL Freedom Attainer ("Annuity #1"); the WRL Freedom Bellwether
and the WRL Freedom Conqueror ("Annuity #2"). Each contains fourteen investment
options referred to as sub-accounts. Each sub-account invests in the
corresponding portfolio of the WRL Series Fund, Inc. (the "Fund"), a registered
management investment company under the investment Company Act of 1940, as
amended. These portfolios and their respective investment management
organizations are as follows:
PORTFOLIO INVESTMENT MANAGER
- --------------------- -------------------------------
Money Market J.P. Morgan Investment
Management Inc.
Bond Janus Capital Corporation
("JCC")
Growth JCC
Short-to-Intermediate AEGON USA Investment
Government Management, Inc. ("AEGON
Management")
Global JCC
Equity-Income Luther King Capital Management
Corporation
Emerging Growth Van Kampen American Capital
Asset
Management, Inc.
Aggressive Growth Fred Alger Management, Inc.
Balanced AEGON Management
Utility Federated Investment Counseling
Tactical Asset Dean Investment Associates
Allocation
C.A.S.E. Growth C.A.S.E. Management, Inc.
Meridian/INVESCO Meridian Investment
Global Sector Management
Corporation/INVESCO
Global Asset
Management Limited
Value Equity NWQ Investment
Management
Company, Inc
WRL and AEGON Management are indirect wholly-owned subsidiaries of AEGON USA,
Inc., which is an indirect wholly-owned subsidiary of AEGON nv, a Netherlands
corporation.
On May 1, 1996 WRL made an initial contribution to the Annuity Account. The
amount of the contribution and units received from the corresponding sub-account
are as follows:
SUB-ACCOUNT CONTRIBUTION UNITS
- ----------------- --------------- ----------------
Meridian/INVESCO
Global Sector $ 500,000 49,997.602730
Value Equity $ 150,000 15,000.000000
Annuity #1 sub-accounts hold assets to support the benefits under certain
flexible payment variable accumulation deferred annuity contracts (the
"Contracts") issued by WRL, which issued the first of such Contracts on February
24, 1989. The Annuity Account equity transactions are accounted for using the
appropriate effective date at the corresponding accumulation unit value.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
The following significant accounting policies, which are in conformity with
generally accepted accounting principles for unit investment trusts, have been
consistently used in preparation of the Trust's financial statements.
18
<PAGE>
WRL SERIES ANNUITY ACCOUNT
FREEDOM AND ATTAINER
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 (CONTINUED)
A. VALUATION OF INVESTMENTS
The investments in the Fund's shares are stated at the closing net asset
value ("NAV") per share as determined by the Fund on December 31, 1996.
Investment transactions are accounted for on the trade date, using the Fund
NAV next determined after receipt of sale or redemption order without sales
charges. Dividend income and capital gain distributions are recorded on the
ex-dividend date. The cost of investments sold is determined on a first-in,
first-out basis.
B. FEDERAL INCOME TAXES
The operations of the Annuity Account are a part of and are taxed with the
total operations of WRL, which is taxed as a life insurance company under the
Internal Revenue Code. Under current law, the investment income of the
Annuity Account, including realized and unrealized capital gains, is not
taxable to WRL. Accordingly, no provision for Federal income taxes has been
made.
NOTE 2--CHARGES AND DEDUCTIONS
Charges are assessed by WRL in connection with issuance and administration of
the Contracts.
A. CONTRACT CHARGES
No deduction for sales expenses are made from the purchase payments. A
contingent deferred sales charge may, however, be assessed against contract
values when withdrawn or surrendered.
On each anniversary through maturity date, WRL will deduct an annual contract
charge as partial compensation for providing administrative services under
the Contracts.
B. ANNUITY #1 SUB-ACCOUNTS CHARGES
A daily charge equal to an annual rate of 1.25% of average daily net assets
is assessed to compensate WRL for assumption of mortality and expense risks
and administrative services in connection with issuance and administration of
the Contracts. This charge (not assessed at the individual contract level)
effectively reduces the value of a unit outstanding during the year.
NOTE 3--DIVIDENDS AND DISTRIBUTIONS
Dividends of the Fund's Money Market Portfolio are declared daily and
reinvested monthly. Dividends of the remaining portfolios are typically declared
and reinvested semiannually, while capital gain distributions are typically
declared and reinvested annually. Dividends and distributions of the Fund are
generally paid to and reinvested by the Annuity Account the next business day
after declaration.
NOTE 4--OTHER MATTERS
As of December 31, 1996 the equity accounts include net unrealized
appreciation (depreciation) on investments as follows:
SUB-ACCOUNT
- ------------
Money Market $ N/A
Bond (2,128,313)
Growth 130,218,801
Short-to-Intermediate Government (110,915)
Global 39,269,786
Equity-Income 21,627,984
Emerging Growth 35,263,527
Aggressive Growth 1,594,990
Balanced 1,414,457
Utility 755,002
Tactical Asset Allocation 5,600,328
C.A.S.E. Growth 221,585
Meridian/INVESCO Global Sector 83,336
Value Equity 1,179,021
19
<PAGE>
Report of Independent Auditors
The Board of Directors
Western Reserve Life Assurance Co. of Ohio
We have audited the accompanying statutory-basis balance sheets of Western
Reserve Life Assurance Co. of Ohio as of December 31, 1996 and 1995, and the
related statutory-basis statements of operations, changes in capital and
surplus, and cash flows for each of the three years in the period ended December
31, 1996. Our audits also included the statutory-basis financial statement
schedules required by Regulation S-X, Article 7. These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits. We
did not audit the "Separate Account Assets" and "Separate Account Liabilities"
in the balance sheet of the Company. The Separate Account financial statements
were audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the data included for the Separate Account, is
based solely upon the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Insurance Department of the State of Ohio, which practices
differ from generally accepted accounting principles. The variances between such
practices and generally accepted accounting principles are also described in
Note 1. The effects on the financial statements of these variances are not
reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matters described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Western Reserve Life Assurance Co. of Ohio at December 31, 1996 and 1995, or
the results of its operations or its cash flows for each of the three years in
the period ended December 31, 1996.
20
<PAGE>
Also, in our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Western Reserve Life Assurance Co. of Ohio at December
31, 1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996 in conformity with
accounting practices prescribed or permitted by the Insurance Department of the
State of Ohio. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic statutory-basis financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
ERNST & YOUNG LLP
February 21, 1997
21
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
BALANCE SHEETS - STATUTORY BASIS
(DOLLARS IN THOUSANDS)
DECEMBER 31
1996 1995
---------- ----------
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments $ 2,480 $ 4,999
Bonds 359,579 452,474
Common stocks at market (cost:
$302 in 1996 and $473 in 1995) 597 834
Mortgage loans on real estate 6,049 6,181
Home office properties, at cost
less accumulated depreciation
($0 in 1996 and $1,505 in 1995) 7,962 5,121
Policy loans 52,604 37,125
---------- ----------
Total cash and invested assets 429,271 506,734
Premiums deferred and uncollected 1,943 1,787
Accrued investment income 5,940 7,565
Receivable from affiliates 1,165 4,337
Transfers from separate accounts 204,181 --
Other assets 3,962 4,264
Separate account assets 3,527,145 2,419,205
---------- ----------
Total admitted assets $4,173,607 $2,943,892
========== ==========
SEE ACCOMPANYING NOTES.
22
<PAGE>
DECEMBER 31
1996 1995
---------- ----------
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life $ 155,166 $ 72,032
Annuity 332,230 319,353
Policy and contract claim reserves 8,584 6,612
Other policyholders' funds 3,104 2,633
Remittances and items not allocated 9,107 5,136
Federal income taxes payable 1,266 1,417
Asset valuation reserve 5,710 5,590
Interest maintenance reserve 7,451 6,392
Payable to affiliate 20,463 --
Other liabilities 13,082 10,984
Separate account liabilities 3,521,888 2,415,804
---------- ----------
Total liabilities 4,078,051 2,845,953
Commitments and contingencies
Capital and surplus:
Common stock, $1.00 par value, 1,500 shares
authorized, issued and outstanding 1,500 1,500
Paid-in surplus 68,015 68,015
Unassigned surplus 26,041 28,424
---------- ----------
Total capital and surplus 95,556 97,939
---------- ----------
Total liabilities and capital and surplus $4,173,607 $2,943,892
========== ==========
SEE ACCOMPANYING NOTES.
23
<PAGE>
<TABLE>
<CAPTION>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENTS OF OPERATIONS - STATUTORY BASIS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations,
net of reinsurance:
Life $ 293,590 $191,508 $150,991
Annuity 740,125 378,390 449,141
Net investment income 36,067 40,891 40,139
Amortization of interest maintenance reserve 1,335 882 726
Commissions and expense allowances on
reinsurance ceded
11 11 12
Other income 13,398 8,237 6,354
---------- -------- --------
1,084,526 619,919 647,363
Benefits and expenses:
Benefits paid or provided for:
Life 21,256 17,844 15,921
Surrender benefits 286,406 206,250 196,169
Other benefits 23,270 19,530 18,403
Increase (decrease) in aggregate reserves for
policies and contracts:
Life 80,139 (15,132) (11,618)
Annuity 12,877 5,229 (78,590)
Other 422 109 286
---------- -------- --------
424,370 233,830 140,571
Insurance expenses:
Commissions 140,261 82,903 78,168
General insurance expenses 47,406 37,246 33,100
Taxes, licenses and fees 10,848 8,919 5,931
Transfer to separate accounts 452,471 242,427 386,174
Other expenses 60 34 18
---------- -------- --------
651,046 371,529 503,391
---------- -------- --------
1,075,416 605,359 643,962
---------- -------- --------
Gain from operations before federal
income taxes and realized capital
losses on investments 9,110 14,560 3,401
Federal income tax expense 9,297 8,917 3,406
---------- -------- --------
Gain (loss) from operations before
realized capital losses on investments (187) 5,643 (5)
Netrealized capital losses on investments
(net of related federal income taxes
and amounts transferred to interest
maintenance reserve) (811) (1,678) (1,133)
---------- -------- --------
Net income (loss) $ (998) $ 3,965 $ (1,138)
========== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
24
<PAGE>
<TABLE>
<CAPTION>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS - STATUTORY BASIS
(DOLLARS IN THOUSANDS)
TOTAL
COMMON PAID-IN UNASSIGNED CAPITAL AND
STOCK SURPLUS SURPLUS SURPLUS
------ ------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1994 $1,500 $23,015 $24,894 $49,409
Capital contribution -- 45,000 -- 45,000
Net loss for 1994 -- -- (1,138) (1,138)
Net unrealized capital losses -- -- (9) (9)
Decrease in non-admitted assets -- -- 368 368
Decrease in asset valuation reserves
-- -- 4,321 4,321
Decrease in surplus in separate accounts
-- -- (748) (748)
Other adjustments -- -- (2,183) (2,183)
------ ------- ------- -------
Balance at December 31, 1994 1,500 68,015 25,505 95,020
Net income for 1995 -- -- 3,965 3,965
Net unrealized capital losses -- -- (500) (500)
Decrease in non-admitted assets -- -- 903 903
Decrease in asset valuation reserve -- -- 2,901 2,901
Increase in surplus in separate accounts
-- -- 541 541
Change in reserve valuation -- -- (3,496) (3,496)
Other adjustments -- -- (1,395) (1,395)
------ ------- ------- -------
Balance at December 31, 1995 1,500 68,015 28,424 97,939
Net loss for 1996 -- -- (998) (998)
Net unrealized capital gains -- -- 1,294 1,294
Decrease in non-admitted assets -- -- 199 199
Increase in asset valuation reserve -- -- (120) (120)
Increase in surplus in separate accounts
-- -- 237 237
Change in reserve valuation -- -- (2,995) (2,995)
------ ------- ------- -------
Balance at December 31, 1996 $1,500 $68,015 $26,041 $95,556
====== ======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES.
25
<PAGE>
<TABLE>
<CAPTION>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENTS OF CASH FLOWS - STATUTORY BASIS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31
1996 1995 1994
---------- -------- ---------
<S> <C> <C> <C>
SOURCES OF CASH
Premiums and other considerations,
net of reinsurance $1,033,565 $569,934 $ 600,405
Net investment income 38,666 42,359 41,977
Other income 12,983 8,052 6,311
---------- -------- ---------
1,085,214 620,345 648,693
Life claims (20,655) (16,759) (14,660)
Surrender benefits and other
fund withdrawals (286,406) (206,250) (196,169)
Other benefits to policyholders (22,129) (19,041) (18,251)
Commissions, other expenses and taxes (196,329) (128,314) (119,755)
Net transfers to separate accounts (658,326) (242,427) (386,174)
Dividends to policyholders (44) (26) (22)
Federal income taxes (9,449) (7,531) (3,378)
---------- -------- ---------
Net cash used in operations (108,124) (3) (89,716)
Proceeds from investments sold,
matured or repaid:
Bonds and redeemable preferred stock 122,820 108,554 99,241
Common stocks 175 2,108 80,066
Mortgage loans on real estate 132 1,954 132
Real estate 4,304 -- --
Miscellaneous proceeds -- -- (28)
---------- -------- ---------
Total cash from investments 127,431 112,616 179,411
Capital contribution -- -- 45,000
Other sources 31,546 2,830 6,135
---------- -------- ---------
Total sources of cash 50,853 115,443 140,830
APPLICATIONS OF CASH
Cost of investments acquired:
Bonds and redeemable preferred stock 26,826 139,402 47,214
Common stocks 4 589 65,911
Mortgage loans on real estate -- 6 1,004
Real estate 7,837 449 37
Net increase in policy loans 15,479 9,605 4,496
Miscellaneous applications 5 -- --
---------- -------- ---------
Total investments acquired 50,151 150,051 118,662
Other applications, net 3,221 7,115 6,086
---------- -------- ---------
Total applications of cash 53,372 157,166 124,748
---------- -------- ---------
Net change in cash and
short-term investments (2,519) (41,723) 16,082
Cash and short-term investments
at beginning of year 4,999 46,722 30,640
---------- -------- ---------
Cash and short-term investments
at end of year $ 2,480 $ 4,999 $ 46,722
========== ======== =========
</TABLE>
SEE ACCOMPANYING NOTES.
26
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Western Reserve Life Assurance Co. of Ohio ("the Company") is a stock life
insurance company and is a wholly-owned subsidiary of First AUSA Life Insurance
Company which, in turn, is a wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"). AEGON is a wholly-owned subsidiary of AEGON nv, a holding company
organized under the laws of the Netherlands.
NATURE OF BUSINESS
The Company operates predominantly in the variable universal life and variable
annuity areas of the life insurance business. The Company is licensed in 49
states and the District of Columbia. Sales of the Company's products are through
financial planners, independent representatives, financial institutions and
stockbrokers. The majority of the Company's new life insurance written and a
substantial portion of new annuities written is done through one marketing
organization; the Company expects to maintain this relationship for the
foreseeable future.
BASIS OF PRESENTATION
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known, which could impact
the amounts reported and disclosed herein.
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Insurance Department of the
State of Ohio, which practices differ from generally accepted accounting
principles. The more significant of these differences are as follows: (a) bonds
are generally carried at amortized cost rather than segregating the portfolio
into held-to-maturity (carried at amortized cost), available-for-sale (carried
at fair value), and trading (carried at fair value) classifications; (b)
acquisition costs of acquiring new business are expensed as incurred rather than
deferred and amortized over the life of the policies; (c) policy reserves on
traditional life products are based on statutory mortality rates and interest
which may differ from reserves based on reasonable assumptions of expected
mortality, interest, and withdrawals which include a provision for possible
unfavorable deviation from such assumptions; (d) policy reserves on certain
investment products use discounting methodologies utilizing statutory interest
rates rather than full account values; (e) reinsurance amounts are netted
against the corresponding receivable or payable rather than shown as gross
amounts on the balance sheet; (f) deferred income taxes are not provided for the
difference between the financial statement amounts and income tax bases of
assets and liabilities; (g) net realized gains or losses attributed to
27
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
changes in the level of interest rates in the market are deferred and amortized
over the remaining life of the bond or mortgage loan, rather than recognized as
gains or losses in the statement of operations when the sale is completed; (h)
declines in the estimated realizable value of investments are provided for
through the establishment of a formula-determined statutory investment reserve
(carried as a liability) changes to which are charged directly to surplus,
rather than through recognition in the statement of operations for declines in
value, when such declines are judged to be other than temporary; (i) certain
assets designated as "non-admitted assets" have been charged to surplus rather
than being reported as assets; (j) revenues for universal life and investment
products consist of the entire premiums received rather than policy charges for
the cost of insurance, policy administration charges, amortization of policy
initiation fees and surrender charges assessed; and (k) pension expense is
recorded as amounts are paid rather than accrued and expensed during the periods
in which the employers provide service. The effects of these variances have not
been determined by the Company.
The National Association of Insurance Commissioners (NAIC) currently is in the
process of recodifying statutory accounting practices, the result of which is
expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in 1997,
will likely change, to some extent, prescribed statutory accounting practices
and may result in changes to the accounting practices that the Company uses to
prepare its statutory-basis financial statements. The impact of any such changes
on the Company's statutory surplus cannot be determined at this time and could
be material.
Other significant statutory accounting practices are as follows:
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with remaining maturities of one year or less when purchased
to be cash equivalents. This amount included $6,500 of short-term intercompany
notes receivable at December 31, 1995.
INVESTMENTS
Investments in bonds (except those to which the Securities Valuation Office of
the NAIC has ascribed a value), mortgage loans on real estate and short-term
investments are reported at cost adjusted for amortization of premiums and
accrual of discounts. Amortization is computed using methods which result in a
level yield over the expected life of the security. The Company reviews its
prepayment assumptions on mortgage and
28
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
other asset backed securities at regular intervals and adjusts amortization
rates prospectively when such assumptions are changed due to experience and/or
expected future patterns. Investments in preferred stocks in good standing are
reported at cost. Investments in preferred stocks not in good standing are
reported at the lower of cost or market. Common stocks are carried at market and
include shares of mutual funds (money market and other), and the related
unrealized capital gains/(losses) are reported in unassigned surplus without any
adjustment for federal income taxes. Real estate is reported at cost less
allowances for depreciation. Depreciation is computed principally by the
straight-line method. Policy loans are reported at unpaid principal. Other
"admitted assets" are valued, principally at cost, as required or permitted by
Ohio Insurance Laws.
Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for anticipated
losses in the event of default by issuers of certain invested assets. These
amounts are determined using a formula prescribed by the NAIC and are reported
as a liability. The formula for the AVR provides for a corresponding adjustment
for realized gains and losses, net of amounts attributed to changes in the
general level of interest rates. Under a formula prescribed by the NAIC, the
Company defers, in the Interest Maintenance Reserve (IMR), the portion of
realized gains and losses on sales of fixed income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity of the security.
During 1996, 1995 and 1994, net realized capital gains of $2,394, $554 and $436,
respectively, were credited to the IMR rather than being immediately recognized
in the statements of operations. Amortization of these net gains aggregated
$1,335, $882 and $726 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Interest income is recognized on an accrual basis. The Company does not accrue
income on bonds in default, mortgage loans on real estate in default and/or
foreclosure or which are delinquent more than twelve months, or real estate
where rent is in arrears for more than three months. Further, income is not
accrued when collection is uncertain. At December 31, 1996, 1995 and 1994, the
Company excluded investment income due and accrued of $0, $1 and $237,
respectively, with respect to such practices.
AGGREGATE RESERVES FOR POLICIES
Life and annuity reserves are developed by actuarial methods and are determined
based on published tables using statutorily specified interest rates and
valuation methods that will provide, in the aggregate, reserves that are greater
than or equal to the minimum required by the laws of the State of Ohio.
29
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The aggregate policy reserves for life insurance policies are based principally
upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary Mortality and
American Experience Mortality Tables. The reserves are calculated using interest
rates ranging from 2.25 to 5.50 percent and are computed principally on the Net
Level Premium Valuation and the Commissioners' Reserve Valuation Methods.
Reserves for universal life policies are based on account balances adjusted for
the Commissioners' Reserve Valuation Method.
Deferred annuity reserves are calculated according to the Commissioners' Annuity
Reserve Valuation Method including excess interest reserves to cover situations
where the future interest guarantees plus the decrease in surrender charges are
in excess of the maximum valuation rates of interest. Reserves for immediate
annuities and supplementary contracts with and without life contingencies are
equal to the present value of future payments assuming interest rates ranging
from 5.75 to 9.25 percent and mortality rates, where appropriate, from a variety
of tables.
POLICY AND CONTRACT CLAIM RESERVES
Claim reserves represent the estimated accrued liability for claims reported to
the Company and claims incurred but not yet reported through the statement date.
These reserves are estimated using either individual case-basis valuations or
statistical analysis techniques. Because estimates are subject to the effects of
trends in claim severity and frequency, the estimates are continually reviewed
and adjusted as necessary as experience develops or new information becomes
available.
SEPARATE ACCOUNTS
Assets held in trust for purchases of variable universal life and variable
annuity contracts and the Company's corresponding obligation to the contract
owners are shown separately in the balance sheets. The assets in the separate
accounts are valued at market. Income and gains and losses with respect to the
assets in the separate accounts accrue to the benefit of the policyholders. The
Company received variable contract premiums of $997,513, $466,822 and $534,372
in 1996, 1995 and 1994, respectively. All variable account contracts are subject
to discretionary withdrawal by the policyholder at the market value of the
underlying assets less the current surrender charge. Separate account
contractholders have no claim against the assets of the general account.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 presentation.
30
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statutory-basis
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparisons to independent markets and, in many
cases, could not be realized in immediate settlement of the instrument.
Statement of Financial Accounting Standards No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements
and allows companies to forego the disclosures when those estimates can only be
made at excessive cost. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the
statutory-basis balance sheet for these instruments approximate their fair
values.
INVESTMENT SECURITIES: Fair values for fixed maturity securities (including
redeemable preferred stocks) are based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair values are
estimated using values obtained from independent pricing services or (in the
case of private placements) are estimated by discounting expected future cash
flows using a current market rate applicable to the yield, credit quality,
and maturity of the investments. The fair values for equity securities are
based on quoted market prices.
MORTGAGE LOANS AND POLICY LOANS: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans are assumed to equal their carrying
value.
INVESTMENT CONTRACTS: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash flow
calculations, based on interest rates currently being offered for similar
contracts with maturities consistent with those remaining for the contracts
being valued.
31
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The following sets forth a comparison of the fair values and carrying values of
the Company's financial instruments subject to the provisions of Statement of
Financial Accounting Standards No. 107:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-------------------------- ---------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds $ 359,579 $ 372,319 $ 452,474 $ 479,656
Common stocks 597 597 834 834
Mortgage loans on real estate 6,049 6,134 6,181 6,536
Policy loans 52,604 52,604 37,125 37,125
Cash and short-term investments 2,480 2,480 4,999 4,999
Separate account assets 3,527,145 3,527,145 2,419,205 2,419,205
LIABILITIES
Investment contract liabilities 321,293 314,748 309,556 279,347
Separate account annuities 2,692,614 2,647,266 1,930,590 1,930,590
</TABLE>
3. INVESTMENTS
The carrying value and estimated fair value of investments in debt securities
are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Bonds:
United States Government and
agencies $ 11,422 $ 13 $ 292 $ 11,143
State, municipal and other
government 5,504 274 -- 5,778
Public utilities 14,808 848 80 15,576
Industrial and miscellaneous 173,097 8,889 910 181,076
Mortgage-backed securities 154,748 4,617 619 158,746
-------- ------- ------ --------
Total bonds $359,579 $14,641 $1,901 $372,319
======== ======= ====== ========
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS (CONTINUED)
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Bonds:
United States Government and
agencies $ 11,611 $ 64 $129 $ 11,546
State, municipal and other
government
Public utilities 15,079 940 - 16,019
Industrial and miscellaneous 219,764 17,444 550 236,658
Mortgage-backed securities 189,877 8,228 240 197,865
-------- ------- ---- --------
Total bonds $452,474 $28,101 $919 $479,656
======== ======= ==== ========
</TABLE>
The carrying value and fair value of bonds at December 31, 1996 by contractual
maturity are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without penalties.
ESTIMATED
CARRYING FAIR
VALUE VALUE
-------- ---------
Due in one year or less $ 25,420 $ 25,667
Due one through five years 91,070 94,377
Due five through ten years 53,798 57,060
Due after ten years 34,543 36,468
-------- --------
204,831 213,572
Mortgage and other asset backed securities 154,748 158,747
-------- --------
$359,579 $372,319
========= ========
33
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
. INVESTMENTS (CONTINUED)
A detail of net investment income is presented below:
YEAR ENDED DECEMBER 31
1996 1995 1994
------- ------- -------
Interest on bonds $33,969 $38,624 $37,495
Dividends on equity investments - 30 700
Interest on mortgage loans 559 573 616
Rental income on real estate 919 1,014 1,014
Interest on policy loans 3,339 2,353 1,830
Other investment income 9 328 611
------- ------- -------
Gross investment income 38,795 42,922 42,266
Investment expenses (2,728) (2,031) (2,127)
------- ------- --------
Net investment income $36,067 $40,891 $40,139
======= ======== =======
Proceeds from sales and maturities of debt securities and related gross realized
gains and losses were as follows:
YEAR ENDED DECEMBER 31
1996 1995 1994
------- -------- -------
Proceeds $122,820 $108,554 $99,241
======= ======== =======
Gross realized gains $ 2,984 $ 1,631 $ 2,019
Gross realized losses 791 1,346 1,362
------- -------- -------
Net realized gains $ 2,193 $ 285 $ 657
======= ======== =======
At December 31, 1996, bonds with an aggregate carrying value of $5,409 were on
deposit with certain state regulatory authorities or were restrictively held in
bank custodial accounts for benefit of such state regulatory authorities, as
required by statute.
34
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS (CONTINUED)
Realized investment gains (losses) and changes in unrealized gains (losses) for
investments are summarized below:
REALIZED
--------------------------------
YEAR ENDED DECEMBER 31
1996 1995 1994
------- ------- -------
Debt securities $ 2,193 $ 285 $ 657
Equity securities -- -- (1,579)
Mortgage loans -- (1,409) --
Real estate (606) -- --
Other invested assets (4) -- --
------- ------- -------
1,583 (1,124) (922)
Tax effect -- -- 225
Transfer to interest maintenance
reserve (2,394) (554) (436)
------- ------- -------
Net realized losses $ (811) $(1,678) $(1,133)
======= ======= =======
UNREALIZED
---------------------------------
YEAR ENDED DECEMBER 31
1996 1995 1994
-------- -------- --------
Debt securities $(14,442) $ 36,399 $ 43,354
Common stock (66) (236) 1,009
-------- -------- --------
Change in unrealized appreciation
(depreciation) $(14,508) $ 36,163 $(42,345)
======== ======== ========
Gross unrealized gains (losses) on common stocks were as follows:
UNREALIZED
------------------------------
YEAR ENDED DECEMBER 31
1996 1995 1994
---- ---- ----
Unrealized gains $295 $361 $597
Unrealized losses -- -- --
---- ---- ----
Net unrealized gains $295 $361 $597
==== ==== ====
The Company issued no mortgage loans during 1996. The maximum percentage of any
one mortgage loan to the value of the underlying real estate at origination was
73%. The Company requires all mortgagees to carry fire insurance equal to the
value of the underlying property.
35
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS (CONTINUED)
During 1996, 1995 and 1994, no mortgage loans were foreclosed and transferred to
real estate. During 1994, a mortgage loan loss reserve of $1,033 was
established. This reserve was released in 1995 coincident with the loss
recognition of $1,409 on a loan payoff.
At December 31, 1996, the Company had no investments (excluding U. S. Government
guaranteed or insured issues) which individually represented more than ten
percent of capital and surplus and the asset valuation reserve.
4. REINSURANCE
The Company reinsures portions of certain insurance policies which exceed its
established limits, thereby providing a greater diversification of risk and
minimizing exposure on larger risks. The Company remains contingently liable
with respect to any insurance ceded, and this would become an actual liability
in the event that the assuming insurance company became unable to meet its
obligations under the reinsurance treaty.
1996 1995 1994
----------- ----------- -----------
Direct premiums $ 1,034,757 $ 570,413 $ 600,608
Reinsurance assumed 2,063 1,569 1,232
Reinsurance ceded (3,105) (2,084) (1,708)
----------- ----------- -----------
Net premiums earned $ 1,033,715 $ 569,898 $ 600,132
=========== =========== ===========
The Company received reinsurance recoveries in the amount of $2,156, $512 and
$1,146 during 1996, 1995 and 1994, respectively. At December 31, 1996 and 1995,
estimated amounts recoverable from reinsurers that have been deducted from
policy and contract claim reserves totaled $974 and $601, respectively. The
aggregate reserves for policies and contracts were reduced for reserve credits
for reinsurance ceded at December 31, 1996 and 1995 of $1,140 and $848,
respectively.
36
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. INCOME TAXES
The Company files a separate federal income tax return.
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to gain from operations before taxes and
realized capital gains (losses) for the following reasons:
1996 1995 1994
------- ------- -------
Computed tax at federal statutory rate (35%) $ 3,189 $ 5,096 $ 1,190
Deferred acquisition costs - tax basis 7,172 4,241 4,043
Tax reserve valuation (696) (34) (1,353)
Excess tax depreciation (65) (49) (258)
Amortization of IMR (467) (309) (254)
Other, net 164 (28) 38
------- ------- -------
Federal income tax expense $ 9,297 $ 8,917 $ 3,406
======= ======= =======
Prior to 1984, as provided for under the Life Insurance Company Tax Act of 1959,
a portion of statutory income was not subject to current taxation, but was
accumulated for income tax purposes in a memorandum account referred to as the
policyholders' surplus account. No federal income taxes have been provided for
in the financial statements on income deferred in the policyholders' surplus
account ($293 at December 31, 1996). To the extent dividends are paid from the
amount accumulated in the policyholders' surplus account, net earnings would be
reduced by the amount of tax required to be paid. Should the entire amount in
the policyholders' surplus account become taxable, the tax thereon computed at
current rates would amount to approximately $103.
In 1995, the Company reached a final settlement with the Internal Revenue
Service for 1987 through 1993 resulting in taxes of $1,275 and interest of $120
(net of $65 tax effect). The assessment was charged to surplus as a prior period
adjustment. An examination is currently underway for years 1994 through 1995.
During 1994, the Company settled tax years 1980 through 1986 with the Internal
Revenue Service, which resulted in a charge to surplus of $1.8 million as a
prior period adjustment.
At December 31, 1996, the Company had capital loss carryforwards of
approximately $11,101 which expire through 2001.
37
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. POLICY AND CONTRACT ATTRIBUTES
Participating life insurance policies are issued by the Company which entitle
policyholders to a share in the earnings of the participating policies, provided
that a dividend distribution, which is determined annually based on mortality
and persistency experience of the participating policies, is authorized by the
Company. Participating insurance constituted approximately .04% and 7.7% of life
insurance in force at December 31, 1996 and 1995, respectively.
A portion of the Company's policy reserves and other policyholders' funds relate
to liabilities established on a variety of the Company's products, primarily
separate accounts, that are not subject to significant mortality or morbidity
risk; however, there may be certain restrictions placed upon the amount of funds
that can be withdrawn without penalty. The amount of reserves on these products,
by withdrawal characteristics are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------------------- ------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal with
market value adjustment $ 14,881 1% $ 13,422 1%
Subject to discretionary withdrawal at
book value less surrender charge 63,619 2 60,970 3
Subject to discretionary withdrawal at
market value 2,692,614 89 1,930,590 85
Subject to discretionary withdrawal at
book value (minimal or no charges or
adjustments) 239,204 7 227,549 10
Not subject to discretionary withdrawal
provision 17,603 1 20,034 1
----------- -------- ----------- --------
3,027,921 100% 2,252,565 100%
======== ========
Less reinsurance ceded - -
---------- ----------
Total policy reserves on annuities and
deposit fund liabilities $3,027,921 $2,252,565
========== ==========
</TABLE>
38
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
A reconciliation of the amounts transferred to and from the separate accounts is
presented below:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Transfers as reported in the summary of
operations of the separate accounts statement:
Transfers to separate accounts $ 997,513 $ 466,882 $ 534,372
Transfers from separate accounts 339,523 224,416 148,582
--------- --------- ---------
Net transfers to separate accounts 657,990 242,466 385,790
Reconciling adjustments - change in accruals for
investment management, administration fees
and contract guarantees (205,519) (39) 384
========= ========= =========
Transfers as reported in the summary of
operations of the life, accident and health
annual statement $ 452,471 $ 242,427 $ 386,174
========= ========= =========
</TABLE>
Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next anniversary
date. At December 31, 1996 and 1995, these assets (which are reported as
premiums deferred and uncollected) and the amounts of the related gross premiums
and loadings, are as follows:
GROSS LOADING NET
------- ------- -------
DECEMBER 31, 1996
Ordinary direct first year business $ 40 $ 9 $ 31
Ordinary direct renewal business 1,431 225 1,206
Group life direct business 622 -- 622
Annuity renewal business 94 10 84
------- ------- -------
$ 2,187 $ 244 $ 1,943
======= ======= =======
DECEMBER 31, 1995
Ordinary direct first year business $ 47 $ 17 $ 30
Ordinary direct renewal business 1,707 229 1,478
Group life direct business 379 -- 379
Reinsurance ceded (100) -- (100)
------- ------- -------
$ 2,033 $ 246 $ 1,787
======= ======= =======
39
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
At December 31, 1996 and 1995, the Company had insurance in force aggregating
$1,904 and $2,374, respectively, in which the gross premiums are less than the
net premiums required by the standard valuation standards established by the
Insurance Department of the State of Ohio. The Company established policy
reserves of $27 and $32 to cover these deficiencies at December 31, 1996 and
1995, respectively.
In 1994, the NAIC enacted a guideline to clarify reserving methodologies for
contracts that require immediate payment of claims upon proof of death of the
insured. Companies were allowed to grade the effects of the change in reserving
methodologies over five years. A direct charge to surplus of $2,995 and $3,496
was made for the years ended December 31, 1996 and 1995, respectively, related
to the change in reserve methodology.
7. DIVIDEND RESTRICTIONS
Generally, an insurance company's ability to pay dividends is limited to the
amount that their net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements. However,
payment of such amounts as dividends may be subject to approval by regulatory
authorities.
8. RETIREMENT AND COMPENSATION PLANS
The Company's employees participate in a qualified benefit plan sponsored by
AEGON. The Company has no legal obligation for the plan. The Company recognizes
pension expense equal to its allocation from AEGON. The pension expense is
allocated among the participating companies based on the FASB Statement No. 87
expense as a percent of salaries. The benefits are based on years of service and
the employee's compensation during the highest five consecutive years of
employment. Pension expense aggregated $581, $505 and $397 for the years ended
December 31, 1996, 1995 and 1994, respectively. The plan is subject to the
reporting and disclosure requirements of the Employee Retirement and Income
Security Act of 1974.
The Company's employees also participate in a contributory defined contribution
plan sponsored by AEGON which is qualified under Section 401(k) of the Internal
Revenue Service Code. Employees of the Company who customarily work at least
1,000 hours during each calendar year and meet the other eligibility
requirements, are participants of the plan. Participants may elect to contribute
up to fifteen percent of their salary to the plan. The Company will match an
amount up to three percent of the participant's salary. Participants may direct
all of their contributions and plan balances to be invested in a variety of
investment options. The plan is subject to the reporting and disclosure
requirements of the Employee Retirement and Income Security Act of 1974. Pension
expense related to this plan was $184, $305 and $250 for the years ended
December 31, 1996, 1995 and 1994, respectively.
40
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
8. RETIREMENT AND COMPENSATION PLANS (CONTINUED)
AEGON sponsors supplemental retirement plans to provide the Company's senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory and benefits are based on years of service and the employee's
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Code. In addition, AEGON has established incentive deferred compensation
plans for certain key employees of the Company. AEGON also sponsors an employee
stock option plan for individuals employed at least three years and a stock
purchase plan for its producers, with the participating affiliated companies
establishing their own eligibility criteria, producer contribution limits and
company matching formula. These plans have been accrued or funded as deemed
appropriate by management of AEGON and the Company.
In addition to pension benefits, the Company participates in plans sponsored by
AEGON that provide postretirement medical, dental and life insurance benefits to
employees meeting certain eligibility requirements. Portions of the medical and
dental plans are contributory. The expenses of the postretirement plans
calculated on the pay-as-you-go basis are charged to affiliates in accordance
with an intercompany cost sharing arrangement. The Company expensed $98, $86 and
$70 for the years ended December 31, 1996, 1995 and 1994, respectively.
9. RELATED PARTY TRANSACTIONS
The Company shares certain officers, employees and general expenses with
affiliated companies.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1996, 1995
and 1994, the Company paid $10,038, $8,825 and $7,497, respectively, for such
services, which approximates their costs to the affiliates. The Company provides
office space, marketing and administrative services to certain affiliates.
During 1996, 1995 and 1994, the Company received $3,271, $4,545 and $3,261,
respectively, for such services, which approximates their cost. The Company had
a net receivable (payable) with affiliates of $(19,298) and $4,337 at December
31, 1996 and 1995, respectively.
Payable to affiliates and intercompany borrowings bear interest at the
thirty-day commercial paper rate of 5.48% at December 31, 1996. During 1996,
1995 and 1994, the Company paid (received) net interest of $138, $(294) and $49,
respectively, to affiliates.
41
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company received capital contributions of $45,000 from its immediate parent,
First AUSA Life Insurance Company, in 1994.
At December 31, 1995, the Company has a $6,500 short-term note receivable from
an affiliate. Interest on this note accrues at 5.82%.
10. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business. Although
such litigation sometimes includes substantial demands for compensatory and
punitive damages in addition to contract liability, it is management's opinion,
after consultation with counsel and a review of available facts, that damages
arising from such demands will not be material to the Company's financial
position.
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the event of insolvency of
other insurance companies. Assessments are charged to operations when received
by the Company except where right of offset against other taxes paid is allowed
by law; amounts available for future offsets are recorded as an asset on the
Company's balance sheet. The future obligation has been based on the most recent
information available from the National Organization of Life and Health
Insurance Guaranty Association. Potential future obligations for unknown
insolvencies are not determinable by the Company. The Company has established a
reserve of $4,344 and $4,445 and an offsetting premium tax benefit of $1,218 and
$1,319 at December 31, 1996 and 1995, respectively, for its estimated share of
future guaranty fund assessments related to several major insurer insolvencies.
The guaranty fund expense was $212, $1,950 and $618 at December 31, 1996, 1995
and 1994, respectively.
42
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
SUMMARY OF INVESTMENTS OTHER THAN
INVESTMENTS IN RELATED PARTIES
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
SCHEDULE I
AMOUNT AT
WHICH SHOWN
MARKET IN THE
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET
------------------ --------- -------- -------------
FIXED MATURITIES
Bonds:
United States Government and government
agencies and authorities $ 91,807 $ 93,675 $ 91,581
State, municipalities and political
subdivisions 1,498 1,533 1,497
Foreign governments 4,006 4,245 4,006
Public utilities 14,852 15,576 14,808
All other corporate bonds 249,093 257,290 247,687
-------- -------- --------
Total fixed maturities 361,256 372,319 359,579
EQUITY SECURITIES
Common stocks:
Industrial, miscellaneous and all other 302 597 597
-------- -------- --------
Total equity securities 302 597 597
Mortgage loans on real estate 6,049 6,049
Real estate 7,962 7,962
Policy loans 52,604 52,604
Cash and short-term investments 2,480 2,480
-------- --------
Total investments $430,653 $429,271
======== ========
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments.
43
<PAGE>
<TABLE>
<CAPTION>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)
SCHEDULE III
FUTURE POLICY POLICY AND NET BENEFITS OTHER
BENEFITS AND CONTRACT PREMIUM INVESTMENT AND CLAIMS OPERATING
EXPENSES LIABILITIES REVENUE INCOME* EXPENSES EXPENSES*
------------- ----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1996
Individual life $145,964 $7,017 $ 289,375 $ 8,228 $ 47,051 $124,181
Group life and 9,202 713 4,215 3,940 2,529 2,818
health
Annuity 332,230 854 740,125 23,899 281,352 71,576
----------- ------ ---------- ------- -------- --------
$487,396 $8,584 $1,033,715 $36,067 $330,932 $198,575
=========== ====== ========== ======= ======== ========
YEAR ENDED DECEMBER 31,
1995
Individual life $ 64,128 $5,811 $ 188,143 $ 9,470 $ 36,032 $ 83,709
Group life 7,904 701 3,365 1,054 2,217 946
Annuity 319,353 100 378,390 30,367 205,375 44,447
----------- ------ ---------- -------- -------- --------
$391,385 $6,612 $ 569,898 $40,891 $243,624 $129,102
=========== ======= ========== ======= ======== ========
YEAR ENDED DECEMBER 31,
1994
Individual life $ 76,345 $4,501 $ 147,282 $10,146 $ 29,254 $ 71,825
Group life 7,323 481 3,709 372 1,754 1,329
Annuity 314,124 137 449,141 29,621 199,485 44,063
----------- ------ ---------- ------- -------- --------
$397,792 $5,119 $ 600,132 $40,139 $230,493 $117,217
=========== ======= ========== ======= ======== ========
</TABLE>
* Allocations of net investment income and other operating expenses are based
on a number of assumptions and estimates, and the results would change if
different methods were applied.
44
<PAGE>
<TABLE>
<CAPTION>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
REINSURANCE
(DOLLARS IN THOUSANDS)
SCHEDULE IV
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Life insurance in force $28,168,880 $ 4,463,986 $ 2,210,601 $25,915,495 8.5%
=========== =========== =========== =========== ==========
Premiums:
Individual life $ 292,239 $ 2,863 $ -- $ 289,376 0.0%
Group life and health 2,393 242 2,063 4,214 49.0
Annuity 740,125 -- -- 740,125 0.0
----------- ----------- ----------- ----------- ----------
$ 1,034,757 $ 3,105 $ 2,063 $ 1,033,715 0.2%
=========== =========== =========== =========== ==========
YEAR ENDED DECEMBER 31, 1995
Life insurance in force $19,438,203 $ 1,365,119 $ 1,619,378 $19,692,462 8.2%
=========== =========== =========== =========== ==========
Premiums:
Individual life $ 189,870 $ 1,727 $ -- $ 188,143 0.0%
Group life 2,153 357 1,569 3,365 46.6
Annuity 378,390 -- -- 378,390 0.0
----------- ----------- ----------- ----------- ----------
$ 570,413 $ 2,084 $ 1,569 $ 569,898 0.2%
=========== =========== =========== =========== ==========
YEAR ENDED DECEMBER 31, 1994
Life insurance in force $14,321,386 $ 1,090,845 $ 1,271,402 $14,501,943 8.8%
=========== =========== =========== =========== ==========
Premiums:
Individual life $ 148,766 $ 1,484 $ -- $ 147,282 0.0%
Group life 2,701 224 1,232 3,709 33.0
Annuity 449,141 -- -- 449,141 0.0
----------- ----------- ----------- ----------- ----------
$ 600,608 $ 1,708 $ 1,232 $ 600,132 0.4%
=========== =========== =========== =========== ==========
</TABLE>
45
<PAGE>
PART A
INFORMATION REQUIRED IN A PROSPECTUS
C.A.S.E. RESERVE VARIABLE ANNUITY PROSPECTUS
<PAGE>
C.A.S.E. RESERVE VARIABLE ANNUITY
Flexible Payment Variable Accumulation
Deferred Annuity Contract
Issued By
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, Florida 33770
(800) 851-9777
(813) 585-6565
This Prospectus describes the C.A.S.E. Reserve Variable Annuity (the
"Contract"), a tax deferred variable annuity contract issued by Western
Reserve Life Assurance Co. of Ohio ("Western Reserve").
The Contract provides for accumulation of Contract values on a variable
basis, a fixed basis, or a combination of both. The Contract also provides for
the payment of periodic annuity payments on a variable basis or a fixed basis.
If the variable basis is chosen, Contract values will be held in the WRL Series
Annuity Account (the "Series Account") and will vary according to the
investment performance of three underlying investment portfolios of the WRL
Series Fund, Inc. (the "Fund") offered through this Prospectus. If the
fixed basis is chosen, Contract values will be allocated to the Fixed Account
and earn interest at no less than the minimum guaranteed rate.
There are currently three Sub-Accounts of the Series Account (in addition
to the Fixed Account) available through this Contract during the Accumulation
Period and after the Maturity Date. Each Sub-Account invests in one
corresponding investment portfolio of the Fund and Net Purchase Payments will be
allocated to one or more of these Sub-Accounts or the Fixed Account as directed
by the Owner. These three investment portfolios of the Fund are: the C.A.S.E.
Quality Growth Portfolio, the C.A.S.E. Growth & Income Portfolio and the
C.A.S.E. Growth Portfolio (collectively, the "Portfolios").
This Prospectus sets forth information about the Contract that a
prospective investor should know before investing. Additional information about
the Series Account has been filed with the Securities and Exchange Commission in
a Statement of Additional Information, dated May 1, 1997, which is incorporated
herein by reference. The Statement of Additional Information is available upon
written or oral request and without charge from Western Reserve, P.O. Box 9051,
Clearwater, FL 34618-9051; telephone number (800) 851-9777. The table of
contents for the Statement of Additional Information appears on page 35 of this
Prospectus.
THE CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED
BY, A BANK OR DEPOSITORY INSTITUTION, AND THE CONTRACT IS NOT FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY, AND INVOLVES INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL
AMOUNT INVESTED.
THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY THE CURRENT PROSPECTUS FOR
THE WRL SERIES FUND, INC. RELATING TO THESE PORTFOLIOS. CERTAIN PORTFOLIOS MAY
NOT BE AVAILABLE IN ALL STATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESPERSON OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
THIS PROSPECTUS SHOULD BE RETAINED FOR FUTURE REFERENCE.
Prospectus Dated May 1, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
DEFINITIONS OF SPECIAL TERMS .................................... 1
SUMMARY ......................................................... 3
CONDENSED FINANCIAL INFORMATION ................................. 7
CALCULATION OF YIELDS AND TOTAL RETURNS ........................ 7
OTHER PERFORMANCE DATA .......................................... 8
PUBLISHED RATINGS ................................................ 10
WESTERN RESERVE, THE SERIES ACCOUNT, AND THE FUND ............... 10
Western Reserve Life Assurance Co. of Ohio ..................... 10
WRL Series Annuity Account .................................... 10
WRL Series Fund, Inc. .......................................... 11
CHARGES AND DEDUCTIONS .......................................... 11
Withdrawal Charge ............................................. 12
Transfer Charge ................................................ 13
Mortality and Expense Risk Charge .............................. 13
Annual Contract Charge ....................................... 13
Administrative Charge .......................................... 14
Premium Taxes ................................................ 14
Deductions for Other Taxes .................................... 14
Expenses of the Fund .......................................... 14
THE CONTRACT ................................................... 14
ACCUMULATION PROVISIONS ....................................... 14
Purchase Payments ............................................. 14
Net Purchase Payments ....................................... 15
Accumulation Unit Value ....................................... 16
Computing Sub-Account Value ................................. 16
Transfers to and from, and among Allocation Options ......... 17
Dollar Cost Averaging ....................................... 18
Partial Withdrawals and Surrenders ........................... 18
Contract Loans For 401(a), 401(k), and 403(b) Contracts ...... 20
Death Benefits during the Accumulation Period ............... 21
ANNUITY PROVISIONS ............................................. 23
Maturity Date and Selection of Annuity Options ............... 23
Fixed Account Annuity Options ................................. 24
Series Account Annuity Options .............................. 25
Death Benefits after the Maturity Date ........................ 25
Improved Annuity Rates ....................................... 25
Proof of Age, Sex, and Survival .............................. 25
OTHER MATTERS RELATING TO THE CONTRACT ........................... 25
Changes in Purchase Payments ................................. 25
Right To Examine Contract .................................... 25
Contract Payments ............................................. 26
Ownership ...................................................... 26
Annuitant ...................................................... 26
Beneficiary ................................................... 26
Modification or Waiver ....................................... 27
</TABLE>
i
<PAGE>
TABLE OF CONTENTS (CONTINUED)
<TABLE>
<S> <C>
FEDERAL TAX MATTERS .................................... 27
Introduction ....................................... 27
Company Tax Status ................................. 27
Taxation of Annuities .............................. 28
Qualified Plans .................................... 29
Additional Considerations ........................... 31
THE FIXED ACCOUNT .................................... 32
Minimum Guaranteed and Current Interest Rates ...... 33
Fixed Account Value ................................. 33
Allocations, Transfers and Partial Withdrawals ...... 33
DISTRIBUTION OF THE CONTRACTS ........................ 34
VOTING RIGHTS .......................................... 34
LEGAL PROCEEDINGS .................................... 35
STATEMENT OF ADDITIONAL INFORMATION .................. 35
</TABLE>
ii
<PAGE>
DEFINITIONS OF SPECIAL TERMS
ACCUMULATION PERIOD - The period between the Contract Date and the Maturity Date
while the Contract is In Force.
ACCUMULATION UNIT VALUE - An accounting unit of measure used to calculate
Sub-Account values during the Accumulation Period.
ADMINISTRATIVE OFFICE - Western Reserve's administrative office for variable
annuity products, the address of which is P.O. Box 9051, Clearwater, Florida
34618-9051. Telephone number: 1-800-851-9777; Fax number: 1-800-572-0159.
ALLOCATION OPTIONS - The Fixed Account and the Sub-Accounts of the Series
Account available under this Contract.
ANNUITANT - The person named in the application, or as subsequently changed, to
receive annuity payments. The Annuitant may be changed as provided in the
Contract's death benefit provisions and annuity provisions.
ANNUITY PROCEEDS - The amount applied to purchase periodic annuity payments.
Such amount is the Annuity Value on the Maturity Date, less any applicable
premium tax.
ANNUITY VALUE - The sum of the Series Account Value and the Fixed Account Value.
ANNUITY UNIT VALUE - An accounting unit of measure used to calculate annuity
payments from certain Sub-Accounts after the Maturity Date.
ANNIVERSARY - The same day and month as the Contract Date for each succeeding
year the Contract remains In Force.
ATTAINED AGE - The Issue Age plus the number of completed Contract Years.
BENEFICIARY - The person(s) entitled to receive the death benefit proceeds under
the Contract.
CASH VALUE - The Annuity Value less any applicable premium taxes and any
Withdrawal Charge.
CODE - The Internal Revenue Code of 1986, as amended.
CONTINGENT BENEFICIARY - The person named in the application, or subsequently
designated, to become the new Beneficiary upon the current Beneficiary's death.
CONTRACT DATE - The later of the date on which the initial Purchase Payment is
received and the date that the properly completed application is received at
Western Reserve's Administrative Office.
CONTRACT YEAR - A period of twelve consecutive months beginning on the Contract
Date and any Anniversary thereafter.
FIXED ACCOUNT - An Allocation Option under the Contract, other than the Series
Account, that provides for accumulation of Net Purchase Payments, and options
for annuity payments on a fixed basis. For Contracts issued in the States of New
Jersey and Washington, the Fixed Account is used solely for Contract loans, and
is not available for allocation of Net Purchase Payments or transfers of Annuity
Value from the Sub-Accounts.
FIXED ACCOUNT VALUE - During the Accumulation Period, a Contract's value
allocated to the Fixed Account.
FUND - WRL Series Fund, Inc.
1
<PAGE>
DEFINITIONS OF SPECIAL TERMS (CONTINUED)
IN FORCE - Condition under which the Contract is active and the Owner is
entitled to exercise all rights under the Contract.
ISSUE AGE - Refers to the age on the birthday nearest the Contract Date.
MATURITY DATE - The date on which the Accumulation Period ends and annuity
payments are to commence.
NET PURCHASE PAYMENT - The Purchase Payment less any applicable premium taxes.
NON-QUALIFIED CONTRACTS - Contracts issued other than in connection with
retirement plans. Non-Qualified Contracts do not qualify for special Federal
income tax treatment under the Code.
OWNER - The person(s) entitled to exercise all rights under the Contract. The
Annuitant is the Owner unless the application states otherwise, or unless a
change of ownership is made at a later time.
PORTFOLIO - A separate investment portfolio of the Fund.
PURCHASE PAYMENTS - Amounts paid by an Owner or on the Owner's behalf to
Western Reserve as consideration for the benefits provided by the Contract.
QUALIFIED CONTRACTS - Contracts issued in connection with retirement plans that
qualify for special Federal income tax treatment under the Code.
SERIES ACCOUNT (OR SEPARATE ACCOUNT) - WRL Series Annuity Account, a separate
investment account composed of several Sub-Accounts established to receive and
invest Net Purchase Payments not allocated to the Fixed Account.
SERIES ACCOUNT VALUE - During the Accumulation Period, the value in the Series
Account allocable to a Contract, which value is equal to the total of the values
allocable to a Contract in each of the Sub-Accounts during the Accumulation
Period.
SUB-ACCOUNT - A sub-division of the Series Account that invests exclusively in
the shares of a specified Portfolio and supports the Contracts. Sub-Accounts
corresponding to each applicable Portfolio hold assets under the Contract during
the Accumulation Period. Other Sub-Accounts corresponding to each applicable
Portfolio will hold assets after the Maturity Date if a Series Account annuity
option is selected.
SURRENDER - The termination of a Contract at the option of the Owner.
VALUATION DATE - Each day on which the New York Stock Exchange is open for
business.
VALUATION PERIOD - The period commencing at the end of one Valuation Date and
continuing to the end of the next succeeding Valuation Date.
2
<PAGE>
SUMMARY
This summary provides you with an overview of the tax deferred variable
annuity contract offered through this Prospectus by Western Reserve and funded
by the Series Account and the Fixed Account.
THE CONTRACT
The Contract is a tax deferred variable annuity contract that may be
purchased by submitting a completed application to Western Reserve for its
approval. The Contract provides for accumulation of Annuity Values on a variable
basis, a fixed basis, or a combination of both. The Contract also provides for
the payment of periodic annuity payments on a variable basis or a fixed basis.
(See "THE CONTRACT ACCUMULATION PROVISIONS" on page 14 and "- ANNUITY
PROVISIONS" on page 23.) (For information about tax status, see "FEDERAL
TAX MATTERS" on pages 27-32.)
RIGHT TO EXAMINE CONTRACT
If an Owner is not satisfied with the Contract, it may be cancelled by
returning it within ten days after receipt together with a written request for
cancellation. In such event, Western Reserve will pay the Owner an amount equal
to the sum of: (i) the Purchase Payments received; plus (or minus) (ii) the
accumulated gains (or losses), if any, in the Series Account for the Contract as
of the date Western Reserve receives the returned Contract. (In certain states,
Western Reserve will refund the Purchase Payments.) (See "OTHER MATTERS
RELATING TO THE CONTRACT - Right to Examine Contract" on page 25.)
THE FUND
The underlying variable investments for the Contracts are shares of three
of the Portfolios of the Fund, namely: the C.A.S.E. Quality Growth Portfolio,
the C.A.S.E. Growth & Income Portfolio and the C.A.S.E. Growth Portfolio.
Western Reserve reserves the right to offer additional investment portfolios or
other mutual funds with differing investment objectives. (See "WESTERN
RESERVE, THE SERIES ACCOUNT, AND THE FUND - WRL Series Fund, Inc." on page
11.)
PURCHASE PAYMENTS
The Owner may make Purchase Payments at such frequency as the Owner elects.
The initial Purchase Payment generally must accompany the application, and for
Non-Qualified Contracts must be at least $5,000; however, a minimum initial
Purchase Payment of $1,000 is allowed provided the application reflects
anticipated additional monthly periodic Purchase Payments of at least $100, on a
monthly basis, via electronic funds transfer from the Owner's bank account. For
Individual Retirement Annuities ("IRAs"), the minimum initial Purchase
Payment is $1,000. For Qualified Contracts other than IRAs, the minimum initial
Purchase Payment is $50. For all Contracts, subsequent Purchase Payments must be
at least $50, unless Western Reserve consents to a smaller amount. The maximum
amount of Purchase Payments that may be made in any Contract Year is $1,000,000,
unless Western Reserve consents to a larger amount. Western Reserve reserves the
right to reject any Purchase Payment for any reason permitted by law. (See
"ACCUMULATION PROVISIONS - Purchase Payments" on page 14.)
PARTIAL WITHDRAWAL AND SURRENDER PRIVILEGE
A Contract may be surrendered or portions of the Cash Value may be
partially withdrawn at any time prior to the Maturity Date. The Cash Value may
not, however, be reduced by any partial withdrawal to less than $10,000. (See
"THE CONTRACT - Partial Withdrawals and Surrenders" on page 18.) For
Qualified Contracts issued under Code Section 403(b), certain restrictions will
apply. Moreover, a partial withdrawal or Surrender may have Federal income tax
consequences. (See "FEDERAL TAX MATTERS - Qualified Plans" on page 29.)
WITHDRAWAL CHARGE
No deductions for sales expenses are made from Purchase Payments. A
Withdrawal Charge, which is a contingent deferred sales charge, may, however, be
assessed against Annuity Value when partially withdrawn or surrendered.
3
<PAGE>
The length of time from receipt of a Purchase Payment to the time of a
partial withdrawal or Surrender of that Purchase Payment determines whether the
Withdrawal Charge will be deducted. The charge is a percentage of the amount of
each Purchase Payment partially withdrawn or surrendered within five years of
its payment. In determining which amounts withdrawn are subject to the
Withdrawal Charge, partial withdrawals and Surrenders will be deemed made first
from Purchase Payments on a first-in, first-out basis and then from any Contract
earnings. The charge is as follows:
<TABLE>
<CAPTION>
Number of Years
from Receipt of Each
Charge Purchase Payment
- --------- ----------------------
<S> <C>
6% 0-2
4% 3
3% 4
2% 5
0% Over 5
</TABLE>
For the first withdrawal or series of Systematic Partial Withdrawals during each
Contract Year, the Withdrawal Charge is waived for the first 10% of the Annuity
Value that otherwise would be subject to the Withdrawal Charge. No Withdrawal
Charge will be assessed if Annuity Values are applied to any annuity option
under the Contract. (See "CHARGES AND DEDUCTIONS - Withdrawal Charge" on
page 12.) Additionally, a 10% penalty tax under Code Section 72(q) is currently
imposed on partial withdrawals or Surrenders from Non-Qualified Contracts if
such partial withdrawals or Surrenders are made prior to age 59-1/2 and other
exceptions do not apply. (See "FEDERAL TAX MATTERS" on page 27.)
MORTALITY AND EXPENSE RISK CHARGE
For assuming mortality and expense risks under the Contracts, during the
Accumulation Period, Western Reserve imposes a 1.10% per annum charge against
all Annuity Value held in the Series Account. After the Maturity Date, the
charge will equal 1.25% per annum of all Annuity Value held in the Series
Account. (See "CHARGES AND DEDUCTIONS - Mortality and Expense Risk Charge"
on page 13.)
ANNUAL CONTRACT CHARGE
An Annual Contract Charge of $30 is deducted annually on each Contract
Anniversary. (See "CHARGES AND DEDUCTIONS - Annual Contract Charge", page
13.)
ADMINISTRATIVE CHARGE
Western Reserve imposes a daily Administrative Charge equal to an annual
rate of 0.15% against all Annuity Value held in the Series Account. (See
"CHARGES AND DEDUCTIONS - Administrative Charge" on page 14.)
PREMIUM TAXES
No deduction is made for premium taxes unless Western Reserve incurs a
premium tax under state law. Certain states impose premium taxes ranging up to
3.5% of Purchase Payments. (See "CHARGES AND DEDUCTIONS - Premium Taxes"
on page 14.)
CHARGES BY THE FUND
The Fund is subject to certain fees, charges and expenses. (See "WESTERN
RESERVE, THE SERIES ACCOUNT, AND THE FUND - WRL Series Fund, Inc." on page 11
and the Prospectus for the Portfolios.)
4
<PAGE>
SUMMARY OF CHARGES AND EXPENSES
The following illustrates the charges and deductions under the Contract
during the Accumulation Period, as well as the fees and expenses of the Fund.
<TABLE>
<S> <C>
OWNER TRANSACTION EXPENSES
Sales Load Imposed on Purchases None
Maximum Withdrawal Charge
(as a % of each Purchase Payment surrendered or partially
withdrawn within 5 years from receipt) 6%
Transfer Charge
On first 12 transfers each year None
On each transfer thereafter $10.00
ANNUAL CONTRACT CHARGE $30.00 Per Contract
SEPARATE ACCOUNT ANNUAL EXPENSES (as a % of average account value)
DURING ACCUMULATION PERIOD
Mortality and Expense Risk Charge 1.10%
Other Account Fees and Expenses
(See "Administrative Charge," page 14) 0.15%
Total Separate Account Annual Expenses 1.25%
AFTER ACCUMULATION PERIOD
Mortality and Expense Risk Charge 1.25%
Other Account Fees and Expenses
(See "Administrative Charge," page 14) 0.15%
Total Separate Account Annual Expenses 1.40%
FUND ANNUAL EXPENSES* (as a % of Fund average net assets)
</TABLE>
<TABLE>
<CAPTION>
C.A.S.E. C.A.S.E. C.A.S.E.
Quality Growth Growth & Income Growth
Portfolio Portfolio Portfolio
----------------- ------------------ -----------
<S> <C> <C> <C>
Management Fees 0.80% 0.80% 0.80%
Other Expenses
(after reimbursement) 0.70% 0.70% 0.20%
Total Fund Annual Expenses 1.50% 1.50% 1.00%
</TABLE>
- ----------------
* Effective January 1, 1997, the Fund adopted a Plan of Distribution pursuant to
Rule 12b-1 under the 1940 Act ("Distribution Plan") and pursuant to the
Plan, has entered into a Distribution Agreement with InterSecurities, Inc.
("ISI"), principal underwriter for the Fund. Under the Distribution
Plan, the Fund, on behalf of the Portfolios, is authorized to pay to various
service providers, as direct payment for expenses incurred in connection with
the distribution of a Portfolio's shares, amounts equal to actual expenses
associated with distributing a Portfolio's shares, up to a maximum rate of
0.15% (fifteen one-hundredths of one percent) on an annualized basis of the
average daily net assets. This fee is measured and accrued daily and paid
monthly. ISI has determined that it will not seek payment by the Fund of
distribution expenses with respect to any Portfolio during the fiscal year
ending December 31, 1997. Prior to ISI's seeking reimbursement, Policyowners
will be notified in advance.
The purpose of the preceding Table is to assist the Owner in understanding
the various costs and expenses that an Owner will bear directly and indirectly.
WRL Investment Management, Inc. has voluntarily
5
<PAGE>
undertaken, until at least April 30, 1998, to pay Fund expenses on behalf of the
Portfolios to the extent that the normal operating expenses exceed 1.50% of the
average daily net assets of the C.A.S.E. Quality Growth Portfolio and the
C.A.S.E. Growth & Income Portfolio and exceed 1.00% of the C.A.S.E. Growth
Portfolio's average daily net assets.
In 1996, Western Reserve, the Fund's Investment Adviser prior to January
1, 1997, reimbursed the C.A.S.E. Quality Growth Portfolio in the amount of
$34,335, the C.A.S.E. Growth & Income Portfolio in the amount of $33,658, and
the C.A.S.E. Growth Portfolio in the amount of $73,269. Without such
reimbursement, total annual Fund expenses during 1996 for the C.A.S.E. Quality
Growth Portfolio, the C.A.S.E. Growth & Income Portfolio and the C.A.S.E. Growth
Portfolio would have been 3.56%, 3.34% and 1.64%, respectively.
Expenses of the Fund may be higher or lower in the future. Certain states
and other governmental entities may impose a premium tax, which the Table does
not include. For more information on the charges described in this Table, see
"CHARGES AND DEDUCTIONS" on page 11 and the Prospectus for the Portfolios
of the Fund which accompanies this Prospectus.
EXAMPLES
1. If you surrender your Contract at the end of the applicable time period:
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
C.A.S.E. Quality Growth Sub-Account $89 $128 $170 $317
C.A.S.E. Growth & Income Sub-Account 89 128 170 317
C.A.S.E. Growth Sub-Account 84 113 145 268
</TABLE>
2. If you annuitize or do not surrender at the end of the applicable time period
(note that annuitization is not available prior to a Contract's fifth
Anniversary):
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
C.A.S.E. Quality Growth Sub-Account $29 $88 $150 $317
C.A.S.E. Growth & Income Sub-Account 29 88 150 317
C.A.S.E. Growth Sub-Account 24 73 125 268
</TABLE>
The above examples assume that no transfer charges have been assessed. In
addition, the examples factor in the $30 Annual Contract Charge based on an
average Series Account Value per Contract of $31,215, which converts that charge
to an annual rate of 0.10% of the Series Account Value.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND THE ACTUAL EXPENSES PAID MAY BE GREATER OR LESS THAN THOSE SHOWN.
THE ASSUMED 5% ANNUAL RETURN IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE ANNUAL RETURNS, WHICH MAY BE GREATER OR LESS
THAN THE ASSUMED AMOUNT.
DEATH BENEFIT
If the Annuitant is also the Owner or if the Owner is not a natural person,
and the Annuitant dies at any time before the Maturity Date, a death benefit
will be provided, unless certain elections have been made that would keep the
Contract In Force. After the Maturity Date, death benefits will be paid in
accordance with the annuity option then in effect. (See "ACCUMULATION
PROVISIONS - Death Benefits during the Accumulation Period" on page 21 and
"ANNUITY PROVISIONS - Death Benefits after the Maturity Date" on page 25.)
6
<PAGE>
ANNUITY PAYMENT OPTIONS
Annuity payment options are available under the Contract for distribution
of the Annuity Proceeds after the Maturity Date. The Maturity Date may not be
earlier than the end of the fifth Contract Year and cannot be deferred beyond
the Annuitant reaching Attained Age 90. Subject to these limitations, the
default Maturity Date may be changed by the Owner, at any time prior to that
date, by delivering a written request to Western Reserve. (See "ANNUITY
PROVISIONS -Maturity Date and Selection of Annuity Options" on page 23.)
TRANSFERS
Prior to the Maturity Date, the Owner may transfer any or all of the
Annuity Value from a Sub-Account to the Fixed Account, from the Fixed Account to
a Sub-Account (subject to certain restrictions), or among the Sub-Accounts. (For
Contracts issued in the States of New Jersey and Washington, the Fixed Account
is not available for transfers of Annuity Value from the Sub-Accounts.) (See
"THE CONTRACT - ACCUMULATION PROVISIONS - Transfers to and from, and among
Allocation Options" on page 17.) Twelve Transfers are permitted without
charge in a Contract Year. Each additional transfer will be subject to a
transfer charge of $10. This charge will not be increased. Certain restrictions
apply to transfers from the Fixed Account. Western Reserve may, at any time,
revoke or modify the transfer privilege. (See "ACCUMULATION PROVISIONS -
Transfers to and from, and among Allocation Options" on page 17 and "THE
FIXED ACCOUNT - Allocations, Transfers and Partial Withdrawals" on page 33.)
FIXED ACCOUNT
Fixed Account Values will be held in the general account of Western Reserve
and earn interest at no less than the minimum guaranteed rate. The Fixed Account
is discussed in the section entitled "THE FIXED ACCOUNT" beginning on page
32.
CONDENSED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PERIOD FROM MAY 1, 1995* TO
DECEMBER 31, 1995
------------------------------------------------------------------
NUMBER OF
ACCUMULATION UNIT ACCUMULATION UNIT ACCUMULATION UNITS
VALUE AT BEGINNING VALUE AT END OUTSTANDING AT
SUB-ACCOUNT OF PERIOD OF PERIOD END OF PERIOD
- ----------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
C.A.S.E. Quality Growth $10.000 $11.266 102,076
C.A.S.E. Growth & Income 10.000 11.384 95,175
C.A.S.E. Growth 10.000 11.964 215,502
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------
NUMBER OF
ACCUMULATION UNIT ACCUMULATION UNIT ACCUMULATION UNITS
VALUE AT BEGINNING VALUE AT END OUTSTANDING AT
SUB-ACCOUNT OF PERIOD OF PERIOD END OF PERIOD
- ----------- --------------------- -------------------- -------------------
<S> <C> <C> <C>
C.A.S.E. Quality Growth $11.266 $13.077 141,682
C.A.S.E. Growth & Income 11.384 13.404 152,527
C.A.S.E. Growth 11.964 13.883 424,512
</TABLE>
- ----------------
* Commencement of operation for these Sub-Accounts.
CALCULATION OF YIELDS AND TOTAL RETURNS
From time to time, Western Reserve may disclose in advertisements and sales
literature yields and total returns for the Sub-Accounts representing the
Accumulation Period under a Contract. In addition, Western
7
<PAGE>
Reserve may, on the same basis, advertise the effective yield of a Sub-Account
under the Contract. THESE YIELDS AND TOTAL RETURNS ARE BASED ON THE
SUB-ACCOUNTS' HISTORICAL PERFORMANCE ONLY AND ARE NOT INTENDED TO INDICATE
FUTURE PERFORMANCE. For more detailed information about the performance data
calculations described below, see the Statement of Additional Information.
YIELD
The yield of a Sub-Account refers to the income produced by a hypothetical
Series Account Value in the Sub-Account over a specified thirty day period
expressed as a percentage rate of return for that period. The yield is
calculated by assuming that the income produced by the investment during that
thirty day period is produced each thirty day period over a twelve month period
and is shown as a percentage of the Series Account Value.
TOTAL RETURN
The average annual total return of the Sub-Accounts shown below is based
upon the actual historical performance of the Sub-Accounts. The calculations
represent the performance of a hypothetical initial Purchase Payment of $1,000
over certain stated periods of time. Total return is calculated according to the
formula provided in the Statement of Additional Information.
THE STANDARD TOTAL RETURN CALCULATIONS IN THE TABLE BELOW HAVE BEEN REDUCED
BY ALL FEES AND CHARGES UNDER THE CONTRACT. Such fees and charges include the
Mortality and Expense Risk Charge of 1.25%, the Administrative Charge of 0.15%,
and the $30 Annual Contract Charge based on an average Series Account Value of
$31,215, which translates into an annual charge of 0.10%. The total return
calculations in the table below also assume a complete surrender of the Contract
at the end of the period, and therefore THE WITHDRAWAL CHARGE IS DEDUCTED.
THE STANDARD AVERAGE ANNUAL TOTAL RETURNS OF THE SUB-ACCOUNTS SINCE THE
INCEPTION OF EACH SUB-ACCOUNT IS:
<TABLE>
<CAPTION>
PERIOD FROM ONE YEAR ENDED
SUB-ACCOUNT MAY 1, 1995* TO DECEMBER 31, 1996 DECEMBER 31, 1996
- ----------- --------------------------------- -----------------
<S> <C> <C>
C.A.S.E. Quality Growth 14.07% 9.96%
C.A.S.E. Growth & Income 15.85% 11.62%
C.A.S.E. Growth 18.42% 9.92%
</TABLE>
- ----------------
* Commencement of operations for these Sub-Accounts.
OTHER PERFORMANCE DATA
Western Reserve may from time to time disclose in advertisements and sales
literature average annual total return in non-standard formats and cumulative
total return for Contracts funded by the Sub-Accounts.
Western Reserve may from time to time also disclose in advertisements and
sales literature yields and non-standard total returns for the Sub-Accounts
(some of which do not include Contract and Series Account fees and charges).
For example, Western Reserve may present hypothetical illustrations
representing past performance of one or more Sub-Accounts for a hypothetical
Contract. Such a hypothetical Contract illustration would present average total
return performance information for the hypothetical Contract, assuming
allocation of initial and subsequent net premiums to one or more Sub-Accounts,
which reflects the performance of those Sub-Accounts for the duration of the
allocations under the hypothetical Contract. The information presented may be
compared to various indices.
NON-STANDARD PERFORMANCE DATA WILL ONLY BE DISCLOSED IF THE STANDARD
PERFORMANCE DATA FOR THE REQUIRED PERIODS IS ALSO DISCLOSED.
8
<PAGE>
Western Reserve may also present non-standard total returns based on the
actual performance of the Portfolios, which were in existence prior to the
Sub-Account's inception. The table below shows the actual average annual total
return for the Portfolios reduced by all fees and charges of the Contract, as if
the Contract had been in existence, EXCEPT THAT THE WITHDRAWAL CHARGE IS NOT
DEDUCTED. Such fees and charges include the Mortality and Expense Risk Charge of
1.25%, the Administrative Charge of 0.15%, and the $30 Annual Contract Charge
based on an average Series Account Value of $31,215, which translates that
charge into an annual rate of 0.10%.
THE NON-STANDARD AVERAGE ANNUAL TOTAL RETURNS OF THE SUB-ACCOUNTS SINCE THE
INCEPTION OF EACH PORTFOLIO IS:
<TABLE>
<CAPTION>
PERIOD FROM ONE YEAR ENDED
SUB-ACCOUNT MAY 1, 1995* TO DECEMBER 31, 1996 DECEMBER 31, 1996
- ----------- ---------------------------------- -----------------
<S> <C> <C>
C.A.S.E. Quality Growth 17.33% 15.96%
C.A.S,E. Growth & Income 19.07% 17.62%
C.A.S.E. Growth 21.60% 15.92%
</TABLE>
- ----------------
* Commencement of operations for these Sub-Accounts.
Western Reserve may compare the performance of each Sub-Account in
advertising and sales literature to the performance of other variable annuity
issuers in general or to the performance of particular types of variable
annuities investing in mutual funds, or investment series of mutual funds with
investment objectives similar to each of the Sub-Accounts. For this purpose,
Western Reserve may use as sources of performance comparison such organizations
as Lipper Analytical Services, Inc. ("Lipper"), Variable Annuity Research
& Data Service ("VARDS"), CDA Investment Technologies, Inc. ("CDA")
and Morningstar, Inc. ("Morningstar"), or other services, companies,
individuals or other industry or financial publications of general interest,
such as FORBES, MONEY, THE WALL STREET JOURNAL, BUSINESS WEEK, BARRON'S,
KIPLINGER'S PERSONAL FINANCE and FORTUNE. Lipper, VARDS and Morningstar are
independent services which monitor and rank the performances 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. VARDS and CDA rankings compare only
variable annuity issuers. The performance analysis prepared by Lipper, VARDS,
CDA and Morningstar each rank such issuers on the basis of total return,
assuming reinvestment of distributions, but do not take sales charges,
redemption fees or certain expense deductions at the separate account level into
consideration. In addition, VARDS prepares 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 of funds defined by the degree of risk inherent in their
investment objectives.
Western Reserve may also compare, as appropriate, the performance of each
Sub-Account in advertising and sales literature to such widely used measures of
stock market performance as the Standard & Poor's Index of 500 Common Stocks,
Dow Jones Industrials Average, Value Line (Arithmetic) Index, CDA/Wiesenberger
Long Term Growth Average-VA, Wilshire 5000, Financial Times (FT) World Index Ex-
USA, Morgan Stanley Capital International World Index, FT World Index, Lehman
Brothers Governmental/ Corporate Bond Index, Dow Jones Utilities Average,
Donoghue's Taxable Money Fund Average and others. Unmanaged indices may assume
the reinvestment of dividends, but usually do not reflect any "deduction" for
the expense of operating or managing an investment portfolio.
In addition, Western Reserve may, as appropriate, compare each
Sub-Account's performance to that of other types of investments such as
certificates of deposit, savings accounts and U.S. Treasuries, or to certain
interest rate and inflation indices, such as the Consumer Price Index, which is
published by the U.S. Department of Labor and measures the average change in
prices over time of a fixed "market basket" of certain specified goods and
services. Similar comparisons of Sub-Account performance may also be made with
appropriate indices measuring the performance of a defined group of securities
widely recognized by
9
<PAGE>
investors as representing a particular segment of the securities markets. For
example, Sub-Account performance may be compared with Donoghue Money Market
Institutional Averages (money market rates), Lehman Brothers Corporate Bond
Index (corporate bond interest rates) or Lehman Brothers Government Bond Index
(long-term U.S. Government obligation interest rates).
PUBLISHED RATINGS
Western Reserve may from time to time publish in advertisements, sales
literature and reports to Owners, the ratings and other information assigned to
it by one or more independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Insurance Rating Services ("Standard & Poor's"), and Duff & Phelps Credit Rating
Co. ("Duff & Phelps"). A.M. Best's and Moody's ratings reflect their current
opinion on the relative financial strength and operating performance of an
insurance company in comparison to the norms of the life/health insurance
industry. Standard & Poor's and Duff & Phelps provide ratings which measure the
claims-paying ability of insurance companies. These ratings are opinions of an
operating insurance company's financial capacity to meet the obligations of its
insurance policies in accordance with their terms. Claims-paying ability ratings
do not refer to an insurer's ability to meet non-policy obligations (i.e.,
debt/commercial paper).
WESTERN RESERVE, THE SERIES ACCOUNT, AND THE FUND
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Western Reserve was originally incorporated under the laws of Ohio on
October 1, 1957. Western Reserve is engaged in the business of writing life
insurance policies and annuity contracts. Western Reserve is admitted to do
business in 49 states and the District of Columbia. The Administrative Office of
Western Reserve is located in Largo, Florida; however, the mailing address is
P.O. Box 9051, Clearwater, FL 34618-9051. Western Reserve is wholly-owned by
First AUSA Life Insurance Company ("First AUSA"), a stock life insurance company
which is wholly-owned by AEGON USA, Inc. ("AEGON"). AEGON is a financial
services holding company whose primary emphasis is on life and health insurance
and annuity and investment products. AEGON is a wholly-owned indirect subsidiary
of AEGON nv, a Netherlands corporation, which is a publicly traded international
insurance group.
WRL SERIES ANNUITY ACCOUNT
The Series Account was established by Western Reserve as a separate account
and a unit investment trust on April 12, 1988. The Series Account meets the
definition of a "separate account" under the Federal securities laws. The
Series Account will receive and invest Net Purchase Payments paid under the
Contracts. In addition, the Series Account may be used for other variable
annuity contracts issued by Western Reserve.
Although the assets of the Series Account belong to Western Reserve, Ohio
insurance law provides that the assets in the Series Account attributable to
variable annuity contracts are not chargeable with liabilities arising out of
any other business of Western Reserve. However, the assets of the Series Account
are available to cover the liabilities of the general asset account of Western
Reserve to the extent that the Series Account's assets exceed the liabilities
arising under variable annuity contracts supported by it.
The Series Account is currently divided into twenty-one Sub-Accounts, three
of which are offered under this Contract. Each Sub-Account invests exclusively
in shares of a single Portfolio of the Fund. Income and both realized and
unrealized gains or losses from the assets of each Sub-Account are credited to
or charged against that Sub-Account without regard to income, gains or losses
from any other Sub-Account or arising out of any other business of Western
Reserve. Western Reserve may add, delete or substitute investments held by the
Sub-Accounts, and Western Reserve reserves the right to add or remove
Sub-Accounts.
10
<PAGE>
Western Reserve further reserves the right to change the investment objective of
any Sub-Account, subject to applicable law as described in the Statement of
Additional Information.
WRL SERIES FUND, INC.
The Series Account currently invests only in shares of the Fund, a series
mutual fund that is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, as amended (the "1940
Act") as an open-end diversified management investment company.
The Fund currently has twenty-one Portfolios, three of which are offered
under this Contract: the C.A.S.E. Quality Growth Portfolio, C.A.S.E. Growth &
Income Portfolio and C.A.S.E. Growth Portfolio. The assets of each Portfolio are
held separate from the assets of the other Portfolios, and each Portfolio has
different investment objectives and policies. Thus, each Portfolio operates as a
separate investment vehicle, and the income or losses of one Portfolio are
unrelated to that of any other Portfolio.
C.A.S.E. Management, Inc. serves as sub-adviser to the Portfolios. THERE IS
NO ASSURANCE THAT ANY PORTFOLIO WILL ACHIEVE ITS STATED OBJECTIVE. More detailed
information, including a description of risks and the investment objective of
each Portfolio, can be found in the Prospectus for the Portfolios, which should
be read carefully before investing.
WRL Investment Management, Inc. ("WRL Management"), a wholly-owned
subsidiary of Western Reserve, serves as investment adviser to the Fund and
manages its assets in accordance with policies, programs and guidelines
established by the Board of Directors of the Fund.
Shares of other portfolios of the Fund are sold through different variable
annuity contracts offered through the Series Account. In addition to the Series
Account, shares of certain portfolios of the Fund are sold to the WRL Series
Life Account, a separate account established by Western Reserve for its variable
life insurance policies, the PFL Endeavor Variable Annuity Account, a separate
account of PFL Life Insurance Company, the AUSA Endeavor Variable Annuity
Account, a separate account of AUSA Life Insurance Company, Inc., and to the
AUSA Series Life Account, a separate account of AUSA Life Insurance Company,
Inc., all affiliates of Western Reserve. Shares of the Fund may in the future be
sold to other separate accounts, including separate accounts established for
variable life insurance policies or variable annuity contracts issued by Western
Reserve or its affiliates. It is conceivable that, in the future, it may become
disadvantageous for variable life insurance separate accounts and variable
annuity separate accounts to invest in the Fund simultaneously. Although neither
Western Reserve nor the Fund currently foresees any such disadvantages, either
to variable life insurance policyowners or to variable annuity contract owners,
the Fund's Board of Directors intends to monitor events in order to identify
any material conflicts between the interests of such variable life insurance
policyowners and variable annuity contract owners and to determine what action,
if any, it should take. Such action could include the sale of Fund shares by one
or more of the separate accounts, which could have adverse consequences.
Material conflicts could result from, for example, (1) changes in state
insurance laws, (2) changes in Federal income tax laws, or (3) differences in
voting instructions between those given by variable life insurance policyowners
and those given by variable annuity contract owners. If the Board of Directors
were to conclude that separate funds should be established for variable life and
variable annuity separate accounts, Western Reserve will bear the attendant
expenses, but variable life insurance policyowners and variable annuity contract
owners would no longer have the economies of scale resulting from a larger
combined fund.
CHARGES AND DEDUCTIONS
Certain charges will be deducted in connection with the Contracts to
compensate Western Reserve for (1) administering the Contracts; (2) assuming
certain risks in connection with the Contracts; and (3) incurring expenses in
distributing the Contracts. The nature and amount of these charges are described
more fully below.
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WITHDRAWAL CHARGE
No deductions for sales expenses are made from Purchase Payments. A
Withdrawal Charge, which is a contingent deferred sales charge, may be assessed
against Annuity Values when partially withdrawn or surrendered. No Withdrawal
Charge will be assessed if Annuity Values are applied to an annuity option
provided under the Contract.
For the first partial withdrawal or Systematic Partial Withdrawal (see
"THE CONTRACT - ACCUMULATION PROVISIONS - Partial Withdrawals and
Surrenders," page 18), during each Contract Year, any applicable Withdrawal
Charge is currently waived on that portion of the amount withdrawn which equals
10% of the Contract's Annuity Value on the date of the withdrawal. For example,
if the amount of the first partial withdrawal during a Contract Year is $2,000,
and the Contract's Annuity Value on the date of the withdrawal is $25,000, then
10% of $25,000 equals $2,500, and the Withdrawal Charge is waived on the entire
$2,000 withdrawn. Thereafter, the full amount of any subsequent partial
withdrawal or Systematic Partial Withdrawal during the remainder of that
Contract Year will be subject to the Withdrawal Charge. However, no waiver of a
Withdrawal Charge will be made in connection with a Surrender. In determining
which amounts withdrawn are subject to the Withdrawal Charge, partial
withdrawals and Surrenders will be deemed made first from Purchase Payments on a
first-in, first-out basis, and then from any Contract earnings.
The length of time from receipt of a Purchase Payment to the time of a
partial withdrawal or Surrender determines whether the Withdrawal Charge will be
deducted. The charge is a percentage of the amount of each Purchase Payment
partially withdrawn or surrendered within five years of its payment. The charge
is as follows:
<TABLE>
<CAPTION>
Number of Years
from Receipt of Each
Charge Purchase Payment
- --------- ----------------------
<S> <C>
6% 0-2
4% 3
3% 4
2% 5
0% Over 5
</TABLE>
For Contracts issued with an appropriate endorsement, if the Owner is
confined to a nursing care facility (as defined in the endorsement) for thirty
(30) consecutive days or longer, Western Reserve will also waive the Withdrawal
Charge on partial withdrawals or Surrenders as follows. Such confinement must
begin after the Contract Date. Western Reserve must receive satisfactory written
evidence of such confinement within two (2) months after the confinement ends.
Western Reserve will waive the Withdrawal Charge under the endorsement only for
Surrenders and partial withdrawals made during such confinement or within two
(2) months after the confinement ends. The endorsement is not available in all
states.
The Withdrawal Charge is imposed to enable Western Reserve to recover sales
expenses it advances, including compensation to broker-dealers, the cost of
printing prospectuses and sales literature and any advertising costs.The
Withdrawal Charge is deducted from the Annuity Value by cancelling the number of
units equal to the charge. The amount of the Withdrawal Charge will be
determined as of the date the partial withdrawal or Surrender payment is
processed. In the event of a partial withdrawal, the Owner will receive the full
amount requested and an amount equal to the Withdrawal Charge will also be
withdrawn in order for the Owner to receive the amount requested. For example,
if the Owner requests a distribution in the amount of $100 during the second
Contract Year (such distribution is deemed to be made from the initial Purchase
Payment) and the Withdrawal Charge is to be imposed on the full amount, the
Owner would receive $100, the total Annuity Value partially withdrawn would be
$106.38, and the Withdrawal Charge would be $6.38 (which is 6% of $106.38). Any
partial withdrawal or Surrender may be subject to tax, and the Owner should,
therefore, consult with his or her tax adviser before requesting any partial
withdrawal or Surrender. (See "FEDERAL TAX MATTERS - Taxation of
Annuities" on page 28 and "- Qualified Plans" on page 29.)
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The Withdrawal Charge may be reduced when sales of Contracts are made to a
group of directors, officers and employees of the same employer (including
directors, officers and employees of Western Reserve and its affiliates), as
outlined in the following paragraph. The amount of reduction will depend on
factors such as the size of the group, total Purchase Payments, and other
relevant factors that might tend to reduce expenses incurred in connection with
such sales.
The Withdrawal Charge may be eliminated for the sale of the Contract to:
(a) current and retired directors, officers, full-time employees and agents of
Western Reserve and its affiliates; (b) current and retired directors, officers,
full-time employees and registered representatives of ISI, an affiliate of
Western Reserve, and any broker-dealer which has a sales agreement with ISI; (c)
any Trust, pension, profit-sharing or other employee benefit plan of any of the
foregoing persons or entities; (d) current and retired directors, officers and
full-time employees of WRL Series Fund, Inc. and any IDEX mutual fund, and any
investment adviser or investment sub-adviser thereto; and (e) any member of a
family of any of the foregoing (e.g., spouse, child, sibling, parent or
parent-in-law). Western Reserve reserves the right to modify or terminate this
arrangement at any time.
TRANSFER CHARGE
After twelve free transfers of Annuity Value among the Sub-Accounts during
any one Contract Year, each additional transfer will be subject to a Transfer
Charge of $10, which will be deducted from the amount transferred to compensate
Western Reserve for the costs of the transfer. All transfers made on any one day
will be considered a single transfer, with any Transfer Charge allocated
equally. The Transfer Charge will not be increased.
MORTALITY AND EXPENSE RISK CHARGE
During the Accumulation Period, Western Reserve will deduct a daily
Mortality and Expense Risk Charge from the Series Account at an annual rate of
1.10% of the average daily net assets of the Series Account. After the Maturity
Date, Western Reserve will deduct a daily Mortality and Expense Risk Charge from
the Series Account at an annual rate of 1.25% of the average daily net assets of
the Series Account. Western Reserve assumes two mortality risks: (1) that the
annuity rates under the Contracts cannot be changed to the detriment of Owners
even if Annuitants live longer than projected; and (2) Western Reserve may be
obligated to pay a death benefit claim in excess of a Contract's Cash Value.
(See "ANNUITY PROVISIONS - Improved Annuity Rates" on page 25 and
"ACCUMULATION PROVISIONS - Death Benefits during the Accumulation Period"
on page 21.) Western Reserve also assumes an expense risk through its guarantee
not to increase the charges for issuing and administering the Contracts and the
Series Account, regardless of its actual expenses.
This charge is deducted from the Series Account both during the
Accumulation Period and after the Maturity Date. The Mortality and Expense Risk
Charge will not be assessed against either the Fixed Account Value or monies
that have been applied to purchase a Fixed Account annuity option.
ANNUAL CONTRACT CHARGE
On each Anniversary through the Maturity Date, Western Reserve will deduct
an Annual Contract Charge of $30 as partial compensation for the cost of
providing administrative services under the Contracts. The Annual Contract
Charge is deducted from each Sub-Account and the Fixed Account in proportion to
the value each bears to the Annuity Value. If the Annuity Value is surrendered
other than on an Anniversary, a full $30 fee will be deducted.
Western Reserve may reduce the amount of the Annual Contract Charge when
sales of Contracts are made to a group of employees of the same employer,
employer group or similar party, under an arrangement which results in a savings
in administrative service expenses. Even if administrative expenses of the
Account increase, Western Reserve guarantees that it will not increase the
amount of the Annual Contract Charge.
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<PAGE>
ADMINISTRATIVE CHARGE
Western Reserve deducts a daily Administrative Charge from values remaining
in the Series Account at an annual rate of 0.15% of the average daily net assets
of the Series Account for the cost of providing administrative services under
the Contracts and the Account. This charge is deducted from the Series Account
both during the Accumulation Period and after the Maturity Date.
Even if administrative expenses of the Contract and the Account increase,
Western Reserve guarantees that it will not increase the amount of the
Administrative Charge.
PREMIUM TAXES
Certain states and other governmental entities may impose a premium tax,
ranging up to 3.5% of Purchase Payments. If applicable, and if Western Reserve
has incurred or reasonably expects to incur expenses in respect of premium
taxes, the tax will be deducted, either from the Purchase Payment when received,
from amounts partially withdrawn or surrendered, from death benefit proceeds, or
from the amount applied to effect an annuity at the time annuity payments
commence. Western Reserve will deduct any applicable premium taxes when it
incurs them, but reserves the right to defer deduction to a later date as long
as such deferral is equitable to Owners.
Premium tax rates are subject to change by the respective state
legislatures, administrative interpretations, or judicial acts. The amount of
any such tax will depend on, among other things, the Owner's state of
residence, the status of Western Reserve in that state, and the insurance tax
laws of such state.
DEDUCTIONS FOR OTHER TAXES
Currently no charge is made to the Series Account for Federal income taxes
attributable to the Series Account. Western Reserve may, however, make such a
charge in the future subject to obtaining any necessary regulatory approvals.
Charges for any other applicable taxes including any tax or other economic
burden resulting from the application of tax laws that Western Reserve
determines to be properly attributable to the Account may also be made. (See
"FEDERAL TAX MATTERS - Company Tax Status" on page 27.)
EXPENSES OF THE FUND
Because the Series Account purchases shares of the Portfolios of the Fund,
the net assets of the Series Account will reflect the investment management fee
and other expenses incurred by the Portfolios, as described in the Fund's
Prospectuses.
Effective January 1, 1997, the Fund adopted a Plan of Distribution pursuant
to Rule 12b-1 under the 1940 Act ("Distribution Plan") and pursuant to the
Plan, has entered into a Distribution Agreement with ISI, principal underwriter
for the Fund.
Under the Distribution Plan, the Fund, on behalf of the Portfolios, is
authorized to pay to various service providers, as direct payment for expenses
incurred in connection with the distribution of a Portfolio's shares, amounts
equal to actual expenses associated with distributing a Portfolio's shares, up
to a maximum rate of 0.15% (fifteen one-hundredths of one percent) on an
annualized basis of the average daily net assets. This fee is measured and
accrued daily and paid monthly. ISI has determined that it will not seek payment
by the Fund of distribution expenses with respect to any Portfolio during the
fiscal year ending December 31, 1997. Prior to ISI's seeking reimbursement,
Policyowners will be notified in advance.
THE CONTRACT
ACCUMULATION PROVISIONS
PURCHASE PAYMENTS
Owners may make Purchase Payments as frequently as they elect. Purchase
Payments after the initial Purchase Payment are payable at Western Reserve's
Administrative Office. The initial Purchase Payment
14
<PAGE>
generally must accompany the application, and for Non-Qualified Contracts must
be at least $5,000; however, a minimum initial Purchase Payment of $1,000 is
allowed provided the application reflects anticipated additional monthly
periodic Purchase Payments of at least $100, on a monthly basis, via electronic
funds transfer from the Owner's bank account. For IRAs the minimum initial
Purchase Payment is $1,000 and for Qualified Contracts other than IRAs the
minimum initial Purchase Payment is $50. For all Contracts, subsequent Purchase
Payments are not required but may be made at any time and in any amount provided
that each payment is for a minimum of $50, unless Western Reserve consents to a
smaller amount and further provided that total Purchase Payments in any Contract
Year do not exceed $1,000,000, unless Western Reserve consents to a larger
amount.
As an accommodation to Owners, Western Reserve will accept transmittal of
both initial and subsequent Purchase Payments of at least $1,000 by wire
transfer. For initial Purchase Payments, the wire transfer must be accompanied
by a simultaneous telephone facsimile transmission of an application ("FAXED
Application"). Initial Purchase Payments accepted via wire transfer with
FAXED Application will be invested at the value next determined following
receipt. Initial Purchase Payments made by wire transfer not accompanied by
simultaneous FAXED Application, or accompanied by an incomplete FAXED
Application, will be retained for a period up to five business days while
Western Reserve attempts to obtain the FAXED Application or complete the
essential information required to establish the Contract and allocate the
initial Purchase Payment at the Accumulation Unit Value which will be determined
after receipt of the FAXED Application or information necessary to complete the
application. If Western Reserve cannot obtain the FAXED Application or essential
information within five business days, Western Reserve will return the initial
Purchase Payment to the applicant, unless the applicant consents to allow
Western Reserve to retain the initial Purchase Payment until the required FAXED
Application or essential information is received. When the FAXED Application
contains all information necessary to issue the Contract and allocate the Net
Purchase Payment, but the FAXED Application has not been signed by the Owner,
Western Reserve will issue the Contract and allocate the Net Purchase Payment as
indicated in the FAXED Application. At the same time, Western Reserve will also
electronically prepare a new application form, containing the same information
received on the FAXED Application, for delivery with the Contract to the Owner.
Upon delivery, the Owner will sign the electronically prepared application,
which will be retained by Western Reserve.
In the event the original application with original signature is later
received and the allocation instructions in that application are, for any
reason, inconsistent with those previously designated on the FAXED Application,
the initial Purchase Payment will be reallocated in accordance with the
allocation instructions in the application with original signature at the
Accumulation Unit Value next determined after receipt of such application.
Owners wishing to make payments via bank wire should instruct their banks
to wire Federal Funds as follows to:
Barnett Bank of Pinellas County
ABA # 063000047
For credit to: Western Reserve Life
Account #: 1263627596
Owner's Name:
Contract Number:
Attention: Annuity Accounting
Fax Number: (813) 588-1620
Western Reserve may reject any application or Purchase Payment for any reason
permitted by law.
NET PURCHASE PAYMENTS
The Net Purchase Payment is equal to the Purchase Payment less any premium
taxes. (See "Premium Taxes," page 14.) Initial and subsequent Net Purchase
Payments are allocated according to the Owner's
15
<PAGE>
direction among the Sub-Accounts of the Series Account, to the Fixed Account, or
to a combination of both. Western Reserve does not currently require that
allocation of Net Purchase Payments to an Account meet a minimum percentage.
Western Reserve does reserve the right to limit allocation of Net Purchase
Payments to any Account to no less than 10% of each Net Purchase Payment. No
fractional percentages are permitted. (For Contracts issued in the States of New
Jersey and Washington, the Fixed Account is not available for allocation of Net
Purchase Payments.) The Owner, or the registered representative/agent of record
for the Contract upon instructions from the Owner, may change the allocation of
subsequent Purchase Payments at any time upon written notice to Western Reserve,
or by telephone by calling Western Reserve's toll-free number, 1-800-851-9777.
Western Reserve will employ the same procedures to confirm that such telephone
instructions are genuine as it employs regarding transfers among Sub-Accounts
and the Fixed Account by telephone. Western Reserve reserves the right to limit
such change to once each Contract Year.
Upon allocation to the Series Account, Net Purchase Payments are converted
into units of the appropriate Sub-Account based upon the Accumulation Unit Value
in that Sub-Account on or following the Valuation Date on which the Purchase
Payment is received at Western Reserve's Administrative Office. (See
"Accumulation Unit Value" below.) If the Contract application and other
information necessary for processing the request to apply the Purchase Payment
(collectively "application") are complete upon receipt, Western Reserve
will accept the application and apply the initial Net Purchase Payment within
two business days of receipt. If it is incomplete, Western Reserve will attempt
to have it properly completed within five business days of receipt, and if
unable to do so, Western Reserve will inform the prospective purchaser of the
reasons that the application is incomplete and request that the prospective
purchaser consent to Western Reserve retaining the Purchase Payment until the
application is properly completed. If such consent is not obtained, Western
Reserve will immediately return the entire Purchase Payment. Once the
application is complete, Western Reserve will accept it and apply the initial
Net Purchase Payment within two business days.
ACCUMULATION UNIT VALUE
The Accumulation Unit Value will vary from one Valuation Period to the next
depending on the investment results experienced by each Sub-Account. When the
Sub-Accounts were first established, the initial Accumulation Unit Value for
each Sub-Account was arbitrarily set at $10. The Accumulation Unit Value for
each Sub-Account at the end of a Valuation Period is the result of:
1. The total value of the assets held in the Sub-Account. This value is
determined by multiplying the number of shares of the designated Fund
Portfolio owned by the Sub-Account times the Portfolio's net asset
value per share; minus
2. The accrued daily percentage for the Administrative Charge and
Mortality and Expense Risk Charge multiplied by the net assets of the
Sub-Account; minus
3. The accrued amount of reserve for any taxes that are determined by
Western Reserve to have resulted from the investment operations of the
Sub-Account; divided by
4. The number of outstanding units in the Sub-Account.
The Mortality and Expense Risk Charge is deducted from an annual rate of
1.10% from net assets during each day in the Valuation Period and compensates
Western Reserve for certain mortality and expense risks. The Administrative
Charge is deducted from an annual rate of 0.15% from net assets during each day
in the Valuation Period and compensates Western Reserve for certain
administrative expenses. (See "CHARGES AND DEDUCTIONS - Mortality and Expense
Risk Charge" on page 13 and "Administrative Charge" on page 14.) The
Accumulation Unit Value may increase, decrease, or remain the same from
Valuation Period to Valuation Period.
COMPUTING SUB-ACCOUNT VALUE
At the end of any Valuation Period, a Sub-Account's value is equal to the
number of units that the Contract has in the Sub-Account, multiplied by the
Accumulation Unit Value of that Sub-Account.
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<PAGE>
The number of units that a Contract has in each Sub-Account is equal to:
1. The initial units purchased on the Contract Date; plus
2. Units purchased at the time additional Net Purchase Payments are allocated
to the Sub-Account; plus
3. Units purchased through transfers from another Sub-Account or the Fixed
Account; minus
4. Any units that are redeemed to pay for partial withdrawals; minus
5. Any units that are redeemed as part of a transfer to another Sub-Account
or the Fixed Account; minus
6. Any units that are redeemed to pay the Annual Contract Charge, any premium
taxes and any Transfer Charges.
PORTFOLIO SHARE NET ASSET VALUE. The net asset value per share of shares
of the Fund is determined, once daily, as of the close of the regular session of
business on the New York Stock Exchange ("Exchange") (usually 4:00 p.m.,
Eastern time), on each day the Exchange is open.
TRANSFERS TO AND FROM, AND AMONG ALLOCATION OPTIONS
Before the Maturity Date, the Owner may, at any time, transfer amounts
among Sub-Accounts or from Sub-Accounts to the Fixed Account. (For Contracts
issued in the States of New Jersey and Washington, the Fixed Account is not
available to receive Annuity Value transferred from the Sub-Accounts.) Transfers
may also be made from the Fixed Account to the Sub-Accounts, subject to certain
restrictions. (See "THE FIXED ACCOUNT-Allocations, Transfers and Partial
Withdrawals" on page 33.) Transfers are not available if the Owner has
elected Dollar Cost Averaging or Systematic Partial Withdrawals.
The amount available for transfer from any Sub-Account or the Fixed Account
is determined at the end of the Valuation Period during which the transfer
request is received at Western Reserve's Administrative Office. As explained in
the previous paragraph, the net asset value for each share of the corresponding
Portfolio of any Sub-Account is determined, once daily, as of the close of the
regular business session of the Exchange (usually 4:00 p.m., Eastern time),
which coincides with the end of each Valuation Period. Therefore, any transfer
request received after 4:00 p.m., Eastern time, on any day the Exchange is open
for business will be processed utilizing the net asset value for each share of
the applicable Portfolio determined as of 4:00 p.m., Eastern time, on the next
day the Exchange is open for business.
The amount available for transfer from the Fixed Account will be determined
in the same manner. The registered representative/agent of record for the
Contract may, upon instructions from the Owner, make telephone transfers upon
request without the necessity for the Owner to have previously authorized
telephone transfers in writing. Written requests must be in a form acceptable to
Western Reserve. If, for any reason, an Owner does not want the ability to make
transfers by telephone, the Owner should provide written notice to Western
Reserve. All telephone transfers should be made by calling Western Reserve at
the toll-free number 1-800-851-9777.
Western Reserve will not be liable for complying with telephone
instructions it reasonably believes to be authentic, nor for any loss, damage,
costs or expense in acting on such telephone instructions, and Owners will bear
the risk of any such loss. Western Reserve will employ reasonable procedures to
confirm that telephone instructions are genuine. If Western Reserve does not
employ such procedures, it may be liable for losses due to unauthorized or
fraudulent instructions. Such procedures may include, among others, requiring
forms of personal identification prior to acting upon such telephone
instructions, providing written confirmation of such transactions to Owners
and/or tape recording of telephone transfer request instructions received from
Owners. Western Reserve may, at any time, revoke or modify the transfer
privilege. Western Reserve ordinarily will effect transfers and determine all
values in connection with transfers at the end of the
17
<PAGE>
Valuation Period during which the transfer request is received at Western
Reserve's Administrative Office. Western Reserve currently imposes a $10 charge
for each transfer after the first twelve transfers during any Contract Year.
(See "CHARGES AND DEDUCTIONS - Transfer Charge" on page 13.)
DOLLAR COST AVERAGING
The Owner may direct Western Reserve to automatically transfer specified
amounts from the Fixed Account on a monthly basis to a Sub-Account. This service
is intended to allow the Owner to utilize "Dollar Cost Averaging," a
long-term investment method which provides for regular, level investments over
time. Western Reserve makes no guarantees that Dollar Cost Averaging will result
in a profit or protect against loss.
To qualify for Dollar Cost Averaging, a minimum of $12,000 must be in the
Fixed Account and at least $1,000, in the aggregate, must be transferred each
month, unless Western Reserve consents to a smaller amount. To further qualify
for Dollar Cost Averaging from the Fixed Account, no more than one-tenth (1/10)
of the amount in the Fixed Account at the commencement of Dollar Cost Averaging
can be transferred each month. Other types of transfers from the Fixed Account
may also be subject to certain other restrictions. (See "THE FIXED ACCOUNT -
Allocations, Transfers and Partial Withdrawals" on page 33.)
A written election of this service, on a form provided by Western Reserve,
must be completed by the Owner in order to begin transfers. The first transfer
will occur during the month following receipt of the form, providing the form is
received by the 25th day of the month. Once elected, transfers from the Fixed
Account will be processed monthly until the entire value is completely depleted
or the Owner instructs Western Reserve in writing to cancel the monthly
transfers.
There is no charge for Dollar Cost Averaging. However, each transfer which
occurs under the Dollar Cost Averaging service will be counted towards the
twelve free transfers allowed during each Contract Year. (See "CHARGES AND
DEDUCTIONS - Transfer Charge" on page 13.) Western Reserve reserves the right
to discontinue offering Dollar Cost Averaging upon 30 days' written notice to
Owners. Dollar Cost Averaging is not available if the Owner has elected
Systematic Partial Withdrawals.
PARTIAL WITHDRAWALS AND SURRENDERS
1. PARTIAL WITHDRAWALS. Prior to the earlier of the Maturity Date or the
death of the Annuitant (when no contingent Annuitant has been named), the Owner
may partially withdraw a portion of the Series Account Value upon written
request, complete with all necessary information, to Western Reserve's
Administrative Office. Unless Western Reserve consents, no partial withdrawal is
permitted if the Cash Value would be reduced below $10,000. No partial
withdrawals from the Fixed Account may be made without the consent of Western
Reserve. (See "THE FIXED ACCOUNT - Allocations, Transfers and Partial
Withdrawals" on page 33.) All requests for partial withdrawals are processed at
the Accumulation Unit Value for each Sub-Account next computed after receipt and
acceptance of the request by Western Reserve at its Administrative Office.
Western Reserve will cancel units equal to the amount requested from each
Sub-Account, and an amount equal to the Withdrawal Charge and any premium tax
will also be withdrawn in order for the Owner to receive the full amount
requested. (See "CHARGES AND DEDUCTIONS - Withdrawal Charge" on page 12 and -
"Premium Taxes" on page 14.) The Sub-Accounts for a partial withdrawal may be
specified and the amount requested to be withdrawn from each specified
Sub-Account may not exceed the value of that Sub-Account. If not specified, the
amount requested will be withdrawn on a pro rate basis from each Sub-Account.
2. SYSTEMATIC PARTIAL WITHDRAWALS. The Owner may elect in writing on a form
provided by Western Reserve to partially withdraw from the Series Account up to
10% of the Cash Value annually (10% of the initial Purchase Payment if elected
at time of application for a Contract), in equal monthly payments ("Systematic
Partial Withdrawals") of at least $200 per month. The first withdrawal will
occur during the month which follows receipt of the form, providing the form is
received by the 25th day of the month. If
18
<PAGE>
Systematic Partial Withdrawals are elected at the time of application for a
Contract, a minimum initial Purchase Payment of at least $25,000 must accompany
the application, unless Western Reserve consents to a smaller amount. A
subsequent election is subject to the Contract then having a minimum of $25,000
of Cash Value, unless Western Reserve consents to a smaller amount. Western
Reserve will pay the Systematic Partial Withdrawal amount requested and cancel
units equal to the amount withdrawn from the Sub-Accounts in the same manner as
the current Net Purchase Payment allocation instructions, except no Systematic
Partial Withdrawals are permitted from the Fixed Account. The amount to be
partially withdrawn from each Sub-Account may not exceed the Cash Value of the
Sub-Account. Western Reserve will not process a Systematic Partial Withdrawal if
the Cash Value for the entire Contract would be reduced below $10,000.
Generally, under a Non-Qualified Contract, Systematic Partial Withdrawals,
like other distributions prior to the Maturity Date, are first treated as
taxable income to the extent that the Contract Value immediately before a
withdrawal exceeds the "investment in the contract" at that time. Any
additional amount withdrawn is not taxable. Further, under a Non-Qualified
Contract, a 10% penalty tax will generally be imposed on the taxable portion of
a Systematic Partial Withdrawal made prior to the Owner's age 59-1/2, unless
certain exceptions apply.
Systematic Partial Withdrawals are not available if the Owner has elected
Dollar Cost Averaging. Systematic Partial Withdrawals may be discontinued by the
Owner at any time by notifying Western Reserve in writing. Western Reserve
reserves the right to discontinue offering Systematic Partial Withdrawals upon
30 days' written notice to Owners.
3. SURRENDERS. The Owner may completely surrender the Contract at any time
prior to the Maturity Date. All requests for Surrender are processed at the
Accumulation Unit Value for each Sub-Account next computed after receipt and
acceptance of the Surrender request by Western Reserve at its Administrative
Office. Western Reserve will deduct from the Surrender proceeds the $30 Annual
Contract Charge, any applicable premium taxes, and any applicable Withdrawal
Charge.
4. PARTIAL WITHDRAWALS AND SURRENDERS. The amount of any partial withdrawal
or Surrender will be paid promptly, and in any event within seven days of
receipt of the request, complete with all necessary information at Western
Reserve's Administrative Office, except that Western Reserve reserves the right
to defer the right of partial withdrawal or Surrender under certain
circumstances. (See "OTHER MATTERS RELATING TO THE CONTRACT - Contract
Payments" on page 26.) Under Non-Qualified Contracts, Western Reserve will
withhold from each partial withdrawal, systematic partial withdrawal or
Surrender for tax purposes the minimum amount required by law, unless the Owner
affirmatively elects, before payments begin, to have either nothing withheld or
a different amount withheld. The Owner should, therefore, consult with his or
her tax advisor before requesting any Systematic Partial Withdrawals. (See
"FEDERAL TAX MATTERS - Taxation of Annuities" on pages 28-29.) When
Western Reserve incurs extraordinary charges, such as wire transfers or
overnight mail expenses for expediting delivery of a partial withdrawal or
Surrender payment to a Contract Owner, Western Reserve will deduct such charges
from the payment. The current charge for wire transfers is $15. The current
charge for overnight delivery is $20. For the protection of Owners, all requests
for partial withdrawals or Surrenders of more than $100,000, or where the
partial withdrawal or surrender proceeds are to be sent to an address other than
the address of record, will require a signature guarantee. All required
guarantees of signatures must be made by a national or state bank, a member firm
of a national stock exchange or any other institution which is an eligible
guarantor institution as defined by rules and regulations of the SEC. If the
Owner is a corporation, partnership, trust or fiduciary, evidence of the
authority of the person seeking redemption is required before the request for
withdrawal is accepted, including withdrawals under $100,000. For additional
information, Policyowners may call Western Reserve at (800) 851-9777. Partial
withdrawals and Surrenders may be subject to tax including a penalty tax. (See
"FEDERAL TAX MATTERS - Taxation of Annuities" on pages 28-29.) For certain
Qualified Contracts, a partial withdrawal may require the consent of the
Owner's spouse under the Code and the regulations promulgated thereunder by the
Treasury Department (the "Treasury Regulations"). (See "FEDERAL TAX
MATTERS - Qualified Plans" on pages 29-31.) For Qualified Contracts issued
under Code
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Section 403(b) and Contracts issued under the Texas Optional Retirement Program,
certain restrictions will apply. (See "FEDERAL TAX MATTERS - Qualified
Plans" on pages 29-31.)
CONTRACT LOANS FOR 401(A), 401(K), AND 403(B) CONTRACTS
After the ten day Right to Examine Contract Period and during the
Accumulation Period, (1) Owners of Contracts used in connection with a Tax
Sheltered Annuity Plan ("TSA Plan") under Section 403(b) of the Code, if
the TSA Plan is not subject to the Employee Retirement Income Security Act of
1974, and (2) Owners of Contracts purchased by a pension, profit-sharing, or
other similar plan qualified under Section 401(a) of the Code (a "401
Plan"), including a Section 401(k) plan, where a plan trustee is the Owner,
may elect a Contract loan endorsement under which the Owner can receive Contract
loans. The availability of Contract loans will also be governed by the
provisions of the TSA Plans or 401 Plans involved. An Owner of a Contract used
in connection with a TSA Plan or 401 Plan may be subject to income tax or tax
penalties if loans from the plan are not repaid in accordance with applicable
provisions of the Code. In addition, Internal Revenue Service authorities
suggest that a Contract loan may, at least in certain circumstances, result in
adverse tax consequences for the TSA Plan or 401 Plan. Accordingly, a competent
tax advisor should be consulted before a Contract loan is requested.
If the Contract loan endorsement is available, the Owner can borrow against
the Contract an amount which may not exceed the lesser of (1) 50% of the Annuity
Value or (2) $50,000 reduced by the highest outstanding loan balance during the
1-year period ending on the day before the loan date (determined below).
However, if the Annuity Value is less than $20,000, the Owner may borrow against
the Contract the lesser of (1) 80% of the Annuity Value or (2) $10,000. In all
events, the minimum amount that can be borrowed is $1,000. The Owner has the
sole responsibility for requesting loans and making loan repayments that comply
with applicable tax requirements.
When a loan is made, an amount equal to the loan will be withdrawn from the
Sub-Accounts specified by the Owner and transferred to the loan reserve. The
loan reserve is part of the Fixed Account used as collateral for any Contract
loan. If no Sub-Accounts are specified, the loan will be made from each Sub-
Account in accordance with the Owner's current Purchase Payment allocation.
Amounts transferred to the loan reserve do not participate in the investment
experience of the Sub-Accounts from which they were withdrawn.
All loan requests are processed at the Accumulation Unit Value for each
Sub-Account next computed after receipt and acceptance of the loan request by
Western Reserve at its Administrative Office. The loan date is the date Western
Reserve processes the loan request. Under its current procedures, Western
Reserve does not charge a fee to cover loan processing and expenses associated
with establishment and administration of the loan reserve. However, Western
Reserve reserves the right to charge such a fee or change it from time to time.
The Contract will be the sole security for the loan. Western Reserve reserves
the right to limit the number of loans an Owner may make during a Contract Year.
On each Contract Anniversary, Western Reserve will compare the amount of
the outstanding loan to the amount in the loan reserve. Western Reserve will
also make this comparison whenever the Owner repays all or part of the loan. At
each such time, if the amount of the outstanding loan (plus any unpaid interest)
exceeds the amount in the loan reserve, Western Reserve will withdraw the
difference from the Contract's Sub-Accounts and transfer it to the loan
reserve, in the same fashion as when a loan is made. If the amount in the loan
reserve exceeds the amount of the outstanding loan, Western Reserve will
withdraw the difference from the loan reserve and transfer it to the
Sub-Accounts in accordance with the Owner's current payment allocation.
However, Western Reserve reserves the right to require the transfer to the Fixed
Account if the amount was transferred from the Fixed Account to establish the
loan.
If the Contract loan at any time exceeds the Cash Value of the Contract,
Western Reserve will mail a notice to the last known address of the Owner and
any assignee of record. If the excess amount is not paid within 31 days after
mailing of the notice, the Contract will terminate without value.
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LOAN INTEREST. Interest on any loan will be at the Contract loan annual
rate of 6% in arrears unless, under a 401 Plan, a higher rate is requested by
the Owner in the loan application. (See "Repayment of Loans," below.)
Amounts in the loan reserve will earn interest at a minimum guaranteed
effective annual interest rate of 4% per year. Western Reserve may declare from
time to time higher current interest rates. Different current interest rates may
be applied to the Fixed Account attributable to the loan reserve than to the
rest of the Fixed Account.
REPAYMENT OF LOANS. Principal and interest must be repaid in substantially
level quarterly or monthly payments, over a 5-year period or, if the loan is
used to acquire the Owner's principal residence, a 10, 15, or 20-year period,
but such an extended period cannot go beyond the year the Owner attains age
70-1/2. If a loan installment repayment is not received within 31 days from the
installment's original due date, a deemed distribution of the entire amount of
the outstanding loan principal, interest due, and any applicable charges under
the Contract, including any Withdrawal Charge, will take place. Under a
Qualified Plan, this distribution may be subject to income tax and a penalty
tax, and may cause the Contract to fail to qualify under the Code. (See
"FEDERAL TAX MATTERS - Qualified Plans", p. 29.)
While the Contract is In Force and during the Accumulation Period, any loan
may be repaid in full. IF NOT REPAID, LOANS WILL AUTOMATICALLY REDUCE THE AMOUNT
OF ANY DEATH BENEFIT PROCEEDS, THE AMOUNT PAYABLE UPON A PARTIAL WITHDRAWAL OR
SURRENDER OF THE CONTRACT AND THE AMOUNT APPLIED ON THE MATURITY DATE TO PROVIDE
ANNUITY PAYMENTS.
DEATH BENEFITS DURING THE ACCUMULATION PERIOD
1. GENERAL
In general, if the Annuitant dies during the Accumulation Period and the
Owner is a natural person other than the Annuitant, the Owner will automatically
become the new Annuitant and the Contract will continue In Force. If the
Annuitant dies during the Accumulation Period and an Owner is either the same
individual as the Annuitant or other than a natural person, Western Reserve will
pay the death benefit proceeds to the Beneficiary in a lump sum upon receipt of
due proof of death unless a written Alternative Election, as described below, is
made.
2. AMOUNT OF DEATH BENEFIT PROCEEDS
IF THE ANNUITANT DIES DURING THE ACCUMULATION PERIOD AND PRIOR TO THE SIXTH
CONTRACT YEAR and an Owner is either the same person as the Annuitant or other
than a natural person, the death benefit proceeds, if payable, will be the
greater of: (i) the Annuity Value as of the date Western Reserve receives due
proof of death and a written election as to the method of payment, as described
above; or (ii) the excess of (a) the amount of Purchase Payments paid less (b)
any amounts partially withdrawn from the Contract to pay for partial
withdrawals, increased by 5% on each Contract Anniversary prior to the Owner's
age 80 (Annuitant's age 80 if the Owner is not a natural person), up to an
amount not to exceed 200% of the Purchase Payments less partial withdrawals.
IF THE ANNUITANT DIES DURING THE ACCUMULATION PERIOD AND AFTER THE FIFTH
CONTRACT YEAR and an Owner is either the same person as the Annuitant or other
than a natural person, the death benefit proceeds, if payable, will be the
greatest of: (i) the Annuity Value as of the date Western Reserve receives due
proof of death and a written election as to the method of payment, as described
above; or (ii) the excess of (a) the amount of Purchase Payments paid less (b)
any amounts partially withdrawn from the Contract to pay for partial
withdrawals, increased by 5% on each Contract Anniversary prior to the Owner's
age 80 (Annuitant's age 80 if the Owner is not a natural person), up to an
amount not to exceed 200% of the Purchase Payments less partial withdrawals; or
(iii) the Annuity Value as of the fifth Contract Anniversary, less any amounts
partially withdrawn from the Contract after the fifth Contract Year to pay for
partial
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withdrawals. In certain states, the calculation of death benefit proceeds under
item (iii) may vary. The Contract should be consulted for details.
The Insurance Departments of Missouri, New Jersey, Pennsylvania, South
Carolina and Washington have disapproved for Contracts issued in these States
that portion of item (ii) of the death benefit provision described in the two
preceding paragraphs, which increases the death benefit payable by 5% on each
Contract Anniversary. Therefore, for Contracts issued in these States, when the
amount of death benefit payable under the Contract is the excess of (a) the
amount of Purchase Payments paid less (b) any amounts partially withdrawn from
the Contract to pay for partial withdrawals, such amount of death benefit will
not be increased by 5% on each Contract Anniversary.
3. ALTERNATIVE ELECTIONS
If the Beneficiary is entitled to receive the death benefit proceeds as in
2. above, and is the spouse of the deceased Annuitant, then the spousal
Beneficiary may elect to become the new Owner and Annuitant and keep the
Contract In Force in lieu of receiving the death benefit proceeds. If the
Beneficiary is not the spouse of the deceased Annuitant and is entitled to
receive the death benefit proceeds, the Beneficiary may elect, in lieu of a lump
sum payment, one of the following options that provide for complete distribution
of the death benefit proceeds and termination of the Contract: (i) within five
years of the date of such Annuitant's death; (ii) over the lifetime of the
Beneficiary; or (iii) over a period that does not exceed the life expectancy of
such Beneficiary, as defined by the Code and the Treasury Regulations. Options
(ii) and (iii) may be elected only if the Beneficiary is a natural person and
payments start within one year of the date of the Annuitant's death. (For a
more detailed explanation of these requirements, see "FEDERAL TAX MATTERS -
Additional Considerations" on page 31.) Multiple Beneficiaries may choose
individually among any of the three options.
Under options (i) and (iii) above, the Annuity Value as of the date Western
Reserve receives due proof of death and a written election as to the method of
payment, if any, will be adjusted to equal the death benefit proceeds, as
described below, and the Contract will remain In Force as a deferred annuity
until the end of the elected distribution period. Under option (i) above,
Western Reserve will:
/bullet/ Allow the Beneficiary, at the time of electing (i), to make a
partial withdrawal. Further partial withdrawals during the
duration of the five-year period are not permitted;
/bullet/ Allow the Beneficiary, at the time of electing (i), to make
"one-time" transfer of Contract values among Sub-Accounts and to
the Fixed Account, and transfers from the Fixed Account to the
Sub-Accounts;
/bullet/ Not deduct the Annual Contract Charge during the duration of the
five-year period;
/bullet/ Not apply the Withdrawal Charge in the event of a partial
withdrawal upon election of (i), or upon a total distribution of
all Contract values during or at the end of the five-year period;
/bullet/ Not allow annuitization during or at the end of the five-year
period. Distribution of all Contract values will be made in a lump
sum;
/bullet/ In the event of the death of the Beneficiary prior to the end of
the five-year period, pay remaining Contract value, according to
its value at the time of payment, to the Beneficiary's estate,
unless a Contingent Beneficiary has been named by the Owner, in
which event payment will be made to the Contingent Beneficiary.
The Beneficiary is not entitled to name his or her own beneficiary
of the Contract's value.
Under option (ii), the Maturity Date will be changed to the date Western
Reserve receives due proof of death and a written election as to the method of
payment, if any, and the death benefit proceeds will be used to purchase annuity
payments under the annuity provisions of the Contract. (See "ANNUITY
PROVISIONS" page 23.)
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4. DEATH OF AN OWNER WHO IS NOT AN ANNUITANT
If an Owner is not the same individual as the Annuitant and dies before the
Annuitant:
(a) If no Successor Owner has been named or, if named, is no longer alive,
the Owner's estate will become the new Owner. The Cash Value must be
distributed within five years of the former Owner's death; or
(b) If a Successor Owner has been named, is alive and is the Owner's spouse,
the Contract will continue with the spouse as the new Owner; or
(c) If a Successor Owner has been named, is alive and is not the Owner's
spouse, the Successor Owner will become the new Owner. The Cash Value must be
distributed either:
(1) within five years of the former Owner's death; or
(2) over the lifetime of the new Owner, if a natural person, with payments
beginning within one year of the former Owner's death; or
(3) over a period that does not exceed the life expectancy (as defined by
the Internal Revenue Code and Regulations adopted under the Code) of
the new Owner, if a natural person, with payments beginning within one
year of the former Owner's death.
5. QUALIFIED CONTRACTS
If a Qualified Contract is issued to a retirement plan, similar provisions
will apply upon the death of the plan participant. However, the required
distribution rules are more complex in the case of a Qualified Contract held by
a plan. Plan participants should consult a qualified pension or tax advisor
concerning the operation of these rules.
ANNUITY PROVISIONS
MATURITY DATE AND SELECTION OF ANNUITY OPTIONS
Provided the Contract is still In Force, annuity payments will begin on the
Maturity Date, which is, for both Non-Qualified Contracts and Qualified
Contracts, the Anniversary nearest the Annuitant's Attained Age 90. However,
the Owner may change the Maturity Date at any time prior to the Maturity Date by
written request. Any new Maturity Date must be at least five years after the
Contract Date, and the Attained Age of the Annuitant as of the new Maturity Date
cannot be greater than 90. After the Maturity Date, no additional purchase
payments, partial withdrawals, transfers, full Surrenders, or change of
Annuitants or annuity options may be made under the Contract. The Qualified
Contract is designed for use with several types of qualified plans. A tax
advisor should be consulted about the use of a Qualified Contract with qualified
plans, including the specified minimum distribution rules applicable to such
plans.
Annuity Payments will be paid under Option D (described below), with 120
payments guaranteed, unless the Owner elects otherwise. The Owner may change the
annuity option by written request at any time prior to the Maturity Date. Thirty
days prior to the Maturity Date, Western Reserve will mail to the Owner a notice
and a form upon which the Owner can select Allocation Options for the Annuity
Proceeds as of the Maturity Date, which cannot be changed thereafter and will
remain in effect until the Contract terminates. If a Series Account annuity
option is chosen, the Owner must include in the written notice the Sub-Account
allocation of the Annuity Proceeds as of the Maturity Date. If Western Reserve
does not receive that form or other written notice acceptable to Western Reserve
prior to the Maturity Date, the Contract's existing Allocation Options will
remain in effect until the Contract terminates. The Owner may also, prior to the
Maturity Date, select or change the frequency of annuity payments, which may be
monthly,
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quarterly, semiannually or annually, provided that the annuity option and
payment frequency provides for payments of at least $100 per period. If none of
these is possible, a lump sum payment will be made.
The Owner may select one of the Fixed Account annuity options or Series
Account annuity options described below or any alternate form of settlement
acceptable to Western Reserve. Treasury Regulations may preclude the
availability of certain annuity options in connection with certain Qualified
Contracts.
Fixed Account annuity options provide equal periodic (monthly, quarterly,
semi-annual or annual) payments of a specific amount that Western Reserve
guarantees will not change. The amount of the periodic annuity payment will be
based on the Annuity Proceeds on the Maturity Date, the annuity option selected
(I.E., the form and duration of payments), the age of the Annuitant or
Beneficiary (or ages of co-annuitants), the sex of the Annuitant (except for
certain Qualified Contracts), and the applicable annuity rate shown in the
Contract (or a more favorable current rate available under the Contracts on the
Maturity Date). The annuity rates shown in the Contract are based on the Society
of Actuaries 1983 Table A with projection and an assumed investment rate of 3%.
Western Reserve may in its sole discretion increase the amount of a payment or
payments once payments begin.
Series Account annuity options (I.E., variable annuity options) are similar
to fixed annuity options except that the amount of each periodic payment after
the first will vary to reflect the net investment experience of the Sub-Accounts
selected by the Owner. The amount of the first annuity payment is determined in
the manner described in the Statement of Additional Information for a Series
Account annuity option. Under a Series Account annuity option, the Owner applies
the Annuity Proceeds to one or more of the three Sub-Accounts designated to
support annuity payments by purchasing units issued in connection with one or
more of these Sub-Accounts. The number of units purchased is equal to the amount
of the first annuity payment allocated to a particular Sub-Account divided by
the Annuity Unit Value for that Sub-Account on the Maturity Date. The number of
units of a particular Sub-Account supporting payments to an Annuitant never
changes, but the second and subsequent payments will vary with the Annuity Unit
Value because each payment will equal the number of units in each selected
Sub-Account multiplied by the Annuity Unit Value of that Sub-Account on the date
the payment is processed. Annuity Proceeds allocated to Series Account annuity
options are subject to a daily Mortality and Expense Risk Charge of 1.25% per
annum and a daily Administrative Charge of 0.15% per annum.
The Annuity Unit Value for a Sub-Account, designed to support annuity
payments, is first calculated in the same manner as the Accumulation Unit Value
corresponding to the same Fund Portfolio would be calculated (see "THE
CONTRACT - ACCUMULATION PROVISIONS," page 14) (except that the Mortality and
Expense Risk Charge is at an annual rate of 1.25% of the average daily net
assets of the Series Account), and then is adjusted to reflect a 5% assumed
investment return. The adjustment results in the Annuity Unit Value increasing
to the extent that the net investment factor increases at greater than an annual
rate of 6.4%. It results in the Annuity Unit Value decreasing to the extent that
the net investment factor decreases or increases at less than an annual rate of
6.4%. Consequently, if, for a monthly periodic payment, the net investment
experience of a Sub-Account for a given month exceeds an annual rate of 6.4%,
the monthly payment from that Sub-Account will be greater than the previous
payment. Likewise, if the net investment experience for that month is less than
an annual rate of 6.4%, the payment will be less than the previous payment.
FIXED ACCOUNT ANNUITY OPTIONS
The following options are available for payment of fixed account monthly
annuity payments.
OPTION A - FIXED INSTALLMENTS. The Annuity Proceeds will be paid in equal
installments over a fixed period of 5, 10, 15, or 20 years or any other fixed
period acceptable to Western Reserve.
OPTION B - LIFE INCOME. The Annuity Proceeds will be paid in equal
installments: (1) during the lifetime of the Annuitant only ("Life
Annuity"); (2) during a 10 year fixed period certain and for the remaining
lifetime of the Annuitant ("Certain Period"); or (3) until the sum of
installments paid equals the Annuity Proceeds applied and for the remaining life
of the Annuitant ("Installment Refund").
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OPTION C - JOINT AND SURVIVOR LIFE INCOME. The Annuity Proceeds will be
paid during the joint lifetimes of the Annuitant and a designated Co-Annuitant
and will continue upon the death of the first payee for the remaining lifetime
of the survivor.
SERIES ACCOUNT ANNUITY OPTIONS
Under the Series Account annuity options, the Contract's Annuity Proceeds
will be used to purchase units of the Sub-Accounts selected by the Owner. The
following Series Account annuity options are available:
OPTION D - VARIABLE LIFE INCOME. The Annuity Proceeds will be paid in
installments determined in accordance with the table set forth in the Contract.
Such installments are payable (1) during the payee's lifetime only
("Variable Life Annuity"); or (2) during a 10 year fixed period certain
and for the payee's remaining lifetime ("Variable Certain Period").
OPTION E - VARIABLE JOINT AND SURVIVOR LIFE INCOME. The Annuity Proceeds
will be paid in installments during the joint lifetime of two payees and
continuing upon the death of the first payee for the remaining lifetime of the
survivor.
DEATH BENEFITS AFTER THE MATURITY DATE
The death benefit, if any, payable after the Maturity Date and after the
commencement of annuity payments depends upon the annuity option selected. If a
payee dies on or after the commencement of annuity payments, the remaining
portion of any interest in the Contract will be distributed at least as rapidly
as under the method of distribution being used as of the date of the payee's
death. (For additional information about death benefit payments under the
Contract, see "ACCUMULATION PROVISIONS - Death Benefits during the
Accumulation Period" on page 21.)
IMPROVED ANNUITY RATES
Western Reserve may offer improved annuity rates to Owners if, at the
Maturity Date, it is offering annuity contracts of the same type and class as
the Contract with more favorable rates than those contained in the Contract's
income tables.
PROOF OF AGE, SEX, AND SURVIVAL
Western Reserve may require proper proof of age and sex of any Annuitant or
Co-Annuitant prior to making the first annuity payment. Prior to making any
payment, Western Reserve may require proper proof that the Annuitant or
Co-Annuitant is alive and legally qualified to receive such payment. If required
by law to ignore differences in sex of any payee, annuity payments will be
determined using unisex rates.
OTHER MATTERS RELATING TO THE CONTRACT
CHANGES IN PURCHASE PAYMENTS
The Owner may change the amount and the mode of the anticipated Purchase
Payment pattern specified in the Contract if agreed to by Western Reserve.
RIGHT TO EXAMINE CONTRACT
An Owner may, within ten days of receipt of the Contract (the "Free-Look
Period"), return it to Western Reserve at its Administrative Office, and
obtain a refund equal to the sum of: (1) the Purchase Payments received; plus
(or minus) (2) the accumulated gains (or losses), if any, in the Series Account
for the Contract as of the date Western Reserve receives the returned Contract.
Certain states require a Free-Look Period
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longer than ten days, either for all Contract Owners or for certain classes of
Contract Owners. The Owner bears the investment risk during the Free-Look
Period. Certain states require Western Reserve to refund the Purchase Payment,
which may be greater or less than the amount computed above. In these states,
Western Reserve bears the investment risk during the Free-Look Period. The
specific terms applicable to a particular Contract will be set forth in the
"Right to Examine Contract" provision of that Contract.
CONTRACT PAYMENTS
All payments under the Contract will be paid in one sum unless the Owner
elects otherwise. Western Reserve reserves the right to suspend or postpone the
right of partial withdrawal and Surrender or postpone the date of payment for
any period: (1) the New York Stock Exchange is closed, other than customary
weekend and holiday closing, or trading on the New York Stock Exchange is
restricted as determined by the SEC; (2) the SEC by order permits postponement
for the protection of Owners; or (3) an emergency exists, as determined by the
SEC, as a result of which valuation or disposal of securities is not reasonably
practicable. Transfers may also be postponed under these circumstances.
Payments of any amounts derived from Purchase Payments paid by check or
bank draft may be delayed until the check or bank draft has cleared the payor's
bank.
OWNERSHIP
The Owner is the person entitled to exercise all rights under the Contract.
Prior to the Maturity Date, the Owner is the person designated on the Contract
Schedule Page or as subsequently named. These rights may be subject to the
consent of any assignee or irrevocable Beneficiary.
A Successor Owner can be named in the application for the Contract or by
notifying Western Reserve in writing. If the Owner is not the Annuitant, the
Successor Owner will become the new Owner of the Contract upon the death of the
Owner prior to the death of the Annuitant. (See "THE CONTRACT ACCUMULATION
PROVISIONS - Death Benefits during the Accumulation Period - 4. Death of an
Owner Who is not an Annuitant," on page 23.)
With regard to Non-Qualified Contracts, ownership of the Contract may be
changed or the Contract collaterally assigned at any time during the lifetime of
the Annuitant and prior to the Maturity Date, subject to the rights of any
irrevocable Beneficiary. The assignment of a Contract will be treated as a
distribution of the Annuity Value for Federal tax purposes. (See "FEDERAL TAX
MATTERS - Taxation of Annuities" on pages 28-29.) Any change of ownership or
assignment must be made in writing and accepted by Western Reserve, and, if
accepted, will be effective as of the date accepted by Western Reserve. Western
Reserve assumes no liability for any payments made or actions taken before a
change is accepted and shall not be responsible for the validity or effect of
any change of ownership or assignment.
Changing the Owner or naming a new Successor Owner cancels any prior
designation of Successor Owner, but it does not change the Beneficiary or
Annuitant.
With regard to Qualified Contracts, ownership of the Contract generally may
be assigned, but any assignment may be subject to restrictions, penalties, or
even prohibition under the Code and must also be permitted under the terms of
the underlying retirement plan.
ANNUITANT
The Annuitant is the person named in the application to receive annuity
payments. If no person is so named, the Owner will be the Annuitant. As of the
Maturity Date, and upon agreement with Western Reserve, the Owner may elect a
different Annuitant or, if either annuity Option C or Option E has been
selected, add a joint annuitant. On the Maturity Date, the Annuitant(s) will
become the payee(s) and receive the annuity payments.
BENEFICIARY
The Beneficiary is the person or persons named in the application or as
subsequently changed. The Beneficiary may be changed during the lifetime of the
Annuitant, subject to the rights of any irrevocable
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Beneficiary. Any change must be made in writing and received at Western
Reserve's Administrative Office and, if accepted, will be effective as of the
date on which signed by the Owner. Western Reserve assumes no liability for any
payments made or actions taken before the change is received and shall not be
responsible for the validity or effect of the change. Prior to the Maturity
Date, if no Beneficiary survives the Annuitant, the Owner, if living, or the
Owner's estate will be the Beneficiary. The interest of any Beneficiary is
subject to that of any assignee. In the case of certain Qualified Contracts, the
Treasury Regulations prescribe certain limitations on the designation of a
Beneficiary.
Unless Western Reserve receives written notice from the Owner to the
contrary, no Beneficiary may assign any payments under the Contract before such
payments are due. To the extent permitted by law, no payments under the Contract
will be subject to the claims of any Beneficiary's creditors.
MODIFICATION OR WAIVER
The contract and the application constitute the entire Contract. Only
statements in the application can be used to void the Contract or defend a
claim. The statements are considered representations and not warranties. No
Contract provision can be waived or changed except by endorsement. Only the
President or Secretary of Western Reserve can agree to change or waive any
provision of the Contract.
The Contract may not be modified by Western Reserve without the consent of
the Owner, except as may be required to make it conform to any law or regulation
or ruling issued by a governmental agency or to improve the rights and/or
benefits under the Contract.
FEDERAL TAX MATTERS
INTRODUCTION
The Contracts are designed for use by individuals to accumulate Annuity
Value and may be used by retirement plans regardless of whether the plans
qualify for special Federal income tax treatment. The ultimate effect of Federal
income taxes on the amounts held under a Contract, on annuity payments, and on
the economic benefits to the Owner, Annuitant or Beneficiary depends on Western
Reserve's tax status, on the type of retirement plan for which the Contract is
purchased, and upon the tax and employment status of the individual concerned.
The following discussion is general in nature and is not intended as tax
advice. Each person concerned should consult a competent tax advisor. No attempt
is made to consider any applicable state or other tax laws. Moreover, the
discussion is based upon Western Reserve's understanding of the Federal income
tax laws as they are currently interpreted. Western Reserve makes no
representations regarding the likelihood of continuation of the Federal income
tax laws, the Treasury Regulations, or the current interpretations by the
Internal Revenue Service (the "Service"). For a discussion of Federal
income taxes as they relate to the Fund, please see the accompanying Prospectus
for the Portfolios.
COMPANY TAX STATUS
Western Reserve is taxed as a life insurance company under Part 1 of
Subchapter L of the Code. Because the Series Account is not an entity separate
from Western Reserve and its operations form a part of Western Reserve, it will
not be taxed separately as a "regulated investment company" under Subchapter M
of the Code. Investment income and realized capital gains on the assets of the
Series Account are reinvested and taken into account in determining the Annuity
Value. Western Reserve believes that under existing Federal income tax law, the
Series Account's investment income, including realized net capital gains, will
not be taxed to Western Reserve. Based upon this belief, it is anticipated that
no charges will be made against the Series Account for Federal income tax. If
any such charge is made, a Contract's Annuity Value will reflect a deduction for
the charge. Western Reserve reserves the right to make a deduction from
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the assets of the Series Account should any tax or other economic burden
resulting from the application of tax laws that Western Reserve determines to be
properly attributable to the Account be imposed with respect to such items in
the future.
TAXATION OF ANNUITIES
The following discussion assumes the Contract will qualify as an annuity
contract for Federal income tax purposes.
1. IN GENERAL. Code Section 72 governs taxation of annuities. In general,
an Owner is not taxed on increases in value under a Contract until some form of
distribution is made under the Contract. The exception to this rule is that
generally, an Owner of any deferred annuity contract who is not a natural person
must include in income any increase in the excess of the Contract's Annuity
Value over the investment in the Contract during the taxable year. However,
there are some exceptions to this exception and you may wish to discuss these
with your tax counsel. The taxable portion of a distribution (in the form of an
annuity or lump sum payment) is generally taxed as ordinary income. For this
purpose, the assignment, pledge, or agreement to assign or pledge any portion of
the Annuity Value generally will be treated as a distribution.
2. PARTIAL WITHDRAWALS AND SURRENDERS. In the case of a partial withdrawal,
Systematic Partial Withdrawal, or Surrender distributed to a participant or
Beneficiary under a Qualified Contract (other than a Qualified Contract used in
a retirement plan that qualifies for special Federal income tax treatment under
section 457 of the Code as to which there are special rules), a ratable portion
of the amount received is taxable, generally based on the ratio of the
investment in the Contract to the total Annuity Value. The "investment in the
contract" generally equals the portion, if any, of any Purchase Payments paid
by or on behalf of an individual under a Contract which is not excluded from the
individual's gross income. For Contracts issued in connection with qualified
plans, the "investment in the contract" can be zero.
Generally, in the case of a partial withdrawal, Systematic Partial
Withdrawal, or Surrender under a Non-Qualified Contract before the Maturity
Date, amounts received are first treated as taxable income to the extent that
the Annuity Value immediately before the partial withdrawal, Systematic Partial
Withdrawal, or Surrender exceeds the "investment in the contract" at that
time. Any additional amount partially withdrawn, applied to a Systematic Partial
Withdrawal, or Surrender is not taxable. In the event of a partial withdrawal or
Systematic Partial Withdrawal from, or Surrender of, a Non-Qualified Contract,
Western Reserve will withhold for tax purposes the minimum amount required by
law, unless the Owner affirmatively elects, before payments begin, to have
either nothing withheld or a different amount withheld.
3. ANNUITY PAYMENTS. Although the tax consequences may vary depending on
the Annuity Payment elected under the Contract, in general, only the portion of
the Annuity Payment that represents the amount by which the Annuity Value
exceeds the "investment in the contract" will be taxed; after the
"investment in the contract" is recovered, the full amount of any
additional Annuity Payments is taxable. For variable annuity payments, the
taxable portion is generally determined by an equation that establishes a
specific dollar amount of each payment that is not taxed. The dollar amount is
determined by dividing the "investment in the contract" by the total
number of expected periodic payments. However, the entire distribution will be
taxable once the recipient has recovered the dollar amount of his or her
"investment in the contract." For Fixed Annuity Payments, in general,
there is no tax on the portion of each payment which represents the same ratio
that the "investment in the contract" bears to the total expected value of
the Annuity Payments for the term of the payments; however, the remainder of
each Annuity Payment is taxable until the recovery of the "investment in the
contract," and thereafter the full amount or each Annuity Payment is taxable.
If death occurs before full recovery of the "investment in the contract",
the unrecovered amount may be deducted on the Annuitant's final tax return.
4. PENALTY TAX ON CERTAIN DISTRIBUTIONS. In the case of a distribution
pursuant to a Non-Qualified Contract, a penalty tax may be imposed equal to 10%
of the amount treated as taxable income. The penalty tax is not imposed in
certain circumstances, including, generally, distributions: (1) made on or after
the date
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on which the Owner attains age 591-/2, (2) made as a result of death of the
Owner or disability of the taxpayer, or (3) received in substantially equal
installments as a life annuity. Other tax penalties may apply to certain
distributions pursuant to a Qualified Contract.
5. TAXATION OF DEATH BENEFIT PROCEEDS. Amounts may be distributed from a
Contract because of the death of an Owner or an Annuitant. Generally, such
amounts are includable in the income of the recipient as follows: (1) if
distributed in a lump sum, they are taxed in the same manner as a full Surrender
of the Contract, as described above, or (2) if distributed under an annuity
option, they are taxed in the same manner as Annuity Payments, as described
above. For these purposes, the investment in the Contract is not affected by the
Owner's or Annuitant's death. That is, the investment in the Contract remains
the amount of any Purchase Payments paid which were not excluded from gross
income.
6. MULTIPLE CONTRACTS. All non-qualified, deferred annuity contracts
entered into after October 21, 1988 that are issued by Western Reserve (or its
affiliates) to the same Owner during any calendar year are to be treated as one
annuity contract for purposes, of determining the amount includable in an
individual's gross income. There may be other situations in which the Treasury
may conclude that it would be appropriate to aggregate two or more annuity
contracts purchased by the same owner. Accordingly, an Owner should consult a
competent tax advisor before purchasing more than one Contract or other annuity
contracts.
7. TRANSFERS, ASSIGNMENTS OR EXCHANGES OF CONTRACTS. A transfer of
ownership or assignment of a Contract, the designation of an Annuitant or other
Beneficiary who is not also the Owner, the selection of certain Maturity Dates,
or a change of Annuitant, may result in certain income or gift tax consequences
to the Owner that are beyond the scope of this discussion. An Owner
contemplating any such transfer, assignment, selection, or change should contact
a competent tax advisor in respect to the potential tax effects of such a
transaction.
8. POSSIBLE CHANGES IN TAXATION. In past years, legislation has been
proposed that would have adversely modified the Federal taxation of certain
annuities. For example, one such proposal would have changed the tax treatment
of non-qualified annuities that did not have "substantial life
contingencies" by taxing income as it is credited to the annuity. Although as
of the date of this Prospectus Congress is not considering any legislation
regarding the taxation of annuities, there is always the possibility that the
tax treatment of annuities could change by legislation or other means (such as
the IRS regulations, revenue rulings, judicial decisions, etc.). Moreover, it is
also possible that any change could be effective prior to the date of the
change.
QUALIFIED PLANS
The Qualified Contract is designed for use with several types of qualified
retirement plans. The tax rules applicable to participants and beneficiaries in
such qualified plans vary according to the type of plan and the terms and
conditions of the plan itself. Special favorable tax treatment may be available
for certain types of contributions and distributions (including special rules
for certain lump sum distributions). Adverse tax consequences may result from
contributions in excess of specified limits, distributions prior to age 59-1/2
(subject to certain exceptions), distributions that do not conform to specified
minimum distribution rules, aggregate distributions in excess of a specified
annual amount, and in certain other circumstances. Therefore, Western Reserve
makes no attempt to provide more than general information about use of the
Contract with the various types of qualified plans. Owners and participants
under qualified plans as well as Annuitants and Beneficiaries are cautioned that
the rights of any person to any benefits under qualified plans may be subject to
the terms and conditions of the plan themselves, regardless of the terms and
conditions of the Contract issued in connection therewith. Some retirement plans
are subject to distribution and other requirements that are not incorporated
into our Contract administration procedures. Owners, participants and
beneficiaries are responsible for determining that contributions, distributions
and other transactions with respect to the Contracts comply with applicable law.
Purchasers of Contracts for use with any qualified plan should seek competent
legal and tax advice regarding the suitability of the Contract therefor.
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1. (A) SECTION 403(B) PLANS. Under Section 403(b) of the Code, payments
made by public school systems and certain tax exempt organizations to purchase
annuity policies for their employees are excludable from the gross income of the
employee, subject to certain limitations. However, such payments may be subject
to FICA (Social Security) taxes. Additionally, in accordance with the
requirements of the Code, Section 403(b) annuities generally may not permit
distribution of (i) elective contributions made in years beginning after
December 31, 1988, and (ii) earnings on those contributions, and (iii) earnings
on amounts attributed to elective contributions held as of the end of the last
year beginning before January 1, 1989. Distributions of such amounts will be
allowed only upon the death of the employee, on or after attainment of age
59-1/2, separation from service, disability, or financial hardship, except that
income attributable to elective contributions may not be distributed in the case
of hardship.
(B) RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAMS. Section
36.105 of the Texas Educational Code permits participants in the Texas Optional
Retirement Program (ORP) to withdraw their interest in a variable annuity
contract issued under the ORP only upon: (1) termination of employment in the
Texas public institutions of higher education; (2) retirement; or (3) death.
Accordingly, a participant in the ORP (or the participant's estate if the
participant has died) will be required to obtain a certificate of termination
from the employer or a certificate of death before the account can be redeemed.
2. INDIVIDUAL RETIREMENT ANNUITIES. Sections 219 and 408 of the Code permit
individuals or their employers to contribute to an individual retirement program
known as an "Individual Retirement Annuity" or an "IRA." Individual
Retirement Annuities are subject to limitation on the amount which may be
contributed and deducted and the time when distributions may commence. In
addition, distributions from certain other types of qualified plans may be
placed into an Individual Retirement Annuity on a tax-deferred basis. The
Service has not reviewed the Contract for qualification as an IRA, and has not
addressed in a ruling of general applicability whether a death benefit provision
such as the provision in the Contract comports with IRA qualification
requirements.
3. CORPORATE PENSION AND PROFIT-SHARING PLANS AND H.R. 10 PLANS. Section
401(a) and 403(a) of the Code permit corporate employers to establish various
types of retirement plans for employees and permit self-employed individuals to
establish qualified plans for themselves and their employees. Such retirement
plans may permit the purchase of the Contracts to provide benefits under the
plans. These retirement plans may permit the purchase of the Contracts to
accumulate retirement savings under the plans. Adverse tax or other legal
consequences to the plan, to the participant or to both may result if this
Contract is assigned or transferred to any individual as a means to provide
benefit payments.
4. DEFERRED COMPENSATION PLANS. Section 457 of the Code, although not
actually providing for a qualified plan as that term is normally used, provides
for certain deferred compensation plans with respect to service for state
governments, local governments, political subdivisions, agencies,
instrumentalities and certain affiliates of such entities and tax exempt
organizations which enjoy special treatment. The Contracts can be used with such
plans. Such plans may permit a participant to specify the form of investment in
which his or her participation will be made. In general, for non-governmental
plans, such investments, however, are owned by, and are subject to, the claims
of the general creditors of the sponsoring employer. Depending on the terms of
the particular plan, a non-governmental employer may be entitled to draw on
deferred amounts for purposes unrelated to its section 457 plan obligations. In
general, all amounts received under a section 457 plan are taxable and are
subject to federal income tax withholding as wages.
5. DISTRIBUTIONS FROM QUALIFIED PLANS. Under the tax qualification rules
for Section 401(a), 403(b), 408 and 457 plans, distributions generally must
commence no later than the later of April 1 of the calendar year following the
calendar year in which the Owner (or plan participant) (i) reaches age 70-1/2,
or (ii) retires, and must be made in a specified form and manner. If the plan
participant is a "five percent owner" (as defined in the Code), distributions
generally must begin no later than the date described in (i). Special rules and
other restrictions may apply depending on the type of plan and the particular
circumstances. Each Owner is responsible for requesting distributions under the
Contract that satisfy applicable tax rules, and should consult a qualified tax
advisor.
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6. RESTRICTIONS UNDER QUALIFIED CONTRACTS. Other restrictions with respect
to the election, commencement, or distribution of benefits may apply under
Qualified Contracts or under the terms of the plans in respect of which
Qualified Contracts are issued.
The above description of Federal income tax consequences pertaining to the
different types of qualified plans that may be funded by the Contracts is only a
brief summary and is not intended as tax advice. The rules governing the
provisions of qualified plans are extremely complex and often difficult to
comprehend. In addition, the Tax Reform Act has significantly changed a great
many rules for qualified plans. Anything less than full compliance with the
applicable rules, all of which are subject to change, may have significant
adverse tax consequences. A prospective purchaser considering the purchase of a
Contract in connection with a qualified plan should first consult a qualified
and competent tax advisor with regard to the suitability of the Contract as an
investment vehicle for the qualified plan.
ADDITIONAL CONSIDERATIONS
1. DIVERSIFICATION. Section 817(h) of the Code requires that the
investments of the Series Account must be "adequately diversified" in
accordance with Treasury Regulations in order for the Contracts to qualify as
annuity contracts under Section 72 of the Code. The Series Account, through the
Fund, intends to comply with the diversification requirements prescribed by the
Treasury in Reg. Sec. 1.817.5, which affect how the Fund's assets may be
invested. Western Reserve believes the Series Account will, thus, meet the
diversification requirements of Section 817(h). If the Series Account does not
meet those diversification requirements, Owners would be taxed currently on any
investment income under the Contract.
In certain circumstances, owners of variable annuity contracts may be
considered the owners, for Federal income tax purposes, of the assets of the
separate account used to support their contracts. In those circumstances, income
and gains from the separate account assets would be includable in the variable
annuity contract owner's gross income. The Treasury Department has stated in
published rulings that a variable annuity contract owner will be considered the
owner of separate account assets if the contract owner possesses incidents of
ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has also announced, in connection with
the issuance of regulations concerning investment diversification, that those
regulations "do not provide guidance concerning the circumstances in which
investor control of the investments of a segregated asset account may cause the
investor (I.E., the contract owner), rather than the insurance company, to be
treated as the owner of the assets in the account." This announcement further
states that guidance would be issued by way of regulations or rulings on the
"extent to which policyholders may direct their investments to particular
sub-accounts without being treated as owners of the underlying assets."
The ownership rights under the Contract are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that contract owners were not owners of separate account assets. For
example, the owner of a Contract has the choice of more Sub-Accounts in which to
allocate net purchase payments and Contract values, and may be able to transfer
among Sub-Accounts more frequently than in such rulings. These differences could
result in an Owner being treated as the owner of the assets of the Series
Account. In addition, Western Reserve does not know what standards will be set
forth, if any, in the regulations or rulings which the Treasury Department has
stated it expects to issue. Western Reserve therefore reserves the right to
modify the Contract as necessary to attempt to prevent an Owner from being
considered the owner of a pro rata share of the assets of the Series Account.
2. DISTRIBUTION-AT-DEATH RULES. The Code also requires Non-Qualified
Contracts to contain specific provisions for distribution of the Contract
proceeds upon the death of an Owner. In order to be treated as an annuity
contract for Federal income tax purposes, the Code requires that such Contract
provide that (a) if any Owner dies on or after the Maturity Date and before the
entire interest in the Contract has been distributed, the remaining portion must
be distributed at least as rapidly as under the method in effect on the Owner's
death; and (b) if any Owner dies before the Maturity Date, the entire interest
in the Contract must generally be distributed within five years after the
Owner's date of death. These requirements will be
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considered satisfied if the entire interest of the Contract is used to purchase
an immediate annuity under which payments will begin within one year of the
Owner's death and will be made for the life of the Beneficiary or for a period
not extending beyond the life expectancy of the Beneficiary. The Owner's
Beneficiary is the person to whom ownership of the Contract passes because of
death and must be a natural person. (In the Contract, the successor owner is the
Owner's Beneficiary.) If the Beneficiary is the Owner's surviving spouse, the
Contract may be continued with the surviving spouse as the new Owner.
Non-Qualified Contracts will be reviewed and modified if necessary to attempt to
assure that they comply with the Code requirements when clarified by regulation
or otherwise. Other rules may apply to Qualified Contracts.
3. WITHHOLDING. Withholding of Federal income taxes on the taxable portion
of all distributions may be required unless the recipient elects not to have any
such amounts withheld and properly notifies Western Reserve of that election.
Different rules may apply to United States citizens or expatriates living
abroad. In addition, some states have enacted legislation requiring withholding.
Effective January 1, 1993, certain distributions from Section 401(a), 403(a) and
403(b) plans are subject to mandatory withholding.
4. SECTION 1035 EXCHANGES. Code Section 1035 generally provides that no
gain or loss shall be recognized on the exchange of one annuity contract for
another. If the surrendered Contract was issued prior to August 14, 1982, the
tax rules that formerly provided that the Surrender was taxable only to the
extent the amount received exceeds the Owner's investment in the Contract will
continue to apply to amounts allocable to investment in the Contract before
August 14, 1982. In contrast, Contracts issued on or after January 19, 1985 in a
Code Section 1035 exchange are treated as new Contracts for purposes of the
penalty and distribution-at-death rules. Special rules and procedures apply to
Code Section 1035 transactions. Prospective purchasers wishing to take advantage
of Code Section 1035 should consult their tax advisors.
5. DIVERSIFICATION AND QUALIFIED PLANS. Code Section 817(h) applies to
variable annuity contracts other than pension plan contracts. The regulations
reiterate that the diversification requirements do not apply to pension plan
contracts. All of the qualified retirement plans (described above) are defined
as pension plan contracts for these purposes. Notwithstanding the exception of
Qualified Contracts from application of the diversification rules, the
investment vehicle for Western Reserve's Qualified Contracts (i.e., the Fund)
will be structured to comply with the diversification standards because it
serves as the investment vehicle for Non-Qualified Contracts as well as
Qualified Contracts.
THE FIXED ACCOUNT
An Owner may allocate Net Purchase Payments and transfer Annuity Value to
the Fixed Account, which is part of Western Reserve's general account. The
Insurance Department of the States of New Jersey and Washington have
disapproved, for Contracts issued in New Jersey and Washington, the ability both
to allocate Net Purchase Payments to the Fixed Account and to transfer Annuity
Value from Sub-Accounts to the Fixed Account.
Because of exemptive and exclusionary provisions, interests in the Fixed
Account have not been registered under the Securities Act of 1933 and neither
the Fixed Account nor the general account has been registered as an investment
company under the 1940 Act. Accordingly, neither the Fixed Account, the general
account nor any interests therein are generally subject to the provisions of
these acts, and Western Reserve has been advised that the staff of the SEC has
not reviewed the disclosure in this Prospectus relating to the Fixed Account.
Disclosure regarding the Fixed Account may, however, be subject to certain
generally applicable provisions of the Federal securities laws relating to the
accuracy and completeness of statements made in prospectuses.
The portion of the Annuity Value allocated to the Fixed Account (the
"Fixed Account Value") will be credited with rates of interest, as
described below. Because the Fixed Account Value becomes part of
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Western Reserve's general account, Western Reserve assumes the risk of
investment gain or loss on this amount. All assets in the general account are
subject to Western Reserve's general liabilities from business operations.
MINIMUM GUARANTEED AND CURRENT INTEREST RATES
The Fixed Account Value is guaranteed to accumulate at a minimum effective
annual interest rate of 4%. Western Reserve presently credits the Fixed Account
Value with current rates in excess of the minimum guarantee, but it is not
obligated to do so. These current interest rates are influenced by, but do not
necessarily correspond to, prevailing general market interest rates. Because
Western Reserve, at its sole discretion, anticipates changing the current
interest rate from time to time, different allocations to and from the Fixed
Account Value will be credited with different current interest rates.
Western Reserve further guarantees that when a higher or lower current
interest rate is declared on an allocation to the Fixed Account Value, that new
interest rate will be guaranteed on such allocation for at least a one year
period measured from the date of each Purchase Payment or transfer (the
"Guarantee Period"). At the end of the Guarantee Period, Western Reserve
reserves the right to declare a new current interest rate on such allocation and
accrued interest thereon (which may be a different current interest rate than
the current interest rate on new allocations to the Fixed Account Value on that
date). The rate declared on such allocation and accrued interest thereon at the
end of each Guarantee Period will be guaranteed again for another Guarantee
Period. At the end of any Guarantee Period, any interest credited on the Fixed
Account Value in excess of the minimum guaranteed rate of 4% per year will be
determined in the sole discretion of Western Reserve. The Owner assumes the risk
that interest credited may not exceed the guaranteed minimum rate.
Allocations from the Fixed Account Value to provide: a) partial withdrawal
amounts, b) transfers to the Series Account, or c) the Annual Contract Charge
are currently, for the purpose of crediting interest, accounted for on a last
in, first out ("LIFO") method.
Western Reserve reserves the right to change the method of crediting
interest from time to time, provided that such changes will not have the effect
of reducing the guaranteed rate of interest below 4% per annum.
FIXED ACCOUNT VALUE
At the end of any Valuation Period, the Fixed Account Value is equal to:
1. The sum of all Net Purchase Payments allocated to the Fixed Account; plus
2. Any amounts transferred from a Sub-Account to the Fixed Account; plus
3. Total interest credited to the Fixed Account; minus
4. Any amounts withdrawn from the Fixed Account to pay for partial
withdrawals; minus
5. Any amounts transferred to a Sub-Account from the Fixed Account; minus
6. Any amounts charged to pay the Annual Contract Charge, premium tax, and
transfer charges, if any.
ALLOCATIONS, TRANSFERS AND PARTIAL WITHDRAWALS
Net Purchase Payments and transfers to the Fixed Account will be allocated
to the Fixed Account on the first Valuation Date on or following the date
Western Reserve receives the payment or transfer request at its Administrative
Office, except that any allocation of the initial Net Purchase Payment will take
place on the Contract Date.
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<PAGE>
Transfers may be made from the Fixed Account to a Sub-Account once each
Contract Year. The amount that may be transferred is the greater of (a) 25% of
the amount in the Fixed Account, or (b) the amount transferred in the prior
Contract Year from the Fixed Account, unless Western Reserve consents otherwise.
No transfer charge will apply to transfers from the Fixed Account to a
Sub-Account. Amounts may be withdrawn from the Fixed Account for partial
withdrawals and Surrenders only upon written request and (other than for
Surrenders) only with Western Reserve's consent. Western Reserve further
reserves the right to defer payment of transfers, partial withdrawals, or
Surrenders from the Fixed Account for up to six months. In addition, Contract
provisions relating to transfers, partial withdrawals or Surrenders from the
Series Account will also apply to the Fixed Account. Dollar Cost Averaging may
be done from the Fixed Account. (See "THE CONTRACT - ACCUMULATION PROVISIONS
- - Transfers to and from, and among Allocation Options" on pages 17-18.)
DISTRIBUTION OF THE CONTRACTS
The Contracts will be sold by individuals who, in addition to being
licensed as life insurance agents for Western Reserve, are also registered
representatives of ISI, which has the same address as Western Reserve, an
affiliate of Western Reserve and the principal underwriter of the Contracts, or
of broker-dealers who have entered into written sales agreements with the
principal underwriter. ISI is registered with the SEC under the Securities
Exchange Act of 1934 and is a member of the National Association of Securities
Dealers, Inc. No amounts have been retained by ISI for acting as principal
underwriter for the Contracts. Broker-dealers will generally receive sales
commissions of up to 5.5% of Purchase Payments. In addition, broker-dealers may
receive renewal commissions of up to 0.25% (twenty-five one-hundredths of one
percent) of the Annuity Value as of each Policy Anniversary, beginning with the
fifth Policy Anniversary, providing the Policy at those times has an Annuity
Value of $25,000 or more on each Anniversary. Certain production, persistency
and managerial bonuses may also be paid. Subject to applicable Federal and state
laws and regulations, Western Reserve may also pay compensation to banks and
other financial institutions for their services in connection with the sale and
servicing of the Contracts. The level of such compensation will not exceed that
paid to broker-dealers for their sale of the Contracts. The offering of
Contracts will be made on a continuing basis.
VOTING RIGHTS
To the extent required by law, Western Reserve will vote the Fund shares
held in the Series Account at shareholder meetings of the Fund in accordance
with instructions received from persons having voting interests in the
corresponding Sub-Accounts of the Series Account. Except as required by the 1940
Act, the Fund does not hold regular or special shareholder meetings. If the 1940
Act or any regulation thereunder should be amended or if the present
interpretation thereof should change, and as a result Western Reserve determines
that it is permitted to vote the Fund shares in its own right, it may elect to
do so.
The number of votes that an Owner has the right to instruct will be
calculated separately for each Sub-Account, and will be determined during the
Accumulation Period by dividing the portion of the Annuity Value in that
Sub-Account by $100. Fractional shares will be counted. After the Maturity Date,
the number of votes that an Annuitant has the right to instruct will be
calculated based on the liability for future variable annuity payments. This
liability will be calculated on the basis of the mortality assumptions used in
determining the number of units purchased by the Annuitant. Because this
liability generally declines as any Annuitant ages, the number of votes
attributable to that Annuitant will decrease over time.
The number of votes of the Portfolio that the Owner or Annuitant has the
right to instruct will be determined as of the date established by that
Portfolio for determining shareholders eligible to vote at the meeting of the
Fund. Voting instructions will be solicited by written communications prior to
such meeting in accordance with procedures established by the Fund.
Western Reserve will vote Fund shares as to which no timely instructions
are received and Fund shares that are not attributable to Owners in proportion
to the voting instructions that are received with respect to all
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Contracts participating in that Portfolio. Voting instructions to abstain on any
item to be voted upon will reduce the votes eligible to be cast by Western
Reserve.
Each person having a voting interest in a Sub-Account will receive proxy
materials, reports and other materials relating to the appropriate Portfolio.
LEGAL PROCEEDINGS
There are at present no legal proceedings to which the Series Account is a
party or to which the assets of the Series Account are subject. Western Reserve
is not involved in any litigation that is of material importance in relation to
its total assets or that relates to the Series Account. ISI, the Series
Account's principal underwriter, is not presently a party to any legal
proceedings that are likely to have a material adverse effect upon its ability
to perform its contract with the Series Account.
STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information contains information and financial
statements relating to the Series Account and Western Reserve. The Table of
Contents of the Statement of Additional Information is set forth below:
1. Custodian
2. Independent Accountants
3. Legal Matters
4. Calculation of Performance Related Information
5. Addition, Deletion, and Substitution of Investments
6. Calculation of Variable Annuity Payments
7. Financial Statements
Inquiries and requests for a Statement of Additional Information should be
directed to Western Reserve Life Assurance Co. of Ohio, P.O. Box 9051,
Clearwater, Florida 34618-9051; telephone number (800) 851-9777.
WRL00024-05/97
35
<PAGE>
PART B
INFORMATION REQUIRED IN A STATEMENT OF
ADDITIONAL INFORMATION
C.A.S.E. RESERVE VARIABLE ANNUITY STATEMENT OF
ADDITIONAL INFORMATION
<PAGE>
WRL SERIES ANNUITY ACCOUNT
C.A.S.E. RESERVE VARIABLE ANNUITY
Flexible Payment Variable
Deferred Annuity Contract
Issued by
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, Florida 33770
Telephone: (800) 851-9777
(813) 585-6565
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a Prospectus and should be read
in conjunction with the C.A.S.E. Reserve Variable Annuity Prospectus, dated May
1, 1997, which is available without charge by contacting Western Reserve Life
Assurance Co. of Ohio ("Western Reserve") at P.O. Box 9051, Clearwater,
Florida 34618-9051 or at the telephone number above.
May 1, 1997
WRL00073-05/97
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Custodian ................................................ 3
Independent Accountants ................................. 3
Legal Matters ............................................. 3
Calculation of Performance Related Information ............ 3
Addition, Deletion, and Substitution of Investments ...... 6
Calculation of Variable Annuity Payments .................. 7
Financial Statements .................................... 8
</TABLE>
2
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CUSTODIAN
The assets of WRL Series Annuity Account (the "Series Account") are
held by Western Reserve. The assets of the Series Account are kept physically
segregated and held apart from the general account and any other separate
accounts of Western Reserve. WRL Investment Services, Inc. maintains records of
all purchases and redemptions of shares of the WRL Series Fund, Inc. (the
"Fund"). Additional protection for the assets of the Series Account is
provided by a blanket bond issued to AEGON U.S. Holding Corporation ("AEGON
U.S.") in the amount of $5 million (subject to a $1 million deductible),
covering all of the employees of AEGON U.S. and its affiliates, including
Western Reserve. A Stockbrokers Blanket Bond, issued to AEGON U.S.A. Securities,
Inc., provides additional fidelity coverage to a limit of $12 million, subject
to a $50,000 deductible.
INDEPENDENT ACCOUNTANTS
The accounting firm of Price Waterhouse LLP, independent accountants,
provided audit services to the Series Account for the year ended December 31,
1996. The principal business address of Price Waterhouse LLP is 1055 Broadway,
Kansas City, Missouri 64105. The accounting firm of Ernst & Young LLP,
independent auditors, provided audit services to Western Reserve for the year
ended December 31, 1996. The principal business address of Ernst & Young LLP is
801 Grand Avenue, Suite 3400, Des Moines, Iowa 50309-2764.
LEGAL MATTERS
Sutherland, Asbill & Brennan, L.L.P., Washington, D.C., has provided advice
on certain legal matters concerning Federal securities laws in connection with
the Contracts. All matters of Ohio law pertaining to the Contracts, including
the validity of the Contracts and Western Reserve's right to issue the
Contracts under Ohio insurance law, have been passed upon by Thomas E. Pierpan,
Esq., Vice President, Associate General Counsel and Assistant Secretary of
Western Reserve.
CALCULATION OF PERFORMANCE RELATED INFORMATION
A. YIELD AND EFFECTIVE YIELD QUOTATIONS
YIELD - The yield quotation is computed by determining the net change,
exclusive of capital changes, in the value of a hypothetical pre-existing
account having a balance of one unit in the sub-account at the beginning of the
period, subtracting a hypothetical charge reflecting deductions from Owner
accounts, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and multiplying
the base period return by (365/7) with the resulting figure carried to at least
the nearest hundredth of one percent.
EFFECTIVE YIELD - The effective yield is computed by determining the net
change, exclusive of capital changes, in the value of a hypothetical
pre-existing sub-account having a balance of one unit in the sub-account at the
beginning of the period. A hypothetical charge, reflecting deductions from Owner
accounts, is subtracted from the balance. The difference is divided by the value
of the sub-account at the beginning of the base period to obtain the base period
return, which is then compounded by adding 1. Next, the sum is raised to a power
equal to 365 divided by 7, and 1 is subtracted from the result. The following
formula describes the computation:
3
<PAGE>
EFFECTIVE YIELD = ( {BASE PERIOD RETURN + 1} 365/7 ) - 1
The effective yield is shown at least to the nearest hundredth of one
percent.
HYPOTHETICAL CHARGE - For purposes of the yield and effective yield
computations, the hypothetical charge reflects all fees and charges that are
charged to all Owner accounts in proportion to the length of the base period.
Such fees and charges include the $30 Annual Contract Charge, calculated on the
basis of an average Series Account Value per Contract of $31,215, which converts
that charge to an annual rate of 0.10% of the Series Account Value. The yield
and effective yield quotations do not reflect any deduction for premium taxes or
transfer charges that may be applicable to a particular Contract, nor do they
reflect the Withdrawal Charge that may be assessed at the time of redemption in
an amount ranging up to 6% of the requested redemption amount. The specific
Withdrawal Charge percentage applicable to a particular redemption depends on
the length of time Purchase Payments have been held under the Contract and
whether redemptions have been previously made during that Contract Year. (See
"Charges and Deductions - Withdrawal Charge" on pages 12-13 of the
Prospectus.) No fees or sales charges are assessed upon annuitization under the
Contracts, except premium taxes. Realized gains and losses from the sale of
securities, and unrealized appreciation and depreciation of assets held by the
sub-account and the Fund are excluded from the calculation of yield.
B. TOTAL RETURN AND YIELD QUOTATIONS FOR THE C.A.S.E. QUALITY GROWTH,
C.A.S.E. GROWTH & INCOME AND C.A.S.E. GROWTH SUB-ACCOUNTS
The total return quotations set forth in the Prospectus for these
Sub-Accounts holding assets for the Contracts during the Accumulation Period are
average annual total return quotations for the one, three, five, and ten-year
periods (OR, while a Sub-Account has been in existence for a period of less than
one, three, five or ten years, for such lesser period) ended on the date of the
most recent balance sheet of the Series Account and for the period from the date
the Sub-Accounts commenced operations until such date. The quotations are
computed by determining the average annual compounded rates of return over the
relevant periods that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the particular period of a
hypothetical $1,000 payment made at the beginning of the
particular period.
For purposes of the total return quotations for these Sub-Accounts, the
calculations take into account all fees that are charged to all Owner accounts
during the Accumulation Period. Such fees include the $30 Annual Contract
Charge, calculated on the basis of an average Series Account Value per Contract
of $31,215, which converts that charge to an annual rate of 0.10% of the Series
Account Value. The calculations also assume a complete surrender as of the end
of the particular period. The calculations do not reflect any deductions for
premium taxes or any transfer charges that may be applicable to a particular
Contract.
The yield quotations for these Sub-Accounts representing the Accumulation
Period set forth in the Prospectus is based on the thirty-day period ended on
the date of the most recent balance sheet of the Series Account and are computed
by dividing the net investment income per unit earned during the period by the
maximum offering price per unit on the last date of the period, according to the
following formula:
a-b
YIELD = 2 [ ( --- + 1)6 - 1]
cd
4
<PAGE>
Where: a = net investment income earned during the period by the corresponding
Portfolio of the Fund attributable to shares owned by the
Sub-Account.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of units outstanding during the period.
d = the maximum offering price per unit on the last day of the period.
For purposes of the yield quotations for these Sub-Accounts, the
calculations take into account all fees that are charged to all Owner accounts
during the Accumulation Period. Such fees include the $30 Annual Contract
Charge, calculated on the basis of an average Series Account Value per Contract
of $31,215, which converts that charge to an annual rate of 0.10% of the Series
Account Value. The calculations do not take into account any premium taxes, the
Withdrawal Charge or any transfer charges.
Premium taxes currently range from 0% to 3.5% of Purchase Payments
depending upon the jurisdiction in which the Contract is delivered. A Withdrawal
Charge may be assessed at the time of surrender in an amount ranging up to 6% of
the requested redemption amount. The Withdrawal Charge percentage applicable to
a particular redemption depends on the length of time Purchase Payments have
been held under the Contract, and whether redemptions have been previously made
during that Contract Year. (See "Charges and Deductions - Withdrawal
Charge" on pages 12-13 of the Prospectus.) There is a Transfer Charge of
$10.00 per transfer after a specified number of transfers in each Contract Year.
(See "Charges and Deductions - Transfer Charge" on page 13 of the
Prospectus.)
C. OTHER PERFORMANCE DATA
Western Reserve may from time to time disclose average annual total return
in non-standard formats and cumulative total return for Contracts funded by
these Sub-Accounts.
Western Reserve may from time to time also disclose in advertisements and
sales literature yields and non-standard total returns for the Sub-Accounts
(some of which do not include Contract and Series Account fees and charges)
including such disclosure for the Sub-Accounts for periods prior to the date the
Sub-Accounts commenced operations.
For periods prior to the date each Sub-Account commenced operations,
performance information will be calculated based on the performance of the
Fund's corresponding Portfolios that commenced operations prior to each
Sub-Account, and the assumption that each Sub-Account was in existence for the
same periods as those indicated for each respective Portfolio, with a level of
fees and charges approximately equal to those currently assessed against each
Sub-Account and the Contract. The Prospectus contains a table which shows
average annual total returns for periods prior to the date each Sub-Account
commenced operations. The Prospectus also contains a similar table for the same
periods which shows average annual total returns which do not reflect any charge
on amounts partially withdrawn or surrendered. The total returns in the second
table are calculated in exactly the same manner as those in the preceding table,
except that the ending redeemable value of the hypothetical account for the
periods is replaced with an ending value for the periods that does not take into
account any charge on amounts partially withdrawn or surrendered. Non-standard
performance data will only be disclosed if the standard performance data for the
required periods is also disclosed.
D. ADVERTISING AND SALES LITERATURE
From time to time Western Reserve may refer to the diversifying process of
asset allocation based on the Modern Portfolio Theory developed by Nobel Prize
winning economist Harry Markowitz. The basic assumptions of Modern Portfolio
Theory are the selection of individual investments has little impact on
portfolio performance, market timing strategies seldom work, markets are
efficient, and portfolio selection should be made among asset classes. Modern
Portfolio Theory allows an investor to determine an efficient portfolio
selection that will provide a higher return with the same risk or the same
return with lower risk.
5
<PAGE>
When presenting the asset allocation process Western Reserve may outline
the process of personal and investment risk analysis including determining
individual risk tolerances and a discussion of the different types of investment
risk. Western Reserve may classify investors into four categories based on their
risk tolerance and will quote various industry experts on which types of
investments are best suited to each of the four risk categories. The industry
experts quoted may include lbbotson Associates, CDA Investment Technologies,
Lipper Analytical Services and any other expert which has been deemed by the
Company to be appropriate. Western Reserve may also provide a historical
overview of the performance of a variety of investment market indices, the
performance of these indices over time, and the performance of different asset
classes, such as stocks, bonds, cash equivalents, etc. Western Reserve may also
discuss investment volatility including the range of returns for different asset
classes and over different time horizons, and the correlation between the
returns of different asset classes. Western Reserve may also discuss the basis
of portfolio optimization including the required inputs and the construction of
efficient portfolios using sophisticated computer-based techniques. Finally,
Western Reserve may describe various investment strategies and methods of
implementation, the periodic rebalancing of diversified portfolios, the use of
dollar cost averaging techniques, a comparison of the tax impact of purchase
payments made on a "before tax" basis through a tax-qualified plan with
those made on an "after tax" basis outside of a tax-qualified plan, and a
comparison of tax-deferred versus non tax-deferred accumulation of purchase
payments.
ADDITION, DELETION, AND SUBSTITUTION OF INVESTMENTS
Western Reserve reserves the right, subject to compliance with applicable
law, to make additions to, deletions from or substitutions for the shares that
are held by the Series Account or that the Series Account may purchase. Western
Reserve reserves the right to eliminate the shares of any of the Portfolios of
the Fund and to substitute shares of another Portfolio of the Fund or of another
open-end registered investment company, if the shares of a Portfolio are no
longer available for investment, or if in Western Reserve's judgment further
investment in any Portfolio should become inappropriate in view of the purposes
of the Series Account. Western Reserve will not, however, substitute any shares
attributable to an Owner's interest in a Sub-Account without notice to and prior
approval of the Securities and Exchange Commission, to the extent required by
the Investment Company Act of 1940, as amended (the "1940 Act") or other
applicable law.
Western Reserve also reserves the right to establish additional
Sub-Accounts, each of which would invest in a new Portfolio of the Fund, or in
shares of another investment company, with a specified investment objective. New
Sub-Accounts may be established when, in the sole discretion of Western Reserve,
marketing, tax or investment conditions warrant, and any new Sub-Accounts will
be made available to existing Owners on a basis to be determined by Western
Reserve. Western Reserve may also eliminate one or more Sub-Accounts if, in its
sole discretion, marketing, tax or investment conditions warrant.
In the event of any such substitution or change, Western Reserve may make
such changes in the Contracts and other annuity contracts as may be necessary or
appropriate to reflect such substitution or change. If deemed by Western Reserve
to be in the best interests of persons having voting rights under the Contracts,
the Series Account may be operated as a management company under the 1940 Act,
or, subject to any required approval, it may be deregistered under that Act in
the event such registration is no longer required.
Western Reserve reserves the right to change the investment objective of
any Sub-Account. Additionally, if required by law or regulation, Western Reserve
will not materially change an investment objective of the Series Account or of a
Portfolio designated for a Sub-Account unless a statement of the change is filed
with and approved by the appropriate insurance official of the state of Western
Reserve's domicile or deemed approved in accordance with such law or
regulation.
6
<PAGE>
CALCULATION OF VARIABLE ANNUITY PAYMENTS
Under a Series Account annuity option, the Owner applies his or her Annuity
Proceeds (or a portion thereof) on the Maturity Date to one or more of the three
Sub-Accounts designated to support annuity payments by purchasing units issued
in connection with each Sub-Account selected by the Owner. The Annuity Unit
Value of any Sub-Account will increase or decrease in accordance with the
investment experience of that Sub-Account. The Annuity Unit Value of any
Sub-Account at the end of a Valuation Period is equal to the product of (a) the
Annuity Unit Value for that Sub-Account at the end of the immediately preceding
Valuation Period, multiplied by (b) the net investment factor for that
Sub-Account for the Valuation Period, multiplied by (c) the "assumed investment
return adjustment factor" for the Valuation Period.
The "assumed investment return adjustment factor" for a Valuation
Period is the product of discount factors of .99986634 per day, and is designed
to recognize the 5% effective annual assumed investment return.
The net investment factor used to calculate the Annuity Unit Value of each
Sub-Account for the Valuation Period is equal to (a) the net result of (1) the
net asset value of a Fund share held in that Sub-Account determined as of the
end of the current Valuation Period; plus (2) the per share amount of any
dividend or capital gain distributions made by the Fund for shares held in that
Sub-Account if the ex-dividend date occurs during the Valuation Period; plus or
minus (3) a per share charge or credit for any taxes reserved for, which Western
Reserve determines to have resulted from the investment operations of the
Sub-Account; divided by (b) the net asset value of a Fund share held in the
Sub-Account determined as of the end of the immediately preceding Valuation
Period; minus (c) a factor representing the mortality and expense risk charge
and administrative charge. This factor is equal, on an annual basis, to 1.40% of
the daily net asset value of a Fund share held in the Series Account for the
Sub-Account.
DETERMINATION OF THE FIRST VARIABLE PAYMENT. The amount of the first
variable payment is determined by multiplying the Annuity Proceeds times the
appropriate rate for the variable option selected. The rates are based on the
Society of Actuaries 1983 Individual Mortality Table A with projection and a 5%
effective annual assumed investment return and assuming a Maturity Date in the
year 2000. Gender based mortality tables will be used unless prohibited by law.
The amount of the first payment depends upon the adjusted age of the
Annuitant. The adjusted age is the Annuitant's actual age nearest birthday at
the Maturity Date, adjusted as follows:
<TABLE>
<CAPTION>
Maturity Date Adjusted Age
- ------------- ------------
<S> <C>
Before 2001 Actual Age
2001 - 2010 Actual Age minus 1
2011 - 2020 Actual Age minus 2
2021 - 2030 Actual Age minus 3
2031 - 2040 Actual Age minus 4
</TABLE>
After the year 2040 as determined by Western Reserve.
DETERMINATION OF SUBSEQUENT VARIABLE PAYMENTS. The amount of variable
annuity payments after the first will increase or decrease according to the
Annuity Unit Value which reflects the investment experience of the selected
Sub-Account(s). Each variable annuity payment after the first will be equal to
the number of units attributable to the Contract in each selected Sub-Account
multiplied by the Annuity Unit Value of that Sub-Account on the date the payment
is processed. The number of such units is determined by dividing the first
payment allocated to that Sub-Account by the Annuity Unit Value of that
Sub-Account on the date the first annuity payment is processed.
7
<PAGE>
FINANCIAL STATEMENTS
The financial statements of Western Reserve which are included in this
Statement of Additional Information should be considered only as bearing on the
ability of Western Reserve to meet its obligations under the Contracts. They
should not be considered as bearing on the investment performance of the assets
held in the Series Account.
Financial Statements for Western Reserve for the years ended December 31,
1996, 1995 and 1994 have been prepared on the basis of statutory accounting
principles, rather than generally accepted accounting principles ("GAAP").
INDEX TO FINANCIAL STATEMENTS
WRL SERIES ANNUITY ACCOUNT (C.A.S.E. RESERVE VARIABLE ANNUITY):
Report of Independent Accountants dated January 31, 1997
Statements of assets, liabilities and equity accounts and statements of
operations for the year ended December 31, 1996
Statements of changes in equity accounts for the years ended December 31,
1996 and 1995
Selected per unit data and ratios for the years ended December 31, 1996 and
1995
Notes to financial statements
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO:
Report of Independent Auditors dated February 21, 1997
Statutory-Basis balance sheets at December 31, 1996 and 1995
Statutory-Basis statements of operations for the years ended December 31,
1996, 1995 and 1994
Statutory-Basis statements of changes in capital and surplus for the years
ended December 31, 1996, 1995 and 1994
Statutory-Basis statements of cash flows for the years ended December 31,
1996, 1995 and 1994
Notes to Statutory-Basis financial statements
Statutory-Basis Financial Statement Schedules
8
<PAGE>
WRL SERIES ANNUITY ACCOUNT
C.A.S.E. RESERVE VARIABLE ANNUITY
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Western Reserve Life Assurance Co. of Ohio and
Contract Owners of the WRL Series Annuity Account - C.A.S.E. Reserve Variable
Annuity Contracts.
In our opinion, the accompanying statements of assets, liabilities and equity
accounts and the related statements of operations and of changes in equity
accounts and the selected per unit data and ratios present fairly, in all
material respects, the financial position of each of the Sub-Accounts
constituting the C.A.S.E. Reserve Variable Annuity Contracts of the WRL Series
Annuity Account (a separate account of Western Reserve Life Assurance Co. of
Ohio, hereafter referred to as the "Annuity Account") at December 31, 1996, the
results of each of their operations for the year then ended, and the changes in
each of their equity accounts and the selected per unit data and ratios for the
year then ended and for the period May 1, 1995 (commencement of operations)
through December 31, 1995, in conformity with generally accepted accounting
principles. These financial statements and selected per unit data and ratios
(hereafter referred to as "financial statements") are the responsibility of the
Annuity Account's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
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.
PRICE WATERHOUSE LLP
Kansas City, Missouri
January 31, 1997
9
<PAGE>
WRL SERIES ANNUITY ACCOUNT
C.A.S.E. RESERVE VARIABLE ANNUITY
STATEMENTS OF ASSETS, LIABILITIES AND EQUITY ACCOUNTS
At December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
C.A.S.E. GROWTH C.A.S.E. QUALITY
C.A.S.E. GROWTH & INCOME GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C> <C>
ASSETS:
Investments:
Investment in WRL Series Fund, Inc.:
Shares ..................................... 439,249.001 159,855.479 150,802.243
=============== =============== ==============
Cost ....................................... $ 5,276,732 $ 1,815,854 $ 1,657,943
=============== =============== ==============
Investments, at net asset value ............. $ 5,893,378 $ 2,044,403 $ 1,852,815
Accrued transfers from (to) depositor - net . 0 0 0
--------------- --------------- --------------
Total assets ............................... 5,893,378 2,044,403 1,852,815
--------------- --------------- --------------
LIABILITIES: .................................. 0 0 0
Total net assets ........................... $ 5,893,378 $ 2,044,403 $ 1,852,815
--------------- --------------- --------------
EQUITY ACCOUNTS:
Contract Owners' equity:
Units ...................................... 374,512.007459 102,527.307380 91,681.641862
=============== =============== ==============
Unit value ................................. $ 13.882712 $ 13.403523 $ 13.077310
=============== =============== ==============
Contract Owners' equity .................... $ 5,199,242 $ 1,374,227 $ 1,198,949
--------------- --------------- --------------
Depositor's equity:
Units ...................................... 50,000.000000 50,000.000000 50,000.000000
=============== =============== ==============
Unit value ................................. $ 13.882712 $ 13.403523 $ 13.077310
=============== =============== ==============
Depositor's equity ......................... $ 694,136 $ 670,176 $ 653,866
--------------- --------------- --------------
Total equity ............................... $ 5,893,378 $ 2,044,403 $ 1,852,815
=============== =============== ==============
</TABLE>
WRL SERIES ANNUITY ACCOUNT
C.A.S.E. RESERVE VARIABLE ANNUITY
STATEMENTS OF OPERATIONS
For the year or period ended December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
C.A.S.E. GROWTH C.A.S.E. QUALITY
C.A.S.E. GROWTH & INCOME GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income ...................................... $ 22,133 $ 18,113 $ 13,460
Capital gain distributions ........................... 96,604 82,838 52,944
-------- -------- --------
118,737 100,951 66,404
EXPENSES:
Mortality and expense risk ........................... (53,656) (21,667) (19,744)
-------- -------- --------
Net investment income (loss) ........................ 65,081 79,284 46,660
Net realized and unrealized gain (loss) on
investments:
Net realized gain (loss) from securities
transactions ....................................... 60,637 53,092 32,572
Change in unrealized appreciation (depreciation) .... 564,848 152,362 166,380
-------- -------- --------
Net gain (loss) on investments ..................... 625,485 205,454 198,952
-------- -------- --------
Net increase (decrease) in equity accounts resulting
from operations .................................. $690,566 $284,738 $245,612
======== ======== ========
</TABLE>
The notes to the financial statements are an integral part of this report.
10
<PAGE>
WRL SERIES ANNUITY ACCOUNT
C.A.S.E. RESERVE VARIABLE ANNUITY
STATEMENTS OF CHANGES IN EQUITY ACCOUNTS
For the year or period ended
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
C.A.S.E. GROWTH
C.A.S.E. GROWTH & INCOME
SUB-ACCOUNT SUB-ACCOUNT
December 31 December 31
----------------------- -----------------------
1996 1995(a) 1996 1995(a)
---- ------- ---- -------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ................. $ 65,081 $ 78,129 $ 79,284 $ 13,400
Net gain (loss) on investments ............... 625,485 52,108 205,454 76,373
---------- ---------- ---------- ----------
Net increase (decrease) in equity accounts
resulting from operations .................. 690,566 130,237 284,738 89,773
EQUITY TRANSACTIONS:
Proceeds from units sold (redeemed) .......... 2,791,028 1,948,178 880,018 494,100
---------- ---------- ---------- ----------
Less cost of units redeemed:
Administrative charges ...................... 2,649 0 513 0
Policy loans ................................ 0 0 0 0
Surrender benefits .......................... 163,812 170 203,303 410
Death benefits .............................. 0 0 0 0
---------- ---------- ---------- ----------
166,461 170 203,816 410
---------- ---------- ---------- ----------
Increase (decrease) in equity accounts
from capital unit transactions ............ 2,624,567 1,948,008 676,202 493,690
---------- ---------- ---------- ----------
Net increase (decrease) in equity accounts .. 3,315,133 2,078,245 960,940 583,463
Depositors' equity contribution (redemption) . 0 500,000 0 500,000
EQUITY ACCOUNTS:
Beginning of period .......................... 2,578,245 0 1,083,463 0
---------- ---------- ---------- ----------
End of period ................................ $5,893,378 $2,578,245 $2,044,403 $1,083,463
========== ========== ========== ==========
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
C.A.S.E. QUALITY
GROWTH SUB-ACCOUNT
December 31
----------------------------
1996 1995(a)
---- -------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ....................... $ 46,660 $ 46,556
Net gain (loss) on investments ..................... 198,952 28,750
---------- ----------
Net increase (decrease) in equity accounts resulting
from operations .................................. 245,612 75,306
EQUITY TRANSACTIONS:
Proceeds from units sold (redeemed) ................ 532,594 574,835
---------- ----------
Less cost of units redeemed:
Administrative charges ............................ 691 0
Policy loans ...................................... 0 0
Surrender benefits ................................ 74,671 170
Death benefits .................................... 0 0
---------- ----------
75,362 170
---------- ----------
Increase (decrease) in equity accounts from capital
unit transactions ............................... 457,232 574,665
---------- ----------
Net increase (decrease) in equity accounts ........ 702,844 649,971
Depositors' equity contribution (redemption) ....... 0 500,000
EQUITY ACCOUNTS:
Beginning of period ................................ 1,149,971 0
---------- ----------
End of period ...................................... $1,852,815 $1,149,971
========== ==========
</TABLE>
(a) The inception date of this sub-account was May 1, 1995.
The notes to the financial statements are an integral part of this report.
11
<PAGE>
WRL SERIES ANNUITY ACCOUNT
C.A.S.E RESERVE VARIABLE ANNUITY
SELECTED PER UNIT DATA AND RATIOS*
For the period ended
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
C.A.S.E. C.A.S.E. GROWTH
GROWTH SUB-ACCOUNT & INCOME SUB-ACCOUNT
December 31 December 31
---------------------- -----------------------
1996 1995(c) 1996 1995(c)
---- ------- ---- -------
<S> <C> <C> <C> <C>
Accumulation unit value, beginning of period ................... $11.96 $10.00 $11.38 $10.00
Income from operations:
Net investment income (loss) ................................. 0.20 0.85 0.57 0.22
Net realized and unrealized gain (loss) on investments ....... 1.72 1.11 1.45 1.16
------ ------ ------ ------
Total income (loss) from operations ......................... 1.92 1.96 2.02 1.38
------ ------ ------ ------
Accumulation unit value, end of period ......................... $13.88 $11.96 $13.40 $11.38
====== ====== ====== ======
Total return (a) ............................................... 16.04% 19.64% 17.74% 13.84%
Ratios and supplemental data:
Net assets at end of period (in thousands) .................... $5,893 $2,578 $2,044 $1,083
Ratio of net investment income (loss) to average net assets (b) 1.51% 11.12% 4.57% 3.07%
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
C.A.S.E QUALITY
GROWTH SUB-ACCOUNT
December 31
-------------------------
1996 1995(c)
---- -------
<S> <C> <C>
Accumulation unit value, beginning of period ................... $11.27 $10.00
Income from operations:
Net investment income (loss) ................................. 0.35 0.70
Net realized and unrealized gain (loss) on investments ....... 1.46 0.57
------ ------
Total income (loss) from operations ......................... 1.81 1.27
------ ------
Accumulation unit value, end of period ......................... $13.08 $11.27
====== ======
Total return (a) ............................................... 16.08% 12.66%
Ratios and supplemental data:
Net assets at end of period (in thousands) .................... $1,853 $1,150
Ratio of net investment income (loss) to average net assets (b) 2.95% 9.72%
</TABLE>
* The above table illustrates the change for a unit outstanding computed
using average units outstanding throughout each period.
(a) For periods less than one year the total return is not annualized.
(b) For periods less than one year the ratio of net investment income to
average net assets is annualized.
(c) The inception date of this sub-account was May 1, 1995.
12
<PAGE>
WRL SERIES ANNUITY ACCOUNT
C.A.S.E. RESERVE VARIABLE ANNUITY
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
NOTE 1--ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
The WRL Series Annuity Account (the "Annuity Account") was established as
a variable accumulation deferred annuity separate account of Western Reserve
Life Assurance Co. of Ohio ("WRL") and is registered as a unit investment
trust ("Trust") under the Investment Company Act of 1940, as amended.
The Annuity Account holds assets that support the benefits under flexible
payment variable accumulation deferred annuity contracts (the "Contracts")
issued by WRL, including the C.A.S.E. Reserve Variable Annuity. The Annuity
Account equity transactions are accounted for using the appropriate effective
date at the corresponding accumulation unit value.
The C.A.S.E. Reserve Variable Annuity investment options, referred to as
sub-accounts, are the C.A.S.E. Growth Sub-Account, the C.A.S.E. Growth &
Income Sub-Account, and the C.A.S.E. Quality Growth Sub-Account. Each
sub-account invests in the corresponding portfolio of the WRL Series Fund,
Inc. (the "Fund"), a registered management investment company under the
Investment Company Act of 1940, as amended. The investment manager for these
three portfolios is C.A.S.E. Management, Inc.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
The following significant accounting policies, which are in conformity
with generally accepted accounting principles for unit investment trusts,
have been consistently used in preparation of the Trust's financial
statements.
A. VALUATION OF INVESTMENTS
The investments in the Fund's shares are stated at the closing net asset
value ("NAV") per share as determined by the Fund on December 31, 1996.
Investment transactions are accounted for on the trade date, using the
Fund NAV next determined after receipt of sale or redemption order without
sales charges. Dividend income, and capital gain distributions are
recorded on the ex-dividend date. The cost of investments sold is
determined on a first-in, first-out basis.
B. FEDERAL INCOME TAXES
The operations of the Annuity Account are a part of and are taxed with the
total operations of WRL, which is taxed as a life insurance company under
the Internal Revenue Code. Under current law, the investment income of the
Annuity Account, including realized and unrealized capital gains, is not
taxable to WRL. Accordingly, no provision for Federal income taxes has
been made.
NOTE 2--CHARGES AND DEDUCTIONS
Charges are assessed by WRL in connection with issuance and administration
of the Contracts.
A. CONTRACT CHARGES
No deduction for sales expenses are made from the purchase payments. A
contingent deferred sales charge may, however, be assessed against
contract values when withdrawn or surrendered.
On each anniversary through maturity date, WRL will deduct an annual
contract charge as partial compensation for providing administrative
services under the Contracts.
B. SUB-ACCOUNT CHARGES
A daily charge equal to an annual rate of 1.25% of average daily net
assets is assessed to compensate WRL for assumption of mortality and
expense risks and administrative services in connection with issuance and
administration of the Contracts. This charge (not assessed at the
individual contract level) effectively reduces the value of a unit
outstanding during the year.
NOTE 3--DIVIDENDS AND DISTRIBUTIONS
Dividends of the Portfolios are typically declared and reinvested
semiannually, while capital gain distributions are typically declared and
reinvested annually.
13
<PAGE>
WRL SERIES ANNUITY ACCOUNT
C.A.S.E. RESERVE VARIABLE ANNUITY
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 (CONTINUED)
Dividends and distributions of the Fund are generally paid to and reinvested
by the Annuity Account the next business day after declaration.
NOTE 4--OTHER MATTERS
As of December 31, 1996 the equity accounts include net unrealized
appreciation (depreciation) on investments as follows:
<TABLE>
<CAPTION>
SUB-ACCOUNT
- -----------
<S> <C>
C.A.S.E. Growth $ 616,646
C.A.S.E. Growth & Income 228,549
C.A.S.E. Quality Growth 194,872
</TABLE>
14
<PAGE>
Report of Independent Auditors
The Board of Directors
Western Reserve Life Assurance Co. of Ohio
We have audited the accompanying statutory-basis balance sheets of Western
Reserve Life Assurance Co. of Ohio as of December 31, 1996 and 1995, and the
related statutory-basis statements of operations, changes in capital and
surplus, and cash flows for each of the three years in the period ended December
31, 1996. Our audits also included the statutory-basis financial statement
schedules required by Regulation S-X, Article 7. These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits. We
did not audit the "Separate Account Assets" and "Separate Account Liabilities"
in the balance sheet of the Company. The Separate Account financial statements
were audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the data included for the Separate Account, is
based solely upon the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Insurance Department of the State of Ohio, which practices
differ from generally accepted accounting principles. The variances between such
practices and generally accepted accounting principles are also described in
Note 1. The effects on the financial statements of these variances are not
reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matters described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Western Reserve Life Assurance Co. of Ohio at December 31, 1996 and 1995, or
the results of its operations or its cash flows for each of the three years in
the period ended December 31, 1996.
15
<PAGE>
Also, in our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Western Reserve Life Assurance Co. of Ohio at December
31, 1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996 in conformity with
accounting practices prescribed or permitted by the Insurance Department of the
State of Ohio. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic statutory-basis financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
ERNST & YOUNG LLP
February 21, 1997
16
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
BALANCE SHEETS - STATUTORY BASIS
(DOLLARS IN THOUSANDS)
DECEMBER 31
1996 1995
---------- ----------
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments $ 2,480 $ 4,999
Bonds 359,579 452,474
Common stocks at market (cost:
$302 in 1996 and $473 in 1995) 597 834
Mortgage loans on real estate 6,049 6,181
Home office properties, at cost
less accumulated depreciation
($0 in 1996 and $1,505 in 1995) 7,962 5,121
Policy loans 52,604 37,125
---------- ----------
Total cash and invested assets 429,271 506,734
Premiums deferred and uncollected 1,943 1,787
Accrued investment income 5,940 7,565
Receivable from affiliates 1,165 4,337
Transfers from separate accounts 204,181 --
Other assets 3,962 4,264
Separate account assets 3,527,145 2,419,205
---------- ----------
Total admitted assets $4,173,607 $2,943,892
========== ==========
SEE ACCOMPANYING NOTES.
17
<PAGE>
DECEMBER 31
1996 1995
---------- ----------
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life $ 155,166 $ 72,032
Annuity 332,230 319,353
Policy and contract claim reserves 8,584 6,612
Other policyholders' funds 3,104 2,633
Remittances and items not allocated 9,107 5,136
Federal income taxes payable 1,266 1,417
Asset valuation reserve 5,710 5,590
Interest maintenance reserve 7,451 6,392
Payable to affiliate 20,463 --
Other liabilities 13,082 10,984
Separate account liabilities 3,521,888 2,415,804
---------- ----------
Total liabilities 4,078,051 2,845,953
Commitments and contingencies
Capital and surplus:
Common stock, $1.00 par value, 1,500 shares
authorized, issued and outstanding 1,500 1,500
Paid-in surplus 68,015 68,015
Unassigned surplus 26,041 28,424
---------- ----------
Total capital and surplus 95,556 97,939
---------- ----------
Total liabilities and capital and surplus $4,173,607 $2,943,892
========== ==========
SEE ACCOMPANYING NOTES.
18
<PAGE>
<TABLE>
<CAPTION>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENTS OF OPERATIONS - STATUTORY BASIS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations,
net of reinsurance:
Life $ 293,590 $191,508 $150,991
Annuity 740,125 378,390 449,141
Net investment income 36,067 40,891 40,139
Amortization of interest maintenance reserve 1,335 882 726
Commissions and expense allowances on
reinsurance ceded
11 11 12
Other income 13,398 8,237 6,354
---------- -------- --------
1,084,526 619,919 647,363
Benefits and expenses:
Benefits paid or provided for:
Life 21,256 17,844 15,921
Surrender benefits 286,406 206,250 196,169
Other benefits 23,270 19,530 18,403
Increase (decrease) in aggregate reserves for
policies and contracts:
Life 80,139 (15,132) (11,618)
Annuity 12,877 5,229 (78,590)
Other 422 109 286
---------- -------- --------
424,370 233,830 140,571
Insurance expenses:
Commissions 140,261 82,903 78,168
General insurance expenses 47,406 37,246 33,100
Taxes, licenses and fees 10,848 8,919 5,931
Transfer to separate accounts 452,471 242,427 386,174
Other expenses 60 34 18
---------- -------- --------
651,046 371,529 503,391
---------- -------- --------
1,075,416 605,359 643,962
---------- -------- --------
Gain from operations before federal
income taxes and realized capital
losses on investments 9,110 14,560 3,401
Federal income tax expense 9,297 8,917 3,406
---------- -------- --------
Gain (loss) from operations before
realized capital losses on investments (187) 5,643 (5)
Netrealized capital losses on investments
(net of related federal income taxes
and amounts transferred to interest
maintenance reserve) (811) (1,678) (1,133)
---------- -------- --------
Net income (loss) $ (998) $ 3,965 $ (1,138)
========== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
19
<PAGE>
<TABLE>
<CAPTION>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS - STATUTORY BASIS
(DOLLARS IN THOUSANDS)
TOTAL
COMMON PAID-IN UNASSIGNED CAPITAL AND
STOCK SURPLUS SURPLUS SURPLUS
------ ------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1994 $1,500 $23,015 $24,894 $49,409
Capital contribution -- 45,000 -- 45,000
Net loss for 1994 -- -- (1,138) (1,138)
Net unrealized capital losses -- -- (9) (9)
Decrease in non-admitted assets -- -- 368 368
Decrease in asset valuation reserves
-- -- 4,321 4,321
Decrease in surplus in separate accounts
-- -- (748) (748)
Other adjustments -- -- (2,183) (2,183)
------ ------- ------- -------
Balance at December 31, 1994 1,500 68,015 25,505 95,020
Net income for 1995 -- -- 3,965 3,965
Net unrealized capital losses -- -- (500) (500)
Decrease in non-admitted assets -- -- 903 903
Decrease in asset valuation reserve -- -- 2,901 2,901
Increase in surplus in separate accounts
-- -- 541 541
Change in reserve valuation -- -- (3,496) (3,496)
Other adjustments -- -- (1,395) (1,395)
------ ------- ------- -------
Balance at December 31, 1995 1,500 68,015 28,424 97,939
Net loss for 1996 -- -- (998) (998)
Net unrealized capital gains -- -- 1,294 1,294
Decrease in non-admitted assets -- -- 199 199
Increase in asset valuation reserve -- -- (120) (120)
Increase in surplus in separate accounts
-- -- 237 237
Change in reserve valuation -- -- (2,995) (2,995)
------ ------- ------- -------
Balance at December 31, 1996 $1,500 $68,015 $26,041 $95,556
====== ======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES.
20
<PAGE>
<TABLE>
<CAPTION>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENTS OF CASH FLOWS - STATUTORY BASIS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31
1996 1995 1994
---------- -------- ---------
<S> <C> <C> <C>
SOURCES OF CASH
Premiums and other considerations,
net of reinsurance $1,033,565 $569,934 $ 600,405
Net investment income 38,666 42,359 41,977
Other income 12,983 8,052 6,311
---------- -------- ---------
1,085,214 620,345 648,693
Life claims (20,655) (16,759) (14,660)
Surrender benefits and other
fund withdrawals (286,406) (206,250) (196,169)
Other benefits to policyholders (22,129) (19,041) (18,251)
Commissions, other expenses and taxes (196,329) (128,314) (119,755)
Net transfers to separate accounts (658,326) (242,427) (386,174)
Dividends to policyholders (44) (26) (22)
Federal income taxes (9,449) (7,531) (3,378)
---------- -------- ---------
Net cash used in operations (108,124) (3) (89,716)
Proceeds from investments sold,
matured or repaid:
Bonds and redeemable preferred stock 122,820 108,554 99,241
Common stocks 175 2,108 80,066
Mortgage loans on real estate 132 1,954 132
Real estate 4,304 -- --
Miscellaneous proceeds -- -- (28)
---------- -------- ---------
Total cash from investments 127,431 112,616 179,411
Capital contribution -- -- 45,000
Other sources 31,546 2,830 6,135
---------- -------- ---------
Total sources of cash 50,853 115,443 140,830
APPLICATIONS OF CASH
Cost of investments acquired:
Bonds and redeemable preferred stock 26,826 139,402 47,214
Common stocks 4 589 65,911
Mortgage loans on real estate -- 6 1,004
Real estate 7,837 449 37
Net increase in policy loans 15,479 9,605 4,496
Miscellaneous applications 5 -- --
---------- -------- ---------
Total investments acquired 50,151 150,051 118,662
Other applications, net 3,221 7,115 6,086
---------- -------- ---------
Total applications of cash 53,372 157,166 124,748
---------- -------- ---------
Net change in cash and
short-term investments (2,519) (41,723) 16,082
Cash and short-term investments
at beginning of year 4,999 46,722 30,640
---------- -------- ---------
Cash and short-term investments
at end of year $ 2,480 $ 4,999 $ 46,722
========== ======== =========
</TABLE>
SEE ACCOMPANYING NOTES.
21
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Western Reserve Life Assurance Co. of Ohio ("the Company") is a stock life
insurance company and is a wholly-owned subsidiary of First AUSA Life Insurance
Company which, in turn, is a wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"). AEGON is a wholly-owned subsidiary of AEGON nv, a holding company
organized under the laws of the Netherlands.
NATURE OF BUSINESS
The Company operates predominantly in the variable universal life and variable
annuity areas of the life insurance business. The Company is licensed in 49
states and the District of Columbia. Sales of the Company's products are through
financial planners, independent representatives, financial institutions and
stockbrokers. The majority of the Company's new life insurance written and a
substantial portion of new annuities written is done through one marketing
organization; the Company expects to maintain this relationship for the
foreseeable future.
BASIS OF PRESENTATION
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known, which could impact
the amounts reported and disclosed herein.
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Insurance Department of the
State of Ohio, which practices differ from generally accepted accounting
principles. The more significant of these differences are as follows: (a) bonds
are generally carried at amortized cost rather than segregating the portfolio
into held-to-maturity (carried at amortized cost), available-for-sale (carried
at fair value), and trading (carried at fair value) classifications; (b)
acquisition costs of acquiring new business are expensed as incurred rather than
deferred and amortized over the life of the policies; (c) policy reserves on
traditional life products are based on statutory mortality rates and interest
which may differ from reserves based on reasonable assumptions of expected
mortality, interest, and withdrawals which include a provision for possible
unfavorable deviation from such assumptions; (d) policy reserves on certain
investment products use discounting methodologies utilizing statutory interest
rates rather than full account values; (e) reinsurance amounts are netted
against the corresponding receivable or payable rather than shown as gross
amounts on the balance sheet; (f) deferred income taxes are not provided for the
difference between the financial statement amounts and income tax bases of
assets and liabilities; (g) net realized gains or losses attributed to
22
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
changes in the level of interest rates in the market are deferred and amortized
over the remaining life of the bond or mortgage loan, rather than recognized as
gains or losses in the statement of operations when the sale is completed; (h)
declines in the estimated realizable value of investments are provided for
through the establishment of a formula-determined statutory investment reserve
(carried as a liability) changes to which are charged directly to surplus,
rather than through recognition in the statement of operations for declines in
value, when such declines are judged to be other than temporary; (i) certain
assets designated as "non-admitted assets" have been charged to surplus rather
than being reported as assets; (j) revenues for universal life and investment
products consist of the entire premiums received rather than policy charges for
the cost of insurance, policy administration charges, amortization of policy
initiation fees and surrender charges assessed; and (k) pension expense is
recorded as amounts are paid rather than accrued and expensed during the periods
in which the employers provide service. The effects of these variances have not
been determined by the Company.
The National Association of Insurance Commissioners (NAIC) currently is in the
process of recodifying statutory accounting practices, the result of which is
expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in 1997,
will likely change, to some extent, prescribed statutory accounting practices
and may result in changes to the accounting practices that the Company uses to
prepare its statutory-basis financial statements. The impact of any such changes
on the Company's statutory surplus cannot be determined at this time and could
be material.
Other significant statutory accounting practices are as follows:
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with remaining maturities of one year or less when purchased
to be cash equivalents. This amount included $6,500 of short-term intercompany
notes receivable at December 31, 1995.
INVESTMENTS
Investments in bonds (except those to which the Securities Valuation Office of
the NAIC has ascribed a value), mortgage loans on real estate and short-term
investments are reported at cost adjusted for amortization of premiums and
accrual of discounts. Amortization is computed using methods which result in a
level yield over the expected life of the security. The Company reviews its
prepayment assumptions on mortgage and
23
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
other asset backed securities at regular intervals and adjusts amortization
rates prospectively when such assumptions are changed due to experience and/or
expected future patterns. Investments in preferred stocks in good standing are
reported at cost. Investments in preferred stocks not in good standing are
reported at the lower of cost or market. Common stocks are carried at market and
include shares of mutual funds (money market and other), and the related
unrealized capital gains/(losses) are reported in unassigned surplus without any
adjustment for federal income taxes. Real estate is reported at cost less
allowances for depreciation. Depreciation is computed principally by the
straight-line method. Policy loans are reported at unpaid principal. Other
"admitted assets" are valued, principally at cost, as required or permitted by
Ohio Insurance Laws.
Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for anticipated
losses in the event of default by issuers of certain invested assets. These
amounts are determined using a formula prescribed by the NAIC and are reported
as a liability. The formula for the AVR provides for a corresponding adjustment
for realized gains and losses, net of amounts attributed to changes in the
general level of interest rates. Under a formula prescribed by the NAIC, the
Company defers, in the Interest Maintenance Reserve (IMR), the portion of
realized gains and losses on sales of fixed income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity of the security.
During 1996, 1995 and 1994, net realized capital gains of $2,394, $554 and $436,
respectively, were credited to the IMR rather than being immediately recognized
in the statements of operations. Amortization of these net gains aggregated
$1,335, $882 and $726 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Interest income is recognized on an accrual basis. The Company does not accrue
income on bonds in default, mortgage loans on real estate in default and/or
foreclosure or which are delinquent more than twelve months, or real estate
where rent is in arrears for more than three months. Further, income is not
accrued when collection is uncertain. At December 31, 1996, 1995 and 1994, the
Company excluded investment income due and accrued of $0, $1 and $237,
respectively, with respect to such practices.
AGGREGATE RESERVES FOR POLICIES
Life and annuity reserves are developed by actuarial methods and are determined
based on published tables using statutorily specified interest rates and
valuation methods that will provide, in the aggregate, reserves that are greater
than or equal to the minimum required by the laws of the State of Ohio.
24
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The aggregate policy reserves for life insurance policies are based principally
upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary Mortality and
American Experience Mortality Tables. The reserves are calculated using interest
rates ranging from 2.25 to 5.50 percent and are computed principally on the Net
Level Premium Valuation and the Commissioners' Reserve Valuation Methods.
Reserves for universal life policies are based on account balances adjusted for
the Commissioners' Reserve Valuation Method.
Deferred annuity reserves are calculated according to the Commissioners' Annuity
Reserve Valuation Method including excess interest reserves to cover situations
where the future interest guarantees plus the decrease in surrender charges are
in excess of the maximum valuation rates of interest. Reserves for immediate
annuities and supplementary contracts with and without life contingencies are
equal to the present value of future payments assuming interest rates ranging
from 5.75 to 9.25 percent and mortality rates, where appropriate, from a variety
of tables.
POLICY AND CONTRACT CLAIM RESERVES
Claim reserves represent the estimated accrued liability for claims reported to
the Company and claims incurred but not yet reported through the statement date.
These reserves are estimated using either individual case-basis valuations or
statistical analysis techniques. Because estimates are subject to the effects of
trends in claim severity and frequency, the estimates are continually reviewed
and adjusted as necessary as experience develops or new information becomes
available.
SEPARATE ACCOUNTS
Assets held in trust for purchases of variable universal life and variable
annuity contracts and the Company's corresponding obligation to the contract
owners are shown separately in the balance sheets. The assets in the separate
accounts are valued at market. Income and gains and losses with respect to the
assets in the separate accounts accrue to the benefit of the policyholders. The
Company received variable contract premiums of $997,513, $466,822 and $534,372
in 1996, 1995 and 1994, respectively. All variable account contracts are subject
to discretionary withdrawal by the policyholder at the market value of the
underlying assets less the current surrender charge. Separate account
contractholders have no claim against the assets of the general account.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 presentation.
25
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statutory-basis
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparisons to independent markets and, in many
cases, could not be realized in immediate settlement of the instrument.
Statement of Financial Accounting Standards No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements
and allows companies to forego the disclosures when those estimates can only be
made at excessive cost. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the
statutory-basis balance sheet for these instruments approximate their fair
values.
INVESTMENT SECURITIES: Fair values for fixed maturity securities (including
redeemable preferred stocks) are based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair values are
estimated using values obtained from independent pricing services or (in the
case of private placements) are estimated by discounting expected future cash
flows using a current market rate applicable to the yield, credit quality,
and maturity of the investments. The fair values for equity securities are
based on quoted market prices.
MORTGAGE LOANS AND POLICY LOANS: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans are assumed to equal their carrying
value.
INVESTMENT CONTRACTS: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash flow
calculations, based on interest rates currently being offered for similar
contracts with maturities consistent with those remaining for the contracts
being valued.
26
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The following sets forth a comparison of the fair values and carrying values of
the Company's financial instruments subject to the provisions of Statement of
Financial Accounting Standards No. 107:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-------------------------- ---------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds $ 359,579 $ 372,319 $ 452,474 $ 479,656
Common stocks 597 597 834 834
Mortgage loans on real estate 6,049 6,134 6,181 6,536
Policy loans 52,604 52,604 37,125 37,125
Cash and short-term investments 2,480 2,480 4,999 4,999
Separate account assets 3,527,145 3,527,145 2,419,205 2,419,205
LIABILITIES
Investment contract liabilities 321,293 314,748 309,556 279,347
Separate account annuities 2,692,614 2,647,266 1,930,590 1,930,590
</TABLE>
3. INVESTMENTS
The carrying value and estimated fair value of investments in debt securities
are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Bonds:
United States Government and
agencies $ 11,422 $ 13 $ 292 $ 11,143
State, municipal and other
government 5,504 274 -- 5,778
Public utilities 14,808 848 80 15,576
Industrial and miscellaneous 173,097 8,889 910 181,076
Mortgage-backed securities 154,748 4,617 619 158,746
-------- ------- ------ --------
Total bonds $359,579 $14,641 $1,901 $372,319
======== ======= ====== ========
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS (CONTINUED)
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Bonds:
United States Government and
agencies $ 11,611 $ 64 $129 $ 11,546
State, municipal and other
government
Public utilities 15,079 940 - 16,019
Industrial and miscellaneous 219,764 17,444 550 236,658
Mortgage-backed securities 189,877 8,228 240 197,865
-------- ------- ---- --------
Total bonds $452,474 $28,101 $919 $479,656
======== ======= ==== ========
</TABLE>
The carrying value and fair value of bonds at December 31, 1996 by contractual
maturity are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without penalties.
ESTIMATED
CARRYING FAIR
VALUE VALUE
-------- ---------
Due in one year or less $ 25,420 $ 25,667
Due one through five years 91,070 94,377
Due five through ten years 53,798 57,060
Due after ten years 34,543 36,468
-------- --------
204,831 213,572
Mortgage and other asset backed securities 154,748 158,747
-------- --------
$359,579 $372,319
========= ========
28
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
. INVESTMENTS (CONTINUED)
A detail of net investment income is presented below:
YEAR ENDED DECEMBER 31
1996 1995 1994
------- ------- -------
Interest on bonds $33,969 $38,624 $37,495
Dividends on equity investments - 30 700
Interest on mortgage loans 559 573 616
Rental income on real estate 919 1,014 1,014
Interest on policy loans 3,339 2,353 1,830
Other investment income 9 328 611
------- ------- -------
Gross investment income 38,795 42,922 42,266
Investment expenses (2,728) (2,031) (2,127)
------- ------- --------
Net investment income $36,067 $40,891 $40,139
======= ======== =======
Proceeds from sales and maturities of debt securities and related gross realized
gains and losses were as follows:
YEAR ENDED DECEMBER 31
1996 1995 1994
------- -------- -------
Proceeds $122,820 $108,554 $99,241
======= ======== =======
Gross realized gains $ 2,984 $ 1,631 $ 2,019
Gross realized losses 791 1,346 1,362
------- -------- -------
Net realized gains $ 2,193 $ 285 $ 657
======= ======== =======
At December 31, 1996, bonds with an aggregate carrying value of $5,409 were on
deposit with certain state regulatory authorities or were restrictively held in
bank custodial accounts for benefit of such state regulatory authorities, as
required by statute.
29
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS (CONTINUED)
Realized investment gains (losses) and changes in unrealized gains (losses) for
investments are summarized below:
REALIZED
--------------------------------
YEAR ENDED DECEMBER 31
1996 1995 1994
------- ------- -------
Debt securities $ 2,193 $ 285 $ 657
Equity securities -- -- (1,579)
Mortgage loans -- (1,409) --
Real estate (606) -- --
Other invested assets (4) -- --
------- ------- -------
1,583 (1,124) (922)
Tax effect -- -- 225
Transfer to interest maintenance
reserve (2,394) (554) (436)
------- ------- -------
Net realized losses $ (811) $(1,678) $(1,133)
======= ======= =======
UNREALIZED
---------------------------------
YEAR ENDED DECEMBER 31
1996 1995 1994
-------- -------- --------
Debt securities $(14,442) $ 36,399 $ 43,354
Common stock (66) (236) 1,009
-------- -------- --------
Change in unrealized appreciation
(depreciation) $(14,508) $ 36,163 $(42,345)
======== ======== ========
Gross unrealized gains (losses) on common stocks were as follows:
UNREALIZED
------------------------------
YEAR ENDED DECEMBER 31
1996 1995 1994
---- ---- ----
Unrealized gains $295 $361 $597
Unrealized losses -- -- --
---- ---- ----
Net unrealized gains $295 $361 $597
==== ==== ====
The Company issued no mortgage loans during 1996. The maximum percentage of any
one mortgage loan to the value of the underlying real estate at origination was
73%. The Company requires all mortgagees to carry fire insurance equal to the
value of the underlying property.
30
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS (CONTINUED)
During 1996, 1995 and 1994, no mortgage loans were foreclosed and transferred to
real estate. During 1994, a mortgage loan loss reserve of $1,033 was
established. This reserve was released in 1995 coincident with the loss
recognition of $1,409 on a loan payoff.
At December 31, 1996, the Company had no investments (excluding U. S. Government
guaranteed or insured issues) which individually represented more than ten
percent of capital and surplus and the asset valuation reserve.
4. REINSURANCE
The Company reinsures portions of certain insurance policies which exceed its
established limits, thereby providing a greater diversification of risk and
minimizing exposure on larger risks. The Company remains contingently liable
with respect to any insurance ceded, and this would become an actual liability
in the event that the assuming insurance company became unable to meet its
obligations under the reinsurance treaty.
1996 1995 1994
----------- ----------- -----------
Direct premiums $ 1,034,757 $ 570,413 $ 600,608
Reinsurance assumed 2,063 1,569 1,232
Reinsurance ceded (3,105) (2,084) (1,708)
----------- ----------- -----------
Net premiums earned $ 1,033,715 $ 569,898 $ 600,132
=========== =========== ===========
The Company received reinsurance recoveries in the amount of $2,156, $512 and
$1,146 during 1996, 1995 and 1994, respectively. At December 31, 1996 and 1995,
estimated amounts recoverable from reinsurers that have been deducted from
policy and contract claim reserves totaled $974 and $601, respectively. The
aggregate reserves for policies and contracts were reduced for reserve credits
for reinsurance ceded at December 31, 1996 and 1995 of $1,140 and $848,
respectively.
31
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. INCOME TAXES
The Company files a separate federal income tax return.
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to gain from operations before taxes and
realized capital gains (losses) for the following reasons:
1996 1995 1994
------- ------- -------
Computed tax at federal statutory rate (35%) $ 3,189 $ 5,096 $ 1,190
Deferred acquisition costs - tax basis 7,172 4,241 4,043
Tax reserve valuation (696) (34) (1,353)
Excess tax depreciation (65) (49) (258)
Amortization of IMR (467) (309) (254)
Other, net 164 (28) 38
------- ------- -------
Federal income tax expense $ 9,297 $ 8,917 $ 3,406
======= ======= =======
Prior to 1984, as provided for under the Life Insurance Company Tax Act of 1959,
a portion of statutory income was not subject to current taxation, but was
accumulated for income tax purposes in a memorandum account referred to as the
policyholders' surplus account. No federal income taxes have been provided for
in the financial statements on income deferred in the policyholders' surplus
account ($293 at December 31, 1996). To the extent dividends are paid from the
amount accumulated in the policyholders' surplus account, net earnings would be
reduced by the amount of tax required to be paid. Should the entire amount in
the policyholders' surplus account become taxable, the tax thereon computed at
current rates would amount to approximately $103.
In 1995, the Company reached a final settlement with the Internal Revenue
Service for 1987 through 1993 resulting in taxes of $1,275 and interest of $120
(net of $65 tax effect). The assessment was charged to surplus as a prior period
adjustment. An examination is currently underway for years 1994 through 1995.
During 1994, the Company settled tax years 1980 through 1986 with the Internal
Revenue Service, which resulted in a charge to surplus of $1.8 million as a
prior period adjustment.
At December 31, 1996, the Company had capital loss carryforwards of
approximately $11,101 which expire through 2001.
32
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. POLICY AND CONTRACT ATTRIBUTES
Participating life insurance policies are issued by the Company which entitle
policyholders to a share in the earnings of the participating policies, provided
that a dividend distribution, which is determined annually based on mortality
and persistency experience of the participating policies, is authorized by the
Company. Participating insurance constituted approximately .04% and 7.7% of life
insurance in force at December 31, 1996 and 1995, respectively.
A portion of the Company's policy reserves and other policyholders' funds relate
to liabilities established on a variety of the Company's products, primarily
separate accounts, that are not subject to significant mortality or morbidity
risk; however, there may be certain restrictions placed upon the amount of funds
that can be withdrawn without penalty. The amount of reserves on these products,
by withdrawal characteristics are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------------------- ------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal with
market value adjustment $ 14,881 1% $ 13,422 1%
Subject to discretionary withdrawal at
book value less surrender charge 63,619 2 60,970 3
Subject to discretionary withdrawal at
market value 2,692,614 89 1,930,590 85
Subject to discretionary withdrawal at
book value (minimal or no charges or
adjustments) 239,204 7 227,549 10
Not subject to discretionary withdrawal
provision 17,603 1 20,034 1
----------- -------- ----------- --------
3,027,921 100% 2,252,565 100%
======== ========
Less reinsurance ceded - -
---------- ----------
Total policy reserves on annuities and
deposit fund liabilities $3,027,921 $2,252,565
========== ==========
</TABLE>
33
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
A reconciliation of the amounts transferred to and from the separate accounts is
presented below:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Transfers as reported in the summary of
operations of the separate accounts statement:
Transfers to separate accounts $ 997,513 $ 466,882 $ 534,372
Transfers from separate accounts 339,523 224,416 148,582
--------- --------- ---------
Net transfers to separate accounts 657,990 242,466 385,790
Reconciling adjustments - change in accruals for
investment management, administration fees
and contract guarantees (205,519) (39) 384
========= ========= =========
Transfers as reported in the summary of
operations of the life, accident and health
annual statement $ 452,471 $ 242,427 $ 386,174
========= ========= =========
</TABLE>
Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next anniversary
date. At December 31, 1996 and 1995, these assets (which are reported as
premiums deferred and uncollected) and the amounts of the related gross premiums
and loadings, are as follows:
GROSS LOADING NET
------- ------- -------
DECEMBER 31, 1996
Ordinary direct first year business $ 40 $ 9 $ 31
Ordinary direct renewal business 1,431 225 1,206
Group life direct business 622 -- 622
Annuity renewal business 94 10 84
------- ------- -------
$ 2,187 $ 244 $ 1,943
======= ======= =======
DECEMBER 31, 1995
Ordinary direct first year business $ 47 $ 17 $ 30
Ordinary direct renewal business 1,707 229 1,478
Group life direct business 379 -- 379
Reinsurance ceded (100) -- (100)
------- ------- -------
$ 2,033 $ 246 $ 1,787
======= ======= =======
34
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
At December 31, 1996 and 1995, the Company had insurance in force aggregating
$1,904 and $2,374, respectively, in which the gross premiums are less than the
net premiums required by the standard valuation standards established by the
Insurance Department of the State of Ohio. The Company established policy
reserves of $27 and $32 to cover these deficiencies at December 31, 1996 and
1995, respectively.
In 1994, the NAIC enacted a guideline to clarify reserving methodologies for
contracts that require immediate payment of claims upon proof of death of the
insured. Companies were allowed to grade the effects of the change in reserving
methodologies over five years. A direct charge to surplus of $2,995 and $3,496
was made for the years ended December 31, 1996 and 1995, respectively, related
to the change in reserve methodology.
7. DIVIDEND RESTRICTIONS
Generally, an insurance company's ability to pay dividends is limited to the
amount that their net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements. However,
payment of such amounts as dividends may be subject to approval by regulatory
authorities.
8. RETIREMENT AND COMPENSATION PLANS
The Company's employees participate in a qualified benefit plan sponsored by
AEGON. The Company has no legal obligation for the plan. The Company recognizes
pension expense equal to its allocation from AEGON. The pension expense is
allocated among the participating companies based on the FASB Statement No. 87
expense as a percent of salaries. The benefits are based on years of service and
the employee's compensation during the highest five consecutive years of
employment. Pension expense aggregated $581, $505 and $397 for the years ended
December 31, 1996, 1995 and 1994, respectively. The plan is subject to the
reporting and disclosure requirements of the Employee Retirement and Income
Security Act of 1974.
The Company's employees also participate in a contributory defined contribution
plan sponsored by AEGON which is qualified under Section 401(k) of the Internal
Revenue Service Code. Employees of the Company who customarily work at least
1,000 hours during each calendar year and meet the other eligibility
requirements, are participants of the plan. Participants may elect to contribute
up to fifteen percent of their salary to the plan. The Company will match an
amount up to three percent of the participant's salary. Participants may direct
all of their contributions and plan balances to be invested in a variety of
investment options. The plan is subject to the reporting and disclosure
requirements of the Employee Retirement and Income Security Act of 1974. Pension
expense related to this plan was $184, $305 and $250 for the years ended
December 31, 1996, 1995 and 1994, respectively.
35
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
8. RETIREMENT AND COMPENSATION PLANS (CONTINUED)
AEGON sponsors supplemental retirement plans to provide the Company's senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory and benefits are based on years of service and the employee's
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Code. In addition, AEGON has established incentive deferred compensation
plans for certain key employees of the Company. AEGON also sponsors an employee
stock option plan for individuals employed at least three years and a stock
purchase plan for its producers, with the participating affiliated companies
establishing their own eligibility criteria, producer contribution limits and
company matching formula. These plans have been accrued or funded as deemed
appropriate by management of AEGON and the Company.
In addition to pension benefits, the Company participates in plans sponsored by
AEGON that provide postretirement medical, dental and life insurance benefits to
employees meeting certain eligibility requirements. Portions of the medical and
dental plans are contributory. The expenses of the postretirement plans
calculated on the pay-as-you-go basis are charged to affiliates in accordance
with an intercompany cost sharing arrangement. The Company expensed $98, $86 and
$70 for the years ended December 31, 1996, 1995 and 1994, respectively.
9. RELATED PARTY TRANSACTIONS
The Company shares certain officers, employees and general expenses with
affiliated companies.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1996, 1995
and 1994, the Company paid $10,038, $8,825 and $7,497, respectively, for such
services, which approximates their costs to the affiliates. The Company provides
office space, marketing and administrative services to certain affiliates.
During 1996, 1995 and 1994, the Company received $3,271, $4,545 and $3,261,
respectively, for such services, which approximates their cost. The Company had
a net receivable (payable) with affiliates of $(19,298) and $4,337 at December
31, 1996 and 1995, respectively.
Payable to affiliates and intercompany borrowings bear interest at the
thirty-day commercial paper rate of 5.48% at December 31, 1996. During 1996,
1995 and 1994, the Company paid (received) net interest of $138, $(294) and $49,
respectively, to affiliates.
36
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company received capital contributions of $45,000 from its immediate parent,
First AUSA Life Insurance Company, in 1994.
At December 31, 1995, the Company has a $6,500 short-term note receivable from
an affiliate. Interest on this note accrues at 5.82%.
10. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business. Although
such litigation sometimes includes substantial demands for compensatory and
punitive damages in addition to contract liability, it is management's opinion,
after consultation with counsel and a review of available facts, that damages
arising from such demands will not be material to the Company's financial
position.
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the event of insolvency of
other insurance companies. Assessments are charged to operations when received
by the Company except where right of offset against other taxes paid is allowed
by law; amounts available for future offsets are recorded as an asset on the
Company's balance sheet. The future obligation has been based on the most recent
information available from the National Organization of Life and Health
Insurance Guaranty Association. Potential future obligations for unknown
insolvencies are not determinable by the Company. The Company has established a
reserve of $4,344 and $4,445 and an offsetting premium tax benefit of $1,218 and
$1,319 at December 31, 1996 and 1995, respectively, for its estimated share of
future guaranty fund assessments related to several major insurer insolvencies.
The guaranty fund expense was $212, $1,950 and $618 at December 31, 1996, 1995
and 1994, respectively.
37
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
SUMMARY OF INVESTMENTS OTHER THAN
INVESTMENTS IN RELATED PARTIES
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
SCHEDULE I
AMOUNT AT
WHICH SHOWN
MARKET IN THE
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET
------------------- --------- -------- -------------
FIXED MATURITIES
Bonds:
United States Government and government
agencies and authorities $ 91,807 $ 93,675 $ 91,581
State, municipalities and political
subdivisions 1,498 1,533 1,497
Foreign governments 4,006 4,245 4,006
Public utilities 14,852 15,576 14,808
All other corporate bonds 249,093 257,290 247,687
-------- -------- --------
Total fixed maturities 361,256 372,319 359,579
EQUITY SECURITIES
Common stocks:
Industrial, miscellaneous and all other 302 597 597
-------- -------- --------
Total equity securities 302 597 597
Mortgage loans on real estate 6,049 6,049
Real estate 7,962 7,962
Policy loans 52,604 52,604
Cash and short-term investments 2,480 2,480
-------- --------
Total investments $430,653 $429,271
======== ========
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments.
38
<PAGE>
<TABLE>
<CAPTION>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)
SCHEDULE III
FUTURE POLICY POLICY AND NET BENEFITS OTHER
BENEFITS AND CONTRACT PREMIUM INVESTMENT AND CLAIMS OPERATING
EXPENSES LIABILITIES REVENUE INCOME* EXPENSES EXPENSES*
------------- ----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1996
Individual life $145,964 $7,017 $ 289,375 $ 8,228 $ 47,051 $124,181
Group life and 9,202 713 4,215 3,940 2,529 2,818
health
Annuity 332,230 854 740,125 23,899 281,352 71,576
----------- ------ ---------- ------- -------- --------
$487,396 $8,584 $1,033,715 $36,067 $330,932 $198,575
=========== ====== ========== ======= ======== ========
YEAR ENDED DECEMBER 31,
1995
Individual life $ 64,128 $5,811 $ 188,143 $ 9,470 $ 36,032 $ 83,709
Group life 7,904 701 3,365 1,054 2,217 946
Annuity 319,353 100 378,390 30,367 205,375 44,447
----------- ------ ---------- -------- -------- --------
$391,385 $6,612 $ 569,898 $40,891 $243,624 $129,102
=========== ======= ========== ======= ======== ========
YEAR ENDED DECEMBER 31,
1994
Individual life $ 76,345 $4,501 $ 147,282 $10,146 $ 29,254 $ 71,825
Group life 7,323 481 3,709 372 1,754 1,329
Annuity 314,124 137 449,141 29,621 199,485 44,063
----------- ------ ---------- ------- -------- --------
$397,792 $5,119 $ 600,132 $40,139 $230,493 $117,217
=========== ======= ========== ======= ======== ========
</TABLE>
* Allocations of net investment income and other operating expenses are based
on a number of assumptions and estimates, and the results would change if
different methods were applied.
39
<PAGE>
<TABLE>
<CAPTION>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
REINSURANCE
(DOLLARS IN THOUSANDS)
SCHEDULE IV
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Life insurance in force $28,168,880 $ 4,463,986 $ 2,210,601 $25,915,495 8.5%
=========== =========== =========== =========== ==========
Premiums:
Individual life $ 292,239 $ 2,863 $ -- $ 289,376 0.0%
Group life and health 2,393 242 2,063 4,214 49.0
Annuity 740,125 -- -- 740,125 0.0
----------- ----------- ----------- ----------- ----------
$ 1,034,757 $ 3,105 $ 2,063 $ 1,033,715 0.2%
=========== =========== =========== =========== ==========
YEAR ENDED DECEMBER 31, 1995
Life insurance in force $19,438,203 $ 1,365,119 $ 1,619,378 $19,692,462 8.2%
=========== =========== =========== =========== ==========
Premiums:
Individual life $ 189,870 $ 1,727 $ -- $ 188,143 0.0%
Group life 2,153 357 1,569 3,365 46.6
Annuity 378,390 -- -- 378,390 0.0
----------- ----------- ----------- ----------- ----------
$ 570,413 $ 2,084 $ 1,569 $ 569,898 0.2%
=========== =========== =========== =========== ==========
YEAR ENDED DECEMBER 31, 1994
Life insurance in force $14,321,386 $ 1,090,845 $ 1,271,402 $14,501,943 8.8%
=========== =========== =========== =========== ==========
Premiums:
Individual life $ 148,766 $ 1,484 $ -- $ 147,282 0.0%
Group life 2,701 224 1,232 3,709 33.0
Annuity 449,141 -- -- 449,141 0.0
----------- ----------- ----------- ----------- ----------
$ 600,608 $ 1,708 $ 1,232 $ 600,132 0.4%
=========== =========== =========== =========== ==========
</TABLE>
40
<PAGE>
WRL Series Annuity Account
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The financial statements for the WRL Series Annuity Account and
for Western Reserve Life Assurance Co. of Ohio ("Western
Reserve") are included in Part B.
(b) Exhibits
(1) Copy of resolution of the Board of Directors of Western
Reserve establishing the Series Account. 1/
(2) Not Applicable.
(3) Distribution of Contracts
(a) Form of Master Service and Distribution Compliance
Agreement. 4/
(b) Form of Broker/Dealer Supervisory and Service
Agreement. 2/
(c) Form of Broker/Dealer Supervisory and Service
Agreement. 6/
(4) (a) Specimen Flexible Payment Variable Accumulation
Deferred Annuity Contract. 5/
(b) Contract Loan Endorsements. 7/
(c) (i) Other Endorsements. 7/
(ii) Form of Other Endorsements. 7/
(d) Tax Sheltered Annuity Endorsements. 8/
(e) Endorsement (Form END00117-04/95). 8/
(5) Form of Application for Flexible Payment Variable
Accumulation Deferred Annuity Contract. 5/
(6) (a) Copy of Second Amended Articles of Incorporation
of Western Reserve. 3/
(b) Copy of Amended Code of Regulations of Western
Reserve. 4/
(7) Not Applicable.
(8) Not Applicable.
(9) Opinion and Consent of William H. Geiger, Esq. as to
Legality of Securities Being Registered. 6/
(10) (a) Written Consent of Sutherland, Asbill & Brennan,
L.L.P.
(b) Written Consent of Ernst & Young LLP.
(c) Written Consent of Price Waterhouse LLP.
(11) Not Applicable.
C-1
<PAGE>
(12) Not Applicable.
(13) Schedules for Computation of Performance Quotations. 7/
(14) Not Applicable.
(15) (a) Powers of Attorney. 8/
(b) Power of Attorney - James R. Walker. 9/
- -------------------------------------
1/ This exhibit was previously filed on Form N-4 dated October 11, 1988
(File No. 33-24856) and is incorporated herein by reference.
2/ This exhibit was previously filed on Pre-Effective Amendment No. 1 to
the Form S-6 Registration Statement dated December 19, 1989 (File No.
33-31140) and is incorporated herein by reference.
3/ This exhibit was previously filed on Post-Effective Amendment No. 1 to
the Form N-4 Registration Statement dated May 1, 1989 (File No.
33-24856) and is incorporated herein by reference.
4/ This exhibit was previously filed on Post-Effective Amendment No. 3 to
the Form N-4 Registration Statement dated March 1, 1991 (File No.
33-24856) and is incorporated herein by reference.
5/ This exhibit was previously filed on the Form N-4 Registration
Statement dated July 10, 1992 (File No. 33-49556) and is incorporated
herein by reference.
6/ This exhibit was previously filed on Pre-Effective Amendment No. 1 to
the Form N-4 Registration Statement dated October 2, 1992 (File No.
33-49556) and is incorporated herein by reference.
7/ This exhibit was previously filed on Post-Effective Amendment No. 1 to
the Form N-4 Registration Statement dated April 28, 1993 (File No.
33-49556) and is incorporated herein by reference.
8/ This exhibit was previously filed on Post-Effective Amendment No. 4 to
the Form N-4 Registration Statement dated April 25, 1995 (File No.
33-49556) and is incorporated herein by reference.
9/ This exhibit was previously filed on Post-Effective Amendment No. 7 to
the Form N-4 Registration Statement dated December 23, 1996 (File No.
33-49556) and is incorporated herein by reference.
Item 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
PRINCIPAL POSITION AND OFFICES
NAME BUSINESS ADDRESS WITH DEPOSITOR
---- ---------------- --------------
John R. Kenney (1) Chairman of the Board,
Chief Executive Officer
and President
Patrick S. Baird 4333 Edgewood Rd. N.E. Director
Cedar Rapids, Iowa 52499
James R. Walker 3320 Office Park Drive Director
Dayton, Ohio 45439
- -------------------------
(1) 201 Highland Avenue, Largo, Florida 33770
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PRINCIPAL POSITION AND OFFICES
NAME BUSINESS ADDRESS WITH DEPOSITOR
---- ---------------- --------------
Lyman H. Treadway 30195 Chagrin Boulevard Director
Suite 210N
Cleveland, Ohio 44124
Jack E. Zimmerman 507 St. Michel Circle Director
Kettering, Ohio 45429
Alan M. Yaeger (1) Executive Vice
President, Actuary and
Chief Financial Officer
G. John Hurley (1) Executive Vice
President
William H. Geiger (1) Senior Vice President,
Secretary and
General Counsel
Allan J. Hamilton (1) Vice President, Treasurer
and Controller
- -------------------------
(1) 201 Highland Avenue, Largo, Florida 33770
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT.
VERENGING AEGON Netherlands Membership Association
AEGON n.v. Netherlands Corporation (53.63%)
AEGON Netherland N.V. Netherlands Corporation (100%)
AEGON Nevark Holding B.V. Netherlands Corporation (100%)
Groninger Financieringen B.V. Netherlands Corporation (100%)
AEGON International N.V. Netherlands Corporation (100%)
Voting Trust - (Trustees - K.J. Storm, Donald J. Shepard, H.B. Van Wijk,
Dennis Hersch)
AEGON U.S. Holding Corporation (DE) (100%)
Short Hills Management Company (NJ) (100%)
CORPA Reinsurance Company (NY) (100%)
AEGON Management Company (IN) (100%)
RCC North America Inc. (DE) (100%)
AEGON USA, Inc. - Holding Co. (IA) (100%)
First AUSA Life Insurance Company - Insurance Holding Co. (MD) (100%)
AUSA Life Insurance Company, Inc. - Insurance (NY) (100%)
Life Investors Insurance Company of America - Insurance (IA) (100%)
Bankers United Life Assurance Company - Insurance (IA) (100%)
PFL Life Insurance Company - Insurance (IA) (100%)
Southwest Equity Life Insurance Company - Insurance (AZ) (100% Voting
Common)
Iowa Fidelity Life Insurance Company - Insurance (AZ) (100% Voting
Common)
Western Reserve Life Assurance Co. of Ohio - Insurance (OH) (100%)
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WRL Series Fund, Inc. - Mutual fund (MD)
Monumental Life Insurance Company - Insurance (MD) (100%)
Monumental General Casualty Company - Insurance (MD) (100%)
United Financial Services, Inc. - General Agency (MD) (100%)
Bankers Financial Life Insurance Company - Insurance (AZ)
The Whitestone Corporation - Insurance agency (MD) (100%)
Cadet Holding Corp. - Holding company (IA) (100%)
AUSA Holding Company - Holding company (MD) (100%)
Monumental General Insurance Group, Inc. - Holding company (MD) (100%)
Monumental General Administrators, Inc. - Provides management
services to unaffiliated third party administrator (MD) (100%)
Executive Management and Consultant Services, Inc. - Provides
actuarial consulting services (MD) (100%)
Monumental General Mass Marketing, Inc. - Marketing arm for sale of
mass marketed insurance coverages (MD) (100%)
AUSA Financial Markets, Inc. - Marketing (IA) (100%)
Universal Benefits Corporation - Third party administrator (IA) (100%)
Investors Warranty of America, Inc. - Provider of automobile extended
maintenance contracts (IA) (100%)
Massachusetts Fidelity Trust Company - Trust company (IA) (100%)
Money Services, Inc. - Provides financial counseling for employees and
agents of affiliated companies (DE) (100%)
Zahorik Company, Inc. - Broker-dealer (CA) (100%)
ZCI, Inc. (AL) (100%)
Intersecurities, Inc. - Broker-dealer (DE) (100%)
ISI Insurance Agency Inc. & its Subsidiaries - Insurance agency
(CA) (100%)
Associated Mariner Financial Group, Inc. - Holding company
management services (MI) (100%)
Mariner Financial Services, Inc. - Broker/Dealer (MI) (100%)
Mariner/ISI Planning Corporation - Financial planning (MI)
(100%)
Associated Mariner Agency, Inc. and its Subsidiaries- Insurance
agency (MI) (100%)
Mariner Mortgage Corporation - Mortgage origination (MI) (100%)
Idex Investor Services, Inc. - Shareholder services (FL) (100%)
Idex Management, Inc. - Investment advisor (DE) (50%)
Idex Series Fund - Mutual fund (MA)
Transunion Casualty Company - Insurance (IA) (100%)
AUSA Institutional Marketing Group, Inc. - Insurance agency (MN) (100%)
Colorado Annuity Agency, Inc. - Insurance agency (MN) (100%)
Diversified Investment Advisors, Inc. - Registered investment advisor
(DE) (100%)
Diversified Investors Securities Corporation - Broker-dealer (DE)
(100%)
AEGON USA Securities, Inc. - Broker-dealer (IA) (100%)
AEGON USA Managed Portfolios, Inc. - Mutual fund (MD)
American Forum for Fiscal Fitness, Inc. - Marketing (IA) (100%)
Supplemental Insurance Division, Inc. - Insurance (TN) (100%)
Creditor Resources, Inc. - Credit insurance (MI) (100%)
CRC Creditor Resources Canadian Dealer Network Inc. - Insurance
agency (Canada)
AEGON USA Investment Management, Inc. - Investment advisor (IA) (100%)
AEGON USA Realty Advisors, Inc. - Provides real estate administrative
and real estate investment services (IA) (100%)
QUANTRA Corporation - (DE) (100%)
QUANTRA Software Corporation - (DE) (100%)
Landauer Realty Advisors, Inc. - Real estate counseling (IA)
(100%)
Landauer Associates, Inc. - Real estate counseling (DE) (100%)
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AEGON USA Realty Management, Inc. - Real estate management (IA) (100%)
Realty Information Systems, Inc. - Information systems for real
estate investment management (IA) (100%)
USP Real Estate Investment Trust - Real estate investment trust
(IA)
Cedar Income Fund Ltd. - Real estate investment trust (IA)
Item 27. NUMBER OF CONTRACTOWNERS.
As of March 31, 1997, the WRL Freedom Attainer Variable Annuity had
6,076 non-qualified contracts and 10,145 qualified contracts In Force.
As of March 31, 1997, the C.A.S.E. Reserve Variable Annuity had 84
non-qualified contracts and 156 qualified contracts In Force.
Item 28. INDEMNIFICATION
Provisions exist under the Ohio General Corporation Law, the Second
Amended Articles of Incorporation of Western Reserve and the Amended
Code of Regulations of Western Reserve whereby Western Reserve may
indemnify certain persons against certain payments incurred by such
persons. The following excerpts contain the substance of these
provisions.
OHIO GENERAL CORPORATION LAW
SECTION 1701.13 AUTHORITY OF CORPORATION.
(E)(1) A corporation may indemnify or agree to indemnify any person who
was or is a party or is threatened to be made a party, to any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, other than an action by or in the right of the
corporation, by reason of the fact that he is or was a director, officer,
employee, or agent of the corporation, or is or was serving at the request of
the corporation as a director, trustee, officer, employee, or agent of another
corporation (including a subsidiary of this corporation), domestic or foreign,
nonprofit or for profit, partnership, joint venture, trust, or other enterprise,
against expenses, including attorneys' fees, judgments, fines, and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit, or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit, or proceeding by judgment, order, settlement, conviction, or upon
a plea of nolo contendre or its equivalent, shall not, of itself create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, he had
reasonable cause to believe that his conduct was unlawful.
(2) A corporation may indemnify or agree to indemnify any person who
was or is a party, or is threatened to be made a party to any threatened,
pending, or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director, officer, employee, or agent of the corporation, or is or was serving
at the request of the corporation as a director, trustee, officer, employee, or
agent of another corporation, domestic or foreign, nonprofit or for profit,
partnership, joint venture, trust, or other enterprise, against expenses,
including attorneys' fees, actually and reasonably incurred by him in connection
with the defense or settlement of such action or suit if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made in
respect of any of the following:
(a) Any claim, issue, or matter as to which such person shall have
been adjudged to be liable for negligence or misconduct in the performance of
his duty to the corporation unless, and only to the extent that the court of
common pleas, or the court in which such action or suit was brought determines
upon application that, despite the adjudication of liability, but in view of all
the circumstances
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of the case, such person is fairly and reasonably entitled to indemnity for such
expenses as the court of common pleas or such other court shall deem proper;
(b) Any action or suit in which the only liability asserted
against a director is pursuant to section 1701.95 of the Revised Code.
(3) To the extent that a director, trustee, officer, employee, or agent
has been successful on the merits or otherwise in defense of any action, suit,
or proceeding referred to in divisions (E)(1) and (2) of this section, or in
defense of any claim, issue, or matter therein, he shall be indemnified against
expenses, including attorneys' fees, actually and reasonably incurred by him in
connection therewith.
(4) Any indemnification under divisions (E)(1) and (2) of this section,
unless ordered by a court, shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
trustee, officer, employee, or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in divisions (E)(1) and (2)
of this section. Such determination shall be made as follows:
(a) By a majority vote of a quorum consisting of directors of the
indemnifying corporation who were not and are not parties to or threatened with
any such action, suit, or proceeding;
(b) If the quorum described in division (E)(4)(a) of this section
is not obtainable or if a majority vote of a quorum of disinterested directors
so directs, in a written opinion by independent legal counsel other than an
attorney, or a firm having associated with it an attorney, who has been retained
by or who has performed services for the corporation, or any person to be
indemnified within the past five years;
(c) By the shareholders;
(d) By the court of common pleas or the court in which such
action, suit, or proceeding was brought.
Any determination made by the disinterested directors under division
(E)(4)(a) or by independent legal counsel under division (E)(4)(b) of this
section shall be promptly communicated to the person who threatened or brought
the action or suit by or in the right of the corporation under division (E)(2)
of this section, and within ten days after receipt of such notification, such
person shall have the right to petition the court of common pleas or the court
in which such action or suit was brought to review the reasonableness of such
determination.
(5)(a) Unless at the time of a director's act or omission that is the
subject of an action, suit or proceeding referred to in divisions (E)(1) and (2)
of this section, the articles or the regulations of a corporation state by
specific reference to this division that the provisions of this division do not
apply to the corporation and unless the only liability asserted against a
director in an action, suit, or proceeding referred to in divisions (E)(1) and
(2) of this section is pursuant to section 1701.95 of the Revised Code,
expenses, including attorney's fees, incurred by a director in defending the
action, suit, or proceeding shall be paid by the corporation as they are
incurred, in advance of the final disposition of the action, suit, or proceeding
upon receipt of an undertaking by or on behalf of the director in which he
agrees to do both of the following:
(i) Repay such amount if it is proved by clear and convincing
evidence in a court of competent jurisdiction that his action or failure to act
involved an act or omission undertaken with deliberate intent to cause injury to
the corporation or undertaken with reckless disregard for the best interests of
the corporation;
(ii) Reasonably cooperate with the corporation concerning the
action, suit, or proceeding.
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(b) Expenses, including attorneys' fees incurred by a director,
trustee, officer, employee, or agent in defending any action, suit, or
proceeding referred to in divisions (E)(1) and (2) of this section, may be paid
by the corporation as they are incurred, in advance of the final disposition of
the action, suit, or proceeding as authorized by the directors in the specific
case upon receipt of an undertaking by or on behalf of the director, trustee,
officer, employee, or agent to repay such amount, if it ultimately is determined
that he is entitled to be indemnified by the corporation.
(6) The indemnification authorized by this section shall not be
exclusive of, and shall be in addition to, any other rights granted to those
seeking indemnification under the articles or the regulations or any agreement,
vote of shareholders or disinterested directors, or otherwise, both as to action
in his official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
trustee, officer, employee, or agent and shall inure to the benefit of the
heirs, executors, and administrators of such a person.
(7) A corporation may purchase and maintain insurance or furnish
similar protection, including but not limited to trust funds, letters of credit,
or self-insurance on behalf of or for any person who is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee, or agent
of another corporation, domestic or foreign, nonprofit or for profit,
partnership, joint venture, trust, or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the corporation would have the power to
indemnify him against such liability under this section. Insurance may be
purchased from or maintained with a person in which the corporation has a
financial interest.
(8) The authority of a corporation to indemnify persons pursuant to
divisions (E)(1) and (2) of this section does not limit the payment of expenses
as they are incurred, indemnification, insurance, or other protection that may
be provided pursuant to divisions (E)(5), (6), and (7) of this section.
Divisions (E)(1) and (2) of this section do not create any obligation to repay
or return payments made by the corporation pursuant to divisions (E)(5), (6), or
(7).
(9) As used in this division, references to "corporation" include all
constituent corporations in a consolidation or merger and the new or surviving
corporation, so that any person who is or was a director, officer, employee, or
agent of such a constituent corporation, or is or was serving at the request of
such constituent corporation as a director, trustee, officer, employee or agent
of another corporation, domestic or foreign, nonprofit or for profit,
partnership, joint venture, trust, or other enterprise, shall stand in the same
position under this section with respect to the new or surviving corporation as
he would if he had served the new or surviving corporation in the same capacity.
SECOND AMENDED ARTICLES OF INCORPORATION OF WESTERN RESERVE
ARTICLE EIGHTH
EIGHTH: (1) The corporation may indemnify or agree to indemnify any
person who was or is a party or is threatened to be made a party, to any
threatened, pending, or completed action, suit, or proceeding, whether civil,
criminal, administrative, or investigative, other than an action by or in the
right of the corporation, by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee, or agent
of another corporation (including a subsidiary of this corporation), domestic or
foreign, nonprofit or for profit, partnership, joint venture, trust, or other
enterprise, against expenses, including attorneys' fees, judgments, fines, and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit, or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit, or proceeding by judgment, order, settlement, conviction, or upon
a plea of nolo contendre or its equivalent, shall not, of itself create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
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corporation, and with respect to any criminal action or proceeding, he had
reasonable cause to believe that his conduct was unlawful.
(2) The corporation may indemnify or agree to indemnify any person who
was or is a party, or is threatened to be made a party to any threatened,
pending, or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director, officer, employee, or agent of the corporation, or is or was serving
at the request of the corporation as a director, trustee, officer, employee, or
agent of another corporation (including a subsidiary of this corporation),
domestic or foreign, nonprofit or for profit, partnership, joint venture, trust,
or other enterprise against expenses, including attorneys' fees, actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any claim, issue, or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the corporation unless, and only to
the extent that the court of common pleas, or the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability, but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses as the court of
common pleas or such other court shall deem proper.
(3) To the extent that a director, trustee, officer, employee, or agent
has been successful on the merits or otherwise in defense of any action, suit,
or proceeding referred to in sections (1) and (2) of this article, or in defense
of any claim, issue, or matter therein, he shall be indemnified against
expenses, including attorneys' fees, actually and reasonably incurred by him in
connection therewith.
(4) Any indemnification under sections (1) and (2) of this article,
unless ordered by a court, shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
trustee, officer, employee, or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in sections (1) and (2) of
this article. Such determination shall be made (a) by a majority vote of a
quorum consisting of directors of the indemnifying corporation who were not and
are not parties to or threatened with any such action, suit, or proceeding, or
(b) if such a quorum is not obtainable or if a majority vote of a quorum of
disinterested directors so directs, in a written opinion by independent legal
counsel other than an attorney, or a firm having associated with it an attorney,
who has been retained by or who has performed services for the corporation, or
any person to be indemnified within the past five years, or (c) by the
shareholders, or (d) by the court of common pleas or the court in which such
action, suit, or proceeding was brought. Any determination made by the
disinterested directors under section (4)(a) or by independent legal counsel
under section (4)(b) of this article shall be promptly communicated to the
person who threatened or brought the action or suit by or in the right of the
corporation under section (2) of this article, and within ten days after receipt
of such notification, such person shall have the right to petition the court of
common pleas or the court in which such action or suit was brought to review the
reasonableness of such determination.
(5) Expenses, including attorneys' fees incurred in defending any
action, suit, or proceeding referred to in sections (1) and (2) of this article,
may be paid by the corporation in advance of the final disposition of such
action, suit, or proceeding as authorized by the directors in the specific case
upon receipt of a written undertaking by or on behalf of the director, trustee,
officer, employee, or agent to repay such amount, unless it shall ultimately be
determined that he is entitled to be indemnified by the corporation as
authorized in this article. If a majority vote of a quorum of disinterested
directors so directs by resolution, said written undertaking need not be
submitted to the corporation. Such a determination that a written undertaking
need not be submitted to the corporation shall in no way affect the entitlement
of indemnification as authorized by this article.
(6) The indemnification provided by this article shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under the articles or the regulations or any agreement, vote of
shareholders or disinterested directors, or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person
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who has ceased to be a director, trustee, officer, employee, or agent and shall
inure to the benefit of the heirs, executors, and administrators of such a
person.
(7) The Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee, or agent of the
corporation, or is or was serving at the request of the corporation as a
director, trustee, officer, employee, or agent of another corporation (including
a subsidiary of this corporation), domestic or foreign, nonprofit or for profit,
partnership, joint venture, trust, or other enterprise against any liability
asserted against him and incurred by him in any such capacity or arising out of
his status as such, whether or not the corporation would have the power to
indemnify him against such liability under this section.
(8) As used in this section, references to "the corporation" include
all constituent corporations in a consolidation or merger and the new or
surviving corporation, so that any person who is or was a director, officer,
employee, or agent of such a constituent corporation, or is or was serving at
the request of such constituent corporation as a director, trustee, officer,
employee or agent of another corporation (including a subsidiary of this
corporation), domestic or foreign, nonprofit or for profit, partnership, joint
venture, trust, or other enterprise shall stand in the same position under this
article with respect to the new or surviving corporation as he would if he had
served the new or surviving corporation in the same capacity.
(9) The foregoing provisions of this article do not apply to any
proceeding against any trustee, investment manager or other fiduciary of an
employee benefit plan in such person's capacity as such, even though such person
may also be an agent of this corporation. The corporation may indemnify such
named fiduciaries of its employee benefit plans against all costs and expenses,
judgments, fines, settlements or other amounts actually and reasonably incurred
by or imposed upon said named fiduciary in connection with or arising out of any
claim, demand, action, suit or proceeding in which the named fiduciary may be
made a party by reason of being or having been a named fiduciary, to the same
extent it indemnifies an agent of the corporation. To the extent that the
corporation does not have the direct legal power to indemnify, the corporation
may contract with the named fiduciaries of its employee benefit plans to
indemnify them to the same extent as noted above. The corporation may purchase
and maintain insurance on behalf of such named fiduciary covering any liability
to the same extent that it contracts to indemnify.
AMENDED CODE OF REGULATIONS OF WESTERN RESERVE
ARTICLE V
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Each Director, officer and member of a committee of this Corporation,
and any person who may have served at the request of this Corporation as a
Director, officer or member of a committee of any other corporation in which
this Corporation owns shares of capital stock or of which this Corporation is a
creditor (and his heirs, executors and administrators) shall be indemnified by
the Corporation against all expenses, costs, judgments, decrees, fines or
penalties as provided by, and to the extent allowed by, Article Eighth of the
Corporation's Articles of Incorporation, as amended.
RULE 484 UNDERTAKING
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
Western Reserve pursuant to the foregoing provisions or otherwise, Western
Reserve has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Western Reserve of expenses
incurred or paid by a director, officer or controlling person of Western Reserve
in the successful defense of any action, suit or proceeding) is asserted by such
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director, officer or controlling person in connection with the securities being
registered, Western Reserve will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 29. PRINCIPAL UNDERWRITER
(a) InterSecurities, Inc. ("ISI"), formerly known as Idex
Distributors, Inc. and before that, as Pioneer Western
Distributors, Inc., also currently distributes securities of WRL
Series Life Account and the mutual funds managed by Idex
Management, Inc., an affiliate of ISI.
(b) Directors and Officers of ISI
PRINCIPAL POSITION AND OFFICES
NAME BUSINESS ADDRESS WITH UNDERWRITER
---- ---------------- ----------------
John R. Kenney (1) Chairman of the Board
G. John Hurley (1) Director, President
and Chief Executive
Officer
Thomas R. Moriarty (1) Senior Vice President
William H. Geiger (1) Secretary and Director
William G. Cummings (1) Vice President and Treasurer
- --------------------------
(1) 201 Highland Avenue, Largo, Florida 33770
(c) Compensation to Principal Underwriter
Not Applicable
Item 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books, or other documents required to be maintained by
Section 31(a) of the 1940 Act and the rules promulgated thereunder are
maintained by the Registrant through Western Reserve, 201 Highland
Avenue, Largo, Florida 33770.
Item 31. MANAGEMENT SERVICES
Not Applicable
Item 32. UNDERTAKINGS
Western Reserve Life Assurance Co. of Ohio ("Western Reserve") hereby
represents that the fees and charges deducted under the Contracts, in
the aggregate, are reasonable in relation to the services rendered, the
expenses expected to be incurred, and the risks assumed by Western
Reserve.
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Item 33. SECTION 403(B)(11) REPRESENTATION
Registrant represents that in connection with its offering of Contracts
as funding vehicles for retirement plans meeting the requirements of
Section 403(b) of the Internal Revenue Code of 1986, Registrant is
relying on the no-action letter issued by the Office of Insurance
Products and Legal Compliance, Division of Investment Management, to
the American Council of Life Insurance dated November 28, 1988 (Ref.
No. IP-6-88), and that the provisions of paragraphs (1) - (4) thereof
have been complied with.
TEXAS ORP REPRESENTATION
The Registrant intends to offer Contracts to participants in the Texas
Optional Retirement Program. In connection with that offering, the
Registrant is relying on Rule 6c-7 under the Investment Company Act of
1940 and is complying with, or shall comply with, paragraphs (a) - (d)
of that Rule.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Post-Effective Amendment No. 9 to its Registration Statement to be signed
on its behalf by the undersigned, thereunder duly authorized, in the City of
Largo, State of Florida, on this 18th day of April, 1997.
WRL SERIES ANNUITY ACCOUNT
(Registrant)
By: /s/ JOHN R. KENNEY
------------------
John R. Kenney, Chairman of the Board, Chief
Executive Officer and President of Western
Reserve Life Assurance Co. of Ohio
WESTERN RESERVE LIFE ASSURANCE
CO. OF OHIO
(Depositor)
By: /s/ JOHN R. KENNEY
------------------
John R. Kenney, Chairman of the Board,
Chief Executive Officer and President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 9 to this Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ JOHN R. KENNEY Chairman of the Board, April 18, 1997
- ------------------- Chief Executive Officer
John R. Kenney and President
(Principal Executive
Officer)
/s/ ALAN M. YAEGER Executive Vice President, April 18, 1997
- ------------------- Actuary & Chief Financial
Alan M. Yaeger Officer
<PAGE>
/s/ ALLAN J. HAMILTON Vice President, Treasurer April 18, 1997
- ---------------------- and Controller
Allan J. Hamilton
/s/ PATRICK S. BAIRD Director April 18, 1997
- ---------------------
Patrick S. Baird */
/s/ LYMAN H. TREADWAY Director April 18, 1997
- ----------------------
Lyman H. Treadway */
/s/ JACK E. ZIMMERMAN Director April 18, 1997
- ----------------------
Jack E. Zimmerman */
/s/ JAMES R. WALKER Director April 18, 1997
- --------------------
James R. Walker */
*/ /s/ THOMAS E. PIERPAN
- -- ---------------------
Signed by Thomas E. Pierpan
As Attorney-in-fact
EXHIBIT 99-C1
Exhibit 10(a)
Consent of Sutherland, Asbill & Brennan, L.L.P.
<PAGE>
S.A.B. letterhead
April 21, 1997
Board of Directors
Western Reserve Life Assurance Co. of Ohio
WRL Series Annuity Account
201 Highland Avenue
Largo, Florida 33770
RE: WRL Series Annuity Account
FILE NO. 33-49556
Gentlemen:
We hereby consent to the use of our name under the caption "Legal
Matters" in the Statements of Additional Information contained in Post-Effective
Amendment No. 9 to the Registration Statement on Form N-4 (File No. 33-49556) of
the WRL Series Annuity Account filed by Western Reserve Life Assurance Co. of
Ohio with the Securities and Exchange Commission. In giving this consent, we do
not admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act of 1933.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN, L.L.P.
By: /s/ STEPHEN E. ROTH
-------------------
Stephen E. Roth
EXHIBIT 99-C2
Exhibit 10(b)
Consent of Ernst & Young LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Independent
Accountants" and to the use of our report dated February 21, 1997, with respect
to the statutory-basis financial statements and schedules of Western Reserve
Life Assurance Co. of Ohio included in Post-Effective Amendment No. 9 to the
Registration Statement (Form N-4 No. 33-49556) and related Prospectuses of WRL
Series Annuity Account.
ERNST & YOUNG LLP
Des Moines, Iowa
April 17, 1997
EXHIBIT 99-C3
Exhibit 10(c)
Consent of Price Waterhouse LLP
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the WRL Freedom Attainer Statement of Additional
Information constituting part of the WRL Series Annuity Account Post-Effective
Amendment No. 9 to the Registration Statement on Form N-4 (the "Registration
Statement") of our report dated January 31, 1997, relating to the financial
statements and selected per unit data and ratios of the sub-accounts comprising
the WRL Series Annuity Account - WRL Freedom Variable Annuity and WRL Freedom
Attainer Contracts, which appears in such Statement of Additional Information.
We also consent to the use in the C.A.S.E. Reserve Variable Annuity Statement of
Additional Information constituting part of the Registration Statement of our
report dated January 31, 1997, relating to the financial statements and selected
per unit data and ratios of the sub-accounts comprising the WRL Series Annuity
Account - C.A.S.E. Reserve Variable Annuity Contracts, which appears in such
Statements of Additional Information. We further consent to the references to us
under the heading "Independent Accountants" in each Statement of Additional
Information.
PRICE WATERHOUSE LLP
Kansas City, Missouri
April 21, 1997
