STATEMENT OF ADDITIONAL INFORMATION
WRL FREEDOM WEALTH CREATOR/registered trademark/
VARIABLE ANNUITY
Issued through
WRL SERIES ANNUITY ACCOUNT
Offered by
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
570 Carillon Parkway
St. Petersburg, Florida 33716
This Statement of Additional Information expands upon subjects discussed in the
current prospectus for the WRL Freedom Wealth Creator/registered trademark/
Variable Annuity offered by Western Reserve Life Assurance Co. of Ohio. You may
obtain a copy of the prospectus dated May 1, 1999, by calling 1-800-851-9777,
or by writing to the administrative office, Western Reserve Life, 570 Carillon
Parkway, St. Petersburg, Florida 33716. The prospectus sets forth information
that a prospective investor should know before investing in a Contract. Terms
used in the current prospectus for the Contract are incorporated in this
Statement of Additional Information.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE READ
ONLY IN CONJUNCTION WITH THE PROSPECTUS FOR THE CONTRACT AND THE WRL SERIES
ANNUITY ACCOUNT.
Dated: May 1, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
DEFINITIONS OF SPECIAL TERMS ............................... 1
THE CONTRACT--GENERAL PROVISIONS ........................... 3
Owner ..................................................... 3
Entire Contract ........................................... 3
Misstatement of Age or Gender ............................. 3
Addition, Deletion or Substitution of Investments ......... 4
Annuity Payment Options ................................... 5
Death Benefit ............................................. 6
Assignment ................................................ 7
Proof of Age, Gender and Survival ......................... 7
Non-Participating ......................................... 8
CERTAIN FEDERAL INCOME TAX CONSEQUENCES .................... 8
Tax Status of the Contract ................................ 8
Taxation of Western Reserve ............................... 12
INVESTMENT EXPERIENCE ...................................... 13
Accumulation Units ........................................ 13
Annuity Unit Value and Annuity Payment Rates .............. 14
HISTORICAL PERFORMANCE DATA ................................ 16
Money Market Yields ....................................... 16
Other Subaccount Yields ................................... 18
Total Returns ............................................. 18
Other Performance Data .................................... 19
Advertising and Sales Literature .......................... 20
PUBLISHED RATINGS .......................................... 20
ADMINISTRATION ............................................. 21
RECORDS AND REPORTS ........................................ 21
DISTRIBUTION OF THE CONTRACTS .............................. 21
OTHER PRODUCTS ............................................. 22
CUSTODY OF ASSETS .......................................... 22
LEGAL MATTERS .............................................. 22
INDEPENDENT ACCOUNTANTS .................................... 22
OTHER INFORMATION .......................................... 23
FINANCIAL STATEMENTS ....................................... 23
</TABLE>
<PAGE>
DEFINITIONS OF SPECIAL TERMS
<TABLE>
<S> <C>
accumulation The period between the Contract date and the maturity date while the
period Contract is in force.
-----------------------------------------------------------------------------
accumulation An accounting unit of measure used to calculate subaccount values during
unit value the accumulation period.
-----------------------------------------------------------------------------
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 provision.
-----------------------------------------------------------------------------
annuity value The sum of the separate account value and the fixed account value.
-----------------------------------------------------------------------------
annuity unit An accounting unit of measure used to calculate annuity payments from the
value subaccounts after the maturity date.
-----------------------------------------------------------------------------
attained age The issue age, which is annuitant's age on the birthday nearest the Contract
date, plus the number of completed Contract years.
-----------------------------------------------------------------------------
beneficiary(ies) 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.
-----------------------------------------------------------------------------
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.
-----------------------------------------------------------------------------
fixed account An allocation option under the Contract, other than the separate account,
that provides for accumulation of purchase payments, and options for
annuity payments on a fixed basis. For Contracts issued in the States of
Massachusetts, New Jersey and Washington, the fixed account is used
solely for Contract loans and is not available for allocation of purchase
payments or transfers.
-----------------------------------------------------------------------------
fixed account During the accumulation period, a Contract's value allocated to the fixed
value account.
-----------------------------------------------------------------------------
fund(s) WRL Series Fund, Inc., an investment company which is registered with the
U.S. Securities and Exchange Commission. We reserve the right to add
other registered investment companies to the Contract in the future.
-----------------------------------------------------------------------------
in force Condition under which the Contract is active and the owner is entitled to
exercise all rights under the Contract.
-----------------------------------------------------------------------------
maturity date The date on which the accumulation period ends and annuity payments
begin.
-----------------------------------------------------------------------------
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
non-qualified Contracts issued other than in connection with retirement plans. Non-
Contracts qualified Contracts do not qualify for special federal income tax treatment
under the Code.
------------------------------------------------------------------------------
owner (you, The person(s) entitled to exercise all rights under the Contract. The an-
your) nuitant 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 Amounts paid by an owner or on the owner's behalf to Western Reserve as
payments consideration for the benefits provided by the Contract. When we use the
term "purchase payment" in this SAI, it has the same meaning as "net
purchase payment" in the Contract, which means the purchase payment
less any applicable premium taxes.
------------------------------------------------------------------------------
qualified Contracts issued in connection with retirement plans that qualify for special
Contracts federal income tax treatment under the Code.
------------------------------------------------------------------------------
separate account WRL Series Annuity Account, a separate account composed of subaccounts
established to receive and invest purchase payments not allocated to the
fixed account.
------------------------------------------------------------------------------
separate account During the accumulation period, a Contract's value in the separate account,
value which equals the total value in each subaccount during the accumulation
period.
------------------------------------------------------------------------------
subaccount A subdivision of the separate account that invests exclusively in the shares
of a specified portfolio and supports the Contracts. Subaccounts cor-
responding to each applicable portfolio hold assets under the Contract
during the accumulation period. Other subaccounts corresponding to each
applicable portfolio will hold assets after the maturity date if a variable
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 trading,
except when a subaccount's corresponding portfolio does not value its
shares.
------------------------------------------------------------------------------
valuation period The period beginning at the end of one valuation date and continuing to the
end of the next succeeding valuation date.
------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
In order to supplement the description in the prospectus, the following
provides additional information about Western Reserve and the Contract, which
may be of interest to a prospective purchaser.
THE CONTRACT-GENERAL PROVISIONS
OWNER
The Contract shall belong to the owner upon issuance of the Contract after
completion of an application and delivery of the initial purchase payment.
While the annuitant is living, the owner may: (1) assign the Contract; (2)
surrender the Contract; (3) amend or modify the Contract with Western Reserve's
consent; (4) receive annuity payments or name a payee to receive the payments;
and (5) exercise, receive and enjoy every other right and benefit contained in
the Contract. The exercise of these rights may be subject to the consent of any
assignee or irrevocable beneficiary; and of the owner's spouse in a community
or marital property state.
A successor owner can be named in the Contract application or in a written
notice. The successor owner will become the new owner upon the owner's death,
if the owner is not the annuitant and dies before the annuitant. If no
successor owner survives the owner and the owner dies before the annuitant, the
owner's estate will become the owner.
The owner may change the ownership of the Contract in a written notice. When
this change takes effect, all rights of ownership in the Contract will pass to
the new owner. A change of ownership may have tax consequences.
When there is a change of owner or successor owner, the change will take effect
as of the date Western Reserve accepts the written notice. We assume 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. Changing the owner or naming a new successor owner cancels any prior
choice of successor owner, but does not change the designation of the
beneficiary or the annuitant.
ENTIRE CONTRACT
The Contract and any endorsements thereon and the Contract application
constitute the entire contract between Western Reserve and the owner. All
statements in the application are representations and not warranties. No
statement will cause the Contract to be void or to be used in defense of a
claim unless contained in the application.
MISSTATEMENT OF AGE OR GENDER
If the age or gender of the annuitant has been misstated, Western Reserve will
change the annuity benefit payable to that which the purchase payments would
have purchased for the correct age or gender. The dollar amount of any
underpayment Western Reserve makes shall
3
<PAGE>
be paid in full with the next payment due such person or the beneficiary. The
dollar amount of any overpayment Western Reserve makes due to any misstatement
shall be deducted from payments subsequently accruing to such person or
beneficiary. Any underpayment or overpayment will include interest at 5% per
year, from the date of the wrong payment to the date of the adjustment. The age
of the annuitant may be established at any time by the submission of proof
Western Reserve finds satisfactory.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
We reserve the right, subject to compliance with applicable law, to make
additions to, deletions from, or substitutions for the shares that are held by
the separate account or that the separate account may purchase. We reserve 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 our judgment further investment in any
portfolio should become inappropriate in view of the purposes of the separate
account. We will not, however, substitute any shares attributable to an owner's
interest in a subaccount 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.
We also reserve the right to establish additional subaccounts, 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 subaccounts may be
established when, in the sole discretion of Western Reserve, marketing, tax or
investment conditions warrant, and any new subaccounts will be made available
to existing owners on a basis to be determined by Western Reserve. We may also
eliminate one or more subaccounts if, in our sole discretion, marketing, tax or
investment conditions warrant.
In the event of any such substitution or change, we 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 interest of persons having voting rights under the Contracts, the separate
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.
We reserve the right to change the investment objective of any subaccount.
Additionally, if required by law or regulation, we will not materially change
an investment objective of the separate account or of a portfolio designated
for a subaccount unless a statement of the change is filed with and approved by
the appropriate insurance offical of the state of Western Reserve's domicile,
or deemed approved in accordance with such law or regulation.
4
<PAGE>
ANNUITY PAYMENT OPTIONS
During the lifetime of the annuitant and prior to the maturity date, the owner
may choose an annuity payment option or change the election. If no election is
made prior to the maturity date, annuity payments will be made under payment
Option D, with 120 payments guaranteed.
Thirty days prior to the maturity date, we 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 separate account annuity
option is chosen, the owner must include in the written notice the subaccount
allocation of the annuity proceeds as of the maturity date. If we do not
receive that form or other written notice acceptable to us 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,
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.
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 variable payment depends upon the gender (if consideration of
gender is allowed under state law) and 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
After 2040 As determined by Western Reserve
</TABLE>
This adjustment assumes an increase in life expectancy, and therefore it
results in lower payments than without such an adjustment.
DETERMINATION OF ADDITIONAL 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
subaccount(s). Each variable annuity payment after the first will be equal to
the number of units attributable to the Contract in each selected subaccount
multiplied by the annuity unit value of that subaccount on the date the payment
is processed.
5
<PAGE>
The number of such units is determined by dividing the first payment allocated
to that subaccount by the annuity unit value of that subaccount on the date the
first annuity payment is processed.
DEATH BENEFIT
DEATH OF OWNER. Federal tax law requires that if any owner (including any joint
owner or any successor owner who has become a current owner) dies before the
maturity date, then the entire value of the Contract must generally be
distributed within five years of the date of death of such owner. Special rules
apply where (1) the spouse of the deceased owner is the sole beneficiary, (2)
an owner is not a natural person and the primary annuitant dies or is changed,
or (3) any owner dies after the maturity date. See "Certain Federal Income Tax
Consequences" for a detailed description of these rules. Other rules may apply
to qualified Contracts.
If the annuitant is not an owner, and an owner dies prior to the maturity date,
a successor owner may surrender the Contract at any time for the amount of the
cash value. If the successor owner is not the deceased annuitant/owner's
spouse, however, the cash value must be distributed: (1) within five years
after the date of the deceased annuitant/owner's death, or (2) as payments that
begin no later than one year after the deceased annuitant/owner's death and
must be made for the successor owner's lifetime or for a period certain (so
long as any period certain does not exceed the successor owner's life
expectancy).
DEATH OF ANNUITANT. Due proof of death of the annuitant is proof that the
annuitant who is an owner died prior to the commencement of annuity payments.
Upon receipt of this proof and an election of a method of settlement and return
of the Contract, the death benefit generally will be paid within seven days, or
as soon thereafter as we have sufficient information about the beneficiary to
make the payment. The beneficiary may receive the amount payable in a lump sum
cash benefit, or, subject to any limitation under any state or federal law,
rule, or regulation, under one of the annuity payment options, unless a
settlement agreement is effective at the owner's death preventing such
election.
If the annuitant was an owner, and the beneficiary was not the deceased
annuitant's spouse, (1) the death benefit must be distributed within five years
of the date of the deceased annuitant/owner's death, or (2) payments must begin
no later than one year after the deceased annuitant/owner's death and must be
made for the beneficiary's lifetime or for a period certain (so long as any
certain period does not exceed the beneficiary's life expectancy). Death
proceeds which are not paid to or for the benefit of a natural person must be
distributed within five years of the date of the deceased annuitant/owner's
death. If the sole beneficiary is the deceased annuitant/owner's surviving
spouse, such spouse may elect to continue the Contract as the new annuitant and
owner instead of receiving the death benefit. (See "Certain Federal Income Tax
Consequences" in this SAI.)
If the beneficiary elects to receive the death benefit proceeds under option
(1), then: (a) we will allow the beneficiary to make only ONE partial
withdrawal during the five-year period. That
6
<PAGE>
withdrawal must be made at the time option (1) is elected. No withdrawal
charges will apply to this withdrawal; (b) we will allow the beneficiary to
make ONE transfer to and from the subaccounts and the fixed account during the
five-year period. That transfer must be made at the time option (1) is elected;
(c) we will deduct the annual Contract charge each year during the five-year
period; (d) we will not apply any withdrawal charges to the total distribution
of the Contract; (e) we will not permit annuitization at the end of the
five-year period; and (f) if the beneficiary dies during the five-year period,
we will pay the remaining value of the Contract first to the contingent
beneficiary named by the owner. If no contingent beneficiary is named, then we
will make payment to the beneficiary's estate. The beneficiary is not permitted
to name his or her own beneficiary.
BENEFICIARY. The beneficiary designation in the application will remain in
effect until changed. The owner may change the designated beneficiary during
the annuitant's lifetime by sending written notice to Western Reserve. The
beneficiary's consent to such change is not required unless the beneficiary was
irrevocably designated or law requires consent. (If an irrevocable beneficiary
dies, the owner may then designate a new beneficiary.) The change will take
effect as of the date the owner signs the written notice. We will not be liable
for any payment made before the written notice is received. Unless we receive
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.
ASSIGNMENT
During the annuitant's lifetime and prior to the maturity date (subject to any
irrevocable beneficiary's rights) the owner may assign any rights or benefits
provided by a non-qualified Contract. The assignment of a Contract will be
treated as a distribution of the annuity value for federal tax purposes. Any
assignment must be made in writing and accepted by Western Reserve. An
assignment will be effective as of the date accepted by Western Reserve. We
assume 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
assignment.
With regard to qualified Contracts, ownership of the Contract generally may be
assigned, but any assignment may be subject to restrictions, penalties,
taxation as a distribution, or even prohibition under the Code, and must also
be permitted under the terms of the underlying retirement plan.
PROOF OF AGE, GENDER AND SURVIVAL
Western Reserve may require proper proof of age and gender 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 gender of any payee, annuity payments
will be determined using unisex rates.
7
<PAGE>
NON-PARTICIPATING
The Contract will not share in Western Reserve's surplus earnings; no dividends
will be paid.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES
THE FOLLOWING SUMMARY DOES NOT CONSTITUTE TAX ADVICE. IT IS A GENERAL
DISCUSSION OF CERTAIN OF THE EXPECTED FEDERAL INCOME TAX CONSEQUENCES OF
INVESTMENT IN AND DISTRIBUTIONS WITH RESPECT TO A CONTRACT, BASED ON THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED, PROPOSED AND FINAL TREASURY
REGULATIONS THEREUNDER, JUDICIAL AUTHORITY, AND CURRENT ADMINISTRATIVE RULINGS
AND PRACTICE. THIS SUMMARY DISCUSSES ONLY CERTAIN FEDERAL INCOME TAX
CONSEQUENCES TO "UNITED STATES PERSONS," AND DOES NOT DISCUSS STATE, LOCAL, OR
FOREIGN TAX CONSEQUENCES. UNITED STATES PERSONS MEANS CITIZENS OR RESIDENTS OF
THE UNITED STATES, DOMESTIC CORPORATIONS, DOMESTIC PARTNERSHIPS AND TRUSTS OR
ESTATES THAT ARE SUBJECT TO UNITED STATES FEDERAL INCOME TAX REGARDLESS OF THE
SOURCE OF THEIR INCOME.
TAX STATUS OF THE CONTRACT
The following discussion is based on the assumption that the Contract qualifies
as an annuity contract for federal income tax purposes.
DIVERSIFICATION REQUIREMENTS. Section 817(h) of the Code provides that in order
for a variable contract which is based on a segregated asset account to qualify
as an annuity contract under the Code, the investments made by such account
must be "adequately diversified" in accordance with Treasury regulations. The
Treasury regulations issued under Section 817(h) (Treas. Reg. (/section/)
1.817-5) apply a diversification requirement to each of the subaccounts of the
separate account. The separate account, through the fund and its portfolios,
intends to comply with the diversification requirements of the Treasury.
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 below) 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.
OWNER CONTROL. 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. Several years ago, the IRS
stated in published rulings that a variable contract owner will be considered
the owner of separate account assets if the contract owner possesses incidents
of
8
<PAGE>
ownership in those assets, such as the ability to exercise investment control
over the assets. More recently, the Treasury Department 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, rather than the insurance company, to be
treated as the owner of the assets in the account." This announcement also
stated that guidance would be issued by way of regulations or rulings on the
"extent to which Contract owners may direct their investments to particular
subaccounts without being treated as owners of 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 owners were not owners of separate account assets. For example,
the owner of a Contract has the choice of one or more subaccounts in which to
allocate purchase payments and annuity values, and may be able to transfer
among these accounts more frequently than in such rulings. These differences
could result in owners being treated as the owners of the assets of the
separate 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. We therefore reserve the right to
modify the Contracts as necessary to attempt to prevent the owners from being
considered the owners of a pro rata share of the assets of the separate
account.
DISTRIBUTION REQUIREMENTS. The Code also requires that non-qualified Contracts
contain specific provisions for distribution of Contract proceeds upon the
death of an owner. In order to be treated as an annuity contract for federal
income tax purposes, the Code requires that such Contracts provide that 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 such owner's death. If any
owner dies before the maturity date, the entire interest in the Contract must
generally be distributed within five years after such owner's date of death or
be applied to provide an immediate annuity under which payments will begin
within one year of such 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. However, if such owner's death occurs prior to the maturity date,
and such owner's surviving spouse is named beneficiary, then the Contract may
be continued with the surviving spouse as the new owner. If any owner is not a
natural person, then for purposes of these distribution requirements, the
primary annuitant shall be treated as an owner and any death or change of such
primary annuitant shall be treated as the death of an owner. The Contract
contains provisions intended to comply with these requirements of the Code. No
regulations interpreting these requirements of the Code have yet been issued
and thus no assurance can be given that the provisions contained in the
Contracts satisfy all such Code requirements. The provisions contained in the
Contracts will be reviewed and modified if necessary to maintain their
compliance with the Code requirements when clarified by regulation or
otherwise.
9
<PAGE>
WITHHOLDING. The portion of any distribution under a Contract that is
includable in gross income will be subject to federal income tax withholding
unless the recipient of such distribution elects not to have federal income tax
withheld and properly notifies Western Reserve. For certain qualified
Contracts, certain distributions are subject to mandatory withholding. The
withholding rate varies according to the type of distribution and the owner's
tax status. For qualified Contracts, "eligible rollover distributions" from
Section 401(a) plans and Section 403(b) tax-sheltered annuities are subject to
a mandatory federal income tax withholding of 20%. An eligible rollover
distribution is the taxable portion of any distribution from such a plan,
except certain distributions such as distributions required by the Code or
distributions in a specified annuity form. The 20% withholding does not apply,
however, if the owner chooses a "direct rollover" from the plan to another
tax-qualified plan or IRA.
QUALIFIED CONTRACTS. The qualified Contract is designed for use with several
types of tax-qualified retirement plans. The tax rules applicable to
participants and beneficiaries in tax-qualified retirement plans vary according
to the type of plan and the terms and conditions of the plan. Special favorable
tax treatment may be available for certain types of contributions and
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 commencement and
minimum distribution rules; and in other specified circumstances. Some
retirement plans are subject to distribution and other requirements that are
not incorporated into Western Reserve's 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.
For qualified plans under Section 401(a), 403(a), 403(b), and 457, the Code
requires that distributions generally must commence no later than the later of
April 1 of the calendar year following the calendar year in which the owner (or
plan participant) (i) reaches age 70-1/2 or (ii) retires, and must be made in a
specified form or manner. If the plan participant is a "5 percent owner" (as
defined in the Code) or if the plan is a traditional IRA, distributions
generally must begin no later than April 1 of the calendar year in which the
owner (or plan participant) reaches age 70-1/2. Each owner is responsible for
requesting distributions under the Contract that satisfy applicable tax rules.
Western Reserve makes no attempt to provide more than general information about
use of the Contract with the various types of retirement plans. Purchasers of
Contracts for use with any retirement plan should consult their legal counsel
and tax advisor regarding the suitability of the Contract.
INDIVIDUAL RETIREMENT ANNUITIES. In order to qualify as a traditional
individual retirement annuity under Section 408(b) of the Code, a Contract must
contain certain provisions: (i) the owner must be the annuitant; (ii) the
Contract generally is not transferable by the owner, E.G., the owner may not
designate a new owner, designate a contingent owner or assign the Contract as
collateral security; (iii) the total purchase payments for any calendar year on
behalf of any individual may not exceed $2,000, except in the case of a
rollover amount or contribution
10
<PAGE>
under Sections 402(c), 403(a)(4), 403(b)(8) or 408(d)(3) of the Code; (iv)
annuity payments or partial withdrawals must begin no later than April 1 of the
calendar year following the calendar year in which the annuitant attains age
70-1/2; (v) an annuity payment option with a period certain that will guarantee
annuity payments beyond the life expectancy of the annuitant and the
beneficiary may not be selected; (vi) certain payments of death benefits must
be made in the event the annuitant dies prior to the distribution of the
annuity value; and (vii) the entire interest of the owner is non-forfeitable.
Contracts intended to qualify as traditional individual retirement annuities
under Section 408(b) of the Code contain such provisions. Amounts in the IRA
(other than nondeductible contributions) are taxed when distributed from the
IRA. Distributions prior to age 59-1/2 (unless certain exceptions apply) are
subject to a 10% penalty tax.
Section 408 of the Code also indicates that no part of the funds for an
individual retirement account or annuity ("IRA") may be invested in a life
insurance contract, but the regulations thereunder allow such funds to be
invested in an annuity contract that provides a death benefit that equals the
greater of the purchase payments paid or the cash value for the Contract. The
Contract provides an enhanced death benefit that could exceed the amount of
such a permissible death benefit, but it is unclear to what extent such an
enhanced death benefit could disqualify the Contract under Section 408 of the
Code. The IRS has not reviewed the Contract for qualification as an IRA, and
has not addressed in a ruling of general applicability whether an enhanced
death benefit provision, such as the provision in the Contract, comports with
IRA qualification requirements.
ROTH INDIVIDUAL RETIREMENT ANNUITIES (ROTH IRA). The Roth IRA, under Section
408A of the Code, contains many of the same provisions as a traditional IRA.
However, there are some differences. First, the contributions are not
deductible and must be made in cash or as a rollover or transfer from another
Roth IRA or other IRA. A rollover from or conversion of an IRA to a Roth IRA
may be subject to tax and other special rules may apply. You should consult a
tax advisor before combining any converted amounts with any other Roth IRA
contributions, including any other conversion amounts from other tax years. The
Roth IRA is available to individuals with earned income and whose adjusted
gross income is under $110,000 for single filers, $160,000 for married filing
jointly, and $10,000 for married filing separately. The amount per individual
that may be contributed to all IRAs (Roth and traditional) is $2,000. Secondly,
the distributions are taxed differently. The Roth IRA offers tax-free
distributions when made five tax years after the first contribution to any Roth
IRA and made after attaining age 59-1/2, or to pay for qualified first time
homebuyer expenses (lifetime maximum of $10,000), or due to death or
disability. All other distributions are subject to income tax when made from
earnings and may be subject to a premature withdrawal penalty tax unless an
exception applies. Unlike the traditional IRA, there are no minimum required
distributions during the owner's lifetime; however, required distributions at
death are the same.
SECTION 403(B) PLANS. Under Section 403(b) of the Code, payments made by public
school systems and certain tax exempt organizations to purchase Contracts 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. The Contract includes a death
11
<PAGE>
benefit that in some cases may exceed the greater of the purchase payments or
the annuity value. The death benefit could be characterized as an incidental
benefit, the amount of which is limited in any tax-sheltered annuity under
Section 403(b). Because the death benefit may exceed this limitation, employers
using the Contract in connection with such plans should consult their tax
advisor. 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, (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.
CORPORATE PENSION AND PROFIT SHARING PLANS AND H.R. 10 PLANS. Sections 401(a)
and 403(a) of the Code permit corporate employers to establish various types of
retirement plans for employees and self-employed individuals to establish
qualified plans for themselves and their employees. Such retirement plans may
permit the purchase of the Contracts to accumulate retirement savings. Adverse
tax consequences to the plan, the participant or both may result if the
Contract is assigned or transferred to any individual as a means to provide
benefit payments. The Contract includes a death benefit that in some cases may
exceed the greater of the purchase payments or the annuity value. The death
benefit could be characterized as an incidental benefit, the amount of which is
limited in a pension or profit-sharing plan. Because the death benefit may
exceed this limitation, employers using the Contract in connection with such
plans should consult their tax advisor.
DEFERRED COMPENSATION PLANS. Section 457 of the Code, while not actually
providing for a qualified plan (as that term is used in the Code), 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. The Contracts can be used with such plans. Under such plans a
participant may specify the form of investment in which his or her
participation will be made. For non-governmental Section 457 Plans, all such
investments, however, are owned by the sponsoring employer, 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.
TAXATION OF WESTERN RESERVE
Western Reserve at present is taxed as a life insurance company under Part I of
Subchapter L of the Code. The separate account is treated as part of Western
Reserve and, accordingly, will not be taxed separately as a "regulated
investment company" under Subchapter M of the Code. Western Reserve does not
expect to incur any federal income tax liability with respect to investment
income and net capital gains arising from the activities of the separate
account
12
<PAGE>
retained as part of the reserves under the Contract. Based on this expectation,
it is anticipated that no charges will be made against the separate account for
federal income taxes. If, in future years, any federal income taxes are
incurred by Western Reserve with respect to the separate account, we may make a
charge to the separate account.
INVESTMENT EXPERIENCE
ACCUMULATION UNITS
Allocations of a purchase payment directed to a subaccount are credited in the
form of accumulation units. Each subaccount has a distinct accumulation unit
value. The number of units credited is determined by dividing the purchase
payment or amount transferred to the subaccount by the accumulation unit value
of the subaccount as of the end of the valuation period during which the
allocation is made. For each subaccount, the accumulation unit value for a
given business day is based on the net asset value of a share of the
corresponding portfolio of the fund less any applicable charges or fees.
Upon allocation to the selected subaccount of the separate account, purchase
payments are converted into accumulation units of the subaccount. At the end of
any valuation period, a subaccount's value is equal to the number of units that
your Contract has in the subaccount, multiplied by the accumulation unit value
of the subaccount.
The number of units that your Contract has in each subaccount is equal to:
1. The initial units purchased on the Contract date; plus
2. Units purchased at the time additional purchase payments are allocated to
the subaccount; plus
3. Units purchased through transfers from another subaccount 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 subaccount or
the fixed account; minus
6. Any units that are redeemed to pay the annual Contract charge, any premium
taxes and any transfer charge.
The value of an accumulation unit was arbitrarily established at $10 at the
inception of each subaccount. Thereafter, the value of an accumulation unit is
determined as of the close of the regular session of business on the New York
Stock Exchange, on each day the Exchange is open.
13
<PAGE>
The accumulation unit value will vary from one valuation period to the next
depending on the investment results experienced by each subaccount. The
accumulation unit value for each subaccount at the end of a valuation period is
the result of:
1. The total value of the assets held in the subaccount. This value is
determined by multiplying the number of shares of the designated fund
portfolio owned by the subaccount times the portfolio's net asset value per
share; minus
2. The accrued daily percentage for the mortality and expense risk charge
multiplied by the net assets of the subaccount; minus
3. The accrued amount of reserve for any taxes that are determined by us to
have resulted from the investment operations of the subaccount; divided by
4. The number of outstanding units in the subaccount. The mortality and expense
risk charge is deducted at an annual rate of 1.40% of net assets for each
day in the valuation period and compensates us for certain mortality and
expense risks. The accumulation unit value may increase, decrease, or
remain the same from valuation period to valuation period.
ANNUITY UNIT VALUE AND ANNUITY PAYMENT RATES
The amount of variable annuity payments will vary with annuity unit values.
Annuity unit values rise if the net investment performance of the subaccount
(that is, the portfolio performance minus subaccount fees and charges) exceeds
the assumed interest rate of 5% annually. Conversely, annuity unit values fall
if the net investment performance of the subaccount is less than the assumed
rate. The value of a variable annuity unit in each subaccount was established
at $10.00 on the date operations began for that subaccount. The value of a
variable annuity unit on any subsequent business day is equal to (a) multiplied
by (b) multiplied by (c), where:
(a) is the variable annuity unit value for that subaccount on the
immediately preceding business day;
(b) is the net investment factor for that subaccount for the valuation
period; and
(c) is the investment return adjustment factor for the valuation period.
The investment return adjustment factor for the valuation period is the product
of discount factors of .99986634 per day to recognize the 5% effective annual
assumed investment return. The valuation period is the period from the close of
the immediately preceding business day to the close of the current business
day.
14
<PAGE>
The net investment factor for the Contract used to calculate the value of a
variable annuity unit in each subaccount for the valuation period is determined
by dividing (i) by (ii) and subtracting (iii) from the result, where:
(i) is the result of:
(1) the net asset value of a portfolio share held in that subaccount
determined at the end of the current valuation period; plus
(2) the per share amount of any dividend or capital gain distributions
made by the portfolio for shares held in that subaccount 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 subaccount.
(ii) is the net asset value of a portfolio share held in that subaccount
determined as of the end of the immediately preceding valuation period.
(iii) is a factor representing the mortality and expense risk charge. This
factor is equal, on an annual basis, to 1.40% of the daily net asset
value of the subaccount.
The dollar amount of subsequent variable annuity payments will depend upon
changes in applicable annuity unit values.
The annuity payment rates vary according to the annuity option elected and the
gender and adjusted age of the annuitant at the annuity commencement date.
ILLUSTRATION OF CALCULATIONS FOR ANNUITY UNIT VALUE
AND VARIABLE ANNUITY PAYMENTS
FORMULA AND ILLUSTRATION FOR DETERMINING ANNUITY UNIT VALUE
Annuity Unit Value = A B C
<TABLE>
<S> <C> <C>
Where: A = Annuity unit value for the immediately preceding valuation period.
Assume ...................................................................... = $ X
B = Net investment factor for the valuation period for which the annuity unit
value is being calculated.
Assume ...................................................................... = Y
C = A factor to neutralize the assumed interest rate of 5% built into the annuity
tables used.
Assume ...................................................................... = Z
</TABLE>
Then, the annuity unit value is: $ X Y Z = $ Q
15
<PAGE>
FORMULA AND ILLUSTRATION FOR DETERMINING AMOUNT OF
FIRST MONTHLY VARIABLE ANNUITY PAYMENT
First monthly variable annuity payment = A B
---
$1,000
<TABLE>
<S> <C> <C>
Where: A = The annuity value as of the maturity date.
Assume .............................................. = $ X
B = The annuity purchase rate per $1,000 based upon the
option selected, the gender and adjusted age of the
annuitant according to the tables contained in the
Contract.
Assume .............................................. = $ Y
</TABLE>
Then, the first monthly variable annuity payment = $X$Y = $Z
---------
1,000
FORMULA AND ILLUSTRATION FOR DETERMINING THE NUMBER OF ANNUITY UNITS
REPRESENTED BY EACH MONTHLY VARIABLE ANNUITY PAYMENT
Number of annuity units = A
-
B
<TABLE>
<S> <C> <C>
Where: A The dollar amount of the first monthly variable annuity payment.
Assume ......................................................... = $ X
B = The annuity unit value for the valuation date on which the first monthly
payment is due.
Assume ......................................................... = $ Y
</TABLE>
Then, the number of annuity units = $ X = Z
---
$ Y
HISTORICAL PERFORMANCE DATA
MONEY MARKET YIELDS
YIELD - The yield quotation set forth in the prospectus for the WRL J.P. Morgan
Money Market subaccount is for the seven days ended on the date of the most
recent balance sheet of the separate account included in the registration
statement, and is computed by determining the net change, exclusive of capital
changes and income other than investment income, in the value of a hypothetical
pre-existing account having a balance of one unit in the WRL J.P. Morgan Money
Market subaccount 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 WRL J.P. Morgan Money
Market subaccount set forth in the prospectus is for the seven days ended on
the date of the most recent balance sheet of the separate account included in
the registration statement. The effective yield is computed by determining the
net change, exclusive of capital changes and income
16
<PAGE>
other than investment income, in the value of a hypothetical pre-existing
subaccount having a balance of one unit in the WRL J.P. Morgan Money Market
subaccount 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 subaccount 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.
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 $35 annual Contract charge, calculated on the
basis of an average separate account value per Contract of $34,638, which
converts that charge to an annual rate of 0.10% of the separate 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 8% 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 made previously during that
Contract year. (See Expenses--Withdrawal Charge on page 22 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 WRL J.P.
Morgan Money Market subaccount and the fund are excluded from the calculation
of yield.
The yield on amounts held in the WRL J.P. Morgan Money Market subaccount
normally will fluctuate on a daily basis. Therefore, the disclosed yield for
any given past period is not an indication or representation of future yields
or rates of return. The WRL J.P. Morgan Money Market subaccount actual yield is
affected by changes in interest rates on money market securities, average
portfolio maturity of the WRL J.P. Morgan Money Market, the types and quality
of portfolio securities held by the WRL J.P. Morgan Money Market and its
operating expenses. For the seven days ended December 31, 1998, the yield of
the WRL J.P. Morgan Money Market subaccount was 3.54%, and the effective yield
was 3.61%.
17
<PAGE>
OTHER SUBACCOUNT YIELDS
The yield quotations for all of the subaccounts, except the WRL J.P. Morgan
Money Market subaccount, representing the accumulation period set forth in the
prospectus is based on the 30-day period ended on the date of the most recent
balance sheet of the separate 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:
YIELD = 2[ (a - bcd + 1)6 -1]
<TABLE>
<S> <C> <C>
Where: A = net investment income earned during the period by the corresponding
portfolio of the fund attributable to shares owned by the subaccount.
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.
</TABLE>
For purposes of the yield quotations for all of the subaccounts, except the WRL
J.P. Morgan Money Market subaccount, the calculations take into account all
fees that are charged to all owner accounts during the accumulation period.
Such fees include the $35 annual Contract charge, calculated on the basis of an
average separate account value per Contract of $34,638, which converts that
charge to an annual rate of 0.10% of the separate account value. The
calculations do not take into account any premium taxes or any transfer or
withdrawal 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 redemption in an amount ranging up to 8% 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 made previously
during that Contract year. (See Expenses--Withdrawal Charge on page 22 of the
prospectus.)
The yield on amounts held in the subaccounts of the separate account normally
will fluctuate over time. Therefore, the disclosed yield for any given past
period is not an indication or representation of future yields or rates of
return. A subaccount's actual yield is affected by the types and quality of its
investments and its operating expenses. For the 30 days ended December 31,
1998, the yield for the WRL AEGON Bond subaccount was 4.05%.
TOTAL RETURNS
The total return quotations set forth in the prospectus for all of these
subaccounts, except the WRL J.P. Morgan Money Market subaccount, 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
subaccount 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
18
<PAGE>
sheet of the separate account, and for the period from the date the subaccounts
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(1+T)n = ERV
<TABLE>
<S> <C> <C>
where: P = a hypothetical initial payment of
$1,000
T = average annual total return
N = number of years
ERV = ending redeemable value of a
hypothetical $1,000 payment
made at the beginning of each
period at the end of each period
</TABLE>
For purposes of the total return quotations for all of these subaccounts,
except the WRL J.P. Morgan Money Market subaccount, the calculations take into
account all fees that are charged to all owner accounts during the accumulation
period. Such fees include the $35 annual Contract charge, calculated on the
basis of an average separate account value per Contract of $34,638, which
converts that charge to an annual rate of 0.10% of the separate account value.
The calculations also assume a complete redemption as of the end of the
particular period. The calculations do not reflect any deduction for premium
taxes or any transfer or withdrawal charges that may be applicable to a
particular Contract.
OTHER PERFORMANCE DATA
We may present the total return data stated in the prospectus on a non-standard
basis. This means that the data will not be reduced by all the fees and charges
under the Contract and that the data may be presented for different time
periods and for different purchase payment amounts. NON-STANDARD PERFORMANCE
DATA WILL ONLY BE DISCLOSED IF STANDARD PERFORMANCE DATA FOR THE REQUIRED
PERIODS IS ALSO DISCLOSED.
We may also disclose cumulative total returns and yields for the subaccounts
based on the inception date of the subaccounts. These calculations will be
determined according to the formulas presented in this SAI.
In addition, we may present historic performace data for the portfolios since
their inception reduced by some or all of the fees and charges under the
Contract. Such adjusted historic performance includes data that precedes the
inception dates of the subaccounts. This data is designed to show the
performance that would have resulted if the Contract had been in existence
during that time.
For instance, we may disclose average annual total returns 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 1.40%, and the $35 annual Contract charge (based on average separate
account value of $34,638, the annual Contract charge is
19
<PAGE>
translated into an annual charge of 0.10%). Such data assumes a complete
surrender of the Contract at the end of the period.
ADVERTISING AND SALES LITERATURE
From time to time we 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: (1) the
selection of individual investments has little impact on portfolio performance,
(2) market timing strategies seldom work, (3) markets are efficient, and (4)
portfolio selection should be made among asset classes. Modern Portfolio Theory
allows an investor to determine an efficient portfolio selection that may
provide a higher return with the same risk or the same return with lower risk.
When presenting the asset allocation process we 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. We 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
Ibbotson Associates, CDA Investment Technologies, Lipper Analytical Services
and any other expert which has been deemed by us to be appropriate. We may also
provide an 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. We
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. We may also discuss the basis
of portfolio optimization including the required inputs and the construction of
efficient portfolios using sophisticated computer-based techniques. Finally, we
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.
As described in the prospectus, in general, an owner is not taxed on increases
in value under a Contract until a distribution is made under the Contract. As a
result, the Contract will benefit from tax deferral during the accumulation
period, as the annuity value may grow more rapidly than under a comparable
investment where certain increases in value are taxed on a current basis. From
time to time, we may use narrative, numerical or graphic examples to show
hypothetical benefits of tax deferral in advertising and sales literature.
PUBLISHED RATINGS
We 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, Standard &
Poor's Insurance Rating Services, Moody's
20
<PAGE>
Investors Service, Inc. and Duff & Phelps Credit Rating Co. A.M. Best's and
Moody's ratings reflect their current opinion of the relative financial
strength and operating performance of an insurance company in comparison to the
norms of the life/health 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 contracts in
accordance with their terms. Claims-paying ability ratings do not refer to an
insurer's ability to meet non-contract obligations such as debt or commercial
paper obligations. These ratings do not apply to the separate account, its
subaccounts, the fund or its portfolios, or to its performance.
ADMINISTRATION
Western Reserve performs administrative services for the Contracts. These
services include issuance of the Contracts, maintenance of records concerning
the Contracts, and certain valuation services.
RECORDS AND REPORTS
All records and accounts relating to the separate account will be maintained by
WRL Investment Services, Inc. As presently required by the 1940 Act and
regulations promulgated thereunder, Western Reserve will mail to all Contract
owners at their last known address of record, at least annually, reports
containing such information as may be required under the 1940 Act or by any
other applicable law or regulation. Contract owners will also receive
confirmation of each financial transaction and any other reports required by
law or regulation.
DISTRIBUTION OF THE CONTRACTS
Prior to May 1, 1999, InterSecurities, Inc. ("ISI"), an affiliate of Western
Reserve, was the principal underwriter of the Contracts. ISI has the same
address as Western Reserve. Effective May 1, 1999, AFSG Securities Corporation
("AFSG") became the principal underwriter of the Contracts. AFSG is located at
4333 Edgewood Rd., N.E., Cedar Rapids, Iowa 52499. Both ISI and AFSG are
registered with the SEC under the Securities Exchange Act of 1934 and are
members of the National Association of Securities Dealers, Inc. No amounts have
been retained by ISI for acting as principal underwriter for the Contracts and
AFSG will not be compensated for its services as principal underwriter of the
Contracts.
The Contracts are offered to the public through broker-dealers licensed under
the federal securities laws, and state insurance laws and who have entered into
written sales agreements with AFSG. Western Reserve will generally pay
broker-dealers first year sales commissions in an amount no greater than 6% of
purchase payments. In addition, broker-dealers may receive renewal commissions
equal to an amount no greater than 0.20% of the annuity value as of each
Contract anniversary, beginning in the second Contract year and each year
thereafter, providing the Contract has an annuity value of $5,000 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
21
<PAGE>
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
the Contracts is continuous and Western Reserve does not anticipate
discontinuing the offering of the Contracts. However, Western Reserve reserves
the right to do so.
OTHER PRODUCTS
Western Reserve makes other variable annuity contracts available that may also
be funded through the separate account. These variable annuity contracts may
have different features, such as different investment choices or charges.
CUSTODY OF ASSETS
The assets of WRL Series Annuity Account are held by Western Reserve. The
assets of the separate account are kept physically segregated and held apart
from our general account and any of our other separate accounts. WRL Investment
Services, Inc. maintains records of all purchases and redemptions of shares of
the fund. Additional protection for the assets of the separate 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.
LEGAL MATTERS
Sutherland Asbill & Brennan LLP has provided advice on certain legal matters
concerning federal securities laws applicable to the issue and sale of 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.
INDEPENDENT ACCOUNTANTS
The accounting firm of PricewaterhouseCoopers LLP, independent accountants,
provided audit services to the separate account for the year ended December 31,
1998. The principal business address of PricewaterhouseCoopers LLP is 160
Federal Street, Boston, Massachusetts 02110. The accounting firm of Ernst &
Young LLP, independent auditors, provided audit services to Western Reserve for
the year ended December 31, 1998. The principal business address of Ernst &
Young LLP is 801 Grand Avenue, Suite 3400, Des Moines, Iowa 50309-2764.
22
<PAGE>
OTHER INFORMATION
A Registration Statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933 as amended, with respect to the
Contracts discussed in this SAI. Not all of the information set forth in the
Registration Statement, amendments, and exhibits thereto has been included in
the prospectus or this SAI. Statements contained in the prospectus and this SAI
concerning the content of the Contracts and other legal instruments are
intended to be summaries. For a complete statement of the terms of these
documents, reference should be made to the instruments filed with the
Securities and Exchange Commission.
FINANCIAL STATEMENTS
The values of an owner's interest in the separate account will be affected
solely by the investment results of the selected subaccount(s). Western
Reserve's financial statements which are included in this SAI, should be
considered only as bearing on Western Reserve's ability to meet its obligations
under the Contracts. They should not be considered as bearing on the investment
performance of the assets held in the separate account.
Financial statements for Western Reserve as of December 31, 1998 and 1997 and
for each of the three years in the period ended December 31, 1998 have been
prepared on the basis of statutory accounting principles, rather than generally
accepted accounting principles.
23
<PAGE>
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
In our opinion, the accompanying statement of assets and liabilities and
the related statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the financial
position of each of the Sub-Accounts constituting the WRL Freedom Variable
Annuity, WRL Freedom Attainer, WRL Freedom Bellwether, WRL Freedom Conqueror
and WRL Freedom Wealth Creator 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, 1998, the results of each
of their operations, the changes in each of their net assets and the financial
highlights for each of the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (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.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 29, 1999
24
<PAGE>
WRL SERIES ANNUITY ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
AT DECEMBER 31, 1998
ALL AMOUNTS (EXCEPT UNIT VALUES) IN THOUSANDS
<TABLE>
<CAPTION>
Money
Market Bond Growth
Sub-Account Sub-Account Sub-Account
<S> <C> <C> <C>
ASSETS:
Investment in WRL Series Fund, Inc.:
Shares .............................................. 143,019 12,371 27,417
======= ====== ======
Cost ................................................ $143,019 $141,968 $ 936,730
======== ======== ==========
Investment, at net asset value ....................... $143,019 $143,431 $1,643,367
Transfers receivable from depositor .................. 0 0 0
-------- -------- ----------
Total assets ........................................ 143,019 143,431 1,643,367
-------- -------- ----------
LIABILITIES:
Accrued expenses ..................................... 0 0 0
Transfers payable to depositor ....................... 240 754 117
-------- -------- ----------
Total liabilities ................................... 240 754 117
-------- -------- ----------
Net assets .......................................... $142,779 $142,677 $1,643,250
======== ======== ==========
NET ASSETS CONSISTS OF:
Contract Owners' equity:
Class A ............................................. $ 48,797 $ 50,893 $ 817,014
Class B ............................................. 93,982 91,784 826,236
Depositor's equity:
Class A ............................................. 0 0 0
Class B ............................................. 0 0 0
-------- -------- ----------
Net assets applicable to units outstanding ......... $142,779 $142,677 $1,643,250
======== ======== ==========
Contract Owners' units:
Class A ............................................. 3,396 2,415 13,063
Class B ............................................. 7,839 6,351 27,435
Depositor's units:
Class A ............................................. 0 0 0
Class B ............................................. 0 0 0
-------- -------- ----------
Units outstanding .................................. 11,235 8,766 40,498
======== ======== ==========
Accumulation unit value -- Class A .................. $ 14.37 $ 21.08 $ 62.54
======== ======== ==========
Accumulation unit value -- Class B .................. $ 11.99 $ 14.45 $ 30.12
======== ======== ==========
</TABLE>
The notes to the financial statements are an integral part of
this report.
25
<PAGE>
WRL SERIES ANNUITY ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
AT DECEMBER 31, 1998
ALL AMOUNTS (EXCEPT UNIT VALUES) IN THOUSANDS
<TABLE>
<CAPTION>
Strategic Emerging
Global Total Return Growth
Sub-Account Sub-Account Sub-Account
<S> <C> <C> <C>
ASSETS:
Investment in WRL Series Fund, Inc.:
Shares .............................................. 34,670 29,841 21,627
====== ====== ======
Cost ................................................ $649,971 $409,291 $410,871
======== ======== ========
Investment, at net asset value ....................... $821,980 $489,540 $582,292
Transfers receivable from depositor .................. 890 0 967
-------- -------- --------
Total assets ........................................ 822,870 489,540 583,259
-------- -------- --------
LIABILITIES:
Accrued expenses ..................................... 0 0 0
Transfers payable to depositor ....................... 0 29 0
-------- -------- --------
Total liabilities ................................... 0 29 0
-------- -------- --------
Net assets .......................................... $822,870 $489,511 $583,259
======== ======== ========
NET ASSETS CONSISTS OF:
Contract Owners' equity:
Class A ............................................. $298,285 $160,783 $201,838
Class B ............................................. 524,585 328,728 381,421
Depositor's equity:
Class A ............................................. 0 0 0
Class B ............................................. 0 0 0
-------- -------- --------
Net assets applicable to units outstanding ......... $822,870 $489,511 $583,259
======== ======== ========
Contract Owners' units:
Class A ............................................. 9,640 7,983 6,443
Class B ............................................. 17,105 16,462 12,279
Depositor's units:
Class A ............................................. 0 0 0
Class B ............................................. 0 0 0
-------- -------- --------
Units outstanding .................................. 26,745 24,445 18,722
======== ======== ========
Accumulation unit value -- Class A .................. $ 30.94 $ 20.14 $ 31.33
======== ======== ========
Accumulation unit value -- Class B .................. $ 30.67 $ 19.97 $ 31.06
======== ======== ========
</TABLE>
The notes to the financial statements are an integral part of
this report.
26
<PAGE>
WRL SERIES ANNUITY ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
AT DECEMBER 31, 1998
ALL AMOUNTS (EXCEPT UNIT VALUES) IN THOUSANDS
<TABLE>
<CAPTION>
Aggressive Growth &
Growth Balanced Income
Sub-Account Sub-Account Sub-Account
<S> <C> <C> <C>
ASSETS:
Investment in WRL Series Fund, Inc.:
Shares .............................................. 17,282 6,282 5,661
====== ===== =====
Cost ................................................ $281,400 $73,205 $70,109
======== ======= =======
Investment, at net asset value ....................... $387,788 $78,793 $69,506
Transfers receivable from depositor .................. 461 0 0
-------- ------- -------
Total assets ........................................ 388,249 78,793 69,506
-------- ------- -------
LIABILITIES:
Accrued expenses ..................................... 0 0 0
Transfers payable to depositor ....................... 0 45 856
-------- ------- -------
Total liabilities ................................... 0 45 856
-------- ------- -------
Net assets .......................................... $388,249 $78,748 $68,650
======== ======= =======
NET ASSETS CONSISTS OF:
Contract Owners' equity:
Class A ............................................. $106,742 $19,730 $16,502
Class B ............................................. 281,507 59,018 52,148
Depositor's equity:
Class A ............................................. 0 0 0
Class B ............................................. 0 0 0
-------- ------- -------
Net assets applicable to units outstanding ......... $388,249 $78,748 $68,650
======== ======= =======
Contract Owners' units:
Class A ............................................. 4,069 1,336 1,021
Class B ............................................. 10,807 4,024 3,248
Depositor's units:
Class A ............................................. 0 0 0
Class B ............................................. 0 0 0
-------- ------- -------
Units outstanding .................................. 14,876 5,360 4,269
======== ======= =======
Accumulation unit value -- Class A ................... $ 26.23 $ 14.77 $ 16.17
======== ======= =======
Accumulation unit value -- Class B ................... $ 26.05 $ 14.67 $ 16.06
======== ======= =======
</TABLE>
The notes to the financial statements are an integral part of
this report.
27
<PAGE>
WRL SERIES ANNUITY ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
AT DECEMBER 31, 1998
ALL AMOUNTS (EXCEPT UNIT VALUES) IN THOUSANDS
<TABLE>
<CAPTION>
Tactical Asset C.A.S.E.
Allocation Growth Global Sector
Sub-Account Sub-Account Sub-Account
<S> <C> <C> <C>
ASSETS:
Investment in WRL Series Fund, Inc.:
Shares .............................................. 24,217 3,976 1,045
====== ===== =====
Cost ................................................ $314,319 $56,032 $11,468
======== ======= =======
Investment, at net asset value ....................... $323,329 $51,653 $11,552
Transfers receivable from depositor .................. 0 88 12
-------- ------- -------
Total assets ........................................ 323,329 51,741 11,564
-------- ------- -------
LIABILITIES:
Accrued expenses ..................................... 0 0 0
Transfers payable to depositor ....................... 5 0 0
-------- ------- -------
Total liabilities ................................... 5 0 0
-------- ------- -------
Net assets .......................................... $323,324 $51,741 $11,564
======== ======= =======
NET ASSETS CONSISTS OF:
Contract Owners' equity:
Class A ............................................. $ 85,428 $14,161 $ 1,433
Class B ............................................. 237,896 37,580 10,131
Depositor's equity:
Class A ............................................. 0 0 0
Class B ............................................. 0 0 0
-------- ------- -------
Net assets applicable to units outstanding ......... $323,324 $51,741 $11,564
======== ======= =======
Contract Owners' units:
Class A ............................................. 5,174 887 123
Class B ............................................. 14,496 3,043 873
Depositor's units:
Class A ............................................. 0 0 0
Class B ............................................. 0 0 0
-------- ------- -------
Units outstanding .................................. 19,670 3,930 996
======== ======= =======
Accumulation unit value -- Class A .................. $ 16.51 $ 15.96 $ 11.66
======== ======= =======
Accumulation unit value -- Class B .................. $ 16.41 $ 12.35 $ 11.61
======== ======= =======
</TABLE>
The notes to the financial statements are an integral part of
this report.
28
<PAGE>
WRL SERIES ANNUITY ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
AT DECEMBER 31, 1998
ALL AMOUNTS (EXCEPT UNIT VALUES) IN THOUSANDS
<TABLE>
<CAPTION>
International U.S.
Value Equity Equity Equity
Sub-Account Sub-Account Sub-Account
<S> <C> <C> <C>
ASSETS:
Investment in WRL Series Fund, Inc.:
Shares .............................................. 10,818 2,176 6,700
====== ===== =====
Cost ................................................ $143,906 $25,592 $88,930
======== ======= =======
Investment, at net asset value ....................... $131,063 $26,267 $96,618
Transfers receivable from depositor .................. 0 0 257
-------- ------- -------
Total assets ........................................ 131,063 26,267 96,875
-------- ------- -------
LIABILITIES:
Accrued expenses ..................................... 0 0 0
Transfers payable to depositor ....................... 206 108 0
-------- ------- -------
Total liabilities ................................... 206 108 0
-------- ------- -------
Net assets .......................................... $130,857 $26,159 $96,875
======== ======= =======
NET ASSETS CONSISTS OF:
Contract Owners' equity:
Class A ............................................. $ 38,640 $ 6,783 $23,419
Class B ............................................. 92,217 19,376 73,456
Depositor's equity:
Class A ............................................. 0 0 0
Class B ............................................. 0 0 0
-------- ------- -------
Net assets applicable to units outstanding ......... $130,857 $26,159 $96,875
======== ======= =======
Contract Owners' units:
Class A ............................................. 2,964 573 1,538
Class B ............................................. 7,103 1,642 4,840
Depositor's units:
Class A ............................................. 0 0 0
Class B ............................................. 0 0 0
-------- ------- -------
Units outstanding .................................. 10,067 2,215 6,378
======== ======= =======
Accumulation unit value -- Class A .................. $ 13.04 $ 11.83 $ 15.22
======== ======= =======
Accumulation unit value -- Class B .................. $ 12.98 $ 11.80 $ 15.18
======== ======= =======
</TABLE>
The notes to the financial statements are an integral part of
this report.
29
<PAGE>
WRL SERIES ANNUITY ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
AT DECEMBER 31, 1998
ALL AMOUNTS (EXCEPT UNIT VALUES) IN THOUSANDS
<TABLE>
<CAPTION>
Third Avenue Real Estate
Value Securities
Sub-Account Sub-Account
<S> <C> <C>
ASSETS:
Investment in WRL Series Fund, Inc.:
Shares .............................................. 1,651 201
===== ===
Cost ................................................ $15,959 $1,774
======= ======
Investment, at net asset value ....................... $15,335 $1,706
Transfers receivable from depositor .................. 5 189
------- ------
Total assets ........................................ 15,340 1,895
------- ------
LIABILITIES:
Accrued expenses ..................................... 0 0
Transfers payable to depositor ....................... 0 0
------- ------
Total liabilities ................................... 0 0
------- ------
Net assets .......................................... $15,340 $1,895
======= ======
NET ASSETS CONSISTS OF:
Contract Owners' equity:
Class A ............................................. $ 5,783 $ 318
Class B ............................................. 9,281 1,071
Depositor's equity:
Class A ............................................. 138 253
Class B ............................................. 138 253
------- ------
Net assets applicable to units outstanding ......... $15,340 $1,895
======= ======
Contract Owners' units:
Class A ............................................. 629 38
Class B ............................................. 1,010 127
Depositor's units:
Class A ............................................. 15 30
Class B ............................................. 15 30
------- ------
Units outstanding .................................. 1,669 225
======= ======
Accumulation unit value -- Class A .................. $ 9.20 $ 8.44
======= ======
Accumulation unit value -- Class B .................. $ 9.19 $ 8.43
======= ======
</TABLE>
The notes to the financial statements are an integral part of
this report.
30
<PAGE>
WRL SERIES ANNUITY ACCOUNT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
ALL AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
Money
Market Bond Growth
Sub-Account Sub-Account Sub-Account
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income ......................................................... $7,098 $6,877 $ 2,436
Capital gain distributions .............................................. 0 0 10,814
------ ------ --------
Total investment income ............................................... 7,098 6,877 13,250
------ ------ --------
EXPENSES:
Mortality and expense risk:
Class A ................................................................ 652 587 8,232
Class B ................................................................ 1,204 1,077 8,089
------ ------ --------
Total expenses ........................................................ 1,856 1,664 16,321
------ ------ --------
Net investment income (loss) ............................................ 5,242 5,213 (3,071)
------ ------ --------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) from securities transactions ................... 0 2,980 84,538
Change in unrealized appreciation (depreciation) ........................ 0 772 534,463
------ ------ --------
Net gain (loss) on investment securities ................................ 0 3,752 619,001
------ ------ --------
Net increase (decrease) in net assets resulting from operations ....... $5,242 $8,965 $615,930
====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
Strategic Emerging
Global Total Return Growth
Sub-Account Sub-Account Sub-Account
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income ......................................................... $ 4,368 $11,176 $ 0
Capital gain distributions .............................................. 28,573 9,413 19,371
-------- ------- --------
Total investment income ............................................... 32,941 20,589 19,371
-------- ------- --------
EXPENSES:
Mortality and expense risk:
Class A ................................................................ 3,594 2,046 2,147
Class B ................................................................ 6,370 4,258 4,191
-------- ------- --------
Total expenses ........................................................ 9,964 6,304 6,338
-------- ------- --------
Net investment income (loss) ............................................ 22,977 14,285 13,033
-------- ------- --------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) from securities transactions ................... 41,579 12,532 34,463
Change in unrealized appreciation (depreciation) ........................ 112,012 9,475 100,637
-------- ------- --------
Net gain (loss) on investment securities ................................ 153,591 22,007 135,100
-------- ------- --------
Net increase (decrease) in net assets resulting from operations ....... $176,568 $36,292 $148,133
======== ======= ========
</TABLE>
The notes to the financial statements are an integral part of
this report.
31
<PAGE>
WRL SERIES ANNUITY ACCOUNT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
ALL AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
Aggressive Growth &
Growth Balanced Income
Sub-Account Sub-Account Sub-Account
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income ......................................................... $ 810 $1,738 $ 2,946
Capital gain distributions .............................................. 19,054 76 518
-------- ------ --------
Total investment income ............................................... 19,864 1,814 3,464
-------- ------ --------
EXPENSES:
Mortality and expense risk:
Class A ................................................................ 1,054 236 204
Class B ................................................................ 2,857 730 643
-------- ------ --------
Total expenses ........................................................ 3,911 966 847
-------- ------ --------
Net investment income (loss) ............................................ 15,953 848 2,617
-------- ------ --------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) from securities transactions ................... 11,096 2,432 1,695
Change in unrealized appreciation (depreciation) ........................ 87,922 550 (3,096)
-------- ------ --------
Net gain (loss) on investment securities ................................ 99,018 2,982 (1,401)
-------- ------ --------
Net increase (decrease) in net assets resulting from operations ....... $114,971 $3,830 $ 1,216
======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
Tactical Asset C.A.S.E. Global
Allocation Growth Sector
Sub-Account Sub-Account Sub-Account
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income ......................................................... $ 9,083 $ 4,661 $202
Capital gain distributions .............................................. 21,777 321 138
--------- -------- ----
Total investment income ............................................... 30,860 4,982 340
--------- -------- ----
EXPENSES:
Mortality and expense risk:
Class A ................................................................ 1,035 187 26
Class B ................................................................ 3,064 492 143
--------- -------- ----
Total expenses ........................................................ 4,099 679 169
--------- -------- ----
Net investment income (loss) ............................................ 26,761 4,303 171
--------- -------- ----
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) from securities transactions ................... 4,988 (437) 208
Change in unrealized appreciation (depreciation) ........................ (12,543) (3,543) 557
--------- -------- ----
Net gain (loss) on investment securities ................................ (7,555) (3,980) 765
--------- -------- ----
Net increase (decrease) in net assets resulting from operations ....... $ 19,206 $ 323 $936
========= ======== ====
</TABLE>
The notes to the financial statements are an integral part of
this report.
32
<PAGE>
WRL SERIES ANNUITY ACCOUNT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
ALL AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
Value International
Equity Equity U.S. Equity
Sub-Account Sub-Account Sub-Account
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income ......................................................... $ 2,672 $ 20 $ 2,868
Capital gain distributions .............................................. 9,420 0 664
--------- ------ -------
Total investment income ............................................... 12,092 20 3,532
--------- ------ -------
EXPENSES:
Mortality and expense risk:
Class A ................................................................ 604 88 209
Class B ................................................................ 1,461 231 625
--------- ------ -------
Total expenses ........................................................ 2,065 319 834
--------- ------ -------
Net investment income (loss) ............................................ 10,027 (299) 2,698
--------- ------ -------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) from securities transactions ................... 7,300 892 3,078
Change in unrealized appreciation (depreciation) ........................ (29,640) 1,160 7,647
--------- ------ -------
Net gain (loss) on investment securities ................................ (22,340) 2,052 10,725
--------- ------ -------
Net increase (decrease) in net assets resulting from operations ....... $ (12,313) $1,753 $13,423
========= ====== =======
</TABLE>
<TABLE>
<CAPTION>
Third Avenue Real Estate
Value Securities
Sub-Account (a) Sub-Account (b)
<S> <C> <C>
INVESTMENT INCOME:
Dividend income ....................................................... $ 42 $ 0
Capital gain distributions ............................................ 0 0
-------- ------
Total investment income ............................................. 42 0
-------- ------
EXPENSES:
Mortality and expense risk:
Class A .............................................................. 58 3
Class B .............................................................. 102 7
-------- ------
Total expenses ...................................................... 160 10
-------- ------
Net investment income (loss) .......................................... (118) (10)
-------- ------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) from securities transactions ................. (367) (97)
Change in unrealized appreciation (depreciation) ...................... (624) (68)
-------- ------
Net gain (loss) on investment securities .............................. (991) (165)
-------- ------
Net increase (decrease) in net assets resulting from operations ..... $ (1,109) $ (175)
======== ======
</TABLE>
(a) The inception date of this Sub-Account was January 2, 1998.
(b) The inception date of this Sub-Account was May 1, 1998.
The notes to the financial statements are an integral part of
this report.
33
<PAGE>
WRL SERIES ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED
ALL AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
MONEY MARKET BOND
SUB-ACCOUNT SUB-ACCOUNT
December 31, December 31,
-------------------------- -----------------------
1998 1997 1998 1997
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ..................... $ 5,242 $ 4,323 $ 5,213 $ 3,787
Net gain (loss) on investment securities ......... 0 0 3,752 2,297
----------- ---------- --------- ---------
Net increase (decrease) in net assets
resulting from operations ....................... 5,242 4,323 8,965 6,084
----------- ---------- --------- ---------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (transferred) ........... 89,466 24,672 39,699 34,812
----------- ---------- --------- ---------
Less cost of units redeemed:
Administrative charges .......................... 67 56 74 60
Policy loans .................................... 10 44 9 29
Surrender benefits .............................. 51,046 35,358 15,360 12,801
Death benefits .................................. 2,489 1,410 1,002 1,119
----------- ---------- --------- ---------
53,612 36,868 16,445 14,009
----------- ---------- --------- ---------
Increase (decrease) in net assets
from capital unit transactions ................. 35,854 (12,196) 23,254 20,803
----------- ---------- --------- ---------
Net increase (decrease) in net assets ........... 41,096 (7,873) 32,219 26,887
Depositor's equity contribution (redemption) ..... 0 0 0 0
NET ASSETS:
Beginning of year ................................ 101,683 109,556 110,458 83,571
----------- ---------- --------- ---------
End of year ...................................... $ 142,779 $ 101,683 $ 142,677 $ 110,458
=========== ========== ========= =========
UNIT ACTIVITY:
Class A:
Units outstanding -- beginning of year .......... 2,861 3,849 2,360 2,513
Units issued .................................... 12,716 11,575 1,411 863
Units redeemed .................................. (12,181) (12,563) (1,356) (1,016)
----------- ---------- --------- ---------
Units outstanding -- end of year ............... 3,396 2,861 2,415 2,360
=========== ========== ========= =========
Class B:
Units outstanding -- beginning of year .......... 5,383 5,254 4,801 3,055
Units issued .................................... 42,233 26,457 5,846 3,754
Units redeemed .................................. (39,777) (26,328) (4,296) (2,008)
----------- ---------- --------- ---------
Units outstanding -- end of year ............... 7,839 5,383 6,351 4,801
=========== ========== ========= =========
CAPITAL UNIT TRANSACTIONS BY CLASS:
Class A
Proceeds from units issued ...................... $ 179,547 $ 156,967 $ 29,044 $ 16,414
Cost of units redeemed .......................... (172,316) (170,491) (27,598) (18,763)
----------- ---------- --------- ---------
Increase (decrease) in net assets
from capital unit transactions ................ $ 7,231 $ (13,524) $ 1,446 $ (2,349)
=========== ========== ========= =========
Class B
Proceeds from units issued ...................... $ 498,610 $ 300,223 $ 82,089 $ 49,003
Cost of units redeemed .......................... (469,987) (298,895) (60,281) (25,851)
----------- ---------- --------- ---------
Increase (decrease) in net assets
from capital unit transactions ................ $ 28,623 $ 1,328 $ 21,808 $ 23,152
=========== ========== ========= =========
<CAPTION>
GROWTH
SUB-ACCOUNT
December 31,
-----------------------------
1998 1997
-------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ..................... $ (3,071) $ 95,008
Net gain (loss) on investment securities ......... 619,001 44,193
---------- ----------
Net increase (decrease) in net assets
resulting from operations ....................... 615,930 139,201
---------- ----------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (transferred) ........... 176,685 100,049
---------- ----------
Less cost of units redeemed:
Administrative charges .......................... 924 824
Policy loans .................................... 276 291
Surrender benefits .............................. 145,324 122,338
Death benefits .................................. 6,422 6,036
---------- ----------
152,946 129,489
---------- ----------
Increase (decrease) in net assets
from capital unit transactions ................. 23,739 (29,440)
---------- ----------
Net increase (decrease) in net assets ........... 639,669 109,761
Depositor's equity contribution (redemption) ..... 0 0
NET ASSETS:
Beginning of year ................................ 1,003,581 893,820
---------- ----------
End of year ...................................... $1,643,250 $1,003,581
========== ==========
UNIT ACTIVITY:
Class A:
Units outstanding -- beginning of year .......... 14,842 17,370
Units issued .................................... 2,325 2,279
Units redeemed .................................. (4,104) (4,807)
---------- ----------
Units outstanding -- end of year ............... 13,063 14,842
========== ==========
Class B:
Units outstanding -- beginning of year .......... 23,273 19,833
Units issued .................................... 14,632 9,817
Units redeemed .................................. (10,470) (6,377)
---------- ----------
Units outstanding -- end of year ............... 27,435 23,273
========== ==========
CAPITAL UNIT TRANSACTIONS BY CLASS:
Class A
Proceeds from units issued ...................... $ 115,049 $ 83,258
Cost of units redeemed .......................... (196,117) (173,750)
---------- ----------
Increase (decrease) in net assets
from capital unit transactions ................ $ (81,068) $ (90,492)
========== ==========
Class B
Proceeds from units issued ...................... $ 349,932 $ 172,646
Cost of units redeemed .......................... (245,125) (111,594)
---------- ----------
Increase (decrease) in net assets
from capital unit transactions ................ $ 104,807 $ 61,052
========== ==========
</TABLE>
The notes to the financial statements are an integral part of
this report.
34
<PAGE>
WRL SERIES ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED
ALL AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
STRATEGIC
GLOBAL TOTAL RETURN EMERGING GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
December 31, December 31, December 31,
------------------------- ------------------------- -------------------------
1998 1997 1998 1997 1998 1997
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ..................... $ 22,977 $ 67,753 $ 14,285 $ 31,906 $ 13,033 $ 34,075
Net gain (loss) on investment securities ......... 153,591 16,167 22,007 39,238 135,100 32,074
---------- ---------- --------- --------- ---------- ---------
Net increase (decrease) in net assets
resulting from operations ....................... 176,568 83,920 36,292 71,144 148,133 66,149
---------- ---------- --------- --------- ---------- ---------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (transferred) ........... 84,146 153,435 53,733 73,224 52,394 65,278
---------- ---------- --------- --------- ---------- ---------
Less cost of units redeemed:
Administrative charges .......................... 531 415 257 230 370 305
Policy loans .................................... 169 179 75 78 81 148
Surrender benefits .............................. 67,089 50,878 41,421 31,156 39,571 28,049
Death benefits .................................. 2,884 2,194 2,375 2,384 1,824 1,218
---------- ---------- --------- --------- ---------- ---------
70,673 53,666 44,128 33,848 41,846 29,720
---------- ---------- --------- --------- ---------- ---------
Increase (decrease) in net assets
from capital unit transactions ................. 13,473 99,769 9,605 39,376 10,548 35,558
---------- ---------- --------- --------- ---------- ---------
Net increase (decrease) in net assets ........... 190,041 183,689 45,897 110,520 158,681 101,707
Depositor's equity contribution (redemption) ..... 0 0 0 0 0 0
NET ASSETS:
Beginning of year ................................ 632,829 449,140 443,614 333,094 424,578 322,871
---------- ---------- --------- --------- ---------- ---------
End of year ...................................... $ 822,870 $ 632,829 $ 489,511 $ 443,614 $ 583,259 $ 424,578
========== ========== ========= ========= ========== =========
UNIT ACTIVITY:
Class A:
Units outstanding -- beginning of year .......... 10,843 10,764 8,831 8,850 7,180 7,440
Units issued .................................... 2,177 3,749 1,416 2,112 1,612 2,547
Units redeemed .................................. (3,380) (3,670) (2,264) (2,131) (2,349) (2,807)
---------- ---------- --------- --------- ---------- ---------
Units outstanding -- end of year ............... 9,640 10,843 7,983 8,831 6,443 7,180
========== ========== ========= ========= ========== =========
Class B:
Units outstanding -- beginning of year .......... 15,530 11,159 15,125 12,771 11,279 9,377
Units issued .................................... 8,478 9,373 5,389 5,551 6,337 6,544
Units redeemed .................................. (6,903) (5,002) (4,052) (3,197) (5,337) (4,642)
---------- ---------- --------- --------- ---------- ---------
Units outstanding -- end of year ............... 17,105 15,530 16,462 15,125 12,279 11,279
========== ========== ========= ========= ========== =========
CAPITAL UNIT TRANSACTIONS BY CLASS:
Class A
Proceeds from units issued ...................... $ 60,997 $ 85,424 $ 27,037 $ 36,001 $ 41,764 $ 53,282
Cost of units redeemed .......................... (93,858) (85,013) (43,014) (36,499) (59,104) (58,078)
---------- ---------- --------- --------- ---------- ---------
Increase (decrease) in net assets
from capital unit transactions ................ $ (32,861) $ 411 $ (15,977) $ (498) $ (17,340) $ (4,796)
========== ========== ========= ========= ========== =========
Class B
Proceeds from units issued ....................... $ 236,884 $ 215,509 $ 101,973 $ 94,632 $ 162,954 $ 137,690
Cost of units redeemed ........................... (190,550) (116,151) (76,391) (54,758) (135,066) (97,336)
---------- ---------- --------- --------- ---------- ---------
Increase (decrease) in net assets
from capital unit transactions ................ $ 46,334 $ 99,358 $ 25,582 $ 39,874 $ 27,888 $ 40,354
========== ========== ========= ========= ========== =========
</TABLE>
The notes to the financial statements are an integral part of
this report.
35
<PAGE>
WRL SERIES ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED
ALL AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH BALANCED GROWTH & INCOME
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
December 31, December 31, December 31,
------------------------- ------------------------ -----------------------
1998 1997 1998 1997 1998 1997
------------ ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ..................... $ 15,953 $ 18,672 $ 848 $ 5,486 $ 2,617 $ 6,496
Net gain (loss) on investment securities ......... 99,018 19,487 2,982 1,940 (1,401) 1,829
--------- --------- --------- -------- --------- --------
Net increase (decrease) in net assets
resulting from operations ....................... 114,971 38,159 3,830 7,426 1,216 8,325
--------- --------- --------- -------- --------- --------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (transferred) ........... 61,019 51,596 21,611 16,015 22,549 13,870
--------- --------- --------- -------- --------- --------
Less cost of units redeemed:
Administrative charges .......................... 253 189 47 35 37 26
Policy loans .................................... 191 69 34 5 15 14
Surrender benefits .............................. 23,320 16,218 7,504 3,892 5,368 3,255
Death benefits .................................. 922 1,009 334 615 342 622
--------- --------- --------- -------- --------- --------
24,686 17,485 7,919 4,547 5,762 3,917
--------- --------- --------- -------- --------- --------
Increase (decrease) in net assets
from capital unit transactions ................. 36,333 34,111 13,692 11,468 16,787 9,953
--------- --------- --------- -------- --------- --------
Net increase (decrease) in net assets ........... 151,304 72,270 17,522 18,894 18,003 18,278
Depositor's equity contribution (redemption) ..... 0 0 0 0 0 0
NET ASSETS:
Beginning of year ................................ 236,945 164,675 61,226 42,332 50,647 32,369
--------- --------- --------- -------- --------- --------
End of year ...................................... $ 388,249 $ 236,945 $ 78,748 $ 61,226 $ 68,650 $ 50,647
========= ========= ========= ======== ========= ========
UNIT ACTIVITY:
Class A:
Units outstanding -- beginning of year .......... 4,173 4,385 1,239 1,124 885 961
Units issued .................................... 1,588 1,851 652 511 654 478
Units redeemed .................................. (1,692) (2,063) (555) (396) (518) (554)
--------- --------- --------- -------- --------- --------
Units outstanding -- end of year ............... 4,069 4,173 1,336 1,239 1,021 885
========= ========= ========= ======== ========= ========
Class B:
Units outstanding -- beginning of year .......... 9,141 6,954 3,157 2,386 2,316 1,554
Units issued .................................... 6,364 5,495 2,021 1,449 2,664 1,325
Units redeemed .................................. (4,698) (3,308) (1,154) (678) (1,732) (563)
--------- --------- --------- -------- --------- --------
Units outstanding -- end of year ............... 10,807 9,141 4,024 3,157 3,248 2,316
========= ========= ========= ======== ========= ========
CAPITAL UNIT TRANSACTIONS BY CLASS:
Class A
Proceeds from units issued ...................... $ 33,380 $ 30,741 $ 9,298 $ 6,670 $ 10,307 $ 6,632
Cost of units redeemed .......................... (34,274) (33,539) (7,930) (5,169) (8,136) (7,537)
--------- --------- --------- -------- --------- --------
Increase (decrease) in net assets
from capital unit transactions ................ $ (894) $ (2,798) $ 1,368 $ 1,501 $ 2,171 $ (905)
========= ========= ========= ======== ========= ========
Class B
Proceeds from units issued ...................... $ 134,461 $ 91,322 $ 28,613 $ 18,801 $ 41,704 $ 18,709
Cost of units redeemed .......................... (97,234) (54,413) (16,289) (8,834) (27,088) (7,851)
--------- --------- --------- -------- --------- --------
Increase (decrease) in net assets
from capital unit transactions ................ $ 37,227 $ 36,909 $ 12,324 $ 9,967 $ 14,616 $ 10,858
========= ========= ========= ======== ========= ========
</TABLE>
The notes to the financial statements are an integral part of
this report.
36
<PAGE>
WRL SERIES ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED
ALL AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
TACTICAL ASSET ALLOCATION C.A.S.E. GROWTH GLOBAL SECTOR
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
December 31, December 31, December 31,
------------------------- ----------------------- -----------------------
1998 1997 1998 1997 1998 1997
------------ ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) .................... $ 26,761 $ 16,973 $ 4,303 $ 3,913 $ 171 $ 505
Net gain (loss) on investment securities ........ (7,555) 15,427 (3,980) (788) 765 (407)
--------- --------- --------- -------- -------- --------
Net increase (decrease) in net assets
resulting from operations ...................... 19,206 32,400 323 3,125 936 98
--------- --------- --------- -------- -------- --------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (transferred) .......... 60,662 71,016 5,436 32,505 (627) 7,365
--------- --------- --------- -------- -------- --------
Less cost of units redeemed:
Administrative charges ......................... 145 107 33 15 8 4
Policy loans ................................... 61 38 17 12 5 1
Surrender benefits ............................. 27,240 17,363 3,062 1,838 799 665
Death benefits ................................. 1,105 1,673 578 222 82 14
--------- --------- --------- -------- -------- --------
28,551 19,181 3,690 2,087 894 684
--------- --------- --------- -------- -------- --------
Increase (decrease) in net assets
from capital unit transactions ................ 32,111 51,835 1,746 30,418 (1,521) 6,681
--------- --------- --------- -------- -------- --------
Net increase (decrease) in net assets .......... 51,317 84,235 2,069 33,543 (585) 6,779
Depositor's equity contribution (redemption) ..... 0 0 0 (25) (556) 0
NET ASSETS:
Beginning of year ............................... 272,007 187,772 49,672 16,154 12,705 5,926
--------- --------- --------- -------- -------- --------
End of year ..................................... $ 323,324 $ 272,007 $ 51,741 $ 49,672 $ 11,564 $ 12,705
========= ========= ========= ======== ======== ========
UNIT ACTIVITY:
Class A:
Units outstanding -- beginning of year ......... 5,049 4,640 1,121 260 220 230
Units issued ................................... 1,544 1,856 538 1,162 44 113
Units redeemed ................................. (1,419) (1,447) (772) (301) (141) (123)
--------- --------- --------- -------- -------- --------
Units outstanding -- end of year .............. 5,174 5,049 887 1,121 123 220
========= ========= ========= ======== ======== ========
Class B:
Units outstanding -- beginning of year ......... 12,633 9,398 2,618 1,164 965 334
Units issued ................................... 5,679 6,245 1,879 2,142 348 878
Units redeemed ................................. (3,816) (3,010) (1,454) (688) (440) (247)
--------- --------- --------- -------- -------- --------
Units outstanding -- end of year .............. 14,496 12,633 3,043 2,618 873 965
========= ========= ========= ======== ======== ========
CAPITAL UNIT TRANSACTIONS BY CLASS:
Class A
Proceeds from units issued ..................... $ 24,856 $ 26,637 $ 8,282 $ 18,073 $ 506 $ 1,229
Cost of units redeemed ......................... (22,698) (20,740) (12,019) (4,706) (1,579) (1,348)
--------- --------- --------- -------- -------- --------
Increase (decrease) in net assets
from capital unit transactions ............... $ 2,158 $ 5,897 $ (3,737) $ 13,367 $ (1,073) $ (119)
========= ========= ========= ======== ======== ========
Class B
Proceeds from units issued ..................... $ 90,625 $ 89,910 $ 22,803 $ 24,989 $ 3,952 $ 9,471
Cost of units redeemed ......................... (60,672) (43,972) (17,320) (7,963) (4,956) (2,671)
--------- --------- --------- -------- -------- --------
Increase (decrease) in net assets
from capital unit transactions ............... $ 29,953 $ 45,938 $ 5,483 $ 17,026 $ (1,004) $ 6,800
========= ========= ========= ======== ======== ========
</TABLE>
The notes to the financial statements are an integral part of
this report.
37
<PAGE>
WRL SERIES ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED
ALL AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
VALUE EQUITY INTERNATIONAL EQUITY U.S. EQUTIY
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
December 31, December 31, December 31,
------------------------- ----------------------- -----------------------
1998 1997 1998 1997 (a) 1998 1997 (a)
------------ ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ..................... $ 10,027 $ 576 $ (299) $ (55) $ 2,698 $ 1,223
Net gain (loss) on investment securities ......... (22,340) 16,752 2,052 (273) 10,725 1,489
--------- --------- --------- -------- --------- ---------
Net increase (decrease) in net assets
resulting from operations ....................... (12,313) 17,328 1,753 (328) 13,423 2,712
--------- --------- --------- -------- --------- ---------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (transferred) ........... 11,585 97,065 9,266 17,763 52,247 38,761
--------- --------- --------- -------- --------- ---------
Less cost of units redeemed:
Administrative charges .......................... 84 41 13 3 25 5
Policy loans .................................... 64 14 26 5 22 0
Surrender benefits .............................. 14,233 7,470 1,407 504 7,153 2,568
Death benefits .................................. 682 315 207 5 386 1
--------- --------- --------- -------- --------- ---------
15,063 7,840 1,653 517 7,586 2,574
--------- --------- --------- -------- --------- ---------
Increase (decrease) in net assets
from capital unit transactions ................. (3,478) 89,225 7,613 17,246 44,661 36,187
--------- --------- --------- -------- --------- ---------
Net increase (decrease) in net assets ........... (15,791) 106,553 9,366 16,918 58,084 38,899
Depositor's equity contribution (redemption) ..... 0 (343) (725) 600 (408) 300
NET ASSETS:
Beginning of year ................................ 146,648 40,438 17,518 0 39,199 0
--------- --------- --------- -------- --------- ---------
End of year ...................................... $ 130,857 $ 146,648 $ 26,159 $ 17,518 $ 96,875 $ 39,199
========= ========= ========= ======== ========= =========
UNIT ACTIVITY:
Class A:
Units outstanding -- beginning of year .......... 3,562 1,486 601 0 987 0
Units issued .................................... 2,145 3,436 665 717 1,779 1,742
Units redeemed .................................. (2,743) (1,360) (693) (116) (1,228) (755)
--------- --------- --------- -------- --------- ---------
Units outstanding -- end of year ............... 2,964 3,562 573 601 1,538 987
========= ========= ========= ======== ========= =========
Class B:
Units outstanding -- beginning of year .......... 7,035 2,119 1,051 0 2,141 0
Units issued .................................... 5,002 7,466 1,776 1,505 5,244 3,215
Units redeemed .................................. (4,934) (2,550) (1,185) (454) (2,545) (1,074)
--------- --------- --------- -------- --------- ---------
Units outstanding -- end of year ............... 7,103 7,035 1,642 1,051 4,840 2,141
========= ========= ========= ======== ========= =========
CAPITAL UNIT TRANSACTIONS BY CLASS:
Class A
Proceeds from units issued ...................... $ 29,077 $ 43,341 $ 7,942 $ 7,704 $ 24,458 $ 20,081
Cost of units redeemed .......................... (36,336) (17,206) (8,214) (1,254) (17,106) (8,686)
--------- --------- --------- -------- --------- ---------
Increase (decrease) in net assets
from capital unit transactions ................ $ (7,259) $ 26,135 $ (272) $ 6,450 $ 7,352 $ 11,395
========= ========= ========= ======== ========= =========
Class B
Proceeds from units issued ....................... $ 69,109 $ 95,515 $ 20,738 $ 16,298 $ 71,783 $ 37,740
Cost of units redeemed ........................... (65,328) (32,768) (13,578) (4,902) (34,882) (12,648)
--------- --------- --------- -------- --------- ---------
Increase (decrease) in net assets
from capital unit transactions .................... $ 3,781 $ 62,747 $ 7,160 $ 11,396 $ 36,901 $ 25,092
========= ========= ========= ======== ========= =========
</TABLE>
(a) The inception date of this Sub-Account was January 2, 1997.
The notes to the financial statements are an integral part of
this report.
38
<PAGE>
WRL SERIES ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED
ALL AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
THIRD AVENUE REAL ESTATE
VALUE SECURITIES
SUB-ACCOUNT SUB-ACCOUNT
December 31, December 31,
1998 (b) 1998 (c)
-------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ......................... $ (118) $ (10)
Net gain (loss) on investment securities ............. (991) (165)
-------- --------
Net increase (decrease) in net assets
resulting from operations .......................... (1,109) (175)
-------- --------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (transferred) ............... 16,606 1,484
-------- --------
Less cost of units redeemed:
Administrative charges .............................. 4 0
Policy loans ........................................ 0 0
Surrender benefits .................................. 453 14
Death benefits ...................................... 0 0
-------- --------
457 14
-------- --------
Increase (decrease) in net assets
from capital unit transactions ..................... 16,149 1,470
-------- --------
Net increase (decrease) in net assets ............... 15,040 1,295
Depositor's equity contribution (redemption) ......... 300 600
NET ASSETS:
Beginning of year .................................... 0 0
-------- --------
End of year .......................................... $ 15,340 $ 1,895
======== ========
UNIT ACTIVITY:
Class A:
Units outstanding -- beginning of year .............. 0 0
Units issued ........................................ 992 84
Units redeemed ...................................... (348) (16)
-------- --------
Units outstanding -- end of year ................... 644 68
======== ========
Class B:
Units outstanding -- beginning of year .............. 0 0
Units issued ........................................ 1,702 302
Units redeemed ...................................... (677) (145)
-------- --------
Units outstanding -- end of year ................... 1,025 157
======== ========
CAPITAL UNIT TRANSACTIONS BY CLASS:
Class A
Proceeds from units issued .......................... $ 9,565 $ 784
Cost of units redeemed .............................. (3,245) (151)
-------- --------
Increase (decrease) in net assets
from capital unit transactions .................... $ 6,320 $ 633
======== ========
Class B
Proceeds from units issued .......................... $ 16,395 $ 2,659
Cost of units redeemed .............................. (6,266) (1,222)
-------- --------
Increase (decrease) in net assets
from capital unit transactions .................... $ 10,129 $ 1,437
======== ========
</TABLE>
(b) The inception date of this Sub-Account was January 2, 1998.
(c) The inception date of this Sub-Account was May 1, 1998.
The notes to the financial statements are an integral part of
this report.
39
<PAGE>
WRL SERIES ANNUITY ACCOUNT
FINANCIAL HIGHLIGHTS*
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
MONEY MARKET SUB-ACCOUNT
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year .............................. $ 13.82 $ 13.29
Income from operations:
Net investment income (loss) .......................................... 0.55 0.53
Net realized and unrealized gain (loss) on investment ................. 0.00 0.00
------- -------
Net income (loss) from operations .................................... 0.55 0.53
------- -------
Accumulation unit value, end of year .................................... $ 14.37 $ 13.82
======= =======
Total return (a) ........................................................ 3.99% 4.00%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................... $48,797 $39,531
Ratios of net investment income (loss) to average net assets (b) ....... 3.89% 3.92%
<CAPTION>
MONEY MARKET SUB-ACCOUNT
December 31,
-----------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year .............................. $ 12.80 $ 12.29 $ 12.03
Income from operations:
Net investment income (loss) .......................................... 0.49 0.51 0.26
Net realized and unrealized gain (loss) on investment ................. 0.00 0.00 0.00
------- ------- -------
Net income (loss) from operations .................................... 0.49 0.51 0.26
------- ------- -------
Accumulation unit value, end of year .................................... $ 13.29 $ 12.80 $ 12.29
======= ======= =======
Total return (a) ........................................................ 3.81% 4.12% 2.22%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................... $51,141 $41,596 $55,318
Ratios of net investment income (loss) to average net assets (b) ....... 3.72% 4.03% 2.28%
</TABLE>
<TABLE>
<CAPTION>
BOND SUB-ACCOUNT
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year .............................. $ 19.52 $ 18.11
Income from operations:
Net investment income (loss) .......................................... 0.82 0.73
Net realized and unrealized gain (loss) on investment ................. 0.74 0.68
------- -------
Net income (loss) from operations .................................... 1.56 1.41
------- -------
Accumulation unit value, end of year .................................... $ 21.08 $ 19.52
======= =======
Total return (a) ........................................................ 7.96% 7.80%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................... $50,893 $46,082
Ratios of net investment income (loss) to average net assets (b) ....... 4.02% 3.95%
<CAPTION>
BOND SUB-ACCOUNT
December 31,
-------------------------------------
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year .............................. $ 18.31 $ 15.08 $ 16.40
Income from operations:
Net investment income (loss) .......................................... 0.77 0.83 0.72
Net realized and unrealized gain (loss) on investment ................. (0.97) 2.40 (2.04)
------- ------- -------
Net income (loss) from operations .................................... (0.20) 3.23 (1.32)
------- ------- -------
Accumulation unit value, end of year .................................... $ 18.11 $ 18.31 $ 15.08
======= ======= =======
Total return (a) ........................................................ (1.10)% 21.46% (8.10)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................... $45,516 $54,109 $47,193
Ratios of net investment income (loss) to average net assets (b) ....... 4.34% 4.94% 4.69%
</TABLE>
<TABLE>
<CAPTION>
GROWTH SUB-ACCOUNT
December 31,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year ............................... $ 38.50 $ 33.17
Income from operations:
Net investment income (loss) ........................................... (0.08) 3.42
Net realized and unrealized gain (loss) on investment .................. 24.12 1.91
------- --------
Net income (loss) from operations ..................................... 24.04 5.33
------- --------
Accumulation unit value, end of year ..................................... $ 62.54 $ 38.50
======= ========
Total return (a) ......................................................... 62.43% 16.09%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $817,014 $571,456
Ratios of net investment income (loss) to average net assets (b) ........ (0.18)% 9.36%
<CAPTION>
GROWTH SUB-ACCOUNT
December 31,
--------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year ............................... $ 28.47 $ 19.60 $ 21.64
Income from operations:
Net investment income (loss) ........................................... 1.64 2.35 (0.06)
Net realized and unrealized gain (loss) on investment .................. 3.06 6.52 (1.98)
-------- -------- -------
Net income (loss) from operations ..................................... 4.70 8.87 (2.04)
-------- -------- -------
Accumulation unit value, end of year ..................................... $ 33.17 $ 28.47 $ 19.60
======== ======== =======
Total return (a) ......................................................... 16.50% 45.29% (9.45)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $576,115 $532,646 $409,881
Ratios of net investment income (loss) to average net assets (b) ........ 5.22% 9.81% (0.28)%
</TABLE>
The notes to the financial statements are an integral part of
this report.
40
<PAGE>
WRL SERIES ANNUITY ACCOUNT
FINANCIAL HIGHLIGHTS*
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
GLOBAL SUB-ACCOUNT
December 31,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year ............................... $ 24.10 $ 20.55
Income from operations:
Net investment income (loss) ........................................... 0.83 2.55
Net realized and unrealized gain (loss) on investment .................. 6.01 1.00
-------- --------
Net income (loss) from operations ..................................... 6.84 3.55
-------- --------
Accumulation unit value, end of year ..................................... $ 30.94 $ 24.10
======== ========
Total return (a) ......................................................... 28.40% 17.28%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $298,285 $261,317
Ratios of net investment income (loss) to average net assets (b) ........ 2.97% 11.01%
<CAPTION>
GLOBAL SUB-ACCOUNT
December 31,
--------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year ............................... $ 16.29 $ 13.40 $ 13.54
Income from operations:
Net investment income (loss) ........................................... 1.62 0.42 0.45
Net realized and unrealized gain (loss) on investment .................. 2.64 2.47 (0.59)
-------- -------- -------
Net income (loss) from operations ..................................... 4.26 2.89 (0.14)
-------- -------- -------
Accumulation unit value, end of year ..................................... $ 20.55 $ 16.29 $ 13.40
======== ======== =======
Total return (a) ......................................................... 26.15% 21.53% (0.99)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $221,185 $141,425 $144,705
Ratios of net investment income (loss) to average net assets (b) ........ 8.60% 2.89% 3.40%
</TABLE>
<TABLE>
<CAPTION>
STRATEGIC TOTAL RETURN
SUB-ACCOUNT
December 31,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year ............................... $ 18.60 $ 15.46
Income from operations:
Net investment income (loss) ........................................... 0.56 1.34
Net realized and unrealized gain (loss) on investment .................. 0.98 1.80
-------- --------
Net income (loss) from operations ..................................... 1.54 3.14
-------- --------
Accumulation unit value, end of year ..................................... $ 20.14 $ 18.60
Total return (a) ......................................................... 8.28% 20.34%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................... $160,783 $164,259
Ratios of net investment income (loss) to average net assets (b) ....... 2.95% 7.83%
<CAPTION>
STRATEGIC TOTAL RETURN SUB-ACCOUNT
December 31,
-------------------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year ............................... $ 13.61 $ 11.06 $11.25
Income from operations:
Net investment income (loss) ........................................... 0.68 0.59 0.16
Net realized and unrealized gain (loss) on investment .................. 1.17 1.96 (0.35)
-------- -------- ------
Net income (loss) from operations ..................................... 1.85 2.55 (0.19)
-------- -------- ------
Accumulation unit value, end of year ..................................... $ 15.46 $ 13.61 $11.06
Total return (a) ......................................................... 13.57% 23.11% (1.7)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................... $136,789 $116,374 $88,607
Ratios of net investment income (loss) to average net assets (b) ....... 4.75% 4.74% 1.43%
</TABLE>
<TABLE>
<CAPTION>
EMERGING GROWTH
SUB-ACCOUNT
December 31,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year ............................... $ 23.10 $ 19.26
Income from operations:
Net investment income (loss) ........................................... 0.69 1.85
Net realized and unrealized gain (loss) on investment .................. 7.54 1.99
-------- --------
Net income (loss) from operations ..................................... 8.23 3.84
-------- --------
Accumulation unit value, end of year ..................................... $ 31.33 $ 23.10
======== ========
Total return (a) ......................................................... 35.63% 19.95%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $201,838 $165,848
Ratios of net investment income (loss) to average net assets (b) ........ 2.69% 8.73%
<CAPTION>
EMERGING GROWTH SUB-ACCOUNT
December 31,
--------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year ............................... $ 16.40 $ 11.31 $ 12.37
Income from operations:
Net investment income (loss) ........................................... 0.63 0.51 (0.13)
Net realized and unrealized gain (loss) on investment .................. 2.23 4.58 (0.93)
-------- -------- -------
Net income (loss) from operations ..................................... 2.86 5.09 (1.06)
-------- -------- -------
Accumulation unit value, end of year ..................................... $ 19.26 $ 16.40 $ 11.31
======== ======== =======
Total return (a) ......................................................... 17.41% 44.97% (8.51)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $143,282 $115,797 $83,480
Ratios of net investment income (loss) to average net assets (b) ........ 3.42% 3.68% (1.21)%
</TABLE>
The notes to the financial statements are an integral part of
this report.
41
<PAGE>
WRL SERIES ANNUITY ACCOUNT
FINANCIAL HIGHLIGHTS*
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH
SUB-ACCOUNT
December 31,
------------------------
1998 1997
------------ -----------
<S> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year ............................... $ 17.86 $ 14.56
Income from operations:
Net investment income (loss) ........................................... 1.13 1.42
Net realized and unrealized gain (loss) on investment .................. 7.24 1.88
-------- -------
Net income (loss) from operations ..................................... 8.37 3.30
-------- -------
Accumulation unit value, end of year ..................................... $ 26.23 $ 17.86
======== =======
Total return (a) ......................................................... 46.84% 22.71%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $106,742 $74,544
Ratios of net investment income (loss) to average net assets (b) ........ 5.39% 8.51%
<CAPTION>
AGGRESSIVE GROWTH SUB-ACCOUNT
December 31,
------------------------------------
1996 1995 1994 (c)
----------- ----------- ------------
<S> <C> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year ............................... $ 13.35 $ 9.79 $ 10.00
Income from operations:
Net investment income (loss) ........................................... 0.25 0.29 (0.08)
Net realized and unrealized gain (loss) on investment .................. 0.96 3.27 (0.13)
------- ------- -------
Net income (loss) from operations ..................................... 1.21 3.56 (0.21)
------- ------- -------
Accumulation unit value, end of year ..................................... $ 14.56 $ 13.35 $ 9.79
======= ======= =======
Total return (a) ......................................................... 9.07% 36.31% (2.08)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $63,843 $65,666 $18,555
Ratios of net investment income (loss) to average net assets (b) ........ 1.77% 2.28% (1.04)%
</TABLE>
<TABLE>
<CAPTION>
BALANCED SUB-ACCOUNT
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year ............................... $ 13.99 $ 12.09
Income from operations:
Net investment income (loss) ........................................... 0.17 1.32
Net realized and unrealized gain (loss) on investment .................. 0.61 0.58
------- -------
Net income (loss) from operations ..................................... 0.78 1.90
------- -------
Accumulation unit value, end of year ..................................... $ 14.77 $ 13.99
======= =======
Total return (a) ......................................................... 5.60% 15.65%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $19,730 $17,324
Ratios of net investment income (loss) to average net assets (b) ........ 1.19% 10.01%
<CAPTION>
BALANCED SUB-ACCOUNT
December 31,
------------------------------------
1996 1995 1994 (c)
----------- ----------- ------------
<S> <C> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year ............................... $ 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 investment .................. 0.77 1.42 (0.86)
------- ------- --------
Net income (loss) from operations ..................................... 1.03 1.71 (0.65)
------- ------- --------
Accumulation unit value, end of year ..................................... $ 12.09 $ 11.06 $ 9.35
======= ======= ========
Total return (a) ......................................................... 9.34% 18.31% (6.52)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $13,598 $11,343 $ 9,379
Ratios of net investment income (loss) to average net assets (b) ........ 2.29% 2.85% 2.63%
</TABLE>
<TABLE>
<CAPTION>
GROWTH & INCOME
SUB-ACCOUNT
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year ............................... $ 15.89 $ 12.91
Income from operations:
Net investment income (loss) ........................................... 0.66 2.06
Net realized and unrealized gain (loss) on investment .................. (0.38) 0.92
------- -------
Net income (loss) from operations ...................................... 0.28 2.98
------- -------
Accumulation unit value, end of year ..................................... $ 16.17 $ 15.89
======= =======
Total return (a) ......................................................... 1.77% 23.10%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $16,502 $14,056
Ratios of net investment income (loss) to average net assets (b) ........ 4.17% 14.87%
<CAPTION>
GROWTH & INCOME SUB-ACCOUNT
December 31,
------------------------------------
1996 1995 1994 (c)
----------- ----------- ------------
<S> <C> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year ............................... $ 11.71 $ 9.46 $ 10.00
Income from operations:
Net investment income (loss) ........................................... 0.50 0.45 0.32
Net realized and unrealized gain (loss) on investment .................. 0.70 1.80 (0.86)
------- ------- --------
Net income (loss) from operations ...................................... 1.20 2.25 (0.54)
------- ------- --------
Accumulation unit value, end of year ..................................... $ 12.91 $ 11.71 $ 9.46
======= ======= ========
Total return (a) ......................................................... 10.25% 23.70% (5.37)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $12,397 $11,890 $ 5,506
Ratios of net investment income (loss) to average net assets (b) ........ 4.17% 4.26% 4.07%
</TABLE>
The notes to the financial statements are an integral part of
this report.
42
<PAGE>
WRL SERIES ANNUITY ACCOUNT
FINANCIAL HIGHLIGHTS*
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
TACTICAL ASSET ALLOCATION SUB-ACCOUNT
December 31,
-----------------------------------------------
1998 1997 1996 1995 (d)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year .............................. $ 15.43 $ 13.40 $ 11.86 $ 10.00
Income from operations:
Net investment income (loss) .......................................... 1.40 1.02 0.46 0.58
Net realized and unrealized gain (loss) on investment ................. (0.32) 1.01 1.08 1.28
------- ------- ------- -------
Net income (loss) from operations .................................... 1.08 2.03 1.54 1.86
------- ------- ------- -------
Accumulation unit value, end of year .................................... $ 16.51 $ 15.43 $ 13.40 $ 11.86
======= ======= ======= =======
Total return (a) ........................................................ 6.98% 15.14% 13.00% 18.61%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................... $85,428 $77,923 $62,195 $34,910
Ratios of net investment income (loss) to average net assets (b) ....... 8.72% 6.99% 3.71% 5.25%
</TABLE>
<TABLE>
<CAPTION>
C.A.S.E. GROWTH SUB-ACCOUNT
December 31,
---------------------------------------
1998 1997 1996 (e)
----------- ----------- -----------
<S> <C> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year .............................. $ 15.77 $ 13.88 $ 12.87
Income from operations:
Net investment income (loss) .......................................... 1.27 3.15 0.39
Net realized and unrealized gain (loss) on investment ................. (1.08) (1.26) 0.62
------- ------- -------
Net income (loss) from operations .................................... 0.19 1.89 1.01
------- ------- -------
Accumulation unit value, end of year .................................... $ 15.96 $ 15.77 $ 13.88
======= ======= =======
Total return (a) ........................................................ 1.20% 13.60% 7.84%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................... $14,161 $17,677 $ 3,612
Ratios of net investment income (loss) to average net assets (b) ....... 8.11% 20.61% 4.43%
</TABLE>
<TABLE>
<CAPTION>
GLOBAL SECTOR SUB-ACCOUNT
December 31,
---------------------------------------
1998 1997 1996 (f)
----------- ---------- ------------
<S> <C> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year .............................. $ 10.75 $ 10.52 $ 10.00
Income from operations:
Net investment income (loss) .......................................... 0.11 0.39 (0.01)
Net realized and unrealized gain (loss) on investment ................. 0.80 (0.16) 0.53
------- ------- -------
Net income (loss) from operations .................................... 0.91 0.23 0.52
------- ------- -------
Accumulation unit value, end of year .................................... $ 11.66 $ 10.75 $ 10.52
======= ======= =======
Total return (a) ........................................................ 8.47% 2.15% 5.19%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................... $ 1,433 $ 2,361 $ 2,417
Ratios of net investment income (loss) to average net assets (b) ....... 0.95% 3.54% (0.09)%
</TABLE>
The notes to the financial statements are an integral part of
this report.
43
<PAGE>
WRL SERIES ANNUITY ACCOUNT
FINANCIAL HIGHLIGHTS*
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
VALUE EQUITY SUB-ACCOUNT
December 31,
---------------------------------------
1998 1997 1996 (f)
----------- ----------- -----------
<S> <C> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year .............................. $13.86 $ 11.22 $ 10.00
Income from operations:
Net investment income (loss) .......................................... 0.89 0.07 0.02
Net realized and unrealized gain (loss) on investment ................. (1.71) 2.57 1.20
------ ------- -------
Net income (loss) from operations ..................................... (0.82) 2.64 1.22
------ ------- -------
Accumulation unit value, end of year .................................... $13.04 $ 13.86 $ 11.22
====== ======= =======
Total return (a) ........................................................ (.96)% 23.49% 12.25%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................... $38,640 $49,376 $16,679
Ratios of net investment income (loss) to average net assets (b) ....... 6.44% 0.55% 0.30%
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY
SUB-ACCOUNT
December 31,
---------------------------
1998 1997 (g)
------------ ------------
<S> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year .............................. $ 10.62 $ 10.00
Income from operations:
Net investment income (loss) .......................................... (0.14) (0.05)
Net realized and unrealized gain (loss) on investment ................. 1.35 0.67
------- -------
Net income (loss) from operations .................................... 1.21 0.62
------- -------
Accumulation unit value, end of year .................................... $ 11.83 $ 10.62
======= =======
Total return (a) ........................................................ 11.45% 6.17%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................... $ 6,783 $ 6,377
Ratios of net investment income (loss) to average net assets (b) ....... (1.16)% (0.52)%
</TABLE>
<TABLE>
<CAPTION>
U.S. EQUITY
SUB-ACCOUNT
December 31,
-------------------------
1998 1997 (g)
----------- -----------
<S> <C> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year .............................. $ 12.54 $ 10.00
Income from operations:
Net investment income (loss) .......................................... 0.54 0.75
Net realized and unrealized gain (loss) on investment ................. 2.14 1.79
------- -------
Net income (loss) from operations .................................... 2.68 2.54
------- -------
Accumulation unit value, end of year .................................... $ 15.22 $ 12.54
======= =======
Total return (a) ........................................................ 21.35% 25.44%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................... $23,419 $12,377
Ratios of net investment income (loss) to average net assets (b) ....... 3.90% 6.37%
</TABLE>
The notes to the financial statements are an integral part of
this report.
44
<PAGE>
WRL SERIES ANNUITY ACCOUNT
FINANCIAL HIGHLIGHTS*
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
THIRD AVENUE
VALUE
SUB-ACCOUNT
December 31,
1998 (h)
-------------
<S> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year .............................. $ 10.00
Income from operations:
Net investment income (loss) .......................................... (0.08)
Net realized and unrealized gain (loss) on investment ................. (0.72)
-------
Net income (loss) from operations .................................... (0.80)
-------
Accumulation unit value, end of year .................................... $ 9.20
=======
Total return (a) ........................................................ (7.99)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................... $ 5,921
Ratios of net investment income (loss) to average net assets (b) ....... (0.89)%
</TABLE>
<TABLE>
<CAPTION>
REAL ESTATE
SECURITIES
SUB-ACCOUNT
December 31,
1998 (i)
-------------
<S> <C>
CLASS A UNITS:
Accumulation unit value, beginning of year .............................. $ 10.00
Income from operations:
Net investment income (loss) .......................................... (0.07)
Net realized and unrealized gain (loss) on investment ................. (1.49)
--------
Net income (loss) from operations .................................... (1.56)
--------
Accumulation unit value, end of year .................................... $ 8.44
========
Total return (a) ........................................................ (15.65)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................... $ 571
Ratios of net investment income (loss) to average net assets (b) ....... (1.26)%
</TABLE>
The notes to the financial statements are an integral part of
this report.
45
<PAGE>
WRL SERIES ANNUITY ACCOUNT
FINANCIAL HIGHLIGHTS*
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
MONEY MARKET SUB-ACCOUNT
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year ............................... $ 11.55 $ 11.12
Income from operations:
Net investment income (loss) ........................................... 0.44 0.43
Net realized and unrealized gain (loss) on investment .................. 0.00 0.00
------- -------
Net income (loss) from operations ..................................... 0.44 0.43
------- -------
Accumulation unit value, end of year ..................................... $ 11.99 $ 11.55
======= =======
Total return (a) ......................................................... 3.83% 3.84%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $93,982 $62,152
Ratios of net investment income (loss) to average net assets (b) ........ 3.72% 3.78%
<CAPTION>
MONEY MARKET SUB-ACCOUNT
December 31,
-----------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year ............................... $ 10.73 $ 10.32 $ 10.11
Income from operations:
Net investment income (loss) ........................................... 0.39 0.41 0.21
Net realized and unrealized gain (loss) on investment .................. 0.00 0.00 0.00
------- ------- -------
Net income (loss) from operations ..................................... 0.39 0.41 0.21
------- ------- -------
Accumulation unit value, end of year ..................................... $ 11.12 $ 10.73 $ 10.32
======= ======= =======
Total return (a) ......................................................... 3.65% 3.96% 2.07%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $58,415 $28,524 $28,537
Ratios of net investment income (loss) to average net assets (b) ........ 3.57% 3.89% 2.26%
</TABLE>
<TABLE>
<CAPTION>
BOND SUB-ACCOUNT
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year .............................. $ 13.41 $ 12.46
Income from operations:
Net investment income (loss) .......................................... 0.60 0.67
Net realized and unrealized gain (loss) on investment ................. 0.44 0.28
------- -------
Net income (loss) from operations .................................... 1.04 0.95
------- -------
Accumulation unit value, end of year .................................... $ 14.45 $ 13.41
======= =======
Total return (a) ........................................................ 7.80% 7.64%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................... $91,784 $64,376
Ratios of net investment income (loss) to average net assets (b) ....... 4.31% 5.26%
<CAPTION>
BOND SUB-ACCOUNT
December 31,
-------------------------------------
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year .............................. $ 12.61 $ 10.40 $ 11.33
Income from operations:
Net investment income (loss) .......................................... 0.56 0.64 0.52
Net realized and unrealized gain (loss) on investment ................. (0.71) 1.57 (1.45)
------- ------- -------
Net income (loss) from operations .................................... (0.15) 2.21 (0.93)
------- ------- -------
Accumulation unit value, end of year .................................... $ 12.46 $ 12.61 $ 10.40
======= ======= =======
Total return (a) ........................................................ (1.25)% 21.28% (8.23)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................... $38,055 $32,772 $17,614
Ratios of net investment income (loss) to average net assets (b) ....... 4.60% 5.45% 4.91%
</TABLE>
<TABLE>
<CAPTION>
GROWTH SUB-ACCOUNT
December 31,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year ............................... $ 18.57 $ 16.02
Income from operations:
Net investment income (loss) ........................................... (0.08) 1.87
Net realized and unrealized gain (loss) on investment .................. 11.63 0.68
------- --------
Net income (loss) from operations ..................................... 11.55 2.55
------- --------
Accumulation unit value, end of year ..................................... $ 30.12 $ 18.57
======= ========
Total return (a) ......................................................... 62.19% 15.91%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $826,236 $432,125
Ratios of net investment income (loss) to average net assets (b) ........ (0.33)% 10.53%
<CAPTION>
GROWTH SUB-ACCOUNT
December 31,
--------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year ............................... $ 13.77 $ 9.49 $ 10.50
Income from operations:
Net investment income (loss) ........................................... 0.95 1.30 (0.03)
Net realized and unrealized gain (loss) on investment .................. 1.30 2.98 (0.98)
-------- -------- -------
Net income (loss) from operations ..................................... 2.25 4.28 (1.01)
-------- -------- -------
Accumulation unit value, end of year ..................................... $ 16.02 $ 13.77 $ 9.49
======== ======== =======
Total return (a) ......................................................... 16.32% 45.08% (9.58)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $317,705 $198,139 $112,383
Ratios of net investment income (loss) to average net assets (b) ........ 6.21% 11.07% (0.26)%
</TABLE>
The notes to the financial statements are an integral part of
this report.
46
<PAGE>
WRL SERIES ANNUITY ACCOUNT
FINANCIAL HIGHLIGHTS*
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
GLOBAL SUB-ACCOUNT
December 31,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year .............................. $ 23.92 $ 20.43
Income from operations:
Net investment income (loss) .......................................... 0.88 2.85
Net realized and unrealized gain (loss) on investment ................. 5.87 0.64
-------- --------
Net income (loss) from operations .................................... 6.75 3.49
-------- --------
Accumulation unit value, end of year .................................... $ 30.67 $ 23.92
======== ========
Total return (a) ........................................................ 28.21% 17.10%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................... $524,585 $371,512
Ratios of net investment income (loss) to average net assets (b). ...... 3.16% 12.33%
<CAPTION>
GLOBAL SUB-ACCOUNT
December 31,
--------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year .............................. $ 16.22 $ 13.36 $ 13.52
Income from operations:
Net investment income (loss) .......................................... 1.79 0.43 0.53
Net realized and unrealized gain (loss) on investment ................. 2.42 2.43 (0.69)
-------- -------- -------
Net income (loss) from operations .................................... 4.21 2.86 (0.16)
-------- -------- -------
Accumulation unit value, end of year .................................... $ 20.43 $ 16.22 $ 13.36
======== ======== =======
Total return (a) ........................................................ 25.96% 21.35% (1.14)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................... $227,955 $111,958 $95,829
Ratios of net investment income (loss) to average net assets (b). ...... 9.45% 2.96% 3.95%
</TABLE>
<TABLE>
<CAPTION>
STRATEGIC TOTAL RETURN
SUB-ACCOUNT
December 31,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year ............................... $ 18.47 $ 15.37
Income from operations:
Net investment income (loss) ........................................... 0.59 1.42
Net realized and unrealized gain (loss) on investment .................. 0.91 1.68
-------- --------
Net income (loss) from operations ..................................... 1.50 3.10
-------- --------
Accumulation unit value, end of year ..................................... $ 19.97 $ 18.47
======== ========
Total return (a) ......................................................... 8.11% 20.16%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $328,728 $279,355
Ratios of net investment income (loss) to average net assets (b) ........ 3.11% 8.31%
<CAPTION>
STRATEGIC TOTAL RETURN SUB-ACCOUNT
December 31,
--------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year ............................... $ 13.56 $ 11.03 $ 11.24
Income from operations:
Net investment income (loss) ........................................... 0.94 0.59 0.16
Net realized and unrealized gain (loss) on investment .................. 0.87 1.94 (0.37)
-------- -------- -------
Net income (loss) from operations ..................................... 1.81 2.53 (0.21)
-------- -------- -------
Accumulation unit value, end of year ..................................... $ 15.37 $ 13.56 $ 11.03
======== ======== =======
Total return (a) ......................................................... 13.40% 22.93% (1.92)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $196,305 $101,651 $71,733
Ratios of net investment income (loss) to average net assets (b) ........ 6.55% 4.76% 1.49%
</TABLE>
<TABLE>
<CAPTION>
EMERGING GROWTH
SUB-ACCOUNT
December 31,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year ............................... $ 22.94 $ 19.15
Income from operations:
Net investment income (loss) ........................................... 0.72 2.00
Net realized and unrealized gain (loss) on investment .................. 7.40 1.79
-------- --------
Net income (loss) from operations ..................................... 8.12 3.79
-------- --------
Accumulation unit value, end of year ..................................... $ 31.06 $ 22.94
======== ========
Total return (a) ......................................................... 35.42% 19.77%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $381,421 $258,730
Ratios of net investment income (loss) to average net assets (b). ....... 2.80% 9.45%
<CAPTION>
EMERGING GROWTH SUB-ACCOUNT
December 31,
--------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year ............................... $ 16.34 $ 11.29 $ 12.35
Income from operations:
Net investment income (loss) ........................................... 0.73 0.54 (0.15)
Net realized and unrealized gain (loss) on investment .................. 2.08 4.51 (0.91)
-------- -------- -------
Net income (loss) from operations ..................................... 2.81 5.05 (1.06)
-------- -------- -------
Accumulation unit value, end of year ..................................... $ 19.15 $ 16.34 $ 11.29
======== ======== =======
Total return (a) ......................................................... 17.23% 44.75% (8.65)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $179,589 $105,115 $62,615
Ratios of net investment income (loss) to average net assets (b). ....... 3.96% 3.85% (1.33)%
</TABLE>
The notes to the financial statements are an integral part of
this report.
47
<PAGE>
WRL SERIES ANNUITY ACCOUNT
FINANCIAL HIGHLIGHTS*
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH
SUB-ACCOUNT
December 31,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year .............................. $ 17.77 $ 14.50
Income from operations:
Net investment income (loss) .......................................... 1.17 1.60
Net realized and unrealized gain (loss) on investment ................. 7.11 1.67
-------- --------
Net income (loss) from operations .................................... 8.28 3.27
-------- --------
Accumulation unit value, end of year .................................... $ 26.05 $ 17.77
======== ========
Total return (a) ........................................................ 46.62% 22.52%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................... $281,507 $162,401
Ratios of net investment income (loss) to average net assets (b) ....... 5.57% 9.55%
<CAPTION>
AGGRESSIVE GROWTH SUB-ACCOUNT
December 31,
-------------------------------------
1996 1995 1994 (c)
------------ ----------- ------------
<S> <C> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year .............................. $ 13.31 $ 9.78 $ 10.00
Income from operations:
Net investment income (loss) .......................................... 0.31 0.40 (0.10)
Net realized and unrealized gain (loss) on investment ................. 0.88 3.13 (0.12)
-------- ------- -------
Net income (loss) from operations .................................... 1.19 3.53 (0.22)
-------- ------- -------
Accumulation unit value, end of year .................................... $ 14.50 $ 13.31 $ 9.78
======== ======= =======
Total return (a) ........................................................ 8.91% 36.10% (2.18)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................... $100,832 $60,420 $11,403
Ratios of net investment income (loss) to average net assets (b) ....... 2.22% 3.04% (1.19)%
</TABLE>
<TABLE>
<CAPTION>
BALANCED SUB-ACCOUNT
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year ............................... $ 13.91 $ 12.05
Income from operations:
Net investment income (loss) ........................................... 0.17 1.40
Net realized and unrealized gain (loss) on investment .................. 0.59 0.46
------- -------
Net income (loss) from operations ..................................... 0.76 1.86
------- -------
Accumulation unit value, end of year ..................................... $ 14.67 $ 13.91
======= =======
Total return (a) ......................................................... 5.45% 15.47%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $59,018 $43,902
Ratios of net investment income (loss) to average net assets (b) ........ 1.19% 10.72%
<CAPTION>
BALANCED SUB-ACCOUNT
December 31,
------------------------------------
1996 1995 1994 (c)
----------- ----------- ------------
<S> <C> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year ............................... $ 11.03 $ 9.34 $ 10.00
Income from operations:
Net investment income (loss) ........................................... 0.30 0.32 0.27
Net realized and unrealized gain (loss) on investment .................. 0.72 1.37 (0.93)
------- ------- --------
Net income (loss) from operations ..................................... 1.02 1.69 (0.66)
------- ------- --------
Accumulation unit value, end of year ..................................... $ 12.05 $ 11.03 $ 9.34
======= ======= ========
Total return (a) ......................................................... 9.18% 18.13% (6.61)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $28,734 $16,069 $ 7,936
Ratios of net investment income (loss) to average net assets (b) ........ 2.69% 3.16% 3.48%
</TABLE>
<TABLE>
<CAPTION>
GROWTH & INCOME
SUB-ACCOUNT
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year ............................... $ 15.80 $ 12.85
Income from operations:
Net investment income (loss) ........................................... 0.66 2.52
Net realized and unrealized gain (loss) on investment .................. (0.40) 0.43
------- -------
Net income (loss) from operations ..................................... 0.26 2.95
------- -------
Accumulation unit value, end of year ..................................... $ 16.06 $ 15.80
======= =======
Total return (a) ......................................................... 1.62% 22.92%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $52,148 $36,591
Ratios of net investment income (loss) to average net assets (b) ........ 4.20% 18.15%
<CAPTION>
GROWTH & INCOME SUB-ACCOUNT
December 31,
------------------------------------
1996 1995 1994 (c)
----------- ----------- ------------
<S> <C> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year ............................... $ 11.68 $ 9.45 $ 10.00
Income from operations:
Net investment income (loss) ........................................... 0.68 0.47 0.33
Net realized and unrealized gain (loss) on investment .................. 0.49 1.76 (0.88)
------- ------- --------
Net income (loss) from operations ..................................... 1.17 2.23 (0.55)
------- ------- --------
Accumulation unit value, end of year ..................................... $ 12.85 $ 11.68 $ 9.45
======= ======= ========
Total return (a) ......................................................... 10.08% 23.52% (5.47)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $19,972 $10,086 $ 3,786
Ratios of net investment income (loss) to average net assets (b) ........ 5.68% 4.50% 4.18%
</TABLE>
The notes to the financial statements are an integral part of
this report.
48
<PAGE>
WRL SERIES ANNUITY ACCOUNT
FINANCIAL HIGHLIGHTS*
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
TACTICAL ASSET ALLOCATION SUB-ACCOUNT
December 31,
--------------------------------------------------
1998 1997 1996 1995 (d)
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year ............................... $ 15.36 $ 13.36 $ 11.84 $ 10.00
Income from operations:
Net investment income (loss) ........................................... 1.43 1.06 0.47 0.82
Net realized and unrealized gain (loss) on investment .................. (0.38) 0.94 1.05 1.02
-------- -------- -------- -------
Net income (loss) from operations ..................................... 1.05 2.00 1.52 1.84
-------- -------- -------- -------
Accumulation unit value, end of year ..................................... $ 16.41 $ 15.36 $ 13.36 $ 11.84
======== ======== ======== =======
Total return (a) ......................................................... 6.82% 14.97% 12.83% 18.43%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $237,896 $194,084 $125,577 $72,300
Ratios of net investment income (loss) to average net assets (b) ........ 8.92% 7.30% 3.72% 7.29%
</TABLE>
<TABLE>
<CAPTION>
C.A.S.E. GROWTH SUB-ACCOUNT
December 31,
---------------------------------------
1998 1997 1996 (f)
----------- ----------- -----------
<S> <C> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year ............................... $ 12.22 $ 10.77 $ 10.00
Income from operations:
Net investment income (loss) ........................................... 1.06 1.34 0.36
Net realized and unrealized gain (loss) on investment .................. (0.93) 0.11 0.41
------- ------- -------
Net income (loss) from operations ..................................... 0.13 1.45 0.77
------- ------- -------
Accumulation unit value, end of year ..................................... $ 12.35 $ 12.22 $ 10.77
======= ======= =======
Total return (a) ......................................................... 1.05% 13.43% 7.73%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $37,580 $31,995 $12,542
Ratios of net investment income (loss) to average net assets (b) ........ 8.79% 11.31% 5.46%
</TABLE>
<TABLE>
<CAPTION>
GLOBAL SECTOR SUB-ACCOUNT
December 31,
---------------------------------------
1998 1997 1996 (f)
----------- ----------- -----------
<S> <C> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year ............................... $ 10.72 $ 10.51 $ 10.00
Income from operations:
Net investment income (loss) ........................................... 0.17 0.69 0.04
Net realized and unrealized gain (loss) on investment .................. 0.72 (0.48) 0.47
------- ------- -------
Net income (loss) from operations ..................................... 0.89 0.21 0.51
------- ------- -------
Accumulation unit value, end of year ..................................... $ 11.61 $ 10.72 $ 10.51
======= ======= =======
Total return (a) ......................................................... 8.31% 1.99% 5.09%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $10,131 $10,344 $ 3,509
Ratios of net investment income (loss) to average net assets (b) ........ 1.48% 6.30% 0.59%
</TABLE>
The notes to the financial statements are an integral part of
this report.
49
<PAGE>
WRL SERIES ANNUITY ACCOUNT
FINANCIAL HIGHLIGHTS*
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
VALUE EQUITY SUB-ACCOUNT
December 31,
----------------------------------------
1998 1997 1996 (f)
------------ ----------- -----------
<S> <C> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year ............................... $ 13.83 $ 11.21 $ 10.00
Income from operations:
Net investment income (loss) ........................................... 0.91 0.08 0.02
Net realized and unrealized gain (loss) on investment .................. (1.76) 2.54 1.19
------- ------- -------
Net income (loss) from operations ..................................... (0.85) 2.62 1.21
------- ------- -------
Accumulation unit value, end of year ..................................... $ 12.98 $ 13.83 $ 11.21
======= ======= =======
Total return (a) ......................................................... (6.10)% 23.30% 12.13%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $92,217 $97,272 $23,759
Ratios of net investment income (loss) to average net assets (b) ........ 6.63% 0.63% 0.33%
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY
SUB-ACCOUNT
December 31,
--------------------------
1998 1997 (g)
------------ -----------
<S> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year ............................... $ 10.60 $ 10.00
Income from operations:
Net investment income (loss) ........................................... (0.15) (0.06)
Net realized and unrealized gain (loss) on investment .................. 1.35 0.66
------- -------
Net income (loss) from operations ..................................... 1.20 0.60
------- -------
Accumulation unit value, end of year ..................................... $ 11.80 $ 10.60
======= =======
Total return (a) ......................................................... 11.28% 6.01%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $19,376 $11,141
Ratios of net investment income (loss) to average net assets (b) ........ (1.31)% (0.58)%
</TABLE>
<TABLE>
<CAPTION>
U.S. EQUITY
SUB-ACCOUNT
December 31,
-------------------------
1998 1997 (g)
----------- -----------
<S> <C> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year ............................... $ 12.53 $ 10.00
Income from operations:
Net investment income (loss) ........................................... 0.62 0.95
Net realized and unrealized gain (loss) on investment .................. 2.03 1.58
------- -------
Net income (loss) from operations ..................................... 2.65 2.53
------- -------
Accumulation unit value, end of year ..................................... $ 15.18 $ 12.53
======= =======
Total return (a) ......................................................... 21.16% 25.26%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $73,456 $26,822
Ratios of net investment income (loss) to average net assets (b) ........ 4.55% 7.99%
</TABLE>
The notes to the financial statements are an integral part of
this report.
50
<PAGE>
WRL SERIES ANNUITY ACCOUNT
FINANCIAL HIGHLIGHTS*
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
THIRD AVENUE
VALUE
SUB-ACCOUNT
December 31,
1998 (h)
-------------
<S> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year ............................... $ 10.00
Income from operations:
Net investment income (loss) ........................................... (0.09)
Net realized and unrealized gain (loss) on investment .................. (0.72)
-------
Net income (loss) from operations ..................................... (0.81)
-------
Accumulation unit value, end of year ..................................... $ 9.19
=======
Total return (a) ......................................................... (8.13)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $ 9,419
Ratios of net investment income (loss) to average net assets (b) ........ (1.03)%
</TABLE>
<TABLE>
<CAPTION>
REAL ESTATE
SECURITIES
SUB-ACCOUNT
December 31,
1998 (i)
-------------
<S> <C>
CLASS B UNITS:
Accumulation unit value, beginning of year ............................... $ 10.00
Income from operations:
Net investment income (loss) ........................................... (0.08)
Net realized and unrealized gain (loss) on investment .................. (1.49)
--------
Net income (loss) from operations ..................................... (1.57)
--------
Accumulation unit value, end of year ..................................... $ 8.43
========
Total return (a) ......................................................... (15.73)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $ 1,324
Ratios of net investment income (loss) to average net assets (b) ........ (1.41)%
</TABLE>
NOTES TO FINANCIAL HIGHLIGHTS:
<TABLE>
<S> <C>
* Per unit information has been computed using average units outstanding throughout each year.
(a) Not annualized for periods less than one year.
(b) Annualized for periods less than one year.
(c) The inception date of this Sub-Account was March 1, 1994.
(d) The inception date of this Sub-Account was January 3, 1995.
(e) This Sub-Account option became effective May 1, 1996.
(f) The inception date of this Sub-Account was May 1, 1996.
(g) The inception date of this Sub-Account was January 2, 1997.
(h) The inception date of this Sub-Account was January 2, 1998.
(i) The inception date of this Sub-Account was May 1, 1998.
</TABLE>
The notes to the financial statements are an integral part of
this report.
51
<PAGE>
WRL SERIES ANNUITY ACCOUNT
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 ("Class A"); the WRL Freedom Bellwether, the WRL
Freedom Conqueror, and the WRL Freedom Wealth Creator ("Class B"). Each
contract type contains seventeen investment options referred to as sub-accounts.
Each sub-account invests in the corresponding portfolio of the WRL Series Fund,
Inc. (collectively referred to as the "Fund" and individually as a
"Portfolio"), a registered management investment company under the Investment
Company Act of 1940, as amended.
The Fund has entered into annually renewable investment advisory
agreements for each Portfolio with WRL Investment Management, Inc. ("WRL
Management") as investment adviser. Costs incurred in connection with the
advisory services rendered by WRL Management are paid by each Portfolio. WRL
Management has entered into sub-advisory agreements with various management
companies, some of which are affiliates of WRL. Each sub-adviser is compensated
directly by WRL Management.
On January 2, 1998 and May 1, 1998, WRL made initial contributions
totaling $900,000 to the Annuity Account. The respective amounts of the
contributions and units received are as follows:
<TABLE>
<CAPTION>
Sub-Account Contribution Units
- ----------------------------------------------- -------------- -------
<S> <C> <C>
Third Avenue Value -- Class A .............. $150,000 15,000
Third Avenue Value -- Class B .............. $150,000 15,000
Real Estate Securities -- Class A .......... $300,000 30,000
Real Estate Securities -- Class B .......... $300,000 30,000
</TABLE>
The Annuity Account sub-accounts hold assets to support the benefits under
certain flexible payment variable accumulation deferred annuity contracts (the
"Contracts") issued by WRL. The Annuity Account equity transactions are
accounted for using the appropriate effective date at the corresponding
accumulation unit value.
The following significant accounting policies, which are in conformity
with generally accepted accounting principles, have been consistently applied
in the preparation of the Trust's financial statements. The preparation of
financial statements required management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
52
<PAGE>
WRL SERIES ANNUITY ACCOUNT
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
A. VALUATION OF INVESTMENTS AND SECURITIES TRANSACTIONS
Investments in the Fund's shares are stated at the closing net asset value
("NAV") per share as determined by the Fund. Investment transactions are
accounted for on the trade date at the Fund NAV next determined after receipt
of sale or redemption orders without sales charges. Dividend income and capital
gains 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 the current Internal Revenue Code, 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 the issuance and
administration of the Contracts.
A. CONTRACT CHARGES
No deduction for sales expenses is 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 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. The charge is 1.25% and 1.40% of average daily net assets for Class A and
Class B respectively.
NOTE 3. DIVIDENDS AND DISTRIBUTIONS
Dividends are not declared by the Annuity Account, since the increase in
the value of the underlying investment in the Fund is reflected daily in the
unit price used to calculate the equity value within the Annuity Account.
Consequently, a dividend distribution by the underlying Fund does not change
either the unit price or equity values within the Annuity Account.
53
<PAGE>
WRL SERIES ANNUITY ACCOUNT
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. SECURITIES TRANSACTIONS
Securities transactions for the year ended December 31, 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
Purchase of Proceeds of
Sub-Account Securities Securities
- ------------------------------------------ ------------- ------------
<S> <C> <C>
Money Market .......................... $367,408 $325,384
Bond .................................. 73,953 44,732
Growth ................................ 211,889 191,220
Global ................................ 147,870 113,198
Strategic Total Return ................ 67,667 42,974
Emerging Growth ....................... 99,470 75,879
Aggressive Growth ..................... 106,771 55,391
Balanced .............................. 24,859 10,654
Growth & Income ....................... 36,832 16,008
Tactical Asset Allocation ............. 85,336 26,271
C.A.S.E. Growth ....................... 24,942 17,980
Global Sector ......................... 3,410 5,344
Value Equity .......................... 61,347 54,729
International Equity .................. 20,250 13,547
U.S. Equity ........................... 73,939 27,750
Third Avenue Value Equity (a) ......... 21,084 4,758
Real Estate Securities (b) ............ 3,063 1,192
</TABLE>
(a) The inception date of this Sub-Account was January 2, 1998.
(b) The inception date of this Sub-Account was May 1, 1998.
NOTE 5. OTHER MATTERS
At December 31, 1998 net unrealized appreciation (depreciation) on
investments was as follows (in thousands):
<TABLE>
<CAPTION>
Sub-Account
- --------------------------------------
<S> <C>
Money Market ...................... $ 0
Bond .............................. 1,463
Growth ............................ 706,637
Global ............................ 172,009
Strategic Total Return ............ 80,249
Emerging Growth ................... 171,421
Aggressive Growth ................. 106,388
Balanced .......................... 5,588
Growth & Income ................... (603)
Tactical Asset Allocation ......... 9,010
C.A.S.E. Growth ................... (4,379)
Global Sector ..................... 84
Value Equity ...................... (12,843)
International Equity .............. 675
U.S. Equity ....................... 7,688
Third Avenue Value Equity ......... (624)
Real Estate Securities ............ (68)
</TABLE>
54
<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, 1998 and 1997, 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, 1998. 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 sheets 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, 1998 and 1997, or the results of its operations or its cash flows for each
of the three years in the period ended December 31, 1998.
However, 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, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998 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
Des Moines, Iowa
February 19, 1999
55
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
BALANCE SHEETS -- STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments .............................. $ 73,808 $ 13,896
Bonds ........................................................ 184,697 255,919
Common stocks:
Affiliated entities (cost: 1998 - $243; 1997 - $150)......... 704 319
Other (cost: 1998 and 1997 - $302)........................... 384 428
Mortgage loans on real estate ................................ 9,916 4,824
Home office properties ...................................... 34,583 19,964
Investment properties ....................................... 11,594 --
Policy loans ................................................ 112,982 76,741
Other invested assets ....................................... 396 --
---------- ----------
Total cash and invested assets ................................ 429,064 372,091
Premiums deferred and uncollected ............................. 900 1,928
Accrued investment income ..................................... 2,867 4,088
Transfers from separate accounts .............................. 350,633 279,958
Cash surrender value of life insurance policies ............... 45,445 --
Other assets .................................................. 9,239 5,221
Separate account assets ....................................... 6,999,290 4,814,594
---------- ----------
Total admitted assets ......................................... $7,837,438 $5,477,880
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
56
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
BALANCE SHEETS -- STATUTORY BASIS
(CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life ............................................ $ 231,596 $ 186,523
Annuity ......................................... 265,418 296,290
Policy and contract claim reserves ............... 9,233 10,929
Other policyholders' funds ....................... 38,080 3,877
Remittances and items not allocated .............. 20,569 9,184
Federal income taxes payable ..................... 5,716 2,283
Asset valuation reserve .......................... 2,848 2,436
Interest maintenance reserve ..................... 9,684 9,134
Short-term note payable to affiliate ............. 44,200 8,200
Payable to affiliate ............................. 37,907 1,925
Other liabilities ................................ 31,151 19,257
Separate account liabilities ..................... 6,997,456 4,812,979
---------- ----------
Total liabilities ................................. 7,693,858 5,363,017
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 .................................. 120,107 88,015
Unassigned surplus ............................... 21,973 25,348
---------- ----------
Total capital and surplus ......................... 143,580 114,863
---------- ----------
Total liabilities and capital and surplus ......... $7,837,438 $5,477,880
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
57
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net of reinsurance:
Life ........................................................................... $ 476,053 $ 394,370 $ 293,590
Annuity ........................................................................ 794,841 822,149 740,125
Net investment income ........................................................... 36,315 40,013 36,067
Amortization of interest maintenance reserve .................................... 744 1,576 1,335
Commissions and expense allowances on reinsurance ceded ......................... 15,333 11 11
Other income .................................................................... 67,751 3,016 13,398
---------- ---------- ----------
1,391,037 1,261,135 1,084,526
Benefits and expenses:
Benefits paid or provided for:
Life ........................................................................... 42,982 28,060 21,256
Surrender benefits ............................................................. 551,528 431,939 286,406
Other benefits ................................................................. 31,280 28,112 23,270
Increase (decrease) in aggregate reserves for policies
and contracts:
Life .......................................................................... 42,940 29,485 80,139
Annuity ....................................................................... (30,872) (35,940) 12,877
Other ......................................................................... 32,178 794 422
---------- ---------- ----------
670,036 482,450 424,370
Insurance expenses:
Commissions .................................................................... 205,939 179,106 140,261
General insurance expenses ..................................................... 102,611 70,546 47,406
Taxes, licenses and fees ....................................................... 15,545 13,101 10,848
Net transfer to separate accounts .............................................. 402,618 519,214 452,471
Other expenses ................................................................. 59 21 60
---------- ---------- ----------
726,772 781,988 651,046
---------- ---------- ----------
1,396,808 1,264,438 1,075,416
---------- ---------- ----------
Gain (loss) from operations before federal income taxes (benefit) and realized
capital gains (losses) on investments ........................................... (5,771) (3,303) 9,110
Federal income tax expense (benefit) ............................................. (347) 469 9,297
---------- ---------- ----------
Loss from operations before realized capital gains
(losses) on investments ......................................................... (5,424) (3,772) (187)
Net realized capital gains (losses) on investments (net of
related federal income taxes and amounts transferred to interest
maintenance reserve) ............................................................ 1,494 747 (811)
---------- ---------- ----------
Net loss ......................................................................... $ (3,930) $ (3,025) $ (998)
========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
58
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
CAPITAL
COMMON PAID-IN UNASSIGNED AND
STOCK SURPLUS SURPLUS SURPLUS
-------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 .............................. $1,500 $ 68,015 $ 28,424 $ 97,939
Net loss for 1996 ...................................... -- -- (998) (998)
Net unrealized capital gains ........................... -- -- 1,294 1,294
Change in non-admitted assets .......................... -- -- 199 199
Change in asset valuation reserve ...................... -- -- (120) (120)
Change 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
Net loss for 1997 ...................................... -- -- (3,025) (3,025)
Change in non-admitted assets .......................... -- -- (702) (702)
Change in asset valuation reserve ...................... -- -- 3,274 3,274
Change in surplus in separate accounts ................. -- -- (2,115) (2,115)
Change in reserve valuation ............................ -- -- (1,872) (1,872)
Capital contribution ................................... -- 20,000 -- 20,000
Tax effect of capital loss carry-forward utilized by
affiliates ........................................... -- -- 3,747 3,747
------ -------- -------- --------
Balance at December 31, 1997 ............................ 1,500 88,015 25,348 114,863
Net loss for 1998 ...................................... -- -- (3,930) (3,930)
Net unrealized capital gains ........................... -- -- 248 248
Change in non-admitted assets .......................... -- -- (1,815) (1,815)
Change in asset valuation reserve ...................... -- -- (412) (412)
Change in surplus in separate accounts ................. -- -- (341) (341)
Change in reserve valuation ............................ -- -- (2,132) (2,132)
Capital contribution ................................... -- 32,092 -- 32,092
Settlement of prior period tax returns ................. -- -- 353 353
Tax benefits on stock options exercised ................ -- -- 4,654 4,654
------ -------- -------- --------
Balance at December 31, 1998 ............................ $1,500 $120,107 $ 21,973 $143,580
====== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
59
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums and other considerations, net of reinsurance ...... $1,356,732 $1,223,898 $1,046,548
Net investment income ...................................... 38,294 43,802 38,666
Life and accident and health claims ........................ (44,426) (26,005) (20,655)
Surrender benefits and other fund withdrawals .............. (551,528) (431,939) (286,406)
Other benefits to policyholders ............................ (31,231) (28,147) (22,129)
Commissions, other expenses and other taxes ................ (326,080) (262,901) (196,373)
Net transfers to separate accounts ......................... (461,982) (596,347) (658,326)
Federal income taxes received (paid) ....................... 11,956 5,006 (9,449)
Interest paid .............................................. -- (731) --
Other, net ................................................. (7,109) (14,901) 28,325
---------- ---------- ----------
Net cash used in operating activities ...................... (15,374) (88,265) (79,799)
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid:
Bonds and preferred stocks ................................ 143,449 146,963 122,820
Mortgage loans on real estate ............................. 221 2,116 132
Real estate ............................................... -- -- 4,304
Other ..................................................... -- -- 175
---------- ---------- ----------
143,670 149,079 127,431
Cost of investments acquired ...............................
Bonds and preferred stocks ................................ (68,202) (40,418) (26,826)
Common stocks ............................................. (93) (150) (4)
Mortgage loans on real estate ............................. (5,313) (891) --
Real estate ............................................... (26,213) (12,002) (7,837)
Policy loans .............................................. (36,241) (24,137) (15,479)
Other ..................................................... (414) -- (5)
---------- ---------- -----------
(136,476) (77,598) (50,151)
---------- ---------- ----------
Net cash provided by investing activities .................. 7,194 71,481 77,280
FINANCING ACTIVITIES
Issuance of short-term note payable to affiliate ........... 36,000 8,200 --
Capital contribution ....................................... 32,092 20,000 --
---------- ---------- ----------
Net cash provided by financing activities .................. 68,092 28,200 --
---------- ---------- ----------
Increase (decrease) in cash and short-term investments ..... 59,912 11,416 (2,519)
Cash and short-term investments at beginning of year ....... 13,896 2,480 4,999
---------- ---------- ----------
Cash and short-term investments at end of year ............. $ 73,808 $ 13,896 $ 2,480
========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
60
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1998
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 N.V., 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, District of Columbia, Puerto Rico and Guam. 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 ("Insurance Department"), which practices differ from
generally accepted accounting principles. The more significant of these
differences are as follows: (a) bonds are generally reported at amortized cost
rather than segregating the portfolio into held-to-maturity (reported at
amortized cost), available-for-sale (reported at fair value), and trading
(reported 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
asset or liability 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 changes in the level of interest
61
<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)
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 (reported 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; (k) pension expense is recorded
as amounts are paid rather than accrued and expensed during the periods in
which the employers provide service; and (l) the financial statements of
wholly-owned affiliates are not consolidated with those of the Company. The
effects of these variances have not been determined by the Company, but are
presumed to be material.
In 1998, the National Association of Insurance Commissioners (NAIC)
adopted codified statutory accounting principles ("Codification"). Codification
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. Codification will require
adoption by the various states before it becomes the prescribed statutory basis
of accounting for insurance companies domesticated within those states.
Accordingly, before Codification becomes effective for the Company, the State
of Ohio must adopt Codification as the prescribed basis of accounting on which
domestic insurers must report their statutory-basis results to the Insurance
Department. At this time it is unclear whether the State of Ohio will adopt
Codification. However, based on current guidance, management believes that the
impact of Codification will not be material to the Company's statutory-basis
financial statements.
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.
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 investment. The Company
reviews its prepayment assumptions on mortgage and other asset backed
securities at regular intervals and adjusts amortization rates retrospectively
62
<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)
when such assumptions are changed due to experience and/or expected future
patterns. Common stocks of unaffiliated companies 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. Common stocks of the Company's
wholly-owned affiliates are recorded at the equity in net assets. Home office
and investment properties are 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. 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 1998, 1997 and 1996, net realized capital gains of $1,294, $3,259
and $2,394, respectively, were credited to the IMR rather than being
immediately recognized in the statements of operations. Amortization of these
net gains aggregated $744, $1,576 and $1,335 for the years ended December 31,
1998, 1997 and 1996, 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. No investment income due and accrued
has been excluded for the years ended December 31, 1998, 1997 and 1996, 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 law.
The aggregate policy reserves for life insurance policies are based
principally upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary
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
63
<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)
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 life contingencies are
equal to the present value of future payments assuming interest rates ranging
from 5.75 to 8.75 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. These 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 and,
accordingly, the operations of the separate accounts are not included in the
accompanying financial statements. The separate accounts do not have any
minimum guarantees and the investment risks associated with market value
changes are borne entirely by the policyholders. The Company received variable
contract premiums of $1,240,858, $1,164,013 and $997,513 in 1998, 1997 and
1996, 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.
STOCK OPTION PLAN
AEGON N.V. sponsors a stock option plan for eligible employees of the
Company. Under this plan, certain employees have indicated a preference to
immediately sell shares received as a result of their exercise of the stock
options; in these situations, AEGON N.V. has settled such options in cash
rather than issuing stock to these employees. These cash settlements are paid
by the Company and AEGON N.V. subsequently reimburses the Company for such
payments. Under statutory accounting principles, the Company does not
64
<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)
record any expense related to this plan, as the expense is recognized by AEGON
N.V. However, the Company is allowed to record a deduction in the consolidated
tax return filed by the Company and certain affiliates. The tax benefit of this
deduction has been credited directly to surplus.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform to the 1998 presentation.
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.
65
<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)
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.
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,
---------------------------------------------------
1998 1997
------------------------- -------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Cash and short-term investments .............. $ 73,808 $ 73,808 $ 13,896 $ 13,896
Bonds ........................................ 184,697 192,556 255,919 267,763
Common stocks, other than affiliates ......... 384 384 428 428
Mortgage loans on real estate ................ 9,916 10,390 4,824 5,143
Policy loans ................................. 112,982 112,982 76,741 76,741
Separate account assets ...................... 6,999,290 6,999,290 4,814,594 4,814,594
LIABILITIES
Investment contract liabilities .............. 297,349 294,105 280,121 276,113
Separate account annuities ................... 5,096,680 5,038,296 3,615,255 3,565,557
</TABLE>
66
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
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, 1998
Bonds:
United States Government and agencies ......... $ 4,749 $ 83 $ -- $ 4,832
State, municipal and other government ......... 3,234 117 -- 3,351
Public utilities .............................. 18,792 818 251 19,359
Industrial and miscellaneous .................. 96,332 6,685 577 102,440
Mortgage-backed securities .................... 61,590 1,235 251 62,574
-------- ------- ------ --------
Total bonds .................................... $184,697 $ 8,938 1,079 $192,556
======== ======= ====== ========
DECEMBER 31, 1997
Bonds:
United States Government and agencies ......... $ 3,675 $ 9 $ 30 $ 3,654
State, municipal and other government ......... 3,855 360 -- 4,215
Public utilities .............................. 15,794 904 403 16,295
Industrial and miscellaneous .................. 121,513 7,700 710 128,503
Mortgage-backed securities .................... 111,082 4,198 184 115,096
-------- ------- ------ --------
Total bonds .................................... $255,919 $13,171 $1,327 $267,763
======== ======= ====== ========
</TABLE>
The carrying value and fair value of bonds at December 31, 1998 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.
<TABLE>
<CAPTION>
ESTIMATED
CARRYING FAIR
VALUE VALUE
---------- ----------
<S> <C> <C>
Due in one year or less ............................ $ 2,706 $ 2,743
Due one through five years ......................... 61,340 64,696
Due five through ten years ......................... 43,233 45,352
Due after ten years ................................ 15,828 17,191
-------- --------
123,107 129,982
Mortgage and other asset backed securities ......... 61,590 62,574
-------- --------
$184,697 $192,556
======== ========
</TABLE>
67
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS--(CONTINUED)
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Interest on bonds .............................. $ 17,150 $ 25,723 $ 33,969
Dividends on equity investments from subsidiary 13,233 10,855 --
Interest on mortgage loans ..................... 499 478 559
Rental income on real estate ................... 2,839 1,371 919
Interest on policy loans ....................... 6,241 4,656 3,339
Other investment income ........................ 540 26 9
-------- -------- --------
Gross investment income ........................ 40,502 43,109 38,795
Investment expenses ............................ (4,187) (3,096) (2,728)
-------- -------- --------
Net investment income .......................... $ 36,315 $ 40,013 $ 36,067
======== ======== ========
</TABLE>
Proceeds from sales and maturities of debt securities and related gross
realized gains and losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Proceeds ...................... $143,449 $146,963 $122,820
======== ======== ========
Gross realized gains .......... $ 4,641 $ 3,921 $ 2,984
Gross realized losses ......... 899 626 791
-------- -------- --------
Net realized gains ............ $ 3,742 $ 3,295 $ 2,193
======== ======== ========
</TABLE>
At December 31, 1998, bonds with an aggregate carrying value of $4,297
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.
Realized investment gains (losses) and changes in unrealized gains
(losses) for investments are summarized below:
68
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS--(CONTINUED)
<TABLE>
<CAPTION>
REALIZED
-----------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Debt securities .............................. $ 3,742 $ 3,295 $ 2,193
Real estate .................................. -- -- (606)
Other invested assets ........................ (18) -- (4)
-------- -------- ---------
3,724 3,295 1,583
Tax expense .................................. (936) (711) --
Transfer to interest maintenance reserve ..... (1,294) (3,259) (2,394)
-------- -------- --------
Net realized gains (losses) .................. $ 1,494 $ 747 $ (811)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED
-------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
------------ ---------- -------------
<S> <C> <C> <C>
Debt securities ................................. $ (3,985) $ (896) $ (14,442)
Common stock .................................... 248 -- (66)
-------- ------ ---------
Change in unrealized appreciation (depreciation) $ (3,737) $ (896) $ (14,508)
======== ====== =========
</TABLE>
Gross unrealized gains (losses) on common stocks were as follows:
<TABLE>
<CAPTION>
REALIZED
-----------------------
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
-------- ------ -------
<S> <C> <C> <C>
Unrealized gains ............. $ 579 $295 $295
Unrealized losses ............ (36) -- --
----- ---- ----
Net unrealized gains ......... $ 543 $295 $295
===== ==== ====
</TABLE>
During 1998, the Company issued one mortgage loan with an interest rate of
6.71%. The maximum percentage of any one mortgage loan to the value of the
underlying real estate at origination was 75%. The Company requires all
mortgagees to carry fire insurance equal to the value of the underlying
property.
During 1998, 1997 and 1996, no mortgage loans were foreclosed and
transferred to real estate. During 1998 and 1997, the Company held a mortgage
loan loss reserve in the asset valuation reserve of $112 and $54, respectively.
69
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS--(CONTINUED)
At December 31, 1998, 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.
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Direct premiums .............. $1,345,752 $1,219,271 $1,034,757
Reinsurance assumed .......... 461 2,389 2,063
Reinsurance ceded ............ (75,319) (5,141) (3,105)
---------- ---------- ----------
Net premiums earned .......... $1,270,894 $1,216,519 $1,033,715
---------- ---------- ----------
</TABLE>
The Company received reinsurance recoveries in the amount of $5,260,
$2,288 and $2,156 during 1998, 1997 and 1996, respectively. At December 31,
1998 and 1997, estimated amounts recoverable from reinsurers that have been
deducted from policy and contract claim reserves totaled $1,003 and $2,721,
respectively. The aggregate reserves for policies and contracts were reduced
for reserve credits for reinsurance ceded at December 31, 1998 and 1997 of
$2,849 and $1,369, respectively.
5. INCOME TAXES
For federal income tax purposes, the Company joins in a consolidated tax
return filing with certain affiliated companies. Under the terms of a
tax-sharing agreement between the Company and its affiliates, the Company
computes federal income tax expense as if it were filing a separate income tax
return, except that tax credits and net operating loss carryforwards are
determined on the basis of the consolidated group. Additionally, the
alternative minimum tax is computed for the consolidated group and the
resulting tax, if any, is allocated back to the separate companies on the basis
of the separate companies' alternative minimum taxable income.
Federal income tax expense (benefit) differs from the amount computed by
applying the statutory federal income tax rate to gain (loss) from operations
before income taxes (benefit) and realized capital gains (losses) on
investments for the following reasons:
70
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
5. INCOME TAXES--(CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ---------
<S> <C> <C> <C>
Computed tax (benefit) at federal statutory rate (35%) ..... $ (2,019) $ (1,156) $3,189
Deferred acquisition costs -- tax basis .................... 9,672 9,164 7,172
Tax reserve valuation ...................................... 1,513 (194) (696)
Excess tax depreciation .................................... (442) (127) (65)
Amortization of IMR ........................................ (260) (552) (467)
Dividend received deduction ................................ (6,657) (5,326) --
Prior year over-accrual .................................... (2,322) (1,541) (9)
Other, net ................................................. 168 201 173
-------- -------- ------
Federal income tax expense (benefit) ....................... $ (347) $ 469 $9,297
-------- -------- ------
</TABLE>
Federal income tax expense differs from the amount computed by applying
the statutory federal income tax rate to realized gains (losses) due to the
differences in book and tax asset bases at the time certain investments are
sold.
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, 1998). 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.
At December 31, 1996, the Company had capital loss carryforwards of
approximately $10,705, which were utilized by the Company's affiliates in the
consolidated tax return filing in 1997. This transaction resulted in a receipt
from the Company's affiliate of $3,747, which was credited directly to
unassigned surplus.
In 1998, the Company reached a final settlement with the Internal Revenue
Service for 1994 and 1995 resulting in a tax refund of $300 and interest
received of $53.
71
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
6. POLICY AND CONTRACT ATTRIBUTES
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,
----------------------------------------------
1998 1997
----------------------- ----------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------------ ---------- ------------ ---------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal with market value adjustment ..... $ 12,810 $ 13,812 1%
Subject to discretionary withdrawal at book value less surrender
charge .............................................................. 76,289 1% 68,376 2
Subject to discretionary withdrawal at market value .................. 5,096,680 94 3,615,255 91
Subject to discretionary withdrawal at book value (minimal or no
charges or adjustments) ............................................. 210,270 4 201,457 5
Not subject to discretionary withdrawal provision .................... 15,681 1 16,572 1
---------- -- ---------- --
5,411,730 100% 3,915,472 100%
=== ===
Less reinsurance ceded ............................................... 1,131 --
---------- ----------
Total policy reserves on annuities and deposit fund liabilities ...... $5,410,599 $3,915,472
========== ==========
</TABLE>
A reconciliation of the amounts transferred to and from the separate
accounts is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Transfers as reported in the summary of operations of the separate
accounts statement:
Transfers to separate accounts ...................................... $1,240,858 $1,164,013 $ 997,513
Transfers from separate accounts .................................... 847,507 646,477 339,523
---------- ---------- ----------
Net transfers to separate accounts ................................... 393,351 517,536 657,990
Reconciling adjustments -- change in accruals for investment
management, administration fees and contract guarantees, and
separate account surplus ............................................ 9,267 1,678 (205,519)
---------- ---------- ----------
Transfers as reported in the summary of operations of the life,
accident and health annual statement ................................ $ 402,618 $ 519,214 $ 452,471
========== ========== ==========
</TABLE>
72
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
6. POLICY AND CONTRACT ATTRIBUTES--(CONTINUED)
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, 1998 and 1997, these assets (which are
reported as premiums deferred and uncollected) and the amounts of the related
gross premiums and loadings, are as follows:
<TABLE>
<CAPTION>
GROSS LOADING NET
--------- --------- ---------
<S> <C> <C> <C>
DECEMBER 31, 1998
Ordinary direct renewal business ............ $1,101 $201 $ 900
------ ---- ------
$1,101 $201 $ 900
====== ==== ======
DECEMBER 31, 1997
Ordinary direct first year business ......... $ 2 $ 1 $ 1
Ordinary direct renewal business ............ 1,350 140 1,210
Group life direct business .................. 717 -- 717
------ ---- ------
$2,069 $141 $1,928
====== ==== ======
</TABLE>
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 $2,132,
$1,872 and $2,995 was made for the years ended December 31, 1998, 1997 and
1996, respectively, related to the change in reserve methodology.
7. DIVIDEND RESTRICTIONS
The Company is subject to limitations, imposed by the State of Ohio, on
the payment of dividends to its parent company. Generally, dividends during any
twelve month period may not be paid; without prior regulatory approval, in
excess of the lesser of (a) 10 percent of statutory capital and surplus as of
the preceding December 31, or (b) statutory gain from operations for the
preceding year. Subject to the availability of unassigned surplus at the time
of such dividend, the maximum payment which may be made in 1999, without the
prior approval of insurance regulatory authorities, is $14,657.
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
73
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
8. RETIREMENT AND COMPENSATION PLANS--(CONTINUED)
$917, $659 and $581 for the years ended December 31, 1998, 1997 and 1996,
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 $632, $448 and
$184 for the years ended December 31, 1998, 1997 and 1996, respectively.
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
for 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 $157, $99 and $98 for the years ended December 31, 1998, 1997
and 1996, 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 1998,
1997 and 1996, the Company paid $12,763, $10,040 and $10,038, respectively, for
such services, which approximates their costs to the affiliates. The Company
provides office space, marketing and administrative services to certain
affiliates. During 1998, 1997 and 1996,
74
<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 $5,125, $4,395 and $3,271, respectively, for such
services, which approximates their cost. The Company had a net payable with
affiliates of $33,449 and $1,925 at December 31, 1998 and 1997, respectively.
Payable to affiliates and intercompany borrowings bear interest at the
thirty-day commercial paper rate of 4.74% at December 31, 1998. During 1998,
1997 and 1996, the Company paid net interest of $1,090, $364 and $138,
respectively, to affiliates.
The Company received capital contributions of $32,092 and $20,000 from its
parent in 1998 and 1997, respectively.
At December 31, 1998 and 1997, the Company had short-term note payables to
an affiliate of $44,200 and $8,200, respectively. Interest on these notes
ranged from 5.13% to 5.54% at December 31, 1998 and was 5.60% at December 31.
1997.
During 1998, the Company purchased life insurance policies covering the
lives of certain employees of the Company. Premiums of $43,500 were paid to an
affiliate for these policies. At December 31, 1998, the cash surrender value of
these policies is $45,445.
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 $3,489 and $4,007 and an offsetting premium tax
benefit of $828 and $1,070 at December 31, 1998 and 1997, respectively, for its
estimated share of future guaranty fund assessments related to several major
insurer insolvencies. The guaranty fund expense (credit) was $(74), $0 and $212
at December 31, 1998, 1997 and 1996, respectively.
75
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
11. YEAR 2000 (UNAUDITED)
The term Year 2000 Issue generally refers to the improper processing of
dates and incorrect date calculations that might occur in computer software and
hardware and embedded systems as the Year 2000 is approached. The use of
computer programs that rely on two-digit date fields to perform computations
and decision-making functions may cause systems to malfunction when processing
information involving dates after 1999. For example, any computer software that
has date-sensitive coding might recognize a code of 00 as the year 1900 rather
than the year 2000.
The Company has developed a Year 2000 Project Plan (the Plan) to address
the Year 2000 issue as it affects the Company's internal IT and non-IT systems,
and to assess Year 2000 issues relating to third parties with whom the Company
has critical relationships.
The Plan for addressing internal systems generally includes an assessment
of internal IT and non-IT systems and equipment affected by the Year 2000
issue; definition of strategies to address affected systems and equipment;
remediation of identified systems and equipment; internal testing and
certification that each internal system is Year 2000 compliant; and a review of
existing and revised business resumption and contingency plans to address
potential Year 2000 issues. The Company has remediated and tested substantially
all of its mission-critical internal IT systems as of December 31, 1998. The
Company continues to remediate and test certain non-critical internal IT
systems, internal non-IT systems and will continue with a revalidation testing
program throughout 1999.
The Company's Year 2000 issues are more complex because a number of its
systems interface with other systems not under the Company's control. The
Company's most significant interfaces and uses of third-party vendor systems
are in the bank, financial services and trust areas. The Company utilizes
various banks to handle numerous types of financial and sales transactions.
Several of these banks also provide trustee and custodial services for the
Company's investment holdings and transactions. These services are critical to
a financial services company such as the Company as its business centers around
cash receipts and disbursements to policyholders and the investment of
policyholder funds. The Company has received written confirmation from its
vendor banks regarding their status on Year 2000. The banks indicate their
dedication to resolving any Year 2000 issues related to their systems and
services prior to December 31, 1999. The Company anticipates that a
considerable effort will be necessary to ensure that its corrected or new
systems can properly interface with those business partners with whom it
transmits and receives data and other information (external systems). The
Company has undertaken specific testing regimes with these third-party business
partners and expects to continue working with its business partners on any
interfacing of systems. However, the timing of external system compliance
cannot currently be predicted with accuracy because the implementation of Year
2000 readiness will vary from one company to another.
The Company does have some exposure to date sensitive embedded technology
such as micro-controllers, but the Company views this exposure as minimal.
Unlike other industries that may be equipment intensive, like manufacturing,
the Company is a life insurance and financial services organization providing
76
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
11. YEAR 2000 (UNAUDITED)--(CONTINUED)
insurance, annuities and pension products to its customers. As such, the
primary equipment and electronic devices in use are computers and telephone
related equipment. This type of hardware can have date sensitive embedded
technology which could have Year 2000 problems. Because of this exposure, the
Company has reviewed its computer hardware and telephone systems, with
assistance from the applicable vendors, and has upgraded, or replaced, or is in
the process of replacing any equipment that will not properly process date
sensitive data in the Year 2000 or beyond.
For the Company, a reasonably likely worst case scenario might include one
or more of the Company's significant policyholder systems being non-compliant.
Such an event could result in a material disruption of the Company's
operations. Specifically, a number of the Company's operations could experience
an interruption in the ability to collect and process premiums or deposits,
process claim payments, accurately maintain policyholder information,
accurately maintain accounting records, and or perform adequate customer
service. Should the worst case scenario occur, it could, dependent upon its
duration, have a material impact on the Company's business and financial
condition. Simple failures can be repaired and returned to production within a
matter of hours with no material impact. Unanticipated failures with a longer
service disruption period could have a more serious impact. For this reason,
the Company is placing significant emphasis on risk management and Year 2000
business resumption contingency planning in 1999 by modifying its existing
business resumption and disaster recovery plans to address potential Year 2000
issues.
The actions taken by management under the Year 2000 Project Plans are
intended to significantly reduce the Company's risk of a material business
interruption based on the Year 2000 issues. It should be noted that the Year
2000 computer problem, and its resolution, is complex and multifaceted, and any
company's success cannot be conclusively known until the Year 2000 is reached.
In spite of its efforts or results, the Company's ability to function
unaffected to and through the Year 2000 may be adversely affected by actions
(or failure to act) of third parties beyond our knowledge or control. It is
anticipated that there may be problems that will have to be resolved in the
ordinary course of business on and after the Year 2000. However, the Company
does not believe that the problems will have a material adverse affect on the
Company's operations or financial condition.
77
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
12. RECONCILIATION OF CAPITAL AND SURPLUS AND NET INCOME
The following table reconciles capital and surplus and net income as
reported in the Annual Statement filed with the Insurance Department of the
State of Ohio, to the amounts reported in the accompanying financial
statements:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1998
-------------- ------------------
TOTAL CAPITAL
AND SURPLUS NET INCOME/(LOSS)
-------------- ------------------
<S> <C> <C>
Amounts reported in Annual Statement ............. $148,038 $ 528
Adjustment to federal income tax benefit ......... (4,458) (4,458)
-------- --------
Amounts reported herein .......................... $143,580 $ (3,930)
======== ========
</TABLE>
78
