MONARCH LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA1
ANNUAL REPORT
DECEMBER 31, 1996
The investment results presented in this report are historical and are no
indication of future performance.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Receiver of Monarch Life Insurance Company
and Contract Owners of Monarch Life Insurance Company Separate Account VA1
In our opinion, the accompanying statements of net assets and the related
statements of operations and changes in net assets present fairly, in all
material respects, the financial position of the Money Market, Investment Grade
Bond, Equity Income, Growth, Asset Manager, High Income and Overseas Divisions
(constituting Monarch Life Insurance Company Separate Account VA1) at December
31, 1996 and 1995 and the results of each of their operations and changes in
their net assets for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of Monarch Life Insurance Company'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, which included
confirmation of investments at December 31, 1996, by correspondence with the
Funds, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
March 21, 1997
<PAGE>
MONARCH LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA1
STATEMENT OF NET ASSETS AT DECEMBER 31, 1996
================================================================================
<TABLE>
<CAPTION>
ASSETS Cost Shares Market Value
================ ================ ================
<S> <C> <C> <C>
Investment in Variable Insurance Products
Fund and Fund II, at Market Value (Note 2):
Money Market Portfolio $ $505,068 505,068 $ 505,068
Investment Grade Bond Portfolio 263,828 23,464 287,201
Equity Income Portfolio 1,078,301 66,679 1,402,255
Growth Portfolio 1,030,388 47,226 1,470,615
Asset Manager Portfolio 394,044 28,863 488,651
High Income Portfolio 144,628 12,657 158,461
Overseas Portfolio 230,314 13,812 260,213
---------------- ----------------
Total Invested Assets $ 3,646,571 4,572,464
================
Total Assets 4,572,464
----------------
LIABILITIES
Total Liabilities --
----------------
Net Assets $ 4,572,464
================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
MONARCH LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA1
STATEMENT OF NET ASSETS AT DECEMBER 31, 1995
================================================================================
<TABLE>
<CAPTION>
ASSETS Cost Shares Market Value
================ ================ ================
<S> <C> <C> <C>
Investment in Variable Insurance Products
Fund and Fund II, at Market Value (Note 2):
Money Market Portfolio $ 635,020 635,020 $ 635,020
Investment Grade Bond Portfolio 310,771 27,719 345,933
Equity Income Portfolio 1,172,482 77,151 1,486,695
Growth Portfolio 979,811 47,453 1,385,631
Asset Manager Portfolio 451,112 34,368 542,672
High Income Portfolio 141,121 12,455 150,084
Overseas Portfolio 234,934 15,102 257,484
---------------- ----------------
Total Invested Assets $ 3,925,251 4,803,519
================
Total Assets 4,803,519
----------------
LIABILITIES
Total Liabilities --
----------------
Net Assets $ 4,803,519
================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
MONARCH LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA1
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
================================================================================
<TABLE>
<CAPTION>
Investment
Money Grade Equity
Market Bond Income Growth
Total Division Division Division Division
=========== ========= ========= =========== ===========
<S> <C> <C> <C> <C> <C>
Investment Income:
Dividends (Note 2) $ 256,953 $ 20,263 $ 17,170 $ 66,692 $ 96,036
Risk Charges and Administrative Expenses (Note 5) (45,509) (3,934) (3,220) (14,835) (14,113)
----------- --------- --------- ----------- -----------
Net Investment Income 211,444 16,329 13,950 51,857 81,923
----------- --------- --------- ----------- -----------
Net Realized Gains 239,787 -- 3,513 124,870 58,508
Net Unrealized Gains (Losses) 47,625 -- (11,789) 9,741 34,407
----------- --------- --------- ----------- -----------
Net Realized and Unrealized Gains (Losses) 287,412 -- (8,276) 134,611 92,915
----------- --------- --------- ----------- -----------
Net Increase in Net Assets
Resulting from Operations 498,856 16,329 5,674 186,468 174,838
----------- --------- --------- ----------- -----------
Transfers of Net Premiums 38,000 -- -- 21,500 16,500
Transfers Due to Terminations (767,911) (312,146) (34,376) (150,287) (91,024)
Transfers Among Investment Divisions -- 165,865 (30,030) (142,121) (15,330)
----------- --------- --------- ----------- -----------
Net Decrease in Net Assets
Resulting from Principal Transactions (729,911) (146,281) (64,406) (270,908) (89,854)
----------- --------- --------- ----------- -----------
Total Increase (Decrease) in Net Assets (231,055) (129,952) (58,732) (84,440) 84,984
Net Assets - Beginning Balance 4,803,519 635,020 345,933 1,486,695 1,385,631
----------- --------- --------- ----------- -----------
Net Assets - Ending Balance $ 4,572,465 $ 505,068 $ 287,201 $ 1,402,254 $ 1,470,615
=========== ========= ========= =========== ===========
<CAPTION>
Asset High
Manager Income Overseas
Division Division Division
========= ========= =========
<S> <C> <C> <C>
Investment Income:
Dividends (Note 2) $ 36,752 $ 13,266 $ 6,774
Risk Charges and Administrative Expenses (Note 5) (5,352) (1,459) (2,596)
--------- --------- ---------
Net Investment Income 31,400 11,807 4,178
--------- --------- ---------
Net Realized Gains 34,014 937 17,945
Net Unrealized Gains (Losses) 3,047 4,871 7,348
--------- --------- ---------
Net Realized and Unrealized Gains (Losses) 37,061 5,808 25,293
--------- --------- ---------
Net Increase in Net Assets
Resulting from Operations 68,461 17,615 29,471
--------- --------- ---------
Transfers of Net Premiums -- -- --
Transfers Due to Terminations (87,618) (22,996) (69,464)
Transfers Among Investment Divisions (34,864) 13,758 42,722
--------- --------- ---------
Net Decrease in Net Assets
Resulting from Principal Transactions (122,482) (9,238) (26,742)
--------- --------- ---------
Total Increase (Decrease) in Net Assets (54,021) 8,377 2,729
Net Assets - Beginning Balance 542,672 150,084 257,484
--------- --------- ---------
Net Assets - Ending Balance $ 488,651 $ 158,461 $ 260,214
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
MONARCH LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA1
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
================================================================================
<TABLE>
<CAPTION>
Investment
Money Grade Equity
Market Bond Income Growth
Total Division Division Division Division
=========== ========= ========= =========== ===========
<S> <C> <C> <C> <C> <C>
Investment Income:
Dividends (Note 2) $ 196,952 $ 44,796 $ 24,011 $ 94,751 $ 7,774
Risk Charges and Administrative Expenses (Note 5) (54,040) (7,817) (5,536) (13,046) (15,663)
----------- --------- --------- ----------- -----------
Net Investment Income 142,912 36,979 18,475 81,705 (7,889)
----------- --------- --------- ----------- -----------
Net Realized Gains (Losses) 559,028 -- 16,210 141,084 269,442
Net Unrealized Gains (Losses) 421,922 -- 48,226 160,764 202,369
----------- --------- --------- ----------- -----------
Net Realized and Unrealized Gains 980,950 -- 64,436 301,848 471,811
----------- --------- --------- ----------- -----------
Net Increase in Net Assets
Resulting from Operations 1,123,862 36,979 82,911 383,553 463,922
----------- --------- --------- ----------- -----------
Transfers of Net Premiums 78,055 -- -- 36,250 36,751
Transfers Due to Terminations (1,688,423) (217,010) (187,887) (322,146) (523,970)
Transfers Among Investment Divisions -- 161,898 (228,188) 182,233 4,970
----------- --------- --------- ----------- -----------
Net Increase (Decrease) in Net Assets
Resulting from Principal Transactions (1,610,368) (55,112) (416,075) (103,663) (482,249)
----------- --------- --------- ----------- -----------
Total Increase (Decrease) in Net Assets (486,506) (18,133) (333,164) 279,890 (18,327)
Net Assets - Beginning Balance 5,290,025 653,153 679,097 1,206,805 1,403,958
----------- --------- --------- ----------- -----------
Net Assets - Ending Balance $ 4,803,519 $ 635,020 $ 345,933 $ 1,486,695 $ 1,385,631
=========== ========= ========= =========== ===========
<CAPTION>
Asset High
Manager Income Overseas
Division Division Division
========= ========= =========
<S> <C> <C> <C>
Investment Income:
Dividends (Note 2) $ 17,655 $ 5,030 $ 2,935
Risk Charges and Administrative Expenses (Note 5) (7,667) (882) (3,429)
--------- --------- ---------
Net Investment Income 9,988 4,148 (494)
--------- --------- ---------
Net Realized Gains (Losses) 93,533 (1,824) 40,583
Net Unrealized Gains (Losses) 7,851 12,358 (9,646)
--------- --------- ---------
Net Realized and Unrealized Gains 101,384 10,534 30,937
--------- --------- ---------
Net Increase in Net Assets
Resulting from Operations 111,372 14,682 30,443
--------- --------- ---------
Transfers of Net Premiums 4,929 -- 125
Transfers Due to Terminations (382,497) (15,100) (39,813)
Transfers Among Investment Divisions (85,139) 81,058 (116,832)
--------- --------- ---------
Net Increase (Decrease) in Net Assets
Resulting from Principal Transactions (462,707) 65,958 (156,520)
--------- --------- ---------
Total Increase (Decrease) in Net Assets (351,335) 80,640 (126,077)
Net Assets - Beginning Balance 894,007 69,444 383,561
--------- --------- ---------
Net Assets - Ending Balance $ 542,672 $ 150,084 $ 257,484
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
MONARCH LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA1
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1994
================================================================================
<TABLE>
<CAPTION>
Investment
Money Grade Equity
Market Bond Income Growth
Total Division Division Division Division
=========== ========= =========== =========== ===========
<S> <C> <C> <C> <C> <C>
Investment Income:
Dividends (Note 2) $ 265,880 $ 28,285 $ 2,668 $ 79,408 $ 87,554
Risk Charges and Administrative Expenses (Note 5) (56,067) (6,768) (8,158) (11,388) (14,014)
----------- --------- ----------- ----------- -----------
Net Investment Income (Loss) 209,813 21,517 (5,490) 68,020 73,540
----------- --------- ----------- ----------- -----------
Net Realized Gains (Losses) 160,791 -- 13,140 39,510 34,168
Net Unrealized Gains (Losses) (422,134) -- (53,738) (39,497) (123,345)
----------- --------- ----------- ----------- -----------
Net Realized and Unrealized Gains (Losses) (261,343) -- (40,598) 13 (89,177)
----------- --------- ----------- ----------- -----------
Net Increase (Decrease) in Net Assets
Resulting from Operations (51,530) 21,517 (46,088) 68,033 (15,637)
----------- --------- ----------- ----------- -----------
Transfers of Net Premiums 60,000 -- -- 30,000 30,000
Transfers Due to Terminations (505,315) (275,324) (42,977) (52,009) (56,221)
Transfers Among Investment Divisions -- 301,768 (253,884) 158,814 (45,638)
----------- --------- ----------- ----------- -----------
Net Increase (Decrease) in Net Assets
Resulting from Principal Transactions (445,315) 26,444 (296,861) 136,805 (71,859)
----------- --------- ----------- ----------- -----------
Total Increase (Decrease) in Net Assets (496,845) 47,961 (342,949) 204,838 (87,496)
Net Assets - Beginning Balance 5,786,870 605,192 1,022,046 1,001,967 1,491,454
----------- --------- ----------- ----------- -----------
Net Assets - Ending Balance $ 5,290,025 $ 653,153 $ 679,097 $ 1,206,805 $ 1,403,958
=========== ========= =========== =========== ===========
<CAPTION>
Asset High
Manager Income Overseas
Division Division Division
=========== ======== =========
<S> <C> <C> <C>
Investment Income:
Dividends (Note 2) $ 58,607 $ 7,560 $ 1,798
Risk Charges and Administrative Expenses (Note 5) (11,186) (680) (3,873)
----------- -------- ---------
Net Investment Income (Loss) 47,421 6,880 (2,075)
----------- -------- ---------
Net Realized Gains (Losses) 41,971 2,465 29,537
Net Unrealized Gains (Losses) (168,635) (10,800) (26,119)
----------- -------- ---------
Net Realized and Unrealized Gains (Losses) (126,664) (8,335) 3,418
----------- -------- ---------
Net Increase (Decrease) in Net Assets
Resulting from Operations (79,243) (1,455) 1,343
----------- -------- ---------
Transfers of Net Premiums -- -- --
Transfers Due to Terminations (67,713) (3,894) (7,177)
Transfers Among Investment Divisions (164,960) 10,955 (7,055)
----------- -------- ---------
Net Increase (Decrease) in Net Assets
Resulting from Principal Transactions (232,673) 7,061 (14,232)
----------- -------- ---------
Total Increase (Decrease) in Net Assets (311,916) 5,606 (12,889)
Net Assets - Beginning Balance 1,205,923 63,838 396,450
----------- -------- ---------
Net Assets - Ending Balance $ 894,007 $ 69,444 $ 383,561
=========== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
MONARCH LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA1
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 1-ORGANIZATION
Monarch Life Insurance Company Separate Account VA1 (the Account), is a
segregated account of Monarch Life Insurance Company (Monarch Life) and is
registered as, The Fidelity Variable Account II, a unit investment trust under
the Investment Company Act of 1940, as amended (1940 Act). Five investment
divisions of the Account are invested solely in the shares of the five
corresponding portfolios of the Variable Insurance Products Fund and the
remaining two investment divisions are invested solely in the shares of the two
corresponding portfolios of the Variable Insurance Products Fund II (the Funds),
both are no-load, diversified, open-end, series management investment companies
registered under the 1940 Act. The Funds' investment advisor is Fidelity
Management & Research Company. Under applicable insurance law, the assets and
liabilities of the Account are clearly identified and distinguished from the
other assets and liabilities of Monarch Life. The Account cannot be charged with
liabilities arising out of any other business of Monarch Life.
Monarch Life is a wholly-owned subsidiary of Regal Reinsurance Company (Regal
Re). On June 9, 1994, the Insurance Commissioner of the Commonwealth of
Massachusetts (the Commissioner) was appointed receiver (the Receiver) of
Monarch Life in a rehabilitation proceeding pending before the Supreme Judicial
Court for Suffolk County, Massachusetts (the Court). A term sheet dated July 19,
1994 (the Term Sheet) among the Commissioner (in her capacity as Commissioner
and Receiver) and certain of Regal Re shareholders and noteholders and holders
of Monarch Life's surplus notes (representing approximately 85% of both the
total outstanding Regal Re notes and common stock) (the Holders) was approved by
the Court on September 1, 1994. Pursuant to the Term Sheet, the Holders
transferred their notes and stock into voting trusts for which the Commissioner
is the sole trustee, which effectively vests control of Monarch Life and Regal
Re in the Commissioner.
On January 31, 1997, the Receiver, with Court approval, appointed a Special
Deputy Receiver for Monarch Life. The Special Deputy Receiver is responsible for
the management of Monarch Life's operations and reports to the Receiver as has
been the case with Monarch Life's President, who recently announced plans to
retire at the end of the first quarter of 1997. The Receiver's active
involvement in the rehabilitation of Monarch Life will not change.
Insurance departments of various jurisdictions have either suspended Monarch
Life's certificate of authority, ordered Monarch Life to cease writing new
business, or have requested a voluntary suspension of sales. In addition,
Monarch Life's certificate of authority has been revoked by the insurance
departments of the states of Louisiana (1994), Michigan (1995), Missouri (1994),
and Wyoming (1992).
Monarch Life currently limits its business to maintaining its existing
disability income insurance, variable life, and annuity business. Monarch Life
ceased issuing new variable life insurance policies and new annuity contracts
effective May 1, 1992, and new disability income insurance policies effective
June 15, 1993.
The assets of the Account are not available to meet the general obligations of
Monarch Life or Regal Re and are held for the exclusive benefit of the contract
owners participating in the Account.
NOTE 2-SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Account in preparation of its financial statements. Preparation
of financial statements requires the use of estimates made by management. Actual
results may differ from these estimates. The policies are in conformity with
generally accepted accounting principles.
INVESTMENTS: The investments in shares of the Funds are stated at the net
asset value per share of the respective portfolios of the Funds.
Investment transactions are accounted for on the date the shares are
purchased or sold. The cost of shares sold and redeemed is determined on
the first-in, first-out method. Dividend and capital gain distributions
received from the Funds are reinvested in additional shares of the Funds
and are recorded as income by the Account on the ex-dividend date. Capital
gains distributions are included in dividend income in the statements of
operations and changes in net assets.
8
<PAGE>
MONARCH LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA1
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 2-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
FEDERAL INCOME TAXES: For federal income tax purposes, operations of the
Account are combined with those of Monarch Life which is taxed as a life
insurance company. Under existing federal income tax law, investment
income (dividends) and capital gains attributable to the Account are not
taxed.
NOTE 3-PURCHASES AND SALES OF SECURITIES
Total cost of purchases and proceeds from sales of Funds shares by the Account
during the year ended December 31, 1996, are shown below:
Purchases Sales
--------- -----
Money Market Portfolio $ 301,894 $ 431,847
Investment Grade Bond Portfolio 17,170 67,626
Equity Income Portfolio 116,510 335,561
Growth Portfolio 173,164 181,095
Asset Manager Portfolio 52,684 143,766
High Income Portfolio 31,742 29,173
Overseas Portfolio 99,188 121,753
--------- ---------
Totals $ 792,353 $1,310,821
========= ==========
NOTE 4-CONTRACT OWNERS' EQUITY
Contract owners' equity at December 31, 1996, consists of the following:
Accumulation
Accumulation Unit
Units Value Equity
---------- ---------- ---------
Money Market Division 39,419.237 $12.812719 $ 505,068
Investment Grade Bond Division 18,723.968 15.338672 287,201
Equity Income Division 54,614.191 25.675657 1,402,255
Growth Division 61,520.937 23.904306 1,470,615
Asset Manager Division 24,260.381 20.141923 488,651
High Income Division 6,422.703 24.672075 158,461
Overseas Division 19,184.154 13.563883 260,213
---------
Totals $4,572,464
==========
NOTE 5-EXPENSES
Monarch Life assumes mortality and expense risks and administrative expenses
related to the operations of the Account. Monarch Life deducts a daily charge
from the assets of the Account to cover these risks. This charge is, on an
annual basis, equal to a rate of 1.0% (0.85% for mortality and expense risks and
0.15% for administrative charges) of the daily net assets of the Account.
9
<PAGE>
MONARCH LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA1
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 6-DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code (the Code),
a variable annuity contract, other than a contract issued in connection with
certain types of employee benefits plans, will not be treated as an annuity
contract for federal tax purposes for any period for which the investments of
the segregated asset account, on which the contract is based, are not adequately
diversified. The Code provides that the "adequately diversified" requirement may
be met if the underlying investments satisfy either a statutory safe harbor test
or diversification requirements set forth in regulations issued by the Secretary
of the Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of the
Code. Monarch Life believes, based on assurances from the Funds, that the
Account satisfies the current requirements of the regulations.
NOTE 7-PRINCIPAL UNDERWRITER AND GENERAL DISTRIBUTOR
Since June 13, 1995, Baystate Capital Services, Inc. (BCSI), has been the
principal underwriter and general distributor of the contracts maintained in the
Account. BCSI is a wholly-owned subsidiary of Monarch Life. Prior to June 13,
1995, the function of principal underwriter and general distributor was
performed by First Variable Capital Services, Inc., a wholly-owned subsidiary of
First Variable Life Insurance Company (FVL). Prior to September 22, 1994, FVL
was a wholly-owned subsidiary of Monarch Life.
Effective September 22, 1994, FVL is no longer an affiliate of Monarch Life.
10
