<PAGE> 1
FIDELITY VIP PLUS
MONARCH LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA1
ANNUAL REPORT
DECEMBER 31, 1998
This is a copy of the annual report of the separate account in which your
Monarch Life Insurance Company variable annuity contract invests. We take pride
in our continued commitment to provide prompt, courteous service to our contract
owners. For inquiries regarding your contract, please call our Annuity Service
Center at 1-800-654-0050.
[MONARCH LIFE INSURANCE LOGO]
The investment results presented in this report are historical and are no
indication of future performance.
<PAGE> 2
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, 1998 and 1997 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,
1998, 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, 1998, by correspondence with the
Funds, provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
February 22, 1999
<PAGE> 3
MONARCH LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA1
STATEMENT OF NET ASSETS AT DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<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 $ 356,648 356,648 $ 356,648
Investment Grade Bond Portfolio 182,481 15,460 200,365
Equity Income Portfolio 935,490 50,644 1,287,379
Growth Portfolio 1,085,901 42,508 1,907,347
Asset Manager Portfolio 373,050 25,593 464,776
High Income Portfolio 137,490 11,197 129,107
Overseas Portfolio 163,162 8,862 177,680
---------- ----------
Total Invested Assets $3,234,222 4,523,302
========== ==========
LIABILITIES
Payable to Monarch Life Insurance Company --
----------
Total Liabilities --
----------
Net Assets $4,523,302
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
MONARCH LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA1
STATEMENT OF NET ASSETS AT DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<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 $ 510,910 510,910 $ 510,910
Investment Grade Bond Portfolio 173,549 15,482 194,455
Equity Income Portfolio 1,044,506 61,777 1,499,937
Growth Portfolio 992,216 43,169 1,601,577
Asset Manager Portfolio 364,726 25,815 464,932
High Income Portfolio 129,634 10,872 147,645
Overseas Portfolio 170,021 9,741 187,033
---------- ----------
Total Invested Assets $3,385,562 4,606,489
==========
LIABILITIES
Payable to Monarch Life Insurance Company 556
----------
Total Liabilities 556
----------
Net Assets $4,605,933
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
MONARCH LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA1
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTALS - ALL DIVISIONS
---------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Investment Income:
Dividends (Note 2) $ 428,341 $ 314,105 $ 256,953
Expenses:
Risk Charges and Administrative Expenses (Note 5) (44,339) (44,583) (45,509)
----------- ----------- -----------
Net Investment Income 384,002 269,522 211,444
----------- ----------- -----------
Net Realized Gains 331,007 214,326 239,787
Net Unrealized Gains 68,153 295,033 47,625
----------- ----------- -----------
Net Realized and Unrealized Gains 399,160 509,359 287,412
----------- ----------- -----------
Net Increase in Net Assets
Resulting from Operations 783,162 778,881 498,856
----------- ----------- -----------
Transfers of Net Premiums -- 4,000 38,000
Transfers Due to Terminations (865,793) (749,412) (767,911)
Transfers Among Investment Divisions -- -- --
----------- ----------- -----------
Net Decrease in Net Assets
Resulting from Principal Transactions (865,793) (745,412) (729,911)
----------- ----------- -----------
Total Increase (Decrease) in Net Assets (82,631) 33,469 (231,055)
Net Assets - Beginning of Year 4,605,933 4,572,464 4,803,519
----------- ----------- -----------
Net Assets - End of Year $ 4,523,302 $ 4,605,933 $ 4,572,464
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
MONARCH LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA1
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment
Money Grade Equity
Market Bond Income
Total Division Division Division
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends (Note 2) $ 428,341 $ 15,506 $ 12,103 $ 94,081
Expenses:
Risk Charges and Administrative Expenses (Note 5) (44,339) (2,930) (2,318) (14,034)
------------ ------------ ----------- ------------
Net Investment Income 384,002 12,576 9,785 80,047
----------- ----------- ---------- -----------
Net Realized Gains 331,007 -- 9,776 156,539
Net Unrealized Gains (Losses) 68,153 -- (3,022) (103,542)
------------ ------------ ----------- ------------
Net Realized and Unrealized Gains 399,160 -- 6,754 52,997
------------ ------------ ----------- ------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 783,162 12,576 16,539 133,044
------------ ------------ ----------- ------------
Transfers of Net Premiums -- -- -- --
Transfers Due to Terminations (865,793) (282,698) (73,524) (272,937)
Transfers Among Investment Divisions -- 116,077 63,008 (72,608)
------------ ------------ ----------- ------------
Net Decrease in Net Assets
Resulting from Principal Transactions (865,793) (166,621) (10,516) (345,545)
------------ ------------ ----------- ------------
Total Increase (Decrease) in Net Assets (82,631) (154,045) 6,023 (212,501)
Net Assets - Beginning of Year 4,605,933 510,693 194,342 1,499,880
------------ ------------ ----------- ------------
Net Assets - End of Year $ 4,523,302 $ 356,648 $ 200,365 $ 1,287,379
============ ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
Asset High
Growth Manager Income Overseas
Division Division Division Division
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends (Note 2) $ 218,664 $ 58,805 $ 15,534 $ 13,648
Expenses:
Risk Charges and Administrative Expenses (Note 5) (17,211) (4,553) (1,372) (1,921)
------------ ------------ ------------ ------------
Net Investment Income 201,453 54,252 14,162 11,727
----------- ----------- ----------- -----------
Net Realized Gains 140,891 15,428 3,629 4,744
Net Unrealized Gains (Losses) 212,085 (8,480) (26,394) (2,494)
------------ ------------ ------------ ------------
Net Realized and Unrealized Gains 352,976 6,948 (22,765) 2,250
------------ ------------ ------------ ------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 554,429 61,200 (8,603) 13,977
------------ ------------ ------------ ------------
Transfers of Net Premiums -- -- -- --
Transfers Due to Terminations (123,313) (56,193) (29,783) (27,345)
Transfers Among Investment Divisions (124,877) (5,000) 19,864 3,536
------------ ------------ ------------ ------------
Net Decrease in Net Assets
Resulting from Principal Transactions (248,190) (61,193) (9,919) (23,809)
------------ ------------ ------------ ------------
Total Increase (Decrease) in Net Assets 306,239 7 (18,522) (9,832)
Net Assets - Beginning of Year 1,601,108 464,769 147,629 187,512
------------ ------------ ------------ ------------
Net Assets - End of Year $ 1,907,347 $ 464,776 $ 129,107 $ 177,680
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 7
MONARCH LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA1
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment
Money Grade Equity
Market Bond Income
Total Division Division Division
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends (Note 2) $ 314,105 $ 28,061 $ 11,323 $ 138,411
Expenses:
Risk Charges and Administrative Expenses (Note 5) (44,583) (5,260) (2,047) (14,023)
------------ ------------ ----------- ------------
Net Investment Income 269,522 22,801 9,276 124,388
------------ ------------ ----------- ------------
Net Realized Gains 214,326 -- 8,560 68,219
Net Unrealized Gains (Losses) 295,033 -- (2,467) 131,477
------------ ------------ ----------- ------------
Net Realized and Unrealized Gains 509,359 -- 6,093 199,696
------------ ------------ ----------- ------------
Net Increase in Net Assets
Resulting from Operations 778,881 22,801 15,369 324,084
------------ ------------ ----------- ------------
Transfers of Net Premiums 4,000 -- -- 2,000
Transfers Due to Terminations (749,412) (287,078) (94,665) (111,175)
Transfers Among Investment Divisions -- 269,902 (13,563) (117,282)
------------ ------------ ----------- ------------
Net Decrease in Net Assets
Resulting from Principal Transactions (745,412) (17,176) (108,228) (226,457)
------------ ------------ ----------- ------------
Total Increase (Decrease) in Net Assets 33,469 5,625 (92,859) 97,627
Net Assets - Beginning of Year 4,572,464 505,068 287,201 1,402,253
------------ ------------ ----------- ------------
Net Assets - End of Year $ 4,605,933 $ 510,693 $ 194,342 $ 1,499,880
============ ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
Asset High
Growth Manager Income Overseas
Division Division Division Division
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends (Note 2) $ 54,226 $ 51,985 $ 9,022 $ 21,077
Expenses:
Risk Charges and Administrative Expenses (Note 5) (15,129) (4,535) (1,277) (2,312)
------------ ------------ ------------ ------------
Net Investment Income 39,097 47,450 7,745 18,765
------------ ------------ ------------ ------------
Net Realized Gains 82,036 28,473 7,523 19,515
Net Unrealized Gains (Losses) 169,134 5,599 4,177 (12,887)
------------ ------------ ------------ ------------
Net Realized and Unrealized Gains 251,170 34,072 11,700 6,628
------------ ------------ ------------ ------------
Net Increase in Net Assets
Resulting from Operations 290,267 81,522 19,445 25,393
------------ ------------ ------------ ------------
Transfers of Net Premiums 2,000 -- -- --
Transfers Due to Terminations (72,397) (80,404) (46,140) (57,553)
Transfers Among Investment Divisions (89,377) (25,000) 15,863 (40,543)
------------ ------------ ------------ ------------
Net Decrease in Net Assets
Resulting from Principal Transactions (159,774) (105,404) (30,277) (98,096)
------------ ------------ ------------ ------------
Total Increase (Decrease) in Net Assets 130,493 (23,882) (10,832) (72,703)
Net Assets - Beginning of Year 1,470,615 488,651 158,461 260,215
------------ ------------ ------------ ------------
Net Assets - End of Year $ 1,601,108 $ 464,769 $ 147,629 $ 187,512
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 8
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
Total Division Division Division
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends (Note 2) $ 256,953 $ 20,263 $ 17,170 $ 66,692
Expenses:
Risk Charges and Administrative Expenses (Note 5) (45,509) (3,934) (3,220) (14,835)
------------ ------------ ----------- ------------
Net Investment Income 211,444 16,329 13,950 51,857
------------ ------------ ----------- ------------
Net Realized Gains 239,787 -- 3,513 124,870
Net Unrealized Gains (Losses) 47,625 -- (11,789) 9,741
------------ ------------ ----------- ------------
Net Realized and Unrealized Gains (Losses) 287,412 -- (8,276) 134,611
------------ ------------ ----------- ------------
Net Increase in Net Assets
Resulting from Operations 498,856 16,329 5,674 186,468
------------ ------------ ----------- ------------
Transfers of Net Premiums 38,000 -- -- 21,500
Transfers Due to Terminations (767,911) (312,146) (34,376) (150,287)
Transfers Among Investment Divisions -- 165,865 (30,030) (142,121)
------------ ------------ ----------- ------------
Net Decrease in Net Assets
Resulting from Principal Transactions (729,911) (146,281) (64,406) (270,908)
------------ ------------ ----------- ------------
Total Increase (Decrease) in Net Assets (231,055) (129,952) (58,732) (84,440)
Net Assets - Beginning of Year 4,803,519 635,020 345,933 1,486,694
------------ ------------ ----------- ------------
Net Assets - End of Year $ 4,572,464 $ 505,068 $ 287,201 $ 1,402,254
============ ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
Asset High
Growth Manager Income Overseas
Division Division Division Division
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends (Note 2) $ 96,036 $ 36,752 $ 13,266 $ 6,774
Expenses:
Risk Charges and Administrative Expenses (Note 5) (14,113) (5,352) (1,459) (2,596)
------------ ------------ ------------ ------------
Net Investment Income 81,923 31,400 11,807 4,178
------------ ------------ ------------ ------------
Net Realized Gains 58,508 34,014 937 17,945
Net Unrealized Gains (Losses) 34,407 3,047 4,871 7,348
------------ ------------ ------------ ------------
Net Realized and Unrealized Gains (Losses) 92,915 37,061 5,808 25,293
------------ ------------ ------------ ------------
Net Increase in Net Assets
Resulting from Operations 174,838 68,461 17,615 29,471
------------ ------------ ------------ ------------
Transfers of Net Premiums 16,500 -- -- --
Transfers Due to Terminations (91,024) (87,618) (22,996) (69,464)
Transfers Among Investment Divisions (15,330) (34,864) 13,758 42,722
------------ ------------ ------------ ------------
Net Decrease in Net Assets
Resulting from Principal Transactions (89,854) (122,482) (9,238) (26,742)
------------ ------------ ------------ ------------
Total Increase (Decrease) in Net Assets 84,984 (54,021) 8,377 2,729
Net Assets - Beginning of Year 1,385,631 542,672 150,084 257,485
------------ ------------ ------------ ------------
Net Assets - End of Year $ 1,470,615 $ 488,651 $ 158,461 $ 260,214
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 9
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 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.
8
<PAGE> 10
MONARCH LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA1
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
Some insurance departments 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 Idaho
(1998), Louisiana (1994), Michigan (1995), Missouri (1994), Nevada (1997), and
Wyoming (1992).
Monarch Life currently limits its business to maintaining its existing blocks of
disability income insurance, variable life, and annuity businesses. 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
market value which is 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 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.
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, 1998, are shown below:
<TABLE>
<CAPTION>
PURCHASES SALES
------------- -------------
<S> <C> <C>
Money Market Portfolio $ 168,429 $ 322,691
Investment Grade Bond Portfolio 75,131 75,974
Equity Income Portfolio 141,000 406,555
Growth Portfolio 224,576 271,782
Asset Manager Portfolio 58,849 65,952
High Income Portfolio 45,554 41,328
Overseas Portfolio 50,376 61,979
------------- -------------
Totals $ 763,915 $ 1,246,261
============= =============
</TABLE>
9
<PAGE> 11
MONARCH LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA1
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4-CONTRACT OWNERS' EQUITY
Contract owners' equity at December 31, 1998, consists of the following:
<TABLE>
<CAPTION>
ACCUMULATION
ACCUMULATION UNIT
UNITS VALUE EQUITY
------------ ------------- -------------
<S> <C> <C> <C>
Money Market Division 25,532.7759 $ 13.968401 $ 356,648
Investment Grade Bond Division 11,226.2862 17.847813 200,365
Equity Income Division 35,770.0450 35.990384 1,287,379
Growth Division 47,259.6484 40.358867 1,907,347
Asset Manager Division 16,959.1411 27.405595 464,776
High Income Division 4,742.3662 27.224287 129,107
Overseas Division 10,624.9972 16.722775 177,680
-------------
Totals $ 4,523,302
</TABLE>
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.
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
Baystate Capital Services, Inc. (BCSI), is the principal underwriter and general
distributor of the contracts maintained in the Account. BCSI is a wholly-owned
subsidiary of Monarch Life.
10
