<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1999.
REGISTRATION NO. 33-36073
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 12 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 13 [X]
PEOPLES BENEFIT LIFE INSURANCE COMPANY
(Exact Name of Registrant)
Peoples Benefit Life Insurance Company
(Name of Depositor)
20 Moores Road Frazer, Pennsylvania 19355
(Address of Depositor's Principal Executive Office)
Depositor's Telephone Number: (800) 523-7900
Peoples Benefit Life Insurance Company
Gregory E. Miller-Breetz, Esquire
P.O. Box 32830
400 West Market Street
Louisville, KY 40232
(Name and Address of Agent for Service)
Copy to:
Michael Berenson, Esquire
Jorden Burt Boros Cicchetti Berenson & Johnson LLP
1025 Thomas Jefferson St. N.W. Suite 400 E
Washington, DC 20007-0805
It is proposed that this filing will become effective (check appropriate box):
[X] Immediately upon filing pursuant to paragraph (b) of Rule 485.
[_] On pursuant to paragraph (b)(1)(v) of Rule 485.
[_] 60 days after filing pursuant to paragraph (a)(1) of Rule 485.
[_] On pursuant to paragraph (a)(1) of Rule 485.
[_] 75 days after filing pursuant to paragraph (a)(2) of Rule 485.
[_] On pursuant to paragraph (a)(2) of Rule 485.
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<PAGE>
PURSUANT TO RULE 481
SHOWING LOCATION IN PART A (PROSPECTUS) AND PART B
(STATEMENT OF ADDITIONAL INFORMATION) OF REGISTRATION
STATEMENT OF INFORMATION REQUIRED BY FORM N-4
PART A
<TABLE>
<CAPTION>
ITEM OF
FORM N-4 PROSPECTUS CAPTION
<C> <S> <C>
1. Cover Page........................ Cover Page
2. Definitions....................... Glossary
3. Synopsis.......................... Summary; Fee Table
4. Condensed Financial Information... Condensed Financial Information
5. General Description of Registrant,
Depositor, and Portfolio
Companies......................... Peoples Benefit Life Insurance
Company; Peoples Benefit Life
Insurance Company; Separate
Account IV; Vanguard Variable
Insurance Fund; Voting Rights
6. Deductions and Expenses........... Expenses; Taxes;
Vanguard Variable Insurance Fund
7. General Description of Variable
Annuity Contracts................. The Annuity Contract
8. Annuity Period.................... Annuity Payments
9. Death Benefit..................... Death Benefit
10. Purchases and Contract Value...... Application and Purchase
Payments; Accumulated Value
11. Redemptions....................... Access to Your Money
12. Taxes............................. Taxes
13. Legal Proceedings................. Legal Matters
14. Table of Contents for the
Statement of Additional
Information....................... Table of Contents for the
Vanguard Variable Annuity Plan
Contract Statement of Additional
Information
PART B
<CAPTION>
ITEM OF STATEMENT OF ADDITIONAL
FORM N-4 INFORMATION CAPTION
<C> <S> <C>
15. Cover Page........................ Cover Page
16. Table of Contents................. Table of Contents
17. General Information and History... The Company
18. Services.......................... Part A: Auditors; Safekeeping of
Account Assets; Distribution of
the Contract
19. Purchase of Securities Being
Offered........................... Distribution of the Contract
20. Underwriters...................... Distribution of the Contract
21. Calculation of Performance Data... Performance Information;
Additional Performance Measures
22. Annuity Payments.................. Computations of Variable Annuity
Income Payments
23. Financial Statements.............. Financial Statements
</TABLE>
<PAGE>
1
Vanguard Variable Annuity Plan Contract
Prospectus
April 30, 1999
Issued Through Peoples Benefit Life Insurance Company Separate Account IV
By Peoples Benefit Life Insurance Company
The Vanguard Variable Annuity Plan Contract (the "Contract") provides a means of
investing on a tax-deferred basis in thirteen portfolios of Vanguard Variable
Insurance Fund
Money Market Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
Short-Term Corporate Portfolio
Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
Mid-Cap Index Portfolio
REIT Index Portfolio
Small Company Growth Portfolio
International Portfolio
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The Contract is available in all states except New York.
This prospectus does not constitute an offering in any jurisdiction where it
would be unlawful to make an offering like this. No one has been authorized to
give any information or make any representations about this offering other than
those contained in this prospectus. You should not rely on any other information
or representations.
The Contract is intended for retirement savings or other long-term investment
purposes. You bear all investment risk (including the possible loss of
principal), and investment results are not guaranteed. The Contract provides a
Free Look Period of at least 10 days (20 days or more in some instances) during
which the Contract may be cancelled.
- --------------------------------------------------------------------------------
Why Reading This Prospectus Is Important
This prospectus explains the Vanguard Variable Annuity Plan Contract. Reading
the Contract prospectus will help you decide whether the Contract is the right
investment for you. The Contract prospectus must be accompanied by a current
prospectus for Vanguard Variable Insurance Fund, which discusses in greater
depth the objectives, risks, and strategies of each portfolio of Vanguard
Variable Insurance Fund. Please read them both carefully before you invest and
keep them for future reference. A Statement of Additional Information for the
Contract prospectus has been filed with the Securities and Exchange Commission,
is incorporated by reference, and is available free by writing to the Vanguard
Variable Annuity Plan Center, P.O. Box 1103, Valley Forge, PA 19482-1103 or by
calling 800-522-5555 on business days between 8 a.m. and 8 p.m. Eastern time.
The Table of Contents for the Statement of Additional Information is included at
the end of the Contract prospectus.
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<PAGE>
2
Contents
3 Cross Reference to Definitions 23 Expenses
4 Summary 25 Taxes
7 Fee Table 29 Access to Your Money
10 Example 30 Performance
10 The Annuity Contract 31 Death Benefit
12 Annuity Payments 34 Other Information
15 Purchase 38 Table of Contents of Statement
of Additional Information
19 Investment Options
39 Appendix (Condensed Financial
Information)
<PAGE>
3
CROSS REFERENCE TO DEFINITIONS
We have generally defined the technical terms associated with the Contract where
they are used in the prospectus. The following list shows where certain of the
more technical and more frequently used terms are defined in the prospectus. In
the text you can easily locate the defined word because it will appear in bold
type or its definition will be covered in a space on the page set aside
specifically for discussion of the term.
Accumulated Value 18
Accumulation Phase 11
Accumulation Unit 18
Accumulation Unit Value 18
Annuitant 31, 32
Annuity Date 12
Annuity Payment Options 12
Beneficiary(ies) 31, 32
Business Day 15
Contract 10
Contract Date 16
Contract Owner 34
Free Look Period 35
Income Phase 11
Initial Purchase Payment 15
Joint Annuitant 32
Net Purchase Payment 15
Non-Qualified Contract 10
Qualified Contract 15
Portfolios 19
Premium Tax 16
Purchase Payment 15
Tax Deferral 25
<PAGE>
4
Summary
The sections in this Summary provide you with a concise discussion of the major
topics covered in this prospectus. Each section of the Summary is discussed in
greater detail in the main body of the prospectus at corresponding section
headings. Please read the full prospectus carefully.
THE ANNUITY CONTRACT
The Vanguard Variable Annuity Plan Contract is a flexible-premium multi-funded
variable annuity offered by Peoples Benefit Life Insurance Company (the
"Company"). The Contract provides a means of investing on a tax-deferred basis
in thirteen portfolios of Vanguard Variable Insurance Fund ("Portfolios").
Who Should Invest
The Contract is intended for long-term investors who want tax-deferred
accumulations of funds, generally for retirement but also for other long-term
purposes.
The Contract provides benefits in two distinct phases: accumulation and
income.
The Accumulation Phase
During the Accumulation Phase, you choose to allocate your investment in the
Contract among the thirteen Vanguard Portfolios available under the Contract.
You can contribute additional dollars to the Contract and you can take
withdrawals from the Contract during the Accumulation Phase. The value of your
investment depends on the investment performance of the Portfolios you choose.
Your earnings are generally not taxed during this phase unless you withdraw
them.
The Income Phase
During the Income Phase, you can receive regular annuity payments on a fixed or
variable basis and for various periods of time depending on your need for income
and the choices available under the Contract. See Annuity Payments, page 12, for
more information about Annuity Payment Options.
Vanguard Variable Insurance Fund
The Portfolios available for investment under the Contract are portfolios of
Vanguard Variable Insurance Fund (the "Fund"), an open-end diversified
investment company. The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies with more than 100
distinct investment portfolios holding assets worth more than $450 billion.
ANNUITY PAYMENTS
During the Income Phase, you receive regular annuity payments under a wide range
of Annuity Payment Options. The Contract allows you to receive an income
guaranteed for as long as you live or until the second of two people dies. You
may also choose to receive a guaranteed number of payments over a number of
years. Most Annuity Payment Options are available on either a variable basis
(where the amount of the payment rises or falls depending on the investment
performance of the Portfolios you have chosen) or a fixed basis (where the
payment amount is guaranteed).
<PAGE>
5
PURCHASE
You can buy the Contract with a minimum investment of $5,000 under most
circumstances. You can add $250 or more at any time during the Accumulation
Phase. The total of all your Purchase Payments in the Contract may not exceed
$1,000,000 without prior approval from the Company.
INVESTMENT OPTIONS
You can allocate your Purchase Payments to one or more of the following
Portfolios described in the Fund prospectus:
Managed by Vanguard's Fixed Income Group
Money Market Portfolio
High-Grade Bond Portfolio
Short-Term Corporate Portfolio
Managed by Vanguard's Core Management Group
Equity Index Portfolio
Mid-Cap Index Portfolio
REIT Index Portfolio
Managed by Wellington Management Company, LLP
High Yield Bond Portfolio
Balanced Portfolio
Managed by Newell Associates
Equity Income Portfolio
Managed by Barrow, Hanley, Mewhinney & Strauss, Inc.
Diversified Value Portfolio
Managed by Lincoln Capital Management Company
Growth Portfolio
Managed by Granahan Investment Management
Small Company Growth Portfolio
Managed by Schroder Capital Management International, Inc.
International Portfolio
You can make or lose money in any of these Portfolios depending on their
investment performance.
EXPENSES
There are no sales charges or sales loads associated with the Contract.
The Company will deduct a daily charge corresponding to an annual charge of
0.10% of the net asset value of the Separate Account as an Administrative
Expense Charge and an annual charge of 0.27% for the mortality and expense risks
assumed by the Company. For Contracts valued at less than $25,000, there is also
a $25 Annual Contract Maintenance Fee.
You will also pay Fund Operating Expenses, which currently range from 0.20%
to 0.48% annually of the average daily value of the Portfolios.
<PAGE>
6
Summary (continued)
TAXES
In general, you are not taxed on earnings on your investment in the Contract
until you withdraw them or receive Annuity Payments. Earnings are taxed as
ordinary income. During the Accumulation Phase, for tax purposes withdrawals are
taken from earnings first, then from your investment in the Contract. If you
receive money from the Contract before age 59 1/2, you may have to pay a 10%
federal penalty tax on the earnings portion received. During the Income Phase,
payments come partially from earnings, partially from your investment. You are
taxed only on the earnings portion of each Annuity Payment.
ACCESS TO YOUR MONEY
You can take money out of your Contract at any time during the Accumulation
Phase without incurring a withdrawal charge. Each withdrawal you make must be at
least $250. You may have to pay income tax and a tax penalty on any money you
take out.
PERFORMANCE
The investment performance of the Portfolios you choose directly affects the
value of your Contract. You bear all investment risk (including the possible
loss of principal), and investment results are not guaranteed.
From time to time, the Company may advertise the investment performance of
the Portfolios. In doing so, it will use standardized methods prescribed by the
Securities and Exchange Commission, as well as certain non-standardized methods.
Past performance does not indicate or predict future performance.
DEATH BENEFIT
If the Annuitant dies during the Accumulation Phase, the Beneficiary will
receive the Death Benefit. The Death Benefit is the greater of the then-current
Accumulated Value of the Contract or the sum of all Purchase Payments (less any
partial withdrawals and any applicable Premium Taxes). The Beneficiary may elect
to receive these amounts as a lump sum or as Annuity Payments.
Federal tax law requires that if a Contract Owner is a natural person and
dies before the Annuity Date, then the entire value of the Contract must be
distributed within five years of the date of death of the Contract Owner.
Special rules may apply to a surviving spouse. If the Contract Owner is not a
natural person, the death of the primary Annuitant triggers the same
distribution requirement.
OTHER INFORMATION
Free Look Period
The Contract provides for a Free Look Period of at least 10 days after the
Contract Owner receives the Contract (20 or more days in some instances as
specified in your Contract) plus 5 days for mailing. If you cancel your Contract
during the Free Look Period, the Company will return the greater of the Purchase
Payments received under the Contract or the Accumulated Value of the Contract as
of the day the Company receives the Contract, except in Pennsylvania, where the
Contract Owner will receive the Accumulated Value whether or not it exceeds
Purchase Payments made under the Contract.
<PAGE>
7
Peoples Benefit Life Insurance Company
Peoples Benefit Life Insurance Company is a life insurance company incorporated
under Missouri law. It is principally engaged in offering life insurance and
annuity contracts.
Peoples Benefit Life Insurance Company Separate Account IV
Established by the Company under Missouri law, the Separate Account is a unit
investment trust registered with the Securities and Exchange Commission. The
Separate Account has thirteen Subaccounts, each of which invests solely in a
corresponding Portfolio of the Fund.
Other topics
Additional information on the topics summarized above and on other topics not
summarized here can be found at Other Information, page 34.
INQUIRIES AND CONTRACT AND POLICYHOLDER INFORMATION
For more information about the Vanguard Variable Annuity Plan Contract, call
800-522-5555 or write:
Regular Mail: Overnight or Certified Mail:
Vanguard Variable Annuity Plan Center Vanguard Variable Annuity Plan Center
P.O. Box 1103 100 Vanguard Boulevard, ZB1
Valley Forge, PA 19482-1103 Malvern, PA 19355
If you have questions about your Contract, please telephone the Vanguard
Variable Annuity Plan Center at 800-462-2391. Please have ready the Contract
number and the Contract Owner's name when you call. As Contract Owner, you will
receive periodic statements confirming any transactions that take place as well
as quarterly statements and an annual report.
Fee Table
The following Fee Table illustrates all expenses that you would incur as a
Contract Owner. The expenses and fees shown are for the Fund's 1998 fiscal year.
The expenses and fees for the Short-Term Corporate Portfolio, the Diversified
Value Portfolio, the Mid-Cap Index Portfolio, and the REIT Index Portfolio are
estimates because the Portfolios had not commenced operations during the Fund's
1998 fiscal year. The purpose of this Fee Table is to assist you in
understanding the various costs and expenses that you would pay directly or
indirectly as a purchaser of the Contract. The Fee Table reflects all expenses
for both the Separate Account and the Fund. For a complete discussion of
contract costs and expenses, see Expenses, page 23.
- --------------------------------------------------------------------------------
Owner Transaction Expenses Separate Account
- --------------------------------------------------------------------------------
Sales Load Imposed on Purchases None
Surrender Fees None
Exchange Fees None
Annual Contract Maintenance Fee* $25
- --------------------------------------------------------------------------------
* Applies to Contracts valued at less than $25,000 at the time of initial
purchase and on the last Business Day of each calendar year.
- --------------------------------------------------------------------------------
<PAGE>
8
Annual Separate Account Expenses
(as a percentage of average account value) Separate Account
- --------------------------------------------------------------------------------
Mortality and Expense Risk Charge** 0.27%
Administrative Expense Charge 0.10
----------
Total Annual Separate Account Expenses 0.37%
- --------------------------------------------------------------------------------
**This charge is based on the combined net assets of the Separate Account and
Separate Account B of AUSA Life Insurance Company, Inc. in the Fund,
according to the following schedule:
Net Assets Rate For All Assets
- --------------------------------------------------------------------------------
Up to $2.5 billion 0.30%
Over $2.5 billion and up to $5 billion 0.28
Over $5 billion 0.27
- --------------------------------------------------------------------------------
The charge is currently 0.27%. See Expenses, page 23, for more information.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses during the fiscal year ended September 30, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
High- High
Money Grade Yield Short-Term Diversified Equity
Market Bond Bond Corporate Balanced Value Income
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Management &
Administrative Expenses 0.15% 0.22% 0.22% 0.25% 0.19% 0.25% 0.23%
Investment Advisory Fees 0.01 0.01 0.06 0.02 0.09 0.12 0.10
12b-1 Distribution Fees None None None None None None None
Other Expenses
Distribution Costs 0.03 0.02 0.02 0.02 0.02 0.02 0.02
Miscellaneous Expenses 0.01 0.03 0.01 0.02 0.01 0.01 0.01
------------------------------------------------------------------------------------
Total Other Expenses 0.04 0.05 0.03 0.04 0.03 0.03 0.03
------------------------------------------------------------------------------------
Total Fund Operating
Expenses 0.20% 0.28% 0.31% 0.31% 0.31% 0.40% 0.36%
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Total Expenses
- ------------------------------------------------------------------------------------------------------------------------------------
High- High
Money Grade Yield Short-Term Diversified Equity
Market Bond Bond Corporate Balanced Value Income
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Separate Account
Expenses 0.37% 0.37% 0.37% 0.37% 0.37% 0.37% 0.37%
Total Fund Operating
Expenses 0.20 0.28 0.31 0.31 0.31 0.40 0.36
------------------------------------------------------------------------------------
Grand Total, Separate
Account and Fund
Operating Expenses 0.57% 0.65% 0.68% 0.68% 0.68% 0.77% 0.73%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
9
<TABLE>
<CAPTION>
Annual Fund Operating Expenses during the fiscal year ended September 30, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Small
Equity Mid-Cap REIT Company
Index Growth Index Index Growth International
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management &
Administrative Expenses 0.17% 0.21% 0.22% 0.26% 0.27% 0.24%
Investment Advisory Fees 0.00 0.15 0.00 0.01 0.11 0.15
12b-1 Distribution Fees None None None None None None
Other Expenses
Distribution Costs 0.02 0.02 0.02 0.02 0.02 0.02
Miscellaneous Expenses 0.01 0.01 0.01 0.02 0.02 0.07
----------------------------------------------------------------------------------
Total Other Expenses 0.03 0.03 0.03 0.04 0.04 0.09
----------------------------------------------------------------------------------
Total Fund Operating
Expenses 0.20% 0.39% 0.25% 0.31% 0.42% 0.48%
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Total Expenses
- ------------------------------------------------------------------------------------------------------------------------------------
Small
Equity Mid-Cap REIT Company
Index Growth Index Index Growth International
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Separate Account
Expenses 0.37% 0.37% 0.37% 0.37% 0.37% 0.37%
Total Fund Operating
Expenses 0.20 0.39 0.25 0.31 0.42 0.48
----------------------------------------------------------------------------------
Grand Total, Separate
Account and Fund
Operating Expenses 0.57% 0.76% 0.62% 0.68% 0.79% 0.85%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Automated Quotes
The Vanguard Tele-Account Service provides access to Accumulation Unit Values
(to two decimal places) and total returns for all Portfolios, and yield
information for the Money Market, High-Grade Bond, High Yield Bond, and the
Short-Term Corporate Portfolios of the Fund. Contract Owners may use this
service for 24-hour access to Portfolio information. To access the service you
may call Tele-Account at 800-662-6273 (ON-BOARD) and follow the step-by-step
instructions, or speak with a Vanguard Variable Annuity Plan Center associate at
800-522-5555 to request a brochure that explains how to use the service.
Vanguard's website also has Accumulation Unit Values (to two decimal places)
for all Portfolios. This service can be accessed from www.vanguard.com by
double-clicking on fund prices.
<PAGE>
10
Example
The following example illustrates the expenses that you would incur on a $1,000
purchase payment over various periods, assuming (1) a 5% annual rate of return
and (2) full surrender at the end of each period. The Contract imposes no
surrender fees of any kind. Your expenses are identical whether you continue the
Contract or withdraw the entire value of your Contract at the end of the
applicable period as a lump sum or under one of the Contract's Annuity Payment
Options.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Money Market Portfolio $ 6 $ 18 $ 32 $ 72
High-Grade Bond Portfolio 7 21 37 82
High Yield Bond Portfolio 7 22 38 85
Short-Term Corporate Portfolio 6 18 32 72
Balanced Portfolio 8 24 42 93
Diversified Value Portfolio 8 25 43 95
Equity Income Portfolio 9 28 48 107
Equity Index Portfolio 7 22 38 85
Growth Portfolio 8 26 45 99
Mid-Cap Index Portfolio 7 22 38 85
REIT Index Portfolio 8 25 43 97
Small Company Growth Portfolio 6 20 35 78
International Portfolio 7 22 38 85
- --------------------------------------------------------------------------------
The Annual Contract Maintenance Fee is reflected in this example as a
percentage equal to the total amount of fees collected during a year divided by
the total average net assets of the Portfolios during the same year. The fee is
assumed to remain the same in each year of the above periods. The fee is
prorated to reflect only the remaining portion of the calendar year of purchase.
Thereafter, the fee is deducted on the last Business Day of the year for the
following year, on a pro rata basis, from each of the Portfolios you have
chosen. For a complete discussion of Contract costs and expenses, see Expenses,
page 23.
You should not consider this example to be a representation of past or future
expenses or performance. Actual expenses may be higher or lower than those
shown, subject to the guarantees in the Contract.
CONDENSED FINANCIAL INFORMATION
Please note that the Appendix contains a history of accumulation unit values in
a table labeled "Condensed Financial Information."
The Annuity Contract
The Vanguard Variable Annuity Plan Contract is a flexible-premium multi-funded
variable annuity offered by Peoples Benefit Life Insurance Company (the
"Company"). The Contract provides a means of investing on a tax-deferred basis
in various portfolios (the "Portfolios") offered by Vanguard Variable Insurance
Fund. You may purchase a Contract using after-tax dollars (a NonQualified
Contract), or you may purchase a Qualified Contract by "rolling over" funds from
another individual retirement annuity or from a qualified plan.
<PAGE>
11
Who Should Invest
The Contract is intended for long-term investors who want tax-deferred
accumulation of funds, generally for retirement but also for other long-term
investment purposes. The tax-deferred feature of the Contract is most attractive
to investors in high federal and state marginal tax brackets who have exhausted
other avenues of tax deferral, such as pre-tax contributions to
employer-sponsored retirement or savings plans.
About the Contract
The Vanguard Variable Annuity Plan Contract is a contract between you, the
Contract Owner, and the Company, the issuer of the Contract.
The Contract provides benefits in two distinct phases: accumulation and
income.
Accumulation Phase
The Accumulation Phase starts when you purchase your Contract and ends
immediately before the Annuity Date, when the Income Phase starts. During the
Accumulation Phase, you choose to allocate your investment in the Contract among
the thirteen available Portfolios. The Contract is a variable annuity because
the value of your investment in the Portfolios can go up or down depending on
the investment performance of the Portfolios you choose. The Contract is a
flexible-premium annuity because you can make additional investments of at least
$250 until the Income Phase begins. During this phase, you are generally not
taxed on earnings from amounts invested unless you withdraw them.
Other benefits available during the Accumulation Phase include the ability
to:
. Make exchanges among your Portfolio choices at no charge and without
current tax consequences. (See Exchanges Among the Portfolios, page 21.)
. Withdraw all or part of your money with no surrender penalty charged by the
Company, although you may incur income taxes and a 10% penalty tax prior to
age 59 1/2. (See Full and Partial Withdrawals, page 29.)
Income Phase
During the Income Phase, you receive regular annuity payments. The amount of
these payments is based in part on the amount of money accumulated under your
Contract (its Accumulated Value) and the Annuity Payment Option you select. The
Annuity Payment Options are explained at Annuity Payments, page 12.
At your election, payments can be either variable or fixed. If variable, the
payments rise or fall depending on the investment performance of the Portfolios
you choose. If fixed, the payment amounts are guaranteed.
Annuity payments are available in a wide variety of options, including
payments over a specified period or for life (for either a single life or joint
lives), with or without a guaranteed number of payments.
The Separate Account
When you purchase a Contract, your money is deposited into the Company's
Separate Account IV. The Separate Account contains a number of Subaccounts that
invest exclusively in shares of the corresponding Portfolios. The investment
performance of each Subaccount is linked directly to the investment performance
of one of the Portfolios. Assets in the Separate Account belong to the Company
but are accounted for separately from the Company's other assets and can be used
only to satisfy its obligations to Contract Owners.
<PAGE>
12
The Annuity Contract (continued)
Vanguard Variable Insurance Fund
The Portfolios available for investment under the Contract are portfolios of
Vanguard Variable Insurance Fund, an open-end diversified investment company
intended exclusively as an investment vehicle for variable annuity and variable
life insurance contracts offered by insurance companies. The Fund is a member of
The Vanguard Group of Investment Companies, a family of more than 30 investment
companies with more than 100 distinct investment portfolios holding assets worth
more than $450 billion. Through their jointly owned subsidiary, The Vanguard
Group, Inc., Vanguard Variable Insurance Fund and the other funds in the group
obtain at cost virtually all of their corporate management, administrative,
shareholder accounting, and distribution services.
Annuity Payments
During the Income Phase, you receive regular annuity payments under a wide range
of Annuity Payment Options.
Starting the Income Phase
As Contract Owner, you exercise control over when the Income Phase begins by
specifying an Annuity Date on the Application when you purchase the Contract.
The Annuity Date is the date on which annuity payments begin and is always the
first day of the month you specify. You may also change the Annuity Date at any
time in writing, as long as the Annuitant or Joint Annuitant is living and the
Company receives the request at least 30 days before the then-scheduled Annuity
Date. Any Annuity Date you request must be at least 30 days from the day the
Company receives written notice of it. The latest possible Annuity Date the
Company will accept without prior approval is the first day of the month after
the Annuitant's 85(th) birthday.
If you do not specify an Annuity Date, either on the Application or by
written request, your Annuity Date will be the first day of the month after ten
full years from the date of your Contract or the first day of the month after
the Annuitant's 65(th) birthday, whichever is later.
The Annuity Date for Qualified Contracts may also be controlled by
endorsements, the plan, or applicable law.
Annuity Payment Options
The income you take from the Contract during the Income Phase can take several
different forms, depending on your particular needs. Except for the Designated
Period Annuity Option listed below, the Annuity Payment Options listed below are
available on either a variable basis or a fixed basis.
If available on a variable basis, the Annuity Payment Options provide
payments that, after the initial payment, will go up or down depending on the
investment performance of the Portfolios you choose.
If available on a fixed basis, the Annuity Payment Options provide payments
in an amount that does not change. If you choose a fixed Annuity Payment Option,
the Company will move your investment out of the Portfolios and into the general
account of the Company.
. Life Annuity - Monthly Annuity Payments are paid for the life of an
Annuitant, ending with the last payment before the Annuitant dies.
<PAGE>
13
. Joint and Last Survivor Annuity - Monthly Annuity Payments are paid for as
long as at least one of two named Annuitants is living, ending with the last
payment before the surviving Annuitant dies.
. Life Annuity With Period Certain - Monthly Annuity Payments are paid for as
long as the Annuitant lives, with payments guaranteed to be made for a period
of at least 10 years, 15 years, or 20 years, as elected. If the Annuitant
dies before the period certain ends, the Company will make any remaining
payments to the Beneficiary.
. Installment or Unit Refund Life Annuity - Available as either a fixed
(Installment Refund) or variable (Unit Refund) Annuity Payment Option.
Monthly Annuity Payments are paid for the life of an Annuitant, with a period
certain determined by dividing the Accumulated Value by the first Annuity
Payment. If the Annuitant dies before the period certain ends, the Company
will make any remaining payments to the Beneficiary.
. Designated Period Annuity - Available only on a fixed basis. Monthly Annuity
Payments are paid for a specified period, which may be from 10 to 30 years.
Calculating Annuity Payments
Fixed Annuity Payments. Each fixed Annuity Payment is guaranteed to be at least
the amount shown in the Contract's Annuity Tables corresponding to the Annuity
Payment Option selected.
Variable Annuity Payments. To calculate variable Annuity Payments, the Company
determines the amount of the first variable Annuity Payment. The first variable
Annuity Payment will equal the amount shown in the applicable Annuity Table in
the Contract. This amount depends on the Accumulated Value of your Contract on
the Annuity Date, the sex and age of the Annuitant (and Joint Annuitant where
there is one), the Annuity Payment Option selected, and any applicable Premium
Taxes. Subsequent variable Annuity Payments depend on the investment experience
of the Portfolios chosen. If the actual net investment experience of the
Portfolios chosen exactly equals the Assumed Interest Rate of 4%, then the
variable Annuity Payments will not change in amount. If the actual net
investment experience of the Portfolios chosen is greater than the Assumed
Interest Rate of 4%, then the variable Annuity Payments will increase. On the
other hand, they will decrease if the actual experience is lower. The Statement
of Additional Information contains a more detailed description of the method of
calculating variable Annuity Payments.
Impact of Annuitant's Age on Annuity Payments. For either fixed or variable
Annuity Payments involving life income, the actual ages of the Annuitant and
Joint Annuitant will affect the amount of each payment. Since payments based on
the lives of older Annuitants and Joint Annuitants are expected to be fewer in
number, the amount of each Annuity Payment will be greater.
Impact of Annuitant's Sex on Annuity Payments. For either fixed or variable
Annuity Payments involving life income, the sex of the Annuitant and Joint
Annuitant will affect the amount of each payment. Since payments based on the
lives of male Annuitants and Joint Annuitants are expected to be fewer in
number, in most states the amount of each Annuity Payment will be greater than
for female Annuitants and Joint Annuitants.
<PAGE>
14
Annuity Payments (continued)
Impact of Length of Payment Periods on Annuity Payments. The value of all
payments, both fixed and variable, will be greater for shorter guaranteed
periods than for longer guaranteed periods, and greater for single-life
annuities than for joint and survivor annuities, because they are expected to be
made for a shorter period.
A FEW THINGS TO KEEP IN MIND REGARDING ANNUITY PAYMENTS
. If an Annuity Payment Option is not selected, the Company will assume that
you chose the Life Annuity With Period Certain option (with 10 years of
payments guaranteed) on a variable basis.
. The minimum payment is $100 ($20 for Contracts issued to South Carolina,
Texas, and Massachusetts residents). If during the Accumulation Phase your
Accumulated Value falls below $5,000 (or $2,000 for Contracts issued to South
Carolina, Texas, and Massachusetts residents), the Company reserves the right
to pay that amount to you in a lump sum.
. From time to time, the Company may require proof that the Annuitant, Joint
Annuitant, or Contract Owner is living.
. If someone has assigned ownership of a Contract to you, or if a non-natural
person (e.g., a corporation) owns a Contract, you may not start the Income
Phase of the Contract without the Company's consent.
. At the time the Company calculates your fixed Annuity Payments, the Company
may offer more favorable rates than those guaranteed in the Annuity Tables
found in the Contract.
. Once Annuity Payments begin, you may not select a different Annuity Payment
Option. Nor may you cancel an Annuity Payment Option after Annuity Payments
have begun.
. If you have selected a variable Annuity Payment Option, you may change the
Portfolios funding the variable Annuity Payments by written request or by
calling the Vanguard Variable Annuity Plan Center at 800-462-2391. However,
because excessive exchanges can potentially disrupt the management of the
Portfolios and increase transaction costs, exchange activity is limited to
two substantive "round trips" through the Portfolios (except the Money Market
Portfolio) during any 12-month period. A "round trip" is a redemption from a
Portfolio followed by a purchase back into the Portfolio within 30 days.
Also, "round trip" covers transactions accomplished by any combination of
methods, including transactions conducted by check, wire, or exchange to or
from another Vanguard fund. "Substantive" means a dollar amount that The
Vanguard Group, Inc. determines, in its sole discretion, could adversely
affect management of the Fund.
. You may select an Annuity Payment Option and allocate a portion of the value
of your Contract to a fixed version of that Annuity Payment Option and a
portion to a variable version of that Annuity Payment Option (assuming the
Annuity Payment Option is available on both a fixed and variable basis). You
may not select more than one Annuity Payment Option.
. If you choose an Annuity Payment Option and the postal or other delivery
service is unable to deliver checks to the Payee's address of record, no
interest will accrue on amounts represented by uncashed Annuity Payment
checks. It is the Payee's responsibility to keep the Company informed of the
Payee's most current address of record.
<PAGE>
15
DEFINITION
Qualified Contract
When the term "Qualified Contract" is used in this prospectus we mean a Contract
that qualifies as an individual retirement annuity under Section 408(b) of the
Internal Revenue Code. There are other types of qualified annuity contracts
defined under different Internal Revenue Code sections, but we are not referring
to those in this prospectus.
Purchase
Application and Issuance of Contracts
Contract Issuance. To invest in the Vanguard Variable Annuity Plan Contract, you
should send a completed Application and your Initial Purchase Payment to the
Vanguard Variable Annuity Plan Center. The Company will issue a Contract only if
the Annuitant and Joint Annuitant are 75 years of age or less.
If the Application is received in good order, the Company will issue the
Contract and will credit the Initial Purchase Payment within two Business Days
after receipt. A Business Day is any day that the New York Stock Exchange is
open for trading.
If the Company cannot credit the Initial Purchase Payment because the
Application is incomplete, the Company will contact the applicant in writing,
explain the reason for the delay, and refund the Initial Purchase Payment within
five Business Days unless the applicant consents to the Company's retaining the
Initial Purchase Payment and crediting it as soon as the necessary requirements
are fulfilled.
In order to prevent lengthy processing delays caused by the clearing of
foreign checks, the Company will accept only those foreign checks that are drawn
in U.S. dollars and are issued by a foreign bank with a U.S. correspondent bank.
You may purchase a Qualified Contract only in connection with a "rollover" of
funds from another qualified plan or individual retirement annuity. Qualified
Contracts contain certain other restrictive provisions limiting the timing of
payments to and distributions from the Qualified Contract. (See QUALIFIED
INDIVIDUAL RETIREMENT ANNUITIES, page 28.)
Purchase Payments
A Purchase Payment is any amount you use to buy or add to the Contract. A
Purchase Payment may be reduced by any applicable Premium Tax or an initial
Annual Contract Maintenance Fee. In that case, the resulting amount is called a
Net Purchase Payment.
A FEW THINGS TO KEEP IN MIND REGARDING PURCHASE PAYMENTS
. The minimum Initial Purchase Payment for a Contract is $5,000.
. The Company will not accept third-party checks for Purchase Payments.
. You may make additional Purchase Payments at any time during the
Accumulation Phase and while the Annuitant or Joint Annuitant, if
applicable, is living. Additional Purchase Payments must be at least $250.
. Additional Purchase Payments received before the close of the New York
Stock Exchange (usually 4 p.m. Eastern time) are credited to the Contract's
Accumulated Value as of the close of business that same day.
. The minimum amount that you can allocate to any one Portfolio is $1,000.
. The total of all Purchase Payments may not exceed $1,000,000 without prior
approval from the Company.
<PAGE>
16
Purchase (continued)
The date on which the Initial Purchase Payment is credited to the Contract
value is called the Contract Date.
DEFINITION
Premium Tax
A Premium Tax is a regulatory tax some states assess on the Purchase Payments
made into a Contract. If the Company should have to pay any Premium Tax, it
will be deducted from each Purchase Payment or from the Accumulated Value as
the Company incurs the tax.
As of the date of this Prospectus, the following state assesses a Premium
Tax on all Initial and subsequent Purchase Payments:
Qualified Non-Qualified
--------- -------------
South Dakota 0.00% 1.25%
As of the date of this Prospectus, the following states assess a Premium
Tax against the Accumulated Value if the Contract Owner chooses an Annuity
Payment Option instead of receiving a lump sum distribution:
Qualified Non-Qualified
--------- -------------
California 0.50% 2.35%
Kentucky 2.00 2.00
Maine 0.00 2.00
Nevada 0.00 3.50
West Virginia 1.00 1.00
Wyoming 0.00 1.00
Purchasing by Wire
Money should be wired to: FIRST UNION NATIONAL BANK
ABA 031201467
DEPOSIT ACCOUNT NUMBER 2014126521732
PEOPLES BENEFIT LIFE INSURANCE COMPANY and
THE VANGUARD GROUP, INC.
[YOUR CONTRACT NUMBER]
[YOUR CONTRACT REGISTRATION]
Please call 800-462-2391 before wiring
Please be sure your bank includes your Contract number to assure proper
receipt. If you would like to wire your Initial Purchase Payment, you should
complete the Vanguard
Variable Annuity Plan Application and mail it to the Vanguard Variable Annuity
Plan Center, P.O. Box 1103, Valley Forge, PA 19482-1103, prior to completing
wire arrangements.
Note that the Company will accept Federal Funds wire purchase orders only
when the New York Stock Exchange and Custodian Bank are open for business.
<PAGE>
17
Annuity Express/(TM)/
The Annuity Express service allows you to make additional Purchase Payments by
transferring funds automatically from your checking or statement savings account
(not passbook savings account) to one or more Portfolios on a monthly,
quarterly, semi-annual, or annual basis. You may add to existing Portfolios
provided you have a minimum balance of $1,000. The minimum automatic purchase is
$50; the maximum is $100,000.
Section 1035 Exchanges
Under Section 1035 of the Internal Revenue Code, you may exchange the assets of
an existing annuity contract or life insurance or endowment policy to the
Vanguard Variable Annuity Plan Contract without any current tax consequences. To
make a "1035 Exchange," complete a 1035 Exchange form and mail it along with
your signed and completed Application and your current contract, to the Vanguard
Variable Annuity Plan Center.
To accommodate owners of Vanguard Variable Annuity Plan Contracts, under
certain conditions the Company will allow for the consolidation of two or more
Vanguard Variable Annuity Plan Contracts into one Contract. In order to provide
Contract Owners with consolidated account reporting, the Company will accept
these exchanges on a case-by-case basis. If applicable, you will be responsible
for only one Annual Contract Maintenance Fee. Under no circumstances will the
Company allow the exchange of an existing Vanguard Variable Annuity Plan
Contract for an identical new Vanguard Variable Annuity Plan Contract.
Because special rules and procedures apply to 1035 Exchanges, particularly if
the Contract being exchanged was issued prior to August 14, 1982, you should
consult a tax adviser before making a 1035 Exchange.
Please note that any outstanding loans you may have on a contract you wish to
exchange may create a current tax consequence. For this reason we encourage you
to settle any outstanding loans with your current insurance company before
initiating a 1035 Exchange into a Vanguard Variable Annuity Plan Contract.
Allocation of Purchase Payments
You specify on the Application what portion of your Purchase Payments you want
to be allocated among which Portfolios. You may allocate your Purchase Payments
to one or more Portfolios. All allocations you make must be in whole-number
percentages and must be at least 10% of your Contract's Accumulated Value and
$1,000. Your Initial Net Purchase Payment will be immediately allocated among
the Portfolios in the percentages you specified on your Application without
waiting for the Free Look Period to pass.
Should your investment goals change, you may change the allocation
percentages for additional Net Purchase Payments by sending written notice to
the Vanguard Variable Annuity Plan Center. The change will take effect on the
date the Company receives your written notice. You may sign the appropriate
section of the Application to establish an option that allows you to give
allocation instructions by telephone. See Telephone Exchanges, page 22.
<PAGE>
18
Purchase (continued)
WHAT'S MY CONTRACT WORTH TODAY?
Accumulated Value
The Accumulated Value of your Contract is the value of all amounts accumulated
under the Contract during the Accumulation Phase (similar to the current market
value of a mutual fund account). When the Contract is opened, the Accumulated
Value is equal to your initial Net Purchase Payment. On any Business Day
thereafter, the Accumulated Value equals the Accumulated Value from the previous
Business Day,
plus:
. Any additional Net Purchase Payments credited
. Any increase in the Accumulated Value due to investment results of the
Portfolio(s) you selected
minus:
. Any decrease in the Accumulated Value due to investment results of the
Portfolio(s) you selected
. The daily Mortality and Expense Risk Charge
. The daily Administrative Expense Charge
. The Annual Contract Maintenance Fee, if applicable
. Any withdrawals
. Any Premium Taxes that occur during the Valuation Period.
The Valuation Period is any period between two successive Business Days
beginning at the close of business of the first Business Day and ending at the
close of business of the next Business Day.
You should expect the Accumulated Value of your Contract to change from
Valuation Period to Valuation Period, reflecting the investment experience of
the Portfolios you have selected as well as the daily deduction of charges.
An Accumulation Unit is a measure of your ownership interest in the Contract
during the Accumulation Phase. When you allocate your Net Purchase Payments to a
selected Portfolio, the Company will credit a certain number of Accumulation
Units to your Contract. The Company determines the number of Accumulation Units
it credits by dividing the dollar amount you have allocated to a Portfolio by
the Accumulation Unit Value for that Portfolio as of the end of the Valuation
Period in which the payment is received. Each Portfolio has its own Accumulation
Unit Value (similar to the share price (net asset value) of a mutual fund). The
Accumulation Unit Value varies each Valuation Period with the net rate of return
of the Portfolio. The net rate of return reflects the performance of the
Portfolio for the Valuation Period and is net of asset charges to the Portfolio.
Per Portfolio, the Accumulated Value equals the number of Accumulation Units
multiplied by the Accumulation Unit Value for that Portfolio.
All dividends and capital gains earned will be reinvested and reflected in
the Accumulation Unit Value. Only in this way can these earnings remain
tax-deferred.
<PAGE>
19
Investment Options
Vanguard Variable Insurance Fund
The Vanguard Variable Annuity Plan Contract offers you a means of investing in
thirteen Portfolios of Vanguard Variable Insurance Fund. A brief description of
each Portfolio is given below. For more detailed information regarding the
Portfolios, you should read the prospectus for Vanguard Variable Insurance Fund
that accompanies the Contract prospectus.
The general public may invest in the Portfolios of Vanguard Variable
Insurance Fund only through certain insurance contracts. The investment
objectives and policies of the Portfolios may be similar to those of publicly
available Vanguard funds or portfolios. You should not expect that the
investment results of any publicly available Vanguard funds or portfolios will
be comparable to those of the Portfolios.
. The Money Market Portfolio seeks to provide current income consistent with
the preservation of capital and liquidity. The Portfolio also seeks to
maintain a stable net asset value of $1 per share. The Portfolio invests
primarily in high-quality money market instruments issued by financial
institutions, non-financial corporations, the U.S. government, state and
municipal governments and their agencies or instrumentalities, as well as
repurchase agreements collateralized by such securities. The Portfolio also
invests in Eurodollar obligations (dollar-denominated obligations issued
outside the U.S. by foreign banks or foreign branches of domestic banks)
and Yankee obligations (dollar-denominated obligations issued in the U.S.
by foreign banks). An investment in the Portfolio is not insured or
guaranteed by the FDIC or any other government agency. Although the
Portfolio seeks to preserve the value of your investment at $1 per share,
it is possible to lose money by investing in the Portfolio. Vanguard's
Fixed Income Group serves as this Portfolio's investment adviser.
. The High-Grade Bond Portfolio seeks to parallel the investment results of
the Lehman Brothers Aggregate Bond Index. The Portfolio invests primarily
in a diversified portfolio of U.S. government and corporate bonds and
mortgage-backed securities. Vanguard's Fixed Income Group serves as this
Portfolio's investment adviser.
. The High Yield Bond Portfolio seeks to provide a high level of current
income by investing in lower-rated debt securities, which may be regarded
as having speculative characteristics and are commonly referred to as "junk
bonds." Under normal circumstances, at least 80% of the Portfolio's assets
will be invested in high-yield corporate debt obligations rated at least B
by Moody's Investors Service, Inc. or Standard & Poor's Corporation or, if
unrated, of comparable quality as determined by the Portfolio's adviser,
Wellington Management Company.
. The Short-Term Corporate Portfolio seeks to provide a high level of income
by investing primarily in high-quality, short-term bonds issued by
corporations. Vanguard's Fixed Income Group serves as this Portfolio's
investment adviser.
. The Balanced Portfolio seeks the conservation of principal, while providing
moderate income, and moderate long-term growth of capital and income. The
Portfolio invests in a diversified portfolio of common stocks and bonds,
with common stocks expected to represent 60% to 70% of the Portfolio's
total assets and bonds to represent 30% to 40%. Wellington Management
Company serves as this Portfolio's investment adviser.
<PAGE>
20
Investment Options (continued)
. The Diversified Value Portfolio seeks to provide long-term growth of capital
and a moderate level of dividend income by investing primarily in common
stocks of large and medium-sized companies whose stocks the adviser considers
to be undervalued and out of favor with investors. Such "value" stocks
typically have above-average dividend yields and/or below-average prices in
relation to such financial measures as earnings, book value, and cash flow.
Barrow, Hanley, Mewhinney & Strauss, Inc. serves as this Portfolio's
investment adviser.
. The Equity Income Portfolio seeks to provide a high level of current income
by investing principally in dividend-paying equity securities. Newell
Associates serves as this Portfolio's investment adviser.
. The Equity Index Portfolio seeks to provide long-term growth of capital by
matching the performance of the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), which contains the stocks of 500 of the largest domestic
companies. Vanguard's Core Management Group serves as this Portfolio's
investment adviser.
. The Growth Portfolio seeks to provide long-term capital appreciation. The
Portfolio invests primarily in equity securities of seasoned U.S. companies
with above-average prospects for growth. Lincoln Capital Management Company
serves as this Portfolio's investment adviser.
. The Mid-Cap Index Portfolio seeks to provide long-term growth of capital by
attempting to match the performance of the Standard & Poor's MidCap 400 Index
("S&P MidCap 400"), which is made up of stocks of medium-sized companies.
Vanguard's Core Management Group serves as this Portfolio's investment
adviser.
. The REIT Index Portfolio seeks to provide a high level of income and moderate
long-term growth of capital by investing in stocks of real estate investment
trusts ("REITs"), which own office buildings, hotels, shopping centers, and
other properties. The Portfolio seeks to match the performance of the Morgan
Stanley REIT Index, a benchmark of U.S. property trusts. Vanguard's Core
Management Group serves as this Portfolio's investment adviser.
. The Small Company Growth Portfolio seeks to provide long-term growth in
capital by investing primarily in equity securities of small companies deemed
to have favorable prospects for growth. These securities are primarily common
stocks but may also include securities convertible into common stock.
Granahan Investment Management serves as this Portfolio's investment adviser.
. The International Portfolio seeks to provide long-term capital appreciation.
The Portfolio invests primarily in equity securities of companies based
outside the United States. Schroder Capital Management International, Inc.
serves as this Portfolio's investment adviser.
There is no assurance that a Portfolio will achieve its stated objective.
Additional information regarding the investment objectives and policies of
the Portfolios and the investment advisory services can be found in the current
Fund prospectus accompanying this prospectus.
<PAGE>
21
Exchanges Among the Portfolios
Should your investment goals change, you may exchange money among the Portfolios
of the Fund at no cost, subject to the following conditions:
. You may make requests for exchanges in writing or by telephone. The Company
will process requests it receives prior to the close of the New York Stock
Exchange (generally 4 p.m. Eastern time) at the close of business that same
day. Requests received after the close of the New York Stock Exchange are
processed the next Business Day.
. The minimum amount you may exchange from a Portfolio is $250 (unless the
Accumulated Value in a Portfolio is less than $250).
. The $1,000 minimum balance requirement per Portfolio must be satisfied at
all times.
. The Company does not charge a fee for exchanges among the Portfolios.
LIMITATIONS ON EXCHANGES
Because excessive exchanges can disrupt management of the Fund and increase the
Fund's costs for all Contract Owners, the Fund limits exchanges as follows:
. You may make no more than two substantive "round trips" through a Portfolio
(not including the Money Market Portfolio) during any 12-month period.
. The Fund and the Company may refuse an exchange at any time, for any
reason.
. The Company may revoke a Contract Owner's telephone exchange privilege at
any time, for any reason.
A "round trip" is a redemption from a Portfolio followed by a purchase back
into the Portfolio within 30 days. Also, "round trip" covers transactions
accomplished by any combination of methods, including transactions conducted by
check, wire, or exchange to or from another Vanguard fund. "Substantive" means a
dollar amount that The Vanguard Group, Inc. determines, in its sole discretion,
could adversely affect management of the Fund.
Automatic Exchange Service
With the Automatic Exchange Service you can move money automatically among the
Portfolios of the Fund. You can exchange fixed dollar amounts or percentages of
your Portfolio balance into the other Portfolios offered under the Contract on
either a monthly, quarterly, semiannual, or annual basis (provided the $1,000
minimum balance requirement has been met in the Portfolios to which you are
moving money).
The minimum amount you may exchange is $250.
<PAGE>
22
Investment Options (continued)
A CLOSER LOOK AT
Dollar-Cost Averaging
Using the Automatic Exchange Service, you can establish exchanges at regular
intervals in a plan of investing often referred to as "dollar-cost averaging,"
moving money, for example, from the Money Market Portfolio into a stock or bond
Portfolio. The main objective of Dollar-Cost Averaging is to shield your
investment from short-term price fluctuations. Since the same dollar amount is
transferred to other Portfolios each month, more Accumulation Units are credited
to a Portfolio if the value per Accumulation Unit is low, while fewer
Accumulation Units are credited if the value per Accumulation Unit is high.
Therefore, it is possible to achieve a lower average cost per Accumulation Unit
over the long term if the Accumulation Unit Value declines over that period.
This plan of investing allows investors to take advantage of market fluctuations
but does not assure a profit or protect against a loss in declining markets.
To take advantage of the Automatic Exchange Service, complete a Vanguard
Variable Annuity Plan Automatic Exchange Service Application Form or send a
letter of instruction to the Vanguard Variable Annuity Plan Center.
You may change the amount to be transferred or cancel this service at any
time in writing or by telephone if you have telephone authorization on your
Contract. This service cannot be used to establish a new Portfolio, and will not
go into effect until the Free Look Period has expired.
Telephone Exchanges
You may establish the telephone exchange privilege on your Contract by
completing the appropriate section of the Application or by sending a letter
authorizing the Company to take exchange instructions over the telephone. The
Company, the Fund, and The Vanguard Group, Inc. shall not be responsible for the
authenticity of exchange instructions received by telephone. We will take
reasonable steps to confirm that instructions communicated by telephone are
genuine. Before we act on any telephoned instruction, we will ask the caller for
his or her Contract number and Social Security number. This information will be
verified against the Contract Owner's records and all transactions performed
will be verified with the Contact Owner through a written confirmation
statement. We will record all calls. The Company, the Fund, and The Vanguard
Group, Inc. shall not be liable for any loss, cost, or expense for action on
telephone instructions believed to be genuine in accordance with these
procedures. We will make every effort to maintain the exchange privilege.
However, the Company and the Fund reserve the right to revise or terminate its
provisions, limit the amount of any exchange, or reject any exchange, as deemed
necessary, at any time.
22
<PAGE>
Expenses
A CLOSER LOOK AT
The Costs of Investing in a Variable Annuity
Costs are an important consideration in choosing a variable annuity. That's
because you, as a contract owner, pay the costs of operating underlying mutual
funds, plus any transaction costs associated with the fund's buying and selling
of securities, as well as the costs associated with the annuity contract itself.
These combined costs can have a significant effect on the investment performance
of the annuity contract. Even seemingly small differences in mutual fund and
annuity contract expenses can, over time, have a dramatic effect on performance.
The projected expenses for the Vanguard Variable Annuity Plan Contract are
substantially below the costs of other variable annuity contracts. For example,
on a $25,000 Contract the average expense ratio of other variable annuity
contracts was 2.15% as of December 31, 1998, compared to 0.69% for the Vanguard
Variable Annuity Plan Contract as of the date of this prospectus. (Source for
competitors' data: Morningstar Variable Annuity/Life Performance Report,
February 1999.)
SUMMARY OF COSTS OF INVESTING
in the Vanguard Variable Annuity Plan Contract
. No sales load or sales charge
. No charge to make full or partial withdrawals
. No fee to exchange money among the Portfolios
. $25 Annual Contract Maintenance Fee on Contracts valued at less than
$25,000
. Annual Mortality and Expense Risk Charge: 0.27%
. Annual Administrative Expense Charge: 0.10%
. Fees and expenses paid by the Portfolios which ranged from 0.20% to 0.48%
in the fiscal year ending September 30, 1998
A fuller explanation of the expenses you would pay under the Contract
follows.
Mortality and Expense Risk Charge
The Company charges a fee as compensation for bearing certain mortality and
expense risks under the Contract. The annual charge is assessed daily based on
the combined net assets of the Separate Account and Separate Account B of AUSA
Life Insurance Company, Inc. in the Fund, according to the following schedule:
- --------------------------------------------------------------------------------
Net Assets Rate For All Assets
- --------------------------------------------------------------------------------
Up to $2.5 billion 0.30%
Over $2.5 billion and up to $5 billion 0.28
Over $5 billion 0.27
- --------------------------------------------------------------------------------
The charge is currently 0.27%.
- --------------------------------------------------------------------------------
23
<PAGE>
24
Expenses (continued)
The mortality and expense risk rates described above cannot be increased. If
the charge is more than sufficient to cover actual costs or assumed risks, any
excess will be added to the Company's surplus. If the charges collected under
the Contract are not enough to cover actual costs or assumed risks, then the
Company will bear the loss.
A CLOSER LOOK AT
The Mortality and Expense Risk Charge
The Company assumes mortality risk in two ways. First, where Contract Owners
elect an Annuity Payment Option under which the Company guarantees a number of
payments over a life or joint lives, the Company assumes the risk of making
monthly annuity payments regardless of how long all Annuitants may live.
Second, the Company assumes mortality risk in guaranteeing a minimum Death
Benefit in the event the Annuitant dies during the Accumulation Phase.
The expense risk the Company assumes is that the charges for administrative
expenses, which are guaranteed not to increase beyond the rates shown for the
life of the Contract, may not be great enough to cover the actual costs of
issuing and administering the Contract.
Administrative Expense Charge
The Company assesses each Contract an annual Administrative Expense Charge to
cover the cost of issuing and administering each Contract and of maintaining the
Separate Account. The Administrative Expense Charge is assessed daily at a rate
equal to 0.10% annually of the net asset value of the Separate Account.
Annual Contract Maintenance Fee
In certain situations, the Company charges an Annual Contract Maintenance Fee of
$25. The fee is to reimburse the Company for the costs it expects over the life
of the Contract for maintaining each Contract and the Separate Account.
The Company charges the fee if:
. Your Initial Purchase Payment is less than $25,000. In that case, your
Initial Purchase Payment is reduced by a pro rated amount of the $25 fee to
reflect the remaining portion of the calendar year of purchase.
. The Accumulated Value of your Contract is less than $25,000 on the last
Business Day of any year. In that case, the fee will be deducted on the last
Business Day of the year for the following year.
The fee is deducted proportionately from each of the Portfolios you have
selected.
Fund Operating Expenses
The value of the assets in the Separate Account will reflect the fees and
expenses paid by Vanguard Variable Insurance Fund. A complete description of
these expenses is found in the "Fee Table" section of this prospectus and in the
"Management of the Fund" section of the Fund's Statement of Additional
Information.
24
<PAGE>
Taxes
INTRODUCTION
The following discussion of annuity taxation is general in nature and is based
on the Company's understanding of the treatment of annuity contracts under
current federal income tax law, particularly Section 72 of the Internal Revenue
Code and various Treasury Regulations and Internal Revenue Service
interpretations dealing with Section 72. The discussion does not touch upon
state or local taxes. It is not tax advice. You should consult with a qualified
tax adviser about your particular situation to ensure that your purchase of a
Contract results in the tax treatment you desire. Additional discussion of tax
matters is included in the Statement of Additional Information.
TAXATION OF ANNUITIES IN GENERAL
Tax Deferral
Special rules in the Internal Revenue Code for annuity taxation exist today. In
general, those rules provide that you are not currently taxed on increases in
value under a Contract until you take some form of withdrawal or distribution
from it. However, it is important to note that, under certain circumstances, you
might not get the advantage of tax deferral, meaning that the increase in value
would be subject to current federal income tax. (See ANNUITY CONTRACTS OWNED BY
NON-NATURAL PERSONS, page 27, and DIVERSIFICATION STANDARDS, page 28.)
A CLOSER LOOK AT
Tax Deferral
Tax deferral means no current tax on earnings in your Contract. The amount you
would have paid in income taxes can be left in the Contract and earn money for
you.
One tradeoff of tax deferral is that there are certain restrictions on your
ability to access your money, including penalty taxes for early withdrawals.
This is one reason why a variable annuity is intended as a long-term
investment.
Another tradeoff is that, when funds are withdrawn, they are taxed at
ordinary income rates instead of capital gains rates, which apply to certain
other sorts of investments.
Taxation of Full and Partial Withdrawals
If you make a full or partial withdrawal (including a Systematic Withdrawal)
from a Non-Qualified Contract during the Accumulation Phase, you as Contract
Owner will be taxed at ordinary income rates on earnings you withdraw at that
time. For purposes of this rule, withdrawals are taken first from earnings on
the Contract and then from the money you invested in the Contract. This
"investment in the contract" can generally be described as the cost of the
Contract, and it generally includes all Purchase Payments minus any amounts you
have already received under the Contract that represented the return of invested
money. Also for purposes of this rule, a pledge or assignment of a Contract is
treated as a partial withdrawal from a Contract. (If you are contemplating using
your Contract as collateral for a loan, you may be asked to pledge or assign
it.)
25
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26
Taxes (continued)
Taxation of Annuity Payments
When you take Annuity Payments in the Income Phase of a Non-Qualified Contract,
for tax purposes each payment is deemed to return to you a portion of your
investment in the Contract. Since with a Non-Qualified Contract you have already
paid taxes on those amounts (the Contract was funded with after-tax dollars),
you will not be taxed again on your investment -- only on your earnings.
For fixed Annuity Payments from a Non-Qualified Contract, in general, the
Company calculates the taxable portion of each payment using a formula known as
the "exclusion ratio." This formula establishes the ratio that the investment in
the Contract bears to the total expected amount of Annuity Payments for the term
of the Contract. The Company then applies that ratio to each payment to
determine the non-taxable portion of the payment. The remaining portion of each
payment is taxable at ordinary income tax rates.
For variable Annuity Payments from a Non-Qualified Contract, in general, the
Company calculates the taxable portion of each payment using a formula that
establishes a specific dollar amount of each payment that is not taxed. To find
the dollar amount, the Company divides the investment in the Contract by the
total number of expected periodic payments. The remaining portion of each
payment is taxable at ordinary income tax rates.
Once your investment in the Contract has been returned, the balance of the
Annuity Payments represent earnings only and therefore are fully taxable.
Taxation of Withdrawals and Distributions From Qualified Contracts
Generally, the entire amount distributed from a Qualified Contract is taxable to
the Contract Owner. In the case of Qualified Contracts with after-tax
contributions, you may exclude the portion of each withdrawal or Annuity Payment
constituting a return of after-tax contributions. Once all of your after-tax
contributions have been returned to you on a non-taxable basis, subsequent
withdrawals or annuity payments are fully taxable as ordinary income. Since the
Company has no knowledge of the amount of after-tax contributions you have made,
you will need to make this computation in the preparation of your federal income
tax return.
Tax Withholding
Federal tax law requires that the Company withhold federal income taxes on all
distributions unless the recipient elects not to have any amounts withheld and
properly notifies the Company of that election. In certain situations, the
Company will withhold taxes on distributions to non-resident aliens at a flat
30% rate unless an exemption from withholding applies under an applicable tax
treaty.
Penalty Taxes on Certain Early Withdrawals
The Internal Revenue Code provides for a penalty tax in connection with certain
withdrawals or distributions that are includible in income. The penalty amount
is 10% of the amount includible in income that is received under an annuity.
However, there are exceptions to the penalty tax. For instance, it does not
apply to withdrawals: (i) made after the taxpayer reaches age 59 1/2; (ii) made
on or after the death of the Contract Owner or, where the Contract Owner is not
an individual, on or after the death of the primary Annuitant (who is defined as
the individual the events in whose life are of primary importance in affecting
the timing and payment under the Contracts); (iii) attributable to the
disability of the taxpayer which occurred after the purchase of the Contract (as
defined in the Internal Revenue Code); (iv) that are part of a series of
substantially equal periodic payments made at least annually for the life (or
life expectancy) of the taxpayer, or joint lives (or joint life expectancies) of
the taxpayer and his or her beneficiary; (v) from a Qualified Contract (note,
however, that
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27
other penalties may apply); (vi) under an immediate annuity contract (as defined
in the Internal Revenue Code); (vii) that can be traced to an investment in the
Contract prior to August 14, 1982; or (viii) under a Contract that an employer
purchases on termination of certain types of qualified plans and that the
employer holds until the employee separates from service.
If the penalty tax does not apply to a withdrawal as a result of the
application of item (iv) above, and the series of payments is subsequently
modified (for some reason other than death or disability), the tax for the year
in which the modification occurs will be increased by an amount (as determined
under Treasury Regulations) equal to the penalty tax that would have been
imposed but for item (iv) above, plus interest for the deferral period. The
foregoing rule applies if the modification takes place (a) before the close of
the period that is five years from the date of the first payment and after the
taxpayer attains age 59 1/2, or (b) before the taxpayer reaches age 59 1/2.
Because the Company cannot predict whether the payments will be substantially
equal, the Company will report such withdrawals to the Internal Revenue Service
as early withdrawals with no known exception.
For Qualified Contracts, other tax penalties may apply to certain
distributions as well as to certain contributions and other transactions.
The penalty tax may not apply to distributions from Qualified Contracts
issued under Section 408(b) of the Internal Revenue Code that you use to pay
qualified higher education expenses or the acquisition costs (up to $10,000)
involved in the purchase of a principal residence by a first-time homebuyer.
Because the Company cannot verify that such an early withdrawal is for qualified
higher education expenses or a first home purchase, the Company will report such
withdrawals to the Internal Revenue Service as early withdrawals with no known
exception.
ANNUITY CONTRACTS OWNED BY NON-NATURAL PERSONS
Where a non-natural person (for example, a corporation) holds a Contract, that
Contract is generally not treated as an annuity contract for federal income tax
purposes, and the income on that Contract (generally the increase in the net
Accumulated Value less the payments) is considered taxable income each year.
This rule does not apply where the non-natural person is only a nominal owner
such as a trust or other entity acting as an agent for a natural person. The
rule also does not apply where the estate of a decedent acquires a Contract,
where an employer purchases a Contract on behalf of an employee upon termination
of a qualified plan, or to an immediate annuity (as defined in the Internal
Revenue Code).
MULTIPLE-CONTRACTS RULE
All non-qualified annuity contracts issued by the same company (or affiliate) to
the same Contract Owner during any calendar year are to be aggregated and
treated as one contract for purposes of determining the amount includible in the
taxpayer's gross income. Thus, any amount received under any Contract prior to
the Contract's Annuity Date, such as a partial withdrawal, will be taxable (and
possibly subject to the 10% federal penalty tax) to the extent of the combined
income in all such contracts. The Treasury Department has specific authority to
issue regulations that prevent the avoidance of the multiple-contracts rules
through the serial purchase of annuity contracts or otherwise. In addition,
there may be other situations in which the Treasury Department may conclude that
it would be appropriate to aggregate two or more Contracts purchased by the same
Contract Owner. Accordingly, a Contract Owner should consult a tax adviser
before purchasing more than one Contract or other annuity contracts. (The
aggregation rules do not apply to immediate annuities (as defined in the
Internal Revenue Code).)
<PAGE>
28
Taxes (continued)
TRANSFERS OF ANNUITY CONTRACTS
Any transfer of a Non-Qualified Contract during the Accumulation Phase for less
than full and adequate consideration will generally trigger income tax (and
possibly the 10% federal penalty tax) on the gain in the Contract to the
Contract Owner at the time of such transfer. The transferee's investment in the
Contract will be increased by any amount included in the Contract Owner's
income. This provision, however, does not apply to transfers between spouses or
former spouses incident to a divorce that are governed by Internal Revenue Code
Section 1041(a).
ASSIGNMENTS OF ANNUITY CONTRACTS
A transfer of ownership in a Contract, a collateral assignment, or the
designation of an Annuitant or other beneficiary who is not also the Contract
Owner may result in tax consequences to the Contract Owner, Annuitant, or
beneficiary that this prospectus does not discuss. A Contract Owner considering
such a transfer or assignment of a Contract should contact a tax adviser about
the potential tax effects of such a transaction.
DIVERSIFICATION STANDARDS
To comply with certain regulations under Internal Revenue Code Section 817(h),
after a start-up period, each Subaccount of the Separate Account will be
required to diversify its investments in accordance with certain diversification
standards. A "look-through" rule applies that suggests that each Subaccount of
the Separate Account will be tested for compliance with the diversification
standards by looking through to the assets of the Portfolios in which each
Subaccount invests.
In connection with the issuance of temporary diversification regulations in
1986, the Treasury Department announced that such regulations did not provide
guidance on the extent to which Contract Owners may direct their investments to
particular subaccounts of a separate account. It is possible that regulations or
revenue rulings may be issued in this area at some time in the future. It is not
clear, at this time, what these regulations or rulings would provide. It is
possible that when the regulations or rulings are issued, the Contract may need
to be modified in order to remain in compliance. For these reasons, the Company
reserves the right to modify the Contract, as necessary, to maintain the
tax-deferred status of the Contract.
We intend to comply with the diversification regulations to assure that the
Contract continues to be treated as an annuity contract for federal income tax
purposes.
QUALIFIED INDIVIDUAL RETIREMENT ANNUITIES
Generally, you may purchase Qualified Contracts only in connection with a
"rollover" of funds from another individual retirement annuity (IRA) or
qualified plan. Qualified Contracts must contain special provisions and are
subject to limitations on contributions and the timing of when distributions can
and must be made. Tax penalties may apply to contributions greater than
specified limits, loans, reassignments, distributions that do not meet specified
requirements, or in other circumstances. Anyone desiring to purchase a Qualified
Contract should consult a personal tax adviser.
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29
Access To Your Money
The value of your Contract can be accessed during the Accumulation Phase:
. By making a full or partial withdrawal.
. By electing an Annuity Payment Option.
. By your Beneficiary in the form of a Death Benefit.
Full and Partial Withdrawals
You may withdraw all or part of your money at any time during the
Accumulation Phase of your Contract without a Company charge, provided the
Annuitant or Joint Annuitant is still living. All partial withdrawals must be
for at least $250.
On the date the Company receives your request for a full withdrawal, the
amount payable is the Accumulated Value.
On the date the Company receives your request for a partial withdrawal, the
Accumulated Value will be reduced by the amount of the partial withdrawal.
Because you assume the investment risk under the Contract, the total amount
paid upon a full withdrawal of the Contract may be more or less than the total
Purchase Payments made (taking prior withdrawals into account).
To make a withdrawal, send your written request to the Vanguard Variable
Annuity Plan Center. Your written request should include your Contract number,
Social Security number, the amount you wish to withdraw, how you want that
amount allocated among the various Portfolios, the signature of all Contract
Owners, and your federal tax withholding election.
Systematic Withdrawals
You may elect to have a specified dollar amount or a percentage of the balance
withdrawn from your Contract's Accumulated Value on a monthly, quarterly,
semiannual, or annual basis. The Company requires a Contract balance of at least
$10,000 and a Portfolio balance of at least $1,000 in order to establish the
systematic withdrawal program for your Contract. The minimum amount for each
Systematic Withdrawal is $250.
You may elect this option by completing the Vanguard Variable Annuity Plan
Systematic Withdrawal Program Application Form. The Form must be signed by all
Contract Owners and must be signature-guaranteed if you are directing the
withdrawal payments to an address other than the Contract address.
The Company must receive your Form at least 30 days before the date you want
systematic withdrawals to begin. The Company will process each Systematic
Withdrawal on the date and at the frequency you specified in your Systematic
Withdrawal Program Application Form.
You may change the amount to be withdrawn and the percentage or the frequency
of distributions by telephone. Any other changes you make, including a change in
the destination of the check or your election to cancel this option, must be
made in writing, and should include signatures of all Contract Owners.
<PAGE>
30
Access To Your Money (continued)
Minimum Balance Requirements
The minimum required balance in any Portfolio is $1,000. If an exchange or
withdrawal would reduce the balance in a Portfolio to less than $1,000, the
Company will transfer the remaining balance to the other Portfolios under the
Contract on a pro rata basis. If the entire value of the Contract falls below
$1,000, the Company may notify you that the Accumulated Value of your Contract
is below the minimum balance requirement. In that case, you will be given 60
days to make an Additional Purchase Payment before your Contract is liquidated.
The Company would then promptly pay proceeds to the Contract Owner. The proceeds
would be taxed as a withdrawal from the Contract. Full withdrawal will result in
an automatic termination of the Contract.
Payment of Full or Partial Withdrawal Proceeds
The Company will pay cash withdrawals within seven days after receipt of your
written request for withdrawal except in one of the following situations, in
which the Company may delay the payment beyond seven days:
. The New York Stock Exchange is closed on a day that is not a weekend or a
holiday, or trading on the New York Stock Exchange is otherwise restricted.
. An emergency exists as defined by the Securities and Exchange Commission
(the "SEC"), or the SEC requires that trading be restricted.
. The SEC permits a delay for your protection as a Contract Owner.
. The payment is derived from premiums paid by check, in which case the
Company may delay payment until the check has cleared your bank, which may
take up to ten calendar days.
Taxation of Withdrawals
For important information on the tax consequences of withdrawals, see Taxation
of Full and Partial Withdrawals, page 25, and Penalty Taxes on Certain Early
Withdrawals, page 26.
Tax Withholding on Withdrawals
If you do not provide the Company with a written request not to have federal
income taxes withheld when you request a full or partial withdrawal, federal tax
law requires the Company to withhold federal income taxes from the taxable
portion of any withdrawal and send that amount to the federal government. In
that case, we will withhold at a rate of 10%.
Performance
Standardized Performance
From time to time, the Company may advertise the yield and total return
investment performance of a Portfolio for various periods, including
quarter-to-date, year-to-date, one-year, five-year, and since inception. The
Company will calculate advertised yields and total returns according to
standardized methods prescribed by the SEC, so that all charges and expenses
attributable to the Contract will be included. Including these fees has the
effect of decreasing the advertised performance of a Portfolio, so that a
Portfolio's investment performance will not be directly comparable to that of an
ordinary mutual fund.
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31
Non-Standardized Performance
The Company may also advertise total return or other performance data in
non-standardized formats that do not reflect the Annual Contract Maintenance
Fee.
Not Indications of Future Performance
The performance measures discussed above are not intended to indicate or predict
future performance.
Statement of Additional Information
Please refer to the Statement of Additional Information for a description of the
method used to calculate a Portfolio's yield and total return and a list of the
indexes and other benchmarks used in evaluating a Portfolio's performance.
Death Benefit
In General
If the Annuitant dies during the Accumulation Phase, the Beneficiary will
receive the Death Benefit. The Death Benefit is either the then-current
Accumulated Value of the Contract or the sum of all Purchase Payments (minus any
partial withdrawals and any applicable Premium Taxes) whichever is greater. The
Beneficiary may elect to receive these amounts as a lump sum or as Annuity
Payments.
Federal tax law requires that if a Contract Owner is a natural person and
dies before the Annuity Date, then the entire value of the Contract must be
distributed within five years of the date of death of the Contract Owner. If the
Contract Owner is not a natural person, the death of the primary Annuitant
triggers the same distribution requirement. Special rules may apply to a
surviving spouse.
Death of the Annuitant During the Accumulation Phase
If the Annuitant dies during the Accumulation Phase, the Beneficiary will be
entitled to the Death Benefit. When we receive Due Proof of Death of the
Annuitant, we will calculate the Death Benefit. The Beneficiary can choose to
receive the amount payable in a lump-sum cash benefit or under one of the
Annuity Payment Options. The Contract Owner can choose an Annuity Payment Option
for the Beneficiary before the Annuitant's death. However, if the Contract Owner
does not make such a choice and the Company has not already paid a cash benefit,
the Beneficiary may choose a payment option after the Annuitant's death.
Paid as a lump sum, the Death Benefit is the greater of:
(1) The Accumulated Value on the date we receive Due Proof of Death; or
(2) The amount of all Purchase Payments made to date minus the amount of all
partial withdrawals and Premium Taxes, if any.
DEFINITION
Due Proof of Death
When the term "Due Proof of Death" is used in this prospectus we mean any of the
following:
. a certified death certificate
. a certified decree of a court of competent jurisdiction as to the finding
of death
. a written statement by a medical doctor who attended the deceased
. any other proof satisfactory to the Company
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32
Death Benefit (continued)
Paid under one of the Annuity Payment Options, the Death Benefit will be
based on the greater of:
(1) The Accumulated Value ten Business Days prior to the Annuity Date elected
by the Beneficiary and approved by the Company; or
(2) The amount of all Purchase Payments minus the amount of all partial
withdrawals and Premium Taxes, if any.
Death of the Annuitant During the Income Phase
The Death Benefit, if any, payable if the Annuitant dies during the Income Phase
depends on the Annuity Payment Option selected. Upon the Annuitant's death, the
Company will pay the Death Benefit, if any, to the Beneficiary under the Annuity
Payment Option in effect. For instance, if the Life Annuity With Period Certain
option has been elected, and if the Annuitant dies during the Income Phase, then
any unpaid payments certain will be paid to the Beneficiary.
A Word About Joint Annuitants
The Contract permits you as Contract Owner to name a Joint Annuitant. This can
have different effects depending on whether the Contract is in the
Accumulation Phase or the Income Phase.
During the Accumulation Phase, the Death Benefit is payable only after the
death of both the Annuitant and the Joint Annuitant.
During the Income Phase, it will not matter that you have named a Joint
Annuitant unless you have chosen an Annuity Payment Option, such as the Joint
and Last Survivor Annuity option, that pays over the life of more than one
person. Therefore, if you have chosen an Annuity Payment Option that provides
income over the life of someone other than the person named as Joint
Annuitant, the Joint Annuitant's death during the Income Phase will have no
effect on the benefits due under the Contract.
Designation of a Beneficiary
The Contract Owner may select one or more Beneficiaries and name them on the
Application. Thereafter, while the Annuitant or Joint Annuitant is living, the
Contract Owner may change the Beneficiary by written notice. The change will
take effect as of the date the Contract Owner signs the notice, but it will not
affect any payment made or any other action taken before the Company
acknowledges the notice. The Contract Owner may also make the designation of
Beneficiary irrevocable by sending written notice to the Company and obtaining
approval from the Company. Changes in the Beneficiary may then be made only with
the consent of the designated irrevocable Beneficiary.
If the Annuitant dies during the Accumulation Period, the following will
apply unless the Contract Owner has made other provisions:
. If there is more than one Beneficiary, each will share in the Death Benefit
equally.
. If one or two or more Beneficiaries have already died, the Company will pay
that share of the Death Benefit equally to the survivor(s).
. If no Beneficiary is living, the Company will pay the proceeds to the
Contract Owner.
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33
. If a Beneficiary dies at the same time as the Annuitant, the Company will
pay the proceeds as though the Beneficiary had died first. If a Beneficiary
dies within 15 days after the Annuitant's death and before the Company
receives due proof of the Annuitant's death, the Company will pay proceeds
as though the Beneficiary had died first.
If a Beneficiary who is receiving Annuity Payments dies, the Company will
pay any remaining Payments Certain to that Beneficiary's named Beneficiary(ies)
when due. If no Beneficiary survives the Annuitant, the right to any amount
payable will pass to the Contract Owner. If the Contract Owner is not living at
this time, this right will pass to his or her estate.
Death of the Contract Owner
Death of the Contract Owner During the Accumulation Phase. With two exceptions,
federal tax law requires that when either the Contract Owner or the Joint Owner
(if any) dies during the Accumulation Phase, the Company must pay out the entire
value of the Contract within five years of the date of death. First exception:
If the entire value is to be distributed to the Owner's Designated Beneficiary,
he or she may elect to have it paid under an Annuity Payment Option over his or
her life or over a period certain no longer than his or her life expectancy as
long as the payments begin within one year of the Contract Owner's death. Second
exception: If the Owner's Designated Beneficiary is the spouse of the Contract
Owner (or Joint Owner), the spouse may elect to continue the Contract in his or
her name as Contract Owner indefinitely and to continue deferring tax on the
accrued and future income under the Contract. ("Owner's Designated Beneficiary"
means the natural person whom the Contract Owner names as a beneficiary and who
becomes the Contract Owner upon the Contract Owner's death.) If the Contract
Owner and the Annuitant are the same person, then upon that person's death the
Beneficiary is entitled to the Death Benefit. In this regard, see Death of the
Annuitant During the Accumulation Phase, page 31.
Death of the Contract Owner During the Income Phase. Federal tax law requires
that when either the Contract Owner or the Joint Owner (if any) dies during the
Income Phase, the Company must pay the remaining portions of the value of the
Contract at least as rapidly as under the method of distribution being used on
the date of death.
Non-Natural Person as Contract Owner. Where the Contract Owner is not a natural
person (for example, is a corporation), the death of the "primary Annuitant" is
treated as the death of the Contract Owner for purposes of federal tax law. (The
Internal Revenue Code defines a "primary Annuitant" as the individual who is of
primary importance in affecting the timing or the amount of payout under the
Contract.) In addition, where the Contract Owner is not a natural person, a
change in the identity of the "primary Annuitant" is also treated as the death
of the Contract Owner for purposes of federal tax law.
Payment of Lump-Sum Death Benefits
The Company will pay lump-sum Death Benefits within seven days after the
election to take a lump sum becomes effective except in one of the following
situations, in which the Company may delay the payment beyond seven days:
. The New York Stock Exchange is closed on a day that is not a weekend or a
holiday, or trading on the New York Stock Exchange is otherwise restricted.
. An emergency exists as defined by the SEC, or the SEC requires that trading
be restricted.
. The SEC permits a delay for your protection as a Contract Owner.
. The payment is derived from premiums paid by check, in which case the
Company may delay payment until the check has cleared your bank, which may
take up to ten calendar days.
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34
Other Information
Peoples Benefit Life Insurance Company (the "Company," "We," "Us," "Our")
Peoples Benefit Life Insurance Company is a stock life insurance company
incorporated under the laws of the state of Missouri on August 6, 1920, with
offices at 20 Moores Road, Frazer, Pennsylvania 19355. It is principally engaged
in offering life insurance and annuity contracts, and is licensed in 49 states,
the District of Columbia, and Puerto Rico.
As of December 31, 1998, the Company had statutory-basis assets of
approximately $12.6 billion. It is a wholly owned indirect subsidiary of AEGON
USA, Inc., which conducts substantially all of its operations through subsidiary
companies engaged in the insurance business or in providing non- insurance
financial services. AEGON N.V. of The Netherlands indirectly owns all of the
stock of AEGON USA, Inc. AEGON N.V., a holding company, conducts its business
through subsidiary companies engaged primarily in the insurance business.
Peoples Benefit Life Insurance Company Separate Account IV
The Company established the Separate Account under the laws of the state of
Missouri on July 16, 1990.
The Separate Account is a unit investment trust registered with the SEC under
the Investment Company Act of 1940 (the "1940 Act"). Such registration does not
signify that the SEC supervises the management or the investment practices or
policies of the Separate Account.
The Company owns the assets of the Separate Account, and the obligations
under the Contract are obligations of the Company. These assets are held
separately from the other assets of the Company and are not chargeable with
liabilities incurred in any other business operation of the Company (except to
the extent that assets in the Separate Account exceed the reserves and other
liabilities of the Separate Account). The Company will always keep assets in the
Separate Account with a value at least equal to the total Accumulated Value
under the Contracts. Income, gains, and losses incurred on the assets in the
Separate Account, whether or not realized, are credited to or charged against
the Separate Account without regard to other income, gains, or losses of the
Company. Therefore, the investment performance of the Separate Account is
entirely independent of the investment performance of the Company's general
account assets or any other separate account the Company maintains.
The Separate Account has thirteen Subaccounts, each of which invests solely
in a corresponding Portfolio of the Fund. Additional Subaccounts may be
established at the Company's discretion. The Separate Account meets the
definition of a "separate account" under Rule O-1(e)(1) of the 1940 Act.
Contract Owner ("You," "Your")
The Contract Owner is the person or persons designated as the Contract Owner in
the Application to participate in the Contract. The term shall also include any
person named as Joint Owner. A Joint Owner shares ownership in all respects with
the Owner. The Owner has the right to assign ownership to a person or party
other than himself.
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35
Payee
The Payee is the Contract Owner, Annuitant, Beneficiary, or any other person,
estate, or legal entity to whom benefits are to be paid.
Free Look Period
The Contract provides for a Free Look Period of at least 10 days after the
Contract Owner receives the Contract (20 or more days in some instances as
specified in your Contract) plus 5 days for mailing. The Contract Owner may
cancel the Contract during the Free Look Period by returning it to the Vanguard
Variable Annuity Plan Center, P.O. Box 1103, Valley Forge, PA 19482-1103. Upon
cancellation, the Contract is treated as void from the Contract Date and the
Contract Owner will receive the greater of the Purchase Payments made under the
Contract or the Accumulated Value of the Contract as of the day the Contract is
received by the Company, except in Pennsylvania, where the Contract Owner will
receive the Accumulated Value plus fees and charges deducted from Purchase
Payments whether or not this amount exceeds Purchase Payments made under the
Contract.
Withdrawals are not permitted during the Free Look Period.
Administrative Services
Administrative services are provided by The Vanguard Group, Inc., the Vanguard
Variable Annuity Plan Center, 100 Vanguard Boulevard, Malvern, PA 19355.
Distributor of the Contracts
The Vanguard Group, Inc., through its wholly owned subsidiary, Vanguard
Marketing Corp., is the principal distributor of the Contract. For these
services, the Fund paid a fee of 0.02% of the Fund's average net assets for the
1998 fiscal year. This fee is guaranteed not to exceed 0.20% of the Fund's
average month-end net assets. A complete description of these services is found
in the "Management of the Fund" section of the Fund's Prospectus and in the
Fund's Statement of Additional Information. The principal business address for
The Vanguard Group, Inc. is 100 Vanguard Boulevard, Malvern, PA 19355.
Voting Rights
The Fund does not hold regular meetings of shareholders. The Trustees of the
Fund may call special meetings of shareholders as the 1940 Act or other
applicable law may require. To the extent required by law, the Company will vote
the Portfolio shares held in the Separate Account at shareholder meetings of the
Fund in accordance with instructions received from persons having voting
interests in the corresponding Portfolio. The Company will vote Fund shares as
to which no timely instructions are received and those shares held by the
Company as to which Contract Owners have no beneficial interest in proportion to
the voting instructions that are received with respect to all Contracts
participating in that Portfolio. Voting instructions to abstain on any item to
be voted upon will be applied on a pro rata basis to reduce the votes eligible
to be cast.
Prior to the Annuity Date, the Contract Owner holds a voting interest in each
Portfolio to which the Accumulated Value is allocated. The number of votes which
are available to a Contract Owner will be determined by dividing the Accumulated
Value attributable to a Portfolio by the net asset
<PAGE>
36
Other Information (continued)
value per share of the applicable Portfolio. After the Annuity Date, the person
receiving Annuity Payments under any variable Annuity Payment Option has the
voting interest. The number of votes after the Annuity Date will be determined
by dividing the reserve for such Contract allocated to the Portfolio by the net
asset value per share of the corresponding Portfolio. After the Annuity Date,
the votes attributable to a Contract decrease as the reserves allocated to the
Portfolio decrease. In determining the number of votes, fractional shares will
be recognized.
The number of votes of the Portfolio that are available will be determined as
of the date established by that Portfolio for determining shareholders eligible
to vote at the meeting of the Fund. Voting instructions will be solicited by
written communication prior to such meeting in accordance with procedures
established by the Fund.
Additions, deletions, or substitutions of investments
The Company retains the right, subject to any applicable law, to make certain
changes. The Company reserves the right to eliminate the shares of any of the
Portfolios and to substitute shares of another Portfolio of the Fund or of
another registered open-end management investment company, if the shares of the
Portfolios are no longer available for investment or if, in the Company's
judgment, investment in any Portfolio would be inappropriate in view of the
purposes of the Separate Account. To the extent the 1940 Act requires,
substitutions of shares attributable to a Contract Owner's interest in a
Portfolio will not be made until SEC approval has been obtained and the Contract
Owner has been notified of the change.
The Company may establish new Portfolios when marketing, tax, investment, or
other conditions so warrant. The Company will make any new Portfolios available
to existing Contract Owners on a basis the Company will determine. The Company
may also eliminate one or more Portfolios if marketing, tax, investment, or
other conditions so warrant.
In the event of any such substitution or change, the Company may, by
appropriate endorsement, make whatever changes in the Contracts may be necessary
or appropriate to reflect such substitution or change. Furthermore, if deemed to
be in the best interests of persons having voting rights under the Contracts,
the Company may operate the Separate Account as a management company under the
1940 Act or any other form permitted by law, may deregister the Separate Account
under the 1940 Act in the event such registration is no longer required, or may
combine the Separate Account with one or more other separate accounts.
Year 2000 Readiness Disclosure
In March 1997, the Company adopted and presently has in place a Year 2000
Project Plan (the "Year 2000 Plan") to review and analyze existing hardware and
software systems, as well as voice and data communications systems, to determine
if they are Year 2000 compliant. As of March 1, 1999, substantially all of the
Company's mission-critical systems are Year 2000 compliant. The Year 2000
Project Plan remains on track as the Company continues with the validation of
its mission-critical and non-mission-critical systems, including revalidation
testing in 1999. In addition, the Company has undertaken aggressive initiatives
to test all systems that interface with any third parties and other business
partners. All of these steps are aimed at allowing current operations to remain
unaffected by the Year 2000 date change.
<PAGE>
37
As of the date of this prospectus, the Company has identified and made
available what it believes are the appropriate resources of hardware, people,
and dollars, including the engagement of outside third parties, to ensure that
the Year 2000 Plan will be completed.
The actions taken by management under the Year 2000 Plan are intended to
significantly reduce the Company's risk of a material business interruption
based on 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 failures to act,
of third parties beyond our knowledge or control.
This statement is a Year 2000 Readiness Disclosure pursuant to Section 3(9)
of the Year 2000 Information and Readiness Disclosure Act, 15 U.S.C. Section 1
(1998).
Financial Statements
The audited statutory-basis financial statements of the Company and the
financial statements of the Separate Account (as well as the Independent
Auditors' Reports on them) are contained in the Statement of Additional
Information.
Auditors
Ernst & Young LLP serves as independent auditors for the Company and the
Separate Account and audits their financial statements annually.
Legal Matters
The law firm of Jorden Burt Boros Cicchetti Berenson & Johnson LLP, of
Washington, D.C., has provided legal advice concerning the issue and sale of the
Contract under the applicable federal securities laws. On behalf of the Company,
Gregory E. Miller-Breetz, Esquire, has passed upon all matters of Missouri law
pertaining to the validity of the Contract and the Company's right to issue the
Contract.
<PAGE>
38
Table of Contents for the Vanguard Variable Annuity Plan Contract
Statement of Additional Information
B-2 The Contract
B-2 Computation of Variable Annuity Income Payments
B-3 Exchanges
B-3 Joint Annuitant
B-3 General Matters
B-3 Non-Participating
B-3 Misstatement of Age or Sex
B-3 Assignment
B-4 Annuity Data
B-4 Annual Report
B-4 Incontestability
B-4 Ownership
B-4 Distribution of the Contract
B-4 Performance Information
B-4 Subaccount Inception Dates
B-5 Money Market Subaccount Yields
B-5 30-Day Yield for Non-Money Market Subaccounts
B-6 Standardized Average Annual Total Return for Non-Money Market Subaccounts
B-8 Additional Performance Measures
B-8 Non-Standardized Cumulative Total Return and Non-Standardized Average
Annual Total Return
B-9 Non-Standardized Total Return Year-to-Date
B-9 Non-Standardized One Year Return
B-10 Safekeeping of Account Assets
B-10 Conflicts of Interest with Other Separate Accounts
B-10 The Company
B-10 Taxes
B-11 State Regulation of the Company
B-11 Records and Reports
B-11 Legal Proceedings
B-11 Other Information
B-11 Financial Statements
<PAGE>
39
Appendix
CONDENSED FINANCIAL INFORMATION
The Accumulation Unit Values and the number of Accumulation Units outstanding
for each Subaccount for 1991 through 1998 are as follows:
For the period April 29, 1991 through December 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
High- High
Money Grade Yield Short-Term Diversified Equity
Market Bond Bond Corporate Balanced Value Income
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value as of:
Start Date* 1.000 10.000 10.000 10.000 10.000 10.000 10.000
12/31/91 1.032 11.027 . . 10.802 . .
12/31/92 1.064 11.656 . . 11.514 . .
12/31/93 1.091 12.695 . . 12.961 . 10.488
12/31/94 1.130 12.290 . . 12.815 . 10.304
12/31/95 1.191 14.437 . . 16.885 . 14.239
12/31/96 1.250 14.882 10.871 . 19.532 . 16.820
12/31/97 1.314 16.219 12.135 . 23.946 . 22.503
12/31/98 1.381 17.546 12.576 . 26.729 . 26.365
Number of units outstanding as of:
12/31/91 32,495 2,122 . . 3,395 . .
12/31/92 75,564 4,417 . . 8,682 . .
12/31/93 109,190 6,592 . . 16,164 . 6,411
12/31/94 154,415 6,589 . . 16,429 . 6,089
12/31/95 183,867 8,684 . . 17,021 . 7,355
12/31/96 246,219 9,395 3,042 . 17,307 . 9,260
12/31/97 282,813 12,403 7,810 . 19,528 . 13,361
12/31/98 387,603 18,252 10,817 . 21,507 . 15,409
(Units are shown in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
For the period April 29, 1991 through December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Small
Equity Mid-Cap REIT Company
Index Growth Index Index Growth International
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value as of: * Date of commencement of
Start Date* 10.000 10.000 10.000 10.000 10.000 10.000 operations for the High-
12/31/91 11.275 . . . . . Grade Bond and Equity
12/31/92 12.039 . . . . . Index Subaccounts was
12/31/93 13.144 10.569 . . . . April 29, 1991, for the
12/31/94 13.224 10.964 . . . 10.128 Money Market Subaccount was
12/31/95 18.073 15.089 . . . 11.678 May 2, 1991, for the
12/31/96 22.098 19.057 . . 9.725 13.319 Balanced Subaccount was
12/31/97 29.301 24.034 . . 10.970 13.708 May 23, 1991, for the Equity
12/31/98 37.565 33.697 . . 11.792 16.226 Income and Growth Subaccounts
Number of units outstanding as of: was June 7, 1993, for the
12/31/91 2,311 . . . . . International Subaccount was
12/31/92 9,645 . . . . . June 3, 1994, and for the
12/31/93 12,971 4,879 . . . . High Yield Bond and Small
12/31/94 13,676 8,004 . . . 6,818 Company Growth Subaccounts
12/31/95 16,292 11,857 . . . 8,146 was June 3, 1996. The Short-
12/31/96 19,360 15,744 . . 5,362 12,435 Term Corporate, Diversified
12/31/97 24,886 18,975 . . 11,350 14,597 Value, Mid-Cap Index, and
12/31/98 28,884 23,656 . . 11,841 14,564 REIT Index Subaccounts had
not commenced operation
(Units are shown in thousands) as of December 31, 1998.
- -------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
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<PAGE>
(This page intentionally left blank.)
<PAGE>
PEOPLES BENEFIT LIFE INSURANCE COMPANY
SEPARATE ACCOUNT IV
STATEMENT OF ADDITIONAL INFORMATION
FOR THE
VANGUARD VARIABLE ANNUITY PLAN CONTRACT
OFFERED BY
PEOPLES BENEFIT LIFE INSURANCE COMPANY
(A MISSOURI STOCK COMPANY)
ADMINISTRATIVE OFFICES
20 MOORES ROAD
FRAZER, PENNSYLVANIA 19355
This Statement of Additional Information expands upon subjects discussed in the
current Prospectus for the Vanguard Variable Annuity Plan Contract (the
"Contract") offered by Peoples Benefit Life Insurance Company (the "Company").
You may obtain a copy of the Prospectus dated April 30, 1999 by calling
800-522-5555, or writing to Vanguard Variable Annuity Plan Center, P.O. Box
1103, Valley Forge, PA 19482-1103. Terms used in the current Prospectus for the
Contract are incorporated in this Statement.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE READ
ONLY IN CONJUNCTION WITH THE PROSPECTUS FOR THE CONTRACT.
April 30, 1999
TABLE OF CONTENTS PAGE
- ----------------- ----
THE CONTRACT B-2
Computation of Variable Annuity Income Payments B-2
Exchanges B-3
Joint Annuitant B-3
GENERAL MATTERS B-3
Non-Participating B-3
Misstatement of Age or Sex B-3
Assignment B-3
Annuity Data B-4
Annual Report B-4
Incontestability B-4
Ownership B-4
DISTRIBUTION OF THE CONTRACT B-4
PERFORMANCE INFORMATION B-4
Subaccount Inception Dates B-4
Money Market Subaccount Yields B-5
30-Day Yield for Non-Money Market Subaccounts B-5
Standardized Average Annual Total Return for
Non-Money Market Subaccounts B-6
ADDITIONAL PERFORMANCE MEASURES B-8
Non-Standardized Cumulative Total Return and
Non-Standardized Average Annual Total Return B-8
Non-Standardized Total Return Year-to-Date B-9
Non-Standardized One Year Return B-9
SAFEKEEPING OF ACCOUNT ASSETS B-10
CONFLICTS OF INTEREST WITH OTHER SEPARATE ACCOUNTS B-10
THE COMPANY B-10
TAXES B-10
STATE REGULATION OF THE COMPANY B-11
RECORDS AND REPORTS B-11
LEGAL PROCEEDINGS B-11
OTHER INFORMATION B-11
FINANCIAL STATEMENTS B-11
B-1
<PAGE>
THE CONTRACT
In order to supplement the description in the Prospectus, the following
provides additional information about the Contract which may be of interest to
Contract Owners.
Computation of Variable Annuity Income Payments
Variable Annuity Income Payments are computed as follows. First, the
Accumulated Value (or the portion of the Accumulated Value used to provide
variable payments) is applied under the Annuity Table contained in the Contract
corresponding to the Annuity Option elected by the Contract Owner and based on
an assumed interest rate of 4%. This will produce a dollar amount which is the
first monthly payment.
The amount of each Annuity Payment after the first is determined by means
of Annuity Units. The number of Annuity Units is determined by dividing the
first Annuity Payment by the Annuity Unit value for the selected Subaccount ten
Business Days prior to the Annuity Date. The number of Annuity Units for the
Subaccount then remains fixed, unless an exchange of Annuity Units (as set forth
below) is made. After the first Annuity Payment, the dollar amount of each
subsequent Annuity Payment is equal to the number of Annuity Units multiplied by
the Annuity Unit value for the Subaccount ten Business Days before the due date
of the Annuity Payment.
The Annuity Unit value for each Subaccount was initially established at
$10.00 on the day money was first deposited in that Subaccount. The Annuity Unit
value for any subsequent Business Day is equal to (a) times (b) times (c),
where:
(a) the Annuity Unit value for the immediately preceding Business Day;
(b) the Net Investment Factor for the day;
(c) the investment result adjustment factor (0.99989255 per day), which
recognizes an assumed interest rate of 4% per year used in determining
the Annuity Payment amounts.
The Net Investment Factor is a factor applied to a Subaccount that reflects
daily changes in the value of the Subaccount due to:
(a) any increase or decrease in the value of the Subaccount due to
investment results;
(b) a daily charge for the mortality and expense risks assumed by the
Company corresponding to an annual rate according to the following
schedule:
Rate For
Net Assets* All Assets
----------- ----------
Up to $2.5 Billion............................................0.30%
Over $2.5 Billion and Up To $5 Billion........................0.28%
Over $5 Billion...............................................0.27%
*Based on combined net assets of the Separate Account and Separate
Account B of AUSA Life Insurance Company, Inc.
(c) a daily charge for the cost of administering the Contract
corresponding to an annual charge of 0.10%.
(d) an annual charge of $25 for maintenance of Contracts valued at less
than $25,000 at time of initial purchase and on the last business day
of each year.
The Annuity Tables contained in the Contract are based on the 1983 Table
"A" Mortality Table projected for mortality improvement to the year 2000 using
Projection Scale G and an interest rate of 4% a year; except that in
Massachusetts and Montana, the Annuity Tables contained in the Contract are
based on a 60% female/40% male blending of the above, for all annuitants of
either gender.
B-2
<PAGE>
Exchanges
After the Annuity Date, if a Variable Annuity Option has been chosen, the
Contract Owner may, by making written request or by calling the Vanguard
Variable Annuity Plan Center, exchange the current value of the existing
Subaccount to Annuity Units of any other Subaccount then available. The request
for the exchange must be received, however, at least 10 Business Days prior to
the first payment date on which the exchange is to take effect. This exchange
shall result in the same dollar amount of Annuity Payment on the date of
exchange. The Contract Owner is limited to two substantive exchanges (at least
30 days apart) from a Portfolio (except the Money Market Portfolio) in any
Contract Year, and the value of the Annuity Units exchanged must provide a
monthly Annuity Payment of at least $100 at the time of the exchange.
"Substantive" means a dollar amount that The Vanguard Group, Inc. determines, in
its sole discretion, could adversely affect management of the Fund.
Exchanges will be made using the Annuity Unit value for the Subaccounts on
the date the request for exchange is received by the Company. On the exchange
date, the Company will establish a value for the current Subaccount by
multiplying the Annuity Unit value by the number of Annuity Units in the
existing Subaccount, and compute the number of Annuity Units for the new
Subaccount by dividing the Annuity Unit value of the new Subaccount into the
value previously calculated for the existing Subaccount.
Joint Annuitant
The Contract Owner may, in the Contract Application or by written request
at least 30 days prior to the Annuity Date, name a Joint Annuitant. Such Joint
Annuitant must meet the Company's underwriting requirements. If approved by the
Company, the Joint Annuitant shall be named on the Contract Schedule or added by
endorsement. An Annuitant or Joint Annuitant may not be replaced.
The Annuity Date shall be determined based on the date of birth of the
Annuitant. If the Annuitant or Joint Annuitant dies prior to the Annuity Date,
the survivor shall be the sole Annuitant. Another Joint Annuitant may not be
designated. Payment to a Beneficiary shall not be made until the death of the
surviving Annuitant.
GENERAL MATTERS
Non-Participating
The Contracts are non-participating. No dividends are payable and the
Contracts will not share in the profits or surplus earnings of the Company.
Misstatement of Age or Sex
Depending on the state of issue of a Contract, the Company may require
proof of age and/or sex before making Annuity Payments. If the Annuitant's
stated age, sex or both in the Contract are incorrect, the Company will change
the Annuity Benefits payable to those which the Purchase Payments would have
purchased for the correct age and sex. In the case of correction of the stated
age or sex after payments have commenced, the Company will: (1) in the case of
underpayment, pay the full amount due with the next payment; or (2) in the case
of overpayment, deduct the amount due from one or more future payments.
Assignment
Any Nonqualified Contract may be assigned by the Contract Owner prior to
the Annuity Date and during the Annuitant's lifetime. The Company is not
responsible for the validity of any assignment. No assignment will be recognized
until the Company receives written notice thereof. The interest of any
Beneficiary which the assignor has the right to change shall be subordinate to
the interest of an assignee. Any amount paid to the assignee shall be paid in
one sum, notwithstanding any settlement agreement in effect at the time
assignment was executed. The Company shall not be liable as to any payment or
other settlement made by the Company before receipt of written notice.
B-3
<PAGE>
Annuity Data
The Company will not be liable for obligations which depend on receiving
information from a Payee until such information is received in a form
satisfactory to the Company.
Annual Report
Once each Contract Year, the Company will send the Contract Owner an annual
report of the current Accumulated Value allocated to each Subaccount; and any
Purchase Payments, charges, exchanges or withdrawals during the year. This
report will also give the Contract Owner any other information required by law
or regulation. The Contract Owner may ask for a report like this at any time.
Incontestability
This Contract is incontestable from the Contract Date, subject to the
"Misstatement of Age or Sex" or "Misstatement of Age" provision.
Ownership
The Owner of the Contract on the Contract Date is the Annuitant, unless
otherwise specified in the Application. The Owner may specify a new Owner by
written notice at any time thereafter. The term Owner also includes any person
named as a Joint Owner. A Joint Owner shares ownership in all respects with the
Owner. During the Annuitant's lifetime all rights and privileges under this
Contract may be exercised solely by the Owner. Upon the death of the Owner(s),
Ownership is retained by the surviving Joint Owner or passes to the Owner's
Designated Beneficiary, if one has been designated by the Owner. If no Owner's
Designated Beneficiary is designated or if no Owner's Designated Beneficiary is
living, the Owner's Designated Beneficiary is the Owner's estate. From time to
time the Company may require proof that the Owner is still living.
DISTRIBUTION OF THE CONTRACT
The Vanguard Group, Inc. through its wholly-owned subsidiary, Vanguard
Marketing Corporation, is the principal distributor of the Contracts. For these
services, the Fund paid a fee of 0.02% of the Fund's average net assets for its
1998 fiscal year. This fee is guaranteed not to exceed 0.20% of the Fund's
average month-end net assets. A complete description of these services is found
in the section of the Fund's Prospectus entitled "The Portfolios and Vanguard"
and in the Fund's Statement of Additional Information. The principal business
address for The Vanguard Group, Inc. is The Vanguard Variable Annuity Plan
Center, 100 Vanguard Boulevard, Malvern, PA 19355.
PERFORMANCE INFORMATION
Performance information for the Subaccounts, including the yield and
effective yield of the Money Market Subaccount, the yield of the remaining
Subaccounts, and the total return of all Subaccounts, may appear in reports or
promotional literature to current or prospective Contract Owners.
Subaccount Inception Dates
Where applicable, the following Subaccount inception dates are used in the
calculation of performance figures: April 29, 1991 for the Equity Index
Subaccount and the High-Grade Bond Subaccount; May 2, 1991 for the Money Market
Subaccount; May 23, 1991 for the Balanced Subaccount; June 7, 1993 for the
Equity Income Subaccount and the Growth Subaccount; June 3, 1994 for the
International Subaccount; and June 3, 1996 for the High Yield Bond Subaccount
and the Small Company Growth Subaccount. As of December 31, 1998, the Short-Term
Corporate Subaccount, the Diversified Value Subaccount, the Mid-Cap Index
Subaccount, and the REIT Index Subaccount had not commenced operations.
B-4
<PAGE>
Money Market Subaccount Yields
Current yield for the Money Market Subaccount will be based on the change
in the value of a hypothetical investment (exclusive of capital changes) over a
particular 7-day period, less a pro-rata share of Subaccount expenses accrued
over that period (the "base-period"), and stated as a percentage of the
investment at the start of the base period (the "base period return"). The base
period return is then annualized by multiplying by /365/7/, with the resulting
yield figure carried to at least the nearest hundredth of one percent.
Calculation of "effective yield" begins with the same "base period return"
used in the calculation of yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
Effective Yield = [(Base Period Return +1)/365/7/] -1
The yield of the Money Market Subaccount for the 7-day period ended
December 31, 1998, was 4.71%.
30-Day Yield for Non-Money Market Subaccounts
Quotations of yield for the remaining Subaccounts will be based on all
investment income per Unit earned during a particular 30-day period, less
expenses accrued during the period ("net investment income"), and will be
computed by dividing net investment income by the value of a Unit on the last
day of the period, according to the following formula:
YIELD = 2[(a - b + 1)/6/-1]
-----
c x d
Where:
[a] equals the net investment income earned during the period by the
Series attributable to shares owned by a Subaccount
[b] equals the expenses accrued for the period (net of reimbursements)
[c] equals the average daily number of Units outstanding during the period
[d] equals the maximum offering price per Accumulation Unit on the last
day of the period
Yield on the Subaccount is earned from the increase in net asset value of shares
of the Series in which the Subaccount invests and from dividends declared and
paid by the Series, which are automatically reinvested in shares of the Series.
The yield of each Subaccount for the 30-day period ended December 31, 1998,
is set forth below. Yields are calculated daily for each Subaccount. Premiums
and discounts on asset-backed securities are not amortized.
<TABLE>
<S> <C>
High-Grade Bond Subaccount........................................5.15%
High Yield Bond Subaccount........................................8.53%
Short-Term Corporate Subaccount...................................---
Balanced Subaccount...............................................3.08%
Diversified Value Subaccount......................................---
Equity Income Subaccount..........................................2.02%
Equity Index Subaccount...........................................0.81%
Growth Subaccount.................................................0.22%
Mid-Cap Index Subaccount..........................................---
REIT Index Subaccount.............................................---
Small Company Growth Subaccount...................................0.17%
International Subaccount..........................................---
</TABLE>
B-5
<PAGE>
Standardized Average Annual Total Return for Non-Money Market Subaccounts
When advertising performance of the Subaccounts, the Company will show the
"Standardized Average Annual Total Return," calculated as prescribed by the
rules of the SEC, for each Subaccount. The Standardized Average Annual Total
Return is the effective annual compounded rate of return that would have
produced the cash redemption value over the stated period had the performance
remained constant throughout. The calculation assumes a single $1,000 payment
made at the beginning of the period and full redemption at the end of the
period. It reflects the deduction of all applicable sales loads or sales
charges, the Annual Contract Maintenance Fee and all other Portfolio, Separate
Account and Contract level charges except Premium Taxes, if any. In calculating
performance information, the Annual Contract Maintenance Fee is reflected as a
percentage equal to the total amount of fees collected during a year divided by
the total average net assets of the Portfolios during the same year. The fee is
assumed to remain the same in each year of the applicable period. The fee is
prorated to reflect only the remaining portion of the calendar year of purchase.
Thereafter, the fee is deducted on the last business day of the year for the
following year, on a pro rata basis, from each of the Portfolios you have
chosen.
Quotations of average annual total return for any Subaccount will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in a Contract over a period of one, three, five and 10
years (or, if less, up to the life of the Subaccount) and year-to-date, six
months to date, month-to-date, and quarter-to-date, calculated pursuant to the
formula:
P(1 + T)/n/ = ERV
Where:
(1) [P] equals a hypothetical Initial Purchase Payment of $1,000
(2) [T] equals an average annual total return
(3) [n] equals the number of years
(4) [ERV] equals the ending redeemable value of a hypothetical $1,000
Purchase Payment made at the beginning of the period (or fractional
portion thereof)
The following tables show the average annual total return for the
Subaccounts for the period beginning at the inception of each Subaccount and
ending on December 31, 1998.
<TABLE>
<CAPTION>
Since
Year Year Ended Subaccount
1 year 3 years 5 years to date 12/31/98 Inception*
------ ------- ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
High-Grade Bond Subaccount............ 8.17% 6.70% 6.66% 8.17% 8.17% 7.56%
High Yield Bond Subaccount............ 3.62% --- --- 3.62% 3.62% 9.29%
Short-Term Corporate Subaccount....... --- --- --- --- --- ---
Balanced Subaccount................... 11.61% 16.53% 15.55% 11.61% 11.61% 13.75%
Diversified Value Subaccount.......... --- --- --- --- --- ---
Equity Income Subaccount.............. 17.15% 22.78% 20.21% 17.15% 17.15% 18.99%
Equity Index Subaccount............... 28.19% 27.60% 23.34% 28.19% 28.19% 18.78%
Growth Subaccount..................... 40.19% 30.69% 26.07% 40.19% 40.19% 24.35%
Mid-Cap Index Subaccount.............. --- --- --- --- --- ---
REIT Index Subaccount................. --- --- --- --- --- ---
Small Company Growth Subaccount....... 7.48% --- --- 7.48% 7.48% 6.59%
International Subaccount.............. 18.35% 11.57% --- 18.35% 18.35% 11.12%
</TABLE>
-------------
*Refer to "Subaccount Inception Dates" under the "PERFORMANCE INFORMATION"
section of this Statement of Additional Information.
B-6
<PAGE>
<TABLE>
Month- Quarter- 6 Months-
to-date to-date to-date
------- ------- -------
<S> <C> <C> <C>
High-Grade Bond Subaccount............. 0.33% 0.23% 4.32%
High Yield Bond Subaccount............. 0.00% 2.44% -0.42%
Short-Term Corporate Subaccount........ --- --- ---
Balanced Subaccount.................... -0.01% 7.36% 2.74%
Diversified Value Subaccount........... --- --- ---
Equity Income Subaccount............... 1.83% 12.08% 7.77%
Equity Index Subaccount................ 5.77% 21.30% 9.17%
Growth Subaccount...................... 8.60% 24.80% 13.25%
Mid-Cap Index Subaccount............... --- --- ---
REIT Index Subaccount.................. --- --- ---
Small Company Growth Subaccount........ 8.60% 23.97% 3.90%
International Subaccount............... 3.50% 17.72% 3.56%
</TABLE>
All total return figures reflect the deduction of the administrative
charge, and the mortality and expense risk charge. The SEC requires that an
assumption be made that the Contract Owner surrenders the entire Contract at the
end of the 1-, 5- and 10-year periods (or, if less, up to the life of the
Subaccount) for which performance is required to be calculated.
Performance information for a Subaccount may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index ("S&P
500"), Dow Jones Industrial Average ("DJIA"), Donoghue Money Market
Institutional Averages, or other indices that measure performance of a pertinent
group of securities so that investors may compare a Subaccount's results with
those of a group of securities widely regarded by investors as representative of
the securities markets in general; (ii) other groups of variable annuity
separate accounts or other investment products tracked by Lipper Analytical
Services, a widely-used independent research firm which ranks mutual funds and
other investment companies by overall performance, investment objectives, and
assets, or tracked by other services, companies, publications, or persons who
rank such investment companies on overall performance or other criteria; and
(iii) the Consumer Price Index (measure for inflation) to assess the real rate
of return from an investment in the Contract. Unmanaged indices may assume the
reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.
Performance information for any Subaccount reflects only the performance of
a hypothetical Contract under which Accumulation Value is allocated to a
Subaccount during a particular time period on which the calculations are based.
Performance information should be considered in light of the investment
objectives and policies, characteristics and quality of the portfolio of the
Fund in which the Subaccount invests, and the market conditions during the given
time period, and should not be considered as a representation of what may be
achieved in the future.
Reports and marketing materials may, from time to time, include information
concerning the rating of Peoples Benefit Life Insurance Company as determined by
A.M. Best, Moody's, Standard & Poor's or other recognized rating services.
Reports and promotional literature may also contain other information including
(i) the ranking of any Subaccount derived from rankings of variable annuity
separate accounts or other investment products tracked by Lipper Analytical
Services or by other rating services, companies, publications, or other persons
who rank separate accounts or other investment products on overall performance
or other criteria, and (ii) the effect of tax deferred compounding on a
Subaccount's investment returns, or returns in general, which may be illustrated
by graphs, charts, or otherwise, and which may include a comparison, at various
points in time, of the return from an investment in a Contract (or returns in
general) on a tax-deferred basis (assuming one or more tax rates) with the
return on a taxable basis.
B-7
<PAGE>
ADDITIONAL PERFORMANCE MEASURES
Non-Standardized Cumulative Total Return and Non-Standardized Average Annual
Total Return
The Company may show Non-Standardized Cumulative Total Return (i.e., the
percentage change in the value of an Accumulation Unit) for one or more
Subaccounts with respect to one or more periods. The Company may also show
Non-Standardized Average Annual Total Return (i.e., the average annual change in
Accumulation Unit Value) with respect to one or more periods. For one year and
periods less than one year, the Non- Standardized Cumulative Total Return and
the Non-Standardized Average Annual Total Return are effective annual rates of
return and are equal. For periods greater than one year, the Non-Standardized
Average Annual Total Return is the effective annual compounded rate of return
for the periods stated. Because the value of an Accumulation Unit reflects the
Separate Account and Portfolio expenses (see Fee Table in the Prospectus), the
Non-Standardized Cumulative Total Return and Non-Standardized Average Annual
Total Return also reflect these expenses. However, these percentages do not
reflect the Annual Contract Maintenance Fee or Premium Taxes (if any), which, if
included, would reduce the percentages reported by the Company.
Non-Standardized Cumulative Total Return
For Period Ending 12/31/98
<TABLE>
<CAPTION>
Since
Month- Quarter- 6 Month- One Subaccount
to-date to-date to-date Year Inception*
<S> <C> <C> <C> <C> <C>
Money Market Subaccount................ 0.40% 1.21% 2.51% 5.11% 38.09%
High-Grade Bond Subaccount............. 0.33% 0.24% 4.32% 8.18% 75.46%
High Yield Bond Subaccount............. 0.00% 2.44% -0.42% 3.63% 25.76%
Short-Term Corporate Subaccount........ --- --- --- --- ---
Balanced Subaccount.................... -0.01% 7.36% 2.74% 11.62% 167.29%
Diversified Value Subaccount........... --- --- --- --- ---
Equity Income Subaccount............... 1.83% 12.08% 7.78% 17.16% 163.65%
Equity Index Subaccount................ 5.77% 21.31% 9.17% 28.21% 275.65%
Growth Subaccount...................... 8.60% 24.80% 13.26% 40.20% 236.97%
Mid-Cap Index Subaccount............... --- --- --- --- ---
REIT Index Subaccount.................. --- --- --- --- ---
Small Company Growth Subaccount........ 8.60% 23.98% 3.91% 7.49% 17.92%
International Subaccount............... 3.50% 17.72% 3.56% 18.36% 62.26%
</TABLE>
- -------------
*Refer to "Subaccount Inception Dates" under the "PERFORMANCE INFORMATION"
section of this Statement of Additional Information.
Non-Standardized Average Annual Total Returns
For Period Ending 12/31/98
<TABLE>
<CAPTION>
Since
Subaccount
One Year Three Year Five Year Inception*
<S> <C> <C> <C> <C>
Money Market Subaccount................... 5.11% 5.06% 4.83% 4.30%
High-Grade Bond Subaccount................ 8.18% 6.72% 6.69% 7.60%
High Yield Bond Subaccount................ 3.63% --- --- 9.30%
Short-Term Corporate Subaccount........... --- --- --- ---
Balanced Subaccount....................... 11.62% 16.55% 15.58% 13.79%
Diversified Value Subaccount.............. --- --- --- ---
Equity Income Subaccount.................. 17.16% 22.79% 20.24% 19.02%
Equity Index Subaccount................... 28.21% 27.62% 23.37% 18.82%
Growth Subaccount......................... 40.20% 30.71% 26.10% 24.39%
</TABLE>
B-8
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Mid-Cap Index Subaccount.................. --- --- --- ---
REIT Index Subaccount..................... --- --- --- ---
Small Company Growth Subaccount........... 7.49% --- --- 6.61%
International Subaccount.................. 18.36% 11.59% --- 11.15%
</TABLE>
- -------------
*Refer to "Subaccount Inception Dates" under the "PERFORMANCE INFORMATION"
section of this Statement of Additional Information.
Non-Standardized Total Return Year-to-Date
The Company may show Non-Standardized Total Return Year-to-Date as of a
particular date, or simply Total Return YTD, for one or more Subaccounts with
respect to one or more non-standardized base periods commencing at the beginning
of a calendar year. Total Return YTD figures reflect the percentage change in
actual Accumulation Unit Values during the relevant period. These percentages
reflect a deduction for the Separate Account and Portfolio expenses, but do not
include the Annual Contract Maintenance Fee or Premium Taxes (if any), which, if
included, would reduce the percentages reported by the Company.
Total Return YTD
as of 12/31/98
Money Market Subaccount................................ 5.11%
High-Grade Bond Subaccount............................. 8.18%
High Yield Bond Subaccount............................. 3.63%
Short-Term Corporate Subaccount........................ ---
Balanced Subaccount.................................... 11.62%
Diversified Value Subaccount........................... ---
Equity Income Subaccount............................... 17.16%
Equity Index Subaccount................................ 28.21%
Growth Subaccount...................................... 40.20%
Mid-Cap Index Subaccount............................... ---
REIT Index Subaccount.................................. ---
Small Company Growth Subaccount........................ 7.49%
International Subaccount............................... 18.36%
Non Standardized One Year Return
The Company may show Non-Standardized One Year Return, for one or more
Subaccounts with respect to one or more non-standardized base periods commencing
at the beginning of a calendar year (or date of inception, if during the
relevant year) and ending at the end of such calendar year. One Year Return
figures reflect the percentage change in actual Accumulation Unit Values during
the relevant period. These percentages reflect a deduction for the Separate
Account and Portfolio expenses, but do not include the Annual Contract
Maintenance Fee or Premium Taxes (if any), which if included would reduce the
percentages reported by the Company.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Money Market Subaccount................. 5.11% 5.10% 4.97% 5.34% 3.66% 2.47% 3.10%
High-Grade Bond Subaccount.............. 8.18% 8.98% 3.08% 17.47% -3.19% 8.92% 5.70%
High Yield Bond Subaccount.............. 3.63% 11.63% --- --- --- --- ---
Short-Term Corporate Subaccount......... --- --- --- --- --- --- ---
Balanced Subaccount..................... 11.62% 22.60% 15.68% 31.76% -1.13% 12.56% 6.59%
Diversified Value Subaccount............ --- --- --- --- --- --- ---
Equity Income Subaccount................ 17.16% 33.78% 18.13% 38.19% -1.76% --- ---
Equity Index Subaccount................. 28.21% 32.59% 22.27% 36.67% 0.61% 9.18% 6.77%
Growth Subaccount....................... 40.20% 26.12% 26.29% 37.62% 3.74% --- ---
Mid-Cap Index Subaccount................ --- --- --- --- --- --- ---
</TABLE>
B-9
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
REIT Index Subaccount................... --- --- --- --- --- --- ---
Small Company Growth Subaccount......... 7.49% 12.80% --- --- --- --- ---
International Subaccount................ 18.36% 2.92% 14.05% 15.31% --- --- ---
</TABLE>
SAFEKEEPING OF ACCOUNT ASSETS
Title to assets of the Separate Account is held by the Company. The assets
are kept physically segregated and held separate and apart from the Company's
general account assets. Records are maintained of all purchases and redemptions
of eligible Portfolio shares held by each of the Subaccounts.
CONFLICTS OF INTEREST WITH OTHER SEPARATE ACCOUNTS
The Portfolios may be made available to registered separate accounts
offering variable annuity and variable life products of the Company or other
insurance companies. Although the Company believes it is unlikely, a material
conflict could arise between the interests of the Separate Account and one or
more of the other participating separate accounts. In the event a material
conflict does exist, the affected insurance companies agree to take any
necessary steps, including removing their separate accounts from the Fund if
required by law, to resolve the matter.
THE COMPANY
The Company is a direct subsidiary of Monumental Life Insurance Company,
Capital Liberty, L.P., and Commonwealth General Corporation, which,
respectively, have 76.3%, 20%, and 3.7% interests in the Company. Monumental
Life Insurance Company is a direct subsidiary of Capital General Development
Corporation and First AUSA Life Insurance Company, which, respectively, have
73.23% and 26.77% interests in Monumental Life Insurance Company. Monumental
Life Insurance Company and Commonwealth General Corporation have, respectively,
99% and 1% interests in Capital Liberty, L.P. Commonwealth General Corporation
is a wholly owned subsidiary of AEGON USA, Inc. Capital General Development
Corporation is a wholly owned subsidiary of Commonwealth General Corporation.
First AUSA Life Insurance Company is a wholly owned subsidiary of AEGON USA,
Inc.
The Company is a wholly owned indirect subsidiary of AEGON USA, Inc., which
in turn is wholly owned by AEGON U.S. Holding Corporation, a wholly owned
subsidiary of AEGON International N.V. AEGON International N.V. is a wholly
owned subsidiary of AEGON N.V. Vereniging AEGON (a Netherlands membership
association) has a 53.63% interest in AEGON N.V.
The Company was formerly known as National Home Life Assurance Company,
until July 1, 1995, when it changed its name to Providian Life and Health
Insurance Company. On October 1, 1998, it changed its name to Peoples Benefit
Life Insurance Company.
TAXES
The Company is taxed as a life insurance company under Part I of Subchapter
L of the Internal Revenue Code. Since the Separate Account is not a separate
entity from the Company and its operations form a part of the Company, the
Separate Account will not be taxed separately as a "regulated investment
company" under Subchapter M of the Internal Revenue Code. Investment income and
realized capital gains on the assets of the Separate Account are reinvested and
taken into account in determining the Accumulated Value. Under existing federal
income tax law, the Separate Account's investment income, including realized net
capital gains, is not taxed to the Company. The Company reserves the right to
make a deduction for taxes should they be imposed with respect to such items in
the future.
Under present laws, the Company will incur state or local taxes in several
states. If there is a change in state or local tax laws, the Company may make
charges for such taxes. At present time, the Company does not charge the
Contract Owner for these other taxes. If there is a change in state or local tax
laws, charges for such taxes may be made. The Company does not expect to incur
any federal income tax liability attributable to investment income or capital
gains retained as part of the reserves under the Contracts. Based upon these
expectations, no charge is currently being made to the Separate Account for
corporate federal income taxes that may be attributable to the Separate
Account.
B-10
<PAGE>
The Company will periodically review the question of a charge to the
Separate Account for corporate federal income taxes related to the Separate
Account. Such a charge may be made in future years for any federal income taxes
the Company incurs. This might become necessary if the Company ultimately
determines that its tax treatment is not what it currently believes it to be, if
there are changes in the federal income tax treatment of annuities at the
corporate level, or if there is a change in the Company's tax status. If the
Company should incur federal income taxes attributable to investment income or
capital gains retained as part of the reserves under the Contracts, the
Accumulated Value of the Contract would be correspondingly adjusted by any
provision or charge for such taxes.
STATE REGULATION OF THE COMPANY
The Company is a stock life insurance company organized under the laws of
Missouri, and is subject to regulation by the Missouri State Department of
Insurance. An annual statement in a prescribed form is filed with Missouri
Commissioner of Insurance on or before March 1 of each year covering the
operations and reporting on the financial condition of the Company as of
December 31 of the preceding calendar year. Periodically, the Missouri
Commission of Insurance examines the financial condition of the Company,
including the liabilities and reserves of the Separate Account
RECORDS AND REPORTS
All records and accounts relating to the Separate Account will be
maintained by the Company or by its administrator, The Vanguard Group, Inc. As
presently required by the Investment Company Act of 1940 and regulations
promulgated thereunder, the Company will mail to all Contract Owners at their
last known address of record, at least semiannually, reports containing such
information as may be required under that Act or by any other applicable law or
regulation.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or
to which the assets of the Separate Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
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 Statement of Additional Information. Not all of the
information set forth in the Registration Statement, amendments and exhibits
thereto has been included in this Statement of Additional Information.
Statements contained in this Statement of Additional Information 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 audited financial statements of the subaccounts of the Separate Account
which are available for investment by Vanguard Variable Annuity Plan Contract
Owners for the year ended December 31, 1998, including the report of Independent
Auditors thereon, are included in this Statement of Additional Information.
The audited statutory-basis financial statements of the Company as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998, including the Report of Independent Auditors thereon, which
are also included in this Statement of Additional Information, should be
distinguished from the financial statements of subaccounts of the Separate
Account which are available for investment by Vanguard Variable Annuity Plan
Contract Owners and should be considered only as bearing on the ability of the
Company 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.
B-11
<PAGE>
Financial Statements
Peoples Benefit Life Insurance
Company Separate Account IV -
Vanguard Variable Annuity Plan
Year ended December 31, 1998
with Report of Independent Auditors
<PAGE>
Peoples Benefit Life Insurance Company
Separate Account IV - Vanguard Variable Annuity Plan
Financial Statements
Year ended December 31, 1998
Contents
Report of Independent Auditors.............................................1
Financial Statements
Balance Sheet..............................................................2
Statement of Operations....................................................4
Statements of Changes in Contract Owners' Equity...........................6
Notes to Financial Statements.............................................10
<PAGE>
Report of Independent Auditors
The Board of Directors and Contract Owners
of the Vanguard Variable Annuity Plan,
Peoples Benefit Life Insurance Company
We have audited the accompanying balance sheet of the subaccounts of Peoples
Benefit Life Insurance Company Separate Account IV (formerly the Providian Life
and Health Insurance Company Separate Account IV), which are available for
investment by the Vanguard Variable Annuity Plan contract owners, as of December
31, 1998, and the related statements of operations for the year then ended and
changes in contract owners' equity for each of the two years in the period then
ended. These financial statements are the responsibility of the Variable
Account's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of mutual fund shares owned as of December 31, 1998, by
correspondence with the mutual funds' transfer agent. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the subaccounts of the Peoples
Benefit Life Insurance Company Separate Account IV, which are available for
investment by the Vanguard Variable Annuity Plan contract owners, at December
31, 1998, and the results of their operations for the year then ended and
changes in their contract owners' equity for each of the two years in the period
then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Des Moines, Iowa
January 29, 1999
1
<PAGE>
Peoples Benefit Life Insurance Company
Separate Account IV - Vanguard Variable Annuity Plan
Balance Sheet
December 31, 1998
<TABLE>
<CAPTION>
High-Grade
Money Market Bond
Total Subaccount Subaccount
------------------------------------------------------
<S> <C> <C> <C>
Assets
Cash $ 2,967 $ 276 $ 388
Investments in mutual funds, at current market value:
Vanguard Variable Insurance Fund:
Money Market Portfolio 535,231,877 535,231,877 --
High-Grade Bond Portfolio 320,260,140 -- 320,260,140
Balanced Portfolio 574,853,184 -- --
Equity Index Portfolio 1,085,016,952 -- --
Growth Portfolio 797,156,552 -- --
Equity Income Portfolio 406,261,994 -- --
International Portfolio 236,307,034 -- --
High Yield Bond Portfolio 136,035,533 -- --
Small Company Growth Portfolio 139,624,184 -- --
------------------------------------------------------
Total investments in mutual funds 4,230,747,450 535,231,877 320,260,140
------------------------------------------------------
Total assets $4,230,750,417 $ 535,232,153 $ 320,260,528
======================================================
Liabilities and contract owners' equity
Liabilities:
Contract terminations payable $ 1,556 $ -- $ --
------------------------------------------------------
Total liabilities 1,556 -- --
Contract owners' equity:
Deferred annuity contracts terminable by owners 4,230,748,861 535,232,153 320,260,528
------------------------------------------------------
Total liabilities and contract owners' equity $4,230,750,417 $ 535,232,153 $ 320,260,528
======================================================
</TABLE>
See accompanying notes.
2
<PAGE>
<TABLE>
<CAPTION>
Equity
Balanced Equity Index Growth Income
Subaccount Subaccount Subaccount Subaccount
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets $ 74 $ 658 $ $
Cash 378 544
Investments in mutual funds, at current market value:
Vanguard Variable Insurance Fund:
Money Market Portfolio -- -- -- --
High-Grade Bond Portfolio -- -- -- --
Balanced Portfolio 574,853,184 -- -- --
Equity Index Portfolio -- 1,085,016,952 -- --
Growth Portfolio -- -- 797,156,552 --
Equity Income Portfolio -- -- -- 406,261,994
International Portfolio -- -- -- --
High Yield Bond Portfolio -- -- -- --
Small Company Growth Portfolio -- -- -- --
--------------------------------------------------------------------------
Total investments in mutual funds 574,853,184 1,085,016,952 797,156,552 406,261,994
--------------------------------------------------------------------------
Total assets $ 574,853,258 $1,085,017,610 $ 797,156,930 $ 406,262,538
==========================================================================
Liabilities and contract owners' equity
Liabilities:
Contract terminations payable $ -- $ -- $ -- $ --
--------------------------------------------------------------------------
Total liabilities -- -- -- --
Contract owners' equity:
Deferred annuity contracts terminable by owners 574,853,258 1,085,017,610 797,156,930 406,262,538
--------------------------------------------------------------------------
Total liabilities and contract owners' equity $ 574,853,258 $1,085,017,610 $ 797,156,930 $ 406,262,538
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
High Yield Small Company
International Bond Growth
Subaccount Subaccount Subaccount
-----------------------------------------------------
<S> <C> <C> <C>
$ $ $ --
Cash -- 649 --
Investments in mutual funds, at current market value:
Vanguard Variable Insurance Fund:
Money Market Portfolio -- -- --
High-Grade Bond Portfolio -- -- --
Balanced Portfolio -- -- --
Equity Index Portfolio -- -- --
Growth Portfolio -- -- --
Equity Income Portfolio -- -- --
International Portfolio 236,307,034 -- --
High Yield Bond Portfolio -- 136,035,533 --
Small Company Growth Portfolio -- -- 139,624,184
-----------------------------------------------------
Total investments in mutual funds 236,307,034 136,035,533 139,624,184
-----------------------------------------------------
Total assets $236,307,034 $136,036,182 $139,624,184
=====================================================
Liabilities and contract owners' equity
Liabilities:
Contract terminations payable $ 285 $ -- $ 1,271
-----------------------------------------------------
Total liabilities 285 -- 1,271
Contract owners' equity:
Deferred annuity contracts terminable by owners 236,306,749 136,036,182 139,622,913
-----------------------------------------------------
Total liabilities and contract owners' equity $236,307,034 $136,036,182 $139,624,184
=====================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Peoples Benefit Life Insurance Company
Separate Account IV - Vanguard Variable Annuity Plan
Statement of Operations
Year ended December 31, 1998
<TABLE>
<CAPTION>
Money High-Grade
Market Bond
Total Subaccount Subaccount
-------------------------------------------------------------
<S> <C> <C> <C>
Net investment income
Income:
Dividends $ 179,823,743 $ 24,923,630 $ 16,080,415
Expenses:
Administration fee 3,832,367 489,491 266,786
Mortality and expense risk charge 9,994,790 1,310,441 711,090
-------------------------------------------------------------
Net investment income 165,996,586 23,123,698 15,102,539
Net realized and unrealized capital gain (loss) from
investments
Net realized capital gain (loss) from sales of investments:
Proceeds from sales 1,138,265,858 555,355,663 45,540,624
Cost of investments sold 1,025,362,178 555,355,663 44,356,485
-------------------------------------------------------------
Net realized capital gain (loss) from sales of investments 112,903,680 -- 1,184,139
Net change in unrealized appreciation (depreciation) of
investments:
Beginning of the period 532,813,077 -- 5,184,920
End of the period 880,502,518 -- 8,220,017
-------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of
investments 347,689,441 -- 3,035,097
-------------------------------------------------------------
Net realized and unrealized capital gain (loss) from
investments 460,593,121 -- 4,219,236
-------------------------------------------------------------
Increase from operations $ 626,589,707 $ 23,123,698 $ 19,321,775
=============================================================
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
<CAPTION>
Equity
Balanced Equity Index Growth Income
Subaccount Subaccount Subaccount Subaccount
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income
Income:
Dividends $ 56,342,557 $ 16,147,373 $ 41,030,363 $ 10,688,743
Expenses:
Administration fee 568,921 968,816 649,631 384,580
Mortality and expense risk charge 1,482,991 2,512,081 1,659,171 1,008,109
-------------------------------------------------------------------
Net investment income 54,290,645 12,666,476 38,721,561 9,296,054
Net realized and unrealized capital gain (loss) from
investments
Net realized capital gain (loss) from sales of investments:
Proceeds from sales 67,893,164 138,859,248 87,266,560 76,789,213
Cost of investments sold 52,832,251 94,103,342 62,209,446 58,496,432
-------------------------------------------------------------------
Net realized capital gain (loss) from sales of investments 15,060,913 44,755,906 25,057,114 18,292,781
Net change in unrealized appreciation (depreciation)
of investments:
Beginning of the period 97,735,292 223,779,983 114,536,965 73,172,778
End of the period 84,859,749 388,424,078 252,061,642 101,632,122
-------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of
investments (12,875,543) 164,644,095 137,524,677 28,459,344
-------------------------------------------------------------------
Net realized and unrealized capital gain (loss) from
investments 2,185,070 209,400,001 162,581,791 46,752,125
-------------------------------------------------------------------
Increase from operations $ 56,476,015 $222,066,477 $201,303,352 $ 56,048,179
===================================================================
<CAPTION>
High Yield Small Company
International Bond Growth
Subaccount Subaccount Subaccount
------------------------------------------------------
<S> <C> <C> <C>
Net investment income
Income:
Dividends $ 3,086,320 $ 10,735,616 $ 788,726
Expenses:
Administration fee 238,987 131,913 133,242
Mortality and expense risk charge 619,767 350,618 340,522
------------------------------------------------------
Net investment income 2,227,566 10,253,085 314,962
Net realized and unrealized capital gain (loss) from
investments
Net realized capital gain (loss) from sales of investments:
Proceeds from sales 64,121,640 52,235,877 50,203,869
Cost of investments sold 57,370,299 52,552,267 48,085,993
------------------------------------------------------
Net realized capital gain (loss) from sales of investments 6,751,341 (316,390) 2,117,876
Net change in unrealized appreciation (depreciation)
of investments:
Beginning of the period 10,643,796 1,912,775 5,846,568
End of the period 35,896,546 (4,094,014) 13,502,378
------------------------------------------------------
Net change in unrealized appreciation (depreciation) of
investments 25,252,750 (6,006,789) 7,655,810
------------------------------------------------------
Net realized and unrealized capital gain (loss) from
investments 32,004,091 (6,323,179) 9,773,686
------------------------------------------------------
Increase from operations $ 34,231,657 $ 3,929,906 $ 10,088,648
======================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Peoples Benefit Life Insurance Company
Separate Account IV - Vanguard Variable Annuity Plan
Statements of Changes in Contract Owners' Equity
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Total Money Market Subaccount
--------------------------------------- ---------------------------------------
1998 1997 1998 1997
--------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 165,996,586 $ 108,177,565 $ 23,123,698 $ 17,808,228
Net realized capital gain (loss) 112,903,680 90,073,861 -- --
Net change in unrealized
appreciation (depreciation) of
investments 347,689,441 240,723,684 -- --
--------------------------------------- ---------------------------------------
Increase from operations 626,589,707 438,975,110 23,123,698 17,808,228
Contract transactions:
Net contract purchase payments 788,299,290 672,985,150 542,070,659 217,903,756
Transfer payments from (to)
other subaccounts or general
account 160,113 -- (360,922,340) (142,786,690)
Contract terminations,
withdrawals and other
deductions (129,886,160) (86,445,867) (40,567,808) (29,153,833)
--------------------------------------- ---------------------------------------
Increase from contract transactions 658,573,243 586,539,283 140,580,511 45,963,233
--------------------------------------- ---------------------------------------
Net increase in contract owners'
equity 1,285,162,950 1,025,514,393 163,704,209 63,771,461
Contract owners' equity:
Beginning of the period 2,945,585,911 1,920,071,518 371,527,944 307,756,483
--------------------------------------- ---------------------------------------
End of the period $ 4,230,748,861 $ 2,945,585,911 $ 535,232,153 $ 371,527,944
======================================= =======================================
</TABLE>
See accompanying notes.
6
<PAGE>
<TABLE>
<CAPTION>
High-Grade Bond
Subaccount Balanced Subaccount
------------------------------------ --------------------------------
1998 1997 1998 1997
------------------------------------ --------------------------------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 15,102,539 $ 9,938,351 $ 54,290,645 $ 33,670,634
Net realized capital gain (loss) 1,184,139 286,829 15,060,913 13,941,055
Net change in unrealized
appreciation (depreciation) of
investments 3,035,097 4,394,682 (12,875,543) 33,151,340
------------------------------------ --------------------------------
Increase from operations 19,321,775 14,619,862 56,476,015 80,763,029
Contract transactions:
Net contract purchase payments 23,801,304 32,631,602 34,390,774 59,455,811
Transfer payments from (to)
other Subaccount accounts or general
account 83,833,768 18,648,896 32,132,098 3,012,081
Contract terminations,
withdrawals and other
deductions (7,863,358) (4,540,307) (15,764,441) (13,650,505)
------------------------------------ --------------------------------
Increase from contract transactions 99,771,714 46,740,191 50,758,431 48,817,387
------------------------------------ --------------------------------
Net increase in contract owners'
equity 119,093,489 61,360,053 107,234,446 129,580,416
Contract owners' equity:
Beginning of the period 201,167,039 139,806,986 467,618,812 338,038,396
------------------------------------ --------------------------------
End of the period $ 320,260,528 $ 201,167,039 $ 574,853,258 $ 467,618,812
==================================== ================================
</TABLE>
Equity Index Subaccount
----------------------------------
1998 1997
------------------- -----------------
Operations:
Net investment income $ 12,666,476 $ 13,093,612
Net realized capital gain (loss) 44,755,906 33,240,639
Net change in unrealized
appreciation (depreciation) of
investments 164,644,095 110,724,340
------------------- -----------------
Increase from operations 222,066,477 157,058,591
Contract transactions:
Net contract purchase payments 68,344,382 120,636,984
Transfer payments from (to)
other subaccounts or general
account
91,359,082 36,845,333
Contract terminations, withdrawals
and other deductions
(25,941,516) (13,185,474)
------------------- -----------------
Increase from contract transactions 133,761,948 144,296,843
------------------- -----------------
Net increase in contract owners'
equity 355,828,425 301,355,434
Contract owners' equity:
Beginning of the period 729,189,185 427,833,751
------------------- -----------------
End of the period $ 1,085,017,610 $ 729,189,185
=================== =================
See accompanying notes.
7
<PAGE>
Peoples Benefit Life Insurance Company
Separate Account IV - Vanguard Variable Annuity Plan
Statements of Changes in Contract Owners' Equity (continued)
<TABLE>
<CAPTION>
Growth Subaccount Equity Income Subaccount
---------------------------------- ----------------------------------
1998 1997 1998 1997
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 38,721,561 $ 13,790,173 $ 9,296,054 $ 10,285,311
Net realized capital gain (loss) 25,057,114 24,923,939 18,292,781 9,488,584
Net change in unrealized
appreciation (depreciation) of
investments 137,524,677 48,660,283 28,459,344 43,397,730
---------------------------------- ----------------------------------
Increase from operations 201,303,352 87,374,395 56,048,179 63,171,625
Contract transactions:
Net contract purchase payments 47,679,438 91,041,141 32,156,785 50,527,970
Transfer payments from (to) other
subaccounts or general account
106,624,819 (12,709,883) 27,844,294 37,182,554
Contract terminations, withdrawals
and other deductions
(14,500,631) (9,692,949) (10,442,192) (5,978,462)
---------------------------------- ----------------------------------
Increase from contract transactions 139,803,626 68,638,309 49,558,887 81,732,062
---------------------------------- ----------------------------------
Net increase in contract owners'
equity 341,106,978 156,012,704 105,607,066 144,903,687
Contract owners' equity:
Beginning of the period 456,049,952 300,037,248 300,655,472 155,751,785
---------------------------------- ----------------------------------
End of the period $ 797,156,930 $ 456,049,952 $ 406,262,538 $ 300,655,472
================================== ==================================
</TABLE>
See accompanying notes.
8
<PAGE>
<TABLE>
<CAPTION>
International Subaccount High Yield Bond Subaccount
---------------------------------- --------------------------------
1998 1997 1998 1997
---------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 2,227,566 $ 4,128,300 $ 10,253,085 $ 5,378,776
Net realized capital gain (loss)
Net change in unrealized 6,751,341 5,753,755 (316,390) 450,764
appreciation (depreciation) of
investments 25,252,750 (6,934,426) (6,006,789) 1,154,287
---------------------------------- --------------------------------
Increase from operations 34,231,657 2,947,629 3,929,906 6,983,827
Contract transactions:
Net contract purchase payments
Transfer payments from (to) other
subaccounts or general account 11,473,115 40,854,983 16,980,800 28,392,471
Contract terminations, withdrawals
and other deductions (3,257,020) (3,461,698) 25,729,756 28,670,333
Increase from contract transactions (6,238,121) (5,873,953) (5,378,034) (2,340,822)
---------------------------------- --------------------------------
Net increase in contract owners'
equity 1,977,974 31,519,332 37,332,522 54,721,982
---------------------------------- --------------------------------
Contract owners' equity:
Beginning of the period 36,209,631 34,466,961 41,262,428 61,705,809
End of the period 200,097,118 165,630,157 94,773,754 33,067,945
---------------------------------- --------------------------------
$ 236,306,749 $ 200,097,118 $ 136,036,182 $ 94,773,754
================================== ================================
<CAPTION>
Small Company
Growth Subaccount
--------------------------------
1998 1997
--------------------------------
<S> <C> <C>
Operations:
Net investment income $ 314,962 $ 84,180
Net realized capital gain (loss) 2,117,876 1,988,296
Net change in unrealized
appreciation (depreciation) of
investments 7,655,810 6,175,448
--------------------------------
Increase from operations 10,088,648 8,247,924
Contract transactions:
Net contract purchase payments 11,402,033 31,540,432
Transfer payments from (to) other
subaccounts or general account (3,184,344) 34,599,074
Contract terminations, withdrawals
and other deductions (3,190,059) (2,029,562)
--------------------------------
Increase from contract transactions 5,027,630 64,109,944
--------------------------------
Net increase in contract owners'
equity 15,116,278 72,357,868
Contract owners' equity:
Beginning of the period 124,506,635 52,148,767
--------------------------------
End of the period $ 139,622,913 $ 124,506,635
================================
</TABLE>
See accompanying notes.
9
<PAGE>
Peoples Benefit Life Insurance Company
Separate Account IV - Vanguard Variable Annuity Plan
Notes to Financial Statements
December 31, 1998
1. Organization and Summary of Significant Accounting Policies
Organization of the Account
Peoples Benefit Life Insurance Company Separate Account IV (the "Mutual Fund
Account"), formerly Providian Life and Health Insurance Company Separate Account
IV, is a segregated investment account of Peoples Benefit Life Insurance Company
("PBL"), an indirect, wholly-owned subsidiary of AEGON N.V., a holding company
organized under the laws of The Netherlands.
The Mutual Fund Account is registered with the Securities and Exchange
Commission as a Unit Investment Trust pursuant to provisions of the Investment
Company Act of 1940. The Mutual Fund Account consists of nine investment
subaccounts which invest exclusively in shares of a corresponding portfolio of
the Vanguard Variable Insurance Fund (the "Series Fund"), an open-end
diversified investment company offered by The Vanguard Group, Inc. ("Vanguard").
Activity in these nine investment subaccounts is available to contract owners of
the Vanguard Variable Annuity Plan.
Prior to October 1, 1998, the Mutual Fund Account was an account of Providian
Life and Health Insurance Company ("PLH"). Effective October 1, 1998, the name
of PLH was changed to PBL.
Prior to June 10, 1997, PLH was an indirect, wholly-owned subsidiary of
Providian Corporation ("Providian"). On June 10, 1997, Providian's insurance
operations, including the operations of PLH, were merged with an indirect,
wholly-owned subsidiary of AEGON N.V. Providian was the surviving corporation in
the merger. Effective October 15, 1997, Providian's name was changed to
Commonwealth General Corporation ("CGC"). Effective December 31, 1997, ownership
of CGC was transferred to AEGON USA, Inc., an indirect, wholly-owned subsidiary
of AEGON N.V.
Investments
Net purchase payments received by the Mutual Fund Account are invested in the
portfolios of the Series Fund as selected by the contract owner.
10
<PAGE>
Peoples Benefit Life Insurance Company
Separate Account IV - Vanguard Variable Annuity Plan
Notes to Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
Prior to August 11, 1998, realized capital gains and losses from the sale of
shares in the Series Funds were determined on the basis of average cost.
Subsequent to this date, such gains or losses are determined on the first-in,
first-out basis. This change was implemented by establishing the average cost of
the portfolio as of August 11, 1998 as the opening cost for purposes of the
first-in, first-out basis. This change has no effect on "net realized and
unrealized capital gain (loss) from investments" and "increase (decrease) from
operations" as reported in the Statement of Operations. Investment transactions
are accounted for on the trade date (date the order to buy or sell is executed)
and dividend income is recorded on the ex-dividend date. Unrealized gains or
losses from the investments in the Series Funds are credited or charged to
contract owners' equity.
Dividend Income
Dividends received from the Series Funds investments are reinvested to purchase
additional mutual fund shares.
2. Investments
A summary of the mutual fund investments at December 31, 1998 follows:
<TABLE>
<CAPTION>
Number of Shares Net Asset Market
Held Value Per Share Value Cost
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market Portfolio 535,231,876.930 $ 1.0000 $ 535,231,877 $ 535,231,877
High-Grade Bond Portfolio 29,353,118.998 10.9106 320,260,140 312,040,123
Balanced Portfolio 33,632,683.145 17.0921 574,853,184 489,993,435
Equity Index Portfolio 33,744,070.051 32.1543 1,085,016,952 696,592,874
Growth Portfolio 28,045,389.860 28.4238 797,156,552 545,094,910
Equity Income Portfolio 18,944,104.020 21.4453 406,261,994 304,629,872
International Portfolio 15,698,647.684 15.0527 236,307,034 200,410,488
High Yield Bond Portfolio 13,461,001.336 10.1059 136,035,533 140,129,547
Small Company Growth Portfolio 11,885,438.105 11.7475 139,624,184 126,121,806
------------------------------------
$4,230,747,450 $3,350,244,932
====================================
</TABLE>
11
<PAGE>
Peoples Benefit Life Insurance Company
Separate Account IV - Vanguard Variable Annuity Plan
Notes to Financial Statements (continued)
2. Investments (continued)
The aggregate cost of purchases and proceeds from sales of investments were as
follows:
<TABLE>
<CAPTION>
Period ended December 31
1998 1997
------------------------------------ ----------------------------------
Purchases Sales Purchases Sales
------------------------------------ ----------------------------------
<S> <C> <C> <C> <C>
Money Market Portfolio $ 719,035,239 $ 555,355,663 $ 432,082,512 $368,352,557
High-Grade Bond Portfolio 160,527,243 45,540,624 91,646,656 35,016,314
Balanced Portfolio 172,632,133 67,893,164 144,500,315 62,110,595
Equity Index Portfolio 284,877,412 138,859,248 267,028,451 109,624,928
Growth Portfolio 265,614,053 87,266,560 180,232,782 97,738,113
Equity Income Portfolio 135,800,139 76,789,213 132,950,196 41,039,734
International Portfolio 68,265,654 64,121,640 98,152,807 62,512,538
High Yield Bond Portfolio 99,817,385 52,235,877 86,666,063 26,595,851
Small Company Growth Portfolio
55,499,343 50,203,869 105,500,966 41,279,050
------------------------------------ ----------------------------------
$1,962,068,601 $1,138,265,858 $1,538,760,748 $844,269,680
==================================== ==================================
</TABLE>
3. Contract Owners' Equity
A summary of deferred annuity contracts terminable by owners at December 31,
1998 follows:
<TABLE>
<CAPTION>
Accumulation Units Accumulation Total Contract
Subaccount Owned Unit Value Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market 387,603,061.784 $ 1.380877 $ 535,232,153
High-Grade Bond 18,252,488.041 17.546130 320,260,528
Balanced 21,507,006.817 26.728650 574,853,258
Equity Index 28,883,542.499 37.565254 1,085,017,610
Growth 23,656,407.827 33.697294 797,156,930
Equity Income 15,409,101.685 26.365102 406,262,538
International 14,563,557.171 16.225895 236,306,749
High Yield Bond 10,817,255.457 12.575850 136,036,182
Small Company Growth 11,840,739.815 11.791739 139,622,913
-----------------
$4,230,748,861
=================
</TABLE>
12
<PAGE>
Peoples Benefit Life Insurance Company
Separate Account IV - Vanguard Variable Annuity Plan
Notes to Financial Statements (continued)
3. Contract Owners' Equity (continued)
At December 31, 1998, contract owners' equity was comprised of:
<TABLE>
<CAPTION>
Money Market High-Grade Balanced
Total Subaccount Bond Subaccount Subaccount
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unit transactions, accumulated net
investment income and realized
capital gains $3,350,246,343 $535,232,153 $312,040,511 $489,993,509
Adjustment for appreciation
(depreciation) to market value 880,502,518 - 8,220,017 84,859,749
-------------------------------------------------------------------
Total contract owners' equity $4,230,748,861 $535,232,153 $320,260,528 $574,853,258
===================================================================
<CAPTION>
Equity Index Growth Equity Income
Subaccount Subaccount Subaccount
--------------------------------------------------
<S> <C> <C> <C>
Unit transactions, accumulated net investment income
and realized capital gains $696,593,532 $545,095,288 $304,630,416
Adjustment for appreciation (depreciation) to market
value 388,424,078 252,061,642 101,632,122
--------------------------------------------------
Total contract owners' equity $1,085,017,610 $797,156,930 $406,262,538
==================================================
<CAPTION>
Small Company
International High Yield Growth
Subaccount Bond Subaccount Subaccount
------------------------------------------------
<S> <C> <C> <C>
Unit transactions, accumulated net investment income
and realized capital gains $200,410,203 $140,130,196 $126,120,535
Adjustment for appreciation (depreciation) to market
value 35,896,546 (4,094,014) 13,502,378
------------------------------------------------
Total contract owners' equity $236,306,749 $136,036,182 $139,622,913
================================================
</TABLE>
13
<PAGE>
Peoples Benefit Life Insurance Company
Separate Account IV - Vanguard Variable Annuity Plan
Notes to Financial Statements (continued)
3. Contract Owners' Equity (continued)
A summary of changes in contract owners' account units follows:
<TABLE>
<CAPTION>
Money Market High-Grade Balanced
Subaccount Bond Subaccount Subaccount
--------------------------------------------------
<S> <C> <C> <C>
Units outstanding at January 1, 1997 246,219,369 9,394,532 17,306,952
Units purchased 322,738,113 5,251,506 4,994,533
Units redeemed and transferred (286,144,343) (2,242,639) (2,773,303)
--------------------------------------------------
Units outstanding at December 31, 1997 282,813,139 12,403,399 19,528,182
Units purchased 492,838,407 5,239,781 3,659,787
Units redeemed and transferred (388,048,484) 609,308 (1,680,962)
--------------------------------------------------
Units outstanding at December 31, 1998 387,603,062 18,252,488 21,507,007
==================================================
<CAPTION>
Equity Index Growth Equity Income
Subaccount Subaccount Subaccount
-------------------------------------------------
<S> <C> <C> <C>
Units outstanding at January 1, 1997 19,360,324 15,744,328 9,259,727
Units purchased 9,635,037 7,615,400 6,180,595
Units redeemed and transferred (4,109,141) (4,384,827) (2,079,557)
-------------------------------------------------
Units outstanding at December 31, 1997 24,886,220 18,974,901 13,360,765
Units purchased 6,550,480 5,861,803 4,496,769
Units redeemed and transferred (2,553,158) (1,180,296) (2,448,432)
-------------------------------------------------
Units outstanding at December 31, 1998 28,883,542 23,656,408 15,409,102
===============================================
<CAPTION>
Small
High Yield Company
International Bond Growth
Subaccount Subaccount Subaccount
------------------------------------------------
<S> <C> <C> <C>
Units outstanding at January 1, 1997 12,435,392 3,041,910 5,362,364
Units purchased 6,519,817 7,081,022 9,916,890
Units redeemed and transferred (4,358,523) (2,312,982) (3,929,423)
------------------------------------------------
Units outstanding at December 31, 1997 14,596,686 7,809,950 11,349,831
Units purchased 2,904,910 5,502,919 2,741,534
Units redeemed and transferred (2,938,039) (2,495,614) (2,250,625)
------------------------------------------------
Units outstanding at December 31, 1998 14,563,557 10,817,255 11,840,740
===============================================
</TABLE>
14
<PAGE>
Peoples Benefit Life Insurance Company
Separate Account IV - Vanguard Variable Annuity Plan
Notes to Financial Statements (continued)
4. Administrative, Mortality and Expense Risk Charge
An annual charge is deducted from the unit values of the subaccounts of the
Mutual Fund Account for PBL's assumption of certain mortality and expense risks
incurred in connection with the contract. The charge is assessed daily based on
the Series Funds' combined net assets attributable to the Mutual Fund Account
and Separate Account B of AUSA Life Insurance Company, Inc. ("AUSA"), an
affiliate of PBL. The annual rate was .375% on the first $1.5 billion of
combined net assets in the Series Funds and was reduced to .30% of combined net
assets in the Series Funds in excess of $1.5 billion. Effective December 1,
1997, the annual rate changed to .30% on the first $2.5 billion of combined net
assets in the Series Funds, is reduced to .28% of combined net assets in the
Series Funds over $2.5 billion and up to $5 billion, and is further reduced to
.27% of combined net assets in the Series Funds in excess of $5 billion.
An administrative charge of .10% annually is deducted from the unit values
of the subaccounts of the Mutual Fund Account. This charge is assessed daily by
PBL, based on the Series Funds' net assets attributable to the Mutual Fund
Account and Separate Account B of AUSA. Additionally, an annual maintenance fee
of $25 per contract is charged for contracts valued at less than $25,000 at the
time of initial purchase and on the last business day of each year. The
maintenance fee is deducted proportionately from the contract's accumulated
value. These deductions represent reimbursement to Vanguard for the costs
expected to be incurred for issuing and maintaining each contract and the Mutual
Fund Account.
5. Taxes
Operations of the Mutual Fund Account form a part of PBL which is taxed as a
life insurance company under Subchapter L of the Internal Revenue Code of 1986,
as amended (the "Code"). The operations of the Mutual Fund Account are accounted
for separately from other operations of PBL for purposes of federal income
taxation. The Mutual Fund Account is not separately taxable as a regulated
investment company under Subchapter M of the Code and is not otherwise taxable
as an entity separate from PBL. Under existing federal income tax laws, the
income of the Mutual Fund Account, to the extent applied to increase reserves
under the variable annuity contracts, is not taxable to PBL.
15
<PAGE>
Peoples Benefit Life Insurance Company
Separate Account IV - Vanguard Variable Annuity Plan
Notes to Financial Statements (continued)
6. 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.
PBL has developed a Year 2000 Project Plan (the Plan) to address the Year
2000 issue as it affects PBL's internal IT and non-IT systems, and to assess
Year 2000 issues relating to third parties with whom PBL 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. PBL has remediated and tested substantially all of its mission-critical
internal IT systems as of December 31, 1998. PBL 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.
PBL's Year 2000 issues are more complex because a number of its systems
interface with other systems not under PBL's control. PBL's most significant
interfaces and uses of third-party vendor systems are in the bank, financial
services and trust areas. PBL utilizes various banks to handle numerous types of
financial and sales transactions. Several of these banks also provide trustee
and custodial services for PBL's investment holdings and transactions. These
services are critical to a financial services company such as PBL as its
business centers around cash receipts and disbursements to policyholders and the
investment of policyholder funds. PBL 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. PBL 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). PBL 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.
16
<PAGE>
Peoples Benefit Life Insurance Company
Separate Account IV - Vanguard Variable Annuity Plan
Notes to Financial Statements (continued)
6. Year 2000 (Unaudited) (continued)
PBL does have some exposure to date sensitive embedded technology such as
micro-controllers, but PBL views this exposure as minimal. Unlike other
industries that may be equipment intensive, like manufacturing, PBL is a life
insurance, and financial services organization providing 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, PBL 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. This
undertaking has been substantially completed for all operations.
For PBL, a reasonably likely worst case scenario might include one or more of
PBL's significant policyholder systems being non-compliant. Such an event could
result in a material disruption of PBL's operations. Specifically, a number of
PBL'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 PBL'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, PBL 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 PBL'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, PBL'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, PBL does not believe that the problems will have a
material adverse affect on PBL's operations or financial condition.
17
<PAGE>
FINANCIAL STATEMENTS - STATUTORY BASIS
PEOPLES BENEFIT LIFE INSURANCE COMPANY
(FORMERLY PROVIDIAN LIFE AND
HEALTH INSURANCE COMPANY)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Peoples Benefit Life Insurance Company
Financial Statements - Statutory Basis
Years ended December 31, 1998, 1997 and 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.................................. 1
Audited Financial Statements
Balance Sheets - Statutory Basis................................ 3
Statements of Operations - Statutory Basis...................... 5
Statements of Changes in Capital and Surplus - Statutory Basis.. 6
Statements of Cash Flows - Statutory Basis...................... 7
Notes to Financial Statements - Statutory Basis................. 8
</TABLE>
<PAGE>
Report of Independent Auditors
The Board of Directors
Peoples Benefit Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of Peoples
Benefit Life Insurance Company (formerly Providian Life and Health Insurance
Company) 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. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
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 Missouri Department of Insurance, which practices differ from
generally accepted accounting principles. The variances between such practices
and generally accepted accounting principles also are 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 Peoples Benefit Life Insurance Company 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.
1
<PAGE>
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Peoples Benefit Life
Insurance Company 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 Missouri Department of Insurance.
/s/ Ernst & Young LLP
February 19, 1999
2
<PAGE>
Peoples Benefit Life Insurance Company
Balance Sheets - Statutory Basis
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
---------------------------------
<S> <C> <C>
Admitted assets
Cash and invested assets:
Cash and short-term investments $ 193,367 $ 45,122
Bonds 4,299,430 4,363,420
Stocks:
Preferred 91,609 31,519
Common (cost: 1998 - $37,955; 1997 - $41,804) 38,092 40,343
Common stock sold, but not yet purchased [cost:
1998 - $(80,447); 1997 - $(7,081)] (83,727) (7,548)
Affiliated entities (cost: 1998 - $202,606; 1997 -
$202,606) 457,011 455,036
Mortgage loans on real estate 2,041,729 2,269,507
Real estate 3,980 8,759
Policy loans 154,703 155,430
Other invested assets 268,783 216,266
---------------------------------
Total cash and invested assets 7,464,977 7,577,854
Premiums deferred and uncollected 44,117 46,428
Accrued investment income 79,705 91,639
Receivable from affiliates 72,156 17,480
Federal income taxes recoverable 12,157 230
Other assets 54,432 15,182
Separate account assets 4,915,961 3,573,052
---------------------------------
Total admitted assets $12,643,505 $11,321,865
=================================
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------------------
<S> <C> <C>
Liabilities and capital and surplus
Liabilities:
Aggregate reserves for policies and contracts:
Life $ 1,120,051 $ 1,149,528
Annuity 3,126,053 3,342,986
Accident and health 81,793 80,534
Policy and contract claim reserves:
Life 30,445 21,199
Accident and health 29,556 27,836
Policyholder contract deposits 1,740,041 1,770,902
Other policyholders' funds 524,254 460,883
Remittances and items not allocated 11,644 24,861
Asset valuation reserve 134,828 109,465
Interest maintenance reserve 16,131 -
Short-term notes payable to affiliates 102,293 -
Payable for securities 116,191 87,078
Other liabilities 68,767 53,142
Transfers to separate accounts 3,215 447
Payable to affiliates 79,952 18,429
Separate account liabilities 4,884,819 3,544,304
--------------------------------
Total liabilities 12,070,033 10,691,594
Commitments and contingencies
Capital and surplus:
Common stock, $11 par value, 1,145,000 shares
authorized, issued and outstanding 12,595 12,595
Preferred stock, $11 par value, $240 liquidation
value, 2,290,000 shares authorized, issued and 25,190 25,190
outstanding
Paid-in surplus 2,583 2,583
Unassigned surplus 533,104 589,903
--------------------------------
Total capital and surplus 573,472 630,271
--------------------------------
Total liabilities and capital and surplus $12,643,505 $11,321,865
================================
</TABLE>
See accompanying notes.
4
<PAGE>
Peoples Benefit Life Insurance Company
Statements of Operations - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net of
reinsurance:
Life $ 165,442 $ 169,292 $ 178,578
Annuity 1,584,173 1,232,283 1,237,874
Accident and health 133,490 144,713 154,993
Net investment income 512,102 559,656 569,860
Amortization of interest maintenance reserve 7,046 6,333 3,109
Commissions and expense allowances on reinsurance
ceded 4,542 2,323 1,123
Other (9,666) 7,770 10,196
------------------------------------------------------------
2,397,129 2,122,370 2,155,733
Benefits and expenses:
Benefits paid or provided for:
Life benefits 207,521 112,403 110,905
Surrender benefits 1,338,387 1,120,236 1,078,321
Accident and health benefits 75,372 79,576 80,190
Other benefits 89,301 162,215 147,974
Increase (decrease) in aggregate reserves for
policies and contracts:
Life (27,717) (16,974) (13,045)
Annuity (210,997) (141,304) (283,135)
Accident and health (2,347) (4,169) (2,301)
Other 32,453 (96,839) 289,343
------------------------------------------------------------
1,501,973 1,215,144 1,408,252
Insurance expenses:
Commissions 46,200 54,554 51,365
General insurance expenses 75,102 106,666 101,446
Taxes, licenses and fees 8,037 10,036 8,933
Net transfers to separate accounts 633,128 599,633 425,800
Other expenses 199 559 3,015
------------------------------------------------------------
762,666 771,448 590,559
------------------------------------------------------------
2,264,639 1,986,592 1,998,811
------------------------------------------------------------
Gain from operations before federal income tax
expense and net realized capital gains on
investments 132,490 135,778 156,922
Federal income tax expense 32,960 54,615 50,639
------------------------------------------------------------
Net income before net realized capital gains on
investments 99,530 81,163 106,283
Net realized capital gains on investments (net of
related federal income taxes and amounts
transferred to interest maintenance reserve) 27,621 24,702 3,394
------------------------------------------------------------
Net income $ 127,151 $ 105,865 $ 109,677
============================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Peoples Benefit Life Insurance Company
Statements of Changes in Capital and Surplus - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
TOTAL
COMMON PREFERRED PAID-IN UNASSIGNED CAPITAL AND
STOCK STOCK SURPLUS SURPLUS SURPLUS
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $12,595 $25,190 $2,583 $ 536,126 $ 576,494
Net income - - - 109,677 109,677
Change in net unrealized
capital gains (losses) - - - 40,540 40,540
Change in non-admitted assets - - - 4,737 4,737
Change in asset valuation reserve - - - (7,683) (7,683)
Dividend to stockholders - - - (125,000) (125,000)
Prior year federal income tax adjustment - - - 6,546 6,546
------------------------------------------------------------------------------------
Balance at December 31, 1996 12,595 25,190 2,583 564,943 605,311
Net income - - - 105,865 105,865
Change in net unrealized capital gains - - - 45,907 45,907
Change in non-admitted assets - - - 341 341
Change in asset valuation reserve - - - (12,296) (12,296)
Change in surplus in separate accounts - - - 424 424
Dividend to stockholders - - - (120,000) (120,000)
Prior year federal income tax adjustment - - - 4,719 4,719
------------------------------------------------------------------------------------
Balance at December 31, 1997 12,595 25,190 2,583 589,903 630,271
Net income - - - 127,151 127,151
Change in net unrealized capital losses - - - (15,584) (15,584)
Change in non-admitted assets - - - 9,324 9,324
Change in liability for
reinsurance in unauthorized companies - - - (27) (27)
Change in asset valuation reserve - - - (25,363) (25,363)
Change in surplus in separate accounts - - - 3,581 3,581
Dividend to stockholders - - - (160,000) (160,000)
Tax benefits on stock options exercised - - - 4,119 4,119
------------------------------------------------------------------------------------
Balance at December 31, 1998 $12,595 $25,190 $2,583 $ 533,104 $ 573,472
====================================================================================
</TABLE>
See accompanying notes.
6
<PAGE>
Peoples Benefit Life Insurance Company
Statements of Cash Flows - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Premiums and other considerations, net of reinsurance $ 1,884,760 $ 1,557,727 $ 1,584,509
Net investment income 529,718 544,108 574,079
Life claims (198,317) (108,112) (107,884)
Surrender benefits and other fund withdrawals (1,338,387) (1,120,708) (1,078,321)
Disability benefits under accident and health policies (73,604) (77,681) (78,376)
Other benefits to policyholders (89,304) (161,602) (148,215)
Commissions, other expenses and other taxes (136,417) (171,155) (172,193)
Net transfers to separate accounts (633,128) (602,788) (412,252)
Federal income taxes, excluding tax on capital gains (40,998) (53,792) (56,121)
Other, net 78,339 (59,738) (308,586)
------------------------------------------------------------
Net cash used in operating activities (17,338) (253,741) (203,360)
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid:
Bonds and preferred stocks 2,370,321 4,006,319 2,992,250
Common stocks 275,513 259,925 233,066
Mortgage loans on real estate 732,217 648,588 705,134
Real estate 7,733 8,784 32,398
Policy loans 727 2,744 590
Other 51,375 136,271 16,871
------------------------------------------------------------
3,437,886 5,062,631 3,980,309
Cost of investments acquired:
Bonds and preferred stocks (2,316,926) (4,114,568) (2,833,247)
Common stocks (293,534) (249,597) (216,931)
Mortgage loans on real estate (485,488) (385,022) (627,598)
Other (118,648) (34,263) (39,734)
------------------------------------------------------------
(3,214,596) (4,783,450) (3,717,510)
------------------------------------------------------------
Net cash provided by investing activities 223,290 279,181 262,799
FINANCING ACTIVITIES
Issuance of short-term intercompany notes payable 102,293 - -
Dividends paid to stockholders (160,000) (120,000) (125,000)
Other - (23) -
------------------------------------------------------------
Net cash used in financing activities (57,707) (120,023) (125,000)
------------------------------------------------------------
Increase (decrease) in cash and short-term 148,245 (94,583) (65,561)
investments
Cash and short-term investments at beginning of year 45,122 139,705 205,266
------------------------------------------------------------
Cash and short-term investments at end of year $ 193,367 $ 45,122 $ 139,705
============================================================
</TABLE>
See accompanying notes.
7
<PAGE>
Peoples Benefit Life Insurance Company
Notes to Financial Statements - Statutory Basis
(Dollars in thousands)
December 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Peoples Benefit Life Insurance Company (the "Company", formerly Providian Life
and Health Insurance Company) is a life and health insurance company domiciled
in Missouri. Prior to June 10, 1997, the Company was an indirect, wholly-owned
subsidiary of Providian Corporation ("Providian"). On June 10, 1997, Providian's
insurance operations, including the operations of the Company, were merged with
an indirect, wholly-owned subsidiary of AEGON N.V., a holding company organized
under the laws of The Netherlands. Providian was the surviving corporation in
the merger. Effective October 15, 1997, Providian's name was changed to
Commonwealth General Corporation ("Commonwealth"). Effective January 1, 1998,
ownership of Commonwealth was transferred to AEGON USA, Inc. ("AEGON"), an
indirect, wholly-owned subsidiary of AEGON N.V.
The Company is directly owned by Monumental Life Insurance Company 76%, Capital
Liberty, Limited Partnership ("CLLP") 20%, and Commonwealth 4%. The Company
wholly owns an insurance subsidiary, Veterans Life Insurance Company ("VLIC").
NATURE OF OPERATIONS
The Company sells and services life and accident and health insurance products,
primarily utilizing direct response methods, such as television, telephone, mail
and third-party programs to reach low to middle-income households nationwide.
The Company also sells and services group and individual accumulation products,
primarily utilizing brokers, fund managers, financial planners, stock brokerage
firms and a mutual fund.
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. Actual results could differ from
those estimates.
Significant estimates and assumptions are utilized in the calculation of
aggregate policy reserves, policy and contract claim reserves, guaranty fund
assessment accruals and valuation allowances on investments. It is reasonably
possible that actual experience could differ from the estimates and assumptions
utilized which could have a material impact on the financial statements.
8
<PAGE>
Peoples Benefit Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The accompanying financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Missouri Department of
Insurance ("Insurance Department"), which practices differ in some respects 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 charged to current operations 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 based on 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 and income tax bases of assets and liabilities; (g) net realized gains
or losses attributed to changes in the level of interest rates in the market are
deferred and amortized over the remaining life of the bond or mortgage loan,
rather than recognized as gains or losses in the statement of operations when
the sale is completed; (h) potential 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 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; (l) stock options settled in
cash are recorded as expense of the Company's indirect parent rather than
charged to current operations; (m) adjustments to federal income taxes of prior
years are charged or credited directly to unassigned surplus, rather than
reported as a component of expense in the statement of operations; (n) a
liability is established for "unauthorized reinsurers" and changes in this
liability are charged or credited directly to unassigned surplus; and (o) 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.
9
<PAGE>
Peoples Benefit Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
Missouri 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 Missouri 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.
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 security. The Company reviews its
prepayment assumptions on mortgage and other asset-backed securities at regular
intervals and adjusts amortization rates retrospectively when such assumptions
are changed due to experience and/or expected future patterns. Investments in
preferred stocks in good standing are reported at cost. Investments in preferred
stocks not in good standing are reported at the lower of cost or market. Common
stocks of unaffiliated companies, which include shares of mutual funds (money
market and other), are carried at market. Common stock sold but not yet
purchased is carried at market as a negative asset. Common stock of the
Company's affiliated insurance subsidiary is recorded at the equity in net
assets. Real estate is reported at cost less allowances for depreciation.
Depreciation is computed principally by the straight-line method. Policy loans
are reported at unpaid principal. Other invested assets consist principally of
investments in various limited partnerships and are recorded at equity in
underlying net assets. Derivative financial instruments, consisting primarily of
interest rate swap agreements, including basis swaps, and futures, are valued
consistently with the hedged item. Hedges of fixed income assets and/or
liabilities are valued at amortized cost. Hedges of items carried at fair value
are valued at fair value. Derivatives which cease to be effective hedges are
valued at fair value. Other "admitted assets" are valued, principally at cost,
as required or permitted by Missouri Insurance Laws.
10
<PAGE>
Peoples Benefit Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Common stock sold but not yet purchased represents obligations of the Company to
deliver specified securities at contracted prices, thereby creating a liability
to purchase the securities at prevailing market prices. Accordingly, these
transactions result in off-balance sheet risk as the Company's ultimate
obligation to satisfy the sale of securities sold but not yet purchased may
exceed the current amount recognized in the financial statements. The Missouri
Department of Insurance has approved the Company's accounting for common stock
sold but not yet purchased as a permitted practice.
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 potential
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.
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 on real estate
where rent is in arrears for more than three months. Further, income is not
accrued when collection is uncertain. At December 31, 1998, 1997 and 1996, the
Company excluded investment income due and accrued of $1,503, $308 and $504,
respectively, with respect to such practices.
The Company uses interest rate swaps as part of its overall interest rate risk
management strategy for certain life insurance and annuity products. The Company
entered into several interest rate swap contracts to modify the interest rate
characteristics of the underlying liabilities. The net interest effect of such
swap transactions is reported as an adjustment of interest income from the
hedged items as incurred.
AGGREGATE POLICY RESERVES
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables based on
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.
11
<PAGE>
Peoples Benefit Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The aggregate policy reserves for life insurance policies are based principally
upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary Mortality and
American Experience Mortality Tables. The reserves are calculated using interest
rates ranging from 2.00 to 6.00 percent and are computed principally on the Net
Level Premium Valuation and the Commissioners' Reserve Valuation Methods.
Reserves for universal life policies are based on account balances adjusted for
the Commissioners' Reserve Valuation Method.
Deferred annuity reserves are calculated according to the Commissioners' Annuity
Reserve Valuation Method including excess interest reserves to cover situations
where the future interest guarantees plus the decrease in surrender charges are
in excess of the maximum valuation rates of interest. Reserves for immediate
annuities and supplementary contracts with and without life contingencies are
equal to the present value of future payments assuming interest rates ranging
from 2.50 to 11.25 percent and mortality rates, where appropriate, from a
variety of tables.
Accident and health policy reserves are equal to the greater of the gross
unearned premiums or any required midterminal reserves plus net unearned
premiums and the present value of amounts not yet due on both reported and
unreported claims.
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.
POLICYHOLDER CONTRACT DEPOSITS
Policyholder contract deposits are comprised primarily of guaranteed investment
contracts (GICs). The GICs consist of three types. One type is guaranteed as to
principal along with interest guarantees based upon predetermined indices. The
second type guarantees principal and interest but also includes a penalty if the
contract is surrendered early. The third type guarantees principal and interest
and is non-surrenderable before the fixed maturity date. Policy reserves on the
GICs are determined following the retrospective deposit method and consist of
contract values that accrue to the benefit of the policyholder.
12
<PAGE>
Peoples Benefit Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEPARATE ACCOUNTS
Assets held in trust for purchases of 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 Company received variable contract premiums of $858,751, $784,931 and
$587,137 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.
Certain separate account assets and liabilities reported in the accompanying
financial statements contain contractual guarantees. Guaranteed separate
accounts represent funds invested by the Company for the benefit of individual
contract holders who are guaranteed certain returns as specified in the
contracts. Separate account asset performance different than guaranteed
requirements is either transferred to or received from the general account and
reported in the statements of operations.
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 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.
13
<PAGE>
Peoples Benefit Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") 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. SFAS No. 119, Disclosures about Derivative Financial Instruments and Fair
Value of Financial Instruments, requires additional disclosure about
derivatives. 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. SFAS No. 107 and No. 119 exclude certain financial instruments and
all nonfinancial instruments from their disclosure requirements and allow
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 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 is assumed to equal their carrying value.
Investment contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash flow
calculations, based on interest rates currently being offered for similar
contracts with maturities consistent with those remaining for the contracts
being valued.
Interest rate swaps and forward-rate agreements: Estimated fair value of
interest rate swaps and forward-rate agreements are based on pricing models or
formulas using current assumptions.
14
<PAGE>
Peoples Benefit Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The following sets forth a comparison of the fair values and carrying values of
the Company's financial instruments subject to the provisions of SFAS No. 107
and No. 119:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------------- ------------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Admitted assets
Cash and short-term
investments $ 193,367 $ 193,367 $ 45,122 $ 45,122
Bonds 4,299,430 4,439,611 4,363,420 4,459,542
Preferred stocks 91,609 98,346 31,519 31,640
Common stocks (45,635) (45,635) 32,795 32,795
Mortgage loans on real estate 2,041,729 2,100,897 2,269,507 2,329,452
Policy loans 154,703 154,703 155,430 155,430
Separate account assets 4,915,961 4,915,961 3,573,052 3,573,052
LIABILITIES
Investment contract liabilities 5,385,785 5,334,953 4,693,812 4,750,436
Separate account liabilities 4,863,189 4,673,802 3,542,308 3,542,308
Short-term notes payable to affiliates 102,293 102,293 - -
Interest rate swaps - 7,022 - 18,417
Forwards - - 1,927 1,927
</TABLE>
15
<PAGE>
3. INVESTMENTS
The carrying value and estimated fair value of investments in debt securities
were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED FAIR
CARRYING VALUE GAINS LOSSES VALUE
--------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1998
Bonds:
United States Government and agencies $ 219,751 $ 6,985 $ 593 $ 226,143
State, municipal and other government 78,160 1,745 3,223 76,682
Public utilities 269,117 11,187 848 279,456
Industrial and miscellaneous 2,546,799 174,695 49,392 2,672,102
Mortgage and other asset-backed securities 1,185,603 16,435 16,810 1,185,228
--------------------------------------------------------------
4,299,430 211,047 70,866 4,439,611
Preferred stocks 91,609 8,327 1,590 98,346
--------------------------------------------------------------
$4,391,039 $219,374 $72,456 $4,537,957
==============================================================
December 31, 1997
Bonds:
United States Government and agencies $ 133,391 $ 931 $ 229 $ 134,093
State, municipal and other government 48,757 1,444 67 50,134
Public utilities 229,353 3,239 3,726 228,866
Industrial and miscellaneous 2,750,636 106,085 11,989 2,844,732
Mortgage and other asset-backed securities 1,201,283 434 - 1,201,717
--------------------------------------------------------------
4,363,420 112,133 16,011 4,459,542
Preferred stocks 31,519 121 - 31,640
--------------------------------------------------------------
$4,394,939 $112,254 $16,011 $4,491,182
==============================================================
</TABLE>
The carrying value and estimated 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 call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
CARRYING VALUE FAIR VALUE
--------------------------------
<S> <C> <C>
Due in one year or less $ 188,074 $ 195,766
Due after one year through five years 601,353 611,724
Due after five years through ten years 627,730 631,326
Due after ten years through fifteen years 238,383 254,067
Due after fifteen years through twenty years 306,216 326,339
Due after twenty years 1,152,071 1,235,161
--------------------------------
3,113,827 3,254,383
Mortgage and other asset-backed securities 1,185,603 1,185,228
--------------------------------
$4,299,430 $4,439,611
================================
</TABLE>
16
<PAGE>
Peoples Benefit Life Insurance Company
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 and notes $337,793 $331,084 $331,264
Dividends on equity investments 3,824 3,267 3,996
Interest on mortgage loans 161,897 196,584 211,972
Rental income on real estate 327 - -
Interest on policy loans 4,645 7,322 7,094
Other investment income 28,830 37,576 30,589
------------------------------------------
Gross investment income 537,316 575,833 584,915
Investment expenses 25,214 16,177 15,055
------------------------------------------
Net investment income $512,102 $559,656 $569,860
==========================================
</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 $2,370,321 $4,006,319 $2,992,250
=================================================
Gross realized gains $ 67,577 $ 43,227 $ 36,073
Gross realized losses (22,015) (29,488) (28,371)
-------------------------------------------------
Net realized gains $ 45,562 $ 13,739 $ 7,702
=================================================
</TABLE>
At December 31, 1998, investments with an aggregate carrying value of $3,950
were on deposit with regulatory authorities or were restrictively held in bank
custodial accounts for the benefit of such regulatory authorities as required by
statute.
17
<PAGE>
Peoples Benefit Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
Realized investment gains (losses) and changes in unrealized gains (losses) for
investments are summarized below:
<TABLE>
<CAPTION>
REALIZED
--------------------------------------------
YEAR ENDED DECEMBER 31
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Debt securities $ 45,562 $ 13,739 $ 7,702
Short-term investments 127 - 1
Equity securities 6,098 16,694 6,679
Mortgage loans on real estate 6,921 (1,121) (5,949)
Real estate (243) 1,604 1,727
Other invested assets 16,592 13,385 (2,443)
--------------------------------------------
75,057 44,301 7,717
Tax effect (17,257) (9,506) (1,402)
Transfer to interest maintenance reserve (30,179) (10,093) (2,921)
--------------------------------------------
Net realized gains $ 27,621 $ 24,702 $ 3,394
============================================
</TABLE>
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED
---------------------------------------
YEAR ENDED DECEMBER 31
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Debt securities $50,675 $ 74,092 $(86,515)
Equity securities 760 44,032 37,736
---------------------------------------
Change in unrealized appreciation (depreciation) $51,435 $118,124 $(48,779)
=======================================
</TABLE>
Gross unrealized gains and gross unrealized losses on equity securities were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-----------------------------
<S> <C> <C>
Unrealized gains $265,902 $253,958
Unrealized losses (14,640) (3,456)
-----------------------------
Net unrealized gains $251,262 $250,502
=============================
</TABLE>
During 1998, the Company issued mortgage loans with interest rates ranging from
5.0% to 8.5%. The maximum percentage of any one mortgage loan to the value of
the underlying real estate at origination was 83% for commercial loans and 95%
for residential loans. Mortgage loans with a carrying value of $2,012 were non-
income producing for the previous twelve months. Accrued interest of $241
related to these mortgage loans was excluded from investment income. The Company
requires all mortgaged properties to carry fire insurance equal to the value of
the underlying property.
18
<PAGE>
Peoples Benefit Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
During 1998 and 1997, mortgage loans of $3,410 and $10,162, respectively, were
foreclosed and transferred to real estate. At December 31, 1998 and 1997, the
Company held a mortgage loan loss reserve in the asset valuation reserve of
$22,530 and $24,218, respectively. At December 31, 1998, the mortgage loan
portfolio is diversified by geographic region and specific collateral property
type as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION PROPERTY TYPE DISTRIBUTION
- ----------------------------------------- ------------------------------------------
<S> <C> <C> <C>
Pacific 24% Residential 28%
South Atlantic 18 Office 20
E. North Central 18 Apartment 17
Middle Atlantic 16 Retail 15
W. South Central 7 Agricultural 7
Mountain 6 Industrial 7
W. North Central 4 Other 4
E. South Central 4 Hotel/Motel 2
New England 3
</TABLE>
At December 31, 1998, the Company had the following investment (excluding U. S.
Government guaranteed or insured issues) which individually represented more
than ten percent of capital and surplus and the asset valuation reserve:
<TABLE>
<CAPTION>
DESCRIPTION OF SECURITY OR ISSUER CARRYING VALUE
- ----------------------------------------------------------------- --------------------
<S> <C>
Bonds:
Nomura $74,108
</TABLE>
The Company utilizes a variety of off-balance sheet financial instruments as
part of its efforts to hedge and manage fluctuations in the market value of its
investment portfolio attributable to changes in general interest rate levels and
to manage duration mismatch of assets and liabilities. Those instruments include
interest rate exchange agreements (swaps), options, futures contracts, and
commitments to extend credit, and all involve elements of credit and market
risks in excess of the amounts recognized in the accompanying financial
statements at a given point in time. The contract or notional amounts of those
instruments reflect the extent of involvement in the various types of financial
instruments.
The Company's exposure to credit risk is the risk of loss from a counterparty
failing to perform according to the terms of the contract. That exposure
includes settlement risk (i.e., the risk that the counterparty defaults after
the Company has delivered funds or securities under terms of the contract) that
would result in an accounting loss and replacement cost risk (i.e., the cost to
replace the contract at current market rates should the counterparty default
prior to settlement date). Credit loss exposure resulting from nonperformance by
a counterparty for commitments to extend credit is represented by the
contractual amounts of the instruments.
19
<PAGE>
Peoples Benefit Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
At December 31, 1998 and 1997, the Company's outstanding financial instruments
with on and off-balance sheet risks, shown in notional amounts, are summarized
as follows:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT
1998 1997
----------------------------
<S> <C> <C>
Derivative securities:
Interest rate swaps:
Receive fixed - pay floating $592,600 $989,490
Receive floating - pay floating 84,763 38,738
Receive floating - pay fixed 208,746 35,958
Futures 78,196 75,502
Forwards - 250,000
</TABLE>
4. REINSURANCE
The Company reinsures portions of risk on 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 obligation under the reinsurance treaty.
Reinsurance assumption treaties are transacted primarily with affiliates.
Premiums earned reflect the following reinsurance assumed and ceded amounts:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------
<S> <C> <C> <C>
Direct premiums $1,618,574 $1,249,031 $1,328,352
Reinsurance assumed 274,237 299,608 244,772
Reinsurance ceded (9,706) (2,281) (1,501)
--------------------------------------------------
Net premiums earned $1,883,105 $1,546,358 $1,571,623
==================================================
</TABLE>
The Company received reinsurance recoveries in the amount of $3,102, $994 and
$1,080 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 $903 and $682 respectively. The
aggregate reserves for policies and contracts were reduced for reserve credits
for reinsurance ceded at December 31, 1998 and 1997 of $12,542 and $1,453,
respectively.
20
<PAGE>
Peoples Benefit Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
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 differs from the amount computed by applying the
statutory federal income tax rate to gain from operations before federal income
taxes and net realized capital gains primarily due to differences in the
statutory and tax treatment of deferred policy acquisition costs, dividend
received deduction, and differences in policy and contract liabilities.
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to net realized capital gains on investments
due to 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 ($17,425 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 $6,099.
Included in the statements of changes in capital and surplus are certain
adjustments increasing surplus by $4,719 and $6,546 at December 31, 1997 and
1996, respectively, relating to tax accrual adjustments applicable to prior tax
years.
The Company's federal income tax returns have been examined and closing
agreements have been executed with the Internal Revenue Service through 1992. An
examination is underway for years 1993 through 1997.
21
<PAGE>
Peoples Benefit Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES
Participating life insurance policies are issued by the Company which entitle
policyholders to a share in the earnings of the participating policies, provided
that a dividend distribution, which is determined annually based on mortality
and persistency experience of the participating policies, is authorized by the
Company. Participating insurance constituted approximately 12% and 14% of
ordinary life insurance in force at December 31, 1998 and 1997, respectively.
A portion of the Company's policy reserves and other policyholders' funds
(including separate account liabilities) relates to liabilities established on a
variety of the Company's products 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, is 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 $ 1,401,397 13% $1,360,368 15%
Subject to discretionary withdrawal at
book value less surrender charge 310,839 3 385,683 4
Subject to discretionary withdrawal at
market value 4,697,903 46 3,519,863 39
Subject to discretionary withdrawal at
book value (minimal or no charges or
adjustments) 1,400,914 14 1,691,979 19
Not subject to discretionary withdrawal
provision 2,422,628 24 2,134,391 23
------------------------------- --------------------------------
10,233,681 100% 9,092,284 100%
Less reinsurance ceded 5,614 -
------------------ ------------------
Total policy reserves on annuities and
deposit fund liabilities $10,228,067 $9,092,284
================== ==================
</TABLE>
Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next anniversary
date. At December 31, 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:
22
<PAGE>
Peoples Benefit Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
<TABLE>
<CAPTION>
GROSS LOADING NET
-------------------------------------------
<S> <C> <C> <C>
December 31, 1998
Life and annuity:
Ordinary direct first year business $ 3,243 $ 1,565 $ 1,678
Ordinary direct renewal business 17,913 6,154 11,759
Group life direct business 40,548 11,816 28,732
Reinsurance ceded (182) - (182)
-------------------------------------------
61,522 19,535 41,987
Accident and health:
Direct 1,485 - 1,485
Reinsurance assumed 751 - 751
Reinsurance ceded (106) - (106)
-------------------------------------------
Total accident and health 2,130 2,130
-------------------------------------------
$63,652 $19,535 $44,117
===========================================
DECEMBER 31, 1997
Life and annuity:
Ordinary direct first year business $ 2,975 $ 2,161 $ 814
Ordinary direct renewal business 18,337 5,589 12,748
Group life direct business 41,659 11,453 30,206
Reinsurance ceded (36) - (36)
-------------------------------------------
62,935 19,203 43,732
Accident and health:
Direct 1,959 - 1,959
Reinsurance assumed 768 - 768
Reinsurance ceded (31) - (31)
-------------------------------------------
Total accident and health 2,696 - 2,696
-------------------------------------------
$65,631 $19,203 $46,428
===========================================
</TABLE>
At December 31, 1998 and 1997, the Company had insurance in force aggregating
$60,859 and $114,171, respectively, in which the gross premiums are less than
the net premiums required by the standard valuation standards established by the
Missouri Department of Insurance. The Company established policy reserves of
$495 and $559 to cover these deficiencies at December 31, 1998 and 1997,
respectively.
Separate accounts held by the Company represent funds held for individual
policyholders. The assets in the separate accounts, carried at estimated fair
value, consist of common stocks, mortgage loans, long-term bonds and cash.
During 1997, the Company made a capital contribution of $26,362 to the separate
accounts. At December 31, 1998 and 1997, the fair value of this capital
contribution was $31,142 and $28,748, respectively, which is included in the
separate account assets but is excluded from the corresponding liabilities.
23
<PAGE>
Peoples Benefit Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
Information regarding the separate accounts of the Company is as follows:
<TABLE>
<CAPTION>
NONINDEXED
GUARANTEED MORE
THAN 4% NONGUARANTEED TOTAL
--------------------------------------------------------
<S> <C> <C> <C>
Premiums, deposits and other
considerations for the year
ended December 31, 1998 $ 189 $ 858,562 $ 858,751
========================================================
Reserves for separate accounts
as of December 31, 1998 $143,533 $4,719,656 $4,863,189
========================================================
Reserves by withdrawal
characteristics as of December
31, 1998:
With market value adjustment $143,533 $ - $ 143,533
At market value - 4,719,656 4,719,656
--------------------------------------------------------
Total $143,533 4,719,656 $4,863,189
========================================================
Premiums, deposits and other
considerations for the year
ended December 31, 1997 $ 3,481 $ 781,075 $ 784,556
========================================================
Reserves for separate accounts
as of December 31, 1997 $166,241 $3,376,067 $3,542,308
========================================================
Reserves by withdrawal
characteristics as of December
31, 1997:
With market value adjustment $166,241 $ - $ 166,241
At market value - 3,376,067 3,376,067
--------------------------------------------------------
Total $166,241 $3,376,067 $3,542,308
========================================================
</TABLE>
24
<PAGE>
Peoples Benefit Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
<TABLE>
<CAPTION>
NONINDEXED
GUARANTEED MORE
THAN 4% NONGUARANTEED TOTAL
--------------------------------------------------------
<S> <C> <C> <C>
Premiums, deposits and other
considerations for the year
ended December 31, 1996 $ 6,467 $ 580,536 $ 587,004
========================================================
Reserves for separate accounts
as of December 31, 1996 $199,480 $2,231,028 $2,430,508
========================================================
Reserves by withdrawal
characteristics as of December
31, 1996:
With market value adjustment $199,480 $ - $ 199,480
At market value - 2,231,028 2,231,028
--------------------------------------------------------
Total $199,480 $2,231,028 $2,430,508
========================================================
</TABLE>
A reconciliation of the amounts transferred to and from the Company's separate
accounts for the years ended December 31, 1998, 1997 and 1996 is presented
below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------
<S> <C> <C> <C>
Transfers as reported in the Summary of
Operations of separate accounts annual
statement:
Transfers to separate accounts $ 858,751 $ 784,931 $ 587,137
Transfers from separate accounts (237,910) (189,627) (163,116)
------------------------------------------------
Net transfers to separate accounts 620,841 595,304 424,021
Reconciling adjustments:
Fees paid to external fund manager - 2,311 2,170
Other transfers to (from) modified separate
account 12,287 2,018 (391)
------------------------------------------------
12,287 4,329 1,779
------------------------------------------------
Transfers as reported in the Summary of
Operations of the Company's Life,
Accident & Health Annual Statement $ 633,128 $ 599,633 $ 425,800
================================================
</TABLE>
25
<PAGE>
Peoples Benefit Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
7. DIVIDEND RESTRICTIONS
The Company is subject to limitations, imposed by the State of Missouri, on the
payment of dividends to its parent company. Generally, dividends during any year
may not be paid, without prior regulatory approval, in excess of the greater of
(1) 10 percent of the Company's statutory capital and surplus as of the
preceding December 31, or (2) the Company's statutory net income for the
preceding year. Subject to availability of unassigned surplus at the time of
such dividend, the maximum payment which may be made in 1999, without prior
regulatory approval, is $99,530.
The Company paid dividends to its parent of $160,000, $120,000 and $125,000 in
1998, 1997 and 1996, respectively.
8. RELATED PARTY TRANSACTIONS
The Company shares certain offices, 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, the
Company paid $1,390 for these services, which approximates their costs to the
affiliates. Prior to 1998, the Company entered into agreements with its
affiliates whereby the Company performed administrative services, management
support services, and marketing services for its affiliates. The Company, as
compensation, received an amount equal to the actual cost of providing such
services. Amounts received were $63,000 and $70,000 in 1997 and 1996,
respectively. Such amounts are classified as reductions of general insurance and
other expenses in the accompanying statements of operations. These agreements
are no longer in place.
Payable to affiliates and intercompany borrowings bear interest at the thirty-
day commercial paper rate of 5.6% at December 31, 1998. During 1998, the Company
received net interest of $309 from affiliates. Interest received in 1997 and
1996 related to similar intercompany transactions was not significant to the
Company.
At December 31, 1998, the Company has a $102,293 short-term note payable to an
affiliate. Interest on this note accrues at rates from 5.25% to 5.35%.
The Company participates in various benefit plans sponsored by AEGON and the
related costs allocated to the Company are not significant.
26
<PAGE>
Peoples Benefit Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company has 2,290,000 shares of redeemable preferred stock outstanding, all
of which are owned by CLLP. The preferred stock has a par value of $11 per share
and a liquidation value of $240 per share. CLLP is entitled to receive a
cumulative dividend equal to 8-1/2 percent per annum of the liquidation value of
the preferred stock. The Company may redeem all or any portion of the preferred
stock at the liquidation value commencing December 18, 2008.
On December 23, 1996, the Company made a capital contribution of its home office
data center with a book value of $4,657 to VLIC.
9. 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. Potential future obligations for unknown insolvencies
are not determinable by the Company. The future obligation has been based on the
most recent information available from the National Organization of Life and
Health Insurance Guaranty Associations. The Company has established a reserve of
$12,062 and $12,595 and an offsetting premium tax benefit of $4,604 and $0 at
December 31, 1998 and 1997, respectively, for its estimated share of future
guaranty fund assessments related to several major insurer insolvencies.
10. 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.
27
<PAGE>
Peoples Benefit Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
10. YEAR 2000 (UNAUDITED) (CONTINUED)
The Company has developed a Year 2000 Project Plan (the Plan) to address the
Year 2000 issue as it affects the Company's internal Information Technology
("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
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
28
<PAGE>
Peoples Benefit Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
10. YEAR 2000 (UNAUDITED) (CONTINUED)
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.
29
<PAGE>
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
Part A None
Part B Financial Statements of Subaccounts of Peoples Benefit Life Insurance
Company Separate Account IV (formerly Providian Life and Health
Insurance Company Separate Account IV) which are available for
investment by Vanguard Variable Annuity Plan Contract Owners as of
December 31, 1998 and for each of the two years in the period ended
December 31, 1998 with Report of Independent Auditors.
Statutory-basis financial statements of Peoples Benefit Life Insurance
Company as of December 31, 1998 and 1997 and for each of the three
years in the period ended December 31, 1998 with Report of Independent
Auditors.
Part C None
(B) EXHIBITS
(1) Resolution of the Board of Directors of National Home Life Assurance
Company ("National Home") authorizing establishment of the Separate Ac-
count./4/
(2) Not Applicable.
(3) Not Applicable.
(4) Form of variable annuity contract/5/
(5) Form of application/5/
(6) (a) Articles of Incorporation of National Home/1/
(b) Amendment to Articles of Incorporation of National Home/2/
(c) Amended and Restated Articles of Incorporation of National Home/3/
(7) Not applicable.
(8) (a) Participation Agreement for the Vanguard Variable Insurance Fund/6/
(b) First Amendment to Participation, Market Consulting and Administra-
tion Agreement/7/
(c) Administration Service Agent/8/
(9) (a) Opinion and Consent of Counsel/9/
(b) Consent of Counsel/9/
(10) Consent of Independent Auditors/9/
(11) No financial statements are omitted from item 23.
(12) Not applicable.
(13) Performance computation/7/
(14) Not applicable.
- --------
/1/ Incorporated by reference from the initial Registration Statement of the
Providian Life & Health Insurance Company Separate Account II, File No. 33-
7033.
/2/ Incorporated by reference from Post-Effective Amendment No. 3 to the Regis-
tration Statement of Providian Life & Health Insurance Company Separate Ac-
count II, File No. 33-7033.
/3/ Incorporated by reference from Post-Effective Amendment No. 5 to the Regis-
tration Statement of the Providian Life & Health Insurance Company Separate
Account II, File No. 33-7033.
/4/ Incorporated by reference from the initial Registration Statement of the
Providian Life & Health Insurance Company Separate Account IV, File No. 33-
36073.
/5/ Incorporated by reference from Pre-Effective Amendment No. 1 to the Regis-
tration Statement of the Providian Life & Health Insurance Company Separate
Account IV, File No. 33-36073.
/6/ Incorporated by reference from Post-Effective Amendment No. 1 to the Regis-
tration Statement of Providian Life & Health Insurance Company Separate Ac-
count IV, File No. 33-36073.
/7/ Incorporated by reference from Post-Effective Amendment No. 6 to Registra-
tion Statement of Providian Life & Health Insurance Company Separate Account
IV, File No. 33-36073.
/8/ Incorporated by reference from Post-Effective Amendment No. 11 to
Registration Statement of Providian Life & Health Insurance Company Separate
Account IV, File No. 33-36073, filed April 30, 1998.
/9/ Filed herewith.
C-1
<PAGE>
Item 25. Directors and Officers of Depositor
<TABLE>
<CAPTION>
Positions and Offices with Depositor Name and Principal Business Address*
- ------------------------------------ ------------------------------------
<S> <C>
President Bart Herbert, Jr.
Senior Vice President Edward A. Biemer
Senior Vice President Thomas P. Bowie
Senior Vice President G. Douglas Mangum, Jr.
Executive Vice President William L. Busler
Treasurer Martha A. McConnell
Vice President Brian Alford
Vice President & Assistant Treasurer Nathan C. Anguiano
Vice President & Division General Counsel Frank A. Camp
Vice President Brenda K. Clancy
Vice President Michele M. Coan
Vice President Jane A. Coyne
Vice President Karen H. Fleming
Vice President Carolyn M. Johnson
Vice President Michael F. Lane
Vice President John A. Mazzuca
Vice President Daniel C. Mohwinkel
Vice President Maureen E. Nielsen
Vice President Larry N. Norman
Vice President G. Eric O'Brien
Vice President Daniel H. Odum
Vice President Douglas A. Sarcia
Vice President Gary H. Scott
Vice President Brian A. Smith
Vice President Colleen M. Tobiason
Vice President William A. Waldie, Jr.
Vice President Michael A. Wapp
Vice President & Actuary Ronald L. Ziegler
Assistant Vice President Janice Boehmler
Assistant Vice President & Qualified Actuary Michael A. Cioffi
Assistant Vice President Kimberly A. Cushing
Assistant Vice President Mary Ellen Fahringer
Assistant Vice President JoAnn Herndon
Assistant Vice President Patricia A. Lukacs
Assistant Vice President William R. Maurer
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Assistant Vice President Robert E. Payne
Assistant Vice President Teresa L. Stolba
Assistant Vice President Harvey Waite
Assistant Treasurer Cliford W. Flenniken
Assistant Controller Paul J. Lukacs
Assistant Controller Joseph C. Noone
Second Vice President Amy E. Anders
Second Vice President George E. Claiborne, Jr.
Second Vice President Cindy L. Chanley
Second Vice President Marvin A. Johnson
Second Vice President Anne M. Spaes
Second Vice President/Investments David L. Blankenship
Second Vice President/Investments C. Ray Brewer
Second Vice President/Investments Kirk W. Buese
Second Vice President/Investments Joel L. Coleman
Second Vice President/Investments William S. Cook
Second Vice President/Investments Deborah A. Dias
Second Vice President/Investments Lee W. Eastland
Second Vice President/Investments Donald E. Flynn
Second Vice President/Investments Eric B. Goodman
Second Vice President/Investments M. Josette Goulet
Second Vice President/Investments James Grant
Second Vice President/Investments David R. Halfpap
Second Vice President/Investments Robert L. Hansen
Second Vice President/Investments Donna L. Heitzman
Second Vice President/Investments David W. Hopewell
Second Vice President/Investments Frederick B. Howard
Second Vice President/Investments Claudia Jackson
Second Vice President/Investments Jon D. Kettering
Second Vice President/Investments Tim Kuussalo
Second Vice President/Investments James D. MacKinnon
Second Vice President/Investments Kathleen B. Madden
Second Vice President/Investments Jeffrey T. McGlaun
Second Vice President/Investments Paul D. Mier
Second Vice President/Investments Thomas L. Nordstrom
Second Vice President/Investments Ralph M. O'Brien
Second Vice President/Investments Douglas H. Owen, Jr.
Second Vice President/Investments Dennis Roland
Second Vice President/Investments James D. Ross
Second Vice President/Investments J. Alan Schork
Second Vice President/Investments Lindsay Schumacher
Second Vice President/Investments Michael B. Shaffer
Second Vice President/Investments Clifford Sheets
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Second Vice President/Investments Michael B. Simpson
Second Vice President/Investments Jon L. Skaggs
Second Vice President/Investments Elizabeth A. Smedley
Second Vice President/Investments Michael S. Smith
Second Vice President/Investments Anne M. Spaes
Second Vice President/Investments Donna J. Spalding
Second Vice President/Investments Bradley L. Stofferahn
Second Vice President/Investments Randall K. Waddell
Second Vice President/Investments Marcia Weiland
Second Vice President/Investments Tammy C. Wetterer
Second Vice President/Special Markets Kim A. Bivins
Second Vice President/Special Markets Gregory M. Curry
Second Vice President/Special Markets Lisa L. Patterson
Second Vice President/Special Markets Rhonda L. Pritchett
Second Vice President/Special Markets Thomas E. Walsh
Second Vice President/Special Markets Harvey Willis
Assistant Secretary Colleen S. Lyons
Assistant Secretary Mary L. Schaefer
Assistant Secretary Gregory E. Miller - Breetz
Assistant Secretary R. Michael Slaven
Assistant Secretary Craig D. Vermie
Advertising Compliance Officer Nancy E. Partington
Product Compliance Officer James T. Bradley
DIRECTORS:
Jay H. Berman Danny L. Kolseud
Bart Herbert, Jr. Douglas A. Sarcia
G. Douglas Mangum, Jr. Brian A. Smith
Larry N. Norman Craig D. Vermie
Brenda K. Clancy
</TABLE>
*The business address of each director and officer of Providian Life and Health
Insurance Company is 20 Moores Road, Frazer, Pennsylvania 19355; 400 West Market
Street, Louisville, Kentucky 40202 or 4333 Edgewood Road NE, Cedar Rapids, Iowa
52499.
3
<PAGE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT.
The Depositor, Peoples Benefit Life Insurance Company ("Peoples Benefit") is
indirectly wholly owned by AEGON USA, Inc. The Registrant is a segregated asset
account of Peoples Benefit.
The following chart indicates the persons controlled by or under common con-
trol with Peoples Benefit.
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF VOTING
NAME INCORPORATION SECURITIES OWNED BUSINESS
---- --------------- ----------------- --------
<S> <C> <C> <C>
AEGON N.V. Netherlands Corporation 53.63% of Vereniging Holding company
AEGON Netherlands
Membership Association
Groninger Financieringen Netherlands Corporation 100% of AEGON N.V. Holding company
B.V. Netherlands Corporation
AEGON Netherland N.V. Netherlands Corporation 100% of AEGON N.V. Holding company
Netherlands Corporation
AEGON Nevak Holding B.V. Netherlands Corporation 100% of AEGON N.V. Holding company
Netherlands Corporation
AEGON International N.V. Netherlands Corporation 100% of AEGON N.V. Holding company
Netherlands Corporation
Voting Trust Trustees: Delaware Voting Trust
K.J. Storm
Donald J. Shepard H.B.
Van Wijk Dennis Hersch
AEGON U.S. Holding Delaware 100% of Voting Trust Holding company
Corporation
Short Hills Management New Jersey 100% of AEGON U.S. Holding company
Company Holding Corporation
CORPA Reinsurance New York 100% of AEGON U.S. Holding company
Company Holding Corporation
AEGON Management Company Indiana 100% of AEGON U.S. Holding company
Holding Corporation
RCC North America Inc. Delaware 100% of AEGON U.S. Holding company
Holding Corporation
AEGON USA, Inc. Iowa 100% AEGON U.S. Holding Holding company
Corporation
AUSA Holding Company Maryland 100% AEGON USA, Inc. Holding company
Monumental General Maryland 100% AUSA Holding Co. Holding company
Insurance Group, Inc.
Trip Mate Insurance Kansas 100% Monumental General Sale/admin. of travel
Agency, Inc. Insurance Group, Inc. insurance
Monumental General Maryland 100% Monumental General Provides management
Administrators, Inc. Insurance Group, Inc. srvcs. to unaffiliated
third party
administrator
Executive Management and Maryland 100% Monumental General Provides actuarial
Consultant Services, Administrators, Inc. consulting services
Inc.
Monumental General Mass Maryland 100% Monumental General Marketing arm for sale
Marketing, Inc. Insurance Group, Inc. of mass marketed
insurance coverages
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF VOTING
NAME INCORPORATION SECURITIES OWNED BUSINESS
---- --------------- ----------------- --------
<S> <C> <C> <C>
Diversified Investment Delaware 100% AUSA Holding Co. Registered investment
Advisors, Inc. advisor
Diversified Investors Delaware 100% Diversified Broker-Dealer
Securities Corp. Investment Advisors,
Inc.
AEGON USA Securities, Iowa 100% AUSA Holding Co. Broker-Dealer
Inc.
Supplemental Ins. Tennessee 100% AUSA Holding Co. Insurance
Division, Inc.
Creditor Resources, Inc. Michigan 100% AUSA Holding Co. Credit insurance
CRC Creditor Resources Canada 100% Creditor Resources, Insurance agency
Canadian Dealer Network Inc.
Inc.
AEGON USA Investment Iowa 100% AUSA Holding Co. Investment advisor
Management, Inc.
AEGON USA Realty Iowa 100% AUSA Holding Co. Provides real estate
Advisors, Inc. administrative and real
estate investment
services
Quantra Corporation Delaware 100% AEGON USA Realty Real estate and
Advisors, Inc. financial software
production and sales
Quantra Software Delaware 100% Quantra Corporation Manufacture and sell
Corporation mortgage loan and
security management
software
Landauer Realty Iowa 100% AEGON USA Realty Real estate counseling
Advisors, Inc. Advisors, Inc.
Landauer Associates, Delaware 100% AEGON USA Realty Real estate counseling
Inc. Advisors, Inc.
Realty Information Iowa 100% AEGON USA Realty Information Systems for
Systems, Inc. Advisors, Inc. real estate investment
management
AEGON USA Realty Iowa 100% AEGON USA Realty Real estate management
Management, Inc Advisors, Inc.
USP Real Estate Iowa 21.89% First AUSA Life Real estate investment
Investment Trust Ins. Co. trust
13.11% PFL Life Ins. Co.
4.86% Bankers United
Life Assurance Co.
RCC Properties Limited Iowa AEGON USA Realty Limited Partnership
Partnership Advisors, Inc. is
General Partner and 5%
owner.
AUSA Financial Markets, Iowa 100% AUSA Holding Co. Marketing
Inc.
Endeavor Investment California 49.9% AUSA Financial General Partnership
Advisors Markets, Inc.
Universal Benefits Iowa 100% AUSA Holding Co. Third party
Corporation administrator
Investors Warranty of Iowa 100% AUSA Holding Co. Provider of automobile
America, Inc. extended maintenance
contracts
Massachusetts Fidelity Iowa 100% AUSA Holding Co. Trust company
Trust Co.
Money Services, Inc. Delaware 100% AUSA Holding Co. Provides financial
counseling for
employees and agents of
affiliated companies
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF VOTING
NAME INCORPORATION SECURITIES OWNED BUSINESS
---- --------------- ----------------- --------
<S> <C> <C> <C>
Zahorik Company, Inc. California 100% AUSA Holding Co. Broker-Dealer
ZCI, Inc. Alabama 100% Zahorik Company, Insurance agency
Inc.
AEGON Asset Management Delaware 100% AUSA Holding Co. Registered investment
Services, Inc. advisor
Intersecurities, Inc. Delaware 100% AUSA Holding Co. Broker-Dealer
ISI Insurance Agency, California 100% Western Reserve Insurance agency
Inc. Life Assurance Co.
of Ohio
ISI Insurance Agency of Ohio 100% ISI Insurance Insurance agency
Ohio, Inc. Agency, Inc.
ISI Insurance Agency of Texas 100% ISI Insurance Insurance agency
Texas, Inc. Agency, Inc.
ISI Insurance Agency of Massachusetts 100% ISI Insurance Insurance Agency
Massachusetts, Inc. Agency Inc.
Associated Mariner Michigan 100% Intersecurities, Holding co./management
Financial Group, Inc. Inc. services
Mariner Financial Michigan 100% Associated Broker/Dealer
Services, Inc. Mariner Financial
Group, Inc.
Mariner Planning Michigan 100% Mariner Financial planning
Corporation Financial Services,
Inc.
Associated Mariner Michigan 100% Associated Insurance agency
Agency, Inc. Mariner Financial
Group, Inc.
Associated Mariner Hawaii 100% Associated Insurance agency
Agency of Hawaii, Inc. Mariner Agency, Inc.
Associated Mariner Ins. Massachusetts 100% Associated Insurance agency
Agency of Mariner Agency, Inc.
Massachusetts, Inc.
Associated Mariner Ohio 100% Associated Insurance agency
Agency Ohio, Inc. Mariner Agency, Inc.
Associated Mariner Texas 100% Associated Insurance agency
Agency Texas, Inc. Mariner Agency, Inc.
Associated Mariner New Mexico 100% Associated Insurance agency
Agency New Mexico, Inc. Mariner Agency, Inc.
Mariner Mortgage Corp. Michigan 100% Associated Mortgage origination
Mariner Financial
Group, Inc.
Idex Investor Services, Florida 100% AUSA Holding Co. Shareholder services
Inc.
Idex Management, Inc. Delaware 50% AUSA Holding Co. Investment advisor
50% Janus Capital
Corp.
IDEX Series Fund Massachusetts Various Mutual fund
First AUSA Life Maryland 100% AEGON USA, Inc. Insurance holding
Insurance Company company
AUSA Life Insurance New York 100% First AUSA Life Insurance
Company, Inc. Insurance Company
Life Investors Insurance Iowa 100% First AUSA Life Insurance
Company of America Ins. Co.
Life Investors Alliance, Delaware 100% LIICA Purchase, own, and hold
LLC the equity interest of
other entities
Bankers United Life Iowa 100% Life Investors Insurance
Assurance Company Ins. Company of
America
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF VOTING
NAME INCORPORATION SECURITIES OWNED BUSINESS
---- --------------- ----------------- --------
<S> <C> <C> <C>
Life Investors Agency Iowa 100% Life Investors Marketing
Group, Inc. Ins. Company of
America
PFL Life Insurance Iowa 100% First AUSA Life Insurance
Company Ins. Co.
AEGON Financial Services Minnesota 100% PFL Life Marketing
Group, Inc. Insurance Co.
AEGON Assignment Kentucky 100% AEGON Financial Administrator of
Corporation of Kentucky Services Group, Inc. structured settlements
AEGON Assignment Illinois 100% AEGON Administrator of
Corporation Financial Services Structured Settlements
Group, Inc.
Southwest Equity Life Arizona 100% of Common Voting Insurance
Ins. Co. Stock First AUSA Life
Ins. Co.
Iowa Fidelity Life Arizona 100% of Common Voting Insurance
Insurance Co. Stock First AUSA Life
Ins. Co.
Western Reserve Life Ohio 100% First AUSA Life Insurance
Assurance Co. of Ohio Ins. Co.
AEGON Equity Group, Inc. Florida 100% Western Reserve Insurance Agency
Life Assurance Co. of
Ohio
WRL Series Fund, Inc. Maryland Various Mutual fund
WRL Investment Services, Florida 100% Western Reserve Provides administration
Inc. Life Assurance Co. of for affiliated mutual
Ohio fund
WRL Investment Florida 100% Western Reserve Registered investment
Management, Inc. Life Assurance Co. of advisor
Ohio
Monumental Life Maryland 26.77% First AUSA Insurance
Insurance Co. Life Ins. Co.
73.23% Capital General
Dev. Corp.
AEGON Special Markets Maryland 100% Monumental Life Marketing
Group, Inc. Ins. Co.
Monumental General Maryland 100% First AUSA Life Insurance
Casualty Co. Ins. Co.
United Financial Maryland 100% First AUSA Life General agency
Services, Inc. Ins. Co.
Bankers Financial Life Arizona 100% First AUSA Life Insurance
Ins. Co. Ins. Co.
The Whitestone Maryland 100% First AUSA Life Insurance agency
Corporation Ins. Co.
Cadet Holding Corp. Iowa 100% First AUSA Life Holding company
Insurance Company
Commonwealth General Delaware 100% AEGON USA, Inc. Holding company
Corporation ("CGC")
PB Series Trust Massachusetts N/A Mutual fund
Monumental Agency Group, Kentucky 100% CGC Provider of srvcs. to
Inc. ins. cos.
Benefit Plans, Inc. Delaware 100% CGC TPA for Peoples Security
Life Insurance Company
Durco Agency, Inc. Virginia 100% Benefit Plans, General agent
Inc.
Commonwealth General. Kentucky 100% CGC Administrator of
Assignment Corporation structured settlements
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF VOTING
NAME INCORPORATION SECURITIES OWNED BUSINESS
---- --------------- ----------------- --------
<S> <C> <C> <C>
AFSG Securities Pennsylvania 100% CGC Broker-Dealer
Corporation
PB Investment Advisors, Delaware 100% CGC Registered investment
Inc. advisor
Diversified Financial Delaware 100% CGC Provider of investment,
Products Inc. marketing and admin.
services to ins. cos.
AEGON USA Real Estate Delaware 100% Diversified Real estate and mortgage
Services, Inc. Financial Products Inc holding company
Capital Real Estate Delaware 100% CGC Furniture and equipment
Development Corporation lessor
Capital General Delaware 100% CGC Holding company
Development Corporation
JMH Operating Company, Mississippi 100% Peoples Security Real estate holdings
Inc. Life Insurance Company
Independence Automobile Florida 100% Capital Security Automobile Club
Association, Inc. Life Insurance Company
Independence Automobile Georgia 100% Capital Security Automobile Club
Club, Inc. Life Insurance Company
Capital 200 Block Delaware 100% CGC Real estate holdings
Corporation
Capital Broadway Kentucky 100% CGC Real estate holdings
Corporation
Southlife, Inc. Tennessee 100% CGC Investment subsidiary
Ampac Insurance Agency, Pennsylvania 100% CGC Provider of management
Inc. (EIN 23-1720755) support services
National Home Life Pennsylvania 100% Ampac Insurance Special-purpose
Corporation Agency, Inc. subsidiary
Compass Rose Development Pennsylvania 100% Ampac Insurance Special-purpose
Corporation Agency, Inc. subsidiary
Frazer Association Illinois 100% Ampac Insurance TPA license-holder
Consultants, Inc. Agency, Inc.
Valley Forge Associates, Pennsylvania 100% Ampac Insurance Furniture & equipment
Inc. Agency, Inc. lessor
Veterans Benefits Plans, Pennsylvania 100% Ampac Insurance Administrator of group
Inc. Agency, Inc. insurance programs
Veterans Insurance Delaware 100% Ampac Insurance Special-purpose
Services, Inc. Agency, Inc. subsidiary
Financial Planning Dist. Columbia 100% Ampac Insurance Special-purpose
Services, Inc. Agency, Inc. subsidiary
Academy Insurance Group, Delaware 100% CGC Holding company
Inc.
Academy Life Missouri 100% Academy Insurance Insurance company
Insurance Co. Group, Inc.
Pension Life Insurance New Jersey 100% Academy Insurance Insurance company
Company of America Group, Inc.
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF VOTING
NAME INCORPORATION SECURITIES OWNED BUSINESS
---- --------------- ----------------- --------
<S> <C> <C> <C>
Academy Services, Inc. Delaware 100% Academy Insurance Special-purpose
Group, Inc. subsidiary
Ammest Development Corp. Kansas 100% Academy Insurance Special-purpose
Inc. Group, Inc. subsidiary
Ammest Insurance Agency, California 100% Academy Insurance General agent
Inc. Group, Inc.
Ammest Massachusetts Massachusetts 100% Academy Insurance Special-purpose
Insurance Agency, Inc. Group, Inc. subsidiary
Ammest Realty, Inc. Pennsylvania 100% Academy Insurance Special-purpose
Group, Inc. subsidiary
Ampac, Inc. Texas 100% Academy Insurance Managing general agent
Group, Inc.
Ampac Insurance Agency, Pennsylvania 100% Academy Insurance Special-purpose
Inc. Group, Inc. subsidiary
(EIN 23-2364438)
Data/Mark Services, Inc. Delaware 100% Academy Insurance Provider of mgmt.
Group, Inc. services
Force Financial Group, Delaware 100% Academy Insurance Special-purpose
Inc. Group, Inc. subsidiary
Force Financial Massachusetts 100% Force Fin. Group, Special-purpose
Services, Inc. Inc. subsidiary
Military Associates, Pennsylvania 100% Academy Insurance Special-purpose
Inc. Group, Inc. subsidiary
NCOA Motor Club, Inc. Georgia 100% Academy Insurance Automobile club
Group, Inc.
NCOAA Management Company Texas 100% Academy Insurance Special-purpose
Group, Inc. subsidiary
Unicom Administrative Pennsylvania 100% Academy Insurance Provider of admin.
Services, Inc. Group, Inc. services
Unicom Administrative Germany 100% Unicom Provider of admin.
Services, GmbH Administrative services
Services, Inc.
Capital Liberty, L.P. Delaware 99.0% Monumental Life Holding Company
Ins. Co.
1% CGC
Commonwealth General LLC Turks & 100% CGC Special-purpose
Caicos Islands subsidiary
Peoples Benefit Life Missouri 3.7% CGC Insurance company
Insurance Company 20% Capital Liberty,
L.P.
76.3% Monumental Life
Ins. Co.
Veterans Life Insurance Illinois 100% Peoples Benefit Insurance company
Co. Life Insurance Company
Peoples Benefit Pennsylvania 100% Veterans Life Ins. Special-purpose
Services, Inc. Co. subsidiary
</TABLE>
C-8
<PAGE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of February 28, 1999 there were 49,418 owners of Contracts.
ITEM 28. INDEMNIFICATION
Item 28 is incorporated by reference from the Post-Effective Amendment No. 6
to the Registration Statement of the National Home Life Assurance Company Sep-
arate Account II, File No. 33-7037.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None.
(b) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of The Continuum Company, Inc., Kansas City, Mis-
souri and The Vanguard Group, Inc., Valley Forge, Pennsylvania.
ITEM 31. MANAGEMENT SERVICES
All management contracts are discussed in Part A or Part B.
ITEM 32. UNDERTAKINGS
(a) Peoples Benefit Life Insurance Company represents that the fees and charges
deducted under the contracts in this registration statement, in the aggregate,
are reasonable in relation to the services rendered, the expenses expected to be
incurred and the risks assumed by Providian Life & Health In-surance Company.
C-10
<PAGE>
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant, Peoples Benefit Life Insurance Company Separate Account V,
certifies that it meets the requirements of Securities Act Rule 485(b) for
effectiveness of this amended Registration Statement and has caused this amended
Registration Statement to be signed on its behalf in the County of Jefferson and
Commonwealth of Kentucky on the 30th day of April, 1999.
PEOPLES BENEFIT LIFE INSURANCE COMPANY
SEPARATE ACCOUNT V (REGISTRANT)
By: Peoples Benefit Life Insurance Company
BART HERBERT, JR.
By: ___________________________________________
Bart Herbert, Jr., President
PEOPLES BENEFIT LIFE INSURANCE COMPANY
(DEPOSITOR)
BART HERBERT, JR.
By: ___________________________________________
Bart Herbert, Jr., President
*By: /s/ Gregory E. Miller-Breetz
------------------------------
Gregory E. Miller-Breetz
Attorney-in-fact
<PAGE>
As required by the Securities Act of 1933, this amended Registration
Statement has been duly signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
JAY H. BERMAN* Director April 30, 1999
- ---------------------------
Jay H. Berman
G. DOUGLAS MANGUM, JR.* Director and Senior Vice President April 30, 1999
- ---------------------------
G. Douglas Mangum, Jr.
MARTHA A. McCONNELL* Treasurer (Chief Accounting Officer) April 30, 1999
- ---------------------------
Martha A. McConnell
DOUGLAS A. SARCIA* Director and Vice President April 30, 1999
- ---------------------------
Douglas A. Sarcia
BRIAN A. SMITH* Director and Senior Vice President April 30, 1999
- ---------------------------
Brian A. Smith
BART HERBERT, JR.* Director and President April 30, 1999
- ---------------------------
Bart Herbert, Jr.
CRAIG D. VERMIE* Director April 30, 1999
- ---------------------------
Craig D. Vermie
*By: /s/ Gregory E. Miller - Breetz
------------------------------
Gregory E. Miller - Breetz
Attorney-in-fact
</TABLE>
<PAGE>
SEPARATE ACCOUNT IV
VANGUARD VARIABLE ANNUITY PLAN CONTRACT
INDEX TO EXHIBITS
EXHIBIT 9(a) OPINION AND CONSENT OF COUNSEL
EXHIBIT 9(b) CONSENT OF COUNSEL
EXHIBIT 10 CONSENT OF INDEPENDENT AUDITORS
<PAGE>
EXHIBIT 9(A)
April 30, 1999
PEOPLES BENEFIT LIFE INSURANCE COMPANY
ADMINISTRATIVE OFFICES
20 MOORES ROAD
FRAZER, PENNSYLVANIA 19355
RE: PEOPLES BENEFIT LIFE INSURANCE COMPANY
SEPARATE ACCOUNT IV--OPINION AND CONSENT
To Whom It May Concern:
This opinion and consent is furnished in connection with the filing of Post-
Effective Amendment No. 12 (the "Amendment") to the Registration Statement on
Form N-4, File No. 33-36073 (the "Registration Statement") under the Securities
Act of 1933, as amended (the "Act"), of Peoples Benefit Life Insurance Company
Separate Account IV ("Separate Account IV"). Separate Account IV receives and
invests premiums allocated to it under a flexible premium multi-funded annuity
contract (the "Annuity Contract"). The Annuity Contract is offered in the manner
described in the prospectus contained in the Registration Statement (the
"Prospectus").
In my capacity as legal adviser to Peoples Benefit Life Insurance Company, I
hereby confirm the establishment of Separate Account IV pursuant to a resolution
adopted by the Board of Directors of Peoples Benefit Life Insurance Company for
a separate account for assets applicable to the Annuity Contract, pursuant to
the provisions of Section 376.309 of the Missouri Insurance Statutes. In
addition, I have made such examination of the law in addition to consultation
with outside counsel and have examined such corporate records and such other
documents as I consider appropriate as a basis for the opinion hereinafter
expressed. On the basis of such examination, it is my professional opinion that:
1. Peoples Benefit Life Insurance Company is a corporation duly organized
and validly existing under the laws of the State of Missouri.
2. Separate Account IV is an account established and maintained by Peoples
Benefit Life Insurance Company pursuant to the laws of the State of Missouri,
under which income, capital gains and capital losses incurred on the assets of
Separate Account IV are credited to or charged against the assets of Separate
Account IV, without regard to the income, capital gains or capital losses
arising out of any other business which Peoples Benefit Life Insurance
Company may conduct.
3. Assets allocated to Separate Account IV will be owned by Peoples Benefit
Life Insurance Company. The assets in Separate Account IV attributable to the
Annuity Contract generally are not chargeable with liabilities arising out of
any other business which Peoples Benefit Life Insurance Company may conduct.
The assets of Separate Account IV are available to cover the general
liabilities of Peoples Benefit Life Insurance Company only to the extent that
the assets of Separate Account IV exceed the liabilities arising under the
Annuity Contracts.
4. The Annuity Contracts have been duly authorized by Peoples Benefit Life
Insurance Company and, when sold in jurisdictions authorizing such sales, in
accordance with the Registration Statement, will constitute validly issued
and binding obligations of Peoples Benefit Life Insurance Company in
accordance with their terms.
<PAGE>
Peoples Benefit Life Insurance Company
5. Owners of the Annuity Contracts as such, will not be subject to any de-
ductions, charges or assessments imposed by Peoples Benefit Life Insurance
Company other than those provided in the Annuity Contract.
I hereby consent to the use of this opinion as an exhibit to the Amendment and
to the reference to my name under the heading "Legal Matters" in the Prospec-
tus.
Very truly yours,
/s/ Gregory E. Miller - Breetz
Gregory E. Miller - Breetz
Assistant General Counsel
<PAGE>
EXHIBIT 9(b)
JORDEN BURT BOROS CICCKETTI BERENSON & JOHNSON LLP
1025 THOMAS JEFFERSON STREET, N.W.
SUITE 400-EAST
WASHINGTON, D.C. 20007-0805
(202) 965-8100
TELECOPIER (202) 965-8104
April 30, 1999
PEOPLES BENEFIT LIFE INSURANCE COMPANY
20 MOORES ROAD
FRAZER, PENNSYLVANIA 19355
Ladies and Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the Prospectus contained in Post-Effective Amendment No. 12 to the
Registration Statement on Form N-4 (file No. 33-36073) filed by Peoples Benefit
Life Insurance Company and Peoples Benefit Life Insurance Company Separate
Account IV with the Securities and Exchange Commission under the Securities Act
of 1933 and the Investment Company Act of 1940.
Very truly yours,
/s/ Jorden Burt Boros Ciccketti Berenson & Johnson LLP
Jorden Burt Boros Ciccketti Berenson & Johnson LLP
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Financial
Statements" in the Prospectus and Statement of Additional Information and
"Auditors" in the Prospectus, and to the use of our reports (1) dated January
29, 1999, with respect to the financial statements of the subaccounts of Peoples
Benefit Life Insurance Company Separate Account IV, which are available for
investment by the Vanguard Variable Annuity Plan contract owners, and (2)
February 19, 1999 with respect to the statutory-basis financial statements of
People's Benefit Life Insurance Company in Post-Effective Amendment No. 12 to
the Registration Statement (Form N-4 No. 33-36073) and related Prospectus of the
Vanguard Variable Annuity Plan.
/s/ Ernst & Young LLP
Des Moines, Iowa
April 27, 1999
