GREAT AMERICAN RESERVE INSURANCE COMPANY
Administrative Office:
Great American Reserve Insurance Company
11815 N. Pennsylvania Street
Carmel, Indiana 46032
(317) 817-3700
INDIVIDUAL AND GROUP FIXED AND VARIABLE
DEFERRED ANNUITY CONTRACTS AND CERTIFICATES
issued by
GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT G
and
GREAT AMERICAN RESERVE INSURANCE COMPANY
The individual and group fixed and variable deferred annuity contracts and
certificates (the "Contracts and Certificates") described in this Prospectus
provide for accumulation of values on a fixed and variable basis and monthly
payment of Annuity Payments on a fixed and variable basis. The Contracts and
Certificates are designed for use by individuals in retirement plans on a
Qualified or Non-Qualified basis. (See "Definitions.")
Purchase Payments for the Contracts/Certificates will be allocated to a
segregated investment account of Great American Reserve Insurance Company (the
"Company") which account has been designated Great American Reserve Variable
Annuity Account G (the "Variable Account") or to the Company's Market Value
Adjustment Account ("MVA Account"). The Variable Account invests in shares of
the following: Conseco Series Trust (Asset Allocation Portfolio, Common Stock
Portfolio, Corporate Bond Portfolio, Government Securities Portfolio and Money
Market Portfolio); Evergreen Variable Trust (Evergreen VA Fund, Evergreen VA
Foundation Fund and Evergreen VA Growth and Income Fund); Federated Insurance
Series (International Equity Fund II); The Alger American Fund (Alger American
Growth Portfolio, Alger American Leveraged AllCap Portfolio, Alger American
MidCap Growth Portfolio and Alger American Small Capitalization Portfolio);
INVESCO Variable Investment Funds, Inc. (INVESCO VIF-High Yield Portfolio and
INVESCO VIF-Industrial Income Portfolio); Lord Abbett Series Fund, Inc. (Growth
& Income Portfolio); The OFFITBANK Variable Insurance Fund, Inc. (OFFITBANK
VIF-Emerging Markets Fund and OFFITBANK VIF-Total Return Fund); and Van Eck
Worldwide Insurance Trust (Worldwide Emerging Markets Fund and Worldwide Hard
Assets Fund).
See "Highlights" and "Tax Status - Diversification" for a discussion of owner
control of the underlying investments in a variable annuity contract.
THE CONTRACTS AND CERTIFICATES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY FINANCIAL INSTITUTION, AND ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY. INVESTMENT IN THE CONTRACTS AND CERTIFICATES IS SUBJECT TO RISK THAT MAY
CAUSE THE VALUE OF THE OWNER'S OR CERTIFICATE OWNER'S INVESTMENT TO FLUCTUATE,
AND WHEN THE CONTRACTS AND CERTIFICATES ARE SURRENDERED, THE VALUE MAY BE HIGHER
OR LOWER THAN THE PURCHASE PAYMENTS.
This Prospectus concisely sets forth the information a prospective investor
should know before investing. Additional information about the Contracts and
Certificates is contained in the statement of additional information ("SAI")
which is available at no charge. The SAI has been filed with the Securities and
Exchange Commission and is incorporated herein by reference. The Table of
Contents of the SAI can be found on the last page of this Prospectus. For the
SAI, call (800) 342-6307 or write to the Company's Administrative Office at the
address listed above.
INQUIRIES:
Any inquiries can be made by telephone or in writing to the Administrative
Office listed above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus and the Statement of Additional Information are dated May 2,
1997.
Investors should read and retain this Prospectus for future reference.
TABLE OF CONTENTS
PAGE
DEFINITIONS
HIGHLIGHTS
General
Variable Account
MVA Account
Right to Examine Period
Charges
Mortality and Expense Risk Charge
Administrative Charge
Contract and Certificate Maintenance Charges
Transfer Fee
Premium and Other Taxes
Taxes
MVA Account
FEE TABLE
THE COMPANY
THE SEPARATE ACCOUNTS
ELIGIBLE FUNDS
Conseco Series Trust
Evergreen Variable Trust
Federated Insurance Series
The Alger American Fund
INVESCO Variable Investment Funds, Inc.
Lord Abbett Series Fund, Inc.
The OFFITBANK Variable Insurance Fund, Inc.
Van Eck Worldwide Insurance Trust
Voting Rights
Substitution of Securities
THE MVA ACCOUNT
CHARGES AND DEDUCTIONS
Deduction for Mortality and Expense Risk Charge
Deduction for Administrative Charge
Deduction for Contract and Certificate Maintenance Charges
Deduction for Transfer Fee
Deduction for Premium and Other Taxes
Deduction for Expenses of the Eligible Funds
THE CONTRACTS AND CERTIFICATES
Owner/Certificate Owner
Joint Owners/Joint Certificate Owners
Group Contract Owner
Annuitant
Assignment
PURCHASE PAYMENTS, CONTRACT VALUE AND CERTIFICATE VALUE
Purchase Payments
Allocation of Purchase Payments
Dollar Cost Averaging
Rebalancing
Contract Value
Certificate Value
Accumulation Units
Accumulation Unit Value
TRANSFERS
Transfers During the Accumulation Period
Transfers During the Annuity Period
WITHDRAWALS
Systematic Withdrawal Program
Suspension or Deferral of Payments
PROCEEDS PAYABLE ON DEATH
Death of Owner or Certificate Owner During the Accumulation Period
Death Benefit Amount During the Accumulation Period
Death Benefit Options During the Accumulation Period
Death of Owner/Certificate Owner During the Annuity Period
Death of Annuitant
Payment of Death Benefit
Beneficiary
Change of Beneficiary
ANNUITY PROVISIONS
General
Annuity Date
Selection or Change of an Annuity Option
Frequency and Amount of Annuity Payments
Annuity Options
OPTION 1. LIFETIME ONLY ANNUITY
OPTION 2. LIFETIME ANNUITY WITH GUARANTEED PERIODS
OPTION 3. INSTALLMENT REFUND LIFE ANNUITY
OPTION 4. PAYMENT FOR A FIXED PERIOD
OPTION 5. JOINT AND SURVIVOR ANNUITY
Annuity
Fixed Annuity
Variable Annuity
DISTRIBUTOR
PERFORMANCE INFORMATION
Money Market Sub-Account
Other Sub-Accounts
TAX STATUS
General
Diversification
Multiple Contracts and Certificates
Contracts and Certificates Owned by Non-Natural Persons
Tax Treatment of Assignments
Income Tax Withholding
Tax Treatment of Withdrawals -- Non-Qualified Contracts and Certificates
Qualified Plans
Tax Treatment of Withdrawals -- Qualified Contracts and Certificates
Tax-Sheltered Annuities -- Withdrawal Limitations
ADDITIONAL INFORMATION ABOUT THE COMPANY
Selected Historical Financial Information of the Company
Business of Great American Reserve
Management's Discussion and Analysis of Financial Condition
and Results of Operations of Great American Reserve
The Company's Directors and Executive Officers
Executive Compensation
LEGAL PROCEEDINGS
ADDITIONAL INFORMATION ABOUT THE VARIABLE ACCOUNT
REGISTRATION STATEMENT
LEGAL OPINIONS
EXPERTS
FINANCIAL STATEMENTS
APPENDIX A
APPENDIX B
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
DEFINITIONS
ACCOUNT(S): The MVA Account and/or one or more of the Sub-Accounts of the
Variable Account.
ACCUMULATION PERIOD: The period prior to the Annuity Date during which Purchase
Payments may be made by an Owner or a Certificate Owner.
ACCUMULATION UNIT: A unit of measure used to determine the value of the Owner's
or Certificate Owner's interest in a Sub-Account of the Variable Account during
the Accumulation Period.
ADJUSTED CERTIFICATE VALUE: The Certificate Value less any applicable Premium
Tax, and Certificate Maintenance Charge (see "Charges and Deductions") and plus
the applicable Market Value Adjustment which may be positive or negative. This
amount is applied to the applicable annuity tables to determine Annuity
Payments.
ADJUSTED CONTRACT VALUE: The Contract Value less any applicable Premium Tax and
Contract Maintenance Charge (see "Charges and Deductions") and plus the
applicable Market Value Adjustment which may be positive or negative. This
amount is applied to the applicable annuity tables to determine Annuity Payments
under an individual Contract.
ADMINISTRATIVE OFFICE: The office indicated on the cover page of this Prospectus
to which notices, requests and Purchase Payments must be sent. All sums payable
to the Company under a Contract or Certificate are payable at the Administrative
Office or an address designated by the Company.
AGE: The age of any Owner, Certificate Owner or Annuitant on his/her last
birthday. For joint Owners and joint Certificate Owners, all provisions which
are based on age are based on the age of the older of the joint Owners or joint
Certificate Owners.
ANNUITANT: The natural person on whose life Annuity Payments are based. On or
after the Annuity Date, the Annuitant shall also include any joint Annuitant.
ANNUITY DATE: The date on which Annuity Payments begin.
ANNUITY OPTIONS: Options available for Annuity Payments.
ANNUITY PAYMENTS: The series of payments made to the Owner or Certificate Owner
or any named payee after the Annuity Date under the Annuity Option selected.
ANNUITY PERIOD: The period of time beginning with the Annuity Date during which
Annuity Payments are made.
ANNUITY UNIT: An accounting unit of measure used to calculate the amount of
Annuity Payments.
BENEFICIARY: The person(s) or entity(ies) who will receive the death benefit
payable under a Contract or Certificate.
CERTIFICATE: The document issued to a Certificate Owner to evidence a
Certificate Owner's Account established under a group Contract.
CERTIFICATE ANNIVERSARY: An anniversary of the Certificate Issue Date.
CERTIFICATE ISSUE DATE: The date a Certificate is issued to a Certificate Owner.
CERTIFICATE OWNER: A person who has established a Certificate Owner's Account
under a group Contract.
CERTIFICATE OWNER'S ACCOUNT: A record established for each Certificate Owner to
maintain values under a group Contract.
CERTIFICATE VALUE: The dollar value as of any Valuation Period of all amounts in
a Certificate Owner's Account.
CERTIFICATE WITHDRAWAL VALUE: The Certificate Value less any applicable Premium
Tax, less any applicable Certificate Maintenance Charge (see "Charges and
Deductions") and plus any Market Value Adjustment which may be positive or
negative.
CERTIFICATE YEAR: The first Certificate Year is the annual period which begins
on the Certificate Issue Date. Subsequent Certificate Years begin on each
anniversary of the Certificate Issue Date.
CODE: The Internal Revenue Code of 1986, as amended.
COMPANY: Great American Reserve Insurance Company.
CONTRACT ANNIVERSARY: An anniversary of the Contract Issue Date.
CONTRACT ISSUE DATE: The later of the date on the cover of the Contract or the
date Purchase Payments are received.
CONTRACT VALUE: The dollar value as of any Valuation Period of all amounts in an
individual Contract.
CONTRACT WITHDRAWAL VALUE: The Contract Value of an individual Contract less any
applicable Premium Tax, less any applicable Contract Maintenance Charge (see
"Charges and Deductions") and plus any Market Value Adjustment which may be
positive or negative.
CONTRACT YEAR: The first Contract Year is the annual period which begins on the
Contract Issue Date. Subsequent Contract Years begin on each anniversary of the
Contract Issue Date.
CREDITED INTEREST RATE: The interest rate credited to a Certificate Owner's
Account or Contract Value by the Company for any given Guarantee Period in the
MVA Account.
EFFECTIVE DATE: The effective date of a Guarantee Period with a Credited
Interest Rate.
ELIGIBLE FUND: An investment entity into which assets of the Variable Account
will be invested.
FIXED ANNUITY: A series of payments made during the Annuity Period which are
guaranteed as to dollar amount by the Company.
GENERAL ACCOUNT: The Company's general investment account which contains all the
assets of the Company with the exception of the Variable Account and other
segregated asset accounts.
GROUP CONTRACT OWNER: The person or entity to which a group Contract is issued.
GUARANTEE PERIOD: The period for which the Credited Interest Rate is credited in
the MVA Account. Each deposit or transfer to the MVA Account creates one or more
new Guarantee Period(s).
MARKET VALUE ADJUSTMENT: An adjustment to the amount withdrawn from or
transferred from the MVA Account prior to the end of the applicable Guarantee
Period. The adjustment reflects the change in the value of the funds withdrawn
or transferred due to the change in the interest rates since the beginning of
the Guarantee Period.
MVA ACCOUNT: A separate account which provides investment options where the
Company guarantees the rate of interest for a Guarantee Period and where
withdrawals or transfers may be subject to a Market Value Adjustment.
NET PURCHASE PAYMENT: A Purchase Payment less any applicable Premium Tax.
NON-QUALIFIED CONTRACTS AND CERTIFICATES: Contracts and Certificates issued
under non-qualified plans which are not Qualified Contracts and Certificates.
OWNER: The person or entity entitled to the ownership rights stated in an
individual Contract.
PORTFOLIO: A segment of an Eligible Fund which constitutes a separate and
distinct class of shares, which may also sometimes be referred to herein as a
Fund.
PREMIUM TAX: Any premium taxes incurred to any governmental entity assessed
against Purchase Payments, Contract Values or Certificate Values.
PURCHASE PAYMENT: A payment made by or for an Owner or Certificate Owner.
QUALIFIED CONTRACTS AND CERTIFICATES: Contracts and Certificates issued under a
retirement plan which receive favorable tax treatment under Sections 403(b) or
408 of the Code.
SUB-ACCOUNT: Variable Account assets are divided into sub-accounts. Assets of
each Sub-Account will be invested in shares of an Eligible Fund or a Portfolio
of an Eligible Fund.
VALUATION DATE: Each day on which the New York Stock Exchange ("NYSE") is open
for business.
VALUATION PERIOD: The period of time beginning at the close of business of the
NYSE on each Valuation Date and ending at the close of business for the next
succeeding Valuation Date.
VARIABLE ACCOUNT: The Company's variable account designated as Great American
Reserve Variable Annuity Account G which provides investment options where the
benefits are variable and are not guaranteed as to dollar amount.
WRITTEN REQUEST: A request in writing, in a form satisfactory to the Company,
which is received by the Administrative Office.
HIGHLIGHTS
GENERAL
The Contracts and Certificates offered by this Prospectus are combined fixed and
variable deferred annuity contracts and certificates issued by Great American
Reserve Insurance Company (the "Company"). Pursuant to selections made by the
Owner or Certificate Owner, Net Purchase Payments are allocated to a segregated
investment account of the Company which has been designated Great American
Reserve Variable Annuity Account G (the "Variable Account"), and/or the MVA
Account, which is a separate account where the Company guarantees the rate of
interest for a specified period and where withdrawals or transfers may be
subject to a Market Value Adjustment. Owners and Certificate Owners may invest
in up to fifteen (15) Sub-Accounts.
VARIABLE ACCOUNT
The Variable Account is divided into Sub-Accounts. The Sub-Accounts invest in
the following:
Conseco Series Trust
Asset Allocation Portfolio
Common Stock Portfolio
Corporate Bond Portfolio
Government Securities Portfolio
Money Market Portfolio
Evergreen Variable Trust
Evergreen VA Fund
Evergreen VA Foundation Fund
Evergreen VA Growth and Income Fund
Federated Insurance Series
International Equity Fund II (formerly, International Stock Fund)
The Alger American Fund
Alger American Growth Portfolio
Alger American Leveraged AllCap Portfolio
Alger American MidCap Growth Portfolio
Alger American Small Capitalization Portfolio
INVESCO Variable Investment Funds, Inc.
INVESCO VIF - High Yield Portfolio
INVESCO VIF - Industrial Income Portfolio
Lord Abbett Series Fund, Inc.
Growth and Income Portfolio
The OFFITBANK Variable Insurance Fund, Inc.
OFFITBANK VIF - Emerging Markets Fund
OFFITBANK VIF - Total Return Fund
Van Eck Worldwide Insurance Trust
Worldwide Emerging Markets Fund
Worldwide Hard Assets Fund (formerly, Gold and Natural Resources Fund)
Owners and Certificate Owners bear the investment risk for all amounts allocated
to the Variable Account.
MVA ACCOUNT
The MVA Account offers investment options which pay fixed rates of interest
declared by the Company for specified periods (currently, 1 year, 3 years, 5
years, 7 years and 10 years) from the date amounts are allocated to the MVA
Account. Please contact the Company or the representative from whom this
Prospectus was obtained for information as to currently available options.
Such declared rates will vary from time to time but will not be less than 3% per
annum, and, once established for a particular allocation, will not change during
the Guarantee Period. However, withdrawals, transfers or annuitization prior to
the end of the Guarantee Period may be subject to a Market Value Adjustment.
Owners and Certificate Owners bear the risk that amounts reallocated within, or
prematurely withdrawn, transferred or annuitized from the MVA Account prior to
the end of the respective Guarantee Period could result in the Owner or
Certificate Owner receiving less than the Purchase Payments or amounts so
allocated.
RIGHT TO EXAMINE PERIOD
The individual Contract or Certificate may be returned to the Company for any
reason within ten (10) calendar days, or longer in states where required (thirty
(30) calendar days if purchased by individuals who are 60 years of age or older
in California or twenty (20) calendar days from the date of receipt with respect
to the circumstances described in (c) below), after its receipt by the Owner or
Certificate Owner ("Right to Examine Period"). It may be returned to the Company
at its Administrative Office. When the Contract or Certificate is received by
the Company at its Administrative Office, it will be voided as if it had never
been in force. Upon its return, the Company will refund the Contract Value or
Certificate Value next computed after receipt of the Contract or Certificate by
the Company at its Administrative Office except in the following circumstances:
(a) where the Contract or Certificate is purchased pursuant to an individual
retirement annuity; (b) in those states which require the Company to refund
Purchase Payments, less withdrawals; or (c) in the case of Contracts or
Certificates which are deemed by certain states to be replacing an existing
annuity or insurance contract and which require the Company to refund Purchase
Payments, less withdrawals. With respect to the circumstances described in (a),
(b) and (c) above, the Company will refund Purchase Payments, less any
withdrawals. The Company has reserved the right, under certain circumstances, to
allocate initial Purchase Payments to the Money Market Sub-Account (except those
allocated to the MVA Account) until the expiration of the Right to Examine
Period. In the event that the Company does so allocate initial Purchase Payments
to the Money Market Sub-Account, at the end of the Right to Examine Period, the
Contract Value/Certificate Value allocated to the Money Market Sub-Account will
be allocated to the Sub-Account(s) selected by the Owner/Certificate Owner.
Currently, however, the Company will allocate the initial Purchase Payment
directly to the Sub-Account(s) of the Variable Account and/or the MVA Account,
as selected by the Owner/Certificate Owner.
CHARGES
MORTALITY AND EXPENSE RISK CHARGE. Each Valuation Period, the Company
deducts a Mortality and Expense Risk Charge from the Variable Account which is
equal, on an annual basis, to 1.15% of the average daily net asset value of each
Sub-Account of the Variable Account. However, the Company may increase this
charge, but it will not exceed 1.25% of the average daily net asset value of the
Variable Account. This charge compensates the Company for assuming the mortality
and expense risks under the Contracts and Certificates. (See "Charges and
Deductions -Deduction for Mortality and Expense Risk Charge.")
ADMINISTRATIVE CHARGE. Each Valuation Period, the Company deducts an
Administrative Charge from the Variable Account which is equal, on an annual
basis, to .15% of the average daily net asset value of each Sub-Account of the
Variable Account. However, the Company may increase this charge, but it will not
exceed .25% of the average daily net asset value of the Variable Account. This
charge compensates the Company for costs associated with the administration of
the Contracts, Certificates and the Variable Account. (See "Charges and
Deductions -Deduction for Administrative Charge.")
CONTRACT AND CERTIFICATE MAINTENANCE CHARGES. The Company makes a deduction
of $30.00 each Contract or Certificate Year. However, during the Accumulation
Period if the Contract Value or the Certificate Value on the Contract or
Certificate Anniversary is at least $25,000, then no Contract or Certificate
Maintenance Charge is deducted. If a total withdrawal is made on other than a
Contract or Certificate Anniversary and the Contract Value or the Certificate
Value for the Valuation Period during which the total withdrawal is made is less
than $25,000, the full Contract or Certificate Maintenance Charge will be
deducted at the time of the total withdrawal. During the Annuity Period, no
Contract or Certificate Maintenance Charge is deducted. (See "Charges and
Deductions - Deduction for Contract and Certificate Maintenance Charges.")
TRANSFER FEE. Under certain circumstances, a Transfer Fee may be assessed
when an Owner or Certificate Owner transfers Contract Values or Certificate
Values between Sub-Accounts of the Variable Account or to or from the MVA
Account. The Transfer Fee is the lesser of $25 or 2% of the amount transferred.
(See "Charges and Deductions - Deduction for Transfer Fee.")
PREMIUM AND OTHER TAXES. Certain states and other governmental entities
impose premium and other taxes based on Purchase Payments received by the
Company. It is the Company's current practice to deduct a charge for Premium
Taxes from an Owner's Contract Value or a Certificate Owner's Certificate Value,
if applicable at the time Annuity Payments begin or from amounts that are
withdrawn (although the deduction could be taken from Purchase Payments in the
future). (See "Charges and Deductions - Deduction for Premium and Other Taxes.")
TAXES
There is a ten percent (10%) federal income tax penalty that may be applied to
the taxable income portion of any distribution from the Contracts and
Certificates. However, the penalty is not imposed under certain circumstances.
See "Tax Status - Tax Treatment of Withdrawals - Non-Qualified Contracts and
Certificates" and "Tax Treatment of Withdrawals - Qualified Contracts and
Certificates."
Withdrawals of amounts attributable to contributions made pursuant to a salary
reduction agreement (as defined in Section 403(b)(11) of the Code) are limited
to circumstances only when an Owner/Certificate Owner: (1) attains age 59 1/2;
(2) separates from service; (3) dies; (4) becomes disabled (within the meaning
of Section 72(m)(7) of the Code); or (5) in the case of hardship. However,
withdrawals for hardship are restricted to the portion of the Owner's Contract
Value or Certificate Owner's Certificate Value which represents contributions
made by the Owner/Certificate Owner and does not include any investment results.
The limitations on withdrawals became effective on January 1, 1989 and only
apply to (i) salary reduction contributions made after December 31, 1988; (ii)
to income attributable to such contributions; and (iii) to income attributable
to amounts held as of December 31, 1988. The limitations on withdrawals do not
affect rollovers or transfers between certain Qualified Plans. Owners and
Certificate Owners should consult their own tax counsel or other tax adviser
regarding distributions. (See "Tax Status - Tax Sheltered Annuities - Withdrawal
Limitations.")
The Treasury Department has indicated that guidelines may be forthcoming under
which a variable annuity contract will not be treated as an annuity contract for
tax purposes if the owner of the contract has excessive control over the
investment underlying the contract. The issuance of such guidelines may require
the Company to impose limitations on an Owner's or Certificate Owner's right to
control the investment. It is not known whether any such guidelines would have a
retroactive effect (see "Tax Status - Diversification").
For a further discussion of the taxation of the Contracts and Certificates, see
"Tax Status."
MVA ACCOUNT
Because of certain exemptive and exclusionary provisions, the MVA Account is not
registered as an investment company under the Investment Company Act of 1940, as
amended.
GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT G
FEE TABLE
OWNER AND CERTIFICATE OWNER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
<S> <C>
Sales Charge None
Transfer Fee (see Note 2 below) No charge for first transfer in a 30 day
period during the Accumulation Period and
no charge for four transfers per
Contract/Certificate Year during the
Annuity Period; thereafter the fee is the
lesser of $25 or 2% of the amount
transferred.
Contract and Certificate $30 per Contract/Certificate Year.
Maintenance Charges
(see Note 3 below)
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
VARIABLE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
Mortality and Expense Risk Charge 1.15%
Administrative Charge .15%
------
Total Variable Account Annual Expenses 1.30%
</TABLE>
CONSECO SERIES TRUST'S ANNUAL EXPENSES
(as a percentage of the average daily net assets of a Portfolio)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Management Other Total Expenses (after
Fees Expenses expense reimbursement)*
----------- --------- ------------------------
Asset Allocation Portfolio** .55% .20% .75%
Common Stock Portfolio** .60% .20% .80%
Corporate Bond Portfolio .50% .20% .70%
Government Securities Portfolio .50% .20% .70%
Money Market Portfolio** .25% .20% .45%
<FN>
* Conseco Capital Management, Inc., the investment adviser of Conseco Series
Trust, has voluntarily agreed to reimburse all expenses, including management
fees, in excess of the following percentage of the average annual net assets of
each listed Portfolio, so long as such reimbursement would not result in a
Portfolio's inability to qualify as a regulated investment company under the
Code: 0.75% for the Asset Allocation Portfolio; 0.80% for the Common Stock
Portfolio; 0.70% for the Corporate Bond Portfolio and Government Securities
Portfolio; and 0.45% for the Money Market Portfolio. The total percentages in
the above table is after reimbursement. In the absence of expense reimbursement,
the total fees and expenses in 1996 would have totaled: 0.95% for the Asset
Allocation Portfolio; 0.81% for the Common Stock Portfolio; 0.77% for the
Corporate Bond Portfolio; 0.91% for the Government Securities Portfolio; and
0.58% for the Money Market Portfolio.
**Conseco Capital Management, Inc., since January 1, 1993, has voluntarily
waived its Management Fees in excess of the annual rates set forth above. Absent
such fee waivers, the Management Fees would be: .65% for the Asset Allocation
Portfolio; .65% for the Common Stock Portfolio; and .50% for the Money Market
Portfolio.
</TABLE>
EVERGREEN VARIABLE TRUST'S ANNUAL EXPENSES
(as a percentage of the average daily net assets of a Portfolio)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Management Other
Fees Expenses Total Expenses*
----------- -------- -----------------
Evergreen VA Fund .95% .65% 1.60%
Evergreen VA Foundation Fund .825% .430% 1.255%
Evergreen VA Growth and Income
Fund .95% .50% 1.45%
<FN>
* The annual operating expenses and examples do not reflect fee waivers and
expense reimbursements for the most recent fiscal period. Actual expenses
net of fee waivers and expense reimbursements for the fiscal period ended
December 31, 1996 were 1.00% for each Fund.
</TABLE>
FEDERATED INSURANCE SERIES' ANNUAL EXPENSES
(as a percentage of the average daily net assets of a Portfolio)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Other
Expenses
Management (after expense Total
Fees reimbursement) Expenses
----------- -------------- ----------
International Equity Fund II* .00% 1.25% 1.25%
<FN>
*Federated Advisers, the investment adviser of Federated Insurance Series, has
voluntarily agreed to reimburse all or a portion of its advisory fee. In the
absence of such expense reimbursement, the maximum Management Fees would be
1.00% of the Fund's average daily net assets. The total operating expenses were
4.30% absent the voluntary waiver of the Management Fee and the voluntary
reimbursement of certain other operating expenses.
</TABLE>
THE ALGER AMERICAN FUND'S ANNUAL EXPENSES
(as a percentage of the average daily net assets of a Portfolio)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Management Other Total
Fees Expenses Expenses
----------- -------- ----------
Alger American Growth Portfolio .75% .04% .79%
Alger American Leveraged
AllCap Portfolio* .85% .24% 1.09%
Alger American MidCap Growth
Portfolio .80% .04% .84%
Alger American Small Capitali-
zation Portfolio .85% .03% .88%
<FN>
* Included in Other Expenses of the Alger American Leveraged AllCap Portfolio is
.03% of interest expense on borrowings made for leveraging purposes. (See The
Alger American Fund prospectus for more information).
</TABLE>
INVESCO VARIABLE INVESTMENT FUNDS, INC.'S ANNUAL EXPENSES
(as a percentage of the average daily net assets of a Portfolio)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Other Expenses
Management (after expense Total Operating
Fees reimbursement) Expenses
----------- --------------- ----------------
INVESCO VIF - High Yield
Portfolio (1)(2) .60% .27% .87%
INVESCO VIF - Industrial Income
Portfolio (1)(2) .75% .20% .95%
<FN>
(1) Certain expenses are being absorbed voluntarily by the investment adviser
and sub-adviser. Total expenses (after expenses were absorbed but before any
expense offset arrangement) of the INVESCO VIF - High Yield Portfolio and
INVESCO VIF - Industrial Income Portfolio for the year ended December 31, 1996
amounted to 0.87% and 0.95%, respectively, of each Portfolio's average net
assets. In the absence of such voluntary expense limitation, the total operating
expenses of the INVESCO VIF - High Yield Portfolio and INVESCO VIF - Industrial
Income Portfolio for the fiscal period ended December 31, 1996 would have been
1.32% and 1.19%, respectively, of each Portfolio's average net assets.
(2) It should be noted that the Portfolio's actual expenses were lower than the
figures shown because the Portfolio's custodian fees and pricing expenses were
reduced under expense offset arrangements. However, as a result of an SEC
requirement for mutual funds to state their total operating expenses without
crediting any such expense offset arrangements, the figures shown above do not
reflect these reductions.
</TABLE>
LORD ABBETT SERIES FUND, INC.'S ANNUAL EXPENSES
(as a percentage of the average daily net assets of a Portfolio)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Other Total
Management Operating Fund Annual
Fees 12b-1 Fees** Expenses Expenses
----------- ------------- ------------ -------------
Growth and Income
Portfolio .50% .07% .02% .59%
<FN>
** The Growth and Income Portfolio of Lord Abbett Series Fund, Inc. has a 12b-1
plan which provides for payments to Lord, Abbett & Co. for remittance to a life
insurance company for certain distribution expenses (see the Lord Abbett Series
Fund, Inc. prospectus). The 12b-1 plan provides that such remittances, in the
aggregate, will not exceed .15%, on an annual basis, of the daily net asset
value of shares of the Growth and Income Portfolio. As of the date of this
Prospectus, no payments have been made under the 12b-1 Plan. For the year ending
December 31, 1997, the 12b-1 fees are estimated to be .07%. The examples below
for this Portfolio reflect the estimated 12b-1 fees.
</TABLE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.'S ANNUAL EXPENSES
(as a percentage of average daily net assets of a Portfolio)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Other Expenses
(after expense
Management Fees reimbursement)* Total Expenses
--------------- --------------- ---------------
OFFITBANK VIF -
Emerging Markets
Fund .90% .60% 1.50%
OFFITBANK VIF -
Total Return Fund+ .70% .50% 1.20%
<FN>
* The adviser has agreed to reimburse Other Expenses of the OFFITBANK VIF-
Emerging Markets Fund ("Emerging Markets Fund") and the OFFITBANK VIF - Total
Return Fund ("Total Return Fund") such that the Total Expenses do not exceed
1.50% and 1.20% respectively of each Fund's average daily net assets. Absent
such reimbursement, the Other Expenses and the Total Expenses for the year
ending December 31, 1997 are estimated to be .53% and 1.33% for the Total Return
Fund. Given the projected asset size of the Emerging Markets Fund, it is not
anticipated that an expense reimbursement will be necessary with respect to that
Fund. Bisys Fund Services, Inc. serves as the administrator to the OFFITBANK
Variable Insurance Fund, Inc. and receives an administration fee equal to .15%
of aggregate average daily net assets of the Funds which is currently being
waived in 1997.
+ The amounts shown above for the Total Return Fund represent the fees and
expenses only with respect to that portion of the Fund's assets which is not
invested in the underlying funds. To the extent that the Total Return Fund
invests in the underlying funds (see "Eligible Funds - The OFFITBANK Variable
Insurance Fund, Inc. - OFFITBANK VIF - Total Return Fund"), the Total Return
Fund will indirectly bear a pro rata share of fees and expenses incurred by the
underlying funds (see the prospectus for the Total Return Fund for the fees of
the underlying funds).
</TABLE>
VAN ECK WORLDWIDE INSURANCE TRUST'S ANNUAL EXPENSES
(As a percentage of average daily net assets of a Portfolio)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Other Expenses
Management (after expense
Fees reimbursement) Total Expenses
----------- -------------- -----------------
Worldwide Emerging Markets Fund* 1.00% .50% 1.50%
Worldwide Hard Assets Fund 1.00% .23% 1.23%
<FN>
* Expenses for Worldwide Emerging Markets Fund currently are being voluntarily
capped by the Fund's investment adviser at 1.50% of average net assets. In the
absence of the investment adviser's absorption of these expenses, Management
Fees for this Fund would be 1.00% of the Fund's average daily net assets and
Other Expenses and Total Expenses would be 1.64% and 2.64%, respectively.
</TABLE>
EXAMPLES (See Note 4 below)
Owner/Certificate Owner would pay the following expenses on a $1,000 investment,
assuming a 5% annual return on assets regardless of whether the
Contract/Certificate is surrendered at the end of each time period or if the
Contract/Certificate is annuitized.
<TABLE>
<CAPTION>
<S> <C> <C>
1 Year 3 Years
--------- ----------
Conseco Series Trust
Asset Allocation Portfolio $ 21 $ 66
Common Stock Portfolio $ 22 $ 67
Corporate Bond Portfolio $ 21 $ 64
Government Securities Portfolio $ 21 $ 64
Money Market Portfolio $ 18 $ 57
Evergreen Variable Trust
Evergreen VA Fund $ 30 $ 91
Evergreen VA Foundation Fund $ 26 $ 81
Evergreen VA Growth and Income Fund $ 28 $ 87
Federated Insurance Series
International Equity Fund II $ 26 $ 81
The Alger American Fund
Alger American Growth Portfolio $ 22 $ 67
Alger American Leveraged AllCap
Portfolio $ 25 $ 76
Alger American MidCap Growth
Portfolio $ 22 $ 68
Alger American Small Capitalization
Portfolio $ 23 $ 70
INVESCO Variable Investment Funds, Inc.
INVESCO VIF - High Yield Portfolio $ 22 $ 69
INVESCO VIF - Industrial Income Portfolio $ 23 $ 72
Lord Abbett Series Fund, Inc.
Growth & Income Portfolio $ 20 $ 61
The OFFITBANK Variable Insurance
Fund, Inc.
OFFITBANK VIF - Emerging Markets Fund $ 29 $ 88
OFFITBANK VIF - Total Return Fund $ 26 $ 79
Van Eck Worldwide Insurance Trust
Worldwide Emerging Markets Fund $ 29 $ 88
Worldwide Hard Assets Fund $ 26 $ 80
<FN>
THE ANNUAL EXPENSES OF THE ELIGIBLE FUNDS AND THE EXAMPLES ARE BASED ON DATA
PROVIDED BY THE RESPECTIVE ELIGIBLE FUNDS. THE COMPANY HAS NOT INDEPENDENTLY
VERIFIED SUCH DATA.
</TABLE>
NOTES TO FEE TABLE AND EXAMPLES
1. The Fee Table is provided to assist Owners and Certificate Owners in
understanding the various costs and expenses that they will bear directly or
indirectly. The Fee Table reflects expenses of both the Variable Account and the
Eligible Funds. For more complete descriptions of the various costs and expenses
involved, see "Charges and Deductions" in this Prospectus and the prospectuses
for the Eligible Funds. Premium Taxes may also be applicable, although they do
not appear in this table.
2. Any transfers made pursuant to an approved Dollar Cost Averaging Program
and/or Rebalancing Program will not be counted in determining the application of
the Transfer Fee. All reallocations on the same day count as one transfer.
3. During the Accumulation Period, if the Owner's Contract Value or the
Certificate Owner's Certificate Value on the Contract or Certificate Anniversary
is at least $25,000, then no Contract or Certificate Maintenance Charge is
deducted. If a total withdrawal is made on other than a Contract or Certificate
Anniversary and the Contract Value/Certificate Value for the Valuation Period
during which the total withdrawal is made is less than $25,000, the full
Contract or Certificate Maintenance Charge will be deducted at the time of the
total withdrawal. During the Annuity Period, no Contract or Certificate
Maintenance Charges are deducted. (See "Charges and Deductions.")
4. The Examples assume an estimated $40,000 Contract Value or Certificate
Value so that the Contract and Certificate Maintenance Charges per $1,000 of net
asset value in the Variable Account is $.75. Such charge would be higher for
smaller values and lower for higher values.
THE COMPANY
Great American Reserve Insurance Company (the "Company" or "Great American
Reserve"), originally organized in 1937, is principally engaged in the life
insurance business in 47 states and the District of Columbia. The Company is a
stock company organized under the laws of the state of Texas and an indirect
wholly owned subsidiary of Conseco, Inc. ("Conseco"). The operations of the
Company are handled by Conseco. Conseco is a publicly owned financial services
holding company, the principal operations of which are the development,
marketing and administration of specialized annuity and life insurance products.
Conseco is located at 11825 N. Pennsylvania Street, Carmel, Indiana 46032.
All inquiries regarding Accounts, the Contracts/Certificates, or any related
matter should be directed to the Company's Variable Annuity Department at the
address and telephone number shown on the cover page of this Prospectus. The
financial statements of the Company included in this Prospectus should be
considered only as bearing upon the ability of the Company to meet the
obligations under the Contracts and Certificates. Neither the assets of Conseco
nor those of any company in the Conseco group of companies other than the
Company support these obligations. As of December 31, 1996, the Company had
total assets of $2.7 billion and total shareholder's equity of $396.9 million.
The Company does not guarantee the investment performance of the Variable
Account investment options.
For further information about the Company, see "Additional Information About the
Company."
THE SEPARATE ACCOUNTS
The Board of Directors of the Company adopted resolutions to establish
segregated asset accounts pursuant to Texas insurance law on January 18, 1996.
One segregated asset account has been designated Great American Reserve Variable
Annuity Account G (the "Variable Account"). The other separate account has been
designated Great American Reserve Market Value Adjustment Account (the "MVA
Account") (collectively, the "Separate Accounts"). The Company has caused the
Variable Account to be registered with the Securities and Exchange Commission as
a unit investment trust pursuant to the provisions of the Investment Company Act
of 1940, as amended.
The assets of the Separate Accounts are the property of the Company. However,
the assets of the Separate Accounts, equal to the reserves and other contract
liabilities with respect to the Separate Accounts, are not chargeable with
liabilities arising out of any other business the Company may conduct. Income,
gains and losses, whether or not realized, are, in accordance with the Contracts
and Certificates, credited to or charged against the Separate Accounts without
regard to other income, gains or losses of the Company. The Company's
obligations arising under the Contracts and Certificates are general
obligations.
The Separate Accounts meet the definition of a "separate account" under federal
securities laws.
The Variable Account is divided into Sub-Accounts. Each Sub-Account invests in
one Portfolio of an Eligible Fund.
ELIGIBLE FUNDS
The Variable Account invests in the shares of the Eligible Funds as described
below. The descriptions below contain a short discussion of the investment
objective(s). See Appendix A in this Prospectus and the prospectuses for the
Eligible Funds for further information.
There is no assurance that the investment objective of any of the Portfolios
will be met. Owners and Certificate Owners bear the complete investment risk for
Purchase Payments allocated to a Portfolio. Contract Values and Certificate
Values will fluctuate in accordance with the investment performance of the
Portfolios to which Purchase Payments are allocated, and in accordance with the
imposition of the fees and charges assessed under the Contracts and
Certificates.
DETAILED INFORMATION ABOUT THE ELIGIBLE FUNDS IS CONTAINED IN THE ACCOMPANYING
CURRENT PROSPECTUSES OF THE ELIGIBLE FUNDS. AN INVESTOR SHOULD CAREFULLY READ
THIS PROSPECTUS AND THE PROSPECTUSES OF THE ELIGIBLE FUNDS BEFORE ALLOCATING
AMOUNTS TO BE INVESTED IN THE VARIABLE ACCOUNT.
CONSECO SERIES TRUST
ASSET ALLOCATION PORTFOLIO: The Asset Allocation Portfolio seeks a high
total investment return, consistent with the preservation of capital and prudent
investment risk. The Portfolio seeks to achieve this objective by pursuing an
active asset allocation strategy whereby investments are allocated, based upon
thorough investment research, valuation and analysis of market trends and the
anticipated relative total return available, among various asset classes
including debt securities, equity securities, and money market instruments.
COMMON STOCK PORTFOLIO: The Common Stock Portfolio seeks to provide a high
total return consistent with preservation of capital and a prudent level of risk
primarily by investing in selected equity securities having the investment
characteristics of common stocks.
CORPORATE BOND PORTFOLIO: The Corporate Bond Portfolio seeks to provide as
high a level of income as is consistent with preservation of capital by
investing primarily in debt securities.
GOVERNMENT SECURITIES PORTFOLIO: The Government Securities Portfolio seeks
safety of capital, liquidity and current income by investing primarily in
securities issued by the U.S. Government, including mortgage-related securities.
MONEY MARKET PORTFOLIO: The Money Market Portfolio seeks current income
consistent with stability of capital and liquidity. An investment in this
Portfolio is neither insured nor guaranteed by the U.S. Government and there can
be no assurance that the Portfolio will be able to maintain a stable net asset
value of $1.00 per share.
EVERGREEN VARIABLE TRUST
EVERGREEN VA FUND: The Evergreen VA Fund seeks to achieve its investment
objective of capital appreciation principally through investments in common
stock and securities convertible into or exchangeable for common stock of
companies which are little-known, relatively small or represent special
situations which, in the Adviser's opinion, offer potential for capital
appreciation. Income will not be a factor in the selection of portfolio
investments.
EVERGREEN VA FOUNDATION FUND: The Evergreen VA Foundation Fund seeks, in
order of priority, reasonable income, conservation of capital and capital
appreciation. The Fund seeks to achieve these objectives by investing in a
combination of common stocks, preferred stocks, securities convertible into or
exchangeable for common stocks and fixed income securities.
EVERGREEN VA GROWTH AND INCOME FUND: The Evergreen VA Growth and Income
Fund seeks to achieve a return composed of capital appreciation in the value of
its shares and current income. The Fund seeks to achieve its investment
objective by investing in the securities of companies which are undervalued in
the marketplace relative to those companies' assets, breakup value, earnings, or
potential earnings growth.
FEDERATED INSURANCE SERIES
INTERNATIONAL EQUITY FUND II (formerly, International Stock Fund): The
International Equity Fund II seeks to obtain a total return on its assets. This
fund seeks to achieve its objective by investing at least 65% of its assets (and
under normal market conditions substantially all of its assets) in equity
securities of issuers in at least three different countries outside of the
United States. Investing in foreign securities generally involves risks not
ordinarily associated with investing in securities of domestic issuers.
Purchasers are cautioned to read "Risks Associated with Non-U.S. Securities" in
the Insurance Management Series Prospectus.
THE ALGER AMERICAN FUND
ALGER AMERICAN GROWTH PORTFOLIO: The investment objective of the Alger
American Growth Portfolio is long-term capital appreciation. Except during
temporary defensive periods, the Portfolio invests at least 65% of its total
assets in equity securities of companies that, at the time of purchase of the
securities, have total market capitalization of $1 billion or greater. The
Portfolio may invest up to 35% of its total assets in equity securities of
companies that, at the time of purchase, have total market capitalization of
less than $1 billion and in excess of that amount (up to 100% of its assets)
during temporary defensive periods.
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO: The Alger American Leveraged
AllCap Portfolio seeks long-term capital appreciation by investing in a
diversified, actively managed portfolio of equity securities. The Portfolio may
engage in leveraging (up to 33 1/3% of its assets) and options and futures
transactions, which are deemed to be speculative and which may cause the
Portfolio's net asset value to be more volatile than the net asset value of a
fund that does not engage in these activities.
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO: The investment objective of the
Alger American MidCap Growth Portfolio is long-term capital appreciation. Except
during temporary defensive periods, the Portfolio invests at least 65% of its
total assets in equity securities of companies that, at the time of purchase of
the securities, have total market capitalization within the range of companies
included in the S&P MidCap 400 Index, updated quarterly.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO: The investment objective of
the Alger American Small Capitalization Portfolio is long-term capital
appreciation. Except during temporary defensive periods, the Portfolio invests
at least 65% of its total assets in equity securities of companies that, at the
time of purchase, have total market capitalization within the range of companies
included in the Russell 2000 Growth Index or the S&P Small Cap 600 Index,
updated quarterly. The Portfolio may invest up to 35% of its total assets in
equity securities of companies that, at the time of purchase, have total market
capitalization outside of this combined range and in excess of that amount (up
to 100% of its assets) during temporary defensive periods.
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO VIF - HIGH YIELD PORTFOLIO: The INVESCO VIF - High Yield Portfolio
seeks a high level of current income by investing substantially all of its
assets in lower rated bonds and other debt securities and in preferred stock.
The Portfolio pursues its investment objective through investment in a variety
of long-term, intermediate term, and short-term bonds. Potential capital
appreciation is a factor in the selection of investments, but is secondary to
the Portfolio's primary objective. The Portfolio invests primarily in lower
rated bonds, commonly known as "junk bonds." Investments of this type are
subject to greater risks, including default risks, than those found in higher
rated securities. See the Portfolio Prospectus for more information on the risks
associated with these types of investments.
INVESCO VIF - INDUSTRIAL INCOME PORTFOLIO: The INVESCO VIF - Industrial
Income Portfolio seeks the best possible current income while following sound
investment practices. Capital growth potential is an additional consideration in
the selection of portfolio securities.
The VIF Industrial Income Portfolio normally invests at least 65% of its total
assets in dividend-paying common stocks. Up to 10% of the Portfolio's total
assets may be invested in equity securities that do not pay regular dividends.
The remaining assets are invested in other income-producing securities, such as
corporate bonds and other straight debt securities ("debt securities"). The
Portfolio also has the flexibility to invest in preferred stock and convertible
bonds. There is no maximum limit on the amount of equity or debt securities in
which the Portfolio may invest.
LORD ABBETT SERIES FUND, INC.
GROWTH AND INCOME PORTFOLIO: The Growth and Income Portfolio seeks
long-term growth of capital and income without excessive fluctuation in market
value. The Portfolio will invest in securities which are selling at reasonable
prices in relation to value. The Portfolio will normally invest in common stocks
(including securities convertible into common stocks) of large, seasoned
companies in sound financial condition, which common stocks are expected to show
above-average price appreciation.
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
OFFITBANK VIF - EMERGING MARKETS FUND: The investment objective of the
OFFITBANK VIF - Emerging Markets Fund is to provide a competitive total
investment return by focusing on current yield and opportunities for capital
appreciation. The Fund will seek to achieve its objective by investing primarily
in corporate and sovereign debt instruments of emerging market countries. Under
normal circumstances, the Fund will invest at least 80% of its total assets in
debt instruments, but may invest up to 20% of its total assets in equity
securities.
OFFITBANK VIF- TOTAL RETURN FUND: The OFFITBANK VIF - Total Return Fund's
investment objective is to maximize total return from a combination of capital
appreciation and current income. The Fund will seek to achieve its objective by
investing primarily in a diversified portfolio of fixed income securities of
varying maturities and by giving the adviser broad discretion to deploy the
Fund's assets among certain segments of the fixed income market that the adviser
believes will best contribute to the achievement of the Fund's objective. The
Fund may invest directly in the markets and securities described in the Fund
prospectus, or indirectly through investing in the other investment portfolios
of The OFFITBANK Variable Insurance Fund, Inc., including the OFFITBANK VIF-U.S.
Government Securities Fund, the OFFITBANK VIF-High Yield Fund and the OFFITBANK
VIF-Emerging Markets Fund (the "underlying funds").
VAN ECK WORLDWIDE INSURANCE TRUST
WORLDWIDE EMERGING MARKETS FUND: The Worldwide Emerging Markets Fund seeks
long-term capital appreciation by investing primarily in equity securities in
emerging markets around the world. The Fund emphasizes countries that, compared
to the world's major economies, exhibit relatively low gross national product
per capita as well as the potential for rapid economic growth. Emerging
countries can be found in regions such as Asia, Latin America, Eastern Europe
and Africa. Peregrine Asset Management (Hong Kong) Limited serves as
sub-investment adviser to the Fund. Investing in foreign securities generally
involves risks not ordinarily associated with investing in securities of
domestic issuers. Purchasers are cautioned to read "Risk Factors" in the Van Eck
Worldwide Insurance Trust Prospectus.
WORLDWIDE HARD ASSETS FUND (FORMERLY, GOLD AND NATURAL RESOURCES FUND): The
Worldwide Hard Assets Fund seeks long-term capital appreciation by investing
globally, primarily in "Hard Asset Securities." Hard Asset Securities include
equity securities of "Hard Asset Companies" and securities, including structured
notes, whose value is linked to the price of a Hard Asset commodity or a
commodity index. The term "Hard Asset Companies" includes companies that are
directly or indirectly (whether through supplier relationships, servicing
agreements or otherwise) engaged to a significant extent in the exploration,
development, production or distribution of one or more of the following
(together "Hard Assets"): (i) precious metals, (ii) ferrous and non-ferrous
metals, (iii) gas, petroleum, petrochemicals or other hydrocarbons, (iv) forest
products, (v) real estate and (vi) other basic non-agricultural commodities.
Under normal market conditions, the Fund will invest at least 5% of its assets
in each of the first five sectors listed above and may invest up to 50% of its
assets in any one of the above sectors. Income is a secondary consideration.
VOTING RIGHTS
In accordance with its view of present applicable law, the Company will vote the
shares of the Eligible Funds held in the Variable Account at special meetings of
the shareholders in accordance with instructions received from persons having
the voting interest in the Variable Account attributable to that option. The
Company will vote shares for which it has not received instructions, as well as
shares attributable to it, in the same proportion as it votes shares for which
it has received instructions. None of the Eligible Funds hold regular meetings
of shareholders.
The number of shares which a person has a right to vote will be determined as of
a date to be chosen by the Company. Voting instructions will be solicited by
written communication prior to the meeting.
SUBSTITUTION OF SECURITIES
If the shares of an Eligible Fund (or any Portfolio within an Eligible Fund or
any other Eligible Fund or Portfolio), are no longer available for investment by
the Variable Account or, if in the judgment of the Company's Board of Directors,
further investment in the shares should become inappropriate in view of the
purpose of the Contracts or Certificates, the Company may limit further purchase
of such shares or may substitute shares of another Eligible Fund or Portfolio
for shares already purchased under the Contracts and Certificates. No
substitution of securities may take place without prior approval of the
Securities and Exchange Commission and under the requirements it may impose.
Shares of the Eligible Funds are issued and redeemed in connection with
investments in and payments under certain variable annuity contracts and
variable life insurance policies of various life insurance companies which may
or may not be affiliated. In addition, certain Eligible Funds offer their shares
to qualified pension and retirements plans ("Qualified Plans"). The Eligible
Funds do not foresee any disadvantage to Owners or Certificate Owners arising
out of the fact that the Eligible Funds offer their shares for products offered
by life insurance companies which are not affiliated (or with respect to certain
Eligible Funds that may offer their shares to Qualified Plans). Nevertheless,
the Boards of Trustees or Boards of Directors, as applicable, of the Eligible
Funds intend to monitor events in order to identify any material irreconcilable
conflicts which may possibly arise and to determine what action, if any, should
be taken in response thereto. If such a conflict were to occur, one or more
insurance company separate accounts (or Qualified Plans) might withdraw its
investments in an Eligible Fund. An irreconcilable conflict might result in the
withdrawal of a substantial amount of a Portfolio's assets which could adversely
affect such Portfolio's net asset value per share.
THE MVA ACCOUNT
In addition to the Sub-Accounts of the Variable Account, Owners and Certificate
Owners may also allocate Net Purchase Payments or transfer values to the MVA
Account, which is a separate account where the Company guarantees the rate of
interest for a specified period.
Net Purchase Payments may be allocated to one or more of the MVA Account
Guarantee Period options. Currently, the Company offers five MVA Account
Guarantee Periods - 1 year, 3 years, 5 years, 7 years and 10 years. In addition,
during the Accumulation Period, Contract Values and Certificate Values can be
transferred from the Variable Account to one or more of the MVA Account
Guarantee Period options. There will be an initial Credited Interest Rate for
the initial Guarantee Period of the MVA Account. After the initial Guarantee
Period, the Credited Interest Rate for any subsequent Guarantee Period of the
MVA Account may change. All interest payable under a Contract or Certificate is
compounded daily at the stated effective annual interest rate. In no event will
the Credited Interest Rate be less than the minimum guaranteed interest rate,
prior to the application of the Market Value Adjustment.
During the thirty (30) days prior to the end of a current Guarantee Period, the
Owner or Certificate Owner may, by Written Request or pursuant to a telephone
transfer authorization, elect to renew for the same or any other Guarantee
Period then available at the then Credited Interest Rate or may elect to
transfer all or a portion of the amount to the Variable Account. Any transfer
elected during the thirty (30) days prior to the end of a current Guarantee
Period will be made as of the date the request is received by the Company and
will not be subject to the Market Value Adjustment.
If the Owner or Certificate Owner does not specify a Guarantee Period at the
time of renewal, the Company will select and transfer to the same Guarantee
Period as has just expired, so long as such Guarantee Period does not extend
beyond the latest Annuity Date that can be selected by an Owner or Certificate
Owner. If such Guarantee Period does extend beyond the latest Annuity Date, the
Company will choose the one year period. If there is no Guarantee Period for the
same period available, the one year period will be selected. If the one year
period is no longer available, the next longest period available will be
selected.
The Owner or Certificate Owner may elect one or more Guarantee Periods subject
to the Company's underwriting rules. Multiple Guarantee Periods are treated
separately for purposes of applying the Market Value Adjustment. The Company
reserves the right to credit different Credited Interest Rates to the Contract
Value/Certificate Value attributable to:
1. different Guarantee Periods; and
2. Guarantee Periods of the same duration with different Effective
Dates.
The Owner or Certificate Owner may upon Written Request or pursuant to a
telephone transfer authorization change to any Guarantee Period then being
offered by the Company with respect to contracts and certificates of this type
and class. The Market Value Adjustment will apply to a change made at any time
other than at the end of a Guarantee Period. The Market Value Adjustment will
not apply to a change made at the end of a Guarantee Period if a Written Request
or a telephone transfer authorization is received by the Company within thirty
(30) days prior to the end of the Guarantee Period. The Market Value Adjustment
will be an addition to or deduction from the remaining amount of Contract Value
or Certificate Value except in the case of a full surrender in which case the
Market Value Adjustment will be an addition to or deduction from the amount
surrendered.
Any amount withdrawn, transferred or annuitized prior to the end of that
Guarantee Period may be subject to a Market Value Adjustment. Owners and
Certificate Owners bear the risk that amounts reallocated within, or prematurely
withdrawn, transferred or annuitized from the MVA Account prior to the end of
their respective Guarantee Period could result in the Owner or Certificate Owner
receiving less than the Purchase Payments or amounts so allocated. The Market
Value Adjustment will be calculated by multiplying the amount withdrawn,
transferred or annuitized by the formula set forth below.
There will be no Market Value Adjustment on withdrawals from the MVA Account in
the following situations: (1) payment of a death benefit under the Contract or
Certificate; (2) amounts withdrawn to pay fees or charges; (3) amounts withdrawn
or transferred from the MVA Account within 30 days prior to the end of the
Guarantee Period; (4) if an Owner/Certificate Owner annuitizes his/her
Contract/Certificate under an Annuity Option providing for at least 60 monthly
Annuity Payments; and (5) withdrawals once each Contract or Certificate Year,
after the first year in such Guarantee Period, of up to a total of 10% of the
value of each Guarantee Period. See Appendix B for examples of the application
of the Market Value Adjustment.
The Market Value Adjustment factor is equal to:
( 1 + A ) N/365
(___________) - 1
( 1 + B )
<TABLE>
<CAPTION>
<S> <C> <C>
where: A = the U.S. Treasury rate in effect at the beginning of
the Guarantee Period for the length of the Guarantee
Period selected.
B = the current U.S. Treasury rate as of the transaction
date plus .005. Treasury rate period is determined by
N/365 rounded to the next highest year.
N = Number of days remaining in the MVA Guarantee Period.
</TABLE>
If the Treasury rate is not available for the period, the rate will be arrived
at by interpolation.
WITHDRAWALS, TRANSFERS OR ANNUITIZATION OF AMOUNTS FROM A GUARANTEE PERIOD OF
THE MARKET VALUE ADJUSTMENT ACCOUNT PRIOR TO THE END OF THAT GUARANTEE PERIOD
MAY BE SUBJECT TO A MARKET VALUE ADJUSTMENT. THE MARKET VALUE ADJUSTMENT MAY BE
POSITIVE OR NEGATIVE AND MAY RESULT IN THE OWNER OR CERTIFICATE OWNER RECEIVING
LESS THAN HIS OR HER PURCHASE PAYMENT OR CONTRACT VALUE OR CERTIFICATE VALUE
ALLOCATED TO THE MVA ACCOUNT.
CHARGES AND DEDUCTIONS
Various charges and deductions are made from Owner's Contract Value and
Certificate Owners' Certificate Value, the Variable Account and the MVA
Account. These charges and deductions are:
DEDUCTION FOR MORTALITY AND EXPENSE RISK CHARGE
Each Valuation Period, the Company deducts a mortality and expense risk charge
from the Variable Account which is equal, on an annual basis, to 1.15% of the
average daily net asset value of each Sub-Account of the Variable Account
("Mortality and Expense Risk Charge"). The Company may increase this charge, but
it will not exceed 1.25% of the average daily net asset value of the Variable
Account. In the event of an increase, the Company will give Owners and
Certificate Owners 90 days prior notice of the increase. The mortality risks
assumed by the Company arise from its contractual obligation to make Annuity
Payments after the Annuity Date (determined in accordance with the Annuity
Option chosen by the Owner/Certificate Owner) regardless of how long all
Annuitants live. This assures that neither an Annuitant's own longevity, nor an
improvement in life expectancy greater than that anticipated in the mortality
tables, will have any adverse effect on the Annuity Payments the Annuitant will
receive under the Contract/Certificate. Further, the Company bears a mortality
risk in that it guarantees the annuity purchase rates for the Annuity Options
under the Contracts and Certificates. Also, the Company bears a mortality risk
with respect to the death benefit. The expense risk assumed by the Company is
that all actual expenses involved in administering the Contracts and
Certificates, including Contract and Certificate maintenance costs,
administrative costs, mailing costs, data processing costs, legal fees,
accounting fees, filing fees and the costs of other services may exceed the
amount recovered from the Contract and Certificate Maintenance Charges and the
Administrative Charge (see below).
If the Mortality and Expense Risk Charge is insufficient to cover the actual
costs, the loss will be borne by the Company. Conversely, if the amount deducted
proves more than sufficient, the excess will be a profit to the Company. The
Company expects a profit from this charge.
DEDUCTION FOR ADMINISTRATIVE CHARGE
Each Valuation Period, the Company deducts an administrative charge from the
Variable Account which is equal, on an annual basis, to .15% of the average
daily net asset value of each Sub-Account of the Variable Account
("Administrative Charge"). However, the Company may increase this charge, but it
will not exceed .25% of the average daily net asset value of the Variable
Account. The Company will give Owners/Certificate Owners 90 days notice before
any increase is implemented. This charge, together with the Contract and
Certificate Maintenance Charges (see below), is to reimburse the Company for the
expenses it incurs in the establishment and maintenance of the Contracts,
Certificates and the Variable Account. These expenses include but are not
limited to: preparation of the Contracts and Certificates, confirmations, annual
reports and statements, maintenance of Owner and Certificate Owner records,
maintenance of Variable Account records, administrative personnel costs, mailing
costs, data processing costs, legal fees, accounting fees, filing fees, the
costs of other services necessary for Owner and Certificate Owner servicing and
all accounting, valuation, regulatory and reporting requirements. Since this
charge is an asset-based charge, the amount of the charge attributable to a
particular Contract or Certificate may have no relationship to the
administrative costs actually incurred by that Contract or Certificate. The
Company does not intend to profit from this charge. This charge will be reduced
to the extent that the amount of this charge is in excess of that necessary to
reimburse the Company for its administrative expenses.
DEDUCTION FOR CONTRACT AND CERTIFICATE MAINTENANCE CHARGES
During the Accumulation Period, on each Contract or Certificate Anniversary, the
Company deducts a contract or certificate maintenance charge ("Contract
Maintenance Charge" or "Certificate Maintenance Charge") from the Contract
Value/Certificate Value by reducing the Contract Value/Certificate Value in the
MVA Account and by canceling Accumulation Units from each applicable Sub-Account
of the Variable Account to reimburse it for expenses relating to the maintenance
of the Contracts and Certificates. The Company makes a deduction of $30.00 each
Contract or Certificate Year. However, during the Accumulation Period if the
Contract Value/Certificate Value on the Contract or Certificate Anniversary is
at least $25,000, then no Contract or Certificate Maintenance Charges are
deducted. If a total withdrawal is made on other than a Contract or Certificate
Anniversary and the Contract Value/Certificate Value for the Valuation Period
during which the total withdrawal is made is less than $25,000, the full
Contract or Certificate Maintenance Charge will be deducted at the time of the
total withdrawal. During the Annuity Period, no Contract or Certificate
Maintenance Charge is deducted. The Contract and Certificate Maintenance Charges
will be deducted from the Sub-Account or MVA Account with the largest balance.
The Company has set this charge at a level so that, when considered in
conjunction with the Administrative Charge (see above), it will not make a
profit from the charges assessed for administration.
DEDUCTION FOR TRANSFER FEE
An Owner/Certificate Owner may transfer all or part of the Owner's/Certificate
Owner's interest in a Sub-Account or the MVA Account (subject to the MVA Account
provisions) after the expiration of any Right to Examine Period, without the
imposition of any fee or charge if there have been no more than the number of
free transfers made. An Owner/Certificate Owner may make one transfer every 30
days without the imposition of the transfer fee during the Accumulation Period
and may make four transfers per Contract/Certificate Year during the Annuity
Period without the imposition of the transfer fee. The transfer fee is the
lesser of $25 or 2% of the amount transferred ("Transfer Fee"). The Transfer Fee
is deducted from the Account which is the source of the transfer. However, if
the Owner's or Certificate Owner's entire interest in an Account is being
transferred, the Transfer Fee will be deducted from the amount which is
transferred. If there are multiple source Accounts, the Transfer Fee will be
allocated to the Sub-Account or MVA Account with the largest balance involved in
the transfer transaction. A transfer made at the end of the Right to Examine
Period from the Money Market Sub-Account will not count in determining the
application of the Transfer Fee. If the Owner or Certificate Owner is
participating in an approved Dollar Cost Averaging Program or Rebalancing
Program, such transfers are not counted toward the number of transfers for the
year and are not taken into account in determining any Transfer Fee. All
reallocations made on the same day count as one transfer for purposes of
determining the Transfer Fee.
DEDUCTION FOR PREMIUM AND OTHER TAXES
Any taxes, including any Premium Taxes, paid to any governmental entity relating
to the Contracts and Certificates may be deducted from Purchase Payments or
Contract Values or Certificate Owner's Certificate Value when incurred. The
Company will, in its sole discretion, determine when taxes have resulted from:
the investment experience of the Variable Account; receipt by the Company of the
Purchase Payments; or commencement of Annuity Payments. The Company may, at its
sole discretion, pay taxes when due and deduct that amount from the Contract
Value or Certificate Owner's Certificate Value at a later date. Payment at an
earlier date does not waive any right the Company may have to deduct amounts at
a later date. The Company's current practice is to deduct such taxes from an
Owner's Contract Value/Certificate Owner's Certificate Value at the time Annuity
Payments begin or from amounts that are withdrawn. Premium Taxes currently range
from 0% to 3.5%.
While the Company is not currently maintaining a provision for federal income
taxes with respect to the Variable Account, the Company has reserved the right
to establish a provision for the deduction of income taxes from the Variable
Account if it determines, in its sole discretion, that it will incur a tax as a
result of the operation of the Variable Account.
The Company will deduct any withholding taxes required by applicable law. (See
"Tax Status - Income Tax Withholding.")
DEDUCTION FOR EXPENSES OF THE ELIGIBLE FUNDS
There are other deductions from and expenses (including management fees paid to
the advisers) paid out of the assets of the Eligible Funds which are described
in the prospectuses for the Eligible Funds.
THE CONTRACTS AND CERTIFICATES
OWNER/CERTIFICATE OWNER
The Owner or Certificate Owner has all interest and rights to amounts held in
his or her Contract/Certificate. The Owner or Certificate Owner is the person
designated as such on the Contract Issue Date/Certificate Issue Date, unless
changed.
The Owner/Certificate Owner may change owners of the Contract/Certificate at any
time by Written Request. A change of Owner or Certificate Owner will
automatically revoke any prior designation of Owner/Certificate Owner. The
change will become effective as of the date the Written Request is signed. The
Company will not be liable for any payment made or action taken before it
records the change.
JOINT OWNERS/JOINT CERTIFICATE OWNERS
The Contract can be owned by joint Owners. A Certificate may be owned by joint
Certificate Owners. If joint Owners or joint Certificate Owners are named, any
joint Owner or joint Certificate Owner must be the spouse of the other Owner or
joint Certificate Owner. Upon the death of either Owner/ Certificate Owner, the
surviving joint Owner/surviving joint Certificate Owner will be the primary
Beneficiary. Any other Beneficiary designation will be treated as a contingent
Beneficiary unless otherwise indicated in a Written Request.
GROUP CONTRACT OWNER
The Group Contract Owner has title to the group Contract. The group Contract and
any amounts accumulated thereunder are not subject to the claims of the Group
Contract Owner nor any of its creditors. The Group Contract Owner may transfer
ownership of the group Contract. Any transfer of ownership terminates the
interest of any existing Group Contract Owner. It does not change the rights of
any Certificate Owners.
ANNUITANT
The Annuitant is the person on whose life Annuity Payments are based. The
Annuitant is the person designated by the Owner/Certificate Owner at the
Contract Issue Date/Certificate Issue Date, unless changed prior to the Annuity
Date. The Owner/Certificate Owner may not change the Annuitant except in the
event that the Annuitant dies prior to the Annuity Date. If no new Annuitant is
designated by the Owner/Certificate Owner within 30 days, the Owner/Certificate
Owner becomes the Annuitant. The Annuitant may not be changed in a
Contract/Certificate which is owned by a non-natural person. Any change of
Annuitant is subject to the Company's underwriting rules then in effect. A
Written Request specifying the change of Annuitant must be provided to the
Administrative Office.
ASSIGNMENT
A Written Request specifying the terms of an assignment of the Contract or
Certificate must be provided to the Administrative Office. The Company will not
be liable for any payment made or action taken before it records the assignment.
The Company will not be responsible for the validity or tax consequences of any
assignment. Any assignment made after the death benefit has become payable will
be valid only with the Company's consent.
If the Contract or Certificate is assigned, the Owner's or Certificate Owner's
rights may only be exercised with the consent of the assignee of record.
If the Contract or Certificate is issued pursuant to a retirement plan which
receives favorable tax treatment under the provisions of Sections 403(b) or 408
of the Code, it may not be assigned, pledged or otherwise transferred except as
may be allowed under applicable law.
PURCHASE PAYMENTS, CONTRACT VALUE AND CERTIFICATE VALUE
PURCHASE PAYMENTS
The initial Purchase Payment is due on the Contract Issue Date/Certificate Issue
Date. The minimum initial Purchase Payment is $50,000 (except for Qualified
Contracts and Certificates, the minimum initial Purchase Payment is $10,000).
The minimum subsequent Purchase Payment is $1,000, or if the automatic premium
check option is elected $250 monthly. The maximum total Purchase Payments the
Company will accept without Company approval are $1,000,000. The Company
reserves the right to change these Purchase Payment requirements. The Company
reserves the right to reject any application or Purchase Payment.
ALLOCATION OF PURCHASE PAYMENTS
Net Purchase Payments are allocated to MVA Account Guarantee Period option(s)
and/or to one or more Sub-Account(s) of the Variable Account in accordance with
the selections made by the Owner/Certificate Owner. The Company has reserved the
right, under certain circumstances, to allocate initial Purchase Payments to the
Money Market Sub-Account (except those allocated to the MVA Account) until the
expiration of the Right to Examine Period. In the event that the Company does so
allocate initial Purchase Payments to the Money Market Sub-Account, at the end
of the Right to Examine Period, the Contract Value/Certificate Value allocated
to the Money Market Sub-Account will be allocated to the Sub-Account(s) selected
by the Owner/Certificate Owner. Currently, however, the Company will allocate
the initial Purchase Payment directly to the Sub-Account(s) and/or the MVA
Account, as selected by the Owner/Certificate Owner. The allocation of the
initial Net Purchase Payment is made in accordance with the selection made by
the Owner or Certificate Owner at the Contract Issue Date or Certificate Issue
Date. Unless otherwise changed by the Owner or Certificate Owner, subsequent Net
Purchase Payments are allocated in the same manner selected by the
Owner/Certificate Owner for the initial Net Purchase Payment. Allocation of the
Net Purchase Payment is subject to the terms and conditions imposed by the
Company. Currently, the Owner or Certificate Owner can select 15 Sub-Accounts of
the Variable Account and the MVA Account. The Company reserves the right to
change this in the future. Allocations must be in whole percentages with a
minimum allocation of 1%. The minimum amount which can be allocated to a
Guarantee Period option is $2,000. The Company has reserved the right to change
this minimum.
For initial Net Purchase Payments, if the forms required to issue a
Contract/Certificate are in good order, the Company will apply the Net Purchase
Payment to the Variable Account and credit the Contract/Certificate with
Accumulation Units and/or to the MVA Account and credit the Contract/Certificate
with dollars within two business days of receipt.
In addition to the underwriting requirements of the Company, good order means
that the Company has received federal funds (monies credited to a bank's account
with its regional Federal Reserve Bank). If the forms required to issue a
Contract or Certificate are not in good order, the Company will attempt to get
them in good order or the Company will return the forms and the Purchase Payment
within five business days. The Company will not retain the Purchase Payment for
more than five business days while processing incomplete forms unless it has
been so authorized by the purchaser. For subsequent Net Purchase Payments, the
Company will apply Net Purchase Payments to the Variable Account and credit the
Contract or Certificate with Accumulation Units and/or to the MVA Account and
credit the Contract or Certificate with dollars as of the end of the Valuation
Period during which the Purchase Payment was received.
DOLLAR COST AVERAGING
Dollar Cost Averaging is a program which, if elected in writing, permits an
Owner or Certificate Owner to systematically transfer amounts monthly,
quarterly, semi-annually or annually during the Accumulation Period from the
Money Market Sub-Account to one or more of the other Sub-Accounts. By allocating
amounts on a regularly scheduled basis as opposed to allocating the total amount
at one particular time, an Owner or Certificate Owner may be less susceptible to
the impact of market fluctuations. A minimum of $2,000 must be in the Money
Market Sub-Account when Dollar Cost Averaging begins (the Company reserves the
right to change this amount). If the amount to be transferred pursuant to Dollar
Cost Averaging exceeds the Contract Value/Certificate Value, the total balance
in the Money Market Sub-Account will be transferred. Currently, an Owner or
Certificate Owner may select up to 15 Sub-Accounts for Dollar Cost Averaging.
There is no current charge for participating in the Dollar Cost Averaging
Program. However, the Company reserves the right to charge for Dollar Cost
Averaging in the future. Transfers made pursuant to the Dollar Cost Averaging
Program will occur on the first business day of the month. Dollar Cost Averaging
will discontinue when the Contract Value/Certificate Value in the Money Market
Sub-Account is zero. The Company will notify Owners/Certificate Owners when the
Dollar Cost Averaging Program is discontinued. The minimum duration of
participation in the Dollar Cost Averaging Program is currently 6 to 60 months.
Transfers made pursuant to the Dollar Cost Averaging program are not taken into
account in determining any Transfer Fee. An Owner or Certificate Owner
participating in the Dollar Cost Averaging Program may not also participate in
the Systematic Withdrawal Program. The Company reserves the right, at any time
and without prior notice to any party, to terminate, suspend or modify its
Dollar Cost Averaging Program.
REBALANCING
Rebalancing is a program, which if elected, provides for periodic pre-authorized
automatic transfers during the Accumulation Period among the Sub-Accounts
pursuant to written instructions from the Owner or Certificate Owner. Such
transfers are made to maintain a particular percentage allocation among the
Portfolios as selected by the Owner or Certificate Owner. Any amounts in the MVA
Account will not be transferred pursuant to the Rebalancing Program. The
Contract Value/Certificate Value must be at least $5,000 to have transfers made
pursuant to the program. Any transfer made pursuant to the Rebalancing Program
must be in whole percentages in one (1%) percent allocation increments. The
maximum number of Sub-Accounts which can be used for rebalancing is fifteen
(15). An Owner or Certificate Owner may select that rebalancing occur on a
quarterly, semi-annual or annual basis. Rebalancing will occur on the date
requested by the Owner or Certificate Owner. Transfers made pursuant to the
Rebalancing Program are not taken into account in determining any Transfer Fee.
There is no fee for participating in the Rebalancing Program. The Company
reserves the right to terminate, modify or suspend its Rebalancing Program at
any time.
CONTRACT VALUE
The Contract Value for any Valuation Period is the sum of the Contract Value in
each of the Sub-Accounts of the Variable Account and the Contract Value in the
MVA Account.
The Contract Value in a Sub-Account of the Variable Account is determined by
multiplying the number of Accumulation Units allocated to the Contract Value for
the Sub-Account by the Accumulation Unit value.
Withdrawals will result in the cancellation of Accumulation Units in a
Sub-Account or a reduction in the MVA Account, as applicable.
CERTIFICATE VALUE
The Certificate Value for any Valuation Period is the sum of the Certificate
Value in each of the Sub-Accounts of the Variable Account and the Certificate
Value in the MVA Account.
The Certificate Value in a Sub-Account of the Variable Account is determined by
multiplying the number of Accumulation Units allocated to the Certificate Value
for the Sub-Account by the Accumulation Unit Value.
Withdrawals will result in the cancellation of Accumulation Units in a
Sub-Account or a reduction in the MVA Account, as applicable.
ACCUMULATION UNITS
Accumulation Units will be used to account for all amounts allocated to or
withdrawn from the Sub-Accounts of the Variable Account as a result of Net
Purchase Payments, withdrawals, transfers, or fees and charges. The Company will
determine the number of Accumulation Units of a Sub-Account purchased or
canceled. This will be done by dividing the amount allocated to (or the amount
withdrawn from) the Sub-Account by the dollar value of one Accumulation Unit of
the Sub-Account as of the end of the Valuation Period during which the request
for the transaction is received at the Administrative Office.
ACCUMULATION UNIT VALUE
The Accumulation Unit value for each Sub-Account was arbitrarily set initially
at $10. Subsequent Accumulation Unit values for each Sub-Account are determined
by multiplying the Accumulation Unit Value for the immediately preceding
Valuation Period by the Net Investment Factor for the Sub-Account for the
current period.
The Net Investment Factor for each Sub-Account is determined by dividing A by B
and subtracting C where:
<TABLE>
<CAPTION>
<S> <C>
A is (i) the net asset value per share of the Eligible Fund or Portfolio
of an Eligible Fund held by the Sub-Account for the current Valuation
Period; plus
(ii) any dividend or capital gains per share declared on behalf of
such Eligible Fund or Portfolio that has an ex-dividend date within
the current Valuation Period; plus (iii) a charge factor, if any, for
taxes or any tax reserve established by the Company as a result of the
operation or maintenance of the Sub-Account.
B is the net asset value per share of the Eligible Fund or Portfolio
held by the Sub-Account for the immediately preceding Valuation
Period.
C is the Valuation Period equivalent of the per month Mortality and
Expense Risk Charge and for the Administrative Charge.
</TABLE>
The Accumulation Unit Value may increase or decrease from Valuation Period to
Valuation Period.
TRANSFERS
TRANSFERS DURING THE ACCUMULATION PERIOD
Subject to any limitation imposed by the Company on the number of transfers that
can be made during the Accumulation Period, the Owner or Certificate Owner may
transfer all or part of the Contract Value or Certificate Value in a Sub-Account
or the MVA Account. Currently, Owners and Certificate Owners may make an
unlimited number of transfers during the Accumulation Period. All transfers are
subject to the following:
1. If more than the number of free transfers have been made in a Contract
or Certificate Year, the Company will deduct a Transfer Fee for each subsequent
transfer permitted. (See "Charges and Deductions - Deduction for Transfer Fee.")
2. The minimum amount which can be transferred is $500 (from any
Sub-Account or any Guarantee Period in the MVA Account) or the Owner's or
Certificate Owner's entire interest in the Sub-Account or the Guarantee Period,
if less. The Company reserves the right to change this amount. This requirement
is waived if the transfer is made pursuant to the Dollar Cost Averaging or
Rebalancing Programs. The minimum amount which must remain in each Account after
a transfer is $500 per Sub-Account or a Guarantee Period in the MVA Account, or
$0 if the entire amount in any Sub-Account or a Guarantee Period in the MVA
Account is transferred. The Company reserves the right to change this amount.
3. The Company reserves the right, at any time and without prior notice to
any party, to terminate, suspend or modify the transfer privilege described
above.
Transfers must be made by written authorization from the Owner/Certificate Owner
or from the person acting for the Owner or Certificate Owner as an
attorney-in-fact under a power-of-attorney if permitted by state law. By
authorizing the Company to accept telephone transfer instructions, the
Owner/Certificate Owner agrees to accept and be bound by the conditions and
procedures established by the Company from time to time. The Company has
instituted reasonable procedures to confirm that any instructions communicated
by telephone are genuine. All telephone calls will be recorded, and the caller
will be asked to produce the Owner/Certificate Owner's personalized data prior
to the Company initiating any transfer requests by telephone. Additionally, as
with other transactions, the Owner/Certificate Owner will receive a written
confirmation of the transfer. If reasonable procedures are employed, neither the
Company nor Conseco Equity Sales, Inc. will be liable for following telephone
instructions which it reasonably believes to be genuine. Written transfer
requests may be made by a person acting for the Owner or Certificate Owner as an
attorney-in-fact under a power-of-attorney.
Neither the Variable Account nor the Eligible Funds are designed for
professional market timing organizations or other entities using programmed and
frequent transfers. A pattern of exchanges that coincides with a "market timing"
strategy may be disruptive to a Portfolio. The Company reserves the right to
restrict the transfer privilege or reject any specific Purchase Payment
allocation request for any person whose transactions seem to follow a timing
pattern.
TRANSFERS DURING THE ANNUITY PERIOD
Subject to any limitations imposed by the Company on the number of transfers
that can be made during the Annuity Period, the Owner or Certificate Owner may
transfer Contract Values or Certificate Values by Written Request. Currently,
Owners and Certificate Owners may make four transfers per Contract/Certificate
Year during the Annuity Period. All transfers during the Annuity Period are
subject to the following:
1. Transfers may be made upon written notice to the Company at least 30
days before the due date of the first Annuity Payment for which the change will
apply. Transfers will be made by converting the number of Annuity Units being
transferred to the number of Annuity Units of the Sub-Account to which the
transfer is made, so that the next Annuity Payment, if it were made at that time
would be the same amount that it would have been without the transfer.
Thereafter Annuity Payments will reflect changes in the value of the new Annuity
Units.
2. If more than the number of free transfers have been made in a
Contract/Certificate Year, the Company will deduct a Transfer Fee for each
subsequent transfer permitted. Currently, the four transfers per
Contract/Certificate Year permitted during the Annuity Period are free. (See
"Charges and Deductions - Deduction for Transfer Fee").
3. The minimum amount which can be transferred is $500 (from any
Sub-Account) or the Owner's/Certificate Owner's entire interest in the
Sub-Account, if less. The minimum amount which must remain in each Sub-Account
after a transfer is $500 per Sub-Account, or $0 if the entire amount in any
Sub-Account is transferred.
4. No transfers can be made between the General Account and the Variable
Account. Transfers may only be made among the Sub-Accounts.
5. The Company reserves the right, at any time and without prior notice to
any party, to terminate, suspend or modify the transfer privilege described
above.
WITHDRAWALS
During the Accumulation Period, the Owner or Certificate Owner may, upon a
Written Request, make total or partial withdrawals of the Contract Withdrawal
Value or Certificate Withdrawal Value.
The Owner/Certificate Owner must specify by Written Request which Sub-Account(s)
of the Variable Account or Guarantee Period of the MVA Account, as applicable,
is the source of the partial withdrawal. A withdrawal from the MVA Account may
be subject to a Market Value Adjustment.
The Company will pay the amount of any withdrawal from the Variable Account
within seven (7) days of receipt of a request in good order unless the
Suspension or Deferral of Payments provision is in effect.
Each partial withdrawal must be for at least $500 from each Sub-Account and each
Guarantee Period of the MVA Account (unless the withdrawal is made pursuant to
the Systematic Withdrawal Option (see below)). The minimum Contract Value or
Certificate Value which must remain in the Contract or Certificate after a
partial withdrawal is $500. The minimum Contract Value or Certificate Value
which must remain in any Sub-Account after a partial withdrawal is $500.
Certain tax withdrawal penalties and restrictions may apply to withdrawals from
the Contracts and Certificates. (See "Tax Status"). For Contracts/ Certificates
purchased in connection with Code Section 403(b) plans, the Code limits the
withdrawal of amounts attributable to contributions made pursuant to a salary
reduction agreement (as defined in Section 403(b)(11) of the Code) to
circumstances only when the Owner/Certificate Owner: (1) attains age 59 1/2; (2)
separates from service; (3) dies; (4) becomes disabled (within the meaning of
Section 72(m)(7) of the Code); or (5) in the case of hardship. However,
withdrawals for hardship are restricted to the portion of the Owner's Contract
Value or Certificate Owner's Certificate Value which represents contributions
made pursuant to a salary reduction agreement by the Owner/Certificate Owner and
does not include any investment results. The limitations on withdrawals became
effective on January 1, 1989 and apply only to salary reduction contributions
made after December 31, 1988, to income attributable to such contributions and
to income attributable to amounts held as of December 31, 1988. The limitations
on withdrawals do not affect rollovers or transfers between certain Qualified
Plans. Owners and Certificate Owners should consult their own tax counsel or
other tax adviser regarding any distributions.
SYSTEMATIC WITHDRAWAL PROGRAM
The Company offers a Systematic Withdrawal Program which enables an Owner or
Certificate Owner to pre-authorize by Written Request a periodic exercise of the
contractual withdrawal rights described above. The Systematic Withdrawal Program
is available if the Contract Value or Certificate Value is at least $5,000 as of
the Valuation Date this option is requested (the Company reserves the right to
change this requirement). Each withdrawal pursuant to the Systematic Withdrawal
Program must be for at least $100. Systematic withdrawals may be made from any
Sub-Account of the Variable Account. Systematic withdrawals cannot be made from
the MVA Account. Owners/Certificate Owners must specify from which Sub-Accounts
the withdrawals are to be made. The amount of the withdrawal must be specified
as a percentage of Contract Value or Certificate Value or in round dollars.
Withdrawals may be scheduled monthly, quarterly, semi-annually or annually. The
standard date of the month for withdrawals is the last day of the month. The
Owner, the Certificate Owner or the Company may terminate systematic withdrawals
at any time and may reinstate the program at any time by completing the
appropriate forms. Systematic withdrawals will terminate if the
Owner/Certificate Owner makes a partial withdrawal outside the program and the
remaining Contract/Certificate Value is less than $5,000. Participation in the
Systematic Withdrawal Program can be exercised at any time, including during the
first Contract/Certificate Year. There is currently no charge for systematic
withdrawals. An Owner or Certificate Owner participating in the Systematic
Withdrawal Program may not also participate in the Dollar Cost Averaging
Program.
Systematic withdrawals are available for Qualified and Non-Qualified Contracts
and Certificates. Certain tax penalties and restrictions may apply to systematic
withdrawals from the Contracts and Certificates. (See "Tax Status - Tax
Treatment of Withdrawals - Non-Qualified Contracts and Certificates" and "Tax
Treatment of Withdrawals - Qualified Contracts and Certificates".)
SUSPENSION OR DEFERRAL OF PAYMENTS
The Company reserves the right to suspend or postpone payments from the Variable
Account for a withdrawal or transfer for any period when:
1. The NYSE is closed (other than customary weekend and holiday closings);
2. Trading on the NYSE is restricted;
3. An emergency exists as a result of which disposal of securities held in
the Variable Account is not reasonably practicable or it is not reasonably
practicable to determine the value of the Variable Account's net assets; or
4. During any other period when the Securities and Exchange Commission, by
order, so permits for the protection of Owners or Certificate Owners;
provided that applicable rules and regulations of the Securities and Exchange
Commission will govern as to whether the conditions described in (2) and (3)
exist.
The Company further reserves the right to postpone payments from the MVA Account
for a period of up to six months.
PROCEEDS PAYABLE ON DEATH
DEATH OF OWNER OR CERTIFICATE OWNER DURING THE ACCUMULATION PERIOD
Upon the death of the Owner or Certificate Owner, or any joint Owner or joint
Certificate Owner during the Accumulation Period, the death benefit will be paid
to the Beneficiary(ies) designated by the Owner or Certificate Owner. Upon the
death of any joint Owner or joint Certificate Owner, the surviving joint Owner
or joint Certificate Owner, if any, will be treated as the primary Beneficiary.
Any other Beneficiary designation on record at the time of death will be treated
as a contingent Beneficiary.
A Beneficiary may request that the death benefit be paid under one of the death
benefit options below. If the Beneficiary is the spouse of the Owner/Certificate
Owner, he or she may elect to continue the Contract/Certificate at the then
current Contract Value/Certificate Value in his or her own name and exercise all
the Owner's/Certificate Owner's rights under the Contract/Certificate.
DEATH BENEFIT AMOUNT DURING THE ACCUMULATION PERIOD
Prior to the Owner/Certificate Owner attaining Age 80, the death benefit will be
the greater of: (i) the Purchase Payments, less any withdrawals; or (ii) the
Contract Value/Certificate Value determined as of the end of the Valuation
Period during which the Company receives both due proof of death and an election
for the payment method. If the death occurs after Age 80, the death benefit will
be the Contract Value/Certificate Value determined as of the end of the
Valuation Period during which the Company receives both due proof of death and
an election for the payment method.
DEATH BENEFIT OPTIONS DURING THE ACCUMULATION PERIOD
A non-spousal Beneficiary must elect the death benefit be paid under one of the
following options in the event of the death of the Owner or Certificate Owner
during the Accumulation Period:
OPTION 1 - lump sum payment of the death benefit; or
OPTION 2 - payment of the entire death benefit within 5 years of the date
of the death of the Owner/Certificate Owner or any joint Owner/joint Certificate
Owner; or
OPTION 3 - payment of the death benefit under an Annuity Option over the
lifetime of the Beneficiary or over a period not extending beyond the life
expectancy of the Beneficiary with distribution beginning within one year of the
date of death of the Owner/Certificate Owner or any joint Owner/joint
Certificate Owner.
Any portion of the death benefit not applied under Option 3 within one year of
the date of the Owner's/Certificate Owner's death, must be distributed within
five years of the date of death.
A spousal Beneficiary may elect to continue the Contract/Certificate in his or
her own name at the then current Contract Value/Certificate Value, elect a lump
sum payment of the death benefit or apply the death benefit to an Annuity
Option.
If a lump sum payment is requested, the amount will be paid within seven (7)
days of receipt of proof of death and the election, unless the Suspension or
Deferral of Payments provision is in effect.
Payment to the Beneficiary, other than in a lump sum, may only be elected during
the sixty-day period beginning with the date of receipt of proof of death.
DEATH OF OWNER/CERTIFICATE OWNER DURING THE ANNUITY PERIOD
If the Owner/Certificate Owner or any joint Owner/joint Certificate Owner, who
is not the Annuitant, dies during the Annuity Period, any remaining payments
under the Annuity Option elected will continue at least as rapidly as under the
method of distribution in effect at such Owner's/Certificate Owner's or joint
Owner's/joint Certificate Owner's death. Upon the death of any Owner/Certificate
Owner during the Annuity Period, the Beneficiary becomes the Owner/Certificate
Owner. Upon the death of any joint Owner/joint Certificate Owner during the
Annuity Period, the surviving joint Owner/joint Certificate Owner, if any, will
be treated as the primary Beneficiary. Any other Beneficiary designation on
record at the time of death will be treated as a contingent Beneficiary.
DEATH OF ANNUITANT
Upon the death during the Accumulation Period of the Annuitant who is not the
Owner/Certificate Owner, the Owner/Certificate Owner may designate a new
Annuitant, subject to the Company's underwriting rules then in effect. If no
designation is made within 30 days of the death of the Annuitant, the
Owner/Certificate Owner will become the Annuitant. If the Owner/Certificate
Owner is a non-natural person, the death of the Annuitant will be treated as the
death of the Owner/Certificate Owner and a new Annuitant may not be designated.
Upon the death of the Annuitant during the Annuity Period, the death benefit, if
any, will be as specified in the Annuity Option elected. Death benefits will be
paid at least as rapidly as under the method of distribution in effect at the
Annuitant's death.
PAYMENT OF DEATH BENEFIT
The Company will require due proof of death before any death benefit is paid.
Due proof of death will be:
1. a certified death certificate; or
2. a certified decree of a court of competent jurisdiction as to the
finding of death; or
3. any other proof satisfactory to the Company.
All death benefits will be paid in accordance with applicable law or regulations
governing death benefit payments.
BENEFICIARY
The Beneficiary designation in effect on the Contract Issue Date/Certificate
Issue Date will remain in effect until changed. The Beneficiary is entitled to
receive the benefits to be paid at the death of the Owner/Certificate Owner.
Unless the Owner/Certificate Owner provides otherwise, the death benefit will be
paid in equal shares to the survivor(s) as follows:
1. to the primary Beneficiary(ies) who survive the Owner's/Certificate
Owner's and/or the Annuitant's death, as applicable; or if there are none
2. to the contingent Beneficiary(ies) who survive the Owner's/Certificate
Owner's and/or the Annuitant's death, as applicable; or if there are none
3. to the estate of the Owner/Certificate Owner.
CHANGE OF BENEFICIARY
Subject to the rights of any irrevocable Beneficiary(ies), the Owner/Certificate
Owner may change the primary Beneficiary(ies) or contingent Beneficiary(ies).
Any change may be made by Written Request. The change will take effect as of the
date the Written Request is signed. The Company will not be liable for any
payment made or action taken before it records the change.
ANNUITY PROVISIONS
GENERAL
On the Annuity Date, the Adjusted Contract Value/Adjusted Certificate Value, as
applicable, will be applied under the Annuity Option selected by the
Owner/Certificate Owner. The Owner/Certificate Owner may elect to have the
Contract Value/Certificate Value applied to provide a Fixed Annuity, a Variable
Annuity or a combination Fixed and Variable Annuity. If a combination is
elected, the Owner/Certificate Owner must specify what part of the Contract
Value/Certificate Value is to be applied to the fixed and variable options.
ANNUITY DATE
The Annuity Date is selected by the Owner/Certificate Owner at the Contract
Issue Date/Certificate Issue Date. The Annuity Date must be the first day of a
calendar month and must be at least 90 days after the Contract Issue
Date/Certificate Issue Date. The Annuity Date may not be later than the earlier
of when the Annuitant reaches attained Age 90 or the maximum date permitted
under state law.
Prior to the Annuity Date, the Owner/Certificate Owner, subject to the above,
may change the Annuity Date by Written Request. Any change must be requested at
least thirty (30) days prior to the new Annuity Date.
SELECTION OR CHANGE OF AN ANNUITY OPTION
An Annuity Option may be selected by Written Request by the Owner/Certificate
Owner. If no Annuity Option is selected, Option 2 with 120 monthly payments
guaranteed will automatically be applied. Unless specified otherwise, that
portion of the Adjusted Contract Value/Adjusted Certificate Value allocated to
the Variable Account shall be used to provide a variable annuity and that
portion of the Adjusted Contract Value or Adjusted Certificate Value allocated
to the MVA Account will be used to provide a Fixed Annuity. Prior to the Annuity
Date, the Owner/Certificate Owner can change the Annuity Option selected by
Written Request. Any change must be requested at least thirty (30) days prior to
the Annuity Date.
FREQUENCY AND AMOUNT OF ANNUITY PAYMENTS
Annuity Payments are paid in monthly installments. The Adjusted Contract
Value/Adjusted Certificate Value is applied to the annuity table for the Annuity
Option selected. If the Adjusted Contract Value/Adjusted Certificate Value to be
applied under an Annuity Option is less than $5,000, the Company reserves the
right to make a lump sum payment in lieu of Annuity Payments. If the Annuity
Payment would be or become less than $50, the Company reserves the right to
reduce the frequency of payments to an interval which will result in each
payment being at least $50.
The Mortality and Expense Risk Charge is assessed during both the Accumulation
Period and the Annuity Period. The Company will continue to assess the Mortality
and Expense Risk Charge during payment of an Annuity Option that does not
involve a life contingency even though the Company no longer bears any mortality
risk on such payment obligation.
ANNUITY OPTIONS
The following Annuity Options or any other Annuity Option acceptable to the
Company may be selected:
OPTION 1. LIFETIME ONLY ANNUITY : The Company will make monthly payments
during the life of the Annuitant. If this option is elected, payments will stop
immediately upon the death of the Annuitant and the annuity will terminate
without further value.
OPTION 2. LIFETIME ANNUITY WITH GUARANTEED PERIODS : The Company will make
monthly payments for the guaranteed period selected and thereafter for the life
of the Annuitant. If this option is elected, upon the death of the Annuitant,
any amounts remaining under the guaranteed period selected will be distributed
to the Beneficiary at least as rapidly as under the method of distribution being
used as of the date of the Annuitant's death. The guaranteed period may be five
(5) years, ten (10) years or twenty (20) years.
OPTION 3. INSTALLMENT REFUND LIFE ANNUITY : The Company will make monthly
payments for the installment refund period (the time required for the sum of the
payments to equal the amount applied), and thereafter for the life of the
Annuitant. If this option is elected, upon the death of the Annuitant, any
amounts remaining under the installment refund period will be distributed to the
Beneficiary at least as rapidly as under the method of distribution being used
at the time of the Annuitant's death.
OPTION 4. PAYMENT FOR A FIXED PERIOD : The Company will make monthly
payments for a fixed period of 3 to 20 years.
OPTION 5. JOINT AND SURVIVOR ANNUITY : The Company will make monthly
payments during the joint life time of the Annuitant and a joint Annuitant.
Payments will continue during the lifetime of the surviving Annuitant and will
be computed on the basis of 100%, 50% or 66% of the Annuity Payment (or limits)
in effect during the joint life time.
ANNUITY
If the Owner/Certificate Owner selects a Fixed Annuity, the Adjusted Contract
Value or Adjusted Certificate Value is allocated to the General Account and the
annuity is paid as a Fixed Annuity. If the Owner/Certificate Owner selects a
Variable Annuity, the Adjusted Contract Value or Adjusted Certificate Value will
be allocated to the Sub-Accounts of the Variable Account in accordance with the
selection made by the Owner or Certificate Owner, and the annuity will be paid
as a variable annuity. If no selection is made, the Adjusted Contract
Value/Adjusted Certificate Value will be applied in the same proportions to the
same Sub-Accounts as the allocations are at the time of election. Unless the
Owner/Certificate Owner specifies otherwise, the payee of the Annuity Payments
shall be the Owner/Certificate Owner. The Adjusted Contract Value/Adjusted
Certificate Value will be applied to the applicable annuity table contained in
the Contract/Certificate based upon the Annuity Option selected by the
Owner/Certificate Owner.
FIXED ANNUITY
The Owner or Certificate Owner may elect to have the Adjusted Contract
Value/Adjusted Certificate Value applied to provide a Fixed Annuity.
The dollar amount of each Fixed Annuity Payment shall be determined in
accordance with annuity tables contained in the Contract/Certificate which are
based on the minimum guaranteed interest rate of 3% per year.
VARIABLE ANNUITY
The Owner or Certificate Owner may elect to have the Adjusted Contract
Value/Adjusted Certificate Value applied to provide a variable annuity. Variable
Annuity Payments reflect the investment performance of the Variable Account in
accordance with the allocation of the Adjusted Contract Value/Adjusted
Certificate Value to the Sub-Accounts during the Annuity Period. Variable
Annuity Payments are not guaranteed as to dollar amount.
DISTRIBUTOR
Conseco Equity Sales, Inc., ("CES"), formerly GARCO Equity Sales, Inc., 11815 N.
Pennsylvania Street, Carmel, Indiana 46032, an affiliate of the Company, is the
principal underwriter of the Contracts and Certificates. CES is registered as a
broker-dealer with the Securities and Exchange Commission and is a member of the
National Association of Securities Dealers, Inc. ("NASD").
Commissions will be paid on the sale of the Contracts and Certificates.
Commissions will be paid which are equal to .75% of Purchase Payments plus an
annual trail commission in the amount of .75% of accumulation value at the end
of each Contract/Certificate Year, for promotional or distribution expenses
associated with the marketing of the Contracts and Certificates. In addition,
under certain circumstances, payments may be made to certain sellers for other
services not directly related to the sale of the Contracts and Certificates. The
Company may use any of its corporate assets to cover the costs of distribution,
including any potential profit which may arise from the Mortality and Expense
Risk Charge.
PERFORMANCE INFORMATION
MONEY MARKET SUB-ACCOUNT
From time to time, the Money Market Sub-Account of the Variable Account may
advertise its "current yield" and "effective yield." Both yield figures are
based on historical earnings and are not intended to indicate future
performance. The "current yield" of the Money Market Sub-Account refers to the
income generated by Contract Values/Certificate Values in the Money Market
Sub-Account over a seven-day period ending on the date of calculation (which
period will be stated in the advertisement). This income is "annualized." That
is, the amount of income generated by the investment during that week is assumed
to be generated each week over a 52-week period and is shown as a percentage of
the Contract Value or Certificate Value in the Money Market Sub-Account. The
"effective yield" is calculated similarly. However, when annualized, the income
earned by the Contract Value or the Certificate Value is assumed to be
reinvested. This results in the "effective yield" being slightly higher than the
"current yield" because of the compounding effect of the assumed reinvestment.
The yield figure will reflect the deduction of any asset-based charges and any
applicable Contract and Certificate Maintenance Charge.
OTHER SUB-ACCOUNTS
From time to time, the Company may advertise performance data for the various
other Sub-Accounts. Such data will show the percentage change in the value of an
Accumulation Unit based on the performance of an investment medium over a period
of time, usually a calendar year, determined by dividing the increase (decrease)
in value for that Unit by the Accumulation Unit value at the beginning of the
period. This percentage figure will reflect the deduction of any asset-based
charges and any applicable Contract and Certificate Maintenance Charges under
the Contracts. Any advertisement will also include total return figures
calculated as described in the SAI.
Although all of the Sub-Accounts of the Variable Account are new and therefore
have no investment performance history, certain of the corresponding Portfolios
of the Eligible Funds have been in existence for some time and consequently have
an investment performance history. In order to demonstrate how the actual
investment experience of the various Portfolios affects Accumulation Unit
values, the Company may develop hypothetical performance. The information will
be based upon the historical experience of the Portfolios for the periods shown.
The performance of the various Sub-Accounts will vary and the hypothetical
results which will be shown will not necessarily be representative of future
results. Performance for periods ending after those which will be shown may vary
substantially from the examples which are shown. The performance of the various
Sub-Accounts will be calculated for a specified period of time by assuming an
initial Purchase Payment of $1,000 allocated to each of the Sub-Accounts and a
deduction of all charges and deductions. (See "Charges and Deductions" for more
information.) No withdrawals will be assumed. The percentage increases are
determined by subtracting the initial Purchase Payment from the ending value and
dividing the remainder by the beginning value.
The Company may make available yield information with respect to some of the
Sub-Accounts. Such yield information will be calculated as described in the SAI.
The yield information will reflect the deduction of any applicable
Contract and Certificate Maintenance Charge as well as any asset-based charges.
The Company may also show historical Accumulation Unit values in certain
advertisements containing illustrations. These illustrations will be based on
actual Accumulation Unit values.
In addition, the Company may distribute sales literature which compares the
percentage change in Accumulation Unit values for any of the Sub-Accounts
against established market indices such as the Standard & Poor's 500 Composite
Stock Price Index, the Dow Jones Industrial Average or other management
investment companies which have investment objectives similar to the underlying
Portfolio being compared. The Standard & Poor's 500 Composite Stock Price Index
is an unmanaged, unweighted average of 500 stocks, the majority of which are
listed on the New York Stock Exchange. The Dow Jones Industrial Average is an
unmanaged, weighted average of thirty blue chip industrial corporations listed
on the New York Stock Exchange. Both the Standard & Poor's 500 Composite Stock
Price Index and the Dow Jones Industrial Average assume quarterly reinvestment
of dividends.
In addition, the Company may, as appropriate, compare each Sub-Account's or
Portfolio's performance to that of other types of investments such as
certificates of deposit, savings accounts and U.S. Treasuries, or to certain
interest rate and inflation indices, such as the Consumer Price Index, which is
published by the U.S. Department of Labor and measures the average change in
prices over time of a fixed "market basket" of certain specified goods and
services. Similar comparisons of Sub-Account and/or Portfolio performance may
also be made with appropriate indices measuring the performance of a defined
group of securities widely recognized by investors as representing a particular
segment of the securities markets. For example, Sub-Account and/or Portfolio
performance may be compared with Donoghue Money Market Institutional Averages
(money market rates), Lehman Brothers Corporate Bond Index (corporate bond
interest rates) or Lehman Brothers Government Bond Index (long-term U.S.
Government obligation interest rates).
The Company may also distribute sales literature which compares the performance
of the Accumulation Unit values of the Contracts issued through the Variable
Account with the unit values of variable annuities issued through the separate
accounts derived from the Lipper Variable Insurance Products Performance
Analysis Service, the VARDS Report or from Morningstar.
The Lipper Variable Insurance Products Performance Analysis Service is published
by Lipper Analytical Services, Inc., a publisher of statistical data which
currently tracks the performance of almost 4,000 investment companies. The
rankings compiled by Lipper may or may not reflect the deduction of asset-based
insurance charges. The Company's sales literature utilizing these rankings will
indicate whether or not such charges have been deducted. Where the charges have
not been deducted, the sales literature will indicate that if the charges had
been deducted, the ranking might have been lower.
The VARDS Report is a monthly variable annuity industry analysis compiled by
Variable Annuity Research & Data Service of Roswell, Georgia and published by
Financial Planning Resources, Inc. The VARDS rankings may or may not reflect the
deduction of asset-based insurance charges. Where the charges have not been
deducted, the sales literature will indicate that if the charges had been
deducted, the rankings might have been lower.
Morningstar rates a variable annuity Sub-Account against its peers with similar
investment objectives. Morningstar does not rate any Sub-Account that has less
than three years of performance data. The Morningstar rankings may or may not
reflect the deduction of charges. Where charges have not been deducted, the
sales literature will indicate that if the charges had been deducted, the
rankings might have been lower.
TAX STATUS
GENERAL
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING OF
CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE COMPANY
CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE MADE.
PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE POSSIBILITY
OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF THE CONTRACTS
AND CERTIFICATES. PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS AND
CERTIFICATES MAY NOT BE TREATED AS "ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX
LAWS. IT SHOULD BE FURTHER UNDERSTOOD THAT THE FOLLOWING DISCUSSION IS NOT
EXHAUSTIVE AND THAT SPECIAL RULES NOT DESCRIBED IN THIS PROSPECTUS MAY BE
APPLICABLE IN CERTAIN SITUATIONS. MOREOVER, NO ATTEMPT HAS BEEN MADE TO CONSIDER
ANY APPLICABLE STATE OR OTHER TAX LAWS.
Section 72 of the Code governs taxation of annuities in general. An owner is not
taxed on increases in the value of a contract until distribution occurs, either
in the form of a lump sum payment or as annuity payments under the Annuity
Option selected. For a lump sum payment received as a total withdrawal (total
surrender), the recipient is taxed on the portion of the payment that exceeds
the cost basis of the Contract/Certificate. For Non-Qualified Contracts and
Certificates, this cost basis is generally the Purchase Payments, while for
Qualified Contracts and Certificates there may be no cost basis. The taxable
portion of the lump sum payment is taxed at ordinary income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion amount
is includible in taxable income. The exclusion amount for payments based on a
fixed annuity option is determined by multiplying the payment by the ratio that
the cost basis of the Contract/Certificate (adjusted for any period certain or
refund feature) bears to the expected return under the Contract/Certificate. The
exclusion amount for payments based on a variable annuity option is determined
by dividing the cost basis of the Contract/Certificate (adjusted for any period
certain or refund guarantee) by the number of years over which the annuity is
expected to be paid. Payments received after the investment in the
Contract/Certificate has been recovered (i.e. when the total of the excludable
amounts equal the investment in the Contract/Certificate) are fully taxable. The
taxable portion is taxed at ordinary income tax rates. For certain types of
Qualified Plans there may be no cost basis in the Contract within the meaning of
Section 72 of the Code. Owners, Certificate Owners, Annuitants and Beneficiaries
under the Contracts/Certificates should seek competent financial advice about
the tax consequences of any distributions.
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Variable Account is not a separate entity from the
Company and its operations form a part of the Company.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the United States Treasury Department
("Treasury Department"), adequately diversified. Disqualification of the
Contract as an annuity contract would result in imposition of federal income tax
to the Owner/Certificate Owner with respect to earnings allocable to the
Contract/Certificate prior to the receipt of payments under the
Contract/Certificate. The Code contains a safe harbor provision which provides
that annuity contracts such as the Contracts/Certificates meet the
diversification requirements if, as of the end of each quarter, the underlying
assets meet the diversification standards for a regulated investment company and
no more than fifty-five percent (55%) of the total assets consist of cash, cash
items, U.S. Government securities and securities of other regulated investment
companies.
On March 2, 1989, the Treasury Department issued Regulations (Treas. Reg.
1.817-5), which established diversification requirements for the investment
portfolios underlying variable contracts such as the Contracts/Certificates. The
Regulations amplify the diversification requirements for variable contracts set
forth in the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be
adequately diversified if: (1) no more than 55% of the value of the total assets
of the portfolio is represented by any one investment; (2) no more than 70% of
the value of the total assets of the portfolio is represented by any two
investments; (3) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (4) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable contracts
by Section 817(h) of the Code have been met, "each United States government
agency or instrumentality shall be treated as a separate issuer."
The Company intends that all Portfolios of the Eligible Funds underlying the
Contracts and Certificates will be managed by the investment advisers for the
Eligible Funds in such a manner as to comply with these diversification
requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which Owner/Certificate
Owner control of the investments of the Variable Account will cause the
Owner/Certificate Owner to be treated as the owner of the assets of the Variable
Account, thereby resulting in the loss of favorable tax treatment for the
Contract/Certificate. At this time it cannot be determined whether additional
guidance will be provided and what standards may be contained in such guidance.
The amount of Owner/Certificate Owner control which may be exercised under the
Contract/Certificate is different in some respects from the situations addressed
in published rulings issued by the Internal Revenue Service in which it was held
that the policy owner was not the owner of the assets of the separate account.
It is unknown whether these differences, such as the Owner's/Certificate Owner's
ability to transfer among investment choices or the number and type of
investment choices available, would cause the Owner/Certificate Owners to be
considered as the owner of the assets of the Variable Account resulting in the
imposition of federal income tax to the Owner/Certificate Owner with respect to
earnings allocable to the Contract/Certificate prior to receipt of payments
under the Contract/Certificate.
In the event any forthcoming guidance or ruling is considered to set forth a new
position, such guidance or ruling will generally be applied only prospectively.
However, if such ruling or guidance was not considered to set forth a new
position, it may be applied retroactively resulting in the Owner/Certificate
Owner being retroactively determined to be the owner of the assets of the
Variable Account.
Due to the uncertainty in this area, the Company reserves the right to modify
the Contracts or Certificates in an attempt to maintain favorable tax treatment.
MULTIPLE CONTRACTS AND CERTIFICATES
The Code provides that multiple non-qualified annuity contracts and/or
certificates which are issued within a calendar year to the same contract owner
by one company or its affiliates are treated as one annuity contract and/or
certificate for purposes of determining the tax consequences of any
distribution. Such treatment may result in adverse tax consequences including
more rapid taxation of the distributed amounts from such combination of
contracts and/or certificates. Owners and Certificate Owners should consult a
tax adviser prior to purchasing more than one non-qualified annuity contract in
any calendar year.
CONTRACTS AND CERTIFICATES OWNED BY NON-NATURAL PERSONS
Under Section 72(u) of the Code, the investment earnings on premiums for the
Contracts and Certificates will be taxed currently to the Owner/Certificate
Owner if the Owner/Certificate Owner is a non-natural person, e.g., a
corporation or certain other entities. Such Contracts/Certificates generally
will not be treated as annuities for federal income tax purposes. However, this
treatment is not applied to Contracts or Certificates held by: (a) a trust or
other entity as agent for a natural person; (b) Qualified Plans; or (c) the
estate of a decedent by reason of the death of the decedent. Additionally, this
treatment is not applied to a Contract or Certificate which is a qualified
funding asset for a structured settlement under Section 130(d) of the Code.
Purchasers should consult their own tax counsel or other adviser before
purchasing a Contract or Certificate to be owned by a non-natural person.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of all or any portion of a Contract or Certificate may
be treated as a taxable event. Any gain in the Contract or Certificate
subsequent to the assignment may also be treated as taxable income in the year
in which it is earned. Owners and Certificate Owners should therefore consult
competent tax advisers should they wish to assign or pledge their Contracts or
Certificates.
INCOME TAX WITHHOLDING
All distributions or the portion thereof which is includible in the gross income
of the Owner or Certificate Owner are subject to Federal income tax withholding.
Generally, amounts are withheld from periodic payments at the same rate as wages
and at the rate of 10% from non-periodic payments. However, the Owner or
Certificate Owner, in most cases, may elect not to have taxes withheld or to
have withholding done at a different rate.
Effective January 1, 1993, certain distributions from retirement plans qualified
under Section 401 or Section 403(b) of the Code, which are not directly rolled
over to another eligible retirement plan or individual retirement account or
individual retirement annuity, are subject to a mandatory 20% withholding for
Federal income tax. The 20% withholding requirement generally does not apply to:
a) a series of substantially equal payments made at least annually for the life
or life expectancy of the participant or joint and last survivor expectancy of
the participant and a designated beneficiary or for a specified period of 10
years or more; or b) distributions which are required minimum distributions; or
c) the portion of the distributions not includible in gross income (i.e. return
of after-tax contributions). Participants should consult their own tax counsel
or other tax adviser regarding withholding requirements.
TAX TREATMENT OF WITHDRAWALS -- NON-QUALIFIED CONTRACTS AND CERTIFICATES
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the Contract Value/Certificate Value exceeds the
aggregate purchase payments made, any amount withdrawn will be treated as coming
first from the earnings and then, only after the income portion is exhausted, as
coming from the principal. Withdrawn earnings are includible in gross income. It
further provides that a ten percent (10%) penalty will apply to the income
portion of any distribution. However, the penalty is not imposed on amounts
received: (a) on or after the taxpayer reaches age 59 1/2; (b) after the death
of the Owner/Certificate Owner; (c) if the taxpayer is totally disabled (for
this purpose disability is as defined in Section 72(m)(7) of the Code); (d) in a
series of substantially equal periodic payments made not less frequently than
annually for the life (or life expectancy) of the taxpayer or for the joint
lives (or joint life expectancies) of the taxpayer and his or her Beneficiary;
(e) under an immediate annuity; or (f) which are allocable to purchase payments
made prior to August 14, 1982.
QUALIFIED PLANS
The Contracts and Certificates offered by this Prospectus are designed to be
suitable for use under certain types of qualified plans. Generally, participants
in a qualified plan are not taxed on increases to the value of the contributions
to the plan until distribution occurs, regardless of whether the plan assets are
held under an annuity contract. Taxation of participants in each qualified plan
varies with the type of plan and terms and conditions of each specific plan.
Owners, Certificate Owners, Annuitants and Beneficiaries are cautioned that
benefits under a qualified plan may be subject to the terms and conditions of
the plan regardless of the terms and conditions of the Contract/Certificate
issued pursuant to the plan. Some retirement plans are subject to distribution
and other requirements that are not incorporated into the Company's
administrative procedures. Owners, Certificate Owners, participants and
Beneficiaries are responsible for determining that contributions, distributions
and other transactions with respect to the Contracts/Certificates comply with
applicable law. Following are general descriptions of the types of qualified
plans with which the Contracts/Certificates may be used. Such descriptions are
not exhaustive and are for general informational purposes only. The tax rules
regarding qualified plans are very complex and will have differing applications
depending on individual facts and circumstances. Each purchaser should obtain
competent tax advice prior to purchasing a Contract or Certificate issued under
a qualified plan.
Contracts and Certificates issued pursuant to qualified plans include special
provisions restricting Contract/Certificate provisions that may otherwise be
available as described in this Prospectus. Generally, Contracts/Certificates
issued pursuant to qualified plans are not transferable except upon surrender or
annuitization. Various penalty and excise taxes may apply to contributions or
distributions made in violation of applicable limitations. Furthermore, certain
withdrawal penalties and restrictions may apply to surrenders from Qualified
Contracts and Certificates. (See "Tax Treatment of Withdrawals -- Qualified
Contracts and Certificates.")
A. TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of "tax-sheltered
annuities" by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. These qualifying
employers may make contributions to the Contracts/Certificates for the benefit
of their employees. Such contributions are not includible in the gross income of
the employees until the employees receive distributions from the
Contracts/Certificates. The amount of contributions to the tax-sheltered annuity
is limited to certain maximums imposed by the Code. Furthermore, the Code sets
forth additional restrictions governing such items as transferability,
distributions, nondiscrimination and withdrawals. (See "Tax Treatment of
Withdrawals -- Qualified Contracts and Certificates" and "Tax Sheltered
Annuities - Withdrawal Limitations" below.) Any employee should obtain competent
tax advice as to the tax treatment and suitability of such an investment.
B. INDIVIDUAL RETIREMENT ANNUITIES
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed to an
IRA which will be deductible from the individual's gross income. These IRAs are
subject to limitations on eligibility, contributions, transferability and
distributions. (See "Tax Treatment of Withdrawals -- Qualified Contracts and
Certificates" below.) Under certain conditions, distributions from other IRAs
and other Qualified Plans may be rolled over or transferred on a tax-deferred
basis into an IRA. Sales of Contracts and Certificates for use with IRAs are
subject to special requirements imposed by the Code, including the requirement
that certain informational disclosure be given to persons desiring to establish
an IRA. Purchasers of Contracts and Certificates to be qualified as Individual
Retirement Annuities should obtain competent tax advice as to the tax treatment
and suitability of such an investment.
TAX TREATMENT OF WITHDRAWALS -- QUALIFIED CONTRACTS AND CERTIFICATES
In the case of a withdrawal under a Qualified Contract/Certificate, a ratable
portion of the amount received is taxable, generally based on the ratio of the
individual's cost basis to the individual's total accrued benefit under the
retirement plan. Special tax rules may be available for certain distributions
from a Qualified Contract. Section 72(t) of the Code imposes a 10% penalty tax
on the taxable portion of any distribution from qualified retirement plans,
including Contracts and Certificates issued and qualified under Code Sections
403(b) (Tax-Sheltered Annuities) and 408(b) (Individual Retirement Annuities).
To the extent amounts are not includible in gross income because they have been
rolled over to an IRA or to another eligible qualified plan, no tax penalty will
be imposed. The tax penalty will not apply to the following distributions: (a)
if distribution is made on or after the date on which the Owner/Certificate
Owner or Annuitant (as applicable) reaches age 59 1/2; (b) distributions
following the death or disability of the Owner/Certificate Owner or Annuitant
(as applicable) (for this purpose disability is as defined in Section 72(m)(7)
of the Code); (c) after separation from service, distributions that are part of
substantially equal periodic payments made not less frequently than annually for
the life (or life expectancy) of the Owner/Certificate Owner or Annuitant (as
applicable) or the joint lives (or joint life expectancies) of such
Owner/Certificate Owner or Annuitant (as applicable) and his or her designated
Beneficiary; (d) distributions to an Owner/Certificate Owner or Annuitant (as
applicable) who has separated from service after he or she has attained age 55;
(e) distributions made to the Owner/Certificate Owner or Annuitant (as
applicable) to the extent such distributions do not exceed the amount allowable
as a deduction under Code Section 213 to the Owner/Certificate Owner or
Annuitant (as applicable) for amounts paid during the taxable year for medical
care; (f) distributions made to an alternate payee pursuant to a qualified
domestic relations order; or (g) distributions from an Individual Retirement
Annuity for the purchase of medical insurance (as described in Section
213(d)(1)(D) of the Code) for the Owner/Certificate Owner or Annuitant (as
applicable) and his or her spouse and dependents if the Owner/Certificate Owner
or Annuitant (as applicable) has received unemployment compensation for at least
12 weeks. This exception will no longer apply after the Owner/Certificate Owner
or Annuitant (as applicable) has been re-employed for at least 60 days. The
exceptions stated in (d) and (f) above do not apply in the case of an Individual
Retirement Annuity. The exception stated in (c) above applies to an Individual
Retirement Annuity without the requirement that there be a separation from
service.
Generally, distributions from a qualified plan must commence no later than April
1 of the calendar year following the later of: (a) the year in which the
employee attains age 70 1/2 or (b) the calendar year in which the employee
retires. The date set forth in (b) does not apply to an Individual Retirement
Annuity. Required distributions must be over a period not exceeding the life
expectancy of the individual or the joint lives or life expectancies of the
individual and his or her designated beneficiary. If the required minimum
distributions are not made, a 50% penalty tax is imposed as to the amount not
distributed.
TAX-SHELTERED ANNUITIES -- WITHDRAWAL LIMITATIONS
The Code limits the withdrawal of amounts attributable to contributions made
pursuant to a salary reduction agreement (as defined in Section 403(b)(11) of
the Code) to circumstances only on or after when the Owner/Certificate Owner:
(1) attains age 59 1/2; (2) separates from service; (3) dies; (4) becomes
disabled (within the meaning of Section 72(m)(7) of the Code); or (5) in the
case of hardship. However, withdrawals for hardship are restricted to the
portion of the Owner's Contract Value or Certificate Owner's Certificate Value
which represents contributions made by the Owner/Certificate Owner and does not
include any investment results. The limitations on withdrawals became effective
on January 1, 1989 and apply only to salary reduction contributions made after
December 31, 1988, to income attributable to such contributions and to income
attributable to amounts held as of December 31, 1988. The limitations on
withdrawals do not affect transfers between certain Qualified Plans. Owners and
Certificate Owners should consult their own tax counsel or other tax adviser
regarding any distributions.
ADDITIONAL INFORMATION ABOUT THE COMPANY
SELECTED HISTORICAL FINANCIAL INFORMATION OF THE COMPANY
The selected historical financial information set forth below was derived
from the audited financial statements of Great American Reserve. Great American
Reserve's balance sheets at December 31, 1996 and 1995, and the statements of
operations, shareholder's equity and cash flows for the year ended December 31,
1996, the four months ended December 31, 1995, the eight months ended August 31,
1995, and the year ended December 31, 1994, and the notes thereto were audited
by Coopers & Lybrand L.L.P., independent accountants, and are included elsewhere
herein. The selected historical financial information set forth below should be
read in conjunction with the financial statements and notes of Great American
Reserve and "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Great American Reserve" appearing elsewhere herein. The
financial data for all periods reflects the effect of the December 31, 1994,
merger of Jefferson National Life into the Company. This merger has been
accounted for as a pooling of interests; therefore, the assets and liabilities
of Jefferson National have been combined with Great American Reserve at their
book values and the financial data is presented as if the merger had occurred
prior to the periods presented.
<TABLE>
<CAPTION>
Prior basis (a)
------------------------------------------
Four Eight
Year months months Year ended
ended ended ended December 31,
December 31, December 31, August 31, ----------------------------
1996 1995 1995 1994 1993 1992(b)
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Insurance policy income........................ $ 81.4 $ 31.8 $ 60.5 $ 98.6 $108.2 $117.6
Net investment income.......................... 218.4 74.2 136.4 187.9 214.5 189.0
Net investment gains.......................... 2.7 12.5 7.3 .2 32.4 33.0
Total revenues................................. 302.5 118.5 204.2 286.7 355.1 339.6
Interest expense on notes payable.............. - - - - - 13.9
Total benefits and expenses.................... 261.4 92.7 159.5 225.2 260.4 272.3
Income before income taxes and
extraordinary charge....................... 41.1 25.8 44.7 61.5 94.7 67.3
Extraordinary charge on extinguishment
of debt, net of tax........................ - - - - - 6.9
Net income .................................. 25.7 16.1 28.2 38.8 54.5 36.4
Preferred dividends............................ - - - - - .4
Net income applicable to common stock.......... 25.7 16.1 28.2 38.8 54.5 36.0
BALANCE SHEET DATA - PERIOD END
Investments.................................... $2,382.8 $2,484.8 $2,217.9 $2,473.8 $2,134.8
Total assets................................... 2,680.5 2,756.8 2,625.0 2,751.1 2,443.3
Insurance liabilities.......................... 1,957.5 2,039.1 2,150.4 2,122.0 1,956.6
Total liabilities.............................. 2,283.6 2,314.2 2,260.1 2,302.6 2,074.4
Shareholder's equity .......................... 396.9 442.6 364.9 448.5 368.9
<FN>
(a) Financial data for the period subsequent to August 31, 1995, reflect the
adoption of a new basis of accounting under the "push down" method as a
result of the Conseco Acquisition. Accordingly, data prior to August 31,
1995, may not be comparable with subsequent data. Significant accounting
adjustments recorded as a result of the adoption of the new basis
include: (i) an increase of $59.0 million to cost of policies purchased;
(ii) a reduction of $27.0 million to cost of policies produced; (iii) a
reduction of $15.1 million to goodwill; (iv) an increase of $1.2 million
to insurance liabilities; and (v) the establishment of a deferred income
tax liability to reflect the income tax effects of all of the accounting
adjustments.
(b) Financial data for periods prior to the IPO of CCP include the accounts
of CCP subsidiaries, consisting principally of debt and preferred stock
which were used to acquire Great American Reserve and which were
expected to be repaid from future income of Great American Reserve.
Subsequent to the IPO and related refinancing transactions, the notes
payable of CCP and its subsidiaries was no longer expected to be repaid
solely from the net income of Great American Reserve. Accordingly, it
was no longer appropriate to push down the accounts of CCP subsidiaries
into Great American Reserve's consolidated financial statements. The
impact of the July 21, 1992, capital restructuring is reflected in Great
American Reserve's 1992 consolidated statements of operations and
shareholder's equity. As a result of no longer pushing down accounts of
CCP subsidiaries into Great American Reserve's consolidated financial
statements, the 1992 consolidated statement of shareholder's equity
reflects: (i) the impact of removing the accumulated earnings of the CCP
subsidiaries, excluding such earnings from their investment in Great
American Reserve, as a dividend distribution; (ii) the impact of
removing the capital accounts of the subsidiaries as a reduction of
contributed capital, and (iii) the impact of removing the assets and
liabilities of the subsidiaries as a contribution of capital to
Great American Reserve, which became Great American Reserve's common
stock and additional paid-in capital.
</FN>
</TABLE>
BUSINESS OF GREAT AMERICAN RESERVE
Background
Great American Reserve Insurance Company ("Great American Reserve"), with
total assets of $2.7 billion at December 31, 1996, markets tax-qualified
annuities and certain employee benefit-related insurance products through
professional independent agents. Since August 1995, Great American Reserve has
been a wholly owned subsidiary of Conseco, Inc. ("Conseco"), a financial
services holding company engaged in the development, marketing and
administration of annuity, individual health insurance and individual life
insurance products. During 1994, Conseco effectively owned 36 percent of Great
American Reserve, through its ownership interest in CCP Insurance, Inc. ("CCP"),
a holding company organized for companies previously acquired by Conseco Capital
Partners, L.P. (the "Partnership"), a limited partnership organized by Conseco.
Great American Reserve was acquired by the Partnership in 1990. During 1995,
Conseco's ownership in CCP (and in Great American Reserve) increased to 49
percent as a result of purchases of CCP common stock by CCP and Conseco. In
August 1995, Conseco completed the purchase of the remaining shares of CCP
common stock it did not already own in a transaction pursuant to which CCP was
merged with Conseco, with Conseco being the surviving corporation (the "Conseco
Acquisition").
Great American Reserve was organized as a Texas corporation and commenced
operations in 1937. Its main administrative offices are located at 11825 N.
Pennsylvania Street, Carmel, Indiana 46032, and its telephone number is (317)
817-3700.
MARKETING
Great American Reserve primarily utilizes independent market specialists to
distribute its products. Great American Reserve does not have the fixed costs
associated with recruiting, training and maintaining employee agents. Rather, a
relatively small number of in-house marketing personnel develop, direct and
support the external distribution channels through which Great American
Reserve's products are marketed.
Products. Great American Reserve's collected premiums (net of reinsurance
ceded) by product categories for the years ended December 31, 1996 and 1995, are
set forth below (dollars in millions).
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------
First Year Renewal Total
Premiums Premiums Premiums
-------------- ------------- ----------------
Products Amount % Amount % Amount %
- -------- ------ --- ------ --- ------ --
<S> <C> <C> <C> <C> <C> <C>
Single premium immediate annuities............. $17.1 21% $ - - % $17.1 8%
Flexible premium deferred annuities............ 15.4 18 27.9 21 43.3 20
Variable annuities............................. 37.9 45 43.6 32 81.5 37
----- --- ------- -- ------ ----
Total annuities......................... 70.4 84 71.5 53 141.9 65
Individual life................................ 2.1 3 45.0 33 47.1 22
Accident and health and other.................. 11.1 13 18.2 14 29.3 13
Guaranteed investment contracts................ .1 - - - .1 -
------ --- ------ --- ------ ---
Total collected premiums............. $ 83.7 100% $134.7 100% $218.4 100%
====== === ====== === ====== ===
</TABLE>
<TABLE>
<CAPTION>
1995
-------------------------------------------------------------
First Year Renewal Total
Premiums Premiums Premiums
-------------- ------------- ----------------
Products Amount % Amount % Amount %
- -------- ------ --- ------ --- ------ --
<S> <C> <C> <C> <C> <C> <C>
Single premium immediate annuities............. $29.9 38% $ - - % $ 29.9 14%
Flexible premium deferred annuities............ 16.3 20 23.6 17 39.9 18
Variable annuities............................. 17.2 22 40.1 30 57.3 27
----- ----- ------ --- ------ ---
Total annuities......................... 63.4 80 63.7 47 127.1 59
Individual life................................ 1.8 2 49.3 36 51.1 24
Accident and health and other.................. 11.8 15 22.6 17 34.4 16
Guaranteed investment contracts ............... 2.4 3 - - 2.4 1
----- --- ------ --- ------- ---
Total collected premiums................... $79.4 100% $135.6 100% $215.0 100%
===== === ====== === ====== ===
</TABLE>
Annuities
Premiums collected by Great American Reserve in 1996 totaled $218.4 million,
of which approximately 65 percent (84 percent of first-year premiums) were from
the sale of annuity products. Premiums collected in 1995 totalled $215.0
million, of which approximately 59 percent (80 percent of first-year premiums)
were from the sale of annuities. Great American Reserve markets several basic
types of annuities: single premium immediate annuities ("SPIAs"), flexible
premium deferred annuities ("FPDAs") and variable annuities.
Single Premium Immediate Annuities. SPIAs accounted for $17.1 million, or 8
percent, of Great American Reserve's total premiums collected in 1996 and $29.9
million, or 14 percent of premiums collected in 1995. Great American Reserve's
SPIAs are designed to provide a series of periodic payments for a fixed period
of time or for life, according to the policyholder's choice at the time of
issue. Once the payments have begun, the amount, frequency and length of time
for which they are payable are fixed. SPIAs often are purchased by persons at or
near retirement age who desire a steady stream of payments over a future period
of years. The single premium is often the payout from a terminated annuity
contract. The implicit interest rate on SPIAs is based on market conditions when
the policy is issued.
Flexible Premium Deferred Annuities. FPDAs accounted for $43.3 million, or
20 percent, of Great American Reserve's premiums collected in 1996 and $39.9
million, or 18 percent, of premiums collected in 1995. Great American Reserve's
FPDAs allow more than one premium payment, usually on a salary reduction basis.
FPDAs are marketed through networks of educator market specialists primarily to
teachers and employees of not-for-profit institutions as tax-qualified
salary-reduction retirement programs as permitted under Section 403(b) of the
Internal Revenue Code. A tax-qualified annuity purchased under Section 403(b) is
similar to contributions made to a 401(k) plan, but with different (and somewhat
more generous) rules on the maximum amount of current income which may be
contributed by the participant on a pre-tax basis. Generally, a participant may
elect to defer (through the purchase of a tax-qualified annuity under a 403(b)
plan) a percentage of includible compensation limited by statute and subject to
a maximum of $9,500 per year.
Great American Reserve's FPDAs typically have a guaranteed crediting rate
for the first policy year that exceeds the minimum annual guaranteed rate of at
least 3 percent. After the first year, the crediting rate may be changed at
least annually. The policyholder is permitted to withdraw all or part of the
accumulation value, less a surrender charge for withdrawals during an initial
penalty period of up to 15 years. The initial surrender charges range from 5
percent to 19 percent of the first year premium and decline over the penalty
period.
Variable Annuities. Variable annuities accounted for $81.5 million, or 37
percent, of Great American Reserve's total premiums collected in 1996 and $57.3
million, or 27 percent, of premiums collected in 1995. Great American Reserve
markets variable annuities primarily to the educator market. Variable annuities,
sold on a single or flexible premium basis, differ from fixed annuities in that
the original principal value may fluctuate depending on the performance of
assets allocated pursuant to various investment options chosen by the contract
owner. Variable annuities offer contract owners a fixed interest option or a
variable rate of return based upon the specific investment portfolios into which
premiums may be directed.
Individual Life
Individual life products, consisting of interest sensitive life and
traditional life products, accounted for $47.1 million, or 22 percent, of Great
American Reserve's premiums collected in 1996 and $51.1 million, or 24 percent,
of premiums collected in 1995. Although Great American Reserve no longer
actively markets these products, it continues to have a substantial block of
in-force policies on which renewal premiums are collected. These products were
sold through professional independent producers.
Interest-sensitive life insurance products (including universal life
products) provide whole life insurance with adjustable rates of return related
to current interest rates. The principal differences between Great American
Reserve's universal life products and other interest-sensitive life insurance
products are policy provisions affecting the amount and timing of premium
payments. Universal life policyholders may vary the frequency and size of their
premium payments, although policy benefits may also fluctuate according to such
payments. Premium payments under the other interest-sensitive policies may not
be varied by the policyholders and, as a result, are designed to reduce the
administrative costs typically associated with monitoring universal life premium
payments and policy benefits.
Individual life products also include whole life and term life products.
Under whole life policies, which were the standard industry product prior to the
advent of universal life insurance, the policyholder generally pays a level
premium over the policyholder's expected lifetime, which exceeds the premium on
comparable term insurance when the policyholder is younger but is less as the
policyholder grows older. These policies combine insurance protection with a
savings component that increases in amount gradually over the life of the
policy. The policyholder may borrow against the savings generally at a rate of
interest lower than that available from other lending sources. The policyholder
may also choose to surrender the policy and receive the accumulated cash value
rather than continuing the insurance protection. Term life products offer pure
insurance protection for a specified period of time-typically one, five, 10 or
20 years.
Accident and Health and Other
Accident and health and other products accounted for $29.3 million, or 13
percent, of Great American Reserve's total premiums collected in 1996 and $34.4
million, or 16 percent, of premiums collected in 1995. Great American Reserve
offers group dental, group disability, blanket student accident and a limited
amount of other health insurance products, primarily through independent market
specialists. Great American Reserve markets accident and health policies
primarily because it believes that offering a broad range of products is
important to successfully market life insurance and annuity products, although
such accident and health policies are also designed to be profitable. Group
dental coverage provides a range of benefits for dental care and related
procedures. Disability products provide defined monthly benefits up to specified
levels in the case of disability. Student accident products provide limited
supplemental reimbursement coverage to students for accidents and sickness.
Great American Reserve's health business is subject to the risk that its claims
experience deviates from the assumptions used in setting premium rates. However,
Great American Reserve has the right to change rates to correct for adverse
experience every six months on many group policies and annually on all others.
Experience may be adversely affected by inflationary trends in the costs of
medical treatment, competition-driven business cycles and the extent to which
insureds utilize covered services.
Great American Reserve collected premiums of $.1 million in 1996 and $2.4
million in 1995, from guaranteed investment contracts issued as investment
options for qualified retirement plans maintained by Conseco.
INVESTMENTS
Conseco Capital Management, Inc. ("CCM"), a registered investment adviser
wholly owned by Conseco, manages the investment portfolio of Great American
Reserve. CCM's investment philosophy is to maintain a largely investment-grade
fixed-income portfolio, provide adequate liquidity for expected liability
durations and other requirements and maximize total return through active
investment management. Investment activities are an integral part of Great
American Reserve's business, since investment income is a significant component
of Great American Reserve's total revenues. Profitability is significantly
affected by spreads between interest yields on investments and rates credited on
insurance liabilities. Although substantially all credited rates on flexible
premium deferred annuities may be changed annually, changes in crediting rates
may not be sufficient to maintain targeted investment spreads in all economic
and market environments. In addition, competition and other factors, including
the impact of the level of surrenders and withdrawals, may limit Great American
Reserve's ability to adjust or to maintain crediting rates at levels necessary
to avoid narrowing of spreads under certain market conditions.
For information regarding the composition and diversification of the
investment portfolio of Great American Reserve, see "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations of Great
American Reserve" and note 3 to Great American Reserve's financial statements
for the year ended December 31, 1996.
COMPETITION
Great American Reserve operates in a highly competitive environment. The
life insurance industry consists of a large number of insurance companies, many
of which are substantially larger and have greater financial resources, broader
and more diversified product lines and larger staffs than those of Great
American Reserve. An expanding number of banks, securities brokerage firms and
other financial intermediaries also market insurance products or offer competing
products, such as mutual fund products, traditional bank investments and other
investment and retirement funding alternatives. In most areas, competition is
based on a number of factors, including pricing, service provided to
distributors and policyholders, and ratings. Great American Reserve must also
compete with other insurers to attract and retain the allegiance of agents.
Financial institutions, school districts, marketing companies, agents who
market insurance products and policyholders use the financial strength ratings
assigned to an insurer by independent rating agencies as one factor in
determining which insurer's annuity to market or purchase. Great American
Reserve is rated "A (Excellent)" by A.M. Best Company ("A.M. Best"). A.M. Best's
insurance company ratings for the industry currently range from "A++ (Superior)"
to "F ( In Liquidation)". Publications of A.M. Best indicate that the "A" rating
is assigned to those companies that, in A.M. Best's opinion, have demonstrated
excellent overall performance when compared to the standards established by A.M.
Best and have demonstrated a strong ability to meet their obligations to
policyholders over a long period of time. A.M. Best's rating procedure includes
quantitative and qualitative evaluations of a company's financial condition and
operating performance. Its quantitative evaluation is based on an analysis of a
company's financial performance in the areas of profitability,
leverage/capitalization and liquidity. A.M. Best's review also includes a
qualitative evaluation of a company's spread of risk, quality and
appropriateness of the reinsurance program, quality and diversification of
assets, adequacy of policy or loss reserves, management experience and
objectives, market presence and policyholders' confidence.
Great American Reserve has been assigned a claims paying ability rating of
"A+" from Duff & Phelps Credit Rating Company ("Duff & Phelps"). Duff & Phelps'
claims-paying ability ratings range from "AAA (Highest claims-paying ability)"
to "DD (Company is under an order of liquidation)." Publications of Duff &
Phelps indicate that the"A+" rating represents "High claims-paying ability." A
plus or minus sign attached to a Duff & Phelps claims paying rating shows
relative standing within a ratings category.
In addition, Great American Reserve has been assigned a claims paying
ability rating of BBBq from Standard & Poor's Corporation ("Standard & Poor's").
Claims-paying ability ratings from Standard & Poor's range from "AAA (Superior)"
to "R (Regulatory Action)." A "BBB" is assigned by Standard & Poor's to those
companies which, in its opinion, have adequate financial security, but their
capacity to meet policyholder obligations is susceptible to adverse economic and
underwriting conditions. A "q" subscript indicates that the rating is based
solely on quantitative analysis of publicly available financial data.
Generally, rating agencies base their ratings upon information furnished to
them by the insurer and upon their own investigations, studies and assumptions.
A.M. Best's ratings, Duff & Phelps' claims-paying ratings and Standard & Poor's
claims-paying ratings are principally based upon factors of concern to
policyholders, agents and intermediaries and are not directed toward the
protection of investors. Given the competitive nature of Great American
Reserve's business and the increasing focus placed on the aforementioned
ratings, Great American Reserve manages its business with the objective of
preserving existing ratings and, where possible, achieving more favorable
ratings. There can be no assurance that any particular rating will continue for
any given period of time, or that it will not be changed or withdrawn entirely
if, in the judgement of the rating agency, circumstances so warrant. If Great
American Reserve's ratings are downgraded from their current levels, sales of
its products and the persistency of its in-force policies could be adversely
affected in a material way.
Great American Reserve believes that it is able to compete effectively
because: (i) it is experienced in establishing and cultivating relationships
with independent market specialists which can respond rapidly to changing
customer needs; (ii) it can offer competitive rates as a result of the
lower-than-average operating costs and higher-than-average investment yields
achieved by applying active investment portfolio management techniques; and
(iii) it has reliable policyholder administrative services, supported by
customized information technology systems.
UNDERWRITING
Underwriting with respect to the majority of products sold by Great American
Reserve (FPDAs and variable annuities) is minimal. Substantially all life
insurance policies issued by Great American Reserve are underwritten
individually, although standardized underwriting procedures have been adopted
for certain low face-amount life insurance coverages. Great American Reserve's
group accident and health policies are underwritten based on the characteristics
of a group and its past claim experience.
REINSURANCE
Consistent with the general practice of the life insurance industry, Great
American Reserve reinsures portions of the risk assumed under its insurance
policies with other insurance companies under agreements of indemnity
reinsurance. Great American Reserve also reinsures risks from other insurers,
which are accounted for in the same manner as direct business.
The policy risk retention limit on the life of one individual is $.5
million. At December 31, 1996, reinsurance ceded by Great American Reserve
represented 8.3 percent of gross life insurance in force and reinsurance assumed
represented 5.3 percent of net life insurance in force. At December 31, 1996,
Great American Reserve's largest reinsurer accounted for less than .4 percent of
total insurance liabilities and 28 percent of total reinsurance receivables.
EMPLOYEES
Great American Reserve has no full-time employees. Great American Reserve's
day-to-day operations are administered by Conseco pursuant to agreements between
Great American Reserve and Conseco.
GOVERNMENTAL REGULATION
Great American Reserve is subject to regulation and supervision by the
states in which it transacts business. State laws generally establish
supervisory agencies with broad administrative authority, including power to:
(i) grant and revoke business licenses; (ii) regulate and supervise trade
practices and market conduct; (iii) establish guaranty associations; (iv)
license agents; (v) approve policy forms; (vi) regulate premium rates for some
lines of business; (vii) establish reserve requirements; (viii) prescribe the
form and content of required financial statements and reports; (ix) determine
the reasonableness and adequacy of statutory capital and surplus; and (x)
regulate the type and amount of permitted investments. Great American Reserve is
subject to periodic examinations by state regulatory authorities. Management
does not expect the results of any on-going examinations to have a material
effect on the financial condition of Great American Reserve.
The federal government does not directly regulate the insurance business.
However, federal legislation and administrative policies in several areas,
including pension regulation, age and sex discrimination, financial services
regulation and federal taxation, do affect the insurance business. In addition,
legislation has been introduced from time to time in recent years which, if
enacted, could result in the federal government assuming a more direct role in
the regulation of the insurance industry.
In December 1992, the NAIC adopted the Risk-Based Capital for Life and/or
Health Insurers Model Act (the "Model Act"). The Model Act provides a tool for
insurance regulators to determine the levels of capital and surplus an insurer
must maintain in relation to its insurance and investment risks and whether
there is a need for possible regulatory attention.
The Model Act provides for four levels of regulatory attention, varying
with the ratio of the company's total adjusted capital (defined as the total of
its statutory capital, surplus, asset valuation reserve and certain other
adjustments) to its risk-based capital ("RBC"). If a company's total adjusted
capital is less than 100 percent but greater than or equal to 75 percent of its
RBC, or if a negative trend (as defined by the regulators) has occurred and
total adjusted capital is less than 125 percent of RBC (the "Company Action
Level"), the company must submit a comprehensive plan to the regulatory
authority proposing corrective actions aimed at improving its capital position.
If a company's total adjusted capital is less than 75 percent but greater than
or equal to 50 percent of its RBC (the "Regulatory Action Level") , the
regulatory authority will perform a special examination of the company and issue
an order specifying corrective actions that must be followed. If a company's
total adjusted capital is less than 50 percent but greater than or equal to 35
percent of its RBC (the "Authorized Control Level"), the regulatory authority
may take any action it deems necessary, including placing the company under
regulatory control. If a company's total adjusted capital is less than 35
percent of its RBC (the "Mandatory Control Level") the regulatory authority must
place the company under its control. At December 31, 1996, the total adjusted
capital for Great American Reserve was greater than twice the respective Company
Action Level.
The Texas Insurance Department has adopted its own RBC requirements, the
stated purpose of which is to require a minimum level of capital and surplus to
absorb the financial, underwriting, and investment risks assumed by an insurer.
Texas' RBC requirements differ from those adopted by the NAIC in two principal
respects: (i) they use different elements to determine minimum RBC levels in
their calculation formulas; and (ii) they do not stipulate "Action Levels" (like
those adopted by the NAIC) where corrective actions are required. However, the
Commissioner of the Texas Insurance Department does have the power to take
similar corrective actions if a company does not maintain the required minimum
level of capital and surplus. Under the Texas Regulations, an insurer has met
RBC requirements if its admitted assets exceed its liabilities by at least 3
percent. Great American Reserve is domiciled in Texas and must comply with Texas
RBC requirements. At December 31, 1996, the admitted assets of Great American
Reserve exceeded liabilities by more than twice the required 3 percent level.
On the basis of statutory statements filed with state regulators annually,
the NAIC calculates twelve financial ratios to assist state regulators in
monitoring the financial condition of insurance companies. A "usual range" of
results for each ratio is used as a benchmark. In the past, variances in certain
ratios of Great American Reserve have resulted in inquiries from insurance
departments to which Great American Reserve has responded. Such inquiries did
not lead to any restrictions affecting Great American Reserve's operations.
Under the solvency or guaranty laws of most states in which it does
business, Great American Reserve is required to pay guaranty fund assessments
(up to certain prescribed limits). Guaranty funds are established by various
states to fund policyholder losses or the liabilities of insolvent or
rehabilitated insurance companies. These assessments may be deferred or forgiven
under most guaranty laws if they would threaten an insurer's financial strength.
In certain instances, the assessments may be offset against future premium
taxes. Great American Reserve believes that the liability established at
December 31, 1996, is sufficient to provide for assessments related to known
insolvencies. This reserve is based upon management's current expectation of the
availability of this right of offset and state guaranty fund assessment bases.
However, changes in the basis whereby assessments are charged to individual
companies or changes to the availability of the right to offset assessments
against premium tax payments could materially affect Great American Reserve's
results. Great American Reserve's statutory financial statements for the year
ended December 31, 1996, include $1.4 million of expenses as a result of such
assessments.
FEDERAL INCOME TAXATION
The annuity and life insurance products marketed and issued by Great
American Reserve generally provide the policyholder with an income tax
advantage, as compared to other saving investments such as certificates of
deposit and bonds, in that income taxation on the increase in value of the
product is deferred until receipt by the policyholder. With other savings
investments, the increase in value is taxed as earned. Annuity benefits, and
life insurance benefits which accrue prior to the death of the policyholder, are
generally not taxable until paid. Life insurance death benefits are generally
exempt from income tax. Also, benefits received on immediate annuities (other
than structured settlements) are recognized as taxable income ratably as opposed
to the methods used for some other investments, which tend to accelerate taxable
income into earlier years. The tax advantage for annuities and life insurance is
provided in the Internal Revenue Code (the "Code"), and is generally followed in
all states and other United States taxing jurisdictions. Accordingly, the tax
advantage is subject to change by Congress and by the legislatures of the
respective taxing jurisdictions.
Great American Reserve is taxed under the life insurance company provisions
of the Code. Provisions in the Code require a portion of the expenses incurred
in selling insurance products to be deducted over a period of years, as opposed
to immediate deduction in the year incurred. This provision increases the tax
for statutory accounting purposes, which reduces statutory surplus and,
accordingly, decreases the amount of cash dividends that may be paid by Great
American Reserve. As of December 31, 1996, the cumulative taxes paid as a result
of this provision were $5.6 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF GREAT AMERICAN RESERVE
The following discussion highlights the material factors affecting the
results of operations and financial condition and resources of Great American
Reserve. This discussion should be read in conjunction with the financial
statements and notes of Great American Reserve included elsewhere herein.
RESULTS OF OPERATIONS
The adjustments resulting from the adoption of a new basis of accounting
under the "push down" method discussed above under "Selected Historical
Financial Information of the Company", may impact the comparability of financial
data for the periods before and after August 31, 1995.
Year Ended December 31, 1996, Compared to 1995 Periods Combined (Eight
Months Ended August 31, 1995 and Four Months Ended December 31, 1995)
Insurance policy income consists of premiums received on traditional life
products and policy fund and surrender charges assessed against investment type
products. This account decreased in 1996 compared to the 1995 periods as a
result of a decrease in sales of policies with mortality or morbidity risks;
partially offset by an increase in surrender charges. Surrender charges assessed
against annuity withdrawals were $1.9 million in 1996 and $1.7 million in the
1995 periods and annuity withdrawals were $202.4 million in 1996 and $179.8
million in the 1995 periods. Increases in withdrawals were primarily due to the
increased size of Great American Reserve's annuity portfolio and increased
competition from higher yielding alternative investment products.
Net investment income includes both income earned on the general invested
assets of Great American Reserve and separate account assets related to variable
annuities. Investment income earned on separate account assets is offset by a
corresponding charge to interest expense on annuities and financial products.
Excluding investment income on separate accounts, net investment income in 1996
decreased 4.5 percent from 1995, to $182.8 million. Average invested assets
(amortized cost basis and excluding separate account assets) were $2.3 billion
in 1996 and 1995, while the yield earned on average invested assets decreased to
8.1 percent from 8.2 percent. Cash flows received during 1995 and 1996
(including cash flows from the sales of investments) were invested in
lower-yielding securities due to a general decline in interest rates.
Net investment income on separate account assets in 1996 increased to $35.6
million from $19.2 million in the 1995 periods.
Net investment gains often fluctuate from period to period. Great American
Reserve sold $988.9 million of investments during 1996 compared to $919.7
million in 1995 which sales resulted in net investment gains of $3.5 million in
1996 compared to net investment gains of $21.4 million in 1995. In addition,
Great American Reserve recorded net investment losses of $.8 million in 1996 and
$1.6 million in the 1995 periods on writedowns taken as a result of conditions
which caused Great American Reserve to conclude that declines in the fair value
of certain securities were other than temporary.
Selling securities at a gain and reinvesting the proceeds at a lower yield
may, absent other management action, tend to decrease future investment yields.
Great American Reserve believes, however, that certain factors would mitigate
the adverse effect on net income of such yield decreases as follows: (i)
additional amortization of the cost of policies purchased and the cost of
policies produced is recognized in the same period as the gain in order to
reflect reduced future yields (thereby reducing such amortization in future
periods); (ii) interest rates credited to some products can be reduced thereby
diminishing the effect of the yield decrease on the investment spread; and (iii)
the investment portfolio grows as a result of reinvesting the investment gains.
See amortization related to net investment gains below.
Insurance policy benefits and change in future policy benefits relate solely
to policies with mortality or morbidity features. The decrease in 1996
corresponds with the decrease in the in-force block of such policies.
Interest expense on annuities and financial products increased 8.9 percent
in 1996 compared to the 1995 periods. Such increase reflects fluctuations in
charges to the account related to separate account assets described above under
net investment income; and changes in crediting rates. The weighted average
crediting rate for annuity liabilities (other than separate accounts where the
credited amount is based on investment income from segregated investments and
excluding interest bonuses guaranteed for the first year of the contract) was
5.5 percent and 5.6 percent at December 31, 1996 and 1995, respectively.
Interest expense on investment borrowings in 1996 and the 1995 periods
reflect changes in investment borrowing activities and lower rates paid on such
borrowings in 1996.
Amortization related to operations is affected by the Conseco Acquisition
and the adoption of a new basis of accounting under the "push down" method.
Amortization related to operations in periods prior to the Conseco Acquisition
is comprised of cost of policies purchased, cost of policies produced and
goodwill based on the previous balances and bases. Amortization related to
operations after the Conseco Acquisition is comprised of amortization of the
aforementioned account balances, reflecting a combination of Conseco's ownership
interests in previous balances and its newly purchased interests using the
step-basis of accounting.
Cost of policies produced represents the cost of producing new business
(primarily commissions and certain costs of policy issuance and underwriting)
which varies with and is primarily related to the production of new business.
Costs deferred may represent amounts paid in the period new business is written
(such as underwriting costs and first year commissions) or in periods after the
business is written (such as commissions paid in subsequent years in excess of
ultimate commissions paid).
Cost of policies purchased represents the cost to acquire Great American
Reserve that is attributable to the right to receive cash flows from insurance
contracts in force at the acquisition dates. Some costs incurred subsequent to
the adoption of the new accounting basis on policies issued prior to such date,
which otherwise would have been deferred had it not been for the change in
accounting basis (because they vary with and are primarily related to the
production of the acquired interests in policies) are expensed. Such costs are
primarily comprised of certain commissions paid in excess of ultimate
commissions which have been expensed as operating expense after August 31, 1995.
However, such amounts were considered in determining the cost of policies
purchased and its amortization.
Amortization related to net investment gains decreased in 1996 as a result
of the decrease in investment gains discussed above.
Other operating costs and expenses increased 48 percent to $54.3 million in
1996 compared to $36.8 million in the 1995 periods as a result of costs which
were previously capitalized as part of cost of policies produced which were
expensed in 1996 (see discussion of amortization related to operations); and
additional costs incurred under new service agreements with Conseco as described
in the notes to the financial statements for the year ended December 31, 1996,
included herein.
Income tax expense fluctuated primarily in relationship to income before
taxes.
1995 Periods Combined (Four Months Ended December 31, 1995, and Eight Months
Ended August 31, 1995) Compared to Year Ended December 31, 1994
Insurance policy income consists of premiums received on traditional life
products and policy fund and surrender charges assessed against investment type
products. This account decreased in the 1995 periods from 1994 as a result of a
decrease in sales of policies with mortality or morbidity risks, partially
offset by an increase in surrender charges resulting from higher annuity policy
withdrawals. Surrender charges assessed against annuity withdrawals were $1.7
million in the 1995 periods and $1.5 million in 1994 and annuity withdrawals
were $179.8 million in the 1995 periods and $129.8 million in 1994. Increases in
withdrawals were primarily due to the increased size of Great American Reserve's
annuity portfolio and increased competition from higher yielding alternative
investment products.
Net investment income includes both income earned on the general invested
assets of Great American Reserve and separate account assets related to variable
annuities. Investment income earned on separate account assets is offset by a
corresponding charge to interest expense on annuities and financial products.
Excluding investment income on separate accounts, net investment income in the
1995 periods increased 3.1 percent from 1994, to $191.4 million. Average
invested assets (amortized cost basis and excluding separate account assets)
were $2.3 billion in 1995 and 1994, while the yield earned on average invested
assets increased to 8.2 percent from 8.0 percent.
Net investment income on separate account assets in the 1995 periods
increased to $19.2 million from $2.3 million in 1994.
Net investment gains often fluctuate from period to period. Great American
Reserve sold $919.7 million of investment securities during the 1995 periods and
$586.0 million in 1994 which sales resulted in net investment gains of $21.4
million in the 1995 periods compared to net investment gains of $1.2 million in
1994. In addition, Great American Reserve recorded net investment losses of $1.6
million in the 1995 periods and $1.0 million in 1994 on writedowns taken as a
result of conditions which caused Great American Reserve to conclude that
declines in the fair value of certain securities were other than temporary.
The effect of net investment gains on the amortization of cost of policies
purchased and cost of policies produced is discussed above under the comparison
of the 1996 and 1995 periods. Also see amortization related to net investment
gains below.
Insurance policy benefits and change in future policy benefits relate solely
to policies with mortality or morbidity features. The decrease in the 1995
periods corresponds with the decrease in the in-force block of such policies.
Interest expense on annuities and financial products increased 17 percent in
the 1995 periods over 1994. Such increase reflects: (i) fluctuations in charges
to the account related to investment income from separate account assets as
described above under net investment income; and (ii) changes in crediting
rates. The weighted average crediting rate for annuity liabilities (other than
separate accounts where the credited amount is based on investment income from
the segregated investments and excluding interest bonuses guaranteed for the
first year of the annuity contract) was 5.6 percent and 5.8 percent at December
31, 1995 and 1994, respectively.
Interest expense on investment borrowings in the 1995 periods and in 1994
reflects changes in investment borrowing activities and the higher rates paid on
such borrowings in the 1995 periods.
Amortization related to operations increased 6.3 percent to $17.0 million in
the 1995 periods from $16.0 million in 1994. Such increase is affected by: (i)
the adoption of a new basis of accounting as discussed above; and (ii) the
increased amount of business in force on which acquisition costs are
capitalized. See the discussion of cost of policies produced and cost of
policies purchased above under the comparison of the 1996 and 1995 periods.
Amortization related to net investment gains increased in the 1995 periods
as a result of the increase in investment gains discussed above.
Income tax expense fluctuated primarily in relationship to income before
taxes.
INVESTMENTS
Great American Reserve's investment strategy is to: (i) maintain a
predominately investment grade fixed income portfolio; (ii) provide adequate
liquidity to meet the cash flow requirements of policyholders and other
obligations; and (iii) maximize current income and total investment return
through active investment management. Consistent with this strategy, investments
in fixed maturity securities, mortgage loans, credit-tenant loans, policy loans
and short-term investments comprised 87 percent of Great American Reserve's
investment portfolio at December 31, 1996. The remainder of the invested assets
were in equity securities, assets held in separate accounts and other invested
assets. At December 31, 1996, Great American Reserve had invested assets of
approximately $2.4 billion.
Great American Reserve is regulated by insurance statutes and regulations as
to the type of investments that it is permitted to make and the amount of funds
that may be used for any one type of investment. In light of these statutes and
regulations and Great American Reserve's business and investment strategy, Great
American Reserve generally seeks to invest in United States government and
government agency securities and corporate securities rated investment grade by
established nationally recognized rating organizations or, if not rated, in
securities of comparable investment quality.
The following table summarizes investment yields earned over the periods
indicated:
<TABLE>
<CAPTION>
Prior basis
-------------------------
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Weighted average invested assets:
As reported ............................ $2,417.9 $2,498.1 $2,416.5 $4,552.3
Excluding unrealized appreciation
(depreciation) (a).................... 2,438.9 2,467.4 2,470.7 4,662.6
Net investment income.......................... 218.4 74.2 136.4 367.8
Yields earned:
As reported............................. 9.0% 8.9% 8.4% 8.1%
Excluding unrealized appreciation
(depreciation) (a) ................... 8.9% 9.0% 8.2% 7.9%
<FN>
(a) Excludes the effect of reporting fixed maturities at fair value as
described in note 1 to the financial statements.
</FN>
</TABLE>
Although investment income is a significant component of total revenues, the
profitability of Great American Reserve's annuity business is determined
primarily by spreads between interest rates earned and rates credited on annuity
contracts. At December 31, 1996, the average yield, computed on the cost basis
of Great American Reserve's investment portfolio, was 7.9 percent and the
average interest rate credited on Great American Reserve's total liability
portfolio was 5.7 percent.
Actively Managed Fixed Maturities
Great American Reserve's actively managed fixed maturity portfolio at
December 31, 1996, was comprised primarily of debt securities of the United
States government, public utilities and other corporations and mortgage-backed
securities. Mortgage-backed securities included collateralized mortgage
obligations ("CMOs") and mortgage-backed pass-through securities.
At December 31, 1996, the amortized cost and estimated fair value of
actively managed fixed maturity securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
United States Treasury securities and obligations
of United States government corporations and
agencies............................................... $ 29.9 $ .3 $ .3 $ 29.9
Obligations of state and political subdivisions and
foreign government obligations......................... 17.7 .1 .6 17.2
Public utility securities................................. 234.8 2.4 7.0 230.2
Other corporate securities................................ 950.1 10.9 17.6 943.4
Mortgage-backed securities ............................... 578.3 2.3 6.2 574.4
-------- ----- ----- --------
Total.................................................. $1,810.8 $16.0 $31.7 $1,795.1
======== ===== ===== ========
</TABLE>
As discussed in the notes to the financial statements, when Great American
Reserve adjusts carrying values of actively managed fixed maturity securities
for changes in fair value, it also adjusts the cost of policies purchased, cost
of policies produced and insurance liabilities. These adjustments are made in
order to reflect the change in amortization that would be needed if those fixed
maturity investments had actually been sold at their fair values and the
proceeds reinvested at current interest rates.
The following table sets forth actively managed fixed maturity securities at
December 31, 1996, classified by rating categories. The category assigned is the
highest rating by a nationally recognized statistical rating organization or, as
to $23.5 million estimated fair value of fixed maturity securities not rated by
such firms, the rating assigned by the National Association of Insurance
Commissioners ("NAIC"). For the purposes of this table, NAIC Class 1 is included
in the "A" rating; Class 2, "BBB-"; Class 3, "BB-"; and Classes 4-6, "B+ and
below":
<TABLE>
<CAPTION>
Percent of Percent of
Investment fixed total
Rating maturities investments
------ ---------- -----------
<S> <C> <C>
AAA................................................................................... 37% 28%
AA.................................................................................... 6 5
A..................................................................................... 21 15
BBB+.................................................................................. 9 6
BBB................................................................................... 13 10
BBB-.................................................................................. 7 5
--- --
Investment-grade................................................................. 93 69
--- --
BB+................................................................................... 1 1
BB.................................................................................... 1 1
BB-................................................................................... 2 2
B+ and below ......................................................................... 3 2
--- --
Below investment-grade........................................................... 7 6
--- --
Total actively managed fixed maturities...................................... 100% 75%
=== ==
</TABLE>
Great American Reserve plans to maintain approximately the present level of
below investment grade fixed maturities. These securities generally have greater
risks than other corporate debt investments, including risk of loss upon default
by the borrower, and are often unsecured and subordinated to other creditors.
Below investment grade issuers usually have high levels of indebtedness and are
more sensitive to adverse economic conditions, such as recession or increasing
interest rates, than are investment grade issuers. Great American Reserve is
aware of these risks and monitors its below investment grade securities closely.
At December 31, 1996, Great American Reserve's below investment grade fixed
maturity investments had an amortized cost of $132.6 million and an estimated
fair value of $131.8 million.
Great American Reserve's investment portfolio is managed by CCM. Great
American Reserve and CCM periodically evaluate the creditworthiness of each
issuer whose securities are held in the portfolio. Special attention is paid to
those securities whose market values have declined materially for reasons other
than changes in interest rates or other general market conditions. Great
American Reserve considers available information to evaluate the realizable
value of the investment, the specific condition of the issuer, and the issuer's
ability to comply with the material terms of the security. Information reviewed
may include the recent operational results and financial position of the issuer,
information about its industry, recent press releases and other information. CCM
employs a staff of experienced securities analysts in a variety of specialty
areas. Among other responsibilities, this staff compiles and reviews such
evidence. If evidence does not exist to support a realizable value equal to or
greater than the carrying value of the investment and such decline in market
value is determined to be other than temporary, Great American Reserve reduces
the carrying amount to its net realizable value, which becomes the new cost
basis; the amount of the reduction is reported as an investment loss. Great
American Reserve recognizes any recovery of such reductions in the cost basis of
an investment only upon the sale, repayment or other disposition of the
investment. Great American Reserve recorded writedowns of investments of $.8
million in 1996 and $1.6 million in 1995 as a result of changes in conditions
which caused it to conclude that the decline in fair value of such investments
was other than temporary. Great American Reserve's investment portfolio is
subject to the risks of further declines in realizable value. Great American
Reserve and CCM, however, attempt to mitigate this risk through the
diversification and active management of its portfolio.
Great American Reserve had no fixed maturity investment in technical default
(i.e., in default, but not as to the payment of interest or principal) or
substantive default (i.e., in default due to nonpayment of interest or
principal) at December 31, 1996. There were no fixed maturity investments about
which management had serious doubts as to the ability of the issuer to comply on
a timely basis with the material terms of the instruments.
At December 31, 1996, fixed maturity investments included $574.4 million of
mortgage-backed securities (32 percent of the fixed maturity security
portfolio). CMOs are securities backed by pools of pass-through securities
and/or mortgages that are segregated into sections or "tranches" which provide
for sequential retirement of principal rather than the pro rata share of
principal return which occurs through regular monthly principal payments on
pass-through securities.
The yield characteristics of mortgage-backed securities differ from those of
traditional fixed income securities. Interest and principal payments occur more
frequently, often monthly, and mortgage-backed securities are subject to risks
associated with variable prepayments. Prepayment rates are influenced by a
number of factors which cannot be predicted with certainty, including the
relative sensitivity of the underlying mortgages backing the assets to changes
in interest rates; a variety of economic, geographic and other factors; and the
repayment priority of the securities in the overall securitization structures.
In general, prepayments on the underlying mortgage loans, and the securities
backed by these loans, increase when the level of prevailing interest rates
declines significantly below the interest rates on such loans. Mortgage-backed
securities purchased at a discount to par will experience an increase in yield
when the underlying mortgages prepay faster than expected. Those securities
purchased at a premium that prepay faster than expected will incur a reduction
in yield. When declines in interest rates occur, the proceeds from the
prepayment of mortgage-backed securities are likely to be reinvested at lower
rates than Great American Reserve was earning on the prepaid securities. As the
level of prevailing interest rates increases, prepayments on mortgage-backed
securities decrease as fewer underlying mortgages are refinanced. When this
occurs, the average maturity and duration of the mortgage-backed securities
increase, which decreases the yield on mortgage-backed securities purchased at a
discount because the discount is realized as income at a slower rate and
increases the yield on those purchased at a premium as a result of a decrease in
annual amortization of the premium.
The following table sets forth the par value, amortized cost and estimated
fair value of mortgage-backed securities including CMOs summarized by interest
rates on the underlying collateral at December 31, 1996:
<TABLE>
<CAPTION>
Par Amortized Estimated
value cost fair value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Below 7 percent............................................................ $209.6 $205.1 $201.5
7 percent - 8 percent...................................................... 247.4 241.5 240.6
8 percent - 9 percent...................................................... 70.9 69.7 69.3
9 percent and above........................................................ 60.1 62.0 63.0
------ ------ ------
Total mortgage-backed securities...................................... $588.0 $578.3 $574.4
====== ====== ======
</TABLE>
The amortized cost and estimated fair value of mortgage-backed securities
including CMOs at December 31, 1996, summarized by type of security were as
follows:
<TABLE>
<CAPTION>
Estimated fair value
------------------------
% of
Amortized fixed
Type cost Amount maturities
- ---- ---- ------ ----------
(Dollars in millions)
<S> <C> <C> <C>
Pass-throughs and sequential and targeted amortization classes............ $458.7 $454.9 25%
Accrual (Z tranche) bonds.................................................. 9.6 9.7 1
Planned amortization classes and accretion directed bonds.................. 77.2 76.7 4
Subordinated classes....................................................... 32.8 33.1 2
------ ------ --
$578.3 $574.4 32%
====== ====== ==
</TABLE>
Pass-throughs and sequential and targeted amortization classes have similar
prepayment variability. Pass-throughs have historically provided the best
liquidity in the mortgage-backed securities market and provide the best
price/performance ratio in a highly volatile interest rate environment. This
type of security is also frequently used as collateral in the dollar-roll
market. Sequential classes pay in a strict sequence; all principal payments
received by the CMO are paid to the sequential tranches in order of priority.
Targeted amortization classes provide a modest amount of prepayment protection
when prepayments on the underlying collateral increase from those assumed at
pricing. Thus, they offer slightly better call protection than sequential
classes and pass-throughs.
Support classes absorb the prepayment risk from which planned amortization
and targeted amortization classes are protected. As such, they are usually
extremely sensitive to prepayments. Most of Great American Reserve's support
classes are higher average life instruments that generally will not lengthen if
interest rates rise further and will have a tendency to shorten if interest
rates decline. However, since these bonds have costs below par values, higher
prepayments will have the effect of increasing yields.
Accrual bonds are CMOs structured such that the payment of coupon interest
is deferred until principal payments begin. On each accrual date, the principal
balance is increased by the amount of the interest (based upon the stated coupon
rate) that otherwise would have been payable. As such, these securities act much
the same as zero coupon bonds until cash payments begin. Cash payments typically
do not commence until earlier classes in the CMO structure have been retired,
which can be significantly influenced by the prepayment experience of the
underlying mortgage loan collateral in the CMO structure. Because of the zero
coupon element of these securities and the potential uncertainty as to the
timing of cash payments, their market values and yields are more sensitive to
changing interest rates than other CMOs, pass-through securities and coupon
bonds.
Planned amortization classes and accretion directed bonds are some of the
most stable and liquid instruments in the mortgage-backed securities market.
Planned amortization class bonds adhere to a fixed schedule of principal
payments as long as the underlying mortgage collateral experiences prepayments
within a certain range. Changes in prepayment rates are first absorbed by
support classes. This insulates the planned amortization classes from the
consequences of both faster prepayments (average life shortening) and slower
prepayments (average life extension).
Subordinated CMO classes have both prepayment and credit risk. The
subordinated classes are used to lend credit enhancement to the senior
securities and as such, rating agencies require that this support not
deteriorate due to the prepayment of the subordinated securities. The credit
risk of subordinated classes is derived from the negative leverage of owning a
small percentage of the underlying mortgage loan collateral while bearing a
majority of the risk of loss due to homeowner defaults.
All mortgage-backed securities are subject to risks associated with variable
prepayments. As a result, these securities may have a different actual maturity
than planned at the time of purchase. When securities having a cost greater than
par are backed by mortgages that prepay faster than expected, Great American
Reserve records a charge to investment income. When securities having a cost
less than par prepay faster than expected, Great American Reserve records
investment income.
The degree to which a mortgage-backed security is susceptible to income
fluctuations is influenced by: (i) the difference between its cost and par; (ii)
the relative sensitivity of the underlying mortgages backing the security to
prepayment in a changing interest rate environment; and (iii) the repayment
priority of the security in the overall securitization structure. Great American
Reserve limits the extent of these risks by : (i) purchasing securities which
are backed by collateral with lower prepayment sensitivity (such as mortgages
priced at a discount to par value and mortgages that are extremely seasoned);
(ii) avoiding securities whose values are heavily influenced by changes in
prepayments (such as interest-only and principal-only securities); and (iii)
investing in securities structured to reduce prepayment risk (such as planned
amortization class ("PAC") and targeted amortization class ("TAC")
collateralized mortgage obligations). PAC and TAC instruments represented
approximately 23 percent of Great American Reserve's mortgage-backed securities
at December 31, 1996.
If Great American Reserve determines that it will dispose of an investment
held in the actively managed fixed maturity category, it will either sell the
security or transfer it to the trading account at its fair value; the gain or
loss is recognized immediately. There were no such transfers in 1996. During
1996, Great American Reserve sold actively managed fixed maturity securities
generating proceeds of $938.3 million, resulting in $16.6 million of net
investment gains and $9.2 million of net investment losses (both before related
expenses, amortization and taxes). Such securities were sold in response to
changes in the investment environment which created opportunities to enhance the
total return of the investment portfolio without adversely affecting the quality
of the portfolio or the matching of expected maturities of assets and
liabilities. The realization of gains and losses affects the timing of the
amortization of the cost of policies produced and the cost of policies
purchased, as explained in note 1 to the financial statements.
During 1996 and 1995, fixed maturity investments with par values totaling
$40.9 million and $34.1 million, respectively, were redeemed prior to the
scheduled maturity date. As a result of such redemptions, Great American Reserve
recognized additional income of approximately $.3 million and $1.4 million,
respectively, which was credited to net investment income.
Other Investments
Credit-tenant loans are loans on commercial properties where the lease of
the principal tenant is assigned to the lender and the principal tenant, or any
guarantor of such tenant's obligations, has a credit rating at the time of
origination of the loan of at least BBB- or its equivalent. The underwriting
guidelines consider such factors as: (i) the lease term of the property; (ii)
the mortgagee's management ability, including business experience, property
management capabilities and financial soundness; and (iii) such economic,
demographic or other factors that may affect the income generated by the
property, or its value. The underwriting guidelines also generally require a
loan-to-value ratio of 75 percent or less. Credit-tenant loans are carried at
amortized cost and were $93.4 million at December 31, 1996, or 3.9 percent of
total invested assets. The total estimated fair value of credit-tenant loans was
$92.5 million at December 31, 1996.
At December 31, 1996, Great American Reserve held mortgage loan investments
with a carrying value of $77.3 million (or 3.2 percent of total invested assets)
and a fair value of $77.0 million. Substantially all of the mortgage loan
investments were commercial loans.
Non-current mortgage loans were not significant at December 31, 1996. Great
American Reserve had no investment losses on mortgage loans for the year ended
December 31, 1996. At December 31, 1996, Great American Reserve had a loan loss
reserve of $.9 million. Approximately 30 percent, 18 percent and 16 percent of
the mortgage loans were on properties located in California, Indiana and Texas,
respectively. No other state comprised greater than 6 percent of the mortgage
loan balance.
At December 31, 1996, Great American Reserve held no trading account
securities. Trading account securities are investments that are purchased with
the intent to be traded prior to their maturity, or are believed likely to be
disposed of in the foreseeable future as a result of market or issuer
developments. Trading account securities are carried at estimated fair value,
with the changes in fair value reflected in the statement of operations.
Short-term investments totaled $14.8 million, or .6 percent of invested
assets at December 31, 1996, and consisted primarily of commercial paper and
repurchase agreements relating to government securities.
LIQUIDITY
Great American Reserve generally produces adequate cash flow from premium
collections and investment income to meet its obligations. The liabilities
related to insurance policies are primarily long term and generally are paid
from future cash flows. Most of the assets, other than policy loans, are
invested in bonds and other securities, substantially all of which are readily
marketable. Although there is no present need or intent to dispose of such
investments, Great American Reserve could liquidate portions of its investments
if the need arose.
As part of its investment strategy, Great American Reserve enters into
reverse repurchase agreements and dollar-roll transactions to increase its
return on investments and improve its liquidity. Reverse repurchase agreements
involve a sale of securities and an agreement to repurchase the same securities
at a later date at an agreed upon price. Dollar-rolls are similar to reverse
repurchase agreements except that the repurchase involves securities that are
only substantially the same as the securities sold. These transactions are
accounted for as short-term collateralized borrowings. Such borrowings averaged
approximately $115.3 million during 1996 (compared to an average of $84.4
million during 1995) and were collateralized by investment securities with fair
values approximately equal to the loan value. The weighted average interest rate
on short-term collateralized borrowings was 5.3 percent in 1996 and 5.4 percent
in 1995. The primary risk associated with short-term collateralized borrowings
is that the counterparty will be unable to perform under the terms of the
contract. Great American Reserve's exposure is limited to the excess of the net
replacement cost of the securities over the value of the short-term investments
(which was not material at December 31, 1996). Great American Reserve believes
that the counterparties to its reverse repurchase and dollar-roll agreements are
financially responsible and that the counterparty risk is minimal.
Of Great American Reserve's total insurance liabilities at December 31,
1996, less than 7 percent could not be surrendered, 56 percent could be
surrendered only by incurring a surrender charge and 37 percent could be
surrendered without penalty.
Great American Reserve believes that it has adequate short-term investments
and readily marketable investment-grade securities to cover the payments under
contracts containing fixed payment dates plus any likely cash needs for all
other contracts and obligations. Great American Reserve's investment portfolio
at December 31, 1996, included $14.8 million of short-term investments and $1.5
billion of publicly traded investment-grade bonds. Great American Reserve
believes that such investments could be readily sold at or near carrying value
or used to facilitate borrowings under reverse repurchase agreements.
THE COMPANY'S DIRECTORS AND EXECUTIVE OFFICERS
The directors and principal executive officers of the Company as of December 31,
1996 are listed below, together with information as to their ages, dates of
election and principal business occupation during the last five years.
<TABLE>
<CAPTION>
<S> <C>
PRINCIPAL BUSINESS OCCUPATION
NAME DURING LAST FIVE YEARS
- -------------------- --------------------------------------------
Ngaire E. Cuneo Since 1993, Director of Conseco's principal
(Age 45) insurance subsidiaries. Since 1992,
Executive Vice President, Corporate
Development of Conseco, Inc. and various
positions with certain of its affiliates.
Prior thereto, Ms. Cuneo was Senior Vice
President/Managing Director of GE Capital
from 1986 - 1992.
Stephen C. Hilbert Since 1979, Chairman of the Board, Chief
(Age 49) Executive Officer and Director of Conseco,
Inc. Since 1988, President and various
positions with the Company and certain of
its affiliates.
Rollin M. Dick Since 1986, Executive Vice President, Chief
(Age 64) Financial Officer and Director of Conseco,
Inc. and various positions with the Company
and certain of its affiliates.
Lawrence W. Inlow Since 1987, Executive Vice President,
(Age 45) Secretary and General Counsel of Conseco,
Inc. and various positions (including
Directorships) with the Company and certain
of its affiliates.
Donald F. Gongaware Since 1985, Executive Vice President, Chief
(Age 60) Operations Officer and Director of Conseco,
Inc. and various positions with certain of
its affiliates. President of Great American
Reserve.
</TABLE>
EXECUTIVE COMPENSATION
The Company has no full-time employees and does not pay compensation to any
employee, officer or director of the Company.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account is a party or to
which the assets of the Variable Account are subject. Neither the Company nor
the Distributor is involved in any litigation that is of material importance in
relation to their total assets or that relates to the Variable Account.
ADDITIONAL INFORMATION ABOUT THE VARIABLE ACCOUNT
Additional information concerning the Variable Account is contained in a SAI
which is available without charge, by contacting the Company at 11815 N.
Pennsylvania Street, Carmel, Indiana 46032, (800)342-6307.
REGISTRATION STATEMENT
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 and Certificates offered hereby. This Prospectus does not contain all
the information set forth in the Registration Statement and amendments thereto
and exhibits filed as a part thereof, to all of which reference is hereby made
for further information concerning the Company and the Contracts and
Certificates offered hereby. Statements contained in this Prospectus as to the
content of Contracts and Certificates and other legal instruments are summaries.
For a complete statement of the terms thereof, reference is made to such
instruments as filed.
LEGAL OPINIONS
Legal matters in connection with the Contracts and Certificates described herein
are being passed upon by the law firm of Blazzard, Grodd & Hasenauer, P.C.,
Westport, Connecticut.
EXPERTS
The financial statements of Great American Reserve as of December 31, 1996 and
1995, and for the year ended December 31, 1996, the four months ended December
31, 1995, the eight months ended August 31, 1995, and the year ended December
31, 1994, included in this prospectus, have been audited by Coopers & Lybrand
L.L.P., independent accountants, as set forth in their report appearing herein,
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
FINANCIAL STATEMENTS
Financial statements of the Company are included in this Prospectus. No
financial statements for the Variable Account have been included because, as of
the date of this Prospectus, the Variable Account had no assets. The financial
statements of the Company included herein should be considered only as bearing
upon the ability of the Company to meet its obligations under the Contracts and
Certificates.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Great American Reserve Insurance Company
We have audited the accompanying balance sheet of Great American Reserve
Insurance Company (the "Company") as of December 31, 1996 and 1995, and the
related statements of operations, shareholder's equity and cash flows for the
year ended December 31, 1996 and the four months ended December 31, 1995. We
have also audited the accompanying statements of operations, shareholder's
equity and cash flows of the Company for the eight months ended August 31, 1995,
and the year ended December 31, 1994, based on the basis of accounting
applicable to periods prior to the adoption of push down accounting upon
Conseco, Inc.'s purchase of all common shares of the Company it did not
previously own (see note 1 of the notes to financial statements regarding the
adoption of push down accounting). 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.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Great American Reserve
Insurance Company as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the year ended December 31, 1996, the four
months ended December 31, 1995, the eight months ended August 31, 1995 and the
year ended December 31, 1994, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
March 14, 1997
F-1
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
BALANCE SHEET
December 31, 1996 and 1995
(Dollars in millions)
ASSETS
1996 1995
---- ----
<S> <C> <C>
Investments:
Actively managed fixed maturities at fair value (amortized cost:
1996 - $1,810.8; 1995 - $1,980.1)............................................... $1,795.1 $2,030.9
Mortgage loans..................................................................... 77.3 95.5
Credit-tenant loans................................................................ 93.4 79.4
Policy loans....................................................................... 80.8 84.7
Other invested assets ............................................................. 89.0 37.8
Short-term investments............................................................. 14.8 19.0
Assets held in separate accounts................................................... 232.4 137.5
-------- --------
Total investments............................................................ 2,382.8 2,484.8
Accrued investment income.............................................................. 32.9 34.0
Cost of policies purchased............................................................. 143.0 120.0
Cost of policies produced.............................................................. 38.2 24.0
Reinsurance receivables................................................................ 25.7 27.0
Goodwill (net of accumulated amortization: 1996 - $11.7; 1995 - $10.2)................. 49.7 53.0
Other assets........................................................................... 8.2 14.0
-------- --------
Total assets................................................................. $2,680.5 $2,756.8
======== ========
(continued on next page)
The accompanying notes are an
integral part of the financial
statements.
</TABLE>
F-2
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
BALANCE SHEET (Continued)
December 31, 1996 and 1995
(Dollars in millions, except per share amount)
LIABILITIES AND SHAREHOLDER'S EQUITY
1996 1995
---- ----
<S> <C> <C>
Liabilities:
Insurance liabilities.............................................................. $1,957.5 $2,039.1
Income tax liabilities............................................................. 29.8 39.0
Investment borrowings.............................................................. 48.4 84.2
Other liabilities.................................................................. 15.5 14.4
Liabilities related to separate accounts .......................................... 232.4 137.5
-------- --------
Total liabilities.......................................................... 2,283.6 2,314.2
-------- --------
Shareholder's equity:
Common stock and additional paid-in capital (par value $4.80 per share, 1,065,000
shares authorized, 1,043,565 shares issued and outstanding).................... 380.8 380.8
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities (net of applicable deferred income taxes:
1996 - $(2.4); 1995 - $6.8).................................................. (4.4) 11.8
Other investments (net of applicable deferred income taxes:
1996 - $(.1); 1995 - $.4).................................................... (.2) .6
Retained earnings.................................................................. 20.7 49.4
-------- --------
Total shareholder's equity................................................. 396.9 442.6
-------- --------
Total liabilities and shareholder's equity................................. $2,680.5 $2,756.8
======== ========
The accompanying notes are an
integral part of the financial
statements.
</TABLE>
F-3
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF OPERATIONS
(Dollars in millions)
Prior basis
---------------------------
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income............................... $ 81.4 $ 31.8 $ 60.5 $ 98.6
Net investment income................................. 218.4 74.2 136.4 187.9
Net investment gains.................................. 2.7 12.5 7.3 .2
------- ------ ------ ------
Total revenues................................ 302.5 118.5 204.2 286.7
------- ------ ------ ------
Benefits and expenses:
Insurance policy benefits............................. 54.9 18.9 45.9 66.2
Change in future policy benefits...................... (3.7) .2 (4.3) (1.3)
Interest expense on annuities and financial products.. 129.4 44.2 74.6 101.4
Interest expense on investment borrowings............. 6.2 1.0 3.6 2.9
Amortization related to operations.................... 17.8 5.3 11.7 16.0
Amortization related to investment gains............. 2.5 10.0 4.3 2.7
Other operating costs and expenses.................... 54.3 13.1 23.7 37.3
------- ------ ------ ------
Total benefits and expenses................... 261.4 92.7 159.5 225.2
------- ------ ------ ------
Income before income taxes.................... 41.1 25.8 44.7 61.5
Income tax expense........................................ 15.4 9.7 16.5 22.7
------- ------ ------ ------
Net income.................................... $ 25.7 $ 16.1 $ 28.2 $ 38.8
======= ====== ====== ======
The accompanying notes are an
integral part of the financial
statements.
</TABLE>
F-4
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF SHAREHOLDER'S EQUITY
(Dollars in millions)
Prior basis
-------------------------
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common stock and additional paid-in capital:
Balance, beginning of period........................... $380.8 $380.8 $339.7 $339.7
Adjustment of balance due to new accounting basis... - - 41.1 -
------ ------ ------ ------
Balance, end of period................................. $380.8 $380.8 $380.8 $339.7
====== ====== ====== ======
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities:
Balance, beginning of period........................ $ 11.8 $ 1.3 $ (53.0) $ 33.3
Change in unrealized appreciation (depreciation).. (16.2) 10.5 55.7 (86.3)
Adjustment of balance due to new
accounting basis................................ - - (1.4) -
------ ------ ------- ------
Balance, end of period.............................. $ (4.4) $ 11.8 $ 1.3 $(53.0)
====== ====== ======= ======
Other investments:
Balance, beginning of period........................ $ .6 $ .6 $ (2.1) $ (.1)
Change in unrealized appreciation (depreciation).. (.8) - 3.3 (2.0)
Adjustment of balance due to new
accounting basis................................ - - (.6) -
------ ------ ------- ------
Balance, end of period.............................. $ (.2) $ .6 $ .6 $ (2.1)
====== ====== ======= ======
Retained earnings:
Balance, beginning of year............................. $ 49.4 $ 33.3 $ 80.3 $ 75.6
Net income ......................................... 25.7 16.1 28.2 38.8
Dividends on common stock........................... (54.4) - (41.2) (34.1)
Adjustment of balance due to new
accounting basis.................................. - - (34.0) -
------ ------ ------- ------
Balance, end of year................................... $ 20.7 $ 49.4 $ 33.3 $ 80.3
======= ====== ======= =======
Total shareholder's equity........................ $ 396.9 $442.6 $ 416.0 $ 364.9
======= ====== ======= =======
The accompanying notes are an
integral part of the financial
statements.
</TABLE>
F-5
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(Dollars in millions)
Prior basis
-------------------------
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 25.7 $ 16.1 $ 28.2 $ 38.8
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization................................... 20.4 15.3 16.0 18.7
Income taxes................................... (3.9) 2.3 2.9 1.3
Insurance liabilities.......................... (40.5) (25.8) (14.0) (10.5)
Interest credited to insurance liabilities..... 129.4 44.2 74.6 101.4
Fees charged to insurance liabilities ......... (32.8) (10.3) (22.2) (36.5)
Accrual and amortization of investment income.. 3.1 3.2 (1.8) (1.2)
Deferral of cost of policies produced.......... (13.2) (3.0) (6.6) (9.4)
Investment gains............................... (2.7) (12.5) (7.3) (.2)
Other.......................................... (8.9) (8.9) (3.2) 5.0
-------- -------- ------- -------
Net cash provided by operating activities...... 76.6 20.6 66.6 107.4
-------- -------- ------- -------
Cash flows from investing activities:
Sales of investments................................... 988.9 513.2 406.5 586.0
Maturities and redemptions............................. 101.7 60.4 57.5 118.4
Purchases of investments............................... (954.2) (532.2) (476.2) (786.9)
-------- -------- ------- -------
Net cash provided (used) by investing
activities................................. 136.4 41.4 (12.2) (82.5)
-------- -------- ------- -------
Cash flows from financing activities:
Deposits to insurance liabilities...................... 169.8 50.8 104.4 146.0
Cash paid in reinsurance recapture .................... - (71.1) - -
Investment borrowings.................................. (35.8) (36.8) 121.0 (58.3)
Withdrawals from insurance liabilities................. (306.7) (71.9) (166.3) (171.4)
Dividends paid on common stock......................... (44.5) - (41.2) (34.1)
-------- -------- ------- -------
Net cash provided (used) by
financing activities....................... (217.2) (129.0) 17.9 (117.8)
-------- -------- ------- -------
Net increase (decrease) in short-term
investments................................ (4.2) (67.0) 72.3 (92.9)
Short-term investments, beginning of period................ 19.0 86.0 13.7 106.6
-------- -------- ------- -------
Short-term investments, end of period...................... $ 14.8 $ 19.0 $ 86.0 $ 13.7
======== ======== ======= =======
The accompanying notes are an
integral part of the financial
statements.
</TABLE>
F-6
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Great American Reserve Insurance Company (the "Company") markets
tax-qualified annuities and certain employee benefit- related insurance products
through professional independent agents. Since August 1995, the Company has been
a wholly owned subsidiary of Conseco, Inc. ("Conseco"), a financial services
holding company engaged in the development, marketing and administration of
annuity, individual health insurance and individual life insurance products.
During 1994, Conseco effectively owned 36 percent of the Company, through its
ownership interest in CCP Insurance, Inc. ("CCP"), a holding company organized
for companies previously acquired by Conseco Capital Partners, L.P. (the
"Partnership"), a limited partnership organized by Conseco. The Company was
acquired by the Partnership in 1990 (the "Partnership Acquisition"). During
1995, Conseco's ownership in CCP (and in the Company) increased to 49 percent as
a result of purchases of CCP common stock by CCP and Conseco. In August 1995,
Conseco completed the purchase of the remaining shares of CCP common stock it
did not already own in a transaction pursuant to which CCP was merged with
Conseco, with Conseco being the surviving corporation (the "Conseco
Acquisition").
The accompanying financial statements give effect to "push down" purchase
accounting to reflect the Partnership Acquisition and the Conseco Acquisition.
As a result of applying "push down" purchase accounting: (i) the Company's
financial position and results of operations for periods subsequent to the
Partnership Acquisition and before the Conseco Acquisition (the "prior basis")
reflect the Partnership's cost to acquire the Company's asset and liability
accounts based upon their estimated fair values at the purchase date; and (ii)
the Company's financial position and results of operations for periods
subsequent to the Conseco Acquisition reflect Conseco's cost to acquire the
Company's asset and liability accounts based upon their estimated fair values at
the purchase date.
The effect of the adoption of the new basis of accounting on the Company's
balance sheet accounts on August 31, 1995, was as follows (dollars in millions):
<TABLE>
<CAPTION>
Debit
(Credit)
--------
<S> <C>
Cost of policies purchased.............................................. $ 59.0
Cost of policies produced .............................................. (27.0)
Goodwill................................................................ (15.1)
Insurance liabilities................................................... (1.2)
Income tax liabilities.................................................. (11.9)
Other................................................................... 1.3
Common stock and additional paid-in capital............................. (41.1)
Net unrealized appreciation of fixed maturity securities................ 1.4
Net unrealized appreciation of other investments........................ .6
Retained earnings....................................................... 34.0
</TABLE>
The accompanying financial statements also include the effect of the
December 31, 1994, merger of Jefferson National Life Insurance Company
("Jefferson National", which was acquired by the Partnership in 1990) into the
Company. This merger has been accounted for as a pooling of interests;
therefore, the assets and liabilities of each company have been combined at
their book values and the statements of operations, shareholder's equity and
cash flows have been reported as if the merger had occurred on January 1, 1994.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP"), which differ in some respects
from statutory accounting practices followed in the preparation of financial
statements submitted to state insurance departments. The financial statements
prepared in conformity with GAAP include amounts based on informed estimates and
judgment of management, with consideration given to materiality. Significant
estimates and assumptions are utilized in the calculation of cost of policies
produced, cost of policies purchased, insurance liabilities, guaranty fund
assessment accruals and deferred income taxes. Actual experience may differ from
those estimates. Certain amounts from the 1995 and 1994 financial statements and
notes have been reclassified to conform with the 1996 presentation.
F-7
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Investments
Fixed maturity investments are securities that mature more than one year
after issuance. They include bonds, notes receivable and preferred stocks with
mandatory redemption features and are classified as follows:
Actively managed - fixed maturity securities that may be sold prior to
maturity due to changes that might occur in market interest rates,
issuer credit quality or the Company's liquidity requirements. Actively
managed fixed maturity securities are carried at estimated fair value
and the unrealized gain or loss is recorded net of tax and related
adjustments described below as a component of shareholder's equity.
Trading account - fixed maturity securities are bought and held
principally for the purpose of selling them in the near term. Trading
account securities are carried at estimated fair value. Unrealized
gains or losses are included in net investment gains (losses). The
Company did not hold any trading account securities during 1996, 1995
or 1994.
Held to maturity - (all other fixed maturity securities) are those
securities which the Company has the ability and positive intent to
hold to maturity, and are carried at amortized cost. The Company may
dispose of these securities if the credit quality of the issuer
deteriorates, if regulatory requirements change or under other
unforeseen circumstances. The Company has not held any securities in
this classification during 1996, 1995 or 1994.
Anticipated returns, including investment gains and losses, from the
investment of policyholder balances are considered in determining the
amortization of the cost of policies purchased and the cost of policies
produced. When actively managed fixed maturity securities are stated at
estimated fair value, an adjustment to the cost of policies purchased and the
cost of policies produced may be necessary if a change in amortization would
have been recorded if such securities had been sold at their fair value and the
proceeds reinvested at current yields. Furthermore, if future yields expected to
be earned on such securities decline, it may be necessary to increase certain
insurance liabilities. Adjustments to such liabilities are required when their
balances, in addition to future net cash flows (including investment income),
are insufficient to cover future benefits and expenses.
Unrealized gains and losses and the related adjustments described in the
preceding paragraph have no effect on earnings, but are recorded, net of tax, as
a component of shareholder's equity. The following table summarizes the effect
of these adjustments as of December 31, 1996:
<TABLE>
<CAPTION>
Effect of fair
Balance value adjustment on
before actively managed Reported
adjustment fixed maturities amount
---------- ---------------- ------
(Dollars in millions)
<S> <C> <C> <C>
Actively managed fixed maturity securities.................... $1,810.8 $(15.7) $1,795.1
Cost of policies purchased.................................... 135.2 7.8 143.0
Cost of policies produced..................................... 37.1 1.1 38.2
Income tax liabilities........................................ 32.2 (2.4) 29.8
Net unrealized depreciation of fixed maturities............... - (4.4) (4.4)
</TABLE>
When changes in conditions cause a fixed maturity investment to be
transferred to a different category (e.g. actively managed, held to maturity or
trading), the security is transferred to the new category at its fair value at
the date of the transfer. There were no such transfers in 1996, 1995 or 1994. At
the transfer date, the security's unrealized gain or loss is recorded as
follows:
o For transfers to the trading category, the unrealized gain or loss
is recognized in earnings;
o For transfers from the trading category, the unrealized gain or loss
already recognized in earnings is not reversed;
o For transfers to actively managed from held to maturity, the
unrealized gain or loss is recognized in shareholder's equity; and
F-8
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
o For transfers to held to maturity from actively managed, the
unrealized gain or loss at the date of transfer continues to be
recognized in shareholder's equity, but is amortized as a yield
adjustment until ultimately sold.
Credit-tenant loans are loans for commercial properties which require: (i)
the lease of the principal tenant to be assigned to the Company; (ii) the lease
to produce adequate cash flow to fund substantially all the cash requirements of
the loan; and (iii) the principal tenant, or the guarantor of such tenant's
obligations, to have an investment-grade credit rating when the loan is made.
These loans also must be collateralized by the value of the related property.
Underwriting guidelines take into account such factors as: (i) the lease term of
the property; (ii) the borrower's management ability, including business
experience, property management capabilities and financial soundness; and (iii)
such economic, demographic or other factors that may affect the income generated
by the property or its value. The underwriting guidelines generally require a
loan-to-value ratio of 75 percent or less. Credit-tenant loans and traditional
mortgage loans are carried at amortized cost.
Policy loans are stated at their current unpaid principal balance.
Short-term investments include commercial paper, invested cash and other
investments purchased with maturities of less than three months and are carried
at amortized cost, which approximates fair value. The Company considers all
short-term investments to be cash equivalents.
Fees received and costs incurred in connection with origination of
investments, principally mortgage loans, are deferred. Fees, costs, discounts
and premiums are amortized as yield adjustments over the contractual life of the
investments. Anticipated prepayments on mortgage-backed securities are taken
into consideration in determining estimated future yields on such securities.
The specific identification method is used to account for the disposition
of investments. The differences between sale proceeds and carrying values are
reported as investment gains and losses, or as adjustments to investment income
if the proceeds are prepayments by issuers prior to maturity.
The Company regularly evaluates investment securities, credit-tenant loans
and mortgage loans based on current economic conditions, past credit loss
experience and other circumstances of the investee. A decline in a security's
net realizable value that is other than temporary is treated as an investment
loss and the cost basis of the security is reduced to its estimated fair value.
Impaired loans are revalued at the present value of expected cash flows
discounted at the loan's effective interest rate when it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the agreement. The Company accrues interest on the net carrying amount
of impaired loans.
As part of the Company's investment strategy, the Company may enter into
reverse repurchase agreements and dollar-roll transactions to increase its
investment return or to improve liquidity. These transactions are accounted for
as collateral borrowings, where the amount borrowed is equal to the sales price
of the underlying securities.
Separate Accounts
Separate accounts are funds on which investment income and gains or losses
accrue directly to certain policyholders. The assets of these accounts are
legally segregated. They are not subject to the claims which may arise out of
any other business of the Company. The Company reports separate account assets
at market value; the underlying investment risks are assumed by the contract
holders. The Company records the related liabilities at amounts equal to the
underlying assets; the fair value of these liabilities equals their carrying
amount.
F-9
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Cost of Policies Purchased
The cost of policies purchased represents the portion of the acquisition
cost that was allocated to the value of the right to receive future cash flows
from insurance contracts existing at the date such insurance contracts were
acquired. The value of cost of policies purchased is the actuarially determined
present value of the projected future cash flows from the insurance contracts
existing at the acquisition date. The method used to value the cost of policies
purchased is consistent with the valuation methods used most commonly to value
blocks of insurance business, which is also consistent with the basic
methodology generally used to value assets. The method used is summarized as
follows:
o Identify the expected future cash flows from the blocks of business.
o Identify the risks inherent in realizing those cash flows (i.e., what
is the probability that the cash flows will be realized).
o Identify the rate of return necessary considering the risks inherent
in realizing the cash flows.
o Determine the value of the policies by discounting the expected
future cash flows by the discount rate required.
The expected future cash flows used in determining such value are based on
actuarially determined projections of future premium collections, mortality,
surrenders, operating expenses, changes in insurance liabilities, investment
yields on the assets held to back the policy liabilities and other factors.
These projections take into account all factors known or expected at the
valuation date, based on the collective judgment of the Company's management.
Actual experience on purchased business may vary from projections due to
differences in renewal premiums collected, investment spread, investment gains
or losses, mortality and morbidity costs and other factors.
The discount rate used to determine the value of the cost of policies
purchased is the rate of return required in order to invest in the business
being acquired. In determining this required rate of return, the following
factors are considered:
o The magnitude of the risks associated with each of the actuarial
assumptions used in determining expected future cash flows.
o The cost of capital required to fund the acquisition.
o The likelihood of changes in projected future cash flows that might
occur if there are changes in insurance regulations and tax laws.
o The acquired business compatibility with other activities of the
Company that may favorably affect future cash flows.
o The complexity of the acquired business.
o Recent prices (i.e., discount rates used in determining valuations)
paid by others to acquire similar blocks of business.
After the cost of policies purchased is determined, it is amortized based
on the incidence of the expected cash flows. This asset is amortized using the
interest rate credited to the underlying policies.
If renewal premiums collected, investment spread, investment gains or
losses, mortality and morbidity costs or other factors differ from expectations,
amortization of the cost of policies purchased is adjusted. For example, the
sale of a fixed maturity investment may result in a gain (or loss). If the sale
proceeds are reinvested at a lower (or higher) earnings rate, there may also be
a reduction (or increase) in future investment spread. Amortization must be
increased (decreased) to reflect the change in the incidence of expected cash
flows consistent with the methods used with the cost of policies produced
(described below).
F-10
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Each year, the recoverability of the cost of policies purchased is
evaluated by line of business within each block of purchased insurance business.
If current estimates indicate that the existing insurance liabilities, together
with the present value of future net cash flows from the blocks of business
purchased, will be insufficient to recover the cost of policies purchased, the
difference is charged to expense. Amortization is adjusted consistent with the
methods used with the cost of policies produced (as described below).
The cost of policies purchased related to the original acquisition of the
Company by the Partnership in 1990 is amortized under a slightly different
method than that described above. However, the effect of the different method on
1996 net income was insignificant.
Cost of Policies Produced
Costs which vary with and are primarily related to the acquisition of new
business are deferred to the extent that such costs are deemed recoverable.
These costs include commissions, certain costs of policy issuance and
underwriting and certain agency expenses. For traditional life and health
contracts, deferred costs are amortized with interest in relation to future
anticipated premium revenue using the same assumptions that are used in
calculating the insurance liabilities. For immediate annuities with mortality
risks, deferred costs are amortized in relation to the present value of benefits
to be paid. For universal life-type, interest-sensitive and investment-type
contracts, deferred costs are amortized in relation to the present value of
expected gross profits from these contracts, discounted using the interest rate
credited to the policy (currently, 5 percent to 8 percent).
Recoverability of the unamortized balance of cost of policies produced is
evaluated regularly and considers anticipated investment income. For universal
life-type contracts and investment-type contracts, the accumulated amortization
is adjusted (whether an increase or a decrease) whenever there is a change in
the estimated gross profits expected over the life of a block of business in
order to maintain a constant relationship between amortization and the present
value (discounted at the rate of interest that accrues to the policies) of
expected gross profits. For traditional and most other contracts, the
unamortized asset balance is reduced by a charge to income only when the sum of
the present value of discounted future cash flows and the policy liabilities is
not sufficient to cover such asset balance.
Goodwill
The excess of the cost of acquiring the Company's net assets over its
estimated fair values is recorded as goodwill and is being amortized on the
straight-line basis over a 40-year period. The Company periodically assesses the
recoverability of goodwill through projections of future earnings of the
acquired business. Such assessment is made based on whether goodwill is fully
recoverable from projected undiscounted net cash flows from earnings of the
acquired business over the remaining amortization period. If future evaluations
of goodwill indicate a material change in the factors supporting recoverability
over the remaining amortization period, all or a portion of goodwill may need to
be written off or the amortization period shortened (no such changes have
occurred).
Insurance Liabilities, Recognition of Insurance Policy Income and Related
Benefits and Expenses
Reserves for traditional and limited-payment life insurance contracts are
generally calculated using the net level premium method based on assumptions as
to investment yields, mortality, morbidity, withdrawals and dividends. The
assumptions are based on projections using past and expected experience and
include provisions for possible adverse deviation. These assumptions are made at
the time the contract is issued or, in the case of contracts acquired by
purchase, at the purchase date.
Reserves for universal life-type and investment-type contracts are based on
the contract account balance, if future benefit payments in excess of the
account balance are not guaranteed, or on the present value of future benefit
payments when such payments are guaranteed. Additional increases to insurance
liabilities are made if future cash flows including investment income are
insufficient to cover future benefits and expenses.
For investment-type contracts without mortality risk (such as deferred
annuities and immediate annuities with benefits paid for a period certain) and
for contracts that permit the Company or the insured to make changes in the
contract terms (such as single- premium whole life and universal life), premium
deposits and benefit payments are recorded as increases or decreases in a
liability account rather than as revenue and expense. Amounts charged against
the liability account for the cost of insurance, policy
F-11
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
administration and surrender penalties are recorded as revenues. Interest
credited to the liability account and benefit payments made in excess of the
contract liability account balance are charged to expense.
For traditional life insurance contracts, premiums are recognized as income
when due. Benefits and expenses are associated with earned premiums resulting in
their level recognition over the premium paying period of the contracts. Such
recognition is accomplished through the provision for future policy benefits and
the amortization of deferred policy acquisition costs.
For contracts with mortality risk, but with premiums paid for only a
limited period (such as single-premium immediate annuities with benefits paid
for the life of the annuitant), the accounting treatment is similar to
traditional contracts. However, the excess of the gross premium over the net
premium is deferred and recognized in relation to the present value of expected
future benefit payments.
Liabilities for incurred claims are determined using historical experience
and represent an estimate of the present value of the ultimate net cost of all
reported and unreported claims. Management believes these estimates are
adequate. Such estimates are periodically reviewed and any adjustments are
reflected in current operations.
For participating policies, the amount of dividends to be paid (which are
not significant) is determined annually by the Company. The portion of the
earnings allocated to participating policyholders is recorded as an insurance
liability.
Reinsurance
In the normal course of business, the Company seeks to limit its exposure
to loss on any single insured and to recover a portion of benefits paid over
such limit by ceding reinsurance to other insurance enterprises or reinsurers
under excess coverage and coinsurance contracts. The Company has set its
retention limit for acceptance of risk on life insurance policies at various
levels up to $.5 million.
Assets and liabilities related to insurance contracts are reported before
the effects of reinsurance. Reinsurance receivables and prepaid reinsurance
premiums (including amounts related to insurance liabilities) are reported as
assets. Estimated reinsurance receivables are recognized in a manner consistent
with the liabilities relating to the underlying reinsured insurance contracts.
Income Taxes
Income tax expense includes deferred taxes arising from temporary
differences between the tax and financial reporting basis of assets and
liabilities. The effects of a tax rate change on current and accumulated
deferred income taxes are reflected in the period in which the change was
enacted.
In assessing the realization of deferred tax assets, the Company considers
whether it is more likely than not that the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences become deductible. If future income does not occur as expected,
deferred income taxes may need to be written off.
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
determining estimated fair values of financial instruments:
Investment securities: The estimated fair values of fixed maturity
securities (including redeemable preferred stocks) are based on quotes from
independent pricing services, where available. For investment securities
for which such quotes are not available, the estimated fair values are
determined using values obtained from broker-dealer market makers or by
discounting expected future cash flows using current market interest rates
applicable to the yield, credit quality of the investments and maturity of
the investments.
F-12
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Mortgage loans, credit-tenant loans and policy loans: The estimated fair
values of mortgage loans, credit-tenant loans and policy loans are
determined by discounting future expected cash flows using interest rates
currently being offered for similar loans to borrowers with similar credit
ratings. Loans with similar characteristics are aggregated for purposes of
the calculations.
Other invested assets: The estimated fair values of these assets have been
assumed to be equal to their carrying value. Such value is believed to be a
reasonable approximation of the fair value of these investments.
Short-term investments: The estimated fair values of short-term investments
are based on quoted market prices, where available. The carrying amount
reported in the balance sheet for these assets approximates their estimated
fair value.
Insurance liabilities for investment contracts: The estimated fair values
of liabilities under investment-type insurance contracts are determined
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.
Investment borrowings: Due to the short-term nature of these borrowings
(terms generally less than 30 days), estimated fair values are assumed to
approximate the carrying amount reported in the balance sheet.
The estimated fair values of financial instruments are as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Financial assets issued for purposes other than trading:
Actively managed fixed maturity securities........... $1,795.1 $1,795.1 $2,030.9 $2,030.9
Mortgage loans....................................... 77.3 77.0 95.5 108.9
Credit-tenant loans.................................. 93.4 92.5 79.4 79.7
Policy loans......................................... 80.8 80.8 84.7 84.7
Other invested assets................................ 89.0 89.0 37.8 37.8
Short-term investments............................... 14.8 14.8 19.0 19.0
Financial liabilities issued for purposes other than trading:
Insurance liabilities for investment contracts (1)... $1,282.1 $1,282.1 $1,346.5 $1,346.5
Investment borrowings................................ 48.4 48.4 84.2 84.2
<FN>
(1) The estimated fair value of the liabilities for investment contracts
was approximately equal to its carrying value at December 31, 1996
and 1995, because interest rates credited on the vast majority of
account balances approximate current rates paid on similar
investments and because these rates are not generally guaranteed
beyond one year. The Company is not required to disclose fair values
for insurance liabilities, other than those for investment contracts.
However, the Company takes into consideration the estimated fair
values of all insurance liabilities in its overall management of
interest rate risk. The Company attempts to minimize exposure to
changing interest rates by matching investment maturities with
amounts due under insurance contracts.
</FN>
</TABLE>
F-13
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
2. JEFFERSON NATIONAL MERGER
On December 31, 1994, Jefferson National was merged with the Company, with
the Company being the surviving corporation. The merger has been accounted for
as a pooling of interests and, accordingly, the financial statements for 1994
have been restated to include the accounts of Jefferson National. Certain 1994
balances for the separate companies are as follows:
<TABLE>
<CAPTION>
Amount prior to Jefferson
effect of merger National Combined
---------------- -------- --------
(Dollars in millions)
<S> <C> <C> <C>
Insurance policy income................................................... $ 53.2 $ 45.4 $ 98.6
Net investment income..................................................... 101.9 86.0 187.9
Total revenues............................................................ 154.1 132.6 286.7
Income before income taxes................................................ 25.9 35.6 61.5
Net income................................................................ 16.7 22.1 38.8
</TABLE>
3. INVESTMENTS
At December 31, 1996, the amortized cost and estimated fair value of
actively managed fixed maturity securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
United States Treasury securities and obligations
of United States government corporations and
agencies............................................ $ 29.9 $ .3 $ .3 $ 29.9
Obligations of state and political subdivisions........ 6.1 .1 .1 6.1
Debt securities issued by foreign governments.......... 11.6 - .5 11.1
Public utility securities.............................. 234.8 2.4 7.0 230.2
Other corporate securities............................. 950.1 10.9 17.6 943.4
Mortgage-backed securities............................. 578.3 2.3 6.2 574.4
-------- ----- ----- --------
Total............................................... $1,810.8 $16.0 $31.7 $1,795.1
======== ===== ===== ========
</TABLE>
At December 31, 1995, the amortized cost and estimated fair value of
actively managed fixed maturity securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
United States Treasury securities and obligations
of United States government corporations and
agencies............................................ $ 59.2 $ 2.1 $ - $ 61.3
Obligations of state and political subdivisions........ 9.3 .2 .1 9.4
Debt securities issued by foreign governments.......... 8.3 .3 - 8.6
Public utility securities.............................. 351.6 11.4 2.0 361.0
Other corporate securities............................. 888.0 34.0 6.4 915.6
Mortgage-backed securities ............................ 663.7 12.2 .9 675.0
-------- ----- ---- --------
Total........................................... $1,980.1 $60.2 $9.4 $2,030.9
======== ===== ==== ========
</TABLE>
F-14
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Actively managed fixed maturity securities, summarized by the source of
their estimated fair value, were as follows at December 31, 1996:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Nationally recognized pricing services.......................................... $1,516.7 $1,500.4
Broker-dealer market makers..................................................... 242.9 243.6
Internally developed methods (calculated based
on a weighted-average current market yield of 10.2 percent).................. 51.2 51.1
-------- --------
Total ................................................................. $1,810.8 $1,795.1
======== ========
</TABLE>
The following table sets forth actively managed fixed maturity securities
at December 31, 1996, classified by rating categories. The category assigned is
the highest rating by a nationally recognized statistical rating organization
or, as to $23.5 million fair value of fixed maturity securities not rated by
such firms, the rating assigned by the National Association of Insurance
Commissioners ("NAIC"). For the purposes of this table, NAIC Class 1 is included
in the "A" rating; Class 2, "BBB-"; Class 3, "BB-"; and Classes 4-6, "B+ and
below":
<TABLE>
<CAPTION>
Percent of Percent of
Investment fixed total
Rating maturities investments
------ ---------- -----------
<S> <C> <C>
AAA................................................................................... 37% 28%
AA ................................................................................. 6 5
A ................................................................................. 21 15
BBB+.................................................................................. 9 6
BBB................................................................................... 13 10
BBB-.................................................................................. 7 5
---- ----
Investment-grade................................................................. 93 69
---- ----
BB+................................................................................... 1 1
BB ................................................................................. 1 1
BB-................................................................................... 2 2
B+ and below ......................................................................... 3 2
---- ----
Below investment-grade........................................................... 7 6
---- ----
Total actively managed fixed maturities...................................... 100% 75%
=== ==
</TABLE>
Below investment-grade actively managed fixed maturity securities,
summarized by the amount their amortized cost exceeds fair value, were as
follows at December 31, 1996:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Amortized cost exceeds fair value by more than 15%.................................. $ 3.1 $ 1.7
Amortized cost exceeds fair value by more than 5% but not more than 15%............. 18.4 16.8
All others.......................................................................... 111.1 113.3
------- -------
Total...................................................................... $132.6 $131.8
====== ======
</TABLE>
F-15
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The Company had no fixed maturity investments in technical or substantive
default as of December 31, 1996. The Company recorded writedowns of fixed
maturity investments and other invested assets totaling $.8 million in 1996,
$1.6 million in 1995 and $1.0 million in 1994, as a result of changes in
conditions which caused it to conclude the decline in the fair value of the
investment was other than temporary. As of December 31, 1996, there were no
fixed maturity investments about which the Company had serious doubts as to the
ability of the issuer to comply with the contractual terms of their obligations
on a timely basis. Investment income foregone due to defaulted securities was
$.2 million in 1996, $.1 million in the four months ended December 31, 1995 and
$1.3 million in 1994. There was no investment income foregone due to defaulted
securities during the eight months ended August 31, 1995.
Actively managed fixed maturity securities at December 31, 1996, summarized
by contractual maturity date, are shown below. Actual maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties and because most
mortgage-backed securities provide for periodic payments throughout their lives.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Due in one year or less......................................................... $ 10.7 $ 10.6
Due after one year through five years........................................... 102.3 103.1
Due after five years through ten years.......................................... 314.7 313.5
Due after ten years............................................................. 804.8 793.5
-------- --------
Subtotal................................................................. 1,232.5 1,220.7
Mortgage-backed securities...................................................... 578.3 574.4
-------- --------
Total ................................................................... $1,810.8 $1,795.1
======== ========
</TABLE>
Net investment income consisted of the following:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Actively managed fixed maturity securities....... $146.4 $53.9 $110.2 $157.9
Mortgage loans................................... 11.8 4.8 8.0 13.0
Credit-tenant loans ............................. 7.2 1.7 4.1 3.8
Policy loans..................................... 5.0 1.9 3.5 5.2
Short-term investments........................... 2.3 .8 1.9 3.8
Other invested assets............................ 11.4 .3 1.6 3.2
Separate accounts................................ 35.6 11.3 7.9 2.3
------ ------ ------ -------
Gross investment income..................... 219.7 74.7 137.2 189.2
Investment expenses.............................. 1.3 .5 .8 1.3
------ ------ ------ -------
Net investment income....................... $218.4 $74.2 $136.4 $187.9
====== ===== ====== ======
</TABLE>
The Company did not have any fixed maturity investments and mortgage loans
not accruing investment income in 1996, 1995 and 1994.
F-16
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The proceeds from sales of actively managed fixed maturity securities were
$938.3 million in 1996, $512.5 million in the four months ended December 31,
1995, $406.0 million in the eight months ended August 31, 1995 and $578.3
million in 1994. Net investment gains consisted of the following:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Fixed maturities:
Gross gains................................... $16.6 $16.5 $14.4 $17.6
Gross losses.................................. (9.2) (2.2) (2.3) (9.3)
Other than temporary decline in fair value.... (.2) (.4) (1.2) (1.0)
------ ------ ----- -----
Net investment gains from fixed maturities
before expenses........................... 7.2 13.9 10.9 7.3
Mortgage loans................................... - - (.2) -
Other .......................................... - - (1.0) (3.1)
Other than temporary decline in fair value....... (.6) - - -
------ ------ ----- -----
Net investment gains before expenses........ 6.6 13.9 9.7 4.2
Investment gain expenses......................... 3.9 1.4 2.4 4.0
------ ------ ----- -----
Net investment gains........................ $ 2.7 $12.5 $ 7.3 $ .2
====== ===== ===== ======
</TABLE>
The change in net unrealized appreciation (depreciation) on investments
consisted of the following:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Actively managed fixed maturities................ $(66.5) $45.5 $164.1 $(254.9)
Other invested assets............................ (1.3) .1 5.1 (3.2)
------ ----- ------ -------
Subtotal................................ (67.8) 45.6 169.2 (258.1)
Less effect on other balance sheet accounts:
Cost of policies purchased.................... 36.6 (26.3) (64.1) 93.1
Cost of policies produced..................... 4.5 (2.7) (12.0) 27.6
Income taxes.................................. 9.7 (6.1) (34.1) 49.1
------ ----- ------- -------
Change in net unrealized appreciation
(depreciation) of securities.................. $(17.0) $10.5 $ 59.0 $ (88.3)
====== ===== ======= =======
</TABLE>
Investments in mortgage-backed securities at December 31, 1996, included
collateralized mortgage obligations ("CMOs") of $221.6 million and
mortgage-backed pass-through securities of $352.8 million. CMOs are securities
backed by pools of pass-through securities and/or mortgages that are segregated
into sections or "tranches." These securities provide for sequential retirement
of principal, rather than the pro rata share of principal return which occurs
through regular monthly principal payments on pass-through securities.
F-17
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The following table sets forth the par value, amortized cost and estimated
fair value of investments in mortgage-backed securities including CMOs at
December 31, 1996, summarized by interest rates on the underlying collateral:
<TABLE>
<CAPTION>
Par Amortized Estimated
value cost fair value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Below 7 percent ..................................................... $209.6 $205.1 $201.5
7 percent - 8 percent................................................ 247.4 241.5 240.6
8 percent - 9 percent................................................ 70.9 69.7 69.3
9 percent and above.................................................. 60.1 62.0 63.0
------ ------ ------
Total mortgage-backed securities................................ $588.0 $578.3 $574.4
====== ====== ======
</TABLE>
The amortized cost and estimated fair value of mortgage-backed securities
including CMOs at December 31, 1996, summarized by type of security were as
follows:
<TABLE>
<CAPTION>
Estimated fair value
----------------------
Percent
Amortized of fixed
cost Amount maturities
---- ------ ----------
Type (Dollars in millions)
- ----
<S> <C> <C> <C>
Pass-throughs and sequential and targeted amortization classes........... $458.7 $454.9 25%
Accrual (Z tranche) bonds................................................ 9.6 9.7 1
Planned amortization classes and accretion directed bonds................ 77.2 76.7 4
Subordinated classes .................................................... 32.8 33.1 2
------ ------ ---
Total mortgage-backed securities................................ $578.3 $574.4 32%
====== ====== ==
</TABLE>
The following table sets forth the amortized cost and estimated fair value
of mortgage-backed securities as of December 31, 1996, based upon the pricing
source used to determine estimated fair value:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Nationally recognized pricing services ............................................. $515.1 $511.3
Broker-dealer market makers......................................................... 52.7 52.5
Internally developed methods (calculated based on a
weighted-average current market yield of 7.4 percent)........................ 10.5 10.6
------ ------
Total mortgage-backed securities........................................... $578.3 $574.4
====== ======
</TABLE>
At December 31, 1996, no mortgage loans or credit-tenant loans had
defaulted as to principal or interest for more than 60 days, were in
foreclosure, had been converted to foreclosed real estate or had been
restructured while the Company owned them. At December 31, 1996, the Company had
a loan loss reserve of $.9 million. Approximately 30 percent, 18 percent, 16
percent and 6 percent of the mortgage loan balance were on properties located in
California, Indiana, Texas and Florida, respectively. No other state comprised
greater than 5 percent of the mortgage loan balance.
As part of its investment strategy, the Company enters into reverse
repurchase agreements and dollar-roll transactions to increase its return on
investments and improve its liquidity. These transactions are accounted for as
short-term borrowings collateralized by pledged securities with book values
approximately equal to the loan value. Such borrowings averaged approximately
F-18
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
$115.3 million during 1996 compared to $84.4 million during 1995. The weighted
average interest rate on short-term collateralized borrowings was 5.3 percent
and 5.4 percent during 1996 and 1995, respectively. The primary risk associated
with short-term collateralized borrowings is that the counterparty will be
unable to perform under the terms of the contract. The Company's exposure is
limited to the excess of the net replacement cost of the securities over the
value of the short-term investments (which was not material at December 31,
1996). The Company believes that the counterparties to its reverse repurchase
and dollar-roll agreements are financially responsible and that the counterparty
risk is minimal.
Investments on deposit for regulatory authorities as required by law were
$17.1 million at December 31, 1996.
No investments of a single issuer were in excess of 10 percent of
shareholder's equity at December 31, 1996, other than investments issued or
guaranteed by the United States government.
4. INSURANCE LIABILITIES
Insurance liabilities consisted of the following:
<TABLE>
<CAPTION>
Interest December 31,
Withdrawal Mortality rate ---------------------
assumption assumption assumption 1996 1995
---------- ---------- ---------- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Future policy benefits:
Investment contracts................ N/A N/A (b) $1,282.1 $1,346.5
Limited-payment contracts........... None (a) 8% 105.3 96.7
Traditional life insurance Company
contracts........................ experience (a) 8% 146.2 153.5
Universal life-type contracts....... N/A N/A N/A 354.4 367.6
Claims payable and other
policyholders' funds............... N/A N/A N/A 69.5 74.8
-------- --------
Total.......................... $1,957.5 $2,039.1
======== ========
<FN>
(a) Principally modifications of the 1975-80 Basic Table, Select and Ultimate
Table.
(b) At December 31, 1996 and 1995, approximately 98 percent of this liability
represented account balances where future benefits were not guaranteed. The
weighted average interest rate on the remainder of the liabilities,
representing the present value of guaranteed future benefits, was
approximately 7 percent at December 31, 1996.
</FN>
</TABLE>
Participating policies represented approximately 3.5 percent, 3.7 percent
and 3.6 percent of total life insurance in force at December 31, 1996, 1995 and
1994, respectively, and approximately 2.7 percent, 2.4 percent and 7.5 percent
of premium income for 1996, 1995 and 1994, respectively. Dividends on
participating policies amounted to $1.9 million, $1.8 million and $1.7 million
in 1996, 1995 and 1994, respectively.
5. REINSURANCE
Cost of reinsurance ceded where the reinsured policy contains mortality
risks totaled $24.6 million in 1996, $29.1 million in 1995 and $35.3 million in
1994. This cost was deducted from insurance premium revenue. The Company is
contingently liable for claims reinsured if the assuming company is unable to
pay. Reinsurance recoveries netted against insurance policy benefits totaled
$19.4 million in 1996, $19.5 million in 1995 and $27.5 million in 1994.
Effective October 1, 1995, Western National Life Insurance Company, a
former subsidiary of Conseco, recaptured certain annuity businesses ceded to the
Company through a reinsurance agreement. Reserves related to these policies
totaled $72.8 million. Recapture fees of $.7 million were recognized as income
during the four months ended December 31, 1995.
F-19
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The Company's reinsurance receivable balance at December 31, 1996, relates
to many reinsurers. No balance from a single reinsurer exceeds $7.0 million.
6. INCOME TAXES
Income tax liabilities consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
---- ----
(Dollars in millions)
<S> <C> <C>
Deferred income tax liabilities (assets):
Cost of policies purchased and cost of policies produced.................. $ 60.3 $ 44.7
Investments............................................................... (3.3) 8.6
Insurance liabilities..................................................... (19.7) (21.7)
Unrealized appreciation (depreciation).................................... (2.5) 7.2
Other..................................................................... (5.0) (7.7)
------- ------
Deferred income tax liabilities....................................... 29.8 31.1
Current income tax liabilities............................................... - 7.9
------- ------
Income tax liabilities................................................ $ 29.8 $39.0
======= ======
</TABLE>
Income tax expense was as follows:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Current tax provision............................... $10.5 $11.9 $19.9 $20.0
Deferred tax provision (benefit).................... 4.9 (2.2) (3.4) 2.7
----- ------ ------ -----
Income tax expense........................... $15.4 $ 9.7 $16.5 $22.7
===== ====== ===== =====
</TABLE>
Income tax expense differed from that computed at the applicable statutory
rate of 35 percent for the following reasons:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Federal tax on income before income taxes at
statutory rate.................................... $14.4 $9.0 $15.6 $21.5
State taxes and other................................ .6 .5 .4 .5
Nondeductible items.................................. .4 .2 .5 .7
----- ---- ----- -----
Income tax expense.............................. $15.4 $9.7 $16.5 $22.7
===== ==== ===== =====
</TABLE>
The Company is currently being examined by the Internal Revenue Service for
the 1994 tax year. The Company believes that the outcome of this examination
will not have a material impact on its financial position or results of
operations.
F-20
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
7. RELATED PARTY TRANSACTIONS
The Company operates without direct employees through management and
service agreements with subsidiaries of Conseco. Fees for such services
(including data processing, executive management and investment management
services) were based on negotiated rates for periods prior to January 1, 1996.
Pursuant to new service agreements effective January 1, 1996, such fees are
based on Conseco's direct and directly allocable costs plus a 10 percent margin.
Total fees incurred by the Company under such agreements were $44.1 million in
1996, $26.6 million in 1995 and $25.1 million in 1994.
During 1996, the Company purchased $31.5 million par value of senior
subordinated notes issued by subsidiaries of Conseco. Such notes had a carrying
value of $34.7 million at December 31, 1996, and are classified as "other
invested assets" in the accompanying balance sheet. In addition, during 1996,
the Company forgave receivables from Conseco totaling $9.9 million. This
transaction is reflected as a dividend to Conseco in the accompanying statement
of shareholder's equity.
8. OTHER OPERATING INFORMATION
Insurance policy income consisted of the following:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Direct premiums collected............................ $241.3 $ 82.8 $158.6 $ 240.3
Reinsurance assumed.................................. 1.7 .7 2.0 3.1
Reinsurance ceded.................................... (24.6) (11.2) (17.9) (35.3)
------ ------ ------ -------
Premiums collected, net of reinsurance.......... 218.4 72.3 142.7 208.1
Less premiums on universal life and products without
mortality risk which are recorded as additions to
insurance liabilities............................. (169.8) (50.8) (104.4) (146.0)
------- ------ ------- -------
Premiums on products with mortality and morbidity
risk, recorded as insurance policy income..... 48.6 21.5 38.3 62.1
Fees and surrender charges........................... 32.8 10.3 22.2 36.5
------- ------ ------- -------
Insurance policy income....................... $ 81.4 $ 31.8 $ 60.5 $ 98.6
======= ====== ======= =======
</TABLE>
The four states with the largest shares of the Company's premiums collected
in 1996 were Texas (29 percent), Florida (19 percent), California (9 percent)
and Michigan (7 percent). No other state's share of premiums collected exceeded
5 percent.
Other operating costs and expenses were as follows:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Policy maintenance expense........................... $37.8 $ 6.5 $14.0 $19.0
State premium taxes and guaranty assessments......... 4.4 1.6 1.1 3.0
Commission expense................................... 12.1 5.0 8.6 15.3
----- ----- ----- -----
Other operating costs and expenses............ $54.3 $13.1 $23.7 $37.3
===== ===== ===== =====
</TABLE>
F-21
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Anticipated returns from the investment of policyholder balances are
considered in determining the amortization of the cost of policies purchased and
cost of policies produced. Sales of fixed maturity investments during 1996, 1995
and 1994, changed the incidence of profits on such policies because investment
gains and losses were recognized currently and the expected future yields on the
investment of policyholder balances were affected. Accordingly, amortization of
the cost of policies purchased and cost of policies produced was increased by
$2.5 million in 1996, $10.0 million in the four months ended December 31, 1995,
$4.3 million for the eight months ended August 31, 1995, and $2.7 million in
1994.
The changes in the cost of policies purchased were as follows:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Balance, beginning of period......................... $120.0 $159.0 $173.9 $ 93.0
Amortization related to operations:
Cash flow realized.............................. (26.2) (9.4) (19.1) (30.4)
Interest added.................................. 13.1 5.0 12.7 20.8
Amortization related to sales of fixed maturity
investments..................................... (2.2) (8.3) (3.4) (2.6)
Amounts related to fair value adjustment of actively
managed fixed maturity securities............... 36.6 (26.3) (64.1) 93.1
Adjustment of balance due to new accounting
basis and other................................. 1.7 - 59.0 -
------ ------ ------ ------
Balance, end of period............................... $143.0 $120.0 $159.0 $173.9
====== ====== ====== ======
</TABLE>
Based on current conditions and assumptions as to future events on all
policies in force, approximately 9.2 percent, 9.2 percent, 8.3 percent, 7.3
percent and 6.7 percent of the cost of policies purchased as of December 31,
1996, are expected to be amortized in each of the next five years, respectively.
The discount rates used to determine the amortization of the cost of policies
purchased ranged from 5 percent to 8 percent and averaged 5.5 percent.
The changes in the cost of policies produced were as follows:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Balance, beginning of period......................... $24.0 $25.9 $ 63.2 $30.8
Additions......................................... 13.2 3.0 6.6 9.4
Amortization related to operations................ (3.2) (.5) (4.0) (4.5)
Amortization related to sales of fixed maturity
investments..................................... (.3) (1.7) (.9) (.1)
Amounts related to fair value adjustment of actively
managed fixed maturity securities............... 4.5 (2.7) (12.0) 27.6
Adjustment of balance due to new accounting basis - - (27.0) -
----- ----- ------- -----
Balance, end of period............................... $38.2 $24.0 $ 25.9 $63.2
===== ===== ======= =====
</TABLE>
F-22
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
9. STATEMENT OF CASH FLOWS
Income taxes paid during 1996, 1995, and 1994, were $18.1 million, $19.3
million and $20.3 million, respectively.
Short-term investments having original maturities of three months or less
are considered to be cash equivalents. All cash is invested in short-term
investments.
10. STATUTORY INFORMATION
Statutory accounting practices prescribed or permitted for insurance
companies by regulatory authorities differ from generally accepted accounting
principles. The Company reported the following amounts to regulatory agencies:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
---- ----
(Dollars in millions)
<S> <C> <C>
Statutory capital and surplus.................................................. $140.3 $156.2
Asset valuation reserve ("AVR")................................................ 28.7 26.2
Interest maintenance reserve ("IMR")........................................... 63.1 64.7
------ ------
Total...................................................................... $232.1 $247.1
====== ======
</TABLE>
The Company had statutory net income of $32.6 million, $38.4 million and
$37.7 million in 1996, 1995 and 1994, respectively.
Statutory accounting practices classify certain segregated portions of
surplus, called AVR and IMR, as liabilities. The purpose of these accounts is to
stabilize statutory net income and surplus against fluctuations in the market
value and creditworthiness of investments. The IMR captures all realized
investment gains and losses resulting from changes in interest rates and
provides for subsequent amortization of such amounts into statutory net income
on a basis reflecting the remaining life of the assets sold. The AVR captures
investment gains and losses related to changes in creditworthiness and is also
adjusted each year based on a formula related to the quality and loss experience
of the investment portfolio.
The following table compares the pre-tax income determined on a statutory
accounting basis with such income reported herein in accordance with GAAP:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Pre-tax income as reported on a statutory accounting
basis before transfers to and from and
amortization of the IMR........................... $40.2 $ 33.6 $ 50.2 $ 58.6
GAAP adjustments:
Investments valuation............................. 4.9 (3.3) .8 7.5
Amortization related to operations................ (17.8) (5.3) (11.7) (16.0)
Amortization related to investment gains.......... (2.5) (10.0) (4.3) (2.7)
Deferral of cost of policies produced............. 13.2 3.0 6.6 9.4
Insurance liabilities............................. 3.2 5.1 2.5 2.5
Other ............................................ (.1) 2.7 .6 2.2
----- ------ ------ ------
Net effect of GAAP adjustments................ .9 (7.8) (5.5) 2.9
----- ------ ------ ------
GAAP pre-tax income........................... $41.1 $ 25.8 $ 44.7 $ 61.5
===== ====== ====== ======
</TABLE>
F-23
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
State insurance laws generally restrict the ability of insurance companies
to pay dividends or make other distributions. Approximately $32.7 million of the
Company's net assets at December 31, 1996, are available for distribution in
1997 without permission of state regulatory authorities.
F-24
APPENDIX A
CONSECO SERIES TRUST
Conseco Series Trust is an open-end management investment company organized as a
business trust under the laws of the Commonwealth of Massachusetts on November
15, 1982. Trust shares are offered only to separate accounts of various
insurance companies to fund benefits of variable life and variable annuity
contracts. Conseco Capital Management serves as the investment adviser.
EVERGREEN VARIABLE TRUST
Evergreen Variable Trust is an open-end management investment company. The Funds
were organized to serve as investment vehicles for (a) separate accounts funding
variable annuity and variable life insurance contracts issued by certain life
insurance companies and (b) qualified pension and retirement plans. Evergreen
Asset Management Corp. serves as the investment adviser to the Funds.
FEDERATED INSURANCE SERIES
Federated Insurance Series is an open-end management investment company
organized as a business trust under the laws of the Commonwealth of
Massachusetts on September 15, 1993. Trust shares are offered only to separate
accounts of various insurance companies to serve as the investment medium of
variable life insurance policies and variable annuity contracts issued by the
insurance companies. Federated Advisers serves as the investment adviser.
THE ALGER AMERICAN FUND
The Alger American Fund is an open-end management investment company organized
as a business trust under the laws of the Commonwealth of Massachusetts on April
6, 1988. Trust shares are offered to separate accounts of various life insurance
companies as investment options of variable life and variable annuity contracts
and as a funding vehicle for qualified pension and retirement plans. Fred Alger
Management, Inc. serves as the investment adviser.
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO Variable Investment Funds, Inc. is a registered, open-end management
investment company that was organized as a Maryland corporation on August 19,
1993. Fund shares are intended to be funding vehicles for variable annuity
contracts and variable life insurance contracts to be offered by separate
accounts of certain life insurance companies. Fund shares are not available for
purchase other than through the purchase of such contracts. INVESCO Funds Group,
Inc. is the investment adviser. The investment adviser has retained
sub-advisers.
LORD ABBETT SERIES FUND, INC.
Lord Abbett Series Fund, Inc. is a diversified open-end management investment
company incorporated under the laws of Maryland on August 28, 1989. Shares of
the Fund are only offered to separate accounts of life insurance companies to
fund benefits of variable annuity contracts and variable life insurance
policies. Lord, Abbett & Co. serves as the Fund's investment manager.
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
The OFFITBANK Variable Insurance Fund, Inc. is an open-end management investment
company that was organized as a Maryland corporation on October 7, 1994. Shares
of the Fund are sold only to certain life insurance companies and their separate
accounts to fund benefits under variable annuity contracts and variable life
insurance policies to be offered by the life insurance companies. OFFITBANK, a
trust company specializing in global fixed income management, serves as the
Fund's investment adviser.
VAN ECK WORLDWIDE INSURANCE TRUST
Van Eck Worldwide Insurance Trust is an open-end management investment company
organized as a business trust under the laws of the Commonwealth of
Massachusetts on January 7, 1987. Trust shares are offered only to separate
accounts of various insurance companies to fund the benefits of variable life
and variable annuity contracts. The investment adviser and manager is Van Eck
Associates Corporation. Peregrine Asset Management (Hong Kong) Limited serves as
sub-investment adviser to the Worldwide Emerging Markets Fund.
A full description of each of the Eligible Funds, including the investment
objectives, policies and restrictions of each of the Portfolios, is contained in
the Prospectuses of the Eligible Funds which accompany this Prospectus and
should be read carefully by a prospective purchaser before investing.
APPENDIX B
Examples of Application of the Market Value Adjustment
CALCULATION OF MARKET VALUE ADJUSTMENT FACTOR:
( 1 + A ) N/365
(__________) - 1 = MVA factor
( 1 + B )
<TABLE>
<CAPTION>
<S> <C> <C>
Where:
A = the U.S. Treasury rate in effect at the beginning of the
Guarantee Period for the length of the Guarantee Period
selected.
B = the U.S. Treasury rate as of the transaction date plus
0.005%. The Treasury rate used is determined by taking
N/365 and rounding it to the next highest year.
N = Number of days remaining in the MVA Guarantee Period.
</TABLE>
If the Treasury rate is not available for the period, the rate will be arrived
at by interpolation.
EXAMPLE 1: FIVE-YEAR GUARANTEE PERIOD; INCREASE IN TREASURY RATE
Assume the Owner or Certificate Owner makes a $50,000 initial deposit in a
5-year Guarantee Period on January 1, 1996. The current 5-year Treasury rate is
6.00%, and the current interest rate is 7.00%. On June 13, 1997 the Owner or
Certificate Owner surrenders the Contract/Certificate with 3 years and 202 days,
or 1,297 days (12/31/2000 - 6/13/1997) remaining in the Guarantee Period. The
current Treasury rate at this point is found by rounding 3 years, 202 days to
the next greatest year and taking the rate for that Guarantee Period. In this
case we would look at a 4-year rate. Assume that the 4-year Treasury rate on
June 13, 1997 is 6.50%. The Market Value Adjustment on the Contract/Certificate
would be calculated as follows:
Accumulation Value at 6/13/1997 (529 days from issue):
(529/365)
$50,000 x (1.07) = $55,151.38
( 1 + .06 ) (1,297/365)
$55,151.38 x[ ( ___________________) - 1 ] = - $1,809.81
( 1 + .065 + .005)
resulting in an Adjusted Contract Value/Adjusted Certificate Value of
$55,151.38 - $1,809.81 = $53,341.57
EXAMPLE 2: FIVE-YEAR GUARANTEE PERIOD; DECREASE IN TREASURY RATE
Assuming a scenario identical to Example 1, but with a 4-year Treasury rate as
of the date of surrender of 5.00%, the following Market Value Adjustment would
result:
(1 + .06) (1,297/365)
$55,151.38 x[ ( __________________) - 1 ] = $934.43
( 1 + .050 + .005)
resulting in an Adjusted Contract Value/Adjusted Certificate Value of,
$55,151.38 + 943.43 = $56,094.81
EXAMPLE 3: TEN-YEAR GUARANTEE PERIOD; INCREASE IN TREASURY RATE
Assume the Owner or Certificate Owner makes a $50,000 initial deposit on a
10-year Guarantee Period on January 1, 1996. The current 10-year Treasury rate
is 7.00%, and the current interest rate is 7.50%. On October 31, 2002 the Owner
or Certificate Owner surrenders the Contract/Certificate with 3 years and 61
days, or 1,157 days (12/31/2005 - 10/31/2002) remaining in the Guarantee Period.
The current Treasury rate at this point is found by rounding 3 years, 61 days to
the next greatest year and taking the rate for that Guarantee Period. In this
case we would look at a 4 year rate. Assume that the 4-year Treasury rate on
October 31, 2002 is 7.50%. The Market Value Adjustment on the
Contract/Certificate would be calculated as follows:
Accumulation Value at 10/31/2002 (2,495 days from issue):
(2,495/365)
$50,000 x (1.075) = $81,972.13
( 1 + .07) (1,157/365)
$81,972.13 x [ (_________________) - 1 ] = - $2,381.85
( 1 + .075 + .005)
resulting in an Adjusted Contract Value/Adjusted Certificate Value of,
$81,972.13 - 2,381.85 = $79,590.28
EXAMPLE 4: DECREASE IN TREASURY RATE
Assuming a scenario identical to Example 3, but with a 4-year Treasury rate as
of the date of surrender of 6.00%, the following Market Value Adjustment would
result:
( 1 + .07) (1,157/365)
$81,972.13 x [ (__________________) - 1 ] = $1,226.13
( 1 + .060 + .005)
resulting in an Adjusted Contract Value/Adjusted Certificate Value of
$81,972.13 + 1,226.13 = $83,198.26
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
ITEM PAGE
Company.............................................................. 2
Experts.............................................................. 2
Legal Opinions....................................................... 2
Distributor.......................................................... 2
Yield Calculation for Money Market Sub-Account....................... 2
Performance Information.............................................. 2
Annuity Provisions................................................... 3
Financial Statements................................................. 4
If you would like a free copy of the Statement of Additional Information dated
May 2, 1997 for this Prospectus, please complete this form, detach, and mail to:
Great American Reserve Insurance Company
Administrative Office
11815 N. Pennsylvania Street
Carmel, Indiana 46032
Gentlemen:
Please send me a free copy of the Statement of Additional Information for Great
American Reserve Variable Annuity Account G at the following address:
Name:________________________________________________________________
Mailing Address:_____________________________________________________
_____________________________________________________
_____________________________________________________
Sincerely,
_____________________________________
(Signature)
[BACK COVER]
Great American Reserve
Insurance Company
A Conseco Company
11815 N. Pennsylvania St.
Carmel, IN 46032
05-7821(5/97) May 2, 1997
