File No. 333-00375
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO.1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GREAT AMERICAN RESERVE INSURANCE COMPANY
_____________________________________________________
(Exact Name of Registrant as Specified in its Charter)
Texas
_____________________________________________________________
(State or Other Jurisdiction or Incorporation or Organization)
________________________________________________________
(Primary Standard Industrial Classification Code Number)
75-0300900
____________________________________
(I.R.S. Employer Identification No.)
11825 N. Pennsylvania Street, Carmel, Indiana 46032-4572 (317) 817-3700
_________________________________________________________________________
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
Lawrence W. Inlow
Great American Reserve Insurance Company
11825 N. Pennsylvania Street
Carmel, Indiana 46032
(317) 817-3700
________________________________________________________
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code of Agent For Service)
Copies to:
Judith A. Hasenauer
Blazzard, Grodd & Hasenauer, P.C.
P.O. Box 5108
Westport, CT 06881
(203) 226-7866
Approximate date of commencement of proposed sale to the public...
As soon as practicable after the effective date.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box (X).
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering ( ).
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering ( ).
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box ( ).
==============================================================================
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
==============================================================================
CROSS REFERENCE PAGE
ITEM IN FORM S-1 CAPTION IN PROSPECTUS
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1. Forepart of the Registration Face Page of Registration,
Statement and Outside Front Cross Reference Page and
Cover Page of Prospectus Cover Page of Prospectus
Item 2. Inside Front and Outside Back Cover Page of Prospectus
Cover Pages of Prospectus
Item 3. Summary Information, Risk Summary
Factors and Ratio of Earnings
to Fixed Charges
Item 4. Use of Proceeds Description of the Contracts
and Certificates
Item 5. Determination of Offering Price Description of Contracts
and Certificates
Item 6. Dilution Not Applicable
Item 7. Selling Security Holders Not Applicable
Item 8. Plan of Distribution Distributor
Item 9. Description of Securities Description of the Contracts
to be Registered and Certificates
Item 10. Interests of Named Experts Not Applicable
and Counsel
Item 11. Information with Respect to
the Registrant
(a) Information required by Item 101 Additional Information About
of Regulation S-K, description the Company
of the business
(b) Information required by Item 102 Additional Information About
of Regulation S-K, description of the Company
property
(c) Information required by Item 103 Additional Information About
of Regulation S-K, legal the Company
proceedings
(d) Where common equity securities are Not Applicable
being offered, information
required by Item 201 of Regulation
S-K, market price of and dividends
on the registrant's common equity
and related stockholder matters
(e) Financial statements meeting the Financial Statements
requirements of Regulation S-X, as
well as any financial information
required by Rule 3-05 and Article
11 of Regulation S-X.
(f) Information required by Item 301 Selected Historical
of Regulation S-K, selected Financial Information
financial data About the Company
(g) Information required by Item 302 Not Applicable
of Regulation S-K, supplementary
financial information
(h) Information required by Item 303 Management's Discussion and
of Regulation S-K, management's Analysis of Financial
discussion and analysis of Condition and Results of
financial condition and results of Operations
operations
(i) Information required by Item 304 Not Applicable
of Regulation S-K, changes in and
disagreements with accountants on
accounting and financial
disclosure
(j) Information required by Item 401 Additional Information About
of Regulation S-K, directors and the Company
executive officers
(k) Information required by Item 402 Additional Information About
of Regulation S-K, executive the Company
compensation
(l) Information required by Item 403 Additional Information About
of Regulation S-K, security the Company
ownership of certain beneficial
owners and management
(m) Information required by Item 404 Financial Statements
of Regulation S-K, certain
relationships and related
transactions
</TABLE>
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 1, 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 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 Payment
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
Hypothetical Performance Information
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, the General 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 & 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 $ 24 $ 73
Evergreen VA Foundation Fund $ 24 $ 73
Evergreen VA Growth and Income Fund $ 24 $ 73
Federated Insurance Series
International Equity Fund II $ 26 $ 81
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 & Income Portfolio $ 20 $ 61
The OFFITBANK Variable Insurance
Fund, Inc.
OFFITBANK VIF - Emerging Markets Fund $ 29 $ 88
OFFITBANK VIF - Total Return Fund $ $
Van Eck Worldwide Insurance Trust
Worldwide Emerging Markets Fund $ $
Worldwide Hard Assets Fund $ $
<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 $____
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 & 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 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 deductions 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 Owner.
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 PAYMENT
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 is
$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 by Written Request. 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 GARCO 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 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 to 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 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., formerly GARCO Equity Sales, Inc., ("CES"), 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. Payments received after the investment in the Contract
has been recovered (i.e. when the total of the excludible amounts equal the
investment in the Contract) are fully taxable. 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 with respect to earnings allocable to the Contract
prior to the receipt of payments under the Contract. The Code contains a safe
harbor provision which provides that annuity contracts such as the Contracts
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
advisor 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 various 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", below.)
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 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 Investments" 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 Great American Reserve Insurance 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.
</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
<PAGE>
<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
<PAGE>
<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
<PAGE>
<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
<PAGE>
<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
<PAGE>
<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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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 currently only offered to separate accounts of life
insurance companies to fund benefits of variable annuity contracts. Lord,
Abbett & Co. serves as the Funds 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 Funds 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 Limited (Hong Kong) 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 on 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 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 = $56,085.81
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 Certificate Value of,
$81,972.13 + 1,226.13 = $83,198.26
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
ITEM PAGE
Company..............................................................
Experts..............................................................
Legal Opinions.......................................................
Distributor..........................................................
Yield Calculation for Money Market Sub-Account.......................
Performance Information..............................................
Annuity Provisions...................................................
Financial Statements.................................................
If you would like a free copy of the Statement of Additional Information dated
May 1, 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)
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Response is incorporated by reference to Registrant's Form S-1 filing
(File No. 333-00375) filed on January 23, 1996.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Bylaws of the Company (Article VI) provide that:
The Corporation shall indemnify any person who was or is a party, or is
threatened to be made a party, to any threatened, pending, or completed
action, suit or proceeding, whether civil, criminal, administrative, or
investigative, by reason of the fact that he is or was a director or officer
of the Corporation, or is or was serving at the request of the Corporation as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise (collectively, "Agent") against
expenses (including attorneys' fees), judgments, fines, penalties, court costs
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order, settlement
(whether with or without court approval), conviction or upon a plea of NOLO
CONTENDERE or its equivalent, shall not, of itself, create a presumption that
the Agent did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Corporation,
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe that his conduct was unlawful. If several claims, issues or
matters are involved, an Agent may be entitled to indemnification as to some
matters even though he is not entitled as to other matters. Any director or
officer of the Corporation serving in any capacity of another corporation, of
which a majority of the shares entitled to vote in the election of its
directors is held, directly or indirectly, by the Corporation, shall be deemed
to be doing so at the request of the Corporation.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted directors and officers or controlling persons of the
Company pursuant to the foregoing, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. FINANCIAL STATEMENTS
The financial statements of the Company together with the opinion of an
independent certified public accountant are included in the Prospectus.
b. EXHIBITS
1. Principal Underwriter's Agreement*
3.(i) Company's Articles of Incorporation*
3.(ii) Company's By-laws*
3.(iii) Resolution of the Board of Directors of the Company*
4.(i) Individual Fixed and Variable Deferred Annuity Contract*
4.(ii) Allocated Fixed and Variable Group Annuity Contract*
4.(iii) Allocated Fixed and Variable Group Annuity Certificate*
5. Opinion of Counsel re: Legality
10.(i) Form of Fund Participation Agreement between INVESCO
Variable Investment Funds, Inc., INVESCO Funds Group,
Inc. and the Company.*
(ii) Form of Fund Participation Agreement between The Alger
American Fund, Fred Alger and Company, Incorporated
and the Company.*
(iii) Form of Fund Participation Agreement between Van
Eck Worldwide Insurance Trust, Van Eck Associates
Corporation and the Company.*
(iv) Form of Fund Participation Agreement between Insurance
Management Series, Federated Securities Corp. and the
Company.*
(v) Form of Fund Participation Agreement between Lord
Abbett Series Fund, Inc. and the Company**
(vi) Form of Fund Participation Agreement between OFFITBANK
Variable Insurance Fund, Inc. and the Company**
(vii) Form of Fund Participation Agreement Between Evergreen
Variable Trust and the Company**
21. Company Organizational Chart*
23.(i) Consent of Counsel
23.(ii) Consent of Independent Accountants
* Incorporated by reference to Registrant's Form S-1 (File No. 333-00375)
electronically filed on January 23, 1996.
** Incorporated by reference to Registrant's Pre-Effective Amendment to
Form S-1 (File No. 333-00375) electronically filed on January 30, 1997.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post effective amendment to this registration statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has caused this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Carmel,
State of Indiana on April 29, 1997.
<TABLE>
<CAPTION>
<S> <C>
GREAT AMERICAN RESERVE
INSURANCE COMPANY
By: /S/ DONALD F. GONGAWARE
__________________________
Donald F. Gongaware
President
Attest:
/S/ KARL W. KINDIG
____________________________
Karl W. Kindig
</TABLE>
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE TITLE DATE
- ------------------- -------------------------- --------
/S/ NGAIRE E. CUNEO Director April 29, 1997
____________________ ________________
Ngaire E. Cuneo
/S/ STEPHEN C. HILBERT Director and Chairman of April 29, 1997
______________________ the Board ________________
Stephen C. Hilbert
/S/ ROLLIN M. DICK Director, Executive Vice April 29, 1997
______________________ President and Chief ________________
Rollin M. Dick Financial Officer (Principal
Financial and Accounting
Officer of the Registrant)
/S/ LAWRENCE W. INLOW Director, Executive Vice April 29, 1997
______________________ President, General Counsel ________________
Lawrence W. Inlow
/S/ DONALD F. GONGAWARE Director, President and April 29, 1997
_______________________ Chief Executive Officer ________________
Donald F. Gongaware (Principal Executive
Officer of the Registrant)
</TABLE>
INDEX TO EXHIBITS
EXHIBIT PAGE
EX-5 Opinion of Counsel re: Legality
EX-23(i) Consent of Counsel
EX-23(ii) Consent of Independent Accountants
Blazzard, Grodd & Hasenauer, P.C.
943 Post Road East
Westport, CT 06880
(203) 226-7866
May 1, 1997
Board of Directors
Great American Reserve Insurance Company
11825 N. Pennsylvania Street
Carmel, IN 46032-4572
Re: Opinion of Counsel - Great American Reserve Insurance Company
Gentlemen:
You have requested our Opinion of Counsel in connection with the filing with
the Securities and Exchange Commission of a Registration Statement on Form S-1
for the Individual and Group Fixed and Variable Deferred Annuity Contracts and
Certificates (the "Contracts") to be issued by Great American Reserve
Insurance Company.
We have made such examination of the law and have examined such records and
documents as in our judgment are necessary or appropriate to enable us to
render the opinions expressed below.
We are of the following opinions:
1. Great American Reserve Insurance Company is a valid and existing
stock life insurance company of the state of Texas.
2. Upon the acceptance of purchase payments made by an Owner or
Certificate Owner pursuant to a Contract issued in accordance with the
Prospectus contained in the Registration Statement and upon compliance with
applicable law, such an Owner or Certificate Owner will have a legally-issued,
fully-paid, non-assessable contractual interest under such Contract.
You may use this opinion letter, or a copy thereof, as an exhibit to the
Registration Statement.
Sincerely,
BLAZZARD, GRODD & HASENAUER, P.C.
By: /S/ LYNN KORMAN STONE
__________________________
Lynn Korman Stone
CONSENT OF COUNSEL
We consent to the reference to our Firm under the caption "Legal Opinions" in
the Prospectus which forms a part of the Registration Statement.
/S/ BLAZZARD, GRODD & HASENAUER, P.C.
Blazzard, Grodd & Hasenauer, P.C.
May 1, 1997
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Great American Reserve Insurance Company on Form S-1 (File No. 333-00375), of
our report dated March 14, 1997 on our audits of the financial statements of
Great American Reserve Insurance Company 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. We also consent to the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
April 25, 1997
