File No.333-40301
SECURITIES AND EXCHANGE COMMISSION
POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GREAT AMERICAN RESERVE INSURANCE COMPANY
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(Exact Name of Registrant as Specified in its Charter)
Texas
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(State or Other Jurisdiction of Incorporation or Organization)
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(Primary Standard Industrial Classification Code Number)
75-0300900
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(I.R.S. Employer Identification No.)
11825 N. Pennsylvania Street, Carmel, Indiana 46032-4572 (317) 817-3700
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(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
Michael A. Colliflower
Great American Reserve Insurance Company
11825 N. Pennsylvania Street
Carmel, Indiana 46032
(317) 817-3700
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(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
Copies to:
Judith A. Hasenauer, Esq.
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, check
the following box ( ).
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 this Form is a post-effective amendment filed pursuant to Rule 462(d) 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, check
the following box ( ).
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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.
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<TABLE>
<CAPTION>
CROSS REFERENCE PAGE
ITEM IN FORM S-1 CAPTION IN PROSPECTUS
<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 Profile
Factors and Ratio of Earnings
to Fixed Charges
Item 4. Use of Proceeds The Annuity Contract
Item 5. Determination of Offering Price The Annuity Contract
and Purchases
Item 6. Dilution Not Applicable
Item 7. Selling Security Holders Not Applicable
Item 8. Plan of Distribution Distributor
Item 9. Description of Securities The Annuity Contract
to be Registered
Item 10. Interests of Named Experts Not Applicable
and Counsel
Item 11. Information with Respect to
the Registrant
(a) Information required by Item 101 Business of Great American
of Regulation S-K, description Reserve
of the business
(b) Information required by Item 102 Business of Great American
of Regulation S-K, description of Reserve
property
(c) Information required by Item 103 Business of Great American
of Regulation S-K, legal Reserve
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 Data
financial data
(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
discussion and analysis of
financial condition and results of
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 Directors and Executive
of Regulation S-K, directors and Officers
executive officers
(k) Information required by Item 402 Executive Compensation
of Regulation S-K, executive
compensation
(l) Information required by Item 403 Not Applicable
of Regulation S-K, security
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>
P R O F I L E CONSECO
Of The Fixed And May 1, 1998
Variable Annuity Contract
Underwritten by
Great American Reserve Insurance Company
THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT POINTS
THAT YOU SHOULD CONSIDER AND KNOW BEFORE PURCHASING THE
CONTRACT. THE CONTRACT IS MORE FULLY DESCRIBED IN THE FULL
PROSPECTUS WHICH ACCOMPANIES THIS PROFILE.
PLEASE READ THE PROSPECTUS CAREFULLY.
1 The
Annuity
Contract:
The fixed and variable annuity contract (Contract) offered by Great American
Reserve is a contract between you, the owner, and Great American Reserve, an
insurance company. The Contract provides a means for investing on a tax-deferred
basis in a fixed account of Great American Reserve, the 1, 3 and 5 year
guarantee periods of the market value adjustment option (mva option) and 40
investment portfolios. The annuity is intended for retirement savings or other
long-term investment purposes. It provides a death benefit and guaranteed income
options.
This Contract offers 40 investment portfolios which are listed in Section 4.
These portfolios are designed to offer a better return than the fixed account.
However, this is NOT guaranteed. Market conditions determine whether you make or
lose money.
The fixed account offers an interest rate that is guaranteed by the insurance
company, Great American Reserve. This interest rate is set periodically. While
your money is in the fixed account, the interest your money will earn is
guaranteed to be no less than 3% annually by Great American Reserve. The
principal is backed by Great American Reserve.
The Contract also offers 3 guarantee periods of the mva option, each for a
different time period and with a different interest rate that is guaranteed by
Great American Reserve. Currently, 1, 3 and 5 year periods are available. An
adjustment to the value of your Contract may apply to withdrawals or transfers
from the guarantee period prior to the end of the period.
You can put money in up to 15 of the investment portfolios, the 3 guarantee
periods of the mva option and/or the fixed account. You can transfer once in
each 30-day period during the accumulation phase without charge or tax
implication. After that, a charge of $25 per transfer may be assessed. During
the income phase, you may make two transfers each year which are without charge
or tax implications.
The Contract, like all deferred annuity contracts, has two phases: the
accumulation phase and the income phase. When you are contributing to the
Contract, it is called the accumulation phase. During the accumulation phase,
earnings accumulate on a tax-deferred basis and are taxed as income when you
make a withdrawal. The income phase occurs when you begin receiving regular
payments from your Contract.
The amount of money you are able to accumulate in your account during the
accumulation phase will determine the amount of income payments during the
income phase.
P R O F I L E
2 Annuity Payments
(The Income Phase):
If you want to receive regular income from your annuity, you can choose one of
four options: (1) monthly payments for a specific number of years in equal
installments; (2) monthly payments for your life, but with payments continuing
to the beneficiary for 5, 10 or 20 years (as you select) if you die before the
end of the selected period; (3) monthly payments of a specified amount until the
principal and interest are exhausted; and (4) monthly payments for your lifetime
and your survivors lifetime. Once you begin receiving regular payments, you
cannot change your payment plan. During the income phase, you can choose to have
payments come from the fixed account, the investment portfolios or both. Annuity
payments cannot come from the mva option. If you choose to have any part of your
payments come from the investment portfolios, the dollar amount of your payments
may go up or down.
3 Purchase:
You can buy this Contract with $5,000 or more under most circumstances. You can
add $500 ($200 monthly if you use the automatic premium check option) or more
any time you like during the accumulation phase. We require at least $2,000 to
be invested in a guarantee period of the mva option. If you buy the Contract as
an Individual Retirement Annuity (IRA), the minimum we will accept is $2,000
initially and $50 thereafter. Your registered representative can help you fill
out the proper forms.
4 Investment Options:
You can put your money in any or all of these investment portfolios which are
described in the prospectuses for the funds:
CONSECO SERIES TRUST
MANAGED BY
CONSECO CAPITAL MANAGEMENT, INC.
- --------------------------------
o Asset Allocation Portfolio
o Common Stock Portfolio
o Corporate Bond Portfolio
o Government Securities Portfolio
o Money Market Portfolio
THE ALGER AMERICAN FUND
MANAGED BY
FRED ALGER MANAGEMENT, INC.
- ---------------------------
o Alger American Growth Portfolio
o Alger American Leveraged
AllCap Portfolio
o Alger American MidCap
Growth Portfolio
o Alger American Small
Capitalization Portfolio
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
MANAGED BY
AMERICAN CENTURY
INVESTMENT MANAGEMENT, INC.
- ---------------------------
o VP Income & Growth
o VP International
o VP Value
BERGER INSTITUTIONAL PRODUCTS TRUST
MANAGED BY
BERGER ASSOCIATES
- -----------------
o Berger IPT - 100 Fund
o Berger IPT - Growth and Income Fund
o Berger IPT - Small Company Growth Fund
MANAGED BY
BBOI WORLDWIDE LLC
- ------------------
o Berger/BIAM IPT - International Fund
THE DREYFUS SOCIALLY RESPONSIBLE
GROWTH FUND, INC.
MANAGED BY
THE DREYFUS CORPORATION
- -----------------------
DREYFUS STOCK INDEX FUND
MANAGED BY
THE DREYFUS CORPORATION
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DREYFUS VARIABLE INVESTMENT FUND
MANAGED BY THE DREYFUS CORPORATION
- -----------------------
o Disciplined Stock Portfolio
o International Value Portfolio
FEDERATED INSURANCE SERIES
MANAGED BY
FEDERATED ADVISERS
- ------------------
o Federated High Income Bond Fund II
o Federated International Equity Fund II
o Federated Utility Fund II
INVESCO VARIABLE INVESTMENT FUNDS, INC.
MANAGED BY INVESCO FUNDS GROUP, INC.
- ------------------------
o INVESCO VIF-High Yield Portfolio
o INVESCO VIF-Industrial Income Portfolio
JANUS ASPEN SERIES
MANAGED BY
JANUS CAPITAL CORPORATION
- -------------------------
o Aggressive Growth Portfolio
o Growth Portfolio
o Worldwide Growth Portfolio
LAZARD RETIREMENT SERIES, INC.
MANAGED BY
LAZARD ASSET MANAGEMENT
- -----------------------
o Lazard Retirement Equity Portfolio
o Lazard Retirement Small Cap Portfolio
LORD ABBETT SERIES FUND, INC.
MANAGED BY
LORD, ABBETT & CO.
- ------------------
o Growth and Income Portfolio
MITCHELL HUTCHINS SERIES TRUST
MANAGED BY
MITCHELL HUTCHINS
ASSET MANAGEMENT INC.
- ---------------------
o Growth and Income Portfolio
NEUBERGER & BERMAN ADVISERS
MANAGEMENT TRUST
MANAGED BY
NEUBERGER & BERMAN
MANAGEMENT INCORPORATED
- -----------------------
o Limited Maturity Bond Portfolio
o Partners Portfolio
STRONG OPPORTUNITY FUND II, INC.
MANAGED BY
STRONG CAPITAL
MANAGEMENT, INC.
o Opportunity Fund II
STRONG VARIABLE INSURANCE FUNDS, INC.
MANAGED BY
STRONG CAPITAL
MANAGEMENT, INC.
o Growth Fund II
VAN ECK WORLDWIDE INSURANCE TRUST
MANAGED BY
VAN ECK ASSOCIATES CORPORATION
- ------------------------------
o Worldwide Bond Fund
o Worldwide Emerging Markets Fund
o Worldwide Hard Assets Fund
o Worldwide Real Estate Fund
Depending upon market conditions, you can make or lose money in any of these
portfolios.
5 Expenses:
The Contract has insurance features and investment features, and there are costs
related to each.
Each year Great American Reserve deducts a $30 contract maintenance charge from
your Contract. Great American Reserve currently waives this charge if the value
of your Contract is at least $50,000. Great American Reserve also deducts for
its insurance charges which total 1.40% of the average daily value of your
Contract allocated to the investment portfolios.
If you take your money out of the Contract, Great American Reserve may assess a
contingent deferred sales charge which is equal to:
Contingent
No. of Years Deferred
From Receipt of Sales
Purchase Payment Charge
- ---------------- ---------
First Year 7%
Second Year 7%
Third Year 6%
Fourth Year 5%
Fifth Year 4%
Sixth Year 3%
Seventh Year 2%
Eighth Year and more 0%
You may be assessed a premium tax charge which generally ranges from 0%-3.5%
depending on the state.
As with other professionally managed investments, there are also investment
charges which range from .28% to 1.58% of the average daily value of the
investment portfolio depending upon the investment portfolio.
The following chart is designed to help you understand the expenses in the
Contract. The column Total Annual Expenses shows the total of the $30 contract
maintenance charge (which has been converted to a percentage and is represented
as .10% below), the 1.40% insurance charges and the investment expenses for each
investment portfolio.
The next two columns show you two examples of the expenses, in dollars, you
would pay under a Contract. The examples assume that you invested $1,000 in a
Contract which earns 5% annually and that you withdraw your money: (1) at the
end of year 1, and (2) at the end of year 10. For year 1, the Total Annual
Expenses are assessed as well as the contingent deferred sales charges. For year
10, the example shows the aggregate of all the annual expenses assessed for the
10 years, but there is no contingent deferred sales charge.
The premium tax is assumed to be 0% in both examples.
<TABLE>
<CAPTION>
EXAMPLES:
Total Annual Total Annual Total Annual
Insurance Portfolio Total Annual End of Year: Expenses at
Portfolio Charges Expenses Expenses 1 Year 10 Years
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
CONSECO SERIES TRUST
- --------------------------------------------------------------------------------------------------------
Asset Allocation 1.50% .75% 2.25% $85 $255
Common Stock 1.50% .80% 2.30% $86 $260
Corporate Bond 1.50% .70% 2.20% $85 $250
Government Securities 1.50% .70% 2.20% $85 $250
Money Market 1.50% .45% 1.95% $82 $224
- --------------------------------------------------------------------------------------------------------
THE ALGER AMERICAN FUND
- --------------------------------------------------------------------------------------------------------
Alger American Growth 1.50% .79% 2.29% $86 $259
Alger American Leveraged AllCap 1.50% 1.00% 2.50% $88 $280
Alger American MidCap Growth 1.50% .84% 2.34% $86 $264
Alger American Small Capitalization 1.50% .89% 2.39% $87 $269
- --------------------------------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
- --------------------------------------------------------------------------------------------------------
VP Income & Growth 1.50% .70% 2.20% $85 $250
VP International 1.50% 1.50% 3.00% $93 $328
VP Value 1.50% 1.00% 2.50% $88 $280
- --------------------------------------------------------------------------------------------------------
BERGER INSTITUTIONAL PRODUCTS TRUST
- --------------------------------------------------------------------------------------------------------
Berger IPT - 100 1.50% 1.00% 2.50% $88 $280
Berger IPT -
Growth and Income 1.50% 1.00% 2.50% $88 $280
Berger IPT -
Small Company Growth 1.50% 1.15% 2.65% $89 $295
Berger/BIAM IPT-International 1.50% 1.20% 2.70% $90 $300
- --------------------------------------------------------------------------------------------------------
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
- --------------------------------------------------------------------------------------------------------
1.50% .82% 2.32% $86 $262
- --------------------------------------------------------------------------------------------------------
DREYFUS STOCK INDEX FUND
- --------------------------------------------------------------------------------------------------------
1.50% .28% 1.78% $81 $206
- --------------------------------------------------------------------------------------------------------
DREYFUS VARIABLE INVESTMENT FUND
- --------------------------------------------------------------------------------------------------------
Disciplined Stock 1.50% 1.02% 2.52% $88 $282
International Value 1.50% 1.42% 2.92% $92 $321
- --------------------------------------------------------------------------------------------------------
FEDERATED INSURANCE SERIES
- --------------------------------------------------------------------------------------------------------
Federated High Income Bond II 1.50% .80% 2.30% $86 $260
Federated International Equity II 1.50% 1.23% 2.73% $90 $303
Federated Utility II 1.50% .85% 2.35% $86 $265
- --------------------------------------------------------------------------------------------------------
INVESCO VARIABLE INVESTMENT FUNDS, INC.
- --------------------------------------------------------------------------------------------------------
INVESCO VIF- High Yield 1.50% .87% 2.37% $87 $267
INVESCO VIF- Industrial Income 1.50% .95% 2.45% $87 $275
- --------------------------------------------------------------------------------------------------------
JANUS ASPEN SERIES
- --------------------------------------------------------------------------------------------------------
Aggressive Growth 1.50% .76% 2.26% $85 $256
Growth 1.50% .70% 2.20% $85 $250
Worldwide Growth 1.50% .74% 2.24% $85 $254
- -------------------------------------------------------------------------------------------------------
LAZARD RETIREMENT SERIES, INC.
- --------------------------------------------------------------------------------------------------------
Lazard Retirement Equity 1.50% 1.50% 3.00% $93 $328
Lazard Retirement Small Cap 1.50% 1.50% 3.00% $93 $328
- --------------------------------------------------------------------------------------------------------
LORD ABBETT SERIES FUND, INC.
- --------------------------------------------------------------------------------------------------------
Growth and Income 1.50% .67% 2.17% $85 $247
</TABLE>
<TABLE>
<CAPTION>
EXAMPLES:
Total Annual Total Annual Total Annual
Insurance Portfolio Total Annual End of Year: Expenses at
Portfolio Charges Expenses Expenses 1 Year 10 Years
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
MITCHELL HUTCHINS SERIES TRUST
- --------------------------------------------------------------------------------------------------------
Growth and Income 1.50% 1.58% 3.08% $94 $336
- --------------------------------------------------------------------------------------------------------
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
- --------------------------------------------------------------------------------------------------------
Limited Maturity Bond 1.50% .77% 2.27% $86 $257
Partners 1.50% .86% 2.36% $86 $266
- --------------------------------------------------------------------------------------------------------
STRONG OPPORTUNITY FUND II, INC.
- --------------------------------------------------------------------------------------------------------
Opportunity Fund II 1.50% 1.15% 2.65% $89 $295
- --------------------------------------------------------------------------------------------------------
STRONG VARIABLE INSURANCE FUND, INC.
- --------------------------------------------------------------------------------------------------------
Growth II 1.50% 1.20% 2.70% $90 $300
- --------------------------------------------------------------------------------------------------------
VAN ECK WORLDWIDE INSURANCE TRUST
- --------------------------------------------------------------------------------------------------------
Worldwide Bond 1.50% 1.12% 2.62% $89 $292
Worldwide Emerging Markets 1.50% 0.80% 2.30% $86 $260
Worldwide Hard Assets 1.50% 1.17% 2.67% $90 $297
Worldwide Real Estate 1.50% 1.00% 2.50% $88 $280
</TABLE>
The expenses reflect any expense reimbursement or fee waivers. For newly formed
portfolios, the expenses have been estimated. For more detailed information, see
the Fee Table in the prospectus for the Contract.
6 Taxes:
Your earnings are not taxed until you take them out. If you take money out
during the accumulation phase, earnings come out first and are taxed as income.
If you are younger than 59 1/2 when you take money out, you may be charged a 10%
federal tax penalty on the earnings. Payments during the income phase are
considered partly a return of your original investment. That part of each
payment is not taxable as income. If your Contract was purchased as an
individual retirement annuity (IRA), your payments may be fully taxable.
7 Access To Your Money:
You can take money out at any time during the accumulation phase. Every year you
can take a portion of your money out of the Contract without a contingent
deferred sales charge (CDSC). This amount is equal to the greater of: (i) 10% of
the value of your Contract (on a non-cumulative basis), or (ii) the IRS minimum
distribution requirement for this Contract if your Contract was issued under an
Individual Retirement Annuity, or (iii) the total of your purchase payments that
have been in the Contract more than 7 complete years. Withdrawals in excess of
these amounts will be charged a contingent deferred sales charge which declines
from 7% to 0% depending upon the number of complete years we have had your
payment. After Great American Reserve has had a payment for 7 complete years,
there is no CDSC charge for withdrawals. Each purchase payment you add to your
Contract has its own 7 year CDSC period. Withdrawals from the MVA option may be
subject to a market value adjustment. Of course, you may also have to pay income
tax and a tax penalty on any money you take out.
8 Performance:
The value of the Contract will vary up or down depending upon the investment
performance of the investment portfolios you choose. As of December 31, 1997,
the sale of the Contracts had not begun. Therefore no performance is presented
here.
9 Death Benefit:
If you die before entering the income phase, the beneficiary will receive a
death benefit. Prior to age 90, the death benefit will be the greater of:
(1) the value of your Contract at the time we receive proof of death and a
payment election; or (2) the total purchase payments you have made, less any
adjusted partial withdrawals, increased by 5% each year. Adjusted partial
withdrawal means the amount of the partial withdrawal multiplied by the
amount of the death benefit just before the partial withdrawal divided by the
value of your Contract just before the partial withdrawal. A partial withdrawal
is the amount paid to you plus any taxes withheld less any contingent deferred
sales charges. For deaths occurring at age 90 or later, the death benefit will
be the value of your Contract at the time we receive proof of death and a
payment election.
10 Other Information:
FREE LOOK. If you cancel the Contract within 10 days after receiving it (or
whatever period is required in your state) we will send you whatever your
Contract is worth on the day we receive your request (this may be more or less
than your original payment) without assessing a contingent deferred sales
charge. If you have purchased the contract as an Individual Retirement Annuity
(IRA) you will receive back your purchase payment.
NO PROBATE. In many cases, when you die, the beneficiary will receive the death
benefit without going through probate. However, the avoidance of probate does
not mean that the beneficiary will not have tax liability as a result of
receiving the death benefit, nor does it mean the value of the Contract is not
includable in the taxable estate.
WHO SHOULD PURCHASE THE CONTRACT?
This Contract is designed for people seeking long-term tax-deferred accumulation
of assets, generally for retirement or other long-term purposes. the
tax-deferred feature is most attractive to people in high federal and state tax
brackets. You should not buy this Contract if you are looking for a short-term
investment or if you cannot take the risk of getting back less money than you
invested.
ADDITIONAL FEATURES. The Contract has additional features you might be
interested in. These include:
o You can arrange to have money automatically sent to you monthly, quarterly,
semi-annually or annually while your Contract is still in the accumulation
phase. You'll have to pay taxes on money you receive and you may have to also
pay a tax penalty. We call this feature the Systematic Withdrawal Program.
o You can arrange to have a certain amount of money automatically invested in
investment portfolios on a regular basis, theoretically giving you a lower
average cost per unit over time than a single one time purchase. We call this
feature Dollar Cost Averaging.
o You can instruct Great American Reserve to automatically readjust the money
between investment portfolios periodically to keep the blend you select. We
call this feature Automatic Rebalancing.
o You can add to your Contract directly from your bank account with as little as
$200 each month. We call this feature the automatic premium check option.
o You can elect to have your fixed account interest earnings periodically
transferred to one or more investment portfolios. We call this the Sweep
Program.
11 Inquiries:
If you need more information about buying
a Contract, please contact us at:
Great American Reserve Insurance Company
Administrative Office
11815 N. Pennsylvania Street
Carmel, Indiana 46032
(317) 817-3700
GREAT AMERICAN RESERVE
1998 Account F
Individual and Group Annuity
================================================================================
THE FIXED AND VARIABLE ANNUITY
issued by
GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT F
and
GREAT AMERICAN RESERVE INSURANCE COMPANY
This prospectus describes the Fixed and Variable Annuity Contract offered
by Great American Reserve Insurance Company (Great American Reserve).
The annuity contract has 44 investment choices--a fixed account which
offers an interest rate which is guaranteed not to be less than 3% by Great
American Reserve, three guarantee periods of the market value adjustment account
option (MVA option) and 40 investment portfolios listed below. You can put your
money in the fixed account, any of the three guarantee periods of the MVA option
and/or the investment portfolios. Currently, you can invest in up to 15
investment portfolios at one time.
CONSECO SERIES TRUST
MANAGED BY CONSECO CAPITAL MANAGEMENT, INC.
Asset Allocation Portfolio
Common Stock Portfolio
Corporate Bond Portfolio
Government Securities Portfolio
Money Market Portfolio
THE ALGER AMERICAN FUND
MANAGED BY FRED ALGER MANAGEMENT, INC.
Alger American Growth Portfolio
Alger American Leveraged AllCap Portfolio
Alger American MidCap Growth Portfolio
Alger American Small Capitalization Portfolio
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
MANAGED BY AMERICAN CENTURY INVESTMENT
MANAGEMENT, INC.
VP Income & Growth
VP International
VP Value
BERGER INSTITUTIONAL PRODUCTS TRUST
MANAGED BY BERGER ASSOCIATES
Berger IPT--100 Fund
Berger IPT--Growth and Income Fund
Berger IPT--Small Company Growth Fund
MANAGED BY BBOI WORLDWIDE LLC
Berger/BIAM IPT--International Fund
THE DREYFUS SOCIALLY RESPONSIBLE
GROWTH FUND, INC.
MANAGED BY THE DREYFUS CORPORATION
DREYFUS STOCK INDEX FUND
MANAGED BY THE DREYFUS CORPORATION
DREYFUS VARIABLE INVESTMENT FUND
MANAGED BY THE DREYFUS CORPORATION
Disciplined Stock Portfolio
International Value Portfolio
FEDERATED INSURANCE SERIES
MANAGED BY FEDERATED ADVISERS
Federated High Income Bond Fund II
Federated International Equity Fund II
Federated Utility Fund II
INVESCO VARIABLE INVESTMENT FUNDS, INC.
MANAGED BY INVESCO FUNDS GROUP, INC.
INVESCO VIF - High Yield Portfolio
INVESCO VIF - Industrial Income Portfolio
JANUS ASPEN SERIES
MANAGED BY JANUS CAPITAL CORPORATION
Aggressive Growth Portfolio
Growth Portfolio
Worldwide Growth Portfolio
LAZARD RETIREMENT SERIES, INC.
MANAGED BY LAZARD ASSET MANAGEMENT
Lazard Retirement Equity Portfolio
Lazard Retirement Small Cap Portfolio
LORD ABBETT SERIES FUND, INC.
MANAGED BY LORD, ABBETT & CO.
Growth and Income Portfolio
MITCHELL HUTCHINS SERIES TRUST
MANAGED BY MITCHELL HUTCHINS ASSET MANAGEMENT INC.
Growth and Income Portfolio
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
MANAGED BY NEUBERGER & BERMAN MANAGEMENT INCORPORATED
Limited Maturity Bond Portfolio
Partners Portfolio
STRONG OPPORTUNITY FUND II, INC.
MANAGED BY STRONG CAPITAL MANAGEMENT, INC.
Opportunity Fund II
STRONG VARIABLE INSURANCE FUNDS, INC.
MANAGED BY STRONG CAPITAL MANAGEMENT, INC.
Growth Fund II
VAN ECK WORLDWIDE INSURANCE TRUST
MANAGED BY VAN ECK ASSOCIATES CORPORATION
Worldwide Bond Fund
Worldwide Emerging Markets Fund
Worldwide Hard Assets Fund
Worldwide Real Estate Fund
===============================================================================
Please read this prospectus before investing and keep it on file for
future reference. It contains important information about the Great American
Reserve Fixed and Variable Annuity Contract.
To learn more about the Great American Reserve Fixed and Variable Annuity
Contract, you can obtain a copy of the Statement of Additional Information (SAI)
dated May 1, 1998. The SAI has been filed with the Securities and Exchange
Commission (SEC) and is legally a part of the prospectus. The SEC has a Web site
(http://www.sec.gov) that contains the SAI, material incorporated by reference,
and other information regarding companies that file electronically. The Table of
Contents of the SAI is on Page __ of this prospectus. For a free copy of the
SAI, call us at (800) 824-2726 or write us at our administrative office: 11815
N. Pennsylvania Street, Carmel, Indiana 46032.
INVESTMENT IN A VARIABLE ANNUITY CONTRACT IS SUBJECT TO RISKS, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL. THE CONTRACTS 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.
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.
May 1, 1998
================================================================================
TABLE OF CONTENTS
PAGE
Index of Special Terms...................................................
Fee Table................................................................
1. The Annuity Contract.....................................................
2. Annuity Payments (The Income Phase)......................................
3. Purchase.................................................................
Purchase Payments........................................................
Allocation of Purchase Payments..........................................
Accumulation Units.......................................................
4. Investment Options.......................................................
Investment Portfolios....................................................
The Fixed Account........................................................
The MVA Option...........................................................
Transfers................................................................
Dollar Cost Averaging Program............................................
Rebalancing Program......................................................
Asset Allocation Program.................................................
Sweep Program............................................................
Voting Rights............................................................
Substitution.............................................................
5. Expenses.................................................................
Insurance Charges........................................................
Contract Maintenance Charge..............................................
Contingent Deferred Sales Charge.........................................
Reduction or Elimination of the
Contingent Deferred Sales Charge........................................
Transfer Fee.............................................................
Premium Taxes............................................................
Income Taxes.............................................................
Investment Portfolio Expenses............................................
6. Taxes....................................................................
Annuity Contracts in General.............................................
Qualified and Non-Qualified Contracts ...................................
Withdrawals--Non-Qualified Contracts.....................................
Withdrawals--Qualified Contracts.........................................
Diversification..........................................................
Investor Control.........................................................
7. Access to Your Money.....................................................
Systematic Withdrawal Program............................................
Suspension of Payments or Transfers......................................
8. Performance..............................................................
9. Death Benefit............................................................
Upon Your Death..........................................................
Death of Annuitant.......................................................
10 Other Information .......................................................
Great American Reserve...................................................
The Separate Accounts....................................................
Distributor..............................................................
Ownership................................................................
Beneficiary.................................................................
Assignment...............................................................
Additional Information...................................................
Selected Historical Financial
Information of Great American
Reserve ................................................................
Business of Great American Reserve
Insurance Company ......................................................
Management's Discussion and Analysis
of Financial Condition and Results
of Operations of Great American
Reserve ................................................................
Directors and Executive Officers.........................................
Executive Compensation...................................................
Independent Accountants..................................................
Legal Opinions...........................................................
Financial Statements.....................................................
Table of Contents of the Statement
of Additional Information ..............................................
Appendix A--Market Value Adjustment .....................................
GREAT AMERICAN RESERVE
1998 Account F
Individual and Group Annuity
================================================================================
Index of Special Terms
We have tried to make this prospectus as readable and understandable for
you as possible. By the very nature of the contract, however, certain technical
words or terms are unavoidable. We have identified the following as some of
these words or terms. They are identified in the text in italic and the page
that is indicated here is where we believe you will find the best explanation
for the word or term.
Accumulation Phase .....................................................
Accumulation Unit ......................................................
Annuitant ..............................................................
Annuity Date ...........................................................
Annuity Options ........................................................
Annuity Payments .......................................................
Annuity Unit ...........................................................
Beneficiary ............................................................
Contract ...............................................................
Fixed Account ..........................................................
Guarantee Period .......................................................
Income Phase ...........................................................
Investment Portfolios ..................................................
Joint Owner ............................................................
MVA Option .............................................................
Non-Qualified ..........................................................
Owner ..................................................................
Purchase Payment .......................................................
Qualified ..............................................................
Tax-deferral ...........................................................
================================================================================
FEE TABLE
OWNER TRANSACTION EXPENSES
Contingent Deferred Sales Charge (as a percentage of purchase payments) (See
Note 2 under "Explanation of Fee Table and Examples," page __)
NO. OF YEARS FROM RECEIPT OF PAYMENT CHARGE
- -------------------------------------------------------------------------
First Year...................................................... 7%
Second Year..................................................... 7%
Third Year...................................................... 6%
Fourth Year..................................................... 5%
Fifth Year...................................................... 4%
Sixth Year...................................................... 3%
Seventh Year.................................................... 2%
Eighth Year and more............................................ 0%
=========================================================================
TRANSFER FEE (see Note 3 under "Explanation of Fee Table and Examples, page __")
No charge for one transfer in each 30 day period during the accumulation
phase; thereafter a fee of $25 per transfer may be charged. No charge for
the two transfers allowed each year during the income phase.
CONTRACT MAINTENANCE CHARGE
(see Note 4 under "Explanation of Fee Table and Examples, page __")
$30 per contract per year
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
Mortality and Expense Risk Charge 1.25%
Administrative Charge .15%
-----
TOTAL SEPARATE ACCOUNT ANNUAL EXPENSES 1.40%
================================================================================
INVESTMENT PORTFOLIO EXPENSES
(as a percentage of the average daily net assets of an investment portfolio)
<TABLE>
<CAPTION>
TOTAL ANNUAL
OTHER EXPENSES PORTFOLIO
(AFTER EXPENSE EXPENSES
REIMBURSEMENT (AFTER EXPENSE
MANAGEMENT 12b-1 FOR CERTAIN REIMBURSEMENT FOR
FEES FEES PORTFOLIOS) CERTAIN PORTFOLIOS)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONSECO SERIES TRUST (1)
Asset Allocation Portfolio (2) ............................. 0.55% -- 0.20% 0.75%
Common Stock Portfolio (2) ................................. 0.60% -- 0.20% 0.80%
Corporate Bond Portfolio ................................... 0.50% -- 0.20% 0.70%
Government Securities Portfolio ............................ 0.50% -- 0.20% 0.70%
Money Market Portfolio (2) ................................. 0.25% -- 0.20% 0.45%
THE ALGER AMERICAN FUND
Alger American Growth Portfolio ............................ 0.75% -- 0.04% 0.79%
Alger American Leveraged AllCap Portfolio (3) .............. 0.85% -- 0.15% 1.00%
Alger American MidCap Growth Portfolio ..................... 0.80% -- 0.04% 0.84%
Alger American Small Capitalization Portfolio .............. 0.85% -- 0.04% 0.89%
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC ..................
VP International ........................................... 1.50% -- 0.0% 1.50%
VP Value ................................................... 1.00% -- 0.0% 1.00%
VP Income & Growth ......................................... 0.70% -- 0.0% 0.70%
BERGER INSTITUTIONAL PRODUCTS TRUST
Berger IPT--100 Fund (4) ................................... 0.00% -- 1.00% 1.00%
Berger IPT--Growth and Income Fund (4) ..................... 0.00% -- 1.00% 1.00%
Berger IPT--Small Company Growth Fund (4) .................. 0.00% -- 1.15% 1.15%
Berger/BIAM IPT--International Fund (4) .................... 0.00% -- 1.20% 1.20%
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC. 0.75% -- 0.07% 0.82%
DREYFUS STOCK INDEX FUND ............................... 0.25% -- 0.03% 0.28%
DREYFUS VARIABLE INVESTMENT FUND
Disciplined Stock Portfolio............................... 0.75% 0.27% 1.02%
International Value Portfolio............................... 1.00% 0.42% 1.42%
FEDERATED INSURANCE SERIES
Federated High Income Bond Fund II (5) ..................... 0.51% -- 0.29% 0.80%
Federated International Equity Fund II (5) ................. 0.02% -- 1.21% 1.23%
Federated Utility Fund II (5) .............................. 0.48% -- 0.37% 0.85%
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO VIF - High Yield Portfolio (6)...................... .60% -- .27% .87%
INVESCO VIF - Industrial Income Portfolio (6)............... .75% -- .20% .95%
JANUS ASPEN SERIES
Aggressive Growth Portfolio (7) ........................... 0.73% -- 0.03% 0.76%
Growth Portfolio (7) ...................................... 0.65% -- 0.05% 0.70%
Worldwide Growth Portfolio (7) ............................. 0.66% -- 0.08% 0.74%
LAZARD RETIREMENT SERIES, INC ..............................
Lazard Retirement Equity Portfolio (8) .................... 0.75% 0.25% 0.50% 1.50%
Lazard Retirement Small Cap Portfolio (8) .................. 0.75% 0.25% 0.50% 1.50%
LORD ABBETT SERIES FUND, INC ...............................
Growth and Income Portfolio (9) ........................... 0.50% 0.15% 0.02% 0.67%
MITCHELL HUTCHINS SERIES TRUST
Growth and Income Portfolio ................................ 0.70% -- 0.88% 1.58%
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST (10)
Limited Maturity Bond Portfolio ............................ 0.65% -- 0.12% 0.77%
Partners Portfolio ......................................... 0.80% -- 0.06% 0.86%
STRONG OPPORTUNITY FUND II, INC.
Opportunity Fund II ........................................ 1.00% -- 0.15% 1.15%
STRONG VARIABLE INSURANCE FUNDS, INC .......................
Growth Fund II (11) ........................................ 1.00% -- 0.20% 1.20%
VAN ECK WORLDWIDE INSURANCE TRUST (12)
Worldwide Bond Fund ........................................ 1.00% -- 0.12% 1.12%
Worldwide Emerging Markets Fund ............................ 1.00% -- (-.20)% 0.80%
Worldwide Hard Assets Fund ................................. 1.00% -- 0.17% 1.17%
Worldwide Real Estate Fund ................................. 0.00% -- 1.00% 1.00%
</TABLE>
(1) 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, as 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 1997 would have totaled: 0.84% for the Asset
Allocation Portfolio; 0.80% for the Common Stock Portfolio; 0.77% for the
Corporate Bond Portfolio; 0.92% for the Government Securities Portfolio; and
0.52% for the Money Market Portfolio.
(2) 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.
(3) The Alger American Leveraged AllCap Portfolio's "Other Expenses"
includes .04% of interest expense.
(4) The Funds' investment advisers have voluntarily agreed to waive their
advisory fee and have voluntarily reimbursed the Funds for additional expenses
to the extent that normal operating expenses in any fiscal year, including the
investment advisory fee but excluding brokerage commissions, interest, taxes and
extraordinary expenses, of each of the Berger IPT--100 Fund and the Berger
IPT-- Growth and Income Fund exceed 1.00%, and the normal operating expenses
in any fiscal year of the Berger IPT--Small Company Growth Fund exceed
1.15%, and the normal operating expenses of the Berger/BIAM IPT -
International Fund exceed 1.20% of the respective Fund's average daily net
assets. Absent the voluntary waiver and reimbursement, the Management Fee for
the Berger IPT--100 Fund, Berger IPT--Growth and Income Fund, the Berger
IPT--Small Company Growth Fund and the Berger/BIAM IPT - International Fund
would have been .75%, .75%, .90%, and .90% respectively, and their Total
Annual Portfolio Expenses would have been 9.18%, 9.62%, 5.81% and 3.83%,
respectively.
(5) In the absence of a voluntary waiver by Federated Advisers, the Funds'
investment adviser, the Management Fee and Total Annual Portfolio Expenses would
have been 0.60% and 0.89%, respectively, for High Income Bond Fund II and
0.75% and 1.12%, respectively, for Utility Fund II. Absent a voluntary waiver of
the management fee and the voluntary reimbursement of certain other operating
expenses by Federated Advisers, the Management Fee and Total Annual Portfolio
Expenses for International Equity Fund II would have been 1.00% and 2.21%,
respectively.
(6) 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, 1997
amounted to 0.83% and 0.91%, 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, 1997 would have been
0.94% and 0.97%, respectively, of each Portfolio's average net assets.
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.
(7) The expense figures shown are net of certain fee waivers or reductions
from Janus Capital Corporation, the investment adviser of the Janus Aspen
Series. Without such waivers or reductions, the total fees and expenses in 1997
would have totaled: 0.78% for Aggressive Growth; 0.78% for Growth; and 0.81% for
Worldwide Growth.
(8) Lazard Asset Management, the Fund's investment adviser, has
voluntarily agreed to reimburse all expenses, including management fees, in
excess of 1.50% of the average annual net assets of the Portfolio.
(9) 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 Fund
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. For the year ending December 31, 1998, the
12b-1 fees are estimated to be .15%. The examples below for this Portfolio
reflect the estimated 12b-1 fees.
(10) Neuberger & Berman Advisers Management Trust is divided into
portfolios (Portfolios), each of which invests all of its net investable assets
in a corresponding series of Advisers Managers Trust. The figures reported under
"Management Fees" include the total of the administration fees paid by the
Portfolio and the management fees paid by its corresponding series. Similarly,
"Other Expenses" includes all other expenses of the Portfolio and its
corresponding series.
(11) Strong Capital Management, Inc., the investment adviser of the Strong
Growth Fund II, has voluntarily agreed to cap the Fund's total operating
expenses at 1.20%. The Adviser has no current intention to, but may in the
future, discontinue or modify any waiver of fees or absorption of expenses at
its discretion with appropriate notification to its shareholders.
(12) All figures are annualized. Expenses of the Worldwide Real Estate
Fund, which commenced operation in June 1997, are being assumed by the Fund's
investment adviser. Without such assumption, Worldwide Real Estate Fund's
Management Fee would be 1.00%, Other Expenses would be 3.88% and Total Expenses
would be 4.88%. Other Expenses of Worldwide Real Estate Fund are an estimate
which assumes $80 million in average daily net assets, and may be greater or
less than those shown. Prior to April 30, 1997, Worldwide Hard Assets Fund was
named Gold and Natural Resources Fund. Other Expenses of the Worldwide Hard
Assets Fund are net of soft dollar credits. Without such credits, Other
Expenses would have been 0.18% and Total Annual Portfolio Expenses would have
been 1.18%. Other Expenses of Worldwide Emerging Markets Fund are net of the
reduction of the Fund's operating fees in connection with a fee arrangement,
based on cash balances left on deposit with the custodian, and net of the waiver
or assumption by the Fund's investment adviser of certain fees and expenses.
Without such fee arrangement and, to a lesser extent, the waiver/assumption,
Other Expenses would have been 0.34% and Total Expenses would have been 1.34%.
The Fund's investment adviser is no longer waiving or assuming fees and
expenses.
================================================================================
EXAMPLES:
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets: (a) upon surrender at the end of each time period; (b)
if the contract is not surrendered; (c) if the contract is annuitized (except
under certain circumstances).
TIME PERIODS
1 YEAR 3 YEARS
- --------------------------------------------------------------------------------
CONSECO SERIES TRUST
Asset Allocation (a) $85 (a) $123
(b) $23 (b) $ 69
(c) $85 (c) $123
Common Stock (a) $86 (a) $124
(b) $23 (b) $ 71
(c) $86 (c) $124
Corporate Bond (a) $85 (a) $121
(b) $22 (b) $ 68
(c) $85 (c) $121
Government Securities (a) $85 (a) $121
(b) $22 (b) $ 68
(c) $85 (c) $121
Money Market (a) $82 (a) $114
(b) $20 (b) $ 60
(c) $82 (c) $114
THE ALGER AMERICAN FUND
Alger American Growth (a) $86 (a) $124
(b) $23 (b) $ 71
(c) $86 (c) $124
Alger American Leveraged AllCap (a) $88 (a) $130
(b) $25 (b) $ 77
(c) $88 (c) $130
Alger American MidCap Growth (a) $86 (a) $126
(b) $23 (b) $ 72
(c) $86 (c) $126
Alger American Small Capitalization (a) $87 (a) $127
(b) $24 (b) $ 74
(c) $87 (c) $127
AMERICAN CENTURY VARIABLE
PORTFOLIOS, INC
VP Income & Growth (a) $85 (a) $121
(b) $22 (b) $ 68
(c) $85 (c) $121
VP International (a) $93 (a) $145
(b) $30 (b) $ 92
(c) $93 (c) $145
VP Value (a) $88 (a) $130
(b) $25 (b) $ 77
(c) $88 (c) $130
BERGER INSTITUTIONAL PRODUCTS TRUST
Berger IPT--100 (a) $88 (a) $130
(b) $25 (b) $ 77
(c) $88 (c) $130
Berger IPT--Growth and Income (a) $88 (a) $130
(b) $25 (b) $ 77
(c) $88 (c) $130
Berger IPT--Small Company Growth (a) $89 (a) $135
(b) $27 (b) $ 81
(c) $89 (c) $135
Berger/BIAM IPT--International (a) $90 (a) $136
(b) $27 (b) $ 83
(c) $90 (c) $136
THE DREYFUS SOCIALLY RESPONSIBLE
GROWTH FUND, INC.
(a) $86 (a) $125
(b) $25 (b) $ 71
(c) $86 (c) $125
DREYFUS STOCK INDEX FUND
(a) $81 (a) $109
(b) $18 (b) $ 55
(c) $81 (c) $109
DREYFUS VARIABLE INVESTMENT FUND
Disciplined Stock (a) $88 (a) $131
(b) $25 (b) $ 77
(c) $88 (c) $131
International Value (a) $92 (a) $143
(b) $29 (b) $ 89
(c) $92 (c) $143
FEDERATED INSURANCE SERIES
Federated High Income Bond II (a) $86 (a) $124
(b) $23 (b) $ 71
(c) $86 (c) $124
Federated International Equity II (a) $90 (a) $137
(b) $27 (b) $ 84
(c) $90 (c) $137
Federated Utility II (a) $86 (a) $126
(b) $24 (b) $ 72
(c) $86 (c) $126
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO VIF - High Yield (a) $87 (a) $127
(b) $24 (b) $ 73
(c) $87 (c) $127
INVESCO VIF - Industrial Income (a) $87 (a) $129
(b) $25 (b) $ 75
(c) $87 (c) $129
JANUS ASPEN SERIES
Aggressive Growth (a) $85 (a) $123
(b) $23 (b) $ 70
(c) $85 (c) $123
Growth (a) $85 (a) $121
(b) $22 (b) $ 68
(c) $85 (c) $121
Worldwide Growth (a) $85 (a) $123
(b) $22 (b) $ 69
(c) $85 (c) $123
LAZARD RETIREMENT SERIES, INC.
Lazard Retirement Equity (a) $93 (a) $145
(b) $30 (b) $ 92
(c) $93 (c) $145
Lazard Retirement Small Cap (a) $93 (a) $145
(b) $30 (b) $ 92
(c) $93 (c) $145
LORD ABBETT SERIES FUND, INC.
Growth and Income (a) $85 (a) $120
(b) $22 (b) $ 67
(c) $85 (c) $120
MITCHELL HUTCHINS SERIES
TRUST
Growth and Income (a) $93 (a) $147
(b) $31 (b) $ 93
(c) $93 (c) $147
NEUBERGER & BERMAN ADVISERS
MANAGEMENT TRUST
Limited Maturity Bond (a) $86 (a) $123
(b) $23 (b) $ 70
(c) $86 (c) $123
Partners (a) $86 (a) $126
(b) $24 (b) $ 73
(c) $86 (c) $126
STRONG OPPORTUNITY FUND II, INC.
Opportunity Fund II (a) $89 (a) $135
(b) $27 (b) $ 81
(c) $89 (c) $135
STRONG VARIABLE INSURANCE FUNDS, INC.
Growth II (a) $90 (a) $136
(b) $27 (b) $ 83
(c) $90 (c) $136
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Bond (a) $89 (a) $134
(b) $26 (b) $ 80
(c) $89 (c) $134
Worldwide Emerging Markets (a) $86 (a) $124
(b) $23 (b) $ 71
(c) $86 (c) $124
Worldwide Hard Assets (a) $90 (a) $136
(b) $27 (b) $ 82
(c) $90 (c) $136
Worldwide Real Estate (a) $88 (a) $130
(b) $25 (b) $ 77
(c) $88 (c) $130
EXPLANATION OF FEE TABLE AND EXAMPLES
1. The purpose of the Fee Table is to show you the various expenses you
will incur directly or indirectly with the contract. The Fee Table reflects
expenses of the Separate Account as well as the investment portfolios.
2. Every year you can take money out of your contract, without the
contingent deferred sales charge, of an amount equal to the greater of: (i) 10%
of the value of your contract (on a non-cumulative basis), or (ii) the IRS
minimum distribution requirement for your contract if issued as an Individual
Retirement Annuity, or (iii) the total of your purchase payments that have been
in the contract more than 7 complete years.
3. Great American Reserve will not charge you the transfer fee even if
there is more than one transfer in a 30-day period during the accumulation phase
if the transfer is for the Dollar Cost Averaging, Sweep or Rebalancing Programs.
We will also not charge you a transfer fee on transfers made at the end of the
free look period. All reallocations made on the same day count as one transfer.
4. Great American Reserve will not charge the contract maintenance charge
if the value of your contract is $50,000 or more, although, if you make a
complete withdrawal, Great American Reserve will charge the contract maintenance
charge.
5. Premium taxes are not reflected. Premium taxes may apply depending on
the state where you live.
6. The assumed average contract size is $30,000.
7. THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
There is no condensed financial information presented because the sale of the
contracts began on March 3, 1998.
1. THE ANNUITY CONTRACT
This Prospectus describes the Fixed and Variable Annuity Contract offered
by Great American Reserve.
An annuity is a contract between you, the owner, and an insurance company
(in this case Great American Reserve), where the insurance company promises to
pay you an income, in the form of annuity payments, beginning on a designated
date that is at least 90 days after we issue your contract. Until you decide to
begin receiving annuity payments, your annuity is in the accumulation phase.
Once you begin receiving annuity payments, your contract switches to the income
phase. The contract benefits from tax-deferral.
Tax-deferral means that you are not taxed on earnings or appreciation on
the assets in your contract until you take money out of your contract.
The contract is a variable annuity. You can choose among 40 investment
portfolios and, depending upon market conditions, you can make or lose money in
any of these portfolios. If you select the variable annuity portion of the
contract, the amount of money you are able to accumulate in your contract during
the accumulation phase depends upon the investment performance of the investment
portfolio(s) you select. The amount of the annuity payments you receive during
the income phase from the variable annuity portion of the contract also depends
upon the investment performance of the investment portfolios you select for the
income phase.
The contract contains a fixed account. The fixed account offers an
interest rate that is guaranteed to be no less than 3% by Great American
Reserve. If you select the fixed account, the amount of money you are able to
accumulate in your contract during the accumulation phase depends upon the total
interest credited to your contract. The amount of the annuity payments you
receive during the income phase from the fixed account portion of the contract
will remain level for the entire income phase.
The contract also contains 3 guarantee periods within the MVA option. Your
money will earn interest at the rate set by Great American Reserve. The interest
rate is guaranteed by Great American Reserve for the time you agree to leave
your money in the guarantee period. We currently offer guarantee periods for 1,
3 and 5 years. To the extent you allocate money to a guarantee period, the
amount of money you are able to accumulate in your contract during the
accumulation phase depends upon the total interest credited to your contract. An
adjustment to your contract will apply to withdrawals, transfers or
annuitizations from the 1, 3 and 5 year guarantee periods prior to the end of
the selected period.
As owner of the contract, you exercise all rights under the contract. You
can change the owner at any time by notifying Great American Reserve in writing.
You and another person can be named joint owners. We have described more
information on this in Section 10--Other Information.
2. ANNUITY PAYMENTS (THE INCOME PHASE)
Under the contract you can receive regular income payments. You can choose
the month and year in which those payments begin. We call that date the annuity
date. Your annuity date can be any date selected by you. You can also choose
among income plans. We call those annuity options.
We ask you to choose your annuity date when you purchase the contract.
With 30 days notice to us, you can change the annuity date or annuity option at
any time before the annuity date. Your annuity date cannot be any earlier than
90 days after we issue the contract. Annuity payments must begin by the earlier
of the annuitant's 90th birthday or the maximum date allowed by law. The
annuitant is the person whose life we look to when we determine annuity
payments.
You can select an annuity option any time 30 days before the annuity date.
If you do not choose an annuity option, we will assume that you selected Option
2 which provides a life annuity with 10 years of guaranteed payments.
On the annuity date the value of your contract, less any premium tax, plus
any market value adjustment (which may be positive or negative), less any
contingent deferred sales charge, and less any contract maintenance charge will
be applied under the annuity option you selected. If you select an annuity date
that is at least 4 years after your contract was issued and you choose an
annuity option that has a life contingency or is for a minimum of 5 years, the
value of your contract, less any premium tax and less any contract maintenance
charge will be applied under the annuity option you selected. A contingent
deferred sales charge will not be deducted under these circumstances.
During the income phase, you can choose to have payments come from the
investment portfolios, the fixed account or both. Payments cannot come from the
MVA option during the income phase. If you don't tell us otherwise, your annuity
payments will be based on the investment allocations in the investment
portfolios and fixed account that were in place on the annuity date.
If you choose to have any portion of your annuity payments come from the
investment portfolio(s), the dollar amount of your payment will depend upon 3
things: 1) the value of your contract in the investment portfolio(s) on the
annuity date, 2) the 3% or 5% (as you selected) assumed investment rate used in
the annuity table for the contract, and 3) the performance of the investment
portfolios you selected. You can choose either a 5% or a 3% assumed investment
rate. If the actual performance exceeds the 3% or 5% (as you selected) assumed
rate, your annuity payments will increase. Similarly, if the actual rate is less
than 3%, or 5% (as you selected) your annuity payments will decrease.
Unless you notify us otherwise, we will pay the annuity payments to you.
You can change the payee at any time prior to the annuity date. Income from any
distribution will be reported to you for tax purposes.
You can choose one of the following annuity options or any other annuity
option which is acceptable to Great American Reserve. After annuity payments
begin, you cannot change the annuity option.
OPTION 1. INCOME FOR A SPECIFIED PERIOD. We will pay an income for a
specific number of years in equal installments.
OPTION 2. LIFE ANNUITY WITH 5, 10 OR 20 YEARS GUARANTEED. We will make
monthly annuity payments so long as the annuitant is alive. However, when the
annuitant dies, if we have made annuity payments for less than the selected
guaranteed period, we will then continue to make annuity payments for the rest
of the guaranteed period to the beneficiary.
OPTION 3. INCOME OF SPECIFIED AMOUNT. We will pay income of a specified
amount until the principal and interest are exhausted.
OPTION 4. JOINT AND SURVIVOR ANNUITY. We will make monthly annuity
payments so long as the annuitant and a joint annuitant are both alive. When
either of these people die, the amount of the annuity payments we will make to
the survivor can be equal to 100%, 66 2/3% or 50% of the amount that we would
have paid if both were alive.
Annuity payments are made monthly unless you have less than $5,000 to
apply toward a payment. In that case, Great American Reserve may make a single
lump sum payment to you. Likewise, if your annuity payments would be less than
$50 a month, Great American Reserve has the right to change the frequency of
payments so that your annuity payments are at least $50.
3. PURCHASE
PURCHASE PAYMENTS
A purchase payment is the money you give us to buy the contract. The
minimum we will accept is $5,000 when the contract is bought as a non-qualified
contract. If you are buying the contract as part of an Individual Retirement
Annuity (IRA) the minimum we will accept is $2,000. For each guarantee period
of the MVA option, a minimum of $2,000 is required. The maximum we accept
is $500,000 without our prior approval. You can make additional purchase
payments of $500 or more to a non-qualified contract and $50 to an IRA contract.
However, if you select the automatic premium check option, you can make
additional payments of $200 each month for non-qualified contracts and $50 each
month for IRA contracts.
ALLOCATION OF PURCHASE PAYMENTS
When you purchase a contract, we will allocate your purchase payment to the
fixed account, the guarantee periods of the MVA option and/or one or more of the
investment portfolios you have selected. CURRENTLY, YOU CAN ALLOCATE MONEY TO UP
TO 15 INVESTMENT PORTFOLIOS AT ANY ONE TIME. If you make additional purchase
payments, we will allocate them in the same way as your first purchase payment
unless you tell us otherwise. Currently, the minimum amount which can be
allocated to any of the guarantee periods of the MVA option is $2,000. We
reserve the right to change this amount in the future.
If you change your mind about owning the contract, you can cancel it
within 10 days after receiving it (or whatever period is required in your
state). When you cancel the contract within this time period, Great American
Reserve will not assess a contingent deferred sales charge. On the day we
receive your request we will return the value of your contract. In some states,
we may be required to refund your purchase payment. If you have purchased the
contract as an IRA, we are required to give you back your purchase payment if
you decide to cancel your contract within 10 days after receiving it (or
whatever period is required in your state).
Once we receive your purchase payment and the necessary information, we
will issue your contract and allocate your first purchase payment within 2
business days. If you do not provide us all of the information needed, we will
contact you. If for some reason we are unable to complete this process within 5
business days, we will either send back your money or get your permission to
keep it until we get all of the necessary information. If you add more money to
your contract by making additional purchase payments, we will credit these
amounts to your contract within one business day. Our business day closes when
the New York Stock Exchange closes, usually 4:00 P.M. Eastern time.
ACCUMULATION UNITS
The accumulation unit value for each account was arbitrarily set initially
at $10.00. The value of the variable annuity portion of your contract will
increase or decrease depending upon the investment performance of the investment
portfolio(s) you choose. In order to keep track of the value of your contract,
we use a unit of measure we call an accumulation unit. (An accumulation unit
works like a share of a mutual fund.) During the income phase of the contract we
call the unit an annuity unit.
Every day we determine the value of an accumulation unit for each of the
investment portfolios by multiplying the accumulation unit value for the
previous period by a factor for the current period. The factor is determined by:
1. dividing the value of an investment portfolio share at the end of the
current period (and any charges for taxes) by the value of an investment
portfolio share for the previous period; and
2. subtracting the daily amount of the insurance charges.
The value of an accumulation unit may go up or down from day to day.
When you make a purchase payment, we credit your contract with
accumulation units. The number of accumulation units credited is determined by
dividing the amount of the purchase payment allocated to an investment portfolio
by the value of the accumulation unit for that investment portfolio.
We calculate the value of an accumulation unit for each investment
portfolio after the New York Stock Exchange closes each day and then credit your
contract.
EXAMPLE:
On Wednesday we receive an additional purchase payment of $4,000 from you.
You have told us you want this to go to the Common Stock Portfolio. When the New
York Stock Exchange closes on that Wednesday, we determine that the value of an
accumulation unit for the Common Stock Portfolio is $12.25. We then divide
$4,000 by $12.25 and credit your contract on Wednesday night with 326.53
accumulation units for the Common Stock Portfolio.
4. INVESTMENT OPTIONS
INVESTMENT PORTFOLIOS
The contract offers 40 investment portfolios which are listed below. You
can invest in up to 15 investment portfolios at any one time. Additional
investment portfolios may be available in the future.
Shares of the funds are offered in connection with certain variable
annuity contracts and variable life insurance policies of various life insurance
companies which may or may not be affiliated with Great American Reserve.
Certain investment portfolios are also sold directly to qualified plans. The
funds do not believe that offering their shares in this manner will be
disadvantageous to you.
YOU SHOULD READ THE PROSPECTUSES FOR THESE FUNDS CAREFULLY BEFORE
INVESTING. COPIES OF THESE PROSPECTUSES ARE ATTACHED TO THIS PROSPECTUS.
CONSECO SERIES TRUST
Conseco Series Trust is a mutual fund with multiple portfolios. Conseco
Series Trust is managed by Conseco Capital Management, Inc. The following
portfolios are available under the contract:
Asset Allocation Portfolio
Common Stock Portfolio
Corporate Bond Portfolio
Government Securities Portfolio
Money Market Portfolio
THE ALGER AMERICAN FUND
The Alger American Fund is a mutual fund with multiple portfolios. Fred
Alger Management, Inc. serves as the investment adviser. The following
portfolios are available under the contract:
Alger American Growth Portfolio
Alger American Leveraged AllCap Portfolio
Alger American MidCap Growth Portfolio
Alger American Small Capitalization Portfolio
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
American Century Variable Portfolios, Inc. is a series of funds managed by
American Century Investment Management, Inc. The following portfolios are
available under the contract:
VP Income & Growth
VP International
VP Value
BERGER INSTITUTIONAL PRODUCTS TRUST
Berger Institutional Products Trust is a mutual fund with multiple
portfolios. Berger Associates is the investment adviser to all portfolios except
the Berger/BIAM IPT--International Fund. BBOI Worldwide LLC is the adviser to
the Berger/BIAM IPT--International Fund. The following portfolios are available
under the contract:
Berger IPT--100 Fund
Berger IPT--Growth and Income Fund
Berger IPT--Small Company Growth Fund
Berger/BIAM IPT--International Fund
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
The Dreyfus Socially Responsible Growth Fund, Inc. is managed by The
Dreyfus Corporation. Dreyfus has hired NCM Capital Management Group, Inc. to
serve as sub-investment adviser and provide day-to-day management of the Fund's
investments.
DREYFUS STOCK INDEX FUND
The Dreyfus Corporation serves as the Fund's manager. Dreyfus has hired
its affiliate, Mellon Equity Associates, to serve as the Fund's index fund
manager and provide day-to-day management of the Fund's investments.
DREYFUS VARIABLE INVESTMENT FUND
The Dreyfus Variable Investment Fund is a mutual fund with multiple
portfolios. The Dreyfus Corporation serves as the investment adviser. The
following portfolios are available under the contract:
Disciplined Stock Portfolio
International Value Portfolio
FEDERATED INSURANCE SERIES
Federated Insurance Series is a mutual fund with multiple portfolios.
Federated Advisers is the investment adviser. The following portfolios are
available under the contract:
Federated High Income Bond Fund II
Federated International Equity Fund II
Federated Utility Fund II
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO Variable Investment Funds, Inc. is a mutual fund with multiple
portfolios. INVESCO Funds Group, Inc. is the investment adviser. The
following portfolios are available under the contract:
INVESCO VIF - High Yield Portfolio
INVESCO VIF - Industrial Income Portfolio
JANUS ASPEN SERIES
The Janus Aspen Series is a mutual fund with multiple portfolios which are
advised by Janus Capital Corporation. The following portfolios are available
under the contract:
Aggressive Growth Portfolio
Growth Portfolio
Worldwide Growth Portfolio
LAZARD RETIREMENT SERIES, INC.
Lazard Retirement Series, Inc. is a mutual fund with multiple portfolios.
Lazard Asset Management, a division of Lazard Freres & Co. LLC, is the
investment manager for each portfolio. The following portfolios are available
under the contract:
Lazard Retirement Equity Portfolio
Lazard Retirement Small Cap Portfolio
LORD ABBETT SERIES FUND, INC.
Lord Abbett Series Fund, Inc. is a mutual fund managed by Lord, Abbett &
Co. The following portfolio is available under the contract:
Growth and Income Portfolio
MITCHELL HUTCHINS SERIES TRUST
Mitchell Hutchins Series Trust is a mutual fund with multiple portfolios.
Mitchell Hutchins Asset Management Inc. provides advisory and administrative
services to the Fund. The following portfolio is available under the contract:
Growth and Income Portfolio
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
Each portfolio of Neuberger & Berman Advisers Management Trust invests in
a corresponding series of Advisers Managers Trust. All series of Advisers
Managers Trust are managed by Neuberger & Berman Management Incorporated. The
following are available under the contract:
Limited Maturity Bond Portfolio
Partners Portfolio
STRONG OPPORTUNITY FUND II, INC.
Strong Opportunity Fund II is a mutual fund managed by Strong Capital
Management, Inc. The following portfolio is available under the contract:
Opportunity Fund II
STRONG VARIABLE INSURANCE FUNDS, INC.
Strong Variable Insurance Funds, Inc. is a mutual fund with multiple
series. Strong Capital Management, Inc. serves as the investment adviser. The
following series is available under the contract:
Growth Fund II
VAN ECK WORLDWIDE INSURANCE TRUST
Van Eck Worldwide Insurance Trust is a mutual fund with multiple
portfolios which are managed by Van Eck Associates Corporation. The following
portfolios are available under the contract:
Worldwide Bond Fund
Worldwide Emerging Markets Fund
Worldwide Hard Assets Fund
Worldwide Real Estate Fund
THE FIXED ACCOUNT
You can invest in the one year fixed account of Great American Reserve.
The fixed account offers an interest rate that is guaranteed to be no less than
3% annually by Great American Reserve. If you select the fixed account, your
money will be placed with the other general assets of Great American Reserve.
THE MVA OPTION
The contract also offers three guarantee periods of the market value
adjustment option (MVA option). A guarantee period is the period of time for
which interest is credited in the market value adjustment option. Each
allocation or transfer to the MVA option creates one or more new guarantee
periods. We currently offer guarantee periods of 1, 3 and 5 years. You can
allocate your purchase payment or transfer money to any of the currently
available periods.
The guarantee periods of the MVA option offer interest rates that are
guaranteed by Great American Reserve. Interest rates may differ from time to
time because of changes in market conditions. The interest rates set for a
guarantee period for new purchase payments may be different from the interest
rates offered for money already in the guarantee periods. We set interest rates
at our discretion. Once we set an interest rate for a guarantee period, it will
not change during that period.
If you do not specify a guarantee period at the time of renewal, we will
select the same guarantee period that just finished so long as it does not
extend beyond the latest annuity date. If it does, we 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 it is not available, the next longest period
will be selected.
If you take money out (whether by withdrawal, transfer or annuitization)
of the guarantee period before the end of the period in excess of the free
amount (see below), an adjustment will be made to the amount withdrawn. This
adjustment is referred to as a market value adjustment. The market value
adjustment can increase or decrease the amount you take out of your contract.
However, after the first year in a period, you can make one withdrawal each year
of up to a total of 10% of the value of your MVA option in that period and no
market value adjustment will be made to that withdrawal (free amount).
We will not apply a market value adjustment for any withdrawals in the
following situations: (1) to pay a death benefit; (2) to pay fees or charges
under the contract; (3) amounts which are withdrawn or transferred during the
30-day period before the end of the guarantee period; or (4) when your contract
switches to the income phase if your annuity payments begin after the 4th year
from the date your contract was issued and you have chosen an annuity option
that provides for a life contingency or is for a period of at least 5 years.
The market value adjustment is determined by comparing the U.S. Treasury
rate which was in effect at the beginning of the guarantee period for the length
of the guarantee period selected versus the current U.S. Treasury Rate as of the
date of the withdrawal or transfer for the number of years remaining (rounded
up) plus .005. The U.S. Treasury Rate is the Bloomberg published Treasury rate
found in the Wall Street Journal or on the Bloomberg System, representing the
last trade made in the Treasury market for the applicable maturities related to
the product. In general, if interest rates have dropped between the time you
allocated your money to the guarantee period and the time you took it out, there
will be a positive adjustment to the value of your contract. But, if interest
rates have increased between the time you allocated your money to the guarantee
period and the time you took it out, there will be a negative adjustment.
The Appendix contains more information regarding how Great American
Reserve calculates the market value adjustment, including examples.
TRANSFERS
You can transfer money among the fixed account, the MVA option and the 40
investment portfolios. However, you cannot be invested in more than 15
investment portfolios, the 3 guarantee periods of the MVA option and/or the
fixed account at any time.
TRANSFERS DURING THE ACCUMULATION PHASE.
You can make one transfer in a 30-day period during the accumulation phase
without charge. You can make a transfer to or from the fixed account, the MVA
option and to or from any investment portfolio. Transfers from a guarantee
period of the MVA option before the end of the period may be subject to an
adjustment. If you make more than one transfer in a 30-day period, a transfer
fee of $25 may be deducted. The following apply to any transfer during the
accumulation phase:
1. The minimum amount which you can transfer is $500 or your entire value
in the investment portfolio, or $2,000 into any guarantee period of the MVA
option or fixed account. This requirement is waived if the transfer is pursuant
to the Dollar Cost Averaging or Rebalancing Programs.
2. You must leave at least $500 in each investment portfolio, guarantee
period of the MVA option or the fixed account after you make a transfer unless
the entire amount is being transferred. Transfers out of the fixed account are
limited to 20% of the value of your contract every 6 months.
3. Your request for a transfer must clearly state which investment
portfolio(s), the guarantee period of the MVA option or the fixed account are
involved in the transfer.
4. Your request for transfer must clearly state how much the transfer is
for.
TRANSFERS DURING THE INCOME PHASE.
You can only make two transfers every year during the income phase. The
two transfers are free. We measure a year from the anniversary of the day we
issued your contract. The following apply to any transfer during the income
phase:
1. You can make transfers at least 30 days before the due date of the
first annuity payment for which the transfer will apply.
2. The minimum amount which you can transfer is $500 or your entire value
in the investment portfolio.
3. You must leave at least $500 in each investment portfolio (or $0 if you
are transferring the entire amount) after a transfer.
4. No transfers can be made between the fixed account and the investment
portfolios. You may only make transfers between the investment portfolios.
This product is not designed for professional market timing organizations.
Great American Reserve has reserved the right to modify the transfer privileges
described above.
TELEPHONE TRANSFERS. You can elect to make transfers by telephone. You can
also authorize someone else to make transfers for you. If you own the contract
with a joint owner, unless Great American Reserve is instructed otherwise, Great
American Reserve will accept instructions from either you or the other owner.
Great American Reserve will use reasonable procedures to confirm that
instructions given us by telephone are genuine. All telephone calls will be
recorded and the caller will be asked to produce personalized data about the
owner before we will make the telephone transfer. We will send you a written
confirmation of the transfer. If Great American Reserve fails to use such
procedures, we may be liable for any losses due to unauthorized or fraudulent
instructions.
DOLLAR COST AVERAGING PROGRAM
The Dollar Cost Averaging Program allows you to systematically transfer a
set amount either monthly, quarterly, semi-annually or annually from the Money
Market Portfolio or the fixed account to any of the other investment
portfolio(s). You cannot transfer to the MVA option under this program. By
allocating amounts on a regular schedule as opposed to allocating the total
amount at one particular time, you may be less susceptible to the impact of
market fluctuations.
You must have at least $2,000 in the Money Market Portfolio or the fixed
account in order to participate in the Dollar Cost Averaging Program.
All Dollar Cost Averaging transfers will be made on the first business day
of the month. Dollar Cost Averaging must be for 36-60 months. Dollar Cost
Averaging will end when the value in the Money Market Portfolio or the fixed
account is zero. We will notify you when that happens.
If you participate in the Dollar Cost Averaging Program, the transfers
made under the program are not taken into account in determining any transfer
fee.
REBALANCING PROGRAM
Once your money has been allocated among the investment portfolios, the
performance of each portfolio may cause your allocation to shift. If the value
of your contract is at least $5,000, you can direct us to automatically
rebalance your contract to return to your original percentage allocations by
selecting our Rebalancing Program. You can tell us whether to rebalance
quarterly, semi-annually or annually. We will measure these periods from the
date you selected. You must use whole percentages in 1% increments for
rebalancing. There will be no rebalancing within the fixed account or the MVA
option. You can discontinue rebalancing at any time. You can change your
rebalancing requests at any time in writing which we must receive before the
next rebalancing date. If you participate in the Rebalancing Program, the
transfers made under the program are not taken into account in determining any
transfer fee.
EXAMPLE:
Assume that you want your initial purchase payment split between 2
investment portfolios. You want 40% to be in the Corporate Bond Portfolio and
60% to be in Growth Portfolio. Over the next 2 1/2 months the bond market does
very well while the stock market performs poorly. At the end of the first
quarter, the Corporate Bond Portfolio now represents 50% of your holdings
because of its increase in value. If you had chosen to have your holdings
rebalanced quarterly, on the first day of the next quarter, Great American
Reserve would sell some of your units in the Corporate Bond Portfolio to bring
its value back to 40% and use the money to buy more units in the Growth
Portfolio to increase those holdings to 60%.
ASSET ALLOCATION PROGRAM
Great American Reserve understands the importance of advice from a
financial adviser regarding your investments in the contract (asset allocation
program). Certain investment advisers have made arrangements with us to make
their services available to you. Great American Reserve has not made any
independent investigation of these advisers and is not endorsing such programs.
You may be required to enter into an advisory agreement with your investment
adviser to have the fees paid out of your contract during the accumulation
phase.
Great American Reserve will, pursuant to an agreement with you, make a
partial withdrawal from the value of your contract to pay for the services of
the investment adviser. If the contract is non-qualified, the withdrawal will be
treated like any other distribution and may be included in gross income for
federal tax purposes and, if you are under age 59 1/2, may be subject to a tax
penalty. If the contract is qualified, the withdrawal for the payment of fees
may not be treated as a taxable distribution if certain conditions are met.
Additionally, any withdrawals for this purpose may be subject to a contingent
deferred sales charge. You should consult a tax adviser regarding the tax
treatment of the payment of investment adviser fees from your contract.
SWEEP PROGRAM
You can elect to transfer (sweep) your earnings from the fixed account to
the investment portfolios on a periodic and systematic basis.
VOTING RIGHTS
Great American Reserve is the legal owner of the investment portfolio
shares. However, Great American Reserve believes that when an investment
portfolio solicits proxies in conjunction with a vote of shareholders, it is
required to obtain from you and other owners instructions as to how to vote
those shares. When we receive those instructions, we will vote all of the shares
we own in proportion to those instructions. Should Great American Reserve
determine that it is no longer required to comply with the above, we will vote
the shares in our own right.
SUBSTITUTION
Great American Reserve may, in the interest of shareholders, deem it
necessary to discontinue one or more of the investment portfolios or substitute
a new portfolio for an existing portfolio. In the event that such a situation
might occur, you will be notified in advance. Prior approval by the Securities
and Exchange Commission will be obtained before any such change is made.
5. EXPENSES
There are charges and other expenses associated with the contract that
reduce the return on your investment in the contract. These charges and expenses
are:
INSURANCE CHARGES
Each day, Great American Reserve makes a deduction for its insurance
charges. Great American Reserve does this as part of its calculation of the
value of the accumulation units and the annuity units. The insurance charge has
two parts: 1) the mortality and expense risk charge and 2) the administrative
charge.
MORTALITY AND EXPENSE RISK CHARGE. This charge is equal, on an annual
basis, to 1.25% of the average daily value of the contract invested in an
investment portfolio, after expenses have been deducted. This charge is for the
insurance benefits provided under the contract and certain administrative and
distribution expenses associated with the contract.
ADMINISTRATIVE CHARGE. This charge is equal, on an annual basis, to .15%
of the average daily value of the contract invested in an investment portfolio,
after expenses have been deducted. This charge may be increased but will not
exceed .25% of the average daily value of the contract invested in an investment
portfolio, after expenses have been deducted. We will give you 60 days' notice
if this charge is increased. This charge is for certain administrative expenses.
CONTRACT MAINTENANCE CHARGE
During the accumulation phase, every year on the anniversary of the date
when your contract was issued, Great American Reserve deducts $30 from your
contract as a contract maintenance charge. We reserve the right to change this
charge but it will not be more than $60 each year. No contract maintenance
charge is deducted during the income phase. This charge is for certain
administrative expenses associated with the contract.
Under current practices, Great American Reserve does not deduct this
charge if the value of your contract is $50,000 or more. Great American Reserve
may some time in the future discontinue this practice and deduct the charge.
If you make a complete withdrawal from your contract, the contract
maintenance charge will also be deducted. The charge will be deducted if the
annuity date is other than an anniversary.
CONTINGENT DEFERRED SALES CHARGE
During the accumulation phase, you can make withdrawals from your
contract. Great American Reserve keeps track of each purchase payment.
Every year you can take money out of your contract, without charge, of an
amount equal to the greater of: (1) 10% of the value of your contract (on a
non-cumulative basis), or (2) the IRS minimum distribution requirement for this
contract if it was issued under an Individual Retirement Annuity, or (3) the
total of your purchase payments that have been in the contract more than 7
complete years. Withdrawals in excess of these amounts will be charged a
contingent deferred sales charge which equals:
NO. OF YEARS CONTINGENT
FROM RECEIPT DEFERRED SALES
OF PURCHASE PAYMENT CHARGE
- -----------------------------------------------------------------------------
First Year...................................................... 7%
Second Year..................................................... 7%
Third Year...................................................... 6%
Fourth Year..................................................... 5%
Fifth Year...................................................... 4%
Sixth Year...................................................... 3%
Seventh Year.................................................... 2%
Eighth Year and more............................................ 0%
In addition, the following circumstances further limit or reduce
withdrawal charges: for issue ages up to 52, there is no contingent
deferred sales charge made after the 15th contract year and later; for
issue ages 53 to 56, there is no contingent deferred sales charge made
after you attain age 67 or later; for issue ages 57 and later, any
otherwise applicable contingent deferred sales charge will be
multiplied by a factor ranging from .9 to 0 for contract years one
through ten and later, respectively.
The contingent deferred sales charge is assessed against each purchase
payment withdrawn and will reduce the remaining value of your contract. The
contingent deferred sales charge compensates us for expenses associated with
selling the contract.
Withdrawals from a guarantee period of the MVA option may also be subject
to a market value adjustment. (See the Appendix for information on the market
value adjustment.)
NOTE: For tax purposes, withdrawals are generally considered to have come
from earnings first.
Great American Reserve does not assess the contingent deferred sales
charge on death benefits or on any payments paid out as annuity payments if your
annuity date is at least four years after we issue your contract and your
annuity option has a life contingency or is for a minimum of 5 years.
REDUCTION OR ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE
Great American Reserve will reduce or eliminate the amount of the
contingent deferred sales charge when the contract is sold under circumstances
which reduce its sales expenses. Some examples are: if there is a large group of
individuals that will be purchasing the contract or a prospective purchaser
already had a relationship with Great American Reserve. Great American Reserve
will not deduct a contingent deferred sales charge when a contract is issued to
an officer, director or employee of Great American Reserve or any of its
affiliates. Any circumstances resulting in the reduction or elimination of the
contingent deferred sales charge requires our prior approval. In no event will
elimination of the contingent deferred sales charge be permitted where it would
be unfairly discriminatory to any person.
TRANSFER FEE
You can make one free transfer every 30 days during the accumulation
phase. If you make more than one transfer in a 30-day period, you could be
charged a transfer fee of $25 per transfer. We reserve the right to change the
transfer fee. The transfer fee is deducted from the account from which the
transfer was made. If the entire amount in the account is transferred, the fee
will be deducted from the amount transferred. If you transfer money from more
than one account, the charge is deducted from the account with the largest
balance. The two transfers permitted each year during the income phase are free.
All reallocations made in the same day count as one transfer. Transfers
made at the end of the free look period by us are not counted in determining the
transfer fee. If the transfer is part of the Dollar Cost Averaging Program, the
Rebalancing Program or the Sweep Program it will not count in determining the
transfer fee.
Transfers from a guarantee period of the MVA option may also be subject to
a market value adjustment. (See the Appendix for information on the market value
adjustment.)
PREMIUM TAXES
Some states and other governmental entities (e.g., municipalities) charge
premium taxes or similar taxes. Great American Reserve is responsible for the
payment of these taxes and will make a deduction from the value of the contract
for them. These taxes are due either when the contract is issued or when annuity
payments begin. It is Great American Reserve's current practice to deduct these
taxes when either annuity payments begin or upon partial or full surrender of
the contract. Great American Reserve may in the future discontinue this practice
and assess the charge when the tax is due. Premium taxes currently range from 0%
to 3.5%, depending on the state.
INCOME TAXES
Great American Reserve will deduct from the contract for any income taxes
which it incurs because of the contract. At the present time, we are not making
any such deductions.
INVESTMENT PORTFOLIO EXPENSES
There are deductions from and expenses paid out of the assets of the
various investment portfolios, which are described in the attached fund
prospectuses.
6. TAXES
NOTE: GREAT AMERICAN RESERVE HAS PREPARED THE FOLLOWING INFORMATION ON
TAXES AS A GENERAL DISCUSSION OF THE SUBJECT. IT IS NOT INTENDED AS TAX ADVICE
TO ANY INDIVIDUAL. YOU SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT YOUR OWN
CIRCUMSTANCES. GREAT AMERICAN RESERVE HAS INCLUDED IN THE STATEMENT OF
ADDITIONAL INFORMATION AN ADDITIONAL DISCUSSION REGARDING TAXES.
ANNUITY CONTRACTS IN GENERAL
Annuity contracts are a means of setting aside money for future needs
usually retirement. Congress recognized how important saving for retirement was
and provided special rules in the Internal Revenue Code (Code) for annuities.
Simply stated these rules provide that you will not be taxed on the
earnings on the money held in your annuity contract until you take the money
out. This is referred to as tax-deferral. There are different rules as to how
you will be taxed depending on how you take the money out and the type of
contract--qualified or non-qualified (see following sections).
You, as the owner, will not be taxed on increases in the value of your
contract until a distribution occurs--either as a withdrawal or as annuity
payments. When you make a withdrawal you are taxed on the amount of the
withdrawal that is earnings. For annuity payments, different rules apply. A
portion of each annuity payment is treated as a partial return of your purchase
payments and will not be taxed. The remaining portion of the annuity payment
will be treated as ordinary income. How the annuity payment is divided between
taxable and non-taxable portions depends upon the period over which the annuity
payments are expected to be made. Annuity payments received after you have
received all of your purchase payments are fully includible in income.
When a non-qualified contract is owned by a non-natural person (e.g.,
corporation or certain other entities other than tax-qualified trusts), the
contract will generally not be treated as an annuity for tax purposes.
QUALIFIED AND NON-QUALIFIED CONTRACTS
If you purchase the contract as an individual and not under an Individual
Retirement Annuity (IRA), your contract is referred to as a non-qualified
contract.
If you purchase the contract under an IRA, your contract is referred to as
a qualified contract.
WITHDRAWALS--NON-QUALIFIED CONTRACTS
If you make a withdrawal from your contract, the Code generally treats
such a withdrawal as first coming from earnings and then from your purchase
payments. Such withdrawn earnings are includible in income.
The Code also provides that any amount received under an annuity contract
which is included in income may be subject to a penalty. The amount of the
penalty is equal to 10% of the amount that is includible in income. Some
withdrawals will be exempt from the penalty. They include any amounts: (1) paid
on or after you reach age 59 1/2; (2) paid after you die; (3) paid if you become
totally disabled (as that term is defined in the Code); (4) paid in a series of
substantially equal payments made annually (or more frequently) under a lifetime
annuity; (5) paid under an immediate annuity; or (6) which come from purchase
payments made prior to August 14, 1982.
WITHDRAWALS--QUALIFIED CONTRACTS
The above information describing the taxation of non-qualified contracts
does not apply to qualified contracts. There are special rules that govern with
respect to qualified contracts. We have provided a more complete discussion in
the Statement of Additional Information.
DIVERSIFICATION
The Code provides that the underlying investments for a variable annuity
must satisfy certain diversification requirements in order to be treated as an
annuity contract. Great American Reserve believes that the investment portfolios
are being managed so as to comply with the requirements.
INVESTOR CONTROL
Neither the Code nor the Internal Revenue Service Regulations issued to
date provide guidance as to the circumstances under which you, because of the
degree of control you exercise over the underlying investments, and not Great
American Reserve would be considered the owner of the shares of the investment
portfolios. If this occurs, it will result in the loss of the favorable tax
treatment for the contract. It is unknown to what extent under federal tax law
owners are permitted to select investment portfolios, to make transfers among
the investment portfolios or the number and type of investment portfolios owners
may select from. If any guidance is provided which is considered a new position,
then the guidance would generally be applied prospectively. However, if such
guidance is considered not to be a new position, it may be applied
retroactively. This would mean that you, as the owner of the contract, could be
treated as the owner of the investment portfolios.
Due to the uncertainty in this area, Great American Reserve reserves the
right to modify the contract as reasonably deemed necessary to maintain
favorable tax treatment.
7. ACCESS TO YOUR MONEY
You can have access to the money in your contract: (1) by making a
withdrawal (either a partial or a complete withdrawal); (2) by electing to
receive annuity payments; or (3) when a death benefit is paid to your
beneficiary. Withdrawals can only be made during the accumulation phase.
When you make a complete withdrawal you will receive the value of the
contract on the day you made the withdrawal less any applicable contingent
deferred sales charge, less any premium tax less any contract maintenance charge
and plus or minus any market value adjustment (which may be positive or
negative). (See Section 5. Expenses for a discussion of the charges and Section
4. Investment Options--The MVA Option and the Appendix for a discussion of
withdrawals from the MVA option.)
You must tell us which account (investment portfolio(s), guarantee periods
of the MVA option and/or the fixed account) you want the withdrawal to come
from. Under most circumstances, the amount of any partial withdrawal from any
investment portfolio, guarantee period of the MVA option or the fixed account
must be for at least $500. Great American Reserve requires that after a partial
withdrawal is made there must be at least $500 left in your contract.
INCOME TAXES, TAX PENALTIES AND CERTAIN RESTRICTIONS MAY APPLY TO ANY
WITHDRAWAL YOU MAKE.
SYSTEMATIC WITHDRAWAL PROGRAM
The Systematic Withdrawal Program allows you to choose to receive your
automatic payments either monthly, quarterly, semi-annually or annually. You
must have at least $5,000 in your contract to start the program. You cannot take
systematic withdrawals from any guarantee period of the MVA option. You can
instruct us to withdraw a specific amount which can be a percentage of the value
of your contract or a dollar amount. The systematic withdrawal program will end
any time you designate. If you make a partial withdrawal outside the program and
the value of your contract is less than $5,000 the program will automatically
terminate. Great American Reserve does not have any charge for this program,
however, the withdrawal may be subject to a contingent deferred sales charge.
For a discussion of the withdrawal charge, see Section 5. Expenses.
All systematic withdrawals will be paid on the last business day of the
month (beginning with the first full month after you bought your contract).
You may not participate in the Systematic Withdrawal Program and the
Dollar Cost Averaging Program at the same time.
INCOME TAXES AND TAX PENALTIES MAY APPLY TO SYSTEMATIC WITHDRAWALS.
SUSPENSION OF PAYMENTS OR TRANSFERS
Great American Reserve may be required to suspend or postpone payments for
withdrawal or transfers for any period when:
1. the New York Stock Exchange is closed (other than customary weekend and
holiday closings);
2. trading on the New York Stock Exchange is restricted;
3. an emergency exists as a result of which disposal of shares of the
investment portfolios is not reasonably practicable or Great American Reserve
cannot reasonably value the shares of the investment portfolios;
4. during any other period when the Securities and Exchange Commission, by
order, so permits for the protection of owners.
Great American Reserve has reserved the right to defer payment for a
withdrawal or transfer from the fixed account for the period permitted by law
but not for more than six months.
8. PERFORMANCE
Great American Reserve may periodically advertise performance of the
annuity investment in the various investment portfolios. Great American Reserve
will calculate performance by determining the percentage change in the value of
an accumulation unit by dividing the increase (decrease) for that unit by the
value of the accumulation unit at the beginning of the period. This performance
number reflects the deduction of the insurance charges and the fees and expenses
of the investment portfolio. It does not reflect the deduction of any applicable
contract maintenance charge and contingent deferred sales charge. The deduction
of any applicable contract maintenance charge and contingent deferred sales
charge would reduce the percentage increase or make greater any percentage
decrease. Any advertisement will also include standardized average annual total
return figures which reflect the deduction of the insurance charges, contract
maintenance charge, contingent deferred sales charge and the fees and expenses
of the investment portfolio.
For periods starting prior to the date the contracts were first offered,
the performance will be based on the historical performance of the corresponding
portfolios, modified to reflect the charges and expenses of the contract as if
the contract had been in existence during the period stated in the
advertisement. These figures should not be interpreted to reflect actual
historic performance.
Great American Reserve may, from time to time, include in its advertising
and sales materials, tax deferred compounding charts and other hypothetical
illustrations, which may include comparisons of currently taxable and tax
deferred investment programs, based on selected tax brackets.
9. DEATH BENEFIT
UPON YOUR DEATH
If you die before annuity payments begin, Great American Reserve will pay
a death benefit to your beneficiary (see below). If you have a joint owner, the
death benefit will be paid when the first owner dies. The surviving joint owner
will be treated as the beneficiary.
If death occurs prior to age 90, the amount of the death benefit will be
the greater of:
(1) the value of your contract at the time Great American Reserve receives
proof of death and a payment election; or (2) the total purchase payments
you have made, less any adjusted partial withdrawals, increased by 5% each
year up to the date of death. Adjusted partial withdrawal means the amount
of the partial withdrawal multiplied by the amount of the death benefit
just before the partial withdrawal divided by the value of your contract
just before the partial withdrawal. A partial withdrawal is the amount
paid to you plus any taxes withheld less any contingent deferred sales
charge.
If death occurs at age 90 or later, the death benefit will be the
contract value at the time Great American Reserve receives proof of death and
a payment election.
The entire death benefit must be paid within 5 years of the date of death
unless the beneficiary elects to have the death benefit payable under an annuity
option. The death benefit payable under an annuity option must be paid over the
beneficiary's lifetime or for a period not extending beyond the beneficiary's
life expectancy. Payment must begin within one year of the date of death. If the
beneficiary is the spouse of the owner, he/she can continue the contract in
his/her own name at the then current value. If a lump sum payment is elected and
all the necessary requirements are met, the payment will be made within 7 days.
Different rules may apply in the case of an Individual Retirement Annuity.
If you or any joint owner (who is not the annuitant) dies during the
income phase, any remaining payments under the annuity option elected will
continue at least as rapidly as under the method of distribution prior to the
death of the owner or joint owner. If you die during the income phase, the
beneficiary becomes the owner. If any joint owner dies during the income phase,
the surviving joint owner, if any, will be treated as the primary beneficiary.
Any other beneficiary on record at the time of death will be treated as a
contingent beneficiary. Different rules may apply in the case of an
Individual Retirement Annuity.
DEATH OF ANNUITANT
If the annuitant, who is not an owner or joint owner, dies during the
accumulation phase, you can name a new annuitant. Unless another annuitant is
named within 30 days of the death of the annuitant, you will become the
annuitant. However, if the owner is a non-natural person (for example, a
corporation), then the death of the annuitant will be treated as the death of
the owner, and a new annuitant may not be named.
Upon the death of the annuitant during the income phase, the death
benefit, if any, will be as provided for in the annuity option selected.
10. OTHER INFORMATION
GREAT AMERICAN RESERVE
Great American Reserve Insurance Company (Great American Reserve) was
originally organized in 1937. It is principally engaged in the life insurance
business in 49 states and the District of Columbia. Great American Reserve is a
stock company organized under the laws of the state of Texas and is an indirect
wholly-owned subsidiary of Conseco, Inc. (Conseco). The operations of Great
American Reserve are handled by Conseco. Conseco is a publicly owned financial
services organization headquartered in Carmel, Indiana. Through its
subsidiaries, Conseco is one of the nation's leading providers of supplemental
health insurance, retirement annuities and universal life insurance.
THE SEPARATE ACCOUNTS
Great American Reserve has established two separate accounts to hold the
assets that underlie the contracts. One account, Great American Reserve Variable
Annuity Account F, serves the variable annuity portion of the contract. The
other separate account, Great American Reserve Market Value Adjustment Account,
serves the portion of the contract that may be subject to a market value
adjustment. The Board of Directors of Great American Reserve adopted a
resolution to establish the Separate Accounts under Texas Insurance law on
September 26, 1997. Great American Reserve Variable Annuity Account F is
registered with the Securities and Exchange Commission as a unit investment
trust under the Investment Company Act of 1940. Great American Reserve Market
Value Adjustment Account is not registered with the Securities and Exchange
Commission.
The assets of the Separate Accounts are held in Great American Reserve's
name on behalf of the Separate Accounts and legally belong to Great American
Reserve. However, those assets that underlie the contracts, are not chargeable
with liabilities arising out of any other business Great American Reserve may
conduct. All the income, gains and losses (realized or unrealized) resulting
from these assets are credited to or charged against the contracts and not
against any other contracts Great American Reserve may issue.
DISTRIBUTOR
Conseco Equity Sales, Inc. (CES), 11815 N. Pennsylvania Street, Carmel,
Indiana 46032 acts as the distributor of the contracts. CES, an affiliate of
Great American Reserve, is registered as a broker-dealer under the Securities
Exchange Act of 1934. CES is a member of the National Association of Securities
Dealers, Inc.
Commissions will be paid to broker-dealers who sell the contracts.
Broker-dealers commissions may cost up to 8.25% of purchase payments and may
include reimbursement of promotional or distribution expenses associated with
the marketing of the contracts. Great American Reserve may, by agreement with
the broker-dealer, pay commissions as a combination of a certain percentage
amount at the time of sale and a trail commission. This combination may result
in the broker-dealer receiving more commission over time than would be the case
if it had elected to receive only a commission at the time of sale. The
commission rate paid to the broker-dealer will depend upon the nature and level
of services provided by the broker-dealer.
OWNERSHIP
The contract is an allocated fixed and variable deferred annuity contract.
This group contract is issued to a contract holder, for the benefit of the
participants in the group. You are a participant in the group and will receive a
certificate evidencing your ownership. You, as the owner of a certificate, are
entitled to all the rights and privileges of ownership. As used in this
prospectus, the term contract refers to your certificate. In some states, an
individual fixed and variable deferred annuity contract may be available
instead, which is identical to the group contract described in this prospectus
except that it is issued directly to the owner.
Spousal joint owners are allowed with this contract (except if it is
issued pursuant to a qualified plan). Upon the death of either joint owner, the
surviving owner will be the designated beneficiary. Any other beneficiary
designation at the time the contract was issued or as may have been later
changed will be treated as a contingent beneficiary unless otherwise indicated.
BENEFICIARY
The beneficiary is the person(s) or entity you name to receive any death
benefit. The beneficiary is named at the time the contract is issued. Unless an
irrevocable beneficiary has been named, you can change the beneficiary at any
time before you die.
ASSIGNMENT
You can assign the contract at any time during your lifetime. Great
American Reserve will not be bound by the assignment until it receives the
written notice of the assignment. Great American Reserve will not be liable for
any payment or other action we take in accordance with the contract before we
receive notice of the assignment. AN ASSIGNMENT MAY BE A TAXABLE EVENT.
If the contract is issued pursuant to a qualified plan, there are
limitations on your ability to assign the contract.
ADDITIONAL INFORMATION
Great American Reserve is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended. In accordance with such
requirements, we file reports and other information with the SEC. Such reports
and other information we file can be inspected and copied. Copies can be
obtained at the public reference facilities of the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, or at the regional offices in Chicago and
New York. The addresses of these regional offices are as follows: 500 West
Madison Street, Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor,
New York, New York 10048. Copies of such material also can be obtained by mail
from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the fees prescribed by the rules and
regulations of the SEC at prescribed rates.
Registration statements have been filed with the SEC, Washington, D.C.,
under the Securities Act of 1933 as amended, relating to the contracts offered
by this prospectus. This prospectus does not contain all the information set
forth in the registration statements and the exhibits filed as part of the
registration statements. Reference should be made to such registration
statements and exhibits for further information concerning the separate
accounts, Great American Reserve and its general account, the investment
portfolios and the contract.
SELECTED HISTORICAL FINANCIAL INFORMATION OF GREAT AMERICAN RESERVE
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, 1997 and 1996, and the
statements of operations, shareholder's equity and cash flows for the years
ended December 31, 1997 and 1996, the four months ended December 31, 1995 and
the eight months ended August 31, 1995, 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 Insurance
Company ("Jefferson National") into Great American Reserve. 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 Year months months Year ended
ended ended ended ended December 31,
December 31, December 31, December 31, August 31, -----------------
1997 1996 1995 1995 1994 1993
---- ---- ---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA
Insurance policy income..................... $ 75.7 $ 81.4 $ 31.8 $ 60.5 $ 98.6 $108.2
Net investment income....................... 222.6 218.4 74.2 136.4 187.9 214.5
Net investment gains....................... 13.3 2.7 12.5 7.3 .2 32.4
Total revenues.............................. 311.6 302.5 118.5 204.2 286.7 355.1
Total benefits and expenses................. 250.3 261.4 92.7 159.5 225.2 260.4
Income before income taxes.................. 61.3 41.1 25.8 44.7 61.5 94.7
Net income.................................. 39.2 25.7 16.1 28.2 38.8 54.5
BALANCE SHEET
DATA - PERIOD END
Investments................................. $2,500.5 $2,382.8 $2,484.8 $2,217.9 $2,473.8
Total assets................................ 2,771.7 2,680.5 2,756.8 2,625.0 2,751.1
Insurance liabilities....................... 2,235.0 2,189.9 2,176.6 2,241.8 2,201.7
Total liabilities........................... 2,354.8 2,283.6 2,314.2 2,260.1 2,302.6
Shareholder's equity ....................... 416.9 396.9 442.6 364.9 448.5
<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 acquisition of all of the common stock of Great American's
parent not previously owned, by Conseco, Inc. 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.
</FN>
</TABLE>
BUSINESS OF GREAT AMERICAN RESERVE INSURANCE COMPANY
Background
Great American Reserve, with total assets of $2.8 billion at December 31,
1997, 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,
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 three years ended December 31, 1997, 1996
and 1995, are set forth below (dollars in millions).
<TABLE>
<CAPTION>
Year ended December 31, 1997
--------------------------------------------------------------
First Year Renewal Total
Premiums Premiums Premiums
------------- ------------- ----------------
Products Amount % Amount % Amount %
- -------- ------ --- ------ --- ------ --
<S> <C> <C> <C> <C> <C> <C>
Single-premium immediate annuities............. $ 10.6 6% $ - -% $ 10.6 3%
Flexible-premium deferred annuities............ 17.0 10 28.4 21 45.4 15
Variable annuities............................. 126.9 76 46.1 35 173.0 58
------ --- ------ --- ------ ---
Total annuities......................... 154.5 92 74.5 56 229.0 76
Individual life................................ 1.5 1 40.9 31 42.4 14
Accident and health and other.................. 12.3 7 16.6 13 28.9 10
------ --- ------ --- ------ ---
Total collected premiums................ $168.3 100% $132.0 100% $300.3 100%
====== === ====== === ====== ===
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1996
-------------------------------------------------------------
First Year Renewal Total
Premiums Premiums Premiums
-------------- ------------- -----------------
Products Amount % Amount % Amount %
- -------- ------ --- ------ --- ------ --
<S> <C> <C> <C> <C> <C> <C>
Single-premium immediate annuities............. $17.2 21% $ - -% % 17.2 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......................... 70.5 84 71.5 53 142.0 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
----- --- ------ --- ------ ----
Total collected premiums................ $83.7 100% $134.7 100% $218.4 100%
===== === ====== === ====== ===
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1995
-------------------------------------------------------------
First Year Renewal Total
Premiums Premiums Premiums
-------------- -------------- ------------------
Products Amount % Amount % Amount %
- -------- ------ --- ------ --- ------ --
<S> <C> <C> <C> <C> <C> <C>
Single-premium immediate annuities............. $32.3 41% $ - -% $ 32.3 15%
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......................... 65.8 83 63.7 47 129.5 60
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
----- --- ------ --- ------ ---
Total collected premiums................ $79.4 100% $135.6 100% $215.0 100%
===== === ====== === ====== ===
</TABLE>
Annuities
Great American Reserve markets several basic types of annuities:
single-premium immediate annuities ("SPIAs"), flexible- premium deferred
annuities ("FPDAs") and variable annuities which are sold through professional
independent producers. The profitability of annuities largely depends on the
investment spread earned (i.e., the excess of investment earnings over interest
credited on annuity deposits), the persistency of in force business and expense
management.
Single-Premium Immediate Annuities. SPIAs accounted for $10.6 million, or 3
percent, of Great American Reserve's total premiums collected in 1997, $17.2
million, or 8 percent, of total premiums collected in 1996 and $32.3 million, or
15 percent, of premiums collected in 1995. 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 begin, 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 and averaged 6
percent at December 31, 1997. SPIA collected premiums have decreased as a result
of decreases in SPIAs purchased with the proceeds of redeemed annuity contracts.
Flexible-Premium Deferred Annuities. FPDAs accounted for $45.4 million, or
15 percent, of Great American Reserve's total premiums collected in 1997, $43.3
million, or 20 percent, of premiums collected in 1996 and $39.9 million, or 18
percent, of premiums collected in 1995. 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 $10,000
per year in 1997.
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 $173.0 million, or 58
percent, of Great American Reserve's total premiums collected in 1997, $81.5
million, or 37 percent, of 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- premium 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. The popularity of such annuities has increased
recently as a result of the desire of investors to invest in common stocks. In
addition, in recent years, Great American Reserve has offered additional
investment options for variable annuity deposits and expanded its variable
annuity marketing efforts. Profits on variable annuities are derived from the
fees charged to contract holders, rather than from the investment spread.
Individual Life
Individual life products, consisting of interest-sensitive life and
traditional life products, accounted for $42.4 million, or 14 percent, of Great
American Reserve's total premiums collected in 1997, $47.1 million, or 22
percent, of 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, and 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, the policyholder generally pays a level premium over
the policyholder's expected lifetime. The annual premium for a whole life policy
is generally higher than the premium for comparable term insurance coverage in
the early years of the policy's life, but is generally lower than the premium
for comparable term insurance coverage in the later years of the policy's life.
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 5, 10 or 20 years.
Accident and Health and Other
Accident and health and other products accounted for $28.9 million, or 10
percent, of Great American Reserve's total premiums collected in 1997, $29.3
million, or 13 percent, of 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, 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.
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; investment income is a significant component of Great American
Reserve's total revenues. Profitability of many of Great American Reserve's
products is significantly affected by spreads between interest yields on
investments and rates credited on insurance liabilities. Although substantially
all credited rates on FPDAs 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. As of December
31, 1997, the average yield, computed on the cost basis of the investment
portfolio, was 7.5 percent, and the average interest rate credited or accruing
to total insurance liabilities, excluding interest bonuses guaranteed for the
first year of the annuity contract only, was 5.4 percent.
Great American Reserve seeks to balance the duration of the invested
assets with the expected duration of benefit payments arising from insurance
liabilities. At December 31, 1997, the adjusted modified duration of fixed
maturities and short-term investments was approximately 5.6 years and the
duration of insurance liabilities was approximately 7.0 years.
For information regarding the composition and diversification of the
investment portfolio of Great American Reserve, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Great American
Reserve - Investments" and note 2 to Great American Reserve's financial
statements for the year ended December 31, 1997.
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.
Marketing companies, agents who market insurance products, school
districts, financial institutions 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 received a claims paying ability rating of "AA-"
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)." An "AA" rating represents
"Very high claims-paying ability." A plus or minus sign attached to a Duff &
Phelps claims paying rating shows relative standing within a ratings category.
Great American Reserve has received a claims paying ability rating of A+
from Standard & Poor's Corporation ("Standard & Poor's"). Claims-paying ability
ratings from Standard & Poor's range from "AAA (Superior)" to "R (Regulatory
Action)". An "A" is assigned by Standard & Poor's to those companies which, in
its opinion, have a secure claims-paying ability and whose financial capacity to
meet policyholder obligation is viewed on balance as sound, but their capacity
to meet policyholder obligations is somewhat more susceptible to adverse
economic and underwriting conditions than more highly rated insurers. According
to Standard & Poor's, a plus or minus attached to a Standard & Poor's
claims-paying rating shows relative standing within a ratings category.
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; (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 enters into both facultative and treaty agreements of indemnity
reinsurance with other insurance companies in order to reinsure portions of the
coverage provided under its insurance products. Indemnity reinsurance agreements
are intended to limit a life insurer's maximum loss on a large or unusually
hazardous risk or to diversify its risk. Indemnity insurance does not discharge
the original insurer's primary liability to the insured. Great American Reserve
believes the assuming companies are able to honor all contractual commitments,
based on periodic review of their financial statements, insurance industry
reports and reports filed with state insurance departments. Great American
Reserve also reinsures risks from other insurers, which are accounted for in the
same manner as direct business.
At December 31, 1997, the policy risk retention limit on the life of one
individual is $.5 million. Reinsurance ceded by Great American Reserve
represented 8.2 percent of gross life insurance in force and reinsurance assumed
represented 4.8 percent of net life insurance in force. At December 31, 1997,
Great American Reserve's largest reinsurer accounted for less than .1 percent of
total insurance liabilities and 7.1 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) approve 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; (x) perform
financial, market conduct and other examinations; (xi) define acceptable
accounting principles; (xii) regulate the type and amount of permitted
investments; and (xiii) limit the amount of dividends and surplus debenture
payments that can be paid without obtaining regulatory approval. 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.
The Risk-Based Capital for Life and/or Health Insurers Model Act (the
"Model Act") adopted by the NAIC 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, 1997, 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 described in the preceding paragraph) 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 6 percent. Great American Reserve is domiciled in Texas and must
comply with Texas RBC requirements. At December 31, 1997, the admitted assets of
Great American Reserve exceeded liabilities by the required 6 percent level.
On the basis of statutory statements filed with state regulators annually,
the NAIC calculates 11 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 establishes a reserve 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 of operations. Great American Reserve's statutory financial
statements for the year ended December 31, 1997, include $1.2 million in
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 it is received 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.
In February of 1998, President Clinton released various revenue proposals
and tax changes to be considered in the current federal budget. Such proposals
contained numerous tax increases directed at the insurance industry, of which
the more significant ones were as follows: taxing asset reallocations within
variable annuities and exchanges of variable annuities, reducing the tax basis
of insurance and annuity contracts for mortality charges and modifying tax
reserving rules for annuity contracts. Great American Reserve has joined the
insurance industry and other groups opposing these taxes upon savings, and
expects that these proposed changes will not be enacted into legislation.
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, 1997, the cumulative taxes paid as a result
of this provision were $6.0 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.
All statements, trend analyses and other information contained in this
report and elsewhere (such as in other filings by Great American Reserve with
the Securities and Exchange Commission, press releases, presentations by Great
American Reserve or its management or oral statements) relative to markets for
Great American Reserve products and trends in Great American Reserve's
operations or financial results, as well as other statements including words
such as "anticipate," "believe," "plan," "estimate," "expect," "intend," and
other similar expressions, constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors that may cause actual results to be materially different from those
contemplated by the forward-looking statements. Such factors include, among
other things: (i) general economic conditions and other factors, including
prevailing interest rate levels, stock market performance and health care
inflation, which may affect the ability of Great American Reserve to sell its
products, the market value of Great American Reserve's investments and the lapse
rate and profitability of Great American Reserve's policies; (ii) Great American
Reserve's ability to achieve anticipated levels of operational efficiencies
through cost-saving initiatives; (iii) customer response to new products,
distribution channels and marketing initiatives; (iv) mortality, morbidity,
use of health care services and other factors that may affect the profitability
of Great American Reserve's insurance products; (v) changes in the federal
income tax laws and regulations that may affect the relative tax advantages of
some of Great American Reserve's products; (vi) increasing competition in the
sale of Great American Reserve's products; (vii) regulatory changes or actions,
including those relating to regulation of financial services affecting (among
other things) bank sales and underwriting of insurance products, regulation of
the sale, underwriting and pricing of insurance products, and health care
regulation affecting Great American Reserve's health insurance products; and
(viii) the risk factors or uncertainties listed from time to time in Great
American Reserve's other filings with the Securities and Exchange Commission.
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, 1997, Compared with Year Ended December 31, 1996
Insurance policy income consists of premiums received on traditional life
products and policy fund and surrender charges assessed against investment type
products. This amount decreased in 1997 compared with 1996 as a result of a
decrease in sales of policies with mortality or morbidity risks. In
addition, withdrawals from insurance liabilities were higher in 1997 than 1996,
however fewer withdrawals were subject to surrender charges. Increases in
withdrawals were primarily due to 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 amounts added to annuity and financial product
policyholder account balances. Excluding investment income on separate accounts,
net investment income in 1997 decreased 8.7 percent from 1996, to $166.9
million. Average invested assets (amortized cost basis and excluding separate
account assets) decreased to $2.1 billion in 1997 from $2.3 billion in 1996, and
the yield earned on average invested assets decreased to 7.9 percent from 8.1
percent. Cash flows received during 1997 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 1997 increased to $55.7
million from $35.6 million in 1996. Such income fluctuates in relation to total
separate account assets and the return earned on such assets.
Net investment gains often fluctuate from period to period. Great American
Reserve sold $755.2 million of investment securities during 1997 compared with
$988.9 million in 1996 which sales resulted in net investment gains of $13.6
million in 1997 compared with net investment gains of $3.5 million in 1996. In
addition, Great American Reserve recorded net investment losses of $.3 million
in 1997 and $.8 million in 1996 on writedowns of fixed maturity securities as a
result of changes in conditions which caused it to believe that a decline in
fair value of the investments was 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 realized gains.
Insurance policy benefits and change in future policy benefits relate
solely to policies with mortality or morbidity features. The increase in the
1997 period corresponds with the increase in the in-force block of such
policies.
Amounts added to annuity and financial product policyholder account
balances (excluding amounts added to variable annuity products) decreased 11
percent in 1997 compared with 1996. Such decrease reflects 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 5.4 percent and 5.5 percent at December 31, 1997 and
1996, respectively.
Interest expense on investment borrowings in the 1997 and 1996 periods
reflect changes in investment borrowing activities and lower rates paid on such
borrowings in 1997.
Amortization consists of the amortization of cost of policies purchased,
cost of policies produced and goodwill.
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.
Net investment gains (losses) affect the timing of the amortization of the
cost of policies purchased and the cost of policies produced. As a result of net
investment gains from the sales of fixed maturity investments, amortization of
cost of policies purchased and cost of policies produced increased $14.2 million
in 1997 and $2.5 million in 1996.
Other operating costs and expenses decreased 48 percent to $28.2 million in
1997 compared with $54.3 million in 1996 primarily as a result of decreases in
policy maintenance expenses.
Income tax expense fluctuated primarily in relationship to income before
taxes.
Year Ended December 31, 1996, Compared with 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 amount decreased in 1996 compared with the 1995 periods as a
result of a decrease in sales of policies with mortality or morbidity risks.
In addition, withdrawals from insurance liabilities were higher in 1996 than
1995, however fewer withdrawals were subject to surrender charges. 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 amounts added to annuity and financial product
policyholder account balances. 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) decreased to $2.3 billion in 1996 from $2.4 billion in 1995,
while the yield earned on such average invested assets was 8.1 percent in both
years.
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 with $919.7
million in 1995 which sales resulted in net investment gains of $3.5 million in
1996 compared with 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.
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.
Amounts added to annuity and financial product policyholder account
balances (excluding amounts added to variable annuity products) decreased 5.8
percent in 1996 compared with the 1995 periods. Such decrease reflects 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 is affected by the Conseco Acquisition and the adoption of a
new basis of accounting under the "push down" method. Amortization 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 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 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.
Net investment gains (losses) affect the timing of the amortization of the
cost of policies purchased and the cost of policies produced. As a result of net
investment gains from the sales of fixed maturity investments, amortization of
cost of policies purchased and cost of policies produced increased $2.5 million
in 1996, $10.0 million in the four months ended December 31, 1995 and $4.3
million in the eight months ended August 31, 1995.
Other operating costs and expenses increased 48 percent to $54.3 million in
1996 compared with $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, 1997,
included herein.
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 80 percent of Great American Reserve's
investment portfolio at December 31, 1997. The remainder of the invested assets
were in assets held in separate accounts and other invested assets. At December
31, 1997, Great American Reserve had invested assets of approximately $2.5
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 Year Four months Eight months
ended ended ended ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Weighted average invested assets
excluding separate account assets):
As reported ................................ $2,113.7 $2,237.9 $2,371.9 $2,312.8
Excluding unrealized
appreciation (depreciation) (a)........... 2,121.2 2,258.9 2,341.1 2,366.9
Net investment income (excluding investment
income on separate accounts).................... 166.9 182.8 62.9 128.5
Yields earned:
As reported.................................... 7.9% 8.2% 8.0% 8.3%
Excluding unrealized
appreciation (depreciation) (a).............. 7.9% 8.1% 8.1% 8.1%
- --------------------
<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, 1997, the average yield, computed on the cost basis
of Great American Reserve's investment portfolio, was 7.5 percent and the
average interest rate credited or accruing to Great American Reserve's total
liability portfolio, excluding interest bonuses guaranteed for the first year of
the annuity contract only, was 5.4 percent.
Actively Managed Fixed Maturities
Great American Reserve's actively managed fixed maturity portfolio at
December 31, 1997, 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, 1997, 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............................................... $ 28.0 $ .7 $ - $ 28.7
Obligations of state and political subdivisions and
foreign government obligations......................... 39.0 1.2 1.3 38.9
Public utility securities................................. 184.6 3.5 2.3 185.8
Other corporate securities................................ 902.0 26.6 7.8 920.8
Mortgage-backed securities ............................... 551.6 8.6 .4 559.8
-------- ----- ----- --------
Total.................................................. $1,705.2 $40.6 $11.8 $1,734.0
======== ===== ===== ========
</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, 1997, classified by rating categories. The category assigned is
the highest rating by a nationally recognized statistical rating organization
or, as to $42.4 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................................................................................... 39% 27%
AA.................................................................................... 7 5
A..................................................................................... 18 13
BBB+.................................................................................. 8 6
BBB................................................................................... 12 8
BBB-.................................................................................. 8 5
--- ----
Investment-grade................................................................. 92 64
--- ---
BB+................................................................................... 2 1
BB.................................................................................... 2 1
BB-................................................................................... 1 1
B+ and below ......................................................................... 3 2
--- ---
Below investment-grade........................................................... 8 5
--- ---
Total actively managed fixed maturities...................................... 100% 69%
=== ==
</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, 1997, Great American Reserve's below investment grade fixed
maturity investments had an amortized cost of $135.8 million and an estimated
fair value of $132.3 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 $.3
million in 1997 and $.8 million in 1996 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)
and $.3 million of fixed maturity investments in substantive default (i.e., in
default due to nonpayment of interest or principal) at December 31, 1997.
At December 31, 1997, fixed maturity investments included $559.8 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, 1997:
<TABLE>
<CAPTION>
Par Amortized Estimated
value cost fair value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Below 7 percent............................................................ $218.9 $216.2 $218.9
7 percent - 8 percent...................................................... 228.4 232.5 235.5
8 percent - 9 percent...................................................... 63.9 62.6 64.2
9 percent and above........................................................ 38.9 40.3 41.2
------ ------ ------
Total mortgage-backed securities...................................... $550.1 $551.6 $559.8
====== ====== ======
</TABLE>
The amortized cost and estimated fair value of mortgage-backed securities
including CMOs at December 31, 1997, 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............ $455.4 $462.2 26%
Planned amortization classes and accretion directed bonds.................. 67.6 68.7 4
Subordinated classes....................................................... 28.6 28.9 2
------ ------ --
$551.6 $559.8 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.
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 17 percent of Great American Reserve's mortgage-backed securities
at December 31, 1997.
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 1997. During
1997, Great American Reserve sold actively managed fixed maturity securities
generating proceeds of $739.4 million, resulting in $20.6 million of investment
gains and $5.1 million in investment losses (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.
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 $88.9 million at December 31, 1997, or 3.6 percent of
total invested assets. The total estimated fair value of credit-tenant loans was
$93.4 million at December 31, 1997.
At December 31, 1997, Great American Reserve held mortgage loan investments
with a carrying value of $57.2 million (or 2.3 percent of total invested assets)
and a fair value of $61.2 million. Substantially all of the mortgage loan
investments were commercial loans.
Non-current mortgage loans were not significant at December 31, 1997. At
December 31, 1997, Great American Reserve had a loan loss reserve of $.8
million. Approximately 35 percent, 20 percent, 9 percent and 9 percent of the
mortgage loans were on properties located in California, Texas, Kentucky and
Florida, respectively. No other state comprised greater than 5 percent of the
mortgage loan balance.
At December 31, 1997, Great American Reserve held $.9 million of trading
securities. Trading 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 securities are carried at estimated fair value, with the
changes in fair value reflected in the statement of operations.
Short-term investments totaled $49.5 million, or 2.0 percent of invested
assets at December 31, 1997, 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 $90.4 million during 1997 (compared with an average of $115.3
million during 1996) 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 4.4 percent in 1997 and 5.3 percent
in 1996. 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, 1997). 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,
1997 less than 8 percent could not be surrendered, 49 percent could be
surrendered only by incurring a surrender charge and 43 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, 1997 included $49.5 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.
YEAR 2000 CONVERSION COSTS
Great American Reserve, like other companies, has initiated programs to
ensure that all of the computer systems it utilizes (including the computer
systems used by its outside service providers) will function properly in the
year 2000. Although an assessment of the total expected costs specifically
related to the year 2000 conversion has not been completed, the total amounts to
be expensed over the next two years are not expected to have a significant
effect on Great American Reserve's financial position or results of operations.
Great American Reserve believes it has taken steps that are reasonably designed
to address the potential failure of computer systems used by its service
providers and to ensure its year 2000 program is completed on a timely basis.
However, there can be no assurance that the steps taken will be sufficient to
avoid any adverse impact.
MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
Great American Reserve seeks to invest its available funds in a manner
that will maximize shareholder value and fund future obligations to
policyholders and debtors, subject to appropriate risk considerations. Great
American Reserve seeks to meet this objective through investments that: (i) have
similar characteristics to the liabilities they support; (ii) are diversified
among industries, issuers and geographic locations; and (iii) make up a
predominantly investment-grade fixed maturity securities portfolio. Many of
Great American Reserve's products incorporate surrender charges, market interest
rate adjustments or other features to encourage persistency. Approximately 49
percent of Great American Reserve's total insurance liabilities at December 31,
1997, had surrender penalties or other restrictions and approximately 8 percent
are not subject to surrender.
Great American Reserve seeks to maximize the total return on its
investments through active investment management. Accordingly, Great American
Reserve has determined that its entire portfolio of fixed maturity securities is
available to be sold in response to: (i) changes in market interest rates; (ii)
changes in relative values of individual securities and asset sectors; (iii)
changes in prepayment risks; (iv) changes in credit quality outlook for certain
securities; (v) liquidity needs; and (vi) other factors. From time to time,
Great American Reserve invests in securities for trading purposes, although such
investments account for a relatively small portion of Great American Reserve's
total portfolio.
Profitability of many of Great American Reserve's products is
significantly affected by the spreads between interest yields on investments and
rates credited on insurance liabilities. Although substantially all credited
rates on Great American Reserve's annuity products may be changed annually
(subject to minimum guaranteed rates), changes in 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.
As of December 31, 1997, the average yield, computed on the cost basis of
Great American Reserve's investment portfolio, was 7.5 percent, and the
average interest rate credited or accruing to Great American Reserve's total
insurance liabilities was 5.4 percent, excluding interest bonuses guaranteed
for the first year of the annuity contract only.
Great American Reserve uses computer models to perform simulations of the
cash flows generated from its existing business under various interest rate
scenarios. These simulations enable Great American Reserve to measure the
potential gain or loss in fair value of its interest rate-sensitive financial
instruments. With such estimates, Great American Reserve seeks to closely match
the duration of its assets to the duration of its liabilities. When the
estimated durations of assets and liabilities are similar, exposure to interest
rate risk is minimized because a change in the value of assets should be largely
offset by a change in the value of liabilities. At December 31, 1997, the
adjusted modified duration of our fixed maturity securities and short-term
investments was approximately 5.6 years and the duration of our insurance
liabilities was approximately 7.0 years.
If interest rates were to increase by 10 percent from their December 31,
1997 levels, Great American Reserve's fixed maturity securities and short-term
investments (net of corresponding changes in the value of cost of policies
purchased, cost of policies produced and insurance liabilities) would decline in
fair value by approximately $35 million. The calculations involved in Great
American Reserve's computer simulations incorporate numerous assumptions,
require significant estimates and assume an immediate change in interest rates
without any management of the investment portfolio in reaction to such change.
Consequently, potential changes in the value of Great American Reserve's
financial instruments indicated by the simulations will likely be different from
the actual changes experienced under given interest rate scenarios, and the
differences may be material. Because Great American Reserve actively manages its
investments and liabilities, actual losses could be less than those estimated
above.
DIRECTORS AND EXECUTIVE OFFICERS
Great American Reserve's directors and executive officers as of February 9,
1998, are listed below:
PRINCIPAL BUSINESS OCCUPATION
NAME DURING LAST FIVE YEARS
- --------------------------------------------------------------------------------
Ngaire E. Cuneo Since 1993, Director of Conseco's principal Insurance
(Age 47) 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 Executive
(Age 52) 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 Financial
(Age 66) Officer and Director of Conseco, Inc. and various
positions with the Company and certain of its
affiliates.
Thomas J. Kilian Since 1998, Executive Vice President, Chief Operations
(Age 46) Officer and Director of Conseco, Inc. and various
positions with certain of its affiliates. President of
Great American Reserve.
John J. Sabl Since 1997, Director, Executive Vice President and
(Age 46) General Counsel of Conseco, Inc. and various positions
with certain of its affiliates. Prior thereto, Mr. Sabl
was a partner in the law firm of Sidley & Austin In
Chicago, Illinois.
EXECUTIVE COMPENSATION
Great American Reserve has no full-time employees and does not compensate
any employee, officer or director of Great American Reserve.
INDEPENDENT ACCOUNTANTS
The financial statements of Great American Reserve as of December 31,
1997 and 1996, and for the years ended December 31, 1997 and 1996 and the four
months ended December 31, 1995 and the eight months ended August 31, 1995,
included in this prospectus, have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as set forth in their report appearing herein.
LEGAL OPINIONS
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut, has provided
advice on certain matters relating to the federal securities and income tax laws
in connection with the contracts described in this prospectus.
FINANCIAL STATEMENTS
The financial statements of Great American Reserve which are included in
this prospectus should be considered only as bearing on the ability of Great
American Reserve to meet its obligations under the contracts. They should not be
considered as bearing on the investment performance of the investment
portfolios. The value of the investment portfolios is affected primarily by the
performance of the underlying investments.
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, 1997 and 1996, and the
related statements of operations, shareholder's equity and cash flows for the
years ended December 31, 1997 and 1996 and the four months ended December 31,
1995. We have also audited the accompanying statement of operations,
shareholder's equity and cash flows of the Company for the eight months ended
August 31, 1995 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, 1997 and 1996, and the results of its
operations and its cash flows for the years ended December 31, 1997 and 1996,
the four months ended December 31, 1995 and the eight months ended August 31,
1995, in conformity with generally accepted accounting principles.
/S/ COOPERS & LYBRAND L.L.P.
----------------------------
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
April 20, 1998
GREAT AMERICAN RESERVE INSURANCE COMPANY
BALANCE SHEET
December 31, 1997 and 1996
(Dollars in millions)
ASSETS
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Investments:
Actively managed fixed maturities at fair value (amortized cost:
1997 - $1,705.2; 1996 - $1,810.8)............................................... $1,734.0 $1,795.1
Mortgage loans..................................................................... 57.2 77.3
Credit-tenant loans................................................................ 88.9 93.4
Policy loans....................................................................... 80.6 80.8
Other invested assets ............................................................. 88.2 89.0
Short-term investments............................................................. 49.5 14.8
Assets held in separate accounts................................................... 402.1 232.4
-------- --------
Total investments............................................................ 2,500.5 2,382.8
Accrued investment income.............................................................. 30.5 32.9
Cost of policies purchased............................................................. 101.6 143.0
Cost of policies produced.............................................................. 60.7 38.2
Reinsurance receivables................................................................ 21.9 25.7
Goodwill (net of accumulated amortization: 1997 - $13.2; 1996 - $11.7)................. 48.2 49.7
Other assets........................................................................... 8.3 8.2
-------- --------
Total assets................................................................. $2,771.7 $2,680.5
======== ========
(continued on next page)
The accompanying notes are an
integral part of the financial
statements.
</TABLE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
BALANCE SHEET (Continued)
December 31, 1997 and 1996
(Dollars in millions, except per share amount)
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Liabilities:
Insurance liabilities:
Interest sensitive products...................................................... $1,522.1 $1,636.5
Traditional products............................................................. 248.3 251.5
Claims payable and other policyholder funds...................................... 62.5 69.5
Liabilities related to separate accounts......................................... 402.1 232.4
Income tax liabilities............................................................. 44.2 29.8
Investment borrowings.............................................................. 61.0 48.4
Other liabilities.................................................................. 14.6 15.5
-------- --------
Total liabilities.......................................................... 2,354.8 2,283.6
-------- --------
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
Accumulated other comprehensive income:
Unrealized appreciation (depreciation) of fixed maturity securities (net of
applicable deferred income taxes: 1997 - $4.4; 1996 - $(2.4))............... 8.2 (4.4)
Unrealized appreciation (depreciation) of other investments (net of applicable
deferred income taxes: 1997 - $.3; 1996 - $(.1))............................ .5 (.2)
Retained earnings.................................................................. 27.4 20.7
-------- --------
Total shareholder's equity................................................. 416.9 396.9
-------- --------
Total liabilities and shareholder's equity................................. $2,771.7 $2,680.5
======== ========
The accompanying notes are an
integral part of the financial
statements.
</TABLE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF OPERATIONS
(Dollars in millions)
<TABLE>
<CAPTION>
Prior basis
------------
Year Year Four months Eight months
ended ended ended ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income............................... $ 75.7 $ 81.4 $ 31.8 $ 60.5
Net investment income................................. 222.6 218.4 74.2 136.4
Net investment gains.................................. 13.3 2.7 12.5 7.3
------- ------- ------ -------
Total revenues............................... . 311.6 302.5 118.5 204.2
------- ------- ------ -------
Benefits and expenses:
Insurance policy benefits............................. 56.5 54.9 18.9 45.9
Change in future policy benefits...................... (4.8) (3.7) .2 (4.3)
Amounts added to annuity and financial product
policyholder account balances:
Interest......................................... 83.6 93.8 32.9 66.7
Other amounts added to variable annuity products 55.7 35.6 11.3 7.9
Interest expense on investment borrowings............. 4.0 6.2 1.0 3.6
Amortization.......................................... 27.1 20.3 15.3 16.0
Other operating costs and expenses.................... 28.2 54.3 13.1 23.7
------- ------- ------ -------
Total benefits and expenses...................... 250.3 261.4 92.7 159.5
------- ------- ------ -------
Income before income taxes....................... 61.3 41.1 25.8 44.7
Income tax expense........................................ 22.1 15.4 9.7 16.5
------- ------- ------ -------
Net income....................................... $ 39.2 $ 25.7 $ 16.1 $ 28.2
======= ======= ====== ======
The accompanying notes are an
integral part of the financial
statements.
</TABLE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF SHAREHOLDER'S EQUITY
(Dollars in millions)
<TABLE>
<CAPTION>
Common stock Accumulated other
and additional comprehensive Retained
Total paid-in capital income earnings
----- --------------- ------ --------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 (a)............................. $364.9 $339.7 $(55.1) $80.3
Comprehensive income, net of tax:
Net income (a)........................................ 28.2 - - 28.2
Change in unrealized appreciation (depreciation) of
securities (net of applicable income taxes of
34.1) (a)........................................... 59.0 - 59.0 -
------
Total comprehensive income (a).................... 87.2
Dividends on common stock (a)........................... (41.2) - - (41.2)
Adjustment of balance due to new accounting basis....... 5.1 41.1 (2.0) (34.0)
------ ------ ------ -----
Balance, August 31, 1995................................... 416.0 380.8 1.9 33.3
Comprehensive income, net of tax:
Net income............................................ 16.1 - - 16.1
Change in unrealized appreciation (depreciation) of
securities (net of applicable income
taxes of $6.1)................................... 10.5 - 10.5 -
------
Total comprehensive income........................ 26.6
------ ------ ------ -----
Balance, December 31, 1995................................. 442.6 380.8 12.4 49.4
Comprehensive income, net of tax:
Net income............................................ 25.7 - - 25.7
Change in unrealized appreciation (depreciation) of
securities (net of applicable income
taxes of ($9.7)).................................... (17.0) - (17.0) -
------
Total comprehensive income........................ 8.7
Dividends on common stock............................... (54.4) - - (54.4)
------ ------ ------ ------
Balance, December 31, 1996................................. 396.9 380.8 (4.6) 20.7
Comprehensive income, net of tax:
Net income............................................ 39.2 - - 39.2
Change in unrealized appreciation (depreciation) of
securities (net of applicable income taxes of $7.2). 13.3 - 13.3 -
------
Total comprehensive income........................ 52.5 - - -
Dividends on common stock............................... (32.5) - - (32.5)
------ ------ ------ -----
Balance, December 31, 1997................................. $416.9 $380.8 $ 8.7 $ 27.4
====== ====== ====== ======
<FN>
(a) Prior basis.
</FN>
The accompanying notes are an
integral part of the financial
statements.
</TABLE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(Dollars in millions)
<TABLE>
<CAPTION>
Prior basis
-------------
Year Year Four months Eight months
ended ended ended ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 39.2 $ 25.7 $ 16.1 $ 28.2
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization..................................... 27.1 20.3 15.3 16.0
Income taxes..................................... 6.7 (3.9) 2.3 2.9
Insurance liabilities............................ (60.9) (40.5) (25.8) (14.0)
Amounts added to annuity and financial
product policyholder account balances......... 139.3 129.4 44.2 74.6
Fees charged to insurance liabilities............ (31.3) (32.8) (10.3) (22.2)
Accrual and amortization of investment income.... .3 3.1 3.2 (1.8)
Deferral of cost of policies produced............ (31.8) (13.2) (3.0) (6.6)
Investment gains................................. (13.3) (2.7) (12.5) (7.3)
Other............................................ (4.6) (8.8) (8.9) (3.2)
--------- -------- ------ -------
Net cash provided by operating
activities................................. 70.7 76.6 20.6 66.6
--------- -------- ------ -------
Cash flows from investing activities:
Sales of investments.................................. 755.2 988.9 513.2 406.5
Maturities and redemptions............................ 150.4 101.7 60.4 57.5
Purchases of investments.............................. (753.6) (954.2) (532.2) (476.2)
--------- -------- ------- -------
Net cash provided (used) by investing
activities................................ 152.0 136.4 41.4 (12.2)
--------- -------- ------ -------
Cash flows from financing activities:
Deposits to insurance liabilities..................... 255.9 169.8 50.8 104.4
Cash paid in reinsurance recapture ................... - - (71.1) -
Investment borrowings................................. 12.6 (35.8) (36.8) 121.0
Withdrawals from insurance liabilities................ (424.0) (306.7) (71.9) (166.3)
Dividends paid on common stock........................ (32.5) (44.5) - (41.2)
--------- ------- -------- -------
Net cash provided (used) by
financing activities...................... (188.0) (217.2) (129.0) 17.9
--------- -------- -------- -------
Net increase (decrease) in short-term
investments............................... 34.7 (4.2) (67.0) 72.3
Short-term investments, beginning of period............... 14.8 19.0 86.0 13.7
--------- -------- -------- -------
Short-term investments, end of period..................... $ 49.5 $ 14.8 $ 19.0 $ 86.0
========= ======== ======== =======
The accompanying notes are an
integral part of the financial
statements.
</TABLE>
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
supplemental health insurance, annuity, individual life insurance, individual
and group major medical insurance and other 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, Inc. (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 dates.
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 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. As such, they include
amounts based on informed estimates and judgment, with consideration given to
materiality. Many estimates and assumptions are utilized in calculating
amortized value and recoverability of securities, cost of policies produced,
cost of policies purchased, goodwill, insurance liabilities, guaranty fund
assessment accruals, liabilities for litigation and deferred income taxes.
Actual results could differ from reported results using those estimates. Certain
amounts from the 1996 financial statements and notes have been reclassified to
conform with the 1997 presentation.
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:
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
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 - fixed maturity securities are bought and held principally for
the purpose of selling them in the near term. Trading securities are
carried at estimated fair value. Unrealized gains or losses are
included in net investment gains (losses). The Company held $.9 million
of trading securities at December 31, 1997, which are included in other
invested assets. The Company did not hold any trading securities at
December 31, 1996 or 1995.
Held to maturity - fixed maturity 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 1997, 1996 or 1995.
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 tables summarize the effect
of these adjustments as of December 31, 1997:
<TABLE>
<CAPTION>
Effect of fair
Balance value adjustment to
before actively managed Reported
adjustment fixed maturity securities amount
---------- ------------------------- --------
(Dollars in millions)
<S> <C> <C> <C>
Actively managed fixed maturity securities.................... $1,705.2 $ 28.8 $1,734.0
Cost of policies purchased.................................... 115.0 (13.4) 101.6
Cost of policies produced..................................... 63.5 (2.8) 60.7
Income tax liabilities........................................ 39.8 4.4 44.2
Net unrealized appreciation of fixed maturity securities, net. - 8.2 8.2
</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 1997, 1996 or 1995. At
the transfer date, the security's unrealized gain or loss is recorded as
follows:
- For transfers to the trading category, the unrealized gain or loss is
recognized in earnings;
- For transfers from the trading category, the unrealized gain or loss
already recognized in earnings is not reversed;
- For transfers to actively managed from held to maturity, the unrealized
gain or loss is recognized in shareholder's equity; and
- 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.
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Credit-tenant loans ("CTLs") 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 secured 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 CTLs and 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.
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:
- Identify the expected future cash flows from the blocks of business.
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
- Identify the risks inherent in realizing those cash flows (i.e., what is
the probability that the cash flows will be realized).
- Identify the rate of return necessary to accept these risks, based on
consideration of the factors summarized below.
- Determine the value of the policies purchased 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 needed to earn in order to invest in the
business being acquired. In determining this required rate of return, the
following factors are considered:
- The magnitude of the risks associated with each of the actuarial
assumptions used in determining expected future cash flows.
- The cost of capital required to fund the acquisition.
- The likelihood of changes in projected future cash flows that might
occur if there are changes in insurance regulations and tax laws.
- The acquired business compatibility with other activities of the Company
that may favorably affect future cash flows.
- The complexity of the acquired business.
- 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).
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
1997 net income was insignificant.
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
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
Goodwill is the excess of the amount paid to acquire a company over the
fair value of its net assets. Goodwill is amortized on the straight-line basis
over a 40-year period. The Company continually monitors the value of the
goodwill based on estimates of future earnings. The Company determines whether
goodwill is fully recoverable from projected undiscounted net cash flows from
earnings of the subsidiaries over the remaining amortization period. If it is
determined that changes in such projected cash flows no longer supported the
recoverability of goodwill over the remaining amortization period, the Company
would reduce its carrying value with a corresponding charge to expense or
shorten the amortization period (no such changes have occurred). Cash flows
considered in such an analysis are those of the business acquired, if separately
identifiable, or the business segment that acquired the business if such
earnings are not separately identifiable.
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 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.
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
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. This liability method of accounting for income taxes also requires
the Company to reflect in income the effect of a tax rate change on accumulated
deferred income taxes in the period in which the change is 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.
Comprehensive Income
As of December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 establishes standards for reporting and presentation of comprehensive
income and its components in a full set of financial statements. Comprehensive
income includes all changes in shareholders' equity (except those arising from
transactions with shareholders) and includes net income and net unrealized gains
(losses) on securities. The new standard requires only additional disclosures in
the consolidated financial statements; it does not affect the financial position
or results of operations.
Comprehensive income excludes net investment gains (losses) included in net
income of: (i) $(3.9) million (after income taxes of $(2.1) million) in 1997;
(ii) $.2 million (after income taxes of $.1 million) in 1996; (iii) $1.4 million
(after income taxes of $.7 million) in the four months ended December 31, 1995;
and (iv) $2.2 million (after income taxes of $1.2 million) in the eight months
ended August 31, 1995.
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), equity
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
securities and trading securities 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 obtained from
broker-dealer market makers or by discounting expected future cash flows
using current market interest rates appropriate for the yield, credit
quality of the investments and for fixed maturities, the maturity of the
investments being priced.
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 on 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 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>
1997 1996
---------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Financial assets held for purposes other than trading:
Actively managed fixed maturity securities........... $1,734.0 $1,734.0 $1,795.1 $1,795.1
Mortgage loans....................................... 57.2 61.2 77.3 77.0
Credit-tenant loans.................................. 88.9 93.4 93.4 92.5
Policy loans......................................... 80.6 80.6 80.8 80.8
Other invested assets................................ 88.2 88.2 89.0 89.0
Short-term investments............................... 49.5 49.5 14.8 14.8
Financial liabilities held for purposes other than
trading:
Insurance liabilities for investment contracts (1). 1,177.5 1,177.5 $1,282.1 $1,282.1
Investment borrowings.............................. 61.0 61.0 48.4 48.4
<FN>
(1) The estimated fair value of the liabilities for investment contracts
was approximately equal to its carrying value at December 31, 1997
and 1996, 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>
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
("SFAS 125") was issued in June 1996 and provides accounting and reporting
standards for transfers of financial assets and extinguishments of liabilities.
SFAS 125 is effective for 1997 financial statements; however, certain provisions
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
relating to accounting for repurchase agreements and securities lending are not
effective until January 1, 1998. Provisions effective in 1997 did not have any
effect on the Company's financial position or results of operations. The
adoption of provisions effective in 1998 are not expected to have a material
effect on the Company's financial position or results of operations.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131") establishes new
standards for reporting about operating segments and products and services,
geographic areas and major customers. Under SFAS 131, segments are to be defined
consistent with the basis management uses internally to assess performance and
allocate resources. Implementing SFAS 131 will have no impact on the
consolidated amounts the Company reports. SFAS 131 is effective for the
Company's December 31, 1998 financial statements.
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132") was
issued in February 1998 and revises current disclosure requirements for
employers' pensions and other retiree benefits. SFAS 132 will have no effect on
the Company's financial position or results of operations. SFAS 132 is effective
for the Company's December 31, 1998 financial statements.
Statement of Position 97-3, "Accounting by Insurance and Other Enterprises
for Insurance-Related Assessments" ("SOP 97-3") was issued by the American
Institute of Certified Public Accountants in December 1997 and provides guidance
for determining when an insurance company or other enterprise should recognize a
liability for guaranty-fund assessments and guidance for measuring the
liability. The statement is effective for 1999 financial statements with early
adoption permitted. The adoption of this statement is not expected to have a
material effect on the Company's financial position or results of operations.
2. INVESTMENTS
At December 31, 1997, 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............................................ $ 28.0 $ .7 $ - $ 28.7
Obligations of state and political subdivisions........ 20.5 1.1 .1 21.5
Debt securities issued by foreign governments.......... 18.5 .1 1.2 17.4
Public utility securities.............................. 184.6 3.5 2.3 185.8
Other corporate securities............................. 902.0 26.6 7.8 920.8
Mortgage-backed securities............................. 551.6 8.6 .4 559.8
-------- ----- ----- --------
Total............................................... $1,705.2 $40.6 $11.8 $1,734.0
======== ===== ===== ========
</TABLE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
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>
Actively managed fixed maturity securities, summarized by the source of
their estimated fair value, were as follows at December 31, 1997:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Nationally recognized pricing services.......................................... $1,416.9 $1,441.2
Broker-dealer market makers..................................................... 143.6 146.2
Internally developed methods (calculated based
on a weighted-average current market yield of 8.0 percent)................... 144.7 146.6
-------- --------
Total ................................................................. $1,705.2 $1,734.0
======== ========
</TABLE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The following table sets forth actively managed fixed maturity securities
at December 31, 1997, classified by rating categories. The category assigned is
the highest rating by a nationally recognized statistical rating organization
or, as to $42.4 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................................................................................... 39% 27%
AA.................................................................................... 7 5
A..................................................................................... 18 13
BBB+.................................................................................. 8 6
BBB................................................................................... 12 8
BBB-.................................................................................. 8 5
--- --
Investment-grade................................................................. 92 64
--- ---
BB+................................................................................... 2 1
BB.................................................................................... 2 1
BB-................................................................................... 1 1
B+ and below ......................................................................... 3 2
--- --
Below investment-grade........................................................... 8 5
--- --
Total actively managed fixed maturities...................................... 100% 69%
=== ==
</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, 1997:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Amortized cost exceeds fair value by more than 30%.................................. $ 1.0 $ .5
Amortized cost exceeds fair value by more than 15% but not more than 30%............ 14.8 11.8
Amortized cost exceeds fair value by more than 5% but not more than 15%............. 15.5 14.0
All others.......................................................................... 104.5 106.0
------ ------
Total below investment-grade fixed maturity investments.................... $135.8 $132.3
====== ======
</TABLE>
The Company had $.3 million of fixed maturity investments in substantive
default and no fixed maturities in technical default as of December 31, 1997.
The Company recorded writedowns of fixed maturity investments and other invested
assets totaling $.3 million in 1997, $.8 million in 1996 and $1.6 million in
1995, 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, 1997, 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 not significant in 1997, 1996 or 1995.
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Actively managed fixed maturity securities at December 31, 1997, 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......................................................... $ 5.8 $ 5.9
Due after one year through five years........................................... 103.0 101.3
Due after five years through ten years.......................................... 357.4 360.5
Due after ten years............................................................. 687.4 706.5
-------- --------
Subtotal................................................................. 1,153.6 1,174.2
Mortgage-backed securities...................................................... 551.6 559.8
-------- --------
Total ................................................................... $1,705.2 $1,734.0
======== ========
</TABLE>
Net investment income consisted of the following:
<TABLE>
<CAPTION>
Year Year Four months Eight months
ended ended ended ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Actively managed fixed maturity securities....... $133.6 $146.4 $53.9 $110.2
Mortgage loans................................... 8.8 11.8 4.8 8.0
Credit-tenant loans ............................. 7.6 7.2 1.7 4.1
Policy loans..................................... 5.4 5.0 1.9 3.5
Short-term investments........................... 3.4 2.3 .8 1.9
Other invested assets............................ 9.4 11.4 .3 1.6
Separate accounts................................ 55.7 35.6 11.3 7.9
----- ------ ----- ------
Gross investment income..................... 223.9 219.7 74.7 137.2
Investment expenses.............................. 1.3 1.3 .5 .8
------ ------ ----- ------
Net investment income....................... $222.6 $218.4 $74.2 $136.4
====== ====== ===== ======
</TABLE>
The Company had insignificant fixed maturity investments and mortgage loans
that were not accruing investment income in 1997, 1996 and 1995.
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The proceeds from sales of actively managed fixed maturity securities were
$739.4 million in 1997, $938.3 million in 1996 and $918.5 million in 1995. Net
investment gains consisted of the following:
<TABLE>
<CAPTION>
Year Year Four months Eight months
ended ended ended ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Fixed maturities:
Gross gains................................... $20.6 $16.6 $16.5 $14.4
Gross losses.................................. (5.1) (9.2) (2.2) (2.3)
Other than temporary decline in fair value.... (.3) (.2) (.4) (1.2)
----- ----- ----- -----
Net investment gains from fixed maturities
before expenses........................... 15.2 7.2 13.9 10.9
Mortgage loans................................... (.2) - - (.2)
Other .......................................... 2.4 - - (1.0)
Other than temporary decline in fair value....... - (.6) - -
----- ----- ----- -----
Net investment gains before expenses........ 17.4 6.6 13.9 9.7
Investment gain expenses......................... 4.1 3.9 1.4 2.4
----- ----- ----- -----
Net investment gains........................ $13.3 $ 2.7 $12.5 $ 7.3
===== ===== ===== =====
</TABLE>
The change in net unrealized appreciation (depreciation) on investments
consisted of the following:
<TABLE>
<CAPTION>
Year Year Four months Eight months
ended ended ended ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Actively managed fixed maturities................ $ 44.5 $(66.5) $45.5 $164.1
Other invested assets............................ 1.1 (1.3) .1 5.1
------- ------ ------ ------
Subtotal................................ 45.6 (67.8) 45.6 169.2
Less effect on other balance sheet accounts:
Cost of policies purchased.................... (21.2) 36.6 (26.3) (64.1)
Cost of policies produced..................... (3.9) 4.5 (2.7) (12.0)
Income taxes.................................. (7.2) 9.7 (6.1) (34.1)
------- ------ ------ ------
Change in net unrealized appreciation
(depreciation) of securities.................. $ 13.3 $(17.0) $10.5 $ 59.0
======= ====== ===== ======
</TABLE>
Investments in mortgage-backed securities at December 31, 1997, included
collateralized mortgage obligations ("CMOs") of $194.2 million and
mortgage-backed pass-through securities of $365.6 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.
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, 1997, 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 ..................................................... $218.9 $216.2 $218.9
7 percent - 8 percent................................................ 228.4 232.5 235.5
8 percent - 9 percent................................................ 63.9 62.6 64.2
9 percent and above.................................................. 38.9 40.3 41.2
------ ------ ------
Total mortgage-backed securities................................ $550.1 $551.6 $559.8
====== ====== ======
</TABLE>
The amortized cost and estimated fair value of mortgage-backed securities
including CMOs at December 31, 1997, 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........... $455.4 $462.2 26%
Planned amortization classes and accretion directed bonds................ 67.6 68.7 4
Subordinated classes .................................................... 28.6 28.9 2
------ ------- --
Total mortgage-backed securities................................ $551.6 $559.8 32%
====== ====== ==
</TABLE>
At December 31, 1997, approximately 84 percent of the estimated fair value
of the Company's mortgage-backed securities was determined by nationally
recognized pricing services, 6 percent was determined by broker-dealer market
makers, and 10 percent was determined by internally developed methods. The
call-adjusted modified duration of the Company's mortgage-backed securities was
4.8 years at December 31, 1997.
At December 31, 1997, no mortgage loans or credit-tenant loans had
defaulted as to principal or interest for more than 60 days, had been converted
to foreclosed real estate or had been restructured while the Company owned them.
Mortgage loans of $1.1 million were in foreclosure at December 31, 1997. At
December 31, 1997, the Company had a loan loss reserve of $.8 million.
Approximately 35 percent, 20 percent, 9 percent and 9 percent of the mortgage
loan balance were on properties located in California, Texas, Kentucky 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
$90.4 million during 1997 compared with $115.3 million during 1996. The weighted
average interest rate on short-term collateralized borrowings was 4.4 percent
and 5.3 percent during 1997 and 1996, 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,
1997). 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
$18.3 million at December 31, 1997.
No investments of a single issuer were in excess of 10 percent of
shareholder's equity at December 31, 1997, other than investments issued or
guaranteed by the United States government.
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
3. INSURANCE LIABILITIES
Insurance liabilities consisted of the following:
<TABLE>
<CAPTION>
Interest
Withdrawal Mortality rate December 31, December 31,
assumption assumption assumption 1997 1996
---------- ---------- ---------- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Future policy benefits:
Interest-sensitive products:
Investment contracts .............. N/A N/A (b) $1,177.5 $1,282.1
Universal life-type contracts...... N/A N/A N/A 344.6 354.4
-------- --------
Total interest-sensitive
products..................... 1,522.1 1,636.5
-------- --------
Traditional products:
Traditional life insurance Company
contracts........................ experience (a) 8% 142.8 146.2
Limited-payment contracts.......... None (a) 8% 105.5 105.3
-------- --------
Total traditional products..... 248.3 251.5
-------- --------
Claims payable and other policyholder
funds................................. N/A N/A N/A 62.5 69.5
Liabilities related to separate
accounts.............................. N/A N/A N/A 402.1 232.4
-------- --------
Total insurance liabilities.... $2,235.0 $2,189.9
======== ========
- --------------------
<FN>
(a) Principally modifications of the 1975-80 Basic Table, Select and Ultimate
Table.
(b) At December 31, 1997 and 1996, approximately 97 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 6.4 percent at December 31, 1997.
</FN>
</TABLE>
Participating policies represented approximately 4.1 percent, 3.5 percent
and 3.7 percent of total life insurance in force at December 31, 1997, 1996 and
1995, respectively, and approximately 2.9 percent, 2.7 percent and 2.4 percent
of premium income for 1997, 1996 and 1995, respectively. Dividends on
participating policies amounted to $2.1 million, $1.9 million and $1.8 million
in 1997, 1996 and 1995, respectively.
4. REINSURANCE
Cost of reinsurance ceded where the reinsured policy contains mortality
risks totaled $24.2 million in 1997, $24.6 million in 1996, and $29.1 million in
1995. 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
$14.9 million in 1997, $19.4 million in 1996 and $19.5 million in 1995.
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.
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The Company's reinsurance receivable balance at December 31, 1997 relates
to many reinsurers. No balance from a single reinsurer exceeds $6.5 million.
5. INCOME TAXES
Income tax liabilities consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
---- ----
(Dollars in millions)
<S> <C> <C>
Deferred income tax liabilities:
Cost of policies purchased and produced................................... $ 52.2 $60.3
Investments............................................................... 9.8 (3.3)
Insurance liabilities..................................................... (19.5) (19.7)
Unrealized appreciation (depreciation).................................... 4.7 (2.5)
Other..................................................................... (4.0) (5.0)
------ -----
Deferred income tax liabilities....................................... 43.2 29.8
Current income tax liabilities............................................... 1.0 -
------ -----
Income tax liabilities................................................ $ 44.2 $29.8
======= =====
</TABLE>
Income tax expense was as follows:
<TABLE>
<CAPTION>
Year Year Four months Eight months
ended ended ended ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Current tax provision............................... $16.3 $10.5 $11.9 $19.9
Deferred tax provision (benefit).................... 5.8 4.9 (2.2) (3.4)
----- ----- ----- -----
Income tax expense........................... $22.1 $15.4 $ 9.7 $16.5
===== ===== ====== =====
</TABLE>
Income tax expense differed from that computed at the applicable statutory
rate of 35 percent for the following reasons:
<TABLE>
<CAPTION>
Year Year Four months Eight months
ended ended ended ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Federal tax on income before income taxes at
statutory rate.................................... $21.5 $14.4 $9.0 $15.6
State taxes and other................................ .4 .6 .5 .4
Nondeductible items.................................. .2 .4 .2 .5
----- ----- ---- -----
Income tax expense.............................. $22.1 $15.4 $9.7 $16.5
===== ===== ==== =====
</TABLE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
During 1997, the Internal Revenue Service completed its examination of the
Company for the 1994 tax year and such examination did not result in any
significant adjustments.
6. 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 agreement were $36.7 million in
1997, $44.1 million in 1996 and $26.6 million in 1995.
During 1997 and 1996, the Company purchased $11.2 million and $31.5 million
par value, respectively, of senior subordinated notes issued by subsidiaries of
Conseco. Such notes had a carrying value of $29.8 million and $34.7 million at
December 31, 1997 and 1996, respectively, and are classified as "other invested
assets" in the accompanying balance sheet. In addition, during 1997, a
subsidiary of Conseco redeemed $16.5 million par value of such notes which were
purchased in 1996. 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.
7. OTHER OPERATING INFORMATION
Insurance policy income consisted of the following:
<TABLE>
<CAPTION>
Year Year Four months Eight months
ended ended ended ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Direct premiums collected............................ $ 309.6 $241.3 $ 82.8 $158.6
Reinsurance assumed.................................. 14.9 1.7 .7 2.0
Reinsurance ceded.................................... (24.2) (24.6) (11.2) (17.9)
-------- ------ ----- ------
Premiums collected, net of reinsurance.......... 300.3 218.4 72.3 142.7
Less premiums on universal life and products without
mortality risk which are recorded as additions to
insurance liabilities............................. (255.9) (169.8) (50.8) (104.4)
-------- ------ ----- ------
Premiums on products with mortality and
morbidity risk, recorded as insurance policy
income........................................ 44.4 48.6 21.5 38.3
Fees and surrender charges........................... 31.3 32.8 10.3 22.2
-------- ------ ----- ------
Insurance policy income....................... $ 75.7 $ 81.4 $ 31.8 $ 60.5
======== ====== ====== ======
</TABLE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The four states with the largest shares of the Company's premiums
collected in 1997 were Texas (27 percent), Florida (17 percent), California (13
percent) and Michigan (6 percent). No other state's premiums collected exceeded
5 percent.
Other operating costs and expenses were as follows:
<TABLE>
<CAPTION>
Year Year Four months Eight months
ended ended ended ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Policy maintenance expense........................... $18.1 $37.8 $ 6.5 $14.0
State premium taxes and guaranty assessments......... 2.0 4.4 1.6 1.1
Commission expense................................... 8.1 12.1 5.0 8.6
----- ----- ----- -----
Other operating costs and expenses............ $28.2 $54.3 $13.1 $23.7
===== ===== ===== =====
</TABLE>
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. The sales of fixed maturity investments during 1997,
1996 and 1995 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 $14.2 million in 1997, $2.5 million in 1996, $10.0 million in the
four months ended December 31, 1995 and $4.3 million for the eight months ended
August 31, 1995.
The changes in the cost of policies purchased were as follows:
<TABLE>
<CAPTION>
Year Year Four months Eight months
ended ended ended ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Balance, beginning of period........................... $143.0 $120.0 $159.0 $173.9
Amortization related to operations:
Cash flow realized................................ (18.2) (26.2) (9.4) (19.1)
Interest added.................................... 11.8 13.1 5.0 12.7
Amortization related to sales of fixed maturity
investments....................................... (13.8) (2.2) (8.3) (3.4)
Amounts related to fair value adjustment of
actively managed fixed maturity securities........ (21.2) 36.6 (26.3) (64.1)
Adjustment of balance due to new accounting
basis and other................................... - 1.7 - 59.0
------ ------ ------ ------
Balance, end of period................................. $101.6 $143.0 $120.0 $159.0
====== ====== ====== ======
</TABLE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Based on current conditions and assumptions as to future events on all
policies in force, approximately 10 percent, 10 percent, 10 percent, 10 percent
and 11 percent of the cost of policies purchased as of December 31, 1997, 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 3.6 percent to 8.0 percent and averaged 5.8 percent.
The changes in the cost of policies produced were as follows:
<TABLE>
<CAPTION>
Year Year Four months Eight months
ended ended ended ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Balance, beginning of period.......................... $38.2 $24.0 $25.9 $ 63.2
Additions.......................................... 31.8 13.2 3.0 6.6
Amortization related to operations................. (5.0) (3.2) (.5) (4.0)
Amortization related to sales of fixed maturity
investments...................................... (.4) (.3) (1.7) (.9)
Amounts related to fair value adjustment of
actively managed fixed maturity securities....... (3.9) 4.5 (2.7) (12.0)
Adjustment of balance due to new accounting basis.. - - - (27.0)
----- ----- ----- -------
Balance, end of period................................ $60.7 $38.2 $24.0 $ 25.9
===== ===== ===== =======
</TABLE>
8. STATEMENT OF CASH FLOWS
Income taxes paid during 1997, 1996, and 1995, were $14.8 million, $18.1
million and $19.3 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.
9. 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,
--------------------
1997 1996
---- ----
(Dollars in millions)
<S> <C> <C>
Statutory capital and surplus.................................................. $140.7 $140.3
Asset valuation reserve........................................................ 29.2 28.7
Interest maintenance reserve................................................... 68.8 63.1
------ ------
Total...................................................................... $238.7 $232.1
====== ======
</TABLE>
The Company's statutory net income was $32.7 million, $32.6 million and
$38.4 million in 1997, 1996 and 1995, respectively.
State insurance laws generally restrict the ability of insurance companies
to pay dividends or make other distributions. Approximately $32.9 million of the
Company's net assets at December 31, 1997, are available for distribution in
1998 without permission of state regulatory authorities.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
Company
Independent Accountants
Legal Opinions
Distribution
Performance Information
Federal Tax Status
Annuity Provisions
Financial Statements
APPENDIX A -- MARKET VALUE ADJUSTMENT
The market value adjustment reflects the impact that changing interest
rates have on the value of your money in a guarantee period of the MVA option.
The longer the period of time remaining in the term you selected, the greater
the impact of changing interest rates. The market value adjustment can be
positive or negative. We will apply the following factor to amounts withdrawn,
transferred or annuitized from a guarantee period in excess of the MVA waiver
amount (see below):
( (1 + A) / (1 + B) )^(N/365)-1
where:
A is the U.S. Treasury rate that is in effect at the beginning of the
guarantee period for the length of the guarantee period you selected.
B is the current U.S. Treasury rate as of the date of the withdrawal or
transfer plus .005. The Treasury rate period is determined by N/365
rounded to the next highest year.
N is the number of days remaining in the guarantee period.
If the Treasury rate is not available for the period, the rate will be
determined by interpolation. If no Treasury rates are available, an index will
be selected by Great American Reserve which will be approved by the state
insurance commissioners.
MVA Waiver Amount: After the first year in a guarantee period, you can
make one withdrawal or transfer from a guarantee period each year of up to 10%
of the value in that guarantee period without the market value adjustment.
EXAMPLES OF THE MARKET VALUE ADJUSTMENT:
EXAMPLE 1: FIVE-YEAR GUARANTEE PERIOD; INCREASE IN TREASURY RATE
Assume you make a $50,000 payment allocated to a 5-year guarantee period
on January 1, 1998. The current 5-year Treasury rate is 6.00%, and the current
interest rate is 7.00%. On June 13, 1999 you surrender the contract with 3 years
and 202 days, or 1,297 days (12/31/2002-6/13/1999) 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 the 4-year rate. Assume that the 4-year
Treasury rate on June 13, 1997 is 6.50%. The market value adjustment would be
calculated as follows:
Contract value at 6/13/1999 (529 days from the day your contract was issued):
$50,000 x [1.07^(529/365)] = $55,151.38
MVA Waiver Amount: $ 5,515.14 (10% after year 1)
Amount remaining: $49,636.24
$49,636.24 x [((1+.06)/(1+.065+.005)) ^(1,297/365)-1] = -$1,628.83
resulting in an adjustment to the amount you withdraw as follows:
$49,636.24 - $1,628.83 + $5,515.14 = $53,522.55
EXAMPLE 2: FIVE-YEAR GUARANTEE PERIOD; DECREASE IN TREASURY RATE
Assuming the same facts as 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:
Contract value at 6/13/1999 (529 days from the day your contract was
issued):
$50,000 x [1.07^(529/365)] = $55,151.38
MVA Waiver Amount: $5,515.14 (10% after 1 year)
Amount remaining: $49,636.24
$49,636.24 x [( (1+.06)/(1+.050+.005)) ^(1,297/365)-1] = $840.99
resulting in an adjustment to the amount you withdraw as follows:
$49,636.24 + $840.99 + $5,515.14 = $55,992.37
(contingent deferred sales charges may also apply)
- --------------------------------------------------------------------------------
If you would like a free copy of the Statement of Additional Information
dated May 1, 1998, 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
Please send me a free copy of the Statement of Additional Information for the
Great American Reserve Variable Annuity Account F fixed and variable annuity
at the following address:
Name:
--------------------------------------------
Mailing Address:
---------------------------------
-------------------------------------------------
Sincerely,
-----------------------------------
(Signature)
- --------------------------------------------------------------------------------
[BACK COVER]
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 to Form S-1 (File No. 333-40301) filed February 3, 1998.
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 opinions 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 by and between American
Century Investment Services, Inc. and Great American Reserve
Insurance Company.****
(vii) Form of Fund Participation Agreement by and among Great American
Reserve Insurance Company, Berger Institutional Products Trust
and BBOI Worldwide LLC.****
21. Company Organizational Chart++
23.(i) Consent of Counsel
23.(ii) Consent of Independent Accountants
24. Power of Attorney++
* Incorporated by reference to Registrant's Form S-1 filed electronically
on November 14, 1997.
++Incorporated by reference to Registrant's Pre-Effective Amendment No. 1
to Form S-1 filed electronically on February 3, 1998.
** 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.
**** Incorporated by reference to Great American Reserve Variable
Annuity Account F, Pre-Effective Amendment No.1 to Form N-4, File
Nos. 333-40309/811-08483, filed electronically on February 3, 1998.
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 this 16th day of April, 1998.
GREAT AMERICAN RESERVE
INSURANCE COMPANY
Registrant
By: /S/ THOMAS J. KILIAN
-------------------------------
Thomas J. Kilian
Attest:
/S/ JOHN J. SABL
- ------------------------
John J. Sabl
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>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/S/ NGAIRE E. CUNEO 4/16/98
- ---------------------- Director ---------
Ngaire E. Cuneo
/S/ THOMAS J. KILIAN Director and President 4/16/98
- ------------------------- (Principal Executive -------
Thomas J. Kilian Officer)
/S/ STEPHEN C. HILBERT 4/16/98
- ---------------------- Director and Chairman -------
Stephen C. Hilbert of the Board
/S/ ROLLIN M. DICK 4/16/98
- ---------------------- Director, Executive Vice -------
Rollin M. Dick President and Chief Financial
Officer (Principal Financial
and Accounting Officer)
/S/ JOHN J. SABL Director, Executive Vice 4/16/98
- ---------------------- President, General Counsel -------
John J. Sabl and Secretary
</TABLE>
INDEX TO EXHIBITS
EXHIBIT PAGE
5 Opinion of Counsel re: Legality
21 Company Organizational Chart
23(i) Consent of Counsel
23(ii) Consent of Independent Accountants
Blazzard, Grodd & Hasenauer, P.C.
943 Post Road East
Westport, CT 06880
(203) 226-7866
April 24, 1998
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 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/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/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.
April 24, 1998
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in Post-Effective Amendment No. 1 to the
Registration Statement on Form S-1 (File No. 333-40301) of our report dated
April 20, 1998, on our audits of the financial statements of Great American
Reserve Insurance Company. We also consent to the reference to our Firm under
the caption "Independent Accountants."
/S/ COOPERS & LYBRAND L.L.P.
-----------------------------
Coopers & Lybrand L.L.P.
Indianapolis, Indiana
April 21, 1998
