P R O F I L E CONSECO
Of The Fixed And February 12, 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 36
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 36 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.
1
<PAGE>
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 options. 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
- --------------------------
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 International
o VP Value
o VP Income & Growth
2
<PAGE>
P R O F I L E
Investment
Options
(Continued)
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
- -----------------------
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
JANUS ASPEN SERIES
MANAGED BY
JANUS CAPITAL CORPORATION
- -------------------------
o Aggressive Growth Portfolio
o Growth Portfolio Worldwide
o 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
NEUBERGER & BERMAN ADVISERS
MANAGEMENT TRUST
MANAGED BY
NEUBERGER & BERMAN
MANAGEMENT INCORPORATED
- -----------------------
o Limited Maturity Bond Portfolio
o Partners Portfolio
MITCHELL HUTCHINS SERIES TRUST
MANAGED BY
MITCHELL HUTCHINS
ASSET MANAGEMENT INC.
- ---------------------
o Growth and Income Portfolio
STRONG OPPORTUNITY FUND II
MANAGED BY
STRONG CAPITAL
MANAGEMENT, INC.
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 Hard Assets Fund
o Worldwide Bond Fund
o Worldwide Emerging Markets Fund
o Worldwide Real Estate Fund
Depending upon market conditions, you can make or lose money in any of these
portfolios.
3
<PAGE>
P R O F I L E
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 0% 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.
4
<PAGE>
<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% 1.09% 2.59% $89 $289
Alger American MidCap Growth 1.50% .84% 2.34% $86 $264
Alger American Small Capitalization 1.50% .88% 2.38% $87 $268
- --------------------------------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
- --------------------------------------------------------------------------------------------------------
VP International 1.50% 1.50% 3.00% $93 $328
VP Value 1.50% 1.00% 2.50% $88 $280
VP Income & Growth 1.50% .70% 2.20% $85 $250
- --------------------------------------------------------------------------------------------------------
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% .99% 2.49% $88 $279
- --------------------------------------------------------------------------------------------------------
DREYFUS STOCK INDEX FUND
- --------------------------------------------------------------------------------------------------------
1.50% .30% 1.80% $81 $208
- --------------------------------------------------------------------------------------------------------
FEDERATED INSURANCE SERIES
- --------------------------------------------------------------------------------------------------------
Federated High Income Bond II 1.50% .80% 2.30% $86 $260
Federated International Equity II 1.50% 1.25% 2.75% $90 $305
Federated Utility II 1.50% 85% 2.35% $86 $265
- --------------------------------------------------------------------------------------------------------
JANUS ASPEN TRUST
- --------------------------------------------------------------------------------------------------------
Aggressive Growth 1.50% .76% 2.26% $85 $256
Growth 1.50% .69% 2.19% $85 $249
Worldwide Growth 1.50% .80% 2.30% $86 $260
- -------------------------------------------------------------------------------------------------------
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% .59% 2.09% $84 $239
</TABLE>
5
<PAGE>
<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>
- --------------------------------------------------------------------------------------------------------
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
- --------------------------------------------------------------------------------------------------------
Limited Maturity Bond 1.50% .78% 2.28% $86 $258
Partners 1.50% . 95% 2.48% $87 $275
- -------------------------------------------------------------------------------------------------------
MITCHELL HUTCHINS SERIES TRUST
- --------------------------------------------------------------------------------------------------------
Growth and Income 1.50% 1.58% 3.08% $94 $336
- --------------------------------------------------------------------------------------------------------
STRONG OPPORTUNITY FUND II
- --------------------------------------------------------------------------------------------------------
1.50% 1.17% 2.67% $90 $297
- --------------------------------------------------------------------------------------------------------
STRONG VARIABLE INSURANCE FUND, INC.
- --------------------------------------------------------------------------------------------------------
Growth II 1.50% 1.20% 2.70% $90 $300
- --------------------------------------------------------------------------------------------------------
VAN ECK WORLDWIDE INSURANCE TRUST
- --------------------------------------------------------------------------------------------------------
Worldwide Hard Assets 1.50% 1.23% 2.73% $90 $303
Worldwide Bond 1.50% 1.16% 2.66% $89 $296
Worldwide Emerging Markets 1.50% 1.32% 2.82% $91 $311
Worldwide Real Estate 1.50% 1.25% 2.75% $90 $305
</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
<PAGE>
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.
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 your 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 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 contingent deferred sales charge period. Withdrawals from an 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 the date of this
prospectus, 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. The death benefit will be the greater of: (1) the value of your
Contract; or (2) prior to age 90, 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.
7
<PAGE>
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.
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 Great American Reserve will 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
<PAGE>
CONSECO
Conseco
Advantage
Fixed and Variable Annuity
February 12, 1998
Prospectus
Great American Reserve
Variable Account F
ISSUED BY GREAT AMERICAN RESERVE INSURANCE COMPANY
This cover is not part of the prospectus
<PAGE>
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 40 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 36 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
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 International
VP Value
VP Income & Growth
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
FEDERATED INSURANCE SERIES
MANAGED BY FEDERATED ADVISERS
Federated High Income Bond Fund II
Federated International Equity Fund II
Federated Utility Fund II
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
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
MANAGED BY NEUBERGER & BERMAN MANAGEMENT INCORPORATED
Limited Maturity Bond Portfolio
Partners Portfolio
MITCHELL HUTCHINS SERIES TRUST
MANAGED BY MITCHELL HUTCHINS ASSET MANAGEMENT INC.
Growth and Income Portfolio
STRONG OPPORTUNITY FUND II
MANAGED BY STRONG CAPITAL MANAGEMENT, INC.
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 Hard Assets Fund
Worldwide Bond Fund
Worldwide Emerging Markets Fund
Worldwide Real Estate Fund
1
<PAGE>
================================================================================
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 February 12, 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 website
(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 47 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.
February 12, 1998
================================================================================
TABLE OF CONTENTS
PAGE
Index of Special Terms................................................... 3
Fee Table................................................................ 3
1. The Annuity Contract..................................................... 7
2. Annuity Payments (The Income Phase)...................................... 7
3. Purchase................................................................. 8
Purchase Payments........................................................ 8
Allocation of Purchase Payments.......................................... 8
Accumulation Units....................................................... 8
4. Investment Options....................................................... 9
Investment Portfolios.................................................... 9
The Fixed Account........................................................ 10
The MVA Option........................................................... 10
Transfers................................................................ 10
Dollar Cost Averaging Program............................................ 11
Rebalancing Program...................................................... 11
Asset Allocation Program................................................. 11
Sweep Program............................................................ 11
Voting Rights............................................................ 11
Substitution............................................................. 11
5. Expenses................................................................. 11
Insurance Charges........................................................ 11
Contract Maintenance Charge.............................................. 12
Contingent Deferred Sales Charge......................................... 12
Reduction or Elimination of the
Contingent Deferred Sales Charge........................................ 12
Transfer Fee............................................................. 12
Premium Taxes............................................................ 12
Income Taxes............................................................. 12
Investment Portfolio Expenses............................................ 12
6. Taxes.................................................................... 12
Annuity Contracts in General............................................. 12
Qualified and Non-Qualified Contracts ................................... 13
Withdrawals--Non-Qualified Contracts..................................... 13
Withdrawals--Qualified Contracts......................................... 13
Diversification.......................................................... 13
Investor Control......................................................... 13
7. Access to Your Money..................................................... 13
Systematic Withdrawal Program............................................ 13
Suspension of Payments or Transfers...................................... 14
8. Performance.............................................................. 14
9. Death Benefit............................................................ 14
Upon Your Death.......................................................... 14
Death of Annuitant....................................................... 14
10 Other Information ....................................................... 14
Great American Reserve................................................... 14
The Separate Accounts.................................................... 14
Distributor.............................................................. 15
Ownership................................................................ 15
Beneficiary.............................................................. 15
Assignment............................................................... 15
Additional Information................................................... 15
Selected Historical Financial
Information of Great American
Reserve Insurance Company .............................................. 15
Business of Great American Reserve
Insurance Company ...................................................... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations of Great American
Reserve ................................................................ 22
Directors and Executive Officers......................................... 29
Executive Compensation................................................... 29
Independent Accountants.................................................. 29
Legal Opinions........................................................... 29
Financial Statements..................................................... 29
Table of Contents of the Statement
of Additional Information .............................................. 47
Appendix A--Market Value Adjustment ..................................... 47
2
<PAGE>
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 ..................................................... 7
Accumulation Unit ...................................................... 8
Annuitant .............................................................. 7
Annuity Date ........................................................... 7
Annuity Options ........................................................ 7
Annuity Payments ....................................................... 8
Annuity Unit ........................................................... 8
Beneficiary ............................................................ 15
Contract ............................................................... 7
Fixed Account .......................................................... 7
Guarantee Period ....................................................... 10
Income Phase ........................................................... 7
Investment Portfolios .................................................. 8
Joint Owner ............................................................ 15
MVA Option ............................................................. 10
Non-Qualified .......................................................... 13
Owner .................................................................. 15
Purchase Payment ....................................................... 8
Qualified .............................................................. 13
Tax-deferral ........................................................... 13
================================================================================
FEE TABLE
OWNER TRANSACTION EXPENSES
Contingent Deferred Sales Charge (as a percentage of purchase payments) (See
Note 2 under "Explanation of Fee Table and Example," page 7)
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 7")
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 during the income phase.
CONTRACT MAINTENANCE CHARGE
(see Note 4 under "Explanation of Fee Table and Examples, page 7")
$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%
3
<PAGE>
================================================================================
INVESTMENT PORTFOLIO EXPENSES
(as a percentage of the average daily net assets of an investment portfolio)
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER EXPENSE TOTAL
REIMBURSEMENT ANNUAL
MANAGEMENT 12b-1 FOR CERTAIN PORTFOLIO
FEES FEES PORTFOLIOS) EXPENSES
- ---------------------------------------------------------------------------------------------------------
<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% -- 0.24% 1.09%
Alger American MidCap Growth Portfolio ..................... 0.80% -- 0.04% 0.84%
Alger American Small Capitalization Portfolio .............. 0.85% -- 0.03% 0.88%
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 (5) .................... 0.00% -- 1.20% 1.20%
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC. (6) 0.75% -- 0.24% 0.99%
DREYFUS STOCK INDEX FUND (7) ............................... .245% -- .055 0.30%
FEDERATED INSURANCE SERIES
Federated High Income Bond Fund II (8) ..................... 0.01% -- 0.79% 0.80%
Federated International Equity Fund II (8) ................. 0.00% -- 1.25% 1.25%
Federated Utility Fund II (8) .............................. 0.24% -- 0.61% 0.85%
JANUS ASPEN SERIES
Aggressive Growth Portfolio (9) ............................ 0.72% -- 0.04% 0.76%
Growth Portfolio (9) ....................................... 0.65% -- 0.04% 0.69%
Worldwide Growth Portfolio (9) ............................. 0.66% -- 0.14% 0.80%
LAZARD RETIREMENT SERIES, INC ..............................
Lazard Retirement Equity Portfolio (10) .................... 0.75% 0.25% 0.50% 1.50%
Lazard Retirement Small Cap Portfolio (10) ................. 0.75% 0.25% 0.50% 1.50%
LORD ABBETT SERIES FUND, INC ...............................
Growth and Income Portfolio (11) ........................... 0.50% 0.07% 0.02% 0.59%
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST (12)
Limited Maturity Bond Portfolio ............................ 0.65% -- 0.13% 0.78%
Partners Portfolio ......................................... 0.84% -- 0.11% 0.95%
MITCHELL HUTCHINS SERIES TRUST
Growth and Income Portfolio ................................ 0.70% -- 0.88% 1.55%
STRONG OPPORTUNITY FUND II ................................. 1.00% -- 0.17% 1.17%
STRONG VARIABLE INSURANCE FUNDS, INC .......................
Growth Fund II (13) ........................................ 1.00% -- 0.20% 1.20%
VAN ECK WORLDWIDE INSURANCE TRUST (14)
Worldwide Hard Assets Fund ................................. 1.00% -- 0.23% 1.23%
Worldwide Bond Fund ........................................ 1.00% -- 0.16% 1.16%
Worldwide Emerging Markets Fund ............................ 1.00% -- 0.32% 1.32%
Worldwide Real Estate Fund ................................. 0.00% -- 0.00% 0.00%
</TABLE>
4
<PAGE>
GREAT AMERICAN RESERVE
1998 Account F
Individual and Group Annuity
================================================================================
(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 1996 would have totaled: 0.95% for the Asset
Allocation Portfolio; 0.81% for the Common Stock Portfolio; 0.77% for the
Corporate Bond Portfolio; 0.91% for the Government Securities Portfolio; and
0.58% for the Money Market Portfolio.
(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 "Other Expenses" includes
.03% of interest expense.
(4) Berger Associates, the Fund's investment adviser, has voluntarily
agreed to waive its advisory fee and has voluntarily reimbursed the Fund 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% 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 and the Berger IPT--Small Company
Growth Fund would have been .75%, .75% and .90%, respectively, and their Total
Annual Portfolio Expenses would have been 7.69%, 7.70% and 8.57%, respectively.
(5) Based on estimated expenses for the first year of operations of the
Berger/BIAM IPT--International Fund, after fee waivers and expense
reimbursements. BBOI Worldwide LLC, the Fund's investment adviser, has
voluntarily agreed to waive its advisory fee and expects to voluntarily
reimburse the Fund 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 the
Berger/BIAM IPT--International Fund exceed 1.20% of the Fund's average daily net
assets. Absent the voluntary waiver and reimbursement, the Management Fee for
the Berger/BIAM IPT--International Fund would be 0.90%, and its Total Expenses
are estimated to be 8.96%.
(6) In 1996, The Dreyfus Corporation waived .03% of its management fee. The
Dreyfus Corporation does not intend to waive a portion of its management fee for
fiscal year 1997.
(7) The Dreyfus Corporation, the Fund's manager, has voluntarily agreed
until such time as it gives investors 180 days' notice to the contrary, to
reimburse all or a portion of its advisory fee to the extent that the total
expenses of the Fund (excluding brokerage commission, transactions fees and
extraordinary expenses) are in excess of .40 of 1% of the value of the Fund's
average daily net assets.
(8) In the absence of a voluntary waiver by Federal Advisers, the Funds'
investment adviser, the Management Fee and Total Annual Portfolio Expenses would
have been 0.60% and 1.39%, respectively, for High Income Bond and 0.75% and
1.36%, respectively, for Utility. Absent a voluntary waiver of the management
fee and the voluntary reimbursement of certain other operating expenses by
Federal Advisers, the Management Fee and Total Annual Portfolio Expenses for
International Equity would have been 1.00% and 4.30%, respectively.
(9) 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 1996
would have totaled: 0.83% for Aggressive Growth; 0.83% for Growth; and 0.91% for
Worldwide Growth.
(10) 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.
(11) 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. As of May 1, 1997, no payments had been made
under the 12b-1 plan. For the year ending December 31, 1997, the 12b-1 fees were
estimated to be .07%. The examples below for this Portfolio reflect the
estimated 12b-1 fees.
(12) 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.
(13) Strong Capital Management, Inc., the investment advisor of the Strong
Growth Fund II, has voluntarily agreed to cap the Fund's total operating
expenses at 1.20%. The Advisor 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.
(14) All figures are annualized. Expenses of 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 0.32% and Total Expenses
would be 1.32%. 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.
5
<PAGE>
================================================================================
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) $89 (a) $133
(b) $26 (b) $ 80
(c) $89 (c) $133
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) $ 73
(c) $87 (c) $127
AMERICAN CENTURY VARIABLE
PORTFOLIOS, INC
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
VP Income & Growth (a) $85 (a) $121
(b) $22 (b) $ 68
(c) $85 (c) $121
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) $88 (a) $130
(b) $25 (b) $ 77
(c) $88 (c) $130
DREYFUS STOCK INDEX FUND
(a) $81 (a) $109
(b) $18 (b) $ 56
(C) $81 (C) $109
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) $138
(b) $28 (b) $ 84
(c) $90 (c) $138
Federated Utility II (a) $86 (a) $126
(b) $24 (b) $ 72
(c) $86 (c) $126
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) $86 (a) $124
(b) $23 (b) $ 71
(c) $86 (c) $124
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) $84 (a) $118
(b) $21 (b) $ 65
(c) $84 (c) $118
NEUBERGER & BERMAN ADVISERS
MANAGEMENT TRUST
Limited Maturity Bond (a) $86 (a) $124
(b) $23 (b) $ 70
(c) $86 (c) $124
Partners (a) $87 (a) $129
(b) $25 (b) $ 75
(c) $87 (c) $129
MITCHELL HUTCHINS SERIES
TRUST
Growth and Income (a) $94 (a) $148
(b) $31 (b) $ 94
(c) $94 (c) $148
STRONG OPPORTUNITY FUND II (a) $90 (a) $136
(b) $27 (b) $ 82
(c) $90 (c) $136
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 Hard Assets (a) $90 (a) $137
(b) $27 (b) $ 84
(c) $90 (c) $137
Worldwide Bond (a) $89 (a) $135
(b) $27 (b) $ 82
(c) $89 (c) $135
Worldwide Emerging Markets (a) $91 (a) $140
(b) $28 (b) $ 86
(c) $91 (c) $140
Worldwide Real Estate (a) $78 (a) $100
(b) $15 (b) $ 47
(c) $78 (c) $100
6
<PAGE>
GREAT AMERICAN RESERVE
1998 Account F
Individual and Group Annuity
================================================================================
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.
As of the date of this prospectus, the sale of the contracts had not begun
and the investment portfolios did not have any assets. Therefore, no condensed
financial information is presented.
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 36 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.
7
<PAGE>
================================================================================
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 IRA (Individual
Retirement Annuity) 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 MVA option is $2,000. We reserve
the right to change this amount in the future.
If you change your mind about owning this 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. 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
accumu-
8
<PAGE>
GREAT AMERICAN RESERVE
1998 Account F
Individual and Group Annuity
================================================================================
lation 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 36 investment portfolios which are briefly described
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. 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 International
VP Value
VP Income & Growth
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.
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
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
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
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
STRONG OPPORTUNITY FUND II
Strong Opportunity Fund II is a mutual fund managed by Strong Capital
Management, Inc.
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 Hard Assets Fund
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Worldwide Bond Fund
Worldwide Emerging Markets 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 36
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
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GREAT AMERICAN RESERVE
1998 Account F
Individual and Group Annuity
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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 21/2 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 591/2, 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 contracts 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.
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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%
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 of 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.
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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 591/2; (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
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).
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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 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.
The amount of the death benefit will be the greater of:
(1) the value of your contract; or (2) if under age 90, 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 charge.
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.
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.
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
14
<PAGE>
GREAT AMERICAN RESERVE
1998 Account F
Individual and Group 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 INSURANCE
COMPANY
The selected historical financial information set forth below was derived
from the unaudited and audited financial statements of Great American Reserve.
Great American Reserve's unaudited balance sheet at September 30, 1997, and
unaudited statements of operations, shareholder's equity and cash flows for the
nine months ended September 30, 1997 and the nine months ended September 30,
1996 are included elsewhere herein. Great American Reserve's balance sheets at
December 31, 1996 and 1995, and the statements of operations, shareholder's
equity and cash flows for the year ended December 31, 1996, the four months
ended December 31, 1995, the eight months ended August 31, 1995, and the year
ended December 31, 1994, and the notes thereto were audited by Coopers & Lybrand
L.L.P., independent accountants, and are included elsewhere herein. The selected
historical financial information set forth below should be read in conjunction
with the financial statements and notes of Great American Reserve and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Great American Reserve" appearing elsewhere herein. The financial
data for all periods reflects the effect of the December 31, 1994, merger of
Jefferson National Life into the Company. This merger has been accounted for as
a pooling of interests; therefore, the assets and liabilities of Jefferson
National have been combined with Great American Reserve at their book values and
the financial data is presented as if the merger had occurred prior to the
periods presented.
15
<PAGE>
================================================================================
<TABLE>
<CAPTION>
PRIOR BASIS (A)
---------------------------------------
NINE NINE FOUR EIGHT
MONTHS MONTHS YEAR MONTHS MONTHS YEAR ENDED
ENDED ENDED ENDED ENDED ENDED DECEMBER 31,
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, AUGUST 31, -----------------------------
1997 1996 1996 1995 1995 1994 1993 1992(b)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Insurance policy income .......... $ 57.4 $ 61.4 $ 81.4 $ 31.8 $ 60.5 $ 98.6 $ 108.2 $ 117.6
Net investment income ............ 155.3 156.5 218.4 74.2 136.4 187.9 214.5 189.0
Net investment gains ............. 6.6 0.2 2.7 12.5 7.3 .2 32.4 33.0
Total revenues ................... 219.3 218.1 302.5 118.5 204.2 286.7 355.1 339.6
Interest expense on notes payable -- -- -- -- -- -- -- 13.9
Total benefits and expenses ...... 170.8 186.2 261.4 92.7 159.5 225.2 260.4 272.3
Income before income taxes and
extraordinary charge ........... 48.5 31.9 41.1 25.8 44.7 61.5 94.7 67.3
Extraordinary charge on
extinguishment of debt, net
of tax ......................... -- -- -- -- -- -- -- 6.9
Net income ....................... 31.0 19.9 25.7 16.1 28.2 38.8 54.5 36.4
Preferred dividends .............. -- -- -- -- -- -- -- .4
Net income applicable to
common stock ................... 31.0 19.9 25.7 16.1 28.2 38.8 54.5 36.0
BALANCE SHEET DATA--PERIOD END
Investments ...................... $2,572.6 $2,414.0 $2,382.8 $2,484.8 $2,217.9 $2,473.8 $2,134.8
Total assets ..................... 2,860.1 2,731.5 2,680.5 2,756.8 2,625.0 2,751.1 2,443.3
Insurance liabilities ............ 1,858.2 1,979.6 1,957.5 2,039.1 2,150.4 2,122.0 1,956.6
Total liabilities ................ 2,454.3 2,349.6 2,283.6 2,314.2 2,260.1 2,302.6 2,074.4
Shareholder's equity ............. 405.8 381.9 396.9 442.6 364.9 448.5 368.9
</TABLE>
- --------------------------------------------------------------
(a) Financial data for the period subsequent to August 31, 1995, reflect the
adoption of a new basis of accounting under the "push down" method as a
result of the Conseco Acquisition. Accordingly, data prior to August 31,
1995, may not be comparable with subsequent data. Significant accounting
adjustments recorded as a result of the adoption of the new basis include:
(i) an increase of $59.0 million to cost of policies purchased; (ii) a
reduction of $27.0 million to cost of policies produced; (iii) a reduction
of $15.1 million to goodwill; (iv) an increase of $1.2 million to insurance
liabilities; and (v) the establishment of a deferred income tax liability
to reflect the income tax effects of all of the accounting adjustments.
(b) Financial data for periods prior to the IPO of CCP include the accounts of
CCP subsidiaries, consisting principally of debt and preferred stock which
were used to acquire Great American Reserve and which were expected to be
repaid from future income of Great American Reserve. Subsequent to the IPO
and related refinancing transactions, the notes payable of CCP and its
subsidiaries were no longer expected to be repaid solely from the net
income of Great American Reserve. Accordingly, it was no longer appropriate
to push down the accounts of CCP subsidiaries into Great American Reserve's
consolidated financial statements. The impact of the July 21, 1992, capital
restructuring is reflected in Great American Reserve's 1992 consolidated
statements of operations and shareholder's equity. As a result of no longer
pushing down accounts of CCP subsidiaries into Great American Reserve's
consolidated financial statements, the 1992 consolidated statement of
shareholder's equity reflects: (i) the impact of removing the accumulated
earnings of the CCP subsidiaries, excluding such earnings from their
investment in Great American Reserve, as a dividend distribution; (ii) the
impact of removing the capital accounts of the subsidiaries as a reduction
of contributed capital, and (iii) the impact of removing the assets and
liabilities of the subsidiaries as a contribution of capital to Great
American Reserve, which became Great American Reserve's common stock and
additional paid-in capital.
16
<PAGE>
GREAT AMERICAN RESERVE
1998 Account F
Individual and Group Annuity
================================================================================
BUSINESS OF GREAT AMERICAN RESERVE INSURANCE COMPANY
BACKGROUND
Great American Reserve Insurance Company ("Great American Reserve"), with
total assets of $2.9 billion at September 30, 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, a
relatively small number of in-house marketing personnel develop, direct and
support the external distribution channels through which Great American
Reserve's products are marketed.
PRODUCTS. Great American Reserve's collected premiums (net of reinsurance
ceded) by product categories for the nine months ended September 30, 1997 and
1996, and the years ended December 31, 1996 and 1995, are set forth below
(dollars in millions).
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
-----------------------------------------------
FIRST YEAR RENEWAL TOTAL
PREMIUMS PREMIUMS PREMIUMS
--------------- -------------- --------------
PRODUCTS AMOUNT % AMOUNT % AMOUNT %
======================================================================================
<S> <C> <C> <C> <C> <C> <C>
Single premium immediate annuities.. $ 9.2 9% $ -- --% $ 9.2 5%
Flexible premium deferred annuities. 12.4 11 21.5 22 33.9 16
Variable annuities.................. 76.5 71 32.9 33 109.4 53
- -------------------------------------------------------------------------------------
Total annuities................... 98.1 91 54.4 55 152.5 74
Individual life..................... 1.1 1 31.2 32 32.3 16
Accident and health and other....... 9.2 8 12.6 13 21.8 10
- -------------------------------------------------------------------------------------
Total collected premiums.......... $108.4 100% $98.2 100% 206.6 100%
=====================================================================================
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
----------------------------------------------
FIRST YEAR RENEWAL TOTAL
PREMIUMS PREMIUMS PREMIUMS
--------------- -------------- -------------
PRODUCTS AMOUNT % AMOUNT % AMOUNT %
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Single premium immediate annuities.. $14.2 24% $-- --% $ 14.2 9%
Flexible premium deferred annuities. 10.8 18 20.7 21 31.5 20
Variable annuities.................. 25.2 42 31.6 31 56.8 35
- -------------------------------------------------------------------------------------
Total annuities................... 50.2 84 52.3 52 102.5 64
Individual life..................... 1.6 3 34.4 34 36.0 22
Accident and health and other....... 7.8 13 14.3 14 22.1 14
- -------------------------------------------------------------------------------------
Total collected premiums.......... $59.6 100% $101.0 100% $160.6 100%
=====================================================================================
</TABLE>
17
<PAGE>
================================================================================
<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.. $17.1 21% $-- --% $ 17.1 8%
Flexible premium deferred annuities. 15.4 18 27.9 21 43.3 20
Variable annuities.................. 37.9 45 43.6 32 81.5 37
- -------------------------------------------------------------------------------------
Total annuities................... 70.4 84 71.5 53 141.9 65
Individual life..................... 2.1 3 45.0 33 47.1 22
Accident and health and other....... 11.1 13 18.2 14 29.3 13
Guaranteed investment contracts..... .1 -- -- -- .1 --
- -------------------------------------------------------------------------------------
Total collected premiums.......... $83.7 100% $134.7 100% $218.4 100%
=====================================================================================
<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.. $29.9 38% $ -- --% $ 29.9 14%
Flexible premium deferred annuities. 16.3 20 23.6 17 39.9 18
Variable annuities.................. 17.2 22 40.1 30 57.3 27
- -------------------------------------------------------------------------------------
Total annuities................... 63.4 80 63.7 47 127.1 59
Individual life..................... 1.8 2 49.3 36 51.1 24
Accident and health and other....... 11.8 15 22.6 17 34.4 16
Guaranteed investment contracts .... 2.4 3 -- -- 2.4 1
- -------------------------------------------------------------------------------------
Total collected premiums.......... $79.4 100% $135.6 100% $215.0 100%
=====================================================================================
</TABLE>
ANNUITIES
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 both career agents and
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 inforce business
and expense management.
Single Premium Immediate Annuities. SPIAs accounted for $9.2 million or 5
percent, of Great American Reserve's total premiums collected in the nine months
ended September 30, 1997 and $14.2 million, or 9 percent of premiums collected
in the nine months ended September 30, 1996. SPIAs accounted for $17.1 million,
or 8 percent, of Great American Reserve's total premiums collected in 1996 and
$29.9 million, or 14 percent of premiums collected in 1995. Great American
Reserve's SPIAs are designed to provide a series of periodic payments for a
fixed period of time or for life, according to the policyholder's choice at the
time of issue. Once the payments have begun, the amount, frequency and length of
time for which they are payable are fixed. SPIAs often are purchased by persons
at or near retirement age who desire a steady stream of payments over a future
period of years. The single premium is often the payout from a terminated
annuity contract. The implicit interest rate on SPIAs is based on market
conditions when the policy is issued. SPIA collected premiums have decreased
primarily as a result of decreases in SPIAs purchased with the proceeds of
redeemed annuity contracts.
Flexible Premium Deferred Annuities. FPDAs accounted for $33.9 million, or
16 percent, of Great American Reserve's premiums collected in the nine months
ended September 30, 1997 and $31.5 million, or 20 percent, of premiums collected
in the nine months ended September 30, 1996. FPDAs accounted for $43.3 million,
or 20 percent, of Great American Reserve's premiums collected in 1996 and $39.9
million, or 18 percent, of premiums collected in 1995. Great American Reserve's
FPDAs allow more than one premium payment, usually on a salary reduction basis.
FPDAs are marketed through networks of educator market specialists primarily to
teachers and employees of not-for-profit institutions as tax-qualified
salary-reduction retirement programs as permitted under Section 403(b) of the
Internal Revenue Code. A tax-qualified annuity purchased under Section 403(b) is
similar to contributions made to a 401(k) plan, but with different (and somewhat
more generous) rules on the maximum amount of current income which may be
contributed by the participant on a pre-tax basis. Generally, a participant may
elect to defer (through the purchase of a tax-qualified annuity under a 403(b)
plan) a percentage of includible compensation limited by statute and subject to
a maximum of $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 $109.4 million, or 53
percent, of premiums collected in the nine months ended September 30, 1997 and
$56.8 million, or 35 percent, of premiums collected in the nine months ended
September 30, 1996.
18
<PAGE>
GREAT AMERICAN RESERVE
1998 Account F
Individual and Group Annuity
================================================================================
Variable annuities accounted for $81.5 million, or 37 percent, of Great
American Reserve's total premiums collected in 1996 and $57.3 million, or 27
percent, of premiums collected in 1995. Great American Reserve markets variable
annuities primarily to the educator market. Variable annuities, sold on a single
or flexible premium basis, differ from fixed annuities in that the original
principal value may fluctuate depending on the performance of assets allocated
pursuant to various investment options chosen by the contract owner. Variable
annuities offer contract owners a fixed interest option or a variable rate of
return based upon the specific investment portfolios into which premiums may be
directed. The popularity of such annuities has increased recently as a result of
the desire of investors to invest in common stocks. In addition, in 1996, Great
American Reserve began to offer more 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 $32.3 million, or 16 percent, of
premiums collected in the nine months ended September 30, 1997 and $36.0
million, or 22 percent, of premiums collected in the nine months ended September
30, 1996. Individual life products accounted for $47.1 million, or 22 percent,
of Great American Reserve's premiums collected in 1996 and $51.1 million, or 24
percent, of premiums collected in 1995. Although Great American Reserve no
longer actively markets these products, it continues to have a substantial block
of in-force policies on which renewal premiums are collected. These products
were sold through professional independent producers.
Interest-sensitive life insurance products (including universal life
products) provide whole life insurance with adjustable rates of return related
to current interest rates. The principal differences between Great American
Reserve's universal life products and other interest-sensitive life insurance
products are policy provisions affecting the amount and timing of premium
payments. Universal life policyholders may vary the frequency and size of their
premium payments, although policy benefits may also fluctuate according to such
payments. Premium payments under the other interest-sensitive policies may not
be varied by the policyholders and, as a result, are designed to reduce the
administrative costs typically associated with monitoring universal life premium
payments and policy benefits.
Individual life products also include whole life and term life products.
Under whole life policies, which were the standard industry product prior to the
advent of universal life insurance, the policyholder generally pays a level
premium over the policyholder's expected lifetime, which exceeds the premium on
comparable term insurance when the policyholder is younger but is less as the
policyholder grows older. These policies combine insurance protection with a
savings component that increases in amount gradually over the life of the
policy. The policyholder may borrow against the savings generally at a rate of
interest lower than that available from other lending sources. The policyholder
may also choose to surrender the policy and receive the accumulated cash value
rather than continuing the insurance protection. Term life products offer pure
insurance protection for a specified period of time-typically one, five, 10 or
20 years.
ACCIDENT AND HEALTH AND OTHER
Accident and health and other products accounted for $21.8 million, or 10
percent, of premiums collected in the nine months ended September 30, 1997 and
$22.1 million, or 14 percent, of premiums collected in the nine months ended
September 30, 1996. Accident and health and other products accounted for $29.3
million, or 13 percent, of Great American Reserve's total premiums collected in
1996 and $34.4 million, or 16 percent, of premiums collected in 1995. Great
American Reserve offers group dental, group disability, blanket student accident
and a limited amount of other health insurance products, primarily through
independent market specialists. Great American Reserve markets accident and
health policies primarily because it believes that offering a broad range of
products is important to successfully market life insurance and annuity
products, although such accident and health policies are also designed to be
profitable. Group dental coverage provides a range of benefits for dental care
and related procedures. Disability products provide defined monthly benefits up
to specified levels in the case of disability. Student accident products provide
limited supplemental reimbursement coverage to students for accidents and
sickness. Great American Reserve's health business is subject to the risk that
its claims experience deviates from the assumptions used in setting premium
rates. However, Great American Reserve has the right to change rates to correct
for adverse experience every six months on many group policies and annually on
all others. Experience may be adversely affected by inflationary trends in the
costs of medical treatment, competition-driven business cycles and the extent to
which insureds utilize covered services.
Great American Reserve collected premiums less than $.1 million in the nine
months ended September 30, 1997 and 1996, from guaranteed investment contracts
issued as investment options for qualified retirement plans maintained by
Conseco. Great American Reserve collected premiums of $.1 million in 1996 and
$2.4 million in 1995, from guaranteed investment contracts issued as investment
options for qualified retirement plans maintained by Conseco.
INVESTMENTS
Conseco Capital Management, Inc. ("CCM"), a registered investment adviser
wholly owned by Conseco, manages the investment portfolio of Great American
Reserve. CCM's investment philosophy is to maintain a largely investment-grade
fixed-income portfolio, provide adequate liquidity for expected liability
durations and other requirements and maximize total return through active
investment management. Investment activities are an integral part of Great
American Reserve's business, since investment income is a significant component
of Great American Reserve's total revenues. Profitability is significantly
affected by spreads between interest yields on investments and rates credited on
insurance liabilities. Although substantially all credited rates on flexible
premium deferred annuities may be changed annually, changes in crediting rates
may not be sufficient to maintain targeted investment spreads in all economic
and market environments. In addition, competition and other factors, including
the impact of the level of surrenders and withdrawals, may limit Great American
Reserve's ability to adjust or to maintain crediting rates at levels necessary
to avoid narrowing of spreads under certain market conditions.
For information regarding the composition and diversification of the
investment portfolio of Great American Reserve, see "Management's Discussion and
Analysis of Consolidated Financial
19
<PAGE>
================================================================================
Condition and Results of Operations of Great American Reserve--Investments" and
note 3 to Great American Reserve's financial statements for the year ended
December 31, 1996.
COMPETITION
Great American Reserve operates in a highly competitive environment. The
life insurance industry consists of a large number of insurance companies, many
of which are substantially larger and have greater financial resources, broader
and more diversified product lines and larger staffs than those of Great
American Reserve. An expanding number of banks, securities brokerage firms and
other financial intermediaries also market insurance products or offer competing
products, such as mutual fund products, traditional bank investments and other
investment and retirement funding alternatives. In most areas, competition is
based on a number of factors, including pricing, service provided to
distributors and policyholders, and ratings. Great American Reserve must also
compete with other insurers to attract and retain the allegiance of agents.
Financial institutions, school districts, marketing companies, agents who
market insurance products and policyholders use the financial strength ratings
assigned to an insurer by independent rating agencies as one factor in
determining which insurer's annuity to market or purchase. Great American
Reserve is rated "A (Excellent)" by A.M. Best Company ("A.M. Best"). A.M. Best's
insurance company ratings for the industry currently range from "A++ (Superior)"
to "F ( In Liquidation)". Publications of A.M. Best indicate that the "A" rating
is assigned to those companies that, in A.M. Best's opinion, have demonstrated
excellent overall performance when compared to the standards established by A.M.
Best and have demonstrated a strong ability to meet their obligations to
policyholders over a long period of time. A.M. Best's rating procedure includes
quantitative and qualitative evaluations of a company's financial condition and
operating performance. Its quantitative evaluation is based on an analysis of a
company's financial performance in the areas of profitability,
leverage/capitalization and liquidity. A.M. Best's review also includes a
qualitative evaluation of a company's spread of risk, quality and
appropriateness of the reinsurance program, quality and diversification of
assets, adequacy of policy or loss reserves, management experience and
objectives, market presence and policyholders' confidence.
Great American Reserve has been assigned a claims paying ability rating of
"A+" from Duff & Phelps Credit Rating Company ("Duff & Phelps"). Duff & Phelps'
claims-paying ability ratings range from "AAA (Highest claims-paying ability)"
to "DD (Company is under an order of liquidation)." Publications of Duff &
Phelps indicate that the"A+" rating represents "High claims-paying ability." A
plus or minus sign attached to a Duff & Phelps claims paying rating shows
relative standing within a ratings category.
In addition, Great American Reserve has been assigned a claims paying
ability rating of BBBq from Standard & Poor's Corporation ("Standard & Poor's").
Claims-paying ability ratings from Standard & Poor's range from "AAA (Superior)"
to "R (Regulatory Action)". A "BBB" is assigned by Standard & Poor's to those
companies which, in its opinion, have adequate financial security, but their
capacity to meet policyholder obligations is susceptible to adverse economic and
underwriting conditions. A "q" subscript indicates that the rating is based
solely on quantitative analysis of publicly available financial data.
Generally, rating agencies base their ratings upon information furnished to
them by the insurer and upon their own investigations, studies and assumptions.
A.M. Best's ratings, Duff & Phelps' claims-paying ratings and Standard & Poor's
claims-paying ratings are principally based upon factors of concern to
policyholders, agents and intermediaries and are not directed toward the
protection of investors. Given the competitive nature of Great American
Reserve's business and the increasing focus placed on the aforementioned
ratings, Great American Reserve manages its business with the objective of
preserving existing ratings and, where possible, achieving more favorable
ratings. There can be no assurance that any particular rating will continue for
any given period of time, or that it will not be changed or withdrawn entirely
if, in the judgement of the rating agency, circumstances so warrant. If Great
American Reserve's ratings are downgraded from their current levels, sales of
its products and the persistency of its in-force policies could be adversely
affected in a material way.
Great American Reserve believes that it is able to compete effectively
because: (i) it is experienced in establishing and cultivating relationships
with independent market specialists which can respond rapidly to changing
customer needs; (ii) it can offer competitive rates as a result of the
lower-than-average operating costs and higher-than-average investment yields
achieved by applying active investment portfolio management techniques; and
(iii) it has reliable policyholder administrative services, supported by
customized information technology systems.
UNDERWRITING
Underwriting with respect to the majority of products sold by Great
American Reserve (FPDAs and variable annuities) is minimal. Substantially all
life insurance policies issued by Great American Reserve are underwritten
individually, although standardized underwriting procedures have been adopted
for certain low face-amount life insurance coverages. Great American Reserve's
group accident and health policies are underwritten based on the characteristics
of a group and its past claim experience.
REINSURANCE
Consistent with the general practice of the life insurance industry, Great
American Reserve reinsures portions of the risk assumed under its insurance
policies with other insurance companies under agreements of indemnity
reinsurance. Great American Reserve also reinsures risks from other insurers,
which are accounted for in the same manner as direct business.
The policy risk retention limit on the life of one individual is $.5
million. At December 31, 1996, reinsurance ceded by Great American Reserve
represented 8.3 percent of gross life insurance in force and reinsurance assumed
represented 5.3 percent of net life insurance in force. At December 31, 1996,
Great American Reserve's largest reinsurer accounted for less than .4 percent of
total insurance liabilities and 28 percent of total reinsurance receivables.
EMPLOYEES
Great American Reserve has no full-time employees. Great American Reserve's
day-to-day operations are administered by Conseco pursuant to agreements between
Great American Reserve and Conseco.
GOVERNMENTAL REGULATION
Great American Reserve is subject to regulation and supervision by the
states in which it transacts business. State laws generally establish
supervisory agencies with broad administrative authority, including power to:
(i) grant and revoke business licenses; (ii) regulate and
20
<PAGE>
GREAT AMERICAN RESERVE
1998 Account F
Individual and Group Annuity
================================================================================
supervise trade practices and market conduct; (iii) establish guaranty
associations; (iv) license agents; (v) approve policy forms; (vi) regulate
premium rates for some lines of business; (vii) establish reserve requirements;
(viii) prescribe the form and content of required financial statements and
reports; (ix) determine the reasonableness and adequacy of statutory capital and
surplus; and (x) regulate the type and amount of permitted investments. Great
American Reserve is subject to periodic examinations by state regulatory
authorities. Management does not expect the results of any on-going examinations
to have a material effect on the financial condition of Great American Reserve.
The federal government does not directly regulate the insurance business.
However, federal legislation and administrative policies in several areas,
including pension regulation, age and sex discrimination, financial services
regulation and federal taxation, do affect the insurance business. In addition,
legislation has been introduced from time to time in recent years which, if
enacted, could result in the federal government assuming a more direct role in
the regulation of the insurance industry.
In December 1992, the NAIC adopted the Risk-Based Capital for Life and/or
Health Insurers Model Act (the "Model Act"). The Model Act provides a tool for
insurance regulators to determine the levels of capital and surplus an insurer
must maintain in relation to its insurance and investment risks and whether
there is a need for possible regulatory attention.
The Model Act provides for four levels of regulatory attention, varying
with the ratio of the company's total adjusted capital (defined as the total of
its statutory capital, surplus, asset valuation reserve and certain other
adjustments) to its risk-based capital ("RBC"). If a company's total adjusted
capital is less than 100 percent but greater than or equal to 75 percent of its
RBC, or if a negative trend (as defined by the regulators) has occurred and
total adjusted capital is less than 125 percent of RBC (the "Company Action
Level"), the company must submit a comprehensive plan to the regulatory
authority proposing corrective actions aimed at improving its capital position.
If a company's total adjusted capital is less than 75 percent but greater than
or equal to 50 percent of its RBC (the "Regulatory Action Level") , the
regulatory authority will perform a special examination of the company and issue
an order specifying corrective actions that must be followed. If a company's
total adjusted capital is less than 50 percent but greater than or equal to 35
percent of its RBC (the "Authorized Control Level"), the regulatory authority
may take any action it deems necessary, including placing the company under
regulatory control. If a company's total adjusted capital is less than 35
percent of its RBC (the "Mandatory Control Level") the regulatory authority must
place the company under its control. At September 30, 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 adopted by the NAIC) where corrective actions are required. However, the
Commissioner of the Texas Insurance Department does have the power to take
similar corrective actions if a company does not maintain the required minimum
level of capital and surplus. Under the Texas Regulations, an insurer has met
RBC requirements if its admitted assets exceed its liabilities by at least 3
percent. Great American Reserve is domiciled in Texas and must comply with Texas
RBC requirements. At September 30, 1997, the admitted assets of Great American
Reserve exceeded liabilities by twice the required 3 percent level.
On the basis of statutory statements filed with state regulators annually,
the NAIC calculates twelve financial ratios to assist state regulators in
monitoring the financial condition of insurance companies. A "usual range" of
results for each ratio is used as a benchmark. In the past, variances in certain
ratios of Great American Reserve have resulted in inquiries from insurance
departments to which Great American Reserve has responded. Such inquiries did
not lead to any restrictions affecting Great American Reserve's operations.
Under the solvency or guaranty laws of most states in which it does
business, Great American Reserve is required to pay guaranty fund assessments
(up to certain prescribed limits). Guaranty funds are established by various
states to fund policyholder losses or the liabilities of insolvent or
rehabilitated insurance companies. These assessments may be deferred or forgiven
under most guaranty laws if they would threaten an insurer's financial strength.
In certain instances, the assessments may be offset against future premium
taxes. Great American Reserve believes that the liability established at
September 30, 1997, is sufficient to provide for assessments related to known
insolvencies. This reserve is based upon management's current expectation of the
availability of this right of offset and state guaranty fund assessment bases.
However, changes in the basis whereby assessments are charged to individual
companies or changes to the availability of the right to offset assessments
against premium tax payments could materially affect Great American Reserve's
results. Great American Reserve's statutory financial statements for the nine
months ended September 30, 1997, include no expenses as a result of such
assessments.
FEDERAL INCOME TAXATION
The annuity and life insurance products marketed and issued by Great
American Reserve generally provide the policyholder with an income tax
advantage, as compared to other saving investments such as certificates of
deposit and bonds, in that income taxation on the increase in value of the
product is deferred until receipt by the policyholder. With other savings
investments, the increase in value is taxed as earned. Annuity benefits, and
life insurance benefits which accrue prior to the death of the policyholder, are
generally not taxable until paid. Life insurance death benefits are generally
exempt from income tax. Also, benefits received on immediate annuities (other
than structured settlements) are recognized as taxable income ratably as opposed
to the methods used for some other investments, which tend to accelerate taxable
income into earlier years. The tax advantage for annuities and life insurance is
provided in the Internal Revenue Code (the "Code"), and is generally followed in
all states and other United States taxing jurisdictions. Accordingly, the tax
advantage is subject to change by Congress and by the legislatures of the
respective taxing jurisdictions.
Great American Reserve is taxed under the life insurance company provisions
of the Code. Provisions in the Code require a portion of the expenses incurred
in selling insurance products to be deducted over a period of years, as opposed
to immediate deduction in the year incurred. This provision increases the tax
for statutory accounting
21
<PAGE>
================================================================================
purposes, which reduces statutory surplus and, accordingly, decreases the amount
of cash dividends that may be paid by Great American Reserve. As of September
30, 1997, the cumulative taxes paid as a result of this provision were $5.8
million.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF GREAT AMERICAN RESERVE
The following discussion highlights the material factors affecting the
results of operations and financial condition and resources of Great American
Reserve. This discussion should be read in conjunction with the financial
statements and notes of Great American Reserve included elsewhere herein.
RESULTS OF OPERATIONS
The adjustments resulting from the adoption of a new basis of accounting
under the "push down" method discussed above under "Selected Historical
Financial Information of Great American Reserve Insurance Company", may impact
the comparability of financial data for the periods before and after August 31,
1995.
NINE MONTHS ENDED SEPTEMBER 30, 1997, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
Insurance policy income consists of premiums received on traditional life
products and policy fund and surrender charges assessed against investment type
products. This account decreased in the first nine months of 1997 compared to
the first nine months of 1996 as a result of a decrease in sales of policies
with mortality or morbidity risks. Surrender charges assessed against annuity
withdrawals were $1.3 million in the first nine months of 1997 and 1996 and
annuity withdrawals were $171.7 million in the first nine months of 1997 and
$123.7 million in the first nine months of 1996. Surrender charges did not
change materially in the first nine months of 1997 despite the increase in
annuity withdrawals because of increased surrenders of annuities which were not
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 interest expense on annuities and financial products.
Excluding investment income on separate accounts, net investment income in the
first nine months of 1997 decreased 8.5 percent from the first nine months of
1996, to $125.6 million. Average invested assets (amortized cost basis and
excluding separate account assets) decreased to $2.1 billion in the first nine
months of 1997 from $2.3 billion in the first nine months of 1996, and the yield
earned on average invested assets decreased to 7.9 percent from 8.0 percent.
Cash flows received during the first nine months of 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 the first nine months
of 1997 increased to $29.7 million from $19.2 million in the first nine months
of 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 $631.2 million of investment securities during the first nine
months of 1997 compared to $668.3 million in the first nine months of 1996 which
sales resulted in net investment gains of $7.1 million in the first nine months
of 1997 compared to net investment gains of $.2 million in the first nine months
of 1996. During the first nine months of 1997, Great American Reserve recorded
$.3 million in 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. There were no such writedowns during the
first nine months of 1996.
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.
Interest expense on annuities and financial products increased 4.6 percent
in the first nine months of 1997 compared to the first nine months of 1996. Such
increase reflects fluctuations in charges to the account related to separate
account assets described above under net investment income; and changes in
crediting rates. The weighted average crediting rate for annuity liabilities
(other than separate accounts where the credited amount is based on investment
income from segregated investments and excluding interest bonuses guaranteed for
the first year of the contract) was 5.7 percent and 5.5 percent at September 30,
1997 and September 30, 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.
Other operating costs and expenses decreased 45 percent to $23.1 million in
the first nine months of 1997 compared to $41.9 million in the 1996 period as a
result of a reduction in costs incurred under service agreements with Conseco.
Income tax expense fluctuated primarily in relationship to income before
taxes.
YEAR ENDED DECEMBER 31, 1996, COMPARED TO 1995 PERIODS COMBINED (EIGHT
MONTHS ENDED AUGUST 31, 1995 AND FOUR MONTHS ENDED DECEMBER 31, 1995)
Insurance policy income consists of premiums received on traditional life
products and policy fund and surrender charges assessed against investment type
products. This account decreased in 1996
22
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GREAT AMERICAN RESERVE
1998 Account F
Individual and Group Annuity
================================================================================
compared to the 1995 periods as a result of a decrease in sales of policies with
mortality or morbidity risks; partially offset by an increase in surrender
charges. Surrender charges assessed against annuity withdrawals were $1.9
million in 1996 and $1.7 million in the 1995 periods and annuity withdrawals
were $202.4 million in 1996 and $179.8 million in the 1995 periods. Increases in
withdrawals were primarily due to the increased size of Great American Reserve's
annuity portfolio and increased competition from higher yielding alternative
investment products.
Net investment income includes both income earned on the general invested
assets of Great American Reserve and separate account assets related to variable
annuities. Investment income earned on separate account assets is offset by a
corresponding charge to interest expense on annuities and financial products.
Excluding investment income on separate accounts, net investment income in 1996
decreased 4.5 percent from 1995, to $182.8 million. Average invested assets
(amortized cost basis and excluding separate account assets) were $2.3 billion
in 1996 and 1995, while the yield earned on average invested assets decreased to
8.1 percent from 8.2 percent. Cash flows received during 1995 and 1996
(including cash flows from the sales of investments) were invested in
lower-yielding securities due to a general decline in interest rates.
Net investment income on separate account assets in 1996 increased to $35.6
million from $19.2 million in the 1995 periods.
Net investment gains often fluctuate from period to period. Great American
Reserve sold $988.9 million of investments during 1996 compared to $919.7
million in 1995 which sales resulted in net investment gains of $3.5 million in
1996 compared to net investment gains of $21.4 million in 1995. In addition,
Great American Reserve recorded net investment losses of $.8 million in 1996 and
$1.6 million in the 1995 periods on writedowns taken as a result of conditions
which caused Great American Reserve to conclude that declines in the fair value
of certain securities were other than temporary.
Selling securities at a gain and reinvesting the proceeds at a lower yield
may, absent other management action, tend to decrease future investment yields.
Great American Reserve believes, however, that certain factors would mitigate
the adverse effect on net income of such yield decreases as follows: (i)
additional amortization of the cost of policies purchased and the cost of
policies produced is recognized in the same period as the gain in order to
reflect reduced future yields (thereby reducing such amortization in future
periods); (ii) interest rates credited to some products can be reduced thereby
diminishing the effect of the yield decrease on the investment spread; and (iii)
the investment portfolio grows as a result of reinvesting the investment gains.
See amortization related to net investment gains below.
Insurance policy benefits and change in future policy benefits relate
solely to policies with mortality or morbidity features. The decrease in 1996
corresponds with the decrease in the in-force block of such policies.
Interest expense on annuities and financial products increased 8.9 percent
in 1996 compared to the 1995 periods. Such increase reflects fluctuations in
charges to the account related to separate account assets described above under
net investment income; and changes in crediting rates. The weighted average
crediting rate for annuity liabilities (other than separate accounts where the
credited amount is based on investment income from segregated investments and
excluding interest bonuses guaranteed for the first year of the contract) was
5.5 percent and 5.6 percent at December 31, 1996 and 1995, respectively.
Interest expense on investment borrowings in 1996 and the 1995 periods
reflect changes in investment borrowing activities and lower rates paid on such
borrowings in 1996.
Amortization related to operations is affected by the Conseco Acquisition
and the adoption of a new basis of accounting under the "push down" method.
Amortization related to operations in periods prior to the Conseco Acquisition
is comprised of cost of policies purchased, cost of policies produced and
goodwill based on the previous balances and bases. Amortization related to
operations after the Conseco Acquisition is comprised of amortization of the
aforementioned account balances, reflecting a combination of Conseco's ownership
interests in previous balances and its newly purchased interests using the
step-basis of accounting.
Cost of policies produced represents the cost of producing new business
(primarily commissions and certain costs of policy issuance and underwriting)
which varies with and is primarily related to the production of new business.
Costs deferred may represent amounts paid in the period new business is written
(such as underwriting costs and first year commissions) or in periods after the
business is written (such as commissions paid in subsequent years in excess of
ultimate commissions paid).
Cost of policies purchased represents the cost to acquire Great American
Reserve that is attributable to the right to receive cash flows from insurance
contracts in force at the acquisition dates. Some costs incurred subsequent to
the adoption of the new accounting basis on policies issued prior to such date,
which otherwise would have been deferred had it not been for the change in
accounting basis (because they vary with and are primarily related to the
production of the acquired interests in policies) are expensed. Such costs are
primarily comprised of certain commissions paid in excess of ultimate
commissions which have been expensed as operating expense after August 31, 1995.
However, such amounts were considered in determining the cost of policies
purchased and its amortization.
Amortization related to net investment gains decreased in 1996 as a result
of the decrease in investment gains discussed above.
Other operating costs and expenses increased 48 percent to $54.3 million in
1996 compared to $36.8 million in the 1995 periods as a result of costs which
were previously capitalized as part of cost of policies produced which were
expensed in 1996 (see discussion of amortization related to operations); and
additional costs incurred under new service agreements with Conseco as described
in the notes to the financial statements for the year ended December 31, 1996,
included herein.
Income tax expense fluctuated primarily in relationship to income before
taxes.
1995 PERIODS COMBINED (FOUR MONTHS ENDED DECEMBER 31, 1995, AND EIGHT
MONTHS ENDED AUGUST 31, 1995) COMPARED TO YEAR ENDED DECEMBER 31, 1994
Insurance policy income consists of premiums received on traditional life
products and policy fund and surrender charges assessed against investment type
products. This account decreased in the 1995 periods from 1994 as a result of a
decrease in sales of policies with mortality or morbidity risks, partially
offset by an increase in surrender charges resulting from higher annuity policy
withdrawals. Surrender charges assessed against annuity withdrawals were $1.7
million in the 1995 periods and $1.5 million in 1994 and annuity withdrawals
were $179.8 million in the 1995 periods and $129.8 million in 1994. Increases in
withdrawals were primarily due to the increased size of Great American Reserve's
annuity portfolio and increased competition from higher yielding alternative
investment products.
23
<PAGE>
================================================================================
Net investment income includes both income earned on the general invested
assets of Great American Reserve and separate account assets related to variable
annuities. Investment income earned on separate account assets is offset by a
corresponding charge to interest expense on annuities and financial products.
Excluding investment income on separate accounts, net investment income in the
1995 periods increased 3.1 percent from 1994, to $191.4 million. Average
invested assets (amortized cost basis and excluding separate account assets)
were $2.3 billion in 1995 and 1994, while the yield earned on average invested
assets increased to 8.2 percent from 8.0 percent.
Net investment income on separate account assets in the 1995 periods
increased to $19.2 million from $2.3 million in 1994.
Net investment gains often fluctuate from period to period. Great American
Reserve sold $919.7 million of investment securities during the 1995 periods and
$586.0 million in 1994 which sales resulted in net investment gains of $21.4
million in the 1995 periods compared to net investment gains of $1.2 million in
1994. In addition, Great American Reserve recorded net investment losses of $1.6
million in the 1995 periods and $1.0 million in 1994 on writedowns taken as a
result of conditions which caused Great American Reserve to conclude that
declines in the fair value of certain securities were other than temporary.
The effect of net investment gains on the amortization of cost of policies
purchased and cost of policies produced is discussed above under the comparison
of the 1996 and 1995 periods. Also see amortization related to net investment
gains below.
Insurance policy benefits and change in future policy benefits relate
solely to policies with mortality or morbidity features. The decrease in the
1995 periods corresponds with the decrease in the in-force block of such
policies.
Interest expense on annuities and financial products increased 17 percent
in the 1995 periods over 1994. Such increase reflects: (i) fluctuations in
charges to the account related to investment income from separate account assets
as described above under net investment income; and (ii) changes in crediting
rates. The weighted average crediting rate for annuity liabilities (other than
separate accounts where the credited amount is based on investment income from
the segregated investments and excluding interest bonuses guaranteed for the
first year of the annuity contract) was 5.6 percent and 5.8 percent at December
31, 1995 and 1994, respectively.
Interest expense on investment borrowings in the 1995 periods and in 1994
reflects changes in investment borrowing activities and the higher rates paid on
such borrowings in the 1995 periods.
Amortization related to operations increased 6.3 percent to $17.0 million
in the 1995 periods from $16.0 million in 1994. Such increase is affected by:
(i) the adoption of a new basis of accounting as discussed above; and (ii) the
increased amount of business in force on which acquisition costs are
capitalized. See the discussion of cost of policies produced and cost of
policies purchased above under the comparison of the 1996 and 1995 periods.
Amortization related to net investment gains increased in the 1995 periods
as a result of the increase in investment gains discussed above.
Income tax expense fluctuated primarily in relationship to income before
taxes.
INVESTMENTS
Great American Reserve's investment strategy is to: (i) maintain a
predominately investment grade fixed income portfolio; (ii) provide adequate
liquidity to meet the cash flow requirements of policyholders and other
obligations; and (iii) maximize current income and total investment return
through active investment management. Consistent with this strategy, investments
in fixed maturity securities, mortgage loans, credit-tenant loans, policy loans
and short-term investments comprised 82 percent of Great American Reserve's
investment portfolio at September 30, 1997. The remainder of the invested assets
were in equity securities, assets held in separate accounts and other invested
assets. At September 30, 1997, Great American Reserve had invested assets of
approximately $2.6 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.
24
<PAGE>
GREAT AMERICAN RESERVE
1998 Account F
Individual and Group Annuity
================================================================================
The following table summarizes investment yields earned over the periods
indicated:
<TABLE>
<CAPTION>
PRIOR BASIS
----------------------------
NINE MONTHS NINE MONTHS YEAR FOUR MONTHS EIGHT MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1997 1996 1996 1995 1995 1994
============================================================================================================================
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Weighted average invested assets:
As reported ..................... $ 2,397.9 $ 2,426.7 $ 2,417.9 $ 2,498.1 $ 2,416.5 $ 4,552.3
Excluding unrealized appreciation
(depreciation) (a) ............ 2,414.5 2,449.0 2,438.9 2,467.4 2,470.7 4,662.6
Net investment income ............. 155.3 156.5 218.4 74.2 136.4 367.8
Yields earned:
As reported ..................... 8.6% 8.6% 9.0% 8.9% 8.4% 8.1%
Excluding unrealized appreciation
(depreciation) (a) ............ 8.6% 8.5% 8.9% 9.0% 8.2% 7.9%
- ----------------------------------------------------------------------------
</TABLE>
(a) Excludes the effect of reporting fixed maturities at fair value as
described in note 1 to the financial statements.
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 September 30, 1997, the average yield, computed on the cost basis
of Great American Reserve's investment portfolio, was 7.8 percent and the
average interest rate credited on Great American Reserve's total liability
portfolio was 5.7 percent.
ACTIVELY MANAGED FIXED MATURITIES
Great American Reserve's actively managed fixed maturity portfolio at
September 30, 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 September
30, 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 ............................................ $ 29.7 $ .4 $ .1 $ 30.0
Obligations of state and political subdivisions and
foreign government obligations ...................... 32.9 .8 .2 33.5
Public utility securities ............................. 197.2 3.2 3.2 197.2
Other corporate securities ............................ 873.4 17.0 5.2 885.2
Mortgage-backed securities ............................ 655.9 6.9 1.1 661.7
- -------------------------------------------------------------------------------------------------------------
Total ................................................. $ 1,789.1 $ 28.3 $ 9.8 $ 1,807.6
=============================================================================================================
</TABLE>
25
<PAGE>
================================================================================
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 September 30, 1997, classified by rating categories. The category assigned is
the highest rating by a nationally recognized statistical rating organization
or, as to $0.2 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":
PERCENT OF PERCENT OF
INVESTMENT FIXED TOTAL
RATING MATURITIES INVESTMENTS
============================================================================
AAA .................................................... 42% 30%
AA ..................................................... 6 4
A ...................................................... 20 14
BBB+ ................................................... 7 5
BBB .................................................... 12 9
BBB- ................................................... 7 4
- ----------------------------------------------------------------------------
Investment-grade ..................................... 94 66
- ----------------------------------------------------------------------------
BB+ .................................................... 1 1
BB ..................................................... 1 1
BB- .................................................... 1 --
B+ and below ........................................... 3 2
- ----------------------------------------------------------------------------
Below investment-grade ............................... 6 4
- ----------------------------------------------------------------------------
Total actively managed fixed maturities ............ 100% 70%
============================================================================
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 September 30, 1997, Great American Reserve's below investment grade fixed
maturity investments had an amortized cost of $105.4 million and an estimated
fair value of $107.1 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 $0.3
million in the nine months ended September 30, 1997 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 had no such write
downs in the nine months ended September 30, 1996. 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 September 30, 1997.
At September 30, 1997, fixed maturity investments included $661.7 million
of mortgage-backed securities (37 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.
26
<PAGE>
GREAT AMERICAN RESERVE
1998 Account F
Individual and Group Annuity
================================================================================
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 September 30, 1997:
PAR AMORTIZED ESTIMATED
VALUE COST FAIR VALUE
================================================================================
(DOLLARS IN MILLIONS)
Below 7 percent ................... $ 183.0 $ 179.7 $ 179.5
7 percent--8 percent .............. 330.3 333.0 336.2
8 percent--9 percent .............. 68.4 68.4 69.7
9 percent and above ............... 75.0 74.8 76.3
- ------------------------------------------------------------------------------
Total mortgage-backed
securities...... $656.7 $655.9 $661.7
================================================================================
The amortized cost and estimated fair value of mortgage-backed securities
including CMOs at September 30, 1997, summarized by type of security were as
follows:
ESTIMATED FAIR VALUE
-----------------------
PERCENT OF
AMORTIZED FIXED
COST AMOUNT MATURITIES
================================================================================
(DOLLARS IN MILLIONS)
Pass-throughs and sequential
and targeted amortization
classes ................................. $ 550.7 $ 555.4 31%
Planned amortization classes
and accretion directed
bonds ................................... 72.3 73.1 4
Subordinated classes ...................... 32.9 33.2 2
- --------------------------------------------------------------------------------
$ 655.9 $ 661.7 37%
================================================================================
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 20 percent of Great American Reserve's mortgage-backed securities
at September 30, 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 the nine months
ended September 30, 1997. During the first nine months of 1997, Great American
Reserve sold actively managed fixed maturity securities generating proceeds of
$631.2 million, resulting in $7.1 million of investment gains (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 $97.4 million at September 30, 1997, or 3.8 percent of
total invested assets. The total estimated fair value of credit-tenant loans was
$99.5 million at September 30, 1997.
At September 30, 1997, Great American Reserve held mortgage loan
investments with a carrying value of $63.0 million (or 2.4 percent of total
invested assets) and a fair value of $66.6 million.
27
<PAGE>
Substantially all of the mortgage loan investments were commercial loans.
Non-current mortgage loans were not significant at September 30, 1997. At
September 30, 1997, Great American Reserve had a loan loss reserve of $.9
million. Approximately 33 percent, 21 percent and 8 percent of the mortgage
loans were on properties located in California, Texas and Florida, respectively.
No other state comprised greater than 7 percent of the mortgage loan balance.
At September 30, 1997, Great American Reserve held no trading account
securities. Trading account securities are investments that are purchased with
the intent to be traded prior to their maturity, or are believed likely to be
disposed of in the foreseeable future as a result of market or issuer
developments. Trading account securities are carried at estimated fair value,
with the changes in fair value reflected in the statement of operations.
Short-term investments totaled $64.2 million, or 2.5 percent of invested
assets at September 30, 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 $47.4 million during the first nine months of 1997 (compared to an
average of $118.0 million during the first nine months of 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 5.1 percent in the first nine months of 1997 and 5.3 percent in
the first nine months of 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 September 30, 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 September 30,
1997 less than 7 percent could not be surrendered, 51 percent could be
surrendered only by incurring a surrender charge and 42 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 September 30, 1997 included $64.2 million of short-term investments and $1.7
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
Great American Reserve, Like other companies, has initiated programs to
assure 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 three 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 assure 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.
28
<PAGE>
GREAT AMERICAN RESERVE
1998 Account F
Individual and Group Annuity
================================================================================
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.
Donald F. Gongaware Since 1985, Executive Vice President, Chief Operations
(Age 62) Officer and Director of Conseco, Inc. and various
positions with certain of its affiliates.
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, 1996
and 1995, and for the year ended December 31, 1996, the four months ended
December 31, 1995, the eight months ended August 31, 1995, and the year ended
December 31, 1994, included in this prospectus, have been audited by Coopers &
Lybrand L.L.P., independent accountants, as set forth in their report appearing
herein.
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.
29
<PAGE>
================================================================================
GREAT AMERICAN RESERVE INSURANCE COMPANY
Financial Statements - September 30, 1997
================================================================================
BALANCE SHEET
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNT) (UNAUDITED)
================================================================================
ASSETS
Investments:
Actively managed fixed maturities at fair value (amortized
cost: $1,789.1) ................................................ $1,807.6
Mortgage loans .................................................. 63.0
Credit-tenant loans ............................................. 97.4
Policy loans .................................................... 80.7
Other invested assets ........................................... 93.6
Short-term investments .......................................... 64.2
Assets held in separate accounts ................................ 366.1
- --------------------------------------------------------------------------------
Total investments ............................................. 2,572.6
Accrued investment income ......................................... 31.4
Cost of policies purchased ........................................ 119.2
Cost of policies produced ......................................... 50.4
Reinsurance receivables ........................................... 22.5
Goodwill (net of accumulated amortization: $12.8) ................. 48.6
Other assets ...................................................... 15.4
- --------------------------------------------------------------------------------
Total assets .................................................. $2,860.1
================================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Insurance liabilities ........................................... $1,858.2
Income tax liabilities .......................................... 44.6
Investment borrowings ........................................... 172.3
Other liabilities ............................................... 13.1
Liabilities related to separate accounts ........................ 366.1
- --------------------------------------------------------------------------------
Total liabilities ............................................. 2,454.3
- --------------------------------------------------------------------------------
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
Unrealized appreciation of securities:
Fixed maturity securities (net of applicable deferred
income taxes: $2.9) .......................................... 5.3
Other investments (net of applicable deferred income
taxes: $.3) .................................................. .5
Retained earnings ............................................... 19.2
- --------------------------------------------------------------------------------
Total shareholder's equity .................................... 405.8
- --------------------------------------------------------------------------------
Total liabilities and shareholder's equity .................... $2,860.1
================================================================================
The accompanying notes are an integral part of the financial statements.
30
<PAGE>
GREAT AMERICAN RESERVE
1998 Account F
Individual and Group Annuity
================================================================================
GREAT AMERICAN RESERVE INSURANCE COMPANY
Financial Statements - Continued
================================================================================
STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS) (UNAUDITED)
================================================================================
NINE MONTHS
ENDED
SEPTEMBER 30,
-----------------
1997 1996
================================================================================
Revenues:
Insurance policy income ................................ $ 57.4 $ 61.4
Net investment income .................................. 155.3 156.5
Net investment gains ................................... 6.6 .2
- --------------------------------------------------------------------------------
Total revenues ....................................... 219.3 218.1
- --------------------------------------------------------------------------------
Benefits and expenses:
Insurance policy benefits .............................. 43.5 41.4
Change in future policy benefits ....................... (2.7) (5.5)
Interest expense on annuities and financial products ... 93.7 89.6
Interest expense on investment borrowings .............. 1.8 4.7
Amortization ........................................... 11.4 14.1
Other operating costs and expenses ..................... 23.1 41.9
- --------------------------------------------------------------------------------
Total benefits and expenses .......................... 170.8 186.2
- --------------------------------------------------------------------------------
Income before income taxes ........................... 48.5 31.9
Income tax expense ....................................... 17.5 12.0
- --------------------------------------------------------------------------------
Net income ........................................... $ 31.0 $ 19.9
================================================================================
The accompanying notes are an integral part of the financial statements.
STATEMENT OF SHAREHOLDER'S EQUITY
(DOLLARS IN MILLIONS) (UNAUDITED)
================================================================================
NINE MONTHS
ENDED
SEPTEMBER 30,
-----------------
1997 1996
================================================================================
Common stock and additional paid-in capital:
Balance, beginning and end of period ................... $380.8 $380.8
- --------------------------------------------------------------------------------
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities:
Balance, beginning of period ......................... $ (4.4) $ 11.8
Change in unrealized appreciation (depreciation) ... 9.7 (25.2)
- --------------------------------------------------------------------------------
Balance, end of period ............................... $ 5.3 $(13.4)
- --------------------------------------------------------------------------------
Other investments:
Balance, beginning of period ......................... $ (.2) $ .6
Change in unrealized appreciation (depreciation) ... .7 (1.0)
- --------------------------------------------------------------------------------
Balance, end of period ............................... $ .5 $ (.4)
- --------------------------------------------------------------------------------
Retained earnings:
Balance, beginning of period ........................... $ 20.7 $ 49.4
Net income ........................................... 31.0 19.9
Dividends on common stock ............................ (32.5) (54.4)
- --------------------------------------------------------------------------------
Balance, end of period ................................. $ 19.2 $ 14.9
- --------------------------------------------------------------------------------
Total shareholder's equity ......................... $405.8 $381.9
================================================================================
The accompanying notes are an integral part of the financial statements.
31
<PAGE>
================================================================================
GREAT AMERICAN RESERVE INSURANCE COMPANY
Financial Statements - Continued
================================================================================
STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS) (UNAUDITED)
================================================================================
NINE MONTHS
ENDED
SEPTEMBER 30,
------------------
1997 1996
================================================================================
Cash flows from operating activities:
Net income .............................................. $ 31.0 $ 19.9
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Amortization ........................................ 11.3 14.2
Income taxes ........................................ 8.8 (3.2)
Insurance liabilities ............................... (103.6) (28.4)
Interest credited to insurance liabilities .......... 93.7 89.6
Fees charged to insurance liabilities ............... (23.8) (24.7)
Accrual and amortization of investment income ....... .6 .1
Deferral of cost of policies produced ............... (17.9) (8.0)
Net investment gains ................................ (6.6) (.2)
Other ............................................... (12.3) (1.7)
- --------------------------------------------------------------------------------
Net cash provided (used) by operating activities .. (18.8) 57.6
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Sales of investments .................................... 631.2 668.3
Maturities and redemptions .............................. 86.6 97.1
Purchases of investments ................................ (679.5) (718.8)
- --------------------------------------------------------------------------------
Net cash provided by investing activities ......... 38.3 46.6
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Deposits to insurance liabilities ....................... 172.6 124.7
Investment borrowings ................................... 123.9 35.7
Withdrawals from insurance liabilities .................. (234.1) (220.1)
Dividends paid on common stock .......................... (32.5) (44.5)
- --------------------------------------------------------------------------------
Net cash provided (used) by financing activities .. 29.9 (104.2)
- --------------------------------------------------------------------------------
Net increase in short-term investments ............ 49.4 --
Short-term investments, beginning of period .............. 14.8 19.0
- --------------------------------------------------------------------------------
Short-term investments, end of period .................... $ 64.2 $ 19.0
================================================================================
The accompanying notes are an integral part of the financial statements.
32
<PAGE>
GREAT AMERICAN RESERVE
1998 Account F
Individual and Group Annuity
================================================================================
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
================================================================================
The following notes should be read in conjunction with the notes to audited
financial statements included elsewhere in this Prospectus.
SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Great American Reserve Insurance Company (the "Company") markets
tax-qualified annuities and certain employee benefit-related insurance products
through professional independent agents. Since August 1995, the Company has been
a wholly owned subsidiary of Conseco, Inc. ("Conseco"), a financial services
holding company engaged in the development, marketing and administration of
annuity, individual health insurance and individual life insurance products.
During 1994, Conseco effectively owned 36 percent of the Company, through its
ownership interest in CCP Insurance, Inc. ("CCP"), a holding company organized
for companies previously acquired by Conseco Capital Partners, L.P. (the
"Partnership"), a limited partnership organized by Conseco. The Company was
acquired by the Partnership in 1990 (the "Partnership Acquisition"). During
1995, Conseco's ownership in CCP (and in the Company) increased to 49 percent as
a result of purchases of CCP common stock by CCP and Conseco. In August 1995,
Conseco completed the purchase of the remaining shares of CCP common stock it
did not already own in a transaction pursuant to which CCP was merged with
Conseco, with Conseco being the surviving corporation (the "Conseco
Acquisition").
The accompanying financial statements give effect to "push down" purchase
accounting to reflect the Partnership Acquisition and the Conseco Acquisition.
As a result of applying "push down" purchase accounting: (i) the Company's
financial position and results of operations for periods subsequent to the
Partnership Acquisition and before the Conseco Acquisition (the "prior basis")
reflect the Partnership's cost to acquire the Company's asset and liability
accounts based upon their estimated fair values at the purchase date; and (ii)
the Company's financial position and results of operations for periods
subsequent to the Conseco Acquisition reflect Conseco's cost to acquire the
Company's asset and liability accounts based upon their estimated fair values at
the purchase date.
The unaudited financial statements as of September 30, 1997 and 1996,
reflect all adjustments, consisting only of normal recurring items, which are
necessary to present fairly the Company's financial position and results of
operations on a basis consistent with that of prior audited financial
statements.
In preparing financial statements in conformity with generally accepted
accounting principles, the Company is required to make estimates and assumptions
that significantly affect various reported amounts. For example, the Company
uses significant estimates and assumptions in calculating the cost of policies
produced, the cost of policies purchased, insurance liabilities, guaranty fund
assessment accruals and deferred income taxes. If future experience differs
materially from these estimates and assumptions, the Company's financial
statements could be affected.
ADJUSTMENT TO ACTIVELY MANAGED FIXED MATURITY SECURITIES
The Company classifies fixed maturity securities into three categories:
"actively managed", and "trading account" (which are carried at estimated fair
value) and "held to maturity" (which are carried at amortized cost). The Company
did not carry any fixed maturity securities in the trading account or held to
maturity categories at September 30, 1997. Adjustments to carry actively managed
fixed maturity securities at fair value have no effect on earnings, but are
recorded, net of tax, as a component of shareholder's equity. The following
table summarizes the effect of these adjustments as of September 30, 1997:
EFFECT OF
FAIR VALUE
ADJUSTMENT ON
ACTIVELY
BALANCE MANAGED
BEFORE FIXED REPORTED
ADJUSTMENT MATURITIES AMOUNT
- ----------------------------------------------------------------------
(DOLLARS IN MILLIONS)
Actively managed fixed
maturity securities .......... $1,789.1 $18.5 $1,807.6
Cost of policies purchased ..... 128.1 (8.9) 119.2
Cost of policies produced ...... 51.8 (1.4) 50.4
Income tax liabilities ......... 41.7 2.9 44.6
Net unrealized appreciation of
fixed maturity securities .... -- 5.3 5.3
SHAREHOLDER'S EQUITY
The Company paid shareholder dividends of $32.5 million and $44.5 million
during the nine months ended September 30, 1997 and 1996, respectively. In
addition, during the first nine months of 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.
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) are based on Conseco's direct and directly allocable costs plus a 10
percent margin. Total fees paid to Conseco were $28.0 million and $32.6 million
during the nine months ended September 30, 1997 and 1996, respectively.
33
<PAGE>
================================================================================
REPORT OF INDEPENDENT ACCOUNTANTS
================================================================================
To the Shareholders and Board of Directors
Great American Reserve Insurance Company
We have audited the accompanying balance sheet of Great American Reserve
Insurance Company (the "Company") as of December 31, 1996 and 1995, and the
related statements of operations, shareholder's equity and cash flows for the
year ended December 31, 1996 and the four months ended December 31, 1995. We
have also audited the accompanying statements of operations, shareholder's
equity and cash flows of the Company for the eight months ended August 31, 1995,
and the year ended December 31, 1994, based on the basis of accounting
applicable to periods prior to the adoption of push down accounting upon
Conseco, Inc.'s purchase of all common shares of the Company it did not
previously own (see note 1 of the notes to financial statements regarding the
adoption of push down accounting). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Great American Reserve
Insurance Company as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the year ended December 31, 1996, the four
months ended December 31, 1995, the eight months ended August 31, 1995 and the
year ended December 31, 1994, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
March 14, 1997
34
<PAGE>
GREAT AMERICAN RESERVE
1998 Account F
Individual and Group Annuity
================================================================================
GREAT AMERICAN RESERVE INSURANCE COMPANY
Financial Statements - December 31, 1996 and 1995
================================================================================
BALANCE SHEET
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
========================================================================================
1996 1995
========================================================================================
<S> <C> <C>
ASSETS
Investments:
Actively managed fixed maturities at fair value
(amortized cost: 1996--$1,810.8; 1995--$1,980.1) ............ $1,795.1 $2,030.9
Mortgage loans ................................................ 77.3 95.5
Credit-tenant loans ........................................... 93.4 79.4
Policy loans .................................................. 80.8 84.7
Other invested assets ......................................... 89.0 37.8
Short-term investments ........................................ 14.8 19.0
Assets held in separate accounts .............................. 232.4 137.5
- ----------------------------------------------------------------------------------------
Total investments ........................................... 2,382.8 2,484.8
Accrued investment income ....................................... 32.9 34.0
Cost of policies purchased ...................................... 143.0 120.0
Cost of policies produced ....................................... 38.2 24.0
Reinsurance receivables ......................................... 25.7 27.0
Goodwill (net of accumulated amortization: 1996--$11.7;
1995--$10.2) ................................................... 49.7 53.0
Other assets .................................................... 8.2 14.0
- ----------------------------------------------------------------------------------------
Total assets ................................................ $2,680.5 $2,756.8
- ----------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Insurance liabilities ......................................... $1,957.5 $2,039.1
Income tax liabilities ........................................ 29.8 39.0
Investment borrowings ......................................... 48.4 84.2
Other liabilities ............................................. 15.5 14.4
Liabilities related to separate accounts ...................... 232.4 137.5
- ----------------------------------------------------------------------------------------
Total liabilities ........................................... 2,283.6 2,314.2
- ----------------------------------------------------------------------------------------
Shareholder's equity:
Common stock and additional paid-in capital (par value $4.80
per share, 1,065,000 shares authorized, 1,043,565 shares
issued and outstanding) ..................................... 380.8 380.8
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities (net of applicable deferred
income taxes:
1996--$(2.4); 1995--$6.8) ................................. (4.4) 11.8
Other investments (net of applicable deferred income taxes:
1996--$(.1); 1995--$.4) ................................... (.2) .6
Retained earnings ............................................. 20.7 49.4
- ----------------------------------------------------------------------------------------
Total shareholder's equity .................................. 396.9 442.6
- ----------------------------------------------------------------------------------------
Total liabilities and shareholder's equity .................. $2,680.5 $2,756.8
========================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
35
<PAGE>
================================================================================
GREAT AMERICAN RESERVE INSURANCE COMPANY
Financial Statements - Continued
================================================================================
STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS)
================================================================================
<TABLE>
<CAPTION>
PRIOR BASIS
--------------------------
YEAR FOUR MONTHS EIGHT MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
==============================================================================================================
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income ........................... $ 81.4 $ 31.8 $ 60.5 $ 98.6
Net investment income ............................. 218.4 74.2 136.4 187.9
Net investment gains .............................. 2.7 12.5 7.3 .2
- --------------------------------------------------------------------------------------------------------------
Total revenues .................................. 302.5 118.5 204.2 286.7
- --------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Insurance policy benefits ......................... 54.9 18.9 45.9 66.2
Change in future policy benefits .................. (3.7) .2 (4.3) (1.3)
Interest expense on annuities and financial
products ......................................... 129.4 44.2 74.6 101.4
Interest expense on investment borrowings ......... 6.2 1.0 3.6 2.9
Amortization related to operations ................ 17.8 5.3 11.7 16.0
Amortization related to investment gains .......... 2.5 10.0 4.3 2.7
Other operating costs and expenses ................ 54.3 13.1 23.7 37.3
- --------------------------------------------------------------------------------------------------------------
Total benefits and expenses ..................... 261.4 92.7 159.5 225.2
- --------------------------------------------------------------------------------------------------------------
Income before income taxes ...................... 41.1 25.8 44.7 61.5
Income tax expense .................................. 15.4 9.7 16.5 22.7
- --------------------------------------------------------------------------------------------------------------
Net income ...................................... $ 25.7 $ 16.1 $ 28.2 $ 38.8
==============================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
STATEMENT OF SHAREHOLDER'S EQUITY
(DOLLARS IN MILLIONS)
================================================================================
<TABLE>
<CAPTION>
PRIOR BASIS
--------------------------
YEAR FOUR MONTHS EIGHT MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
==============================================================================================================
<S> <C> <C> <C> <C>
Common stock and additional paid-in capital:
Balance, beginning of period ...................... $380.8 $380.8 $339.7 $339.7
Adjustment of balance due to new accounting basis -- -- 41.1 --
- --------------------------------------------------------------------------------------------------------------
Balance, end of period ............................ $380.8 $380.8 $380.8 $339.7
- --------------------------------------------------------------------------------------------------------------
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities:
Balance, beginning of period .................... $ 11.8 $ 1.3 $(53.0) $ 33.3
Change in unrealized appreciation
(depreciation) ............................... (16.2) 10.5 55.7 (86.3)
Adjustment of balance due to new accounting
basis ........................................ -- -- (1.4) --
- --------------------------------------------------------------------------------------------------------------
Balance, end of period .......................... $ (4.4) $ 11.8 $ 1.3 $(53.0)
- --------------------------------------------------------------------------------------------------------------
Other investments:
Balance, beginning of period .................... $ .6 $ .6 $ (2.1) $ (.1)
Change in unrealized appreciation
(depreciation) ............................... (.8) -- 3.3 (2.0)
Adjustment of balance due to new accounting
basis ........................................ -- -- (.6) --
- --------------------------------------------------------------------------------------------------------------
Balance, end of period .......................... $ (.2) $ .6 $ .6 $ (2.1)
- --------------------------------------------------------------------------------------------------------------
Retained earnings:
Balance, beginning of period ...................... $ 49.4 $ 33.3 $ 80.3 $ 75.6
Net income ...................................... 25.7 16.1 28.2 38.8
Dividends on common stock ....................... (54.4) -- (41.2) (34.1)
Adjustment of balance due to new accounting basis -- -- (34.0) --
- --------------------------------------------------------------------------------------------------------------
Balance, end of period ............................ $ 20.7 $ 49.4 $ 33.3 $ 80.3
- --------------------------------------------------------------------------------------------------------------
Total shareholder's equity .................... $396.9 $442.6 $416.0 $364.9
==============================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
36
<PAGE>
GREAT AMERICAN RESERVE
1998 Account F
Individual and Group Annuity
================================================================================
GREAT AMERICAN RESERVE INSURANCE COMPANY
Financial Statements - Continued
================================================================================
STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
================================================================================
<TABLE>
<CAPTION>
PRIOR BASIS
--------------------------
YEAR FOUR MONTHS EIGHT MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
==============================================================================================================
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ......................................... $ 25.7 $ 16.1 $ 28.2 $ 38.8
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization ................................. 20.4 15.3 16.0 18.7
Income taxes ................................. (3.9) 2.3 2.9 1.3
Insurance liabilities ........................ (40.5) (25.8) (14.0) (10.5)
Interest credited to insurance liabilities ... 129.4 44.2 74.6 101.4
Fees charged to insurance liabilities ........ (32.8) (10.3) (22.2) (36.5)
Accrual and amortization of investment income 3.1 3.2 (1.8) (1.2)
Deferral of cost of policies produced ........ (13.2) (3.0) (6.6) (9.4)
Investment gains ............................. (2.7) (12.5) (7.3) (.2)
Other ........................................ (8.9) (8.9) (3.2) 5.0
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities .. 76.6 20.6 66.6 107.4
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Sales of investments ............................... 988.9 513.2 406.5 586.0
Maturities and redemptions ......................... 101.7 60.4 57.5 118.4
Purchases of investments ........................... (954.2) (532.2) (476.2) (786.9)
- --------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing
activities ................................ 136.4 41.4 (12.2) (82.5)
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Deposits to insurance liabilities .................. 169.8 50.8 104.4 146.0
Cash paid in reinsurance recapture ................. -- (71.1) -- --
Investment borrowings .............................. (35.8) (36.8) 121.0 (58.3)
Withdrawals from insurance liabilities ............. (306.7) (71.9) (166.3) (171.4)
Dividends paid on common stock ..................... (44.5) -- (41.2) (34.1)
- --------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing
activities ................................ (217.2) (129.0) 17.9 (117.8)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in short-term
investments ............................... 4.2) (67.0) 72.3 (92.9)
Short-term investments, beginning of period .......... 19.0 86.0 13.7 106.6
- --------------------------------------------------------------------------------------------------------------
Short-term investments, end of period ................ $ 14.8 $ 19.0 $ 86.0 $ 13.7
==============================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
37
<PAGE>
================================================================================
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements - Continued
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Great American Reserve Insurance Company (the "Company") markets
tax-qualified annuities and certain employee benefit-related insurance products
through professional independent agents. Since August 1995, the Company has been
a wholly owned subsidiary of Conseco, Inc. ("Conseco"), a financial services
holding company engaged in the development, marketing and administration of
annuity, individual health insurance and individual life insurance products.
During 1994, Conseco effectively owned 36 percent of the Company, through its
ownership interest in CCP Insurance, Inc. ("CCP"), a holding company organized
for companies previously acquired by Conseco Capital Partners, L.P. (the
"Partnership"), a limited partnership organized by Conseco. The Company was
acquired by the Partnership in 1990 (the "Partnership Acquisition"). During
1995, Conseco's ownership in CCP (and in the Company) increased to 49 percent as
a result of purchases of CCP common stock by CCP and Conseco. In August 1995,
Conseco completed the purchase of the remaining shares of CCP common stock it
did not already own in a transaction pursuant to which CCP was merged with
Conseco, with Conseco being the surviving corporation (the "Conseco
Acquisition").
The accompanying financial statements give effect to "push down" purchase
accounting to reflect the Partnership Acquisition and the Conseco Acquisition.
As a result of applying "push down" purchase accounting: (i) the Company's
financial position and results of operations for periods subsequent to the
Partnership Acquisition and before the Conseco Acquisition (the "prior basis")
reflect the Partnership's costs to acquire the Company's asset and liability
accounts based upon their estimated fair values at the purchase date; and (ii)
the Company's financial position and results of operations for periods
subsequent to the Conseco Acquisition reflect Conseco's cost to acquire the
Company's asset and liability accounts based upon their estimated fair values at
the purchase date.
The effect of the adoption of the new basis of accounting on the Company's
balance sheet accounts on August 31, 1995, was as follows (dollars in millions):
DEBIT
(CREDIT)
- --------------------------------------------------------------------
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
The accompanying financial statements also include the effect of the
December 31, 1994, merger of Jefferson National Life Insurance Company
("Jefferson National", which was acquired by the Partnership in 1990) into the
Company. This merger has been accounted for as a pooling of interests;
therefore, the assets and liabilities of each company have been combined at
their book values and the statements of operations, shareholder's equity and
cash flows have been reported as if the merger had occurred on January 1, 1994.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP"), which differ in some respects
from statutory accounting practices followed in the preparation of financial
statements submitted to state insurance departments. The financial statements
prepared in conformity with GAAP include amounts based on informed estimates and
judgment of management, with consideration given to materiality. Significant
estimates and assumptions are utilized in the calculation of cost of policies
produced, cost of policies purchased, insurance liabilities, guaranty fund
assessment accruals and deferred income taxes. Actual experience may differ from
those estimates. Certain amounts from the 1995 and 1994 financial statements and
notes have been reclassified to conform with the 1996 presentation.
INVESTMENTS
Fixed maturity investments are securities that mature more than one year
after issuance. They include bonds, notes receivable and preferred stocks with
mandatory redemption features and are classified as follows:
Actively managed--fixed maturity securities that may be sold prior to
maturity due to changes that might occur in market interest rates, issuer credit
quality or the Company's liquidity requirements. Actively managed fixed maturity
securities are carried at estimated fair value and the unrealized gain or loss
is recorded net of tax and related adjustments described below as a component of
shareholder's equity.
Trading account--fixed maturity securities are bought and held principally
for the purpose of selling them in the near term. Trading account securities are
carried at estimated fair value. Unrealized gains or losses are included in net
investment gains (losses). The Company did not hold any trading account
securities during 1996, 1995 or 1994.
Held to maturity--(all other fixed maturity securities) are those
securities which the Company has the ability and positive intent to hold to
maturity, and are carried at amortized cost. The Company may dispose of these
securities if the credit quality of the issuer deteriorates, if regulatory
requirements change or under other unforeseen circumstances. The Company has not
held any securities in this classification during 1996, 1995 or 1994.
Anticipated returns, including investment gains and losses, from the
investment of policyholder balances are considered in determining the
amortization of the cost of policies purchased and the cost of policies
produced. When actively managed fixed maturity securities are stated at
estimated fair value, an adjustment to the cost of policies purchased and the
cost of policies produced may be necessary if a change in amortization would
have been recorded if such securities had been sold at their fair value and the
proceeds reinvested at current yields. Furthermore, if future yields expected to
be earned on such securities decline, it may be necessary to increase certain
insurance liabilities. Adjustments to such liabilities are required when their
balances, in addition to future net cash flows
38
<PAGE>
GREAT AMERICAN RESERVE
1998 Account F
Individual and Group Annuity
================================================================================
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements - Continued
================================================================================
(including investment income), are insufficient to cover future benefits and
expenses.
Unrealized gains and losses and the related adjustments described in the
preceding paragraph have no effect on earnings, but are recorded, net of tax, as
a component of shareholder's equity. The following table summarizes the effect
of these adjustments as of December 31, 1996:
EFFECT OF
FAIR VALUE
ADJUSTMENT ON
ACTIVELY
BALANCE MANAGED
BEFORE FIXED REPORTED
ADJUSTMENT MATURITIES AMOUNT
- ----------------------------------------------------------------------
(DOLLARS IN MILLIONS)
Actively managed fixed
maturity securities .......... $1,810.8 $(15.7) $1,795.1
Cost of policies purchased ..... 135.2 7.8 143.0
Cost of policies produced ...... 37.1 1.1 38.2
Income tax liabilities ......... 32.2 (2.4) 29.8
Net unrealized depreciation of
fixed maturities ............. -- (4.4) (4.4)
When changes in conditions cause a fixed maturity investment to be
transferred to a different category (e.g. actively managed, held to maturity or
trading), the security is transferred to the new category at its fair value at
the date of the transfer. There were no such transfers in 1996, 1995 or 1994. At
the transfer date, the security's unrealized gain or loss is recorded as
follows:
o For transfers to the trading category, the unrealized gain or loss is
recognized in earnings;
o For transfers from the trading category, the unrealized gain or loss
already recognized in earnings is not reversed;
o For transfers to actively managed from held to maturity, the
unrealized gain or loss is recognized in shareholder's equity; and
o For transfers to held to maturity from actively managed, the
unrealized gain or loss at the date of transfer continues to be
recognized in shareholder's equity, but is amortized as a yield
adjustment until ultimately sold.
Credit-tenant loans are loans for commercial properties which require: (i)
the lease of the principal tenant to be assigned to the Company; (ii) the lease
to produce adequate cash flow to fund substantially all the cash requirements of
the loan; and (iii) the principal tenant, or the guarantor of such tenant's
obligations, to have an investment-grade credit rating when the loan is made.
These loans also must be collateralized by the value of the related property.
Underwriting guidelines take into account such factors as: (i) the lease term of
the property; (ii) the borrower's management ability, including business
experience, property management capabilities and financial soundness; and (iii)
such economic, demographic or other factors that may affect the income generated
by the property or its value. The underwriting guidelines generally require a
loan-to-value ratio of 75 percent or less. Credit-tenant loans and traditional
mortgage loans are carried at amortized cost.
Policy loans are stated at their current unpaid principal balance.
Short-term investments include commercial paper, invested cash and other
investments purchased with maturities of less than three months and are carried
at amortized cost, which approximates fair value. The Company considers all
short-term investments to be cash equivalents.
Fees received and costs incurred in connection with origination of
investments, principally mortgage loans, are deferred. Fees, costs, discounts
and premiums are amortized as yield adjustments over the contractual life of the
investments. Anticipated prepayments on mortgage-backed securities are taken
into consideration in determining estimated future yields on such securities.
The specific identification method is used to account for the disposition
of investments. The differences between sale proceeds and carrying values are
reported as investment gains and losses, or as adjustments to investment income
if the proceeds are prepayments by issuers prior to maturity.
The Company regularly evaluates investment securities, credit-tenant loans
and mortgage loans based on current economic conditions, past credit loss
experience and other circumstances of the investee. A decline in a security's
net realizable value that is other than temporary is treated as an investment
loss and the cost basis of the security is reduced to its estimated fair value.
Impaired loans are revalued at the present value of expected cash flows
discounted at the loan's effective interest rate when it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the agreement. The Company accrues interest on the net carrying amount
of impaired loans.
As part of the Company's investment strategy, the Company may enter into
reverse repurchase agreements and dollar-roll transactions to increase its
investment return or to improve liquidity. These transactions are accounted for
as collateral borrowings, where the amount borrowed is equal to the sales price
of the underlying securities.
SEPARATE ACCOUNTS
Separate accounts are funds on which investment income and gains or losses
accrue directly to certain policyholders. The assets of these accounts are
legally segregated. They are not subject to the claims which may arise out of
any other business of the Company. The Company reports separate account assets
at market value; the underlying investment risks are assumed by the contract
holders. The Company records the related liabilities at amounts equal to the
underlying assets; the fair value of these liabilities equals their carrying
amount.
COST OF POLICIES PURCHASED
The cost of policies purchased represents the portion of the acquisition
cost that was allocated to the value of the right to receive future cash flows
from insurance contracts existing at the date such insurance contracts were
acquired. The value of cost of policies purchased is the actuarially determined
present value of the projected future cash flows from the insurance contracts
existing at the acquisition date. The method used to value the cost of policies
purchased is consistent with the valuation methods used most commonly to value
blocks of insurance business, which is also consistent with the basic
methodology generally used to value assets. The method used is summarized as
follows:
o Identify the expected future cash flows from the blocks of business.
o Identify the risks inherent in realizing those cash flows (i.e., what
is the probability that the cash flows will be realized).
o Identify the rate of return necessary considering the risks inherent
in realizing the cash flows.
39
<PAGE>
================================================================================
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements - Continued
================================================================================
o Determine the value of the policies by discounting the expected future
cash flows by the discount rate required.
The expected future cash flows used in determining such value are based on
actuarially determined projections of future premium collections, mortality,
surrenders, operating expenses, changes in insurance liabilities, investment
yields on the assets held to back the policy liabilities and other factors.
These projections take into account all factors known or expected at the
valuation date, based on the collective judgment of the Company's management.
Actual experience on purchased business may vary from projections due to
differences in renewal premiums collected, investment spread, investment gains
or losses, mortality and morbidity costs and other factors.
The discount rate used to determine the value of the cost of policies
purchased is the rate of return required in order to invest in the business
being acquired. In determining this required rate of return, the following
factors are considered:
o The magnitude of the risks associated with each of the actuarial
assumptions used in determining expected future cash flows.
o The cost of capital required to fund the acquisition.
o The likelihood of changes in projected future cash flows that might
occur if there are changes in insurance regulations and tax laws.
o The acquired business compatibility with other activities of the
Company that may favorably affect future cash flows.
o The complexity of the acquired business.
o Recent prices (i.e., discount rates used in determining valuations)
paid by others to acquire similar blocks of business.
After the cost of policies purchased is determined, it is amortized based
on the incidence of the expected cash flows. This asset is amortized using the
interest rate credited to the underlying policies.
If renewal premiums collected, investment spread, investment gains or
losses, mortality and morbidity costs or other factors differ from expectations,
amortization of the cost of policies purchased is adjusted. For example, the
sale of a fixed maturity investment may result in a gain (or loss). If the sale
proceeds are reinvested at a lower (or higher) earnings rate, there may also be
a reduction (or increase) in future investment spread. Amortization must be
increased (decreased) to reflect the change in the incidence of expected cash
flows consistent with the methods used with the cost of policies produced
(described below).
Each year, the recoverability of the cost of policies purchased is
evaluated by line of business within each block of purchased insurance business.
If current estimates indicate that the existing insurance liabilities, together
with the present value of future net cash flows from the blocks of business
purchased, will be insufficient to recover the cost of policies purchased, the
difference is charged to expense. Amortization is adjusted consistent with the
methods used with the cost of policies produced (as described below).
The cost of policies purchased related to the original acquisition of the
Company by the Partnership in 1990 is amortized under a slightly different
method than that described above. However, the effect of the different method on
1996 net income was insignificant.
COST OF POLICIES PRODUCED
Costs which vary with and are primarily related to the acquisition of new
business are deferred to the extent that such costs are deemed recoverable.
These costs include commissions, certain costs of policy issuance and
underwriting and certain agency expenses. For traditional life and health
contracts, deferred costs are amortized with interest in relation to future
anticipated premium revenue using the same assumptions that are used in
calculating the insurance liabilities. For immediate annuities with mortality
risks, deferred costs are amortized in relation to the present value of benefits
to be paid. For universal life-type, interest-sensitive and investment-type
contracts, deferred costs are amortized in relation to the present value of
expected gross profits from these contracts, discounted using the interest rate
credited to the policy (currently, 5 percent to 8 percent).
Recoverability of the unamortized balance of cost of policies produced is
evaluated regularly and considers anticipated investment income. For universal
life-type contracts and investment-type contracts, the accumulated amortization
is adjusted (whether an increase or a decrease) whenever there is a change in
the estimated gross profits expected over the life of a block of business in
order to maintain a constant relationship between amortization and the present
value (discounted at the rate of interest that accrues to the policies) of
expected gross profits. For traditional and most other contracts, the
unamortized asset balance is reduced by a charge to income only when the sum of
the present value of discounted future cash flows and the policy liabilities is
not sufficient to cover such asset balance.
GOODWILL
The excess of the cost of acquiring the Company's net assets over its
estimated fair values is recorded as goodwill and is being amortized on the
straight-line basis over a 40-year period. The Company periodically assesses the
recoverability of goodwill through projections of future earnings of the
acquired business. Such assessment is made based on whether goodwill is fully
recoverable from projected undiscounted net cash flows from earnings of the
acquired business over the remaining amortization period. If future evaluations
of goodwill indicate a material change in the factors supporting recoverability
over the remaining amortization period, all or a portion of goodwill may need to
be written off or the amortization period shortened (no such changes have
occurred).
INSURANCE LIABILITIES, RECOGNITION OF INSURANCE POLICY INCOME AND RELATED
BENEFITS AND EXPENSES
Reserves for traditional and limited-payment life insurance contracts are
generally calculated using the net level premium method based on assumptions as
to investment yields, mortality, morbidity, withdrawals and dividends. The
assumptions are based on projections using past and expected experience and
include provisions for possible adverse deviation. These assumptions are made at
the time the contract is issued or, in the case of contracts acquired by
purchase, at the purchase date.
Reserves for universal life-type and investment-type contracts are based on
the contract account balance, if future benefit payments in excess of the
account balance are not guaranteed, or on the present value of future benefit
payments when such payments are guaranteed. Additional increases to insurance
liabilities are made if future cash flows including investment income are
insufficient to cover future benefits and expenses.
For investment-type contracts without mortality risk (such as deferred
annuities and immediate annuities with benefits paid for a period certain) and
for contracts that permit the Company or the insured to make changes in the
contract terms (such as single-pre-
40
<PAGE>
GREAT AMERICAN RESERVE
1998 Account F
Individual and Group Annuity
================================================================================
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements - Continued
================================================================================
mium 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.
For contracts with mortality risk, but with premiums paid for only a
limited period (such as single-premium immediate annuities with benefits paid
for the life of the annuitant), the accounting treatment is similar to
traditional contracts. However, the excess of the gross premium over the net
premium is deferred and recognized in relation to the present value of expected
future benefit payments.
Liabilities for incurred claims are determined using historical experience
and represent an estimate of the present value of the ultimate net cost of all
reported and unreported claims. Management believes these estimates are
adequate. Such estimates are periodically reviewed and any adjustments are
reflected in current operations.
For participating policies, the amount of dividends to be paid (which are
not significant) is determined annually by the Company. The portion of the
earnings allocated to participating policyholders is recorded as an insurance
liability.
REINSURANCE
In the normal course of business, the Company seeks to limit its exposure
to loss on any single insured and to recover a portion of benefits paid over
such limit by ceding reinsurance to other insurance enterprises or reinsurers
under excess coverage and coinsurance contracts. The Company has set its
retention limit for acceptance of risk on life insurance policies at various
levels up to $.5 million.
Assets and liabilities related to insurance contracts are reported before
the effects of reinsurance. Reinsurance receivables and prepaid reinsurance
premiums (including amounts related to insurance liabilities) are reported as
assets. Estimated reinsurance receivables are recognized in a manner consistent
with the liabilities relating to the underlying reinsured insurance contracts.
INCOME TAXES
Income tax expense includes deferred taxes arising from temporary
differences between the tax and financial reporting basis of assets and
liabilities. The effects of a tax rate change on current and accumulated
deferred income taxes are reflected in the period in which the change was
enacted.
In assessing the realization of deferred tax assets, the Company considers
whether it is more likely than not that the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences become deductible. If future income does not occur as expected,
deferred income taxes may need to be written off.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
determining estimated fair values of financial instruments:
INVESTMENT SECURITIES: The estimated fair values of fixed maturity
securities (including redeemable preferred stocks) are based on quotes from
independent pricing services, where available. For investment securities for
which such quotes are not available, the estimated fair values are determined
using values obtained from broker-dealer market makers or by discounting
expected future cash flows using current market interest rates applicable to the
yield, credit quality of the investments and maturity of the investments.
MORTGAGE LOANS, CREDIT-TENANT LOANS AND POLICY LOANS: The estimated fair
values of mortgage loans, credit-tenant loans and policy loans are determined by
discounting future expected cash flows using interest rates currently being
offered for similar loans to borrowers with similar credit ratings. Loans with
similar characteristics are aggregated for purposes of the calculations.
OTHER INVESTED ASSETS: The estimated fair values of these assets have been
assumed to be equal to their carrying value. Such value is believed to be a
reasonable approximation of the fair value of these investments.
SHORT-TERM INVESTMENTS: The estimated fair values of short-term investments
are based on quoted market prices, where available. The carrying amount reported
in the balance sheet for these assets approximates their estimated fair value.
INSURANCE LIABILITIES FOR INVESTMENT CONTRACTS: The estimated fair values
of liabilities under investment-type insurance contracts are determined using
discounted cash flow calculations based on interest rates currently being
offered for similar contracts with maturities consistent with those remaining
for the contracts being valued.
INVESTMENT BORROWINGS: Due to the short-term nature of these borrowings
(terms generally less than 30 days), estimated fair values are assumed to
approximate the carrying amount reported in the balance sheet.
The estimated fair values of financial instruments are as follows:
1996 1995
- --------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- --------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
Financial assets issued
for purposes other than
trading:
Actively managed fixed
maturity securities ..... $1,795.1 $1,795.1 $2,030.9 $2,030.9
Mortgage loans ............ 77.3 77.0 95.5 108.9
Credit-tenant loans ....... 93.4 92.5 79.4 79.7
Policy loans .............. 80.8 80.8 84.7 84.7
Other invested assets ..... 89.0 89.0 37.8 37.8
Short-term investments .... 14.8 14.8 19.0 19.0
Financial liabilities
issued for purposes
other than trading:
Insurance liabilities
for investment
contracts(1) ............ $1,282.1 $1,282.1 $1,346.5 $1,346.5
Investment borrowings ..... 48.4 48.4 84.2 84.2
- ----------
(1) The estimated fair value of the liabilities for investment contracts was
approximately equal to its carrying value at December 31, 1996 and 1995,
because interest rates credited on the vast majority of account balances
approximate current rates paid on similar investments and because these
rates are not generally guaranteed beyond one year. The Company is not
required to disclose fair values for insurance liabilities, other than
those for investment contracts. However, the Company takes into
consideration the estimated fair values of all insurance liabilities in its
overall management of interest rate risk. The Company attempts to minimize
exposure to changing interest rates by matching investment maturities with
amounts due under insurance contracts.
41
<PAGE>
================================================================================
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements - Continued
================================================================================
2. JEFFERSON NATIONAL MERGER
On December 31, 1994, Jefferson National was merged with the Company, with
the Company being the surviving corporation. The merger has been accounted for
as a pooling of interests and, accordingly, the financial statements for 1994
have been restated to include the accounts of Jefferson National. Certain 1994
balances for the separate companies are as follows:
AMOUNT PRIOR TO JEFFERSON
EFFECT OF MERGER NATIONAL COMBINED
=======================================================================
(DOLLARS IN MILLIONS)
Insurance policy income ......... $ 53.2 $ 45.4 $ 98.6
Net investment income ........... 101.9 86.0 187.9
Total revenues .................. 154.1 132.6 286.7
Income before income taxes ...... 25.9 35.6 61.5
Net income ...................... 16.7 22.1 38.8
3. INVESTMENTS
At December 31, 1996, the amortized cost and estimated fair value of
actively managed fixed maturity securities were as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
================================================================================
(DOLLARS IN MILLIONS)
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
================================================================================
At December 31, 1995, the amortized cost and estimated fair value of
actively managed fixed maturity securities were as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
================================================================================
(DOLLARS IN MILLIONS)
United States Treasury
securities and obligations
of United States
government
corporations and
agencies .................... $ 59.2 $ 2.1 $ -- $ 61.3
Obligations of state and
political subdivisions ...... 9.3 .2 .1 9.4
Debt securities issued by
foreign governments ......... 8.3 .3 -- 8.6
Public utility securities ..... 351.6 11.4 2.0 361.0
Other corporate securities .... 888.0 34.0 6.4 915.6
Mortgage-backed securities .... 663.7 12.2 .9 675.0
- --------------------------------------------------------------------------------
Total ..................... $1,980.1 $60.2 $ 9.4 $2,030.9
================================================================================
Actively managed fixed maturity securities, summarized by the source of
their estimated fair value, were as follows at December 31, 1996:
ESTIMATED
AMORTIZED FAIR
COST VALUE
================================================================================
(DOLLARS IN MILLIONS)
Nationally recognized pricing services ........ $1,516.7 $1,500.4
Broker-dealer market makers ................... 242.9 243.6
Internally developed methods (calculated
based on a weighted-average current
market yield of 10.2 percent) ............... 51.2 51.1
- --------------------------------------------------------------------------------
Total ..................................... $1,810.8 $1,795.1
================================================================================
The following table sets forth actively managed fixed maturity securities
at December 31, 1996, classified by rating categories. The category assigned is
the highest rating by a nationally recognized statistical rating organization
or, as to $23.5 million fair value of fixed maturity securities not rated by
such firms, the rating assigned by the National Association of Insurance
Commissioners ("NAIC"). For the purposes of this table, NAIC Class 1 is included
in the "A" rating; Class 2, "BBB-"; Class 3, "BB-"; and Classes 4-6, "B+ and
below":
PERCENT OF PERCENT OF
FIXED TOTAL
RATING MATURITIES INVESTMENTS
================================================================================
AAA ............................................. 37% 28%
AA .............................................. 6 5
A ............................................... 21 15
BBB+ ............................................ 9 6
BBB ............................................. 13 10
BBB- ............................................ 7 5
- --------------------------------------------------------------------------------
Investment-grade .............................. 93 69
- --------------------------------------------------------------------------------
BB+ ............................................. 1 1
BB .............................................. 1 1
BB- ............................................. 2 2
B+ and below .................................... 3 2
- --------------------------------------------------------------------------------
Below investment-grade ........................ 7 6
- --------------------------------------------------------------------------------
Total actively managed fixed maturities ..... 100% 75%
================================================================================
Below investment-grade actively managed fixed maturity securities,
summarized by the amount their amortized cost exceeds fair value, were as
follows at December 31, 1996:
ESTIMATED
AMORTIZED FAIR
COST VALUE
================================================================================
(DOLLARS IN MILLIONS)
Amortized cost exceeds fair value
by more than 15% .............................. $ 3.1 $ 1.7
Amortized cost exceeds fair value by
more than 5% but not more than 15% ............ 18.4 16.8
All others ...................................... 111.1 113.3
- --------------------------------------------------------------------------------
Total ....................................... $132.6 $131.8
================================================================================
The Company had no fixed maturity investments in technical or substantive
default as of December 31, 1996. The Company recorded writedowns of fixed
maturity investments and other invested assets totaling $.8 million in 1996,
$1.6 million in 1995 and $1.0 million in 1994, as a result of changes in
conditions which caused it to conclude the decline in the fair value of the
investment was other than temporary. As of December 31, 1996, there were no
fixed maturity investments about which the Company had serious doubts as to the
ability of the issuer to comply with the contractual terms of their obligations
on a timely basis. Investment income foregone due to defaulted securities was
$.2 million in 1996, $.1 million in the four months ended December 31, 1995 and
$1.3 million in 1994. There was no investment income foregone due to defaulted
securities during the eight months ended August 31, 1995.
42
<PAGE>
GREAT AMERICAN RESERVE
1998 Account F
Individual and Group Annuity
================================================================================
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements - Continued
================================================================================
Actively managed fixed maturity securities at December 31, 1996, summarized
by contractual maturity date, are shown below. Actual maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties and because most
mortgage-backed securities provide for periodic payments throughout their lives.
ESTIMATED
AMORTIZED FAIR
COST VALUE
================================================================================
(DOLLARS IN MILLIONS)
Due in one year or less ......................... $ 10.7 $ 10.6
Due after one year through five years ........... 102.3 103.1
Due after five years through ten years .......... 314.7 313.5
Due after ten years ............................. 804.8 793.5
- --------------------------------------------------------------------------------
Subtotal ...................................... 1,232.5 1,220.7
Mortgage-backed securities ...................... 578.3 574.4
- --------------------------------------------------------------------------------
Total ......................................... $1,810.8 $1,795.1
================================================================================
Net investment income consisted of the following:
<TABLE>
<CAPTION>
FOUR EIGHT
YEAR MONTHS MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
====================================================================================
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Actively managed fixed
maturity securities ... $146.4 $53.9 $110.2 $157.9
Mortgage loans .......... 11.8 4.8 8.0 13.0
Credit-tenant loans ..... 7.2 1.7 4.1 3.8
Policy loans ............ 5.0 1.9 3.5 5.2
Short-term investments .. 2.3 .8 1.9 3.8
Other invested assets ... 11.4 .3 1.6 3.2
Separate accounts ....... 35.6 11.3 7.9 2.3
- ------------------------------------------------------------------------------------
Gross investment income 219.7 74.7 137.2 189.2
- ------------------------------------------------------------------------------------
Investment expenses ..... 1.3 .5 .8 1.3
- ------------------------------------------------------------------------------------
Net investment income . $218.4 $74.2 $136.4 $187.9
====================================================================================
</TABLE>
The Company did not have any fixed maturity investments and mortgage loans
not accruing investment income in 1996, 1995 and 1994.
The proceeds from sales of actively managed fixed maturity securities were
$938.3 million in 1996, $512.5 million in the four months ended December 31,
1995, $406.0 million in the eight months ended August 31, 1995 and $578.3
million in 1994. Net investment gains consisted of the following:
<TABLE>
<CAPTION>
FOUR EIGHT
YEAR MONTHS MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
====================================================================================
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Fixed maturities:
Gross gains ............ $16.6 $16.5 $14.4 $17.6
Gross losses ........... (9.2) (2.2) (2.3) (9.3)
Other than temporary
decline in fair value (.2) (.4) (1.2) (1.0)
- ------------------------------------------------------------------------------------
Net investment gains
from fixed
maturities before
expenses ........... 7.2 13.9 10.9 7.3
Mortgage loans .......... -- -- (.2) --
Other ................... -- -- (1.0) (3.1)
Other than temporary
decline in fair value .. (.6) -- -- --
- ------------------------------------------------------------------------------------
Net investment gains
before expenses .... 6.6 13.9 9.7 4.2
Investment gain expenses 3.9 1.4 2.4 4.0
- ------------------------------------------------------------------------------------
Net investment gains . $ 2.7 $12.5 $ 7.3 $ .2
====================================================================================
</TABLE>
The change in net unrealized appreciation (depreciation) on investments
consisted of the following:
<TABLE>
<CAPTION>
FOUR EIGHT
YEAR MONTHS MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
====================================================================================
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Actively managed fixed
maturities ............. $(66.5) $ 45.5 $164.1 $(254.9)
Other invested assets ... (1.3) .1 5.1 (3.2)
- ------------------------------------------------------------------------------------
Subtotal .............. (67.8) 45.6 169.2 (258.1)
Less effect on other
balance sheet accounts:
Cost of policies
purchased .......... 36.6 (26.3) (64.1) 93.1
Cost of policies
produced ........... 4.5 (2.7) (12.0) 27.6
Income taxes ........ 9.7 (6.1) (34.1) 49.1
- ------------------------------------------------------------------------------------
Change in net unrealized
appreciation
(depreciation) of
securities ............ $(17.0) $ 10.5 $ 59.0 $ (88.3)
====================================================================================
</TABLE>
Investments in mortgage-backed securities at December 31, 1996, included
collateralized mortgage obligations ("CMOs") of $221.6 million and
mortgage-backed pass-through securities of $352.8 million. CMOs are securities
backed by pools of pass-through securities and/or mortgages that are segregated
into sections or "tranches." These securities provide for sequential retirement
of principal, rather than the pro rata share of principal return which occurs
through regular monthly principal payments on pass-through securities.
The following table sets forth the par value, amortized cost and estimated
fair value of investments in mortgage-backed securities including CMOs at
December 31, 1996, summarized by interest rates on the underlying collateral:
PAR AMORTIZED ESTIMATED
VALUE COST FAIR VALUE
================================================================================
(DOLLARS IN MILLIONS)
Below 7 percent ....................... $209.6 $205.1 $201.5
7 percent--8 percent .................. 247.4 241.5 240.6
8 percent--9 percent .................. 70.9 69.7 69.3
9 percent and above ................... 60.1 62.0 63.0
- --------------------------------------------------------------------------------
Total mortgage-backed securities .... $588.0 $578.3 $574.4
================================================================================
The amortized cost and estimated fair value of mortgage-backed securities
including CMOs at December 31, 1996, summarized by type of security were as
follows:
ESTIMATED FAIR VALUE
=====================
PERCENT
AMORTIZED OF FIXED
COST AMOUNT MATURITIES
================================================================================
(DOLLARS IN MILLIONS)
Pass-throughs and sequential
and targeted amortization classes ... $458.7 $454.9 25%
Accrual (Z tranche) bonds ............. 9.6 9.7 1
Planned amortization classes and
accretion directed bonds ............ 77.2 76.7 4
Subordinated classes .................. 32.8 33.1 2
- --------------------------------------------------------------------------------
Total mortgage-backed securities $578.3 $574.4 32%
================================================================================
43
<PAGE>
================================================================================
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements - Continued
================================================================================
The following table sets forth the amortized cost and estimated fair value
of mortgage-backed securities as of December 31, 1996, based upon the pricing
source used to determine estimated fair value:
ESTIMATED
AMORTIZED FAIR
COST VALUE
================================================================================
(DOLLARS IN MILLIONS)
Nationally recognized pricing services ......... $515.1 $511.3
Broker-dealer market makers .................... 52.7 52.5
Internally developed methods (calculated
based on a weighted-average current market
yield of 7.4 percent) ......................... 10.5 10.6
- --------------------------------------------------------------------------------
Total mortgage-backed securities ........... $578.3 $574.4
================================================================================
At December 31, 1996, no mortgage loans or credit-tenant loans had
defaulted as to principal or interest for more than 60 days, were in
foreclosure, had been converted to foreclosed real estate or had been
restructured while the Company owned them. At December 31, 1996, the Company had
a loan loss reserve of $.9 million. Approximately 30 percent, 18 percent, 16
percent and 6 percent of the mortgage loan balance were on properties located in
California, Indiana, Texas and Florida, respectively. No other state comprised
greater than 5 percent of the mortgage loan balance.
As part of its investment strategy, the Company enters into reverse
repurchase agreements and dollar-roll transactions to increase its return on
investments and improve its liquidity. These transactions are accounted for as
short-term borrowings collateralized by pledged securities with book values
approximately equal to the loan value. Such borrowings averaged approximately
$115.3 million during 1996 compared to $84.4 million during 1995. The weighted
average interest rate on short-term collateralized borrowings was 5.3 percent
and 5.4 percent during 1996 and 1995, respectively. The primary risk associated
with short-term collateralized borrowings is that the counterparty will be
unable to perform under the terms of the contract. The Company's exposure is
limited to the excess of the net replacement cost of the securities over the
value of the short-term investments (which was not material at December 31,
1996). The Company believes that the counterparties to its reverse repurchase
and dollar-roll agreements are financially responsible and that the counterparty
risk is minimal.
Investments on deposit for regulatory authorities as required by law were
$17.1 million at December 31, 1996.
No investments of a single issuer were in excess of 10 percent of
shareholder's equity at December 31, 1996, other than investments issued or
guaranteed by the United States government.
4. INSURANCE LIABILITIES
Insurance liabilities consisted of the following:
<TABLE>
<CAPTION>
INTEREST DECEMBER 31,
WITHDRAWAL MORTALITY RATE --------------------
ASSUMPTION ASSUMPTION ASSUMPTION 1996 1995
===========================================================================================
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Future policy benefits:
Investment contracts ........ N/A N/A (b) $1,282.1 $1,346.5
Limited-payment contracts ... None (a) 8% 105.3 96.7
Traditional life insurance Company
contracts ................. experience (a) 8% 146.2 153.5
Universal life-type
contracts .................. N/A N/A N/A 354.4 367.6
Claims payable and other
policyholders' funds ...... N/A N/A N/A 69.5 74.8
- -------------------------------------------------------------------------------------------
Total $1,957.5 $2,039.1
===========================================================================================
</TABLE>
(a) Principally modifications of the 1975-80 Basic Table, Select and Ultimate
Table.
(b) At December 31, 1996 and 1995, approximately 98 percent of this liability
represented account balances where future benefits were not guaranteed. The
weighted average interest rate on the remainder of the liabilities,
representing the present value of guaranteed future benefits, was
approximately 7 percent at December 31, 1996.
Participating policies represented approximately 3.5 percent, 3.7 percent
and 3.6 percent of total life insurance in force at December 31, 1996, 1995 and
1994, respectively, and approximately 2.7 percent, 2.4 percent and 7.5 percent
of premium income for 1996, 1995 and 1994, respectively. Dividends on
participating policies amounted to $1.9 million, $1.8 million and $1.7 million
in 1996, 1995 and 1994, respectively.
5. REINSURANCE
Cost of reinsurance ceded where the reinsured policy contains mortality
risks totaled $24.6 million in 1996, $29.1 million in 1995 and $35.3 million in
1994. This cost was deducted from insurance premium revenue. The Company is
contingently liable for claims reinsured if the assuming company is unable to
pay. Reinsurance recoveries netted against insurance policy benefits totaled
$19.4 million in 1996, $19.5 million in 1995 and $27.5 million in 1994.
Effective October 1, 1995, Western National Life Insurance Company, a
former subsidiary of Conseco, recaptured certain annuity businesses ceded to the
Company through a reinsurance agreement. Reserves related to these policies
totaled $72.8 million. Recapture fees of $.7 million were recognized as income
during the four months ended December 31, 1995.
The Company's reinsurance receivable balance at December 31, 1996, relates
to many reinsurers. No balance from a single reinsurer exceeds $7.0 million.
44
<PAGE>
GREAT AMERICAN RESERVE
1998 Account F
Individual and Group Annuity
================================================================================
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements - Continued
================================================================================
6. INCOME TAXES
Income tax liabilities consisted of the following:
DECEMBER 31,
----------------------
1996 1995
==========================================================================
(DOLLARS IN MILLIONS)
Deferred income tax liabilities (assets):
Cost of policies purchased and
Cost of policies produced ..................... $ 60.3 $ 44.7
Investments .................................... (3.3) 8.6
Insurance liabilities .......................... (19.7) (21.7)
Unrealized appreciation (depreciation) ......... (2.5) 7.2
Other .......................................... (5.0) (7.7)
- --------------------------------------------------------------------------
Deferred income tax liabilities ............... 29.8 31.1
Current income tax liabilities ................... -- 7.9
- --------------------------------------------------------------------------
Income tax liabilities ........................ $ 29.8 $ 39.0
==========================================================================
Income tax expense was as follows:
<TABLE>
<CAPTION>
FOUR EIGHT
YEAR MONTHS MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
====================================================================================
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Current tax provision ... $10.5 $11.9 $19.9 $20.0
Deferred tax provision
(benefit) .............. 4.9 (2.2) (3.4) 2.7
- ------------------------------------------------------------------------------------
Income tax expense .... $15.4 $ 9.7 $16.5 $22.7
====================================================================================
</TABLE>
Income tax expense differed from that computed at the applicable statutory
rate of 35 percent for the following reasons:
<TABLE>
<CAPTION>
FOUR EIGHT
YEAR MONTHS MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
====================================================================================
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Federal tax on income
before income taxes
at statutory rate ..... $14.4 $9.0 $15.6 $21.5
State taxes and other ... .6 .5 .4 .5
Nondeductible items ..... .4 .2 .5 .7
- ------------------------------------------------------------------------------------
Income tax expense .... $15.4 $9.7 $16.5 $22.7
====================================================================================
</TABLE>
The Company is currently being examined by the Internal Revenue Service for
the 1994 tax year. The Company believes that the outcome of this examination
will not have a material impact on its financial position or results of
operations.
7. RELATED PARTY TRANSACTIONS
The Company operates without direct employees through management and
service agreements with subsidiaries of Conseco. Fees for such services
(including data processing, executive management and investment management
services) were based on negotiated rates for periods prior to January 1, 1996.
Pursuant to new service agreements effective January 1, 1996, such fees are
based on Conseco's direct and directly allocable costs plus a 10 percent margin.
Total fees incurred by the Company under such agreements were $44.1 million in
1996, $26.6 million in 1995 and $25.1 million in 1994.
During 1996, the Company purchased $31.5 million par value of senior
subordinated notes issued by subsidiaries of Conseco. Such notes had a carrying
value of $34.7 million at December 31, 1996, and are classified as "other
invested assets" in the accompanying balance sheet. In addition, during 1996,
the Company forgave receivables from Conseco totaling $9.9 million. This
transaction is reflected as a dividend to Conseco in the accompanying statement
of shareholder's equity.
8. OTHER OPERATING INFORMATION
Insurance policy income consisted of the following:
<TABLE>
<CAPTION>
FOUR EIGHT
YEAR MONTHS MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
====================================================================================
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Direct premiums collected $ 241.3 $ 82.8 $ 158.6 $ 240.3
Reinsurance assumed ...... 1.7 .7 2.0 3.1
Reinsurance ceded ........ (24.6) (11.2) (17.9) (35.3)
- ------------------------------------------------------------------------------------
Premiums collected, net
of reinsurance ........ 218.4 72.3 142.7 208.1
Less premiums on
universal life and
products without
mortality risk which
are recorded as
additions to
insurance liabilities . (169.8) (50.8) (104.4) (146.0)
- ------------------------------------------------------------------------------------
Premiums on products
with mortality and
morbidity risk,
recorded as insurance
policy income ......... 48.6 21.5 38.3 62.1
Fees and surrender charges 32.8 10.3 22.2 36.5
- ------------------------------------------------------------------------------------
Insurance policy income . $ 81.4 $ 31.8 $ 60.5 $ 98.6
====================================================================================
</TABLE>
The four states with the largest shares of the Company's premiums collected
in 1996 were Texas (29 percent), Florida (19 percent), California (9 percent)
and Michigan (7 percent). No other state's share of premiums collected exceeded
5 percent.
Other operating costs and expenses were as follows:
<TABLE>
<CAPTION>
FOUR EIGHT
YEAR MONTHS MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
====================================================================================
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Policy maintenance
expense ................. $37.8 $6.5 $14.0 $19.0
State premium taxes and
guaranty assessments ... 4.4 1.6 1.1 3.0
Commission expense ....... 12.1 5.0 8.6 15.3
- ------------------------------------------------------------------------------------
Other operating costs
and expenses ......... $54.3 $13.1 $23.7 $37.3
====================================================================================
</TABLE>
Anticipated returns from the investment of policyholder balances are
considered in determining the amortization of the cost of policies purchased and
cost of policies produced. Sales of fixed maturity investments during 1996, 1995
and 1994, changed the incidence of profits on such policies because investment
gains and losses were recognized currently and the expected future yields on the
investment of policyholder balances were affected. Accordingly, amortization of
the cost of policies purchased and cost of policies produced was increased by
$2.5 million in 1996, $10.0 million in the four months ended December 31, 1995,
$4.3 million for the eight months ended August 31, 1995, and $2.7 million in
1994.
45
<PAGE>
================================================================================
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements - Continued
================================================================================
The changes in the cost of policies purchased were as follows:
<TABLE>
<CAPTION>
FOUR EIGHT
YEAR MONTHS MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
====================================================================================
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Balance, beginning of
period ................. $120.0 $159.0 $173.9 $93.0
Amortization related
to operations:
Cash flow realized ... (26.2) (9.4) (19.1) (30.4)
Interest added ....... 13.1 5.0 12.7 20.8
Amortization related
to sales of fixed
maturity investments .. (2.2) (8.3) (3.4) (2.6)
Amounts related to
fair value adjustment
of actively managed
fixed maturity
securities ........... 36.6 (26.3) (64.1) 93.1
Adjustment of balance
due to new accounting
basis and other ...... 1.7 -- 59.0 --
- ------------------------------------------------------------------------------------
Balance, end of period .. $143.0 $120.0 $159.0 $173.9
====================================================================================
</TABLE>
Based on current conditions and assumptions as to future events on all
policies in force, approximately 9.2 percent, 9.2 percent, 8.3 percent, 7.3
percent and 6.7 percent of the cost of policies purchased as of December 31,
1996, are expected to be amortized in each of the next five years, respectively.
The discount rates used to determine the amortization of the cost of policies
purchased ranged from 5 percent to 8 percent and averaged 5.5 percent.
The changes in the cost of policies produced were as follows:
<TABLE>
<CAPTION>
FOUR EIGHT
YEAR MONTHS MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
====================================================================================
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Balance, beginning of
period .................. $24.0 $25.9 $63.2 $30.8
Additions ............... 13.2 3.0 6.6 9.4
Amortization related
to operations ......... (3.2) (.5) (4.0) (4.5)
Amortization related
to sales of fixed
maturity investments .. (.3) (1.7) (.9) (.1)
Amounts related to
fair value adjustment
of actively
managed fixed maturity
securities ............ 4.5 (2.7) (12.0) 27.6
Adjustment of balance
due to new accounting
basis ................. -- -- (27.0) --
- ------------------------------------------------------------------------------------
Balance, end of period ... $38.2 $24.0 $25.9 $63.2
====================================================================================
</TABLE>
9. STATEMENT OF CASH FLOWS
Income taxes paid during 1996, 1995, and 1994, were $18.1 million, $19.3
million and $20.3 million, respectively.
Short-term investments having original maturities of three months or less
are considered to be cash equivalents. All cash is invested in short-term
investments.
10. STATUTORY INFORMATION
Statutory accounting practices prescribed or permitted for insurance
companies by regulatory authorities differ from generally accepted accounting
principles. The Company reported the following amounts to regulatory agencies:
DECEMBER 31,
-----------------------
1996 1995
=================================================================
(DOLLARS IN MILLIONS)
Statutory capital and surplus ......... $140.3 $156.2
Asset valuation reserve ("AVR") ....... 28.7 26.2
Interest maintenance reserve ("IMR") .. 63.1 64.7
- -----------------------------------------------------------------
Total ............................... $232.1 $247.1
=================================================================
The Company had statutory net income of $32.6 million, $38.4 million and
$37.7 million in 1996, 1995 and 1994, respectively.
Statutory accounting practices classify certain segregated portions of
surplus, called AVR and IMR, as liabilities. The purpose of these accounts is to
stabilize statutory net income and surplus against fluctuations in the market
value and creditworthiness of investments. The IMR captures all realized
investment gains and losses resulting from changes in interest rates and
provides for subsequent amortization of such amounts into statutory net income
on a basis reflecting the remaining life of the assets sold. The AVR captures
investment gains and losses related to changes in creditworthiness and is also
adjusted each year based on a formula related to the quality and loss experience
of the investment portfolio.
The following table compares the pre-tax income determined on a statutory
accounting basis with such income reported herein in accordance with GAAP:
<TABLE>
<CAPTION>
FOUR EIGHT
YEAR MONTHS MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
====================================================================================
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Pre-tax income as
reported on a statutory
accounting basis before
transfers to and from and
amortization of the IMR .. $40.2 $ 33.6 $ 50.2 $ 58.6
GAAP adjustments:
Investments valuation .... 4.9 (3.3) .8 7.5
Amortization related to
operations ............. (17.8) (5.3) (11.7) (16.0)
Amortization related to
investment gains ....... (2.5) (10.0) (4.3) (2.7)
Deferral of cost of
policies produced ...... 13.2 3.0 6.6 9.4
Insurance liabilities .... 3.2 5.1 2.5 2.5
Other .................... (.1) 2.7 .6 2.2
- ------------------------------------------------------------------------------------
Net effect of GAAP
adjustments .............. .9 (7.8) (5.5) 2.9
- ------------------------------------------------------------------------------------
GAAP pre-tax income ....... $41.1 $ 25.8 $ 44.7 $ 61.5
====================================================================================
</TABLE>
State insurance laws generally restrict the ability of insurance companies
to pay dividends or make other distributions. Approximately $32.7 million of the
Company's net assets at December 31, 1996, are available for distribution in
1997 without permission of state regulatory authorities.
46
<PAGE>
GREAT AMERICAN RESERVE
1998 Account F
Individual and Group Annuity
================================================================================
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements - Continued
================================================================================
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
Company
Independent Accountants
Legal Opinions
Distribution
Performance Information
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 contact 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 February 12, 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
Separate Account F fixed and variable annuity at the following address:
Name:
--------------------------------------------
Mailing Address:
---------------------------------
-------------------------------------------------
Sincerely,
-----------------------------------
(Signature)
- --------------------------------------------------------------------------------
47
<PAGE>
[BACK COVER]
Great American Reserve Insurance Company
11815 N. Pennsylvania St.
Carmel, IN 46032
[copyright] 1998, Great American Reserve Insurance Company 05-8318 (2/98)
