<PAGE> 1
FINANCIAL STATEMENTS
PAINEWEBBER LIFE VARIABLE ANNUITY ACCOUNT
YEAR ENDED DECEMBER 31, 1999
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE> 2
PaineWebber Life Variable Annuity Account
Financial Statements
Year ended December 31, 1999
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors..............................................1
Audited Financial Statements
Statements of Net Assets....................................................2
Statements of Operations....................................................5
Statements of Changes in Net Assets.........................................7
Notes to Financial Statements...............................................9
</TABLE>
<PAGE> 3
[ERNST & YOUNG LETTERHEAD]
Report of Independent Auditors
The Board of Directors
PaineWebber Life Insurance Company
We have audited the accompanying individual and combined statements of net
assets of each of the divisions of PaineWebber Life Variable Annuity Account
(comprised of the Money Market, Strategic Fixed Income, High Grade Fixed Income,
Global Income, Balanced, Growth and Income, Growth, Aggressive Growth and Global
Equity Divisions) as of December 31, 1999, the related statements of operations
for the year then ended and changes in net assets for each of the two years in
the period then ended. These financial statements are the responsibility of the
Account's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of mutual fund shares owned as of December 31,
1999, by correspondence with the transfer agent. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the individual and combined financial position of each of
the divisions PaineWebber Life Variable Annuity Account at December 31, 1999,
and the individual and combined results of their operations for the year then
ended and the changes in their net assets for each of the two years in the
period then ended, in conformity with accounting principles generally accepted
in the United States.
/s/ ERNST & YOUNG LLP
January 19, 2000
1
<PAGE> 4
PaineWebber Life Variable Annuity Account
Statements of Net Assets
December 31, 1999
<TABLE>
<CAPTION>
STRATEGIC HIGH GRADE
MONEY FIXED FIXED
MARKET INCOME INCOME
COMBINED DIVISION DIVISION DIVISION
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments at net asset value:
Mitchell Hutchins Series Trust Money
Market Portfolio, 3,707,696 shares at
$1.00 per share (cost - $3,707,696) $ 3,707,696 $ 3,707,696 $ - $ -
Mitchell Hutchins Series Trust Strategic
Fixed Income Portfolio, 344,367 shares at
$10.42 per share (cost - $3,778,262) 3,588,307 - 3,588,307 -
Mitchell Hutchins Series Trust High Grade
Fixed Income Portfolio, 537,988 shares at
$8.82 per share (cost - $4,963,249) 4,745,052 - - 4,745,052
Mitchell Hutchins Series Trust Global
Income Portfolio, 369,604 shares at
$10.54 per share (cost - $4,235,678) 3,895,628 - - -
Mitchell Hutchins Series Trust Balanced
Portfolio, 1,073,756 shares at
$11.75 per share (cost - $12,040,417) 12,616,636 - - -
Mitchell Hutchins Series Trust Growth and
Income Portfolio, 556,613 shares at
$16.34 per share (cost - $7,296,901) 9,095,061 - - -
Mitchell Hutchins Series Trust Growth
Portfolio, 709,310 shares at $24.09 per
share (cost - $12,101,312) 17,087,278 - - -
Mitchell Hutchins Series Trust Aggressive
Growth Portfolio, 907,992 shares at
$17.06 per share (cost - $10,833,045) 15,490,342 - - -
Mitchell Hutchins Series Trust Global
Equity Portfolio, 542,125 shares at $16.21
per share (cost - $7,617,533) 8,787,841 - - -
------------------------------------------------------------------------------
Total net assets (cost - $66,574,093) $79,013,841 $ 3,707,696 $ 3,588,307 $ 4,745,052
==============================================================================
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
GLOBAL GROWTH AND AGGRESSIVE GLOBAL
INCOME BALANCED INCOME GROWTH GROWTH EQUITY
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ - $ - $ - $ - $ - $ -
- - - - - -
- - - - - -
3,895,628 - - - - -
- 12,616,636 - - - -
- - 9,095,061 - - -
- - - 17,087,278 - -
- - - - 15,490,342 -
- - - - - 8,787,841
- -----------------------------------------------------------------------------------------------------------------------
$ 3,895,628 $ 12,616,636 $ 9,095,061 $ 17,087,278 $ 15,490,342 $ 8,787,841
=======================================================================================================================
</TABLE>
3
<PAGE> 6
PaineWebber Life Variable Annuity Account
Statements of Net Assets (continued)
<TABLE>
<CAPTION>
Net assets represented by:
<S> <C>
CURRENTLY PAYABLE ANNUITY CONTRACTS
High Grade Fixed Income Division $ 9,375
Global Income Division 2,347
Balanced Division 21,020
Growth Division 12,511
Aggressive Growth Division 4,064
Global Equity Division 11,214
--------------------
60,531
</TABLE>
<TABLE>
<CAPTION>
CONTRACTS IN ACCUMULATION PERIOD
UNITS VALUE
--------------- ---------------
<S> <C> <C> <C>
CONTRACTS SOLD SUBJECT TO EARLY WITHDRAWAL CHARGES
Money Market Division 305,307 $11.71 3,574,696
Strategic Fixed Income Division 275,073 12.27 3,375,249
High Grade Fixed Income Division 397,781 10.60 4,218,123
Global Income Division 293,493 11.61 3,407,508
Balanced Division 636,853 18.12 11,541,423
Growth and Income Division 359,026 23.23 8,341,556
Growth Division 634,308 25.56 16,212,018
Aggressive Growth Division 599,996 23.14 13,885,550
Global Equity Division 525,841 15.08 7,927,094
--------------------
72,483,217
CONTRACTS SOLD NOT SUBJECT TO EARLY WITHDRAWAL CHARGES
Money Market Division 11,487 11.58 133,000
Strategic Fixed Income Division 17,522 12.16 213,058
High Grade Fixed Income Division 49,325 10.49 517,554
Global Income Division 42,933 11.31 485,773
Balanced Division 58,510 18.02 1,054,193
Growth and Income Division 31,879 23.64 753,505
Growth Division 34,366 25.10 862,749
Aggressive Growth Division 69,903 22.90 1,600,728
Global Equity Division 62,243 13.65 849,533
--------------------
6,470,093
--------------------
$79,013,841
====================
</TABLE>
See accompanying notes.
4
<PAGE> 7
PaineWebber Life Variable Annuity Account
Statements of Operations
Year ended December 31, 1999
<TABLE>
<CAPTION>
MONEY
MARKET STRATEGIC FIXED
COMBINED DIVISION INCOME DIVISION
----------------------- -------------------- ----------------------
<S> <C> <C> <C>
NET INVESTMENT INCOME (LOSS)
Income:
Dividends $ 213,786 $178,715 $ -
Capital gains distributions 6,799 - 890
----------------------- -------------------- ----------------------
Total investment income 220,585 178,715 890
Expenses (Note 2):
Mortality, distribution and expense risk and enhanced
death benefit fees (1,600,257) (80,976) (80,117)
Administrative charges (132,564) (4,981) (7,079)
----------------------- -------------------- ----------------------
Total expenses (1,732,821) (85,957) (87,196)
----------------------- -------------------- ----------------------
Net investment income (loss) (1,512,236) 92,758 (86,306)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
(NOTE 4)
Net realized gain (loss) on investments 4,096,950 - (150,827)
Change in net unrealized appreciation/depreciation of
investments 6,403,680 - (37,556)
----------------------- -------------------- ----------------------
Net increase (decrease) in net assets resulting from
operations $8,988,394 $ 92,758 $(274,689)
======================= ==================== ======================
</TABLE>
See accompanying notes.
5
<PAGE> 8
<TABLE>
<CAPTION>
HIGH GRADE
FIXED GLOBAL GROWTH AND AGGRESSIVE GLOBAL
INCOME INCOME BALANCED INCOME GROWTH GROWTH EQUITY
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ - $ - $ - $ 137 $ - $ - $ 34,934
- - 268 - 358 - 5,283
- -----------------------------------------------------------------------------------------------------------------------------
- - 268 137 358 - 40,217
(98,509) (95,642) (276,669) (196,284) (318,683) (277,973) (175,404)
(7,179) (6,178) (24,084) (12,144) (28,199) (27,024) (15,696)
- -----------------------------------------------------------------------------------------------------------------------------
(105,688) (101,820) (300,753) (208,428) (346,882) (304,997) (191,100)
- -----------------------------------------------------------------------------------------------------------------------------
(105,688) (101,820) (300,485) (208,291) (346,524) (304,997) (150,883)
(114,453) (320,416) 71,079 1,207,701 1,762,954 1,545,040 95,872
(134,027) (4,001) (48,901) (279,229) 3,474,464 1,978,493 1,454,437
- -----------------------------------------------------------------------------------------------------------------------------
$ (354,168) $ (426,237) $ (278,307) $ 720,181 $ 4,890,894 $ 3,218,536 $ 1,399,426
=============================================================================================================================
</TABLE>
6
<PAGE> 9
PaineWebber Life Variable Annuity Account
Statements of Changes in Net Assets
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
MONEY STRATEGIC
MARKET FIXED INCOME
COMBINED DIVISION DIVISION
--------------------------------------------------------
<S> <C> <C> <C>
Net assets at January 1, 1998 $ 129,309,639 $ 6,426,761 $ 6,223,086
Operations:
Net investment income 11,228,364 169,272 324,585
Net realized gain (loss) on investments 3,212,769 - (911)
Change in net unrealized appreciation/depreciation of
investments 2,667,899 - 80,618
--------------------------------------------------------
Net increase in net assets resulting from operations 17,109,032 169,272 404,292
Changes from principal transactions:
Purchase payments 2,048,725 127,999 42,075
Contract distributions and terminations (19,818,608) (1,081,793) (589,368)
Transfer payments (to) from other divisions - 1,490,673 434,096
Annuity payments and actuarial adjustment in reserves (7,234) - -
--------------------------------------------------------
Increase (decrease) in net assets derived from principal
transactions (17,777,117) 536,879 (113,197)
--------------------------------------------------------
Total increase (decrease) (668,085) 706,151 291,095
--------------------------------------------------------
Net assets at December 31, 1998 128,641,554 7,132,912 6,514,181
Operations:
Net investment income (loss) (1,512,236) 92,758 (86,306)
Net realized gain (loss) on investments 4,096,950 - (150,827)
Change in net unrealized appreciation/depreciation of
investments 6,403,680 - (37,556)
--------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 8,988,394 92,758 (274,689)
Changes from principal transactions:
Purchase payments 595,780 182,921 20,000
Contract distributions and terminations (59,109,302) (5,115,448) (2,934,249)
Transfer payments (to) from other divisions - 1,414,553 263,064
Annuity payments and actuarial adjustment in reserves (102,585) - -
--------------------------------------------------------
Decrease in net assets derived from principal transactions (58,616,107) (3,517,974) (2,651,185)
--------------------------------------------------------
Total decrease (49,627,713) (3,425,216) (2,925,874)
--------------------------------------------------------
Net assets at December 31, 1999 $ 79,013,841 $ 3,707,696 $ 3,588,307
========================================================
</TABLE>
See accompanying notes.
7
<PAGE> 10
<TABLE>
<CAPTION>
HIGH
GRADE
FIXED GLOBAL GROWTH AGGRESSIVE GLOBAL
INCOME INCOME BALANCED AND INCOME GROWTH GROWTH EQUITY
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 7,734,959 $ 10,092,657 $ 23,338,547 $ 14,297,145 $ 23,451,731 $ 22,416,168 $ 15,328,585
413,966 433,530 2,435,561 888,413 2,365,645 2,034,563 2,162,829
84,032 (50,318) 471,298 727,712 148,153 1,288,817 543,986
(137,347) 317,372 197,232 417,885 3,249,216 (489,190) (967,887)
- ---------------------------------------------------------------------------------------------------------------------------------
360,651 700,584 3,104,091 2,034,010 5,763,014 2,834,190 1,738,928
80,833 52,258 318,208 512,067 105,883 470,334 339,068
(951,624) (1,010,394) (4,352,343) (2,353,018) (4,693,479) (2,692,313) (2,094,276)
178,182 (707,998) 351,613 2,094,124 (706,828) (1,883,142) (1,250,720)
(168) (811) (1,962) - (1,424) (239) (2,630)
- ---------------------------------------------------------------------------------------------------------------------------------
(692,777) (1,666,945) (3,684,484) 253,173 (5,295,848) (4,105,360) (3,008,558)
- ---------------------------------------------------------------------------------------------------------------------------------
(332,126) (966,361) (580,393) 2,287,183 467,166 (1,271,170) (1,269,630)
- ---------------------------------------------------------------------------------------------------------------------------------
7,402,833 9,126,296 22,758,154 16,584,328 23,918,897 21,144,998 14,058,955
(105,688) (101,820) (300,485) (208,291) (346,524) (304,997) (150,883)
(114,453) (320,416) 71,079 1,207,701 1,762,954 1,545,040 95,872
(134,027) (4,001) (48,901) (279,229) 3,474,464 1,978,493 1,454,437
- ---------------------------------------------------------------------------------------------------------------------------------
(354,168) (426,237) (278,307) 720,181 4,890,894 3,218,536 1,399,426
20,512 20,669 54,914 4,629 21,886 248,486 21,763
(2,728,311) (4,502,000) (9,285,603) (7,485,284) (12,160,827) (8,444,625) (6,452,955)
405,028 (322,528) (629,956) (728,793) 497,488 (676,569) (222,287)
(842) (572) (2,566) - (81,060) (484) (17,061)
- ---------------------------------------------------------------------------------------------------------------------------------
(2,303,613) (4,804,431) (9,863,211) (8,209,448) (11,722,513) (8,873,192) (6,670,540)
- ---------------------------------------------------------------------------------------------------------------------------------
(2,657,781) (5,230,668) (10,141,518) (7,489,267) (6,831,619) (5,654,656) (5,271,114)
- ---------------------------------------------------------------------------------------------------------------------------------
$ 4,745,052 $ 3,895,628 $ 12,616,636 $ 9,095,061 $ 17,087,278 $ 15,490,342 $ 8,787,841
=================================================================================================================================
</TABLE>
8
<PAGE> 11
PaineWebber Life Variable Annuity Account
Notes to Financial Statements
December 31, 1999
1. INVESTMENT AND ACCOUNTING POLICIES
ORGANIZATION
PaineWebber Life Variable Annuity Account (the "Account") was organized by
PaineWebber Life Insurance Company (the "Company") in accordance with the
provisions of California Insurance laws and is a part of the total operations of
the Company. The Company is a wholly-owned subsidiary of PaineWebber Life
Holdings, Inc., which is a wholly-owned subsidiary of PaineWebber Group, Inc.
(the "Parent"). The assets and liabilities of the Account are clearly identified
and distinguished from the other assets and liabilities of the Company. The
Account invests solely in specified portfolios of Mitchell Hutchins Series Trust
(the "Series Trust"), an open-end management investment company under the
Investment Company Act of 1940, as directed by eligible contract owners. The
Fund receives investment advisory and administrative services from Mitchell
Hutchins Asset Management Inc. ("MHAM"), an indirectly wholly-owned subsidiary
of the Parent, and is charged fees pursuant to an advisory and administration
contract between the Fund and MHAM which has been approved by the Fund's board
of trustees. All series of shares are diversified except Global Income Portfolio
and Strategic Fixed Income Portfolio. At July 28, 1999, the Global Growth
Division changed its name to Global Equity Division.
The Company has elected to terminate sales efforts of the Account. As a result,
the Account is no longer available to new contract owners. Existing contract
owners may continue to allocate purchase payments to, or transfers into, the
Account.
INVESTMENT OPERATIONS
Investments are stated at the closing net asset values per share on December 31,
1999.
The average cost method is used to determine realized gains and losses.
Dividends are taken into income on an accrual basis as of the ex-dividend date.
ANNUITY RESERVES
Currently payable annuity contract reserves are computed according to the
Individual Annuity Valuation 1983 Table using an assumed interest rate of 4.0%.
If the amount paid to the contractholder is less than originally estimated,
charges paid for mortality and expense risks are reimbursed to the Company. If
additional amounts are required, the Company reimburses the Account.
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
accompanying notes. Such estimates and assumptions could change in the future as
more information becomes known, which could impact the amounts reported and
disclosed herein.
9
<PAGE> 12
PaineWebber Life Variable Annuity Account
Notes to Financial Statements (continued)
2. EXPENSES
The Company is compensated for mortality, distribution and expense risks and
enhanced death benefits by a charge equivalent to an annual rate of 1.60% of the
asset value of each contract sold subject to early withdrawal charges and 1.77%
of the asset value of each contract sold not subject to early withdrawal
charges. These charges amounted to $1,600,257 in 1999.
An annual contract administration charge of $30 is deducted on the first
valuation date on or after each contract anniversary prior to the annuity date.
A transfer charge of $10 will be imposed on each transfer between divisions
(portfolios) of the account in excess of twelve in any one contract year.
However, the Company has waived this charge until further notice. A withdrawal
transaction charge of the lesser of $25 or 2% of the amount withdrawn will be
imposed on each withdrawal in excess of two per contract year. Contracts sold
subject to early withdrawal charges are assessed a charge equal to 5% of the
amount withdrawn for purchase payments made within a five year period following
the date the payment was received. Total administrative charges amounted to
$132,564 in 1999.
3. FEDERAL INCOME TAXES
Operations of the Account are a part of the operations of the Company. Under
current practice, no federal income taxes are allocated by the Company to the
operations of the Account.
4. PURCHASES AND SALES OF INVESTMENT SECURITIES
The aggregate cost of purchases and proceeds from sales of investments were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------------- ------------------------------
PURCHASES SALES PURCHASES SALES
----------------------------- ------------------------------
<S> <C> <C> <C> <C>
Portfolio:
Money Market $ 2,945,282 $ 6,370,498 $ 5,885,259 $ 5,179,108
Strategic Fixed Income 1,044,818 3,342,194 1,028,899 875,168
High Grade Fixed Income 1,579,057 3,433,365 1,565,519 1,962,147
Global Income 779,658 5,086,681 760,010 1,963,145
Balanced 3,082,156 10,350,244 5,311,756 5,451,974
Growth and Income 2,332,198 9,579,465 6,830,190 4,608,410
Growth 4,405,642 13,813,471 7,139,611 7,423,939
Aggressive Growth 2,798,726 9,527,513 4,771,817 5,902,412
Global Equity 2,639,637 7,019,289 890,624 4,069,180
----------------------------- ------------------------------
$21,607,174 $68,522,720 $34,183,685 $37,435,483
============================= ==============================
</TABLE>
10
<PAGE> 13
PaineWebber Life Variable Annuity Account
Notes to Financial Statements (continued)
5. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS
Transactions in units were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------- --------------------------
PURCHASED REDEEMED PURCHASED REDEEMED
-------------------------- --------------------------
<S> <C> <C> <C> <C>
CONTRACTS SOLD SUBJECT TO EARLY
WITHDRAWAL CHARGE
Division:
Money Market 223,338 510,260 464,043 421,725
Strategic Fixed Income 48,659 235,229 50,083 59,852
High Grade Fixed Income 95,889 301,418 96,367 153,339
Global Income 12,828 403,128 7,989 130,404
Balanced 10,649 553,152 71,669 265,048
Growth and Income 54,934 420,748 212,562 199,835
Growth 78,681 629,576 93,584 411,616
Aggressive Growth 15,093 444,254 60,703 300,748
Global Equity 8,344 471,696 40,859 279,660
-------------------------- --------------------------
548,415 3,969,461 1,097,859 2,222,227
========================= =========================
CONTRACTS SOLD NOT SUBJECT TO EARLY
WITHDRAWAL CHARGE
Division:
Money Market 6,979 24,393 31,016 27,755
Strategic Fixed Income - 26,332 1,817 2,456
High Grade Fixed Income 4,932 13,521 7,906 15,669
Global Income 875 11,508 621 21,425
Balanced 706 21,514 9,912 40,281
Growth and Income 1,226 19,029 16,642 18,674
Growth 6,145 18,939 18,682 19,829
Aggressive Growth 4,308 32,419 17,353 5,451
Global Equity 5,253 47,993 28,248 27,899
-------------------------- --------------------------
30,424 215,648 132,197 179,439
========================= =========================
</TABLE>
11
<PAGE> 14
PaineWebber Life Variable Annuity Account
Notes to Financial Statements (continued)
6. NET ASSETS
Net assets at December 31, 1999 consisted of the following:
<TABLE>
<CAPTION>
STRATEGIC HIGH GRADE
MONEY FIXED FIXED
MARKET INCOME INCOME
COMBINED DIVISION DIVISION DIVISION
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unit transactions $15,790,487 $ 3,036,672 $ 2,302,665 $ 3,606,768
Accumulated net investment income 50,783,606 671,024 1,475,597 1,356,481
Net unrealized appreciation (depreciation)
of investments 12,439,748 - (189,955) (218,197)
------------------------------------------------------------------
$79,013,841 $ 3,707,696 $ 3,588,307 $ 4,745,052
==================================================================
</TABLE>
<TABLE>
<CAPTION>
GLOBAL GROWTH AND
INCOME BALANCED INCOME
DIVISION DIVISION DIVISION
---------------------------------------------------
<S> <C> <C> <C>
Unit transactions $ 2,362,718 $ 1,848,834 $ 661,969
Accumulated net investment
income 1,872,960 10,191,583 6,634,932
Net unrealized appreciation (depreciation) of investments (340,050) 576,219 1,798,160
---------------------------------------------------
$ 3,895,628 $ 12,616,636 $ 9,095,061
====================================================
</TABLE>
<TABLE>
<CAPTION>
AGGRESSIVE GLOBAL
GROWTH GROWTH EQUITY
DIVISION DIVISION DIVISION
-------------------------------------------------
<S> <C> <C> <C>
Unit transactions $ - $ 51,459 $ 4,936,251
Accumulated net investment
income 12,101,312 10,781,586 2,681,282
Net unrealized appreciation (depreciation) of investments 4,985,966 4,657,297 1,170,308
-------------------------------------------------
$17,087,278 $15,490,342 $ 8,787,841
=================================================
</TABLE>
12
<PAGE> 15
FINANCIAL STATEMENTS
PAINEWEBBER LIFE INSURANCE COMPANY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE> 16
PaineWebber Life Insurance Company
Financial Statements
Years ended December 31, 1999, 1998 and 1997
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors................................................1
Audited Financial Statements
Balance Sheets................................................................2
Statements of Income..........................................................3
Statements of Changes in Stockholder's Equity.................................4
Statements of Cash Flows......................................................5
Notes to Financial Statements.................................................6
</TABLE>
<PAGE> 17
[ERNST & YOUNG LETTERHEAD]
Report of Independent Auditors
The Board of Directors
PaineWebber Life Insurance Company
We have audited the accompanying balance sheets of PaineWebber Life Insurance
Company as of December 31, 1999 and 1998, and the related statements of income,
changes in stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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 PaineWebber Life Insurance
Company at December 31, 1999 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Des Moines, Iowa
April 11, 2000
1
<PAGE> 18
PaineWebber Life Insurance Company
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Held to maturity, at amortized cost (market: 1999 -
$7,471,800; 1998 - $5,533,121) $ 7,509,104 $ 5,450,208
Available for sale, at market (amortized cost: 1999 -
$44,915; 1998 - $55,671) 46,800 59,400
Short-term investments 11,307,712 10,696,834
-------------------------------
Total investments 18,863,616 16,206,442
Cash and cash equivalents 1,106,416 212,970
Accrued investment income 198,409 223,443
Deferred policy acquisition costs 82,877,800 61,769,920
Goodwill, less accumulated amortization (1999 -
$840,000; 1998 - $720,000) 360,000 480,000
Due from affiliate under tax allocation agreement - 240,766
Other assets 93,102 163,678
Separate account assets 79,013,841 128,641,553
===============================
Total assets $182,513,184 $207,938,772
===============================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Net funds held on reinsurance assumed $ 43,928,191 $ 32,128,624
Expense allowance payable on reinsurance assumed 2,115,114 487,133
Deferred income taxes 9,064,952 5,418,448
Other liabilities 1,424,654 1,033,679
Separate account liabilities 79,013,841 128,641,553
--------------------------------
Total liabilities 135,546,752 167,709,437
Commitments and contingencies (Note 8)
Stockholder's equity:
Common Stock, $100 par value - 25,000
shares authorized, issued and outstanding 2,500,000 2,500,000
Additional paid-in capital 26,757,295 26,757,295
Accumulated other comprehensive income 1,225 2,424
Retained earnings 17,707,912 10,969,616
--------------------------------
Total stockholder's equity 46,966,432 40,229,335
--------------------------------
Total liabilities and stockholder's equity $182,513,184 $207,938,772
===============================
</TABLE>
See accompanying notes.
2
<PAGE> 19
PaineWebber Life Insurance Company
Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
--------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Annuity product charges $21,551,696 $15,674,503 $11,922,506
Investment income, net of related expenses 791,398 812,070 687,963
Realized loss on investments (650) (795) (156)
--------------------------------------------------------------------------
Total revenues 22,342,444 16,485,778 12,610,313
Expenses:
Commissions 19,937,100 12,798,511 8,037,598
General expenses 14,359,601 8,503,368 5,526,993
Insurance taxes 124,434 106,904 78,188
Policy acquisition costs deferred (26,951,522) (16,133,100) (8,482,896)
Amortization of deferred policy acquisition costs 3,802,892 3,051,994 2,376,746
Amortization of goodwill 120,000 120,000 120,000
Loss on recapture of reinsurance assumed 273,728 - -
--------------------------------------------------------------------------
Total expenses 11,666,233 8,447,677 7,656,629
--------------------------------------------------------------------------
Income before income taxes 10,676,211 8,038,101 4,953,684
Income tax expense (benefit):
Current 290,766 (240,766) 50,000
Deferred 3,647,149 3,054,433 2,362,710
--------------------------------------------------------------------------
3,937,915 2,813,667 2,412,710
--------------------------------------------------------------------------
Net income $ 6,738,296 $ 5,224,434 $ 2,540,974
==========================================================================
</TABLE>
See accompanying notes.
3
<PAGE> 20
PaineWebber Life Insurance Company
Statements of Changes in Stockholder's Equity
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDER'S
STOCK CAPITAL INCOME EARNINGS EQUITY
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1997 $ 2,500,000 $ 26,757,295 $ 2,011 $ 3,204,208 $ 32,463,514
Comprehensive income:
Net income - - - 2,540,974 2,540,974
Change in net unrealized
appreciation of invest-
ments, net of tax - - 453 - 453
------------
Total comprehensive income 2,541,427
----------------------------------------------------------------------------------
Balances at December 31, 1997 2,500,000 26,757,295 2,464 5,745,182 35,004,941
Comprehensive income (loss):
Net income - - - 5,224,434 5,224,434
Change in net unrealized appreciation of
investments, net of tax - - (40) - (40)
------------
Total comprehensive income 5,224,394
----------------------------------------------------------------------------------
Balances at December 31, 1998 2,500,000 26,757,295 2,424 10,969,616 40,229,335
Comprehensive income (loss):
Net income - - - 6,738,296 6,738,296
Change in net unrealized appreciation of
investments, net of tax - - (1,199) - (1,199)
------------
Total comprehensive income 6,737,097
----------------------------------------------------------------------------------
Balances at December 31, 1999 $ 2,500,000 $ 26,757,295 $ 1,225 $ 17,707,912 $ 46,966,432
==================================================================================
</TABLE>
See accompanying notes.
4
<PAGE> 21
PaineWebber Life Insurance Company
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
--------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,738,296 $ 5,224,434 $ 2,540,974
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of goodwill 120,000 120,000 120,000
Net amortization of fixed maturities 12,826 (25,781) (46,082)
Deferral of policy acquisition costs (26,951,522) (16,133,100) (8,482,896)
Amortization of deferred acquisition costs 3,802,892 3,051,994 2,376,746
Change in expense allowance payable and net funds
held on reinsurance assumed 14,693,820 5,445,790 1,023,568
Payments to ceding companies on reinsurance assumed (3,797,888) (1,346,268) (1,734,647)
Payments received from ceding companies on reinsurance assumed 4,298,638 1,579,774 2,939,412
Provision for deferred income taxes 3,647,149 3,054,433 2,362,710
Realized loss on investments 650 795 156
Loss on recapture of reinsurance assumed 273,728 - -
Changes in operating assets and liabilities, net of reinsurance assumed:
Decrease (increase) in accrued investment income 25,034 22,164 (81,067)
Increase in due from affiliate under tax allocation agreement 240,766 (240,766) -
Decrease (increase) in other assets 70,576 (123,821) 63,589
Increase in other liabilities 390,975 227,809 187,113
--------------------------------------------------
Net cash provided by operating activities 3,565,940 857,457 1,269,576
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid:
Fixed maturities - held to maturity 1,245,000 6,235,000 1,360,000
Fixed maturities - available for sale 10,000 10,000 5,000
--------------------------------------------------
1,255,000 6,245,000 1,365,000
Cost of investments acquired:
Fixed maturities - held to maturity (3,316,616) (3,903,874) (1,368,226)
Short-term investments - net (610,878) (3,187,234) (1,558,391)
--------------------------------------------------
(3,927,494) (7,091,108) (2,926,617)
--------------------------------------------------
Net cash used in investing activities (2,672,494) (846,108) (1,561,617)
--------------------------------------------------
Increase (decrease) in cash and cash equivalents 893,446 11,349 (292,041)
Cash and cash equivalents at beginning of year 212,970 201,621 493,662
--------------------------------------------------
Cash and cash equivalents at end of year $ 1,106,416 $ 212,970 $ 201,621
==================================================
</TABLE>
See accompanying notes.
5
<PAGE> 22
PaineWebber Life Insurance Company
Notes to Financial Statements
December 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
PaineWebber Life Insurance Company (the Company) is a wholly-owned subsidiary of
PaineWebber Life Holdings, Inc., which is a wholly-owned subsidiary of
PaineWebber Group, Inc. (the Parent). The Company offers separate account
variable annuity products. These products are marketed through the Parent's
licensed brokers.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported in the financial statements and accompanying notes. Such
estimates and assumptions could change in the future as more information becomes
known, which could impact the amounts reported and disclosed herein.
INVESTMENTS
Fixed maturity securities that the Company has the positive intent and ability
to hold to maturity are designated as "held to maturity". Held to maturity
securities are reported at cost adjusted for amortization of premiums and
discounts. Changes in the fair value of these securities, except for declines
that are other than temporary, are not reflected in the Company's financial
statements. Fixed maturity securities which may be sold are designated as
"available for sale". Available for sale securities are reported at fair value
and unrealized gains and losses on these securities are included directly in
stockholder's equity as accumulated other comprehensive income. Securities that
are determined to have a decline in value that is other than temporary are
written down to estimated fair value, which becomes the security's new cost
basis, by a charge to realized losses in the Company's statements of income.
Premiums and discounts are amortized utilizing the interest method which results
in a constant yield over the securities' expected life. Realized gains and
losses are determined on the basis of specific identification of investments.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
GOODWILL
Goodwill includes the costs of various insurance licenses acquired in
conjunction with the purchase of the Company. These costs are being amortized on
a straight-line basis over 10 years.
6
<PAGE> 23
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED POLICY ACQUISITION COSTS
Commissions and other costs of acquiring new business which vary with and are
primarily related to the production of new business have been deferred. The
deferred costs are being amortized in relation to the present value of expected
gross profits. This amortization is adjusted periodically to reflect differences
in actual and assumed gross profits and changes in assumptions regarding future
gross profits.
DEFERRED INCOME TAXES
Deferred income tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and liabilities
using the enacted marginal tax rate. Deferred income tax expenses or credits are
based on the changes in the asset or liability from period to period.
DIVIDEND RESTRICTIONS
Prior approval of insurance regulatory authorities is required for payment of
dividends to the Company's parent which exceed an annual limitation. During
2000, the Company will be able to pay dividends to its parent of approximately
$1,745,000 without prior approval of statutory authorities.
SEPARATE ACCOUNT
The separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered, principally for the
benefit of certain variable annuity contractholders who bear the underlying
investment risk. The separate account assets and liabilities are carried at fair
value. Fees are received for administrative expenses and for assuming mortality,
distribution and expense risks. Operations of the separate account are not
included in these financial statements.
COMPREHENSIVE INCOME
Other comprehensive income excludes realized investment losses included in net
income which merely represent transfers from unrealized to realized losses.
These amounts totaled $422 and $517 in 1999 and 1998, respectively. Such
amounts, which have been measured through the date of sale, are net of deferred
income tax benefit of $228 and $278 in 1999 and 1998, respectively.
7
<PAGE> 24
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures About
Fair Value of Financial Instruments, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparisons to independent markets and, in many
cases, could not be realized in immediate settlement of the instruments. SFAS
No. 107 also excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented herein are limited by each of these factors and do not
purport to represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Fixed maturities: The fair values for fixed maturities are based on quoted
market prices, where available.
Cash and cash equivalents, short-term investments and separate account
assets: The carrying amounts reported in the balance sheet for these
financial instruments approximate their fair values.
Separate account liabilities: Fair values for the Company's liabilities
under investment-type insurance contracts are based on cash surrender value
of the underlying contracts.
8
<PAGE> 25
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The following sets forth a comparison of the carrying amounts and fair values of
the Company's financial instruments subject to provisions of SFAS No. 107:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
------------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities:
Held to maturity $ 7,509,104 $ 7,471,800 $ 5,450,208 $ 5,533,121
Available for sale 46,800 46,800 59,400 59,400
------------------------------- -------------------------------
7,555,904 7,518,600 5,509,608 5,592,521
Short-term investments 11,307,712 11,307,712 10,696,834 10,696,834
Cash and cash equivalents 1,106,416 1,106,416 212,970 212,970
Separate account assets 79,013,841 79,013,841 128,641,553 128,641,553
LIABILITIES
Separate account liabilities 79,013,841 78,974,773 128,641,553 128,371,364
</TABLE>
3. BASIS OF PRESENTATION
The financial statements prepared on the basis of accounting principles
generally accepted in the United States differ from those prepared on a
statutory basis primarily as follows: (a) revenues on investment products
consist of policy charges for the cost of issuance, policy administration
charges, amortization of policy initiation fees and surrender charges assessed
rather than premiums received; (b) acquisition costs such as commissions and
other costs related to acquiring new business are being deferred and amortized
over the life of the policy rather than being charged to current operations as
incurred; (c) policy reserves on investment products are based on full account
values rather than discounted methodologies utilizing statutory interest rates;
(d) a portion of fixed maturity investments is designated as "available for
sale" and valued at fair value with unrealized appreciation/depreciation
credited/charged directly to stockholder's equity rather than valued at
amortized cost; (e) deferred federal income taxes are provided for temporary
differences between carrying value of assets and liabilities reported in the
financial statements and the tax returns; (f) certain assets designated as
"non-admitted assets" have been reported as assets rather than being charged to
stockholder's equity; (g) the carrying value of investments is reduced to fair
value by the recognition of a realized loss in the statement of income when
declines in carrying value are judged to be other
9
<PAGE> 26
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
3. BASIS OF PRESENTATION (CONTINUED)
than temporary rather than recording an asset valuation reserve, in the nature
of a contingency reserve which is recorded as a liability through a charge to
stockholder's equity; (h) net realized capital gains (losses) attributable to
changes in the level of market interest rates are recognized in the statement of
income in the year of disposition rather than being deferred and amortized over
the remaining life of the bonds disposed of; (i) assets and liabilities are
restated to fair values, with provision for goodwill and other intangible
assets, when a change in ownership occurs rather than retaining their historical
value; and (j) reinsurance reserve credits are recorded as reinsurance
recoverable assets rather than recorded as a reduction to aggregate policy
reserves.
Net income (loss) for the Company as reported in accordance with statutory
accounting practices was approximately $1,745,000 in 1999, $(87,000) in 1998 and
$1,679,000 in 1997. Total statutory capital and surplus, as reported, was
$17,878,000 at December 31, 1999 and $16,127,000 at December 31, 1998.
In 1998, the National Association of Insurance Commissioners (NAIC) adopted
codified statutory accounting principles (Codification) effective January 1,
2001. Codification will likely change, to some extent, prescribed statutory
accounting practices and may result in changes to the accounting practices that
the Company uses to prepare its statutory-basis financial statements.
Codification will require adoption by the various states before it becomes the
prescribed statutory basis of accounting for insurance companies domesticated
within those states. Accordingly, before Codification becomes effective for the
Company, the State of California must adopt Codification as the prescribed basis
of accounting on which domestic insurers must report their statutory-basis
results to the California Insurance Department. At this time it is anticipated
that the State of California will adopt Codification. Management has not yet
determined the impact of Codification to the Company's statutory-basis financial
statements.
10
<PAGE> 27
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
4. INVESTMENTS
At December 31, 1999 and 1998, the amortized cost, gross unrealized gains and
losses, and estimated fair value of investments in fixed maturity securities are
as follows:
HELD FOR INVESTMENT
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
Bonds - United States Government and agencies $ 7,509,104 $ 4,544 $ 41,848 $ 7,471,800
Short-term investments - United States Government and
agencies 11,307,712 - - 11,307,712
------------------------------------------------------------------
$18,816,816 $ 4,544 $ 41,848 $18,779,512
=================================================================
DECEMBER 31, 1998
Bonds - United States Government and agencies $ 5,450,208 $ 86,491 $ 3,578 $ 5,533,121
Short-term investments - United States Government and
agencies 10,696,834 - - 10,696,834
------------------------------------------------------------------
$16,147,042 $ 86,491 $ 3,578 $16,229,955
=================================================================
</TABLE>
AVAILABLE FOR SALE
<TABLE>
<CAPTION>
AMORTIZED GROSS UNREALIZED GROSS UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
Bond - other government $44,915 $1,885 $ - $46,800
================================================================================
DECEMBER 31, 1998
Bond - other government $55,671 $3,729 $ - $59,400
================================================================================
</TABLE>
11
<PAGE> 28
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
4. INVESTMENTS (CONTINUED)
The unrealized appreciation or depreciation on available-for-sale fixed maturity
securities is included in stockholder's equity as accumulated other
comprehensive income, reduced by a provision for deferred income taxes. Net
unrealized appreciation of available-for-sale fixed maturity securities as
reported were comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
--------------------------------
<S> <C> <C>
Unrealized appreciation on available-for-sale fixed maturity securities $1,885 $3,729
Related net deferred income taxes 660 1,305
--------------------------------
Net unrealized appreciation of available-for-sale fixed maturity securities $1,225 $2,424
================================
</TABLE>
The amortized cost and estimated fair value of investments in fixed maturity
securities, by contractual maturity at December 31, 1999, are shown below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
HELD FOR INVESTMENT AVAILABLE FOR SALE
----------------------------------------- -----------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------------------------------------ -----------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $3,159,804 $3,149,500 $ - $ -
Due after one year through five years 4,289,463 4,260,500 44,915 46,800
Due after five years through ten years 59,837 61,800 - -
------------------------------------------ -----------------------------------
$7,509,104 $7,471,800 $44,915 $46,800
========================================== ===================================
</TABLE>
Major categories of net investment income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
----------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Held for investment $358,573 $412,981 $478,639
Available for sale 3,195 4,000 4,534
Short-term investments 514,033 473,963 308,140
Other 288 3,775 3,019
----------------------------------------------------------------
876,089 894,719 794,332
Less investment expenses 84,691 82,649 106,369
----------------------------------------------------------------
$791,398 $812,070 $687,963
================================================================
</TABLE>
At December 31, 1999, investments with an aggregate carrying value of $7,509,104
(1998 - $7,556,679) were on deposit with regulatory authorities or were
restrictively held in bank custodial accounts for the benefit of such regulatory
authorities as required by statute.
12
<PAGE> 29
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
5. FEDERAL INCOME TAXES
The effective tax rate on income before taxes is different from the prevailing
federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
Income before income taxes $10,676,211 $ 8,038,101 $ 4,953,684
================================================
Tax effect of federal statutory rate (35%) $ 3,736,674 $ 2,813,335 $ 1,733,789
Tax effect (decrease) of:
Dividends received deduction, including revisions to prior year
estimates in 1997 - (23,596) 67,857
Change in valuation allowance - - (147,872)
Other, including revisions to prior year estimates 201,241 23,928 758,936
------------------------------------------------
Income tax expense $ 3,937,915 $ 2,813,667 $ 2,412,710
================================================
</TABLE>
The tax effect of temporary differences giving rise to the Company's deferred
income taxes is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Net operating loss and credit carryovers $ 4,038,469 $ 4,474,012
Reinsurance 15,374,867 11,245,018
Deferred front-end load 403,584 256,538
Other 146,748 178,955
------------------------------------------
19,963,668 16,154,523
Deferred income tax liabilities:
Unrealized appreciation of fixed maturity 660 1,305
Deferred policy acquisition costs 29,007,230 21,520,549
Fixed maturity discounts 1,210 733
Other 19,520 50,384
------------------------------------------
29,028,620 21,572,971
------------------------------------------
Net deferred income tax liability $ 9,064,952 $ 5,418,448
==========================================
</TABLE>
The Company files a consolidated federal income tax return with its Parent. Each
entity within the consolidated tax group reports current income tax expense as
allocated under the consolidated tax allocation agreement. Generally, this
allocation results in profitable companies recognizing a tax provision as if the
individual company filed a separate return and loss companies recognizing
benefits to the extent their current year losses contribute
13
<PAGE> 30
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
5. FEDERAL INCOME TAXES (CONTINUED)
to reduce consolidated taxes. Under the tax sharing agreement, the Company will
not recognize a current benefit for any loss and credit carryforwards until the
time they will be able to utilize the loss or credit on a separate company
basis. Deferred income taxes have been established by each member of the
consolidated group based upon the temporary differences, the reversal of which
will result in taxable or deductible amounts in future years when the related
asset or liability is recovered or settled, within each entity. At December 31,
1999, the Company had net operating loss carryforwards of $11,300,000 for which
they have not received a current benefit. The net operating loss carryforwards
expire beginning 2009 through 2011.
6. REINSURANCE
The Company has modified coinsurance agreements with various insurance companies
to assume a specified percentage of their variable annuity contracts. Under
these agreements, the Company receives from the ceding company the account
balances of the reinsured contracts. The Company in return pays to the ceding
companies an expense allowance for commissions and other expenses associated
with the reinsured contracts. In addition, the Company pays or receives an
amount equal to the change in the statutory reserve held by the ceding companies
on the reinsured contracts, adjusted for investment earnings credits. For the
years ended December 31, 1999, 1998 and 1997, the Company recorded annuity
product charge of $19,868,827, $13,339,829 and $10,361,869, respectively,
related to contracts assumed under these agreements. At December 31, 1999 and
1998, the assets on deposit with ceding companies and funds held on reinsurance
assumed are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------------------------------
<S> <C> <C>
Assets on deposit with ceding companies $1,126,314,796 $817,857,660
Funds held on reinsurance assumed (1,170,242,987) (849,986,284)
-----------------------------------------------
Net funds held on reinsurance assumed $ (43,928,191) $(32,128,624)
===============================================
</TABLE>
During 1999, the Company recaptured one of its modified coinsurance assumed
agreements. The Company received $1,286,000 from the ceding company representing
the present value of distributable earnings on the block of business being
recaptured. Deferred acquisition costs of $2,040,750 and net funds held on
reinsured of $481,022 were recaptured by the ceding company.
14
<PAGE> 31
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
6. REINSURANCE (CONTINUED)
The Company also has a modified coinsurance agreement with American Republic
Insurance Company (American Republic) (see Note 7) to cede a specified
percentage of the risks associated with the variable annuity contracts. Under
this agreement, the Company pays American Republic the reinsurance percentage of
charges and deductions collected on the reinsured policies. American Republic,
in return, pays the Company an expense allowance for certain developmental, new
business and maintenance costs on the reinsured contracts. The Company has also
entered into a separate reinsurance agreement to reinsure the enhanced death
benefit provision of the contracts. During 1999, 1998 and 1997, the Company
incurred reinsurance premiums of $1,045,858, $1,519,246 and $1,465,655,
respectively, and had benefit recoveries of $29,514, $107,933 and $48,087,
respectively, in connection with these agreements.
7. SERVICE AGREEMENTS WITH RELATED PARTIES
The Company has a third-party and corporate administrative agreements with
American Republic to provide services for new business processing and account
maintenance of the variable annuity contracts. The Company paid American
Republic $335,000, $398,000 and $552,000 for these services in 1999, 1998 and
1997, respectively.
Commissions relating to the sale of all variable annuity contacts are paid to an
affiliated company.
8. COMMITMENTS AND CONTINGENCIES
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the event of insolvency of
other insurance companies. Potential obligations, if any, are not presently
determinable by the Company; accordingly, no accrual has been made on these
financial statements.
15
