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PROSPECTUS
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INDIVIDUAL FLEXIBLE PREMIUM
VARIABLE ANNUITY CONTRACT
ISSUED BY
LUTHERAN BROTHERHOOD
625 Fourth Avenue South * Minneapolis, Minnesota 55415 * (612) 340-7210
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This Prospectus describes an individual flexible premium variable annuity
contract (the "Contract") being offered by Lutheran Brotherhood ("LB"), a
fraternal benefit society organized under the laws of the state of Minnesota.
LB is offering the Contract only in situations in which the Annuitant is
eligible for membership in Lutheran Brotherhood. The Contract may be sold to
or in connection with retirement plans which may or may not qualify for
special Federal tax treatment under the Internal Revenue Code. Annuity
payments under the Contract are deferred until a selected later date.
The Contract Owner may elect to have premiums accumulate on a variable basis
and/or on a fixed basis. Premiums may be allocated, as designated by the
Contract Owner, to one or more Subaccounts of LB Variable Annuity Account I
(the "Variable Account"), a separate account of LB, and/or to the Fixed
Account (which is the general account of LB, and which pays interest at a
guaranteed fixed rate). The assets of each Subaccount will be invested solely
in a corresponding Portfolio of LB Series Fund, Inc. (the "Fund"), which is a
diversified, open-end management investment company (commonly known as a
"mutual fund"). The accompanying Prospectus for the Fund describes the
investment objectives and attendant risks of the six Portfolios of the Fund --
the Growth Portfolio, the High Yield Portfolio, the Income Portfolio, the
Opportunity Growth Portfolio, the World Growth Portfolio, and the Money Market
Portfolio. Additional Subaccounts (together with the related additional
Portfolios of the Fund) may be added in the future. The Accumulated Value of
the Contract in the Subaccounts and, except to the extent fixed amount annuity
payments are elected by the Contract Owner, the amount of annuity payments
will vary, primarily based on the investment experience of the Portfolio whose
shares are held in the Subaccounts designated. Premiums allocated to the Fixed
Account will accumulate at fixed rates of interest declared by LB.
This Prospectus describes only the elements of the Contract pertaining to the
Variable Account except where reference to the Fixed Account of the Contract
is specifically made.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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This Prospectus sets forth concisely the information about the Contract that
a prospective investor ought to know before investing, and should be read
and kept for future reference. It is valid only when accompanied
or preceded by the current Prospectus of LB Series Fund, Inc.
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The date of this Prospectus is May 1, 1996.
[Continued from cover page]
On the date LB approves the Contract Owner's application, the initial premium
and any interest accumulations accrued during the underwriting period will be
allocated among the Subaccount(s) and the Fixed Account according to the
Contract Owner's instructions. See "THE CONTRACTS--Allocation of Premiums."
Subsequent premiums will be allocated among the Subaccounts and the Fixed
Account in the same proportion as the initial premium, at the end of the
Valuation Period in which the subsequent premium is received by LB.
Additional information about the Contract, LB and the Variable Account,
contained in a Statement of Additional Information dated May 1, 1996, has been
filed with the Securities and Exchange Commission and is available upon
request without charge by writing to Lutheran Brotherhood, 625 Fourth Avenue
South, Minneapolis, Minnesota 55415. The Statement of Additional Information
relating to the Contract having the same date as this Prospectus is
incorporated by reference in this Prospectus. The Table of Contents for the
Statement of Additional Information may be found on page __ of this
Prospectus. Information about the Fixed Account may be found in the Appendix
to this Prospectus.
TABLE OF CONTENTS
Page
DEFINITIONS 4
SUMMARY FEE TABLE 6
SUMMARY 8
LUTHERAN BROTHERHOOD, THE VARIABLE ACCOUNT AND THE FUND 11
Lutheran Brotherhood 11
The Variable Account 12
LB Series Fund, Inc. 12
Addition, Deletion or Substitution of Investments 14
THE CONTRACTS 15
Issuance of a Contract 15
Free Look Period 15
Allocation of Premium 16
Accumulated Value; Accumulation Units
and Accumulation Unit Value 16
Death Benefit Before the Maturity Date 17
Death Benefit After the Maturity Date 17
Surrender (Redemption) 18
Transfers 19
Telephone Transfers 19
Special Transfer Service -- Dollar Cost Averaging 20
Assignments 20
Contract Owner, Beneficiaries and Annuitants 20
CHARGES AND DEDUCTIONS 21
Surrender Charge (Contingent Deferred Sales Charge) 21
Administrative Charge 22
Mortality and Expense Risk Charge 22
Investment Advisory Fee of the Fund 23
Taxes 23
Sufficiency of Charges 23
ANNUITY PROVISIONS 23
Maturity Date 23
Settlement Options 24
Frequency and Amount of Annuity Payments 25
Subaccount Annuity Unit Value 25
Assumed Investment Rate 26
GENERAL PROVISIONS 26
Postponement of Payments 26
Date of Receipt 26
Reports to Contract Owners 26
Contract Inquiries 26
FEDERAL TAX STATUS 26
Introduction 26
Variable Account Tax Status 27
Taxation of Annuities in General 27
Qualified Plans 28
1035 Exchanges 29
Diversification Requirements 30
Withholding 30
Other Considerations 30
EMPLOYMENT-RELATED BENEFIT PLANS 30
VOTING RIGHTS 31
SALES AND OTHER AGREEMENTS 31
LEGAL PROCEEDINGS 32
LEGAL MATTERS 32
FINANCIAL STATEMENTS AND EXPERTS 32
FURTHER INFORMATION 32
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS 33
ORDER FORM 33
APPENDIX -- MORE INFORMATION ABOUT THE GENERAL ACCOUNT 34
DEFINITIONS
Accumulated Value. The total amount of value held under a Contract at any time
prior to and including the Maturity Date. A Contract's Accumulated Value will
reflect the investment experience of the chosen Subaccounts of the Variable
Account, any amount of value in the Fixed Account, any premiums paid, any
surrenders, and any charges assessed in connection with the Contract.
Accumulation Unit. A unit of measure by which the value of the Contract's
interest in each Subaccount is determined.
Accumulation Unit Value. The value of each Accumulation Unit representing the
Contract's interest in each Subaccount.
Annuitant. The person(s) named in the Contract whose life is used to determine
the duration of annuity payments involving life contingencies.
Annuity Unit. A unit of measure which is used in the calculation of the second
and each subsequent variable annuity payment.
Annuity Unit Value. The value of each Annuity Unit.
Beneficiary. The person(s) named by the Contract Owner to receive the
Contract's death benefit.
Contract. The individual flexible premium variable annuity contract offered by
LB and described in this Prospectus.
Contract Anniversary. The same date in each succeeding year as the Date of
Issue.
Contract Owner. The person(s) who controls all the rights under the Contract
while an Annuitant is alive. The Annuitant is the Contract Owner, unless
another owner is named in the Contract application. While an Annuitant is
living, the Contract Owner may exercise all rights set out in the Contract. If
there are two Contract Owners, both must act in concert to exercise ownership
rights.
Contract Year. The period from one Contract Anniversary to the next. The first
Contract Year will be the period beginning on the Date of Issue and ending on
the first Contract Anniversary.
Date of Issue. The date on which the application and the first premium are
received by LB at its Home Office.
Fixed Account. The Fixed Account is the general account of LB, which consists
of all assets of LB other than those allocated to a separate account of LB.
Premium payments allocated to the Fixed Account will be paid a fixed rate of
interest (which may not be less than 3.0%) declared by LB at least annually.
Amounts accumulated in the Fixed Account are guaranteed by LB. (See Appendix.)
Fund. LB Series Fund, Inc., which is described in the accompanying Prospectus.
Home Office. LB's office at 625 Fourth Avenue South, Minneapolis, Minnesota
55415 or such other office as LB shall specify in a notice to the Contract
Owner.
LB Representative. A person who is licensed by state insurance officials to
sell the Contracts and who is also a registered representative of LBSC.
LBSC. Lutheran Brotherhood Securities Corp., which is an indirect subsidiary
of Lutheran Brotherhood and which acts as the principal underwriter of the
Contracts.
Lutheran Brotherhood ("LB"). A fraternal benefit society organized under the
laws of the State of Minnesota and owned by and operated for its members and
the issuer of the Contracts, and which acts as investment adviser to the Fund.
Maturity Date. The date on which the annuity payments are to start as selected
by the Contract Owner, which date must be a Contract Anniversary at least
three years after the Date of Issue.
Minimum Death Benefit Date. For purposes of calculating the amount of the
death benefit before the Maturity Date, the first such date is the Date of
Issue of the Contract. Thereafter, such date occurs every six years on the
Contract Anniversary.
Portfolio. A Portfolio of the Fund. Each Subaccount invests exclusively in the
shares of a corresponding Portfolio of the Fund.
Qualified Plan. A retirement plan qualified under Section 401, 403, 408 or 457
or similar provisions of the Internal Revenue Code.
Subaccount. A subdivision of the Variable Account. Each Subaccount invests
exclusively in the shares of a corresponding Portfolio of the Fund. Currently,
there are six Subaccounts: the Growth Subaccount (which invests exclusively
in the Growth Portfolio); the High Yield Subaccount (which invests exclusively
in the High Yield Portfolio); the Income Subaccount (which invests exclusively
in the Income Portfolio); the Opportunity Growth Subaccount (which invests
exclusively in the Opportunity Growth Portfolio); the World Growth Subaccount
(which invests exclusively in the World Growth Portfolio); and the Money
Market Subaccount (which invests exclusively in the Money Market Portfolio).
Valuation Date. Each day the New York Stock Exchange is open for trading and
any other day on which there is sufficient trading in the securities of a
Portfolio of the Fund such that the current net asset value of its shares
might be materially affected, in each case excluding July 5, the day after
Thanksgiving, and the day before Christmas.
Valuation Period. The period commencing at the close of business of a
Valuation Date and ending at the close of business of the next Valuation Date.
Variable Account. LB Variable Annuity Account I, which is a separate account
of LB. The Subaccounts are subdivisions of the Variable Account.
Written Notice. A written request or notice signed by the Contract Owner and
received by LB at its Home Office.
SUMMARY FEE TABLE
The Contract Owner may allocate premiums and transfer Accumulated Value to any
one of six Subaccounts -- Growth, High Yield, Income , Opportunity Growth,
World Growth and Money Market -- or to the Fixed Account or to any combination
of the Subaccounts and the Fixed Account. The following table shows the
various fees and expenses associated with the Contract.
Contract Owner Transaction Expenses
Sales Load Imposed on Purchase (as a percentage of purchase payments) 0%
Maximum Deferred Sales Load (as a percentage of Excess
Amount surrendered) 6%(1)
Exchange Fee 0%
Annual Contract Fee $30.00(2)
Annual Expenses For Growth, High Yield, Income, Money Market
and Opportunity Growth Subaccounts
(as a percentage of average daily Accumulated Value or Annuity Unit Value)
Mortality and Expense Risk Fees 1.10%(3)
Total Subaccount Annual Expenses 1.10%
Annual Expenses For Growth, High Yield, Income, Money Market
and Opportunity Growth Portfolios
(as a percentage of Portfolio average daily net assets)
Management Fees (Investment Advisory Fees) 0.40%(4)
Other Expenses After Expense Reimbursement 0%(5)
Total Portfolio Annual Expenses 0.40%
EXAMPLE (6)
1 year 3 years 5 years 10 years
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If you surrender or annuitize your
Contract at the end of the
applicable time period:
You would pay the following expenses
on a $1,000 investment, assuming
5% annual return on assets $71 $88 $105 $182
If you do not surrender or annuitize your
Contract:
You would pay the following expenses on
a $1,000 investment, assuming 5%
annual return on assets $16 $48 $83 $182
Annual Expenses For World Growth Subaccount
(as a percentage of average daily Accumulated Value or Annuity Unit Value)
Mortality and Expense Risk Fees 1.10%(3)
Total Subaccount Annual Expenses 1.10%
Annual Expenses For World Growth Portfolio
(as a percentage of Portfolio average daily net assets)
Management Fees (Investment Advisory Fees) 0.85%(4)
Other Expenses After Expense Reimbursement 0%(5)
Total Portfolio Annual Expenses 0.85%
EXAMPLE (6)
1 year 3 years 5 years 10 years
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If you surrender or annuitize your
Contract at the end
of the applicable time period:
You would pay the following expenses on
a $1,000 investment, assuming 5%
annual return on assets $76 $101 $128 $231
If you do not surrender or annuitize your
Contract:
You would pay the following expenses on
a $1,000 investment, assuming 5%
annual return on assets $20 $62 $107 $231
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(1) See "CHARGES AND DEDUCTIONS--Surrender Charge (Contingent Deferred Sales
Charge)". A surrender charge is deducted only if a full or partial surrender
occurs during the first six Contract Years; no surrender charge is deducted
for surrenders occurring in Contract Years seven and later. The surrender
charge will also be deducted at the time annuity payments begin, except under
certain circumstances. Up to 10% of the Accumulated Value existing at the time
the first surrender in a Contract Year is made may be surrendered without
charge; only the Excess Amount will be subject to a surrender charge. The
maximum charge is 6% of the Excess Amount and is in effect for the first
Contract Year. Thereafter, the surrender charge decreases by 1% each
subsequent Contract Year.
(2) See "CHARGES AND DEDUCTIONS--Administrative Charge". A $30 annual
administrative charge is deducted on each Contract Anniversary only if, on
that Contract Anniversary, the total of premiums paid under the Contract minus
all prior surrenders is less than $5,000. The $30 fee is a Contract charge and
is deducted proportionately from the Subaccounts and the Fixed Account that
make up the Contract's Accumulated Value.
(3) See "CHARGES AND DEDUCTIONS--Mortality and Expense Risk Charge".
(4) See "CHARGES AND DEDUCTIONS--Investment Advisory Fee of the Fund".
(5) The amount shown for Fund Annual Expenses does not reflect a deduction for
operating expenses of the Fund, other than the investment advisory fee,
because LB and its affiliates have agreed to reimburse the Fund for these
operating expenses. For the fiscal year of the Fund ending December 31, 1995,
the Fund was reimbursed approximately $1,886,225 for such operating expenses.
See "LUTHERAN BROTHERHOOD, THE VARIABLE ACCOUNT AND THE FUND--LB Series Fund,
Inc.".
(6) In this example, the $30 annual administrative charge is approximated as a
.02% charge based on the average contract size of a substantially identical
contract issued by Lutheran Brotherhood Variable Insurance Products Company,
an affiliate of LB.
The purpose of the table is to assist the Contract Owner in understanding the
various costs and expenses that a Contract Owner will bear directly or
indirectly. The table reflects expenses of the Variable Account as well as the
Fund. Cross-references to the relevant sections of the Prospectus for more
complete descriptions of the various costs and expenses have been provided.
THE EXAMPLE SHOWING EXPENSES FOR SURRENDERS AT 1, 3, 5, AND 10-YEAR PERIODS
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
SUMMARY
The Contracts
Issuance of a Contract. The Contracts are individual flexible premium variable
annuity contracts issued by LB. In order to purchase a Contract, application
must be made to LB through a licensed LB Representative, who is also a
registered representative of LBSC. The Contracts are offered only in
situations in which the Annuitant is eligible for membership in Lutheran
Brotherhood. The Contracts may be sold to or in connection with retirement
plans which may or may not qualify for special Federal tax treatment under the
Internal Revenue Code. Annuity payments under the Contracts are deferred until
a selected later date.
The minimum amount LB will accept as an initial premium is $600 on an
annualized basis. LB may, however, in its sole discretion, waive such minimum
initial premium requirements. Subsequent premiums may be paid under the
Contracts, but LB may choose not to accept any subsequent premium if it is
less than $50.
Free Look Period. The Contract Owner has the right to return the Contract
within 10 days after such Contract Owner receives the Contract. See "THE
CONTRACTS--Free Look Period".
Allocation of Premiums. Premiums under the Contract may be allocated to one or
more Subaccounts of the Variable Account and to the Fixed Account as
designated by the Contract Owner. The assets of each Subaccount will be
invested solely in a corresponding Portfolio of the Fund--the Growth
Portfolio, the High Yield Portfolio, the Income Portfolio, the Opportunity
Growth Portfolio, the World Growth Portfolio, or the Money Market Portfolio.
See "LUTHERAN BROTHERHOOD, THE VARIABLE ACCOUNT AND THE FUND" and "THE
CONTRACTS--Allocation of Premiums". The Accumulated Value of the Contract in
the Subaccounts and, except to the extent fixed amount annuity payments are
elected by the Contract Owner, the amount of annuity payments will vary,
primarily based on the investment experience of the Portfolio whose shares are
held in the Subaccounts designated. Premiums allocated to the Fixed Account
will accumulate at fixed rates of interest declared by LB. (See Appendix.)
See "THE CONTRACTS--Accumulated Value; Accumulation Units and Accumulation
Unit Value".
On the date LB approves the Contract Owner's application, LB will transfer
from the general account the initial premium and any interest accumulations
accrued during the underwriting period among the Subaccount(s) and/or Fixed
Account according to the Contract Owner's instructions. See "THE CONTRACTS--
Allocation of Premiums." Subsequent premiums will be allocated to the
Subaccounts and the Fixed Account in the same proportion as the initial
premium, at the end of the Valuation Period in which the subsequent premium is
received by LB. See "THE CONTRACTS--Allocation of Premiums".
Surrenders. If a Written Notice from the Contract Owner requesting a surrender
is received on or before the Maturity Date, all or part of the Accumulated
Value of a Contract will be paid to the Contract Owner after deducting any
applicable surrender charge. Partial surrenders must be for at least $500, and
may be requested only if the remaining Accumulated Value is not less than
$1,000. Under certain circumstances the Contract Owner may make surrenders
after the Maturity Date. See "THE CONTRACTS--Surrender (Redemption)".
Transfers. On or before the Maturity Date the Contract Owner may request the
transfer of all or a part of a Contract's Accumulated Value to other
Subaccounts or to the Fixed Account. The total amount transferred each time
must be at least $500 (unless the total value in the Subaccount or the Fixed
Account is less than $500, in which case the entire amount may be
transferred). LB reserves the right to limit the number of transfers in any
Contract Year, provided that at least two such transfers each Contract Year
will always be allowed. With respect to the Fixed Account, transfers out of
the Fixed Account are limited to only one each Contract Year and must be made
on or within 45 days after a Contract Anniversary. After the Maturity Date,
the Contract Owner may, by Written Notice and only once each Contract Year,
change the percentage allocation of variable annuity payments among the
available Subaccounts. See "THE CONTRACTS--Transfers".
Charges and Deductions
The following charges and deductions are made in connection with the
Contracts:
Surrender Charge (Contingent Deferred Sales Charge). No charge for sales
expense is deducted from premiums at the time premiums are paid. However, if a
Contract is surrendered in whole or in part before it has been in force for
six full Contract Years, a surrender charge is deducted from the amount
surrendered; provided that in each Contract Year, a Contract Owner may
surrender without a surrender charge up to 10% of a Contract's Accumulated
Value existing at the time the first surrender is made in that Contract Year.
The maximum charge is 6% of the Excess Amount and is in effect for the first
Contract Year. Thereafter, the surrender charge decreases by 1% each
subsequent Contract Year. In no event will the total surrender charge on any
one Contract exceed 6 1/2% of total gross premiums paid under the Contract.
The surrender charge will also be deducted at the time annuity payments begin
except as set forth under the heading "CHARGES AND DEDUCTIONS--Surrender
Charge (Contingent Deferred Sales Charge)".
Administrative Charge. On each Contract Anniversary prior to and including the
Maturity Date, LB deducts an annual administrative charge of $30 from the
Accumulated Value of each Contract. No such charge is deducted if on that
Contract Anniversary the total amount of premiums paid under the Contract,
less the amount of all prior partial surrenders (which includes the amount of
related surrender charges), is equal to or greater than $5,000.
Mortality and Expense Risk Charge. LB deducts a daily mortality and expense
risk charge to compensate LB for assuming certain mortality and expense risks.
The charge is deducted from the net assets of the Variable Account. The charge
is currently in an amount equal to an annual rate of 1.10% (approximately
0.80% for mortality risk and approximately 0.30% for expense risk) of the
average daily net assets of each Subaccount in the Variable Account. This
charge is guaranteed not to increase above an annual rate of 1.25%.
Investment Advisory Fee of the Fund. Because the Variable Account purchases
shares of the Fund, the net assets of the Variable Account will reflect the
investment advisory fee incurred by the Fund. LB is paid a daily fee by the
Fund for its investment management services equal to an annual rate of 0.40%
of the aggregate average daily net assets of the Money Market Portfolio,
Growth Portfolio, Income Portfolio, High Yield Portfolio, and Opportunity
Growth Portfolio. LB also receives a daily investment advisory fee from the
Fund equal to .85% of the aggregate average daily net assets of the World
Growth Portfolio.
For a more detailed description of these charges and deductions, see "CHARGES
AND DEDUCTIONS".
Annuity Provisions
The Contract Owner may select an annuity settlement option or options, and may
select whether payments are to be made on a fixed or variable (or a
combination of fixed and variable) basis. The Contract Owner may also elect to
receive a single sum by surrendering the Contract on the Maturity Date and
paying any applicable surrender charge. See "ANNUITY PROVISIONS".
Federal Tax Status
For a description of the Federal income tax status of annuities, see "FEDERAL
TAX STATUS --Taxation of Annuities in General". Generally, a distribution from
a Contract before the taxpayer attains age 59 1/2 will result in a penalty tax
of 10% of the amount of the distribution which is includable in gross income.
Condensed Financial Information
The following condensed financial information is derived from the financial
statements of the Variable Account. The data should be read in conjunction
with the financial statements, related notes and other financial information
included in the Statement of Additional Information.
Selected data for Accumulation outstanding throughout the period ending
December 31:
Growth Subaccount
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1995 1994
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Accumulation Unit Value:
Beginning of period $17.95 $19.68*
End of period 24.38 17.95
Number of Accumulation Units
outstanding at end of period 7,742,874 3,142,640
High Yield Subaccount
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1995 1994
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Accumulation Unit Value:
Beginning of period $18.64 $20.41
End of period 22.06 18.64
Number of Accumulation Units
outstanding at end of period 5,577,895 2,514,043
Income Subaccount
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1995 1994
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Accumulation Unit Value:
Beginning of period $16.07 $17.21
End of period 18.98 16.07
Number of Accumulation Units
outstanding at end of period 5,274,785 2,264,894
Money Market Subaccount
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1995 1994
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Accumulation Unit Value:
Beginning of period $1.33 $1.33
End of period 1.43 1.36
Number of Accumulation Units
outstanding at end of period 15,771,786 5,984,694
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*Commencing February 1, 1994, the date the Registration Statement for the
Variable Account was declared effective.
The financial statements of LB are also contained in the Statement of
Additional Information.
Calculation of Performance
From time to time the Variable Account will advertise the Money Market
Subaccount's "yield" and "effective yield". Both yield figures are based on
historical earnings and are not intended to indicate future performance. The
"yield" of the Subaccount refers to the income generated by an investment in
the Subaccount over a seven-day period (which period will be stated in the
advertisement). This income is then "annualized". That is, the amount of
income generated by the investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when
annualized, the income earned by an investment in the Subaccount is assumed to
be reinvested. The annualized current yield and effective yield for the seven-
day base period ended December 31, 1995 , was 4.29% and 4.38%, respectively.
For more information, see the Statement of Additional Information.
Also, the Variable Account may advertise for the Subaccounts other than the
Money Market Subaccount a yield quotation based on a 30-day (or one month)
period computed by dividing the net investment income per Accumulation Unit
earned during the period (the net investment income earned by the Fund
portfolio attributable to shares owned by the Subaccount less expenses
incurred during the period) by the maximum offering price per Accumulation
Unit on the last day of the period. The current yield for the 30-day based
period ended December 31, 1995 for the High Yield Subaccount was 8.52%. The
current yield for the same 30-day base period for the Income Subaccount was
5.02%. For more information, see the Statement of Additional Information.
From time to time, LB may advertise the average annual total return quotations
for the Subaccounts for the 1, 5 and 10-year periods computed by finding the
average annual compounded rates of return over the 1, 5 and 10-year periods
that would equate the initial amount invested to the ending redeemable value
of a hypothetical $1,000 payment made at the beginning of the 1, 5 or 10-year
periods. For periods prior to February 1, 1994, total return figures are based
on a hypothetical Contract assumed to have been invested in a Portfolio of the
Fund when that Portfolio was first available for investment under a variable
annuity contract issued by an LB affiliate, Lutheran Brotherhood Variable
Insurance Products Company. If the assumed investment was made less than 10
years from the date of the quotation, the total return from the date of such
investment will be given.
The average annual total returns for the 1, 3 and 5-year periods through
December 31, 1995 and for the period from commencement of operations through
December 31, 1995 for the Subaccounts are as follows:
Commencement
1 Year 3 Year 5 Year of Operations
------- ------ ------ -------------
Growth Subaccount (3/8/88) 28.48%* 10.36%* 15.39%* 12.07%*
High Yield Subaccount (3/8/88) 11.92%* 9.46%* 16.24%* 10.64%*
Income Subaccount (3/8/88) 11.69%* 5.83%* 9.08%* 8.54%*
Money Market Subaccount (2/18/88) -1.09%* 1.79%* 2.87%* 4.61%*
*Does not include the annual administrative charge of $30 deducted from any
Contract for which the total of premiums paid under such Contract minus all
prior surrenders is less than $5,000. Inclusion of the administrative charge
would reduce the total return figures shown above. Assumes applicable sales
charge upon surrender.
Average annual total return quotations assume a steady rate of growth. Actual
performance fluctuates and will vary from the quoted results for periods of
time within the quoted periods. For more information, see the Statement of
Additional Information.
The Variable Account's performance reported from time to time in
advertisements and sales literature may be compared with that of other
insurance company separate accounts or mutual funds included in the generally
accepted indices, analyses or rankings prepared by Lipper Analytical Service,
Inc., Standard & Poor's Corporation, Morningstar, Inc., VARDS, Dow Jones or
similar independent rating or statistical investment services that monitor the
performance of insurance company separate accounts or mutual funds.
Performance of the Variable Account may be quoted or compared to rankings,
yields or returns as published or prepared by independent rating or
statistical services or publishers of publications such as THE BANK RATE
MONITOR NATIONAL INDEX, BARRON'S, BUSINESS WEEK, DONOGHUE'S MONEY MARKET FUND
REPORT, FINANCIAL SERVICES WEEK, FINANCIAL TIMES, FINANCIAL WORLD, FORBES,
FORTUNE, GLOBAL INVESTOR, INSTITUTIONAL INVESTOR, INVESTOR'S DAILY,
KIPLINGER'S PERSONAL FINANCE, LIPPER ANALYTICAL SERVICES, MONEY, MUTUAL FUND
FORECASTER, NEWSWEEK, THE NEW YORK TIMES, PERSONAL INVESTOR, STANGER REPORT,
SYLVIA PORTER'S PERSONAL FINANCE, USA TODAY, U.S. NEWS AND WORLD REPORT, THE
WALL STREET JOURNAL and WIESENBERGER INVESTMENT COMPANIES SERVICE.
LUTHERAN BROTHERHOOD, THE VARIABLE ACCOUNT
AND THE FUND
Lutheran Brotherhood
The Contracts are issued by LB. Lutheran Brotherhood, a fraternal benefit
society owned and operated for its members, was founded in 1917 under the laws
of the State of Minnesota. LB is currently licensed to transact life insurance
business in all 50 states and the District of Columbia and is offering the
Contracts in states where it has authority to issue variable contracts. At the
end of 1995, LB had total assets of over $10.9 billion.
LB is subject to regulation by the Insurance Division of the State of
Minnesota as well as by the insurance departments of all the other states and
jurisdictions in which it does business. LB submits annual reports on its
operations and finances to insurance officials in such states and
jurisdictions. The forms of Contracts described in this Prospectus are filed
with and (where required) approved by insurance officials in each state and
jurisdiction in which Contracts are sold. LB is also subject to certain
Federal securities laws and regulations.
The Variable Account
The Variable Account is a separate account of LB, established by the Board of
Directors of LB in 1993 pursuant to the laws of the State of Minnesota. The
Variable Account meets the definition of a "separate account" under the
federal securities laws. LB has caused the Variable Account to be registered
with the Securities and Exchange Commission (the "SEC") as a unit investment
trust under the Investment Company Act of 1940 (the "1940 Act"). Such
registration does not involve supervision by the SEC of the management or
investment policies or practices of the Variable Account.
The assets of the Variable Account are owned by LB, and LB is not a trustee
with respect to such assets. However, the Minnesota laws under which the
Variable Account was established provide that the Variable Account shall not
be chargeable with liabilities arising out of any other business LB may
conduct. LB may transfer to its general account assets of the Variable Account
which exceed the reserves and other liabilities of the Variable Account.
Income and realized and unrealized gains and losses from each Subaccount of
the Variable Account are credited to or charged against that Subaccount
without regard to any of LB's other income, gains or losses. LB may accumulate
in the Variable Account the charge for expense and mortality risk, mortality
gains and losses and investment results applicable to those assets that are in
excess of net assets supporting the Contracts.
LB Series Fund, Inc.
Each Contract Owner may allocate the premiums paid under the Contract to one
or more of the six Subaccounts of the Variable Account -- the Growth
Subaccount, the High Yield Subaccount, the Income Subaccount, the Opportunity
Growth Subaccount, the World Growth Subaccount and the Money Market
Subaccount. The assets of each such Subaccount will be invested in the
corresponding Portfolio (the Growth Portfolio, the High Yield Portfolio, the
Income Portfolio, the Opportunity Growth Portfolio, the World Growth Portfolio
or the Money Market Portfolio) of the Fund. The investment objectives of the
Portfolios of the Fund (individually a "Portfolio" and collectively the
"Portfolios") are:
Growth Portfolio. To achieve long-term growth of capital through investment
primarily in common stocks of established corporations that appear to offer
attractive prospects of a high total return from dividends and capital
appreciation.
High Yield Portfolio. To achieve a higher level of income through a
diversified portfolio of high yield securities ("junk bonds") which involve
greater risks than higher quality investments, while also considering growth
of capital as a secondary objective.
Income Portfolio. To achieve a high level of income over the longer term while
providing reasonable safety of capital through investment primarily in readily
marketable intermediate and long-term fixed income securities.
Money Market Portfolio. To achieve the maximum current income that is
consistent with stability of capital and maintenance of liquidity through
investment in high-quality, short-term debt obligations.
Opportunity Growth Portfolio. To achieve long term growth of capital by
investing primarily in a professionally managed diversified portfolio of
smaller capitalization common stocks.
World Growth Portfolio. To achieve long-term growth of capital by investing
primarily in a professionally managed diversified portfolio of common stocks
of established, non-U.S. companies.
No assurance can be given that the Portfolios of the Fund will achieve their
respective investment objectives.
Shares of the Fund purchased by each Subaccount of the Variable Account will
be held by LB as custodian for the Variable Account.
The Fund is designed to provide an investment vehicle for variable annuity and
variable life insurance contracts. Shares of the Fund will be sold to other
insurance company separate accounts of LB and separate accounts of its wholly
owned indirect subsidiary, Lutheran Brotherhood Variable Insurance Products
Company ("LBVIP"), and the Fund may in the future create new portfolios. It is
conceivable that in the future it may be disadvantageous for both variable
annuity separate accounts and variable life insurance separate accounts to
invest simultaneously in the Fund, although LB does not foresee any such
disadvantages to either variable annuity or variable life insurance contract
owners. The management of the Fund intends to monitor events in order to
identify any material conflicts between such contract owners and to determine
what action, if any, should be taken in response. Such action could include
the sale of Fund shares by one or more of the separate accounts, which could
have adverse consequences. Material conflicts could result from, for example,
(1) changes in state insurance laws, (2) changes in Federal income tax law,
(3) changes in the investment management of the Fund, or (4) differences in
voting instructions between those given by the contract owners from the
different separate accounts. In addition, if LB believes the Fund's response
to any of those events or conflicts insufficiently protects Contract Owners,
it will take appropriate action on its own.
The Fund is registered with the SEC under the 1940 Act as a diversified, open-
end management investment company (commonly called a "mutual fund"). This
registration does not involve supervision by the SEC of the management or
investment practices or policies of the Fund. Shares of the Fund may be sold
to other separate accounts, and the Fund may in the future create new
Portfolios.
The Variable Account will purchase and redeem shares from the Fund at net
asset value. Shares will be redeemed to the extent necessary for LB to collect
charges under the Contracts, to make payments upon surrenders, to provide
benefits under the Contracts, or to transfer assets from one Subaccount to
another as requested by Contract Owners. Any dividend or capital gain
distribution received from a Portfolio of the Fund will be reinvested
immediately at net asset value in shares of that Portfolio and retained as
assets of the corresponding Subaccount.
The Fund receives investment advice with respect to each of its Portfolios
from LB, which acts as investment adviser to the Fund. LB is a registered
investment adviser under the Investment Advisers Act of 1940. Lutheran
Brotherhood Research Corp. ("LBRC"), an indirect subsidiary of Lutheran
Brotherhood, acted as investment adviser to the Fund until January 1994, when
it was replaced by LB. LBRC provided investment advisory services to the Fund
using personnel and services provided by LB. As investment adviser to the
Fund, LB charges the Fund a daily investment advisory fee equal to an annual
rate of .40% of the aggregate average daily net assets of the Money Market,
Income, High Yield, Growth, and Opportunity Growth Portfolios. LB also
charges the Fund an annual investment advisory fee equal to .85% of the
aggregate average daily net assets of the World Growth Portfolio.
The Fund has entered into an Investment Advisory Agreement with LB under which
LB will, subject to the direction of the Board of Directors of the Fund, carry
on the day-to-day management of the Fund, and provide advice and
recommendations with respect to investments and the purchase and sale of
securities in accordance with the Fund's investment objectives, policies and
restrictions. LB also furnishes at its own expenses all necessary
administrative services, office space, equipment and clerical personnel for
servicing the investments of the Fund and maintaining its organization, and
investment advisory facilities and executive and supervisory personnel for
managing the investments and effecting the portfolio transactions of the Fund.
The Investment Advisory Agreement provides that the Fund will pay, or provide
for the payment of, all of its own expenses, including, without limitation,
the compensation of the directors who are not affiliated with LB or its
affiliates, governmental fees, interest charges, taxes, membership dues in the
Investment Company Institute allocable to the Fund, fees and expenses of the
independent auditors, of legal counsel and of any transfer agent, registrar
and dividend disbursing agent of the Fund, expenses of preparing, printing and
mailing prospectuses, shareholders' reports, notices, proxy statements and
reports to governmental officers and commissions, expenses connected with the
execution, recording and settlement of portfolio security transactions,
insurance premiums, fees and expenses of the Fund's custodian for all services
to the Fund, including safekeeping of funds and securities and keeping of
books and calculating the net asset value of the shares of the Portfolios of
the Fund, expenses of shareholders' meetings and expenses relating to the
issuance, registration and qualification of shares of the Fund. LB and LBVIP
have agreed with the Fund to pay, or to reimburse the Fund for the payment of,
all of the foregoing expenses and all other expense associated with operating
the Fund pursuant to a separate written agreement (the "Expense Reimbursement
Agreement"). The Expense Reimbursement Agreement could be terminated at any
time by the mutual agreement of the Fund, LB and LBVIP, but the Fund and LB
and LBVIP currently contemplate that the Expense Reimbursement Agreement will
continue so long as the Fund remains in existence. If the Expense
Reimbursement Agreement were terminated, the Fund would be required to pay
those operating expenses, which would reduce the net investment return on the
shares of the Fund held by the Subaccounts of the Variable Account.
LB has engaged Rowe Price-Fleming International, Inc., ("Price-Fleming") as
investment sub-adviser for the World Growth Portfolio. Price-Fleming was
founded in 1979 as a joint venture between T. Rowe Price Associates, Inc. and
Robert Fleming Holdings Limited. Price-Fleming is one of the world's largest
international mutual fund asset managers with approximately $20 billion under
management as of December 31, 1995 in its offices in Baltimore, London, Tokyo
and Hong Kong. Price-Fleming has an investment advisory group that has day-
to-day responsibility for managing the World Growth Portfolio and developing
and executing the Portfolio's investment program.
LB pays the Sub-adviser for the World Growth Portfolio an annual sub-advisory
fee for the performance of sub-advisory services. The fee payable is equal to
a percentage of that Portfolio's average daily net assets. The percentage
varies with the size of the Portfolio's net assets, decreasing as the
Portfolio's assets increase. The formula for determining the sub-advisory fee
is described fully in the prospectus for the Fund.
Each Contract Owner should periodically consider the allocation among the
Subaccounts in light of current market conditions and the investment risks
attendant to investing in the Fund's various Portfolios. A full description of
the Fund, its investment objectives, policies and restrictions, its expenses,
the risks attendant to investing in the Fund's Portfolios and other aspects of
its operation is contained in the accompanying Prospectus for the Fund, which
should be carefully read together with this Prospectus.
Addition, Deletion or Substitution of Investments
LB reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the Variable
Account or that the Variable Account may purchase. If the shares of a
Portfolio of the Fund are no longer available for investment or if in LB's
judgment further investment in any Portfolio should become inappropriate in
view of the purposes of the Variable Account, LB may redeem the shares, if
any, of that Portfolio and substitute shares of another registered open-end
management company. LB will not substitute any shares attributable to a
Contract interest in a Subaccount of the Variable Account without notice and
prior approval of the SEC and state insurance authorities, to the extent
required by applicable law.
LB also reserves the right to establish additional Subaccounts of the Variable
Account, each of which would invest in shares corresponding to a new Portfolio
of the Fund or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required SEC approval,
LB may, in its sole discretion, establish new Subaccounts or eliminate one or
more Subaccounts if marketing needs, tax considerations or investment
conditions warrant. Any new Subaccounts may be made available to existing
Contract Owners on a basis to be determined by LB.
If any of these substitutions or changes are made, LB may by appropriate
endorsement change the Contract to reflect the substitution or change. If LB
deems it to be in the best interest of Contract Owners and Annuitants, and
subject to any approvals that may be required under applicable law, the
Variable Account may be operated as a management company under the 1940 Act,
it may be deregistered under that Act if registration is no longer required,
or it may be combined with other LB separate accounts.
THE CONTRACTS
Issuance of a Contract
In order to purchase a Contract, application must be made to LB through a
licensed LB Representative, who is also a registered representative of LBSC.
LB is offering Contracts only in situations in which the Annuitant is eligible
for membership in Lutheran Brotherhood. Contracts may be sold to or in
connection with retirement plans which may or may not be Qualified Plans. LB
reserves the right to reject an application for any reason permitted by law.
The minimum amount LB will accept as an initial premium is $600 on an
annualized basis. LB may, however, in its sole discretion, waive such minimum
initial premium requirements. Subsequent premiums may be paid under the
Contracts, but LB may choose not to accept any subsequent premium if it is
less than $50.
Free Look Period
The Contract provides for an initial "free look" period. The Contract Owner
has the right to return the Contract within 10 days after such Contract Owner
receives the Contract. When LB receives the returned Contract at its Home
Office, it will be cancelled and LB will refund to the Contract Owner an
amount equal to the sum of (i) the Accumulated Value (as of the date the
returned Contract is received by LB at its Home Office or by the LB
Representative from whom the Contract was purchased) plus (ii) the amount
attributable to the Contract for mortality and expense risk charges deducted
from the Variable Account plus (iii) the advisory fees charged by the Fund
against the net asset value in the Fund Portfolios attributable to the
Contract's value in the corresponding Subaccounts of the Variable Account. If,
however, applicable state law so requires, the full amount of any premium
received by LB will be refunded.
For Contracts issued in Pennsylvania, when LB receives the returned Contract
at its Home Office, it will be canceled and LB will refund to the Contract
Owner an amount equal to the sum of (i) the difference between the premiums
paid and the amount allocated to the Variable and Fixed Accounts plus (ii) the
Accumulated Value on the day the Contract is received by the LB Representative
from whom the Contract was purchased.
With respect to individual retirement annuities, under the Employee Retirement
Income Security Act of 1974 ("ERISA") a Contract Owner establishing an
Individual Retirement Account must be furnished with a disclosure statement
containing certain information about the Contract and applicable legal
requirements. This statement must be furnished on or before the date the
individual retirement annuity is established. If the Contract Owner is
furnished with such disclosure statement before the seventh day preceding the
date the individual retirement annuity is established, the Contract Owner will
not have any right of revocation under ERISA. If the disclosure statement is
furnished after the seventh day preceding the establishment of the individual
retirement annuity, then the Contract Owner may give a notice of revocation to
LB at any time within seven days after the Date of Issue. Upon such
revocation, LB will refund the premiums paid by the Contract Owner. The
foregoing right of revocation with respect to an individual retirement annuity
is in addition to the return privilege set forth in the preceding paragraphs,
i.e., LB will allow a participant establishing an individual retirement
annuity a "ten day free-look", notwithstanding the provisions of ERISA.
Allocation of Premium
Until the date LB approves the Contract Owner's application, the initial
premium will be deposited into LB's general account. Interest will be credited
on the initial premium held in LB's general account at a rate of interest
determined by LB. On the date LB approves the Contract Owner's application, LB
will add this accumulation amount to the initial premium and allocate this
amount among the Subaccount(s) and/or the Fixed Account according to the
Contract Owner's instructions. If the Date of Issue and the date of acceptance
by LB are the same day, then the initial premium payment will be immediately
allocated among the chosen Subaccount(s) and/or Fixed Account according to the
Contract Owner's instructions.
This initial premium allocation procedure is designed as a way to give the
Contract Owner interest on the initial premium from the Date of Issue to the
date LB approves the Contract Owner's application, with the interest payment
being paid by LB. Other Contract Owners' interests will not be adversely
affected by this initial premium allocation procedure, because LB, and not the
existing Contract Owners, will bear any expenses in effecting the procedure,
including the expense of crediting the interest accumulations.
If the application is determined to be in good order, LB will allocate the
premium payment to the chosen subaccount and/or Fixed Account within two days
of receipt of the completed application and premium payment. If the
application is determined by LB not to be in good order, LB will attempt to
complete the application within five business days. If the application is not
complete at the end of this period, LB will inform the applicant of the reason
for the delay and that the initial premium will be returned immediately unless
the applicant specifically consents to LB keeping the initial premium until
the application is complete.
The percentages of each premium that may be allocated to any Subaccount of the
Variable Account or the Fixed Account must be in whole numbers and the sum of
the allocation percentages must be 100%. LB reserves the right to adjust
allocation percentages to eliminate fractional percentages. Subsequent
premiums will be allocated among the Subaccounts and the Fixed Account in the
same proportion as the initial premium, at the end of the Valuation Period in
which the subsequent premium is received by LB. The allocation proportion for
future premiums may, however, be changed without charge at any time by
providing LB with Written Notice or by telephone (if the Contract Owner has
completed the Telephone Transaction Authorization Form). Premiums paid
thereafter will be allocated in the manner provided in such changed
instruction, unless another change is subsequently requested.
The values in the Subaccounts of the Variable Account will vary with the
investment experience of the Subaccounts and the Contract Owner bears the
entire investment risk. Contract Owners should periodically review their
allocations of premiums in light of market conditions and the Contract Owner's
overall financial objectives.
Accumulated Value; Accumulation Units and Accumulation Unit Value
The Accumulated Value of the Contract is the total amount of value held under
the Contract at any time prior to and including the Maturity Date. A
Contract's Accumulated Value will reflect the investment experience of the
chosen Subaccounts of the Variable Account, any amount of value in the Fixed
Account, any premiums paid, any surrenders, and any charges assessed in
connection with the Contract. There is no guaranteed minimum Accumulated
Value, and, because a Contract's Accumulated Value on any future date depends
upon a number of variables, it cannot be predetermined.
Calculation of Accumulated Value. The Accumulated Value of the Contract is
determined on each Valuation Date. The Contract's Accumulated Value will be
the aggregate of the values attributable to the Contract in each of the
Subaccounts, determined for each Subaccount by multiplying the Subaccount's
Accumulation Unit Value on the relevant Valuation Date by the number of
Subaccount Accumulation Units allocated to the Contract, plus any amounts in
the Fixed Account.
Determination of Number of Accumulation Units. Any amounts allocated to the
Subaccounts will be converted into Accumulation Units of the Subaccount. The
number of Accumulation Units to be credited to the Contract is determined by
dividing the dollar amount being allocated by the Accumulation Unit Value as
of the end of the Valuation Period during which the amount was allocated. The
number of Subaccount Accumulation Units in any Subaccount will be increased by
(i) any premiums allocated to the Subaccount during the current Valuation
Period, and (ii) any Accumulated Value transferred to the Subaccount from
another Subaccount or from the Fixed Account during the current Valuation
Period. The number of Subaccount Accumulation Units in any Subaccount will be
decreased by (i) any Accumulated Value transferred from the Subaccount to
another Subaccount or to the Fixed Account during the current Valuation
Period, (ii) the amount of any partial surrender (including any related
surrender charge) during the current Valuation Period, and (iii) any
administrative charge taken from the Subaccount during the current Valuation
Period.
The Accumulation Unit Value is determined before any Contract transactions on
the Valuation Date that would affect the number of Subaccount Accumulation
Units (see the immediately preceding paragraph). If the Contract's Accumulated
Value in the Variable Account is to be calculated for a day that is not a
Valuation Date, the next following Valuation Date will be used.
Determination of Accumulation Unit Value. The Accumulation Unit Value for a
Subaccount is calculated on each Valuation Date by dividing (1) by (2), where
(1) is the net result of:
(a) the net asset value of the corresponding Portfolio of the Subaccount at
the end of the current Valuation Period, plus
(b) the amount of any dividend or capital gain distribution declared by the
Portfolio if the "ex-dividend" date occurs during the Valuation Period, plus
or minus
(c) a charge or credit for any taxes reserved which LB determines to be a
result of the investment operation of the Portfolio, less
(d) the mortality and expense risk charge (see "CHARGES AND DEDUCTIONS --
Mortality and Expense Risk Charge") for each day during the current Valuation
Period (a current charge of .003014%, but never to exceed .003425%, of the net
assets for each day during the current Valuation Period), and
(2) is the number of Accumulation Units for the Subaccount attributable to all
Contracts, including Accumulation Units held as reserves for the Contracts.
Death Benefit Before the Maturity Date
If an Annuitant, who is the Contract Owner unless another owner is named in
the application, dies before the Maturity Date, the Beneficiary will be
entitled to receive a death benefit under the Contract calculated on the later
of (a) the date LB receives proof of the Annuitant's death and (b) the date LB
receives a written request from the Beneficiary for either a single sum
payment or a settlement option. If no such request is made within one year
from the date of the Annuitant's death, the Beneficiary will be deemed to have
requested a single sum payment. Any proceeds not subsequently withdrawn will
be paid in a lump sum on the date 5 years after the date of death. If the
Contract has two Annuitants, LB will pay the Beneficiary in the manner
described above on the death of the first Annuitant. (If the Beneficiary is
the spouse of the deceased Contract Owner, such spouse may, to the extent
permitted by law, elect to continue the Contract in force, in which case such
spouse shall become and be treated as the Annuitant. This election will be
automatic if the spouse Beneficiary is also an Annuitant.)
Amount of Death Benefit. If a death benefit has become payable under a
Contract as described above, the amount of the death benefit will be the
greatest of (i) the Accumulated Value calculated on the later of the date LB
receives the proof of death and the written request referred to above, (ii)
the sum of the premiums received by LB under the Contract to the date of such
receipt, less any previous partial surrenders (including any applicable
charges); and (iii) the Accumulated Value on the preceding Minimum Death
Benefit Date plus the sum of premiums received by LB since that date, less the
amount of any partial surrenders since then (including any related surrender
charge). For Contracts issued in North Carolina the amount of the death
benefit will be the greater of (i) and (ii) as described above.
Manner of Payment -- Contracts Not Issued in Connection with Certain Qualified
Plans. If the Contract in question was not issued in connection with a
Qualified Plan, the following rules govern the manner of payment of the death
benefit if the Annuitant dies before the Maturity Date:
(a) if a single sum is requested, the death benefit will be paid within seven
days after the day LB receives the proof of death and written request referred
to above under "Amount of Death Benefit"; or
(b) if a settlement option is requested, (i) it must be a settlement option
that the Contract Owner could have selected before the Maturity Date, and (ii)
the settlement option must provide that the entire amount due under the
Contract will be distributed (1) within five years from the date of death, or
(2) over the life of the Beneficiary or for a period not in excess of the
Beneficiary's life expectancy, provided that the distributions must begin
within one year from the date of death.
Manner of Payment -- Contracts Issued in Connection with Qualified Plans. If
the Contract in question was issued in connection with a Qualified Plan,
certain restrictions on the manner of payment of the death benefit prior to
the Maturity Date, similar to those described above under "Manner of Payment -
- - Contracts Not Issued in Connection with Certain Qualified Plans", are
applicable. The manner of payment of such death benefit under a Contract
issued in connection with a Qualified Plan will be stated in the Contract or
the plan documents. Purchasers acquiring Contracts pursuant to Qualified Plans
should consult qualified pension or tax advisers.
Death Benefit After the Maturity Date
If an Annuitant dies after the Maturity Date, the death benefit, if any, shall
be as stated in the settlement option in effect, provided, however, that death
benefit payments must be paid at least as rapidly as payments were being paid
under the settlement option in effect on the date of death. With respect to a
Contract issued in connection with a Qualified Plan, certain additional
restrictions on the manner of payment of the death benefit after the Maturity
Date, similar to those described above under "Death Benefit Before the
Maturity Date -- Manner of Payment -- Contracts Not Issued in Connection with
Certain Qualified Plans", are also applicable.
Surrender (Redemption)
If a Written Notice from the Contract Owner requesting a surrender is received
by LB on or before the Maturity Date, all or part of the Accumulated Value
will be paid to the Contract Owner after deducting any applicable surrender
charge (see "CHARGES AND DEDUCTIONS--Surrender Charge (Contingent Deferred
Sales Charge)").
A surrender will take place at the end of the Valuation Period during which
the requirements for surrender are completed and payment will be made within
seven days after such surrender. If a surrender is partial, the surrender
payments will be taken proportionately from all Subaccounts and the Fixed
Account on a basis that reflects their proportionate percentage of the
Accumulated Value. The Contract Owner may select a different allocation basis
with LB's approval. Partial surrenders must be for at least $500, and may be
requested only if the remaining Accumulated Value is not less than $1,000.
LB may cancel the Contract on any Contract Anniversary if (a) the Accumulated
Value is less than $1,000 and no premium payments have been made under the
Contract within the last 24 months or (b) the Accumulated Value as of the
Contract Anniversary is less than the administrative charge (see "CHARGES AND
DEDUCTIONS--Administrative Charge"). LB will notify the Contract Owner 60 days
before such Contract Anniversary and provide the Contract Owner the minimum
dollar amount required to keep the Contract in force. Failure to make
sufficient payment will result in cancellation of the Contract on the Contract
Anniversary. If such Contract Anniversary is not a Valuation Date, then the
Accumulated Value will be determined on the next Valuation Date. Upon
cancellation under (a) above, LB will pay the Contract Owner the Accumulated
Value as of such Valuation Date.
After the Maturity Date, certain of the available settlement options (those
that do not involve a life contingency) also permit surrenders by the Contract
Owner. In such cases, the amount available for surrender is the commuted value
of any unpaid annuity installments, computed on the basis of the assumed
interest rate incorporated in such annuity installments. However, a surrender
charge is deducted at the time of annuitization if these settlement options
are selected (see "CHARGES AND DEDUCTIONS--Surrender Charge (Contingent
Deferred Sales Charge")).
Consideration should be given to the tax implications of a surrender prior to
making a surrender request. See "FEDERAL TAX STATUS--Taxation of Annuities in
General".
Transfers
On or before the Maturity Date, the Contract Owner may request by Written
Notice (or by telephone if the Contract Owner has completed the Telephone
Transaction Authorization Form) the transfer, subject to any conditions the
Portfolio whose shares are involved may impose, of all or a part of a
Contract's Accumulated Value among the Subaccounts of the Variable Account and
the Fixed Account. The transfer will be made by LB without charge on the day
Written Notice (or telephonic instructions) requesting such transfer is
received by LB. To accomplish a transfer from the Variable Account, the
Variable Account will surrender Accumulation Units in the particular
Subaccounts and reinvest that value in Accumulation Units of other particular
Subaccounts and the Fixed Account as directed in the request. The total amount
transferred each time must be at least $500 (unless the total value in a
Subaccount of the Variable Account or the Fixed Account is less than $500, in
which case the entire amount may be transferred). LB reserves the right to
limit the number of transfers in any Contract Year, provided that at least two
such transfers each Contract Year will always be allowed. With respect to the
Fixed Account, transfers out of the Fixed Account are limited to only one
during each Contract Year and must be made on or within 45 days after a
Contract Anniversary. To accomplish a transfer from the Fixed Account, the
Fixed Account will surrender Accumulated Value from the Fixed Account and
reinvest that value in Accumulation Units of particular Subaccounts of the
Variable Account as directed in the request.
After the Maturity Date, the Contract Owner may, by Written Notice and only
once each Contract Year, change the percentage allocation of variable annuity
payments among the available Subaccounts.
Telephone Transfers
Telephone transfers are available when the Contract Owner completes the
Telephone Transaction Form. If the Contract Owner elects to complete the
Telephone Transaction Authorization Form, the Contract Owner thereby agrees
that LB, its agents and employees will not be liable for any loss, liability
cost or expense when LB, its agents and employees act in accordance with the
telephone transfer instructions that have been properly received and recorded
on voice recording equipment. If a telephone authorization or instruction,
processed after the Contract Owner has completed the Telephone Transaction
Authorization Form, is later determined not to have been made by the Contract
Owner or was made without the Contract Owner's authorization, and a loss
results from such unauthorized instruction, the Contract Owner bears the risk
of this loss. LB will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. In the event LB does not
employ such procedures, LB may be liable for any losses due to unauthorized or
fraudulent instructions. Such procedures may include, among others, requiring
forms of personal identification prior to acting upon telephone instructions,
providing written confirmation of such instructions and/or tape recording
telephone instructions.
Special Transfer Service -- Dollar Cost Averaging
LB administers a dollar cost averaging program which enables a Contract Owner
to pre-authorize a periodic exercise of the transfer rights described above. A
Contract Owner entering into a dollar cost averaging agreement will instruct
LB to periodically transfer predetermined dollar amounts from the Money Market
Subaccount to as many of the five other Subaccounts or to the Fixed Account as
specified by the Contract Owner until the amount in the Money Market
Subaccount is exhausted or the agreement is terminated by the Contract Owner.
The dollar cost averaging program is generally suitable for Contract Owners
making a substantial deposit to the Contract and who wish to use the other
Subaccounts or the Fixed Account investment option, but desire to control the
risk of investing at the top of a market cycle. The dollar cost averaging
program allows such investments to be made in equal installments over time in
an effort to reduce such risk. Dollar cost averaging does not guarantee that
the Variable Account will gain in value, nor will it protect against a decline
in value if market prices fall. However, if a Contract Owner can continue to
invest regularly throughout changing market conditions, it can be an effective
strategy to help meet long-term goals. Contract Owners interested in the
dollar cost averaging program may obtain an application and full information
concerning the program and its restrictions from LB.
Assignments
If the Contract is used in a Qualified Plan and the Contract Owner is a trust,
custodian or employer, then the Contract Owner may transfer ownership to the
Annuitant. Otherwise, the Contract may not be sold, assigned, discounted or
pledged as collateral for a loan or as security for performance of an
obligation or for any other purpose to any person other than LB.
If the Contract is not used in a Qualified Plan, then ownership may be
transferred, but not to a natural person, and the Contract may be assigned as
Collateral.
LB shall not be bound by any sale, assignment, pledge or transfer until
Written Notice thereof is actually received by LB at its Home Office and shall
not be responsible for the validity of any sale, assignment, pledge or
transfer. Any payments made or actions taken by LB before LB actually receives
Written Notice shall not be affected by the sale, assignment, pledge or
transfer.
Considerations should be given to the tax implications of an assignment. See
"FEDERAL TAX STATUS--Taxation of Annuities in General".
Contract Owner, Beneficiaries and Annuitants
Unless another owner is named as the Contract Owner in the application for the
Contract, the Annuitant is the Contract Owner and may exercise all of the
Contract Owner's rights under the Contract.
The Contract Owner may name a Beneficiary to receive the death benefit payable
under the Contract. If the Beneficiary is not living on the date payment is
due or if no Beneficiary has been named, the death benefit will be paid to the
estate of the Annuitant.
The Contract Owner may change the Beneficiary by giving LB Written Notice of
the change, but the change shall not be effective until actually received by
LB at its Home Office. Upon receipt by LB of a notice of change, it will be
effective as of the date it was signed but shall not affect any payments made
or actions taken by LB before LB received the Written Notice, and LB shall not
be responsible for the validity of any change.
CHARGES AND DEDUCTIONS
Surrender Charge (Contingent Deferred Sales Charge)
General. No charge for sales expense is deducted from premiums at the time
premiums are paid. However, within certain time limits described below a
surrender charge is deducted from the Accumulated Value of the Contract in the
case of surrender, in whole or in part, before annuity payments begin and, if
certain settlement options are selected, at the time annuity payments begin.
In the event surrender charges are not sufficient to cover sales expenses, the
loss will be borne by LB; conversely, if the amount of such charges proves
more than enough, the excess will be retained by LB (see "Sufficiency of
Charges" below). LB does not currently believe that the surrender charges
imposed will cover the expected costs of distributing the Contracts.
If a Contract is surrendered in whole or in part before it has been in force
for six full Contract Years, a surrender charge is deducted from the amount
surrendered; provided that in each Contract Year, a Contract Owner may
surrender without a surrender charge, up to 10% of a Contract's Accumulated
Value existing at the time the first surrender is made in that Contract Year.
For example, if a total surrender is made during a Contract Year in which a
partial surrender has been made, the Contract Owner may surrender free of
charge an amount equal to 10% of the Accumulated Value of the Contract at the
time of the partial surrender less the total of the partial surrender to which
no charge was applied. This right is not cumulative from Contract Year to
Contract Year. In the event that a surrender is made in excess of the amount
which may be surrendered free of charge, only the excess (the "Excess Amount")
will be subject to a surrender charge.
The charge is applied as a percentage of the Excess Amount surrendered, but in
no event will the total surrender charge on any one Contract exceed a maximum
limit of 6 1/2% of total gross premiums paid under the Contract. Such total
charge equals the aggregate of all applicable surrender charges for total and
partial surrenders, including any charges deducted at the time annuity
payments begin (as described below).
Charges for Total and Partial Surrenders. If a Contract is surrendered, in
whole or in part, while the Contract is in force and on or before the Maturity
Date, a surrender charge is imposed on the Excess Amount of such surrender if
such surrender occurs before the Contract has been in force for six full
Contract Years as follows:
Contract Year in which
Total or Partial Charge as Percentage of
Surrender Occurs Excess Amount Surrendered*
----------------------- ---------------------------
1 6%
2 5
3 4
4 3
5 2
6 1
7 and after 0
- ------------
* Although the charge as a percentage of Excess Amount surrendered decreases
from 6% to 0 over time, the actual aggregate amount of surrender charge
deducted may be up to the 6 1/2% of total gross premiums paid maximum limit
described above.
For purposes hereof, the amount surrendered is equal to the amount of the
surrender request, and the amount received by the Contract Owner is equal to
the amount of the surrender request less the applicable surrender charge and
any withholding if applicable.
No surrender charge is deducted if the surrender occurs after expiration of
the time period applicable to such charge as shown in the table above.
Surrender charges otherwise payable will be waived with respect to surrenders
made by the Contract Owner when the Annuitant is totally disabled (as defined
in the Contract) or confined to a hospital, nursing home or a hospice if the
confinement begins while the Contract is in force and has continued for six
consecutive months.
Certain surrenders are subject to a 10% Federal tax penalty on the amount of
income withdrawn (see "FEDERAL TAX STATUS--Taxation of Annuities in General").
Charge at the Time Annuity Payments Begin. Generally, at the time annuity
payments begin, a surrender charge as described above will apply. Such charge
is the same as that which would apply had the Contract been fully surrendered
on the Maturity Date, taking into account the 10% free surrender provision
described above and subject to the maximum 6 1/2% limitation described above.
If, however, the Contract Owner has chosen a settlement option providing an
income for a fixed period (e.g., Option 3V described under "Annuity
Provisions--Settlement Options"), for any annuitization made more than three
years after the Date of Issue, no surrender charge will be deducted from the
portion of Accumulated Value annuitized provided that payments under such a
settlement option will be made for at least five years and that proceeds may
not be withdrawn. This surrender charge will be waived if the Annuitant is
totally disabled (as defined in the Contract) or confined to a hospital,
nursing home or a hospice if the confinement begins while the Contract is in
force and has continued for six consecutive months on the Maturity Date. No
further surrender charge is deducted with respect to surrenders during the
annuity period under such a settlement option.
No surrender charge is imposed at the time of annuitization (if annuitization
occurs more than three years after the Date of Issue) if a settlement option
involving a life income with a guaranteed period is chosen (e.g., Option 4V or
Option 5V described under "ANNUITY PROVISIONS--Settlement Options"), but
surrenders are not permitted during the annuity period under such a settlement
option.
Administrative Charge
On each Contract Anniversary prior to and including the Maturity Date, LB
deducts from the Accumulated Value, proportionately from the Subaccounts and
the Fixed Account that make up such Accumulated Value, an annual
administrative charge of $30 to reimburse LB for administrative expenses
relating to the Contract, the Variable Account and the Subaccounts. Subject to
LB's approval, the Contract Owner may specify a different allocation for the
administrative charge. No such charge is deducted if on that Contract
Anniversary the total amount of premiums paid under the Contract, less the
amount of all prior partial surrenders (which includes the amount of related
surrender charges), is equal to or greater than $5,000. LB does not expect to
make a profit on this charge. No administration charge is payable during the
annuity period.
Mortality and Expense Risk Charge
The variable annuity payments made to Annuitants will vary in accordance with
the investment experience of the Subaccounts selected by the Contract Owner.
However, neither such variable annuity payments, nor fixed annuity payments if
fixed annuity payments have been selected, will be affected by the mortality
experience (death rate) of persons receiving annuity payments. LB assumes this
"mortality risk" and has guaranteed the annuity rates incorporated in the
Contract, which cannot be changed. LB also assumes the mortality risk that
Beneficiaries of Contract Owners or Annuitants dying before the Maturity Date
may receive amounts in excess of the then current Accumulated Value (see "THE
CONTRACTS--Death Benefit Before the Maturity Date"). In addition, LB will not
increase charges for administrative expenses regardless of its actual
expenses.
To compensate LB for assuming such mortality and expense risks, LB deducts a
daily mortality and expense risk charge from the average daily net assets in
the Variable Account. LB has determined that a mortality and expense risk
charge at an annual rate of 1.25% of the average daily net assets of each
Subaccount in the Variable Account would be reasonable in relation to the
mortality and expense risks assumed by LB under the Contract. LB will,
however, initially impose a daily mortality and expense risk charge in an
amount that is equal to an annual rate of 1.10% (approximately 0.80% for
mortality risk and approximately 0.30% for expense risk) of the average daily
net assets of each Subaccount in the Variable Account. The mortality and
expense risk charge is guaranteed not to increase above an annual rate of
1.25%.
If the mortality and expense risk charge is insufficient to cover the actual
cost of the mortality and expense risk undertaken by LB, LB will bear the
loss. Conversely, if the mortality and expense risk charge proves more than
sufficient, the excess will be profit to LB and would be available for any
proper corporate purpose including, among other things, payment of sales
expenses. See "Sufficiency of Charges" below.
Investment Advisory Fee of the Fund
Because the Variable Account purchases shares of the Fund, the net assets of
the Variable Account will reflect the investment advisory fee incurred by the
Fund. LB is paid a daily fee by the Fund for its investment management
services equal to an annual rate of 0.40% of the aggregate average daily net
assets of the Money Market Portfolio, Growth Portfolio, Income Portfolio, High
Yield Portfolio and Opportunity Growth Portfolio, and .85% of the aggregate
average daily net assets of the World Growth Portfolio. See "LUTHERAN
BROTHERHOOD, THE VARIABLE ACCOUNT AND THE FUND--LB Series Fund, Inc.", and the
accompanying current Prospectus for the Fund.
Taxes
Currently, no charge will be made against the Variable Account for Federal
income taxes. LB may, however, make such a charge in the future if income or
gains within the Variable Account will result in any Federal income tax
liability to LB. Charges for other taxes, if any, attributable to the Variable
Account may also be made. See "FEDERAL TAX STATUS".
Sufficiency of Charges
If the amount of all charges assessed in connection with the Contracts as
described above is not enough to cover all expenses incurred in connection
therewith, the loss will be borne by LB. Any such expenses borne by LB will be
paid out of its general account which may include, among other things,
proceeds derived from mortality and expense risk charges deducted from the
Variable Account. Conversely, if the amount of such charges proves more than
enough, the excess will be retained by LB.
ANNUITY PROVISIONS
Maturity Date
The Contract Owner selects the Maturity Date, which must be a Contract
Anniversary at least three years after the Date of Issue, when making
application for the Contract. The Contract Owner may change a Maturity Date
selection by Written Notice received by LB at least 30 days before both the
Maturity Date currently in effect and the new Maturity Date. The new date
selected must satisfy the requirements for a Maturity Date.
For a Contract issued in Pennsylvania, the following requirements for maximum
maturity ages of the Contract will be used. Maturity age is the last birthday
of the Annuitant on the Contract Anniversary on or immediately prior to the
Maturity Date.
PENNSYLVANIA MAXIMUM MATURITY AGES
Age on Maximum
Date of Issue Maturity Age
-------------- -------------
70 or less 85
71 - 75 86
76 - 80 88
81 - 85 90
86 - 90 93
91 - 93 96
94 - 95 98
96 99
Settlement Options
The Contract Owner may select an annuity settlement option or options, and may
select whether payments are to be made on a fixed or variable (or a
combination of fixed and variable) basis. To the extent a fixed annuity is
selected, Accumulated Value will be transferred to the Fixed Account, and the
annuity payments will be guaranteed as to minimum dollar amount. See APPENDIX
- -- MORE INFORMATION ABOUT THE FIXED ACCOUNT. The Contract Owner may also
change a choice of settlement option by Written Notice received by LB at least
30 days before the Maturity Date.
The following variable annuity settlement options are generally available
under the Contract:
Option 3V--Income for a Fixed Period. Income will be paid for a fixed number
of years not to exceed 30.
Option 4V--Life Income with Guaranteed Period. Income will be paid for the
lifetime of the payee. If the payee dies during the guaranteed period,
payments will be continued to the named Beneficiary to the end of that period.
A period of 10 or 20 years may be selected. After the first payment is made,
this option may not be revoked or changed.
Option 5V--Joint and Survivor Life Income with Guaranteed Period. Income will
be paid for as long as at least one of two payees is alive. If both payees die
during the guaranteed period, payments will be continued to the named
Beneficiary to the end of that period. A period of 10 or 20 years may be
selected. After the first payment is made, this option may not be revoked or
changed.
Payments may be made under any other settlement option suggested by the
Contract Owner that is agreed to by LB.
LB also provides fixed annuity options, which are not described here. Any one
of the variable annuity options or any one of the fixed annuity options may be
selected, or any one of the variable annuity options may be selected in
combination with any one of the fixed annuity options.
If no valid selection of a settlement option has been made by the Maturity
Date and one Annuitant is living on the Maturity Date, the Life Income with
10-Year Guarantee Period fixed annuity settlement option shall be
automatically effective. If no valid selection of a settlement option has been
made by the Maturity Date and two Annuitants are living on the Maturity Date,
the Joint and Survivor Life Income with 10-Year Guarantee Period fixed annuity
settlement option shall be automatically effective.
It should be noted that under a settlement option providing an income for a
fixed period (e.g., Option 3V described above), for any surrender made more
than three years after the Date of Issue, no surrender charge will be deducted
from the portion of Accumulated Value surrendered, provided that payments
under such settlement option will be made for at least five years and that
proceeds may not be withdrawn. Also, no surrender charge will be imposed at
the time of annuitization (if annuitization occurs more than three years after
the Date of Issue) under a settlement option providing a life income with a
guaranteed period (e.g., Option 4V or Option 5V above). Surrenders after the
Maturity Date are permitted only in connection with settlement options that do
not involve a life contingency (see "THE CONTRACTS--Surrender (Redemption)").
The Contract Owner may elect the receipt of a single sum, rather than payment
pursuant to annuity settlement options, by surrendering the Contract in full
on the Maturity Date. In such case, a surrender charge will be deducted from
the Accumulated Value of the Contract if the Maturity Date occurs at any time
during the surrender charge period, taking into account the 10% free surrender
provision and subject to the maximum 6 1/2% limitation described under
"CHARGES AND DEDUCTIONS--Surrender Charge (Contingent Deferred Sales Charge)".
Frequency and Amount of Annuity Payments
Annuity payments under a settlement option will be paid as monthly
installments, unless the Contract Owner and LB agree to a different payment
schedule. However, if the Accumulated Value at the Maturity Date is less than
$2,000 or would not result in a payment of at least $25, LB may pay the
Accumulated Value in a single sum and the Contract will be canceled. Also, if
annuity payments would be or become less than $25 if a single settlement
option is chosen, or $25 on each basis if a combination of variable and fixed
options is chosen, LB may change the frequency of payments to intervals that
will result in payments of at least $25 each from each option chosen.
The amount of the first variable annuity payment (and, in the case of fixed
annuities, the amount of subsequent payments) is determined by applying the
Accumulated Value to be applied to the settlement option at the Maturity Date,
less any surrender charge due (see "Settlement Options" above), to the annuity
table in the Contract for the settlement option selected. The table shows the
amount of the initial annuity payment for each $1,000 applied.
Subsequent variable annuity payments vary in amount in accordance with the
investment experience of the selected Subaccount(s). Assuming annuity payments
are based on the unit values of a single Subaccount, the dollar amount of the
first annuity payment, determined as set forth above, is divided by the
Annuity Unit Value as of the Maturity Date to establish the number of Annuity
Units representing each annuity payment. This number of Annuity Units remains
fixed during the annuity payment period. The dollar amount of the second and
subsequent variable annuity payments is not predetermined and may change from
payment to payment. The dollar amount of the second and each subsequent
variable annuity payment is determined by multiplying the fixed number of
Annuity Units by the Annuity Unit Value (see "Subaccount Annuity Unit Value"
below) with respect to such Subaccount at the end of the last Valuation Date
of the period with respect to which the payment is due. If the payment is
based upon the Annuity Unit Values of more than one Subaccount, the foregoing
procedure is repeated for each applicable Subaccount and the sum of the
payments based on each Subaccount is the amount of the annuity payment.
The annuity tables in the Contracts are based on the mortality table specified
in the Contract. Under such tables, the longer the life expectancy of the
Annuitant under any life annuity option or the duration of any period for
which payments are guaranteed under the option, the smaller will be the amount
of the first monthly variable annuity payment. LB guarantees that the dollar
amount of each fixed and variable annuity payment after the first payment will
not be affected by variations in expenses or in mortality experience from the
mortality assumptions used to determine the first payment.
Subaccount Annuity Unit Value
The value of an Annuity Unit is determined independently for each Subaccount.
For each Subaccount, the Annuity Unit Value on any Valuation Date is
determined by multiplying the Annuity Unit Value at the end of the immediately
preceding Valuation Date by the net investment factor for the Valuation Date
for which the Annuity Unit Value is being calculated, and multiplying the
result by an interest factor which offsets the effect of the assumed
investment earnings rate of 3 1/2% per annum which is assumed in the annuity
tables contained in the Contract.
The net investment factor for each Subaccount for a Valuation Date is
determined by dividing the value of an Accumulation Unit for the applicable
Subaccount as of the end of the current Valuation Period by the value of an
Accumulation Unit for the applicable Subaccount as of the end of the
immediately preceding Valuation Period.
Assumed Investment Rate
A 3 1/2% assumed investment rate is built into the annuity tables contained in
the Contracts. A higher assumption would mean a higher initial payment but
more slowly rising and more rapidly falling subsequent payments. A lower
assumption would have the opposite effect. If the actual net investment rate
were at the annual rate of 3 1/2%, the annuity payments would be level.
GENERAL PROVISIONS
Postponement of Payments
General. LB may defer payment of any surrender and annuity payment amounts, or
death benefit amounts that are in the Variable Account if (a) the New York
Stock Exchange is closed other than customary weekend and holiday closings, or
trading on the New York Stock Exchange is restricted as determined by the SEC,
or (b) an emergency exists, as determined by the SEC, as a result of which
disposal of securities is not reasonably practicable or it is not reasonably
practicable to determine the value of the Variable Account's net assets.
Transfers and allocations of Accumulated Value to and against the Subaccounts
of the Variable Account may also be postponed under these circumstances.
Payment by Check. Payments under the Contract of any amounts derived from
premiums paid by check may be delayed until such time as the check has cleared
the Contract Owner's bank.
Date of Receipt
Except as otherwise stated herein, the date of receipt by LB of any Written
Notice, premium payment, telephone instruction or other communication is the
actual date it is received at LB's Home Office in proper form unless received
(1) after the close of the New York Stock Exchange, or (2) on a date which is
not a Valuation Date. In either of these two cases, the date of receipt will
be deemed to be the next Valuation Date.
Reports to Contract Owners
LB will mail each Contract Owner, at such Contract Owner's last known address
of record, at least annually after the first Contract Year, a report
containing the Accumulated Value or current value of the Contract as of a date
not more than two months prior to the date of mailing and any further
information required by any applicable law or regulation.
Contract Inquiries
Inquiries regarding a Contract may be made by writing to LB at its Home
Office, 625 Fourth Avenue South, Minneapolis, Minnesota 55415.
FEDERAL TAX STATUS
Introduction
The ultimate effect of Federal income taxes on a Contract's Accumulated Value,
on annuity payments and on the economic benefit to the Contract Owner, the
Annuitant or the Beneficiary depends upon the tax status of such person and,
if the Contract is purchased under a retirement plan, upon the tax and
employment status of the individual concerned. The discussion contained herein
is general in nature and is not intended as tax advice. No attempt is made to
consider any applicable state or other tax laws. Moreover, the discussion
contained herein is based on LB's understanding of Federal income tax laws as
currently interpreted. No representation is made regarding the likelihood of
continuation of these interpretations by the Internal Revenue Service. LB does
not make any guarantee regarding the tax status of any Contract. Each person
concerned should consult a qualified tax adviser.
Variable Account Tax Status
The Internal Revenue Code of 1986, as amended (the "Code") in effect provides
that the income and gains and losses from separate account investments are not
income to the insurance company issuing the variable contracts so long as the
contracts and the separate account meet certain requirements set forth in the
Code. Because the Contracts and the Variable Account meet such requirements,
LB anticipates no tax liability resulting from the contracts, and consequently
no reserve for income taxes is currently charged against, or maintained by LB
with respect to, the Contracts. LB is currently exempt from state and local
taxes. If there is a material change in state or local tax laws, charges for
such taxes, if any, attributable to the Variable Account may be made.
Taxation of Annuities in General
Section 72 of the Code governs taxation of annuities in general.
Contracts Held by Individuals. An individual Contract Owner is not taxed on
increases in the value of a Contract until a distribution occurs, either in
the form of a single sum payment or as annuity payments under the settlement
option selected.
Upon receipt of a single sum payment or of an annuity payment under the
Contract, the recipient is taxed on the portion of such payment that exceeds
the cost basis of the Contract.
For single sum payments, the taxable portion is generally the amount in excess
of the premiums paid under the Contract. Such taxable portion is taxed at
ordinary income tax rates. The investment in the Contract is not affected by
loans or assignments of the Contract but is increased by any amount included
in gross income as a result of the loan or assignment. Payments in partial or
full surrender of a Contract generally will be taxed as ordinary income to the
extent that the Accumulated Value exceeds the taxpayer's investment in the
Contract. An assignment of the Contract (other than a gift to the Contract
Owner's spouse or incident to a divorce) or the use of the Contract as
collateral for a loan will be treated in the same manner as a surrender.
For annuity payments, the taxable portion is determined by a formula which
establishes the ratio that the cost basis of the Contract bears to the total
value of annuity payments for the term of the annuity. Such taxable portion is
taxed at ordinary income tax rates. For certain types of Qualified Plans there
may be no cost basis in the Contract within the meaning of Section 72 of the
Code. In such event, the total payments received may be taxable. Contract
Owners, Annuitants and Beneficiaries under such Contracts should seek
qualified tax and financial advice about the tax consequences of distributions
under the retirement plan in connection with which such Contracts are
purchased.
Generally, a distribution from a Contract before the taxpayer attains age 59
1/2 will result in an additional tax of 10% of the amount of the distribution
which is includable in gross income. The penalty tax will not apply if the
distribution is made as follows:
(1) in connection with death or disability as described in section 72(q)(2) of
the Code;
(2) from certain Qualified Plans;
(3) under a qualified funding trust (commonly referred to as structured
settlement plans); or
(4) it is one of a series of substantially equal periodic annual payments for
the life or life expectancy of the taxpayer or the joint lives or joint life
expectancies of the taxpayer and the beneficiary; for this purpose, if there
is a significant modification of the payment schedule before the taxpayer is
age 59 1/2 or before the expiration of five years from the time of the annuity
starting date, the taxpayer's income shall be increased by the amount of tax
and deferred interest that otherwise would have been incurred.
Depending on the type of Qualified Plan, distributions may be subject to a 10%
penalty tax.
Contracts Held by Other Than Individuals. The Tax Reform Act of 1986 provides
that, except as hereafter noted, a Contract held by other than a natural
person, such as a corporation, estate or trust, will not be treated as an
annuity contract for Federal income tax purposes. The income on such a
Contract will be taxable in the year received or accrued by the Contract
Owner. The provision does not apply if the Contract Owner is acting as an
agent for an individual, if the Contract Owner is an estate which acquired the
Contract as a result of the death of the decedent, if the Contract is held by
certain Qualified Plans, if the Contract is held pursuant to a qualified
funding trust (commonly referred to as structured settlement plans), if the
Contract was purchased by an employer with respect to a terminated Qualified
Plan or if the Contract is an immediate annuity.
Multiple Contracts. Section 72(e)(11) of the Code provides that for the
purposes of determining the amount includable in gross income, all non-
qualified annuity contracts entered into on or after October 22, 1988 by the
same company with the same contract owner during any calendar year shall be
treated as one contract. The total impact of this Section is not clear. It
will likely accelerate the recognition of income by a contract owner owning
multiple contracts and may have the further effect of increasing the portion
of income that will be subject to the 10% penalty tax.
Qualified Plans
The Contracts are designed for use with several types of Qualified Plans. The
tax rules applicable to participants in such Qualified Plans vary according to
the type of plan and the terms and conditions of the plan. Therefore, no
attempt is made herein to provide more than general information about the use
of the Contracts with the various types of Qualified Plans. Participants under
such Qualified Plans as well as Contract Owners, Annuitants and Beneficiaries
are cautioned that the rights of any person to any benefits under such
Qualified Plans may be subject to the terms and conditions of the plans
themselves regardless of the terms and conditions of the Contracts issued in
connection therewith. Following are brief descriptions of the various types of
Qualified Plans and of the use of the Contracts in connection therewith.
Tax-Sheltered Annuities. Section 403(b) of the Code permits employers of
public school employees and of employees of certain types of charitable,
educational and scientific organizations specified in Section 501(c)(3) of the
Code to purchase on behalf of their employees annuity contracts and, subject
to certain limitations, have the amount of purchase payments excluded from the
employees' gross income for tax purposes. These annuity contracts are commonly
referred to as "tax-sheltered annuities". Purchasers of the Contracts for such
purposes should seek qualified advice as to eligibility, limitations on
permissible amounts of purchase payments and tax consequences on distribution.
An amendment to Section 403(b) of the Code, adopted pursuant to the Tax Reform
Act of 1986, imposes restrictions on certain distributions from tax-sheltered
annuity contracts meeting the requirements of Section 403(b), which will apply
to tax years beginning on or after January 1, 1989. The amendment adds a new
Section 403(b)(11) that requires that distributions from Section 403(b) tax-
sheltered annuities that are attributable to employee contributions made
pursuant to a salary reduction agreement may be paid only when the employee
reaches age 59 1/2, separates from service, dies or becomes disabled, or in
the case of hardship (hardship, for this purpose, is generally defined as an
immediate and heavy financial need, such as for paying for medical expenses,
for the purchase of a principal residence, or for paying certain tuition
expenses).
A participant in a Contract purchased as a tax-sheltered Section 403(b)
annuity contract will not, therefore, be entitled to exercise the surrender
right, described under the heading "THE CONTRACTS--Surrender (Redemption)", in
order to receive Accumulated Value attributable to elective contributions
credited under the Contract to such participant unless one of the above-
described conditions has been satisfied. The restrictions imposed by Section
403(b)(11) of the Code conflict with certain sections of the 1940 Act that are
applicable to the Contracts. In this regard, LB is relying on a no-action
letter issued by the Office of Insurance Products and Legal Compliance of the
SEC, and the requirements for such reliance have been complied with by LB.
H.R. 10 Plans. The Self-Employed Individuals Tax Retirement Act of 1962, which
is commonly referred to as "H.R. 10", permits self-employed individuals to
establish Qualified Plans for themselves and their employees. The tax
consequences to participants under such plans depend upon the plan itself. In
addition, such plans are limited by law to maximum permissible contributions,
distribution dates, nonforfeitability of interest and tax rates applicable to
distributions. In order to establish such a plan, a plan document, usually in
prototype form pre-approved by the Internal Revenue Service, is adopted and
implemented by the employer. Purchasers of the Contracts for use with H.R. 10
plans should seek qualified advice as to the suitability of the proposed plan
document and of the Contracts to their specific needs.
Individual Retirement Annuities. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"individual retirement annuity". These individual retirement annuities are
subject to limitations on the amount that may be contributed, on the persons
who may be eligible, and on the time when distributions may commence. In
addition, distributions from certain other types of Qualified Plans may be
placed on a tax-deferred basis into an individual retirement annuity. When
issued in connection with an individual retirement annuity, the Contracts will
be specifically amended to conform to the requirements under such plans. Sales
of the Contracts for use with individual retirement annuities may be subject
to special requirements imposed by the Internal Revenue Service. Purchasers of
the Contracts for such purposes will be provided with such supplementary
information as may be required by the Internal Revenue Service or other
appropriate agency.
Corporate Pension and Profit-Sharing Plans. Sections 401(a) and 403(a) of the
Code permit corporate employers to establish various types of retirement plans
for employees. Such retirement plans may permit the purchase of the Contracts
to provide benefits under the plans. Corporate employers intending to use the
Contracts in connection with such plans should seek qualified advice in
connection therewith.
Section 457 Plans. Section 457 of the Code permits states, local governments
and tax-exempt organizations to establish deferred compensation plans on
behalf of their employees. Such plans may permit the purchase of the Contracts
to provide benefits under the plans. Employers intending to use the Contracts
in connection with such plans should seek qualified advice in connection
therewith.
1035 Exchanges
Section 1035(a) of the Code permits the exchange of certain life insurance,
endowment and annuity contracts for an annuity contract without a taxable
event occurring. Thus, potential purchasers who already own such a contract
issued by another insurer are generally able to exchange that contract for a
Contract issued by LB without a taxable event occurring. There are certain
restrictions which apply to such exchanges, including that the contract
surrendered must truly be exchanged for the Contract issued by LB and not
merely surrendered in exchange for cash. Further, the same person or persons
must be the obligee or obligees under the Contract received in the exchange as
under the original contract surrendered in the exchange. Careful consideration
must be given to compliance with the Code provisions and regulations and
rulings relating to exchange requirements, and potential purchasers should be
sure that they understand any surrender charges or loss of benefits which
might arise from terminating a contract they hold. Owners considering such an
exchange should consult their tax advisers to insure that the requirements of
Section 1035 are met.
Diversification Requirements
The Code imposes certain diversification standards on the underlying assets of
variable annuity contracts. The Code provides that a variable annuity contract
shall not be treated as an annuity contract for any period (and any subsequent
period) for which the investments are not "adequately diversified". Section
817(h) of the Code also requires that investments of the Variable Account meet
certain diversification requirements stated in Section 817(h)(2) or as may be
prescribed by the Treasury Department in regulations. The assets of the Fund
will meet the diversification requirements. The Company will monitor the
Contracts and the regulations of the Treasury Department to ensure that the
Contract will continue to qualify as a variable annuity contract under the
Code. Disqualification of the Contract as an annuity contract would result in
imposition of Federal income tax on the Contract Owner with respect to
earnings allocable to the Contract prior to the receipt of payments under the
Contract.
Withholding
The taxable portion of a distribution to an individual is subject to Federal
income tax withholding unless the taxpayer elects not to have withholding. LB
will provide the Contract Owner with the election form and further information
as to withholding prior to the first distribution. Generally, however, amounts
are withheld from periodic payments at the same rate as wages and at the rate
of 10% from non-periodic payments.
Also, effective January 1, 1993, certain distributions from retirement plans
qualified under Section 401 or 403(b) of the Code, that are not directly
rolled over to another eligible retirement plan or individual retirement
account or individual retirement annuity, are subject to a mandatory 20%
withholding for Federal income tax. The 20% withholding requirement does not
apply to: a) distributions for the life or life expectancy of the participant
or joint and last survivor expectancy of the participant and a designated
beneficiary; b) distributions for a specified period of 10 years or more; or
c) distributions which are required minimum distributions. For complete
information on withholding, a qualified tax adviser should be consulted.
Other Considerations
Because of the complexity of the law and its application to a specific
individual, tax advice may be needed by a person contemplating purchase of a
Contract or the exercise of elections under a Contract. The above comments
concerning Federal income tax consequences are not exhaustive, and special
rules are provided with respect to situations not discussed in this
Prospectus.
The preceding description is based upon LB's understanding of current Federal
income tax law. LB cannot assess the probability that changes in tax laws,
particularly affecting annuities, will be made.
The preceding comments do not take into account state income or other tax
considerations which may be involved in the purchase of a Contract or the
exercise of elections under the Contract. For complete information on such
Federal and state tax considerations, a qualified tax adviser should be
consulted.
EMPLOYMENT-RELATED BENEFIT PLANS
The Contracts described in this Prospectus (except for Contracts issued in the
state of Montana) involve settlement option rates that distinguish between men
and women. Montana has enacted legislation requiring that optional annuity
benefits offered pursuant to Contracts purchased in Montana not vary on the
basis of sex. On July 6, 1983, the Supreme Court held in Arizona Governing
Committee v. Norris that optional annuity benefits provided under an
employer's deferred compensation plan could not, under Title VII of the Civil
Rights Act of 1964, vary between men and women on the basis of sex. Because of
this decision, the settlement option rates applicable to Contracts purchased
under an employment-related insurance or benefit program may in some cases not
vary on the basis of sex. Any unisex rates to be provided by LB will apply for
tax-qualified plans and those plans where an employer believes that the Norris
decision applies. Employers and employee organizations should consider, in
consultation with legal counsel, the impact of Norris, and Title VII
generally, and any comparable state laws that may be applicable, on any
employment-related insurance or benefit plan for which a Contract may be
purchased.
VOTING RIGHTS
To the extent required by law, LB will vote the Fund shares held in the
Variable Account at regular and special shareholder meetings of the Fund in
accordance with instructions received from persons having voting interests in
the corresponding Subaccounts of the Variable Account. If, however, the 1940
Act or any regulation thereunder should be amended or if the present
interpretation thereof should change, and as a result LB determines that it is
permitted to vote the Fund shares in its own right, it may elect to do so.
Before the Maturity Date, the Contract Owner shall have the voting interest
with respect to Fund shares attributable to the Contract. On and after the
Maturity Date, the person entitled to receive annuity payments shall have the
voting interest with respect to such shares, which voting interest will
generally decrease during the annuity period.
The number of votes which a Contract Owner or person entitled to receive
annuity payments has the right to instruct will be calculated separately for
each Subaccount. The number of votes which each Contract Owner has the right
to instruct will be determined by dividing a Contract's Accumulated Value in a
Subaccount by the net asset value per share of the corresponding Portfolio in
which the Subaccount invests. The number of votes which each person entitled
to receive annuity payments has the right to instruct will be determined by
dividing the Contract's reserves in a Subaccount by the net asset value per
share of the corresponding Portfolio in which the Subaccount invests.
Fractional shares will be counted. The number of votes of the Portfolio which
the Contract Owner or person entitled to receive annuity payments has the
right to instruct will be determined as of the date coincident with the date
established by the Portfolio for determining shareholders eligible to vote at
the meeting of the Fund. Voting instructions will be solicited by written
communications prior to such meeting in accordance with procedures established
by the Fund.
Any Portfolio shares held in the Variable Account for which LB does not
receive timely voting instructions, or which are not attributable to Contract
Owners, will be voted by LB in proportion to the instructions received from
all Contract Owners. Any Portfolio shares held by LB or its affiliates in
general accounts will, for voting purposes, be allocated to all separate
accounts of LB and its affiliates having a voting interest in that Portfolio
in proportion to each such separate account's votes. Voting instructions to
abstain on any item to be voted upon will be applied on a pro rata basis to
reduce the votes eligible to be cast.
Each person having a voting interest in a Subaccount will receive proxy
materials, reports and other materials relating to the appropriate Portfolio.
SALES AND OTHER AGREEMENTS
Lutheran Brotherhood Securities Corp. ("LBSC"), 625 Fourth Avenue South,
Minneapolis, Minnesota 55415, an indirect subsidiary of Lutheran Brotherhood,
acts as the principal underwriter of the Contracts pursuant to a Distribution
Agreement to which LB and the Variable Account are also parties. The Contracts
are sold through LB Representatives who are licensed by state insurance
officials to sell the Contracts. These LB Representatives are also registered
representatives of LBSC. The Contracts are offered in all states where LB is
authorized to sell variable annuities.
Compensation of LB Representatives. Commissions and other distribution
compensation to be paid to LB Representatives on the sale of Contracts will be
paid by LB and will not result in any charge to Contract Owners or to the
Variable Account in addition to the charges described in this Prospectus. LB
Representatives selling the Contracts will be paid a commission of not more
than 4% of the premiums paid on the contracts. Further, LB Representatives may
be eligible to receive certain benefits based on the amount of earned
commissions.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account is a party or to
which the assets of the Variable Account are subject. Neither LB nor LBSC are
involved in any litigation that is of material importance in relation to their
total assets or that relates to the Variable Account.
LEGAL MATTERS
All matters of applicable state law pertaining to the Contracts, including
LB's right to issue the Contracts thereunder, have been passed upon by James
M. Odland, Counsel for LB. Certain legal matters relating to the Federal
securities laws have been passed upon by the law firm of Jones & Blouch
L.L.P., Washington, D.C.
FINANCIAL STATEMENTS AND EXPERTS
Financial statements of LB and the Variable Account are contained in the
Statement of Additional Information.
The financial statements of LB and the Variable Account included in the
Statement of Additional Information have been so included in reliance of Price
Waterhouse LLP, independent accountants, given on the authority of said firm
as experts in auditing and accounting.
FURTHER INFORMATION
A Registration Statement under the Securities Act of 1933 has been filed with
the SEC with respect to the Contracts described herein. This Prospectus and
the Statement of Additional Information do not contain all of the information
set forth in the Registration Statement and exhibits thereto, to which
reference is hereby made for further information concerning the Variable
Account, LB and the Contracts. The information so omitted may be obtained from
the SEC's principal office located at 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of the fee prescribed by the SEC, or examined there
without charge. Statements contained in this Prospectus as to the provisions
of the Contracts and other legal documents are summaries, and reference is
made to the documents as filed with the SEC for a complete statement of the
provisions thereof.
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Page
Introduction 2
Custody of Assets 2
Independent Accountants and Financial Statements 2
Distribution of the Contracts 2
Calculation of Performance 3
Money Market Subaccount 3
Other Subaccounts 4
Financial Statements of Variable Account 7
Comment on Financial Statements of LB 13
Financial Statements of LB 13
How To Obtain the INDIVIDUAL FLEXIBLE PREMIUM
VARIABLE ANNUITY CONTRACT
Statement of Additional Information
Send this request form to:
Lutheran Brotherhood
P.O. Box 288
Minneapolis, MN 55440-9041
Please send me a copy of the most recent INDIVIDUAL FLEXIBLE PREMIUM VARIABLE
ANNUITY CONTRACT SAI.
- ---------------------------------------------------------------------------
(Name) (Date)
- ---------------------------------------------------------------------------
(Street Address)
- ---------------------------------------------------------------------------
(City) (State) (Zip Code)
APPENDIX
MORE INFORMATION ABOUT THE FIXED ACCOUNT
Because of exemptive and exclusionary provisions, interests in the Fixed
Account have not been registered under the Securities Act of 1933 ("1933
Act"), nor is the Fixed Account registered as an investment company under the
Investment Company Act of 1940 ("1940 Act"). Accordingly neither the Fixed
Account nor any interests therein are generally subject to the provisions of
the 1933 or 1940 Acts. Disclosures regarding the Fixed Account option and the
Fixed Account, however, may be subject to certain generally applicable
provisions of the federal securities laws relating to the accuracy and
completeness of statements in prospectuses. LB has been advised that the staff
of the Securities and Exchange Commission has not reviewed disclosure relating
to the Fixed Account.
Accumulated Values allocated to the Fixed Account are combined with all the
general assets of LB and are invested in those assets chosen by LB and allowed
by applicable law. LB allocates the investment income of the Fixed Account to
the Contracts covered by the Fixed Account in the amounts guaranteed in such
Contracts. Immediately prior to the Maturity Date, the Accumulated Value of
the Contract in the Fixed Account is subject to a reduction for any surrender
charge, if applicable.
Under the Fixed Account option, LB allocates premium payments to the Fixed
Account, guarantees the amounts allocated to the Fixed Account, and pays a
declared interest rate. The guaranteed minimum interest credited to the Fixed
Account will be at the effective rate of 3% per year, compounded daily. LB may
credit interest at a rate in excess of 3% per year; however, LB is not
obligated to credit any interest in excess of 3% per year. There is no
specific formula for the determination of excess interest credits. Such
credits, if any, will be determined by LB based on information as to expected
investment yields. Some of the factors that LB may consider in determining
whether to credit interest above 3% to amounts allocated to the Fixed Account,
and the amount thereof, are general economic trends, rates of return currently
available and anticipated on LB's investments, regulatory and tax requirements
and competitive factors. ANY INTEREST CREDIT TO AMOUNTS ALLOCATED TO THE FIXED
ACCOUNT IN EXCESS OF 3% PER YEAR WILL BE DETERMINED AT THE SOLE DISCRETION OF
LB. THE CONTRACT OWNER ASSUMES THE RISK THAT INTEREST CREDITED TO FIXED
ACCOUNT ALLOCATIONS MAY NOT EXCEED THE MINIMUM GUARANTEE OF 3% FOR ANY GIVEN
YEAR.
Nonetheless, for any amount allocated or transferred to the Fixed Account, LB
guarantees that the initial interest rate will be effective for at least 12
months, and subsequent interest rates will not be changed more often than once
every 12 months.
To the extent a fixed annuity payment option is selected by the Contract
Owner, Accumulated Value at the Maturity Date will be transferred to the Fixed
Account, which supports the insurance and annuity obligations of LB.
Contract Owners have no voting rights in the Variable Account with respect to
Fixed Account values.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FLEXIBLE PREMIUM
VARIABLE ANNUITY CONTRACT
Issued By
LUTHERAN BROTHERHOOD
This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Prospectus dated May 1, 1996 (the "Prospectus")
describing an individual flexible premium variable annuity contract (the
"Contract") being offered by Lutheran Brotherhood ("LB"). Purchase payments
will be allocated to one or more Subaccounts of LB Variable Annuity Account I
(the "Variable Account"), a separate account of LB and/or to the Fixed Account
(which is the general account of LB, and which pays interest at a guaranteed
fixed rate). Much of the information contained in this Statement of
Additional Information expands upon subjects discussed in the Prospectus. A
copy of the Prospectus may be obtained from Lutheran Brotherhood, 625 Fourth
Avenue South, Minneapolis, Minnesota 55415.
Capitalized terms used in this Statement of Additional Information that are
not otherwise defined herein shall have the meanings given to them in the
Prospectus.
--------------------------------------------------
TABLE OF CONTENTS
Page
INTRODUCTION 2
CUSTODY OF ASSETS 2
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS 2
DISTRIBUTION OF THE CONTRACTS 2
CALCULATION OF PERFORMANCE 3
Money Market Subaccount 3
Other Subaccounts 4
FINANCIAL STATEMENTS OF VARIABLE ACCOUNT 7
COMMENT ON FINANCIAL STATEMENTS OF LB 13
FINANCIAL STATEMENTS OF LB 13
--------------------------------------------------
The date of this Statement of Additional Information
is May 1, 1996.
INTRODUCTION
The Contracts are issued by LB. Lutheran Brotherhood, a fraternal benefit
society owned and operated for its members, was founded in 1917 under the laws
of the State of Minnesota. LB is currently licensed to transact life
insurance business in all 50 states and the District of Columbia. At the end
of 1995, LB had total assets of over $10.9 billion. The Contract may be sold
to or in connection with retirement plans which may or may not qualify for
special federal tax treatment under the Internal Revenue Code. Annuity
payments under the Contract are deferred until a selected later date.
Premiums will be allocated, as designated by the Contract Owner, to one or
more Subaccounts of the Variable Account, a separate account of LB and/or to
the Fixed Account (which is the general account of LB, and which pays interest
at a guaranteed fixed rate). The assets of each Subaccount will be invested
solely in a corresponding Portfolio of LB Series Fund, Inc. (the "Fund"),
which is a diversified, open-end management investment company (commonly known
as a "mutual fund"). The Prospectus for the Fund that accompanies the
Prospectus describes the investment objectives and attendant risks of the six
Portfolios of the Fund-the Growth Portfolio, the High Yield Portfolio, the
Income Portfolio, the Opportunity Growth Portfolio, the World Growth Portfolio
and the Money Market Portfolio. Additional Subaccounts (together with the
related additional Portfolios of the Fund) may be added in the future. The
Accumulated Value of the Contract and, except to the extent fixed amount
annuity payments are elected by the Contract Owner, the amount of annuity
payments will vary, primarily based on the investment experience of the
Portfolios whose shares are held in the Subaccounts designated. Premiums
allocated to the Fixed Account will accumulate at fixed rates of interest
declared by LB.
CUSTODY OF ASSETS
LB, whose address appears on the cover of the Prospectus, maintains custody of
the assets of the Variable Account.
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
The financial statements of LB and the Variable Account included in this
Statement of Additional Information have been so included in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of LB should be considered only as bearing upon the
ability of LB to meet its obligations under the Contracts. The financial
statements of LB should not be considered as bearing on the investment
experience of the assets held in the Variable Account.
DISTRIBUTION OF THE CONTRACTS
Lutheran Brotherhood Securities Corp. ("LBSC"), an indirect subsidiary of
Lutheran Brotherhood, acts as the principal underwriter of the Contracts
pursuant to a Distribution Agreement to which LB and the Variable Account are
also parties. The Contracts are sold through LB Representatives who are
licensed by state insurance officials to sell the Contracts. These LB
Representatives are also registered representatives of LBSC. The Contracts
are offered in all states where LB is authorized to sell variable annuities.
The offering of the Contracts is continuous.
There are no special purchase plans or exchange privileges not described in
the Prospectus (see "THE CONTRACTS--Transfers" in the Prospectus).
No charge for sales expense is deducted from premiums at the time premiums are
paid. However, a surrender charge, which may be deemed to be a contingent
deferred sales charge, is deducted from the Accumulation Value of the Contract
in the case where the Contract is surrendered, in whole or in part, before
annuity payments begin and, if certain settlement options are selected, at the
time annuity payments begin, under the circumstances described in, and in
amounts calculated as described in, the Prospectus under the heading "CHARGES
AND DEDUCTIONS--Surrender Charge (Contingent Deferred Sales Charge)". There is
no difference in the amount of this charge or any of the other charges
described in the Prospectus as between Contracts purchased by members of the
public as individuals or groups, on the one hand, and Contracts purchased by
any class of individuals, such as officers, directors or employees of LB or of
LBSC, on the other hand.
CALCULATION OF PERFORMANCE
Money Market Subaccount
The Prospectus contains information with respect to the yield and effective
yield of a hypothetical preexisting account having a balance of one Money
Market Portfolio Subaccount Accumulation Unit at the beginning of a specified
seven-day period. Such yield quotations have been calculated by determining
the net change, exclusive of capital changes, in the value of a hypothetical
pre-existing account having a balance of one Accumulation Unit of the
Subaccount at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from Contract Owner accounts, dividing the net change by
the value of the account at the beginning of the period to obtain the base
period return, and multiplying the base period return by 365/7. The effective
yield has been calculated by compounding the yield quotation for such period
by adding 1 and raising the sum to a power equal to 365/7, and subtracting 1
from the result.
In determining the net change in the value of the account as described in the
preceding paragraph, all deductions that are charged to all Contract Owner
accounts have been reflected in proportion to the length of the seven-day base
period and the mean (or median) account size under a substantially identical
contract issued by an LB affiliate. Deductions from purchase payments and
surrender charges assessed have not been reflected in, and realized gains and
losses from the sale of securities and unrealized appreciation and
depreciation of the Subaccount and the related portfolio company have been
excluded from, the computation of yield.
This example illustrates the yield quotation for the Money Market Subaccount
for the seven-day period ended December 31, 1995:
Value of hypothetical pre-existing account with exactly
one Accumulation Unit at the beginning of the period $1.424298
Value of same account (excluding capital changes) at end
of the seven-day period $1.425469
Net change in account value $0.001171
Base Period Return:
Net change in account value divided by beginning account value $0.000822
Annualized Current Yield [0.000822 X (365/7)] 4.29%
Effective Yield (0.000822 + 1)365/7-1 4.38%
The annualization of a seven-day average yield is not a representation of
future actual yield.
Other Subaccounts
The Prospectus contains information with respect to yield quotations by
Subaccounts other than the Money Market Subaccount. These yield quotations are
based on a 30-day (or one month) period computed by dividing the net
investment income per accumulation unit earned during the period (the net
investment income earned by the Fund portfolio attributable to shares owned by
the Subaccount less expenses incurred during the period) by the maximum
offering price per Accumulation Unit on the last day of the period, by setting
yield equal to two times the difference between the sixth power of one plus
the designated ratio and one, where the designated ratio is the difference
between the net investment income earned during the period and the expenses
accrued for the period (net of reimbursement) divided by the product of the
average daily number of Accumulation Units outstanding during the period and
the maximum offering price per Accumulation Unit on the last day of the
period.
For fees that vary with the size of the Contract, a Contract size equal to the
mean (or median) contract size of a substantially identical contract issued by
an LB affiliate has been assumed.
The following example illustrates the annualized current yield calculation for
the High Yield Subaccount for the 30-day base period ended December 31, 1995:
Dividends and interest earned by the High Yield Subaccount
during the base period $964,083
Expenses accrued for the base period $143,505
------------
$820,578(A)
============
Product of the maximum public offering price on
the last day of the base period and the average
daily number of Units outstanding during
the base period that were entitled to receive
dividends ($22.052447 x 5,334,035 Units) = $117,628,524(B)
=============
Quotient of dividends and interest earned minus
expenses accrued divided by product of maximum
public offering price multiplied by average
Units outstanding (A divided by B) = 0.006976(C)
Adding one and raising total to the
6th power (C + 1)6= 1.042593(D)
Annualized current yield [2(D - 1) X 100] = 8.52%
The following example illustrates the annualized current yield calculation for
the Income Subaccount for the 30-day base period ended December 31, 1995:
Dividends and interest earned by the Income Subaccount
during the base period $508,052
Expenses accrued for the base period $115,427
------------
$392,625(A)
============
Product of the maximum public offering price on
the last day of the base period and the average
daily number of Units outstanding during
the base period that were entitled to receive
dividends ($18.974878 x 4,995,334 Units) = $94,785,853(B)
Quotient of dividends and interest earned minus
expenses accrued divided by product of maximum
public offering price multiplied by average
Units outstanding (A divided by B) = 0.004142(C)
Adding one and raising total to the 6th power (C + 1)6 = 1.025112(D)
Annualized current yield [2(D-1) X 100] = 5.02%
Annualized current yield of any specific base period is not a representation
of future actual yield.
The Prospectus contains information with respect to performance data relating
to the Contracts. Such performance data includes average annual total return
quotations for the 1, 5 and 10-year periods computed by finding the average
annual compounded rates of return over the 1, 5 and 10-year periods that would
equate the initial amount invested to the ending redeemable value, by equating
the ending redeemable value to the product of a hypothetical initial payment
of $1,000, and one plus the average annual total return raised to a power
equal to the applicable number of years. For periods prior to February 1,
1994, total return figures are based on a hypothetical Contract assumed to
have been invested in a Portfolio of the Fund when that Portfolio was first
available for investment under a variable annuity contract issued by an LB
affiliate, Lutheran Brotherhood Variable Insurance Products Company. If the
assumed investment was made less than 10 years from the date of the quotation,
the total return from the date of such investment will be given.
Such performance data assumes that any applicable charges have been deducted
from the initial $1,000 payment and includes all recurring fees that are
charged to all Contract Owners. If recurring fees charged to Contract Owners
are paid other than by redemption of Accumulation Units, such fees will be
appropriately reflected.
Average annual total return for any specific period is not a representation of
future actual results. Average annual total return assumes a steady rate of
growth. Actual performance fluctuates and will vary from the quoted results
for periods of time within the quoted periods.
The following example illustrates the average annual total return for the
Growth Subaccount of a hypothetical Contract invested in the Growth Portfolio
of the Fund from the date the Portfolio was first available for investment
under a contract issued by an LB affiliate through December 31, 1995:
Hypothetical $1,000 initial investment on March 8, 1988 $1,000
Ending redeemable value of the investment on
December 31, 1995 (after deferred sales charge) $2,438.00
Total return for the period is the difference between the
ending redeemable value and the hypothetical $1,000 initial
investment divided by the hypothetical $1,000 initial
investment; the result is expressed in terms of a percentage
(For example, 2 equals 200%) 143.80%*
Average annual total return from inception through
December 31, 1995 is the sum of the total return
calculated above plus one; such sum is raised to
the power of 1/n where n is expressed as seven years
and 10 months; the result is reduced by one and is
expressed in terms of a percentage
(For example, 0.2 equals 20%) 12.07%*
The following example illustrates the average annual total return for the High
Yield Subaccount of a hypothetical Contract invested in the High Yield
Portfolio of the Fund from the date the Portfolio was first available for
investment under a contract issued by an LB affiliate through December 31,
1995:
Hypothetical $1,000 initial investment on March 8, 1988 $1,000
Ending redeemable value of the investment on
December 31, 1995 (after deferred sales charge) $2,205.20
Total return for the period is the difference between the
ending redeemable value and the hypothetical $1,000
initial investment dividend by the hypothetical $1,000
initial investment; the result is expressed in terms of
a percentage (For example, 2 equals 200%) 120.52%*
Average annual total return from inception through
December 31, 1995 is the sum of the total return
calculated above plus one; such sum is raised to the
power of 1/n where n is expressed as seven years
and 10 months; the result is reduced by one and is
expressed in terms of a percentage
(For example, 0.2 equals 20%) 10.64%*
The following example illustrates the average annual total return for the
Income Subaccount of a hypothetical Contract invested in the Income Portfolio
of the Fund from the date the Portfolio was first available for investment
under a contract issued by an LB affiliate through December 31, 1995:
Hypothetical $1,000 initial investment on March 8, 1988 $1,000
Ending redeemable value of the investment on December 31, 1995
(after deferred sales charge) $1,897.50
Total return for the period is the difference between the
ending redeemable value and the hypothetical $1,000
initial investment dividend by the hypothetical $1,000
initial investment; the result is expressed in terms
of a percentage (For example, 2 equals 200%) 89.75%*
Average annual total return from inception through
December 31, 1995 is the sum of the total return
calculated above plus one; such sum is raised to the
power of 1/n where n is expressed as seven years
and 10 months; the result is reduced by one and is
expressed in terms of a percentage
(For example, 0.2 equals 20%) 8.54%*
The following example illustrates the average annual total return for the
Money Market Subaccount of a hypothetical Contract invested in the Money
Market Portfolio of the Fund from the date the Portfolio was first available
for investment under a contract issued by an LB affiliate through December 31,
1995:
Hypothetical $1,000 initial investment on February 18, 1988 $1,000
Ending redeemable value of the investment on December 31, 1995
(after deferred sales charge) $1,425.47
Total return for the period is the difference between
the ending redeemable value and the hypothetical $1,000
initial investment divided by the hypothetical $1,000
initial investment; the result is expressed in terms
of a percentage (For example, 2 equals 200%) 42.55%*
Average annual total return from inception through
December 31, 1995 is the sum of the total return
calculated above plus one; such sum is raised to the
power of 1/n where n is expressed as seven years and
11 months; the result is reduced by one and is
expressed in terms of a percentage
(For example, 0.2 equals 20%) 4.61%*
- ------------------
*Does not include the annual administrative charge of $30 deducted from any
Contract for which the total of premiums paid under such Contract minus all
prior surrenders is less than $5,000. Inclusion of the administrative charge
would reduce the total return figures shown above.
FINANCIAL STATEMENTS OF VARIABLE ACCOUNT
Set forth on the following pages are the audited financial statements of the
Variable Account.
<PAGE>
3100 Multifoods Tower
33 South Sixth Street
Minneapolis, MN 55402-3795
Price Waterhouse LLP [LOGO OMMITTED]
Report of Independent Accountants
To Lutheran Brotherhood and Contract Owners
of LB Variable Annuity Account I
In our opinion, the accompanying statement of assets and liabilities and
the related statements of operations and of changes in net assets present
fairly, in all material respects, the financial position of LB Variable
Annuity Account I and the Growth, High Yield, Income and Money Market
subaccounts thereof at December 31, 1995, the results of each of their
operations for the year then ended and the changes in each of their net
assets for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of Lutheran Brotherhood's management; our responsibility is
to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
February 5, 1996
<PAGE>
<TABLE>
LB Variable Annuity Account I
Statement of Assets and Liabilities
December 31, 1995
<CAPTION> Subaccounts
------------------------------------------------------------
High Money
Growth Yield Income Market
------------ ------------ ------------ -----------
ASSETS:
<S> <C> <C> <C> <C>
Investments in LB Series Fund, Inc.--
Growth Portfolio, 10,276,030 shares at net asset value
of $18.27 per share (cost $159,237,332) $187,783,655
High Yield Portfolio, 12,320,560 shares at net asset value
of $9.94 per share (cost $120,680,639) $122,443,311
Income Portfolio, 9,863,440 shares at net asset value
of $10.08 per share (cost $94,710,056) $99,405,956
Money Market Portfolio, 22,045,536 shares at net asset value
of $1.00 per share (cost $22,045,536) $22,045,536
------------ ------------ ------------ -----------
187,783,655 122,443,311 99,405,956 22,045,536
Receivable from LB for units issued 1,146,400 644,957 765,769 454,650
Dividends receivable from LB Series Fund, Inc. -- 53,565 33,224 6,524
------------ ------------ ------------ -----------
Total assets 188,930,055 123,141,833 100,204,949 22,506,710
------------ ------------ ------------ -----------
LIABILITIES:
Payable to LB for mortality and expense risk charge 168,185 109,090 87,799 19,342
------------ ------------ ------------ -----------
NET ASSETS $188,761,870 $123,032,743 $100,117,150 $22,487,368
============ ============ ============ ===========
Number of units outstanding 7,742,874 5,577,895 5,274,785 15,771,786
============ ============ ============ ===========
Unit value (net assets divided by units outstanding) $24.38 $22.06 $18.98 $1.43
====== ====== ====== =====
</TABLE>
<TABLE>
Statement of Operations
Year Ended December 31, 1995
<CAPTION>
Subaccounts
-----------------------------------------------------------------
High Money
Growth Yield Income Market
----------- ----------- ----------- --------
INVESTMENT INCOME:
<S> <C> <C> <C> <C>
Dividend income $1,799,434 $7,603,920 $3,964,752 $691,892
Mortality and expense risk charge (1,198,239) (850,258) (647,760) (137,940)
----------- ----------- ----------- --------
Net investment income 601,195 6,753,662 3,316,992 553,952
----------- ----------- ----------- --------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments 37,620 (673) 4,312 --
Net change in unrealized appreciation or
depreciation of investments 29,290,583 5,397,450 6,149,569 --
----------- ----------- ----------- --------
Net gain on investments 29,328,203 5,396,777 6,153,881 --
----------- ----------- ----------- --------
Net increase in net assets resulting from operations $29,929,398 $12,150,439 $9,470,873 $553,952
=========== =========== =========== ========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<TABLE>
LB Variable Annuity Account I
Statement of Changes in Net Assets
Years Ended December 31, 1995 and 1994
<CAPTION>
Growth High Yield
Subaccount Subaccount
---------------------------- ----------------------------
1995 1994 (a) 1995 1994 (a)
------------ ----------- ------------ -----------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS --
<S> <C> <C> <C> <C>
Net investment income $601,195 $226,731 $6,753,662 $2,079,613
Net realized gain (loss) on investments 37,620 16,517 (673) 9,272
Net change in unrealized appreciation or depreciation
of investments 29,290,583 (744,260) 5,397,450 (3,634,778)
------------ ----------- ------------ -----------
Net change in net assets resulting from operations 29,929,398 (501,012) 12,150,439 (1,545,893)
------------ ----------- ------------ -----------
UNIT TRANSACTIONS --
Proceeds from units issued 82,049,665 7,934,980 52,906,716 7,176,677
Net asset value of units redeemed (2,375,506) (428,164) (2,196,323) (503,749)
Transfers from other subaccounts 28,525,452 52,633,523 17,387,777 44,680,523
Transfers to other subaccounts (5,713,020) (2,820,122) (3,823,068) (2,233,385)
Transfers from fixed account 553,165 5,702 469,977 1,346
Transfers to fixed account (621,883) (410,308) (727,722) (710,572)
------------ ----------- ------------ -----------
Net increase in net assets from unit transactions 102,417,873 56,915,611 64,017,357 48,410,840
------------ ----------- ------------ -----------
Net increase in net assets 132,347,271 56,414,599 76,167,796 46,864,947
NET ASSETS:
Beginning of period 56,414,599 -- 46,864,947 --
------------ ----------- ------------ -----------
End of period $188,761,870 $56,414,599 $123,032,743 $46,864,947
============ =========== ============ ===========
<CAPTION>
Income Money Market
Subaccount Subaccount
---------------------------- ----------------------------
1995 1994 (a) 1995 1994 (a)
------------ ----------- ----------- ----------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS --
<S> <C> <C> <C> <C>
Net investment income $3,316,992 $1,116,926 $553,952 $114,730
Net realized gain (loss) on investments 4,312 6,137 -- --
Net change in unrealized appreciation or depreciation
of investments 6,149,569 (1,453,668) -- --
------------ ----------- ----------- ----------
Net change in net assets resulting from operations 9,470,873 (330,605) 553,952 114,730
------------ ----------- ----------- ----------
UNIT TRANSACTIONS --
Proceeds from units issued 46,881,706 5,355,807 64,868,424 140,268,731
Net asset value of units redeemed (1,947,850) (366,336) (773,124) (74,427)
Transfers from other subaccounts 12,257,769 34,551,520 8,073,348 8,813,878
Transfers to other subaccounts (2,686,503) (1,862,299) (54,021,755) (133,763,638)
Transfers from fixed account 483,796 4,039 469,406 3,820
Transfers to fixed account (746,778) (947,989) (4,843,454) (7,202,523)
------------ ----------- ----------- ----------
Net increase in net assets from unit transactions 54,242,140 36,734,742 13,772,845 8,045,841
------------ ----------- ----------- ----------
Net increase in net assets 63,713,013 36,404,137 14,326,797 8,160,571
NET ASSETS:
Beginning of period 36,404,137 -- 8,160,571 --
------------ ----------- ----------- ----------
End of period $100,117,150 $36,404,137 $22,487,368 $8,160,571
============ =========== =========== ==========
(a) For the period from February 3, 1994 (inception) through December 31, 1994.
The accompanying notes are an integral part of the financial statements.
</TABLE>
LB Variable Annuity Account I
Notes to Financial Statements
December 31, 1995
(1) ORGANIZATION
The LB Variable Annuity Account I (the Variable Account), a unit investment
trust registered under the Investment Company Act of 1940, was established
as a separate account of Lutheran Brotherhood (LB) in 1993, pursuant to the
laws of the State of Minnesota. LB offers financial services to Lutherans
and is a fraternal benefit society owned by and operated for its members.
The Variable Account contains four subaccounts - Growth, High Yield, Income
and Money Market - each of which invests only in a corresponding portfolio
of the LB Series Fund, Inc. (the Fund). The Fund is registered under the
Investment Company Act of 1940 as a diversified open-end investment company.
The Variable Account is used to support only flexible premium deferred
variable annuity contracts issued by LB. Under applicable insurance law, the
assets and liabilities of the Variable Account are clearly identified and
distinguished from the other assets and liabilities of LB. The assets of the
Variable Account will not be charged with any liabilities arising out of any
other business conducted by LB.
(2) SIGNIFICANT ACCOUNTING POLICIES
Investments
The investments in shares of the Fund are stated at the net asset value of
the Fund. The cost of shares sold and redeemed is determined on the average
cost method. Dividend distributions received from the Fund are reinvested in
additional shares of the Fund and recorded as income by the Variable Account
on the ex-dividend date.
Federal Income Taxes
LB qualifies as a tax-exempt organization under the Internal Revenue Code.
Currently, no tax liability is charged to the operations of the Variable
Account by LB. Accordingly, no provision for income taxes has been made
against the Variable Account.
(3) RELATED PARTY TRANSACTIONS
Proceeds received by the Variable Account for units issued represent gross
contract premiums received by LB. No charge for sales distribution expense
is deducted from premiums received.
A surrender charge is deducted by LB if a contract is surrendered in whole
or in part during the first six years the contract is in force. The
surrender charge is 6% during the first contract year, and decreases by 1%
each subsequent contract year. For purposes of the surrender charge
calculation, up to 10% of a contract's accumulated value may be excluded
from the calculation each year. Surrender charges of $137,692 were deducted
in 1995 and $19,980 for the period from February 3, 1994 through December
31, 1994.
An annual administrative charge of $30 is deducted on each contract
anniversary from the accumulated value of the contract to compensate LB for
administrative expenses relating to the contract and the Variable Account.
This charge is deducted by redeeming units of the subaccounts of the
Variable Account. No such charge is deducted from contracts for which total
premiums paid, less surrenders, equals or exceeds $5,000. No administrative
charge is payable during the annuity period. Administrative charges of
$83,208 were deducted in 1995, and no charges were deducted for the period
from February 3, 1994 through December 31, 1994.
A daily charge is deducted from the value of the net assets of the Variable
Account to compensate LB for mortality and expense risks assumed in
connection with the contract and is equivalent to an annual rate of 1.1% of
the average daily net assets of the Variable Account. Mortality and expense
risk charges were $2,834,197 in 1995 and $782,993 for the period from
February 3, 1994 through December 31, 1994.
A fixed account investment option is available for Contract Owners of the
flexible premium deferred variable annuity. Assets of the fixed account are
combined with the general assets of LB and invested by LB as allowed by
applicable law. Accordingly, the fixed account assets are not included in
the Variable Account financial statements. The asset value of net transfers
to the fixed account was $4,963,494 in 1995 and $9,256,485 for the period
from February 3, 1994 through December 31, 1994.
(4) UNIT ACTIVITY
Transactions in units (including transfers among subaccounts) were as
follows:
<TABLE>
<CAPTION>
Subaccounts
------------------------------------------------------
High Money
Growth Yield Income Market
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Units outstanding at
February 3, 1994
(inception) -- -- -- --
Units issued 3,386,761 2,725,759 2,497,105 114,157,607
Units redeemed (244,121) (211,716) (232,211) (108,172,913)
--------- --------- --------- ------------
Units outstanding at
December 31, 1994 3,142,640 2,514,043 2,264,894 5,984,694
Units issued 5,171,607 3,523,167 3,427,902 56,150,961
Units redeemed (571,373) (459,315) (418,011) (46,363,869)
--------- --------- --------- ------------
Units outstanding at
December 31, 1995 7,742,874 5,577,895 5,274,785 15,771,786
========= ========= ========= ==========
</TABLE>
(5) PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments in
the LB Series Fund, Inc. were as follows:
<TABLE>
<CAPTION>
Subaccounts
--------------------------------------------------------
High Money
Growth Yield Income Market
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
For the period from
February 3, 1994 through
December 31, 1994
Purchases $56,910,788 $50,433,261 $38,018,585 $17,311,456
Sale 22,776 48,425 221,582 9,503,396
For the year ended
December 31, 1995
Purchase 102,658,812 70,335,357 57,309,262 24,669,368
Sales 346,775 36,624 392,104 10,431,893
</TABLE>
<PAGE>
COMMENTS ON FINANCIAL STATEMENTS OF LB
The financial statements of LB included in this Statement of Additional
Information should be considered as bearing only upon the ability of LB to
meet its obligations under the Contracts. The value of the interests of
Contract Owners, Annuitants and Beneficiaries under the Contracts are affected
primarily by the investment experience of the Subaccounts of the Variable
Account. The financial statements of LB should not be considered as bearing
on the investment performance of the assets held in the Variable Account.
FINANCIAL STATEMENTS OF LB
Set forth on the following pages are the audited financial statements of LB.
<PAGE>
Report of Independent Accountants
February 23, 1996
To The Board of Directors and Members
of Lutheran Brotherhood
In our opinion, the accompanying statement of financial position and the
related statements of operations and unassigned surplus and of cash
flows present fairly, in all material respects, the financial position
of Lutheran Brotherhood (the Society) at December 31, 1995 and 1994, and
the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles
(practices prescribed or permitted by insurance regulatory authorities -
see Note 1). These financial statements are the responsibility of the
Society's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits
of these statements in accordance with generally accepted auditing
standards which 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, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
Price Waterhouse Logo goes here
<TABLE>
<CAPTION>
LUTHERAN BROTHERHOOD
STATEMENT OF FINANCIAL POSITION
(in thousands)
December 31,
------------------------------
1995 1994
------------------------------
<S> <C> <C>
ASSETS
Bonds:
U.S. government $ 464,547 $ 453,998
Mortgage-backed securities 2,469,895 2,105,847
Corporate and other 2,849,891 2,580,808
------------------------------
5,784,333 5,140,653
Stocks:
Common 312,481 128,444
Preferred 77,878 85,104
------------------------------
390,359 213,548
Mortgage loans:
Residential and commercial 2,138,958 1,896,455
Loans to Lutheran churches 272,041 261,867
------------------------------
2,410,999 2,158,322
Real estate:
Home office 28,403 29,819
Other property 74,921 67,643
------------------------------
103,324 97,462
Loans on insurance contracts 630,176 599,793
Cash and short-term investments 755,934 677,602
Investment in subsidiary 94,076 71,270
Other investments 156,374 128,758
------------------------------
Total invested assets 10,325,575 9,087,408
Investment income due and accrued 111,453 111,460
Premiums deferred and uncollected 60,484 55,372
Assets held in separate accounts 446,250 151,315
Other assets 10,565 8,637
------------------------------
Total assets $10,954,327 $9,414,192
==============================
LIABILITIES, ASSET RESERVE AND SURPLUS
Contract reserves $ 8,619,658 $8,076,952
Benefits in process of payment 28,856 27,812
Dividends payable 161,380 150,456
Dividends on deposit at interest 32,538 32,045
Liabilities related to separate accounts 426,578 143,762
Amounts due to brokers 623,223 132,715
Other liabilities 124,072 117,818
Interest maintenance reserve 99,177 81,285
Asset Valuation Reserve 177,823 118,983
------------------------------
Total liabilities and asset reserve 10,293,305 8,881,828
Unassigned surplus 661,022 532,364
------------------------------
Total liabilities, asset reserve
and surplus $10,954,327 $9,414,192
==============================
The accompanying notes are an integral part of the financial statements.
</TABLE>
<TABLE>
<CAPTION>
LUTHERAN BROTHERHOOD
STATEMENT OF OPERATIONS AND UNASSIGNED SURPLUS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(in thousands)
1995 1994
------------------------------
Income:
<S> <C> <C>
Insurance premiums $ 549,645 $ 531,438
Annuity considerations 640,419 417,564
Net investment income 705,835 655,076
Income from charges
to separate accounts 12,219 7,671
Other income 81,495 52,837
------------------------------
Total income 1,989,613 1,664,586
------------------------------
Deductions:
Net additions to contract reserves 542,520 515,873
Net transfer to separate accounts 228,153 145,926
Death benefits 100,185 88,310
Annuity benefits 421,497 297,559
Surrender benefits 129,173 115,113
Fraternal benefits 50,266 49,178
Other benefits 86,784 75,435
Commissions 66,740 58,766
Operating expenses 99,971 92,908
------------------------------
Total deductions 1,725,289 1,439,068
------------------------------
Savings from operations before dividends
and net realized capital gains 264,324 225,518
Dividends to members 160,066 149,359
------------------------------
Savings from operations before net
realized capital gains 104,258 76,159
Net realized capital gains 25,619 3,461
------------------------------
Net savings from operations 129,877 79,620
------------------------------
Other transactions affecting unassigned surplus:
Net unrealized capital gains (losses) 59,530 (34,296)
Decrease (increase)
in asset valuation reserve (58,840) 431
Other changes (1,909) 6,987
------------------------------
Total other transactions (1,219) (26,878)
------------------------------
Net increase in unassigned surplus 128,658 52,742
Unassigned surplus, beginning of year 532,364 479,622
------------------------------
Unassigned surplus, end of year $ 661,022 $ 532,364
==============================
The accompanying notes are an integral part of the financial statements.
</TABLE>
<TABLE>
<CAPTION>
LUTHERAN BROTHERHOOD
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(in thousands)
1995 1994
------------------------------
<S> <C> <C>
Cash flows from operating activities:
Insurance premiums, annuities and other considerations $1,268,292 $ 998,237
Net investment income 682,726 633,657
Income from charges to separate accounts 12,192 7,666
Benefits paid to members and beneficiaries (719,597) (555,066)
Commissions, operating expenses and fraternal benefits paid (235,200) (215,045)
Net transfers to separate accounts (240,662) (153,479)
Dividends to members (149,274) (145,667)
Net loans on insurance contracts (30,376) (31,514)
Other operating items, net (11,657) 2,982
------------------------------
Net cash provided by operating activities 576,444 541,771
------------------------------
Cash flows from investing activities:
Proceeds from investments sold, matured or repaid:
Bonds 4,689,971 2,365,279
Stocks 954,804 791,788
Mortgage loans 169,297 134,288
Real estate 1,441 10,758
Other invested assets 16,342 27,386
------------------------------
5,831,855 3,329,499
------------------------------
Costs of investments acquired:
Bonds 4,796,826 2,142,312
Stocks 1,066,837 711,562
Mortgage loans 426,293 460,478
Real estate 11,722 787
Other invested assets 28,289 46,441
------------------------------
6,329,967 3,361,580
------------------------------
Net cash used in investing activities (498,112) (32,081)
------------------------------
Net change in cash and short-term investments 78,332 509,690
Cash and short-term investments beginning of year 667,602 167,912
------------------------------
Cash and short-term investments end of year $ 755,934 $ 677,602
==============================
The accompanying notes are an integral part of the financial statements.
</TABLE>
LUTHERAN BROTHERHOOD
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Lutheran
Brotherhood (the Society), a fraternal benefit organization offering
financial services and other fraternal benefits for Lutherans.
The financial statements have been prepared in conformity with statutory
accounting practices prescribed or permitted by the Department of
Commerce of the State of Minnesota. These statutory practices are
considered to be generally accepted accounting principles for fraternal
benefit societies. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make certain estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. In April 1993,
the Financial Accounting Standards Board issued Interpretation No. 40,
"Applicability of Generally Accepted Accounting Principles to Mutual
Life Insurance and Other Enterprises", which establishes a different
definition of generally accepted accounting principles for mutual and
fraternal life insurance companies. Under the Interpretation, financial
statements of mutual and fraternal life insurance companies for periods
beginning after December 15, 1995, which are prepared on the basis of
statutory accounting, will no longer be characterized as in conformity
with generally accepted accounting principles.
In order to continue to present financial statements in accordance with
generally accepted accounting principles for general purpose
distribution in 1996, the Society expects to present its financial
statements in accordance with the requirements of the Interpretation.
Management believes that financial statements prepared on this basis
would result in an increase to unassigned surplus. The effects of this
change in accounting basis would be reported retroactively through
restatement beginning with the earliest year presented.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Invested Assets and Investment Reserves
Invested assets are valued according to the methods established by the
National Association of Insurance Commissioners (NAIC). Generally, bonds
not backed by other loans are valued at amortized cost, using the
interest method. Loan-backed bonds and structured securities are valued
at amortized cost using the interest method including anticipated
prepayments at the date of purchase; significant changes in estimated
cash flows from the original purchase assumptions are accounted for
using the retrospective method. Common stocks are valued at market
value, preferred stocks are valued at cost, loans on insurance contracts
are valued at the aggregate unpaid balances, and mortgage loans are
valued at amortized cost. Real estate is valued at the lower of cost
less accumulated depreciation or current market value. Real estate is
depreciated on the straight line basis. Other invested assets (primarily
limited partnership and joint venture interests) are valued on an equity
basis. Net realized capital gains and losses are included in net savings
from operations except as indicated in the following paragraphs.
Statutory accounting regulations require the Society to maintain two
reserves. The asset valuation reserve (AVR) establishes a reserve for
virtually all invested assets held by the Society. The interest
maintenance reserve (IMR) establishes a reserve for realized gains and
losses resulting from changes in interest rates on short and long-term
fixed income investments. Net realized gains and losses charged to the
IMR are amortized into investment income over the approximate remaining
life of the investment sold using the grouped method.
Cash and Short-term Investments
Cash and short-term investments include cash, U.S. Treasury bills,
repurchase agreements collateralized by U.S. government-backed
obligations maturing within one year, and commercial paper with
maturities of less than 90 days.
Subsidiaries and Affiliates
The Society owns all of the common stock of Lutheran Brotherhood
Financial Corporation (LBFC), a downstream holding company which in turn
owns a stock insurance company (LBVIP), an investment advisor, a
broker/dealer, and a real estate development company. The Society's
investment is valued at equity in the subsidiary's net assets. The net
income or loss from subsidiary operations is included in net unrealized
capital gains and losses. The Society has agreed to provide LBFC and its
subsidiaries with necessary capital requirements.
Contract Reserves
Contract reserves are based on statutory mortality and interest
requirements and are designed to be sufficient to provide for all
contractual benefits. Life insurance reserves are determined primarily
in accordance with modified preliminary term or net level premium
methods employing various mortality tables and interest rates ranging
predominantly from 2-1/2% to 4%. For contracts issued since 1980
interest rates range mainly from 4% to 4-1/2% with mortality based on
1958 and 1980 Commissioners Standard Ordinary tables. Health insurance
reserves are calculated on the basis of various morbidity tables and
interest rates.
Annuity reserves consist primarily of reserves for deferred annuities.
Interest rates used in reserve determination range predominantly from 3%
to 4%. Reserves, determined in accordance with the Commissioners'
Annuity Reserve Valuation Method, exceed statutory requirements, and
reflect all contractual provisions and guarantees. For the majority of
annuities, these reserves equal or exceed full account value.
Annuity reserves and deposit liabilities total $3.7 billion at December
31, 1995. The majority of these annuity contracts are either not subject
to withdrawal or withdrawal would be net of a surrender charge. The
Society does not write guaranteed investment contracts or group
annuities. Claim liabilities are established in amounts estimated to
cover incurred claims. These liabilities are based on individual case
estimates for reported claims and estimates of unreported claims, based
on past experience.
Use of these actuarial tables and methods involves estimation of future
mortality and morbidity based on past experience. Actual future
experience could differ from these estimates.
Premium Income and Operating Expenses
Premiums are recorded as income over the premium paying period of the
contracts. Operating expenses, including costs of acquiring new
business, are charged to current operations as incurred.
Dividends
The dividend scale, approved annually by the Board of Directors, seeks
to achieve equity among contract members. Dividends charged to current
operations represent those amounts established to be paid or credited to
contract members in the following year.
Income Taxes
The Society qualifies as a tax-exempt organization under the Internal
Revenue Code under Section 501(c)(8). Accordingly, no provision for
income taxes has been made.
Non-admitted Assets
Certain assets (principally furniture and equipment, amounts due from
field representatives, and accounts receivable) have been designated by
the NAIC as non-admitted assets and are not included in the Statement of
Financial Position. Investment income due and accrued is a non-admitted
asset and excluded from investment income for the following assets: 1)
bonds with interest one month past due, 2) mortgage loans in
foreclosure, 3) mortgage loans with payment three months past due.
Changes in these non-admitted assets are reflected directly in the
unassigned surplus. Non-admitted assets approximated $33.0 million and
$30.4 million at December 31, 1995 and 1994, respectively.
NOTE 3 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summarizes the bases used by the Society in estimating its
fair value disclosures for financial instruments:
Bonds and preferred stocks -- Fair values are determined by discounting
future cash flows using interest rates based on a risk-adjusted spread
to the current U.S. Treasury curve.
Mortgage loans -- Fair values are determined by discounting future cash
flows using interest rates based on a risk-adjusted spread to the
current U.S. Treasury curve.
Loans on insurance contracts -- The carrying amount reported in the
Statement of Financial Position approximates fair value since loans on
insurance contracts reduce the amount payable at death or at surrender
of the contract.
Cash and short-term investments and due and accrued investment income --
The carrying amounts reported in the Statement of Financial Position
approximate fair value.
Annuity reserves and supplemental contracts (without mortality/morbidity
features) -- Fair values are derived by discounting the future estimated
cash flows using current interest rates for similar maturities or by
using cash surrender value. For 1995 the respective carrying amounts of
$55.1 million and $148.6 million approximate fair value.
Other deposit liabilities -- The carrying amounts for dividend
accumulations and premium deposit funds of $32.4 million and $3.4
million, respectively, reported in the Statement of Financial Position
approximate fair value.
NOTE 4 -- INVESTMENTS
Bonds
Investments in bonds and preferred stock are primarily intended to back
long- term liabilities; therefore, care should be exercised in drawing
any conclusions from market value information.
Investments in bonds and preferred stock at December 31, 1995 and 1994
follow (in thousands):
<TABLE>
<CAPTION>
December 31, 1995
----------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Bonds Value Gains Losses Value
------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government $ 464,547 $ 21,028 $ -- $ 485,575
Mortgage-backed securities 2,469,895 79,757 3,834 2,545,818
Non-investment grade bonds 242,980 11,249 1,141 253,088
All other corporate bonds 2,606,911 197,529 6,688 2,797,752
------------- ------------- ------------- -------------
5,784,333 309,563 11,663 6,082,233
------------- ------------- ------------- -------------
Preferred Stock 77,878 5,524 1,427 81,975
------------- ------------- ------------- -------------
$5,862,211 $ 315,087 $ 13,090 $6,164,208
============= ============= ============= =============
December 31, 1994
----------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Bonds Value Gains Losses Value
------------------------------------------------------------
U.S. government $ 453,998 $ -- $ 23,789 $ 430,209
Mortgage-backed securities 2,105,847 21,230 107,119 2,019,958
Non-investment grade bonds 219,364 2,514 12,236 209,642
All other corporate bonds 2,361,444 26,180 114,030 2,273,594
------------- ------------- ------------- -------------
5,140,653 49,924 257,174 4,933,403
------------- ------------- ------------- -------------
Preferred Stock 85,104 37 5,632 79,509
------------- ------------- ------------- -------------
$5,225,757 $ 49,961 $ 262,806 $5,012,912
============= ============= ============= =============
The carrying value and estimated market value of bonds at December 31,
1995, by contractual maturity, are as follows (in thousands):
<CAPTION>
Estimated
Carrying Market
Value Value
------------ ------------
<S> <C> <C>
One year or less $ 58,797 $ 59,250
Over 1 year through 5 years 928,296 959,902
Over 5 years through 10 years 1,567,991 1,660,698
Over 10 years 3,229,249 3,402,383
-------------- --------------
$5,784,333 $6,082,233
============== ==============
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Common Stocks
Investments in equity securities at December 31, 1995 and 1994 are as
follows (in thousands):
<S> <C> <C>
1995 1994
------------ ------------
Cost $ 272,536 $ 123,399
Gross unrealized gains 44,905 13,356
Gross unrealized losses (4,960) (8,311)
------------ ------------
Carrying value $ 312,481 $ 128,444
============= =============
Mortgage Loans
The mortgage loan portfolio diversification by property type as of
December 31, 1995 and 1994 is as follows (in thousands):
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Retail $ 703,446 $ 629,263
Apartment 645,192 563,162
Office buildings 300,740 276,752
Industrial and other 489,580 427,278
Church 272,041 261,867
------------ ------------
$2,410,999 $2,158,322
============= =============
The estimated fair value of the mortgage loan portfolio at December 31,
1995 is $2.6 billion as compared to the carrying value of $2.4 billion.
The mortgage loan portfolio's five largest geographic concentrations by
state as of December 31, 1995 and 1994 were as follows
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Minnesota 12.0% 13.6%
Texas 10.1% 8.1%
Florida 8.6% 8.7%
Missouri 6.7% 7.5%
Washington 6.0% 7.0%
The Society monitors creditworthiness of the borrowers by using controls
that include credit approvals, limits, and other monitoring procedures.
Collateral for mortgage loans often includes pledges of assets,
guarantees, and letters of credit. Statutory standards for new mortgage
loans require loan to value ratios of 80% or less at the time of the
mortgage origination.
The Society has restructured mortgage loans with a carrying value of
approximately $13.3 million and $32.4 million at December 31, 1995 and
1994, respectively. The new terms generally defer a portion of contract
interest payments to future periods. The Society had outstanding
commitments to fund up to $139.6 million and $95.3 million in new
commercial and church mortgage loans at December 31, 1995 and 1994,
respectively. These commitment amounts approximate market value.
Real Estate
The real estate portfolio diversification by property type as of
December 31, 1995 and 1994 is as follows (in thousands):
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Home Office $ 28,403 $ 29,819
------------ ------------
Other properties:
Office buildings 21,732 23,268
Retail 16,260 16,455
Industrial and other 36,929 27,920
------------ ------------
74,921 67,643
------------ ------------
Total $ 103,324 $ 97,462
============= =============
Real estate is shown net of accumulated depreciation of $25.6 million
and $22.2 million at December 31, 1995 and 1994, respectively.
At December 31, 1995, approximately 68% of the Society's total real
estate is located in Minnesota.
Securities Loaned
To generate additional income, the Society participates in a securities
lending program administered by the Society's custodian bank. Securities
are periodically loaned to brokers, banks and other institutional
borrowers of securities, for which collateral in the form of cash or
U.S. Government securities is received by the custodian in an amount at
least equal to 102% of the market value of the securities loaned.
Collateral received in the form of cash is invested in short-term
investments by the custodian from which earnings are shared between the
borrower, custodian and the Society at negotiated rates. The Society may
experience delays in recovery of the collateral should the borrower of
securities fail financially. As of December 31, 1995, the market value
of securities loaned and the cash collateral held were $285.6 million
and $292.7 million, respectively.
Investment Income and Realized Capital Gains and Losses
Investment income and the related gross realized gains and losses for
1995 and 1994 are as follows (in thousands):
<CAPTION>
Year Ended December 31, 1995
-------------------------------------------
Gross Gross
Investment Realized Realized
Income Gains Losses
------------- ------------- -----------
<S> <C> <C> <C>
Bonds $384,858 $ 50,757 $ 22,937
Common stock 4,151 44,196 13,536
Preferred stock 4,606 539 2,909
Mortgage loans 201,680 1,024 450
Real estate 25,143 46 4,312
Other 121,690 2,467 1,267
------------- ------------- -----------
742,128 $ 99,029 $ 45,411
============= ============= ===========
Investment expenses (36,293)
-------------
Net investment income $705,835
=============
Year Ended December 31, 1994
---------------------------------------------
Gross Gross
Investment Realized Realized
Income Gains Losses
---------------------------------------------
Bonds $379,663 $ 20,821 $ 46,128
Common Stock 2,594 27,723 16,056
Preferred Stock 5,397 5,558 3,742
Mortgage loans 179,850 1,909 1,200
Real estate 24,771 1,662 1,276
Other 90,455 1,210 2,863
------------------------------ --------------
$682,730 $ 58,883 $ 71,265
============================== ==============
Investment expenses (27,654)
---------------
Net investment income $655,076
===============
Derivative Financial Instruments
The Society's current utilization of derivative financial instruments is
limited. Most of the Society's derivative transactions are used to
reduce or modify interest rate risk and to replicate assets in certain
markets. These strategies use option contracts, interest rate swaps and
structured securities. The Society does not use derivative instruments
for speculative purposes. Changes in the market value of these contracts
are deferred and realized upon disposal of the hedged assets. The effect
of derivative transactions is not significant to the Society's results
from operations or financial position.
NOTE 5 -- SEPARATE ACCOUNT BUSINESS
Effective February of 1994, the Society began issuing variable life and
variable annuity contracts in states which have approved the model
fraternal code allowing fraternal benefit societies to own separate
accounts and wherein the Society has obtained authority to do so. Prior
to February 1994, variable products were sold only by Lutheran
Brotherhood Variable Insurance Products Company, an indirect subsidiary
of the Society.
Separate account assets include segregated funds invested by LB for the
benefit of variable life insurance and variable annuity contract owners.
A portion of the contract owner's premium payments is invested by LB
into the LB Variable Insurance Account I or the LB Variable Annuity
Account I (the Variable Accounts). LB records these payments as assets
in the separate accounts. Separate account liabilities represent
reserves held related to the separate account business.
The excess of separate account assets over separate account liabilities
at December 31, 1995 and 1994 represents the difference between the full
account value of annuity contracts and reserves required to be held for
these contracts.
The Variable Accounts are unit investment trusts registered under the
Investment Company Act of 1940. Each Variable Account has four
subaccounts, each of which invests only in a corresponding portfolio of
the LB Series Fund, Inc. (the Fund). The Fund is a diversified, open-end
management investment company. The investments in shares of the Fund are
carried in the Variable Accounts' financial statements at the net asset
value of the Fund.
A fixed account is also included as an investment option for variable
annuity contract owners. Net premiums allocated to the fixed account are
invested in the assets of LB.
The assets and liabilities of the Variable Accounts are clearly
identified and distinguished from the other assets and liabilities of
LB. The assets of the Variable Accounts will not be applied to the
liabilities arising out of any other business conducted by LB.
Considerations received on variable life insurance and variable annuity
contracts are included in the income of LB and correspondingly offset by
transfers to the Variable Accounts.
NOTE 6 -- BENEFIT PLANS
Lutheran Brotherhood has noncontributory defined benefit and defined
contribution retirement plans which cover substantially all employees
and field representatives. The Society's policy is to fund all accrued
defined benefit pension costs using the aggregate level valuation
method. In comparison to other acceptable methods, the annual
contributions under the aggregate level method are generally higher in
the earlier years and decrease over time. As of January 1, 1995 the most
recent actuarial valuation date available, the defined benefit plans
were fully funded. The actuarial present value of vested and nonvested
accumulated plan benefits for these retirement plans, based on an
interest rate assumption of 8%, were $239.4 million and $3.2 million,
respectively. As of that date, approximately $186.7 million of the
plans' assets were held by the Society and the remaining $55.5 million
were held in a separate trust. The accrued pension liability at December
31, 1995 of $198.4 million is included in contract reserves.
The Society also has a noncontributory non-qualified defined
contribution retirement plan which covers substantially all of its
general agents. Agents accrue benefits based on a percentage of eligible
participant earnings. Accumulated vested and non-vested plan benefits at
December 31, 1995 total $42.5 million and $.5 million respectively, and
are included in other liabilities.
Expense for all retirement plans was $12.2 million and $9.6 million for
1995 and 1994, respectively, which represents funding for both defined
benefit and defined contribution plans. In addition, the Society has
deferred compensation plans which cover field representatives and
eligible employees.
The Society has no obligation for post-retirement medical benefits for
retirees. The Society does provide a minor subsidy of certain medical
benefits for eligible early retirees until age 65. Prior to 1993, the
Society accounted for these benefits on a pay as you go method.
Effective January 1, 1993, the Society changed its method of accounting
for these costs to an accrual method. As permitted by statutory
provisions, the Society has elected to amortize the expense associated
with recognizing the initial benefit obligation over a twenty year
period. The unamortized transition obligation was $1.9 million and $2.0
million at December 31, 1995 and December 31, 1994, respectively. During
1995, the Society recognized $0.2 million of expense related to such
benefits which includes amortization of the initial benefit obligation
of $0.1 million. At December 31, 1995, and December 31, 1994, the
unfunded benefit obligation for the fully eligible or vested
participants was $1.7 million and $2.0 million, respectively. The
estimated post retirement benefit obligation for active non- vested
employees was $2.7 million. The discount rate used to determine the
obligation was 8% and the health care cost trend was 12.0%, graded to 6%
over 12 years. If the health care cost trend rates were increased by 1%,
the benefit obligation as of December 31, 1995 would be increased by
$0.1 million. The valuation of retirement and post-retirement medical
benefits based on the actuarial present value of future plan benefits
involves estimation of future mortality and morbidity based on past
experience. Actual future experience could differ from those estimates.
NOTE 7 -- REINSURANCE
In the normal course of business, the Society seeks to limit its
exposure to loss on any single insured and to recover a portion of
benefits paid by ceding business to other insurance enterprises or
reinsurers under excess coverage and co-insurance contracts. As of
December 31, 1995, total life insurance inforce approximated $40
billion, of which approximately $708 million had been ceded to various
reinsurers. The Society retains a maximum of $2 million of coverage per
individual life. Premiums ceded to other companies of $4.7 million are
reported as a reduction in premium income and benefits were reduced by
$1.6 million for reinsurance recoverable for the year ended December 31,
1995.
Reinsurance contracts do not relieve the Society from its obligations to
contractholders. Failure of reinsurers to honor their obligations could
result in losses to the Society; consequently, allowances are
established for amounts deemed uncollectible. The Society evaluates the
financial condition of its reinsurers and monitors concentrations of
credit risk to minimize its exposure to significant losses from
reinsurer insolvencies.
</TABLE>
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